Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, October 17, 1978 : Greenbook Part 2

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CONFIDENTIAL (FR)

October 11,

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff

Board of Governors
of the Federal Reserve System

1978

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and production......................................

Personal income and consumer spending..........................

........
Residential construction...........................
Business investment...........................
.............
Government sector activity.....................................
.........
Prices.............. .................. ............

6
6
11
13

TABLES:
Changes in employment .......................................
Selected unemployment rates....................................
Personal income................................................

2
2
5

Contracts and orders for plant and equipment...................

Business inventories.............

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

Inventory ratios........ ........... 0.0..

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

0.0.........

......

Changes in producer prices... ............................. ..
Changes in consumer prices.....................................

15
15

CHARTS:
New private housing starts....................

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

New orders for nondefense capital goods........................

III

DOMESTIC FINANCIAL DEVELOPMENTS

Monetary aggregates and bank credit............................
Business credit................................................

3
7

Government finance.............................................
Mortgage markets ..............................................
Consumer credit..........................
................

13
15
16

TABLES:
Selected financial market quotations..........................
.....
Monetary aggregates...................................
....
Commercial bank credit.................................
Security offerings....
.... .. .. ........ ,..*...............
,

2
4
8
12

Interest rates and supply of mortgage
........ 17
funds at selected S&Ls....,......,........
17
Secondary home mortgage market activity....................
Consumer instalment credit..

.... .. .

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

CHARTS:
Ratio of liquid assets to total liabilities at
large banks inside and outside New York City............. .
Stock prices and price-earnings ratios......,...,.............

10
14

Continued

TABLE OF CONTENTS
Section
DOMESTIC FINANCIAL DEVELOPMENTS (cont.)

Page

III

CHARTS:
.
Average maturity on new-auto contracts..,.............a....,..
Proportion of low-downpayment contracts.a....,,oa.............
IV

INTERNATIONAL DEVELOPMENTS

....
.... ,..*. *.
Foreign exchange markets..............
U.S. bank lending abroad..................................
U.S. international transactions...............................
Merchandise trade deficit.....................................
Exports,

... ...

........
*...

20
20

,,,,

a
, .................. . .

1
5
7
9
10

4 .. ...........
Nonpetroleum imports........*...............44
Oil imports....................... ...... .. ,... ...............

11
12

........................
.
#........
Current account...........
Bank-reported private capital transactions.....................
Private securities transactions....a...........................

12
12
13

Foreign official assets in United States.....................
OPEC banking and security holdings in United States............

13
14

Foreign economic developments.................................
Notes on individual countries..............................

15
15

Major industrial countries:
Real GNP and industrial production..........................
Consumer and wholesale prices................................
Trade and current-account balances..........................
Growth of money stock in selected industrial countries.........

16
17
18
19

TABLES:
U.S. bank claims on foreigners

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

U.S. international transactions summary........................
U.S. merchandise trade.......................................

9
10

CHARTS:
Average exchange value of U.S. dollar........................
Swiss franc/dollar exchange rate ........... .......................

2
2

U.S. merchandise trade.............................................

- T - 1

October 11, 1978

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

Period

Release
Date

Data

Per Cent Change from
Three
Year
Periods
Preceding
earlier
Earlier
Period
(At annual rate)

Defense & space equipment
Materials
Consumer prices (1967=100)

Food
Commodities except food
Services

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

3.8
5.9
3.7
-. 8
.6
-1.2

Sept.
Sept.

10-6-78
10-6-78

35.8
5.75

35.8
5.72

35.9
5.66

35.9
5.31

Sept.
Aug.

10-6-78
9-29-78

40.4
165.1

40.4
-9.4

40.5
-1.2

40.3
6.2

9-15-78
9-15-78
9-15-78
9-15-78
9-15-78

146.6

147.3
165.3

5.8
.8
13.2

7.5
.8
12.7

86.2

11.2

12.4

148.1

4.1

8.3

9-26-78
9-26-78
9-26-78
9-26-78

197.6

7.3
3.4
5.5
10.2

8.1
6.3
6.7
10.2

7.9
10.4
6.0
8.7

10-5-78
10-5-78
10-5-78

212.1

9.6
6.8

5.5
7.5
-1.3

8.7
7.3
13.8

9-18-78

Business equipment

100.9
6.0
3.4
86.1
20.3
65.8

Sept.
Sept.
Sept.

Industrial production (1967=100)
Consumer goods

10-6-78
10-6-78
10-6-78
10-6-78
10-6-78
10-6-78

Aug.
Aug,
Aug.
Aug.

Unit labor cost (1967=100)

Sept.
Sept.
Sept.
Sept.
Sept.
Sept.

Aug.
Aug.
Aug.
Aug.
Aug.

Civilian labor force
Unemployment rate (%)1/
Insured unemployment rate (%)1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hour (hr.)1/
Hourly earnings ($) 1/
Manufacturing:
Average weekly hours (hr.)1/

1728.4

11.0

12.2

Personal income ($ bil.)2/

214.5
175.7

214.0
212.3
208.6

19.3

5.9

6.2
1.8
9.4
6.7
7.6

(Not at annual rates)
10-3-78
10-3-78
10-3-78
10-3-78

71.0
22.4
19.1
3.4

9.0
15.9
11.7
47.5

1.4
1.0
5.2
-17.5

19.9
31.7
31.2
34.1

July
Aug.
July

10-3-78
10-3-78
10-3-78

1.43
1.52
1.32

1.41
1.55
1.31

1.40

1.46

1.52

1.31

1.59
1.32

Aug.

10-3-78

.597

.598

.594

.655

Aug.
Aug.

9-11-78
9-11-78

64.6
14.1

.6
-. 6

9.4
8.2

Sept.
Sept.
Sept.

10-6-78
10-6-78
10-6-78

10.6
8.7
1.9

-11.9
-12.1
-5.9

2.5
3.5

Housing starts, private (thous.) 2'

Aug.

Leading indicators (1967-100)

Aug

9-19-78
9-29-78

2,029
137.1

Mfrs. new orders dur. goods ($ bil.) Aug.
Capital goods industries
Aug.
Nondefense
Aug.
Defense
Aug.
Inventories to sales ratio:l/
Manufacturing and trade, total
Manufacturing

Trade
Ratio:

Mfrs.' durable goods inveptories to unfilled orders"

Retail-sales, total ($ bil.)
GAF_/
Auto sales, total (ml. units.)
Domestic models
Foreign models

-10.9
-11.3
-8.9

-4.7
.8

r Actual data used in lieu of per cent changes tor earlier periods.
At annual rate.
Excludes mail order houses.

-1.2
.1

-1.7
-. 4
4.3

II - 1

DOMESTIC NONFINANCIAL DEVELOPMENTS
Most indicators suggest that economic activity grew at a moderate
pace throughout the third quarter.
have moved up in September.

Industrial production is estimated to

Payroll employment,

however, has flattened

in recent months following the unusually rapid pace of hiring earlier this
year.

In the fixed investment sector, residential and nonresidential

construction activity remained relatively firm and capital equipment shipments and orders rebounded in August.

Over-all price increases eased

somewhat in recent months as a result of declines for some foods, but a
resumption of more rapid price increases is

indicated by large increases

in September producer prices for foods.
Employment and Production
Employment gains have been modest since June and the unemployment
rate has changed little.
survey, rose 290,000.

Total employment, as measured by the household

The unemployment rate edged up to 6.0 per cent in

September with little change for most groups of workers.

The labor market

surveys conducted last month were unaffected by the four-day nation-wide

railroad labor dispute late in the month, although there were some
temporary disruptions in rail shipments and auto production because of
parts shortages.
Nonfarm payroll employment, as indicated by the establishment
survey, registered a small decline in September.

Employment in the private

II - 2
CHANGES IN EMPLOYMENT 1/
(Thousands of jobs; based on seasonally adjusted data)

1977

QIII

1978
Aug.

Sept.

- - - Average Monthly Changes -

184
84
47

37
-11
19
-31
-1
87
32
-38

131
-30
5
-35
-22
177
56
2

-58
10
24
-14
-20
36
-16
-84

215
52

260
37

22
-18

36
-44

-21
16

346
340

368
343

16
37

156
183

287
236

284
66
50
16
30
170
79
28

380
55
43
12

Private nonfarm production workers
Manufacturing production workers
Total employment 3/
Nonagricultural

Nonfarm payroll employment 2/
Manufacturing
Durable
Nondurable
Construction
Private service-producing
State and local government

1/ Changes are from final month of preceding period to final month of period
indicated.
2/ Survey of establishments.
3/ Survey of households.
SELECTED UNEMPLOYMENT RATES
(Per cent; based on seasonally adjusted data)
1973
Annual Average

QII

1978
QIII

Aug.

Sept.

4.9

6.2

5.9

6.0

5.9

6.0

14.5
7.8
2.5
4.0

16.9
10.3
3.5
4.9

15.9
9.4
3.3
5.1

16.2
9.4
3.4
5.3

15.6
9.0
3.4
5.3

16.6
9.3
3.4
5.0

White
Black and other

4.3
8.9

5.4
12.3

5.1
12.0

5.2
11.8

5.2
11.7

5.3
11.2

Fulltime workers

4.3

5.7

5.4

5.6

5.5

White collar
Blue collar
Craft and kindred
Operatives, ex. transport

2.9
5.3
3.7
6.1

3.5
7.1
5.1
8.0

3.5
6.5
4.3
8.0

3.6
7.0
4.4
8.7

3.5
7.0
4.4
9.0

3.5
.7.0
4.7
8.5

Total, 16 years and older
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

II - 3

service-producing sector increased only 34,000 and employment in the
construction industry edged downward for the second consecutive month.
Manufacturing employment was essentially unchanged over the month as

small gains in durable goods industries were again offset by declines
at nondurable manufacturing establishments.

The factory workweek, which

has been at a relatively high level throughout most of the year, remained
at 40.4 hours in September.
Even though the household and establishment employment surveys
showed divergent patterns in September, they have been relatively consistent over longer periods.

In the first half of 1978, both showed strong

gains, and employment levels in both surveys now stand slightly above
their respective June levels.
Industrial production for September appears to have increased
about 1/4 to 1/2 per cent, close to the August gain, but below the
average monthly increase of 0.6 per cent during the first eight months
of the year.

Production of business equipment, construction supplies,

and durable goods materials apparently continued to advance last month,
while output of consumer goods appears to have changed little for the
fifth consecutive month.

With factory production up only moderately

in September, the rate of capacity utilization in manufacturing likely
remained near 85 per cent.

So far in 1978, manufacturing operating rates

have risen about 2 percentage points above those that persisted during
most of 1977.

Although capacity use is now above the post-war average,

- 4

it remains far below its previous highs, and appreciably so in the
materials sector.

