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CONFIDENTIAL (FR)

CURRENT ECONOMIC
and
FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

coe

S2,16

CONFIDENTIAL

(FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff

Board of Governors
of the Federal Reserve System

October 27, 1965

I-

SMMY

AND OUTLOOK

Outlook for demands and output
Prospects are good for a continuing expansion in final
demands in the current quarter -- at a rate which is likely to boost
GNP by around $10 billion, despite a considerable drop in the rate of
inventory accumulation.

Sharp curtailment of steel output may be

causing industrial production to show little change in this quarter
even though total GNP is continuing to rise.

The production index

dropped by one per cent in September and is unlikely to recover this
month.

However, divergence between GNP and industrial production is

not unexpected, given the special circumstances affecting the steel
industry on the one hand and the sharp rise in income payments and consumer spending on the other.
A further large increase is in prospect for consumer buying
this quarter.

Much of the large retroactive increase in social security

benefits in September is likely to be spent by recipients in the current
quarter.

Also, a military pay raise, effective in September, is being

followed by a Federal civilian pay raise effective this month, and
current incomes of social security beneficiaries are at the higher
level established in September.

These special factors are accompanying

the on-going rise in incomes being generated by expanding private
economic activity and by rising government employment -- civilian and
military.
The additional spending generated by this increase in incomes
is expected to be almost entirely in nondurables and services.

I-2

uncertainty in the near-term consumption outlook is the rate of auto
sales, but current new model sales and fourth quarter output schedules
of producers suggest consumer purchases will continue at the very high
rate prevailing thus far in 1965.
Federal outlays are being further increased by additional
defense expenditures to support the war in Vietnam.

New orders for

defense products have been increasing steadily, and the defense order
backlog Is up substantially from the beginning of the year.

State

and local government purchases are continuing their steady growth.
Business fixed investment outlays are slated for a large
further rise in the current quarter while residential construction
activity and net exports are expected to change little.

Apart from

steel, there is no evidence that inventory accumulation is changing
much from the third quarter rate.

Prospective developments in resource utilization, costs and prices
Heavy spending for plant and equipment is yielding widespread
and substantial increases in capacity; the estimated gain in manufacturing capacity is 6 per cent for this year and at least as much for next
year.

Recently, the utilization rate in steel has dropped sharply

while that in the rest of manufacturing has apparently shown little
change.

Nor is any significant change in capacity utilization expected

through the remainder of the year.
Employment continued to expand through the summer but some
slackening in the advance occurred in September in part because of
slowdowns in manufacturing output and construction activity.

The

I-3

unemployment rate -- 4.4 per cent in September -- is unlikely to show

much change for the balance of the year.
Because of the decrease in steel production since the labor
settlement, output per manhour is lower and unit labor costs higher in
that and closely related industries.

The pace of wage increases in

industries other than steel has shown no acceleration and output is
rising further.

Consequently, measures of labor costs per unit of

output in these lines are likelyo-to show little increase during the
current quarter.
The industrial commodity price index has been virtually
stable since mid-August, following a rise of about 1.5 per cent over the

preceding year.

Nevertheless, further price increases among materials

are likely, especially in view of the recent rise for primary copper.

Selective increases in list prices for steel also are taking place,
although it is uncertain to what extent average prices will rise until

demands for steel strengthen again.
With increases in labor costs and materials prices neither
large nor widespread, price increases among finished products also
are likely to be selective and some decreases may continue to be
announced.

Moreover, current and prospective rates of capacity utili-

zation are high in most lines, and the outlook is for a continued upward
creep in industrial prices without any appreciable acceleration.

Bank credit and money
Demand for bank loans from nonfinancial customers has continued strong in recent weeks, and is expected to remain vigorous over

I-4

the final months of 1965, although somewhat less so than in the third
quarter.

Expansion in business loans will be moderated by the reduced

needs of firms which previously had been stockpiling steel.

On the other

hand, demands for funds for more general working and fixed capital
purposes should continue very strong, and prevailing interest rate
relationships are tending to channel a large part of such demands into
the banking system.

Consumer and real estate loan demands are expected

to continue at about the same rate as shown in recent months.
Bank security portfolios have increased sharply so far this
month, as banks absorbed the Treasury's tax bill offering.

The re-

sulting bulge in bank investments is likely to be temporary, but over
the remainder of the year will likely be followed by other bulges, mainly as a
result of additional financing by the Treasury.

Total Treasury financing

this quarter is expected to add about $7 billion to the market supply
of Government securities (including the tax bills already offered),
and this will be only partly offset by about $2 billion of official
purchases to meet seasonal reserve needs.

Much of this increased supply

will be absorbed initially by the banking system, and redistribution to
the nonbank public may be relatively slow at current rate levels.
Meanwhile, banks are curtailing their acquisitions of municipal and
agency securities.
Accommodation of private loan demands and the Treasury's
financing plans will likely result in a faster growth rate for total
bank credit over the fourth quarter of the year.

However, this does not

necessarily imply an acceleration in the rate of private deposit expansion.

I - 5

Private deposit expansion was already at an advanced rate in the third
quarter, but Treasury deposits declined sharply.

in total deposits was held down.

As a result, growth

In the fourth quarter, Treasury de-

posits are expected to remain basically unchanged.

Thus, while private

deposits are not likely to increase as rapidly as in the third quarter,
total deposits are expected to grow more rapidly.

This growth in total

deposits throughout the rest of the year will require renewed expansion
in total reserves.
Securities market prospects
Long-term interest rates have edged up again since mid-October,
reflecting active and anticipated demands for funds by businesses and
Government.

Whether or not long-term interest rates will continue to

rise over the rest of 1965 will depend in large measure on whether
business demands for financing continue to press actively on available
supplies of funds.

The pace of mortgage financing and State and local

government security flotations is not expected to change appreciably.
Nor is the impact of expected Treasury cash borrowing likely to fall
directly on long-term markets.
During October the volume of publicly-offered corporate
bonds was less than half that of September, and the calendar of offerings
presently scheduled for the weeks immediately ahead is also on the light
side.

However, underwriters report a very large volume of new corporate

borrowing currently being arranged, some of which may represent an
effort to anticipate early 1966 needs ahead of possible interest rate
increases.

A larger than usual proportion of this financing may take

the form of private placements, thus minimizing the upward pressure on
market yields.

S-6
In the municipal bond market, yield increases very recently
have reflected a concentration of new offerings, along with an unexpected
and large issue of FNMA participation certificates.

But over the

longer period, yield changes on municipals will continue to be highly
sensitive to bank demand, which in turn will depend importantly on the
strength of loan demands and continuing bank ability to attract funds.
The U.S. Government bond market continues to be cautious,
with investor demand largely absent in recent weeks.

Upward rate

pressures may be minimized by keeping the mid-November Treasury refunding in the 18-month area,

Nevertheless, the long end of the market

is still vulnerable and could be pushed up by a rise in short- or
intermediate-term rates, or a change in expectations.

Balance of payments
Prospects for the fourth-quarter balance of payments now
appear more uncertain than

they did before the receipt last week of

semifinal data on settlements in September (and the third quarter),
described and discussed in the main body of this report.

The latest

data show a third-quarter deficit of $700 million on regular transactions
and a small surplus on the official settlements basis, both figures
less favorable than had been anticipated earlier.
Despite these developments, it is still possible on optimistic
assumptions to visualize a regular transactions deficit considerably
smaller in the fourth quarter than in the third, and perhaps no larger
than the average for the first three quarters ($450 million).

The

merchandise trade surplus, which is likely to continue higher than it

I -7
was in the first half-year, would contribute toward improvement, and
outflows of direct investment capital may be down substantially from
the very high levels of the first two quarters.
A more pessimistic prognosis would take into account not only
the possibility that seasonally adjusted outflows of bank credit and
movements of U.S. liquid funds may be less favorable than earlier, and
the probability that the United Kingdom will again exercise its option
to postpone year-end debt service payments to this country of about $140
million, but also a newly emerging possibility that direct investment
outflows may not fall off as much as previously was supposed likely.
It seems possible that recent talk about the possibility of new measures
for dealing with direct investment outflows may be stimulating anticipatory flows.
The deficit settled by official transactions in the fourth
quarter may be about as large as the deficit on regular transactions,
whatever the size of the latter, as inflows of foreign private liquid
funds seem likely to be small.

Efforts by U.S. banks to attract funds

through their foreign branches may be less successful because foreigners
may be shifting out of dollars into sterling and because the Italian
banks may not be putting as large sums into the Euro-dollar market as in
the third quarter.

