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CONFIDENTIAL (FR)

CURRENT ECONOMIC
and
FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

November 17, 1965

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

November 17, 1965

I-

SUMMARY AND OUTLOOK
Outlook for demands and output
Prospects for a substantial rise in final demands in the
current quarter and in early 1966 are firmer than they were three weeks
ago. Another large drop in steel output in October was more than offset by gains in business equipment and defense industries and even in
some consumer lines, and total industrial production rose half a point
instead of showing a small decline as anticipated earlier.

GNP,

now estimated at $677.5 billion annual rate in the third quarter,
was up $11-1/2 billion from the second quarter and a further increase
of roughly similar size is expected in the current quarter.
Consumers are now benefiting from the rise in nonfarm employment--larger in October than in the preceding two months--and from
higher current social security payments.

Retail sales in October were

up 1 per cent from third quarter levels, with auto sales continuing
high.
In January consumers face a substantial boost in social
security taxes, which will act temporarily to moderate the rise in
disposable income and presumably also in consumption expenditures in
the first quarter.

However, some offsetting stimulus to consumption

expenditures will accrue from the second round of excise tax cuts,
also effective in January.

Employers, too, will be affected by the

social security tax increase, which will raise labor costs somewhat.

I - 2

Continued rapid expansion in business fixed investment
outlays seems assured for early 1966, on top of notable gains throughout
this year and in 1964, and by the first quarter, with the steel inventory
liquidation tapering off, the rate of total business inventory accumulation will probably be rising again from the reduced fourth quarter
level.

Moreover, continued increases are in prospect for national

defense outlays.

Capacity utilization and prices
The industrial commodity price index edged up further in
October and early November, and some upward creep seems likely to
continue.

But since mid-year, the rise in prices has been at an annual

rate of 1 per cent, compared with a rate of 2 per cent in the prededing
nine months.
The

For particular commodities, shortages have persisted.

price increases that have occurred in most nonferrous metals have been
the result of inadequate world mine capacity and repeated strikes and
other disruptions to output.

For some, such as lead and zinc, market

conditions apparently have eased since summer, but for copper, the
supply situation has worsened.
In general, however, industrial capacity limitations have not
been a source of widespread upward pressures on prices so far.

Capacity

utilization in manufacturing has been reduced slightly recently, reflecting mainly the drop in steel production, and a GNP growth of
$10-$12 billion a quarter should not result in much change in the
utilization rate over the next few months.

But if strong plant and

S-

equipment spending coincides with defense spending substantially larger
than now indicated, added pressure on resources in already taxed areas
could encourage more rapid increases in prices and costs than have
been experienced recently.

Business credit demands
Business loan expansion in October and early November appears
to have tapered further from the pace of summer and early fall, raising
the possibility that the year-end loan bulge may be more moderate
than earlier anticipated.

Not only is cessation of inventory stock-

piling in the steel-using industries reducing loan demand from metals
firms, but bank loans to other industries are increasing less rapidly
than earlier in the year.
This slowdown may reflect, in part, increased capital market
financing.

Bond issues have been large in recent weeks and the calendar

remains fairly heavy.

With favorable prospects for continued vigorous

economic expansion, external financing needs of business are likely to
remain large in the aggregate.

Deposit and bank credit expansion
Private demand deposits are likely to grow considerably less
rapidly in November than in the previous two months, partly because of
bank sales of Treasury issues.

On the other hand, time and savings

deposits are likely to continue to grow fairly rapidly.

With CD's

at Regulation Q ceilings in New York, however, further increases in
market rates would reduce the flexibility of banks in gaining funds

1-4
from this source.

Outstanding CD's did decline on balance in early

November, but this seemed to be less a reflection of the restraining
effect of the Q ceiling than of the reduced bank interest in tapping
this source of funds in light of the apparently weaker loan demands at
the time, and of the comfortable money position of one large New York

City bank.
A temporary bulge in bank credit will result from bank
acquisitions of the new Treasury tax bill, to be paid for by tax and
loan account credit on the last Wednesday of the month.

On a daily

average basis, however, bank credit expansion is likely to be comparatively moderate in November, although still substantial for the fourth
quarter as a whole.

Securities market prospects
Investor judgment that current rate levels may be sustainable
seems to be developing in some key security markets.

Nonetheless,

both long- and short-term markets remain quite sensitive to changes
in prospective supply and demand factors, including monetary policy.
The high yields recently available on new offerings of corporate securities have apparently attracted a good flow of investment
funds, although the fairly heavy calendar of corporate issues seems
likely to discourage any tendency for the market to rally.

The U.S.

Government bond market has rallied in recent days, but trading has
remained thin and dominated by market professionals.

Dealer bill

inventories are not exceptionally large for this time of year, but
dealers will soon have to take into position the $2.5 billion of new June
tax bills as they are sold by banks.

I - 5
In the municipal bond market, however, the November calendar
remains full at a time when it often shows some seasonal slackening,
and bank demand remains well below summer levels.

Also, interest

rates on home mortgage loans have shown a slight tendency to rise
since late summer--the first rise in six years.

Large current supplies

of high yielding corporate securities, the reduced general liquidity
of commercial banks, and the unusually large backlog of loan commitments
at major lending institutions are all operating to moderate the availability of funds in home mortgage markets.

Balance of payments
U.S. and Canadian financial authorities are seeking to postpone

up to $200 million of new issues of Canadian securities in the United
States previously scheduled for November and December.

These efforts

enhance the prospects that the fourth quarter deficit on "regular

transactions" can be held to about the $400 million average of the
first three quarters.

Preliminary data on changes in reserves and

liabilities during October are consistent with this outlook.

The

"official settlements" balance--on a definition that has been revised
significantly--will show a reversion to deficit after surpluses in

the second and third quarters.

For the year, the deficit on the new

official settlements basis is expected to be roughly $1/2 billion,
compared with $1-1/4 billion in 1964.
The U.K. Treasury has liquified about $1/2 billion of its
U.S. security portfolio this year, adding that much to the "official
settlements" deficit.

On the other hand, the deficit has been reduced

1-6

by a number of important temporary influences,
crisis,

including the sterling

the French debt prepayments, and flows of Italian commercial

bank funds into the Euro-dollar market.
distance to go before U.S.

Thus,

there remains some

international transactions are brought into

reasonable equilibrium.
(For further discussion of the changes in balance of payments
presentations, see Section IV of this Green Book and the forthcoming
Supplement.)

T - 1

November 16

1965

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)
Nonfarm employment
Manufacturing
Other industrial
Nonindustrial

Amount
Latest
Period Latest Preced'g
Period Period
Oct. '65 75.8
75.5
II
3.3
3.3
"
4.4
4.3

Year
Ago
74.3
3.9
5.2

61.0
18.2
7.9
34.9

58.4
17.2
7.7
33.5

4.5
6.1
2.6
4.2

payroll (mil.)

60.8
18.2
7.9
34.7

Per cent change
Year
2 Yrs.
Ago*
Ago*
2.0
3.5
-15.2 -21.5

6.9
6.7
4.6
7.6

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

143.6
144.1
143.2

143.0
142.6
143.0

131.6
130.5
132.6

9.1
10.4
8.0

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

103.1
102.4
103.0
103.7

103.0
102.3
103.0
103.5

100.8
101.1
100.4
98.2

2.3
1.3
2.6
5.6

2.6
1.8
6.2
4.6

Sept.'65 110.2
I!
104.9
109.7
il
"'
118.5

110.0
104.7
110.1
117.9

108.4
104.3
107.2
115.5

1.7
0.6
2.3
2.6

2.9
1.2
4.1
4.4

Oct.'65 2.65
"
108.77

2.64
107.40

2.54
102.97

4.3
5.6

6.9
7.9

545.3

532.0

501.7

8.7

16.2

24.0
8.4
5.5

23.8
8.9
5.4

21.4
5.8
5.1

12.0
44.2
8.6

15.7
11.6
21.9

1.5

1.2
10.0
12.4
7.7

-16.9
1.0
20.0
26.0
25. 1

Consumer prices (57-59=100)1/
Commodities except food
Food
Services
Hourly earnings, mfg. ($)
Weekly earnings mfg. ($)
Personal income ($ bil.)2/

Sept.'65

Retail sales, total ($ bil.)
Autos (million units)2/
GAF ($ bil.)

Oct. '65
It

Selected leading indicators:
Housing starts, pvt. (thous.)2/ Sept.'65 1,424
Oct.'65 41.0
Factory workweek (hours)
New orders, dur. goods ($ bil.)
Sept.'65 21.9
"
New orders, nonel. mach. ($ bil.)
3.3
Common stock prices (1941- 4 3=10)1/Oct. '65 91.39
Inventories

book val. ($ bil.)

Gross national product ($ bil.)2/
Real GNP ($ bil. 1958 prices)2/
*Based on unrounded data.

13.9
13.3
14.1

1,422
40.8
21.5
3.3
89.38

1,445
40.5
19.9
2.9
84.85

Sept.'65 116.7

116.7

108.5

7.6

13.2

QIII '65
"

665.9
601.4

634.8
582.6

6.7
4.7

14.2
10.1

677.5
609.7

1/ Not seasonally adjusted.