Despite scattered reports of shortages of selected

materials--mainly cement and some types of aluminum shapes used in
aircraft production, supplies generally appear to be adequate.
Personal Income and Consumer Spending
Growth of personal income moderated in August, in part reflecting
slower employment and wage increases.

Private wage and salary disburse-

ments advanced at only a $2.4 billion annual rate--well below the [$10.8]
billion average monthly increase during the first seven months of the year.
Consequently, despite a slowing of the rise in consumer prices, real
personal income declined in August.

So far this year, real income has

advanced at less than half the more than 4 per cent annual rate throughout the first three years of the current expansion.
Total retail sales increased only a little from April through
August and weekly data suggest that this trend apparently continued in
September.

However, the weekly data also indicate that sales at non-

durable goods stores increased in September, following three months of
little advance.

As a result, for the third quarter as a whole it appears

that sales excluding autos and mainly nonconsumer items rose by about
1-1/2 per cent--somewhat below the relatively weak average rise over
the first half of this year.

PERSONAL INCOME
(Based on seasonally adjusted data)

1978
1977
-

QII

June 78
to
July 78

July 78
to
Aug. 78

Average monthly change, in billions of dollars $13.5
12.3
1.2

$12.4
15.7
-3.3

$16.5
14.1
2.4

$24.2
25.0
-. 8

$ 8.6
8.8
-. 2

Wage and salary disbursements
Private
Manufacturing

8.3
7.0
2.7

13.1
12.2
4.0

10.6
9.6
1.9

11.0
10.0
3.5

3.4
2.4
-. 4

Other income
Transfer payments

5.7
1.3

1.0
1.0

6.4
.2

13.9
8.2

5.2
1.4

Total personal income
Nonagricultural income
Agricultural income

Per cent change at

compound annual

rate

1/--

Total personal income
Current dollars
Constant dollars 2/

11.2
4.1

9.5
.2

12.6
1.0

17.1
10.9

5.9
-1.4

10.7
3.7

16.2
6.3

12.5
1.0

12.0
5.8

3.7
-3.6

Wage and salary disbursements
Current dollars
Constant dollars 2/

1/ Changes for year and quarters are from final month of preceding period to
Per cent changes for year and
the final month of the period indicated.
months are not compounded.

2/ Deflated by CPI, seasonally adjusted. Beginning January 1978,
the CPI for all urban consumers, seasonally adjusted.

deflated by

II - 6
Total unit auto sales declined in September as sales of domestic
units fell to an 8.7 million annual rate--the slowest pace since the
weather-affected first

two months of the year.

Some moderation in

auto

sales had been expected as consumer surveys suggested that part of the
earlier strength may have represented some buying in anticipation of
higher prices that borrowed from future sales.

might be noted that

the introduction of new models complicates the interpretation of current
sales data.
Residential Construction
Recent indicators show that activity in the housing market held
up well throughout the summer.
to an all-time high in August,

Total sales of single-family houses rose
sales of new homes edged down for the

third consecutive month and all of the September rise was in existing
houses.

In August, private housing starts were at a 2.03 million unit

annual rate, down slightly from the upward-revised July level, and 120
thousand units below the recent peak in
Nevertheless,

the fourth quarter of last year.

total starts held above the 2 million unit rate for the

sixth consecutive month.

In August, single-family units

to a 1.4 million unit annual rate.

edged down

Starts in the more volatile multi-

family sector declined sharply in August,

but the July-August average

rate remained near the high second quarter rate.
Business Investment
Incoming data on business fixed investment commitments were
somewhat mixed in August,
increases in

but they remain consistent with moderate

near-term capital spending.

II -

NEW PRIVATE HOUSING STARTS
(Millions of units, seasonally Adjusted Annual Rate)

I1111111 111|111 111 I
~

2.4

2 .0

TOTAL

S-

SINGLE

1.6

FAMILY

II - 8
Shipments of nondefense capital goods rose 3 per cent in
August, after little change in the preceding month; the July-August
average was up at a 3.9 per cent quarterly rate from the second quarter,
about the same as the average rate of increase over the first half of the
year.

The value of private nonresidential construction put-in-place in

August declined somewhat, after rising at a 40 per cent annual rate from
February to July.
In August, new orders for nondefense capital goods spurted
almost 12 per cent after falling 6 per cent in July.

This recent

volatility in these orders appears to have been concentrated in nonvehicular transportation equipment, particularly commercial aircraft.
On balance, aircraft orders have been strong in 1978, reflecting strong
In contrast, orders

investment spending plans of commercial airlines.

for machinery, which are usually indicative of the underlying trend in
the demand for producers' durable equipment, have been flat since February
and in real terms have declined by 2 per cent over this period.

Addi-

tionally, total nonresidential building contracts increased 5 per cent
in August; strength was widespread but particularly impressive in the
So far this year,

commercial and manufacturing building components.

contracts for private nonresidential construction have been running
about 18 per cent above the comparable period last year.
Inventory accumulation at manufacturing apparently continued
the fairly stable trend of the past several months.

Stocks

II - 9

NEW ORDERS FOR NONDEFENSE CAPITAL GOODS

(Millions of dollars, seasonally adjusted monthly rate)

1974
1/

1975

1976

1977

1978

1/Includes nonelectrical machinery (excluding farm machinery and machine
shops), electrical transmission and distribution equipment and industrial apparatus, and other electrical machinery.

II - 10
CONTRACTS AND ORDERS FOR PLANT AND EQUIPMENT1/

(Per cent change from preceding comparable period, seasonally adjusted)

1977
QIV
QIII

1978
July
QII

Aug.

Dec. 77
to
Aug. 78

Current dollars
Total

-1.3

5.2

11.7

-4.8

4.2

10.4

11.5

Nondefense capital goods orders

-1.1

10.3

5.6

3.5

-6.0

11.7

12.2

Construction contracts 2/

-2.4

-17.5

48.4

-40.2

94.1

4.8

8.6

-3.4

3.2

9.4

-5.6

3.0

9.0

6.3

Nondefense capital goods orders

-3.2

8.2

3.5

2.4

-6.8

9.9

6.6

Construction contracts 2/

-4.0

-19.6

46.5

-40.9

92.8

5.0

1972 dollars
Total

1/ The Commerce Department creates this series by adding new orders for nondefense
capital goods to the seasonally adjusted sum of new contracts awarded for commercial
and industrial buildings and for private nonbuilding projects (e.g., electrical
utilities, pipelines, etc.).
2/ FRB staff estimate. Derived by subtracting new orders for nondefense capital goods
from the published total for contracts and orders.

- 11

rose at a $20.2 billion annual rate in August in book value terms, virtually
the same in the first half.

Most of the August accumulation was in durable

goods, as was the case in the past nine months.

By stage of processing

inventory investment was rather evenly distributed.

Total manufacturing

accumulation in August was accompanied by a substantial pickup in shipments (3.3 per cent), and as a result the ratio of inventories to sales

remained historically quite low.
Government Sector Activity
In the Federal sector, unified budget outlays in August were
around $1 billion higher than staff and Administration expectations.
Most of the unexpected spending occurred in the national defense,
community development, and education functions.

Preliminary data suggest

that some of this over-run was partially offset in September, as outlays
appear to have fallen short of agency expectations.

Federal spending

is now expected by the staff to have totaled around $450 billion in
FY 1978 and receipts are estimated at about $402 billion.

This results

in a deficit of approximately $48 billion, about the same as expected
a month ago.
Congress has now adopted binding Federal budget totals for
FY 1979.

The Second Concurrent Budget Resolution sets a ceiling on

spending of $487.5 billion, a floor on receipts of $448.7 billion;
these would result in a deficit of $38.8 billion.

The resolution

assumes that the temporary tax cuts scheduled to expire at the end of

- 12

BUSINESS INVENTORIES
(Change at annual rate in seasonally
adjusted book value; billions of dollars)

QI
Manufacturing and trade
Manufacturing
Durable

Nondurable
Trade,

total

Wholesale
Retail
Auto
1/
2/

QII

1977
QIII

QIV

QII

1978
July 1/

Aug. 2/

31.0
10.6
6.4

28.3
15.7
7.8

25.2
10.2
7.7

17.8
2.8
3.8

44.2
16.6
13.2

44.3
22.8
15.9

22.5
19.3
13.7

n.a.
20.2
18.5

4.2

7.9

2.4

-1.0

3.4

6.9

5.6

1.7

20.4

12.6

15.0

14.9

27.6

21.5

3.2

n.a.

12.0
8.4
.8

2.6
10.0
2.2

4.7
10.3
1.5

7.5
7.4
2.9

19.5
8.1
.9

11.8
9.8
.2

-7.9
11.1
.6

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

Revised.
Preliminary.

INVENTORY RATIOS

QI
Inventory to sales:
Manufacturing and trade
Manufacturing
Durable
Nondurable
Trade, total
Wholesale
Retail

1/
2/

Revised.
Preliminary.

QII

1977
QIII

QIV

QII

1978
July 1/

Aug.

1.46
1.60
1.97
1.20

1.46
1.60
1.96
1.22

1.48
1.61
1.96
1.22

1.44
1.56
1.90
1.18

1.46
1.56
1.90
1.17

1.42
1.52
1.85
1.14

1.43
1.55
1.90
1.16

n.a.
1.52
1.84
1.15

1.33
1.24
1.41

1.32
1.21
1.43

1.35
1.24
1.45

1.33
1.23
1.42

1.36
1.27
1.45

1.31
1.20
1.43

1.32
1.19
1.44

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

II -

this year are extended (amounting to $9 billion) and that additional
tax cuts totaling $15 billion for FY 1979 or $20 billion on a calendar
year basis are enacted by the Congress.
Recent data indicate that growth in State and local government
spending in September moderated after rising sharply in the second quarter.
Employment by States and localities was down by 85,000, in part due to
strike activity as well as an apparent decrease in hiring of teachers
for the new school year.

State and local construction outlays in August,

although down nearly $1.0 billion from July, remained at a high level.

Prices
In August, the rate of inflation at the consumer level continued
well below the pace of the first half of 1978 as the CPI rose 0.6 per
cent.

As in July, the major moderating force was an easing of food

prices--especially for fresh vegetables, meat, and coffee.

Retail meat

prices dropped 4-1/2 per cent in July and August after rising 20 per
cent during the first half of this year.

The September producer price

index, however, indicates that the moderation in food price increases
at retail is likely to be short-lived.

Prices of both finished consumer

foods and crude foods reversed two months of declines and rose close to
2 per cent in September--mainly because of a sharp rise in meat prices.
Prices of consumer nonfood items continued to rise in August
at about the same pace as in earlier months.

Nonfood commodity prices

have been rising at a 6-1/2 per cent annual rate since the first of the

year.

