Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 7, 1967 : Greenbook

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

The attached document represents the most complete and accurate version available
based on original copies culled from the files of the FOMC Secretariat at the Board
of Governors of the Federal Reserve System. This electronic document was created
through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned
versions text-searchable. 2 Though a stringent quality assurance process was
employed, some imperfections may remain.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

In some cases, original copies needed to be photocopied before being scanned into electronic
format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced
tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other
blemishes caused after initial printing).

A two-step process was used. An advanced optical character recognition computer program (OCR)
first created electronic text from the document image. Where the OCR results were inconclusive,
staff checked and corrected the text as necessary. Please note that the numbers and text in charts and
tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Content last modified 6/05/2009.

CONFIDENTIAL (FR)

CURRENT ECONOMIC
and
FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

March 1. 1967

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

March 1,

1967

I - 1

SUMMARY AND OUTLOOK

Outlook for economic activity
Private final demands appear to have weakened further in
recent weeks--particularly consumer demands for goods--and we have
written down the rise in prospect for GNP during the first half.

are now projecting dollar gains of $5 billion per quarter (compared
with $7 billion per quarter projected four weeks ago) and almost no
expansion in real terms.

The decline in industrial production appears

to have continued in February and may be picking up momentum.

A slow-

down in income gains is expected in the second quarter as production
cutbacks limit further increases in employment.

Much of the rise in

income would come from further gains in wage rates.

As indicated in

the GNP discussion, consumer outlays are expected to rise about in line
with the gains in disposable income and the saving rate should remain
at a relatively high level.
The poor showing of retail sales in recent weeks suggest
that reduction in the rate of inventory accumulation is not proceeding
as fast as was projected earlier.

Nevertheless, we still feel that

reduced inventory building is likely to materialize in both this quarter
and the next, and will continue to serve as a limiting factor on overall expansion.

Given the present uncertainties in the outlook for final

demands and in the speed with which producers may cut back on purchasing
and output, the actual reduction in the rate of inventory accumulation
could prove to be larger than we have estimated.

However, in view of

I-

the cohtinued high and rising levels of consumer income and increasing

availability of credit, we are anticipating some sttengthening in consumer expenditures and in residential construction in the second quarter
which will serve to enlarge aggregate final demands.
Recent evidence on prospects for business spending on plant
and equipment is ambiguous.

A further decline in total new orders for

machinery and equipment in January--with very sharp cuts reported for
such items as machine tools and railroad equipment--and industry pleas
for prompt restoration of the 7 per cent investment tax credit suggest
growing weakness in this sector.

But a recent McGraw-Hill survey

reported some slight strengthening in business spending plans for 1967
and corporate expectations for somewhat higher profits in 1967 than in
1966.

We are projecting further small gains in business fixed invest-

ment through the first half, in line with both the recent McGraw-Hill
findings and the earlier Commerce-SEC quarterly survey.

But with back-

logs now beginning to fall off, a further rise in investment outlays in
the second half may be dubious.

Resource use and prices
With new plant and equipment continuing to come on stream at
a rapid rate, pressures on industrial capacity have been reduced and
are expected to ease further.

The utilization rate for manufacturing

currently (February) is about 87 per cent, down from 91 per cent in

mid-1966.

Most nondurable goods industries are operating at rates not

much different from their longer-run averages.

Utilization rates remain

high mainly in the aircraft and machinery industries, it aluminum and
in copper; also in rubber products where prospective labor negotiations
are influencing inventory policies.

Rising stocks of rubber and non-

ferrous metal products may lead soon to a reduction in pressure on
resources in those areas.
Industrial prices as a whole are estimated to have remained
unchanged in February.

For foods, retail and wholesale prices have

levelled off and domestic food supply prospects have improved-recently
with marked gains indicated for beef, chickens, eggs, and citrus fruit.
A decrease in utilization rates in the equipment industries might lead
to reduction of upward pressures in industrial prices, although prices
in these industries are probably more responsive to rising labor and
other costs than to short-run declines in demand and to moderate reductions in utilization rates.

With consumer demands for apparel as well

as for durable goods down since last autumn, upward pressures on prices
and costs in these markets also have been weakening.
The labor market continues strong, but sighs of some easing
are beginning to appear in help wanted indexes, in lower hours of work,
and in more than seasonal increases in unemployment claims.

We estimate

the over-all unemployment rate will be moderately higher in the first
quarter than in the fourth and will increase further in the second
quarter..

1-4

Outlook for bank loans and deposits
Business loans are expected to show an appreciable rise in
March following nominal growth in February, but the increase probably
will be well below the large $1.4 billion expansion in January.

Business

needs for financing in March, as in other recent months, will be heavily
influenced by the volume of corporate tax payments falling due; such
payments are estimated at about $12.5 billion, about the same as in
March 1966, but considerably above those in February.
In view of reduced levels of corporate liquidity and the
smaller-than-usual volume of tax anticipation bills maturing in March,
businesses would be expected to rely heavily on bank borrowing in meeting
their tax and dividend payments.

However, the extent to which they will

need to do so should be moderated by the availability of funds from other
sources, particularly from recent capital market financing and expected
slackening in the rate of inventory accumulation.

Moreover, corporations

have acquired a substantial volume of CD's over the past two months, and
indications are that the volume of March maturities appreciably exceeds the
volume a year ago.

Thus, CD run-offs may be used by some corporations

to finance a sizable part of March cash needs.
Private demand deposits rose moderately in February on average
and we look for further growth in March; Government balances, which rose
sharply in January, levelled off in February and are expected to show
only a modest increase in March.

I-5
In large part, the intensity of business demands for bank
loans in March will determine how actively banks compete for CD's and
hence will heavily influence the rate of growth in time and savings
deposits.

The rapid growth in these deposits so far this year has been

dominated by the surge in outstanding CD's at large city banks.

However,

in the last few weeks, the rise.in CD's has fallen off sharply, suggesting
that major issuers may be approaching or may already have reached desired
levels of outotandings.

Some support for this conclusion is found in the

recent sharp decline in yield

spreads of CD's over Treasury bills.

Fur-

ther growth in CD's prior to the mid-month tax period may be relatively
small, with outstandings showing the usual decline at mid-month and some
late month recovery.
Thus, growth in total time and savings deposits in March is
likely to stem mainly from the consumer sector.

Consumer-type time

deposits, which have been expanding rapidly, are likely to continue to
do so, particularly if yields on market instruments ease back from recent
advanced levels.

However, the rate of growth of these deposits would

not be expected to maintain the January-early February pace, which was
probably influenced in part by one-time transfers of funds out of market
instruments in a period when market rates had been declining rapidly.

I-6

Capital markets outlook
The levels to which bond yields had declined by early February,
in the face of the large and growing forward calendar of new security
offerings, reflected in large part expectations of further easing of
monetary conditions.

Bond yields backed up sharply when such expecta-

tions were called into question, in part by developments in the money
market area.

This was compounded as the March calendar of scheduled

corporate and municipal security offerings grew to even larger proportions
than had generally been anticipated, as additional borrowers moved to
capture long-term funds before yields rose further, and as expectations
grew of an offering in March of Federal participation certificates.
Most recently, yield increases appear to.have been halted and partly
reversed by a succession of factors, including purchases of coupon
issues in the market by the Treasury trust accounts, an easing of money
market conditions in response to continued System reserve supplying
operations in the open market, and by the reduction in reserve requirements.
Scheduled March offerings of publicly-offered corporate bonds
reached a record volume in excess of $1.2 billion, and municipal offerings
are likely to reach $1 billion or more for the third month in a row, but
some of this financing may be rescheduled over a longer period of time
if the recent change in market tone creates expectations of more
favorable market conditions ahead.

I-

Looking beyond March, business demands for external financing
of all types are generally expected to remain large at least through the
second quarter.

The advance payment of Federal income taxes accounts

for a large part of these expected demands, but another large part
reflects continuing corporate needs to replenish liquidity and readjust
financial structures.
capital markets.

Demands of this latter type tend to focus on

Of course, the post-March calendar of corporate public

offerings would be smaller if term loans at banks should become more
readily available at lower rates and if funds available for immediate
take-down on private-placements from other types of lenders should increase.
In mortgage markets, some observers have expressed concern that
the recent congestion in bond markets may slow progress toward mortgage
credit expansion.

But to the extent that congestion in bond markets is

dispelled, the tendencies toward easier credit terms already evident in
mortgage markets during January (and probably February) should continue.

International developments
The behavior of U.S. imports now looks less encouraging than
it seemed a month ago.

This is partly a result of the latest over-

hauling of foreign trade seasonal adjustment.

The new verdict is that

the rise in imports has only slowed, and did not come to an end in the
fourth quarter, nor in January.

Meanwhile, though U.S. exports were

sharply higher in January than in December, for the two months together
they were down a shade from October-November; and the trade surplus was
consequently at a new low, for pairs of months, in December-January.
Despite these results, it still seems reasonable to suppose
that the domestic economic outlook implies a weakening of U.S. import
demand in coming months.

Hopes for early U.S. export gains continue to

rest mainly on prospects in Japan and in other countries outside Europe
and the Western Hemisphere, and there is no reason to modify these
hopes at present.

Later in the year the course of world trade, and of

U.S. exports, will depend more and more on how soon and how strongly
demand picks up in the German, British and other European economies.
The additional decline in interest rates in Germany and
Britain during February has been a reassuring development, mainly
because it indicates governmental concern in these countries that
economic expansion resume.

Favorable direct impacts of the rate declines

on the U.S. balance of payments are unlikely to be great, but easing of
credit conditions in Europe may facilitate overseas financing by U.S.
direct investment companies.

I - 9

Some key rates have fallen no more than U.S. rates.

Long-

term rates, even after very large declines in some instances, remain
generally much higher than U.S. long-term rates.

In any case, primary

protection against flows of U.S. portfolio capital or bank credit to
Europe will still be afforded by the IET and the VFCR program for banks
and other financial institutions.

Likewise, the Commerce Department

is continuing to ask U.S. nonfinancial corporations not to place liquid
funds in Canada or elsewhere abroad.
Interest rates in the Euro-dollar market stablized, and
moved up slightly, in February after sharp drops in December and
January.

From mid-December to the end of January, Euro-dollar rates

dropped by a full percentage point or more as U.S. banks returned more
than $1 billion to the Euro-dollar market.

This week, Euro-dollar

call money has been at 5-3/8 per cent, and 3-month deposits at a little
over 5-1/2 per cent.

The very sharp advance in Euro-dollar rates last

year when U.S. banks were increasing their liabilities to their branches
abroad, the subsequent sharp decline in rates, and then the stabilizing
of rates just when U.S. banks ceased reducing their liabilities, all
indicate how important a factor in the market the U.S. head offices'
demands for funds have become.

I --

T - 1

February 28, 1967

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Latest
Period
Jan'67

Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)

Amount
Latest
Period
77.1

2.8
3.7

II
"

Ago*

2.3
- 3.8

4.6
-20.1

8.0
35.9

158.9
158.9
158.4

150.6
150.3
150.9

4.8
5.0
4.6

13.8
14.1
13.2

106.2
105.0
101.6
107.2

105.9
104.7
101.4
106.7

104.6

1.5

103.0
103.8
107.7

1.9

114.7
107.3
114.7
125.5

i14.7
107.7
114.8
125.2

111.0
105.3
111.4
119.5

Industrial production (57-59=100)
Final products
Materials

157.9
157.8
157.8

Wholesale prices (57-59=100)1/
Industrial commodities
Sensitive materials
Farm products and foods

Food
Services

Ago*

9.9
10.3
5.5
10.7

65.4
19.5
8.1
37.7

Per cent change
Year 2 Years

4.6
4.9
1.2
5.2

Nonfarm employment, payroll (mil.)
Manufacturing
Other industrial
Nonindustrial

Consumer prices (57-59=100)Commodities except food

Preced'g Year
Period I Ago
75.4
76.8
2.9
2.9
3.7
3.9
65.1
19.4
8.1
37.5

62.5
18.6

2.66
2.76
112.93 110.33

5.1
3.4
0.3
9.3

-2.1

-0.5
3.3
1.9
3.0

5.0

5.3
2.3
7.6
7.6

4.1
2.9

7.8
7.0

Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)

"
"

2.77
113.49

Personal income ($ bil.) 2 /

607.2

601.8

560.2

8.4

17.5

3/
QIV'66-

82.5

81.9

78.7

4.8

21.9

25.3
7.8
6.0

25.3
8.0
6.0

25.0
9.4
5.9

1.2
-17.5
2.8

-18.8

1,243

1,085

40.9

22.7
3.4
84.45

23.9
3.6
81.33

1,611
41.4
23.6
3.4
93.32

-22.8
- 1.2
- 3.8
- 0.2
- 9.5

Dec'66

135.0

133.9

120.9

QIV'66
"

759.3
657.2

745.3
649.9

704.4
631.2

Corporate profits before tax ($bit)

Jan'67

Retail sales, total ($ bil.)
Autos (million units)2/
GAF ($ bil.)

Selected leading indicators:
Housing starts, pvt. (thous.)Factory workweek (hours)
New orders, dur. goods ($ bil.)
New orders, nonel. mach. ($ bil.)
Common stock prices (1941-43=10)
Inventories, book val. ($ bil.)

