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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

November 15,
By the Staff
Board of Governors
of the Federal Reserve System

1972

TABLE OF CONTENTS

Section

Page

DOMESTIC NONFINANCIAL SCENE

I
. .
. .
. * * * * ..
Summary and GNP outlook, ......
7
..
.*
.* .
*
.
. .
Industrial production..
*. .
. 8
.
.
.
. .
Retail sales . . . .
10
* *
* * * * * *
Unit sales of consumer durables. * * .
.- 11
* * * * * *
* . .*
*. .
*. .
Consumer credit. . * * * * .
.
..- 13
Census consumer purchase and income expectations . . ..
*
e . -16
.
Anticipated plant and equipment spending ,.*. .
.* *17
,
. . a.
.*
. ..0
.*
Cyclical indicators. .. . ..
.
.- 17
a
.
....
.
.
.
.
.
.
Construction and real estate
.
*
.-21
o
.
.
.
a
.
..
.
.
o
Manufacturers' orders and shipments.
* * * -22
q * * * q **
* * *
* * *
Inventories, * * * * * * *
.- 23
. . .. a
.a
a. a a a .
.
. . a a
Labor market .
.
24
. ..*
a.
.
. . . . .
Unemployment and labor force . ,
.25
. a a a a ,*
. . . . . . . .. . . . .a . . . .
.
Earnings
. . -26
.. * 4 a
. . . *
*
Collective bargaining. .. * *..
. . *28-*
.. 0 .
, . . . .
.
.
Wholesale prices . . . . .
,-29
. • a 9
.
. a * ..a
. . a*
.
Consumer prices.
. .4 .* . .- 31
.
.
.
*.
*
.
Agricultural developments. .
II

DOMESTIC FINANCIAL SITUATION
.
a.
..
Summary and outlook. ..
. . . . . .
.
Monetary aggregates. . .
. *
Bank credit, . . . . ...
a, * , a ,
Short-term interest rates.
. .
Nonbank financial institutions .
..
.a.
Mortgage market, .. ,
.
.
Long-term security markets . .
. . . . . .
Federal finance. ..

a.
.
. ..
. .
.
a .
*
. .
.
. .. a
. . . . .
,
.*.

.
a .- 1
a aa
4
. . * . . . . .
7
* a a a .a * .
a .a. . . . . ,-10
*.. -12
* * *
* .
.-14
.
. a.
a
.*16
. . . .** * .a
.aa. .-21
. . .a . .

III

INTERNATIONAL DEVELOPMENTS
. .
. * . .
Summary and outlook.
Foreign exchange and Euro-dollar markets
.a *
. .
..
Balance of payments. ..
. *.
.
.
U. S. Foreign trade. . * .
The short-term outlook
for the major industrial countries .

* *
. . . . . * * * *
.a * ..
.
. . . . . a
* * .* a*
.
. *.
.*.
. *.
.
. .
*

* * * a.

. a.

1
2
6
7

. -10

APPENDIX A
The wage/price

freeze in

the United Kingdom.

. . . . .

. ..

a . -A-1

DOMESTIC NONFINANCIAL
SCENE

November 11, 1972
I --

T - 1

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

Latest Data-1972
Release
Period
Date
Data

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

Civilian labor force
Unemployment rate
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufac turing
Private nonfarm:
Average weekly hours (hours)
Hourly earnings ($)
Output per manhour (1967=100)
Compensation per manhour (1967=100)
Unit labor cost (1967=100)
Manufacturing:
Average weekly hours (hours)
Unit labor cost (1967=100)

Oct.
Oct.
Oct.
Oct.
Oct.

11/3
11/3
11/3
11/3
11/3

87.3
73.5
19.1
54.3

5.0
8.0
3.9

Oct.
Oct.

QIII
QIII
QIII

11/3
11/3
11/3
11/3
11/3

37.3
3.72
113.2
142.2
125.6

37.31/
9.8
3.7
4.2
0.5

I/
37.21 37.012.2
6.6
4.3
5.7
1.3

Oct.
Sept.

11/3
40.7
10/27 120.5

40.71/
3.0

40.6
1.7

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

Oct.
Oct.
Oct.
Oct.
Oct.

11/15 116.7
11/15 124.9
11/15 106.2
11/15 80.0
11/15 119.6

10.4
9.7
21.9
4.5
8.1

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

Oct.
Oct.
Oct.

11/2
11/2
11/2

0.9
-1.1
-1.0

Consumer prices (1967=100)
Food
Commodities except food
Services2/

Sept.
Sept.
Sept.
Sept.

10/20 126.2
10/20 124.7
10/20 120.4
10/20 134.1

Sept.

10/17 945.7

Materials

Personal income ($ bil.)

5.5

120.5
118.8
124.8

3.1

5.5 ' /

F.3

3.7

5.51-'
4.8
6.0
4.4

9.8

3.0
5.8-/
3.8
3.5
3.9

39.91
3.3

5.6
9.6

9.3
7.1
8.1
5.7
12.2

4.0
1.9
8.5

4.9
3.3
8.9

9.9

8.4

9.5
16.1

(Not at Annual Rates)
Plant & equipment expen. ($ bil.)
Mfrs. new orders dur. goods ($ bil.)
Capital goods industries:

Nondefense
Defense

1973
Sept.
Sept.
Sept.
Sept.

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

98.6
36.8
11.7
9.4
2.3

Sept.
Sept.
Sept.

11/14
11/2
11/14

1.50
1.66
1.34

1.49 11/
1.66-',

1.521
1. 69

1.321'

/
1.36-

1.821.38-

Sept.

11/2

.874

.894-

.898-

.958

10.7

3.0
9.3
2.5

50.7

3.3
-3.8
2.3
-22.9

24.1
28.7
26.4
39.1

Inventories to sales ratio:
Manufacturing and trade, total

Manufacturing
Trade
Ratio:

1. 60 ;

durable goods inventories to
unfilled orders

10.8
2.8
3.8
Oct.
11/14 38.8
Retail sales, total ($ bil.)
2.4
3.2
11.8
10.2
Oct.
11/14
GAAF
3/
-4.1
0.8
1.3
Oct.
11/6 11.29
Auto sales, total (mil. units)Oct.
9.83
0.0
-0.2
-3.7
Domestic models
11/3
Oct.
11/6
-6.4
'6.6 13.2
1.46
Foreign models
31
Sept.
10/18 2,352
-4.1
0.9
15.9
Housing starts, private (thous.)10/27 146.2
Sent.
Leadin indicators (1967=100)
0.4
3.1
13.8
1/ Actual data. 2/ Not seasonally adjusted. 3/ At annual rate. 4/ McGraw-Hill
October survey of business capital spending plans.

I-1
DOMESTIC NONFINANCIAL DEVELOPMENTS

The pace of economic expansion appears to have accelerated in
recent months and staff projections indicate a rise in real GNP at an
annual rate of 7.5 per cent this quarter, compared to 6 per cent (or
perhaps a little more after the forthcoming revision) in the third
quarter.

All major demand categories,

except for residential construc-

tion, are expected to increase more rapidly in the fourth quarter than
in the third, with the largest gains expected in consumer spending and
inventory investment.

Federal defense

purchases are projected to rise

moderately following a sharp decline in the third quarter.
Heightened demands have been accompanied by sizable gains in
industrial production and employment.

Industrial output increased by

almost 1 per cent in October, with advances widespread among consumer
goods, business equipment, and materials.

From July to October, the

rise in the index was at an annual rate of 10 per cent.
farm employment were substantial in October,

Gains in non-

for the third consecutive

month, with manufacturing contributing appreciably to the overall rise.
However, the unemployment rate in October remained at 5.5 per cent as
the labor force also increased strongly.
Consumer spending recently has been especially expansive.
Retail sales were up almost 3 per cent in October according to the
advance report, following

the September decline.

Unit sales of domestic-

type autos have remained strong through early November.

Recent surveys

of consumer attitudes and buying intentions indicate an upsurge in
mism.

Housing starts were still at an exceptionally high level in

September.

opti-

I - 2
Book value of in-

The business sector also has been strong.

ventories increased considerably further in September,

and for the third

quarter as a whole the increase was almost half again larger than in
the second quarter.

Sales were also up sharply, and stock sales ratios

remained at the lowest levels

Manufacturers' new

in a number of years.

as did unfilled

orders for durable goods rose further in September,
orders.

The recent McGraw-Hill survey of business plans to spend for

plant and equipment indicates a rise of 11 per cent for 1973, with a
sharper gain in prospect for manufacturing.
Wage increases have been larger in recent months than earlier.
However,

the rise in wholesale

rate of only 1 per cent.

prices slowed in October to an annual

The rise in prices of farm products and foods

moderated considerably and industrial prices were virtually unchanged,
primarily because of a decline in prices of autos and trucks associated
with quality improvements in the new models.

Consumer prices increased

rapidly in September, reflecting continued sharp advances for food and
a sizable rise for other commodities.
Outlook.

Staff expectations,

strong expansion in the economy in
1973, also,

as before, are for continuing

the remainder of this year.

our projections are relatively little

For

changed overall from

five weeks ago, following a thorough review of the underlying statistics
and despite modifications in some major assumptions.
Specifically, we no longer assume expiration of the price-wage
controls program at the end of April, but rather continuation of a
reasonably effective program throughout the year.

Also, the current GNP

I-3

projection assumes Federal expenditures of $253 billion in fiscal 1973
on a unified budget basis, well below the projection of five weeks ago
but still

somewhat above the Administration's target.

Third, we have

taken into account the sizable boost in social security taxes associated
with "reform" legislation passed at the end of the Congressional session.
Monetary policy, however, is still assumed to produce growth in the
monetary aggregates at rates consistent with 6 per cent expansion in M
1
during 1973.

The quarterly pattern of GNP growth in 1973, as shown in the
table, continues to be for gradual moderation in real terms, with the
rate of price inflation accelerating appreciably less rapidly than in
our preceding projection over the course of the year.

STAFF GNP PROJECTIONS

Date

Change in
Nominal GNP
$ billion
1 )/11/72 Current

1971-1
1972
1973

Per cent increase, annual rate
Private GNP
fixed weight
Real GNP
price index
Unemployment rat
10/11/72 Current 10/11/72 Current 10/11/72 Curri

74.0
101.3
117.6

74.0
100.5
114.4

2.7
6.4
6.7

2.7
6.4
6.4

4.5
3.2
3.3

4.5
3.2
3.4

5.9

5.6
5.0

5.6
5.1

1972-III1972-IV

31.0
30.3
24.0
31.5

31.0
30.3
22.8
30.6

6.5
9.4
6.0
8.1

6.5
9.4
5.9
7.5

4.5
2.5
2.9
2.8

4.5
2.5
2.7
3.1

5.8
5.7
5.6
5.4

1973-1
1973-11
1973-III
1973-IV
L/ Actual; for

32.0
32.5
7.1
6.6
3.2
3.5
5.2
28.4
28.0
3.7
5.0
3.6
5.6
5.7
4.8
4.9
25.4
4.5
4.2
28.0
3.9
26.0
4.3
4.3
4.8
4.3
27.5
3.9
1972-III current GNP figures are preliminary Commerce estimates.

1/
1972-11/
1972-11-1/

5.2
5.1
5.0
4.9

I - 4

The quarterly projection for 1973 will, as usual, be presented
in detail at next week's Chart Show.

We note here in summary that most

demand sectors--residential construction being the only exception--are
expansive in the first half of 1973.
strong,

in part because

Consumer spending is

of the large tax refunds in prospect.

spending on fixed capital maintains a fairly rapid advance,
by recent surveys.

especially
Business

as suggested

And inventory investment is expected to rise

further in line with final sales of goods.
In the second half of the year, demand forces are likely to
be losing some of their upward momentum.
will have been completed,

The bulk of the tax refunds

inventory investment is

expected

to show

little further increase from the pace reached by mid-year, and residential construction is projected to be declining.
is

The unemployment rate

expected to decline to just under 5.0 per cent in the fourth quarter,

about the same rate as projected earlier.

I - 5

CONFIDENTIAL - FR

November 15,

1972

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of dollars, with quarterly figures at annual rates.)
1971

Gross National Product
Final purchases
Private
Excluding net exports

1972
Proj.

1973
Proj.

1971

1972

III

Proj.
IV

1050.4
1046.7
813.9
813.2

1150.9
1145.7
890.1
893.9

1265.3
1252.8
977.5
978.7

1078.1
1076.4
835.5
837.6

1109.1
1108.6
859.2
863.8

1139.4
1134.4
880.3
885.5

1162.2
1156.6
900.0
903.4

1192.8
1183.3
920.9
923.0

Personal consumption expenditures
Durable goods
Nondurable goods
Services

664.9
103.5
278.1
283.3

720.6
115.8
299.1
305.7

791.0
130.1
327.5
333.3

680.5
106.1
283.4
290.9

696.1
111.0
288.3
296.7

713.4
113.9
297.2
302.4

728.1
118.4
301.4
308.3

744.8
120.0
309.3
315.5

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

152.0
42.6
105.8
3.6
2.4

178.5
53.3
120.0
5.2
4.8

200.2
53.0
134.8
12.5
12.5

158.8
47.3
109.8
1.7
0.8

168.1
51.6
116.1
0.4
0.1

177.0
52.8
119.2
5.0
4.3

181.0
54.2
121.1
5.7
5.3

187.7
54.7
123.5
9.5
9.3

-3.8
73.6
77.4

-1.2
84.5
85.7

-2.1
63.0
65.1

-4.6
70.7
75.3

-5.2
70.0
75.2

-3.4
75.0
78.4

-2.1
78.8
80.9

Net exports of goods and services
Exports
Imports

0.7
66.1
65.4

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

232.8
97.8
71.4
26.3
135.0

255.6
106.8
76.6
30.1
148.9

275.3
107.1
76.9
30.3
168.2

240.9
100.7
71.9
28.7
140.2

249.4
105.7
76.7
28.9
143.7

254.1
108.1
78.6
29.6
146.0

256.6
106.2
75.2
31.0
150.4

262.4
107.0
76.0
31.0
155.4

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

741.7
141.6

788.9
145.8

839.2
150.8

754.5
142.9

766.5
144.7

783.9
145.3

795.3
146.1

810.1
147.0

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

861.4
572.9
744.4
60.9
8.2

935.0
626.3
794.5
54.8
6.9

1019.8
684.6
876.9
66.1
7.5

881.5
585.9
785.5
59.3
7.8

907.0
608.0
770.5
55.7
7.2

922.1
620.5
782.6
50.1
6.4

939.5
630.4
798.7
51.3
6.4

971.2
646.4
826.2
61.9
7.5

83.3
78.2

94.8
92.0

110.3
104.9

83.2
82.7

88.2
85.9

91.6
90.8

97.3
93.7

102.0
97.5

199.1
220.8
-21.7

228.1
248.0
-19.9

247.5
270.9
-23.4

202.8
227.5
-24.7

221.4
236.3
-14.8

224.9
246.5
-21.6

230.2
243.1
-12.9

235.8
265.9
-30.1

Corporate profits before tax
Corp. cash flow, net of div. (domestic)
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Surplus or deficit (-)

