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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

November 14, 1973
By the Staff
Board of Governors
of the Federal Reserve System

TABLE OF CONTENTS
Section

Page

DOMESTIC NONFINANCIAL SCENE
Summary and GNP outlook ...,......................,......,.
Industrial production ...
.....................
................
Ratail sales ................................ .........
.
Unit sales of consumer durables ................
...
Construction and real estate ....
.........................
Anticipated plan and equipment spending ....................
Manufacturers orders and shipments .........................
Inventories ....... ....... .......
.......................

Cyclical indicators

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

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

,......

- 1
-10
-12
-13
-15
-18
-19
-20

-22

Labor market ................ .......
.......................
Earnings ...............................................
Productivity and costs .......
...... ......
..............
Consumer prices ...............
.......
,.............
......
Wholesale prices ............................................

-23
-24
-25
-26
-28

Agriculture .................................................

-31

DOMESTIC FINANCIAL SITUATION

II

Summary and outlook ...................

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

- 1

Monetary aggregates .
...........................
Bank credit .
..............................
....

- 4
6

Nonbank financial institutions ............................

- 9

Consumer credit .... ...............................
4

-11

......

Commercial paper outstanding ................................
Short-term rates .........
...............
.......
.....
Treasury coupon market .......................
.... ...
Long-term security markets .................................

-11
-13
-15
-17

-20
...
..........
.:
:
Mortgage arket ..................
Agricultural finance ...... ,,,,
",...,,..,,,,,,,...,,.,.. -22
Federal finance ........

INTERNATIONAL DEVELOPMENTS

.... .......

,.

,...........

*25

III

Summary and outlook ........................
*....,.o.,
Foreign exchange markets . ................
...........
..
Euro-dollars .... ,.... ....................
,.........,..

- 1
- 3
- 5

U.S. balance of payments .... ,,,,........,......,...,,,..
U.S. foreign trade ......
,.......... ,........,...
...

- 7
- 9

Monetary conditions and monetary policy
in major industrial countries ............................

-11

DOMESTIC NONFINANCIAL
SCENE

I

--

T-

1
November 14, 1973

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

Period

Release
Date

Data

Per Cent Change From
Three
Preceding Periods
Year
Period
Earlier Earlier
(At Annual Rates)
4.8

4

.3
4 1/

4.81/;

4.7f,

Civilian labor force
Unemployment rate
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.
Sept.
Oct.
Oct.
Oct.

11/2
11/2
10/20
11/2

89.8
4.5
2.8
76.3

11/2

20.0

11/2

56.3

4.8
6.3
4.3

Oct.

11/2

37.0

37.2-1/

11/2

3.98

9.1

37.21
7.2

37.31/

Oct.
Oct.
Sept.

11/2
10/29

40.6
124.0

40.81
4.9

40.74.9

40.71/

Industrial production (1967=100)

Oct.

11/15

Oct.
Oct.
Oct.
Oct.

11/15
11/15
11/15
11/15

127.8
133.3
127.3

6.6
14.6
19.2
8.9
-2.7

3.5
1.5
14.0
2.5
2.4

5.0
14.1
4.7
7.7

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

Sept.
Sept.
Sept.
Sept.

10/19
10/19
10/19
10/19

135.5
124.3
140.6

3.8
-1.6
1.0
11.2

9.9
26.1
2.6
7.2

7.4
18.8
3.3
4.8

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

Oct.
Oct.
Oct.

11/7
11/7
11/7

140.2
129.7
169.2

-3.6
13.7
-39.1

17.1
8.8
37.8

16.2
9.1

35.3

Personal income ($ billion) 3 /

Sept.

10/17

11.3

11.9

11.1

Consumer goods
Business equipment
Defense & space equipment
Materials

81.6

131.7

148.3

1057.2

2.7-

2.74.2
3.6
4.4

2.9
5.5/
3.43.7
4.0
3.5

6.7

4.9
7.2

(Not at Annual Rates)
-1.4
-1.2
0.6
-12.2

-2.1
-6.3
-2.7
-25.1

12.9
10.4
14,1
-9.7

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:
Nondefense
Defense

Sept.
Sept.
Sept.
Sept.

11/1
11/1
11/1
11/1

42.1
12.7
11.1
1.6

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

Sept.
Sept.
Sept.

11/15
10/31
11/15

1.44
1.59
1.29

1/
1.431.57
1.2&8-

1.441 /
1.581.3

Sept.

11/1

.726

.733- 1

1/
.756-

Oct.
Oct.

11/9
11/9

43.4
11.2

2.1
1.1

1.3
1.3

Oct.
Oct.
Oct.

11/5
11/5
11/5

10.2

1974
1974

11/10
11/10

Ratio:

Mfrs.' durable goods inventories
to unfilled orders

Retail sales,
GAF

total ($ bil.)

Auto sales, total (mil. units) 3/
Domestic models
Foreign models
Plant & equipment expen. ($ bil.) 4/
All industries
Manufacturing

/
Sept.
Housing starts, private (thous.)Sept.
Leading indicators (1967=100)
I/ Actual data. 2/ Not seasonally adjusted. 3/
McGraw-Hill.

11/17
10/29

8.7
1.5

-15.9
-17.8
-3.1

1,763
166.7

At annual rate.

10.9
8.6

-13.8
-13.1
-17.5

-11.7
-11.4
-13.2
-

113.85
46.52
-14.7
-0.4
4/

-17.2
1.5
Planned--

149
1.65-,
1.34"

13.67
24.19

-27.3
13.3

I-1
DOMESTIC NONFINANCIAL DEVELOPMENTS

Aggregate output and employment have continued to expand
appreciably, though less rapidly than earlier this year.

Recent

declines in prices of farm products and foods have tempered the rate
of over-all price advances but non-food commodity prices have continued
to rise rapidly.

Capacity constraints continue to limit expansion in

a number of important areas, and the fuel crisis is adding major uncertainties to prospects for output and prices.
In October, industrial production increased 0.6 per cent from
a September level which has been revised slightly downward.

Output of

business equipment continued strongly expansive and output of consumer
goods advanced further, but materials production showed little change,
in part reflecting constraints imposed by available capacity.
The labor market recently has strengthened.

In October, the

unemployment rate dropped from 4.8 per cent to 4.5 per cent, the lowest

level since the spring of 1970.

Nonfarm payroll employment has shown a

resurgence; the October rise amounted to 300,000, with manufacturing
employment up for the first significant increase since June.

Upward

revisions for August and September have brought the rise in total non-

farm employment in the latest three months to an annual rate of over
3 million.
Revised data indicate that retail sales in the third quarter
were not so sluggish as originally reported.

In October, retail sales

rose 2 per cent according to the advance report.
autos, however, were weak.

Unit sales of new

Shortages of small models relative to

I -2

demand may have contributed to the decline, as well as consumer
dissatisfaction with some features of the new models.
Inventory investment has remained exceptionally moderate
relative to activity levels; delays and/or inability to obtain desired
stocks probably have been an important factor holding down inventory
accumulation.

Business plans to spend on plant and equipment are still

strong, however, as evidenced by the recent McGraw-Hill survey.

Although

the rise in new orders for nondefense equipment has moderated, unfilled
orders have mounted further even though output of business equipment
has continued to increase rapidly.
Wage rates have continued to advance rapidly, with the hourly
earnings index up about 7-1/2 per cent at an annual rate since March.
In the nonfarm economy, productivity growth was at a relatively slow
pace in the third quarter, and unit labor costs rose rapidly.
Wholesale prices of farm products and foods declined further
from September to October, but were still 4-1/2 per cent above the June
level, prior to the freeze.

The rise in industrial prices accelerated

in October--to 1.1 per cent for the month--with the index 9 per cent
above a year earlier.

Higher prices for petroleum products accounted

for much of the October increase, but price advances were widespread.
In September, the rise in the consumer price index had moderated because
of lower prices for foods, but the index was about 7-1/2 per cent above
a year earlier.

I - 3

Outlook.

The following staff assumptions are incorporated

in the GNP projections:

(1) Growth in M1 will average about 5 per cent

or so over the projection period.

Under this assumption, short-term

money market rates are expected to average close to current levels
during 1974, but long-term rates are expected to move up somewhat
further next year.

(2) Federal defense expenditures in calendar 1974

have been raised $1.5 billion, reflecting replacement of military equipment going to Israel.

(3) Price and wage controls will be continued

beyond the April expiration date, but with further selective decontrol
as the year unfolds.

(4) Because of uncertainties as to the time

period over which oil imports may be restricted, and as to probable
allocation programs, no specific allowance has been made for the effects
of an acute oil shortage on real economic activity.
Real GNP is now projected to rise at an annual rate of 3.8
per cent this quarter, rather than the 3.5 per cent indicated in the
October Greenbook.

Looking forward to 1974, the most important changes

from the projection of five weeks ago are higher rates of real GNP
growth and a somewhat faster rate of price increase.

The unemployment

rate is now projected to rise from a low of 4.6 per cent in the current
quarter to 5.2 per cent in the fourth quarter of 1974.
The higher rate of growth in real GNP projected for 1974
reflects somewhat more strength in several demand sectors.

Business

outlays for fixed capital are now projected to increase over 12 per cent
for the year.

The upward revision reflects additional evidence of

strong demands for new capacity and other purposes, and takes into

I - 4
account the recent McGraw-Hill Survey.

The projected decline in

housing starts and residential construction has been tempered because
savings inflows have improved and are now expected to hold up better
than earlier assumed.

On the other hand, net exports of goods and

services are expected to rise less in 1974 from a higher fourth
quarter level than had been assumed previously.

Growth in consumer

spending has been raised relatively little despite a faster rise than
projected earlier for wage rates and disposable income.
Nonfood commodity prices are now expected to increase somewhat more rapidly than appeared likely five weeks ago.

The GNP private

fixed weight deflator is projected to rise at an annual rate of 5
per cent in the second half of 1974, rather than 4-1/2 per cent projected previously.

Underlying the present projection are expected

higher unit labor costs, the pervasive effects of fuel and other materials
shortages, and the effects of gradual and selective decontrol of wages
and prices.

I-5
STAFF GNP PROJECTIONS
Per cent change annual rate
Gross private

Changes in
nominal GNP
$ billion

product
Real GNP

fixed weighted
price index

Unemployment
rate

10/10/73

11/14/73

10/10/73

11/14/73

10/10/73

11/14/73

10/10/73

78.3
99.7
133.5
108.1

78.3
99.7
133.3
115.2

3.2
6.1
6.1
2.5

3.2
6.1
6.1
2.9

4.6
3.2
6.0
5,7

4.6
3.2
5.8
5.9

5.9
5.6
4.8
5.2

5.9
5.6
4.8
4.9

1973-1/
II*
III'/
IV

43.3
29.5
32.2
32.1

43.3
29.5
32.0
31.6

8.7
2.4
3.7
3.5

8.7
2.4
3.6
3.8

7.0
7.9
7.1
6.3

7.0
7.9
7.1
5.8

5.0
4.9
4.8
4.7

5.0
4.9
4.8
4.6

1974-1
II
III
IV

27.2
25.0
19.2
19.7

29.7
26.3
24.1
26.3

2.5
2.3
1.0
1.1

3.0
2.5
2.0
2.0

5.9
5.2
4.6
4.6

6.2
5.4
5.0
5.0

4.9
5.1
5.3
5.5

4.7
4.8
5.0
5.2

137.1

136.4

4.5

4.6

7.1

6.9

-.
6

-.7

73-IV to
74-IV
91.1
106,4
1.7
1/ Actual.
2/ Commerce preliminary for GNP.

2.4

5.1

5.4

.8

.6

19711/
1972'
1973
1974

Change:
72-IV to
73-IV

11/14/

I-6

CONFIDENTIAL - FR

November 14, 1973

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1973
1972

Gross National Product

Final purchases
Private

1155.2
1149.1

894.1

1973
Proj.

1288.5
1282.4
1004.7
1000.1

Excluding net exports

898.7

Personal consumption expenditures
Durable goods

726.5
117.4
299.9
309.2

805.2

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

178.3
54.0
118.2
6.0
5.6

201.1
58.2

Net exports of goods and services
Exports
Imports

-4.6
73.5
78,1

4.6
100.6
96.0

Nondurable goods
Services

132.1
336.4
336.7

136.8
6.2

5.5

Proj.
IV

1972
IV

I

II

1166.5
1157.8
903.1
906.9

1199.2
1191.0
930.3
933.8

1242.5
1237.8
969.2
969.2

1272.0
1267.5
992.2
989.4

734.1
120.2
302.3
311.6

752.6
122.9
310.7
319.0

779.4
132.2
322.2
325.0

795.6
132.8
330.3

814.

332.6

340.5

181.5
54.5
118.3
8.7
8.4

189.4
56.9
124.3
8.2
7.9

194.5
59.0
130.9
4.6
4.4

198.2
59.6
134.1
4.5
4.4

203.1
59,3
138.71,
5.5

0.0
89.7
89.7

2.8
97.2
94.4

6.9
104.597,6-'

8.8
110.9
102.1

275.3
107.3
74.2
33.1
168.0

279.61 /

172.5-

287.1
109.7
75.1
34.6
177.4

834.3
152.5

841.6
154.9

849.5
157.2

III

-3.8
74.0
77.7

-3.5
79.7
83.2

IIIp

1304.0 , 1335.6
1298 5- 1325.6
1018.91 1038.5
1012.01' 1029.7
132.

0'1

341.5 '

4.0'

1

831.6
131.5
351.6
348.5
208.1
54.8
143.3
10.0
9.0

254.7
102.3
71.9
30.4
152.4

260.7

150.5

277,7
107.4
74.3
33.1
170.2

72.4
30.3
158.0

268.6
105.5
74.3
31.2
163.0

constant (1958) dollars
GNP implicit deflator (1958 - 100)

790.7
146.1

838.7
153.6

796.7
146.4

812.3
147.6

829.3
149.8

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

939.2
627.8
797.0
49.7
6.2

1034.3
691.6
881.6
52.9
6.0

943.7
632.7
800.9
45.8
5.7

976.1
648.7
828.7
54.4
6.6

996.6
666.7
851.5
50.0
5.9

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

98.0
105.0

126.4
109.2

98.4
91.9

106.1
97.7

228.7
244.6
-15.9

264.9
264.7
0.2

236.9
260.3
-23.4

0.4

-0.8

7.3

-10.9

-0.9

0.0

State and local government surplus or
deficit (-), (N.I.A. basis)

13,1

10,7

9.5

19.6

13.9

11.5

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

89,0
2.5
86.5
5.6

91.1
2.3
88.8
4.8

89.3
2.4
86.9
5.6

89.6
2.4
87.2
5.3

90.0
2.4
87,6
5.0

90.9
2.3
88.6
4.9

91.3
2.3
89.0
4.8

92.1
2.3
89.8
4.6

Nonfarm payroll employment (millions)
Manufacturing

72.8
18.9

75.5
19.8

73.0
19.0

73.8
19.3

74.6
19.6

75.3
19.8

75.7
19.8

76.4
20.0

125.7
83.2
95.5

116,3
79.4
91.0

124.8
83.3
94.4

126.8
83.4
96.3

128.3
83.3
97.4

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

255.0
104.4
74.4
30.1

102.7

107.1

73.6
33.5 ,

Gross national product in

1019.0
869.7
51.0
5.9

698.9
890.9
52.
5.99=

1074.9
718.0
914.4
57.8
6.3

119.6
104.9

128.9
110.3

128.0e
110.4

129.0
111.1

253.6
258.6
-5.0

262.4
262.4
0.0

268.9e
265.7
3.2e

274.7
272.0
2.7

682.6

1046.7

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

Receipts
Expenditures
Surplus or deficit (-)
ligh employment surplus or deficit (-)

Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials (per cent)

115.1
78.6
90.2

229.6
237.0
-7.4

120.2
81.5
92.4

2.40
2.10
2.37
11.69
11.63
11.52
9.90
9.91
9.87
Domestic models
1.79
1.76
1.61
Foreign models
preliminary estimates because
be made in
of revisions
of revisions to be made in Commerce preliminary estimates because
1/ Estimates
1/Estimates
Housing starts, private (millions, A.R.)

