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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

May 9, 1973
By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Page

Section

DOMESTIC NONFINANCIAL SCENE

Summary and GNP outlook ...................................

Industrial production..... ................................

- 7

Retail sales................................................

1
7

Unit sales of consumers durables...............
..........
....
Construction and real estate...................................

- 9
-11

Capital spending plans.......................................

-13

Manufacturers orders and shipments..........................

-14

..... ... ... ..... ................
Inventories.............. ,,
Cyclical indicators ................ ,..... ............

-16
-18

........

Labor market ......................................

-19

Unemployment and labor force.................................
Earnings ..... ..... ... .. ........
.. ...... ......... ..........
Productivity and costs...........
t........ .................

-20
-21
-23

Industrial relations .............................
.......
Consumer prices ....................
..........
.............
Wholesale prices.............................................
Phase II and Phase III developments-major price indexes.......

-25
-26
-28
-31

........

Agriculture .....................

......

...............

Agricultural credit.........................................
DOMESTIC FINANCIAL SITUATION

-34

Summary and Outlook.*..*,*
.**................................ - 1
Monetary aggregates.... ..............
....
,..*.............
- 4

Bank credit ..................................
,,
... ,,,,....
Consumer Credit.,................. ...........
.............
U.S, Treasury securities..........................
......
Private short-term rates...... .......................
.......

- 6
- 9
-10
-12

Long-temn

-13a

private securities markets.......................

Nonbank thrift institutions.......... ,,...............

-18

Mortgage market..................................,........
Federal finance............................................

-20
-22

INTERNATIOUAL DEVELOPMENTS
Summary and outlook..
Foreign exchange

III
o,,,,.,
**....**

....,...
....
ff*****f

.
*

.....***f«ft
«

1
-

3arketS
3

Euro-dollar markets..................................
..
U.S. balance of payuents ............... ....
.... ........
U.S. foreign trade. ......... ................. ..............
Balance of payments outlook..................................

- 4
- 7
- 8
-12

Economic activity in major foreign industrial countries......

-16

DOMESTIC NONFINANCIAL
SCENE

May 8, 1973

SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Release
Period
Date
Civilian labor force
Unemployment rate
Insured unemployment rate
Nonfarm employment, payroll (mil.)

Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Output per manhour (1967=100)
Compensation per manhour (1967=100)
Unit labor cost (1967=100)
Manufacturing:

Apr.
Apr.
Mar.
Apr.
Apr.

Apr.

Data

Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At Annual Rates)

5/4
5/4
4/20
5/4
5/4
5/4

88.4
5.0
2.8
75.0
19.7

5/4
5/4

37,2 16.3
4.1

55.3

6.6

1.1

5.0
2.81.7
6.9
-0.1

QI
QI
QI

5/4
5/4
5/4

37.4
3.83
115.2
147.3
127.9

Average weekly hours (hours)
Unit labor cost (1967=100)

Apr.
Mar.

5/4
4/26

41.1.
121.6

40.9
-4.9

Industrial production (1967=100)
Consumer goods

4/16

Materials

Mar.

4/16
4/16
4/16
4/16

121.7
129.0
115.6
80.4
125.0

7.9
10.3

Business equipment
Defense & space equipment

Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.
Mar.

4/20
4/20
4/20
4/20

Apr.
Apr.

Apr.

5/3
5/3
5/3

Mar.

4/18

Consumer prices (1967=100)
Food

Commodities except food

Services 2/
Wholesale prices (1967=100)
Industrial comodities

Fam products & foods & feeds
Personal income ($ bil.)3/

Apr.
Apr.

5.0

3.04.3
5.6
3.8

36.9
6.4

37.31
5.8
4.9
7.2
2.2

10.6

6.2
1/
40.15.7

1/
=

2.5
5.81/
3.6r3.9
5.1
3.5

40.8

2.4

10.7

9.8

9.4
7.9
14.1
3.6
10.5

129.9
134.8
121.7
136.6

9.6
30.1
4.0
3.5

8.5
26.9
3.3
3.5

4.7
10.0
2.8
3.4

130.6
124.1
148.2

11.7
15.8
0.8

19.7
14.0
33.0

11.2
6.1
25.1

8.4
7.3
16.2

12.6
-1.5

1.5

9.6

1001.2

(Not at Annual Rates)
Plant & equipment expen.

($ bil.)4/

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefens e
Defense
Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade

Ratio:

Mfrs.' durable goods inventories
to unfilled orders

Retail sales, total ($ bil.)
GAF

Auto sales, total (mil. units)3/

1973

5/4

105.5

10.5
8.5
6.4
21.5

41.5
12.8
10.7
2.1

Mar.
Mar.
Mar.
Mar.

24.6
23.5
25.6
13.4
1/

1.61a/
1.33 =

1.561'
1.70O
1.39-

.843-1

.8641

.931-

41.9
11.3

1.7
4.8

6.4
12.3

15.1
17.4

11.65
9.78

-7.8
-8.1
-6.2
-8.1
1.4

Feb.
Mar.
Feb.

5/8
5/1
5/8

1.42
1.57
1.28

1/
1.571/

Mar.

5/1

.823

Mar.
Mar.

5/8
5/8

5/4
514

Apr.
Domestic models
Apr.
Apr.
Foreign models
Mar.
Rousing starts, private (thous.Mar.
Leading indicators (1967=100)
3/
21 Not seasonally adjusted.
1/ Actual data.
taken May 1973.

19.3

5/4
1.86
4/17
2,259
4/26
161.1
At annual rate.

l/f

-4.2
13.7
-4.8
11.4
-1.2
27.7
-4.6
-2.3
16,5
4.7
McGraw-Hill survey

I - 1

DOMESTIC NONFINANCIAL DEVELOPMENTS
Current dollar GNP is expected to increase about $34 billion
this quarter, a somewhat larger rise than projected four weeks ago.
The upward revision reflects entirely an expectation of a larger
average price increase.
The projected second quarter advance in nominal GNP amounts
to an annual rate of 11 per cent, compared with 14 per cent in the first
quarter.

We continue also to anticipate a moderation of real growth,

with real GNP projected to increase this quarter at an annual rate of
the two preceding quarters.

6 per cent,

following rates of 8 per cent in

The rise in

the GNP implicit deflator and the private fixed weight

index is
first

expected to slow only a little

from the exceptionally rapid

quarter pace.
Activity in

the industrial sector continues brisk.

Industrial

production is tentatively estimated to have increased at about an 8-1/2
per cent annual rate in April, about the same as in the first

quarter.

Gains in

output were widespread,

strong.

Manufacturing employment also rose considerably further in

with business equipment particularly

April, and the factory workweek edged up to its

highest level in over

6 years.
The anticipated moderation of real expansion in

the second

quarter reflects primarily an expected slowing of the rise in

spending from the exceptional first quarter pace.

consumer

Weekly retail sales

suggest a decline in April from the sharply advanced March level.

I - 2

Unit auto sales were at an annual rate of 11.7 million in April (9.8
million domestic-type), down somewhat from the first quarter average.
Also, residential construction activity is expected to turn down this
quarter.

New housing starts were off 8 per cent in March, and the

decline of permits in recent months suggests a probable further drop
in starts.
Business demands, on the other hand, appear to be strengthening.

The McGraw-Hill survey taken in April indicates an increase of

19 per cent in anticipated business expenditures for plant and equipment
in 1973, compared with 14 per cent indicated by the Commerce survey
taken in February.

Much of the upscaling is in durable goods manu-

facturing and is consistent with continued strength in new orders and
increasing reports of pressures on capacity.

Inventory/sales ratios

are at unusually low levels, and a sizable increase in inventory investment appears in prospect in this and coming quarters.
Wage rates advanced more rapidly in March and April than over
the preceding few months, but the average rate of increase in the
hourly earnings index remains moderate thus far in 1973.

In real terms,

weekly and hourly earnings have fallen below the highs reached early
last fall.
Wholesale prices of farm products and foods edged up only
slightly in April, following five months of exceptionally large
increases, but prices
further.

of consumer finished foods advanced considerably

Prices of industrial commodities rose 1.3 per cent, the third

consecutive month of large and widespread increases.

On May 2, the

I - 3
President announced that prenotification would be required of large
firms that raise the average of their prices by more than 1-1/2 per
cent above that authorized on January 10.
Outlook.

The staff continues to assume growth in the mone-

tary aggregates consistent with expansion in M1 at a 5 to 5-1/2 per cent
annual rate this year, and some further rise in market interest rates.
The Federal spending assumptions are unchanged.
The current GNP projection for the second half of 1973

differs little from that of four weeks ago.

Growth in real GNP is

still projected to taper off to an annual rate of around 4 per cent
in the fourth quarter, and the unemployment rate to edge down to about
4-3/4 per cent.
We have raised somewhat our projection of business fixed
investment on the basis of the McGraw-Hill survey and also incoming
information on orders.

to be a bit weaker.

Net exports, on the other hand, are expected

The rise in consumer spending is still projected

to slow appreciably, as growth of disposable income moderates following
completion of tax refunds.

Inventory investment is projected to rise

to an annual rate of about $20 billion in the fourth quarter; even
so, stock-sales ratios would remain near recent low levels.
The projected slowdown in the rise in the private GNP fixed
weight price index--from a 6.7 per cent annual rate in the first
quarter to 4.7 per cent in the fourth--reflects primarily the anticipation that food price increases will slow sharply from the extraordinary rates of early this year.

But rising costs are expected to

exert upward pressure on prices of other goods and services, particularly
producer and consumer durables.

I - 4

STAFF GNP PROJECTIONS

Change in
nominal GNP
$ billion
4/11/73 Current

Date
19711/
1972 "/
1973

74.0
101.4
128.8

Per cent increase, annual rate
Private GNP
fixed weight
Real GNP
price index
4/11/73 Current 4/11/73 Current

Unemployment
rate
4/11/73 Current

74.0
101.4
131.3

2.7
6.4
6.7

2.7
6.4
6.8

4.5
3.3
4.3

4.5
3.3
4.6

5:9
5.6
4.8

5.9
5.6
4.8

1 1/

31.0

6.5

4.5

5.8

-II-III/
-IV -

30.3
24.6
30.9

9.4
6.3
8.0

2.5
2.9
3.1

5.7
5.6
5.3

40.1
32.5
29.0
27.0

40.6
34.5
29.5
28.0

7.0
6.1
4.8
3.8

7.9
6.0
4.8
3.9

6.2
4.5
4.3
4.6

6.7
5.3
4.4
4.7

5.0
4.9
4.8
4.7

128.6

132.6

5.5

5.7

5.0

5.3

- .6

1972-

1973-- 1 /
-II
-III
-IV
Change:

1972-IV to
1973-IV
/ Actual.

- .6

CONFIDENT

L - FR

I - 5

May 9,

1973

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted.
Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1972

1973
Proj.

1972
III

1151.8
1145,9
891.3
895.5

1283.1
1268.7
993.7
997.7

1164.0
1156.0
900.4
903.8

1194.9
1184.6
925.3
928.8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

721.0
116.1
299.5
305,4

800.3
133.1
335.9
331.3

728.6
118.6
302.0
308.0

745.7
120.8
310.4
314.5

Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm

180.4

211.9
56.6
140.8
14.4
14.3

183.2
54.4
120.7

193.4
57.0
126.1

8.0

10.3

7.9

10.1

-3.4
74.4
77.8

-3.5
79.6
83.1

Gross National Product
Final purchases
Private
Excluding net exports

et exports of goods and services 2/
Exports
Imports

54.0

120.5
5.9
5.6
-4.2
73.7
77.9

-4.0
93.0
97.0

1973
Projected
III

1235.5 1 1270.0
1229.'- 1/ 1256.0
962.5984.1
965.2
989.6

1299.5
1281.5
1004.0
1009.0

1327.5
1308.0
1024.4
1027.0

773.7
130.1
322.9
320.7

793.6
233.0
332.9
327.7

809.5
134.5
340.2
334.8

824.4
135.0
347.4
342.0

197.7-1
59.2
132.31/
6.21
5.9

210.0

217.5
55.7
143.8
18.0
18.0

222.1
53.8
148.8
19.5
19.5

-2 7IF
88.1-,
90.8-

57.7

138.3
14.0
14.0
-5.5
91.8
97.3

Gov't. purchases of goods and services
Federal
Defense
Other
State & local

254.6
105.8
75.9
29.9
148.8

274.9
108.0
74.5
33.5
166.9

255.6
105.4
75.1
30.2
150.2

259.3
104.0
73.2
30.8
155.2

266.8
107.0
75.0
32.1
159.8

271.9
107.1
74.2
32.9

Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)

789.5
145.9

843.5
152.1

796.1
146.2

811.6
147.2

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

935.9
627.0
795.1
54.8
6.9

1028.9
691.3
880.0
59.0
6.7

939.9

94.3
91.7

-5.0
94.0
99.0

-2.6
98.2
100.8

164.8

277.5
108.2
74.3
33.9
169.3

283.6
109.8
74.6
35.2
173.8

827.1
149.4

839.5
151.3

849.6
152.9

857.9
154.7

798.8
50.8
6.4

974.6
648.8
828.2
62.8
7.6

993.9
668.4
850.9
57.3
6.7

1019.5
684.5
876.0
61.7
7.0

119.0
108.0

95.7
93.1

101.5
97.1

113.9
104.4

118.0
107.4

120.5
109.2

123.5
111.1

228.6
246.8
-18.1

260.3
265.4
-5.1

229.8
241.6
-11.8

238.4
262.7
-24.3

251.1
260.4
-9.3

253.9
264.0
-10.1

265.1
266.8
-1.7

271.1
270.5
0.6

-0.9

-0.8

3.9

-12.1

-1.5

-4.3

-0.3

2.9

State and local government surplus or
deficit (-), N.I.A. basis

12.7

11.3

9.4

19.5

14.6

11.4

10.3

9.0

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

89.0
2.4
86.5
5.6

90.8
2.4
88.4
4.8

89.3
2.4
86.9
5.6

89.6
2.4
87.2
5.3

90.0
2.4
87.6
5.0

90.6
2.4
88.2
4.9

91.0
2.4
88.6
4.8

91.4
2.4
89.0
4.7

Nonfanm payroll employment (millions)
Manufacturing

72.8

75.3

72.9

73.8

74.6

75.2

75.6

75.9

18.9

19.7

18.9

19.3

19.6

19.7

19.8

114.4
77.6
89.6

124.1
81.2
94.5

115.0
78.1
90.6

123.4
81.2
94.4

125.4
81.5
94.8

126.7
81.5
95.2

Corporate profits before tax
Corp. cash flow, net of div. (domestic)
Federal government receipts and
expenditures, (N.I.A. basis)
Receipts
Expenditures

Surplus or deficit (-)
High employment surplus or deficit (-)

Industrial production (1967 - 100)
Capacity utilization: Mfg. (per cent)
Major materials (per cent) 3/
Housing starts, private (millions, A.R.)

Sales new autos (millions, A.R.)

630.6

118.4
79.7
92.2

120.8
80.5
93.6

1041.0
699.3
888.6
58.0
6.5

1061.0
713.0
904.6
58.8
6.5

2.38

2.13

2.37

2.40

2.18

2.05

1.90

10.94

11.71

11.53

11,69

12.23

12.10

11.50

11.00

9.50
10.35
10.00
9.91
9.90
10.27
9.32
10.03
Domestic models
1.50
1.50
1.95
1.75
1.79
1,61
1.68
1.61
Foreign models
/
F. R. estimates reflecting more recent balance of payments data than were incorporated in the Comerce
preliminary estimates.
GNP exports and imports estimates for 1972 have not yet been revised to reflect revised Balance of Payments
2/
estimates incorporating new seasonal factors; these revised estimates for 1972 and corresponding projections
for 1973 are:
-1.7
-4.1
-4.6
-1.8
-2.6
-3.5
-3.1
-4.2
Net exports of goods & services
98.7
94.5
92.3
88.6
80.1
73.9
93.5
77.5
Exports
100.4
98.6
96.9
90,4
82.7
77.3
96.6
77.8
Imports
%/ Unpublished, prelinanary F.R.B. measure of capacity utilization for a selected grouping of major materials proR. System.
dncing industries (to be discussed in forthecming supplement to Greenbook). Not for use outside ofv.

