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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

May 17,
By the Staff
Board of Governors
of the Federal Reserve System

1972

TABLE OF CONTENTS
Page No.
Section
I

DOMESTIC NONFINANCIAL SCENE
. . .
...
. . . .
Summary and outlook. ....
Industrial production. . . . . .. . . . . . .
.
.
. . . . . . . . . . . .
Retail sales .
Consumer durables. . .
...
. .
. .
.
Census consumer buying indicators. . .
. ,
Cyclical indicators. . . . .
. . .
. . . . ...
.. .
. . . . .
.
. .
Inventories .
. . .
Manufacturers' orders and shipments. . . . . . .
Planned spending for new plant and equipment .
Construction and real estate . . . . . . . .
. .
.
Personal income. . . . . . . . . .
.
. .
...
.
. .. . . .
Labor market .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Earnings ...
.
. .
.
.
.
.
costs
.
labor
Productivity and
. . . . . . . . .
Minimum wage . . . . . . . .
Industrial relations . . . . . . . . . . .
.
.
. .
. .
.. .
Wholesale prices .
. .. . .
.. . .
Consumer prices. . . . . .

. - 1
. .
7
. - 8
9
. . -10
-12
. -12
. -14
. . -15
. -16
.
-17
. -19
. . -22
.
-22
. -24
-25
.
-27
-29

DOMESTIC FINANCIAL SITUATION
Summary and outlook.
Monetary aggregates.
Bank credit, . . . .
Consumer credit. .

. . ..
....
.......
*
.
. .
......
.
.
. . ..
.
.
. . . . . .
.
. . . . .
. . . . . ..

Nonbank financial institutions and mortgage markets.

9
. . . ..
-13
.
. . -15
III

INTERNATIONAL DEVELOPMENTS
.

. .

Foreign exchange markets . ,
.
Euro-dollar market . . .
Balance of payments.

- 7

Long-term securities . . . . . . . ........
..
Short-term security markets. . . .
. . . .......
Federal finance. . .... .

Summary and outlook.

1
3
5
7

. .

U. S. foreign trade, . , .

. . - 2
. . . . . . .. ..
.
.
.
- 5
.
.
.
.
. .
. .

......

. ...

Trade balance of major industrial countries.

...

. -10

. -13

DOMESTIC NONFINANCIAL
SCENE

May 16,
I--

1972

T - 1

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

Latest Data-1972
Release
Period
Date
Data

Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At annual rates)

Apr.
Apr.
Apr.
Apr.

5/5
5/5
5/5
5/5

5.9
72.2
18.9
53.3

[5.9]/

Apr.
Apr.
QI
QI
QI

5/5
5/5
5/3
5/3
5/3

37.3
3.60
109.3
136.8
125.1

[37.111
6.7
3.7
9.3
5.4

[37.0]11
6.8

Apr.
Mar.

5/5
4/28

40.8

{40J.4]1

119.7

[40.0- 1 / [39.8] 1
6.1
3.1

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

Apr.
Apr.
Apr.
Apr.
Apr.

5/1
5/16

5/16

110.9
119.4
100.4
76.0
113.1

12.0
11.2
15.7
11.2
16.1

6.9
2.8
9.9
7.7
11.3

Wholesale prices (1967=100)
Industrial commodities
Farm products & foods and feeds

Apr.
Apr.
Apr.

5/5
5/5
5/5

117.5
117.1
119.0

3.1
5.1
-1.0

3.8
4.5
3.1

3.7
3.5
4.4

Consumer prices (1967=100)
Food
Commodities except food
Services 2/
l
3/

Mar.

4/21
4/21
4/21
4/21

124.1
122.6
118.3
132.0

0.2
2.1
2.8
1.8

3.4
7.0
1.6
3.7

3.5
4.6
2.3
4.3

Apr.

5/16

909.7

5.4

7.6

7.9

Personal income ($ bil.)

Mar.

5/16
5/16

3.0
5.0
2.3

15.911

[6.011
2.2
1.2
2.6

Unemployment rate (%)
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Output per manhour (1967=100)
Compensation per manhour (1967=100)
Unit labor cost (1967=100)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)

3.3
5.3
2.6

[37.0]
6.2
3.3
6.6
3.1

4.4
4.2
5.6
-0.7

5.2

(Not at annual rates)
Retail sales, total ($ bil.)

GAF
3/
Auto sales, total (mil. units)Domestic models
Foreign models

Apr.
Apr.
Apr.
Apr.
Apr.

5/10
5/10
5/8
5/4
5/8

35.9
9.5
10.48
9.02
1.46

-1.5
-1.8
0.7
2.9
-11.0

2.8
1.5
5.5
4.8
10.6

6.8
8.2
8.2
9.5
0.7

4/
14.4
1972
4/28
89.77
Plant & equipment expen. ($ bil.)11.4
9.1
35.1
1.6
Mar.
5/2
Mfrs. new orders dur. goods ($ bil.)
2.9
10.7
-1.8
8.8
Mar.
5/2
Capital equipment
-12.0
11.9
-6.7
5/2
1.8
Mar.
Defense products
3/
8.4
-10.3
-15.0
2,115
5/16
Apr.
Housing starts, private (thous.)2.6
11.0
Mar.
4/26
136.1
0.9
Leading indicators (1967=100)
1/ Actual data.
2/ Not seasonally adjusted.
3/ At annual rate
4/
Planned--McGraw-Hill (their Febr lary 1972 survey indicated an increase of 11.4 per
cent).

I - 1
THE ECONOMIC PICTURE IN DETAIL
Domestic Nonfinancial Scene

Summary.

Real GNP appears to be increasing at an annual

rate of about 7 per cent in the current quarter.

This compares to a

rise of 5.6 per cent (revised) in the first quarter and is also
larger than had been projected in the preceding Greenbook.

The GNP

deflator is expected to rise much more slowly than in the first
quarter, when it was boosted by Federal pay raises and the effects of
the post-freeze bulge.
Strong demands for goods have been reflected in large
industrial output gains.

The Board's index increased 1 per cent

further in April, with advances widespread among consumer goods,
business equipment, and materials.

In the four months December to

April, the index rose at an annual rate of 9 per cent, with business
equipment up at a rate of about 12 per cent.

New orders for capital

equipment in the first quarter were up appreciably from the fourth
quarter.

The book value of manufacturing and trade inventories in-

creased at a quite modest pace in March and the overall stock sales
ratio declined further to a relatively low level.
Retail sales dropped back moderately in April, according to
the advance report, following an upsurge in March; for both months
combined, however, the rise was sizable.

Auto sales continue strong,

with sales of domestic-type autos at a 9.0 million unit rate in April

I -2

and close to that in early May.

Housing starts declined 10 per cent

in April to an annual rate of 2.1 million units, but this drop
reflected in part a smaller number of working days; building permits
remained strong.
Demands for labor continue expansive, even though the unemployment rate in April remained at 5.9 per cent.

Nonfarm payroll

employment again rose substantially, with increases widespread by
industry.

In manufacturing, the workweek also rose sharply further

to the highest level in three years.

Average hourly earnings in the

nonfarm private economy rose at a fairly rapid rate in April, but the
5.7 per cent annual rate of increase from January to April was smaller
than before the freeze.
Wholesale prices rose further in April, as industrial
commodities continued to advance at about a 4 per cent annual rate.
Prices of farm products and foods changed little on average following
a sizable decline in March.
Outlook.

The staff is now projecting a more vigorous

expansion over the remainder of this year than in the previous
projection.

Real GNP is expected to increase at an annual rate

approaching 8 per cent in the second half, compared to a little more
than 7 per cent in the preceding projection. Monetary aggregates are
assumed to grow at rates consistent with a 7 per cent expansion in M1,
which is likely to entail rising short-term interest rates in the
second half of the year.

I-3

The more rapid expansion now expected in real output has
led the staff to raise its projection of employment, and to lower the
unemployment rate further to 5.2 per cent in the fourth quarter.

The

projected increase in the GNP implicit price deflator is larger
than anticipated earlier.
STAFF GNP PROJECTIONS

Change in
Nominal GNP
$ billion
4/12/72 Current

Per cent increase, annual rate
Private GNP
fixed weight
Real GNP
price index
4/12/72 Current 4/12/72 Current

Unemployment
Rate
4/12/72 Current

Actual
1971-IV

19.5

5.8

1.8

5.9

1972-I

30.0

30.7

5,6

5.6

4.3

4.4

5.8

1972-II

27.0

30.2

6.2

6.9

3.5

4.0

5.7

1972-III

30.0

32.3

7.4

7.9

3.2

3.4

5.5

1972-IV

29.0

32.7

6.9

7.8

3.0

3.4

5.2

Projected

The more rapid growth now anticipated for the seccnd quarter
reflects in part an expected step-up in inventory accumulation from
the minimal first quarter rate.
strong.

Business fixed investment continues

Consumer spending is still expected to show a large advance,

at an annual rate of 9 per cent, in response to an exceptionally
strong rise in disposable income.
improvement,

Net exports are expected to show

following the very poor first

quarter performance.

I - 4
Upward revisions of GNP growth for the second half of the year
in part reflect changed assumptions on defense spending and social
security benefits.

Defense outlays are expected to rise in a lagged

response to the recent escalation in Vietnam, and it now appears
most likely that Congress will enact a larger social security increase
than previously projected.

The staff is now assuming an increase

of around 12-1/2 per cent effective July 1. We have also incorporated
the income effects of the recently enacted House minimum wage bill-described in another section--which are relatively small.

In addition,

business spending on fixed capital has been raised--to an increase of
14 per cent for the year--in part because of the significant upward
revision in spending plans indicated by the recent McGraw-Hill survey.
The recent sustained rise in output of business equipment lends further
support to this projection.

A somewhat larger rise in inventory

accumulation is also projected for the second half, while other major
sectors of demand have been modified relatively little.
The staff now expects less slowing than earlier in the rate of
price increase, with the GNP price deflator projected to rise at an
annual rate of about 3-1/2 per cent in the fourth quarter rather than
3.0 per cent.

This expectation reflects mainly our judgment that the

rise in employee compensation is unlikely to moderate to the extent
previously projected; our present estimates allow for an overall
increase in the 6-1/2 - 7 per cent range.

I-5
CONFIDENTIAL - FR

May 17,

1972

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarterly figures at annual rates.)
1971

1972
Proj.

1971
III

1046.8
1044.5
811.5
811.5

1150.6
1144.6
885.7
889.3

1053.4
1054.6
820.8
820.8

1072.9
1070.4

Personal consumption expenditures
Durable goods
Nondurable goods
Services

662.1
100.5
278.6
282.9

715.7
112.4
298.3
305.1

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

151.6
40.6
108.7
2.2
1.7

179.6
49.7
123.9
6.0
5.8

Gross National Product
Final purchases
Private
Excluding net exports

Net exports of goods and services 1/
Exports
Imports

1166.1
1157.9
896.0
898.8

1198.8

829.6
834.2

1133.8
1130.6
875.5
879.5

668.8
102.8
280.2
285.8

677.2
103.6
283.3
290.3

691.8
107.6
288.0
296.2

707.2
110.6
294.6
302.0

722.9
113.6
301.4
307.9

741.0
117.6
309.2
314.2

150.8
42.7
109.3
-1.2
-2.0

159.4
44.4
112.6
2.4
2.0

168.3
49.0
118.7
0.6
0.1

175.5
50.3
122.0
3.2
3.0

184.1
50.4
125.5
8.2
8.2

190.4
48.9
129.5
12.0
12.0

1186.8
917.8
919.4

0.0

-3.7

0.0

-4.6

-6.2

-4.0

-2.8

-1.6

65.3
65.3

70.5
74.2

68.2
68.2

60.4
'65.0

69.2
75.4

69.1
73.1

70.6
73.4

73.2
74.8

233.0
97.6
71.4
26.2
135.5

258.9
107.4
77.7
29.7
151.5

233.8
97.6
70.2
27.4

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

739.4
141.6

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

857.0
574.2
741.3
60.5
8.2

Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)

1103,6
1103.0
853.4
859.6

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

Corporate profits before tax
Corp. cash flow, net of div. (domestic)

1972
Projected
III

85.5
81.0

198.8
221.9
-23.1

136.2

240.8
100.3
71.4
28.9
140.5

249.6
104.9
75.8
29.0
144.8

255.1
106.3
76.8
29.5
148.8

261.9
108.5
78.3
30.2
153.4

269.0
110.0
79.8
30.2
159.0

782.9
146.9

740.7
142.2

751.3
142.8

761.6
144.9

774.7
146.3

790.1
147.6

805.4
148.8

931.6
631.5
794,8
59.8
7.5

864.6
577.3
748.5
61.0
8.2

876.7
587.0
755.0
59.0
7.8

900.1
'609.0
764.3
53.5
7.0

919.0
623.8
782.6
56.2
7.2

943.1
638.6
807.2
64.9
8.0

964.0
654.4
825.0
64.4
7.8

85.8
82.4

86.2
85.6

105.0
100.8

114.0
106.8

227.3
255.1
-27.8

233.9
258.9
-25.0

102.0
98.1

227.1
248.4
-21.2

197.8
224.6
-26.7

203.1
228.7
-25.6

91.6
90.0

222.1
235.4
-13.3

97.5
94.9

225.2
244.0
-18.8

2.9

1.0

1.3

6.6

10.4

3.5

-4.9

-5.1

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

86.9
2.8
84.1
5.9

88.6
2.4
86.7
5.6

87.0
2.8
84.2
6.0

87.7
2.7
85.0
5.9

88.4
2.5
85.9
5.8

88.9
2.4
86.5
5.7

87.3
2.4
86.9
5.5

89.8
2.4
87.4
5.2

Nonfarm payroll employment (millions)
Manufacturing

70.7
18.6

72.7
19.0

70.6
18.5

71.0
18.6

71.8
18.7

72.4
18.9

73.0
19.1

73.7
19.4

Industrial production (1967 = 100)
Capacity utilization, manufacturing
(per cent)

