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Confidential (FR) Class II FOMC Part 1 May 14, 1975 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Summary and Outlook Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONFIDENTIAL (FR) May 14, 1975 SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System SUMMARY AND OUTLOOK I - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Indications that the economic recession is nearing its bottom have become more widespread over the past month. The inventory overhang was reduced substantially further in March. In April, industrial production declined only fractionally further, and total employment increased somewhat for the first time in over half a year. Retail sales, other than autos, have continued to rise, and the tax rebate checks now being mailed out should add strength to consumer outlays in the months ahead. Continued moderation of inflationary pressures will also provide support to growth in real disposable income and consumer spending. At the same time, weaknesses in auto demand, investment spending, and residential construction raise doubts regarding the timing and vigor of the expected recovery. The index of industrial production, according to preliminary estimates, declined by 0.4 per cent in April, less than half the drop in March and substantially smaller than the declines of the previous four months. Production of business equipment, steel, and durable materials continued to fall, but consumer goods output rose, largely as a result of increased auto assemblies and a rise in output of nondurables--where inventory positions have improved. Total employment rose by about a quarter million in April, but the civilian labor force increased even more rapidly, and the unemployment rate rose further to [9].9 per cent. Manufacturing I-2 payroll employment declined, but by substantially less than in other recent months, with the cuts concentrated in the durable-goods sector. The manufacturing workweek--generally a reliable lead indicator of activity--rose by 0.2 hours. Some increase in the unemployment rate is indicated by the further rise in total insured unemployment since the April survey period, although initial claims have continued their downward trend of recent months, reflecting fewer new layoffs. Retail sales have continued to present a fairly firm tone, with the exception of autos. Excluding autos, retail sales rose by 1.2 per cent in April, about the average pace of growth since the beginning of the year. With consumer prices rising more moderately, this suggests continued real gains. Sales of domestic-type cars totaled only 5.5 million units, annual rate, in late April--down from the first 20 days. For April as a whole, the annual sales rate was 5.7 million, compared with 6.0 million in March, and about equal to the low of the immediate prerebate period. With assemblies up and sales down, auto stocks rose for the first time this year, and producers have started to scale down production plans for the next few months. Sales of foreign cars held up quite well last month at 1.6 million, annual rate, possibly because of the large inventory of models available at 1974 prices. Residential construction activity has yet to show any recovery, despite the strong inflows of savings to mortgage lenders. Private housing starts were about unchanged in March. Reports suggest I - 3 that the 5 per cent tax credit on new homes has thus far had only a moderate effect in clearing the heavy overhang of existing homes, in part because of a reluctance on the part of builders to offer homes at their historically lowest price. The near-term outlook for business spending remains gloomy. New orders for nondefense capital goods fell further in March, and in real terms are now 37 per cent below the peak last summer. In addition, contracts for commercial and industrial buildings declined another 15 per cent in March to half their level a year earlier. Yet, the most recent surveys of anticipated plant and equipment outlays suggest that businessmen have ceased cutting their spending plans for this year. The annual rate of inventory liquidation in the GNP accounts appears to have been somewhat larger than the $18 billion preliminary estimate by Commerce for the first quarter. The book value of manu- facturing and trade inventories decreased at a $23.1 billion annual rate in March; for the first quarter as a whole, the decline is estimated at $11.6 billion. The dollar value of manufacturers' stocks declined in March for the first time in nearly 4 years, with the liquidation concentrated in nondurable goods. Both wages and prices have continued to show signs of moderation in recent months. The average hourly earnings index I - 4 increased at an annual rate of 6.7 per cent between December and April, compared with an 8.7 per cent rate of increase in the second half of last year. Wholesale farm and food prices rose in April, but industrials