Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 16, 1976 : Greenbook Part 2

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Prefatory Note

The attached document represents the most complete and accurate version available
based on original copies culled from the files of the FOMC Secretariat at the Board
of Governors of the Federal Reserve System. This electronic document was created
through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned
versions text-searchable. 2 Though a stringent quality assurance process was
employed, some imperfections may remain.
Please note that some material may have been redacted from this document if that
material was received on a confidential basis. Redacted material is indicated by
occasional gaps in the text or by gray boxes around non-text content. All redacted
passages are exempt from disclosure under applicable provisions of the Freedom of
Information Act.

1
In some cases, original copies needed to be photocopied before being scanned into electronic
format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced
tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other
blemishes caused after initial printing).
2
A two-step process was used. An advanced optical character recognition computer program (OCR)
first created electronic text from the document image. Where the OCR results were inconclusive,
staff checked and corrected the text as necessary. Please note that the numbers and text in charts and
tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Content last modified 6/05/2009.

CONFIDENTIAL (FR)

November 10, 1976

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section

Page

DOMESTIC NONFINANCIAL DEVELOPMENTS

Industrial production........................................

Materials capacity utilization...............................

...... .....................
Nonfarm payroll employmente..
.
Unemployment rate..........................................
.....
............................
Personal income.............
Retail sales..................... ........... .................
.
... .... .............
.... ........
Auto sales .........

2
2
4
7
7

...........
Conference Board consumer survey......................
Accumulation of manufacturers' inventories...................

7
9

.............
McGraw-Hill survey..........................
Private housing starts......................................
Federal spending.............................................
State and local governments...................................
Average hourly earnings index.................................
Nonfarm business productivity................................
.
Consumer price.................... ...........................
...............
Wholesale price .................... .......

9
12
16
19
20
20
20
22

TABLES:
........

Selected unemployment rates...................................
.......
Personal income.................................

3
6

Retail sales.............8......................
*************
...
*
Auto sales...........

Changes in employment...

Business inventories...

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

***

................... ... .. a............

.
...
*.......... *......... 10
Inventory ratios.. 0..# ....
11
Private capital spending surveys.............................
14
Commitments data for business fixed investment................
New private housing units........... ....................... •

Growth in Federal outlays during first
three calendar quarters..................................

Shortfall in Federal budget estimates..........................

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

Productivity and costs...................................
Consumer prices..........................

21
23

Hourly earnings index..........

Wholesale prices.................

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

.....

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

CHARTS:
Real personal income...............
.........
...............
Real wage and salary disbursements....................... ...
....
...
Producers' durable equipment........ ........... .
Nonresidential structures ... ..... ....
........
..........
DOMESTIC FINANCIAL DEVELOPMENTS

5
5
13
13

III

Monetary aggregates and bank credit................... ........
6
Business credit... .................... ................
Municipal and U.S. government securities markets............. 12
Mortgage and consumer credit markets.... ..............
....
15
TABLES:
Selected financial market quotations........ ..................
Monetary aggregates...... ....................................
...................
Commercial bank credit... ................
Security offerings............
... ................. .......
Changes in Treasury debt outstanding in 1976 by maturity......
Interest rates and supply of funds for conventional home
.
.....................
S&Ls .. ...
selected
at
mortgage
activity
market .......................
mortgage
hom
Secondary
Consumer instalment credit...................................
CHART:

2
4
7
9
14

Liquidity measures of nonfinancial corporations.... .. .......

INTERNATIONAL DEVELOPMENTS

16
16
17

............. .....
Foreign exchange markets............ .....
..
OPEC investment flows..................... ..... .........
.....
....
U.S. international transactions.. ................
...........
Bank reported private capital transactions .......
New issues of foreign bonds..... ...... ................ ....
.
..
......................
Foreign official assets. .....
Economic activity in foreign industrial countries.. ..........

1
3
7
9
10
11
12

TABLES:
Estimated disposition of OPEC surpluses. .....................
.....................
U.S. merchandise trade ... ...............
Industrial production in major industrial countries... .......
Real GNP and components in major foreign countries ............

4
7
13
14

November 10, 1976
II - T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
AVAILABLE SINCE PRECEDING GREENBOOK
(Seasonally adjusted)
Latest Data

Period

Release
Date

Data

Per Cent Change From
Three
Year
Preceding Periods
Period
Earlier
Earlier
(At Annual Rate)

Civilian labor force
Unemployment rate (per cent)
Insured unemployment rate (%)
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)

Oct.
Oct.
Oct.
Oct.
Oct.
Oct.

11-5-76
11-5-76
11-5-76
11-5-76
11-5-76
11-5-76

95.3
7.9
5.0
79.5
19.0
60.5

Oct.
Oct.

11-5-76
11-5-76

36.2
4.94

Oct.
Sept.

11-5-76
10-29-76

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

Sept.
Sept.
Sept.
Sept.
Sept.

Consumer prices (1967=100)
Food
Commodities except food
Services

1.8

0
7.81

7.8-

2.3
8 1/

8.6

5.0-. 8
-9.2
1.8

4.7-/

1/
6. 0i
4.92-

1/
36.2-/
4.87-'

1/
36. 2z
4.63;-

39.8
144.5

1/
39.71
5.0

1/
40.23.6

1/
39.82.9

10-15-76
10-15-76
10-15-76
10-15-76
10-15-76

131.3
137.3
136.9
79.1
133.1

.0
-8.7
3.5
1.5
.9

3.7
-1.5
5.6
4.1
6.1

7.5
6.4
6.0
-2.6
10.0

Sept.
Sept.
Sept.
Sept.

10-21-76
10-21-76
10-21-76
10-21-76

172.5
181.8
158.5
183.0

4.9
.0
4.6
6.6

5.6
1.8
6.4
6.9

5.5
2.1
4.8
8.3

Oct.
Oct.
Oct.

11-4-76
11-4-76
11-4-76

185.6
186.6
180.4

6.9
12.3
-11.2

2/
Personal income ($ billion)-

Sept.

10-15-76

1392.2

5.8

Mfrs. new orders dur. goods
Capital goods industries
Nondefense
Defense

Sept.
Sept.
Sept.
Sept.

11-3-76
11-3-76
11-3-76
11-3-76

46.8
13.6
12.1
1.4

-2.5
-1.2
3.0
-26.3

Aug.
Sept.
Aug.

10-15-76
11-3-76
10-15-76

1.48
1.65
1.35

1/
1.481/
1
1.621.3411

Sept.

11-3-76

.850

1
.842-

Retail sales, total ($ bil.)
GAF

Sept.
Sept.

10-12-76
10-12-76

54.6
13.5

.1
.0

2/
Auto sales, total (mil. units)Domestic models
Foreign models

Oct.
Oct.
Oct.

11-8-76
11-8-76
11-8-76

9.5
7.6
1.9

-5.7
-7.4
2.3

-6.7
-12.6
29.1

3.2
-1.7
29.5

2/
Housing starts, private (thous.)Leading indicators (1967=100)

Sept.
Sept.

10-19-76
10-29-76

1,814
107.9

17.6
-. 7

20.1
-1.2

39.1
5.3

sale prices (1976=100)
ndustrial commodities
Farm products & foods & feeds

5.6
10.6
-11.4

Inventories to sales ratio:
Manufacturing and trade, total
Manufacturing
Trade
Ratio:

Mfrs.' durable goods inventories to unfilled orders

ctual data.

At Annual rate.

9.0

at Annual Rates)
10.9
11.2
18.8
-27.3

-6.2
-5.4
2.5
-42.5

6.2.5
2.6
2.5

3.4
6.6
-5.9

6.4
(Not

($ bil.)

1.7
.9
2.0

1.54

1.461.601.341/
134-

1.70

.838/
.838-

1/
.819-

1.1
2.3

1.36

10.0
8.0

DOMESTIC NONFINANCIAL DEVELOPMENTS
A significant pickup in the pace of consumer spending
occurred in the past two months, while industrial output and total
hours worked rose more in November than can be accounted for by the
ending of strikes.

With the pick-up in retail sales, some progress

may have been made in working off excess inventories especially in
nondurable goods lines.

However, the near term outlook remains clouded

by continued large inventories of durable goods.

In addition, the

recent Commerce survey of plant and equipment spending plans shows
disappointingly little strength in the first half of 1977.
Industrial production is estimated to have increased by
1-1/4 per cent in November.

More than half of this rise was due to

resumption of production following settlements of labor disputes,
but moderate increases were widespread among non-affected industries.
Consumer goods production increased about 1-3/4 per cent, mainly
reflecting renewed production of autos and utility vehicles.

Auto

assemblies increased 14 per cent to an 8.8 million unit annual rate
in November, close to their pre-strike levels.

December output

schedules call for a 9.2 million unit annual rate, with heavy concentration of production in models that have been in short supply.
Production of farm equipment and business vehicles also recovered
from strike reduced levels.

In addition, there were moderate advances

in the consumer durable goods and business equipment sectors not
affected by strike activity.

Production of consumer nondurables,

II -

notably apparel, also advanced.

Output of materials also increased

with gains throughout the durables group and advances in the paper
and chemical industries.
The rise in industrial production in November generated
an increase in the level of the newly re-estimated FR series of
capacity utilization in manufacturing to 80.5 per cent up from a
strike-reduced figure of 79.8 per cent in October.
peacetime cyclical peak rates to 88 to 89 per cent.

This compares to
Thus, there

appears to be sufficient capacity presently for appreciable near-term
expansion in both advanced and primary processing industries.

For

industrial materials, the November rate of capacity utilization was
nearly 81 per cent, about the average level maintained since May;
however, in recent months the utilization rates for textiles and basic
metal materials have declined from levels reached earlier in the year.
Stocks continued to accumulate rapidly at the factory
level in October, despite a decline in industrial production during
that and the preceding month, as shipments of goods slipped further.
Book value of manufacturing inventories rose at a $17-1/2 billion
annual rate, somewhat slower than the $22 billion September rate, but
above the $15 billion monthly average of the third quarter.

Durable

manufacturers inventories rose even faster in October than in
September.

Those stocks have been rising for six months, but the

September and October rates exceeded those in the previous four months.
On the other hand, nondurable stocks rose in October at less than half

II - 3
BUSINESS INVENTORIES
(Change at annual rates in seasonally
adjusted book values, $ billions)

II
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail
Auto

-15.4
-12.5
-4.3
-8.2
-2.8
-2.7
-.1
.0

1975
III

1976
III

Sept.

Oct.

6.2
-6.6
-8.6
2.0

-.4
.6
-3.5
4.2

21.9
6.3
1.8
4.5

28.3
11.0
5.7
5.4

29.0
14.8
6.4
8.4

39.5
22.1
13.3
8.8

18.4
17.6
14.1
3.5

12.8
3.1
9.7
5.9

-1.0
-2.0
1.0
-.9

15.6
5.1
10.5
1.1

17.3
9.0
8.3
.1

14.2
4.3
9.9
4.8

17.4
8.6
8.8
-.9

.9
3.2
-2.3
-5.6

INVENTORY RATIOS

1974
IV

1975
IV

1976
III

Sept.

Oct.

Inventory to sales
Manufacturing and trade
Manufacturing
Durable
Nondurable

1.62
1.79
2.25
1.29

1.52
1.68
2.22
1.16

1.49
1.63
2.09
1.15

1.49
1.60
2.03
1.16

1.51
1.64
2.08
1.19

1.51
1.65
2.11
1.18

1.52
1.67
2.14
1.19

Trade, total
Wholesale
Retail

1.45
1.24
1.63

1.36
1.21
1.48

1.36
1.20
1.47

1.37
1.22
1.48

1.38
1.22
1.51

1.38
1.20
1.51

1.38
1.22
1.49

Inventories to unfilled orders:
Durable manufacturing
.734

.829

.846

.838

.854

.859

- 4

the September and third quarter rates.

This drop in

the rate of

accumulation of nondurable inventories was widespread.
manufacturing inventory-sales ratio rose to about its
end of last year.

