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CONFIDENTIAL (FR)

May 10, 1978

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

. 1
Employment and production ............................
3
Income and consumer sector activity..........................
6
........
Business investment................................
10
Residential construction...................................
13
Government sector activity...... ...................................
Prices, wages, and costs................................... ..... 15
TABLES:
Average monthly changes in employment.........................
Selected unemployment rates....................................
.....
Personal income.......................................
. .............
Auto sales. ............................... .......
Contracts and orders for plant and equipment................
Plant and equipment expenditures...............................
Recent plant and equipment survey performance..................
...
o
Business inventories.................... .... ..............
Inventory ratios.......................................... ..
Recent changes in consumer prices.............................
Recent changes in producer prices.............................
Hourly earnings index .......... .............................
Major collective bargaining settlements.......................
Productivity and costs.........................................

2
2
4
5
7
9
9
11
11
16
18
19
21
22

CHARTS:
8
New orders for nondefense capital goods......................
12
New private housing starts.....................................
Saving by State and local governments........................... 14
DOMESTIC FINANCIAL DEVELOPMENTS

III

Monetary aggregates and bank credit.............................
Business credit ................................ ......................
Short- and intermediate-term business borrowing........ ..........
Longer-term business credit...................................
Government securities markets.................................
...............
Mortgage markets.............................
Consumer credit,...............................................

3
8
8
10
14
16
18

TABLE OF CONTENTS

Continue

Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

TABLES:

Selected financial market quotations..........................

Monetary aggregates ...........................................

Commercial bank credit........................................

Security offerings...........................................
Interest rates and supply of funds for conventional

home mortgages at selected S&Ls...................
.........
Secondary home mortgage market activity........................
Consumer instalment credit.....................................

19
19
22

CHARTS:

Treasury yield curves........................................ 4
Stock prices and trading volume............................... 13
Savings and loan liquidity...........

......................... 18

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets......................................
Borrowing in international capital markets....................
U.S. international transactions................................

1
4
8

The trade deficit .................................
Exports............ ................
....
................................

...........

9
9

Nonpetroleum imports...........................................
Petroleum imports............................................
Foreign official assets in the United States. ................
Bank-reported private capital transactions.....................
Foreign private net purchases of U.S. corporate stocks..........
U.S. net purchases of foreign securities......................

10
10
11
11
12
13

OPEC banking and security holdings............................. 13
Foreign economic developments................................. 14
TABLES:
Borrowing in international capital markets......................
U.S. international transactions summary........................
U.S. merchandise trade.......................................

U.S. bank-reported private capital flows..........

......

5
8
9

Real GNP industrial production in major industrial countries... 16
Consumer and wholesale prices in major industrial countries.... 17
Trade and current-account balances of major
industrial countries................. ....................

II - T - 1

May 10,

1978

SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data
Period

Release
Date

Data

Per Cent Change from
Three
Preceding
Periods
Year
Earlier
earlier
Period
(At annual rate)

Apr.
Apr.
Apr.
Apr.
Apr.
Apr.

5-5-78
5-5-78
5-5-78
5.5-78
5-5-78
5-5-78

99.8

6.0
3.2
85.2
20.2
64.9

4.5
6.2
3.5
8.8
3.6
10.4

Average weekly hour (hr.)1/
Hourly earnings ($)1/
Manufacturing:
Average weekly hours (hr.)1
Unit labor cost (1967=100)

Apr.
Apr.

5-5-78
5-5-78

36.2
5.62

36.1
5.56

35.6
5.49

36.2
5.17

Apr.
Mar.

5-5-78
5-1-78

40.5
166.1

40.5
8.0

39.6
16.8

40.3
8.7

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

Mar.
Mar.
Mar.
Mar.
Mar.

4-14-78
4-14-78
4-14-78
4-14-78
4-14-78

141.0
146.8
156.7
81.2
139.5

17.3
25.0
14.7
15.0
14.8

3.7
2.7
7.0
8.6
2.0

Consumer prices (1967=100)
Food
Commodities except food
Services

Mar.
Mar.
Mar.
Mar.

4-28-78
4-28-78
4-28-78
4-28-78

190.2
204.3
170.9
204.7

10.2
16.1
7.1
10.0

9.0
15.5
5.9
8.8

Wholesale prices (1967=100)

Apr.
Apr.
Apr.

5-4-78
5-4-78
5-4-78

206.2
205.6
206.2

12.9
8.8
25.0

12.6
7.7
30.3

Mar.

4-18-78

1652.2

14.3

7.3

Civilian labor force
Unemployment rate (%)1/
Insured unemployment rate (%)1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing

Private nonfarm:

Industrial commodities
Farm products & foods & feeds
2
Personal income ($ bil.) /

10.2

(Not at annual rates)
5-3-78
5-3-78
5-3-78
5-3-78

69.0
21.9
17.5
4.5

3.3
6.2
-2.3
60.3

Feb.
Mar.
Feb.

5-9-78
5-3-78
5-9-78

1.43
1.52
1.33

1.47
1.53
1.36

1.45
1.52
1.33

1.45
1.55
1.31

Mar.

5-3-78

.603

.612

.624

.651

Mar.
Mar.

4-10-78
4-10-78

62.8
13.6

1.9
1.1

1.3
-3.9

Apr.
Apr.
Apr.

5-8-78
5-8-78
5-8-78

12.1
10.1
2.1

1.6
2.0
-. 3

21.7
25.8
5.0

Mar.
Mar.

4-18-78
5-1-78

2,074
134.1

31.8
-. 1

-5.9
-. 8

Mfrs. new orders dur. goods ($ bil .) Mar.
Capital goods industries
Mar.
Nondefense
Mar.
Defense
Mar.

16.4
27.9
19.6
75.5

Inventories to sales ratio:1
Manufacturing and trade, total
Manufacturing
Trade
Ratio:

Mfrs.' durable goods invenr
tories to unfilled orderst

Retai sales, total ($ bil.)
GAFD
Auto sales, total (mil.
Domestic models
Foreign models

units.)2J

Housing starts, private (thous.)V
Leading indicators (1967-100)
17
2/
3/

Actual data used in lieu of per cent changes for earlier periods.
At annual rate.
Excludes mail order houses.

8.4
8.1

4.2
8.6
-12.6
-. 8
3.2

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity has rebounded vigorously in

recent months.

Employment and industrial production rose markedly in April to levels
well above their respective first quarter averages.

In addition, con-

sumer goods demand has continued strong, and capital spending appears
to have picked up following disruptions earlier in

the year.

Housing

starts bounced back sharply in March but remained below the advanced
levels experienced in

late 1977.

However,

price increases have inten-

sified this year, especially in the food sector.
Employment and Production
Nonfarm payroll

employment rose by 465,000 in April (strike-

adjusted), about a third faster than the rapid pace of the first quarter.
Growth in

payrolls was further swelled by the return from strike of coal

workers.

Contract construction employment rose by about 175,000--the

second month of sharp increase--to a level nearly 400,000 above a year
earlier. Maufacturing employment accounted for 60,000 new jobs in
April--somewhat

less than the rapid increases in

As has been the case since September,
was concentrated in

tne two previous months.

the bulk of new factory hiring

durable goods industries.

The factory workweek was

unchanged at 40.5 hours in April.
Tne unemployment rate fell to a three-year
in April,
force.

as employment

The reduction in

low of 6.0 per cent

growth outpaced a substantial increase in

the labor

unemployent was concentrated among adult men.

Jobless rates for blue-collar occupations fell substantially in April,

II - 2

AVERAGE MONTHLY CHANGES IN EMPLOYMENT
(Thousands of jobs; based on seasonally adjusted data)

Dec.

June 77

Dec. 77

Feb. 78

Mar. 78
to

Mar. 78

Apr. 78

June 77

Dec. 77

Mar. 78

298

212

369

491

619
464
60
52
40
20
173
59
95
37
535
570

Nonfarm payroll employment 1/

305
83
85
53
30
47
57
70
25

Total employment 2/
Nonagricultural

1/
2/

239
43
46
44
-1
10
58
87
31

357
99
92
71
28
32
78
93
49

367
352

(Strike adjusted)
Manufacturing
(Strike adjusted)
Durable
Nondurable
Construction
Trade
Services and finance
State and local government

485
89
82
52
37
97
99
116
53

327
328

219
223

263
195

Survey of establishments.
Survey of households.

SELECTED UNEMPLOYMENT RATES
(Per cent; based on seasonally adjusted data)

QIV

1978
Mar.

6.9

6.6

6.2

6.0

5.2
7.0
18.1

5.0
7.0
17.6

4.8
6.8
16.7

4.6
5.9
16.9

4.5
5.8
17.3

4.2
5.8
16.9

5.2
6.9

5.0
6.6

4.9
6.5

4.7
6.2

4.0
5.7

4.0
5.6

3.9
5.4

6.7
12.9

6.3
12.8

6.1
13.6

5.8
13.3

5.4
12.3

5.3
12.4

5.2
11.8

QII

7.4

7.1

Men, 20 years and older
Women, 20 years and older
Teenagers

5.7
7.1
18.6

Total, 25 years and older
Fulltime workers

Total,

16 years and older

White
Black and other

1977
QIII

Apr.

II -

as the rate for construction industry workers declined to a fouryear low.
Reflecting the growth in employment, industrial production
is tentatively estimated to have increased around 1 per cent in
April.

Output of coal and steel mill products, which rebounded from

strike-affected March levels, accounted for about one-third of the
overall advance. Business equipment production evidently advanced in
April for the third successive month. In addition, renewed strength in
auto sales was reflected in a further pick-up in automotive assemblies,
which rose by over 5 per cent to a 9.8 million unit annual rate--a
pace somewhat greater than the average for 1977 as a whole.

Industrial

output has risen at a 5 per cent annual rate since last October.
The April production increase suggests that capacity utilization in
manufacturing rose by about 0.6 percentage point to 83.5 per cent--a
marginally higher rate than the recent peak in July 1977.

Income and Consumer Sector Activity
The surge in employment gains has been accompanied by robust
growth of total wages and salaries.

In March, personal income rose

at a 14 per cent annual rate and over the last two quarters grew at
an 11-1/2 per cent annual rate; over the same period, the annual rate
of rise in real terms was almost 5 per cent--well above trend rates
of increase.
The strong growth of income has been accompanied by a brisk
recovery of retail sales, which evidently continued in April.

Total

II - 4

PERSONAL INCOME
(Per cent change at a compound annual rate;
based on seasonally adjusted data)

Jan. 78
to
Feb. 78

Feb. 78
to
Mar. 781/

1977
QII QIII

QIV

13.1
12.0

11.4
11.9

8.9
10.2

14.5
12.6

8.7
9.5

5.6
9.1

14.3
15.2

12.7
14.9
17.9
4.9

13.0
15.1
17.5
5.0

7.5
7.7
6.3
7.1

12.7
12.5
12.4
13.2

11.5
12.9
16.0
5.9

10.1
11.5
19.5
4.6

18.0
21.9
26.3
2.3

14.5
11.6
1.0

8.5
-1.0
20.1

10.8
11.7
21.4

16.8
7.7
12.9

6.4
6.7
1.8

-1.5
.6
2.7

8.0
10.0
5.5

4.4
3.4

2.4
2.9

3.5
4.7

9.5
7.7

.8
1.6

-2.1
1.4

4.0
5.0

4.1

3.9

2.3

7.8

3.4

2.4

7.7

1978
QI

Current dollars
Total personal income
Nonagricultural income
Wage and salary
disbursements
Private
Manufacturing
Government
Nonwage income
Transfer payments
Dividends
Constant dollars 2 /
Total personal income
Nonagricultural income
Wage and salary
disbursements

1/ Per cent change at annual rate, not compounded.
2/ Deflated by CPI, seasonally adjusted.
Beginning January 1978,
by CPI/U, seasonally adjusted.

deflated

II - 5

automobile sales were at a 12.1 million unit annual rate in April-up more than 180,000 units from the March pace. This was almost
as strong in March 1977--the highest
expansion.

selling rate of the current

Sales of domestic cars were at a 10.1 million unit rate

in April with gains fairly evenly distributed by size class.

While

sales of imports continued at a high level in April, their market
share declined slightly from the first quarter average.