Gross national product ($ bil.)
Real GNP ($ bil., 1958 prices)2/
*

"
"
"

Based on unrounded data. 1/ Not seasonally adjusted.
Federal Reserve estimate.

11.7
7.8
4.1

2/ Annual rates.

10.4
14.4
-13.8
-

0.5

6.6
10.6
-

1.9

21.6
17.9
11.9

I --

February 28, 1967

T -2

SELECTED DOMESTIC FINANCIAL DATA
Week ended Four-Week
Average
Feb. 24
Money Market 1/ (N.S.A.)
Federal funds rate (per cent)
U.S. Treas. bills, 3-mo., yield (percent)
Net free reserves 2/ (mil. $)
Member bank borrowings 2/ (mil. $)
Security Markets (N.S.A.)
Market yields 1/ (per cent)
5-year U.S. Treas. bonds
20-year U.S. Treas. bonds
Corporate new bond issues, Aaa
Corporate seasoned bonds, Aaa
Municipal seasoned bonds, Aaa
FHA home mortgages, 30-year 3/
Common stocks S&P composite index 4/
Prices, closing (1941-43=10)
Dividend yield (per cent)

5.06
4.61
122
477

4.93
4.56
48
366

6.25
5.59
149
928

3.50
4.46
- 583
176

4.81
4.70
5.20
5.05
3.53
6.62

4.73
4.59
5.19
5.02
3.38
6.62

5.64
5.00
5.99
5.53
4.04
6.81

4.60
4.44
5.11
4.99
3.25
6.58

87.41
3.36

87.37
3.36

86.66
3.89

73.20
3.32

Change
in
Jan.
Banking (S.A., mil. $)
Total reserves
Bank loans and investments:
Total
Business loans
Other loans
U.S. Government securities
Other securities
Money and liquid assets:
Demand dep. & currency
Time and savings dep.
Nonbank liquid assets

Last six months
Low
High

Average
change
Last 3 mos.

Annual rate of
change (%)
3 mos. 1 year

329

104

5.4

2.0

3,800
1,400
1,700
- 500
1,200

2,100
500
800
500
400

8.3
8.1
7.5
10.7
9.1

6.1
10.0
7.2
- 7.2
8.0

0
1,200
300

0.2
9.2
1.3

1.0
9.3
3.7

600
2,400
1,000

N.S.A. -- not seasonally adjusted. S.A. -- seasonally adjusted.
1/ Average of daily figures. 2/ Averages for statement week ending February 22.
3/ Latest figure indicated is for month of January. 4/ Data are for weekly
closing prices.

I - T-3
U.S. BALANCE OF PAYMENTS
(In millions of dollars)

1967
Jan.

Dec.

1 9 6 6
QIII

QIV

QII

1965
1965
QIV
Year
(billions)

Seasonally adjusted

Current account balance
305
2,595
-2,290

Trade balance
Exports
Imports

Services, etc.,

165
2,390
-2,225

742
7,402
-6,660

900

1,252

1,405

1,309

6.0

772
7,333
-6,561

977
7,184
-6,207

1,239
7,251
-6,012

1,248
7,011
-5,763

4.8
26.3
-21.5

1.2

net

275
-1,244

Capital account balance
Govt. grants & capital 2/
U.S. private direct investment
U.S. priv. long-term portfolio
U.S. priv. short-term
Foreign nonliquid

Errors and omissions

-1,098

Liquidity bal., S.A.
Seasonal components
Balance, N.S.A.
Official settlements bal.
Seasonal component
Balance, N.S.A. 3/

Memo items:
Monetary reserves
(decrease -)
Gold purchases or
sales (-)

156

-470

753

226

-249
71
-178

-33

6
-27

-121

1/ Balance of payments basis which differs a little
adjustments for trade revised.
2/ Net of loan repayments.

960

-167

-297

-80

118

-201

-686

-881
-731

-964
-976

-551
30
-521

-1,542

-948
-687
-219
-22
289

-794
-700
-33
20
263

Balances, with and without seasonal adjustment (-

-1,587

-80
-38

-154
-27
251

-6.9
-3.4
-3.4
-1.1
0.8
0.2
-0.4

= deficit)

-703

-131
-21
-152

-541
493
-48

955
-528
427

-204
-176
-380

-231
633
402

-1,158
33
-1,125

-82

-68

-424

-271

-1.2

-68

-119

-1.7

-502

-173

*209

from Census basis.

-332
-3
-355

-1.3
-1.3
-1.3
-1.3

Seasonal

Differs from liquidity balance by counting as receipts (+) increases in liquid
liabilities to commercial banks, private nonbanks, and international institutions
(except IMF) and by not counting as receipts (+) increase in certain nonliquid
liabilities to foreign official institutions.

II - 1

THE ECONOMIC PICTURE IN DETAIL

The Nonfinancial Scene
Gross national product.

We have revised downward our

projection of GNP for the first half of the year--estimating increases
of only $5 billion in the current and second quarters, as compared with
gains of $14 billion in the fourth quarter and, on average, throughout
1966.

Despite a projected slowing in prices from last year's large

advance, real growth during the first half would be negligible--at an
annual rate of only 0.5 per cent a year.
We still are expecting a sharp fall-off in the rate of
inventory accumulation--reversing last year's large run-up--but there
is not much evidence that it has begun to any great extent.

The pro-

jected moderate strengthening in final sales also is not yet evident
and, in fact, final sales now appear a little weaker than was estimated
four weeks ago, particularly consumer demands for goods.
Retail sales in January and February appear to have shown
little change from the reduced December level, with new domestic car
sales declining from an annual rate of 8 million units in December to
about 7.3 million in February (a fifth below the exceptionally high
year-earlier level).

Sales of household durable goods also appear to

have edged down over the period.

In mid-January, consumers' future

buying plans for durable goods, as reported by the Census Bureau,
remained on the weak side, although the intentions data do not necessarily imply further decreases in consumer takings from recent reduced

II - 2

levels.

Altogether, we are now estimating a decline of $2 billion in

the annual rate of consumer purchases of durable goods in the current
quarter, and with nondurable goods estimated to rise only $1 billion,
consumers' total dollar spending for goods--which was virtually
unchanged between the third and fourth quarters--is expected to decline
slightly in this quarter.

In real terms, consumer takings of goods

appear to have declined moderately since last fall--after showing only
a moderate increase after early 1966.

Consumer spending on services,

however, apparently continues to expand rapidly--although much of the
dollar gain is being accounted for by price increases.

Total consump-

tion expenditures are projected to rise $3.3 billion in the current
quarter--as compared with a little more than $4 billion in the fourth

quarter.
Meanwhile, consumer income showed a surprisingly large rise
in January--with wages and salaries, transfer payments and other income
up by sizable amounts; despite the boost in social insurance contributions effective January 1, the January rise in personal income was the
largest since last August.
Manufacturing employment and wages and salaries rose further
in January.

However, in February manufacturing employment is expected

to decline.

With weakness in manufacturing,a distinct slowing of the

rise in total employment is projected.

The increase in minimum wage

rates effective February 1 is presumably adding about $1 billion to
wage and salary disbursements and sizable wage rate increases are
expected to continue, but, with employment gains slowing markedly, the

II - 3

rise in total wages and salaries is projected at a much slower rate in
coming months.

Moreover, the rise in transfer payments, which has been

very sharp since the institution of Medicare last July, is likely to
taper off.
Reflecting mainly the larger than anticipated January rise
in wages and salaries, the estimated levels of personal and disposable
income have been revised upward appreciably for the first quarter.

Dis-

posable income now is estimated to show an increase of $10.5 billion in
the first quarter, and with consumer spending projected as rising only
about $3.5 billion, the saving rate is projected to rise sharply further
to 7.0 per cent--the highest rate since late 1958.
A further increase of only $5.5 billion--about half the
first quarter rise--is projected for disposable income in the second
quarter, and consumer spending is believed likely to rise about in
line with the increase in income.

The projected rise in consumer spend-

ing--while smaller than was estimated four weeks ago--is somewhat larger
than the increase now estimated for the current quarter, owing mainly to
the likelihood that durable goods purchases will tend to level off

following earlier declines.

Nondurable goods purchases are expected to

continue upward at a slow rate, while service outlays should show a
large further gain.

It now seems likely that the saving rate will

remain high, probably at about the 7.0 per cent level.
In the second quarter, we are now anticipating some upturn
in residential construction activity--in line with gains in seasonally
adjusted housing permits and starts reported through January--and we

II - 4

are also projecting a slight further increase in business fixed investment.

The latter seems to be implied by the recent McGraw-Hill special

survey of business spending plans for 1967, though the increase is only
nominal.

In dollar terms, business fixed investment is projected as

rising at an annual rate of only 3 per cent in the first half--in real
terms this probably represents little change.

A firmer base for

assessing both near-terms trends and the entire year's prospect for
business fixed investment outlays will be provided by the next CommerceSEC quarterly survey, results of which are due in a week or so.
The course of total government purchases of goods and services
is about as projected four weeks ago--with expansion at the rate of a
little over $5 billion in the first quarter and $4 billion in the second
quarter.

According to the most recent Treasury statements, defense

purchases appear to be running somewhat higher in the current quarter
than was projected four weeks ago, although the current expansion
(nearly $3 billion) is less than in the fourth quarter ($3.5 billion)
and a further slowing to a $2 billion increase is projected in the
second quarter.
Total business inventory accumulation in the fourth quarter
is now reported at an annual rate of $16.4 billion (up $2 billion from
the estimate available four weeks ago), with nonfarm accumulation at a
$17.6 billion rate.

These figures incorporate preliminary December

figures for manufacturing and trade, and the manufacturing figures are
now being revised upward.

The extraordinary fourth quarter bulge in

nonfarm inventory accumulation--which accounted for $7 billion, or half,

II-

of the fourth quarter rise in GNP--was heavily concentrated in consumer
goods and related lines, both durable and nondurable, at both the
factory and distributor level, as sales lagged significantly.

Output

of major consumer durable goods and such materials as steel began to
be reduced in late 1966.
In January, new orders for steel dropped sharply further,
the order backlog was down about a fourth from early last fall, and
output was cut further; output curtailments were extended for consumer
durable goods--particularly autos; and output cuts were initiated in
some nondurable goods industries.
With sales of consumer goods continuing to lag in the current
quarter and total production down only moderately, it is not yet clear
that business is achieving any marked cut in the rate of stock building
in this sector--except in the case of autos where unit stocks of new
cars have been reduced appreciably.

While a major part of the large

reduction projected in the rate of nonfarm inventory accumulation over
the first half of the year is expected to come from sharply reduced
rates of accumulation in consumer goods and materials (with net liquidation in some lines), a considerable slackening in recent high rates of
accumulation (much of it in work-in-process stocks) is expected in business and defense equipment industries along with the pronounced slowing
of expansion now programmed for final demands in this sector.

- 6

March 1, 1967

CONFIDENTIAL -- FR
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Expenditures and income figures are billions of dollars
seasonally adjusted annual rates)
1966
1965

1967
Projected

1966

III

Gross National Product
Final sales

681.2
672.1

739.6
727.7

721.2
712.3

732.3
720.0

745.3
735.4

759.3
743.1

764.3
752.8

769.3
764.3

Personal consumption expenditures
Durable goods
Nondurable goods

431.5
66.1
190.6
174.8

464.9
69.3
206.2
189.4

455.6
70.3
201.9
183.4

460.1
67.1
205.6
187.4

469.9
70.2
208.1
191.5

474.1
69.6
209.2
195.3

477.4
67.7
210.4
199.3

482.6
67.5
212.0
203.1

106.6
27.8
69.7
9.1
8.1

117.0
25.8
79.3
11.9
12.2

114.5
28.6
77.0
8.9
8.5

118.5
28.0
78.2
12.3
12.1

115.0
24.8
80.3
9.9
10.4

120.0
21.9
81.6
16.4
17.6

115.6
21.9
82.2
11.5
12.0

110.2
22.4
82.8
5.0
5.0

Services

Gross private domestic investment
Residential construction

Business fixed investment
Change in business inventories
Nonfarm
Net exports
Gov't purchases of goods & services
Federal
Defense
Other

State & local
Gross National Product in
constant (1958) dollars
GNP Implicit deflator(1958=100)
Per cent change, annual rate
GNP current dollars
GNP constant dollars
Implicit deflator

7.0

4.8

6.0

4.7

4.2

4.1

5.0

6.0

136.2
66.8
50.1
16.7
69.4

153.0
76.9
60.0
16.9
76.2

145.0
71.9
54.6
17.4
73.1

149.0
74.0
57.1
16.9
75.0

156.2
79.0
62.0
17.0
77.2

161.1
81.7
65.5
16.2
79.4

166.3
85.1
68.3
16.8
81.2

170.5
87.5
70.3
17.2
83.0

614.4
110.9

647.8
114.2

640.5
112.6

643.5
113.8

649.9
114.7

657.2
115.5

657.7
116.2

658.6
116.8

7.8
5.9
1.8

8.6
5.4
3.0

9.5
5.9
3.6

6.2
1.9
4.3

7.1
4.0
3.2

7.4
4.4
3.1

2.6
0.3
2.4

2.6
0.5
2.1

573.5
387.4
499.9
26.6
5.3

585.2
396.7
507.8
24.5
4.8

598.3
405.0
518.4
30.4
5.9

610.0
413.0
529.0
37.3
7.0

616.5
418.0
534.5
37.3
7.0

535.1
358.4
469.1
25.7
5.5

580.4
392.3
505.3
27.0
5.3

564.6
380.0
495.1
26.7
5.4

Total labor force (millions)
Armed forces
Civilian labor force
Unemployment rate (per cent)

77.2
2.7
74.5
4.5

78.9
3.1
75.8
3.8

78.1
2.9
75.2
3.8

78.4
3.1
75.4
3.8

79.1
3.2
76.0
3.8

79.8
3.3
76.5
3.7

80.4
3.4
77.0
3.8

80.6
3.5
77.1
4.0

Nonfarm payroll employment (millions)

60.8

63.8

62.8

63.6

64.1

64.8

65.3

65.5

Personal income
Wage and salaries
Disposable income
Personal saving
Saving rate (per cent)

Note: Labor force revised to exclude persons age 14 and 15. Quarterly data for 1966 also
reflect new seasonal factors; projections for 1967 reflect new definitions of unemployment.