- 14

Service prices, however, continued to rise at a more rapid pace--

a 10-1/2 per cent rate so far this year--boosted principally by rapid
increases in medical care and mortgage costs.
Producer prices of nonfood finished goods rose 0.6 per cent in
September, similar to the average increase so far in 1978; increases
were balanced between consumer goods and capital equipment.

Prices for

intermediate materials continued at about the same pace as earlier this
year as a moderation in price increases for steel mill products and
construction materials was offset by an acceleration in price rises for
paper products and leather.

Crude nonfood materials prices rose in

September after an August decline.

II -

CHANGES IN PRODUCER PRICES
(Per cent change at compound annual rates; based
on seasonally adjusted data)l/
Relative
Importance
Dec. 1977

1977
H1

1978
QI

QII

QIII

11.2
14.6
10.5
9.1

5.2
-1.0
8.3
6.0

Aug.

Sept.

10.4
19.9
6.5
7.2

Finished goods
Consumer foods
Consumer nonfoods
Capital equipment

41.2
10.3
18.7
12.2

Materials:
Intermediate 2/
Crude nonfood
Crude food

45.5
4.6
6.3

7.2
7.4
1.7

5.6
6.6
1.3

9.2
16.2
40.3

6.0
11.9
28.1

7.3
11.9
-9.4

8.3
-5.8
-21.1

7.7
12.0
22.7

11.3

19.0

5.1

4.3

9.9

5.3

1.8

7.8

Memo:
1/

Energy 3/

8.2
10.9
8.4
5.9

5.0
2.4
4.3
8.4

9.6
21.2
5.3
7.1

-1.2
-18.4
5.2
4.2

Changes are from final month of preceding period to final month of period
indicated. Monthly changes are not compounded.
Excludes intermediate materials for food manufacturing and manufactured

animal feeds.
3/

Fuels and related products and power.

CHANGES IN CONSUMER PRICES
(Per cent changes at compound annual rates; based
on seasonally adjusted data) 1/
Relative
Importance
Dec. 772/

All items
Food
Commodities (nonfood)
Services

1977
H1

1978
QII
July

Aug.

100.0
17.7
41.6
40.7

8.9
13.4
5.8
9.6

4.7
3.0
4.0
6.3

9.3
16.4
6.1
9.1

11.4
20.4
7.2
11.8

6.1
-. 6
6.9
9.7

73.7
3.4
5.2

7.7
12.2
11.2

5.2
5.3
1.4

8.0
12.2
.2

9.9
22.1
8.4

8.3
6.1
13.7

7.6
3.0
12.4

9.2

15.3

7.3

16.7

21.6

16.8

19.8

7.3
3.4
5.5
10.2

Memoranda:

All items less food
and energy 3/
Gas and electricity
Gasoline and fuel oil 4/
Home financing, taxes,
and insurance

2/
3/

Changes are from final month of preceding period to final month of period
indicated.
Monthly changes are not compounded.
Based on new index for all urban consumers.
Energy items excluded:
gasoline and motor oil, fuel oil and coal, gas and

electricity.
Includes motor oil, coal, and bottled gas.

III-T-1
SELECTED DOMESTIC FINANCIAL DATA

Latest Data
Level
Period

Indicator

Month
ago

Per cent at annual rates

$ billions

1/
Monetary and credit aggregatesTotal reserves
Nonborrowed reserves
Money supply
M1
M2
M3
Time and savings deposits (less CDs)
CDs 2 /
Thrift deposits (S&Ls + MSBs
+ Credit Unions)
Bank credit (end of month)

Net Change from:
Year
Three
ago
months ago

Sept.
Sept.

38.2
37.1

9.0
11.9

5.0
5.5

7.5
6.4

Sept.
Sept.
Sept.
Sept.
Sept.

361.1
862.6
1455.9
501.5
88.1

14.8
12.8
0.7
11.6
1.8

9.4
10.5
7.3
11.2
1.4

8.4
8.5
8.3
8.5
24.3

Sept.
Sept.

609.1
951.7

15.0
9.9

13.5
10.7

10.8
11.3

Latest
Indicator
Period
arket yields and stock prices
Federal funds
wk. endg.
Treasury bill (90 day)
"
Commercial paper (90-119 day) "
New utility issue Aaa
"
Municipal bonds (Bond Buyer) 1 day
FNMA auction yield (FHA/VA)
Dividend price ratio (common
stocks)
wk endg.
NYSE index (12/31/65=50)
end of day

data
Per cent
or index

10/4/78
10/4/78
10/4/78
10/6/78
10/5/78
10/2/78

Net Change from:
Three
Month
months Year
ago
ago
ago

8.85
8.03
8.64
9.04
6.07
9.91

1.08
1.04
.86
.14
-.24
-.11

2.50
2.05
2.33
.87
.47
1.14

5.02
58.84

10/4/78
10/10/78

.58
.43
.57
.27
-. 06
.13
.14
-1.54

-. 36
5.29

1.47
6.34

Net Change or Gross Offerings
Year to Date
Latest Year

Period

Data

ago

1978

1.5
2.7
7.9
1.9
4.0
.6
1.9

24.5
26.9
60.0
15.3e
36.6e
17.2
41.6

1977

Credit demands
Business loans at commercial banks 1/

Consumer instalment credit outstanding 1/
Mortgage debt outstanding (major holders)1/3/
Corporate bonds (public offerings)
Municipal long-term bonds (gross offerings)
Federally sponsored agcy. (net borrowing)
U.S. Treasury (net cash borrowing)
1/ Seasonally adjusted.
2/ $ billions, not at annual rates
3/ Includes comm'l banks, S&Ls, MSBs,
e - Estimated

Sept.
Aug.
July

Sept.
Sept.
Sept.
Oct.

1.8
3.0
8.3
1.5e
2.3e
2.1
6.0

life ins. cos, FNMA, and GNMA.

16.5
20.2
52.5
18.3
35.9
5.1
38.0

III - 1
DOMESTIC FINANCIAL DEVELOPMENTS

Credit flows to the private nonfinancial sectors of the economy
apparently picked up a bit in September from the moderate pace in August.
Short- and intermediate-term business borrowing was somewhat larger than
in August, but remained substantially below earlier months of the year,
and public bond offerings by corporations again were relatively light.
In the household sector, growth of consumer credit probably changed
little in September, but mortgage lending is likely to have expanded
for the second consecutive month, as deposit inflows to thrift institutions increased further. Public sector borrowing, on the other hand,
which had been boosted in August by a surge in advance refundings of
tax-exempt issues, fell substantially in September. On balance for the
third quarter, aggregate credit flows were considerably below the first
half pace, primarily due to the reduced pace of business borrowing.
Growth in the major monetary aggregates accelerated again in
September following strong increases in August.

In addition to faster

M-1 growth, large inflows to savings and consumer-type time deposits at
banks and thrift institutions continued to bolster expansion in M-2 and
M-3.
Short-term market rates generally have risen 25 to 50 basis
points further over the intermeeting period. Long-term market yields,
which had been comparatively stable despite the large increase in shortterm rates in prior weeks, have risen 5 to 30 basis points since the
September FOMC, but remain about 15 basis points below the peaks reached

III - 2

SELECTED FINANCIAL MARKET QUOTATIONS
(per cent)

Short-term rates
Federal funds 1/

6.65

4.47

7.87

8.36

8.85

3/
8.78

Treasury bills
3-month
6-month
1-year

6.27
6.51
6.62

4.41
4.55
4.67

6.99
7.31
7.67

7.95
8.03
8.03

8.16
8.38
8.20

6.58
6.66

4.53
4.63

7.61
7.76

8.36
8.46

6.62
6.84

4.60
4.65

7.80
8.38

7.75

6.25

8.36
8.48

+.91

+.42

8.21
8.42
8.27

+1.22
+1.11
+.60

+.26

8.52
8.67

8.75
8.87

+1.14
+1.11

+.39
+.41

8.65
8.90

8.75
9.30

9.13
9.55

+1.33
+1.17

+.48
+.65

9.00

9.50

9.75

+.75

+.25

7.90
7.95

8.81
8.89

8.74
8.73

9.06
9.00

9.04p
9.05p

+.23
+.16

+.30
+.32

5.93

5.45

6.03

6.02

6.09

6.07

+.04

+.05

7.39
7.66
7.96

5.74
6.48
7.20

8.27
8.39
8.51

8.41
8.41
8.43

8.50
8.55
8.64

8.47
8.54
8.62

+.20

+.06
+.13
+.19

Low

High

FOMC

Oct.

Aug.

Sept.

August

September

FOMC

+.39

+.24

Commercial paper
1-month
3-month
Large negotiable CDs 4/

3-month
6-month
Bank prime rate
Intermediate- and longterm rates

Corporate
New AAA 5/
Recently offered 6/
Municipal
(Bond Buyer) 7/
U.S. Treasury

(constant maturity)
3-year

7-year
20-year

+.15
+.11

Stock prices
Dow-Jones Industrial

807.74

985.74

887.13

861.57

867.90

891.63

+4.50

+30.06.

N.Y.S.E. Composite

50.13

56.98

58.48

57.84

57.80

58.84

+.36

+1.00

110.37
530

126.86
633

161.56
690

169.07
691

168.93
677

171.41
676

+9.85
-14

+2.34
-15

AMEX
Keefe Bank Stock 6/

Daily averages for statement week, except where noted.
One-day quotes except as noted.

Average for first 6 trading days of statement week ending October 11.
Highest quoted new issues.

1978 figures are averages for preceding week.
1978 figures are one-day quotes for preceding Friday.
1978 figures are one-day quotes for preceding Thursday.
Calendar week averages.

III - 3

in July. Expectations of a further tightening in money markets--prompted
by the System's recent firming moves and by published data indicating
greater strength in the monetary aggregates--apparently have been a key
factor in the general advance in market yields. Upward pressures on
bond yields also may be the result of accumulating evidence that the
pace of inflation and economic activity are slowing less than some
had anticipated.
Monetary Aggregates and Bank Credit
Growth in M-1 accelerated to a 14-3/4 per cent annual rate in
September from the already rapid 8-1/2 per cent pace of August.

Trans-

actions demands for money continued strong, but in addition, two special
factors--the early disbursement of social security checks not fully
accounted for in seasonal factors, and delays in processing Federal tax
payments by individuals due to the unusually large volume--may have acted
to boost M-1 growth in September by 2 to 3 percentage points.
On average for the third quarter M-1 expanded at a 7-1/2 per
cent annual rate, down somewhat from the preceding quarter but still quite
high by historical standards.

The moderation in quarterly M-1 growth was

accompanied by a much sharper slowdown in GNP expansion, and hence growth
in M-1 velocity declined from the unusually high second quarter pace.

Wide

swings in the quarterly growth rate of velocity typically accompany sharp
fluctuations in GNP growth, as money demands tend to adjust with a lag
to such movements.

