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CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

November 19, 1969

TABLE OF CONTENTS
Page No.
Section
SUMMARY AND OUTLOOK

Outlook for resource use and prices
Prospective financial developments

.
.

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

.
.

- 1

. . . . .. .

Outlook for economic activity . . . . . . .

Balance of payments outlook . . . . . . . .

..
.

. . .

- 8

3
5

THE ECONOMIC PICTURE IN DETAIL:
II

Domestic Nonfinancial Scene
.

Gross national product

. . . . . . . . . . ..
Retail sales
. . . .
Consumer credit . . . . . .
expectations
Census consumer buying
. .
. . . .
Inventories . . . . .
. . .
Construction and real estate
. . .
Plant and equipment spending

.
.
.
.

.
. .

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

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

..
.

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

- 8
-

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

1
9
11
12
13
14
17

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

Wages and industrial
Wholesale prices

- 19
- 21

Labor market . .
Personal income .

22
24

.
. . . . . . . .
.. . . . . .
Bank credit . ....
.
. . . . . . . . .
. . . .
Bank sources of funds ...
Nonbank depositary institutions . . . . . . . . . . . .
Mortgage market . . . . . . . . . . . . . . . .... ...
.
Corporate security and municipal bond markets . .
Government securities market . . . . . . . . . . ..

1
3
6
9
13
19

Other short-term credit markets .

relations
. . . . .

. . . .
. . ..

.
.

III

Domestic Financial Situation

Federal finance .

. .

. . . .

. . . . . . . . .

...

- 24

International Developments
. .
U.S. balance of payments
. . .......
.
U.S. foreign trade
. . . . .
Euro-dollar market

IV
.

.
.

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

.
.

. .
Foreign exchange markets . . . . . . . . . . ...
Financial market conditions in other . . . . . . . .
. . . . . . . . . . . . . . ..
industrial countries

1
5
9

- 12
- 15

APPENDIX A
Two Special Mortgage Market Developments in 1969

. . .

A - 1

I -1
SUMMARY AND OUTLOOK

Outlook for economic activity
The revised third quarter GNP figures indicate that final
sales were weaker but inventory accumulation more rapid than
officially estimated earlier.

Moreover, business fixed investment

expenditures rose faster than first reported.
cantly for the first time since early 1967.

Profits fell signifiThese developments offer

further evidence of growing imbalance in key economic sectors, and it
seems likely that GNP growth will slow appreciably in the fourth
quarter.
Sluggishness in retail sales was again reported in October.
With gains in personal income slowing rather sharply, increases in
consumer expenditures should continue to be moderate, although some
rebound cannot be ruled out.

It is also anticipated that industrial

production, which has declined for the third month in a row, will drop

further as output is adjusted to current sales and inventory developments.

Rising unemployment compensation claims through mid-November

suggest that the unemployment rate is not likely to recede and will
probably go higher before year end.

In October, housing starts lost

their earlier gains and building permits showed further weakness,
tending to confirm the downward trend evident since early this year,
Demands in most sectors of the economy are expected to continue
to ease in the first half of next year and bring real GNP growth to a

I -2

halt.

The current tight credit conditions should be reflected in

further deterioration in housing activity and relatively limited
growth in capital outlays of State and local governments.

Defense

expenditures are expected to decline significantly further, consistent
with official statements.

Slowing employment gains, a declining

workweek and reduction in overtime and other premium payments should
largely offset the effects on disposable income of the expected reduction in the surcharge and higher social security payments early
next year.

Consumer expenditures are expected to increase only

moderately with durable goods outlays showing little change from
current levels,
With respect to business fixed investment, we have assumed
that the rate of expansion will moderate progressively over coming
quarters, even though new orders for machinery have been relatively
large and business equipment output remains high.

With economic

activity moderating and profits falling, it seems unlikely that plans
for capital spending indicated in recent private surveys for the year
as a whole will be entirely realized.
It is doubtful that recent rates of inventory accumulation
can be maintained for long in the face of weakening demands for goods
and high credit costs.

We anticipate that stock-building will slow

early next year as final demands continue to ease.

I -3

Outlook for resource use and prices
Key measures of resource use eased further in October, and
prospects are for further slackening well into next year.

Industrial

production is now expected to decline this quarter and through the
first half of next year, though there may be moderate recovery thereafter.

The manufacturing capacity utilization rate declined from

around 84.5 per cent in the second quarter to 83 per cent in October
and, with capacity continuing to grow, the rate is expected to
decline further to about 80 per cent by mid-1970.
Indications persist of easing demands for labor.

October, the unemployment rate held near the 4 per cent September
level and the manufacturing workweek declined along a broad front.
In line with our GNP projection, nonfarm employment is projected to
change little in the first half of next year, with manufacturing
employment down somewhat, and then to resume a modest expansion.

The

unemployment rate is expected to continue to drift up irregularly,
perhaps reaching the 5 per cent level by the end of next year.
Wage and benefit increases negotiated in major contract
settlements have averaged significantly larger this year than last.
But fewer workers have been involved, and this has helped to dampen
the rise in average hourly earnings.

Next year, many more workers

will be involved in major contract negotiations.

The increase in

strike activity this quarter may foreshadow stormy bargaining and
more strikes next year as employer resistance hardens under the

I -4

pressure of declining profits and as unions press to obtain wage
increases to more than compensate for sizable advances in consumer
prices.

Nevertheless, some dampening of increases in average hourly

earnings may be expected next year because of the effects of reduced
demands for labor, a shorter workweek and less overtime premium pay,
and a firm stance by management.
Continued upward pressure on prices will be exerted by
prospective further increases in unit labor costs, as advances in
hourly earnings outpace productivity gains, and by efforts to minimize
declines

in profits.

But on balance we look for a moderate decelera-

tion in the pace of price increase over the next year, mainly as a
result of reduced demands and ample resource availability.
Among industrial commodities, large inventories and
prospectively weaker demands suggest reduced pressure on prices in
such key sectors as steel, nonferrous metals, and other materials.
At the consumer level, also, the modest nature of further growth in
demand combined with overbuilt inventory positions suggest some mild
slowing in the price advance for goods.

Food supply prospects

suggest more or less offsetting changes in food prices this quarter
and a relatively small advance in the first half of 1970.

I - 5

Prospective financial developments
The banking system can be expected to remain under pressure
through the turn of the year, as demands for bank credit continue
fairly strong relative to the constricted sources of funds available.
With outlays for inventories and plant and equipment expected to
remain large, and corporate profits and liquidity squeezed, the
somewhat larger volume of business borrowing that has developed at
banks in recent weeks is likely to persist.

If borrowing to pay

quarterly income taxes should exceed seasonal proportions, as it may,
total business demands for bank credit would show additional strength.
Moreover, demands for bank credit are currently being augmented by
the need to finance $2.5 billion of Treasury tax bills just announced
for auction on Friday and payment next week.
Given current money market conditions, banks will continue
to be hard pressed to meet anticipated customer demands.

Although

recent trends suggest that total deposits may not be as weak as in
the third quarter, there is not much prospect for deposit growth over
the fourth quarter as a whole.

To meet their loan commitments,

therefore, banks on balance will probably have to continue to resort
to sizable liquidation of securities and to seek additional nondeposit sources of funds.

The extent to which banks will actually

utilize commercial paper is somewhat conjectural in view of the
Board's proposed regulatory action; hence pressure could focus more
on the Euro-dollar market, Federal funds, and the discount window.

I-

Bond markets.

Some further near-term increase of bond yields

from current advanced levels is a distinct possibility, given the
currently weak technical state of corporate and municipal bond markets
and the rather sizable calendar of new corporate and municipal offerings
over the next few weeks,

Dealers' positions in both corporate and

municipal markets are still uncomfortably large despite a rash of
recent syndicate terminations.

The most recent new issues have received

generally poor receptions, even though corporate yields have now risen
to new records and tax exempt yields are rapidly approaching their
earlier highs.
Bond yields may ease off again as markets move into the turn
of the year, when new issue volume usually drops off and the availability
of investment funds from some types of institutional lenders picks up.
Any such tendency would be encouraged if there were significant new
indications of a further slowing in the pace of economic activity,
particularly since much of the renewed advance of yields recently
has apparently resulted from the discrediting of earlier market
expectations that monetary policy would soon ease.
At the same time, the likelihood of any sustained drop-off
in new issue volume during the early months of 1970 seems limited.
While the volume of tax exempt offerings has shrunk a little as yields
have backed up again, it has remained well above the lows of last

summer.

This has apparently reflected both upward adjustments in

municipal rate ceilings and the necessitous'state to which earlier

I - 7
deferrals of financing has brought many would-be municipal borrowers.
While the immediate bond financing needs of business corporations
appear to be less pressing than those of State and local governments,
utility-financing demands are expected to remain large for some time,
and the queue of industrial corporations planning long-term financing
within the next six months to a year is reportedly also sizable.

Thus,

the potential volume of bond offerings available to brake any significant tendency for bond yields to decline is probably very large.
Mortgage markets.

Barring a change in rate ceilings, the

savings experience of thrift institutions is likely to continue to
deteriorate into 1970.

There could be some recovery in net saving

flows in November and December, but savings losses are likely to be
very large during the vulnerable January reinvestment period.

cover these anticipated losses, as well as the erosion of its own
liquidity, the Home Loan Bank System will have to continue to sell
substantial amounts of new debt.
Given the bleak outlook for savings growth, thrift institutions
are likely to cut back further on new mortgage loan commitments.

The

ability of FNMA to continue to pump money into the FHA and VA mortgage
market may become more limited as discounts deepen and lenders become
less willing to originate insured mortgages.

Already, the further

general advance of capital market yields, and the resulting deepening
of discounts on Government underwritten home loans, have forced a
slackening in mortgage market activity.

I -8
Balance of payments outlook
The scanty information presently available on U.S. external
transactions in September, October and the first part of November tends
to support the projections of the balance of payments given to the
Committee in late October

In particular, the overall deficit on the

liquidity basis in the current quarter is likely to show substantial
improvement from its average annual rate of over $10 billion in the
first three quarters.

Probably an important factor in this improve-

ment will be found to have been a reversal of earlier speculative flows
into German marks, directly by U.S. holders or through U.S. direct
investment affiliates abroad.
Improvement in the trade balance through September reflected
mainly strong foreign demand for U.S. exports, which is expected to
persist well into next year.

Imports in September were somewhat below

the very high August level, but clear evidence of a sharp slowing in
the import growth trend such as has been projected is not yet at hand.
Some lag in import reaction behind the leveling off in U.S. industrial
activity would not be abnormal.
Concern in other industrial countries about inflationary
pressures has brought widespread tightening of credit conditions this
year and a general rise in interest rates in national money and capital
markets.
tendency.

High rates in the Euro-dollar market have contributed to this
(The marked easing of Euro-dollar rates in the latter half

I-9

of October proved very short-lived, and has now been completely
reversed.)

Since demand for capital and credit in most continental

European economies and in Japan is likely to continue strong for
some time ahead, there is a real danger that large reflows of funds to
Europe could develop next year, if and when financial markets in this
country turn easier.

T - 1

I--

November 18, 1969
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest

Period
Civilian labor force (mil.)
Unemployment

Oct'69
I"

(mil.)

Unemployment (per cent)

78.8
2.8
3.6
68.4
19.8
8.2
40.4

173.9
172.1
175.9

166.0
167.0
165.7

113.6
112.2
113.5
114.3

109.1
108.8
107.9
107.4

7.4
6.5
12.3
9.8

129.3
118.7
127.5
146.0

128.7
118.2
127.4
145.0

122.2

10.4
7.9
10.0
13.4

3.25
131.34

II
II

Sep'69

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

Oct'69
"

'I
f'
"

Personal income ($ bil.)-

Corporate profits before tax ($ bil.)2/QIII'69

Oct'69
11

GAF ($ bil.)

Ago

Per Cent Change
2 Yrs.
Year
Ago*
Ago*
3.4
4.4
13.0
-3.5

114.0
112.8
113.5
114.3

II
I1

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

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

Year

70.5
20.2
8.5
41.8

3.24
131.79

3.07
125.31

5.9
4.8

13.6
13.3

763.1

760.7

706.2

8.1

19.4

92.4

95.4

91.5

1.0

16.2

29.4
8.4
8.1

29.2
9.1
7.9

28.7
9.1
7.7

2.3
-7.7
5.9

12.4
10.8
15.0

70.7
20.2
8.5
42.0

Wholesale prices ( 5 7 - 5 9 =100)1/
Industrial commodities (FR)
Sensitive materials (FR)
Farm products, foods & feeds

Amount
Preced'g
Period
81.4
3.2
4.0

173.3
171.3
175.7

Nonfarm employment, payroll (mil.)
Manufacturing
Other industrial
Nonindustrial
Industrial production (57-59=100)
Final products
Materials

Latest
Period
81.5
3.2
3.9

3.3
1.8
3.6
4.0
4.4
2.6
6.0

113.9

120.4
136.0

10.2
9.1
11.4

Selected leading indicators:
Housing starts, pvt. (thous.)Factory workweek (hours)
New orders, dur. goods ($ bil.)
New orders, nonel. mach. ($ bil.)
Common stock prices (1941-43=10)

1,342

1,533

1,570

"
Sep'69
1"
Oct'69

40.5
32.2
6.1
95.52

40.8
30.5
5.5
94.51

40.9
28.4
5.2
103.76

-1.0
13.4
17.4
-7.9

-0.5
27.9
38.6
-0.1

Inventories, book val. ($ bil.)

Sep'69

162.7

161.7

150.7

8.0

15.2

QIII'69
"

942.8
730.6

924.8
726.7

876.4
712.8

7.6
2.5

17.8
7.8

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

1/ Not seasonally adjusted.

2/ Annual rates.

-14.5

-10.3

I--

T - 2

SELECTED DOMESTIC FINANCIAL DATA

Money Market 1/ (N.S.A.)
Federal funds rate (per cent)
U.S. Treas. bills, 3-mo., yield (per cent)
U.S. Treas. bills, 1-yr., yield (per cent)
Net free reserves 2/ ($ millions)
Member bank borrowings 2/ ($ millions)

9'.21
7.14
7.15
-939
1,244

Corporate new bond issues, Aaa 8/
Corporate seasoned bonds, Aaa 1/

Municipal seasoned bonds, Aaa 1/
FHA home mortgages, 30-year 3/
Common stocks, S&P composite series 4/
Prices, closing (1941-43-10)
Dividend yield (per cent)

8.80
7.04
7.09
-968
1,192

10.18
7.14
7.41
-349
1,634

8.11
5.93
5.96
-1,242
740.

7.44
6.71
8.27
7.29
5.78

Capital Market (N.S.A.)
Market yields (per cent)
5-year U.S. Treas. bonds 1/
20-year U.S. Treas. bonds 1/

7.33
6.55
8.02
7.28
5.79
8.40

7.97
6.77
8.27
7.37
5.85
8.40

6.40
5.93
7.52
6.78
5.30
8.05

97.69
3.25

105.94
3.40

93.19
3.02

97.07
3.27

3-month
average

Latest
month
New Security Issues (N.S.A., $ millions)
Corporate public offerings 5/

State & local govt. public offerings
Comm. & fin. co. paper (net change in
outstandings) 6/

1,850
850

1,520
900

Nov. e
Nov. e

1,187

Sept.'69

OutChange
3-month
Latest standings Latest
average
month
Latest
month
month
Banking (S.A.)
Total reserves 1/
Credit proxy 1/ 10/
Bank credit, total 6/
Business loans
Other loans
U.S. Govt. sec.

Oct. '69
it
If
11
II

Other securities
Total liquid assets 1/
6/11/
Demand dep, & currency 1/

Time & say. dep.,
Savings,

Other 6/
N.S.A.

I
I,
I"

comm. banks 1/

- Not seasonally adjusted.

27.35
283.5
394.8
104.2
168.0
53.4
69.1

($ billions)
- 0.05
- 2.2
+ 0.1
+ 0.2
+ 1.6
- 1.1
- 0.7-

0.06

Change from
year earlier
Latest 3-month
month average
445

-171

177

-555

558

698

Annual rate of
change from

Pre-

ceding months months
month
ago
ago
(per cent)

1.5
0.3
0.5
0.6
1.1
0.4

-11.6
- 9.2

- 2.6
- 6.4

- 0.5
- 2.8

+ 0.3
+ 2.3
+11.5
-24.2
-12.0

- 0.9
+ 6.2
+ 4.3
-22.6
- 6.8

+ 2.8
+11.6
+ 6.1
-16.8
+ 1.2

+ 1.2
- 3.7
- 0.6
-62.6

- 0.2

1.4
0.6
0.1

+
+
+

other thrift instit. 6/

Last 6 months
High
Low

4-week
average

Week ended
November 15, 1969

S.A.

199.2
193.5
201.7
120.0

+
-

0.2
0.6
0.1
6.6

- Seasonally adjusted,

- 8.5

+ 3.6
- 0.7

3.9
3.0
4.2
8.2

e - Estimated.