II - 7

Industrial production.

Industrial production is estimated

to have declined further in February--at least one-half of a point and
possibly considerably more.

Declines in output are expected in a

variety of consumer goods and materials but business and defense equipment may have increased somewhat further.
Auto assemblies, which had earlier been scheduled at the
reduced January rate of 7.2 million units, declined 10 to 15 per cent
further in February.

While February production schedules were reduced

as sales continued to decline, snowstorms and a wildcat strike at a
General Motors body plant accounted for a part of the February drop.
Production of household appliances and television and radio
sets declined further in early February as sales continued soft and
inventories held by manufacturers and distributors remained high.

major producer has announced additional cutbacks in output in March
for a wide range of appliances.
Steel ingot production was about unchanged in February from
a January level for iron and steel, which was down 15 per cent from
the mid-1966 highs.

The decline in steel production during this period

would have been larger but for steel mills building up their own inventories.

These stocks rose by almost 10 per cent in the last half of

1966 to a record high of 19 million tons, about 3 months supply at the
1966 consumption rate.
Capacity utilization in manufacturing declined further in
January and, at 88 per cent, was the lowest since the first quarter of
1965.

A further decline in manufacturing output of one point in February

would lower the utilization rate to 87 per cent.

II - 8

During the 1957-58 period of a major inventory readjustment,
industrial production started to decline in September 1957 following a
12-month period of little change.

In the first month of the decline--

from August to September--the total index declined 1.4 per cent, with
almost all the major cyclical industries declining.

Output in these

industries generally continued to decline through April 1958, with the
drop in the total index amounting to 14 per cent from August to April.
In the last half of 1966, the total index changed little,
and then declined 0.6 per cent in January.

During this seven-month

period, the cyclical industries have shown a diversity of movements,
as various industries reached the point of excessive inventories at
varying times.

Output of consumer durable goods peaked in October 1966

and then declined.

Production of both business and defense equipment

continued to expand to new highs throughout the period.

Among materials,

lumber production fell 20 per cent from April to October and then
bottomed out.

Production of iron and steel has been declining since

mid-1966, but output of nondurable materials has continued to expand
despite some readjustments in textiles, chemicals, and paper.
While available production data for January and February do
not, as yet, indicate a downward movement of the breadth and depth of
the 1957-58 recession, there are disquieting signs.

Inventories are

generally high relative to final takings, and there is no upward movement discernible in sales.

New orders for durable goods have been

declining in recent months, and the preliminary January figure was
4 per cent below both the fourth quarter of 1966 and a year earlier.

II - 9

Declines in orders are widespread among durable manufacturers, including
machinery, and especially orders for metal cutting and forming tools
which in January were 40 per cent below a year ago.

Autos.

Daily average sales of new domestic automobiles

continued to weaken in the first 20 days of February.

Assuming this

tendency continues through the remainder of the month, the seasonally
adjusted annual rate for February will likely be about 7.3 million
units, 7 per cent below the 7.8 million unit rate for January and about
one-fifth below the 9.2 million unit rate a year earlier.
The automobile industry's planned output curtailments in
February, along with severe snowstorms and a wildcat strike at the
General Motor's Fisher body plant, seem to have stopped the recent
expansion of inventories of new cars at about 1.5 million units.

Out-

put for the entire month of February is expected to be at a seasonally
adjusted annual rate of about 6.5 million units, down at least 10 per
cent from the preceding

month and 30 per cent below a year ago.

With

a sales rate of 7.3 million units, the seasonally adjusted inventory
level at the end of February would be slightly less than at the end of
January.

In relation to this year's lower sales rate, of course,

stocks are considerably above a year ago.
Prices of used cars remained virtually unchanged in January
at the lowest point in the last four years.

Consumer credit.

Consumer instalment credit continued to

grow at a slow rate in early 1967.

Preliminary January data for

II - 10

commercial banks, however, suggest a little faster rate than in
December but slower than in the fourth quarter as a whole.

On this

basis, and in light of recent auto and other sales information, we
project the first quarter expansion at $4.0 billion, annual rate.

INCREASES IN CONSUMER INSTALMENT CREDIT
(Seasonally adjusted annual rate, billions of dollars)

Repayments

Net Change

72.5
74.4
76.8
77.8

65.1
66.4
68.5
70.0

7.4
8.0
8.3
7.8

78.9
78.6
80,0
78.4

71.7
72.3
73.4
73.9

7.1
6.3
6.6
4.6

78.0

74.0

4.0

Extensions
1965
Q1
Q2
Q3
Q4
1966
Q1
Q2
Q3
Q4
1967
Ql (est.)

To a large extent, the pattern of credit use last year
paralleled developments in consumption expenditures.

The second and

fourth quarters of 1966, for example, were periods of relative slack
in consumer spending, especially for autos and other durable goods, and
they were periods of slow growth in consumer credit as well,

The low

point for the year was reached in December when the increase in outstanding credit was at an annual rate of $3.9 billion, the smallest in
more than four years.

For 1966 as a whole, the increase in instalment

II -

credit amounted to $6.1 billion, sharply less than the record
$8 billion for 1965.

Expressed in percentage terms, last year's

increase was a little less than 9 per cent, compared with a rise of
more than 13 per cent in 1965 and increases of 10 per cent or more for
all previous years of the current expansion.
Much of the sluggishness in consumer credit has been and
continues to be associated with slow sales of autos.

But demand for

personal loans and repair and modernization loans also has been slow.
The only area of strength has been in "other consumer goods", and this
probably reflects the inclusion in this category of an ever-widening
group of consumer items purchased on revolving credit plans.
The gap between new credit extensions and repayments on old
debt has narrowed.

Credit extensions were running at a $79 billion

annual rate early in 1966, they topped $80 billion briefly in the
summer months, and then they backed off again toward the end of the
year and apparently are continuing downward in the current quarter.

In the meantime, repayments expanded from an annual rate of just under
$72 billion in the first quarter to nearly $74 billion in the last and
are estimated at about that rate in the current quarter.

Consumer buying plans.

Consumer buying intentions have

continued to weaken in recent months according to the Census quarterly
survey in mid-January.

The proportion of households expecting to pur-

chase new automobiles, household durables, and houses were all below a
year ago.

Declines in intentions to purchase new automobiles and houses

II -

began to show up in the surveys in the third quarter of last year, a

quarter later than the initial downturn in actual reported purchases.
Intentions to purchase new automobiles within the next
12 months fell to 9.4 perccent of reporting households from 9.8 per
cent a year earlier.

Intentions to buy used cars, however, were

8.0 per cent in mid-January as compared with 7.4 per cent a year ago.
Reported intentions to purchase new or previously occupied
houses within 12 months decreased to 4.6 per cent in the current survey
from 5.3 per cent in January 1966.

There was also a decline in inten-

tions to purchase one or more of 7 major household durables:

from

23.7 per cent to 22.7 per cent, with plans to buy television sets down
the most.
The proportion of households with higher incomes than last
year declined for the second successive quarter.

Expectations for

higher incomes in the next year, however, were up sharply:

27.3 per

cent expected their incomes to be higher, as compared with 25.8 per
cent a year ago.

These optimistic income expectations appear to con-

tradict the restraint indicated in buying plans, since respondents
with higher income expectations also typically report higher intentions
to purchase new automobiles.

Business inventories.

- 13

The book value of manufacturers'

inventories has been revised up for December, to show a rise for the
month of $1 billion as compared with the preliminary showing of a
$775 million increase.

The upward revision boosted the end-of-month

levels--and increases for the month--for both durable and nondurable
goods.

As a result of the revision, the monthly average rise in

manufacturers' inventories during

the fourth quarter was at an annual

rate of $12 billion--slightly larger than the $11.7 billion rate in
the third quarter.
Trade inventories in December (preliminary) increased about
$400 million (in terms of book value).

Stocks of nondurable goods

at retail stores rose sharply, when sales showed a sizable decline.
Retail stocks of durable goods (including autos), which had increased
sharply in the preceding three months, declined moderately in December;
but stocks of durable goods at wholesale distributors rose considerably
further.

The total book value increase in trade inventories in

December was little changed from November but well below the October
rise, when durable goods stocks rose sharply at both wholesale and
retail.

Altogether, the fourth quarter increase now reported in
the book value of trade inventories was at an annual rate of nearly
$6 billion, and the increase for manufacturing and trade combined

was at an annual rate of close to $18 billion--as compared with
$13 billion in the third quarter.

With the recent upward revision

in data for manufacturing and with the December trade figures subject
to possible upward revision, the $17.6 billion rate of accumulation in
nonfarm stocks incorporated in the present GNP estimate for the fourth
quarter may require upward revision.
Orders for durable goods.

New orders for durable goods

declined 5 per cent in January, with sizable decreases reported for
steel, fabricated metal products, and defense products and a moderate
further decline in machinery and equipment.

New orders were at the

lowest level since November 1965 and were 10 per cent below the peak.
reached last September when orders for defense products bulged sharply.
Unfilled orders, which rose at a rapid pace through last
October, showed little change between October and December and then
declined appreciably in January.
widespread in January.

Declines in order backlogs were

Steel showed an especially large decline, to

a level about a fourth below last fall's high.

Unfilled orders for

machinery and equipment--earlier rapid expansion in which had tapered
off in late 1966--showed a small decline in January.

Expansion in

defense order backlogs continued in January but at a sharply reduced
rate.
Construction activity.

Outlays for new construction--

residential and nonresidential--changed little in January, following
a moderate downward revision for December.

Residential construction

turned upward after ten months of decline, reflecting in part, an
improved although still low level of starts.

While private nonresidential

II - 15

outlays continued at an advanced level, they remained appreciably
below the peak reached last March, with public utilities the only
component to show a persistent uptrend.

Public construction outlays

also edged higher in January, after being revised downward by 4 per
cent in December.

NEW CONSTRUCTION PUT IN PLACE
January 1967
(S billions)!/
69.7

Total

Per cent change from
December 1966
March 1966
-

-18

46.5

-16

Residential

20.6

-24

Nonresidential

25.9

- 7

23.2

- 5

Private

Public

1/ Seasonally adjusted annual rates; preliminary.

Seasonally adjusted private housing starts advanced appreciably further in January, raising the possibility that the near term
response of new housing activity to the recent easier mortgage market
situation might turn out to be more rapid than had been anticipated.
The annual rate of 1,243,000 was the highest since last June, but there
is reason to question the sustainability of such a starts level during
the next several months when very sharp increases are expected on a
seasonal basis.

The unadjusted number of starts in January was virtually

unchanged from December, but beginning with February, unadjusted starts
will have to rise very sharply just to maintain the January seasonally
adjusted rate.

It should be noted, too, that an unusually large part

'II

- 16

of the advance was concentrated in one region--the Northeast, where
the seasonal allowance for January is particularly large.
Seasonally adjusted building permits, which usually are much
less volatile than starts, also expanded sharply in January and were a
fourth above the exceptionally low rate reached last October.

Unlike

developments in other recent months, permits for multifamily structures
showed about the same relative month-to-month rise as for single-family
structures.

PRIVATE HOUSING STARTS AND PERMITS
January
ousands
of units)1/

December 1966

1,243

-23

893
560
333

18
17
19

-29
-21
-39

236
227
282
148

67
18
- 3
11

(thousands

Starts
Permits
1-family
2-or-more family
Northeast
North Central
South
West
1/

Per cent change from
Year earlier

-20
-30
-30
-26

Seasonally adjusted annual rate; preliminary.

Incontrast with other postwar periods prior to 1959,
further decline in

the

starts last year was not associated with outright

shortages of housing.

Nevertheless, with completions below the level

of basic demands, there has been an appreciable reduction in vacancy
rates nationally from earlier advanced levels.

In the fourth quarter

of 1966, rental vacancy rates edged upward somewhat, but the average--

- 17

7.0 per cent--was one of the lowest since 1959.

