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Content last modified 6/05/2009.
CONFIDENTIAL (FR)
SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
May 11,
By the Staff
Board of Governors
of the Federal Reserve System
1973
SUPPLEMENTAL NOTES
The Domestic Economy
Industrial production.
Industrial production rose 1.0
percent further in April and at 123.0 percent (1967=100) was 9.0
percent above a year earlier.
Gains in output were widespread among
consumer goods, business equipment and materials.
Output of furniture, some household appliances, and room
air conditioners continued to increase in April, and production of
television sets was maintained at advanced levels.
Auto assemblies
were at an annual rate of 9.9 million units compared with a 10.1
million unit rate in March.
March-April level.
May production schedules are at about
Production of clothing, processed foods, and
consumer chemical and paper products rose further in April.
Output
of business equipment increased 1.0 percent further and was 15.7
percent above a year earlier, with the April gains widespread among
the equipment industries.
Production of construction products, steel,
and other durable and nondurable industrial materials also advanced
strongly.
Very Confidential until release Tuesday, p.m.. May 15.
Retail sales.
March,
Sales in April declined 1.5 percent from
according to the advance report.
Lower sales were widespread,
but most of the decline was attributable to the automotive, general
merchandise,
months.
and apparel groups which have been very strong in
Sales of the GAF group declined 3.7 percent.
food were virtually unchanged from the previous month.
recent
Expenditures for
Compared with a
year earlier, sales of all types of stores increased 13.9 percent.
- 2 -
RETAIL SALES
(Seasonally adjusted, percentage change
from previous quarter)
1972
Q III
Q IV
Total sales
1973
I
February
March
April
2.6
3.7
5.7
1.3
1.7
-1.5
Durable
Auto
Furniture and
appliance
3.9
4.6
5.4
6.0
8.2
7.8
1.2
.8
1.5
2.2
-1.9
-2.8
2.0
3.2
9.3
3.0
.2
- .4
Nondurable
Food
Genera
merchandise
1.9
1.7
2.8
1.7
4.4
3.7
1.4
-.8
1.8
.2
-1.2
.2
2.6
2.0
6.1
2.5
5.2
-3.0
Total, less auto and
nonconsumption items
1.9
2.9
4.7
1.4
1.6
-1.1
GAF
1.9
2.8
6.9
2.7
4.8
-3.7
Real*
1.6
2.8
3.6
.3
*Deflated by all commodities CPI, seasonally adjusted.
.5
n.a.
Census consumer buying indicators.
The April survey by the
Census Bureau, like the most recent Michigan and Conference Board
surveys, indicated a marked increase in consumer pessimism.
The index
of expected new car purchases--especially for families with above
median incomes--broke very sharply from the unusually high level in
January.
Purchase plans for furniture and appliances were lower than
in the previous survey and also a year earlier.
However, plans to buy
houses remained close to the very high level maintained since last fall.
Evaluations of both realized and expected income gains were more
unfavorable in April, although still above a year earlier.
-3-
CONSUMER BUYING INDICATORS
Expected Unit Purchases of Cars, Houses,
and Household Durables 1/
April
1972
July
1973
October
(Seasonally adjusted
All households:
New cars
103.5
Houses
110.4
Households with above
median incomes:
New cars
99.2
Houses
106.4
Number of major
appliances reported
likely to be bought
per 100 households
27.6
January
April
Jan-Apr 1967=100)
99.6
110.1
109.9
123.5
119.7
121.2
111.5
121.1
98.1
105.7
107.2
123.4
118.7
121.3
102.7
120.6
26.0
28.7
28.2
26.4
12.3
28.5
6.4
5.6
12.0
29.6
6.7
521
11.9
28.9
6.6
5.1
20.1
6.1
14.0
17.1
6.4
10.7
16.6
6.3
10.3
Actual and Expected
Changes in Family Income
Current income compared
to income a year ago:
Percent reporting-Substantially higher 10.9
Higher
24.8
Lower
6.5
Substantially lower
6.0
9,9
24.4
6.4
4.5
Probability of
income change in
next 12 months
Increase
16.1
19.9
Decrease
6.7
6.4
Difference
9.4
13.5
1/ Average of 6 & 12 month probabilities.
- 4 -
Inventories.
Book value of retail trade inventories rose
at a $1.9 billion annual rate in March; a $3.1 billion rate increase
in nondurable goods stocks was partly offset by declines at auto and
furniture dealers.
The March rate of increase for total manufacturing
and trade was $16.6 billion, reduced from $22.2 billion in February.
For the first quarter, the rate was $21.6 billion, up from $15 billion
in the fourth quarter on a book value basis but reflected price,
rather than volume, increases to a far greater extent than in the
fourth quarter.
CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)
1972
Q IV
1973
Feb.
Mar
(Prel.)
(Rev.)
(Pre
Q I
Manufacturing and trade
14.9
21.6
22.2
16.4 6
Manufacturing, total
6.4
10.2
10.4
14.' 1
5.2
1.2
7.2
5.8
9.!
3.0
4.6
4.
8.5
11.5
11.8
4.3
4.2
3.3
1.5
5.5
5.6
. 69
6.0
.4
.4
6.2
2.0
2.2
1.1
-1. 2
-1. 0
1.8
-. 1
-. 3
-.
2
Nondurable
.8
4.2.
5.6
NOTE: Detail may not add to totals because of rounding.
3.
I
Durable
Nondurable
Trade, total
Wholesale
Retail
Durable
Automotive
Nonautomotive
The inventory-sales
ratio declined further to 1.41,
the same low level as in March 1966.
2. 5
about
1
I
-5
-
INVENTORY RATIOS
1973
1972
Feb.
Mar.
Feb.
Mar.