1/ Average of daily figures. 2/ Average for statement week ending November 12. 3/ Latest
figure is monthly average for September. 4/ End-of-week closing prices; yields are for
Friday. 5/ Corporate security offerings include both bonds and stocks. 6/ Month-end data.
7/ U.S. savings bonds and U.S. Government securities maturing within 1 year. 8/ Adjusted
to Aaa basis. 9/ Federal funds data are 7-day averages for week ending Sunday: latest
figure is for week ending November 16.
10/ Reflects $400 million reduction in member bank
deposits resulting from withdrawal of a large country bank from System membership in
January 1969. Percentage annual rates are adjusted to eliminate this break in series.
11/ Reflects $1.7 billion increase beginning January 1969 in U.S. Government securities
maturing within 1 year to conform to the new Budget concept. Percentage annual rates are
adjusted where necessary.
r - Revised.

T - 3

I--

U.S. BALANCE OF PAYMENTS
(In millions of dollars)
1
II

8
III

2,516
626
33,598
-32,972
1,890

841
264
8,395
-8,131
577

909
313
8,879
-8,566
596

301
-75
8,383
-8,458
376

363
-103
7,469
-7,572
466

283
-7
9,588
-9,595
290

Remittances and pensions
Govt. grants & capital, net

-1,159
-3,955

-274
-1,055

-325
-968

-285
-835

-271
-793

-286
-1,103

U.S. private capital
Direct investment
Foreign securities
Banking claims
Other

-5,157
-3,025
-1,266
269
-1,134

-1.537

-947
-283
-455
-120
-89

-1.345

-1.962

243
-607

-1.868
-1,262
-337
-90
-179

-928
-323
78
-172

-1,101
-426
-473
38

Foreign capital
Official foreign, nonliquid
Official foreign, liquid
Int'l and reg., liq. & nonliq. 3/
Foreign private non-bank, liq.
Foreign commercial banks, liq.
New direct invest, issues 4/
Other

9.277
2,407
-3,099
235
374
3,382
2,129

2,645

2.515

2.902

3 349

4 340

433
-55
78
44
702
586
727

709
22
273
223
-74
378
1,371

-42
-1,132

-272
-578
21

3,849

937
-2,186
-97
103
2,297
585
1,006

-23
2,959
401
1,090

4,787
145
384

-642

-480

309

-60

-1,254

-973

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

Errors and omissions

-1,009
-164

1
IV

9
III /

Aug.P/

Sept./

n.a.

336

90
3,250

201
3,217
-3,016

9,567
-9,231

-147

-3,160

-583
185

-191
1,263

Balances, with and without seasonal adjustment (deficit -)
Official settlements balance, S.A.
Seasonal component
Balance, N.S.A. 5/
Liquidity balance, S.A.
Seasonal component
Balance, N.S.A.
Adjusted over-all balance, S.A. 6/
Seasonal component
Balance, N.S.A.
Financed by: Liab. to comm. banks
abroad, N.S.A. (decrease -)
Official settlements, N.S.A. 7/

367
-442
-75

1,143
567
1,710

1,234
-29
1,205

-933
-107
-1,040

-633

-697

-1,170

-469

1,638

1,553
-3
1,550

168

9
96
105

-139
-269
-408

862
-124
738

-1,668
395
-1,273

-3,850
64
-3,786

-2,533
-355
-2,888

-613
-269

464
-124

-1,824
395

-3,560
64

-2,204
-355

-1,744

-751
96
-655

882

340

-1,429

-3,496

-2,559

-1,058

-303

3,382
-1,638

2,205
-1,550

954
-72

-415
75

3,139
-1,710

4,701
-1,205

1,519
1,040

425
633

-394
697

Reserve changes, N.S.A. (decrease -)

Total monetary reserves
Gold stock
Covertible currencies
IMF gold tranche

1/
2/
3/
4/
5/

880
-1,173
1,183
870

137
-22
-267
426

571
74
474
23

1,076
137
575
364

299
317
-246
228

686
11
442
233

Equals "net exports" in the GNP, except for latest revisions.
Balance of payments basis which differs a little from Census basis.
Long-term deposits and Agency securities.
New issues sold abroad by U.S. direct investors.
Differs from liquidity balance by counting as receipts (+) increase in liquid liabilities to commercial banks,
private nonbanks, and international institutions (except IMF) and by not counting as receipts (+) increases in
certain nonliquid liabilities to foreign official institutions.
Represents the net result of all international transactions of the U.S. other than changes in reserve assets,
in all liabilities to foreign monetary authorities and in liabilities to commercial banks abroad (including
U.S. bank branches) reported by banks in the U.S.
Minus sign indicates decrease in net liabilities.

Not seasonally adjusted.

- 1

THE ECONOMIC PICTURE IN DETAIL

Domestic Nonfinancial Scene

Gross national product.

Although business optimism about

the longer-run outlook apparently remains firm, there are increasing
indications of near-term downward adjustments in activity in response
to weakening in demand.

Industrial production was off slightly in

October for the third month in a row, employment growth has halted in
manufacturing, the workweek has declined, and the unemployment rate
has been rising irregularly.

However, both current and anticipated

expenditures for business fixed investment continue strong, although a
drop of $3 billion in corporate profits in the third quarter is expected
to contribute to a slower growth in such spending in the future.
In overall terms, the estimated increase in gross national
product for the third quarter was revised upward by Commerce from
$17.5 billion to $18 billion.

But final demands were revised down by

almost $1 billion while inventory accumulation was even larger than had
been officially estimated earlier.

Personal consumption expenditures

were revised down sharply, as were estimates of State and local government purchases of goods and services.

On the other hand, there was

greater strength in business fixed investment than earlier reported.
In real terms, third quarter GNP growth was at an annual rate of 2 per
cent, about the same as in the preceding quarter.
GNP growth is likely to slow substantially in the current
quarter, to about a $12.5 billion increase.

The lift provided by the

II - 2

Federal pay raise in the third quarter will not be repeated and
inventory investment is expected to change little following the sharp
A further slackening of demand should

increase of the third quarter.

also be evident in some key areas.

Residential construction activity

is expected to decline by an additional $1 billion in the fourth
quarter, under the pressure of sharply curtailed fund availability and
high interest rates.

Savings outflows from the thrift institutions

were large in October, and housing starts, which fell moderately in the
third quarter, may well drop more sharply in the fourth quarter as outstanding mortgage commitments are run down.

In fact, housing starts

declined sharply in October.
In addition, the decline in Federal purchases of goods and
services is expected to resume in the fourth quarter under Administration
pressure to contain spending within the $192.9 billion budget ceiling
for fiscal 1970.

Defense spending is

expected to bear the brunt of cur-

tailed outlays, with a decline of about $1 billion projected in the
current quarter.

At the State and local levels, restricted credit avail-

ability, high interest rates,

and legal interest ceilings in

some States

have forced these governments to curtail both their borrowing and
spending.

Some resurgence from the unusually low third quarter rate of

growth of these expenditures

to be expected as some States raise

their interest ceilings and increase

taxes,

earlier rate of expansion seems unlikely in
easing of financial constraints.

but resumption of the
the absence of a substantial

II - 3
The persisting weakness of consumer demand has also been a
significant factor slowing growth in final demand over recent months.
Personal consumption expenditures rose by only $7 billion in the third
quarter, despite a substantial increase in disposable income, as durable
goods spending declined.

The saving rate rose sharply--by a point and

a half--to 6.7 per cent, so that some recovery in consumer demand and
decline in the saving rate would seem a logical expectation for the
current quarter.

However, the initial monthly report on retail sales

showed only a slight pickup in October, and auto sales dropped back
again after their September post-introduction surge.

Moreover, personal

income now appears to be on a much less expansive course, thus tending
to dampen prospects for any substantial rebound in consumer demand this
quarter.

Although industrial output of consumer goods is off somewhat,

adjustments in production are likely to lag weakening final demand.
Thus, inventory accumulation may continue at a relatively high rate,
as in the third quarter, but with more of it involuntary.
The near term outlook for new plant and equipment expenditures
now appears a little stronger than we had expected.

The October McGraw-

Hill survey--roughly in line with other recent private surveys--indicates
that business is planning an increase of 8 per cent in capital spending
for 1970.

As a result, we have adjusted up somewhat our projections of

plant and equipment expenditures for the fourth quarter and for early
next year.

But with sales likely to be disappointing and profits

declining, and funds still assumed to be scarce and expensive, it seems
likely that business investment plans will be revised downward,

II -

particularly if the investment tax credit is removed by year-end.

are therefore projecting a decelerating rate of growth of business
investment with these expenditures leveling off by mid-1970.

For next

year as a whole, we have projected an increase of 6 per cent.
It still appears likely that growth in real GNP in the first
half of next year will show little or no gain.

Declines in construction

activity will probably be extended under the impact of continued monetary restraint, with starts projected to drop to about 1 million units
by the second quarter.

Financing difficulties are also expected to

continue to inhibit the growth of State and local spending, and defense
purchases are reported likely to be further curtailed.

Growth of dis-

posable income and consumption should be stimulated somewhat by the
reduction of the surcharge to 5 per cent which we have assumed for
January 1, as well as by an increase in Social Security benefits proposed for the second quarter.

But these sources of strength in dispos-

able income are likely to be offset in large part by slow growth of
employment and further reductions in the workweek.
Moreover, it does not seem likely that the current rate of
inventory accumulation will be maintained much longer, and we expect
that inventory investment will begin to slow appreciably by early next
year.

With growth of real output halting, unemployment should rise

significantly and capacity utilization rates decline.

The easing of

demand pressures should have some effect on the ability of markets to
absorb price increases--whether or not cost induced--and a slowing in
the rise of the GNP price deflator to under a 3-1/2 per cent rate is
projected for the second quarter.

II - 5

Some rebound in GNP growth seems probably after mid-1970 as
residential construction activity begins to recover and inventory
investment tends to stabilize.

Consumer demand would be supported by

the elimination of the remaining 5 per cent surcharge at midyear and by
an

expected Federal pay increase.

Federal expenditures generally are

expected to be more stimulative in the second half of next year, and
the budget is projected to swing into deficit.

Under these circumstances,

a resumption of real GNP growth is expected, but perhaps at a rate somewhat less than the expected growth of resources.

Further weakening in

market receptivity to higher prices could thus result, which, along with
some easing in cost pressures, should lead to a further moderation in
price increases by the year's end.

CONFIDENTIAL - FR

II - 6

November 19, 1969

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.)

1969*
1968

1969
Proj.

1970
Proj.

III

1970*
Prolected
II
III

Gross National Product
Final sales
Private
Excluding net exports

865.7
858.4
658.1
655.6

932.9
924.3
709.5
707.2

980.1
974.2
749.9
746.4

924.8
917.9
705.0
703.4

942.8
932.0
715.0
712.3

955.3
945.3
726.0
722.6

962.8
955.5
735.1
731.9

970.8
964.7
743.7
740.0

985.8
980.7
754.3
750.8

1000.8
995.7
766.3
762.9

Personal consumption expenditures
Durable goods
Nondurable goods
Services

536.6
83.3
230.6
222.8

575.9
89.7
243.9
242.4

614.2
90.6
261.7
261.9

572.8
90.6
242.1
240.1

579.8
89.8
245.1
244.9

588.8
90.0
249.1
249.7

598.9
90.0
254.4
254.5

609.0
90.0
259.5
259.5

619.7
91.0
264.3
264.4

629.3
91.5
268.5
269.3

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

126.3
30.2
88.8
7.3
7.4

140.0
31.9
99.4
8.7
8.4

137.9
26.8
105.4
5.8
5.5

137.4
32.7
97.8
6.9
6.7

143.3
31.4
101.1
10.7
10.3

144.3
30.3
103.5
10.5
10.0

140.0
28.2
104.8
7.0
6.6

136.8
25.4
105.6
5.8
5.6

136.2
25.5
105.6
5.1
4.9

138.7
28.0
105.6
5.1
4.9

Net exports of goods and services

2.5

2.2

3.6

1.6

2.7

2.9

3.5

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

200.3
99.5
78.0
21.5
100.7

214.8
102.1
79.3
22.7
112.8

224.3
100.9
76.5
24.4
123.4

212.9
100.6
78.5
22.1
112.3

217.0
103.2
80.3
22.9
113.8

219.3
102.8
79.5
23.3
116.5

220.4
101.2
77.5
23.7
119.2

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

707.6
122.3

728.4
128.1

735.7
133.2

726.7
127.3

730.6
129.0

733.2
130.3

Personal income
Wages and salaries
Disposable income
Personal saving
Saving rate (per cent)

687.9
465.0
590.0
38.4
6.5

747.2
510.1
629.6
37.7
6.0

796.9
545.1
676.1
45.0
6.7

740.5
504.3
622.0
33.3
5.3

756.5
516.9
639.0
43.1
6.7

767.4
525.8
647.1
42.0
6.5

91.1

93.5

82.8

95.4

92.4

201.4
191.7
9.7

198.1
202.1
-4.0

202.8
189.3
13.5

201.4
193.6
7.8

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

176.3
181.5
-5.2

4.0

3.5

3.4

221.0
99.0
75.0
24.0
122.0

226.4
101.6
76.8
24.8
124.8

229.4
101.8
76.8
25.0
127.6

732.4
131.5

732.4
132.5

736.1
133.9

742.0
134.9

776.8
532.1
658.3
42.9
6.5

789.7
539.3
668.5
42.8
6.4

804.7
550.4
684.3
47.5
6.9

816.2
558.6
693.2
46.6
6.7

90.5

86.5

82.5

80.5

81.5

202.9
195.5
7.4

197.3
196.3
1.0

198.3
199.3
-1.0

196.6
204.9
-8.3

200.3
208.0
-7.7

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

82.3
3.5
78.7
3.6

84.2
3.5
80.7
3.6

85.4
3.3
82.1
4.6

83.8
3.5
80.3
3.5

84.6
3.5
81.1
3.7

84.8
3.5
81.3
4.0

85.0
3.4
81.6
4.2

85.3
3.3
82.0
4.5

85.6
3.3
82.3
4.8

85.9
3.2
82.7
5.0

Nonfarm payroll employment (millions)
Manufacturing

67.9
19.8

70.1
20.2

70.9
19.9

70.0
20.1

70.4
20.2

70.6
20.2

70.8
20.1

70.8
19.9

70.9
19.8

71.2
19.9

Industrial production (1957-59=100)
Capacity utilization, manufacturing
(per cent)

165.4

172.6

172.7

172.6

174.3

173.2

172.5

172.0

172.8

173.5

84.5

84.0

79.9

84.5

84.2

82.7

81.2

80.0

79.3

79.0

1.51

1.48

1.13

1.51

1.43

1.25

1.13

1.00

1.10

1.30

8.62

8.44

8.51

8.54

8.45

8.40

8.50

8.75

Housing starts, private (millions A.R.)
Sales new domestic autos (millions,
A.R.)

Assumes Adminstration's proposals for repeal of investment tax credit and extension of tax surcharge at 10% through
1969 and then at 5% through June 1970.

CONFIDENTIAL - FR

II - 7

November 19, 1969

CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1969 *
1969
Proj.

1968

1970
Proj.

III

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

Gross National Product
Inventory change
Final sales
Private
Excluding net exports
Net exports
Government

72.2
-0.1
72.2
52.0
54.7
-2.7
20.2

67.2
1.3
65.9
51.4
51.6
-0.2
14.5

47.2
-2.7
49.9
40.4
39.2
1.2
9.5

GNP in constant (1958) dollars
Final sales
Private

33.0
33.3
24.9

20.8
19.8
18.3

7.3
9.8
10.8

3.6
3.5
3.9

7.8
7.7
7.8

Personal consumption expenditures
Durable goods
Nondurable goods
Services

9.0
14.1
7.2
9.1

7.3
7.7
5.8
8.8

Gross private domestic investment
Residential construction
Business fixed investment

8.9
20.8
6.1

10.8
5.6
11.9

5.1
5.4
5.7

3.9
0.6
1.4

7.5
-3.5
11.0
9.9
9.3
0.6
1.1

2.6
2.7
2.6

-0.8
2.2
2.7

8.0
-1.2

15.0
0.0

9.2
8.6
8.1
0.5
0.6

12.0
12.1
-0.1

0.0
0.6
1.8

6.5
-7.2
10.5

4.9
-3.5
5.0
8.0

17.2
-15.9
13.5

2.1
0.3
1.0
5.6

5.9
5.6
4.6

-11.9
-27.7
5.0

-9.1
-39.7
3.1

-1.8
1.6
0.0

1.1
-8.7
-12.9
5.1
9.4

9.8
10.5
9.6
13.3
9.2

-0.5
1.2
1.9

0.0
0.3
1.2

3.6

3.3

7.3
39.2
0.0

2.0
2.8
2.7 2/
4.17.6
8.2
9.5

Corporate profits before tax

13.4

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

16.7
10.8

2.6

14.2
5.6

5.7
6.0
5.2

-11.5

0.4

-12.6

-8.2

-17.7

-18.5

-9.7

5.0

-1.6
5.4

8.5
1.7

-2.8
9.1

3.0
3.9

-11.0
1.6

2.0
6.1

-3.4
11.2

7.5
6.1

1.1
-2.0

0.0
-4.0

0.6
-2.0

1.7
2.0

3.0
2.1

3.2
2.0

1.1
-1.5

2.9
0.0

2.3
2.0

1.1
0.0

4.6
16.7
14.0

4.4
-2.1
-2.1

0.1
-23.3
0.8

5.6
-48.3
8.4

3.9
-21.5
-4.2

-2.5
-50.9
-2.5

-1.6
-39.1
0.0

-1.2
-44.4
0.0

1.9
40.0
4.8

Assumes Administration's proposals for repeal of investment tax credit and extension of tax surcharge at 10%
through 1969 and then at 5% through June 1970.

