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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

May 20, 1970

TABLE OF CONTENTS
Page No.
Section
SUMMARY AND OUTLOOK

Nonfinancial

- 1

Recent developments
Outlook . . . . . .

..
. .

..
. ..
. . . .

..
.

. . ....
. . .

- 1
- 2

..
. ..

- 4

Financial

- 5

Prospective business and government demands for funds
Outlook for mortgage markets
.
Outlook for interest rates

.
.

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

.
.

6
7

- 7

Balance of payments
THE ECONOMIC PICTURE IN DETAIL:
Domestic Nonfinancial Scene

.......
.
. . . . . . .
Gross national product
. . . . .
Industrial production . . . . . . . . .
Retail sales
. . . . . . . . . . ..
.
. .
. .
. . . . . . . . . . .
Unit auto sales and stocks
. . . . . . . . . . . . . . ..
Consumer credit .

.. . .

Census consumer buying expectations .
Inventories .

.....

.
.

.. .

- 11
.-

.....

Residential construction and real estate . . . . . .
Manufacturing capital appropriations . . . . . . ..
. . . . .
.
Labor market . . . . . . . . . .. .
.

Nonfarm employment

. .

Personal income .

Industrial relations
Wholesale prices
Consumer prices .

. . . . . . .

Labor force and unemployment
.

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

.
.

. . . .

- 23

.
.

25
29

1
3
6
8

.
.

Domestic Financial Situation

III

Bank credit . . . . . . . . . . .
Monetary aggregates . . . . . . .
Nonbank depositary intermediaries
Mortgage market . . . . . . . . .

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

. .
. .

..
.
.

.
.

.
...

.
. . . .
. . . . . . . .
Life insurance companies
. .Corporate financing of fixed investment . . . .
Corpbrate and municipal security markets . . . . . .
Stock market

- 14
- 17
- 17

. . ...
.-

. . .
. . .

1
7
9
10
11

. .

..
Government securities market
Other short-term credit markets .
Federal finance . . . . . . . . .

. . .
. . .
. . .

. . . .
.
. .
.
.. .

.
..

- 11
13
- 17
-

. ..

Total private borrowing and lending . . . . ..

....
.

- 22
-

28
31
34

-2-

Page No.
Section
International Developments
U.S. Balance of Payments ............
U.S. Foreign Trade ..................
Euro-dollar Market . . . . .. .

IV
.
.

. .

..
.

Foreign Exchange Markets . . . . . . . . .......
Financial Developments in Major Industrial Nations . .

- 1
- 4
- 6

- 7
- 11

SUMMARY AND OUTLOOK
Nonfinancial
Revised Commerce Department estimates show a decline in real
GNP in the first quarter at an annual rate of 3.0 per cent.

recently, industrial output and the labor market have continued relatively weak, and common stock prices have dropped considerably further.
But with a substantial downward adjustment having already occurred in
inventory investment, and with large income supplements promising to
sustain final sales, we still expect that output of goods and services
will about level off this quarter.

Recent developments.

The first quarter decline in real GNP

was chiefly attributable to a sharp drop in the rate of nonfarm inventory
accumulation; the rate of inventory investment dropped to virtually
zero for the first time in nine years.

In April, industrial production

declined to about its January level, but personal income showed an
exceptionally large rise as a result of special payments--retroactive
and increased social security benefits and a retroactive Federal pay
increase.

Retail sales advanced in April, with sales up at both

durable and nondurable goods stores, although in early May auto sales
turned sluggish.
The labor market eased substantially further in April, with
the unemployment rate increasing to 4.8 per cent, from 4.4 per cent in
March and 3.5 per cent at the end of last year.

Much of the increase

I-

in unemployment reflects a much larger than "normal" increase in the
labor force.

But employment gains have also dwindled recently; and

manufacturing employment is down considerably.

In April, total nonfarm

employment declined, largely as a result of strikes.
The increase in the GNP deflator, apart from the influence of
the Federal pay raise, turned out to be slightly larger in the first
quarter than the preliminary estimate.

Some slowing, however, developed

in the rise in wholesale prices over the course of the quarter.

The

wholesale price index was unchanged from mid-March to mid-April as
lower prices of farm products and foods offset a further advance in
industrial prices at about a 4 per cent annual rate.

But consumer

prices in April rose at an annual rate of about 6 per cent after
allowance for seasonal influences.

Outlook.

It now seems likely that any further decline in

inventory investment this quarter will be modest.

Moreover, the

addition to personal income of higher social security benefits and the
Federal military and civilian pay increases, including the retroactive
features, is expected to generate a larger rise in consumer spending
than in the first quarter.

This assumes that the depressed stock

market and Cambodian developments will not significantly dampen consumer
outlays.

On balance, both current dollar and real GNP are expected

to show some improvement this quarter;

in real terms, GNP should change

little in contrast to the 3 per cent decline reported in the first
quarter.

I-

It seems even more probable than earlier that businessmen
will cut back on their planned investment outlays this year.

Contri-

butory evidence includes the recent drop in new orders for machinery
and equipment, the decline in profits, and results of the NICB survey
of large manufacturers which indicate a further sizable decline in
capital appropriations in the first quarter.

We have, therefore,

revised downward somewhat our estimates for business fixed investment
for the second quarter and the last half of the year.

In most other

sectors the outlook for the current quarter has not changed materially.
We continue to anticipate a resumption of economic growth in
the second half of this year, with real GNP now expected to rise at an
annual rate of around 2-1/2 to 3 per cent.

This is less than previously

projected, in part because of the more moderate increase of business
fixed investment spending now anticipated.

Nevertheless, gains in final

sales should be larger in the final half of the year than in the first
half, in part reflecting a turn-around in residential construction
activity.

Moderate inventory accumulation is also expected to add to

growth of GNP, in contrast to the decline in the first half of the year.
The labor market is expected to ease further over the
balance of this year.

Unemployment seems likely to increase again in

May, in part reflecting layoffs due to the trucking strike.

With a

national agreement now ratified covering most of the trucking industry,
the secondary impact on employment and unemployment from the strike
should diminish considerably in the weeks ahead.

But some further

rise in unemployment is anticipated in the second half of the year since

I-4

real GNP growth is projected to continue below potential.

We have

raised the projection for second half unemployment to a little over 5
per cent to take account of anticipated slower rate of real economic
growth and more rapid increase in the labor force.
Output per manhour in manufacturing has begun to rise more
rapidly in recent months and the rise in unit labor costs has moderated.
The resumption of over-all economic expansion later this year should
extend productivity gains to other sectors.

With upward cost pressures

abating somewhat, we continue to project a gradual slowing in the
rise of the GNP deflator, to a 3.7 per cent annual rate in the fourth
quarter.

Financial
Since the previous FOMC meeting, stock prices have dropped
further; yields on corporate and municipal bonds have risen to levels
above the previous highs of late 1969; and Treasury bill yields have
remained generally at levels which make Regulation Q ceilings on large
bank CD's noncompetitive.

These developments were influenced by wide-

spread uncertainties associated with recent disturbing domestic and
international events and with developments affecting the economic outlook,
including the outlook for fiscal policy.

At the same time, the Treasury

was engaged in a major, relatively complicated financing, and capital
markets were under pressure from the huge AT&T "rights" financing.

While

interest rates have edged down a little most recently, particularly in

I-5
the Treasury bill market, general confidence in the current and
prospective state of securities markets remains quite fragile,
particularly in light of the heavy anticipated volume of business and
Government borrowing.

Prospective business and government demands for funds.

Unless

business spending is cut below our projections, there appears to be little
room for any substantial lessening of business demands for external
financing, given the current outlook for weak corporate profits.
Corporate demands on capital markets into the summer are not likely to
drop off much from recent advanced levels (ex-the AT&T debentures).
While business borrowing at banks has slackened somewhat in March and
April relative to the 1969 pace, in part related to the sharp slowing
of inventory accumulation, bankers continue to report a fairly strong
underlying business loan demand.
With business borrowing expected to remain large, the recent
tendency for market participants to revise upward their projections of
Federal cash borrowing has added to uncertainties about future interest
rates.

The Board staff estimates that the net Federal cash need for

the second half of 1970 will amount to about $12 billion, or $3-1/2
billion larger than in the comparable period of 1969, but some market
forecasts are for substantially larger financing requirements.

As to

the immediate future,the next Treasury borrowing is expected around
mid-July, with the total July need for new money estimated at $4.0
to $5.0 billion.

I-

In the case of State and local governments, the volume of
borrowing has dropped off recently, as high interest rates and reduced
bank demand have encouraged deferrals of new bond offerings.

The back-

log of unmet demands remains large, however, and expected action by
the State of California to raise its interest rate ceiling could bring
a significant part of this backlog into the market over the summer.

Outlook for mortgage markets.

The general strengthening of

deposit growth evident at non-bank thrift institutions during March and
April may not be fully sustained in May becuase of competition from the
attractive new Treasury and AT&T issues and the generally higher level
of short-term market yields.

In addition, the windfall increments to

consumer cash flows in April and early May, from tax refunds and
retroactive increases in social security benefits and Federal pay, will
not be repeated after mid-May.
Still, for the second quarter as a whole, net inflows to thrift
institutions should be significantly improved relative to the first
quarter.

This--together with the FHLB program of encouraging S&L's

to shift to lower cost, longer-maturity expansion advances--should add
to credit flows in the mortgage market.

All of the major types of

lenders queried in the FRB-FHLBB survey, now in the process of evaluation, report that they expect moderate improvement in mortgage commitments and flows and housing starts over the balance of the year.

I-

Outlook for interest rates.

Assuming moderate growth in money

and bank credit, the weight of current and prospective credit demands
seem likely to maintain yields in longer-term markets at high levels,
although some moderate yield declines from recent highs would not be
surprising now that the Treasury and AT&T financings are out of the
way.

Such interest rate declines would, of course, be extended by any

evidence that businesses were cutting back significantly on their
capital spending plans and by progress toward a cooling of domestic
and international political tensions.

In short-term markets the

depleted state of dealer bill positions, and the sizable--if temporary-Federal debt repayment scheduled for June, may contribute to some
further decline of Treasury bill rates over the weeks just ahead.
But in view of the heavy Treasury cash requirement in early summer,
any such yield decline may not be large and much of it may be only
temporary, given the current course of monetary policy.

Balance of payments outlook
Exchange markets for the dollar have shown considerable
weakness in recent weeks, and additions to reserves of other major
industrial countries have been fairly widespread.

In total these

reserve accruals were continuing at a pace suggesting a fairly large
U.S. official settlements deficit for the current quarter, even
though U.S.

banks did not repay Euro-dollar borrowings on

balance

I-

over the period from the beginning of April to mid-May.

The liquidity

balance before special transactions has been in substantial deficit.
Seasonal factors affect the U.S. balance of payments unfavorably in April, but do not suffice to explain the apparent weakening
of the liquidity balance in comparison with February and March.

Nor

is the explanation to be looked for in foreign trade, according to
preliminary indications in advance of the compilation of customs
data.

Apparently capital flows of various kinds are running rather

unfavorably.
Short-term capital flows between Canada and the United
States have contributed to Canada's unusually large reserve gains
lately.

Financial market conditions and interest rate relationships

are likely to stimulate continuing reflows to that country, since
Canadian monetary policy is attempting to deal with strong inflationary
forces.

In European countries, too, the general outlook is for tight

financial markets in coming months.

Thus U.S. banks are likely to

reduce their Euro-dollar borrowings further--perhaps to the May 1969
base total before many months pass--and other capital flows are likely
to be influenced adversely.

I --

T - 1

May 19,

1970

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Per Cent Change* From
Year
3 mos.
1 mo.
ago
ago
ago

Jan.

1970
Mar.
Feb.

Civilian labor force (mil.)
Unemployment rate (%)
Insured unempl. rate (%)

82.2
3.9
2.5

82.2
4.2
2.6

82.8
4.4
2.7

82.9
4.8

Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing

70.8
20.0
50.9

71.0
19.9
51.1

71.1
19.9
51.2

71.0
19.7
51.3

-0.1
-0.7
0.1

0.2
-1.2

1.7
-1.9

0.8

3.2

Industrial production (57-59=100)
Final products, total
Consumer goods
Business equipment
Materials

170.4
168.5
161.5
192.8
172.5

170.5
170.0
162.0
196.8
171.3

171.1
170.6
163.7
197.0
171.8

170.4
169.4
163.5

-0.4
-0.7
-0.1
-1.4
-0.2

0.0
0.5
1.2
0.7
-0.6

-0.8
-0.5
1.1
0.1
-0.9

[84.51]

0.0
0.3
0.8
-1.0

0.5
1.0
0.5
-0.5

4.2
3.6
1.6
6.0

1.4
1.3
0.4
2.7

6.1
7.5
3.4
8.1

1.9
0.9
-0.1

6.7
5.4
3.3

80.1

Capacity util. rate, mfg.

116.0
114.0
116.0

79.8

79.7

Apr.

0.8
---

3.2

194.2
171.4
79.0

3.0
[3.51
[2.0]

118.2

116.4
114.4
115.9
118.7

116.6
114.7
115.7
118.8

116.6
115.1
116.6
117.6

131.8
130.7
120.1
149.6

132.5
131.5
120.4
150.7

133.2
131.6
120.8
152.3

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

0.5

3.13
3.28
132.59

3.15
3.28
131.47

3.18
3.31
132.80

3.19
3.31
132.46

0.3
0.0
-0.3

86.86

85.57

86.22

n.a.

0.8

Personal income ($ bil.) 2/

774.3

778.3

783.3

801.1

2.3

3.5

8.9

Retail sales, total ($ bil.)
Autos (million units) 2/
GAAF ($ bil.) 3/

29.6
6.8
8.1

30.0
7.9
8.3

29.7
7.3
8.0

30.2
7.5
8.2

1.5
1.7
2.8

2.1

9.3
1.3

2.7
-9.0
1.7

149.8

151.0

150.8

n.a.

-0.1

-1.0

0.5

1,306
39.9
25.8
29.7
6.6
87.16

1,384
40.2
26.8
28.6
6.0
88.65

1,181
40.0
32.6
n.a.
n.a.
85.95

Wholesale prices (57-59=100)
Industrial commodities (FR)
Sensitive materials (FR)
Farm products, foods & feeds
Consumer prices (57-59=100) 1/ 5
Food
Commodities except food
Services
Hourly earnings, pvt. nonfarm ($)
Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)
Net spend. weekly earnings, mfg.
(3 dependents 57-59 $) 1/ 5/

12 leaders, composite (1963=100)

Selected leading indicators:
Housing starts, pvt. (thous.) 2/
1,059
Factory workweek (hours)
40.3
Unempl. claims, initial (thous.) 5/ 23.5
New orders, dur. goods, ($ bil.) 28.9
Machinery & equipment 5/
6.4
Common stock prices (41-43=10)
90.31

0.1
0.3
1.1

-14.7
-0.5
-21.7
-3.5
-9.4
-3.0

-2.1

-1.4

11.5 -21.5
6/ -0.76/ -2.0
78.3 6/
S-39.1

-5.5
-7.8
-4.8

*
Based on unrounded data.
1/ Not seasonally adjusted. 2/ Annual rates.
3/ Gen'l. merchandise, apparel, and furniture and appliances.
4/ Actual figures.
6/ Sign reversed.
/5 Per cent change calculated to March 1970.

-3.6
-6.8
-15.1

T-

SELECTED DOMESTIC FINANCIAL DATA

Averages
QII

1969
QIII

QIV

Apr.

1970
Week ended
May 13

1970

Interest rates, per cent
Federal funds
3-mo. Treasury bills
3-mo. Federal agencies
3-mo. Euro-dollars
3-mo. finance co. paper
4-6 mo. commercial paper

8.33
6.20
6.80
9.69
6.72
7.54

8.98
7.02
7.63
10.89
7.74
8.49

8.94
7.36
7.92
10.48
7.89
8.63

8.56
7.21
7.72
9.26
7.94
8.55

8.10
6.51
6.88

Bond buyer municipals
Aaa corporate-new issues
20-year Treasury bonds
FHA mortgages, 30-year

5.43
7.32
6.14
8.17

6.00
7.75
6.34
8.38

6.40
8.32
6.71
8.53

6.35
8.45
6.78
9.25

6.35
8.60
6.85
9.10

7.96
6.74
7.20
8.51
7.38
8.38

8.36

7.26
8.06

6.89
8.98
7.11

During Period

Change

1970

1969

0191

April

Change in monetary

aggregates (SAAR, per cent)
Total reserves
Nonborrowed reserves
Credit proxy
Credit proxy + nondep. funds
Money supply
Time and savings deposits
Deposits at S&L's and MSB's
Bank credit, end-of-month
Treasury securities
Other securities
Total loans
Business

1.2

1.4
- 0.1
0.1
2.1
1.2

- 9.3
- 4.8
- 9.4
- 4.0

- 4.7
- 2.2

n.a.

4.5
- 3.0

-13.3
2.1
- 0.8
-11.4
- 7.2
3.1
5.1

3.9
6.1
-

8.4

0.6
10.9
10.8

1.4
2 .1
-21.2

QIII

3,522

3,233
1,350

24.0
16.8
13.7
10.7
22.2
8.3

0.6

0.7
3.8
0.4
1.9
0.2

6.0

-15.4
10.8

50.6
16.6

-4.3
- 2.3

7.2
5.0

3.8
1970

1969

_QTI

20.0

2.9
0.4

0IV

April

Change in millions
Commercial paper (SA)
Bank related (NSA)

n.a.

3,250
1,614 r

1968
QI

1970

1969

April

1,870
109

2,765
2,224 r

April

New security issues (NSA, $ mil.)

Total corp.

issues

Public offerings
State and local government
bond offerings
Fed. sponsored agency debt
(change)
Fed. gov't. debt (change)

n.a. - Not available.

5,178
3,454

1,428
989

6,218
4,680

2,748
2,098

7,831e
6,604

3,000e
2,600e

3,840

1,318

2,787

1,801

4,049

1,650e

1,112
6,816

281
-1,630

1,194
157

841
-2,456

3,714
1,981

783e
-4,500e

e - Estimated.

SAAR - Seasonally adjusted annual rate.

p - Preliminary.

NSA - Not seasonally adjusted.