CONFIDENTIAL - FR

I-

May 9,

1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1972

1973
Proj.

1972
III

1973
Projected
II
III

------------------------- Billions Of Dollars-----------------------

Final purchases
Private
Excluding net exports
Net exports
Government

101.4
2.3
99.2
77.4
82.3
-4.9
21.8

131.3
8.5
122.8
102.4
102.2
0.2
20.3

24.6
3.0
21.6
20.1
18.3
1.8
1.5

30.9
2.3
28.6
24.9
25.0
-0.1
3.7

40.6
-4.1
44.7
37.3
36.4
0.8
7.5

34.5
7.8
26.7
21.6
24.4
-2.8
5.1

29.5
4.0
25.5
19.9
19.4
0.5
5.6

28.0
1.5
26.5
20.4
18.0
2.4
6.1

GNP in constant (1958) dollars
Final purchases
Private

47.8
45.8
40.6

54.0
47.4
44.5

12.2
9.8
11.1

15.5
13.8
13.8

15.5
17.7
17.3

12.4
7.9
5.5

10.1
6.8
5.6

8.3
6.7
5.4

Gross National Product

Inventory change

------------------------ Per Cent Per Year--------------------------Gross National Product
Final purchases
Private

9.7
9.5
9.5

11.4
10.7
11.5

8.9

11.0

14.3

11.2

9.3

8.6

7.6
9.1

9.9
11.1

15.1
16.1

8.7
9.0

8.1
8.1

8.3
8.1

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.4

11.0

8.5

9.4

15.0

10.3

8.0

7.4

12.2
7.7
7.8

14.6
12.1
8.5

16.5
6.5
7.4

7.4
11.1
8.4

30.8
16.1
7'.9

8.9
12.4
8.7

4.5
8.8
8.7

1.5
8.5
8.6

Gross private domestic investment
Residential construction
Business fixed investment

18.7
26.8
14.0

17.5
4.8
16.8

14.0
12.1
5.0

22.3
19.1
17.9

9.5
15.4
19.7

24.2
-10.1
18.1

14.3
-13.9
15.9

Gov't. purchases of goods & services
Federal
Defense
Other
State & local

9.4
8.2
6.3
13.7
10.2

8.0
2.1
-1.8
12.0
12.2

2.4
-10.0
-17.8
8.1
11.5

5.8
-5.3
-10.1
7,9
13.3

11.6
11.5
9.8
16.9
11.9

7.6
0.4
-4.3
10.0
12.5

8.2
4.1
0.5
12.2
10.9

8.8
5.9
1.6
15.3
10.6

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
2/
Private GNP fixed weight inder-

6.4
6.2
6.7
3.0
3.3

6.8
6.0
6.9
4.3
4.6

6.3
5.0
7.0
2.4
2.9

8.0
7.0
8.5
2.8
3.1

6.0
3.8
3.2
5.1
5.3

4.8
3.2
3.3
4;4
4.4

3.9
3.2
3.0
4.7
4.7

Personal income
Wage and salary disbursements

8.6
9.4
6.8

9.9
10.3
10.7

7.7
6.6
8.3

14.8
11.5
14.7

7.9
12.1
11.0

10.3
9.6
11.8

8.4
8.6
5.8

7.7
7.8
7.2

Corporate profits before tax

13.2

26.2

17.9

24.2

48.9

14.4

8.5

10.0

Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures

14.8
11.8

13.9
7.5

8.7
-8.0

15.0
34.9

21.3
-3.5

4.5
5.5

17.6
4.2

9.1
5.5

3.0
2.2

3.5
4.1

2.2
0.0

4.9
8.0

4.3
4.9

3.0
2.9

2.1
2.0

1.6
0.0

7.1
14.1
6.8
7.4
3.3

8.5
-10.5
7.1
7.6
4.2

6.7
15.1
41.9
44.9
27.9

11.8
6.4
5.7
-0.5
44.1

8.2
0.2
18.5
15.2
36.4

8.5
-37.3
-4.3
3.0
-41.8

6.3
-23.9
-19.8
-13.5
-57.1

4.4
-29.3
-17.4
-20.0
0.0

Disposable income

Nonfarm payroll employment
Manufacturing

Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models

Excluding Federal pay increase, 5.3 per cent annual rate.
2/ Using expenditures in 1967 as weights.

7.9
8.8
10.51/
6.06.7

8.5
-13.6
13.9

Industrial production.

- 7

Industrial production is tentatively

estimated to have increased about 0.7 per cent further in April, about
the same percentage as in March, to a level 8.7 per cent above a year
earlier.

Gains in output are indicated to be widespread, except for a

number of durable consumer goods which were already at advanced levels.
Production of autos, some household appliances, and color TV
sets have been close to capacity for some months.

However, output of

household furniture, room air conditioners, some apparel lines, and
consumer chemical and paper products apparently rose further in April.
Advances in output of business equipment are estimated to be
widespread and to have continued at the rapid rate of growth of recent
months.

Among industrial materials, production of raw steel increased

and output of textiles, chemicals and rubber products are indicated to
have risen further, but capacity limitations seem to be restricting
gains in some other materials-producing industries.
Retail sales.

Sales in April declined 2 per cent from

March, according to tentative staff estimates based on weekly data.
The lower sales were largely in the automotive, apparel, and general
merchandise groups which had reported unusually large gains in recent
months.

Sales of the food group were unchanged from the previous month.
More complete sample counts for February and March slightly

lowered the very large first quarter rise in sales.

According to

revised data, first quarter sales were 5.7 instead of 6.0 per cent
above the fourth quarter.

The automotive and food groups were primarily

responsible for the lower estimates; the GAF group was revised upward
with the first quarter increase now 6.9 per cent rather than 6.4 per cent.

I-8

RETAIL SALES
(Seasonally adjusted, percentage changes
from previous quarter)

1972

1973

February

March

Q IV

2.6

3.7

5.7

1.3

1.7

Durable
Auto
Furniture and
appliance

3.9
4.6

5.4
6.0

8.2
7.8

1.2
.8

1.5
2.2

2.0

3.2

9.3

3.0

Nondurable
Food
General
merchandise

1.9
1.7

2.8
1.7

4.4
3.7

1.4
- .8

1.8
.2

2.6

2.0

6.1

2.5

5.2

Total, less auto and
nonconsumption items

1.9

2.9

4.7

1.4

1.6

GAF

1.9

2.8

6.9

2.7

4.8

Real*

1.6

2.8

3.6

Q III
Total sales

Deflated by all commodities CPI, seasonally adjusted.

I - 9

Unit sales of consumers durables.

Sales of new domestic-

type autos were at a 9.8 million unit annual rate in April, down from
the record 10.6 million of March but well above a year earlier.

the first 4 months of 1973, sales were at an average rate of 10.2
million units.

Foreign car sales in April were at a 1.9 million unit rate,
down 6 per cent from the record level of March but a fourth higher
than a year ago.

The import share, on a seasonally adjusted basis was

16.0 per cent, little changed from last month but above the 14.6 per

cent of April last year.
Unit factory sales of major home appliances, TVs, and radios
are estimated to be 4 per cent above March levels, in the basis of
data through the middle of April.

Color TV sales increased enough to

more than offset a decline in black and white units and total TV sales
were 5 per cent above March.

Appliances were 3 per cent above a month

earlier as air conditioners, washers, driers, refrigerators, and freezers
increased.

I -

UNIT SALES OF SELECTED CONSUMER DURABLE GOODS
(Seasonally adjusted)
1972
Feb.
April

1973
March
April

Per cent change from
Month ago
Year ago

Annual rates in millions
Auto sales total
Domestic total
Foreign total

10.3
8.8
1.5

11.9
9.9
2.0

12.6
10.6
2.0

11.7
9.8
1.9

-7
-8
-6

14
11
28

Indexes, 1967=100
Home goods factory sales
total
TVs
1/
Radios 1/
Major appliances

142

150p

156e

141
105
146

132
107
153

154
96
154p

162e
83e
158e

5
-14
3

p - Preliminary
e - Estimated from data through April 14.
1/ Includes foreign-made units sold under domestic labels; foreign-label
units not included.

15
-21
8

- 11

Construction and real estate.

Seasonally adjusted outlays

for new construction were revised upward by 2 per cent to a new high
for March but edged off in April to an annual rate of $136.4 billion.
Private outlays were about unchanged in April while expenditures for
public construction declined owing entirely to Federally owned projects.
The Census Bureau's composite index of construction costs in
April was 144 per cent (1967=100), about the same as the record March
level and 7 per cent above a year earlier.

In 1972 as a whole, the

increase had been 5 per cent from 1971.

NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)

Total-current dollars
Private
Residential
Nonresidential
Public
State and local
Federal

1973

Per cent change
in April from:
March 1973 April 1972

1972
QIV

QI (p)

129.0

136.5

136.4

+ 13

97.0

102.5

102.6

+ 12

56.9
40.1

59.3
43.2

59.2
43.3

1
-

+ 13
+ 12

32.1

34.0

33.8

+ 17

27.6
4.4

28.8
5.2

29.0
4.8

-- 15

April 1/

Total-1967 dollars
91.7
95.3
94.6
1
Data for April 1973 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.

+ 17
+ 15
+

I - 12

Seasonally adjusted private housing starts dropped sharply
further in March to an annual rate of 2.26 million units.

Even so,

the first quarter average matched last year's fourth quarter rate
and was only slightly below the peak--2.43 million units--reached in
the first quarter of 1972.

Given the exceptionally strong pace of

housing starts last winter and the downtrend in permits which has
persisted since December, the starts rate may have declined further in

April.
PRIVATE HOUSING PERMITS, STARTS, AND COMPLETIONS
(Seasonally adjusted annual rates, in millions of units)

1972
QIV(r)

QI(p)

1973
February(r)

March(p)

Per cent change in
March from:
month ago year ago

Permits

2.24

2.17

2.19

2.09

Starts

2.40

2.46

2.26

1.28
1.12

1.35
1.05

1.38
1.08

1.24
1.02

- 10
- 6

5
2

2.04

n.a.

1-family
2-or-more-family
Completions

2.02

Memorandum:
Mobile home
shipments
.61
Preliminary.
P/
n.a. Not available.
Jan. - Feb. average only.
1/

(2.12)1/

.67

.64

8)2/

+ 15

3)1

+ 24

Per cent changes based on February.

Reflecting continued exceptionally high levels of demand,
rental vacancy rates in the first quarter averaged 5.7 per cent nationally,
the same as the relatively low average in the second half of last year

I - 13
and only moderately above the average in the first quarter of other
recent years.

Vacancy rates for homeowner properties continued at a

minimal 1.0 per cent.

However, with the over-all pace of completions

now exceeding a seasonally adjusted annual rate of 2 million units and
with mobile home shipments expanding considerably further, some rise in
vacancy rates is likely in the period ahead.
RESIDENTIAL VACANCY RATES
(Per cent)

1965

Average for the first quarter
1973
1971
1972
1970

Rental units

8.5

5.4

5.3

5.7

Northeast

6.3

2.4

3.2

3.6

North Central

7.8

6.0

6.1

5.9

5.7

9.3
11.0

7.7
5.6

7.4
5.4

6.7
5.3

7.2
6.3

1.7

1.0

South
West
Homeowner units

Capital spending plans.

The McGraw-Hill spring survey of

planned spending for new plant and equipment indicates an increase of
19 per cent in 1973--substantially more than reported in the Commerce
survey released in March.

Manufacturers plan to increase spending by

29 per cent, with the sharpest increase relative to previous surveys
coming in durable goods where plans now call for a 38 per cent rise.
Aside from manufacturing, business indicated plans for a 14 per cent
rise, with strength concentrated in utilities, communications, and the
commercial and other category.

The increase in

to those shown by earlier surveys.

this sector was similar

I - 14

Historically, McGraw-Hill surveys taken at this time of the
year and at this point in the cycle have tended to overestimate somewhat
the actual increase realized in capital outlays.

A new Commerce survey

should be available in early June.

EXPENDITURES FOR NEW PLANT AND
EQUIPMENT BY U.S. BUSINESS

(Per cent change from prior year)
1973

1971

1972

McGraw-Hill
(Nov. 1972)

Commerce
(Mar.
(Jan.
1973)
1973)

McGraw-Hill
(May 1973)

-------------- Anticipated---------------

1.9

8.9

10.6

12.9

13.8

19.3

Manufacturing
-6.1
Durable goods
-10.4
Nondurable goods -1.9

4.5
10.5
- .8

13.8
15.3
12.3

13.6
16.7

18.0

10.6

19.6
16.5

29.2
38.1
20.2

7.2
-18.4

11.5
16.0

8.9
-6.7

12.5
1.6

11.4
-2.4

13.9
8.9

20.8
6.6

12.6
10.4

13.0
9.0

17.1
17.6-

16.5
12.8

14.0

10.4

14.0

All business

Nonmanufacturing
Transportation
Electric
utilities
Communication

16.0

Commercial and
other
1/

Confidential,

10.0
11.2
8.8
separately.
not published

Manufacturers orders and shipments.
goods rose 3.6 per cent in March (p)
February.

9.81/

New orders for durable

following a 1.7 per cent rise in

The March rise was particularly strong in nondefense capital

goods--6.8 per cent--and in primary metals, mostly for steel, 12.5 per
cent.

I - 15

Bolstered by strength in steel, motor vehicles and defense,
new orders for durable goods showed considerable acceleration in the
first quarter from the fourth quarter.

Increases in nondefense capital

goods and household durable goods orders remained close to the high
fourth quarter rates.
Shipments of durable goods were about unchanged in March, but
were up 5 per cent for the first quarter.

Backlogs of unfilled orders

continued to increase rapidly in March, and in the quarter as a whole.

MANUFACTURERS NEW ORDERS FOR DURABLE GOODS
(Per cent changes)
1972
Q IV from

Q III
Durable goods total
Excluding defense

1973
March from
I
from
Q
Q IV 1972(p)
Feb. (p)

4.6
4.8

8.1
7.9

3.6
3.5

Primary metals
Motor vehicles and parts
Household durables

2.1
4.0
5.6

15.7
9.2
4.7

12.5
-3.3
-2.3

Capital goods industries
Nondefense
Defense

5.2
6.1
.2

6.6
5.6
12.4

6.5
6.8
4.9

Construction & other durables

5.4

6.0

1.0

I - 16

Inventories.

Book value of manufacturers' inventories rose

at a $14.1 billion annual rate in March (p); the February rate of
$10.4 billion was revised little.

For the first quarter as a whole,

the annual rate of increase was $10.2 billion, up from $6.4 billion
in the fourth quarter and the highest since the first quarter of 1967.
Wholesale trade stocks were little changed in March, but the firstquarter rate of $5.5 billion was higher than the fourth quarter rate.
However, all of these book value increases in large part reflect

the

rapid rate of price rise in the first quarter, particularly for foods
and other nondurables.
Manufacturers accelerated their rate of increase in materials
holdings in the first quarter and continued to build work-in-process
stocks at about the advanced fourth quarter rate.

The value of

finished goods stocks also rose somewhat, after declining in the fourth
quarter.
By market categories, the acceleration of manufacturers'
book value growth in the first quarter occurred mainly at home goods
and apparel and miscellaneous intermediate goods producers.

Book

value increases were slight for consumer staple goods, which probably
declined on a physical volume basis.

Stocks of both defense and non-

defense capital goods continued to rise at the relatively high
fourth-quarter rate.

I - 17

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)

1972
QIV
Manufacturing and trade

14.9

QI
(Prel. )

1973
Feb.
(Rev.)

Mar
Mar.
(Prel.)

n.a.