AUTO SALES
(Millions of units; seasonally adjusted)
Annual Rates
1978
Feb.
Mar.

Apr.

10.8

10.5

12.0

12.1

2.0

1.9

2.1

8.8

8.5

9.9

1977
QIV

10.8

Imports
Domestic

Total

2.1
10.1

Retail sales excluding autos and mainly nonconsumption items
are tentatively estimated to have risen further in April, the third
consecutive monthly gain following the sharp decline in January. Large
gains were apparently registered among sellers of durable goods and
nondurable outlets are estimated to have had slightly higher sales during
April.
Survey data indicate mixed trends in consumer attitudes.

The

Michigan Survey Research Center index of sentiment fell sharply in March,
while the Conference Board measure of confidence edged back up in April
after a sharp decline in March.

However, Michigan reported an increase

in favorable appraisals of market conditions for automobiles, homes,
and large appliances.

II - 6

Business Investment
Incoming data suggest that capital spending should increase
sharply in the current quarter, following weather-induced disruptions
of commercial and industrial construction spending early in the year.
The value of private nonresidential buildings put-in-place jumped 10 per
cent in March after declining earlier, and shipments of nondefense
capital goods have registered substantial advances in recent months.
Commitments data, which are indicative of future outlays
for equipment spending and building construction, showed a sizable
gain in the first quarter.

Nondefense capital goods orders rose

3.4 per cent in real terms--about the same as the average quarterly
gain realized in 1977 (Chart 1), while construction contracts were
particularly strong as they more than recouped the sizable decline
in the fourth quarter.
The McGraw-Hill capital spending survey--conducted in April-showed businesses planning a 17 per cent increase for 1978.

additional reading by the less comprehensive nerrill Lynch survey
showed a comparable upward revision to spending plans.

This is the

second upward revision in spending plans shown by the McGraw-Hill
survey since the initial reading for 1978 taken last October. However,
in recent years this spring survey has overstated actual spending,
and thus it is likely that the actual gain will fall short of these
intentions. (See lower panel of the table on plant and equipment
expenditures.)

- 7

CONTRACTS AND ORDERS FOR PLANT AND EQUIPMENT 1/
(Per cent change from preceding comparable period, seasonally adjusted)

1977
QIII
QIV

1978
Feb.

Mar.

Mar. 77
to
Mar. 78

Current dollars
Total
Nondefense capital goods orders
/
Construction contracts 2

-. 3

4.1

11.6

11.5

-8.5

24.8

-1.1

10.3

5.5

8.3

-2.3

19.6

24.8

-31.4

61.1

3.2

-22.0

48.4

-2.3

2.1

9.2

10.9

-8.0

16.3

-3.2

8.2

3.4

7.8

-1.8

11.9

24.4

-31.6

48.2

1972 dollars
Total
Nondefense capital goods orders
2
Construction contracts /

1.8

-24.2

45.3

The Commerce Department creates this series by adding new orders for nondefense capital goods to the seasonally adjusted sum of new contracts awarded
for commercial and industrial buildings and for private nonbuilding projects
pipelines, etc.).
(e.g., electrical utilities,
FRB staff estimate. Derived by subtracting new orders for nondefense capital
goods from the published total for contracts and orders.

- 8

Chart

NEW ORDERS FOR NONDEFENSE CAPITAL GOODS
Ratio Scale
Billions of 1972 dollars

i 13
- 12

1974

1974
Note:

1975

1976

1977

Dotted line represents 3-month moving average.

1978

PLANT AND EQUIPMENT EXPENDITURES
(Per cent change from preceding year)

1/
Commerce1/
Feb.
Survey

Anticipated for 1978
McGraw-Hill
2/
Oct.
SpecialApril
Survey
Check-up
Survey

10.9

11.1

14.1

17.3

Manufacturing

11.7

10.0

15.2

18.9

Durables

12.0

14.2

17.4

22.9

Nondurables

11.5

8.2

13.3

15.4

Nonmanufacturing

10.4

11.3

13.2

16.0

All Business

1/
2/

Results are adjusted for systematic bias. Without this adjustment
the February Commerce survey showed a 13.9 per cent increase.
Conducted in late January and early February.

RECENT PLANT AND EQUIPMENT SURVEY PERFORMANCE
(Per cent change from preceding year)

Year

McGraw-Hill
April Survey

Commerce
May Survey

Actual

1972

14.5

10.3

8.9

1973

19.3

13.2

12.8

1974

19.5

12.3

12.7

1975

5.5

1.6

1976

12.9

7.3

6.8

1977

17.5

12.3

12.7

II - 10

The book value of manufacturers' inventories rose at an annual
rate of $16.6 billion in March--about the same
first quarter as a whole.

as in February and the

While this rate of accumulation represents a

sharp snapback from the much-reduced fourth quarter pace, inventory
policies apparently still remained quite conservative.

The manufacturing

inventory-sales ratio in March was significantly below the historically
low levels of 1977.
Thus far this year most of the pick-up in manufacturing accumulation has been by producers of durable goods.

In harcn inventory invest-

ment in this sector was at a $12.6 billion annual rate --down a bit from
February but almost double the average 1977 pace.

Most of the increase in

durable goods' stocks was reported in the machinery and transportation
equipment sectors.

Overall accumulation was held down in March by further

run-offs in primary metals and in petroleum and coal products where the
effects of the coal strike apparently were still being felt.

Wholesale

trade inventories rose at about $17-1/2 billion annual rate in March,
close to the upward-revised February pace.
Residential Construction
Total private housing starts rebounded 32 per cent in March
to a 2.1 million unit annual rate, following two months in which starts
were at depressed rates largely because of extreme weather conditions
(Chart 2).

For the first quarter, total starts were at a 1.73 million

unit rate--down almost a fifth from the advanced fourth quarter average.
While both single-family and multifamily starts sustained sharp declines,

II -

BUSINESS INVENTORIES
(Change at annual rates in seasonally
adjusted book value; billions of dollars)

1978
Feb.1/Mar1/

1976
QIV
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail
Auto

QII

1977
QIII

QIV

14.8
9.8
9.6
.3

33.6
10.6
6.4
4.2

30.1
15.7
7.8
7.9

27.2
10.2
7.7
2.4

13.1
2.8
3.8
-1.0

n.a.
16.2
12.5
3.7

34.1
17.0
14.8
2.2

4.9
3.5
1.5
1.3

23.0
12.0
11.1
2.2

14.3
2.6
11.8
2.4

17.1
4.7
12.4
1.3

10.3
7.5
2.8
1.8

n.a.
15.3
n.a.
n.a.

17.1 n.a.
16.4 17.6
.7 n.a.
-2.1 n.a.

Feb. l/Mar.2/

n.a.
16.6
12.6
4.0

1/ Revised.
2/ Preliminary.
INVENTORY RATIOS

1976
QIV

1977
QI

QII

QIII

1978
QIV

Inventory to sales:
Manufacturing and trade 1.50

1.47

1.49

1.44

n.a.

1.43

n.a.

Manufacturing
Durable
Nondurable

1.67
2.07
1.23

1.60
1.97
1.20

1.60
1.96
1.22

1.61
1.96
1.22

1.56
1.90
1.18

1.56
1.90
1.17

1.53
1.86
1.16

1.52
1.84
1.15

Trade, total
Wholesale
Retail

1.34
1.24
1.42

1.34
1.24
1.43

1.34
1.21
1.45

1.37
1.24
1.48

1.33
1.23
1.43

n.a.
1.25
n.a.

1.33
1.22
1.44

n.a.
1.22
n.a.

1/ Revised.
2/ Preliminary.

- 12

Chart 2

NEW PRIVATE HOUSING STARTS
Annual rate, millions of units

iii ll illl

ll l

ii lll

2 .4

TOTAL

2.0

1.6

1 .2
SINGLE-FAMILY

.8
MULTI-FAMILY

1974

1975

,IIi ,t I,,,iiii,,,,ii
, ii

1976

1977

1978

- 13

the more modest drop in
to increased Federal

the multifamily sector is

partially attributable

involvement via the Section 3 rental subsidy program.

Sales of new and existing single-family

homes have

slackened noticeably early in 1978, and prices of such homes continued
to rise rapidly. In the multifamily sector, rents increased at an annual
rate of almost 7 per cent,

and rental vacancy rates edged down to their

lowest level in 20 years.
Government Sector Activity
In the State and local sector spending continues to evidence
moderate growth.

The value of construction put-in-place increased by

nearly 5 per cent in

March, but still

fourth quarter of 1977.
April.

remained below the level of the

Employment in

This increase was somewhat

this sector grew by 35,000 in

lower than tne average monthly gains

during the first quarter, probably reflecting the fact that the Public
Service
late in

Employment program reached its authorized

level of over 700,000

February.
Fiscal conservatism

has continued into early 197.

the State and local sector apparently
While growth

revenues was small in

the first quarter, it was somewhat above the advance in total expenditures, and this sector registered another record surplus.

The saving

generated by this sector's surpluses (including both operating and
social insurance funds)

now estimated to have totaled $31 billion

over the past four quarters--up 40 per cent from the total in
preceding four quarters.

(Chart 3.)

the

II -

Chart 3

SAVING BY STATE AND LOCAL GOVERNMENTS
Billions of dollars

I 1 F1

NIA SURPLUSES

S24

S-16

-1-I
1975
1976
NOTE:

.I_
1977

t\
1978

Total NIA surplus reflects balances of both operational and
social insurance funds. 1978:QI is staff estimate.

II -

Federal outlays grew at a reduced rate early this year.
While spending on a unified budget basis picked up sharply in
March, preliminary Treasury data for April now suggest that Federal
outlays may have fallen short of agency expectations.

Unified receipts

in April also were lower than expected with the shortfall occurring
primarily in individual nonwithheld collections.

The IRS indicates

that the number of returns processed to date is about 5 per
cent below last year.

Since processing should be completed quite soon, the

shortfall in receipts is expected to made up this month.
Prices, Wages, and Costs
Price increases continue to be considerably larger this year
than in late 1977.

The fixed-weighted price index for gross domestic

business product--a broadly based price measure--rose at a 6.6 per cent
annual rate in the first quarter; this compares with a 5.2 per cent rate
in the second half of 1977.
Sharp increases in food prices continue to be a primary factor
in the resurgence of inflation.

The iiarch rise in consumer food

prices reflected marked increases in a wide variety of meat items as
well as a rapid rise in restaurant prices.

Producer prices of consumer

foods rose 1.9 per cent in April--continuing the exceptional rate of
increase in the first quarter.

In addition to another round of wholesale

meat increases, prices for fruits and vegetables also turned up sharply
in April.

RECENT CHANGES IN CONSUMER PRICES
(Per cent change at a compound annual rate; based
on seasonally adjusted data)1/

Relative
Importance
Dec. 772/
All items
Food
Commodities (nonfood)
Services
Memoranda:
All items less food
and energy 3/
Gas and electricity
Gasoline and fuel oil 4/
1/
2/
3/
4/

1977
QII
QIII

1 9 7 82

QIV

March

100.0
17.7
41.6
40.7

10.0
15.3
7.4
9.8

7.8
11.5
4.2
9.4

4.5
1.9
2.7
7.6

4.9
4.2
5.4
4.9

9.3
16.4
6.1
9.1

10.2
16.1
7.1
10.0

73.7
3.4
5.2

8.5
12.5
12.5

6.9
11.9
9.9

5.1
12.0
.8

5.3
-. 9
2.0

8.0
12.2
.2

7.9
16.2
-. 6

Changes are from final month of preceding period to final month of
period indicated. Monthly changes are not compounded.
Based on new index for all urban consumers.
Energy items excluded: gasoline and motor oil, fuel and coal, gas
and electricity.
Includes motor oil, coal, and bottled gas.

- 17

While rising less rapidly than foods, consumer nonfood
prices also continued to increase at a relatively rapid pace.

Exclusive

of foods, consumer retail prices rose by an annual rate of 8.4 per
cent in March; large increases in apparel prices and in costs of home
financing contributed to this rise.

For the first quarter as a whole,

this index rose at about an 8 per cent annual rate as compared to
a 5.1 per cent rate in the second half of 1977.
Producer prices for finished non-food goods also rose substantially in April.

