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Content last modified 6/05/2009.

CONFIDENTIAL (FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

September 5, 1968

I-

1

SUMMARY AND OUTLOOK
Outlook for economic activity
The rise in over-all economic activity is expected to be
considerably less vigorous this quarter than in April-June, largely
as a result of a sharply lower rate of steel and other inventory accumulation.
summer.

Retail sales,however, have been quite strong thus far this
In the fourth quarter, increases in both final sales and in-

ventory building are likely to be smaller, with little rise in real
GNP.

Some deceleration in the rate of price advance also is anticipated

by the fourth quarter.
The anticipated slackening in economic activity reflects the
expected impact of fiscal restraint, as well as the lagged effects of
tight monetary conditions, and the post-steel settlement inventory
adjustments.

The effects of the recent change in fiscal stance has not

been apparent in most business indices as yet.

While available data

indicate strengthen consumer buying thus far, it is probable that by the
fourth quarter several months of slower growth in disposable income will
have dampened expansion in consumer demand.

The recent fiscal package

also will reduce the stimulus from rising Federal expenditures in the
second half of this year.

The deficit, NIA basis, was at rate of

about $9,5 billion in the first half of the year; in the second half,
the deficit should be reduced to about $6 billion by the increase in
tax collections and further tapering off of the rise in Federal outlays.

I-2
Changes in other major sectors will contribute little to
growth in the rest of this year:

residential construction is expected

to be maintained at about the rate of the last two quarters (as starts
dip and begin to rise again) and figures from the new Commerce-SEC survey indicate that investment in plant and equipment will recover in the
third quarter, but only to the first quarter level, and show little
further increase in the fourth.
Outlook for resource use and prices
Liquidation is now underway in steel inventories and this
is expected to continue into the fourth quarter.

Over coming month,,

expectations are that growth in private demands, production, incomes,and
employment will slacken further and the unemployment rate is likely
to rise gradually to about 4 per cent.

In addition, the rate of

capacity utilization in manufacturing is expected to be reduced further.
Although the expansionary effects of new wage agreements for the remainder
of the year will be more limited than earlier because of the smaller
number of workers involved, the pattern of 7 per cent or more in firstyear wage increases is likely to continue to exert strong upward pressure
on unit labor costs and to curtail profit prospects.
The wholesale industrial price average was unchanged in August
and the number of classes of products that were stable or showed declines
remained large for the third month in a row.

Selective advances in

domestic steel mill products will contribute directly to a slight increase
in September in the average level of wholesale commodity prices, and new

I - 3
auto prices are also expected to be higher this autumn.

On the other

hand, actual and prospective increases both here and abroad in the
supply of farm products and food are exerting downward pressure on
the wholesale price level.

These developments should also limit

further increases in the consumer price index, which rose rapidly in
June and July.
Demands for credit
The abatement of business credit demands appears to be having
relatively more of an effect so far on capital markets than on banks.
Business loan demands on banks may remain near their June-August pace
in September, but moderate substantially thereafter.
bolstering loan demands is the recent tax legislation.

One factor
Corporate

income tax payments are expected to be much larger in September than
in any earlier month of the year except June, and to exceed payments
of September 1967 by about $1.5 billion.

Apart from any such tax-

related borrowing, however, the expected slower pace of business activity
between now and year-end, including a reduced rate of inventory
accumulation, is expected to lead to smaller short-term credit demands
of business.
Expectations of declining long-term interest rates may have
also contributed to maintenance of business loan demands on banks,
while corporate bond offerings have been reduced.

Corporate bond

issues are expected to continue at around the recent moderate pace
over the next few months.

Not only will fund requirements probably drop

I-4
off, but, in view of their improved liquidity position and the availability
of bank credit, corporations are also in a relatively good position to
handle such needs without heavy reliance on bond markets.
In contrast to the corporate bond market, municipal offerings
are likely to continue near their recent record pace, bolstered in part
by sizable industrial revenue bond offerings.

Some issuers may decide

to postpone scheduled offerings, however, in view of the advanced level
of rates and the congested near-term calendar.
These demand conditions in prospect suggest that corporate
bond yields are likely to edge down over the months ahead.

The major

factor that could push such yields up would be development of
expectations that interest rates were near their bottom; this could
lead to some return of major industrial borrowers to the market.

In

contrast, technical conditions in the municipal market suggest the
possibilities of some interest rate increases over the short run,
although over the longer-run such yields may tend to decline, given
no dramatic shifts in the business outlook.

The potential weakness

in the municipal market reflects substantial accumulated inventory
of unsold securities combined with the continuing large volume of
new offerings.

This same potential exists in the Government market,

though probably to a lesser degree, for the volume of coupon issues
in dealer hands remains unusually large, and the cost of carry negative.

I-5

However, new Treasury cash borrowing is not expected until the last half
of October (and will probably take the form of tax bills), and new
coupon issues are not likely to come to market until announcement of the
mid-November refunding.
Supply of funds
While net savings inflows to thrift institutions may pick
up a bit in the period immediately ahead, it will likely remain below
year-earlier levels. With mortgage portfolio repayments continuing to
run modestly ahead of last year, total cash flows to savings and loan
associations and savings banks could be large enough to encourage some
further increases in new mortgage commitment

activity particularly if

thrift institutions remain interested in locking up the high prevailing
mortgage yields.
Inflows of consumer-type time and savings deposits at banks
are expected to continue at close to the recent moderate pace unless
there should be a significant further drop in market yields.

Negotiable

CD's, which have been the major contributor to the July-August upsurge
in commercial bank time deposits, are expected to show only a small
further rise in the coming weeks unless loan demand should be unexpectedly
strong.

Outstanding CD's at New York and Chicago banks have shown

little net change recently and the rate of growth at banks outside
these cities has tapered off.

While no substantial run-off is

anticipated over the tax period, banks undoubtedly would be able to
recoup any such attrition rapidly if it did develop.

I-6

Private demand deposits are expected to show relatively moderate
growth in the weeks ahead, continuing the recent slowdown.

In part, this

would reflect the further unwinding of some of the temporary influences
contributing to rapid monetary growth earlier--such as the surge in stock
market activity, heavy bank financing of securities dealer inventories,
and the decline in U.S. Government deposits--but moderation in the pace
of economic expansion generally would also be a factor.
Thus, in contrast to the July-August period, changes in supplies
of funds during the period just ahead would seem unlikely to contribute
to any tendency to move market yields down further from their recent
rather stable levels.
International developments
After three months of near balance on the liquidity basis
(measured before special transactions) a large deficit in the balance of
payments reoccurred in August; preliminary and partial weekly data indicate
a deficit for that month of over $700 million, well in excess of the average
for the month in recent years.

We have not been able to explain the improve-

ment in the May-July period on the basis of available data, nor are we now
able to explain the reversal in August.

Perhaps too much stress should

not be put on this latest reversal, though it certainly puts a damper on
optimism about the outcome for the year.
There was a modest improvement in the trade balance in July
on a seasonally adjusted basis.

A major improvement in the trade balance

in the remaining months of the year is still a reasonable hope.

I-

7

Imports should fall off as the anticipated tapering in the growth of
domestic demand occurs, and because of the disappearance of certain
special factors tending to produce abnormally high imports in the
first six months.

Exports in January-June were about 7.5 per cent above

the rate of the last half of 1967 and hopefully will continue to increase
at a healthy rate.
On the capital side it is difficult to see any overall improvement
on the first-half performance.

While direct investment outflows will

probably decline, this could be more than offset by a swing in bank
lending.

Outstanding U.S. bank credit to foreigners was reduced about

$800 million through July.

Some of this reduction was seasonal but a

fair-sized net outflow, seasonally adjusted, could occur during the last
five months, without violating the guidelines.

The change in net flows

from the first to the last half of the year could therefore be substantial.
On direct investments, we apparently had a very considerable
outflow in the first half of the year, and if the controls are effective,
the last half should show a smaller use of funds from the United States.
Recently released data on plant and equipment expenditures of foreign
affiliates of U.S. companies are somewhat reassuring; the continuation of
only small year-to-year increases is contemplated in 1968 and 1969, which
would be entirely consistent with a continuing reduction in the amount of
financing from U.S. sources.

I-8

So far this year the underlying balance of payments deficit
has not involved a financing problem.

In fact, there has been an

official settlements surplus as U.S. banks increased their liabilities
to foreign branches by over $3.0 billion.

It seems highly unlikely

that this flow will continue at this rate, if it continues at all.
Thus, the problem of financing the U.S. deficit may come to the fore
again.
To the foregoing uncertainties, which are probably apparent
to most sophisticated market observers, has been added the speculation
over possible revaluation of the mark.

Although such a revaluation

would strengthen weak currencies, anticipatory speculation inevitably
drains reserves from countries whose payments position is weakest.
It seems clearer than ever that continued close cooperation among
monetary authorities will be needed to finance reserve changes brought
about by speculative short-term capital flows in ways that will abate
rather than increase the speculative fever.

September 3, 1968

T - 1

I--

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Latest
Period
Civilian labor force (mil.)
Unemployment (mil.)
Unemployment (per cent)

Jul'68
II
it

Nonfarm employment, payroll (mil.)
Manufacturing
Other industrial
Nonindustrial

68.2
19.8
8.2
40.2

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

Wholesale prices (57-59=100)-

Latest
Period
79.0
2.9
3.7

Industrial commodities (FR)
Sensitive materials (FR)
Farm products, foods & feeds

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

Amount
Preced'g
Period
79.0
3.0
3.8
68.0
19.8
8.1
40.1

Year

Per Cent Change
Year
2 Yrs.

Ago

Ago*

77.5
3.0
3.9

Ago*

1.9
-2.3

4.3
1.7

65.9
19.3
8.1
38.5

165.3
164.3
166.5

164.7
164.3
165.7

156.6
157.1
156.1

5.6
4.6
6.7

5.2
5.8
4.8

109.1
108.0
106.3
109.4

108.7
107.9
105.9
108.0

106.5
105.2
100.0

107.3

2.4
2.7
6.3
2.0

2.5
3.3
0.0
-0.5

121.5
113.2
120.0
134.9

120.9
113.0
119.1
133.9

116.5
109.1
116.0
127.7

4.3
3.8
3.4
5.6

7.2
6.1
5.0
10.0

($)
($)

"

3.01

3.00

"

123.08

122.81

2.83
114.51

6.4
7.5

10.7
9.7

Personal income ($ bil.).-

"

689.2

683.7

629.8

9.4

17.3

Hourly earnings, mfg.
Weekly earnings, mfg.

Corporate profits before tax ($ bil.)-9

QII'68

91.1p

88.9

80.3

13.4

6.4

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

Jul' 68

29.1
9.1
7.2

28.2
8.8
6.9

26.4
8.1
6.3

9.9
12.9
13.6

14,6
11;0
18.3

Aug'68

1,539
40.9
24.7
4.0
98.11

1,349
40.9
24.6
4.0
100.30

1,369
40.5
23.7
3.6
94.49

12.4
1.0
4.3
10.9
3.8

42.6
-0.7
1.5
15.4
21.6

Jul'68
QII'68

84.9
851.6

84.6
831.2
692.7

80.6
780.2
669.2

5.3
9.2
4.9

16.8
15.0
7.5

it
II

GAF ($ bil.)
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)
Manufacturers'
Inventories, book val. ($ bil.)
Gross national product ($ bil.)Real GNP ($ bil., 1958 prices)2/
* Based on unrounded data.

I,
'i

I"
I!

I

702.3

1/ Not seasonally adjusted.

2/ Annual rates.

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)

Week ended
Aug.
31,E 1968
m

4-week
average
[I

5.90
5.19
5.17
-234
374

6.02

5.50
5.24
6.36
5.97
4.25

5.50

Last 6 months
High
Low
II
6.42
5.82
5.99
21
823

4.62
4.96
5.10
-551
374

5.23
6.29
6.01
4.03
7.42

6.15
5.68
6,83
6.29
4.42
7.52

5.46
5.18
6.14
5.97
3.80
6.78

98.31
3.10

102.34
3.38

88.42
2.94

5.10
5.16
-245
577

Capital Market (N.S.A.)
Market yields (per cent)

5-year U.S. Treas. bonds

1/

20-year U.S. Treas. bonds 1/
Corporate new bond issues, Aaa adj.
Corporate seasoned bonds, Aaa 1/

8/

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)

98.86

3.08

Change from
year earlier
Latest 3-month
month average

Latest
month

Amount

3-month
average

Sept. '681/
/
Sept. '68,

1,725
1,500

1,833
1,533

2
170

-362
490

+948

+746

+54

+481

New Security Issues (N.S.A., $ millions)
Corporate offerings 5/
State & local govt. public offerings
Comm. & fin. co. paper (net change in
outstandings) 6/

July '68

OutChange
Latest standings Latest
3-month
month
Latest
month
average
month
Banking (S.A.)
Total reserves 1/
Credit proxy 1/
Bank credit, total 6/ 9/
Business loans
Other loans
U.S. Govt. sec.
Other securities

($ billions)
August '68 p 26.40
"
285.7
July '68
364.6
""
91.2
"
146.5

"
"

62.6
64.2

II
Total liquid assets 1/ 6/
677.3
Demand dep. & currency 1/
August '68 p 190.0
Time & sav. dep., comm. banks 1/
193.7
"
Savings, other thrift instit. 6/ July '6 i8
190.2
it
Other 6 /
107.3
/

0.48
4.8
7.3
0.8
3.5
2.1
0.8

0.23
2.8
3.4
0.7
1.5
0.9
0.3
3.3
1.3
2.0
0.8
-0.3

Annual rate of
change from
Pre3
12
ceding months months
month
ago
ago
(per cent)
22.0
10.7
7.2
20.1
12.1
7.4
24.5
11.5
9.7
10.6
9.9
9.4
29.4
13.0
10.1
41.7
17.3
5.4
15.1
5.0
13.6
11.1
3.8
20.8
6.3
9.0

5.9
8.4
13.0
5.3
-3.7

N.S.A. -- not seasonally adjusted.
S.A. -- seasonally adjusted. p - Preliminary
Average for statement week ending
e. Estimated by F.R.B. 1/ Average of daily figures. 2/
3/ Latest figure is monthly average for July. 4/ End of week closing prices;
August 28.
yields are for Friday. 5/ Corporate security offerings include both bonds and stocks.
U.S. Savings bonds and U.S. Government securities maturing within 1
6/ Month-end data. 7/
year. 8/ Adjusted to Aaa basis. 9/ Data for total bank credit and components are based on
revised seasonal factors.

T-

I--

3

U.S. BALANCE OF PAYMENTS
(In millions of dollars)
1967
I

1968
III

II

I

IV

JuneP

II

JulyP

Seasonally adjusted
Goods and services,
Trade balance 2/
Exports
2/
Imports
2/
Services balance

net- / 1,293
975
7,661
-6,686
318

1,269
1,098
7,703
-6,605
171

1,359
1,085
7,626
-6,541
274

848
319
7,478
-7,159
529

7,924
-7,840
290

-263
-1,008

-269
-1,163

Remittances and pensions
-262
Govt. grants & capital 3 / -1,176

-392
-1,039

-358
-988

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

-1,104
-651
-199
-198
-56

-1,788
-902
-476
-435
25

-1,638
-815
-332
95
-586

1,202
724

766
18
-215
233
117
631

353
150
147
3
30
173

-975
-653

-259
79
-142

Foreign capital, nonliquid
Official foreign accts.
Long-term deposits
U.S. Govt. liab.
Int'l. institutions 4/
Other 5/
Errors and omissions

865
382
304
78
70
413
-250

584
140

97
381

374

84

8,323
-8,310 r

94
-112r
r
2,759 ' 2,778
-2,871 r -2,684

r

-716
-468
-406

3 6 0r
-202

1,311
336
117
219
-92
1,067

-34

-458

13 r

-81
204

49

-126

317

-231

97
1,553

993

-73

137
-22
-267
426

-285
213
-907
409

303
-5
294
14

144
763
-64

r

-200

Balances, with and without seasonal adjustment (- deficit)
Liquidity balance, S.A.
Seasonal component
Balance, N.S.A.
Official settlements
balance, S.A.
Seasonal component
Balance, N.S.A. 6/

-522
302
-220

-802
-410
-1,212

-1,742
-1,901

-251

-1,764
485
-1,279

-806
101
-705

247
-272
-25

-1,082
-314
-1,396

-530r
630
100

Reserve changes,
-1,027
Total monetary reserves
Gold stock
-51
Convertible currencies -1,007
31
IMF gold tranche
m

r

-505
267
-238

419
-15
424
10

N.S.A.
375
-92
462
5

-663

-159

4

12 r

-156 r
29 8 r
14 2 r
1,45 6 r

(decrease -)

181
-1,012
1,145

48

-904
-1,362
401
57

Equals "net exports" in the GNP.
Balance of payments basis which differs a little from Census basis.
Net of scheduled and non-scheduled repayments.
Long-term deposits and Agency securities.
Includes some foreign official transactions in securities.
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.

II

- 1

THE ECONOMIC PICTURE IN DETAIL

The Nonfinancial Scene

Gross national product.

Although hard facts on recent and

current economic activity are still scarce, staff estimates indicate
that expansion in the economy is now slowing, and will slow further
in the fourth quarter.

The deceleration reflects the combined impact

of reduced inventory investment, the tax surcharge and curtailed Federal
expenditures.

GNP in current dollars is expected to increase by $12

billion this quarter, and by about $9 billion in October-December.
These changes correspond to annual rates of growth in real GNP of 1.3 per
cent and 0.4 per cent, compared to about 6 per cent in the first half
of the year.

Prices in the private economy, as measured by the GNP

deflator, are expected to rise somewhat less rapidly as the growth in
economic activity eases.
The slowing this summer in total economic activity is not a
reflection of the surtax, which took effect on withholdings in mid-July.
Indeed, the rise in final demand this quarter is expected to be
exceptionally strong, exceeding that of any recent quarter except the
first.

Consumption expenditures will increase substantially even if

retail sales in August and September level off at the advanced July
rate.

In addition, increases in outlays for housing and for plant

and equipment are likely.

Diminished GNP growth for the quarter is

thus largely attributable to an anticipated large downward swing

II - 2

in inventory accumulation. Although business stocks as a whole are
projected to continue to grow, accumulation is likely to be reduced
by some $5 billion from the high rate of accumulation in April-June,
when acceleration in inventory building reflected in part a large rise
in steel stocks prior to the wage settlement.
In the fourth quarter, the income drain resulting from the
surtax is likely to weaken growth in consumer expenditures appreciably,
and, since little change is projected in either fixed investment or
Federal spending, the rise in fnnal sales will be considerably reduced
and inventory accumulation will be curtailed further.

The large

reduction in steel production following the contract settlement will
adversely affect incomes directly.

And secondary declines in production

and income may well begin before the end of the year.
Retail sales rose very strongly in July--up 3 per cent from
June, according to advance estimates--and have apparently continued
at close to the July rate in August.

Although unit sales of new

U.S.- made cars slackened in August from their extremely high July
rate, sales of new domestic autos in the quarter appear likely to
average 8.6 million compared to an annual rate of 8.44 million in
April-June.

At the same time, the rise in nondurable goods expenditures

appears to be one of the strongest since early 1966, compensating
in part for the weak performance in the second quarter.

These

increases have taken place despite the fact that personal income is
now advancing at a rate considerably below that of last quarter.
surtax began to reduce pay-checks in the second half of July, and

The

II - 3

the

increase in spendable income this quarter is expected to be one

of the smallest in recent years.