Among regions, rental

vacancy rates during the fourth quarter changed little from those during the third quarter in the Northeast and also in the North Central
states, where the decline has been particularly marked.

In the South

and West, rates turned upward again, but to levels still significantly

below earlier highs.

Unlike rental vacancies, vacancy rates for homes for sale
dipped further in the fourth quarter, to 1.2 per cent, the lowest for
this quarter since 1961.

For 1966, as a whole, the average was 1.3 per

cent, as against a recent high of 1.45 per cent in 1965--when a downward

adjustment in home starts was already under way--and 1.4 per cent in
other recent years.

Further suggesting the extent to which the ground-

work for additional pressure on demands was being laid, this winter,
seasonally adjusted new homes for sale by speculative builders continued
to drop in December and were at the lowest level on record for the
series, (which began in 1963) and more than a fourth below the peak in
May 1964.

Business fixed investment.

Nonfarm business expenditures

for new plant and equipment in 1967 are expected to rise 6.3 per cent
from last year, to $64.4 billion, according to a McGraw-Hill special
survey of business plans conducted in January.
survey had indicated a rise of.4.9 per cent.)

(The McGraw-Hill October
A 6.3 per cent rise in

1967, while very small compared with the 16.6 per cent rise apparently
realized in 1966, would allow outlays to rise in each quarter of the

II -

year at an annual rate of about 4 per cent--about the average rate
shown for the first two quarters of the year by the November CommerceSEC surveyof business plans.

(The Cormerce-SEC February survey for the

first two quarters and for the year will be available in a week or ten
days.)
A special survey conducted last November by the Department of
Commerce and the Securities and Exchange Commission indicated that plant
and equipment expenditures planned for 1967 would be cut back by
$2.3 billion from what they otherwise would have been, as a result of
the temporary suspension of the investment tax credit and certain accelerated depreciation allowances for Federal income tax purposes.

than 80 per cent of the indicated 1967 cutback in plans would be about
equally divided between manufacturing and the commercial sector with
most of the balance in transportation industries.
The relatively small further rise in plant and equipment
expenditures this year now indicated

by recent surveys seems consistent

with the decline in new orders for machinery and equipment since mid1966 and the apparent peaking at the end of last year in unfilled orders.
Machine tool orders, which are particularly sensitive to changes in
investment plans, have been trending downward since early last year,
except for a bulge in September just before the investment tax credit
and the accelerated depreciation allowances were suspended.

Moreover,

cancellations of machine tool orders have risen sharply since last
summer.

- 19

The January McGraw-Hill survey indicates that last fall's
investment plans have been changed considerably by a number of major
industries, even though total fixed investment plans are only moderately
higher.

Significantly higher outlays are now planned for 1967 by pro-

ducers of iron and steel, electrical machinery, aerospace products,
ships and railroad equipment, paper and pulp, and rubber, and by mining

industries and electric and gas utilities.

Smaller outlays than were

planned last October are now indicated by producers of nonferrous metals,
fabricated metal products and instruments, chemicals, foods and beverages,
and textiles, and by airlines and commercial enterprises.
The N.I.C. B. capital appropriations data for large manufacturing concerns seem to support the indications that fixed capital
spending by manufacturing industries will continue at a high level but
not increase substantially further.

Closing backlogs of unspent appro-

priations continued to rise through the fourth quarter of last year,
although the increases in the third and fourth quarters were the smallest
since early 1963.

Newly approved appropriations rose 4.6 per cent in

the fourth quarter from the sharply reduced third quarter rate and were
about the same as a year earlier.

However, for the current quarter, a

decline to the reduced third quarter rate is now estimated for this relatively volatile series.

Labor market.

- 20

The continued over-all strength of the labor

market has been impressive, particularly in the face of persistent
reports of production cutbacks in selected manufacturing industries.
Employers, operating in a tight labor market, apparently have been
cutting back on the work-week rather than trimming employment.

These

efforts to cut costs and yet avoid the loss of scarce manpower
suggest that producers so far have been viewing any current slackening
in demand as temporary.

Although unemployment compensation claims

have again started to show significantly more than seasonal increase,
after having remained relatively stable in January and early February,
employment cutbacks have been selective, and industry-wide
reductions have occurred only in construction and the buildingrelated lumber and stone, clay, glass industries--which may now
have bottomed out--and in automobiles.

II - 21
AVERAGE WEEKLY HOURS, PRODUCTION WORKERS,
SELECTED MANUFACTURING INDUSTRIES
Seasonally adjusted
_

1967
1967
January

I___
1966_
1966

___

IVQ

Total

41.5

41.2

40.9

Durable
Lumber & wood
Furniture & fixtures
Stone, clay & glass

42.4
41.2
41.8
42.6

42.0
40.4
40.9
42.0

41.8
39.9
40.7
42.0

Primary metals
Fabricated metals
Machinery

41.9
42.5
43.9

42.3
42.3
43.8

41.4
42.4
43.8

Electrical equipment
Transportation equip.
Automobiles

41.4
43.2
43.7

40.9
42.0
41.7

40.8
41.6
40.9

40.4
41.2
42.3
36.4
43.4

40.1
41.0
41.1
36.6
43.2

40.1
41,1
41.1
36.5
43.0

42.0
42.5
42.3

42.1
42.4
41.8

42.0
42.8
41.6

Nondurable
Food
Textile-mill
Apparel
Paper
Chemicals
Petroleum
Rubber & plastic

Reductions in the manufacturing workweek from a year earlier.
have been general.

Average weekly hours in manufacturing--a relatively

sensitive lead indicator of economic activity--in January were 0.6
hours below their first quarter 1966 peak of 41.5 hours.

The largest

reductions in hours in durable goods occurred in autos (down almost
3 hours); and in lumber and furniture and fixtures, which are both
down by over an hour since the first quarter 1966.

Hours of work

are also significantly lower in the electrical equipment and in the
primary metals industries.

Only in fabricated metals and in the

machinery industries has the workweek been maintained at earlier
high levels.

Hours have not been reduced as sharply in the non-

durable goods industries.

But in textile mills, last year's unusually

long workweek was down by over an h6ur, and in the rubber and paper
industries the workweek also has been curtailed.
Despite the trending-off in the workweek, persistent strength
in employment has continued to expand manhour input in manufacturing.
In January employee manhours were 4 per cent above a year earlier.
Because of the levelling off in output, there has been a virtual
cessation of growth in manufacturing productivity since about mid-1966.
Meanwhile, hourly earnings have continued to rise and unit labor
costs in manufacturing have been moving sharply upward.

In the

fourth quarter of 1966 they were 2.6 per cent above a year earlier;
in January they were almost 4-1/2 per cent higher, according to
data currently available.
Although hourly earnings in manufacturing have risen over
4 per cent since January a year ago, the rise in weekly earnings
over the year--because of cutbacks in the workweek--was under 3 per
cent.

Adjusted for cost-of-living increases, the "real" weekly

earnings of factory workers actually declined slightly (by 0.5 per
cent) in the year ending January 1967; in the year ending January 1966,
real earnings had increased by 2.3 per cent.

II - 23

Changes in labor force data.

Beginning in January 1967,

some changes were made in the procedures for collecting data on
labor force, employment and unemployment which affect the levels and
comparability of the statistics somewhat.

Briefly, the sample has

been enlarged by 50 per cent; the lower age limit for inclusion in
the statistics has been raised from 14 to 16; and some changes were
made in the definition of unemployment which exclude some groups
previously counted.

In addition, some questions obtain better infor-

mation on hours actually worked.

These changes were discussed in

some detail in the January 5 appendix of the Greenbook.
The effect of the elimination of the 14 and 15 year olds-the only revision actually carried back into the 1966 data--reduced
the reported annual average unemployment rate for 1966 from 3.9 to
3.8 per cent, and the December 1966 rate from 3.8 to 3.7 per cent.
The new definitions--had they been in effect in 1966--would have lowered
the 1966 unemployment rate by another 0.1 to 3.7 per cent.

Moreover,

they would have resulted in a slightly smaller unemployment rate for
adult men (2.2 instead of 2.5 per cent), but a larger rate for
adult women (4.2 instead of 3.8 per cent).

For the 16-19 year olds

the new definitions would have reduced their unemployment rate from
12.7 per cent to 11.7 per cent in 1966.

On the other hand, for

nonwhite workers the rate would have been raised from 7.3 to 7.6 per
cent.
The elimination of 14 and 15 year olds, and the annual
recalculation of seasonal adjustment factors changed the monthly
pattern of unemployment for 1966 somewhat.

The revised data now

show the low point of unemployment in the fourth quarter of 1966,
at 3.5 per cent in November.

- 24

An advance estimate published by the BLS

Commodity prices.

for their regular monthly total wholesale price index showed an 0.2
per cent decline for February, following a .3 per cent rise in January
to 106.2 per cent of 1957-59.

The projected February decline anticipates

small decreases in prices of farm and food products and no change in
(This advance estimate replaces the weekly

industrial commodities.

indexes which were discontinued because of their inaccuracies--but the
sample used for estimating industrial commodities has still not been
expanded to include a representation of finished goods).
In January, industrial commodities rose 0.3 per cent, reflecting increases in 11 of the 13 major groupings, but about half of the
rise was in metal products and equipment.

Prices of equipment and indus-

trial supply items probably have continued to increase since then.

Major

producers also sought to raise gasoline prices in February but have
encountered both competitive and Federal resistence.

Prices of some

grades of lumber and plywood were reported to have shown a recovery from
earlier reduced levels.

A major company has raised asphalt floor tile

to be effective March 6 but two previous moves last year failed to hold.
In the more sensitive industrial markets, prices have continued
to tend downward--mainly metal scrap, brass and copper products, textiles,
crude rubber, and waste paper.

The most dramatic decline in prices was

an array of reductions by the American Motors Company for its lowest
priced models ranging up to $234 per unit.
per cent in

the retail list

This was equivalent to 11

price and 7 per cent at the factory level

as dealers' margins were reduced.

- 25

The new prices are aimed to be enough

below other domestically-produced compact cars to attract purchases
from foreign compacts.
The consumer price index was unchanged in January from its
December level of 114.7.

Partly seasonal declines in apparel, food,

and new and used auto prices, were offset by further increases in charges
for consumer services.

The total index was 3.3 per cent above a year

earlier, with the rise in

consumer services amounting to 5 per cent.

Influenced partly by rising labor costs, household service charges were
up 6 per cent and medical care services up 8-1/2 per cent.
Prospective cattle supplies.

New data on cattle inventories

indicate that beef slaughter in the second half of 1967 will be at least
as large as a year earlier instead of being smaller and, when combined
with an anticipated large slaughter in the first half, will provide per
capita

supplies even larger than the record 103 pounds consumed in 1966.

In their price and farm income projections in late 1966, Department of
Agriculture analysts had counted heavily on declining beef production
to lend strength to pork, poultry, and egg prices in the second half of
1967.

Now, with larger beef slaughter in prospect, it appears that prices

of fed cattle will average close to year earlier levels rather than above.
This assumes that normal pasture conditions will permit orderly marketings.
The January 1 inventory data, revised in line with the 1964
Census benchmark and other information, show that, contrary to expectations, the cyclical upswing in

cattle numbers that began in

1958 has not

II - 26

stopped but continues to edge upward.
in 1966 and heifers by 3 per cent.

Total numbers increased 1 per cent

Beef cow numbers were unchanged.

appears that slaughther was about in balance with inventory in 1966 and
that 1967 slaughter can equal last year's without cutting down on inventory.

The long-run price prospects of the cattle industry, from range

producers to cattle feeders, are due for considerable realignment in
the light of these figures.

More or less stable prices over the next

two or three years now seem more probable than the strengthening trend
forecast on the basis of the old inventory numbers.
Larger supplies of all the high-protein foods except dairy
products are likely in the second half of 1967.
indications of adjustments in production.

However, there are some

Broiler producers are reducing

the rate of expansion of production and hog farmers indicated in the
December survey that pig numbers for fourth quarter marketing would be
no larger than a year earlier.

n-c-i

2/28/67

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

EMPLOYMENT AND UNEMPLOYMENT

NATIONAL PRODUCT
I I 1

DOLLARS

ES
E --

850
8 00

.-I

1"""""'1n
i ""111 68

MILLIONS OF PERSONS, ESTAB BASIS
NONAGRICULTURAL EMPLOYMENT
RATIO SCALE

TOTAL

JAN 654

759 3

750CURRENT

DOLLARS

700
S

0Q-IM657 2

S---'

INDUSTRIAL AND RELATED

'-650

S600

-r

"25

-23

00--

INDUSTRIAL PRODUCTION-I

WORKWEEK AND LABOR COST IN MFG.
III""""

1957-59=100
RATIO SCALE

200

AVERAGE WEEKLY HOURS""""

HOURs

180

JAN 1579
JAN 157_

160
PRODUCTION

WORKERS

140
195759.100

TOTAL

120

RATIO SCALE

TOTAL UNIT

LABOR COST IJAN
,0,
1040

MATERIALS
ALL EMPLOYEES

1961

1963

1965

1967

100
1961

NDUSTRIAL PRODUCTION-nl
957 59-ln

Ill.llll[l.l

RATIO SCALE
___

___

JAN 181 I
JAN 181 1

-I-

___

&wvv

JAN 1147
ALL

EQUIPMENT
TOTAL
I

I
1965

ITEMS
_______

110

I_____________

nc
JAN 1470

CONSUMER GOODS

1963

20
15

1961

CONSUMER

1957 S9100
NOT S A

________

1967

RATIO SCALE

1965

PRICES

1963

I......
1.
1967

n-C-2

2/28/67

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

BUSINESS INVESTMENT
BILLIONS OF DOLLARS, ANNUAL RATES

I I I

RATIO SCALE

NEW

-PLANT AND

---

* *

641-60

EQUIPMENT
-EXPENDITURES-- F--

-50

(COM.-S.E.C.