Much of this increase was in prices of consumer

finished goods, which were up 1.3 per cent in part as a result of
higher automobile prices and a very large increase in jewelry prices.
Prices of capital equipment (producers' finished goods) rose 0.6 per
cent in April--about the same as the average since last October.
Wages also have increased at rapid rates thus far in 1978.
The average hourly earnings index rose at a 9.4 per cent annual rate
in April, close to the first quarter rate of 9.8 per cent.
so far in

The rise

1978, which was importantly affected by the minimum wage

increase, was much higher than the average pace of 7.7 per cent
during 1977. During the first three months of 1978, first-year wage
rate adjustments negotiated in major collective bargaining settlements
averaged 9.9 per cent. However, the increase was significantly affected
by the substantial first-year increase provided by the bituminous coal
agreement.

When the coal settlement is excluded from the first quarter

data, first-year adjustments were roughly comparable to the 7.8 per cent
average increase in 1977.

RECENT CHANGES IN PRODUCER PRICES
(Per cent change at a compound annual rate; based
on seasonally adjusted data)l/

Relative
Importance
Dec. 1977

1977
QII
QIII

1978
QIV

Apr.
15.2
22.6
16.2
6.8

Finished goods
Consumer foods
Consumer nonfoods
Capital equipment 4/

41.2
10.3
18.7
12.2

10.0
17.9
9.0
5.0

6.4
4.3
7.8
6.8

2.9
-2.3
4.0
6.0

7.2
7.4
4.7
10.9

9.4
21.0
5.1
6.9

Intermediate nonfood
materials 2/

45.5

8.9

5.5

7.1

4.2

9.0

4.6

25.6

-8.1

-5.3

20.1

15.7

10.9

All Commodities
100.0
Farm and food products 21.0
Industrial commodities 79.0
Industrial commodities
ex. fuels and power
67.7

11.1
19.3
8.8

4.0
-3.1
6.4

2.1
-14.8
6.7

6.7
14.5
5.2

12.0
28.8
7.8

12.3
25.0
8.8

6.7

4.5

7.0

5.5

8.1

Crude nonfood
materials 3/

1/
2/
3/
4/

6.2

10.0

Changes are from final month of preceding period to final month of period
indicated.
Monthly changes are not compounded.
Excludes intermediate materials for food manufacturing and manufactured
animal feeds.
Excludes crude foodstuffs and feedstuffs.
Formerly called producer goods.

II -

HOURLY EARNINGS INDEX1 /
(Per cent change from preceding comparable period
at a compound annual rate; based on seasonally
adjusted data)

1978
QI
Private nonfarm
Construction
Manufacturing
Trade
Transportation and public
utilities
Services

1/
2/

QII

1977
QIII

8.1

6.7

7.7

8.3

9.8

8.3

9.4

5.7
7.9
9.0

4.5
7.8
6.9

4.0
9.2
6.5

5.6
7.9
8.0

7.3
8.7
12.7

9.1
6.9
8.9

2.1
6.4
10.6

6.0
10.3

7.3
5.7

8.0
8.4

10.8
8.9

9.5
11.3

13.0
6.7

9.3
13.0

QIV

Mar. 2

Apr. 2

Excludes the effect of interindustry shifts in employment and fluctuations in overtime pay in manufacturing.
Monthly change at an annual rate, not compounded.

II - 20

Hourly compensation rose sharply during the first quarter,
reflecting legislated increases in employer Social Security and unemployment insurance taxes in addition to the minimum wage increase.

At the

same time, productivity in the private nonfarm business sector fell more
than 3 per cent at an annual rate, as total hours of paid employment
increased further despite weather and strike-related declines in output.
As a result, in the first quarter unit labor costs increased 17 per cent
in the nonfarm business sector.

In the second quarter, with output

rebounding and with no additional government-mandated pressures on compensation, unit labor costs should return to a more moderate rate of increase.

- 21

MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Per cent change)

Average Adjustment
1975 1976 1977 1978 QI
Wage-rate settlements (1,000 or more workers)
First year adjustment
Average over life of contract 1/

10.2
7.8

8.4
6.4

7.8
5.8

9.9
7.3

Wage and benefit settlements (5,000 or more
workers)
First year adjustment
Average over life of contract 1/

11.4
8.1

8.5
6.6

9.6
6.2

14.6
8.5

8.1
3.2.
3.2
1.6

8.0
3.0
3.2
1.7

1.2
.4
.6
.2

Effective wage-rate adjustment (1,000 or
more workers)
Current settlement
Prior settlement
Escalator provision

Excluding cost-of-living adjustments.

8.7
2.8
3.7
2.2

II -

PRODUCTIVITY AND COSTS
(Per cent change from preceding period at a compound annual rate;
based on seasonally adjusted data)

1977
QII
QIII

QIV

1978
QI

1977 QI
to
1978 QI

Output per hour
Total private business
Nonfarm business
Manufacturing
Durable
Nondurable

5.7
4.7
.1
-1.5
2.5

-1.0
.8
3.8
6.1
.5

5.3
3.8
5.2
3.5
7.7

2.3
2.3
-.9
-1.7

8.4
7.5
6.9
5.7
7.9

7.7
8.2
8.0
8.3
7.3

14.0

2.9
3.5
1.6
2.1
.2

5.3

18.3

8.4

5.8
9.0
10.0
7.0

17.0
18.8
20.9
15.7

8.2
8.2
8.8
6.8

-3.6

-3.3
-3.3

-5.7
.4

.7
.9
1.1
.5
2.2

Compensation per hour
Total private business
Nonfarm business
Manufacturing
Durable
Nondurable

11.3
11.3
12.8
13.2
11.8

13.2
14.9
14.0

16.2

9.1
9.1
9.4
9.4
9.1

Unit labor costs
Total private business
Nonfarm business
Manufactur ing
Durable
Nondurable

5.3
6.3
12.7
15.0

9.0

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest data

Indicator

Period

April
April

10.5
3.0

4.3
3.4

6.4
5.0
7.1
8.2
9.9
9.0
21.8

April
April
April
April
April

344.9
827.5
1409.0
482.6
83.4

16.9
10.7
9.7
6.2
1.4

6.5
6.8
7.2
7.1
7.1

April
April

581.5
909.3

8.3
21.5

7.7
13.7

Market yields and stock prices
Federal funds
wk. endg. 5/3/78
Treasury bill (90 day)
"
5/3/78
Commercial paper (90-119 day)
"
5/3/78
"

Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)
Dividend price ratio (common
stocks)
wk endg.
NYSE index (12/31/65=50) end of day

Indicator

5/5/78

7.27
6.38
6.91
-

ago

Per cent at annual rates

Latest data
Per cent
or index
Period

Indicator

New utility issue Aaa

36.99
36.43

months ago

ago

Level

$ billions
Monetary and credit aggregates 1/
Total reserves
Nonborrowed reserves
Money supply
M1
M2
M3
Time and savings deposits (less CDs)
CDs2/
Thrift deposits (S&Ls + MSBs
+ Credit Unions)
Bank credit (end of month)

Net change from:
Year
Three

Month

12.4
10.9

Net change from:
Three
Month
months
Year
ago
ago
ago

.42
-.01
.15

.48
-.04
.15

2.12
1.73
2.08
--

5/4/78
5/1/78

5.98
9.52

.22
.08

.35
.25

.22
.82

5/3/78
5/8/78

5.63
53.82

.05
3.41

.21
3.47

1.12
-.33

Net Change or Gross Offerings
Year to Date
Latest Year
Period Data
ago
1978
1977
$ billions

Credit demands
Business loans at commercial banks 1/
Apr.
Consumer instalment credit outstanding1/ 1/Mar.
Mortgage debt outstanding (major holders)1 Feb.
Corporate bonds (public offerings)
Apr.
Municipal long-term bonds (gross offerings)pr.
Federally sponsored agcy. (net borrowing) Apr.
U.S. Treasury (net cash borrowing)
May
1/ Seasonally adjusted.
2/ $ billions, not at annual rates.
e
Estimated.

3.5
4.1
7.0
2.0e
3.5e

1.8

2.4
3.0
5.7
2.0
3.4
1.5
-2.9

11.9
9.2
14.5
6.6e
13.8e
6.3
18.9

7.6
7.0
11.6
8.5
14.3
2.3
16.0

III - 1

DOMESTIC FINANCIAL DEVELOPMENTS

The volume of funds raised by businesses and consumers in
April apparently was not quite as large as in March.

Short- and

intermediate-term business borrowing changed little, but gross
offerings of bonds and equities by nonfinancial corporations decreased somewhat.

In the household sector, home mortgage borrowing

in April apparently fell somewhat below the previous month's level,
and consumer credit growth probably moderated from the advanced March
pace.

Funds raised by public sectors showed largely seasonal changes.

After borrowing heavily throughout most of the first quarter, the
Treasury reduced its outstanding debt substantially in April, reflecting a large buildup in its cash balance associated with tax receipts.
At the same time, State and local borrowing picked up markedly, because
of a bulge in short-term issues.
M-1 expanded sharply in April, and the broader monetary
aggregates also grew at a rapid pace--despite continued relatively
sluggish growth of consumer-type time and savings deposits at
commercial banks and nonbank thrift institutions.

Banks reduced

their use of managed liabilities in April, while S&Ls continued
to borrow heavily to help meet strong demands for mortgage credit.
The Federal funds rate has moved up to about 7-1/4 per cent
since the April FOMC

eeting, after remaining around 6-3/4 per cent

for more than three months.

With the increase in the funds rate and

apparent revision of market expectations in response to incoming data

III - 2
SELECTED FINANCIAL MARKET QUOTATIONS
(per cent)

Short-term rates
Federal funds 1/

6.65

4.47

6.65

6.78

7.27

7.323/

+.67

+.54

Treasury bills
3-month
6-month
1-year

6.27
6.51
6.62

4.41
4.55
4.67

6.13
6.44
6.53

6.15
6.58
6.83

6.46
6.93
7.16

6.45
6.98
7.23

+.32
+.54
+.70

+.30
+.40
+.40

Commercial paper
1-month
3-month

6.58
6.66

4.53
4.63

6.60
6.68

6.63
6.79

6.75
6.94

6.81
6.96

+.21
+.28

+.18
+.17

6.62
6.84

4.60
4.65

6.70
7.00

6.90
7.25

7.30
7.70

7.25
7.75

+.55
+.75

+.35
+.50

7.75

6.25

7.75

8.00

8.25

+.50

+.25

8.36
8.48

7.90
7.95

8.48

8.88
8.84

8.92
8.91

8.90p

+.42

+.06

5.93

5.45

5.66

5.74

5.89

5.98

+.32

+.24

7.39
7.66
7.96

5.74
6.48
7.20

7.34
7.66
7.98

7.73
7.99
8.27

7.97
8.15
8.38

8.06
8.24
8.44

+.72
+.58

+.33
+.25
+.17

Large negotiable CDs
3-month
6-month
Bank prime rate
Intermediate- and longterm rates
Corporate
New AAA 5/
Recently offered 6/

Municipal
(Bond Buyer)

+.06

U.S. Treasury
(constant maturity)
3-year
7-year
20-year

8/
Stock prices
Dow-Jones Industrial
N.Y.S.E. Composite
AMEX
Keefe Bank Stock 6/
1/
2/
3/
4/
5/
6/
7/
8/

8/
Low High30

807.74
50.13
110.37
530

985.74
56.98
126.86
633

Dec.

FOMC
Apr.18

831.17
52.50
127.89
588

803.27
52.16
134.66
614

Daily average for statement week, except where noted.
One-day quotes except as noted.
Average for first 6 days of statement week ending May 10.
Highest quoted new issues.
1978 figures are averages for preceding week.
1978 figures are one-day quotes for preceding Friday.
1978 figures are one-day quotes for preceding Thursday.
Calendar week averages.

May
2
840.18
54.18
137.70
647

May
9
822.07
53.68
140.18
n.a.

+.46

Dec.
30

Apr.
FOMC

-9.10
+1.18
+12.29
n.a.

+18.80
+1.52
+5.52
n.a.

III-3

indicating further rapid rises in prices of goods and services,
a vigorous pickup in economic activity, and sharp acceleration in the
growth of the monetary aggregates, other market interest rates have
also risen noticeably during the intermeeting period.
tne increases generally have been
the funds rate.