T -

October 26, 1965

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Latest
Period

Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)

Amount
Latest Preced'g
Period Period
75.8
75.5
Sept '65
It
3.3
3.4
"
4.4
4.5

Year
Ago
74.3
3.8
5.1

60.8
18. 2
7.9
34.7

58.5
17.4
7.7
33.3

Nonfarm employment, payroll (mil.)
Manufacturing
Other industrial
Nonindustrial

60.7
18.2
7.9
34.6

Per cent
Year
Ago*
1.6
-13.5

4.0
4.3
2.6
4.2

change
2 Yrs.
Ago*
3.2
-18.4

6.9
6.9
4.2
7.6

Industrial production (57-59=100)
Final products
Materials

142.8
142.6
142.8

144.3
142.3
145.9

134.0
132.8
135.6

6.6
7.4
5.3

13.6
12.9
14.2

Wholesale prices (57-59=100)1/
Industrial commodities
Sensitive materials
Farm products and foods

103.0
102.3
102.9
103.5

102.9
102.3
103.1
103.3

100.7
100.7
99.5
99.3

2.3
1.6
3.4
4.2

2.7
1.9
6.1
5.1

110.0
104.7
110. 1
117.9

110.2
104.7
110.9
117.8

108.2
104.2
106.9
115.4

1.7
0.5
3.0
2.2

2.7
1.1
3.9
4.1

2.3
3.3

6.9
7.5

Aug

Consumer prices (57-59=100)1/
Commodities except food
Food
Services

'65

Sept '65 2.64
"
107.66

Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)

Personal income ($ bil.)2/
Retail sales, total ($ bil.)
Autos (million units)2/
GAF ($ bil.)
Selected leading indicators:
Housing starts, pvt. (thous.)2/
Factory workweek (hours)
New orders, dur. goods ($ bil.)
New orders, nonel. mach. ($ bil.)
Common stock prices (1941-43=10)1/

2.63
2.58
107.46 104.18

545.3

532.0

501.7

8.7

16.2

23.3
8.9
5.4

23.7
8.9
5.3

22.3
8.8
4.9

4.9
0.5
8.2

14.3
24.1
16.3

1,424
40.9
21.8
3.2
89.38

1,422
40.9
21.5
3.3
86.49

1,445
40.5
19.9
2.9
83.41

-1.5
1.0
9.3
10.4
7.2

-16.9
1.0
19.2
23.7
22.7

Inventories, book val. ($ bil.)

Aug '65

116.7

116.0

107.6

8.4

13.6

Gross national product ($ bil.)2/
Real GNP ($ bil. 1958 prices)2/

QII '65
"

676.9
609. 1

665.9
601.4

634.8
582.6

6.6
4.5

14.1
10.0

unrounded data.
on unrounded
*Based
*Based on
data.

seasonally adjusted
1/ Not
1/
Not seasonally adjusted

2/ Annual rates.

Annual rates.

I - T - 2

October 26, 1965

SELECTED DOMESTIC FINANCIAL SERIES
Week ended Four-Week
Average
Oct. 22
Money Marketl/ (N.S.A.)
Federal funds rate (per cent)
U.S. Treas. bills, 3-mo., yield (percent)
Net free reserves 2/ (mil. $)
Member bank borrowings.2/ (mil. $)
Security Markets (N.S.A.)
Market yieldsl/ (per cent)
5-year U.S. Treas. bonds
20-year U.S. Treas. bonds
Corporate new bond issues, Aaa
Corporate seasoned bonds, Aaa
Municipal seasoned bonds, Aaa
FHA home mortgages, 30-year3/
Common stocks S&P composite index4/
Prices, closing (1941-43-10)
Dividend yield (per cent)

4.05
4.03
-97
591

3.92
4.01
-152
544

4.25
4.05
-91
627

1.00
3.77
-233
345

4.35
4.32
-4.57
3.31
5.46

4.32
4.32
4.68
4.56
3.31
5.46

4.35
4.34
4.71
4.57
3.31
5.46

4.13
4.20
4.37
4.41
3.09
5.44

91.84
2.90

90.97
2.93

91.98
3.11

81.60
2.90

Change
in
Sept.
Banking (S.A.,
mil.
Total reserves

Last six months
Low
High

Average
change
last 3 mos.

Annual rate of
change (%)
3 mos.
1 year

Bank loans and investments:
Total
Business loans
Other loans
U.S. Government securities
Other securities
Money and liquid assets:
Demand dep. & currency
Time and savings dep.
Nonbank liquid assets

-8

-0.4

3.8

100
700
-300
-500
200

1,300
700
500
-500
600

5.5
13.6
4.8
-9.7
16.2

9.3
19.4
11.5
-8.2
16.5

1,600
1,500
1,500

800
1,900
1,800

6.2
16.8
8.7

3.9
16.0
6.3

N.S.A.--not seasonally adjusted. S.A.--seasonally adjusted.
1/ Average of daily figures. 2/ Averages for statement week ending October 20.
3/ Latest figure indicated is for month of September. 4/ Data are for weekly
closing prices.

I - T-3

U.S. BALANCE OF PAYMENTS

Sept.

Aug.

1965
QIIIp/ QII
Jul.

1964
Year

QIV

Seasonally adjusted annual rates, in billions of dollars
- 2.8e/

Balance on regular transactions

0.5

Services,

etc.,

- 6.2

5.2

8.1

6.9

Current account balance
Trade balance 1/
Exports 1/
Imports 1/

- 3.1

7.3
6.0
27.2
27.8
-21.2
-20.5

6.9
26.7
-19.8

6.7
5.2
27.1
27.2
-20.5
-21.9

Govt. grants & capital 2/
U.S. private direct inv.
U.S. priv. long-term
portfolio
U.S. priv. short-term
Foreign nonliquid

7.2
6.7
25.3
26.8
-19.6
-18.6

1.5

0.9

1.0

- 5.7

- 8.3

-12.5

- 9.7

- 3.8
- 3.5

- 3.2
- 4.6

- 4.1
- 3.3

- 3.6
- 2.4

0.5
2.0
- 0.9

- 2.8
1.3

- 3.3
- 2.3

- 2.0
- 2.1

1.1

0.4

- 1.7

- 1.2

- 259

- 0.7

Errors and omissions

7.7

1.7

net

Capital account balance

3.7
22.3
-18.6

- 3.1

Monthly averages, in millions of dollars
Balance on regular transactions
(seas. adjusted, - = deficit)
Less: Net seas. adjustment
Balance before adjustment
- 465

- 425

- 265

465

425

265

385

179

221

229

Financing (unadjusted)
Adv. on military 3/
Advance debt repayment 3/
Liabilities increase
Nonofficial 4/
Official 5/
Monetary reserves decrease
of which: Gold sales
JMemo:

Official financing 6/

64
272
129
S10
401

403
308

- 331

235.e
1508/
385

- 174

24
42
2

260
86

86
23

517

1
-

518

259
19
10
130
86
14
10

83
13

281
277

217
300
- 50
57

251

156

- 259

518
50
2

- 286

196
80

- 286

1/
2/
3/
4/

Balance of payments basis which differs a little from Census basis.
Net of associated liabilities and of scheduled loan repayments.
Assumed zero in absence of information.
Includes international institutions (except IMF), commercial banks and private
nonbanks.

Includes nonmarketable bonds.

65/

Decrease in monetary reserves, increase in liabilities to foreign official
institutions, and advance repayments on Government loans.

111

- 1

THIE ECONOMIC PICTURE IN DETAIL

The Nonfinancial Scene

Gross national product.

According to a staff projection,

gross national product is expected to rise about as much in the
current quarter as in the third.

Fourth quarter GNP is now estimated

at an annual rate of $687 billion, up from $677 billion (Commerce
preliminary estimate) in the third quarter and from $666 billion in

the second.
Key factors in the projected rise in the fourth quarter are:

(1) the anticipated increase of nearly $2 billion (annual rate) in
business fixed investment, which is in line with business plans reported in the latest Commerce-SEC survey; and (2) the projected rise
of $1.5 billion in Federal defense outlays, which is based partly on
the build-up in defense orders and trends in defense expenditures
accompanying the heightening of military activity in Vietnam.

Also

contributing to the fourth quarter rise in defense outlays is the
military pay raise, which was effective for one month in the third

quarter.
A Federal civilian pay raise is now slated to be effective
October 1, and this accounts for the bulk of the step-up shown in
other Federal outlays in the fourth quarter.

Residential con-

struction activity, which had declined somewhat in the third quarter,
is now assumed to be stabilizing or perhaps increasing slightly.
This is in line with general trade forecasts.

II - 2

The steel wage settlement at the beginning of September
marked the termination of the large steel stock build-up which had
kept total business inventory accumulation at relatively high levels
into the third quarter.

Excessive steel stocks are now being

liquidated, and the steel inventory adjustment is estimated to
lower the rate of overall inventory accumulation by about $2.5
billion, from an annual rate of $6.1 billion to $3.7 billion.
The steel adjustment is also causing industrial production
to level off in the current quarter at about the third quarter
average, following rapid gains earlier in the year.

With industrial

capacity continuing to rise as a result of record outlays for new
plant and equipment, the rate of manufacturing capacity utilization
is likely to recede slightly in the current quarter--from 90 to 89 per
cent.
Leveling off of industrial production may also slow somewhat
the rise in the flow of personal income from private economic activity.
With the Federal pay boosts and the 7 per cent increase in current
social security payments, supplementing the flow of income from
expanding activity, total personal income is expected to show a
sizable gain in the current quarter.

The rise will be much smaller

than in the third quarter, however, because of the special large
retroactive social security payment late in that period.

This large

boost to incomes was not reflected immediately in consumer spending
but it is assumed to affect such spending in the current quarter.
Consumption expenditures, therefore, are expected to rise more than
incomes in the fourth quarter, and the savings rate, which spurted in

II - 3

the third quarter, should recede toward the low second quarter
level.
Among the major categories of consumption expenditures,
outlays for nondurable goods and services are expected to rise in
the current quarter at about thethird quarter annual rate of
7 per cent.