106.3

112.9

105.9

107.0

109.1

111.3

114.2

117.1

74.6

76.7

74.1

75.1

76.0

77.3

78.6

Housing starts, private (millions, A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models

2.05
10.13
8.68
1.46

2.28
10.54
9.05
1.49

2.11
10.29
8.76
1.53

2.24
10.47
9.20
1.25

2.51
10.15
8.69
1.46

2.30
10.50
9.00
1.50

2.20
10.50
9.00
1.50

2.10
11.00
9.50
1.50

High employment surplus or deficit (-)

The projected GNP exports and imports of goods and services, and their net, are based on quarter-to-quarter
changes projected in balance of payments exports and imports, shown below. These are consistent with revised
'71-IV figures not yet incorporated in the GNP accounts.
1.0
-0.2
-1.4
-3.6
-2.1
0.2
-1.0
0.7
Net exports of goods and services

Exports
Imports

65.9
65.2

72 .
73.S

68.3
68.1

62.7
64.8

71.5
75.1

71.4
72.8

72.9
73.1

75.5
74.5

I-6
CONFIDENTIAL - FR

May 17, 1972
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1971

1972
Proj.

1971
III

1972
Projected
II
III

------------------------- Billions Of Dollars-----------------------Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government

72.7
-0.6
73.2
59.6
63.2
-3.6
13.6

GNP in constant (1958) dollars
Final purchases
Private

30.7
-1.8
32.6
23.8
25.4
-1.6
8.8

103.8
3.8
100.0
74.1
77.8
-3.7
25.9
43.5
40.9
33.5

4.9
9.5
6.9

10.6
7.7
4.1

10.3
12.4
10.9

13.1
10.9
9.7

32.3
5.0
27.3
20.5
19.3
1.2
6.8

32.7
3.8
28.9
21.8
20.6
1.2
7.1

15.4
11.3
9.2

15.3
12.3
10.2

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

5.21/

7.6(/

12.01

7.4
7.4

6.0
4.3

12.2
11.5

11.4
9.7
9.4

11.2
10.0
9.7

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.1
11.8

7.0
14.9

5.0
3.1

8.6
15.4

8.9
11.2

8.9
10.8

10.0
14.1

7.1
7.8

3.5
7.6

4.4
6.3

6.6
8.1

9.2
7.8

10.4
8.2

Gross private domestic investment
Residential construction
Business fixed investment

18.5
22.4
14.0

-5.5
27.0
3.7

22.8
15.9
12.1

22.3
41.4
21.7

17.1
10.6
11.1

19.6
0.8
11.5

13.7
-11.9
12.7

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

11.1

7.3

10.0
8.8
13.4
11.8

6.7
-6.7
45.5
7.8

12.0
11.1

14.6
18.3
24.6
1.4
12.2

8.8
5.3
5.3
6.9
11.0

10.7
8.3
7.8
9.5
12.4

10.8
5.5
7.7
0.0
14.6

6.9
5.7
6.3
4.0
4.0

7.9
5.8
5.9
3.4
3.4

7.8
6.3
6.4
3.4
3.4

10.5
9.5
12.6

8.9
9.9
8.8

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weight indexPersonal income
Wage and salary disbursements
Disposable income

5.9
5.5
5.6
3.8

2.71
5.2
4.6
2.51'

3.6

3.6 /

8.7

5.2

10.0
7.2

4.4
4.8

6.8
21.9
12.6
5.81
4.2
2.7

5.6 1
6.6
7.2
6.0/
4.
10.7
15.0
4.9

8.4
9.7
9.6

Corporate profits before tax

L3.4

19.3

-5.1

1.9

25.1

25.8

30.8

34.3

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

3.8
8.2

14.2
11.9

0.2
5.8

10.7
7.3

37.4
11.7

5.6
14.6

3.7
18.2

11.6
6.0

Nonfarm payroll employment
Manufacturing

0.1
-3.9

2.8
2.2

-0.2
-2.4

2.3
2.2

4.5
2.2

3.3
4.3

3.3
4.2

3.8
6.3

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

-0.4
43.4
21.3
21.9
18.7

4.2
22.7
6.2
20.1
-73.2

7.9
48.2
-12.2
-22.2
67.2

8.1
-33.5
13.8
14.3
11.0

10.4
-17.4
0.0
0.0
0.0

1/At

10.2
-18.2
19.0
22.2
0.0

compound rates.

2/ Using expenditures in 1967 as weights.
3/ Excluding the first

$1.2 billion, annual rate, of the volunteer army pay increase, 1.2 per cent per year.

4/ Excluding the remaining $1.2 billion, annual rate, of the volunteer army pay increase and the general
Federal employees pay increase, 4.3 per cent per year.

I-7
Industrial production.

Industrial production rose 1.0

per cent further in April and at 110.9 per cent (1967=100) was 4.4
per cent above a year earlier but still 0.9 per cent below the 1969
high.

Since last December, the total index has increased at an

accelerated annual rate of 9.0 per cent.

In April, gains were wide-

spread among consumer goods, business and defense equipment, and
materials.

The January, February, and March indexes were revised up

slightly.
Auto assemblies rose 9 per cent in April to an annual rate
of 9.0 million units, and May output is scheduled at an 8.8 million unit
rate.

Output of carpeting, furniture, and some home goods rose further

in April.

Production of television sets changed little from the

moderately advanced March level and output of household appliances
also was steady in April, but down 10 per cent from the February peak.
Output of most business equipment lines advanced further and the index
for this group was 6.4 per cent above its May 1971 low.

Since last

December, production of business equipment has risen at an 11.7 per cent
annual rate.

Production of defense equipment also rose in April, but

this index is subject to large revisions.

Output of steel and most

other durable goods materials increased, as did output of nondurable
goods including the textile, paper and chemical group.

I-8
INDUSTRIAL PRODUCTION
(1967=100, seasonally adjusted)

1972
March April

Total index

March 1972
to
April 1972

Per cent changes
April 1971 *Sept 1969
to
to
April 1972
April 1972
-

109.8

110.9

1.0

4.4

118.3
104.6
117.3
118.5

119.4
114.3
118.5
118.7

.9
9.3

4.2
10.8

1.0

6.4

6.2

2.8

6.6

99.1
75.3

100.4
76.0

1.3
.9

5.6
- .7

-9.0
-25.6

117.5

117.2

-.3

4.3

4.5

products

117.5

116.9

-.5

3.1

4.5

Materials, total
Durable
Steel
Nondurable

111.6
106.5
98.0
118.0

113.1
107.9
102.5
118.9

1.3
1.3
4.6
.8

5.2
5.6
-6.0
5.5

-1.1
-6.1
-12.4
4.5

Consumer goods
Autos
Home goods
Apparel & staples
Business equipment
Defense equipment
Intermediate products
Construction

6.3
-2.0

*Pre-recession peak for total index.

Retail sales.

In April sales declined 1.5 per cent,

according

to the advance report, but some backing off following the 3.0 per cent
rise in March was not surprising.
still

Sales in March and April combined

averaged 1.6 per cent higher than in

the first

quarter.

Much of

the acceleration in the March-April period was centered in the auto-

motive category, although sales of general merchandise were also quite
strong.

I-9

(Seasonally adjusted,

RETAIL S
percentage change from previous quarter)

II-

1971
III-

IV-

III Q

IV Q

I Q

Total sales

2.6

1.8

1.1

Durable

5.5

3.1

Auto

7.5

1.8

-3.4

-. 5

5.5

1.3
.3

Feb.

1972
March

April

1.3

3.0

-1.5

-.2

5.1

-2.8

1.7

5.0

-1.8

9.0

-. 7

2.8

-4.3

1.2
-. 1

1.6
1.8

2.0
3.8

2.0
1.0

- .9
-1.3

3.3

1.4

2.6

1.5

2.8

-1.3

1.3

1.5

2.0

1.7

2.2

-1.1

GAAF

1.8

2.2

3.1

2.5

-1.8

Real*

1.9

1.5

2.7

n.a.

Furniture and

appliance
Nondurable
Food
General

merchandise
Total, less auto and

nonconsumption items

*Deflated by all commodities CPI,

Consumer durables.

seasonally adjusted.

April sales of new domestic-type autos

were at a 9.0 million unit annual rate, up slightly from a month
earlier.

Sales continued strong in the first

10 days of May at an 8.8

million unit rate, about the average of the first four months of this
year.

Dealer inventories at the end of April were equivalent to a

55 day supply, about the same as in earlier months this year.
April sales of imported cars were at a 1.5 million unit rate,
down somewhat from March but about the same rate that prevailed during
most of 1971.
April,

The import share of total sales came to 14 per cent in

compared with 17 per cent in April last year.

I - 10

According to preliminary estimates, retailers' unit purchases
of major home appliances rose 10 per cent from March to April and were
14 per cent above last year.

Dealers' purchases of electric ranges,

dishwashers, driers, air conditioners, and refrigerators were especially
strong.

Unit purchases of both color and monochrome TVs were also up

substantially.
UNIT PURCHASES OF HOME GOODS BY RETAILERS
(Seasonally adjusted 1967=100)
1971
April

Feb

1972
Mar April

TVs 1/

114

121

141

Radios

112

105

-6

125

139

129

143

Home appliances
1/
2/

Percent change
Month ago Year ago

Includes foreign-made units sold under U.S. brand names. Foreignmade sold under foreign brands not included.
Weighted average of indexes for air-conditioners, dishwashers,
dryers, freezers, electric ranges, gas ranges, refrigerators,
washing machines, and vacuum cleaners. Weights are 1967 retail
sales values.

Census consumer buying indicators.

The April Census survey

indicated some improvement in expected expenditures for durable goods
and homes,

but like the latest Michigan and Conference Board surveys

contains some elements which suggest continued restraint in consumer
spending.
Purchase plans for houses rose sharply from the previous
quarter and were well above a year earlier.

The number of major

appliances likely to be bought was up from January and was also higher
than a year earlier.

Moreover, the dollar value of expected purchases

I - 11

of appliances, furniture and home improvements was up sharply from
both the previous survey and 12 months ago.
On the less optimistic side, the index of expected unit
purchases for new cars was still below a year earlier although it
recovered from a low January level, and purchase plans for new autos
for households with above median incomes were down both from the previous
survey and a year earlier.

Also disappointing was the failure of

income expectations to improve despite some gains in the percentage of
families reporting favorable changes in current income compared with a
year earlier.
HOUSEHOLD PURCHASE AND INCOME EXPECTATIONS
(Census survey)

April

1971
July

104.7
101.7

102.4
96.5

1972
April

Oct.

Jan.

94.8
97.7

103.4
95.5

98.8
98.9

103.5
110.4

93.2
95.7

105.6
96.2

99.6
93.4

99.2
106.4

37.6
12.5
25.1

34.9

35.2

13.7
21.2

12.7
22.5

35.7
12.5
23.2

17.0
6.8
10.2

15.7
6.7
9.0

15.9
6.2
9.7

INDEXES OF EXPECTED UNIT PURCHASES
(Jan. 1967-April 1967=100)
All households:
New cars
Houses
Households with abovemedian incomes:
New cars
Houses
ACTUAL AND EXPECTED CHANGES IN

HOUSEHOLD INCOME
Current income compared to income
a year ago--per cent reporting:
Higher current income
Lower current income
Difference

35.1
14.5
20.6

Expectations of substantial changes
in household income--per cent reporting:
Increase
19.9
Decrease
7.5

Difference

12.4

16.1
6.7
9.4

I - 12

Cyclical indicators.

The Census trend-adjusted composite

index of leading indicators rose 2.4 per cent (p) in April, after a
March increase of 1.6 per cent.

April was the tenth consecutive month

of increase for this composite, which is now 24 per cent above November
1970.

The coincident composites were also up in April.

CHANGES IN COMPOSITE CYCLICAL INDICATORS
April 1972
Per cent change from:
Three months
Previous
month (p)
earlier (p)
12 Leading (trend adjusted)
12 Leading, prior to trend
adjustment
5 Coincident
5 Coincident, deflated
6 Lagging

2.4

4.9

2.1
.8
.7
n.a.

3.7
2.4
2.1
n.a.

(Confidential until release.)

Inventories.

Book value of business inventories rose at

a $3.1 billion (p) annual rate in March, following an upward-revised
$4.7 (r) billion February rate.

For the first quarter, the rate of

book value increase was $4.7 billion, slightly above the fourth quarter
rate.

Since prices rose faster, however, the rate of inventory

investment after valuation adjustment declined in the first quarter.
Durable materials stocks increased somewhat in the first
quarter after two quarters of liquidation; users'

stocks continued

to decline but this was offset by accumulation at primary metals
plants,

response to sharp improvement in ordering.