3.7

-2.0

-8.3

6.8

8.6

-2.4

2.2

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

86.9
2.8
84.1
5.9

89.1
2.4
86.6
5.6

90.9
2.4
88.5
5.1

87.7
2.7
85.0
5.9

88.4
2.5
85.9
5.8

88.8
2.4
86.4
5.7

89.2
2.4
86.8
5.6

89.8
2.4
87.4
5.4

Nonfarm payroll employment (millions)
Manufacturing

70.7
18.6

72.8
18.9

75.0
19.7

71.0
18.6

71.8
18.7

72.5
18.9

73.0
18.9

73.7
19.2

Industrial production (1967 = 100)
Capacity utilization, manufacturing
(per cent)

106.8

113.8

122.9

107.4

109.9

113.3

114.9

117.4

75.0

77.5

80.5

74.6

75.3

77.4

78.0

79.1

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

2.05
10.13
8.68
1.45

2.35
10.76
9.37
1.39

2.08
11.45
10.07
1.38

2.24
10.48
9.20
1.28

2.51
10.05
8.65
1.40

2.26
10.30
8.91
1.39

2.34
11.28
9.90
1.38

2.28
11.38
10.00
1.38

High employment surplus or deficit (-)

-16.5

1/ Revisions in underlying balance of payments data for 1972-IL not yet reflected in the GNP data, indicate a
$1 billion larger deficit in net exports of goods and services for that and following quarters.

I-6

CONFIDENTIAL - FR

November 15, 1972

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1971

1972
Proj.

1973
Proj.

1971
IV

1972
I

III

Proj.
IV

------------------------ Billions Of Dollars------------------------Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government

74.0
-1.3
75.2
61.4
64.3
-2.9
13.8

GNP in constant (1958) dollars
Final purchases
Private

19.6
21.1
22.5

100.5
1.6
99.0
76.2
80.7
-4.5
22.8
47.2
45.8
39.7

114.4
7.3
107.1
87.4
84.8
2.6
19.7

21.2
0.4
20.8
13.5
16.0
-2.5
7.3

31.0
-1.3
32.2
23.7
26.2
-2.5
8.5

30.3
4.6
25.8
21.1
21.7
-0.6
4.7

22.8
0.7
22.2
19.7
17.9
1.8
2.5

30.6
3.4
27.1
21.3
19.6
1.7
5.8

50.3
51.2
41.8

12.0
12.1
8.6

12.0
12.5
11.4

17.4
13.7
12.0

11.4
10.8
11.1

14.8
11.7
10.2

------------------------Gross National Product
Final purchases
Private

9.6
9.5
9.4

9.9
9.3
9.8

Per Cent Per Year-------------------------8.31/
7.9
6.6

12.0
12.0
11.3

11.41/
9.3
9.8

8.0
7.8
9.0

10.5
9.4
9.5

Personal consumption expenditures
Durable goods
Nondurable goods
Services

7.8
14.4
5.2
8.2

8.4
11.9
7.6
7.9

9.8
12.3
9.5
9.0

5.8
0.0
7.0
6.7

9.2
18.5
6.9
8.0

9.9
10.5
12.3
7.7

8.2
15.8
5.7
7.8

9.2
5.4
10.5
9.3

Gross private domestic investment
Residential construction
Business fixed investment

10.9
36.5
4.9

17.4
25.1
13.4

12.2
-0.6
12.3

17.3
25.2
13.2

23.4
36.4
23.0

21.2
9.3
10.7

9.0
10.6
6.4

13.9
3.7
7.9

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

6.3
1.3
-4.9
22.3
10.2

7.7
0.3
0.4
0.7
13.0

12.5
11.4
10.3
12.9
13.3

14.1
19.9
26.7
2.8
10.0

GNP in constant (1958) dollars
Final purchases
Private
GNP implicit deflator
2/
Private GNP fixed weight index-

6.71/
6.5
5.7
1.5t1.7-1

Personal income
Wage and salary disbursements
Disposable income

6.51/
6.6
7.4 1
5.14.5 I-

3.9
-7.0
-17.3
18.9
12.1
9.411
7.2
7.7
" 1/
1.82.511

5.91/
5.5
7.0
2.22.7-1/

9.0

3.0
4.3
0.0
13.3
7.5

5.9
6.3

3.0
3.1

9.1
9.3
10.4

6.3
6.9
4.3

11.6
15.1
6.3

6.7
8.2
6.3

7.5
6.4
8.2

13.5
10.2
13.8

12.1

13.8

16.4

-4.3

24.0

15.4

24.9

19.3

3.9
8.0

14.6
12.3

8.5
9.2

7.4
9.5

36.7
15.5

6.3
17.3

9.4
-5.5

9.7
37.5

Nonfarm payroll employment
Manufacturing

0.1
-3.9

2.9
1.7

3.1
3.3

2.5
1.3

3.8
2.2

4.1
5.5

2.5
1.4

3.8
6.3

Industrial production

0.2
43.1
21.3
21.9
17.9

5.6
13.8
37.9
44.4
-4.9

8.8
-11.3
3.5
4.0
0.0

Corporate profits before tax
Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures

Housing starts, private
Sales new autos
Domestic models
Foreign models

1/ At compound rates.
2/

Using expenditures in

1967 as weights.

6.6
14.5
6.2
7.9
-4.4

8.0
-11.4
6.4
7.5
-0.7

3.4
24.2
7.4
20.1
-76.9

9.3
48.5
-14.9
-28.4
50.6

12.4
-39.8
20.3
12.1
-3.0

I-7
Industrial production.

Industrial production increased 0.9

per cent in October and at 116.7 per cent (1967=100) was 9.3 per cent
above a year earlier.
among consumer goods,

The gains in output in October were widespread
equipment, and materials.

The September and August

indexes each have been revised upwards by 0.5 points, to 115.7 and
115.0, respectively.

Growth in output has been unusually rapid since

July, at an annual rate of 10 per cent.
Auto assemblies rose 7 per cent in October, to an annual
rate of 9.1 million units.

Production schedules for November and December

indicate a further increase of about 6 per cent.

these schedules are

realized, auto output in 1972 would total 8.8 million units compared
with 8.5 million units in 1971.

Output of furniture and nondurable

consumer goods rose again in October, but production of appliances changed
little.
Output of business equipment continued to rise strongly and
was 8 per cent above a year ago; it was 12 per cent above the 1971 low
but still 4 per cent below its 1969 peak.

Production of defense

equipment changed little in October, and,although up 8 per cent from the
January 1972 low,was still one-fourth below its 1969 peak.

Output of

construction products and steel, textiles, and chemicals advanced further.

I - 8
INDUSTRIAL PRODUCTION
(1967=100, seasonally adjusted)
Per cent changes
Sept. 1969* to
Oct. 1971 to
Oct. 1972
Oct. 1972

1972
Sept.(r) Oct.(e)

Item

115.7

116.7

9.3

4.3

Consumer goods
Autos
Home goods
Apparel &
staples

123.9
109.6
126.3

124.9
116.9
126.1

7.1
8.4
10.7

11.2
.3
13.0

123.0

123.7

6.1

11.1

Business equipment
Defense equipment

104.3
79.7

106.2
80.0

8.1
5.7

-3.7
-21.6

121.1

122.7

8.4

9.5

120.5

122.5

8.6

9.5

12.2
13.8
27.6
7.7

4.5
1.2
-2.5
8.9

Total index

Intermediate
products
Construction
products

Materials, total
118.8
Durable
115.4
Steel
111.8
Nondurable
123.2
* Pre-recession peak for total
r Revised.
e Estimate.

Retail sales.

119.6
116.3
114.1
123.9
index.

Sales in

October rose by an unusually large

amount, 2.8 per cent, according to the advance report.
widespread by store type.

Further,

Advances were

more complete sample counts raised

earlier estimates of retail sales in August and September, and the third
quarter increase is now reported to be 2.5 per cent--a very large
increment on top of the substantial 3.3 per cent gain in
quarter.
in

the second

These changes suggest the likelihood of an upward revision

third quarter personal consumption expenditures in

the GNP accounts.

I-9

In October,
strong increases.
September,

all

major types of outlets showed moderate to

Durable goods sales increased 3.9 per cent from

with the automotive group reporting a 5 per cent gain.

Non-

durable goods sales were 2.3 per cent higher, with food sales up 2.2
per cent and general merchandise sales up 3.1 per cent.

RETAIL SALES
(Percentage change from previous period)

I Q

II Q

III Q

1972
August

1.2

3.3

2.5

1.7

- .8

2.8

Item

All retail stores
Durable
Auto
Furniture &
appliance
Nondurable
Food

General merchandise
GAAF
Total,

September

October

4.2

3.9

3.0

-1.9

3.9

-3.1

6.4

4.6

4.4

-2.7

5.0

9.2

- .5

2.0

-2.6

1.6
1.7

2.9
3.6

1.9
1.7

1.0
1.0

2.3

2.7

2.6

3.0

2.4

2.1

2.9

.2
.6

2.3
2.2

3.1

2.0

2.4

1.8

- .2

2.1

-1.4

n.a.

less autos &

nonconsumer items

1.5
1.4
.3
2.7
Real*
* Deflated by seasonally adjusted all commodities CPI.

I -

Unit sales of consumer durables.

October sales of new

domestic-type autos were at a 9.8 million unit rate, slightly below
September but the same as a year earlier.

Sales have been especially

strong in the past four months, averaging a 9.9 million unit rate.

the first 10 days of November, sales were at a 9.6 million rate. Dealer
inventories amounted to only a 45-day supply at the end of October, 9
per cent above the reduced September levels,but 13 per cent below the
low level a year earlier.
Sales of imported cars in October were at a 1.5 million unit
rate, down slightly from a month earlier, but up a sixth from October
last year, when dock strikes and Phase I measures sharply curtailed
import sales.

The October import share, on a seasonally adjusted

basis, was 13.4 per cent, approximately the same as in September, but
well below the share prior to the adjustment in exchange rates last
year.
Truck sales in October are estimated at a 2.4 million unit
annual rate, up 7 per cent from both a month and a year earlier.
Data for most of October indicate that retailers' unit purchases
of major home appliances were below the levels of both a month and a
year earlier.

All appliances in the index, with the exception of

freezers, either remained at or declined from September levels.

UNIT PURCHASES OF HOME GOODS BY RETAILERS
Seasonally adjusted, 1967=100

Per cent change
Year ago
Month ago

1971
Oct.

Aug.

1972
Sept.

Oct.

TVs 1/

121

139

149r

135

-10

Radios

106

98r

-14

-20

135

139r

Home appliances-

140r

130e

-7

1/ Includes foreign-made units sold under U. S. brand names.
under foreign brands not included.

-4

Foreign-made sold

2/ Weighted average of indexes for dishwashers, driers, freezers, electric
ranges, gas ranges, room air conditioners, refrigerators, washing machines
and vacuum cleaners.
Consumer credit.

In September, total consumer credit outstanding

expanded at a reduced seasonally adjusted annual rate of $15.9 billion,

The sharp drop from the August high of $22.2 billion was widespread by
both type of credit and lender, and partly reflected the early date of
Labor Day and a decline in the proportion of retail purchases financed
with credit.

Scattered trade reports indicate that net credit extensions

rebounded substantially in October.
During the third quarter, the net increase in total consumer
credit edged up to a new high of $18.7 billion.

The rise in instalment

credit accelerated further but the advance in the noninstalment sector
was smaller than in the preceding quarter.

I - 12

NET CHANGE IN CONSUMER CREDIT OUTSTANDING
(Billions of dollars, seasonally adjusted annual rates)

Total

Instalment

Noninstalment

I
II
III
IV

7.3
9.9
12.9
13.7

5.5
7,8
10.8
11.8

1.8
2.1
2.2
1.9

1972 - Q I
Q II
Q III

13.1
18.0
18.7

13.2
14.8
16.1

- .1
3.2
2.6

18.0
22.1
15.9

13.1
19.7
15.4

4.9
2.5
.4

1971 - Q
Q
Q
Q

July
August
September

Growth in auto credit has accounted for an increasing proportion of the quarterly net gains in instalment credit outstanding
this year.

In the first quarter, auto credit rose at a seasonally

adjusted annual rate of $3.9 billion and accounted for 29 per cent of
the total growth in instalment debt; the second and third quarters
showed increases of $5.0 billion (33 per cent) and $5.9 billion (37 per
cent), respectively.

Since the end of last year the average instalment

contract has risen about $65 for new cars and nearly $125 for used cars.
In September, finance rates for new cars were one-quarter of a point
below the year earlier level; used car rates have shown an apparent seasonal
rise throughout the model year but were still slightly below the September
1971 level.

I - 13

Mobile home credit is becoming an increasingly significant part
of consumer financing activity at commercial banks and finance companies.
At the end of September, mobile home loans outstanding at these insti-

tutions had reached a total of $8.3 billion, up 24 per cent from the
year earlier total of $6.7 billion.

Mobile home loans, although still

a relatively small part of total consumer credit outstanding, now constitute 36 per cent of nonautomotive consumer goods credit outstanding at
banks and 46 per cent at finance companies.