Sales new autos (millions, A.R.)

underlying data.

2.38
10.94
9.32
1.61

123.1
82.8
93.8

-1.5
9.8e

-0.7
7.6

1.78
2.22
2.01
11.74
10.85
11.73
10.11
9.25
9.87
1.60
1.63
1.96
1.86
more
of revised and more complete
complete
of revised and
2.40
12.23
10.27

CONFIDENTIAL - FR

November 14, 1973

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarter figures at annual rates.)
1974
Proj.

1974
Projected
II
III

I
Gross National Product
Final purchases
Private
Excluding net exports

IV

1403.7
1394.0
1088.4
1079.2

1365.3
1353.8
1059.4
1050.5

1391.6
1381.6
1080.5
1070.9

1415.7
1406.7
1098.3
1089.0

1442.0
1433.7
1115.5
1106.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

874.9
131.8
376.6
366.5

851.0
132.0
363.0
356.0

869.1
132,0
374.1
363.0

883.2
132.0
381.2
370.0

896.2
131.0
388.2
377.0

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

214.0
50.7
153.6
9.7
9.5

211.0
51.2
148.3
11.5
12.0

211,8
49.3
152.5
10.0
10.0

214.8
50.3
155.5
9.0
8.5

218.4
52.1
158.0
8.3
7.5

Net exports of goods and servicesExports
Imports

9.3
119.7
110.4

8.9
115.7
106.8

9.6
119.0
109,4

9.3
120.8
111.6

9.3
123.1
113.8

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

305.5
114.7
77.4
37.3
190.8

294.4
111.7
75.5
36.2
182.7

301.1
113.3
76.3
37.0
187.8

308.4
115.0
77.5
37.5
193.4

318.1
118.7
80.3
38.4
199.4

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

863.0
162.6

855.8
159.5

861.1
161.6

865.4
163.6

869.7
165.8

1134.2
758.3
965.7
63.7

1102.4
734.6
938.4
61.6

1123.7
750.0
958.0
62.2

1144.3
765.6
973.8
63.1

1166.4
782.9
992.5
68.0

6.6

6.6

6.5

6.5

6.9

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

128.4
113.5

128.5
111.9

129.0
113.1

128.0
113.6

128.0
115.4

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

288.3
292.6
-4.3

282.4
285.7
-3.3

286.6
290.0
-3.4

290.1
293.9
-3.8

294.1
300.7
-6.6

5.9

-1.4

4.3

9.7

11.0

5.5

8.3

5.9

5.2

2.8

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

93.1
2.3
90.8
4.9

92.5
2.3
90.2
4.7

92.9
2.3
90.6
4.8

93.3
2.3
91.0
5.0

93.7
2.3
91.4
5.2

Nonfarm payroll employment (millions)
Manufacturing

77.1
19.9

76.7
20.0

77.0
20.0

77.3
19.9

77.5
19.8

Industrial production (1967 = 100)
Capacity utilization, mfg. (per cent)
Major materials

130.2
82.2
97.5

129.4
83.1
98.0

130.0
82.5
97.7

130.5
81.9
97.2

130.8
81.2
96.9

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

1.76
10.01
8.41
1.60

1.70
10.25
8.65
1.60

1.70
10.10
8.50
1.60

1.75
10.10
8.50
1.60

1.83
9.60
8.00
1.60

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

High employment surplus or deficit (-)
State and local government surplus or
deficit (-), (K.I.A. basis)

CONFIDENTIAL -

I-8

FR

November 14, 1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1972

1973

1972

1973

Proj.

Proj.
III

----------------------Gross National Product
Inventory change
Final purchases
Private
Net exports

IV

I

II

IIIp

IV

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

99.7
-0.1
99.7
79.0
-5.4

Excluding net exports

133.3
0.2
133.3
110.6
9.2

24.
3.2
20.9
20.4
1.9

32.7
-0.5
33.2
27.2
0.3

43.3
-3.6
46.8
38.9
3.5

29.5
-0.1
29.7
23.0
2.8

32.0
1.0
31.4/
26.7T/
4.1-

31.6
4.5
27.1
19.6
1.9

84.4

101.4

18.5

26.9

35.4

20.2

22.64/

17.7

Personal consumption expenditures
Durable goods
Nondurable goods
Services

59.3
13.8
21.2
24.3

78,7
14.7
36.5
27.5

14.9
5.1
4.4
5.4

18.5
2.7
8.4
7.4

26.8
9.3
11.5
6.0

16.2
0.6
8.1
7.6

18.4t/
-0.87'
11.27.9

17.6
-0.5
10.1
8.0

Residential structures

11.3

4.2

1.7

2.4

2.1

0.6

-0.3

-4.5

13.8
20.7
6.3
14.3

18.6
22.7
3.0
19.7

2.0
0.5
-4.4
4.9

6.0
6.0
0.4
5.6

6.6
7.9
2.8
5.0

3.2
6.7
1.8
5.0

4.6
4.3'
-0.2
4.5

4.6
7.5
2.6
4.9

45.3
46.0
41,4

48.0
47.9
45.6

11.1
8.7
10.9

15.6
16.0
14.3

17,0
20.0
19.1

5.0
5.0
4.2

7.3
6.8
6.7

Nonresidential fixed investment
Government
Federal
State and local
GNP in constant (1958) dollars
Final purchases
Private

"

7.9
3.4
2.5

------------------------- Per Cent Per Year---------------------9.4
9.5
9.7

11.5
11.6
12.4

8.7
7.6
9.6

11.7
12.0
12.6

15.2
16.7
17.8

9.8
9.9
9.8

10.4
10.1
11.2

10.1
8.6
7.9

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.9
13.3
7.6
8.5

10.8
12.5
12.2
8,9

8.5
18.9
6.0
7.2

10.5
9.3
11.6
9.8

15,0
33.9
15.6
7,7

8.6
1.8
10.4
9.7

9.6
-2.4
14.3
9.8

8.9
-1.5
12.4
9.7

Gross private domestic investment
Residential structures
Business fixed investment

16.4
26.5
13.2

12.8
7.8
15.7

16.5
13.5
7.1

18.6
18.8
21.9

11.2
15,6
23.0

7.8
4.1
10.1

11.1
-2.0
14.4

9.4
-27.2
13.9

Gov't. purchases of goods & services
Federal
Defense

8.8
6.4
3.9
13.6
10.5

8,9
2.9
-0.1
10.0
13.1

0.8
-15.5
-22.4
4.0
14.0

9.8
1.6
2.8
-1.3
15.5

12.7
11.4
10.9
12.4
13.3

10.4
7.0
-0.5
26.7
12.8

6.3
-0.7
-3.2
4.9
11.2

11.2
10.1
8.4
13.8
11.9

5.8
4.5
7.0
2.8
3.1

8.1
8.4
9.1
3.3
4.1

8.6
10.3
12.0
6.1
7.0

2.4
2.4
2.5
7.4
7.9

3.5
3.3
4.0
6.4
7.0

Gross National Product
Final purchases
Private

Other

State and local
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weighted index-r

3.8
1.7
1.5
6.15.8

8.8
9.5
6.8

10.1
10.2
10.6

7.8
7.7
8.1

14.5
10.5
14.6

8.7
11.6
11.5

9.3
9.9
8.8

11.3
9.9
10.1

11.2
11.4
11.0

Corporate profits before tax

15.2

29.0

16.1

35.2

61.5

34.9

-2.8

3.2

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

15.0
10.7

15.8
8.2

7.7
-11.6

13.3
45.5

31.3
-2.6

14.6
6.0

10.3
5.1

8.9
9.8

3.0
2.2

3.7
4.8

2.8
2.6

4.5
7.1

4.5
5.4

3.7
4.7

2.2
1.2

Personal income
Wage and salary disbursements

Disposable income

Nonfarm payroll employment
Manufacturing
Industrial production

Housing starts, private
Sales new autos
Domestic models
Foreign models
Percentage rates of change are annual rates

3.5
3.1

7.9

9.1

9.2

13.8

10.1

5.8

6.3

4.9

14.1

-11.8

16.0

6.6

0.2

-27.1

-33.3

-38.1

6.3
49.7
6.8
5.9
53.1
7.4
9.3
30.9
3.3
compounded quarterly.

5.9
-0.5
52.0

19.8
16.0
42.3

-15,4
-14.9
-18.1

0.2
10.1
-41.7

-26.9
-29.9
-6.2

Excluding Federal pay increase, 5.9 per cent per year.
SUsing expenditures in 1967 as weights.
Reflects estimates of revision in net exports incorporated in Commerce figures.

I - 9

CONFIDENTIAL - FR

November 14, 1973

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1974
Proj .

I

1974
Projection
II
III

IV

.---------Billions of Dollars-----------Gross National Product
Inventory change
Final purchases
Private
Net exports
Excluding net exports
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Residential structures
Nonresidential fixed investment
Government
Federal
State and local
GNP in constant (1958) dollars
Final purchases
Private

115.2

3.5
111.6
83.7

4.7
79.1
69.7
-0.3
40.2
29.8
-7.5

16.8
27.8
7.3

20.6
24.3
20.3
16.0

6.3
4.6
3.4

5.3
6.4
5.1

4.3
5.0
3.5

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

4.3
4.7
2.9

-----------

8.9
8.7
8.3

9.2
8.8
8.3

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.7
-0.2
12.0
8.9

9.7
1.5
13.6
8.9

8.8
0.0
12.8
8.1

6.6
0.0
7.8
7.9

6.0
-3.0
7,5
7.8

Gross private domestic investment
Residential structures
Nonresidential fixed investment

6.4
-12.9
12.3

5.7
-23.8
14.7

1.5
-14.0
11.8

5.8
8.4
8.1

6.9
15.1
6.6

10.1
6.1
6.4
5.5
12.5

13.2
13.5
15.3
10.0
13.0

2.0
2.4
2.0
5.0
5.0

2.0
2.2

7.5
8.6
6.8

8.0
9.3
7.9

10.6
7.5
2.1
19.8
12.5

Gov't. purchases of goods & services
Federal
Defense
Other
State and local
GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
Private GNP fixed weighted index-

3.0
2.2
1.9,2
6.0-'
6.2

Personal income
Wage and salary disbursements
Disposable income

8.0
8.7
8.6

1.6

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

-1.5

1.6

-3.1

0.0

8.8

11.7

6.1

5.0

5.6

10.5

21.7

6,2

5.5

9.6

2.1
0.5

Nonfarm payroll employment
Manufacturing

1.6
0.0

1.6
0.0

1.6
-2.0

1.0
-2.0

3.5

Domestic models
Foreign models

0.9

-16.8

-13.9
-14.8
-9.1

Sales new autos

3.5

-16.1

Industrial production
Housing starts, private

-20.4
-23.5

19.6
-18.4
-21.5
0.0

0.0

Percentage rates of change are annual rates compounded quarterly.

2/ Excluding Federal pay increase,

5.9 per cent annual rate.

3/ Excluding Federal pay increase,

5.0 per cent annual rate.

4/

Using expenditures in

5.5-'
5.0

10.6
9.6
10.9

Corporate profits before tax

1/

1.63,

1967 as weights.

I - 10

Industrial production.

Industrial production rose 0.6 per

cent further in October, following a slightly downward revised September
increase of 0.5 per cent.

The October index at 127.8 per cent of the

1967 average was 7.2 per cent above a year ago.

Over the month, output

gains were widespread among consumer goods and business equipment but
production of industrial materials changed little.
Auto assemblies rose 3-1/2 per cent further in October to an
annual rate of 9.4 million units.

November production schedules have

been cut back from a 10.0 million unit rate to a 9.8 million rate.
Output of some household goods and most nondurable consumer goods
advanced in October and production of appliances and television sets
remained at advanced levels.

Output of business equipment increased a

strong 1.6 per cent further with advances in most lines.

Production of

durable goods materials was unchanged at record levels, but output of
nondurable goods materials was off slightly.

For both types of materials,

output has been pressing capacity limits for several months.

I - 11
INDUSTRIAL PRODUCTION
1967=100, seasonally adjusted

1972

1973

Per cent change from

Aug.

Sept.

Oct.

Month ago

Year ago

119.2

126.5

127.1

127.8

.6

7.2

Consumer goods

127.0

131.1

131.7

133.3

1.2

5.0

Business equip.
Defense equip.

111.6
77.9

123.9
80.8

125.3
81.0

127.3
81.6

1.6
.7

14.1
4.7

Materials
Steel

122.3
118.4

131,5
119.2

132.0
121.5

131.7
122.0

- .2
.4

7.7
3.0

9.2

8.0

9.1

9.4

3.6

3.0

Oct.
Total index

Autos*

* Seasonally adjusted annual rate, millions of units.
For release Thursday, November 15.

I -12

Retail sales.

Recent data suggest more strength in consumer

buying than had been indicated earlier.

Total retail sales rose 2.1

per cent in October, according to the advance report, and sales for
August and September were revised upward.
Durable goods sales in October increased in line with the
total, largely as a result of strong sales of nonconsumer items and
miscellaneous durable goods.

Nondurable goods sales rose 2.0 per

cent with sales at gasoline stations and food stores rising about 3
per cent.
With August and September figures revised upward, third
quarter sales are now estimated to be 2.8 per cent (instead of 2.2
per cent) above the second quarter.

The food group, with a rise of

4.7 per cent, was the strongest of the components.

In real terms,

sales edged up from the second to third quarter, but they were still

more than 2 per cent below the first quarter.

I - 13

RETAIL SALES
(Seasonally adjusted, percentage change from previous quarter)

1973

II

I

III

Aug.

Total sales

5.7

.1

2.8

-1.0

Durable

8.2

-2.0

1.7

.5

Nondurable
Food
General merchandise

4.4
3.7
6.3

1.3
2.2
.4

3.4
4.7
2.0

-1.7
-1.8

Total, less auto and
nonconsumption items

4.7

1.3

GAF

6.9

-

Real*

3.8

-2.5

.5

Sept.
.3
-1.9

Oct.

2.1
2.1

-1.8

1.4
.4
1.0

2.0
3.0
1.2

3.1

-1.4

1.3

2.0

2.1

-1.5

1.8

1.1

.2

-3.4

.2

n.a.

*Deflated by all commodities CPI, seasonally adjusted.

Unit sales of consumer durables.

October sales of new

domestic-type autos were at an 8.7 million unit annual rate down
nearly a fifth from September and over a tenth from a year earlier.
Primarily as a result of this reduced selling rate, auto stocks at
the end of October rose to a 58 day supply, up 40 per cent from
September and up 30 per cent from a year earlier.
Preliminary estimates place foreign auto sales in October at
a 1.5 million unit rate, slightly below September and 13 per cent
below a year earlier as imports continued the steady decline from
their February peak.

On a seasonally adjusted basis, the import share

I - 14

of the market was 14.5 per cent as compared with 12.5 per cent in
September and 14.7 per cent last October.
Incomplete data for October indicate that factory unit sales
of major appliances, TVs and radios were down 7 per cent from September.
UNIT SALES OF SELECTED CONSUMER DURABLES
Seasonally adjusted 1/

1972

Per cent change from
Month ago
Year ago
Annual Rate, millions of units
-13
11.5
-16
11.3
12.1
10.2
-18
-11
9.8
9.7
10.6
8.7
0
-13
1.5
1.5
1.7
1.6

Oct.
Auto sales
Domestic
Foreign

1973

Aug.

Sept.

Oct.