Expansion in durable goods, on the other hand, is

expected to be slower.

Total new car sales including imports are

estimated to hold at the advanced third quarter annual rate of about
9.5 million.

Household durable expenditures are assumed to rise

somewhat further.
Given this pattern and level of spending, price changes in
private economic transactions are expected to be similar in the
fourth quarter to those in the third.

However, the Federal pay

increase, which are treated as price increases in calculating GNP
in constant prices, result in some step-up in the rate of increase
of the emplicit GNP deflator.

Thus, although the increase in GNP

in current prices is projected to be about the same as in the third
quarter, real GNP is projected to rise somewhat less.
The leveling off in industrial production may contribute to
a slower rise in productivity in that sector in the current quarter.
It is expected that total nonagricultural employment will continue
to rise at about the slackened third quarter pace.

This suggests

that the unemployment rate, which was reduced from 4.7 per cent in
the second quarter to 4.5 per cent in the third, may decline slightly
further in the current quarter.

II - 3a

GROSS NATIONAL PRODUCT
(Billions of dollars, seasonally adjusted annual rates)

1965

IIQ

IIIQ /

IVQ=/

IIIQ
from
IIQ

IVQ
from
IIIQ
10.5

Gross National Product

665.9

676.9

687.4

11.0

Personal consumption expend.
Durable goods
Nondurable goods
Services

424.4
63.7
187.6
173.1

432.2
65.4
191.0
175.9

439.5
66.0
194.5
179.0

7.8
1.7
3.4
2.8

7.3
.6
3.5
3.1

Gross private domestic invest.
Business fixed invest.
Residential construe.
Change in business invent.

101.1
66.4
28.0
6.7

101.8
68.1
27.6
6.1

101.4
69.9
27.8
3.7

.7
1.7
-.4
-.6

-.4
1.8
.2
-2.4

7.5

7.8

8.0

132.9

135.1

138.5

2.2

3.4
2.2

Net exports
Govt, purchases of goods
and services
Federal

National defense
Other
State and local
1/
2/

65.9

67.3

69.5

1.4

49.4
16.5

50.8
16.5

52.3
17.2

1.4
0

1.5
.7

67.0

67.8

69.0

1.2

Commerce Dept. preliminary estimate
Staff projection, October 26, 1965

II - 4

Industrial production.

The one per cent decline in industrial

production in September, to 142.8 per cent from 144.3 in August, was
due to the sharp decline in steel production, to reduction in aircraft,
autos, coal, and newspapers because of strikes, and to a loss in crude
oil caused by Hurricane Betsy.

Output of business equipment and consumer

staples increased, and output of home goods and apparel changed little.
In October, steel ingot production has continued to decline
and for the month as a whole total steel output is likely to be down
10 per cent, amounting to a loss of .7 of one point in the total production index.

However, with the strikes limiting production in Sept-

ember settled by early October, with recovery in crude oil, and with
an expected further rise in business equipment production, output in
these industries may rise enough to offset the loss in steel.

Any

change in the total index in October thus will depend on developments
for consumer goods and/or materials other than steel, for which data
are not yet available.
Consumer goods output in total has been relatively stable from
January through September although with much diversity among major
components.

Apart from the influence of the strike at American Motors

in September, auto assemblies have been steady since April.

Output of

home goods peaked last March, then declined gradually and in August
(the latest month with solid figures) was down 4 per cent.

Output of

apparel and consumer staples changed little in the first half of the
year and then edged up in the third quarter.

II - 5

Orders for durable goods.

New orders fpr durable goods rose

a little in September and the third quarter average was moderately above
the first half level as a sharp drop in steel orders was more than offset by gains for most other durable goods.

NEW ORDERS FOR DURABLE GOODS
(Monthly averages, in billions of dollars)

1965

Total
Steel
All other
Defense products
Machine ry & equip.
Miscell aneous

P er cent change

3rd
quarter

2nd
quarter

lst
quarter

3rd quarter
firom 1st quarter

21.8

21,4

21.4

1.5

1.8

2.2

20.3

19.6

19.2

2.9
4.2
13.2

2.8
4.1
12.8

2.4
3.9
12.8

18
7
3

-30

New orders for steel in September were about as low as they
were in mid-1963, when a steel settlement also precipitated a large
inventory run off.

New orders for defense products, on the other hand,

rose sharply to nearly equal the high reached last April.
In September, as in earlier months this year, the new order
level exceeded shipments and unfilled orders rose further.

Unfilled

orders at the end of September amounted to 2.8 months' sales, which was
not much above the average over this past year.
Since February, when the steel backlog was at its peak for
the inventory build-up period, unfilled orders for durable goods have
increased 7 per cent further despite the decline of 42 per cent in the
steel order backlog.

II -

UNFILLED ORDERS FOR DURABLE GOODS
(Billions of dollars)

1965
February

Per cent change
Sept. from Feb.

58.9

55.1

2.8

4.8

September
Total
Steel
All others
Defense prodiicts
Machinery & equip.
Miscellaneouss

Prices.

-42

56.1

50.3

23.2
15.2

20.3
13.6

17.7

16.5

15
12
7

The industrial commodity price index was stable from

mid-August to mid-September, and weekly estimates show little change
to late October.

Wholesale prices of foodstuffs, after edging down

from advanced July levels, have generally been stable since mid-August,
and the total wholesale price index has shown little change in the
past three months.
The industrial index, while up 1.6 per cent from September
1964 when it began to move out of the narrow range in which it had
fluctuated for five years, has risen only .2 per cent since mid-June.
Increases in an index of metals and machinery, which from autumn 1964
to late spring accounted for much of the rise in the industrial index,
have slowed appreciably in recent months, while an index of industrial
commodities excluding metals and machinery has continued to edge up
slowly.
Major copper producers abroad advanced prices 2 cents to 38
cents a pound, following the Chilean government's price-raising directive

II - 7

to American owned companies.

For the present, domestically-produced

copper will remain at 36 cents, while imported copper, accounting for
about one third of U.S. consumption, will sell at 38 cents -- over 20
per cent above levels of early 1964.

With continuing shortages, and

the crisis in Rhodesia threatening to reduce supplies from Africa, the
price of copper in the London market has risen to around 64 cents a
pound.

Prices of domestic copper scrap have risen to around 44 cents

a pound, and have created the anomaly of some finished products selling
below the scrap price.

Market analysts expect not only a rise in the

domestic price to the foreign price of 38 cents, but also further increases in prices of fabricated copper products.
The President has abolished lead and zinc import quotas which
have been in effect for seven years.

With the increased availability

of foreign lead and large increases in production from new mines,
domestic lead supplies are expected to be adequate by early 1966.

The

abolition of the zinc quota, however, will have little effect in the
near future, and stockpile releases will continue to be an important
source of supply.
Steel producers raised prices of tin plate about 2-1/2 per
cent, and, at the same time, reduced prices of "tinless" tinplate purportedly to recapture markets lost to other materials.

Can producers

do not expect volume production of "tinless" cans until late next
summer, and following the tin plate rise, advanced prices of tin plated
cans.

II - 8

WHOLESALE PRICE INDEXES
Per cent increase
Feb. 1961
to
Sept. 1964

Sept. 1964
to
June 1965

June 1965
to
Sept. 1965

Industrial commodities

-0.3

1.4

Industrial materials

-0.4

1.7

Industrial products
Consumer nonfoods
Producer goods

-0.2

-1.1
1.6

1.0
1.0
1.2

.1
.1
.1

Foodstuffs

-0.6

4.3

Industrial commodities
Less metals and machinery
Metals and machinery

-1.4
1.3

1.1

.2
.1

Commodity group

Employment.

1.7

Nonfarm payroll employment continued to expand

in September, but the increase at an annual rate of 1.5 million was
somewhat slower than early this year.

The lower rate of employment

expansion now appears to be more in line with growth in the labor force
and suggests little change in the unemployment rate in the next few
months.
Largest employment gains during the month were in State and
local government, mainly reflecting the hiring of teachers as the new
school year began.

In manufacturing, employment gains in September

were small and more selective than earlier.

Most of the increase was

in the machinery and ordnance industries while liquidation of steel
inventories held employment in primary metals at the reduced August
levels.

Construction employment failed to show any improvement.

- 9

NONFARM PAYROLL EMPLOYMENT
Annual Rates of Change
(Seasonally adjusted, millions of persons)
Industry

Total
Manufacturing
Construction
Trade
Finance & service
Government
Other 1/

Dec.'64
to Mar.'65

Sept. to
Dec.'64

June to
Sept.'65

Mar. to
June'65

1.7

1.6

3.1

3.0

.6
-.1
.2
.5
.4
.1

.8
-.4
.2
.3
.5
.1

.9
.2
1.0
.5
.4
.1

.7
.7
.5
.3
.7
.1

/ Mining, transportation and public utilities.

At 60.8 million in September, nonfarm employment was 2.4
million higher than a year ago but the rise in employment in the past
two quarters has slowed significantly.

The more moderate rate of ex-

pansion has been largely due to construction and trade.

Construction

employment has tended to drift downward since March reflecting some
declines in residential activity; gains in trade employment which were
unusually rapid between September 1964 and March 1965, have slackened
considerably and in recent months have been closer to the longer-run
trends in the industry.