The total
level at the

Total trade inventories were essentially unchanged

in October as auto stocks declined during the strike and growth of
nonauto stocks moderated substantially from the September pace.
Retail sales are estimated to have moved up briskly at
almost all major types of stores last month,
ward revised) October increase.

following a strong (up-

Excluding autos and mainly noncon-

sumer items, sales in November are estimated to be 1.4 per cent above
October with a large gain reported for sales of furniture and appliances
as well as another rise in general merchandise.
United Parcel Service in
relatively little

The strike against

15 eastern states appears to have had

impact on total sales in November.

Compared to the

third quarter, sales in November excluding autos and nonconsumer items
were up 3.4 per cent--distinctly stronger than gains in
two quarters.

the preceding

Higher spending at general merchandise and apparel

stores and at gasoline stations were important sources of strength over
this longer period.
The demand for cars as reflected in unit auto sales appears
to have about returned to pre-strike levels.

Domestic auto sales were

at an 8.0 million unit annual rate in November--up from a 7.6 million
unit rate in October--and rose further to an 8.7 million annual rate
in

the first

ten days of December.

This is

close to the average rate

- 5

RETAIL SALES
(Per cent change from previous period;
based on seasonally adjusted data)

I-II

1976
II-III

1976
Sept. Oct.

III-Nov.

Nov.a

Total sales

1.9

1.2

2.6

-1.0

1.1

(Real*)

1.0

n.a.

-1.9

-.1

n.a.

Total, less auto and
nonconsumption items

1.3

1.6

3.4

1.4

GAF

-.2

2.9

4.7

-1.4

3.3

1.5

3.4
4.5

.2
-. 7

1.3
.4

-4.0
-6.2

.6
-. 2

2.5
3.5

2.7

-.2

3.3

-2.2

2.6

1.9

1.2
-3.2
1.2
-.1
.0

1.7
5.7
1.0
3.0
2.3

3.3
1.5
2.1
5.9
2.9

.5
-1.1
-.3
-1.2
.7

1.3
2.6
1.0
3.6
1.4

1.3
-.7
.7
2.0
.9

Durable
Auto
Furniture and
appliances
Nondurable
Apparel
Food
General merchandise
Gasoline

1.7

aAdvance, partial sample estimate.
Deflated by an unpublished Bureau of Economic Affairs price measure.
AUTO SALES
(Seasonally adjusted, millions of dollars)

1976
III

July

Aug.

10.0

10.3

10.2

10.5

Imports

1.3

1.4

1.6

1.4

Domestic

8.7

8.9

8.6

8.7

Total

1977
Sept.

Oct.

Nov.

10.0

9.5

1.6

1.8

1.9

1.5

8.9

8.2

7.6

8.0

earlier in the year.

- 6

Strike-related inventory shortages at Ford have

held down the sales rate, and sales of General Motors cars were also
affected by shortages of some popular intermediate and standard units.
Sales in late November and in early December clearly benefited from the
newly-authorized cash rebates on subcompacts.
Sales of imported units in November were at a 1.5 million
unit annual rate, down from the more than 1.8 million pace of the previous two months.

This decline reflects, in part, the conclusion of

dealer incentive programs by two producers undertaken during the fall
in the face of a heavy inventory hangover at model changeover time.
Inventories of imported models remain high, however.
The most recent survey of business capital spending plans
for early 1977 shows surprising weakness.

The Commerce Department's

latest survey of anticipated plant and equipment expenditures--conducted
in late October and November--shows business planning to increase
capital spending at an annual rate of 17.4 per cent in the fourth
quarter of 1976, but only at a 5 to 6 per cent annual rate in the
first two quarters of 1977.

however, it

On the basis of flow data for October,

seems likely that there will be another shortfall of actual

plant and equipment expenditures from expectations

the current

quarter with the shortfall likely to be carried over into the first
half of 1977.

This pattern has occurred repeatedly in the recent past.

Overall, the Commerce survey suggests a weaker outlook for
capital spending than the McGraw-Hill survey, which showed a 13 per

BUSINESS EXPENDITURES FOR PLANT AND EQUIPMENT
Per cent change from previous quarter

Per cent

Seasonally adjusted, annual rate
-

-- 24
I
S

I
Anticipated
Expenditures*

"
,

I
iS

12S12

7Actual

,Expenditures
,
--

S1-

'74

1975

Current quarter anticipations.

1976

II -

Business Expenditures for New Plant and Equipment
(Annual Rate Percentage Changes from Previous Quarter)

1976
I

1977
III

----- Anticipated- ----

10.4

11.9

15.0

17.4

4.7

5.9

Manufacturing

20.4

11.6

32.7

10.6

5.4

4.1

Durables

10.6

16.8

36.4

10.4

4.6

14.6

Nondurables

28.4

7.4

30.0

10.6

6.1

-4.4

3.3

12.0

1.7

22.9

4.1

7.3

All Industry

Nonmanufacturing

Expenditure plans from Commerce survey conducted in late October
and November.

Manufacturers' New Capital Appropriations-

(Per cent change from prior period based on seasonally
adjusted quarterly totals)

1976

1975

QIIIp

QII

QIII

QIV

QII

-10.1

-3.6

-7.3

26.4

-11.9

10.1

Ex Petroleum

-16.8

-12.1

-5.5

18.9

1.8

27.5

-18.0

Durables

-28.2

-16.9

-5.8

10.4

18.5

33.3

-15.6

9.0

5.6

-8.1

35.4

-25.9

-7.0

3.8

-6.1

-5.2

28.2

-14.2

19.7

Manufacturing

Nondurables
Ex Petroleum

-9.2

-2.4
-21.5

-/Conference Board Survey of 1000 largest manufacturing companies as
ranked by total assets.

- 9

COMMITMENTS DATA FOR BUSINESS FIXED INVESTMENT
(Percentage change from preceding period; based on seasonally adjusted data)

Oct. 75
to
Oct. 76

QII

1976
QIII
Aug. Sept.

7.0
5.5

8.3
7.5

-3.0
-4.6

-. 1
-. 6

-2.9
-3.9

2.1
.8

12.6
5.4

1.6
.1

9.3
8.1

4.2
2.9

-6.8
-7.1

2.6
1.7

3.3
2.6

16.8
10.1

1.4
-8.6

11.1
24.1

-7.1
-3.8

-7.1
-3.2

30.9
-9.5

4.0
11.1

13.8
1.4

11.7
9.1

3.1
2.3

.0
-. 5

-8.9
-8.4

3.6
2.6

15.1
12.4

28.8
20.3

Oct.

New Orders Received by Manufacturers
Total Durable Goods
Current Dollars
1967 Dollars 1/

Nondefense Capital Goods
Current Dollars
1967 Dollars 1/
Construction Contracts for Commercial
and Manufacturing Buildings 2/
Current Dollars
Square Feet of Floor Space

Contracts and Orders for Plant & Equip.3/
Current Dollars
1967 Dollars 4/

FR deflation by appropriate WPI.

Current Dollar series obtained from FR seasonals
adjusted by Census.

Contracts and orders for plant and equipment (BCD Series No. 10) is constructed
by adding new orders for nondefense capital goods to the seasonally adjusted
sum of new contracts awarded for commercial and industrial buildings and new
contracts awarded for private nonbuilding (e.g. electric utilities, pipelines,
etc.).

An experimental BCD series.

Floor space is seasonally

cent rise for all of 1977.

- 10

Moreover, newly approved capital appro-

priations of the 1,000 largest manufacturing companies--which decreased
9 per cent in the third quarter of 1976--also indicate less prospective
strength.

Excluding the petroleum industry (where appropriations tend

to be particularly volatile), the total for manufacturing dropped 18
per cent after a cumulative increase of 54 per cent in the previous
three quarters.
Commitments data for business fixed investment remain
relatively more promising, but they, too, are showing less bouyancy
than earlier this year.

New orders for nondefense capital goods rose

3.3 per cent in October to record their ninth increase in the last
ten months.

While orders continue strong, the rate of increase has

been much less since mid-year than in the first half of 1976.

The

volatile series on construction contracts for commercial and manufacturing buildings rose sharply in October, and in dollar terms
these contracts were 14 per cent above their level of a year earlier;
but measured in square feet of floor space, they were up only 1 per
cent.
Residential construction continues to show surprising
strength.

Private housing starts in October were only slightly

below the strong rate recorded in September.

The decline--to a

seasonally adjusted annual rate of 1.79 million units--reflected a drop
in multifamily starts, which had jumped sharply in September in response
to efforts by HUD to encourage activity in this sector.

II -

PRIVATE HOUSING STARTS--HUD ASSISTED PROGRAMS

Per cent of

Number of units
Type

of unit

type

(NSA)
Sept.

Oct.

Sept.

44,200

38,700

100

10,039

8,278

6,552

5,128

2,597

3,150

Rent supplement

162

Low rent public
housing (turnkey)

728

108,900

108,600

100

760

600

Oct.

Multifamily
Total
HUD Programs
Sec. 8 1/
236 1

Sec.

Single-family
Total
HUD programs
(Sec. 235 revised 2/)

NOTE:

Details may not add to totals because of rounding.
Sec. 8 calculated
from HUD cumulative monthly totals.
Rent supplement excludes Sec. 236.
Sec. 235 estimated by HUD.

Section 8 and Section 236 programs provide rental assistance to low and
moderate income households.

2/The section 235 program provides mortgage payment subsidies to enable selected
low and moderate income households to purchase homes.

- 12

NEW PRIVATE HOUSING UNITS
(Seasonally adjusted annual rates, millions of units)

Per cent change in
1976
Oct. from:
QIII(p) Sept.(r) Oct.(p) Month ago
Year ago

1975
QIV

QII

All units
Permits
Starts
Under construction 1/
Completions

1.11
1.37
1.04
1.28

1.17
1.40
1.06
1.30

1.13
1.43
1.06
1.33

1.34
1.59
1.11
1.36

1.50
1.86
1.11
1.36

1.44
1.79
n.a.
n.a.

+
-

4
4
3*
3*

+29
+25
+ 7*
+ 4*

Single-family
Permits
Starts
Under construction 1/
Completions

.81
1.03
.56
.91

.87
1.12
.59
.97

.81
1.09
.61
.99

.89
1.19
.64
1.05

.93
1.29
.64
1.01

.99
1.33
n.a.
n.a.

+
+
+
-

7
3
3*
8*

+25
+22
+22*
+ 4*

Multifamily
Permits
Starts
Under construction 1/
Completions

.30
.33
.48
.37

.30
.28
.46
.33

.32
.35
.46
.34

.45
.40
.47
.31

.58
.57
.47
.36

.45
.46
n.a.
n.a.

-22
-19
+ 3*
+16*

+41
+37
- 8*
+ 3*

.23

.27

.24

.26

.28

+ 9

+18

MEMO:

Mobile home shipments

* Per cent changes based on September data.
1/ Seasonally adjusted, end of period.
NOTE:

Per cent changes are based on unrounded data.
cent is indicated by --

A change of less

than 1 per

II - 13

The pace of single-family starts continued to increase in
October, reaching a seasonally adjusted annual rate of 1.33 million
units.

This rate was only 7 per cent below the January 1973 peak,

when support under federal subsidy programs was much larger.

Mean-

while, sales of both new and existing homes in October, while down
from their exceptional pace of September, remained quite strong.
With the exception of the second quarter of 1976, state
and local government spending has risen quite modestly of late--up
only 0.8 per cent from a year ago in real terms, compared to a longrun average rise of over 3 per cent.

Most of the slowdown reflects

reduced investment in structures and low employment growth stemming
partly from fiscal constraints faced by many units.

The latest indi-

cators of state and local government purchases show continued weakness
in investment.

The value of construction put-in-place fell sharply

in October, according to preliminary data, to well below the average
for the third quarter.

Although state and local employment increased

in November its level was only slightly above that in August.

