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Confidential (FR) Class I FOMC

September 10,

RECENT DEVELOPMENTS

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

1980

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and production........................................
Personal income and consumer spending............................

1
3

Business fixed investment...............................

Inventory investment...........................
..
Residential construction.....................................

9
13

Federal government sector....................................

State and local government sector................

........

Prices ............... ... ........................................
Wages and labor costs...........................................

17
21

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

2
2
4
6

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

Business investment spending...................................

Business capital spending commitments ...........................
Surveys of plant and equipment expenditures.....................
Changes in manufacturing and trade inventories...................

8
10
12

Inventories relative to sales...................................

Auto sales................................

Private housing activity.........................................

Recent changes in producer prices................................

Recent changes in consumer prices.............................
Hourly earnings index...........................................

18
20

CHARTS:
Manufacturers' newly approved capital appropriations............
Market conditions for new single-family homes...................

11
15

Selected measures of wage change................................

DOMESTIC FINANCIAL DEVELOPMENTS

III

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

Business finance..............................................

Government debt markets .........................................

....................
Mortgage markets.............
Consumer credit..................................................

12
15

TABLE OF CONTENTS (cont.)

Section
DOMESTIC FINANCIAL DEVELOPMENTS

Page

III

TABLES:
Selected financial market quotations.............................

Monetary aggregates.............................................
Commercial bank credit and short- and intermediate-term
business credit................................................

Gross offerings of corporate securities.........................
Government security offerings.............................

8
10

Interest rates and supply of mortgage funds at
selected S&Ls........................ ..........................

Secondary home mortgage market activity. .........................

Consumer installment credit.....................................

CHARTS:
Personal bankruptcies...........

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

Consumer bank installment credit delinquency rates...............
APPENDIX A:

THE SENIOR LOAN OFFICER OPINION SURVEY ON
BANK LENDING PRACTICES ..........................

INTERNATIONAL DEVELOPMENTS

A-l

Foreign exchange markets.......................................

OPEC surpluses and investment flows..............................

U.S. international transactions...............................

Foreign economic developments

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

Individual country notes.....................................

TABLES:
Estimates of OPEC current account and external investments.......
Oil imports........
..............................................
U.S. merchandise trade..... .......................... .........

9
10

Net Eurodollar borrowing by U.S. commercial banks...............

Eurodollar CDs of banking offices in the United Kingdom..........
U.S. international transactions.................................
Consumer and wholesale prices in major industrial

13
16

countries...............................................

Real GNP and industrial production in major industrial
countries ...........................
............................
Trade and current-account balances of major industrial
countries ........................................ ..............

20
21

CHARTS:
Weighted-average exchange value of U.S. dollar...................

Three-month interest rates ......................................

II - T - 1

September 10,

1980

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest Data

Period

Release
Date

Data

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

Aug.
Aug.
Aug.
Aug.
Aug.
Aug.

9-5-80
9-5-80
9-5-80
9-5-80
9-5-80
9-5-80

105,0
7.6
4.4
90.1
19.9
70.2

-2.0
7.8
4.5
2.7
5.5
1.9

Aug.
Aug.

9-5-80
9-5-80

35.1
6.70

34.9
6.66

35.1
6.57

35.7
6.22

Aug.
July

9-5-80
8-29-80

39.6
200.9

39.1
16.3.

39.3
21.6

40.1
14.8

July
July
July
July
July

8-15-80
8-15-80
8-15-80
8-15-80
8-15-80

138.8
139.4
166.2
95.8
137.0

Consumer prices all items (1967=100) July
All items, excluding food & energy July
Food
July

8-22-80
8-22-80
8-22-80

247.1
233.1
252.9

7.4
7.7
7.2

13.1
12.4
7.5

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

Aug.
Aug.
Aug.

9-5-80
9-5-80
9-5-80

250.2
282.9
282.4

16.3
8.2
80.5

14.6
14.0
13.5

Personal income ($ bit.) 2/

July

8-18-80

2117.6

8.9

9.5

Civilian labor force
Unemployment rate (%) 1/
Insured unemployment rate (%) I/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($)
1/
Manufacturing:
Average weekly hours (hr.) 1/
Unit labor cost (1967=100)
Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