The manufacturing rise has been smaller in the

past quarter in part because of recent reductions in output in steel
and related industries.

Hours and earnings in manufacturing.

The factory workweek

was unchanged in September at 40.9 hours, seasonally adjusted, and has
been relatively stable at these levels since March but was below the
very high first quarter average of 41.4 hours.

In primary metals

II - 10

and related industries the average workweek was curtailed somewhat in
September as steel inventory liquidation got underway.

But in the

transportation equipment industry, the workweek was lengthened and
overtime increased as new model production was accelerated.

In that

industry the workweek was longer than a year ago.
Average hourly earnings in manufacturing continued to advance moderately.

At $2.63 per hour in September earnings continued

moderately higher than a year earlier.

For the first nine months of 1965

average hourly earnings increased 3.2 per cent.

With the workweek

holding relatively steady, the contribution of overtime pay

to weekly

earnings has tended to become somewhat less important than earlier.
Average weekly earnings in September totaled $180, up 3.3 per cent from
a year ago.

For the first nine months this year the average increase

was 4.3 per cent.

Unit labor costs.

The recent course of unit labor costs in

manufacturing has been altered somewhat by upward revision in the total
employee compensation data.

As previously reported there had been a

downward drift since 1960 of about 3 per cent.

In contrast, the revised

data show little change with the index remaining close to 100 over the
whole period.

II -

LABOR COSTS PER UNIT OF OUTPUT
IN MANUFACTURING
(1957-59 = 100)

Years
1957
1958
1959
1960
1961
1962
1963
1964

NEW
Series

OLD
Series

98.7
102.2
99.7
100.7
100.4
100.4
99.7
99.6

99.0
102.0
99.5
100.4
100.0
99.7
99.0
97.8

Months

OLD
Series

98.9
99.5
99.1
99.8
99.8
99.6
98.8
99.8

96.7
97.1
96.9
97.1
97.2
96.9
96.7
97.5

1965 - Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.

Source:

NEW
Series

101.0

Bureau of the Census
Through August, both series showed no significant change

in unit labor costs this year.

A rise in September to 101 in the

new series was almost entirely attributed to the drop in steel output,
while manhours of work and payrolls in manufacturing showed little
change,

Usually differences in timing in declines in output and man-

hours, and the fact that many nonproduction workers are not laid off,
tend to cause an increase in costs when activity is curtailed.

similar rise occurred last year during the auto strike.
The unit labor cost index is derived from the Department of
Commerce series on employee compensation in manufacturing (wages and
salaries, and supplements to wages) and the FRB index on manufacturing
output.

The revision in total employee compensation was part of the

newly published national income and product accounts.

Although both

wages and salaries and supplements to wages (employer contributions
to public and private pensions and welfare funds) were revised upward,

- 12

the bulk of the change was in supplements.

Apparently employer

contributions to group insurance programs grew more rapidly in
recent years than had been previously estimated.

The output series was

not revised and thus all changes result from the revision in employee
compensation.
The statistical revision in the manufacturing wages and
salary component was relatively small and because it greatly overshadows the supplements to wages, the overall revision in employee
compensation was relatively minor.

Supplements have increased sharply

in recent years and in 1964 they accounted for 11 per cent of manufacturing employee conpensation as compared to only 6 per cent in 1950.
However, since 1963 the rate of increase in supplements has been
about the same as in wages and salaries and the proportion of supplements to total compensation has shown no further rise.

Personal income.

Personal income in September rose at a

$13.3 billion annual rate as a result of a $10.6 billion lump-sum
retroactive payment of the 7 per cent increase in old-age and
survivors insurance benefits and a $1 billion increase in military
pay rates.

Excluding these two special factors, personal income in

September was up $1.7 billion, annual rate, from August and was
6.4 per cent above a year earlier.

The $1.7 billion "regular" gain

was about the same as in the two previous months.

Private wages

and salaries increased $.8 billion in September, with small gains
being about equally divided among commodity-producing, distributive,
and service industries.
edged up further.

Dividends and personal interest income also

- 13

Without the retroactive OASI benefits, personal income in
October will be considerably lower than the $545 billion rate in September.

It, however, will be augmented by the increase in the regular

monthly OASI payments -- estimated at about $1.3 billion annual rate -and by the just-enacted higher pay scales for Federal civil service and

postal employees of $.6 billion annual rate.
Retail sales. Retail sales appear to have risen again in the
first two weeks of October, following a small decline in August and
In early October, sales of durable goods stores, which had

September.

been mainly responsible for the earlier decline, seem to have risen
moderately although a true reckoning of the recent course of seasonally
adjusted auto dealer sales is uncertain because of this year's shift
in model changeover dates.

Nondurable goods sales, which were relatively

stable at advanced levels during the third quarter, were up in the first
two weeks of October, with gains indicated for all major lines.
Unit sales of new domestic autos in the first 20 days of
October were indicated to be below the 8.9 million annual rate during
the summer but above the April-May levels.
Consumer credit.

Demands for consumer credit were a bit

stronger in September than in August, judging by early reports from
commercial banks.

Increases were reported for all major types of credit,

but the auto area experienced the heaviest demands, reflecting continued
high new car sales, and perhaps even more important, the changed mix of
old vs. new model sales.

With the later

introduction dates this year

- 14

the bulk of new car sales in September was 1965 models.

Consumers

buying the 1965's would be more likely, past experience shows, to use
credit than those purchasing the new models.

The latter group tradi-

tionally includes a high proportion of cash buyers.
The September increase in total instalment credit was less than
in the spring, and for the third quarter as a whole the increase was
below the $8 billion annual rate of the second quarter.
The August data on consumer loan delinquencies at commercial
banks, as reported by the ABA,present a somewhat less favorable picture
than earlier.

The total delinquency rate bounced up rather sharply

both on an unadjusted and a seasonally adjusted basis.

The biggest

increase came in auto loan delinquencies, particularly in the purchased
paper category, and in home appliance loans.

For home improvement loans,

on the other hand, the delinquency rate showed some improvement in
August.

Residential construction.

Private housing starts in September,

at a seasonally adjusted annual rate of 1,424,000 units, were unchanged
from the revised (upward) August level.

For the third quarter as a

whole, starts reached the lowest rate in several years.

Regionally,

third-quarter starts held to their second-quarter level only in the
South.

The average rate in the West -- which had changed little over

the preceding three quarters -- declined to the lowest point since

the current series began in 1959.
The immediate outlook appears to be for no significant improvement in starts, judging at least from building permits, which precede

- 15

most starts but do not always follow precisely the same pattern.
Permits declined by 5 per cent in September, reducing the third-quarter
average slightly to the lowest level in a number of years.

Both 1-

family and multifamily permits were lower in the third quarter.

PRIVATE HOUSING STARTS AND P1
ERMITS
3rd Qtr. 1965
(thousands of
units /

Per cent change 3rd Q '65 from:
3rd Qtr
2nd Qtr
965
1964
1!

Starts (total)

1,440

-7

- 3

Permits (total)

1,206

-2

- 5

1 family
2-or-more family

690
516

-2
-2

- 1
- 9

Northeast
North Central
South
West

247
332
373
254

12
16
-8
-4

+2
+14
- 5
-25

1/ Seasonally adjusted annual rate; preliminary.
Industry analysts are generally projecting some increase in
housing starts for next year.

At the high end of the range, members

of the National Association of Home Builders estimate an increase of
5 per cent.

The F. W. Dodge Company, on the other hand, anticipates

a smaller increase -- of 2 per cent -- and its outlook is about in

line with most trade opinion.

These trade estimates appear a bit higher

than a preliminary staff projection which suggests at best little change
in the number of starts.

The staff projection is based on econometric

and other analysis,which takes account of expected household formation
and related factors.

- 16

Sales of new nonfarm 1-family houses in August were somewhat
more active than a year earlier, and the inventory of unsold new homes
declined slightly further, according to the Census Bureau's monthly
sample survey.

The ratio of homes-for-sale to homes sold improved

again, and reached the lowest level (3.5 months) since the series began
nearly three years ago.

Partly reflecting upgrading, median prices

of homes sold and of homes-for-sale continued to show sharper year-overyear gains than in the same month a year earlier.
Livestocks prospects.

Recent livestock reports indicate

that improved meat supplies are in prospect for this quarter.

The

number of cattle on feed on October 1 was 7 per cent larger than a year
ago, and feeders' reported intentions of expanding marketings 5 per cent
from the fourth quarter of 1964 appear reasonable in the light of
distributions of weights and the time-on-feed of the inventory.

Broiler

production is now 11 per cent larger than a year ago and expanding.
Turkey production is 5 per cent larger.

Hog marketings, which this

year have averaged 8 per cent below a year earlier, are now rising
seasonally but they are still well below last fall.

Beginning of the

build-up phase in hog numbers this fall is indicated by farmers' reports
and by the

slowdown in sow slaughter, but pork supplies probably will

not increase appreciably until the second half of 1966.

The USDA,

citing the experience of previous hog cycles has warned producers against
overexpansion of production and a concomitant depression in prices.
New farm law.

The Food and Agriculture Act of 1965 now

awaiting the President's signature provides the framework for a far-

- 17

reaching and complex farm program covering the next four years.