The

Federal sector (NIA basis), after having made up during the third
quarter some of its earlier shortfall in spending, appears to have
reverted to a more modest growth rate of spending in the fourth
quarter--when allowance is made for the recent Federal pay raise.
Total employment rose by 360,000 in November--more than
offsetting the declines recorded in September and October.

However,

the civilian labor force, which was virtually unchanged from July to

October, jumped 560,000 in November and the unemployment rate rose
0.2 percentage points to 8.1 per cent--its highest level since
December 1975.

Over the past six months, household employment has

grown by only 430,000, well below the increase in the labor force,
and the unemployment rate has increased by 0.8 percentage point.
The rise in unemployment over the past half year has been widespread
among age-sex and occupation groups.

This rise occurred not only

among reentrants and new entrants, but also among job losers.
Nonfarm payroll employment (establishment series) rose
150,000, strike adjusted, in November.

Gains in employment occurred

in service-producing industries as well as in construction, and mining.

Manufacturing employment rose 100,000 in November, but on a

strike-adjusted basis factory jobs were about unchanged over the month.
The factory workweek rose 0.3 hour to 40.0 hours in November--reflecting
in part the end of strikes in autos and agriculture machinery.
November figures leave manufacturing

The

employment and hours virtually

unchanged from their levels of last spring before the tire and auto
strikes began.
Total personal income rose at a $10.2 billion annual rate
in October compared to a $6.2 billion rate in October; the Federal
government pay raise accounted for $2.0 billion of this increase,
while manufacturing payrolls were essentially unchanged in October.
In November, payrolls are likely to be up significantly, reflecting
the return of workers involved in labor disputes.

II - 15
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)
1975

QII
Total, 16 years and older
Men, 20 years and older
Women, 20 years and older
Teenagers
Household heads
Married men

1976

QIII

8.7

8.6

7.0
8.4
20.2

7.0
7.9
20.2

6.0
5.5

5.9
5.4

8.7
8.7

8.5
8.6

QIV
8.5

QIII

QII

Oct.

Nov.

7.6

7.4

7.8

7.9

8.1

5.7
7.4
19.4

5.7
7.1
18.7

6.0
7.6
18.8

6.3
7.6
19.0

6.5
7.7
19.0

5.9
5.1

5.0
4.1

4.9
4.1

5.3
4.4

5.4
4.4

5.4
4.6

8.3
8.5

7.9
7.8

7.3
7.5

7.7
7.6

7.7
7.9

7.8
7.9

7.0
7.9
19.5

Total, Alternative Seasonal
Adjustment Methods
All Additive Factors
1975 Factors

CHANGES IN EMPLOYMENT
(average monthly change in thousands; based
on seasonally adjusted data)

June 1975-*
Apr. 1976

Apr. 1976Nov. 1976

Oct. 1976Nov. 1976

Nonfarm Payroll Series
257
254

100
98

260
152

-5

88
90

6
4

100
-6

48
40

19
-13

121
-21

Trade

-19

Services and Finance

Total Government
State and Local

34
34

11
11

41
37

290

104

357

Total
(Strike adjusted)
Construction
Manufacturing
(Strike adjusted)
Durable
Nondurable

Household Series
Total

June 1975 was the specific cyclical low for payroll employment.

II - 16

Since last spring, however, the growth rate of personal
income has slowed considerably.

The reduced pace reflects a weaker

rise of wage and salary disbursements and a sizeable decline in farm
income.

The slower advance of wage and salary disbursements was due

in part to the auto strike but also reflected smaller increases in
employment, no growth in the length of the workweek, and smaller
increases in hourly earnings.
In real terms, wage and salary disbursements have risen
6.2 per cent since their trough in July 1975.

This compares with a

10.9 per cent increase over the comparable 15 month period of the
1958-59 recovery.

Real personal income has risen 4.9 per cent since

July 1975; in the first 15 months of the 1958-59 recovery, it increased
8.5 per cent.

Furthermore, real personal income is only 1.5 per

cent above its previous peak in November 1973 compared to 6.4 per
cent at a similar stage in the 1958-59 recovery.
The rate of wage increase over the first 11 months of this
year has moderated significantly from the rapid pace experienced in
1974 and 1975.

The average hourly earnings index for private nonfarm

workers has increased at an annual rate of 6.9 per cent since last
December compared with 7.9 per cent and 9.4 per cent for all of 1975
and 1974, respectively.
in all major industries.

The moderation has been widespread--occurring

II - 17
CYCLICAL CHANGES IN REAL INCOME*
(cumulative per cent change; based on seasonally adjusted data)

Personal
Income**
A.

Expansions--15 months after trough
Trough = 6/49
6/54

4/58
12/60
11/70
7/75
B.

Wage and Salary
Disbursements**

12.4
10.5
10.9
7.8
7.4
6.2

11.3
10.4
8.5
7.4
7.5

15 months after trough compared to previous peak
Previous Peak
Trough plus 15 months
12/48
5/53
3/57
7/60
10/69
11/73

8.6
7.1
4.6
5.7
5.1
-0.3

9/50
9/55

7/59
3/62
2/72
10/76

* November 1973 was the specific high and July 1975 was the specific low
for the deflated wasge and salary component.
** Deflated by the CPI, seasonally adjusted.
PERSONAL INCOME
(average monthly change , billion of dollars seasonally
adjusted at an annual rate)

July 75*
July 76
Total Personal Income

10.7

July 76Oct. 76
7.0

Sept. 76Oct. 76
10.2

Labor and Nonfarm Proprietors' Income
Wage and Salary Disbursements
Other Labor Income
Nonfarm Proprietors' Income

8.8
7.5
.7
.7

Farm Proprietors' Income

-. 2

Transfer Payments

1.2

1.1

1.7

Rents, Dividends, and Personal
Interest

1.4

2.1

1.9

7.0
5.8
.7
.5
-2.9

7.8
6.7
.7
.4
-. 9

* July 1975 was the specific low for deflated wage and salary disbursements.

- 18

Revised figures for nonfarm business sector productivity
show a smaller third quarter increase (2.9 per cent annual rate) than
previously reported (3.6 per cent annual rate) reflecting a weaker
estimate of the output measure.

Unit labor costs are now estimated

to have increased at a 3.9 per cent rate, compared to a 3.3 per cent
advance during the year ending in the second quarter of 1976.
The wholesale price index rose 0.6 per cent in November
primarily as a result of a further large advance in industrial commodities.

The index of industrial commodities prices has accelerated from

a 3 per cent annual rate over the first five months of the year to a
nearly 10 per cent rate over the last six months.

If fuels and power

are excluded, this divergence would narrow and the rates of increase
would be about 5 and 7 per cent, respectively.

Apart from fuels,

higher prices for metals, machinery, transportation equipment, and
lumber and wood products have been the prime movers in the advance
since May.
The composition of increases in consumer prices appears
little changed from June

through October, and is characterized by

modest advances for food and large increases for energy items.

Declin-

ing meat prices--the result of abundant supplies--have been the major

factor in the favorable performance of food prices.

However, consumer

food prices are likely to rise more in the next few months as a result

II - 20
RECENT PRICE CHANGE
(Per cent changes at annual rates; based on seasonally adjusted data)-

Relative
importance
Dec. 75

Dec. 74
to
Dec. 75

Dec. 75
to
Mar. 76

Mar. 76
to
June 76

June 76
to
Sept. 76

Sept. 76
to
Oct. 76

Oct. 76
to
Nov. 76

Wholesale Prices
All commodities

100.0

-1.8

Farm and food products

22.8

Industrial commodities
Excluding fuels and
related products
and power
Materials, crude and
intermediate 2/

77.2

12.3

66.8

8.9

48.1

11.7

Finished goods
Consumer nonfoods
Producer goods
Memo:
Consumer foods

-0.3

-15.8

18.7
11.9

18.0

2.3
3.3

11.1

-20.5

-11.0

10.1
5.7

-11.2

10.9

8.8
17.2

-12.2

-4.7

6.1

5.8

4.2

7.2
5.6
6.2

1.8
6.6
7.1

3.3
4.5
6.6

5.5
9.3
12.1

6.7
15.6
13.6

3.6
13.6
15.5

16.8

Consumer Prices
All items
Food
Commodities (nonfood)
Services
Memo:
All items less food and
energy 2/3/
Petroleum products 2/
Gas and electricity

100.0

7.0

24.7
38.7
36.6

6.5
6.2
8.1

68.1
4.5
2.7

6.7
10.1
14.2

2.9
-7.9
2.9
10.6

7.7
15.7
6.4

1/ Not compounded for one-month changes.
2/ Estimated series.
3/ Energy items excluded: gasoline and motor oil, fuel oil and coal, gas and electricity.

III-T-1
SELECTED DOMESTIC FINANCIAL DATA
(Dollar amounts in billions)

Indicator

Latest data
Period
Level

Net change from
Month
Three
ago

Monetary and credit aggregates
Total reserves
Nonborrowed reserves
Money supply
Ml
M2

November
November
November
November
November

Time and savings deposits
(Less CDs)
November
CDs (dollar change in billions)
November
Savings flows (S&Ls + MSBs + Credit Unions)November
Bank credit (end of month)
November
Market yields and stock prices
Federal funds
wk. endg.
"
Treasury bill (90 day)
"
Commercial paper (90-119 day)
"
ew utility issue Aaa
nicipal bonds (Bond Buyer)
1 day
auction yield
(FHA/VA)
Dividends/price ratio (Common
stocks)
wk. endg.
NYSE index (12/31/65=50)
end of day

12/8/76

12/8/76
12/8/76
12/10/76
12/9/76
12/13/76
12/8/76
12/14/76

Credit demands

34.89
34.82

Total of above credits
e - Estimated

ago

SAAR (per cent)
4.3
14.2
15.0
4.6

309.8
731.9
1223.5

0.0
10.1
11.7

4.4
11.9
13.9

4.8
10.5
12.6

422.1
62.1
491.5
770.1

17.6
0.1
14.1
9.4

17.5
-2.3
16.9
9.2

15.2
-19.7
15.8
5.9

Percentage or index points
4.67
-. 31
-. 58
4.40
-. 47
-. 70
4.68
-. 40
-. 70
7.93
-. 38
-. 35
5.96
-. 43
-. 56
8.51
-. 16
-. 41

3.94
56.59

-. 18
1.06

.23
1.02

-.59
-1.22
-1.25
-1.44
-1.38
-.81
-. 23
46.38

Net change or gross offerings
Current month
Year to date

1976
Business loans at commercial
banks
Consumer instalment credit outstanding
Mortgage debt outst. (major holders)
Corporate bonds (public offerings).
Municipal long-term bonds (gross
offerings)
Federally sponsored Agcy. (net borrowing)
U.S. Treasury (net cash borrowing)

Year

months ago

November
October
September
November

1.9
1.6
5.9
1.2e

November
November
December

-. 6

1975

3.2e
6.5
19.7

1976
1.8
13.7
42.7
23.6e

2.4
.5
8.2
19.2

32.2e
2.9
69.4
186.3

1975
-6.1
4.4
28.9
30.9
28.5
3.1

85.4
175.1

III - 1

DOMESTIC FINANCIAL DEVELOPMENTS
Domestic securities markets have staged a strong rally in
recent weeks.

Since the November FOMC meeting, market interest rates

have fallen 25 to 60 basis points, dropping to their lowest levels in
more than two years.

The rally was fueled in part by the further

easing of the Federal funds rate from 5 per cent to below 4-3/4 per
cent and the cut in the discount rate by one-quarter percentage point.
In addition, the weakness of incoming economic indicators--suggesting
that private credit demands may not increase markedly in the months
ahead--and the sluggish performance of M1 lent support to the widelyheld view that the Federal Reserve might soon lower still further its
operating target for the funds rate.

An indication of the market's

expectation of further easing is that yields on most short-term market
securities remain below the Federal funds rate.
Declining interest rates contributed to sustained inflows
of time and savings deposits to depository institutions, although some
institutions reportedly have taken actions designed to slow deposit
growth.

