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CONFIDENTIAL

(FR)

CURRENT ECONOMIC AND FINANCIAL CONDITIONS

By the Staff
Board of Governors
of the Federal Reserve System

September 9, 1970

TABLE OF CONTENTS
Page Section

SUMMARY AND OUTLOOK
Nonfinancial . . . . . . .
Outlook . . . . . . . .
Financial . . . . . . . .
Balance of payments
. . .

- 1

. .
.
. .
. .

ijji

- 2
- 3
- 6

THE ECONOMIC PICTURE IN DETAIL:
Domestic Nonfinancial Scene
Gross national product . . . . . . . . . . . . .
Industrial production
. . . . . . . . . . . . .
Unit auto sales
. . . . . . . . . . . . . . . .
Consumer credit
. . . . . . . . . . . . . . .
Cyclical indicators
. . . . . . . . . . . . . .
Michigan survey of consumer demand . . . . . . .
Inventories
. . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Manufacturers' new orders
. . . . .. . .
Construction and real estate .
Manufacturers' new capital appropriations
. . .
Anticipated spending for new plant and equipment
Labor market

Industrial relations
Wholesale prices ..
. .
Consumer prices
Corn blight
. . . .

. . .
. . .
. . .
. .

.
.
.
.

. .
. .
. .
. .

.
.
.
.

. .
. .
. .
. .

- 1
- 8
- 9
-

10
11
12
14
16

- 17
- 20
-

21
23
26

- 28
-

29
32

1
3
6
7
9

Domestic Financial Situation
Monetary aggregates
. . . . . . . .
Bank credit
. .
. . . . . . . . .
Nonbank depositary intermediaries
. . . . . . . . . .
Mortgage market
Corporate and municipal bond markets
Stock market . . . . . . . . . . . .
Government securities market . . . .
. .
Other short-term credit markets
. . . . . . . . . .
Federal finance

- 16
- 19
- 23

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

.
.
.
.

. .
. .
. .
. .

.
.
.
.

- 1
- 3
- 6
- 9

2 -

APPENDIX A
Revised Projections for Housing Starts and
Residential Expenditures . . . . . . . . . . .

A
. ...

APPENDIX B
The State and Local Government Borrowing:
Anticipation and Realization . . . . . . . . . .

- 1
B

...

- 1

I-

SUMMARY AND OUTLOOK

Nonfinancial
Data becoming available since the preceding Greenbook
continue consistent with the staff projection of a modest rise in real
GNP in the third quarter and some abatement of upward price pressures.
With output of business and defense equipment apparently

down further and output of consumer goods continuing to edge up, total
industrial production is now estimated to have declined somewhat in
August, following an

increase in July.

The index has been in a very

narrow--one-half of one percentage point--range for the four months
May-August.

Retail sales are tentatively estimated to have declined

one-half to one per cent in August, on the basis of weekly figures,
although the July-August average still appears to be somewhat above the
second quarter level.

Unit sales of new domestic autos were at an

annual rate of close to 8.5 million units in August, for the third consecutive month.

A July increase in new orders was mostly attributable

to defense orders, an erratic series, but capital equipment orders
increased somewhat and were at about the reduced second quarter average.
Meanwhile housing starts increased sharply in July, following a sizable
increase in June.

And the composite index of 12 leading indicators

rose in July for the second consecutive month.
The labor market eased slightly further in August, as employment rate edged up to 5.1 per cent, nonfarm employment declined, and the
average workweek in manufacturing was also off.

Major contracts in the

I-

auto industry expire at midnight September 14, and the UAW strike
targets are GM and/or Chrysler.
Recent price developments offer additional evidence that
inflationary pressures are abating.

On a seasonally adjusted basis,

average wholesale prices declined from mid-July to mid-August, as the
sharp July rise in prices of farm products was more than reversed,
while the rise in industrial commodities slowed further.
sensitive industrial materials declined again.

Prices of

Reports of the corn

blight have raised questions about prospective supplies and prices of
both corn and related products, but we expect that the effect on food
prices will be relatively small at least until early next year.

The rise in consumer prices has also slowed perceptibly in
recent months, with food prices and a leveling off of mortgage interest
rates important contributing factors.

But prices of services generally

have continued to rise sharply and prices of 1971 model autos also will
rise considerably.
Outlook.

Real GNP is expected to increase at a modest pace

in the current quarter and more rapidly next quarter.

In the first two

quarters of 1971, real GNP is projected to increase at an average rate
of 3-1/4 per cent, with growth projected to be a little faster in the
second quarter.

With manpower and capital resources continuing ample

relative to demands, the increase in the GNP deflator is expected to
slow to an annual rate of 3 per cent next spring.
As compared with our last projection, the current outlook is
for greater strength in residential construction, a little less weakness

I-3

in plant and equipment spending, and a somewhat larger decline in
defense outlays.

Housing starts are now projected to rise to an annual

rate of about 1-3/4 million units in the second quarter of next year,
assuming continued relatively sizable inflows of funds into depositary
institutions.

With housing starts generally on a higher track, resi-

dential construction has been raised correspondingly.
The expected decline in business fixed investment is somewhat
smaller than in the preceding projection.

We have made some allowance

for the tendency of new orders for capital equipment to level off most
recently, for the leveling off of new manufacturing capital appropriations in the second quarter and the possibility of a rise this quarter,
and for the modest reduction from earlier plans reported in the August
Commerce-SEC survey.
We note again that our projections assume no lengthy auto
strike.

Any extended strike, particularly against GM, would lower

fourth quarter output and income, consumer spending and inventories
from present projections--and tend to raise these categories in the
first quarter of 1971.

Financial
In August, as investor attitudes changed, both short- and
long-term market interest rates declined on balance, stock prices and
volume rose, and finance companies were able to increase their outstanding commercial paper for the first time since May.

These changes

in financial markets accompanied the more rapid growth of bank credit

I-4
and the monetary aggregates, easing of money market conditions, and
announcement of the cut in reserve requirements.

In early September,

however, the financial markets became somewhat less buoyant in the face
of a mounting forward volume of new security issues and the somewhat
tauter money market conditions that developed in spite of sizable System
reserve supplying operations.
Prospective credit demands over the fall appear to be quite
large.

Despite the expected decline in capital outlays and some improve-

ment in the availability of internal funds, the forward calendar of new
corporate security offerings remains historically high and underwriters
report a significant volume of new and rescheduled issues in process.
State and local governments are also beginning to step up their pace of
offerings, and the most recent FRB-Census survey indicates that these
units plan to expand their borrowing in coming months.

Treasury net

borrowing in the fourth quarter is expected to be around $7-1/2 billion,
larger than in the previous two years.

Moreover, FHLB and FNMA net new

money demands in the final four months of the year are projected by
these agencies to total about $3.0 billion, although, given the apparent
improvement in mortgage credit flows, such large demands may not
materialize.
Current and prospective financial patterns suggest that even
large total credit demands might be accommodated at declining yields
in coming months.

Bank credit growth is expected to remain large as

time deposit expansion continues sizable, though tapering off from the
recent exceptional pace.

The projected deposit growth suggests that

I-5
banks will not only be able to continue to absorb Treasury and taxexempt obligations, but also soon could become more willing lenders to
businesses, and perhaps to the mortgage market.

Indeed, present and

prospective interest rate relationships and continued deposit growth
could set the stage for a cut in the prime rate in the next few weeks.
In the event of such a reduction in the prime rate, there could be a
significant drop in both short- and long-term market yields, as investor
expectations shift and possibly as some businesses shift borrowing from
the open market to banks.
Residential mortgage markets are reflecting the impact of
accelerated savings inflows to nonbank thrift institutions.

With

inflows expected to remain large--although below the July pace--and
with the liquidity of thrift institutions already largely restored,
increased aggressiveness in forward mortgage commitment policies is
likely, particularly with the backstop of a lenient FHLB advance policy.
FNMA and the FHLB continue to plan for maintenance of a high pace of
their own activities, supplemented--under new congressional authority
granted to the FHLB--by the initiation before the end of the year of
some conventional mortgage purchases in the secondary market.

I - 6
Balance of payments
In July-August the over-all payments deficit on the liquidity basis (before special transactions) was at a rate less than half
of the second quarter's $2.2 billion, quarterly rate.
change reflected improvement in the trade balance.

Partly the

Through July at

least, the general trend in exports was still one of rapid expansion,
reflecting strong demand abroad, as had been the case since the beginning of this year.

Particularly notable has been the strength in

shipments of machinery, while sales of industrial materials have
leveled off.

U. S. imports had bulged in May, but in July they were

again no larger in value than during the early months of the year.
A major part of the over-all improvement in the payments
balance after midyear occurred in private capital flows.

Recently

available data show that direct investment outflows in the first and
second quarters were much in excess of the quarterly average implied
in the OFDI program for 1970; probably the pace of these outflows has
been reduced in recent months,

Bank credit reflows after midyear were

another factor, and still another was the resumption, which started
in June, of foreigners' net purchases of U. S. equity securities on a
moderate scale.
Prospective developments in the U. S. economy and in Europe,
Japan and Canada are such as to suggest the maintenance on into next
year of a considerable surplus in U. S. merchandise trade.

The net

inflow of foreign buying in the stock market is also likely to continue.

The OFDI controls should prove helpful during the remainder of

1970 in discouraging direct investment outflows.

I - 7

Despite the improvement in July-August, the liquidity
deficit has continued sizable.

With repayments by U. S. banks of

liabilities to their foreign branches also large in July, the official
settlements deficit for the past two months exceeded its second-quarter
level (over $2 billion quarterly).

Hope that the official settlements

deficit may be smaller in the rest of the year depends a good deal on
faith in the restraint on U. S. banks' Euro-dollar repayments set up
by the

prospect of automatic reductions of reserve-free bases.

The

effectiveness of this restraint is likely to diminish if banks become
convinced that there is little likelihood of a renewed squeeze on
their liquidity positions over the coming year or two.
Foreign central bank reserve gains were extraordinarily large
in the first half of 1970.

In the second quarter, gains by other in-

dustrial countries much exceeded those explainable by U.S. international
transactions; one significant cause of this difference in the second
quarter was a growth of official reserve holdings in the form of dollar
balances with institutions outside the United States.

Even if foreign

reserve gains during the remainder of the year are no larger than the
U.S. official settlements deficit, the growth of official dollar reserves in 1970 will be much larger than was contemplated as an annual
average for the first three-year period of SDR allocations.

September 8, 1970
I -- T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

1970

Per Cent Change* From
1 mo.
3 mos.
Year
ago
ago
ago

May

June

July

82.6
5.0
3.6

82.1
4.7
3.7

82.8
5.0
3.6

82.7

Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing

70.9
19.6

70.6
19.5
51.1

70.6
19.4
51.2

70.5
19.3
51.2

-0 .1
-0 .4
0 .0

-0.4
-1.2
-0.1

0.1
-4.5
1.9

Industrial production (57-59=100)Final products, total
Consumer goods
Business equipment
Materials

169.1
167.8
163.3
170.8

168.8
167.1
162.6
188.3
170.7

169.2
167.2
163.3
186.9
171.5

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

0 .2
0 .1
0 .4
-0 .7
0 .5

-0.6
-0.8
0.1
-3.2
-0.2

-3.1
-3.2
-0.7
-5.1
-2.8

77.8

77.3

77.2

n.a.

[84.6]

Wholesale prices (57-59=100)-5/
Industrial commodities (FR)Sensitive materials (FR)
Farm products, foods & feeds

116.8
115.5
116.9
117.0

117.0
115.7
115.9
117.5

117.7
115.9
114.7
119.3

117.2
n.a.
114.5
117.0

0.3
0.7
-2.1
0.0

3.4
4.0
1.8
2.1

Consumer prices (57-59=100)1/ 5/
Food
Commodities except food
Services

134.6
132.4
122.3
154.1

135.2
132.7
122.8
155.0

135.7
133.4
122.9

155.8

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

1.3
1.1
1.1
1.6

5.9
5.3
4.1
8.2

3.20
3.34
132.93

3.21
3.36
133.73

3.23
3.38
135.82

3.25
3.40
135.14

0 .6
0 .5
-0 .5

1.7
1.9
1.7

5.9
5.0
3.2

85.64

86.12

85.21

n.a.

-1.1

-0.2

Personal income ($ bil.) 2/ 5/

799.7

798.2

801.8

n.a.

0.5

-0.5

6.5

Retail sales, total ($ bil.) 5/
Autos (million units) 2/
GAAF ($ bil.) 3/

30.5
7.8

30.5
8.6
8.2

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

0.7

-1.4
1.8

14.0
-1.1

5.7
-3.2
3.2
-1.3

Civilian labor force (mil.)
Unemployment rate (%)
Insured unempl. rate (%)

Capacity util. rate, mfg.

Hourly earnings, pvt. nonfarm ($)
Hourly earnings, mfg. ($)
Weekly earnings, mfg. ($)
Net spend, weekly earnings, mfg.
(3 dependents 57-59 $) 1/ 5/

51.3

188.7

8.3
2 /

30.7
8.5
8.4

August

-0 .2

0.1
---

5.1
n.a.

--0 .4
0 .2
-0 .2

-1.9
0 .4
0 .5
0 .1
0 .5

12 leaders, composite (1963=100)

114.0

114.3

116.1

n.a.

1.6

0.7

Selected leading indicators:
Housing starts, pvt. (thous.) 2/
Factory workweek (hours)
Unempl. claims, initial (thous.)
New orders, dur. goods, ($ bil.)
Machinery & equipment
Common stock prices (41-43=10)

1,242
39.8
314
29.5
6.2
76.06

1,375
39.8
312
29.7
6.4
75.59

1,585
40.1
270

n.a.

15.3

39.9

-0.56/

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

13.33.3
1.7
2.7

29.5
0.3,
17.27.4
7.0
2.2

30.7
6.5
75.72

77.73

2/ Annual rates.
Based on unrounded data.
1/ Not seasonally adjusted.
Gen'l. merchandise, apparel, and furniture and appliances.
4/ Actual figures.
Per cent calculated to June 1970. 6/ Sign reversed.

2.1
[3.5]1
[2.2]

-1.5

10.9
-I. 76/
-1.76/
-26.0
-1.1
1.9
-17.5

I--

T - 2

SELECTED DOMESTIC FINANCIAL DATA

1969
QIV

Averages
1970
0QII
July

1970
Week ended
Aug. 26

Aug.

Interest rates, per cent
Federal funds
3-mo. Treasury bills
3-mo. Federal agencies
3-mo. Euro-dollars
3-mo. finance co. paper
4-6 mo. commercial paper

8.94
7.36
7.92
10.48
7.89
8.63

8.56
7.21
7.72
9.26
7.94
8.55

7.88
6.67
7.09

Bond buyer municipals
Aaa corporate-new issues
20-year Treasury bonds
FHA mortgages, 30-year

6.40
8.32
6.71
8.53

6.35
8.45
6.78
9.25

6.81

8.87
7.41

8.16
8.94
7.14

9.12

6.34
6.28
6.71

7.21
6.45
6.68
8.76
7.64
8.29

6.61
6.41
8.19
7.48
7.90

8.15

6.53
8.63
6.92
9.11

6.20
8.52
7.08
n.a.

6.16
8.40
7.09
n.a.

6.87

7.43
7.90

1970

1969

July

QIV

Auk.

Change in monetary
aggregates (SAAR, per cent)
Total reserves
Nonborrowed reserves
Credit proxy
Credit proxy + nondep. funds
Money supply
Time and savings deposits
Deposits at S&L's and MSB's
Bank credit, end-of-month
Treasury securities
Other securities
Total loans
Business

1.4
-

0.1

- 2.9
- 0.4

0.1
2.0
1.2
1.4
4.8
-20.5
4.5
10.0
7.7

0.6
0.5
3.8
0.4
1.9
-

0.4

-12.3
9.5
- 0.7
- 4.5

23.0
48.5
29.6
23.9
11.2
27.7
n.a.
16.4
36.8
20.7
10.7
19.3

6.0
16.1
22.7
18.1
4.1
35.2
12.3
16.6
31.1
8.0
16.1
4.6

2.6
4.1
6.0
6.5
4.2
13.8
7.1
4.2
30.2
9.9
- 2.0

1.5
1970

1969
QIV

QII
2,091
1,035

Aug.

July
-2,033
217

Change, in millions of dollars
Commercial paper (SA)
Bank related (NSA)

3,151
1,614

3,185
2,224

n.a.
-

512

1970

1968
Year

Year

1969
QII

Aug.

21,965
15,314

26,744
21,131

7,354
5,679

1,427
1,167

16,574

11,881

3,648

3,354
15,300

9,292
-2,557

2,411
-12,527

QII

Aug.

10,272e
8,963e

2,600e
2,200e

808

3,711

1,275e

947
679

1,233
-6,396

504e
2,794e

New security issues (NSA, $ mil.)
Total corp. issues
Public offerings
State and local government
bond offerings
Fed. sponsored agency debt
(change)
Fed. gov't. debt (change)

p - Preliminary.
e - Estimated
n.a. - Not available,
NSA - Not seasonally adjusted.
SAAR - Seasonally adjusted annual rate.

I -- T - 3

U.S. Balance of Payments
In millions of dollars; seasonally adjusted

1 9 7 0

1969 r/

Year

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

1 950
638
36,473
-35,835
1,312

851
518
10,241
-9,723
333

1,119
847
10,714
-9,867
272

Remittances and pensions
Govt. grant & capital, net

-1,191
-3,828

-328
-855

-5,374
-3,070
-1,494
-541
-269

-1,686
-1,411
-133
147
-289

-1,813
-1,363
64
-459
-55

Foreign capital
Official foreign, liquid
Official reserve holders, nonliquid
Other official foreign, nonliquid
Foreign commercial banks, liquid
New direct investment issues 3/
U.S. corporate stocks
Other
U.S. monetary reserves (inc.-)
Gold stock
Special drawing rights
IMF gold tranche
Convertible currencies

12,345
-525
-996
259
9,225
1,029
1,565
1,788
-1,187
-967
--1,034
814

1,679
3,044
-422
-38
-1,916
155
-85
941
481
-44
-53
-253
831

1,547
450
506
-182
-118
308
-128
711
1.022
14
-37
227
818

Errors and omissions

-2,715

-142

-6,517

-1,978
-2,061
-1,420
-1,411
-1,860
-1,858

9,225
-2,708

-1,736
2,829

-203
2,061

JULY*

239
3,588
-3,349

423
3,710
-3,287

421
3,640
-3,219

61
-280

41
-123

-144
345

378
128

502
288

1,29,
i
-71

-343

-739

-1,131

-200

754
2
1
150
601

-163
11
-32
10
-152

26:
-4'
-1
-101
41 )

-1,260

-627

-751

280

-335

-917

112

-35(

-343
1,260

-739
627

-1,13
1,481

-729

-3,103
-2,829
-1,598
-1,496
-1,187
-1,093

JUNE*

-359
-785

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

BALANCES (deficit -) 4/
Official settlements, S.A.
"
"
, N.S.A.
Liquidity, S.A.
"
, N.S.A.
Adjusted over-all, S.A
"
"
, N.S.A.
Financed by: 5/
Liab. to comm. banks
Official settlements

2,708
-7,012

MAY*

-1,48

Only exports and imports are seasonally adjusted.
Equals "net exports" in the GNP, except for latest revisions.
Balance of payments basis which differs a little from Census basis.
New issues sold abroad by U.S. direct investors.
Excludes initial allocation of SDRs on January 1, 1970; total $867 million,
quarterly S.A., $217 million.
5/ Minus sign indicates decrease in net liabilities. Data not seasonally adjusted.