Indexes, 1967=100
Home goods factory
unit sales
TVs 2/

Radios 2/
Major appliances
1/

140
154
103
133

154
154
93
158

161
167
183

155

150e
156e
71e
149e

-7
-6
-60
-4

7
1
-30
12

Series revised 11/1/73.

2/ Includes domestic and foreign label imports.
e/

Estimated on the basis of data through the first four weeks of
October.

I - 15

Construction and real estate.

Seasonally adjusted value of

new construction activity, which was revised downward for September,
declined further in October to an annual rate of $132.9 billion.

The

private residential construction sector accounted for all of the
October decline, but private nonresidential and public construction
also remained below earlier peaks.
The Census composite index of construction costs held in
October at about 153 per cent of the 1967 average, 8 per cent above a
year earlier.
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)

QI

Total - current dollars
Private
Residential
Nonresidential
Public
State and local
Federal
Total - 1967 dollars

1973
QIII(r) Oct.

1/

Per cent change in
October from
Sept. 1973 Oct. 1972

136.5

137.2

132.9

-2

+ 3

103.3

106.1

101.7

-2

+ 6

60.5
42.8

59.7
46.4

56.2
45.6

-4
--

+14

33.2

31.1

31.2

+1

- 4

28.0
5.2

26.4
4.6

26.4
4.8

-+9

- 5
+ 8

94.0

89.9

86.3

-2

- 5

1/ Data for October 1973 are confidential Census Bureau extrapolations.
-

In no case should public reference be made to them.
Means change of less than 1 per cent.

I - 16

Seasonally adjusted private housing starts dropped sharply
further in September to an annual rate of 1.76 million, the lowest
since February of 1971.

Including upward revisions for July and

August, the third quarter average slightly exceeded a 2 million unit
annual rate; however, it was a sixth below the near-record first
quarter.

For technical statistical reasons,

starts may have risen in

October, but building permits and other indications point to a further
drop over the quarter as a whole.
Mobile home shipments, which also have been declining since
the first quarter, dropped sharply further in the third quarter to a
seasonally adjusted annual rate of 529,000 units, slightly below a
year earlier.
Completions of conventionally built homes have slowed but
some increase is indicated for the period ahead given the large backlog
of units under construction.
Vacancy rates for rental residences in the third quarter
averaged 5.8 per cent of total units available for use.

While still

well below earlier highs, this rate equaled the high level of the
previous quarter as well as of the third quarter of 1972.

Vacancy

rates for home-owner properties, moreover, increased to an average of
1.1 per cent in the third quarter--the highest since 1970.
was particularly marked in

the West.

The increase

I - 17

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

per cent change in
September from:
Sept. (p) Month ago Year ago

QI

QIII(p)

1973
Aug.(r)

Permits

2.19

1.71

1.75

1.60

- 8

-32

Starts

2.40

2.01

2.07

1.76

-15

-27

1.35
1.05

1.12
.89

1.12
.95

.98
.78

-12
-18

-29
-26

2.11

1.88

1.83

1.85

+ 1

- 6

.68

.53

.57

.47

-13

- 5

1-family
2- or more-family
Completions
MMO:
Mobile home shipments

p/ Preliminary.
RESIDENTIAL VACANCY RATES
(Per cent)

1965
Rental units

Average for the third quarter
1970
1971
1972

1973

7.8

5.3

5.6

5.8

5.8

Northeast
North Central
South
West

5.0
6.8
8.7
11.3

3.1
5.9
7,1
5.2

3.0
5.6
7.4
6.5

3.2
6.2
7.3
6.7

3.9
6.1
7.2
6.2

Homeowner units

1.6

1.1

1.0

.9

1.1

Northeast
North Central
South
West

.9
1.3
2.0
2.0

*7
1.0
1.2
1.1

.7
1.0
1.1
1.2

.5
1.0
1.0
1.0

.6
.9
1.2
1.5

I - 18
Anticipated plant and equipment spending.

In the fall survey

of 1974 capital spending intentions, McGraw-Hill found that businesses
plan to spend 14 per cent more than in 1973.

Manufacturers reported

a prospective gain of 24 per cent, whereas non-manufacturing industries
planned a 7 per cent increase.

Within manufacturing, exceptional

strength (expected annual gains of 35 per cent or greater) was reported for iron and steel, nonferrous metals, nonelectrical machinery,
paper, and stone, and clay and glass.
The intentions of businesses reported by McGraw-Hill are
not significantly different from the findings reported last month
by Lionel D. Edie and Co. and Rinfret-Boston Associates.
EXPENDITURES FOR NEW PLANT AND EQUIPMENT BY U.S.
(Per cent change from prior year)
1971

1972

BUSINESS

1973
Commerce

September
Survey

1974

RinfretBoston

Lionel D.-McGrawEdie

Hill

--------------- Anticipated-----------All industries

8.9

13.2

15

12

14

Manufacturing
Durable goods
Nondurable goods

-6.1
"10.4
-1.9

4.5
10,5
- .8

19.4
21,9
16.9

24
23
24

19
21
17

24
26
22

NonmanufacturingRailroads

7.2
-6.0

11.5
7.8

9.9
11.7

10
10

7
20

7
10

Air & other transportatin

'23.5

20.3

-1.0

-8

-9

Electric utilities
Gas utilities
Communications
Commercial

1
2/

1.9

20.8

12.6

12,4

16

14

14

-2.0
6.6
8.8

3.3
10.4
11.2

22.2
11.4
6.8

11
14
8

10
5
4

5
5
4

Confidential.
Includes industries not shshown separately.

-11

I - 19

Manufacturers orders and shipments.

New orders for

durable goods declined 1,4 per cent in September (p), following no
change in August and a 0.7 per cent drop in July.

Excluding defense,

new orders were off almost one per cent in September but nondefense
capital goods orders rose 0.6 per cent.

Orders at blast furnaces and

steel mills were down sharply--reflecting in part capacity problems.
For the third quarter as a whole, new orders for durable
goods were only slightly above the second quarter level, according
to the preliminary estimate; excluding defense the rise was a bit
more.

The rise of 1.8 per cent in nondefense capital goods orders

was considerably slower than the gains of about 6 per cent reported
in the first and second quarters.
Unfilled orders for durable goods rose at a 7.3 per cent
annual rate in the third quarter--off somewhat from the 11 per cent
rate of the second quarter.

In the third quarter, unfilled orders

were about one-third higher than in the third quarter of 1972 and
44 per cent above their level in the fourth quarter of 1970 (the
cyclical trough).

Backlogs are particularly high in blast furnaces

and steel mills, motor vehicles and parts and for nondefense capital
goods.
Shipments of durable goods were up 0.9 per cent in September
following a 2.8 per cent drop in August,
continued to increase rapidly.

Backlogs of unfilled orders

I - 20

MANUFACTURERS' NEW ORDERS FOR DURABLE GOODS
(Per cent changes)

QII from
QI

1973
QIII from August from
QII (p)

July

Sept. from
August (p)

Durable goods, total
Excluding defense
Primary metals
Motor vehicles and parts
Household durables

5,7
5.4
13.8
-1.8
3.6

.5
1,6
-3.2
6.8
.3

.0
-1.6
7.4
-3,7
-5.0

-1.4
- .9
-12,7
1.9
1.5

Nondefense capital goods
Defense capital goods

6,5
11.2

1,8
-21.6

-3,3
54.7

,6
-12.2

4.7

1,8

-2.8

2,4

Construction & other durables

Inventories.

Book value of manufacturing and trade inventories

rose at a $15 billion annual rate in September (p), down rather sharply
from May-August rates.

For the third quarter as a whole, the rate was

$18.6 billion, more than $4 billion below the second quarter--reflecting
in part a slower rate of increase in prices. On a GNP basis, the rate of
accumulation in the third

quarter may be about the same as in the second

quarter.
Book value of manufacturers' inventories rose at an annual

rate of $10.6 billion in September (p)--off a bit from the August
rate.

By stage of fabrication, inventories of materials and supplies

and of work in process were down sharply from August rates while stocks
of finished goods rose after declining in August.

Wholesale trade

inventories increased at an annual rate of $3.9 billion in September (p).
Retail trade inventories showed almost no change between August and
September (p) as auto inventories declined sharply and growth in nondurable
stocks slowed appreciably.

I - 21

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, $ billions)

Q I

1973
Q III

Q II

Aug.

Sept.

(Prel.)

(Rev.)

(Prel.)

Manufacturing and trade

21.5

22.9

18.6

22.3

14.7

Manufacturing, total

9.8

11.4

11.1

12.0

10.6

Durable

6.6

7.7

8.8

11.2

Nondurable

3.2

3.7

2.3

.7

11.7
6.1

11.5
3.6

7.5
4.6

10.3
3.7

4.0
3.9

5.6

7.9

2.9

6.6

.2

Trade, total
Wholesale

Retail
NOTE:

9.5
1.1

Detail may not add to totals because of rounding.
The overall manufacturing and trade ratio rose slightly

to 1.44 in September--still a relatively low level.

The inventory-

shipments ratio for all manufacturing edged up to 1.59.

In wholesale

trade, the inventory-sales ratio also increased slightly in September,
while the retail inventory-sales ratio declined slightly.

The ratio

of inventories to unfilled orders in durable manufacturing continued
to decline,
INVENTORY RATIOS

1972

1973
Sept.

Aug.

Sept.

(Rev)

Aug.

(Prel.)

Inventories to sales:

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

1.49
1.66

1,49
1.65

1.43
1,57

1.44
1.59

1.98
1.28
1,32
1.20
1.40

1.95
1,27
1,34
1.21
1.42

1.90
1.19
1,28
1.14
1.39

1,90
1.21
1.29
1,16
1.38

.873

.733

.726

Inventories to unfilled orders:

Durable manufacturing

.893

I - 22

Cyclical indicators.

The Census composite index of leading

indicators declined 0.4 per cent in September (p)-only the second
drop since September 1970.

The coincident, deflated coincident, and

lagging indicators all rose.
CHANGES IN COMPOSITE CYCLICAL INDICATORS
(Per cent change from prior month)
1973
July

Aug.

Sept. (p)

Apr.

12 Leading, trend adjusted
12 Leading, prior to trend
adjustment
5 Coincident

5 Coincident, deflated

May

June

-1.1

1.9

.9

.9

1.0

- .4

-1.4
.6

1.6
.9

.5
.9

.5
1.2

.6
.3

- ,7
.9

.3

1.5

-1.0

.9

2,8

2,8

2,4

.7

.1
2.4

6 Lagging

.4
1.7

Of the eight leading series available, series increasing

in September were the average workweek in manufacturing, initial claims
for unemployment insurance (inverted) and common stock prices.

Series

declining included new orders for durable goods, contracts and orders
for plant and equipment, housing permits, the ratio of price to unit

labor cost in manufacturing and industrial materials prices.
In October, stock prices increased while the average workweek
in manufacturing declined.

I - 23

Labor market.

The labor market has shown increased strength

in recent months--employment has been expanding at a rapid rate and
unemployment is down.

Along with employment,

the labor force has grown

rapidly, with about three-fourths of the increase among those seeking
full-time jobs.

The October drop of 0.3 percentage points in unemploy-

ment brought the rate to 4-1/2 per cent for the first time since the
spring of 1970.

The decline was concentrated among teenagers and young

adults (20-24 years old).

Unemployment rates for adults 25 and over and

for most experienced worker categories, however, have been on a plateau
for several months; although down from a year ago, they still remain
above the 1966 to 1969 average.
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

1966-1969

1972

1973

average

October

June

3.7

5.5

4.8

4.5

12.7
5.6

15.4
9.2

13.3
7.7

13.9
6.6

Men 25 years and over
Women 25 years and over

1.9
3.4

3.1
4.5

2.5
4.2

2.4
3.7

Household heads
State insured

2.0
2.3

3.4
3.2

2.9
2.8

2.7
2.7

White
Negro and other races

3.3
7.0

5.0
10.0

4.3
8.5

4.1
8.3

Total

October

Both sexes:
16-19 years
20-24 years

Revised nonfarm payroll employment data now show impressive
gains in the past three months, with a rise of 300,000 in October.

About

one-third of the October advance was in manufacturing, where there had

I - 24

been virtually no growth from June to September;

factory gains were

strongest in the metal-using industries.
CHANGES IN NONFARM PAYROLL EMPLOYMENT
(In thousands, seasonally adjusted)
Oct. 1970Oct. 1971*
--------------Total

Oct. 1971Oct. 1972*

Oct. 1972June 1973

June 1973Oct. 1973

Annual rate------------------

814

2,740

2,913

2,253

Goods-producing

-234

911

1,140

507

Manufacturing

-145
146

724
98

969
140

375
132

Construction
Service-producing
Trade
Services

972
1,829
1,773
1,746
312
587
635
618
254
500
554
699
Federal government
316
-32
-39
-15
State and local govt.
126
419
301
506
*Changes from year earlier based on data which are not seasonally adjusted.

Earnings.

Wages are still

moving up at a rapid pace.

The

index of average hourly earnings for the private nonfarm economy rose at
a 6.1 per cent annual rate in October, and at a 7.4 per cent rate since
March.

An acceleration of wage rate increases has been evident in most

industries since the first quarter.

However, real spendable earnings

have been declining; they were about unchanged in September (the latest
month for which consumer price data are available) and down at a 2 per
cent rate from March.

I - 25

AVERAGE PRODUCTION WORKER EARNINGS
(Seasonally adjusted; per cent change at annual rates)
Jan.
Jan.
Hourly earnings index
Total private nonfarm
Manufacturing
Construction
Transportation
Services

19711972

6.8
6.3
8.2
9.9
6.5

Jan.
Mar.

19721973

5.6
5.4
5.5
9.2
4.7

Mar.
Oct.

19731973

7.4
7.2
7.2
8.7
7.2

Real spendable weekly earnings
(worker with 3 dependents,
-2.0 1 /
.5
3.9
1967 dollars)
1/ Change shown is March 1973 to September 1973, the latest month for
which data are available.

Productivity and costs.

Output per manhour in the private

nonfarm sector rose by 1.9 per cent (annual rate) in the third quarter,
according to preliminary figures, compared with no change in the preceding quarter.
Compensation per manhour increased at a faster rate in the
third quarter, rising at a 7.9 per cent annual rate, with an increase
of over 9 per cent in the manufacturing sector.

Since hourly compensa-

tion was up considerably more than productivity, unit labor costs rose
rapidly--6.7 per cent in the private economy and 5.9 per cent in the
nonfarm sector.

This is the third consecutive quarter of substantial

unit labor cost increases--an average of 5.8 per cent (annual rate) for
private nonfarm since the start of the year, compared with a rise of under
3 per cent during 1972.

I - 26

Consumer prices.

The rise in consumer prices slowed in

September to an annual rate of about 4 per cent, seasonally adjusted,
as food prices retreated somewhat from their very advanced August levels.
As in August, prices were about 7-1/2 per cent above the same month a
year earlier.

Nonfood commodity prices, little affected as yet by

upward price readjustments permitted by Phase IV, were up at only a one
per cent rate, but the rise in

service costs accelerated markedly.

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)
Relative
importance
Dec. 1972

Nov. 1971
to
Jan. 1973
(14 months)

Jan. 1973
to
June
(5 months)

June 1973
to
Sept.
(3 months)

Aug. 1973
to
Sept.
(I month)

All items

100.0

3.6

8.3

10.3

3.9

Food

22.5

6.5

20.3

28.8

-1.6

Commodities less
food
Services 1/

40.1
37.4

2.4
3.5

5.2
4.3

2.6
7.4

1.0
11.8

96.3

3.7

8.7

9.4

1,8

30.9

3.3

4.6

4.8

6.4

31.8

2.1

6.1

2.3

1.0

Addendum:
All items less mortgage costs 2/
Services less home
finance 11/2//
Commodities less

food, used cars,
home purchase 3/
1/
2/

3/

Not seasonally adjusted.
Home financial costs excluded from services reflect property taxes and
insurance rates as well as mortgage costs, which in turn move with mortgage
interest rates and house prices.
Confidential.