PER CENT

GNP FIXED INVESTMENT
AS SHARE OF GNP

10
11III

BILLIONS OF DOLLARS
ANNUAL

RATIO SCALE

. 190

RATES

EXTENSIONS

..-

, Q

-....... .

_ .
/

...-- ..50

REPAYMENTS
40

NET CHANGE IN OUTSTANDING
,961
-1961

19
1963

111111
1 1 1ll
1965

1
1967

1963

1965

1967

1961

1963

1965

196;

IUSINESS

INSTALMENT CREDIT

1961

INVENTORIES,

NONFARM

III - 1

DOMESTIC FINANCIAL SITUATION
Bank credit.

Based on available data, it is tentatively

estimated that total loans and investments at all commercial banks may
have risen in February by about $2.3 billion--or at a 9 per cent annual
rate.

This would bring the cumulative increase over the three months

since the monetary policy shift in late November to $8.5 billion, or
an annual rate of 11 per cent,

The February increaee in the end-of-

month series appears to be considerably less than that shown on a
daily average basis (credit proxy), mainly because the end of January
figure was high relative to the average

for the month.

Also, further

reductions in borrowings from foreign branches in Feburary--not reflected
yet in the credit proxy--also contributed to this difference.
All of the February credit increase appears to have been
accounted for by bank acquisitions of securities.

Total loans

declined on balance, with small increases in business, real estate,
and consumer loans more than offset by declines in loans to security
dealers and nonbank financial institutions.
The relatively large inflow of time deposits in February-especially in the first half of the month--further reduced pressure
on most banks, though money market banks had an outflow of CD's in
the two weeks ending February 22 and a few New York City banks raised
their offering rates on CD's late in the month.

City banks acquired

substantial amounts of new Treasury notes, apparently, in connection
with the February 15 refunding.

Total holdings of Treasury issues

for all banks rose by about $1.2 billion in February--after having

III - 2
declined by $500 million in January.

Furthermore, banks continued

to acquire municipals and other securities at a rapid pace--adding
about $1.2 billion--including significant amounts of tax warrants
and other short-term instruments, which added further to their
liquidity positions.

Following the substantial January rise, business loans
apparently showed only a nominal increase in February--even less
than the low rate of growth over the last five months of 1966.
As contrasted with January, business payments of accelerated withheld

taxes were small in February.

Moreover, the near record January-

February volume of corporate borrowing in the capital markets, following
the large calendar in late 1966, may have reduced the need for some
businesses to seek accommodations at banks and enabled some others
to repay bank loans.

But the reduced level of bank borrowing in

the face of widespread indications of increased availability of
funds and some easing in bank loan policies suggests that underlying
demand for bank loans may be in a weakening phase.
Over the four weeks ending February 15, expansion has been
slight or declines have been larger than seasonal in almost all
major business loan categories.

Weakness has been particularly

evident in those industries where borrowing is generally associated
with inventory needs.

Among these industries, loans to food processors,

commodity dealers, and manufacturers of nondurable goods declined
sharply.

III - 3
From mid-August to late November

1966, while the large

money market banks were under pressure from CD runoffs and
reduced reserve availability, New York City banks increased their
business loans relatively more than did weekly reporting banks outHowever, from late

side of New York City, as shown in the table.

November 1966 through February 15, 1967, as large banks recovered
most of their CD's and monetary policy eased, the expansion of business
loans diminished abruptly in New York City while it was better
This reversal in trends of business

sustained in the outlying banks.

lending might be indicative of some over-all weakening in the demand
for bank credit by large national corporations.

RECENT CHANGES IN SELECTED ASSETS AND LIABILITIES
Weekly Reporting Banks
(Millions of dollars, not seasonally adjusted)

1/
1/
Late Novemberto mid-February
1966- 1965- 19641967
1966
1965

Mid-Augustto late November
1966

1965

1964

828

657

New York Cit y Banks
Business loans
Time deposits
CD's
Use of Euro-dollars3/

850

1,276

600

950987

50
-130

1,046
236

-1,963

611

564

-1,903

257

359

-542

773
Banks Outside of New York City

Business loans
Time deposits
CD's
Use of Euro-dollars3/

429

1,207

1,188

409

1,121

976

4,222
2,026

1,402
- 121

3,291
779

-1,135
-1,154

1,708
339

885
180

-379

605

Twelve weeks ending February 15, 1967, February 16, 1966, and
February 17, 1965.
Fourteen weeks ending November 23, 1966, November 24, 1965, and
November 25, 1964.
Includes data for 12 banks, 8 in New York City, 2 in Chicago, and
1 each in San Francisco and Boston, and American Express.

III - 4

Preliminary data from the February 15 lending practices
survey show that over the last 3 months, most banks did not change
terms on loans other than interest rates to established customers.
However, nearly half of the banks reported a greater willingness to
lend to new customers, with many banks especially interested in
extending real estate and construction loans, particularly on single
family homes, as well as consumer loans and term loans to nonfinancial
businesses.For all commercial banks in February, real estate loans
expanded at only a moderate pace, no doubt reflecting the substantial
lags in commitment of funds and generation of new mortgages.

Loans

to security dealers declined in February--following the sharp rise
in January--as a change in dealer expectations as to near-term interest
rate movements and higher borrowing

costs led to reductions in dealer

inventories.
Bank Deposits.

Time deposit inflows at commercial banks

remained strong through most of February,

On a seasonally adjusted

daily average basis, total time and savings deposits are estimated to
have increased at an annual rate close to 20 per cent--above the
January rate of 18 per cent and the largest since January 1965.

The

rate of growth was particularly rapid at large banks outside of New
York City where CD's contributed heavily to the expansion, while that
at country banks remained about the same as in other recent months.

A more detailed summary of the results of the survey is presented
in the Appendix.

III - 5
In late February, however, the rate of expansion of time deposits at

city banks fell off substantially.

With time deposit inflows relatively

large, banks continued to reduce their Euro-dollar borrowing in
February.

From the early December 1966, peak of about $4.3 billion

through February 22, these borrowings declined by about $1.0 billion.

TIME AND SAVINGS DEPOSITS INFLOWS
Weekly Reporting Banks
(In millions of dollars, not seasonally adjusted)

All weekly

New York

reporting banks

19671/

1966/

City Banks

1967-

1966 1

All other banks
19661/
1967-/

Total time and

savings deposits

1113

-24

-359

1105

335

Negotiable CD's

668

-71

-16

-313

683

242

Other time2-

459

- 18

444

Savings deposits

-14

-32

- 28

-22

1/ Three weeks ending February 15, 1967, and February 16, 1966.
2/

Other than large negotiable CD's,

The money stock rose at about a 5 per cent annual rate in
February--offsetting the decline in January.

Currency outstanding

increased about $100 million and private demand deposit $600 million.
The increase in demand deposits may in part reflect the increased
availability of bank credit, though some reductions in Treasury balances
late in the second half of the month also contributed to this rise.

III - 6

Since November, the money stock has increased at about a 3 per cent
annual rate, compared with a 1 per cent rate of decline over the
preceding three-month period,
The February rise in short-term market rates has generally
not induced a similar change in CD rates.

While CD rates will remain

relatively attractive compared with Treasury bills, their yield
advantage declined .in February, and other short-term paper continues

to yield more than CD's.

Accordingly, while most large banks were

able to add further to their outstandings, the pace of the expansion
has fallen off considerably and New York City banks lost CD's in the
last two weeks of February.

By February 22, outstandings had almost

recovered their mid-August high.
In the three weeks ending February 15, banks outside of
New York City accounted for all of the increase in outstanding CD's,
whereas earlier in the year, more than half of the growth in CD's
occurred at New York City banks.

This shift probably reflected

mainly a lessening of the desire of New York City banks for CD's,
since the sharp expansion earlier in the year may have satisfied
temporarily the needs of New York City banks.

However, late in

February, a few New York City banks raised the offering rates on
their CD's as short-term market rates began backing up.
On the basis of data for all but one District on the
February 22 CD maturity survey, it appears that the average maturity
of outstanding CD's remained about unchanged in February.

However,

at banks in New York City and Chicago, the average maturities of CD's

III - 7

sold in February were substantially below those sold in January and
were heavily concentrated in March maturities,

These banks may have

preferred to confine their sales of CD's to the short endof the maturity
scale in anticipation of lower rates later on.

Moreover, corporations

may have desired to acquire CD's to finance their March tax payments.
Time deposits other than CD's increased sharply further at

weekly reporting banks outside of New York City in February, whereas
at New York City banks they only rose slightly after having declined
sharply in January.

It is possible that the continuing cpmpetition

from nonbank intermediaries has been primarily responsible for this

slowing in consumer-type time deposits at New York City banks.
Corporate and municial bond markets.

Yields on corporate

and municipal bonds have turned down in initial response to announcement
of the Board's reserve requirement action.

An Aaa-rated telephone

bond, reoffered to yield 5.55 per cent just prior to the announcement,
has sold out quickly; three corporate bonds totaling $150 million and
tentatively scheduled for offering this week or early next have been
postponed for a week to await market developments; and a fourth has been
postponed indefinitely.

Prior to the Board's action yields on corporate

and municipal bonds had advanced markedly from the 1967 lows reached in
early February.

On new corporate issues the up-turn amounted to nearly

40 basis points, and on seasoned municipals it ranged to over 25 basis
points.

In both markets the yield reversal erased more than a third

of the previous decline from 1966 peaks,

III - 8

BOND YIELDS
(Weekly Averages, Per cent per Annum)

Corporate Aaa
Seasoned
New
With call Without call
_protection protection

1965

State and local Gov't.
Bond Buyer's
Moody's
(mixed qualities)
Aaa

End of July 2/
Early December 1966
Late Summer high

4.58
4.79

4.48
4.60

3.16
3.37

3.25
3.50

5.98*

5.44

4.04

4.24

5.80

6.10

5.37

3.89

4.02

Weeks ending:

Dec.

Feb.

5.21

5.02

3.25

3.40

Feb. 10

5.09

5.18

5.00

3.25

3,41

Feb. 17
Feb. 24
Feb. 27-

5.16
5.20*
5.45

5.39
--

5.01
5.05

3.50
3.53

3.62
3.66

Week prior to President's announcement of increased U.S,

involvement

in Vietnam.
2/ Week preceding Federal Reserve discount rate increase.
*

The largest issue included in this average carried 10-year call
protection,

3/ An adjusted one-day quote calculated from the 5.55 per cent reoffering rate on the Chesapeak and Potomac Telephone Company bond.

Bond yields backed up during February chiefly because the
forward calendar of security offerings suddenly became very large at
a time when market participants were questioning whether further nearterm easing of monetary policy could be expected.

Reflecting these

pressures, syndicate price restrictions on 8 of 12 sizable

new

corporate bonds offered in February had to be terminated before

III - 9

distribution was complete, with subsequent upward adjustment in reoffering

yields of 8 to 25 basis points.

These were the first corporate issues

of any size released from syndicate with unsold balances since midNovember.

Lack of investor interest in new issues also expanded the

security inventories of municipal bond underwriters.

As a result, the

"blue list" of their advertised inventories grew to more than $650
million in late February, the highest level since November 1965,
Prior to the Board's reserve requirement action, underwriters
estimating that gross public offerings of interest bearing securities,
would total as much as $3.4 billion in March, excluding new issues of
U.S, Treasury and Federal agency debt.

Corporate bonds accounted for

$1.4 billion of the estimated total, municipal bonds for about $1 billion,
Federal participation certificates for $800 million, and World Bank bonds
for $250 million. Corporate bonds already definitely scheduled for
public offering in March total $1.2 billion, including $700 million
added to the calendar in the past three weeks. Additional postponements
which stretched out corporate demands, the expectation of more favorable
market conditions ahead, could, of course, reduce this figure,
It now appears that corporate bond offerings in February
totaled $825 million--well ahead of February a year ago and substantially
more than had previously been estimated for this month. Most of the
increase was accounted for by the $250 million Union Carbide issue, the
offering of which was advanced into February in order to escape the
congested early March calendar.

With the January volume of corporate

III - 10

public offerings also substantially larger this year than last, it
now appears that gross public offerings for the first quarter will
exceed the first quarter 1966 total by more than 60 per cent.
First quarter corporate security offerings of all types
are likely to fall below last year's first quarter volume, however,
due chiefly to a greatly reduced volume of private placements.

Some

year-to-year short-fall is also expected in the volume of stock
offerings.