(Rev.)
(Prel.)
Inventories to sales:
Manufacturing and trade
1.56
1.53
1.42
1.41
Manufacturing, total
Durable
Nondurable
1.73
2.07
1.32
1.70
2.04
1.30
1.57
1.86
1.21
1.57
1.87
1.20
Trade, total
1.39
1.36
1.28
1.26
1.24
1.48
2.07
1.72
2.56
1.21
1.22
1.44
1.96
1.62
2.44
1.19
1.16
1.36
1.71
1.34
2.25
1.17
1.14
1.34
1.68
1.30
2.24
1.16
Wholesale
Retail
Durable
Automotive
Nonautomotive
Nondurable
New homes sold by merchant builders turned downward in March
from last winter's advanced pace and, at a seasonally adjusted annual
rate of 674,000, were only slightly above the comparatively low level
in March of 1972.
Partly reflecting this development, homes available
for sale rose to a new high both absolutely and in terms of months'
supply--7.7 at the March rate of sales.
increased in March,
Prices of homes sold also
to a median of $31,500--15 percent above a year
earlier; but, with demand for upgraded units still
a factor in the
market, the median price of the units sold was some $2,000 greater than
the median price of units awaiting sale.
In March, the median price of
existing homes sold was $28,540, about a tenth above a year earlier.
The year-to-year gain in sales of such homes was 8 percent.
- 6-
NEW SINGLE FAMILY HOMES SOLD AND FOR SALE
Homes
Sold 1/
Homes 2/
for Sale
(Thousands of units)
Median price of
Homes Sold
Homes for Sale
(Thousands of dollars)
1972
QI
QIII
QIV (r)
688
733
761
318
386
402
26.2
27.9
29.0
26.1
27.1
28.3
QI (p)
716
430
30.5
29.4
January (r)
February (r)
March (p)
738
735
674
420
426
430
20.1
29.9
31.5
28.5
29.1
29.4
1973
1/
2/
p-
SAAR.
SA, end of period.
Preliminary
r - Revised.
- 7 -
The Domestic Financial Situation.
Flow of funds, first quarter.
Borrowing by private non-
financial sectors in the first quarter maintained the very high rates
of flow of the fourth quarter--almost 15 percent of GNP as against
11- to 13- percent rates in the preceding two years.
Business bank
loan growth was large enough to offset both the reduction in commercial
paper outstanding and a sharply reduced volume of corporate and municipal
security flotations.
Bank loans increased from a 16 percent share of
the total flow in the fourth quarter to 39 percent of private credit
in the first.
In the supply of credit market funds, Federal Reserve and
foreign flows were both sharply increased in the first quarter and
together supplied about 28 percent of total funds raised during the
quarter.
Private direct credit supply was predominantly from banks
and other financial institutions, while private nonfinancial investors
made a sizable transfer of funds out of market instruments and into
negotiable CD's and other time deposits at banks.
Liquid assets of
private investors increased less rapidly than GNP, however, and for
the first time since 1970 the ratio of private liquid assets to GNP
decreased.
This reflected in large part the heavy volume of credit
supply from official and foreign sources.
Flow of Funds Summary, First Quarter 1973
Table 1. Funds Raised in Credit Markets
(Seasonally adjusted annual rates)
Change,
IV/72 to
1970
1971
1972
IV/72
I/73p
1/73
-10.7
Billions of dollars
Total funds raised by nonfinancial sectors
101.6
156.3
170.7
214.6
203.9
U.S. Govt. securities
12.8
25.5
17.3
36.1
21,9
All other
88,8
130.8
153.4
178.6
181.9
13,8
28.0
25.8
4.3
16.8
20.2
33.7
47.0
10,4
19.5
14.5
26.1
65.4
19.2
28.3
13.9
25.5
72.9
26.1
40.3
3,4
18.7
64.8
25.3
69.7
-10,5
-6.8
-8.1
-. 8
29.4
State and local govt. sec.
Corporate & fgn. securities
Mortgages
Consumer credit
Other
-14.2
3.3
Per Cent of GNP
Total funds raised
10.4
14.9
14.8
18.0
16.5
-1.5
US, Govt, securities
1.3
2.4
1.5
3.0
1,8
-1,2
All other
9.1
12.5
13.3
14.9
14.7
-. 2
Table 2. Supply of Funds to Credit Markets
(Billions of dollars, seasonally adjusted annual rates)
Change,
1970
1971
1972
IV/72
1173p
IV/72 to
1/73
101.6
12.7
10.9
156.3
6.0
27.2
170.7
9.3
10.8
214.6
8.1
13,1
203.9
13,9
38.8
-10.
5.8
25.7
.4
Total funds supplied to non-
financial sectors
By: U.S. Govt. agencies/
Foreign
Federal Reserve
5.0
8.8
-1.6
22.2
23,8
Commercial banking
31.6
49.8
67.0
86.3
92.6
6.3
Savings institutions
Other finance
16.9
33.1
42.1
33.1
49.8
39.5
49.4
46.8
53.1
35.4
3.7
-11.4
13.1
9.6
19.6
28.3
25.4
-2.9
4.5
63.9
-1.0
95.7
13.3
104.4
40.8
100.8
-26.7
133.5
-67,5
32.7
68.4
94.7
117.7
141.6
106.8
-34.8
83.0%
83.7%
84.6%
84.6%
84.0%
-. 6%
31.1%
31.9%
39.3%
40.2%
45.4%
5.2%
Finance sector funds raised
In
credit and equity mkts.
b/
Pvt. domestic nonfinancial sectors
Direct advances in markets
Deposits and currency
Total
Liquid asset holdings as per
cent of GNPc/
Commercial bank advances as per cent
of total
a/
b/
Includes Federally sponsored credit agencies.