The $200 million increase

during September in mobile home credit outstanding amounted to one-half
of the total increase in other consumer goods financing.
One reason for the rapid growth in mobile home balances has
been the increase in average price and contract size due to market acceptance of "14-wides" and double-wide units.

At finance companies, the

average amount financed per contract during September was over $6,500,
up nearly $600 since last spring.

Bank contracts have shown an even

larger increase.
Census consumer purchase and income expectations. The
October Census survey indicates an unusually large increase in consumer
optimism--confirming the latest Michigan Survey Research Center report
and the attitudinal questions from the current Conference Board survey.
Buying plans for autos rose sharply, as did purchase plans for homes.

Both intentions to buy major appliances and expected purchases of furniture and carpets were up almost as strongly.

I - 14
Actual income changes and expectations of future income

increase were also more favorable.

Higher current income was

reported by 40.8 per cent of all households, up sharply from the
34.3 per cent of the July survey. The response is comparable to
the favorable income developments reported during 1968.

Income

expectations improved more modestly but households in the July
survey had already indicated a very marked increase in income
expectations.

I -

HOUSEHOLD PURCHASE AND INCOME EXPECTATIONS

1971
October

Jan.

1972

103.4
95.5

98.8
98.9

103.5
110.4

99.6
110.1

109.9
123.5

34.9

35.2

35.7

34.3

40.8

13.7
21.2

12.7
22.5

12.5
23.2

10.9

28.8

23.4

28.8

15.7

15.9
6.2

19.9

9.7

16.1
6.7
9.4

6.4
13.4

20.1
6.4
14.0

26.1

25.6

27.6

26.0

26.7

26.1

26.7

28.8

25.8

28.8

April

July

October

SEASONALLY ADJUSTED INDEXES
OF EXPECTED UNIT PURCHASES
(Jan. 1967-April 1967 = 100)
All households:
New cars
Houses
ACTUAL AND EXPECTED CHANGES
IN INCOME
Current income compared to
income of one year ago:
All households:
Per cent reporting higher
current income
Per cent reporting lower
current income
Difference
Mean expectations of substantial changes in
income:
All households:
Increase
Decrease
Difference

6.7
9.0

EXPECTATIONS TO BUY FURNITURE,
APPLIANCES, AND HOME IMPROVEMENTS WITHIN 12 MONTHS
Number of major appliances
reported likely to be bought
per 100 households
Per cent of households reporting probable major
expenditures on-Furniture and carpets

I - 16

Anticipated plan and equipment spending.

Three recent private

surveys indicate that business now reports plans to increase spending
for new plant and equipment by about 9-11 per cent in 1973.

The McGraw-

Hill survey indicates that 1973 spending by manufacturers is programmed
to rise at a more rapid pace (14 per cent) than that of nonmanufacturing
concerns (9 per cent); in contrast, in 1971 and 1972 nonmanufacturing
firms showed much sharper gains.

Electric utilities and communication

firms continue to plan further sizable gains in new capital spending.
Historically, the November McGraw-Hill survey taken at this stage
of an economic recovery has tended to understate the actual change by
/about 3 percentage points. Surveys, taken earlier, by Lionel D. Edie
and Rinfret-Boston show generally similar results,

although the magnitude

of change is slightly smaller than in the McGraw-Hill survey.

PLANT AND EQUIPMENT EXPENDITURES
(Per cent change from preceding year)

1971

19721/
(Antic.)

McGraw-Bill
(November)

1973
Rinfret-Boston
(October)

Lionel D. Edie
(October)

149

9.7

Manufacturing
-6.1
Durable goods -10.4
Nondurable
goods
-1.9

5.6
10.9

14
15

13
10

13
14

7.2
-6.0

12.1
8.3

9
-1

7
-6

9
12

-23.5

19.0

-9

-5

20.8
-2.0
6.6
8.8

13.3
12.6
11.4
10.7

13
6
9
10

6
-6
10
4

13
-9
12
9

Total

Nonmanufacturing 2/
Railroad
Other Trans-

portation
Electric
utilities
Gas utilities
Communication
Commercial
1/
2/

U.S.

Department of Commerce Survey--September 1972.

Includes industries not shown separately.

I- 17
Cyclical indicators.

The Census composite index of leading

indicators rose slightly further in September, following a strong
increase in August.

Leading series increasing included the workweek,

new orders for durable goods,

contracts and orders for plant and

equipment (which exceeded its previous high), housing permits and
industrial materials prices.
initial

claims (inverted),

Series declining were unemployment

common stock prices and the ratio of price

to unit labor cost.

CHANGE IN COMPOSIT CYCLICAL INDICATORS
(per cent change from previous month)

June

12 Leading (trend adjusted)

- .1

12 Leading, prior to trend
adjustment
5 Coincident
5 Coincident, deflated
6 Lagging

- .4
.4
.4
.9

July

.1
- .4
.7
.6
.6

Aug.

Sept.

2.6

2.3
1.2
1.0
.9

.0
.9
.7
1.1

(p)

p - Preliminary
Construction and real estate.

Seasonlly adjusted value of

new construction put in place, which was revised downward somewhat for
September,
peak.

edged off further in October but remained near the August

Within the private sector, a further rise in residential

expenditures was more than offset by a reduction in nonresidential
construction outlays.
in

Outlays for public construction apparently rose

October, with the rise entirely in Federally owned projects.
The Census Bureau's composite construction cost index in

October remained at the 139 per cent level (1967 equals 100) reached in
September, holding the year-to-year increase to less than 5 per cent

I - 18

for the fifth consecutive month.

This compares with a year-to-year rise

of nearly 7.5 per cent in 1971 as a whole and 7 per cent in 1970.
NEW CONSTRUCTION PUT IN PLACE
(Seasonally adjusted annual rates, in billions of dollars)
1972
QII(r)

QIII(p)

Aug.(r)

121.2

122.1

123.1

122.9

122.0

92.1

93.5

94.0

94.7

93.4

52.6
39.4

54.3
39.2

54.3
39.8

55.1
39.6

55.4
38.0

29.1

28.5

29.1

28.2

28.6

24.6
4.5

24.4
4.1

25.1
4.0

24.2
4.0

24.2
4.3

88.8

88.3

89.0

88.7

87.9

Sept.(r)

Oct. 1 /

Total - current

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

dollars
1/

Data for October 1972 are confidential Census Bureau extrapolations.
In no case should public reference be made to them.
Seasonally adjusted private housing starts, which had expanded

sharply in August, dipped only 4 per cent in September to an annual rate
of 2.35 million units.

As a result, the average for the third quarter

as a whole held above the second quarter pace and,

except for this

year's first quarter average, was the highest on record.

While housing

starts may move downward during the fourth quarter, the advanced rate
of building-permits and mortgage-commitments
decline will be limited.

in recent month suggests that the

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

QII

QIII

1972
July(r)

2.51

2.26

2.34

2.22

2.45

2.35

1.35
1.16

1.27
.99

1.35
.99

1.29
.93

1.40
1.06

1.38
.97

Permits

2.09

2.04

2.16

2.11

2.24

2.25

Completions

1.98

1.90

1.94

1.89

2.00

1.93

.57

.60

.54

.57

.53

.50

Starts
1-family
2-or-more-family

MEMORANDUM:
Mobile home
shipments

Aug.(r)

Sept.(p)

p - Preliminary

Although completions of new housing units have been at a
record rate this year, they have continued appreciably below the
extraordinary level of starts, reflecting, in part, capacity constraints-particularly for lumber and related materials.
data through September,
remained very strong.

Meanwhile, based on sales

demands for both new and existing dwellingshave
Consequently, rental vacancy rates moved only

moderately higher in the third quarter to an average of 5.8 per cent
of units available for use.

This was still

below the third quarter rate

in 1968 and well below the record for the series reached in 1965.

the case of home-owner units, the vacancy rate actually was below the
year-earlier

level.

I - 20

RESIDENTIAL VACANCY RATES

1965
Rental units

Average for the third quarter:
1968
1969
1970
1971

1972

7.8

5.9

5.5

5.3

5.6

5.8

Northeast
North Central
South
West

5.0
6.8
8.7
11.3

3.7
5.8
7.5
6.5

3.0
5.9
7.1
5.9

3.1
5.9
7.1
5.2

3.0
5.6
7.4
6.5

3,2
6.2
7.3
6.7

Homeowner units

1.6

1.2

1.1

1.0

3.9

I - 21
Manufacturers' orders and shipments.
goods rose 3 per cent (p)

in September.

from a rebound in the volatile

New orders for durable

Most of the increase resulted

defense orders series,

but there was

also a 2.5 per cent increase in orders for nondefense capital goods.
For the third quarter as a whole,

new orders were up 2.9 per cent,

which was about half the second quarter rate of increase.

Defense

orders were down sharply and nondefense capital goods rose more slowly
than in the second quarter, but orders for motor vehicles

and primary

metals accelerated.

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

Q II from
Q I

1972
from
Q III
Q II (p)

5.7
5.8

2.9
4.3

3.0
.9

Primary metals
Motor vehicles and parts
Household durables

6.8
1.2
8.4

9.7
12.4
.4

- .9
- .3
2.4

Capital goods industries:
Nondefense
Defense
Construction & other durables

8.7
4.3
4.3

2.6
-17.8
.1

2.5
50.7
.6

Durable goods, total
Excluding defense

Sept. from
Aug. (p)

Durable goods shipments also rose in September but remained
below the level of incoming orders, and unfilled orders rose a strong
2.4 per cent, with increases for every reported industry and market
category.

The durable goods order backlog has now risen 14 per cent

above its July 1971 low,

somewhat more than the comparable expansion in

1968-69 but only half the 1965-66 increase.

I - 22

Inventories.

Book value of manufacturing and trade inven-

tories rose at a $14.7 billion (p) annual rate in September,
below the upward-revised August rate of $18.3 billion.
as a whole,

not far

For the quarter

the rate was $12.8 billion, well above the second quarter

rate of $8.7 billion and the highest in four years.

About $2 billion

of this amount was an unusual increase at wholesale farm and raw
materials dealers; this apparently reflected both higher wheat prices
and movement of grains into warehouses in anticipation of shipment to
Russia.

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(Seasonally adjusted annual rate, billions of dollars)
1972

Q II

Q III

Aug.

Sept.

(Prel.)

(Rev.)

(Prel.)

Manufacturing and trade

8.7

12.8

18.3

14.7

Manufacturing, total
Durable
Nondurable

4.2
3.3
.9

7.1
4.8
2.3

15.0
10.8
4.2

1.8
.9
.8

3.3
4.5
5.6
Trade, total
1.3
4.2
1.9
Wholesale
2.0
1.5
2.6
Retail
NOTE: Detail may not add to totals because of rounding.

12.9
6.3
6.6

The outlook for sustained increases in inventory investment
remains good.

In September,

the inventory-sales ratio for manufacturing

and trade rose slightly but remained near the lowest
years.

level in many

The ratio of inventories to unfilled orders at durable goods

manufacturers dropped further.

I - 23

INVENTORY RATIOS
1972

1971
August

Sept.

August
(Rev.)

1.58

1.60

1.49

1.50

1.79
2.14
1.36

1.82
2.22
1.36

1.66
1.97
1.28

1.66
1.96
1.28

1.38
1.23
1.48

1.32
1.20
1.40

1.34
1.21
1.42

Inventories to unfilled orders:
.956
Durable manufacturing

.958

.894

.874

Inventories to sales:
Manufacturing and trade

Manufacturing,
Durable
Nondurable

total

Trade, total
Wholesale
Retail

Labor market.

Sept.
(Prel.)

Demand for labor continued strong in October

as both payroll and total employment advanced by over a quarter million.
But the civilian labor force increased sharply as well and the unemployment rate remained unchanged.
Employment expansion has been brisk in the past three months
following a relatively slack interval during the summer.

Much of the

recent strength has been in manufacturing where employment increases
had lagged during the first year of the recovery, spurted in the early
months of 1972,
early summer.

and then remained on a plateau in

the late spring and

Recent gains have been concentrated in durable goods-

primarily metal and metal-using industries.

Outside of manufacturing,

employment advances have continued appreciable in trade, services and
finance,

and State and local government.

I - 24

NONFARM PAYROLL EMPLOYMENT
(Seasonally adjusted, in thousands)
July 1972Oct. 1972

Sept.
Oct.

19721972

Oct. 1971May 1972

May 1972July 1972

-----------

Average Monthly Change-----------

Total

247

Government
Federal
State and local
Private

Manufacturing
Mining
Construction
Transportation
Trade
Services & finance

291

303

-22

198
57
12
9
12

31
-16
-3
-23
-9

224
94
2
19
13

265
126
1
0
22

The manufacturing workweek remained at 40.7 hours in
The factory workweek has been stable since June,

nine-year low reached in September 1970.

October.

after having risen from a

Average overtime hours in manu-

facturing also have changed little in recent months, but have been substantially more than a year ago.
Unemployment and labor force.

The unemployment rate remained at

5.5 per cent (seasonally adjusted) in October, about the same as in the

previous four months.
change.

Jobless rates for most groups showed little

or no

Compared with a year ago, when the overall unemployment rate was

5.8 per cent,

unemployment was down moderately for adult men,

teenagers, and

white workers, while rates remained about the same for household heads,
adult women,

and Negro workers.

The unemployment situation for Vietnam

I - 25

era veterans has improved considerably in recent months, and in October
the rate for veterans 20 to 29 years of age was about the same as the nonveteran rate.

SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

Total
Men 20 years and over
Women 20 years and over
Teenagers
Household heads
White workers
Negro workers
Veterans 20 to 29 years
Nonveterans 20 to 29 years

1972
Sept.
June

1971
Oct.

April

5.8

5.9

5.5

4.3
5.5
16.7

4.3
5.4
17.3

4.0
5.5
14.5

3.8
5.4
16.5

3.9
5.5
15.3

3.5

3.4

3.6

3.3

3.4

5.3
10.4

5.4
9.6

5.0
9.4

5.0
10.2

5.0
10.1

8.0
7.3

8.6
7.6

7.2
6.5

6.6
6.1

6.4
6.6

Oct.

The civilian labor force increased substantially in October.
Compared to a year earlier, the civilian labor force was up by 2.2
million; about 300,000 of the increase resulted from declines in the
armed forces.
Earnings.

