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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. 1 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). 2 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) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System May 6, 1971 SUPPLEMENTAL NOTES The Domestic Economy Industrial production. The preliminary production worker manhour data for April in conjunction with the available physical volume data indicate a rise of .5 of one point or more in industrial production (annual rate of about 3 1/2 per cent) as a further decline in durable goods industries was more than offset by a rise in nondurables. Data now available for consumer goods point to increases in output of some household goods, apparel, and consumer staples more than offsetting a decline in auto assemblies. A further decline in most business and defense equipment lines is indicated but among materials there was increased production of iron and steel, some other metal products, and textiles and rubber products. Output of raw steel rose 4 per cent further in April and presumably there was a further increase in output of steel mill shapes and forms. Trade reports have indicated that rolling mill operations have been close to capacity for some time. Autos. Sales of new domestic type autos in April were at a seasonally adjusted annual rate of 7.9 million units, and down somewhat from the rate of earlier months this year. Sales of imported cars were at a seasonally adjusted annual rate of 1.6 million units, about the same as a month ago but about 40 per cent above a year earlier. AUTO SALES (Seasonally adjusted annual rates) Millions 1971 1970 April C.6 QI April 9.6 9.5 Domestic 7.5 8.1 7.9 Imports 1.1 1.5 1.6 TOTAL Preliminary data indicate an auto production rate of about an 8.0 to 8.2 million units in April, down about one-tenth from March. Present schedules for May and June are for an annual rate of 8.5 million units. Labor market. and April. The labor market continued slack between March Employment rose slightly (seasonally adjusted) reflecting employment increases in state and local government and construction. In manufacturing, both employment and the average workweek moved slightly lower in April with the employment decline occurring primarily among nonproduction workers in the durable-goods sector. The unemploy- ment rate edged up to 6.1 per cent from 6.0 per cent in March, and the rate for Negroes reached 10 per cent, its highest point since early 1964. NONFARM PAYROLL EMPLOYMENT (Seasonally adjusted, in thousands) Total Government Private MenufacturinNonmanufacturing 1971 April 1970 August January April 71,149 70,414 70,652 70,719 12,610 58,539 12,596 57,818 12,323 57,829 12,952 57,7k7 19,795 38,744 19,271 38,547 18,807 39,022 18,645 39,122 Payroll employment has held comparatively steady since the turn of the year. ment was still Compared to a year-earlier, nonfarm payroll employ- down by 430,000 in April as growth in the service- producing industries and government was more than offset by declines in manufacturing (1.15 million) and construction (119,000). The unem- ployment rate also has shown little change since the turn of the year after it had risen from 3.9 per cent in January 1970 to 6.2 per cent in December. The total labor force rose in April but was little changed from last December and was up by only 634,000 from April 1970, less than half the normal rise. LABOR FORCE AND UNEMPLOYMENT (Seasonally adjusted, thousands) 1971 1970 A pril December March April Total labor force Civilian labor force 86,031 82,760 86,522 83,609 86,405 83,475 g5,6O5 33,783 Total employment Ionacricultural 7S,886 75,317 78,63 75,055 78,475 75,C79 70,'e 75,140 Unemployment rate, percent 4.7 6.2 6.0 6.1 Wholesale prices. The rise in wholesale prices accelerated in April to a seasonally adjusted annual rate of 6 per cent, the sharpest rise since last October; prices of both industrial commodities and farm products and foods also rose at about a 6 per cent rate. The increase in industrial commodity prices was sharply higher than over