On average, the rate of M-1 growth since early 1977

has conformed rather closely with predictions of econometric models relating money to GNP and interest rates.

III - 4
MONETARY AGGREGATES
(Seasonally adjusted)1/

Sept. '77

1978
QI

Major monetary aggregates
1. M-1 (currency plus demand
deposits)
6.2
2. M-2 (M-1 plus time & savings
deposits at CBs, other
6.9
than large CDs)
3.
M-3 (M-2 plus all deposits at 7.7
thrift institutions)
Bank time and savings deposits
4.
Total
12.8
5.
Other than large negotiable
CDs at weekly reporting banks
(interest bearing component
of M-2)
7.3
6.
Savings deposits
2.6

to
P
Sept. '78

QIIIP

July

9.9

7.6

4.8

8.5

14.8

8.4

7.9

9.0

8.0

10.4

12.8

8.5

7.8

10.0

9.3

11.8

13.6

9.4

10.1

9.5

10.2

7.5

13.6

12.1

6.4
1.6

9.9
1.3

10.3
-4.3

11.5
8.1

11.6
9.7

8.5
2.5

2.5

-0.6

9.9

8.7

3.0

-15.5 -68.8

0.0

16.2

-4.5

14.2

13.1

14.0

Individuals 2/

2.4

1.8

Other 3/

2.6

0.0

Time deposits

11.4

10.5

17.2

22.5

Aug.

Sept.P

QII

10.
11.
12.

Small time 4/
3.6
6.8
8.3
8.5
4.2
11.2
6.1
Large time 4/
26.9 17.3
32.7 47.5 31.3
16.4
30.1
Time and savings deposits sub- 3.0
3.8
4.3
1.2
6.4
10.3
4.0
ject to rate ceilings (6+10)
Deposits at nonbank thrift institutions 5/
13. Total
8.9
7.6
11.6 11.2 13.9
15.0
10.8
14. Savings and loan associations 9.0
7.9
12.8 12.8 15.6
16.9
11.5
15. Mutual savings banks
5.8
3.9
6.8
6.2
9.7
10.5
6.7
16. Credit unions
18.2 15.8
n.a. 11.8
n.a.
n.a.
n.a.
Average monthly changes, billions of dollars
MEMORANDA:
17.
Total U.S. Govt. deposits
18.
19.

-1.2

1.1

1.5

2.9

0.7

0.8

0.4

Total large time deposits 6/
4.6
Nondeposit sources of funds 7/ 1.7

2.8
0.7

3.1
1.1

4.5
0.0

1.5
2.1

3.2
0.5

4.0
1.2

n.a.--not available.
p--preliminary.
1/ Quarterly growth rates are computed on a quarterly average basis.
2/ Savings deposits held by individuals and nonprofit organizations.
3/ Savings deposits of business, government, and others, not seasonally adjusted.
4/ Small time deposits are time deposits in denominations less than $100,000.
Large time deposits are time deposits in denominations of $100,000 and above
excluding negotiable CDs at weekly reporting banks.
5/ Growth rates computed from monthly levels based on average of current and preceding end-of-month data.
6/ All large time certificates, negotiable and nonnegotiable, at all CBs.
7/ Nondeposit borrowings of commercial banks from nonbank sources include
Federal funds purchased and security RPs plus other liabilities for borrowed
money(including borrowings from the Federal Reserve), Eurodollar borrowings,
and loans sold, less interbank borrowings.

III - 5
M-2 expansion increased to a 12-3/4 per cent annual rate in
September, buoyed by the faster growth in M-1.

Surprisingly large in-

flows into time and savings deposits subject to rate ceilings (line 12)
contributed to continued strong growth in total interest bearing deposits
included in M-2 (line 5), and offset a marked deceleration in the large
time deposit component of this aggregate (line 11).

The unexpected re-

bound in savings flows at banks in August apparently continued through
mid-September.

However, these flows are estimated to have tapered off

substantially in the last half of the month, as would be expected given
the high level of market rates relative to passbook interest rates.
Small time deposits at banks rose at an 8-1/4 per cent annual
rate in the third quarter, a pick-up from the first half pace.

In-

flows of funds to the new 6-month deposit--which now pays the highest
yield of all small time deposits--accounted in large part for this
recovery.

Since June, money market certificate inflows at banks have

totaled an estimated $10 billion.

During the same period, the volume of

other short-maturity (less than 4 years) small time deposits outstanding
has dipped sharply, and there has also been a leveling-off in long-maturity deposit growth.
At savings and loan associations, survey results indicate that
sales of the money market certificate in September continued above the
pace in August, but below that in June and July.

Outstanding money mar-

ket certificate balances at S&Ls stood at approximately $16 billion as
of September 20, almost 4 per cent of total deposits at these institutions.

III -

Total deposit growth at thrift institutions continued to accelerate in September, contributing to more rapid growth in M-3.

Combined

deposit growth of S&Ls and MSBs--at an estimated 16-1/2 per cent annual
rate-was the highest in 12

months.

The pick-up in deposit growth has

enabled S&Ls to reduce their reliance on other sources of funds and to
improve their liquidity positions even as mortgage lending activity has
increased.

Borrowing from FHLBs slowed progressively in August and Sep-

tember, and the average liquidity ratio of insured S&Ls increased in July
and again in August (latest data available) to near 9.0 per cent, its
highest level since year-end 1977.
Despite increased inflows of demand and savings and small time
deposits, commercial banks continued to add to their managed liabilities
in September.

Total large time deposits increased $3.2 billion-just

above the average monthly rise during the second and third quarters.

The

September expansion in large time deposits largely reflected sales of CDs
by a few large banks for end-of-quarter window dressing--a recent practice
that has not yet been fully incorporated into seasonal factors.

However,

banks have been increasing their reliance on managed liabilities--including large CDs and various nondeposit sources of funds-since the first
quarter of 1977, and the ratio of such liabilities to total liabilities
has retraced about two-thirds of its decline from the 1974 peak.
Bank credit expanded at a 10 per cent annual rate in September
following a slow August pace.
from a sharp decline

The weakness in August resulted in part

in the volatile security loan category. In

III - 7

September, security loans expanded by a small amount, while growth in
real estate and business loans moderated.

The expansion of investment

portfolios also contributed to the more rapid growth of bank credit in
September; holdings of U.S. Government securities fell only moderately-following a sharp run-off the previous month--and holdings of other securities grew at almost a 10-1/4 per cent annual rate.

The pace of acquisitions

of securities in this latter category has been gradually increasing throughout this year, perhaps reflecting demand for tax-exempt assets occasioned
by a rise in bank profitability.

Business Credit
Business loans at commercial banks (net of bankers acceptances)
grew at a 9 per cent annual rate in September, close to the August pace;
on average in the third quarter, business loans increased at a 10-3/4
per cent rate, much slower than in the first half of the year.

Since

June, the pace of business lending generally has been stronger at small
banks than at large ones, and the September growth reflected some acceleration at small banks.

Among large banks, business loan growth at New

York City banks has considerably outpaced lending activity at the large
institutions outside of New York.

Informal discussions with senior per-

sonnel at several major New York banks suggest that part of this increase
reflects spillover effects related to declining liquidity at regional
banks.

The spillover reportedly has resulted in a rise in loan partici-

pations offered by regional respondents, in loan purchases from such

III - 8
COMMERCIAL BANK CREDIT

(Per cent changes at annual rates, based on seasonally adjusted data)1/

Sept.

12
months
ending
Sept.

9.9

11.3

1978

QII

QIII

9.7

13.5

10.7

16.7

3.3

8.6

2.3

9.2

-5.5

3.2

2.3

15.9

-32.5

-8.7

-4.4

QI
2/
Total loans & investments2/
Investments

July

Aug.

1978

5.2

11.7

-8.5

5.3

6.7

8.8

12.3

15.4

14.0

19.6

Business loans

16.3

19.0

11.0

10.8

12.3

Security loans

-29.9

62.4

-24.0

54.0

-132.1

12.9

-2.1

Real estate loans

16.1

17.2

17.1

16.9

18.5

15.2

18.2

Consumer loans

14.6

21.0

n.a.

14.9

22.1

n.a.

Commercial paper issue
by nonfinancial firms3/

-2.5

30.6

23.72/

56.8

-6.8

20.5

Business loans at banks
net of bank holdings of
bankers acceptances

17.8

19.5

10.8

13.7

9.2

9.1

Sum of items 1 & 2

16.1

20.3

11.7

16.8

8.0

10.0E I

/
16.1 .

Memo item 3 plus
business loans from
finance companies

15.5

18.6

n.a.

14.7

7.6

n.a.

Treasury securities
Other securities
2
Total loans

5.2

11.0
9.4

10.2

6.5
15.2

12.5

15.3

9.5

MEMORANDA:
1.
2.

17.8

16.0

n.a.-not available.
p--preliminary.
1/ Last-Wednesday-of-month series except for June and December, which are adjusted
to the last business day of the month.
2/ Loans include outstanding amounts of loans reported as sold outright to a bank's
own foreign branches, nonconsolidated nonbank affiliates of the bank, the bank's
holding company (if not a bank), and nonconsolidated nonbank subsidiaries of the
holding company.
3/ Measured from end of month.

III - 9

banks, and in direct lending to regional customers that have been referred
to New York City banks.
Consistent with these reported developments, the average liquidity ratio at large banks outside New York declined in August to the lowest level since May 1975, though remaining well above the low reached in
July 1974 (see Chart on page 10).

For banks in New York City the liqui-

dity ratio is much higher than for other large banks, although it too,
has fallen in recent months.

Meanwhile, survey data for farm-oriented

banks in several districts indicate further rises in loan/deposit ratios
in August.
Commercial paper issued by nonfinancial businesses grew in September following a slight decline in August.

For the quarter, the rate

of growth of commercial paper outstanding was somewhat below that of the
second quarter, and combined growth of business loans and commercial
paper during the third quarter was sharply below the first half pace.
business lending by finance companies also moderated in the third quarter,
with latest available data for August showing the smallest advance since
September of last year.

The August slowdown reflected a drop in wholesale

automotive paper resulting from unusually large reductions in auto dealer
inventories during the model changeover period.
In long-term markets, gross public offerings of bonds by nonfinancial corporations remained relatively light in September, as a rebound in industrial offerings was partially offset by a more moderate

III

RATIO OF LIQUID ASSETS TO TOTAL LIABILITIES1/
AT LARGE BANKS INSIDE AND OUTSIDE NEW YORK CITY
(not seasonally adjusted)
Per Cent

Large
banks in New
York City

I
d

.s1

% a
I

Other
large banks

I
I

If,,-,

'
Ai

/(
I
I
\~

The liquidity ratio is calculated as the sum of Treasury and other securities
maturing in one year or less, loans to brokers and dealers and domestic commercial banks, holdings of bankers' acceptances and gross sales of Federal
funds, all divided by liabilities less capital accounts, valuation reserves,
and demand deposits due to banks.