were about unchanged, and have risen at only a 2.4 per cent annual rate over the last three months. Consumer prices in March rose by 0.3 per cent, the smallest increase since July 1973. Outlook. The current staff GNP projection continues to show an economic recovery in the third quarter, but it is now expected to be less vigorous than was depicted in the last Greenbook. Real GNP is now projected to grow about 5 per cent in the four quarters ending second quarter 1976, about half a per cent less than expected a month ago. The general contour of the projection remains similar-- with a small decline in real GNP during the current quarter and a recovery thereafter. The policy assumptions underlying this projection have changed very little since the preceding Greenbook. On the monetary side, we assume a rate of growth of M1 over the next year around the midpoint of a 5--7½ per cent range. As before, we assume that short- term interest rates are likely to come under upward pressure as the recovery commences, carrying the bill rate somewhat above 8 per cent by the middle of 1976, and resulting in a moderation of inflows into thrift accounts. I - 5 On the fiscal side, we project a FY 1976 unified budget deficit of $76 billion. Projections of total spending have been increased slightly, with budget outlays now estimated at $366 billion, or $1 billion below the recent Congressional target. Estimates of marginal tax rates have been increased somewhat to yield $4 billion more in revenues, but this still leaves our revenue projection well below Congressional estimates, mainly because of our lower income estimates. During the current quarter, we expect a decline in real GNP of about 1 per cent, annual rate, compared to the 10 the first quarter. per cent drop of Inventory liquidation is expected to continue, but at a considerably slower pace than in the first quarter, with little further reduction in nondurable inventories and some backup of auto stocks. This projected slowdown in inventory liquidation provides support to GNP growth. But with consumer durable purchases remaining sluggish and exports declining, final sales in real terms are expected to shrink. Housing starts are now projected to increase by only about 100,000 units in this quarter--to an annual rate of 1.1 million. The main items expected to bolster GNP growth during the second half of this year are the expansive effects on consumption of tax reductions and larger social security payments, a rise in housing starts to a 1.5 million level by year-end, and a continuing moderation in the pace of inventory liquidation. The expansive thrust of these I-6 sectors is now expected to be somewhat less than we thought a month ago. Business fixed investment is still assumed to decline in real terms through the remainder of 1975. We expect the rate of expansion in real GNP to edge down somewhat in the spring of next year, as the effects of the tax rebate wear off and housing starts level out in response to a projected weakening of savings inflows. Unemployment is expected to peak at around 9.4 per cent during the third quarter and to edge down slightly thereafter. Our price projection remains essentially unchanged--with the GNP fixed weighted deflator expected to be rising at a 5¼ per cent annual rate toward the end of this year and somewhat less by mid-1976. I-7 STAFF GNP PROJECTIONS Per cent change, annual rate Changes in nominal GNP ($ billions) 4/9/75 5/14/75 Real GNP 419/75 5/14175 Gross private product fixed weighted price index 49/75 5/14/75 77.8 103.1 136.9 102.5 65.9 1971 1972 1973 1974 1975 1973-11 1/ Iv 1/ 1974-I II III IV 1975-I 1/ II III IV 1976-1 II Change: 73-IV to 74-IV 74-II to 75-II 74-IV to 75-IV 75-II to 76-11 1/ Actual. 77.8 103.1 136.9 102.5 65.8 3.3 6.2 5.9 -2.1 -3.9 3.3 6.2 5.9 -2.1 -4.1 4.3 3.3 6.3 11.4 9.3 31.0 35.1 31.0 35.1 1.6 2.3 1.6 2.3 8.4 9.1 14.8 14.8 25.0 25.0 32.5 14.6 -7.0 -1.6 -1.9 -9.0 -7.0 -1.6 -1.9 -9.0 32.5 14.6 -15.4 20.0 -11.7 19.8 -11.2 14.1 12.3 13.8 12.6 Unemployment rate (per cent) 4/9/75 5/14/75 9.3 5.9 5.6 4.9 5.6 9.0 5.9 5.6 4.9 5.6 9.1 8.4 9.1 4.8 4.8 4.8 4.8 14.1 12.3 13.8 5.2 5.1 5.5 12.6 6.6 5.2 5.1 5.5 6.6 4.3 3.3 6.3 11.4 42.5 37.0 46.0 42.5 6.5 6.8 -10.4 -1.2 4.6 5.7 37.0 35.5 39.5 35.0 4.9 4.7 5.6 4.6 86.9 86.9 -4.9 -4.9 13.0 51.7 55.2 -5.8 -5.7 10.4 10.4 93.1 87.6 .3 161.0 154,0 5.7 8.3 9.2 9.4 9.3 13.0 - .7 - .5 5.1 8.3 9.1 9.3 9.2 4.8 4.5 4.8 4.5 9.0 9.0 4.0 4.1 2.7 6.6 6.6 2.6 5,0 5.1 - .1 - .1 CONFIDENTIAL - May 14, 1975 I-8 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of dollars, with quarter figures at annual rates.) FR 1974 1975 1976 Projection IV I II 1593.0 1588.0 1217.9 1175.8 1558.0 1555.5 1193.2 1201.9 961.3 130.5 420.5 410.3 985.2 136.0 429.4 419.8 1005.3 140.0 436.3 429.0 1025.5 142.5 444.7 438.3 174.9 39.9 143.8 -8.8 -8.5 186.6 44.8 145.8 -4.0 -5.0 199.1 48.3 148.3 2.5 2.5 207.3 51.0 151.3 5.0 5.0 -4.0 136.3 140.3 -7.6 139.4 147.0 -8.7 144.9 153.6 150.2 