2/ Annual rates.

T -

November 16

1965

SELECTED DOMESTIC FINANCIAL SERIES
Week ended Four-Week
Average
Nov. 12
Four-Week
Average
Week
12
Money Market!/ (N.S.A.)
Nov. ended
Federal funds rate (per cent)
3.97
4.02
U.S. Treas. bills, 3-mo,yield (per cent)
4.06
4.05
Net free reserves 2/ (mil. $)
62
-73
Member bank borrowings 2/ (mil. $)
437
334
Security Markets (N.S.A.)
Market yields 1/ (per cent)
5-year U.S. treas. bonds
20-year U.S. treas. bonds
Corporate new bond issues, Aaa
Corporate seasoned bonds, Aaa
Municipal seasoned bonds, Aaa
FHA home mortgages, 30-year 3/
Common stocks S&P composite index4/
Prices, closing (1941-43=10)
Dividend yield (per cent)

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

4.25
4.06
62
627

1.00
3.77
-233
334

4.48
4.40
4.73
4.60
3.32
5.49

4.39
4.36
4.63
4.58
3.32
5.49

4.40
4.36
4.73
4.60
3.32
5.49

4.13
4.20
4.49
4.43
3.09
5.44

92.13
2.98

91.91
2.92

92.55
3.11

81.60
2.91

Change
in
October
Banking (S.A., mil. $)
Total reserves

Last six months
Low
High
Low
Last
Highsix months

Average
change
last 3mos.

Annual rate of
change (%)
3 mos.
lyear
0.1

4.4

500
400

2,500
600
1,200
200
500

10.5
11. 0
12.0
4.2
14.2

10.6
19.5
12.9
-5.0
15.8

1,300
2,000
1,400

1,000
2,000
1,700

7.6
17.4
7.8

4.3
16.3
6.3

1,700

500
1,300

N.S.A.--not seasonally adjusted. S.A.--seasonally adjusted.
1/ Average of daily figures. 2/ Averages for statement week ending November 10.
Data are for weekly
3/ Latest figure indicated is for month of October. 4/
closing prices.

I - T-3
U.S. BALANCE OF PAYMENTS

Oct.

Sept.

1965
Aug.
QIII

1964
QII

QIV

Year

Seasonally adjusted annual rates, in billions of dollars
-2.5

Balance on regular transactions
Current account balance
6.0
7.3
27.2
27.8
-21.2
-20.5

Trade balance 1/
Exports
1/
Imports
1/
Services, etc.,

6.2
27.4
-21.2

0.5

-3.1

-6.2

6.8

5.2

8.1

5.1
27.0
-21.9

net

Capital account balance
Govt. grants & capital 2/
U.S. private direct inv.
U.S. priv. long-term portfolio
U.S. priv. short-term
Foreign nonliquid
Errors and omissions

3.7
7.2
22.3
26.8
-18.6
-19.6

-3.1
7.7
6.7
25.3
-18.6

1.7

1.5

0.9

1.0

-5.7

-8.3

-12.5

-3.8
-3.5
0.5
2.0
-0.9

-3.2
-4.6
-2.8
1.3
1.1

-4.1
-3.3
-3.3
-2.3
0.4

-3.6
-2.4
-2.0
-2.1
0.4

-0.7

-1.7

-1.2

-260
-174
-86

-517
1
-518

-259

-9.7

Monthly averages, in millions of dollars
Balance on regular transactions
(seas.

adjusted,

- = deficit)

Less: Net seas. adjustment
Balance before adjustment
Financing (unadjusted)
Advance on military 3/
Advance debt repayment
Liabilities increase
To Nonofficial 4/
To Official
5/
Monetary reserves decrease
of which: Gold sales
IMemo:

Official financin) 6/

-350

-464

-425

350

464

425

59
275
130
-9

403
308
-286
53

405

268
82
-12

-205
163
-368

40
16
24

368
-17
60

-24
42
2

86
23
3

518
50
2

-52
-39
23
197

66
-286
281
277

217
300
-50
57

-14

-2

251

157

-259
259
19
10

111

Balance of payments basis which differs a little from Census basis.
Net of associated liabilities and of scheduled loan repayments.
Assumed zero in absence of information.
Includes international institutions (except IMF), commercial banks and private
nonbanks.
5/ Includes nonmarketable bonds.
6/ Decrease in monetary reserves, increase in liabilities to foreign official
institutions, and advance repayments on Govt. loans.
1/
2/
3/
4/

- 1

THE ECONOMIC PICTURE IN DETAIL
The Nonfinancial Scene

Gross national product.

GNP increased $11.6 billion in the

third quarter, to a seasonally adjusted annual rate of $677.5 billion,
according to Commerce estimates.

Preliminary figures, available a

month ago, had indicated a rise of $11 billion.
The picture remains one of substantial expansion in all
major final demand sectors except residential construction.

Outlays for

residential expenditures were a little lower in the third quarter than
in the second.

And investment in nonfarm business inventories increased

somewhat less in the third quarter than in the second.

The slight

upward revision in total GNP for the third quarter resulted mainly
from slightly larger gains for business fixed investment, net exports,
and State and local government outlays.

Consumption expenditures

increased $7.8 billion, the same as estimated earlier.
GNP in the fourth quarter is now projected at $689 billion,
up $11.5 billion from the third quarter.

The magnitude of the rise is

somewhat greater than that shown here three weeks ago.

With retail

sales showing renewed strength in October, a slightly larger rise has
been projected for consumption expenditures.
ventories

And recent data on in-

suggest that the decline in the rate of inventory accumulation

may be smaller than projected earlier.

But residential construction is

now shown as declining slightly further, rather than rising.

In sum,

gross private domestic investment shows the same change in the fourth
quarter that was indicated three weeks ago.

II - 2

A GNP of $689 billion in the fourth quarter signifies a
level for the entire year of $672 billion, $43.5 billion, or nearly
7 per cent, above 1964.

In real terms the rise would be 5 per cent,

which is close to the average annual rate of increase since 1961 when
this expansion period began,
With output continuing to rise rapidly, total employment is
expected to increase about 0.5 million in.the fourth quarter or at an
annual rate of 2.0 million.

This would be about in line with the rise

in the third quarter and over the past year.
is expected to increase somewhat

The civilian labor force

faster than in the first half of this

year but close to the rate it has been since July.

With employment

increasing somewhat faster than the civilian labor force, unemployment
has declined and can be expected to continue downward.

Moreover, the

speed-up in draft calls and enlistments in order to bring the Armed
Force strength up to 3.0 million by the second quarter of 1966 -earlier than previously indicated -- should also tend to lower the unemployment rate somewhat, especially among youths.

The overall

unemployment rate is estimated to average 4.2 per cent in the current
quarter, as compared with 4.4 per cent in the third quarter and 5 per
cent a year earlier.

Current indications are for no significant reduction in the
rate of productivity increase in this quarter, although inventory
liquidation in steel dampened the rise in output per manhour in
manufacturing in September and October.

II - 3
Confidential

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

1965

IIQ

IIIQ

IVQl/

IIIQ

IVQ

from

IIQ

IIIQ

Gross National Product

665.9

677.5

689.0

11.6

11.5

Personal consumption
Durable goods
Nondurable goods
Services

424.4
63.7
187.6
173.1

432.2
65.0
191.1
176.1

440.5
66.0
195.4
179.1

7.8
1.3
3.5
3.0

8.3

Gross private domestic investment
Business fixed investment

101.1
66.4
28.0
6.7

102.0
68.3
27.6
6.1

101.6
70.1
27.3
4.2

.9
1.9

Residential construction
Change in business inventories

7.5

Net exports

8.1

Govt. purchases of goods
and services
Federal
National defense
Other
State and local

132.9
65.9
49.4
16.5
67.0

135. 2
67.1

Gross National Product in
Constant (1958) dollars

601.4

Civilian labor force (millions)
Employment
Unemployment

1.8
-.

-1.9

138. 6

3.4
2.2
1.5
.7
1.2
7.1

50.8

69.3
52.3

16.3
68.1

17.0
69.3

2.3
1.2
1.4
-.2
1.1

609.7

616.8

8.3

75.8
72.4
3.4

76.1
72.9
3.2

4.7

4.4

4.2

1/ Staff projection, November 16, 1965.

-. 4

8.3

75.5
71.9
3.6

Unemployment rate (per cent)

-. 4
-. 6

1.0
4.3
3.0

.3
.5
-.2

II - 4

Industrial production in October rose

Industrial production.

to 143.6 per cent from 143.0 per cent in September but was still below
the record July-August average of 144,3.

In October, a further decline

in steel output was more than offset by increases in final products
and nondurable materials.

Compared with a year ago, the index was up

9 per cent but, it must be recalled that in October last year output
declined 2 per cent because of strikes in the auto industry.

For the

first 10emonths of 1965, the index averaged 8 per cent above a year
earlier.
Production of iron and steel declined 8 per cent further in
October, as liquidation of inventories accelerated, and this brought
steel output down 22 per cent from the summer level.