-18.7
-13.6
-17.1
-3.7
-24.9

16.4

-25.4
-14.9
-18.8
-3.3
-37.3

-9.2
-7.6
-3.0
3.2
-13.1

(Not at annual races)
July
July
July
July

9-2-80
9-2-80
9-2-80
9-2-80

73.3
25.3
20.8
4.5

10.3
7.6
4.4
25.5

1.2
-6.8
-6.0
-10.0

-1.8
7.3
-1.9
90.9

June

9-8-80

July
June

9-2-80
9-8-80

1.52
1.68
1.34

1.53
1.72
1.34

1.44
1.69
1.29

1.44
1.52
1.33

tories to unfilled orders 1/ July

9-2-80

.581

.555

2.0
1.9

2.8
3.3

5.5
3.7

-5.3
.1
-18.8

17.7
23.9
2.1

-22.3
-27.5
-.8

Mfrs. new orders dur. goods ($ bil.)
Capital goods industries
Nondefense
Defense
Inventories to sales ratio: 1/
Manufacturing and trade, total
Manufacturing
Trade
Ratio:

Mfrs.' durable goods inven-

Retail sales,
GAF 3/

total ($ bil.)

Auto sales, total (mil. units.) 2/
Domestic models
Foreign models
Plant & Equipment
AllIndustries

expen.

8-11-80
8-11-80

Aug.
Aug.
Aug.

9-5-80
9-5-80
9-5-80

1980
1980-Q7
1980-Q3
1980-Q4

9-10-80
9-10-80
9-10-80
9-10-80

192.51
193.89
191.24
193.17

1.3
-1.4
1.0

1980-Q2
July
July

8-29-80
8-18-80
8-29-80

25,050
1,266
130.7

-12.8
4.8
4.6

Actual data used in lieu of percent changes for earlier periods.

At annual race.
Excludes mail order houses.
t/ Planned-Commerce August 1980 Survey.

77.1
16.9

($ bit.) 4/

Capital Appropriations, Mfg.
Housing starts, private (thous.) 2/
Leading indicators (1967=100)

July
July

22.9
3.6

26.0

-28.2
-7.4

DOMESTIC NONFINANCIAL DEVELOPMENTS

The decline in economic activity has moderated recently, after an
extremely sharp contraction during the second quarter.

Improvement has

been evident in the housing sector, and the sharp decline in consumer
spending, which began last spring, appears to have bottomed out--led by
a pick-up in auto sales.

Payroll employment rose in August and industrial

production apparently increased, following six months of decline.

How-

ever, substantial weakness still exists in business investment spending,
and inflationary pressures remain strong.
Employment and Production
Recent employment data indicate that the sharp deterioration in
labor demand has been checked, at least temporarily.

Employment as

measured by the household survey was unchanged in August, but the number
of unemployed fell 200,000.
7.6 percent.

As a result, the jobless rate edged down to

After rising rapidly this past spring, the unemployment

rate has remained in a 7-1/2 to 7-3/4 percent range over the last four
months.
Employment as measured by the establishment survey rose 200,000
in August, following five months of decline, but nonfarm payrolls still
are more than 1 million below the high recorded in February.

Almost

half of the August increase in jobs occurred in the manufacturing sector,
mainly among producers of nondurable goods.

Within the hard goods

sector, employment advances in the lumber and metals industries were
partly offset by a further decline at manufacturers of electrical equipment.

Increases in factory hours of work were widespread in August, as a

lengthening of overtime schedules contributed to a substantial rise of
II-1

II-2
CHANGES IN EMPLOYMENT
(Thousands of employees; based on seasonally adjusted data)
1978

1980

1979
Q1

July

Aug.

- - - - - - Average monthly changes - - - - - Nonfarm payroll employment 2
Strike adjusted

357
341

176
182

155
158

-366
-390

-182
-49

201
152

74
62
12
31
182

1
4
-3
20
113

-15
0
-15
-29
144

-308
-253
-55
-50
-15

-202
-140
-62
-60
140

91
22
69
36
98

Private nonfarm production workers
Manufacturing production workers

264
54

112
-11

55
-35

-387
-306

-109
-174

224
89

Total employment 3
Nonagricultural

270
264

173
175

-85
-85

-373
-317

459
393

10
87

Manufacturing
Durable
Nondurable
Construction
Trade, finance and services

1. Average change from final month of preceding period to final month of period
indicated.
2.
Survey of establishments.
Data for 1980 are revised to reflect benchmark
levels for March 1979; revisions for prior years have not yet been received.
Data are not strike adjusted, except where noted.
3. Survey of households.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1978
Total,

16 years and older

1980

1979
Q1

July

Aug.

6.0

5.8

6.1

7.5

7.8

7.6

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

16.3
9.5
3.3
5.1

16.1
9.0
3.3
4.8

16.2
9.8
3.7
4.9

18.0
12.2
5.2
5.6

19.0
12.3
5.6
5.7

19.1
11.9
5.4
5.7

White,
Black and other

5.2
11.9

5.1
11.3

5.4
11.7

6.6
13.4

6.9
14.2

6.8
13.6

Fulltime workers

5.5

5.3

5.7

7.2

7.6

White collar
Blue collar

3.5
6.9

3.3
6.9

3.4
7.9

3.8
10.9

3.7
11.5

7.4
3.7
11.4

II-3

one-half hour in the average workweek.

