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Content last modified 6/05/2009.
CONFIDENTIAL (FR)
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
By the Staff
Board of Governors
of the Federal Reserve System
November 10, 1971
TABLE OF CONTENTS
Section
SUMMARY AND OUTLOOK
I
Nonfinancial ..
Financial
.
....
.
.
.
.
Balance of payments
.
.
. . . . . . . .
. .
. . . .
.
.
.
. . . . .
.
.
.
.. . .
.
. . .
.
. .
.
.
- 1
. .
- 4
. ..
.
- 7
THE ECONOMIC PICTURE IN DETAIL
Domestic Nonfinancial Scene
Gross national product
Industrial production
Unit autosales
. . ...
Unit auto sales
. . .
Consumer credit ..
.
Census consumer buying
.
. .. .
. . .
. . . .
. . . .
. . . .
survey
II
. .
. . .
.
.
. . .
.
.
.
Manufacturers' orders and shipments
.
.
..
.
. .
. . .
. .
.
. .
. . . .
. .
. . . . . ..
. .
.
. . . . . . .
.
.
.
...
.
. . . . . . ..
Inventories . . . . . . . . . . . . . . .
. . . . . . . . . . .
Cyclical indicators
.
Construction and real estate ......
Planned plant and equipment spending . . .
Labor market
. ..
. . . .
. . .. .
Pay board policy .....
. .
. . . . .
Wage developments .....
. . .
............
Industrial relations ...........
Productivity and labor costs
...
. .
Wholesale prices ................
Consumer prices . . . . . . . . . . . . .
GNP price indexes . . . . . . . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
...
. .
. .
..
. . .
.
.
...
.
.
.
.
.
.......
. . .
..
. .
.
....
. .
. . . . . . .
Domestic Financial Situation
Monetary aggregates
. . . . . . . . . . .
Bank credit . . . . . . . . . . .
. . .
Nonbank depositary institutions ............
Mortgage market . . . . . . . .........
Corporate and municipal securities markets
Government securities market . . . . . . .
Other short-term credit markets . . . . .
Federal finance . . . . . . . . . . .
.
- 1
- 5
- 8
- 8
- 9
-11
-13
-14
-17
-20
22
-24
25
. -2
-28
-30
-32
-35
III
. . . . . . .
.
. . .
.
...
. . . . .
. . . ..
. . .
.
. .
.
.
.
.
.
.
- 1
- 2
- 4
- 8
-10
-15
-18
-22
International Developments
. . .
U.S. balance of payments . .
Euro-dollar markets
. . . . . . . .
Foreign exchange markets
.
. . .
.
U.S. Foreign trade . * . . . . . .
.
Interest rate developments and monetary
in major industrial countries abroad
. . ...
. . . .
.
.
.
. ...
,
policy
, .
.,
Appendix ADemand Deposit Ownership: Third Quarter 1971
Appendix BThe Floating Prime Rate
......
..
S
*
*
4
5
*
*
*
o .o
S
*
-2
-3
-6
.
.
.
-9
. , . . .
.
. .
Appendix CA Survey of the Impact of Floating Exchange Rates
on International Trade and Finance
. . . . .
- 1
*
*..
. ,
A -1
..
B -1
.
C -1
I-
1
Nonfinancial
Overall economic activity is expected to be more expansive
this quarter than in the third, with the staff projecting a rise in
real GNP at an annual rate of close to 6 per cent--double the third
quarter rate.
The pace of consumer spending has stepped up further.
Auto sales were in record volume in October, even though sales of
imported cars were down.
Retail sales of nondurable goods are estimated,
on the basis of weekly data, to have increased appreciably in October.
Also contributing to the projection of accelerated growth this quarter
is the expectation that inventory investment will increase in contrast
to its decline last quarter when steel stocks were being run down rapidly.
Residential construction activity, however, will not provide as much of
a stimulus as earlier this year when starts were rising rapidly.
Industrial production is estimated to have changed little in
October, as coal output was depressed by the strike.
The underlying
trend appears to be up, however, with further increases in output of
consumer goods and business equipment.
New orders for durable goods declined
in September, following a rise in August; orders for capital equipment
have changed little on average since early this year, and unfilled
orders have tended to drift down.
The labor market improved somewhat in October as the unemployment rate declined by 0.2 per cent to 5.8 per cent, and employment as
I - 2
measured by the household survey rose appreciably.
However, nonfarm
payroll employment, adjusted to include those on strike, showed a
much smaller rise.
Average hourly earnings in October continued to
reflect the wage freeze, with a relatively small increase for the
private nonfarm economy and no change in manufacturing and trade since
August.
Price changes have also reflected the mid-August freeze.
Wholesale prices of industrial commodities, seasonally adjusted, declined further from mid-September to mid-October, at an annual rate of
3.3 per cent--the largest decline since 1960.
The rise in the consumer
price index slowed appreciably from August to September.
The Pay Board on November 8 announced basic Phase II wage
policies, approved by a 10-5 vote.
The test states that "permissible
annual increases would be those normally considered supportable by
productivity improvement and cost of living trends."
Specifically, for
new contracts, the policies provide initially for a general pay standard-presumably including fringe benefits--allowing an annyal increase of up
to 5.5 per cent; the acceptance of existing contracts, including deferred pay increases, but subject to review under certain conditions;
and no allowance of retroactive increases that had been scheduled during
the freeze interval unless approved by the Board in specific cases.
Outlook.
The staff is currently projecting GNP increases of
$27.5 billion a quarter in the first half of next year, with real growth
I - 3
at an average annual rate of about 6.5 per cent, somewhat more rapid
than in the current quarter.
All major demand categories are projected to increase, but
the principal expansive strength in the private sector is expected from
consumer spending, business fixed investment, and inventory investment.
Residential construction activity is counted on for only moderate
further expansion, with the number of starts remaining near the record
rate now projected for the fourth quarter.
The expected vigor of consumer spending reflects large
prospective increases in personal disposable income arising from employment gains, increased Federal personal tax exemptions, the increased Federal outlays for the volunteer army, and a prospective increase in social security benefits.
The expected rise in business
fixed investment is moderate and is about in line with the recent
McGraw-Hill Survey, which indicates an increase of 7 per cent in 1972.
Inventory investment is expected to rise substantially as businessmen
react to rising sales volume.
While real output is projected to increase substantially, the
unemployment rate declines only moderately to about 5.5 per cent by
mid-1972 in view of prospective gains in output per man hour and in
the civilian labor force.
Phase II price and wage policies are assumed
I-4
to be relatively effective, and the rise in the private GNP fixed
weight price index is projected to moderate to an annual rate of about
3 per cent in the second quarter of 1972.
Financial
Interest rates have continued to decline since the last
Committee meeting, with short-term rates down one-fourth to three-eights
of a percentage point, the prime rate lowered in two steps by one-half
point, and the long-term rates off 15 to 25 basis points.
Altogether,
these declines bring the cumulative change in yields since the President's
August announcement to about one full percentage point in long-term
markets and three-fourths to one and one-half points in short-term
markets.
An important factor influencing recent rate developments has
been the gradual easing of the Federal funds rate and expectations that
further ease may be in prospect.
In addition, short-term rates have
been influenced by the pattern of Treasury financings.
Bills have
been in relatively short market supply as a result of the Treasury
cash build-up associated with the late summer sale of special certificates to official foreign accounts, heavy foreign official purchases
directly in the market, and the Treasury's emphasis on debt extension
in the current and recent financings.
As market yields, and also stock prices, declined, inflows of
consumer-type deposits accelerated at commercial banks, and remained
large at the thrift institutions, despite the step-up in consumer
purchases of automobiles.
With such deposit inflows large, and
I
business loans weak,
- 5
commercial banks were able not only to finance
a high level of net mortgage acquisitions and a large increase in
consumer loans--the latter associated with the record level of
automobile sales--but also to purchase sizable amounts of tax-exempt
bonds.
Outlook.
Business loan demands are now expected to be quite
modest over the period immediately ahead, reflecting small inventory
accumulation by business firms, possible repayments of loans made
earlier for exchange rate speculation, and the continued relatively
high level of capital market financing.
The latter apparently results
from a sustained high level of utility financing, the declining, but
still large, desire to restructure balance sheets by large borrowers,
and the appearance of increased demands from medium sized corporations
taking advantage of lower rates.
Most recently, the volume of cor-
porate bond financing, uncertanties regarding implementation of phase
II, and agressive dealer pricing, has caused syndicate positions to
mount in both the corporate and tax-exempt bond market.
Dealer positions in Treasury coupon issues have also risen
substantially in the wake of the recent refunding.
And a fairly sizable
addition to the supply of bills is in prospect as the Treasury is
expected to raise most of the about $5 billion of cash needed in late
November and December in this market.
Thus, the technical position
of the securities markets suggests the possibility of some near-term,
I - 6
temporary back-up in rates.
However, today's reduction in the discount
rate to 4-3/4 per cent should temper, if not avert, any such adjustment.
With market interest rate changing little on balance,
consumer-type time deposit inflows at thrift institutions and banks
are likely to remain large.
This will help sustain mortgage credit
availability over the balance of the year.
Indeed, the continued
favorable position of private lenders has led the housing agencies to
cut back somewhat on their own borrowing plans.
I-7
Balance of payments
Judgments about effects thus far of the import surcharge and
the changes in exchange rates since August 15 are severely hampered
by the distortion of flows of imports and exports caused by the West
Coast dock strike and preparations for the East Coast stoppage which
began on October 1.
In September, though West Coast operations had
not yet resumed, imports rose considerably and exports rose very
sharply.
This was the result of the acceleration of shipments and
arrivals at East Coast and Gulf ports ahead of the October 1 strike
date.
The trade balance for the month of September was a surplus; for
the third quarter as a whole there was a deficit at an annual rate of
about $2 billion, compared with about $4 billion in the second quarter.
The third-quarter balance on goods and services ("net
exports" in the GNP accounts) is now estimated as a very slight
negative figure, about the same as for the second quarter.
Offsetting
the lessening of the trade deficit--which clearly reflected a
special situation--investment income receipts are estimated to
have fallen off from what had been an abnormally high level in the
second quarter.
Some improvement in net exports of goods and services is
looked for next year as a result of the alterations in the international exchange rate structure that have already occurred or that
I-8
might take the place of the import surcharge.
However, without
further rate alternations in the direction of appreciation of
foreign currencies against the dollar, and given the expected changes
in economic activity here and abroad, we project the merchandise
trade balance as a continuing, though reduced, excess of imports
over exports.
For the immediate future, the import surcharge in particular
is undoubtedly tending to hold imports down, not only because of the
addition to costs but also because of uncertainties as to its
duration.
Nevertheless, because the acceleration of exports before
the October 1 strike date borrowed heavily from the fourth quarter,
statistics for the balance on goods and services are not likely to
show any improvement in the present quarter.
Foreign countries have added relatively little to their
official reserve holdings in recent weeks--since about the middle of
October.
This result, at a time when the U. S. balance on current
account and long-term capital remains heavily in deficit, can be
taken as an indication that some partial unwinding of hedgers' and
speculators' positions has been occurring.
various forms.
This could be taking
There may be some shrinking of lead time on dollar
payments to foreigners for U. S. imports, and other changes in leads
and lags.
Corporations could be pulling back funds from subsidiaries
I - 9
abroad.
And now that 3-month Eurodollar interest rates have fallen
below 6-1/2 per cent--and this week below 6 per cent--some withdrawals of U. S. depositors' funds from the Eurodollar market may be
occurring.
The easing of Eurodollar rates may itself be explained
by reduced demand for credit to finance hedgers' and speculators'
positions--as well as by the interest rate
declines that have been
occurring in U. S. and some European national money markets.
The unwinding of speculative positions may speed up greatly
if and when the business world becomes convinced that exchange rate
adjustments have been about completed--for a period of months or a
year ahead, at least.
When that happens we would expect to see a
partial reversal of the currency appreciations of recent months;
foreign central banks would then have to decide how far to let the
reversal go before resisting it by selling dollars out of their
reserves.
November 10,
I --
1971
T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
July
Civilian labor force (mil.)
Unemployment rate (7)
5
Insured unempl. rate (%)-
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Industrial production (1967=100)
Final products, total
Consumer goods
Business equipment
Materials
5/
1971
Aug.
Sept.
83.8
5.8
4.0
84.3
84.6
6.1
4.2
6.0
4.5
70.5
18.5
52.0
70.5
18.5
52.1
70.9
18.6
52.3
Oct.
Per Cent Change* From
Year
3 mos.
1 mo.
ago
ago
ago
1.84
I.14/
5.57
84.8
5.8
n.a.
4.1'
52.3
0.0
0.1
0.0
0.5
0.5
0.5
1.2
-0.2
1.7
0.5
0.1
0.2
0.6
1.3
-1.8
0.4
0.1
1.9
-4.9
-1.1
1.4
5.5
-3.7
-4.9
70.9
18.6
106.1
104.7
115.8
96.4
105.5
104.8
104.8
116.0
96.2
102.4
105.3
104.9
116.2
96.8
103.7
n.a.
n.a.
n.a.
n.a.
n.a.
74.3
72.7
72.5
n.a.
Wholesale prices (1967=100)-- 5/
Industrial commodities (FR)Sensitive materials (FR)
Farm products, foods & feeds
114.6
114.3
114.9
114.9
116.4
114.6
114.5
114.8
116.3
113.0
114.4
n.a.
115.4
113.0
-0.1
-0.1
-0.8
0.0
-0.2
1.0
0.3
-1.7
3.1
4.2
3.3
2.4
5/
121.8
122.4
119.1
117.8
129.9
n.a.
n.a.
117.0
128.8
122.2
120.0
117.3
129.4
0.2
-0.8
0.4
0.4
0.7
-0.1
0.6
1.3
4.2
2.9
3.9
5.2
Hourly earnings, pvt. nonfarm ($)
Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)
Net spend, weekly earnings, mfg.
3.43
3.58
143.09
3.46
3.59
142.40
3.46
3.60
142.22
3.47
3.59
142.81
0.3
-0.3
0.4
1.2
0.3
-0.2
6.1
6.5
7.3
(3 dependents 1967 $) 1/ 5/
101.27
100.68
101.79
n.a.
1.1
-0.6
2.0
859.2
867.6
870.8
n.a.
0.4
0.1
6.9
Capacity util. rate, mfg.-
1/
Consumer prices (1967=100)1/
Food
Commodities except food
Services
Personal income ($ bil.) 2/
Retail sales, total ($
115.1
115.0
119.8
5/
7/
bil.)-
Autos (million units) 2/
GAAF ($ bil.) 2/ 7/
12 leaders, composite (1967=100)-
/
Selected leading indicators:
2/ 5/
Housing starts, pvt. (thous.)- Factory workweek (hours)
5/
Unempl. claims, initial (thous.)
New orders, dur. goods, ($ bil.)Capital equipment
Common stock prices (41-43-10)
n.a.
n.a.
77.04/
33.7
8.4
n.a.
34.6
8.4
n.a.
n.a.
n.a.
9.5
n.a.
10.6
n.a.
11.7
26.6
73.6
127.0
126.9
126.5
n.a.
-0.3
1.1
10.5
2,229
40.0
275
32.0
7.5
99.00
2,235
39.8
333
31.8
8.0
97.24
1,958
39.6
327
30.8
7.7
99.40
n.a.
39.7
n.a.
n.a.
n.a.
97.29
-12.4
0.3
2.0-3.1
-3.9
-2.1
-2.1
-6.40.3
-5.7
-1.7
Not seasonall y adjusted. 2/ Annual rates.
Based on unrounded data. I/
Gen'l. merchandise, apparel, and furniture and appliance s. 4/ Actual fi gures.
Per cent calculated to September, 1971. 6/ Sign reverssed.
7/ To be re vised.
6/
29.8
0.86/
4.5-6
8.5
13.6
15.3
I --
T -2
SELECTED DOMESTIC FINANCIAL DATA
Averages
Week ended
QI
QIII
Sept.
Oct.
Nov. 3
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
Bond buyer municipals
Aaa corporate-new issues
20-year Treasury bonds
FHA mortgages, 30-year
3.86
3.76
3.78
5.50
4.48
4.57
4.56
4.26
4.43
6.72
4.74
5.05
5.47
5.01
5.29
7.77
5.52
5.74
5.55
4.69
5.11
8.34
5.44
5.75
5.20
4.46
4.69
6.58
5.30
5.54
5.16
4.27
4.24
5.99
5.03
5.19
5.25
7.33
6.00
5.74
7.83
6.24
7.67
5.75
7.68
6.24
7.91
5.37
7.44
6.05
7.84
5.06
7.29
5.92
5.11
7.11
5.84
QII
n.a.
Oct. p
QIII
Sept.
10.4
10.8
9.8
9.1
3.0
11.3
12.7
9.8
-14.0
9.9
14.7
16.5
15.8
-15.0
29.6
-12.2
2.1
4.8
-1.5
15.6
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 1/
Treasury securities
Other securities
Total loans 1/
Business 1/
11.0
11.0
17.0
10.9
8.9
27.3
23.3
12.2
19.8
27.9
6.3
2.5
6.6
5.3
9.6
6.5
11.3
13.5
17.3
9.1
9.8
17.0
6.6
4.6
8.6
8.9
-3.7
15.8
13.4
n.a.
9.4
9.7
-17.5
-29.7
24.2
12.3
3.0
17.2
12.4
8.1
QIII
Set.
Oct.
834
108
n.a.
82
Change in commercial paper
($ millions)
Total (SA)
Bank-related (NSA)
-2,581
-657
1969
H-2
-874
41
H-2
1970
QIII
Oct.
1971
OIII
Oct.
New security issues
(NSA, $ millions)
Total corp. issues
Public offerings
State and local government
bond offerings
Fed. sponsored agency debt
(change)
Fed. govt. debt (change)
13,172
10,770
20,499
18,113
8,560
7,596
2,777
3,473
10,605
9,011
3,010 e
2,510 e
5,446
10,327
4,465
1,924
4,465
1,700 e
5,586
9,811
3,057
16,278
1,593
7,387
416
2,561
1,711
9,087
706 e
1,600 e
e - Estimated.
n.a. - Not available.
SAAR - Seasonally adjusted annual rate.
1/ Adjusted for loans sold to bank affiliates.
p - Preliminary.
NSA - Not seasonally adjusted.
11/10/71
I-T - 3
U.S. Balance of Payments
In millions of dollars; seasonally adjusted
9 7 1 £
i1
I.
II
1,147
269
11,030
-10,761
878
-22
-1,040
10,716
-11,756
1,018
Remittances and pensions
Govt. grants & capital, net
-342
-1,026
-357
-1,094
U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other
-2,230
-1,370
-353
-72
-53
-225
-157
-1,967
-1,315
-396
38
-317
66
-43
-2,241
92
78
317
164
-2.693
-3,042
78
271
-199
-110
-24
1
264
-59
-59
-85
-148
174
-233
4.856
5,067
-211
Goods and services, net 1/
Trade balance 2/
Exports 21
Imports 2/
Service balance
Nonbank-reported claims -- liquid
S "
"
other
Foreign capital (excl. reserve trans.)
Direct investment in
U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:
Commercial banks abroad
Other private foreign
Intl. & regional institutions
Nonliquid liab. to banks and others
F reign official reserve claims
Liquid
Other
U.S. monetary reserves (increase, -)
Gold stock
Special drawing rights 3/
IMF gold tranche
Convertible currencies
Errors and omissions
1
1SEPT.*
III
AUG.*
-520
11,505
-12,025
-335
3,630
-3,965
190
4,445
-4,255
-174
-281
-1,308
-191
12
-11
-231
-405
-1,206
e/-81
t
459
e/148
230
79
155
-2. 93
-2,091
-381
179
-1.099
-1,114
-92
107
-609
-367
-223
-19
5.047
5,216
-169
10-914
11,095
-181
7,616
7,719
-103
1,443
1,454
-11
862
109
125
255
373
838
456
196
252
-66
1,373
300
150
851
72
1,155
244
-3
-1,026
-2,335
50
859
2
BALANCES (deficit -) 3/
-5,718
Official settlements, S.A.