Nevertheless,

moderate, compared to the rise in

Lost short-term rates have moved up 20 to 40 basis

points, while yields on longer term securities generally have advanced 5 to 35 basis points.

In addition, the bank prime rate has

been raised to 8-1/4 per cent from 8 per cent.
Prior to the April FOMC meeting, intermediate- and longterm rates apparently had already incorporated some expected
tightening in System policy.

Scarcity of Treasury bills available

to domestic investors, prevalent for several months, also helped to
restrain rate increases at the very short end of the maturity range.
Due partly to the relative scarcity of short-term bills, the Treasury
yield curve for issues maturing within one or two years has become
steeper since the end of 1977; the yield curve for longer maturities
has flattened somewhat (Chart 1).

Monetary Aggregates and Bank Credit
Growth in M-1 surged during April to a 17 per cent annual
rate from a 3-1/2 per cent pace in iiarch.

Much of this strength

evidently reflected larger transactions needs associated with the
rebound in economic activity, although there were also some temporary
tax-related factors.

Nonwithheld individual Federal income tax

liabilities were larger this year than in other recent years, and
the processing of returns by the IS

has lagged behind the usual

Chart 1
TREASURY YIELD CURVES

Yield
8.5

----------

5/9/78
4/18/7

- * --

8.0

12/30/77

7.5

TREASURY BILL YIELD CURVESYield
7.0

6.5

5/9/78

7.75

7.25

4/18/78

12/30/77

6.75

6.0

j
Months

6.25

5.5

Maturity

*/ Coupon-equivalent basis.

Year

III-5

schedule; as a result an exceptionally large volume of unprocessed
tax payments still remained in individual's demand balances during
the last half of April.

In addition, disbursements of refunds of

withheld taxes surpassed normal seasonal flows in April.
Bolstered by the strong M-1 expansion, M-2 grew by 11 per
cent in April, double the March pace.

While time and savings deposits

(other than large CDs at weekly reporting banks) increased at a 6 per
cent annual rate, similar to March, their composition changed significantly.

Growth of the large time deposit component of M-2 fell

sharply from the March pace.

In contrast, there was an increase in

the growth of individual's savings deposits and a more moderate runoff
of other savings accounts.

Small time deposits increased substantially,

as in March.
The pickup in savings deposit growth at banks in April
occurred despite further increases in market yields and continued
investor interest in alternative short-term instruments--as evidenced
by large noncompetitive tenders at weekly Treasury bill auctions and
continued rapid growth of money market mutual funds.

The strengthen-

ing of these deposit flows was likely related to end-of-quarter interest
crediting and the relatively large tax refunds in April. 1/
M-3 expanded at a somewhat slower pace than the narrower
aggregates in April, as deposit growth at S&Ls and mutual savings
banks continued around the relatively weak pace of recent months.

1/ On a seasonally adjusted basis, savings deposits advanced
in early April, but registered net declines later in the month. A
similar pattern occurred in January following interest crediting,
suggesting that a change in seasonal patterns may be developing.

III - 6

MONETARY AGGREGATES
1/

(Seasonally adjusted)19 7 7
QIII
QIV

1 9 7 8
Mar.

12 months
ending
Apr. 78e

Apr.e

Net changes at annual
Major monetary aggregates
1. M1 (currency plus
demand deposits)

8.1

7.2

5.0

3.5

9.9

8.0

6.4

5.3

11.9

10.6

7.4

Bank time & savings deposits
4. Total

10.3'

13.0

5. Other than large negotiable
CDs at weekly reporting banks

11.2

ercn
er

10.7

3. M 3 (M2 + all deposits at
thrift institutions)

rae

16.9

2. M2 (M1 + time & savings
deposits at CBs other
than large CDs)

rates

.13.1

11.4

8.3

8.5

7.5

6.5

6.2

9.0

12.2

7.3

5.4

2.2

0.5

3.3T

4.4

9.6

7.0

3.1

1.2

4.1

5.7

-8.0

-16.2

-8.2

-11.0

12.0

12.2

2.7

11.0

11.6

32.4

29.9

14.3

3.8

27.9

15.0

14.4

8.8

7.7

8.3

12.4

16.2

15.4

9.0

8.0

8.2

13.2

9.5

9.9

5.2

3.6

4.5

Individuals

Other

-17.1

-17.8

14.6

Time deposits
Small time4/

8.3

11. Large time4/

10.

9.7

Savings deposits

6.2

28.1

11.4

1.0

8.8

13.1
6.2

5/
Deposits at nonbank thrift
5/
institutions-

Deposits at nonbank thrift
12. Total
13.

Savings and loans

14.

Mutual savings banks

15.

Credit unions

20.1

20.0

18.2

20.0

14.7

7.8
19.9

Average monthly changes, $ billions
MEMORANDA:
16. Total US Govt deposits

0.2

-1.2

0.4

0.3

-0.2

17. Total large time deposits-

1.7

6.2

4.5

3.7

1.7

3.5

18. Nondeposit sources of funds

1.4

1.9

1.1

-3.5

1.1

1/ Quarterly growth rates are computed on a
fj Savings deposits held by individuals and
3/ Savings deposits of business, government
4/ Small time deposits are time deposits in

quarterly average basis.
nonprofit organizations.
and others, not seasonally adjusted.
denominations less than $100,000.

Large time deposits are time deposits in denominations of $100,000 and above
excluding negotiable CDs at weekly reporting banks.

5/ Growth rates computed from monthly levels based on averages of current and
preceding end-of-month data.
6/ All large time certificates, negotiable and nonnegotiable, at all CBs.

7/ Nondeposit borrowings of commercial banks from nonbank sources include Federal
funds purchased and security RPs plus other liabilities for borrowed money,
including borrowings from the Federal Reserve, Etro-dollar borrowings and loans
sold, less interbank loans.
a--estimated

cent

III-7

Data through March indicate that passbook accounts have been the
weakest component of deposits at S&Ls, while time accounts have held
up relatively well.
At the beginning of April, market interest rates were above
all deposit rate ceilings at nonbank thrifts, with the exception of
those on accounts maturing in 6 years or more.

By early hay, however,

yields on comparable maturity Treasury securities were about equal
to the maximum effective yields payable on 6-year deposits, and
market yields were more than 80 basis points above effective ceilings
on all time accounts maturing in less than 4 years.
Growth of demand, small time, and savings deposits facilitated a 21-1/2 per cent increase in commercial bank loans and investments in April.

Meanwhile, banks reduced their use of managed

liabilities, even though member bank borrowing from the Federal
Reserve spurted in the latter part of the month as the differential
between the discount rate and short-term market rates widened.

Large

negotiable Cus accounted for a far smaller volume of funds raised
than in any of the previous six months, and bank reliance on other
large time deposits and nondeposit sources of funds also moderated.
Thus, the recent sharp rise in the ratio of managed to total liabilities
appears to have halted, at least temporarily, in April.

In addition,

very large acquisitions of short-term securities and security loans
greatly enhanced liquid asset holdings, thereby reversing the recent
deterioration in commercial bank liquidity ratios.

These portfolio

acquisitions may signify only a transient liquidity shift, however,

III-8

I/
since they reflected in part unusual government financing as well as
a bulge in credit associated with the surge in the stock market.
Primarily associated with the sharp increase in security
loans, growth in total bank loans accelerated to a 21.6 per cent
annual rate in April, substantially above the strong March pace.

The

real estate and business loan components expanded at rates close to
those registered in March, and indications are that consumer loans also
grew appreciably.

Business Credit
External financing requirements of nonfinancial corporations
apparently remained large in April, following a substantial widening
of the financing gap in the first quarter.

With long-term interest

rates at their hignest levels since late 1975 and stock values still
quite low--despite a strong rally late in the month--reliance on bond
and equity financing by nonfinancial corporations remained around the
reduced first quarter pace, while their borrowing in markets for shortand intermediate-term credit remained large.

Borrowing by financial

corporations in both bond and commercial paper markets continued large
during the month.
Short- and intermediate-term business borrowing.

In April,

growth of bank loans (net of bankers' acceptances) to nonfinancial

1/ For example, large banks, principally in New York City, acquired
a large volume of New York State tax warrants and part of the $6 billion
in cash management notes issued by the Treasury early in the month to
mature on April 27.

III - 9

COMMERCIAL BANK CREDIT
(Per cent changes at annual rates, based on seasonally adjusted data)
1 9 7 7
QIII

2/
Total loans & investments2/

8.6

1 9 7 8
QIV

8.3

March

April

12 mos
ending
April

10.9

10.5

9.1

21.5

-2.9

-5.8

4.4

-5.6

21.2

1.9

-19.4

-26.4

12.8

-12.3

23.6

-4.7

-0.5

-1.5

19.6

6.3

Investments
Treasury securities
Other securities

13.7

14.3

13.0

15.1

21.6

14.9

Business loans

10.2

16.0

16.4

21.7

19.7

15.0

Security loans

4.3

19.3

-51.0

-53.6

231.6

11.5

Real estate loans

16.6

15.0

14.7

17.5

15.9

16.8

Consumer loans

18.4

16.2

12.9

18.0

15.8

-2.5

108.3

38.2

12.5

Total loans

n.a.

n.a,

MEMORANDA:
1.

Commercial paper issued
by nonfinancial firms/
Business loans at banks
net of bank holdings of
bankers acceptances

8.9

14.9

19.8

22.7

23.5

15.9

Sum of memo items 1 & 2

8.6

14.9

18.1

28.2

24.5

15.6

9.4

18.0

17.1

24.7

4. Memo item 3 plus
business loans from
finance companies
1/
2/

n.a.

Last-Wednesday-of-month series except for June and December, which are
adjusted to the last business day of the month.
Loans include outstanding accounts of loans reported as sold outright by
banks to their own foreign branches, nonconsolidated nonbank affiliates
of the bank holding companies (if not a bank), and nonconsolidated nonbank subsidiaries of holding companies.
Measured from end of month.

n.a.--not available

III -10
business was above the rapid rates recorded during the previous two
quarters and slightly exceeded even the exceptional March pace. Noteworthy expansion in business loans extended by the largest banks occurred
in the fabricated metals, services, communications, and wholesale and
retail trade industries. As in the first quarter, business lending expanded
much more rapidly at small banks than at large ones, and large New York
banks continued to experience sluggish growth.
Total commercial paper outstanding rose $2.7 billion (seasonally adjusted) during April, the largest increase since June 1977.
Nonbank financial paper contributed the major portion of the growth,
primarily reflecting increased issuance of paper by all types of
finance companies to finaance short-term consumer- and businessrelated receivables.

Nonfinancial commercial paper rose by $500 million

in April--less than in March, but nonetheless a relatively large
increase.

The sum of bank loans to businesses and nonfinancial com-

mercial paper grew at a 24-1/2 per cent annual rate, somewhat below
the rapid March pace.
Longer-term business credit.

Gross public offerings of

corporate bonds increased slightly to $2.0 billion in April, while
private placements are estimated to have remained around the reduced
first quarter pace.

Public bond offerings by nonfinancial corporations

remained moderate, but financial concerns--primarily finance companies
and S&Ls--continued to raise a large volume of funds through intermediate-term issues.

Bond offerings by financial corporations

have accounted for more than two-fifths of total publicly offered
corporate bonds in the first four months of 1978, compared with onefifth, on average, in previous five years.

III -

SECURITY OFFERINGS
(Monthly totals or monthly averages, in millions of dollars)

1977
Year

Mar.3/

1978
Apr.e/ Mayf/ Junef/

QIV
QI
Gross offerings
4,518
5,361
3,088

3,700

3,300

3,200

3,800

Publicly offered bonds
By quality 1/
Aaa and Aa
Less than Aa 2/
By type of borrower
Utility
Industrial 3/
Financial

2,016

1,955

1,527

1,900

2,000

1,700

1,800

1,089
927

1,010
945

755
772

650
1,250

1,125
875

692
700
624

660
490
805

472
514
541

675
525
700

425
675
900

Privately placed bonds

1,501

2,000

933

1,000

800

1,200

Stocks

1,001

1,406

628

800

500

700

800

728

1,130

554

Corporate securities--total

Foreign securities--total
Publicly offered
Privately placed

State and local govt.
securities--total
Long-term
Short-term

437
184

342
140

425
303

950
180

550

5,771

4,812

4,988

5,904

3,891
1,880

3,595
1,217

3,433
1,555

4,300
1,604

375

300

8,300

6,000

5,300

3,500
4,800

4,000
2,000

3,300
2,000

7,200 12,760 -11,445
1,071
1,804 2,687

4,600
3,142

-3,600
1,582

Net offerings
U.S. Treasury
Sponsored Federal agencies

3,433
604

7,167
703

Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes equipment trust certificates.
Classified by original offering date.
Estimated.
Forecast.