The saving rate in the third

quarter is expected to average 6.6 per cent--down 1 percentage
point from the very high second quarter rate.
The increase in personal income is likely to be further slowed
in the fourth quarter and the rise in disposable income should just
about match the small rise in the third quarter.

Earnings of production

workers in manufacturing are likely to be affected by cuts in hours
and employment as inventory adjustments continue and many earners
will be paying social security taxes in the fourth quarter of this
year for the first time because of the higher statutory level of earnings
subject to tax--a not inconsiderable bite out of spendable income; since
the tax rate is now 4-1/2 per cent of taxable earnings.

Some further

reduction in the saving rate is anticipated for the fourth quarter,
but on balance the slow growth of disposable income is likely to be
more fully reflected than in the third quarter in a smaller rise in
consumption expenditures.
A net reduction in inventories of steel and autos (which
together accounted for about half of the investment in nonfarm
inventories in the second quarter) is likely this quarter.

Steel

inventories are expected to decline modestly, since the liquidation
of steel stocks did not begin until August, and the high level of
auto sales should result in a larger than seasonal reduction of auto
stocks.

Inventories in other areas in general are expected to increase

in line with final sales, but the recent strength in retail sales may

II - 4

also reduce stocks at some retailers (such as apparel and general
merchandise).

In the fourth quarter, the run-down in steel inventories

will be much larger than in the third quarter, so that even if stocks
"back-up" in other lines as a result of weak sales, total accumulation
should drop further.
Housing starts, according to revised estimates, have been
rising somewhat faster in recent months than previously had been
estimated.

The revised second quarter starts rate, plus a sharp

spurt in July, indicates that expenditures for residential construction
in the current quarter will be somewhat above the previous period.
However, the July starts apparently reflected some non-recurrent
factors of strength, and a decline in starts in August and September
is still expected to reduce the quaeterly rate somewhat below that in
April-June.

Improving credit conditions should result in a rising

rate of starts before the end of the fourth quarter, but probably
too late to raise the fourth quarter average rate significantly above
the third quarter.

Expenditures for housing construction in the

fourth quarter should be maintained close to the level of the second

and third quarters.
The recently released official survey of intentions to
invest in new plant and equipment suggests a smaller rise in the second
half of the year, and particularly in the fourth quarter, than the May
survey had shown.

A much sharper dip in outlays apparently took place

in the second quarter than was indicated formerly (or is reflected in
the current official estimates of GNP) but the decline is expected to
be recovered in the third quarter.

Both third and fourth quarter

II - 5

fixed investment is now expected to increase little from the rate in
the first quarter of the year.

Outlays in both the manufacturing

and commercial sectors are expected by business to be appreciably
lower at the end of the year than previously reported.
No further rise after July (when the Federal pay-raise
operated to increase spending) is anticipated for

either defense

or nondefense purchases of goods and services except for CCC
commodity loans,which because of record crops are exceeding January
Budget estimates.

A leading indicator of defense expenditures--"gross

national defense obligations incurred outside the Federal budget"-leveled off several months ago, indicating that the peak may already
have been reached in defense procurement.

Total Federal expenditures

(NIA basis) in the third quarter are estimated at a rate of about $185.0
billion, which is close to the rate now estimated for the entire
fiscal year; a bulge in fourth quarter non-defense expenditures reflects
CCC outlays.
The Federal deficit is expected to decline from a rate of over
$10 billion in the second quarter to between $6 and $6.5 billion in the
second half of the year.

(The drop would be larger, except that declining

corporate profits are projected to offset some of the increase in receipts
that otherwise would result from the surtax.)

Owing to the retroactive

feature of the personal income surcharge and a rise in social security
taxes, a substantial further increase in tax receipts will occur
early next year.

II - 6
September 4, 1968

CONFIDENTIAL - FR

GROSS NATIONAL PRODUCT AND RELATED ITEMS
Expenditures and income
(Quarterly figures are seasonally adjusted.
figures are billions of dollars, with quarterly figures at annual rates)
1968

1967
1967

1968
Prol.

III

IV

I

II*

Projected
IV
III

Gross National Product
Final sales
Private

789.7
783.6
605.2

854.9
849.8
652.9

795.3
789.9
610.3

811.0
802.7
619.2

831.2
829.1
638.6

851.6
841.6
646.0

863.8
859.3
659.8

872.8
869.3
667.3

Personal consumption expenditures

492.2
72.6
215.8
203.8

532.7
80.4
231.8
220.5

495.5
73.1
216.4
205.9

502.2
74.2
218.4
209.6

519.4
79.0
226.5
213.9

527.6
80.9
228.2
218.4

538.5
81.4
234.4
222.7

545.1
80.2
237.9
227.0

114.7
26.0
83.3
5.3
4.8

121.8
28.5
85.0
8.3
7.1

119.7
29.1
88.6
2.1
1.6

127.4
29.5
87.9
10.0
9.7

122.1
123.2
29.9
29.6
88.8
89.0
4.5
3.5
4.5
3.0

Durable goods
Nondurable goods
Services
Gross Private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
Net Exports

114.3
24.6

123.1
29.5
83.6
88.6
6.1
5.0
5.6
4.7

4.8

2.2

5.4

3.4

1.5

0.9

2.6

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

178.4
90.6
72.4
18.2
87.8

196.9
100.3
79.2
21.1
96.6

179.6
91.3
72.9
18.4
88.4

183.5
93.5
74.6
19.0
90.0

190.5
97.1
76.8
20.3
93.4

195.6
100.0
79.0
21.0
95.6

199.5
101.8
80.5
21.3
97.7

202.0
102.3
80.5
21.8
99.7

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

673.1
117.3

701.2
121.9

675.6
117.7

681.8
118.9

692.7
120.0

702.3
121.2

704.6
122.6

705.3
123.7

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

628.8
423.4
546.3
40.2
7.4

683.2
461.7
587.8
40.7
6.9

633.7
426.3
550.0
40.5
7.4

645.2
436.4
559.6
43.4
7.8

662.7
448.3
574.4
40.8
7.1

678.1
457.6
586.3
44.4
7.6

691.8
467.3
592.2
39.2
6.6

700.0
413.6
598.2
38.5
6.4

81.6

88.6

80.8

85.4

88.9

91.lp

166.6
175.1
-8.6

171.5p
181.7
-10.2p

178.9
185.1
-6.2

180.0
186.5
-6.5

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

Total labor force (millions)

151.2
163.6
-12.4

174.3
182.1
-7.8

152.2
165.1
-12.9

156.4
168.6
-12.2

88.5

3.6

86.0

80.8
3.4
77.3
3.8

82.5
3.6
78.9
3.8

81.1
3.5
77.6
3.9

81.6
3.5
78.2
3.9

81.9
3.5
78.4
3.6

82.2
3.5
78.7
3.6

82.7
3.6
79.1
3.7

83.0
3.6
79.4
4.0

66.0
19.4

67.9
19.6

66.1
19.3

66.7
19.5

67.4
19.6

67.8
19.7

68.1
19.7

68.2
19.5

Industrial production (1957-59=100)
158.0
Capacity utilization, manufacturing
(per cent)
85.3

162.9

157.2

Armed forces

Civilian labor force

"

Unemployment rate (per cent)
Nonfarm payroll employment (millions)
Manufacturing

159.5

162.1

163.8

163.2

162.5

83.5

84.3

84.7

84.9

84.5

83.0

81.5

1.29

1.44

1.41

1.45

1.50

1.44

1.40

1.40

7.57

8.37

7.57

7.44

8.19

8.44

8.60

8.25

Housing starts, total private

(millions A.R.)
Sales new U.S.-made autos (millions,
A.R,)
*

Second quarter data subject to revision to lower plant and equipment expenditure levels from

new Commerce-SEC survey.
first quarter estimates.

Third quarter projections for business fixed investment tied to

II

-

7

CONFIDENTIAL - FR

September 4, 1968
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1967
1967

1968
Proj.

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

III

1968
IV

I

II

In billions of dollars--------------

Gross National Product
Final sales
Private

42.1
50.8
28.6

65.2
66.2
47.7

15.1
11.9
9.6

15.7
12.8
8.9

20.2
26.4
19.4

20.4
12.5
7.4

GNP in constant (1958) dollars
Final sales
Private

16.0
24.0
9.8

28.1
29.3
21.1

6.4
3.5
3.1

6.2
3.4
2.8

10.9
16.9
12.4

9.6
2.2
-0.5

-------------------Gross National Product
Final sales
Private

5.6
6.9
5.0

Personal consumption expenditures
Durable goods
Nondurable goods
Services

8.3
8.4
7.9

Projected
IV
III

12.2
17.7
13.8
2.3
7.5
7.0

9.0
10.0
7.5
0:7
1.7
1.0

In Per Cent Per Year-------------7.7
6.1
6.4

8.2
10.7
7.4
8.2

4.2
-1.6
2.0
8.5

7.9
6.5
5.8

10.0
13.2
12.5

9.8
6.0
4.6

13.7
25.9
14.8
8.2

5.7
8.4
8.5

4.2
4.7
4.5

8.3 4.9
2.5 -5.9
10.9
60
7.9 7.7

Gross private domestic investment
Residential construction
Business fixed investment

-5.4
-0.8
2.8

7.7
19.9
6.0

26.4
58.1
2.9

24.8
38.5
8.2

-6.9
8.4
16.9

25.7
5.5
-3.2

-13.2
5.4
4.1

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

14.2
17.1
19.5
8.3
11.4

10.4
10.7
9.4
15.9
10.0

5.2
5.8
4.4
11.2
5.5

8.7
9.6
9.3
13.0
7.2

15.3
15.4
11.8
27.4
15.1

10.7
11.9
11.5
13.8
9.4

8.0
7.2
7.6
5.7
8.8

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

2.4
3.7
1.9
3.1

4.2
4.4
4.0
3.9

3.8
2.1
2.4
3.8

3.7
2.0
2.1
4.1

6.4
10.0
9.3
3.7

5.5
1.3
-0.4
4.0

1.3
4.3
5.1
4.6*

Personal income
Wages and salaries
Disposable income

7.2
7.3
6.8

8.7
9.0
7.6

7.8
8.3
6.3

7.3
9.5
7.0

10.8
10.9
10.6

9.3
8.3
8.3

8.1
8.5
4.0

-4.7

8.6

2.5

22.8

16.4

9.9p -11.4 -11.3

5.7
14.9

15.3
11.3

10.8
8.9

11.0
8.5

26.1
15.4

3.1
1.0

2.9
1.0

2.4
-2.1

3.6
4.1

4.2
2.0

1.1
10.3
-9.7

3.1
11.6
10.6

3.3
66.1
-26.6

5.9
11.3
-6.9

Corporate profits before tax

-3.6
-4.0
0.9

4.7
5.4
4.1

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

Receipts
Expenditures
Nonfarm payroll employment
Manufacturing
Industrial production
Housing starts, total private

Sales new U.S.-made autos
*

6.5
13.8
40.3

11.8p
15.1
2.4
2.0
4.2
-16.0
12.2

17.3
7.5

2.5
3.0

1.8
0.0

0.6
-4.1

-1.5 -1.7
-11.1
0.0
7.6 -16.3

Excluding the pay increase of Federal government military and civilian employees, the annual
rate of increase is 4.0 per cent.

II - 8

In August, industrial production is

Industrial production.

tentatively estimated to have declined about 2 points from the preliminary July level of 165.3, reflecting a 25 per cent cutback in steel
output following the labor contract settlement.

The August drop in

steel was especially severe compared to contract settlements in 1963 and
1965, as shown in the table.

In 1963 and 1965, the decline in steel

production was spread over a four month period, and amounted to 1.7
points and 2.3 points, respectively, in the total index.

The largest

monthly decline in those periods was in September 1965 and amounted to
1 point in the total index.

In both 1963 and 1965,

excluding steel was rising (see

table).

industrial production

In August 1968,

however,

there

is little indication (on the basis of incomplete data) of any marked
upward movement in other segments of the index.
CHANGES IN INDUSTRIAL PRODUCTION
FOLLOWING STEEL CONTRACT SETTLEMENTS
(1957-59-100,

seasonally adjusted)
1963

Total index
Steel
All Other

May

June

124.4
129.3
124.0

125.6
126.1
125.4

Aug.

Sept.

125.4
102.6
126.7

125.6
100.0
127.2

July
125.6
117.1
126.1

Per Cent Change
May to September
1.0
-22.7
2.6

1965
Jly
Total index
Steel
All Other

144,3
152,2
142,8

Aug.

Sept.

Oct.

Nov.

144,9
143.3
145,0

144.1
125.0
145.2

145.5
115.8
147.2

146.7
110.5
148.8

Per cent Change
July to November
1.7
-27.4
4.2

II - 9

With steel consuming industries working off inventories built
up prior to the contract settlement, steel production in September will
probably continue close to the reduced rate reached in the last week
of August and for the month as a whole will be down about 7 per cent

from August.
Recovery in industrial production from the June 1967 low

was not limited to the steel industry, as shown in the table.
increases were widespread among other industries.

Output

The .6 point

estimated increase in the total index from June to July 1968 was the
result of a further rise in output of materials including steel.

In

August auto assemblies, after allowance for the model changeover period,
were about unchanged from the July rate.

Output of other consumer

goods and business equipment probably changed little, and, as mentioned
earlier, there are no indications of any marked change either up or
down to offset or accentuate the indicated decline in iron and steel
output.
INDUSTRIAL PRODUCTION
POINTS IN THE TOTAL INDEX

Total index*

Consumer goods

July 1968

Change
Index points

Per cent

155.6

165.3

9.7

6.2

47.5

50.3

5.9
18.8
8.3
5.6
3.2

Automotive products

4.8

5.7

Home goods

7.2

7.8

7.2
28.2

7.6
29.1

2.8
.9
.6
.4
.9

Business equipment
Defense equipment

21.2
5.7

21.4
6.2

.3
.5

Durable materials
Steel

39.8
6.6

42.9
8.3

3.1
1.7

Nondurable materials

41.7

44.7

3.0

Apparel
Staples

*

1967 Low
June

Does not add to total because of rounding.

1.4
8.8
7.8
25.8
7.2

II - 10

Capacity utilization.

The August rate of manufacturing

capacity utilization is now estimated to be about 83 per cent, down
sharply from the 84.5 per cent recorded in July.

The decline is the

result of reduced steel production.
Most manufacturing industries appear to have considerable
unused capacity.

Aircraft, motor vehicle, petroleum and rubber

industries are exceptions.

UTILIZATION RATES
(per cent)

QIII

QIV

Q I

Q II

1968
June

July

Aug. (e)

84.3

84.7

84.9

84.5

84.6

84.5

83.0

83.0

85.3

85.5

86.1

86.1

86.2

--

85.2

84.3

84.4

83.4

83.6

83.3

--

Indust1967

Manufacturing
Primary processing
industries
Advanced processing
industries
e

--

estimated.

Retail sales.

August weekly retail figures suggest that sales

last month continued at about the high July level.

July had surged

3,0 per cent above June, for the largest month-to-month gain since mid1966.

In August there apparently was no net gain, but this in itself

suggests strength since large month-to-month increases in this series
are often followed by some decline in the next month.

II

- 11

The July gain had been greater for durables (4.8 per cent)
than for nondurables (2.1 per cent), but within the nondurables group,
general merchandise stores showed unusual strength (5.4 per cent).

Weekly

figures suggest that in August there continued to be greater strength in
durables than in nondurables, which may have declined slightly.
Stronger sales in the automotive group, despite the decline in unit
auto sales, appear to have offset lower sales in other durable goods
categories.

(In July the automotive group had also moved ahead more

strongly than other durable goods categories.)

Among nondurable goods,

the food group in August may have been about even with July while general
merchandise may have declined somewhat.

SEASONALLY ADJUSTED RETAIL SALES
Month-to-Month Percentage Changes
July

April

May

June

-1.8

1.4

0.8

3.0

Durable
Automotive
Furniture & appliances

-2.4
-3.9
-1,5

2.3
5.2
0.4

1.2
2.6
0.1

4.8
5.6
3.5

Nondurable
Food group
General merchandise

-1.5
0.3
-2.7

0.9
1.3
0.0

0.6
-0.1
3.3

2.1
0.6
5.4

All retail

II

- 12

Unit sales and stocks of autos,

Dealer sales of new domestic

autos in August were at a seasonally adjusted annual rate of 8.6 million
units compared with 9.1 million in July and 7.0 million a year earlier.
The August level of sales was about the same as the average for the
first seven months of 1968.

Stocks of new cars declined about seasonally

from the advanced end of July level, but were about one-third above
a year earlier.

However, the supply of new cars is estimated to have

been equal to about 48 days of sales, not much above the 45 days a year
earlier.

The larger dealer inventories, price cuts available at

model change-over time, and anticipated price increases for the 1969
model have been sustaining forces in the auto market.
Consumer credit.
tinued to increase in July.

The use of consumer instalment credit conExtensions, that is credit granted during

the month, reached an all time high of nearly $7.7 billion--a seasonally
adjusted annual rate of $92 billion.

This July spurt reflected

increased borrowing for all major purposes:

autos, other consumer

durables, personal loans, and home repair and modernization.
Although repayments on consumer instalment debt also moved
up to a new record level during July, the even stronger growth in
extensions produced a net increase of $9.3 billion in outstandings
(seasonally adjusted annual rate), the highest rate of increase for
instalment credit outstanding in any month since November 1965.
The present increase, however, is still well below the record rise

of $8.9 billion (annual rate) in April 1965, a figure that was even
larger relative to consumer expenditures than in the current period.

II

- 13

Consumer buying expectations.

The Census Consumer Buying

Expectations Survey, taken in early July after the passage of the surtax but before the increased withholdings took effect, suggests a
continuation of the present high level of demand for durables and houses
despite some deterioration in respondents' evaluation of their income
situation.
The survey suggests that sales of all new automobiles
(foreign and domestic) will be at an annual rate of 9.2 million units
in the final quarter of this year and the first quarter of 1969.

The

fourth quarter forecast is below the current unusually high rate of
sales but consistent with our projection of sales of 8.25 million U.S.made automobiles in the final quarter of the year.

Plans to buy used

cars declined from April but are still slightly above a year ago.
The index of expected expenditures for houses, at 117.9, is
up strongly both from April, 114.7, and a year ago, 106.6.

Much of

the increase reflects the expectation of paying more for a house.

In

addition, the probability of a household planning to purchase a house
in the next 6 months was 5 per cent above the figure a year earlier.
On the other hand, the index of expected expenditures for household
durables showed no significant change from April, and was about 1 per
cent above a year ago.

This index has shown very little change in any

of the 7 surveys for which it is available.
The index of family income expectations for the next year
declined for the second survey in a row, as optimism decreased among
families with incomes under $5,000.

These families represent over one

II

third of the sample.

- 14

Families considered their change in income from a

year ago less favorable than a similar year-over-year comparison in
the second quarter, but their income evaluation was still well avove
the same comparison for the third quarter of 1967.
This new Census survey has yet to establish its usefulness
as a leading indicator.

Since the series was changed in January 1967,

the widely followed component index for expected purchases of new cars-which had been the best component of the 1959-1966 survey--has incorrectly
indicated the direction of movement in the quarter following the
survey about half of the time.

Apparently, the new procedure of asking

respondents to assign a weight from 0 to 100 to their expenditures
plans is not adding to the reliability of the series.