160.1 85.7 43.3 209.0 343.8 129.6 85.9 43.7 214.2 354.3 134.3 89.3 45.0 220.0 362.3 136.4 90.4 46.0 225.9 370.1 138.0 91.6 46.4 232.1 782.3 181.4 779.9 184.5 788.8 187.1 799.8 189.9 810.8 192.2 819.9 194.3 1193.0 1246.2 791.5 1074.7 87.2 8.1 100.9 106.5 1274.3 808.8 1095.7 83.9 7.7 111.5 116.5 1300.6 828.2 1112.6 80.3 7.2 116.8 120.5 1328.9 845.6 1134.6 81.6 7.2 121.9 125.0 277.7 360.7 -83.0 289.6 371.6 -62.0 305.5 378.6 -73.1 314.6 -6.2 1p II III 1430.9 1413.1 1089.3 1087.4 1419.2 1437.1 1104.3 1098.9 1439.0 1450.5 1112.5 1113.1 1476.0 1484.8 1141.0 1145.0 1518.5 1522.5 1168.2 901.3 136.1 389.0 376.2 895.8 120.7 391.7 383.5 916.3 125.5 399.3 391.5 934.7 125.5 408.7 400.5 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 205.8 209.4 40.4 151.2 17.8 17.5 164.6 35.2 147.4 -18.0 -16.6 166.9 35.6 142.8 -11.5 -10.5 Net exports of goods and services 1/ Exports Imports -3.1 143.6 146.7 1.9 147.5 145.7 5.4 143.5 138,1 135.9 136.5 Gov't. purchases of goods and services Federal Defense Other State & local 312.3 117.2 78.4 38.8 332.8 338.0 127.7 85.2 42.5 205.1 129.0 195.1 323.8 124.5 84.0 40.6 199.3 823.1 172.1 804.0 178.0 III IV 1416.3 1407.6 1095.3 1098.4 Personal consumption expenditures Durable goods Nondurable goods Services Gross National Product Final purchases Private Excluding net exports 46.2 150.9 8.7 6.6 Gross national product in constant (1958)dollars GNP implicit delfator (1958=100) Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) Corporate profits & inventory val. adj. Corporate profits before tax 1168.2 763.0 993.1 65.5 6.6 1186.9 -. 6 1227.8 -9.9 764.9 105.8 157.0 1008.8 86.5 8.6 103.4 131.5 1017.4 74.8 7.4 93.1 99.3 1220.3 775.7 1082.6 122.0 11.3 93.1 101.5 294.7 319.3 -24.5 277.0 338.0 -61.0 241.0 354.7 -113.7 24.7 17.8 9.7 -36.9 -5.9 -9.8 -5.9 2.1 Feaeral government receipts and expenditures, (N.I.A. basis) Receipts 2/ Expenditures Surplus or deficit (-) 2/ 769.2 -. 1 -2.4 -2.0 -1.4 -. 1 .5 -. 2 302.8 304.7 -1.9 High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) 386.7 -72.1 Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) 93.6 2.2 94.0 2.2 94.0 2.2 94.5 2.2 94.7 2.2 94.8 2.2 94.9 2.2 95.2 2.2 91.4 91.8 91.8 92.3 92.5 92.6 92.7 93.0 5.5 6.6 8.3 9.2 9.4 9.3 9.1 9.1 Nonfarm payroll employment (millions) Manufacturing 78.7 20.1 78.3 19.6 76.8 18.4 76.2 17.8 76.1 17.7 76.2 17.8 76.5 17.9 77.0 18.1 Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials (per cent) 125.4 79.4 88.5 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models 1.21 10.07 8.52 1.55 -1.3 146.8 Foreian models 7 !et exports ot g. & s. (Sal. Exports Imports ot paymts) 148.1 121.3 75.7 79.1 1.00 7.38 ... 6.05 1.33 151. 11/ 147.8 111.6 68.2 70.5 .99 8.31 6.60 1.71 148.83/ 137.2 110.1 67.0 70.2 1.10 7.60 6.00 1.60 141.23/ 135.6 112.2 67.7 71.4 1.33 8.25 6.65 1.60 2.2 141.6 139.4 114.5 68.5 72.9 1.50 9.00 7.40 1.60 144.7 146.1 117.1 69.5 74.4 1.55 9.50 7.90 1.60 150.2 152.7 119.0 70.0 75.2 1.50 9.50 7.90 1.60 -3.1 155.5 159.2 2/ Federal government N.I.A. receipts are reduced to reflect the $8.1 billion rebate of 1974 individual income taxes and $9.3 billion reduction in 1975 individual income taxes in those quarters. This latter reduction enacted only for 1975, is assumed to be continued in 1976. 3/ Includes shipments of military equipment and supplies to Israel which are not included in GNP exports; amounts billions of dollars are: 1974-III, $.3; 1974-IV, $.4; 1975-1 and II, $.3. CONFIDENTIAL - FR May 14, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1974 III IV II Ip 1976 I II Billions of Dollars----------------- --------------------- -11.7 -35.8 24.0 15.0 3.5 11.5 20.5 4.8 19.8 6.5 13.4 8.2 -6.0 14.2 18.4 .0 37.0 2.7 34.3 28.5 -3.4 31.9 26.6 5.0 11.8 9.8 4.3 1.0 5.8 .6 5.2 42.5 4.8 37.7 27.2 -3.6 30.8 23.9 5.5 8.9 9.5 4.9 2.0 10.5 4.7 5.8 Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 32.5 -4.8 37.3 29.4 -1.6 31.0 32.2 6.6 13.2 12.4 -2.6 1.5 7.9 2.9 5.0 GNP in constant (1958) dollars Final purchases Private -4.0 -19.1 -21.7 -2.4 8.9 11.0 11.0 9.1 - .8 -25.0 .2 -4.1 6.5 7.7 6.1 7.1 - .9 -25.4 - 1.8 -4.5 6.7 8.1 7.1 6.6 1/ -------------------- In Per Cent Per Year--------------- Gross National Product Final purchases Private 9.7 11.3 11.5 4.2 1.6 -2.2 - 3.2 7.0 5.6 5.7 3.8 3.0 10.7 9.8 10.6 12.0 10.6 9.9 10.8 9.0 8.8 9.3 8.6 8.5 Personal consumption expenditures Durable goods Nondurable goods Services 15.7 22.0 14.8 14.3 -2.4 -38.1 2.8 8.0 9.5 16.9 8.0 8.6 8.3 .0 9.8 9.5 11.9 16.9 12.1 10.2 10.3 18.0 8.7 9.6 8.4 12.3 6.6 9.1 8.3 7.3 7.9 9.0 Gross private domestic investment Residential structures Business fixed investment -10.9 -19.7 4.1 7.2 -41.5 .8 -61.8 -42.4 - 9.7 5.7 4.6 -11.9 20.6 57.8 2.8 29.6 58.9 5.7 29.6 35.1 7.0 17.5 24.3 8.3 Gov't purchases of goods and services Federal Defense Other State and local 10.8 10.5 9.7 12.2 10.9 15.6 27.3 31.8 19.9 8.9 11.6 10.7 5.8 20.1 12.2 6.4 4.1 2.4 7.7 7.8 7.0 1.9 .9 3.7 10.3 12.8 15.3 16.8 12.4 11.3 9.3 6.4 5.0 9.2 11.2 8.9 4.8 5.4 3.5 11.4 GNP in constant (1958) dollars Final purchases Private 3 GNP implicit deflator Private GNP fixed weighted index- -1.9 -9.0 - .4 -11.7 - .5 -14.3 11.9 14 .4 2 13.8 12.6 -10.4 .1 - 1.1 8.0 2 7.6 -1.2 -2.0 -2.8 7.0 6.8 4.6 3.4 4.3 5.8 5.7 Personal income Wage and salary disbursements Disposable income 12.4 9.9 11.5 6.6 3.3 t.5 2.1 -2.2 3.5 9.5 5.8 28.2 Corporate profits before tax 62.8 -50.8 -67.5 Federal government receipts and expenditures (N.I.A. basis) Receipts Expenditures 21.2 19.2 -10.3 20.6 1.7 -. 