Credit flows in mortgage markets remained strong in November,

and business and real estate loans at commercial banks continued to
expand.

Consumer instalment credit growth has remained moderate,

reflecting in part the lackluster pace of consumer expenditures for
automobiles and other durable goods and the utilization of other sources
of funds to make purchases traditionally financed by consumer credit.

III - 2

New Treasury and State and local government financing remained
large in November, but the volume of private domestic long-term bond
financing fell off to the smallest monthly total in more than two years.
However, the large volume of issues scheduled for December suggests
that some private and municipal borrowers have accelerated their
long-term borrowing plans to take advantage of the recent declines
in interest rates.
Monetary Aggregates and Bank Credit
The level of M1 was unchanged in November, after growing at
a 13-3/4 per cent annual rate in October.

Because recent monthly

growth rates of M1 have been quite volatile, a more reliable indicator
of the short-run growth trend in this aggregate may be obtained by
averaging the rates of growth in the last few months.

The average

annual rate for the three-month period from September through November,
for example, was about 4-1/2 per cent, near the 4-3/4 per cent average
for the year ending in November.
Although growth in M2 and M3 was somewhat weaker in November
than in the previous month, their expansion was in line with the average growth rates in these aggregates over the past year.

All of the

moderation in the rate of expansion of M2--from a 15-3/4 per cent rate
in October to a 10 per cent rate in November--was due to the weakness
in M1.

Growth in commercial bank time and savings deposits (excluding

negotiable CDs at weekly reporting banks) was slightly above the

III - 3

MONETARY AGGREGATES 1/
(Seasonally adjusted changes)

HII

Twe l v e

1976

1975

O--t

QII

QIII

Oct

Nov

months

Nov

ending
Nov 76

Per cent at annual rates
M 1 (currency plus
demand deposits)

4.7

5.6

2.7

8.4

4.1

13.7

0.0

6.9

4.8

M 2 (M plus time deposits
a commercial banks
other than large CDs) 8.3

10.4

9.7

10.8

9.2

15.7

10.1

13.0

10.5

M 3 (M plus deposits at
thrift institutions) 11.5

11.8

11.2

12.0

11.6

16.5

11.7

14.2

12.6

Adjusted bank credit
proxy

3.7

2.4

2.3

2.4

3.8

11.7

13.2

12.5

3.9

Total time and savings
deposits at CBs

7.3

6.3

7.2

5.3

7.1

14.0

15.6

14.9

8.0

Other than large
negotiable CDs

11.4

14.1

15.3

12.5

13.2

17.3

17.6

15.2

1. Savings deposits
2. Time deposits

17.0
7.4

25.8
5.4

28.3
5.6

21.7
5.1

13.4
12.7

30.0
7.0

26.2
10.2

28.4
8.6

24.7
8.0

Savings and loans

18.2

15.5

15.0

15.4

16.5

18.8

14.9

17.0

17.3

Mutual savings banks 11.9

9.7

9.1

10.1

12.2

12.6

10.8

11.7

11.4

Credit unions

16.6

16.8

15.8

16.0

19.1

18.6

.2 e

.8e

.7e

Billions of dollars
(Average monthly changes, seasonally adjusted)
Memoranda:
a.

Total U.S. Government
deposits
0.3

Negotiable CDs

Nondeposit sources
of funds

-0.2

0.2

0.3

0.4

1.1

-0.4

1.1

0.8

-0.4

0.1

-2.1

-3.2

-0.9

-2.7

-0.4

0.1

-0.2

-1.6

-0.1

0.1

-0.1

0.8

0.1

0.5

0.1

1/ Half-year and quarterly growth rates are based on quarterly average data.
p--Preliminary
e--Estimated

III

- 4

17-1/2 per cent annual rate of the most recent three-month period.
The continued rapid inflows of these deposits may be attributable
to the low level of market yields relative to bank offering rates.
With the entire yield curve continuing to move downward since the

summer, yields on Treasury obligations (of comparable maturities)
are now well below the maximum allowable rates for deposits in all
maturity categories. However, according to an informal System survey of banks and thrift institutions taken in the first week of
December, a significant number of banks throughout the country have
either ceased offering longer-term consumer-type time deposits
or have reduced their offering rates.1/
Rate cutting by thrift institutions--whose ceiling rates
are higher--appears to be even more common than for commercial banks,
and deposit flows into these institutions abated somewhat in November
for the second consecutive month.

On a seasonally adjusted basis,

the annual rate of growth of their deposits during November fell to
2/
an estimated 13-3/4 per cent from October's 17 per cent rate.2/
1/ About 10 per cent of sampled commercial banks stopped offering
longer-term deposits during the last six months, while a slightly
higher percentage cut deposit rates on long and short-term deposits
over this period. None of the sampled banks has yet reduced rates
on savings deposits. A more detailed summary of the survey,
conducted by staffs of the Board and the Reserve Banks, will
appear in the Supplement.
2/ Problems in seasonal adjustment associated with the seasonal
coincidence of disintermediation cycles in 1973 and 1974 may also
have resulted in overstating the extent to which deposit growth
at thrifts has fallen since the summer.

III - 5

The weakness in the rate of increase of M , as well as the slower
deposit inflows at thrift institutions, contributed to a deceleration in the rate of growth of M3 to a 12 per cent annual rate in
November, compared to 16-1/2 per cent in October.
Large negotiable CDs outstanding at weekly reporting banks
grew by $1 billion from late October to late November, after declin-

ing every month this year except June.

This pickup was accompanied

by some lengthening in maturities of the certificates sold.

early December, two major banks in New York City took the unusual
action of placing through underwriters significant amounts of CDs
in the four to five-year maturity range.

It has been reported that

rates on intermediate-term CDs recently have been attractive in terms
of bankers' rate expectations, and that some banks have taken advantage
of opportunities to pin down profitable spreads on fixed-rate term
loans financed by CDs.
Total bank credit expanded at a 9-1/2 per cent annual rate
in November, somewhat lower than the 12 per cent rate in October but
still the second highest rate of growth in the last twelve months.
Bank holdings of U.S. Government securities increased moderately in
November, following two successive monthly declines, but other
securities in bank portfolios, mostly tax-exempts, registered a sharp
increase.

Total loans rose at a 5-3/4 per cent annual rate in Novem-

ber, off substantially from the unusually rapid 18 per cent rate of

III

growth in October.

Nearly all of the expansion in loans in November

was concentrated in business and real estate loans.
Business Credit
Business loans at commercial banks advanced at a 13 per cent
annual rate in November, the third consecutive monthly increase, and
such loans are now slightly above the level outstanding at the beginning of the year.

However, more than half of this increase (and a

smaller share of the October rise) was accounted for by acquisitions
of bankers acceptances, which some banks have been using to build up
their loan portfolios for year-end statement date and tax purposes.1/
Commercial paper issued by nonfinancial corporations rose
$200 million, seasonally adjusted, in November, after declining
during the previous two months.

Despite little net growth in commercial

paper in October and November, the total of nonfinancial commercial
paper and business loans at banks grew at an annual rate of 14-3/4
per cent during this period.

Even after excluding from the business

loan increases the unusually large acquisitions of bankers acceptances
during the past two months, the average monthly increase in the remaining short-term business credit for October and November is substantially larger than for any two-month period since mid-1974.
1/

(See

For ten New York City banks, nearly all of the $1 billion growth
(not seasonally adjusted) in business loans for the month was in
bankers acceptances.

III - 7

COMMERCIAL BANK CREDIT
(Seasonally adjusted changes at annual percentage rates)1/

1975

1976

HII

QII

QIII

Sep

Oct

Nov

4.5

4.9

5.5

4.3

7.0

5.9

12.2

9.4

22.1

36.8

44.3

26.3

-12.6

-6.4

10.3

Other securities

2.9

-1.0

-4.1

2.2

8.3

8.2

3.3

22.0

2/
Total loans2/

2.3

1.6

2.1

1.0

8.0

8.7

18.2

5.7

-1.2
4.3
9.3

-4.9
8.0
4.9

-7.4
8.9
4.0

-2.2
6.9
5.7

3.5
6.0
11.3

6.9
8.5
11.5

18.6
6.7
8.9

12.9
7.5
n.a.

-1.7

-5.3

1.9

-2.6

16.7

12.7

-3.5

2.9

-2.2

-8.5

14.5

7.8

Total loans and
investments 2/
Treasury securities

Business loans2/
Real estate loans
Consumer loans
MEMO:

Business loans plus

nonfinancial 3/
commercial paper -3.1
Short-term business
credit less
4/ -5.2
bankers acceptances
1/

-. 3

Last-Wednesday-of-month series except for June and December,
which are adjusted to the last business day of the month.
2/ Includes outstanding amounts of loans reported as sold outright by banks
to their own foreign branches, nonconsolidated nonbank affiliates of the
bank holding companies (if not a bank), and nonconsolidated nonbank subsidiaries of holding companies.
3/ Nonfinancial commercial paper is measured from end-of-month to end-of-month.
/ Business loans at commercial banks, plus nonfinancial commercial paper, less
acquisitions of bankers acceptances by 155 large banks.
n.a.--not available

III - 8

the last line of the Commercial Bank Credit table.)

The composition

and timing of the expansion in short-term business credit is somewhat puzzling.

Such growth, however, is consistent with inventory

accumulation--perhaps unintended--by business firms that have no
alternative source of financing except banks.

It also may reflect

abatement of balance sheet restructuring by businesses or more
aggressive efforts by banks to add to their loan portfolios.

Not

only has the prevailing prime rate been cut from 7 per cent to 6-1/4
per cent since late September--with one major bank going to 6 per
cent--but also there is evidence that banks have eased further their
nonprice terms of lending in recent months.1/2/
Gross issues of publicly offered bonds by domestic corporations totaled only $1.2 billion during November.

This relatively

light calendar reflected the low levels of offerings by high-grade
industrial concerns and finance companies.

(Finance companies had

been issuing record amounts of long-term debt throughout most of 1976.)
With bond yields at three-year lows, several corporations have accelerated the dates of their offerings or increased the amounts to
be borrowed.
1/
2/

December's holiday-shortened calendar currently is

A summary of the November 15, 1976 Survey of Changes in Bank
Lending Practices will appear in the Supplement.
There have been reports in the press that some banks are more
willing to make fixed rate and "cap" loans; at this writing,
the Board staff has found no confirmation of these reports.

III - 9

projected at $2.4 billion, with less than $500 million of the issues

carrying ratings of Aaa or Aa.

Private placements, normally heavy

at the end of the year, are projected to be especially large in
December, apparently because institutional investors are aggressively
seeking such placements.
The dearth of public offerings of domestic corporate bonds
in November was largely offset by a record volume ($1.3 billion) of
publicly offered foreign bonds, particularly from the World Bank and
several Canadian issuers who were attracted by the relatively favorable
interest rates in U.S. markets.

Foreign bond offerings (public and

private) currently are expected to be a record $9.7 billion in 1976,
compared to the previous record of $7.3 billion in 1975.
Yields in private long-term securities markets have moved
downward with other market rates since the November FOMC meeting,
and are currently at their lowest levels in almost three years.

The

Board's index of new, Aaa-rated utility bond yields has declined more
than 25 basis points since mid-November to just under 8 per cent.
Stock market prices have risen about 5 per cent (NYSE
Composite Index) on increased volume since the last FOMC meeting,
although most broad stock market indexes remain below levels reached
in late September.

Utility stock prices have moved higher throughout

most of the year--as the industry reported markedly improved profits

III - 10
SECURITY OFFERINGS
or
totals
Monthly averages, in millions of dollars)
monthly

1975
Year
Corporate securities-Total

HI
QIIIe/
Gross offerings

Oct.3/

1976
Nov.e.

Dec.f.

Jan.f.