Funds raised by sponsored credit agencies, banks, and private nonbank finance.
- 10 INTEREST RATES
1973
Highs
Lows
Apr.
16
May 10
Short-Term Rates
6.84 (4/11)
7.60 (5/9)
6.19
7.13
7.38
7.81
6.00
7.13
5.38 (1/3)
7.00 (4/11)
7.25 (5/9)
(4/6)
(3/28)
5.38 (1/4)
5.63 (1/12)
5.64 (1/3)
6.40
7.13
6.92
6.40
7.13
6.90
(5/9)
5.63 (1/3)
7.00 (4/11)
7.00 (5/9)
6.76 (3/16)
7.36 (4/3)
5.40 (1/4)
5.86 (1/2)
6.34
7.18
6.47
7.24
7.00 (5/9)
4.15 (4/4)
5.75 (1/3)
3.20 (1/3)
7.00 (4/11)
3.95 (4/11)
7.00 (5/9)
4.00
Treasury coupon issues
5-years
20-years
6.92 (3/16)
6.98 (5/9)
6.23 (1/4)
6.04 (1/3)
6.57
6.83
6.77
6.97
Corporate
Seasoned Aaa
Baa
7.32 (3/26)
8.12 (4/5)
7.10 (1/2)
7.83 (1/12)
7.24
8.10
7.26
8.03
7.52 (3/14)
7.29 (1/10)
7.51 (4/4)
7.40 (5/2)
Municipal
Bond Buyer Index
5.35 (3/21)
5.00 (1/17)
5.07 (4/11)
5.10
Mortgage--implicit yield
in FNMA auction 1/
7.92 (4/30)
7.69 (1/8)
7.86 (4/2)
7.92 (4/30)
Federal funds (wkly. avg.)
3-month
Treasury bills (bid)
Comm. paper (90-119 day)
Bankers' acceptances
Euro-dollars
CD's (prime NYC) 60-89 day
Most often quoted new
7.60 (5/9)
5.61 (1/3)
6.55
7.13
7.38
9.25
5.12
5.63
5.75
5.81
(5/10)
(3/2)
7.25 (5/9)
6-month
6.81
Treasury bills (bid)
7.25
Comm. paper (4-6 mo.)
7.19
Federal agencies
CD's (prime NYC) 180-269 day
Most often quoted new
7.00
1-year
Treasury bills (bid)
Federal agencies
CD's (prime NYC)
Most often quoted new
Prime municipals
(4/3)
(5/10)
(4/3)
(1/4)
(1/12)
(1/11)
(1/5)
7.38
8.50
Intermediate and Long-term
New Issue Aaa Utility
1/Yield on short-term forward commitment after allowance for commitment fee
and required purchase and holding of FNA stock. Assumes discount on 30year loan amortized over 15 years.
- 11 -
CORRECTIONS
GREENBOOK:
Page 11-3, paragraph 1, add at end of the paragraph:
The housing agencies, particularly the FHLBanks and
FNMA, can thus be expected to continue as relatively heavy borrowers
in the securities markets.
REDBOOK:
Page - iii -
Delete sentence beginning line 4 and the remainder of that
paragraph.
Insert the following new paragraph:
The Boston academic contacts disagreed in their policy
recommendation.
One rejected a more restrictive policy.
The other
recommended a monetary growth rate of 4 percent even if that entailed
rising short-term interest rates.
However, this recommendation was
somewhat less restrictive than the 3 percent he suggested last month.
A - 1
SUPPLEMENTAL APPENDIX A
GERMAN GOVERNMENT INTRODUCES
FISCAL RESTRAINT MEASURES*
The German government announced a series of restrictive fiscal
measures on May 9 and 10 designed to slow Germany's high and accelerating
rate of inflation. 1/ The measures include:
a. imposition of an 11 per cent tax (equal to the prevailing
rate of the value added tax) on outlays for plant and equipment for up
to two years starting May 9;
b.
suspension of fast write-off provisions on plant and
equipment for one year;
c.
elimination of similar provisions governing depreciation
of privately owned homes;
d.
a cutback in projected public sector borrowing, with the
federal government to reduce planned borrowing from DM 3.8 billion to
DM 2.1 billion and the länder (state) and municipal governments being
ordered (by authority of the Growth and Stability Law of 1967) to
decrease borrowing to DM 4.3 billion (from DM 7.1 billion) and DM 7
billion (from DM 8 billion), respectively;
works in
plans;
a decrease in joint federal and länder-expenditures on public
e.
1973 of about DM 1 billion -- or 10 per cent -- below original
f. a reduction this year in discretionary expenditures by
the federal government of DM 700 million (The länder and municipalities
were urged to cut such expenditures, too. They were also requested to
freeze revenue in excess of amounts originally budgeted, as the federal
government promised to do when it announced its draft budget for 1973 in
February.);
1/
Recent developments in the German economy and the 1973 outlook (prior
to the new restrictive measures) were discussed in the Greenbook of May 9,
III 16-27.
*Prepared by Martin Kohn, Economist, Division of International Finance.
A-
2
g. a request to pensions funds to divert to the Bundesbank
this year DM 2.5 billion which they would otherwise have lent to other
borrowers, with the Bank to pay interest on these funds but keep them
frozen;
h. a reduction in the income level above which the federal
government plans to impose a non-refundable 10 per cent income tax
surcharge, starting July 1.
As regards the last measure, the draft budget of February
stipulated that the surcharge be applied to corporations, single persons
with incomes over DM 100,000 and married couples with incomes over
DM 200,000. Under the May 10 proposal, incomes over DM 24,000 in the
case of single persons and over DM 48,000 in the case of married couples
will be subject to the additional levy. Despite this revision, however,
the number of persons expected to have to pay the surcharge is still
limited -- about 800,000 according to the government.