6 -.3 -60.7 45.5 33.8 138.3 Nonfarm payroll employment Manufacturing Industrial production Housing starts, private Sales new autos Domestic models Foreign models 1/ 2/ 3/ 14.6 9.1 5.5 -6.0 5.0 -11.0 -5.5 -15.4 2.7 7.3 -5.8 .3 11.5 7.3 4.2 1975 Projection III IV 7.6 9.4 8.0 9.0 -5.2 .4 -3.8 9.0 3.2 5.8 -4.6 5.2 1.3 3.9 5.7 3.9 5.1 6.0 2 / 5.3 5.6 3.1 4.4 5.02/ 4.8 4.6 3.6 4.0 4.5 4.5 8.8 8.4 -2.9 9.3 9.0 8.0 8.5 9.9 6.3 9.0 8.7 8.2 9.2 21.2 43.2 14.5 15.8 -21.9 25.6 -42.7 21.3 76.3 6.9 18.3 12.6 23.8 7.8 12.5 8.8 -1.7 -10.4 -7.7 -22.3 -3.1 -12.4 -. 5 -2.2 .5 2.3 -12.5 -53.0 -71.2 -74.6 -46.2 -28.4 -5.2 -5.1 53.7 60.9 -30.0 41.8 -31.7 173.3 -23.4 7.9 113.7 38.9 50.9 .0 8.3 61.8 41.6 53.3 .0 9.6 6.5 14.0 -12.3 24.1 .0 29.9 .0 .0 .0 13.7 per cent; 1975-I, 7.8 per cent; Percentage rates are annual rates compounded quarterly. 1974-IV, Excluding Federal pay increases rates of change are: 1975-IV, 5.3 per cent; and 1976-I, 4.8 per cent. Using expenditures in 1967 as weights. 1.6 2.3 2.6 4.5 I - 10 CONFIDENTIAL - FR May 14, 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of dollars, with quarter figures at annual rates.) 1974 1973 1972 III III IV I II IV I II 1169.3 1159.1 904.0 908.8 1204.7 1193.7 931.1 936.4 1248.9 1238.9 969.9 970.7 1277.9 1267.2 993.9 993.4 13D8.9 1297.0 1020.1 1013.4 1344.0 1315.1 1028.7 1019.4 1358.8 1341.9 1045.6 1034.3 Personal consumption expenditures Durable goods Nondurable goods Services 736.8 121.2 302.0 313.6 757.2 124.3 310.9 322.0 781.7 132.4 323.3 325.9 799.0 132.1 332.7 334.2 816.3 132.4 340.1 823.9 124.3 352.1 347.4 840.6 123.9 364.4 352.4 869.1 129.5 375.8 363.8 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 182.1 54.5 117.5 10.2 9.6 190.2 56.7 122.5 11.0 10.4 199.0 58.5 130.5 205.1 58.7 135.6 10.7 7.7 209.0 58.1 139.0 11.8 7.4 224.5 53.6 141.9 28.9 24.0 210.5 48.4 145.2 16.9 13.1 211.8 48.8 149.4 13.5 10.4 6.7 103.7 96.9 9.3 113.6 104.3 11.3 131.2 119.9 -1.5 138.5 140.0 Gross National Product Final purchases Private Excluding net exports Net exports of goods and services 1/ Exports Imports -4.8 73.3 78.1 -5.3 78.5 83.8 10.0 6.5 - .8 88.8 89.5 .5 95.4 94.9 343.8 1383.8 1370.3 1065.9 1067.4 Gov't. purchases of goods and services Federal Defense Other State & local 255,1 102.7 72.6 30.1 152.4 262.6 105.2 74.7 30.5 157.4 269.0 106.4 75.0 31.4 162.6 273.3 106.2 74.0 32.2 167.1 276.9 105.3 73.3 32.0 171.6 286.4 108.4 75.3 33.1 177.9 296.3 111.5 75.8 35.7 184.8 304.4 114.3 76.6 37.7 190.1 Gross national product in constant (1958) dollars = 100) GNP implicit deflator (1958 798.1 146.5 814.2 148.0 832.8 150.0 837.4 152.6 840.8 155.7 845.7 158.9 830.5 163.6 827.1 167.3 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 950.3 631.4 807.2 49.3 6.1 985.0 647.5 838.1 58.9 7.0 1013.6 667.6 869.5 65.3 7.5 1039.2 683.8 892.1 69.6 7.8 1068.0 698.2 913.9 73.2 8.0 1099.3 717.0 939.4 89.3 9.5 Corporate profits & inventory val. adj. Corporate profits before tax 92.9 100.2 99.8 108.2 103.9 120,4 105.0 124.9 105.2 122.7 Federal government receipts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) 228.4 238.2 -9.8 235.6 261.2 -25.6 249.1 260.2 -11.2 255.0 262.4 -7.4 1.3 -19.2 -8.5 9.2 19.1 13.2 High employment surplus or deficit (-) State and local government surplus or deficit (-), (N.I.A. basis) 745.2 966.5 71.5 7.4 106.4 122.7 107.7 135.4 105.6 139.0 261.8 263.4 -1.7 268.3 270.6 -2.3 278.1 281.0 -2.8 288.6 291.6 -3.0 -3.4 4.6 4.8 14.0 19.6 10.4 8.4 4.6 3.2 2.0 92.1 2.3 89.8 4.8 92.7 2.3 90.5 5.2 92.9 2.2 90.6 5.1 77.8 20.3 78.0 20.2 78.3 20.2 89.3 2.4 86.9 5.6 89.6 2.4 87.1 5.3 90.0 2.4 87.6 5.0 Nonfarm payroll employment (millions) Manufacturing 74.0 19.2 74.9 19.5 75.8 19.8 76.5 20.0 77.1 20.1 116.3 79.4 90.6 120.2 81.5 92.3 123.1 82.8 93.0 124.8 83.3 93.4 126.7 83.3 93.5 127.0 82.6 92.3 2.42 11.68 9,90 1.78 1 7. -5.3 78.5 83.8 2.39 12.18 10.26 1.92 - .7 88.8 89.5 2.17 12.03 10.17 1.85 2.01 11.33 9.66 1.62 10.15 8.51 Major materials (per cent) 2.37 11.21 9.59 1.61 1/ Net exports of g. & s. (Bal. of Paymts.) -4.8 Exports 73.3 Imports 78.1 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) Domestic models Forelen models 1134.6 727.6 950.6 84.4 8.9 Total labor force (millions) rmed forces Civilian labor force " Unemployment rate (per cent) Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) 1112.5 1.67 .5 6.6 95.4 94.9 103.7 97.1 1.64 124.9 80.5 90.2 1.61 9.04 7.49 1.55 10.92/ 116.!