INDEXES OF CONSUMER PLANS TO PURCHASE
(Av<
erage of January 1967 and April 1967 = 100.0)
Household
Duralles
Dualle

New
Cars

Used
Cars.

101.0

98.7

98.1

100.8

April

99.0

101.3

101.9

99.2

July

104.7

101.0

106.6

100.9

Oct

102.2

101.6

102.5

99.4

January

103.9

103.4

105.7

100.1

April

104.3

103.9

114.7

101.6

July

106.4

102.0

117.9

101.7

Date of survey

Houses

1967

January

1968

II

- 15

Durable goods orders and shipments.

Manufacturers new orders

for durable good in July showed an increase of 0.5 per cent from the
June level.

But this rise resulted entirely from a sharp increase in
On

aircraft orders and durable orders excluding aircraft declined.

the other hand, durable goods shipments increased by 3.1 per cent in
July--to a record level.
Although there were offsets within each group, new orders
declined for primary metals (iron and steel was down 13 per cent) and
fabricated metals.

A 25

per cent rise in aircraft orders resulted

in an increase in the transportation and in the defense products groupings
(which includes aircraft).

Orders declined for consumer durables and

for the machinery and equipment groupings, although orders for
machinery and equipment remained above the level prevailing in early
1968.
Unfilled orders declined for the second straight month.
Declines were widespread but the sharpest drop occurred at iron
and steel manufacturers.
Manufacturers' inventories.

In July the book value of

inventories at manufacturers increased $295 million from a June level
which had been revised up to show an increase of $113 million.

The

July increase was less than two-thirds of the average monthly increase
in the second quarter.
Although stocks rose at both durable and nondurable
manufacturers, the bulk of the increase occurred in the latter group.
Food and chemical manufacturers showed the largest increases in the
nondurable group.

Among the durable goods, holdings in electrical machinery,

II

- 16

consumer durable goods and defense products increased.

Inventories

held by steel and machinery and equipment producers declined.
Both durable and nondurable goods shipments increased
substantially in July.

Consequently, the over-all inventory

shipments ratio fell to 1.66, the lowest level since mid-1966.
Manufacturers' capital appropriations.

The latest National

Industrial Conference Board's survey indicates that in the second
quarter manufacturers' net new appropriations increased 2 per cent from
the first quarter level.

However, the second quarter level of these

appropriations remained below the average for 1967.
Since capital expenditures by manufacturers remained
at the first quarter's level--the lowest since the first quarter of 1966-the backlog of unspent appropriations increased.

At current levels,

the backlog is the highest since the fourth quarter of 1966.
The increase in total appropriations resulted from offsetting
movements at durable and nondurable manufacturers.

Durable manufacturers

increased their appropriations by 5 per cent while nondurable
manufacturers appropriations showed a slight decline.

Both groups,

however, increased their backlogs of unspent appropriations.
Anticipated expenditures for plant and equipment.

The August

Commerce-SEC Survey indicates that firms have revised downward significantly their anticipated expenditures on plant and equipment from
the levels indicated in the May survey,

(These data are confidential

until released, either September 6 or early the following week.)

The

II

- 17

latest survey, the first since the enactment of the surtax, now
reports the prospective increase in plant and equipment expenditures
for the year 1968 at only 4.4 per cent; the May survey had indicated
an increase of 6.7 per cent.

ANTICIPATED EXPENDITURES FOR NEW PLANT
AND EQUIPMENT
(Annual Rate, $ billion)
Date of
Survey

quarter

Year
196

i
All Firms

III

IV

66,0
64.9

67.5
65.2

May
August

65,8
64.4

64.9
64.9

May

27.6

26.4

27.6

28.3

28.0

August

26.5

26.4

25.8

26.8

27.2

64.6
62,8
Manufacturing firms

The final estimate for the second quarter now indicates that
actual outlays declined by $2.1 billion from the first quarter whereas
the May survey had suggested a decline of only $0.3 billion.

Declines

by manufacturing firms accounted for almost all of this shortfall.
Manufacturers had expected to increase their outlays in the second
quarter, but these actually declined by more than $0.5 billion.
Both manufacturers and all firms, taken together, now
anticipate that this shortfall will be recouped in the third quarter.
However, for the total, indicated expenditures in the second half of
the year will be only slightly above the first quarter; the fourth
quarter increase is anticipated to be only $250 million.

II

- 18

Revision of plans to purchase new plant and equipment have
not been substantial in the other sectors, except for the "comercial
Utilities still expect lower outlays in the second

and other" group.

half while anticipated expenditures by railroads have been revised
upward.

However, anticipated outlays by the "commercial and other"

group--a series which is subject to considerable revision--have been
revised down almost $1 billion for the fourth quarter.
Construction and real estate.

Seasonally adjusted new

construction put in place--revised upward somewhat for both June and
July--edged higher in August, but remained slightly below the peak
reached last February.

Private nonresidential construction expenditures,

in a downtrend since February, apparently changed little in August.
However, residential construction moved temporarily higher, reflecting
in part a much greater than expected reversal in the rate of housing
starts in July.

Also, public construction outlays rose further to a

new record in August.

NEW CONSTRUCTION PUT IN PLACE
(Confidential FRB)
August 1968
($ billions)./

Per Cent Change
from

July 1968

August 1967

83.2

+ 1

+

8

54.2

+ 1

+

5

Reeidential

27.6

+ 1

+ 10

Nonresidential

26.6

-

--

29.0

+ 2

+ 15

Total
Private

Public

1/ Seasonally adjusted annual rates; preliminary. Data for the
most recent month (August) are available under a confidential
arrangement with the Census Bureau. Under no circumstances
should public reference be made to them.

II - 19

Private housing starts, which had declined further in June,
soared above the 1.5 million annual rate in July, reflecting mainly an
advance of four-fifths in the Northeast states from a reduced rate in
June.

Particular strength was reported in the New York City area, where

excavation was begun for a few exceptionally large apartment projects,
some with building permits issued nearly a year ago,
A major factor in the surge in

the Northeast states probably

was the long-anticipated one-time increase in usury ceilings, effective
July 1, in New York and New Jersey where builders were apparently held
back pending clearance by lenders of loans under the higher permissible
rates now in effect.

Another factor was an unusual increase in the

number of working days from 20 in June to 22 in July this year--just
the opposite of the usual pattern-for which no direct adjustment is
incorporated by the Census Bureau in the starts series.
While single-family units also participated in the July starts
advance, the particularly volatile multifamily starts series about
matched the record 1963 level and accounted for 42 per cent of total
starts.
Seasonally adjusted residential building permits, which
include an allowance for working days, declined 4 per cent in July.
Multifamily permits slipped by 8 per cent from a relatively high rate.
Single-family permits, after a three month decline, edged slightly
higher.

Unlike starts, among the individual regions only the West

posted an advance over the June rate of permits,

II - 20

PRIVATE HOUSING STARTS AND PERMITS
_
July 1968
(thousands
of units)l/

Starts

Per cent change from
June 1968

July 1967

1,539

+ 14

+ 12

1-family
2-or-more family

898
641

+ 14
+ 14

+ 4
+ 26

Northeast
North Central
South
West

348
356
595
240

+ 79
+ 12
+ 9
- 17

+ 14
+ 6
+ 21
+ 2

-4

+

9
1

Permits

1,236

1-family
2-or-more family

1/

648
588

+

1

-

-

8

+ 24

Seasonally adjusted annual rates; preliminary.
During June, the latest month for which data are available,

sales of new homes by speculative builders increased 5 per cent
(seasonally adjusted annual rate).

But in the second quarter as a

whole, sales were down somewhat further from the first quarter owing
to the still relatively limited supply of new houses available for sale
under the conditions of gradually increasing restraint which had
prevailed in the residential mortgage market for more than a year.
Indications since the mid-June passage of the fiscal package
of possible easing in underlying mortgage market conditions have buoyed
hopes of a sustained recovery in housing activity before the year end.
These hopes have been strengthened recently by the brighter inflow
expectations of some intermediaries, some reduction in liquidity requirements by the Federal Home Loan Bank Board, and other developments.

In

II - 21
the current quarter, however, given the low inflow of savings earlier
this year, a declining rate of housing starts would appear to be indicated

for August and especially September from the high July rate.

Consequently, although demand pressures are strong, the third quarter
average may run at a seasonally adjusted annual rate of 1.4 million-higher than originally projected, but still somewhat below the
upward-revised second quarter.
The labor market.
continued firm in August.

The employment situation appears to have

The level and rate of insured unemployment

continued below year-earlier levels thouugh mid-August.

But youngsters--

generally not protected by unemployment insurance and, therefore, not
reflected in these figures--have carried the burden of easing demand
this summer.

Some 1.8 million 16 to 21 year-olds were jobless this

June and July, about 150,000 more than year earlier.

It is probable

that many of these youngsters withdrew from the labor force in August.

No August employment data are available yet, but easing
of growth in July is even more clearly evident in the revised July
figures.

As revised, the preliminary employment increase of 63,000

in manufacturing in July is virtually eliminated, reflecting sizable
downward adjustments in electrical equipment, apparel, fabricated
metals, and food, along with smaller reductions in 10 other manufacturing
industries.
llth.)

(These data are confidential until released September

The only large employment increase remaining in manufacturing--

43,000 in transportation equipment--was mainly due to a later than

II - 22
usual model changeover in the auto industry.

Exclusive of transportation

equipment, manufacturing employment declined by nearly 40,000 in
July.
With demand still strong in August, employment is likely
to show a further gain; however, later in the year easier demand
for labor should weaken the employment picture.

Increased tax

withholdings and rising prices are likely to dampen consumption,
particularly affecting industries such as television, recreation
goods, clothing, and, autos.

At the same time, the heavy-goods industries

are entering a phase of comparatively slow growth.

With capacity

utilization rates likely to dip, and construction activity likely to
remain fairly stable, demand for producers durables may rise only

modestly in the last half.

In addition, the defense industries

are faced with a slow-down in purchases and the steel adjustment
will likely last through year end.

All these factors point to widespread

but modest reductions in manufacturing employment.
In construction, unless there is an unexpected and substantial

pickup in building activity, employment, after falling by 200,000
between February and July, is likely to stabilize at about 3.2 million
for the remainder of the year.

Service and trade employment is

likely to continue up, but at a slightly slower pace.

Federal

government employment is expected to decline this fall and winter,
while State and local government employment is likely to expand at
a reduced pace.

II - 23
With employment growth easing labor force increases are
likely to fall somewhat below projected long-term "normal" growth
of about 1.5 million a year.

But the labor force is likely to rise

by more than employment, and the total unemployment rate will move
irregularly higher over the fall and winter months, and may average
about 4.0 per cent for the fourth quarter,

Wage changes.

Collective bargaining settlements in the

first half of this year provided substantially higher first-year
wage increases--7.5 per cent--than in contracts negotiated in 1967
or 1966.

But wage rate increases provided for later years of the

contract were substantially lower--about 4 per cent--so that the annual
rate of increase when averaged over the life of the contract was little
changed from the average for 1967.

The spread of "front-loading" to

settlements in nonmanufacturing industries this year has been an
important factor in the upward pressure on wage rates.

As these

contracts mature, the smaller wage rate increases of second subsequent
years will tend to moderate labor coat pressures somewhat.

II - 24

WAGE CHANGES IN COLLECTIVE BARGAINING SITUATIONS
--

1966

First-year increases:

--

Median percentage change
1st half
1967
1968

4.8

5.7

7.5

4.2

6.4

7.7

5.0

5.0

7.5

during life of contract: 3.9

5.0

5.2

Manufacturing
Nonmanufacturing

5.1
5.0

5,2
5.3

Manufacturing
Nonmanufacturing
Annual rate of increase

3.8
3.9

II - 25

Wholesale prices.

Average prices of industrial commodities

are estimated by the BLS to be unchanged in August, while prices of
agricultural commodities have declined following a one month rise in
July.

The preliminary total wholesale price index declined 0.4 per

cent to its June level of 108.7 per cent of the 1957-59 average.
It was expected that the general price increases first
announced by the steel industry in early August would exert upward
pressures on August figures, but the effective dates were later than
the BLS pricing date of August 13th.

Subsequently, additional selective

price increases were announced and the average rise for all steel mill
products is

estimated to be about 2-1/2 per cent.

This will be

reflected in the September WPI and is likely to amount to an increase
of about 0.1 per cent in the total index.
Most of the 0.4 per cent increase in the WPI for July was
attributable to a temporary upturn in farm and food products, while
grain prices continued to decline in July and August.

Wheat prices

have dropped 10 per cent since June and are 20 per cent below last
season.

Prices of other grains and soybeans have also declined in line

with a worldwide easing in supplies of major farm commodities.

Reduced

domestic supplies of cotton, fruits, and vegetables last season had led
to higher prices during the first half of this year, but larger crops
of these products are being realized this season.
Prices of industrial commodities in July increased by only
0.1 per cent as higher prices for lumber, textiles, leather, and rubber
products were nearly offset by declines in fuels, chemicals, and metals--

II - 26

especially nonferrous metals.

The largest price rise was in lumber

and wood products partly reflecting increased demands by lumber dealers
to rebuild inventories and a higher rate of housing construction.
Excess capacity for liquified petroleum gas and an improvement in
copper supplies resulted in lower prices.

Among final products there

was a slight decline in wholesale prices of new cars resulting from
intensified dealer incentive programs.

On the other hand, prices of

furniture, appliances, and automobile tires registered increases.
The further easing in upward pressure on industrial commodity
prices shown in the BLS preliminary data for July has been confirmed by
the release of the revised data shown below.

The reduction in the

number of price increases since the past winter and spring, as well as
the large jump in the number of decreases in July, is impressive.

MONTHLY CHANGES IN WHOLESALE PRICES OF
225 INDUSTRIAL PRODUCT CLASSES

January

February

March

April

May

June

July

Increases

127

131

110

115

90

90

87r

Decreases

36

25

30

38

42

38

55r

Unchanged

62

69

85

72

93

97

83r

Consumer prices.

The consumer price index rose 0.5 per cent

in July for the second consecutive month--the sharpest two-month increase
since June-July 1957.

More than one-half of the July increase was due

to the increase of 0.7 per cent in consumer services, primarily mortgage
interest and medical care charges.

II

- 27

Mortgage interest charges increased by 4-1/2 per cent (they
increased nearly 4 per cent in June) and were 13-1/2 per cent above a
year earlier.

Property taxes and insurance rose 0.8 per cent, and

domestic services were up 0.5 per cent.
1.3 per cent in July.

Over-all homeowner costs rose

Medical care services increased 0.7 per cent as

their steep climb was resumed following a moderate rise in June.

Higher

physician and dentist fees were mainly responsible for the increase, but
hospital service charges also rose substantially.
Grocery-store prices advanced 0.8 per cent, a smaller increase
than expected seasonally, and restaurant meals and between-meal snacks
increased 0.6 per cent further.

The rise in food prices at wholesale

in July was followed by a decline in August which may limit the increase
in retail food prices in August.

Apparel prices declined less than

expected seasonally in July, and footwear rose contraseasonally owing
to increased demands and higher costs.

Over-all, prices of commodities

other than foods advanced 0.2 per cent instead of registering the
alight decline that is usual for July.
Agricultural conditions.

Based on August 1 conditions, crop

production this year will top the record output of 1967 by 3 per cent
and exceed the 1957-59 average by 21 per cent.

Prior to the August 1

crop report, it had been assumed that crop output would about equal
1967.

II - 28

CROP PRODUCTION
1957-59 = 100

All crops

1965

1966

1967

1/
1968-

115

111

117

121

Feed grains

111

110

124

123

Hay and forage

112

110

115

110

Food grains

117

118

134

145

Vegetables

108

109

112

115

Sugar crops
Cotton

138
121

137
78

136
62

161
89

Tobacco
Oil crops

107
153

109
164

116
171

105
185

Cropland used

94

93

96

95

122

119

122

127

Crop production
per acre
1/

Based on August 1 conditions.

The new crop report has resulted in raising estimated CCC
net expenditures for price supports this year $700 million above the
January Document estimate of $2,859 million.

The increase will go

largely for price support loans on 1968 crops of feed grains, wheat,
and soybeans.

Abroad, as well as at home, surplus production of farm
commodities is in prospect in contrast to the critical shortages of two
years ago.

Even in India transportation and storage of the huge crops

are a problem.

Pressure on prices and on the price stabilization pro-

grams of the free world are great.

The U.S. net expenditure for

stabilization of farm prices, now estimated at $3.5 billion for 1968-69
compares with an estimated net expenditure in the EEC countries of $2.7
billion in 1968-69.

9/3/68

I[-C-I

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY

GROSS NATI ONAL PRODUCT
BILLIONS OF

DOLLARS

ADJUSTED

AND UNEMPLOYMENT

EMPLOYMENT
F

I

ANNUAL RATES
RATIO SCALE

I

50
9 00
9

I

ESTAB BASIS
MILLIONS OF PERSONS
NONAGRICULTURAL EMPLOYMENT-RATIO SCALE

-8 50

68

64

TOTAL
JULY 68 2

0Q 8516

7

;

---

00

56
-INDUSTRIAL

-

AND RELATED

JULY 280

*-7

-

--

650

27

25

k

"l'^"

-

.-

60

50

--------------I

--

8 00

DOLLARS

CURRENT

uuul

1958 DOLLARS-

I

i

-

550

P ER

UNEMPLOYMENT

CENT

QI 702 3
I I I
I I

1964

1962

1966

1 I
I II

i

500

1968

,,
1962

1964

WORKWEEK
HOURS
|
RATIO SCALE

1968

1966

T

AND LABOR COST IN AA FG
l42

AVERAGE

WEEKLY

PRODUCTION
JULY 409
|

HOURS .....

..

40

WORKERS

I
115

1957 59-100
RATIO SCALE

TOTAL UNIT

LABOR COST
110

05
ALL EMPLOYEES
JULY 1107

00

T
^ \vmoo--

7
95

1962

INDUSTRIAL PRODUCTION-II
1957 59=100

nn

RATIO SCALE

+

I

EQUIP MENT

-

_74r

TOTAL /

JULY 1831

-i

180

I/

160

140
CONSUMER

GOODS

JULY 1556
1
MEIIT
-TI

1962

1964

120
1966

1968

1964

1966

1968

II-C-2
ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY

INCOME AND SALES

9/3/68

ADJUSTED

BUSINESS INVESTMENT

12

GNP FIXED INVESTMENT
AS SHARE OF GNP

PERCENT

H 10.
3

linii l 1l-

1962

1964

1968

1966

a

INSTALMENT CREDIT

SURPLUS
NET CHANGE
---

DEFICIT-Qo .o
102

1964

8

|_

4
-

1962

iULY 8

IN OUTSTANDING

1966

WL.JLL.
1968

I
I

I

1962

I

I

I

I

-1I

1964

I

I

1966

LI m nnmLLL
1ll~

1968

III - 1
DOMESTIC FINANCIAL SITUATION

Bank credit.

Total loans and investments at all commercial

banks are estimated to have increased at approximately a 14 per cent
annual rate in August, about half the exceptionally rapid July rate of
growth.

In July, a $4 billion Treasury cash financing in the latter

part of the month contributed substantially to the increase in bank
credit.

In August, too, Treasury financings added to bank credit

growth as the Treasury raised nearly $2 billion of new cash and

refunded a sizable amount of maturing coupon issues.