-5,885
-12,287
S"
-1,440
, N.S.A.
-5,440
-6,444
-12,680 -8,771
Net Liquidity, S.A.
-2,728
-5,930
e/-9,508
S
" , N.S.A.
e/-968
-2,604
-6,572 e/-l0,162 -7,200
Adjusted liquidity, S.A. 4/
-3,025
-5,826
-9,994
"
. N.S.A.
-831
-2,927
-6,548
-10.575 -7,672
e/ Estimated.
*
Monthly, only exports and imports are seasonally adjusted.
1/
Equals "net exports" in the GNP, except for latest revisions.
2/ Balance of payments basis which differs a little from Census basis.
3/ Excludes allocation of $717 million of SDRs on 1/1/71.
4/ Measured by changes in U.S. monetary reserves, all liabilities to foreign official
to commercial banks and other foreigners.
reserve agencies and liquid liabilities
,
.
II - 1
THE ECONOMIC PICTURE IN DETAIL
Domestic Nonfinancial Scene
Gross national product.
Commerce Department figures for the
third quarter show a GNP increase of $15.9 billion -an annual rate of gain of only 2.9 per cent.
in real terms
But given proposed fiscal
actions, and accepting our previous assumptions in regard to the timing
and relative effectiveness of wage and price controls, we continue to
expect a step-up in real growth during this and the next several
quarters averaging in excess of 6 per cent.
be reflected in
a significant recovery in
improvement in
the unemployment situation.
This rate of growth should
industrial output and an
We now expect GNP to increase by $22 billion in the current
quarter --
some $6 billion more than in the third quarter, although
about $3-1/2 billion less than we had projected last month.
The down-
ward adjustment reflects not quite as strong an increase in consumer
nondurable goods outlays and a less favorable outlook for net exports.
In the consumer sector, auto sales have been running stronger than we
had anticipated -rate, for October.
totaling 10.6 million domestic-type units, annual
We expect such auto sales to dip somewhat in November
and December, but to average about 9-3/4 million units, annual rate, for
this quarter.
Sales of foreign models are likely to drop somewhat
further under the pressure of relatively higher price tags as well as
supply shortages caused by the dock strikes.
II - 2
Retail sales other than autos, particularly nondurables, had
been somewhat less buoyant in September, but appear to have improved
during October on the basis of the weekly figures.
The expected increase
in nondurable sales for this quarter ($5 billion), while below our
earlier projection, is substantially larger than the weak third quarter
rise, with fairly good gains anticipated at general merchandise and department stores.
The other major change in our fourth quarter figures
is a $1-1/2 billion downward adjustment
in the change in net exports
as a result of the adverse effects of the coal and dock strikes.
Our projections of other sectors are about as presented last
month.
Contributing to the expected gain in GNP is the continued in-
crease in residential construction expenditures, albeit at a more moderate
rate than in recent quarters.
In addition, the beginning of a step-up
in inventory accumulation should become evident, as the downward
influence of the runoff of excessive steel stocks last quarter comes
to an end and as businessmen begin to increase stocks in response to
improved consumer demand.
The slight upward adjustment in our projection
of business fixed investment expenditures represents a higher estimate
of business purchases of trucks and cars, while the small downward
revision in State and local spending reflects mainly the surprisingly
low level of construction outlays reported recently by these jurisdictions.
We anticipate that the economy will continue to advance at
a brisk pace throughout the first half of next year although somewhat
less rapidly than had been projected last month.
We now project GNP
increases averaging $27-1/2 billion annual rate per quarter.
Growth in
II
- 3
GNP AND RELATED ITEMS, 1971
(Changes in seasonally adjusted totals at annual rates)
QIII
QIV
OBE
Proj. of
Prel.
10/13/71
Current
----- Billions of dollars-----
GNP
Final Sales
Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State & local purchases
Inventory change
15.9
25.5
22.0
20.0
23.7
20.1
11.2
2.0
2.7
.0
1.9
2.3
14.9
1.1
.0
1.0
3.7
3.0
12.9
.9
.5
- .5
3.6
2.7
-4.1
1.8
1.9
----Per Cent Per Year----
3/
Real GNP
2.9=
7.1
5.8
GNP deflator
3.32.5
2.
1/ Excluding the first $1.2 billion, annual rate, of voluntary army
pay increase, 2.1 per cent per year.
2/
Excluding the first $1.2 billion, annual rate, of voluntary army
pay increase, 2.0 per cent per year.
3/
At compound rates.
consumer income and purchases should be supported during both quarters
by a series of stimuli:
larger employment gains, increased Federal
payments to the military in furtherance of a volunteer army, lower withholding taxes, and appreciable tax refunds resulting from retroactive
tax concessions which we assume will be enacted shortly by Congress.
II - 4
The saving rate may rise to about 7.7 per cent during the first quarter,
reflecting in part the "windfall" nature of the tax refunds,
but the
rate is expected to dip to under 7-1/2 per cent in the second quarter.
Anticipated changes in
business fixed investment and in
residential
construction expenditures for the first half differ only a little
our estimates in
the last Greenbook.
from
The latest McGraw-Hill survey
figures for 1972 appear to be in line with the 7 per cent increase we
have projected for the first two quarters.
Residential construction
expected to advance moderately further, with housing starts
activity is
edging off only slightly from the 2.2 million rate expected this quarter.
We are holding to our previous estimate of a sizable gain in
inventory investment, in response to the brisk rise in final sales
and reflecting also a rebuilding of steel and auto stocks.
Some modest
improvement should also be evident for net exports early next year once
the adverse influences of the coal and dock strikes are removed.
The continuing strength in the economy should be reflected
in
sizable gains in
both employment and in
the civilian labor force,
and a modest reduction in the unemployment rate, to about 5-1/2 per cent
by mid-year.
We expect a relatively rapid rate of productivity gain, which
should help to keep cost increases in check, and thus operate to support
the Phase II program of limiting advances in wages and prices.
in prices,
as measured by the fixed weight GNP deflator is
The rise
now expected
to moderate to about a 3 per cent annual rate by the second quarter.
II - 5
GNP AND RELATED ITEMS, 1972
(Changes in seasonally adjusted totals at annual rates)
QII
QI
Proj. of
10/13/71
Current
Proj. of
10/13/71
Current
----------- Billions of dollars----------GNP
Final sales
Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State & local purchases
Inventory change
31.0
27.8
28.0
25.0
27.0
22.2
27.0
24.7
17.2
1.8
1.5
1.5
1.8
4.0
15.1
1.7
1.1
2.0
2.0
3.1
15.3
.4
2.5
1.5
- .5
3.0
16.9
.6
2.8
.5
.3
3.6
3.2
3.0
4.8
2.3
------------ Per Cent Per Year--------Real GNP
GNP deflator
1/ Excluding the
pay increase,
2/ Excluding the
pay increase,
6.6
7.1
6.3
7.9
2.5
3.1
4.0=
3.5-1
remaining $1.2 billion, annual rate, of voluntary army
3.1 per cent per year.
remaining $1.2 billion, annual rate, of voluntary army
3.6 per cent per year.
II
- 5a
CONFIDENTIAL - FR
November 10, 1971
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarterly figures at annual rates.)
1971
Proj.
1972
Proj.
1971
III
IV
I
1972
Projected
II
III
IV
1051.0
1047.5
814.1
813.6
1149.4
1139.6
887.2
885.2
1059.0
1057.4
823.0
823.5
1081.0
1077.5
836.8
837.8
1109.0
1102.5
856.7
855.7
1136.0
1127.2
877.5
876.0
1163.0
1152.7
897.4
894,9
1189.5
1176.0
917.2
914.2
Personal consumption expenditures
Durable goods
Nondurable goods
Services
665.7
102.8
280.1
282.8
724.9
115.8
305.8
303.3
672.1
104.7
281.7
285.7
685.0
108.2
286.8
290.0
700.1
111.5
293.5
295.1
717.0
114.5
302.0
300.5
733.0
117.3
309.7
306.0
749.5
119.9
317.9
311.7
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
151.4
40.1
107.8
3.5
3.0
170.1
44.1
116.2
9.8
9.7
152.9
41.7
109.7
1.6
0.8
156.3
42.6
110.2
3.5
3.0
162.1
44.3
111.3
6.5
6.3
167.8
44.9
114.1
8.8
8.8
172.2
44.0
117.9
10.3
10.3
178.2
43.1
121.6
13.5
13.5
Net exports of goods and services
Exports
Imports
0.6
65.9
65.4
2.0
72.0
70.0
-0.5
68.5
69.0
-1.0
62.7
63.7
1.0
69.1
68.1
1.5
71.2
69.7
2.5
72.8
70.3
Gov't. purchases of goods & services
Federal
Defense
Other
State & local
233.4
97.8
72.2
25.6
135.6
252.4
104.2
74.4
29.8
148.2
234.4
97.6
71.4
26.2
136.8
240.7
101.2
72.6
28.6
139.5
245.8
103.2
74.0
29.2
142.6
249.7
103.5
73.9
29.6
146.2
255.3
105.4
75.1
30.3
149.9
258.8
104.8
74.4
30.4
154.0
Gross national product in
constant (1958) dollars
GNP implicit deflator (1958 = 100)
741.6
141.7
784.5
146.5
743.6
142.4
754.5
143.3
766.3
144.7
778.9
145.8
790.2
147.2
802.6
148.2
Personal income 1/
Wage and salary disbursements
Disposable income 1/
Personal saving 1/
Saving rate (per cent) 1/
858.6
575.1
743.2
58.6
7.9
925.6
620.7
804.2
59.1
7.4
866.3
578.8
750.0
58.8
7.8
878.2
587.02/
759.52/
55.2
7.3'
915.0
899.0
601.72/ 613.32
780.3-2/" 795 9='
Z
58.
60.4
/
/
7.41
7 .7
935.5
627.3
812.9
595
59.5
7.3
953.0
640.3
827.8
57.6
57.6
7.0
86.4
81.7
102.3
96.5
86.9
82.8
200.7
222.4
-21.7
216.9
243.4
-26.5
201.7
224.9
-23.2
206.1
230.4
-24.3
1.9
-4.5
3.0
0.4
Total labor force (millions)
Armed forces
Civilian labor force
Unemployment rate (per cent)
86.9
2.8
84.1
5.9
88.3
2.5
85.8
5.5
87.0
2.8
84.2
6.0
Nonfarm payroll employment (millions)
Manufacturing
70.7
18.6
72.3
18.9
Industrial production (1967 = 100)
Capacity utilization, manufacturing
(per cent)
106.0
74.0
Housing starts, private (millions A.R.)
Sales new autos (millions, A.R.)
Domestic models
Foreign models
2.03
10.25
8.80
1.45
Gross National Product
Final purchases
Private
Excluding net exports
Corporate profits before tax 1/
Corp. cash flow, net of div. (domestic)1/
Federal government receipts and
expenditures (N.I.A. basis)
Receipts I/
Expenditures
/
Surplus or deficit (-)
High employment surplus or deficit (-)
NOTE:
90.0
86.9
92.5
89.3
100.0
94.5
105.0
98.6
111.5
103.5
210.2
237.9
-27.7
213.7
240.1
-26.4
219.3
246.7
-27.4
224.5
248.9
-24.4
-6.2
-3.5
-5.5
-2.9
87.5
2.7
84.8
5.8
87.8
2.6
85.2
5.7
88.1
2.5
85.6
5.6
88.4
2.5
85.9
5.5
88.8
2.5
86.3
5.3
70.7
18.5
71.1
18.6
71.6
18.7
72.0
18.9
72.5
19.0
73.0
19.1
112.3
75.3
105.4
73.2
106.5
73.3
108.7
74.0
111.2
74.9
113.5
75.7
116.0
76.6
2.10
10.88
9.58
1.30
2.14
10.29
8.76
1.53
2.20
11.00
9.75
1.25
2.18
10.80
9.40
1.40
2.15
10.80
9.50
1.30
2.10
10.85
9.10
1.25
2.00
11.05
9.80
1.25
Projection of related items such as employment and industrial production index are based on projection
of deflated GNP. Federal budget high employment surplus or deficit (N.I.A. basis) are staff estimates
and projections by method suggested by Okun and Teeters.
1/
Incorporates provisions of Revenue Act of 1971 as passed by House.
2/
Incorporates effect of acceleration of payment of estate and gift taxes.
- 5b
II
CONFIDENTIAL - FR
November 10, 1971
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1971
1971
Proj.
1972
Proj.
III
IV
1972
Pro j ected
III
I
II
IV
----------.----------- Billions Of Dollars---------------------Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government
76.9
0.7
76.2
62.2
65.2
-3.0
14.0
98.4
6.3
92.1
73.1
71.7
1.4
19.0
15.9
-4.1
20.0
15.8
15.8
0.0
4.2
22.0
1.9
20.1
13.8
14.3
-0.5
6.3
28.0
3.0
25.0
19.9
17.9
2.0
5.1
27.0
2.3
24.7
20.8
20.3
0.5
3.9
27.0
1.5
25.5
19.9
18.9
1.0
5.6
26.5
3.2
23.3
19.8
19.3
0.5
3.5
GNP in constant (1958) dollars
Final purchases
Private
21.6
20.8
21.1
42.9
37.9
34.0
5.2
8.4
5.8
10.9
9.5
7.2
11,8
9.3
9.1
12.6
10.9
10.2
11.3
10.1
9.8
12.4
9.8
9.3
----------------Gross National Product
Final purchases
Private
7.9
7.8
8.3
9.4
8.8
9.0
Personal consumption expenditures
Durable goods
Nondurable goods
Services
8.1
16.0
5.8
7.7
8.9
12.6
9.2
7.2
Gross private domestic investment
Residential construction
Business fixed investment
11.9
31.9
5.6
Gov't. purchases of goods & services
Federal
Defense
Other
State & local
6.4
0.6
-4.2
16.9
11.0
In Per Cent Per Year------------------6.31/
7.7
7.8
8.3
7.6
6.7
10.4
9.3
9.5
9.7
9.0
9.7
9.5
9.0
9.1
9.1
8.1
8.8
6.8
15.5
2.7
7.6
7.7
13.4
7.2
6.0
8.8
12.2
9.3
7.0
9.7
10.8
11.6
7.3
8.9
9.8
10.2
7.3
9.0
8.9
10.6
7.5
12.4
10.0
7.8
1.3
20.2
10.1
8.9
8.6
1.8
14.9
16.0
4.0
14.1
5.4
10.1
10.5
-8.0
13.3
13.9
-8.2
12.6
8.1
6.5
3.0
16.4
9.3
7.3
7.9
-2.2
38.5
6.8
10.8
14.8
6.7
36.6
7.9
8.5
7.9
7.7
8.4
8.9
6.3
1.2
-0.5
5.5
10.1
9.0
7.3
6.5
9.5
10.1
5.5
-2.3
-3.7
1.3
10.9
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
2/
Private GNP fixed weight price index
1.0
2.9
3.6
4.7
4.9
5.8
5.1
5.7
3.4
3.3
2.91/
4.6
3.9
3.31/
5.8
5.1
4.8
2.42/
6.3
5.0
6.0
4.04/
6.6
5.7
6.6
3.1
5.8
5.2
6.2
5
3.6 /
6.3
5.0
5.8
2.8
4.41/
2.0
3.6
3.1
2.9
2.8
Personal income
Wage and salary disbursements
Disposable income
6.8
6.2
8.1
7.8
7.9
8.2
5.2
4.5
4.6
5.5
5.7
5.1
9.5
10.0
11.0
7.1
7.7
8.0
9.0
9.1
8.5
7.5
8.3
7.3
14.6
18.4
2.3
14.3
11.1
32.4
20.0
24.8
4.8
8.4
8.1
9.4
7.3
7.2
8.7
9.8
8.0
13.0
6.7
3.7
10.5
11.0
9.5
3.6
0.1
-4.1
2.3
2.7
0.0
-2.2
2.3
2.2
2.8
2.2
2.2
4.3
2.8
2.1
2.8
2.1
-0.7
41.5
22.7
23.6
18.0
5.9
3.7
6.1
8.9
-10.5
-5.2
36.5
19.0
22.7
-1.0
4.2
11.0
27.8
45.3
-72.6
8.3
-4.5
-7.3
-14.4
48.0
9.2
-4.6
0.0
4.3
-28.6
8.3
-9.3
1.9
4.2
-15.4
8.8
-19.0
7.4
8.3
0.0
Corporate profits before tax
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, private
Sales new autos
Domestic models
Foreign models
1/At
compound rates.
2/ Using expenditures in 1967 as weights.
3/ Excluding the first $1.2 billion, annual rate, of voluntary army pay increase, 2.0 per cent per year.
4/ Excluding the remaining $1.2 billion, annual rate, of voluntary army pay increase, 3.6 per cent per year.
5/ Excluding Federal government general pay increase,
2.9 per cent per year.
II
Industrial production.
- 6
Industrial production is tentatively
estimated to have changed little in October as an apparent rise in
output of consumer goods and business equipment was offset by a sharp
decline in coal production because of a strike.
Auto assemblies in October were at an 8.5 million unit rate,
the same as in the third quarter.
November production schedules are
also set at an 8.5 million rate despite the large rise in sales since
late September.
While General Motors has raised its December output
schedule by 8000 cars, this amounts to an increase of only 1.3 per cent
for the monthly scheduled total, to an annual rate of 8.6 million units.
Producers are evidently not sure that sales of domestic cars will
continue at the very advanced October rate after the freeze.
Output of
consumer staples, furniture, and some appliances probably rose in October.
Production of industrial and commercial equipment is estimated to have
increased moderately, following the pattern of the last few months
(production worker manhours for both electrical and nonelectrical machinery
rose one per cent further in October).
Gains in output of raw steel moderated in October and production
of steel mill products apparently also showed less rise than in September.
Output of copper recovered further from the strike-reduced July level.
The decline in coal production because of the strike is equivalent
to a drop of 0.6 of a point in the total index.
II - 7
INDUSTRIAL PRODUCTION
1967=100, seasonally adjusted
1971
Total index
Consumer goods
Autos
Home goods
Apparel & staples
Business equipment
Defense equipment
Intermediate products
Construction products
July
Aug.
Sept.
106.1
104.8
105.3
-5.9
2.6
115.8
107.9
112.8
115.9
116.0
108.5
111.8
116.4
116.2
108.0
111.8
116.6
3.5
-7.4
7.9
108.5
4.9
3.8
96.4
77.7
96.2
77.7
96.8
76.9
113.3
114.1
111.4
110.0
111.2
110.0
Materials, total
105.5
102.4
Durable
98.9
93.7
63.3
99.8
Steel
113.0
112.5
Nondurable
1/ Pre-recession peak of the total index.
2/ Auto strike induced low of the total index.
Retail sales.
Per cent change
Sept 1969 1/ Nov 1970 2/
to Sept
to Sept
1971
1971
103.7
95.7
78.3
112.6
.2
4.8
-12.2
2.3
-5.9
-24.7
-
-.4
.8
-1.7
-. 4
-9.4
.9
2.2
-16.7
-33.1
-1.1
-18.1
-. 6
Retail sales in October were about half a
per cent higher than in September, according to our estimate based on the
weekly reports.
This estimate may revise upward since the weekly figures
on the value of sales of the automotive group indicate a decline for the
month in contrast to the strong increase in unit auto sales.
Sales of
furniture and appliances and nondurables increased by close to 1 per cent,
with general merchandise and apparel showing the most strength.
(Official figures should be available for inclusion in the Supplement.)
II - 8
Unit auto sales.