1/ Excluding Federal pay increase 4.3 per cent.
2/

3.7
5.1
3.9

2.0
-6.2
-10.1
6.9
9.3

2.8
-14.0
9.5

Personal income
Wages and salaries
Disposable income

3.0

6.2
0.9
7.5
7.8

7.7
10.3
9.2
14.5
5.3

GNP in constant (1958) dollars
Final sales
Private
GNP implicit deflator

Industrial production
Housing starts, private
Sales new domestic autos

15.0

7.1
7.0
7.5

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

Nonfarm payroll employment
Manufacturing

In Per Cent Per Year-----------------------------

7.7
10.0
5.9
8.7

-1.5
-16.0
6.0

Billions of Dollars---------------------------18.0
3.8
14.1
10.0
8.9
1.1
4.1

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

9.1
9.2
8.5

Gross National Product
Final sales
Private

1970 *
Projected
II
III

Excluding Federal pay increase 3.1 per cent.

1.6
72.7
11.8

II - 8

Industrial production.

Industrial production edged off

further in October and, at 173.3 per cent of the 1957-59 average, was
down 0.4 per cent from September and 0.7 per cent from the July peak.
The October decline reflected strikes in the automotive and electrical
machinery industries as well as further declines of output for some
other durable and nondurable goods.
Auto assemblies in October were at a seasonally adjusted
annual rate of 8.4 million units, down 4 per cent from September.

Pro-

duction schedules for November and December are now posted at an annual
rate of 8.2 and 7.6 million units, respectively.

Output of home goods

and apparel declined further as production of furniture, television
sets (not due to the GE strike), some appliances, and apparel was curtailed.

Output of consumer staples, however, changed little.
Revised data now indicate that output of business equipment

rose to a new high in September.

While production of electrical

apparatus in October was curtailed by the GE strike, this was offset
by a rise of output in other equipment industries.
Among industrial materials, production of steel and chemicals
changed little in October, but output of textiles, paper, and some
rubber products declined.
While the decline in the total index since July has been
moderate--0.7 per cent--readjustments in output in a number of industries have been substantial.

PER CENT DECLINES IN SELECTED INDUSTRIES
From 1969 Highs

Month of
1969 high

Per cent declines from
1969 high to October

Finished goods
Autos
Apparel
Furniture, household
Misc. home goods
Defense equipment

July
July
June
June
May

-8.2
-5.0
-4.7
-4.4
-4.0

Materials
Textiles
Mining
Construction materials
Paper
Rubber
Industrial chemicals

June
June
March
August
August
July

-3.7
-3.1
-3.0
-2.5
-2.1
-1.7

The declines listed above have been largely offset by
increased output in some industries, such as business equipment, equipment parts for further processing, and electric and gas utilities.
Moreover, output has leveled off in other industries, such as consumer
staples, steel, and miscellaneous business supplies.

Also, among some

of the industries showing declines, the initial drop has been followed
by little change in production in recent months.

If this mixed pattern

of change continues as industries adjust production to the high level
of stocks and sluggish sales, the total index will probably decline
somewhat further for the balance of the year.

Retail sales.

Retail sales in October rose about 1/2 per

cent from September, according to the initial monthly report, but the

- 10

level was no higher than in June and was only 2.3 per cent above a year
earlier.

In real terms, October apparently was the fifth month in a

row in which sales were below year-earlier levels.
Sales of nondurable goods stores increased 1-1/2 per cent
from September as all major types of stores reported larger volume.
Department stores, which had been among the weakest groups in September,
increased the most in October.

Sales of durable goods stores declined

2 per cent, with the automotive group off 3 per cent.
September 1969 retail sales figures were revised downward by
an unusually large amount, largely as a result of a change in the
seasonal factor for the automotive group.

The seasonal revision produced

an even larger downward revision in the sales of the automotive group in
September 1968, however, so that the recorded year-over-year gain was
widened to 6.6 per cent.
Dealer deliveries of new domestic autos in the first 10 days
of November advanced significantly from the October seasonally adjusted
annual rate of 8.4 million units.

Early November sales were still well

below the rate of late September which reflected the new model introductions.
Stocks of new autos showed a seasonally adjusted increase
of 5 per cent for the month of October to a level of 1.4 million units.
This was equivalent to a seasonally adjusted stock/sales ratio of 61
days' supply--about the highest on record.
A spokesman for the Automobile Manufacturer's Association
has stated that 10-day sales and stocks figures will no longer be

II - 11

reported.

In this event,

this information will be available only on a

monthly basis, probably four or five days following the end of the month.

Consumer credit.

Consumer instalment credit outstanding rose

at a seasonally adjusted annual rate of $8.4 billion in September, after
2 months of relatively modest gains.

The earlier sales dates for 1970

model autos may have exaggerated the increase in September this year.
The expansion for the third quarter as a whole was at a $7.7 billion
annual rate,

compared with a $9 billion rate in the first

half of the

year and with a $10 billion rate in the second half of last year.
Instalment credit extensions declined slightly from August
to September as reductions in nonautomotive consumer goods and personal
loans more than offset a sizable increase in extensions for auto purchases.
Repayments fell moderately but were higher than in any other month except
August.

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

Other
consumer
goods

l
Personal

Home repair
and
modernization

Total

Automobile

1968 - QI
QII
QIII
QIV

$ 7.0
8.4
10.0
10.2

$2.8
3.0
3.9
3.8

$1.9
2.8
2.6
2.7

$2.4
2.4
3.3
3.5

$ 0
.1
.2
.2

1969 - QI
QII
QIII

8.3
9.6
7.7

2.7
3.1
1.9

2.5
2.9
2.6

3.0
3.2
3.1

.2
.4
0

loans

- 12

Census consumer buying expectations.

The October survey of

consumer buying expectations suggests no substantial change in the conservative pattern of household expenditures which has prevailed since
late 1968.

The probability of a household purchasing a new car has

declined since July and suggests that total dealer sales of new cars
in the fourth and first quarters may average slightly less than from
July to October of 1969.

After rising sharply in the second quarter,

the prospect of a household buying a house, either new or used, dropped
Income expectations

back in the third quarter to the year earlier level.

were also less optimistic than in July, although still better than a year
earlier.

Buying plans for furniture and appliances-

were the only

area to show improvement, and this anticipated gain is somewhat surprising in view of house purchase plans and the lower percentage of households planning to make major expenditures on home improvements.

In the

past, consumer surveys have been least reliable in foreshadowing
developments in furniture and appliance sales.
CHANCE IN 100 OF BUYING WITHIN 6 MONTHS
(Seasonally adjusted)

1967
October
Any
New
Any
New

car
car
house
house

1968
October

January

8.7
4.3
3.5
1.7

8.9
4.6
3.3
1.5

9.0
4.3
3.3
1.6

1969
April July
9.4
4.5
3.9
1.8

October

9.4
4.7
3.7
1.7

9.2
4.3
3.3
1.4

Addendum:
Per cent of households reporting probably expenditures for:
Furniture & carpets
Major expenditure on
home improvements

26.0

25.4

25.2

26.9

25.3

28.0

6.5

7.1

8.1

9.5

8.5

7.7

Major appliances and TV's are not included in the table.

Inventories.

- 13

Total business inventory accumulation in the

third quarter is now estimated at a $10.7 billion annual rate (GNP
basis), higher than first reported and significantly more than the $7
billion rate in the first half of the year.

Inventory-building was

substantial throughout the quarter at both manufacturing and retail
The increase in retail auto stocks was particularly

establishments.

sharp in the third quarter.

INVENTORY RATIOS
1966
November December

August

1969
September

Inventories to sales:
Manufacturing & trade,
Manufacturing,
Durable
Nondurable

Trade, total
Wholesale
Retail
Durable
Automotive
Nondurable

1.56

1.54

1.72
2.00
1.37

1.70

2.00
1.31

1.67
1.96
1.30

1.38
1.21
1.49
2.10
1.68
1.20

total

1.54
1.69
1.95
1.38

total

1.39
1.22
1.51
2.10
1.67
1.23

1.37
1.18
1.51
2.16
1.74
1.22

1.38
1.17
1.53
2.14
1.72
1.24

3.53
1.57

3.60
1.60

Manufacturing and retail inventories to
Home goods & apparel
Consumer staples

(G.A.F.)

retail sales:

3.50
1.62

3.54
1.65

.63

.64

Inventories to unfilled orders:
Durable manufacturing

.72

Orders and sales increased in September at manufacturers and
wholesalers, and their inventory ratios dropped back; however, durable
manufacturing inventories remain at an advanced level relative to sales

and to order backlogs, mainly in the defense products industries.
Inventory-building may continue at durables industries, particularly
machinery and equipment, but recent employment cutbacks at defense
products industries, including aircraft, suggest that a slowdown in
accumulation may be near in this sector.
The downward revision of September retail sales brought the
retail inventory-sales ratio clearly above the high level of late 1966.
Auto inventories remained high relative to sales in September and were
even higher relative to October's reduced sales rate.

Stocks of other

cyclical consumer goods (home goods and apparel) at factories and retail
outlets are high and rising relative to retail sales.

Construction and real estate.

Seasonally adjusted new

construction outlays, which were revised upward for August and September,
apparently edged higher in October to a record annual rate of $93.1
billion.

All of the year-to-year advance reflected increased costs; in

physical volume, the October rate was about 4 per cent below the high
reached last January.
While private residential construction outlays in current
dollars rose further in October, they were no higher than a year earlier
and appreciably under the peak reached last March.

Private nonresidential

expenditures apparently remained at the record rate achieved in September
after a five-month rise.
Public construction outlays--already at a new high--continued
to increase in October, according to initial Census Bureau projections.

However, the estimates for State and local outlays may be somewhat
overstated for this period, judging by the most recent Federal Reserve
Board survey of State and local Government borrowing and expenditures.
The results of this survey, which will be summarized in the Supplement,
suggest that developments in financial markets had already begun to
have substantial impact on outlays of such Governmental units by the
third quarter.

Moreover,

according to "Engineering News-Record,"

about

half the states are reported to have pledged some reduction in future
projects in response to Federal Government requests to help minimize
pressures on available resources under prevailing inflationary conditions.

NEW CONSTRUCTION PUT IN PLACE
(Confidential FRB)

October 19691/
($ billions)-'

Per cent change from
October 1968
September 1969

93.1

+ 6

Private
Residential
Nonresidential

62.9
29.7
33.2

+1
+2
-

+ 6
-+13

Public
Federal
State and local

30.2
3.4
26.8

+1
+2
+1

+ 6
- 3
+ 7

Total

Data for the most
Seasonally adjusted annual rates; preliminary.
recent month (October) are confidential Census Bureau extrapolations.
In no case should public reference be made to them.

Seasonally adjusted private housing starts, which had turned
sharply upward in September, reversed direction by more than a tenth in
October and resumed their downtrend as expected.

The annual rate of

1.34 million in October was the lowest for any month in nearly two years.

- 16

Both single-family and apartment units shared in the drop, which was
Regionally, starts rose only in the

most pronounced for apartments.
Northeast states.

PRIVATE HOUSING STARTS AND PERMITS

October 1969
ctober
(Thousands

of units)!/

September 1969

October 1968

-12

1,342

Starts

Per cent change from

-15

1-family
2-or-more-family

765
577

- 9
-16

-21
- 5

Northeast
North Central
South
West

167
284
523
368

+ 8
-24
-15
- 4

-23
-29
-27
+13

1,119

- 7

-19

--13

-19
-19

Permits
1-family
2-or-more-family
1/

563
556

Seasonally adjusted annual rates; preliminary.

Building permits continued to decline in October and reached
the lowest rate since early 1967.

Given this development and the sus-

tained downward pressure on mortgage commitment activity, a further
sharp drop in starts is suggested for November, possibly to somewhat
below a 1.2 million unit rate.

For the quarter as a whole, however,

starts may still average about a 1.25 million annual rate, compared with
a third quarter average now reported at 1.43 million.
Seasonally adjusted sales of new homes by merchant builders

in September were the lowest since early 1967.

Although the number of

- 17

new homes available for sale changed little, it reached a relatively
supply at the currently reduced level of sales.

high 6.6 million

Median prices of homes not yet sold continued to rise in September and,
at $26,200, were about 7 per cent more than a year earlier.

Sales of

existing homes have also apparently slackened in recent months, with
prices of such homes continuing about a tenth above a year earlier.

Plant and equipment spending.

Business spending on new plant

and equipment is projected to increase by 8 per cent next year following
an 11 per cent increase in 1969, according to the McGraw-Hill survey
taken in October.

These results are generally in line with those reported

earlier by two other private surveys.

Because capital goods prices are

expected to rise by 7 per cent, the McGraw-Hill survey suggests that in
real terms investment would grow only 1 per cent compared with an
increase of 5 per cent estimated for 1969.

The Commerce-SEC survey

covering spending plans for early 1970 will be available in early December.

PLANT AND EQUIPMENT SPENDING
Billions of dollars
1970
1968
1969
Actual Estimated Planned*

Per cent change
196919681970
1969

64.08

70.85

76.71

10.6

8.3

Manufacturing
Durable goods
Nondurable goods

26.44
13.51
12.93

29.68
15.43
14.25

32.26
16.49
15.77

12.3
14.2
10.2

8.7
6.9
10.7

Nonmanufacturing
Mining
Railroad
Non-rail transportation
Public utilities
Communication
Commercial and other

37.64
1.42
1.34
4.31
11.54
6.36
12.67

41.17
1.56
1.47
4.52
12.74
7.55
13.33

44.45
1.73
1.10
5.31
14.18
8.00
14.13

9.4
10.2
9.8
4.9
10.4
18.7
5.2

8.0
10.9
-25.2
17.5
11.3
6.0
6.0

All business

* McGraw-Hill October 1969 Survey.

- 18

Percentage increases in spending by manufacturing industries are
projected to be about the same as in nonmanufacturing industries, both
taken as a group.

Within manufacturing, relatively large increases are

planned by the shipbuilding, electrical and nonelectrical machinery, instruments, food, chemicals, and petroleum industries.

Iron and steel, rubber,

and textile producers are scheduling declines in new investment.

In non-

manufacturing, airlines are planning the largest percentage increase-nearly one-third--as they begin buying the new 747 jumbo jets; railroads
are planning to cut spending by 25 per cent.
The McGraw-Hill Survey also reported that manufacturers as a
group expect that their 1970 sales in terms of physical volume will be up
6 per cent from this year and that prices of their products will be up
3 per cent.

If sales should deviate greatly from these expectations,

investment outlays might be adjusted to reflect the changes in outlook.
The McGraw-Hill Survey in the past has provided a valuable early
look at the direction of investment plans for the next year.

But the

record has been less accurate in assessing the magnitudes of change, especially in periods when activity levels were changing.

In years of slowing

economic activity, reported spending plans have tended to overstate actual
spending, and in years of rising output the survey has tended to understate actual outlays.

In the four years of declining output for which the

survey results are available they have overestimated the change by an
average of 5 percentage points while indicating the right direction in
each case.
survey.

Part of this error undoubtedly stems from the timing of the

Many investment plans are not formally ratified by boards of

directors until late in the fourth quarter so that what is reported in
October frequently represents preliminary plans which remain subject to
change.

II - 19

Labor market.

Signs of easing labor demand continue to

emerge in the volatile industrial sector.

Although total nonfarm

employment rose by nearly 200,000 in October, employment moved down
somewhat in both construction and manufacturing--where the level was
about the same as in June--while the factory workweek fell appreciably.
The unemployment rate showed little net change in October-edging down to 3.9 per cent--thus tending to confirm the step-up to
the 4 per cent order to magnitude reported for September.

A pro-

gressive rise in joblessness has been apparent since late in the first
quarter.

Insured unemployment also has been rising, with the most

recent two weeks showing a year-over-year increase of more than 10
per cent in the number of persons receiving unemployment compensation.

UNEMPLOYMENT RATES
(Seasonally adjusted)

October

IIQ

IIIQ

3.3

3.5

3.7

3.9

Men, aged 20 and over

1.9

2.0

2.2

2.4

Women, aged 20 and over

3.5

3.7

3.9

4.0

12.1

12.3

12.6

13.0

Total

Teenagers

The bulk of the increase in nonfarm payroll employment in
October was in trade and services.

Growth in these sectors is often

erratic, but even with the larger employment increase of October the

- 20

average monthly rise of nonindustrial employment has been noticeably
slower since March than it was in the first quarter.