This decline

compares with reductions of 23 per cent in 1963 and 26 per cent in 1962,
which also were affected by strike threats.
Output of coal and crude oil recovered in October from the
effects of strikes and a hurricane, respectively, and production of
most other nondurable materials rose.
Auto assemblies increased from the strike lowered September
level to an annual rate of 9.3 million units, somewhat below the spring
and summer levels.
same rate.

November production schedules are set at about the

Output of home goods and apparel showed some rise and

consumer staples rose further.

Production of industrial and commercial

machinery continued to advance, and with settlement of a work stoppage
in early October in the aircraft industry, output of freight and passenger
equipment rose sharply.

II - 5

Retail sales.

The advance September figure for retail sales

has been revised upward by nearly 2 per cent and now shows an increase
from August and a slight edge on the former record high in July.
October, retail sales rose appreciably further.

The September-October

rise occurred despite a moderate decline reported at auto dealers, as
sales of other durable goods and of nondurable goods showed sizable
gains.

The auto sales decline may be overstated because of difficulty

in adjusting seasonally for the effects of model changeovers.
October retail sales were up one per cent from the third
quarter and about 4 per cent from the first quarter.

Total sales of

durable goods have shown little change since the beginning of the year,
as auto sales declined after the first quarter splurge while sales
of other durable goods have increased about enough to offset the decline in autos.

Sales of nondurable goods have increased steadily

throughout the year.
Because of an overall price increase of nearly one per cent,
the real volume of retail sales has shown less increase than the
dollar volume this year.

However, price changes have differed between

the durable and nondurable goods sectors.

Prices of consumer durable

goods have declined about 2 per cent since the beginning of the year,
and this means that the real volume of durable goods sales has increased somewhat while the dollar volume has been unchanged.

For non-

durable goods, on the other hand, prices have increased about 2 per
cent and the rise of 6 per cent in dollar sales between the first
quarter and October should be discounted accordingly as a measure of
the change in real volume.

II - 6

The table below shows changes in (current dollar) retail
sales over the year, in terms of (rounded) indexes based on the fourth
quarter 1964 as 100.

CHANGES IN RETAIL SALES DURING 1965
(Indexes, 1964 IVQ. = 100)
1964
IVO

110

1965
1I0

October

Total

100

105

106

108

109

Durable goods

100

113

110

113

Autos
Other durables

100
100

120
103

115
104

119
106

114
112

Nondurable goods

100

101

103

106

108

Auto unit sales.

Demands for new cars continued strong in

the early weeks of the 1966 model year, although sales declined from
the advanced summer level after allowance for seasonal changes.
Deliveries of new domestic automobiles in October were at an annual
rate of 8.4 million.

In early November sales continued at about the

October rate but deliveries may have been limited by supply and dealer
capacity in both October and November.

Dealer inventories at the end

of October were equal to only 32 days' supply at the new-model sales
rate, compared with the usual 40-50 days' supply.
Sales of imported cars in September were at an annual rate of
0.6 million, a little below the previous month but well above earlier
months this year.

Large trade-in volume associated with the high summer

new car sales put pressure on used car markets and prices in September
again declined a little more than seasonally.

II - 7

Consumer credit.

Consumer use of istallment

credit has

risen further this summer and fall, although the rate of growth has
been uneven.

Net borrowings were large in July, when they reached an

$8 billion annual rate, mainly because of a spurt in demands for auto
credit and travel and education loans.

Growth slowed in August but

increased again in September to a little above the $8 billion rate as
auto dealers reduced their stocks of 1965 models.

Incomplete data now

available for October suggest that consumer borrowing may have slackened
again.
Repayments on instalment debt have continued to rise, from
a $67 billion seasonally adjusted annual rate in July to $68 billion
in September.
Repayments have been increasing faster than disposable income
since the first of the year, and consequently the ratio of repayments
to income has risen further.

The ratio was 13.9 per cent in the final

quarter of 1964, and by the third quarter of this year it has reached
14.4 per cent.

The ratio held steady at 13.9 per cent in 1964, as the

rise in repayments was matched by a rise in disposable income following
the tax cut.

Labor market. Demand for labor continued strong in October.
Gains in nonfarm employment accelerated following some slackening
during the July-September period and were almost up to the very high
rates of increase attained early in the year.

Evidence of strength

in the labor market also was indicated by the unemployment rate which
edged down to 4.3 per cent from 4.4 per cent in September and by a
rise in the workweek in manufacturing industries.

II - 8

Although the unemployment rate declined further in October,
there seems to be little evidence of any widespread limitation on production arising from manpower shortages.

Employers in those manufacturing

industries in which considerable demands for additional manpower exist -generally the machinery and related metals producing industries -- have
mainly relied on overtime work, intensified in-plant training and the
hiring of new workers at entry grades to meet their output requirements.
In contrast to earlier trends, when large gains in manufacturing primarily accounted for the upward momentum in employment,
much of the October advance -- almost 80 per cent of the total gain -was due to increases in trade, service, and State and local government employment.

As a consequence, most of the requirements for

additional workers was readily met from further expansion in the labor
force, mainly adult women and youths.
In manufacturing, employment increased in October by 38,000
but only 15,000 of these were production workers.

Continued cut-backs

in steel production worker employment due to inventory liquidation
almost offset further sizable gains in machinery, electrical equipment,
and in defense related industries.

Other manufacturing industries showed

little change and in the nondurable goods lines only apparel advanced
significantly in October.
The workweek increased to 41.0 from 40.8 in September and
40.9 in August.

The rise was largely concentrated in the transportation

industry reflecting heightened levels of automobile output.

Somewhat

longer workweeks were also reported in machinery, ordnance, apparel,

II - 9

In the lumber, primary metals and petroleum

rubber, and leather.

industries, hours of work were reduced.
Since July, labor force growth has accelerated to an annual
rate of 1.6 million and in October more than half the gain was represented by teenagers.

In contrast, in the first half of this year

the labor force increased at a rate of only 1.1 million per year, of
whom about 200,000 were youths.

CHANGES IN THE LABOR FORCE
OCTOBER 1964 TO OCTOBER 1965
(Thousands of persons)
Civilian labor force
All ages

Women 20 years
& over

Unemployment

1578

207-

495

939

904

343

-371

669

826

- 157

14 to 19 years
Men 20 years &
over

Employment

The importance of the young workers in the current labor
market is shown by the fact that teenagers accounted for almost all of
the 300,000 increase in total employment in October.

Of the over 2

million increase in employment since October 1964 almost half were
younger workers.

However, with a sharp rise in their labor force, the

number of youth unemployed remained relatively unchanged over the year.
Among women, employment gains have continued large and have
exceeded additions to the labor force and thus unemployment declined
moderately.

Although adult men accounted for the smallest increase

II - 10

in employment over the past year, the greatest declines in unemployment have been among men, reflecting in large part existing high
participation rates and a labor force which is not expanding.

October, the unemployment rate for adult men was down to 2.9 per cent,
the lowest rate in 12 years and for married men the rate was 2.1 per
cent.
Two special factors will have some specific effect on reducing
a speeding-up of the Armed Force expansion to

unemployment further:

bring the total to 3 million by the second quarter of 1966 -- earlier'
it had been indicated the goal would not be reached until late in the
year -- and programs initiated under the Economic Opportunity Act.
Draft calls have been stepped-up from around 17,000 a month last summer
to over 40,000 in December and are expected to continue at or above that
rate into next year.

These increased calls and increased voluntary

enlistments are expected to lower unemployment about 150,000 by the
second quarter of 1966.
Expansions in the Job CoEs, the Neighborhood Youth Corps,
and other Economic Opportunity programs are expected to draw down
unemployment by an additional 100,000 in the next 6-8 months.

As a

consequence of these various factors, which mainly will reduce unemployment among youths, the overall unemployment rate is expected to drop
0.3 to 0.4 percentage points by the second quarter of 1966, from the 4.3
per cent level in October.

Earnings and labor costs in manufacturing.

Average hourly

earnings in manufacturing have continued to advance moderately, rising

II - 11

in October by 1 cent to $2.64.

In the first ten months of this year,

hourly earnings have increased 3.2 per cent, about in line with wage
increases in other recent years and close to the gains in overall
productivity.
Meanwhile, productivity in manufacturing which had been
growing at close to a 4 per cent rate through midyear, showed little
change in September and October, primarily because output in the steel
industry has declined faster than manhours of work in that industry.
When activity is curtailed, it is usual for output to go down faster
A temporary decline in productivity

than employment and hours of work.

occurred last year during the auto strike.

A clear reading of current

productivity trends will have to await completion of steel liquidation.
With productivity showing little change, unit labor costs are
expected to remain above earlier levels in October, but should go down
when steel output begins to rise.

However, increases in employer

contributions to social security funds at the start of 1966 will cause
labor costs to go up about 0.5 per cent in almost all private industries
and about an equivalent amount later in the year as the rise in the
taxable wage base becomes effective.

Prices.

The industrial commodity price index, unchanged from

mid-August to mid-September, rose 0.1 per cent to mid-October.