I - 27

Prices of fresh vegetables and poultry dropped sharply and
declines for pork and eggs also helped to more than offset the effect
of other large increases, particularly for cereal and bakery products,
dairy products and restaurant meals and snacks.
September pricing dates for food in

Since the early-

the CPI, prices at wholesale of

pork, broilers and eggs have declined further.

However,

their effect

on retail food prices in the next month or two may be offset by the
substantial increases posted at wholesale in October for fresh and
processed fruits and vergetables, fats and oils, and dairy, cereal and
bakery products.
Consumers have benefited relatively little
in

farm prices since August.

from sharp drops

Price increases authorized after the relaxa-

tion of controls, combined with the reversal in farm prices, appear to
have widened considerably the "spread" between the retail cost and the
farm value of the USDA's market basket, according to preliminary estimates (confidential for October).

This spread--which covers all non-

farm costs as well as profit margins of processors and distributors-has increased about 15 per cent since the first quarter of this year,

suggesting that any overall squeeze on profits from rising costs has
probably been eliminated.
FARM-RETAIL SPREADS
(Indexes, 1967=100)

1971
1

1972

QI

QII

July

1973
1973
Aug.

1972

1/

Sept.

Oct.p-

Market basket

117

119

121

126

126

123

134

140

Beef

123

140

141

145

134

121

179

190

Pork
I/
Confidential.

117 .109

106

118

77

99

153

145

I - 28

The spread for meats (over one-fifth of the total) appears
particularly high, especially on beef.

Retailers may anticipate a

rebound in wholesale beef prices, and thus be slow to adjust their
prices down in line with recent declines.

In the case of pork, the

spread had been depressed since last year, but it was high for beef
during most of this and last year.

If the spread on beef were at 1972

levels, retail prices would have been over 10 cents less in September,
and near 15 cents less in October.
A temporary drop in gasoline prices helped to offset increases
for other nonfood commodities, particularly household durables.

However,

substantial advances have since been authorized for gasoline, starting
in late September, and COLC regulations permit cent-for-cent pass-through
of the large recent and expected further increases in crude oil and
refined petroleum product prices.

Retail prices in coming months will

also reflect the large wholesale advances in October for apparel and
other textile products, furniture and tires.

However, the delay in

authorizing automobile price increases should result in a seasonally
adjusted decline in October for new cars, as in the WPI.
The near-12 per cent rate of rise for services reflects the
influence of sharply rising mortgage costs.

However, the index exclud-

ing these costs also rose faster than in previous months.
Wholesale prices.

Wholesale prices declined between September

and October at a seasonally adjusted annual rate of 3.5 per cent as
prices of farm and food products dropped sharply for the second consecutive month and more than offset widespread price increases for industrial commodities.

I - 29
WHOLESALE PRICES
(Per cent changes at seasonally adjusted annual rates)
1973
Phase IV

Freeze
October 1972

Dec.1972

June

July

August

to

to

to

to

to

to

October 1973

June

July

Aug.

Oct.

Oct.

All commodities

16.3

22.3

-15.5

106.4

-10.4

Farm products

35.3

47.5

-43.0

735.2

-40.5 -32.8

Industrial commodities
Crude materials
Intermediate materials
Finished goods
Producer

9.1
23.1
9.2
7.2
4.5

12.5
23.3
13.3
10.0
5.7

.7
15.1
- .9
-1.0
1.0

4.8
15.8
8.7
3.6
7.0

8.6

12.2

-2.0

11.8
3.5

17.0
5.0

-2.9
2.1

Consumer
Nondurable, excl. foods
Durable

14.6
35.1
9.6
17.4
4.9

2.0

12.5

24,0

1.0
5.3

20.3 40.7
-4.5 -10.7

Prices of farm and food products fell at a seasonally adjusted
annual rate of 32.8 per cent (monthly decline of 3.3 per cent) as prices
Sharply lower prices

for soybeans were also reported and were a major factor in the decline
in both the farm and food price index and the overall WPI.

However,

prices of a number of agriculturally-based commodities increased,
including those for potatoes, processed fruits and vegetables, milk,
eggs, sugar, and vegetable oils.

-3,5

11.3
40.9
8.1
9.8
4.4

Consumer finished foods
25.6
28.3
-9.5
243.7
-8.4
Note: Farm products include farm products and processed foods and feeds.

of livestock, meat, and poultry declined markedly.

Sept.

3.1

I - 30
The October index of prices of industrial commodities rose at
an annual rate of 14.6 per cent (monthly increase of 1.1 per cent).
Major influences in the rise were increases for refined petroleum
products, metals and metal products, textile products and apparel,
chemicals and allied products, and paper and paper products.

Although

prices of passenger cars rose in October, the increase was less than
expected seasonally and this was the chief factor in the decline in
the index of consumer durables.
Higher prices for fuels had a major impact on the WPI for
October as increased prices of gasoline and fuel oil boosted the index
of refined petroleum products to a level about 40 per cent above a year
earlier.

Prices of crude petroleum although unchanged in the October

WPI, were about a sixth above a year earlier.

Recently, further increases for refined petroleum products
were announced by some major producers with advances ranging from about
1 to 4 cents a gallon for gasoline and 2 to 3 cents for fuel oil.
Additional increases are expected as most observers expect domestic

prices of crude oil to rise substantially further.

The WPI for October

did not reflect the above-ceiling prices permitted by the Cost-of-Living
Council on some crude oil.

That is, as an incentive to increase

production, companies which produce crude oil in excess of last year's

production may sell such "new" crude oil at above-ceiling prices.
They may also sell at above-ceiling prices an additional amount of
crude oil equal to the "new" production.

I - 31

WHOLESALE PRICES OF REFINED PETROLEUM PRODUCTS
(Percentage changes for selected periods)
Dec.

1971

J une 1972
to

to

June 1972

(6 months)
Refined petroleum products

2.3

Gasoline
Light distillates!i.
Middle distillates 2 '
Residual fuels
1
2

Dec. 1972
( 6 months)

2.3
.9
.9
3.4

3.2
4.4
4.0
2.9
-

.5

Dec. 1972
to

June 1973
(6 months)

June 1973
to
Oct. 1973
(4 months)

30. 9

6.8

3.4

33.2
40.5
38. 8
15.4

14.3

11.8
20.3

Largely Kerosene, for space heating, and jet fuel.

Home heating fuel and disel oil.

Agriculture.

Prices received by farmers fell 4 per cent in

the month ending October 15,
the mid-August peak.
a year ago.

for a total decline of 11 per cent since

The average, however, was still

42 per cent above

Cattle, broiler, and egg prices continued downward through

early November but wheat, corn, and soybean prices firmed.
Clear harvesting weather and expected good yields per acre
were responsible for the earlier weakness in crop prices.
and soybean crops are expected to be 12,
respectively, than in 1972.

Wheat, corn,

2 and 23 per cent larger,

But usage will increase and wheat stocks

may fall to the lowest level since 1947.
Livestock prices fell in response to larger marketings as
October red meat and poultry production rose 6 per cent from September.
Larger broiler marketings appear sustainable through winter since egg

I - 32

settings are up. But numbers and weights of cattle on feed indicates
that the current bulge in marketings is

a result of previous withholding

and that slaughter will drop by early next year.

Since July, pork production has been about 10 per cent
below 1972 levels and farmers indicate no plans for expansion despite
profitable feeding margins.

Hog raisers who grow corn apparently

intend to sell their grain at high prices rather than enlarge their
feeding operations.

DOMESTIC FINANCIAL
SITUATION

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

Indicator

Monetary and credit aggregates
Total reserves
Reserves available (RPD's)
Money supply
M1
M2

M3

Latest data
Level
Period

Net change from
Three
Month
ago
months ago

Year
ago

SAAR (per cent)
11.2
31.7
12.5
14.9

October
October

35.Op
32.7p

October
October
October

264.4p
557.3p
8 73 6
. p

4.6
10.9
10.0

October
October
October

292.9p
63.4p
3 18 3
. p
626.3p

16.6
-3.4
6.4
6.7

10.4
12.2

0.2
7.1
4.6

5.1
7.9
8.5

13.6
-1.1
3.0
9.2

10.6
23.4
9,5
15.4

Time and savings deposits

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

October

11/7/73
11/7/73
11/7/73
11/9/73

11/8/73
11/12/73

10/31/73
11/12/73

Percentage or index
1.01
9.71
7.84
0.54
8.78
-0.75
7.99
0.03
5.17
0.20
8.87
-0.10
3.10
55.96

0.06
-4.29

Current month
1973

Total of above credits

e - Estimated

-4.46
3.13
3.65
0.09

1.15

-0.07
0.73

0.35

-6.44

Net change or gross offerings

Credit demands

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)

points
0.86
-0.64
-1.30
-0.53
-0.41
+0.16

October
September
August
August
August

November
November

1972

1973

1972

27.6
16.2
42.7
7.9

1.5
-0.2e
2.6e
18.3

10.2
11.0
35.6
13.2

15.2
15.9e
5.3e

1.4
5.6
0.8

11.7

Year to date

16.1
3.3
13.2

130.8

102.6

II

- 1

DOMESTIC FINANCIAL SITUATION
A marked turnaround in short-term interest rates occurred
late in October as market participants abandoned the view that the
Federal funds rate would continue to decline.

Most private short-term

rates have increased 1/2 to 1 percentage point, but at current levels
remain well below the highs reached in mid-September.

Shorter-term

Treasury bill rates, however, have risen considerably more than other
rates.

The bill market has been subject to special pressures arising

from sales or redemptions of U.S. Government securities by foreign
central banks resulting from movements of funds out of foreign currencies into dollars.

The total volume of foreign central bank sales and

redemptions has amounted to nearly $3 billion over the past three weeks,
and to replace part of these funds the Treasury issued a $1.1 billion
bill strip early this month.
In bond markets, interest rates have moved up somewhat under
the pressure of rising short-term rates and increased supplies of bonds.
The volume of new publicly offered corporate bonds rose in October to
about twice the average volume of the earlier months of 1973, and the
higher pace of new offerings continued into November.

State and local

government bond issues also rose in October, although by a much smaller
amount than in the corporate market, while the Treasury issued $300
million of a 20-year bond and $2 billion of a 6-year note as part of

its November refunding.
Bank loan growth in October fell far short of the pace re-

corded earlier in the year, as business loans showed no net expansion.
With business loans weak, inflows of demand deposits and consumer-type

II - 2

time deposits strengthened, and costs of CD's augmented by the September
increase in marginal reserve requirements, banks allowed large CD's to
run off in volume and reduced their reliance on nondeposit sources of
funds.

However, this decline in bank demands on short-term markets was

replaced by sharply increased business borrowing in the commercial
paper market.

The combined growth in business borrowing from banks

and the commercial paper market in October was about as rapid as the
average for the first 9 months of the year.
Savings and loan associations experienced a considerable
inflow of funds in October and cut back their borrowings from the FHLBB.
Mutual savings banks,
of deposits,
November.

on the other hand, experienced further outflows

although fragmentary data indicate small inflows

With the improved flow of deposits at S&L's,

for early

average rates

on new mortgage commitments in the primary and secondary markets have
declined somewhat in recent weeks.
Outlook.

Interest rates in private markets are likely to be

under upward pressure between now and year-end reflecting seasonal
pressures on short-term markets and the prospective strong demands in
capital markets.

The energy crisis and the potential for further large

reflows of funds from abroad make the overall interest rate outlook
more than usually uncertain.

Under these circumstances,

any significant

rise in the Federal funds rate is likely to accentuate upward adjustment
in interest rates generally.
The Treasury may have to raise $2-1/2--$4 billion of new cash
in early December (assuming enactment of debt ceiling legislation).
The high end of this range would help provide some cash balance cushion

II - 3

to meet further redemptions of special issues by foreign official institutions.
Borrowing by Federal agencies is expected to moderate if
interest rates do not move sharply higher, in view of the sizable
amount of liquidity already built up by these agencies.

But S&L's will

be especially vulnerable in the year-end reinvestment period and in
early 1974 because of a bunching of certificate maturities, and saving
outflows could be quite large especially if interest rates rose substantially.

In that event, S&L's probably would step up their borrowing

from FHL Banks, and this would generate additional market borrowing
demands by the latter.
Even if market rates did not rise significantly further, the
recent decline in mortgage rates is not likely to be extended, given the
most recent upturn in short-term rates.

Any further significant tight-

ening of the money market would likely lead to a renewed rise in mortgage rates.
Credit demands by the business sector are likely to continue
at advanced rates, given projected investment expenditures and availability of internal funds.

Demands on capital markets are expected to

remain large, adjusting for seasonal slack around year-end, but significantly higher long-term rates and lower equity prices would lead
some firms to shift demands to short-term markets.
prospect,

Even without this

banks will likely face increased credit demands by businesses

because of the recent and prospective rise in the commercial paper rate
relative to the prime rate.

As a result, banks can be expected to re-

sume issuance of large CD's to supplement other deposit sources of funds.

II -

Monetary aggregates.
picked up in October.
indicate that M1

4

Growth in the monetary aggregates

After two months of decline, preliminary data

expanded at a 4.6 per cent seasonally adjusted annual

rate in October, probably reflecting the effect on money demand of the
continuing strong expansion in nominal GNP.

October inflows of consumer-

type time deposits also were more rapid at both commercial banks and
nonbank thrift institutions, contributing to faster growth in
M2 and M3.
Some of the October increase in consumer-type interest
bearing deposits at both banks and thrift institutions probably reflected
a shift to deposits from market securities, as yields on debt instruments
declined and stock prices fell.

At large commercial banks, the growth

in consumer-type time deposits was accounted for entirely by the
four-year deposits on which the new 7.25 per cent rate ceiling did
not become effective until November 1.
With other deposit inflows strong, loan demands moderating,
and CD costs higher as a result of the September increase in marginal
reserve requirements, banks allowed their outstanding CD's to decline
by $3.4 billion in October, and the decline continued in early
November.

Along with the runoff of CD's, banks also reduced their

borrowings in Euro-dollar and commercial paper markets.
The sharp decline in CD's and nondeposit sources of funds in
October offset in

large part the increased inflows of other deposits.

Consequently, total inflows of bank funds, as measured by the daily
average member bank credit proxy, increased at only a 2.2 per cent
annual rate in October, the slowest pace since May of 1970.

II

- 5

MONETARY AGGREGATES
(Seasonally adjusted changes)

1973

QI

QII

Q III
Per cent at

M1

M

M

(Currency plus private
demand deposits)

(M1

1.7

10.3

.3

Sept.

Aug.

Oct.p

annual rates
-1.8

4.6

-2,3

plus commercial bank
time and savings deposits
other than large CD's)
5,7

9.5

5.1

6.4

3,9

(M2 plus time and savings
deposits at mutual savings
banks and S&L's)
8.6

9.4

4.4

4,2

3.2

9.4

Adjusted bank credit proxy

10.9

15.0

12,2

10.5

17.0

5.4

2.2

23,1

16,0

13.4

20.4

6.8

2.4

9,8

14,0

9.6

Time and savings deposits at
commercial banks
a.

Total

b,

Other than
large CD's

16.6

Billions of dollars/

Memoranda:
U. S. Government
demand deposits

.8

.9

1.5

b.

Negotiable CD's

2,5

- .2

-3.4

c.

Nondeposit sources
of funds

.6

.1

a,

p - Preliminary and partially estimated.
1/

Month-to-month change in levels or monthly averages of last-month-inquarter to last-month-in-quarter changes, not annualized.

- .4

II - 6

Bank credit.

Total credit at all commercial banks (last

Wednesday of the month series, seasonally adjusted) also increased at
a modest pace in October--an annual rate of 6.6 per cent.

This rise

was slightly faster than in September, reflecting a sizeable increase
in bank holdings of securities other than U.S. governments--primarily
Federal agency issues.