the first quarter and was equaled last year only in May and October. Materials rose strongly with increases in both cotton and man-made fiber textile products, nonferrous metals, hides and leather, waste paper, and crude rubber. Coal prices increased further, bringing the rise over the year to 30 per cent. An 8 per cent rise in can prices was associated in part with anticipated higher labor costs after the April contract settlement prices advanced on several important construction materials. Finished non-durable goods (ex foods) leveled off in April, continuing the relatively favorable first quarter performance. declined much less than seasonally. Foods The rise in prices of both consumer and producer durables has slowed since the second half of last year, and the increase in producers' durables has also been appreciably slower than in the corresponding period of 1970. Prices of steel mill products rose in April and early May. A further increase, covering sheet and strip products and effective in mid-June, was announced May 5 by U.S. Steel. If effectuated industry- wide, this increase will raise prices by about 6 1/4 per cent, on over 35 per cent of steel mill products, and bring to over 80 per cent of shipments the total of products with price increases this year. Copper prices have weakened recently, with the price on the London Metal Exchange falling early this week to a level close to that of U. S. producers. WHOLESALE PRICES (Per cent changes, seasonally adjusted annual rates) 6 months June to Dec. 69 to June 70 All commodities Farm & food 1/ Industrials 2/ Crude materials- Intermediate materialsFinished goods Producer Consumer2/ Durable Nondurable- Dec. 2.2 2.4 -1.8 3.8 0.5 - 3 months Monthly Dec. 1970 March 1971 to March 1971 to April 1971 5.4 6.0 .4 11.3 6.5 3.4 2.9 6.4 .8 - 2.4 25.4 4.3 1. 4.0 7.7 4.1 2.7 6.0 5.1 3.9 2.2 2.1 1.1 2.9 2.8 5.7 4.7 2.2 1.5 3.3 .0 1/ Farm products, and processed foods and feeds. 2/ Excludes foods. Collective Bargaining. Wage rate increases in the first quarter for major private nonfarm settlements averaged 8.4 per cent a year, little changed from the 8.9 per cent for the yaar 1970 as a whole. Settlements were negotiated covering 750,000 workers in nonfarm industries, including railroads, autos, farm equipment, metal cans, and petroleum. There were virtually no major settlements in the construc- tion industry. In manufacturing, wage increases averaged 8.1 for the first year and 6.0 per cent for the life of the contract--both about unchanged from the 1970 averages. In nonmanufacturing, where railroad settlements predominated, the annual rate of wage increases over the life of the contract was 11.3 per cent compared to 11.5 per cent in 1970. First year wage increases declined somewhat, probably reflecting in part the absence of important settlements in the construction industry; in 1970, settlements covering 700,000 construction workers contributed substantially to large wage rate increases. When wages and benefits are combined, the average annual rate of increase over the life of the contract for all settlements in the first quarter was 8.5 per cent compared with an increase of 9.1 per cent in 1970 as a whole. WAGE INCREASES IN MAJOR COLLECTIVE BARGAINING SETTLEMENTS (Mean Adjustments) Annual Rate of Increase Year 1st Quarter 1969 1970 9.2 7.6 11.9 8.9 9.9 8.4 First year 7.9 8.1 8.1 Average over life of contract 6.0 6.0 6.0 Nonmanufacturing First year Average over life of contract 10.8 9.3 15.4 11.5 1971 Private nonfarm industries1 / First year Average over life of contract Manufacturing 1/ 12.0 11.3 Covers settlements affecting 1,000 workers or more. Construction. Seasonally adjusted value of new construction put in place, which was revised downward somewhat for March, edged higher in April and at an annual rate of $103 billion, was just short of the peak reached last February. Outlays for private residential construction increased for the ninth consecutive month in April, and were at a record rate of $37 billion, two-fifths above the low of last July. Expenditures for both private nonresidential and public