While no data are yet available on private placement

takedown in 1967, SEC fourth quarter figures indicate that private
placements were $350 million smaller than the already reduced volume
While funds available for

estimated earlier by the Board staff.

private placements reportedly have shown some increase recently, it
seems unlikely that there will be a substantial expansion as early as
the first quarter,

Consequently in the accompanying table a year to

year short-fall in private placements similar to that evident in the
fourth quarter is assumed to persist in early 1967.
1/
CORPORATE SECURITY OFFERINGS-

(Inmillions of dollars)

Bonds

Public
Offerings 2/

Private
Placements

1966

1965

1966

Total

8,018

5,570

4th Quarter

2,047

1,226

1967

1966

Total Bonds
and Stocks

1965

1966

1965

7,542

8,151

18,074

15,992

1,247

2,264

3,669

4,030

1967

1966

1967

1966
1,339

January

730e

460

400e

692

1,230e

February

825e

560

350e

583

1,300e

1,273

March

1,350e

753

600e

1,311

2,075e

2,482

1st Quarter

2,905e 1,774

1,350e

2,586

4,605e

5,094

1/ Data are gross proceeds.
2/ Includes refundings.

III - 11

In the municipal bond market, the late February build-up of
dealers' advertised inventories reflected both a continuing heavy
volume of current offerings and a tendency for investors to hold back
in making commitments of funds.

While yields were declining generally,

dealers were willing accumulaters of municipals, but when bond
markets widened, dealers attempted with only limited success to cut back
on inventories.

This helps to explain the sharpness of the February

yield advance iu municipal markets.
Municipal debt offerings in February apparently totaled
nearly $1.3 billion, even though rising interest rates led to postponement of about $125 million of planned offerings and additional postponements of issues originally scheduled for early March have also been
announced recently.

Nevertheless, March volume may still aggregate

as much as $1.0 billion, increasing volume for the first quarter to
a record $3,6 billion, roughly a fifth larger than in the previous
record first quarter of 1966,

STATE AND LOCAL GOVERNMENT BOND OFFERINGS
(In millions of dollars)

1966

1965

11,362

11,329

2,631

2,651

1967

1966

January
February
March

l,325e
1,275e
1,000e

1,219
867
879

1st Quarter

3,600e

2,965

Total
4th Quarter

Data are for principal amounts of new issues.

III - 12

Stock market.

Common stock prices--as measured by Standard

and Poor's index of 500 stocks--have recovered most of the loases
registered early this week and are now only slightly below the
recent high reached February 17.

Prior to mid-February, the Standard

and Poor's index had risen more than 9 per cent from early January, to
a level nearly 20 per cent above its October 1966 low.
Trading activity on the New York Stock Exchange continued to
average just under 10 million shares per day in February, about the
same as in January.

Several low-priced issues have appeared regularly

on the most active stocks listed in recent weeks, and Standard's and
Poor's price index of 20 low-priced common stocks has advanced more
rapidly than the broader 500 stock index this year.

From the end

of 1966, for example, the low priced index rose 28 per cent to a new
high on February 21, slightly above the previous high reached near the
peak of the market in April last year.

Trading volume on the American

Stock Exchange, where low-priced issues are particularly important,
has also been relatively high recently, rising to more than 40 per
cent of that on the New York Stock Exchange during the final weeks of
February.

This ratio is substantially above the 20 to 30 per cent

relationship that usually prevails.
Despite the rise in stock prices and trading activity during
January, stock market credit declined about $100 million.

Forty per

cent of this decline represented reductions in customer net debit balances
at member firms of the New York Stock Exchange and 60 per cent represented
a cut-back in purpose loans at banks.

The monthly drop in stock market

credit was the first since October and tends to support the view that much
of the upward pressure on prices during January came from institutional
buying.

III - 13
U.S. Government securities market.

Yields on Treasury notes

and bonds have risen some 15 to 20 basis points since late January and
in the longest maturities this increase has served to erase nearly
half of the previous yield decline that started in late November.
Intermediate-term issues in recent weeks have retraced 1/5 to 1/4 of
their earlier decline.

Treasury bill rates moved up sharply in the

first three weeks of February, but have declined again in recent
trading sessions.

The initial impact of the announcement of a cut

in bank reserve requirements was to reduce yields moderately throughout the list.

YIELDS ON U.S. GOVERNMENT SECURITIES
(Per Cent)
Date
3-month
Date 3-moh
bills
(Closing bids)

6-month
6-m
h
bills

3 years

5 years

10 years

20 years

1965
Dec. 3

4.12

4.26

4.54

4.52

4.44

1966
Aug. 29
Sep. 21

5.02
5.59

5.51
5.96

6.22
5.90

5.89
5.53

5.51
5.21

5.12
4.97

Nov. 25
Dec. 30

5.27
4.81

5.47
4,92

5.56
4.94

5.39
4.80

5.23
4.64

4.91
4.58

1967
Jan. 27
Feb.
3

4.59
4.46

4.56
4.47

4.58
4.61

4.61
4.66

4.47
4.52

4.47
4.50

7
23

4.55
4.64

4.54
4.71

4.65
4.85

4.68
4.83

4.54
4.74

4.53
4.73

4.48

4.74

4.75

4.69

4.67

Feb.

March 1*
*

Noon quotations.

III - 14

Major factors influencing the Treasury bond market in receit
weeks have been the large and continuing build-up in the corporate bond
calendar and indications of a possible offering 6f FNMA participation
certificates in March.

The market has also reacted bearishly to the

somewhat tauter atmosphere in the Federal funds and dealer loan markets,
and to recent developments in Vietnam. Against this background, a
growing conviction developed that the earlier yield declines had been
overdone,

Dealers accordingly sought to reduce their inventories, and

despite some simultaneous investor selling, partly on swaps into new
participation certificates, dealers were sizable net sellers of notes
and bonds in recent weeks.

From their peak on February 3, net dealer

holdings of coupon issues due in more than 1-year declined nearly $500
million to a level of just under $600 million on February 28.

Of this

decline, $223 million was accounted for by Treasury trust fund purchases
on February 24.
The rise in bill rates in the first three weeks of February
appeared to reflect mainly market reaction to the tighter Federal
funds market and the associated rise in dealer financing costs,

this period dealers were willing and at times aggressive sellers of
bills and they were able to reduce their inventories somewhat from
unusually high levels in January and early February.

More recently,

dealer bill sales accelerated as the System and the Treasury were
large buyers.

Partly as a consequence but also as a result of a

more comfortable tone in the Federal funds market and the reduction in
required reserves, bill rates have fallen sharply in the last few days
from their recent highs reached on February 23.

Ill - 15
Yields on most other short-term debt instruments rose after
the first part of February, as the table shows.

SELECTED SHORT-TERM INTEREST RATES

1966
High

1967
Low

Feb. 24

Commercial paper 4-6 months

6.00 (12/31)

5.38 (2/24)

5.38

Finance company paper 30-89 days

5.88 (12/31)

5.00 (2/14)

5.13

Bankers' Acceptances 1-90 days

5.75 (10/25)

4.75 (2/10)

5.00

Certificates of deposit (prime NYC)
Typical new issue:

5.50 (1/18/67) 5,00 (2/20)
5.50 (1/11/67) 5.00 (2/20)

5,13
5.13

5.90 (9/21)
6.30 (9/28)

5.15 (2/14)
5.20 (2/14)

5.25
5.30

5.76 (9/21)

4.70 (2/10)

4.75

6-months

6.04 (9/21)

4.82

9-months

6.04 (9/21)

4.92 (2/9)

5.10

4.25 (9/21)

2.75 (2/10)

2.80

3-months
6-months
Secondary market:

3-months
6-months
Federal Agencies (secondary market):
3-months

Prime Municipals 1-year
N.B.

(2/10)

4,99

Latest dates on which high or low rates occurred are indicated in
parentheses.

Treasury finance.

,The Treasury is expected to announce a cash

offering of around $2.5 billion of June tax bills as soon as final
legislation is secured raising the debt ceiling from the present $330 billion to $336 billion.

Since payment date for the new bills will not

be before mid-March and the Treasury cash operating balance will be
drawn down to low levels in the meantime, the Treasury may need to borrow
directly from the System at some point during this period,

III -

The next regularly scheduled Treasury financing operation
will be the refunding of $9.7 billion of notes maturing in mid-May.
Of this total, only $2.9 billion is held by private investors.

III - 17

Corporate profits.

Corporate profits before taxes, according

to present staff estimates, were at a seasonally adjusted annual rate
of $82.5 billion in the fourth quarter of last year.

This is nearly

$3 billion larger than advance estimates had assumed and reflects
primarily the better than expected earnings reported by manufacturing
companies.
Profits of manufacturing corporations, based on data now
available for over 600 companies that account for nearly two-thirds
of the earnings of all manufacturing corporations, appear to have
been 5 to 6 per cent larger than in the fourth quarter of 1965.

This

is a smaller year-to-year increase than in any quarter since early
1963.

But the year-to-year rise is large enough to produce a

seasonally adjusted increase from the third to the fourth quarter,
since profits were rising sharply in the latter part of 1965.
Profits/sales ratios probably held about steady, following declines
in the second quarter and again in the third.
It had generally been expected that manufacturing profits
would continue to decline in the fourth quarter of last year and such
a development would have been consistent with the increase reported
in unit labor costs, the decline in price per unit of labor cost and
the slight increase in industrial output.

Excluding automobiles,

profits of manufacturing corporations apparently did in fact decline-but only a little--from the third to the fourth quarter, but auto
manufacturers reported a much greater narrowing in the year-to-year

III - 18
decline in their earnings than would have been expected from the
moderate narrowing in the year-to-year decline in their output.
Presently available data do not indicate whether earnings reported
by manufacturers for the fourth quarter were inflated by special
factors such as year-end credits or repatriation of foreign earnings
in anticipation of increased taxes.

Flows to financial intermediaries.

More complete data

now available for January document the strength of the improvement
in savings flows to financial intermediaries.

Net flows to both

commercial and savings banks were in record volume.

While net

flows to savings and loan associations were also dramatically higher
than in January 1965, they still fell substantially short of the
$600 million average January inflow during the 1960-1964 period.

NET FLOWS TO DEPOSITARY-TYPE FINANCIAL INTERMEDIARIES
(Millions of dollars, unadjusted)

Total I/

S&L's

Mutual
Savings
Banks

Commercial Banks
With
Without
CD's 1/
CD's

January
1967
1966
1965
1964

2,543
981
2,288
2,069

370
-77
254
469

400
227
358
382

1,773
831
1,676
1,218

3,986
1,164
2,726
1,218

4th Quarter
1966
1965
1964

5,349
8,576
8,249

2,210
3,032
3,277

1,069
1,046
1,202

2,070
4,498
3,770

744
4,678
4,398

Excludes CD's in excess of $100,000 at weekly reporting banks.

III - 19

Thus far only fragmentary evidence is available on savings
flows in February.

During the first half of the month, the 15 largest

savings banks in New York City received $50 million in new deposits,
more than double the inflow for the same period in February 1965.
While similar data are not available for S&L's, the S&L's have continued to make substantial repayments of debt at the Home Loan Banks,
suggesting that inflows have remained relatively large.

This explains

why the Federal Home Loan Bank System was able to repay in full the
$543 million issue of its notes which matured in February.
To a considerable extent the large loan repayments by
member S&L's in recent weeks have reflected a continuing shortage
of immediately available mortgages.

For this reason, in January as in

December, new mortgage loans by S&L's were smaller than the return
flow of payments on outstanding loans.

CHANGES IN S&L ADVANCES AND DEPOSITS AT
HOME LOAN BANKS
(Millions of dollars)
Liquidity of
the FHL Banks I/

First 3 weeks
of February

Change in
Advances

Change in Deposits
at FHL Banks

1967

-511

138

2,309

1966

-142

-44

719

1965

- 89

560

1964

-211

-15

857

Represents operating funds in excess of liquidity reserve requirements and reserves for unanticipated advances. This figure is as
of the end of January.

III - 20
Mortgage market developments.

With net savings flows to

lenders apparently continuing at a high level, mortgage markets
eased further during February.

Recently, however, some observers

have expressed concern that the pace of easing might slow unless
congestion is reduced in bond markets.
One indication of further easing in mortgage markets was the
FHA Commissioner's recent statement implying that secondary-market
yields on certain FHA-insured home loans declined by considerably
more in February than they did in January.

Also, weekly offerings

of FHA and VA mortgages to FNMA for purchase under its secondarymarket operations continued at a low level through mid-February, despite some increase in FNMA's prices early in the month along with
other steps taken to encourage a larger volume of offerings.
While statistics for February are fragmentary, data available for January show that easing in mortgage markets was greater
in certain respects than during any comparable month following
shortly after earlier postwar turning points in mortgage yields.
Secondary-market offerings to FNMA dropped by nearly half.

Applica-

tions and requests to FHA and VA to underwrite mortgages on existing
homes picked up substantially.

And declines were reported both in

Federally-underwritten home loan discounts and in conventional home
mortgage interest rates.
Secondary-market yields on certain FHA home loans--which
had risen so sharply last year--were down by 15 basis points in

III - 21
January, more than in any comparable month of earlier yield downturns.