I - 13

Stocks declined over the quarter at nondurable goods manufacturers.

The decline was all in finished goods and was associated

with continued increases in shipments, suggesting involuntary decreases.

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, billions of dollars)
1972
Feb. (r)
Mar. (p)

1971
Q IV

1972
QI (p)

Manufacturing and trade

4.1

4.7

3.1

Manufacturing, total

1.1

2.3

1.9

1.0

Trade, total

2.9

2.4

2.8

2.0

NOTE:

Detail may not add to totals because of rounding.

Sales rose more rapidly than stocks in March, especially at
retail, and the inventory-sales ratio for manufacturing and trade
declined further to 1.48 from 1.50.
declined.

Ratios for all major categories

The level and recent movements of the inventory-sales ratio

are similar to other periods of economic expansion such as 1955, early
1959, and 1964-65.

Durable goods stocks also declined relative to

unfilled orders, but this ratio remained high compared with past periods
of expanding business activity.

I - 14

INVENTORY RATIOS
1971

1972

February

March

1.57

1.56

1.50

1.48

Manufacturing, total

1.77

1.74

1.63

1.62

Trade, total

1.37

1.36

1.33

.822

.823

.840

.835

February (r) March (p)

Inventories to sales:
Manufacturing & trade

Inventories to unfilled orders:
Durable manufacturing

New orders for durable

Manufacturers' orders and shipments.

goods rose 1.6 per cent (p) in March, regaining nearly all the ground
lost in February.

For the quarter as a whole, all major market groups

showed substantial gains.
MANUFACTURERS' NEW ORDERS FOR DURABLE GOODS
(Per cent change)
March from
February (p)
Durable goods, total

1.6

Primary metals
Motor vehicles & parts
Household durables

5.7
-4.8
10.8

Defense products
Capital equipment
Construction and other durables

-1.8
4.2

1972-1 from
1971-IV (p)
9.2

13.2
15.5
5.8

9.9
5.7
8.0

Shipments of durable goods rose for the third month, and unfilled orders for the fifth month.

Over the quarter, all major groups

had substantial increases in unfilled orders, except capital equipment

where the backlog declined slightly further.

I -

Planned spending for new plant and equipment.

The spring

McGraw-Hill survey found that business now anticipates a 14.4 per cent
increase in

1972 expenditures

for new capital

spending.

February,

the Commerce and McGraw-Hill surveys had indicated gains of 10-1/2
and 11-1/2 per cent, respectively, for 1972.
planned increases

McGraw-Hill now reports

manufacturing of 15 per cent and in

nonmanufacturing

of about 14 per cent.
The survey also indicated that manufacturers now expect sales
to increase 9 per cent in 1972 as compared with less than 7 per cent
in

1971.

The combined effects of the investment tax credit and

liberalized depreciation rules were reported by business to have added
about

$0.8 billion

(or 1 per cent) to 1972 spending plans.

ANTICIPATED 1972 EXPENDITURES FOR NEW PLANT
AND EQUIPMENT BY U.S. BUSINESS
(Per cent change from 1971)

McGraw-Hill
(Oct. 1971)
All business
Manufacturing
Durable goods
Nondurable goods
Nonmanufacturing
Transportation
Electric utilities
Communication
Commercial & other
1/

McGraw-Hill
Comm-SEC
(Dec. 1971) (Feb. 1972)

McGraw-Hill
Comm.
(Feb.1972) (Apr 1972

6.9

9.1

11.4

10.5

14.4

8.4
8.7
8.2

4.0
5.1
3.0

12.0
13.1
11.1

8.7
13.9
4.2

15.1
14.8
15.4

11.0
23.6
8.0
10.0
11.0

11.6
16.0
13.4
14.2 1/
8.1 1/

14.1
31.6
11.0
8.0
13.0

5.9
13.3
2.0
10.0
4.0

12.1
18.3
16.1
12.8 1/
7.3 1/

Confidential, not published separately.

I -

Construction and real estate.

Seasonally adjusted value of

new construction put in place, which was revised upward by 1 per cent

for March, edged up to a new record annual rate of $124.4 billion in
April.

Unlike other recent months, however, only outlays for private

nonresidential construction apparently showed a significant rise
during the month.

Total outlays in April were 18 per cent above a

year earlier--11 per cent in real terms.

As in March, this would imply

an increase in construction costs somewhat below the average year-toyear rise for 1971.
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates in billions of dollars)
1971
QI

QIV

1972
Mar.p/

Apr.1/

102.0

115.7

121.7

123.8

124.4

71.4

84.6

89.7

91.6

92.7

Residential

36.6

46.9

51.5

53.0

53.2

Nonresidential

34.8

37.6

38.2

38.6

39.5

30.6

31.1

32.1

32.2

31.7

26.8
3.8

27.0
4.1

27.5
4.5

27.4
4.8

27.4
4.3

Total
Private

Public
State and local
Federal

1/ Data for April 1972 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.

Private housing starts dropped 10 per cent in April to a
seasonally adjusted annual rate of 2.1 million units.

The decline,

which may reflect in part the unusually small number of working days
in April relative to earlier years, was widespread, both by type of

I - 17

property and among most geographic regions.

Unlike starts, seasonally

adjusted building permits rose 3 per cent in April.

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

1971
1971

1971

QI(p)

1972
Mar(p)

Apr(p)

QIII

QIV

2.11

2.24

2.51

2.36

2.12

1.18
.94

1.25
.99

1.35
1.16

1.30
1.06

1.17
.94

Permits

1.99

2.12

2.04

1.93

1.99

Completions

1.74

1.84

1.98

1.91

n.a.

Starts
1-family
2-or-more-family

MEMORANDUM:
Mobile home shipments
p/ Preliminary.
n.a. Not available.

.57

.60

n.a.

While seasonally adjusted sales of new homes by merchant
builders declined in March, the average for the first quarter exceeded
a 700,000 unit annual rate for the first time on record.

Stocks of

homes for sale continued to rise in March, but represented about 5.7
months supply--not exceptionally high by earlier standards.

Moreover,

apparently reflecting a demand for higher quality, the median price of
new homes sold in March rose further to $26,900, while the median price
of homes for sale again edged lower.

The median price of used homes

sold in March also continued upward, to $25,110.

I - 18

Nationally,
was little
units.

the rental vacancy rate in the first

quarter

changed from a year earlier at 5.3 per cent of available
Most important in this development has been the sustained

high level of demand so far this year.

Also, withdrawals from the

housing stock have continued greater than usual.

Completions, which

lag starts, have continued to rise, but they have yet to ease the
overall supply-demand situation within the rental market.

RESIDENTIAL VACANCY RATES
Average for the first quarter of:
Old series 1/
New series 1/
1972
1971
1970
1970
1965
Rental units
Northeast

North Central
South
West
Home-owner units
1/

7.7
5.5

5.0
2.1

5.4
2.4

5.3
2.4

5.3
3.2

7.2

5.5

6.0

6.1

5.9

8.2
10.6

7.1
5.4

7.7
5.6

7.4
5.4

6.7
5.3

1.5

1.0

New series beginning 1970 reflects inclusion of all units available
Old series reflects
for sale or rent regardless of condition.
exclusion of dilapidated units. QI 1970 regional detail--new
series--is confidential.

Personal income.

Personal income in April increased by $4

billion to $910 billion, annual rate.

The increase was about the same

as in March, and virtually all of it was concentrated in wages and
salaries.

Wage and salary increases in the past several months have

included retroactive payments approved by the Pay Board.
$1.3 billion in April,

substantially less than in March.

These added
Excluding

these retroactive payments from both months, personal income rose by
$5.3 billion in April.

The largest gain was in manufacturing where a

I - 19

sharp rise in the workweek and a sizable employment advance resulted
in an increase of $1.7 billion.

In the distributive industries, wages

and salaries climbed by $1.2 billion after edging down in the previous
month.

Compared to a year ago personal income was up by 7.9 per cent

and wage and salary disbursements by 8.7 per cent.

PERSONAL INCOME
(Billions of dollars; seasonally adjusted, annual rates)

February

1972
March

April

Net change
March 1972April 1972

901.8

905.6

909.7

4.1

Wage & salary disbursement
Government
Private
Manufacturing
Distributive
Services
Other

610.6
132.5
478.1
169.2
149.4
112.3
47.2

613.2
132.3
480.9
171.6
148.6
113.5
47.2

617.2
132.8
484.4
173.3
149.8
114.1
47.2

4.0
.5
3.5
1.7

Nonwage income
Less: Personal contributions
for social insurance

325.4

326.8

327.0

34.5

Total

Labor market.

34.2

34.4

1.2

.6
.0

Nonfarm payroll employment continued to

strengthen in April, increasing by 180,000.

The largest gains were in

manufacturing, centered in the metals and metal-using industries, and
in trade.
moderately.

State and local government employment also increased
Payroll employment has been climbing strongly since last

August, rising by 1.6 million over this period.

Manufacturing has

risen by 400,000 from the low last August, but remains 1.4 million
below the mid-1969 peak.

I - 20
NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)

Change to April 1972 from:

April 1971*
Total
Goods producing

Manufacturing
Mining
Contract construction
Service producing

Transportation & p.u.
Trade
Services and finance
Government
Federal
State and local
* Not seasonally adjusted.

August 1971

March 1972

1,525

1,643

182

150
215
-20
-45

408
398
-6
16

43
78
-8
-27

1,375
31
445
500
399

1,235
108
383
363
381

139
-4
93
19
31

2
397

19
362

0
31

Both total employment and the civilian labor force were
unchanged in April following substantial increases in March.

The over-

all unemployment rate, although remaining at 5.9 per cent, edged up
for adult males while the volatile teenage rate moved down.

The rate

for white workers was unchanged in April, but the rate for Negro
workers was down from 10.5 to 9.6 per cent, due to a decline in the
Negro labor force.

I - 21

SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

1972

1971
April
Total

August

1972
March
April

6.0

6.1

5.9

4.4
5.9
17.0

4.5
5.8
17.1

4.1
5.4
17.9

4.3
5.4
17.3

Married men

3.6

3.2

2.8

2.9

White workers
Negro workers

5.6
9.8

5.6
9.9

5.3
10.5

5.4
9.6

Men 20 years and over
Women 20 years and over
Teenagers

Average weekly hours of factory production workers rose
sharply by 0.4 hours in April, to 40.8 hours.

Increases were wide-

spread, with the largest advances in metals, machinery and transportation
equipment.

Since January, the factory workweek has risen 0.8 hours to

the highest level in three years.

The average workweek for all pro-

duction and nonsupervisory workers on private nonfarm payrolls rose
by 0.2 hours in April to 37.3 hours, the highest since March 1970.

I - 22

Earnings.

Average hourly earnings of production workers on

private nonfarm payrolls (adjusted for inter-industry shifts) increased
at an annual rate of 6.3 per cent from last August--just prior to the
freeze--to April, compared to a 6.7 per cent rate in the first eight
months of 1971.

During both intervals manufacturing wages increased

at an annual rate of about 6 per cent, but the earnings rise in contract
construction, trade, and finance has slowed somewhat since August.
Increases in most sectors have moderated since January.
HOURLY EARNINGS FOR PRODUCTION
AND NONSUPERVISORY WORKERS*
(Per cent change, seasonally adjusted, annual rate)

Jan. 1971Aug. 1971
Private nonfarm

Aug. 1971April 1972

Jan. 1972April 1972

April 1971April 1972

6.7

6.3

5.7

6.5

Manufacturing
Mining
Construction
Transportation

6.1
8.0
9.0
3.0

6.0
7.3
6.3
10.7

5.1
4.2
5.3
8.4

6.2
8.0
7.4
10.3

Trade
Finance
Services

6.5
7.6
4.4

4.5
4.0
7.1

3.0
3.1
7.1

5.2
4.8
6.1

* Adjusted for inter-industry shifts, and in manufacturing only,
for overtime hours.
Productivity and labor costs.

Output per manhour in private

nonfarm activities increased in the first quarter at an annual rate of
3.7 per cent, reflecting continued strong gains in real output.

The

first quarter productivity rise was smaller than the (revised) 4.5
per cent rate of the fourth quarter of 1971, but well above the 20

I -

Productivity in manufacturing increased

year average of 2.6 per cent.

at an annual rate of 2.9 per cent.
Reflecting the surge in earnings associated with the end of
the wage freeze, compensation per manhour increased at an annual rate
of 9.3 per cent in the private nonfarm sector from the preceding quarter.
The first quarter increase also reflected higher employer contributions
to social security.

Since a year ago, nonfarm compensation per manhour

has increased by 6.6 per cent.

The large first quarter increase in

average hourly compensation resulted in an accelerated 5.4 per cent
rise in unit labor costs.

In comparison with the first quarter a year

earlier, however, the increase in unit labor costs was only 3.1 per cent.

PRODUCTIVITY AND UNIT LABOR COSTS, PRIVATE NONFARM
(Per cent change from preceding quarter,
seasonally adjusted annual rate)

1972

1971

Output per manhour
Compensation per manhour
Unit labor costs
r/ Revised.
p/ Preliminary.

QII

QIII

QIV

6.6
8.6
1.9

2.7
6.6
3.8

2.3
5.4r /
3.0

4.5 r/
5.0 r/
.5 r/

3.7 p/
9.3 p/
5 .4 p/

I -

Minimum wage.