The proceeds --
which are to be frozen at the Bundesbank -- are now expected to total
DM 4.6 billion in a full year, compared to only DM 2.4 billion under
the original plan.
The restraint package put forward May 9 and 10 is intended to
supplement the Bundesbank's monetary policy, which has been progressively
tightened for about a year now, and to reinforce the moderately restrictive
character of the draft budget. The principal deflationary measures in
that budget, in addition to the income tax surcharge, included an increase
in the tax on mineral oil, tighter depreciation rules for buildings, and
a cut in tax benefits for investment in less developed areas in Germany.
The February budget called for federal government spending of
DM 120 billion (almost 13 per cent of projected GNP this year) and revenue
(not including the surcharge ) of about DM 116 billion. The government
also instituted a so-called "stability loan," designed to raise about
DM 4 billion from the non-bank public this year, in several installments.
The proceeds of the loan, like those from the surcharge, are to be frozen
at the Bundesbank. DM 1.5 billion has already been raised. The efficacy
of the stability loan as a deflationary instrument has been questioned on
the ground that it probably results in the diversion of savings from one
form to another rather than in the creation of new savings.
Many of the measures announced this week will require parliamentary approval. But once enacted, they will be effective retroactive to
May 9.
A-
3
The prospects for Parliamentary passage of the government's
program appear bright. Though the ruling Social Democratic Party (SDP)
is in a minority in the second house of Parliament -- the Bundesrat --
the universal concern over inflation virtually insures a favorable
reception for the government's proposals in both houses. It is true
that the surcharge in the draft budget in February encountered strong
opposition in the Bundesrat. But the objections focused primarily on
the eventual disposition of the proceeds rather than on the merits of
the surcharge itself.
New Measures May Ease Labor Discontent
That the government, in tightening fiscal policy, limited
increases in personal taxes to middle and higher income groups implies
its concern that increasing the tax burden in lower income brackets
would give added impetus to the upward trend of wage demands. These
demands have intensified in response to the failure of inflation to
abate. In Aril consumer prices were about 7-1/2 per cent higher than
a year earlier. From April 1971 to April 1972 the increase had been
only 5.1 per cent. The high increases in the cost of living are
reflected in a recent escalation in the size of wage settlements. In
early 1973, agreements were providing for relatively moderate annual
increases in wage rates of about 8-1/2 per cent. In a key settlement
last month, the paper and printing workers received a raise of almost
11 per cent. Even higher wage boosts were expected in other industries
before the government acted this week.
Like representatives of other institutions in Germany, important labor leaders have of late been pointing to the need for a
stabilization program. Now that the government has introduced one,
inflationary expectations may diminish and wage demands may be correspondingly reduced.
However, how effective the government's fiscal restraint
measures will prove remains to be seen. The government apparently acted
on the premise that a necessary condition -- though not a sufficient one,
given the importance of inflationary expectations -- of slowing inflation
is to reduce the rate of real economic growth, now running in excess of 7
per cent a year. With capacity already tight, such rapid growth is
clearly exerting strong upward pressure on prices. But the measures of
May 9 and 10 may not be sufficient to reduce growth promptly or substantially. The success of the government's program depends to a
significant degree on inducing a slower rate of expansion in business
investment than was envisaged prior to the unveiling of this week's
A - 4
stabilization package.
(Private fixed non-residential investment was
expected to increase, in real terms, by 5 to 6 per cent from 1972 to
1973.
It had shown virtually no increase from 1971 to 1972.)
However,
the impact on investment is likely to occur only with a lag, since the
investment tax so critical to damping investment applies only to plant
and equipment ordered after May 9. Consequently, the large backlog of
capital now on order is not subject to the tax.
SUPPLEMENTAL APPENDIX B:
THE TREASURY"S PROPOSALS FOR TAX CHANGE*
On Monday, April 30, 1973 the Treasury's 1973 proposals for tax
reform were made public. In his testimony before the House Ways and Means
Committee, Secretary Schultz indicated that the proposed tax changes were
not intended to raise revenue, and that the first full year net revenue
impact would be a loss of $.6 billion. Instead the changes were designed
to simplify the tax forms and insure that all persons pay their 'fair
share of taxes while, at the same time, retaining certain tax incentives
which encourage economic growth.
In this appendix we discuss the principal features of the
Treasury's tax proposals including: (i) repeal of the existing minimum
tax on individual preference income which is replaced by two new provisions
applicable to individuals--a concept of "Minimum Taxable Income" designed
to "prevent the combination of exclusions and itemized deductions from
offsetting more than one-half of a taxpayer's income", and a Limitation
On Artificial Accounting Losses" designed to reduce the benefits from
certain tax shelters; (ii) a new more simplified tax form; (iii) an
investment credit for the oil industry applicable to exploratory drilling
expenses; (iv) an annual credit for tuition paid to non-public schools;
(v) a subsidy to state and local government to encourage taxable bond
issues, and a new Treasury bond designed for purchases by state and
local government with the proceeds of advance refunding bonds. Other
assorted provisions dealing with foreign source. income, political
contributions, and regulations governing commercial preparers of tax
returns are not discussed in this appendix.
I. Two Provisions to Replace the Minimum tax on Preference Income
(a) Minimum taxable income.
In an attempt to assure that no taxpayer of means can escape
paying at least a minimum tax, the Treasury has defined for persons a
concept called 'Minimum Taxable Income." Tax preference items 1/ are
added to normal adjusted gross income and then personal exemptions and a
standard $10,000 deduction are subtracted. This net sum is then divided
by two and defined as the taxpayer's Minimum Taxable Income, (MTI).