*
1/
2/
3/
4/

II - 1

THE ECONOMIC PICTURE IN DETAIL
Domestic Nonfinancial Scene

Gross national product.

Economic data for the past several

weeks indicate the likelihood of a modest improvement in the rate of
growth of activity this quarter.

The decline in industrial production

seems to have about halted in the past several months, and the recent
rough stability of hours of work and unemployment claims suggest that
the period of large layoffs may be at, or close to, an end.

New orders

for durable goods have been edging up in the past few months, and there
has been a strong recovery in housing starts and residential construction activity.

Although consumer demand for goods appears not to have

been fully maintained in August, we still anticipate a larger increase
in GNP this quarter than last.

In current dollar terms, a rise of $14

billion is anticipated, as compared to an $11-1/2 billion increase in
the second quarter.

Assuming a slight further moderation in the rise

of the deflator, this means an increase in real GNP of over 1-1/2 per
cent as compared with 0.6 per cent in the second quarter.
Economic activity this quarter is being strengthened by a
resurgence of residential construction activity.

We have revised up

our projection of such outlays, as a result both of the recent sharp
rise in housing starts and the surprisingly large flow of consumer-type
time and savings deposits at both banks and nonbank intermediaries.
Residential starts are now projected to rise to about a 1.5 million
annual rate this quarter, an increase of 200,000 units, annual rate,

II -

from last quarter, and outlays are expected to rise by $1.6 billion,
instead of by the $0.5 billion we had formerly projected.

(See

Appendix A.)

CHANGES IN GNP AND RELATED ITEMS, 1970
(Seasonally adjusted, annual rates)

Third Quarter
Projection
Current
of 8/12/70 Projection

Fourth Quarter
Projection
Current
of 8/12/70 Projection

------------- Billions of dollars-------------GNP

13.5

13.9

14.8

15.0

10.6
1.6
-.5
.6
-.7
2.3

10.8
2.7
-1.0
.3
-1.0
3.0

11.0
2.7
-.5
.3
-1.5
3.0

-.3

Inventory change

15.0

11.5
.5
-.5
.6
-.6
2.3

Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State and local purchases

15.2

13.8

Final sales

13.9

-.1

------------------ Per cent-------------------Real GNP

1.6

1.7

2.7

2.5

GNP deflator

4.0

3.5

3.6

On the other hand, growth of consumer spending this quarter
now appears likely to fall about $1 billion short of our projection in
the preceding Greenbook.

Based on weekly data, August retail sales

were apparently from one half to one per cent below the upward revised
July level, with weakness particularly evident at durable goods stores,
department, and apparel stores.

The dollar volume of auto sales fell

somewhat below the July level, although unit sales of domestically produced
cars were virtually unchanged at close to an 8-1/2 million annual rate.

II - 3

Despite the dip in August, we still expect a sizable gain of about
$10-1/2 billion in consumer outlays for the quarter as a whole, with
demand sustained in part by removal of the tax surcharge at midyear
and by a lagged response to the large increase in disposable income
last quarter, which raised the saving rate to an abnormally high level.
Projections of other major demand sectors for the third
quarter remain virtually unchanged--a larger increase in State and
local outlays than in the second quarter, but little further change in
the rate of inventory accumulation; we continue to expect business
fixed investment spending to begin to edge down slightly this quarter,
despite business plant and equipment spending plans which call for some
increase in the third quarter.
Assuming no auto strike, real growth is expected to increase
somewhat further in the fourth quarter to about a 2-1/2 per cent annual
rate, about as we had been projecting earlier.

The composition of the

fourth quarter increase has been changed slightly, however.

The recent

firmness in new orders figures and the August Commerce-SEC survey
results suggest that capital expenditures may hold up a bit better than
we had expected.

We now project a fourth quarter decline of about $0.5

billion, rather the $1.0 billion decline formerly projected.

The pro-

jected decline in these expenditures in the first half of 1970 is
revised to $1 billion a quarter from $1-1/2 billion.
On the other hand, it is now anticipated that Congressional
appropriations are likely to curtail defense outlays somewhat more than
formerly expected for the remainder of fiscal 1971, and such purchases

II - 4

are now expected to drop by about half a billion dollars more than
projected earlier in the fourth quarter.

On balance, these various

changes should be about offsetting, and GNP is expected to rise by
about $15 billion.
In the event of an auto strike, particularly a protracted
one against GM, the gain in fourth quarter GNP could be cut significantly.

The impact of this cut would be largely on inventories but

consumer durable goods purchases would also be affected as production
and income are cut back.

However, much of this loss of output would

likely be made up in the first quarter.

CHANGES IN GNP AND RELATED ITEMS, 1971
(Seasonally adjusted, annual rates)

First Quarter
Current
Projection
of 8/12/70 Projection

Second Quarter
Current
Projection
of 8/12/70 Projection

------------- Billions of dollars-------------18.2

GNP
Final sales
Personal consumption
Residential construction
Business fixed investment
Net exports
Federal purchases
State and local purchases
Inventory change

17.5

16.0

17.1

17.9

17.0

14.5

16.1

11.0
2.4
-1.5
.6
1.9
3.5

11.2
2.0
-1.0
.6
.7
3.5

11.0
1.1
-1.5
.1
..
0
3.8

11.5
1.4
-1.0
.1
.3
3.8

1.5

1.0

------------------ Per cent------------------Real GNP

3.2

2.8

3.3

3.7

GNP deflator

1/
4.11/

1/
4.2-

3.0

1/ Excluding effects of Federal pay increase, 3.2 per cent per year.

II - 5

Our projections call for a further rise in real GNP in the
first half of 1971, despite the lower amounts now projected for defense
spending.

Continued recovery is anticipated for residential construc-

tion activity, and easier financial markets should permit more rapid
expansionof State and local outlays; with support for consumer demand
provided by a Federal pay raise, and some expansion in inventory investment, we expect GNP to increase by over $17 billion a quarter, or an
average 3-1/4 per cent annual rate in real terms.

Growth would still

remain below potential, suggesting a further small rise in unemployment
and some continued easing of pressure on prices.

II - 6
CONFIDENTIAL - FR

September 9, 1970

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

1970
1969

1970
Proj.

1971

III

Projected
IV
I

Gross National Product
Final purchases
Private
Excluding net exports

931.4
922.9
710.7
708.8

978.9
976.3
756.4
752.0

959.5
957.9
738.3
734.8

971.1
968.1
749.7
745.6

985.0
982.0
762.0
757.3

1000.0
997.0
775.5
770.5

1017.5
1014.0
788.3
782.7

1034.6
1030.1
800.3
794.6

Personal consumption expenditures
Durable goods
Nondurable goods
Services

577.5
90.0
245.8
241.6

619.6
92.4
264.7
262.5

603.1
89.1
258.8
255.2

614.4
91.9
259.9

625.0
93.5
266.5
265.0

636.0
95.0
271.0
270.0

647.2
96.2
275.5
275.5

658.7
97.2
280.5
281.0

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

139.8
32.0
99.3
8.5
8.0

135.1
30.1
102.4
2.7
2.4

133.2
29.1
102.6
1.6
0.9

134.3
28.4
102.8
3.1
2.6

135.3
30.0
102.3
3.0
3.0

137.5
32.7
101.8
3.0
3.0

139.0
34.7
100.8
3.5
3.5

140.4
36.1
99.8
4.5
4.5

Net exports of goods and services

1.9

4.3

3.5

262.6

4.1

4.7

5.0

5.6

5.7

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

212.2
101.3
78.8
22.6
110.8

219.9
99.6
76.1
23.5
120.3

219.6
102.3
79.3
23.0
117.4

218.4
99.7
76.8
22.9
118.7

220.0
99.0
75.5
23.5
121.0

221.5
97.5
73.0
24.5
124.0

225.7
98.2
72.8
25.4
127.5

229.8

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

727.1
128.1

727.2
134.6

723.8
132.6

724.9
134.0

727.9
135.3

732.4
136.5

737.5
138.0

744.4
139.0

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

748.9
509.0
631.6
37.6
6.0

803.7
543.0
686.4
49.0
7.1

782.3
531.9
665.3
44.8
6.7

801.3
539.5
683.6
51.5
7.5

809.5
546.5
693.5
50.7
7.3

821.5
554.0
703.3
49.0
7.0

835.0
564.5
713.5
47.7
6.7

848.6
572.8
724.5
46.9
6.5

91.2

82.7

Corporate profits before

tax

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

200.6
191.3
9.3

196.2
206.9
-10.7

82.6

82.3

82.5

83.5

195.9
197.7
-1.7

196.6
210.9
-14.3

194.7
209.0
-14.3

197.4
210.0
-12.6

86.0
3.1
82.9
5.1

86.4
3.1
83.3
5.3

86.8
3.0
83.8
5.5

87.3
3.0
84.3
5.6

70.7
19.4

71.0
19.5

71.3
19.5

71.8
19.6

170.0

171.0

172.2

174.0

77.9

77.3

76.8

76.6

1.25

1.28

1.49

1.53

1.65

1.75

7.35

7.95

8.50

8.65

8.75

-5.4

-4.3

84.2
3.5
80.7
3.5

86.0
3.2
82.8
4.8

85.8
3.3
82.4
4.1

85.7
3.2
82.5
4.8

(millions)

70.3
20.2

70.9
19.6

71.1
20.0

70.9
19.6

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

172.8

170.3

170.7

169.3

83.7

78.0

79.8

1.47

1.39

8.46

8.08

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

207 9
218.0
-10.1
8.1

2.9

Nonfarm payroll employment
Manufacturing

84.5

8.0

-1.6

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

204.7
215.0
-10.3

72.0
26.5
131.3

0.3

4.5

High employment surplus or deficit (-)

82.5

98.5

II - 7
September 9, 1970

CONFIDENTIAL-FR
CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1970
1969

1970
Proj.

1971
Projected

III

Billions of Dollars----------------------------

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

17.5
0.5
17.0
12.8
12.2
0.6
4.2

Gross National Product
Inventory change
Final purchases
Private
Excluding net exports
Net exports
Government
-5.4
-0.5
1.1

GNP in constant (1958) dollars
Final purchases
Private

--------------------------- In

1.1
-0.5
3 3
Per Cent Per Year----------------------------

Gross National Product
Final purchases
Private
Personal consumption expenditures
Durable goods
Nondurable goods
Services
Gross private domestic investment
Residential construction
Business fixed investment
Gov't. purchases of goods & services
Federal
Defense
Other
State & local

-3.4
-5.9
3.1

-20.0
-17 1
0.0

3.6
-1.7
-3.3
4.0
8.6

10.5
5 6
12.0

6.1
0.8
2.5
-5.2
11.2

3.3
-9.6
0.8

3.0
22.5
-1.9

6.5
36.0
-2.0

2.7
-6.1
-13.2
17.0
9.9

-2.2
-10.2
-12.6
-1.7
4.4

4.4
24.5
-3.9

4.0
16.1
-4.0

7.6

2.9
-1.1
14.7
11.3

GNP implicit deflator

0.0
0.7
2.1
5.1

-3.0
-0.4
0 81
64-

0 6
-0.3
2 3
4.3

2.5
2.5
3.9
3.6

2.8
2.6
3.6
4.2-

Personal income
Wages and salaries
Disposable income

7.3
6.7
8.7

6.1
5 0
9 0

9.7
5.7
11.0

5.9
5.5
5.7

6.6
7.6
5.8

-26.7

-1.5

-12.1
3.7

1 4
26 7

GNP in constant (1958) dollars
Final purchases
Private

Corporate profits before

tax

2.8

-9.3

Federal government receipts and
expenditures (N.I.A. basis)
Receipts
Expenditures
Nonfarm payroll employment
Manufacturing

Industrial production
Housing starts, private
Sales new domestic autos

3.5
2 0

0.9
-3.0

4.4
-2.7
-1.9

-1.4
-5.3
-4.6

1.7
-2.0
-2.8
-31.0
-38.1

Excluding effects of Federal pay increase, 5.5 per cent per year.

Excluding effects of Federal pay increase, 3.3 per cent per year.

1.0

4.8

-4.8

-3.9
-3.6

5.5
1.9

14.8
9.5

-1.1
-8.0

-1.1
-4.1

1.7
2.1

1.7
0.0

2.8
2.1

-3.3
8.9
32.3

-1.7
65.6
27.8

2.4
11.5
0.0

2.8
30.5
7.1

4.2
24.2
4.6

II - 8

Industrial production.

The available physical product data

(still very sketchy at this time) and the manhours data indicate some
decline in industrial production in August.

Output of business and

defense equipment was apparently down further and on balance production
of materials probably declined.

Output of consumer goods, mainly of

nondurables, is estimated to have edged up.
Auto assemblies in August, at a seasonally adjusted annual
rate of about 8.5 million units after allowance for the model changeover period, were unchanged from July.

Production schedules for

September, excluding a strike, are set at the August rate.

Output of

television rose further in August and was up 35 per cent from the 1970
low, but was still about one-fifth below the early 1969 level.

However,

production of household appliances declined from the record July volume.
Output of furniture, following a year of decline, leveled off in July
and increased in August.

Although retail sales continue sluggish, the

readjustment in inventories and output of consumer durable goods in the
manufacturing sector seems to be over.
The August manhours data indicate further declines in almost
all business equipment lines.

Production of trucks, however, was close

to record levels.
Among materials, production of raw steel eased off in August
and available data suggest declines in output of paper and textile
products, and possibly construction materials.

Production of chemicals

and rubber changed little, while output of crude oil increased.

In 1967 the United Auto Workers went on strike against Ford
on September 7 and settled on October 25.

There were also small,

II - 9

short-lived strikes against the other auto manufacturers.

The strike

came during the recovery from the 1967 mini-recession and, despite
secondary effects on other industries, the total index excluding only
motor vehicles and parts continued to rise, except for the first month
of the strike.

If there is a strike this month, the effect on the total

index will depend on several factors; whether the strike is against
General Motors or Chrysler or both, the length of the strike, and, of
course, underlying strength or weakness in the rest of the industrial
sector.
INDUSTRIAL PRODUCTION

AND THE 1967 AUTO STRIKE

Aug.

Sept.

Oct.

Nov.

Dec.

Total index (1957-59=100)

158.3

156.8

157.2

159.8

162.1

Motor vehicles & parts

158.0

129.4

128.6

141.4

166.9

Total, excluding motor
vehicles and parts

158.3

158.1

158.6

160.7

161.9

Unit auto sales.

Sales of new domestic autos in August were

at a seasonally adjusted annual rate of 8.4 million units, down slightly
from a month ago and 5 per cent below a year earlier.

Unit sales in the

three months June-August were at an 8.5 million unit rate, up 14 per
cent from the first 5 months of 1970 and down 4 per cent from a year
earlier.
Dealers' stocks of new domestic autos at the end of July (the
latest data available) represented 52 days' supply, compared with 53
days a year earlier.

- 10

Consumer credit.

Consumer instalment credit outstanding

increased at a seasonally adjusted annual rate of $5.3 billion in July-about the same rate as in June.

Increases in personal loans and home

repair loans during July equaled those of the preceding month; a decline
in auto credit outstanding was offset by a rise in nonautomotive consumer
goods paper.
There were sizable sales of both auto and other consumer
goods instalment paper by finance companies to commercial banks in July,
in part because of dislocations in the commercial paper market.

Even

after adjustment for such transfers, both extensions and repayments of
instalment credit reached new records in July, on a seasonally adjusted
basis.

Extensions of auto credit, which had decreased slightly in June

despite a substantial advance in unit sales of new cars, rose to their
highest volume this year but they were still below the high levels of
late 1968-early 1969.

Personal loan extensions exceeded their previous

high reached last August, but nonautomotive consumer goods lending was
somewhat below the May 1970 peak.

CONSUMER INSTALMENT CREDIT EXTENSIONS
(Billions of dollars, seasonally adjusted annual rates)

Total

Automobile

Other
r
O
Consumer Goods

Personal

1969 - QI
QII
QIII
QIV

100.7
104.4
103.5
102.5

32.4
33.0
32,0
31.9

31.5
33.6
33.3
33.5

34.4
35.2
35.9
35.1

1970 - QI
QII
July

102.2
104.7
108.8

30.0
31.0
32.2

35.5
35.8
37.5

34.6
35.7
36.8

Loans

II - 11

Cyclical indicators.

In July, the preliminary leading

indicator composite rose 1.6 per cent, the second month of rise in a
row; the June composite, originally reported as unchanged, now shows a
small increase.

At past cyclical upturns, this series has led the turn

in general activity by 2 to 9 months, with 2-month leads in the last
two recessions.

The coincident composite was unchanged in July and the

lagging composite declined slightly.

COMPOSITE CYCLICAL INDICATORS
(1967 = 100 1/)

12 Leading,
12td adingd
trend adiusted

5 Coincident

6 Lagging

1969 - December

117.8

122.2 (H)

132.3 (H)

1970 - January
February
March
April
May
June
July (prel.)

115.9
116.7
115.0
115.3
114.0
114.3
116.1

121.7
121.9
122.0
122.0
121.2
121.4
121.4

131.8
131.2
130.7
130.8
131.0
131.1
130.9

1/ The base year for these indexes has been changed from 1963 to 1967.
(H) Current high value.

The increase in the leading composite resulted from a sharp
drop in initial claims for unemployment insurance and from increases
in the manufacturing workweek, new orders for durable goods, contracts
and orders for plant and equipment, common stock prices, and the ratio
of price to unit labor costs.

There were declines in July in housing

permits and industrial materials prices.

II - 12

In August according to preliminary data, common stock prices
rose, materials prices and the workweek declined, and a rise in unemployment initial claims will also have a downward effect on the composite
index.

Michigan Survey of Consumer Demand.

The August survey of

consumer demand suggests little imminent change in the present
restrained rate of consumer durable goods purchases.

While the index

of consumer sentiment increased to 77.1 (February 1966 = 100) from
75.4 in May--the first rise after five declines--the change was not
significant, according to the Survey Research Center.

Moreover, most

components of the index did not improve.

In the past, small changes

in the index have usually been meaningful

only when all components

moved in the same direction.

INDEX OF CONSUMER SENTIMENT
ALL FAMILIES
(February 1966 = 100)

PERCENTAGE OF FAMILIES
INDICATING A "GOOD TIME
TO BUY"

SLarge
hold

Date of survey

housegoods

Cars

1969-February

95.1

May-June

91.6

Aug.-Sept.

86.4

Oct.-Nov.