I--

T-

U.S. BALANCE OF PAYMENTS
In millions of dollars; seasonally adjusted

1 9 7 0
Tln *

1968
Year

1969
yearr

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

2,524
634
33,598
-32,964
1,890

2,015
632
36,469
-35,837
1,383

Remittances and pensions
Govt. grants & capital, net

-1,159
-3,955

-1,163
-3,865

U.S. private capital

-5,157

-5,015

Direct investment
Foreign securities
Banking claims
Other

-3,025
-1,266
269
-1,135

-3,060
-1,380
-534
-41

Foreign capital
Official foreign, nonliquid
Official foreign, liquid
Foreign commercial banks, liquid
New direct investment issues 3/
U.S. corporate stocks
Other

9,277
2,282
-3,099
3,382
2,129
2,084
2,499

12,265
-713
-528
9,424
1,026
1,515
1,541

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

-880
1,173
--870
-1,183

-1,187
-967
--1,034
814

-650

-3,050

1,638

2,713

168

-7,208

-1,744

-6,711

-3,313
-2,799
-1,944
-1,602
-1,520
-1,186

3,382
-1,638

9,424
-2,713

-1,613
2,799

Errors and omissions
BALANCES, (deficit -) 4/
Official settlements, S.A.
"
"
, N.S.A. 5/
Liquidity, S.A.
"
, N.S.A.
Adjusted over-all, S.A.
"
"
, N.S.A. 6/
Financed by:
7/
Liab. to comm. banks
Official settlements

Fbh

Mar.*

519
10,218
-9,699

-3,300
-3,300

375
3,575
-3,200

144
3,343
-3,199

-168
138

-18
361

-130
114

-103
-191

3,264
-1,793

668
232

1,346
-902

728
-943

-90

-41

L/481
-44
/-53
-253
831

-15

-34

435
-23
!/-32
3
487

-274
-24
-20
-186
-44

320
3
-1
-70
388

-429

-1,072

-1,300

-1,348

-87

-167

-661

-170

-357

232
429

-902
1,072

-943
1,300

* 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/ New issues sold abroad by U.S. direct investors.
4/ Excludes initial allocation of SDRs on Jan. 1, 1970; total $867 million, quarterly
S.A. $217 million.
5/ Differs from liquidity balance by counting as receipts (+) increase in liquid liabilities to commercial banks, private nonbanks, and international institutions (except IMF)
and by not counting as receipts (+) increases in certain nonliquid liabilities to foreign
official institutions.
6/ Represents the net result of all international transactions of the U.S. other than
changes in reserve assets, in all liabilities to foreign monetary authorities and in liabilities to commercial banks abroad (including U.S. bank branches) reported by banks in the
U.S.
7/ Minus sign indicates decrease in net liabilities. Data not seasonally adjusted.

- 1

THE ECONOMIC PICTURE IN DETAIL

Domestic Nonfinancial Scene

Gross national product.

Revised Commerce Departm nt figures

indicate that activity in the first quarter weakened more than originally reported, with real GNP declining at a 3.0 per cent annual rate-about twice as rapidly as earlier estimated.

The first quarter current

dollar GNP increase was revised downward from $8.2 billion to $7.4
billion.
The relatively small overall change in current dollar GNP
Most significant was a $2.1 billion

reflected some substantial offsets.

downward revision in the rate of inventory accumulation which is now
estimated at only $0.8 billion, about $7 billion less than in the
previous quarter and $10 billion less than last summer.

In addition,

net exports were revised down by $700 million, and there were small
downward revisions in business fixed investment and durable consumption
expenditures.

On the other hand, Federal purchases were revised up as

the result of the inclusion of the $2.1 billion retroactive portion of
the Federal pay increase in the first quarter rather than in the second
as assumed in our last projection.

Since government pay increases

While Federal purchases in the first quarter are thus raised by
$2.1 billion, and Federal subsidies less current surplus of government enterprises (in the Federal government N.I.A. account) by
$0.4 billion, because of the retroactive payment for postal workers,
an accrual adjustment transfers the effect of these payments on
total Federal expenditures, and the surplus or deficit, from the
first quarter to the second quarter of the year when these payments
were made.

II - 2

are treated as a price rise, this adjustment was the major factor in a
sharp upward revision in the implicit GNP price deflator from an annual
rate of 5.0 per cent to 6.2 per cent.
Our present projection of current dollar GNP in the second
quarter calls for a $10.4 billion rise from the first quarter--the
same increase as projected three weeks ago, excluding the effect of our
assumption about the retroactive portion of the Federal pay increase.
Real GNP, as before, is expected to show a very slight decline from the
first quarter level.
The most important change from our previous projection is a
reduction in the growth of business fixed investment in the second
quarter and for the remainder of the year.

For the current quarter,

we have reduced the projected increase in capital outlays

from $2.2

billion to $1.0 billion, with a rise of only $1.0 billion expected after
mid-year.

For 1970 as a whole, the increase is now projected at 6 per

cent instead of 8 per cent.

Enough evidence has now accumulated in our

view to warrant making some downward revisions in this important area.
Recent indications of weakened demand include the downdrift in new
orders for machinery and equipment, which by March were off about
10 per cent from their second quarter 1969 peak, and the latest NICB
survey (for release Friday, May 22) which indicates that manufacturing
capital appropriations were off 15 per cent in the first quarter.
Moreover, the recent sharp break in stock prices in addition to the
substantial first quarter drop in corporate profits are likely to
dampen business investment plans.

We anticipate, however, that

- 3

continued strength in the nonmanufacturing sector of the economy
(especially public utilities and communications) will support a high
level of investment spending for the remainder of the year.

CHANGES IN GNP AND RELATED ITEMS, 1970
(Seasonally adjusted annual rates)

Second Qiuarter
First Quarter
Last
Current
Preliminary Revised
Projection
Commerce Projection
Commerce
Estimate
Estimate
(4/29)
(5/19)
(Billions of dollars)
GNP
Final demands
Consumer expenditures
Business fixed investment
Net exports
Federal purchases
Inventory change

8.2

7.4

15.0

10.4

13.0
11.1
1.8

14.4
10.9
1.5

16.9
12.0
2.2

1.0

-2.1
-4.8

.0
-6.9

12.1
12.3
1.0
S.0
-2.7
-1.8

1.7
-1.9

(Per cent per year)
Real GNP
GNP deflator
1/
2/

-1.6
5.0

-3.0 /
6.2-

- .2
4.5-

.2
4.5

Excluding e-fect of the ret:roactive portion of the Federal pay raise,
5.2 per cent.
Excluding e"ect of FederalL pay raise.

Among other elements of our second quarter projection, net
exports are now expected to show no change instead of a drop of $0.7
billion.

The sharp housing starts drop in April brought the starts

rate a little below our projection of 1.2 million units for the current
quarter but the increase in building permits would seem to support the
projected rate for the quarter as a whole.

Consumer spending is still

expected to increase significantly in response to the substantial gains
in income brought about by the boost in Social Security benefits and

II - 4

the Federal pay increase.

Retail sales rose briskly in April, after a

relatively weak March, and seemed to gather strength as the month progressed.

Auto sales, however, except for a spurt at the end of April,

have not shown as much strength as expected.

With information for

almost half the quarter in, unit sales of new domestic autos have been
at an annual rate under 7-1/2 million; as a result, we have reduced our
auto sales projections from 7.8 to 7.6 million, annual rate, for the
second quarter.
A further decline in inventory investment, with some actual
liquidation, is expected in the second quarter.

Auto production is

now scheduled at more than an 8 million unit annual rate for May and
But defense inventories are

also for June, and auto stocks may rise.

down and are likely to continue to decline.

And the projected slower

growth in investment spending may result in some runoff of machinery
and equipment inventories.

Moreover, the current and projected squeeze

on profits, combined with high interest rates, could make for even more
cautious inventory policies.
It still appears that there will be an appreciable recovery
in economic activity in the second half, although the leveling off in
business fixed investment now expected results in smaller gains in
overall GNP than previously indicated.

Residential construction is

still projected to rebound and a modest increase in inventories is
anticipated following the second quarter liquidation.

Overall, we now

expect current dollar GNP to increase by about $16 billion a quarter;
in real terms, the rate of growth is expected to average a little under
3 per cent in the second half of the year.

CONFIDENTIAL - FR

May 20, 1970
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.)

1969
1968

1969

1970
Proj.

III

1970
Projected
II
III

Gross National Product
Final purchases
Private
Excluding net exports

865.7
858.4
658.1
655.6

932.1
924.1
709.5
707.4

979.6
978.9
755.6
752.1

924.8
917.9
705.0
703.4

942.8
932.0
715.0
712.3

952.2
944.5
726.2
723.5

959.6
958.9
737.7
734.7

970.0
971.0
749.7
746.7

986.5
985.5
761.4
757.4

1002.5
1000.5
773.8
769.8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

536.6
83.3
230.6
222.8

576.0
89.8
243.6
242.6

616.8
90.4
262.5
263.9

572.8
90.6
242.1
240.1

579.8
89.8
245.1
244.9

589.5
90.4
248.7
250.3

600.4
89.4
255.4
255.6

612.7
90.0
261.6
261.1

622.2
90.7
264.9
266.6

631.7
91.5
268.0
272.2

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

126.3
30.2
88.8
7.3
7.4

139.4
32.2
99.2
8.0
7.8

136.1
30.1
105.3
0.7
0.6

137.4
32.7
97.8
6.9
6.7

143.3
31.4
101.1
10.7
10.3

141.8
31.6
102.5
7.7
7.4

135.0
30.2
104.0
0.8
0.4

133.0
29.0
105.0
-1.0
-1.0

136.2
29.2
106.0
1.0
1.0

140.1

Net exports of goods and services

2.5

2.1

3.5

1.6

2.7

3.0

4.0

32.1

106.0
2.0
2.0
4.0

200.3
99.5
78.0
21.5
100.7

214.6
101.9
79.2
22.7
112.7

223.3
99.7
75.8
23.9
123.6

212.9
100.6
78.5
22.1
112.3

217.0
103.2
80.3
22.9
113.8

218.3
102.3
79.2
23.1
116.0

221.2
102.3*
78.9*
23.3*
118.9

221.3
99.6
76.6
23.0
121.7

224.1
98.9
74.7
24.2
125.2

226.7
98.0
73.0
25.0
128.7

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

707.6
122.3

727.5
128.1

727.6
134.6

726.7
127.3

730.6
129.0

729.8
130.5

724.3
132.5

723.9
134.0

728.6
135.4

733.6
136.6

Personal income
Wages and salaries
Disposable income
Personal saving
Saving rate (per cent)

687.9
465.0
590.0
38.4
6.5

747.2
509.9
629.7
37.6
6.0

800.9
546.8
680.9
47.4
7.0

740.5
504.3
622.0
33.3
5.3

756.5
516.9
639.0
43.1
6.7

767.4
525.0
647.5
41.7
6.4

778.6
532.4
660.4
43.5
6.6

800.8
545.0
679.5
50.1
7.4

806.6
550.6
687.6
48.6
7.1

817.6
559.0
696.0
47.2
6.8

92.5

91.4

85.1p

82.5

84.0

203.3
196.7
6.7

198.7
198.4'
0.3

Gov't. purchases
Federal
Defense
Other
State & local

of goods & services

91.1

Corporate profits before tax
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)
High employment surplus or deficit

176.3
181.5
-5.2
(-)

-10.0

93.8

201.5
192.0
9.5

84.3

200.4
205.4
-5.0

95.4

202.8
189.3
13.5

201.3
193.6
7.7

200.8
210.4*
-9.6*

199.2
205.7
-6.5

202.7
206.9
-4.2
8.0

5.3

4.0

7.8

3.9

5.6

5.2

-0.8

3.7

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

82.3
3.5
78.7
3.6

84.2
3.4
80.7
3.5

86.3
3.2
83.0
4.8

83.9
3.5
80.4
3.5

84.6
3.5
81.0
3.6

85.0
3.5
81.5
3.6

85.8
3.3
82.4
4.1

86.1
3.2
82.9
4.9

86.4
3.2
83.2
5.1

86.7
3.1
83.6
5.2

Nonfarm payroll employment (millions)
Manufacturing

67.9
19.8

70.1
20.1

71.4
19.7

70.0
20.1

70.4
20.2

70.7
20.1

71.1
19.9

71.2
19.7

71.4
19.6

71.8
19.6

165.5

172.8

171.6

172.6

174.3

84.6

83.7

78.6

84.5

84.2

1.51

1.47

1.32

1.52

8.62

8.46

7.69

8.54

Industrial production (1957-59=100)
Capacity utilization, manufacturing
(per cent)
Housing starts, private (millions A R.)
Sales new domestic autos (millions,
A.R.)

171.9

170.7

170.5

171.8

173.4

81.7

79.9

78.6

78.2

77.8

1.43

1.36

1.25

1.20

1.35

8.45

8.13

7.35

7.60

7.80

1 Federal purchases of goods and services and GNP, in '70-I, include the retroactive part of the pay increase for Federal
military and civil service personnel ($2.1 billion annual rate). By means of accrual adjustments, however, this
retroactive part is excluded from total Federal expenditures and the surplus or deficit in '70-1 and included in these
in '70-II. The retroactive part of the pay increase for postal employees ($.4 billion annual rate) is included in
Federal government N.I.A. account item, subsidies less current surplus of government enterprises, in '70-I; this also
is excluded from total expenditures in '70-I and included therein in '70-II.

II
CONFIDENTIAL -

- 6
May 20,

1970

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1970

1949
1968

1969

1970
Proj.

------------------------

III

Proected
III
IV

In Billions of Dollars-------------------------

Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net Exports
Government

72.2
-0.1
72.2
52.0
54.7
-2.7
20.2

66.4
0.7
65.7
51.4
51.8
-0.4
14.3

47.5
-7.3
54.8
46.1
44.7
1.4
8.7

16.1
0.3
15.8
12.9
12.8
0.1
2.9

18.0
3.8
14.1
10.0
8.9
1.1
4.1

9.4
-3.0
12.5
11.2
11.2
0.0
1.3

7.4
-6.9
14.4
11.5
11.2
0.3
2.9

10.4
-1.8
12.1
12.0
12.0
0.0
0.1

16.5
2.0
14.5
11.7
10.7
1.0
2.8

16.0
1.0
15.0
12.4
12.4
0.0
2.6

GNP in constant (1958) dollars
Final purchases
Private

33.0
33.0
24.9

19.9
19.6
18.3

0.1
6.5
10.1

3.6
3.5
3.9

3.9
0.6
1.4

-0.8
1.8
2.8

-5.5
0.5
2.2

-0.4
1.5
3.0

4.7
2.7
1.9

5.0
4.1
3.6

------------------------Gross National Product
Final purchases
Private

9.1
9.2
8.5

7.7
7.7
7.8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

9.0
14.1
7.2
9.1

7.3
7.8
5.6
8.9

Gross private domestic investment
Residential construction
Business fixed investment

8.9
20.8
6.1

10.4
6.6
11.7

5.1
5.9
6.5

-2.4
-6.5
6.1

In Per Cent Per Year-------------------------3.1
6.1
6.3

4.3
5.0
6.5

7.1
7.0
7.5

7.8
6.1
5.7

4.0
5.4
6.3

7.7
10.0
5.9
8.7

4.9
-3.5
5.0
8.0

6.7
2.7
5.9
8.8

7.4
-4.4
10.8
8.5

8.2
2.7
9.7
8.6

6.5
-7.2
10.5

17.2
-15.9
13.5

-4.2
2.5
5.5

-19.2
-17.7
5.9

-5.9
-15.9
3.8

5.3
0.0
-1.5
3.5
10.0

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

2.1
0.3
1.0 1/
5.6-

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator *

-0.4
1.0
2.0
4.5

8.6
10.0
10.9

Personal income
Wages and salaries
Disposable income

6.8
6.0
6.2

0.2
-10.6
-11.7
-5.1
9.4

6.5
6.1
6.5

4.6
-3.6

-9.1
13.2
11.2

-3.0
0.3
1.5
6.2-

-0.2
0.8
2.1
4.5

2.6
1.5
1.3
4.2

2.8
2.3
2.5
3.7

5.8
5.6
8.0

11.4
9.5
11.6

2.9
4.1
4.8

5.5
6.1
4.9

Corporate profits before tax

13.4

3.0

-10.1

0.4

-12.2

-4.8

-27.6

-12.2

7.3

7.1

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

16.7
10.8

14.3
5.8

-0.5
7.0

8.5
1.7

-3.0
9.1

4.0
6.4

-9.0
3.5

4.2
24.2

-3.2
-8.9

7.0
2.3

3.0
2.1

3.4
1.8

1.9
-2.0

3.3
1.6

2.0
1.8

1.7
-3.4

2.3
-4.0

0.6
-4.0

1.1
-2.0

2.2
0.0

4.7
16.7
14.0

4.4
-2.7
-1.9

-0.7
-9.7
-9.1

5.6
-31.4
8.4

3.9
-22.7
-4.2

3.0
50.0
10.5

3.7
44.4
10.3

Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new domestic autos
--

1/
2/

Based on deflators calculated to three decimals.
Excluding effects of Federal pay increase, 4.3 per cent per year.
Excluding effects of Federal pay increase, 5.2 per cent per year in 70-I.

-5.5
-20.2
-15.1

-2.8
-32.1
-38.2

-0.5
-16.0
13.4

Industrial production.

The 0.4 per cent decline in industrial

production from March to April followed a similar increase (revised)
from February to March, as shown in the table.

Both February and March

were revised upward mainly because of revisions in the physical product
data.

The total index in April was at the January-February level and

was only 0.8 per cent below a year earlier and 2.4 per cent below the
July 1969 peak.

INDUSTRIAL PRODUCTION
Per cent changes

February to
March 1970

March to
April 1970

Total index

Consumer goods

Business equipment

-1.4

-2.1

Defense equipment

Materials

-3.8
-

Major output declinesin April occurred in business equipment,
with production of industrial, commercial, and freight and passenger
equipment down.

Output of trucks was off 10 per cent but May schedules

indicate a 10 per cent increase.

The decline in the aerospace industry

was about in line with preceding months.

It is not clear, however, how

much of the fall in manufacturing production, and especially in the
equipment industry, was due to the effects of the trucking strike.

The

declines in manufacturing employment and in the workweek could have been
caused by shortages of parts and supplies, as in the automotive industry.