22.2

n.a.

Manufacturing, total
Durable
Nondurable

6.4
5.2
1.2

10.2
7.2
3.0

10.4
5.8
4.6

14.1
9.9

Trade, total
Wholesale
Retail

8.5
4.3
4.2

n.a.
n.a.
5.5

11.8

n.a.

NOTE:

n. a.

5.6
6.2

4.2

..6
n.a.

Detail may not add to totals because of rounding.
In March, manufacturers' shipments also increased and the

inventory-shipments ratio remained at a low 1.57.

Wholesale sales

increased 2-1/2 per cent and the wholesale trade inventory-sales ratio
declined to the lowest point since mid-1966.
At durable goods manufacturers, the inventory-backlog ratio
declined further in March.

Overall, this ratio is still well above the

low ratios of previous cycles; but at primary metals manufacturers,
where stocks have been depleted and backlogs have risen rapidly, the
inventory/backlog ratio dropped abruptly in March to the lowest point
since late 1966.

I - 18

INVENTORY RATIOS

1973
1972
Mar.
Feb.

Feb.
(Rev.)

Mar.
(Prel.)

1.56

1.53

1.42

n.a.

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
Wholesale
Retail

1,39
1.24
1,48

1.36
1.22
1.44

1.28
1.16
1.36

n.a.
1.14
n.a.

Inventories to sales:
Manufacturing & trade

Inventories to unfilled orders:
Durable goods manufacturing

Cyclical indicators.

.937

.931

.843

.823

The Census composite index of leading

indicators increased 1.4 per cent in March (p), following advances of
1.5 per cent in February and 1.8 per cent in January.

The index

before trend adjustment, which has a lead on peaks of at least 6
months, also continued to rise, and by more than its average revision.
The coincident composite index was up 0.9 per cent in March and the
lagging index, 1.2 per cent.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from previous month)

12 Leading (trend adjusted)
12 Leading, prior to trend

adjustment
5 Coincident
5 Coincident, deflated
6 Lagging

Dec.

Jan.

Feb.

Mar. (p)

1.1

1.8

1.5

1.4

1.1

.8
.7
1.3

1.3
.9
1.7

1.2
.7
2.5

.9
.7
1.2

I - 19

Leading series increasing in March were new orders for durable
goods, industrial materials prices, and the ratio of price to unit
labor cost.

The manufacturing workweek was unchanged.

Series decreasing

were initial unemployment claims (inverted), contracts and orders for
plant and equipment, housing permits, and common stock prices.
According to revised (but still preliminary) data for March, new orders
rose more than the advance indication used in the preliminary leading
index, and contracts and orders for plant and equipment increased
rather than declined.

The change in consumer instalment

debt also

increased in March.
In April, common stock prices declined further while the
manufacturing workweek and industrial materials prices rose.

should be noted that in 1969-72, the materials price index, previously
a leading indicator, behaved more like a lagger.
Labor market.

Total employment and the labor force changed

little in April, following sharp advances in the preceding month, and
the unemployment rate remained at 5 per cent--the fifth successive
month at about that rate.

Preliminary payroll employment data for

April show a gain of only about 110,000, compared with an average monthly
increase of 240,000 over the past year.

Manufacturing employment rose

substantially in April as did State and local government, but construction employment fell owing to bad weather and an increase in
strike activity.

A reported decline in trade employment in April may

reflect in part inadequate seasonal adjustments
Easter this year.

because of the late

I - 20

NONFARM PAYROLL EMPLOYMENT
(Change from previous period; in thousands)

Total
Private
Manufacturing

Construction

April 1972-

April 1971April 1972

April 1972April 1973

March 1973April 1973*

1,774

2,847

109

1,365
249

2,445
951
55
672
521

59
113

Trade

498

Services

398

Government
Federal
State & local

March 1973-

April1971

409
2
407

402
38
440

- 59
- 27

31
-

50
8
58

Based on seasonally adjusted data.

Over the past year, employment expansion has been very large.
Much of the increase has been due to a rapid pick-up in factory jobs,
accompanied by continued gains in service-producing industries.

addition, the average factory workweek has lengthened, and at 41.1

hours in April was at its highest level since the end of 1966.

Over-

time hours have also risen--to 4.1 hours, half an hour longer than a
year ago.

Unemployment and labor force.

Although the unemployment rate

has changed little since the end of 1972, it is much lower than a year
ago for most groups.

The average duration of unemployment in April

was three weeks shorter than last year. The number of workers
experiencing short-term unemployment (less than 15 weeks) was about the

I - 21

same as in April 1972, but there were half a million fewer workers in
the long-term unemployed category.

Despite the year-to-year improvement,

unemployment rates for all groups are still well above the cyclical
lows reached in the late sixties.

SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1972

1973

1972
April
October

Total

1973
March

April

5.8

5.5

5.0

4.2
5.4
16.7

3.9
5.5
15.4

3.4
4.9

3.4
4.7

14.2

15.4

Household heads

3.4

3.0

White
Negro and other races

5.3
9.3

5.0
10.0

4.4

4.5

9.0

9.1

White-collar workers
Blue-collar workers

3.3

3.5

2.9

3.1

6.8

6.0

5.4

Men 20 years and over
Women 20 years and over

Teenagers

Although the civilian labor force changed little from March
to April, over the year it has grown by 2.1 million.

Nearly half of

that increase represented adult women, most of whom were seeking fulltime work.
Earnings.

The index of hourly earnings for production

workers in the private nonfarm economy was revised up slightly for
March and rose at about a 7-1/2 per cent annual rate in April.

The

I - 22

index, which tends to move unevenly on a monthly basis, was a
relatively moderate 5.4 per cent higher than a year earlier and up at
a 5.1 per cent annual rate over the six months ending in April.

With

the exception of the transportation and public utilities category,
wage increases in the major industry groups over the past

year have

been at or below the 5-1/2 per cent wage standard.
HOURLY EARNINGS INDEX

(Per cent change; seasonally adjusted
at annual rates)

Apri

191

April 1971April 1972

April 1972April 1973

Oct. 1972April 1973

ac
93
March 1973April 1973

Private nonfarm

6.7

5.4

5.1

7.5

Manufacturing

6.2
7.4

5.3
5.5

5.0
5.3

6.0
7.1

11.2
5.5
6.4

8.3
5.2
4.5

7.0
5.5
4.6

4.7
9.4
4.2

Construction
Transportation &
public utilities
Trade
Services

Sharply rising consumer prices in recent months have been
eroding real purchasing power.

Moreover, an increase in Social

Security taxes for 1973 has further reduced real take-home pay.

During

much of 1972 real spendable earnings showed quite substantial increases,
rising at over a 4 per cent annual rate.

Since October, however, the

level of real spendable earnings has been declining, and in March 1973
(the latest month for which price data are available) they were no
higher than a year earlier.

I - 23

REAL SPENDABLE WEEKLY EARNINGS*
(Per cent change)

Worker and 3
dependents

Oct. 1971Oct. 1972

Dec. 1971Dec. 1972

Feb. 1972Feb. 1973

March 1972March 1973

4.8

3.3

0.0

* Data relate to the weekly earnings of production workers in the
private nonfarm sector.

Gross weekly earnings are reduced by the

average Federal income and Social Security tax liability for a
worker with three dependents and are deflated by the Consumer
Price Index.

Productivity and costs.

Productivity continued to grow at a

rapid rate in the first quarter, accompanying the rapid further rise in

output.

In private nonfarm activities, output per manhour increased at

a 4.1 per cent annual rate according to preliminary estimates.

Output

per manhour has been rising rapidly for the past year and a half,

following a period of cyclical decline in the late sixties, and is now
above its long-run trend.
Compensation per manhour rose sharply--at a 10.6 per cent
annual rate in the first quarter, up from a 7-1/2 per cent rise in the

fourth quarter.

Although the quarter's productivity gain was rapid,

the acceleration in compensation resulted in a large rise in unit labor
costs.

However, about 3.5 percentage points of the rise in compensation

per manhour in the first quarter was associated with an increase in
employers'contributions to Social Security effective January 1.

I - 24

Excluding this Social Security change, unit labor costs in nonfarm
activities rose by about 3 per cent, somewhat less than in the fourth
quarter of 1972.
PRODUCTIVITY, COMPENSATION AND UNIT LABOR COSTS
IN THE PRIVATE NONFARM SECTOR
(Per cent change from previous period at annual rates
based on seasonally adjusted data)

1972:

Compensation
per manhour

QIV

5.2
5.1
6. 6
3.6

9.1
4.6
6.1
7.6

Year

4.7

6.5

1.7

QIp/

4.1

10.6

6.2

QI
QII

QIII

1973:
P/

Unit labor
costs

Output per
manhour

Preliminary.

3.8
- .5
- .4

3.8

I - 25

Industrial relations.

In the first of the major manu-

facturing settlements so far this year, the United Rubber Workers
ratified a new three year contract with Goodyear Rubber Co. on April 24
which provides a 16 per cent wage rate increase over the life of the
contract.

Covering 23,000 workers in 15 Goodyear plants, the agree-

ment boosts wages 6.0 per cent in the first year, effective July 2,
1973, 4.9 per cent in the second, and 4.5 per cent in the final year
of the contract.

There is no cost-of-living provision or wage reopening

clause in the new agreement.

In addition to larger monthly benefit

payments, a new early retirement plan was agreed to, whose costs will
depend on the number of workers who opt for early retirement.

The

over-all cost of the wage and fringe package apparently averages about

6 per cent a year over the whole period.

Negotiations are now under

way at Goodrich, Firestone, and Uniroyal, but apparently worker dissatisfaction with the Goodyear package led to a strike of 10,000 at 7
Goodrich plants on May 8.
A moderate rate of negotiated wage increase is evident in

data on first quarter major collective bargaining settlements, (those
involving 1,000 or more workers).

Wage increases averaged 4.5 per cent

a year over the life of the contract for all contracts, declining from
an average gain of 6.4 per cent in 1972.

But the smaller average was

the result mainly of the railroad settlement, involving 500,000 workers,
which provided only a small wage rate adjustment but substantial benefit
increases through reduced payments to the railroad retirement fund.
In manufacturing, the average pay increase of 6.1 per cent over-the-life
of the contract was up slightly from 1972.

Very few construction

I - 26
industry settlements have occurred so far.

For all industries, wage

and benefit gains together averaged 5.5 per cent over the life of
the contract compared with 7.3 per cent in 1972.
In May, major contracts will expire in the electrical
equipment (General Electric) and in the paper industries followed by
the trucking industry early in June.

WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS*
(Mean per cent wage adjustment--annual rate)
19 7 3 p

1972p
1971

19 7 2

8.1
7.3
8.9
10.8

6.4
5.7
6.8
5.9

7.8
5.5
9.9
13.0

6.4
5.7
6.6
6.1

11.6
10.9

7.0
6.6

8.4
7.3

12.2

7.2

9.4

Q I

Q II

Q IV

Q I

6.1
5.7
6.3
5.5

5.6
5.9
5.4
3.6

4.5
6.1
3.8
4.9

6.6
7.0

6.9
6.7

6.2
6.4

5.3
6.5

6.5

6.9

6.0

4.7

4.5

Average-over-lifeof-contract

Total
Manufacturing
Nonmanufacturing
Construction
First year
Total
Manufacturing

Nonmanufacturing

6.0
12.6
6.6 14.6
6.4
Construction
*
Applies to settlements affecting 1,000 or more workers.
p - Preliminary.

Consumer prices.

Consumer prices rose in March at about the

February rate--10 per cent seasonally adjusted annual rate--as food

prices soared for the third successive month.

Prices of other commodities

and of services advanced at annual rates of 4.0 and 3.6 per cent, respectively.

Since last December, a 9 per cent annual rate of rise has

boosted the "All items" index to a level 4.7 per cent above March 1972.

I - 27

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

All items
Food
Commodities less food
Services 1/

1972

1973
Dec. 1972
Feb.
to
to
March 1973 March

Relative
importance
Dec. 1972

Dec. 1971
to
June 1972

June
to
Dec.

100.0

2.9

3.9

8.8

22.5
40.1
37.4

3.5
2.6
3.7

6.1
2.5
3.5

29.8
3.4
3.6

10.0
34.7
4.0
3.6

Addendum:
All items less mortgage
costs 2/
96.3
3.0
3.9
8.8
Services less home
finance 1/ 2/ 3/
30.9
3.5
3.1
4.0
Commodities less food,
used cars home
purchase 3/
31.8
2.2
2.0
4.1
1/ Not seasonally adjusted.
2/
Home financing costs excluded from services reflect property taxes and
insurance rates as well as mortgage costs, which in turn move with
mortgage interest rates and house prices.
3/ Confidential.

9.8
4.6

5.1

In the 3 months from December to March grocery store food
prices climbed nearly 8 percent (not at an annual rate), reaching a
level 11 per cent above March 1972.

Meats were up 6 per cent over the

month, 15 per cent from December and 20 per cent from a year ago.
Moreover, poultry prices jumped over 20 per cent in March alone, contributing substantially, as did fresh vegetables and eggs, to the latest
one-month and three-month advances.
According to the USDA chainstore sample, beef and pork prices
in the first half of April remained fairly close to the ceilings imposed

at the end of March.

However, there was probably a rise, relatively

small compared to the last few months, between the early March and early
April pricing dates for the CPI.

I - 28
The price rise for other commodities has accelerated recently
with a substantial advance for apparel in March and sharp increases for
gasoline and fuel oil in

February.

Rents have also risen faster in the

last three months--at an annual rate of over 5 per cent, the most rapid
since April 1971.

Costs of several other services, including gas,

electricity, and auto and home repair, have advanced in recent months at
rates above those in 1972.
Wholesale prices.

Wholesale prices rose at a seasonally

adjusted annual rate of 12.3 per cent between March and April, largely
as a result of widespread and sharply higher prices for industrial
commodities (up 17 per cent at an annual rate).

Prices of farm and food

products were only marginally higher, following five months of extremely
rapid increases, although consumer finished foods rose substantially
further.
WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)
1973

1972

All commodities
Farm products1/
Consumer finished foods

June
to
Sept.

Sept.
to
Dec.

Dec. 1972
to
Mar. 1973

March
to
April

7.2

9.4

21.1

12.3

19.2
11.8

27.7
13.2

51.9
44.2

.8
17.6

Industrial commodities
3.4
2.4
10.2
17.0
Crude materials 2/
10.6
14.2
11.8
33.0
Intermediate materials 3/
3.1
4.1
12.4
16.6
Finished goods 4/
3.2
- .1
6.4
14.5
4.7
8.2
2.4
-1.0
Producer
Consumer
3.6
.4
7.2
17.8
1/ Farm products and processed foods and feeds.
Excludes crude foodstuffs and feedstuffs, plant and animal fibers,
2/
oilseeds, and leaf tobacco.
3/
Excludes intermediate materials for food manufacturing and manufactured animal feeds.
4/
Estimated.
Excludes foods.

I - 29
Further large increases in prices of fuels, especially
gasoline, led the widespread advance in industrial commodity prices in
April.

Nonferrous metals and lumber and wood products also increased

in price again; however, there have been some signs of topping out in
lumber prices very recently.

Machinery and equipment prices moved higher,

and prices of textile products rose further, at rapid rates.

Substantial

increases were also posted for other processed materials and for crude
materials.
Prices for both producers finished goods and consumer nonfood
finished goods have accelerated sharply this year.

In 1972, prices of

finished goods, excluding foods, rose about 2 per cent.
The rise in consumer finished foods in the April WPI was
mainly the result of sharply higher prices for fresh fruits and vegetables,
poultry, cereal and bakery products, and eggs.