construction (revised down for March) apparently changed little in April at a level only moderately below the all-time peaks reached earlier this year. Within the public sector, outlays for State and local projects were notably strong, at a rate a fifth above the low in March of 1970. While total outlays in April averaged 14 per cent above a year earlier in current dollar terms, the year-to-year increase in constant dollars amounted to just 4 per cent. Thus far in 1971, construction costs have continued to show about the same year-to-year increase as in 1970-9 per cent, as measured by the Census Bureau's composite cost index. NEW CONSTRUCTION PUT IN PLACE Private All Total Residential Non residential Public Annual 1970 91.3 63.1 29.3 33.8 28.3 94.4 102.9 65.3 70.4 31.9 35.5 33.4 34.9 29.1 32.5 104.2 70.8 35.6 35,2 33.4 36.5 37.4 34.0 33.9 32.1 32.0 Quarterly (SAAR) 1970 - IV 1971 - I (r) Monthly (SAAR) 1971 February (r) March (r) April (p) 1/ 102.7 103.3 70.5 71.3 Per cent change in April from year earlier In current dollars + 14 +12 + 25 -- + 18 In 1957-59 dollars + 4 + 4 + 18 -10 + / 6 Data for the most recent month (April) are confidential Census Bureau extrapolations. In no case should public reference be made to them. -10- Inventories. The book value of business inventories rose at a $6.3 billion annual rate in March, according to preliminary data; strikerelated stockbuilding continued at a rapid rate in the auto and steel sectors, and stocks declined elsewhere, though at a less rapid rate than in February. For the first quarter as a whole, book value rose at a $4.6 billion annual rate, little changed from the fourth quarter. CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES Seasonally adjusted annual rates, billions of dollars 1970 1971 1971 February March Q IV QI (Revised) (Prel.) 4.4 4.6 3.9 6.3 -4.1 8.5 6.3 -1.7 8.1 -4.2 7.6 -1.3 .6 Wholesale and retail trade, total -5.7 Autos and steel 6.2 5.8 7.3 8.2 10.0 7.0 Excluding autos and steel 6.3 .4 - .9 3.0 Manufacturing, total Autos and steel Excluding autos and steel 3.8 1.6 2.3 -1.6 .5 -2.1 -3.4 - .1 -3.3 -3.7 .6 -4.3 Manufacturing and trade, total Autos and steel Excluding autos and steel The inventory-sales ratio declined further in March. The ratio excluding autos and steel continued to improve, but most of the improvement has been in manufacturing; trade inventories other than autos, and steel in March remained at the January-February relationship to sales based on preliminary data. -11INVENTORY-SALES RATIOS 1970 1971 February (Revised) March (Prel.) June December January Manufacturing and trade, total Autos and steel Excluding autos and stee 1 1.56 1.50 1.56 1.60 1.61 1.60 1.57 1.49 1.55 1.45 1.54 1.46 1.59 1.57 1.56 Wholesale and retail trade , total Autos and steel Excluding autos and stee l 1.36 1.66 1.30 1.40 1.76 1.34 1.36 1.59 1,32 1.37 1.63 1.32 1.37 1.64 1.32 Manufacturing, total Autos and steel Excluding autos and stee I 1.73 1.34 1.78 1.47 1.80 1.83 1.77 1.39 1.83 1.72 1.28 1.80 1.70 1.27 1.78 Manufacturers' and wholesalers' stocks of steel mill shapes in March were somewhat higher, relative to recent rates of steel use, than in previous pre-contract periods. The ratio of inventories to unfilled orders at durable goods manufacturers rose. Census survey of consumer purchases and income expectations. The April survey of consumer expectations suggests no basic change in household attitudes has occurred in the last year or so. The index of purchase plans for new cars declined from 107.9 in January (January-April 1967 = 100) to 104.7 in April. This compares with 105.8 a year earlier and is about the same as in October. A decline from January has appeared likely because the high value reported in the previous survey reflected strike rebound expectations. The probability of a household expecting an increase in income increased to 19.9--the same level as a year earlier--and up from 17.2 in a the January survey, but there was also an increase in the probability of -12household expecting a decrease in income. The per cent of households reporting higher current income compared