II - 8

Thus, output of autos and trucks declined sharply in the first week of
the trucking strike but recovered in the following week.
Consumer goods production showed offsetting changes in April.
Auto assemblies changed little from the annual rate of 7 million units
May and June production schedules, however, have

reached in March.

been revised upwards to annual rates of 8.2 and 8.5 million units
respectively.

Output of household appliances rose further in April,

but trade reports indicate some production cutbacks in May.

Output of

television sets dropped 19 per cent in April and was 35 per cent below the
first half of 1969.
little in April.

Production of most other consumer goods changed

Among materials, production of construction materials,

equipment parts for further processing, and rubber products (because of
a strike) declined.

Output of iron and steel and most nondurable

materials changed little.
Industrial production declined 2.4 per cent from July 1969
to January 1970, and then changed little from January to April, although
there was considerable divergence among the major groups as shown in the
table.

II - 9

INDUSTRIAL PRODUCTION
Per cent changes

July 1969 to
January 1970
-

Total index

- 1.8
-11.3
-26.6
1.7

Equipment, total
Business
Defense

Materials
Durable
Steel
Nondurable

- 2.3

3.8
2.1

-10.2

Retail sales.

4.1
7.0
0.6

April 1969
to April 1970

2.4

Consumer goods
Durable
Autos
Nondurable

January 1970
to April 1970

1.1
- 4.2

1.2
4.2
3.9
'.2

8.5

2.9
-

-. 8
1

3.3

1.5

.7
-7.5

-16.6
-

-. 6
-'.9
1.4
-. 4

1.1
4.6
2.9

2.4

The advance report for April indicates that

retail sales were 1.5 per cent higher than in March (which was revised
slightly downward, and weekly sales estimates showed increasing strength
as the month progressed.

Durable goods rose 2.5 per cent, partly as a

result of higher sales among automotive outlets--reflecting in part the
temporary effects of dealer incentive contests toward the end of the
month--and continued improvement in sales of Furniture and appliances.
Nevertheless, sales of all types of durables were still below year
earlier levels for the sixth successive month.

Total April sales in

current dollars were only 2.7 per cent above a year earlier.
Sales of nondurable goods were 1.1 per cent higher than in
March, with gains reported at all major types of stores except food.

II - 10

Department stores recovered the March decline, but were only 2.0 per
cent above a year earlier.

In 1969 department store sales averaged

9.3 per cent above 1968.

RETAIL SALES
Per cent change from previous month, seasonally adjusted

February
1.4

All stores

March
- .8

1.5
2.5
2.9
-.9

Durable
Auto
Furniture and appliance

2.9
4.1
-2.4

-'.2

Nondurable
Food
Department stores
Gasoline

.7
- .3
.7
..0

-1.1
-. 9
-2.7
- .6

1.0

-1.1

Real, all stores (deflated
by all commodities CPI)

Unit auto sales and stocks.

April

.4
.1

1.1
-' .1
3.2
'.5

1.0

Sales of new domestic autos in

the first 10-day period of May were at an annual rate of 6.8 million
units, down 8 per cent from a month ago and 23 per cent below a year
earlier when sales were quite high.

The relatively poor showing in

early May was due in part to sales contests which ended April 30.
Stocks of new domestic autos changed little during April and
at month's end amounted to 58.8 days

supply, down from 69.0 days at

the end of January and 59.2 days at the end of April 1969.

II -

Consumer credit.

With credit extensions dropping sharply,

consumer instalment credit outstanding increased at a seasonally
adjusted annual rate of only $2.4 billion in March, the smallest
increase since May 1967.

Outstanding auto credit--where the drop in

extensions has been concentrated--declined for the second month in a
row.

And the increases in nonautomotive consumer goods credit and

personal loans were only one-half as large as those recorded in February.
For the first quarter as a whole the rise in outstanding instalment
credit amounted to slightly less than $4 billion, seasonally adjusted
annual rate, compared with $6.8 billion in the fourth quarter of 1969
and a peak of $10.2 billion in the fourth quarter of 1968.

CONSUMER INSTALMENT CREDIT EXTENSIONS
(Billions of dollars, seasonally adjusted annual rates)

Other

Personal

Total

Automobile

Otr
Consumer Goods

1968 - QI
QII
QIII
QIV

92.8
95.6
99.4
100.4

30.2
30.7
32.6
32.2

29.3
30.7
30.7
31.8

31.2
32.0
33.9
34.1

1969 - QI
QII
QIII
QIV

100.7
104.4
103.5
102.5

32.4
33.0
32.0
31.9

31.5
33.6
33.3
33.5

34.6
35.2
35.9
35.1

1970 - QI

102.2

30.0

35.5

34.6

Census consumer buying expectations.

Loans

New car sales will rise

considerably in the next six months, according to the April Census
buying survey.

More than the usual uncertainty surrounds this indicated

II - 12

rise.

Strength was not widely based among income groups and calculation

of the April buying plan index includes a weight of one-third from the
January survey, which forecast too high a level of car sales.

The

number of major appliances expected to be bought was off sharply, but
purchase plans for furniture and carpets were higher.

Planned expendi-

tures on home improvements were also higher.
Households were slightly less optimistic than in the first
quarter about substantial increases in income within the next 12 months,
but the level of such optimism is still high and well above a year
earlier.

As in the previous survey, much of the optimism about future

income was in the under $3,000 income group (probably still reflecting
increased Social Security benefits), although in the latest survey
there was some increase in the $10,000 and over income group.

SURVEY OF CONSUMER BUYING EXPECTATIONS, SELECTED RESULTS
1970

1969

Index of expected 6-month
unit car purchases (seasonally adjusted, Jan.Apr. 1967 = 100)

Jan.

Apr.

July

Oct.

Jan.

Apr.

99.4

103.3

104.0

100.8

104.7

109.4

4.3

4.5

4.7

4.3

4.5

4.6

27.9

25.8

26.2

28.6

25.5

24.3

16.5

18.1

18.6

17.6

20.1

19.9

Average chance in 100 of
buying a new car--not
seasonally adjusted
Number of major appliances
likely to be bought per
100 households
Average chance in 100 of

receiving a substantial
income increase within
12 months

II - 13

Inventories.

Manufacturers' inventories increased somewhat

more in March than previously reported, but the total book value change
for the month--$4.6 billion, annual rate--was still well below the
Most of the revision was in nondurable goods manufac-

February rate.
turers.

Wholesale stocks declined in March, according to the preliminary

report, but there was a sharp upward revision in the February figures.

The

Retail trade inventories increased moderately in March.

Other

value of auto dealers' stocks rose after four months of decline.

durable goods retailers reduced their holdings and the growth of stocks
In April, dealers'

at nondurable retailers was slower than in February.
unit stocks of new domestic autos were little changed.

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
Seasonally adjusted annual rates, billions of dollars

Manufacturing and trade, total
Manufacturing,
Durable
Nondurable

total

Trade, total
Wholesale
Retail
Durable
Automotive
Nonautomotive
Nondurable

1969
QIV

1970
February

March

13.5

4.3

11.7

4.6

6.8
6.1
.7

4.1
2.9
1.2

6.5
1.6
4.9

3.8
3.6
.2

6.7
2.6
4.1
2.1
.6

.2
1.5p
-1.3
-2.3
-1.8

5.2
4.4
.8
-2.0
-3.4

.8
-1.4p
2.2
1.0
2.0

1.5
2.0

- .5
1.0

1.4
2.8

-1.0
1.2

p - preliminary.

With stocks rising and sales declining, the business
inventory-sales ratio rose in March.

At the end of March, several

II - 14

ratios that vary significantly over the business cycle--the inventorysales ratios for durable goods manufacturing and for retail and total
trade, and the inventory-backlog ratio for durable manufacturing--were
higher than in March 1967, and were at or above levels reached in the
1960-61 recession.

INVENTORY RATIOS

1967
March
February
Inventories to sales:
Manufacturing and trade, total

1970
March
February

1.59

1.60

1.57

1.59

Manufacturing, total
Durable
Nondurable

1.77
2.08
1.40

1.78
2.09
1.40

1.74
2.10
1.30

1.76
2.16
1.29

Trade, total
Wholesale
Retail
Durable
Automotive
Nonautomotive
Nondurable

1.39
1.22
1.50
2.15
1.73
2.70
1.21

1.38
1.23
1.48
2.08
1.61
2.74
1.20

1.39
1.21
1.51
2.18
1.74
2.79
1.22

1.40
1.21
1.53
2.20
1.77
2.80
1.24

Inventories to unfilled orders,
durable manufacturing

.663

.675

Residential construction and real estate.

.754

.767

Seasonally adjusted

private housing starts, which had turned up sharply in the previous two
months, dropped 15 per cent in April to an annual rate of 1.18 million
units.

The decline was concentrated in multifamily units, although

single family starts also were down slightly further despite increasingly strong support from the Government-underwritten sector.

Regionally,

the drop in the Northeast from an exceptionally high March was most
pronounced.

- 15

Unlike starts, building permits turned upward in April.
Moreover, the rise was appreciable for both single and multifamily
units and in most regions.

Based on this and related developments,

there may be at least a moderate rise in starts in May to or above a
1.2 million unit rate.

This rate would compare with a seasonally

adjusted annual rate of 1.25 million in the first quarter.

PRIVATE HOUSING STARTS AND PERMITS

April 1970
(Thousands
of units)!/
2/

Starts-

March 1970

April 1969

1,181

-15

-22

1-family
2-or-more family

693

488

- 1
-28

-13
-31

Northeast
North Central
South
West

209
248
512
212

-34
-14
- 1
-20

-16
-30
-10
-36

1,249

+14

-17

612
637

+10

- 7

+16

-24

Permits
1-family
2-or-more family

1/
2/

Per cent change from

Seasonally adjusted annual rates; preliminary.
Apart from starts, mobile home shipments for domestic use in
March--the latest month for which data are available--were at a
seasonally adjusted annual rate of 348,000, 13 per cent below
a year earlier.
Sales of new homes by merchant builders dropped further in

March to the lowest rate since the series began in late 1962.

But

with the pace of such building limited, stocks of such homes available
for sale were little changed from either the previous month or a year
earlier.

The median price of homes actually sold in March was up some-

what from January to $24,200, but it continued well below the median
price of all homes for sale by builders.

Apart from greater concentration

II - 16

by buyers on lower-priced homes, a factor in this development has
apparently been the relatively greater availability of funds for
Government-underwritten mortgages which are most often utilized in the
financing of properties at the lower end of the price scale.

At the

same time, however, prices of used homes involved in transactions have
continued to advance; in March, the median price of such homes reached
a new high of $22,820 or 8 per cent more than a year earlier, according
to the National Association of Real Estate Boards.

Manufacturing capital appropriations.

The latest N.I.C.B.

survey (confidential until released Friday) shows that new capital
appropriations of the 1,000 largest manufacturers were reduced by 15
per cent in the first quarter following a 5 per cent decline in the
fourth quarter.

These cutbacks suggest that fixed capital spending by

manufacturers will be reduced later this year.
The major factor in the sharp first quarter drop was the
petroleum industry, where appropriations were down 36 per cent
following a 37 per cent increase in the previous quarter.

But more

significant was a reduction of 15 per cent by producers of durable
goods following a 12 per cent reduction in the previous quarter.

Non-

durable goods manufacturers, excluding petroleum, increased appropriations by about 12 per cent in the first quarter following a 19 per
cent drop.
Apart from the sharp rise and decline in petroleum, reductions in new appropriations have been large in the latest two reported
quarters--down 7 per cent in the first quarter and down 14 per cent in
the fourth quarter of 1969.

Labor market.

The labor market apparently continued to

ease in late April and early May.

State insured unemployment totaled

1.8 million in the week ending May 2--an increase of 800,000 from a
year earlier, compared to an over-the-year increase of about 600,000
as of mid-April.

Initial claims for jobless benefits, which jumped

sharply in early April, have declined somewhat in recent weeks,
probably reflecting settlements of some local trucking industry disputes
and a reduced number of secondary layoffs.

Nevertheless, initial

claims continue to average significantly above a year earlier.

Other

labor market data show continuing declines in help-wanted advertising,
unfilled-job openings, nonfarm job placements, and factory employment
and hours of work.

Nonfarm employment.

Nonfarm payroll employment declined 88,000

in April, with reductions in construction and transportation attributable
to strikes.

Modest gains continued in trade, services and government

(the latter due mainly to the hiring of more temporary census takers).
Manufacturing employment continued to decline in April,
dropping by 144,000 over the month to 19.7 million.

The April decline

was widespread--only three major industries, textiles, tobacco, and
leather reported increases--but the bulk of the drop was in the durable
goods sector.

The average workweek in manufacturing declined 0.2 hour

to 40.0 hours in April and is now 0.8 hour below a year earlier.
Shorter workweeks caused by parts and materials shortages were widespread,
suggesting that the teamster strike was responsible for part of the
decline in average hours.

II -

CHANGES IN NONFARM PAYROLL EMPLOYMENT, 1970
(In thousands, seasonally adjusted)

Feb. to
March

March to
April

186

-88

69
117

79
-23

90
-178

-79
196

-21
- 2

-144
- 34

Jan. to
Feb.
Total
Government
Private
Manufacturing
Nonmanufacturing

Labor force and unemployment.

In the past, slow economic

growth or declines and reduced employment opportunities have tended
to bring slower growth in the labor force.

In 1969-70, however, labor

force growth has continued exceptionally strong despite rising unemployment.

Compared to a projected 'normal" growth of 1.5 million annually,

the labor force was up by about 2.3 million between April 1969 and
April 1970, continuing the exceptionally large year-over-year increases
of the preceding three quarters.

Total employment rose by 1.3 million

over the year, while unemployment increased by 1 million and the unemployment rate jumped from 3.5 to 4.8 per cent.

LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT
(Change from a year earlier, in millions)
--

Civilian labor force
Employed
Unemployed

1970

1969
III

2.2
2.1
.1

2.4
2.2
.2

April

2.4
1.6
.8

2.3
1.3
1.0

The greater-than-projected labor force increases have
centered in women and teenagers, whose participation usually is more
discretionary than that of adult men.

The number of men entering the

civilian labor force has been a little less than the projected "normal."

CIVILIAN LABOR FORCE CHANGES
(In thousands, seasonally adjusted)

Men,
25 years
and over
Projected "normal"
growth, annually

405

Men
20 to 24
years
308

Women,
20 years
and over

Both sexes
16 to 19
years

607

168

(Actual change from year earlier)
1969:
IIIQ
IVQ

271
359

295
282

1,295
1,176

351
580

1970:
IQ

376

346

1,054

523

Continued strong gains in sectors which typically employ many
women and teenagers may have been partly responsible for stimulating
the continued rapid rise in their labor force participation over the
projected levels.

Trade, services and government--which employ large

numbers of women and teenagers--have added nearly 1.5 million payroll
jobs over the past year.

It also seems probably that the pressure of

inflation on family income, along with increasing layoffs of married
men, have provided some of the incentive for
labor force growth of women and teenagers.

the unexpectedly large

II -

In contrast to the service-oriented industries, wage and
salary employment in commodity-producing industries--mainly male and
full time--declined by nearly 350,000 over the past year, with the
declines reflecting almost entirely layoffs of adult men, who tend
to remain in the labor force regardless of economic conditions.
Largely because of these layoffs full-time employment has dropped
below the third quarter of 1969.

FULL
AND PART-TIME LABOR FORCE
(Seasonally adjusted, in thousands)

1970
_April

1969
III Q

IV Q

Full-time
Civilian labor force
Employed
Unemployed
Rate

70,032
67,827
2,205
3.1

70,214
68,022
2,192
3.1

70,529
67,908
2,621
3.7

70,810
67,720
3,090
4.4

Part-time
Civilian labor force
Employed
Unemployed
Rate

10,996
10,262
734
6.7

11,312
10,599
713
6.3

11,798
10,961
837
7.1

11,949
11,064
885
7,4

I Q

Unemployment rates for all groups have increased sharply
in recent months, and most rates by age, sex, color and occupation are
close to those of April 1965 when the over-all rate was last 4.8 per
cent.

The rate for men aged 25 years and over remains somewhat below

its April 1965 level, while the rate for those of age 20 to 24 years

is somewhat higher.

The increase for young men is partially attribu-

table to the recent large increase in their number in the civilian
population, reflecting both reductions in the Armed Forces and the high
birth rates of the post World War II

years.

UNEMPLOYMENT RATES
(Seasonally adjusted)

1965

April
1969

1970

4.8

3.5

4.8

7.4
3.0
4.7
16.2

4.8
1.6
3.8
12.7

7.9
2.6
4.4
15.7

4.4
8.4

3.1
7.0

4.3
8.7

Married men
Full-time workers
State insured

2.5
4.6
3.2

1.5
3.2
2.1

2.4
4.4
3.1

White-collar workers
Blue-collar workers
Service .orkers

2.4
5.9
5.5

1.8
4.0
4.5

2.9
5.7
5.0

Total
Men 20-24 years old
Men 25 years and over
Women, 20 years and over
Both sexes, 16-19 years
White
Negro and other races

Personal income rose in April at an annual

Personal income.

rate of nearly $18 billion, to $801 billion.

This extremely large

increase was due entirely to the increase in social security benefits
and the 6 per cent Federal pay raise, including retroactive portions
of both.

Exclusive of these changes, personal income would have

declined slightly--for the first time in recent years--reflecting widespread declines in employment and hours in manufacturing and strikes in
trucking and construction.

AVERAGE MONTHLY CHANGES IN PERSONAL INCOME
(Seasonally adjusted, billions of dollars)

Personal income

July 1969 to
January 1970

February

1970
March

April

$3.8

$4.0

$5.0

$17.8

-.5
2.9
.6
2.2
.3
2.0

1.1
2.2
.5
1.7
- .8
2.5

1.3
2.9
.4
2.5
1.1
1.4

Transfer payments
Wages and salaries
Government
Private
Manufacturing
Nonmanufacturing

Industrial relations.

12.7
5.1
6.7
-1.6
- .8
- .8

The tentative national agreement

reached in early April between the trucking industry and the teamsters
union has been ratified by mail ballot.

Thus, secondary layoffs caused

by shortages of parts and material resulting from local strikes and
lockouts of truck drivers--already down from the mid-April high--should
taper off further as most truck drivers return to work.