The additional

slowing of total employment growth since June reflects a decline in
construction and a leveling off in manufacturing.

NONFARM PAYROLL EMPLOYMENT
(In thousands, seasonally adjusted)

DecemberMarch
Total

1969 average monthly changes
MarchJuneJune
October

278

Government
Private industry
Construction
Manufacturing
All others

197

33
245

42
154

11
82

15
55
175

31
25
98

-15
-2
99

Manufacturing employment edged down in October, reflecting
small declines in a number of individual industries, and the earlier
September employment estimate was revised downward.

Exclusive of

the auto industry, where the early model changeover this year has confused
the monthly movements, manufacturing employment has been on a plateau
since June and the average workweek has been moving irregularly
lower since last winter.

The average workweek fell 0.3 hour to 40-1/2

hours in October, as compared with this year's high of 40.9 hours in
March.

The drop in average hours reflects small declines in almost

all individual industries, while employment increases were few in

number and small in size.

- 21

Thus, only a few of the manufacturing

industries now show signs of continued gains in manhours of work.
The G.E. strike did not influence the employment estimate for October
because it began late in the month, but it will have an impact on the
November estimates of employment and income.

Personal income.

In October, personal income rose by only

$2-1/2 billion, or only about half as much as the average from January
to August.

The smaller growth in October was primarily a result of

the reduction of average hours in manufacturing, where gross wage and
salary payments were down slightly for the first time in 18 months.
The expansion of private nonmanufacturing payrolls continued near
the June-September average as employment and hourly earnings rose at
about the same rate as over the summer.

The October increase in

Government payrolls was an outgrowth of hiring in State and local
units; in the summer, Government payroll increases had been swelled
by the Federal pay raise.
Income flows from dividends, interest and rent were not
dramatically different in October than over the summer.

Farm income

continued about steady for the fourth successive month after a strong
run-up earlier in the year.

II - 22

PERSONAL INCOME
(Billions of dollars, seasonally adjusted)

1969 average monthly changes
SeptemberD ecemberMarchJuneOctober
March
September
June

4.9

5.1

4.9

2.4

4.0

3.5

3.8

1.6

0.5
3.5

0.5
3.0

1.4
2.4

0.5
1.1

Manufacturing
Nonmanufacturing

1.0
2.5

1.0
2.0

1.0
1.4

-0.2
1.4

Other sources of income

0.8

1.7

0.9

1.1

Personal income
Wage & salary disbursements
Government
Private

Note:

Totals may not add due to rounding.

Wages and industrial relations.

Increased collective

bargaining activity in the months ahead appears likely to intensify
wage pressures.

Thus far in 1969 growth in compensation per manhour

in the private nonfarm economy has averaged slightly less than in 1968,
largely because of the reduction in collective bargaining and the
smaller impact in 1969 than in 1968 of the statutory increases in
minimum wages.

Only two million workers were covered by major collec-

tive bargaining settlements negotiated in the first nine months of this
year compared with four million in the same period of 1968.

Thus, the

number of workers receiving large first-year pay increases declined,
while the number of workers receiving deferred--usually smaller-increases rose.

This redistribution of relative weights resulted in

some abatement of upward pressures on average wages.
At the same time, however, wage increases provided in newly
negotiated contracts have continued very large.

First-year wage increases

II - 23

negotiated in major collective bargaining agreements in private nonfarm
industries averaged 8 per cent in the first nine months this year compared with a little over 7 per cent for the same period last year.

Much

of the upward push came from the substantial increases negotiated in
construction, where median first-year wage increases covering nearly
300,000 workers were over 16 per cent.

During this period, there were

relatively few key settlements in manufacturing, where first-year wage
increases averaged about 7 per cent compared to 10.4 per cent in nonmanufacturing activities inclusive of construction, and an estimated
8 per cent exclusive of both construction and manufacturing.

WAGE CHANGES IN MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Annual rate of increase, per cent)

Settlements concluded during:
1st 9 months
Full year
1966
1967
1968
1969
First-year increases:

4.8

5.7

7.2

8.0

Manufacturing
Nonmanufacturing

4.2
5.0

6.4
5.0

6.9
7.5

6.9
10.4

3.9
3.8
3.9

5.0
5.1
5.0

5.2
4.9
5.9

6.6
5.5
8.5

Changes over life of contract:
Manufacturing
Nonmanufacturing

The strike of 147,000 General Electric workers called on
October 27 continues.

So far, G.E.'s policy of standing by its original

offer (6 per cent in the first year with wage reopenings) has
resulted in a stalemate and there are still no signs of movement toward

II - 24

a settlement.

In a related situation, Westinghouse employees have

agreed to extend their contract on a day-to-day basis, but one local
walkout has occurred and others may follow.
Shopcraft railway unions have turned down the recommendations
of the Presidential Emergency Board so that the possibility remains
of a strike upon expiration of the 60-day cooling off period December 3.
If these workers elect to strike, it probably would involve three or
four railroads and trigger an industry-wide lockout, thus shutting
down the Nation's railroads.

This, in turn, might lead the President

to request special Congressional intervention.

At year's end, other

railroad contracts involving about 400,000 workers are expected to be
reopened, and the unions reportedly are planning to ask for 12 to 15
per cent pay boosts.
The strike at American Motors over local issues continues,
although the overall one-year contract covering economic issues has
been settled.

The contract reportedly provides a 6 per cent wage

and cost-of-living increase, and a considerable "catch-up" on fringe
benefits; such a settlement for this company can not be considered a
pace-setter for the auto industry, where most contracts come up for
renegotiation next September.

Wholesale prices.

Wholesale prices rose 0.4 per cent from

mid-September to mid-October as a result of an increase of 0.5 per
cent in average industrial prices--the largest monthly rise since
February--and little change in farm and food products.

Recent price

- 25

announcements on increases in industrial prices, while numerous, do
not give the impression of having the over-all importance of changes
in recent months and suggest the possibility of a reduced rate of
increase in the November index.
The rise of 3.2 per cent in new car prices accounted for
about one-third of the increase in average industrial prices in October,
although increases occurred in more than one-half of the product
classes.

Excluding passenger cars, the rise was about in line with

the third quarter average rise for industrial commodities and below
September's increase.

WHOLESALE PRICES
(Percentage changes at annual rates)

Dec. 1968
to
March 1969

1969
June-Sept.

Sept.-Oct.
4.8

6.8

5.2

1.6

6.4
8.4
9.6
20.8
61.2
2.8

0.8
0.4
4.0
17.2
-78.4
2.4

3,6
4.4
9.6
23.6
-28.0
2.8

6.0
3.6
9.6
10.8
- 7.2
8.4

9.2

18.8

- 4.4

- 1.2

All commodities
Industrial commodities
Materials
Steel mill products
Nonferrous metals
Lumber and plywood
Products

Mar.-June

Food and foodstuffs

Increases for metals and for machinery and equipment
together accounted for about two-fifths of the October increase in
industrial prices, with price advances for aluminum ingot, aluminum
and copper mill shapes, and steel mill products, and for construction
and metal working machinery.

Important increases also were reported

II - 26

for apparel and automobile tires.

Lumber prices continued to decline

for the sixth consecutive month although plywood rose further.
Farm and food products were expected to decline seasonally
in October by about 1 per cent, but the index showed little change as
many offsetting movements occurred.

Hog prices rose, but cattle

prices continued down and meats and fresh fruits were lower.
If the 6 per cent increase in railroad freight rates authorized
by the ICC for November 18 is stands--as seems likely--it will add
to the costs of such bulk-shipped commodities as coal, grain, steel,
scrap and also of many other items.

The over-all contribution of

the railroad industry to the GNP has been declining and in 1968 was
only about 1.8 per cent.

However, 3.2 cents on every dollar of the

inputs of the steel industry represented rail transport costs in
1968.

The 6 per cent increase is expected to add about $600 million

to gross revenues of the industry.

11/18/69

II-C-1

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY

ADJUSTED

EMPLOYMENT AND UNEMPLOYMENT
.

ESTAB BASIS
MILLIONS OF PERSONS,
RATIO SCAL72

~__NONAGRICULTURAL
EMPLOYMENT

_..

6 8

64
TOTAL

OCT

707

30
28

26
INDUSTRIAL
OCT 287

AND

RELATED
I

PER
CENT

UNEMPLOYMENT

1963

1965

INDUSTRIAL PRODUCTION-I
1957 59-100

I-I"I-

-11"

RATIO SCALE.

MATERIALS
OCT

1757-

TOTAL
OCT 173 3

1969

1967

1965

1963

INDUSTRIAL PRODUCTION-II
RATIO SCALE

______--

BUSINESS & D EFENS E
.^_EQUIPMENT
OCT

191 6

CONSUMER GOODS
OCT

161 8

1963

1965

.. . .. .

1967

1969

1967

1969

11/18/69

II-C-2

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY

ADJUSTED

BUSINESS INVESTMENT
ILLIONS OF DOLLARS, ANNUAL RATES1

RATIO SCALE

I 1

NEW P. & E.

OUTLAYS

(COM.-S.E.C.)

ALL

BUSINESS

QIP 721

MANUFACTURING
QlY 30 6

PER CENT

GNP

FIXED

INVESTMENT

AS SHARE OF GNPomio7

Itlllllllllilllllllll

1964

BUSINESS

INVENTORIES,

QUARTERL
CHANGE
ANNUAL
BILLIONS OF DOLLARS

Qrl 103

16Q
6
DEFICIT
1964

1966

SURPLUS
T
3
7

I
1968

1970

II
1970

NONFARM
TI

RATES

GNP

,. tfl

ll,-I

1968

1966

BASIS

EIISS

III - 1

THE ECONOMIC PICTURE IN DETAIL

Domestic Financial Situation

Bank credit.

Outstanding bank credit rose slightly in

October, but still remained below the level at the end of May.
continued to run

Banks

off holdings of U.S. Government securities in volume--

in spite of two large tax bill financings by the Treasury--and
reduced considerably further their holdings of other securities as
well.

Loan expansion was somewhat greater than in recent months,

largely the result of a substantial rise in security loans associated
with the financings.

And, if the sizable October increase in the

outstanding amount of loans sold by banks to their own holding companies,
affiliates, and subsidiaries is added to the change in bank loans,
the October rise in this total of loans approximates the rapid
expansion in the first five months of the year.

However, the average

monthly increases since May in total bank credit, total loans, and
business loans, adjusted by the addition of loans sold to affiliates
are still only one-half to one-third of those earlier in the year,

III - 2
NET CHANGE IN BANK CREDIT
All Commercial Banks
(Seasonally adjusted percentage change, at annual rates)
1968

1969
June October

October

Year

1st 5
months

Total loans & investments-

11.0

3.9

- 0.5

0.3

U.S. Gov't securities

3.0

-21.5

-11,1

-24.2

- 7.4

-12.0

Other securities

16.4

Total loans

11.6

11.2

3.5

8.0

Business loans

11.1

16.8

3.7

2,3

Other loans

11.9

7.7

3.3

11.5

2/
Total loans plus loan sales- 11.6

12.6

6.2

11.8

Business loans plus business
loan sales 3/

19,2

8.6

10.1

Memo:

11.1

Last Wednesday of month series.

Includes outright bank sales of loans to their own holding companies,
affiliates, and subsidiaries.

Includes outright bank sales of business loans to their own holding
companies, affiliates, and subsidiaries.

Banks reduced their holdings of securities by $1.8 billion
in October, or by about the same amount as in September.

Even though

banks underwrote two Treasury bill financings totaling $5 billion,
their holdings of U.S. Government securities fell by $1.1, representing mainly the run-off of maturing bond issues.

Banks resumed

reduction in holdings of other securities--mainly municipals--at
close to the rapid rate of July and August, following a small increase
in holdings during September.

Consequently, bank liquidity positions

fell further in October, reaching new lows well below those in late
1966,

III - 3

Nearly one-half of the October increase in bank loans went
to brokers and dealers, apparently to finance increases in their
inventories of securities stemming from the two Treasury financings.
With the exception of consumer loans--which expanded at the somewhat
increased rate of September--most other major loan categories, including
business loans, continued to increase very little.

However, there was

also a large rise--$900 million--in October, in the outstanding amount
of loans sold by banks to affiliates, with $750 million of this rise in
business loans.

The October increase in business loans, including

the rise in these loan sales, was somewhat larger than in recent
months, but still was well below average monthly expansion in the
first five months of the year.
Bank sources of funds.

Member bank deposits fell sharply

further in October, reflecting largely a substantial drop in U,S.
Government demand deposits, although time and savings deposits and
private demand deposits also declined.

In early November, however,

deposits at these banks rose markedly in response to a sizable
increase in U.S. Government demand deposits associated with the late
October Treasury financing.

While banks did not, on balance, supple-

ment their deposits with any additional borrowings in the Euro-dollar
market during October and the first week in November, their
affiliates did acquire during this period a large amount of funds
from the commercial paper market that was used to purchase loans
from the banks.

III- 4
CD attrition accounted for a much smaller proportion of
the outflow of time and savings deposits since the end of September
than earlier in the year.

CD's held by individuals, partnerships,

and corporations continued to decline at about the rate prevailing
in recent months--by $750 million in the 6 weeks ending November 5-but this reduction was offset in large part by increases in outstanding
The latter apparently

CD's held by foreign official institutions.

were mainly purchases of CD's by the Bank of International Settlements--primarily from banks in New York City--and largely represented
switches from Euro-dollar deposit holdings.

NET CHANGE IN SELECTED SOURCES OF FUNDS
Weekly Reporting Banks
(Millions of dollars, not seasonally adjusted)

Dec.
1967

All other time

Euro-dollar borrowings--

Commercial paper-

12,899

5,259

-14,738

708

2,221

4,049
- 222
4,271

977
- 2,239
1,262

407
152
255

852
239
613

1,145

-12,515

538

1,147

923

Negotiable CD's

Sept.
1967

4,490

Consumer-type
Savings
Other time 2/

2/
241
1969

7,486
1,363
6,123

Total time & sav. deps.

11-Sept.
1968

- 1,246

-237

222

- 290

2,470

6,993

501

- 173

2,546

1/
_
51969

24-Nov.
1968

-1,158
-

534
123
411

- 278
-

346
9
1,188

1/ Dates are for 1969; corresponding dates used for other years.

2/ Time deposits, IPC, other than CD's, IPC.
3/ Through foreign branches.
4/ Issued by a bank holding company, affiliate, or subsidiary.

The runoff of consumer-type time and savings deposits at large
banks, on the other hand, accelerated following quarterly interest
crediting at the end of September,

Moreover, time deposits other than

III - 5

CD's and other than consumer-type at these banks also fell substantially
during this period, reflecting in large part the continued reduction
in holdings of these deposits by State and local governments.

Country

banks, too, experienced sizable attrition of time and savings deposits
in recent weeks, following a considerable net outflow over the third
quarter.
However, banks have acquired a large amount of funds from
nondeposit sources since the end of September.

In the 6 weeks ending

November 5 their affiliates raised almost $1.2 billion in the commercial
paper market.

On the other hand, funds obtained by banks from loans

sold under repurchase agreement continued to fall--by about $200
million--and, on balance, banks borrowed virtually no additional
funds in the Euro-dollar market during this period, either through
foreign branches or directly.
Demand deposits held by the public fell in October, for
the third consecutive month.

But further expansion in their currency

holdings resulted in some net growth--at an annual rate of about 1.2
per cent--in the money stock, following virtually no increase during
the third quarter,

So far this year, the money stock has risen at

an annual rate of 2,7 per cent, as compared with 7.2 per cent during
1968.

III - 6

Nonbank depositary institutions.

During October, outflows

from the savings and loan associations, according to sample data,
were unusually large, with net withdrawals continuing even after
the end of the reinvestment period.

About half of the outflow

occurred in the San Francisco District, with the remainder generally
Most observers were surprised at the size

dispersed geographically.

of the attrition (almost $450 million, before seasonal adjustment),
but the continued attraction of high market yields was the apparent
major factor during the month.
DEPOSIT FLOWS
NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rate, per cent)

Mutual Savings Banks

Savings & Loan Associations

Both

1968

7.1

6.2

6.5

1969

6.2

6.1

4.3

3.5

3.8

III(p)

1.9

2.2

2,1

0.3

2/
- l.5 -

October(p)

Memo:
Sept.-Oct.
(p)

/
2/

1/
/

1969(p) -1.7

1.5;-

Preliminary
Because of seasonal adjustment difficulties, monthly patterns may
not be significant.
Based on sample,

-0.9

1,6

III - 7
For probably the same reason, mutual savings banks in October,
On

showed practically no deposit expansion after seasonal adjustment.

an unadjusted basis, New York State institutions suffered net outflows,
which were offset only in part by expansion at institutions in other
States.

New York State savings banks have shown particular weakness

since mid-year, and less than seasonal growth continued during the
first 15 days of November at the largest New York City institutions.
DEPOSIT INFLOWS
15 LARGEST NEW YORK CITY MUTUAL SAVINGS BANKS
FIRST FIFTEEN DAYS OF NOVEMBER
(Millions of dollars, not seasonally adjusted)

1966

1967

1968

1969

Net inflow, excluding dividends credited

New inflows, adjusted for passbook loans made

To offset deposit losses and supplement lendable funds, the
FHLB's advanced a sizeable $600 million to member associations in
October, and another $100 million in the first two weeks of November.
The level of such advances in early November stood at $8.5 billion,
an increase of $3.3 billion since the beginning of 1969.