79.7

78.1

April-May

75.4

August

77.1

1970-February

There was

- 13

however, a slight increase in the percentage of

families planning to purchase a new car compared with a year earlier,
and a specific question on expected price trends for new cars indicated
some anticipation of improved price trends--presumably because of the
new compacts.

Nonetheless, an unusually large percentage of families

reported it was a bad time to buy cars; opinions about whether it is a
good time to buy large household goods also declined to a low level.
A growing number of families (now about 70 per cent) thought it would
be a hardship to make larger instalment payments.

Expectations of

higher unemployment, although less than in the April survey, were still
at a high level.

INTENTIONS TO BUY CARS DURING NEXT 12 MONTHS
(Percentage of family units)

August

All Cars

New Cars

Used Cars

1966

18.6

10.7

8.0

1967

15.7

8.8

6.9

1968

17.4

10.7

6.7

1969

18.1

9.5

8.6

1970

15.7

10.1

5.6

A decrease in inflationary expectations was evident in the
survey, however, and this finding is suggestive of a future upturn in
consumer durable expenditures, if incomes are maintained.

Consumers

indicated the change in their inflationary attitudes both in response
to a direct question on the size of likely price increases and in

II - 14

another question comparing expected price changes with prices in the
past year.

During earlier post-World War II inflations, the Survey

Research Center found that consumers attempted to save more of their
income for necessities rather than buy in anticipation of price rises.

Inventories.

Book value of manufacturers' inventories rose

at a $9.2 billion annual rate in July, according to preliminary data,
after declining at a $2.2 billion rate in June.

Both the July increase

and the June decline were entirely at durable goods plants, with nondurable manufacturers' inventories showing small, partly offsetting
changes.
Inventory increases were widespread among producers of
capital equipment, construction materials, autos, and other consumer
durable goods; both dollar and unit data indicate a marked increase in
factory stocks of household durables.

Defense stocks increased little.

Nearly half the durables increase was in finished goods, but both
materials and in-process stocks also rose.

CHANGE IN BOOK VALUE OF MANUFACTURERS' INVENTORIES
(Billions of dollars, seasonally adjusted annual rate)

1970
I

June

4.0

3.3

-2.2

9.2

Durable

2.8

-2.8

9.8

Nondurable

1.2

2.9

-.6

Manufacturing, total

July E

Durable goods shipments rose more than inventories, and the
inventory-shipments ratio declined for the third month in a row.

This

- 15

ratio has been dropping in a manner similar to that in the early stages
of cyclical recoveries.

Further cyclical decline in this ratio would

most likely be the result of small inventory increases accompanied by
somewhat greater increases in sales, if the pattern of 1961 and 1967 is
followed.
The inventory-backlog ratio, on the other hand, continued its
rapid rise, and is at an all-time high for the 17-year history of the
series.

Inventories rose relative to backlogs for all major market

groupings except defense products; a jump in defense backlogs reduced
the defense inventory-backlog ratio, which remains quite high, however.

DURABLE GOODS MANUFACTURING INVENTORY RATIOS
Selected recovery periods

Year and month

2/
1961-FebruaryMarch
April
May
2/
1967-May-June
July
August
2/
1970-April-/
May
June
July

Inventories
to sales I/

Inventories to
unfilled orders

2.22
2.18
2.12
2.07

.744
.743
.733
.730

2.12
2.10
2.12
2.10

.681
.673
.674
.678

2.18
2.16
2.12
2.11

.781
.789
.794
.807

1/ Two-month moving average, recorded in second month.
2/ Month of high in inventory sales-ratio.

II - 16

Manufacturers' new orders.

New orders for durable goods rose

$1 billion, or 3.3 per cent in July, according to the preliminary
report--revised down from the 6 per cent increase reported in the
advance release.

The rise reflected a sharp jump in orders for defense

products, while nondefense orders, on balance, declined slightly.

The

defense series showed a similar large increase in July of last year;
still, in July and the preceding two months of this year defense orders
averaged 20 per cent above year-ago levels.

These recent increases are

not necessarily inconsistent, as yet, with the anticipated scaling down
of defense expenditures.

A six-month average--probably more appro-

priate for this extremely irregular series--yields a 4 per cent decline
in defense orders from a year ago.
Capital equipment orders increased somewhat from the June
level but were no higher than the reduced second-quarter average.
Orders for construction materials declined after two months at advanced
levels.

Orders for primary metals other than iron and steel were also

down, while iron and steel orders were unchanged.

Orders for household

durables declined and remained below a year ago, while motor vehicle
orders rose.

II - 17

VALUE OF MANUFACTURERS'

NEW ORDERS

(Seasonally adjusted, averages of monthly data, millions of dollars)
1970
QII

Manufacturing, total

June

July

54.5

55.6

56.6

Durable

29.2

29.7

30.7

Nondurable

25.3

25.9

Home goods and apparel
Household durables
Defense products
Capital equipment
Producers' capital goods industries*
Autos and related equipment

4.6
2.0
1.7
8.1
6.2
4.5

4.9
2.1
1.7
7.9
6.4
4.7

Construction materials

4.5

4.6

4.3

Primary metals
Iron and steel

4.8
2.2

4.9
2.2

4.7
2.2

Selected groups:

4.7
2.0
3.0
8.1
6.5
4.8

* Formerly titled 'machinery and equipment industries".
Durable goods shipments exceeded new orders and the backlog
declined--although by only $300 million, considerably less than the
$900 million average monthly decline in the first half of the year.
The defense products backlog rose, but this increase was more than offset by declines in unfilled orders for capital equipment, construction
materials, nonferrous metals, and household durables.

Construction and real estate.

Outlays for new construction

put in place, were revised down for July to show continuation of the
downtrend since February.

In August, however, they advanced 2 per cent

to a seasonally adjusted annual rate of $89.5 billion.

While the August

rate was unchanged compared with a year earlier, in real terms it was
lower by 5 per cent.

- 18

With housing starts up sharply in recent months, current
dollar outlays for private residential construction increased appreciably and accounted for nearly all of the rise in total construction
in August.

Outlays for private nonresidential construction were

unchanged at a level only 4 per cent below the peak reached last
February and--like residential outlays--were at least as high as in
August of 1969.

Within the public construction sector, there was a

sizable recovery in expenditures for Federally-owned projects, but it
was from a considerably reduced July rate; altogether, the combined
public subtotal increased only slightly as outlays in the large State
and local sector apparently remained at about the low established last
April.
NEW CONSTRUCTION PUT IN PLACE
(Confidential FRB)

August 19701/
($ Billions)-

Per cent change from
August 1969
July 1970

89.5

+ 2

Private
Residential
Nonresidential

62.6
29.3
33.3

+ 2
+ 5

Public
Federal
State and local

26.9
3.2
23.6

+ 1
+11
-

Total

-2
-5
-2

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

The upsurge in private housing starts in

July, which followed

a 7 per cent rise in June, carried the seasonally adjusted annual rate

II - 19

to nearly 1.6 million units, the highest in more than a year.

However,

all of the July rise was in multifamily starts, which soared two-fifths
from their reduced earlier rate, a remarkable shift even for that
volatile group.

Moreover, while all regions shared in the month-to-

month advance, one region--the Northeast--showed by far the major gain.
Given the recent decline in building permits for multifamily
units, as shown in the table, and other factors, indications are that
total starts may have turned downward again in August.

Still, if as

seems likely under present mortgage market conditions, total starts
hold at or above a 1.4 million rate through September, the third quarter
average would approach a 1.5 million annual rate.

This would mark a

substantial advance from the 1.27 million rate averaged in the first
half of the year when starts showed little quarter-to-quarter change.

PRIVATE HOUSING STARTS AND PERMITS

July 1970
ly 1970
(Thousands

Per cent change from

of units)!/

June 1970

July 1969

1,585

+15

+11

1-family
2-or more-family

827
758

-+39

+ 3
+21

Northeast

260

+49

+55

North Central
South
West

323
655
347

+ 7
+11
+12

+ 6
+12
- 7

1,265

- 3

+ 3

630
635

+ 3
- 8

+11
- 3

Starts2/

Permits
1-family
2- or more-family

1/ Seasonally adjusted annual rates; preliminary.
2/ Apart from starts, mobile home shipments for domestic use in July
were at a seasonally adjusted annual rate of 432,000, 5 per cent
above a year earlier.

II - 20

While resistance to higher costs and to the advanced level
of interest rates apparently has continued, residential vacancy rates
have remained exceptionally low.

In the second quarter, for example,

rental vacancy rates were unchanged from the first quarter and were the
lowest for any second quarter since 1957, at an over-all average of only
5.0 per cent of rental units available and fit for use.

Regionally,

only in the North Central states were such rates above their already
reduced year earlier level.

Vacancy rates for home-owner properties,

a much less sensitive series than that for rental units, edged down to
0.9 per cent from the first to the second quarter of the year.

This

compared with a second quarter high of 1.4 per cent in 1966 and some
other earlier years and with a low of 0.8 per cent in the first and
third quarters of 1957.

RENTAL VACANCY RATES
(Per cent)

1957

Average for second quarter of:
1968
1969
1965
1967

1970

All Regions

4.9

7.5

6.3

5.7

5.1

5.0

Northeast

3.0

4.8

4.2

3.5

2.9

2.7

North Central

4.4

6.6

5.4

4.8

5.6

South

5.8

7.7

7.5

7.2

6.4

West

7.5

12.0

8.6

7.6

6.4

5.4

Manufacturers'

new capital appropriations.

An NICB survey

of the 1,000 largest manufacturing firms indicates that new appropriations for capital spending declined only 1 per cent in the second

- 21

quarter, after falling 13 per cent in the first quarter and 2 per cent
in the fourth quarter of 1969.

Both durable and nondurable manufactur-

ing industries showed about the same magnitude of decline in the second
quarter.
Given the usual lag of about three quarters between the time
when funds are appropriated and when they are spent, the appropriations
data for the second quarter would seem to indicate further reductions
in manufacturing outlays at least through early 1971.

Further support

to this position is the fact that backlogs of unspent funds have been
dropping in recent quarters suggesting that some firms may be nearing
completion of projects without authorizing new ones.
The NICB also indicated that their respondents expect third
quarter appropriations to total somewhat more than in the second
quarter.

(These expectations have sometimes differed rather markedly

from actual appropriations, in direction of change as well as in magnitude.)

If these expectations are realized it could mean that manu-

facturers' plant and equipment spending might begin to rise sometime
next spring.

Anticipated spending for new plant and equipment.

According

to the August Commerce-SEC survey, businessmen, as expected, have
scaled down their 1970 capital spending plans somewhat further from
those reported in the May survey.

The increase in anticipated 1970

outlays is now 3 percentage points below that reported in the February
survey.

Current plans now indicate an increase in total outlays of 6.6

per cent over 1969 as opposed to the 7.8 per cent rise planned in May.

II - 22

PLANNED EXPENDITURES FOR NEW PLANT AND EQUIPMENT, 1970
(Comparison of successive Commerce-SEC surveys)

Per cent change
from 1969
August
May
Feb.
Survey Survey Survey

(Billions of dollars)
1969
1970
August
May
Feb.
Actual
Actual
Survey Survey Survey
Total

75.56

82.94

81.45

80.52

9.8

7.8

6.6

Manufacturing
Durable goods
Nondurable goods

31.68
15.96

34.60
17.50

32.85
16.44

32.05
15.88

15.72

17.10

16.42

16.16

9.2
9.7
8.8

3.7
3.0
4.5

1.2
-.5
2.8

Nonmanufacturing

43.88

48.34

48.60

48.47

10.2

10.8

10.5

Actual spending in the second quarter rose $2.0 billion,
only $0.4 billion less than expected at the time of the May survey.
For the remainder of 1970 businessmen now anticipate an increase of
$0.8 billion in the third quarter instead of their earlier anticipated
$2.6 billion gain.

But, they now expect a rise of $1.2 billion in the

fourth quarter rather than the slight decline anticipated in the May
survey.

Past experience suggests, however, that additional shortfalls

of actual spending from planned outlays are likely to occur.

QUARTERLY PATTERN OF ANTICIPATED EXPENDITURES
FOR NEW PLANT AND EQUIPMENT, 1970
(Billions of dollars, seasonally adjusted annual rates)

i 970

1969

I
II
III
IV
I
II
---------------- (actual)----------------

III
IV
anticipated

72.52

73.94

77.84

78.22

80.22

81.05

82.24

Manufacturing
Durable
Nondurable

29.99
15.47
14.52

31.16
15.98
15.18

33.05
16.53
16.52

32.39
15.88
16.50

32.44
16.40
16.05

34.43
16.32
16.11

31.21
15.38
15.84

32.15
15.53
16.62

Nonmanufacturing

42.53

42.78

44.80

45.46

45.78

47.79

49.84

50.09

Total

II - 23

Second quarter spending by manufacturers of durable goods was
essentially unchanged from the preceding quarter as reductions in primary metals and nonautomotive transportation equipment were offset by
sharp increases in the machinery and auto equipment industries.

However,

for the third quarter most of these industries plan cuts from their
second quarter spending, and with few exceptions still further reductions
are planned for the fourth quarter.
Nondurable manufacturing investment in the second quarter
was only slightly above that of the first as increases in spending by
producers of petroleum and chemicals cancelled reductions in most other
industries.

Reductions in plans of petroleum, paper, and rubber manu-

facturers are expected to result in a decline in third quarter spending.
But some recovery is anticipated in the fourth quarter with most
industries now planning increased expenditures.
In the second quarter, nonmanufacturing industries--especially
communications and public utilities--accounted for all of the gain in
overall fixed investment spending.

Spending by air transportation and

electric utility companies is expected to surge in the third quarter and
taper off in the fourth.

At the same time communication and commercial

firms currently anticipate only a slight change in the second half from
the second quarter level.

Labor market.
August.

The labor market eased slightly further in

The unemployment rate edged up to 5.1 per cent from 5.0 per

cent in July, with the entire rise among teenagers.

At the same time,

II - 24

nonfarm payroll employment dropped about 90,000 reflecting a further
decline in the goods-producing industries.

Employment reductions in

August were smaller than the average during the March-July period, but
With

there were no signs of strengthened labor demand in any sector.

the exception of State and local governments, no industry group has
shown appreciable employment growth since March, while large employment
declines have continued in manufacturing and construction.

NONFARM PAYROLL EMPLOYMENT, 1969-70
(Seasonally adjusted, in thousands)

JulyMarchNov. 1969August 1970
July 1970
March 1970
-------- (Average monthly change)------112

Government
Private
Mining
Construction
Manufacturing
Transportation
Trade
Services & finance

-155

- 92

49
64

Total

21
-176

23
-115

1
2
-35
10
34
52

- 2
-42
-133
9
- 11
3

3
- 39
- 73
- 15

8
17

Average weekly hours of production and nonsupervisory workers
on private payrolls were unchanged in August after rising slightly in
June and July.

In the more volatile manufacturing sector, the workweek

declined in August to 39.9 hours after rising in July to 40.1 hours
(revised upward).

Both the July and August changes were centered in

auto parts supplier firms and for the most part probably reflected the
timing of the auto model changeover.

Over the past four months, the

II - 25

workweek of factory workers has averaged a little less than 40 hours.
This was the shortest workweek for an extended period since 1961, but
it appears that average working hours have about leveled off, after
moving irregularily lower in the last half of 1969 and early 1970.

Unemployment.

Teenage unemployment rose further in August to

a rate of nearly 16 per cent, while rates for adults continued near
their July levels.

Jobless rates for all groups were sharply higher

than a year earlier,
SELECTED UNEMPLOYMENT RATES
(Seasonally adjusted)

August
Total

1969
November

February

1970
May

August

3.5

4.2

5.0

5.1

4.5
1.7
3.8
12.3

5.3
1.7
3.6
11.8

6.9
2.2
4.1
13.4

7.7
2.9
5.1
14.3

8.5
3.0
4.8
15.9

White-collar
Blue-collar

2.2
3.8

2.1
4.2

2.3
5.0

2.8
6.2

2.7
7.0

Insured unemployed

2.2

2.3

2.6

3.6

3.7*

Men aged:
20 to 24 years
25 and over
Women, aged 20 and over
Teenagers

*Estinmaed monthly average.

The rise of total unemployment has slowed markedly in the last
three months,

partly as a response to fewer layoffs.

But the slowing

also has been associated with a leveling off of the civilian labor force,
which was no higher in August than in March.

Some workers--especially

youngsters--apparently became discouraged by slack in labor markets and
did not enter the work force in their usual numbers this spring and
summer.

II - 26

Hourly earnings.

Despite large wage increases negotiated in

recent collective bargaining settlements and deferred increases provided
in earlier collective bargaining agreements, advances in average hourly
earnings of production and nonsupervisory workers on private payrolls
have been somewhat smaller this year than last year.

Moderation has

occurred in trade, finance, services and manufacturing.

The slowing in

manufacturing is primarily attributable to much less overtime and to
lower employment in high-wage industries.

Hourly earnings increases have

been larger than last year in construction, and more recently in trucking, reflecting the effect of large wage settlements in those industries.

AVERAGE HOURLY EARNINGS OF PRODUCTION
AND NONSUPERVISORY WORKERS
(Per cent change from a year earlier)

1970

QII

QIII*

6.7

6.4

6.0

5.9

6.4
6.3
6.6

6.0
6.3
6.2

5.8
5.4
6.3

5.7
6.0
5.9

5.3
5.6
5.8

5.0
7.3

7.5
8.4

6.8
10.0

6.4
8.7

6.7
9.4

5.6
7.1
6.6
6.1

6.1
6.7
6.2
8.2

5.4
6.8
5.2
8.6

5.3
6.3
4.8
7.7

6.0
5.9
4.8
7.2

1968

1969

6.3

Manufacturing
Durables
Nondurables
Mining
Contract construction
Transportation and
public utilities
Trade
Finance
Services

Total private

* July-August average.

Industrial relations.

Contract negotiations between the

auto industry and 650,000 members of the United Auto Workers are now
approaching the September 14th expiration date of the present contract.

II - 27

As of this writing, the U.A.W.

has not specified its full range of

economic demands but has insisted on a return to an unlimited cost-ofliving escalator clause.

The 1967 contract is estimated to have

provided workers with an average annual increase of about 6 per cent
(including fringe benefits).

The membership expects their leadership

to obtain a larger package this year, especially in light of the big
increases granted in recent construction and trucking industry agreements.

Wage bargaining is further complicated this year by an ambiguous

clause in the 1967 contract; it provides that cost-of-living increases
"lost" under the limitations imposed in the 1967 contract (amounting to
26 cents) are to be made available at the end of the contract period.
Some auto workers apparently feel that the 26 cents should be added to
the current hourly rate (an average of $3.84), while the industry
negotiators argue that is should be considered part of the first-year
wage raise.

With the industry and union so far apart, and workers very
militant on the wage issue, it
settlement.

is hard to visualize a strike-free

At present, the U.A.W. has indicated that the strike

target will be General Motors and/or Chrysler.
in 1967, has been excluded.

Ford, which was struck

II -

Wholesale prices.