However,

transport services will continue to be disrupted by strikes of some
steel haulers who feel their special interests have not been met and

II -

by strikes in Chicago pending a local contract settlement.

The national

contract is subject to renegotiation if the Chicago teamsters negotiate
a larger increase in wages and fringe benefits than agreed to in the
national contract--estimated at 8 per cent annually (exclusive of
escalator increases) over a 39-month period.
Strikes continue involving 34,000 rubber workers at Goodyear
and Goodrich, which began after expiration of contracts April 20, but
tire shortages have not as yet developed because of earlier large inventory build-ups and continued production by Firestone and Uniroyal.
Strikes in the construction industry continue to spread; more than
60,000 workers have gone on strike since early May.

In settlements so

far this year, construction workers have received average first-year
wage increases of more than 18 per cent compared with an average of
13 per cent in major construction settlements during 1969.

II Wholesale prices.

The wholesale price index was unchanged

from mid-March to mid-April (revised from the preliminary report of a
decline of 0.1 per cent) as a rise of 0.3 per cent in the average price
of industrial commodities was offset by a sharp decline in prices of
farm products.
Metals and metal products accounted for about one-third of
the increase in price of industrial commodities, as increases for
copper and aluminum ingot and fabricated products more than offset a
sharp decline in steel scrap.

And the recent downward trend in the

FRB sensitive industrial materials index was reversed mainly because
of the increase of nearly 2-1/2 per cent in the price of nonferrous
metals.

Recent announcements by steel companies of increases effective

June in the prices of steel sheets, used widely in industrial and
consumer products, suggest that metals will have an important effect on
the WPI in June.

A rise in fuels and related products, as a result of

sharp increases in prices of coal and coke, also contributed substantially to the advance of industrial commodities in April.

Lumber and

wood products increased for the first time since last November, largely
as a result of higher prices for softwood plywood.
Livestock, eggs, and fresh and dried fruits and vegetables
were the main contributors to the sharp decline in prices of farm
products.

Offsetting movements within processed foods and feeds

resulted in no change for the month in that group.
Since December prices of industrial commodities have increased
at an annual rate of 4.2 per cent, compared with 4.8 per cent in the

An important factor in the behavior of industrial

previous four months.

prices has been the slower rate of advance in machinery and equipment
prices, which may, however, in part reflect seasonal influences.

The

rate of rise for agricultural products, because of developments in March
and April, slowed even more than that for industrial commodities.

WHOLESALE PRICES
(Percentage changes at annual rates)

All commodities
Industrial
commodities
Metals and metal
products
Machinery and
equipment

Dec. 1969
to
Jan. 1970

Jan. 1970
to
Feb. 1970

Feb. 1970
to
Mar. 1970

9.4

4.1

2.1

5.2

4.2

10.7
5.9

Lumber and wood
products
Farm products and
processed foods
and feeds

-8.8

18.6
8.6

Farm products
Processed foods
and feeds

24.5

Aug. 1969
to
Dec. 1969

Dec. 1969
to

4.5

3.9

3.1

4.1

4.8

4.2

11.5

8.6

7.5

8.5

9.7

2.9

7.1

3.7

-7.0

6.0

-3.6

5.9

-13.8

Mar. 1970
to
Apr. 1970

5.1

1.0

-12.1

4.7

12.8

6.3

-31.5

7.7

-2.9

Apr. 1970

3.1
-1.1

2.7

5.6

Price behavior during the present slowdown has been different
from the price patterns during the comparable interval of other postwar
declines in output.

If we assume that the peak month of the recent

expansion was November 1969 (the mid-month of the quarter in which real

GNP first declined), we find that prices for industrial commodities
have continued to rise through April (5 months) while average experience during other recent recessions was a rather flat movement of
prices over the first 5 months following the peak.

This divergence is

accounted for almost entirely by the faster rise this time in prices
of industrial materials.

Prices of industrial products, consumer non-

foods and producers' equipment, have behaved much as they have in
previous downturns.
The behavior of the ratio of price to unit labor costs in
manufacturing also differs in the present slowdown from experience of
other recent recessions.

It has not shown the tendency to decline

shown in earlier slowdowns--in fact it has risen somewhat since
December, as may be seen in the following chart.

RATIO:

PRICE TO UNIT LABOR COST, MANUFACTURING

(Index of peak month prior to recession = 100)
102.0

101.0
S-

1960-61

100.0

1969-70

1957-58
COn

99.0

4--

\
*----

1966-67

98.0

1953-54

\
\

97.0

96.0

I
-3

-2
before

-1

peak month
MONTHS

I
3
after

II -

Consumer prices.

Consumer prices rose at a seasonally adjusted

annual rate of 6 per cent in April, faster than in March but about the
same as in the first quarter as a whole.

(The April increase was some-

what larger without seasonal adjustment.)
Food prices again rose sharply, although not so fast as in
earlier months this year.

Increases were large for fruits and vegetables,

meat, and cereal and bakery products.

Prices of men's and boy's clothing

increased strongly and footwear prices continued to climb.

Gasoline prices

also increased, but were only about 1 per cent above a year earlier.
The rise in durable goods prices was the largest since last
October.

Used car prices

(which are not seasonally adjusted) rose strongly

after a period of little change but are still well below a year ago.
Household durable goods continued to rise rapidly.
The increase in service costs in April was at an annual rate
of about 8 per cent, compared with 11 per cent in the first quarter.
rise in insurance and finance

costs

continued very large and medical care

costs continued to mount rapidly.

CONSUMER PRICES, APRIL 1970
Per cent change, seasonally adjusted, from

All items
Food
Apparel and upkeep
Transportation
Services
Insurance and finance
Utilities and public trans.
Housing and home maintenance
Medical care
Addendum:
All items, unadjusted

The

March
1970

April
1969

January
1970

6.0

1.4

7.1
4.4
3.5

1.2
.8
.9

.3
.2
1.3

8.0
13.7
5.5
8.9
6.7

2.5
5.1
1.3
1.8
2.6

.7
1.1
.5
.4
.8

6.0

1.7

5/19/70

1I-C-1

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE

GNP INCREASE

BIL

EMPLOYMENT

MILLIONS OF PERSONS

BASIS
ESTAB

NONAGRICULTURAL
APR 710

MANUFACTURING
APR 197

1...............
..........

,,19
HOURS

- 42
4

WORKWEEK-MFG.
APR 400

1970

1968

INDUSTRIAL PRODUCTION - I

1957-59=100

UNEMPLOYMENT RATES

PERCENT

ARITHMETIC SCALE

TOTAL
APR 48

TOTAL
APR

170 4

SINSURED

CONSUMER GOODS

APR 32

APR 163 5

1968

INDUSTRIAL PRODUCTION- II

1970
1957-59=100

1970

1968

MILLIONSOFUNITS

HOUSING
ANNUAL RATES

-2.0
STARTS
APR I 18

1.5

PERMITS
APR 125

1.0

CHANGE
IN.8

*CHANGE

1966

111111

IN SERIES

1968

1970

II-C-2
ECONOMIC DEVELOPMENTS - UNITED STATES

5/19/70

SEASONALLY ADJUSTED, RATIO SCALE
INCOME

BLS

PRICES AND COSTS

1957-59=100

ANNUAL RATE

PERSONAL
APR 8011

DISPOSABLE
CONSUMER PRICES*

016604

MAR 1332

UNIT LABOR COST

PER

APR 1178

ARITHMETIC SCALE

SAVING RATE
INDUSTRIAL WHOLESALE*
APR 1151

*NSA

1968

I II

1970

11111

II970

1970

1968

BUSINESS INVESTMENT

RETAIL SALES

BILS

PLANT AND EQUIPMENT OUTLAYS

TOTAL

ANNUAL RATE

APR302

-80

HI 8606

-60

MFG. NEW ORDERS
GAAF
APR 82

MACHINERY AND EQUIPMENT
MAR 60

I I

1968

1970

I I I

IIIII

I I

1970

1968

INVENTORIES, NONFARM - CHANGES

BILS

ARITHMETIC SCALE
ANNUAL RATE

GNP
QI 4

-10

PERCENT

IMPORTS

ARITHMETIC SCALE

APR 1.2
-1.6

INVENTORY SALES RATIO

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

MAR 159

I
SI
l l II

1968

1970

1968

1970

1.2

III - 1

THE ECONOMIC PICTURE IN DETAIL
Domestic Financial Situation
Bank credit.

Final seasonally adjusted data for April

show a rate of growth in total bank loans and investments adjusted
for loan sales to affiliates somewhat larger than that recorded in
March and over the first quarter of this year.

An exceptionally

strong advance in holdings of investments, particularly U.S. Treasury
securities, was responsible for this modest pickup.

Total loans,

adjusted for loan sales to affiliates, declined moderately over the
month, extending a downtrend begun in March.
COMMERCIAL BANK CREDIT ADJUSTED TO INCLUDE LOAN SALES TO AFFILIATES'
(Seasonally adjusted percentage change, at annual rates)
19691
2nd Half
Total loans & investments 2

1.5

I
2.7r

11970
March

April

4.5r

6.5

U.S. Govt. securities

-16.0

-15.4

9.7

50.6

Other securities

- 3.6

10.8

27.1

16.6
-3.4

Total loans 3/
Business loans
1/
2/
3/

6.4

4.1r

- 2.5r

7.1

6.3

- 3.3

1.1

Last Wednesday of month series.
Includes outright sales of loans by banks to their own holding
companies, affiliates, subsidiaries, and foreign branches.
Includes outright sales of business loans by banks to their own
holding companies, affiliates, subsidiaries, and foreign branches.

r - Revised.

III - 2

This edging down in loan portfolios in April was primarily
due to a decline in security loans associated with a sharp cutback
in dealer trading positions.

But developments in real estate and

consumer loans also continued quite weak and little strength was
displayed by other major loan categories.

Business loans, after

adjustment for loan sales to affiliates, did show a slight increase
over the month--in contrast to the minor decline that occurred in
March--but this advance fell well short of the gains recorded in
January and February of this year, or in the second half of 1969.
Weekly reporting bank data for the early part of May
suggest that commercial bank credit developments may be weaker in
May than in April, largely as a result of reduced participation in
securities markets.

Holdings of U.S. Treasury securities were liqui-

dated in heavy volume during the two weeks ending May 13.

Moreover,

even though banks acquired a sizeable volume of new 18-month notes
sold for cash on May 15, there were some redemptions on maturing issues
and some bank liquidation of the new issue can be expected over the
remainder of the month.

Thus, the May increase in bank holdings of

Treasury issues is likely to fall short of April's substantial rise.

similar conclusion appears warranted regarding the May increase in
holdings of "other securities."

Over the early part of the month

banks continued to make fairly large additions to their holdings of
these securities, particularly municipals, part of which they had
subscribed to in early April when inflows of time and savings deposits

III - 3

were unusually large.

However, dealers have reported sharp cutbacks

in bank orders for municipal securities scheduled for delivery in
mid- to late May because of uncertainties about the IRS position on
the tax deductibility of certain interest costs.
With respect to loan developments in the early part of May,
real estate and consumer loans have continued their generally weak
pattern of other recent weeks, loans to nonbank financial institutions
have stayed about unchanged, and loans to brokers and dealers have
continued the decline begun in April.

Business loans adjusted for loan

sales to affiliates rose sharply during the first week of May but then
according to preliminary data declined in the following week.
balance it appears that business loan

demands at banks may have

increased to some degree--in part because the cost of financing in
the commercial paper market has risen appreciably above the prime rate-but data are as yet too fragmentary to come to a firm judgment.
Monetary aggregates.

The money stock declined sharply over

April, offsetting about three-fourths of the end-of-March bulge.
The average level of the outstanding money stock in April was 10.7
per cent above March, 5.6 per cent higher than in December 1969 and
2.6 per cent above a year ago.

Following its $5 billion decline

during April, the money stock rose about $2 billion in the first week
of May.

This increase, which was unanticipated, was largely due to

Federal Reserve purchases of Treasury issues in the week of May 6, undertaken to cushion markets during the Treasury refinancing, and to a
sharp rundown of balances by the Treasury.

III - 4
MONETARY AGGREGATES
(Seasonally adjusted percentage changes, at annual rates)1970

1969
2nd Half

Q I

April

Member bank deposits

-4.6

16.8

Member bank deposits plus
nondeposit sources 2/

-1.2

13.7

-6.7

22.2

3.8

10.7

Commercial bank time and
savings deposits
Money stock

1/
2/

Based on monthly average of daily figures for deposits and monthly
average of weekly figures for nondeposit funds.
Includes all deposits subject to reserve requirements plus the
following nondeposit sources: commercial paper issues by a holding
company or bank affiliate; loans or participation in pools of loans
sold under repurchase agreement to other than banks and other than
banks' own affiliates or subsidiaries; Euro-dollarsborrowed directly
through brokers or dealers; liabilities to banks' own branches in
U.S. territories and possessions; and liabilities to banks' own
foreign branches.

Growth in time and savings deposits, after slowing abruptly
over the mid-April tax date, picked up again during the latter part
of the month and in the early part of May.

The pace of advance in

these recent weeks, although well below that established in late
March and early April, was about in line with that prevailing in late
February and early March.
The volume of negotiable CD's outstanding did decline in early
May following only a small rise in late April.

But other sources of

time deposit funds on balance continued to provide a significant inflow.
At country member banks, in particular, the recent inflow of time

III - 5

deposit funds was exceptionally large, as the pace of advance
established in late March and early April was at least sustained
and perhaps increased during the last half of April and the early
Continued inflows of consumer-type deposits also

weeks of May.

occurred at weekly reporting banks over the latter part of April and the
early part of May, although at a slower rate than in March.

The

recent retroactive payments in connection with the Federal pay raise
and with increased social security benefits may have been partly
responsible for maintaining inflows of consumer-type deposits.

NET CHANGE IN TIME AND SAVINGS DEPOSITS
(Billions of dollars, not seasonally adjusted)
March 25 - April 151 /
1970
1968
1969

April 15 - May 6 1/
1969
1970
1968

Weekly Reporting Banks
-1.4

-1.1

1.3

- .5

Consumer-type

- .5

- .6

- .3

- .1

CD's

-1.1

- .8

1.0

- .5

IPC

-1.0

- .7

- .2

Other

- .0

- .1

- .0

Total time & savings

All other time
Country banks
Total time & savings

Dates are for 1970; comparable dates used for other years.

III - 6
Nonbank depositary intermediaries.

Deposit growth at nonbank

intermediaries continued to exhibit a great deal of strength during
April, particularly at savings and loan associations.

The relatively

slower growth in mutual savings bank deposits reflects the experience
of the large, more interest sensitive, New York City institutions.

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rate, in per cent)
Mutual
Savings
Banks

1969 - Q
Q
Q
Q

BOTH

6.1
4.3
2.0
3.3

6.0
3.7
2.1
.4

6.0
3.9
2.1
1.4

2.9

1.5

2.0

January *
February*
March 2/*

-2.1
5.4
5.5

-6.7
2.2
9.2

-5.2
3.3
7.9

April P/*

6.2

9.3

8.3

March and April

5.8

9.3

8.1

I
II
III
IV

1970 - Q I P/

Savings and
Loan
Associations

Monthly patterns may not be significant because of seasonal
adjustment difficulties.

p/ Preliminary.

In May, there were reports of a large number of individuals
participating in the recent Treasury issue.

It is not yet clear whether

this and the AT&T issue have affected withdrawals from thrift institution
balances or sales of other securities; the only firm indications for
deposit flow patterns during May are from the large New York City savings

III - 7

banks, who during the first half oftthe month continued to receive
inflows only marginally larger than a year earlier and much lower
than in years before that.
Although complete April data are not yet available, there
are indications that savings and loan associations have been responding
to the FHL Bank's attempts to keep its advances up.

Despite the large

volume of deposits received, there was still a net increase in funds
borrowed from the FHLB in April and in early May; the volume of new
advances was lower than in the previous two years, but there were no
net repayments as there had been in March and in 1967.

Reflecting

the combination of its own near-record high liquidity position and the
only modest rise in net advances, the FHLB retired $100 million, on
net, of its own obligations in its May refunding.
The FHLB has apprently been quite successful in its attempts
since mid-April to encourage conversion of outstanding advances to
a one-year, reduced cost, instrument.

As of May 7, of the $9.9 billion

total advances outstanding, $7.4 billion was of the type eligible to
be converted to the one-year issue, and 62 per cent of that had already
been converted.
The FHLB staff expects even more conversions in the near
future, partly because one of its District banks has only just begun
to implement the program.

III - 8

Mortgage market.

Loan originations in the residential

mortgage market continue to be limited by slow property sales and
the curtailed number of new starts, which in turn reflect the low
level of commitment activity in recent months.

Furthermore, FNMA

field reports suggest that uncertainty concerning future interest
rate movement is tending to encourage some potential mortgage investors
to adopt a wait-and-see attitude, despite the improved deposit flows
at the thrift institutions, which continue to allocate funds to
increased holdings at liquid assets.
However, due partly to the low level of the mortgage commitment backlog and the prospects for some further improvement in savings
inflows, the majority of lenders responding to the recently conducted
FRB-FHLBB field survey of residential mortgage market conditions
anticipated that the pace of their new mortgage commitments would
improve modestly by the end of the third quarter.

A detailed

analysis of the survey results will appear as an attachment to the
Greenbook Supplement.
Part of the confusion concerning future rate trends stems
from the fact that as interest rates in other segments of the
capital markets rose from mid-April through early May, yields on
FNMA forward purchase commitments continued to decline.

response to what it considered an inconsistent movement of auction
yields, and to pressure on its own resources, FNMA reverted to a
weekly auction on May 4, a move intended to increase auction sensivitity
to other current capital market developments.

In addition, FNMA has in

III -

the past few weeks accepted a smaller proportion of the bids received,
thereby adding to the upward pressure on auction yields.

In the two

auctions following the shift back to a weekly auction, yields on the
6-month commitments partially reversed their downward trend of the
past four months, but at mid-May still remained 23 basis points below
the January peak.

Even with this rise in yields, the volume of bids

has increased as some auction participants have attempted to replace
commitments they obtained in January with new higher priced--and lower
yield--commitments.