III - 12

Corporate bond yields nave continued to move higher since
the last FOMC meeting, although the increases have been less than
those recorded by money market interest rates.

The Board's index

of recently offered Aaa-rated utility bond yields was 8.90 per cent
in early May, about 5 basis points above its level at the last FOMC
meeting.
New issues of common and preferred stock by domestic corporations totaled $500 million in April, somewhat below the first
quarter rate and well below the 1977 pace.

However, stock rose

have risen sharply in April, contributing to a decline in the
relative cost of equity financing as compared with bonds.

The Dow

Jones Industrial Average has climbed almost 11 per cent since the
end of February (its 1978 low), with most of tne gain occurring in
the latter part of April.

More broadly based indexes of N.Y.S.E.-

listed industrial issues have increased by similar amounts, as
have the stock prices of American Stock Exchange-listed securities
and issues traded in the over-the-counter market.

The recent strong

rally in stock prices has been accompanied by unprecedented trading
activity.

N.Y.S.E. trading volume averaged more than 40 million

shares per day in the last two weeks of April, and large block trades
(10,000 or more shares) jumped to a record 833 on April 17, more
than twice the previous high for a single day (Chart 2).
The recent rise in stock prices can be attributed in part
to the resurgence in economic activity and the upward movement of
the dollar in foreign exchange markets.

Market professionals also

indicate that many institutional investors had

large liquid asset

III

STOCK PRICES AND TRADING VOLUME

Chart 2

Average

1,000

900

800

I
I
I...

L
I

I
I

1977

700

1978
Millions of shares per day

Daily Trading Volume

1977

1978

N.Y.S.E. Average Daily Number of Block Trades

Number c blocks

600
Weekly

400

200

0
1977
Latest data shown: Week ending May 5. 1978

1978

III - 14

positions prior to the upsurge and may have committed some of these
funds to equities.

In addition, the closing of many of the short

sale positions that had accumulated during the prolonged bearish
period of 1977 and early 1978 probably provided early buying strength
for the market upswing.

Government Securities Markets
The Treasury reduced its outstanding debt by $1.9 billion
in the latest mid-quarter refinancing operation, issuing $2.5 billion
of 10-year notes and $1.5 billion of reopened 22-1/4 year bonds to
refund $5.9 billion of maturing issues.

A net paydown is not

unusual for the mid-May refunding, as April tax receipts produce a
seasonal buildup in the Treasury's cash balance.

Since the beginning

of April, however, the Treasury has raised $1.1 billion of new money
through marketable coupon issues.

The paydown in the mid-May refund-

ing has been more than offset by $2.5 billion raised with a 5-year
note at the beginning of April and $500 million through sales to
1/
foreign accounts in conjunction with the offering of 2-year notes.
The decision of the Treasury not to sell an anchor issue
(normally a 3-year note) at the mid-ay refunding reflects a continuing effort to lengthen the average maturity of its debt.
Moreover, the Treasury rolled over maturing 3- and 6-month and 1-

1/
With respect to nonmarketable issues, foreign offical institutions redeemed $200 million, savings bond and notes increased $400
million, and State and local net purchases were $700 million in
April.

III - 15

year issues at the weekly and monthly bill auctions in April and made
net paydowns of $6.0 billion in cash management bills (on a payments
basis).
Borrowing by sponsored agencies totaled $1.8 billion in
April, slightly less than in March, and housing agencies accounted
for about half of the total.

FMHA issued $600 million in debentures

in early April and close to $100 millon in discount notes during the month
The FHLBs raised only about $150 million in discount notes in April,
financing most of the large increase in advances to S&Ls through reductions of over $1 billion in liquid asset holdings.

This reflects

the Home Loan Banks' tendency to restrict major borrowing to bond
financing operations.

The terms of their second quarter financing

will be announcedMay 15.
Gross offerings of long-term State and local government
bonds declined to $3.5 billion in April, almost 20 per cent below the
volume for Marcn.

Issues sold to refund or advance refund outstand-

ind obligations totalled nearly $1 billion, still quite large by
historical standards.

Short-term municipal borrowing was considerably

above the previous month's total, due to New York State's record
$3.8 billion note sale in early April.

Both the rating and reoffer-

ing scale for the issue show a significant improvement in the

1/
State's credit position since last year's spring borrowing.

1/ Moody's upgraded its rating of the issue from MIG-2 to MIG-1,
and yields on all maturities were less than 1 percentage point above
prime Goverment-backed housing notes (a common standard for shortterm municipal offerings)--as opposed to last year's differential of
approximately 1.65 percentage points.

III - 16

Yields on municipal bonds have increased 20 to 25 basis
points since the last FOMC meeting; the Bond Buyer index climbed to
5.98 per cent in early May, its highest level since late 1976.

These

rate increases apparently were associated partly with forthcoming
heavy supplies of bonds in the wake of a recent IRS ruling, effective
May 10, which further restricts the ability of issuers to invest sinking fund payments in taxable securities.

Despite the recent runup of

municipal yields the ratio of tax-exempt to taxable yields remains quite
low by historical standards.
Mortgage harkets
Net mortgage lending in April apparently declined somewhat
from the March pace to a level roughly equivalent to the reduced first
quarter average.

At commercial banks, net mortgage acquisitions were

$2.4 billion in April, slightly below the March expansion.

Issues

of GNMA-guaranteed mortgage-backed securities fell to $0.8 billion,
while FNMA mortgage purchases increased further to $0.9 billion; the
sum of these two, representing the major marketing outlets for
originators of FHA/VA mortgages, was about 20 per cent below the
record volume posted in March.

At savings and loan associations--

the principal suppliers of conventional mortgage funds--mortgage
commitments outstanding declined further in March (latest data
available), as new commitment activity remained near the reduced
February rate and takedowns of outstanding commitments picked up
1/
from the weather-depressed January-February levels. At the end

1/ The ratio of outstanding mortgage commitments at insured
S&Ls relative to prospective three-month cash flows--defined as
deposit growth plus mortgage repayments--fell to 1.46 at the end of
March, still relatively high by histortical standards but down from
a three-year high of 1.71 at year-end 1977.

III -

of the first quarter, mortgage commitments outstanding at S&Ls and
New York State mutual savings banks combined were about 6 per cent
below the end-of-year peak of $40 billion.
With the continued weakness in deposit growth during April,
S&Ls again relied upon borrowed funds to help support mortgage lending.
Outstanding FHLB advances (SA) increased by $1.8 billion during April-the fifth consecutive monthly rise in excess of $1 billion--and S&Ls
raised $290 million through three publicly offered mortgage-backed
bond issues.

The liquidity ratio (SA) at insured S&Ls--cash and

liquid assets as a percentage of deposits plus short-term borrowing-slipped to 8.5 per cent at the end of March, its lowest level since
year-end 1974 (Chart 3).

To ease liquidity pressures, the Federal Loan

Bank Board lowered the minimum liquidity ratio for S&Ls from 7.0 per
per cent to 6.5 per cent, effective May 1, reducing required liquid
asset balances by an estimated $1.8 billion.
Average interest rates on new commitments for conventional
home mortgages at S&Ls have increased 15 basis points since the
last FOMC meeting to 9.48 per cent--about 50 basis points above
levels prevailing in December--and field reports indicate that increasing numbers of thrift institutions have been tightening nonrate
terms and lending standards.

Given the rise in primary market

rates in recent months, State usury ceilings are reportedly
constraining originations of conventional home mortgages in some
areas.

Six States currently nave interest rate ceilings below

10 per cent.
Yields in the secondary mortagage markets nave also increased
in recent weeks.

GNMA security yields moved up about 18 basis points,

Chart

3
Per C,

Savings and Loan Liquidity

.
V.. ... .r
..

. r. -

--~.---i~.-

12
Average Liquidity Ratio (SA) at Insured S&Ls

I \
I,

-1,

9
-

00
I-

S.'-'

",I
VI

Minimum Liquidity Ratio Required by FHLBB

1970

1972

1974

1976

Cash and liquid assets as a per cent of deposits plus borrowings payable within one year.

-97i

III - 19
INTEREST RATES AND SUPPLY OF FUNDS FOR
CONVENTIONAL HOME MORTGAGES
AT SELECTED S&Ls

Average rate on
new commitments
for 80% loans
(Per cent)
9.00

1976--High
Low

Basis point
change from
month or
week earlier

8.65

/
Per cent of S&Ls 2
with funds in
short supply

Spread1/
(basis
points)
+92
+37

22
2
14
12
11
18

1977--Aug
Sep
Oct
Nov
Dec

8.93
8.90
8.90
8.93
9.00

0
-3
0
+3
+7

1978--Jan
Feb
Mar

9.05
9.15
9.25

+2
+10
+10

+44
+42

27
38
45

9.28

+3
+5
+5
+5

+40
+45
+45
+51

44
46
52
54

Apr

7
14
21

9.33

28
May

9.38
9.43

+92
+65
+62
+70

9.48

Average mortgage rate minus average yield on new issues of Aaa utility bonds.
Per cent reporting supply of funds slightly or substantially below normal
seasonal patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Conventional
Govt.-underwritten
Amount

($ millions)
Offered
416
123

1977--High
Low
1978--Apr

May

Yield

Amount

($ millions)
Offered
855
50

Accepted
570
35

FNMA1
8.98
8.45

3
10
17
24

523

295

9.69

626

364

9.44

451

283

9.74

284

166

9.44

646

305

9.80

655

350

9.52

8
1/

Accepted
278
83

Yield
to
FNMA1/
9.21
8.81

Yields on GNMA
guaranteed
mortgage backed
securities for
immediate
delivery2/
8.43
7.56
8.70
8.67
8.67
8.81
8.80

8.85

Average gross yield before deducting fee of 38 basis points for mortgage servicing.
Data, based on 4-month FNMA purchase commitments, reflect the average accepted
bid yield for home mortgages, assuming a prepayment period of 12 years for 30-year
loan without special adjustment for FNMA commitment fees and related stock requireMortgage amounts offered by bidders relate to total eligible bids received.
ments.
Average net yields to investors assuming prepayment in 12 years on pools of 30year FHA-VA mortgages carrying the prevailing ceiling rate on such loans.

III -20

in line with increases on intermediate-term Treasury securities.

view of this adjustment, as well as increased market uncertainty
about the future course of mortgage prices, the volume of offerings
in FNMA's May 1 auctions of commitments to purchase home mortgages
1/
increased substantially. Average yields on accepted bids rose 8
basis points as the average price for 8-3/4 per cent FHA/VA home
loans fell to 94.7 per cent of par.

Field reports indicate that

deepening discounts required in the secondary markets are constraining originations of Government-underwritten home mortgages to some
extent.

Consumer Credit
Growth of consumer instalment credit surged to a 22 per cent
annual rate in March as sales of autos and other consumer goods
recovered sharply from the weather-reduced rates of January and
February.

In April, however, credit growth probably moderated, as

suggested by a slower advance in consumer loans at weekly reporting
commercial banks.

The exceptionally strong March gain--reflecting

a large increase in credit extensions and little change in liquidations-boosted the first quarter annual growth rate to the upper end of the
15 to 17 per cent range that prevailed during most of last year.

1/ FNMA's outstanding commitments were over $8 billion at the
end of April, compared with $3.5 billion last fall. The other Federal
and related agencies operating in the secondary markets--GNMA and
FHLMC--had about $6 billion in purchase commitments outstanding.

III -

All holders recorded more rapid rates of increase in March, and
commercial banks--which accounted for half of the total advance-showed particular strength.
With the first quarter expansion of instalment credit
outpacing the increase in disposable personal income, the ratio of
of consumer outstanding credit to income surpassed its previous high.
Repayments increased more slowly, however, and the repayments-toincome ratio edged down.