To prepare

themselves for further assistance to the associations, the FHLB
borrowed $600 million of new money in November and may have to enter
the market again in December for a moderate amount of new cash--an
unprecedented event for that month,

In an additional effort to

support mortgage activity, the FHLBB in mid-November reduced the
required liquidity ratio from 6.0 to 5,5 per cent, the second reduction
1/

Assuming that the FHLB does borrow about $300 million in
December their total net borrowings in 1969 will amount to
$3.9 billion, $3.0 billion in the second half of the year.

III - 8
In the aggregate, this frees about $650 million of S&L

this year,

resources, but the distribution of liquidity suggests that perhaps
only as much as half of this will be used.
Very few of the mutual savings banks, most of which have
not joined the FHLB System, have borrowing recourse at a Federal
agency, but they can, and do, borrow from commercial banks--through
direct loans or RP's, and mortgage warehousing credits,

The New

York State savings banks, which have been most severely affected by
rising market yields, did borrow about $100 million in the third
quarter, mostly from commercial banks, and may have borrowed about
that much again from banks in late October and early November.
No significant improvement in net savings flows is expected
over the balance of the year, and the staff expects considerable
attrition at thrift institutions in the coming December-January reinvestment period.

At S&L's the potential for this development is enlarged

by heavy December-January maturities of certificate accounts.

Such

accounts represent one-third of total savings capital, and a recent
confidential Savings and Loan League sample survey indicated that
almost one-half of these are scheduled to mature in December and
January.

This maturity concentration apparently reflects a seasonal

profile produced by shifting from regular to special accounts during
previous reinvestment periods; the bulk of December-January maturities
were probably originally issued for 6-month terms at mid-1969.

While

certificate accounts thus do not represent unusually "hot" money at

III - 9
S&L's, the fact that they have been shifted from regular savings
indicates a certain interest rate sensitivity; and even a rate of
attrition as low as 10 per cent among maturing December-January maturities would amount to almost $2 billion.
Mortgage market.

With savings inflows to the thrift

institutions particularly weak in October, the mortgage commitment
activity of these institutions was probably somewhat more restricted.
Hopefully, October commitment data for all savings and loan associations and New York State mutual savings banks will be available
in time for the Greenbook Supplement.
In addition to the anticipated reduction in commitment
activity at the thrift institutions, FNMA support of the Governmentunderwritten sector of the mortgage market has recently become
somewhat more limited.

Following a sharp drop in the amount of bids

received during the second half of October, the weekly volume of
forward purchase commitments accepted by FNMA fell in early November
to the lowest level in nine months, as FNMA continued to set its
auction limits so that it would acquire no more than approximately
60 per cent of the bids it receives.
The drop in bids received during October reflected in part
the inability of a number of mortgage companies to originate FNMA
and VA loans carrying the 7-1/2 per cent interest rate ceiling,
due to the resultant size of the discount--as high as 8 points-associated with the FNMA auction price.

Also contributing to the

III - 10

October decline in bids was the fact that some bidders had expected
the mortgage market to improve in the near term and, given the
existing range of FNMA prices, were unwilling to bid.

More recently,

the volume of bids received has risen back to September levels as
expectation

prompt easing in the mortgage market diminished.

However, the volume of bids accepted has not recovered to the same
extent, apparently because FNMA is not convinced that the most recent
volume of bids received will be sustained.

FNMA WEEKLY AUCTIONS
Amount of total offers
Accepted
Received

(Millions of dollars)

Implicit private market
yield 6-month commitments

(Per cent)

Highs
1968
1969

$ 232 (6/3)
410 (6716)

$ 89 (7/1)
152 (9/8)

7.71 (6/10)
8.63 (10/20)

Sept. 2
8

253
243

151
152

8.34
8.36

242

145

8.40

247

145

8.44

258

144

8,48

251

147

8.52

218

146

8.59

162

135

8.63

121

118

8.60

230

8.49

267

102

8.49

243

123

8.51

Oct.

Nov,

Note:

Average secondary market yield after allowance for commitment fee
and required purchase and holding of FNMA stock, assuming prepayment period of 15 years for 30-year Government-underwritten

mortgages. Yields shown are gross, before deduction of 50 basis
point fee paid by investors to servicers. The first auction
date was May 6, 1968.

III - 11

Due to the record level of support provided by FNMA in 1969,
1/
its demand for funds has risen sharply throughout the year.Through
the first eleven months of this year, FNMA has borrowed $2.9 billion
in net new money through the issuance of long-term debentures and
expects to obtain an additional $200 million in December.

Given

the backlog of its outstanding mortgage commitments, now totaling nearly
$3 billion, FNMA is estimated by the staff to require at least $700
million in new money financing during the first quarter of 1970.
The implicit private market yield on FNMA 6-month forward
purchase commitments declined near the end of October in a lagged
response to the sharp drop in corporate bond yields.

However, by

the November 17 auctionyields had again begun to rise, though
uncertainty engendered by the extent of the existing discount caused
bidders to move quite slowly in further reducing their bid prices.
The average yield in the private secondary market for FHAinsured home mortgages rose again in October as the accompanying
discounts reached a near-record 7.7 points.

The average contract

rate in the primary market for conventional first-mortgages also
advanced in October.

Regionally, in the West, where usury ceilings

have not been a limiting factor and where demand for housing has
been exceptionally strong, the average conventional contract rate
increased to 9 per cent, the highest rate ever reported by the FHA.

1/ For a detailed analysis of the FNMA mortgage market support in 1969
as well as that of the FHLBB, see Greenbook Appendix A.

III - 12
AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES
Secondary Market:
Primary Market:
FHA-insured loans
Conventional Loans
Yield
Yield
Level
(per
cent)

spread
(basis
points)

Level
(per
cent)

spread
(basis
points)

Discount
(points)

26(Mar.)
120(Aug.)

4.4(Sept.)
7.9(Apr.)

1968
Low
High

6.75(Jan.Feb.)
7.40(Dec.)

23(Mar.)
115(Aug.)

6.78(Feb.)
7.52(June)

1959
Low
High

7.55(Jan.)
8.30(Oct.)

27(Sept.)
69(Feb.)

7.85./(Jan.) 42(Sept.)
8,48(Oct.)
108(Feb.)

2.8S/(Jan.)
7.7(Oct.)

April
May
June

7.75
7.75
8.00

58
53
42

8,06
8,06
8.35

89
84
77

4.5
4.5
6.7

July
August
September

8.10
8.20
8.25

47
55
27

8.36
8.36
8.40

73
71
42

6.8
6.8
7.1

October

8,30

8.48

7.7

1969

Note:

FHA series: Interest rates on conventional first mortgages (excluding
additional fees and charges) are rounded to the nearest 5 basis
points. Data for FHA loans in January 1969 estimated by Federal
Reserve for 7-1/2 per cent regulatory interest rate, on which 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 service fees, minus average
yield on new issues of high grade corporate bonds with 5-year
call protection.

Estimated.

III - 13

Corporate security and municipal bond markets.

Corporate

and municipal bond yields have advanced substantially since mid-October,
with yields on new corporate bonds most recently surpassing previous
peaks.

The sharp reversal in bond yields--which began to occur

before the President's Vietnam speech--reflected the heavy current
and prospective volume of new offerings and limited fund availability
at several major institutional investors.

Although underwriters

pursued aggressive pricing policies through October, buyers generally
became increasingly cautious about the outlook for yields, given
mixed economic statistics and declining hope of a near-term shift
in monetary policy; the President's speech may also have revised some
earlier expectations regarding the peace outlook.

In this atmosphere,

many new bond issues sold poorly and in the first half of November
underwriters attempted to reduce rising inventories by cutting prices;
since the end of October, 8 corporate issues have been released to
free market trading with upward yield adjustments ranging from 10
to 20 basis points,

Municipal underwriters also cut prices on slow

moving issues adding upward pressure to rates in that market.

both markets, even after syndicate terminations, dealer inventories
apparently remained uncomfortably high.

III - 14
STOCK PRICES AND BOND YIELDS

NYSE

Bond Yields
Long-term
New Corporate State and local
Bonds 37
Aaa 2/ ,

Stock
Prices 1/
AMEX

1968
21.58(3/5)
48.66(3/4)
61.27(11/29) 33.25(13/20)

Low
High

6.13(8/30)
6.92(12/13)

4.07(8/9)
4.85(12/29)

1969
49.31(7/29)
59.32(5/14)

25.02(7/29)
32.91(1/3)

6.90(1/10)
8.27(11/14)

4.82(12/24)
6.37(9/5)

Oct. 17
24
31

53.72
54.89
54.45

27.66
28.37
28.37

7.95
7.82
7.87

5.92
6.07
6.13

Nov.

55.07
54.56

28.61
28.31

8.13
8.27

6.11
6.17

Low
High
Week of:

7
14

NYSE is New York Stock Exchange.

AMEX

Prices as of the day shown.
is American Stock Exchange.

With call protection (includes some issues with 10-year call protection),

Bond Buyer (mixed qualities).

The stock market continued its October rally through the
first week in November, ignoring the renewed softness in bond markets
since mid-October, and despite persistent indications that previous
expectational shifts regarding monetary policy had been premature.
For example, at the close on November 7, the NYSE Index stood 10.5
per cent above its July low, having recovered nearly half of the
decline from its record peak of December 1968.

However, during the week

III - 15
ended November 14, both prices and trading volume on the NYS
AMEX declined moderately.

and

Trading volume on the NYSE averaged 13.2

million shares per day during October, considerably above the 10.5
million share average for the third quarter.
Although fragmentary reports from margin panel firms suggest that margin debt increased somewhat during October, and thus
that individual investor trading contributed to increased demand,
the major impact on the market appears to have been the result of
renewed institutional activity.
stood at an

The liquidity of mutual funds, which

unusually high 9 per cent of assets at the end of

September (the latest data available), suggests that the funds had
been holding back from the market in anticipation of a turn in prices.
There is also fragmentary evidence that some of these funds shifted
their purchases from bonds to stocks in October and early November.
An increased volume of stock offerings was associated with
the general improvement in stock prices.

This accounted in part for

the continued rapid pace of total corporate security offerings.
The staff's estimated volume of stock issues has been revised upward
for both October and November to about $100 million above the average
third quarter volume.

Public bond offerings in November are estimated

at $1.2 billion, $0.2 billion above earlier estimates due to the
shift of some issues from late October into November and a modest
pickup of covertible issues.

Included in the November volume are

two large nonconvertible industrial issues, a type of offering
absent from the calendar since early in the third quarter.

III - 16

CORPORATE SECURITY OFFERINGSMonthly or Monthly Averages
(Millions of dollars)
Total,

r
=,:, ir, L

lvJ

Public Bond
Offerings
I968
1969

Private Bond
Offerings

Stocks
19 68"1969" I 1968

Total
1969

1968

1969

554

547e

382

628e

1,830

2,177

Year

894

1,01le

821

886

574

513

330

674

1,726

2,073

1,035

1,136

548

526

319

709

1,902

2,371

Q II
Q III

869

1,070e

454

547e

389

560e

1,711

2,177

Q IV

852

953e

641

600e

491

567e

1,984

2,087

1,009

960e

595

500e

525

650e

2,129

2,110

November

939

1,200e

362

500e

466

650e

1,767

2,250

December

607

700e

965

800e

483

400e

2,055

1,900

October

e/ Estimated.

l/ Data are gross proceeds.

Looking ahead to December--when new flotations traditionally
cease after mid-month--public bond offerings now scheduled aggregate
about $0.6 billion and are expected ultimately to total $0.7 billion.
Making a rough allowance for the usual seasonal lull in December,
this volume is comparable to over $1 billion for other months.
bulk of the scheduled volume is in public utility bonds.

The

Under-

writers do not report any concrete signs of large industrial firms
about to enter the market, although the squeeze on corporate liquidity
may prod some firms to enter the market in the near-term.

Taking

account of private bond offerings and equity issues, total corporate

III - 17

security offerings in December are estimated at a sizable $1.9 billion.
For the full year, total corporate security offerings are tentatively
estimated at about $26 billion, a record and more than $1 billion
above the previous high in 1967.
Total municipal bond and note offerings in November are
estimated slightly above the almost $1.3 billion volume during
October.

However, there is a substantial switch between short and

long-term issues in these two months, with long-term volume nearly
one-third less than October, a time when interest rates fell below
6 per cent.

The increase in interest rates so far in November

accounts, in part, for the sharp rise in short-term offerings.

But

the volume of long-term issues has been maintained above the low
during other months this year.

This reflects the relaxation

of rate

ceilings in some areas, enlarged borrowing by units without ceiling
constraints, and increased emphasis on shorter average maturities
of bond offerings.-

Rates have also not risen as high as during

the third quarter, reflecting the virtual end of discussion about
taxing municipal bond interest.

But earlier cut backs in long-

term issues will keep total gross long-term offerings in 1969 to
under $12 billion as compared with the $15 billion of nonindustrial
revenue issues in 1968.
1/ The composition of issues on the calendar is heavily weighted
in areas with rate ceilings above 6 per cent or no ceilings at all.
Currently, 19 States have rate ceilings on State G.O.'s of 6 per
cent or below and 27 States have such ceilings applicable to local
G.O.'s. Local G.O.'s, moreover, are often rated below the highest
quality and presently bonds rated A yield considerably more than
6 per cent. About 24 States still have rate ceilings of 6 per cent
or less on local agencies, such as school districts. As will be
indicated in the appendix to the supplement, these units were particularly affected by the rising level of rates in the third quarter.

III

STATE AND LOCAL GOVERNMENT OFFERINGS
Monthly or Monthly Averages
(Millions of dollars)
Long-Term 1/
Long-Term I/

Net Short-Term 2/

Total 3/
1969

1968

1969

Year

1,381

962

-20

1,246

930

-51

302

1,195

1,232

Q II

1,285

1,208

344

1,296

1,552

Q III

1,537

810

-73

366

1,464

1,176

Q IV

1,455

900e

n.a.

1,488

n.a.

October

2,230

1,250e

250

30e

1,980

1,280e

November

1,021

850e

413

500e

1,434

1,350e

December

1,115

600e

-565

n.a.

1,680

n.a.

1968

1969

1968
1,361

Estimated.

Data are for principal amounts of new issues.

EXCLUDES note offerings of Housing Assistance Administration and
Renewal Assistance Administaation.

Combines GROSS long-term and NET short-term issues.

Municipal bond volume in December is estimated at $600 million,
relatively high for this month--except for December 1968
bulged by industrial revenue issues.

which was

Even though long-term municipal

volume for the fourth quarter as a whole is likely to be larger than
during the quarter earlier, actual borrowing will fall significantly
short of the roughly $5 billion of borrowing desired by governmental
units, as of September 30, for the three months ended in December.
appendix to be issued in the supplement will discuss further
recent survey results of State and local Government borrowing plans
and expenditure cutbacks.

III - 19
Government securities market.

Yields on longer-term U.S.

Government securities have shared in the general advance in capital
market interest rates that began around the third week in October.
In the case of Governments, however, only part of the sharp rate
declines that had occurred earlier in October were retraced.

Inter-

mediate-term yields in particular have stayed well below their previous
highs.

Nevertheless, rates on most notes and bonds have risen 30 to

60 basis points since the turnaround, while Treasury bill yields
have advanced on balance by some 15 to 40 basis points, with the
3-month issue reaching a new high of 7.20 per cent on November 13.

MARKET YIELDS ON U. S. GOVERNMENT SECURITIES(Per cent)
Lows

Highs

Oct. 27

Nov. 10

Nov. 17

Bills
1-month
3-month
6-month
1-year

5.30
5.87
5.96
5.86

(3/25)
(4/30)
(4/30)
(1/16)

7.20
7.20
7.55
7.47

(9/22)
(11/13)
(11/17)
(7/1)

6.80
6.99
7.23
7.10

6.92
7.12
7.41
7.12

6.68
7.07
7.55
7.24

6.02
6.11
6.09
5.95
5.91

(1/20)
(1/20)
(1/16)
(1/20)
(5/5)

8.14
8.04
7.76
7.52
6.81

(10/1)
(10/1)
(10/1)
(10/1)
(10/1)

7.35
7.28
6.99
5.93
6.48

7.53
7.35
7.03
6.99
6.65

7.72
7.55
7.16
7.13
6.76

Coupons
3-year
5-year
7-year
10-year
20-year
1/

Latest dates of high or low rates in parentheses.

III -

With no new Treasury financings in the one- to seven-year
area expected before February, yields on intermediate-term issues have
Increased

reversed only about half of their early October declines.

supply, however, has been forthcoming in the Federal Agency market,
and the recent $1.1 billion Federal Home Loan Bank financing (raising
$600 million of new money) put some upward pressure on Government
security yields.