The taxpayer is to be taxed on MTI or on his taxable income calculated
according to present law, whichever is larger. Relative to the current
*Prepared by David M. Reaume, Economist, Government Finance Section.
1/ Which are (1) the excluded half of net long-term capital gains, (2)
depletion in excess of a property's cost basis; (3) exempt earned
income from foreign sources, and (4) the nontaxable bargain element
in certain stock options.
situation, this provision may increase the tax liability of some high income
taxpayers, in particular those with large deductions. However, it
appears that other taxpayers--those with large amounts of realized capital
gains or depletion allowances and small deductions--may pay less under the
proposed tax system because an additional provision calls for the repeal
of the 10 per cent minimum tax on the preference income of persons. 2/
(The tax on preference income of corporations is to be retained.) Because
the possibility of an overall reduction in the tax on capital gains and
oil income is not explicitly mentioned in the Treasury's Report, perhaps
clarification at a later date will indicate that the reduction was
unintended.
(b) The "Limitation on Artificial Accounting Losses" (LAL).
Current law allows a taxpayer to concentrate property related
expenses into the first few years of a property's life. Any loss generated
in this period can be used to offset or "shelter unrelated income of the
taxpayer. For taxpayers currently in high marginal tax brackets but
destined to be in a lower bracket in the future, the effect of the shelter
is to reallocate income to a period when the taxpayer's marginal rate is
lower. The savings to the taxpayer is derived from the lower (future)
tax rate and postponement of tax payment, the latter savings being equal
to the present value of the additional income he can earn on the postponed taxes. The Treasury's proposal will prohibit the taxpayer from
using "artificial accounting losses from one activity to offset income
from an unrelated activity. 3/ Thus the loss is restricted to a level
2/ While the unreported half of long-term capital gains is added to adjusted
gross income so that both halves would seem to be in the tax base,
the last step of division by two in arriving at MTI ensures that only
one-half of capital gains will enter MTI. Since inclusion of only
one-half of capital gains in the base is no different from the present
treatment of capital gains, the receipt of capital gains income no
matter how great appears to have no effect on whether or not a taxpayer is forced to use MTI instead of his current tax base. Similar
but not identical conditions hold with respect to the treatment of
"excess oil depletion allowances. The possibility of a reduction
in tax liability occurs because of the related Treasury proposal to
repeal the current 10 per cent tax on preference income over $30,000
per year which currently applies to one-half of capital gains and the
other preference items. Whether MTI and the repeal of the tax on
preferences will raise or lower a taxpayer's total tax bill depends
upon the size of his preference income, his wage and salary income,
and the level of his normal deductions. Generally speaking, taxpayers
with high wage and salary income, high deductions (over approximately
50 per cent of earned income), and preference income under $30,000
per year will be taxed heavier under the proposed plan. Taxpayers
with high preference income and low deductions relative to earned
income will receive a tax break.
3/ Artificial deductions are defined to include, among others, depreciation
in excess of straight line, intangible drilling and development costs
when they are expensed, and amortization of rehabilitated housing in
excess of straight line.
such that net income from the shelter is zero. Any additional deductions
must be postponed until some future period when net income from the activity
to which the loss applies is positive. Secretary Schultz noted that the
deductions are not lost but are postponed until the investment generates
income, and that therefore the intended investment incentive is still
partially in effect.
II.
Simplification of Tax Forms.
A taxpayer may choose to use a new more simplified tax form,
designated 1040S, instead of the present long form. In essence the new
form together with a single auxiliary form reduces to two the number of
forms most taxpayers must use. However, in certain special cases, for
example when one declares moving expenses, the long form would still
be required. Included on the new general form are spaces in which to
enter miscellaneous income, charitable contributions, child care expenses,
old age credits, and capital gains and losses. As a further simplification, Treasury has proposed that a new miscellaneous standard deduction
of $500 be substituted for the combined total of a portion of the current
medical expense deduction, the $100 dividend exclusion, the deduction
for gasoline taxes paid, the sick pay exclusion, and the first $200
of those deduction listed under miscellaneous deductions on the present
tax form. Admendments to the child care deduction and the retirement
income credit are also proposed. The various simplification measures are
estimated to result in a revenue loss of $4 billion in the first full
year of operation. 4/
III.
Investment Credit for Exploratory Drilling.
A 7 to 12 per cent investment credit for exploratory drilling
expenses is also proposed by the Treasury to encourage new exploration in
the United States. For purposes of the credit an 'exploratory well is
defined as one which is bottomed not less than two statue miles horizontally
from the nearest well which is capable of commercially producing oil or
gas or was previously so productive, or which is bottomed at least 3,000
feet below the lower limit of a commercially producible deposit penetrated
by any such closer well.
The credit applicable to dry wells is 7 per
cent while an additional 5 per cent is received for productive wells.
IV.
Tuition Credit.
The Administration also proposes a personal income tax credit
for tuition paid for non-religious instruction in non-public, non-profit
primary and secondary schools. The credit would be limited to 50 per cent
4/ Additional revenue loss is possible. Current tax law restricts deduction
of long-term capital losses to the total of short-term gains, long-term
gains, and $1,000 of ordinary income. The $1,000 limitation on the
deduction of net long-term losses against ordinary income does not
appear to be incorporated into the proposed new forms. However,
because it is not mentioned in the text it is likely that this
omission was not intended.
of the tuition cost, up to $200, for each child. The tax benefit is phased
out for higher income taxpayers by reducing the credit by 5 per cent of
adjusted gross income in excess of $18,000. The annual revenue loss
attributable to this provision is estimated to be $450 million.