Its

eight titles provide for stabilization programs covering feed grains,
wheat, rice, cotton, dairy products, and wool; for a cropland adjustment program; and among other things, for the use of projected yields
rather than historical average yields in crop program calculations.

The

Act gives the Secretary wide discretion in administering the programs.
A wheat program for 1966 is expected to be the first program announced
under authority of the new act.
The Act extends to cotton the policy already applied to feed
grains and wheat of stabilizing producer incomes through (1) price
support extended in two ways -- price-support loans at close to world
price levels, and supplementary payments based on specified percentages
of normal production, and (2) rental payments for acreage diverted
from production.
The cotton title spells out in detail the 1966 cotton program
and directs the Secretary to provide similar programs for 1967, 1968,
and 1969 crops.

On the 1966 crop:

(1) the loan rate for Middling 1-inch

is set at 21 cents, a little under the world price; (2) producers are
required to divert 12.5 per cent of acreage allotments and may divert
up to a total of 35 per cent at rental payments of about $50 per diverted
acre; and (3) price support payments are provided in an amount equal to
9.42 cents per pound multiplied by projected yield on 65 per cent of
the total allotment.

The blend price derived from these benefits will

probably range from 29.15 to producers making the mandatory diversion
only up to 36.07 to those making the maximum 35 per cent diversion.

II - 18
small national quota of 250,000 acres may be allocated in 1966 to producers
willing to forego all price support and to sell in the export market only.
The budget expenditure on the 1966 program is expected to be
about $100 million less than the $750 expenditure on cotton in 1964-65.
Payments to producers will be greatly increased but equalization payments to mills of about $400 million annually will be eliminated.
A producer referendum on marketing quotas and acreage allotments will be held on November 23, 1965.

If it should not be approved

by two-thirds of producers, price support loans only will be available
to producers planting within their allotment at the relatively low
levels of 50 per cent of parity or about 21 cents.
Other programs.

Voluntary feed grain and wheat programs

essentially like the 1965 programs are extended through 1969.
Act is also extended.

The Wool

For rice, provision is made for an acreage di-

version program if cuts in acreage allotments should be required within
the term of the Act.

The dairy program permits each of the 75 marketing

order milk sheds to adopt by referendum a Class I base plan which would
give Class I production quotas to producers.

The cropland adjustment

program is similar in many respects to the soil bank program.

The

administration of the program is left almost entirely to the Secretary
of Agriculture.
The USDA has estimated that the new programs will cost less
than the $4 billion annual outlay for price stabilization and foreign
assistance of recent years.

Undoubtedly weather and producer response

to these programs will be important determinants of the net expenditure.

II-c-i

10/26/65

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

EMPLOYMENT AND UNEMPLOYMENT

GROSS NATIONAL PRODUCT
IILLIONS OF DOLLARS
ANNUAL RATES

SEPT
60 1

u 3u

SQ-m

CURRENT DOLLARS

MILLIONS OF PERSONS, ESTAB BASIS
NONAGRICULTURAL EMPLOYMENT

Q-m 6769

TOTAL

6091

6--600
54

----

~~.0

SEPT
261

050

INDUSTRIAL AND RELATED

1-550

le .0001958 DOLLARS

1964

1962

1960

"l----"

---

o7.59.100-

PR CENT

1960

INDUSTRIAL PRODUCTION-I
195

23
500

__
---

I
I
UNEMPLOYMENT

1964

1962

SEPT 44

WORKWEEK AND LABOR COST INI MFG.

l"l

"""'""

AVERAGE WEEKLY HOURS'

HOURS

150
-EPT

SEPT

142.8 140

[v)

--PRODUCTION

wORKERS

S14130
TOTAL

38
120

1957.5910o

TOTAL UNIT LABOR COST

105
SEPT

MATERIALS

1010

1
110

100
ALL EMPLOYEES

_.,

1962

1960

I__I
1964

i1
n.11

1960

1962

IIIIIi I I I I 9 5

1964

PRICES

INDUSTRIAL PRODUCTION -II
1957-59.100

A L L

100

S I
SEPT
-- , riA an

19!7-59-100
NOT S A

CONSUMER

, , ,112
AUG
1100

/ 140
-CC

ONSUM ER GOODS -

5t4J-

196

1962

130

1964
1964

107

1397

----

/EQUIPMENT
TOTAL
1 YO

ITEms

SEPT

.J-

1960

ALL

,,,,,, I,, II

102

-C-2

10/26/65

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

NEW ORDERS AND H

BILLIONS OF DOLLARS
ANNUAL RATES
OIB 530

;;,,-50

NEW PLANT AND EQUIPMENT
EXPENDITURES,

TOTAL
..

1960

I l i ilil i,30
1964

1962

INVENTORY/SALES

RATIOS

MANUFACTURERS

.75

DISTRI BUTOR!

AUG 1 32

L- ^
NET CHANGE IN OUTSTANDING

10733
0

1960

1962

1964

1.25

1960

1962

J.L .~.~

1964

1.00

III - 1

DOMESTIC FINANCIAL SITUATION

Bank credit.

Bank credit expansion during the early weeks of

October was dominated by bank acquisitions of the Treasury's new issue
of March and June tax bills carrying full tax and loan credit.

Virtually

all of the $2 billion contraseasonal increase in earning assets at weekly
reporting members during the first two weeks of the month was accounted
for by purchases of Treasury securities and loans to Government security
dealers.

Government dealers added to their inventories of bills after

heavy official purchases late in September had depleted them.
As Treasury deposits are drawn down over the next few weeks
to cover the large seasonal Treasury cash deficit, bank holdings of
bills are also likely to decline, but perhaps less rapidly than was
anticipated earlier.

Indeed, New York banks added to their holdings of

bills the week after the financing.

Rapid increases in private deposits,

and a slowdown in loan demand from the late September rate, apparently
have moderated the need to reduce Treasury holdings.
Most other categories of loans and investments did not increase
materially in early October, after allowance for seasonal movements.
Finance company borrowings declined relatively sharply in New York, where
some banks have increased interest rates charged to these borrowers.
The deceleration in bank purchases of municipal and Federal agency
securities, observed in September, has apparently continued into October,
in contrast to very rapid growth during the summer.

The reduced rate of

purchases of municipals probably reflects the effect of the accelerated
reduction in bank liquidity so far this year.

III - 2

Business loan expansion at New York banks was stronger than
during similar previous periods and about seasonal at other banks in
early October.

Loans to metal and metal products firms showed only

roughly seasonal declines in outstandings with somewhat more than usual
liquidation at New York banks during the third week of October.

Loans to

trade firms, however, continued strong.
Business loan expansion so far in 1965 has accounted for almost
half of the increase in bank credit.

While such loans have been spread

over most industry categories, the durable goods industries have been
particularly heavy borrowers.

The metal and metal products industries,

for example, which accounted for only one-seventh of outstanding business
loans at weekly reporting banks at the end of 1964, were responsible for
over one-fourth of the increase in such loans over the first three quarters
of 1965.

With the elimination of their need to stockpile inventory in

anticipation of a strike, loan demands of these firms should moderate
somewhat.

But with the continued strong pace of the economy--especially

in the fixed investment area--business loan demand is likely to remain
vigorous and to account for a large proportion of the increase in total
bank credit over the coming months.
Bank deposits.

Rapid growth in demand and time deposits in the

first weeks of October suggests that the month may show another large
rate of increase in private bank deposits.

Data for the first weeks of

October imply a monthly seasonally adjusted annual rate of increase in
private demand deposits--and the money stock--which is likely to be
larger, although below the very high September rate; reductions in Government

III - 3

balances are continuing to contribute to the growth in private demand
balances.

For the first nine months of the year, demand deposits have

increased at a 3.5 per cent annual rate, and the money supply has expanded
at a 3.8 per cent rate.
Time and savings deposits are expected to show a rate of expansion
near the July-August average of 18.5 per cent.

Although savings deposits

have accounted for most of the growth, continued large sales of CD's-especially in New York--have contributed to the increase.

By mid-October,

total outstanding CD's had regained their pre-tax date high.

Reflecting

somewhat lower yields on other short-term securities and high rates of
inflows of demand and savings deposits.

CD offering rates at New York

banks have eased somewhat since late September.
U.S. Government deposits at banks, reflecting the tax bill
financing, rose around the middle of the month by enough to offset
reductions in these balances in late September and early October.

High

rates of expenditures are expected to reduce these balances substantially
through mid-November.

On a seasonally adjusted basis, a decline of some-

what over a billion dollars is expected in November.

From the high week

in October to the low week in November, the actual reduction is expected
to be about $3 billion.

This decline should contribute to expansion in

private deposits.
U.S. Government securities market.

Yields have risen recently

in all maturity sectors of the U.S. Government securities market.

The

increase in Treasury bond yields since mid-October has generally offset
the declines earlier in the month and these yields are currently at or

III - 4

close to 1965 highs.

Treasury bonds have continued to be dominated by

trading among market professionals with investment activity remaining light
The general tone of the

on both buying and selling sides of the market.

market has been one of caution and sensitivity to news or rumors which
might suggest further acceleration in the pace of economic activity or
tightening of monetary policy.
Treasury bill rates have inched up since about mid-October
despite fairly sizable investment demand from corporations and to a lesser
extent from state funds.

The prospect of further additions to the bill

supply by the Treasury later this fall as well as continuing bank sales
distribution of tax bills auctioned earlier this month have exerted a
dampening influence on the market.