4,468

4,667

3,495

4,650

3,100

5,250

4,300

Publicly offered bonds
by quality 1/
Aaa and Aa
Less than Aa 2/
By type of borrower
Utility
Industrial
Other

2,715

2,499

1,568

2,650

1,200

2,450

3,000

1,422
1,293

1,354
1,145

700
868

1,250
1,400

525
675

625
1,825

925
1,430
360

720
1,055
724

575
515
478

850
1,000
800

825
325
50

530
1,200
720

Privately placed bonds

848

1,055

1,293

1,200

2,000

89
09
75

339
235
135

1,310
1,310
335
500
475

500
250
125

3,500
1,200

3,200
1,170

2,500
1,200

2,500
1,000

1,330

6,423

5,719

6,000

181

282

1,000

1,112

Stocks
Foreign securities--total
Publicly offered 3/
Canadian
Int'l lending agencies
Other
Privately placed
Canadian
Other

606
460
221
134
105
146
n.a.
n.a.

67
80
68

100
104
104

50
250
n.a.
n.a.

State and local gov't. securities
Long-term
Short-term

2,544
2,420

2,886
2,147

2,735
1,681

Net offerings

U.S. Treasury
Sponsored Federal
agencies

7,564

5,128

5,215

187

Estimated.
Forecast.
Bonds categorized according to Moody's Bond ratings.
Includes issues not rated by Moody's
Classifed by original offering date.

-287

III - 11

and as falling interest rates made dividend yields on these stocks
relatively attractive--and the NYSE's utility stock index reached its
1976 high in early December.

Offerings of new common and preferred

stock totaled approximately $800 million in November, and public
utilities continued to account for most of the volume.
Other Securities Markets
During the recent rally, some of the largest yield declines
were in the intermediate-term Treasury security area--a pattern that
has prevailed since rates began their downtrend from the peaks of
this past spring.

Since late May, for example, yields on three-month

Treasury bills and on 20-year issues have dropped around 100 basis

points, while the yield on five-year issues has fallen 180 basis
points (see yield curve chart).

This relative easing of intermediate-

term yields may be a reflection of the market's less exuberant view
of the likely future course of the economy or of some downward revisions in inflationary expectations.

Also, since late May, commercial

bank acquisitions of Treasury securities have been concentrated in
the intermediate range.

These institutions reportedly are feeling

considerable pressure to reduce their low-yielding short-term asset
positions, especially with year-end statement dates nearing.

III -

SELECTED FINANCIAL MARKET QUOTATIONS
(One day quotes--in per cent)

Nov. '75
FOMC
Nov. 18

Sept. '76
FOMC
Sept. 21

Oct. '76
FOMC
Oct. 19

Nov. '76
FOMC
Nov. 16
Nov. 30

Dec. 7

Dec. 1

Short-term
Federal funds1/

5.24

5.21

4.97

5.02

4.78

4.67

4.675/

Treasury bills
3-month
6-month
1-year

5.47
5.80
6.12

5.03
5.23
5.38

4.84
4.95
5.10

4.83
4.95
5.07

4.42
4.57
4.69

4.40
4.51
4.64

4.34
4.51
4.66

5.38
5.75

5.00
5.25

4.75
5.00

4.88
5.13

4.63
4.75

4.50
4.63

6.13
6.70

5.25
5.45

4.90
5.10

5.15
5.30

4.70
4.85

4.63
4.70

4.60
4.70

Federal agencies
1-year

6.88

5.95

5.53

5.69

5.22

5.14

Bank prime rate

7.50

7.00

6.75

6.50

5 12
(12/10)
6.25
(12/13)

Corporate,
New AAA3/
Recently offered-

9.40
9.24

8.23
8.30

8.28
8.20

8.24
8.28

7.95
8.04

7.93p
7.97

n.a.
7.95P

Municipal
(Bond Buyer)-

7.43

6.50

6.25

6.39

6.16

6.03

5.96

U.S. Treasury
(20-year constant
maturity)

8.36

7.71

7.69

7.67

7.44

7.31

7 3

855.24
48.15
85.40
494

1014.79
57.51
104.15
589

949.97
54.18
98.56
569

935.34
53.52
98.23
574

947.22
54.80
98.94
587

960.69
55.63
101.42
600

Commercial paper
1-month
3-month
2/
Large neg. CD's2/
3-months
6-months

Long-term

. 3p

Stock prices
Dow-Jones Industrial
N.Y.S.E. Composite
AMEX
Keefe Bank Stock

Weekly average.
Highest quoted new issues.
One day quotes for preceding Friday.
One day quotes for preceding Thursday.
Average for first 6 days of statement week ending December 15.
n.a. - not available.
p - preliminary.

980.63
56.59
103.73
632

III - 13

The Treasury has borrowed $5.6 billion of new cash in the
market since the mid-November refunding operation and Board staff
projections indicate that only a modest amount of new money will be
raised over the remainder of this month.

About one-fourth of the

projected $17.8 billion Treasury borrowing from the public in the
fourth quarter is in non-marketable form, reflecting the continued
sale of savings bonds as well as significant purchases of special
issues by foreign governments and a surge in special issues to State
and local governments.1 /
Sales of municipal bonds in November were $3.2 billion,
bringing total long-term tax-exempt financing for the first eleven
months to $32.1 billion--already $1.6 billion over last year's 12-month
record total.

As noted in previous Greenbooks, the heavy volume of

bond financing stems, in part, from funding of short-term obligations,
financing of nuclear power plants being constructed by State and local
government authorities, and the reactivation of borrowing plans disrupted
by the New York crisis in 1975.
1/ State and local units may purchase such securities as a temporary
interest-bearing repository for their borrowing proceeds. The yields
on these special issues are tailored to meet Federal regulations
prohibiting State and local governments from realizing arbitrage
profits by investing funds obtained at tax-exempt rates in higher
yielding Treasury securities.

III -

TREASURY YIELD CURVES
(Based on constant maturity
interest rate series --

single day quotations)

5/21/76
11/16/76

Years to maturity

12/14/76

III - 15

Yields on long-term tax-exempt securities have declined
appreciably since the last meeting of the FOMC; the Bond Buyer Index
now stands at 5.96 per cent, its lowest level since June 1974.

The

pattern of declining yields in the face of a heavy volume of new issues
has existed since early summer and continues to prevail despite the
market's initial reaction to the recent decision overturning the 1975
New York Moratorium Act.1 / Renewed interest in the tax-exempt market
by property-casualty insurance companies--and in recent months by
commercial banks--has bolstered demand for these securities.

New

buying support also has come from the recently authorized open-end
tax-exempt bond funds.

Total assets of these funds have grown rapidly

over the last month, reaching about $400 million as of early December.
Mortgage and Consumer Credit
Activity in the mortgage market is estimated to have remained
at a high level in November.

Despite slower deposit growth at savings

and loan associations, outstanding commitments at these institutions
continued to increase during October from their record level in
September.

New issues of GNMA guaranteed mortgage-backed securities

1/ On Friday, November 19, the New York Moratorium Act was overturned
by the New York State Court of Appeals. Under the court order,
holders of $1 billion of New York City notes can receive principal
and interest payment as soon as a payment schedule can be worked out
with New York officials. The noteholders are believed to be largely
individuals and small banks. The immediate market reaction was
limited to a sharp drop on Municipal Assistance Corporation bonds.
Prices, however, rebounded quickly the following Monday as market
participants viewed the court decision as a reaffirmation of the
security behind general obligation bonds.

III - 16

also remained large in November.

The expansion in mortgage credit has

continued to be dominated by loans for new and existing single family
homes; however, some strengthening in the multi-family sector has also
been apparent in recent months, reflecting increased momentum in existing
Federal subsidy programs.
Rates on conventional home mortgages in the primary market have
fallen less rapidly from their peak in late 1974 than yields on long-term
market securities, and downward pressures on mortgage

rates have

intensified in recent weeks, particularly in the secondary mortgage
market.

Since the November FOMC meeting, yields have dropped 17 basis

points further on government underwritten mortgages in the FNMA auction
and by as much as 40 basis points on GNMA guaranteed mortgage-backed
securities which compete directly in the bond market.

Moreover, trade

reports suggest that rate cutting in the primary home mortgage market
has broadened significantly--a development which, however, has yet
to show up in the regularly published series.
Consumer instalment credit outstanding expanded at an 11 per
cent annual rate in October--up moderately from September and slightly
above the average of the past year.

The commercial bank share of the

net expansion declined in October, owing partly to slower growth of
bank-card credit outstanding and partly to a pickup in credit expansion
by retailers and finance companies.

III - 17
The growth of total instalment credit outstanding during the
past year averaged just under 10 per cent, compared with nearly 15 per
cent in comparable periods of previous post-war recoveries.

This

relatively sluggish expansion may be attributed in part to the slow
growth at this stage of the current cycle of purchases for which
instalment credit is most often used, particularly consumer durables.1/
Moreover, households appear to have been liquidating equity in existing
homes,2/which may have permitted less intensive use of instalment credit
for consumer goods purchases.3/

1/ Sales of these goods have declined as a proportion of total retail
sales during the recent recovery, in contrast to behavior during
earlier upswings.
2/ The robust growth in home mortgage credit in recent months has
considerably exceeded household net expenditures on homes. See the
Greenbook of September 1976.
3/ Automobile credit expansion, in particular, has fallen in relation
to automobile sales--in contrast to rising in most recent cyclical
upswings. Development of consumer leasing may help to explain
the less intensive use of automobile instalment credit.

III - 18
INTEREST RATES AND SUPPLY OF FUNDS FOR
CONVENTIONAL HOME MORTGAGES
AT SELECTED S&Ls

Average rate on
new commitments
for 80% loans
(Per cent)

Basis point
change from
month or
week earlier

80
-20

11
0

+12
+ 8
+ 2
- 3
- 7
- 5
- 5
0

+20
+26
+53
+74
+61
n.a.
49
56

6
7
7
9
8
8
7
6

0
0
0

75
83
n.a.

6
2
n.a.

9.10
8.70

June
July
Aug.
Sept.
Oct.
5
Nov.
12
19

8.90
8.98
9.00
8.97
8.90
8.85
8.80
8.80

26
Dec. 3
10

8.80
8.80
8.80

1976--High
Low

Per cent of S&Ls
with funds in
short supply

Spread1/
(basis
points)

Average mortgage rate minus average yield on new issues of Aaa utility bonds.
n.a. - Not available.

SECONDARY HOME MORTGAGE MARKET ACTIVITY

FNMA auctions of forward purchase commitments
Govt.-underwritten
Conventional
Yield
Yield
to 1/
Amount
to 1/
Amount
($ millions)

Offered

8
15
22
29
Dec.

($ millions)

Offered

FNMA-

Accepted

immediate

delivery 2/

171
33

1976--High
Low
Nov.

FNMA-

Accepted

Yields on GNMA
guaranteed
mortgage backed
securities for

6
13

127
23

9.31
8.99

634
58

321
32

9.20
8.63

8.44
7.62

142

112

9.00

215

8.67

8.02

141

127

9.00

219

114

8.68

8.99

8.63-

8.02
8.02
7.84
7.75

8.89

8.51

7.62
7.60

1/Average gross yields before deducting fee of 38 basis points for mortgage servicing.
Data reflect the average accepted bid yield for home mortgages, assuming a prepayment
period of 12 years for 30-year loans, without special adjustment for FNMA commitment
fees and FNMA stock purchase and holding requirements on 4-month commitments.
Mortgage amounts offered by bidders related to total bids received.
2/ Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FHA/VA mortgages carrying the prevailing ceiling rate on such loans.

III -

CONSUMER INSTALMENT CREDIT

19761974

1975

QII

QIII

Sept.

Oct.