V. Provisions Affecting State and Local Governments.
To significant proposals have been made with respect to the
issuance of debt by state and local governments. The first asks that State
and local governments be allowed the option of issuing Federally taxable
bonds. The Federal Government will pay an interest subsidy to the
issuers equal to 30 per cent of the net interest expense incurred. The
hope is that such bonds will be attractive to pension trusts and other
exempt organizations and will lend stability to the market for State
and local debt by enabling those governments to compete more effectively
with corporations" when interest rates on tax free securities are under
upward pressure. This proposal is also favored by tax reformers who have
argued that the current system of subsidizing State and local governments
via the exemption of their obligations from Federal tax is inefficient
because it costs the Treasury more than the benefit to State and local
governments.
A second provision aimed at State and local governments calls
for the creation of a new Treasury bond for purchase by these governments
when investing the proceeds of advance refunding issues. Currently
these proceeds are invested in relatively low yield securities because
of the Federal law discouraging "arbitrage" profits. 5/ The issuers
of these low yield securities receive a windfall because they borrow
at artifically low rates. By allowing the Treasury to offer an
alternative security in which State and local governments may obtain
a yield "equal to the yield permitted under present law plus an
additional one-fourth of one per cent" the arbitrage gain may be redirected
into the U.S. Treasury.
5/ The Tax Reform Act of 1969 provided that municipal bonds would lose
their tax exempt status if issued in expectation of investing the
proceeds in higher yielding securities.
APPENDIX C:
DEMAND DEPOSIT OWNERSHIP FIRST QUARTER 1973*
Demand Deposit Ownership data for all commercial banks
(Table 1) indicate a slightly larger decline in total gross IPC demand
deposits (daily averages, not seasonally adjusted) in the first quarter
of 1973 than in the first quarters of the two preceding years for
which data are available. The survey suggests that weakness in the
money supply in the first quarter was broadly based by IPC ownership
category with every IPC sector--except foreign--showing contraseasonal
weakness or virtual seasonal changes over the period. Most of the
total decline (97 percent) occurred at non-financial businesses with
the quarterly pattern roughly similar to that occurring in 1971 and
1972. Demand deposits held by financial businesses also fell, apparently
contraseasonally, as did deposits of miscellaneous IPC owners ("all
other"). Household holdings of demand deposits rose only marginally,
but it is difficult to determine from previous data what the normal
first quarter pattern is for this sector. The data, however, do not
suggest an unusual reduction in household holdings of demand balances,
and thus, do not lend support to the hypothesis that first quarter
slowing in M1 reflected a large shift of money from households to the
corporate sector as the result of the spurt in retail sales.
Foreign IPC deposits rose by $200 million in the first quarter.
Furthermore, all of this increase occurred at the large weekly reporting
banks in February--the month when international uncertainties resulted
in a large outflow of funds to foreign countries.
Some additional insight is gained from disaggregating these
data between weekly reporting and non-weekly reporting banks (Table 2).
As might be expected, most of the first quarter decline in both total
and corporate deposits occurred at the larger banks. At the smaller
banks, consumer deposits showed a relatively strong increase, while
financial business deposits increased only moderately.
Monthly data for the weekly reporting banks suggest that the
first quarter weakness in IPC deposits--especially business deposits-was not concentrated early in the quarter as in the previous two years.
In the early years, first quarter declines were associated with slowing
in January and February, with all the deposit categories usually
beginning to expand again in the last month of the quarter. This year,
however, both non-financial and financial business deposits continued
to decline in March.
* Prepared by Martha Strayhorn, Economist, Banking Section, Division of
Research and Statistics.
Table 1
Change in Level of Gross IPC Deposits by Ownership
Category, All Commercial Banks 1/
(Billions of dollars)
QI
1970
1971
1972
1973
Financial Business
QIII
QIV
QI
n.a.
n.a.
1.0 -0.2
1.7 -2.3
-0.1
0
-0.2
0
0.3
0.6
0.9
n.a.
-6.4
-5.8
-6.5
___
1970
1971
1972
1973
1/
Nonfinancial Business
QII
QII
n.a.
3.3
5.0
Households
QIII
QIV
QI
QII
QIII
2.7
1.9
4.0
4.6
6.9
7.8
n.a.
0.8
-3.9
0.2
n.a.
1.8
5.7
2.4
1.2
2.6
QI
QII
QII
QII
QIV
QI
QII
QIII
n.a.
.1
0
.2
n.a.
-. 1
0
- .2
- .1
0
-. 1
.1
.1
n.a.
.3
1.6
-. 5
n.a.
0
-1.3
n.a.
-4.2
-6.3
-6.7
n.a.
4.9
7.1
5.3
2.1
7.0
QIII
.4
-. 8
.4
Q
.3
1.0
.8
Changes are based on daily averages of last-month-in quarter to last-month-in-quarter,
annualized. Data are before deduction for cash item in process of collections.
Figures may not sum to total due to rounding.
2.2
1.2
1.8
Total
All Other
Foreign
QI
QIV
QIV
7.3
9.7
11.4
not
Table 2
First Quarter Change in Level of Gross IPC Demand Deposits
by Ownership Category, at Weekly Reporting Banks vs. Non-Weekly Reporting Banks 1/
(Billions of dollars)
Nonfinancial Business
Financial Business
Year
WRB
NON-WRB
TOTAL
WRB
1971
1972
1973
.7
-. 4
-. 3
.3
2.1
.2
1.0
1.7
-0.1
-3.7
-2.7
-5.4
Foreign
Year
1971
1972
1973
1/
WRB
0
0
.2
NON-WRB
.1
0
0
Households
NON-WRB
TOTAL
WRB
NON-WRB
TOTAL
-2.7
-3.1
-1.1
-6.4
-5.8
-6.5
.6
.3
-. 7
.2
-4.2
.9
.8
-3.9
.2
All Other
TOTAL
.1
0
.2
WRB
.2
.1
-. 1
NON-WRB
.1
1.5
-. 4
Total
TOTAL
WRB
.3
1.6
-. 5
-2.2
-2.7
-6.4
NON-WRB
-2.0
-3.6
-. 3
TOTAL
-4.2
-6.3
-6.7
Changes are based on daily averages of last-month-in-quarter to last-month-in-quarter, not
annualied. Data are before deduction for cash items in process of collection. Only data
for total and weekly reporting banks are reported; thus figures for non-weekly reporting banks
are residuals.