YIELDS ON U.S. GOVERNMENT SECURITIES
(Per Cent)

Date
(closin bids)

3-month
bills

6-month
bills

3 years

5 years

10 years

20 years

1965
Highs
Lows
1965
July
Sept.
Oct.
Oct.

28
29
13
26

4.05
3.76

4.21
3.81

4.36
4.00

4.37
4.08

4.38
4.17

4.34
4.17

3.81
4.05
4.01
4.05

3.88
4.21
4.18
4.18

4.09
4.35
4.29
4.35

4.15
4.34
4.30
4.37

4.20
4.36
4.30
4.38

4.21
4.34
4.30
4.33

In the first two statement weeks of Fovember, the System is
likely to be an active buyer of bills in view of the need to supply about
$800 million of reserves in that period.

Dealers also anticipate some

III - 5

demand from holders of maturing issues in the November refunding.

These

factors should tend to keep upward pressures off bill rates through the
early days of November.

But over a longer time span the sustainability

of current yield levels will depend on the strength of credit demands
and of continuing corporate interest in bills.
The Treasury is expected to announce the terms of its November
refunding on October 27.

The market generally expects a short-term issue

in all likelihood an 18-month note, to refund the $3.3 billion of publiclyheld maturing debt.

The Treasury will have to return to the market soon

after the completion of the November refunding to raise a substantial
amount of cash.

On the basis of earlier indications by Treasury officials,

the market anticipates that the Treasury will need some $3.0 billion.
However, the amount could be reduced to $2.5 billion because the Treasury
balance will be increased by $375 million on December 1 when payment is
due for the recently announced FNMA issue of participation certificates.
Corporate and municipal bond markets.

Yields on corporate

bonds have remained generally stable in October, as the volume of new
publicly-offered issues has dropped to less than half the September total.
On the other hand, yields on State and local Government bonds rose again
last week, when investor interest in the very large weekly calendar of
new offerings proved to be disappointing.

Earlier in the month, with

new issue volume unusually light, yields on municipals, like those on
corporates, had showed a stabilizing tendency.
At present levels, yields on seasoned corporate bonds of top
quality are the highest they have been since February 1960, only 4 basis

111 - 6

points below the post-World War II high reached earlier that year.

Yields

on top quality municipals have moved up to the levels that prevailed prior
to the Regulation Q change in early 1962.

Since yields on U.S. Treasury

midsummer than those on corporate issues,

bonds have risen more since

the yield spread between the two markets has narrowed somewhat.

However,

the spread between yields on long-term Government and top-quality seasoned
corporate issues remains substantially wider than it had been during most
of the preceding two and one-half years.

BOND YIELDS
Corporate
Aaa
New

Sea soned

State and local government
Bond buyer
Moos
Moody's
(mixed qualities)

Post-war
Previous High

5.13(9/18/59)

4.61 (1/29/60

3.65(9/24/59)

3.81(9/17/59)

1965
High
Low

4.71(8/27)
4.33(1/29)

4.57 (10/22)
4.41 (3/12)

3.31(10/21)
2.94(2/11)

3.04(2/11)

4.56
--1/
--1/
-- 1/

4.48
4.53
4.57
4.57

3.16
3.31
3.31
3.31

3.25
3.41
3.38
3.40

Week
July
Oct.
Oct.
Oct.

ending:
23
1
15
22

3.41(10/7)

1/ No representative issues offered.
In the corporate market, public offerings of only $300 million
during October were well below the 1965 monthly average of $462 million.
Reflecting this reduction in supply, underwriters experienced little
difficulty in distributing most new issues at prevailing prices, and
unsold syndicate balances are low.

Adding to the technical strength

of the market is the fact that the immediate calendar of scheduled publicofferings remains a bit light.

111 - 7

In the municipal market more than half of October's $800 million
total of new offerings was concentrated in the week of October 18-22.
With new issue volume unusually low during the two preceding weeks, dealers
had been able to reduce their advertised inventories of unsold municipal
securities by nearly $200 million to less than $600 million--although not
without some further price concessions.

But less than half of last week's

large volume of competitive offerings has been distributed, and the general
tone of the market has weakened again.

While the supply of new offerings is

light in the current week, volume for November is likely to pick up as
the period progresses and--if another block of public housing bonds is
offered within the month--may ultimately total nearly as much as in October.

BOND OFFERINGS- 1
(In millions of dollars)

Corporate
Private

Public

offerings
1965 e/

1964

placements
1965 e/

1964

State & local govt.

1965 e/

1964

Jan.-Oct. average

462

327

649

526

945

907

August
September
October

369
640
300

183
376
181

438
700
700

453
693
642

750
1,000
800

799
920
852

Includes refundings--data are gross proceeds for corporate offerings
and principal amounts for State and local government issues.

Mortgage markets.

Secondary-market operations of FNMA in recent

weeks continue to suggest some lessening of ease in home mortgage markets.
In the four-week period ending October 14, there were further increases
in offerings of Federally-underwritten mortgages to FNMA as well as in

III - 8

purchases by FNMA, reflecting in part efforts by some mortgage companies
to liquidate heavily-warehoused inventories.

For the third quarter as a

whole, FNMA recorded the largest quarterly purchase volume in 3-1/2 years.
Another sign of less ease during September was an additional
slight increase in secondary-market discounts on certain FHA-insured newhome loans.

FHA reports about contract rates on conventional first

mortgages, however, continued to show averages of 5.80 per cent on newhome loans and 5.90 per cent on existing-home loans.
Outstanding mortgage debt reached about $333 billion at the end
of the third quarter.

The seasonally adjusted annual rate of expansion

has continued to approximate $30 billion, with the year-over-year pace
of growth--the smallest in some time--less than 10 per cent.

Commercial

banks were the only major private lender with somewhat larger net mortgage
acquisitions in the third quarter than in the same period of last year.
Net takings by savings and loan associations were down the most.
Mortgage commitments of reporting savings banks, savings and
loan associations, and life insurance companies suggest that a continued
large volume of such lending is in prospect.

Thus, at the end of August

outstanding commitments for these three types of institutions were about
8 per cent above the year-earlier level.

This is a record backlog and

is said to be one factor making many mortgage lenders more cautious about
entering into additional loan arrangements.
On October 21, the Federal National Mortgage Association
announced plans to offer on November 16 an additional $375 million in
participation certificates backed by a pool of Federally-owned mortgages.

III - 9

The issue, to be dated December 1, will consist of 15 annual serial
maturities of $25 million each, falling due from 1966 to 1980.
Judging from results of two earlier issues, most of the $375
million in ENMA participation certificates will find their way into the
hands of investors who do not specialize in mortgage lending.

At the end

of September, FNMA's outstanding participation certificates were reported
to be held chiefly by others than banks, savings and loan associations,
and life insurance companies.

These four major types of lenders, which

own four-fifths of all privately-held mortgage debt, held only a fourth
of the $525 million of FNMA certificates issued in July and a third of
the $300 million issued last November.

State and local pension funds

held 10 and 8 per cent of the two issues respectively, and fire and
casualty companies 11 and 6 per cent.

Miscellaneous holders on which

no break-down is available accounted for half of the July issue and for
nearly half of the November issue.

Stock market.

Common stock prices, as measured by Standard

and Poor's composite index of 500 stocks, have continued to advance to
new high levels this month in very heavy trading.

At the close on

October 26, this index registered 92.20, about 2 per cent above its May
peak and 13 per cent above its summer low of 81.60 (on June 28).

Since

October 1, the volume of trading on the NYSE has averaged 7.9 million
shares per day, 0.5 million shares above the average daily volume in
September and 3.1 million shares higher than that of October a year ago.
Moreover, on 9 of the last 12 trading days, activity has exceeded 8.0

III - 10

million shares.

Much of this expansion in activity since summer seems to

have been concentrated in so-called glamour stocks and low-priced speculative issues.
Stock price changes continue to vary greatly from one industry
group to another.

Of the group indexes comprising the Standard and Poor's

composite, 44 are now above their early May levels but 38 remain below.
Indexes for radio-TV manufacturers, electronics, air transport, aerospace,
and machine tools have posted the greatest gains (ranging from 17 per cent
up to 52 per cent) while so-called defensive groups, such as utilities,
retail, food-related and many other consumer soft goods industries, still
lag well behind their spring levels.
Through September, despite this buoyant and active character of
the market, there was no significant increase in stock buying on credit.
Such credit, as measured by debits in margin accounts for a sample of
margin customers, remained unchanged in September, although customers' net
debit balances, as reported by NYSE member firms, rose $108 million.

The

latter figure includes temporary clearing debits in cash accounts, which
appear to have expanded with the sharp increase in transactions volume
in the closing week.

m-C-1

10/26/65

FINANCIAL DEVELOPMENTS - UNITED STATES
BANK RESERVES
BILLIONS Of DOLLAR

LIQUID ASSETS HELD BY PUBLIC

TT
"

BILLIONS OF DOLLARS

SEPT

...