However, banks continued to liquidate Treasury

securities, and growth in total loans, which had moderated noticeably
in September, slackened further in October.

Almost all categories of

loans showed some slowing, but business loans were especially weak,
not increasing at all from the end of September to the end of October,
on a seasonally adjusted basis.

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

QI

QII

QIII

1973
Aug.

Sept.(r)

Oct.

Total loans and
investments 2/

19.9

12.7

11.4

16.7

4.1

U.S. Treasury
securities

-9.7

7.9

-34.4

-38.3

-29.1

-29.8

2.4

9.2

12.3

16,8

7.8

29.1

30.1

14.5

17.8

24.2

7.4

5.2

2
Business loans.
Real estate loans

37.7
20.4

18.4
20.2

17.3
17.0

19.5
18.6

3.1
16.2

0.0
14.9

Consumer loans

17.6

14.1

14.7

18.7

10.7

10.6

Other securities
Total loans2/

6.7

1/ Last-Wednesday-of-month series.
2/ Includes outstanding amounts of loans reported as sold outrigh t by
banks to their own holding companies, affiliates, subsidiaries, and
foreign branches.
r/ Revised.

II

- 7

While some of the moderation in bank loan expansion may
reflect more restrictive bank lending policies,1/the recent weakness
in business borrowing from commercial banks since mid-August appears
to be associated primarily with the relatively high cost of bank loans.
Although banks lowered their prime rate in October from 10 to 9.75 per
cent (and to 9.50 per cent at a few banks), commercial paper rates fell
more than 150 basis points to around 8-1/2 per cent on dealer-placed
paper late in the
month.

As a result, many business firms shifted

their credit demands from banks to the commercial paper market, reversing
the shift from commercial paper to bank financing that had prevailed
earlier in the year, when commercial paper rates had exceeded the bank
prime rate.

Indicative of the continued strength of credit demands,

total short-term business credit, as measured by the sum of bank
loans plus dealer-placed commercial paper, increased at a 19.5 per
cent annual rate in October--about equal to the average for the first
9 months of the year.
Consumer credit expansion at banks slowed in both September
and October, probably reflecting in part the recent weakness in sales
of new model automobiles.

Growth in real estate loans also moderated

further from the rapid pace earlier in the year.

In addition, there

was a large decline in loans to nonbank financial institutions as both
finance companies and other nonbank financial institutions reduced
their borrowings.

The reduction in finance company borrowing

apparently reflects mainly the recent substantial volume of financing
by these companies in the capital markets.
1/ A detailed discussion of bank loan commitments is presented in the
Greenbook Supplement.

II - 8

CHANGES IN BUSINESS LOANS AND COMMERCIAL PAPER 1/
(Amounts in billions of dollars, seasonally adjusted monthly changes)

Business
Loans

at all
Commercial
Banks 2 /

Annual
Dealer

Percentage

Placed
Commercial

Rate of
Change in

Paper

Total

Totals 3 /

Average Monthly Changes
1973 -- QI

4.1

-1.3

2.8

23.7

QI1
QIII

2.2
2.2

.2
.1

2.4
2.3

18.7
15.6

January

3.6

- ,3

3.3

28.7

February
March

5.2
3.6

-1.9
-1.7

3.3
1.9

27.0
15.2

April
May
June

2.4
2.8
1.4

- .1
-.6

2.3
2.8
2.0

18.2
21.8
15.3

July
August
September

3.6
2.5
.4

-- .5
.9

3.6
2.0
1,3

27.2
14.8
9.6

2.6

2.6

19.5

October

-

1/ Changes are based on last-Wednesday-of-month data.

2/ Adjusted for outstanding amounts of loans sold to affiliates.
3/ Measured from

end-of-month to end-of-month.

II - 9

Nonbank financial institutions.

According to estimates by

the FHLBB, S&L's experienced a deposit inflow in October of about $1 billion, in marked contrast to outflows of $1.2 billion and $250 million
in August and September, respectively.

The annual rate of expansion

in October was about 9.0 per cent, seasonally adjusted.
Mutual savings banks apparently had a moderate outflow
during the month.

After seasonal adjustment, the growth rate is estimated

at about 1.5 per cent--slightly lower than in September.

The bulk of

the outflow occurred early in the month at large New York City
institutions, and coincided with increased investor interest in equity
markets as well as with a sizeable volume of funds collected for
Israel.

Reports from a sample of large NYC MSB's indicate a moderate

inflow in the first five days of November.

Reflecting the improved deposit performance at S&L's,
FHLB advances during October totaled $490 million--down from
$785 million in

September and $1.1 billion in August.

November, outstanding advances increased little.

In early

Under the new

FHLBB $2.5 billion forward commitment program, whereby member S&L's
obtain commitments to be taken down 6 months to 1 year later, the
FHLBB had issued $1.5 billion of commitments and received applications

for an additional $160 million as of early November.

Despite the

8-1/2 per cent rate on the loans to be made under the commitments,
member S&L's appear to find them an attractive hedge against possible
further deposit outflows given the low (1/4 per cent) commitment fee
and prevailing rates on mortgage loans.

II

- 10

Policy loan activity at life insurance companies in September
remained near the record high level of August.

At 15 large companies

holding 64 per cent of all policy loans outstanding, the September net

increase was $219 million.

Scattered reports from individual life

companies indicate that demands for policy loans moderated in October,
although recent increases in market rates of interest could generate
a pick-up in such loans.

Nevertheless, available information suggests

that life companies continued to have a relatively comfortable liquidity
position.

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutua
Banks
Savings
1972 - QI
QII

QIII
QIV

Savings and Loan
Associations

Both

22.5
15.9
18.2
14.2

19.7
14.3
16.2
13.2

13.6
10.7

11.6
11.0

QII
QIIIp/

6.8
-. 4

16.0
10.4
3.1

13.6
9.2
2.1

1973 - Aug. _
Sept.
Oct. e /

-1.5
2.5
1.5

-1.2
7.5
9.0

-1.3
6.0
6.7

1973 - QI

8.1

p/ Preliminary.

e/ Estimated on the basis of sample data,

II - 11
Consumer credit.

Growth in total consumer credit outstanding

dropped sharply to a seasonally adjusted annual rate of $14.8 billion
in September,
billion.

following

four months of growth at rates in excess of $24

Instalment credit outstanding advanced $16.3 billion in

September, SAAR,

compared with $22.7 billion in August.

The major factor in the slackened rate of instalment credit
growth was a decline in the rate of credit extensions
and other consumer goods.

for automobiles

The decline in extensions was particularly

pronounced for retail outlets and bank credit cards.
New car interest rates, which remained relatively stable
during the first half of the year and advanced only modestly during
July and August, rose more sharply in September.

During September,

rates rose 19 basis points on direct loans at commercial banks and
15 basis points on purchased loans at finance companies.

Following

the advance, both rates were roughly 40 basis points above year-earlier
levels.
Commercial paper outstanding.

In October, commercial paper

outstanding expanded an estimated $2.4 billion on a seasonally adjusted
basis.

This matched the largest monthly increase on record, and was

attributable to a surge in dealer placed paper reflecting the reduced
cost of paper issuance in relation to borrowing at banks.

At the end

of October, outstanding dealer placed paper was only marginally below
the level reached at the end of 1972, just before businesses began
switching in volume from commercial paper to bank credit.
Nonbank directly placed paper increased an estimated $200
million in October.

The raising of funds through long-term debt and

the slower pace of retail automotive sales apparently reduced short-term

II

- 12

funds requirements of some large finance companies.

Bank-related com-

mercial paper dropped an estimated $400 million--the first
this category in

decline in

a year.

COMMERCIAL PAPER OUTSTANDING
(Seasonally adjusted, billions of dollars) 1/

Estimated
Oct. 31

Estimated change in outstanding
during period: 1973

1973
Total commercial paper
outstanding

Oct.

41.1

2.4

Q III
2,5

Q II
2,2

1
-1.5

4,9

- .4

.9

.8

36,2

2.8

1.5

1,4

-2.4

Dealer

11.6

2.6

.4

.6

-3.9

Direct

24.6

.2

1.2

.8

Bank-related

Nonbank-related

1/

,8

1.6

Seasonally adjusted figures are unavailable for bank related paper.
The unadjusted data for bank-related paper are combined with
seasonally adjusted nonbank-related data to obtain the total for
commercial paper outstanding.

Note:

Components may not add to total due to rounding.

II

Short-term rates.

- 13

Following the last Committee meeting,

short-term interest rates declined substantially further; but, since
late October, they have turned up sharply, particularly on U.S.
Treasury bills.

The recent advance has carried bill yields substan-

tially above levels prevailing at the time of the Committee meeting,
as the table shows, and erased most or all of the post-meeting reductions in other short-term rates.
SELECTED SHORT-TERM INTEREST RATES

(per cent)

Mid-Sept.
highs

Oct. FOMC
Meeting
(Oct.16)

Daily rates
Recent lows
(October
24-31)

Nov.

7

Nov. 13

Treasury bills
3-months
6-months
1*year

9.04
9.00
8.50

7.28
7.30
7.30

7.02
7.01
6.78

8.20
8.00
7.47

8.62
8.41
7.68

10.50
10,50

9.25
9,13

8.38
8.13

8.88
8.75

9.13
9.00

11.00

9.25

8.13

9.00

9.25

Commercial paper
90-119 days
4-6 months
Large negot. CD'se /

3-months

11.00

9.25

8.13

9.00

9.25

6-months

10,65

8,50

7.50

8.38

8.50

9.11

7.81

7.56

7.86

7.96

11.00

9.25

8.75

9.00

9.25

10,00

10,00

9.75

9.509.75

9.509,75

Nov. 7

Nov. 1W

Federal agencies
1-year
Bankers'

acceptances

Bank prime rate

Oct. 17

Statement week ended
Oct. 24
Oct. 31

Federal funds

(weekly average)
10.07
1/ Highest quoted new issues.
2/

9.98

Average for first 6 days of the week.

9.90

9.71

9.81

II

- 14

Perhaps the most important factor contributing to the recent
turnaround in rates was a shift in market expectations as to the future
course of monetary policy.

From mid-September through late October, a

consensus among market participants was that Federal Reserve policy was
likely to move persistently in the direction of ease in future months,
and this provided much of the impetus for the sharp fall in rates over
that period.

But, as the Federal funds rate showed no tendency to

drop significantly below 10 per cent from early October on and emerging
data indicated a substantial pickup in growth of the aggregates, the
market lost its conviction as to the likelihood that monetary policy
would shift further in the direction of ease, at least over the near-

term future,
In the Treasury bill market, rate changes prompted by the
shift in underlying market expectations were strongly accentuated when
foreign central banks liquidated Treasury security holdings in volume
to obtain needed dollar exchange.

Since the last week in October,

foreign central banks have sold about $1.0 billion of bills directly
in the market or to the Federal Reserve and also have redeemed about
$1.9 billion of special issues.

In addition to the direct impact of

these sales on the market supply of bills, the redemptions of special
issues required the Treasury unexpectedly to seek new funds in the market
in early November and increased the possibility of market borrowing in
coming months.

So far this additional borrowing has taken the form of

a $1.1 billion auction of a bill strip on November 9 and the addition

of $100 million to the weekly auction on November 12.
Looking ahead, the Treasury will have to raise new cash in
early December.

The size of the offering is in some doubt and will

II - 15

depend on the extent of cash loss from redemptions of Treasury specials
by foreigners and on the availability of borrowing authority from the

Federal Reserve (currently lapsed).

At the moment it would appear that

borrowing would be in the $2.5 to $4.0 billion range, and possibly

would take the form of tax bills.
In the Agency market, the Federal Home Loan Banks have a

reduced need to borrow because inflows into savings and loan associations have been better than expected.

As a result, it presently

appears that Agency borrowing during November and December may amount
to about $1.8 billion, rather than the $2.9 billion projected earlier.

With the recent backup in rates, however, the outlook for Agency
borrowing is more uncertain than usual.
Treasury coupon market. Yields on Treasury coupon issues also
have risen significantly since early October, offsetting about onethird to two-fifths of the reductions recorded in most maturity areas
over August and September.

The backup reflected, in part, the sharp

rise in short-term rates, a build-up in the calendar of new issues
scheduled to be sold in related markets, and the impact of the recent
Treasury refunding which was accentuated when the offering of strip
bills was announced before dealers had made much progress in distribution

issues required in the refunding.

II

- 16

YIELDS ON TREASURY COUPON ISSUES
(Daily rates, at constant maturity, in per cent)

1973 highs
(Aug, 7)

Intermediate
lows
(Oct. 9-12)

Oct. FOMC
meeting
(Oct. 16)

Oct, 30

Nov.

7

Nov.

13

3-years

8.34

6.73

6.81

6.78

7.15

7.26

5-years

8 13

6.68

6.80

6.75

6.98

7.15

7-years

7.82

6.69

6.79

6.78

6.94

7.03

10-years

7.58

6,75

6.81

6.72

6.76

6.77

20-years

7.83

7.05

7.19

7.26

7.33

7.37

In its November refunding operation, the Treasury sold
$3.8 billion of securities.

These included $1.5 billion of 25-month

notes and $2 billion of 6-year notes,

both with a 7 per cent coupon,

auctioned at average yields of 6.91 per cent and 6.82 per cent, respectively.

Also,

$300 million of a reopened 20-year bond carrying a 7-1/2

per cent coupon--first auctioned last August--were sold in a Dutch
auction at an issuing yield of 7.35 per cent.

Yields on the two notes

have since moved up significantly in when-issued trading, while the
current yield on the bond remains at about its auction average.
Dealers took large positions of about $1.2 billion in
these issues, but sizable sales to the public have enabled them to
reduce their holdings.

As of November 12, dealer net positions in

all coupon issues maturing in more than a year were down to about $650
million.

II

- 17

Long-term security markets.

The bond market rally that

began early in August faded in early October.
rates have risen somewhat,

Since then long-term

although they are still

points below their August peaks.

about 30 to 50 basis

The rise apparently reflected a

relatively heavy volume of current and prospective new issues,

and un-

certainty about the strength of the economy and the future course of
monetary policy, which previously had been interpreted as easing.

SELECTED LONG-TERM INTEREST RATES
(Per cent)

New Aaa
utility
bonds 1/

Recently offered
Aaa utility
bonds 1/

1971 - High
Low

8.26 (7/30)
7.02 (2/5)

8.19 (1/2)
7.14 (12/31)

1972 - High
Low

7.60 (4/21)
6.99 (11/24)

1973 - High

8.52 (8/10)

Long-term
State and
local bonds 2/

6.23 (6/24)

U. S. Government
bonds (10-year

constant maturity) 0*

4,97 (10/21)

6.89 (7/20)
5,87 (1/14)

7.46 (4/21)
7.21 (12/1)

5.54 (4/13)

6,58 (9/27)

4.96 (12/7)

5.87 (1/14)

8.32 (8/10)
7.28 (1/5)

5.59 (8/3)

7.55 (8/10)

7.29 (1/12)

4,99 (10/11)

6.42 (1/3)

12

7.96

7.88

4.99

6.77

19

8.05
7.97

5.05
5.12

6,80

26

7.98
7.98

7.76
7.99p

7.96

8.05p

5.17
5.19

6.72
6 75
.
p

Low
Oct.

Nov.

2
9

1/ FRB series.
2/
p/

Bond Buyer.
Preliminary.

6.75

II

- 18

Stock prices declined appreciably from late October into early
November apparently reflecting investor concern about rising interest
rates, the energy crisis, and domestic and international political uncertainties.

The decline erased about one-half of the gains recorded

during the rally throughout most of September and early October.