III - 11
pace of utility financings (especially telephone issues).

As in other

recent months, about one-half of the dollar volume of industrial issues
were offerings by firms whose debt securities are rated Baa and lower.
The volume of offerings by financial firms fell further in September to
one of the lowest figures in recent years.
Corporate bond yields have increased approximately 30 basis
points since the last FOMC meeting, with the Board's index of newly
issued, Aaa-rated utility bond yields climbing to 9.04 in early October,
14 basis points below its July peak.

Nevertheless, spreads between

yields on Treasury bonds and corporate obligations, which often widen as
rates rise, remain relatively narrow.
Stock prices posted sharp gains through most of the third quarter, reaching their 1978 highs in early September before moving somewhat
lower.

Large institutional investors were active in stock traders in

the third quarter as indicated by a near-record volume of block
transactions of 10,000 or more shares.

Mutual funds were net purchasers

of common stock in both July and August (latest available data), after
having been net sellers in each month of the preceding 2-1/2 years.

contrast, foreign investors were net sellers of stock in July and August
combined, after making substantial net purchases in the second quarter.
Margin credit also has expanded rapidly in recent months, including a record $550 million increase in August (latest available data).
The number as well as dollar volume of margin accounts has grown rapidly, suggesting that purchases by individuals probably contributed to
the overall increase in stock prices since the spring.

III - 12

SECURITY OFFERINGS
totals
monthly
or monthly averages, in millions of dollars)

1977
Year

e/
QIII-

1978
e/
Aug.-

e/
Sept.-

f/
Oct.-

f/
Nov.-

Gross Offerings
Corporate securities--total

4,518

3,775

3,513

2,900

3,500

3,900

3,500

Publicly offered bonds
By quality 1/
Aaa and Aa
Less than Aa 2/
By type of borrower
Utility
Industrial 3/
Financial

2,016

1,695

1,700

1,500

2,000

1,800

1,089
927

825
870

867
833

1,025
475

692
700
624

525
583
587

770
530
400

Privately placed bonds

1,501

1,263

1,180

1,200

1,000

Stocks

1,001

817

633

900

700

621

640

317

437
184

466
174

183
134

750

300

5,771

6,162

6,109

7,964

4,800

5,500

4,300

3,891
1,880

4,050 . 4,107
2,112
2,002

6,161
1,803

2,300
2,500

4,000
1,500

3,000
1,300

5,900
2,804

2,481
2,229

1,500

10,700

585

1,139

Foreign securities--total
Publicly offered 4/
Privately placed
State and local gov't.
securities--total
Long-term
Short-term

800

Net Offerings
U.S. Treasury
Sponsored Federal agencies

1/
2/
3/
4/
e/
f/

3,433
601

2,382
2,012

3,609
2,101

Bonds categorized according to Moody's bond ratings.
Includes issues not rated by Moody's.
Includes equipment trust certificates.
Classified by original offering date.
Estimated.
Forecast.

III -

Major stock price indexes of NYSE-listed securities currently
show year-to-date gains of 7 to 12 per cent, and are close to or above
their highs in the current expansion, reached at year-end 1976.1

Stock

price indexes of American Stock Exchange-listed issues and those traded
in the over-the-counter market are near record highs.

The recent sharp

increase in prices of ASE-listed stocks has produced a substantial rebound in their price-earnings ratios, but these ratios are still under
the levels recorded in the early 1970's (see Chart on page 14).

The

average price-earnings ratio for the S&P 500 stock price index is currently
above 9, as compared to its long-run average of approximately 13. Although
the rise in price-earnings ratios for the stocks of smaller companies has
induced some increase in the number of new offerings by such firms, the
current low level of stock prices continues to discourage the raising of
funds in equity markets.

Stock offerings for the year to date are lagging

even the reduced pace of 1977.

Government Finance
Gross offerings of tax-exempt bonds in September totaled $2.3
billion, sharply below August's record $6.2 billion.

The decline largely

reflects a drop in advance refunding issues--from $2.8 billion in August
to only $35 million in September--following the implementation of new
Treasury regulations on September 1 that greatly reduced the attractiveness of such operations.
The light supply of new issues, and continued demand reported
for property/casualty insurance companies, commercial banks, and individ-

1/ The Dow-Jones Industrial index, however, remains well below its year-end
1976 high.

III

STOCK PRICES AND PRICE-EARNINGS RATIOS
Monthly Averages

Index
170

Stock Price Indexes
--

I
I
I
; -

150

130

/
t

American Stock Exchange Composite

I
S'

119

SS&P

500

10
.

. .

III - 15

uals, contributed to a relatively favorable price performance in municipal
bond markets.

Since the FOMC meeting the Bond Buyer Index has risen

only about 5 basis points, while indexes of taxable yields have increased
15 to 30 basis points.
The Treasury raised $2.5 billion of new cash in September, with
the bulk of the funds obtained through offerings of marketable coupon
issues.

A 15-year bond auction late in the month contributed $1.5 billion,

with another $700 million coming in the regular auction cycle of two-year
notes.

The remainder ($300 million) was financed by additions to the

52-week bill auction.

The outstanding supply of Treasury bills remains

close to its beginning-of-year level, but net issuance of marketable coupon issues has amounted to $28.6 billion for the year to date.

This cou-

pon financing has been concentrated, however, in the regular cycle issues
of 2, 4, and 5 years, and as a result the average maturity of the publicly
held debt has risen this year by only two months, to 37 months.

Mortgage Markets
The volume of net mortgage lending apparently picked up somewhat further in September, raising the third quarter average slightly
above the reduced first half pace.

Lending by commercial banks remain-

ed quite strong, and loan growth at S&Ls probably increased.

Mortgage

commitments outstanding at S&Ls expanded in August (latest data available) after declining for 7 consecutive months, as new commitment activ-

ity increased to the highest level for the year.
In late September, average rates on new commitments for 80-per
cent, 30-year conventional home mortgages at sampled S&Ls began to edge

III -

up--reaching close to 9-7/8 per cent in early October, after remaining
stable at 9-3/4 per cent for the past 3 months. At the same time, rates
on short-term construction loans to builders, as well as the costs to
mortgage companies of carrying loan inventory, have risen further due to
increases in the bank prime rate and commercial paper rates.
In secondary markets, yields on GNMA-guaranteed mortgage-backed
securities have backed up about 25 basis points in recent weeks, in line
with movements in intermediate-term Treasury yields.

Moreover, expecta-

tions of further rate increases on GNMA securities and upward movements
of primary mortgage rates apparently led to a surge in the volume of
bids in FNMA's October 2 auctions of forward commitments to purchase
home mortgages; average yields on accepted bids rose by about 10 basis
points.

Consumer Credit
Consumer instalment credit outstanding appears to have expanded less rapidly during the third quarter--at an annual rate of about 16
per cent compared with near 19 per cent during the first half--despite
continued strong advances in the automobile component.

Changes in var-

ious terms of lending in the last three years--in particular, longer
loan maturities (which enlarge the amount of finance changes included in
a contract) and reduced downpayments--apparently have caused auto credit
to continue expanding more rapidly than auto sales and prices.

Some

tightening of such credit terms, however, may have begun during the second
quarter.

The average maturity of new-auto contracts at commercial banks

III - 17
INTEREST RATES AND SUPPLY OF MORTGAGE FUNDS
AT SELECTED S&Ls

Conventional home mortgages
Average rate on
new commitments
for 80% loans
(Per cent)
9.00
8.65

Period
1977--High
Low

1978-High
Low

Spread1 /
(basis

Per cent of S&Ls2/
with mortgage funds

in short supply

points)
+92

+37

+101
+30

9.80

1978

Basis point
change from
month or
week earlier

9.43

9.00

July

9.73
9.75

+51
+66
+57
+67

Aug

9.80

+100

9.75
9.75
9.75

+95
+98
+101
+85
+72

Apr
May
June

Sep

9.68

1
8
15
22
29

9.75
9.78

Oct 6
9.85
+7
+81
65
1/ Average mortgage rate minus average yield on new issues of Aaa utility bonds.
2/ Per cent reporting supply of funds slightly or substantially below normal
seasonal patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Conventional
Govt.-underwritten
Amount
($ millions)
Offered
Accepted
416
278
123
83

1977--High
Low
1978--High
Low
1978

Sep

Yield
to
FNMA 1 /
9.21
8.81

Amount
($ millions)
Offered Accepted
885
570
50
35

Yields on GNMAguaranteed
mortgage-backed
Yield securities for
to
immediate
FNMA!/
delivery 2
8.98
8.43
7.56
8.45

717
75
5
II
18
25

363
48

10.21
9.28

1011
130

605
80

10.02
9.13

9.20
8.43

199

126

10.01

351

155

9.78

285

157

10.01

367

181

9.79

8.92
8.89
8.90
9.10

Oct
2
396
167
10.10
682
279
9.91
9.13
Average gross yield before deducting fee of 38 basis points for mortgage servicing.
Data, based on 4-month FNMA purchase commitments, reflect the average accepted bid
yield for home mortgages, assuming a prepayment period of 12 years for 30-year loan
without special adjustment for FNMA commitment fees and related stock requirements.
Mortgage amounts offered by bidders relate to total eligible bids required.
2/ Average net yields to investors assuming prepayment in 12 years on pools of 30-year
FHA-VA mortgages carrying the prevailing ceiling rate on such loans.

III -

decreased slightly, and the proportion of finance company new- and usedauto contracts with low downpayments also turned down (see Chart on page
20).

However, auto loan maturities at finance companies continued to

lengthen a bit and auto loan rates remained unchanged.

III - 19

CONSUMER INSTALMENT CREDIT1/
1978
July

1975

1976

1977

7.4
4.7
39.4

20.0

12.3
53.9

30.8
16.9
50.8

36.6
17.2
48.3

45.5
20.4
51.4

39.6
16.9
58.0

35.8
15.1
55.1

163.9
47.2

192.4
48.9

226.0
49.1

245.4
49.1

268.5
49.8

268.0
50.7

271.6
50.7

156.6
14.4

172.4
14.5

195.3
15.0

208.8
15.0

223.1
15.6

228.4
15.8

235.8
16.1

Aug

Total

Change in outstandings
Billions of dollars
Per Cent
Bank share (per cent)
Extensions

Billions of dollars
Bank share (per cent)
Liquidations
Billions of dollars
Ratio to disposable income
Automobile Credit
Change in outstandings
Billions of dollars
Per cent
Extensions
Billions of dollars

3.2

10.2

13.2

15.2

20.2

18.2

17.4

6.1

18.3

20.1

19.2

24.4

20.6

19.3

51.5

62.8

73.1

77.9

87.5

85.9

88.8

Quarterly and monthly dollar figu res and related per cent changes are
seasonally adjusted annual rates.