Sales of new domestic type autos in
October continued their rapid rise to a record seasonally adjusted
annual rate of 10.6 million units, up 12 per cent from September and
sharply over a year ago when sales were depressed by the GM strike.
Since
August 21, domestic sales have been at a 9.6 million unit rate, a pace
15 per cent above the 8.3 million unit annual rate of the seven and one
half months of the year before the New Economic Program.
Stocks of new domestic-type cars at the end of October were
similar in actual numbers to the recent relatively normal years of 1968
and 1969.
However, with sales in October at a record rate, stocks amounted
to only a 48.5 day supply, a relatively low level by recent standards.
October sales of foreign cars were at an annual rate of 1.3
million units, down 12 per cent from the revised September figure but
7 per cent above a year ago.
The decline from September reflected supply
shortages caused by dock strikes and rising prices resulting from
production cost increases, the import surcharge, and changes in exchange
rates.
The import share of total sales fell to 11 per cent, down from
15 per cent in September and 17 per cent a year ago.
Sales of foreign
cars in the first 10 months of the year were at a 1.5 million unit rate.
II - 9
DISTRIBUTION OF U.S. AUTO SALES
(In per cent 1/)
1970
October
Total
Domestic
Total
Large
Small 2/
August
1971
September
October
100.0
100.0
100.0
100.0
83.5
66.9
16.6
78.1
57.1
21.1
85.5
65.6
19.9
88.9 e
69.9 e
19.0 e
14.5
12.2
11.1 e
9.6 e
Imports
Total
16.5
21.9
Low priced
14.4
18.6
1/
Based on not seasonally adjusted data.
2/ Compacts and subcompacts.
Consumer credit.
The September increase in consumer instalment
credit outstanding--a leading indicator--amounted to a record $12.0
billion, seasonally adjusted annual rate, as compared with $9.9 billion
in August.
The increase for the quarter as a whole was $10.3 billion
(annual rate),
also a record.
The previous monthly and quarterly highs
were reached in October 1968 and the fourth quarter of that year
respectively.
While the new peaks largely reflect exceptional strength in
automobile sales,
sizable gains have also occurred during recent months
in other types of credit.
The increases in nonautomotive consumer goods
credit and personal loans during the third quarter were substantially
larger than in the second quarter.
II
- 10
NET CHANGE IN CONSUMER INSTALMENT CREDIT OUTSTANDING
(Billions of dollars, seasonally adjusted annual rates)
Total
Automobile
Other
consumer
goods
Personal
loans
Home repair
and
modernization
1970 - QIII
QIV
4.1
-1.5
- .6
-4.4
2.4
1.8
2.1
1.1
.1
.0
1971 - QI
QII
QIII
2.7
6.7
10.3
.4
2.3
3.7
.6
1.8
2.8
1.7
2.3
3.5
.1
.3
.3
Interest rates on consumer instalment loans up to $5,000 with
maturities up to 36 months were reduced about 1 percentage point (true
annual rate) in early November by 3 major banks in New York (Chase
Manhattan, First National City, Bankers Trust).
These announced reductions
lowered consumer loan rates to about the levels posted by 2 other New York
banks (Chemical, Franklin National) in late August.
One West Coast bank
(Crocker National) also announced a reduction early this month of
approximately one-half percentage point (true annual rate) on consumer
instalment loans.
Terms on consumer loans are generally regarded as determined
on a regional market basis and rates show considerable disparity throughout the country.
loan is
For example, the rate for a 12-month unsecured personal
now listed at 10.07 per cent at the New York banks and 15.78
per cent at Crocker National; a 36-month new car loan is now 10.88
per cent at the big New York City banks (except Franklin National, 10.27
per cent) but 9.11 per cent at Crocker National.
II - 11
Census consumer buying survey.
The October Census survey
indicates that consumer buying plans and expected income changes are
similar to those of a year ago.
The index of expected purchases of new
cars (Jan-April 1967=100) increased to 103.4 in October from 94.8 in
July, and compares with 103.8 a year earlier.
The number of appliances
reported likely to be bought also rose in the current survey from July
and approximates the year earlier level.
Buying plans for houses
declined for the second successive quarter and were unchanged from
October 1970.
Households expecting an income increase declined appreciably
in the current survey, presumably reflecting the wage freeze; however,
those expecting a decrease in income edged downward and, on balance,
expectations are very similar to those a year earlier.
On the other
hand, actual income changes worsened, with higher income reported by
fewer households and lower income reported by more families as compared
with a year ago and with the previous survey in July this year.
None-
theless, reported actual current income is still better than in the
first half of this year.
The buying intentions portion of this survey appears to have
limited predictive value, probably largely because of inaccurate household projections of family income.
An examination of actual new car
purchases by families remaining in this survey over three successive
periods suggests that families with zero intention of buying a new car
are more apt to purchase a new car if it turns out that their actual
income increases when they previously thought it might not.
Moreover, a
II - 12
higher percentage of families expecting to buy a car actually go
through with the purchase if they think their income will increase and
their income actually does increase.
Thus, if income does increase sub-
stantially over the next quarter or so, past experience with this survey
suggests that the current survey index of unit purchases of new autos
may understate actual sales developments.
HOUSEHOLD PURCHASE AND INCOME EXPECTATIONS
1971
1970
January
April
July
October
103.8
95.6
107.9
96.3
1-04.7
101.7
94.8
97.7
103.4
95.5
37.3
35.0
35.1
37.6
34.9
13.6
23.7
1l.2
20.8
14.5
20.6
12.5
25.1
13.7
21.2
October
INDEXES OF EXPECTED UNIT PURCHASES
(Jan 1967-April 1967 = 100)
New cars . . . . . . . . . . . .
Houses
. . . .. .
. .
.. . .
. .
. .
ACTUAL AND EXPECTED CHANGES IN INCOME
Current income compared to income
of one year ago:
Per cent reporting higher current
income . . . . . . .
. . . . . . .
Per cent reporting lower current
. .
. .
. . . . .
income
Difference . . . . . . . . . . . . . .
Mean expectations of substantial
changes in income:
Increase
. . . . . . . . . . . . .
.
16.7
17.2
19.9
17.0
15.7
Decrease
. . . . . . . . . . . . . .
7.3
6.7
7.5
6.8
6.7
9.4
10.5
12.4
10.2
9.0
26.8
2.4
26.1
24.1
Difference . . . . . . . . ...
.
..
Number of major appliances reported
likely to be bought per 100 households
within 12 months
NOTE:
.
.
.
.
.
.
.
Indexes of expected unit purchases are seasonally adjusted.
do not appear to contain seasonal movement.
26.1
Other series
II
- 13
Manufacturers' orders and shipments.
New orders for durable
Steel orders
goods declined 3 per cent in September (preliminary).
began to pick up as stocks accumulated earlier were run down, but the
volatile defense series dropped sharply and there were also declines
in all other major market categories.
Excluding defense and primary
metals, orders declined 2-1/2 per cent, but this decline followed an
August increase of 3.2 per cent, and both the September level and the
average for the quarter as a whole were above the second quarter figures.
This recent improvement in non-defense orders occurred entirely in the
motor vehicle and "all other" durables group; the latter includes manufacturers of construction materials and automotive components.
Orders
for capital equipment were down 2 per cent in the third quarter.
MANUFACTURERS' NEW ORDERS FOR DURABLE GOODS
(Seasonally adjusted, monthly averages)
1971
QII
QIII
(prel.)
Aug.
Sept.
(rev.)
(prel.)
--Billions of dollars-------Durable goods, total 30.5
Excluding defense
and primary metals 24.2
Change,
Sept. from
August
--Per Cent--
31.5
31.8
30.8
-3.1
24.9
25.4
24.8
-2.5
Primary metals
4.7
4.4
4.2
4.5
7.4
Iron & steel
Other
2.1
2.6
1.9
2.5
1.7
2.5
2.0
2.5
19.1
- .7
5.2
2.4
1.5
7.7
9.5
-1.9
-2.7
Motor vehicles
4.7
& parts
Household durables 2.4
1.6
Defense products
Capital equipment
7.9
All other durables 9.2
NOTE: Detail may not add to
5.3
5.2
2.4
2.5
2.2
2.2
8.0
7.7
9.6
9.7
total because of rounding.
-31.6
-3.9
-1.5
II - 14
Steel shipments increased from the very low August level,
but this was more than offset by a drop in defense shipments and
declines in several other groups.
The backlog of unfilled orders
declined 0.6 per cent and was back to the reduced July level, 13
per cent below the mid-1969 peak.
Inventories.
In September, according to preliminary book
value data, business inventories rose at a $9.5 billion annual rate, the
highest since March.
Stocks rose for all major categories, except
durable goods manufacturing.
Durable goods manufacturers continued to
run down stocks of steel and other materials but increased finished and
in-process stocks at steel mills and machinery and transportation equipment establishments.
For the third quarter as a whole, the book value
increase was about the same as in the second quarter.
September retail sales are not available on the revised basis
and the business inventory-sales ratio cannot yet be calculated.
For
both manufacturers and wholesale trade, sales were down and the inventory-sales ratio up slightly in September.
Manufacturing ratios were
more favorable than a year earlier and similar to the 1968 steel runoff,
while the wholesale trade ratio was about the same as a year earlier.
With the durable manufacturers' order backlog resuming its decline in
September, the inventory/backlog ratio continues to indicate a heavy and
increasing overhang, particularly for capital equipment.
II
- 15
CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, billions of dollars)
1971
QIII
(prel.)
6.2
6.3
5.8
9.5
total
.1
-1.0
1.2
-1.3
-1.3
.0
-1.6
-2.0
.5
1.8
- .3
2.1
Trade, total
Wholesale
Retail
Durable
Automotive
Nonautomotive
6.0
2.2
3.9
2.7
2.8
- .1
7.6
2.0
5.7
4.7
4.6
.1
7.4
- .9
8.2
6.9
7.6
- .8
7.7
.4
7.3
6.4
5.5
.9
1.1
1.0
1.4
.9
Manufacturing and trade
Manufacturing,
Durable
Nondurable
Nondurable
NOTE:
Aug.
(rev.)
Sept.
(prel.)
QII
Detail may not add to total because of rounding.
INVENTORY RATIOS
1971
1970
1968
Aug.
Sept.
Aug.
Sept.
Aug.
Sept.
(rev.) (prel.)
Inventories to sales:
Manufacturing, total
Durable
Nondurable
Wholesale trade, total
1.80
2.18
1.36
1.20
1.74
2.07
1.34
1.18
1.79
2.13
1.37
1.23
1.81
2.17
1.37
1.24
1.73
2.05
1.35
1.23
1.74
2.07
1.36
1.24
.716
.716
.616
.833
.862
.867
Inventories to unfilled
orders:
Durable manufacturers
II
Cyclical indicators.
- 16
The preliminary Census composite leading
indicator index declined 0.3 per cent in September.
The August decline,
previously reported at 1 per cent, is now indicated to be 0.1 per cent,
so that the preliminary September index is only 0.4 per cent below its
July peak.
Leading series which declined in September were the manufacturing
workweek, new orders for durable goods, contracts and orders for plant
and equipment, housing permits, and the ratio of price to unit labor
cost.
There were increases in industrial materials prices and the monthly
average of common stock prices, and a slight decline in initial claims
for unemployment insurance (treated inversely in the index).
COMPOSITE CYCLICAL INDICATORS
(1967=100)
12 Leading
Trend Adjusted
1971:
(H)
April
May
June
July
August
September (prel.)
Current high value.
5 Coincident
6 Lagging
124.1
125.2
125.1
123.1
124.0
126.2 (H)
123.6
123.0
124.0
127.0 (H)
126.9
126.5
124.5
124.1
125.2
124.3
126.6
127.6
The preliminary coincident composite rose 0.9 per cent in
September but was still below the June high, while the lagging composite
rose 0.8 per cent.
The latter index is 3.7 per cent above its May low
but still 3.6 per cent below the peak reached in August 1970.
II - 17
Construction and real estate.
Seasonally adjusted new
construction put in place in October edged higher from September 1/
to
virtually the peak $113 billion annual rate now reported for August.
Outlays for residential construction--already up more than 50 per cent
from the low in July of 1970--changed little from the record rate
achieved in September.
Outlays for public projects, mainly State and
local, also changed little in October at a rate still moderately under
the high reached in the first quarter of this year.
While expenditures
for private nonresidential construction advanced in October, they remained moderately below their August peak.
Over-all, construction costs apparently edged off somewhat
in October, according to tentative Census Bureau indications.
But, at
a level 9 per cent above a year earlier, they continued to account
for about half the year-to-year gain in total current dollar outlays
in October.
1/ The September figure was revised upward by 2 per cent as part
of an extensive revision just completed. The revision carries back to
January of 1960 in the case of residential and farm construction; for
the more recent period, it also incorporates a number of data and
procedural improvements affecting two categories of private nonresidential
construction, namely, nonresidential buildings and privately owned public
utilities. For 1970 and other recent years, the net effect of all the
revisions was to raise the level of the new series relative to the old
by up to 3 per cent for total construction and by about 8 per cent for
the private residential component as a whole, with only a moderate upward
adjustment for private nonresidential and virtually no change for public.
In the case of the residential sector, the upward revision resulted
almost entirely from a much needed separation of 1-unit structures from
multifamily structures for estimating purposes. On a seasonally adjusted
basis, the new residential outlay series shows the same cyclical turning
point in 1970 as the old.
II
- 18
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rate)
Private
All
Total
NonresiResidential 1/dential 1 /
Public
Billions of dollars
1970 - Annual (Old)
Annual (r)
91.3
94.3
63.1
66.1
1971 - IQ (r)
102.0
IIQ (r)
IIIQ (r)
107.6
111.9
113.0
111.9
112,4
29.3
31.7
33.8
34.4
28.2
28.1
71.4
36.6
34.8
30.6
78.0
82.4
41.1
44.7
36.9
37.7
29.5
29.5
83.1
82.7
83.2
44.8
45.6
45.5
38.3
37.0
37.7
29.8
29.2
29.3
1971
August (r)
September (r)
October (p) 2/
Per cent change in August from a year earlier
In current dollars
In 1967 dollars
+17
+23
+38
+8
+2
+8
+13
+30
-4
-6
1/ New series includes Farm Residential, a very nominal amount, formerly in
Nonresidential.
2/ Data for the most recent month (October) are confidential Census Bureau
extrapolations. In no case should public reference be made to them.
Seasonally adjusted private housing starts, which had surged
to an exceptional 2.2 million unit annual rate this summer, dropped more
than a tenth in September.
Even so, the September rate was sufficiently
high to leave the third quarter average at a record 2.14 million annual
pace, nearly a tenth above the advanced second quarter rate and up
more than 70 per cent from the cyclical low experienced in the first
quarter of 1970.
While the uncertainty about "Phase II" developments,
including the possibility of lower interest rates, may have contributed
to the September drop, technical measurement problems related to working
day allowances appear also to have been a factor.
Both types of factors
II -
19
may also contribute to a dampening of the starts rate for October, which
However, given the near-record volume of mort-
has yet to be reported.
gage commitments outstanding and the advanced rate of building permits,
some increase beyond the third quarter average is indicated for the
fourth quarter as a whole, probably mainly in single-family units.
PRIVATE HOUSING STARTS AND PERMITS
(Seasonally adjusted annual rates,
Total1970 - Annual
/
in
Starts
Per Cent
Single-family
thousands of units)
Per Cent
FHA-insured 2/
Permits
1,434
57
29
1,324
1,286
1,512
1,777
58
56
58
28
28
35
1,257
1,358
1,593
1,813
1,962
2,141
55
58
56
24
22
24
1,608
1,805
2,008
2,229
2,235
1,958
53
54
60
22
23
28
2,052
2,006
1,967
1970
IIQ
IIIQ
IVQ
1971
1Q
IIQ
IIIQ (p)
1971
July (r)
August (r)
September (p)
1/ Apart from starts, mobile home shipments for domestic use in August-the latest month for which data are available--were at a seasonally
adjusted annual rate of 529,000, virtually matching the record reached in
July and 10 per cent above the advanced rate in the second quarter of
the year.
2/ Based on unadjusted totals for all periods. FHA-insured starts include
both subsidized and nonsubsidized units.
Based on the number of units available and fit for use, rental
vacancy rates advanced to an average of 5.3 per cent in
of 1971.
the third quarter
While this was the highest for any third quarter since 1968,
II -
20
it was still well below earlier highs both nationally and regionally.
Moreover, with new and existing home sales continuing relatively strong,
vacancy rates for home-owner units remained quite low even by more recent
standards.
RESIDENTIAL VACANCY RATES
(Per cent)
1965
Average for third quarter of:
1968
1969
1970
1971
7.2
5.4
5.0
4.9
5.3
Northeast
North Central
South
West
4.6
6.4
7.9
10.8
3.4
5.4
6.8
6.2
2.8
5.5
6.3
5.8
2.8
5.4
6.5
5.0
2.8
5.3
7.0
6.3
Home-Owner Units
1.5
1.1
1.0
1.0
.9
Rental Units
Planned plant and equipment spending.
Businessmen currently
plan to increase outlays for new plant and equipment by 7-9 per cent
in 1972 according to two recent surveys; the estimated increase for
1971 is 2 per cent.
The McGraw-Hill survey,
taken in October,
indicates
an expected rise in spending of 7 per cent, with manufacturers planning
an 8 per cent increase (in contrast to a decline of 6 per cent in 1971)
and nonmanufacturers a 6 per cent rise (compared with 8 per cent in 1971).
The earlier Lionel D. Edie survey showed a 9 per cent overall increase
with 8 per cent in manufacturing and 9 per cent in nonmanufacturing.
The
difference in the planned nonmanufacturing increase between the two surveys
is largely attributable to electric utilities.
McGraw-Hill reports only
II
-
21
a very small prospective increase by utilities firms while Edie reports
a significant further rise.
In both surveys the planned increase for
electric utilities is well below the estimated sharp rise in 1971.
PLANS FOR CAPITAL SPENDING
1971
(Estimated) 1/
Edie
McGraw-Hill
(per cent change from 1971)
(Bil. $)
(per cent
change from
1970)
81.44
2
7
9
Manufacturing
Durable goods
Nondurable goods
30.11
14.31
15.80
-6
-9
-2
8
9
8
8
8
9
Nonmanufacturing 2 /
Railroads
Other transportation
Electric utilities
Gas utilities
Communication
Commercial
51.33
1.64
3.16
13.12
2.40
10.99
17.94
7
-8
-26
23
-4
9
8
6
-3
22
2
6
10
4
9
4
33
10
16
6
6
All business
1/
2/
1972
(Planned)
Commerce-SEC.
Includes industries not shown separately.
Respondents to both surveys indicate that the new liberalized
depreciation rules and the proposed investment tax credit will have only
a minimal impact on 1972 investment plans--McGraw-Hill puts the impact
at $0.4 billion of the total increase of $5.6 billion.
impact is expected in 1973 and following years.
However, a greater
McGraw-Hill also indi-
cated that businesses expect to pay 5 per cent more for plant and equipment
in 1972 while charging 3 per cent more for their own products; the dollar
volume of manufacturing sales is expected to increase by about 8 per cent
in 1972 (5 per cent in physical volume terms).
II - 22
Labor market.
improvement:
The labor market continues to show limited
unemployment was down in October and total employment
in the household series showed a sizable gain, but the nonfarm payroll series showed little strength.
The unemployment rate declined
in October by 0.2 percentage points to 5.8 per cent, seasonally
adjusted.
Nearly all of the decline in unemployment occurred among
adult men, most of whom were apparently seeking full time work.
The
unemployment rate for married men dropped 0.3 percentage points to 3.0
per cent, the lowest rate since October 1970; joblessness also fell
among blue-collar workers.
groups showed little change.
The unemployment rates for most other
Compared to a year ago, the unemployment
rate for Negroes is up 1.4 percentage points while the rate for whites
is virtually unchanged, returning the Negro-to-white unemployment ratio
from 1.8 to one to its longer-run ratio of two to one.