Average hourly earnings of production workers on

private nonfarm payrolls

(adjusted for overtime in manufacturing and

inter-industry shifts) have been rising at a quickened pace recently;
estimates for September have been revised up, and with substantial increases
also in October the increase in earnings in the last two months has
averaged around 8 per cent (annual rate).

Increases have been very rapid

I - 26

in several industries--especially services, manufacturing and construction.

Since January, nonfarm earnings have increased at a 5.5

per cent rate, but the increase since July has been at nearly a 7 per
cent rate.

HOURLY EARNINGS INDEX
(Per cent change; seasonally adjusted, annual rate)

Total

Jan. 1971-

Jan. 1972-

Aug. 1971

Oct.

1972

July 1972Oct. 1972

6.6

5.5

6.9

Manufacturing
Mining

6.0
8.3

5.6
4.2

6.8
3.9

Construction

8.8

4.4

6.6

Transportation

8.2

9.0

7.9

Trade

6.2

4.4

4.3

Finance
Services

7.1
5.5

5.2
4.7

5.9
8.7

Collective bargaining.
collective

Wage increases in major nonfarm

bargaining settlements averaged 6.6 per cent over-the-life

of the contract in the first nine months of 1972 as compared to the
8 per cent rise in 1971.

Settlements

in both manufacturing and non-

manufacturing industries were well below wage rate changes negotiated a
year ago, with the construction industry showing a marked slowing.
First year increases have been substantially smaller, indicating a
movement away from the widespread practice of front-end loading of contracts.

In addition, contracts this year have a shorter average duration--

about three months on average less than previously--indicating a
tendency toward shorter contracts during the stabilization period,

I - 27

especially in the construction industry.

Wage and benefit increases

together averaged 7.6 per cent over-the-life of the contract,
with 8.8 per cent in

compared

1971.

The new settlements cover nearly 1.5 million workers,
marily in

the aerospace,

railroad,

construction, and maritime industries--

significantly fewer than the 2.8 million covered in
of 1971.

pri-

the first

nine months

The Pay Board and the Construction Industry Stabilization

Committee have yet to act on agreements affecting an additional 872,000
workers.

WAGE INCREASES PROVIDED BY MAJOR CONTRACT SETTLEMENTS
(Mean wage adjustment--annual rate
of increase, per cent)

1970

1971

First 9 months
1971
1972

Average over life of contract
Total
Manufacturing
Nonmanufacturing
Construction

8.9
6.0
11.5
14.9

8.1
7.3
8.9
10.8

8.0
7.1
9.0
11.7

6.6
5.6
7.2
6.6

First year
Total
Manufacturing
Nonmanufacturing
Construction

11.9
8.1
15.2
17.6

11.6
10.9
12.2
12.6

11.8
10.7
13.0
13.5

7.2
6.9
7.3
7.1

Year

Applies to settlements affecting 1,000 or more workers.

I - 28
Wholesale prices.

Wholesale prices rose between September

and October at a seasonally adjusted annual rate of 0.9 per cent, the
smallest monthly increase since last March.

Prices of industrial

commodities changed little, and the increase for farm and food products was the smallest in recent months.
Lower seasonally adjusted prices of automobiles and trucks
more than offset substantial increases for lumber and plywood, textile
products and apparel, hides, skins, leather, and iron and steel scrap.
If the transportation equipment group were excluded, industrial
commodities would have shown an annual rate of increase of about 2-1/2
per cent, seasonally adjusted.
On a seasonally unadjusted basis, prices of passenger cars
fell about 2 per cent and trucks more than 1 per cent.

In the case

of passenger cars, the BLS allowance for quality improvements in 1973
models was larger than the price rise resulting from the discontinuance
of rebates to dealers and from price increases allowed by the Price
Commission to cover costs of optional equipment made standard on the
new models.

After adjustment for seasonal influences the decline in

prices amounted to about 5 per cent for passenger cars and 3 per cent
for trucks.
Although the increase in prices of farm and food products
in October was the smallest in 6 months, consumer finished foods rose
markedly as seasonally adjusted prices of meat, poultry, egg, and
dairy products moved higher.

I-

During the first 11 months of Phase II, wholesale prices rose

at an annual rate of about 5 per cent,
of 1971 preceding the freeze.

the same rate as in the 8 months

However, prices of industrial commodities

advanced at a more moderate pace--3.5 per cent--while farm and food
products moved up more rapidly than in

the pre-stabilization period.

WHOLESALE PRICES
(Percentage changes at seasonally adjusted annual rates)

1972

Pre-stab.
period

Phase II

Dec. 1971
to
June 1972

June
to
Sept.

Sept.
to
Oct.

Dec. 1970
to
Aug. 1971

Nov. 1971
to
Oct. 1972

4.9

6.7

5.2

Farm products 1/

5.9

17.4

1.9

6.5

9.6

Industrial commodities
Crude materials2/
Intermediate materials3/
Finished goods4/
Producer
Consumer

4.5
9.2
5.2
3.2
2.7
2.7

3.2
10.6
2.4
3.3
2.0
3.9

-1.1
15.4
4.1
-7.9
-7.0
-8.4

4.7
3.3
6.5
2.7
3.7
2.2

3.5
9.6
4.1
2.1
2.5
2.2

A11 commodities

Farm products and processed foods and feeds.
Excludes crude foodstuffs and feedstuffs, plant and animal fibers, oilseeds,
and leaf tobacco.
Excludes intermediate materials for food manufacturing and manufactured animal

Excludes foods.

1/
2/

feeds.

Consumer prices.

Consumer prices rose at a seasonally adjusted

annual rate of 5.7 per cent in September and were 3.3 per cent above a
year earlier.

The September advance,

the largest since February,

included

continued sharp increases for food--at an 8 per cent rate--and an accelerated
rate of rise of about 5 per cent for
service costs continued moderate.

other commodities.

The increase in

I - 30

CONSUMER PRICES
(Percentage changes, seasonally adjusted annual rates)

Pre-stab.

period

1972
Dec. 1971

June

Aug.

Sept.

June 1972

Dec.

1970

Phase II
Nov. 1971

to
Aug.

1972

19711 Sept.

All items

2.9

4.6

5.7

3.8

3.5

Food

3.5

7.0

8.0

5.0

4.9

Commodities less food
Services 1/

2.6
3.7

4.1
3.1

5.1
2.7

2.9
4.5

3.0
3.5

Addendum:
All items less mortgage
3.7
4.6
5.9
2.9
4.8
costs 2/
Services less home
3.2
6.7
2.8
2.5
3.5
finance 1/ 2/ 3/
Commodities less food,
used cars, home pur2.6
2.5
6.3
3.4
2.2
chase 3/
Gasoline and
3.3
.1
25.7
17.5
-3.1
motor oil
1/ Not seasonally adjusted.
2/ Home financing 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.
The sharp rise in

food costs in

September was largely

attributable to fresh fruit and vegetable prices which dropped much
less than seasonally,

as in August,

because of short supplies.

Beef

prices fell, for the first time since May, but this was more than offset
by advances for pork and poultry.
The increase in

apparel prices in September--the

in which fall and winter clothing are priced--followed
(seasonally adjusted) declines.

first

month

three months of

Gasoline and motor oil prices rose

I - 31

again in September, bringing the 3-month advance since June to the
fastest rate since 1962.
Among durables, prices of 1972-model cars continued to
rise on a seasonally adjusted basis, bringing the increase over the
year to almost 4 per cent.

The quality adjustment on 1973-model cars

should affect October retail prices, but by much less than it affected
wholesale prices; the impact will be spread over more than one month
to reflect the proportion of 1973 models in retail auto sales, and the
weight of new cars in the CPI is considerably less than in the WPI.
Agricultural developments.

Prices received by farmers

increased 1 per cent in the month ending October 15, led by cattle,
milk, wheat, oranges, and cotton.

Lower prices for hogs, eggs, lettuce,

and potatoes were partly offsetting.

October red meat and poultry

production was unchanged from the previous month and both the beef
and pork components were unchanged.

In recent weeks, increases in

cattle marketings have reduced liveweight prices about 5 per cent since
mid-October, while hog prices have remained at about the October 15
level.
Wet weather in late October and early November has delayed
harvests and increased prices of corn, soybeans, and cotton.

Corn is

deteriorating in some areas and cotton quality has been hurt.

Corn and

soybean prices are already above last year because of increased
exports, but cotton prices are running 10 per cent lower because of an
expected 30 per cent increase in production.

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
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.
(90 day)
Treasury bill
Commercial paper (90-119 day)
New utility issue Aaa
Municipal bonds (Bond Buyer)
1 day
FNMA auction yield
wk. endg.
Dividends/price ratio (Common
"
stocks)
NYSE index (12/31/65=50)
end of day

SAAR (per cent)
8.1
8.3

33.8
31.0

16.2
3.9

October
October
October
October

242.5
505.2
795.1
262.7

4.5
8.1
10.2
11.5

5.2
8.2
10.5
11.1

6.5
10.2
12.5
13.9

October
October
October

40.7
289.9
542.6

0.4
12.4
11.4

2.6
14.6
14.0

8.0
16.8
13.0

Percentage or
+.10
5.25
4.71
+.11

Nov.
Nov.
Nov.

5.13

Nov.
Nov.
Nov.

Nov.
Nov.

7.28
5.10
7.71

8
13

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

e - Estimated

Year
ago

October
October

Credit demands

Total of above credits

Net change from
Three
Month
months ago
ago

Latest data
Level
Period

2.74
62.33

index points
+.56
+.87
+.50
-. 12
-.20
-.06
-.30
.10
-.01
-.06
.50

-. 10
2.29

+.32
+.54
+.23
-. 02

-.09
-.01
-.55
11.48

Net change or gross offerings
Year to date
Current month
1972
1971
1972
1971

2.2
1.3e
4.9
1.9

11.5
9.9
4 0 .8e
21.1

1.7
0.4 e
5.3e
17.7

17.7
2 .8 e
11.1
14.5

114.9

6.7
5.0
29.9
29.4
18.9
0.8
16.3
107.0

II - 1

DOMESTIC FINANCIAL SITUATION

The more favorable climate emerging in securities markets at
the time of the last Committee meeting has continued, contributing to
general--although relatively modest--interest rate declines.

Recently,

market rates generally have been 10-35 basis points below the 1972
highs reached, in most cases, during September and October.

Much of

the recent improvement in market atmosphere has, of course, reflected
expectational factors--stemming from negotiations on Vietnam, the
apparent resolve of the Administration to hold the line on spending
(despite the failure of Congress to adopt a fixed expenditure ceiling),
and evidence of slower growth in the monetary aggregates.
In short-term markets, increased demands for funds have,
nevertheless, tended to blunt much of the downward pressure on rates
resulting from the better market sentiment--although pressures from
Federal borrowing have been less severe than anticipated.

Several types

of private borrowing--including business loans at banks, consumer credit,
and commercial paper issued by non-financial corporations--showed sizable
increases in October, and in the case of business loans increased further
in early November.

The decision to defer retroactive revenue-sharing

payments until early December reduced the size of the November Treasury

refinancing, and the announcement of Treasury plans to meet its large
December-January cash requirements through a combination of relatively
routine bill and note financings also helped to calm market expectations.
In bond markets,

demands for funds have continued to moderate,

and rate declines generally have been more pronounced than in short-term

II - 2

markets.

Improved tax receipts and the prospect of added near-term

flows from revenue-sharing payments account for the more moderate
State and local government borrowing demands, while expanding flows

of internal funds and greater reliance on alternative forms of external
financing explain the continued moderation of business demands.
Mortgage markets also appear to have been under less pressure
recently, as inflows of funds to thrift institutions have remained
large.

In addition, with other institutional lenders seeking outlets

for long-term funds--at a time when yields on bonds have been easing

off and mortgage demands have been slackening seasonally--some speculative warehousing of mortgages has reportedly reappeared among mortgage bankers.
Outlook.

During the remainder of 1972 the weight of borrowing

in short-term markets seems likely to lead to some updrift in short-term
rates.

Business loan demands at banks and possibly also in the commer-

cial paper market should remain strong, as the recent acceleration of
inventory accumulation continues.

growth continuing large.

Most forecasters see consumer loan

And Federal net cash borrowing from mid-

November through the end of January is expected to total about $7-1/2
billion.

However, a partial offset to short-term market demand pressures

will be provided by State and local government investment of some of
the proceeds of $5 billion in revenue sharing funds paid out in early
December and early January.
In accommodating these sizable credit demands, banks will
likely continue to be aggressive issuers of large negotiable CD's and
can be expected to hold back on acquisitions of securities.

Inflows

II - 3

of other time and savings deposits may continue moderately favorable,
but tax and loan accounts are likely to decline substantially by early
winter as the Treasury seeks to squeeze through its period of peak
deficit.

Some of the drop in tax and loan balances, of course, might

be offset by a more rapid expansion of private demand deposits.
So long as short-term rates experience no more than a modest
rise into early 1973, prospective supply-demand relationships in longterm markets suggest that continued stability and possibly further
declines of long-term rates can be expected.

However, any marked

rise in short-term rates that seemed likely to be sustained would soon
be reflected in long rates as well.
Only in the State and local government sector of bond markets
have rates recently tended to rise, and these adjustments followed a
period of several weeks of decline.

Sizable additions to the December

bond calendar, at a time when market professionals held large secondary
inventories of other issues, explain the recent market weakening.

But

the longer-run outlook is for moderate offerings of new State and local
government issues, partly because the $5 billion of revenue sharing
payments will cover some portion of future State and local government
outlays.

In the corporate bond market, there is little reason to

expect much change in the factors accounting for the recent moderation
of new issue volume, although some borrowers have reportedly begun to
add to the calendar for January when institutional investment flows
typically show a seasonal expansion.
Rates in the primary mortgage market, where demands for funds
continue large, seem unlikely to move up in the financial environment

II -

contemplated.

Indeed, there could be some further decline in secondary

market rates, especially if corporate bond prices experience a turn of
the year rally as they often do.
Monetary aggregates.

Data now available from the demand

deposit ownership survey 1 / for the third quarter of 1972 suggest that
a significant proportion of the growth of M 1 in that period was accounted for by increased holdings of demand balances by nonfinancial
businesses.