The long term Government market continued to be

influenced by recent weakness in the corporate sector, with reports
of some investor switching into corporates at their recent record
high yields.

Total dealer inventories of bills rose from a low of around
$600 million on October 6 to a recent high of nearly $3.6 billion on
November 5. Factors contributing to the build-up of positions
included the need to absorb bank liquidation of the $5 billion of
tax bills auctioned in October, end-of-month awards in the monthly
bill auction, and large net acquisitions of bills from foreign accounts-notwithstanding the fact that the Federal Reserve itself bought $1.3

billion of bills directly from foreign accounts in reserve-supplying
operations.

Prior to the President's speech on Vietnam, dealers

absorbed bills without much upward pressure on bill yields.

Since

then, however, dealer bill holdings have been reduced to about $2.5
billion as foreign accounts have moved to the buy side of the market
and the System has continued to purchase bills to provide reserves.
Despite this buying, yields have advanced significantly.

To some

III -

extent, this has reflected the general shift in market expectations
since the President's speech.

In addition, with their bill position

still at relatively high levels, with financing costs higher, and
with the Treasury about to sell an additional $2.5 billion of tax
bills, dealers have become increasingly reluctant to take on bills
at prevailing yields.

DEALER POSITIONS IN GOVERNMENT SECURITIES

(In millions of dollars)
October 27

November 10

November 17

2,788

3,264

2,804

Treasury bills (total)

2,267

2 807

2.475

Due in 92 days or less

-23

-25

93 days or over

2,185

2,831

2,500

520

457

330

120

1-5 years

242

168

137

over 5 years

196

169

127

Total

Treasury notes and bonds

(Total)
Due within 1 year

III - 22

Other short-term credit markets.

Yields on commercial paper

and bankers' acceptances declined somewhat during the last week in
October with rates for 3-month commercial paper reaching 8.25 per cent,
the lowest level since August.

By mid-November, however, rates had

turned up again, along with yields on Treasury bills, and the quote
on 3-month and 6-month commercial paper had moved back to 8.50 per
cent.

Rates on 3-month finance paper have remained at their relatively

high level of 8.13 per cent since early October as the automobile model
changeover continued to exert pressure on this market.
SELECTED SHORT-TERM INTEREST RATES

(Friday Quotation--Discount Basis)
October 17
3-month
8.63
Commercial paper
8.13
Finance paper
Bankers' acceptances
1 8.25
Federal agencies (secondary market)- 7.39
Treasury bill
6.97

October 31

November 4

8.25
8.13
8.00
7.66
7.00

8.50
8.13
8.00
7.61
7.09

6-month

Commercial paper
Finance paper
Bankers' acceptances

8.50
7.75
8.25

8.25
7.75
8.00

8.50
7.75
8.00

Federal agencies 1/
Treasury bill

7.77
7.30

7.83
7.31

8.08
7.46

5.45
7.18

5,45
7,03

5.45
7.17

12-month
Prime municipals 1/
Treasury bill
1/ Bond yield basis.

III - 23

In the secondary market for short-term Federal agency debt,
rates have been drifting steadily higher since mid-October.

By November 14

issues due within 6 months were quoted at about 8.08 per cent, some 30
basis points above their mid-October

lows.

In the market for new agency
For

debt, yields on shorter maturities have also risen substantially.
example, a 6-month Bank for Cooperatives issue was priced to yield

8.45 per cent on November 18, 40 basis points above a comparable issue
one month earlier.

On the other hand, rates on new longer-term issues--

due in one year or more--have increased only slightly since mid-October.
For example, Federal Home Loan Bank issues with one year and 25-month
maturities were offered to yield 8.25 per cent and 8.20 per cent
respectively on October 15.

But when the agency returned to market to

offer 10-month and 24-month issues on November 13, reoffering yields
of 8.38 and 8.20 per cent were considered sufficient although both issues
moved to somewhat higher yields in initial secondary market trading.

NEW FUNDS OBTAINED FROM THE PUBLIC
IN THE FEDERAL AGENCY MARKET
1966

1967

1968

1969

494
234

272
- 28

822
-145

755
1,101

September

-306

- 83

111

October
November

-123
72

- 53
829

354
204

July
August

393
1,776
600 (as of

11-14)

III -

NOTE:

In September, the latest month for which data are available, the

volume of commercial and finance paper outstanding increased by $1,386
million to a total of $30.2 billion.

Almost 30 per cent, or $1,103

million, of the increase was accounted for by directly placed paper
reflecting pressure on automobile finance companies during the model
changeover.

Bank-related paper increased to $2.5 billion at the end

of September and subsequently to $3.7 billion by November 5.
COMMERCIAL AND FINANCE PAPER AND BANKERS'
ACCEPTANCES OUTSTANDING
(In millions of dollars)
September

July

Note:

Bank related paper
(unadjusted)

Bankers' acceptances

27,812
10,314
17,498

28,862
11,019
17,843

30,243
11,302
18,946

1,869

2,210

2,496

4,991

Commercial & finance paper 1/
Total
Placed through dealers
Placed directly 2/

August

5,145

5,232

Data for commercial and finance paper are seasonally adjusted, in
contrast to similar data published in the Bulletin that are seasonall y
unadjusted.
2/ As reported by companies that place paper directly with investors.
As of June 1969, these figures include for the first time directly
placed commercial paper issued by bank related companies. Dealer
totals have always included paper issued by bank related companies.

Federal Finance.

Expenditures data for September indicate that

defense outlays in that month were $.6 billion lower and CCC spending
was $.2 billion less than the Staff had estimated in the last Greenbook.

III -25
In addition, total outlays during October and November appear to be
more modest than had been anticipated.

While other signs point toward

offsetting increases in social insurance and veterans'

benefits later

in the year, the Administration's fiscal year spending total of $192.9
billion may be achievable, although it is still toward the low end of
the range of reasonable projections.

However, estimates of receipts

have also been adjusted downward and the budget surplus now expected
for this fiscal year is somewhat smaller than that shown in the last
Greenbook.

September receipts, mainly individual withheld taxes, were

$.8 billion lower than the Staff had predicted.

Reflecting this short-

fall, forecasts of receipts over the next few months have been revised
downward by $.5 billion.
As a result of lower than expected receipts, the Treasury's
fourth quarter cash positions is slightly less comfortable than the
Staff had projected.

The cash balance at the end of October was $5.5

billion, but it should increase to about $6.6 billion by the end of
November as a result of Treasury cash financing.

In addition to

$400 million of new money to be raised by adding $100 million to each
of the month's four weekly bill auctions, the Treasury has announced
$2.5 billion of borrowing, in the form of $1.0 billion of April and
$1.5 billion of June tax bills for payment on November 26.

This

new cash, plus continued $100 million supplements to the weekly bills

III - 26

in December, is expected to maintain the cash balance above $3 billion
even at its seasonal low on December 15.
should carry the balance to about $6.5

Strong corporate tax payments
billion by the end of the

calendar year, and the end of January balance could approach $7.5
billion.

III - 27

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Nov.

Oct.

Dec.

Jan.

Borrowing operations
New cash raised:
Weekly and monthly bills
Tax bills

.4
2.5

5.0
-I.I

Coupon issues
Other (agency, debt repayment, etc.) -1.1
Total net borrowing from public

Plus:

Other net financial sources-

Plus:

Budget surplus or deficit (-)

Equals:

Change in cash balance

Memoranda:

-2.5
-2.1

3.9

2.9

-1.0

-5.6

-0.8

2.0

-0.1

1.1

-0.1

0.9

6.6

6.5

7.4

14.3
15.1

17.6
15.6

16.2
16.3

-1.1

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

a/
b/

5.5-'

12.0
17.6

Checks issued less checks paid and other accrual items.
Actual

NEW BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
FY 1969
Actual

Calendar
year
1969e/

Fiscal 1970
Summer Budget F.R.
Review
Board

IIIe/

IVe/

Ie/

-2.5
47.9
50.4

-4.4
43.9
48.3

-3.6
44.2
47.8

.2-/
-.7
--

4.7
.1
-.4

2.4
,5
.7

lie/

Quarterly data, unadiusted
New budget:
Surplus/deficit
3.1
Receipts
187.8
Total expenditures and net lendingl84.8
Means of financing:
Total borrowing from the public
Decrease in cash operating balance
Other 3/
Cash operating balance, end of period

-1.4-'
- .6
-1.1

6.4
196.7
190.3
-4.5
-1.8
- .2

5.9
198.8
192.9

2.4
195.3
192.9

15.3
60.8
45.5

n.a.

-1.4
-0.1
-0.9

-12.6
-1.1
-1.7

6.0

5.9

6.6

6.5

6.0

12.9
59.3
46.4
-11.7
-1.2

5.9

6.5

4.9
192.3
187.4

9.7
201.4
191.7

5.1
201.2
196.1

3.8
200.0
196.2

13.5
202.8
189.3

7.8
201.4
193.6

7.4
202.9
195.5

1.0
197.3
196.3

-1.0
198.3
199.3

9.3

n.a.

7.3

12.6

7.8

8.9

5.9

6.5

Seasonally adjusted annual rate
Federal surplus/deficit
in national income accounts
Receipts
Expenditures

High employment budget surplus/deficit- 2.7

*--Actual
e--Projected. Assumes extension of surcharge at 5 per cent from January to June 1970. Also assumes discontinuance
of investment tax credit effective, retroactively, April 1969.
n.a.--Not available.
1/ Excludes effect of conversion of agencies to private ownership.
2/ Excludes effect of reclassification of $1.6 billion of CCC certificates of interest from Budget transactions
to borrowing from the public.
3/ Includes such items as deposit fund accounts and clearing accounts.
4/ National Income account translation estimated by Federal Reserve staff.

III-C.1
FINANCIAL DEVELOPMENTS - UNITED STATES
CHANGES IN BANK CREDIT

FREE RESERVES AND COSTS
ET

BILLIONS OF DOLLARS

11/18/69

REE

SRESERVES
NET BORROWED
NOV

RESERVES
V

BANK RESERVES

BILLIONS OF DOLLARS

BORROWED
OCT

114

EXCESS

OCT13
1965

1967

MONEY

AND TIME DEPOSITS

1969

'l
'''

BILLIONS OF DOLLARS
SEASONALLY ADJUSTED
RATIO

SAVINGS SHARES AND DEPOSITS

2
2

''''''

SCALE

BILLIONSOF DOLLARS
RATIO SCALE

SAVINGS AND LOAN
ASSOCIATION S
-MONEY
OCT 1992

SUPPL.Y

COMMERCIAL BANK
TIME DEPOSITS
OCT

CENT OF GNP

DEPOSITS ,,,

TIME

MONEY

SUPPLY

DEPOSITSQMI

11111

I
419

SUPPLY Qm 211

1965

1965~~~~

___

,11

S Il

MONEY

1348

193 5

EXCLUDES HYPOTHECATED

IPER

OCT

196

1967

1969

OCT

669

S 30
16

MUTUAL SAVINGS BANKS

9
20
2

* REFLECTS CONVERSION OF A S & L ASSN WITH SHARE CAPITAL
OF ABOUT $175 MILLION TO A MUTUAL SAVINGS BANK
- -

19516716
1965

1967

1969

11/18/69

III-C.2

FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED-NONFINANCIAL SECTORS
I

BILLIONS OF DOLLARS
SEASONALLY ADJUSTED
ANNUAL RATES

SHARES IN FUNDS
PER CENT

DEPOSITORY

ANSTITUTIONS

COMMERCIAL

LESS FEDERAL
GOVERNMENT

NONBANK

TOTAL-120

A
/

SUPPLIED
o1291

BANKS

G III02

Qm 85 B

I
HOUSEHOLDS
-NET

AND

BUSINESS

CAPITAL OUTLAYS---- 79 3
III

NET

FUNDS

RAISEDQII

732

1970

1968

1966

NEW CORP

OCT

BONDS &
STOCKS:

789

STATE AND LOCAL GOVT

Ann

NEW SECURITY ISSUES

1968

1967
STATE AND

1
3

LOCAL GOVERNMENT

MAR.

JUNE

SEPT.

DEC.

1965

1967

1969

IV THE ECONOMIC PICTURE IN DETAIL

International Developments

U.S. balance of payments.

Beginning in September the rate of

the liquidity deficit has been considerably lower than in the preceding
eight months, if adjustments are made for adverse seasonality and certain
special factors.

Of course, the most recent figures are quite tentative,

as are the monthly seasonal adjustments, but the following pattern
indicates the extent of the shift that is appearing (in millions of
dollars):
July-

IQ
Liquidity deficit, NSA
-1,273
Seasonal element
395
Liquidity deficit, SA
-1,668
"special" transactions
230
Liquidity deficit (SA) before
"special" transactions
-1,898

Sept. Oct.

IIQ

IIIQ

Aug.

-3,786
64
-3,850
-350

-2,888
-355
-2,533
-547

-2,419
-405
-2,014
-294

-469
50
-519
-253

-690
-450
-240
40

-3,500

-1,986

-1,720

-266

-280

Weekly data for November, through the 12th, show a sizable
surplus, though this is also a seasonally adverse month.

The lower

deficits since August probably depend in part on a reversal of earlier
speculative outflows of capital.

Thus, to establish the level for the

underlying deficit a considerable upward adjustment is probably necessary.
The factors in this turn for the better are not yet clear from
any actual statistical measurement, but several are very likely at work.
One is the gain in the trade account, discussed below, that showed up in

IV - 2

the August-September reports and is perhaps continuing.

Another factor

is probably a reduced level of U.S. private capital outflows, apart
from speculative movements.

Bank-reported claims were reduced in the

third quarter; sketchy coverage of October transactions indicates there
may have been a further reduction.

Sales of new issues of foreign bonds

in the U.S. market have been sharply reduced from $550 million (seasonally
adjusted) in the third quarter to about $75 million in October and about
$100 million so far in November.

There are also some indications that

foreign investors were purchasing fairly sizable amounts of U.S. equities
in October.
A reduction in direct-investment outflows had been expected in
the fourth quarter, but last year's pattern suggested that this might not
occur until the last weeks of the year.

However, both direct investors

and others may have begun to unwind their Deutschemark positions at an
accelerating pace in October and November.

In addition, the flow of U.S.-

resident funds to the Euro-dollar market may have diminished.
The preliminary report on the third quarter balance of payments
(see following table) shows that the residual item in which short-term
speculative flows, together with direct investments and many other items,
would be reflected, was reduced below the inflated amounts of the first
two quarters, though it was still above the quarterly average of 1967 or
1968.

Balance of Payments 1/
(millions of dollars, seasonally adjusted)

1
Year
Merchandise excluding military
Exports
Imports
Net

9
I

6
II

8
III

6
9
IL11

9
IIIEI

9,588
-9,590
-2

9,567
-9,231
336

-120

-323
78

-426
-473

-583
185

459

786

751

127

155

656

504

622

202

223

3
175
772

55
119
409

169
240
556

44
-50
95

34
-173
-171

-150
-258
-115

540
-880
904

2,314
-2,186
-137

765
-55
-571

192
22
-1,076

2,848
-1,132
-48

4,716
-567
-299

1,080
2,139
-686

Other transactions (derived as residual)

-6,689 -1,823

-2,400

-1,723

-743

-2,782

-2,968

-2,326

Balances (deficit(-))
Official settlements balance
Liquidity balance
Adjusted over-all balance

1,638
168
-1,744

1,553
9
-751

97
-139
-613

367
862
464

1,143
-1,668
-1,824

1,234
-3,850
-3,560

-933
-2,533
-2,204

7,469
8,383
-8,458 -7,572
-103
-75

33,598
7,941
-32,972 -7,817
124
626

8,395
-8,131
264

8,879
-8,566
313

-1,267
269

-311
236

-164
243

-337

-455

-90

2,084

309

2,276

530

Selected Government transactions
Nonscheduled debt repayments
Nonliquid U.S. bank liabilities 2/
Nonliquid U.S. Government liabilities

269
590
2,010

42
56
273

Liquid liab. to private foreign accts.
Liquid liab. to official foreign accts.
U.S. reserve assets (increase(-))

3,811
-3,099
-880

U.S. purchases (-) of foreign sec.
U.S. banking claims (increase(-))
Foreign purchases of U.S. corp. stocks
Foreign purchases of other U.S. sec.,
excluding Treasury issues

p/
1/
2/

-379
-564
-844

Preliminary. r/ Revised.
Items available, or partially estimated, for third quarter of 1969 as of November 18, 1969.
Includes some non-official transactions.

IV - 4

Movements in the official settlements balance have become
erratic as U.S. commercial banks adjusted their borrowings from the
Euro-dollar market to cope with changing circumstances, and as foreign
official holders of dollars shifted some funds out of Euro-dollars into
time deposits in the United States.

This balance showed a sizable

deficit in August as U.S. banks drew only a moderate amount from the
Euro-dollar market and liabilities to official accounts (mainly German)
expanded sharply.

In September, U.S. banks reduced their Euro-dollar

liabilities, and the official settlements deficit exceeded the liquidity
deficit.