III - 20

MATURITY ON NEW-AUTO

AVERAGE

AT COMMERCIAL BANKS

AND FINANCE

CONTRACTS

COMPANIES

MONTH.

Finance
Companies

Cormrcial

L-

Banik

" c

1974

1976

COMVANY

NEW-AND

1978

PROPORTION OF LOW-DOWNPAYMENT
FINANCE

USED-AUTO

CONTRACTS
CREDIT
PE F
RCENT

1 45

40
Used

"?,
30
25
---

! ~
1974
Note:

1976

1978

Low downpayment contracts are those for which credit extended
equals 100 per cent or more of dealer cost (new) or wholesale

value (used).

ions
U.S. International Transactions
(in million of dollars; receipts, or increase in

RES'.

1976

Year
Trade balance 1/
Merchandise exports
Merchandise imports

Change in net foreign positions of banking
offices in U.S. (excl. liab. to foreign official inst.)
Through interbank transactions with
a) Own offices in foreign countries
b) Unaffiliated banking offices in foreign countries

5.
6.

Through nonbank transactions
a) Claims on nonbanks in foreign countries (increase, -)
b) Liabilities to private nonbanks in foreign
countries (inc. custody liab.)

7.
8.

1977

Year

11,

1978

June

August
-1.960
12,441
-14,401

609

326

539

4/
4/

4,702
-3,093

-2,670
3,029

1,163
-35

-180

-1,131

-554

-1,089

-136

131

521

500

-10.170
29,457
-39,627

-11.201
30,664
-41,865

-9,935

-3.907

-5.142

-6.031

-6,282
-3,220

-2,717
-2,203

-5,545
-147

-3,346
-2,369

-3,142

-423

-487

2,709

1,436

1,037

-7,802 -1.857
35,067 12,121
-42,869 -13,978

July
-3.532
11,534
-15,066

-31.059
120,585
-151,644

-9,353
114,694
-124,047

1.
2.
3.

October

liablitites,

3.778

9.
10.
11.
12.
13.

Private securities transactions, net
Foreign net purchases of U.S. corp. bonds
Foreign net purchases of U.S. corp. stocks
Foreign net purchases of U.S. Treasury securities
U.S. net purchases (-) of foreign securities

-4,697
397
853
2,783
-8,730

-2.081
1,549
1,325
569
-5,524

-242
223
580
-297
-748

406
133
341
881
-949

882
179
1,018
796
-1,111

-16
169
54
468
-707

-1.843
50
-44
-1,568
-281

-88
268
-102
-108
-146

14.

Change in foreign official reserve assets in U.S.

13,091

35,406

15,152

14.899

-5,568

-293

3,522

2.113

(increase +)

15.
16.
17.

By Area
G-10 countries and Switzerland
OPEC
All other countries

3,922
6,802
2,367

29,414
5,989
3

14,476
757
-81

12,312
1,354
1,233

-3,085
-2,389
-94

1,098
-726
-665

2,475
269
778

3,721
-1,481
-127

18.
19.

By Type
U.S. Treasury securities
Other 2/

9,315
3,776

30,218
5,188

12,900
2,252

12,964
1,935

-5,589
21

-322
29

2,459
1,063

1,328
785

-2,532

-237

-2

246

328

102

13.426

1.878

404

1.681

8.382

1,455

1,495

-652

4,339

-15,265

-6,959

-6,854

-3,261

20.

Change in U.S.

21.

All other transactions and statistical discrepancy

reserve assets (increase -)

MEMO:

Current account 3/
1/
2/
3/
4/

International accounts basis, seasonally adjusted.
Includes deposits in banks, commercial paper, bankers'
Seasonally adjusted.
Data not shown separately because of break in series.

acceptances,

RESTRICTED

and borrowing under repurchase agreements.

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets.

Exchange markets have remained unsettled

during the past four weeks; rates have fluctuated widely, particularly
for the Swiss franc, and pressures have continued to mount within the EC
snake.

The value of the dollar has fallen fairly steadily since mid-

September with its cumulative decline during the month amounting to about
3 per cent.

The reported decline in the trade deficit in August and the

increase in short-term U.S. interest rates were not sufficient to overcome
market concern with the U.S. inflation rate and expectations that particular
The weighted average value of the dollar

currencies would appreciate.

is currently about 9 per cent below its level in late May and 16 per cent
lower than it was a year ago.
Attention in exchange markets in the past several weeks has
focussed on the Swiss franc and on the German mark and its partner currencies in the snake.

Within a two-week period starting in mid-September,

the Swiss franc appreciated over 8.5 per cent against the dollar and 6
per cent against the mark.

In late September, the Swiss National Bank

indicated it would intervene energetically to restore the Swiss franc
to more acceptable levels, particularly against the German mark.

the Swiss franc declined over 9 per cent against the mark;

IV - 2

MARCH1973=100

108

WEIGHTED AVERAGE EXCHANGE VALUE OF U.S.

DOLLAR

10
- 104

100

Daily:
FOMC 19 Sept 1978
29 Sept 1978
11 Oct 1978

SEPT 1

89.7
88.8
87.1

OCT 11

9
-6

8
-8

1978

1977

FRANCS

2.7

1977

1978

2.5

2.3

IV - 3

initially it also dropped sharply against the dollar, but the dollar's
continuing weakness has left the Swiss franc 4-1/2 per cent higher than
in mid-September.

As part of its strategy to reduce upward pressure on

the Swiss franc, the BNS also announced that it is going to subsidize
imports.

In addition it will reduce by half the quantity of capital con-

versions of foreign borrowings of Swiss francs that must be done with the
BNS, in effect reducing official sales of dollars and raising the quantity
of Swiss francs offered in the market.

It also announced that it was

removing one of its earlier exchange restrictions by permitting foreigners
to reinvest their Swiss franc proceeds from the sale of Swiss bonds.
Pressures within the snake intensified throughout the past month,
as expectations grew that the German mark would be revalued, at least
within the context of the proposed new European monetary arrangement.
The German mark was at the top of the snake with the Dutch guilder,
Belgian franc, and Norwegian and Danish krone at their bottom limits
through most of this period.
. The
Dutch increased their discount rate by 1 percentage point and other shortterm money market rates sharply in an effort to reduce exchange-rate
pressures.

On October 11, the Belgian National Bank announced it was

effectively reducing its first tranche discount quotas, so that any further
borrowing by commercial banks will have to be made at the Lombard rate,
which was raised to 8-1/2 per cent.

The central banks of Norway and Denmark

have also raised their short-term interest rates.

IV - 4

The New York Desk has been both a buyer and seller of dollars,

as it intervened in support of the dollar but continued to acquire mark
balances when possible for use in swap repayments.

Net purchases of

dollars (sales of DM) by the United States totalled approximately $200
million; these purchases made the System increase swap drawings in marks
to $3/4 billion equivalent, and the ESF increased its, to $412 million equivalent.

In addition, the Desk intervened on behalf of the System

to sell Swiss francs during New York trading.

The System's swap drawings

in Swiss francs now equal about $270 million equivalent.

IV - 5
U.S.

U.S.

bank lending abroad.

banks'

claims on countries

other than international financial centers increased more slowly in
first

half of 1978 than in

the first

half of 1977,

the

even after adjusting

for the estimated effects of extensive reporting changes.
According to published data,
international financial centers

(i.e.,

claims on countries other than
other than G-10 countries,

Swit-

zerland, and offshore banking centers) were only slightly higher in
June 1978 than six months earlier.
changes in

reporting systems,

about 7 per cent.

After allowance for the effects of

appears that these claims increased

This compares with 9 per cent in the period from

December 1976 to June 1977.

Claims on oil-exporting countries, non-oil

LDCs,

appear to have risen more slowly this year

and Eastern Europe all

than last.

The increase in

claims on non-oil LDCs in

this year seems to have been 3-4 per cent,
year-earlier period.
in

claims on Mexico,

the first quarter,

the first

half of

down from 6 per cent in

the

The decrease largely reflected an absolute decline
as Mexican borrowings continued,

to be shifted from U.S.

to non-U.S.

at least through
banks.

Comparison of June data with figures for earlier dates is
complicated by two reporting changes.
by domestic offices of U.S.
merly were included.

Beginning in

June claims reported

banks exclude customer claims, which for-

At the same time,

the number of foreign branches

reporting to the System has been reduced as a result of a rise in
reporting exemption levels.

Together these changes seem to have reduced

total claims on all types of borrowers by $10-11 billion.

IV - 6
U.S. Bank Claims on Foreigners

(in billions of dollars)
1976
Dec.
I.

Countries Other Than International Financial Centers
Smaller developed countries
Greece
Spain

Scandinavia2 /
South Africa

1977
Dec.
June

76.2

83.2

92.3

94.8

99.0

15.1
1.7

16.9

19.0

20.9
2.3

21.5

2.8
3.6
2.2

III.
IV.

International Financial
Centers3/
Miscellaneous and Unallocated
Grand Total

3.5
4.7
2.4

17.6

43.3

45.8

49.3

1.9
11.1

2.1
11.8
12.2

12.6
2.2

Non-oil developing countries
Argentina
Brazil
Mexico
Korea
Philippines
Taiwan
Other

II.

2.2

15.0
2.2
5.5
4.6

Oil-exporting countries
Indonesia
Middle East
Venezuela

Eastern Europe

1.8
3.2
4.2
2.3

4.2
4.1

11.7
3.1
2.2
2.3

3.4
2.3
2.7

June 1978
Actual Adjusted1/

3.9

5.6
2.4
18.8
1.9
8.0
5.6

19.8

51.0

11.9
3.9
2.5
3.1

48.6
3.0
13.3
10.9
3.6
2.7
2.6

2.2
6.9

5.5
2.9
12.7

5.2

5.5

6.4

6.5

126.3

129.5

141.3

139.0

5.4

5.1

5.3

207.8

217.8

238.9

8.1-

241.9

6.7
145.0
8.2

252.2

Actual data adjusted for estimated effects of reporting changes occuring
in the second quarter of 1978.
2/ Denmark, Finland, Norway.
3/ G-10 countries, Switzerland, and offshore banking centers.
4/
The rise from December 1977 mainly reflects certain changes in reporting
instructions for foreign branches.
3eneral note: These data include claims of domestic offices and foreign
branches of U.S. banks, exclude.caims. of U.S. agencies and branches of
foreign banks, and are adjusted to exclude claims between offices of the
same parent bank.

IV -

U.S. International Transactions.

The U.S. merchandise

trade balance in August was in deficit by $23.5 billion at an
annual rate compared with a July deficit rate of $42.4 billion.
In July and August combined, the deficit was $33 billion, up only
slightly from the second-quarter rate.