with a year earlier remains at a low level--35.1 per cent--the same as in January and off sharply from 41.3 per cent a year earlier. However, consumers were more optimistic in their housing plans. The index of buying plans for new houses increased strongly to 101.7 in April from 96.3 in the last survey and 87.9 in April 1970. HOUSEHOLD PURCHASE AND INCOME EXPECTATIONS 1970 April July 1971 Oct. Jan. April INDEXES OF EXPECTED UNIT PURCHASES (Seasonally adjusted. Average of January 1967 and Apri, 1967 = 100) All households: Houses New cars ACTUAL AND EXPECTED CHANGES IN INCOME 87.9 92.9 95.6 96.3 101.7 105.8 105.8 103.8 107.9 104.7 41.3 39.9 37.3 35.0 35.1 12.4 13.0 13.6 14.2 14.5 19.9 18.2 16.7 17.2 19.9 7.3 7.3 6.7 7.5 Current income compared to income of one year ago: All households: Per cent reporting higher current income Per cent reporting lower current income Mean probabilities of substantial changes in income: All households: Increase Decrease NOTE: 7.0 Indexes based on average of 6- and 12-month mean purchase probabilities. -13- Consumer credit. Consumer instalment credit outstanding rose $5.9 billion, seasonally adjusted annual rate, in March. This was the largest increase since November 1969 and was centered in automobile credit and personal loans. For the first quarter, the rate of expan- sion was $2.7 billion. Both extensions and repayments of instalment credit were at record levels in March and the first quarter. Extensions rose sharply to a seasonally adjusted annual rate of $110.1 billion for the quarter, up $8.0 billion from the strike-reduced fourth quarter, and $3.2 billion above the previous high in the third quarter of 1970. NET CHANGE IN CONSUMER INSTALMENT CREDIT OUTSTANDING (Billions of dollars, seasonally adjusted annual rates) 1970--QI QII QIII QIV 1971--QI Other Consumer Goods Personal loans Total Automobile 4.0 .0 2.4 1.7 4.6 .2 2.3 1.9 2.4 1.8 2.1 1.1 .6 1.7 4.1 -1.5 -. 6 -4.4 2.7 .4 -14- New orders. Revised data for new orders received by manu- facturers of durable goods declined 1.1 per cent in March, according to preliminary data, rather than 2.2 per cent as indicated in the advance report. Unfilled orders were still reported down 0.6 per cent. The Domestic Financial Situation Monetary aggregates. Preliminary estimates indicate that all the monetary aggregates increased at a slower rate in April than in March. As may be seen in the table, the pace of advance in M 1 (currency plus private demand deposits) during April was only slightly below that recorded in March which has been revised upward to 11.6 per cent from 10.5 per cent. The April rates of growth in M2 (M1 plus commercial bank time and savings deposits) and M3 (M2 plus deposits of mutual savings banks and savings and loan associations) declined more perceptibly, primarily because inflows of consumer time and savings deposits at banks and nonbank institutions failed to match the exceptional advances of other recent months. The rate of expansion in further in April. the adjusted credit proxy also slowed The reduced rate of advance reflected the forementioned cutback in growth of consumer time and savings deposits, in a slight decline large certificate of deposits and further substantial cuts in nondeposit liabilities. A pickup in private demand deposit growth and an increase in U.S. Treasury deposits partly offset these developments. The further decline in nondeposit liabilities principally reflected a reduction in head office liabilities of foreign branches undertaken to finance the acquisition by the foreign branches of $1.5 billion in certificates. special U.S. Commercial paper borrowing by bank affiliates, major source of nondeposit funds, Treasury the other remained about unchanged over the month. (Seasonally adjusted, 1. 2. 3. 4. Currency plus private demend deposits Commercirl bank time and sEvings deposits e. lar e CD's b. other time and sevincs MONETARY AGGREGATES annual rates of change, Annual 1969 1970 3.1 5.4 5.9 -5.0 18.4 1.4 14.1 32.; -53.3 132.4 9.5 1.4 11.5 Sevin:s deposits ct mutual scvirs banks and S&L's 3.4 7.0 Adjusted bank credit pro::y n.e. C.3 in per cent) 1970 QIII 1S71 QIV QI Feb. March 3.4 0.9 14.0 11.6 10.9 21.3 27.3 28.6 25.9 10.7 61.C 256.2 79.4 27.9 12.1 19.2 -20.G . 