During October the banks with foreign branches first drew heavily

from the Euro-dollar market, probably in part to be sure of obtaining
additional reserves to cover the increased requirements under Regulation M.
Then in the latter half of the month they greatly reduced their liabilities
to branches, partly because of the shift of official funds to time deposits,
but also in response to the increased cost of such borrowing subject to
the new reserve requirement as well as the increased use of other sources
of non-deposit funds.

Early in November this downward adjustment was

arrested as proposed regulations affecting sales of commercial paper by
bank affiliates once more shifted the focus of borrowing toward Euro-dollars.
As a result of these fluctuations, the official settlements balance may
have registered an October deficit comparable to that on the liquidity
basis, but then reverted to a surplus in early November.

IV -

U.S. foreign trade.

The merchandise export surplus in the

third quarter was at an annual rate of $1.3 billion, balance of payments
basis.

This compares with a small deficit in the first half of the year

and is the best showing in nearly two years.

Particularly noteworthy

were the increasing monthly surpluses during the quarter, with the surplus
in September accounting for more than one-half of the quarterly total.
Exports, which had shown virtually no change from the last half of 1968
to the first half of 1969, increased sharply in the third quarter -to a level 12 per cent above that of the first half.

Imports in the

third quarter also advanced but more slowly, by 7.5 per cent.
Still uncertain is how much of the improvement in the trade
surplus represents a strengthening in our basic trade position and how
much is a post dock-strike effect.

Exports had been more adversely

affected by the strike than imports, and part of the recent sharp rise
in exports may represent goods that otherwise would have been shipped
earlier in the year.
The export advance in the third quarter was broadly based, both
by commodity categories and by principal foreign markets.

Shipments of

both agricultural and nonagricultural products were considerably higher
than in the first half.

Agricultural exports, which had slumped badly,

principally because of the strike, increased to a level slightly above
that recorded for the second half of 1968.

Grain shipments were up

sharply despite some slippage in P.L. 480 shipments and lower wheat prices.

IV - 6

The full impact of the wheat price cuts has yet to be reflected in
exports.

This, together with a disappointing cotton crop this year,

makes it questionable whether the third quarter rate of agricultural
shipments can be sustained.
Exports of all types of nonagricultural products (except
commercial aircraft) were sharply higher in the third quarter than in
the first half.

Industrial supplies (paper, chemicals, steel), machinery,

U.S. Merchandise Trade
(billions of dollars, seasonally adjusted, annual rates)
1968
1st
Half
Balance of payments basis
Exports, total
(Agricultural)
(Nonagricultural)
Imports, total
Balance
Census basis
Imports, total
Foods and beverages
Industrial supplies
Iron and steel
Capital equipment
Auto. vehicles & parts
From Canada
From other areas
Consumer goods
All other

Preliminary

1 9 6 9
3rd
Qtr.-

2nd
Half

1st
Half

32.7
(6.4)
(26.3)
31.9
0.8

34.5
(6.2)
(28.3)
34.1
0.5

34.1
(5.5)
(28.6)
34.3
-0.2

38.3
(6.3)
(32.0)
36.9
1.3

32.0
5.1
14.0
2.0
2.7
3.9
2.4
1.5
5.0
1.3

34.2
5.4
14.2
2.2
2.9
4.7
2.9
1.9
5.5
1.2

34.6
5.0
13.8
1.8
3.2
4.9
3.2
1.8
6.3
1.4

37.2
5.3
14.6
2.0
3.6
6.0
3.8
2.2
6.8
1.6

IV - 7

automotive equipment to Canada, and other nonfood consumer goods all
increased.

With industrial output continuing to expand sharply in

Europe and Japan, and capacity-utilization rates in manufacturing in
many of these countries at peak rates, further advances in shipments
of these products can be expected.

Foreign orders for U.S. machinery

rose again in September; new orders in the third quarter as a whole were
nearly 20 per cent greater than the average rate in the first half of the
year.

Deliveries of commercial aircraft in September were the lowest in

two years but advance information suggests a substantial pickup in October,
with total deliveries in the fourth quarter expected to be greater than
in the third quarter.
Exports to all areas were sharply higher in the third quarter than
on average in the first half.

The advance in shipments to Europe and Latin

America was in nonagricultural commodities; shipments of agricultural goods
to these areas showed little or no change from the relatively low level to
which they had previously fallen.

The growth in exports to Japan and to

the less-developed countries of Asia and Africa was in both agricultural
and nonagricultural commodities.
While there was a further rise in shipments of automobiles and
parts to Canada, this was more than offset by declines in all other major
categories of nonagricultural products, possibly reflecting the decline in
industrial activity in Canada.

IV - 8

The import expansion in the third quarter was also widely
distributed.

Purchases of foreign consumer goods and machinery, which

had increased sharply in the first half of the year despite the dock
strike, rose further.

In addition, arrivals of foodstuffs and industrial

materials, which had declined in the first half from the levels in the
last half of 1968, also advanced in the third quarter.

The import/GNP

ratio was a very high 3.9 per cent, slightly higher than in the first half
and in calendar 1968.
Arrivals of foreign capital equipment, mainly machinery, were
particularly strong in the third quarter, and more than kept pace with
the sharp rise in total domestic expenditures on producers' durable
equipment.

Imports of nonfood consumer goods (other than automobiles)

increased further in the third quarter, although somewhat more slowly
than in the two preceding half-years, and continued to account for a
rising portion of total expenditures on such goods.

Arrivals of auto-

mobiles and parts also accelerated in the third quarter; imports both
from Canada and other sources were at a rate more than one-fifth greater
than in the first half.

In the third quarter, foreign cars (other than

from Canada) were 12.5 per cent of all new domestic car registrations
compared with about 10.5 per cent in 1968 and in the first half of 1969.
Preliminary reports for October indicate that sales of cars from Europe
and Japan were over 100,000 units for the first time.

Sales of Volkswagens,

which had been running below those of 1968, turned up sharply in October
to a new record.

IV - 9

Despite the levelling off in domestic industrial output, imports
of almost all major categories of industrial materials -- paper, textiles,
steel and other metals, and fuels -- were higher than in the first half
of the year.

This followed a dip in purchases of such imports from the

last half of 1968 to the first half of this year.

The principal exception

to this general upturn in imports of materials was in building materials,
The

reflecting lower lumber prices and the slowdown in housing starts.
increase in food imports was largely in meats, fish and cocoa.
Euro-dollar market.

October's declining trend in Euro-dollar

rates continued until just before the month end;

the three-month deposit

rate declined to 8-11/16 per cent per annum on October 27 -- its lowest
level since May of this year -- and rates in all other maturities were
well below 9 per cent.

Since late October, however, there has been a

sharp and generally steady advance in Euro-dollar rates, particularly
in the three-month and longer maturities.

The three-month rate advanced

to about 11 per cent on November 19 while call and one-month funds were
quoted around 9-1/2 per cent; and six- and twelve-month funds were 10-11/16
per cent and 10-1/4 per cent, respectively.
U.S. banks resumed active bidding for Euro-dollar funds just
before the month-end, after having allowed their Euro-dollar borrowings
through foreign branches to run off by about $1.3 billion in the two
weeks ended October 29.

From October 29 to November 12, U.S. banks'

liabilities to their foreign branches increased by over $700 million

IV - 10

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
(weekly average of daily figures)

Average
for week
ending
Wednesday
Oct.

1
8
15
22
29
Nov. 5
12
19
2/

(1)
Call
Euro-$
Deposit

Federal
Funds

10.00
9.60
9.16
8.90
8.58
9.05
8.80
9.45

9.11
9.43
9.68
8.68
8.39
9.07
9.32
9.072

(2)

(3)
=(I)-(2)
Differential
0.89
0.17
-0.52
0.22
0.19
-0.02
-0.52
0.38

(4)
3-month
Euro-$
Deposit
11.08
10.65
10.39
9.63
9.10
9.89
10.01
10.71

(5)
3-month
Treasury
Bill

(6)
=(4)-(5)
Differential

7.07
7.00
7.02
6.94
7.00
7.01
7.14
7.12!

4.01
3.65
3.37
2.69
2.10
2.88
2.87
3.59

Preliminary

(although foreign branch participations in head office domestic loans
declined by about $230 million).

Data available through November 18

indicate a further rise in U.S. banks' borrowings of Euro-dollars.
It should be noted that part of the October decline in
borrowings probably reflected a shifting of foreign official funds
from branch to head office books -- largely in response to a bidding
up, relative to Euro-dollar rates, of rates offered by U.S. banks for
foreign official time deposits.

(These deposits are not subject to

Regulation Q and carry a reserve requirement of only 6 per cent,
compared with the 10 per cent marginal rate on liabilities to branches.)
Rates offered for these deposits (see table below) exceeded comparable
Euro-dollar rates by 40 to 50 basis points in the last two weeks of
October, and U.S. banks' time deposit (including C/D) liabilities to

IV - 11

foreign official institutions increased by about $500 million during that
Since the turn of the month the rates offered for these deposits

period.

have become less competitive with Euro-dollar rates and official time
deposits have increased less rapidly -- by $200 million in the two weeks
ended November 12.

This slowdown may also reflect the pressures put on

total foreign official holdings of dollars by the large surpluses on the
U.S. official settlements balance since the end of October.

Comparison of Euro-dollar Rates with Rates Offered by
Prime Banks in New York for Foreign Official Time Deposits

Average

(1)

for week
ending
Uednesday

3-month
Euro-$
Deposit

(2)

(3)=(1)-(2)

Foreign 1/
Official Time
Dep. Rate

Differential

1968 - Dec. 25

7.33

6.25

1.08

1969 - June 28

11.11

9.00

2.11

Sept. 3
17
Oct. 1
15

11.25
11.14
11.08
10.39

10.00
10.25
10.75
10.13

1.25
0.89
0.33
0.26

9.63

10.13

-0.50

9.10

9.50

-0.40

9.89

9.50

0.39

10.01

10.00

0.01

Nov.

Rates (most often quoted) by Prime New York banks and one

Boston bank on 90-179 day funds; quoted as of the Monday prior to the
dates in the table.

IV - 12

The continued very large-scale reflows of funds from the
German mark, reflected in a $1.8 billion decline in Bundesbank reserves
from the end of October to November 19, offset by only about $425 million
of net purchases of dollars by other major central banks, may have contributed significantly to the availability of Euro-dollar funds for
taking by the branches of American banks, although -- as noted in the
discussion of the U.S. balance of payments -- much of the reflow from
marks may have been directly to the United States.
Foreign exchange markets.

Exchange market

activity has been

relatively calm since the German Government fixed the mark's new parity
at 27.32 cents three-and-a-half weeks ago.

The flow of speculative

funds from marks has been large, and there has been some reflow of funds
from Dutch guilders -- funds which had moved into guilders in anticipation
of revaluation along with the mark.

Demand for sterling has been strong --

at times quite buoyant; demand for the Italian lira has been firmer; and
selling pressure on the French franc has moderated.
The German mark has been under fairly persistent selling pressure
since October 27 -- the day the new parity became effective -- and the
Bundesbank has sold about $3 billion, holding the mark's rate at its
lower limit.

Since September 30 -- when the floating mark arrangement

went into effect -- the Bundesbank has sold spot a total of $4.1 billion.
The Bundesbank's reserves of gold and foreign exchange have fallen to
about $7.8 billion, their lowest level since April.

In addition, the

IV -

Bundesbank currently has outstanding forward contracts to receive dollars
totalling slightly more than $900 million, all of which mature before the
end of the year.
Strong demand for sterling pushed the exchange rate up to just
below $2.399 during the first week of November, its highest level since
April 1963.

The greater demand for sterling was associated with the

favorable prospects for further improvement in the British balance of
payments, particularly since revaluation of the German mark, and some of
the buying of sterling early in the month was in anticipation of announcement of the October trade figures.

The U.K. trade account -- on the

balance of payments basis -- continued in surplus for the third consecutive month, but the October surplus was only £3 million, down sharply
from very favorable £25 million and £40 million surpluses in September
and August, respectively.

Since the trade figures announcement on

November 13 sterling has turned softer and the Bank of England has not
been able to purchase any dollars.
purchased $500 million.

From October 27 to November 12 it

The market for forward sterling continues to

reflect increased confidence in the pound.

The discount on 3-month

sterling narrowed to around 1 per cent per annum before the end of
October and has narrowed further in November, to about 0.30 per cent
per annum on November 13.
Among other major currencies, the Netherlands Bank has sold
about $280 million since the mark's revaluation, about 40 per cent of

IV - 14

its dollar purchases during a four-week period of speculation on a
guilder revaluation.

Firming of demand for the French franc -- on the

other hand -- enabled the Bank of France to purchase an estimated $200
million between October 27 and November 10, which largely offset its
dollar sales earlier in October.

The market for Italian lire also

turned around following the mark revaluation; the lira moved up to a
level slightly above par -- its highest level in nine months -- and
the Bank of Italy purchased about $150 million, largely offsetting its
early October dollar sales.
The price of gold has fallen sharply during the past four
weeks.

On November 19 the London fixing price was $36.65 an ounce,

down $3.50 from October 27.

The current price is the lowest gold

has been since the two-tier gold arrangement has been in effect.

IV - 15

Financial market conditions in other industrial countries
In recent months monetary policy has assumed a more firmly
anti-inflationary posture in virtually every part of the industrialized
world except the United Kingdom, where policy had already become very
restrictive.

Since early July, nine important industrial countries have

raised their official discount rate, and some have taken further measures
to restrain credit expansion.

For purely domestic reasons the discount

rate has been increased in Germany, Switzerland, Canada, and Japan.

The

German authorities also increased reserve requirements--although they
later reduced them after the mark revaluation--while in Switzerland
credit expansion has been subjected to quantitative ceilings.
The discount rate has been raised also in France, Belgium (twice),
Italy, Sweden, and the Netherlands.

In each of these countries internal

demand has been excessive, especially in France, where as a result the
external accounts have remained in deficit, and where other restrictive
measures have been taken lately in addition to the discount rate hike.
In Belgium, Italy, and Sweden as well, there hes been concern over the
balance of payments and a desire to influence capital movements in a way
favorable to those countries' official reserves.
Interest rates were already rising in most industrial countries
during the first half of the year; they have since received further upward
impetus from restrictive policy actions while economic activity and
prices were rising.

In some countries rates have held about steady since

IV - 10

June, but the only instance of an actual decline has been in bond yields
in Britain, a drop--from an extraordinarily high peak--associated with
the recent improvement in that country's balance of payments.

During

September speculative flows into German marks mitigated upward pressures
on interest rates in Germany but added to such pressures in the many
countries where the run to the mark caused a decline in official net
foreign assets.

Conversely, since the mark was set free to float on

September 29 (a Step followed by the establishment on October 26 of a
new parity 9.3 per cent above the old one),

flows of funds out of marks,

and inflows into certain currencies that for a while were considered to
be candidates for revaluation (the currencies of Belgium, the Netherlands,
and Switzerland) have eased conditions in some centers while requiring
the German authorities to move against an undesired tightening.
At this juncture it is impossible to point to an important
industrial country where monetary conditions seem likely to become less
tight in the near future.

For Germany, it is true, the mark revaluation

will ease the pressure of demand on resources, and in fact German officials
have been saying they do not believe monetary conditions will tighten at
all in the foreseeable future.

But credit seems certain to become scarcer

in France, and in Italy a pronounced shift in the direction of restraint
has been indicated.

And while the mark revaluation comes as a highly

welcome event for international payments adjustment, it will intensify
inflationary pressures in countries where increases in exports to Germany

IV -

could significantly affect national resource availability or where imports
from Germany are an important item of national expenditure.

The Netherlands,

Belgium, Switzerland and Austria seem likely to feel these pressures the
most.
Measures to restrain credit expansion in Germany would probably
have been more severe than they were if the authorities had not wished
to consider the desirability of maintaining the net outflow of long-term
and other nonspeculative capital.

Discount rate increases of one percentage

point in April and June preceded the latest rise, also of one percentage
point,to 6 per cent on September 11.

Reserve requirements were increased

10 per cent effective August 1, following an increase of 15 per cent in
June.

The September discount rate increase was accompanied by a rise in

the Bundesbank's Lombard rate (on advances) from 6 to 7.5 per cent.
German money market rates rose from March to early October more or less
in line with the discount rate.
German bond yields, which had risen appreciably during the
second quarter, advanced scarcely further in most of the third.

But they

rose very sharply in the last two weeks of September in the wake of the
discount rate increase.

Net new issues of bonds by German and foreign

borrowers in the German capital market averaged DM 1.9 billion per month
in the third quarter, only a little above the average in the first half
of the year.

Foreign borrowers, continuing to find Germany an important

source of new long-term funds, took almost a third of the total.