As can be seen in the table, gross demand deposits of

these businesses are estimated to have increased considerably more in
the third quarter of 1972 than in comparable periods of the previous two
years.

An increased demand for transaction balances by such firms is

to be expected during a period of rapid economic expansion and there also
have been reports that banks--in line with the expanding utilization
of credit lines--have been pressing corporate borrowers for higher
compensating balances.
Consumers also increased their holdings of demand balances
over the third quarter more than in the third quarters of 1970 and 1971-with most of the strength at smaller banks.

However, holdings of finan-

cial businesses and foreign depositors showed little change.

The demand deposit ownership survey collects sample data for gross
demand deposits (i.e., before deductions for cash items in the process
of collection) only for individuals, partnerships and corporations.
Insufficient data have been collected to seasonally adjust the
ownership series. The lack of seasonal adjustment, the collection
of data only for deposits owned directly by individuals, partnerships,
and corporations (IPC), and the collection of data on a gross basis
make it impossible to compare the survey results directly with the
seasonally adjusted money supply, but the DDOS is helpful in giving
insight concerning changes in M .
1

II - 5

CHANGES IN GROSS IPC DEMAND DEPOSITS BY OWNERSHIP CATEGORY
AT ALL COMMERCIAL BANKS
(Billions of dollars, not seasonally adjusted)

1970

Third quarters*
1971

1972

Nonfinancial business

2.7

1.6

4.1

Consumers

2.4

1.5

2.6

Foreign

-. 2

-. 1

-. 9

5.3

2.1

7.4

Sector
Financial business

All other
Total

*Figures may not add to totals because of rounding.

In October, M 1 is estimated to have expanded at a 4.5 per
cent seasonally adjusted annual rate.

This increase was close to the

5.5 per cent pace registered in August and September, but sharply below
that in July.

Although October growth in M1 was slightly slower than

in September, M 2 grew at about the same rate, as time deposits other
than large certificates of deposit continued to expand relatively
rapidly.

The incraase in consumer-type time and savings deposits ap-

peared strong at both country and reserve city banks.
The increase in outstanding negotiable CD's (seasonally
adjusted) was the smallest since March.

In large part because of the

substantial increase in Treasury deposits, banks did not need to rely
as heavily on CD sales for funds.

In general, offering rates on CD's

edged downward during the month in unison with rates on competing
financial assets in comparable maturity ranges.

II - 6
MONETARY AGGREGATES
(Seasonally adjusted changes)

1972
Sept.
August
QIII
QII
Per cent at annual rates

Oct.p

(Currency plus private
demand deposits)

9.3

5.3

8.5

5.5

4.5

M 2 (M1 plus commercial
bank time and savings
deposits other than
large CD's)

13.3

8.6

9.3

8.0

8.4

8.1

M3 (M2 plus savings
deposits at mutual
savings banks and S&L's)

15.5

10.8

11.6

10.7

10.4

10.2

Adjusted bank credit proxy

11.3

11.1

10.7

9.3

10.2

9.8

Time and savings deposits
at commercial banks
a.

Total

14.8

15.7

13.2

13.9

13.7

12.0

Other than large CD's

17.1

11.8

10.1

9.9

11.6

11.5

Billions of dollars 1/

Memorandum:
a.

U.S. Government
demand deposits

-.1

-.8

Negotiable CD's

-.1

3.7

Nondeposit sources
of funds

-.3

-. 7

3.2

1.2

-. 1

p - Preliminary and partially estimated.
1/ Month-to-month and last-month-in-quarter to last-month-in-quarter changes
in averages, not annualized.

II - 7

The slower growth in demand and total time deposits in October
was offset in part by a rise in the level of U.S. government deposits.
Consequently, growth in the adjusted bank credit proxy was only marginally
below that of September and the third quarter.
Bank credit.

Total bank credit (seasonally adjusted, last

Wednesday of the month series) expanded at a moderately higher rate
in October than in September.1/

Following a slow-down in September,

total loans increased rapidly, while bank holdings of securities declined.
Almost all loan categories showed strength during the month, with business
loans and loans to nonbank financial institutions experiencing the
largest increases; real estate and consumer loans continued to rise at
close to the relatively high third quarter rates.
It should be noted that over the last five months, there have
been large monthly fluctuations in the growth rate of business loans,
suggesting that seasonal adjustment or other technical problems may be
affecting the month-to-month changes.

Hence, the underlying trend in

business loans is probably better measured by the relatively strong
12 to 14 per cent average growth rate of recent months, than by the
increase for any one month.

This substantial growth in business loans

in recent months is consistent with the increasing working capital needs
of firms in an expanding economy.

Indeed, in October the rise in busi-

ness loans was accompanied by a sharp increase in dealer placed commercial paper, an increase only slightly less than the surge in June.

1/ After adjustment is made for a Federal Reserve matched sale-purchase
transaction on the last Wednesday of September.

- 8

COMMERCIAL BANK CREDIT ADJUSTED FOR

LOANS SOLD TO AFFILIATES 1/
(Seasonally adjusted changes at annual percentage rates)

1972

1
Total loans and
investments 2/
U.S. Treasury
securities
Other securities
Total loans 2/
Business loans 2/
Real estate loans
Consumer loans 5/

IIQz

QIII

AUG.

SEPT.

13.6(13,9)-

18.3

11.9(10.1)

11.7
10.7
12.4(9.7)-

15.7

9.5

10.5
16.8
16.3

5.8
6.2
11.2

-7.6
-17,3
9.8
3/ 11.9
18.8(17.927.0

10.6
18.7
11.9

8.0 4
19.2
14.2

12.4
17.5
18.0

24.4
5.7
19.9 14.3
22.1.,16.3

OCT.
/

11.4(13.2)1

-40.6
-23.5(26.2)
21.0
16.7
17.9

1/
Last Wednesday of month series.
2/ Includes outstanding amounts of loans reported as sold outright by banks
to their own holding companies, affiliates, subsidiaries, and foreign
branches.
3/ Adjusted to exclude an $800 million matched sale-purchase transaction by
the Federal Reserve on the last Wednesday of September.
4/ Second quarter figures have been adjusted to exclude a reclassification of
loans by a major New York City bank in June.
5 Data revised to conform with major revisions in Consumer Credit statistics.

II - 9

In recent weeks, the increased business loan demand at banks
appears to be broadly based geographically and across industry groups.
However, at large banks in October, borrowing by public utilities and
trade concerns seemed especially strong, after allowance for the usual
seasonal factors.
Borrowings by finance companies and other nonbank financial
institutions also were strong during the month.

The increase in bank

borrowing by nonbank financial institutions was associated in part with
a large September sale of mortgages by GNMA to mortgage companies for
delivery in October.

In addition, it is reported that mortgage companies

were increasing their inventory positions in speculation on future price
rises.
Total holdings of securities declined in October, largely
reflecting a sizable drop in holdings of Government securities.

The

decline in Governments was concentrated exclusively at large banks, while
small banks increased their holdings.

Smaller than usual net cash

borrowing by the Treasury, together with the increasing loan demand, contributed to the net decline in acquisitions of Treasury securities at
large banks.

Bank holdings of other securities showed no net increase

for the first time since June; an increase at large banks offset a
decline at smaller banks--where bank loans and holdings of Treasury
issues rose sharply.
Over-all liquidity positions of larger commercial banks still
remained high.

New York City weekly reporting banks maintained liquid-

ity ratios near this year's peak levels, while the liquidity positions
of other weekly reporting banks have been essentially unchanged since
early in the year.

Short-term interest rates.

- 10

A generally calm atmosphere has

prevailed in short-term security markets since the October 17 FOMC meeting, and interest rates have edged slightly lower.

In the market for

U.S. Treasury bills, rates declined on balance from about 6 basis points
in the 3-month maturity area to 22 basis points in the one-year area.
Market professionals, observing the recent shift toward moderation in
money supply growth, have apparently concluded that the Federal Reserve
may not be under pressure to tighten for awhile.

Announcement of the

Treasury's decision to auction $2 billion of April tax bills November 17
for payment November 24, and $2.5 billion of June tax bills November 29
for payment on December 5, both with full tax and loan account credit,
had been generally anticipated and exerted only a slight impact on bill
rates.
Rates on private short-term securities also edged lower since
the last Committee meeting.

Commercial paper and commercial bank CD's

in the 90 to 119 day maturity areas, for example, dropped about 1/8 of a
percentage point,

offsetting rate increases recorded during early October.

With the drop in open market rates, two banks that follow a floating prime
rate policy lowered their rates by 1.8 of a percentage point to 5-3/4 per
cent, bringing them into line with rates charged by other major banks.
The generally improved outlook in securities markets ensured a
highly successful mid-November Treasury refinancing.

In this operation

a single 6-1/4 per cent 4-year note was auctioned to redeem $1.3

II - 11

billion of maturing issues and raise $1.7 billion of new money.
Subscriptions to the offering exceeded $7 billion and the average
rate was set at 6.20 per cent.

Since then, the yield on the issue

declined to 6.11 per cent in when-issued trading.
SELECTED SHORT-TERM INTEREST RATES
(Per cent)

1972
Nov. 6

Nov. 13

Change
Oct. 16-Nov. 13

Oct. 16

Oct. 30

Treasury bills
3-month
6-month
1-year

4.80
5.13
5.40

4.74
5.14
5.36

4.68
4.99
5.14

4.74
5.08
5.18

-. 06
-.05
-.22

Federal agency
1-year

5.80

5.78

5.58

5.61

-. 19

Commercial
paper
90-119 days

5.25

5.12

-. 13

Large negotiable CD's 1 /
60-89 days
90-119 days

5.00
5.25

4.95
5.12

5.00
5.12

-.13

Bank prime rate most prevalent

5.75

Statement Week Ended
Nov. 8
Nov.
Oct. 18
Nov. 1
Federal funds
(daily average)
1/
2/

4.91

5.06

5.25

Rate is for closest preceding Wednesday.
6 days of the week.
Average for first

5.12

Change--week ending
Oct. 18 to week
ending Nov. 14

+.21

II - 12

Nonbank financial institutions.

According to sample data,

the estimated annual rate of deposit growth at thrift institutions
slowed during October to 12-1/2 per cent from the 15-1/2 per cent
rate recorded in September and the third quarter as a whole.

But net

inflows to S&L's continued relatively strong by historical standards
with high-yielding certificate accounts attracting the major portion of
new funds.

At the end of September, certificate accounts constituted

nearly half of total savings capital, up from 44 per cent a year ago.
DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)

Mutual
satvings banks

1971 - QI

QII
QIII

QIV
1972 - QI
QII
QIlle
August P/
September 2/
October e

Savings and loan
associations

Both

16.3
15.0
9.6
10.6

24.6
18.4
15.7
13.8

21.9
17.3
13.7
12.8

14.3
11.1
10.7
9.2
11.5

23.4
16.0
18.8
13.7
17.3

20.5
14.5
15.6
12.3
15.5

8.4

14.2

12.4

Preliminary.

Estimated on the basis of sample data.
Total sources of funds at insured S&L's reached a record third

quarter volume this year.

Nearly all of these funds were used to acquire

mortgages, as shown in the following table.

- 13

SOURCES AND USES OF FUNDS AT INSURED SAVINGS AND LOAN ASSOCIATIONS
(Not seasonally adjusted, billions of dollars)

1969

Third quarter
1970
1971

1972

Sources
Deposit accounts,

net 1/

- .2

2.8
.2

5.2

7.3

3.0

.5
5.7

.8
8.1

3.6

4.0

6.4

8.0

.3
5.2

.8
7.8

.4
12.5

.8
16.9

- .8
6.0
5.2

.6
7.2
7.8

.7
13.2
12.5

.1
16.8
16.9

Mortgage refinancings (included
above in repayments)

1.2

1.3

Average ratio of outstanding
mortgage commitments to recent
cash flow 5/

1.12

.89

Borrowed funds
Subtotal

1.5
1.3

Gross mortgage repayments 2/

Other sources, net 3/
Total
Uses
Net increase in liquid assets 4/
Gross mortgage acquisitions
Total

Memoranda

1/
2/

.99

1.00

Net change in deposits, including interest credited.
Includes, in addition to repayments, proceeds from sales of loans
and participations and miscellaneous credits. Excludes interest,
taxes, etc.
Includes net changes in loans in process, reserves and surplus,
and other liabilities minus the net changes in miscellaneous

loans and assets not set out separately in the "uses" statement.
4/

Reflects all eligible liquid assets according to FHLB requirements.
For 1968, includes only cash and U. S. Government securities.
Since 1968, includes also Federal agency issues maturing within
five years.
Represents the average of the monthly ratios produced by dividing
outstanding commitments plus loans in process by the sum of cash
flow in the current month and previous two months.

Mortgage market.

- 14

Net mortgage debt expanded at an estimated

record seasonally adjusted annual rate of $66 billion in the third
quarter, with savings and loan associations particularly large lenders.
Residential mortgage debt formation rose to another record high, while
formation of nonresidential mortgage debt showed little change.

addition to the larger number of dwelling units financed, a higher rate
of loan refinancing as well as an increase in average loan amount have
contributed to the rise in residential mortgage debt during recent
quarters.

According to FHLBB data, the average size of conventional

home loans closed in the third quarter of 1972 was 5 per cent higher
for new and 9 per cent higher for existing-home loans, as compared to
the third quarter of last year.
Outstanding mortgage commitments on all types of properties,
which normally indicate future trends in mortgage debt formation,
rose further at savings and loan associations and at New York State
mutual savings banks in September, reaching a record seasonally adjusted

total of over $23 billion--7 per cent above the level at the end of
the second quarter and 42 per cent above a year earlier.
to larger loan amounts,
appears to reflect,

the rise in

In addition

outstanding commitments at S&L's

in part, a further rise in

their share of total

mortgage lending.
Rates on home mortgages were virtually unchanged in October,
according to HUD (FHA).

In the primary market, the average rate on

- 15

conventional first mortgages remained at 7.70 per cent for new-home
loans, and 7.75 per cent for existing-home loans.