Weekly

estimates indicate a further 0.1 per cent rise to 102.5 per cent of
the 1957-59 average in mid-November.

Thus, the index has increased

0.4 per cent in the five months since mid-June after rising 1.4 per cent
over the preceding nine months.

Average prices of foodstuffs have

- 12

continued to fluctuate around the advanced level reached in June, and
the total wholesale price index has risen an estimated 0.3 per cent
since mid-June.
The comprehensive data for October reveal selective advances
among paper products and chemicals, and a continuation of the rise in
machinery.

Further declines occurred in synthetic textiles and gypsum

products.
Aluminum producers announced price increases on primary ingot
of 1/2 cent to 25 cents a pound -- a level about 3 cents below the peak
reached early in 1960.

The announcement was followed by a breakdown

of negotiations over long-term disposal of the 1.4 million tons of
surplus aluminum in the stockpile.

The surplus is equal to about six

months' domestic production with about one-half needing only
Presidential authorization for release.

The industry desired a flexible

disposal program designed to accommodate variations in market demand,
and requested that only 100,000 tons be released in 1966.

The Govern-

ment desired systematic disposal of one-half of the metal by rigid
contracts over a five-year period, and cited sharply increased imports
and rising military demand as reasons for a more rapid disposal rate.
The price increases were rescinded after the Government announced that
in addition to its desired release of 200,000 tons in 1966 an additional
100,000 tons would be sold immediately.

Subsequently, negotiations

resumed and a compromise disposal plan was agreed upon.

The industry

is to buy a minimum of 100,000 tons and a maximum of 200,000 tons a
year, but with a minimum of 150,000 tons in 1966,

- 13

One tinplate producer (Wheeling), with 5 per cent of the
market, has not followed the steel industry's announced price increase
of 2-1/2 per cent effective in December.

Thus, with large excess

inventories of tinplate still to be worked off by users, some doubt
The same

exists over whether the price increase will become effective.

producer along with one other also broke with tradition by adopting a
policy of pricing at time of order rather than time of, shipment except
in instances of price decline.
Domestic copper producers -- as expected -- advanced prices 2
Reflecting fears that

cents to the world price of 38 cents a pound.
Rhodesia might cut supplies from Zambia

and Katanga, and also fears

of further strikes in Chile, the London price has risen to 6P cents a
pound and domestic scrap has risen to a postwar high.

WHOLESALE PRICE INDEXES
1957-59 = 100
Per cent increase

Index
October
1965

Feb. 19651
to
Sept. 19 64

Sept. 1964
to

Total index

-0.3

2.1

0.3

103.1

Industrial commodities

-0.3

1.4

0.3

102.4

Industrial materials

-0.4

1.7

0.3

101.7

Industrial products

-0.2

1.0

0.3

103.1

Foodstuffs

-0.6

4.3

0.3

105.0

Industrial commodities
Less metals and machinery
Metals and machinery
Nonferrous metals

-1.4
1.3
8.3

1.1
1.7
8.6

0.4
0.2
1.0

100.5
105.1
117.4

June 1965

to
*

Oct.

1965

Business inventories.

- 14

Book value of business inventories

showed little change in September after increasing sharply in July
and August, and for the third quarter the rate of accumulation was
down moderately from the second quarter.
Stability in total business inventories in September resulted
from roughly offsetting changes at manufacturers and distributors.
Manufacturers' inventories increased $450 million while distributors'
inventories declined about $400 million.
The rise in factory stocks, which was about the same as in
August, was entirely in durable goods industries and, as in August,
much of the rise was centered in the machinery industries.

Stocks also

rose at iron and steel producers as their shipments were cut back more
sharply than output at the beginning of the steel inventory adjustment
now under way.

Steel stocks held by metal users declined only slightly

in September, but large decreases are expected in the fourth quarter.
Inventories declined at both wholesalers and retailers in
September.

The decline was centered at retailers and was largely in

auto stocks, which had risen sharply in August in anticipation of model
changeover.

In addition, inventories at food stores declined --

probably temporarily -- in September after a number of months of little
change.

The book value of other retail stocks was at about the same

level as in other recent months.
Between the first and third quarters, the rate of accumulation
of total business inventories declined steadily, and this decline, which
was substantial at the total level, reflected a very sharp reduction

II - 15

in the rate of accumulation of distributors' inventories.

Accumulation

by manufacturers, in contrast, rose sharply in the third quarter, to
a rate that was nearly double the amount of accumulation anticipated by
manufacturers according to the Commerce August survey.

There were

temporary features about this spurt in factory stocks -- it was heavily
concentrated in a buildup in work-in-process stocks in the durable
sector -- and, in line with manufacturers' earlier anticipations, a
large decline in the rate of accumulation is in prospect for the fourth
quarter.

CHANGE IN BOOK VALUE OF BUSINESS INVENTORIES
(In billions of dollars, seasonally adjusted)

1st
auarter
Total
Manufacturers

1965
2nd
quarter

3rd
quarter

2.50

2.02

1.69

.76

.92

1.61
1.34

Durable goods

.56

.98

Materials

.38

.47

.28

Work-in-process
Finished goods

.11
.07

.49
.02

.84
.22

.20

-.06

.27

1.73

1.10

.08

.60

.35

.05

1.13
.68
.45

.75
.56
.19

.03
.13
-.10

Nondurable goods
Distributors
Wholesale
Retail
Auto dealers
Other retailers

Business fixed capital investment.

Business outlays for new

plant and equipment in 1966 are indicated to be 8 per cent larger than
this year, according to the McGraw-Hill October survey of spending plans.

- 16

Outlays now indicated for 1967 are almost as large as those now planned
for 1966.

The increase reported for 1966 is considerably larger than

had been indicated by the fall surveys in any of the past four years,
when actual increases turned out to be considerably larger than indicated
by plans reported in the preceding October.

Because of this tendency

to understate actual increases realized, this survey is being interpreted by McGraw-Hill as suggesting that business fixed "capital spending
next year again will be an active force in maintaining a high level of
business activity throughout the economy next year," which we, in turn,
interpret to mean a rise roughly similar to that being realized this year.

INCREASE IN BUSINESS SPENDING FOR
NEW PLANT AND EQUIPMENT
(Per cent)
Increase from previous year
Indicated by
McGraw-Hill
Actual
fall survey
--

1966

7.8

1965

4.9

13.4*

1964

4.2

14.5

1963

2.7

5.1

1962

4.0

8.6

* Indicated by Commerce -- S.E.C. August survey.

All major manufacturing industries, except iron and steel
(which is down 2 per cent), and all major nonmanufacturing industry
groups now plan increases in fixed capital outlays next year.

The

planned increase for manufacturing is 8.5 per cent as compared with an
actual increase this year of 18 per cent; in October 1964, the survey
had indicated a rise of 8 per cent.

II - 17

Increases now planned by most industries are smaller than
actually being achieved this year.

Major exceptions are:. aerospace,

shipbuilding and railroad equipment, fabricated metals and instruments,
and electric and gas utility industries, which plan 1966 increases
larger than realized this year; and food and beverages and rubber producers and airlines, which plan increases of about the same size as this
year.
BUSINESS SPENDING FOR NEW PLANT
AND EQUIPMENT
----

Estimated 1965 1/
Amount
Amot
_

(billions
of dollars)

Increase
(per cen

Planned 1966 2/
Amount
Increase
(billions
e
cent)
(per
of dollars) (pe

ALL BUSINESS

50.9

13.4

54.9

7.8

Manufacturing

21.9

17.8

23.7

8.5

11.0
10.9

16.2
19.2

11.9
11.9

8.4
8.6

1.3
1.6
1.1

10.1
14.9
24.2

1.4
1.8
1.4

3.8
9.9
22.1

6.5
6.7
11.8

12.8
7.6
8.8

7.1
7.3

8.9
8.7

Durable goods
Nondurable goods

Mining
Railroads
Airlines
Other transportation and
communications
Electric and gas utilities
Commercial

12.3

1/ Commerce -- S.E.C. August survey.

2/ McGraw-Hill October survey.
Construction and real estate. New construction put in place,
which has been tending up this year, declined in October slightly
below the (revised) record September level.

Expenditures for private

residential construction were down a little again in October, for the

4.0

II -

fourth consecutive month, following some recovery earlier this year.
Outlays for business and other private nonresidential construction,
after a sustained rise during earlier months to a new high in September,
were lower in October.

Public construction activity, which has fluctuated

this year around an advanced level, was below the new high attained
in September.

NEW CONSTRUCTION PUT IN PLACE

Total

October 1/

Per cent change from:

(billions)

Month ago I Year ago

$68.2

-1

Private
Residential
Nonresidential
Business

47.6
26.1
21.5
15.9

-1
-1
-1
-2

5
2
10
12

Public

20.6

-3

1/ Seasonally adjusted annual rates; preliminary.
Housing vacancy rates during the third quarter remained within
ranges prevailing over the past five years, although completions of new
dwellings resulting from starts in earlier quarters have remained high.
Compared with the preceding quarter and a year earlier, the average
rental vacancy rate of 7.2 per cent was somewhat lower.
cent homeowner vacancy rate was only slightly higher.

