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Content last modified 6/05/2009.

CONFIDENTIAL (FR)

SUPPLEMENT

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the
Federal Open Market Committee

By the Staff
Board of Governors
of the Federal Reserve System

September 30, 1966

SUPPLEMENTAL NOTES

The Domestic Economy
The Michigan Survey Research Center, in their August report
on consumer attitudes and inclinations to buy, found a further large
deterioration in consumer "sentiment."

Owing mainly to awareness of

and concern over high and rising prices and interest rates, consumers
showed a pronounced increase in pessimism about the outlook for
general business conditions, and, although the proportion reporting
higher incomes remained large, there was some deterioration in con-

sumers' evaluation of their recent and prospective personal financial
progress.

Reflecting these developments, the Index of Consumer Senti-

ment was down considerably from May (the preceding reading) and sharply
below last November.

The decline in this index from late 1965 to August

was about as large as in the corresponding number of months preceding
the 1957-58 recession.
Consumers' growing pessimism has also been reflected in
deteriorations -- particularly over the past few months -- in their

evaluation of market conditions for houses, cars, and large household goods (i.e., fewer feel that it is a "good time to buy" and more
that it is a "bad time to buy").

Surprisingly, however, consumers'

12-month buying plans for new and used cars, large household durable
goods, and even houses remain at high levels -- i.e., at or above year
earlier levels.

The Survey attributes this apparent contradiction in

-2

part to a moderate increase in the proportion of consumers who
report that the prospect of higher prices is a reason for buying now;
and, in part as recognition of the fact that "when people feel that
they need new things, have the ability to buy them, and do not think
that a later time would present better opportunities," they will buy.
Nonfarm real estate foreclosures

rose less than seasonally

from the first to the second quarter of this year and the year-to
year increase (2 per cent) was the smallest since the second quarter
of 1956.

Reflecting this development, the foreclosure rate, which tends

to reach a seasonal peak in the second quarter, was slightly below the
rate reached in the like period of 1965 and the same as in the second
quarter of 1964.

NONFARM MORTGAGE FORECLOSURES

Second
quarter

1966
1965
1964
1963
1962
1961
1960

Number
Per cent
(In
increase
thousands
over year
at annual
earlier
rate)

123.2
120.3
113.5
102.5
86.7
74.4
49.7

2
6
11
18
16
50
7

Rate per
thousand
mortgaged
structures

5.1
5.2
5.1
4.7
4.2
3.8
2.6

-3

-

The book value of manufacturers' inventories increased over
$1.1 billion in August, following a rise of $1 billion in July.

The

increase in these two months was at an annual rate of $12.9 billion -considerably greater than in any quarter in the current expansion period
and forty per cent higher than in the second quarter when stocks rose
at an annual rate of $9.2 billion.

At the end of August manufacturers'

inventories were only $200 million short of the level manufacturers
had expected to be reached at the end of September (according to the
Commerce August anticipations survey).
Most of the large August accumulation was in the durable goods

sector where the machinery and equipment, defense, and auto industries
accounted for the bulk of the rise.

The relatively large increases

in inventories -- mainly materials and supplies and work-in-process --

in the machinery and transportation equipment industries resulted in
further increases in the ratios of inventories to shipments for these
groupings.

For all manufacturing industries combined, sales have shown

little change in recent months, and the stock-sales ratio, which averaged
1.61 from January 1965 to May 1966, rose to 1.68 in August.

New orders received by durable goods manufacturers in August,
according to the new preliminary figures, were higher than shown by the

advance estimates and down 4 per cent (instead of 5 per cent) from
July (which has also been revised up slightly).

As a result of the

higher level of new orders unfilled orders showed larger increases in
both July and August than had been indicated earlier; however, the August
rise remains well below increases in most other recent months.

Upward

revisions were mainly in machinery and equipment and defense products.

- 5 The Domestic Financial Situation

For the month to date, including all weekly reporting banks
for the three weeks ending September 21 and New York City banks for
the week of the 28th, business loans this year rose roughly the same
as last year, after adjusting for the special term loans to Consolidated
Coal.

At New York City banks in the week ending September 28, business

loans increased only $42 million, an amount which was essentially the
same as in the comparable week last year.

Total corporate tax payments

in the first three weeks of September, on the other hand, are now estimated at about $2.0 billion higher this year than last, rather than
$1.0 billion less as previously reported.

The level of corporate

withholding taxes for September apparently is running much higher than
previously estimated and borrowing for payment of the second instalment
of September's withholding taxes, formerly thought to be excluded from
weekly reporting bank data for the week ending September 21, probably
was largely reflected in data for that week.

Therefore, business

borrowing at banks relative to tax payments was less this year than
last, rather than greater, as previously stated in the Greenbook on
the top of page III - 2.
Yields on Treasury notes and bonds have declined sharply
in recent trading sessions and bill rates have declined further.

The

3-month bill is currently bid at 5.33 per cent, down from a peak of
5.59 per cent on September 21.

-6All new corporate bond issues were accorded an enthusiastic

response by investors, and yields on new and recently offered issues
continued to decline.

The

week's largest offering, Southern Bell

Telephone's $100 million debenture issue carrying an initial yield
to investors of 5.95 per cent, was quickly sold out and was
subsequently quoted in the secondary market at 5.84 per cent.
Common stock prices declined significantly on Wednesday

and Thursday in moderate trading.

Standard and Poor's index of

500 stocks dropped a total of 1.79 points or 2.3 per cent for these
two days.

At this lower level, however, stock prices were still

above the 1966 low registered on August 29 -- by approximately 2.4
per cent.

SUPPLEMENTARY PAGE
Table on time and savings deposits referred to
on page III - 4 of September 28, 1966 Greenbook.

Changes in Time and Savings Deposits
Weekly Reporting Banks
(in millions of dollars, not seasonally adjusted)

Januarv-August -/
1966
1965

Total time and savings
Savings deposits
Time deposits
CD's

Time deposits other than CD's
Consumer savings

1/

Mid-September 1965
1966

5,681
-3,443
9,124
1,547
7,577

8,822
3,081
5,741
3,594
2,147

-367
- 86
-281
-499
218

397
153
244
100
144

4,134

5,228

132

297

For all reporting banks January to August includes 35 weeks ending
August 31 in 1966 and 34 weeks ending August 25 in 1965; and midSeptember means the two weeks ending September 14 and 8.