The House on May 11 passed a bill

which

provides for increases in the nonfarm minimum wage to $2.00 an hour
spread over three years.

The House measure raises the minimum for

workers covered by the Fair Labor Standards Act before 1966 from
the present $1.60 an hour to $1.80 sixty days after enactment and
to $2.00 a year later.

Workers covered by the 1966 amendments --

mainly in services and retail trade -in the three steps -and $2.00 in 1974.

are scheduled for increases

to $1.70 in sixty days, $1.80 a year later,

Farm workers go from the present $1.30 an hour

to $1.50 sixty days after passage, and to $1.70 a year later.

The

bill also provides a lower minimum wage of $1.60 an hour for workers
under age 18 and for students under 21.

The bill does not extend

coverage or phase out any existing exemptions.

It has been estimat-

ed by the Employment Standards Administration to add about $185
million, annual rate, to the wage bill, when it becomes effective.
The Senate Labor Committee is considering a bill which
provides for a higher minimum wage and extends coverage to an additional 6 million workers, mainly employees of small retail trade
establishments and domestic servants.

This bill, which may reach

the Senate floor by mid-June, increases the minimum wage to $2.20
an hour in two steps for those covered prior to 1966 ($2.00 first
year, $2.20 a year later) and in three steps for those covered by
the 1966 amendments ($1.70 first year, $2.00 second year, $2.20 third
year).

I -

Industrial relations.

The Pay Board cut the East Coast

dock workers'first year wage rate increase to 55 cents, or 12 per
cent, from a negotiated settlement of 70 cents, or 15 per cent.

rise in excess of the guidelines was permitted because of anticipated
increases in productivity and other cost savings to employers resulting from changes in work rules.

The negotiated increases in wage

and fringe benefits combined were reduced to 9.8 per cent for 28,000
North Atlantic dock workers, to 11.8 per cent for 11,000 West Gulf
Coast longshoremen, and to 12.0 per cent for 10,200 workers at the
New Orleans docks.

Earlier this year the Pay Board scaled back the

West Coast longshore first year wage and fringe benefit settlement
to 14.9 per cent from 20.9 per cent.

The West Coast workers have

accepted this cut-back with the provision that when wage-price
controls are eliminated, a new contract can be negotiated.
Wage increases in major nonfarm collective bargaining
settlements in the first quarter of 1972 averaged 7.8 per cent over
the life of the contract -- only slightly down from the 8 per cent
gain posted in the pre-freeze period of 1971.

New major contracts

covered 362,000 workers, primarily in the railroad and aerospace
industries where settlements averaged about 10 per cent and 6.8 per
cent, respectively.

The average increase in manufacturing was con-

siderably below last year; in construction, however, wage increases
of 13.0 per cent were higher than in 1971, but these agreements
covered only 32,000 workers.

I - 26
First year wage increases in

new contracts slowed

appreciably, reflecting an apparent movement away from front-end
loading and toward spreading increases more evenly over the life
of the contract.

This tendency has been influenced by Pay Board

policy to take initial

action only on first

year increases in new

settlements and to defer review of subsequent increases until they
are scheduled to become effective.
together in

the first

Wage and benefit increases

quarter totaled 8.1 per cent --

down from

8.7 in 1972.

WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS
(Mean wage adjustment,

per cent)

Year

1972
Q I

1971
1970

Jan-Sept

Average over life of contract:
Total
Manufacturing
Nonmanufacturing
Construction

8.9
6.0
11.5
14.9

8.0
7.1
9.0
11.7

8.1
7.2
9.0
11.8

7.8
5.5
9.9
13.0

11.9
8.1
15.2
17.6

11.8
10.7
13.0
13.5

11.7
10.8
12.7
13.3

8.4
7.3
9.4
14.6

First year:
Total
Manufacturing
Nonmanufacturing
Construction

I Wholesale prices.

Wholesale prices rose at a seasonally

adjusted annual rate of 3.4 per cent between March and April.

Indus-

trial commodities continued to rise at the post-freeze average rate
of a little over 4 per cent.

The increase in prices of nonfood

finished goods continued substantial both for consumer and producer
goods with prices rising at rates exceeding those prior to the freeze
last year.

Some of the significant increases since last November

were:
Per cent increases
Nov. 1971 to April 1972
Lumber
Plywood
Hides and skins
Leather
Cotton products
Synthetic textile products

9
11
53
22
7
4

Farm and food products prices were off slightly in April
following a sizable decline in March.

In April, substantial reductions

in prices of livestock, meat and eggs were almost offset by increases
for several commodities, including fresh fruits and vegetables and
grains.

Livestock prices have moved up again in May, but are below

earlier peaks.

I -

WHOLESALE PRICES

(Percentage changes at seasonally adjusted annual rates)
Phase II
Mar. 1972
Nov. 1971
to
to
Apr. 1972
Apr. 1972

Pre-stabil
Dec. 1970
to
Aug. 1971

Phase I
Aug. 1971
to
Nov. 1971

5.2

-0.2

5.1

3.4

Farm and food 1/

6.5

1.1

7.5

-1.0

Industrial commodities

4.7

-0.5

4.1

4.2

Crude materials 2/

3.3

2.3

7.5

-9.0

Intermediate materials 3/
Finished goods 4/
Producer
Consumer

6.5
2.7
3.7
2.2

-0.7
-0.9
-2.0
-0.4

4.0
3.6
4.8
3.3

6.3
3.9
5.2
3.2

All Commodities

1/
2/
3/
4/

Farm products and processed foods and feeds.
Excludes foods, plant and animal fibers, oilseeds, and leaf tobacco.
Excludes intermediate materials for food manufacturing and manufactured
animal feeds.
Excludes foods.

Changes in prices of domestic raw agricultural products and
imports had little effect on the seasonally unadjusted WPI in April.
Imports during the post-freeze period have not been a significant factor
in price increases as reported in the WPI, especially in the industrial
sector.

But since the weight of imported commodities in the WPI is

low compared to the ratio of the value of imports to domestic output,
the actual effect of the devaluation may be larger than the index
suggests.

About 3 per cent of the weight of farm and food commodities

priced in the WPI are imports; only about 1 per cent of the weight of
industrials is represented by imports.

Passenger cars, some metals,

and jute woven goods comprise more than 65 per cent of the weight of
the imported industrial commodities in the WPI.

I - 29
Consumer prices.

Consumer prices were almost unchanged in

March, after seasonal adjustment.

However, the seasonally adjusted

indexes for food and for other commodities rose at annual rates of 2 and
3 per cent, respectively, while service costs advanced at close to a 2
per cent rate.

BLS attributes the difference to rounding in the calculation

of the seasonally adjusted indexes for "All items" and for its components.

Price movements for uncontrolled items were offsetting and

therefore had no net effect on the (unadjusted) change in the index.
Since November, consumer prices have risen at an annual rate of 3.7 per
cent.
CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

Pre-stabilisation
Dec. 1970 June 1971
to
June 1971 Aug. 1971
All items
Food
Commodities less food
Services 1/

Phase

Aug.

1971

Phase II

Nov.

1971

Feb. 1972

to
Nov. 1971

to
Mar. 1972

4.0

3.3

1.7

3.7

6.2
3.0
4.2

1.0
2.6
5.7

1.7
.0
3.1

7.4
2.1
3.7

2.0
3.1
1.8

5.0

3.5

1.3

3.7

2.0

Addendum:
All items less mortgage
costs 2/

Services less home
finance 1/ 2/
7.4
4.9
1.9
3.6
1.9
Commodities less food, used
cars, home purchase 3/
3.0
2.1
.0
2.6
2.1
1/ Not seasonally adjusted.
2/
Confidential: Home financing costs excluded from services reflect property
taxes and insurance rates as well as mortgage costs, which in turn move with
mortgage interest rates and house prices.
Confidential.
3/

I - 30
The March increase for food--priced during the first week of
the month--includes some additional advance in beef prices, partly
offset by a decline for pork. In April the index should begin to reflect the March and April reductions in meat
level.

prices at the wholesale

The cost of restaurant meals and snacks in March registered

the largest (seasonally adjusted) increase since last August.
The small size of the advance for services reflects the
moderate nature of increases for rent and medical services, the
temporary suspension of utility rate increases through mid-March, and
a sharp drop in local transit fares in Atlanta.
From November 1971 to March 1972--the first four months of
Phase II--food prices rose at nearly a 7-1/2 per cent rate,

faster than

in the first half of 1971 and close to the rates of late 1969 and early
1970.

The rapid run-up in meat prices was the major factor in the rise

in foods, with the March index for meats more than 10 per cent above 12
months earlier.
in

The 2.6 per cent rate of rise over the same four months

other commodity prices,

excluding houses and used cars,

large part increases for new cars,
Service costs,

reflects in

apparel and tobacco products.

excluding home financing, rose between November

and March at a 3.6 per cent rate,

in contrast to rates of 7 per cent

and more during 1970 and the first half of 1971.

Advances for rent,

medical and most other services--except utilities

and public transport--

were substantially smaller than before the freeze.
still

However, it is

too early to determine to what extent these lower rates were

affected by lags, both in
them in the index.

implementing price increases and recording

DOMESTIC FINANCIAL
SITUATION

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

Latest data
Indicator
Indicator

Period

Monetary and credit aggregates
Total reserves
Reserves available (PNB)
Money supply
M1
M2
M3
Time and savings deposits
(Less CDs)
CDs (dollar change)
Savings flows (S&Ls + MSBs)
Bank credit (end of month)
Market yields and stock prices
Federal funds
Treasury bill (90 day)
Commercial paper (90-119 day)
New corporate bonds Aaa
Municipal bonds (Bond Buyer)
FNMA auction yield
Dividends/price ratio (Common
stocks)
NYSE index (12/31/65=50)

wk.

Three
months ago

SAAR (per cent)
11.1
7.6

Year
ago

$ 32.7
30.2

23.4
6.9

April
April
April
April

235.1
483.2
752.8
248.1

8.2
7.7
11.1
7.8

11.0
11.3
14.0
11.4

6.3
9.4
11.9
12.6

April
April
April

34.7
269.6
508.5

1.3
15.8
3.6

1.5
19.0
11.4

6.9
16.7
11.7

5/10
"
5/10
5/10
1 day
5/12
wk. endg. 5/13
"
5/13
end of day 5/12

Percentage or index points
4.20
.02
.95
.32
3.53
-. 27
4.48
-. 10
.60
7.28
.14
-. 02
.08
-. 15
5.39
-. 01
.06
7.60
2.92
59.13

.10
-. 17

-. 01
.80

8.9
7.6

-3.9
-3.2
-.20

-. 35
-. 57

.17
-. 06
2.78

Net change or gross offerings
Year to date
During Month
1971
1972
1971
1972

Credit demands

e Estimated

Month
ago

April
April

endg. 5/10
"

Business loans at commercial
banks (dollar change)
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Coporate bonds (public offerings)
Municipal long-term bonds (gross
offerings)
Federally sponsored Agcy. (net borrowing)
U. S. Treasury (net cash borrowing)

Net change from

Level

March
March
May

0.9
1.4
4.2e
1.6 e

0.6
.5
3.0
2.1

May
May
May

1.7e
1.2ee
.O

2.2

April

-.02

2.2

2.8

1.9

3.0
10.4
8.5

.7
7.2
12.6

9.7e
2 .5
2.2

10.9
.36
3.5

II - 1

DOMESTIC FINANCIAL SITUATION
Since the last Committee meeting most long- and short-term
market interest rates have declined 5 to 15 basis points, on balance,
although some short-term interest rates, particularly bill rates, have
risen very recently.

In general, the downward movement in market

interest rates in the last four weeks reflects current and prospective
moderation in credit demands.

Reaction to the President's May 8

speech was brief and mild in all debt markets.
The prospective supply of securities was diminished by
indications of net repayment of Treasury debt in May, the high level
of the Treasury's cash position, and announcements by Treasury officials
that second half borrowing needs are likely to be smaller than previously expected.

In addition, both corporate and tax-exempt bond offerings

moderated in April and the forward calendar remains modest.
Business loans at commercial banks in April, on the other
hand, again expanded substantially, with continuing indications that such
credit demands are from regional, rather than large nation-wide firms.
Bank inflows of funds from all sources except consumer interest-bearing
deposits remained large. Growth in time deposits of the latter type
slowed further at banks in April, apparently in association with income
tax payments; in late April and early May inflows of these deposits
strengthened.
Despite a similar slow-down of deposit inflows at the nonbank
depositary institutions around mid-April, the higher offering rates on

II - 2

deposits at such institutions are probably a factor in their continued
large inflows relative to commercial banks; earlier this year, several

large banks had cut their offering rates.

With savings inflows contin-

uing relatively large, the savings and loan associations apparently
increased their outstanding mortgage commitments again in April.
Additional support was given to the mortgage market by substantial
FNMA mortgage commitment purchases, reducing the inventory exposure
of mortgage bankers.

However, home mortgage interest rates edged up

during April in both the primary and secondary markets.
Outlook.

Barring a significant change in either international

developments or monetary policy, market interest rates generally are
likely to fluctuate within a narrow range over the balance of the
quarter, although Treasury bill rates may be subject to some downward
pressure as the Treasury repays debt in June.
Credit demands in securities markets appear to be moderating
somewhat more than expected at the time of the last Greenbook. With its
large cash balance, the Treasury is expected to be a net repayer of debt
until July.