I - 30

WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)
Phase II
Nov. 1971
to
Jan. 1973
(14 months)
All commodities
Farm products and processed foods

and feeds
Farm products
Processed foods and feeds
Industrial commodities
Lumber and wood products
Fuels and related products and power
Textile products and apparel
Metals and metal products
Pulp, paper and allied products

Phase III
Jan. 1973
to
April 1973
(3 months)

6.9

21.2

16.1

37.3

21.6
12.3

54.2
26.1

3.5
11.1
5.7
5.0
2.9
3.8

14.8
93.3
33.2
16.4
15.5
13.0

Chemicals and allied products
Machinery and equipment
Transportation equipment
Motor vehicles and equipment
Passenger cars

1.2
2.1
2.5 1/
4.1
2.1

8.6
6.6
2.8 1/
5.9
6.5

Furniture and household durables
Nonmetallic mineral products
Rubber and plastic products
Hides, skins, leather, and related
products
Miscellaneous products
Not seasonally adjusted annual rates.

1.7
2.1
.41/

5.4
5.1
2.2 1 /

21.0
2.0 1/

-1.7
10.01/

I - 31
Phase II and Phase III developments--major price indexes.
The recent acceleration in price increases, which is reflected in all
major indexes, appears to be in part a "bulge" following the shift to
Phase III.

But much of the rise has been in prices of farm products

and foods, which would have shown comparable increases even if Phase II
controls had been continued.

Devaluations of the U.S. dollar with

respect to foreign currencies have also contributed to higher prices.
The GNP deflator and the fixed weight price index for the
private economy increased twice as fast from the fourth to the first
quarter--2 months of which included Phase III--as between the fourth
quarters of 1971 and 1972 which coincide roughly with Phase II.

Al-

though the acceleration was sharpest for consumer nondurables (which
include food), it was also marked in consumer durables and services.
In both periods the deflators for the private economy and for personal
consumption expenditures rose less rapidly than the corresponding fixed
weight indexes because of shifts in weights--e.g., a marked increase in
expenditures on durable goods, which have low deflators (with respect
to the 1958 base), relative to other components with high deflators will
tend to lower the over-all deflator.
Consumer prices (CPI) have shown more acceleration in Phase III
than the fixed weight index for PCE largely because the increases in CPI
and components have been computed over the two months from January to
March and the increases in the PCE index from quarterly averages.
prices contribute disproportionately to the rise in the CPI in both

Food

I - 32

Phase II and Phase II1, but more so in Phase III thus far.

However,

commodity prices excluding food (and home purchase and used cars) have
also accelerated recently.
The exceptionally sharp rise in wholesale prices in recent

months reflects in part farm prices and materials prices which are more
volatile than those of finished goods.

Soaring prices for farm products

and foods and feeds account for over 60 per cent of the rise in wholesale
prices in Phase II and near half in the first 3 months of Phase III.
Nevertheless, industrial prices rose at an annual rate of 15 per cent
from January to April in contrast to the 3-1/2 per cent rate of
Phase II.

The advance in intermediate industrial materials prices has

intensified while crude materials have continued the sharp rise evident
in Phase II.

Both producer and consumer finished goods have been

showing sharper gains, with the latter likely to be reflected in coming
months in the nonfood sections of the CPI.

I - 33

PRICE DEVELOPMENTS,

SUMMARY
PHASE II AND PHASE III

(Per cent change, seasonally adjusted annual rates)

Phase III

Phase II
GNP INDEXES
QIV 1971-QIV 1972

QIV 1972-QI 1973p

3.0
3.3
3.1

6.0
6.7
6.7

GNP deflator
Private economy-fixed weight index
PCE-fixed weight index
CONSUMER PRICES

Nov. 1971-Jan. 1973

All items

Food
All items less food
Commodities less food,
1/
home purchase, used cars-

Jan.

1973-Mar.1973

3.7

9.9

6.3
2.8

32.0
4.8

2.1

5.7

WHOLESALE PRICES
Nov.

All commodities
Farm products and processed foods & feeds
Consumer finished foods
Industria s
Crude materials
Intermediate materials
Finished goods 2/
Producer
Consumer

1/ Confidential, not for publication.
2/

Estimated.

Excludes foods.

1971-Jan.

1973

Jan.

1973-Apr.1973

6.9
16.1
10.6
3.5
10.4

21.2
37.3
34.9
14.8
18.8

4.0
2.3
2.3
2.3

17.2
10.9
7.2
12.8

I - 34

Agriculture.

April red meat production declined 12 per cent

from the previous month to the lowest level since mid-1966. The slowdown in livestock marketings was mainly a response to consumer resistance
and helped keep red meat prices relatively firm. However, broiler prices
have declined 13 per cent since April 1.
Sharply advancing livestock feed prices may curtail expansion
in poultry and hog operations, adversely affecting meat supplies and
prices by late this year.

The price of soybean meal has increased

about 50 per cent since April 1 and corn prices have increased 18 per
cent.

Continued strong world demand for these commodities, dimming pros-

pects for larger Peruvian fish meal supplies, and weather-delayed plantings
in the U.S. have been major factors causing the large jump in feed prices.
Expected large plantings of corn and soybeans, 12 per cent and
15 per cent greater than last year, respectively, may yet be realized if
wet weather abates.

But flooding in the Mississippi Delta is expected to

reduce cotton acreage to 5 per cent below the level farmers had intended

to plant as of March 1. However, high prices may cause farmers in nonflooded areas to plant more than they had planned earlier.

Cotton prices

have risen 20 per cent since April 1, due in part to large sales to
China and Japan.
Winter wheat remains in generally excellent condition.
Higher winter wheat yields combined with larger spring wheat plantings
are expected to result in a record crop, estimated in a May 1 survey to
be 15 per cent above last year.
Agricultural credit.

Farm data continue to feature (1) a boom

in land prices and transfer activity, with consequent strong demand for

I - 35

mortgage debt; (2) high cash flow and net income, which during the past
winter led to improved rural bank liquidity by permitting relatively
strong deposit gains and production loan repayments; and (3) the prospect

of sharply higher operating expenses to be financed this year, as production activity is expanded.
Income and net worth data document a boom in the farming sector.

At an annual rate of $22 billion in the first quarter, net farm income was
running 30 per cent above the $17 billion plateau of 1969-71 and 48 per cent
above the depressed level of 1967-68.

The income gain over 1971 averages

$1,800 per farm, at an annual rate, but in farmer psychology may be overshadowed by the paper capital gains recorded in the last two years.

Due

mainly to higher land and livestock prices, farm proprietors' equity
increased by $55 billion (20.0 per cent) during 1971-72, or by $19,000
per farm--easily the largest two-year percentage gain since the boom of
1950-51. And so far in 1973, higher meat prices have added another $5
billion to the value of the farm livestock inventory, and land prices
have reportedly continued to rise.
New evidence received in April helps confirm that many rural
banks were in a relatively liquid position going into this year's crop
production season. The quarterly agricultural credit conditions survey
conducted by the Minneapolis F.R. Bank found 36 per cent of Ninth District
rural banks with a lower loan/deposit ratio than they desired--the
largest proportion since this question was first asked in 1964--while
only 7 per cent had a ratio higher than desired.

Four fifths of the

banks were actively seeking new farm loan accounts.

At the same time,

demand for farm loans was evidently strengthening, as one-fourth of the
banks now reported demand greater than usual-double the proportion
reporting in January.

I - 36

In spite of the relatively liquid position of rural banks this
past winter, several sources indicate that, apparently in response to
rising short-term money-market yields, bank interest rates on farm
loans have been rising after bottoming out in the third quarter of
last year.

The Chicago F.R. Bank's April survey of agricultural banks in

the Seventh District found that the average rate on feeder cattle loans
was 20 basis points above its July 1972 low, and that the average real
estate loan rate had risen 38 basis points over the same interval.

the April Ninth District survey, 24 per cent of banks reported a trend
to higher short-term rates on farm loans and 18 per cent to higher
long-term rates; none reported a trend to lower rates.

The turning

point in these series also appears to be last year's third quarter.

the FR-FDIC national interest rate survey for the CID, bank rates on
both feeder cattle and other farm production loans began to advance
after July 1972 and had risen 69 and 46 basis points respectively by
April 1973.

However, farm lending rates of the two principal institu-

tional suppliers of farm mortgage credit--life insurance companies and
Federal land banks--remain in the range first reached in mid-1972.

DOMESTIC FINANCIAL
SITUATION

II-T-1
SELECTED DOMESTIC FINANCIAL DATA
(Dollar amounts in billions)

Latest data
Level
Period

Indicator

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)

April
April

Money supply
Ml

April
April
April

M2
M3

Net change from
Three
Month
months ago
ago

32.3 p

SAAR (per cent)
1.2
11.3

29.9 p

12.1

6.8

6.6
7.7
7.9

4.1

536.0
845.2
278.1
58.6
309.2
588.1

9.1
3.7
8.3
6.4

258.0

Year
ago

6.1
8.0

6.2
8.9
11.0

Time and savings deposits

(Less CDs)
CDs (dollar change in billions)

April

Savings flows (S&Ls + MSBs)

April
April

April

Bank credit (end of month)
Market yields and stock prices
Federal funds

Treasury bill,(90 day)
Commercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
FNMA auction yield

wk. endg.
I

5/2/73

(FHA/VA),

5/2/73
5/4/73
5/3/73
4/30/73

wk. endg.
end of day

4/25/73
5/14/73

1 day

8.2
14.2
11.2
16.1

Percentage or index points
1.22
7.43
0.25
0.56
0.20
6.24
1.00
7.13
0.05
-0.02
0.11
7.40
-0.06
5.10
-0.12
.22
7.92
.11

11.6
23.4
14.8
15.3

3,18
2.63
2.63
0.17
-2.5
.32

Dividends/price ratio (Common

stocks)
NYSE index (12/31/65=50)

0.02
0.73

0.16
-3.02

0.04
-0.33

Net change or gross offerings

Credit demands

Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings)

2.96
58.77

April
March
January
February

Current month
1972
1973

Year to date
1972
1973

2.3
2.0
5.7
0.6

14.8
6.0
57.2
1.6

1.5
1.3

3.8
1.0

4.4
3.3
41.9
2.8

Municipal long-term bonds (gross

offerings)
Federally sponsored Agcy. (net borrowing)

U.S. Treasury (net cash borrowing)
Total of above credits
e - Estimated
p - Preliminary.

February
May
May

1.5
1.8 e
-1.6 e
12.3

2.0
0.3
-0.6
9.3

3.5
5.6 e
4.7 e
93.4

58.6

- 1

DOMESTIC FINANCIAL SITUATION
Despite a rise in the Federal funds rate since the last meeting
of the Committee, most short-term interest rates have changed little
balance.

Rates on shorter-term Treasury bills are a key exception,

on
and

they have turned down sharply, widening their already large spreads
against the rest of the short-rate structure.

This divergent behavior

reflects a reduced supply of Treasury bills and very low dealer inventories.
In addition to the usual seasonal pay-off of tax bills,

the Treasury

elected to redeem a sizable part of its maturing May securities and
refunded the rest with longer-term debt.

At the same time it announced

that because of its comfortable cash position the usual early summer
need for new borrowing could be deferred until August.
Private short-term rates were about unchanged, except for the
prime rate on bank loans to large businesses and rates on large
negotiable CD's.

While banks continued to issue a considerable volume

of CD's in April in the 30- to 89-day maturity range and rates on such
instruments rose 20 basis points further, net new issues of negotiable
CD's were significantly smaller than during earlier months this year.
Business loan growth at banks moderated in Aprilas

the

substitution of bank credit for commercial paper financing slowed.
But total short-term business credit demands remained sizable.
capital markets, demands for funds slackened a bit.

With internal

funds generation exceptionally strong, corporate demands remained
moderate.

The volume of financing by State and local governments

receded somewhat, reflecting in part rising tax receipts and another

instalment of revenue sharing payments.

II - 2
Longer-term security rates continued to fluctuate in a
relatively narrow band.

While yields on Treasury notes and bonds

advanced somewhat in response to the debt extension in the May refinancing, corporate and municipal bond yields have shown little change.
With inflows to nonbank thrift institutions slowing further in April
and outstanding mortgage commitments near record levels, mortgage
interest rates continued to edge higher.
Even though corporate internal funds generation

Outlook.

is likely to remain large, the projected continued expansion in
economic activity, and particularly in business investment in fixed
capital and inventories,suggests that corporate demands for credit
will remain sizable.

Since underwriters report little build-up in

the prospective calendar of new capital market financing, these business
demands are likely to fall chiefly on short-term markets, especially
commercial banks.

However, as the prime rate for large businesses

continues to move up into alignment with the rest of the short-term
rate structure, some diversion of financing back into the commercial
paper market is likely.

Bank issuance of CD's should remain large but below the
record rates of the first quarter.

Given the present high cost of CD's,

banks will probably also meet a part of their needs for lendable funds
by further reductions in investments.

In this environment bank lending

terms and conditions are expected to tighten further and banks will
probably become less willing lenders.

II - 3

At nonbank thrift institutions lending policies are already
being modified in response to the slowing of deposit flows.

Deposit

inflows to these institutions are likely to remain depressed in coming
months,

assuming no change in Regulation Q ceilings.
To a considerable extent, the impact on rates of expanded

Federal agency borrowing will be mitigated by the absence of any nearterm Treasury demands.

Aggregate private short-term credit demands

are likely to remain strong, though not larger than in the first
quarter, and corporate and municipal demands on capital markets appear
likely to be relatively light.

Thus, there is little indication that

credit demands, taken by themselves, will generate substantial upward
interest rate pressures.

However, continued constraint on the total

supply of lendable funds in the face of currently large demands could
precipitate upward interest rate movements.

Moreover, rising interest

rates could lead to an acceleration of financing plans, thereby
reinforcing upward rate pressures--particularly in long-term markets.

Monetary aggregates.

-4

Preliminary data indicate that M1

expanded at an annual rate of 6.5 per cent in April, faster than the
first quarter pace, which had been much slower than might have been expected given the rapid increase in nominal GNP. 1/ Thus, the April
acceleration may reflect a return to a growth rate more in line with
expanding transactions needs.
Growth in M2 accelerated in April in response to the more

rapid increase in M1, while inflows of consumer-type time and savings
deposits remained close to the moderately strong March pace.

In March

and especially in April, inflows of consumer-type time and savings
deposits were temporarily strengthened by deposits of tax refunds.
Also, in mid-April, State of California deposits of tax receipts in
non-negotiable CD's were unusually large.

However, given the wide

difference between market interest rates and Regulation Q ceilings,
further growth in consumer-type time and savings deposits at banks
may be expected to moderate from the current pace.

Already, inflows

to nonbank thrift institutions have slowed significantly.

Although banks continued to sell a large volume of negotiable
CD's, net sales in April were well below the record levels of February
and March.

This slowing was attributable mainly to a moderation in

loan demands.

In addition, however, as rates on CD's rose above 7 per

cent, banks apparently began to turn to other, less expensive sources
of funds--including liquidation of investments.

They also obtained an

1/ Demand Deposit Ownership Survey data suggest that weakness in the
IPC component of M1 in the first quarter was fairly broadly based.
More detail on this survey will be in the forthccming Supplement.

II - 5
additional $300 million of funds from nondeposit sources--mainly
sales of bank related commercial paper--$400 million increase in March.
MONETARY AGGREGATES
(Seasonally adjusted changes)
1972

1972
QIII

QIV

1973
Maicch
Feb.

ApriL(p)

Per cent at annual rates
M1 (Currency plus private
demand deposits)

8.6

1.7

6.1

- .5

6.5

10.3

10.2

5.7

5.9

4,7

7.7

12.4

11.5

8.6

9.0

6.9

7.8

9.8

12.1

15.0

16.4

19.7

13.1

14.0

14,4

23.1

21.6

30. 9

21.0

12.3

11.6

9.5

5.7

9.6

9.1

8.2

M 2 (M1 plus commercial bank

time and savings deposits
other than large CD's)

M 3 (M2 plus savings deposits
at mutual savings banks
and S&L's)
Adjusted bank credit proxy

Time and savings deposits
at connercial banks
a.