In addition to

the effects of Treasury financing, bank credit expansion in August was
augmented by large bank acquisitions of municipal and agency issues as
well as further growth in virtually all major loan categories.
NET CHANGE IN BANK CREDIT
All Commercial Banks
(Seasonally adjusted annual rates in per cent)

1967

First
half

First
8 mos.

1968
JulyAug.

1/
ug

2/
Total loans & investments-

11.6

6.2

9.7

19.5

14.1

U.S. Gov't. securities

11.4

2.7

9.5

29.8

17.3

Other securities

26.1

6.5

9.5

18.0

20.6

8.3

7.1

9.8

17.2

12.1

9.8

9.6

10.1

11.3

11.8

11.6

5.5

8.2

15.6

20.4

Total loans

Business loans
MEMO:
Credit Proxy-

1/ All August rates are preliminary estimates based on incomplete
data and are subject to revision.
2/
Last Wednesday of the month series.
3/ Monthly average of daily figures, adjusted to include Euro-dollar
borrowing.

III - 2

Business loans, as measured by the end-of-month series, are
estimated to have increased $900 million in August, or at about the
pace of the previous two months.

Weekly reporting bank data on busi-

ness loans by industry, however, do not indicate any broad strength in
loan demand.

With the exception of some mild expansion in textiles,

construction, and public utilities, bank loans to most industrial

categories displayed about normal or somewhat less than normal growth
over the first three weeks of the month.

While a few banks indicated

somewhat greater leniency in lending to established and local customers,
the August Lending Practices Survey gave no indication that easier
lending policies were a significant factor affecting the recent volume
of business loan

expansion.

(See Appendix A.)

In spite of recent uncertainty as to the course of interest
rates in the near future and the continued high cost of dealer financing, security loans in August showed a moderate further increase-following the July surge--as dealers apparently are maintaining their
high level of speculative inventories in hopes that interest rates will
decline.

Consumer loans also continued to expand at the increased pace

of recent months, associated in large part with financing of the high
volume of automobile sales.

Growth in real estate loans remained

moderate, and may reflect hesitancy on the part of some banks to expand
commitments to acquire mortgages while inflows of consumer-type time
and savings deposits continue at the moderate pace of recent months.
With the availability of funds improved, banks acquired
approximately $2.0 billion of securities in August in order to take

III - 3

advantage of the relatively high yields still

available.

Since midyear--

when the marked improvement in deposit inflows began--banks have taken
nearly $5.0 billion of securities into portfolio.

About 60 per cent of

the July-August increase in bank security holdings represents Governments, most of which were acquired in the recent Treasury financings.
(Net bank acquisitions of the new 6-year notes offered in the midmonth
refunding accounting for most of the $900 million increase in Government
security holdings in August.)
Moreover, banks also added approximately $1.1 billion of
other securities to their portfolios in August bringing net acquisitions since midyear to almost $2.0 billion.

While much of the August

increase in these holdings was in short-term municipals, banks--as in
July--acquired a significant amount of the relatively high yielding
longer-term issues.

Bank deposits.

Following an increase of almost $2.5 billion

in July, time and savings deposits at all commercial banks in August
are estimated to have increased by another $3.3 billion, on a daily
average basis, or at about a 20.8 per cent annual rate.

As in July, a

large part of this rapid expansion was attributable to CD sales by
banks, since August inflows of consumer-type time and savings deposits
appear to have remained at the moderate pace of recent months.

Time

deposits held by state and local governments also rose more than usual,
probably reflecting in part the temporary investment of funds obtained
in recent capital market financings.

III - 4

AVERAGE WEEKLY CHANGE IN TIME AND SAVINGS DEPOSITS
Weekly Reporting Banks
(Millions of dollars, not seasonally adjusted)
1968

Total time & savings deposits

August

April

May

June

July

-226

-12

- 79

512

545

90
10

101
47

102
-77

121
7

Consumer-type deposits
Savings deposits
Time deposits, IPC
(Other than CD's, IPC)

-125
-175
51

80

54

178

114

Negotiable CD's

-192

-49

- 68

436

267

90

-54

-112

-26

157

All other time deposits

Despite the recent back up in some market rates of interest,
CD's still remain competitive with most other money market instruments,
and large banks added another $800 million to their outstandings during
the first three weeks in August--bringing this total to a new high of
$22.3 billion.

The increase in outstanding CD's occurred almost

exclusively at banks outside of New York and Chicago, where loan demand
for the most part has remained somewhat stronger.

Banks in New York

and Chicago have ready access to the Euro-dollar market and as the cost
of these funds fell slightly below that of CD's during August, they
relied more heavily on the Euro-dollar than on the CD market as a source
of funds.

(Over the four weeks ending August 28, banks in New York and

Chicago account for all of the $900 million increase in head office
liabilities to their foreign branches.)

However, interest in CD's by

outside banks also appears to be waning, as indicated by the successively
smaller weekly increases in CD's outstanding at these banks during August.

III - 5

With most market rates of interest unchanged to somewhat
higher than early in the month, inflows of consumer-type time and
savings deposits at large banks during the first three weeks in August
remained at about the moderate pace prevailing since the end of April.
Although the average weekly change in these deposits during August rose
somewhat over that of recent months, much of this increase occurred at
banks in New York during the week of the Treasury financing.

Savings

deposits at large banks, after declining in July, showed only nominal
growth compared to most recent past years.

Inflows of savings deposits

at country banks, although much greater than those at large banks, also
were below the comparable period of last year.

Time certificates and

open accounts at large banks, however, continued to expand fairly
rapidly, matching the expansion in 1967.
Following the rapid July increase, the money stock, on a
daily average basis, is estimated to have expanded at a much reduced
3.8 per cent annual rate in August.

This slower rate of expansion may

reflect some movement of private demand balances into U.S. Government
deposits in response to the recent Treasury financing, although the
reduced level of stock market activity in August probably also contributed to a lower transactions need for cash.
Nonbank depositary intermediaries.

During the first half of

August, savings appeared to be flowing into mutual savings banks at a
more rapid rate than in July, as judged by data from the fifteen largest
savings banks in New York City, the only institutions for which August

III
1/
data are available.-

- 6

Moreover, although the increase in their passbook

loans was sizable, it was considerably below that for May, the corresponding month in the reinvestment cycle.

SAVINGS INFLOWS: FIRST FIFTEEN DAYS OF THE MONTH
Fifteen Largest Savings Banks in New York City*
($ millions; seasonally adjusted)

May

June

July

August

1965

31.9

39.5

40.3

32.1

1966
1967
1968

20.5
78.3
56.7

28.9
73.6
51.4

113.6
58.1
5.4

51.5
56.6
41.8

9.0
15.3
18.1
30.3

12.3
16.3
18.2
34.6

11.3
12.6
13.0
13.1

10.4
13.8
20.6
19.4

Savings inflow

Increase in passbook loans
1965
1966
1967
1968
*

These banks account for 28 per cent of industry deposits.

During July, mutual savings banks' liquidity ratios-

/

continued to drift downward, while the net increase in mortgage holdings exceeded for the third consecutive month the continued large net
acquisition of corporate securities.

The savings and loan average

liquidity ratio also dropped in July--from 10.0 per cent in June to
9.6 per cent, the lowest since November 1966.

1/
2/

This reflected the FHLBB

Savings and loan association and mutual savings bank data may be
available around September 12.
The liquidity ratio is U.S. Government plus cash holdings expressed
as a per cent of total share capital.

III - 7

regulatory change permitting a one-half percentage point decrease-to 6.5 per cent--in the required liquidity ratio to help stimulate
mortgage lending.

While the net increase in S&L mortgage holdings was

not particularly large, it was presumably aided by the decrease in
required liquidity.

Mortgage market developments.

The residential mortgage

market eased slightly further during August, judging from fragmentary
reports received thus far.

Weekly applications to FHA for insurance

of existing-home mortgages, which usually fluctuate rather sensitively
with general market conditions, tended higher through the week ended
August 22, the latest available date.

After changing little through

mid-August, implicit yields in the FNMA weekly forward commitment
auction of Government underwritten home loans available for future
delivery to FNMA edged down in each of the three weeks following the
initial reduction in the Federal Reserve discount rate effective
August 16.
FNMA WEEKLY AUCTIONS
(6-month forward commitments)
Auction
pate
July

1
8
15
22
29

August

5
12
19
26

September 3
Note:

Accepted bids
($ millions)

Implicit private
market yield (per cent)

60.5
65.9
57.3
47.4
53.7

7.48
7.40
7.35
7.32
7.33

49.7
43.4
37.4
37.0

7.32
7.31
7.27
7.24

37.6

7.23

Average secondary market yield after allowance for commitment
fee and required FNMA stock purchase, assuming prepayment period

of 15 years for 30-year mortgages.

Yields shows are gross, before

deduction of 50 basis point fee paid by investors to servicers.

III - 8

During July as a whole, yields on certain FHA-insured
mortgages traded in the private secondary market reversed their earlier
uptrend and declined by as much as 10 basis points, according to the
FHA series, affirming earlier indications of easing in this sensitive
sector of the mortgage market.

The decline was the first in 5 months,

and the largest in more than a year and a half.

Average discounts

required by lenders on these loans dropped to 5-1/2 points--still large
enough to inhibit some transactions financed with this type of credit
but nevertheless the lowest in nearly a year.
In the more sluggish primary mortgage market, interest rates
on conventional new-home loans increased less during July than in any
of the 3 preceding months, based on the FHA series shown in the table.
The Northeastern area again recorded the largest rise, reflecting
further increases in usury ceilings in New Jersey and New York, both
effective July 1, following an increase in Pennsylvania around mid-May.
During July, returns on Government underwritten as well as
conventional mortgages again widened somewhat over yields on new issues
of high-grade corporate bonds.

The gross yield margin favoring these

mortgages, while the most attractive in more than a year, continued
considerably below spreads generally prevailing prior to 1965, even if
some allowance is made for interim reductions in mortgage servicing
costs.

III - 9

AVERAGE RATES AND YIELDS ON SELECTED NEW-HOME MORTGAGES

Primary Market:
Conventional loans
S
Yield
Level
spread
r
(per
(basis
cent)
points)

l

Level

cen)

Secondary Market:
FHA-insured loans
Yield
Discount
spread
(basis
(points)
points)

1967
July
August
September

6.50
6.55
6.55

72
66
67

6.53
6.60
6.63

75
71
75

4.6
5.2
5.4

October
November
December

6.55
6.65
6.70

43
12
19

6.65
6.77
6.81

53
24
30

5.6
6.5
6.8

January
February
March

6.75
6.75
6.80

51
46
24

6.81
6.78
6.83

57
49
27

6.8
6.6
7.0

April
May

6.90
7.15

38
49

6.94
7.50e

42
84e

7.9
6.le

June

7.25

60r

7.52

87r

6.3

July

7.30

76

7.42

88

5.5

1968

Note:

FHA series:
interest rates on conventional first mortgages
(excluding additional fees and charges) are rounded to the
nearest 5 basis points; secondary market yields and discounts
are for certain 6 per cent, FHA-insured Sec. 203 loans through
April with data for May 1968 estimated by Federal Reserve based
on the new 6-3/4 per cent regulatory rate. Gross yield spread
is average mortgage return, before deducting servicing fees,
minus average yield on new issues of high grade corporate bonds.

Confidential field reports from both FHA and VA indicated
some improvement in the availability of mortgage funds by the end of
July, particularly on long-term loans, as lenders apparently accelerated
their new commitment approvals in order to lock up the high yields
prevailing at the time.

In view of this development, total outstanding

III - 10

residential mortgage commitments of reporting thrift institutions rose
in July for the first time in three months, according to the seasonally
adjusted data shown in the table.

At thrift institutions the backlog

of mortgage commitments to be taken down in coming months remained
quite high relative to their recent cash flow positions, undoubtedly
also reflecting expectations of further improvement ahead in inflows.

RESIDENTIAL MORTGAGE COMMITMENTS OUTSTANDING

(Per cent increase from month to month)
Thrift Institutions
All
New York State
S&Ls
savings banks

l

Reporting
life insurance
companies

All
reporting
lenders

1967

June
July
August
September
October
November

11.4
7.4
6.2
2.4
3.2
2.3

7.7
0.8
-1.5
5.9
-0.5
0.1

10.1
5.1
3.6
3.5
2.0
1.6

1.5
-1.2
0.7
0.2
-0.7
1.8

8.0
3.7
3.0
2.8
1.4
1.6

December

--

-3.2

-1.0

1.8

-0.5

1968
0.4

-2.5

-0.5

5.3

0.7

February
March
April
May

0.9
3.8
1.4
-1.6

-2.3
0.8
0.8
1.3

-0.1
2.9
1.2
-0.8

5.2
-0.1
3.6
1.3

1.0
2.3
1.8
-0.3

June
July p/

-3.0
2.8

2.5
3.8

-1.3
3.1

0.5
n.a.

-0.9
n.a.

January

Note:

Based on seasonally adjusted dollar volume which is confidential
for life insurance companies. Reporting savings banks and life
insurance companies account for about 70 per cent of total mortgage lending in the industry. Data for savings banks and S&Ls
include a minor amount of nonresidential commitments.

III - 11

The quality of outstanding mortgage debt generally improved
again during the second quarter, judging from such after-the-fact
measures as delinquency rates and foreclosure rates relating to loans
closed mainly in earlier periods.

Some improvement could have been

expected in view of demand pressures for available housing, further
increases in used-house prices, and the comparatively limited number
of unseasoned risk-prone loans outstanding relative to the growing
number of total mortgages in force.

While the composite delinquency

rate on home mortgages (MBA series) rose in the second quarter, the
increase reflected a slight rise only in short-term delinquencies from
a reduced level, as 60-day-and-over delinquencies showed further yearover-year improvement to the lowest rate in 8 years.

The over-all

foreclosure rate on nonfarm mortgages (FHLBB series) again declined,
and reached the lowest level since 1961.

Corporate and municipal bond markets.

Yields on corporate

bonds on balance showed little change over the latter half of August,
while municipal bond yields advanced significantly, returning to early
July levels.

In both markets, investor response accorded new issues

notably lacked enthusiasm and the volume of unsold bonds in syndicate
consequently rose.

After the sharp yield decline in July, investors

appeared to have second thoughts about their expectations as to the
course or rapidity of monetary ease.

But the recent cut in the discount

rate seemed to be viewed by investors as some confirmation of their
earlier expectations that monetary restraint was in the process of being
relaxed.

While this action did not drive yields down, it limited the

extent of developing upward yield pressures.

III - 12

BOND YIELDS
(Weekly averages, per cent per annum)
Corporate
ooae Aaa
New
Seasoned
With call
protection

State and local Government
S&P High
Grade

Bond Buyer's
(mixed qualities)

1968
Low
High

6.12 (2/2)
6.83 (5/24)

5.97 (8/30)
6.29 (6/7)

July 12
19
26

6.56*
6.51
6.40

6.27
6.26
6.22

4.44
4.41
4.27

4.36
4.33
4.16

Aug.

2
9

6.36
--

6.15
6.07

4.18
4.15

4.11
4.07

16

6.13

6.00

4.29

4.22

23
30

6.13
6.13

5.98
5.97

4.34
4.45

4.27
4.38

4.15 (8/9)
4.68 (5/24)

4.07 (8/9)
4.71 (5/24)

Week ending:

*

Some issues included carry 10-year call protection.

The divergent path of corporate and municipal bond yields
appears to be primarily a reflection of the substantially different
volume of current and prospective new issues in these two markets.
Public flotations of corporate bonds in August are estimated to have
aggregated $675 million, about 45 per cent below July--a much larger
than seasonal drop-off.

This volume was below earlier expectations as

several convertible bond offerings were pushed forward to the September
calendar.

Total corporate security offerings, including private place-

ments and stock issues, are estimated at about $1.6 billion, which is
also well below earlier months this year and the outsized August 1967
volume.

III - 13

CORPORATE SECURITY OFFERINGS- /
(Millions of dollars)
B(onds
Public
2/
Offerings1967
1968

Total bonds
and stocks

Private
Placements
1968
1967

1967

1968

1,088
1,339
1,534

822
1,035
895e

604
489
517

575
548
633e

1,821
2,069
2,277

1,726
1,901
1,878e

July

1,889

1,260e

August
September

1,813
902

675e
750e

486
412
647

600e
600e
700e

2,589
2,481
1,763

2,310e
1,575e
1,750e

QI monthly avg.
QII monthly avg.
QIII monthly avg.

e/
1/
1i

Estimated.
Data are gross proceeds.
Includes refundings.

Moderation of corporate bond offerings is likely to continue
in September, as the calendar now totals about $550 million and the
ultimate volume may be no more than $750 million.

While there are no

sizable industrial issues currently scheduled, some such offerings may
be placed on the market by corporations which deferred financing
earlier in the hope of catching lower rates.

But the total volume of

corporate security offerings, nonetheless, will likely show at most a
seasonal rise in September.
In contrast to the corporate market, the estimated volume of
new municipal issues in August--at $1.7 billion--was a record for any
month.

This sharply enlarged volume included more than $200 million

industrial aid bonds and a $286 million utility revenue issue--the
largest single municipal offering in more than four years.

Even though

offering yields advanced throughout much of the month, a sizable volume

III - 14

of these issues was not fully absorbed.

As a consequence, the market

is in a poor technical position with about $800 million of dealers'
advertised inventories, a high for the year.

Moreover, this overhang

of unsold bonds is coincident with no respite from the unusually large
volume of new offerings.

The September volume is estimated at $1.5

billion--a record for the month--with more than $300 million industrial
revunue bonds included.

STATE AND LOCAL GOVERNMENT BOND OFFERINGS
(Millions of dollars) 1/

1967

1968

QI monthly average

1,391

1,240

QII monthly average

1,294

1,259

QIII monthly average

1,050

1,533e

July

950

1,400e

August

860

1,700e

1,340

1,500e

September
e/
1/

Estimated.
Data are for principal amounts of new issues.

Stock market.

During August, common stock prices fluctuated

within a narrow range somewhat below their all-time highs reached in
mid-July.

Trading volume remained moderate throughout the month.

Apparently stemming the earlier decline and contributing to the market
stability throughout August were somewhat improved investor expectations
regarding monetary policy, profit prospects, and the economic outlook
in general.

III

- 15

STOCK PRICES
Dow-Jones

Industrials

New York Stock
Exchange Index

American
Exchange Index

March 29

840.67

50.05

22.42

Mid-July high

923.72

57.69

30.08

Early August low

869.65

54.18

27.52

September 3

900.36

55.65

28.82

--

TRADING VOLUME

New York Stock Exchange
March

American Exchange

9.2

3.6

June

15.1

7.4

July

14.3

6.6

August

10.8

4.8

Preliminary figures now available for July show that margin
debt of brokers' customers dropped $240 million or 3.6 per cent to
$6,450 million during the month.

Over the same period the New York

Stock Exchange composite price index fell 2.3 per cent.

The decline

in margin debt was the first since January 1968 and the largest in the

two-and-one-half-year history of the series.

In addition, the number

of margin accounts declined by 5,000, the first decline since 1966.

At banks, purpose loans to non-brokers continued to rise moderately-by $14 million--possibly because of borrowing to buy corporate or
municipal bonds;-1/ indeed, during the first half of August such debt
rose by an additional $50 million to $2,473 million.
1/

Since March 1968, the margin debt figure has not included debt
associated with bond acquisitions; however, such debt continues to be
included in bank purpose loans to others than brokers and dealers.