11.3 15.4 27.2 30.5 27.0 14.8 2.5 7.0 11.5 23.; 13.5 24.8 19.1 QI .5 OII 5.3 L.5 6.1, 16.5 9.3 17.2 6.3 10.9 ipril 5.6 Concepts of Money 5. Mi: *. M : 7. (1) 5.4 5.9 5.C (1) + (2b) 3.2 3.4 8.4 11.0 9.2 7.9 2.7 7.9 10.3 S.7 M3: (1) + (2b) + (3) E/ PcriElly ec:imeted. 5.1 3.4 14.0 11.6 10.9 17.0 22.1 18.9 12.9 19.0 22.1 19.8 15.1 8.9 E/ -16- Commercial bank credit. Preliminary estimates indicate that total loans and investments at commercial banks, adjusted for transfers of loans between banks and their affiliates, declined moderately between the last Wednesday in March and the last Wednesday in April. This reduction, the first monthly decline since October of last year, was attributable primarily to a sharp drop in Treasury bill holdings. Holdings of longer term Treasury issues were also trimmed, however, and total loans dropped moderately. These declines were partly offset by a further sharp increase in holdings of other securities (mainly municipal, securities, and Federal agency issues); the advance, however, failed to match the gains recorded in other recent months. The decline in total loans was attributable to a marked pay- down of broker and dealer loans--reflecting the sharp cutback in dealer inventory positions which occurred over the month--and to a slight reduction in loans to nonbank financial institutions. recorded in all other loan categories. Increases were Real estate loans continued rising at an above average pace, while other categories rose only moderately. Business loans expanded at an annual rate of about 1 per cent which contrasts with the sharp decline recorded in March. -17- COMMERCIAL BANK CREDIT ADJUSTED TO INCLUDE OUTSTANDING AMOUNTS OF LOANS SOLD TO AFFILIATES 1/ (Seasonally adjusted percentage changes, at annual rates) 1970 1971 QIV QI March AprilE Total loans & investments 2/ 6.1 13.8 12.9 - 2.1 U.S. Government securities Other securities 2.8 34.5 22.1 30.4 32.2 30.7 -31.4 22.2 Total loans -1.0 7.3 -9.2 2.5 Business loans 3/ 3.2 4/ -11.7 - 3.6 1.1 1/ Last Wednesday of month series. 2/ Includes outstanding amounts of loans sold outright by banks to their own holding companies, affiliates, subsidiaries, and foreign branches. 3/ Includes outstanding amounts of business loans, sold outright by banks to their own holding companies, affiliates, subsidiaries, and foreign branches. Excludes $814 million of System matched sale-purchase agreements 4/ outstanding on February 24. E/ Partially estimated. -18Nonbank thtift institutions. On the basis of information for most of the month, it is now estimated that deposit growth at nonbank thrift institutions continued during April at near the high rate of the first quarter. It is noteworthy that for the first four months of 1971 (seasonally adjusted but not at an annual rate) net deposit inflows to the two nonbank thrift intermediaries have already exceeded $16 billion; there is no full year, at least back to 1955, in which net deposit inflows were that high. DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS (Seasonally adjusted annual rates, in per cent) Mutual Savings Banks Savings and Loan Associations Both 1970 - QIII QIV 6.9 10.2 10.6 12.1 9.3 11.5 1971 - QI 17.5 25.9 23.2 21.2 14.2 26.6 21.5 24.8 19.1 March* p/ April* e/ * Monthly patterns may not be significant because of difficulties with seasonal adjustment. p/ preliminary. e/ estimated on the basis of data for part of the month. Despite what appears to be continued large deposit inflows, the savings and loan associations are reported to be revising down- ward their projected repayments of funds advanced from the Federal Home Loan Banks. Presumably,the recent increase in short-term market yields has changed savings and loan managers' outlook for future -19deposit growth. In any event, advances repaid during April amounted to about $1.5 billion, nearly all of which represented the fixedrate fixed-term advances that began to mature after the 15th. The Federal Home Loan Bank