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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee November 12, By the Staff Board of Governors of the Federal Reserve System 1971 SUPPLEMENTAL NOTES The Domestic Economy Retail sales. Seasonally adjusted retail sales for August and September--and the third quarter--have been revised upward, mainly because of larger increases now reported for the automotive group. August sales are now indicated to be up 2.9 percent from July and September sales are estimated to be up 1.4 percent from August. For the third quarter, the increase is now shown to be 2.6 percent instead of 2.1 percent. The advance monthly indication for October is for a rise of 0.3 percent from September for total sales with nondurable goods up 1.0 percent. Sales of durable goods show a small decline, but this apparently reflects seasonal adjustment problems in the automotive group. Home sales. Seasonally adjusted sales of new homes by specu- lative builders declined further in September. However, the annual rate of 597,000 was a tenth above the rising pace a year earlier and the third quarter average matched the record reached in the first quarter of the year. The median price of new homes sold rose to $25,800, more than $3,000 above a year earlier, reflecting, in part, the greatly improved demand for upgraded, non-subsidized homes this year. While stocks of new homes available for sale increased somewhat further, they were still not especially high in relation to sales and--unlike last year--at a median price only moderately above that for homes sold. - 2 - The number of existing homes sold in September also was well above a year earlier, 16 percent, according to the National Association of Real Estate Boards. At $24,830, the median price of such homes showed the same year-to-year rise--8 percent--as in August. NEW SINGLE FAMILY HOMES SOLD AND FOR SALE Homes sold 1/ Homes 2/ for sale- (Thousands of units) Median price of: Homes sold Homes for sale (Thousands of dollars) 1969 448 228 25.6 27.0 1970 485 227 23.4 26.2 IIQ 457 IIIQ 518 IVQ 271 219 215 227 24.4 23.0 22.6 27.0 27.1 26.2 1971 IQ 661 26.1 629 660 220 247 268 24.3 IIQ (r) IIIQ (p) 25.6 25.2 26.4 630 725 658 597 247 250 259 268 26.1 26.4 26.7 26.4 26.1 26.1 1971 June July Aug. Sept. 1/ 2/ (r) (r) (r) (p) SAAR. SA, end of period. 25.1 25.1 25.8 -3- The Domestic Financial Situation Mortgage market. In the primary market for conventional new-home mortgages, average interest rates charged on new commitments declined slightly in October, according to the FHA series, reflecting mixed regional changes. spring. The rate decline was the first since last Discounts on FHA-insured loans in the secondary market con- tinued to edge down in October for the third consecutive months, reaching 6.1 points, the lowest level in 5 months. Although there was some additional improvement in average gross yield spreads of home mortgages over new issues of high grade corporate bonds, the margin continued to offer no strong investment inducement for diversified lenders, after account is taken of higher servicing costs on mortgages. until November 16. Confidential -4AVERAGE RATES AND YIEIDS ON NEW-HOME MORTGAGES Primary market: Conventional loans Yield spread Level (basis points) (per cent) Secondary market: FHA-insured loans Yield spread Level (basis Discount points) (points) (per cent) 1970 Low High 8.30 (Dec.) 8.60 (July, Aug.) -56 (June) 50 (Dec.) 6.40 (Dec.) 9.29 (Feb.) -36 7.75 7.89 1 (May) 99 (Feb.) 3.1 (Nov.) 6.0 (Feb.) 1971 May June July Aug. Sept. Oct. NOTE: 7.65 7.70 7.80 -20 -16 7.97 -36 -1 1 6.1 7.2 7.8 7.85 