They

IV - 18

SELECTED FINANCIAL YIELDS, MAJOR INDUSTRIAL COUNTRIES, 1969
(in per cent)

__
Low

Long-Ter
EndJune
High

Latest

Low

Short- Term
EndJune
High

Germany

3.88
2/28

7.50
11/13

6,00
6/27

7.50
11/13

6.19
2/28

7.13
11/13

6.69
6/27

7.13
11/13

France

7.75
2/7

9.88
6/27

9.50
11/8

7.02
3/1

7.78
10/31

7.55
6/27

7.78
10/31

6.46
Jan.

6.84
Sept.

6.55
June

6.84
Sept.

6.70
1/10

8.27
10/3

7.67
6/27

7.82
11/7

Latest

Italy

Netherlands

4.91
1/2

6.00
11/7

5.50
6/30

6.00
11/7

Belgium

5.00

8.50

6.55

8.50

6.65

7.86

7.16

7.82

1/13

11/17

6/30

11/17

1/2

10/1

7/1

11/1

Sweden

5.32
2/28

8.15
8/31

6.61
6/30

7.90
9/30

6.27
1/15

7.29
7/15

6.98
6/15

7.28
9/15

Switzerland

4.00
2/7

5.00
11/5

5.00
6/30

5.00
11/5

4.37
1/24

5.40
10/3

4.69
6/27

5.25
10/31

United Kingdom

6.53
2/14

7.71
6/20

7.58
5/27

7.61
10/31

8.05
1/2

9.66
6/12

9.47
6/26

8.81
11/6

Japan

6.94
6/27

8.25
11/8

7.30
6/30

8.25
11/8

8.71
1/31

8.96
4/30

8.80
6/30

8.76
8/31

Canada

6.01
2/14

7.53
10/3

6.89
6/27

7.43
11/13

7.17
1/22

8.15
11/12

7.55
6/25

8.15
11/12

11.25 10.50
11/18 6/30

10.94
11/19

Euro-dollar deposit 6.83

1/29

a/ Rates quoted are generally for 3-month funds, as follows: for Treasury
bills in Belgium, the Netherlands, the United Kingdom, Sweden and Canada; for
interbank loans in Germany; and for bank deposits in Switzerland. For France
and Japan, the call loan rate is shown.
b/ All yields apply to long-term government bonds; most are composite
yields, but yields on specific issues are shown for the United Kingdom and
Canada.

IV - 19

floated bonds at

an annual rate of DM 6.4 billion during the first nine

months of this year (a $1.6 billion rate at the old parity of 4 marks
per dollar),

up 20 per cent from a year earlier.

About $500 million was added to German net official reserves in
August and a further $1.3 billion in September, increasing in like amount
the reserve base of the German banking system and thereby permitting a
substantial reduction of borrowings from the central bank and a generation
of excess reserves.

After the mark was floated and then revalued, profit-

taking by speculators together with the continuing deficit on current and
long-term capital account caused official reserves to decline $1.5 billion
in October and a further $1.8 billion in the first 19 days of November.
On November 6, to prevent expected further reserve losses from tightening
the money market, the Bundesbank lowered reserve requirements by 10 per
cent and abolished the 100 per cent marginal reserve requirement against
foreign liabilities that had been imposed on December 1, 1968.

Interest

rates in Germany declined in October but rose again in early November.
In the Netherlands the Treasury bill yield climbed approximately
a full percentage point, and government bond yields about 60 basis points,
between the end of June and the end of September; the discount rate was
raised from 5-1/2 to 8 per cent on August 2.

A new agreement between the

Netherlands Bank and the Dutch commercial and agricultural banks permits
the banks to expand outstanding short-term credits to the private sector
at no more than a 10 per cent annual rate, seasonally adjusted, in the

IV - 20

final four months of 1969; the same rate of increase had been allowed in
the first eight months.

Violations of the ceilings have occurred

despite penalties.
In October, prior to the mark revaluation, Dutch net official
reserves increased about $750 million as speculation on a guilder
revaluation mushroomed after the earlier floating of the mark.

The

resultant flood of liquidity to the banking system brought both shortand long-term interest rates down, particularly the call loan rate.

After

the Dutch Government's announcement on October 27 that the guilder would
not be revalued, reserves decreased nearly $300 million through November 12.
The Swiss National Bank raised its discount rate from 3 per cent
to 3.75 per cent on September 15.

The rate for 3-month bank deposits has

not changed since June, but the composite yield on Swiss government bonds
rose about 70 basis points in the third quarter before falling back around
15 points in October.

The weakening of bond prices was probably related

to the conclusion of a new agreement between the Swiss National Bank
and Swiss commercial banks concerning credit expansion, a type of credit
control device previously employed in Switzerland from 1962 to 1967.

The

new agreement limits credit expansion to 9 per cent over the 12 months
from July 31, compared with an annual rate of increase in the region
of 15 per cent in the first seven months of this year.
A variety of new actions have been taken in France in further
attempts to cool off a badly overheated economy.

After the devaluation

of the franc on August 8 the National Credit Council raised interest rates

IV -

on many types of loans made by public lending agencies.

In particular,

the rate of interest on loans by the Credit National (medium- and long-term
loans to industry for purchase of equipment) was raised from 7.25 to
8.75 per cent.

To curb consumer buying, the terms of installment credit

were again tightened in September and are now very severe.

On purchases

of new automobiles, for example, the minimum downpayment was increased
from 30 to 50 per cent, and the maximum repayment period was shortened
from 21 to 15 months.

The immediate effect of this tightening will be

enhanced by the authorities' declaration that the terms will revert to
their former, less severe condition after next January.
Quantitative restrictions on bank credit expansion have been
extended from the year-end through June 1970.

Short-term credit outstanding

at the end of next June can be only 2.9 per cent more than at the end of
June 1969, an allowed rise that compares with an actual increase of over
11 per cent in the 12 months to last June.

French banks have been

operating under credit ceilings since the beginning of this year, and
while the ceilings have not yet had much if any effect on total spending
in France it is believed they will do so soon.

Penalties against banks

violating the ceilings were introduced in September and made more severe
recently.

The ceilings on short-term loans will be supplemented with new

directives designed to stop practices that have allowed them to be
partially circumvented.

To this end, formal ceilings have now been

placed on banks' medium-term loans, which play an important role in the

IV -

French credit picture.

In addition, equipment loans by the Credit

National will be severely restricted (as well as more costly), and
credit expansion by consumer finance houses will be held more tightly
in check.
The Bank of France has kept short-term interest rates at very
high levels.

The call money rate of 9.5 per cent on November 8 was

indicative of the levels that have prevailed since June; the latest
tender rate for 1-year Treasury bills was 10.1 per cent.

The increase

in the discount rate from 7 to 8 per cent on October 8--the highest level
in more then a century--had no perceptible effect on money market rates
because of the much higher level of the latter, a gap now diminished but
still large.

The discount rate rise led to a one percentage point

increase in the banks' lending rate to prime borrowers, which now stands
at 9.75 per cent.

A rise in bond yields in October probably reflected

anticipation of the new quantitative credit controls.
Increases in the discount rate of the National Bank of Belgium
on July 31 and September 18 were the sixth and seventh since December 1968
and took the rate from 6 to 7-1/2 per cent.

The Treasury bill rate rose

approximately two full percentage points in the third quarter and the
composite yield on government bonds about 70 basis points.

In raising

the discount rate the National Bank was concerned with both strong demand
pressures at home and the high levels of Euro-dollar rates which, over
the past year, have pulled a substantial volume of funds from Belgium.

IV - 23

The September action was also influenced by the adverse speculation that
assailed the Belgian franc after the French franc was devalued, and by
the prospect of speculative flows from Belgian francs to German marks.
As it happened, Belgian net official reserves were unchanged for September
as a whole.

In October, reserves rose about $300 million as speculators

in marks took profits and also moved funds to Belgium in expectation of
a possible upward revaluation of the franc.

This increase helped stabilize

short-term interest rates, while bond yields dipped.
Monetary policy has tightened in Italy after five years of
relative ease.

The increase on August 14 from 3-1/2 to 4 per cent in the

basic rate for rediscounts and (more importantly) advances by the central
bank was the first in 11 years.

Simultaneously, the penalty discount rate

introduced July 1 (applicable to most rediscounts now being made) was hiked
from 5 to 5-1/2 per cent, and increases of 1/2 per cent were also made
in the penalty rates applied to excessive advances, which now range from
4-1/2 to 5-1/2 per cent.

In July and August, Italian commercial banks

raised their prime rate in two steps by a total of 1.25 percentage points.
Bond yields, which had been held nearly stable by the monetary authorities
for 3 years, have advanced considerably, the composite yield on all bonds
except Treasury bonds advancing from a monthly average of 6.50 per cent
in May to 6.84 per cent in September.
Price increases in Italy have accelerated this year.

Important

wage negotiations are under way or will soon be, which according to
estimates may raise hourly earnings in 1970 as much as 12 per cent over

IV -

1969 and add about 7 per cent to unit labor costs.

Recent actions by

the Bank of Italy may have reflected the belief that a less easy monetary
atmosphere would temper the size of eventual wage increases.

In addition,

the outflow of capital has continued at a very heavy rate that will mean
an overall balance of payments deficit this year in the neighborhood of
$1.5 billion.

Even though capital outflows may be in large measure a

consequence of conditions unrelated to the current state of financial
markets, higher interest rates in Italy relative to those abroad would
presumably reduce the outflow.
According to reports, a statement by Treasury Minister Colombo
on October 31 announced a severe tightening of monetary policy.

The

Minister is alleged to have said that the Bank of Italy will now keep the
money supply from rising faster than real GNP.

Output of goods and

services in Italy will increase in 1970 by about 6-1/2 per cent according
to OECD projections.

The money supply was expanding by around 15 per cent

a year up to last June, before slowing down in July-August.
The Swedish authorities raised the discount rate from 6 to
7 per cent on July 11 because of both overly strong internal demand and
declines in official reserves in the first half of the year.

This move

was accompanied by the reintroduction of cash reserve requirements and
of ceilings on Riksbank advances to the commercial banks.

The Treasury

bill rate has risen since June by more than the rise in the discount rate,
and bond yields have also risen.

The prospect of continued intense

pressure on resources in the near future makes monetary relaxation improbable.

IV - 25

Monetary policy in the United Kingdom remains restrictive notwithstanding improvement in the balance of payments, which is thought to
have been in surplus (current and long-term capital accounts) at an
In

annual rate of about $1.2 billion in the second and third quarters.

mid-October the clearing banks' outstanding advances were still in excess
of the ceiling laid down by the Bank of England.

The clearing banks'

advances to the private sector are subject to a ceiling equal to 98 per
cent of the level in November 1967, but the actual level is now 102 per cent.
The absence of a critical Bank of England reaction to this latest violation
of its guideposts should not, however, be interpreted as a move in the
direction of easier credit policy.

Rather, it may be looked upon as

appropriate now that the import deposit plan has been extended for another
year, instead of lapsing on December 4 as had been scheduled, and given
the authorities' success in keeping overall domestic credit expansion
within targets announced last spring.

The plan has been liberalized by

reducing the required deposits from 50 per cent of imports to 40 per cent,
but its retention will nevertheless lock up funds that were previously
expected to be added to firms' readily usable cash balances.
In September the clearing banks broke with tradition by raising
their prime rate from 8-1/2 per cent to 9 per cent, a full percentage
point above the discount rate instead of the customary half point.
Even though no relaxation of curbs on credit, and no reduction
of short-term interest rates, seem in the offing in Britain, there has
been a substantial decline in bond yields since mid-September.

The

IV - 26

8.81 per cent yield on War Loan compares with nearly 9-1/2 per cent in
early September, prior to reports of improvements in Britain's balance
of payments and trade position.
of payments basis),

In October the trade surplus (balance

though smaller than in August or September, was

still more favorable than for several years prior to August.
The money supply in the United Kingdom, seasonally adjusted,
declined 0.7 per cent from December 1968 to June 1969, in contrast with
increases of 3.1 per cent and 3.4 per cent during the first and second
halves of 1968, respectively.

The change reflects in part a greater

determination to control domestic credit expansion, in particular a greater
willingness of the Bank of England to refrain from supporting the government bond market, or to sell bonds on the open market (with offsetting
absorption of bills) even though bond sales would depress prices.

previous years, concern over bond prices frequently meant pumping
money into the economy and liquidity into the banking system when "tight
money" was supposedly the order of the day.
Monetary policy in Japan took a restrictive turn with the
raising of the discount rate from 5.84 per cent to 6.25 per cent on
September 1.

This step, which was accompanied by increases of 0.25 or

0.50 percentage points in reserve requirements, caused the call loan
rate to jump 0.30 point.

With private credit demands continuing to

expand briskly, the average rate on bank loans and discounts moved up
a bit in August and September.

Booming business conditions entailing

accelerating price and wage increases have convinced the government of the

IV - 27

need for higher yields on new bond issues, which in Japan are controlled
by the government through its rationing of borrowers' access to the new
issues market.

The yield on new issues of grade A industrial bonds is

due to be raised from 8.2 per cent to 8.4 per cent in December, and higher
yields are also planned for government bonds, bank debentures, and
government-guaranteed bonds issued primarily by utilities and other
public corporations.
The degree of restrictiveness of Canadian monetary policy has
not changed perceptibly since the discount rate was increased from
7-1/2 per cent to 8 per cent on July 16.
money supply nearly stable:

Present policy has kept the

as defined to include time deposits denominated

in Canadian dollars, the money supply expansion during August-October was
0.6 per cent at an annual rate.
tight.

Bank liquidity positions are extremely

The ratio of banks' "more liquid" assets (which include cash

reserves, call loans, all government securities, and net foreign assets)
to their total assets declined from the so-called normal level of 30 per
cent last March to 27 per cent in June, and shrank slightly further to
26.5 in October, a level thought to be an historic low.
The bill rate changed little in the third quarter after the
discount rate increase, but dipped in October when Canada's official
reserves rose $95 million in reflection of an increased flow of funds from
the United States into Canadian finance company paper and a fairly large
volume of conversions of new bond issues by Canadian borrowers in the
U.S. market.

Recent remarks by Governor Rasminsky strongly imply that

IV - 28

an easing of monetary restraint is nowhere in sight.

Following declines

in October, Canadian bond yields touched new highs during the first
half of November.

IV-C.1

11/18/69

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY ADJUSTED

U.S. BALANCE

OF PAYMENTS

BILLIONS OF DOLLARS
QUARTERLY

---

OFFICIAL RESERVE
TRANSACTION BASIS

-on

LIQUIDITYmm 2\
BASIS
Gm

1963

I
1

ADJUSTED--

255

---- -

OVER-ALL
BALANCE
m 22
-

- -

1967

1965

1969

200
+

0
200

200
+

0
200

90-DAY RATES
PER LtNI
NOT SA

,,,,,,,,,,,,,,,,,,
~''''' ~
''''~'''

-- "

''I

EURO-DOLLARS
NOV

S 10 00

6
U.S.
NOV

1966

1967

C-D'S
5

8 35

1968

1969

APPENDIX A:

TWO SPECIAL MORTGAGE MARKET DEVELOPMENTS IN 1969*

Many market analysts believe that trends in private housing
starts depend heavily on net savings flows to S&L's and savings banks.
So far in 1969, however, a number of developments in the mortgage market
and elsewhere have changed this dependence at least temporarily. Among
these developments has been greater reliance by S&L's on non-deposit
sources of funds furnished through the FHLBank System. Another has been
increased credit made available by a non-deposit intermediary--FNMA.
Both developments have helped to maintain mortgage commitments and housing
starts at higher levels than could have been supported solely by the sharply
reduced net savings inflows to the thrift institutions.
S&L borrowing. While net savings inflows to S&L's during the
first nine months of 1969 declined less sharply than in the same period
of 1966, as shown in the upper panel of Chart 1, they have followed a
similar downtrend. However, as shown in the second panel of the chart,
S&L cash flow other than borrowing from the FHLBanks--that is, net savings
flows plus mortgage repayments and reductions in liquid asset holdings-has dropped less drastically than in 1966, reflecting in part more lenient
liquidity regulation by the FHLBank Board. And as indicated in the lower
panel of the chart, S&L total cash flow,including substantial borrowing
from the FHLBanks, has remained considerably above 1966 levels.
Partly as a result, S&L mortgage commitments against both new
and existing properties have continued stronger than in 1966. FHLBank
Board pronouncements in late 1968 and early 1969, suggesting that FHLBank
advances would remain available, were an important factor in helping to
limit the extent of the decline in S&L commitment activity so far this
year.
FNMA. In its changed role as a semi-private corporation, FNMA
has auctioned off a record amount of mortgage purchase commitments in
1969, and its commitment backlog has expanded to new highs. During 1966,
by contrast, this type of market support was minimal. Operating then as
a wholly Government-owned agency, FNMA generally limited its commitments
to very short terms, and restricted them severely because of budgetary
as well as statutory constraints.
As one measure of its market support in the present circumstances, FNMA's total new mortgage commitments made during the first
three quarters of 1969 have amounted to as much as a third of all commitments approved by insured S&Ls, as shown in the upper panel of Chart 2.
In contrast, over the same period of 1966, FNMA's restricted volume of
new commitments came to only a sixth of the severely reduced S&L total.
This year, also, FNMA's outstanding commitments--some for long-delayed
takedown--have risen by $2.1 billion to a level more than one-half that
*

Prepared by Robert M. Fisher, Senior Economist, Capital Markets Section,
Division of Research and Statistics.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 25, 1969 : Greenbook

FRASER