D - 1
APPENDIX D:
MAJOR MATERIALS CAPACITY UTILIZATION*
Introduction
A family of capacity utilization series describing utilization developments in a group of basic materials industries recently
has been developed on an experimental and confidential basis. These
series are not consistent with the published FRB series on the rate of
utilization in all manufacturing.
The industries composing the major materials group are raw
steel, aluminum ingots, copper refining, man-made fibers, paper,
paperboard, cement, petroleum refining, broadwoven fabrics, and yarn
spinning. The new major materials utilization series is similar in
both industry composition and methodology to a series with the same
name which the Board staff produced for several years prior to 1962.
The present series differs from the former, however, in including
broadweaving but excluding coke, wood pulp, and several chemical
industries for which basic capacity data are no longer available.
Present plans call for the addition of coke, wood pulp, and softwood
plywood to the current major materials series as soon as that can be
done.
The physical capacity data used in estimating the individual
industry utilization rates are generally based on industry-wide surveys
of establishments conducted either by industry associations or Government agencies, which provide data on year-end capacity for each of the
industries except steel. Because of the key role in the economy which
many of the component industries play, the major materials utilization
series has broader implications for many analytical purposes than the
industries includedin the series explicitly.
The following discussion presents a brief overview of
economic developments as related to the new Major Materials Utilization
series followed by a brief description of the methodology by which the
series was constructed.
Overview of Recent Developments in
Major Materials Industry Utilization
Table 1 presents utilization rates for the major materials
group and its industry components for 1972 and 1973, and Table 2
*
Prepared by Nathan Edmanson, Economist, Business Conditions Section,
Division of Research and Statistics.
D - 2
presents equivalent annual data for the 1960's. The major materials
rate was just under 94 per cent in the first quarter of 1973, up from
a low of 82 per cent in the third quarter of 1971. The first quarter
1973 level is the highest for any postwar quarter except one. This
upswing in utilization reflects not only the substantial upswing in
output, but also a reduced rate of capacity growth: capacity grew at
an average of 4.1 per cent per year from 1966 to 1971, but only at 2.1
per cent from 1971 to 1972. The reduced rate of capacity growth is to
some extent a normal cylical event, but there were a number of contributory special circumstances, examples of which are discussed below.
Table 1
MAJOR MATERIALS CAPACITY UTILIZATION
RECENT QUARTERLY AND MONTHLY DATA
(per cent)
1973
1973
1972
Industry
Feb.
Mar.
91
94
95
87
86
96
97
98
84
84
94
97
95
87
86
96
96
98
90
87
97
97
100
95
95
79
95
94
95
90
84
92
94
95
97
77
95
100
95
97
77
98
100
I
II
III
IV
I
Jan.
87
89
91
92
94
Broadweaving
Spinning
Paper
Paperboard
Man-made Fibers
85
92
93
94
87
86
91
95
96
94
86
90
96
99
92
88
88
99
96
92
Petroleum Refining
Raw Steel
Copper Refining
Aluminum
Cement
92
74
71
85
95
92
80
74
89
89
94
86
77
93
91
95
92
71
92
92
Total
Source:
Federal Reserve Board, Business Conditions Section.
The industry figures of Table 1 show that the major materials
utilization upswing was broad-based, as six of the component industries
rose to high levels in 1972 and 1973: petroleum refining, man-made
fibers, steel, aluninum, paper, and paperboard. A seventh industry,
cement, showed a high utilization rate in the first quarter, but is not
included in this listing because the high first quarter of 1973 level
is believed to be a seasonal phenomenon. All of the six mentioned were
in the 95-100 per cent range in the first quarter, and petroleum refining
and man-made fibers were at ten-years highs.
Table 2
MAJOR MATERIALS CAPACITY UTILIZATION
ANNUAL DATA, 1961 - 1972
(per cent)
Industry
Total
Broadweaving
Yarn Spinning
Paper
Paperboard
Man-made Fibers
Petroleum Refining
Raw Steel
Copper Refining
Aluminum
Cement
Source:
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
79
81
84
89
91
92
87
90
91
86
85
85
99
90
88
85
84
100
91
89
88
92
96
95
94
93
93
100
97
97
87
88
96
96
91
92
87
94
100
98
87
85
86
93
91
78
84
92
89
90
83
88
90
79
100
78
92
90
77
100
78
93
85
62
93
77
91
89
76
100
80
91
81
76
99
76
90
74
66
91
82
87
88
77
99
77
Federal Reserve Board, Business Conditions Section.
93
90
51
100
74
1972
D -4
The following discussions describe selected industry highlights within the major materials group.