This measure of consumer debt burden, at

just under 15 per cent, remained about one percentage point below
the peak levels in the early 1970's.
cluded as well, the

If home mortgages are in-

ratio of scneduled household debt payments to

income held near the record level reached in the final quarater
of 1977.

III - 22

CONSUMER INSTALMENT CREDIT

1977
QIV

50.7

32.8
16.0
52.5

36.6
17.2
48.3

31.9
14.8
48.1

48.8
22.3
49.7

192.4
48.9

226.0
49.1

238.3
49.9

245.4
49.1

242.1
49.1

259.1
49.1

156.6
14.4

172.4
14.6

195.2
14.9

205.5
15.1

212.4
14.9

210.2
14.9

210.3
15.1

3.2
6.1

10.2
18.3

13.3
20.2

13.8
18.2

15.2
19.2

13.2
16.4

18.3
22.4

51.5

62.8

73.1

76.6

77.9

76.8

81,9

14.0
23.5

25.4
33.9

40.7
47.7

44.8
52.7

50.5
55.4

n.a.
n.a.

1976

1977

7.3

19.9

4.7

30.8
16.9

39.6

12.3
54.0

163.9
47.2

1975
Total
Change in outstandings
Billions of dollars
Per Cent
Bank share (per cent)
Extensions
Billions of dollars
Bank share (per cent)
Liquidations
Billions of dollars
Ratio to disposable income
Automobile Credit
Change in outstandings
Billions of dollars
Per cent
Extensions
Billions of dollars
New car loans over 36 months
as per cent of total new
car loans at:
Commercial banks2/
Finance companies2/

1/
2/

1978
Feb

Quarterly and monthly dollar figures and related per cent changes are
seasonally adjusted annual rates.
Data reported for the mid-month of each quarter.

n.a.--not available.

Mar

May 10, 1978
International Transactions
U.S.
(in millions of dollars, seasonally ajusted 1/)
- T -

1976

TgM

04
29,425
39,323
-9.89

-302
-5,627
(-3,829)

-6
980
(1,349)

-3 126
5136
-106
-5,030
(-3,118)

3,071
35
3,036
2,080
(1,544)

-144
248
-59
-250
(-929)

-347
21
.- 368
415
(-496)

2,010
214
1,796
1,527
(1,029)

186
-1,528

443
513

7
-351

-80
-703

12
257

568

1.252

-313

881

757

101

-2 428
34

-1,640
56

72
803

-453
459

44
107

-28
355-

(853)
-8,730
(-9,954)

(1,385)
-5,362
(-6,848)

(139)
-2,156
(-2,276)

(580)
-731
(-1,319)

(340)
-912
(-1.107)

33.407
5,978
(1,365)
29,429

7.90M
1,415
(362)
6,493

9.
10.
11.
12.
13.

Liabilities to foreigners (increase +)
Long-term
Short-term
to commercial banks abroad
(of which to commercial banks in
offshore centers 2/)
to other private foreigners
to int'l and regional organizations
Foreign private net purchases (+) of
U.S. Treasury securities

10,991
231
10,760
8,030
(4,115)

6,668
374
6,294
5,159
(4,604)

2,655
193
2,462
3,804
(3,206)

2,719
11

1,691
-556

2.783

Other
private
securities transactions (net)
Foreign net purchases (+) of U.S. corp.
securities
(of which stocks)
U.S. net purchases (-) of foreign securities
and
notes)
(new foreign issues of bonds

-7.480
1,250

22.
23.
24.
25.

Change in foreign official res. assets in the U.S.
OPEC countries (increase +)
(of which U.S. corporate stocks)
Other countries (increase +)

13,091
6,820
(1,828)
6,271

26.

Change in U.S.

-2.530

27.

Other transactions and statistical discrepancy
(net payments (-)
Other current account items
Military transactions, net
Receipt of income on U.S. assets abroad
Payment of income on foreign assets in U.S.
Other services, net
Remittances
pensions
and
U.S. Gov't grants

-231

36
746
(318)
14,410

14837
1,340
(324)
13,497

2,917
63
(48)
2,854

8,063
29
(169)
7,771

246

148

238

-1 347
3,236
559
6,391
-3,225
845
-510
-824

790
1,849
50
5,876
-3,733
740
-480
-604

964

.1,792

860

Other capital account items
U.S. Gov't capital, net claim
(increase -)
U.S. direct
investment abroad (increase -)
Foreign direct investment in U.S. (increase +)
Nbnbank-reported capital, net claims
(increase -)

-4,297
725
-4,596
2,176

-5,368
-1,792
-5,009
1,527

-1,058
619

-1,735
-378
-1,549
-197

-2,601

-94

2,147

389

40.

Statistical discrepancy

10,237

-2,728

-5,443

676

41.
42.

Current account balance
Official ettlments balance

-1,427
-10,561

-20,464
-35,176

-4,034
-8,059

-8,049
-15,156

43.

4/S

-29,19

-6,644

-14,410

(322)
-383
414)

2.936
11,032
1,432
24,940
-13,005
2,460
-2,008
-2,787

-3,741

(14)
-63
28) (-

151

13.833
7,893
366
21,369
-11,561
2,743
-1,878
-3,146

bal. excluding O C

541

-5.807
946
709
-13
-445
-8,865
-1,264
(-841) (-6,121)

Bank-reported private capital flows
Claim on foreigners (increase -)
Long-term
Short-term
(of which on commercial banks in
offshore centers 2/)

35.
36.
37.
38.
39.

-6 275

10,626
14,082
-3,456

-4'756
-11,424
-746
-10,678
(-7,518)

4.
5.
6.
7.
8.

28.
29.
30.
31.
32.
33.
34.

10,166
14,648
-4,482

-j1_J77
-21,368
-2,362
-19,006
(-12,961)

Trade Balance

reserve assets (increase -)

30,578
41,778
-11.200

N--h

30,973
38,243
-7.270

Feb.

120,472
151,968
-31-496

Merchandise exports
imports
Merchandise

17.
18.

114,694
124,014
-9.320

1.
2.

14.
15.
16.

-848

Only tade and service, U.S. CGat. grets and U.S. Cot. capital are aMoadily adjusted.
/ Offshore eenter are United tdem, Bahams, Parns, British Vest oldies and Barnda.
±/ Leas than $500,000.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.

The dollar moved sharply higher on

exchange markets over the past month.

In the four weeks since the last

green book, the average exchange value of the dollar rose by 2-1/2 per cent,

reversing nearly one third of the decline in dollar exchange rates which
occurred last Fall and earlier this year.

The dollar started to rise on

exchange markets at mid-April, triggered by an upsurge in stock prices,
rising U.S. interest rates and an announcement by the Treasury that it
would sell 1.8 million ounces of gold over the next six months.

Underlying

this shift to a more favorable exchange market sentiment toward the dollar
was probably a perception in the market of a shift in U.S. economic policy
toward a greater emphasis on resisting inflation.

The Desk made net purchases of marks totaling $461 million equivalent over the past four weeks.

IV - 2

. The marks acquired by the Desk over the past month
were used to repay mark swap drawings by both the System and the Treasury.
The System repaid a total of $258 million equivalent of mark swap drawings
over the past month, reducing the System's outstanding swap debt to the
Bundesbank to $1,585 million equivalent.

The Treasury repaid $162 million

equivalent of marks to the Bundesbank, reducing its outstanding swap obligations in marks to $838 million equivalent.

The System also repaid $42

million equivalent of Swiss franc swap drawings made earlier this year,
using francs purchased directly from the Swiss National Bank.

This reduced

the System's outstanding indebtedness arising from this year's Swiss franc
swap drawings to $27 million equivalent.

Continued weekly repayments during

the period reduced the System's pre-1971 Swiss franc swap debt to $367
million equivalent.
The currency which declined most against the dollar over the
past month was the Swiss franc, which fell by 5 per cent.

The mark and

other snake currencies depreciated by about 4 per cent against the dollar,
while the Japanese yen and British pound declined by 3 per cent.

Since

the pound came under strong selling pressure in early March, it has depreciated by over 6 per cent, despite
a sharp increase in British interest rates, including
increases in the Bank of England's Minimum Lending Rate from 6-1/2 per
cent to 8-3/4 per cent.

IV - 3

The Canadian dollar was the only exception to the general decline
of foreign currencies against the dollar over the past four weeks.

After

reaching a 40 year low in mid-April, the Canadian dollar has moved up by
over 2 per cent against the U.S. dollar, due mainly to announcements of
additional large-scale foreign borrowing by the Canadian government, and
an increase in Canadian relative to U.S. interest rates.
The gold price dropped sharply in reaction to the Treasury's
announcement of future gold sales, then recovered partially to trade around
$172, well below its March peak of $190.

IV - 4

Borrowing in

international capital markets was at a record level in

borrowing in
the first

Gross new

international capital markets.

quarter of 1978, an annual rate about one-third higher than

the 1977 total of $67 billion.
increase in

The step-up resulted from a sharp

medium-term Euro-credits,

for new funds by borrowers in

mostly reflecting stronger demand

a wide range of countries although there

was some refinancing of existing loans.

Loan spreads fell further, and

the average maturity of credits lengthened considerably for the second
consecutive quarter.

Aggregate new Euro-bond issues decreased because

of severe contraction in

the U.S.

dollar sector, but LDCs again

increased their Euro-bond flotations.

The volume of foreign bond

issues was maintained thanks to another large increase in

issues in

the

Japanese market.
Medium-term Euro-credits completed in the first quarter of
1978 were $14-1/2 billion,
of 1977.

not much less than in

the entire second half

All major categories of borrowers showed large increases in

their rate of borrowing.
stepped up its

Among developed countries,

Hydro-Quebec

recourse to the Euro-market with a $1.25 billion,

8-1/2 year loan at a spread of 3/4 per cent over LIBOR,
spread level for highest-quality borrowers.
borrowing,

Much higher rates of

relative to 1977, were recorded by France,

and the United States; borrowings by U.S.

close to the

Spain, Denmark,

corporations included credits

of $250 million to Philip Morris and $200 million to Marathon Oil.
Credits completed by oil-exporting countries included $1.2 billion for
Venezuela for 10 years (bringing new Venezuelan credits to $4 billion

IV - 5
Borrowing in International Capital Markets
(in billions of dollars)

1975
Year

1977
Year
2nd H

1978

20.6

28.8

32.3

16.7

14.5

6.6
.1
.3
.5
1.0
.5
4.2

10.8
.9
.8
.7
2.0

6.9
.9
.4
.2
1.8
.1
3.5

12.5
.5
.9
1.7
1.7
.4
7.3

5.4

Oil-Exporting Countries
Algeria
Indonesia
Iran
Nigeria
Venezuela
Other

3.1
.5
1.6
.2

3.5

1.8
.2
.2
.2

5.4
.4
.1
1.7

2.5
.3
.1
.9

.2
.6

1. 1
.. 3

1.1
.1

1.7
1.5

.4
.8

Other developing countries

1976
Year
2nd H

7.8

6.5
.9
2.2
1.3
.2
1.9

13.3

1.0

Medium-term Euro-credits:
total1/
Developed countries
Canada
Denmark
France

Spain
United States
Other

.4
6.0

.7
.5
.9

Mexico
Philippines

2.1
2.2
.2

Other

3.3

2.7

2.5

Communist countries

III.

3.5
.4
.6
.2
1.0
1.2
.1

2.3
2.6
.7
6.9

8.0
.4
1.5
2.0
.5
3.6

4.
.1
1.1
.9
.3
1.8

2.8

1.7

1.5

total
Euro-bonds:
LDCs
By borrower:
all other
U.S. dollar
By currency:
German mark
Other

10.5
.3
10.2
3.1
2.5

15.4
1. 1
14.3
10.0
2.8
2.6

6.6
.6
6.0
4.6
1.3
.7

19.4
2.5
16.9
12.3
5.1
2.0

8.9
1.3
7.6
5.4
2.7
.8

3.9
1.0
2.9
1.6
1.8
.4

total
Foreign Bonds:
By borrower: Canada
Other
U.S. 2 .
By market:

12.3
3.4
8.9
6.9
3.5
.3
1.6

18.9
6.1
12.8
10.6
5.4
.3
2.6

8.8
2.7
6.1
4.9
2.5
.1
1.3

15.6
3.3
12.3
7.6
4.7
1.4
1.9

8.6
1.7
6.9
3.9
2.6
1.3
.8

4.1
1.3
2.8
1.4
1.4
.9
.4

43.4

63.1

31.6

67.3

Switzerland
Japan

Other
IV.