9.0
6.1
44.4

6.8
4.4
41.7

16.9
10.5
40.1

16.7
10.0
43.8

17.8
10.4
47.1

18.8
10.9
42.9

160.0
45.4
151.1

163.5
47.2
156.6

182.5
47.2
165.6

186.8
47.9
170.1

189.3
47.8
171.5

192.7
47.4
173.9

0.3
0.7

2.6
5.2

7.6
14.2

7.1
12.6

7.3
10.3

43.2

48.1

54.6

55.8

57.2

55.0

8.8
8.6

14.0
23.5

22.4
32.3

28.5
36.2

36.8

11.36
13.11

11.03
13.15

11.07
13.18

11.07
13.21

11.04
13.20

Total

Change in outstandings
$ Billions
Per cent
Bank share (%)
Extensions
$ Billions
Bank share (%)
Liquidations ($ billions)
Automobile Credit
Change in outstandings

$ Billions
Per cent
Extensions
$ Billions
New-car loans over 36 mos.
as % of total new-car loans
Commercial banks 2/
Finance companies
New-car finance rate (APR)
Commercial banks
(36 mo. loans)
Finance companies

10.97
12.61

6.3
8.9

Quarterly and monthly dollar figures and related percentage changes are SAAR.
Series was begun in May 1974, with data reported for the mid-month of each quarter.
Figure for 1974 is average of May, August, and November.

U.S. International Transactions
(In millions of dollars, seasonally adjusted 1/)

December 15, 1976

IV - T - 1
1975

Merchandise exports
Merchandise imports
Trade Balance
Bank-reported private capital flows
Claims on foreigners (increase -)
Long-term
Short-term
(of which on commercial banks in
offshore centers 2/)
Liabilities to foreigners (increase +)
Long-term
Short-term
to commercial banks abroad
(of which to commercial banks in
offshore centers 3/)
to other private foreigners
to int'l and regional organizations
Foreign private net purchases (+) of
U.S. Treasury securities
Other private securities transactions (net)
Foreign net purchases (+) of U.S. corp.
securities
(of which stocks)
U.S. net purchases (-) of foreign securities
(new foreign issues on bonds and notes)
Change in foreign official assets in the U.S.
OPEC countries (increase +)
(of which U.S. corporate stocks)
Other countries (increase +)

26.

Change in U.S. reserve assets (increase -)

27.

YEAR
107,088
98,058

1 976

26,836
28,510

28,450
29,735

Q3
29,711
32,612

Sept.
9,875
10,986

-1,674

-1.285

-2.901

-1.111

-12.840

-2,960

-1.246

-1.621

-13,487
-2,373
-11,114

-3,637
-291
-3,346

-4,764
-385
-4,379

-3,339
-989
-2,350

9.030

677
-91
768
1,077

3,518
-25
3,543
2,220

1,718
66
1,652
1,941

-855

-739

1,734

-2,562
-245
-2,317

-687
-144
-543

(-7,212) (-3,603) (-2,393) (-2,258)(-2,129)
647
-300
947
-666

Oct.
9,767
10,622

1,823
-21
1,844
1,752

(279)
2,421
167
2,254
2,445

(1,798)
1,549
64

(-227)
155
-464

(1,205)
468
855

(299)
905
-1,194

(455)
331
-239

2.667

430

-592

3.021

827

-2.739

-499

-488

-45
(-56)
-454
(-489)

-151
(-225)
-337
(-402)

-3.701

-1,538

-1.264

2,505
989
185
67
(3,054)
(945)
(189)
(-45)
-6,206
-2,527
-1,449
-2,806
(-7,260) (-2,853) (-1,622) (-3,074)
5.211

(3,137)
-138
-53

2.329

3.314

1.272

-593

806

5,940
(1,643)
-729

2,230
(555)
99

2,737
591
577

1,228
(374)
44

-501
(65)
-92

444
(130)
362

-607

-773

-408

-324

-81

3,376

2,439

-1.135

Other transactions and statistical discrepancy

-1.578

(net payments (-))
Other current account items
Military transactions, net 4/
Receipt of income on U.S. assets abroad
Payment of income on foreign assets in U.S.
Other services, net
Remittances and pensions
U.S. Gov't grants 4/

240
2,667
-883
18,219
-12,212
2,163
-1,727
-2,893

4,186
1,614
-5
5,495
-3,216
458
-483
-635

1,987
-13
5,462
-3,305
715
-441
-431

Other capital account items
U.S. Gov't capital, net claims 4/ (increase
Foreign direct investment in U.S. (increase

-6,952
-1,731
-6,307
2,437

-2,414
798
-1,757
-728

-282
-234
463
547

Nonbank-reported capital, net claims
(increase -)

-1,351

U.S. direct investment abroad (increase -)

40.

Statistical discrepancy

-727

2,651

-1,058

4,525

4,986

946

M IO:
41. Current account balance
42. Official settlements balance

11,697
-4,604

-60
-1,556

702
-1,736

n.a.
-864

n.a.
917

n.a.
-725

0/S bal. excluding OPEC

1,336

674

1,001

364

416

-281

43.

NOTES :
1/ Only trade and services, U.S. Govt. grants and U.S. Govt. capital are seasonally adjusted.
2/ Offshore centers are United Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and
ermud).
epresents mainly liabilities of U.S. Banks to their foreign branches in offshore centers which are the
nited Kingdom, Bahamas, Panama and Other Latin America (mainly Cayman Islands and Bermuda).
4/ Excludes prepayments for military purchases.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.

Since the second week of November,

the weighted average exchange value of the dollar has declined by 1/2
per cent.
. The currencies which have shown the
largest movement relative to the dollar during the recent period have
been the pound and Canadian dollar.
Strong selling pressure on the Canadian dollar was triggered
by the November 15 election victory of the French Seperatists in Quebec.
The political uncertainty generated by the Quebec situation added to concerns
that Canadian inflation rates would continue to exceed those in the United
States and that the very high levels of Canadian foreign borrowings might
prove unsustainable, and touched off very heavy selling pressure on the
Canadian currency.

The Canadian dollar depreciated from U.S. $1.02 to

a low of U.S. $0.96 on November 30 as trading volume hit record levels.
The Canadian dollar has since recovered partially to U.S. $0.98.

The British pound has appreciated by over 3 per cent during the
past month, rising at one point to nearly $1.70.

. Sterling's recent exchange market movements have been most
heavily influenced by rumors concerning the continuing negotiations between

IV - 2

the British government and the IMF over a $3.9 billion loan to the United
Kingdom.

The pound's recent rise reflects the apparently successful con-

clusion of these negotiations, as well as reports that some form of additional
assistance may be provided the British to deal with sterling balances.
On November 18 U.K. authorities tightened exchange controls by prohibiting
U.K. banks from making sterling loans to finance third country trade.

The foreign currency purchase tax and other Italian foreign exchange control
measures have helped reduce exchange market supply of lira.

An amnesty

on repatriations of Italian foreign investments, held in violation of
Italian exchange control measures, is estimated to have resulted in capital
inflows into Italy in excess of $1 billion.

Despite the lira's recent

strength, pessimism over the future exchange value of the lira is reflected
in the continued substantial discounts on lira for future delivery.

The

price of lira for delivery in one year, for example, is nearly 17 per cent
below the price for immediate delivery.
The currencies of the European joint float have changed little
against the dollar over the past month.

The mark has remained at the bottom

IV - 3

of the snake, occasionally touching its lower intervention limit against
the Danish krone.

. The System purchased small amounts of marks, Swiss
francs and French francs in the market over the past month, and purchased
larger amounts of Swiss francs directly from the Swiss National Bank.
These purchases enabled the System to make repayments totaling $73 million
equivalent on its Swiss franc swap debt, reducing the total of such debt
outstanding to $1,074 million.
After Mexican authorities abandoned their long-standing 8 cent
parity for the peso on September 1, they attempted to stabilize the peso's
exchange rate, first at about 5 cents and later at just above 4 cents.

. On November 19 rumors of imminent exchange controls
and political uncertainty generated by the impending installation of a
new Mexican President, brought the flight out of pesos into dollars to a
new peak, and Mexican banks began rationing their supply of dollars or
ceased selling dollars entirely.

On November 22 the Bank of Mexico
announced that

banks would be prohibited from foreign exchange trading, with this activity
transferred to stockbrokers.

The peso immediately fell to about 3.6 cents

with trading characterized by sharp rate movements and wide bid-ask spreads.

IV - 4

Since November 22, the peso has firmed to around 5 cents, a level
38 per cent below its old 8 cent parity.

On November 28, the Australian dollar was devalued relative to
the U.S. dollar by 17-1/2 per cent.

New Zealand followed the next day

with a 7 per cent devaluation of its currency.

Subsequently, the Australians

have announced two small revaluations, of 2 per cent and 1-1/4 per cent,
in accordance with their new policy of smaller, more frequent exchange
rate adjustments.
The gold price has moved over a range of $128 to $138 during
the past four weeks, with the current $135 level unchanged from that of
a month ago.

On December 8 the IMF held its fifth gold auction, selling

780,000 ounces at a common price of $137.00.
of 780,000 ounces, will be held on January 26.

The next IMF auction, also
Beginning in March, auctions

of 525,000 ounces each will be held by the Fund on the first Wednesday of

IV -5
each month.

In the first half of January, the IMF expects to initiate the

restitution of 6.25 million ounces of gold to its members in proportion
to their quotas.

This is the first of four annual restitutions which will

total 25 million ounces.

International capital markets.

Total borrowing in the markets

for medium-term Euro-credits, Euro-bonds, and foreign bonds has continued
at a high level.

Borrowing in the four months July-October 1976 totalled

$18 billion, which at an annual rate was about 10 per cent less than in
the first half of this year; seasonal factors explain much of this slowing.
Newly-arranged Euro-credits increased sharply in these four months relative
to the rate in the first half of the year, as borrowers in industrial and
oil-exporting countries as well as in non-oil developing countries stepped
up their rate of borrowing.

New Euro-bond issues were well-maintained in

the July-October period, but foreign bond issues in national markets slowed
perceptibly mainly because of reduced Canadian flotations in the U.S. market.
Interest rates have eased significantly in all these markets since midyear, reflecting generally soft demand for credit in the national markets
of the industrial countries.
Publicized medium-term Euro-credits arranged in July-October
amounted to $9.7 billion, almost 20 per cent above the rate in the first
half of 1976.

Loans to industrial countries of $4.0 billion in fact exceeded

the first-half total by a considerable margin.

Spain raised $1.2 billion,

of which $1 billion was obtained by the Spanish Government in July; British
public sector borrowers, who had been out of the market for some time until

Borrowing in International Capital Markets
(in billions of dollars)

1975
1st H 2nd H

1976

1974
Year
Medium-term Euro-credits:
total l/

28.5

20.6

Industrial countries
Denmark
France
Spain
United Kingdom
Other

Year

19.0
.4
3.3
1.1
5.7
3.5

6.4
.3
.5
1.0
.6
4.0

2.8
0
.4
.5
.3
1.6

3.6
.3
.1
.6
.4
2.2

3.6
.4
.7
.3
1.0

.8
0
.4
.2

1.4
.1
1.1
0
.2
0

1.8
.4

.1
.1

3.2
.5
1.6
.3
.2

1.7
.4
.3
.7
0
.3

5.3

Oil-exporting countries
Algeria
Indonesia
Iran
Venezuela
Other

8.5

12.0

.2
0
.6

1st H

12.3

1.2

7.2
.5
1.6
1.5
.9
2.7

7.9
*/1

3.3

2.6
.7
.7
.7
.1
1.1

Socialist countries and
org.'s

1.1

2.7

1.1

1.6

5.6
.3
.8
.6
3.9
2.0
2.3
1.3

4.6
.9
.5
.6
2.5
2.9
.6
1.2

8.4
1.9
.8
.7
5.0
5.3
1.7
1.7

Int'l org.'s & other
II.

total
Euro-bonds:
By borrower: Canada
France
Japan
Other
By currency:ZU.S. dollar
German mark
Other

4.5
.4
.3
.2
3.5
3.1
.6
.8

2.1
2.2

10.2

1.2
1.3
1.2
6.5
4.8
2.9
2.5

(continued on next page)

1.4
1.5
.1
2.3

Oct.