The 1.5 per
Rental vacancy

rates were reported as below year-earlier levels in all four major
geographic regions, but remained unusually high (10.8 per cent) in the

West.

These national vacancy developments suggest that the large volume

II - 19

of new dwelling completions has continued to be about offset by
growth in final demand and the disappearance from the market of
older dwellings, in part to provide sites to accommodate the boom
in business construction.

I-C-1

11/16/65

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

GROSS N, ATIONA

PRODUnCT

EMPLOYMENT AND UNEMPLOYMENT
BASIS
MILLIONS OF PERSONS, ESTA
NONAGIICULTURAL EMPLOYMENT

!
7
O-m6775

IILLIONS OF DOLLARS
ANNUAL RATES

DOLLARS

CURRENT

-------------

-#*

Z.--

0-m

I--

-,^---

INDUSTRIAL AND RELATED

1958 DOLLARS
_____
-

609 7

'.-1958

TOTAL

.00
0

X-

tnn

I I I

1960

1962

1964

1957s59.10

TOTAL UNIT LABOR COST
SEPT
1010

ALL EMPLOYEES

6I
II

1960

1962

1Y04

i llll

I-C-2

11/16/65

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED

NEW ORDERS AND HOUSING
BILLIONS OF DOLLARS

NEW

1111111111

SEPT 219

ORDERS

20
GOODS

DURABLE

LESS DEFENSE PRODUCTS
I
MILLIONS OF UNITS

ANNUAL RATES

HOUSING

STA

1.5

TOTAL
3MO M OV

-514

1964

1962

1960

BUSINESS INVESTMENT

BILLIONS OF DOLLARS

ANNUAL

RATES

NE
ANNUAL

PLANT
AND
RATE

Q. I
EQUIPMENT
-Z

EXPENDITURES,

53 0
53 50
0

TOTAL

40
ill
lillllill
1960

FINANCE-N.I
:EDERAL
------ ---- -- ILtIUN

Or DOLLARI-N

I A

Q Im 126 2

000"

1221m.
1221

RECEIPTS

1"11"

2.0)0

MANUFACTURERS
9110

1964

INVENTORY/SALES RATIOS

ACCOUNTS

BAS

ANNUAL RATES

EXPENDITURES

1962

SEPT 165

1.5
DISTRIBUTORS

SEPT I 31

.i. i

1960

1962

1964

.iitliil

1.2

III - 1

DOMESTIC FINANCIAL SITUATION

Bank credit grew at an annual rate of over 11 per

Bank credit.

cent during October, about two percentage points more than the expansion
in the first three quarters of the year.

More than one-third of the bank

credit growth for the month was accounted for by acquisitions of Treasury
issues and loans to Government security dealers, reflecting the recent
Treasury cash financing.

Business loan expansion moderated, but banks

added to their municipals and agency securities at a faster rate than
in September, perhaps because the inflow of time and savings deposits
accelerated; but the growth in holdings of such securities remained
considerably below the rate of earlier this year.
Weekly reporting bank data for recent weeks indicate a slowing
in the pace of bank credit expansion.

A reduction in Treasury balances

of about $1.3 billion during the last week in October and in the first
week in November was accompanied by heavy liquidation of Treasury
issues at weekly reporting banks.

Treasury financing operations, however,

should lead to a sizable increase in bank credit again toward the end of
November when a $2.5 billion tax bill, payable by 100 per cent credit to
tax and loan accounts, will increase bank holdings of Treasury issues.
The bills will be paid for on November 24, the last Wednesday of the
month, and therefore the financing will be fully reflected in the monthly
bank credit increases as measured by the changes between the last Wednesday of the month.

In the latter part of November and in December this

expansion in bank credit will tend to moderate as banks sell the tax

III - 2
bills, although it is not clear at this point how rapidly they will have
to sell them off--with the pace depending on the movement of Treasury
deposits and the strength of business credit demands.
Though growth in total bank credit was rapid in October, the
expansion in business and finance company loans moderated to seasonally
adjusted annual rates of 9 and 10 per cent, respectively--well below
the pace of the first nine months.

Some of the slowdown in business

loan expansion is attributable to reduced demands of metal and metal
products firms, which had been accounting for about one-fourth of the
growth of business loans over the first nine months.

But most other

industry groups also have been increasing their bank loans at a slower
rate than earlier in the year, due in part perhaps to increased capital

market financing.
Bank loans to finance companies expanded only about $100 million
in October, on a seasonally adjusted basis, despite the high pace of

automobile sales.

A major factor in this slowdown appears to have been

the early October increase in rates charged on such loans at a few

banks--especially in New York--which encountered vigorous resistance
from finance companies.

While some finance company loans were shifted

to banks not increasing their rates, there also appears to have been
an expansion in commercial paper sales; finance company paper rates were

raised in mid-October.

There have also been sizable recent and prospective

finance company flotations in the capital market.

In early November,

many banks rescinded the general rate increase on loans to finance
companies but, through the second week of November, there was no in-

dication of a return of finance company borrowing to New York banks.

III - 3
Bank deposits.

Time and savings deposits in October continued

to increase at the third quarter annual rate of nearly 17 per cent, but
early indications for November are that these inflows to banks are
moderating somewhat.

Bank sales of CD's during the month--almost $500

million--were somewhat less than during the same period last year and
outstandings declined early in November, especially in New York.
While CD rates in New York were generally at Q ceilings in
late October and early November, there is as yet no evidence that Regulation Q ceilings are as yet causing any general unwanted run-offs of
deposits.

Smaller banks--those with deposits of less than $500 million--

continue to hold their own in regional markets, and in the 4 weeks through
mid-October, there was only one bank--with deposits of less than $100
million--whose CD run-off was as high as 4 per cent of deposits.

Declines

in outstandings in early November are apparently not as closely related to
Regulation Q ceilings as they are to a reduced loan demand and to the
comfortable money position of one large New York bank.

In the second

week of November, New York bank CD's rose again by almost $100 million.
The money stock expanded again in October--growing at a
seasonally adjusted annual rate of 9.5 per cent--bringing growth for
the year to a 4.4 per cent rate, about the same as for the year 1964.
Weekly data thus far available for November indicate that growth in the
money supply has slowed.

While recent declines in Treasury balances might

have been expected to add to growth in the private money stock, this
appears to have been offset by absorption of private demand balances from
bank sales of Treasury securities.

III - 4
U.S. Government securities market.

Yields on Treasury notes

and bonds extended their earlier rise in the first part of November,
but the market most recently has firmed and rates have retreated from
earlier peaks.

Contributing to the recent rate decline have been the

good receptions accorded several major corporate offerings and the
Administration's success in prompting a roll-back in the price of aluminum.

This success, which may have had some effect on inflationary

expectations, has been interpreted by some market participants as enhancing prospects that the Administration may also endeavor to hold
the line on interest rates.
While the market has been generally quiet and dominated by
dealer activity in recent weeks, investor trading was stimulated by
the Treasury's November refunding.

The refunding met with a relatively

unenthusiastic initial investor response, as allotments of the new 18month notes soared to an unexpectedly high 48 per cent of large subscriptions.

But early downward price adjustments were stemmed by

official purchases, which reduced dealers' initial holdings of $361
million by about two-fifths, and no marked selling pressure in the
secondary market developed.

Instead, net demand for the new notes began

to appear from private investors prior to the payment date and, as of
November 15, dealer holdings of these notes had been reduced to $118
million.

Some moderate selling by investors of short- and intermediate-

term issues did occur against payment for the notes, though.

III - 5
YIELDS ON U.S.

Date

3-month

GOVERNMENT SECURITIES
(Per Cent)

6-months

10 years

20 years

(closing bids)

bills

bils

3 years

5 years

1965
Highs
Lows

4.09
3.76

4.25
3.81

4.49
4.00

4.50
4.08

4.48
4.17

4.41
4.17

July 28
Oct. 13

3.81
4.01

3.88
4.18

4.09
4.29

4.15
4.30

4.20
4.30

4.21
4.30

Nov. 3
Nov. 9
Nov. 16

4.09
4.07
4.09

4.24
4.24
4.25

4.44
4.49
4.44

4.44
4.50
4.46

4.43
4.48
4.45

4.38
4.41
4.40

1965

On November 12, the Treasury announced a $2.5 billion auction
of June tax bills to be held November 17.

Banks will be allowed to pay

for their bills through 100 per cent tax and loan credit and are expected
to subscribe for the bulk of the issue.

This cash borrowing will complete

the Treasury's financing program for 1965, but the Treasury will need
additional cash in early January.

The market has not focussed on a

particular figure for this financing, although some observers have
mentioned $2 billion.
higher than that.

The actual cash need could well turn out to be

After the January financing, a large seasonal surplus

is projected.
Treasury bill rates have been fluctuating irregularly since
early November after rising in previous weeks.

Net dealer sales to

private investors have been at reduced levels recently, as demand by
corporations and public funds has been partly offset by continued bank
selling.

In the weeks ahead, the dealers will have to absorb continued

III - 6
bill sales by banks, especially the new June tax bills.