In the secondary

market for Government-underwritten new-home loans, the average yield
edged up 1 basis point further to 7.57 per cent.
AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES
Primary market:
conventional loans
Spread
(basis
Level
points)
(per cent)
1971 - Low

-36
52

7.32
7.97

-27
31

High

7.55
7.70

15
39

7.45
7.56

5
28

3.7
4.7

July
Aug.
Sept.
Oct.

7.65
7.65
7.70
7.70

27
28
30
32

7.54
7.55
7.56
7.57

16
18
16
19

4.4
4.5
4.6
4.7

1972 - Low

2.5e
7.8

7.55
7.95

High

NOTE:

Secondary market:
FHA-insured loans
Spread
Discounts
(basis
Level
(points)
points)
(per cent)

interest rates on conventional first mortgages
FHA series:
(excluding additional initial fees and charges) are rounded by
FHA to the nearest 5 basis points. On FHA loans carrying the 7
per cent ceiling rate in effect since mid-February 1971, a
change of 1.0 points in discount is associated with a change
of 12 to 14 basis points in yield. Gross yield spread is
average mortgage return, before deducting servicing costs, minus
average yield on new Aaa utility bonds.

Estimated.

In the latest FNMA auction held on November 13, the average
yield on the forward purchase commitments for FHA and VA underwritten
home loans edged down 1 basis point to 7.71 per cent, the first

decline since mid-August.

- 16

In addition, bids received by FNMA dropped

sharply further to the lowest amount in 5 months, reflecting a recent
change in the outlook of mortgage

companies from an expectation that

mortgage prices would continue to decline to an anticipation of a rise
in prices by year end.
Long-term security markets.

Yields on long-term securities

have declined from 6 to 20 basis points since the October Committee
meeting, as apparent agreement on a Vietnam peace settlement sparked a
rally.

At the same time, favorable expectations on the future course

of interest rates were being generated by relatively light forward
calendars, the slowed growth of M1, and an edging down of most shortterm interest rates.

Moderation of fears about rising interest rates

stimulated acquisition of bonds by long-term investors and enabled
corporate dealers, particularly, to lighten inventory positions that
became heavy in late October.

The improved market atmosphere also

contributed to the relative ease with which the Treasury has been
able to initiate borrowing to meet its fourth-quarter cash requirements.

- 17

SELECTED LONG-TERM INTEREST RATES
(Per cent)

New Aaa 1/
utility bonds

Long-termState and
local bonds

U. S. Gov't.
(10-year
constant
maturity)

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

4.97 (11/21)
6.23 (6/24)

5.42 (3/26)
6.89 (7/20)

Low

7.08 (3/10)

4.99 (1/14)

5.87 (1/14)

High

7.60 (4/21)

5.54 (4/14)

6/61 (9/28)

1971
Low
High
1972

Week Ending:
Oct.

6
13
20
27

7.44
7.48
7.30
7.34

5.22
5.16
5.23
5.13

6.53
6.49
6.48
6.43

Nov.

3
10

7.27

5.04
5.10

6.37 r
6.28 p

r/
p/
1/
2/

Revised.
Preliminary.
FRB series.
Bond Buyer (mixed qualities).

From mid-October to mid-November there was a decline of
about 20 basis points in yields on high-grade utility bonds, while
yields on long-term U. S. Government securities fell 15 to 20 basis
points.

Yields on municipal bonds declined only about 6 basis points,

II - 18

on balance, over the period as some back-up in tax-exempt yields
occurred in response to the announcement on November 9 of a $1 billion
increase in the 30-day visible supply.

Current levels of yields on

private long-term bonds are only about 20 basis points higher than
their 1972 lows.

However, yields on Treasury bonds are 40 basis points

above their yearly low, reflecting the impact of significant debt
lengthening accomplished by the Treasury since mid-year.
The stock market began to rally in mid-October, apparently
on the basis of the Vietnam peace reports.

During the first two

weeks of November, the rise in equity prices on the major exchanges
continued, with the Dow-Jones Industrial Index showing a particularly
strong gain.

Most major indices are now at or near all-time highs.

Volume on the major exchanges has surged recently, with the NYSE
averaging over 21 million shares for the first 9 business days of
November.

RECENT CHANGES IN STOCK PRICES
Level of prices as of:
Nov. 14
Oct.16 Oct. 30

D-J Ind.

Per cent change from:
Oct. 30 to
Oct. 16 to
Nov. 14
Nov. 14

921.66 946.42

1,003.16

8.8

6.0
3.0

NYSE

58.49

61.12

62.94

7.6

AMEX

25.69

25.87

26.11

1.6

125.87 129.46

132.90

5.6

2.7

NASDAQ

II - 19

The forward calendar for new corporate securities continues
to indicate a greater-than-seasonal decline in public bond offerings
in the fourth quarter.

October volume, which was swelled by several

large finance company issues, was about $1.7 billion.

With the

continued lack of filings by industrial corporations and the
relatively small volume of utility debt offerings, the staff estimates
that November volume will be about $850 million and the December total,
$1 billion.

Takedowns of private placements are projected at a monthly

average of over $700 million.

Insurance companies and other institu-

tional investors are reported to be still actively seeking private
placements.

New equity issues, while expected to decline somewhat,

especially around the year-end holiday season, will probably remain
close to the $1 billion monthly average.
CORPORATE AND MUNICIPAL LONG-TERM SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)
Year
1971

1st eight
months

Sept.e/

Oct.e/

Nov.e/ Dec.f/

Corporate securities
Total

3,758

3,411

2,750

3,500

2,400

Public bonds

2,065

1,664

850

1,650

850

613

660

800

650

800

Stock

1,080

1,086

1,100

1,200

900

700

State and local
Government securities

2,080

2,004

1,693

1,850

1,600

1,400

Privately placed
bonds

2,500
1,00

- 20

Although market participants were surprised by the sudden
increase in schedulings of tax-exempt securities for late November
and December, the staff estimates that total offerings of long-term
debt by State and local governments, including these recent additions,
will decline in the fourth quarter.

Thus, monthly average volume may

be significantly below the $2 billion level which has prevailed for
almost 2 years.

Commercial banks appear to have slackened the pace of

their acquisitions recently, especially in the maturity range beyond
7 years.

However, casualty companies continue to be a major purchaser

in the long-term tax-exempt market, having experienced an unusually
favorable cash flow this year.

II - 21
Federal finance.

In light of the Administration's recent

statements that it intends to hold down fiscal year 1973 spending, the
staff has revised downward its projection of outlays to $253.0 billion.
This, combined with an upward revision of receipts to $226.5 billion,
results in a revised deficit of $26.5 billion, a figure $4.0 billion
below that shown in the October Greenbook.
Since the last Greenbook, a number of bills were enacted that
increased estimated outlays.

Among these are water pollution control

($700 million), and social security liberalization and medicare, HR-1
($900 million).

New legislation and developments in "uncontrollable"

outlays would have raised estimated outlays to $258 billion, as shown
in the table on the next page.

However, we assume $4 billion of savings

attributable to the Administration's efforts at controlling spending,
and approximately $1 billion more as the result of the expected settlement of the Vietnam War.
Our estimate of receipts has been increased by about $2.0
billion since the October Greenbook largely as the result of the
increase in social insurance tax rates incorporated in HR-1.

On a

calendar year basis, this tax rate increase amounts to $3.5 billion
and, together with previously legislated increases effective
January 1973, it will raise social insurance receipts by $10 billion
(annual rate).
The staff is holding to its earlier projection of $6.5
billion in extra withholding for calendar year 1972, which together
with the correction for previous underwithholding, results in an $C
billion year-to-year increase in refunds payable in the first two

II -

quarters of calendar 1973.

However, since monthly withholding receipts

for September and October have been lower than projected,

there is

the

possibility of a moderate downward revision in these figures.
These changes in estimated receipts and expenditures resulted
in rather substantial reductions in our projections of the high employment deficit--$4.3 billion for fiscal 1973 and $6.8 billion for calendar
1973.

We are currently projecting-a high employment deficit of $12.0

billion for fiscal 1973 and one of $8.3 billion for calendar 1973.
calendar year 1972 our estimate shows a deficit of $2.0 billion.

For

sharp move toward fiscal restraint is foreseen for the last two quarters
of calendar 1973 with the budget going from a deficit of $16.1 billion
(annual rate) in 1973 II to a surplus of $2.2 billion (annual rate) in
1973 IV.

The following table indicates the major factors accounting

for these shifts.

HIGH EMPLOYMENT BUDGET SUMMARY--NIA BASIS
(In billions of dollars at annual rates)

1973

1972
III
IV

III

2.4

2.6

6.9

-9.0

-11,3

10.0

5.5

-4.0

-13.5

3.0

-10.6

-6.0

2.2 -16.5

-17.7

-1'.1

-1.7

High employment surplus before

special programs shown below: -4.3

-3.4

-4.5

Effect of 20. social security
benefit increase and HR-1

-6.0

-- 8

Effect of wage base increase to
to $10,800 and rate increase
to 5.85%
-Net effect of overwithholding

6.5

Revenue sharing

Total surplus/deficit(-)

-11.7

-6.0
2.2

BUDGET OUTLAYS FOR FISCAL YEAR 1973
(Billions of dollars)
246.3

Total outlays, January 1972 Budget

2.9

Changes due to enacted budget amendments
Defense supplemental for Vietnam speed-up

1.2

Disaster relief, Hurricane Agnes

1.5

Other
Changes due to Congressional action or inaction
Coal miner benefits
General revenue sharing, shift of fiscal

1972 request to fiscal 1973
General revenue sharing above request

Social Security benefit increase (20% vs. 5%)
Social Security liberalization and medicare (HR-1)
Defense appropriations
Water pollution control
Other, net

.2
6.3
.9

2.3
1.0

4.1
-1.0
-1.7
.7
.0

2.5

Uncontrollable" outlays
Interest on debt
Public service grants, after allowance for

Congressional ceiling of $2.5 billion
Agriculture price supports
Other, net (including delay in asset sales and
reduced unemployment compensation)

1.3
-.3
1.0
258.0

Total outlays, excluding Administration economies
Assumed Administration economies, etc.
General revenue sharing, postponement of one payment
until fiscal year 1974
Defense, Vietam settlement
Nondefense purchases
Grants
Total outlays, current staff estimate

-5.0
-1.5
-1.0
-1.0
-1.5
253.0

II - 24
The end-of-October Treasury cash balance was $8.0 billion.
On November 10, the Treasury announced the sale of $4.5 billion of
tax anticipation bills, as mentioned previously.

In addition, a $2

billion two-year note issue is expected to be auctioned in late
December, and additions to the weekly bill auctions are projected to
be continued.

Borrowing in the first quarter of calendar 1973 is still

expected to be large for that period of the year.
quarter estimate is $9.0 billion.

Our current first

II -

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Total net borrowing
Weekly and monthly bills
Tax bills
Coupon issues

Oct.

Nov.

Dec.

Jan.

3.0

5.3

2.1

3.0

1.2
-2.0

1.1
2.0
3.0

0.8
2.5
--

1.0
---

-.6

2.0
--

As yet unspecified new
borrowing
Special issues to foreigners
Agency transactions, debt

repayment, etc.
a/

Plus:

Other net financial sources-

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

Level of cash balance
end of period
Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays

a/
b/
c/

-.8

-1.2

1.5

-.9

-1.0

1.6

-6.3

-3.6

-2.9

-5.4

0.8

-1.8

-0.8

8.8

7.0

6.2

17.6
21.2

18.8
21.7

19.1
24.5

-1.8-

8.0-

14.2
20.5

Matuning coupon issues
held by public c/

1.3

1.2

Net borrowing by gov'tsponsored agencies

0.4

0.3

Checks issued less checks paid and other accrual items.
Actual
In the August prefunding, $.9 billion and $1.1 billion, respectively, were
exchanged for the November and December maturities, leaving $1.3 billion
and $1.2 billion to be redeemed in cash.

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

F.R.B. Staff .Etimates

.I
Fiscal Fiscal Year 1973 Calendar Years
Year
Adm.l/
F.R. F.R. Estimates
1973
1972* Estimate Board 1972,

Calendar Quarters
1972
1973
II
III
III*
IV
I

Federal Budget
Surplus/deficit
Receipts
Outlays

Unadjusted data
-23.2
208.6
231.9

-25.0
225.0
250.0

-26.5
226.5
253.0

-19.8
221.7
241.4

-21.9
244.5
266.4

-2.0
55.6
57.6

-12.8
50.6
63.4

-13.3
52.6
65.9

.1.7
67.7
66.0

-1.5
65.5
67.0

-8.8
58.7
67.5

Means of financing:
Net borroxing from the public
Decrease in cash operating balance
Other 2/

19.4
-1.3
5.1

n.a.
n.a.
n.a.

21.9
3.6
1.0

13.3
4.3
2.2

18.0
0.5
3.4

5.0
0.3
-3.3

10.4
2.8
-.4

9.0
1.3
3.0

-2.5
-0.8
1.6

2.0
- .5

9.5
--.7

Cash operating balance, end of period

10.1

n.a.

6.5

7.0

6.5

9.8

7.0

5.7

6.5

4.7

n.a.

n.e.

3.5

n.e.

0.7

1.2

0.9

n.e.

Memo:

Net agency borrowing 3/

Seasonally adjusted, annual rates

National Income Sector
Surplus/deficit
Receipts
Expenditures

High employment surplus/deficit
(NIA basis) 4/

n.e.

-22.1
211.0
233.1

n.a.
n.a.
n.a.

-27.0
234.9
261.9

-19.9
228.1
248.0

-23.4
247.5
270.9

-12.9
230.2
243.1

4.1

n.a.

-12.0

-2.0

-8.3

2.2

-30.1
235.8
265.9

-33.0 -32.0 -15.8
239.5 234.1 255.6
272.5 266.1 271.4

-16.5 -17.7

-16.1

-12.8
260.8
273.6

-1.7

*Actual
e--projected
n.e.--not estimated
n.a.--not available
1/ Revised Administration estimates were disclosed by Secretary Shultz in testimony before the House Ways and
Means Committee on September 18, 1972.
2/ Includes such items as deposit fund accounts and clearing accounts.
3/
Federally-sponsored credit agencies, i.e., Federal Home Loan Banks, Federal National Mortgage Assn., Federal
Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.
4/
Estimated by F.R. Board Staff.