20 7.92 27 7.4 7.85 41 7.84 40 6.8 7.80 51 7.75 46 6.1 mortgages (exFHA series; interest rates on conventional first cluding additional initial fees and charges) are rounded to the nearest 5 basis points. On FHA loans carrying the 7 percent ceiling rate in effect since mid-February 1971, a change of 1.0 points in discount is associated with a change of 12 to 14 basis points in yield. Gross yield spread is average mortgage return, before deducting servicing costs, minus average yield on new issues of high-grade corporate bonds with 5-year call protection. Confidential until November 16. Government securities market. The Treasury auctioned $2.75 billion of 15-month 4-7/8 percent notes on Tuesday, November 9, as noted in the Greenbook. The average price set in the auction was around 99.96, which resulted in a yield of 4.91 percent. With no tax and loan account privilege allowed in the auction, commercial banks were not principal underwriters in this financing. As a result, Government security dealers received very large initial awards of nearly $1.2 billion. INTEREST RATES Highs 1971 Aug. 13 Lows Oct. 18 Nov. 11 Short-Term Rates 5.59(9/15) 3.29 (3/10) 5.59 (8/11) 5.29(10/13) 4.93 7.89 5.58 4.45 5.00 6.60 4.68(10/15) 5,50 5.12 4.18 4.75 5.93 4.33 4.62 5.25 5.34 4.75 4.88 4.60 5.12(e) 5.62 4.80(10/15 4.39 4.88(e) 4.88 4.43 5.38 5.50 5.00 5.00 ,6.01(7/28) 3.45 <3/11) 5.85 4.74 4.48 6.25(8/11) 4.38 (3/3) 6.25 3.60(8/12) 2.15 (3/24) 3.60 5.62 5.12 2.70(10/15) 2.70 Treasury coupon issues 5-years 20-years 7.03(8/10) 4.74 (3/22) 6.56(6/15) 5.69 (3/23) 5.92 Corporate Seasoned Aaa Baa 7.71(8/13) 8.93(1/5) 7.05 (2/16) 7.71 8.33 (2/25) 8.87 8.48 7.36 7.24 8.37 8.23(5/20) 6.76 (1/29) 7.97 7.22(10/15) 7.12 Municipal Bond Buyer Index Moody's Aaa 6.23(6/24) 5.90(6/30) 5.00 (3/18) 6.03 4.65 (10/21)5.80 4.99(10/15) 5.19 Mortgage--implicit yield in FNMA auction 1/ 3.07(7/26) 7.32 (4/12) -- 7.83 Federal funds (wkly. avg.) 3-month Treasury bills (bid) Bankers' acceptances Euro-dollars Federal agencies Finance paper 5.53(7/19) 3.22 3.88 10.00(8/17) 4.94 5.70(7/30) 3.27 5.62(8/16) 3.62 5.62(8/23) (3/11) (3/10) (3/17) (2/24) (3/15) CD's (prime NYC) Most often quoted new Secondary market 5.62 5.75(8/11) 3.62 (3/24) 5.75 6.05(8/18) 3.80 (3/17) 5.88(8/11) 6-month Treasury bills (bid) 5.84(7/24) Bankers' acceptances 5.75(8/23) Commercial paper (4-6 m o.)5.88(8/18) Federal agencies 6.02(7/30) CD's (prime NYC) Most often quoted new 6.00(8/11) Secondary market 6.40(8/18) 1-year Treasury bills (bid) CD's (prime NYC) Most often quoted new Prime municipals 5.15 3.35 (3/11) 5.51 4.00 (3/10) 5.75(e) 4.00 (3/29) 5.88 3.53 (3/10) 5.63 4.00 (3/24) 6.00 3.70 (3/3) 6.25(8/11) Intermediate and Long-Term New Issue Aaa 1/ 6.78 6.32 5.94 5.90 5.-8 4.65(10/15) 4.90 *7.77(11/0 Yield on 3-month forward commitment after allowance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year e--estimated. * 4-month commitment. loan amortized over 15 years. International Developments The Swedish Riksbank lowered its discount rate on November 11 from 5-1/2 to 5 percent. It was the fourth half-point cut this year, the last cut having been made on September 10. The Riksbank action was taken in part because of interest rate declines elsewhere, but mainly the move was intended as an expansionary measure. activity in Sweden has been lagging since last spring. Economic In addition to easing monetary policy, the government has introduced several stimulative fiscal measures this year. * * * * * CORRECTIONS: Page IV-10. Insert at the top of the page the following paragraph: "Elsewhere, stability of short-term rates has been the rule in