4.7

5.0

2.5
0
.1
1.1
.3
1.0

1.5
0
0
.1
.6
.8

.4
.1

1.1
0

4.7
.1
1.2

.7
.7
2.0

0
.1

0
1.0

1.6
.1
.7
.4
.1
.3

2.0
.5
*/
.9
.1
.5

Other developing countries
Argentina
Brazil
Mexico
Philippines
Other

Q-3

*l
3.1
.6
.3
.3
1.9
2.4
.5
.2

1.0
.2
.1
.1
.6
.6
.3
.1

IV - 7
III.

Foreign Bonds:
By borrower:

IV.

7.8
2.0
3.1
2.7
3.6
1.0

11.9
3.4
2.4
6.1
5.8
3.4

5.1
1.3
.6
3.2
2.7
1.4

569
2i0
1.7
3.2
3.8
2.0

9.6
3.4
1.6
4.6
5.4
2.6

3.4
1.1
0.5
1.8
2.0
1.1

0.9
0.3
0
0.6
0.4
0.4

Other

By market:.'

total
Canada
IBRD
Other
U.S.-/
Switzerland

3.2

1.0

1.6

40.8

42.7

19.2

23.5

30.3

11.2

6.9

Total Borrowing (I+II+III)

1/ Publicized credits of over one-year maturity.
2/ Breakdowns may not add to totals because of lack of comprehensive revised
data.
3/ Figures differ from those from U.S. sources.
*/ Less than $50 million.
Source: World Bank.
last May, raised credits of $300 million in July (National Water Council)
and $500 million in October (Electricity Council).

The smaller industrial

countries also stepped up their rate of borrowing, particularly Ireland
($400 million) and Greece ($308 million).

The Government of Denmark, an

active borrower in the first half, did not arrange Euro-currency credits
in the period under review but subsequently arranged a $400 million credit
in early December to replenish its external reserves.
The $1.5 billion raised by oil-exporting countries nearly equalled
their first-half total; Venezuela, which had not borrowed in this market
since early 1975, arranged a $1 billion loan in October to pay off shortterm debts.
The non-oil developing countries arranged $4.1 billion of mediumterm Euro-credits in July-October, which was a higher rate than in the
first half.

(Some part of the new loans was to meet maturing debt.)

Loans to Argentina and Mexico were particularly large.

In October Argentina

IV - 8

effectively completed negotiations with U.S. banks for a $500 million loan
(although the agreement has not yet been formally signed).

This is part

of a $1.3 billion package that Argentina is negotiating to stretch out
maturities on its external debt and that will include loans from European,
Canadian and Japanese banks and a $300 million IMF drawing.

Credits arranged

by Mexico in July-October of $1.3 billion were nearly double the firsthalf amount and included an $800 million loan to the Mexican Government
from a syndicate of U.S., Canadian, and European banks for which funds
were fully committed in October although formal signing did not occur until
mid-November.
seven years.

One-half of this loan was for five years and one-half for
Brazilian borrowing continued to be heavy in the third quarter.

Brazil is currently negotiating two loans from European banks totalling
$920 million, but part of this package may be in domestic currencies.
Socialist countries and organizations

arranged $540 million

of new Euro-credits in July-October, principally for Hungary, Czechoslovakia,
and Bulgaria; this amount was at a lower rate than borrowing by this group
in 1975 and the first half of 1976.

In December new credits were negotiated

by Hungary and Poland for about $350 million.
Since June the volume of Euro-credits arranged has been encouraged
by declining lending rates.

3-month deposit rates are now about 5 per cent

compared with a 5.7 per cent average for the first half of this year.
Spreads over deposit rates on Euro-dollar loans have also tended to narrow
slightly in recent months.

IV - 9

New issues of Euro-bonds of $4.1 billion in the period under review
were at about a 25 per cent slower rate than in the first half of the year,
mainly because of seasonal factors.

Flotations by Canadian borrowers,

however, declined more than did total issues.

Australian recourse to the

Euro-bond market increased sharply when the Government floated a $300 million
issue in September in three tranches of 7-, 10-, and 15-year maturities.
The average final maturity of new issues in July-October was 7.26 years,
slightly below the second quarter when maturities began to lengthen but
still well above the 6.91 years of the first quarter.

Yields in the secondary

market eased after mid-year; yields on dollar bonds of U.S. compares at the
end of October were down about 40 basis points from the first-half average.
Foreign bond issues, totalling $4.3 billion, were down one-third
from their first-half rate, a decline apparently more than seasonal.
and World Bank issues declined more than those of other borrowers.

Canadian

IV -

U.S. International Transactions.
U..S

Major developments in the

international accounts in October were the continuation of a large

trade deficit, and the emergence of a net inflow of funds on bank-reported
private capital transactions.
Nonagricultural exports declined slightly in each month from
August to October, following a period of substantial growth in the first
seven months of the year.

The pattern of a strong growth in these

exports earlier in the year, followed by a slowdown more recently, was
wide-spread geographically.

Shipments to most industrial countries

leveled off and in some cases declined slightly, while shipments to nonoil developing countries dropped more noticeably.
The recent decline was more pronounced in volume terms, as
nonagricultural export prices, which had been flat earlier in the year,
rose 3.3 per cent during the three months ending in October.

The

largest volume declines were in machinery and automotive products.
The slowdown in auto exports and in exports to Canada, which receives
most of our automotive exports, was largely a result of the UAW strike
against Ford Motor Company in September-October.

These exports had

increased in earlier months in anticipation of the strike.

More broadly,

the recent movements in U.S. exports reflect the pattern of growth in
activity abroad, which has slackened noticeably in recent months,
following a surge in the early stages of the upturn.

IV - 11

Looking to the near future, available indicators give
conflicting signals.

While recent movements in export shipments and

foreign activity suggest weakness and the currency depreciations in
Canada and Mexico are likely to reduce exports, export orders for
durable goods, especially for machinery, are up strongly.

In July-

October, new orders for machinery (which account for 35 per cent of
nonagricultural exports) were 25 per cent above the second quarter in
constant dollars and 34 per cent above the first quarter.
Agricultural exports have increased steadily throughout the
year, with a particularly large rise in October, reaching a record level
of $28.4 billion (seasonally adjusted annual rate).

Mcst of the increase

has been in volume, as prices have remained fairly stable in 1976, The
sharp rise in October resulted from a large increase in the volume of
corn exports to Europe, particularly to those areas that had been
severely affected by the drought earlier this year.

Weekly data on

shipments for November suggest that agricultural exports will be down
from the October peak.
Nonfuel imports in October declined slightly from September
levels.

After increasing steadily through July, the volume of nonfuel

imports has eased in recent months with the slowdown in the growth
of U.S. economic activity.

This pattern held across most import

categories except capital goods and automotive products.

Capital goods

imports have continued to increase, in line with the moderate but

IV -

steady growth in domestic business fixed investment expenditures,
while automotive products have dropped off much more sharply than
other imports in recent months.

Most of the drop in automotive

imports (largely from Canada) is related to the Ford strike.
Automotive imports from other areas have been fairly steady on balance
U.S. Merchandise Trade. International Accounts Basis
(billions of dollars, seasonally adjusted annual rates)

1975

1975
Year
EXPORTS

107.1 1107.3
21.3

22.2
Agric.
Nonagric. 84.8

86.1

IMPORTS
Fuels
Nonfuels

98.1
28.5
69.5

114.0
31.8

BALANCE

+9.0

-6.7

NOTE:

1976 7
1 9

)

82.3

3Qr

July

113.8
23.5
90.3

118.8
25,3
93.6

119.4
25.4
94.0

93.3

118.9
36.5
82.5

130.4
39.9
90.6

132.3
40.2
92.1

127.2
40.2

-5.1 -11.6

'-12.9

Aug.

Sept.r

Oct.

118.5
25.2
93.3

117.2
28.4
88.8

87.0

131.8
38,7
93.1

127.5
36.4
91.1

-8.6

-13.3

-10.3

118.6
25.3

Details may not add to totals because of rounding.

Index Numbers 1973=100
1975
Year
NONAGRIC. Exports
Price
144.1
Volume
110.1

1976

LQI

July

Volume

Sept.

Oct.

150.3
107.0

152.4
110.8

153.91 152.4
113.61 115.4

153.0
114.0

156.5
111.6

157.4
105.5

138.6
80.2 1 96.6
---

141.7
94.7

I
144.11 143.4
143.9
98.3
102.21 104.6
---

145.1
104.3

145.1
102.1

NONFUEL Imports

Price

A ug,

140.9

IV -

this year, with increases in shipments from Japan offsetting declines
in shipments from Europe.

There has been a pickup in new foreign car

sales in recent months, which has been stimulated by improvements in
price and quality incentives relative to domestic competition.

The

increase in sales has largely come out of inventories that were built
up earlier in the year.
The growth of fuel imports has eased off in the last few
months with the volume of oil imports dropping from a rate of about
8-1/2 million barrels per day during the summer months to still high
rates of 7-1/2 to 8 million barrles per day in September and October.
Fuel imports are likely to remain at these rates through the end of
the year as stockpiling continues in anticipation of an OPEC price
increase.

The average price of imported oil has inched up throughout

the year and in October was $12.25 per barrel.
Bank-reported capital transactions showed a large net inflow
of funds in October, following a smaller net outflow in September (revised
from the net inflow reported last month).

The increase in bank-

reported claims fell off from the rates of earlier months, and bankreported liabilities to private foreigners rose more strongly.

After

adjusting for the understatement of outstanding claims due to over-theweekend arbitrage between the Federal Funds and Eurodollar markets,
the net inflow of funds in October may have been on the order of $250 to $750
million.

The inflow represents, in part, U.S. banks' substitution

IV -

of near term Euro-dollar funds raised by their overseas branches
for maturing certificates of deposit.
less than 30 days maturity --

These Euro-dollar funds are of

a range where U.S. head offices are unable

to compete directly because of the prohibition on interest payments.
New

issues of foreign bonds in the United States were down

slightly in October, but are expected to be about $2.5 billion in the
fourth quarter, a rate equal to that of the first three quarters.

The

relative yield on Canadian issues has responded adversely to the political
situation in Quebec.

However, there has been only a slight drop-off in

Canadian issues in the United States during the fourth quarter.

Another

development related to foreign long -term issues in the United States
is that Venezuela, the first OPEC member to enter the U.S. market in
recent years, plans to float a five year $75 million public issue in
the first quarter of 1977.
Foreign official assets in the United States increased by
$800 million in October.

Holdings of OPEC official agencies accounted

for more than half of the increase, and an increase in liabilities to
Italy accounted for most of the remainder.

IV -

15 -

Fiscal Policy in Foreign Industrial Countries.

Until recently,

the stance of fiscal policy in the major foreign industrial countries has
been directed towards reducing the stimulus provided during the 1974-75 recession.

In Japan and Germany, these efforts have been relaxed somewhat,

in response to the pause in economic activity, and may soon be reversed.
In Italy and the United Kingdom, the move towards reduction in fiscal stimulus has become more pronounced, due to unusually high rates of inflation
and associated pressures on exchange rates.

Canada and France show few

signs of changes in fiscal posture in either of these directions.
Policy makers are faced with a set of circumstances that gives
no clear indication of the appropriate fiscal stance.

The most recently

available data point to a continuation of the pause in the recovery, at
levels of activity and employment that are well below potential.

This

suggests that a move towards fiscal stimulus might be in order.

However,

changes in labor force characteristics and in the productivity of the
capital stock (resulting from higher oil prices, environmental considerations, changes in the composition of demand, etc.) hamper calculations of
the gap between potential and actual GNP, and therefore, of the proper fiscal action.
At the same time, rates of increase in prices in 1977 are expected to remain between six and ten per cent -- somewhat lower in Germany,
higher in the United Kingdom and Italy -- representing at best gradual
improvement over 1976.

Thus, there is considerable caution in all countries

about renewing inflationary pressures and expectations.