Board has revised downward its estimates of its own repayments of borrowed funds during the current quarter, on the basis of the new lower projections of repayments of advances from S&Ls. Moreover, the FHLBB also is anticipating that during the second half of this year advances will expand--perhaps by as much as $2 billion, about equal to the repayments now estimated for the second quarter. The FRB staff expects savings inflows to the S&Ls to taper off during the second half of this year, but not as sharply as the FHLBB staff. We also expect higher repayments of advances than the FHLBB staff is now projecting for the second quarter. Mortgage market. With deposit growth continuing unusually strong, new and outstanding mortgage commitments at New York State mutual savings banks increased further during March. By the end of March, however, the backlog of outstanding commitments at these diversified long-term lenders--which account for about 60 per cent of the industry--was still a fourth below earlier highs. Including S&Ls and reporting life insurance companies as well, the aggregate volume of residential mortgage commitments outstanding at all three lender groups combined expanded in February for the tenth consecutive month, reaching a total that was within -207 per cent of the early 1969 high. Although life insurance company commitment data are not yet available for March, the backlog of outstanding residential mortgage commitments for these three lender groups taken together probably climbed to a record high during that month. RESIDENTIAL MORTGAGE COMMITMENTS OUTSTANDING AT SELECTED LENDERS 1/ (Billions of dollars, seasonally adjusted) Date 1969 - High - Low 1970 - High - Low N.Y. State Savings Banks S&L's Both Thrift Institutions Reporting Life Insurance Companies All Three Lender Groups 3.3 (Apr., May) 7.2 (Apr.) 10.4 (Apr.) 4.2 (July, Aug.) 14.5 (Apr.) 2.6 (Dec.) 5.8 (Dec.) 8.4 (Dec.) 3.8 (Dec.) 12.2 (Dec.) 2.6 (Jan.) 8.1 (Dec.) 10.1 (Dec.) 3.5 (Jan.) 12.7 (Dec.) 1.8 (Oct., Nov.) 5.2 (Mar.) 7.7 (Mar.) 2.6 (Dec.) 10.9 (Mar., Apr.) 2.0 8.1 10.1 2.6 12.7 2.1 2.3 2.5 8.3 8.9 10.1 10.4 11.2 12.6 2.5 2.4 n.a. 12.9 13.5 n.a. 1970 December 1971 January February March 1/ Based on data, including loans in process, from Federal Home Loan Bank Board, Savings Banks Association of New York State, and Life Insurance Association of America covering 80 per cent of industry. Data for savings banks and S&L's include a minor amount of nonresidential commitments. FNMA weekly field reports continue to confirm the upturn in secondary market yields on Government-underwritten home mortgages that occurred late in April within this sensitive sector of the market. A sharp shift in investor sentiment was reflected in the exceptionally large volume of offers received by FNMA in its mortgage purchase auction of April 26, and in the minimal amount of bids submitted to FNMA in its mortgage sales auction of April 29. -21Corporate and municipal securities. Yields on both corporate and municipal bonds continued to rise in late April and early May. Although yield indexes for the week of May 7 are not yet available, it appears likely that long-term rates will set new highs for 1971. BOND YIELDS (In per cent) New Aaa 1/ Coroorate bonds Long-term State 2/ and local bonds 1970 Low High 7.68 9.30 (12/18) (6/18) 5.33 (12/10) 7.12 (5/28) 6.76 7.81 (1/29) (4/30) 5.00 (3/18) 5.74 (1/7) 1971 Low High Week of: April 1/ 2/ 2 9 16 23 30 7.15 7.17 7.32 7.54 7.81 5.15 5.21 5.32 5.48 5.69 With call protection (includes some issues with 10-year protection) Bond Buyer (mixed qualities) The recent difficulties experienced by corporate and taxexempt bond markets reflect investor uncertainties associated with adverse international developments--especially given their concern about the outlook for monetary policy. In the municipal area, a recent slackening in commercial bank acquisition of tax-exempt securities also depressed the market. -22- Given the uncertain market situation of the past few weeks, further switching of corporate offering dates occurred, and the April volume of public bonds was