Wholesale prices declined at a seasonally

adjusted annual rate of 1 per cent from July to August (July 14 to
August 11) as a result of a drop in prices of farm and food products and
a slower increase in prices of industrial commodities.

The decline in

the overall index was the first since April 1967.
The wholesale price indexes for July and August illustrate the
saw-tooth movement of prices of farm and food products and the marked
effect that it can have on monthly changes in the overall WPI.

Lower

prices for hogs, cattle, eggs, meat, and fresh and dried fruits and
vegetables were the main reasons for the August decline in prices of
farm and food products.

WHOLESALE PRICES
(Seasonally adjusted percentage changes at annual rates)

June 1969
to
Dec 1969
All commodities
Farm products, and processed
foods and feeds

4.2

Dec 1969

June 1970

July 1970

to
June 1970

to
July 1970

to
August 1970

2.5

6.0

- 1.0

5,4

- 1.9

16.0

- 5.1

Farm products

5.9

- 5.5

17.5

-28.1

Processed foods and feeds

4.7

1.0

13.6

4.8

4.1
Industrial commodities
Fuels & related products
2.1
& power
-11.3
Lumber & wood products
2.2
Pulp, paper & allied products
10.0
Metals & metal products

3.9

3.2

2.0

4.7
- 3.8
4,9
8.6

3.3
- 6.0
3.2
- .9

7.7
6.0
- 2.1
- 1.9

1.7

-12.4

- 2.1

Addendum:
Sensitive industrial materials
(not seasonally adjusted)

4.6

Industrial prices rose at an annual rate of 2.0 per cent in
August, significantly less than in July and in the first half of 1970.
Increases for fuels and power contributed most to the August rise in
prices of industrial commodities, but increases were also reported for
machinery and equipment, softwood lumber and plywood, and some chemicals.
Declines occurred for paper products, leather, passenger cars, cigarettes,
and man-made fiber textiles.
The slower rate of increase in prices of industrial commodities
in the July-August period is encouraging, but for a variety of reasons,
it is not necessarily a precursor of as low or lower rates of increase
in the remaining months of this year.

According to advance announce-

ments, prices of new-model passenger cars and trucks will be up more
this fall than last.

In addition, declines in June and July in prices

of lumber and wood products were reversed in August, and these prices
could continue to rise if projections of higher housing starts are realized.

The decline in prices of nonferrous metals may slacken as stocks

are reduced and, in turn, act to brake any slowing in the rate of increase
in the index of industrial commodities.
Consumer prices. The increase in consumer prices was at a
seasonally adjusted annual rate of 3.4 per cent in July, significantly
below the rise in June and well below the 6 per cent advance in the first
five months of the year.

Food prices increased only about 1 per cent

while the rise in non-food commodities slowed to a 2 per cent rate.
The slowing in the rise of non-food commodities reflects a
number of mixed trends.

Much of the improvement derives from a July

II -

decrease in used car prices, which had risen very rapidly in the AprilJune quarter.

Other consumer durable goods have also been rising less

rapidly, despite an upturn in prices of new cars in July.

The favorable

trend may be temporarily reversed in October and November, however, when
1971 model cars make their appearance at higher prices.
With respect to nondurables, seasonally adjusted apparel prices
rose at a rate of 3.5 per cent in the second quarter, following a decline
in the first, but in July prices were reduced slightly.

Other nondurables

(excluding food), which have more relative importance than apparel, rose
at a rate of about 4 per cent in July, faster than in June but less than
in the second quarter.

Numerous increases have been reported for such items

as gasoline and fuel oil, newspapers, cigarettes, liquor, and nondurable
housefurnishings.
The rise in service costs has moderated from a rate of almost
11 per cent in the first quarter to 7 per cent in the second quarter and
6.2 per cent in July.

However, most of the drop is due to the reversal

in mortgage interest rates;

if we exclude the cost of mortgage finance,

the price of services has increased at the rate of about 7.5 per cent
annually this year compared to 5.7 per cent last year.

Medical care

costs and transportation service costs (insurance, licenses, taxes,
and public transportation) are rising even more rapidly than last year
and the rise in rents has speeded up somewhat.

PER CENT CHANGES IN CONSUMER PRICES
(Seasonally adjusted annual rates)

Dec '69
to
March '70

All items

March '70
to
June '70

May '70
to
June '70

June '70
to
July '70

6,2

5.6

4.2

3.4

5.2
2.9
3.0
2.5

1,2
6.2
7.9
1.2

- 4.5
4,9
7.2
.0

..9
1.9
2.1
2.3

3.9
- 2.4
2,5

3,6
3.5
4.7

10.8
9.7
26.6

7.1
8.1
.5

7.0
8.7
- .8

6.2
8.0
.0

Services less home finance
7.5
Consumer durable products 1/ 2.9
Used cars (unadjusted)
-20,3

7.7
2.2
49.0

6.5
2.2
42.3

7.6
2,2
- 1.8

Food
Non-food commodities
Durables
New cars
Nondurables
Apparel
Other
Services
Medical care
Mortgage interest rates

.9
4.6
1.9

,9
.9
3.8

Addendum

Excludes used cars and houses.
Changes in the GNP deflators for consumer expenditures in the last four
quarters are shown below.

The lower rate of rise for durable goods in

the deflator as compared to the durable goods component of the CPI reflects in part the exclusion of house and used car prices.

(These are

also excluded in "consumer durable products" appearing in the addendum
to the preceding table.)

The increase in the rate of rise in the de-

flator for services from the second half of 1969 to the first half of

this year is similar to the rise in "services less mortgage finance".
(In the national income accounts residential construction is classified
in investment, and consumer expenditures for housing by owner-occupants
are represented by "imputed rent".)

Per Cent Changes in Deflators
(Seasonally adjusted annual rates)

1970

1969

QIII
Consumer expenditures
Durable
Nondurables
Services

QIV

QII

4.8
2.6
4.7
4.8

4.8
2,3
5.5
5.0

5.1
3.0
4.5
5.7

4.0
1.5
3.7
5.9

Corn blight. The first assessment of damage to livestock feed
supplies from a new and more virulent strain of the corn fungus will be
made in the crop report to be released September 11.

This survey will

allay some of the uncertainty which has sent grain and oilseed futures
prices up sharply since August 24 but it will be November or later before
firm corn crop estimates are available.
The impact of the blight on food supplies is not expected to
be immediate.

The main effect will be on livestock products and it will

be governed by the extent of the cut in corn, the principal feed grain.
If the crop is reduced snarply, livestock producers can be expected to
reassess their plans for increasing output of hogs and poultry for the
next year's markets in the light of higher feed costs.

Instead of the

expanded production which had been counted on earlier to hold the line

on retail food prices, we could have more moderate production and a rise
in the price structure of the whole livestock-feed complex by spring,
Expanded production already in process for the fall and winter markets

will be little affected.

Slaughter might be cut a little by marketings

of hogs and fed cattle at lighter weights because of higher feed costs.
On the other hand, slaughter might be increased a little by marketings
of hog breeding stock.

So far, no shifts in production plans are

evident but the pig crop report to be released September 22 may shed
some light on producer plans.
Unexpected cuts in corn crops have occurred before and farmers
have demonstrated considerable flexibility in stretching their feed
supplies.

Feed use projected for 1970/71 before the blight emerged as

a problem indicated that use would exceed output by a small margin.
More livestock were expected to be fed at slightly lower per unit feeding rates.

If the corn crop is 10 per cent below the August 1 estimate,

prices of all feedstuffs will be higher and the higher prices will ration
use.

Producers can be expected to reduce feeding rates and possibly

numbers of animals fed, and they may feed more wheat since stocks are
large.

Exports may decline a little.
*

Southern corn leaf blight was first identified in the South

in the 1920's where it had long been a problem.

Sometime between 1963

and 1969 a new race of the fungus developed which attacks the corn stalk
and ear as well as the leaf.

Little is known about this new strain.

spores are windborne and need free moisture for 4 to 6 hours for

The

II -

germination and penetration of the plant.

Heavy dew can provide the free

moisture if the weather is humid enough.

Mature corn is less susceptible

than young corn to the disease.
This year the blight appeared on winter sweet corn in Florida
and spread rapidly to field corn in the Southeastern states.

In July

the spores moved northward with the prevailing winds into all of the
Corn Belt States.

August weather was relatively favorable for develop-

ment of the spores in Southern parts of the Corn Belt and in the Southeast.

The forecast for September is for drier weather which will curb

the growth of the fungus.
Use of blight resistant varieties of corn is the most practical
method of control of the blight.

It is believed that the spores can

overwinter in the Corn Belt and many grasses and weeds are hosts to the
spores.

But this is considered to be of minor importance compared with

the problem of wind blown spores.

From 70 to 90 per cent of the corn

acreage this year was planted to hybrids carrying a "T" gene which is
susceptible to the new blight.

Seed companies are planning winter

production of resistant varieties in Hawaii and Latin America to supplement normal supplies of seeds of non "T" corn hybrids.

II -

FEED:

SUPPLY, USE AND PRICE RELATIONSHIP
(Feed in millions of tons)

Marketing year beginning October 1
1970
1969
1964-68
Assuming 10% cut
1
August
average
in corn crop
estimate

Feed grains

Supply
Stocks, October 1
Production
Use
Feed
Food, industry
Exports
Ending stock

Livestock-feed concentrate
Amount fed
Feed grains
Wheat & rye
By-product feeds
Animal units fed 2/
Amount fed per unit
Livestock-feed price3/

ratio (1957-59+100)

209

225

222

209

50
159

50
174

47
175

47
162

162
125
15
23
47

178
141
17
20
47

179
142
17
20
44

169
134
17
18
40

relationship
182
160
141
125
6
4
35
31
118
110
1.55
1.46

183
142
6
35
122
1.50

100

115 -

178-182
134
8-10
36-38
122
1.46-1.49

121

1/Corn, grain sorghum, oats, barley.
2/Millions of units: A unit is the equivalent of 1 milk cow in terms
of feed consumed in one year.
3/Prices received by farmers for livestock divided by prices paid

for feed. Calendar years.
4/ August 15, 1970 relationship.

9/8/70

II-C-1

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE
GNP INCREASE

BILS

ANNUAL RATE
ARITHMETIC SCALE

CURRENT $
QlI
a

EMPLOYMENT

ESTAB
BASIS

MILLIONS OF PERSONS

-20

-70
NONAGRICULTURAL

,I
I

AUG 70

ANUAL RATE

-21

11 1
1I

MANUFACTURING
AUG

19 3

PERCENT

1958

ARITHMETIC
SCALE

- 65

WOURS

IE 0 6

i
1968

AUG 399

1970

INDUSTRIAL PRODUCTION - I

1957-59=100

TOTAL
JULY
1692

CONSUMER GOODS
JULY1633

1968

IDUSTRIAL PRODUCTION - I

1970

- 42

WORKWEEK-MFG.
.i

1968

.40
1970

9/8/70

11-C-2

ECONOMIC DEVELOPMENTS - UNITED STATES
SEASONALLY ADJUSTED, RATIO SCALE

PRICES AND COSTS

1957-59=100

CONSUMER PRICES*
JULY 135 7

UNIT LABOR COST
JULY 119 6

INDUSTRIAL WHOLESALE*
JULY 115 9
*NSA

i i

I I

1968

I I

1970

BUSINESS INVESTMENT

RETAIL SALES

PLANT AND EQUIPMENT OUTLAYS

TOTAL

ANNUAL RATE

JULY 30 7

QI3 82 24

-128

MFG. NEW ORDERS

GAAF
JULY 8 4

MACHINERY AND EQUIPMENT
JULY 6 5

- 7

,Ill

11ll111111

11I

1970

1968

1I1I

Illlillllli

1970

1968

NVENTORIES, NONFARM - CHANGES
ARITHMETIC
SCALE
ANNUAL RATE

GNP

111-

IMPORTS

RITHMETIC SCALE

QII 2 6
]I26

rIm11

I•

I I

JULY 1 3

........

INVENTORY SALES RATIO

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

JUNE ! 57
l
i

1970

1968

i i i

i , ,

, ,

1970

III - 1

THE ECONOMIC PICTURE IN DETAIL

Domestic Financial Situation
Monetary aggregates.

After growing at a 1.2 per cent annual

rate from May to July, the money supply, according to preliminary
estimates, grew on average at about an 11 per cent seasonally adjusted
annual rate from July to August.

For the year to date, the rate of

growth has been at a 5.0 per cent annual rate.
Time deposits continued flowing into the banking system at a
very rapid rate in August, although the increase for the month was
somewhat less than that recorded in July.

Sales of large CD's paced

the August advance, as they had in July.

On a seasonally unadjusted

basis, large CD's at weekly reporting banks rose by slightly more than
$2.3 billion during the 4 weeks ending August 26, compared to a rise
of about $3.8 billion in the preceding 4-week period.

About 90 per

cent of the negotiable CD's sold at weekly reporting banks in August
had maturity dates of less than 90 days and about 70 per cent of the
$20.2 billion of CD's outstanding at these banks on the August 26
survey date were scheduled to mature by the end of November.
Moderation in the rate of CD inflow was evident during
the early weeks of August.

However, the application of reserve

requirements to bank-related commercial paper and the reduction of
requirements against time and savings deposits above $5 million from
6 to 5 per cent provided further stimulus to growth of CD inflows.
With commercial paper with original maturity of less than 30 days
becoming subject to the same reserve requirements as demand deposits,
banks began issuing CD's in anticipation of the maturing of outstanding
short notes.

III - 2

MONETARY AGGREGATES
annual
rates)
(Seasonally adjusted percentage changes, at annual rates)

QII

June

July

3.8

4.2

-1.8

4.1

11.0

Commercial bank time and
savings deposits

13.8

8.4

35.2

27.5

Member bank deposits

6.0

5.8

22.3

29.6

Member bank deposits plus
nondeposit sources 2/

6.5

7.0

18.1

23.9

Money stock

August p/

1/ Based on monthly average of daily figures for deposits and monthly
average of weekly figures for nondeposit funds. Quarterly changes are
calculated from the average amounts outstanding in the last months
of each quarter.
2/ Includes all deposits subject to reserve requirements plus the
following nondeposit sources: commercial paper issued by a holding
company or bank affiliate; loans or participation in pools of loans
sold under repurchase agreement to other than banks and other than
banks' own affiliates or subsidiaries; Euro-dollars borrowed directly
through brokers or dealers; liabilities to banks' own branches in
U.S. territories and possessions; and liabilities to banks' own
foreign branches.
p/ Preliminary.
Weekly reporting banks continued to record substantial growth
in consumer-type time and savings deposits during August and total time
deposits inflows at country member banks also remained relatively
large.

In both cases, the gains fell somewhat short of the unusually

large advances recorded in July.

The mid-month Treasury financing may

have been at least partly responsible for the slackening in growth of
these deposits.

III -

Growth in the adjusted credit proxy (total member bank deposits
plus nondeposit sources of funds) was at an annual rate of about 24 per
cent in August.

This was above the rate recorded in July, reflecting

mainly a larger increase in private demand deposits was somewhat less
rapid than in July and banks reduced their use of nondeposit sources
of funds.

There was a marked decline in commercial paper issues of

affiliates and in borrowings from foreign branches.
Bank credit.

Commercial bank credit adjusted for loan sales

to affiliates is estimated to have increased at a 15.5 per cent seasonally adjusted annual rate from the last Wednesday in July to the last
Wednesday in August; this was fractionally below July's rapid rate of
advance.

Increased security holdings accounted for slightly more than

half of the total expansion in earning

assets, with banks acquiring

a large volume of securities at the Treasury's mid-month financing
and also adding substantially to their holdings of other securities,
mainly municipal and agency securities.

Loans to brokers and dealers

continued to advance in August at the rapid pace of July, and business
loans, which rose only moderately in July, also increased sharply.
On the other hand, with the commercial paper market improving, loans
to nonbank financial institutions declined slightly over the month
in marked contrast to the record gain recorded in July.

The generally

weak trends shown in real estate and consumer loans in recent months
continued in August.

III

- 4

COMMERCIAL BANK CREDIT ADJUSTED
TO INCLUDE LOAN SALES TO AFFILIATES 1/
(Seasonally adjusted percentage changes, at annual rates)
1969
2nd Half

1970
QI

Q II

July

August

2.9

2.5

5.3

16.6

15.5

U.S. Govt. securities

-15.6

-12.3

30.2

31.1

36.8

Other securities

- 1.4

9.5

9.9

8.0

20.7

7.8

3.4

- .3

16.1

9.6

9.5

5.5

5.8

3.2

13.9

Total loans & investments 2/

Total loan2/

Business loans 3/
/

Last Wednesday of month series.

2/ Includes outright sales of loans by banks to their own holding
companies, affiliates, subsidiaries, and foreign branches.
3/ Includes outright sales of business loans by banks to their own
holding companies, affiliates, subsidiaries, and foreign branches.
The sharp advance in business loans--adjusted for bank
reacquisition of loans previously sold to affiliates

at an annual

rate of more than 14 per cent--was a striking bank credit development
in August.

Several factors seem to have accounted for this surge in

business loan growth.
over the month.

Holdings of bankers' acceptances rose sharply

A greater than seasonal growth in loans to commodity

dealers apparently reflected the impact of the corn blight on commodity
market activity.

Loans to machinery manufacturers and to retail trade

were also up more than seasonally.

Put aside from these special factors,

the August business loan growth still appears stronger than in other
recent months.

III - 5

NET CHANGE IN TIME AND SAVINGS DEPOSITS
(Billions of dollars, not seasonally adjusted)
July 8 - July 29 1/

July 29 - August 26 1/

1967-69
average

1970

Weekly reporting banks
.6

4.9

3.2

Consumer-type

CD's

3.8

2.3

- .1

1.4

1.0

Total time and savings

All other
Country banks
Total time and savings

1/ Dates are for 1970; comparable dates used for other years.

III -

Nonbank depositary intermediaries.

More complete data

have confirmed earlier indications of exceptionally large deposit
inflows during July, particularly at savings and loan associations.
There have been scattered indications that the pattern of deposit
inflows will be relatively strong in August, with no discernible
impact on deposit flows from the August 17 payment date for the
Treasury's cash offering of low-denomination short term notes.

DEPOSIT GROWTH AT NONBANK THRIFT INSTITUTIONS
(Seasonally adjusted annual rates, in per cent)
Mutual Savings
Banks
1969 Q III
Q IV
1970 Q I
Q II

Both

2.0
3.3
/

'May*
June*p/
July*P/

Savings and Loan
Associations
2.1
0.4

2.1
1.4

2.6
6.4

1.5
7.4

1.9
7.1

6.4
6.0
7.1

5.6
7.8
14.8

5.9
7.2
12.3

Monthly patterns may not be significant
seasonal adjustment.
reliminary.

because of difficulties with

III - 7

Savings and loan associations continued to limit their borrowing
activity during August, when advances from the FHLBanks increased by
less than $100 million.

With inflows unusually large in July, S&Ls

also continued to increase their liquid asset holdings, contrary
to the usual July run-off of such assets.
The liquidity of the FHLB System, bolstered by a modest
addition of new money from its August security issue, remained more
than ample at $1.8 billion as of the end of August.