III - 16

U. S. Government securities market.

The market for Treasury

securities has shown no clear trend since the last meeting of the

Committee, with prices in both the bond and bill sectors fluctuating
moderately in response to a number of diverse influences.

The cut in

the discount rate by the Minneapolis Federal Reserve Bank and the
accompanying reduction in the repurchase agreement rate to 5-1/4 per
cent on August 15 had a favorable,

but very short-lived effect on yields,

Thus, after yield declines of around 6 basis points on Treasury bills
and of from 2 to 4 points on intermediate and long-term issues in trading immediately after the initial

discount rate cut, market yields

quickly rebounded and within a week were at or above the levels immediately preceding the discount rate action.
MARKET YIELDS ON U. S. GOVERNMENT SECURITIES
(Per cent)

1967

Highs

1968

Highs

July 15 Aug. 5 Aug. 12 Sept. 3

Bills

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

4.75
5.07
5.60
5.71

(1/4)
(12/15)
(12/1)
(12/29)

5.70
5.92
6.08
6.03

(5/21)
(5121)
(5/21)
(5/21)

5.40
5.42
5.53
5.50

4.95
4.89
5.12
5.04

5.00
5.05
5.25
5.19

5.05
5.18
5.20
5.14

6.36 (5/21)

5.64

5.41

5.47

5.33

5.68
5.56
5.33

5.48
5.37
5.16

5.52
5.42
5.22

5.46
5.42
5.22

Coupons
3-years

5.87 (11/13)

5-years
10-years
20-years

5.91 (11/13) 6.21 (5/21)
5.87 (11/13) 6.02 (5/21)
5.81 (11/20) 5.77 (3/14)

III - 17

Remarks by the President on the bombing of North Vietnam and
the tensions caused by the Czech crisis had an adverse impact on the
market because of their possible implications for Government spending.
Moreover, there was apparently some adjustment in positions by dealers
who had anticipated a larger discount rate reduction.
Most recently, prices of coupon issues have moved higher as
market participants have interpreted recent System actions and reserve
data as at least confirming that policy had taken an easier stance.
In addition there has been a moderate net retail demand for Governments.
The market also was buoyed by the anticipation that the Desk probably
would buy coupon issues in preparation for the Labor Day weekend.

On

Thursday before the holiday the System did buy over $80 million of
notes and bonds.
A hesitant tone has pervaded the market for Treasury bills
in most sessions.

Bill yields now stand about 10 basis points above

the level reached about the time of the last Committee meeting.
The dealers' large bill positions, as well as relatively
substantial coupon holdings, together with the higher cost of day-today financing, have in part been responsible for this back-up of rates
as some dealers sought to reduce their positions from the record levels
reached at midmonth.

The reduction in the discount rate by 1/4 of a

point, rather than the 1/2 many had expected, encouraged this movement.
The occurrence of three regular auctions in the week of August 26
frustrated this action to some extent; and on September 3, dealer positions in bills stood at $3.7 billion, despite the fact that sizable
sales to foreign accounts had eased some of the pressure on holdings.

III - 18

DEALER BORROWINGS AND POSITIONS
(In millions of dollars)

July 1

July 31

Aug. 15

Aug. 30

Sept. 3

830
646
1,571

1,620
1,216
237
2,220

1,790
1,558
311
2,363

1,364
1,470

1,518
1,429

2,441

2,426

3,047

5,293

6,022

5,274

5,372

1,580
417
139
231
33

3,920
763
169
183
139

3,479
327
313
813
146

3,293
426
222
822
120

3,720
421
215
834
121

2,400

5,175

5,079

4,883

5,311

Borrowings
New York Banks
Other banks
Federal Reserve
Nonbank Lenders
Total
Positions
Treasury Bills
Other within 1 year
1 to 5 years
5 to 10 years
Over 10 years
Total

As the accompanying table shows, dealer positions and
borrowings rose markedly in July; borrowings continued upward in August
and totaled $6 billion on August 15, the payment date for the Treasury
financing.
banks.

The increased demand for financing fell most heavily on

Of the $3 billion rise in borrowings from the beginning of July

to mid-August, about two-thirds was accommodated at banks.

This grow-

ing demand contributed to the relatively high dealer loan rates and
large basic reserve deficits of the major banks throughout July and
August.
Since August 15 dealer positions have risen by about $370
million.

Daily financing needs have continued to be frequently near

$1.5 million, but borrowings have been reduced $250 billion.

Almost

III - 19

all of the reduction has been at banks, with nonbank lenders--mainly
corporations, who appear to be in relatively liquid position--now
providing a somewhat higher proportion of these funds than at midmonth.
Rate movements on other short-term instruments in recent
weeks have also fluctuated and, if anything, have been even less clearcut as to a general trend than have short maturity Government yields.
On balance, however, these yields--like those on Treasury bills--are
generally higher than at midmonth, although in many instances the change
has been negligible.

SELECTED SHORT-TERM RATES

1-month
CD's (prime NYC)
Highest quoted new issue
Secondary market
3-month
Bankers' acceptances
Federal agencies
Finance paper
CD's (prime NYC)
Highest quoted new issue
Secondary market
6-month
Bankers' acceptances
Commercial paper
Federal agencies
CD's (prime NYC)
Highest quoted new issue
Secondary market
1-Year
Federal agencies
Prime municipals

1968
July 15

1966
Highs

1967
Highs

Highs

5.50 (12/13)
5.75 (9/28)

5.50 (12/29)
5.50 (12/29)

5.50 (8/29)
6.20 (5/31)

5.50
5.90

5.50
5.80

5.50
5.75

5.75 (10/25)
5.76 (9/21)
5.88 (12/31)

5.63 (12/29)
5.30 (12/29)
5.88 (1/6)

6.13 (5/24)
6.11 (5/17)
6.13 (6/25

5.88

5.65
5.88

5.75
5.45
5.75

5.63
5.59*
5.63

5.50 (12/31)
5.90 (9/21)

5.50 (12/29)
5.70 (12/29)

6.00 (7/18)
6.20 (5/31)

6.00
6.05

5.75
5.85

5.75
5.84

6.00 (9/23)
6.00 (12/31)
6.04 (9/21)

5.75 (12/29)
6.00 (1/6)
5.55 (12/29)

6.25 (5/24)
6.25 (7/25)
6.25 (5/24)

6.00
6.25

5.75

5.80

5.88
5.88
5.49

5.50 (12/31)
6.30 (9/28)

5.50 (12/29)
6.00 (12/29)

6.25 (7/11)
6.40 (5/31)

6.25
6.18

5.75
5.90

5.75
5.90

6.13 (9/23)
4.25 (9/21)

5.95 (12/29)
4.00 (12/29)

6.01 (5/31)
3.90 (5/31)

5.88
3.30

5.55
2.75

5.65*
2.90*

N.B. - Latest dates on which high rates occurred are indicated in parentheses.
* - August 30.

Aug.

12

Sept. 3

5.88
5.59*

II

Federal finance.

- 21

The Treasury's cash operating balance at

the end of August totaled $4.6 billion, or $500 million less than projected in the last Greenbook, with the shortfall spread rather widely
through a number of receipt and expenditure items.

According to

present projections, the balance will decline to a rather low level
at mid-September, possibly requiring temporary overdrafts with the
Federal Reserve, but thereafter as quarterly tax payments are deposited,
it will rise substantially.
Looking beyond September to the fourth quarter, the Treasury
will experience large, partly seasonal, cash drains, as shown in the
table.

Accordingly, a $3.0 billion borrowing operation is assumed for

the second half of October.

In view of the large Treasury cash surplus

projected for next spring, and in line with previous Treasury statements,
the October financing is likely to consist of tax bills.
While trends in Federal spending for fiscal 1969 to date are

difficult to interpret from the data now available, thus far they seem
to be consistent with the assumptions underlying Greenbook projections.
The Administration's problem of deciding which specific programs to cut
is still complicated by the fact that Congress has not yet completed
action on several major appropriation bills.

Moreover, spending in two

uncontrollable programs that fall within the area of the budget subject
to the over-all expenditure ceiling is now expected to be about $1 billion
larger than previously projected, necessitating a commensurately larger
cut-back in other programs also subject to the ceiling.

About $700

million of the expected overage is attributable to CCC crop purchases,
and the other $300 million to Medicaid and other public assistance grants
to states.

III - 22

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)

Aug.a//

Sept.

Oct.

N
Nov.-

Dec.

Borrowing operations
New cash raised
Weekly bills
Tax bills
Coupon issues
PC's

.5

Debt repayment etc. (-)

Plus:

Other net fin'l.

Plus:

Budget surplus or deficit (-)

a/
b/

sourcesb/

Change in cash balance

Memorandum:

--

1.7
.8

-

-

.1

Total net borrowing from public

Equals:

.4

-

Level of cash balance
end of period

2.9

.2
3.0
-- .1

-3.0
.5
.2

.4

3.1

3.3

- .5

.9

.1

- .8

-3.8

1.9

-5.1

-3.5

-1.4

3.2

-1.9

-1.0

4.6

7.8

5.9

4.9

Actual and estimated data.
Checks issued less checks paid and other accrual items.

III-c-1
FINANCIAL DEVELOPMENTS - UNITED STATES

9/3/68

FREE RESERVES AND COSTS
BILLIONS OF

DOLLARS

NET FREE RESERVES

NET BORROWED
RESERVES
CENT

PER

AUG 28 23

FEDERAL

7

FUNDS

AUG 30 590

-F.R.

DISCOUNT

v

RATE I

5ll\i

AUG 30 525

TREASURY

BILLS

3-MO. (Discount
AUG 31 519

3

Basis)

~Ii

I l

l I I

I

1966

1964

I I

I I

I I

1968

IN BANK LOANS-BY TYPE

SAVINGS SHARES AND DEPOSITS
BILLIONS OF DOLLARS
RATIO SCALE

SAVINGS AND LOAN
ASSOCIATIONS

COMMERCIAL BANK
TIME DEPOSITS AUG 1937
EXCLUDES HYPOTHECATED DEPOSITS

JULY 1272

..........
--

PER

CENT
SI

OF GNP

I

II
MONEY

1964

1966

I

I

I

I

I
MUTUAL SAVINGS BANKS

I

I,,I|,|I

SUPPLYQII 218

1968

S JULY630 |
|
SREFLECTSCONVERSION OF A S & L ASSN
OF ABOUT

1964

|
WITH SHARE CAPITAL

$175 MILLION TO A MUTUAL, SAVINGS

1966

BANK

,.

1968

III-

C -2

9/3/68

FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED-NONFINANCIAL SECTORS

SHARES IN FUNDS SUPPLIED

tI 1 120

BILLIONS OF DOLLARS

SEASONALLY ADJUSTED
ANNUAL RATES

1.

PER CENT
COMMERCIAL
BANKS

I I

1I

II

60

A0

TOTAL
on 721

S

NONBANK DEPOSITORY
INSTITUTIONS
-Qrn 222

60

0

l 62 3

40

PRIVATE DOMESTIC
ST.

- (ex.

A

PER CENT

L. Govt's.)-

PRIVATE

DOMESTIC TO PRIVATE
INVESTMENT
OUTLAYSOn 301

-AR
-NSUR

-TOTAL

on 85

40

--

40

TO GNP-

0
NONFINANCIAL

PVT.

20

on 18 2

20

20
2 0

0

______2

1964

1966

1968

MARKET YIELDS

MARKET YIELDS-U.S.
''

PER CENT
NEW HOME

1968

1966

1964

PER CENT

GOVT. SEC.
I IIT

III

II

I

7

FIRST MORTGAGES:

-YEAR. FHA-INSURED

1-YEAR BILLS*
AUG 544

5-YEAR ISSUES/
AUG 550
BONDS

AND STOCKS:

,

5

1

20-YEAR

/,f

BONDS
AUG

NEW CORPORATE Aae
AUG 626

*y^-:-^^ /
AUG

/

AUG 309 STOCKS DIVIDEND/PRICE RATIO
S1

l

1964

l1 1

__

I

I

I

CORPORATE
S
"-

1968

\

I

I

523

*INVESTMENT

1968

NEW SECURITY ISSUES
I

v

3

-1
11 1 II I II I I II II

1966

BILLIONS OF DOLLARS

__

3-MONTH BILLS*

Aoa

STATE AND LOCAL GOVT
AUG 400

COMMON

522

t

1964

YIELD BASIS

1966

1968

3.0 1

I

2.5

1967--

A

/

'
1.5

V
1966

\1.0
.5

STATE

MILLIONS OF SHARES

AND LOCAL GOVERNMENT_

RATIO SCALE

AUG 108

VOLUME OF TRADING

.5
MAR.

JUNE

SEPT.

DEC.

N Y S.E.,

1964

Av.

1966

Daily

Volume

l

1968

A

IV - 1

INTERNATIONAL DEVELOPMENTS
Contents

Page

Exchange market developments
Euro-dollar market
U.S. balance of payments
Direct foreign investments
Other capital accounts
U.S. foreign trade
Financial markets in major industrial countries

Exchange market developments.

IV -

1
3
5
6
10
11
15

Until the last week of August

-

when rumors of a revaluation of the German mark thoroughly destabilized
the exchange markets --

the pattern of developments for most foreign

currencies had not been significantly different from that of July.

In

the first three weeks of August the French franc continued to be under
selling pressure,

although less severe than in

July.

The German mark

(until August 27) continued to trade well below par as very easy money
market conditions in Germany continued to encourage both short- and longterm capital outflows; the Canadian dollar remained quite firm with the
Bank of Canada making sizeable purchases of dollars; the Italian lira
continued to show seasonal strength; the other major currencies showed
little tendency for significant pressures to develop in either direction.
The most notable

exception to this approximate repetition of

the July pattern of events was in the market for sterling.

The pound

had recovered quite well in July and the Bank of England purchased over
$500 million in the market.

Early in August sterling remained firm but

its first setback of the month came on August 13 with the release of

the British trade figures for July, which showed a deficit paralleling

IV - 2

those of April and May.

A little more than one week later (on August 21)

sterling experienced another
emerged.

setback as the Czech-Soviet confrontation

Up to this point sterling had been quoted markedly lower than

in the first two weeks of August but selling pressure was moderate and
the Bank of England had provided only modest support for the rate.
The mark revaluation rumors which began on August 27 sharply
accelerated pressures on both sterling and the French franc.

During

this final hectic week of the month the Bank of England and Bank of
France each sold approximately $150 million in support of their respective currencies while the Bundesbank made spot market purchases
in excess of $850 million.

Furthermore, the Bundesbank intervened in

the forward market, swapping $240 million (selling dollars spot against
two and three-month forward repurchase); and the Federal Reserve Bank
of New York sold $32 million equivalent of marks on an outright forward
basis, half for System account and half for Treasury account.
The French franc began and ended the month at its floor;
sterling's overall decline was from about 239.40, in the first two

days of August, to its August 30 afternoon quotation of 238.38; during
the last week of August the German mark moved nearly the full range
between its lower and upper support levels.
The failure of the mark revaluation to materialize on the
last weekend of August has not generated a major reflow of funds away
from marks.

The speculative atmosphere seemed to have subsided somewhat

as of last Monday and Tuesday (September 2 and 3), but on Wednesday a

IV -

3

new wave of speculation hit the market --

possibly in response to

Bundesbank President Blessing's statement late Tuesday that "some day"
the mark might have to be revalued if Germany's trading partners continued to tolerate creeping inflation.
Between August 26 and September 4 the Bundesbank made gross
spot market purchases of dollars totaling about $1 billion, while
engaging in

"swap"

operations with German commercial banks totaling

about $700 million.

The resulting net increment to German reserves

of about $300 million was roughly equal to the volume of intervention
losses by other major central banks (principally the Bank of France
and Bank of England).
Gold markets have been generally quiet in the past several
weeks.

During the month of August prices advanced from a level just
Prices declined modestly

under $39.00 to a level just under $40.00.

early in the month but began to rise concurrent with the release of
the British trade figures on August 13; they were marked up rather
sharply (but temporarily) at the time of the Czech crisis, and advanced further during the week of German mark speculation.
Euro-dollar market.

U.S. banks drew rather heavily on the

Euro-dollar market for funds during the month of August.

Between

July 31 and August 28 liabilities to foreign branches increased $875
million to a new peak of $7,085 million.

U.S. banks had reduced

their use of Euro-dollar funds during the last three weeks of July
by about $750 million; thus, the $7,085 million peak level of

IV - 4

outstanding liabilities on August 28 was only about $120 million more

than the previous peak level of July 10.
The decrease in U.S. bank liabilities to overseas branches
after July 10 is not readily explainable,

especially in view of the

fact that the cost of Euro-dollar funds to the banks was, generally
speaking, lower than the cost of funds acquired in domestic financial
markets during this period.
had, however,

Dollar advances to banks' head offices

risen very sharply during the second quarter, and growing

evidence of easier monetary conditions in the United States coupled
with the fact that some banks may have felt overly dependent on Eurodollar funds may have caused U.S. banks to reduce their liabilities
to overseas branches.

The volume of outstanding C/D's of New York

banks increased by about $350 million between July 10 and July 31,
coinciding with the reduction in Euro-dollar liabilities through
overseas branches and indicating that U.S. banks again were able to
compete more successfully for funds in domestic markets.
Even though supply conditions in the Euro-dollar market
were less favorable than in June and early July, when there were
massive flows of speculative funds from the French franc and sterling,
Euro-dollar rates fell considerably in the last three weeks of July,
probably reflecting the reduced demand for funds from U.S. banks.

The

rate for three-month funds felt from 6.69 per cent per annum on July 10
to 6.25 per cent by the end of July.

IV - 5

During August Euro-dollar rates have held relatively steady;
the three-month deposit rate has ranged between 5.94 and 6.12 per cent
per annum even in face of the relatively heavy demand for funds from
U.S.

banks.

The supply of funds apparently came mainly from holders

of sterling, French franc and (until the final week of August) German
mark assets.

There are two possible factors behind the recent increase

in demand for Euro-dollar funds from U.S. banks.
Euro-dollar funds --

particularly 3-month deposits --

has been lower

Second, it may be that U.S.

than the cost of domestic U.S. funds.
banks,

First, the cost of

anticipating a further decline in domestic U.S.

interest rates

and hence being hesitant to issue long-term domestic C/D's, are acquiring very short-term deposits in

the Euro-dollar market in

lieu of

longer-term domestic funds.
U.S.

balance of payments.

The third quarter opened with an

unusually low liquidity deficit in July --

about $100 million before

special transactions or seasonal adjustment.

This relatively favor-

able outcome resulted in part from a net reduction of over $180 million
in claims on foreigners reported by banks, and continued heavy purchases
of U.S. corporate stocks by foreigners.

According to the weekly figures

for August, however, the liquidity balance has once more swung into
heavy deficit.

In the four weeks ended August 28 it amounted to $561

million, and about $775 million before special transactions.

The

special transactions in August included the latest $125 million installment under the German military offset agreement,

and a conversion

IV - 6

of $100 million of official Argentine balances from liquid to non-liquid
form.

August, and the third quarter as a whole, are seasonally adverse

because of tourism and other factors, but the average August deficit
before special transactions has been about $400 million in the past few
years.

These early and partial figures for August suggest that the im-

provement in the overall balance registered in the May-July period has
suffered at least a temporary setback.
The balance on the official settlements basis showed a deficit
of $73 million in July but turned to a surplus of about $140 million in
August through the 28th.