Outside of manufacturing, employ-

ment in the trade and service sectors, which had dipped earlier in the
summer, resumed its upward trend, and construction employment, after
adjustment for returning strikers, was little changed.
In conjunction with the increases in manufacturing work schedules
and employment, a moderate rise in industrial production apparently
occurred in August, following a 1.6 percent decline in July and a 9 percent cumulative drop during the preceding six-month period.

The August

increases appear to have been widespread across most manufacturing
industries except motor vehicles, as both auto and truck production were
cut.

In the materials sector, raw steel production rose slightly in

August, after falling 40 percent during the preceding 12 months.
Capacity utilization at manufacturers also appears to have edged up in
August, after falling in July to a 74.2 percent rate--nearly 13 percentage points below its cyclical peak in March 1979.
Personal Income and Consumer Spending
Wage and salary disbursements edged down slightly in July after
changing little on balance during the second quarter.

However, the

annual cost-of living adjustment for social security benefits boosted
total personal income.

In real terms, it is estimated that disposable

income rose in July for the first time since January but, even so,
was more than 1 percent below the January peak.

Employment gains in

August, along with a further rise in average hourly earnings, suggests
some improvement in wage and salary disbursements for that month.
Consumer spending has firmed in recent months, after extremely
sharp declines earlier in the year.

This improvement results in part

II-4

(Based

PERSONAL INCOME
on seasonally adjusted annual rate data)

1978

1980

1979
QI

QII

June

July

- - Percentage change, at annual rates1 - Total personal income
Wage and salary
disbursements
Private

12.9

11.2

10.9

4.4

6.3

16.4

12.8
14.1

10.1
10.8

10.9
12.0

2.1
1.0

2.5
2.0

-1.5
-2.8

Nominal disposable personal
income
Real disposable personal
income

12.0

10.4

13.5

4.1

5.4

18.7

-5.9

-1.0

4.2

n.a.

2
- - Changes in billions of dollars - -

Total personal income
Wage and salary disbursements
Private
Manufacturing
Other income
Transfer payments
Less: Personal contributions
for social insurance
Memorandum:
3
Personal saving rate

$17.8

S16.8

11.5
10.1
3.2

9.7
8.4
2.0

$13.9
10.4
9.1
2.7

S 6.3
-. 5
-2.0

-3.6

$10.9 $28.6
2.8
1.8
-2.2

-1.7
-2.5
-1.8

8.1
2.9

4.3
2.4

7.2
3.3

8.3
3.0

4.5

3.7

4.8

n.a.

4.8

30.5
24.6

1. Changes over periods longer than one quarter are measured from final
quarter of preceding period to final quarter of period indicated.
Changes for quarterly periods are compounded rates of change; monthly
changes are not compounded.
2. Average monthly change.
3. Monthly saving rate equals the centered three-month moving average of
personal saving as a percentage of the centered three-month moving
average of disposable personal income.

I-5

from an upswing in outlays on motor vehicles.

Unit sales of domestic

autos, which rose sharply in July, remained at a 6.4 million unit
annual rate in August, more than 20 percent above the unusually low
selling pace of May and June.

August sales reflected the continuation

of dealer incentive programs by the three major auto companies:

contrast, sales of foreign cars fell back to the 2.1 million unit pace
of the second quarter, after a temporary surge in July.
Nominal retail sales excluding autos and nonconsumption items
rose about 3/4 percent in June and July; in real terms, however, these
sales remained about unchanged in both months.

The July gain in nominal

sales reflected a sizable advance in purchases at the general merchandise,
apparel, and furniture grouping of stores that was only partly offset by
reduced spending at gasoline stations.

The recent firming in retail

sales coincides with an increase in both the Conference Board and
University of Michigan measures of consumer confidence, although they
still are quite low by historical terms.

The surveys indicate that in

August consumers were less pessimistic on balance than earlier about
upcoming business conditions and about employment and income opportunities.
Business Fixed Investment
Fixed investment spending continued at a relatively low level in
July.

After drifting down throughout most of the first half of 1980,

nominal spending on nonresidential construction fell 3.5 percent further
in July, bringing the cumulative drop so far this year to just over 8
percent.

Shipments of nondefense capital goods were about unchanged in

July and were still 3-1/2 percent below the February peak.