Accompanying the decline in unemployment was an increase of
320,000 in total household employment.
The civilian labor force was up
by 185,000 in October, after growing by an average of 385,000 in August
and September.
The civilian labor force has expanded 1.5 million from
a year ago and the total labor force by 1.1 million--both increases were
less than the labor force growth expected on the basis of population
growth and longer-run trends in participation rates.
Since October
1970, total employment (household series) has advanced by 1.1 million and
the unemployment rate has increased from 5.5 to 5.8 per cent.
II
-
23
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1970
October
April
1971
Sep tember
October
5.5
6.1
6.0
5.8
Adult men
Adult women
Teenagers
4.1
5.0
17.0
4.4
6.0
17.2
4.5
5.6
1 7.1
4.3
5.5
17.0
Married men
White
Negro
3.0
5.2
9.3
3.1
5.6
10.0
3.3
5.4
0.5
White-collar
Blue-collar
3.0
7.3
3.8
7.4
3.3
Total
3.0
5.3
10.7
3.4
7.2
8.0
In contrast to total household employment, payroll employment
showed no change in October after rising sharply in
lack of any growth was due to an increase in
month in
September.
But the
strike activity over the
the mining (coal) and transportation (docks)
industries.
Even
after excluding the effect of strikes, however, payroll employment rose
by only 85,000,and manufacturing employment was virtually unchanged.
Sizable gains occurred in
primary metals and autos,
but in
tries employment showed little change or small declines.
manufacturing,
employment rose moderately in
other indusOutside of
services and State and local
governments.
The number of employees on nonfarm payrolls has increased by
450,000 since the beginning of the year, but is still 250,000 below the
peak reached in March 197.
in
trade,
Most of the unemployment increases have been
services and State and local government.
Manufacturing employ-
ment in October was down 120,000 from January and was 1.6 million below
the alltime high reached in July 1969.
24
II -
Average hours of production workers in manufacturing rose
0.1 hours to 39.7 in October after declining in the previous two
months.
Most of this increase occurred in
durable goods manufacturing
where gains in metals, electrical machinery and autos raised average
hours in durable manufacturing 0.4 hours.
however,
still
The manufacturing workweek,
remains below the 40.0 hour mark of earlier this year.
NONFARM PAYROLL EMPLOYMENT, 1971
(seasonally adjusted, in thousands)
I
Total
Average monthly change
II
III
Oct. from Sept.
56
59
83
19
44
61
-47
Manufacturing
Production workers
-62
-43
0
16
4
10
12
-10
Nonmanufacturing
Mining
Construction
Transportation & p.u.
Trade
Services and finance
82
0
-13
23
41
31
43
-1
-3
-7
20
34
57
-2
-4
-15
44
34
-59
-93
15
-25
5
39
37
0
36
15
-7
23
22
11
10
41
3
38
Private
Government
Federal
State and local
Pay Board policy.
-6
As a general standard for pay increases
during Phase II, the Pay Board has established that annual wage and
benefit increases should be related to productivity improvement and costof-living trends.
Initially,
the Board has set a 5.5 per cent guideline
for annual aggregate increases in
all labor agreements signed after the
II
freeze ends November 13.
- 25
This guideline is not inflexible, however,
and the Board announced that the standard will be reviewed periodically and could be revised in the future.
In addition, the Board
indicated that in reviewing new contracts it will take account of
ongoing collective bargaining and pay practices and equity considerations.
The Board also decided to accept contracts agreed to
prior to the freeze, including deferred wage increases scheduled to
go into effect after the freeze period,
provided they are not challenged
by an interested party or 5 members of the Pay Board; increases,
however, which would have gone into effect during the freeze period
cannot be granted retroactively except under limited conditions.
Wage developments.
The rapid pace of wage increases has
slowed sharply since the wage freeze began.
Average hourly earnings
of production workers on private nonfarm payrolls have risen at a
far slower rate since August than from January to August.
The
peculiar August-October movements in mining and transportation are due
to strikes.
In manufacturing and trade there has been no increase in
average hourly earnings; in construction, there has been a dramatic
slowdown.
II
- 26
AVERAGE HOURLY EARNINGS OF PRODUCTION
AND NONSUPERVISORY WORKERS, 1971
(Per cent change, annual rate;
seasonally adjusted)
August-October
January-August
Private nonfarm
6.7
1.7
Manufacturing
5.4
.0
Mining
7.4
-30.5
Construction
Transportation & p.u.
9.1
7.6
Trade
6.1
.0
Finance
8.1
- 1.8
Services
4.1
6.0
4.2
11.3
First-year wage increases in major collective bargaining
settlements concluded in private nonfarm industries during the
third quarter of 1971 averaged 14.0 per cent. The faster rate of increase
in the third quarter reflected large wage settlements prior to the
wage freeze in both manufacturing and nonmanufacturing, mainly
because of the steel and telephone agreements which covered nearly
one million workers--about 70 per cent of the workers concluding
settlements in the third quarter.
Settlements reached in the first
nine months of this year covered 2.8 million workers.
Nearly 1.4
million workers whose contracts expired during this period have not
settled; longshoring and coal because of strikes and aerospace and
steel fabricating because of the freeze.
In contract construction,
reports of settlements have been fragmentary.
II - 27
WAGE INCREASES IN MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Mean Adjustments)
Annual Rate of Increase
1971
Year
1969
1970
1st 6 mos.
IIIQ
Private nonfarm industries 1/
First year
Average over life of contract
Manufacturing
First year
Average over life of contract
9.2
7.6
11.9
8.9
10.0
8.0
14.0
7.8
7.9
6.0
8.1
6.0
8.7
6.4
14.5
8.5
13.6
Nonmanufacturing
10.8
15.2
12.0
Average over life of contract
9.3
11.5
10.8
7.2
Construction
First year
Average over life of contract
13.1
13.1
17.6
14.9
13.4
14.2
11.4
10.3
First year
1/ Covers settlements affecting 1,000 workers or more.
Wage increases averaged over the life of the contract
amounted to 7.8 per cent a year in major contracts concluded in the
third quarter, little changed from the average for the first half of
the year and moderately lower than in 1970.
In construction, wage
rate increases although still high have declined substantially since
1970, probably reflecting the necessity for approval by the Construction
Industry Stabilization Committee of all wage increases in settlements
reached after March 28, 1971.
Reported construction settlements cover
186,000 workers or only about one-third of all workers covered by
major construction contracts scheduled to expire in 1971.
When wages and benefits are combined,
first-year adjust-
ments averaged 15.0 per cent in the third quarter; averaged over the
life of the contract,
the annual rate of increase was 8.4 per cent
compared with 9.1 per cent in 1970.
II - 28
Industrial relations.
There appears to have been little
collective bargaining activity in key contract negotiations during
The strike of 80,000 coal miners has lasted more than a
October.
month.
Dwindling stockpiles of coal and some shortages have led to
layoffs at scattered steel and aluminum plants.
Layoffs of railroad
workers because of reduced coal shipments have been reflected in a
sharp rise in the number of claims for benefits under the railroad
unemployment insurance program.
Longshoremen at the ports of
Philadelphia, Baltimore, New Orleans, and Beaumont, Texas recently
returned to work in response to court orders, leaving about 30,000
dock workers on strike at Atlantic and Gulf ports.
At the key New
York port, contract negotiations have reportedly been stepped up
The West Coast dock strike was halted by Taft-Hartley
recently.
injunction.
If there is no settlement during the 80-day cooling off
period, the strike could be resumed December 24.
Productivity and labor costs.
Growth in output per manhour
in the private nonfarm economy slowed to a 2.1 per cent annual rate
in the third quarter--half the second quarter gain.
The sharp cut in
steel production was partly responsible for this slowing and was a
major factor in an outright decline in manufacturing productivity.
Compared with the third quarter last year, output per manhour was up
2.8 per cent in the nonfarm sector.
This year-over-year increase,
while still on the low side, was a considerable improvement over the
performance of 1969 and 1970.
II - 29
COMPENSATION,
PRODUCTIVITY, AND UNIT LABOR COSTS
Compensation
per manhour
Private
Nonfarm
Manufaceconomy
turing
Output per manhour
Private
Manufacnonfarm
economy
turing
Unit labor cost
Private
Manufacnonfarm
economy
turing
Per cent change from
previous quarter:
(annual rate)
1970: III
IV
8.7
5.5
9.1
5.8
5.6
-1.6
4.1
-4.7
2.9
7.2
4.4
11.1
1971: I
II
III
9.1
7.8
5.4
10.3
5.2
4.4
6.7
4.3
2.1
8.4
6.7
-2.1
2.3
3.4
3.2
1.4
-1.0
6.7
Per cent change from
year earlier:
1969
6.9
6.4
- .1
1.3
7.1
5.1
1970
7.0
6.6
.7
1.5
6.3
5.0
1971: I
II
III
7.4
7.8
6.9
7.9
7.6
6.4
3.7
3.7
2.8
4.0
3.5
1.9
3.6
3.9
4.0
3.8
3.9
4.4
The rise in compensation per manhour in the private nonfarm
economy slowed to a 5.4 per cent annual rate in the third quarter from
7.8 per cent in the second quarter due partly to the effects of the
freeze.
As would be expected,
the freeze had less influence on the size
of the over-the-year increases in compensation per manhour and these continued about as large in the third quarter as in 1969 and 1970 in both
the private nonfarm economy and manufacturing.
But, with productivity
gains much larger this year than in 1969 and 1970, the year-over-year
rise in unit labor costs continued smaller in the third quarter than for
the years 1969 and 1970.
II - 30
On a seasonally adjusted basis,
Wholesale prices.
the whole-
sale price index rose at an annual rate of 1.3 per cent between September
and October as an increase in prices of farm and food products at an
annual rate of 18.4 per cent more than offset the 3.3 per cent rate of
Before seasonal adjustment, the
decline for industrial commodities.
overall WPI dropped 1.0 per cent at an annual rate and would have declined even more but for increased prices of raw agricultural products,
which are not controlled under the President's economic stabilization
The
program, and imported items, to which special regulations apply.
second consecutive monthly decline in
the seasonally adjusted index of
industrial commodities was the largest since mid-1960; two consecutive
monthly declines last occurred in early 1964.
The rise in farm and food prices reversed last month's decline
and reflected increases for fresh and dried fruits and vegetables, meats,
and dairy products.
WHOLESALE PRICES
(Percentage changes, seasonally adjusted annual rates)
June 1970 Dec. 1970 June 1971 Sept 1971 Aug. 1971
to
to
to
to
to
Dec. 1970 June 1971 Sept 1971 Oct. 1971 Oct. 1971
All commodities
1/
Farm and food 1 /
Industrial commodities
2/
Crude materialsIntermediate
materials 2/
Finished goods 2/
Producer
Consumer
1/
2/
2.2
5.0
2.1
1.3
- .4
7.2
-5.5
16.4
-2.1
3.4
4.1
4.7
-3.3
-2.1
.8
4.7
1.3
4.0
1.8
5.4
6.0
5.5
2.3
3.3
6.8
2.4
2.6
-2.0
-3.8
-5.0
-1.0
-2.4
-3.0
5.1
1.8
2.2
-3.2
-2.1
Farm products, and processed foods and feeds.
Excludes food.
-1.8
3.0
II
- 31
The preponderance of declines or no-changes among the groups
of industrial commodities was reflected in the direction of change in
231 industrial product classes in October.
These changes are similar
to those for September and are markedly different
than a year earlier
and from more recent periods.
WHOLESALE PRICES
Monthly changes in 231 industrial product classes
1970 1/
Sept. Oct.
1971
Average monthly changes
Jan to Apr. to July to
August
June
March
Sept.
October
Number of:
Increases
Decreases
101
42
109
41
124
40
111
40
113
33
51
53r
48
50
No changes
85
78
67
79
85
127r
133
1/ 228 product classes
Prices of consumer nonfood finished goods declined 0.3 per
cent on a seasonally adjusted basis in October as prices of gasoline
dropped and those for new-model passenger cars increased less than
usual.
Lower seasonally-adjusted prices for passenger cars and trucks
were mainly responsible for the 0.4 per cent decline in producer
finished goods.
The October increase in unadjusted prices of passenger cars
reflected not only an advance in prices of U. S. cars but an increase
also for imported cars and may presage changes in
positions of U. S. and imported cars.
the competitive price
A recent staff study shows that
the Administration's new economic policies involving prices, import
II
- 32
surtaxes. Federal excise taxes on automobiles, and exchange rate adjustments can improve markedly the competitive price position of U. S.
subcompacts vis-à-vis foreign makes.
The October wholesale price index
for passenger cars to some extent reflects these policies as the surcharge and exchange rate adjustments contributed to the rise in prices
of imported passenger cars.
If, however, the import surcharge is termi-
nated and a price increase of only one-half of the increase that had
been announced prior to the freeze is made on domestic 1972 models, the
relative price competitiveness of the subcompacts will revert to a
position similar to that of the pre-freeze period, assuming no further
appreciation of the currencies of the major foreign auto producers.
The rise in consumer prices slowed in
Consumer prices.
September to a seasonally adjusted annual rate of 2.4 per cent.
Parti-
cularly sharp declines for raw foods offset in part substantial increases in certain processed foods, apparel, and college tuition.
CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
Dec. 1970
to
Mar. 1971
Mar. 1971
to
June 1971
2.8
5.3
6.0
6.3
1.0
3.2
4.9
5.2
Services less home
finance 1/2/
8.5
6.3
All items
Food
Commodities
less food
Services 1/
June 1971
to
Sept. 1971
Aug.
1971
to
Sept. 1971
5.2
2.4
1.0
-3.0
3.1
5.4
6.3
5.7
2.1
4.7
4.9
4.8
3.8
3.3
-
July 1971
to
Aua. 1971
.3
Addendum:
1/
2/
Not seasonally adjusted.
Confidential.
II
- 33
Items exempted from the freeze declined on balance as the
increases in mortgage rates and taxes (both indexes embody lags) were
more than offset by the drop in prices of unprocessed foods.
Declines in fresh fruits and vegetables, eggs and coffee more
than offset sizable increases in beef, frozen orange juice, margarine
and salad oils.
As a result, seasonally adjusted food prices in
September were below their June level; over the previous six months they
had increased at an average annual rate of about 6 per cent.
The September index includes substantial increases in certain nonfood commodities and services, but the rates of rise for these
components were significantly lower than in August and over the first
seven months of the year.
Prices of apparel rose more than seasonally
and gasoline prices rose further, although by less than in August, and
remained about 3 per cent above year-ago levels.
Both new and used
car prices fell, but were still about 6 per cent above those a year
earlier.
The major service price increases occurred in home maintenance
and repair services and college tuition.
Rent and medical service costs
rose more slowly than previously this year, and gas and electricity and
public transport hardly at all.
A substantial portion of the increase in the September index
may reflect pre-freeze changes in price.
Fall and winter apparel is
not priced in August but may actually have been sold at the higher
prices before mid-month.
Food prices relate to the first
week of each
month and may therefore have risen after the August pricing date but
before the freeze.
College tuition charges are collected in July,
August and September for the coming academic year.
II - 34
As most other commodities and services are priced every three
months outside the five major cities, pre-freeze price changes for
these could account for a significant proportion of the September increase.
In the case of services, this is substantiated by a special
BLS analysis of 4000 prices included in the September CPI; nearly all
the increase in these occurred before August.
The BLS also did a special tabulation, for 3885 individual
nonfood prices in the five largest cities, of post-freeze quotations in
August and September.
Of these, less than 8 per cent rose, 87 per cent
showed no change and nearly 6 per cent declined.
II
GNP price indexes.
- 35
The rate of price rise, as measured by
the fixed-weighted index for gross private product, slowed from an
annual rate of 5.0 per cent in the second quarter to 4.4 per cent in
the third, according to preliminary estimates (third quarter fixedweighted estimates are confidential).
The rates of increase for the
implicit deflators for both GNP and gross private product also dropped
in the third quarter; however, shifts in weights have held down recent
implicit deflator increases to rates about one percentage point below
those shown by the fixed-weighted indexes.
PRICE CHANGE IN GROSS PRIVATE PRODUCT AND COMPONENTS
MEASURED BY FIXED-WEIGHTED INDEXES 1/
(Percentage changes from previous quarters
at seasonally adjusted annual rates)
Gross private product 2/
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment(fixed)
QI
1971
QII
5.5
5.0
4.4
5.3
4.5
3.6
7.0
3.0
7.2
1.8
4.2
5.7
2.0
2.8
4.9
4.8
6.6
QIII 3/
10.3
Non-residential:
Structures
2.7
14.7
20.6
Producers' durable equipment
2.0
2.8
4.1
Residential structures
9.0
6.9
14.1
1/ 1967 expenditure weights.
2/ Includes change in business inventories and net exports, not shown
separately, as well as Government purchases less employee compensation.
3/ Preliminary--unpublished data.
II - 36
Major factors in the third-quarter slowing were the reduced
rates of increase in prices of nondurables (mainly food) and, to a
lesser extent, services, which more than offset the rapid acceleration
in construction costs.
The fixed-weighted index for residential
structures climbed at an average rate of more than 10 per cent over the
first three quarters of 1971, well above previous peak rates of 6-7
per cent from mid-1967 to mid-1969.
The August 15 imposition of price
ceilings had a relatively small effect on the change in the third
quarter as a whole but is expected to be much more important for the
fourth quarter.
It should be noted that both the fixed-weighted price index
and the implicit deflator for gross private product include prices of
farm products. While the weight of such products is relatively small,
price changes are frequently very large so that their effect on the
overall price measures can be appreciable.
A fixed-weighted price index
for the nonfarm private economy is not available.
However, as shown in
the table, both a nonfarm and a farm component are available for the
implicit deflator for gross private product.
II
- 37
PRICE CHANGE FOR PRIVATE GROSS PRODUCT BY SECTOR
(Percentage changes at seasonally adjusted annual rates)
QI 1969
to
QI 1970
to
QIV 1970
to
QI 1970
QIV 1970
QI 1971
QII 1971
to
QII 1971 QIII 19 7 1p
QI 1971
to
Fixed-weighted index
for gross private
product 1/
4.9
4.9
5.5
5.0
4.4 3/
5.0
5.1
4.5
4.1
3.4
Implicit deflators for
gross private
product 2/
Business:
Nonfarm
Farm
1/
4.4
5.9
4.0
3.9
3.9
15.3
-18.9
17.3
10.3
-10.0
1967 weights.
Includes households and institutions sector,
Confidential.
not shown separately.
An inspection of the total and of the two components clearly
shows that big savings in prices of farm products appreciably affect the
total deflator.
Most recently, the large drop in the deflator for farm
products in the third quarter of 1971 had the effect of lowering the total
implicit deflator; presumably, the fixed-weighted index would have shown
a larger increase than the indicated 4.4 per cent rate had it not been
for this influence.
II-C-1
11/9/71
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE
GNP INCREASE
ANNUAL
BIL$
EMPLOYMENT
MILLIONS OF PERSONS
ESTABBASIS
RATE ARiTHMETIC SCALE
NONAGRICULTURAL
^
OCT 709
CURRENT $
01 159
J65
II
18
MANUfACTURING
OCT 186
PER(
ANNUAL RATE ARITHMETIC
SCALE
I
I-
I I II
II I I
HOURS
1958 $
01 28
-^I
- 42
WORKWEEK-MFG.