FNMA AUCTIONS

Amount of total offers
Received
Accepted
(Millions of dollars
Weekly Auction
1?69 High
1970 High
Bi-weekly Auction
1970 High

Implicit private
market yield on
6-month commitments
(Per cent)

8.87 (12/29)

705 (1/5)

$152 (9/8)
151 (1/12)

581 (1/26)

298 (1/26)

9.29 (1/26)

$410 (6/16)

9.36 (1/12)

March

9
23

355
395

276
239

9.19
9.14

April

6
20

268
316

190
185

9.07
9.04

443

195

9.04

May

Weekly Auction
May

11
18

269
300

9.07
9.13

Note: Average secondary market yield after allowance for commitment fee
and required purchase and holding of FNMA stock, assuming prepayment
period of 15 years for 30-year Government-underwritten mortgages. Yields
shown are gross, before deduction of 50 basis point fee paid by
investors to servicers.

III - 10
In the primary market, the average contract rate on conventional
new-home mortgages remained unchanged in April for the third consecutive
month, according to the FHA field office series based on commitments.
Regionally, modest rate advances in the Northeast, Middle Atlantic
and Southwest were offset by some easing of rates in the North
Central and West.

In the secondary market for existing FHA-insured

mortgage loans, the rate declined for the second time in as many
months.

AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES
Primary market:
Conventional Loans
Yield
spread
(basis
Level
points)
(per cent)

Secondary market:
FHA-insured loans
Yield
spread
(basis
Discounts
Level
(per cent) points) (points)

1969
-40 (Dec.)
7.55 (Jan.)
69 (Feb.)
8.35 (Nov., Dec.)

7.85e (Jan.) -13 (Dec.) 2.8e (Jan.)
8.62 (Dec.) 108 (Feb.) 8.7 (Dec.)

January
February
March

8.55
8.55
8.55

9.25e
9.29
9.20

6.0
5.3

April

8.55

9.10

4.6

Low

High
1970

5.7e

Note: FHA series: Interest rates on conventional first mortgages
(excluding additional fees and charges) are rounded to the nearest
5 basis points. On 8-1/2 per cent, FHA loans, a change of 1.0 points
in discount is associated with a change of 13 to 15 basis points in
yield. Gross yield spread is average mortgage return, before deducting
serving fees, minus average yield on new issues of high grade corporate
bonds with 5-year call protection.
e/ - Estimated.

III - 11

Life insurance companies.

Recent data for a sample of life

insurance companies indicate that policy loan pressure through April
has persisted at about the same level as during the fourth quarter.
More detailed and comprehensive data now available for the last two
quarters of 1969 indicate that there was a sizeable number of large
companies at which net funds advanced for policy loans equalled onehalf or more of the total gross volume of all other investments.

Thus,

given the persistence of large policy loan volume, there is reason
to believe that there were several large companies at which the net
increase in policy loans during the first quarter was probably close
to the size of their net increase in long-term investments.

NET CHANGE IN POLICY LOANS OUTSTANDING
AT 15 LIFE INSURANCE COMPANIES*
(Monthly averages in millions of dollars, not seasonally adjusted)
19681969

19691970

140

154

106

148

139

145

19651966

19661967

Quarter IV

104

March
April

Quarter

19671968

These companies account for about 65 per cent of policy loans outstanding
in the industry.

III - 12

DISTRIBUTION OF 34 LIFE INSURANCE COMPANIES*
BY POLICY LOAN NET INCREASE AS PER CENT OF GROSS FUNDS INVESTED**
Policy loan

increase as
%of funds
invested**

Q IV '66

Number of Companies
Q IV '67
Q IV '68 Q III '69

Q IV '69

Decrease to
increase of
less than 5%

5 to 10%

10 to 20%

20 to 50%

17.4

5.4

6.8

33.0

24.6

50% and over
Total companies
Weighted average, %

These companies accounted for 57% of industry assets and 63% of
industry policy loans as of the end of 1968.

Funds invested exclude policy loans.

For well over a year, the industry had projected diminished
cash flows, not just because of policy loans but also because of
reduced return flows from existing investments and policyholder
reluctance to prepay premiums or make optional extra premium payments.
But to guard against the contingency of realized cash flows falling
short of projections--which appears to have happened as policy loan
volume was larger than anticipated--scheduled disbursements on
forward investment commitments had been kept at a fairly constant
level of about three-fourths of projected cash flow.

This ratio, which

III - 13

had been maintained since 1966, represented a good deal more leeway
than was the practice just prior to that time.

However, during the

fourth quarter, new projections of cash flows available for investment
through the first half of 1970 were modified even further downward in
light of the larger-than-expected policy loan volume.

These projections

suggest that for the first time since 1966, for a sample of companies
representing a sizeable proportion of industry assets, commitments
scheduled for takedown during the first half of 1970 represent over
85 per cent of projected cash flows available for such investments.
This relatively high aggregate

ratio suggests that the carefully

husbanded leeway maintained between commitments and projected cash
flow has been reduced,at least for some companies.

To be sure,

sources of funds such as increased sales of securities from portfolio
and commercial bank lines of credit are available; but the data
suggest a degree of pressure that has not been evident at life
insurance companies in several years.
Corporate financing of fixed investment.

Financing by

corporations in capital markets thus far this year, despite its
unusually large volume, has fallen short of the external financing needs
generated by the continued rise in fixed investment.

At the same

time, borrowing from banks and other short-term sources, while well
below its 1969 average, has contracted less than corporate spending
for inventories and other working capital.

These developments suggest

that corporations as a whole have been financing fixed investment with

III - 14

relatively short-term funds to as great an extent as they did last
year.

While a number of companies have used the proceeds of new

bond and stock issues to repay short-term debts, the bulk of such
financing for restructuring purposes may still lie ahead.
A major feature of corporate financing since mid-1968 has
been the increasingly large volume of external financing required to
fill the gap between a relatively stable flow of internal funds and
a rising level of fixed investment.

Prior to 1969, on net, some

long-term funds were used to finance short-term uses.

A striking

feature in 1969 was a shift in this relationship and the reliance
on short-term borrowing to fill part of the long-term gap, with
the result that short-term sources exceeded short-term uses--by
$5-1/2 million--for the first time since 1956.

In the 7 preceding

years the short-term sources were less than short-term uses by an
average of about $4

billion.

Thus, in terms of the financing

relationships of the earlier yearsabout $10 billion of corporate
financing demands seem to have been shifted from the capital markets
to the banking system and the commercial paper market last year.
This is equivalent to half the net new long-term funds raised
externally by corporate business in 1969 and exceeds the amounts
raised in any year prior to 1966.
Preliminary estimates of flow-of-funds for the corporate
sector in the first quarter of 1970 indicate a continued use of
short-term borrowing to finance fixed investment.

Despite the fact that

III -

short-term borrowing was $2-1/2 billion below the rate in the last
half of 1969, short-term uses declined more and $7 billion of short
term funds were available for long-term uses, $1-1/2 billion more than
in the second half of last year.

And, despite the record volume of funds

raised in the capital markets in the first quarter of 1970, the ratio
of long-term sources to long-term uses, after declining sharply
in 1969, appears to have declined a little further.

(The latest

estimates of inventory accumulation and of corporate retained
earnings in the first quarter, not incorporated in the table, would
increase the excess of short-term funds and reduce still further the
shortfall of long-term funds.)

Thus there is no indication on net

of restructuring of corporate balance sheets by repayment of shortterm debts incurred last year.
Capital market financing in the second quarter appears to
be rising faster than fixed investment, largely reflecting the AT&T
offering and receipt by corporations of proceeds from a large volume
of offerings sold in late March.

Nevertheless, the relationship of

long-term funds--internal and capital market funds combined--to longterm outlays thus far this year seems to have been no higher than in
1969.

This means that potential long-term financing demands for

restructuring purposes now overhanging the market are as large or
larger than at the close of last year.

While the present structure

of interest rates may be inducing some corporations to continue
rolling over their short-term loans, many must feel under pressure to
replace them with more permanent funds.

III - 16

FLOW OF FUNDS, NONFINANCIAL CORPORATIONS
(Dollars in Billions)
1970

1969
1962-66

1967

1968

(Avg.)

H 1

H 2

Q I

(SAAR)

Long-term sources
Internal 1/
Capital market

61.2
50.8
10.4

82.7
61.2
21.5

81.0
63.1
17.9

82.6
62.9
19.7

84.7
62.5
22.2

85.7
62.3
23.4

Long-term uses
Plant and equip.
Other 2/

51.3
46.8
4.5

68.7
63.8
4.9

71.2
68.0
3.2

80.9
75.2
5.7

83.2
79.2
4.0

87.6
81.8
5.8

Short-term sources

6.4

7.8

13.2

20.5

13.7

11.0

5.8
.6

6.4
1.4

9.6
3.6

13.4
7.1

8.3
5.4

5.5
5.5

Short-term uses
Inventory
accumulation

10.0

13.5

16.1

15.1

8.0

3.8

7.4

6.4

6.5

6.6

8.3

3.6

Other, net. 5/

2.6

7.1

9.6

8.5

- .3

99
20
119

89
32
121

89
25
114

78
24
102

75
27
102

71
27
98

Bank loans n.e.c. 3/
Other loans 4/

Per cent of long-term uses:
Internal funds
Capital market
Total

1/ Total retained earnings and capital consumption allowances.
2/ Residential construction and foreign direct investment.
3/ Includes business bank loans reported as sold to bank affiliates.
Excludes commercial paper held by banks.
4/ Includes loans from finance companies and sale of commercial
paper (including that held by banks).
5/ Current assets (other than inventories) less current liabilities
(other than bank and other loans).

III - 17
Corporate and municipal security markets.

New peaks were

reached by corporate and municipal bond yields in mid-May, as the
weight of heavy forward calendars and uncertainties related to foreign
and domestic policies continued to depress prices of long-term securities.

BOND YIELDS
Bond Yields
New Corporate
Aaa 1/

Long-term State
arn Local Bonds 2/

1969
Low
High

6.90 (1/10)
8.85 (12/5)

4.82 (2/23)
6.90 (12/18)

8.20 (2/27)
9.10 (5/15)

5.95 (3/12)
6.96 (5/14)

8.65
8.75

6.50
6.73

8.91
8.98
9.10

6.79
6.89
6.96

1970
Low
High
Week of:
April

May

17
24
1
8
15

With call protection.
Bond Buyer (mixed qualities).

In mid-May, the Board's index of yields on newly issued Aaa
corporate bonds exceeded 9 per cent for the first time in its 19-year
history, and $300 million of new public bond offerings were withdrawn.
At these record yields, however, investors quickly bought out those
issues that were marketed that week, and some of the larger borrowers

III - 18

who had previously postponed their offerings returned to the market.
Consequently, the May volume of public bond issues is likely to be
about $3.2 billion (including AT&T), down only slightly from the
previous staff estimate.

Although the sharply lower stock prices

resulted in a number of cancellations and withdrawals of new equity
offerings, the volume of new stock issues so far appears to be remaining
at unusually high levels.

This development probably reflects not only

the pressing need for capital, but also the increasing need for many
corporations to reduce debt ratios.

With both bond and stock volume

remaining large in May (excluding AT&T) and June, gross corporate
issues are thus expected to remain at near the record April pace.
1/
CORPORATE SECURITY OFFERINGS(Monthly or monthly averages in millions of dollars)
Bonds
ruDi1C

Offerings

1969

1970

rrivate
Placements
1970
1969

Stocks
1969

1970

Total
1969

1970

886

1,521e

513

392e

674

697e

2,073

2,610e

1,137

2,333e

558

367e

756

633e

2,451

3,333e

April

1,268

2,000e

649

400e

830

600e

2,748

3,000e

May*

871

3,200e

510

300e

694

600e

2,076

4,100e

June

1,272

1,800e

514

400e

744

700e

2,530

2,900e

1/
e/
*

Data are gross of underwriting expenses.
Estimated.
"Public bond" figure and "Total" include AT&T rights offering.

III - 19

The May schedule of long-term municipal bonds was reduced
significantly, as the sharp rise in rates and the slow movement of
bonds out of dealer inventories depressed the market.

State and local

governments withdrew offerings and the pace of new bond filings slowed
The staff now estimates that long-term borrowing by

appreciably.

state and local units in May will be only about $1 billion, $300
million less than previously estimated, and there is no evidence as
yet that the June volume will be much higher.

Undoubtedly, municipal

financing plans have been dampened by the 100 basis point rise in the
Bond Buyer index over the 8-week period beginning in mid-March.

STATE AND LOCAL GOVERNMENT OFFERINGS
(Quarterly or monthly averages in millions of dollars)

Year
QI
Q II

1970

990
927

1,350

1,216

1,217e

April

1,801

1,650e

May

1,110

1,000e

737

l,000e

June
e/

1969

Estimated.

Uncertainty about the tax deductibility of the cost of some
bank funds used to purchase municipal bonds still hung over the market
after the ambiguous Internal Revenue Service announcement in mid-May
concerning guidelines about investment of borrowed funds.

Doubts

about the nature of the guidelines and their future interpretation
will probably restrict bank participation in the municipal market
for the immediate future.

III - 20
Stock market.

Stock prices declined substantially further

during the three weeks ended May 15, as trading volume continued at
a moderate to light pace.

Reflecting uncertainties regarding the

implications for monetary policy of persisting inflationary pressures,
as well as the corporate profits outlook and U.S. military involvement
in Indochina, both the New York Stock Exchange Index and the American
Stock Exchange Index have fallen more than 15 per cent since April 3 -when prices most recently began to erode--and 31 and 37 per cent,
respectively, since cyclical highs of December 1968.

Price-earnings

ratios have declined to levels reached only once in the last decade-briefly--during late 1966.
The reduction in margin requirements on May 6 had only a

1/
brief impact on stock prices during the first week of May.

Declines

in broker-extended margin credit had continued into April, for which
a $140 million drop to $4.4 billion is estimated, and there is little
reason to expect that margin trading has increased during May.

The

average 9 to 10 per cent interest being charged by brokers on debit
balances, combined with doubts that there will be a rapid recovery
in stock prices, may limit--over the next several months--the added
buying stimulus which the greater availability of stock market
credit ordinarily provides.

1/ The Board reduced required margins on stocks from 80 to 65 per
cent and on convertible bonds from 60 to 50 per cent, citing the
more than 30 per cent decline in margin credit extended by brokers
from June 1968--when margin requirements were last raised--through
March 1970.

III - 21

STOCK PRICES, TRADING VOLUME AND PRICE-EARNINGS RATIOS
Stock Prices
Amex
NYSE
Index
Index

NYSE
Trading
Volume 1/

Average
Price-Earnings
Ratio 2/

1968 - High
Low

33.25 (12/20)
21.58 (3/5)

61.27 (11/29)
48.66 (3/5)

21,350 (6/13)
6,700 (3/25)

19.19
16.45

1969 - High
Low

32.91 (1/3)
25.02 (7/29)

59.32 (5/14)
49.31 (7/29)

19,950 (10/14)
6,683 (8/11)

18.31
15.35

1970 - High

27.02 (1/8)

52.36 (1/5)

17,508 (3/25)

16.88

21.22 (5/18)

41.99 (5/13)

6,650 (5/11)

14.71

3
10
17

24.92
24.33
23.35

49.70
48.86
47.29

9,647
9,010
10,064

16.88
16.57
16.05

22.40

45.53

9,806

15.60

1
8
15

21.99
21.69
21.11

44.75
43.61
42.14

11,369
10,577
11,349

15.16
14.71
14.16

Low
Week Ended:
April

May

Daily average trading volume in thousands of shares for week ended
data; actual daily total for highs and lows.
Calculated for the Standard & Poor 425 Industrial Average on Wednesday
of each week. Current or latest available annualized quarterly
earnings are used in the calculation. Currently, the ratio is
calculated using fourth quarter 1969 earnings, and thus the level
of the ratio may be misleading; if investors are anticipating a
seven per cent decline in earnings for 1970, for example, the
effective price-earnings ratio on May 15 was 15.22

III - 22

Total private borrowing and lending.

Although corporate

business continues the large excess of fixed capital outlays over
internal funds that has been generating demand for long-term financing,
the total amount of business excess spending diminished somewhat in the
first quarter with the cutback in inventory investment.

This improve-

ment is reflected in Table 1 below on net financial investment, where
the business net deficit is somewhat less deep in the first quarter
than earlier.

Households have also been improving their net financing

position, starting from their unusually low surplus in the first
half of 1969, through a combination of rising gross saving and reductions in capital outlays.

The unusual deficit of private sectors

throughout 1969 was the counterpart of the Federal Government's
surplus of last year and the strong position of the rest of the world
on current account vis-a-vis the United States.

In the first quarter,

both the Federal and foreign positions shifted to more usual relationships, with concomitant increases in the private balance of saving
and outlays to a first quarter rate $15 billion above the 1969 year
total.

(Table 1)

III - 23

Table 1
NET FINANCIAL INVESTMENT, BY SECTOR- /
(Net flows in billions of dollars,
seasonally adjusted annual rates)
1970
Q I

1969 half yrs.
H 2
H

1965-68
average

1969

Domestic private nonfinancial
sectors
Households
Business
State and local governments

- .4
27.5
-23.9
-4.0

-23.3
20.3
-36.1
-7.5

-29.5
13.4
-32.6
-10.3

-17.3
27.1
-39.8
-4.6

-8.3
30.5
-33.6
-5.2

Federal Government and foreign
Federal Government
Foreign

-6.3
-4.9
-1.4

12.3
8.6
3.7

17.5
12.0
5.5

7.0
5.2
1.8

-2.9
- 1.2
-1.7

Net financial investment is excess of financial asset acquisitions over
increases in total liabilities. Except for sector discrepancies, it
equals sector saving less capital expenditures.

This shift is reflected in first quarter financial data as a
combination of reduced borrowing by private sectors and higher rates
of financial flow from these sectors to markets.

Private borrowing

has, in total, been decreasing fairly steadily from the first-half
1969 peak, and this continued into the first quarter of this year.