Average interest rates on conventional first mortgages

for home purchase (FHA series) edged down for the second consecutive
month, largely reflecting declines in the Southwest and West where
rates had risen the most in 1966.

Even the lagging FDIC-FHLBB

conventional home mortgage series finally turned down in January,
as both rate and non-rate terms eased slightly, although not all
lenders or areas reported liberalization.

AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES
(Per cent)

PRIMARY MARKET.:
Conventional loans

1966
January
November
December
1967
January
Source:

FHA-insured

loans

FHIC-FHLBB

'L-

SECONDARY MARKET:

Ser-_s

Yield

6.00

5.81

5.70

4.0

6.70
6.65

6.40
6.44

6.81
6.77

6.8
6.5

6.60

6.43

6 b2

5.3

Discount

Fel-ral Housing Aiminis:iation and Federal Hon'aLoan 3ank
Bo.rd. Convent'onal loan contracc interest rate data exclude
fees and charges.

m-c-i

2/28/67

FINANCIAL DEVELOPMENTS - UNITED STATES
FREE RESERVES AND COSTS
BILLIONS OF DOLLARS

HIII

NET FREE RESERVES

FEB 22 JO

NET BORROWED RESERVES

IDEPOSITS

ER CENT

III
.

OF ON

Q-.F 43 3

1il ,l l
II

MONEY SUPPLY & TIME DEPOSITS
MONEY

SUPPLY

Q.1

1965

MUTUAL SAVINGS

BANKS

JAN 553

40
22

3
1963

ii30
15
1L67

1963L196

ll*ij*ll
l l ll

1963

1965

lli

1967

T -C-2

2/28/67

FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED-NONFINANCIAL SECTORS
BILLIONS OF DOLLARS
SEASONALLY ADJUSTED,
ANNUAL RATES

-TOTAL-

100
1

SHARES IN TOTAL CREDIT
PERCENT

Q80
QIV 32 9

DOMESTIC

PRIVATE

PERCENT -

57 2

4sI

COMMERCIAL

BANKS

PRIVATE DOMESTIC TO

PRIVATE INVESTMENT

OUTLAYS

---

NONBANK DEPOSITORY
INSTITUTIONS

0 M 240

1963

TO G.N P.

TOTAL

I
l

1967

1965

MARKET YIELDS

STATE AND LOCAL GOVERNMENT
*JAN

MAR.

JUNE

SEPT.

DEC.

PUBLIC
1964

V
1965

1966

121

I
1967

IV - 1

INTERNATIONAL DEVELOPMENTS

U.S. balance of payments. The balance of payments measured on
the liquidity basis was in moderate deficit in early 1967 --

on the order

of $100 million, before seasonal adjustment, for the month of January
plus three weeks of February.

The first

able for the U.S. payments position -the deficit by about $500 million --

quarter is

customarily favor-

the seasonal adjustment increases

but monthly data for recent years

suggest that little of this adjustment should be applied to the results
for January and February.
In contrast, the balance measured on the basis of official
reserve transactions was in deficit in the first seven weeks of 1967
by more than $600 million before seasonal adjustment, and by a larger
amount after adjustment.
in

This deficit had a substantial counterpart

the very large dollar accruals by the Bank of England,

which used

much of its net receipts to repay drawings on Federal Reserve swaps
and other official assistance.

(In February, there were sizable dollar

reserve gains by Germany as well,
at the beginning of the year.)

partly reversing the seasonal decline

Thus,

so far the large foreign official

reserve gains associated with our deficit on official reserve transactions have not increased foreign demands for monetary gold.
million decline in

the total gold stock in

the first

The $70

two months of this

year has reflected small purchases by a number of countries and sales
to U.S. domestic industry.
The relatively low rate of deficit on the liquidity basis
early this year --

relatively low as compared with recent estimates of

IV - 2

the underlying payments position --

may be partly explained by a $260

million reduction in outstanding bank credits to foreigners in January.
This decline was substantially more than seasonal,
in January 1966.

and as large as that

It showed up in both short-term loans and acceptance
and was fairly widely distributed among

credits and long-term loans,

Moreover,

foreign borrowing countries.

new long-term loan commitments

to foreigners in January were little changed from the low average rate
Thus, net flows of U.S.

of the last half of 1966.

bank credits to

foreigners as yet show no evidence of having shifted in response to
easier credit conditions in this country.
Moreover, recent scheduling of foreign security issues in the
United States appears toreflect changed capital market conditions here
only in the case of the prospective $250 million offering by the IBRD
(part for delayed delivery); it now appears likely that new bond offerings by Canadian borrowers arranged in
larger than in

the fourth.

the first

quarter will be little

The IBRD issue can be expected to affect

the payments deficit on the liquidity basis only gradually as the IBRD
makes disbursements-- initially the Bank will invest the proceeds in
long-term instruments in
in

the U.S.

the United States,

as it

borrowings

market last year.

The trade balance improved in
sharply almost to their October peak.

January,

the surplus was a little

rate of $3 billion.

as exports advanced

Details on the country and com-

modity distribution of trade are not available.
together,

did with its

For December-January

below the fourth quarter annual

IV - 3

The fourth quarter trade surplus has been revised downward on
the basis of new seasonal adjustment factors, and the trends in both
imports and exports have been somewhat changed.

Imports now appear not

to have leveled off in the fourth quarter, but instead to have increased
at an annual rate of 6 per cent from the third quarter.

This rise still

represents a marked slowing from the annual rate of 20 per cent which
occurred between the third quarter of 1965 and the third quarter of 1966.

U.S. EXPORTS, AGRICULTURAL AND NON-AGRICULTURAL:
(Billions of dollars)

1965-66

1 9 6 6
1966
1965
1966
I
II
III
IV
(Seasonally adjusted annual rates)

Non-agricultural exports
Canada
Western Europe
Japan
Latin America
Other countries
Special categories
other than military
grant aid
Agricultural exports
Total exports

Note:

20.2

22.4

22.1

22.2

22.4

22.8

5.0
6.2
1.2
3.3
4.2

6.0
6.6
1.4
3.7
4.3

5.6
6.9
1.3
3.8
4.2

6.0
6.7
1.3
3.6
4.2

6.0
6.6
1.3
3.8
4.5

6.4
6.3
1.6
3.7
4.6

6.3

7.1

6.8

6.9

7.4

7.1

26.5

29.4

28.9

29.0

29.8

29.9

Census basis which differs somewhat

from balance of payments basis.

IV - 4

The revised export figures now show a slower growth during
1966, and fourth quarter exports were $29.6 billion at an annual rate
(balance of payments basis.)

As shown in the table, which presents

data on the Census basis, divergent trends in exports continued in the
fourth quarter.

While total non-agricultural exports were up, there

was a further marked decline in these exports to Western Europe, reflecting in part lower sales to the United Kingdom.

The expansion in

non-agricultural exports to Canada consisted entirely of automobiles
and parts, but the growth in sales to Japan is believed to have been
broadly based.

The decline in agricultural exports in the fourth quarter

reflected mainly a dip in sales of wheat and other grains.
Money markets and interest rates abroad,

Interest rates in

Germany and Britain during February were markedly below last autumn's
levels.

The decline in three months from mid-November amounted to about

3/4 of a percentage point for typical short-term money market rates in
Britain -- about the same as for U.S. 3-month Treasury bills.

German

3-month rates were down about 1-1/2 per cent from last September.

Long-

term bond yields in Britain and in Germany, which were higher in 1963
than ours, and which rose much more than ours in the three years after
mid-1963, have also fallen more than ours since last summer and autumn -but still remain relatively high.

After declining by around 0.8 per cent

in Britain and over 1 per cent in Germany since early September, longterm government bond yields are still around 6-1/2 per cent in Britain
and 7-1/4 per cent in Germany -- compared with about 4-1/2 per cent in
the United States, down 30 or 40 basis points from early autumn.

IV - 5

In other European countries, interest rate movements have been
less clear-cut; but in most countries the uptrends since 1963 have now
topped out.
In Canada, rate movements since December have roughly paralleled
those in the United States; earlier in 1966 Canadian short-term rates
moved up sharply above ours, but during the summer and autumn they held
relatively steady.
Japanese interest rates have moved very differently from those
in most other industrial countries.
to decline.

Throughout 1965 and 1966 they tended

In the past two months some Japanese rates have risen a little.

Three major influences are responsible for the striking downturns in British and German interest rates.

First, with economic activity

no longer expanding, domestic credit demands have been diminishing.
Secondly, the easing of money market conditions in the United States has
removed upward pressures previously exerted from this country through the
Euro-dollar market.

Finally, and of special importance, monetary policies

have changed in the direction of ease, in recognition of (1) the fading
of aggregate demand pressures; (2) the probability of a further decline
this year in private investment spending on plant and equipment in Britain
and earlier fears of such a development in Germany; and (3) the desirability
of concerted efforts to bring interest rates down from last year's extraordinarily high levels.
Highly visible facets of the shifts taking place in policy
have included the reductions, since early January, in the discount rates
of the central banks in Germany, Britain and Canada, and reductions in

IV - 6

bank reserve requirements in Germany.

Elsewhere in Europe, the Belgian

and Swedish central banks have also reduced their discount rates.
In the Euro-dollar market, rates declined much more than seasonally after mid-December, as U.S. banks reduced their liabilities to their
branches abroad.

From December 14 to February 1 these liabilities fell

by $1.2 billion.

In the week ended February 8 they rose by $0.2 billion;

changes in the next two weeks were small.

The 90-day Euro-dollar deposit

rate dropped by 1-1/2 percentage points from mid-December to the end of
January; a normal seasonal decline would be about 1/2 per cent,

SHORT-TERM INTEREST RATES
(per cent per annum)
1963

U.S.:

3-mo. Treas. billl
Federal funds 1/

Euro-dollar:

U.K.

3-mo.
3-mo.

Germany:

1965
Dec.

2.99

4.12
4.13

5.40
5.80

2.96

1966
Sept. Nov.
16
18

1967
Jan.
20

Recent

5.38
5.96

4.71

4.61 (2/2 24)

5.25

5.18 (2/4 24)

call money
3-mo. deposit

3.50
3.84

4.50

6.25
6.69

6.25
6.75

5.25

5.75

5.25 (2/2 !4)
5.56 (2/2 i4)

Treas. bill
local authority

3.63
4.25

5.24
6.38

6.60
7.38

6.57
7.25

6.10
6.63

5.89 (2/2 21)
6.34 (2/2 24)

3.88

6.25

6.88

7.18

5.31

5.31 (2/2 24)

2.86
6.25
3.40
2/1.87

4.00

4.25
3.63
7.75
4.75

4.38
5.38
6.00
5.00

4.50
5.50
6.15
4.88

4.50
4.81
6.00
4.78

3-mo.

Switzerland:
France:
Belgium:
Netherlands:

June

inter-bk.

3-mo, deposit
call money
Treas. bill
Treas. bill

4.81

5.00
4.29

Average for week ending at specified date.
Average for June 1963.

(2/
(2/]
(2/;
(2/1

L5)
L5)
!1)
L7)

IV - 7

Market rates of interest in the United Kingdom began to decline
after early September, and by the end of November the yield on War Loan
was already almost 40 basis points under the September peak.

In the

Treasury bill market the Bank of England resisted the declining tendency
of short-term rates until the end of November.

Renewed declines in December

and most of January reflected easing credit conditions in other national
and international markets as well as widespread anticipation of an early
reduction in

Bank Rate.

The cut in Bank Rate on January 26, from 7 to 6-1/2 per cent,
was less than many in the market had expected; subsequently, and partly
in anticipation of a further cut, market rates declined further.

While

the British authorities welcome the fall in long-term rates as an encouragement for private fixed investment, they have proceeded cautiously in allowing short-term rates to decline in order to maintain covered interest rate
spreads that favor switches from Euro-dollar assets to local authority
deposits or other sterling investments.

Such switching contributed to

large U.K. official reserve gains in January and February.
The rise in seasonally adjusted unemployment in Britain
slackened in January and February.

Industrial production (preliminary)

picked up in December, but for November and December together industrial
output averaged 3-1/2 per cent below its level last July and August.

IV - 8

LONG-TERM GOVERNMENT BOND YIELDS
(per cent per annum)
II

1967
Jan.
Recent
20

1963
June
28

1965
Dec.
3

196 6
Dec.
Sept.
2
2

U.S. (10-year and over) 1/
Canada (4-1/2% 1983) 2/

4.00
4.95

4.36
5.45

4.87
5.96

4.74
5.97

4.37
5.61

U.K. (War Loan) 21
Germany (6% publ.author.) 4/

5.54
6.1

6.49
7.78

7.31
8.32

6.93
7.79

5.75

6.54 (2/ '23)

7.37

7.23 (2j/24)

Switzerland (3-1/2% 1967-74)

3.11

3.98

4.08

4.18

France (public sector) 5/
Belgium (composite)
Netherlands (composite) h.

5.38
5.03
4.29

5.86
5.66
5.97

6.29
5.84
6.76

6.44
5.90

4.23
6.45
n.a.

4.24 (2117)
6.45 (2 /10)
n.a.