Total

b. Other than large
CD's

1/
dollarsBillions
of
I II
io fI
.. .. .. . . . ...

Memorandum:
a,

U.S. Government demand
deposits

Negotiable CD's

Nondeposit sources of
funds

-1.6

-1.1

1,4

2.4

3.3

11,7

4.5

6.1

3.7

p - Preliminary and partially estimated.
1/ Month-to-month and last-month-in-quarter to last-month-in-quarterchanges
in averages, not annualized.

II - 6
Bank credit.

Total loans and investments of commercial banks

(last-Wednesday-of-the-month series, seasonally adjusted) expanded at
only a 6.4 per cent annual rate in April,1/
per cent rate in the first quarter.

sharply below the rapid 20

This slowing was primarily the

result of a moderation in business loan demands, although reductions in
outstanding security and nonbank financial loans and in holdings of
municipals and other securities also contributed.

Real estate and con-

sumer loans continued to increase at rapid rates.
By late March, many of the special factors-both international
and domestic--which contributed to the sharp rise in business borrowing
early in the first quarter had begun to dissipate.

Consequently, growth

in total short-term borrowings by businesses, as measured by the sum of
bank loans and commercial paper borrowing, slowed from the unusually
rapid pace of January and February.

Although below the first quarter

pace, the April growth in these borrowings continued at a strong 19 per
cent rate, above the fourth quarter rate.
Substitution of business loans for commercial paper borrowing
moderated in April, following an almost $4 billion (seasonally adjusted)
run-off of commercial paper in the previous two months.

Some modera-

tion in business loan expansion following the record first quarter
growth was to be expected, as corporations drew down their credit lines.
1/

In April the adjusted bank credit proxy increased, on average, at a
13.1 per cent annual rate. However, bank credit, as measured by
total loans and investments, is based on single day, last-Wednesdayof-the-month data and also includes nonmember banks. Because of this,
the credit proxy often shows somewhat different growth rate patterns
than the bank credit series. If measured from the end of March to
the end of April, the annual rate of increase in the credit proxy
was 9.8 per cent, somewhat closer to the 6.4 per cent growth rate

of bank loans and investments.

- 7

COMMERCIAL BANK CREDIT ADJUSTED FOR
LOANS SOLD TO AFFILIATES 1/
(Seasonally adjusted changes at annual percentage rates)

1972

1973

QIV

March

14.4(15.0)3/

20.3

19.4

U.S. Treasury
securities

-9.0

8.0

Other securities

8,1

Total loans and
investments 21

April
6.4(4.9)4 /

3,5

18.7 (19.5)2/

30.2

27.1

Business loans2/

15.2

39.1

30.9

21.7

Real estate loans
Consumer loans

17.6
19.0

16.0
17.6

15.6
16,5

13.0
16.3

Total loans 2 /

-6.2
10.

(8.

1/
Last-Wednesday-of-month series.
2/ Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.
3/ Adjusted to exclude an $800 million matched sale-purchase transaction
3/

by the Federal Reserve on the last Wednesday of September.
Adjusted to exclude a $700 million matched sale-purchase transaction
by the Federal Reserve on the last Wednesday of April.

- 8

Rate relationships, however, still favor corporate use of bank credit,
even though the large business prime rate moved up by 1/4 per cent to
6-3/4 per cent in April, following the CID institution of a two-tier prime
rate, and to 7 per cent in early May.
Weakness in loans to nonbank financial institutions during the
month was largely associated with reduced bank borrowing by finance
companies.

This reduction is somewhat surprising since borrowings by

finance companies in the commercial paper market also were relatively
light, even though consumer credit demands remained large.

In contrast,

borrowings by other financial institutions at banks--including mortgage
companies-remained strong.
For the second consecutive month, banks experienced a decline

in security loans in April.

This decline was associated in part with

a drop in trading positions of government security dealers to unusually
low levels.

Also, margin debt of brokers and dealers, other than U.S.

government security dealers, declined sharply in March, and although
more recent data are not yet available, it is possible that this decline
continued in April as well.
The recent reduction in bank security holdings contributed to
a further decline in liquidity ratios at large banks.

In April, the

ratio of liquid assets to total liabilities at these banks reached the

lowest level in 16 months.

II - 9

CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER, 1973 1/
(Amounts ii billions of dollars, seasonally adjusted monthly changes)
Business

loans

Dealer-

at all
commercial
banks

placed
commercial
paper

Annual perTotal

centage rate
of change
in total

Average monthly changes
1972 - QI

1.0

9.9

QII

1.1

10.0

QIII

1.3

-,4

8.0

QIV

1.6

1.8

14.8

4.3

-1.3

3.0

24.6

January
February
March

3.9
5.3
3.6

,2
-2,0
-1.8

3.7
3.3
1.8

31,0
27.0
14.4

April

2.6

-.2 /

2.4 P/

19.0 e

1973 - QI

Changes are based on last-Wednesday-of-month data.

2/ Adjusted for outstanding amounts of loans sold to affiliates.
e/ Partially estimated.
Consumer credit.

In March, consumer credit outstanding rose

at a seasonally adjusted annual rate of $27.5 billion, about 17 per cent
more than in February and 7 per cent less than the record $29.6 billion
rate of advance in December 1972.

In the instalment credit category, the

record first quarter average rate of growth ($24.0 billion) was sharply
above the low in the strike-depressed fourth quarter of 1970 ($2.5 billion),
bolstered mainly by increases in automobile and nonautomotive consumer
goods credit.

Both extensions and repayments for all types of instalment
credit increased during March. The seasonally adjusted annual rate of

- 10

extensions rose $5.0 billion from February,
the growth in

with more than one-half of

personal loan volume.

NET CHANGE IN CONSUMER INSTALMENT CREDIT OUTSTANDING
(Billions of dollars, seasonally adjusted annual rates)
Other
consumer
1971 - QI

QII
QIII
QIV
1972 - QI

QII
QIII
QIV
1973 - QI

Other
Personal

Home repair
and

Total

Automobile

goods

loans

modernization

5.5

2.1

1.7

1.4

7.8

2.9

2.7

2.0

10.8
11.8

4.2
4.5

3.0
3.6

3.2
3.3

.4
.4

13.2

3.9

4.1

4.6

14.8
16.1
19.5

5.0
5.9
7.4

4.8
6.0
7.3

4.3
3.3
4.0

.7
.9
.9

24.0

10.0

7.4

5.4

1.1

Consumer borrowing has continued to be facilitated by a reasonably ample supply of funds available on terms which have changed little

in recent months.

Issuance of the new commercial bank interest rate

criteria by the Committee on Interest and Dividends on April 16 should

contribute to the continued availability of consumer financing at relatively stable rates.

Some increase in the attractiveness of commercial

banks as a source of consumer financing is likely to be associated with
the developing trend to use of simple interest instalment loans, which
consumers can readily understand.

A large bank in Boston recently

became the third major bank in the nation to convert instalment lending
to a simple interest plan.
U.S. Treasury securities.

Treasury bill rates increased about

10 basis points for 3-month maturities to 25 basis points for one-year

- 11

maturities in the week following the April Committee meeting.

Since

then, however, bill rates generally have been under downward pressure,
particularly in the past week, when the 3-month and 6-month bill rates
moved down to 6.02 per cent and 6.36 per cent, 17 and 5 basis points
The rate

respectively below their levels at the time of the meeting.

on the one-year bill remains somewhat above its mid-April level, however.
The moderate fluctuation in bill rates reflected the influence
of countervailing factors.

Upward pressures on bill rates would normally

have been associated with the increases in the bank prime rate, CD rates
and the Federal funds rate over the period.

With the further rise in the

average Federal funds rate above 7.40 per cent in the past two statement
weeks, for example, the differential between this rate and the 3-month
Treasury bill rate has widened to nearly 140 basis points, an unuaually
large difference,

Other factors, however, insulated Treasury bill rates

from these upward pressures.

The market remained in a technically strong

position throughout the period--which is normal for this time of year
when the Treasury seasonally repays debt--as dealer inventories were at

low levels and the volume of bills outstanding was declining.

Bill

rates also were held down by the Treasury decision to offer two long term
securities and to pay down $1.6 billion of debt in its mid-May refunding.
Finally, the Treasury announced during the period that it presently
foresees no need to borrow new money in the market until August, and,
in addition, indicated that it plans to reduce the size of its 6-month
bill auction by $100 million for an indefinite period.

The lack of

pressure on the market by the Treasury should tend to soften the impact
of continued heavy financing by Federal agencies.

- 12

Yields on longer term Treasury issues generally edged up
about 1/8 of a percentage point in the past 4 weeks, apparently adjusting
to the increase in supply of long term securities resulting from the
Treasury auctions.

In these auctions the Treasury sold $2.0 billion of

a 6-7/8 per cent, seven year note and $650 million of a 7 per cent,
25 year bond.

Market interest in these issues diminished just prior to

each of the auctions and both issues sold at yields higher than their
coupon rates.

The yield on the 7 year note averaged 7.01 per cent with

a stop-out of 7.05 per cent while the average (and stop-out) yield set
in the "dutch" auction of the bond was 7.11 per cent.

Both issues have

since been trading at slightly lower yields.
Dealers received relatively large awards in the two auctions,
amounting to $687 million in the case of the notes and $333 million in
the case of the bond.

So far, however, they have had good success in

distributing these issues to final investors, and their current holdings
of the notes and bonds are down to about $300 million and $140 million,
respectively.
Private short-term rates.

Most private short-term rates have

remained on "dead center" since the April meeting.

Rates on short-term

CD's, however, have continued to move higher, apparently responding to
firming in the Federal funds rate and to continued strong bank needs
for lendable funds.
Moreover, the large business prime rate was increased to 6.75
per cent from 6.50 per cent following issuance by the Committee on
Interest and Dividends on April 16 of criteria for a two-tier prime rate.
On May 4, some large banks announced a further increase in this rate to
7 per cent, and many other banks have since followed suit.

II - 13

INTEREST RATES ON U.S. TREASURY SECURITIES

(Per cent)
Change

Daily rates

April 17

April 24

Treasury bills
3-month
6-month
1-year

6.19
6,41
6.39

6.28
6.60
6.59

Notes and Bonds
(Constant Maturity Yields)
1-year
5-years
7-years
10-years
20-years

6.77
6 66
6.63
6.64
6.84

May 1 May 8 1/ April 17-May 8
6.29
6.60
6.62

6.02
6.36
6.45

6.79
6.82
6.80
6.73
6.75
6.80
6.70
6.78
6.79
6,66
6.71
6.80
6.86
6.92
6.98
Statement week ended
18SAril
April 25 May 2 May 9

-.17
-. 05
+.06
+.03
+.14
+.16
+.16
+.14
Change--week ending April 18 to
week ending May 9

Memorandum:
Federal funds
(daily average)

7,23

7.14

7.43

7.66

+.43

Average for first 6 days of the week.
SELECTED SHORT-TERM INTEREST RATES
(Per cent)

April 17
Commercial paper
90-119 day
4-6 month

Daily rates
April 24 May 1

Change
May 8

April 17 - May 8

7.13
7.13

0
0

Large negotiable CD's l
Just under 3-month
6 months
Bankers acceptances
61-90 day
150-180 day

7.25
7.00

7.35
7.00

7.40
7.00

7.45
7.00

.20
0

7.25
7.50

0
0

Federal agencies
1-year

7.17

7.14

7.18

Bank prime rate
(most prevalent)

6.50

6.75

7,00

Highest quoted new issue.

+.01

+.50

- 13a

Long-term private securities markets.

Interest rates on

long-term private securities generally have shown little net change
over the past month.

Board indexes of yields on both newly issued

and recently offered Aaa utility bonds have drifted downward 5 to 10
basis points since the April FOMC meeting. Although rates on taxexempt bonds rose somewhat in mid-April, the Bond Buyer index
subsequently declined and rates were virtually unchanged over the
period.

In corporate and municipal markets underwriter inventory

positions are comfortable, the supply of investment funds ample, and
it appears at present that new issue volume over the second quarter
may be contra-seasonally small.

Strong liquidity positions have

reduced dependence of both corporate and municipal borrowers on longterm markets, and few market participants apparently believe that
long-term rates will rise appreciably over the next few months.

- 14

SELECTED LONG-TERM INTEREST RATES
(Per cent)

New Aaa

utility bonds 1/

Recently offered

Long-term State

Aaa utility bonds 1/ and local bonds 2/

1971
Low
High

7.02 (2/5)
8.26 (7/30)

7.14 (12/31)
8.19 (1/2)

4.97 (10/21)
6.23 (6/24)

1972
Low
High

6.99 (11/24)
7.60 (4/21)

7.12 (12/1)
7.46 (4/21)

4.96 (12/7)
5.54 (4/13)

7.29 (1/12)
7.52 (3/16)

7.26 (1/5)
7.60 (3/16)

5.00 (1/19)
5.35 (3/23)

7.50
-7.47
-- *
7.45

7.50
7.52
7.42

5.22
5.07
5.17
5.14

7.40p

7.42p

5.10

1973

Low
High
Apr.

May

6
13
20
27
4

Preliminary.
No observations available for new issues rated A or higher that meet
the criteria for inclusion in the series.
FRB Series.
Bond Buyer.

Public offerings of corporate bonds in April amounted to
only $800 million; and, although there are some medium-sized industrial
offerings on the May calendar, the staff estimates that total volume
for this month will be only about $900 million.

Scheduled utility

volume for June, however, is already about $700 million, and it is
likely that total public bond volume in June will be over $1 billion.

- 15

For the second quarter as a whole, it now appears that public bond
offerings may remain at about the reduced first-quarter pace.

Since

public bond issues usually have a seasonal peak in the second quarter,
this represents an appreciable moderation in corporate long-term
credit demands.
CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1972
Corporate securities
Total
Public bonds
Privately placed bonds
Stock
State and local Gov't
securities

1973
April e/ May f/

QIV

QIe

3,398
1,528

3,521
1,386

2,776
910

2,550
800

2,450
1,050

780

1,049

542

650

500

1,087

1,086

1,324

800

900

1,970

1,952

1,937

1,525

1,800

e/ Estimated.
f/

Forecast.

Data on commitment activity and proposed takedowns of bonds
by life insurance companies suggest that private placement volume will
remain large in spite of the small volume reported by the SEC for the
first two months of 1973.

The staff estimates that monthly average

takedowns for April and May will be around $600 million, while the
expected volume in June will be considerably greater, reflecting the
usual upward movement in takedowns at the end of each quarter.

II - 16

Average new gross equity volume in April and May is estimated

at about $850 million, an historically large volume but more moderate
than in recent months.

Some bond fund offerings--which are included

in stock issues--have been reduced in size because of selling problems.
The recent decline in stock prices also has reduced the volume of
smaller equity issues, particularly initial offerings.
Stock prices have fluctuated considerably in the last few weeks
but even with

the increases in recent days there has been little

change on balance since the April Committee meeting. At current
levels, stock prices are still well below the recent peak levels in
early January, prior to the shift to Phase III and the developing
concern about rising interest rates.

Since the last Committee meeting,

trading activity has averaged lower than the moderate levels of earlier
months this year.
RECENT STOCK MARKET DEVELOPMENTS
Oct.
Jan.

16,
11,

19721973

Jan. 11, 1973April 17, 1973

April 17, 1973May 7, 1973

Price change (per cent)
NYSE
D-J Ind.

AMEX
NASDAQ

11.7
13.8

-9.9
-9.3

- .8
- .3

3.8
8.5

-9.8
-17,0

-1.8
-2.8

18.6
4.2
9.0

16.4
3.5
7.7

Trading volume (daily

average, millions of
shares)
NYSE
AMEX
NASDAQ

14.5
2.9
6.0

- 17

Long-term debt securities offerings by State and local
governments in April fell to about $1.5 billion, a decline which
undoubtedly contributed to the edging downward of yields on such
securities after mid-April.