But whether such

sales will cause the market to weaken will depend on the state of corporate
demand for the bills.

Also, sizable System purchases to provide seasonal

reserve needs will be a factor strengthening the market in early December.
Corporate and municipal bond markets.

Yields on corporate

and municipal bonds rose again to new highs for the year during the
first half of November after declining slightly in some series
of which are shown in the table) in October.

(not all

At the higher yields now

prevailing, the heavy recent volume of corporate bond offerings has
attracted a good investor demand,

helping to strengthen the tone of bond

markets generally.
BOND YIELDS
Corporate
Aaa
New
Postvar
Previous High

State and local Government
Moody's
Bond buyer
Aaa
(mixed qualities)

Seasoned

5.13(9/18/59)

4.61(1/29/60)

3.65(9/24/59)

3.81(9/17/59)

4.73(11/12)
4.33(1/29)

4.60(11/12)
4.41(3/12)

3.32(10/29)
2.94(2/11)

3.45(11/12)
3.04(2/11)

4.56
--4.73

4.48
4.53
4.57
4.60

3.16
3.31
3.31
3.32

3.25
3.41
3.38
3.45

1965
High
Low
Week
July
Oct.
Oct.
Nov.

ending:
23
I
15
12

Renewed general upward pressure on bond yields in early
November reflected a rapid build-up in listings of publicly offered
corporate bonds for November and beyond.

While new corporate offerings

III - 7
in the first week of November were quite light, yields come under pressure
early in the month as underwriters released unsold portions of older
issues from price restrictions in preparation for the enlarged calendar
of subsequent weeks.

This action, together with the favorable reception

accorded recent offerings, has forestalled any significant build-up in
underwriters' unsold balances.
Altogether, the calendar of public offerings scheduled for
November totals about $650 million, with approximately 60 per cent
already sold.

This total, in addition to being a record for the month,

is the fourth largest monthly volume of public offerings this year.
Particularly striking, as in earlier periods of heightened pressure on
new issue yields, is the high volume of public offerings relative to
private placements.

This ratio stands at about 50 per cent for November,

similar to May when yields on new offerings showed their sharpest rise
of the year.

BOND OFFERINGSL/
(In millions of dollars)
Corporate
Private
Public
placements
offerings
1965 e/ 1964 1965 e/ 1964

State & local govt.
1965 e/

1964

Jan.-Nov. average

478

300

653

536

936

888

September
October
November

664
300
640

376
181
30

700
700
700

693
642
645

1,000
800
850

920
852
578

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

III - 8
The further rise of yields on State and local government bonds
since mid-October has been accompanied by some pickup in both the new
issue calendar and dealers' advertised inventories, from the reduced
levels that developed in each of these quantities during the first half
of October.

Although the estimated volume of new issues for November

is below the average monthly volume for the year to date, it slightly
exceeds October, and is larger than in November of other recent years.
Investor reception of this seasonally large calendar has been less
favorable than in the corporate bond market.
Of longer-run significance are the results of November bond
issue referenda.
billion submitted.

Voters approved approximately $2 billion of the $3
This greatly exceeded the previous "off-year" election

high of $1.1 billion, largely on the basis of the $1 billion authorization
of New York State water polution control bonds.
Mortgage markets.

Returns on home mortgages have tended higher

recently, as yields in other sectors of the capital markets have been
under upward pressure.

Reflecting this firming, there was a further

increase in secondary-market offerings of Federally-underwritten mortgages
to FNMA, and in FNMA purchases, during the four-week period ended November 11.

Offerings have risen in part because FNMA buying prices, which

have not been changed for some time, have become more favorable as
discounts on FHA and VA loans have edged up in the private market.
Yields in the secondary market on certain FHA-insured new-home
loans rose slightly in October for the third consecutive month, reaching
5.49 per cent as the average discount on these 5-1/4 per cent 30-year

III - 9

loans exceeded 2 points for the first time since early 1963.

Average

contract rates on conventional first-mortgage loans on new homes in
October were also up a bit to 5.85 per cent, the highest level in
more than 2-1/2 years in this FHA series.

On existing-home loans,

interest rates remained unchanged at the higher 5.90 per cent level
reached in August.
The FHLBB-FDIC series on conventional first-mortgage terms
showed mixed changes, on balance, in September from the previous month
and from a year earlier, as shown in the table.
AVERAGE TERMS ON CONVENTIONAL FIRST MORTGAGES FOR HOME PURCHASE
1965

Per cent increase in
September from
Sepeer fro
a year ago

August

196
September

5.76
24.9

5.75
24.9

Loan amount ($1,000)
Loan/price (per cent)

18.2
73.8

18.1
73.7

3
-1

Maturity (years)

24.5

24.9

New home loans
Contract rate (per cent)
Purchase price ($1,000)

Existing home loans
Contract rate (per cent)

5.86

5.89

-1

Purchase price ($1,000)

19.7

19.2

Loan amount ($1,000)
Loan/price (per cent)
Maturity (years)

14.1
72.1
20.4

13.7
71.6
20.1

2
2

Delinquency rates of 30 days or more on home mortgages increased
about seasonally during the third quarter, according to the regular survey by the Mortgage Bankers AssociaLion of America of its members.
Although

he average level of 3.2 per cent was the highest for the third

III - 10

quarter since the series commenced in 1953, it was only slightly above
the previous third-quarter high two years ago.

As in the second quarter,

delinquency rates on conventional as well as Government-underwritten
mortgages were above year-earlier levels.

The average foreclosure

rate reported in the third quarter was unchanged from both the second
quarter and from a year earlier.

Stock market.

Common stock prices, as measured by Standard

and Poor's composite index of 500 stocks, closed at 92.41 on November 16,
slightly below the record high set the day before.

But some other

popular stocks averages have not recovered their earlier highs.

At the

current level, the Standard and Poor's index is almost 2-1/2 per cent
above its May peak and about 13 per cent above the June low of 81.60.
The aluminum episode had a dampening effect on stock prices
for several days in early November.

But continuing reports of good

earnings and increased dividend payments by corporations have apparently
helped to counter this influence.

Price movements during most of the

past three weeks have been confined to a narrow range, with daily
trading volume averaging about 7 million shares.

The glamour stocks

are still well represented on the list of most active issues, but even
for such issues, there is some evidence of reduced price volatility.

FINANCIAL DEVELOPMENTS - UNITED STATES
BANK RESERVES

......

BILLIONS OF DOLLAR;

-~r~---

EXCESS

TOTAl-

OCT2 49 187
2 0

1962

1964

1960

1962

1964

0
1960

MARKET YIELDS-BONDS & MORT( ;AGES
F l CENT

'11.
1.lll

l l

NEW HOME FI ST MORTGAG ES:

72 s
YEAR
-

CONVENTIONAL

-OCT 585
O

OCT 549

FHA-INSULRED
30-YEAR
BONDS:
S ON

NEW
CORPORATE Aaa

OCT 469

OCt 4324

20-YEAR U.S. GOVT.
OCT 3 31

N--

STATE AND LOCAL GOVT. Aaa
1960

1962

.i i ... ..,

1964

;

11/16/65

IV - 1

INTERNATIONAL DEVELOPMENTS
U.S. Balance of payments.

The seasonally adjusted deficit on

regular transactions in the third quarter has been revised to $615 million;
bringing the total for the first three quarters to $1.3 billion.

The

October deficit (preliminary) is estimated at about $300 million before
seasonal adjustment but after adjustment for an identified instance of
double-reporting U.S. liabilities to foreigners.

The deficit for October

customarily accounts for a large share of the total for the fourth quarter;
the preliminarly result for this year is about half the average October
deficit in the previous 3 years.

Thus, on regular transactions the deficit

for the first 10 months appears to be about $1-3/4 billion at a seasonally
adjusted annual rate.
The "regular transactions" concept, and also the category
"special Government transactions," are no longer to be used in official
balance-of-payments tabulations.

Instead, as agreed by a technical com-

mittee charged with implementing the recommendations of the Bernstein
Committee Report, a "liquidity" balance (previously published but not
publicized) and an "official settlements" balance will be shown, starting with today's press release by the Commerce Department.

For both

balances, debt prepayments and military prepayments will be treated
as above-the-line receipts, reducing the deficit rather than helping to
finance it.

Hence, the new balances will look more favorable than

those usually cited in the past.

(Further details of these changes will

be given in the forthcoming Supplement.)

The new "liquidity" balance

shows a seasonally adjusted deficit of $485 million in the third quarter,
and $940 million for the first three quarters.

The new "official"

IV - 2
settlements" balance shows a surplus of $260 million in the third
quarter, and a deficit of $160 million for the first three quarters.
Recent information on the third quarter reveals some elements
of strength in the trade account and the doubtless more temporary influence of further reflows of liquid funds.

Incomplete data show a

net reflow of liquid funds of roughly $150 million for the quarter,
almost entirely from Canada and representing reductions in both foreigncurrency and U.S. dollar-denominated money market assets.

(This reported

decline reinforces indications from confidential Canadian data that the
increase in U.S. dollar-denominated deposits in Canadian banks in the
third quarter did not represent outflows from this country.)