the second half of 1971. In Belgium, Canada, Germany, the Netherlands, France, and Italy, the net change in short-term yields between the beginning of July and November was slight, and with only minor exceptions there have been no marked swings during this period." Page IV-11. At the end of the first full paragraph, relating to discount rate reductions, change "European" to "OECD", to include Canada. Page IV-12. In the first paragraph on Germany, the reserve requirement reduction on domestic liabilities should read "10 per cent." SUPPLEMENTAL APPENDIX A DEMAND DEPOSIT OWNERSHIP: THIRD QUARTER 1971* Preliminary data obtained from the September Survey of Demand Deposit Ownership suggest that the slowdown in the growth of the money stock over the third quarter was broadly based, as changes in all ownership categories except foreign were weaker than in the comparable period of 1970. 1/ As may be seen in the last four columns of Table 1, this pattern is generally the same at both weekly reporting banks and nonweekly reporting banks. TABLE 1 CHANGES IN THE OWNERSHIP OF GROSS IPC DEMAND DEPOSITS AT ALL COMMERCIAL, WEEKLY REPORTING, AND NON-WEEKLY REPORTING BANKS (3rd Quarter of 1970 and 1971, in $ billions, not seasonally adjusted) All 1970 Non-Weekly Weekly commercial banks reporting banks 1971 1970 1971 reporting banks 1970 1971 -- Financial business -- -.2 -.1 -.2 .1 Non-Finance business 2.7 1.8 .9 .1 1.8 1.7 Consumer 2.4 1.5 .8 .2 1.6 1.3 -.2 -.4 .2 -.5 Foreign .2 -- All other 1/ .4 -1.0 .2 Total gross IPC 3.7 1.6 -.3 2.1 5.3 demand deposits 1/ Nonprofit institutions, and trust departments of banks maintaining 2.3 balances with their own bank. * Prepared by Frederick M. Struble, Economist, Banking Section. 1/ The estimated changes for the third quarter of last year reflect revisions to the estimates of balances outstanding in the various owner categories in June 1970. The estimated levels for nonfinancial businesses and consumers were lowered approximately $500 million and $900 million, respectively, while the estimates for financial businesses and the foreign category were raised $400 million and $100 million, respectively by these revisions. The level for the all other category remained essentially unchanged. These alterations in the June levels had the effect of increasing the size of the 3rd quarter 1970 gains in nonfinancial businesses and consumers and lowering the estimated changes in financial businesses and foreign categories. The revised estimates of outstandings (in $ billions) for June, 1970 are: Financial Business All Commercial Banks Weekly Reporting Banks 17.1 13.5 Nonfinancial Business Consumer Foreign All Other 85.3 52.9 49.0 20.3 1.6 1.5 9.6 5.3 A- 2 The monthly changes in demand deposit ownership at Weekly Reporting banks over the third quarter (Table 2) also suggest that all owner categories were responsible for the progressive weakening in monetary growth over the quarter. Data for August indicate, however, that the change in nonfinancial business deposits was primarily responsible for the slowdown in that month while the September cutback appears to have been more evenly distributed. TABLE 2 MONTHLY CHANGES IN DEMAND DEPOSIT OWNERSHIP AT WEEKLY REPORTING BANKS (Billions of dollars, not seasonally adjusted) CHANGE August to September June to July July to August Financial business 71 70 .1 .0 -. 8 -. 9 Nonfinancial business 71 70 .5 .0 -1.2 -- .4 .3 -. 5 -- .3 .6 -- -- .5 .7 .8 1.0 Consumer 71 70 Foreign 71 70 -- .2 All other 71 70 Total IPC deposits 71 70 -. 6 .0 -. 4 -. 5 .5 .6 .5 .3 -3.0 -1.5 2.2 2.9
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