Motor

vehicle spending, however, continued to pick up in July from the
extremely low levels from earlier in the year.

II-6

RETAIL SALES
(Percentage change from previous period;
based on seasonally adjusted data)

1980

1979
Q3

Total sales

4.0

2.0

(Real)1

2.0

-. 4

Total, less auto and
nonconsumption items

4.0

3.5

2.6

GAF 2

4.6

1.7

-. 1

Durable
Auto
Furniture & appliances

4.3
3.7
6.5

-1.5
-3.0
-1.1

Nondurable
Apparel
Food
General merchandise 3
Gasoline

3.8
4.8
2.3
3.8
8.2

3.9
-. 73.3
3.7
7.7

July

May

June

2.1

-3.8

-. 6

1.4

2.0

-1.2

-5.9

1.0

1.4

-1.0

0.0

-.4

-1.6

2.1

-. 7

1.9

.8
1.5
1.0

-12.2
-16.7
-4.7

-1.2
-1.8
1.1

2.4
4.5
-1.0

4.8
8.3
1.1

2.8
1.4
2.3
-1.2
9.2

.4
1.0
1.8
-1.4
4.2

-. 3
1.1
-1.6
2.8
-. 5

.9
1.6
1.7
-1.4
1.8

.8
.6
1.2
2.7
-. 6

1. BCD series 59. Data are available approximately 3 weeks following
the CPI release.
2. General merchandise, apparel, and furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order
sales are also excluded in the GAF composite sales summary.

AUTO SALES
(Millions of units; seasonally adjusted annual rates)
1979
Q3

Total

1980
Q4

June

July

August

10.8

9.8

10.6

7.7

7.6

9.0

8.6

Foreign-made

2.2

2.4

2.8

2.1

2.2

2.6

2.1

U.S.-made

8.6

7.4

7.9

5.5

5.4

6.4

Small

3.6

3.5

4.0

2.8

2.7

3.1

3.3

Intermediate & standard

4.9

4.0

3.9

2.7

3.3

3.2

Note:

Components may not add to totals due to rounding.

II-7

Commitments data suggest that capital spending is likely to remain
weak over the next few quarters in spite of some recent improvement.
The volatile series on contracts for business construction generally
has trended downward so far this year in both nominal and real terms,
despite increases in June and July.

Those increases reflected some

pickup in the industrial and nonbuilding components while contracts
for new commercial buildings fell further.

New orders for nondefense

capital goods in real terms rose 2.0 percent in July; however, these
orders--which lead spending by about six months, on average--still were
well below levels reached earlier this year.

Moreover, new bookings

for nondefense machinery (also in real terms), edged down in July to
a level about 9-1/4 percent below the peak rate of the first quarter.
The latest Commerce Department survey of 1980 plant and equipment
spending plans taken in July and August, reports that businesses
expect to increase spending by 8.3 percent from 1979, 1.2 percentage
points less than reported in the May survey.

The downward revision is

a result of sharp cutbacks in plans for spending in the second half
of 1980, which are now indicated to be about the same as in the first
half.

This implies an appreciable decline in real terms in spending

during the second half of the year.
As for longer-term commitments data, current dollar capital appropriations of the nation's 1000 largest manufacturers (net of cancellations) fell 12.8 percent in the second quarter, erasing half of the
sharp increase posted during the first quarter.

Excluding the volatile

petroleum industry, the decline in second quarter capital spending
commitments was more pronounced, and the level of net appropriations in
these industries was below that of a year ago.

II-8

BUSINESS INVESTMENT SPENDING
(Percentage change from preceding comparable
based on seasonally adjusted data in current

1979
Q4

period,
dollars)

1980
June

July

Nondefense capital goods shipments
Current dollars
Constant dollars1
Addenda:
Unit sales of
heavy-weight trucks
(thousands)

1.4
2.7

6.0
2.0

-2.5
-3.0

-0.6
1.8

0.1
-2.3

330

240

260

280

4.2
1.0

3.3
0.5

-2.1
-3.3

0.2
-1.8

-3.4
-4.1

Nonresidential construction
Current dollars
Constant dollars
1.

FRB staff estimate.

BUSINESS CAPITAL SPENDING COMMITMENTS
(Percentage change from preceding comparable period,
based on seasonally adjusted data)
1979
Q4

1980
Q1

June

July

Nondefense capital goods orders
Current dollars

1.9

4.3

-9.2

1.9

4.4

Constant dollars

3.2

0.4

-9.6

4.4

2.0

6.59

6.42

6.57

6.58

6.59

3.7
5.0

5.5
1.5

-13.0
-13.4

2.9
5.5

1.6
-0.8

18.8
31.2

-16.1
-17.8

-31.7
-37.7

86.8
83.8

Addendum: Ratio of unfilled
orders to shipments
(current dollars, monthly)
Machinery
Current dollars
Constant dollars1
Contracts for nonresidential plant
Current dollars
Constant dollars
1.