The striking difference in

the behavior of the

two measures of the balance between July and August reflected primarily
the fact that in

July non-official foreign liquid dollar holdings rose

by only about $50 million, whereas in the four weeks of August such
accounts increased by some $900 million.

Most of the activity in these

accounts is reflected in liabilities to foreign branches of U.S. banks,
which are discussed above.
Direct foreign investments.

Much of the hope for improvement

in the balance of payments this year was based on the new mandatory controls, which were to reduce direct investment (including reinvested
earnings) by $1 billion from the 1967 amount.

Many changes have already

been made in the regulations governing the program, and some unexpected
developments have occurred,

including (a)

a very large demand for special

authorizations covering prior commitments or abnormal circumstances in
the base period,

and

(b) a massive and successful effort by direct

IV - 7

investors to tap European capital markets.

As far as can be judged by

the not altogether satisfactory information gathered from OFDI (Office
of Foreign Direct Investments) operations and projections at this time,
a saving of $1 billion compared to 1967 is still possible, but it will
depend in large part on companies that do not use their basic quotas
in 1968 but carry them into 1969.

This will occur either because

investors -- especially those with large bases in less developed
countries -- will not wish to invest as much as they could this year,
or because of the requirement now in the regulations that companies
with funds available out of foreign borrowings must use those funds
prior to using their generally allowable investment quotas in

various scheduled areas.

the

But if there is a large carry forward, it

will, of course, complicate the operation of any 1969 program.
It is difficult to judge from the direct investment capital
outflow figures given in the balance of payments accounts how much
effect the restraint program had in the first half of the year, and

whether a different result can be expected in the second.
DIRECT INVESTMENT CAPITAL FLOW
(in millions of dollars; outflow (-))

Total
All countries
-3,020
Canada
-392
United Kingdom
-342
Other Europe
-1,100
Japan
-33
Australia, New Zealand,
and South Africa
-357
Other countries
-796
Note: not seasonally adjusted.

1967
I

II

III

IV

1968
I

II

-899
-64
-41
-270
-29

-423
-52
-116
-244
-3

-719
-123
-74
-257
-7

-980
-153
-112
-330
7

-589
26
-9
-210
-4

-836
-239
-28
-219
-7

-70
-425

-66
+58

-164
-94

-57
-335

-27
-365

-87
-256

IV - 8

As indicated in the table, direct investment outflows rose
in the second quarter (and show a considerably larger increase on a
seasonally adjusted basis),

though most of the upturn was in

Canada, which are exempt from the restrictions.

However,

flows to

these figures

include amounts derived from foreign borrowing, which should be subtracted to arrive at the outflow of U.S.
restrictions.

For all

funds subject to the OFDI

of 1967 the Office of Business Economics tables

show $278 million of foreign financing entering these outflows, reducing
the net flow to about $2-3/4 billion.

In the first half of 1968 the OBE

tally shows that only about $150 million of foreign funds was included
in the total.

These figures on the use of foreign funds are probably

low, since they exclude certain types of borrowing, but they are consistent for the two periods.

On this basis, the net outflow of U.S.

funds for direct investment in the first half of 1968 (excluding Canada
but including some other outflows not covered by the OFDI program) was
about the same as in the first half of 1967.
Data from OFDI reports for the second quarter will not be
tabulated for several weeks,

and important differences will perhaps

appear because the regulations do not extend to all the outflows

included in the balance of payments accounts.

At the moment, however,

the OBE estimates indicate that the drawdowns against proceeds of
foreign financing will have to accelerate in the second half if
investors are to stay within the program allowables.

This would

imply somewhat less pressure on the balance of payments in the

IV - 9

second half, since the balance of payments gain does not show up when
these funds are borrowed and held abroad in liquid form, but occurs
instead when these funds are drawn down and substituted for outflows

of U.S.

funds.
Income received from direct foreign investments was at an

annual rate of $4.6 billion in

half of the year,

the first

above the $4.5 rate for all of last year.

However, such returns had

reached a $5 billion rate in the last half of 1967.
OFDI limits on reinvested earnings in
plus some improvement in
income receipts in

slightly

The effect of

Schedule C (developed)

earnings experience abroad,

countries,

should be to raise

the second half to at least the level achieved at

the end of last year.
The latest projections of expenditures for plant and equipment
by foreign affiliates of U.S.

firms indicate continued cooling off from

the 20 per cent increases of 1964 and 1965 and the 16 per cent increase
of 1966.

In 1967 such expenditures increased by a relatively moderate

7 per cent, and for 1968 the increase is expected to drop to 5 per cent.
For 1969 these early indicators suggest no more than another modest
rise in capital expenditures abroad.

The results of the new survey

are summarized in the accompanying table.

Year-to-year changes are

measured by the OBE by comparing estimates made at the same period of
each year.

However,

the control programs may be affecting the timing

of company planning, and if the comparison is made based on the last
two columns of the table --

which give the projections for both 1968

IV - 10

and 1969 as made by the companies in June this year -- some decline is
suggested.

In any case, expenditures in 1968 and in 1969 will be main-

tained at far higher levels than a few years ago, but will be financed
to a much lesser extent by outflows from the United States.
PLANT AND EQUIPMENT EXPENDITURES BY
FOREIGN AFFILIATES OF U.S. COMPANIES
(millions of dollars)

Total
By industry
Mining
Petroleum
Manufacturing
Other industries

1967

1965
Final

1966
1966
Final

JuneT/

Final

7,440

8,640

10,045

9,245

9,785

10,520

10,168

629
2,277
3,884
650

789
2,526
4,583
741

931
3,295
5,035
783

902
3,018
4,513
812

761
3,432
4,853
739

1,101
3,595
4,963
861

969
3,385
4,894
921

1,847
1,073
2,639
1,880

2,357
1,092
3,253
1,938

2,360
1,441
3,970
2,274

2,208
1,258
3,637
2,142

2,053
1,601
3,814
2,317

2,244
1,715
3,803
2,759

2,206
1,791
3,858
2,313

1 9 6 7

1968
1 9 68
une / June-

1969
June='

By area
Canada

Latin America
Europe
Other areas
1/
2/

Estimated in June of current year.
Estimated in June of previous year.
Other capital accounts.

As mentioned earlier, bank-reported

claims on foreigners were reduced by about $180 million in July, of which
about $130 million was in banking claims covered by the restraint program.
The inflow came mainly from Europe ($140 million) and Japan ($68 million),
and was partly offset by outflows to Canada.

In the seven months through

July the net capital inflow from bank-reported claims totalled $800 million, accounted for mainly by a reduction of nearly $400 million in
Europe and $200 million in Japan.

IV -

11

An additional effect of the controls on direct investments
has been to force some liquidation of liquid balances abroad, apart
from those consisting of the temporarily invested proceeds of foreign
The exact amount involved is

borrowing.

uncertain because of the

intermingling of these two kinds of liquid foreign assets, but as a
rough order of magnitude the liquidation in

the first

half might have

By June 30 the reduction of balances re-

amounted to $200 million.

quired by OFDI regulations should have been accomplished.
Purchases of U.S. securities by foreigners continued on
a substantial scale in July.

Foreigners bought, net, about $160

million of U.S. corporate stocks, in
of the first

half of the year,

line with the monthly average

and also purchased approximately $150

million of convertible bonds issued by Delaware affiliates for use
in

financing direct foreign investments.
U.S.

foreign trade.

In July the merchandise trade balance

(balance of payments basis) returned to an export surplus,

following

two successive monthly deficits, as exports increased slightly and
imports fell

sharply.

But for the three months of May-July combined,

the trade balance was in
rate,

deficit by about $400 million,

at an annual

compared with a surplus at a rate of nearly $900 million in

January-April.
Comparing the first

four months of the year to the May-July

period, exports rose at an annual rate of about 7 per cent; average
shipments in the latter period exceeded those in

the early months by

IV -

a little

less than 2 per cent.

12

A gain of over 4 per cent in

non-

agricultural exports was largely offset by a steep decline in
shipments of agricultural products,
wheat to India and Pakistan.

mainly P.L. 480 deliveries of

The general abundance of crops in both
uncertain whether

foreign exporting and importing countries makes it
exports of agricultural commodities in

fiscal 1969 will be as large

as they were in the last fiscal year.
The gains in

shipments of nonagricultural products in May-

July appear to be somewhat more widespread than they were earlier in
the year.

Exports of aircraft remained high, and sales of cars to

Canada expanded further, while shipments of refined copper continued
to rise following the resumption of operations by domestic copper
refineries after the copper strike ended in March.

In addition,

exports of machinery, chemicals and logs and lumber also advanced
in

the more recent period.
By area,

the greatest gain in exports in May-July over

those in January-April was in

shipments to the EEC countries.

increased by nearly 13 per cent over the rate in
of the year, with much of the advance in
and aircraft.
sharply.

the first

These

four months

commodities other than copper

Exports to the U.K. and Latin America also expanded

The more moderate rise in shipments to Japan consisted

largely of greater deliveries of commercial aircraft.

Despite the

advance in deliveries of cars to Canada, total exports to that country
fell substantially during May-July.

IV - 13

Imports in July declined by over 6 per cent from the record
rate of the preceding month.
a few commodities --

The drop, however,

was concentrated

nonferrous metals, mainly copper,

in

and cars from

Canada, and does not appear to signal any general weakening in imports
from the very high rates of the first

six months of the year.

The decline in arrivals of cars from Canada was exceptionally
large, apparently greater than seasonal.
low rate will be sustained.

It

is

Continued growth in

not expected that this
such imports seems

probable after the changeover to the 1969 models is

completed.

Imports

of cars from Europe and Japan continued to gain in July as the inventory
buildup in

these cars accelerated.
Copper imports in

July were only about two-thirds of the pre-

strike rate, as both refined and unrefined types fell sharply.

Arrivals

of refined copper in July were at the prestrike level, but imports of
unrefined copper were considerably below a "normal" rate.

Exceptionally

heavy withdrawals of copper from customs warehouses in June to avoid
payment of import duties which were reimposed on July 1,

following

their suspension since early 1966, may have temporarily reduced new
import requirements.

After working off of these inventories there

may be an upturn in copper imports later in
domestic demand declines.

the year,

unless of course,

For the next month or two, however,

pro-

duction difficulties in Chile resulting from a drought and the
consequent reduction in waterpower may limit imports from that country.

IV - 14

The Treasury Department has announced the imposition of
countervailing duties on all

shipments of dutiable imports from

France, beginning September 14.

The action is a result of an

investigation conducted after issuance by the French Government
of a decree providing for certain subsidy payments on French
exports.

The amount of the countervailing duty will be equal to

2.5 per cent of the f.o.b. price of the imported merchandise from
September 15 through the end of October,

and half that rate from

November until January 31 when the French subsidies are scheduled
to be removed.

Since the countervailing duties at the full rate

of 2.5 per cent are to be imposed only for slightly more than one
month,

little

expected,

permanent effect on our imports from France is

although there may be some postponements.

IV - 15

Financial markets in major industrial countries.

In general,

financial markets have eased somewhat in most industrial countries
during recent weeks, although, except in Canada and in the Euro-dollar
market, the softening in interest rates from peaks reached earlier
this year has not gone as far as it has in the United States.

In

most countries, interest rates are currently below their recent highs,
with declines in long-term yields noticeably less pronounced than in
those on short-term instruments.

It is not yet clear to what extent, if

any, this trend toward ease will be impeded by the current speculative
movement into German marks.
The sharpest declines in interest rates have occurred in
the Euro-dollar and Canadian markets, with the 3-month Euro-dollar
rate dropping from 7-1/8 in late May to 6-1/3 per cent by the end
of August; the Canadian 91-day Treasury bill rate fell by 1.45 percentage points during the same period.

Because of the close link

between these markets and the U.S. financial market, such changes
can be attributed in large part to the significant drop in U.S. rates
during roughly the same period.

Relaxation of pressures in other

foreign financial markets also can apparently be characterized in
part as a reaction to changed financial conditions in the United States,
and in some cases to a desire to back away from abnormally high rates
established earlier.

Improved balances of payments in a number of

countries have contributed directly to the easing of monetary conditions by adding to bank reserves, and in Canada and Japan discrete
policy actions have signaled the trend towards ease.

SHORT-TERM INTEREST RATES
(per cent per annum)
Recent Rates

1968

1967
Low

Low

High

6/21

7/121

8/2

4.50 (1/26)

High

|

8/16

I

8/231

8/30

Euro-dollar
Call
3-month

4.00 (9/1)
4.62 (4/28)

6.75 (12/22)

5.44 (2/16)

6.62 (6/28)
7.19 (5/31)

6.50
6.88

5.75
6.31

5.75
6.06

5.75
6.00

5.88

(11/24)

6.00

6.00
6.13

United Kingdom:
Treasury bill
Local authority

5.16 (5/19)
5.50 (9/19)

7.44 (11/24)
7.75 (12/26)

6.81 (8/23)
7.50 (8/23)

7.47 (2/2)
8.50 (6/14)

7.09
8.38

7.09
8.19

6.97
7.88

6.84
7.88

6.88
7.50

6.87
7.50

Germany:
Call money
3-month inter-bank

0.75 (7/20)
3.23 (7/23)

5.88 (1/2)
5.95 (1/6)

1.50 (1/19)
3.22 (1/23)

3.56 (8/26)
3.75 (6/30)

2.44
3.63

1.88
3.50

2.63
3.50

3.25
3.50

3.56
3.63

2.50
3.62

Switzerland:
3-month bank deposit

2.75 (9/15)

4.50 (4/7)

2.75 (5/7)

3.75 (8/16)

3.75

3.75

3.75

3.75

n.a.

n.a.

France:
Call money I/
2
12-month Treasury bill-

3.75 (9/8)
4.61 (6/15)

5.88 (1/4)
5.19 (3/6)

4.75 (2/21)
5.02 (2/26)

6.00 (8/29)
6.02 (7/16)

5.75
5.75

6.00
6.02

6.00
6.02

5.88
5.96

5.88
5.92

6.00
6.09

Belgium:
3-month Treasury bill

4.40 (12/31) 5.85 (Jan.)

Netherlands:
3-month local authority

5.38 (4/17)

6.63

Canada:
91-day Treasury bill

3.86 (4/21)

Japan:
Call, over-month end

6.57 (May)

6.75

3.75

(8/30)

4.40

(1/29)

3.75

3.75

3.75

3.75

3.75

3.75

4.75

(2/8)

5.88 (6/21)

5.88

5.75

5.13

5.13

5.13

n.a.

5.84 (12/22)

5.57

(8/23)

6.79

(5/3)

6.46

6.17

5.82

5.67

5.57

5.31

8.03 (Dec.)

8.40 (Feb.)

9.13 (July)

9.13

9.13

9.13

8.76

8.76

n.a.

(1/3)

Wednesday or Thursday rates.
Rates for July 31 and August 21
Recent auction dates are for June 25, July 16, July 31, August 12 and August 21.
auctions are for 10-month bills; rate of 8/30 is for 3-mo. bills. 12-mo. bills auctioned on 8/26 went at 5.89%.
Note:
If high or low rate prevailed on more than one date in period, only latest date is shown.
1/
2/

LONG-TERM INTEREST RATES
(per cent per annum)

1967
Low

1968
High

Low

High

6/21

7/12

Recent Rates
8/2
8/16

8/23

8/30

Euro-bonds:
Foreign governments

6.12 (4/21)

7.44 (12/22)

7.38 (7/30)

7.81 (7/5)

7.79

7.76

7.62

7.60

7.60

7.60

United Kingdom:
3-1/2% War Loan 1/

6.41 (4/21)

7.20 (12/15)

7.12 (1/12)

7.77 (7/5)

7.53

7.53

7.52

7.55

7.57

7.55

Germany:
6% public authority

6.62 (12/29) 7.55 (1/2)

6.24 (8/30)

6.88 (3/21)

6.34

6.34

6.31

6.25

6.25

6.24

France:
Public sector 2/

6.30 (8/11)

6.48 (12/29)

6.45 (5/10)

6.99 (6/21)

6.99

6.78

6.71

6.64

6.67

n.a.

Italy:
Composite 3/

6.35 (Feb.)

6.51 (Dec.)

6.48 (Feb.)

6.55 (June)

6.55

n.a.

n.a.

n.a.

n.a.

n.a.

Belgium:
Government 4/

6.54 (Dec.)

6.77 (July)

6.44 (June)

6.60 (Feb.)

6.44

6.52

6.45

6.45

6.45

6.45

Netherlands:
Government

5.46 (5/5)

6.09 (12/29)

6.21 (1/5)

6.65 (7/12)

6.55

6.65

6.56

6.54

6.53

n.a.

Canada:
Government-4-1/2% 1972 5/
4-1/2% 1983 5/

4.98 (3/29)
5.44 (3/17)

6.75 (12/27)
6.69 (10/18)

6.34 (8/8)
6.45 (8/7)

7.28 (5/22)
7.08 (5/22)

6.61
6.67

6.77
6.65

6.46
6.48

6.38
6.48

6.38
6.51

6.24
6.45

7.28 (Aug.)
7.30 (Jan.)

7.37 (Jan.)
8.17 (Dec.)

7.39 (Jan.)
8.51 (Jan.)

7.52 (June)
8.84 (June)

7.5261 n.a.
8.84- n.a.

n.a.
n.a.

n.a.
n.a.

n.a.
n.a.

n. a.
n.a.

7.56 (Jan.)

8.58 (Dec.)

8.57 (Feb.)

8.83 (June)

8.83 6

n.a.

n.a.

n.a.

n.a.

Japan:
3/
Banks loans & discounts
Bank Debentures 3/
Telegraph & Telephone
Bonds 3/
Thursday rates.
June.
Note:

If

2/ Net of withholding tax,
weekly average.

3/ Monthly averages.

high or low rate prevailed on more than one date in period,

n.a.

4/ Beginning of month.

only latest date is

shown.

5/ Wednesday rates.

VI - 18

In the United Kingdom short-term rates have declined
significantly while long-term rates, although slightly below their

mid-July highs, remain above the end-of-May levels.

The sharp de-

cline in Euro-dollar rates from their peaks at the end of May has
been a major factor permitting the decrease of U.K. short-term
yields.

The markedly lower discount on forward sterling probably

both reflected and aided the strengthening trend in British financial
markets.

The expectation throughout July that the discount rate

would be reduced also contributed to the decline in the Treasury

bill rate.

It was widely assumed that the authorities would react

to the strengthening of sterling in early July by lowering Bank Rate,
and the market had discounted the anticipated reduction.

However,

the setback dealt to sterling by the poor July trade figures and the
impact of the East European crisis make a cut in Bank Rate in the
coming weeks unlikely.

British long-term interest rates rose very sharply from
May until early July in connection with increased concern over the
future of the $2.40 parity.

In the early part of July, however, bond

prices advanced markedly, primarily in response to (a) assurances
that international assistance would be provided to deal with withdrawals of officially held sterling balances and (b) the announcement
that Britain's trade deficit had substantially narrowed in June.
Bond prices weakened again in Mid-August on news that the July trade

VI - 19
deficit had again widened.
reduced bond prices further.

The Czech crisis the following week
Gilt-edged yields, although above

end-of-May levels, currently remain below their early July highs.
When the pound was devalued in November, the Bank of England
instructed the banks to limit the total volume of lending to the
private sector to levels then outstanding.

Loans to finance exports

were exempted, however, and, as a result, total lending continued
to rise.

By late May private sector loans were 4 per cent above the

November level, indicating that "export" credits extended by the
banks during this period were exceedingly large.