Data which have recently

become available show a sharp drop in the second-quarter U.S.
current-account deficit, to $13 billion at an annual rate, less
than half the deficit rate in the first quarter.

This reflected

both a decline in the trade deficit from the record high rate in
the first

quarter and strong dollar earnings of U.S.

direct foreign

investments.
Official foreign assets in the United States (excluding
OPEC) rose by $2.5 billion in July and $3.7 billion in August

Partial data indicate that these holdings declined in

September but increased sharply in early October
.
of OPEC funds,

about $1.5 billion in August,

For the year through September,

The outflow

slowed in September.

the outflow of OPEC funds from the

United States amounted to approximately $3 billion compared with
an inflow of $5.2 billion in the year earlier period.

IV - 8

U.S. Merchandise Trade

October 11,

1978

International Accounts Basis
Billions of dollars, seasonally adjusted, annual rate
Monthly Data

Quarterly Data -

/
IMPORTS

/ \

I
'

Billions of dollars, seasonally adjusted,

1976

1977

1978

IV -

U.S. International Transactions Summary
(in billions of dollars, (-) = outflow)
1 9 7 8

1977

Year
1.
2.

Trade balance 1/
(annual rate)

3.
4.
5.

Private capital trans. adj. 2/
Private capital as rept. net
Reporting bias 3/

-5.9
-5.9

6.
7.
8.

OPEC net investments in U.S.
Other foreign official assets
U.S. reserve assets

6.0
29.4

9. All other 4/
10.
Not seasonally adjusted
Seasonal component 5/

Memorandum:
GNP net exports of goods
and services
12.
Current account balance

-31.1

Q-4

Q-l

-10.2

-11.2

(-40.8] (-44.8)
-2.9

-5.4
2.5

-.2

1.8
1.8

.8
14.4
*

-2.1
-3.2
1.1

Q-2

June

'July

Aug.

-7.8
-1.9
-3.5
-2.0
31.3)(-22.3)(-42.4)(-23.5)

-7.4
-5.6
-1.8

5.2

-. 7

-. 2

4.7
.5

.6
-1.3

-1.5
1.3

1.4
13.5
.2

-2.4
-3.2
.3

-. 7
.4
.1

.3
3.2

3.5
3.4
.1

-1.5
3.6

7 .9i

2.8

7.4
.5

3.2
-.4

1.0
-. 8

.2
-.8

n.a.

-.6

11.

-10.9
-15.3

-4.7
-7.0

-6.0
-6.9

-2.6
-3.3

1/ Seasonally adjusted.
2/ Includes bank-reported capital, foreign purchases of U.S. Treasury securities,
and other private securities transactions.
3/ Adjustment for reporting bias in bank-reported data associated with week-end
transactions. See page IV 10-11 in the June 1976 greenbook.
4/ Includes service transactions, unilateral transfers, U.S. government capital,
direct investment, nonbank capital transactions, and statistical discrepancy.
5/ Equal but opposite in sign to the seasonal component of the trade balance,
J/ Less than $50 million.

The sharp drop in the merchandise trade deficit in August
resulted mainly from an increase in nonagricultural exports and a
decrease in nonpetroleum imports from rates recorded in July.

For

IV -

July-August combined nonpetroleum imports increased slightly faster
than nonagricultural exports, more than accounting for the marginal
rise in the deficit from the second-quarter rate.

U.S. Merchandise Trade, International Accounts Basis
(billions of dollars, seasonally adjusted annual rates)
1977 I

1 9 7 8

1 9 7 7
r

Year

EXPORTS
Agric.
Nonagric.

120.6

117.9
24.9
93.0

122.5
26.0
96.5

124.0

117.7
22.7

122.7

23.9

100.2

95.1

26.0
96.6

140.3
32.0
108.3

IMPORTS
Petroleum
Nonpetrol.

151.7

149.0
46.1
102.9

153.1
45.2

158.6
42.3

106.7

146.0
46.3
99.7

107.8

116.3

167.5
39.8
127.7

BALANCE

-31.1

-28.1

-26.5

-29.0

-40.8

-44.8

24.4
96.2

45.0

July &i

Aug.

July

Aug.

143.9
32.0
111.9

138.4
30.3
108.2

149.3
33.7
115.6

171.5
43.2
128.2

176.8
42.3
134.5

180.8
41.1
139.7

172.8
43.4
129.4

-31.2

-33.0

-42.4

-23.5

1
NOTE: Details may not add to totals because of rounding.
to totals because of rounding.
r/ revised

The value of nonagricultural exports in July-August increased
by over 3 per cent from the rate in the second quarter.

Most of the

increase was in capital goods, particularly civilian aircraft.

U.S.

aircraft exports, while volatile month-to-month, are expected to
show a strong upward trend over the next year, as aircraft companies
report increased foreign orders.
The value of agricultural exports in July-August was
unchanged from the second-quarter rate.

A sharp drop in the volume

IV -

and value of soybean exports was offset by increased U.S. shipments
of wheat, cotton, and tobacco.

Export unit values for most agricultural

commodities fell sharply in July following predictions of bumper crops
here and abroad,but rebounded somewhat in August.

In late September, President Carter announced an export
promotion plan.

It consists mainly of a small increase in govern-

ment subsidized financing of U.S. exports, mainly through the Ex-Im
bank and the Commodity Credit Corporation, to be implemented fully
by 1980.

It also includes a call for the reduction of regulatory

impediments to exports and an increase in the export promotion
activities of the State and Commerce Departments.

Without a significant

change in U.S. regulations governing the export of military equipment
and nuclear reactors, the plan is unlikely to increase U.S. exports
by more than $1 billion per year by 1980, less than 0.6 per cent
of the current annual rate of U.S. exports.
Nonpetroleum imports increased in value in July-August
by about 5 per cent over the second quarter rate.
accounted for three quarters of the increase.

A rise in volume

The sharpest rise

was in imports of capital goods, in part machine tools and office
machines.

On a seasonally adjusted basis, strong July increases

in steel and foreign car imports were partly reversed in August
but remained above average monthly rates in the second quarter.

IV -

The value of oil imports in July-August increased slightly
over the rate in the first half of 1978.

The volume of oil imports

averaged 8.7 million barrels per day (mbd.) for the two months,
compared with 8.5 mbd in the first half of 1978.

The average price

of a barrel of imported oil rose marginally in August to $13.28.
Data released recently by the Department of Commerce showed
a sharp drop in the U.S. current account deficit to $13 billion at
an annual rate in the second quarter from a $27.4 billion rate in
the preceding quarter, partly as a result of a much smaller trade
deficit.

In addition, earnings of U.S. direct investments abroad

were stronger than expected,

perhaps as a result of an increase

in the dollar value of foreign profits because of the dollar's
depreciation.

Military goods shipments also increased sharply in

the second quarter.

In addition, net travel receipts increased as

U.S. travelers spent less abroad and foreign travelers spent more
here than in the previous quarter.
Bank-reported private capital transactions in August
resulted in a net inflow of $0.5 billion.

U.S. banks increased

their borrowing from foreign banks (including their own overseas
branches) by somewhat more than they increased their net lending
to nonbank foreigners.

Part of the strength in loans to nonbank

foreigners is attributable co intervention related borrowing of

IV -

the Government of Canada.

For July and August, private capital

transactions reported by banks showed a net capital inflow at a
somewhat reduced rate compared with the sizeable inflow in the
second quarter.
In August, private securities transactions resulted in a
Foreigners sold (net) about $100

net outflow of about $90 million.

million of U.S. corporate stock in August and $50 million in July,
after net purchases of over $1 billion in the second quarter.

August, net sales of U.S. corporate stocks by Swiss and German
brokers and investors of about $250 million were partially offset
by net purchases originating in the United Kingdom and offshore
financial centers.

In the first three quarters of 1978, new securities

issued in the United States by foreigners and international organizations
totaled $5.5 billion, $700 million less than in the comparable period
last year.

This fall-off reflects the decision by the World Bank to

abstain from new dollar borrowings.
Foreign official assets in the United States (excluding
OPEC holdings) in August increased by $3.7 billion.

Foreign official assets in

the United States

IV -

are likely to have declined slightly in September but rose sharply
in early October

OPEC banking and security holdings in the United States
fell by $1.5 billion in August after increasing slightly in July
and falling by $2.4 billion in the second quarter.

In August, OPEC

countries were net sellers of U.S. corporate stocks for the first
time in several years.

In September, OPEC holdings at the Federal Reserve

Bank of New York fell by a further $700 million.

IV - 15

Foreign Economic Developments.

Prospects for foreign GNP

growth have improved marginally for 1978 but appear about unchanged for
1979, as compared with the staff view last month; for both years, however,
growth is weak by historical standards.
The major components of this outlook are the somewhat higherthan-expected growth of GNP in Germany, the United Kingdom and Canada.
Japanese attempts to achieve higher growth rates continue to be impeded
by difficulties Japan faces in simultaneously achieving higher GNP and
The 1978 growth outlook for Italy, Switzerland,

lower export growth.

Sweden and the Benelux countries remains below the average for major
foreign countries.

The unemployment picture continues mixed, with unem-

ployment rates increasing since the first quarter of 1978 in all major
foreign countries except Germany and the United Kingdom.

Industrial

production generally advanced at slower rates in the second quarter
than in the first; in Canada, however, this was not the case and higher
second quarter rates of increase continued into July and August.

The

combined trade account surplus of six major foreign countries rose from
$11.7 billion in the first quarcer to $13 billion in the second quarter;
this surplus has fallen by about $3 billion in July (excluding Italy,
for which July data are not yet available).

Rates of inflation, as

measured by the CPI, continue to run ahead of first quarter 1978 rates
in all major countries except Germany, but rate of advance have slackened in recent months.
Notes on Individual Countries.

It continues to appear likely

that Japan will meet neither its goal of a 7 per cent rate of GNP growth
in the year ending March 1979 (FY 1978) nor its goal of reducing its

Real GNP and Industrial Production in Major Industrial Countries
(percentage change from previous period, seasonally adjusted)

1977

Canada:

France:

Germany:

Italy:

Japan:

1978

2.7
4.0

0.3
0.7

1.5
1.4

0.7
0.6

1.1
1.4

5.8
9.8

2.0
1.5

0.4
-0.5

0.5
-0.8

1.8
2.7

n.a.
0.8

-2.5
-5.5

5.6
7.7

3.1
3.1

0.2
0.3

1.5
1.1

-0.1
-0.3

2.1
-0.6

GDP
IP

-3.5
-9.2

5.7
12.4

1.7
1.1

-0.5
-0.8

-0.1
-2.1

1.8
5.5

0.4
-2.2

GNP
IP

1.5
-11.1

6.3
11.1

5.2
4.2

0.1
-0.1

1.5
1.5

2.5
2.9

1.1
1.7

*0
0.1

0.3
0.3

-2.0
-4.9

2.3
0.5

1.0
0.4

0.2
1.0

0.8
1.0

1.6
1.0

1.8

-2.0

1.8

-2.0

-1.3
-8.9

5.7
10.1

4.9
5.6

1.4
1.1

0.0
0.2

2.1
3.1

1975

1976

1977

GNP
IP

1.3
-5.4

5.5
5.1

GDP
IP

-0.5
-8.9

GNP
IP

United Kingdom:

United States:

GNP
IP
GNP
IP

*GNP data are not published on monthly basis.