May volume, at about $1.8 billion, is

being boosted by several large revenue bonds but is still less than the
$2.0 billion average of offerings of the last two years.

Revenue

bonds account for an unusually high proportion of recent issues, and
these generally higher-yielding securities are particularly attractive
to casualty companies.

Underwriters report that banks, too, are

increasing their purchases in the longer maturity ranges in order to
take advantage of the higher yields, although bank holdings of
municipal securities have been declining in the aggregate.

II - 18

Nonbank thrift institutions.

During April, deposit growth

at savings and loan associations slowed considerably from the upward
revised rate in March.

According to sample data, the seasonally

adjusted annual rate of deposit growth at S&L's fell to 5.0 per cent,
the lowest rate since early 1970.

However, these sample data may

understate actual deposit growth, as was the case in March.

Major

factors contributing to reduced inflows appear to have been higher
interest rates on market instruments relative to those on S&L shares
and the continued high level of consumer spending.
At mutual savings banks, fragmentary data for April suggest
that deposit growth also may have amounted to about a 5 per cent
seasonally adjusted annual rate, a further slowing from the pace during
the first quarter.

Deposit experience of large New York City mutual

savings banks--institutions with relatively interest-sensitive depositors--was especially weak.

These institutions had a net outflow of

about $100 million for the month.

While there are reports of a tightening of lending policies
at S&L's recently, outstanding mortgage commitments in March (the
latest available) rose $1 billion.

With deposit flows declining and

outstanding mortgage commitments near record levels, S&L's have found
it necessary to increase substantially their borrowing from FHLB Banks
in order to meet takedowns.

Such borrowings rose $900 million in April

following a first quarter increase of about $400 million.

- 19

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual
savings
banks

Savings and loan
associations

Both

13.6
10.7

22.5
15.9

19.7
14.3

QIII
QIV

11.6
11.0

18.2
14.2

16.2
13.2

1973 - QIP /

8.0

16.0

13.6

1973 - February
March P /
Aprile/

6.1
7.1
5.0

10.4
13.7
5.0

9.1
11.7
5.0

1972 - QI
QII

p/
e/

Preliminary.
Estimated on the basis of sample data.

II
Mortgage market.

- 20

While available data on primary mortgage

market developments for early April show relatively little change,
field reports and trade opinion suggest that yields required by lenders
for home loans have been under upward pressure in recent weeks.
These sources indicate that numerous lenders have stiffened somewhat
their non-rate terms on conventional home mortgages and that low
usury ceilings in certain States have begun to restrain lending.

In the secondary market, expectations of some further increase
in mortgage yields over the period ahead have persisted, judging from
the results of the latest FNMA auctions (April 30) of commitments to
purchase home mortgages within 4 months.

In the case of the-auction

for FHA/VA commitments, the average yield to FNMA tended upward
further--to 7.91 per cent, 23 basis points above the recent low late
last year; offerings to FNMA remained near the advanced levels maintained
since mid-March.

In FNMA's associated auction of forward purchase

commitments for high-ratio conventional home mortgages, the rise in yields
remained appreciably greater.

However, offerings in this auction con-

tinued well below the FHA/VA volume.
Net flows of credit to all types of mortgages apparently
accelerated during the first quarter of 1973 to a seasonally adjusted
annual rate of around $80 billion, judging from preliminary estimates.

This was sharply above the recent low of $21 billion in early 1970.
Although net expansion in both nonresidential and residential mortgage
debt outstanding advanced to new highs, the increase for the residential

sector was especially striking--to an annual rate approximating $60
billion, compared with $45 billion a year earlier.

Savings and loan

- 21

associations accounted for about half the increase in mortgage debt
outstanding during the first quarter.

However, the net contribution

from commercial banks and mutual savings banks was also exceptionally
large for this time of year, and net activity by FNMA and related
agencies operating in the secondary market expanded further on average.

FNMA PURCHASE AUCTIONS
(FHA/VA HOME MORTGAGES)
Total offers

Received

Per cent
accepted

Yield to
FNMA 1/
(per cent)

92 (5/1,7/24)

7.74 (10/30)

36 (11/27)

42 (3/20)

7.53 (3/20)

of offers

Accepted

(millions of dollars)

1972 - High

365 (5/1)

- Low

61 (11/27)

336 (5/1)

1973 - Feb.

5
20

129
110

65
72

51
65

7.71
7.73

Mar.

5
19

171
297

108
169

63
57

7.75
7.81

7.86
62
146
2
235
7.89
191
88
16
217
30
261
186
72
7.92
Data show gross yield to FNMA on 4-month commitments, before deduction of 38 basis point fee paid for mortgage servicing, assuming a
prepayment period of 12 years for 30-year loans, without special
adjustment for FNMA charges for commitment fees and stock purchase
and holding requirements.
Apr.

II
Federal finance.

- 22

The staff has raised its estimate of fiscal

year 1973 receipts by $1.0 billion since the April Greenbook.

The

current projection of $232.5 billion, together with an unchanged outlays estimate of $249.8 billion, results in a revised deficit forecast
of $17.3 billion.
The higher revenue projection partly reflects recent larger
than expected receipts (based on preliminary data for April and actual
figures for March).

Part of this excess was in withheld taxes,

suggesting that taxpayers have not made any significant adjustments to
overwithholding.

Although payments of personal tax refunds were

delayed through March, April refund payments,

estimated to be $6.4

billion, were large--almost twice last year's level.

As a result, we

also have raised our estimate of refunds by about $1 billion to $21.0
billion for the fiscal year.

The table shows the current status of

refund payments compared with a year ago.
COMPARISON OF REFUND PAYMENTS

IN LAST HALF OF FISCAL YEARS 1972 AND 1973

1973

Amount disbursed, January 1 to April 27
(excluding estimated corporate refunds,
millions)

Average size of refund, January 1 to April 27

1972

$ 13,300

10,186

346

251

(in dollars)

Estimated disbursement, April 28 through
June 30 (millions)

7,000

3,382
(actual)

- 23

While the rate of Federal spending in recent months suggests
that outlays for the current fiscal year could fall about $2.0 billion
short of the budget figure, the staff has not lowered its estimate
below the Administration's figure, on the assumption that the budget
estimate will be achieved by an acceleration of spending in June and
perhaps by a shortfall in planned asset sales (negative outlays).
Through April, we estimate that only $3.4 billion of the projected
$5.5 billion of financial asset sales have been made.

Moreover, a

large proportion of the planned $750 million sales from the Defense

Department stockpile of strategic materials remains to be achieved,
including $350 million which requires Congressional approval.
On May 2, Secretary Schultz announced that the Treasury had
raised its revenue forecasts for fiscal 1973 by $5 billion, to a total
of $230 billion, and for fiscal 1974 by $7 billion.
outlays was not revised.

The forecast of

This reduced the corresponding official

deficit projections for these years to $19.8 billion and $5.7 billion,
respectively.

The Treasury is now using income assumptions for 1973

of $1,283 billion for GNP; $1,030 billion for personal income; and
corporate profits before taxes of $115.7 billion.

Our receipts estimate

for fiscal year 1973 is $2.5 billion higher than the revised Treasury
projection due partly to our assumptions of higher corporate profits
and effective personal and social insurance tax rates.

Secretary Schultz

also presented the Administration's new tax proposals which are dis-

cussed briefly in an Appendix to be included in the Supplement.

- 24

On a high employment budget basis, we are now projecting a
deficit of $3.5 billion for fiscal 1973 and a deficit of $.8 billion
for the calendar year.

These deficits are shallower than the staff

had previously projected, and indicate little shift in net stimulus
from calendar year 1972 to 1973.

However, the stimulus (as measured

by the high employment deficit) is still considerably greater in the
first half of calendar 1973 than in the second half due to the continued
slowing of growth in expenditures as the year goes on, and the concentration of refund payments in the first half year.
The end-of-April Treasury cash balance was $14.2 billion,
$1.0 billion more than projected in the April Greenbook.

The increase

was accounted for entirely by the higher than anticipated revenues
received during the month.

Given the projected pattern of outlays and

receipts and assuming no extensive repayment of special issues recently
purchased by foreign central banks, it is unlikely that the Treasury
will need to engage in any further cash borrowing before the refunding
scheduled for August.

Moreover, there will be no need for the Treasury

to sharply reduce its currently very large balance at the Federal
Reserve until early June.

- 25

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Special foreign series
Agency transactions, debt
repayment, etc.

Apr.

May

June

-2.1

-1.6

-2.6

.2
-2.0

-.2

-. 3

Other net financial sources-

1.2

Plus:

Budget surplus or deficit (-)

2.2

1.3/

Change in cash balance

Memoranda:

1.6

-2.5

-1.4

.3
1.0

-1.3

-3.3

5.7

-4.5

-5.4

4.1

-3.8

-. 5

Level of cash balance,
end of period

14.2

8.8

12.9

9.1

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

25.4
23.2

18.3
21.6

27.5
21.8

22.0

Maturing coupon issues
held by public
Sales of financial assets

a/
b/

2.0

---l

Plus:

Equals:

-. 4

July

4.3
.3

Budget agency borrowing

-.6

Net borrowing by government-sponsored agencies

2.1

1.1

n.e.
.4

1.8

Checks issued less checks paid and other accrual items.
Actual

n.e.--not estimated

17.5

1.9

FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
I

Fiscal 1973 e/
Ada. Est.
F.R.
5-2-73
.Board

FY 1974 e/ Calendar Years
1972
1973
Adm. Est.
5-2-73
Actual F.R.B.-

F.R. Staff Estimates
Calendar Quarters
1973
1972
IV*
I*
II
IIL

Federal Budget
Surplus/deficit
Receipts
Outlays

-19.8
230.0
249.8

-17.3
232.5

-5.7
263.0

249.8

268.7

Means of financing:
Net borrowing from the public
Decrease in cash operating balance
Other 1/

n.a.
n.a.
n.a.

19.5
-2.8
.7

n.a.
n.a.

Cash operating balance, end of period

n.a.

12.9

2/
Memo- :

3/
Sales of financial assetsBudget agency borrowing /
Sponsored agency borrowing 5/

5.5
1.4
7.6

5.4
.3
7.6

-17.4
221.5
239.0

-10.2
248.4
258.6

-10.5
50.5
60.9

-9.5 4.6
55.2 71.2
64.7 66.6

-. 5
64.0
64.5

-4
58.0
62.8

n.a.

15.2
0.2
2.0

5.7
2.3
2.2

8.4 -6.3
12.3
-1.3 -1.8
-0.5 2.9
1.7

-2.0

2.5
2.7
-. 4-

n.a.

11.1

8.8

11.1

3.1
0.8
3.1

n.e.
.2
11.7

4.0
2.5
9.6

1.1
1.4

12.9

11.5

8.8

1.1

1.2

2.3

n.e.

0.3

-.6

0.8

1.7

4.2

3,4

2.4

National Income Sector
Surplus/deficit
Receipts
Expenditures
High Employment surplus/deficit
(NIA basis) 7/

n.a.
n.a.

259.9

n.a.

-18.1,
239.1
257.2

n.a.
n.a.
275.5

n.a.

-18.1
228.6
246.3
-0.9

-5.1
260.3

265.4
-0.8

-24.3
-9.3e-10. 1
238.4 251. 1 e253.9
262.7 260.4P264.0

-12.1

-1.5

-4.3

-1.7
265.1 271.1
266.8 270.5
-0.3

* Actual
e--projected
n.e.--not estimated n.a.--not available
p.--preliminary
j/ Includes such items as deposit fund accounts and clearing accounts.
2/ The sum of sponsored and budget agency debt issues and financial asset sales does not necessarily reflect the

2.9

footnotes continued
since both the sponsored and budget agencies acquire a portion of

volume of debt absorbed by the public,
these issues.

Includes net sales of loans held by the Commodity Credit Corporation, Farmers Home Adm., Government
National Mortgage Assn., Federal Housing Adm., and Veterans Adm.
Receipts from these sales are netted against
Federal Budget Outlays shown above.

Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee Valley
Authority, which is included in the Net Treasury Borrowing from the Public shown above.

Federally-sponsored credit agencies, i.e.,
Federal Home Loan Banks, Federal National Mortgage Assn.,
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.

Quarterly average exceeds fiscal year total by $412 billion due to spreading of wage base and refund
effect over calendar year.

Estimated by F.R. Board Staff.

Federal

INTERNATIONAL
DEVELOPMENTS

5/9/73
STRICTLY CONFIDENTIAL (FR)
III -- T - 1
U.S. Balance of Payments
In millions of dollars; seasonally adjusted
19 72
Year
-IV
-4.219 L
-656
-1,683
-6,816
13,240
48,840
-55,656 -14,923
1,027
2,597

Goods and services, net 1/
Trade balance 2/
Exports 2/
Imports 2/
Service balance
Remittances and pensions

-1,556

Govt. grants & capital, net

-3,575

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid

-8.339
-3,339

S i

oft

U tfttCJ

Nonbank-reported claims -- liquid
S"
"
other

-619
-733
-2,780
-406
-462

-2,695
-857
-84
-43
-1,425
-7
-279
4,757
95
1,223
540
105
2.633
2,133
(-52)

Liab. to foreign official reserve agencies

Errors and omissions
BALANCES (deficit -) 4/
Official settlements,

, N.S.A.

5,355
-5,423

29
-1,203
-2,033
-352

46
-1,191
-1,663
-393

110
82
-558
58

1,266

438

347

-1.871
-1,892
(-559)

-1.896
176
(52)

-2,033
(-544)

109

-40

10,265

1,688

9,972

7,676

2,834

742
547

220

128

-5

153
35

-16
82

-13
233

-4
132

-3,806

-1,608

-11,007
-14,684

Liquidity, S.A. 5/

, N.S.A.

-423

5,000
-5,423

180
161

Net liquidity, S.A.
"

IMar.*

320

S.A.

, N.S.A.

15,343
-16,261
./550

1__9 7 3
Feb.*

-416
-1,141

Foreign capital (excl. reserve trans.)
10,488
322
Direct investment in U.S.
U.S. corporate stocks
2,463
New U.S. direct investment issues
1,974
64
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:
4,816
Commercial banks abroad
3,905
Of which liab. to branches 3/
(178)
Other private foreign
809
Intl. & regional organizations
102
Other nonliquid liabilities
849

U.S. monetary reserves (increase. -)
Gold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies

.0-1 J
£-368
-918

-15,823

-1,754
-1,465
-4,337
-3,249
-4,387
-3,235

-10,192
-10,006
-6,766
-6.562
-8,321
-8,173

-5

-7,804

-2,829

-4,324

-3.117

-5,908

-2,977

e/ Estimate.
* Monthly, only exports and imports are seasonally adjusted.
1/ Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
31 Not seasonally adjusted.
4/ Excludes allocation of $710 million of SDRs on 1/1/72.
5/ Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to
commercial banks and other foreigners.

III - 1

INTERNATIONAL DEVELOPMENTS
Summary and outlook.

Since mid-March the official settlements

balance has registered a substantial surplus, reversing perhaps one fifth
of the deficit of February and early March.

Most of the reduction in

liabilities to foreign official accounts since mid-March has been in
Japanese balances here, partly the result of large official prepayments.
Foreign exchange markets have been functioning smoothly.

Euro-dollar rates

have recovered from the distortions of the speculative period, and are
currently reflecting the general firming of interest rates in national
markets.
Some of the improvement in the over-all balance has stemmed
from a favorable shift to net inflows from commercial banks abroad, in

contrast to the large outflows that were a major feature of the period
of speculation.

There has probably also been some reversal of the leads

and lags and other financial flows that normally escape statistical

reporting.

Data are not yet available for the trade balance or trans-

actions in securities in April, but it seems unlikely that results in
these sectors were as favorable as in March, when the trade deficit was
unexpectedly small and there were still unusually large net foreign

purchases of U.S. corporate stocks.
In the months ahead the trade balance will probably show somewhat larger deficits than in the first quarter -- partly because the
bulge in agricultural exports in the first quarter may have been temporary, and partly because much of the adverse terms of trade effects from
devaluations still lies ahead.