The Bank of England

was therefore prompted, on May 24, to impose a new ceiling directing
that lending to private borrowers not exceed the May level.

Loans

for exports were included under the May ceiling, indicating that the
Bank was tightening monetary policy further.
Through August, private borrowing at banks stayed within
the prescribed limits, but there are indications that the demand
for bank credit is strengthening.

Since the Bank has made clear

that breaches of the ceiling will not be allowed, lower interest
rates would be inopportune--an additional reason not to expect a
Bank Rate reduction in the near future.
Financial markets in Germany have remained liquid, although
interest rates have moved downward only slightly further.

An indica-

tion of financial strength is the fact that the bond market has been
absorbing a growing volume of net new issues while bond yields have

VI - 20

continued to decline, albeit only slightly.

In July and August nearly

$485 million (equivalent) in DM issues were placed in Germany by
foreign borrowers, $200 million of which was placed by the IBRD.

The

total was significantly larger than the $134 million sold in the first

six months of the year.

The share of foreign issues offered in

Germany taken by German investors has also risen sharply this year-from 38 per cent in the first half of 1967 to 83 per cent.

During the remainder of the year, domestic recourse to the
capital markets is expected to fall off from the advanced levels of
the first eight months.

The central government is not expected to

float any more issues this year, and there are at present only two
local government offerings on the calendar.

Public sector capital

expenditures, however, are expected to continue to rise during the
last half of the year, although at a slower rate than earlier.
By mid-August interest rates in France had declined from
their post-crisis peaks but remained above mid-May levels.

The French

authorities reacted to the crisis by increasing the cost of credit.
At the same time they permitted an extremely rapid rise in the volume
of bank credit outstanding to accommodate the financial requirements of
those many firms, particularly smaller ones, left on the verge of
bankruptcy by strike losses and greatly increased wage bills.

"Medium

and small firms" were cushioned from the cost effects of higher interest

VI - 21

rates, and their access to bank credit was facilitated by the creation
of special borrowing facilities.

Such enterprises, constituting 90

per cent of all French firms, may borrow from commerical banks their

increased working capital requirements made necessary by the unrest
for a period of up to 18 months at a fixed rate of 5 per cent.

Loans

made under this regulation are rediscountable at the Bank of France
outside the discount ceilings and at 3-1/2 per cent, i.e., at the
discount rate prevailing before the July 2 increase.

Also, in July

the medium-term paper reserve requirements for commercial banks were

reduced from 16 per cent of deposit liabilities to 14 per cent.

It

is estimated that this had the effect of reducing total reserve requirements (cash plus medium-term paper) from about 20 per cent to about
18.

Basic rediscount ceilings for individual banks were also increased

by 20 per cent for a four-month period.
As a result of the above measures, Bank of France credit
increased from Fr. 23,763 million on May 8 to Fr. 34,980 million on
August 14, an increase of over 47 per cent. During the same period
in 1967, central bank credit increased by only 7 per cent.
The much higher budget deficit resulting from the Spring
unrest implies increased Treasury recourse to the money market.

Dur-

ing the period from mid-May to August 8, the Treasury auctioned Fr. 3.7
billion of 12- and 10-month bills, compared with Fr. 2.0 billion a
year earlier, an increase of 85 per cent.

The cost of Treasury borrow-

ing was up, though not as much as the discount rate; before the crisis,

VI - 22

the yield on such bills averaged about 5.3 per cent. about 60 basis
points below recent rates.

The French Treasury debt is becoming more

concentrated in short-term maturities and the Treasury will likely
continue to be an active participant in the short-term market.

In

the long-term sector of the market, however, new bond issue activity
by the private sector has been at a virtual standstill.
In the Netherlands short-term rates increased from mid-May
to the end of July by over 1 percentage point.

During August, rates

declined somewhat and are currently approaching end-May levels.

Short-

term rates in Belgium have remained steady throughout the period.

The

short-term rate in Switzerland increased by 50 basis points between
the end of April and early June and has not since declined.

In May

and June bond yields in Italy continued their upward movement, while
longer-term rates in Belgium and the Netherlands fluctuated within a
relatively narrow range during the May-August period.

Effective August 29, the Danish discount rate was reduced
from 6-1/2 to 6 per cent--the third reduction this year--in recognition of continued tendencies toward better overall balance in
the Danish economy.
Monetary conditions in Canada have eased significantly during
recent weeks.

The Bank of Canada reduced the bank rate in two 1/2

percentage point steps during July, and effective September 3, the
discount rate has been reduced another 1/2 percentage point to
per cent.

The Canadian Treasury bill yield is currently almost 1-1/2

VI - 23

percentage points below the May peak, and long-term government bond
yields have declined by about 65 basis points over the same period.
Short-term rates are now at the levels which prevailed before Canada's
foreign exchange crisis began in January.
The shift from the extreme tightness of early 1968, when
interest rates reached record highs, has a number of explanations.
The principal factor was the end of Canada's foreign exchange crisis
and speculative capital outflows, and their replacement by an already
large and potentially sizable inflow of reserves.

Since Canada had a

very strong trade account and also undertook heavy flotations of bonds
abroad during the first half of 1968, the reversal of speculative
capital outflows has caused a rapid increase in official foreign exchange

reserves.

The reserves are approaching the $2,544

billion limit which

was agreed upon with the United States in exchange for the exemption
of Canada from the IET on new issues, and the Bank of Canada is easing

monetary policy partly, at least, in order to discourage a continuation
of this potentially embarrassing capital inflow.
The second major factor contributing to the Bank of Canada's
decision to ease credit conditions is provided by a combination of
soft domestic demand pressures and the March imposition of an income

tax surcharge.

Since demand pressures had partially subsided by the

time the tax increase was passed, monetary policy was eased to maintain
domestic aggregate demand at desirable levels.

The decline in United States interest rates in recent months
provides a third cause for the downward trend in Canadian yields.

The

VI - 24 extensive integration of the financial markets of the two countries
means that Canadian interest rates have an inherent tendency to follow
the trend in United States yields, even in circumstances--unlike the
present--when Canadian economic objectives would seem to call for
an opposite trend.
Japan formally relaxed its tight money policy on August 7,
when the Bank of Japan reduced its basic discount rate from 6.21 per
cent to 5.84 per cent.

This move restored the rate to the level pre-

vailing prior to January 6, 1968.
reduced in August.

Other interest rates were also

The over-month-end call loan rate was cut on

August 7 to 8.76 per cent from 9.13 per cent.

On August 9 the Bankers'

Association reduced by 0.365 percentage points the maximum interest
rate on new loans.

The average interest rate on bank loans and discounts had
already leveled off in the second quarter at 7.52 per cent, having
risen from a low of 7.28 per cent reached last August.

It is likely

that this rate will ease now, in line with the trend for other money

rates.
Selected long-term rates generally rose during the first
half of this year; unfortunately, more recent data are not available.
The yield on bank debentures increased from 8.51 per cent in January
to 8.84 per cent in June, and the yield on Japan's telegraph and telephone bonds also rose from 8.70 to 8.83 per cent over the same period.

VI - 25 -

Although some interest rates are declining, credit conditions
are likely to remain somewhat tight through September.

The Bank of

Japan's current quarterly ceiling on the expansion of commerical bank
credit, which is relatively stringent, will remain in force through
September.

APPENDIX A:

BANK LENDING PRACTICES SURVEY *

Four-fifths of the 125 banks reporting in the August 15 Bank
Lending Practices Survey indicated that demand for business loans was
essentially unchanged or moderately weaker during the preceding three
months (Table 1). This is in marked contrast to the previous survey,
in which 70 per cent of the banks expected that loan demand would be
stronger in this period. About 80 per cent of the respondent banks
now anticipate unchanged or moderately weaker loan demand over the
next three months ending in November. However, with loan/deposit ratios
still very high, most banks reported that lending policies in August
remained unchanged from those in May.
Interest rates and compensating balance requirements.
Nearly 85 per cent of the banks indicated essentially unchanged
interest rate policy on loans to business borrowers and 96 per cent reported unchanged interest rate policy in dealing with independent finance
companies. Policies regarding compensating balances--which influence
the effective interest rate borrowers must pay--were also unchanged at
nearly all the banks on loans to both business borrowers and independent
finance companies, although, as with interest rate policy, this percentage was somewhat higher with respect to finance companies.
Other nonprice terms and conditions.
Nonprice terms and conditions on loans to businesses also were
unchanged at most of the reporting banks. However, a small percentage
of the banks reported moderate easing of policies on loans to new and
established customers, and to local service area customers.
Other types of loans.
For the most part, the willingness of banks to make other types
of loans was also unchanged since the preceding survey. Although about
one-fifth of the reporting banks were more willing to make single-family
mortgage loans, a somewhat smaller number reported that they were less
willing to make other types of mortgage loans. As in the last survey,
however, an appreciable number of banks reported that they had become
more willing to make consumer instalment loans.
Size of bank differences.
Demand for business loans as compared to three months ago, and
that anticipated in the next three months is reported to be somewhat
stronger at larger rather than smaller banks (Table 2). Generally, however,
no significant differences exist with respect to bank size as to policy
responses on interest rate, compensating balance, or nonprice terms and
conditions. Smaller banks indicated a firmer policy with respect to establishing new or larger credit lines to independent finance companies
than did larger banks. Large banks seemed less willing to make mortgage
loans, broker loans, and participation loans with correspondent banks.
* - Prepared by Don Matthews, Research Assistant, Banking Section,
Division of Research and Statistics.

A-2

Factors associated with policy changes.
While many banks commented that there had been no significant
changes in the last ninety days, several stated that since July 31 they
had begun to climb out of the tight money situation as a result of improved deposit inflows. One bank in qualifying its essentially unchanged
policy indicated that it felt that conditions for the past year relating
to deposit levels, loan demand, interest rates, etc. had been characterized by considerable uncertainty.
Some indicated that with improved deposit inflows and with demand for loans expected to be moderately weaker during the next three
months, they are presently considering a move to more active loan policy.
A Philadelphia bank said, "We are aggressively seeking any type of sound
and profitable loan." However, many banks point to continued high
loan/deposit ratios as the reason for their unchanged restrictive loan
policies.
Several banks in New York indicated less willingness to make
loans to brokers. One bank stated that it had all loans to brokers
under surveillance due to the difficulties that these institutions
were experiencing--paper jam, financial problems, etc.

NOT FOR QUOTATION OR PUBLICATION

_

TABLE 1

___

PAGE 01

___

QUARTERLY
(STATUS OF

SURVEY OF CHANGES IN BANK LENDING PRACTICES
AT SELECTED LARGE BANKS IN THE U.S.
1/
POLICY UN
AUGUST 15,1968
COMPARED TO THREE MONTHS EARLIER)
(NUMBER OF BANKS C PERCENT OF TOTAL BANKS REPORTING)

BANKS

MODERATELY
STRONGER

ESSENTIALLY
UNCHANGED

MOE RATEL Y
WEAKER

PCT

BANKS

BANKS

BANKS

MUCH
STRONGER

TOTAL
PCT

BANKS

PCT

PCT

PCT

MUCH
WEAKER
BANKS

PCT

STRENGTH OF DEMAND FOR COMMERCIAL ANO
INDUSTRIAL LOANS (AFTFR At LOWANCF _FOR
BANK'S USUAL SEASONAL VARIATION)
COMPARED TO THREE MONTHS AGO
ANTICIPATED

DEMAND

3 MONTHS

IN NEXT

125

100.0

2

1.6

23

IB.4

72

57.6

124

10J.0

0

0.3

26

21.0

72

58.0

27

21.6

1

0.8

26

21.0

0

0.0

-~-~---~--~-

MUCH
FIRMER
POLICY

ANSWERING
QUESTION

-j BANK_ _PGI_ _
LENDING TO NONFINANCIAL
TERMS

PCT

ESSENTIALLY
UNCHANGED
POLICY

BANKS

PCT

BANKS

PCT

MODERATELY
EASIER
POLICY
BANKS

PCT

MUCH
EASIER
POLICY
BANKS

PCT

BUSINESSES

AND CONDITIONS:

125

100.0

1

O.d

9

7.2

106

84.8

9

7.2

0

0.0

125

100.0

1

0.8

9

7.2

111

88.8

4

3.2

0

0.0

STANDARDS OF CREDIT WORTIINESS

125

100.u

0

0.0

8

b.4

115

92.0

2

1.6

0

0.0

MATURITY OF TERM LOANS

125

100.0

0

0.0

7

5.6

113

90.4

5

4.0

0

0.0

125

100.0

0

U.0

2

1.6

114

91.2

9

7.2

0

0.0

125

100.0

4

3.2

9

7.2

92

73.6

19

15.2

1

0.8

123

100. 0

4

3.3

108

o

O.u

123

100.0

17

13.8

94

INTEREST RATES
COMPENSATING

REVIEWING

CHARGED

OR SUPPORTING

BALANCES

CREDIT LINES OR LOAN APPLICATIONS

ESTABLISHED CUSTOMERS
NEW

CUSTOMERS

LOCAL

SERVICE AREA CUSTOMERS

NONLOCAL SERVICE AREA

1/

BANKS

MODERATELY
FIRMER
POLICY

SURVEY
AS OF

CUSTOMERS

OF LENDING PRACTICES AT
AUGUST 15, 1968.

125 LARGE BANKS

REPORTING

IN

THE

FEDERAL

RESERVE QUARTERLY

8.8
76.4

INTEREST RATE SURVEY

TABLE

NOT FOR QUOTATION OR PUBLICATION

MJCH
FIRMER
POLILY

ANSWERING
QUESTI ON
BANKS
FACTORS

PCT

BANKS

PCT

PAGE 02

MODERAT ELY
FIRMER
POLICY

ESSENTIALLY
UNCHANGED
POLICY

MODERATELY
EASIER
POLICY

BANKS

BANKS

BANKS

PCT

PCT

PCT

MUCH
EASIER
POLICY
BANKS

PCT

RELATING TO APPLICANT 2/

VALUE AS DEPOSITOR OR
SOURCE OF CJLLATBEAL BUSINESS

125

100.0

3

2.4

15

12.0

105

84.0

INTENDME

124

100.0

2

1.6

12

9.7

106

85.5

124

100.0

0

0.0

4

3.2

119

96.0

0

0.0

COMPENSATING OR SUPPORTING BALANCES

124

100.0

0

0.0

4

3.2

119

96.0

0

0.0

OF BALANCE REQUIREMENTS

123

100.0

1

0.8

10

8.1

111

90.3

0

0.0

124

100.0

8

6.5

19

15.3

89

71.7

0

0.0

USE OF THE LOAN

TERMNS AND CONDITIONS

_

FINANCE COMPANIF S

LENDING TO "NONCAPTIVE"
_

_INTFRFST RATES CHARGED

ENFORCEMENT

__

ESTABLISHING NEW OR LARGER

LRED1

LINES

ANSWERING
QUESTI 'J
BANKS
TO MAKE OTHER

WILLINGNESS

JIEBM

LDANS

CONSUMER
SIMGI

T

ALL

BUSINESSES

_ _

FAMILY MORTGAGE LOANS
I3RTGAGE LOANS

OTHER MORTGAGE

PARTICIPATION
CORRESPONDENT

LOANS__

LOANS WITH
BANKS

LOANS TO BROKERS

PCT

CONS IDERABLY
LESS
WILLING
BANKS

PCr

ESSENTIALLY
UNCHANGED

MO)E RATELY
MORE
WILLING

PLT

BANKS

BANKS

4 3DRATELY
LESS
ILLINC
JANKS

PCT

PCT

CONSIDERABLY
MORE
WI LLING
BANKS

PCT

TYPES OF LOANS

INSTALMENT LOANS

Ui_
MLI-FILY

2/

1 (CONTINUED)

_

125

100.0

2

1.6

12

9.6

103

82.4

_6.4

0

0.0

124

100.0

0

0.0

3

2.4

104

83.9

12.1

2

1.6

8

6.6

86

71.1

18.2

4

3.3

B-.b

J2L1 Lfa.A-

1

121

100.0

3

2.5

13

10,7

99

81.8

3.3

Z

1.7

121

100.0

2

1.7

14

11.6

93

76.8

9.1

1

0.8

125

100.0

1

0.8

9

7.2

107

85.6

124

iOJ.0

1

0.8

13

10.5

104

83.9

FIRMER MEANS THE FACTORS WERE CDNSIDERED
FOR THESE FACTORS,
CREDIT REQUESTSt AND EASIER MEANS THFY WERE LESS IMPORTANT.

MORE

IMPORTANT

IN

--

.,

MAKING DECISIONS FOR APPROVING

NOT FOR QUOTATION OR PUBLICATION_
COMPARISON

_ _
___

___

__

PAGE 03

TABLE2 __

BANKS GROUPED BY SIZE OF TOTAL DEPOSITS/
OF QUARTERLY CHANGES IN BANK LENDING PRACTICES ALL
AUGUST 15, 1968, LOMPARED TO THREE MONTHS EARLIER)
(STATUS OF POLICY ON
___
{__(NUMBER OF BANKS IN EACH COLUMN AS PER CENT OF TOTAL BANKS ANSWERING QUESTION)

_

---

SIZE

TOTAL

51 &

UNDER

OF BANK

--

TOTAL

DEPOSITS IN BILLIONS

MODERATELY
STRONGER

MUCH
STRONGER
UNDER
$1

$1 &
OVER

OVER

$I

$1 &
OVER

100

103

2

I

24

100

100

0

0

29

ESSENTIALLY
UNCHANGED

UNDER
$1

$1

&

JVER

UNDER

$1

MODERATELY
WEAKER
$1 &
OVER

UNDER
$1

MUCH
WEAKER
$1 &
OVER

UNDER
$1

STRENGTH OF DEMAND FOR COMMERCIAL AND
INDUSTRIAL LOANS (AFTER ALLOWANCE FOR
BANK'S USUAL SEASONAL VARIATION)
COMPARED TO THREE MONTHS AGOi
ANTICIPATED DEMAND

IN NEXT

3 MONTHS

TOTAL

$1 &
OVER

LENDING TO NM3FINANCIAL

UNDER
$1

MODERATELY
FIRMER

MJCH
FIRMER

$1 &
OVER

~~-----------~

UNDER
$1

$S E
OVER

UNDER
$1

_

ESSENTIALLY
UNCHANGED

MODERATELY
WEAKER

$1 &
VEI

$1

UNDER
$I

&

UNDER

OVER

$1

0

1

0

0

MUCH
WEAKER

St & UNDER
OVER
$1

BUSINESSES

TERMS AND CONDITIONS:
INTEREST RATES ChARGED

100

2

0

8

COMPENSATI(G OR SUPPORTING BALANCES

100

2

u

7

STANDARDS OF CREDIT WORTHINESS

100

0

MATURITY OF TERM LOANS

1 00

0

0

8

7

0

0

I

0

0

0

0

0

4

o

0

94

0

0

-------

~------~--

6

REVIEWING CREDIT LINES OR LOAN APPLICATIONS
ESTABLISHED CUSTOMERS

tOO

100

0

NEW CUSTOMERS

100

100

5

76

2

0

LOCAL SERVICE AREA CUSTOMERS

100

100

0

89

o
0

o0

NONLOCAL SERVICE AREA CUSTOMERS

1OO

100

5

76

3

0

--

0

41 LARGE BANKS (DEPOSITS OF $1 hlLL O1 OR MIOE) AND
J1 SURVEY OF-LENDING PRACTICES AT
$1 BILLIOm REPORTING IN THE FEDERAL RESERVE QUARTERLY INTEREST RATE SURVEY AS OF

84 SMALL BANKS (DEPOSITS
1968.
AUGUST 15,

OF

LESS THAN

NiT

FIJR

I0
Il
QUOTATIIININR PULla.