2.2

INTERNATIONAL
DEVELOPMENTS

11/15/72
III -- T - 1
U.S. Balance of Payments
(In millions of dollars; seasonally adjusted)

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

1972p/

1971
Year

726

-1,188

-2,689 -1,687
42,770 11,791
-45,459 -13,478
499
3,416

QII
Sept.*
QIII
-1,561 -1,100
-560
-1,943 -1,668
11,445 12,272 4,133
-13,388 -13,940 -4,693
58
382

Remittances and pensions
Govt. grants & capital, net

-1,530
-4,422

-389
-944

-377
-652

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

-9,782
-4,765
-909
-566
-2,372
-506
-664

-3,240
-1,266
-393
-533
-765
-159
-124

-290
-200
-344
312
114
-93
-79

242
-449
-705
e/-99

44
398
-108

-4,551
-68
849
1,161
272
Other U.S. securities (excl. U.S. Govt.)
-6.691
Liquid liabilities to:

1,484

2,773
346
164
747
29

374
352

172

other

Foreign capital (excl. reserve trans.)

-6,908
(-4,942)
-465
682
-74

-360
695
296
76
551
476
(-199)
53
22
226

27,417

2,827

1,081

4,724

-533

3.065
866
468
1,350
381

607
544
--1
64

-53
-7
185
-245

122
3

-93
1

-15
134

-5
-89

829

-935

-22,719

-3,434
-3,221
-3,293
-3,062

-1,028
-749
-2,425
-3,062

-4,846
-5,574
-4,708
5,337

-23,791

-3,985
-3,810

-2,206
-2,924

-5,256
-5,809

Direct investment in U.S.
U.S. corporate stocks
New U.S. direct investment issues

Commercial banks abroad
Of which liab. to branches 3/

Other private foreigners
Intl. & regional institutions

Other nonliquid liabilities
Liab. to foreien official reserve aeencies
U.S. monetary reserves (increase, -)
Gold stock
Special drawing rights 4/
IMF gold tranche
Convertible currencies

-10,927

Errors and omissions
BALANCES (deficit -) 4/
Official settlements, S.A.

, N.S.A.

-30,482

Net liquidity, S.A.
"

, N.S.A.

Liquidity, S.A. 5/

N.S.A.

1,178
968
(399)
280
-70
309

-71
410
294
(34)
150
-34

764
643
(277)
202
-81

626

-138

e/ Estimate.
Monthly, only exports and imports are seasonally adjusted.
Equals "net exports" in the GNP, except for latest revisions.
Balance of payments basis which differs a little from Census basis.
Not seasonally adjusted.
Excludes allocations of SDRs as follows: $717 million on 1/1/71 and
$710 million 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.
*
1/
2/
3/
4/

III - 1
INTERNATIONAL DEVELOPMENTS
Summary and outlook.

The U.S.

balance of payments was in

deficit on official settlements by about $3/4 billion in the five weeks
ended November 8.

U.S. reserve liabilities to Japan have risen by much more

than this amount, while reserve liabilities to other countries have
declined on balance.
The outlook for the U.S. balance of payments in the remainder
of 1972 is dependent on short-term flows associated with developements
in exchange markets - and in particular in the market for the yen.

the absence of such flows, the customary seasonal reflows could be expected to hold down the deficit on official settlements.
The third quarter deficit on official settlements of $4.7
billion (seasonally adjusted) reflected outflows in July following the
floating of the pound, but, for the 3 months August-October, it appears
that the official settlements deficit was on the order of $1 billion
(not seasonally adjusted).

As in the spring, this result reflected a

large underlying deficit, offset to a considerable extent by private
capital flows, including further short-term inflows through banking
channels and foreign purchases of U.S. stocks.
The trade deficit continued large through September.

Imports

of industrial materials were strong in the third quarter, reflecting
accelerated domestic activity; however, lack of growth in most groups
of finished goods imports may indicate some impact of last year's re-

alignment of exchange rates.

Export expansion in the third quarter was

very strong and included growth in most major commodity categories.

III - 2
Increased exports to Western Europe and Canada accounted for most of
the expansion.
Revised projections of an inter-agency committee point to
a reduction in the deficit on goods and services from about $4-3/4
billion this year to about half that amount next year.

Essentially

all of this improvement is expected on merchandise trade -the effects of exchange rate realignment, aswell

reflecting

as larger exports of

argricultural commodities and aircraft (both of which will involve
Little improvement is

larger outflows of Government-related capital).

expected in the service balance, since interest payments on a larger
stock of foreign liquid dollar assets are likely to increase.

Moreover,

projected increased outflows of U.S. Government grants and credits and
of private long-term capital (as direct investment increases from depressed
levels) suggest that the basic balance -- current account plus government and private long-term capital -- will be little changed in 1973
from the $11-12 billion range expected this year.
This projection is based on the assumption of further recovery
and expansion abroad.

The OECD Secretariat projects strong growth in

the major European industrial countries and in Japan through the end
of next year, with some narrowing of margins of excess capacity.
Foreign exchange and Euro-dollar markets.

During the past

five weeks sterling and the Japanese yen have been the foci of attention
in the exchange markets.

Sterling declined by about 3 percent between

October 11 and November 14, while the yen required massive intervention
by the Bank of Japan to keep it from soaring above its ceiling rate.

III - 3
Rates for continental European currencies declined slightly, on balance,
and the Canadian dollar weakened in the first few days following the
inconclusive Canadian Parliamentary elections on October 30.
Sterling began the period at around $2.42, eased moderately
over the next week, then plunged precipitously from October 19 to
October 27, reaching a low of $2.32 on the latter date.

The stimulus

for the selling of sterling appeared to be the threat of a power
workers' strike and subsequent market rumors and press speculation
that sterling would be re-pegged as low as $2.25, this against the background of an acceleration of Britain's wage-price inflation.

The Bank

of England did little to cushion the drop in the rate, selling only
about $134 million in market intervention.

In the last two days of

October and in early November sterling staged a modest recovery, with
the rate rising more than one full cent on November 6 when Prime Minister
Heath proposed a stationary wage-price freeze to Parliament.

The Bank

of England purchased about $50 million as sterling rallied.

In recent

days the pound has fluctuated fairly narrowly around the $2.35 level.
The Bank of Japan purchased $18 billion in the five weeks
ended November 14, bringing its total intervention purchases since
sterling was floated to $4.8 billion.

On October 20 Japan announced

a five-point program to reduce its swollen trade surplus which included, inter alia, tariff cuts, import quota increases and proposed
quantitative limits on exports by commodity by country.

The announce-

ment of these proposals had little effect on market expectations of an

III - 4
early yen appreciation, however, and Bank of Japan intervention continued in sizeable amounts.
substantial premiums,

Forward yen quotes are currently at

with yen for delivery in April currently

quoted at nearly 10 per cent above par.
Continental European currencies as a group have eased
modestly over the period.

The effects of higher interest rates in

Europe have apparently been overshadowed by a general bullishness towards
the dollar as a result of the movement towards a Vietnam settlement and
the re-election of the President.

The German Federal Bank sold $244

million between October 12 and November 8.

Other continental central

banks (probably excepting Italy) did not intervene in recent weeks,
though the System continued its small daily purchases of Swiss and
Belgian francs in order to effect swap repayments.
The Canadian dollar, which had been holding steady at around
$1.0180, dropped by about 2/5 of one cent in the first few days after
the Canadian elections with the Bank of Canada providing some $80
million in market support.

In recent days the rate has stabilized

around $1.0140 and the Bank of Canads has not done much in the market.
In the Euro-dollar market, the overnight rate has declined
slightly over the past month.

A rise in the Federal funds rate during

this period has raised the differential favoring U.S. bank's borrowing
of reserve-free overnight Euro-dollars to a current level of 1/2 per
cent.

However, overnight Euro-dollar borrowings subject to the 20 per

cent reserve requirement are still about 60-70 basis points more costly

III - 5

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
Average for
month or
week ending

(1)
Overnight

Federal

Wednesday

Euro-$1/

Funds/

3.79
4.07
5.20
4.47
4.54
4.77

4.27
4.46
4.55
4.80
4.86
5.05

-0.48
-0,37
0.65
-0.33
-0.33
-0.28

40.47) 4.25
(0,64) 4.82
(1.95) 5.34
(0.79) 5,18
(0.79) 5.15
(0.91) 5.10

4.21
4.50
4.72
4,73
4.96
5.10

0.04
0.32
0.62
0,45
0.19
0.00

(1.10)
(1.53)
(1,96)
(1.75)
(1.48)
(1.28)

Oct. 4
11
18
25

4.62
4.87
4.89
4.57

5.18
5.09
4.91
5.01

-0.56
-0.22
-0,02
-0.44

(0.60)
(1.00)
(1.20)
(0.70)

5.01
5.16
5.09
5.13

5.07
5.13
5.13
5.13

-0.06
0.03
-0.04
0.00

(1,19)
(1.32)
(1.23)
(1.28)

Nov, 1

4.71

5.06 -0.35

(0,83) 5.01

5.00

0.01

(1,26)

4,74

5.25 -0.51

(0.68)

5.04

5.00

0.04

(1.30)

15P

4.80

5.13 -0.33

(0.87) 4.95

5.00

-0.05

(1.19)

1972 - May
June
July
Aug.
Sept.
Oct.

(2)

(3)
Differential

(4)
1-month
Euro-$

30-59 day
CD rate

(1)-(2)(*) Depositl/ (Adi.)!/

Differential
(4) -5)(A)

1/ 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 rate.
3/ Offer rates (median, as of Wednesday) on large denomination CD's by
prime banks in New York City; CD rates adjusted for the cost of required

serves.
Differentials in parentheses are after adjustment of Euro-dollar rates
*/
for the 20 percent marginal reserve requirement (relevant to banks with
borrowings in excess of their reserve-free bases).

P/ Preliminary

III - 6
than Federal funds borrowings.

The rates on Euro-dollar deposits of

one-and three-month maturity have also softened slightly since midOctober, but approximately equal declines in CD rates of comparable
maturity have kept the relative cost to U.S. banks of these potential
sources of funds unchanged, with the reserve-free cost of one-month
Euro-dollars equal to that for one-month CD's and the three-month Eurodollar rate exceeding the three-month CD rate by about 2/3 per cent.
The daily average of U.S. banks' liabilities to their foreign
branches has continued stable during the past month at a level slightly
above the Regulation M reserve free base.

Continuing the pattern of

the previous month, liabilities of U.S. agencies and branches of foreign
banks to foreign commercial banks have risen further since mid-October,
increasing by about $800 million in the four week period ended November 8.
Balance of payments.

The U.S. payments deficit on official

settlements showed a deficit in October and early November of about
$3/4 billion --

roughly the size of the September surplus.

For the

three months August-October the deficit has been on the order of $1
billion (not seasonally adjusted) -- little changed from the rate of
deficit that has obtained since early spring, apart from the extraordinary outflow in July following the decision of the United Kingdom
to float the pound.
These relatively low rates of official settlements deficit
in the face of a persisting large current account deficit reflect
continued private capital inflows.

Agencies and branches of foreign

banks were increasing their outstanding foreign borrowings through early
November.

Foreign purchases of U.S. stocks amounted to $170 million

- 7

in September and according to preliminary indicators continued large
in October.

An additional inflow in September was a reduction of

$400 million in bank-reported claims on Canada --

probably in good

part customers' claims.
U.S. foreign trade.

In September the trade deficit was

slightly larger than in August as exports slipped while imports were
For the third quarter the deficit was at an annual rate

unchanged.

of $6-3/4 billion (balance of apyments basis), down from $7-3/4 billion
in the second quarter but about the same level as in the first quarter
Exports in the third quarter were about 7 percent higher than in the
second quarter, all in volume as prices (unit-values) rose only
marginally.

Imports in the third quarter also increased but more

moderately -- 4 percent -- with about a third of the increase accounted
for by higher prices, principally in foods.
The trade deficit in the third quarter was still very high,
with shifts in the commodity composition of trade indicating that
an increasingly important element is the strong growth in domestic
business activity.

The bulk of the increase in imports from the second

to the third quarter was in industrial materials --

particularly

petroleum, but also in paper, steel and other metals and textiles.
Almost all of the increase in imports of industrial materials represented
higher volumes.

The value of imports of foodstuffs also increased in

the third quarter but this was largely because of higher prices for
coffee, meat and fish.

III - 8
In contrast to the upturn in these classes of imports, imports
of finished goods -- capital equipment, automobiles and other durable
consumer goods -- all fell or showed little change from the second to
the third quarter, both in value and in real terms.
durable consumer goods sector were imports higher.

Only in the nonOf even greater

significance is that in the third quarter imports of each of these classes
of finished goods, again with the exception of nondurable consumer
goods, was a decreasing portion of total domestic expenditure on thes
types of goods.

The absolute levels of imports of finished products are

still very high by any past standard, perhaps in part because movements of
these goods may still be affected to some degree by the disrupting
effects of domestic strikes that occurred last year.

The third quarter

data, however, suggest that the exchange-rate changes of the Smithsonian
Agreement may be beginning to slow the long-term rise in the ratio of
imports to total domestic expenditures for such goods.
The steep rise in exports in the third quarter was broadly
based across commodity categories and included increases in agricultural
products, industrial materials, machinery, consumer goods, and automobile
parts to Canada.

Shipments of agricultural commodities accounted for

about one-fourth of the total rise, reflecting not only heavier grain
shipments to the Soviet Union but also larger exports of rice,
hides and skins, and tobacco to other countries.

Grain movements to

Russia, however, have proceeded rather slowly because of transportation
problems and movement of the $1-1/4 billion of grain and soybeans sold

to that country is certain to accelerate in the coming months.
Particularly encouraging in the pattern of exports in the third quarter

III - 9

was the steep rise in deliveries of machinery and a wide variety of
nonagricultural industrial materials -- chemicals, steel, metals.
Foreign orders for U.S.

machinery are holding up well and the expecta-

tions of stronger economic activity abroad, particularly in Japan,
should stimulate further advances in exports of these commodities.
Exports of commercial aircraft slumped in the third quarter but a sharp
pickup is expected in the current quarter as deliveries of the new
DC-10's to foreign airlines begin and an increased number of jumbo jets
are exported.
Exports to all major areas increased from the second to the
third quarters with shipments to the Western European countries particularly
strong.