Price-

earnings ratios remain historically low; for example, based on third
quarter earnings the ratio for the Dow-Jones

industrial average is

presently about 12, in contrast to a long-term average around 17. 1/
Continued sizable additions to the calendar of corporate
security offerings have resulted in upward revisions in the already
large volume of offerings forecast in the October Greenbook,

Corporate

public bond offerings in October are now estimated to have totalled
$1.7 billion and the November forecast is $1.9 billion, about twice
the average monthly volume during the first three quarters of 1973.
In December, corporate public bond offerings are expected to decline
from these levels, mainly for seasonal reasons.

Stock offerings in

November also are projected to be somewhat higher than earlier forecasts,
bolstered by the announcement of a $500 million preferred offering by
A.T.& T.
The increased corporate security financing reflects large
capital expenditure plans, the desire to fund short-term debt, and a
general view that long-term rates probably will not fall much further
in the immediate future.

However, corporate demands for capital market

financing appear especially volatile since corporations still have considerable financial flexibility and could easily postpone financing if
rates rose to levels that appeared unattractive.
1/

Preliminary national income estimates of third quarter profits for all
non-financial corporations indicate little change from the second
quarter. The Greenbook Supplement will provide an analysis of profit
developments in the third quarter.

II

- 19

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

1973
1st 3 Qts. e/

State and local government
securities

f/

Nov.

1,925

3,400

4,300

3,200

946
717
889

Public bonds
Privately placed bonds
Stock

Oct. e/

2,552

Corporate securities Total

e/

f/

Sept. e/

575
800
550

1,700
800
900

1,900
900
1,500

1,300
1,200
700

1,867

1,625

2,200

1,750

1,350

Dec. f/

Estimated.
Forecast.

Long-term

unicipal financing in October is

estimated at $2.2

billion, about $.2 billion higher than expected earlier.

Most of this

increase consists of industrial revenue bonds and other types of
special revenue bond issues.
is

Looking ahead, State and local financing

expected to return to a level more in line with that in

the first

nine months of 1973-about $1.75 billion in November and a seasonal
drop to $1.35 billion in December.

II - 20

Mortgage market.

Preliminary data suggest that the volume of

new mortgage commitments at savings and loan associations in October
rose somewhat above the sharply reduced September level.

The backlog

of outstanding mortgage commitments remained little changed, however,
at about 23 per cent below the February high.
In the primary market the decline in average contract interest
rates on new commitments for 80 per cent conventional home loans which
began in early October slackened considerably in early November,
judging from the weekly FHLMC survey of 120 S&L's.

On November 9 the

rate was 8.59 per cent--26 basis points below the late September peak.
With yields on new issues of high-grade corporate bonds up appreciably
over this period, the spread favoring

such mortgages declined 44 points.

Secondary market yields on 8-1/2 per cent FHA/VA mortgages
also have declined, primarily because originations of such mortgages
have been limited and pressure on mortgage companies to complete their
mortgage pools in time to meet earlier commitments for GNMA-guaranteed
securities has increased.

Partly reflecting these developments, offerings

to FNMA in each of the October auctions for short-term commitments to
purchase Government-underwritten home mortgages were relatively limited.
Net expansion of total mortgage debt in the third quarter
dipped to a seasonally adjusted annual rate of $70 billion--down $7
billion from the peak in the first half of 1973.

This decline was due

largely to slower growth in the residential sector, even though

II

- 21

advances to S&L's from the Federal Home Loan Banks were in record
volume and Federal agencies operating in

the secondary market stepped

up their purchases of residential mortgages.

Altogether, if GNMA pass-

throughs and net FHLB advances are included,

Federal agencies accounted

for almost half of the net change in

outstanding residential debt

during the quarter.

CONVENTIONAL HOME MORTGAGES
At 120 S&L's
Average
going rate on
80% loans

(per cent)

End
of

Period

Basis point
change from
month or week

earlier

points)

Spread 1/
(basis

Number of
Federal Home Loan Bank
districts with funds

in short supply

1973
April
May
June

7.56
7.70
7.76

+ 7
+14
+ 6

11
9
3

4
3
4

7

July

8.18

+42

15

Aug.

8.66

+48

n.a.

Sept.

8.85

+19

104

11

Oct.

8.68

-17

71

10

7
14

8.77
8.81

+11
+ 4

83
107

12
11

21
28

8.83
8.85

+ 2
+ 2

80
104

10
11

5
12

8,82
8.83

- 3
+ 1

107
87

11
11

19
26

8.75
8.68

- 8
- 7

70
71

10
10

2

8.62

- 6

86

10

9

8.59

- 3

60

10

Sept.

Oct.

Nov.

1/

12

Gross yield spread is average mortgage return before deducting servicing
costs minus average yield on new issues of Aaa utility
bonds with 5-year
call protection.

II
Agricultural finance.
through the third quarter.

- 22

Demand for farm loans remained strong

In September, for instance, outstanding

loans at production credit associations rose contraseasonally, as they
also had in August.

In both months, new loans exceeded collections,

which also is unusual at that time of the year.

Higher production

expenses basically explain the strong credit demand,

along with such

contributing factors as a sharply reduced level of pre-harvest
Government farm program payments, a continued large volume of farm
equipment purchases,

the withholding of cattle from market during the

price freeze, and the postponement of grain marketing for several

reasons--price anticipations, transportation difficulties, and to
minimize income taxes.

FARM INCOME AND EXPENSES IN 1973
Percentage change from-1969-71 average
1972
Year

Year

QIII

QIV

1973

QIII

QIV

1973

Gross income ..........

58

76

54

33

42

29

Production expenses....
Realized net income....

59
56

79
68

54
56

33
32

46
31

30
29

Source:

U.S. Department of Agriculture.

Data for 1973 are preliminary.

However, October 1 surveys of rural banks in the Seventh
and Ninth Federal Reserve Districts indicate that farm loan demand may
be easing in

the fourth quarter; in

fact,

the proportion of bankers

expecting reduced demand for farm production loans set a record high

II - 23

in both quarterly surveys.

Clearly, bankers expect significant farm

loan repayments to result from this fall's extraordinary net farm
income.

As a partial offset, demand for grain storage and farm

equipment loans will remain at high levels.
Fewer loan renewals and large post-harvest deposit gains
should combine to produce a more liquid position at many rural banks
this winter.

But during the third quarter, the availability of loan

funds at some rural banks deteriorated.

On the October 1 Survey date,

for instance, fewer Ninth District banks were actively seeking new
loan accounts than three months earlier, and more had refused loan
requests because of a shortage of funds.

In the Seventh District, an

increased number of banks regarded their loan/deposit ratios as too
high.

Such series reflecting credit availability, however, were still

far from the levels they exhibited in 1970.
During the third quarter, interest rates rose sharply at
all major farm lender groups.

In contrast, during the first half of

the year,rates had increased significantly only at lenders with
close ties to short-term money markets--the production credit
associations and the larger banks--while rising only slightly at rural
banks and remaining unchanged at the Federal Land Banks.

II - 24

AVERAGE INTEREST RATES ON FARM LOANS
(Per cent)
January
1

1973

April
1

July
1

7.52
7.67

7.55
7.71

7.69
7.81

8.27
8.35

8.06
8.20
7.92

8.08
8.20
7.95

8.18
8.26
8.05

8.55
8.67
8.43

Commercial banks reporting for G.10 release:
Feeder cattle loans.......................
Other production loans....................

7,74
7,89

8.03
8.01

8.61
8.35

9.43a
9 . 7a
1

Farm finance subsidiary of a large bank....

7.25

7.68b

8.61 b

10.87b

Production credit associationsc............

7.43

7.71

8.16

8.98

Federal Land Banks c ........................

7.35

7.35

7.35

7.75

Rural commercial banks
Seventh District:
Feeder cattle loans.....................
Real estate loans.......................
Ninth District:
Short-term loans ......................
Intermediate-term loans................
Long-term loans........................

October
1

a/ First week of September (data for October are not yet available).
b/ As of two weeks before the date indicated.
c/ Simple averages estimated by Board staff.

- 25

II
Federal finance.

With fiscal 1974 budget outlays now forecast

at $272.0 billion and receipts at $269.0 billion, our estimate of the
deficit for the current fiscal year has grown to $3.0 billion.

This

compares with revised Administration figures of $270.6 billion for budget
outlays and $270.0 billion for budget receipts.*
Federal outlays so far this fiscal year have been lower than
projected, especially for grants-in-aid.

Nonetheless, our fiscal 1974

outlays forecast has been raised $0.7 billion since the October Greenbook, for two principal reasons.

The first is that we project a "catch-up"

in grants-in-aid later this fiscal year as a result of recent court
decisions that may require the release of a large amount of impounded
funds.

The second is the President's request for supplemental

appropriations for defense to replace equipment going to Israel.
We have estimated this program to cost $.4 billion in fiscal 1974
and $1.5 billion for calendar 1974.
In contrast with official forecasts of a 5.9 per cent social
security benefit increase in July 1974, the staff projection calls
for a 5.9 per cent increase in January 1974.

While our estimate is

close to the amount enacted by the Senate, the increase that is finally
enacted might be somewhat larger.

The House Ways and Means Committee

has approved a 7 per cent benefit increase payable in April 1974, with
a further 4 per cent increase to follow in July.
* The "Administration" figure of $270.6 billion for outlays is not
an official published figure but rather is the sum of the official
$270.0 billion estimate of October 18 and the Budget Scorekeeping
estimate of $.6 billion for Mid-East related defense expenditures.

II

- 26

Our fiscal 1974 receipts forecast has been reduced $.6 billion
since the October Greenbook

due entirely to revised income assumptions.

However, withheld taxes in recent months have been lower than
projected, possibly indicating that an adjustment to over-withholding
finally may be materializing, that is, that wage earners are increasing
their claimed exemptions.

Another uncertainty arises from the House

Ways and Means Committee's social security bill that includes a larger
wage base increase than currently scheduled and, if passed, could
significantly raise receipts in the second half of calendar 1974.
As yet, however, we have not responded to these developments in
our forecasts.
The Senate Finance Committee now has the House-enacted bill
raising the Federal debt ceiling to $475.7 billion.
$4.3 billion below the Administration's request.

This amount is

Nonetheless, staff

estimates indicate that it should be sufficient to finance Treasury
operations through fiscal 1974.

II - 27
PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Oct.
Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues
As yet unspecified new
borrowing
Special foreign series
Agency transactions, debt
repayment, etc.
Plus:

a
Other net financial sources-

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

Nov.

Dec.

Jan.

1.5

2.5

4.0

0.0

1.8
---

1.2
2.0
3.8

4.0

-0.4

-1.4

0.1

-3.1

1.9-

-0.4

-0.5

1.6

-6.0

-2.3

-0.1

-1.5

-2.6c

-0.2

3.4

0.1

5.5

8.9

9.0

21.7
21.8

22.5
24.0

-

Level of cash balance,
end of period

5.7

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

17.3
23.3

19.8
22.1

Maturing coupon issues
held by public

-

3.6

Sales of financial assets

0.1

0.1

0.7

0.2

0.3

--

0.2

0.9

1.0

c/

Budget agency borrowing
Net borrowing by government-sponsored agencies
a/
b/
c/
d/

*

2.9

-0.2

'

--

Checks issued less checks paid and other accrual items.
Includes $1.2 billion in receipts resulting from the monetization of gold.
Actual.
In the November refinancing, $3.8 billion of notes an bonds were sold to
provide funds for refunding the $3.6 billion of publicly-held bonds
maturing on November 15.
Less than $50 million.

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

Fiscal Fiscal 1974 e/
Year Adm. Est.., F.R.
1071

-.

-

*

n.10-..-7
-'
,
... .

t

Calendar Years
F.R. Estimates
1)71

107A
.

Calendar Ouarters

S.1974

1973
Trw.

Federal Budget

'
rL...

t

'r,"

. v

V

Unadjusted data

Surplus/deficit
Receipts
Outlays

-14.4
232.2
246.6

Means of financing:
Net borrowing from the public
Decrease in cash operating balance

Other 2/
Cash operating balance, end of period

3/
Memo- : Sales of financial assets 4/
Budget agency borrowing 51
Sponsored agency borrowing 6/

-0.6
270.0
270.6

19.3
-2.5
-2.4

n.a.
n.a.
n.a.
n,a.

-2.2

12.6

n.a.

8.9

8.9

n.a.
n.a.

3.4
1.4

3.5
0.1
16.8

4.8
0.4
8.7

-3.0 -11.4
269.0 249.3
272.0
260.8

15.0

n.a.

National Income Sector
Surplus/deficit
Receipts
Expenditures

-12.1
242.9
255.0

n.a.
n.a.

-8.4
58.8
67.2

-2.8
-0.7
2.6
4.3
3.0 -2.5

3.7
1.4

-2.8 -1.1
64.4
287.2 65.5

8.0
-0.6
1.0

284.4

6.3
n.e.
n.e.
n.e.

8.3
-0.3
0.4
6.1

-6.0
63.2
69.2

12.5
82.6
70.1

-2.1 -7.2
72.7
65.9
74.8

73.1

2.3 -11.8
2.6
0.2 -0.2 0.5
3.5 -0.5 -1.0

4.1
2.1
1.0

8.9

8.7

8.9

8.4

6.3

0.9
0.3
3.6

1.3
0.5
2.5

1.5
0.3
2.7

n.e.
n.e.
n.e.

n.e.
n.e.

n.e.

Seasonally adjusted, annual rates
-0.2 / 0.2
278.2- 264.9
278.4 264.7

-4.3
3.2 2.7
288.3 268.9 274.7
292.6 265.7 272.0

282.4
285.7

286.6

-6.6
294.1
300.7

5.9 -1.5 -0.7 -1.4
n-.-o availab

4.3

9.7 -11.0

-3.3

3.8
290.1
290.0 293.9
-3.4

High Employment surplus/deficit

(NIA basis) 8/
*

Actual

n.a.
*~~~~~-

Actual
e--prjecte
e--projected

n.a.

0.2

n--e--not esimte

n.e.--not estimated

-0.8

n.a.--not available

Footnotes continued
1/

The Administration's estimate, presented at the October 18th hearings on the debt ceiling, was $270 billion
for both receipts and outlays. Since that time, as a result of increased aid to Israel, the Administration
has requested additional funds for defense which would add about $0.6 billion to fiscal year 1974 outlays.

2/

Includes such items as deposit fund accounts and clearing accounts.

3/

The sum of sponsored and budget agency debt issues and financial asset sales does not necessarily reflect
the volume of debt absorbed by the public, since both the sponsored and budget agencies acquire a portion
of these issues.

4/

Includes net sales of loans held by the Commodity Credit Corporation, Farmers Home Adm., Government
National Mortgage Assn., Federal Housing Adm., and Veterans Adm. Receipts from these sales are netted
against Federal Budget Outlays shown above.

5/

Includes, for example, debt issued by the U.S. Postal Service, Export-Import Bank, and Tennessee Valley
Authority, which is included in the Net Treasury Borrowing from the Public shown above.

6/

Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn.,
Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.

7/

Calculated by averaging appropriate quarters. Official fiscal year estimates are adjusted for spreading
of wage base and refund effect over calendar year.

8/

Estimated by F.R. Board Staff.

INTERNATIONAL
DEVELOPMENTS

CONFIDENTIAL (FR)
III

11/14/73

-- T - I

U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)
1

10Q77
r

V

other

Foreign capital (excl. reserve trans.)
Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues
Other U.S. securities (excl. U.S. Treas.)
Liquid liabilities to:
Commercial banks abroad

Of which liab. to branches 3/
Other private foreign
IntL. & regional organizations
Other nonliquid liabilities

Liab. to foreign official reserve agencies
U.S. monetary reserves (increase, -)
Gold stock

0-TI
l0o

-7*

-230
16,747
-16,977
846

-8,534

-6,133

0-TTT
4

I 1

BU

r

783
18,220

Net liquidity, S.A.
"
"
, N.S.A.
Liquidity, S.A. 5/
"
, R.S.A.
Basic balance, S.A.
"
"
, N.S.A.