5.2
1.3
.5
1.0
.7
.5
1.3

Int'l. org's. and others
II.

.2
.7
.2
1.0
.1
3.2

11.4
.9
3.3
2.1
.9
4.2

Argentina
Brazil

16.2

0-1

Total Borrowing

4.9

34.2

22..

1/ Completed credits of over one-year maturity.
2/ Figures may differ from statistics of U.S. international transactions, which
are on a drawdowns basis.
*/ Less than $50 million.
Source: World Bank.

IV - 6

since mid-1976), $1.0 billion for Nigeria (its first Euro-credit) for
seven years and $500 million for the central bank of Indonesia for
seven years; the Indonesian credit, at a 1-3/8 per cent spread, was to
refinance outstanding borrowings carrying a 1-7/8 per cent spread.
Among non-oil LDCs, Brazil and Mexico borrowed heavily in the first
quarter.

Credits to Communist countries included $400 million for the

Soviet Foreign Trade Bank for seven years, the first Soviet Euro-credit
since August 1976.
The weighted average maturity of new medium-term credits,
which for some time had been between 6 and 7 years, moved up to about
7-1/2 years in the fourth quarter of 1977 and to over 8 years in the
first quarter of 1978 based on credits announced in the quarter.
Average loan spreads dropped somewhat further in the first quarter to
the lowest levels since 1974, as prime borrowers obtained spreads of
1/2-3/4 per cent.
First-quarter Euro-bond issues of $3.9 billion were below
their 1977 rate.

Because the declining .exchange rate of the U.S.

dollar reduced investor demand for dollar issues, new issues of dollar
bonds fell to one-half their 1977 average volume and accounted for only
40 per cent of total Euro-bond offerings.

German mark issues were

buoyant and exceeded 45 per cent of total issues, the first time in the
market's history the mark share has exceeded the dollar share.

In con-

trast with the slump in total Euro-bond offerings, new issues by LDCs
(principally non-oil) rose sharply further to a $4 billion annual rate.

IV - 7

Foreign bond issues amounting to $4.1 billion in the first
quarter were at approximately their 1977 rate.

Canadian issues

totalled $1.3 billion, somewhat larger than their 1977 rate, and
included a $750 million three-tranche issue (for 5,

7-1/2,

and 20

years) in the United States by the Canadian Government in March, its
first external bond issue since 1968.
Government

In late April the Canadian

announced additional new international borrowing arrange-

ments that include DM 1.5 billion of 4-6 year notes to be sold in the
Euro-bond or German markets and a $3 billinn standby facility with
U.S.

banks (that is additional to an existing $2.5 billion standby

with Canadian banks).

Foreign issues in the Japanese market increased

further to $900 million in the first quarter, well above their rate in
the second half of 1977.

Prior to mid-1977 foreign issues in Japan

had run at only $300 million annually because long-term borrowing
costs in Japan were relatively high then and restrictions on foreign
issues were less liberal than now.

IV-8

U.S. International Transactions.

During the first quarter of

1978 the U.S. trade deficit rose to $45 billion at an annual rate, up from
a revised rate of $40 billion during the fourth quarter of 1977.

Net private

capital outflows (adjusted for reporting bias) reached $7.6 billion in the
first quarter, more than twice their fourth-quarter level, while official
foreign assets in the United States (excluding OPEC holdings) increased by
$13.5 billion, slightly less than during the fourth quarter.
U.S. International Transactions Summary
(in billions of dollars, (-) = outflow)
Year

1. Trade balance 1/
2.
(annual rate)
3;
4.

1 9 77
Q-4

-31.5

Jan.

1 9 7 8
Feb.

Mar.

-9.9
-11.2
-3.3
-4.5
-3.5
(-39.6) (-44.8) (-39.1)(-53.8) (-41.5)
-3.5
-6.0

-7.6
-5.8

-4.1
-4.1

2.5

-1.8

6. OPEC net investments in U.S.
7. Other foreign official assets
8. U.S. reserve assets

6.0
29;4
-0.2

0.7
14.4
*

1.3
13.5
0.2

1.0
2.8
-0.1

0.1
2.9
0.1

0.3
7.8
0.2

All other 4/
Not seasonally adjusted

2.9
2,9

-1.7
-2.4

3.8
3.7

3.7
4.7

0.1
-0.7

0.1
-0.2

LO.

Seasonal component 5/

-1.0

0.8

0.3

Private capital trans, adj. 2/
Private capital as rept. net
Reporting bias 3/

-6.6
-6.6

Q-1

1.3
1.3

-4.9
-3.1

-1.8

Memorandum:

5/
*/

GNP net exports of goods
-10.6
-5.4
-5.2 e
n.a
n.a
n.a
and services
Current account balance
-205
-80
-87
n.a
na
n.a
Seasonally adjusted.
Includes bank-reported capital, foreign purchases of U.S. Treasury securities,
and other private securities transactions.
Adjustment for reporting bias in bank-reported data associated with weekend
transactions. See page IV 10-11 in the June 1976 green book.
Includes service transactions, unilateral transfers, U.S. government capital,
direct investment, nonbank capital transactions, and statistical discrepancy.
Equal but opposite in sign to the seasonal component of the trade balance.
Less than $50 million.

Estimated,

11.
12.
1/
I/
3/
4/

IV-9

The trade deficit declined in March to a rate slightly above
the rates recorded for January and the fourth quarter of 1977, but a record
February imbalance raised the first-quarter deficit to an annual rate of
nearly $45 billion.
Exports during the first quarter increased 4 per cent in value

from a fourth-quarter rate that was somewhat depressed by the dock strike.
Most of the export growth reflected higher shipments of agricultural commodities,
which rose by 11 per cent in volume and 4 per cent in average price quarter
to quarter, due largely to increased shipments of wheat and corn.

Non-

agricultural exports increased about one per cent in value but declined
about one per cent in volume quarter to quarter.

Declines in both values

U.S. Merchandise Trade, International Accounts Basis
(billions of dollars, seasonally adjusted annual rate)
1977
Year !

1 9 7 8
4Q

Jan.

Feb.

Mar.

EXPORTS
Agric.
Nonagric.

120.5
24.4
96.1

117;7
22.6
95.1

122;3
26.0
96.4

117.4
23.9
93.5

122.0
25.4
96.6

127.5
28.6
99.0

IMPORTS
Petroleum
Nonpetrol.

152.0
45.0 i
107.0

157.3
42.2
115.1

167;1
39.9
127.3

156.6
40.3
116.3

175.8
42.4
133.4

169.0
36.9
132.1

BALANCE

-31.5,

-39.6 ! -44.8

-39.1

-53.8

-41.5

NOTE:

Details may not add to totals because of rounding.

IV-10

and volumes were recorded for exports of civilian aircraft (from a high
fourth-quarter rate) and coal (because of the strike), while increases in
values and volumes were recorded for machinery, industrial materials other
than coal, and automotive products (particulary trucks).
Nonpetroleum imports during the first quarter were more than 10
per cent higher than their fourth-quarter value, as their volume grew 4
per cent and their average price rose 6 per cent.

About half of the

increase in value reflected additional purchases of industrial materials,

but substantial increases were also recorded for foods, automotive products,
other consumer goods and capital goods.

First-quarter steel imports main-

tained their high fourth-quarter volume,

as importers rushed to buy before

the end-of-April deadline for complying with the Treasury's trigger-price
levels.

Imports of non-Canadian automotive products in the first quarter

increased about 10 per cent in value from a high fourth-quarter level, as
U.S. sales of foreign cars remained strong.

The first-quarter rise in food

imports resulted primarily from a higher volume of coffee purchases.
Petroleum imports declined by $2.3 billion quarter to quarter,
dropping from 8.6 to 8.2 million barrels per day, and from $13.41 to $13.31
per barrel.

The decline in import volume followed primarily from the drawing

down of private stocks that were accumulated during 1977 in anticipation of
both a December OPEC price rise and various changes in U.S. crude-oil
pricing regulations.

The fall in unit values reflects both discounting and

higher imports of lower-priced residual oil.

IV-11

Foreign official assets in the United States (excluding OPEC
holdings) increased by $7.8 billion in March.

This brought the total net

inflow in the first quarter to $13.5 billion, nearly as much as the inflow
in the fourth quarter of 1977.

An increase in Japanese holdings accounted

for more than two-thirds of the March increase.
In April, foreign official assets in the United States declined by
more than $3 billion, reflecting declines in official holdings by the United
Kingdom, Germany and Japan.

The fall in U.K. holdings reflects the use of

dollars both in repayment of a credit-tranche drawing from the IMF and in
official intervention to support the pound.

The decline in Germany's holdings

reflects capital controls under which large-scale mark borrowings in Germany
by nonresidents are converted into dollars with the Bundesbank.

The re-

duction in Japanese dollar holdings resulted both from advances to Japanese
commercial banks under the Japanese government's import financing facility
and from time-deposit placements by the Japanese government with the Tokyo
branches of major U.S. banks.
Bank-reported private capital transactions, adjusted for reporting
bias, resulted in a net outflow of $4.9 billion in March and more than $8
billion in the first quarter.

The surge in borrowing from U.S. banks in

March likely reflects the positioning of Japanese banks and firms both for
an anticipated appreciation of the yen and to window-dress their end-offiscal-year financial statements.

Japanese balance-of-payments data for

IV-12

March show a $2.6 billion net inflow of private capital transactions, compared
with a $900 million net outflow in February; a major component of this swing
was a shift in short-term transactions of Japanese commercial banks from a
February net outflow of $1.1 billion to a March net inflow of $1.9 billion.
Foreign private net purchases of U.S.

corporate stocks increased

to about $325 million in March following foreign purchases in January-February
that amounted to only $13 million.

Securities dealers have indicated that

there was a further increase in net foreign purchases of U.S. stocks in
April.

A number of securities dealers have suggested that foreign institu-

tional participation in the April stock-market rally was largely in response
to prompting from U.S. brokers.
U.S. Bank-reported, Private Capital Flows 1/
(billions of dollars: increase in assets,-)
1976
Change in net foreign positions of
U.S. banking offices
Net change through interbank

transactions (including own
foreign affiliates)
Loans to non-bank
foreigners
Acceptances and collections 2/
Liabilities to private

-10.3

1977
-4.7

-8.2

-3.0!

-3.2

-. 5

-1.3
2.8

-2.7
1.5

nonbank foreigners

1/ Adjusted for reporting bias.
2/ Includes minor foreign currency claims.
*/ Less than $50 million.
Details may not add to totals because of rounding.

1977
Q1-Q3
-1.6
-.4

*
-1.7
.5

1977
Q4

1978
March

1978
Q1

-3.3

-4.9

-8.1

-2.71

-4.7

-7.7

-. 5

-. 2

-. 3

-1.11
1.0

-.
5
.4

-.
1
-.
1

IV-13

U.S. net purchases of foreign securities increased to $383 million
in March. Of these, U.S. purchases of yen-denominated bonds were over
$300 million, almost one-quarter of the record $1.35 billion of Japanese
bonds purchased by non-Japanese residents in March.

During the first quarter

as a whole, yen-denominated bonds accounted for slightly less than half of
the foreign bonds purchased by U.S. residents.
OPEC banking and security holdings in the United States increased
by $300 million in March; this brought the first quarter inflow to $1.3
billion.

Preliminary data indicate that OPEC holdings showed little

change in April.

IV -

14 -

Foreign Economic Developments.

The signs of economic

activity abroad continue to be mixed, although on balance the outlook

appears to be weaker than last month. Economic activity in Germany,
in particular, appears to have weakened; industrial production has
declined for two consecutive months for a total fall of nearly 6 per
cent between January and March.
be due to temporary factors.

Much of this decline, however, may

Although industrial production in Japan

rose in March by 1.6 per cent, much of this strength appears to be
derived from government spending, while private domestic demand has
shown little indication yet of reviving.
In Canada industrial production in February recovered from
its January decline and moderate growth is expected in 1978.