FRB staff estimate.

9.8
10.3

II-9
Inventory Investment
Businesses have been quite successful in preventing a further
buildup of inventories in recent months following imbalances that
emerged during the first half of 1980.

Manufacturing and trade stocks,

in real terms, fell at a $4-1/4 billion annual rate in June following
an even larger drop in the preceding month.

Consequently, the five-

month uptrend in the stock-sales ratio was halted in June.
Data available for July provide confirming evidence that recent
production adjustments have been effective in containing stock levels.
Manufacturers' inventories in book value terms rose at an $11 billion
annual rate in July, continuing the pattern of moderate increases seen
in May and June, which were about one fourth the average rise during
the first four months of the year.

Most of the July increase in

inventories was concentrated at manufacturers of aerospace products,
nonelectrical machinery, food, and petroleum and coal products; however,
elsewhere declines were widespread.

The July increase in producers'

inventories was accompanied by a 2.7 percent advance in shipments, and
as a result, the stock-sales ratio for all manufacturers fell for the
first time since January.

In the wholesale trade sector, the ratio of

inventories to sales also declined in July in spite of a sizable
increase in the book value of stocks.

Most of this accumulation was

due to a large rise at merchant wholesalers of raw farm products as
recent drought-related price increases swelled the value of stocks.
Excluding this farm-related component, the rise in wholesale inventories
was only slightly above the moderate increase in the previous month.

II-10

SURVEYS OF PLANT AND EQUIPMENT EXPENDITURES
(Percent change from prior year)

Planned for 1980

1979
Dec. 1979

All Business

Commerce Departmentl
Feb. 1980 May 1980

Aug. 1980

15.1

10.9

11.1

9.9

8.7

Manufacturing

16.7

14.3

13.5

11.7

Durables

20.7

15.5

16.8

12.8

Nondurables

13.1

13.2

12.0

14.1

13.9

8.3

8.6

7.0

Mining

16.4

16.8

11.5

11.1

15.6

Transportation

25.7

10.4

16.3

8.2

6.1

Utilities

10.5

3.6

3.5

1.1

Communication,
Commercial,
and other

13.8

10.0

10.2

Nonmanufacturing

9.1
14.2
6.3

8.9

1. Results are adjusted for systematic bias. Without this adjustment,
the Commerce results would have been 11.1 percent in December, 13.2
percent

in February, 10.9 percent in May, and 10.3 percent in August.

II-11

MANUFACTURERS'

NEWLY APPROVED CAPITAL APPROPRIATIONS
(Net of cancellations)
Quarterly Rate,
Billions of dollars

-16
Total Excluding Petroleum

1977

-- 12

1978

1979

1980

II-12

CHANGES

IN MANUFACTURING AND TRADE INVENTORIES
(Annual rate)

1978

1980

1979
Q2
Q______1

May

June

July

Book Value Basis
Total
Manufacturing
Wholesale
Retail

43.2
18.1
12.8
12.3

47.2
29.9
9.1
8.1

46.1
41.1
7.2
-2.1

30.6
20.4
7.7
2.5

10.3
10.3
4.9
-5.0

7.2
2.7
5.8
-1.3

n.a.
10.9
17.5
n.a.

12.8
5.3
4.2
3.2

7.7
7.2
1.0
-0.5

-1.8
5.3
0.2
-7.3

3.1
4.1
.9
-2.0

-8.7
-1.9
-1.6
-5.2

-4.2
-1.4
0.2
-3.0

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

Constant Dollar Basis
Total
Manufacturing
Wholesale
Retail

Totals may not add due to rounding.

INVENTORIES RELATIVE TO SALES
1980

1980
May

June

July

1979
Q1

Book Value Basis
Total
Manufacturing
Wholesale
Retail

1.42
1.52
1.20
1.44

1.42
1.52
1.17
1.46

1.42
1.57
1.15
1.40

1.52
1.71
1.23
1.46

1.53
1.72
1.22
1.47

1.52
1.72
1.22
1.45

n.a.
1.68
1.21
n.a.

1.55
1.78
1.28
1.38

1.59
1.83
1.31
1.41

1.60
1.90
1.31
1.35

1.71
2.09
1.36
1.41

1.73
2.09
1.39
1.43

1.73
2.11
1.38
1.41

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

Constant Dollar Basis
Total
Manufacturing
Wholesale
Retail

II-13

Residential Construction
The housing market improved during the summer from the depressed
second quarter levels, reflecting the easing in mortgage credit
conditions that began in the spring.