/ 105.1 132.1/ 121.1 125.5 80.1 90.2 1.53 9.17 7.92 1.25 - 74/ 140.9 2/ Lncluder shipments of military equipment and supplies to Israel which are not included in GNP exports; amounts in oltlions of dollers at annual rates are 1973-IV, $2.4; 1974-I, $.3; 1974-II, $.3. I - 11 CONFIDENTIAL - FR May 14, 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1972 III 1973 I. IV -------------- -35.4 .8 34.6 27.1 1974 III IV I II Billions of Dollars---------------- - .5 dollars 11.5 9.7 11.7 8.1 - .3 .3 -8.1 - .4 5.6 12.4 3.9 9.4 8.3 11.1 5.9 1.8 .2 - .6 5.0 7.5 2.5 5.0 Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 20.0 17.3 2.2 Durable goods 6.2 22.7 17.3 8.9 8.4 Personal consumption expenditures 1.3 34.3 24.5 35.1 17.1 18.1 8.6 2.6 6.0 7.6 3.1 Excluding net exports 4.5 27.6 20.4 Gross National Product Inventory change Final purchases Private Net exports GNP in constant (1958) Final purchases Private II 44.2 -1.0 45.2 38.8 29.0 .7 28.3 24.0 31.0 1.1 29.8 26.2 14.8 -12.0 26.8 16.9 2.0 14.9 16.7 25.0 -3.4 28.4 20.3 -12.8 33.1 28.5 8.0 6.4 1.2 5.2 5.1 4.3 - .2 4.5 3.4 3.6 - .9 4.5 8.3 7.3 -4.5 2.9 9.5 3.1 6.3 12.3 5.0 -5.2 3.3 9.9 3.1 6.9 11.4 11.4 .4 4.2 8.1 2.8 5.3 16.1 15.6 14.4 18.6 20.2 19.1 4.6 4.1 4.3 3.4 3.1 3.3 4.9 -7.0 -9.0 -15.2 -5.8 -6.1 -3.4 -1.0 - .8 ---------------- In Per Cent Per Year --------------Gross National Product Final purchases Private 9.5 8.7 10.7 12.7 12.5 12.5 15.5 16.0 17.7 9.6 9.5 10.3 10.1 9.7 11.0 11.2 5.7 3.4 Personal consumption expenditures Durable goods Nondurable goods Services 9.3 18.4 6.3 8.9 11.5 10.6 12.3 11.2 13.6 28.7 16.9 4.9 9.2 - .9 12.1 10.6 8.9 .9 14.0 7.3 3.8 -22.3 10.0 8.9 8.4 -1.3 14.7 5.9 14.3 19.3 13.1 13.6 Gross private domestic investment 15.9 12.7 10.1 19.0 17.2 18.1 19.8 13.3 28.8 12.8 1.4 16.6 7.8 -4.0 10.4 33.1 -27.6 8.6 -22.7 -33.5 9.6 2.5 3.3 12.1 2.1 -11.5 -16.3 1.3 12.7 12.3 10.1 12.1 5.4 13.8 10.1 4.6 1.6 12.3 13.9 6.5 - .7 -5.2 10.6 11.5 5.4 -3.3 -3.7 -2.5 11.2 14.4 12.3 11.4 14.5 15.5 14.6 11.9 2.7 35.3 16.4 11.4 10.4 4.3 24.4 12.0 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator Private GNP fixed weighted index 2/ 6.0 5.1 7.6 3.3 3.6 8.3 8.1 9.2 4.1 3.8 9.5 10.4 12.0 5.5 7.4 2.2 2.0 2.5 7.3 8.1 1.6 1.5 1.9 8.3 8.4 2.4 -3.3 -5.1 8.6 9.1 -7.0 -2.8 -3.5 12.3 14.1 -1.6 Personal income Wage and salary disbursements Disposable income 8.6 7.5 9.0 15.4 10.6 16.2 12.1 13.0 15.8 10.5 10.1 10.8 11.6 8.7 10.1 12.2 11.2 11.6 4.9 6.0 4.9 10.0 6.9 Corporate profits before tax 18.7 36.0 53.3 15.8 -6.9 .0 48.3 11.1 Federal government receipts and expenditures (N.I.A. basis) Receipts Expenditures 7.9 -8.7 13.2 44.6 25.0 -1.5 9.8 3.4 11.1 1.5 10.3 11.4 15.4 16.3 3.6 3.3 4.8 7.3 5.0 6.3 3.9 4.4 3.0 2.1 3.8 3.7 1.0 -2.4 Industrial production 9.1 14.1 10.0 25.5 9.1 -5.5 Housing starts, private Sales new autos 22.2 17.9 18.3 Domestic models 20.8 13.4 15.4 Foreign models 30.9 48.0 35.4 1/ Percentage rates are annual rates compounded quarterly. Using expenditures in 1967 as weights. 2/ 5.6 -32.7 -5.0 -3.5 -12.9 6.2 -25.3 -21.3 -18.6 -35.0 1.0 -58.3 -35.5 -39.8 -5.9 Residential structures Business fixed investment Gov't. purchases of goods and services Federal Defense Other State and local Nonfarm payroll employment Manufacturing 4.5 8.4 6.7 -6.5 -2.0 -37.1 -40.0 -20.0 7.6 8.7 8.0 -. 5 -. 5 9.4 12.3 8.2 1.9 -19.1 5.9 25.1 -57.8 CONFIDENTIAL - FR I - 12 May 14, 1975 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of dollars) 1969 1970 1971 1972 1973 1974 1975 Gross National Product Final purchases Private Excluding net exports 930.3 977.1 1054.9 1158.0 1294.9 1397.4 1463.2 922.5 712.5 710.6 972.6 753.1 749.5 1048.6 814.4 814.6 1149.5 893.8 899.8 1279.6 1003.2 999.3 1383.2 1074.0 1071.9 1473.7 1131.5 1133.2 Personal consumption expenditures Durable goods Nondurable goods Services 579.5 90.8 245.9 242.7 617.6 91.3 263.8 262.6 667.1 103.9 278.4 284.8 729.0 118.4 299.7 310.9 805.2 876.7 127.5 380.2 369.0 949.4 Gross private domestic investment Residential Construction Business fixed investment Change in business inventories Nonfarm 139.0 32.6 98.5 7.8 7.7 136.3 31.2 100.6 4.5 4.3 153.7 42.8 104.6 6.3 4.9 179.3 54.0 116.8 8.5 7.8 209.4 57.2 15.4 11.4 209.4 46.0 149.2 14.2 11.9 1.9 55.5 53.6 3.6 62.9 59.3 65.4 65.6 - 6.0 72.4 78.4 3.9 100.4 96.4 2.1 140.2 138.1 -1.7 138.8 140.5 Gov't. purchases of goods and services Federal Defense Other State & local 210.0 98.8 78,4 20.4 111.2 219.5 96.2 74.6 21.6 123.3 234.2 97.6 71.2 26.5 136.6 255.7 104.9 74.8 30.1 150.8 276.4 106.6 74.4 32.2 169.8 309.2 116.9 78.7 38.2 192.3 342.2 130.2 86.5 43.6 212.1 Gross national product in constant (1958) dollars GNP implicit deflator (1958=100) 725.6 128.2 722.5 135.. 