only slightly over $2.1 billion; the shifting of dates suggest that May bond volume will reach $2.7 billion. The forward calendar for June seems to be building rather slowly at present, but the outlook is quite uncertain. Although underwriters report that there are still many prospective bond issuers, relatively few firms have announced or filed offerings; and the staff estimates that the June public bond total will be about $2.2 billion, only slightly above the 1970 average. While the volume of public bonds for the second quarter is thus expected to fall below that of the previous two quarters, stock offerings are likely to remain somewhat above the 1970 average, and takedowns of private placements appear to be picking up significantly. Therefore, the total corporate security offerings in the second quarter of 1971 will still be at a near-record level. CORPORATE SECURITY OFFERINGS (Monthly or monthly averages in millions of dollars) Bonds Public Offerings Private Placements Stocks Total 1969 - Year 1970 - Year 1,061 2,099 468 403 700 713 2,229 3,245 1971 - QI - QII 2,789e 2,333e 519e 583e 737e 867e 4,046e 3,783e April 2,100e 450e l,100e 3,650e May June 2,700e 2,200e 500e 800e 700e 800e 3,900e 3,800e -23- Long-term debt offerings by State and local governments seem to have been slowed somewhat by the rapid rise of interest rates over the past month. The postponement of two large issues lowered the staff estimates for April and May, and unless interest rates decline substantially, the June total may not exceed $1.8 billion. Municipal needs for long-term funds have not diminished, but rising yields have made interest ceilings operative again in some areas. STATE AND LOCAL GOVERNMENT OFFERINGS (Monthly or monthly averages, in millions of dollars) Long-term 1969 - Year 1970 - Year 991 1,515 1971 - QI 2,230e QII 1,850e 1,850e 1,900e 1,800e April May June Government securities market. In the quarterly refunding, the Treasury offered two notes in a rights exchange to holders of maturing May issues. The new issues were a 15-month 5 per cent note priced at par and a reopened 3-1/2 year 5-3/4 per cent note priced to yield 5.88 per cent. Wednesday, May 5. Subscription books were open through -24- In the two days just after the April 28 announcement, the prices of the when-issued notes rose to premiums of 6/32 above the initial offering price. However, the premiums were erased subsequently, and most recently both notes were trading at or near issue price. Hence, a substantial amount of attrition is now expected for the refunding-but, at the same time, the Treasury's cash needs may be lessened due to reinvestments of U.S. dollars by foreign central banks in the form of special issues. Yields on outstanding Treasury notes and bonds have risen by another 15 to 30 basis points since the Greenbook was released. Treasury bill rates, however, have shown only small mixed changes on balance since that time. -25INTEREST RATES 1971 Highs Lows April 5 May 4 Short-Term Rates Federal funds (weekly averages) 4.27 (4/21) 3-month Treasury bills (bid) 4.89 Bankers' acceptances 5.50 Euro-dollars 6.50 Federal agencies 4.90 Finance paper 5.50 CD's (prime NYC) Most often quoted new issue 5.38 Secondary market 5.62 (1/4) 3.29 (3/10) 4.02 (3/31) 4.14 (4/28) (3/11) (3/10) 3.69 4.25 5.48 3.68 (3/31) 4.00 3.88 3.75 (3/31) 3.90 (3/31) 4.63 (4/28) 4.82 (4/28) 4.22 (1/6) (1/5) 3.22 3.88 4.94 3.27 3.62 (1/6) (1/6) 3.62 (3/24) 3.80 (3/17) (1/4) (1/6) (1/7) (1/6) 3.35 4.00 4.00 3.53 (3/29) (3/10) 3.75 4.38 (e) 4.25 3.78 (3/31) (1/6) (1/6) 4.00 (3/24) 3.70 (3/3) 4.13 (3/31) 4.10 (3/31) 4.75 (4/28) 4.97 (4/28) 4.74 (1/4) 3.45 (3/11) 3.70 4.45 Most often quoted new issue 5.50 (1/6) Prime municipals 3.00 (1/6) 4.38 (3/3) 2.15 (3/24) 4.50 (3/31) 2.30 (3/31) 5.13 (4/28) 2.85 (4/29) 6-month Treasury bills 4.94 5.62 Commercial paper (4-6 months) 5.75 Federal agencies 5.10 CD's (prime NYC) Most often quoted new issue 5.50 Secondary market 5.68 Bankers' acceptances 1-year Treasury bills (bid) (1/6) (1/4) (3/17) (2/24) (3/15) (3/11) (3/10) 5.00 6.26 4.23 (4/29) 4.38 5.12 (e) 5.00 4.50 (4/29) CD's (prime