In addition, sev-

eral countries must cope with adverse current-account and exchange-rate

IV - 16 developments, suggesting a more restrictive policy stance.
Finally, public budget deficits -- even measured in relation to
GNP -- generally remain high compared with the years prior to 1975.

Prob-

lems of financing these deficits, and the adverse effects of the size of
these deficits per se on confidence and expectations, suggest to some
policy makers that a fiscal stimulus which would increase these deficits
in the short run might be ineffective.
In 1975 the combined effects of the reaction of automatic stabilizers to declines in real GNP, discretionary fiscal measures, and high rates
of inflation resulted in huge increases in central government budget
deficits measured in

current prices.

Measuring the deficits in 1974 prices

gives some idea of the contribution of inflation in magnifying the difference between nominal expenditures and nominal revenues (Table I).

In 1976

projected budget deficits remain in the area of the 1975 absolute levels,
except in France, where a large decline is expected.

In terms of the ratio

to GNP, there has not been much change except for France and Italy.

For

those countries where 1977 estimates are available, the size of the deficits
are expected to decline somewhat in realterms, and in relation to GNP.
There has been considerable variability in the extent to which
central government borrowing requirements have been financed by central
banks and the private banking system.

The proportion financed by the

central bank has been highest in Italy (60 per cent in 1975, 80 per cent so
far in 1976), and was also important in both France and Japan in 1975 (over
40 per cent), with private banks accounting for somewhat smaller shares.
In 1976 the pattern is much the same in Japan, while in France the shares

IV - 17 -

Table I
Central Government Budget Deficits
(Current Prices 1/, Constant Prices 2/, and as a

Percentage of GNP)
1974

1975

1976

1977 3

Canada/
Current Prices

1.2

4.1

5.0

n.a.

Constant Prices
Deficit/GNP

1.2
0.8

3.7
2.5

4.1
2.7

n.a.
n.a.

2864
2864
2.2

6251
5836
4.3

7600
6684
4.7

8100
6672
4.4

Japan4/
Current Prices
Constant Prices
Deficit/GNP
France
Current Prices
Constant Prices
Deficit/GNP

-4.3
-4.3
-0.3

39
34.2
2.7

23
17.6
1.3

10
7.4
0.5

10.3
10.3

35
32.3

34.3
30.7

1.0

3.4

3.0

2.3

16500
14077
14.7

14000
10200
10.3

13900
8500
8.6

Germany
Current Price
Constant Prices

Deficit/GNP

28.2
24.2

Italy

Current Prices
Constant Prices
Deficit/GNP

8962
8962
9.0

United Kingdom-4/
Current Prices

5.1

8.8

10.4

n.a.

Constant Prices
Deficit/GNP

5.1
6.3

6.9
8.7

7.2
9.8

n.a.
n.a.

1/ Billions of local currency
2/ Billions of local currency, 1974 prices.
3
Forecast.
4/
Fiscal year beginning in April of year cited.

IV - 18 -

of both the central and private banks have declined sharply.

Non-bank

domestic sources have accounted for much of the borrowing requirement in
Canada and the United Kingdom in 1975 (70 and 60 per cent respectively)
and again in 1976.

Private banks have met most of the financing require-

ment in Germany, where "overborrowing" in late 1975 substantially eased the
problem of financing this year's deficit, and allayed fears that crowding
out would occur in 1976.
To provide an indication of the changes in fiscal stimulus associated with the budget deficits since 1975, Table II gives percentage
changes in central government expenditures and revenues, and in actual and
potential GNP, all measured in current prices.

One measure of changes in

the impact of the budget on GNP is based on the concept of the cyclically
neutral budget -- one in which expenditures grow at the same rate as
potential GNP, while revenues maintain a fixed relationship to actual GNP,
so that the budget balance (in relation to GNP) moves counter-cyclically.
Changes in the ratio of expenditures to potential GNP or revenues to actual
GNP would then represent further stimulus or restrictiveness, according to
the directions of the movements.
direction

Where the movements are in the same

(e.g., expenditures increasing more than potential GNP and

revenues increasing more than actual GNP), the magnitude of the changes,
and a weighting scheme, are necessary to determine the net stimulus.
By these criteria, it is evident that fiscal policy in 1975
provided a substantial stimulus compared with 1974 in Canada, Japan, France,
Germany, and Italy.

In the United Kingdom, proportionate changes in expend-

itures and revenues were close to those of potential and actual GNP

IV - 19 -

Table II
Annual Percentage Changes in Expenditures, Revenues,
Actual and Potential GNP 1/

1975/74
Canada

1976/75

1976/74

1977'

Expenditures
Revenue
Actual GNP
Potential GNP

18.6
6.2
11.5
15.2

13.4
15.4
15.0
14.2

34.5
22.6

Expenditures
Revenue
Actual GNP
Potential GNP

9.0
-10.2

18.1

28.7

12,7

23.4

13.5

12.6

27.8

Expenditures
Revenue
Actual GNP
Potential GNP

22.0

9;0
26.6

33.0
25.0

15.5

27.7

6.8
8.8
13;0

14.1

35.2

12.8

Expenditures
Revenue
Actual GNP
Potential GNP

19.4
1.0
4.6
12.6

26.2
9.1
14.1
20.9

11;2
90
8.2

Expenditures
Revenue
Actual GNP
Potential GNP

44.0
29.5
13.2
21.6

23;0

77.1

33.0

21;2
20.5

72.1
37;1
46.5

18;0
19;5
19;3
24.2

United Kingdom3/ : Expenditures
Revenue
Actual GNP
Potential GNP
(2.0, 2.7)

30;0
22;9
24.8
30.0

17.7

53;0

n.;a

17.5
15.0

44.4

n.a.

(4.0, 5.4)
Japan3 :

(6.0, 7.4)
France:

(4.0, 5.4)
Germany:

(4.0, 4.4)
Italy:

(3.5, 4.7)

9.5

-1.2

10.6
18.6

16.7

5.7
8.0
9.1

7.6

16.0

n.a.
n.a.

28.2

31.6
15.8
20.0
1.8
13.2

4.8

43.5
51.6

1 Numbers in parentheses give assumed growth rates of potential GNP
real) and trend growth rates for 1963-4 to 1973-4, respectively.
SForecasts and preliminary budget data.
SFiscal year, beginning in April of year cited.

5.4

IV - 20 -

respectively, but on balance the stimulus in 1975 was a bit greater than
in 1974.

in 1976 budgetary stances tended to be more neutral or contrac-

tionary than in 1975 in the sense that expenditures rose about as much as,
or less than, potential GNP while revenues generally increased about as
fast, or faster than actual GNP.

The single clear exception is Japan,

where the changes in potential and actual GNP were about the same, expenditures rose more than revenues, and both rose more than GNP, imparting
further stimulus to the economy.

The direction of change in the United

Kingdom is difficult to identify, since expenditures and revenues increased more than potential and actual GNP (respectively), by broadly
similar magnitudes.
While 1976 budgetary stances generally reduced the fiscal stimulus provided during 1975, changes in expenditures and revenues for the
1975-76 period as a whole indicate an overall expansionary stance in Canada,
Germany, and Japan.

In the United Kingdom and France, the pattern of in-

crease in expenditures and revenues was on balance roughly neutral.

Italy, large increases in revenues and expenditures relative to both
potential and actual GNP make it difficult to characterize fiscal policy.
Budgets for 1977 are currently under debate in Germany, France,
and Italy (where the fiscal years begin in January) and are still in the
planning stages in the United Kingdom, Canada, and Japan (where the fiscal
years begin on April 1).

Preliminary budget forecasts indicate generally

reduced stimulus, with expenditures in most cases rising less than potential GNP, and revenues rising in relation to actual GNP.

Partially in re-

sponse to the urging of international creditors, recently announced fiscal

IV -

21 -

policy measures of a discretionary nature in the United Kingdom and Italy
are restrictive, reflecting the need to bring rates of inflation down towards those of other major industrial countries and thereby restore some
stability to exchange rates.

In Germany and Japan, the prolonged pause in

economic activity has prompted consideration of expansionary measures.
In the United Kingdom attention has focused on the public sector
borrowing requirement (PSBR), which amounted to £10.6 billion (about $22.5
billion or 10 per cent of GDP) in the fiscal year ending in March 1976.
According to recent forecasts, the PSBR is expected to be slightly higher
(about £11 billion) in the current fiscal year, an improvement, however,
of nearly £1 billion compared with the original budget estimate.

In July,

the U.K. government announced plans to cut public sector spending in 1977-78
by £1 billion and increase revenues by about £900 million through an increase in employers' social security contributions.

Further measures in

conjunction with the IMF negotiations are scheduled to be announced on
December 15 (evening).

(A summary of these measures will appear in the

Greenbook Supplement.)
In Italy a series of measures was announced in October and November that would increase revenues by some 5 trillion lira (nearly $6 billion).
Prior to these measures, the 1977 deficit had been forecast at nearly
14 trillion lira (8.6 per cent of forecast GNP), slightly higher than the
projected deficit for 1976.

The measures include increased excise taxes,

indirect taxes and prices for public utilities (3 trillion lira); an acceleration of income tax payments so that part of the tax on 1977 incomes
will be paid in 1977 rather than 1978 (1.5 trillion lira) and increases in

IV - 22 -

public administrative charges (0.5 trillion lira).

New estimates of the

1977 budget figures incorporating these steps have not yet been announced.
In France, a supplemental budget was announced in September 1976
that called for FF9.4 billion ($1.9 billion) of expenditures in the form
of transfer payments, but provided for tax increases that would match the
spending increases, so that the projected FF15 billion deficit remained
unchanged.

A second supplemental budget introduced in November provided

for further spending of FF12.1 billion, and tax increases and spending cuts
totalling only FF4.1 billion, thereby increasing the deficit for this year
to FF23 billion, ($4.6 billion or 1.3 per cent of GNP) compared with FF39
billion last year.

According to President d'Estaing, these measures

covered spending that had been agreed upon before the launching of the
counter-inflation program in September, rather than new measures for the
sake of stimulus.

Programs announced in conjunction with the 1977 budget

call for steps to stimulate investment, a reduction in the value-added
tax, increases in corporate income taxes, and a shift in the income tax
burden from lower to higher income brackets.

The proposed budget is in

balance, as were the proposed budgets for 1975 and 1976; supplementary
budgets announced over the course of the year may well alter the balance.
In Germany, the strong fiscal stimulus imparted to the economy
in 1975 has been partially reversed in the 1976 and proposed 1977 budgets
in an effort to reduce the central government deficit and alleviate the
effects of the deficit on confidence and expectations.

The draft budget

incorporates tax increases expected to yield DM4.5 billion ($1.3 billion)
and provides for a relatively slow growth in public expenditure.

Plans

IV - 23 -

for an increase in the basic VAT rate from 11 to 13 per cent have been
shelved until at least 1978.

The recently released report of the German

Council of Economic Experts advocates a "medium term growth and stability
program" that would liberalize depreciation allowances, increase research
expenditures, lower interest rates for new and small firms, and increase
federal assistance to combat structural unemployment.
program would be DM3 billion (0.3 per cent of GNP).

The cost of the
An announcement of

possible policy initiatives is expected later this week.
In Japan a seven point stimulative program was announced on
November 12, providing for an acceleration of public works expenditures,
the revival of ¥400 billion ($1.3 billion) in railway and communications
fixed capital expenditures, loans for housing projects, accelerated investment of ¥800 billion ($2.7 billion) by the electric power industry, loans
to small enterprises, and measures to promote exports and employment.
Most observers expect the program to have only a moderate impact on the
economy, which has sharply slowed its rate of advance since the late
spring.

A supplementary budget providing for further spending increases

is presently being compiled.

If the economy continues to remain sluggish

in the coming months, it is expected that the government will reduce the
personal income tax burden, as it has done in each of the past four years.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 16, 1976 : Greenbook Part 2

FRASER