In addition, corporate bond offerings are expected to remain

near their recent more moderate levels, with underwriters reporting that
large corporations have little immediate need for long-term funds.

Tax-

exempt offerings are expected to decline somewhat, reflecting improved
liquidity of State and local governments and the completion of borrowing
postponed in the 1969-1970 period of high interest rates.

Offerings

of equities, on the other hand, are expected to remain large.

- 2a

In contrast to bond markets, a continued increase in business
loan growth at commercial banks is likely as working capital needs expand
in line with the improvement in economic activity.

Banks' high liquidity

and sustained deposit inflows should limit their need to make any basic
portfolio adjustments over the near-term in order to finance the higher
level of business loans.

However, as the increase in business credit

demands at banks continues, banks can be expected to accelerate their
movement toward shorter-term security investment and a reduced rate of
tax-exempt acquisitions, as well as to begin moderating their mortgage
acquisitions.

II - 3

Monetary Aggregates.

Expansion in M1 and M2 slowed in April

following very rapid growth in February and March, as both private
demand deposits and time deposits other than large negotiable CDs advanced less rapidly.

The latter deposits,

fact, showed the slowest

rate of increase since late last summer, probably due to the combination
of withdrawals associated with large Federal income tax payments and a
lagged response to earlier rate declines at some banks and the rise in
yields on competing market instruments over the two preceding months.
Most of the April growth in time deposits other than CDs was concentrated
in deposits of State and local governments in California, reflecting the
investment of receipts from a new State withholding tax.
Growth in the adjusted credit proxy also slowed in April, but
the 14 per cent annual rate of increase for the month exceeded that for
the first quarter.

The continued rapid expansion in the credit proxy

reflected in part a further buildup of U.S. Government deposits,

Treasury receipts continued larger than anticipated and expenditures
and tax refunds fell short of expectations.

In addition, large

negotiable CDs expanded by about $1.3 billion on a seasonally adjusted
basis, the first significant growth since the end of last year.
Most of the CD growth through the middle of April was concentrated at large banks in New York City, and took place despite
larger-than-usual CD maturities at these banks over the tax date.
Funds were available without aggressive bidding from a variety of
sources,
in

including some proceeds from capital market issues.

the month,

Later

CD growth shifted to banks outside New York, perhaps

- 4

MONETARY AGGREGATES
(Seasonally adjusted changes)

1971
QIV
QIII

1972
March
Feb.

Apr.p

Annual percentage rates
M 1 (Currency plus private
demand deposits)

3.7

1.1

9.3

12.6

11.9

8.2

M2 (M1 plus commercial bank
time and savings deposits
other than large CDs)

4.4

8.0

13.3

14.3

11.6

7.7

M3 (M2 plus savings deposits
at mutual savings banks
and S&L's)

7,8

9.6

15.5

16.7

13.8

11.1

Adjusted bank credit proxy

7,6

9.7

11.3

5.9

17,7

13.9

Time and savings deposits at
commercial banks

Total

8.2

15.9

14.8

16.2

7.8

12.4

Other than large CDs

5.3

14.7

17.1

15.4

10,8

7.8

a. U.S, Government
demand deposits

2.3

-. 4

-. 1

-2.6

2.4

1.3

b. Negotiable CDs

2.3

1.8

*.1

-. 4

1.3

c. Nondeposit sources
of funds

-.4

-. 3

a1.3

Memorandum:

p - preliminary and partially estimated.
1/ Month-to-month and last-month-in-quarter to
changes in daily averages, not annualized.

last-month-in-quarter

-,2

II - 5
reflecting reinvestment demand from holders of maturing tax-anticipation
bills turned in for cash.

Offering rates on short CDs

tended to drift

downward toward the end of April as competing money market rates eased,
but investors apparently favored short maturities and the average
maturity of new CDs issued declined for the third consecutive month
to just over 2 1/2 months.
Bank Credit.

Bank credit growth, as measured on a last-Wednesday-

of-the-month basis, slowed markedly in April to a seasonally adjusted
annual rate of about 3.5 per cent.

This contrasts sharply with the con-

tinued rapid expansion in the daily average adjusted credit proxy noted
earlier.

These two series often diverge because, among other things,

of fluctuations and random events that can affect the single-day measurement of the last Wednesday series.

In April, the divergence reflects

in part the fact that nonearning assets that are excluded from the
direct measure of bank credit--particularly member bank reserves-showed an unusually large increase late in the month.

In addition, the

maturity date for the April tax-anticipation bills, with its downward
influence on bank credit, fell unusually close to the last-Wednesdayof-the-month this year.

For March and April combined, last-Wednesday-

of-the-month bank credit grew at about an 11 per cent annual rate,
much closer to the rate of growth in the proxy over the two-month
period than for April alone.
Business loan expansion increased further in April and weekly
reporting bank data show continued strength in early May.

This provides

further confirmation of the turnaround in business loan demand
suggested by the faster rates of expansion in February and March. 1/
1/ Downward call report benchmark revision of business loan data for late
1971, also have increased the business loan growth rate indicated for January

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

1971 3/
QIII
QIV
Total loans & investments 2/

Other securities
Total loans

2/
2/

April

11.1

15.1

12.4

18.0

3.6

5.3

9.9

26.1

23.6

3.9

12.0

20.1

16.1

12.5

17.9

14.7

9.4

15.7

10.2

16.7

9.6

9.1

9.7

-18.5

U.S. Treasury securities

1972 3 /
Feb.
March

-1.1
5.0

Business loans 2/

14.4

-3.4

Real estate loans

14.2

14.7

13.1

15.8

14.2

Consumer loans

13.3

13.6

11.7

13.1

10.8

10. 7

9.1

12.0

Last-Wednesday-of-month series.
Includes outstanding amounts of loans reported as sold outright by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.
Data revised beginning July 1971 to reflect adjustments to December 31,
1971 Call Report benchmarks.

Increased demand continued to be centered at banks outside New York City,
however.

Loans to public utilities

strength in

accounted for the largest part of the

aggregate business loans, with some contribution from con-

struction loans as well.

Real estate and consumer loans continued to

expand in April at about the same brisk pace evident in other recent
months, while security loans and loans to nonbank financial institutions
both declined after increasing for several consecutive months.

In the investments component of bank credit, holdings of U.S.
Government issues increased only slightly while holdings of other
securities showed a decline for the first

time in many months.

The

II - 7

decline in holdings of other securities reflected in significant part a

runoff in holdings of short-term municipals at banks in California,
primarily due to the redemption of short-term California and New York
obligations.

Banks in California reported that the supply of that

state's short-term warrants available for replacement purposes was limited
due to the accumulation of large cash balances stemming from the institution of a withholding tax by the State, as noted earlier.

Despite

reductions in holdings of short-term tax exempt securities, large commercial banks continued very liquid, with ratios of liquid assets to
liabilities continuing at or near the highs for recent years,
Consumer credit.

The increase in consumer instalment credit

outstanding in March amounted to a record $16.4 billion,
adjusted annual rate.

seasonally

In February the rise was at a $11.6 billion

annual rate, and the previous peak--$15.2 billion--was reached last
November.
The increase in outstandings reflected a substantial gain in
extensions of new credit and only a moderate rise in

repayments.

Record

levels of extensions were reported in all loan categories.
Nonbank financial institutions and mortgage markets.

Deposit

inflows to nonbank thrift institutions remained strong during April,
although somewhat below the high first quarter rate.
Deposit flows to savings and loan associations tapered off in
mid-April (when income tax payments would most likely have had an effect)
and then picked up again toward the end of the month.

Repayments of

advances from the Home Loan Bank System also slowed during April relative

- 8

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

Mutual
Savings Banks

Savings and Loan
Associations

Both

1971 - QI
QII
QIII
QIV

16.3
15.0
9.6
10.6

24.6
18.4
15.7
13.8

21.9
17.3
13.7
12.8

1972 - QI p/

14.1

23.5

20.4

12.6
15.0
11.6

19.9
20.6
17.8

17.6
18.8
15.8

February
March p/
April e/
p/ Preliminary.
e/ Estimated from sample data.

to the large pay-down recorded in the first quarter.

This slowing most

likely reflects uncertainty about the future strength of deposit flows
and the expected rise in takedowns of mortgage commitments.

According

to FHLBB estimates based on limited reporting, new mortgage commitments
of S&L's continued substantial during April, and outstanding commitments
increased further.
Backed by strong support from both S&L's and commercial banks,
growth in outstanding residential mortgage debt--which had changed
little in the fourth quarter of 1971--picked up during the first quarter
to a seasonally adjusted annual rate of over $42 billion, according to
preliminary estimates.

This was a new high, sharply above the recent

low of $14 billion two years earlier.

Expansion of total mortgage

credit outstanding--at a seasonally adjusted annual rate of about $56
billion--also attained a record level, partly reflecting accelerated
growth of commercial mortgage debt.

-9

Despite the extraordinary first-quarter net flow of funds into
residential mortgages,

yields on home mortgages began to edge higher

toward the end of March in lagged response to rate increases in other
financial markets.

On FNMA's forward commitments to purchase FHA and

VA home mortgages, yields in

the bi-weekly auction rose slightly through

April and early May, and then stabilized in the latest (May 15) auction.
At that time,

the average mortgage yield, at 7.63 per cent, was 9 basis

points above the low in late March.
During April, the average contract interest rate on conventional new-home mortgages in

the primary market rose by 5 basis points--

the first increase since last August.

Yields rose by the same amount on

Government underwritten loans in the private secondary market.

In both

cases, however, such yields remained unattractive relative to returns
available on new issues of high-grade corporate bonds--a factor that
has continued to discourage investment in home mortgages by life
insurance companies.
Long-term securities.

Over the last 4 weeks,

yields on long-

term securities have edged down with yields on corporate and municipal
bonds dropping about 15 basis points and those on long-term Government
securities only 3 basis points.

Dealer positions are relatively light,

the forward supply of long-term securities appears to be moderating,
and investment funds are reported to be ample.

Recent developments in

Southeast Asia have generated some uncertainty in

the market in the

past week; but, aside from an immediate sharp decline in the stock
market,
markets.

there seems to have been little

adverse effect on long-term

II - 10

AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES

Primary market:
Conventional loans
Spread
(basis

Level
(per cent)

points)

Secondary market:
FHA-insured loans
Level
(per cent)

Spread
(basis
points)

Discount
(points)

1971 - Low
High

7.55
7.95

-36
71

7.32
7.97

-36
56e

Nov.
Dec.

7.75
7.70

56
61

7.62
7.59

43
50

5.1
4.8

7.60
7.60
7.55
7.60

53
44
33
29

7.49
7.46
7.45
7.50

42
30
23
19

4.0
3.8
3.7
4.1

1972 - Jan.
Feb.
March
April
NOTE:

2.5e
7.8

FHA series: interest rates on conventional first mortgages
(excluding additional initial fees and charges) are rounded by
FHA to the nearest 5 basis points. On FHA loans carrying the
7 per cent ceiling rate in effect since mid-February 1971, a
change of 1.0 points in discount is associated with a change of
12 to 14 basis points in yield. Gross yield spread is average
mortgage return, before deducting servicing costs, minus average
yield on new issues of high-grade corporate bonds with 5-year
call protection.

Stock prices and volume were both at high levels in the
first half of April; but in the latter part of the month and in
early May,

the market backed off.

For example,

the NYSE index over the

last three weeks registered a decline of 3.2 per cent from its April 12
high.

Volume on the major exchanges is down almost to the late 1971

level, with NYSE daily volume averaging 14.8 million shares during late
April and early May.

Investors appear to be concerned over both the

Vietnam situation and Price Commission actions which might adversely
affect corporate profits.

II -

SELECTED LONG-TERM INTEREST RATES
(Per cent)

New Aaa
Corporate bonds 1/

Long-term
State and
local bonds 2/

U.S. Gov't.
(10-year
constant
maturity)

1971

Low
High

6.76 (1/25)
8.23 (5/21)

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

5.42 (3/26)
6.89 (7/30)

Low

6.86 (1/14)

4.99 (1/14)

5.87 (1/14)

High

7.42 (4/4)

5.54 (4/4)

6.22 (4/21)

1972

Week of:
April

7
14
21
23

7.33
7.42
7.42
7.32

5.49
5.54
5.50
5.20

6.17
6.21
6.22
6.17

May

5
12

7.20
7.23

5.35
5.39

6.16
6.17p

1/
2/
p/

With call protection (includes some issues with 10-year
protection).
Bond Buyer (mixed qualities).
Preliminary.

RECENT CHANGES IN STOCK PRICES

Price as of

Per cent change
from Jan. 31

Per cent change
from April 12

May 15, 1972

to April 12

to May 15

NYSE

59.47

6.4

-3.2

AMEX

27.60

5.2

-3.2

NASDAQ

130.34

12.0

-2.1

D-J INDUSTRIAL

942.20

7.2

-2.6

- 12

The volume of public bond offerings by utilities

in April was

substantially larger than the first-quarter average, but the volume of
industrial issues was unseasonally low,

reflecting in part the post-

ponement of several planned offerings around mid-April, when yields
backed up temporarily.
billion.