Petroleum
based on crude runs
up from 90 per cent
reflects increasing
refining.--The petroleum refining utilization rate,
to stills, was 95 per cent in the first quarter,
in the third quarter of 1972. This increase
runs to stills which have been in response to
rising demand for petroleum products, but it also reflects very slow
growth in capacity in recent years: less than one per cent per year
in 1971 and 1972 as contrasted with an average annual growth of 4.9
per cent in 1969 and 1970. Two reasons for this slow growth were the
need to meet pollution standards, and uncertainty regarding future oil
import policy. A third factor which has probably affected adversely
investment in refinery capacity expansion is that since 1969, major
oil companies' rate of return on invested capital has declined in the
U. S., but has risen overseas.1/
Man-made fibers and broadweaving.--Utilization in the manmade fibers industry was extremely high in the first quarter--98 per
cent--and was up dramatically from the fourth quarter of 1970, when it
stood at 76 per cent. Utilization in the broadweaving industry, a
major consumer of man-made fibers, has not shown an increase parallel
to that of man-made fibers utilization.
Part of the explanation for this disparate performance is in
the fact that a significant proportion of the increase in man-made
fiber output went into the production of knit cloth, not reflected in
broadweaving utilization. This hypothesis is supported by evidence of
a dramatic increase in the number of circular knitting machines in the
U. S.: approximately 23,000 at the end of 1972, up from approximately
17,000 at the end of 1971.2/
A second element in the dramatic increase in the man-made
fibers utilization rate is substitution away from cotton in fabric
making as the price of cotton rose in 1972 and 1973. This resulted
in weaving mills' increasing their consumption of man-made fibers without increasing their output correspondingly.
1/ The Chase Manhattan Bank, N.A.
2/
"Financial Analysis of a Group of
Petroleum Companies," 1962-1971.
Based on a telephone interview with persons in the American Textile
Manufacturers' Institute.
D - 5
Paper and paperboard.--In the first quarter of 1973, utilization in paper and board was in the 95-100 per cent range, and industry
sources report short periods with output in excess of 100 per cent of
capacity. The paper and paperboard industries' rise in utilization
reflects a comparatively slow rate of capacity growth: growth averaged
approximately 2.0 per cent per year in the 1970-1972 period, but was
never below 3.5 per cent per year from 1964 through 1969. Part of
the explanation appears to be in the diversion of significant amounts
of plant and equipment expenditures from basic capacity expansion to
expansion of paper fabricating facilities, pollution control facilities,
and investments in activities unrelated to paper and board production.
Steel.--Steel capacity utilization has been pushed to high
levels by a widespread boom in steel demand. First quarter utilization
was 95 per cent, up from 74 per cent in the 1972 first quarter. The
rapid rise of basic steel utilization reflects also comparatively slow
capacity growth. One condition contributing to this slowness is the
fact that steel companies have found investment opportunities in steel
fabricating more profitable in recent years than investment in basic
steelmaking. A second contributing factor is that many marginal
facilities, which have traditionally constituted the industry's peak
load capacity, have been written off in recent years as being obsolescent or too expensive to bring into conformity with requirements of
pollution control laws.
Inventories and shortages.--The recent upswing in major
materials utilization was quite abrupt as compared with that which
occurred in the 1961-1966 period. The very abruptness of the rise
raises the possibilities of shortages of some materials, as materials
producers have had very little time to adjust capacity; and shortages'
have in fact been reported by purchasing agents in various instances
in recent past. Table 3 shows, however, that there was a significant
increase in the rate of materials inventory accumulation concurrent
with the rise in utilization rate. This suggests that an inventory
cushion of industrial materials has been built up which would prevent
widespread industrial aterials shortages for the time being, even
though little excess productive capacity appears to exist in materials
industries.
Nevertheless, the current situation is tight enough that
important shortages are likely to appear in selected areas. For
example, stocks of motor gasoline are expected to be abnormally drawn
down with the summer season's heavy gasoline consumption. Gasoline
Table 3
MAJOR MATERIALS UTILIZATION AND INDUSTRIAL MATERIALS INVENTORY CHANGE
Year and Quarter
1971
Item
I
Major Materials
Utilization (per cent)
Industrial Materials
Inventory Change
(Billions of 1963 dollars)
Source:
Federal Reserve Board.
II
1972
III
IV
I
II
1973
III
IV
I
87
87
82
84
87
89
91
92
94
1.92
2.62
-1.20
-1.14
1.29
3.56
4.37
3.90
4.45
D - 7
shortates may appear only sporadically this summer, but the anticipated
large inventory drawdown could have serious implication for heating oil
supplies in the coming winter and gasoline supplies the following
summer. Also, there have been a number of reports from purchasing
agents of lengthening order backlogs among materials suppliers, if
not outright shortages.
Capacity growth acceleration.--Some available evidence appears
to suggest some faster growth in major materials capacity. The FRB
production index for manufacturing equipment has risen at a 19 per cent
annual rate in the six-month period which ended with March, 1973. A
rise in equipment production rates can be expected to anticipate a
rise in the rates of new equipment installation, which would be consistent with an increase in the manufacturing capacity growth rates.
Some of this increase would presumably take place in materials industries.
Recent surveys of plant and equipment spending provide
additional reasons for anticipating an increase in the capacity growth
rate, as reports that business anticipates a substantial increase in
expenditures for new plant and equipment in the materials industry in
1973.
Methodology of the Major Materials
Utilization Series
Major materials utilization is a weighted average of
utilization rate series computed separately for each of the component
industries. For each of these industries,annual physical unit output
and year-end capacity originate either with the Census Bureau or with
an industry association. The Steel industry is the only component
industry for which capacity is not available for the end of each year,
and an interpolation procedure making use of steel industry investment
data is used to estimate capability in years for which it is not
available.
Quarterly capacity is estimated by linearly interpolating
between the year-end points, which are based on large-scale establishment surveys. Quarterly output is estimated by distributing the
annual physical output through the year in the same way as the appropriate industrial production index. Quarterly utilization is quarterly
output divided by quarterly capacity. The major materials aggregate
uses the value added weights used in the industrial production index
aggregates.
@FedFRASER