(Table 2)

III - 24

Table 2
FUNDS RAISED IN CREDIT MARKETS
(Net flows in billions of dollars
seasonally adjusted annual rates)
1969 half years

1965-68

1970

Average

1969

H 1

80.1

87.8

91.0

85.0

8.3

-4.0

-7.1

- .7

Debt of other sectors b/
Long-term debt
Bonds
Mortgages

71.7
43.7
19.4
24.3

87.4
49.1
21.8
27.4

96.4
53.2
24.5
28.6

78.5
45.0
18.9
26.1

71.3
46.5
23.0
23.5

Short-term debt
Bank loans n.e.c. c/
Open-market paper

27.4
11.9
1.1

38.3
14.2
3.3

43.1
17.9
4.5

33.5
10.6
2.2

24.8
4.6
5.0

14.4

20.8

20.7

15.2

4.5

1.7

7.2

7.5

Total funds raised by nonfinancial sectors a/

U.S. Government a/

Consumer credit and other
Corporate equities

Q 1

81.3

2.5

1/Net of changes in Treasury cash balances.
b/ Private nonfinancial sectors and foreign.
c/ Includes business loans sold to bank affiliates.
d/ Issued by nonfinancial corporations.

Unlike earlier periods, however, the first quarter drop in private
borrowing was extremely concentrated, falling entirely in short-term
credit and even more specifically in loans directly from banks.
Bank affiliates were

important first-quarter lenders, and business

continued to draw heavily on the commercial paper market, but these
forms of credit flow were not sufficient to offset the sharp decrease
in loans held directly by banks.

III - 25
The drop in short-term credit is roughly consistent with the
low inventory investment figures now estimated for the first quarter.
However, short-term credit flows were still too large to be associated
with the corporate push into security financings during the

quarter.

Net new bond issues in the first quarter were up sufficiently to hold
the total of long-term financing

roughly steady at earlier rates,

offsetting the continuing decline in mortgage credit flows (Table 2).
Moreover, the impact of corporate bond financing

tends to be understated

in the first-quarter figures on net new issues, because large offerings
were still in process at the end of March and will be included in second
quarter net issues along with the AT&T and other offerings of this quarter.
The evidence is nevertheless that a restructuring of corporate debt is
yet to come and that the large volume of capital market borrowing is being
fully absorbed by the continuing large excess of fixed-capital outlays
over internal funds.

As suppliers of credit, private investors were a principal
source of short-term credit to business during the first quarter through
their purchases of the continuing large volume of commercial paper
offerings by bank affiliates and nonfinancial businesses (included in
direct investment in private short-term claims in Table 3).

These

purchases were a continuation of the 1969 development of the commercial
paper market that has brought private holdings of commercial paper from
$14.5 billion at the end of 1968 to over $27 billion at the end of
March this year.

These holdings, at recent levels, are about five times

the amount of large CD's held by these investors and more than half as
large as private holdings of short-term Governments.

III - 26
TABLE 3
SOURCES OF CREDIT MARKET FUNDS
(Net flows in billions of dollars,
seasonally adjusted annual rates)

Total funds raised bI nonfinancial sectors-

1970

1965-68
average

1969

80.1

87.8

91.0

85.0

81.3

48.7

40.3

38.7

41.1

46.0

13.7

41.7

37.1

46.0

31.7

4.3

15.8

11.9

19.8

1.4

3,9
5.6

10.6
15.3

8.9
16.3

12.0
14.2

16.7
13.6

1969 half years
H2
HI

Supplied by:
Private domestic nonfinancial sectors
Direct investment in
credit markets
U.S. Government
Securities
Private Claims-Short term
Long term

b/
Corporate equitiesDeposits and currency-

a d/

Other sources--

a/
b/
c/
d/

- 2.7
1.4

- 4.0

- 1.5

39.8

5.5

- 3.4

3.2
11.1

31.4

47.5

52.3

43.9

35.3

- 4.8

Net of changes in Treasury cash balances.
Net of security credit borrowing.
Includes demand deposits and time and savings deposits at
commercial banks, mutual savings banks, S&L's, credit unions
Mainly foreign funds and sources of funds to financial institutions
other than deposits and credit market borrowing.

III - 27

Private buying of long-term securities was not large in the
first quarter by recent standards except in equities, which continued
to be issued in the large volume established in the fourth quarter.
Through a combination of circumstances, including low loan demand in
March, banks were the main support for municipals in that quarter, while
banks together with the home loan bank system were major buyers of
Governments.

The flow of household funds into equities (net of

security debt) in the first quarter, however, is an upward shift of
almost $6 billion from 1969 totals and in sharp contrast to the
entire decade of the 1960's.

III -

Yields on Treasury notes and

Government securities market.

bonds have shown only minor changes on balance since the May 5 meeting
of the Committee.

Treasury bill rates, on the other hand, have fluctuated

fairly widely and are generally about 20 to 30 basis points lower than
around the time of the meeting.
WEEKLY AVERAGE MARKET YIELDS ON U.S.GOVERNMENT
AND AGENCY SECURITIES 1/
(Per cent)
197
Lows

Late 1969
Highs

..
May 5

Week ending
May 12

May 19

Bills
1-month
3-month
6-month
1-year

7.54
8.08
8.09
7.86

(12/31)
(12/29)
(12/29)
(11/24)

6.22
6.08
6.18
6.20

(3/24)
(3/24)
(3/23)
(4/13)

6.66
6.94
7.19
7.16

6.56
6.75
6.85
7.05

6.52
6.75
6.94
7.09

Coupons
3-year

8.51 (12/29)

6.37 (3/25)

7.90

7.89

7.92

5-year

8.33 (12/29)

7.05 (3/25)

7.97

7.96

7-year
10-year
20-year

7.77 (12/29)
8.05 (12/29)
7.14 (12/29)

6.98 (3/25)
6.90 (2/27)
6.55 (2/27)

7.94
7.86
7.13

7.87
7.82
7.11

7.39
7.85
7.12

6-month

3.70 (12/30)

7.17 (4/15)

7.68

7.67

7.61

1-year
3-year

8.87 (12/11)
8.55 (12/31)

7.46 (4/14)
7.75 (3/25)

8.09
8.27

8.23
8.28

8.24
8.25

5-year

8.47 (12/31)

7.78 (3/25)

8.19

8.29

8.30

Agencies

1/ Latest dates of high or low rates in parentheses and refer to single dates.

The Treasury's May refunding operation raised somewhat more cash
-than anticipated, although the actual distribution of the public's takings
of various issues was somewhat at variance with earlier expectations.

During

the refunding period, the success of the operation came into question as

III- 29
a result of market uncertainties following the
of

U. S. involvement in Cambodia.

resident's announcement

However, very large reserve injections

by the System improved the technical position of the market and strengthened
prices of Treasury coupon securities.

In the event, the financing turned

out somewhat more successfully than expected with the Treasury raising a
total of $2.0 billion in new cash, compared with an intended new borrowing total of $1.0 billion.

This result reflected the Treasury's decision

to allot in full the $3.6 billion in subscriptions to the 18-month, 7-3/4
per cent note, combined with an attrition in the exchange portion of the
financing totaling only about $1.6 billion, slightly less than one-third
of the publicly held maturing issues.
The System's large reserve injections during the financing
period, which in the week ending May 6 totaled nearly $1.2 billion on a
daily average basis, primarily took the form of outright bill purchases.
Consequently, dealer's positions in Treasury bills have declined sharply
and the technical position of the bill market is very strong.

Neverthe-

less, market uncertainty about bill rates and likely financing costs has
increased considerably as dealers have come to realize that somewhat
wider variations in short-term interest rates and day-to-day money costs
apparently may be expected under the System's current mode of operations.
In addition, dealers are apprehensive that the System may sharply

reverse

the reserve supplying operations undertaken earlier in support of the
Treasury financing.

Thus, dealers have been wary of adding substantially

to their positions, and sudden changes in demands or supplies have been
reflected in relatively sharp rate movements.

III - 30

DEALER POSITIONS IN GOVERNMENT AND AGENCY SECURITIES
(In millions of dollars)

April
Daily Average

May 4

May 12

May 18

4 508

20239

2,518

2,053

3 816

1,521

1,300

1,035

Due in 92 days or less

721

-137

-126

-125

93 days or over

3,095

1,658

1,426

1,159

Treasury notes and bonds
(total)

692

567

1,217

1,019

Due within 1 year

413

512

137

142

1-5 years

107

-32

677

523

over 5 years

172

404

354

705

699

554

Due within 1 year

479

536

500

419

over 1 year

226

164

198

135

Treasury securities
Total
Treasury bills (totals)

Agency securities
Total

There has been little activity in the market for Federal
agency issues, and prices have generally moved in parallel with Treasury
securities of comparable maturity.
million in new cash thus far in May.

New issues have raised net $800
The three major new issues were:

a $400 million 23-month FNMA offering on April 29, all representing

new money and priced to yield 8.40 per cent; a FLB offering of a
$500 million, 1-year issue and a $200 million, 2-year issue, yielding

III-

8.20 and 0.15 per cent, respectively, and refinancing maturing
securities, except for $100 million which were redeemed for cash; and
$400 million of GNMA mortgage-backed bonds, all representing new cash
and composed of $150 million 1-year bonds yielding 3-1/8 per cent and
$250 million of 5-year bonds yielding 8-3/8 per cent.

Other Agency

issues taken together raised about $100 million in new cash.

All of

these issues were well received by investors.
Other short-term credit markets.

Outstanding commercial and

finance paper increased sharply in April from a higher revised March
total.

The $1.9 billion increase in total commercial and finance paper

in April entirely represented directly placed paper and brought the
average monthly increase for the first four months of the year to about
$1.3 billion.

Revised data indicate that bank-related paper increased

by some $450 million in March, compared to an earlier estimate of about
$125 million.

The April increase in such paper is now estimated at

about $100 million, whereas the increase in the first week of May
totalled nearly $170 million.

III -

COMMERCIAL AND FINANCE COMPANY PAPER AND BANKERS' ACCEPTANCE OUTSTANDING
(End-of-month data--in millions of dollars)

1970

Total commercial and
finance paper 2/
Placed through dealers
Placed directly
Note:

Bank-related paper 3/
(seas. unadj.)

Bankers' acceptances

May

March

Apil

35,930

36,406r

3 8 ,2 7 6 p

13,088
22,842

13,319r
23,087r

13 ,2 4 9 p
25,02 7 p

NA
NA

5,967

6,433r

6,542

5,249

5,352

5,614

February

6,710
NA

1/ Bank-related paper as of May 6, 1970.
2/ Data for commercial and finance paper are seasonally adjusted, in
contrast to similar data published in the Bulletin that are seasonally
adjusted.
3/ Bank-related paper is included in directly-placed, dealer-placed and
total commercial paper.
r--revised
p--preliminary

III - 33

With growth in commercial paper strengthening once again, rates
on private short-term credit instruments tended to advance slightly
further for the most part in the first two weeks of May;
Treasury bill rates declined somewhat over the period.

even though
finance paper rates

were unchanged to 1/4 higher, while 6-month commercial paper advanced by
1/8.

In contrast, bankers' acceptance rates were generally unchanged, re-

portedly in response to a fairly marked increase in investor demand for
acceptances.

SELECTED SHORT-TERM INTEREST RATES
(Friday Quotation - Discount Basis)
-

I---

1969
Nov.-Dec. ?Axhs I/_

May Ji

_ May 8

May 15

9.00 (12/31)
Finance paper
Bankers' acceptances 9.00 (12/31)
Treasury bill
7.54 (12/31)

8.00
3.00
6. 67

8.00
8.00
6.54

8.13

3-Month
Commercial paper
9.25 (12/31)
Finance paper
u.13 (12/31)
Bankers' acceptances 9.00 (12/31)
Treasury bill
.03
(12/29)

0.25
7.50
3.00
6.84

8.38
7.50
8.00
6.56

8.25
7.75
8.00
6.76

6-Month
Commercial paper
Finance paper
Bankers' acceptance
Treasury bill

9,25 (12/31)
3.13 (12/31)
9.00 (12/31)

3.13
7.50
3.00
7.24

3.25
7.50
8.00
6.64

12-Month
Prime municipals 2/
Treasury bill

.G25(12/12)

4.50
7.21

5.25
6.99

1-Month

S.09 (12/29)

7.06 (11/24)

3.00
6.57

8.25
7.50

8.00
6.97

5.50
7.14

1/ Dates of highs in parentheses; latest date used if high occurred on more
than one date.
2/ Bond yield basis.
Source:
Salomon Brothers & Hutzler's Bond Market Roundup for private rates.

III - 34

Federal finance.

On Tuesday, President Nixon announced that

the Federal budget will show deficits of $1.8 billion and $1.3 billion
in fiscal 1970 and 1971, respectively.

The shift to deficit in fiscal

1970 from the previous projected budget surplus is due mainly to a $3
billion anticipated shortfall in revenues.

Outlays in fiscal 1970 are

expected to exceed the January budget estimate by only $300 million,
thus reaching a total of $198.2 billion.

(Current staff estimates

indicate a somewhat larger deficit for the current fiscal year--about
$3.0 billion, mainly due to a lower estimate for receipts.)
For fiscal 1971, outlays have been revised upward by $4.8
billion from the January Budget as a result of various spending revisions shown in the accompanying table.

As is shown in the table, the

budget revisions do not allow for a possible $1.9 billion of additional
social security benefits in fiscal 1971 that would begin in January
1971 if the House Committee bill were to be enacted.
Despite the large increase in anticipated expenditures, the

Administration budget review shows only a moderate shift toward
deficit in fiscal 1971 due to the inclusion of $3.1 billion revenues
from proposed new taxes.

The speed-up in the estate and gift tax--

proposed earlier--is included with a $1.5 billion revenue impact in
fiscal 1971.

This assumes passage of the proposed speed-up will be

completed by June 30.

The tax provides for a 7-month lag between the

date of death and the date of payment of an estimated tax, a considerable
speed-up from the present 15-months lag.

Therefore, even assuming

III -

PROJECTED CHANGES IN FEDERAL BUDGET OUTLAYS
(Billions of dollars, Fiscal Years)
_
Total outlays, January Budget Document

1970
__~_

1971

197.9

200.8

Changes resulting from completed
Congressional action
Federal employee pay raise 1/
HEW appropriations (mainly education)
Veterans' education benefits

1.6
1.2
.3
.1

1.8
1.4
.2
.2

Items not subject to tight control
Interest on the Federal debt
Agriculture price supports
Unemployment Insurance Benefits
Public Assistance Grants (including Medicaid)

1.3
.6
.3
.1
.3

2.3
1.0
.3
.5
.5

Anticipated miscellaneous changes
Proposed postal rate increase, net 2/
(negative expenditure)
Cuts in medicare
Cuts in HUD (mostly model cities).
Cuts in NASA
Farmers' Home Administration
Administration release of construction funds
Family assistance program, House Postponement
Revenue sharing program, postponement
All other, net
new
outlays,
Administration estimate 4/Total
Total outlays, new Administration estimate-

Addendum:

Social Security benefit increase and
5/
reform included in House committee bill5% benefit increase
Reform
Total including Social Security Bill

-2.6
.2
-.3
-.2
-.2
-.3

.7
-. 4
-. 3
-. 2

.3
.5
-. 4

-1.8
198.2

-. 3 3/
1.5205.6

.8
1.1
207.5

1/ Assumes $.4 billion of pay raise absorption through personnel
economies in fiscal year 1971.
2/ Reflects failure to raise postal rates in fiscal 1970, and proposed
rate increases resulting in additional revenues of $1.6 billion in fiscal
1971 offset by revenue hikes of $1.2 already assumed in January Budget.
3/ Includes additional spending for education outside of HEW appropriation bill, additional pollution outlays, housing incentives, and
miscellaneous.
4/ So far no revisions have been scheduled in defense outlays.
5/ Committee also provides for an increase in revenues, but this was
already included in January Budget.

III -

speedy passage, tax collections would not be affected until February
1971.

The second revenue measure is a tax on lead in gasoline--imposed

on manufacturers or importers of lead additives--that would add about
2.3 cents a gallon to the cost of gasoline and bring in an estimated
$1.6 billion in revenue for a full year.

Without these revenue measures

the fiscal 1971 deficit would be $4.4 billion according to current
estimates.

Such a deficit however, would mainly be the result of low

rates of economic growth since the high employment surplus for fiscal
1971--even without the additional revenues--would still show a surplus
of close to $10 billion.
In regard to the Federal sector in the national income
accounts, the Staff continues to project a small surplus ($1.2 billion)
in fiscal 1970; the deficit in calendar 1970 is expected to be about
$5.0 billion.
No revision for defense outlays in fiscal 1970 or 1971 was
made in the Administration's new figures.

Some question has arisen about

the prospect for defense spending in light of the mixed behavior of
advance defense indicators and recent action in Cambodia.

Defense

outlays other than personnel compensation would have to continue their
recent pattern of decline in order for Budget targets to be met.

Cuts

in defense personnel have been substantial through March 1970.
The end-of-May cash balance at the Treasury is projected by
the Staff to be about $5.0 billion.

The net effect of the Treasury's

May financing (after adjustment for attrition and Federal agency purchases

III - 37

of the new issues) was to add $1.7 billion to the cash balance.

further financing (other than additions to regular bill auctions) is
now expected in fiscal 1970.

In July and again in August the Treasury

will need an estimated $4 to $4.5 billion of new money, with the lower
end of this range likely if additions to regular bill auctions are
continued beyond June.

The next refunding will involve the quarterly

note and bond maturities in August, of which $5.6 billion are publicly
held.

III - 38
FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
Fiscal 1970 e/
Revised.
F.R.
Board
Budget-

Fiscal 1971 e/
Jan.
Revised
Budget
Budget

Calendar Years
F.R. Board
1969
1970
I

5.3
195.6
190.3

-8.3
194.8
203.1

-3.5
44.3
47.8

8.6
60.4
51.8

-6.0
47.6
53.6

-7.4
42.5
49.9

-4.1
- .6
- .7

7.0
-1.3

2.0
-1.6
3.1

-6.8
- .5
-1.3

6.3
- .5
.2

5.5
2.6
- .7

5.3

6.9

7.4

7.9

5.3

-5.0
.3 -9.6 -6.5
200.4 198.7 200.8 199.2
205.4 198.4 210.4 205.7

-4.2
202.7
206.9

Calendar Ouarters
1970
IVe/
lie/
IlIIe/

Federal Budget
(Quarterly data, unadjusted)
Surplus/deficit
Receipts
Outlays

-1.8
196.4
198.2

-3.0
195.5
198.5

1.3
202.1
200.8

Means of financing:
2/
Net borrowing from the publicDecrease in cash operating balance
Other 1
n.a.