Despite its

large holdings of liquid assets and reduced lending to member
associations, the FHLB still plans to raise a sizeable amount of new
money during the remainder of 1970.

Some of these additional funds

are intended for acquisitions of conventional mortgages in the
secondary market through the new Federal Home Loan Mortgage Corporation created by the Emergency Home Finance Act of 1970.- /
Mortgage market.

While no firm data are yet available, new

residential mortgage commitments probably increased somewhat further
in August, judging from savings flows, trade opinion, and field
reports.

Minor reductions in mortgage rates were also indicated.
During July, when savings inflows to the nonbank thrift

institutions were exceptionally large, seasonally adjusted new
1/ The FHLB Board has not yet made definite plans for use of funds voted
in the Emergency Home Finance Act of 1970 to subsidize the cost to
member associations of FHLB advances. Funds have not yet been appropriated for this program.

III

- 8

mortgage commitments picked up at S&Ls as well as at the mutual savings
banks in New York State.

For both lender groups combined, July new

commitment volume was the largest in nearly a year and a half, and
double the unusually small March total.1 /

y the end of July, the

combined amount of outstanding mortgage commitments at these institutions was the highest of the year.

In addition, FNMA reported a

record $4-3/4 billion backlog of outstanding commitments, suggesting
that its takedowns and borrowings will remain substantial in the
period ahead.
During August, FNMA weekly field reports indicated that
improvement among different regions in the availability of funds for
home mortgages was rather spotty in the primary market, where usury
ceilings in numerous States still posed a restraint on investment,
particularly in conventional home loans.

Yields in the secondary

mortgage market remained under a downward pressure owing to a shortgage
of loans available to a gradually increasing number of prospective
investors.

Lender demand for loans was apparently being encouraged

by growing expectations of some further easing in yields, including
the belief in some quarters that the present 8-1/2 per cent ceiling
rate on FHA and VA mortgages might be reduced before the November
elections.

In FNMA's bi-weekly auction of August 24, yields on 6-

month forward commitments to purchase Government underwritten
home mortgages remained at 9.03 per cent--9 basis points below the
month-earlier level.
1/ Only a very minor part of the July increase in the mortgage commitments
at these thrift institutions seems to have reflected commitments made on
FHA and VA loans for subsequent resale to the FHLBanks to back a proposed
GNMA-guaranteed bond issue.

III - 9

An innovation in the mortgage market during 1970--designed
to broaden sources of funds for housing finance--has been the issuance
of securities guaranteed by GNMA and backed by p ols of FHA and VA
mortgages.

Through the end of August, two bond-type issues of GNMA

guaranteed securities totaling $800 million had been publicly offered
by FNMA, and another $200 million has been announced for sale on
September 11.

Also, the Federal Home Loan Banks have been assembling

a $300 million-plus pool of mortgages to back still another GNMAguaranteed bond issue.

In addition, 16 issues of GNMA guaranteed

"pass-through" type securities had been privately placed by mortgage
companies by the end of last month.

Slightly less than half of the

$64 million total was purchased by private or public pensi n funds.
The remainder was taken by savings and loan associations, banks, and
insurance companies.

Judging from the $260 million backlog of pass-through

securities approved by GNMA but not yet floated, more issues will be
forthcoming, depending partly on the future course of market rates.
Corporate and municipal bond markets.

While corporate and

municipal bond yields declined noticeably following the mid-August
announcement of the cut in reserve requirements, the bond rally, which
1/ On bond-type mortgage-backed securities, GNMA guarantees that the bond
payments will be made to the holder as scheduled. On the most commonly
used form of "pass-through" securities, GNMA guarantees the timely payment
to the holder of specified principal payments and a fixed rate of interest
on the unpaid balance, with all principal prepayments passed through to
the holder.

III -

had stalled earlier in August, again faltered in early September.
Commercial bank acquisitions of tax-exempt bonds continued to form a
solid demand base in that market; but the mounting forward calendar
of both corporate and municipal offerings has tended to dampen investor
enthusiasm, and new issues in the week immediately preceding the LaborDay weekend moved slowly.

However, on balance, in the 5 trading

weeks since July 31, these long-term yields have shown declines of
15 to 20 basis points.
BOND YIELDS
New Aaa
Corporate Bonds 1/

Long-term State
and Local Bonds 2/

1969

,.o0 (2/21)
8.85 (12/5)

4.82 (2/23)
6.90 (12/18)

8.20 (2/27)
9.30 (6/18)

Low
High

5.95 (3/12)
7.12 (5/28)

1970
Low
High
Week of;
August

7
14
21
28

8.35
8.53
8.70
8.38

6.25
6.30
6.17
6.07

Sept.

8.40

6.16

1/ With call protection (includes some issues with 10-year protection).
2/ Bond Buyer (mixed qualities).

III - 11

Public issues of corporate bonds remain large, with $2.1
billion now expected by the staff in September and about $1.9 billion
in October, suggesting no near-term let-up in the pace of offerings.
Underwriters confirm the continued large volume of prospective issues
by utilities, large manufacturing corporations, and firms that had
postponed or cancelled issues earlier in the year.

Private placements

of bonds and offerings of equities are expected to be maintained at
a pace about equal to the average of the first three quarters.

Stock

offerings, however, are expected to increase in September, with a
number of large utility and several mortgage trust

fferings scheduled

for that month.
CORPORATE SECURITY OFFERINGS
(Monthly or monthly averages, in millions of dollars)
Bonds
Public
Offerings

Private
lacements

Stocks

Total

1969-entire year
1,70-through October

1,061
1,914e1/

468
426e

710
652e

2,229
2,992e ./

1970 - Q I
Q II
Q III

1,525
2,329e1/
1,892e

420
437e
433e

712
658e
600e

2,659
3,424e1/
2,925e

1,750e
2,100e
1,900e

400e
500e
400e

450e
700e
600e

2,600e
3,300e
2,900e

August
September
October

Estimated.

The second quarter "Public offerings" and "Total" figures included the
$1,569 billion AT&T offering. The monthly average for "Public Bond
Offerings" excluding AT&T would be $1,757(e) for the year through
October and $1,806(e) for the second quarter. The ex-AT&T monthly
averages for "Total Offerings" would be $2,835(e) for the year
through October and $2,901 for the second quarter.

III -

Sales of long-term bonds by State and local governments in
August were about $1.3 billion, the same as in

uly.

But with the

continued improvement in market conditions, the forward calendar is
beginning to build, and new offerings are expected to increase
significantly in coming months.

The most recent Federal Reserve-Census

survey of State and local borrowing anticipations, which is reported
in Appendix B, tends to confirm this view.

Planned borrowing in the

second half of 1970 is large but actual borrowing in the third quarter
will apparently again be below their anticipations.

With rates now

more attractive, and banks more actively purchasing tax-exempts, the
survey results suggest the possibility of a significant rise in
offerings during the final months of the year.

STATE AND L CAL GOVERNMENT OFFERINGS
(Monthly or monthly averages, in millions of dollars)

1969-entire year
1970-through October

90
1,380e

1970 - Q I
Q II

1,368
1,237

Q III
August
September
October

1,390e
1,275e
1,600e
1,800e

Estimated.

III - 13

Stock market.

Stock prices moved up sharply during the third

week of August, with investor optimism apparently rekindled by the
Board's action on reserve requirements which, along with recent declines
in money market rates, has been widely interpreted by market analysts
as a significant sign of credit easing.

Over the past few days,

short-term profit taking and uncertainties over the possible impact
of a strike in the automobile industry as well as over the likelihood
of an impasse in the Mideast peace talks have contributed to a retreat
from recent gains, but as of the close of trading on September 4,
the NYSE and AMEX indices were respectively 19 and 10 per cent above
their end-of-May 1970 lows.

As the percentage price change table

indicates, these indices are still well below (10 and 15 per cent,
respectively) their 1970 highs of early April and substantially
depressed from levels reached during the height of the intensely
speculative market of 1968.
Large institutional investors, which had reportedly been very
inactive in the past few months, now appear to be back in the market
on a limited scale, primarily for the purpose of upgrading their
portfolios.

Mutual funds in particular are in a position to add

substantially to market demand whenever they become convinced that
a sustained market upturn has begun.

At the end of July, open-end

funds' liquid balances represented an historically high 11.8 per cent
of total assets.

PERCENTAGE CHANGE IN STOCK PRICES INDICES
^Fromn

1968 High

1970 High (April)

1969 Low

To:

NYSE

AMEX

NYSE

1969 low

-20

-25

1970 high (April)

-18

-25

+ 2

1970 low (May)

-39

-42

-24

Sept. 4, 1970

-27

-36

- 9

AMEX
--

NYSE

AMEX

1970 Low (May)
NYSE

AMEX

-23

-25

-23

-15

-10

-15

+19

+10

No Change

III - 15

Added institutional buying interest would help to bolster
sagging trading volume, which has led to substantial declines in the
profits of most brokerage firms, and the failure of several recently.
On the average, trading volume for 1970 is down 17 per cent from
1968 on the NYSE and 45 per cent on the AMEX.

AVERAGE STOCK TRADING VOLUME

(THOUSANDS

OF SHARES)

NYSE

AMEX

1968
1969

12,971
11,452

6,187
5,047

1970 (8 months)

10,776

3,410

10,239

2,264

7
14
21
28

8,114
7,775
9,991
15,732

2,083
1,805
2,148
4,353

12,072

3,428

Week ended:
July 31
August

Sept.

III - 16

Government securities market.

In the latter half of August,

yields declined throughout the U.S. Government securities market as
market professionals and final investors reacted favorably to the
System's August 17 reserve requirement changes and to a substantial
easing of money market conditions.

In the note and bond sector

of the market, yields declined by around 20 basis points on average
in the three weeks ending September 1, while Treasury bill rates moved
from 10 to nearly 25 basis points lower on balance.

More recently,

however, the large volume of new corporate issues has attracted
investors' attention and the earlier decline in yields on Treasury
coupon issues has stalled.

At the same time, the money market

has turned somewhat firmer, despite substantial System reserve-supplying
operations; and, with the higher cost of day-to-day money, Treasury
bill rates have backed up somewhat, although they still remain below
their mid-August levels.

III - 17

WEEKLY AVERAGE MARKET YIELDS ON U.S. GOVERNMENT AND AGENCY SECURITIES1/

(Per cent)
1970
Highs

Lows

Aug. 18

Week ending
Sept. 1
Aug. 25

Sept. 8

Bills
1-month

7.84 (1/28)

6.02 (6/24)

6.41

6.29

6.27

6.28

3-month
6-month
1-year

7.93 (1/16)
7.99 (1/5)
7.62 (1/30)

6.08 (3/24)
6.18 (3/23)
6.20 (4/13)

6.52
6.62
6.61

6.31
6.46
6.44

6.30
6.51
6.49

6.38
6.58
6.50

8.42
8.30
8.12
8.22
7.73

(1/7)
(1/7)
(4/26)
(5/26)
(5/26)

6.87
7.05
6.98
6.90
6.55

(3/25)
(3/25)
(3/25)
(2/27)
(2/27)

7.55
7.65
7.68
7.64
7.20

7.37
7.51
7.56
7.57
7.14

7.33
7.44
7.47
7.48
7.04

7.31
7.41
7.46
7.49
7.05

8.65
8.75
8.54
8.43

(1/27)
(1/2)
(1/2)
(1/15)

7.17
7.46
7.75
7.78

(4/15)
(4/14)
(3/25)
(3/25)

7.48
7.66
8.00
8.06

7.35
7.55
7.91
7.98

7.24
7.40
7.81
7.89

7.24
7.39
7.81
7.87

Coupons
3-year
5-year
7-year
10-year
20-year
Agencies
6-month
1-year
3-year
5-year

1/ Latest dates of high or low rates in parentheses and refer to single
dates.

Dealers' positions in all Treasury securities increased on
balance in the latter half of August and early Septembe r, largely in
reflection of a $1.4 billion rise in holdings of Treasury bills.
Positions in coupon issues declined fairly steadily over the month
of August and thus far in September as dealers continued to distribute
the issues offered in the Treasury's mid-August refunding; but the level

III - 18

of these coupon positions remains higher than at any other time this
year before mid-August.

In the expectation that the longer-term outlook

is for declining interest rates, dealers have not been particularly
restive with their enlarged bill and coupon positions.

But dealers'

attitudes toward their positions are clearly still very sensitive, as
the most recent back-up in bill rates with the emergence of tauter
money market conditions has shown.
DEALER POSITIONS IN GOVERNMENT AND AGENCY SECURITIES
(In millions of dollars)
Sept.
8

Aug.
17

Aug.
24

Aug.
31

4476

3,919

3,780

4487

5038

Treasury bills (total)

3,041

2,482

2.526

3 243

3.837

Due in 92 days or less

596

472

399

612

989

93 days or over

2,446

2,010

2,127

2,631

2,848

1,435

1,437

1,254

1,245

1201

349

214

193

305

388

1-5 years

455

511

440

369

321

over 5 years

630

712

621

571

492

810

783

831

727

657

564

539

583

492

469

247

244

248

235

187

August (Daily
Average)
Treasury securities

Total

Treasury notes and bonds
(total)
Due within 1 year

Agency securities
Total
Due within 1-year

other 1 year

III - 19

In the market for Federal agency securities, new issue activity
has been fairly limited, although GNMA has announced that the $200 million
20-year offering, originally scheduled for August 26 but postponed at
mid-month, will be offered September 11.

A $200 million, 25-month portion

of the earlier GNMA financing, however, was well received at a 7.50
per cent yield and subsequently traded at a modest premium.

In the

short- and intermediate-term market for outstanding agency issues yields
have generally declined about in line with Treasury issues.
Other short-term credit markets.

Total commercial and finance

company paper outstanding declined $173 million to a seasonally adjusted
level of $36.3 billion in August based on data through the last
Wednesday of the month.

This decrease was more than accounted for by

the $512 million drop in bank-related paper; nonbank related paper rose
$339 million over the month on an adjusted basis (representing an
unadjusted gain of $821 million).

The increase in nonbank related

paper reflected a sharp recovery in directly-placed paper and a
continuing reduction in paper placed through dealers.
The decline in bank-related paper was concentrated in the
second half of August, and reflected bank reaction to the Board's midAugust action imposing reserve requirements on bank-related commercial
paper.
CD's.

Banks have replaced these funds through the issuance of additional

III - 20

COMMERCIAL AND FINANCE COMPANY PAPER
(End-of-month data, in millions of dollars)
June

July

August 1/

Amounts Outstanding
Total commercial and
finance paper 2/
Bank related 3/
Nonbank related 4/
Placed through dealers
Placed directly

38,497

36,464

e/
36,2917

7,468

7,685

7,173

12,482
18,547

11,449
17,330
Net Change

finance paper 2/

-1,006

-2,033

173t

Bank related 3/
Nonbank related 4/
Placed through dealers
Placed directly

217

512

487
522

-1,033
-1,217

602e/
941e/

10,847e/
18,271e/

Total commercial and

Estimated; see footnote 1.

As of August 26. The end-of-month data will differ from these
Wednesday figures, due to the difference in dating.

Combines seasonally adjusted nonbank related paper and seasonally
unadjusted bank related paper.

Seasonally unadjusted.

Seasonally adjusted.

III - 21

Rates on commercial and finance paper fell another 1/2 of a
percentage point and yields on acceptances dropped 3/8 of a percentage
point during August, with most of the declines coming in the latter half
of the month when money market condtiions eased substantially and market
expectations of lower interest rates generally became stronger.

Reflect-

ing the declines, commercial paper was quoted at 7-5/8 per cent on onemonth and 8-1/4 per cent on three-month maturities at the beginning of
September.

The rate decreases on commercial paper were much sharper than

those on Treasury bills, with the result that spreads have narrowed from
around 180 basis points to 135 basis points on one-month maturities and
from 225 to 185 basis points on three-month obligations.
Yields on new issue short-term CD's also fell further during
August.

One-month maturities dropped 37 basis points to 7.25 per cent,

while three-month issues fell 31 basis points to 7.44 per cent.

Although

the rate on new CD's in the 1-year area is still generally at the 7-1/2
per cent ceiling, at least one large New York bank has reduced its
offering rate for this maturity to 7-1/4 per cent.

III - 22

SELECTED SHORT-TERM INTEREST RATES
(Wednesday Quotation - Discount Basis)
1969
Nov.-Dec.

Aug. 5

Aug. 19

Sept. 2

Net ahange
(Aug. 5-

Sept. 2)

highs 1/
1-month
8.00
7.75
7.50

7.62
7.25
7.25

-.50
-.50

9.00 (12/31)

8.12
7.75
7.62

6.25

7.62

7.56

7.25

-.37

7.54 (12/31)

6.30

6.38

6.29

-.01

9.25 (12/31)

8.50
7.75
7.38

8.25
7.25
7.00

-.50
-.50
-.38

Commercial paper
Finance paper
Bankers' acceptances
Certificate of deposit-new issue 2/

9.25 (12/31)
9.00 (12/31)

Treasury bill

-.37

3-month
Commercial paper
Finance paper
Bankers' acceptances
Certificate of deposit-new issue 2/

9.00 (12/31)

8.75
7.75
7 38

6.50

7.75

7.73

7.44

-.31

Treasury bill

8.00(12/29)

6.50

6.41

6.40

-.10

9.00 (12/31)
8.09 (12/29)

7.38
6.65

7.38
6.47

7.00
6.61

-. 38
-.04

6.25 (12/12)
7.8b (11/24)

4.30

4.10
6.45

4.00

-. 30
-. 12

8.13(12/31)

6-month

Bankers' acceptances
Treasury bill
12-month
Prime municipals 2/
Treasury bill

6.66

6.54

1/ Dates of highs in parentheses; latest date used if high occurred on
more than one date.
2/ Investment yield basis.
Source:

Wall Street Journal's Money Rates for commercial and finance paper
and bankers' acceptances; all other data from the Federal Reserve
Bank of New York.

III-

Federal finance. The Board staff estimate of total receipts and
outlays in the unified budget for fiscal 1971 remains unchanged from
the previous Greenbook.

The $11.7 billion deficit projected by the staff

is much higher than the official (May 19th) Administration estimate
of only $1.3 billion for fiscal 1971, but there have been unofficial
reports that Administration economists now estimate a budget deficit
in the range of $10 to $15 billion.
There is still considerable uncertainty in the staff estimate
of budget outlays, among othersin the area of defense spending, because
the defense appropriations bill is still being worked out in Congress.
The amendment proposing a $66 billion ceiling in defense spending (i.e.,
a $5.2 billion cut in the proposed defense budget) was defeated in the
Senate. Nevertheless, it appears likely at this date that the
combination of pressure by Congress and by the Administration will
result in a cut in defense spending by perhaps as much as $1 billion.
The staff expects that such a cut in outlays will be offset by increased
interest payments on the public debt and by other items such as a
higher-than-projected Post Office deficit arising from a further delay
in the projected postal rate increase.
On a National Income Accounts basis the staff is projecting
a $10.7 billion deficit for the Federal sector for calendar 1970 and
$11.8 billion deficit for fiscal 1971.