1
I
OCT397
1971
1969
1969
NDUSTRIAL PRODUCTION - I
1967=100
-1140
CONSUMER GOODS
SEPT 1162
TOTAL
SEPT 1053
ill
ll
i ll
l i i ll
l lI
1969
NDUSTRIAL PRODUCTION - 1
1967=100
1120
rOUSING
ANNUAL RATES,MILLIONS OF UNITS
BUSINESS
EQUIPMENT
LSEPT 968
SEPT 196
DEFENSE & ,
EQUIPMENT
ERM4T1'S
SEPT 769
SEPT 197
S
1971
1971
1969I
1969
I I I I I I I I I AI I I I I I I i I I i I I'
11/9/71
II-C-2
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE
BILS
INCOME
PRICES AND COSTS
1967=100
ANNUAL RATE
RETAIL SALES
BUSINESS INVESTMENT
PLANT AND EQUIPMENT OUTLAYS
ANNUAL RATE
OS 8242
MFG. NEW OROERS
GAAF *
CAPITAL EQUIPMENT
TO BE REVISEDI
i
___
1969
1971
11
111111
1969
NUFACTURRS' INVENTORIES
RATIO TO UNFILLED ORDERS
CAPITALQOUIPMENT
SEPT84
A
IMPORTS
SEPT
1.4
-1.0
m
i ..
.
.
. . . .
I . .
. . II I
I
111111 *
!111 t1
1971
PERCENT
III - 1
THE ECONOMIC PICTURE IN DETAIL
Domestic Financial Situation
Monetary Aggregates.
narrow money stock (M1)
Preliminary data indicate that the
declined during October for the second con-
secutive month, and the estimated level for early November is little
different from the July average.1/
In contrast, early figures show
that M2 increased at a moderate 6 per cent rate during October, as
growth in time and savings deposits other than large CD's increased to
a rate of about 13 per cent, significantly above the rate for other
recent months and about equal to the rapid rates realized during the
second quarter of the year.
The increased rate of growth in time and
savings deposits may stem from the increased yield differential in favor
of such deposits vis-à-vis open market investments that has arisen from
the recent declines in open market rates.
Despite the increased rate of growth in M2, the adjusted
credit proxy expanded during October at the slowest rate thus far this
year as U. S. Government deposits, which had remained roughly stable
on average in September, declined and the rate of growth in large
negotiable time CD's was reduced.
Progressive cutbacks in CD offering
rates during October slowed the flow of CD money sharply after the
early part of the month, although the average for the month showed a
seasonally adjusted rise of almost $1 billion from September. Early
November data for New York City banks show a sizable drop in outstanding
CD's.
1/
Changes in demand deposit ownership over the third quarter are
discussed in Appendix A.
III - 2
MONETARY AGGREGATES
(Seasonally adjusted changes)
1971
QI
QII
QIII
Aug.
Oct.
Sept.
Annual percentage rates
1.
M1 (Currency plus private
demand deposits)
8.9
11.3
3.0
2.6
-3.7
-1.6p
M2 (M1 plus commercial bank
time and savings deposits
other than large CD's)
17.8
12.6
4.5
4.8
1.6
5.8p
M3 (M2 plus savings deposits
at mutual savings banks
and S&L's)
19.0
14.8
7.4
7.2
4.8
n.a.
4.
Adjusted bank credit proxy
10.9
6.5
9.1
10.3
8.9
4.8p
5.
Other aggregates
a) Total time and savings
deposits
27.3
13.5
11.3
6.5
15.8
15.6p
Time and savings deposits
other than large CD's
27.2
13.7
6.0
6.4
7.4
13.1p
2.1
,9p
2.
3.
b)
b)
Billions of dollars
c)
Negotiable CD's (SA)
0.6
0.2
1.3
0.2
Increased growth in nondeposit sources of funds in October offset
to some degree the weaker pattern in Government deposits and CD's as
banks increased their Eurodollar borrowing by about $650 million on
average.
Overnight Eurodollars continued to be slightly less expensive
than Federal funds over most of the month.
Longer-term Eurodollars
remained more costly than CD's of comparable maturity, but the differential narrowed quite sharply over the period.
Bank Credit.
Commercial bank credit on a last-Wednesday-of-the-
month basis grew at about the same rate during October as in September.
III - 3
As in other recent months, the growth was concentrated in loans and bank
holdings of securities other than U. S. Governments--primarily municipals-while holdings of direct Treasury issues showed a sharp decline on a seasonally adjusted basis.
COMMERCIAL BANK CREDIT ADJUSTED FOR LOANS
SOLD TO AFFILIATES 1/
(Seasonally adjusted percentage changes at annual rates)
1971
QIII
Aug.
Sept.
Oct.
9.1
9.8
13.4
9.7
9.4
19.8 9.8
27.9 17.0
6.3 6.6
-14.0
9.9
14.7
2.5 4.6
10.0 13.0
4.8 6.3
16.5
14.2
14.1
QI
Total loans & investments 2/
U. S. Treasury securities
Other securities
Total loans 2/
Business loans 2/
Real estate loans
Consumer loans
1/
2/
12.2
QII
-3.9 -17.5
-3.7 17.2
22.5 12.4
-29,7
24.2
12.3
8.1
13.9
18.5
3.0
12.2
13.6
29.1
14.1
14.0
Last-Wednesday-of-month series.
Includes outstanding amounts of loans reported sold outright by
banks to their own holding companies, affiliates, subsidiaries,
and foreign branches.
Among the loan categories, real estate loans continued to rise
sharply, reflecting the high level of residential construction activity,
and consumer loans remained very strong as a result of the high level of
automobile sales.
Business loans showed relatively little
growth, however,
confirming the lackluster demand that has prompted two 1/4 percentage
point reductions in the prime lending rate in recent weeks.
On October 20,
most major banks lowered the prime rate from 6 per cent to 5-3/4 per cent
and a new round of reductions on November 4 brought the rate to 5-1/2 per
III - 4
cent 1/
Although the possibility cannot be ruled out, the evidence does
not suggest that the behavior of business loans during October was influenced by repayments of foreign-exchange-related borrowing undertaken
in August and September.
The large seasonally adjusted drop in bank holdings of U. S.
Treasury obligations during October, as over the third quarter as a
whole, reflects in part the fact that with the large inflow of funds
from foreign central banks during August and September,
the amount of
new cash raised from the domestic public through the sale of marketable
debt was much smaller than in other recent years.
Since much of this
debt ordinarily is acquired at least in the first instance by commercial
banks, the seasonal factors for these months allows for larger increases
and smaller declines than in fact occurred this year.
Nonbank depositary institutions.
Deposit inflows to nonbank
thrift institutions during October were only slightly below the pace in
the third quarter.
During the third quarter, savings and loan associa-
tions continued to have an extraordinarily large cash flow to invest in
mortgages.
In addition to large deposit inflows, some borrowed funds
1/ At about the time of the first reduction, several major banks shifted
to a "floating" prime rate policy under which this key lending rate is
tied to open market rates and/or the cost of funds to the bank. Some
details of these policies and the spread of the "floating" prime rate
are discussed in Appendix B along with some comments on the significance
of this development.
III - 5
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual
Savings and Loan
Both
Savings Banks
Associations
1970 - QI
QII
QIII
QIV
2.7
6.4
6.9
10.5
2.3
7.2
10.6
12.1
2.5
7.0
9.3
11.6
1971 - QI
QII
QIII p/
17.7
15.0
6.5
26.0
18.4
14.7
23.3
17.3
12.7
6.6
9.9
8.6
9.3
15.1
12.7
8.4
13.5
11.4
9.3
14.0
12.5
1971 - August*
September* p/
October* P/
September
and October p/
*
pg
Monthly patterns may not be significant because of difficulties
with seasonal adjustment.
Preliminary.
were utilized,1/ and gross mortgage repayments continued to be sizable.
Part of the increase in mortgage repayments is attributable to the
record volume of refinancings in the third quarter as shown in the
table.
By the end of the third quarter the cumulative volume of re-
financings was already almost twice that for all of 1970.
The net decrease in liquid assets during the third quarter,
as shown in
the table,
is
due partly to the lower FHLBB minimum
liquidity requirements for S&Ls, but more probably reflects the
drawing down of funds stored earlier for mortgages acquired in this
quarter.
S&L commitments outstanding to acquire mortgages appear to be
in line with recent cash flow.
1/
Funds borrowed by S&Ls during the third quarter tended to be the
relatively new fixed-rate fixed-maturity options that many of the
district FHLBanks have been offering.
During the month of October,
there was very little
net additional change in advances.
III - 6
SOURCES AND USES OF FUNDS AT INSURED SAVINGS AND LOAN ASSOCIATIONS
(Seasonally unadjusted, billions of dollars)
1968
Third Quarter
1970
1969
1971
Sources
Deposit accounts, net 1/
Borrowed funds
Subtotal
Gross mortgage repayments 2/
Other sources, net 3/
Total
.9
.2
1.1
3.7
.7
-.2
1.5
1.3
3.6
.3
2.8
.2
3.0
4.0
.8
5.2
..5
5.7
6.4
.4
5.5
5.2
7.8
12.5
-.6
6.1
-.8
6.0
.6
7.2
-.7
13.2
5.5
5.2
7.8
12.5
.4
.3
.5
1.2
Uses
Net increase in liquid assets 4/
Gross mortgage acquisitions
Total
Memoranda
Mortgage refinancings (included
above in repayments)
Average ratio of outstanding
mortgage commitments to recent
cash flow 5/
.97
1.12
.89
.99
1/ Net change in deposits, including interest credited.
2/
3/
4/
5/
Includes, in addition to repayments, proceeds from sales of loans
and participations and miscellaneous credits. Excludes interest,
taxes, etc.
Includes net changes in loans in process, reserves and surplus, and
other liabilities minus the net changes in miscellaneous loans and
assets not set out separately in the "uses" statement.
Reflects all eligible liquid assets according to FHLB requirements.
For 1968, includes only cash and U. S. Government securities.
Since 1968, includes also Federal agency issues maturing within five
years.
Represents the average of the monthly ratios produced by dividing
outstanding commitments plus loans in process by the sum of cash
flow in the current month and previous two months.
III - 7
At mutual savings banks, net deposit inflows in the third
quarter were considerably larger than those of other recent third
quarters and net mortgage acquisitions were nearly twice the volume
acquired in the third quarters of the past two years.
quarter was the first
this year in which savings banks'
The third
net mortgage
acquisitions exceeded their net purchases of corporate securities.
This change probably reflects disbursal of the large volume of mortgage commitments made earlier in
the year when savings banks'
deposit
inflows had started to increase.
SOURCES AND USES OF FUNDS AT MUTUAL SAVINGS BANKS
(Seasonally unadjusted, billions of dollars)
1968
Third Quarter
1970
1969
1971
Sources
Net change in
deposits
Other sources 1/
Total
1.0
.3
1.1
1.6
.2
1.2
.2
.5
.2
1.3
.3
1.9
.7
.4
*
.1
1.2
.5
*
- .1
.1
.5
.6
.5
.1
.1
1.3
1.1
.6
*
.2
1.9
Uses
Net mortgage acquisitions
Net change in corporate securities
Net change in liquid assets 2/
Net other uses 3/
Total
1/
Less than $500 million.
Reserves and miscellaneous liabilities.
2/
Cash and U. S. Governments.
3/
State and locak,
*
other loans, and miscellaneous assets.
III - 8
Mortgage market.
Yields on Government underwritten home
mortgages in the secondary market continued to edge down through
October, according to FNMA auction results.
By the latest auction
(November 1), average yields on FNMA's short-term forward commitments
to purchase such mortgages were 30 basis points below the 1971 high
reached late in July.
FNMA PURCHASE AUCTIONS
Amount of total offers
Received
Accepted
(Millions of dollars)
1971 - High
NOTE:
1,168 (5/10)
Short-term commitments
Private
Discount
market yield
(Per cent)
(Points)
314 (4/26)
8.5 (7/26)
8.07 (7/26)
July 26
686
183
3.5
8.07
Aug. 25
635
154
7.8
7.97
Sept
7
20
445
433
189
193
7.1
6.9
7.08
7.86
Oct.
4
18
365
220
195
104
6.9
6.7
7.35
7.83
Nov.
1
130
56
6.2
7,77
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. Implicit yields shown are gross, before deduction of fee
paid by investors to servicers of 38 basis points. Beginning
October 18, short-term commitments are for 4-rather than 3-month
terms.
III - 9
Along with the decline in secondary market yields, the volume
of bids submitted to FNMA declined further in the latest auction.
Both
developments reflected increased interest in FHA and VA mortgages by
judging from field reports and trade opinion.
institutional investors,
In addition,
they reflected increased willingness by mortgage companies,
anticipating an additional rise in secondary market prices, to originate
these loans without first obtaining resale commitments.
Market expectations of further increases in mortgage prices
also encouraged applications to the Government National Mortgage
Association for insurance of securities to be issued by mortgage companies and other loan originators against pools of Government underwritten loans assembled some time earlier when mortgage prices were
lower.
During October,
insurance applications to GNMA amounted to
about $230 million, the largest volume since April.
Meanwhile,
under
Programs 21 and 22 initiated in August to subsidize discount points on
certain FHA and VA mortgages, GNMA by November 3 had accepted a total
of $1.7 billion in commitments to purchase loans at prices of 95 or 96.
It
had transferred $1 billion of these commitments to mortgage com-
panies and other loan originators at lower prices, generally 93 to 94.
In the primary market for conventional new-home mortgages,
average interest rates declined a little during October in some areas,
according to press reports and trade opinion.
Whether these individual
cases are indicative of national developments is
not clear, because the
conventional mortgage interest rate series published by the Federal
Housing Administration is
not yet available for October.
In September,
this series showed mixed regional trends, with no change in the national
average of 7.85 per cent.
III - 10
At nonbank thrift institutions during September, the combined
backlog of mortgage commitments increased slightly to a new high.
By
the end of that month, the total amount of mortgage commitments outstanding at all savings and loan associations and at New York State
mutual savings banks was more than twice the low posted early last year.
MORTGAGE COMMITMENTS OUTSTANDING AT THRIFT INSTITUTIONS 1/
(Billions of dollars, seasonally adjusted)
Date
S&L's
1970 - High
Low
N. Y. State
Savings Banks
Both Thrift
Institutions
10.1 (Dec.)
7.7 (Mar.,Apr.)
8.1 (Dec.)
5.2 (Mar.)
2.6 (Jan.)
1.8 (Oct., Nov.)
7.1
1.9
11.1
2.8
13.8
April
May
11.1
12.2
2.3
3.1
13.3
15.4
June
13.0
3.1
16.1
July
August
September
13.2
13.3
13.3
3.1
3.1
3.2
16.4
16.4
16.5
September
1971
9.1
1/ Based on data, including loans in process, from Federal Home Loan
Bank Board and Savings Banks Association of New York State. Detail
may not add to total because of rounding.
Corporate and municipal securities markets.
Yields on cor-
porate and municipal debt securities continued to fall during October
and by early November were 20 to 25 basis points below the levels prevailing at the time of the last FOMC meeting.
But some investor resistance
to these higher prices has led to a rise in syndicate positions relative
to issue volume in recent weeks.
However, dealers apparently do not
III - 11
feel uneasy about the situation, since they have been able to reduce
inventories of older, higher-coupon bonds at a profit over this period.
BOND YIELDS
(Per Cent)
New Aaa
Corporate Bonds 1/
Long-term State
/
and Local Bonds 2
1970
7.63 (12/18)
9.30 (6/9)
5.33 (12/10)
7.12 (5/28)
6.76 (1/29)
3.23 (5/21)
4.97 (10/22)
6.23 (6/24)
1
8
15
22
29
7.53
7.30
7.22
7.17
7.11
5.24
5.17
4.99
4.97
5.11
November 5
7.05
4.99
Low
High
1971=
Low
High
Week
of:
October
1/ With call protection (includes some issues with 10-year protection.)
2/ Bond Buyer (mixed qualities)
Declining bond yields seem to have stimulated corporate filings.
October volume of public bond offerings reached almost $2 billion, and
it
is
estimated that the November calendar will be about the same.
Underwriters report that the current lower level of yields has encouraged
some medium-sized,
with convertibles.
lower-grade borrowers to enter the market,
mainly
Although December volume usually drops sharply be-
cause of the long holiday season, there is already a substantial volume
III - 12
of issues ready for filing, suggesting that the December calendar could
be at least $1.5 billion.
Thus, it appears that total corporate public
bond offerings for the year will approach the $25 billion level, about
matching the record 1970 volume.
Although the most recently available
SEC data suggest a leveling off in the growth of takedowns on private
placements, the 1971 total for direct placements will be substantially
above that of 1970.
CORPORATE SECURITY OFFERINGS
(Monthly or monthly averages in millions of dollars seasonally unadjusted)
Bonds
I
i
[
i
i
Public
Private
i
Stocks
Total
1970 - Year
Through October
2,099
1,995
403
375
713
708
3,245
3,070
1971 - Through October e/
2,163
537
1,049
3,749
1971 - QII
QIII g/
QIV e/
2,132
1,577
1,017
586
596
533
1,128
1,5051/
787
3,896
3,673
3,137
1,950
2,000
1,500
500
400
700
560
1,000
00
3,010
3,400
3,000
October e/
November e/
December e/
e/
1/
Estimated.
Includes $1.4 billion AT&T stock offering.
In the stock market, prices over the last three weeks have
generally drifted downward to the pre-Phase I levels of August 1971.
As of November 5, however, both the NYSE and AMEX indices remained
above their May 1970 lows by 39 and 27 per cent, respectively.
Volume
over the last three weeks has continued low relative to early 1971
levels, with daily trading on the NYSE, for example, averaging 12 to
13 million shares.
III - 13
STOCK PRICE INDICES
May 1970
Low
NYSE
AMEX
33.20
August 13
1971
November 8
1971
Per cent change
from May 1970
Low to Nov. 8
Per cent change
from August 13
to Nov. 3
52.33
52.12
36.4
-1.4
19.36
24.59
24.50
26.5
-0.4
n.a.
105.44
105.43
n.a.
-0.0
NASDAQ
The behavior of the stock market since mid-year may account
for some of the recent slowdown in equity offerings, but new stock
volume for 1971 will show a significant increase over the previous year.
As mentioned in the last Greenbook, the absolute volume of electric
utility stock issues has remained high.
Utilities are turning more to
the stock market to raise needed capital because sharply rising interest
costs over the past two years have contributed to a growing fixed debt
burden.
Long-term debt offerings by State and local governments fell
off to $1.7 billion in October, as expected.
Because a few unusually
large issues are included in the November schedule, the staff now
estimates that volume will be about $1.9 billion in this month.
Seasonal
forces usually result in a decline of new offerings in December, but the
volume will still be relatively high if the governmental units accomplish their borrowing plans.
In the short-term municipal market, there was some retirement of debt in October and it appears that this trend may continue over
the quarter.
The volume of maturing issues in November and December is
III - 14
unusually large and the normal seasonal pattern would indicate a reduction in outstandings.
STATE AND LOCAL GOVERNMENT OFFERINGS
(Monthly or monthly averages in millions of dollars, seasonally unadjusted)
Long Term
Net Short Term
1,514
393
Through October
1,422
326
1971 - Through October
2,041
379
QII
QIII e/
QIV e/
2,032
1,972
1,767
423
331
-253
October
November e/
December e/
1,700
1,900
1,700
-98
-348
-329
1970 - Year
e/ Estimated
III - 15
Government securities market.
Interest rates continued
to move lower throughout the Treasury securities market over the
latter part of October and early November.
In general, yields on
coupon issues have declined by about 10-25 basis points from their
October 19 levels,
while bill
rates are down by 15-30 basis points
except in the case of the 3-month issue which has declined by
33 basis points.