3.5
-1.5
1.0

-1.2

Cash operating balance, end of period

na.

-1.3
204.3
205.6

na.

7.4

National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
Expenditures

n.a.
n.a.
199.3

1.2
201.0
199.8

1.6
205.4
203.8

n.a.
n.a.
208.3

9.5
201.5
192.0

High employment budget surplus/
deficit 4/
n.a.
3.5
n.a.
12.6
5.3
4.0
5.2
-.8
3.7
e--projected
n.a.--not available
1/ Official Budget Revision: May 19, 1970
2/ Excludes effect of reclassification of $1.6 billion of CCC certificates of interest, as of July 1, 1969.
reclassification increased Federal debt, but is not treated as borrowing from the public.
Includes such items as deposit fund accounts and clearing accounts.
Estimated by Federal Reserve Board Staff.

8.0

This

III - 39

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

May

June

July

August

Borrowing operations

New cash raised
Unspecified new borrowing
Weekly and monthly bills
Tax bills
Coupon issues
Other (agency, debt repayment, etc.)
Total net borrowing from public
Plus:

Other net financial sources-

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

Level of cash balance
end of period
Derivation of budget
surplus or deficit
Budget receipts
Budget outlays

3.4

4.2
.4

3.6
-2.4

-4.5

-. 8

1.6

-3.9

4.7

3.0

-. 9

-. 3

-3.8

7.2

6.0

-3.3

-2.0

2.4

1.0

5.0

7.4

6.4

14.0
17.8

24.1
16.9

12.5
18.5

Checks issued less checks paid and other accrual items.

5.8

14.9
18.2

5/19/70

III-C-1

FINANCIAL DEVELOPMENTS - UNITED STATES
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, RATIO SCALE

BANK CREDIT
-400
-

TOTAL
APR 400 4

111 1

III

r350

III - 1 1 1

SCALE
ARITHMETIC
NSA

BORROWED
APR

V
EXCESS AP

1968

1970

CREDIT PROXY

BUSINESS LOANS
APR 1037

DEPOSITS AND ALL

NONDEPOSIT SOURCES

I IM

APR 3097

DEPOSITS AND

EURO-DOLLARS
APR 302 0

OTHER SECURITIES
APR 734

U.S. GOVT. SECURITIES
APR 519

1968

I I I I I I I I197l

I I I

1970

NEW SERIES
I
I I I I I

I I I

1968

I IL

1970

SAVINGS ACCOUNTS

SAVINGS & LOAN ASSN.
APR 1364

1968

1970

I I1

I I l I I1

I I I I 1I 1 1

I j

5/19/70

M-C-2

FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED

SHARES IN FUNDS SUPPLIED

NONFINANCIALSECTORS

SEASONALLY ADJUSTED
ANNUAL RATE

TOTAL

LESS FEDERAL
GOVERNMENT
QI788

HOUSEHOLDS AND BUSINESS

PRIVATE NONFINANCIAL
01430

NETFUNDS RAISED
I 677

-50

NETCAPITALOUTLAYS
01691

I
1968

YIELDS

PERCENT

SHORT-TERM

950
I
1970

1968

1970

LONG-TERM

PERCENT

FEDERAL FUNDS
APR 810

8
COMMERCIAL PAPER/
4-6 MONTHS
APR 806

F.R. DISCOUNT RATE
APR 600

TREASURY BILLS
3-MONTH
APR651

-4

1968

1970

NEW SECURITY ISSUES

STOCK MARKET

BILS

BIL$

140 RATIO SCALE

CORPORATE
1970
APR30 /

TOTAL
CUSTOMER CREDIT

12-

-3

I20-

-12

MAR 85

1969
- in

100
1968
I

COMMON STOCK PRICES
I

----

1941 310

APR 86 0

80
STATE AND LOCAL GOVERNMENT
I

[ lI

-2

t 1

11
1

l l

APR 17

VOLUME
N.Y.S.E., DAILY AV.

1969
I

|I
MAR.

JUNE

SEPT.

)

DEC.

l l

MILLIONS OF SHA

RATIO SCALE

1968

1970

IV - 1
THE ECONOMIC PICTURE IN DETAIL

International Developments

U.S

balance of payments.

Little new information about

the state of the balance of payments has become available in the
short interval since the last Green Book.

One new piece of infor-

mation is that cash receipts from foreign governments to pay for
current and future deliveries of military goods were exceptionally
high in 196

($1.5 billion) and especially in the fourth quarter

($.6 billion) -- mostly because of large receipts from Germany;
smaller amounts were also received from the U.K. , Australia and a
number of other countries.

But in the first quarter of this year

these receipts were much lower, and we understand they will probably
not exceed $1.0 billion for the year.
Using the presently available data on the first quarter
balance of payments as shown in the next page, the transactions not
yet identified -- representing not only errors and omissions but also
direct-investment capital flows and income receipts, government
grants and credits, and a number of other categories -- amount to
net payments nearly as large as the average in the first three
quarters of 1969.

This supports the surmise we had made earlier that

a large reversal of fourth-quarter capital inflows occurred in the
first quarter; whether this will finally appear as a recorded capital
outflow or as a large unrecorded payments item is not yet known.

Balance of Payments 1/
(millions of dollars, seasonally adjusted)

Qtr.3

Qtr.4

1970
Qtr.p

9,583
-9,608
-25

9,580
-9,262
318

9,834
-9,392
442

10,218
-9,699
519

-323
67

-427
-500

-562
229

-69
-324

-168
138

1,515

751

127

169

468

-90

2,276

1,518

622

210

224

462

367

3,843
269
590
2,010
974

650
-87
-675
-41
1,453

332
44
-49
95
242

9
34
-176
-171
322

-236
-154
-265
-115
298

545
-11
-185
150
591

-180
90
-176
-244
150

3,811
-3,099
-880

8,923
-528
-1,187

2,842
-1,181
-48

4,742
-625
-299

1,176
1,819
-686

163
-541
-154

-1,801
3,264
264
217

Other transactions (derived as residual)

-7,672

-9,614

-2,958

-3,212

-2,451

-992

-2,530

Balances (deficit(-)) 3/
Official settlements balance
Liquidity balance
Adjusted over-all balance

1,638
168
-1,744

2,713
-7,208
-6,711

1,192
-1,613
-1,760

1,299
-3,818
-3,506

-615
-2,309
-1,926

837
532
481

-3,096
-1,727
-1,303

1 9 6
Qtr.l

1968
Year

Year

33,598
-32,964
634

36,469
-35,837
632

7,472
-7,575
-103

-1,266
269

-1,381
-528

Foreign purchases of U.S. corp. stocks
Foreign purchases of other U.S. sec.,
excluding Treasury issues

2,084

Selected Government transactions, total
Nonscheduled debt repayments
Nonliquid U.S. bank liabilities 2/
Nonliquid U.S. Government liabilities
Cash receipts for military sales

Merchandise excluding military
Exports
Imports
Net
U.S. purchases (-) of foreign securities
U.S. banking claims (increase(-))

Liquid liab. to private foreign accts.

Liquid liab. to official foreign accts.
U.S. reserve assets (increase(-))

Qtr.2

Allocation of SDRs

p/
1/
2/
3/

Preliminary. r/ Revised.
Items available, or partially estimated, for first quarter of 1970 as of May 15, 1970.
Includes some non-official transactions.
Includes initial allocation of SDRs in first quarter of 1970

IV - 3

New estimates of seasonal factors have now been introduced,
primarily to pick up distortions resulting from the control programs.
The first quarter data are only slightly affected, but the fourth
quarter surpluses are greatly reduced.
Midway in the second quarter the monthly liquidity deficits
still seem to be very large.

The early monthly indicator for April

shows a deficit approaching $1.0 billion, before special transactions
Even allowing for highly adverse seasonal

of about $150 million.

factors in April, the rate of deficit is much larger than in the
two preceding months.

However, there was an extraordinary increase --

$544 million -- in Libyan reserves in the month, indicating that

tax payments by U.S. petroleum companies were much larger than in
April of 1969.

There was a continuation of sizable deficits in the

first two weeks of May.
On the official settlements basis the April deficit was
probably relatively small, as liabilities co private foreigners
increased.

Liabilities of U.S. banks to their foreign branches

rose by about $700 million in the month, but then were reduced by
a like amount in the period to May 13.

All major banks are still

maintaining their liabilities to foreign branches at, or close to,
the level of their reserve-free base.

In the four weeks ended

May 13, these banks still had on average about $1 billion of such
liabilities subject to reserve requirements; in the prior four week
period they held about $1.4 billion above the marginal base.

IV - 4

U.S. foreign trade.

Preliminary indicators (duty collections,

counts of exporters' and importers' shipping declarations, etc.)

suggest

that the April export surplus may have been somewhat larger than the
relatively low March balance.

Imports in April are estimated co

have been about the same as in March and exports somewhat higher.
The export surplus in the first quarter was $2.1 billion at an annual
rate (balance of payments basis) up from the $1.3 and $1.0 billion rates,
respectively, in the third and fourth quarters of 1969.
One of the elements in the rise in value of both exports and
imports in the first quarter was higher prices of industrial materials.
Export prices of coal, aluminum and steel scrap -- leading items in
the expansion of total exports since mid-1969 -- were all up substantially.

As a result of the continuing economic boom abroad,

exports of these products have accounted for an increasing portion
of domestic production, and this has put considerable pressure on
domestic prices.

Coal and aluminum exports were 10 and

9 per cent,

respectively, of U.S. output of these products in the first quarter
compared to 9 and 5-1/2 per cent in 1969.

Shipments abroad of steel

scrap are now over 15 per cent of total U.S. shipments, up from 12 per
cent in 1968.

Higher prices for steel mill products announced since the
beginning of the year were not yet reflected in export prices through
March.

Export demand was probably one of the factors responsible for

IV - 5

the price increases.

Exports of steel rose from 2.2 million tons

in 1968 and 5.2 million tons in 1969 to about 8 million tons
($1-1/
1970.

billion) at an annual rate in the first three months of
Exports of steel in the first quarter were 3-1/2 per cent

of domestic production; for the year 1963 this ratio was 2-1/2 per
cent.

Meanwhile steel imports have declined.
The level of total imports in the first quarter was higher

than expected, and all the more so in view
of estimated real GNP in the first quarter.

of the dowmward revision
While increased purchases

of nonfood foreign consumer goods and machinery account for much of
the current strength in imports, higher prices of metals, newsprint
and coffee are also a factor.

It is estimated that the increases in

the import prices of these commodities from the first half of 1969
to the first quarter of 1970 (shown in the accompanying table) raised
the value of imports in the first three months of this year by between
$400 to $500 million at an annual rate -- i.e., by about 1-1/2 per
cent.

Coffee prices may be expected to remain high as supplies have

been reduced by frost damage to the Brazilian crop.

Import prices

of metals are also likely to be firm for some time, given the strong
demand abroad.

IV -

IMPORT UNIT VALUES OF SELECTED COMMODITIES

Jan.-June
Jan.-iIarch
1969
1970
($ Der Dound)($.S er Dound)

.331

Coffee
Cocoa
Ne-7sprint 1/
Copper
Nicke 1
Aluminun
Lead
Zinc
Tin

Per cent Increase
Jan.-June 1969 to
Jan.-March 1970

.413

.379

.319

.33J.25
.461
1.019
.232
.116
.126
1.390

142.225
.539
1.2S9
.240

.143
.143
1.645

1/ Dollars per short ton.

Euro-dollar market.
slightly lower during the first
mid-month.

Euro-dollar interest rates moved
week of May,

but turned firmer around

By May 20 rates Were generally about 1/4 per cent higher

than at the beginning of the month.

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
(weekly average of daily figures)
Average
for week
ending
.ednesday
liar.
Apr.
May

25
22
2S
6
13

(1)
Call
Euro-$
Deposit
3.77
7.5'
G.63
8.23
'.40
3.23

(2)
Federal
7un's
7.45

3.21
C.43
0.46
7.96
3.07

(3)
(4)
=(1)-(2) 3-month
Differ- Euro-$
ential
Deposit
1.32
-0.63
0.20
-0.23

-0.56
0.21

3.6
U.03

3.49
3.65
3.51
0.31

(5)
3-month
Treasury
Bill

(6)
=(4)-(5)
Differential

6.31
6.51
6.74
6.94
6.74
6.71 p

2.37
1.57
1.75
1.71
1.77
2.10

IV - 7

Contributing to the upward pressure on Euro-dollar rates
has been the $425 million Euro-market borrowing by ENEL, the Italian
state-owned electric utility holding company, which included $300
million of Euro-dollar bank loans, the rest being 10-year dollar
notes.

The proceeds of this loan package are being drawn down in

several tranches.

Tight credit markets in Germany and Switzerland

have also contributed to pressure on Euro-dollar rates.
U.S. banks' liabilities to their foreign branches showed
little change during the first week of May, then declined by some
$400 million to a total of $12,246 on May 13, about the same level
as at the first of April.

As foreign official CD's at U.S. banks'

head offices also fell, by about $300 million from April 29 to May 13,
it is evident that there was a substantial decline in U.S. banks' total
use of interest-sensitive foreign funds.
Foreign exchange markets. Demand for most major foreign
currencies has continued strong during May, as it was in April.
Many currency rates have risen further against the dollar -- some
to their upper limits -- and the Bank of Canada and major European
central banks have together purchased just less than $1 billion in
foreign exchange markets so far this month.

In April they purchased

$1.1 billion.
Strongest demand has been for the Canadian dollar.

The

Bank of Canada has purchased $315 million so far this month.

Its

reserves have increased almost $850 million this year (excluding its

SDR allocation) to a little under $4 billion ($4.1 billion including
SDRs).

The gain in the first quarter was primarily the result of

a sharp, but mainly temporary, improvement in the trade account.
Though the trade account is expected to weaken later, Canada's overall balance of payments may remain in strong surplus for some time
as a result of favorable short-term capital flows.

(Last year's total

net short-term capital outflow was $1.3 billion).
The easier demand for the Canadian dollar following the
decrease in the Bank of Canada's discount rate from 3 to 7-1/2 per
cent on May 12 was only temporary, and the Canadian exchange rate
soon moved back to its upper limit.
The German mark exchange rate continued to rise under the
influence of tight domestic financial market conditions.

It reached

its upper limit on May 13 and the Bundesbank purchased $210 million,
its largest intervention gain since revaluation.

After markets

closed that day, the Bundesbank announced supplemental measures
designed to curb foreign borrowing by German banks (see Page IV - 15).
Tightening financial conditions in Switzerland caused a
major Swiss bank to repatriate foreign currency assets about mid-May,
and the Swiss National Bank purchased $250 million in a direct
transaction with that bank.

(The System then drew $200 million on

the swap facility with the SNB, the only drawing by the System currently
outstanding).

This took considerable pressure off the exchange market,

IV - 9

and the announcement that the Swiss National Bank would do foreign
currency swaps over month-end with the commercial banks caused the
Swiss franc exchange rate to fall substantially thereafter.
Demand for sterling has been generally firm in May, and
the Bank of England has purchased about $100 million.

However,

uncertainty generated by announcement on May 18 of the general election
to be held June 13 caused some selling of sterling and the pound rate
fell sharply to around $2.4030, its lowest level since early February.
The French franc exchange rate continued to rise to
successive post-devaluation highs through mid-May.

Growing demand

for the Dutch guilder -- reflecting tighter domestic credit markets -pushed the exchange rate continuously upward during the first half
of May, and continuing strength in Belgium's trade account together
with relatively tight credit markets kept the Belgian franc very close
to its upper limit.

Each of these central banks has purchased some

dollars in their exchange markets this month.
The market for the Italian lira has been generally wellbalanced.

The Bank of Italy used $400 million it acquired primarily

from conversions of the ENEL loan (see page IV - 7 above) to reduce
its swap drawings on the System to $400 million.

(A further payment

of $200 million on its swap drawings will be made on May 26).
The System repaid completely on May 15 its outstanding
swap drawings on the National Bank of Belgium ($100 million) and the

IV -

Netherlands Bank ($60 million).

The U.S. Treasury provided most

of the necessary guilders and francs to the System by drawing
$150 million on the IMF and selling $10 million of SDRs each to
these central banks.

This is the first time the United States

has made use of its SDR holdings.

IV - 11

Financial developments in major industrial nations.

Interest

rates in nearly all industrial nations remain at high levels, despite
some easing in several countries since the start of the year.

Given

the prospect of continued inflationary pressures, interest rates in
most of these countries are not likely to decline in the immediate
months ahead, nor to any significant degree by the end of the year.
A marked decline in U.S. and Euro-dollar rates could modify the magnitude
and timing of interest rate changes in some countries, but would most
likely not affect basic policy stances.
Concurrent with the decline in short-term interest rates that
occurred earlier this year in the United States and the Euro-dollar
market, short-term interest rates in Canada, France, the Netherlands,
the United Kingdom and Belgium also fell from the high levels that
prevailed at the end of 1969, and short-term rates in Japan eased
slightly starting in April.

However, short-term rates in Italy,

Germany and Switzerland advanced during the first four months of the
year.

In contrast to recent years, German rates currently are at or

above international levels.

The spread of short-term

interest rates among industrial countries has narrowed substantially.
Declines in long-term interest rates during this period have
been fewer and noticeably less pronounced than the declines in shortterm rates.

Long-term yields have risen steadily in Italy, the Netherlands,

Switzerland and Germany.

Long-term interest rates ir industrial countries

have come closer together than they were at the end of 1969.

IV -

TABLE 1. SHORT-TERM INTEREST RATES, 1 /
MAJOR INDUSTRIAL COUNTRIES 1969 AND 1970

High

1969
Low

Dec.

France

10.87
(12/19)

7.75
(2/13)

10.41

Germany

9.00
(12/31)

3.75
(1/2)

Italy

7.50
(12/31)

Belgium

High

Low

1 970
Mar.

Apr.

Latest

10.63
(1/2)

8.50
(5/15)

9.47

9.05

8.50
(5/15)

9.00

9.56
(5/15)

9.00
(1/15)

9.56

9.56
(5/15)

5.50
(5/31)

7.50

8.25
(3/31)

7.50
(2/28)

8.25

n.a.