Housing starts were at a 1.3

million unit annual rate in July, almost 40 percent above their nadir
of May.

Building permits have risen even more rapidly; a 60 percent

upswing between April and July was followed by another sizable rise
in the first half of August, according to an advanced sample reading.
However, qualitative reports indicate that the increase moderated
appreciably in the latter part of the month as mortgage interest rates
rose.
Starts of single-family units advanced 40 percent from May to
July, largely reflecting improved market conditions and in builder
inventory positions.

New house sales, which had fallen to an extremely

low level in April, rebounded in each of the subsequent three months.
As a result, by the end of July the number of unsold units stood at
its lowest level in more than four years.

Existing house sales also

rose sharply in June and July, after eight consecutive months of
decline.

Nevertheless, these sales stood well below the record pace

in late 1978.

In the multifamily sector, activity has improved in

recent months, but the July rate of 400,000 starts also remained well
below the most recent peak recorded over two years earlier.
Federal Government Sector
Federal government spending, on a unified budget basis, was
slightly above administration expectations in July; most of the overrun was due to purchases of military goods on behalf of foreign

II-14
PRIVATE HOUSING ACTIVITY

(Seasonally adjusted annual

rates, millions of units)

1979
Annual

1980
May

All units
Permits
Starts

1.55
1.75

1.34
1.59

1.14
1.26

.90
1.05

.83
.91

1.08
1.21

Single-family units
Permits
Starts

0.98
1.19

.82
1.06

.68
.83

.53
.67

.50
.63

.63
.76

.79
.87

.71
3.74

.62
3.56

.53
2.93

.45
2.40

.46
2.31

.54
2.48

.66
2.92

Multifamily units
Permits
Starts

.57
.55

.52
.54

.45
.45

.37
.38

.33
.28

.45
.45

.45
.40

Mobile home shipments

.28

.26

.18

.16

Sales
New homes
Existing homes

1. Preliminary estimates.
n.a.--not available.

June

July 1
1.24
1.27

n.a.

II-15

MARKET CONDITIONS FOR NEW SINGLE-FAMILY HOMES
(Seasonally adjusted)
Thousands of units
- 900
/

800

\1\

New home sales
(Annual rate)
\\

600
7

600

\
I

500

New homes for sale
(Number, end of month)

I
.

400

I300
Months
16

Supply of unsold homes

1978

1979Y

II-16
governments and to social security payments.

Preliminary Treasury data

for August suggest that some offset to the July overruns may have
occurred.

In particular, the Commodity Credit Corporation (CCC) account

registered a large offset to outlays, as farmers--responding to higher
agricultural prices--appeared to be repaying CCC loans and redeeming
the crops used as collateral.

On balance, outlays appear to be about

in line with the Administration's July forecast of $578 billion for
FY1980.

On the receipts side, withheld tax collections for July and

August have been stronger than previously expected by the staff.
During the past month, the Senate Budget Committee approved a
Second Concurrent Resolution for fiscal year 1981--based on revised
economic assumptions--that contains an $18 billion deficit, reflecting
outlays of $633 billion and receipts of $615 billion.

The Committee

voted not to include a tax cut in its resolution at that time.

How-

ever, the Senate Finance Committee has approved a $39 billion tax cut
(liability basis) for calendar year 1981.

And in late August, the

administration announced an economic revitalization plan calling for a
tax cut of about $28 billion, which includes $9 billion in tax incentives to encourage private investment and $18-1/2 billion of personal
and business income tax credits to offset the scheduled rise in
social security taxes and deductions to reduce the "marriage penalty."
State and Local Government Sector
Recent activity in the state and local government sector has
remained sluggish, as small employment gains were coupled with further
reductions in capital investment.

Preliminary data indicate that state

and local governments increased payrolls by only 12,000 in August.

II-17

Construction spending continued the downward trend that has been evident
since the beginning of the year.

In July, outlays for new construction

decreased 3.6 percent--down nearly one-fifth from the recent January
peak level.

The July decrease was due primarily to a fall-off in

building projects; in contrast, most of the decrease in construction
outlays that occurred earlier this year resulted from sharp reductions
in highway, water, and power-generating projects.
Prices
Inflationary pressures generally remain strong, although recent
aggregate price indexes have exhibited contrasting movements.

Increases

in retail prices of food and many commodity items accelerated in July,
but a sharp decline in contracted mortgage interest costs kept the
overall CPI from increasing.