745
6,372

- 1 7 ,437
1,017

-5,627

-2,025
51
-1,296
-2,052

-1,158
-128
870
-1,746

-189
-358
420
+52
n.a.

-25
157
229
n.a.
n.a.

-492

-615

-87

-517

-168

228

10.287

483

870
193
170
1.395

213

2.297

160
2,268
2,003
64

273

455
151
274
87
1.122

1,301

4 776

384
61
-1-899

3,862
(178)
810
104

-1,916
(-579)
7
10

696
(586)
361
65

879
(110)
164
352

1,016

364

10,308

10,279

-373

-2,133

742

220

17

-13

-(-288)
163
458

162

--

-9

9

-13
233
-3,921

229

I10,499

356
784
-1,549
-1,951
-766
-1,172
-732

4/
, N.S.A.

iept.*

---

-1,930

-3,404
-614
-742
-2,764

Official settlements, S.A.
"

,,

-381
-455

-3,112

Errors and omissions

"

7Wi
-'-

-397
-681

Special drawing rights 4/
IMF gold tranche
Convertible currencies

BALANCES (deficit -)

4

a

-3,513

U.S. private capital (- = outflow)
Direct investment abroad
Foreign securities
Bank-reported claims -- liquid
"
"
"
other
Nonbank-reported claims -- liquid

"

--

-1,570

Remittances and pensions
Govt. grants & capital, net

"

O-T

-I-fl.~-ir% iU
UV
4
-6,912
-960
-48,769
15,320
-55,681 -16,280
1,110
2,303
-a-

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

"

0

i

-11,050

-9,995
-6,689

-14,592

-6,314
-8,600
-8,162
-947

-15,826
-9 843

* Monthlyr only exports and imports are seasonally adjusted.
/ Equals "net exports" in the GNP, except for latest revisions.

2/ Balance of payments basis which differs a little from Census basis.
3/ Not seasonally adjusted.

4/ Excludes allocation of $710 million SDRs on 1/1/72.
5/ Measured by changes in U.S. monetary reserves, all liabilities to
foreign official reserve agencies and liquid liabilities to
commercial banks and other foreigners.

2,146
921
1,057
126
751
-328

-4

III - 1

INTERNATIONAL DEVELOPMENTS
Summary and Outlook.

Preliminary data (to be released on

November 15) show a dramatic improvement in the U.S. balance of pay-

ments during the third quarter.

There was an official settlements

surplus for the quarter of $8.6 billion (seasonally adjusted annual
rate), following a surplus of $1.4 billion in the second quarter, and
in August and September the dollar appreciated on average against
other major currencies, reversing most of the July depreciation.
Another large official settlements surplus developed in mid-October,
cumulating to nearly $2.0 billion by November 7, and the dollar has
appreciated sharply further in recent weeks, to about its May level.
The data now available indicate that the third-quarter
improvement occurred in the components of the basic balance -- the
current account and long-term capital flows.

Both the trade balance

and the balance on long-term private capital shifted from secondquarter deficits to substantial surpluses.
It is likely that the basic balance will continue to be in
surplus, but unlikely that the rate of surplus will remain so high as
in the third quarter.

Net purchases of U.S, stocks by foreigners

reached an annual rate of $3.5 billion in the third quarter, but
October inflows are expected to be down very sharply.

The balance on

other long-term private capital flows will probably also turn less
favorable than the unusually high third-quarter net inflow.

Further

III - 2

increases in the merchandise trade surplus, while not unlikely, would

have to be substantial to offset the probable decline in the surplus
on long-term capital flows.
The Arab cutback in oil production, if sustained, would
have a lesser impact in the United States than in countries
heavily dependent on oil imports for industrial uses, including Japan
and a number of European countries.

The rapid rise in the price of

oil implies a larger oil import bill for this and other countries,

in spite of the production cutbacks, but a substantial portion of the
increased earnings of the oil producers will probably be spent or
invested in this country, either directly or indirectly.

Considerations

such as these, together with the large September trade surplus, have
brought the dollar under strong upward pressure against other major
currencies in recent weeks.
Most major foreign countries are continuing on a course of

monetary restraint, with high or rising interest rates, and with sharp
drops in the growth of national money stocks (M1) shown by the data
through September.

Following the announcement of a sharp deterioration

in the trade balance of the United Kingdom for September, on November 13
the Bank of England raised its minimum lending rate by 1-3/4 percentage
points to a record 13 percent and issued a call for additional special
deposits by the banking system equal to 2 percent of liabilities.

III - 3

Foreign exchange markets.

The major development in the exchange

markets in recent weeks has been, of course, the explosion of demand for
dollars against European and Japanese currencies consequent upon the release
of U.S.

trade figures for September,

showing a whopping surplus, and the

subsequent evolution of the oil crisis.

The dollar has risen, in a little

over two weeks, by 6 to 9 per cent against the European snake currencies,
5 per cent against the Japanese yen and the Swiss franc, and lesser amounts
against Sterling, the lira, and the Canadian dollar.

Only massive amounts

of dollar intervention by the Bank of Japan prevented the appreciation against
the yen from being substantially greater.
While a substantial part of the dollar's appreciation followed
directly upon the release of the trade figures, much the larger part of
the rise was, seemingly, associated with the subsequent development of
the oil crisis, which was interpreted by the market to portend a worsening
of European and Japanese industrial capabilities and balances of payments
relative to those of the United States.

While the System took the opportunity

of the favorable market reaction to the U.S. trade figures to clean up its
outstanding swap debt in marks, and Germany simultaneously sold dollars
it had purchased in September, during the past week or so, despite often
hectic activity in the markets, there was only token central bank intervention in European currencies.

As the dollar moved up against the snake,

the various currencies in the snake changed positions,
strains on the band developed.

but no significant

The mark, which together with the guilder

suffered the largest losses against the dollar, moved to the bottom of the
snake, but the Bundesbank sold only nominal amounts of Danish kroner, the
currency at the top.

III - 4

In contrast to European central banks, the Bank of Japan interFrom October 26 to

vened massively to supply dollars to the market.
November 14, the Bank of Japan sold $1.9 billion.

The market seemed to

expect that Japan's balance of payments would be the hardest hit of any
major country by the recent oil price hikes and its economy most affected
by an oil production cutback.

The Japanese authorities took some adminis-

trative actions on November 13 to curb the demand for dollars, but these
actions would appear unlikely to have significant impact.
Sterling declined against the dollar by the smallest amount,
2 per cent, of any of the European currencies.

On November 13, however,

the U.K. released trade figures for October, showing a record monthly
trade deficit of £298 million.

Simultaneously with release of the trade

figures, and partly to blunt the expected market reaction to those figures,
the U.K. announced a 1-3/4 per cent increase (to 13 per cent) in the Bank
of England's minimum lending rate and issued a call for additional special
deposits (cash reserves) of the banking system equal to 2 per cent of
liabilities.

The U.K. also declared a national state of emergency over

the oil crisis.

In response to this variety of actions, exchange market

activity wound down abruptly, and the dollar's rise against sterling came
to an, at least temporary, halt.
In the gold market, prices tended to decline with the strengthening of the dollar and the apparent success of the Mid-East cease fire.
By November 13 the price had fallen to $96.75.

On November 14, in response

to the announcement of the ending of the March, 1968 gold agreement, which

had prohibited signatory central banks from selling gold on the private
market, the gold price plunged to $90.00 in rather heavy trading.

III - 5

Euro-dollar market.

Euro-dollar interest rates have shown net

declines over the past four weeks.

Changes in Euro-dollar rates over

this period have generally followed, both in timing and magnitude, changes
in U.S. money market rates, declining throughout October then firming slightly
in early November.

The surge in

demand for dollars which developed on

exchange markets at the end of October has had little
rates.

impact on Euro-dollar

This shift in demand has been reflected, however,

in decreased forward

premiums or increased forward discounts on major foreign currencies and
increased Euro-currency interest rates on these currencies.
The overnight Euro-dollar rate averaged nearly 9-1/2 per cent
in the week ended November 14, a decrease of 1/4 percentage point from
the week of October 17.

The average Federal funds rate also declined by

1/4 percentage point over this period and remained approximately 1/3 percentage point above the overnight Euro-dollar rate.

In contrast,

overnight

Euro-dollar borrowing subject to the 8 per cent marginal reserve requirement has remained more expensive than borrowing in the Federal funds market
throughout the period.

Three-month Euro-deposits were bid at an average

rate of 9.6 per cent in the week ended November 14, down from
the 10 per
cent level of four weeks previous.

The three-month CD rate has remained

below the three-month Euro-dollar rate by over 1/2 percentage
point
throughout the period.
U.S. banks' liabilities to their foreign branches averaged
$1,893 million in

the week ended November 7,

from the week of October 10.

a decline of $98 million

U.S. agencies and branches of foreign banks

increased their foreign liabilities by slightly over $1 billion during
this same period.

III - 6

SELECTED EURO-DOLLAR AND U.S.

MONEY MARKET RATES

Average for

(1)

(2)

(3)

(4)

(5)

(6)

month or
week ending

Overnight

Federal

Differential

3-month
Euro-$

60-89 day

Differential

Wednesday

Euro-$I/

Funds 2

(1)-(2)(*)

Deposit!/

CD rate 3 7

(4)-(5)(*)

1973-Feb.

9.03

6.58

2.45 (4.71)

7.46

6.16

1.30 (2.85)

Mar.

9.19

7.09

2.10 (4,40)

8.53

6.84

1.69 (3,46)

Apr.

7.43

7.12

0.31 (2.17)

8.15

7.10

1.05 (2.72)

May
June

7.74
8.19

7.84
8.49

-0.10 (0.90)
-0.30 (0.41)

8.45
8.81

7.30
7.94

1.15 (1.87)
0.87 (1.01)

July
Aug,
Sept.
Oct.

9.75
10.70
10.85
10.04

10.40
10.50
10.79
10.01

(0.20)
(1.13)
(1.00)
(0.90)

10,40
11.49
11.16
9.96

9.06
10.20
10.30
9.16

1973-Oct.

-0.65
0.20
0.06
0.03

1.34
1.29
0.86
0.80

(1.45)
(1.40)
(0.81)
(0.54)

1/

12.25

10.72

1.53 (2.60)

10.38

9.63

0.75 (0.46)

10.65
9.68
9.74

9.87
10.07
9.98

0.78 (1,71)
-0.39 (0.45)
-0.24 (0.61)

10.65
10.08
9.60

9.50
9.35
9.00

1.15 (0.91)
0.73 (0.45)
0.60 (0.32)

31
7

9.61
9.23

9.90
9.70

-0.29 (0,55)
-0.47 (0.33)

9.27
9.39

8.50
8.75

0.77 (0.55)
0.64 (0.38)

14!' 9.47

Nov.

3

10
17
24

9.81

-0.34 (0.48)

9.63

8.75

0.88 (0.64)

All Euro-dollar rates are noon bid rates in the London market; overnight
rate adjusted for technical factors to reflect the effective cost of funds
to U.S. banks.

2/ Effective rates.
/ Offer rates (median, as of Wednesday) on large denomination CD's by prime
banks in New York City.
*/
p/

Differentials in parentheses are adjusted for the cost of required reserves.
Preliminary.

III - 7

U.S. balance of payments.

Preliminary data show an official

settlements surplus of $0.9 billion (not seasonally adjusted) during
the third quarter, while the dollar appreciated against most other
major currencies after dropping in early July.

Seasonally adjusted,

the official settlements surplus was $2.1 billion for the quarter,
following a deficit of $10.1 billion during the first half of the year.
Since mid-October the official settlements surplus has risen sharply
as countries intervened to moderate the continuing appreciation of the
dollar, which in mid-November recovered its average level for the
second quarter.
The basic balance for the third quarter may have moved into

a surplus of more than $6 billion at a seasonally-adjusted annual rate,
compared with a second-quarter deficit rate of $3 billion and a 1972
deficit of nearly $10 billion.

Among major components of the basic

balance, the merchandise trade balance improved by $4 billion (annual

rate) during the third quarter, while the long-term private capital
account appears to have shifted to a substantial surplus.

A very

tentative estimate shows a small increase in the surplus on military
transactions and services, but outflows of government grants and
credits, which were abnormally low in the second quarter, increased
considerably.
Incomplete data suggest that the third-quarter inflow of
foreign private long-term capital was about twice as great as the

III - 8

$4.1 billion (annual rate) inflow during the second quarter.

With

renewed optimism about stock prices and the value of the dollar on
the currency exchanges, foreign net purchases of U.S. stocks increased
to an annual rate of $3.5 billion, compared with $0.6 billion during
the second quarter and $2.3 billion during 1972.

These net purchases

declined toward the end of the quarter, however, and appear to have
dropped sharply in October.

Third-quarter data are not yet available

on foreign direct investment in the United States, but several large
acquisitions occurred that probably raised the inflow substantially
beyond the record-breaking second-quarter level of $1.8 billion
(annual rate).
Outflows for U.S. private long-term investment abroad are
estimated to have declined sharply during the third quarter.

U.S.

direct investment abroad probably dropped substantially after the very
high rate of outflows in the first half of the year.

In addition, banks

reduced their long-term claims on foreigners in the third quarter,
reversing outflows during the first two quarters.
Recorded flows of short-term capital showed a reduction in
bank-reported non-liquid claims on foreigners during the third quarter,
compared with large outflows in the first two quarters.

Preliminary

third-quarter data also show a continued large net inflow of liquid
private capital.

III -

U.S. foreign trade.

9

The U.S. merchandise trade balance

for September showed a surplus of $8.9 billion (seasonally-adjusted
annual rate, balance of payments basis), raising the third quarter
trade surplus to a $3.1 billion rate, compared with a second-quarter
deficit rate of $0.9 billion and a 1972 deficit of $6.9 billion.
Improvements in U.S. bilateral trade balances from the second to the
third quarter were widely spread around the world.
Agricultural exports in the third quarter, which provided
just over one-fourth of total export sales, fell in volume by 5 percent
(net an annual rate) from their second quarter level, while increasing
in price (unit-values) by almost 20 percent.

On a month-to-month

basis, the volume of agricultural exports has been declining fairly
steadily since March.

Nevertheless, third-quarter volume was more than

20 percent higher this year than in 1972.
Exports of non-agricultural commodities grew in volume by
4 percent in the third quarter, while their unit values increased
by roughly 3 percent.

Since third-quarter 1972, volume has grown by

23 percent and unit values have risen 10 percent.
The value of imports rose by roughly 3 percent between the
second and third quarters.

On the basis of preliminary data, import

volume fell for the second quarter in a row, averaging an 11 percent
annual rate of decline since the first quarter.

This decline is notable,

since it occurred at a time of fairly rapid U.S. business expansion.

III - 10

Some weakness in import volumes may be due to the pressure of demand
abroad, but the cumulating effect of the increase in import prices, due
in part to the depreciation of the dollar, is also a strong influence.
During the third quarter the unit value of imports rose further by
4-1/2 percent.
Among major end-use categories of imports, both capital
goods and fuels grew in volume in the third quarter, by 10 percent and
5 percent, respectively.

Imports in almost all other categories have

declined in volume for at least two successive quarters.

Third-

quarter unit values were above second-quarter levels for all major
end-use categories except automotive imports from Canada and capital
goods, for which the indices declined by roughly 3 and 1 percent,
respectively.
Imports of crude petroleum and fuel oil grew in quantity
by 4-1/2 percent in the third quarter, to a level more than 40 percent
higher than in third quarter 1972.

The unit value of these imports

rose in the third quarter by 10 percent, to a level nearly 25 percent
higher than in third-quarter 1972.
Unfilled export orders for durable goods (excluding motor
vehicles and aircraft) increased in September (seasonally adjusted)
for the ninth consecutive month.

New export orders for these goods

(seasonally adjusted) fell sharply in September after an equally-sharp
increase in August.