Moreover, the rapid rise of demand in

III - 2

the United States that began last year will be exerting a strong pull
on imports for some time to come.
nonagricultural exports is bright.

On the other hand, the outlook for
Export orders for manufactures have

been rising for some time, and the devaluations have by now probably
begun to have a significant effect on the volume of shipments.
Export prospects are buoyed by high and rising rates of economic
activity in nearly all industrial countries.

Although counter-measures

against excess demand and price inflation are being taken -- especially
in Germany and Japan -- overall economic activity in industrial countries
should continue to expand vigorously.

In particular, private invest-

ment expenditures for machinery and equipment, which did not contribute
much to economic activity last year, are beginning to rise substantially,
and this sector is of particular importance for U.S. exporters.
At present the odds are probably better than they have been
for some time that confidence in the dollar will not be shaken by a
major disappointment with the trade performance of the United States -although temporary setbacks may occur -- and that an unwinding of hedged
positions against the dollar will continue.

The principal dangers would

lie in a turn for the worse in U.S. price performance and pressures on
the ability of U.S. suppliers to respond to demand from both domestic

and foreign sources.

III - 3

Foreign Exchange Markets.

Exchange markets have been very

quiet for the most part in recent weeks.

The dollar firmed moderately

until May 8 against every major currency save for sterling, with the
sharpest gains occurring after the release of U.S. trade figures for
March.

The dollar's overall appreciation was restrained by continued

heavy intervention sales of dollars by the Bank of Japan -- $1.1 billion
in the four weeks ended May 8 and $1.8 billion since markets reopened
on March 19.

The unwinding of leads and lags, an upsurge in Japanese

imports in response to a booming domestic economy, and various special
factors have combined to produce a strong demand for dollars in the
Tokyo market.

The Bank of Japan seems to have set an implicit floor

for the yen of 16 per cent over its old Smithsonian rate.
The European band was fully extended on most days over the
past month, with the guilder at the bottom and the French franc, and
occasionally the Scandinavian currencies, at the top.

The guilder was

also at its lower limit vis-à-vis the Belgian franc within the narrower
Benelux band for most of the period.

In intervention operations, the

Netherlands Bank sold in excess of $200 million equivalent of Belgian
francs and other European currencies.

Conditions in the Dutch money

market were very easy during April and into early May in contrast to
other national markets in Europe.
The German mark, which had previously occupied the nethermost
position in the snake, firmed against other European currencies, apparently
on the strength of extremely tight money market conditions in Germany.

III - 4

(Call money was quoted at rates in excess of 20 per cent on some days
and was seldom below 12 per cent during the period).
Sterling, alone among the major foreign currencies to strengthen
against the dollar up to May 8, has benefited from a shift in expectations
resulting from an apparent improvement in Britain's domestic economic
outlook. Labor relations have seemingly improved and measured inflation
(of non-food prices) has slowed while elsewhere in the world inflation
has worsened.
On May 8 and 9, the mark led a general rise in European
currencies against the dollar.

The market turned uneasy following

indications that the German government would soon propose very severe
anti-inflation measures and that the government's economic consultants
had suggested that a further revaluation of the mark against European
currencies might be required within six months.

A government denial,

on May 9, that it would even consider a revaluation did little to
reassure the market.
Euro-dollar market.

The decline in Euro-dollar rates after

the resolution of the March exchange market crisis ended in mid-April.

Since then, rates have moved up slightly in the shorter maturities, and
somewhat more for 3-month funds, under the influence of rising interest
rates in the United States and abroad (notably Germany).

The excess of

the 3-month Euro-dollar rate over the 60-89 day CD rate has widened to
75 basis points as of May 9, but the current differential of 30 points

III - 5

between 1-month Euro-dollars and 30-59 day CD's shows little change
from mid-April.
The sharp rise in the Federal funds rate in the past month
has lifted that rate above the overnight Euro-dollar rate from time to
time since mid-April.

In the statement week ending May 9, U.S. banks

with reserve free bases found it cheaper, by an average of 64 basis
points, to borrow overnight Euro-dollars than to borrow Federal funds.
But in the two preceding weeks, overnight Euro-dollars were on average
more costly than Federal funds.

U.S. banks' borrowings from their

foreign branches continued to decline slowly through the statement
week ending May 2, dropping to a daily average of $2.22 billion compared
with $2.36 billion in the week of April 4.

On the other hand, U.S.

agencies and branches of foreign banks substantially increased their
foreign liabilities in the three weeks up to May 2.

III - 6

SELECTED EURO-DOLLAR AND U.S.

Average for
month or
week ending
Wednesday
197 2 -Oct.
Nov.
Dec.
1973-Jan.
Feb.
Mar.
Apr.
1973-Mar.28

(2)
Federa
Funds'

(3)
Differential
- (1)-(2)(*)

(4)
1-month
Euro-$
DepositL/

(5)
30-59 day
CD rat
(Adi.)-A

(6)
Differential
(4)-(5)(*)

4.77
4.74
4.75
5.72
9,03
9.194/

5.05
5.05
5.33
5.94
6.58
7.90

-0.28
-0.31
-0.58
-0.22
2.45
2.10

(0.91)
(0.88)
(0,61)
(1.21)
(4.71)
(4.40)

5.10
5.08
6.05
5.97
7.70
8.79

5.10
5.01
5.25
5.79
6.35
7.20

0.00
0.07
0.80
0.18
1.35
1.59

7.43

7.12

0.31

(2.17)

8.00

7.27

0.73 (2,73)

(2.00)

1.33 (3.47)

(1.28)
(1.34)
(2.31)
(1.67)
(3.28)
(3.79)

7.29

7.11

0.18

8.57

7.24

15.05'

7.18

1.37 (11.63)

8.38

7,37

1.01 (3.11)

6.93

6.84

0.09

(1.82)

7.96

7.11

0.85 (2.84)

18
25
May 2

6.90
7.48
8.32

7.24
7.14
7.43

-0,34
0.34
0.89

(1.39)
(2.21)
(2.97)

7.79
7.96
7.85

7.24
7.37
7.37

0.55 (2.50)
0.59 (2.58)
0.48 (2.44)

7.03

7.67

-0.64

(1.12)

7.92

7.37

0.55 (2.53)

Apr. 4

(1)
Overnight
Euro-/

MONEY MARKET RATES

All Euro-dollar rates are noon bid rates in

the London market; overnight

rate adjusted for technical factors to reflect the effective cost of
funds to U.S. banks.
2/ Effective rates.
3/ Offer rates (median, as of Wednesday) on large denomination CD's by
prime banks in New York City; CD rates adjusted for the cost of required
reserves.
4/ 8.07 excluding March 29. A technical anomaly involving a quarter-end
squeeze on dollar balances raised overnight Euro-dollar borrowing to
60 per cent on that date.
5/ 7.57 excluding March 29.
*/ Differentials in parentheses are after adjustment of Euro-dollar rates
for the 20 per cent marginal reserve requirement (relevant to banks
with borrowings in excess of their reserve-free bases).
p/ Preliminary.

III - 7

U.S.

balance of payments.

In April, the balance on the

official settlement basis was a surplus estimated at about $1 billion,
as U.S. agencies and branches of foreign banks reversed some of the
reduction in liabilities to foreign commercial banks that had occurred
during the monetary turmoil of February and early March.

Details on

April transactions are still very meager but the surplus in that month

reflects among other things, a special repayment of $175 million of
post World War II debt by Japan. Allowing for a continuing sizable
deficit on current account and long-term capital, the April surplus
suggests a return flow -- on the order of $1-1/2 billion -- of some

of the funds that had left the country earlier in the year, including
a $400 million reduction in commercial bank claims on foreigners
(according to the weekly banking statistics).
More complete data are now available on transactions in the
first quarter.

The overall balance on the official settlements basis

in the first quarter was a large deficit of $10.2 billion (seasonally
adjusted but not at an annual rate).

The trade deficit, although

substantially lower than in the fourth quarter, was about $900 million;
bank claims on foreigners increased by about $3-1/4 billion (seasonallyadjusted) while liquid liabilities to commercial banks abroad and other
private foreigners decreased by $2 billion. Net payments connected
with remittances, pensions, and U.S. Government grants and credits
amounted to about $1.3 billion. These outflows were only partially

III - 8

offset by the continued large sales of U.S. securities to private
foreigners --

$1-1/4 billion of corporate stocks and over $1/2 billion

of bonds, mainly offshore issues.

On balance there was a net liquidation

of foreign securities in the first quarter; U.S. purchases of foreign
bonds remained at a low level while there were continued net sales of
foreign stocks.

The surplus on investment income, other services, and

military transactions is estimated to have been about $1/2 billion.
The sum of these transactions is an outflow of about $5 billion.
If net direct investment outflows were roughly $1-1/2 billion, total
recorded payments would amount to some $6-1/2 billion, compared to an
over-all deficit of about $10 billion.

The difference would represent

unrecorded transactions of U.S. investors and others positioning
themselves against an expected dollar devaluation by increasing their
net dollar liabilities and their net foreign-currency assets.
U.S. foreign trade.

The trade deficit in March fell sharply

to less than $1 billion at an annual rate (balance of payments basis)
as exports advanced strongly while imports were unchanged from the
high levels of the preceding two months.

For the first quarter, the

trade deficit was $3-3/4 billion at an annual rate, nearly $3 billion

less than the deficit rate in the fourth quarter of 1972.

Both exports

and imports increased extraordinarily from the fourth to the first
quarter; exports rose by over 15 percent, imports by 9 percent.
A major element in the steep climb of exports, in March as
well as earlier in the quarter, was the very sharp acceleration in

III - 9

shipments of agricultural commodities.

Although these commodities are

less than one-fourth of total exports, they accounted for more than
one-half of the total rise in exports in the first quarter; about onethird of the higher value resulted from higher prices -- particularly
for soybeans.

The value of agricultural exports in the first quarter

was $15-1/4 billion at an annual rate (over $16-1/2 billion in March).
In calendar 1972 agricultural exports were only $9-1/2 billion.

Although the value of agricultural exports is expected to
remain high in the next few months -- with a further rise in prices
offsetting a possible drop in volume due to supply limitations -- it is
likely that these exports will fall to a lower rate in the course of
the year.

U.S. EXPORTS BY PRINCIPAL COMMODITIES
(billions of dollars; seasonally adjusted annual rates)

Total
Agricultural
Nonagricultural

Civilian aircraft

Autos to Canada
Other nonagricultural
Industrial materials
Machinery

1972
Q-4

1973
March

1973
Q-1

Percent change
1973
Q-1
1972
Q-4

53.0

64.3

61.4

10.8
42.2

16.6
47.6

15.2
46.2

41
9

1.9

2.3

1.8

4.3
36.0
12.9
13.9

4.1
41.3
16.5
15.3

4.6
39.8
15.7
15.3

7
10
22
10

Deliveries of aircraft are also expected to decline from the
very high March rate.

Exports of other nonagricultural commodities should

rise considerably given the strong expansion in industrial output abroad.

III - 10

Foreign orders for machinery rose further in March and for the first
quarter averaged 16 percent higher than in the fourth quarter. Foreign
orders for steel, nonferrous metals and other types of durable equipment
are also on the rise.
Imports in the first quarter were, in total, considerably
higher than in the fourth quarter.

Following a sharp advance in

January, however, there was no further advance in February and March
although import unit-values rose quite strongly in March -- nearly
2 percent. Unit values of foodstuffs (coffee, meat, sugar), semifinished industrial materials and finished goods (particularly cars)
were all up in March, reflecting the first price effects of the February
devaluation as well as other factors now pushing up prices generally.
The rise in imports in the first quarter was led by imports
of petroleum.

Imports of fuel jumped by 19 percent and in March

reached an annual rate of $6-1/2 billion, compared with less than
$5 billion in the year 1972.

Other increases are summarized in the

table. Domestic sales of cars from Europe and Japan continued at a
high level in April, holding close to an annual rate of 2 million units,
well above the first quarter level of imports.

The strength in April

sales is attributed to heavy purchases of Japanese cars as higher
prices for these cars were not posted by Japanese producers until
mid-April.

III - 11

U.S. IMPORTS BY PRINCIPAL COMMODITIES
(billions of dollars; seasonally adjusted annual rates)
1972
Q-4

1973
March

1973
Q-1

Percent change
1973
Q-1

1972

0-4
Total

59.7

Foods and feeds

65.1

65.0

7.6

8.8

8.5

Industrial materials
Fuels
Other
Capital goods

22.1
5.2
16.9
6.1

24.1
6.6
17.5
6.8

24.2
6.2
18.0
6.6

9
19
6
8

Automotive

10.0

11.1

10.7

From Canada
From other
Other consumer goods

5.6
4.4
11.9

6.2
5.0
12.8

6.2
4.5
13.0

11
2
9

The reduction in the trade deficit in the first quarter shows
up in improved U.S. trade balances with Western Europe and Japan.
Heavy shipments of agricultural commodities and aircraft were the main
elements in the strong rise in exports to Western Europe, turning the
deficit that had prevailed with that area throughout most of 1972 into
a surplus in the first quarter.

Exports to Japan, particularly

agricultural products but also machinery, rose sharply in the first
quarter while imports from Japan were only moderately higher.
Consequently the trade deficit with Japan in the first quarter fell to
an annual rate of $2-3/4 billion, compared with a rate of over $4 billion
in each quarter of 1972.

III - 12

Balance of payments outlook.

The outlook for the balance of

payments for the rest of the year has recently been reviewed by an interagency committee, in the light of the striking developments evident in
the still incomplete data for the first quarter.

For the basic balance --

current account and long-term capital -- a deficit on the order of
$8 billion is projected for the year, although the first-quarter rate may
have been somewhat lower.

No attempt is made to project the official

settlements balance; whether the over-all deficit is much larger or
smaller than the $10 billion registered in the first quarter will depend
on the behavior of volatile funds.

While there has been some unwinding

since mid-March of the outflows associated with currency disturbances,
a major reflow is still inhibited by rising interest rates abroad and
lingering doubts about the stability of the present exchange rate relationships.
Projections of the trade balance for the year still anticipate
a deficit of about $5 billion, even though the first-quarter rate was
less than $4 billion.

The worsening of the balance after the first

quarter assumes, among other things, that the annual rate of exports of
agricultural commodities, at $15.2 billion in the first quarter, will be
dropping to $12 billion after mid-year.

There is a possibility that further

price increases will be large enough to offset the likely drop in volume
of agricultural exports, in which case the trade balance for the year
could be substantially better.

However, the adverse effects of the

devaluations, especially the more recent changes in the dollar prices

III - 13

and value of imports, will probably be stronger in the months ahead,
and allowance must be made for rising petroleum imports at higher prices.
On the other hand, prospects are good for strong demand for
U.S. exports in other industrial countries, where there is a broadlybased rapid increase in demand, and also in some of the developing countries
with large reserve holdings.

Consequently, after some worsening in the

summer months the trade balance is expected to improve considerably,
though still showing deficits into 1974.
Although the 1973 trade deficit should show a considerable gain
over the 1972 result, net receipts of income on investments are expected
to fall, yielding a rather limited gain in the combined balance on goods
and services.

While receipts from U.S. direct investments abroad are

projected to continue to score large gains -- mainly because of the boom
in economic activity in foreign countries --

this will be more than

offset by rising interest payments to foreigners.

Taking into account

the higher level of liquid liabilities to foreigners, much of which
came early in the year, and the year-over-year rise in U.S. interest
rates, interest payments on these liabilities will rise by well over
$2 billion.
No important shifts are expected in net military expenditures,
or in the balance of other service transactions.

A new element in the

picture is a reduction of nearly $.5 billion in net U.S. Govt. grants
and capital flows, stemming primarily from special transactions with
Japan and advance payments on military export orders.