The small increase in the

III - 24

deficit since the previous Greenbook partly reflects reduced corporate
profit tax accruals, due to a reduction in projected profits.

On a

seasonally adjusted basis, the NIA deficit is expected to become
progressively smaller, declining from $14.3 billion in the third
quarter of 1970 to $10.1 billion in the second quarter of 1971, as
total expenditures during that period are projected to grow at an
annual rate of about 5.5 per cent while receipts grow somewhat faster.
With Federal expenditures under constraint, staff estimates
of high employment surplus or deficit still show that Federal fiscal
policy will shift in a more restrictive direction during fiscal
1971.

The high employment budget is expected to move from a $2.0

billion deficit in the second half of calendar 1970 to an $8 billion
surplus in the first half of calendar 1971.
The Treasury's cash balance will be cut during September by
an anticipated German redemption of $800 million in special Treasury
foreign issues that will be reinvested by market purchases of outstanding Treasury bills.

Taking this into account, the end-of-September

cash balance is expected to be $7.6 billion.

The Treasury is expected

to raise around $2.5 billion of new money in late October, probably
through an offering of tax bills, along with the already-scheduled
additions to weekly and monthly bill offerings.

FEDERAL BUDGET AND FEDERAL SECTOR IN NATIONAL INCOME ACCOUNTS
(In billions of dollars)
Fiscal
ar1970*

Calendar
Year 1970
F.R. Board

Fiscal Year 1971
F. R.
Revised
Budget 1/ Board

Calendar Quarters
1971
1970
II* IIIe/
IVe/
Ie/
lie/

Federal Budget
(Quarterly data, unadjusted)
Surplus/deficit
Receipts
Outlays

-2.9
193.3
196.8

-10.2
193.5
203.6

Means of financing:
2/
Net borro-ing from the public3.8
Decrease in cash operating balance -2.1
Other 3/
1.2

10.0
-1.1
1.4

Cash operating balance, end of period

-1.3
204.3
205.6

-11.7
199.4
211.1

-3.5
44.4
47.8

8.7
58.7
50.0

-7.4
47.6
55.0

-8.0
42.8
50.8

-6.1
46.4
52.5

9.7
62.5
52.8

n.a.

11.0
1.0
-.2

2.0
-1.6
3.1

-6.4
-1.1
-1.1

6.9
.4
.1

7.5
1.2
-.7

4.2
.4
1.5

-7.6
-1.0
-1.1

7.0

6.9

8.0

7.6

6.4

6.0

7.0

-1.7 -14.3
195.9 196.6
197.7 210.9

-14.3
194.7
209.0

-12.6
197.4
210.0

-4.3

8.0

6.4

National Income Sector
(Seasonally adjusted annual rate)
Surplus/deficit
Receipts
Expenditures

-.4
198.8
199.3

-10.7
196.2
206.9

n.a.
n.a.
208.3

-11.8
201.2
213.0

High employment budget surplus/
deficit 4/

1.2

-1.6

n.a.

3.0

2.9

-5.4

-10.3 -10.1
204.7 207.215.0 218.0
8.0

* Actual
e--projected
n.a.--not available
1/ Official Budget Revision: May 19, 1970
2/ Excludes effect of reclassification of $1.6 billion of CCC certificates of interest, as of July 1, 1969.
Chis
reclassification increased Federal debt, but is not treated as borrowing from the public.
3/ Includes such items as deposit fund accounts and clearing accounts.
4/ Estimated by Federal Reserve Board Staff. Since the last Greenbook, the high employment figures have been
revised to include the effect on the GNP price deflator of the assumed Federal pay raise beginning in the
first quarter of 1971.

8.1

III

- 26

PROJECTION OF TREASURY CASH OUTLOOK
(In billions of dollars)
Aug.
Total net borrowing:
Weekly and monthly bills

2.8

Sept.
-1.9

Tax bills
Coupon issues

3.1

As yet unspecified new
borrowing
Other (agency, debt repayment, etc.)

--.7

Oct.

Nov.

Dec.

2.8

2.4

2.3

--2.5

.5
---

---

.7
---

2.3
--

2.6
-1.0

1.5
.1

-.2

-.6

-.7

-2.7

2.0

-6.0

-2.4

Equals: Change in cash balance

-.1

-2.6

-.6

2.0

Memoranda: Level of cash balance,
end of period

7.3b/

7.6

5.0

4.4

6.4

15.4
18.1

19.6
17.6

11.9
17.9

14.4
16.8

16.5
16.1

5.6

6.0

Plus: Other net financial sourcesPlus: Budget surplus or deficit (-)

Derivation of budget
surplus or deficit:
Budget receipts
Budget outlays
Maturing coupon issues
held by public

a/ Checks issued less checks paid and other accrual items.
b/ Actual.

III-c-1
FINANCIAL DEVELOPMENTS - UNITED STATES

9/8/70

BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, RATIO SCALE

BANK CREDIT

BANK RESERVES
TOTAL
AUG

400

286

11TOTAL

AUG 416 3

350

NONBORROWED
4AUG

-126

27 8

275
I |

I .

LOANS
AUG

ARITHMETIC SCALE
NSA

ILl

282 4

I I

III

I I I

T-

BORROWED
AUG

225

EXCESS AUG
1 1 1 11 1 1 1 1
1 1 1

11
-

1 1 1 1 11

1968

110

1970

CREDIT PROXY

BUSINESS LOANS

AUG

107 4
-

DEPOSITS AND ALL
NONDEPOSIT SOURCES
AUG 322
DEPOSITS AND
EURO-DOLLAR
.
AUG 313 7

-1 70

OTHER SECURITIES
AUG

76 6

DEPOSITS
AUG

303 3

U.S. GOVT. SECURITIES
AUG 57 2

I 1111

I I NEW I SERIES I
J
I I

1 11

1970

I I

1968

I I

1970

SAVINGS ACCOUNTS

SAVINGS & LOAN ASSN.
JULY 139 5

MUTUAL SAVINGS BANKS
JULY 68 5

.I II I

I I,

III-C-2
FINANCIAL DEVELOPMENTS - UNITED STATES
NET FUNDS RAISED

9/8/70

SHARES IN'FUNDS SUPPLIED

NONFINANCIALSECTORS

PERCENT
-I

SEASONALLY ADJUSTED
ANNUAL RATE

NONBANK FINANCE
II36 6

TOTAL
oni 105 1

-50

COMMERCIAL BANKS (ANDAFFILIATES)
on 23 6

LESS FEDERAL
GOVERNMENT
Q I88 5

1I _I

PRIVATE NONFINANCIAL
HOUSEHOLDS AND BUSINESS

Q1 29 5

NETFUNDS RAISED
Q0l 73 7

50
0

QI 62 6

ijL

1970

1968

YIELDS

PERCENT

YIELDS SHORT-TERM

LONG-TERM

PERCENT

FEDERAL FUNDS
AUG 6 61

8
COMMERCIAL PAPER
4-6 MONTHS
AUG 7 94

F.R. DISCOUNT RATE
AUG

6 00

TREASURY BILLS
3-MONTH
AUG 6 41

1970

1968

STOCK MARKET

BILS

NEW SECURITY ISSUES
1970
1

TOTAL
SCUSTOMER CREDIT

120

AUG 26

BIL$

1IRATIO SCALE

CORPORATE

JUNE 7 4

1941
3-10

-1-J

_______--__I-

1970

77 7

I ., , , , , , I , , , , , ,
2

1968

AUG

STATE AND LOCAL GOVERNMENT

AUG

tCOMMON STOCK PRICES

1968

MILLIONS OF SHA

VOLUME

RATIO SCALE

N Y.SE,DAILY AV.

1969
I
I
MAR.

Ii,,

1
JUNE

SEPT.

DEC.

-1-

1968

1970

IV - 1

THE ECONOMIC PICTURE IN DETAIL

International Developments

U.S. balance of payments.

The rate of over-all deficit on

the liquidity basis (before special transactions and seasonally adjusted)
appears to have abated considerably since June.

In July this deficit

was on the order of $100 million, and though the weekly data for August
show some increase the deficit for the month was probably under $500
million.

Barring a major change in September, the third-quarter deficit

should be much improved as compared with the $1.3 billion of the first
quarter or the $2.2 billion of the second.
Improvement in the liquidity balance in July reflected not
only the favorable trade balance (discussed below) but also favorable
capital flows.

There was a net reduction of $350 million of bank-

reported claims on foreigners, which was a more-than-seasonal reversal
of second-quarter outflows.

In addition, for the second month foreigners

were net purchasers of U.S. equity securities to the extent of about
$50 million, while U.S. purchases of foreign bonds were still lower than
in other recent years.
Relatively complete data for the second quarter (confidential
until published late in the month) confirm earlier impressions that
recorded outflows of U.S. private capital were high, and that unrecorded
net payments

were also large.

In particular, direct investment outflows

IV -

were about as high as the $1.4 billion of the first quarter; the total
of $2.8 billion for the first half was much larger than for any earlier
six-month period.

At the same time, U.S. companies were raising only

small amounts of funds abroad to help finance these investments, and
apparently were not drawing down funds held abroad that were the proceeds
of earlier borrowing.

These results strongly suggest that direct investors

will have to cut back very sharply on their capital outflows in the second
half, and may have to increase their income remittances over the moderate
second-quarter rate, in order to stay within the limits of the controls.
In fact, reports to the OFDI still indicate that the year-over-year
increase in capital outflows will be much smaller than these first-half
figures would suggest, pointing to a repetition of last year's experience,
when outflows fell sharply in the final quarter.
Improvement in the third-quarter liquidity balance, therefore,
clearly reflects primarily a cessation of unsustainably large capital
outflows in the first half, probably aided by a moderate gain in the
current account.

On the official settlements basis, however, the third

quarter deficit will still be large.

The July-August deficit on this

basis (seasonally adjusted) was about $2 billion, as liabilities to
private foreigners were reduced by about $1.6 billion -- including a
decline of $1.5 billion in liabilities to foreign branches.

The decline

in liabilities to private foreign accounts was much smaller in August
than in

July, and further reductions in the rest of the year may be

IV - 3

limited by the fact that most banks are close to their reserve-free
bases on their Euro-dollar borrowings.
U.S. foreign trade.

In July, the export surplus held at

the very high June level as both exports and imports fell by about
the same amount.

For the three months of May-July combined the

surplus was $4.3 billion at an annual rate (balance of payments basis).
This compares with rates of $2.8 billion in February-April and $1.5
billion in the second half of 1969.
The very large increase in the export surplus in the MayJuly period results from a sharp acceleration in exports -- over 20
per cent at an annual rate from the February-April level -- while
imports rose much more moderately -- by 8 per cent.

The commodities

accounting for the recent export expansion differ from those responsible
for the advance in exports in the earlier months of the year.

Shipments

of machinery bulk much more importantly in the latest gain while the
earlier advance was led by greater exports of industrial materials -steel, copper, aluminum, coal and chemicals -- and deliveries of
large numbers of commercial aircraft.

Exports of automotive equipment

to Canada, which had sagged earlier this year, picked up sharply in
May-July.
advance.

Shipments of agricultural commodities have continued to
The rise in imports in the last three months was concentrated

in May; imports fell in the following two months, and in July were no
higher than the levels registered in February-April.

IV - 4

Exports in May-July were at an annual rate of $43.8 billion,
about $2-1/2 billion more than the rate in the preceding three months.
Agricultural items accounted for about one-fifth of the increase,
reflecting a further rise in corn shipments, and in deliveries of rice
to Korea under the P.L. 480 program.
also greater.

Cotton and tobacco exports were

Among the non-agricultural items, the largest advances

were recorded in machinery -- particularly in June and July -- and in
cars to Canada as automobile sales there improved.

Exports of ferrous

scrap, particularly to Japan, also increased, while shipments of steel,
copper, coal and chemicals in May-July were maintained at the

high

values recorded in the first part of this year.
Exports of steel peaked in May, and there has been a sharp
drop in export orders for U.S. steel, suggesting that such shipments
will probably continue to slide.

Supplies of steel have become more

plentiful in Europe and production in countries like Germany appears
to have stabilized as large stocks there are being worked off.

The

increased deliveries of machinery reflect the continued heavy demand
for producers' equipment in foreign industrial countries, some of which
are experiencing record rates of capacity utilization in manufacturing.
By areas, the largest increases in U.S. exports in May-July
have been in shipments to the United Kingdom, Germany and other Common
Market countries, and to Japan.

Exports to the less-developed countries

of Asia and Africa have also risen but shipments to Canada and to the
Latin-American countries have declined.

IV - 5

Despite the very strong growth in U.S. exports of nonagricultural products, the United States share of world exports of
manufactured goods in the first half of this year has remained
unchanged from the relatively low ratio to which it had dipped in
1969.

Germany, France, Italy and Japan have increased their shares.

The United Kingdom's share, however, shrank appreciably this year.
Imports in May-July were at an annual rate of $39.4 billion
(balance of payments basis) about 2 per cent greater than the rate in
February-April.

As in the earlier months, machinery, automobiles from

Canada, and other nonfood consumer goods, accounted for most of the
recent rise.

Imports of European and Japanese cars fell; continued

growth in sales of those cars in the United States was met by drawing
down stocks.

Arrivals of foodstuffs, which had risen strongly in the

early part of the year, declined slightly in May-July, mainly because
of a substantial drop in imports of meat.

The value of coffee imports

was up because of a further rise in prices, but the volume of coffee
imported was lower.
The rise in imports of consumer goods was centered in footwear -possibly reflecting purchases in anticipation of quotas -- and in TV
sets.

Imports of radios and clothing were lower.
Imports of industrial materials, in the aggregate, showed little

change in May-July from those in February-April.
individual commodities vary.

The movements by

Arrivals of petroleum dropped sharply and

IV - 6

there was a further decline in lumber imports.

However, imports of

fabrics, steel, copper, and nickel rose in May-July.

The increase in

nickel imports probably represents a final recovery in shipments from
the low level which had prevailed since the strike at Canadian nickel
plants last year.

Higher steel imports stem from the easing in the

European steel supply position.
Although world prices of copper and other metals have been
declining in recent months, there has, as yet, been no downward movement in the import price of those metals.

With the copper price on

the London Metal Exchange falling about 4 cents below U.S. producers'
prices in August, there will probably be a weakening in the import
price of copper and possibly in other metals in the closing months of
this year.
Foreign exchange markets.

Since mid-August there has been

a serious deterioration in the strength of the pound sterling, and a
remarkable turnaround in the fortunes of the Italian lira.

Among

other major foreign currencies, the German mark and the French franc
firmed somewhat, while the Belgian franc eased modestly, and the
Canadian dollar showed a further substantial advance.
The sterling exchange rate has fallen from just over $2.39
at the beginning of August to just over $2.38 at present.

Forward

sterling has weakened even more, and the three-month forward discount
is currently running at about 2 per cent per annum, compared with

IV - 7

1/4 per cent around the first of August.

The Bank of England allowed

the exchange rate to take most of the selling pressure during August
-- its intervention losses in that month totaled $72 million.

With the

intensification of selling pressures in early September, the Bank of
England intervened on a much larger scale and sold more than $425
million from September 4-8.
The bearish mood in the sterling market is a reflection of
the poor outlook for the British economy, as discussed in the latest
report of the National Institute for Economic and Social Research, which
called for additional stimulus to aggregate demand and suggested that
in the absence of a firm incomes policy there was a likelihood of
another devaluation.
The Italian lira began to firm during the third week of August
when the new government announced that it was preparing new fiscal
measures to stabilize the Italian economy.

Within two weeks the

exchange rate rose from its lower limit to well above parity.

For

the month of August the Bank of Italy had net intervention gains of
$75 million, in sharp contrast to its losses of nearly $350 million
in July.

During the first four days of September it purchased an

additional $95 million in the market.

At the beginning of the second

week in September, however, the exchange rate slipped below parity,
possibly reflecting an earlier 'over-buying" of lire, as well as some
spillover of the market's nervousness with respect to sterling.

IV - 8

The German mark, after easing somewhat during the first two
weeks of August in response to a decline in domestic short-term money
market rates, firmed moderately through early September.

The Bundes-

bank's intervention purchases of dollars in August amounted to only
$120 million spot and $100 million forward, compared to July's purchases
of $1.1 billion spot and nearly $300 million forward.

In the first week

of September, with renewed tightening in the domestic money market (the
result of higher reserve requirements on commercial banks), the exchange
rate firmed and the Bundesbank purchased $150 million in the spot market.
The market for French francs was quiet for most of August,
Late in the

with very little intervention by the Bank of France.

month the exchange rate firmed, despite a decrease in the discount
rate.

Demand for francs was particularly strong in the last two days,

of August, and the Bank of France purchased $100 million.

The exchange

rate remained firm during the first week of September.
The demand for Dutch guilders remained strong in the first
three weeks of August.

The exchange rate eased moderately toward the

end of August but firmed again in early September.

The Netherlands

Bank purchased almost $275 million in the market from mid-July to
mid-August, and the System provided cover for most of this dollar
intake by drawing $220 million equivalent on the swap facility with
the Dutch.
Demand for the Belgian franc eased considerably in August,
and for the month the Belgian central bank had dollar purchases of only

IV - 9

$25 million compared with $125 million in July.

Since mid-August,

the System has drawn an additional $10 million equivalent on the
swap facility with the National Bank of Belgium, bringing its

outstanding indebtedness on that line to $95 million.
The Canadian dollar exchange rate advanced from a little
less than 97.5 U.S. cents in early August to about 98.5 cents currently,
mainly reflecting seasonal strength in an already strong Canadian balance
of payments.

The Bank of Canada purchased $110 million spot and did

$27 million in swaps with the market during August.

The cut in the

Bank of Canada's discount rate on September 1 had no noticeable effect
on the spot rate, but did induce a modest narrowing of the premium on
forward Canadian dollars, now at a little less than 1/2 per cent per
annum on three-month contracts.
Euro-dollar market.

Euro-dollar interest rates for three-month

and longer maturities declined in the latter half of August and the first
week of September, reaching their lowest levels since April, but advanced
sharply on September 8 and 9. The three-month deposit rate -- which
had been about 8-3/8 per cent in early August -- declined to about
7-15/16 per cent in the week ended September 2, but firmed to 8-1/4 per
cent on September 9. Call Euro-dollar funds declined to less than
7 per cent in the third week of August but have since advanced rather
steadily

and were quoted at 8-1/4 per cent on September 9.

IV -

Euro-dollar borrowings by U.S. banks through their foreign branches declined, net, by about $300 million from August 12
through September 2.

These borrowings rose by over $400 million

in the two weeks to August 26, but declined by more than $700 million
in the following week.

As of September 2, gross liabilities to foreign

branches (including domestic loan participations) totaled about
$10.7 billion, about $0.9 billion below the average of the four
Wednesdays in the reserve requirement computation period ended
August 5.
Recent developments in certain of the major foreign national
money markets may have contributed to the easing in longer maturity
Euro-dollar rates from mid-August to early September.