The total volume for the month was only $1.6

The staff estimates that May volume will be about the same,
Underwriters

and that the June calendar might be slightly lower.

report that most of the large corporations which use the public bond
markets seem to have comfortable liquidity positions and little immediate need for long-term funds, given improved cash flows.
Total corporate security volume for May and June, however,
will probably be slightly higher than in April because of a rise in
new stock issues, particularly by utilities, and the expected end-ofquarter bulge in takedowns of private placements.

CORPORATE AND MUNICIPAL LONG TERM SECURITY OFFERINGS
(Monthly or monthly averages in millions of dollars)

1971
Monthly

1972
e

average

March

April-

May-

June-

Corporate securities-Total

3,753

3,550

3,050

3,250

3,330

Public bonds
Privately placed bonds
Stock

2,065
613
1,080

1,650
800
1,100

1,600
550
900

1,00
550
1,100

1,500
800
1,000

State and local government
securities

2,080

2,195

2,041

1.700

1,800

e/
f/

Estimate
Forecast

II - 13
Yields on municipal bonds have dropped about 15 basis points
on balance since the last Committee meeting.

This lower level probably

reflects mainly a slackening in the tax-exempt calendar.May and June
volume are estimated at $1.7 and $1.3 billion, respectively, down about
10 per cent from the monthly average for the past 18 months.

Many State

and local governments may now have regained their customary liquidity
levels and have caught up on borrowings postponed during the 1969-1970
period of high interest rates.

The results of the FRB-Census Survey

of State and Local Bond Anticipations and Realizations, which will be
available later in May, should provide more evidence about future
borrowing needs.
Short-term security markets.

Since the April 18 FOMC meeting,

most short-term interest rates have declined moderately on balance.

The

Federal funds rate, however, moved higher shortly after the Committee
meeting and has remained around a 4-1/4 per cent level since that time.
Also, rates on short-term Treasury bills, after initially declining,
have since risen markedly and the rate on 3-month bills now exceeds its
April 18 level.
Seasonal investment demands such as those emanating from the
usual run-off in April tax bills, may have been partly responsible for
the decline in short-term rates over late April and early May, which
took the 3-month bill rate to as low as 3.42 per cent.

Market rates

were also pushed down by the Treasury's April 26 announcement regarding
the mid-May refinancing,

since the cash redemption of $700 million of

maturing debt on May 15 would provide the potential for a strong boost
in demand for short-term securities at that time.

In addition, the cash

- 14

redemption announcement drew attention to the unexpected strength of
the Treasury's current cash position, thus signaling the likelihood of
lighter Treasury borrowing over the remainder of the current fiscal year
than previously had been anticipated.
Sizeable bill sales by the System open market account and by
Treasury and foreign accounts (the latter, partly to switch into coupon
issues) were mainly responsible for the initial backup in short-term
bill rates.

A belief by some market participants that the 3-month bill

rate had been temporarily out of line with the funds rate may also have
contributed to its rise back into a 3.60-3.65 per cent range which preDuring the early part of this week,

vailed during most of last week.

the 3-month bill rate has moved even higher, most recently trading
around 3.75 per cent.

Some backup in other short-term rates has accom-

panied the advance in bill rates.
The volume of outstanding commercial paper of nonbank issues
appears to have increased about $500 million in April, the first significant monthly rise this year.

On a seasonally adjusted basis, the

expansion was about evenly divided between the directly placed and
dealer markets.

- 15

SELECTED SHORT-TERM INTEREST RATES

(Per cent)
Basis point change
Apr il

May 3

April 19-May 16

May 16
. 292

Federal Funds 1/

4.04

4.25

Treasury bills
3.month

3. 64

6-month
1-year

4. 21
4. 60

3.60
4.05
4.37

3.76
4.20
4.53

5. 22

4.79

4.86

-36

90-119 day
Commercial Paper 4. 63

4.50

-13

4.50

4.25

4. 38

Federal Agency
1-year

60-89 day CDs
1/

25
12
-1
-7

-12

Weekly average.
Five-day average.

May 10.
Federal finance.

The staff has again lowered its estimate of

the fiscal year 1972 budget deficit, because tax receipts continue to

exceed earlier projections.

The deficit is now projected to be

between $26.5 and $27 billion--$2.0 to $2.5 billion lower than the
preceding Greenbook estimate and about $12.0 billion below the January
budget figure,
Our estimate of tax receipts in fiscal 1972 has been raised by
more than $2.0 billion since the last Greenbook, largely because of
lower than expected refunds in April and because withheld personal
taxes remain larger than earlier projected.

So far, the Treasury's

educational campaign, urging taxpayers to adjust their exemptions, has

II - 16

Thus the staff estimate of

not had a noticeable effect on receipts.
fiscal 1972 receipts is

$7.0 billion above the January budget estimate

and $5.0 to $6.0 billion of this now appears attributable to overwithholding.
Outlays in

the current fiscal year are still

expected to be about
Nearly half of

$5.0 billion below the budget estimate of $236.6 billion.

the projected shortfall in outlays is attributable to the staff assumption
that there will be no outlays for general revenue sharing this fiscal
year.

Most of the remaining shortfall is

in a wide range of programs

including agriculture, public assistance grants and unemployment benefits.
In regard to defense, a small shortfall in spending still seems likely,
on a unified Budget basis,

even after allowing for some additional costs

connected with current operations in Vietnam and a substantial acceleration in the processing of payments toward the end of the fiscal year.
The acceleration of air and naval activities in Vietnam,
which has continued for more than a month, has raised the possibility
of a significant speed-up in defense purchases--partly in
fiscal year but mainly in fiscal 1973.
reports DOD spokesmen say that it

the current

According to recent press

"very likely" they will ask

Congress for supplemental spending authority of $.5 to $1.0 billion this
fiscal year and an undetermined amount for fiscal 1973.

Since the

increased war activity was not anticipated in budget planning,

the DOD

may already have borrowed from other funds to finance some portion of
the acceleration and a supplemental appropriation would restore funds
to these other activities.*
* Recent legislation apparently permits the Secretary of Defense to
transfer $750 million from lower to higher priorities largely at
his discretion.

II - 17

In the second half of this calendar year the projected deficit
(unified budget basis) has been lowered by about $1-1/2 billion since
the last Greenbook: estimates of both receipts and expenditures have
been increased, but receipts have been adjusted up somewhat more.

The

higher receipts estimate for the half-year is again due largely to the
higher level of withheld taxes.

On net, the estimate of outlays has

been raised $2.1 billion for the half year.

The largest increase is

$1.5 billion for social security, a change which appears to reflect
Congressional sentiment.

It assumes that the social security benefit

increase will be 12.5 per cent rather than the 5 per cent raise proposed
by the Administration.

It also assumes higher defense spending (nearly

$1.4 billion for the half year as a result of the increased activity
in Vietnam.
The staff estimate of the high employment budget, on a NIA
basis, indicates a $1.0 billion surplus for calendar 1972--$1.9 billion
shift toward deficit from calendary 1971.

However, during calendar 1972

the high employment budget shifts more sharply toward deficit from the
$10.4 billion surplus in the first quarter to an essentially level $5.0
billion deficit over the second half of the year.

About $3.0 billion

of this shift is the result of the acceleration in estate and gift
tax taxes, a one-time speed-up in payments that increases receipts in
the fourth quarter of 1971 and the first quarter of 1972.

In these

projections, overwithholding is estimated to increase receipts by the
following amounts (annual rates)

in calendar 1972: $10 billion in

the

first and second quarters; $9 billion in the third quarter and $8 billion
in the fourth quarter.

II - 18
The Treasury's end-of-May cash balance is now expected to
total about $8.8 billion.

The staff projection assumes that the

Treasury will raise no further new money in the current fiscal year.
The $1.2 billion of bonds maturing in mid-June and the $3.0 billion of
June tax bills would thus be retired.

It is also assumed that the

$100 million reduction in the latest weekly bill offering will be
followed by similar cut backs in the five succeeding auctions.

Given

these assumptions the end-of-June balance is estimated to be $7.2
billion.
Our projections indicate that the Treasury will need to
raise about $20 billion in the second half of the calendar year.

consdierable amount of net borrowing, perhaps $9 billion, is expected
to be raised during July and August.

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

Calendar Quarters
Fiscal 1972 e/
Jan.
F.R.
Budget Board

FY 1973 e/
Jan.
Budget

Calendar Years
1972
1971
Actual F.R.B.

IV*

F.R.B. Staff Estimates
1972
II
III
IV
I*

Federl.Budget
(Quarterly data, unadjusted)
Surplus/deficit
Receipts
Outlays
Means of fihancing:
Not borrouing from the public
Decrease in cash operating balance
Other 1/
Cash 6perating balance, end of period
Memo:

2/
Net agency borrowing-

-38.8
197.8

236.6

-26.7
204.8
231.5

-.7

20.9
1.6
4.2

8.8

7.2

39.5

n.n,.

5.0

-25.5
220.8
246.3

27.5
-2.0
8.8

n.e.

-24.8
194.0
218.8

24.8
-3.2
3.2
11.3

1.1

-10.0
50.6
60.6

-10.5
48.1
58.6

2.2
63.6
61.4

-9.8
55.9
65.7

3.9
3.6
3.0

-4.6
.5
1.9

10.9
-1.0
-.1

9.8

-1.3
-. 6
11.3

7.7

7.2

8.2

7.5

1.4

1.1

n.e.

-13.3 -18.8 -27.8
222.1 225.2 227.3
235.4 244.0 255.1

-25.0
233.9
258.9

-28.1
218.2
246.3

-10.6
44.6

20.0

12.5

3.8
4.2
7.5

55.2

n.e.

.7
-.6

National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
Expenditures
High etmpl6yinent surplus/deficit
(NIA basis)
3/

-35.0
202.8
237.8

n.a.

-21.1
212.0
233.2
5.4

-28.0
227.9
255.9

n.a.

-23.1
198.8
221.9
2.9

-21.2
227.1
248.4

1.0

-25.7
203.0
228.7
6.6

10.4

3.5

-4.9

* Actual
e--projected
n.e.--not estimated
n.a.--not available
1/ Includes such items as deposit fund accounts and clearing accounts.
2/ Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn., Federal
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
3/ Estimated by F.R. Board Staff.

-5.1

II - 20

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

April
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Other (debt repayments, etc.)
Plus:

Other net financial sources--

Plus:

Budget surplus or deficit (-)

Equals:
Memoranda

Change in cash balance

-1.7

June

July

-2.9

5.0

- .4

-4.0
1.8

-3.0

5.0

5.1

4.0-b/

Level of cash balance
end of period

11.7-

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

23.6
18.5

Maturing coupon issues
held by public
Net agency borrowing

May

-. 3

-.4

-4.5

1.6

-6.9

-2.9

-1.6

-2.3

8.8

15.6
20.1

4.9

24.4
22.8

14.5
21.4

2.4/

Checks issued less checks paid and other accrual items.
Actual.
Includes $0.8 billion of capital ga ins from gold revaluation.
The Treasury auctioned $1.8 billion of notes and bonds in a partial
refunding of the $2.4 billion matur ing. The remaining $700 million was
redeemed in cash.

INTERNATIONAL
DEVELOPMENTS

III --

T - 1

U.S. Balance of Payments
In millions of dollars; seasonally adjusted
1971

;

Year J

699
-2,879
-352
42,769 4,182
-45,648 -4,534
3,578

Goods and services, net 1/
Trade balance 2/
Exports 2/
Imports 2/
Service balance
Remittances and pensions
Govt. grants & capital, net

-1,459
-3,860

U.S. private capital (- = outflow)

-9,585
-4,526
-910
-580
-2,389
-509
-672

Direct investment abroad

Foreign securities
Bank-reported claims -- liquid

"
"
"
other
Nonbank-reported claims -- liquid
"

19 72

Jan.*

other

Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Govt.)
Liquid liabilities to:
Commercial banks abroad
Of which liab. to branches
Other private foreign
Intl. & regional institutions
Other nonliquid liabilities
Reserve liab. to foreign official institutions
U.S. monetary reserves (increase, Gold stock
Special drawing rights 3/
IMF gold tranche
Convertible currencies

-5 400
-192
836
1,137
278
-6.705
-6,902
(-4,942)
-478

675

-272
6
160
-105

269

388
388
216
<-106)
20
152

I Feb.*

1 Mar.-*

-628
3,793
-4,421

-655
3,835
-4,490

-1,635
11,810
-13,445
735

-8
-80
-164
-201
-317
-384
-83
e/-134

-342
-459
-716
e/-196

153

257

-5

175
175
202
(-423)
41
-68

-5
58
(331):

-2
-61

-754

27,419
3,065
866
468
1,350
381

865
-2 _

803
549

1,028
_

Net liquidity, S.A.

607
544

544-

-1
64

-2

BALANCES (deficit -) 3/
Official settlements, S.A.
"

3,065

-10,878

Errors and omissions

712
448
48
378
296
<-378)
59
23

, N.S.A.

-30,484

-863

-1,352

-1,088

-3,672
-3 301
;e/-3,395

"
"
, N.S.A.
-22,690 -1,152
-1,280
-748 ie/-3, 178
Liquidity, S.A. 4/
-4,050
"
-2377q
-1251
N S A
-1083
-3 859
-1 527
5
1-1-083
79. 1
1-1
251 -1
* Monthly, only exports and imports are seasonally adjusted.
1/ Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ Excludes allocations of SDRs as follows: $717 million on 1/1/71 and $710 million

on 1/1/72.