PAGE 04

TAdLE Z _LCCNIlJEDL)_ __

SIZE
NUM3ER
ANSWERI ,3
QUESTI '13

OF BANK

MUCH
FIRMER
POLICY

-TOTAL DEP3SITS I BILLION.
MODERATELY
MODERATELY
ESSENTIALLY
EASI-P
FIRMER
UNCHANGED
POLICY
POLICY
POLICY

$1 &
UVER

UNDER
$1

$1 .
OVER

UNDER
$1

MUCH
EASIER
POLICY

$1 6
OVER

UNDOE
$1

$1 &
OVER

UNDER
$1

SOJRCE OF COLLATERAL BUSINESS

100

100

0

0

0

INTENDED USE OF THE LJAN

100

100

2

0

0

INTEREST RATES CPARGED

100

100

0

0

3

4

97

9'

0

1

0

0

COMPENSATING OR SUPPORTING BALANCES

100

100

0

0

3

4

94

96

3

0

0

0

ENFORCEMENT OF BALANCE REQUIREMENTS

100

100

0

1

3

11

3

0

0

0

18

5

7

0

0

$1 &
OVER

UNDER
$1

$1 &
OVER

UNDER
$1

FACTORS RELATING TO APPLICANT 2/
VALUE AS DEPOSITOR

OR__

LENDING TO "NLNCAPTIVE"

FINANCE COMPANIES

TERMS AND COYI1TI3NS:

ESTABLISHING NEW OR LARGER CREDIT LINES

100

NUMBER
ANSWERING
QUESTION
g
$1
OVER

UNDER
$1

8

CONSIDERABLY
LFSS
WILLING
_1

& _UNDER.

OVER

$1

10

MODERATELY
LESS
WILLING
_$I & _UNDE
OVER
$1

ESSE4TIALLY
U\ CHANGED
$1 &
UVLR

'JD-ER
$1

MODERATELY
MORE
WILLING _

$1 &
OVER

UNDER
$1

CONSIDERABLY
MORE
WILLING

$1 &
OVER

UNDER
1S

TO MAKE OTIER TYPES OF LOANS

SWILLINGNESS

TO BUSINESSES

100

100

INSTALMENT LOANS

100

100

100

100

TERM LOANS
CONSUMER

3

100

SINGLE FAMILY MORTGAGE LOANS

__

_

86

81

5

7

0

0

3

8o

83

8

14

3

1

66

74

21

17

8

1
1

7

5

1

0

7

___

7

6b

89

8

1

3

21_

7

66

83

13

7

0

1

12

5

76

90

12

4

0

0

1

15

78

87

7

4

0

O

100

1JO

3

2

ALL OTHER MORTGAGE LOANS

100

100

0

2

PARTICIPATION LOANS WITH
CORRESPONDENT BANKS

100 -IJU

0

100

0

MULTI-FANILY

LOANS

MORTGAGE LOANS __

TO BROKERS

MEANS TrlH FACTUR;
F.jMj4E
2f FOR THESE FACTORS,
CREJIT RLrtUESTS, AND EASILR MEANS THEY htRE

100

WEifE CONSIDEIREO
LESS IMPCRTANT.

MUR

_18

IMPORTANT

IN MAKING

DECISIONS

FOR

APPROVING

TABLE 3
NET RESPONSES OF BANKS IN LENDING PRACTICES SURVEYS
(In per cent)

Strength of loan demand 1/
(compared to 3 months ago)
Anticipated demand in next 3 months

Feb.
1967

May
1967

Aug.
1967

Nov.
1967

Feb.
1968

May
1968

Aug.
1968

-29.3
17.3

12.0
44.4

20.2
63.2

18.8
71.2

-8.0
50.0

64.8
66.4

-2.4

21.6

- 3.0

-69.8
1.5
9.5
- 3.1

12.0
5.6

30.4
25.0
8.9
12.1

34.4
16.1
7.3
1.6

93.6
56.8
32.8
32.8

-14.3
-38.3
-17.6
-10.8

-14.2
-23.1
-12.1
- 4.0

1.6
16.8
0.8
16.1

6.4
21.6
6.5
18.9

-0.8
10.5
2.5
11.6

28.0
64.8
30.0
56.9

-5.6
-5.6
-5.6
10.6

5.3
-12.9

6.3
-13.4

25.6
10.4

20.0
14.4

19.2
12.0

54.4
44.4

12.8
8.1

-49.6
4.5
9.8
- 0.8

-14.2
2.4
4.8

6.4
9.6
14.4
13.7

10.4
11.2
17.6
14.4

22.4

60.5
25.0
32.3
53.2

2.4
2.4
8.1
15.3

-25.6
-23.5
-42.0
- 4.6
-14.5

-21.5
-31.2
-53.2
-17.0
-28.3

6.4
-16.1

11.2
-16.1
4.1
14.0
14.0

- 4.0
-22.6
- 4.9
7.4

49.6

4.8
-11.3
-14.1
8.2
3.4

-22.1
-17.4

-24.2
-13.8

- 6.4
1.6

- 4.8
3.2

8.8
1.6

LENDING TO NONFINANCIAL BUSINESSES 2/
Terms and Conditions
Interest rates charged
Compensating or supporting balances
Standards of credit worthiness
Maturity of term loans

-75.2
2.3
9.1

20.8

Reviewing Credit Lines
Established customers
New Customers
Local service area customers
Non-local service area customers

Factors Relating to Applicant
(Net percentage indicating more important)
Value of depositor as source of business
Intended use of loan
LENDING TO NONCAPTIVE FINANCE COMPANIES 2/
Terms and Conditions
Interest rates charged
Compensating or supporting balances
Enforcement of balance requirements
Establishing new or larger credit lines
WILLINGNESS TO MAKE OTHER LOANS

- 5.6

5.6
12.8
7.2

3/

Term loans to businesses
Consumer instalment loans
Single-family mortgage loans
Multi-family mortgage loans
All other mortgage loans
Participation loans with correspondent
banks
Loans to brokers

- 8.2

9.0
9.8

- 0.8

32.0
36.4
43.4
16.0
23.4

1/ Per cent of banks reporting stronger loan demand minus per cent of banks reporting
Positive number indicates net stronger loan demand, negative number
weaker loan demand.
indicates net weaker loan demand.
2/ Per cent of banks reporting firmer lending policies minus per cent of banks reporting weaker lending policies. Positive number indicates net firmer lending policies,
negative number indicates net easier lending policies.
3/ Per cent of banks reporting less willingness to make loans minus per cent of banks
Positive number indicates less willingness, negative number
more willing to make loans.
indicates more willingness.
133 banks participated in the February 1967 Survey; 125 banks have participated
NOTE:
in the surveys since that time.

1.6
6.5

B - 1

APPENDIX B:

CHANGES IN U.S. LIABILITIES TO FOREIGN OFFICIAL ACCOUNTS

The three tables appended deal successively with (1) the
financing of the U.S. balance of payments deficit, (2) the composition
of changes in U.S. liabilities to foreign official accounts, and (3)
the place of changes in U.S. liabilities among the official reserve transactions of 7 continental European countries, and the relation of these
changes to the over-all balance of payments surpluses of this group of
countries.
The period covered is a 2-1/4-year interval starting from
March 31, 1966. This is divided into 6-month periods and one 3-month
period, chosen to avoid periods ending at midyear or December 31. The
following list will serve as a reminder of the state of economic affairs
in each period.
I. April-September 1966

Culmination of tight money.
Downturn in Germany and U.K.

II.

III.

IV.

Oct. 1966-Mar. 1967

Recessions in Europe and U.S.
Early-1967 revival of confidence
in sterling.

April-September, 1967

Beginnings of upturns.

Oct. 1967-Mar. 1968

Sharp rise in U.S. imports.
Sterling devaluation.
Gold rush.

V.

April-June, 1968

Further expansion.
French crisis.

Over these 27 months there was only a negligible net increase
(under $0.4 billion) in total U.S. liquid and near-liquid liabilities

to foreign official accounts apart from the transfer of U.K. security
portfolio proceeds to the U.K. reserves.
(See last line of Table 1, with
footnote 2.)
In period III, however, there was a large increase ($1.5

billion); together with a large increase in liquid liabilities to foreign
private accounts, including the foreign branches of U.S. banks, this
covered a very large over-all deficit ($4.4 billion at an annual rate, on
basis described in footnote 1 of Table 1) and also served to provide a
substantial amount of assistance to the United Kingdom (represented approximately by the $0.9 billion increase in official U.S. holdings of convertible
foreign currencies -- 4th line of Table 1). In period IV the U.S. deficit
increased further and even larger assistance was given the United Kingdom
than in period III, but the rise in U.S. liabilities to foreign official
accounts was reduced to negligible proportions (apart from the liquefying

B - 2

of the British security portfolio), because gold sales jumped to $2.4
billion. These gold sales -- the amount includes, of course, the U.S.
share of gold pool sales -- were partly to central banks, partly to
other foreign buyers, and partly to domestic buyers. To the extent that
the other foreign buyers were moving out of currencies other than dollars,
their purchases caused reserve losses for the countries whose currencies
were involved; through the operation of the pool these reserve losses
took the form partly of gold losses in those countries and partly of reduction in U.S. liabilities.
In the second quarter of 1968 -- period V -- U.S. liabilities
to foreign accounts fell by $1.4 billion in three months, despite the
continuing large U.S. balance of payments deficit. As may be seen in the
last column of Table 1, this astonishing result was due mainly to the
extremely large ($2.3 billion) increase in U.S. liquid liabilities to
private foreign accounts, which in turn was made possible by flights of
private foreign funds out of sterling and the French franc, mainly via
the Euro-dollar market. Besides this, the period was a seasonally favorable one (to the extent of $0.3 billion). Other changes, mutually offsetting, were an increase in our IMF position resulting from the British
and French IMF drawings, and a related reduction of our official holdings

of foreign currencies as the U.K. paid off Federal Reserve swap drawings.
Table 2 shows that over the 2-1/4 years under review the net
change in U.S. liabilities to foreign official accounts was made up as
follows:
To other than leading industrial countries
To Canada and Japan
To United Kingdom (adjusted for portfolio
liquidation)
To 7 Continental European countriesl/
Unallocated

+$1.4 billion
- .3
+
+$

.6
.1
.1
.4 billion

The rise in liabilities to countries outside the Group of Ten took the
form mainly of an increase in time deposits of original maturity over one
year. Japan also acquired long-term time deposits and Canada took nonmarketable U.S. Treasury bonds denominated in U.S. dollars: "liquid"
dollar assets of these two countries were reduced by $1.5 billion. They
took no foreign currency claims on the United States.
The seven continental European countries took virtually no

long-term time deposits or nonmarketable U.S.-dollar securities, but they
increased their official foreign currency claims on the United States by
$0.5 billion.

I/

Including BIS.

B - 3
The U.S.-dollar official claims of these countries on the
United States were reduced by $0.4 billion over the 2-1/4-year period
(next-to-last line of Table 3; excluding BIS). The last line of
Table 3 indicates that through swap drawings initiated by the Federal
Reserve, $0.8 billion of the $1.2 billion increase in such dollar
liabilities during periods I to IV -- from March 31, 1966 to March 31,
1968 -- was given exchange value guaranties; in the second quarter of
1968, when the dollar liabilities fell to these countries by $1.6
billion, the swap drawings on them were cut only $0.5 billion.
Table 3, line I, shows that the continental G-10 countries
had a fairly steady over-all balance of payments surplus (as measured
by changes in net external assets of commercial banks plus net official
reserve assets) between March 31, 1966 and March 31, 1968, at annual
rates between $1.5 and $2 billion, with seasonally more favorable results
in the April-to-September semesters. In these 24 months, their net official reserve assets rose by $2.8 billion, with a similar seasonal variation.
It should be observed, however, that in period IV -- October 1967 to
March 1968 -- both the over-all surplus and the reserve gain would have
been larger if it had not been for gold-rush buying by holders of their
currencies.
In periods I and II, the increase in U.S. liabilities to offi-

cial accounts in these seven countries was substantially smaller than
their total net reserve asset gains, because they acquired some gold and
added substantially to their IMF and GAB positions. In period III, however, the U.S. liabilities increased by $1.2 billion, a little more than

the amount of net reserve gains.
The subsequent shrinkage in the rate of additions to U.S.
reserve liabilities to these countries was not due to the shrinkage,
seasonal or otherwise, in their over-all payments surplus, because this
shrinkage was more than compensated for by their gold losses. What
caused the slowing in rise of their claims on the United States was a
sharp increase in their reserve claims on other countries, primarily
on the United Kingdom.
In period V -- the three months April-June of this year -- U.S.
official reserve liabilities to the seven continental G-10 countries fell
by $1.5 billion. The decline occurred mainly in dollar holdings of
Germany and Italy; both countries purchased substantial amounts of gold,
and French and British drawings of their currencies through the IMF were
converted into dollars.

September 5,

1968

B-4

Table 1
FINANCING THE U.S. PAYMENTS DEFICIT-1
(in millions of dollars)

Six-month periods ending:
Sept.
March
Sept.
March
1966
1967
1967
1968

AprilJune
1968p.

Adjusted deficiti/

Seasonally adjusted
Annual rate (b.)
Actual amount, s.a.
Without seas. adj.

2.0
1,110
1,560

3.4
1,704
,1,570

4.4
2,177
2,285

5 .9j/
2,971
2,748

4.2
1,062
762

Incr. in U.S. official holdings
of convertible fgn.currencies
Net financing through gold, IMF,
and liability increases

589

-834

886

1,546

-267

2,149

736

3,171

4.294

495

Incr. in liquid liabilities:
to commercial banks
to other private fgn. accts.

1,460
157

80
26

1,447
108

1,217
227

2,219
96

382

172

107

2,374

22

403

32

-10

-97

-437

-253

426

1,519

Gold sales
Decr. in IMF position (incr.,-)
less gold deposit liab. to IMF
Incr. in liabilities to foreign
official accounts

1/

573 3 /

-1,405

This analysis deals with the balance financed by official reserve transactions and increases in liquid liabilities to commercial banks abroad and
to other foreign private accounts. This is closely similar to the balance
on the liquidity basis before special transactions, except that it counts
"above the line " rather than as financing items, the following: all
changes in liabilities, liquid or nonliquid, to international institutions
other than the IMF; foreign prepayments of debts to the U.S. Government;
and certain special transactions other than changes in foreign official
holdings of nonmarketable U.S. Treasury debt and long-term time deposits.
In particular U.K. official transactions in U.S. corporate and Agency
securities are counted above the line.
2/ Would be $4.9 billion if adjusted for U.K. reserve addition from security
liquidations.
3/ Includes proceeds of U.K. security liquidations added to U.K. reserves
($490 million).

September 5, 1968
B - 5

Table 2
BREAKDOWN OF CHANGES IN
LIABILITIES TO FOREIGN OFFICIAL ACCOUNTS 1'
(in millions of dollars)

Six-month periods ending:
Sept.
March
Sept.
March
196R
1967
1967
1966

Total

-253

To others than leading industrial countries:
Long-term time deposits
196
Non-marketable US-$ bonds & notes
0
Short-term US-$ assets./ & marketable
19
US-$ Govt. securities
-49
Foreign currency securities
Total
(166)

To Canada and Japan:
Long-term time deposits
Non-marketable US-bonds & notes
Short-term US-$ asssts2/ & marketable
US-$ Govt. securities
Total
To United Kingdom:
Long-term time deposits
Short-term US-$ assets2/ & marketable
US-$ Govt. securities
Total
3/
To 7 Continental European countries:Long-term time deposits
Nonmarketable US-$ bonds & notes
Short-term US-$ assets & marketable
U.S.-$ Govt. securities
Foreign currency securities
Total
Unallocated

1/
2/
3/
4/

4

/

113
0
-444
(-331)

426

.519

AprilJune
19Rp

573

-1,405

341
0

243
0

106
10

0
(461)

218
0
(559)

-140
0
(103)

- 36
0
(80)

240
-155

86
200

72
70

58
500

469
0
-8

-135
(-50)

-344
(-58)

-222
(-80)

-351
207

263
(231)

-366
(-418)

605
(569)

-104
(-104)

2

- 1
-6

- 1
-10

61
-671
(-610)

0
-12

-5

707
-198
(497)

-237
- 1
(-241)

1,283
157
(1,433)

-521
474
(-58)

-1,707
126
(-1,589)

4

See last line of Table 1. Does not include changes in foreign official holdings
of U.S. corporate and Government Agency securities.
Includes nonmarketable (short-term) certificates, in addition to marketable bills
and certificates, deposits, and miscellaneous short-term private U.S. liabilities.
Belgium, France, Germany, Italy, Netherlands, Sweden, Switzerland; also BIS.
Miscellaneous nonmarketable U.S. Government liabilities other than U.S. Treasury
securities.

September 5,

1968

B - 6

Table 3
CHANGES IN RESERVE POSITIONS
OF 7 CONTINENTAL EUROPEAN COUNTRIES
(in millions of dollars)

Six-month periods ending:
Sept.
March
Sept.
March
1966
1967
1967
1968

AprilJune
1968p.

Increase in net external assets of
commercial banks & official agencies

1,166

749

1,203

346

n.a.

Commercial banks (short-term)
Official

-194
1,360

572
177

284
919

-59
405

-750

290
585

53
115

121
-385

-746
130

351
29

-28
513
-198
711

235
-226
0
-226

-5
1,188
96
1,092

961
60
476
-416

325
-1,455
126
-1,581

225

-225

403

434

-513

Gold
IMF and GAB positions
Other net assets:
Other than U.S. liabilities
U.S. liabilities
Payable in foreign currency
Payable in U.S. dollars
Memo:

Source:

Increase in US-initiated swap
drawings from these countries
and BIS

Confidential BIS compilations, except breakdown of changes in official
"other net assets"; changes in U.S. liabilities correspond to data in
Table 2, but exclude BIS. Change in "other net assets other than U.S.
liabilities" is a residual, and may include errors arising from differences
between U.S. liability accounts and foreign asset accounts.

IV-C-I

9/3/68

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
SEASONALLY

U.S. EXPORTS BY AREA

ADJUSTED

U.S. MERCHANDISE TRADE

i,,,, IIi

Ii
|
BILLIONS OF DOLLARS
ANNUAL RATES, ADJUSTED FOR STRIKES
CENSUS BASIS
1
3MO MOV AV (121) --

,IN

35

EXPORTS

30

M J 33 1

e IMPORTS
M J 333

1962

1964

1966

1968

U.S. BANK CREDIT OUTFLOWS
TJ

MILLIONS OF

NSA

I

AME
LATIN
---Off

*

1 I I$

F

I

I

\ /EUROPE

,

IC/

JAPAN

23.

p5

iJ^

V/\A
V
1962

IO

VT

LL OTHER

QTT71

1964

I

I

1966

V
1968

LIAB. OF U.S. BANKS TO FOR. BRANCHES
BILLIONS OF DOLLARS
NOT SEASONALLY ADJUSTED

III I

AUG 28 709
6

2

0

END OF QUARTER
196--------966--------6-----1968-1965
1966
1967
1968