MARKET YIELD ON U. S. GOVERNMENT AND AGENCY SECURITIES
(Per cent)
1971
Weekly average for week ending
Daily highs 1/ Daily lows 1/
Nov 2 Nov 9
Aug 13
Oct 19
Oct 26
5.17
5.25
5.67
5.92
4.12
4.45
4.58
4.73
4.12
4.45
4.51
4.60
4.14
4.33
4.44
4.46
4.401
4.16
4.33
4.43
6.81
6.94
7.03
6.82
6.41
5.53
5.89
5.94
5.91
5.91
5.45
5.84
5.91
5.90
5.91
5.35
5.81
5.90
5.87
5.8
5.30
5.75
5.6
5.74
5.79
6.08
6.53
7.33
4.96
5.34
6.10
7.44
6.32
4.83
5.24
6.02
6.25
4.78
5.12
5.-87
6,16
4.43
4.90
5.66
6.03
Bills
1-month
3-month
6-month
1-year
5.33
5.53
5.84
6.01
(7/19)
(7/19)
(7/27)
(7/28)
2.07
3.22
3.35
3.45
(3/12)
3-year
5-year
7-year
10-year
20-year
6.91
7.03
7.11
6.95
6.56
(7/28)
(8/10)
(8/10)
4.27
4.74
5.15
5.38
5.69
(3/22)
6.20
6.56
7.33
7.45
(7/23)
(8/28)
(6/15)
(3/11)
(3/11)
(3/11)
(3/22)
(3/23)
(3/23)
(3/23)
Agencies
6-month
1-year
3-year
5-year
1/
(7/28)
(8/12)
(8/13)
3.67 (3/16)
3.93 (3/16)
4.70 (3/24)
5.12 (3/23)
Latest dates of high and low rates in paretheses.
III - 16
The further downward movement in yields for Treasury notes
and bonds has largely been a reflection of a strengthening and
spreading of expectations that interest rates are liely to continue
adjusting lower through the winter.
levels has been firm.
Thus, demand at current price
In this environment, the response to the
Treasury's November refunding operation was quite good.
Of the publicly held November maturities, $1.3 billion, or
34 per cent, were not exchanged into either the new 6 per cent 7-year
note or the 6-1/8 per cent 15-year bond.
Since no short-term option
was offered in the exchange, this result is considered very satisfactory.
In the prerefunding part of the financing, approximately 40 per cent,
or about $3.2 billion, of the eligible May and August 1972 maturities
were exchanged into the new securities.
Individual cash subscriptions
to the long bond were a neglibible $25 million.
Altogether, $5.1 billion
of the 7-year note and $0.6 billion of the 15-year bond will be issued.
On November 9, the Treasury is auctioning $2.75 billion of 4-7/8 per
cent 15-month notes to cover the attrition on the November maturities
and to raise about $1.4 billion of new money.
Besides the general pressures toward lower rates, Treasury
bill rates have been subject to some special influences.
The cuts in
the commercial bank prime rate have generated recurrent expectations
that the discount rate will be lowered in the near future.
There has
III - 17
been continued demand for bills by foreign buyers.
And finally, the
market supply of bills, including tax bills, is somewhat smaller than
in other recent years.
Thus, rates have remained under fairly
contininous downward pressure.
In these circumstances, dealers have had no difficulty in
selling awards from bill auctions, and in
fact they have pared down
their bill holdings slightly very recently from the level generally
Positions in
prevailing in October.
coupon issues have been swelled
by the Treasury's November "rights" financing operation in which the
dealers received about $1.3 billionoof the new securities, including
nearly $300 million of the 15-year bond.
Progress in distributing
these issues has not been particularly rapid as yet.
DEALER POSITIONS IN GOVERNMENT AND AGENCY SECURITIES
(In millions of dollars)
October
Aug 13 Daily average
Oct 18
Oct 22
Nov 1 Nov 8
Treasury securities
Total
Treasury bills (total)
2,381
1 823
4.354
2 834
3.769
2.114
4.5S5
2,987
5.518 5.013
3235 2755
Due in 92 days or less
93 days or over
968
855
1,278
1,557
948
1,166
1,366
1,621
1,121
898
2,114 1,857
Treasury notes and bonds
(Total)
Due within 1-year
1-5 years
over 5 years
558
1,521
1,655
1 598
2,283 2.258
185
315
59
779
395
347
836
477
342
790
434
374
223
1,987
468
486
- 172 1,549
599
261
318
905
379
526
830
315
515
950
434
517
1.053 1.040
401
422
652
619
Agency securities
Total
Due within 1-year
Over
1-year
III - 18
The amount of new money raised in the Federal agency market
FNA
in late October was slightly less than in the preceding 4 weeks.
continued its new money demands, raising $550 million compared with
$400 million the preceding month; on balance, other agency borrowing
activity--by the farm credit agencies and the TVA--resulted in a small
net repayment of funds to the market.
System action in the agency
market was confined to a single operation in which $83 million of
such issues were purchased, including $57 million with maturities of
over one year.
NEW FEDERAL AGENCY OFFERINGS
Amounts
Date
Agency
($ millions)
Maturity
Yield
New Money
<$ millione)
Oct. 19
TVA
150
25-year
7.30
150
Oct. 20
FICB
Coops
594
9-mo.
6-mo.
4.95
4.85
-101
3
FNMA
350
5.70
)
6.12
)5.50
6.75
)
Oct. 22
282
300
250
Octt.
I/
26
TVA
80
2 yr. 7 mo.
4 yr. 10 mo.
11 yr. 10 mo.
119 days
4.52/
-80
Average discount.
Other short-term credit markets.
Seasonally-adjusted nonbank
commercial and finance company paper rose an estimated $900 million
over the preceding month to $29.2 billion.
For the second consecutive
month, the bulk of the increase was in directly-placed finance company
paper, which rose $1.3 billion in the two-month period.
III - 19
The magnitude and widespread nature of the current increase
appear to reflect the recent rise in consumer borrowing.
the increase is accounted for by auto finance companies,
A part of
who have been
stimulated by the continuing decline in their short-term borrowing
costs to compete more actively with commercial banks for auto loans.
Financing of auto dealers by the captive finance companies probably
did not increase, as new car inventories are estimated to have
declined in October.
All short-term market rates are continuing their downward
movement, with declines since mid-August running as high as 150 basis
points.
Declines in these rates since October 20 in the three-month
maturities have ranged from 25 to 38 basis points, leaving spreads
between bills and commercial paper little changed.
III - 20
COMMERCIAL AND FINANCE COMPANY PAPER
(End-of-month data, in millions of dollars)
1971
Total commercial and
finance paper 1/
Bank related 2/
Nonbank related 3/
Placed through dealers
Placed directly
August
September
October
29,342
30,176
31,189e
1,792
27,550
11,236
16,314
1,900r
28,276
11,396
16,880
1,9 8 1p
29,208e
11,574e
17,634e
Net change
Total commercial and
finance paper l/
Bank related 2/
Nonbank related 3/
Placed through dealers
Placed directly
1/
- 55
834
1,013
- 16
- 39
-223
184
108
726
160
566
81
932
178
754
Combines seasonally adjusted nonbank-related paper and seasonally
unadjusted bank-related paper.
2/ Seasonally unadjusted.
3/ Seasonally adjusted.
e/ estimated.
p/ preliminary.
r/ revised.
III - 21
SELECTED SHORT-TERM INTEREST RATES
(Wednesday Quotation-Discount Basis)
1970
1971
Net change
Highs Lows Aug 11 Oct 20 Nov 3 Aug 11-Nov 3 Oct 20-Nov3
1-month
n.a.
9.25
9.00
9.00
n.a.
5.50
5.00
5.50
5.75
5.75
5.50
5.75
5.25
5.25
5.00
5.25
4.88
5.00
4.75
5.00
-
7.75
7.84
5.00 5.50
4.58 5.17
4,88
4.12
4.63
4.04
n.a.
9.25
8.25
9.00
n.a. 5.83
6.00 6.00
5.50 5.88
5.25
5.63
5.25
5.38
6.75
7.93
5.50 5.75
4.74 5.22
9.00
7.99
Certificates of
Deposit--new issue 3/
Treasury bill
Prime municipal notes
Commercial paper 1/
Commercial paper 2/
Finance paper
Bankers' acceptances
Certificates of
Deposit--new issue 3/
Treasury bill
87
75
75
75
-37
-25
-25
-25
- 87
-113
-25
-8
5.00
5.38
4.88
5.00
-
83
62
62
88
-25
-25
-37
-38
5.13
4.46
4.88
4.16
- 87
-106
-25
-30
5.50 6.00
4.78 5.67
5.38
4.52
5.00
4.30
-100
-137
-38
-22
7.50
7.62
5.50 6.25
4.74 5.91
5.50
4.64
5.00
4.37
-125
-154
-50
-27
5.80
2.95 3.60
2.70
2.55
-105
-15
3-month
Commercial paper 1/
Commercial paper 2/
Finance paper
Bankers' acceptances
Certificates of
Deposit--new issue 3/
Treasury bill
5.50 5.50
6-month
Bankers' acceptances
Treasury bill
12-month
Federal Reserve Bank of New York.
Wall Street Journal's Money Rates.
Highs for certificates of deposit are ceilings
Investment yield basis.
effective as of January 21, 1970.
n.a. Not available.
1/
2/
3/
Source:
Wall Street Journal's Money Rates for finance paper and banker's
acceptances, other data from the Federal Reserve Bank of New York.
III - 22
Since the preceding Greenbook,
Federal finance.
House version of the 1971 Revenue Act was incorporated in
when the
the Staff
estimates, there have been no major changes in the fiscal assumptions
listed in the accompanying table.
expected to report out a tax bill
version.
The Senate Finance Committee is
substantially similar to the House
The projected unified budget deficit for fiscal year 1972,
however, has been increased by about $2 billion to $29.5 billion since
the preceding Greenbook.
This is
accounted for mainly by a downward
revision in the estimate of personal tax receipts, due partly to
the lower level of recent collections and partly to a decrease in
projected wage and salary levels.
Outlays for fiscal year 1972 are
projected slightly lower than in the last Greenbook, due to an unexpectedly large decrease in
military spending in
the third quarter
budget accounts.
New estimates that extend the projection period on the basis
of the assumptions listed in
the next table,
show an expected budget
deficit of $31.0 billion for calendar year 1972,
more sluggishly than outlays.
as receipts increase
These projections assume that there will
be no major cutback in foreign aid, and that the drop in budget defense
spending that occurred in the third quarter will be reversed.
All available estimates of the high employment budget--despite
differences
in
levels due to different calculation methods--show a
significant shift toward expansive fiscal policy in calendar year 1972.
III - 23
MAJOR FISCAL ASSUMPTIONS IMPLICIT IN
STAFF PROJECTIONS OF FEDERAL SECTOR, NIA ACCOUNTS
(Effects in billions of dollars)
Expenditures
Effect
Calendar 1972
Federal military and civilian pay raise
July 1972 (after 6-mo. freeze)
Volunteer-army pay raise, Nov. 15, 1971
No general revenue sharing before 1973
No welfare reform before 1973
HR-1 medicare increase and OASDI liberalization, Jan. 1972
HR-1 increases in OASDI benefits, July 1972
Increased agricultural price supports Q3 and 4 1971- /
Decline in defense purchases aside from pay raise
7 per cent expenditure growth calendar year 1971 to 1972
excluding items above
$1 O
2.4
--
3.0
1.0
-. 8
15.3
2/
ReceiptsIncreased personal exemption to $700 on July 1, 1971 (avg. $675
for year) and $750 in Jan. 1972
Increased standard deduction from 13 to 15 per cent, Jan. 1972
Low income allowance of $1,050 in 1971 (no phase-out) and $1,300
in 1972
Other reform and relief from 1969 Act
7 per cent investment tax credit
Elimination of ADR 3/4-year convention
DISC tax deferral on increased export earnings
Repeal of auto and light truck excises
Social insurance wage base increase to $9,000 on Jan. 1, 1972
(not the 3R-1 base and rate hikes)
10 per cent import surcharge through CY 1972
1/
2/
-1.9
- .3
-1.0
-2.8
-3.6
1.7
- .1
-2.6
+3.0
+2.0
Effect is $.9 billion for FY 1972.
Items correspond to the House tax bill (Revenue Act of 1971) plus
"other reform and relief," the social insurance base hike, and the
import surcharge.
III -
24
The staff estimate of the high employment deficit for fiscal year
1972 now amounts to $1.5 billion as the moderate surplus in the current
half year is more than cancelled by a deficit rate of almost $5 billion
in January to June 1972.
For calendar
year 1972, the staff is
estimating a high employment deficit of $4.5 billion.
Treasury sale of $2.75 billion of 15-month notes for settlement on November 15 will cover $1.3 billion of attrition in the
November refunding and provide $1.4 billion of new cash for the
Treasury.
With no further new money the Treasury balance would be
expected to drop to $3.5 billion by the end of November and further
drains are expected in December.
Thus it seems likely that there
will be an additional cash offering for settlement in late November
or early December, and again around mid-December.
For the remainder
of 1971, a total of $5 billion of additional borrowing is estimated.
Of this total $1 billion is accounted for by the ongoing weekly
increases of $200 million in Treasury bill issues, and the remainder
by the additional cash operations referred to above.
FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS(In billions of dollars)
F.R.B. Staff Estimates
Calendar Quarters
1972
1971
I
II
III
IV
III*
I
1971
SY
1972e/
-
Calendar Years
F.R. Estimates
1972
1971
-29.5
200.5
230.0
-25.8
-31.0
192.3
208.6
239.6
IV
Federal Budget
(Quarterly data, unadjusted)
Surplus/deficit
Receipts
Outlays
-23.2
188.3
211.6
Means of financing:
Net borroving from the public
Decrease in cash operating balance
Other 2/
Cash operating balance, end of period
Memo:
3/
Net agency borrowing-
217.9
19.4
-.8
4.5
27.2
1.9
.5
20.9
1.6
3.2
1.4
8.8
6.9
6.5
1.1
n.e.
29.6
-7.8 -11.4
40.6
42.9
56.3
54.3
9.1
-1.2
-11.3
47.8
59.1
1.0 -9.6
61.2 52.1
60.2 61.7
-11.2
47.4
58.6
-.1
8.6
3.5
-.7
9.6
.1
1.7
-.1
-.5
-.4
8.6
1.0
11.5
.4
-.7
6.5
10.0
6.5
6.4
6.9
6.9
6.5
n.e.
1.7
1.5
2.4
n.e.
n.e.
-23.2 -24.3
201.7 206.1
224.9 230.4
-27.7
210.2
237.9
.4
-6.2
N
t
n.e.
National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
Expenditures
High employment surplus/deficit
(NIA basis) 4/
-18.8
193.9
212.7
1.4
-25.4
207.9
233.3
-1.5
-21.7
200.7
222.4
-26.5
216.9
243.4
-4.5
3.0
-26.4 -27.4
213.7 219.3
240.1 246.7
-3.5
-5.5
-24.4
224.5
248.9
-2.9
* Actual
n.e.--not estimated
e--projected
n.a.--not available
1/ Estimates reflect effects of House Revenue Bill, which provides $.8 billion less in tax cuts in fiscal year 1972 than
the President's program. The Administration budget deficit estimate on the basis of the President's program is
$27.0--28.0 billion for FY 1972 with outlays estimated at $232.0 billion. These figures would imply a receipts
estimate ranging from $204.0--205.0 billion.
Includes such items as deposit fund accounts and clearing accounts.
Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn., Federal
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives 4/ Estimated by F.R. Board staff.
III - 26
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)
Oct.
Nov.
Dec.
1.8
4.2
2.6
.4
2.0
.8
.6
---
--
-=
-.6
4.0
-.6
2.0
--
Plus: Other net financial sources-
1.1
-1.1
-.7
Plus: Budget surplus or deficit (-)
-6.2
-4.5
-.7
Equals: Change in cash balance
-3.3-
-1.4
1.2
6.7-
5.3
6.5
12.4
18.6
14.4
18.9
16.1
16.8
Maturing coupon issues
held by public
-
3.7
Net agency borrowing
.7
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Other (debt repayments, etc.)
Memoranda: Level of cash balance
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays
.5
a/ Checks issued less checks paid and other accrual items.
b/ Actual.
.4
I I-C-1
FINANCIAL DEVELOPMENTS - UNITED STATES
11/9/71
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, RATIO SCALE
BANK CREDIT
TOTAL
SEPT 4701
TLOANS
SEPT 3104
BUSINESS LOANS
SEPT 1170
]
90
tO0
OTHER SECURITES
SEPT990
1969
MONEY AND TIME DEPOSITS
1971
SAVINGS ACCOUNTS
SAVINGS & LOAN ASSN.
OCT1701
"50
130
MONEY
SEPT 2273
L
-
s
MUTUAL SAVINGS BANKS
SEPT766
- 70
TIME DEPOSITS
SEPT 2616
I
1969
1971
1969
.
11/9/71
III-C-2
FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUhNDS RAISED
NONFINANCIAL SECTORS
BILS
SHARES IN FUNDS SUPPLED
PERCENT
ADJUSTED
"SEASONALLY
ANNUAL RA TE
LESS FEDERAL
GOVERNMENT
on 1280
+
100
I
I
HOUSEHOLDS AND BUSINESS
NET FU IDS RAISED
Q1 1052
70
I
COMMERCIAL BANKS(ANDAFFII'ATES)
-
Qn 339
50
5
L
I
PRIVATE NONFINANCIAL
al.1
/
-
50
0
NET CAP"*. OUTLAYS
73 3
-
0!
CORPORATE
I
i
50
1969
1971
1969
1971
1969
1971
1969
1971
V
I1
I
I
I
STATE AND LOCAL GOVERNMENT
1971
OC
2
17
1970
9,1690
MAR.
JUNE
SEPT.
DEC.
I
IV - 1
THE ECONOMIC PICTURE IN DETAIL
International Developments
U.S. balance of payments.
In the period since mid-October
the official settlements measure of the U.S. balance of payments has
shown markedly lower deficits.
During September known international
transactions were relatively favorable to the United States; the trade
accounts were temporarily in surplus, U.S. banks reported a reduction
of about $450 million in claims on foreigners (mainly a reduction in
claims on U.K. borrowers), U.S. investors sold a small amount, net, of
foreign securities, and foreigners raised their net purchases of U.S.
corporate securities to about $225 million for the month, including
net purchases of about $150 million of U.S. corporate stocks.
of these favorable developments
In view
holding down the deficit, the con-
tinuation of an over-all deficit of $1-1/2 billion in September suggested
that some outflow of liquid funds still persisted.
More recently, however, the weekly balance-of-payments
indicators suggest the flow of funds from the United States has dwindled
considerably, or even begun to be reversed.
In recent weeks only Germany
and the United Kingdom have added significantly to their dollar holdings.
Gains by Japan have tapered off and French dollar holdings have been
reduced.
Some of this change may reflect a shift by corporations who,
after sending large amounts abroad earlier in the year, find that it is
now advantageous to substitute foreign funds -- as they would be required
to do in any case before the year end.
IV - 2
Evidence that a change has occurred in the flow of liquid
private funds is given by the significant weakening of Euro-dollar
rates since the beginning of October and the tendency of other currencies
as a group to level off or even weaken against the dollar.
Euro-dollar markets.
Since the previous Greenbook Euro-
dollar rates have followed the general decline in U.S. and other
national money market rates.
As shown in the table below the differential
between CD rates and three-month Euro-dollar deposits has tended to
narrow.
The differential between overnight Euro-dollars and Federal
funds shifted to the advantage of Federal funds in the last two weeks
and U.S. banks' liabilities to foreign branches have decreased by $110
million from October 6 through November 3.
Over the same period an
additional $1 billion of special Euro-dollar Treasury issues was
allowed to run off at maturity.
The fear of exchange loss to Euro-dollar deposit holders,
and continuing demand for Euro-dollar loans to finance holdings of
foreign currencies, had resulted in unusually high rates in August
and September.
The influence of these factors abated in October as
exchange rates against the dollar levelled off.
Other factors tending
to depress Euro-dollar rates includedthe announcement by ENEL, a stateowned Italian enterprise, that it would prepay $300 million in Eurodollar loans during November.