III - 14

An area of great uncertainty is the future of flows of private
long-term capital.

In the current projection the net flow of such

capital is projected to be about in balance, as it was in 1972, but
this depends on a number of important assumptions, including general
stability in exchange markets.

The net outflow of U.S. private long-term

capital is put at not much above the 1972 rate of $5.4 billion, with
direct investment outflows rising only moderately in response to the
pick-up in economic activity abroad.

U.S. banks increased their long-

term claims on foreigners by about $1.3 billion in 1972, and are projected
to have somewhat smaller outflows this year.
The net inflow of foreign private long-term capital was
$5.6 billion in 1972 and is projected to rise slightly in 1973.

crucial factor will be the attitude of foreign investors toward U.S.
corporate stocks and the offshore borrowings of U.S. direct investment
companies.

Such investments accounted for $4.5 billion of the inflow in

1972, and they are projected to be somewhat larger this year.

This is

based on the assumption that following the spurt in foreign purchases
of U.S. corporate stocks in the first quarter -- when net purchases totaled
$1.2 billion -- there will be a smaller but still substantial rate of
inflow in the rest of the year, bringing the total to over $3 billion.
However, it is also assumed that offshore corporate borrowing will be
reduced to about $1-1/2 billion from nearly $3 billion in 1972.

This

slowdown reflects both some difficulties in placing dollar-denominated
bonds in the Euro-bond market and also the uncertainty faced by the

III - 15

direct investors, who prefer to hold down their borrowings in view of
the expected termination of the controls.

It appears that the offshore

financing will increasingly take the form of shorter-term bank loans,
so as to result in a minimum of high cost foreign borrowing outstanding
after the end of 1974.
If the present projection is nearly correct, it suggests that
gains in the basic balance will come gradually in 1973, with improvement
in the trade balance showing up strongly only late in 1973 and into 1974
as demand pressures in the United States abate.

This picture could be

changed for the better, however, if agricultural exports stay close to
their recent high level.

III - 16

Economic Activity in Major Foreign Industrial Countries.
Economic activity in most of the major industrial countries expanded

rapidly during the second half of 1972 and, on the basis of preliminary
indicators, during the first quarter of 1973.

As shown in the table on

the following page, real GNP for these countries as a whole grew at an

annual rate of 5.9 per cent from 1971 to 1972, and this rate is expected
to increase

to 7

per cent from 1972 to 1973.

In most foreign countries,

as in the United States, the underlying strength of activity was somewhat
greater than had been forecast, mainly because private consumption expenditures rose more rapidly than had been anticipated.

Private capital

investment, relatively sluggish in 1972, is expected to accelerate and
contribute substantially to growth in 1973, as is inventory investment.
Consequently, rapid growth of output is expected to continue during the
rest of this year -- in most cases with further acceleration as the
expansion becomes broader based.
Unemployment has dropped substantially in most of the countries.
Tightness in some segments of the labor market is exerting upward
pressure on labor costs -- even in countries where the overall unemployment rate is still high.

Despite tightening labor market conditions,

wage increases early this year were relatively moderate.

However, the

high current rates of price increases have caused more recent settlements
to be higher -- and in Germany, for example, there is talk of reopening
later this year negotiations on settlements made in January and February.

STRICTLY CONFIDENTIAL
GROWTH RATES OF REAL GNP AND CHANGES IN GNP DEFLATORS, 1959-1973
(Percentage changes)

Average
1959-60 to 1970-71
GNP
deflator

GNP

1971
deflator
tor

From previous year
1972 (estimates)
GNP
deflator

1973 (forecasts)*
GNP
deflator

Germany

4.9

3.6

2.7

7.7

2.9

6.1

6-1/2

United Kingdom

2.9

4.2

1.7

8.9

3.5

6.7

6-1/4

France

4.4

5.1

5.0

5.6

5.8

6-1/4

Italy

5.5

4.4

1.0

7.0

3.2

5.8

Netherlands

5.3

4.8

4.5

7.5

4.0

9.5

Japan

11.1

4.8

6.4

4.6

9.2

4.9

Canada

4.9

3.0

5.5

3.3

5.5

4.9

United States

3.9

2.8

2.7

4.7

6.4

3.0

6-3/4

4-1/4

TOTAL

5.0

3.4

3.3

5.4

5.9

4.3

5-1/4

*N.B.: 1973 forecasts are strictly confidential.
Source:

OECD Secretariat, April 12, 1973 and national forecasts.

11-1/4

6-1/2

III - 13

Thus, in most countries, inflationary expectations rather than labor
market shortages seem to be the major factor making for faster rises
in wage demands.

As illustrated by the changes in GNP deflators in the table,
rates of inflation have been increasing rapidly.

The sharp worldwide

upward movement of agricultural and raw material prices which began in
the second half of 1972 has been a notable feature of the situation.
With increasing demand pressures, the OECD's forecasting group now anticipates an acceleration of prices of manufactures and services almost
everywhere in the course of this year, as well as continued increases in
basic commodity prices.

In addition, the EEC farm price decisions of

May 1 will contribute further to increases in food prices in the
European countries.
With the acceleration of inflationary trends, a number of
countries have adopted a more restrictive policy stance in order to
moderate demand and price pressures.

Monetary policy measures have been

widely employed to date, but further and more varied policy moves can
be expected.

So far, a comprehensive set of wage and price controls

has been employed only in the United Kingdom.
The economic recovery in Germany dating roughly from the
beginning of 1972

is developing into a broad-based boom.

Most

observers now expect the increase in German real GNP in 1973 over 1972
to be about 6 per cent, a more rapid rate than was officially anticipated
just a few months ago.

III - 19
Exports have played the leading role in the expansion to date.
The rapid rise in new industrial orders from abroad -- 70 per cent,
annual rate, from July-August 1972 to January-February 1973 -- indicates
that exports will continue to be a major stimulative force.

However,

business surveys as well as the rise in domestic new orders suggest that
a marked recovery in private capital investment is also likely to occur
this year.
The high rate of capacity utilization at a time when demand
continues to expand rapidly is adding considerably to inflationary
expectations.

The overall capacity utilization rate in industry was

in excess of 85 per cent in the fourth quarter of 1972 (compared to a
peak of over 90 per cent during the boom of 1970) and has certainly risen
since then; the unemployment rate (s.a.) averaged a very low 1 per cent
in the first three months of 1973.

The tightness in the labor market

is exerting upward pressure on wages, but a major factor in increasingly
stronger wage demands has been the fast price rise of recent months and
the expectation that prices are likely to continue to rise rapidly.
Although some budgetary restraint is being exercised, the
German authorities currently are relying primarily on monetary policy
to slow inflation.

The Bundesbank's determination to maintain monetary

stringency was demonstrated by its willingness to allow the rate on
overnight interbank loans to soar to record-breaking heights.

And on

May 3, the discount and the Lombard rates were raised by 1 percentage

III

- 20

point to 6 and 8 per cent, respectively.

However, there are general

expectations that the government will announce an anti-inflation

package which is likely to include various tax measures.

Since the

German government believes that developing excess demand is the base
of the inflationary pressures, price and wage controls are not likely
to be instituted.

Economic activity in the United Kingdom has increased rapidly
since mid-1972.

Real GDP rose at an annual rate of over 6 per cent

from the first to the second half of the year, although the growth rate

was distorted by strikes in the first and third quarters of the year.
The main expansionary element of demand has been private consumption

expenditure, which rose at an annual rate of 8 per cent from the
first to the second half of last year, and at a rate of 11 per cent in
the first quarter of this year.

However, these recent rates of growth

reflect to some extent anticipatory buying before the introduction of
the value-added tax (VAT) on April 1, 1973.
Unemployment began to fall sharply in the second half of 1972.
In April 1973, the unemployment rate (s.a.) in Great Britain was 2.7 per
cent compared with 3.8 per cent a year earlier; a rate of about 2 per
cent is considered optimum.

Job vacancies for adults now are higher than

at any time since the boom years of 1965-66.
The outlook is for a growth rate of real GNP in 1973 of about
6 per cent -- above the official target rate of 5 per cent -- assuming

III - 21
a continuation of the present policy posture, with heavy reliance on

wage and price controls.

A survey recently released by the Confedera-

tion of British Industry confirms earlier forecasts that private
investment expenditures and exports will provide the major stimulus.

However it also suggests that supply constraints will become increasingly
important.
The faster rate of economic expansion in France,which began
in the middle of 1972,is expected to continue with real GNP growing by
about 6.0 per cent, in line with the target rate of the 1971-75 plan.
Industrial production has been increasing exceptionally fast -- 12 per
cent, annual rate, from August 1972 through February 1973.
The most substantial stimuli to economic activity have been
exports and private consumption.

With the expected growth in world

trade, export expansion is expected to continue in 1973, and consumer
expenditure may grow even more rapidly than in 1972.

The strength of

private consumption is mainly due to the rapid rise in personal incomes.
Hourly wages rose 12.3 per cent in 1972, and the tightening in the labor
market, especially for skilled workers, coupled with stronger union demands, suggests that increases in earnings will be somewhat larger in
1973.

Utilization of capacity is now higher than at any time since

1969-70.

In addition, planned investment expenditures are being revised

upward and in 1973 may rise by about 8 per cent in real terms.

III - 22

As elsewhere, price increases are a major policy concern in
France.

The December 1972 consumer price index was 6.9 per cent above

its year earlier level.

The government's December anti-inflationary

program included direct action on prices through selective VAT reductions,
as a result of which retail price levels in January and February increased
only slightly or not at all.

However,

the upward trend resumed in March.

On May 3 the French government renewed its system of price guidelines
with a 3.6 per cent ceiling (compared to 3 per cent a year ago) for
price increases of most industrial goods over the next twelve months.
A sharp upturn in economic activity in Italy in the fourth
quarter of 1972 -duction -in

reflected in a 9 per cent rise in industrial pro-

was induced by a renewed surge in exports and a strengthening

several components of domestic demand --

specifically, consumer spend-

ing, residential construction, and continued rebuilding of inventories.
Some of this increase resulted from anticipatory buying in advance of
the introduction of the VAT at the beginning of 1973, and some in
expectation of renewed strike activity in the first quarter.

In fact,

industrial output in the first quarter of 1973 was sharply lower because
of strikes.
Prospects now appear favorable for a sustained increase in
economic activity in Italy for the first time in four years.

The sign-

ing of new wage contracts in the metal and engineering industries in the
first week in April removed a major uncertainty for employers that had

III - 23

been a depressant to investment.

The contracts provide for large pay

increases that should cause consumer spending to rise more rapidly.

significant share of the cost pressures that might have resulted from
the large wage increases is expected to be alleviated by the proposed
shifting of part of the cost of social security contributions from
employers to the budget.
Price rises have accelerated sharply since the summer of 1972
with the GNP deflator expected to peak at an annual rate of 9 per cent
in the first half of 1973.

The introduction of the VAT and the effect

on import prices of the depreciation of the lira further contributed to
the acceleration of the inflation rate.

By the second half of this year,

this rate may drop off to about 6-1/2 per cent, still high by past
standards.

Nevertheless, absorption of economic slack remains the main

policy objective at this time,and anti-inflationary measures are likely
to aim at the reduction of costs rather than of demand.
Economic activity in the Netherlands advanced briskly from
mid-1972 through January of this year.

Exports appear to have been

the major contributor to the pickup in activity.

Seasonally adjusted

unemployment declined from August 1972 through January 1973, but remained
high by

Dutch standards.

In addition, job vacancies also fell, leaving

the ratio of unemployed to vacancies at around 2 to 1.
Real output statistics are not available beyond January, but
rises in unemployment since then suggest that strikes which plagued the

III - 24

economy from the latter part of February to the latter part of April
slowed the growth of output.

The strikes stemmed primarily from labor-

management conflict over determination of an acceptable formula for
granting pay increases in connection with rises in consumer prices.

provisional agreement was reached at the end of April, providing for
proportionately higher cost-of-living wage boosts for lower paid workers.
The government estimates that average earnings will rise by 13-1/2
per cent from 1972 to 1973.
Real GNP this year is projected to exceed last year's total
by 4 per cent.

Steep rises are expected in exports and in private non-

residential investment.
Inflation in the Netherlands remains severe -- overall consumer
prices in February were 7.2 per cent above their year-ago level, as
were those for all items excluding food.

However, partly because the

economy is still operating at a level well below capacity and partly
because until a few days ago it still had not been possible to form a
new government, the interim government has not pursued a very active
stabilization policy.
The economic expansion in Japan which began in early 1972
accelerated through the year.
1972 over 1971.

Real GNP increased by 9.2 per cent in

By the fourth quarter of 1972 the rate of growth had

accelerated to 15.2 per cent per annum.

Government capital expendi-

ture, private consumption expenditure, private construction, and

III - 25
exports were the main factors contributing to growth in 1972.

Real

GNP in 1973 is expected to rise by 11-1/4 per cent over the 1972
level, with private investment expenditure becoming an important
factor.
Since late last year, consumer and wholesale prices have
been increasing sharply.

March 1973 wholesale prices were 11 per

cent above their year earlier levels, while consumer prices (Tokyo)
were up 9 per cent.

Recent large wage increases of 18 per cent in

the transport industry may well set the pattern for other industries.
The Bank of Japan began to tighten its monetary policy late
Credit restraints were introduced for the first and

last year.

second quarters of 1973, reserve requirements were increased in January
and again in March, and the basic discount rate was increased from 4.25
per cent to 5.0 per cent on April 2, 1973.

But the liquidity position

of the private sector is very comfortable, so that the effect of the
recent monetary policy measures is not likely to be readily apparent.
Monetary policy is expected to remain tight as price inflation is likely
to continue.

Fiscal policy, which was very stimulative last year, will

continue to contribute significantly to overall demand, particularly to
investment demand, this year -- albeit at a declining rate.
Economic activity in Canada in 1972 continued to be strong for
the second consecutive year.

Preliminary estimates indicate the same

real rate of growth of Canadian GNP in 1972 as in 1971 --

5.5 per cent --

III - 26

despite an interruption in the third quarter of 1972 resulting from
strikes and bad weather.

Private consumption expenditure and resi-

dential construction were especially strong during 1972.

Forecasts

for the growth of real GNP for 1973 range from 6.5 to 7 per cent, as
business investment is expected to pick up strongly.
The increase in output in 1972 was accompanied by large
employment gains.

However, the labor force was also growing rapidly,

and the unemployment rate for 1972 was 6.3 per cent -- virtually the
same as in 1971.

The unemployment rate (s.a.) has subsequently

decreased from 6.7 per cent in December 1972 to 5.5 per cent in March
1973 -- the lowest level in three years.
in unemployment persist.

However, regional disparities

The seasonally adjusted March unemployment

rates ranged from 3.9 per cent in Ontario to 8.3 per cent in the Atlantic
provinces.
Inflation is a problem in Canada as elsewhere.

Price rises

accelerated in 1972 and are expected to continue high in 1973.

The

March consumer price index was 6.0 per cent above its level one year ago,
and the GNP deflator is rising at an annual rate of about 5 per cent.
Fiscal policy in Canada remains expansionary.

The February

budget aimed mainly at encouraging economic growth to reduce unemployment, although it was also directed toward decreasing the rate of
inflation.

There are some indications that the Bank of Canada may pur-

sue a somewhat less expansionary monetary policy in 1973.

On April 6

III - 27

it raised the discount rate by 1/2 percentage point to 5-1/4 per cent;
this was followed by an increase in the prime lending rates of the
chartered banks on April 9 from 6 to 6-1/2 per cent.
activity may not be restrained very much.

Still, economic

Most forecasts assume that

the proposed reductions in corporate tax rates and the liberalization
of write-off provisions will be put into effect.

But, even if these

were not to materialize, the large increases in business investment
forecast for this year are still likely to come about, because most of
the anticipated spending is already in the pipeline.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 15, 1973 : Greenbook

FRASER