At the producer level, finished goods

prices rose rapidly in both July and August, averaging almost 20 percent
at an annual rate--a pace similar to that of the first quarter of 1980.
This recent surge in these producer prices has been associated primarily
with a sharp increase in food prices, which had edged down in the first
half of the year.
Producer food prices accelerated at all stages of processing in
July and August, largely as a result of recent cutbacks in pork and
beef production and the effects of adverse weather conditions on poultry
supplies and feed grains.

Farm prices soared 9.0 percent in both July

and August as the drought pushed up grain, poultry, and beef prices.
Retail food prices rose 1 percent in July.

II-18
RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data) 1
Relative
importance 2
Dec. 1979
1978
Finished goods
Consumer foods
Consumer nonfood
Energy
Exc. energy
Capital equipment

100.0
24.3
47.4
10.3
37.0
28.4

'9.2
11.9
8.4
8.0
8.5
8.0

Intermediate materials 3 94.9
81.4
Exc. food and energy

8.3
8.9

Crude food materials
Crude nonfood
Exc. energy

55.5
44.5
16.0

18.3
15.6
21.0

1979

12.6
19.3
7.6 -1.2
18.0
34.8
62.7 109.4
9.6
18.1
8.8
13.4
16.5
13.0

1980
July

Aug.

6.0
-7.8
10.1
17.0
7.7
10.9

20.3
45.6
11.1
-7.7
17.8
16.1

18.5
53.1
6.7
2.6
8.2
10.9

4.4
4.1

8.2
3.7

6.4
7.3

24.0
18.3

11.1 -16.7 -10.5
26.0
21.9 -3.9
13.1
7.4 -38.0

107.5 108.4
38.6
21.9
85.1 35.1

1. Changes are from final month of preceding period to final month
of period indicated. Monthly changes are compounded.
2. Relative importance weights are on a stage of processing basis.
3. Excludes intermediate materials for manufacturing food and animal
feed.
RECENT CHANGES IN CONSUMEzR PRICES 1
(Percentage change at annual rates; based on seasonally adjusted data) 2
Relative
importance
Dec. 1979
All items
100.0
Food
17.7
Energy 3
10.3
All items less food
and energy 3
72.0
Homeownership
24.9
All items less food,
energy and homeownership 4
50.7
Used cars
2.8
Other commodities 5
21.3
Other services 5
26.6
Memorandum:
Gasoline

5.6

1978

1979

1980
02

July

9.0
11.8
8.0

13.3
10.2
37.4

18.1
3.8
64.8

11.6
5.6
8.1

0.0
11.5
3.6

8.5
12.4

11.3
19.8

15.7
24.1

13.5
26.6

-2.1
-21.7

6.9
13.6
5.3
7.7

7.5
2.2
6.6
8.8

12.1
-2.5
12.9
12.3

7.6
-16.8
6.9
11.0

8.0
8.7
7.7
6.1

8.5

52.2

105.7

-6.2

-5.5

1. Based on index for all urban consumers.
2. Changes are from final month of preceding period to final month of
period indicated. Monthly changes are not compounded.
gasoline and motor oil, fuel oil and coal, gas and
3. Energy items:
electricity.
4. Reconstructed series; includes home maintenance and repairs (relative
importance weight of 3.6), also a component of homeownership costs.
5. Reconstructed series.

II-19

Price developments in the energy sector continued to hold down
overall inflation rates at the consumer level in July
reflecting a small decline in gasoline prices.

largely

But gas and electric

rates generally have continued to rise rapidly in recent months.

the producer level, energy price developments for the most part
exhibited similar trends.
Shelter costs declined sharply in July, reflecting the 5.7 percent decrease in mortgage closing rates recorded in June as well as the
recent deceleration in rents and home purchase prices.

FHLBB data on

settlement rates indicate that further declines are likely to be
reflected in the CPI conventional mortgage rate component for August
and September.

This improvement could be short-lived as mortgage

commitment rates have risen substantially in recent weeks.
Prices for consumer items other than food, energy, and homeownership continued rising at a relatively rapid 8 percent annual rate in
July.

Increases were quite large for commodities, particularly new

and used cars, as automakers continued their practice of raising
prices at the beginning of each quarter.

The rise in prices of consumer

service slowed in July to about half the pace recorded in the first
half of the year.

At the producer level, prices for nonfood, nonenergy

items accelerated markedly in July but generally slowed in August.
On balance, over the two-month period, price advances at all stages of
production have been more rapid than during the second quarter.