III - 11

Monetary Conditions and Monetary Policy in Major Industrial
Countries.

Though the rapid rate of real economic growth in major in-

dustrial countries that began in 1972 and continued through early 1973
has apparently been slackening for several months, high rates of price
inflation persist.

Consequently, monetary authorities almost every-

where in the industrialized world have been pursuing policies intended
to slow the growth of bank credit and money.

Efforts to curb inflation

through damping aggregate demand have placed prime reliance on monetary
restraint, with the exception of Germany, where strong anti-inflationary
fiscal measures have been enacted to supplement restrictive monetary
policy.
Initiation of tight money policies generally dates back at
least to mid-1973 and, in the case of Germany and Japan, to the end of
1972.

Reflecting the tightness of monetary conditions, short-term in-

terest rates rose very steeply this year, peaking in the late summer
or early fall.
sharply.

Long-term rates likewise climbed, though much less

In several countries, expansion of monetary aggregates--as

is illustrated by the data on M1 and M2 in Table 1--has decelerated
this year following very rapid growth in 1971 and 1972.
In some instances, efforts have been made--in Canada and
Italy, for example--not only to curtail growth of the money supply and
total credit, but to channel bank credit into certain sectors and to
smaller enterprises.

III - 12

TABLE 1
PERCENTAGE GROWTH RATES IN MONEY SUPPLY
FOR SELECTED INDUSTRIAL COUNTRIES
(Seasonally Adjusted - Annual Rates)
Average Monthly Changes
Average Annual Changes
1964-70 1971
1972

Latest
12 mos.

Latest
6 mos.

Latest
3 mos.

Latest
Month

U.K.
M1
M3

4.7
7.3

15.1
14.2

13.0
27.8

8.0
25.1

7.4
25.6

-0.4
35.2

September

M1
M2

6.8
9.5

13.0
14.4

12.9
17.0

0.6
15.8

-6.2
1A.2

-16.8
10.0

September

M1
M2

6.5
11.1

10.9
17.6

14.4
18.4

9.4
16.8

6.6
15.2

-2.0
10.8

August

M1
M2

6.2
10.0

17.4
14.9

13.2
15.9

14.5
12.4

14.7
12.3

13.0
15.8

September

Ml
M2

16.2
16.6

29.8
24.2

24.7
24.7

25.2
20.4

15.6
16.8

3.7
11.5

August

Ml
M2

5.1
7.4

5.9
3.4

6.6
11.4

5.1
7.5

5.0
7.2

0.0
4.8

Germany

France

Canada

Japan

U.S.
September

Note: Changes shown are end-of-period to end-of-period. For each country
M2 includes M1 plus pprivate time and savings deposits, with the following
exceptions: Germany:
time deposits of over 4 years maturity and all
savings deposits are excluded; Japan: public sector deposits are included,
as are contract sharees in mutual savings and loan associations; United
States: negotiable CD's in amounts greater than $100,000 are excluded.
In the U.K. the Bank of England's series on M2 has been discontinued. The
M3 series has been used. This includes, in addition to M1, all sterling
and non-sterling deposits in the U.K. banking sector held by both public

and private U.K. residents.

All money supply data are from national sources.

III - 13

One of the consequences of the effort to control and allocate
credit has been an inversion of the normal term structure of interest
rates, as occurred in the United States.

In several markets short-term

rates have been appreciably above long-term rates since mid-year.
A second consequence of rising interest rates has been the
strong growth of time deposits in several of the industrial countries.
Spiraling short-term rates have attracted substantial funds into time
and savings deposits while, as stringent credit policies take hold, the
growth of M1 has slowed drastically.

In some countries, in fact, M1

has actually declined in recent months.
In Germany, the authorities have been pursuing a tight monetary policy for over a year.

The Bundesbank has raised its discount

rate six times, from 4 to 9 per cent, since the beginning of October
1972 and, more important, has taken a variety of steps this year to
more directly limit the banking system's capacity to expand credit.
These steps have included cuts in rediscount quotas, virtual elimination of the banks' Lombard borrowing privilege, increases in reserve
requirements on resident deposits, and reductions in the base above
which the 90 to 100 per cent reserve requirements on non-resident deposits apply.
The Bundesbank's most recent restrictive actions were taken
in early October, to offset the domestic impact of the heavy capital
inflows resulting from the flight from the French franc in the wake of

TABLE 2
INTEREST RATES FOR MAJOR COUNTRIES
(Per cent per annum, at or near end of month)

Short-term Rates

Annual Avgs.
1971
1972

June

Long-term Rates

Sept. Latest

Annual Avgs.
1972
1971

June

Sept.

Latest
11.29 (11/2)
9.57 (10/31)

U.K.
Germany

6.20
7.10

6.65
5.54

8.38
13.75

13.38
13.75

12.2 (11/9)
14.0 (11/9)

9.01
8.00

9.21
7.91

10.33
9.91

11.45
9.73

France

5.75

5.04

8.50

11.80

11.25 (11/2) 7.7b

8.00

8.75

9.29

9.28 (10/19)

Italy

5.86

5.34

6.00

8.50

8.50 (*)

8.02

7.28

7.37

7.22

7.22 (**)

Belgium
Netherlands

5.00
3.02

3.83
1.89

5.70
5.03

7.45
7.50

7.60 (11/7) 7.28
7.70 (11/2) 7.20

7.04
6.68

7.21
7.83

7.62
8.01

7.62 (10/15)
7.49 (11/2)

Switzerland

3.10

1.92

2.50

4.50

4.50 (11/2) 5.26

4.97

5.36

5.79

5.77 (10/19)

Japan

6.33

4.65

6.75

9.00

8.75 (11/2) 7.76

6.74

7.55

8.15

8.15 (**)

Canada

4.54

5.63

7.00

8.75

9.00 (11/9)'6.95

7.23

7.74

7.72

7.60 (10/31)

6.94

6.23

6.23

6.93

6.95

6.72 (11/2)

U.S.

4.20

4.49

7.29

8.01 (11/9)

**August
*September
Notes:
Short-term rates: U.K. - 90-day local authority deposits; Germany - 3-month interbank loan
rate; France - call money rate against private paper; Italy - interbank deposits of up to
one-month maturity; Belgium - tap rate on 3-month Treasury bills; Netherlands - call money
rate; Switzerland - 3-5 month deposit rate; Japan - call money rate, unconditional; Canada Canadian finance company paper; U.S. - U.S. Treasury bill,

Long-term rates:

U.K. - 3-1/2% war loan; Germany - 6% public authority bond yield; France -

public sector bonds; Italy - composite yield on all bonds except Treasury bonds (monthly
average); Belgium - long-term government bonds, composite yield; Netherlands - average of
three 4-1/4 - 4-1/2% government loans; Switzerland - Swiss government composite yield;
Japan - 7-year industrial bonds; Canada - Government long-term average yield; U.S. Government 10-year constant maturity bond yield.

III - 15
the guilder revaluation in mid-September.

Reserve requirements on

domestic deposits were increased by 3 per cent, rediscount quotas were
cut by about 8 per cent for medium-sized banks and by 25 per cent for
large banks, and the base above which the stiff marginal reserve requirement on foreign deposits are imposed was lowered by 15 per cent.
The Bundesbank's restrictive measures have been reflected in
the movement of monetary aggregates this year.

Bank lending to domestic

non-banks, for example, rose at a seasonally adjusted annual rate of
about 10 per cent from the end of February through the end of August.
In the year ending in February, the increase had been 17 per cent.
There has also been a deceleration in the growth of the money supply.
The growth of

2 in the six months through September was down to a

seasonally adjusted annual rate of about 11 per cent, compared to a
rise of 17 per cent in 1972 and of over 20 per cent in the year ending
in March.

M1 has experienced a substantial net decline since March,

reflecting large-scale switching out of sight deposits into time deposits,
interest rates on which have risen very sharply.

Efforts to control

the growth in the money supply have been complicated, even since the
initiation of the EC joint float in March, by heavy speculative capital
inflows, first in June--leading to the revaluation of the DM at the
end of that month--and again in September.

Also contributing to the

rise in M2 has been the movement out of savings deposits into shortterm time deposits.

Increases in yields on the former have failed to

keep pace with the upsurge in yields on the latter.

III - 16

The Bundesbank's tight money policy has produced a general
rise in interest rates this year.

Short-term rates have climbed much

more steeply than long-term yields, which are now lower than many key
short-term rates.

Long-term rates have shown a softening tendency in

recent months, apparently reflecting, in part, expectations that the
authorities might ease their present restrictive policy stance. But both
the government and the monetary authorities continue to maintain that
inflationary pressures remain too strong to permit any relaxation of
restraint at this time.

In contrast to several other countries, the

government has reinforced a tight-money policy with restrictive fiscal
measures, notably steps to curtail government spending and discourage
private-sector investment.
Monetary policy in France continues to tighten.

The pattern

of rising discount and bank lending rates evident elsewhere was also
followed in France in recent months, though apparently with a slight
lag behind U.K. and German moves.

From July to September, the Bank of

France raised the discount rate up 3-1/2 points to 11 per cent, prompting
banks to raise their base lending rates correspondingly.

By September

short-term rates had edged slightly higher than long-term yields.
Recent French policy has been strongly influenced by exchange
market uncertainty which followed the September 17 revaluation of the
Dutch guilder.

In early August French controls on tourist expenditures

and private transfers were relaxed, but in September measures were taken

III - 17

to encourage capital inflows.

Then, in contrast to its continued tightening

of general monetary policy, the Bank of France in October removed the 100
per cent marginal reserve requirement on non-resident franc accounts and
authorized resumption of interest payments on such accounts.

Furthermore,

though raising reserve requirements for resident accounts from 12 to
14 per cent, the Bank of France lowered requirements for non-resident
accounts from 6 to 5 per cent.
French monetary authorities have also progressively tightened
direct quota controls to constrain the expansion of bank credit.

Year-

to-year credit growth limits of 13-14 per cent are in effect for the
remainder of 1973, and are being strictly enforced.

This panoply of

measures has helped to significantly reduce the growth rate of M2 this
year from the near 18 per cent levels of 1971 and 1972.

M1 has been

essentially flat since May, as recent growth of the total money supply
has been concentrated in interest-bearing time deposits.
In Italy, a strong economic upswing is now in progress.

Until

recently Italian authorities continued to pursue an expansionary monetary
policy to stimulate recovery from the 1970 slowdown.

Until early 1973,

in fact, interest rates tended to decline, and monetary policy continued
easy.

Signs of a gradual tightening first appeared in July, when inter-

bank loan rates and overdraft rates on the commercial banks began to

climb rapidly toward levels already reached elsewhere.

In July overall

credit ceilings were also imposed, with strict ceilings on lending to

III - 18

large borrowers from the banks and with preferences for smaller borrowers.
In mid-September the Bank of Italy raised the basic discount rate 2-1/2
points to 6-1/2 per cent, and the rates on advances also rose to 6-1/2
per cent.
In October the rediscounting of loans to smaller borrowers was
exempted from the 3 per cent penalty rates imposed by the Bank of Italy
to discourage repeated discounting.
To avoid inhibiting the recovery in productive investment,
measures have also been taken to hold down long-term rates.

Italian

banks have been required to buy large quantities of securities, and longterm rates have recently fallen below short-term levels.
Further tightening of monetary policy is possible, although
the authorities may be willing to accept higher inflation rates in Italy
than elsewhere, rather than risk inhibiting recovery when considerable
slack capacity still exists.
Money supply figures are not available beyond May.

In 1971 and

1972 both M1 and M2 increased in the 18 to 19 per cent range, but after
December 1972 the growth of M1 slowed somewhat.
Monetary policy was sharply tightened in the United Kingdom
this week, with the Bank of England on November 13 raising its minimum
lending rate from 11-1/4 to 13 per cent and increasing the special deposits requirement from 4 to 6 per cent.

The two percentage point in-

crement will be implemented through four 1/2-points rises between the

III -

19

end of November and the beginning of next January.

Special deposits

are interest-bearing deposits that British banks can be required to
maintain at the Bank of England.

Changes in special deposit require-

ments are used to vary the required reserve rate for British banks
above their base liquid reserve requirement of 12-1/2 per cent.
The immediate causes of the Bank of England's action this
week [was] a worsening in Britain's balance of payments deficit--the
October trade deficit was the largest ever recorded--and a level of
demand for credit deemed to be excessive.

Credit--along with other

monetary aggregates such as the broadly defined money supply--has in
fact been expanding at a very rapid rate this year.
The special deposits requirement had been raised earlier
this year, in July, from 3 to 4 per cent.

In the same month, the Bank

of England's minimum lending rate was raised from 7-1/2 to 11-1/2 per
cent.

By August the base landing rate of the clearing banks had risen

from 8 to 10 per cent.

Government bond sales also helped to push up

long-term rates.
One effect of the sharp upswing in British rates was to
encourage extensive switching from sight to time deposits, and especially
to large denomination sterling CD's.

Some bank customers utilized their

overdraft facilities to invest in these CD's, the effect of which was
to exaggerate the underlying growth trend in M3.

III - 20

There was some easing of both short- and long-term rates in
September and October.

However, the Bank of England's latest action

clearly will reverse the downward trend.
In Japan, monetary policy-which, as in most countrieshas
played the major role this year in efforts to restrain domestic demandhas become increasingly restrictive since the end of 1972.
From January through October the authorities have slowly increased
reserve requirements on time deposits for the large banks from 0.5
to 1.75 per cent, and on sight deposits from 1.5 to 3.75 per cent,
while raising the discount rate to 7 per cent, an historically high
level for Japan.

The prime and rediscount rates have climbed apace,

and in October the rate for the rediscounting of short-term bills
due after January 1, 1974, reached 9.75 per cent.
The authorities have also intensified measures introduced in
the early months of the year to restrain the growth of consumer credit
and to reduce the rate of expansion of bank credit.

Quarterly ceilings

applied to the loan expansion of the city banks have been progressively
lowered through the year.

This action has had the effect of reducing

the annual rate of bank credit expansion from around 25 per cent in
the last half of 1972 to about 14 per cent since May of this year.
Growth in the money supply has also slowed this year.

While

M1 rose at an average annual rate of 16 per cent in the 1964-70 period,
the rise in the money supply accelerated to 30 per cent in 1971 and

III - 21
declined only slightly, to 25 per cent, in 1972.
growth slowed very substantially, and M1
to August.

This year, however,

actually declined from July

In recent months, M2 has risen considerably faster than M1--

reflecting the interest sensitivity of Japanese funds--but the increase
in M2 has also slowed markedly.
The pace of monetary tightening in Canada has been steady
and gradual this year, following an expansionary stance which lasted
through 1971 and 1972.

Beginning in April, the Bank of Canada discount

rate - which had remained at 4-3/4 per cent since October, 1971 - was
raised in a series of half-point steps to 7-1/4 per cent on September 13.
There was a concomitant rise in the chartered banks' prime lending rates,
from 6 per cent in April to S per cent in mid-September.
Canadian authorities have also encouraged the banks to avoid
discrimination against borrowers in the small business and farm sectors.
This objective is being pursued through a dual lending rate structure
set up by the chartered banks in May.
The chartered banks have raised deposit rates somewhat, including the rates for term deposits under the "WinnipegAgreement,"
which provides for ceiling rates on term deposits of less than one year.
As in other countries, yields on long-term bonds have increased, but
less than those for short-term instruments, and as a result, the term

structure is similar to that elsewhere.
Because of the Canadian concern with high unemployment, efforts

III - 22

to slow the growth of the money supply were more cautious than those
in the European countries.

As can be seen in Table 1, the growth of

Canadian M1 appears to be keeping up with increases in M2, with both
expanding at about a 15 per cent annual rate.

Monetary policy might be

tightened further, but only moderately, as the rate of growth of
Canadian GNP is

expected to slow somewhat next year.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102