6.57

6.06

5.90 (2j/10)

4.55 (2/ '24)
5.61 (21 '15)

1/ Average for week ending at specified date.
/ Wednesdays.
3/ Thursdays.
4/ Figure for June 28, 1963 is the monthly average for that month on all
public authority bonds.
5/ After withholding tax.
6/ Figures for June 28, 1963 and December 3, 1965 are monthly averages
for those months.

Sluggish business conditions in Germany in the fourth quarter
of 1966 were reflected in a further slowing of the expansion of bank loans
to private borrowers.

The balance-of-payments surplus has continued to

supply additional reserve funds to the banking system, and since the turn
of the year the Bundesbank has taken overt action to increase bank liquidity.
Consequently, the easing tendency in short-term rates that began last
summer has continued --

apart from seasonal tightening near the year-end.

German industrial production in November-December was 4-1/2 per
cent below its high of last March and April.

In shifting its policy stance

to resist the slowdown in domestic economic activity, the Bundesbank has
been influenced by the brighter prospects for noninflationary wage settlements

IV - 9
this year and by the satisfactory solution the Government has found for
its budgetary problem in the current economic situation.

The discount

rate was reduced by 1/2 per cent on January 6 and by another 1/2 per cent
on February 17.

Lower bank reserve requirements against domestic deposits,

originally announced as a seasonal measure for December only, were extended

indefinitely as of January 1. Effective February 1, reserve requirements
on foreign liabilities were reduced to the same level as those applying
to domestic liabilities, thereby offsetting the restrictive effect of a

Then,

January 1 change in the basis for calculating foreign liabilities.

effective March 1, reserve requirements on all liabilities were reduced
further by 10 per cent.

The Bundesbank also lowered its buying and selling

rates on Treasury bills and other open market paper on five occasions
from December 30 to February 17, the reductions generally totalling 1 per
cent.

The interest rates that banks pay on time and savings deposits

were lowered a uniform 1/2 per cent as of February 1.
The bond market has seen a steady rise in prices since November,
in response to the improving state of bank liquidity and the near-complete
moratorium on new flotations by the German public authorities.

This year

the German authorities have begun a cautious relaxation of the ban on

new bond offerings by the public authorities.

In January, one state and

one municipal issue were marketed; each was oversubscribed, and the down-

ward trend of bond yields was not interrupted.

Further issues were

scheduled in February.
The easier tone in Canadian financial markets, induced largely
by developments outside the country, has been influenced also by evidence

of slackening in the pace of rise in Canadian economic activity.

IV - 10

December it was learned that real GNP had undergone an absolute decline
in the third quarter.

On January 30, the Bank of Canada moved to reduce

interest rates further and cut its discount rate from 5-1/4 to 5 per cent.
In France, some interest rates have dropped since the beginning
Of 1967, but it is difficult to determine to what extent the previous upward trend of rates may have been reversed.

Short-term rates continued

to rise steeply through the end of 1966, so that in December call money
averaged nearly 5.7 per cent in contrast to a 4.6 per cent monthly average
as recently as September.

Principally, this increase reflected a hardening

of interest rate policies of the Bank of France, which no longer found it
expedient to maintain French money market rates below those in other
countries.

The call money rate then declined to 4-3/4 per cent by mid-

February, influenced partly by seasonal factors and also by structural
changes in French monetary regulations.

In January, required cash reserves

for banks were instituted, while other regulations were eased, and the net
effect was to improve the liquidity position of the banking system.

(It

is not known whether the authorities intended such a net result or not.)
In addition, declining rates abroad had an impact on French market conditions.
In the French bond market, some further increases in yields
occurred in November and December.

In January and February, yields on

outstanding corporate bonds declined by about 10 basis points, but yields
on public sector bonds have been fairly steady.
In Switzerland, the rate on 3-month deposits had held steady
since the end of 1966 at 4-1/2 per cent.
steadied since late December.

Bond yields also seem to have

- 11

Japanese money market conditions tightened slightly in January
and probably also in February, mainly as a result of increased Treasury
receipts, marking the first significant change from a two-year trend
of easing.

Upward pressure on interest rates is considered likely to

continue in March.

The Bank of Japan on January 25 approved an increase

in the maximum call loan rate for over-month-end money, i.e., call money
repayable at a day's notice in the following month.

The rate rose from

6.57 to 6,75 per cent.
Yields on government and most other bonds generally remained
unchanged through December.

However, yields on Telephone and Telegraph

issues, which are the most freely traded of the Japanese bonds, rose
slightly from 7.51 per cent in August to 7.58 per cent in November.

Iv-C-1

2/28/67

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED

U.S. BANK CREDIT OUTFLOWS

U.S. BALANCE OF PAYMENTS
BILLIONS OF DOLLARS
QUARTERLY

OFFICIAL RESERVE
TRANSACTION BASIS

+
-0
Of

LIQUIDITY BASIS
----

------

1963

1961

---

----

1967

1965

REST OF WORLD

7i/-/'1965

tC~-l
'57

'59

'61

'63

'65

1967

APPENDIX A:

SURVEY OF BANK LENDING PRACTICES, FEBRUARY 1967*

On February 15 the quarterly survey of changes in bank
lending practices was conducted for the first time on the new
reporting schedule, that is, as of the 15th of February, May, August,
and November. The sample also was enlarged to about 130 banks to
coincide with the revised reporting panel for the quarterly survey
of interest rates charged on business loans. This sample group
included 77 banks that had reported in earlier surveys. The results
of the February survey are summarized in this appendix and accompanying
tables.
Nearly three-fifths of the respondents (77 out of 130 banks)
reported loan demand unchanged in the three months ending February 15
and about the same proportion anticipated no change in demand over
the next three months, as shown in Table 1. Nevertheless, over onethird of the banks indicated loan demand was moderately weaker in this
period--a larger proportion than in any previous survey--while only
8 banks reported that demand had strengthened.
Reflecting the reduction in the prime rate in late January,
three-fourths of the banks had lowered interest rates charged business
borrowers and about half also had reduced their rates to finance
companies. However, at most banks, other lending terms and conditions
were essentially unchanged.
Nevertheless, some shift toward easier lending practices
was noted in the types of borrowers to which banks were willing to
lend and in the intended use of the loan. Almost half of the banks
reported moderately easier policies on loans to new customers, and
nearly one-fifth indicated easier policies on loans to borrowers
outside the bank's service area. Also one-fifth showed reduced concern
about the intended use of the loan proceeds. By contrast, few banks
reported firmer lending policies in any of these areas.
Easing also was indicated by the greater willingness of
banks to make particular types of loans. About half of the banks
were more willing than 3 months earlier to make loans on single
family residences and nearly one-fourth to make other mortgage loans,
except those on multi-family properties. Many banks commented that
they were actively seeking single family loans and an even larger
number expressed increased interest in construction loans. Several
banks stated that they were currently making some real estate construction
loans they would not have made three months earlier, This change

Prepared by Caroline H, Cagle, Economist, Division of Research and
Statistics.

A - 2
resulted in some cases from a decline in residential loan portfolios,
an increase in time deposits or both. Some liberalizing of terms
on mortgage loans was being made to meet competition at a number of
banks.
A sizable proportion of respondents (over one-fourth) also
were more willing to make term loans to business borrowers and
consumer instalment loans. One bank stated that with slackening
demand for business loans, it was competing more aggressively for consumer loans to maintain earnings. Relatively few banks showed
increased willingness to make participation loans, loans to brokers,
and multi-family mortgage loans, but even here the proportions ranged
from one to two-tenths of the sample.
To indicate the extent of the recent shift in bank lending
posture, Table 2 shows the net number of banks reporting easier
lending practices in the last three surveys. In other words, this
table shows the number of banks reporting easier policies less the
number reporting firmer policies, ignoring those reporting policies
essentially unchanged. To maintain comparability, the comparison is
based on the old survey reporting panel in each period. The
table suggests that the numerical shift from restraint toward ease
generally was greater from September to December than from December to
February. However, the significance of the shift is not adequately
measured by the figures alone. The change from September to December
represented mainly a reduction in the number of banks reporting firmer
policies; that from December to February represented mainly an increase
in the number of banks making overt moves to liberalize lending
policies.
Comments on the reasons for changes in policies were provided
by a larger proportion of respondents than in any previous survey.
Many banks stated that their policy changes were not extensive and
were applied selectively. Among the more frequently mentioned
reasons for easing policy were the decline in loan demand, the greater
availability of loanable funds, and the rescinding of the September 1
letter. Some banks emphasized that they had experienced net liquidation of loans as a result of their restrictive policies of last year.
The availability of these funds, coupled with their greater ability
to compete for time deposits, had given them increased flexibility.
By contrast, some banks pointed out that the demand for
loans and for new lines of credit and other commitments had not
abated, and that on the basis of loan demand, there was no justification
for the reduction in the prime rate. Other banks emphasized that the
moderate weakening of interest rates was in response to competitive
pressure and improved bank liquidity. Most lending practices, it
was stated, were unchanged because respondents anticipated that loan
demand pressures would recur later in the year.

Not for quotation of publication

Table 1
QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES
AT SELECTED LARGE BANKS IN THE U.S. 1/
(STATUS OF POLICY ON FEBRUARY 15, 1967, COMPARED TO THREE MONTHS EARLIER)
(Number of Banks)

Total

Much
Stronger

Moderately
Stronger

STRENGTH OF DEMAND FOR COMMERCIAL AND
INDUSTRIAL LOANS (after allowance for
bank's usual seasonal variation)
COMPARED TO THREE MONTHS AGO

Essentially
Unchanged

Moderately

Weaker

Much
Weaker

ANTICIPATION DEMAND IN THE NEXT
3 MONTHS
Number
Answering
Question

Much
Firmer

Moderately
Firmer

Policy

Essentially
Unchanged
Policy

Moderately
Weaker
Policy

Much
Weaker
Policy

LENDING TO NONFINANCIAL BUSINESSES
Terms and Conditions
Interest rates charged
Compensating or supporting balances
Standards of credit worthiness
Maturity of term loans
Reviewing Credit Lines or Loan Applications
Established customers
New customers
Local service area customers
Nonlocal service area customers
(cont'd)
1/

Survey of Lending Practices at 130 Large Banks Reporting in the Federal Reserve Quarterly Interest
Rate Survey as of February 15, 1967.

Number
Answering
Question
Factors Relating to Applicant 2/
Value as depositor or source of
collateral business
Intended use of the loan

Much
Firmer
Policy

Moderately
Firmer
Policy

Essentially
Unchanged
Policy

129
129

115
92

130
130
130
130

58
122
117
90

Moderately
Weaker
Policy

Much
Weaker
Policy

Moderately
more

Considerably
more
willing

LENDING TO "NONCAPTIVE" FINANCE COMPANIES
Terms and Conditions
Interest rate charged
Compensating or supporting balances
Enforcement of balance requirements
Establishing new or larger credit lines

Number
Answering
Question

Considerably Moderately
less
less
willing willing

Essentially
Unchanged

willing

WILLINGNESS TO MAKE OTHER TYPES OF LOANS
Term loans to businesses
Consumer instalment loans
Single family mortgage loans
Multi-family mortgage loans
All other mortgage loans
Participation loans with correspondent
banks
Loans to brokers
2/

130
129
128
128
128

94
82
60
105
91

128
129

99
100

For these factors, firmer means the factors were considered more important in making decisions for approvi'ng
credit requests, and weaker means they were less important.

A-5
Table 2
NET NUMBER OF BANKS REPORTING EASIER LENDING PRACTICES 1/
Feb. 15,

Dec.

15,

Sept.

1967

1966

15,

LENDING TO NONFINANCIAL BUSINESSES
Terms and Conditions
Interest rates charged

-18

-79

Compensating or supporting balances

-26

-67

Standards of credit worthiness
Maturity of term loans

-3
3

-14
-12

-40
-44

Established customers
New customers
Local service area customers
Nonlocal service area customers

16
38
17
13

-6
-18
- 7
-23

-60
-76
-56
-67

Factors Relating to Applicant 2/
Value as depositor or source of
collateral business
Intended use of the loan

-2
12

-22
-15

-69
-66

Reviewing Credit Lines or Loan Applications

LENDING TO "NONCAPTIVE"

FINANCE COMPANIES

Terms and Conditions
Interest rate charged

- 9

-64

Compensating or supporting balances

-2

-17

-42

Enforcement of balance requirements
Establishing new or larger credit lines

-3
6

-26
-23

-47
-66

Term loans to businesses

-14

-69

Consumer instalment loans
Single family mortgage loans
Multi-family mortgage loans
All other mortgage loans
Participation loans with correspondent
banks
Loans to brokers

13
36
5
14

4
- 7
-19
-19

-18
-44
-55
-61

16
12

- 1
-13

-55
-51

WILLINGNESS TO MAKE OTHER TYPES OF LOANS

1/
Survey of Lending Practices at 81 large banks reporting in the Federal
Reserve Quarterly Interest Rate Survey. In the February Survey only 77 of the
banks reported due to a revision in the sample.
2/
For these factors, firmer means the factors were considered more important
in making decisions for approving credit requests, and weaker means they were
less important.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 7, 1967 : Greenbook

FRASER