In the

other major foreign countries -- France, Italy and the United Kingdom --

economic activity has accelerated in the first few months of 1978 with
industrial production showing significant gains in all three countries.
The outlook in France and the United Kingdom is for continued moderate
gains through the rest of 1978, while the Italian outlook is more uncertain because of the authorities' objective of cutting the public
sector deficit.
There have been conflicting developments concerning the inflationary outlook.

Wage settlements in Japan are averaging about

6 per cent, below last year's 9 per cent.

Moderate wage settlements

have also been concluded in Germany during the current round of
negotiations.

On the other hand, inflation in France has reaccelerated

somewhat and further inflationary pressures, stemming from publicservice price increases and increases in the minimum wage, are expected.

IV - 15 -

Major current-account imbalances persist.

Thus,Japan

recorded a very large first quarter current surplus of $5.5 billion, and the German trade and current-account surpluses continue.
The United Kingdom's external position has become disturbing as
the current account swung into deficit in the first quarter, after
recording a surplus in late 1977; the current account had been expected to remain in surplus over the next few years.
however,

In Canada,

the trade surplus widened markedly in the first quarter,

and in Sweden the kroner devaluation of last August is helping to
eliminate the trade deficit.
Notes on Individual Countries.

In Japan relatively little

progress has been made recently on the two key issues of slow growth
in domestic demand and the large external surplus.
per cent rise in industrial production in

Although the 1.6

March is a positive sign,

private consumption and investment are still

lagging; growth in

domestic demand continues to come primarily from government expenditure.

On the other hand,

future demand may be strengthened because

the process of inventory decumulation that took place during 1977
appears to be coming to an end.

With the annual spring wage offensive

now past its peak, it appears that Japanese workers are accepting wage
increases averaging about 6 per cent.

The current-account surplus in

the first quarter was very large ($5.5 billion, s.a.) as exports increased rapidly in anticipation of official controls or administrative
guidance and further appreciation of the yen.

Real GNP and Industrial Production in Major Industrial Countries
(percentage change from previous period, seasonally adjusted)

1975
Canada:

France:

Germany:

Italy:

Japan

1.1

1976

1977

-~-_-I

4.9
5.0

0.8
0.G

1978
Q1
n.a.
n.a.
n,a,

0.3
-1.3

1.4
-0.3

n.a.
n.a.

-1.1

-0.1
0.3

1.4
1.1

n.a.
-1.1

-2.5
-7.2

-0.5
-3.7

-0.1
-0.4

n.a.
n.a.

1.0
2.1

n.a.
2.9

-0.1
-0.7

n.a.
n.a.

Q2
0.0
0.3

GNP
IP

-4.8

GDP
IP

0.1
-9.2

.5.2
10.1

2.2
1.7

-0.7
-2.1

-2.5
-5.5

5.6
7.8

2.4
3.0

0.0

GNP
IP

1977
Q3
-

~--

GDP
IP

-3.5
-9.1

5.7
12.9

1.7
0.8

GNP
IP

2.5
-11.1

6.2
13.7

5.1
4.5

1.7
0.9

0.4
-1.0

0.8
0.2

0.6
-1.2

0.2
0.7

United Kingdom:

United States:

GNP
IP
GNP
IP

-2.1
-4.7
-1.3
-8.9

2.3
0.5
6.0
10.1

4.9
5.6
*GNP data are not published on monthly basis.
*GNP data are not published on monthly basis.

1.5
2.5

Q4
-

0.9
0.6

-0.1
0.2

Jan.
*

1978
Feb,
*

-1.1

0.9

iar.
*

n.a.
*

0.
0.8
S

0.3

n.a.

4.2

-1.7

-4.2

5.4

-1.7
*

2.2

n.a.

0.9

0.1

1.6

0.5

0.8

n.a.

-0.8

0.3

1.4

Consumer and Wholesale Prices in Major Industrial Countries
(percentage change, from previous period or as indicated)

Latest 3 Months
from:
1977
1975
Canada:

France:

Germany:

1976

Q4
0-4

1978
01

Previous
3 Months

Year

Latest

1977

Q2
0

8.0
9.1

2.4
3.1

2.2
0.9

2.2
1.0

1.8
n.a.

7.4
9.7

8.8
9.0

liar.
Feb.

(at Ann.

4-Q3
a ~
-4

Rate
ae

Ago

TMnn t-h

CPI
WPI

10.8

6.5

7.5
4.3

CPI
WPI

11.7
-5.7

9.6
7.4

9.5
5.6

3.1
1.1

2.4
-0.9

1.9
0.0

1.6
1.2

6.2
4.8

9.2
1.4

liar.
Mar.

5.9
3.4

4.6
5.8

3.9
1.8

1.4
1.2

0.2
-1.8

0.2
-0.9

1.3
0.1

5,4
0.5

3:0
-0.5

Apr.
Mar.

18.4
17.4

3.8
2.4

2.5
1.5

3.3
2.0

2.6
2.1

10.5
8.5

12.9
8.2

liar.
Mar.

8.3
2.0

2.5

0.3

0.8

0.9

0.1

-0.5

-0.7

-0.6

7.7
-2.3

4.6
-1.9

Apr.
Mar.

15.8
19.2

4.5
4.5

1.6
3.3

1.5
1.6

1.7
2.5

6.8
9.7

9.5
11.6

Mar.
Apr.

6.5
6.1

2.1
2.5

1.5
0.2

1.1
1.1

1.7
2.4

6.8
11.5

6.6
6.2

lar.
Apr.

CPI
WPI

Italy:

CPI
WPI

16.9
8.5

Japan:

CPI
WPI

12.1
3.0

United Kingdom:

United States:

CPI
WPI
CPI
WPI

24.2
24.1

16.8
22.9

16.6
16.4

-4

1__

a/
Trade and Current-Account Balances of Major Industrial Countriesa/
(billions of U.S. dollars; seasonally adjusted)
1977
1975

Canada:

France:

Germany:

Italy:

Japan:

1976

1977

2.7

1978
01

Jan.
'78

Feb.
'78

Mar.
'78

Trade
Current Account

-0.6
-4.7

1.2
-4.2

0.8
-0.9

0.3
-1.4

0.6
-1.1

1.0
-0.6

1.2

0.2

0.7

-4.0

n.a.

Trade
Current Account

1.5
0.0

-4.2
-6.0

-2.4
-3.1

-1.1
-1.3

-0.6
-0.6

-0.5
-0.8

-0.2
-0.3

-0.2

15.3
3.9

13.5
3.4

16.4
3.6

3.7
0.6

4.2
1.4

3.7
-0.5

4.8
1.9

Trade
b/
Current Accountb/

-3.4
-0.6

-6.7
-2.9

-2.5

-1.4
-0.9

-0.8
0.2

0.1
2.4

-0.4

n,a.

0.0

-0.1

n.a.

Trade
Current Account

5.0
-0.7

9.9
3.7

17.5
11.0

4.2
2.3

4.4
2.8

4.2
2.7

4.6
3.1

7.3
5.5

2.2
1.5

2.5
1.9

2.7
2.0

-7.1
-3.7

-6.3
-2.0

-2.9
0.0

-1.7
-0.9

-1.2
-0.6

-0.1
0.8

0.1
0.6

-1.0
-0.4

-0.6
-0.5

0.2
0.3

-0.5
-0.3

9.0
11.5

-9.3

-7.5
-4.6

-6.8

-7.3

-4.5

-3,5

-4.0

-9.9 -11.2
n.a.
-0.0

-3.3

-3.8

Trade
Current Account

United Kingdom:

United States:

Trade
Current Account
Trade
Current Account

-1.4

n.a.

-31.5
-20.5

0.0

0.3

4.3

1.2

1.4

1.8

n.a.

a/ The current account includes goods, services, and private and official transfers.
b/ Not seasonally adjusted.
* Comparable monthly current-account data are not published.

-0.5

n.a.

*
I

O
a

IV - 19 -

The government has recently announced the implementation
of a program to reduce the current-account surplus.

The package

includes measures to increase imports by facilitating import financing and further increasing emergency imports, to expand development
assistance, and to ensure that the reduced cost of imported commodities is passed on to retail prices.

The Japanese authorities have

also indicated that they will seek to keep the yen value of exports
(and therefore volume) in 1978 at or below the 1977 level.
In Germany, industrial production fell sharply in February
and March, while new orders (domestic and foreign) fell in both January and February.

Domestic orders continued to decline in March,

although a large foreign order caused total orders to rise slightly.
Much of the decline in domestic activity is attributed by German
authorities to severe weather in February and strike activity in
March.

On April 24, Germany's five major economic institutes jointly

forecast that 1978 real GNP growth would amount to only 2-1/2 per cent.
The German Finance Minister has indicated that additional fiscal policy
measures will be seriously considered early this summer if signs of
weak domestic economic activity persist.
The economic situation in the United Kingdom has deteriorated
somewhat since the beginning of the year.
ward pressure.

Sterling has been under down-

The current account, after recording a surplus toward

the end of 1977, showed a deficit of some $420 million (s.a.) in the
first quarter of 1978.
pickup:

Economic activity has shown some signs of a

Industrial production in the three months to February was

IV - 20 -

4.5 per cent (s.a.a.r.) higher than in the previous three-month
period, and consumer spending has been strong.
in output is still

expected in 1978.

A moderate upturn

Consumer price inflation is

expected to remain in single digits throughout 1978, although sterling's recent weakness has started to feed through into some wholesale prices.

After a period of falling real wages, nominal wages

are now rising faster than consumer prices.

Monetary growth has been

relatively rapid in recent months and in response,
moved to increase interest rates --

the government has

the Bank of England's

Minimum

Lending Rate has increased by 2-1/4 percentage points in two steps
since April 12, and is now 8-3/4 per cent.

In a recent move, Parlia-

ment has voted to cut taxes by an amount greater than recommended in
the April budget.
The first post-election business surveys in France confirm
that final demand strengthened appreciably during the first quarter
and expectations of rising activity in coming months have strengthened,
as reflected in rising orders and falling inventories.

The rate of

increase in consumer prices, which slowed in the fourth quarter of 1977,
accelerated in February and again in March and inflationary pressures
remain strong.

Substantial price increases in public services will

take effect in coming months in response to government decisions to
reduce subsidies to public service industries; also the minimum wage
was raised by four per cent on May 1, with further increases scheduled
for July and October.

Future price developments depend crucially on

the ability of the government to restrict wage increases in upcoming

IV - 21

wage negotiations in the public sector and to induce compliance
with wage guidelines in the rest of the economy.
Some signs of a recovery in Italy continue to appear, largely
in the form of improved business expectations and a strong recovery
in industrial production.

The sources of strength appear to be an

expansion of production to rebuild depleted inventories and, greater
final demand stemming from exports and household consumption.

House-

hold consumption probably is being stimulated by substantially larger
transfers this year (mainly for pensions), and should also benefit
from this month's termination of a freeze on inflation-linked wage
increases for higher income workers.

However, other sources of final

demand are weak, and if the government successfully cuts the public
sector deficit, household income and consumption will probably be

weaker.
Industrial production in Canada recovered in February from
its January drop and activity in 1978 is expected to continue its
moderate growth.

Several measures have been taken by the Bank of

Canada, including an increase in the discount rate, to resist downward pressure on the exchange rate.

Due to the rise in interest

rates, which began in early March, the growth rate of M1 has fallen
below the lower end of the target range and the growth of activity
may be restrained as a result.
The Swedish trade balance appears to be responding to the
August devaluation and the weakness of domestic demand;a $200 million

IV - 22 trade surplus was recorded in the first quarter of 1978 in contrast
to a $500 million deficit in the same period last year.

The Swedish

authorities recently announced a new cost-reducing measure, the
abolition of a 2 per cent payroll tax on employers, effective July 1.
Also, the central bank lowered the discount rate from 7-1/2 to 7 per

cent to redirect funds from the short to the long-term credit markets.
The Norwegian government recently published its revised budget for
1978 with an austerity package designed to absorb [IT.kr.l]billion of

purchasing power this year.

The package includes an increase in the

rate of employees' social security contributions effective July 1.
Bank lending is to be reduced, the investment tax abolished, and
electricity prices raised.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 16, 1978 : Greenbook Part 2

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