NYC) Intermediate and Long-Term Treasury coupon issues 5-years 6.14 (5/4) 20-years 6.39 (1/4) 4.74 (3/22) 5.69 (3/23) 5.30 5.89 6.14 6.26 7.47 (1/4) 8.93 (1/5) 7.05 (2/16) 8.28 (2/16) 7.23 8.45 7.42 8.51 7.81 (4/30) 6.76 (1/29) 7.15 (4/2) 7.81 (4/30) Municipal Bond Buyer Index Moody's Aaa 5.74 (1/7) 5.50 (4/29) 5.00 (3/18) 5.15 (4/2) 5.00 (4/2) 5.69 (4/29) 4.75 (2/11) Mortgage--implicit yield in FNMA biweekly auction 1/ 7.96 (1/25) 7.43 (3/1) 7.45 (3/29) 7.54 (4/26) Corporate Seasoned Aaa Baa New Issue Aaa 1/ 5.50 (4/29) Yield on 6-month forward commitment after allowance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year loan amortized over 15 years. e--estimated -26- International developments and the balance of payments Massive speculative flows into German marks, and, to a lesser extent, other European currencies on Tuesday and Wednesday, May 3 and 4, caused the central banks of Germany, Switzerland, the Netherlands and Belgium to withdraw from their exchange markets early on Wednesday. These central banks remained out of the markets for the rest of the week, pending weekend meetings of government officials to decide upon courses of action. The outburst of speculation appeared to be triggered by the publication on Monday of a report by the five major German economic research institutes, four of whom joined in recommending the floating of the German mark while the fifth recommended revaluation. Remarks made by German Economics Minister Schiller encouraged exchange market participants to believe that some such action might be taken, and consequently led to a great demand for marks on the exchanges. The Bundesbank purchased nearly a billion dollars on Tuesday, and another billion in the first forty minutes of trading on Wednesday, at which time it withdrew from the market. Demand for other European currencies then swelled, and in short order the central banks of Switzerland, the Netherlands, and Belgium purchased $600 million, $250 million, and $100 million, respectively, before those banks withdrew from their markets. The central banks of France, Britain, and Italy continued to operate normally. The Bank of France purchased $250 million early on Wednesday; then the demand for francs ebbed, and it has not had to purchase dollars since that time. -27The Bank of Japan, which was closed on Wednesday because of a legal holiday, purchased $330 million on Thursday, and is expected to continue to deal with the market on Friday. Spot exchange rates for the floating European currencies moved to only small premiums over their previous upper limits in active trading on Wednesday and Thursday. The excess over the previous upper limit on the DM amounted to about 1-1/2 per cent, on the Swiss franc 3-1/2 per cent, on the guilder 1 per cent, and on the Belgian franc less than 1/2 per cent. There was little change between Wednesday and Thursday. No quantitative information on positions taken by commercial banks is available. Euro-dollar rates firmed very sharply in the wake of the speculative activity. The one-month rate on Thursday reached 8-1/2 per cent, compared to 5-3/4 per cent on Monday. Money market rates in Germany, which had stiffened shortly before the end of April, fell off again this week in consequence of the inflow of funds to the German banking system. U.S. banks' liabilities to their foreign branches, which as noted in the April 28 Greenbook had stabilized since mid-April, declined only moderately to Tuesday May 4, but have undoubtedly fallen off more later in the week. The U.S. balance of payments deficit on the liquidity basis, according to preliminary indications, was very large in the week ending Wednesday April 28. Data for the following week are not available. No new indications on developments in trade and other elements of the -28- balance of payments are available, and there is no reason to alter the view that the great size of the deficit in recent months is due primarily to movements of short-term capital, influenced at first by interest rate differences and recently by hedging and speculation on currency values.
@FedFRASER