746.3 141.4 792.5 146.1 839.2 154.3 821.2 170.2 787.7 185.7 Personal income Wage and salary disbursements Disposable income Personal saving Saving rate (per cent) 750.9 509.7 634.4 38.2 6.0 808.3 542.0 691.7 56.2 8.1 864.0 573.0 746.4 60.5 8.1 944.9 626.8 802.5 52.6 6.6 1055.0 691.7 903.7 74.4 8.2 79.8 84.9 69.2 74.0 78.7 83.6 92.2 99.2 197.3 189.2 8.1 192.0 203.9 -11.9 198.5 220.3 -21.9 8.8 3.7 .7 Net exports of goods and services 1/ Exports Imports Corporate profits & inventory val. adj. Corporate profits before tax Federal government receipts and expenditures, (N.I.A. basis) Receipts Expenditures Surplus or deficit (-) High employment surplus or deficit (-) - .2 130.3 338.0 336.9 136.8 129.4 414.5 405.5 173.3 38.9 145.0 -10.6 -10.2 1150.5 751.2 979.7 77.0 7.9 1233.5 785.2 1067.6 92.0 8.6 105.1 122.7 105.6 140.7 99.7 106.0 227.2 244.7 -17.5 258.5 264.2 -5.6 291.1 299.1 -8.1 271.3 356.3 -84.9 -4.7 -6.7 - .7 19.4 -10.7 1.8 3.4 12.3 9.2 1.8 -1.5 State and local government surplus or deficit (-), (N.I.A. basis) Total labor force (millions) Armed forces Civilian labor force " Unemployment rate (per cent) 84.2 3.5 80.7 3.5 85.9 3.2 82.7 4.9 86.9 2.8 84.1 5.9 89.0 2.4 86.5 5.6 91.0 2.3 88.7 4.9 93.2 2.2 91.0 5.6 94.5 2.2 92.3 9.1 Nonfarm payroll employment (millions) Manufacturing 70.4 20.2 70.9 19.3 71.2 18.6 73.7 19.1 76.8 20.1 78.3 20.0 76.3 17.9 Industrial production (1967 = 100) Capacity utilization, mfg. (per cent) Major materials <per cent) 110.7 86.5 90.0 1.47 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) 9.57 Domestic models 8.46 Foreign models 1.11 1/ Net exports of g. & s. (Bal. of Paymts.) 1.3 Exports 55.0 53.6 Imports 2/ 106.7 78.3 86.2 106.8 75.0 85.3 115.2 78.6 89.6 125.6 83.0 1.43 8.40 7.12 1.28 2.9 62.3 59.4 2.05 10.24 8.68 1.56 - .2 65.4 65.6 2.36 10.93 9.32 1.61 -6.0 72.4 78.4 2.05 11.44 9.67 1.77 93.0 124.7 78.9 87.0 112.1 67.9 71.3 1.34 8.87 7.45 1.42 CP 1.23 8.29 6.66 1.63 4., 4.4 2/ 3.3 101.0 /142./ 96.6 139.4 139.6 Includes shipments of military equipment and supplies to Israel which are not included in GNP 1973, $.6; 1974, $.325; and 1975, $.150. exports; amounts in billions of dollars are: I - 13 May 14, CONFIDENTIAL - FR 1975 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS Proj. 1969 1970 -------------- CNP in constant (1958) dollars Final purchases Private 50.1 40.6 1.7 38.9 38.1 .5 17.9 19.9 -1;4 2.1 9.5 -2.6 12.1 1973 1974 103.1 136.9 77.8 1.6 2.2 6.9 76.0 100.9 130.1 79.4 109.4 61.3 -3.8 -5.8 9.9 65.1 85.2 99.5 49.6 61.9 76.2 12.6 14.5 11.9 14.6 21.3 38.3 26.1 22.2 26.0 11.6 11.2 3.2 4.0 12.2 20.0 14.7 21.5 20.7 1.4' 7.3 1.7 14.2 13.3 19.0 102.5 - 1.1 103.6 70.8 - 1.8 72.6 71.5 - 2.8 42.2 32.1 -11.2 12.4 32.8 10.3 22.5 -3.1 - .4 -22.5 33.5 46.2 46.7 -18.0 -44.4 43.0 -15.9 -17.1 20.6 6.2 18.5 46.1 45.2 -17.5 -19.6 -------------- Per Cent per year---------------5.0 5.4 5.7 8.0 7.8 8.1 9.8 9.6 9.7 6.6 .6 7.3 8.2 8.0 13.8 5.5 8.5 9.3 14.0 7.7 9.2 10.5 8.9 10.1 - 2.1 12.8 12.5 8.4 9.5 12.8 37.2 4.0 16.7 26.2 11.7 .0 -17.2 16.8 5.9 -19.6 -15.4 -2.8 17.1 9.1 8.1 8.1 6.5 9.7 Gross private domestic investment Residential structures 10.3 8.3 10.9 -1.9 -4.3 2.1 23.8 4.5 11.8 11.3 12.2 7.9 8.1 7.1 11.9 9.7 5.8 18.6 13.3 1.1 5.9 5.5 6.5 - 2.1 - 1.9 - 2.6 5.6 6.3 10.3 11.4 9.1 9.3 11.7 10.4 12.6 9.1 8.6 8.4 7.2 4.5 9.0 -. 4 -. 1 Personal income Wage and salary disbursements Disposable income 7.6 6.3 9.0 6.9 5.8 7.9 Corporate profits before tax -3.1 -12.8 13.0 18.7 23.7 14.7 Federal Government receipts and expenditures (N.I.A. basis) Receipts Expenditures 12.7 4.2 -2.7 7.8 3.4 8.0 14.5 11.1 13.8 8.0 12.6 13.2 3.7 2.0 .7 -4.1 .4 -4.0 3.5 2.8 4.2 5.0 Using expenditures in 1967 as weights. 10.7 11.4 9.9 14.1 10.3 8.1 1.6 -. 5 7.0 12.6 -2.6 -4.8 5.9 10.9 GNP in constant (1958) dollars Final purchases Private GNP implicit deflator 1/ Private GNP fixed weighted index- 1/ 8.3 1.5 9.0 9.9 5.5 4.8 Gov't purchases of goods & services Federal Defense Other State and local Industrial production Housing starts, private Sales new autos Domestic models Foreign models 65.8 -24.8 90.5 57.5 -3.8 61.3 72.7 1.9 34.3 36.5 -7.1 -4.2 33.0 13.3 19.8 18.7 Personal consumption expenditures Durable goods Nondurable goods Services Nonfarm payroll employment Manufacturing 1975 19.0 Gross National Product Final purchases Private Business fixed investment 1972 Billions of Dollars-------------- 46.8 -3.3 Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Durable goods Nondurable goods Services Residential fixed investment Business fixed investment Government Federal State and local 1971 -3.6 -2.3 -12.3 -15.9 15.5 9.0 -13.2 4.7 3.7 9.8 -4.1 -2.1 -2.9 -24.7 -6.8 19.1 -2.6 2.0 -.2 -10.5 -. 