RATIO SCALE

MONEY SUPPLY-

... 2

S21

,.160

TO AL

SAVINGS

1-. 181

SEPT 164 3

SEPT

INSTITUTIONS

SEPT 99 L 100

1
BORROWED
\

COMMERCIAL BANK TIME DEPOSITS

0"-''-

,SA
1960

1964

1962

BANK ASSETS

ISEPT

1962

i 65

,i,

1964

MARKET YIELDS - U.S. GOVT. SEC.
200

SEPT186 2

BILLIONS OF DOLLARS
SEASONALLY

BONDS

SHORT TERM SEC.-

SEPT53

EXCESS

1960

SAVINGS
A N D

11111111111 5.0

PR CENT

ADJUSTED

RATIO SCALE

TOTAL LOANS

51 0

LESS REAL ESTATECORP0RATE4.0

2
-03 92

SEPT 90 9

5-YEAR BONDS

U.S. GOVT. SECURTIES

70'

DISCOUNT RATE
TO3TAL.0

--60
SEPT

OTHER SECURITIES
AND REAL ESTATE LOANS

----

. ...........
1960

1964

1962

1960

56 2

Int1

1 0

11111111111111.2.0

1964

1962

STOCK MARKET

MARKET YIELDS-BONDS & MORTGAGES
PER CENT

-MONTH BILLS

PRICES AND CREDIT

BILLIONS OF DOLLARS

1 11941-43:1'0

100

RATIO SCALE

NEW HOME FIRST MORTGAGES:

CONVENTIONAL

YEAR

SEPT 580. 6
SET

- FHA-INS URED

J -

BONDS:
BONDS

NEW

_ISEPT 894

COMMON
STOCK PRICES

7-\

5 4-

--.-

SCORPORAT E A

775
SEPT 467
SEPT 430 4

20-YEAR U.S. GOVT.
I
I
I

90
80

SEPT70

30-YEARI
--

70
60

6
/"'

f^'

TOTAL

IV - 1

INTERNATIONAL DEVELOPMENTS

U.S. balance of payments.

The U.S. payments deficit on regular

transactions in September was about $450 million, unadjusted, and the
deficit for the third quarter is now estimated at $700 million after
seasonal adjustment.

This latter figure is about double the rate of

deficit in the first half, and also above earlier indications for the
third quarter.

On the official settlements basis there was only a small

surplus, estimated at less than $100 million for the quarter after seasonal
adjustment, despite very large inflows of foreign liquid funds in JulyAugust.

These figures will not be released until mid-November.
The deficit on regular transactions for the third quarter represented

a deterioration of about $800 million from the surplus achieved in the
second quarter as a result of temporary factors.

Detailed data available

at present explain only a relatively small part of this shift.
In fact, the trade account shows an improvement of about $250 million
from the second quarter, despite the fact that the second-quarter trade
surplus had been swollen by net exports delayed by the earlier port strike.
Merchandise exports in the third quarter averaged $27.2 billion at an
annual rate, up slightly from the swollen second-quarter rate, and up
7 per cent from a year earlier.

Imports, although up 12 per cent from a

year earlier, were below their second-quarter rate; in the third quarter
they were about $20.9 billion (annual rate) after rough adjustment for a
change in statistical coverage.
rate of $6-1/4 billion.

The trade surplus thus rose to an annual

IV - 2

Movements of bank credit and new security issues do explain some
of the third-quarter deterioration, as was to have been expected since
the second-quarter reflows of bank credit had been exceptionally large
and new issues had been small.
Net liquidation of bank*reported claims in the third quarter,
amounting to $270 million, was substantially less than in the second,
and much of it may have reflected the usual seasonal reflows.

Outflows

on new foreign security issues in the third quarter, seasonally adjusted,
appear to have been about $400 million, or close to twice the secondquarter figure.

These -two items show adverse shifts from the second quarter totaling about $1/2 billion, seasonally adjusted.

While this more than offsets the

$1/4 billion improvement on trade, it still leaves more than $1/2 billion of
deterioration unexplained.
Current estimates imply some deterioration on travel, and perhaps
also a decline in investment income.

It seems likely, too, that the reflow

of liquid funds was substantially smaller than in the second quarter.

had been thought, however, that such changes as these would be partly offset by a falling off in the net outflow on direct investment (for which no
data are yet available).

Present information simply is inadequate to

explain the third-quarter balance of payments.
The cumulated "regular transactions" deficit for the first three
quarters of 1965 is nearly $1.4 billion, i.e. an annual rate of about
$1.8 billion.

IV - 3

On the "official settlements" basis, the third quarter shows a
small seasonally adjusted surplus of about $50 million, reflecting
large inflows of foreign private balances.

For the year to date the

deficit on this basis is about $400 million.

in the third quarter, infllws

of foreign commercial funds, concentrated in July and August, were
particularly large.

In September, recovery of sterling was among the

factors checking such inflows.
In appraising the significance of the wide difference between the
two measures of the U.S. deficit in the third quarter, it should be borne
in mind that during that period the Italian commercial banks put several
hundred million dollars, net, into the Euro-dollar market, acquiring the
dollars from the Bank of Italy under swap arrangements.

Indirectly, some

of the increase in U.S. liabilities to commercial banks abroad reflected
this shift of ownership of dollars from the central bank to commercial
banks.
On either system of measurement the balances both in the third
quarter and in the preceding quarter have been adversely affected by
British official actions to liquefy their holdings of American securities.
While the proceeds of sales have not been taken into published official
U.K. reserves, probably a large part has increased U.S. liquid liabilities
to foreign official accounts.

In each of the last two quarters, net

British sales (probably mainly official) of U.S. corporate stocks and
bonds and U.S. Government agency bonds amounted to about $200 million.

IV - 4

Payments balances of other countries.

A sharp improvement

occurred in September in the British balance of payments, as measured
by the change in official reserves, IMF account, and liabilities to
other central banks.

Published reserves rose $171 million after fall-

ing $420 million in the three preceding months.

A better measure of

the drain on British reserves and related accounts in June-August is a
figure of about $1.0 billion (confidential data received through BIS).
The August-to-September shift of several hundred million dollars
in the U.K. monthly balance of payments seems to have had part of its
counterpart in the increase of about $400 million in the U.S. deficit
on the "official settlements" basis between August and September.

addition, the reserves of nine Continental European countries (adjusted
for related accounts) increased somewhat less in September than they
had in August ($25 million as against $150+ million on the basis of
official settlements accounts only, or $250+ million as against $300+
million if increases in the net external short-term assets of commercial
banks are also counted as settlement items).

None of the figures in

these paragraphs is adjusted for seasonal variation, and the usual caveats
against giving undue significance to monthly data in this field should be
borne in mind.
Quarterly data indicate that most of the nine Continental
European countries covered (which include the largest reserve gainers
of the recent past) had smaller balance-of-payments surpluses in the
third quarter this year than they had a year earlier (as measured in

IV - 5
PAYMENTS BALANCES MEASURED BY CHANGES IN
NET OFFICIAL RESERVES AND COMMERCIAL BANKS' POSITIONS 1/
(quarterly averages in millions of dollars)

Third Quarter
1964

I
France

Year
1964

January-September
1964
1965

1965

2/ a/ 148

181

2/a/ 264

181

199

-256

-130

-43

143

-2

-47

Germany

Netherlands

111

Belgium

a/ 30

843

535

458

110

201

780
(-63)

739
(204)

707
(249)

399
(289)

486
(285)

-164

-49

-94

-38

Spain 5/

197

105

Sweden

-8

256

-55

126

201

772

995

652

525

687

Italy
Total EEC
(Excluding Italy)
Switzerland 3/
Austria 4/

Total these four
Grand total for nine

periods, but
1/ The data available are not strictly comparable for all
the inconsistencies appear to be minor. Confidential BIS data ahown for
Group-of-ten countries differ somewhat from published data.
2/ Includes advance debt repayment to the United States of $179 million.
3/ Balances measured by changes in net official reserves only. Thus,
unlike the balances of the other countries, these balances include the
effect on official reserves of outflows or inflows of commercial bank funds.

4/ Official reserves are "gross" instead of "net."
5/ Official reserves are "gross" instead of "net." Also, the lack of
commercial bank balances has the same effect on payments as in the case
of Switzerland.
a/ Approximate, due to the lack of September data for commercial banks.

IVthe manner indicated by the table).

exception:

6
Italy was a very important

the lag in Italian imports, as compared with its rapidly

rising exports, has contributed to an increased surplus, and Italy's
seasonally favorable tourist receipts were even more favorable this
year than last.
For Germany, unlike Italy, the third quarter is normally not a
favorable one.

The increase in the German deficit since the third

quarter of 1964 indicates, however, that the underlying position of
Germany's balance of payments has shifted into deficit;

this is the

result mainly of a large and continuous rise in German imports since
1963.

In September, the German deficit was reduced considerably, and in

recent weeks there have been suggestions that very high German bond yields
are tending to pull capital into Germany.
A relatively recent reduction in France's monthly surpluses is not
fully apparent from the figures in the table.

Contrary to experience in

1964, French monthly surpluses fell off markedly in August and September
this year, and the exchange rate has remained below the upper support
limit during most of October.
Deterioration in the payments balances of the Netherlands,
Switzerland, Sweden, and Spain over the past year reflects strong internal
demand, and in the case of Spain a rise in prices of the order of 15 per
cent.
Outside Europe, Canada's balance of payments, which had been
moving toward smaller surpluses, strengthened in the third quarter of

IV - 7

1965 as a result of wheat sales to Russia and Canadian borrowing in
the United States.