In part,

the reflows of U.S. funds may reflect hesitancy to place funds in
Canada following the failure of Atlantic Acceptance Corporation.
The third-quarter trade surplus -- $6-1/4 billion at an annual
rate -- reflected both a dip in imports and a further advance in exports.
Much of the decline in imports from the second to the third quarter was
attributable to lower imports of industrial supplies, which customarily
account for about half of the total.

But purchases of capital equip-

ment, foods and beverages and consumer goods all declined more (or
increased less) than they had between the same two quarters a year ago.
Because the declines this year were from levels swollen by a post port
strike bulge, the more moderate levels of imports in the third quarter
may be more representative of underlying trends.
The decline in imports of industrial supplies represented in
part a return to levels more in line with past experience following an
acceleration in the second quarter, particularly in purchases of steel

IV -3

products.

Although decreasing during the third quarter, steel imports

still remained well above the pre-strike-threat level and should decline
further.

On the other hand, most categories of imports can be expected

to increase further with advances in output in this country.

Moreover,

third quarter imports may be understated in the figures because of
statistical changes; the understatement would not have affected payments
for imports or the over-all balance, but it would dampen slightly the
outlook for the trade balance.
U.S. EXPORTS
(In billions of dollars, at seasonally adjusted annual rates)

Non-Agricultural Exportas/
Canada
Western Europe
Latin America
Rest of world
Total
Agricultural Exports
Total

1964
2nd
HalfI/

1965
1st
3rd
Qtr.
Halfl/

1963

let
Half

3.6
5.9
2.8
5.2
17.6

4.1
6.5
3.1
5.6
19.3

4.4
6.8
3.4
6.1
20.8

4.6
6.3
3.1
6.0
20.0

5.2
6.8
3.4
6.2
21.6

5.6

6.2

6.4

5.7

6.7

23.3

25.5

27.2

25.7

28.3

1/ Affected by strike
2/ Includes Department of Defense military shipments and other special
category exports (which ranged from $0.6 to $0.9 billion at annual rate) in
order to facilitate year-to-year comparisons.
The continued growth in exports since last year resulted from an

expected rise in agricultural exports and from further marked increases in
non-agricultural exports to Canada where domestic expansion continued strong.
Non-agricultural exports to other areas do not, on the basis of available
evidence, appear to have risen significantly above the second half of
last year.

Stability in non-agricultural exports to Western Europe and

Japan doubtless reflected the essentially stable levels of output which
have persisted since late last year.

Expansion in U.S. exports from the

IV - 4

strike-depressed first half of 1965 occurred in the face of a decline in
sales of "special category" military goods; statistics on these goods,
normally excluded from the regional trade figures, are included in the
table to permit year-to-year comparisons that would otherwise be made
difficult by changes in definitions and coverages.
Agricultural exports, seasonally adjusted, rose sharply in the
third quarter over the depressed level of the first half.

In part this

rise represented sales to Western Europe of wheat, stimulated by poor
European harvests, and of feed grains and soybeans.
Early in November, the U.S. Treasury and the Canadian authorities
announced that they would ask Canadian borrowers to defer until 1966 the
payments on new security issues previously scheduled for the remainder of
the fourth quarter.

The calendar prior to the announcement called for

about $200 million of new Canadian issues in the remainder of the fourth
quarter, including a $50 million issue by the Quebec Hydroelectric
Commission, which has already been postponed until early nest year.
Canadian new issues in the first ten months of the year were
about $650

iAllion, and in the absence of any deferrals appeared likely to

reach $850 million for the year -- compared to $700 million in each of the
two preceding years.

Moreover, in the first ten months of this year

Canadian reserves (including the creditor position in the IMF) rose $170
million, and they are now more than $350 million above the level of mid-1963,
when Canada obtained an exemption from the IET, on the understanding that
Canadian borrowing here would not be a means of adding to Canadian reserves.

IV - 5

Aggregate industrial

Industrial production in Western Europe.

production in Western Europe has risen little since early 1964, and has
leveled

out since early this year.

the Scandinavian countries,

In Germany,

output growth is

still

the Netherlands,

and

hampered by plant

capacity limitations and tight labor markets, although weakening of
demand pressure is

Reduced pressure

also a factor in some industries.

of consumer demand in

the United Kingdom this year has lessened

some-

what the significance of supply limitations as a factor restraining
further U.K. output growth.

Production is rising again in France and

Italy; both countries have substantial margins of unutilized productive
capacity, and private investment is still depressed in both.

INDUSTRIAL PRODUCTION, OECD EUROPE
(Seasonally /djusted, Q-IV 1963=100)

1964
Q-IV

1965
Q-I

Q-II

June

July

Aug.

Sept.

n.a.

105.5

n.a.

TOTAL

105

107

107.5

106

United Kingdom

104.5

105.5

104.5

105.5

E.E.C.

105

106

107

105.5-1 107-

103.5
107.5
97

101.5
111
98

103.5
111
101.5

104
111
103.5

100ob
108.5
103

105.5

106.5

108

109

100

France
Germany
Italy

Sweden

n.a.

100Cl
111
n.a.

105.5
106.5
n.a.

n.a.

a/
Estimated at the Board of Governors.
b/ July-August figures for France are significantly understated (to an
unknown extent) because of difficulties in making adequate seasonal adjustment
for the vacation period.
Note.
Data computed from rounded OECD indexes based on 1960 = 100.

IV - 6

In Germany, industrial production was generally level on the
average from February through the third quarter.

(It is too early to

tell whether the apparent drop-off in September is significant.)

Much

of this stability was due to pressure on available supplies of labor
and plant capacity, especially for machinery and equipment.

But easing

of demand played a part in some cases, notably in construction.

So far

this year, building activity has not advanced beyond last year's levels.
While this may have been due in part to bad weather in the second quarter,
better weather in

the third quarter did not produce a large upsurge in

construction.
The fact that underlying demand forces are still very strong
in Germany, despite the leveling-off in total industrial production this
year, is evidenced by the continued rapid rise of imports through
September, although some of the increase is reportedly attributable to
the increased competitiveness of some foreign goods.
In France, industrial production (excluding construction) has
moved up from the recession low reached last January.

In the second

quarter the seasonally-adjusted index was up 2 per cent from the firstquarter, and in .September it

showed a further gain of 2 per cent.

The gains in industrial production this year reflect expansion
in three sectors of demand.

First, seasonally-adjusted exports rose

nearly 10 per cent from the first quarter to July-August (comparison of
monthly averages), continuing the rapid uptrend that resumed in the fall
of last year.

French exports to Germany have been exceptionally strong,

and France has also benefited from the recovery to date in-Italianimports.

Second, budget expenditures have continued to rise.

Third

IV - 7

and most important, consumer expenditures began to rise again in the
second quarter, after declining during the preceding twelve months, and
the rise continued in the third quarter.
The outlook for industrial production in the near term seems
fairly promising, with reduced manufacturers' inventories of most
consumer products and some basic and intermediate products,

increased

orders for nearly all goods of these kinds, and a marked increase in
September over July (according to INSEE)
regarding their production levels

in manufacturers' optimism

the next few months.

In Italy, the recovery of industrial production, which was
slow earlier this year, accelerated in the second quarter.

In June,

the seasonally adjusted index was 6 per cent above the first-quarter
average.

A fractional decline occurred in July, the latest month for

which figures are available.
Booming exports have been one of the main factors in the
output rise.

In June-July, seasonally adjusted exports exceeded the

first quarter level by 8 per cent, and the June-July level of 1964 by
20 per cent.
In the second quarter, consumer goods production (seasonally
adjusted) averaged 6.5 per cent above January-March, marking the first
quarterly increase in total consumer goods output since the final quarter
of 1963.

In July, consumer goods output rose further by 2 per cent
quarter also saw a vigorous

over the second-quarter average.

The second

revival of automobile production,

as well as of output in

industry--probably tires.

the rubber

Production of other consumer goods, taken as

a group, also advanced in the second

quarter and in July, but the textile

sector was generally weak and output declined through July.

IV - 8

In the investment-goods sector, steel output continued to rise
rapidly, but output of other producers' goods was generally down in the
first quarter and mixed in the April-June period.

Construction activity--

not included in the industrial production index--continued to drop, a
pick-up in public works being more than offset by continuing declines
in housing construction.
In the United Kingdom, industrial production was level through
August, a little

below the new peak reached last January.

The cessation

in output growth this year reflects mainly the easing of private demand
which took place after the first quarter.

Second-quarter production was

also adversely affected by wildcat strikes.
According to the Industrial Trends Survey of the Confederation
of British Industry, released in mid-October, the economy is still
operating at high levels of output and employment but the trend of new
orders has leveled off sharply since June, and the number of firms
working below capacity has increased slightly.
Industrial production in Japan.

Preliminary data on industrial

production in Japan for September indicate that seasonally adjusted output
rose 2.5 per cent over the August level.
a substantial dip in August.

However, this upswing followed

The September level of production was about

the same as earlier this year, and only 1 per cent higher than a year earlier,
indicating that the economy was still

in a state of comparative stagnation.