Canadian

interest rates declined fairly sharply in the latter half of August
and on September 1 the Bank of Canada reduced its discount rate by
1/2 per cent, to 6-1/2 per cent.

The Bank of France reduced its

discount rate on August 27 to 7-1/2 per cent, from 8 per cent.
Although German money markets have remained very tight since midAugust, the Bundesbank's decision (announced August 12 and effective
September 1) to impose a substaitial additional reserve requirement
on all classes of German bank liabilities in excess of the secondquarter-1970 average of such liabilities has perhaps discouraged
German banks from adding to their liabilities to the Euro-dollar
market.

IV - 11

SELECTED EURO-DOLLAR AND U.S. MONEY MARKET RATES
(weekly averages of daily figures)
Average
for week
ending
Wednesday

(1)
Call
Euro-$
Deposit

(2)
Federal
Funds

(3)
(1)-(2)
Differential

(4)
3-month
Euro-$
Deposit

(5)
3-month
Treasury
Bill

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

July 29

6.95

6.89

0.06

8.36

6.34

2.02

5
12
19
26

7.13
7.53
6.98
7.23

6.93
6.82
6.64
6.34

0.20
0.71
0.34
0.89

3.37
3.33
8.08
8.15

6.43
6.51
6.50
6.28

1.94
1.82
1.58
1.87

Sept. 2
9

7.35
7.63

6.46
6.65'

0.89
0.98

7.94
7.97

6.33
6.35 p

1.61
1.62

Aug.

IV - 12

Payments and reserve changes of major industrial nations.

In the spring

and summer of this year the major industrial countries other than the
United States have had a combined payments surplus- / that was larger
than the surpluses experienced in the first quarter and in the same
period of 1969.

Net official reserve assets (excluding initial alloca-

tions of SDR's) of the G-10 countries other than United States rose by
$3.6 billion during the second quarter compared with $2.3 billion in the

TABLE 1. CHANGES IN OFFICIAL NET FOREIGN ASSETS
(in millions of dollars; no sign=increase)

-- 1969

I II

1970 '
I
II
486
1,865
471
529
167 1,484
238
-877

433
185
-1,804
-381

196
-1,219
1,893
16

- 142
- 264
1, 828
- 192

IV
845
198
-4,954
43

-106
-58
-68

82
-127
-165

- 146
-26
-49

278
272
141

-31
51
-77

118
14
-8

319
-38

-94
-45

168
-1

407
138

283
378

-1
840

-172
113

-1,518

537

1, 176

-2,632

2,288

3,642

1,308

Switzerland
192
-778
5
1/ Excluding initial allocation of SDR's.
Source: Confidential BIS data.

590

-432

384

United Kingdom
France
Germany
Italy
Belgium
Netherlands
Sweden
Japan
Canada
Total for G-10
countries excluding
United States

July
14
218
1,043
-124
72
119
25

-376

1/ In this section the term "overall balance of payments surplus (or
deficit)" is used to refer to the balance financed by changes in official
net foreign assets and net foreign assets of commercial banks.

IV - 13

first quarter and $0.5 billion in the second quarter of 1969 (Table 1).
In July these countries had further net reserve asset gains of $1.3

billion.

On an overall balance of payments basis, the results were

similar (Table 2).
TABLE 2. OVERALL BALANCE OF PAYMENTS SURPLUSES OR DEFICITS1/
(in millions of dollars; no sign=surplus)
____

^_« _ __

I
United Kingdom
France
Germany
Italy

421
-559
-625

-357

" - - 1970='
1969
IV I
II
I
II
III c
July
271
n.a.
236
254
870 1,351
263
434
5862/ n.a.
-219
-1,150
-250
n.a.
1,161
1,803
784 -6,185
223
-48
-186
-711
-515
-117

Japan
Canada
Total for G-10
countries excluding
United States

-50
89
-132

100
-112
-150

-68
-73
-81

164
246
32

-1
4
-77

90
156
40

n.a.
n.a.

278
23

Belgium
Netherlands
Sweden

637
235

658
107

710
184

-16
87

23
72332

n.a.

-S12

1,102

1,227

-3,902

821

3,273

n.a.

Switzerland
n.a.
421 n.a.
347
-164
301
-327
- 1/ Measured by changes in net foreign assets of the monet ary authorities
and commercial banks.
2/ Excluding initial allocation of SDR's.
3/ Excluding change in commercial bank positions in June.
n.a. - Not available.
Source: Confidential BIS data and FR estimates.

The analysis that follows is based on reported changes in
reserves and in positions of commercial banks.

It is worth noting that

the aggregate gain in net reserves of the industrial countries in the

IV - 14
second quarter, plus what is known about reserve gains by the rest of
the world, is much greater than can be accounted for by the deficit in
the U.S. balance of payments on the official settlements basis.

Such

discrepancies have occurred frequently, and probably reflect the
difficulties in accounting for flows of official foreign dollar holdings through the Euro-dollar market.

For instance, if one central bank

places newly received funds in the Euro-dollar market, and the funds
accrue to another central bank as a result of loans to residents of its
country from that market, the sum of the foreign exchange reserves
reported by both banks will increase.

In the U.S. balance of payments,

however, there will be no effect on the official settlements balance,
since reported liabilities of U.S. banks to foreign monetary authorities
will be unchanged.

(If--when foreign central banks are increasing their

Euro-dollar holdings--U.S. banks increase their borrowings in the Eurodollar market or other foreign private accounts here increase, that
activity would prevent the additional accrual of funds to foreign central
banks but the U.S. official settlements deficit would be reduced below
the amount reflected in changes in total holdings of dollars by foreign
central banks.

However, U.S. bank liabilities to private foreigners

were reduced in the second quarter.)
German foreign exchange reserves have grown rapidly since the
first quarter after a massive reduction in reserves in October-March
following last autumn's revaluation of the mark.

The German trade

IV - 15

account has remained very strong despite the continued boom which has
been little restrained by revaluation or subsequent deflationary measures.
Continued strong demand pressures in major German export markets such as
Italy and the Netherlands and the terms-of-trade effects of the revaluation
are reflected in German trade developments this year.

The German capital

account has also shifted because of a rather tight monetary policy and
other factors.
Rapidly rising Canadian reserves and the prospect of large
speculative inflows led to a June 1 decision to abandon the fixed exchange
rate for the Canadian dollar.

Despite a 5.4 per cent appreciation since

early June the Canadian payments position remains strong and the Bank of
Canada has purchased sizable amounts of U.S. dollars to avoid a still
larger appreciation.

The U.K. payments situation, in contrast, has dete-

riorated since the first quarter.

The British trade surplus has declined

in recent months; this--together with rapidly rising wages and prices plus
continued unemployment and labor strife--has shaken market confidence in
sterling and has led to a decline in capital inflows.

A slight easing of

monetary conditions in Britain has also adversely affected capital inflows.
The French balance of payments position remains strong.

Since

devaluation, French exports have risen rapidly while the rate of increase
in imports has slackened.

Italy's external position improved significantly

in the second quarter after very heavy reserve losses early in the year;
the political crisis of July was accompanied by a reserve loss which,

IV - 16

however, ended in the latter half of August.

Dutch reserves have risen

rapidly in recent weeks largely as a result of speculation on a guilder
revaluation.

Japan's external payments have been in near balance this

year, after a substantial surplus in 1969.
A strong second quarter performance of Canada's balance of
payments was primarily the result of an unusually large trade account
surplus of $630 million compared to $93 million in the same period of
1969.

Preliminary figures for July show a trade surplus of $306 million

compared with $73 million last July despite the appreciation of the
currency.

Primary forces behind Canada's trade surplus this year are

continuing inflation in Europe, a noticeable easing of demand in Canada,
and the unwinding of the effects of 1969 strikes on exports of commodities
such as nickel and iron ore.
Canada's capital account was also strong in the second quarter
when $529 million (net) flowed in compared to $239 million in the same
period of 1969.

The improvement mainly represented shifts in flows of

short-term funds.

Canadian banks reduced their net foreign assets and a

shift appears to have occurred in the leads and lags in payments for
merchandise trade.

The strong trade position and reserve gains by the

Bank of Canada apparently led some market participants to cover outstanding
positions in U.S. dollars or to take positions in Canadian dollars.
Although these flows were relatively small in volume, fear of much larger
speculative flows led to the June 1 decision of the Canadian government
to float the exchange rate.

IV - 17

The continuing strength of the Canadian payments position is
suggested by the Bank of Canada's decisions to intervene in the exchange
market to purchase U.S. $111 million in July and $172 million in August
in order to keep the Canadian dollar from appreciating much beyond 98
U.S. cents.

The effects of the recent further easing of Canadian

monetary policy and autumn's seasonally weak period in Canada's trade
may end the upward pressure on the exchange rate.
The United Kingdom's balance of payments surplus, which was
very large in the last quarter of 1969 and the first quarter of 1970
has declined sharply, and questions of confidence are again being raised
about sterling.

A net reserve gain of $1.9 billion in the first quarter

was followed by one of $486 million in the second quarter.

Britain's

official reserve position was virtually unchanged during July and August.
The U.K. overall balance of payments showed a surplus of $1.4 billion
in the first quarter and only $271 million in the second quarter.
The U.K. current account surplus declined from $346 million in the
first quarter to $127 million in the second quarter, largely as a result of
an adverse movement in the visible trade balance.

The U.K. trade account,

seasonally adjusted, moved from a surplus of $77 million in the first
quarter to a deficit of $223 million in the second quarter.

Although

a number of special factors may have affected the British trade balance,
the continuation of rapid wage and price inflation despite stagnant
output and high unemployment has been a vital factor.

IV - 18

The worsening of Britain's trade position was accompanied by
a diminution in capital inflows during the second quarter resulting
from completion of any likely improvements in the leads and lags in
Britain's payments, an easing of liquidity pressures, and the reemergence
of market uncertainty about the prospects for sterling.

The recent pres-

sure on sterling in exchange markets suggests that Britain's payments
position may be continuing to worsen through the summer, although this
may also in part be the result of seasonal weakness in the balance of
payments of the rest of the sterling area.
In Germany the maintenance of a substantial trade surplus and
a recurrence of large scale short-term capital imports have caused German
official reserves to rise rapidly in recent months.

The German overall

balance of payments also produced a large surplus during the second
quarter.

The German trade account surpluses of $898 million, seasonally

adjusted, and $920 million in the first two quarters of this year are
only slightly lower than those recorded for the first two quarters of 1969.
The German current account surplus is down from last year, however, owing
to an increased travel deficit, foreign workers remittances, and the
unwinding of dividend payments held Lack until after the revaluation.
A restrictive monetary policy has been imposed in Germany to
restrain inflation.

German banks have reduced their assets abroad in

response to the squeeze in their liquidity and non-banks have imported
large amounts of short-term capital.

The Bundesbank has attempted, thus

IV - 19

far unsuccessfully, to discourage these inflows and is moving to offset
their effect on internal liquidity through higher marginal reserve requirements on increases in all bank liabilities, domestic and foreign, above
the average level of the second quarter.

Long-term capital exports have

declined as a result of the unwinding of speculative positions, the
weakness of the U.S. stock market and tight domestic monetary conditions,
If

thus no longer providing a major offset to inflows on other accounts.
credit remains scarce in Germany, it is difficult to foresee an end of
German reserve gains.
In Italy the heavy reserve losses of the first quarter have
been followed by rather wide month-to-month fluctuations.

There was a

surplus in the second quarter but in July, when seasonal factors should
have brought further improvement, there was a sizable reserve loss.

With

the formation of an anti-inflation program by the new government, the lira
has strengthened since mid-August.
The Italian trade balance has deteriorated seriously this year;
the deficit on a payments basis (imports, c.i.f.) was $1,139 million for
the first six months, compared with $394 million in the same period of
1969.

Imports were up by 22 per cent and exports by 10 per cent.

Export

proceeds in recent months have suffered from strikes and other labor
difficulties which have held back production of export goods.

The rise

in imports reflects rapidly rising aggregate demand as well as the impact
of labor troubles on the availability of home-produced goods.

(In judging

IV - 20

the change in Italy's trade position, one should recall that in recent
years. Italy was thought to have an excessively large trade surplus.)
The Italian non-bank capital account for the first half of
this year was greatly improved from last year, the improvement being
largely concentrated in the second quarter.

Foreign borrowing by state

enterprises, which has been strongly encouraged by the government as

well as by rapidly rising Italian interest rates, has accounted for much
of this shift in the capital account.

Sizable month-to-month swings

have occurred in commercial bank flows owing to changes in government
banking regulations and shifts in confidence in the lira.
In France the balance of payments has remained strong since
the beginning of this year.

The second quarter produced an official

reserve asset gain of $471 million compared to $529 million in the first
three months of the year.

The French gained another $218 million in

July and smaller but still significant reserve increases were registered
in August and early September.

France's overall balance of payments

surplus has been sizable thus far this year, following a smaller surplus

in the fourth quarter of 1969 and a large deficit in the year and a half

before devaluation.
This remarkable turnaround from the reserve losses of 1969 has
been caused by a number of factors, including primarily a reversal of
leads and lags and a surprisingly fast improvement of the French trade
balance after the 1969 devaluation.

The French trade deficit, which set

IV - 21

a record of $800 million in the second quarter of 1969, dropped to
$60 million in the fourth quarter, and the trade account has been in
approximate balance for the first seven months of 1970.

French exports

to countries outside the franc area, valued in U.S. dollars, rose by 37
per cent during the first half of 1970 compared to a year earlier, while
imports increased by only 8 per cent.

The French capital account has

been strong both because of the return of previously stretched leads and
lags (a source of inflows which is now finished), and the flow of shortterm funds into France seeking high interest rates.

The recent reduction

of the French discount rate should reduce these flows, with a corresponding
effect on French reserve gains.
The Netherlands reserves grew slowly in both the first and
second quarters of this year, but have risen more rapidly during the
summer.

Official reserves rose by $65 million in the first half, and

by $119 million during July.

The overall balance of payments was in

balance during the first quarter and showed a surplus of $156 million
during the following three months.

The increase in the rate of reserve

accretion is not the result of a shift in the current account, but instead
reflects primarily speculation in anticipation of an unlikely revaluation
of the guilder.

The basis for speculation on a guilder revaluation was

apparently in part the OECD Annual Review of the Dutch economy which some
have interpreted as recommending such a move.

The past strength of Dutch

foreign exchange reserves, the fact that the guilder was revalued together

IV - 22

with the German mark in 1961, and the close ties between the Dutch and
German economies might also lead some to expect the Dutch eventually
to follow the mark's appreciation of October 1969.

This speculation

persists despite a deficit of $780 million, seasonally adjusted, in
the Dutch trade account during the first half of this year compared to
$555 million in the second half of last year and $450 million during
the first half.
The reserves of Belgium-Luxembourg rose by $118 million during
the second quarter of 1970 after a small decline in the previous quarter
and a $132 million gain in the second half of 1969.
of $72 million occurred during July.

A further increase

The overall balance of payments

accounts showed a surplus of $89 million for the first half of this year.
This was more than the $50 million surplus in the first half of 1969,
but less than the $164 million surplus of the fourth quarter of 1969 that
was swelled not only by a temporary trade balance improvement but also,
more importantly, by the unwinding of speculation in German marks after
the mark revaluation.

For the first quarter of this year, Belgian trade

results were unchanged from the same period a year earlier, but a further
shift in leads and lags contributed to the continued strength of the
balance of payments.

Other non-bank capital showed a net outflow of $84

million during the first quarter compared to a $146 million inflow during
all of 1969.

Part of this shift was the result of a decline in direct

investment in Belgium-Luxembourg from the unusually high levels of the
second half of 1969.

IV - 23

Sweden ran a balance of payments deficit in the first half of
1970, but this was smaller than in the corresponding period of 1969.
Sweden's trade balance, however, has deteriorated this year, reflecting
the influence of excessive domestic demand pressures.

Sweden's official

reserves rose in July, apparently as a result of the tight money policy
instituted by the Bank of Sweden to restrain inflation.
Switzerland's overall balance of payments surplus of $421
million in the first quarter contrasted sharply with the $327 million
deficit of a year earlier.

The first quarter trade deficit this year

showed a large year-to-year increase which, however, was more than offset
by a favorable shift on capital account related at least in part to the
heavy exodus of capital from Italy.
Japan's overall balance of payments showed a very small surplus
in the first half of this year after the very large surplus of 1969.
Japan's trade surplus remained strong throughout the first half of 1970,
but increased service payments reduced the current account surplus by
about $230 million.

In addition, long-term capital movements contributed

to the smaller reserve gains in recent months.

An outflow of $917 million

in the first half of this year contrasted with an inflow of $129 million
the same period of 1969.

The primary factors causing this shift were a

sharp decline in net foreign purchases of Japanese securities, and an
increase in Japanese trade credits and long-term loans.

Because of

official actions to reduce reserves, official reserves remained unchanged

IV - 24

in the second quarter and declined by $172 million in July.

These

actions included a $200 million loan to the World Bank and the purchase
of $83 million in U.S. Eximbank participation certificates.

IV-C-1

9/8/70

U.S. AND INTERNATIONAL ECONOMIC DEVELOPMENTS
BILLIONS OF DOLLARS
INTERNATL RESERVES
NETOFFICIAL

EECCOUNTRIES

INTERNATL RESERVES OTHERCOUNTRIES

NETOFFICIA

NETOFFICIAL PLUS BANKS

NETOFFICIAL

/
LESS
DEVELOPED
COUNTRIES

QIL 16 5
OTHER DEVELOPED
COUNTRIES

L
ITALY
BENELUX

FRANCE
1 Q3 3

---

Q 4 2
i I

OrL

1970

1968

0146

CANADA

JAPAN

1968

SWITZERLAND
5 6
Q1

SWITZERLAND
Offr A 4

QI 54

_
JAPAN

SDRs

1970

QI4 5

1968

U.S BANK LIABILITIES

TO FOREIGN BRANCHES
AUG

26 11 20

IHARE OF MANUFACTURES EXPORTS

US MERCHANDISE TRADE

PER
CENT

BASIS
OF
BALANCE PAYMENTS
ANNUAL RATESSEASONALLY
ADJUSTED
3 MO MOV AV I1 2 1)
1969 DATA AFFECTED PORT STRIKES
BY

-24
W. GERMANY
SQ 19 9

U.S.
Q0

19 2

16
JAPAN
Q1 11 3

U.K.
QIl 10 4

I
1968

1970

1968

~I l l i l

1970

APPENDIX A:

REVISED PROJECTIONS FOR HOUSING STARTS
AND RESIDENTIAL EXPENDITURES*

Greenbook projections of seasonally adjusted private housing
starts and the related series for residential construction expenditures have been revised appreciably upward. The revisions reflect
altered projections of inflows of funds to the major lending institutions--in line with the most recent fund flow data--and the evidence,
based on the July spurt, that multifamily starts have more momentum
than the drop in the second quarter of this year had suggested.