Japan's balance of payments, too, shows recent

improvement, with a downtrend in reserves giving way to small increases;
strong Japanese exports have generated a current account surplus exceeding the unusual Japanese deficit on capital account this year.

-y-C-1

10/26/65

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED

U.S. LONG-TERM PRIVATE CAP. OUTFLOWS
5

BILLIONS OF DOLLARS
ANNUAL RATES

PRIV. CAP. OUTFLOWS - BANK REPT. CLAI AS
A

ISHORT-TERM

6 00

00
277

0
DIRECT INVESTMENT

00
-NEW

ISSUES

LONG-TERM

e-m-

1________________

OTHER LONG -TERM, NET
__________________L1960

1962

1964

1960

1962

M 70-

1964

0
00

AAPPENDIX

AUTHORITATIVE STATEMENT OF FRENCH VIEWS ON
INTERNATIONAL MONETARY PROBLEMS

(Statement by Finance Minister Giscard d'Estaing before
the National Assembly on October 13, 1965 in defense of
Article 62 of the 1966 Finance Bill which would authorize
the government to agree to a 25 per cent increase in
Fund quotas.)

In any case, Article 62 would certainly have called for some
explanations; this has become even more important after the remarks of
the Rapporteur General, which were very interesting even though he concluded against approval of the Article, whereas the Government will ask
you to adopt it.
What is our national line of conduct in the international
monetary field? It involves two elements which should be kept in mind
simultaneously; the continuation of international monetary cooperation
and the reform of the world monetary system. Our action is constantly
inspired by these two concerns.
For example, last year at about this same time, France participated in several operations under the heading of international monetary
cooperation, in particular when Great Britain was faced with special
difficulties. Last spring, we confirmed these acts of international
monetary cooperation by participating in the operation to make additional
resources available to the International Monetary Fund for the benefit
of Great Britain.
At the same time, we insist on the necessity of a reform of
the world monetary system. In this respect, what is the essential
criticism we have made of that system, and does it or not justify
Mr. Vallon's observations?
We criticize the world monetary system for offering exceptional
advantages to reserve currency countries in balance of payments deficit,
because they can finance their deficits through the holding of their
currencies by other countries.
Thus for nearly ten years the U.S. deficit has been financed
through the holding of large dollar assets by a certain number of
countries, including France.

A- 2

The criticism is justified. On this point, as you certainly
noted, there was a change of tone and attitude during the most recent
discussions in the International Monetary Fund. No one continued to
argue that the international monetary system, such as it has been
functioning, should be prolonged. On the contrary, everyone was in
agreement on the necessity of a reform. The reserve currency countries
specifically confirmed that they had now realized the necessity of restoring the equilibrium of their balances of payments prior to any new
action.
The significance of the result obtained should not be minimized.
Whereas proposals for reform of the international monetary system were
looked on as a kind of scandal three years ago, speakers representing the
principal countries have now recognized the necessity of such reform.
Let us take solemn note of the point.
During the summer of 1964 the ten countries which signed the,
Paris Agreements nearly four years ago jointly drew up several conclusions
after one year of study.
The first of these conclusions noted the timeliness of considering the reform of the world monetary system. The second related to
the putting into effect of a system of multilateral surveillance of the
financial facilities which countries grant one another. The third provided for a moderate increase in the quotas of the International
Monetary Fund.

On the first point, the recognition by the ten countries of
the necessity of actively undertaking preliminary studies with regard
to reform of the international monetary system clearly represented an
appreciable success for the theses which our country had defended.
The second point, the putting into effect of a system for surveillance of the financial facilities which countries grant one another,
was also a very considerable result, for you know that during 1962 and
1963 the countries in deficit--the United States and Great Britain--had

multiplied the most ingenious and most clandestine systems to create for
themselves complementary facilities in the form of what was called
swaps or Roosa bonds, the latter being named after their creator.
result, it was impossible for the world monetary community to have
clear idea of the public, semi-public, or other assistance granted
these various forms.

either
As a
a
under

Since last summer multilateral surveillance exists, which means
that each country is obliged to indicate the nature and extent of the

A - 3

assistance it is receiving, and thus world opinion can bring to bear its
observations, its criticisms, or its doubts with respect thereto.
On the third point, namely the increase in the quotas of the
International Monetary Fund, there is to my mind some contradiction
between wanting to decrease the role of the reserve currencies and
wanting to oppose the increase of IMF quotas.
In this matter we must make a choice. From the moment when
certain countries are in balance of payments deficit--and what country
has not been, is not, or will not be in temporary deficit?--these
countries must be able to call upon some assistance. This assistance
cannot be a questionable facility like that enjoyed by the reserve
currency countries when other countries accumulate balances in their
currencies. If facilities of this nature are denied, coordinated
mechanisms for compensating deficits must be allowed to operate,
specifically through the International Monetary Fund.
During the above-mentioned discussion among the Ten, our
British and American partners clearly had in mind a considerable increase in quotas; they no doubt had the idea of creating by that device
large facilities that would make it possible for them to get on top of
their difficulties once and for all, and at the same time to escape the
discipline of restoring equilibrium in their balances of payments.
In agreement with our European partners, who in this matter
follow the same line of thought and action as we, we asked that the
increase be moderate. As a matter of fact, as of that time the quotas
of the International Monetary Fund had not been raised for several
years, even though world trade had grown and transactions had increased.
It was thus normal to bring quotas into line with actuality.
This is why we accepted a 25 percent increase in IMF quotas,
which was of the same order of magnitude as the evolution of world trade
and payments during the same period. This decision having been taken,
the moment arrived to put it into effect.
The Bretton Woods Agreements provide for payment of one-fourth
of quotas in gold and three-fourths in currency, The remarks of the
Rapporteur General are very pertinent in this respect. As far as we are
concerned, we have been intending to pay one-fourth in gold and threefourths in currency--that is, in francs. For the reserve currency
countries, in particular the United States, the problem presents itself
in the following fashion. The United States never contested that it
would have to pay its own share one-fourth in gold and three-fourths in

A-

its own currency, but it pointed out that with all countries increasing
their quotas, certain among them, in order to get the necessary gold,
would seek the conversion of dollars into gold, and by this fact the
United States would be subjected to an additional drain on its reserves.
There is thus no refusal on the part of the United States to
subscribe its own quota increase, but rather an effort to mitigate the
indirect effect flowing from the requirements of other countries for
gold to finance the increases in their quotas. In this connection, we
made it very clear from the beginning that we did not intend to ask for
the conversion of dollars, but that we would use gold held by our own
central bank.
The truth is that the device invented to offset these supplementary effects on the United States is open to severe criticism both
from the technical viewpoint and as a matter of simple good sense, for
it consists--I shall not go into detail--of counting the same gold
twice, which, after all, is not a model of,the best accounting practices.
Finally, from the viewpoint of world monetary policy, the
device is an absurdity, since the reserve currency countries, after
having explained that their currencies are as good as gold, when confronted with such conversions into gold, invent devices, low tricks
which diminish very greatly the significance of their affirmations.
Thus, to mark our disapproval, and in agreement with our franc
area partners, we voted against this device. Politically speaking, this
is the first time within the International Monetary Fund that the member
countries of the franc area have registered a negative vote on question
of this degree of importance.
This minority vote having been registered, the problem now is
to decide whether or not we should increase our IMF quota, in conformity
with the decision adopted by the majority.
After having considered the matter, the Government decided that
the French quota should be increased for the following reasons.
First, this increase is consistent with the evolution of the
position of our country. Since the role of France in international
financial and economic life has increased very appreciably in recent
years, it would thus be abnormal that the position of our country in an
international institution should be diminished because we did not keep
pace with the average progression of others.

A- 5
In the second place, whatever may be the absence of memory
which most frequently governs relationships among nations, our country
cannot forget the large appeals which it made in The past to international
monetary solidarity, at a time when, certainly, the present majority did
not control the Government, but when, nevertheless, as a nation, we benefited from the advantages of that cooperation.
It would not be appropriate, I think, that in a question of
this nature such a consideration should be entirely absent from our
memory.
Third, it is important to demonstrate by our attitude that
the reforms sought by France and with which she is progressively
associating an increasing number of countries, does not in our mind
exclude international cooperation.
The type of reform we are trying to obtain will preserve
international monetary cooperation and will accord their just place
to the institutions for such cooperation, that is, will very precisely
define their functions. In addition, the reform will involve an overhauling of the instruments of the world monetary system.
If therefore the Government asks you to adopt Article 62 it
does this, if I may say so, in the perspective of the reform towards
which we are moving. There will still be temporary balance of payments
deficits which will have to be financed under normal conditions, in
accordance with the original text of the Bretton Woods Agreements,
that is, by recourse to the resources of the International Monetary Fund.
On the other hand, the problem of reserve currencies and the
creation of international liquidity is an entirely different one, which
clearly must be dealt with outside of the institutions of the International
Monetary Fund. If the attention you have devoted to this problem and the
vote of the Finance Committee indicate a belief that expanding the
operations of the International Monetary Fund will not bring about a
reform of the world monetary system, the Government very willingly gives
you its agreement as to the sense of such a vote.
It is, however, essential to maintain international monetary
cooperation within the context of any reform. That is why the
Government invites you to adopt Article 62.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 2, 1965 : Greenbook

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