7 -34.6 -22.5 -23.0 -20.1 -10.2 -8.2 -6.5 -10.6 14.8 I - 14 DOMESTIC FINANCIAL DEVELOPMENTS Summary. The relatively tense situation in securities markets that began to develop in late March and continued into April has now evaporated. Expectations of the future course of interest rates have apparently been adjusted to the view that upward interest rate pressures may not develop until later on. The recent shift in expectations was prompted in part by the announcement of the Treasury on May 1 of reduced cash requirements in the remaining portion of the fiscal year. More recently, a small decline in the Federal funds rate and considerably slower growth in the monetary aggregates than in March has erased, at least temporarily, concerns about an increase in the Federal funds rate. At current levels, short-term market rates are 25 to 50 basis points below the levels prevailing at the time of the April FOMC meeting and long-term market rates are 5 to 20 basis points lower. Given the improved market environment, the Treasury has been able to market readily a sizable amount of issues so far this month. Through May 14, the Treasury has sold $7 billion of new coupon issues ($3.8 billion of which was used to refund maturing issues) and has continued to add large amounts to bill auctions. Demands for Treasury securities--especially shorter-term issues--have continued to be quite large by commercial banks, thrift institutions, and other investors who are still in the process of rebuilding liquidity. I - 15 In April, commercial bank additions to their Treasury security holdings were the only major area of bank credit expansion, and weekly reporting data for early May indicate continued bank acquisitions. Other security holdings declined slightly last month, while total loans fell at about an 11 per cent annual rate. consumers declined considerably. Loans to businesses and Contributing to the decline in such credit was a probable rapid runoff in business inventories, the large volume of funds raised by businesses in bond and stock markets, the sluggish performance of consumer durable sales, and the maintenance by banks of conservative lending policies. With outstanding bank loans declining and consumer-type savings and time deposits expanding at a strong rate, banks allowed their CD's to decline further. In the bond and stock markets, flotations of new issues have continued at a brisk pace. With interest rates declining and under- writers in a more comfortable inventory position, much of the $1.5 billion of issues postponed during late March and early April now have been offered or rescheduled for sale later this month. The present level of stock prices, which is about 47 per cent above the lows late last year, has also encouraged increased issuance of equities. New issues of State and local government securities are also being marketed in volume, but bank demands remain limited and investors in general are quality conscious, particularly in view of the continuing financial problems of New York City. I - 16 In the mortgage markets, demands for credit reportedly have picked up significantly in recent weeks, especially on the West Coast. New and outstanding mortgage commitments at S&L's have apparently increased further in April. However, S&L's--as well as other mortgage lenders--continue to behave cautiously; they are rebuilding liquidity, repaying debt, and extending commitments selectively. Under the circumstances, mortgage rates have increased 10 to 30 basis points since mid-April. Outlook. Barring any marked change in market expectations, it appears likely that demands for funds will not be sufficiently strong to generate upward interest rate pressures over the next month or so. Total business credit demands are likely to remain weak, and these demands are expected to be concentrated in bond and equity markets rather than at banks and in the commercial paper market, as has been the case since autumn of last year. Moreover, while the tax rebate program is expected to increase consumer spending, relatively little strength is anticipated in the auto and other large durable goods categories, which traditionally are associated with heavy consumer financing demands. The tax rebate program will also tend to boost deposit flows at banks and other institutions in the near-term. These institutions undoubtedly will continue to add to their liquid asset holdings, especially Treasury securities. The Treasury will conduct another I - 17 note auction to raise $1.5 billion of additional new money next week and will continue adding to bill auctions at least through mid-June. But thereafter the Treasury will not place additional net demands on the market until early July. Assuming short-term market interest rates change little from current levels, there appears to be room for a little further decline in rates on longer-term market instruments. The steepness of the yield curve is likely to persuade some investors to lengthen portfolios, and may persuade some borrowers to seek shorter-term credits. With stability in open market rates, and with continued sizable inflows of funds to thrift institutions, recent upward pressure on mortgage market rates may abate. I - 18 INTERNATIONAL DEVELOPMENTS Summary. Since mid-April the exchange value of the dollar has receded by about 1 percent against a weighted average of leading foreign currencies, but it still remains 1-1/2 percent above its 1975 low (first week of March). Interest in foreign exchange markets in recent weeks, however, focussed less on the dollar than on other