0.1
-0.6
0.8
0.6

April

May

1978
June

-0.9

0.6

-0.9

1.6

-3.1

-0.8

1.6

-3.1

-0.8

0.9

-0.9

0.9

-0.9

July

-3.3

1.4

August
n.

n.a.
*

n.a.
*
1.7

-0.9

0.4

0.0

-0.8

0.0

-0.8
*

0.4

n.a.
*
-1.7

n.a.
*

0.9
*

n.a.

0.7
0.5
I

0.5

0.7

0.5

I--

Consumer and Wholesale Prices in Major Industrial Countries
(percentage change, from previous period or as indicated)

1978

1977
1975

1976

2.2
1.1

1.8
2.6

2.4
2.8

10.5
7.6

8.6
7.0

September
July

1.9
0.0

1.6
1.2

2.9
2.0

11.7

9.4
5.0

August
August

1.3
1.0

0.9
0.3

8.0
9.1

2.2
0.9

France:

CPI
WPI

11.7
- 5.7

9.6
7.4

9.5
5.6

2.4
-0.9

5.9
3.4

4.6
5.8

3.9
1.8

0.2

-1.8

-.0.9

18.4
17.4

CPI
WPI

16.9
8.5

16.8
22.9

Japan:

CPI
WPI

12.1

9.7
5.0

United Kingdom:

United States:

3.0
CPI
WPI
CPI
WPI

Latest
Month

7.5
4.3

Italy:

Ago

10.8
6.5

8.3
1.9

2.5
1.5

3.3
2.0

2.6
2.1

0.8

0.5

-0.7

0.9
-0.5

2.0
-0.3

7.0
-0.3
- 2.3

-0.1
-0.6

3.0
2.3

0.3

Rate)

CPI
WPI

(at Ann.

1977

Canada:

Germany:

Latest 3 Months
from:
Previous
Year
3 Months

24.2
24.1

16.6
16.4

15.8
19.2

1.6
3.3

1.5
1.6

1.7
2.5

2.7
2.0

9.1
9.2

5.7
4.6

6.5
6.1

1.5
0.2

1.1
1.1

1.7
2.4

September
September
August
August

9.3
7.3

September
August

8.0
8.5

August
September

11.0
6.3
a

4.3
- 3.6

8.9
8.6

2.1

11.4
8.5

3.1
-4.8

0.8

2.6
3.0

2.3
- 0.3

7.9

August

8.7

September

Trade and Current-Account Balances of Major Industrial Countries a/
(billions of U.S. dollars; seasonally adjusted)

1977

1978
Q2

1975
Canada:

France:

Germany:

Italy:

Japan:

1976

1977

Trade
Current Account

-0.6
-4.7

1.2
3.9

2.2
-3.9

0.8
-0.8

0.2
-1.2

0.4
-1.2

0.7
-0.7

1.3
-0.5

Trade
Current Account

1.5
0.0

-4.2
-6.0

-2.2
-3.3

-1.1
-1.3

-0.7
-0.8

-0.5
-0.8

0.1
-0.3

-0.1
0.2

15.3
4.1

13.5
3.9

16.5
3.9

3.7
1.0

4.2
1.1

3.7
-2.0

4.8
3.8

Trade
Current Accountb/

-3.4
-0.6

-6.5
-2.9

2.5
2.3

-1.3

-0.8

-0.2

-0.9

0.2

2.4

0.7

0.3

Trade
Current Account

5.0
-0.7

9.9
3.7

17.5
11.0

4.2
2.3

4.4
2.8

4.2
2.7

4.6
3.1

7.4
5.5

-7.1

-6.3

-2.9

-3.7

2.0

0.3

-1.7
-0.8

-1.2
-0.6

-0.1
0.9

0.1
0.9

-1.1
-0.6

-9.3 -31.1
4.3 -15.2

-7.0
-2.7

-6.6
-2.7

-7.3 -10.2 -11.2
-2.9 -7.0 -6.9

Trade
Current Accountb /

United Kingdom:

United States:

Trade
Current Account
Trade
Current Account

9.0
18.4

0.5
-1.2

_
May

1978
June July

Aug.

0.3

0.0

0.3
n.a.

0.0

0.1

0.2

4.3
1.6

5.0
2.0

1.4
0.2

2.0
1.0

1.3
1.0

2.0
0.0

-0.1

0.5

0.4

n.a. n.a.

a/ The current account includes goods, services, and private and official transfers.
b/ Not seasonally adjusted.
* Comparable monthly current-account data are not published.

-0.1

0.2
*

n.a.

6.9
5.1

2.1
1.4

3.0
2.4

2.1
1.5

-0.2
0.4

-0.4
-0.2

-0.2

-0.3

0.1

0.0

-0.1

0.3

-7.8
-3.3

-2.7

-1.9

-3.5 -2.0
*

Growth of Money Stock in Selected Industrial Countries

Jan.

1978
(percentage change from previous month,
seasonally adjusted monthly rates)
July
May
June
Mar.
Apr.
Feb.

Aug.

Percentage change
in latest 3 months
from same period
year earlier
9.8

-0.4

3.1

0.8

1.0

1.4

0.4

1.3

0.3

1.0

n.a.

13.6

1.0

0.4

0.9

1.0

0.3

1.4

11.4

0.6

0.9

1.0

2.2

0.2

1.4

1.1

n.a,

11.7

Switzerland(M1)2/

0.2

2.0

6.6

0.3

-0.6

-0.1

n.a.

16.9

United Kingdom(£M3 )

2.4

0.6

2.5

0.9

0.3

1.1

-1.0

United States(M1)

0.9

0.0

0.3

1.6

0.6

0.4

0.7

8.8

0.8

0.4

0.9

0.6

0.7

0.9

8.2

Canada (M1)

-1.0

1.1

-0.7

France(M 2 )

0.7

1.9

Germany(CBM)1/

1.8

Japan(M2 )

(M )
2

15.3

Central Bank Money, equal to currency plus non-currency components of M 3 weighted by their reserve
requirements as of January 1974.
Not seasonally adjusted.

IV - 20

current account surplus. Domestic demand in the second quarter of
1978 grew at a 9 per cent annual rate, while a decline in net exports
reduced real GNP growth to 4.4 per cent (s.a.a.r.).

The most recent

Japanese target for the current-account surplus is about ¥ 2.7 trillion
for the current fiscal year -- about $13 billion equivalent when converted
at the ¥ 200=$1 exchange rate for the remainder of the fiscal year, as
assumed by the Japanese.

Reflecting declining trade surpluses, the

current-account surplus fell to about $1.5 billion per month in both
July and August.

While these surpluses are less than the record $2.3

billion surplus in June, they are still sufficiently large to make it
doubtful that the $13 billion target for the year will be met, since
the surplus for the first five months of the current fiscal year is
already $8 billion.
The decline in Japanese export volume, which in August was
nearly 5 per cent below its average level in the last quarter of 1977,
reflects both the continued influence of past exchange-rate changes and
negotiated restrictions.

As a consequence, industrial production has

been flat since recording strong gains in the first quarter, while
unemployment continues to be a serious problem, remaining at the high,
for Japan, 2.3 per cent level it reach in May.
The German outlook for 1978 has improved marginally, largely
because of higher-than-expected growth of industrial production and GNP
in the second quarter.

A major source of GNP growth in the second quar-

ter was continued strong construction activity, while rising domestic
order figures and strong loan demand point to strengthening of other

IV - 21

domestic demand components.

Industrial production advanced strongly in

June and July after a slight decline in the first five months of 1978,
but then declined again in August; the German industrial production index
has recently been revised with unusual frequency.

In contrast, foreign

demand has not been a contributing factor to this improved picture:

the

foreign contribution to real GNP fell slightly in the second quarter and
was significantly lower for the first half of 1978 than the first half
of 1977.

The German current-account balance was zero in August, with July-

August running at a $1.5 billion quarterly rate, about unchanged from the
first quarter of 1978.
Canadian domestic activity appears to be quite strong so far in
the third quarter.

Industrial production rose by 1.2 per cent in July --

following a similar rise in June -- and now stands about 5-1/2 per cent
above a year earlier.

Gross fixed capital formation, which was quite

strong during the second quarter, may continue to grow in real terms
during the third quarter according to an investment survey by the Canadian Conference Board.

Reflecting these factors, real GNP is expected

to rise by 1 to 1-1/2 per cent during the third quarter of this year.
Consumer prices fell in September, after advancing at nearly a 10 per
cent annual rate in the second quarter.
In the United Kingdom, real GNP rose sharply in the second
quarter of 1978.

The year-over-year rate of price increase during the

current recovery has moderated as well.

Wages, however, increased about

15 per cent between July 1977 and July 1978, roughly twice the rate of
increase in consumer prices during the period.

Recent anti-inflation

measures undertaken by the U.K. government include a nonstatutory limit

IV - 22

of 5 per cent annually on wage increases granted after the beginning of
August.

While these limits lack the force of law, the government has

previously enforced them by withholding government assistance and orders.
The government has also extended the limit on the growth of bank liabilities.

The latter is intended to keep monetary growth within the overall

target range of 8-12 per cent for sterling-denominated M3 for the year
ending in April 1979;in August 1978, sterling M3 fell about 1 per cent.
The weakness of the recovery in Italy was confirmed by the July
industrial production index, which rose slightly but remains below the
first-quarter level.

Consistent with this evidence, the latest official

government forecast indicated that GDP for 1978 would be only 2 per cent
above last year's level.
French Economics Minister[Honory] announced last week that the
growth rate of M2 in France would be 11 per cent in 1979, compared with
a 12 per cent target rate this year.

Ceilings on the growth of bank

credit -- which are designed to achieve the money growth objective -- are
to be announced soon.
Norway enacted a fifteen month wage and price freeze effective
September 15, with the announced support of trade unions; this follows
the recent introduction of similar measures by Denmark.

The outlook for

economic activity in the Benelux countries remains bleak, but there is an
improving price outlook.

The Netherlands has raised discount rates in

response to recent weakness of the guilder against the DM in the snake.
The Swiss government announced a variety of new measures on October 2
aimed at halting Swiss franc appreciation while liberalizing capitalmarket controls (discussed above).

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, October 17, 1978 : Greenbook Part 2

FRASER