The rise in exports to Canada was virtually all in automotive

equipment while the near doubling of exports to the Soviet Union resulted
from the heavy movement of grains.

III -

The short-term outlook for economic activity in the major
industrial countries.

Economic activity in all the major industrial

countries has recovered this year from the generally slow pace in
1971.

The growth of output is generally expected to continue next

year -- in most cases at an accelerated rate.

This past year private

consumption expenditures, and, to a lesser extent, government
expenditures, have been the main factors contributing to growth,
but in 1973 private investment expenditures in most countries
are expected to expand more rapidly and to become relatively more
important.
This is the view expressed by the OECD Secretariat in a
set of forecasts prepared in October

for the recent Short-Term

Forecasters' and Economic Policy Committee meetings.

The Secretariat

expects a rate of growth of real GNP for the seven major OECD
1/
countries- of around 6-1/2 per cent through the end of 1973 -compared to the long-run average rate of growth of about 5-1/2 per
cent.

It also expects that existing margins of excess capacity will

be reduced, in some countries to the point where aggregate demand
pressures may become a matter of policy concern before the end
of next year.
Our own assessment of the outlook for economic activity
in the major countries is in substantial agreement with that of

1/ Canada, France, Germany, Italy, Japan, the United Kingdom, and
the United States.

III - 11

the Secretariat on two points:

(1) the cyclical upswing is

generally expected to continue at least through next year, and
(2) current rates of price increase are clearly too high in many
countries and inflation may even become more of a problem next
year.

However, large margins of unemployed resources do exist in

most countries.

With the impact of fiscal policies expected to be

somewhat less expansionary next year in any case, and with the
Common Market countries (including the United Kingdom) presumably
committed to slowing down rates of growth of monetary aggregates
in those countries, it seems premature to suggest that further
actions to restrict the growth of demand will soon be desirable.
For the major industrial countries other than Canada
and the United States, the rate of growth of GNP forecast for 1973
is not significantly different from the average rate observed from
1958-59 to 1969-70.

Moreover, because the current expansion

follows an extended period of slow growth or recession, it is
accompanied by historically high rates of productivity increase.
Consequently, increases in unit labor costs are moderating in many
countries, despite continued relatively high wage settlements in some
cases.

In Germany and the Netherlands, for example, unit labor

costs have flattened out completely and are beginning to decline.
In short, output expansion at this stage of the cycle tends to reduce costs rather than to increase them, at least in the short run.

III - 12

Economic activity in Germany surged strongly in the first
quarter of this year, reflecting partly exceptionally strong
construction activity due to the mild weather, and partly a recovery from output levels which were depressed in late-1971
by international uncertainties and strikes.

In the second quarter

growth of output fell back, so that real GNP in the first half of
1972 as a whole increased at an annual rate of 5.7 per cent.
Real GNP is expected to grow more slowly in the second
half of this year, and then to pick up somewhat in 1973 to a rate
of a little more than 5 per cent.

The pick-up next year is based

on an assumption that business fixed investment will be stronger.
Favorable export prospects, an improvement in company profits,
and relatively high rates of capacity utilization for this stage
of the cycle -- as well as recent business surveys -the business climate is favorable.

suggest that

Inventories, which have been

falling the last two years, are also expected to be built up to
more normal levels as growth continues.

Residential construction

should remain buoyant, but will show slowing rates of growth due
to the exceptionally large output in the first half of this year.
Both private consumption expenditures and net exports
are expected to contribute about the same amount to real growth
in 1973 as in 1972.

Consumption should remain fairly strong,

bolstered by an accelerated growth in earnings and transfers
from the public sector; this will be offset only partially by a

III - 13

faster rise in prices.

German exports may increase rapidly next

year as Germany's export markets expand, but German imports will
accelerate as well as the cycle progresses.
Consumer expenditures in the United Kingdom recovered
strongly in the first half of this year.

Fixed investment ex-

penditures also showed some strength, with an upswing in private
residential investment, especially, offsetting continued declines
in investment expenditures by the manufacturing industry.

This

increase in demand, however, was reflected in only moderate growth
of output, as inventories were run down significantly.
The outlook for activity in the United Kingdom is clouded
by uncertainties over the effects of the wage/price freeze imposed
by the Heath Government on November 6 (see Appendix A).

However,

recent surveys suggest that private investment expenditure by the
manufacturing sector will turn up, despite the continued existence
of considerable excess capacity.

In addition, there is likely to

be some rebuilding of inventories, given the historically low
stock/output ratios, although it does seem that there has been a
permanent shakeout of inventories (i.e., desired normal stock/
output ratios may now be permanently lower than was previously the
case).
Two big questions remain as a result of the freeze.
(1) Will fixed investment and stockbuilding be sufficiently strong
to sustain growth at something like the current 5 per cent annual

III - 14
rate in the face of somewhat slower growth of government expenditures
and, perhaps, less buoyant consumer demand (as the freeze retards
the growth of real income)?

(2)

How much, if at all, will the foreign

sector contribute to the growth of aggregate demand next year?
The recovery in Japan which began around the turn of the
year was fueled by a sharp recovery in private consumption and strong
government investment.

Both of these factors resulted in large part

from the Supplementary Budget for FY 1971 (ending March 1972), which
provided for a sizable increase in expenditure and a reduction in
taxes.

The strength of private consumption, in real terms, also

reflected a slowdown in the rate of increase of prices while wages
and employment rose more rapidly.
tures,

Private fixed investment expendi-

ith the exception of investment by the manufacturing industry,

has also been strong.

But stockbuilding was weak, and the foreign

balance deteriorated significantly (in constant yen prices), so that
the growth of real GNP has been limited in 1972 to about 9 per cent -or moderately lower than pre-recession levels.
In 1973 real GNP is now expected to increase by about 11
per cent.

This forecast has recently been revised upward in light

of a Supplementary Budget for FY 1972 (ending March 1973) that was
approved by the Cabinet on October 20.

The strong advance in real

consumption expenditures is not expected to continue, in spite of
rapidly rising nominal disposable income and a possible fall in the
saving ratio, largely because consumer prices may accelerate.
Residential construction is assumed to remain very strong, although

III - 15

this assumption may be overly optimistic.

Business investment may

recover, but business confidence is depressed by considerable uncertainty concerning the trend of exports and the future course of
public policies (an election is scheduled for December 10, following
the dissolution of the Diet on November 13).

Finally, both the

trade and current account surpluses are expected to decline somewhat
from the high 1972 levels, with exports forecast to rise, but with
imports forecast to rise considerably more rapidly.

The net contri-

bution of the foreign sector to the growth of total demand will
remain negative in 1973 (i.e., net exports in volume terms will
become smaller) -- in marked contrast to 1971.
In Canada, output growth accelerated sharply in the second
quarter of this year.

The growth rate of real GNP has averaged

about 7 per cent (annual rate) in the six quarters ending in mid1972.

The second-quarter acceleration reflected primarily a 10-1/2

per cent (annual rate) increase in consumer expenditures -- based,
in turn, on a sharp rise in government transfer payments -- and a
strengthening of the external sector.
Growth of real GNP is expected to continue next year at
about the same rate as in 1972 -- a little over 6 per cent -although forecasts both by the OECD Secretariat and by some Canadian
observers suggest that growth may peak around mid-year.

Consumer

expenditures should remain strong, with only a gradual deceleration
from current high rates of growth.

Residential construction

III - 16

activity may decelerate, but only gradually.

Business investment,

particularly in machinery and equipment, should show considerable
strength, and an increase in inventories from very low inventory/
shipment levels is expected.

Rising economic activity abroad --

especially in the United States -- should stimulate Canadian exports,
but imports are also likely to grow rapidly.

In spite of continued

rapid output growth, unemployment is expected to remain a problem
in 1973; the unemployment rate stood at 6.7 per cent in the third
quarter of this year.

A-1
APPENDIX A:

THE WAGE/PRICE FREEZE IN THE UNITED KINGDOM*

On November 6, Prime Minister Heath introduced into Parliament
the Counter-Inflationary (Temporary Provisions) Bill, which provides
that essentially all prices, wages, rents, and dividends are to be
frozen as of November 6. The freeze initially will last 90 days from
the date on which the Bill is passed and receives Royal Assent. Since
passage is expected to take several weeks, at least, the freeze will
last roughly 4 months, and can be extended a further 60 days. That
is, it could last until May of next year.
Some of the details of the "Phase I" freeze, based on a

white paper entitled "A Programme for Controlling Inflation", are as
follows:
A. Prices. The standstill applies to prices and charges
for goods and services supplied to the home market by either the
private or the public sector. Increases announced, but not implemented,
prior to November 6 are not allowed. Enterprises that believe their
costs (either import costs or domestic costs) have risen so much that
they cannot be absorbed may request an exemption; exemption will
ordinarily be granted only in cases where raw materials or raw agricultural produce account for a high proportion of total costs.
Wholesalers and retailers are expected to do everything
possible to avoid any increases in prices; in particular they should
not increase their cash margins during the freeze.
Certain prices -- especially those for fresh food such as
fruit, vegetables, meat and fish and for imported raw materials -are subject to fluctuations arising from external or seasonal causes.
When such prices rise, enterprises handling these products without
applying any manufacturing process to them may raise their prices by
the same amount. When there are price reductions, enterprises will
be expected to pass them on in full.
B. Employment Incomes. The standstill applies to all
increases in pay and to other improvements in the terms and conditions
of employment (e.g., hours and holidays). The term "pay" covers all

*Prepared by Larry J. Promisel, Economist, World Payments and Economic
Activity Section, Division of International Finance.

A-2

rates of pay, including, in addition to the basic rate, rates of pay
for overtime or weekend work, piece rates, and all allowances normally
considered as pay. The standstill will not apply to increases in

earnings resulting directly from extra effort or output under existing
arrangements (e.g., increases in piece work earnings based on increased
output), nor will it apply to individual pay increases resulting from

genuine oromotions.
In all cases where a settlement was reached before the

freeze, and the operative date of increase was on or before November 6,
the increase can be implemented. Otherwise, the operative date of
such increases must be deferred until the standstill ends. Similarly,
any increase resulting from negotiations or arbitrations which take
place during the standstill must be deferred, and will be subject to
the policy in force after the standstill.
The standstill will also apply to salaries and other forms
of remuneration not determined by collective bargaining, as well as
to charges and fees for services by self-employed persons.
C. Rents. Rents on private accommodations, as well as on
business premises and land, are subject to the standstill provisions.
Increases in rent which are already scheduled must be deferred until
the end of the standstill.
D. Dividends. The standstill will apply to dividends declared
by companies incorporated in the U.K. These companies will not be
allowed to declare dividends in excess of the corresponding amount in
the same calendar period a year ago.
E.

Interest rates are not subject to the freeze.

F. Enforcement. The Government is relying on the public to
notify them of violations. Fines will be imposed in cases where an
individual or company fails to comply with a Government order to roll
back prices, incomes, charges, or dividends or withholds information,
and also where anyone acts to force an increase contrary to the provisions of the freeze. Orders can be given prohibiting the raising of
dividends or rents.1/ Fines for breach of any order can be up to £400
on summary convictions, and up to an unspecified amount on conviction

1/ Strictly speaking, one cannot be fined for raising prices or wages,
but rather for refusing to roll them back upon request.

A-3

on indictment. Refusing to supply information, or giving false information, will carry a fine up to £100.
If unions strike against an order, they will be liable to
fines as corporations, not as groups of individuals. (This provision
is designed to avoid having to deal with "martyrs" as the Government
did in conjunction with the Industrial Relations Act.) If individual
workers are fined, the fines can be collected by "attachment of earnings"
orders on their employers.

The freeze was imposed after the tripartite talks -- among
the Government, the Confederation of British Industry, and the Trade
Unions Congress -- broke down on November 2.
The tripartite talks, which were sought as a "more sensible
way of settling our differences" in the wake of the miners' strike
in February, began on July 18. On September 26, Prime Minister Heath
put forward a proposal designed to sustain growth of real income, to
improve the relative position of lower paid workers, and to restrain
the rate of inflation. The main points of the proposal included a
commitment to a 5 per cent rate of real growth, a 5 per cent limit
on retail price increases, a £2 per week flat-rate pay increase, and
threshold agreements.
The talks finally broke down at the beginning of November,
partly because the unions were unhappy with a flat-rate increase in
general, and a £2 limit in particular, and also because the unions
were not prepared to adopt a voluntary wage policy unless there were
stronger guarantees -- preferably statutory -- that price rises would
not exceed the limits. The CBI, in turn, was not prepared to accept
a statutory price policy and insisted that price rises -- even at the
retail level -- would be restrained.
With the season of wage settlements approaching, with
sterling floating, and with entry into the Common Market scheduled
for January 1, some action to restrain wage and price inflation
was clearly called for. This freeze, therefore, can properly be

viewed as a means of buying time for a longer-term wage/price policy
to be worked out. The Heath Government is still hopeful that the
tripartite talks will continue -- despite the unions' insistence that
they will not participate -- and that a workable "Phase II" program
can be agreed upon in that forum. Otherwise, a statutory policy will
be forthcoming. In either case, the expectation now is that the
"Phase II" program will resemble the proposals Prime Minister Heath
put forward in September.

A-4

In order to ease pressures during the period of the freeze,
and to make the freeze more palatable to labor, several large² wage
settlements were reached immediately prior to November 6, and the
Prime Minister announced several measures, in conjunction with the
freeze, that involve transfer payments to low-income persons (this
is aimed at the second of the objectives of the Government's September
proposal). The fact that the price freeze follows 15 months of selfimposed price restraint on the part of the CBI has raised some
objections, but this is not expected to affect seriously the freeze.

2/ "Large" in the sense of number of workers involved; the amounts of
the settlements were reasonably moderate, i.e., less than the 14-16
per cent of recent months, but more than the 8 per cent or so that the
Government would like to see.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 20-21, 1972 : Greenbook

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