currencies. The Both sterling and the Canadian dollar weakened sharply. depreciation of the pound related to increasing doubts that the British authorities would be able to bring prices and wages under control. The consumer price index now is rising at an annual rate of over 25 percent and various measures included in the recent Budget will speed up this price rise over the next month or so. Wage claims have begun to accelerate in face of these price expectations. The weakening of the Canadian dollar is associated with the deterioration in the Canadian trade balance and the difficulties some new Canadian bond issues have encountered in the New York market. The continuous strength of the French franc since the beginning of the year gained further impetus in recent weeks and led to the announcement on May 9 that the franc would be rejoining the European snake. The reasons for the long-term strengthening of the franc are not clear given the relative price performance of the I - 19 French economy. The recent strengthening may be associated with the weakness of sterling, some inflows from OPEC countries and possible movements of Vietnamese funds into France. A possible association of the Swiss franc with the snake arrangement is currently also under discussion. The trade balance shifted unexpectedly into a surplus position of about $5-1/2 billion (annual rate) in the first quarter of 1975 from a deficit of almost $6 billion in the fourth quarter of 1974. The more than $11 billion swing (on an annual rate basis) in the U.S. trade position largely reflected cyclical factors. The volume of imports dropped by about 10 percent between the fourth quarter of 1974 and the first quarter of 1975, while that of exports of non-agricultural goods -- the cyclically sensitive part of overseas sales -- fell only by 4 percent. This lesser decrease in export than in import volumes partly reflects the sharper drop in output in the United States as compared with most other countries and the fact that long-lead-time machinery exports are declining relatively slowly since they were last to be affected by the economic downturn abroad. The volume of agricultural exports rose in the first quarter, partly offsetting the decline in other export categories. Consequently, total exports, in real terms, were off by only 1 percent from their fourth quarter, 1974 level. I - 20 The general weakness in world demand and the accompanying shrinkage in the volume of world trade were reflected in a slowing in the rate of price increase for traded goods, particularly on the import side. Unit values for U.S. agricultural exports fell, but unit values for other goods continued to rise, perhaps reflecting deliveries of long-lead investment goods. The strengthening in the U.S. trade balance in the first quarter was accompanied by sharply higher net outflows of private capital through banks and securities transactions and a reduction in the net inflow of foreign official funds. There was a net outflow on bank-reported private transactions of $5.4 billion in the first quarter compared with only $0.3 billion in the fourth quarter of 1974. Liabilities to foreigners declined in the first quarter in marked contrast to the inflows of 1974 and lending to foreigners continued large, probably reflecting earlier high commitment activity. The net outflow on securities transactions of about $1-1/2 billion in the first quarter related to a large increase in new issue activity in the bond markets with U.S. purchasers buying more than $2 billion worth of newly issued foreign bonds, This increase in sales of foreign bond issues more than offset the revival in foreign interest in U.S. equities. taper off. However, the volume of new foreign issues has begun to I - 21 Outlook. Despite the stronger trade performance during the first quarter of this year, the outlook remains for a re-emergence of a trade deficit in the second half of the year. Economic activity in the U.S. is expected to begin to pick up a bit earlier than in other countries, so cyclical factors will no longer support the U.S. trade position. Policy actions in other countries, except in Germany, have lagged behind those taken in the U.S. in strength as well as in timing. But some stimulative action has been taken almost everywhere and there are signs that the recession in other countries may be bottoming out by mid-year. However, given the structure of U.S. exports, the main effect of an upturn elsewhere on U.S. sales abroad may occur only later in the cycle when investment activity abroad begins to revive. Consequently, non-agricultural exports are projected to continue to fall through the second quarter and revive slowly in the second half of the year. Agricultural exports are likely to fall throughout the year. As imports are expected to pick up faster than exports, the trade balance may well be in a deficit of $5-6 billion (annual rate) by the fourth quarter of this year.
@FedFRASER