4/ Measured by changes in U.S. monetary reserves, all liabilities to foreign official
reserve agencies and liquid liabilities to commercial banks and other foreigners.

III-1

INTERNATIONAL DEVELOPMENTS
Summary and outlook
Since mid-March the U.S. balance of payments has been in
slight surplus on the official settlements basis, in contrast to
the heavy deficit of the first 2-1/2 months of 1972.

Evidence

relating to merchandise trade is available only through March, when
the trade deficit was of near-record size, as it had been in
February.

While some improvement may have occurred in trade since

then, it is likely that a major part of the over-all improvement
has been in capital flows, recorded and unrecorded.
With the changes in money market interest rates here and
abroad that occurred in March and April, overnight borrowing of
Eurodollars by member banks from their branches has become very
attractive so long as liabilities to branches do not exceed a bank's
reserve-free base; the average borrowings outstanding in recent
computation periods have no longer been declining.

There has been a

substantial net flow of funds from foreign banks to U.S. money
markets via the branches and agencies of foreign banks in this
country; this flow is not subject to U.S. reserve requirements at
any point.
Projections of the U.S. balance of payments made recently
by an interagency committee envisage somewhat less progress this
year than had been hoped for earlier toward the current account
target set at the time of the Smithsonian meeting.

The revisions

allow for a somewhat greater contrast between the strengthening

III-2

of aggregate demand in the United States and the slow recovery
expected abroad than had been estimated before.

Net exports of

goods and services, which were at an annual rate of minus $1 billion
in the second half of 1971, are expected to be at an average rate of
minus $2-1/2 billion in the current half year.

It is thought that

effects of the exchange rate changes on real volumes of imports
and exports may begin to be felt in the present quarter.

Beyond

midyear, the staff projection for net exports of goods and services
rises to near zero in the third quarter and to about plus $1 billion
in the fourth.

Substantial further improvement would be looked for

in 1973-74.
So long as confidence in the viability of the Smithsonian
realignment of exchange rates holds and interest rate relationships
are as favorable for inflows as at present (or no more unfavorable,
depending on the type of asset or liability involved), further net
inflows of private capital are to be expected in the months ahead.
Interest rates incentives could possibly become still stronger;
however, rate levels in leading foreign countries may be about as
low by now as they are likely to go in the current cycle.

the over-all balance of payments, with continuing negative balances
on the accounts for Government capital and grants and for private
remittances and pensions, and with net exports still small, the
U.S. official settlements balance in the near term should remain
near zero or slightly positive.

CONFIDENTIAL (FR)

III-3

Foreign exchange markets.

Supply and demand for major foreign

currencies have been generally in balance over the past month or so,
with dollar exchange rates moving by less than 1/2 percent, except for
the Canadian dollar.

Foreign central bank intervention has remained

relatively small, again with the exception of Canada.

The dollar

weakened moderately in response to the new U.S. initiatives in Vietnam
in early May, but by mid-month had, in most cases, recovered to levels
prevailing a month ago.

On May 17, in association with an upsurge of

speculation in the gold market and a $3 dollar one-day increase in
the gold price, the dollar again came under some selling pressure.
FOREIGN EXCHANGE RATES
Percent Above or Below (-) Central Rates
(weekly averages)
Sterling

Mark Swiss
Franc

Guilder

Lira

French
Franc

Belgian
Franc

Yen

Dec. 29
Jan. 26
Feb. 23

-2.2
-0.7
0.0

-1.5
0.3
1.6

-1.8
-0.8
-0.3

-0.7
1.5
2.3

-2.1
-1.2
-0.9

-2.1
-0.7
0.8

-0.8
1.6
2.3

-2.2
-1.1
1.7

Mar. 15
Mar. 29

1.1
0.2

2.0
1.5

0.3
-0.5

2.1
1.5

0.4
-0.2

1.8
1.4

2.1
1.8

2.1
1.9

Apr. 12
Apr. 26

0.2
0.2

1.6
1.4

-0.3
-0.6

1.3
0.9

-0.1
-0.5

1.6
1.6

1.9
1.6

1.8
1.5

May

0.3

1.3

-0.6

1.0

-0.1

2.1

1.9

1.4

The Canadian dollar and the French franc have shown the
greatest strength in recent weeks, apparently reflecting relatively tight
money market conditions in Canada and France.

In the case of the franc,

a change in exchange controls to allow the conversion of some service

III-4

receipts through the commercial franc market had the effect of strengthening
The Canadian dollar

that rate and weakening the financial franc rate.

reached a peak of $1,0114 on May 11, some 9.3 percent above its old
par value, and the Bank of Canada purchased around $75 million in late
April and the first half of May to moderate the rise in the rate.

The

franc moved close to its dollar ceiling, and even closer to its intraEEC ceiling in early May, but the Bank of France was not required to
intervene.
The EEC narrow band arrangement went into effect on April 24,
with the U.K.

and Denmark joining on May 1.

has yet been required, though,

No intra-EEC intervention

as indicated above,

the French franc on

several days was very near its upper limit (2-1/4 percent) with respect
to the Italian lira.
In official transactions, the U.S. Treasury drew SDR 200
million equivalent in sterling on the IMF on April 27 as part of the
United Kingdom's Fund repayment package.

The Treasury added this amount

to its sterling balances for the time being, thus avoiding a decline in
U.S. reserve assets -- the drawing from the IMF reduced our reserve
position in the Fund.

On April 28, the United States officially notified

the IMF of the change in the dollar par value.
The free market price of gold reached a new peak of $57.75
on May 17 in London, up some $8 from mid-April.

Against a background

of a rising trend in industrial and commercial demand, and some actual

CONFIDENTIAL (FR)

III-5

and prospective decline in South African supplies, there has reportedly
been an increase in hoarding demand from the Far East as a result of
the new developments in the Vietnam war and some speculation on a possible
U.S.-Soviet agreement to raise the official price of gold to $55.
Secretary Connally's resignation was interpreted by some market
participants as increasing the possibility of such a further increase
in the official gold price.
Euro-dollar market.

The decline in Euro-dollar interest

rates that began around the end of the first quarter continued without substantial interruption in April and the first half of May.
One- and three-month Euro-dollar rates have averaged about 4-3/16 and
4-7/8 percent, respectively, in recent days, down about 1.2 and
0.8 percent from their average levels in the final week of March
(when Euro-dollar rates in most maturities were at their highest levels
this year).

In domestic markets, CD rates of comparable maturity

have declined by only about 1/4 percent since they reached their
highs for this year in the first half of April.

This relatively

more rapid decline in Euro-dollar than in U.S. rates has virtually
equalized the costs of one-month money as between reserve-free
Euro-dollars and domestic CDs.

The excess of the three-month Euro-

dollar rate over the (adjusted) 60-89 day CD rate is now about
1/2 percent.

III - 6

The overnight Euro-dollar rate, which has been below the
Federal funds rate at most times since mid-March, has been at about
3-3/4 percent in recent weeks, or about 1/2 percent below the Federal
funds rate.

As the table shows, Euro-dollar rates are not yet low

enough to make borrowing subject to the 20 percent marginal reserve
requirement attractive.

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES

Average for
(1)
(2)
(3)
month or
OverFederal Differential
week ending night
Wednesday Euro-1/ Funds2 / (1)-(2) (*)

(4)
(5)
(6)
1-month
30-59 day
Euro-$
CD rate Differential
Depositl/ (AdJ.)4)-(5) (*)

4.58
4.02
3.87
3.92

3.50
3.29
3.83
4.17

1.08
0.73
0.04
-0.25

(2.23)
(1.74)
(1.01)
(0.73)

5.02
4.46
5.05
4.72

3.81
3.43
3.80
4.44

1.21
1.03
1.25
0.28

(2,47)
(2.15)
(2.51)
(1.46)

1972 - Apr.19 4.37
26 3.63

4.05
4.20

0.32
-0.57

(1.41)
(0.34)

4.77
4.50

4.45
4.35

0.30
0.15

(1.49)
(1.28)

4.25
4.20
4.27

-0.48
-0.61
-0.57

(0.46)
(0.29)
(0.35)

4.45
4.30
4.18

4.21
4.21
4.21

0.24
0.09
-0.03

(1.35)
(1.17)
(1.02)

1972 - Jan.
Feb.
Mar.
Apr.

May

3 3.77
10 3.59
17 3.70

1/ All Euro-dollar rates are noon bid rates in the London market; overnight rate adjusted for technical factors to reflect the effective cost of
funds to U.S. banks.
2/ Effective rate.
3/ Offer rates (median, as of Wednesday) on large denominated CD's by
prime banks in New York City; CD rates adjusted for the cost of required
reserves
*/ Differentials in parentheses are after adjustment of Euro-dollar
rates for the 20 percent marginal reserve requirement (relevant to banks
with borrowings in excess of their reserve-free bases).
p/ Preliminary.

III - 7

Short-term interest rates in most of the major foreign
national money markets have not declined (and in some cases have
even risen moderately) in the past several weeks.

In Germany,

however, call money in the interbank market has declined from
about 4-1/4 percent in early April to about 3 percent at present,
although interest rates for three-month funds have changed little
on balance, remaining at about 4-3/4 percent.
Possibly contributing to the decline in Euro-dollar rates
in April was the Japanese Finance Ministry's decision to further
increase its dollar deposits at Japanese banks.

(Japanese banks

reduced their net external liabilities by about $0.3 billion
equivalent in April, apparently substituting dollar liabilities to
the Japanese Finance Ministry for external dollar borrowings).
In the Euro-dollar reserve requirement computation period
ended April 12, U.S. banks' Euro-dollar positions subject to
Regulation M averaged $2.2 billion, about unchanged from the previous
four-week computation period and only slightly below the amounts in
the two periods before that.

Partial data indicate that these

positions remained little changed in the computation period ended
May 10.
Balance of payments.

Preliminary data for the first-quarter

balance of payments published on May 16 show a deficit on official
settlements of $3.7 billion (seasonally adjusted, before allocation of

III - 8

SDRs).1/

Major features of the first quarter accounts were an

increase in the trade deficit to $1.6 billion (an annual rate of
$6.5 billion), a net outflow of $1.2 billion (S.A.)in bank-reported
claims on foreigners, and an unusually large net capital inflow

associated with transactions in securities amounting to over $850
million.

There were also large reported flows of private liquid

capital in both directions:

liquid assets abroad reported by U.S.

nonbanking concerns rose by $200 million, while U.S. liquid liabilities
to commercial banks abroad rose by $300 million (both figures seasonally adjusted).

Some of the increase in bank-reported claims on

foreigners mentioned above was also in relatively liquid forms.
The net liquidity deficit for the first quarter was about

$3.4 billion (S.A.) -- close to the official settlements deficit,
as reported flows of U.S. and foreign private liquid funds were
nearly equal.

At this stage information is not available for long-

term corporate capital flows and other major elements of the accounts.
The size of the residual item representing all the unestimated flows
remained high in the first quarter ($2.9 billion), though less than
the comparable figure for 1971, when the quarterly average was $5.6
billion.

Nevertheless, the size of the overall deficit indicates

that in the first quarter, taken as a whole, there was still an
outward movement of private capital.
1/ This measure now excludes as "above-the-line" receipts,
and counts "below-the-line", substantial Japanese official purchases
of marketable obligations of U.S. Government agencies.

III - 9

At mid-March, however, a significant favorable shift in the
flow of funds began, and this has continued through April and the early
part of May.

From mid-March through May 10 the official settlements

balance registered a surplus of about $275 million.

In quarterly

rate terms this represented an improvement -- compared with the
first quarter -- of about $4 billion.

There are no indications of

a shift in the trade account that would explain any large part of
this.

It appears that flows of private capital have become favorable

on balance, including not only those classed as "liquid" but also others.
With the help of these "nonliquid" capital inflows, the over-all deficit
on the net liquidity basis has diminished greatly, though the balance on
this basis apparently does continue in deficit.
The apparent change in flows of private capital no doubt
reflects greater confidence in the viability of the Smithsonian
realignment, based largely on the firmness of U.S. interest rates
while European short-term rates have declined.

Weekly data indicate

thatlending abroad by U.S. banks dropped in April and early May,
and inflows may be occurring.

There appears to have been a continued

inflow to purchase U.S. equity securities, though probably at a lower rate
than the first-quarter average of $240 million per month.

Capital

1/ This figure is on the VFCR basis, i.e., excluding customers'
funds and foreign assets of U.S. agencies and branches of foreign
banks, but includes export credits and claims on Canada.

III - 10

outflows for new issues of foreign bonds in the U.S. market in April
were quite small, though sizable placements by Canadian borrowers are
scheduled for late May and June.
Part of the improvement in the official settlements balance
as compared with the first quarter resulted from a larger inflow of
liquid funds via interbank transactions.

In the first quarter lia-

bilities to commercial banks abroad rose $475 million (after seasonal
adjustment this becomes $300 million, as noted earlier).

Foreign

banks (mainly Canadian, Japanese and French) placed large amounts
of funds with their agencies and branches in the United States,
while liabilities of U.S. banks to their branches abroad fell about
$200 million.