8.25
(3/31)

8.50
(12/31)

5.00
(1/13)

8.50

8.50
(1/31)

8.00
(5/18)

8.15

8.06

8.00
(5/18)

Netherlands

10.00
(10/3)

5.63
(1/17)

9.09

8.75
(3/20)

8.00
(4/24)

8.62

8.03

8.25
(5/8)

Switzerland

5.00
(12/31)

4.00
(2/5)

5.00

5.50
(5/8)

5.00
(3/10)

5.38

5.50

5.50
(5/8)

10.00

7.75

8.92

10.25

7.75

9.12

8.28

8.13

( 9/5)

(1/17)

(3/4)

(4/17)

8.50
(12/31)

6.94
(6/20)

8.50

8.50
(3/28)

8.25
(5/8)

8.50

8.25

6.38

7.78

6.52

7.35

6.81

United Kingdom
Japan

Canada

7.81
(12/31)

Euro-dollar
United States

Note:

(1/30)

12.50

7.25

(6/10)

(1/3)

7.80
(12/19)

5.92
(3/28

7.83
(1/7)

11.20
7.72

(5/19)

(5/13)

10.50

8.00

(1/9)

(4/17)

7.93
(1/2)

6.11
(3/26)

8.25
(5/8)

6.52
(5/13)

9.03

8.34

8.94
(5/20)

6.54

6.36

6.64
(5/19)

Actual dates are indicated below the high, low and latest rates. If
a high or low rate prevailed on more than one date, the latest date
is shown. For months, the monthly average of end of week rates is
shown.

1/ Rates quoted are generally for 3-month funds as follows:

Italy and

Switzerland, time deposits; Germany, interbank loan; the United Kingdom,
local authority deposit; the Netherlands, public authority loan; Canada
and the United States, Treasury bills; Belgium, tap rate on Treasury
bills; Euro-dollar, deposit. For France and Japan, the call loan rate
is shown.

IV -

TABLE 2.
LONG-TERM INTEREST RATES, -l
MAJOR INDUSTRIAL COUNTRIES 1969 AND 1970
(per cent per annum)
196

9
Low

1970
Mar.

Apr.

Latest

7.93
(5/8)

8.05

7.99

7.93
(5/8)

8.06
(5/11)

7.35
(1/2)

7.63

7.66

8.00
(5/14)

7.28

8.36
(Apr.)

7.35
(Jan.)

8.33

8.36

8.36
(Apr.)

6.65
(1/2)

7.73

7.82
(2/2)

7.64
(4/1)

7.65

7.64

7.78
(5/1)

6.71

7.88

8.03

8.37

8.53

Dec.

High

Low

7.17
(1/3)

8.01

8.08
(3/13)

7.45
(12/18)

6.34
(1/13)

7.24

Italy

7.28
(Dec.)

6.49
(Feb.)

Belgium

7.86
(10/1)

High
8.01
(2/26)

Germany

France

Netherlands

8.23

8.62

8.50

(5/8)

(4/24)

(1/9)

5.34

6.08
(5/8)

5,31
(1/9)

5.76

5.87

6.08
(5/8)

8.05
(1/2)

9.02

9.45
(5/14)

8,44
(3/6)

8.53

8.88

9.43
(5/19)

8.77
(Dec.)

8.34
(Jan.)

8.77

8.82
(Feb.)

8.81
(Jan.)

n.a.

8.82
(Feb.)

Canada

8.33
(12/31)

7.16
(1/29)

8.33

8.37
(1/7)

7.79
(4/15)

8.05

7.88

8.17
(5/13)

Euro-bond

7.54
(1/3)

7.01
(5/23)

7.30

7.35
(2/20)

7.30
(1/16)

7.33

n.a.

7.32
(4/10)

United States

6.78
(12/24)

5.40
(1/24)

6.65

6.87
(5/5)

6.23
(2/25)

6.40

6.43

6.79
(5/19)

(10/10)

(1/3)

Switzerland

5.40
(10/1)

4.37
(1/24)

United Kingdom

9.66
(6/12)

Japan

Note:

Actual dates are indicated below the high, low and latest rates. If
a high or low rate prevailed on more than one date, the latest date
is shown.
The monthly average of end of week rates is shown for
most individual monthly rates. For Italy and Japan the monthly
average rates are shown, while for Belgium the beginning of month
yield is cited.

1/ Yields generally apply to long-term government and public sector bonds.
Most are composite yields, but yields on specific issues are shown for
the United States and the United Kingdom. For Germany and Japan, yields
refer to a composite of private industrial bonds, while for Italy the
composite yield is for all bonds except Treasury bonds. For France, the
yield is net of withholding tax; gross yields are approximately one
percentage point higher.

IV - 14

Prevailing interest rate levels basically reflect continued
strong domestic demand conditions and restrictive monetary policies.
Inflation is becoming more widespread, and, for some countries, intensified
wage increases are adding fuel to the inflationary tendencies and
expectations.

Investment demand continues to be buoyant in most countries,

despite the adoption of anti-inflationary measures.

In some cases, a

desire to consolidate short-term borrowings into long-term debt has been a
factor influencing the rise of long-term rates.

The fall in equity and

bond prices in the United States also has contributed to the maintenance
of a structure of high yields in financial markets.
Policy actions have reflected the official concern with
inflation.

France has retained tight credit ceilings, and such ceilings

also are in effect in Switzerland, the Netherlands, Belgium and Denmark.
Discount rate increases in Italy, Germany, Austria and Spain during the
first four months of the year also indicate stiffening monetary policy
postures.

The Italian discount rate change, however, was motivated more

by the desire to curb capital outflows by bringing yield levels closer
to those elsewhere than to contain internal demand pressures.
The easing of interest rates in Canada and--to a limited extent-in the United Kingdom and Belgium--was motivated, in part, by the desire
of the authorities to avoid short-term capital inflows.
The rise of interest rates in Germany, which started in the
fall of 1969, has brought rates up to or above, those of most other
industrial economies.

While long-term rates continued to advance

IV - 15

through early May, short-term rates declined in February but advanced
somewhat since March.

These high rates reflect the tight credit

policy pursued by the Bundesbank (and intensified when the government
failed to adopt more restrictive fiscal measures), a shrinkage of bank

liquidity resulting from sizable capital outflows following the October
mark revaluation, strong credit demands by both domestic and foreign
borrowers, and an apparent effort by German borrowers to lengthen
their debt maturities.
Earlier German forecasts of a slowdown in economic activity by
mid-1970--not shared in by the Bundesbank--are now being proved wrong.
Estimates of the growth in real and nominal GNP have been progressively
revised upwards.

The immediate concern of the authorities is to combat

the intensification of price and wage advances.
To prevent German banks from circumventing monetary policy
objectives by borrowing abroad, the Bundesbank in March imposed an
additional 30 per cent reserve requirement on banks' gross external
liabilities above a prescribed base period.

Since banks were trying

to by-pass this measure by selling securities to foreigners under repurchase
agreements, the Bundesbank on May 14 reinforced the marginal reserve
requirement regulation by reducing the rediscount quotas of the banks at
the Bundesbank by the amount of securities sold to foreigners under such
repurchase arrangements.

IV - 16

During the first quarter of this year, German firms have
steadily increased their borrowing in the Euro-dollar market.

In many

cases, such borrowing has been facilitated by German banks guaranteeing
their customers' loans.

If Euro-dollar rates resume their decline or

German interest rates increase further, there could be a substantial new
flow of credit to German businesses in the months ahead.

This would

weaken the effectiveness of the restrictive monetary policy and result
in a rise in German reserves.
Given the intensity of inflationary pressures, financial
conditions are not likely to ease quickly.

Unless fiscal measures are

taken to combat the boom and until there are signs of a moderation in
price advances, the very high interest rates now prevailing in Germany
will not decline significantly.
Interest rates have advanced further in Italy this year.
Bond yields in March had advanced by some 180 basis points above mid-1969
levels.

Italian bond yields, however, had been relatively low in

comparison with long-term rates in other financial markets.
The increases in interest rates reflect a response by the
authorities to the need to stem the heavy outflow of capital.

Italy

incurred sizable balance of payments deficits in January and February,
including heavy capital outflows.

The need to discourage these outflows

was made more critical by the prospect that Italy's current account surplus
would shrink markedly in 1970.

IV-

On March 6 the Bank of Italy raised its rates for rediscounts
and advances from 4 to 5.5 per cent.

Commercial banks followed by raising

their rates on domestic currency time deposits and on loans to customers.
These increases brought Italian rates more in line with those prevailing
abroad, and have apparently helped curb the capital outflow, partly by
affecting the net extension of loans and trade credits to foreign
borrowers by Italian companies.

At the same time, the Bank of Italy

has urged State enterprises to borrow abroad.

Since the start of the

year, more than $750 million has been raised abroad through the issuance
of Euro-bonds and through medium-term foreign bank loans.

In previous

years, such enterprises have borrowed very small sums in foreign financial
markets.
Apart from external considerations, domestic economic prospects
by themselves would have justified some stiffening of monetary policy
in the past six to nine months, although not to the degree that has
occurred.

The large wage increases granted in late 1969 will drive

up unit labor costs sharply this year.

The authorities are anxious

that cost-push inflation not be exacerbated by an intensification of
already substantial demand pressures.

At the same time, the government

wishes to see real output rise as fast as possible, and would be wary
of monetary restraint that might unduly discourage investment.
Italy's balance of payments prospects are uncertain; containing
capital outflows will depend greatly on political and economic confidence
factors.

Since the overall balance may be in deficit for the remainder

IV - 18
of the year despite the recent tightening of monetary conditions.
interest rates will probably not decline in the months ahead.
Interest rates have risen in Switzerland this year, but
both short-term and long-term rates remain significantly below those

prevailing in other financial markets.

The demand for long-term funds

has risen markedly because of the rising level of economic activity
and enterprises' desire to retire shorter-term bank loans by raising
long-term funds.

With no slowing expected in the expansion of aggregate

demand, interest rates are unlikely to decline in the near future.
To contain the inflationary pressures which have been developing,
the authorities have adopted both fiscal and monetary stabilization measures.
Effective February 1, Swiss commercial banks and the Swiss National Bank
agreed to make more severe the quantitative limits on credit expansion
initially agreed upon in the summer of 1969.

The authorities also

are curbing the issuance of Swiss-franc denominated bonds by foreign
borrowers.
During the first four months of this year, the call money rate
in France declined from the extremely high level which prevailed at the
end of 1969, while long-term rates eased only slightly.
rates in early May remain high.

But interest

Although the authorities appear to have

succeeded in achieving a fairly rapid balance of payments recovery since
the devaluation, a continued tight rein on internal demand remains
necessary to maintain this improvement.

The prospects for any significant

easing of present restrictive credit policies are slight.

Interest rates

are likely to remain at the current level, and may even increase, in
the months ahead.

IV - 19

The French call money rate, in effect set by the Bank of France,
has been maintained above the corresponding Euro-dollar rate in order
to attract short-term capital inflows as well as discourage illegal
capital exports.

As Euro-dollar rates have declined, the Bank of France

has been able to lower the call money rate.

However, the decline in this

rate also reflects a significant easing in the banks' liquidity positions
resulting from sizable balance of payments surpluses thus far this year.
Until recently, the expansionary impact of these payments
surpluses was not being countered.

On April 22, however, the National

Credit Council raised by one percentage point (from 15 to 16 per cent)
the part of commercial banks' required reserves that is held in the
form of medium-term rediscountable bills.
The general credit ceilings in effect since October 1969
remain very restrictive.

No expansion in absolute terms is permitted

during the first half of this year in short-term bank credits and in most
categories of medium-term bank credits.

The French economy has been

expanding rapidly and inflation is not yet under control.

If, as now

seems likely, the credit ceilings are allowed to expire at mid-year,
general monetary measures to limit the supply of bank credit will
replace the credit ceilings.

Interest rates, thus, are likely to

rise around mid-year.
In the Netherlands long-term interest rates have advanced
steadily this year, reflecting a continuation of tight credit conditions.
Short-term interest rates have eased, but remain high.

Short-term

rates have followed movements of U.S. short-term market rates.

IV - 20

Dutch authorities primarily wish to avoid an intensified wageprice spiral.

Domestic and foreign demand for Dutch output continues

strong, and inflationary signs are becoming more pronounced.

The major

restrictive monetary measure used by the Netherlands Bank has been the
imposition of credit ceilings on the increase in short-term loans to the
private sector by commercial and agricultural banks.

Short-term lending

was allowed to increase by 10 per cent in 1969 and the same rate of
credit expansion is permitted this year through August.

The Bank will

very likely maintain this policy of credit restraint for the balance
of the year.
Short-term interest rates in the United Kingdom have moved
downward since the beginning of March.

Bank Rate has been reduced twice

this year--from 8 to 7-1/2 per cent on March 5 and by an additional
half percentage point, to 7 per cent, effective April 15.

Long-term

rates declined during the first two months of the year, and then edged
upward through mid-April.

Since the budget was presented on April 14,

long-term yields have risen by 70 to 80 basis points.

The sharp drop

in bond prices also was affected by the marked decline in U.S. bond prices.
The easing of British rates has been motivated in part by the
desire to reduce the cost of foreign balances and to discourage large,
but volatile, interest-sensitive capital inflows.

The timing of the

March Bank Rate cut was dictated by a sudden rise in short-term yields
which, in turn, triggered a massive inflow of funds.

IV - 21

The huge short-term inflows which began in the fourth quarter
of 1969 have been little affected by interest rate differentials
between Euro-dollar and comparable sterling assets.

Except for a few

days early in March, the covered differential between sterling assets and
non-sterling alternatives has been in favor of the latter.

The capital

inflow has been associated with a reversal of leads and lags in Britain's
favor, reflecting primarily restoration of confidence in the pound.
In addition, a major portion of the short-term capital inflow represented
inter-company funds drawn to ease domestic liquidity pressures.
The decline in interest rates is an understandable
response to the improved balance of payments position.

Bank

Rate cuts have gone hand in hand with a somewhat more permissive policy
toward expansion of bank lending.

In the Budget message, the ceiling on

bank lending to the private sector was replaced by an informal guideline,
calling for an increase in bank lending formerly subject to the ceiling
of about 5 per cent in the year ending next March.
The rise in long-term rates is symptomatic of widespread public
expectation of inflation, in view of accelerating price increases in
recent months and the Chancellor's moderately expansionary budget for
fiscal 1970-71.

Given prevailing demand pressures, long-term interest

rates probably will not fall back to the pre-budget level, and Britain
will continue to have fairly high interest rates in the months to come.

IV - 22

This year there has been some decline in Belgian interest rates,
with short-term rates falling more sharply than long-term rates.
interest rates were still high at the end of April.

But

The decline appears

to reflect internal developments as well as the influence of Euro-dollar
rates.

Belgian commercial banks have reduced their net foreign liabilities

in the early months of this year.
Domestic demand pressures seem to be easing slightly.

Expectation

of further interest rate declines (including a possible reduction in the
Belgian National Bank discount rate) probably account for the downward
movement of bond yields.
In Japan, most interest rates have advanced since the adoption
of restrictive monetary measures in September 1969.

The unconditional call

loan rate did decline slightly in the beginning of April, mainly owing
to a seasonal easing in money markets, but it has remained steady at the
new level through early May.
The upward movement in interest rates is attributable primarily
to internal conditions.

In addition to the increase in the basic discount

rate last September, the Bank also has curbed bank credit expansion by
various actions restraining the commercial banks' reserve base.

Both

banks and businesses have experienced a moderate tightening in their
liquidity positions in recent months.
The Japanese economy has continued to advance rapidly, and
inflationary pressures have remained strong.

Since there seems little

prospect of an easing of internal demand pressures this year, the

IV - 23
Bank of Japan can be expected to maintain its restrictive monetary
posture.

Hence, interest rates are likely to remain firm or increase

slightly in the coming months.

The May 15 increase in the Bank of Japan's

official rates on export-related loans and discounts will reinforce the
upward pressures on interest rates.
Interest rates in Canada peaked in January of this year and
have since fallen, the most pronounced decline being in short-term rates.
The May 12 reduction in the Bank of Canada's discount rate, from 8 to
7-1/2 per cent, brings the discount rate into line with short-term money rates.
The principal factor behind the decline in interest rates has
been a moderate easing of Canada's monetary policy which for internal
stabilization reasons had been extremely restrictive.

Owing to an

unexpectedly strong trade performance as well as a reduction in the
traditional short-term capital outflow from Canada because of the
decline in U.S. and Euro-dollar short-term interest rates relative
to Canadian rates, Canada's external reserves have risen by about
$850 million since the start of this year.

Until recently, the authorities

have not fully offset the expansionary effect of the increase in foreign
exchange reserves.

On May 12, however, the Bank of Canada announced that

effective July 1, 1970, the secondary reserve requirement of the chartered
banks would be increased from 8 to 9 per cent of their deposit liabilities,
thereby freezing an estimated C$250 million of liquid assets in the banks'
portfolios.

IV - 24

The easing of conditions in financial markets would probably
not have occurred on the basis of domestic economic developments.

Economic

activity has not slowed nearly to the same extent as in the United States.
The Canadian authorities are not attempting to offset completely the
expansionary liquidity effects of the increase in official foreign
exchange reserves because a widening of the interest spread above U.S.
rates would lead to further reserve increases.

Unwillingness to accumulate

larger reserves can be traced, in part, to the understandings between
Canada and the United States on Canadian reserve policy.
Canadian interest rate policy in the months ahead will remain
strongly influenced by U.S. interest rate developments.

Domestic demand

conditions, however, continue to call for fairly tight credit conditions.

I -C-1

5/19/70

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
BILLIONS OF DOLLARS

U.S BANKS' FOREIGN CLAIMS

U.S. BALANCE OF PAYMENTS
SEASONALLY ADJUSTED

OFFICIAL RESERVE
TRANSACTION BASIS

0Q 30

1970 DATA

1966

ADJUSTED
OVER-ALL
BALANCE
Qa13
INCLUDES
SDRSSASIS

LIQUIDITY
a 1
1968

1970

SHORT-TERM INTEREST RATES IOTHERCOUNTRIES)

PERCENT

EURO-DOLLAR

APR 8 34

196Il899iI97
1968

1969

1970

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 26, 1970 : Greenbook

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