There is also a large potential for
repayment of Euro-dollar borrowings by German corporations if money market
conditions in Germany ease relative to the Euro-dollar market.
IV - 3
SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
Average for
month or
week ending
Wednesday
1971
Jan.-Mar.
Apr.-June
July
Aug.
Sept.
Sept.
Oct.
22
29
6
13 r
20
27
(1)
(2)
OverNight l/ Feder
Euro-$
Funds-
(3)
(4)
(1)-(2)
Differential
3-month
Euro-$
Deposit-
(5)
(6)
60-89 day (4)-(5)
DifferCD rate
(Adj.) / ential
4.68
6.15
3.87
4.56
0.81
1.59
5.52
6.70
4.41
4.95
1.11
1.75
5.39
12.20
5.10
5.28
5.57
5.55
0.11
6.63
-0.45
6.47
8.16
8.34
5.81
5.72
5.70
0.66
2.44
2.64
4.97
5.18
4.94
5.09
5.09
4.64
5.46
5.43
5.33
5.29
5.14
5.11
-0.49
-0.25
-0.39
-0.20
-0.05
-0.47
8.21
8.21
7.30
6.77
6.55
6.15
5.76
5.74
5.66
5.38
5.26
5.12
2.45
2.47
1.64
1.39
1.29
1.04
3
5.25
5.17
0.08
5.99
5.00
0.99
10P
5.06
4.96
0.10
5.97
5.00
0.97
1/ All Euro-dollar rates are noon bid rates in the London market;
Nov.
overnight rate adjusted for certain technical factors to reflect the
effective cost of funds to U.S. banks.
2/ Effective rate.
3/ Offer rate (median, as of Wednesday) on large denomination CD's by
prime banks in New York City; CD rates are adjusted for the cost of
required reserves.
p/ Preliminary.
Foreign exchange markets.
The dollar's gradual depreciation
against major foreign currencies (weighted average basis) since August 15
was moderately reversed in the past two weeks.
Its further depreciation
against the Japanese yen, the Dutch guilder and the Belgian franc was
somewhat more than offset by its appreciation against most other
major foreign currencies,
dollar.
particularly the German mark and the Canadian
IV - 4
PER CENT APPRECIATIONS OR DEPRECIATIONS (-) FROM PAR VALUES
OF MAJOR FOREIGN CURRENCIES
Against all currencies
Against U.S. dollar
Oct. 13
Oct. 27
Oct. 13
Oct. 27
Nov. 10
-3.09
Nov. 10
-
-
-3.07
-3.11
3.7
7.5
10.3
10.2
3.9
8.0
9.9
9.7
3.9
7.5
9.4
9.5
0.53
4.51
6.86
6.83
0.66
4.62
6.51
6.3L
Guilder
7.8
3.0
8.3
4.44
4.64
4.96
French franc
0.4
0.6
0.5
-2.66
-2.55
-2.66
Belgian franc
Lira
Yen
7.0
2.1
6.9
7.1
2.1
9.2
7.7
2.0
9.5
3.66
-1.04
5.53
3.79
-1.07
-5.80
4.45
-1.11
6.12
U.S. dollar
Sterling
Canadian dollar
DM
Swiss franc
Note:
--
0.68
4.42
6.14
6.16
Calculations are based on offer rates in the New York market on
October 13 and 27 and November 10, 1971 and par values in effect on
May 1, 1971. For weighted average appreciations (columns 4 -6), weights
are shares of each country in 1970 world trade. Shares are calculated
as the sum of each country's exports and imports (f.o.b.) divided by
two times world exports. Currencies other than the ten are assumed, as
a group, to have neither appreciated nor depreciated against the U.S.
dollar.
Foreign central banks' purchases of dollars in the exchange markets,
as evidenced by the United States
official settlements balance,
amounted to only about $200 million in the three weeks ended November 3,
compared with $1-1/4 billion in the previous three weeks.
Bank of
Japan intervention, in particular, was substantially reduced, but
the Bank of England has continued to purchase fairly large amounts
of dollars through early November.
One notable development during the period was the re-emergence
of trading in forward yen for the first time since mid-August, prior
to the floating of the Japanese yen on August 28.
The three-month
IV - 5
forward yen rate in
recent days has been at a 13.2 per cent per annum
a level about 13 per cent above
premium over the current spot rate -the yen's par value.
Whether forward market activity resumed because
of reduced uncertainty, now that the spot rate has appreciated to
around 9-1/2 per cent over par, or because of some change in Japanese
exchange control policy, is not clear.
An indication that Japanese
banks now have a little more freedom of operation is the resumption
of limited trading in spot yen in New York.
For several weeks there
had been practically no trading in yen outside Tokyo.
The firmness of the Belgian franc in recent weeks was partly
attributable to purchases by the Federal Reserve Bank of New York of
Belgian francs for System account.
These purchases, undertaken at
the request of the National Bank of Belgium, are being made in order
to repay $105 million equivalent (at the exchange rate at the time of
the drawing) of System swap drawings maturing in January.
The Belgian National Bank in turn has been purchasing Dutch
guilders in the market in order to repurchase from the Netherlands
Bank francs which the latter accumulated in August and September
in keeping the franc/guilder cross rate from moving beyond the agreed
upon range.
This partially accounts for the guilder's strength.
In
light of the strength of both the guilder and the franc the Belgian
National Bank requested on November 9 that the System hold off on
further purchases of francs for at least a week.
IV -6
U.S. foreign trade.
Extraordinarily large increases in
exports and imports in September are attributed to an acceleration
in trade activity in anticipation of the East and Gulf Coast dock
strikes which began on October 1.
With exports increasing by 22 per
cent from the August level and imports by 7-1/2 per cent, the trade
balance in September was a surplus.
The more moderate rise in imports than in exports may
reflect earlier hedge-buying by importers in anticipation of the
dock strike and the restraining effect of the work stoppage at West
Coast ports, which handle more imports than exports.
Also, the large
withdrawals of imported goods from customs-bonded warehouses in
September to avoid paying the surcharge that would be levied on such
goods beginning October 1 may have reduced the need for additional purchases of "new" imports.
(Goods withdrawn from warehouses are not
included in the balance of payments trade data which are recorded on
an arrival basis).
For the third quarter, the trade balance was a deficit of
about $2 billion at an annual rate, compared with a deficit of
$4-1/4 billion in the second quarter.
More than one-half of the change
resulted from a reduction in our trade deficit with Japan as imports
from that country fell by 20 per cent.
This sharp fall-off in imports
is undoubtedly related to the West Coast dock strike since nearly
one-half of U.S, imports from Japan ordinarily arrive by vessels
IV - 7
through those ports.
Also imports from Japan in the first half of
the year may have been abnormally high because of accelerated purchases in anticipation of possible controls on U.S. imports of textiles
or other goods of which Japan is a principal supplier.
A series of events this year has tended to obscure the
trends of exports and imports.
Trade movements in the first quarter
were affected by the recovery from the GM strike in late 1970.
Then
and later,actual or expected strikes by longshoremen and in the steel,
coal, railroad, copper, aluminum, and other industries, caused changes
in the timing or volume of import and export trade.
Anticipation of
controls on U.S. imports, climaxed by a textile agreement with Japan,
Hong Kong, Korea, and Taiwan in October, and the uncertainties resulting
from the floating of the dollar and the imposition of an import surcharge after August 15 probably also have distorted trade this year.
On balance it
appears likely that these diverse influences tended to
worsen the trade balance in the second quarter and improve it in the
third quarter.
Trade movements in the closing months of this year and possibly
into the early months of 1972 are likely to be very erratic even if the
current dock strike at East Coast ports ends very soon.
Although the
West Coast dock strike was halted, at least temporarily, by a TaftHartley injunction on October 1, more than one-third of the ships that
were caught in those ports when the strike began in early July were
IV - 8
still waiting to be unloaded as of the first week of November.
Any
confirmation of the effectiveness of the surcharge and exchange rate
appreciations realized so far will probably have to be postponed until
the first part of 1972.
Changes in aggregate demand in foreign economies and in the
United States have played an important role in worsening the U.S. trade
balance since last year.
In 1970 U.S. exports were buoyed by high
activity abroad while U.S. imports were depressed by the sluggishness
of domestic demand.
The U.S. trade surplus of just over $2 billion
that year, if adjusted for cyclical factors, may have been a deficit of
about a $1/2 billion.
This year the slackening of economic growth in Europe and
Japan, as well as the moderate upturn in domestic economic activity,
have diminished the benefit of these cyclical changes on our trade
balance.
The average rate of the recorded trade deficit in the
second and third quarters,more than $3 billion,may not be much different
from the cyclically-adjusted balance.
IV - 9
Interest rate developments and monetary policy in major
industrial countries abroad.
Short-term interest rates in major
industrial countries abroad have moved in somewhat diverse Fashion
since mid-1971.
(See table.)
In the United Kingdom, Japan and
Switzerland, they decreased substantially, from July through October,
by amounts ranging from about 1 to 1-1/2 points.
The decline in the
United Kingdom and Japan came largely in response to policy actions,
though increased liquidity resulting from capital inflows also contributed; in Sitzerland, it reflected mainly massive speculative shortterm capital inflous in the first two weeks of August.
SELECTED SHORT-TERM INTEREST RATES 1/
High
1970
June
July
Aug.
1971
Sept. Oct.
United Kingdom
9.27 (Feb.)
6.49
6.19
5.96
5.42
5.16
5.09 (10/29)
Switzerland
Japan*
Canada
5.50 (Apr.)
8.50 (Feb.)
7.54 (Jan.)
3.50
6.50
3.03
3.50
6.45
3.47
3.12
6.25
3.80
2.12
6.00
3.79
2.10
5.60
3.72
2.00 (11/5)
5.50 (10/29)
3.28 (11/5)
Latest
Belgium
Germany
Netherlands
France*
Italy
6.50
9.56
6.00
10.27
8.25
(Jan.)
(Mar.)
(Oct.)
(Jan.)
(July)
4.80
6.57
4.39
6.00
4.75
4.86
7.64
4.03
5.72
4.75
4.84
7.58
4.24
5.72
4.75
4.68
7.57
4.43
5.94
4.75
4.60
7.86
4.46
6.00
n.a.
4.60
7.38
4.50
5.62
4.75
(11/1)
(11/3)
(10/29)
(11/5)
(9/30)
Euro-dollar:
3-mo. deposit
Overnight
United States
10.04 (Jan.)
n.a.
7.78 (Jan.)
7.08
4.89
4.58
6.56 8.16
6.66 12.20
5.26 4.84
8.48
5.51
4.59
6.58
4.94
4.40
6.06 411/5)
5.25 <11/5)
4.06 (11/5)
1/ Rates quoted are monthly averages (end-month for Italy), generally
for 3-month funds, as follows: Italy and Switzerland, time deposits;
Germany, interbank loan rate; United Kingdom, local authority deposit;
Canada, Netherlands, and United States, Treasury bills; Belgium, tap
rate on Treasury bills; Euro-dollar deposit; France and Japan, call
money rate.
* - Call money.
IV - 10
In contrast to domestic short-term rates, Euro-dollar rates
moved over a broad range, climbing steeply from mid-July until the
beginning of September, easing on balance through most of September,
and declining sharply since then.
The climb in the Euro-dollar rates --
in the case of 90-day deposits, from about 6.25 per cent in mid-July
to 9 per cent in early September -- was largely associated with
speculative pressures against the dollar.
The recent decline implies,
inter alia, that the market is becoming increasingly doubtful that the
SELECTED LONG-TERM BOND YIELDS 1/
High
1970
June
July
Aug.
1971
Sept. Oct.
United Kingdom
9.75 (Dec.)
9.36
9.17
9.13
8.74
8.56
Japan
Switzerland
Canada
8.89 (Apr.)
7. 73
7.59
8.34 (Jan.)
7.23
5.41
7.41
n.a.
5.15
7.00
7.51 <Aug.)
5.35
7.51
5.42
7.34
n, a,
n.a.
6.05 (July)
5.02
6.82
4.97 (10/29)
6.10 (11/3)
France
Italy
Belgium
Netherlands
Germany
8.05 (Mar.)
9.43 (July)
8.05 (Oct.)
7.80
7.80
7.70
7.75
8.10
n, a.
n.a.
8,10 (Sept.)
7.15
7.37
8.11
7.29 (10/1)
7,14
8.20
7.32
7.14
8.27
7.29
8.53 (Apr,)
8.78 (June)
8.15
7.28
7.35
8.34
8.12
7.97
7.07 (10/29)
7.93 (10/29)
United States
Euro-bonds
7.34 (June)
9.38 (June)
6.38
8.30
6.38
6.27
8.70
6.05
8.45
5.92
5.81 (11/8)
n. a.
8.45 (Sept.)
8.18
7.35
7.15
8.34
Latest
8.69 (10/29)
7.75 (10/15)
1/ Rates are monthly averages except for Belgium, where the beginningof-month yield is shown, and Euro-bonds, where the end-of-month yield
is cited. Yields are for long-term government and public sector bonds
except as follows: the Euro-bond yield is a composite of 10 dollardenominated issues of U.S. companies; for Italy, the composite yield is
for all bonds except Treasury bonds; for Japan, a composite yield of
private industrial bonds is shon. The French yield is net of with-
holding tax, the gross yield being approximately one percentage point
higher.
IV - 11
dollar will depreciate much further vis-a-vis those other currencies
into which it is possible to move funds.
The 90-day Euro-dollar rate
is currently down to the 6 per cent level again.
Long-term rates for the most part have moved downward since
mid-year (see table), the most pronounced decreases occurring in Canada
and the United Kingdom.
Declines in yields elsewhere since June or
July have not exceeded 50 basis points.
The movement in long-term yields
largely reflects the easing of short-term rates, and the actual and
anticipated relaxation of monetary policies.
Nine central banks in
European countries lowered their discount rates in September and October.
The monetary relaxation reflects, in part, growing concern
over actual or anticipated slowdowns in the growth of aggregate demand.
In several countries -- notably, Italy, Canada, and the United Kingdom -the discount rate reductions represented continuation of easier monetary
policies initiated in late 1970 or early 1971.
In France, too, the
easing of monetary restraint dates back to early 1970, though the
movement toward greater ease has been very moderate and marked by
some retightening measures along the way (such as the discount rate
rise in May).
Japan --
which did not cut the discount rate in
September
or October but has done so four times since the summer of 1970, most
recently in July --
has also been pursuing an easy monetary policy for
over a year.
Only in Germany and the Netherlands do the recent steps in
the direction of relaxation represent a reversal of previous monetary
IV - 12
Overall, the recent easing, though general, has been moderate,
policies.
as most countries are still
also concerned about a too-rapid rise in
prices.
It
should be noted that theeasing of monetary policy has
been undertaken not only, and in some instances not even primarily,
to stimulate the domestic economy.
their exchange rates,
In countries which have floated
official steps to lower interest rates reflect
efforts to hold down or push down the value of the domestic currency
vis-a-vis other currencies.
The main intent of such efforts is
presumably to improve a country's bargaining position in negotiations
over exchange rate realignment.
In Germany, monetary policy was eased slightly in mid-October
when the Bundesbank lowered its discount rate from 5 to 4-1/2 per cent
and the Lombard rate from 6-1/2 to 5-1/2 per cent.
Reserve require-
ments on domestic liabilities were also reduced by 1 per cent, effective
November 1.
These steps did not signal a major change in economic policy.
On the contrary,
and despite clear evidence of a slowdown as reflected
in declining industrial production and new orders in recent months,
German policy continues to accord priority to checking inflationary
pressures.
The prime objective of lowering the Bundesbank lending rates
may have been to reduce the mark exchange rate.
In fact, the rate
fell from 10.5 per cent above parity with respect to the dollar in
October to 9.7 per cent above parity recently.
early
IV - 13
Until the Bundesbank action in October, monetary policy had
remained firm.
In April, the discount and Lombard rates were reduced,
but this was done in what turned out to have been a vain attempt to
halt speculative capital inflows and the resulting rise in bank liquidity.
Indeed, the rate cuts were accompanied by restrictive monetary measures.
The capital inflows of April and early May increased bank
liquidity, which, however, was then sharply constricted in June when
the foreign exchange holdings of the Bundesbank were reduced.
Bank
liquidity has remained tight since.
Short-term interest rates in Germany, as reflected by the
3-month interbank loan rate, rose sharply in June and July, then
levelled off until October.
They then rose as money market conditions
tightened again, partly because banks were reluctant to commit funds
in anticipation of a discount rate cut and partly because they had
to increase their reserves with the central bank to meet monthly
requirements.
At the end of October and in early November, the inter-
bank loan rate declined.
In addition, there has been a very sharp
decrease in the call money rate in the same period.
Long-term bond
rates have edged downward since July, mainly because of expectations
of an easing of monetary policy.
In the Netherlands, the central bank lowered its discount
rate on September 15 from 5.5 to 5 per cent.
The move was intended
in part to discourage inflationary capital inflows.
Earlier in the
month the government had acted to slow such inflows by placing restrictions on purchases of Dutch bonds by nonresidents.
IV - 14
However, the discount rate cut also reflects a slight easing
of monetary policy in response to the marked slowdown in economic
activity in the Netherlands and is aimed at providing a moderate stimulus
to investment and consumption.
The tentative character of the move-
ment toward ease is explained by the persistence of strong inflationary
pressures and is demonstrated by the retention of the quantitative
ceilings on lending by Dutch banks.
The reduction in the discount rate two months ago has not
been reflected in lower short-term market interest rates.
The rate on
call money, as well as the 3-month Treasury bill rate -- the latter
had been edging down since July -- are somewhat higher now than when
the discount rate was cut.
Long-term bond yields, however,
have
decreased slightly.
Despite the absence of any expansionary measures -- as policy
continues to stress curbing inflation -- monetary developments in
Switzerland have been marked by a sharp decline in short-term interest
rates.
The decreases largely reflect the huge inflow of funds in the
first half of August, when speculation reached enormous proportions.
As a result of this capital inflow,
commercial bank deposits at the
Swiss National Bank increased from about 4 billion francs on July 31
to almost 13 billion on August 13.
Despite the agreement of August 16
between the Swiss National Bank and the commercial banks that the
newly-instituted reserve requirement against increases in banks' foreign
liabilities after July 31
would be 100 per cent, the amount of the
required reserves through the third week of October was less than
IV - 15
2 billion francs, implying that the bulk of the August capital inflow
did not take the form of bank liabilities to nonresidents.
With their free reserves increased by over 7 billion francs,
banks cut the rate they pay on 3-5 month time deposits from 3-1/2 to
2-1/2 per cent on August 23.
place on October 4.
A further cut, of 1/2 a point, took
The decline in Euro-dollar rates may have been
an additional reason for the October reduction.
Bond yields, which had been creeping slowly upward for
several months, have retreated considerably since mid-August.
The
composite yield on Confederation bonds has fallen about half a point
since August 6.
The downward pressure on bond yields is probably
explained by the additions to liquid balances of Swiss residents
that occurred when they repatriated funds in August.
French monetary policy continues to be cautiously expansionary,
as was indicated by the small reduction in the discount rate on October 29
from 6.75 to 6.50 per cent.
The cut has been interpreted as a marginally
reflationary action, reflecting some concern that the French boom is
slowing down more than the authorities desire,
tionary pressures still strong -September --
However,
with infla-
consumer prices rose sharply in
further relaxation of monetary policy is considered unlikely
in the near future.
In May,
in
order to underscore official concern over inflation,
the discount rate had been raised by a quarter of a point, to 6.75 per
cent.
Other restrictive monetary steps taken by the authorities this
IV - 16
year include several increases in reserve requirements, designed to
offset the expansionary impact of capital inflows.
However, the money supply has been allowed to expand at a
substantially faster rate in 1971 than in 1970, indicating that, on
balance, monetary policy has been intended to be moderately stimulative.
The easing began in late 1970, in fact, when all quantitative limits
on credit expansion were abolished.