PRIVATE HOUSING STARTS AND
RESIDENTIAL CONSTRUCTION EXPENDITURES
(Seasonally adjusted annual rates)

Starts, including
farm (thousands
of units)
New
Old

Residential construction expenditures
(billions of dollars)
New
Old

1970-QI
QII
QIIIp
QIVp

1,252
1,280
1,350
1,500

1,252
1,280
1,490
1,533

29.1
28.4
29.0
31.7

29.1
28.4
30.0
32.6

1971-QIp
QIIp

1,575
1,625

1,650
1,750

34.1
35.2

34.7
36.1

p - Projected.

Because of the lag between net inflows of funds to mortgage
lenders and housing starts, starts for the remainder of this year are
essentially established by the level of net inflows and commitments
that occurred in the first half of this year. By the same token, of
course, the starts pattern for the first half of next year still
remains largely to be determined. Assuming the money stock rises at
an annual rate of about 5 per cent over the rest of the year, staff
projections are that net inflows to thrift institutions will be at an
annual rate of 7.5 per cent and at about a 12 per cent annual rate for
consumer-type time and savings deposits at commercial banks. This
means that even if flows to the life insurance companies fall below
the earlier projection, net inflows to the four lending institutions

* Prepared by Bernard Freedman, Economist, Capital Markets Section,
Division of Research and Statistics.

A - 2

combined may now exceed $20 billion for the second half as a whole or
about $4 billion more than was projected earlier. (If, moreover,
large CD's to commercial banks were also included, the combined level
would actually be raised substantially further.) Allowing for repayment flows of at least $21 billion to the four intermediaries during
this period, and for direct support on the order of $4 billion from
FNMA, GNMA and the FHLBB in the same interval, total loanable funds
could come to nearly $45 billion. This would compare with only $30
billion a year earlier.
Because of institutional and other shifts over the past few
years, the relationship between flows to the major intermediaries in a
given half-year period and actual housing starts during the subsequent
half year--the "funds/starts-commitment ratio"--has, of course,
varied considerably over time. However, in determining the size of
the ratio for this period, attention must be given not only to the
magnitude of the over-all rise in net inflows now expected, but also
to its composition.
Commercial banks have received a very large share of the
increased net inflows. This has taken the form of the extremely large
expansion in regular time and savings deposits and an even greater
expansion than had been projected earlier for CD's. The expansion in
time deposits together with the distributional effect by type of bank
of the recent reserve requirement reduction gives reason to expect that
commercial banks will contribute much more than their normal share to
construction lending and the mortgage market in general.
At the same time, the projected rise in net inflows to the
thrift institutions which specialize in mortgage lending is substantial
and would come at a time when their own liquidity positions have already
been much improved and when additional assistance from the Federal Home
Loan Banks is readily available. Moreover, given the possibility that
mortgage rates will ease further, all lenders will most likely be
tempted to attempt to "lock in" commitments to the extent possible.
There are, of course, a number of factors that will tend to
limit the rise in housing starts even with the improvement in fundsavailability indicated. Among these are the strong possibility of a
revival in refinancing activity for existing homes. Also, the generally
high costs of housing and the still high level of mortgage rates will
continue to be a resistance factor, although some allowance has been
made in the projection for a tendency--particularly by builders of
single family homes--to operate to a greater extent than earlier in the
lower-priced home market.
(This allowance is, of course, included in
the expenditures figures shown in the table.)
However, given the extent
of underbuilding that has prevailed since 1965 and the exceptionally low
level of vacancy rates for both multifamily and single-family housing,
the improved availability of funds which presently seems tenable raises
the prospects for a more rapid expansion next year than seemed possible
earlier this year.

CONFIDENTIAL (FR)

APPENDIX B:

STATE AND LOCAL GOVERNMENT BORROWING
ANTICIPATIONS AND REALIZATIONS*

Preliminary results of the second annual FRB-Census survey
of State and local government long-term borrowing anticipations, conducted as of June 30, 1970, suggest that these units plan gross longterm borrowing of $16.6 billion over the course of fiscal year 1971
(July 1970 through June 1971).1/ Of this amount, over $13 billion had
already been authorized by the electorate or appropriate legislative
body.
On the basis of the survey, the staff calculates that an additional $3.3 billion of planned borrowing not yet legally authorized
will probably receive approval during the fiscal year, bringing total
anticipations to over $16 billion.
These anticipations for fiscal 1971 are significantly more
modest than the $18.8 billion of planned borrowing for fiscal year
1970, indicated by the first
FRB Survey, 2 / although $3.3 billion more
than the actual borrowing carried out during that period. The yearover-year reduction in anticipations probably reflects increased
Actual and Anticipated Long-term Borrowing
State and Local Governments
Fiscal 1965-1971 1/
Billions of Dollars
20

-20

Actualn
DAnticipated

I -

lO10

1.15

-10

-415

m
-

1965

1966

aS
-

1967

1968

1969

1970

1971

Fiscal Year
1/

Anticipations were gathered by the first and second annual surveys
(fiscal 1970 and 1971).

1/ Census is responsible for the design of the sample as well as the
polling of respondents.
Its cooperation, diligence and expertise
have added much to the quality of this survey.
2/ See Greenbook appendix of September 5, 1969.
* Prepared by Paul Schneiderman, Economist, Capital Markets Section,
Division of Research and Statistics.

B -

CONFIDENTIAL (FR)

uncertainty, given the disappointing borrowing experience of fiscal
year 1970 when market conditions forced the first decline in actual
borrowing in a decade. Should tax-exempt yields continue to decline
over the next few months, however, it would be reasonable to assume
that follow-up surveys will indicate increased borrowing anticipations.

STATE AND LOCAL GOVERNMENTAL BORROWING REALIZATIONS
DURING FISCAL YEAR 1970

The four follow-up surveys of State and local government
borrowing realizations for fiscal year 1970 indicated that high interest
rates induced approximately $6 billion in gross cumulative shortfalls
from planned long-term borrowings. Even after allowing for borrowings
repeatedly offered but not carried through, successful sales of previously deferred bond issues, and downward revisions in borrowing plans
due to high interest rates, it appears that net unsatisfied borrowing
demands induced both directly by the high cost of money and by legal
rate ceilings over the 12-month interval came to between $4 and $5
billion.../ Shortfalls of this magnitude are equal to 30 to 40 per cent
of the $13.25 billion in long-term borrowing actually accomplished in
fiscal year 1970. It is estimated that for the fiscal year as a whole,
State and local government capital outlays (net) were reduced by $2
billion as a result of credit market conditions. Approximately half of
these cutbacks occurred among local school districts. For the entire
State and local sector, capital spending cutbacks stemming from high
interest rates were equivalent to about 9 per cent of actual construction spending in fiscal year 1970.
Borrowing Shortfalls
Table 1 displays the quarterly pattern of the long-term
borrowing experience of State and local governments in fiscal year
1970, based on the quarterly follow-up surveys. The columns give,
respectively, the amount of long-term borrowing actually accomplished,
gross cumulative borrowing shortfalls induced by high interest rates,
downward revisions in ensuing quarterly borrowing plans induced by high
interest rates (shown in the quarters that they were revised), and

3/ All data, unless otherwise indicated, unfortunately cumulate borrowing shortfalls at each occurence for issues rescheduled and repeatedly
postponed. More precise estimates of the net impacts of high interest
rates and other factors on the borrowing experience of the units will
be available when the quarterly data have been tabulated on a unitby-unit basis. Moreover, the overall accuracy of the sample's
responses is being checked through the use of Investment Bankers
Association's records of bond sales.

CONFIDENTIAL

B - 3

(FR)

4/
resumption of issues previously delayed because of high interest rates.The final column shows "net" interest rate impacts.

Table 1
LONG-TERM BORROWING ADJUSTMENTS INDUCED BY HIGH INTEREST RATES
Fiscal year 1970 (1969-III to 1970-11)

(Billions of dollars)

Interest Rate ImpactsCalendar

Comebacks of
Previously Induced

Net Interest
Rate

Revisions

Postponements2 /

Impacts-

(2)

(3)

(4)

(5)

1969-III

2.46

1.67

n.a.

2.98

2.24

.40

.69

1.95

1970-I

4.10

.97

.40

1.20

.17

3.71

1.10

.46

.40

1.16

Total

13.25

5.98

1.26 5 /

2.295 /

3.28-

Short-

Downward

Borrowing

falls.1

(1)

Quarter

Actual

1/ Adjustments to actual borrowing which would have taken place if not
for adverse market conditions.
2/ Gross (i.e., units continually rescheduling, but not successfully
borrowing due to interest rates, as shortfalls at each postponement).
3/ Borrowing previously postponed due to high interest rates.
4/ Columns 2+3-4.
5/ Three quarter totals only.
Long-term borrowing shortfalls were concentrated in the last
two quarters of calendar 1969 when interest rates on municipal bonds
rose by over 100 basis points. Approximately two-thirds of all displacements during the fiscal year occurred in those two quarters. The
easing of municipal bond market conditions in the first quarter of 1970
4/ The actual borrowing data are from the IBA. The survey units (on a
blown-up basis) accounted for $12.5 billion, or 95 per cent of the
universe of borrowing. About $1 billion of the sample's borrowing
evidently took place in the first half of 1970 (the last half of the
survey year) after respondents involved expressed no intention to
borrow during that period.

B -

CONFIDENTIAL (FR)

caused a rapid turnaround in the volume of sales.
On the basis of the
Board's preliminary survey of State and local government realizations,
it appears that approximately $1.2 billion of the borrowing accomplished
in that quarter represented successful issuance of long-term issues
previously postponed because of high interest rates.
Nevertheless, the
continued high level of interest rates still induced approximately $1
billion in long-term borrowing shortfalls among units that had originally planned to borrow in the first quarter of 1970. Hence, while some
earlier borrowing shortfalls were made up when conditions eased, these
successful fundings were accompanied by another--if smaller--round of
postponements by other State and local governments. As interest rates
rose in the second calendar quarter of 1970, the volume of "comebacks"
declined sharply, while shortfalls increased somewhat.
Altogether, $6 billion of gross cumulative long-term debt
sales planned for fiscal year 1970 were not accomplished because of
higher interest rates.
In addition, it is estimated that units revised
their borrowing expectations downward by about $1.2 billion primarily
because of high interest rates.
Offsetting these two setbacks were an
estimated $2.3 billion in comebacks of long-term debt that had been
postponed earlier at least in part for interest-rate reasons.
These
comebacks were particularly large in the first quarter of 1970, accounting for about 30 per cent of the $4.1 billion in actual long-term debt
sales in that quarter.
Effects on Capital Spending
Table 2 displays the pattern of capital spending cutbacks
induced by high interest rates as reported in the quarterly follow-up
surveys.
Such cutbacks were by far most severe in the last half of
calendar 1969, although they continued in early 1970. The figures
reported show spending cutbacks initiated as the result of unrealized
borrowing in each quarter. Also shown are projects that evidently were
resumed when previously postponed borrowing was later carried out.
These data do not give temporal net impacts, both because in some
instances the same construction cutbacks were reported in more than
one quarter and because the entire impact is shown for the quarter of
the borrowing shortfall. Moreover, they do not make allowance for
cutbacks due to downward revisions in borrowing expectations for future
quarters.
Tabulations have not yet been completed to calculate these
influences accurately; nevertheless it appears that net construction
cutbacks (counting each deferred project only once) amounted to approximately $2 billion over fiscal 1970.

B - 5

CONFIDENTIAL (FR)

Table 2
CONSTRUCTION SPENDING AND CONTRACT AWARD CUTBACKS INDUCED BY
HIGH INTEREST RATES, FISCAL YEAR 1970 (1969-III to 1970-II)
(Millions of dollars)

Calendar
quarter
69-III

Contract and
/
spending cutbacks-

Makeups 2/
of cutbacks-

680

n.a.

1,200

70-I

200

400

70-11

250

Total

2,330

69-IV

535-

1/ Midpoint of range given by addition of proxy amounts of spending
reduction where units indicated spending cutbacks but failed to
give a dollar estimate.
2/ Projects evidently reinstated when deferred issues were sold later
in the year.
3/ Three quarter total.

Table 3 gives a breakdown of capital spending reductions by
type of government. Given the limitations on the data indicated above,
it appears that the bulk of spending cutbacks induced by high borrowing
costs occurred in school districts, amounting to over $1.0 billion.
For local government units of all types, reported spending impacts
resulting from high interest rates came to an estimated $1.7 billion,
or about 13 per cent of actual construction expenditures by such units
in fiscal year 1970. State units fared somewhat better, their reductions amounting to less than 6 per cent of their actual total construction spending for the fiscal year.

CONFIDENTIAL (FR)

B - 6

Table 3
CAPITAL SPENDING AND CONTRACT AWARD CUTBACKS INDUCED BY HIGH
INTEREST RATES RELATIVE TO ACTUAL CONSTRUCTION SPENDING
Fiscal year 1970 (1969-III to 1970-11)

Contract and
1/
spending cutbacks(Millions of dollars)
3/
State-

640

County

110

11,300

5.7

12,800

13.2

24,100

9.7

360

Special Dist.

R
Ratio
(r
cnt
per c

120

City & town

/
Actual con2/
struction spending(Millions of dollars)

School Dist.

Total

1 110

2,340

1/ Long-term borrowing shortfalls induced by high interest are given
in Table 1.
2/ Census Bureau.
3/ Includes state colleges.

For the past few years, State and local construction expenditures had been growing by approximately $2 billion a year. However,
figures recently released by the Bureau of the Census show that in
fiscal 1970, State and local construction spending fell by 3 per cent,
or by approximately $800 million, from the previous year. While other
factors may have played a role in this strong reversal of trend, it
appears that high interest rates were the dominant cause. Moreover,
given the long lags inherent in the capital spending impacts, the
effects of past monetary restraint will continue to be felt for some
time to come.
Alternative Means of Financing
Table 4 gives the quarterly pattern and yearly total of
alternative sources used to compensate for long-term borrowing shortfalls due to high interest rates by units that did not reduce their
capital spending as the result of borrowing shortfalls../
The experience of fiscal 1970 verifies both the heavy reliance placed on shortterm borrowing and the relative lack of importance of current budget
aids, such as inter-governmental loans and reductions in current
expenditures.

5/ Again, these tables are based on quarterly experiences and therefore
involve some continuations of issues which were postponed for more
than one quarter.

CONFIDENTIAL (FR)

B - 7

Table 4
ALTERNATIVE MEANS OF FINANCING SHORTFALLS DUE TO HIGH INTEREST RATES
Fiscal Year 1970 (1969-III to 1970-II)
(Millions of dollars)

69-III

Year/quarter
69-IV 70-I

Total

Per cent
of total

70-11

Short-term borrowing

464

437

342

526

1,769

Reductions in liquid
assets

175

140

448

128

129

414

Governmental loans

161

Other means

135

724

797

648

786

2,955

100

Reductions in current
expenditures
No immediate need

Total

Of the $3 billion in interest rate induced shortfalls that
did not lead to spending cutbacks, 60 per cent or $1.8 billion was
alternatively financed through short-term loans. The bulk of the
remainder was covered by reductions in current assets (15 per cent)
and by the fact that the bond proceeds were not immediately needed for
construction purposes (14 per cent).
Although the conclusion must remain tentative at this stage,
it nonetheless is evident that one-half of the $3.6 billion increase
in State and local short-term debt in fiscal 1970 was attributable to
long-term borrowing postponements induced by high interest rates.

II.

LONG-TERM BORROWING ANTICIPATIONS:

FISCAL YEAR 1971

The June 30, 1970 Federal Reserve Board survey of State and
local governments long-term gross borrowing expectations for fiscal
year 1971, conducted by the Governments Division of the Bureau of the
Census in replies from 4,226 sample units indicates planned fiscal year
1971 borrowing of $16.6 billion. 6 /

On a unit basis, the response rate was 96 per cent; nevertheless,
the response rate in dollar terms is much higher. Those units not
reporting represent only a small share of actual borrowing (approximately 1 to 3 per cent).

CONFIDENTIAL (FR)

B - 8

Planned Borrowing by Quarter
Table 5 presents the survey results for fiscal year 1971 by
quarter. It is estimated that approximately one half of the not yet
approved issues will gain approval by the proper authorizing body
during the fiscal year.7/ Experience with the survey suggests that
plans for the immediate future are more certain than expectations for
the later quarters of the fiscal year. A repolling of our sample will
take place late in December in order to gain better estimates for third
and fourth quarter anticipations.8/

Table 5
ANTICIPATED GROSS LONG-TERM BORROWING BY STATE AND
LOCAL GOVERNMENTS BY QUARTERS OF FISCAL 1971
(Billions of dollars)

July-Sept.
1970

Oct.-Dec.
1970

Jan.-Mar.
1971

Apr.-June
1971

Fiscal
year 1971

5.05

3.76

1.95

2.59

13.35

.89

2.27

1.83

1.50

6.49

Total

5.94

6.03

3.78

4.09

19.84

Adjusted
total 1/

5.50

4.90

2.86

3.34

16.60

Authorized
Unauthorized

1/ Authorized plus 50 per cent of unauthorized, assuming that 50 per
cent of unauthorized is approved and sold according to schedule.

7/ This estimate is based on the assumption that the bulk of not yet
authorized debt represents scheduled bond elections. Lately, about
50 per cent of dollar volume of issues has been approved in these
elections.
8/ The survey system has been redesigned to allow for more accurate
reporting. Anticipations will now be gathered semi-annually so that
we may ascertain changes in expectations due to expected changes in
conditions and past performance of State and local units in the
municipal market place.

B -

CONFIDENTIAL

(FR)

Comparison with Earlier Period and Recent Developments
The anticipated borrowing for fiscal year 1971 represents a
return to a higher pace of long-term financing after the turndown in
actual borrowing in fiscal 1970. The long-term borrowing anticipations
by State and local units represent an increase over actual fiscal 1970
levels of about $3.3 billion. This figure may even move higher should
credit conditions continue to relax, and postponed issues reenter the
market.
Table 6
ACTUAL AND ANTICIPATED GROSS LONG-TERM BORROWING
BY STATE AND LOCAL GOVERNMENTS 1/
(Billions of dollars)

uarter1968

1969

Calendar Year
1970

1971

3.7

2.8

4.1

2.9 antic.

3.9

3.8

3.7

3.3 antic.

III

4.6

2.5

5.5 antic.

4.4

3.0

4.9 antic.

1/ Investment Bankers Association data through 1970-II, adjusted
anticipations thereafter.

However, shortfalls are already apparent for the third
calendar quarter of 1970. With two months of this period already complete, staff estimates imply shortfalls from expectation of about $1.3
billion in the current quarter. These shortfalls can still be attributed mainly to the high cost of borrowing but expectations of further
declines in interest rates may also be partly responsible. At the end
of September, units planning to borrow this quarter will be surveyed,
and reasons for the shortfall will be available by November. But, in
any event, if market conditions improve in the October to December
quarter, it is likely that continued attempts at reentry by previously
postponed issues will lead to a sharp increase in actual long-term
financing--as well as anticipated borrowing--over the balance of fiscal
1971.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 15, 1970 : Greenbook

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