Since mid-March foreign bank funds held with the

agencies appear to have grown even faster, while U.S. bank liabilities
to branches have about held their earlier level.

The accelerated in-

flow of foreign bank funds is clearly associated with the decline in
overnight Euro-dollar rates below the Federal funds rate after midMarch.

Funds moving through this channel would not incur the 20 per

cent reserve requirement that applies on direct borrowings by U.S.
banks through their own branches abroad.
U.S. foreign trade.

The U.S. trade deficit in March was

again extremely large -- about equal to the very high deficit of
February.

For the first quarter the deficit was $6.5 billion at

an annual rate, balance of payments basis, compared with an average

III - 11

deficit of slightly over $4 billion at an annual rate in the last
half of 1971.
The levels of both exports and imports in the first quarter
were boosted by shipments delayed by the dock strikes of last summer
and fall.

Rough adjustments for these effects reduce the increase in

the first quarter value of imports (over the 1971 second-half rate)
from 16 percent to 8 percent and that of exports from 12 percent to
4 percent.

The ratio of imports, so adjusted, to U.S. GNP in the

first quarter rose to 4.7 percent, compared with 4.5 percent in the
last half of 1971.
Most of the rise in the strike-adjusted value of imports
in the first quarter was in volume; import prices (unit-value index)
averaged only about 2 percent higher than in the last half of 1971,
although February and March unit values increased very sharply.

How

accurately this index reflects prices actually paid we do not know;
U.S. customs officials are raising the declared value of imports to
reflect the new higher foreign exchange rates unless there is evidence
that the declared value is the actual transactions value.
The small rise in the value of strike-adjusted exports in
the first quarter was about evenly divided between prices and quantity.
While exports currently are rising very slowly, foreign orders for
U.S. machinery in March rose strongly, representing an acceleration of
the gradual rise that has been in progress since mid-1971.

III

- 12

Recent U.S. Government actions on petroleum and steel
should considerably affect imports of these commodities this year.
The announced increase in crude oil import quotas of 230,000 barrels
per day, most of which is expected to come from the Mideast, will
add about $200 million to imports this year, at current prices.
However, this increase should be offset by an estimated $200 million
drop in steel imports as a result of the recently negotiated
"voluntary" agreements with the United Kingdom, the EEC countries
and Japan.

In addition, it is expected that the "voluntary" textile

agreements with Japan, Hong Kong, Taiwan, and Korea on man-made fiber
and wool textiles, reached earlier this year, could reduce imports
by about $400 million below what they otherwise would be in 1972.

The

combined effect of these three actions could, therefore, slice about
$400 million from the$52 billion level of imports projected for this
year.

IV - 13

Trade balances of major industrial countries.

In the

past year imports and exports of industrial countries have been
affected by both cyclical forces and widespread exchange rate
changes.

Trade flows were also influenced by deep and prolonged

uncertainty over exchange rates in the period May-December 1971,
but there is no way of knowing how much these uncertainties may
have distorted trade balances in that period or subsequent months.
Since the floating of the German mark a year ago, the
currencies of Japan, Germany, the Netherlands, Belgium and
Switzerland have appreciated relative to other currencies on the
average.

The U.S. dollar and the Canadian dollar have depreciated,

while the pound sterling, French franc, Italian lira and Swedish
krona have changed very little.

Comparing quarterly averages of

daily exchange rates with May 1, 1971 parities (or the mid-August
market rate in the case of the Canadian dollar), the weighted
average percentage appreciation or depreciation of each of the
above-mentioned currencies vis-à-vis the others was as follows
(the weights being based on each country's share of the foreign
trade of the group as a whole):

IV - 14

1971

1972
I

III
(8/16 to 8/30 only)

Japanese yen
German mark

+1.6
+6.2

+5.6
+6.7

+9.5

Dutch guilder
Belgian franc
(Official market)
Swiss franc

+2.6

+4.3

+5.2

+0.8
+6.6

+3.5
+5.8

+5.3
+4.8

Pound sterling

-0.5

French franc
(Official market)
Swedish krona
Italian lira

-2.4
-1.4
-1.1

-3.8
-0.8
-2.1

+0.7
-0.2
-1.5

-3.3

-4.3

-3.8

-5.6

-6.8
-9.4

Canadian dollar
U.S. dollar

+7.1

0.0

It is still too soon to expect the anticipated beneficial
effects of exchange rate changes on trade balances to be visible,
partly because resource

shifts necessary to accomplish the potential

change in trade flows take time to materialize and partly because
cyclical forces have tended to obscure exchange rate effects.

More-

over, the immediate shift in the terms of trade which accompanies an
exchange rate change tends to have a temporary perverse effect on trade
values.
Thus, the very large trade surpluses of Germany and Japan
have not yet begun to contract.

(See Table.)

In real terms, Japanese

exports have declined since the second quarter of 1971, but German exports have not.

In both Germany and Japan, weakened domestic demand has

IV - 15

Trade Balances of Selected Industrial Countries
(in billions of dollars; seasonally-adjusted annual rates;
exports f.o.b. less imports c.i.f.)

1971
II

1970
Year

Year
1/

0.4
4.4

4.3
4.7

2.8
3.6

4.6
4.5

5.3
6.4

Japan
Germany

1972
I

III

5.2
5.1

4,4
4.4

Netherlands

-1.6

-1.3

-1.2

-1.3

0.2

Belgium-Lux.
Switzerland

0.2
-1.3

-0.4
-1.5

-0.5
-1.5

-0.4
-1.5

0.1
-1.4

-0.5
-1.6

-0.2
-1.4

United Kingdom
France

-2.4
-1.2

-1.6
-0.7

-3.3
-0.4

-1.7
-0.6

-0.8
-1.3

-1.3
-0.7

-3.3
-1.2

Sweden

-0.2

0.4

0.7

-1.8

-0.9

-1.7

2.8

2.2

Italy
Canada 3

2.7

Partly estimated-for most countries.

January-February.
Imports f.o.b.

0.3

0.2

1.0

-1.0

-0.1

-0.6

-0.1

2.2

1.6

0.6

0.3

been reflected in a levelling off in the real volume of imports.

In the

other countries whose currencies have appreciated, the trade balance
of the Netherlands increased sharply in the first quarter because of
a fall in imports, and the Belgian and Swiss balances have not shown
signs of declining.

Even though the exchange rate changes over the

past year have led to an average depreciation of the Canadian dollar,
the trade balance has decreased because of the cyclical revival in
Canada and the earlier effective appreciation of the Canadian dollar
beginning in June 1970.

IV - 16

In Britain, France, and Italy, trade balances show contrasting movements.

Britain's trade balance has worsened in

reflection of stronger domestic demand, rapidly rising prices, and
the coal strike in the first quarter.

The French balance has

tended to decrease since mid-1971, but Italy's balance has risen,
mainly because of the low level of domestic activity.
The outlook for adjustments of trade imbalances is
brightened by the prospect that cyclical upturns in Japan and
Germany before the end of the year will reinforce the effects of
currency appreciations and reduce those countries' surpluses.

Germany, most forecasters expect the decline in investment spending
to end during 1972, following which import volume should move up
and tighter domestic supply conditions could begin to hold down
further export gains.

Also, the exchange rate effects on the volume

of exports seem likely to be more pronounced in the future, because
the rise in DM export prices since the beginning of the year indicates that attempts to absorb part of the currency appreciation
in profit margins are now coming to an end.

In the more immediate

future, further decreases in the Canadian and British trade balances
are expected.
The Japanese trade surplus in the first quarter was about
the same in yen terms as in the second quarter of 1971 but the dollar
equivalent rose from $4.6 to $5.2 billion at an annual rate.

The yen

IV-

value of exports fell 5 per cent from 1971-II to 1972-I but because of the change in the yen-dollar exchange rate the dollar
value rose 11 per cent.

Japanese wholesale prices have declined somewhat

since last summer, and export prices in yen in

1972-I were down

2-1/2 per cent from the 1971-II level, as a result of which the
rise in export prices in dollar terms was held to about 13 per cent.
As shown by the accompanying figures, the volume of exports in

the

first quarter of this year implied by the (seasonally adjusted) yen
value and price indexes was about 2-1/2 per cent below 1971-I
Foreign Trade Indexes for Japan
(1971-11 = 100)
1971

Q-

Q-II

1972

Q-III

Q-IV

Q-I

Exports
Yen value (seas.

adj.)

94.0

100

99.5

94.7

95.2

Yen prices
1/
Volume (seas. adj.)-

99.3
94.7

100
100

100.3
99.2

98.9
95.7

97.5
97.6

Yen value (seas. adj.)

101.9

100

96.9

96.8

94.7

Yen prices
Volume (seas.

99.2
102.7

100
100

99.5
97.4

94.8
102.1

Imports

adj.)

93.1
101.7

Seasonally-adjusted yen value index deflated by price index.

Japanese imports have remained very depressed in reflection
of the state of internal demand, the implied volume in the first quarter
being fractionally below a year earlier.
yen have fallen about 6 per cent.

Import prices in terms of

IV - 18

Germany's trade surplus in the first quarter was somewhat
swollen because strikes in Germany in the fourth quarter of 1971
shifted some exports from that quarter into the next.

Combining the

fourth and first quarters the trade surplus ran at an annual rate of

DM 15.4 billion ($4.75 billion), compared to DM 16.0 billion ($4.6 billion)
in the second quarter of 1971.
Cyclical developments have played a dominant role in keeping
the surplus high.

Expressed in DM terms the value of imports has been

essentially flat for four quarters.

Volume has risen about 7 per cent,

Foreign Trade Indexes for Germany
(1971-II = 100)

1972

1971
I
Exports
DM value
(seas. adj.)
DM price index
Volume (seas.
adj.)1/
Imports
DM value
(seas. adj.)

III

Jan.-Feb.

99.9
99.1

100.0
100.0

103.0
100.2

96.4
99.8

106.5
101.0

100.8

100.0

102.8

96.6

105.4

99.0

100.0

99.1

98.3

102.4

DM price index
Volume (seas.

99.6

100.0

96.7

95.2

95.9

adj.)/

99.4

100.0

102.5

103.3

106.8

Seasonally-adjusted DM values deflated by price index.

but import prices in DM were declining until last November and in JanuaryFebruary were 4 per cent below the second quarter of 1971.

On the export

side, export prices in DM rose in January and February; but they had

IV - 19

earlier declined from July to December, and in January-February were
only 1 per cent higher than in 1971-11.

Export volume in January-

February was 5.4 per cent greater than in 1971-II, a much smaller rise
than recorded in preceding German economic downswings; it is likely
that Germany's export performance has deteriorated compared to other
countries during the past year.
The widening trade deficit in the United Kingdom has partly
reflected a poor export performance since mid-1971.

Foreign Trade Indexes for the United Kingdom
(1971-II = 100)

III

1972
Jan.-Feb.

1971
I
Exports
Sterling value
(seas. adj.)
Sterling unit
value 1/
Volume (seas.

adj.)
Imports
Sterling value
(seas. adj.)
Sterling unit
value1/
Volume (seas.
adj.)
1/

87.2

100.0

102.3

102.7

100.4

98.3

100.0

102.3

103.9

106.2

88.7

100.0

98.8

94.5

96.3

100.0

99.4

102.8

105.4

96.9

100.0

100.6

101.5

101.9

99.4

100.0

98.8

101.3

103.4

Derived by dividing value index by volume index.

Export unit values rose 6.2 per cent in this period, and, given the
weakening in export performance, just mentioned, this trend is a cause
for concern.

The volume of imports has risen rather vigorously in

IV - 20

recent months, in reflection of the quickened pace of aggregate domestic
demand.

They were somewhat swollen in March by abnormally large coal

imports; for the first quarter the sterling value of imports (price

and volume data are not yet available) exceeded the 1971-II level by
7.2 per cent.

Canada's trade surplus has been contracting rapidly in recent
quarters, falling to a $560 million annual rate in the first quarter of
1972 compared with a calendar 1970 record surplus of $2.

billion.

The

exchange rate changes in the other industrial countries in 1971 should,
on balance, serve to swell the trade surplus; until now, however,
Canadian trade has been dominated by the more rapid expansion of economic

activity in Canada than in the United States and, to a more marked
degree, than in Europe and Japan, as well as by the earlier appreciation of the Canadian dollar.

Export growth has been fairly rapid but

has been well surpassed by an expansion of imports (U.S. dollar values)
at annual rates of 22 per cent in the 12-month period, and 27 per cent
in the 6-month period, ending with 1972-I.
In France the trade balance has shown erratic quarterly changes
but has tended to decline since the first half of 1971.

Imports have

been expanding quite rapidly, the franc value (seasonally adjusted) in the
first quarter being up 12.4 per cent over 1971-II compared with an 11.1 per
cent rise for exports.

The differential in these rates reflects inter

alia a more rapid expansion of domestic demand and economic activity in
France than in France's main trading partners, expecially Germany, Italy,

IV - 21

and Belgium.

Italy's trade balance has been tending to rise since the

latter part of 1970, in the virtual absence of any growth in real output in Italy.

From 1971-11 to 1972-I the seasonally adjusted lira

value of exports rose 13 per cent compared with 6-1/2 per cent for
imports.

In coming months the balance seems likely to rise further

since any expansion of domestic economic activity will probably be
quite modest.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 23, 1972 : Greenbook

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