Short-term interest rates continue to be determined by the
Bank of France's intervention rate on the Paris money market.
Rates
were kept relatively high in September and early October, but were
allowed to decline slightly late in the month.
Long-term rates, on
the other hand, have been inching up since June, partly in response
to the rise in the discount rate in May.
If long-term rates continue
to respond to discount rate changes with a lag, they will decline
during the balance of 1971 and in early 1972.
Since August 15, in order to inhibit the growth of foreign
exchange reserves and the resulting increase in bank liquidity, the
French Government has resorted mainly to exchange controls and other
administrative measures, rather than further increases in the already
high required reserve ratios.
The most important measure to date, aside
from the separation of the commercial and financial franc markets, has
been to require importers to make payments for goods from abroad within
90 days of customs entry.
This move is credited with having forced
the commercial franc rate down from the IMF ceiling in
September.
IV - 17
In the latest move to ease Italian monetary policy, the
Bank of Italy on October 14 lowered its discount rate from 5 to
4-1/2 per cent and its rate on secured advances by a full point from
5 to 4 per cent.
The action was intended to encourage investment
spending, which has declined this year, significantly contributing to
a deterioration of the already unsatisfactory level of Italian economic
activity.
The cuts are unlikely to augment the already ample lending
capacity of the commercial banks, whose liquidity is high as a result
of the easy monetary policies in effect since the autumn of 1970.
The prime objective of that policy has been to accelerate the growth
of the monetary base, the main elements of which -- currency circulation
and deposits at the Bank of Italy -- rose by 21 per cent from the end
of August 1970 to the end of August 1971, compared to 15 per cent in
the preceding 12 months.
The main contributors to this year's rise
were an increase in external official reserves of $1.3 billion and
increases in the Bank of Italy's advances to the Treasury and holdings
of Treasury securities.
The effects of these operations on the monetary
base were partly offset by a drop in Bank of Italy credit to banks.
The rapid growth of the monetary base has been partly employed
by the banks to swell their free reserves to inordinately high levels.
A ten-fold increase occurred in the year ending August 31.
At the
same time, banks reduced their rediscounts and advances from the Bank
of Italy by more than two-thirds.
IV - 18
The discount rate cut was the second this year, the rate
having been reduced by half a point in
April.
The banks immediately
responded to the earlier cut by reducing their prime lending rates by
1/4 per cent; further reductions of 1/4 per cent each were made in
June and September,
demand.
reflecting rising liquidity and lagging loan
The banks also reduced the rate paid on deposits by 1/4 per
cent in April, but no further cuts had occurred by the end of September.
Despite rising bank liquidity, bond yields --
following a
very sharp drop in January and February --
rose again in May and
June,
Yields fell in
and held steady in
July and August.
September
but were still above the end-March level.
Easy money in Italy was abetted in August and September by
the decision to prevent the lira from appreciating, on a weighted
average basis,
against other currencies.
Intervention in
the exchange
markets to implement this decision was responsible for a net increase
in official reserves of almost $600 million in those two months.
British monetary policy, which has been stimulative since
early 1970, has also served, since August 15, to inhibit the appreciation
of the floating pound.
The authorities have recently indicated, however,
that no further easing is contemplated for at least the balance of the
year.
At the end of March,
in
conjunction with the moderately
stimulative budget for the year which began April 1,
ceilings on bank
lending were liberalized, as was the target limit for money supply
IV - 19
growth.
Additional expansionary measures adopted by the government
in July included the removal of all restrictions on installment buying.
On September 2, Bank rate was cut by a full point to 5 per
cent.
The move was explained as part of an effort to curtail capital
inflows, and, indeed, the reduction came only a few days after the
introduction of an array of exchange controls designed to prevent
or discourage such inflows.
However, since lower interest rates were
unlikely to augment significantly the impact of the direct barriers
to capital inflows, the principal aim of decreasing the discount rate
may well have been to promote domestic economic activity.
Interest rates have decreased substantially on balance since
mid-year.
Short-term yields not rigidly linked to Bank rate edged
downward in July and August,
reflecting the high degree of liquidity
associated with Britain's strong balance of payments position, stemming
both from a current account surplus and, in August at any rate, heavy
short-term capital inflows.
During the last two months, short-term
rates have continued downward, under the influence of the Bank rate cut,
the continuing high level of bank liquidity, and, since last September,
falling Euro-dollar rates.
Long-term yields,
after rising in
the latter half of July
when the Chancellor's expansionary package failed to include measures
aimed at lowering interest rates, then declined almost steadily until
mid-October.
The drop, averaging almost a full percentage point in
the case of long-term government bonds,
stemmed in large measures from
IV - 20
revived expectations of easier money.
Since mid-October, long-term
yields have risen slightly, probably because no further easing of
monetary policy is anticipated.
In mid-September administratively imposed limits on bank
lending were abolished as the change in
the method of implementing
monetary policy proposed in May took effect.
Under the new arrange-
ment, all banks (and not, as before, the clearing banks only) must
hold specified liquid assets equal to at least 12-1/2 per cent of
their sterling deposits.
Since the change left the clearing banks,
which account for the bulk of domestic lending, with ample excess
reserves, the immediate effect of the new
system can be expected to
be on the expansionary side.
Evidence that no further relaxation of monetary policy is
now planned was provided when Bank rate was not lowered last month,
despite the strengthening of exchange controls designed to check
the steady appreciation of the pound vis-a-vis the dollar and despite
the downward trend in interest rates abroad.
The apparent decision not to ease monetary policy further
would indicate that the government is convinced that the economy will
now be growing at a satisfactory rate.
The Chancellor announced in
July a goal of 4 to 4-1/2 per cent for growth between the first halves
of 1971 and 1972.
Though wage inflation has slowed somewhat this year
and though price increases also appear to have decelerated since July,
inflationary pressures are still sufficiently intense --
despite high
IV - 21
unemployment and a large margin of unused plant capacity -- to dictate
caution in applying stimulative measures.
Reflecting lessened demand pressures in the Belgian economy
this year, the discount rate was reduced from 6 to 5-1/2 per cent on
September 23 and ceilings on bank lending were allowed to expire on
September 30.
An additional reason why the discount rate was cut may
have been that, as a result of the floating of the exchange rate on
August 23, cash balances of the banks are no longer being augmented
by official purchases of foreign exchange; rediscounts at the central
bank are therefore tending to increase and the discount rate is having
a greater effect on market rates.
Since the reduction in the discount
rate, the auction rate on 4-month bills has dropped a further 20 basis
points (to 50 points under the level in early August).
Partly because of the continuing high level of unemployment,
Canadian monetary policy was further eased recently, as the Bank of
Canada lowered its discount rate from 5.25 to 4.75 per cent on October 25.
The reduction supplemented the proposal on October 14 of several
expansionary fiscal measures.
Like discount rate reductions in several other countries
since August 15, the Canadian cut is intended not only to stimulate
output through its impact on domestic credit conditions but also to
exert downward pressure or counteract upward pressure on the exchange
rate.
Underscoring the importance which has recently been attached
to the latter objective -- as the Canadian dollar approached parity
IV - 22
with the U.S. dollar -- the Bank of Canada bought U.S. dollars on a
large scale at the end of October, something it had not done since
the Canadian dollar was floated at the end of May 1970.
Short-term interest rates in Canada have been unusually
low in relation to U.S. rates since April.
Canadian rates, as reflected
in the movement of yields on 3-month Treasury bills, showed little
change from mid-August until the discount rate cut, which was accompanied by corresponding cuts in the chartered banks' prime rates,
interest rates on savings accounts and mortgage rates.
Between the latter
part of May and mid-August, Canadian short-term yields rose rather
sharply -- the Treasury bill rate increasing from about 3 per cent to
4 per cent -- despite a substantial increase in the money supply.
Long-term yields, as measured by the average yield on
Canadian government bonds, declined by about 70 basis points from
mid-August to mid-October.
As with short-term rates, Canadian and
U.S. yields moved in parallel fashion.
Earlier this year, Canadian
bond prices fell sharply, and the recent recovery still leaves yields
above their 1971 low
of 6.60 on January 20.
As part of the effort to counteract the slowdown in economic
growth, Japan continues to pursue the easy monetary policy introduced
in the summer of 1970.
The Bank of Japan has reduced its discount
rate four times since October 1970, most recently in July.
A further
reduction in the rate is considered likely before the end of the year.
IV - 23
Other indications of the stimulative bent of monetary policy
have been the more rapid rates at which bank credit and the money
supply have been expanding this year compared to last.
Interest rates have generally been declining since the summer
of last year.
The call loan rate declined from 8.5 per cent in September
1970 to 5.5 per cent in October 1971, the lowest level in 15 years.
The average interest rate on commercial bank loans and investments fell
from a peak of 7.70 per cent in October 1970 to 7.57 per cent in August
of this year.
Long-term yields have also come down, but only slightly,
and small cuts have been made in some officially controlled rates.
Mainly because of large balance of payments surpluses, the
banking system is now very liquid.
One consequence of this development
is that Japanese banks have substantially reduced their indebtedness
to the Bank of Japan.
As a result, the Japanese authorities fear that,
should tight money be appropriate in the future, discount policy will
prove ineffective.
To deal with this potential problem the Bank of
Japan reportedly plans to make more active use of legal reserve requirements in the future.
IV-C-1
11/9/71
U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
BILLIONS OF DOLLARS
INTEREST RATES(OTHER
SHORT-TERM INTEREST RATES (EECCOUNTRIES)
COUNTRIES)
U S BANK LIABILITIES
"fUS X IM NOTES AND
TREASURY CERTIFICATES HELD BY BRANCHES
2
U.S MERCHANDISE TRADE
ANNUAL RATfS SEASONALLY ADJUSTED
3 MO MOV AV 121
1969 DATA AFFECTED BY PORT STRIKES
XPORTS
40
IMPORTS
JS A80
- 30
6
1971
1971
1969
1969
1971
1971
APPENDIX A WILL APPEAR IN THE SUPPLEMENT
APPENDIX B:
THE FLOATING PRIME RATE*
In response to an informal survey, the Reserve Banks have
indicated that to their knowledge only four commercial banks have thus
far publicly adopted a floating prime rate. Two other commercial banks
have apparently abandoned the prime rate convention altogether, intending
to negotiate rates separately with each customer. Other banks have
stated that they are interested in the floating rate concept but do not
believe that a suitable rate setting mechanism has been devised as yet.
The rate-setting procedures adopted by banks that have shifted
to a floating rate differ to some degree. First National City Bank has
tied its prime rate to a level 50 basis points above the rate charged
borrowers on 90 day commercial paper and has indicated that, when necessary,
it will change the prime rate weekly in one eighth point intervals, using
either a weekly average or rates established on the last days of the
preceding week as the base rate. Irving Trust Co. has tied its rate 50
basis points above the dealer rate offered buyers of commercial paper,
with changes to be made in quarter point intervals on the basis of
fluctuations in the weekly average of the base rate.
Michigan Bank
NA,in Detroit, has adopted an index of the 90 day commercial paper rate
and the rate on 360 day negotiable CD's. The prime rate determined in
this way will be limited to borrowers in the banks own market area. The
final details of the policy of the First National Bank of Boston,have
not been worked out yet, but the bank has indicated that it intends to
use a broader range of money market variables than those adopted by the
other banks, and will also give considerationto its own portfolio position
in setting its rate. This bank plans to change its rates on a monthly
basis in one eighth point intervals but does not intend to annouce its
actions.
The prime rate has progressively become a more flexible rate
in recent years, changing more frequently and in smaller intervals to
alterations in money market conditions as banks have responded to the
competitive challenge offered by the commercial paper market and have
placed greater reliance on large CD's and non deposit funds, the cost of
which tend to move sensitively with money market conditions. In some
respects, therefore, the significance of the new floating rate policy
That is to say, the
would appear to be more political than economic.
newly developed mechanism may bring about a slight speed up in the
* Prepared by Fred Struble, Economist, Banking Section, Division of
Research and Statistics.
B-2
reaction of banks to changing market rates and may result in changes
in the prime rate of smaller size, but the range of variation in this
rate over the cycle will probably not be widened significantly by the
mechanism.
A device which imparts a more mechanical, non-administered
appearance to a prime rate change, however, may reduce public objection
to a possible hike in this rate at some future time.
APPENDIX C:
A SURVEY OF THE IMPACT OF FLOATING EXCHANGE RATES ON
INTERNATIONAL TRADE AND FINANCE*
Summary
As a result of the mid-August suspension of gold convertibility
by the United States, since August 23 exchange rates have been allowed to
float --
subject to varying degrees of official control --
in all of the
European Group of Ten countries, except the French franc rate for trade
transactions. The Japanese yen began to float on August 28. The German
and Dutch currencies had, of course, been floating since May 10, and the
Canadian dollar since June 1, 1970. Moreover, in several countries the
authorities have acted with both direct and indirect measures to limit
the movement of the exchange rate away from the official parity. Nevertheless, the current situation constitutes a radical departure from the
past because floating rates are at present widespread and because great
uncertainty prevails, here and abroad, as to the levels of exchange rates
in the near future.
A survey of recent exchange market and trade developments was
requested by the Department of State from the American Embassies in nine
countries 1/ and was carried out in late October. It indicates that, in
the limited period of time since mid-August, the new exchange rate situation has so far had no readily apparent effect on the volume of foreign
trade, with the important exception of export sales involving credits of
relatively long maturity. (The survey did not cover effects on trade of
changes in exchange rate levels, i.e., of the resulting changes in
relative prices.) The survey results suggest that, on the basis of exchange market activity, capital movements have not been hindered by the
floating rates per se, except possibly in Japan. On the other hand,
despite the great uncertainty about spot exchange rates there has been
no general increase in the use of the forward exchange market. The survey
also covered reactions of the public to the U.S. measures of August 15;
the findings show a general unhappiness but no organized pressure for
retaliatory measures in any of the countries surveyed.
1/ Belgium, France, Germany, Italy, Japan, the Netherlands, Sweden,
Switzerland, and the United Kingdom.
* Prepared by Rodney H. Mills, Jr., Economist, European Section,
Division of International Finance
C - 2
Effects on trade
The results of the survey suggest that increased uncertainties
over exchange rates since August 15 have had no obvious repercussions on
most types of trade transactions. But in most of the countries covered
by the survey, difficulties have been experienced for exports involving
relatively long-term credits, in general those over one year, because the
long payment period increases the exchange risk, and forward cover for
longer periods is unobtainable or very expensive. One way in which the
exporter can avoid an exchange risk is to invoice his shipments in his
own currency, thus placing the risk on the buyer. According to the survey,
this practice is now widespread, or has recently increased, in Belgium,
France, the Netherlands, Sweden, Switzerland and Japan. In Switzerland,
exports requiring long-term finance came to a halt after mid-August but
now are reviving because buyers have given in and agreed to being billed
in Swiss francs.
Importers' resistance to invoicing in the seller's currency
obliges some exporters to bill in the importer's currency or some third
currency, usually the dollar (although some shifting from the dollar to
sterling was noted in Sweden and Switzerland). In these instances, the
exporter may still avoid an exchange risk by borrowing the invoice currency
from a bank, rather than domestic currency, to finance his sales, and this
practice was specifically reported in Belgium. The exporter may also avoid
an exchange risk by selling his export proceeds forward. But in most countries, dollars can be sold forward only at substantial discounts from spot
rates, and usually markets do not exist for forwards longer than one year.
The survey reported that forward cover was a problem, of greater or lesser
severity, for exporters in Japan, Germany, the Netherlands, Belgium, and
Sweden, especially for relatively small firms.
In Japan, long-term export contract negotiations were suspended
after the floating of the yen, but are now being resumed. The exchange
risk problem is being resolved in part by increased invoicing of exports
in yen, which Japanese shipbuilders were already doing before last August.
But activity in the Tokyo forward exchange market has declined drastically,
and the cost of forward cover has risen very sharply. This is creating
difficulties especially for small- and medium-sized exporters. The
Japanese Ministry of Finance is now making dollar deposits with banks to
facilitate their purchases of export bills sold by small- and medium-sized
firms. In Germany, exporters' problems with exchange risks have apparently
been aggravated by the fact that, since the floating of the mark in May,
there has been a decline in the proportion of exports invoiced in marks
(presumably because of importers' resistance).
C -3
Effects on exchange markets
The volume of exchange market trading was reduced drastically
in Switzerland, and to a lesser extent in other European countries, in the
first few days after the reopening of the European exchanges on August 23.
The floating of the yen on August 28 caused trading to fall sharply in
Tokyo, where turnover (spot and forward) is still 20-30 per cent below
normal. In Europe, trading volume is still generally smaller than in July
and early August, when speculative activity was intense. But in all the
European countries covered by the survey, trading volume has now returned
to the normal levels (reached in Switzerland in late October), or has risen
above normal (Sweden). The survey did not specifically seek to inquire
about the effects of floating rates on international capital flows. But
the resumption of normal levels of exchange market trading in Europe suggests
that, if capital flows in European countries were initially hindered by the
new exchange rate system, they are no longer hindered. From London it is
reported that the international bond market is operating without any difficulties as a result of floating rates, and that activity in that market has
been more dominated by dollar issues since the float than it was before.
In Switzerland, demand for dollar-denominated Euro-bonds has increased at
the expense of issues denominated in marks. The evidence that capital flows
are now little if any restricted by floating rates should, of course, be
considered in conjunction with the fact that the United Kingdom, France,
Switzerland and Japan have imposed controls since mid-August to discourage
or prevent inflows of short-term capital of one kind or another, to reduce
upward pressure on the exchange rate, and the Netherlands has established
a special exchange market for transactions in guilder-denominated bonds
between residents and nonresidents.
In Japan, the volume of trading in forward exchange has been
reduced by two-thirds or more, which is proportionately a much greater
reduction than that in spot exchange trading.
In Europe, exchange markets
do not show any important shifts in the composition of trading between spot
and forward transactions as compared with normal periods in the past. Sweden
was the only country for which the survey reported a definite rise in the
volume of forward transactions; there, forward sales of dollars and forward
purchases of sterling and marks have increased. In Italy there is "some
tendency" for more exporters to cover forward, but for Britain the survey
found no significant increase in the demand for forward cover. The general
situation in European markets remains one in which trading in forwards is
a small part of the total (a figure of 10-15 per cent was reported for
Belgium) and in which importers and exporters typically do not cover for-
ward.
Following the floating of the mark and the guilder in May, and
following the reopening of the European exchanges in August, spreads between
C-4
banks' bid and offer rates for foreign currencies generally widened
sharply. Since then, spreads have narrowed again, but they still remain
two or three times greater than normal in Switzerland and four times
larger in France and the Netherlands.
Reactions to U.S. measures
Apart from the controls on capital inflows imposed by Japan,
Switzerland, France, the United Kingdom and the Netherlands, the only
significant actions taken specifically in reaction to the U.S. measures
of August 15 were several measures by Japan. As reported above, steps
have been taken to help exports of small- and medium-sized firms. The
Japanese government will pay at least 60 per cent of their normal average
wage to workers temporarily laid off because of the U.S. measures and the
floating of the yen. In addition, three government-affiliated financing
institutions will extend long-term, low-interest loans to export-related
firms, and special loans will be made to enable firms to change their line
of business. Exporters in Britain, Germany, and France are more concerned
about the U.S. investment tax credit than about the import surcharge, while
the opposite was reported for Italy and Japan. Exporters' dissatisfaction
over appreciation of the exchange rate was noted in Germany and Belgium.
Although floating rates have had relatively little injurious effect on
trade, there is a general concern that prolonged uncertainty about exchange
rates could eventually be harmful. In Switzerland, industrialists and
bankers have stated that if progress in eliminating the U.S. surcharge and
the uncertainty over exchange rates were not made by early 1972, pressures
could begin to influence the Swiss government's economic policies.
@FedFRASER