A recent Bank of Japan report states that domestic demand remains
sluggish.

Output of most commodities has been relatively steady, but steel

and textile production fell moderately in September due to industry cutback
programs.

Machinery led other industries in

the September gain in output.

-C-1

11/16/65

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED

INDUSTRIAL PRODUCTIOI

U.S. LONG-TERM PRIVATE CAP. OUTFLOWS

BIILLONS OF DOLLARS
ANNUAL RATES
HI41

i-i

DIRECT INVESTMENT

/
2

-NEW

ISSUES

I
10

I
H^
IHi

6
OTHER LONG -TERM,

I II

1960

1962

NET

1964

A - 1

APPENDIX As

SOME ASPECTS OF THE RECENT COMPREHENSIVE GNP REVISIQN*

The large upward revision in the producers' durable equipment
(PDE) component of the GNP--as much as one-fifth in the current level of
the constant dollar figure--has brought the series broadly in line with
the trend of the business equipment component of the Board's production
index for the period from 1958 to date. Before the revision there had
been substantial differences in these two measures, as shown in the
accompanying chart.
Some differences in quarterly and trend behavior of the two
series should be expected partly because of differences in concept and
coverage for such items as government purchases of nonmilitary equipment
and exports and imports of equipment. In addition, some of the
differences shown between the two series in the 1954-56 period reflect the
inclusion in the GNP series of a fixed portion of new auto sales for
business purposes. Also, there appears to be some differences resulting
from the seasonal adjustments used, particularly in the third-quarter
figures during the mid-fifties.
The revision of PDE provides a different picture of the pattern
of investment in the 1954-56 period which has certain implications for
appraisal of economic policies at that time, Before the revision, GNP
as well as other data led to the view that capital goods output was on
a downtrend during 1954 and expanded only after a boom in autos and
housing late in 1954 and in early 1955. Thus, real PDE and business
equipment output were both at a low in the fourth quarter of 1954 and
the SEC-Commerce investment expenditure series on new plant and equipment
reached its low-point of $25.6 billion, annual rate, in the first
quarter of 1955. The expenditure series subsequently rose steadily to
a peak of $37.8 billion in the third quarter of 1957, reflecting in
part rising prices and costs for equipment and structures.
In the revised real PDE figures the low point of the 1954
recession in this sector is moved from the fourth quarter to the first
quarter of that year before the low for the economy as a whole was
reached.
A peak in PDE is reached in the fourth quarter of 1955 which
is not exceeded until 1960 and then by only a slight amount in a single
quarter. Within the next year ending in the fourth quarter of 1956,
PDE declines 5 per cent while business equipment rises further by 12
per cent.
In considering these alternative results it may be noted that
subsequent revisions of the monthly production-indexes are hardly likely
to follow the new 1954-56 changes shown by PDE, Fluctuations in major
subtotals of production indexes are influenced by a pattern of monthly

Prepared by Clayton Gehman, Chief, Business Conditions Section,

Division of Research and Statistics.

A-

events which are fairly firmly defined by independently reported series
on employment and average hours, manufacturers' shipments and
inventories, electric power, and freight traffic--in addition to the
available output series themselves.
Consequently, while the levels of
production indexes over longer periods have been subject to substantial
revision on occasion, these revisions usually have been reflected
mainly in the steepness of the slopes of monthly changes rather than
in major shifts in the timing of cyclical changes-also partly because
periodic review of seasonal factors in recent years has generally kept
their revisions to a minimum.
Reflecting in part the upward revision in PDE, the whole
goods component of the GNP is 6 per cent greater now relative to 1947
than before--177 rather than 167. Furthermore, the early postwar level
of total GNP was reduced somewhat so that the revised total is about
2-1/2 per cent larger relative to 1947 than previously. The amount of
this revision in the GNP total was limited by large downward revisions
in the construction series and by the elimination of consumer interest
from the services component.

11/17/65

OUTPUT TRENDS IN EQUIPMENT
-I

I lII

200

180

160

BUSINESS
EQUIPMENT II.P.)
I

^ .

'-""

100

_
SInConstan Prices

% -_

___________________l

I
l

I
1

60
s6

B - 1
APPENDIX B:

FEDERAL BUDGET OUTLOOK *

A major uncertainty in evaluating fiscal policy over the

coming months, is the level of Government spending, especially for
defense. The January budget document will shed light on near-term
prospects but, in the meantime, Federal Reserve staff projections

have been revised upward to reflect what appears to be something like
a median forecast of additional defense spending resulting from the
greater U.S. commitment in Vietnam.
Cash payments for fiscal year ending in June 1966 are
currently projected at $131.4 billion. This is $4 billion above the
amount shown in the Budget document of January 1965 and $9 billion
above the actual payments in fiscal 1965. As compared with the Budget document estimate, defense spending may be up only $1-2 billion .in
fiscal 1966. Presumably defense spending will build up over the
course of the current fiscal year, perhaps to a level by mid-1966
which would be $5 billion (annual rate) above mid-1965. Of that
amount about $1 billion represents the recent military pay increase.
Cash receipts are also expected to increase in fiscal
1966, although not by quite as much as spending. Our most recent
projections indicate cash receipts may total $127.5 billion, up
$4 billion from the Budget document figure and nearly $8 billion
from the actual fiscal 1965 inflow. Withheld individual taxes have
continued high thus far in the calendar year, as growth in personal
income has been sustained. And corporate tax receipts are projected
about $3 billion above fiscal 1965 collections, reflecting not only
further growth in profits but also the acceleration of tax payments
to a more current basis. While the two-stage reduction in excise
taxes will reduce revenues from these taxes by over $2 billion in
fiscal 1966, almost three-fourths of this will be offset by greater
cash inflows because of increased social security taxes effective
January 1, 1966.
These developments as they affect the posture of fiscal
policy are indicated by the full employment budget shown in the
bottom three lines of the table. Reflecting the large social
security lump-sum payment in September 1965, the higher permanent
benefits, and some pick-up in defense spending, the full-employment
budget appears in balance in the July-December 1965 period. A
return to surplus, however, is expected in the first half of calendar
1966, when the new social security taxes go into effect. These taxes,
* Prepared by dCverrnent Finance Section,
Division of Research and Statistics.

B - 2

together with revenue from voluntary medical insurance, are expected
to add $5.6 billion (national income basis) to receipts at an annual
rate in calendar 1966.
As finally passed, the social security tax increase will
have a less restraining effect on the private economy than would
have been the case with the original proposals. The final bill
established a higher wage ceiling and a lower tax rate than the
original one; such a combination was selected in order to spread
the increase in tax collections more evenly through the year.
Taking the year as a whole, fiscal policy would seem to be
more expansive in fiscal 1966 than in fiscal 1965, as judged by a
greater reduction in the projected full employment surplus. But
this more expansive fiscal policy is concentrated in July-December
1965, a period almost over. As the economy enters 1966, fiscal
policy can be expected to begin exerting a more restraining effect
than currently, at least insofar as can be seen from information
now available.

Note: The figures indicated here are consistent with the income
and expenditure estimates shown in the GNP discussion in the first
section of this Green Book.

B--T - 1

November 17, 1965

Various Federal Budgets by Quarters
(In billions)

Quarterly Totals
Cash Budget
Receipts
Payments
Surplus/Deficit
National Income
Receipts
Expenditures
Surplus/Deficit
Full Employment
Receipts
Expenditures
Surplus
-

30.3
28.7
1.6

33.4

27.0

30.1 30.9
3.3 -3.9

24.3
30.6
-6.3

30.7
28.3
2.4

37.7
32.6
5.1

29.2
33.1
-3.9

26.5
33.6
-7.1

31.1
32.3
-1.2

40.7
32.4
8.3

115.0
120.3
- 5.2

124.1
127.6
- 3.5

119.7
122.4

127.5
131.4

- 2.7

- 3.9

119.4
119.3
.2

126.0
128.9

124.8
119.1
5.7

130.6
128.6
2.0

Annual Rates, Seasonally Adjusted
114.8
117.5
-2.6

112.0
119.6
-7.6

114.6
118.2
-3.6

116.8
117.9
-1.1

124.2 120.1 122.0 123.6
116.8 119.0 117.7 118.4
7.4
1.1
4.3
5.2
--

122.7
120.2
2.5

123.7
122.0
120.8 126.6
2.8
-4.6

125.8 127.8
119.8 120.4
6.0
7.4

126.2
126.2
0

123.0
128.0
-4.0

128.9
129.6
- .7

130.1
131.6
-1.5

114.5
118.3
- 3.8

123.0
124.0
- 1.0

127.6
127.6
0

133.4
129.2
4.2

134.6
131.3
3.3

122.5
118.0
4.5

126.8
123.5
3.3

Receipts in 1966-11 contain a median estimate of nonwithheld individual income tax receipts. Depending on the
ultimate size of 1965 tax cut, cash receipts in the second quarter could be as high as $41.7 billion or as low
as $39.7 billion.

Projected.

- 2.9

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 23, 1965 : Greenbook

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