II-20
HOURLY EARNINGS INDEX 1
(Percent change at compound annual rates;
based on seasonally adjusted data) 2

1978

Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Total trade
Services
Real Hourly Earnings
Index

1979

Aug. 1979
to
Aug. 1980

July

Aug.

1980

8.4

8.1

9.0

9.4

9.9

4.1

6.6

8.4
8.5
8.2
7.6

8.7
8.7
8.7
6.8

10.6
10.8
10.2
6.6

9.9
10.6
8.8
5.0

12.6
13.6
10.8
8.9

10.1
10.5
9.4
7.6

7.6
5.2
12.3
5.7

7.4
9.6
7.6

9.0
7.6
7.6

7.0
8.3
9.3

7.8
11.2
8.8

9.1
7.1
9.8

-. 4
5.5
-2.2

-1.7
6.4
9.0

-. 5

-4.3

-6.5

-3.3

3.7

n.a.

-3.5

1. Excludes the effect of interindustry shifts in employment
tions in overtime pay in manufacturing.
2. Changes over periods longer than one quarter are measured
final quarter of preceding period to final quarter of period
Changes for quarterly periods are compounded rates of change;
changes are not compounded.
3. Change from July 1979 to July 1980.

and fluctuafrom
indicate d.
monthly

II-21

Wages and Labor Costs
Wage rates accelerated substantially in the first half of 1980.
Although the volatile index of average hourly earnings for production
workers rose at just a 6-1/2 percent annual rate in August, this
measure of basic wage movements now stands 9 percent above the level
of a year ago.

Despite the pick-up in nominal wage changes, in

real terms wage rates remain well below those of a year earlier.
The Employment Cost Index (ECI), which measures wage rate changes
for both blue- and white-collar workers, shows a similar acceleration
in labor costs.

Over the twelve-month period ending in June, the

index for wages and salaries rose 9.3 percent, as compared with a 7.6
percent rise over the preceding year.

Like the hourly earnings index,

this ECI shows that, by industry, wage adjustments in the manufacturing
sector generally have outpaced those in other sectors.

In both

manufacturing and nonmanufacturing industries, workers in establishments
in which the majority of employees are unionized--and, thereby, are
more likely to be covered by formal cost-of-living adjustments--have
fared better than their non-union counterparts.

The spillover from

these types of cost-of-living adjustments also appears to have resulted
in an acceleration in white-collar pay, particularly for workers in
professional and clerical occupations.

II-22
SELECTED MEASURES OF WAGE CHANGE

Percent change from year earlier
11
-10
Hourly Earnings Index

-, 9

8
-7

Employment Cost Index

I NTI
ICI

EX I

EMPLOYMENT COST INDEX

Blue Collar
-

.,---..

hite Collar

EMPLOYMENT COST INDEX
EMPLOYMENT COST INDEX

Union

Icc

//
/

,i
1976

Nonunion

l'"
r', , 1 , i, ,
1977

1978

,
1979

i 1i
1980

III-T-1
SELECTED DOMESTIC FINANCIAL DATA
Latest data
Indicator
Period

Level

Month
ago

$ billions
Monetary and credit aggregates
Total reserves

Net Change from:
Three
Year
months ago
ago

Percent at annual rates

August

40.76

16.9

6.3

6.1

August

40.10

9.1

10.1

7.4

August

379.2

17.7

12.4

4.2

August
August
August
August

401.2
1627.2
1885.6
697.1

19.8
13.4
13.3
7.4

15.4
16.6
13.4
2.7

5.6
9.1
9.3
8.9

Nonborrowed reserves
Money supply
M-1A

M-1B
M-2
M-3
CB Gross Time and savings deposits
Total Thrift deposits (S&Ls + MSBs
+ Credit Unions)

August

693.6

10.8

Bank credit

10.2

6.2

August

1177.8

16.0

7.0

6.5

Net Change from:
Latest data

Percent
Market yields and stock prices
Federal funds

Period

or index

Three

Month

months

ago

-. 55

Year

wk.

endg.

9/3/80

10.47

.87

-.27

Treasury bill (90 day)

9/3/80

9.97

1.32

2.26

.06

Conmercial paper (90-119 day)
New utility issue Aaa

"
"

9/3/80
9/5/80

10.61
12.25

1.60
.22

1.76
1.34

-.42
-

Municipal bonds (Bond Buyer) 1 day

1 day

9/4/80

8.78

.17

1.11

2.31

FNMA auction yield (FHA/VA)

9/2/80

14.41

.83

1.99

3.49

Dividend price ratio (common stocks) wk. endg.

9/3/80

5.06

-. 06

-.52

-. 31

NYSE index (12/31/65-50)

9/2/80

71.28

1.84

8.06

9.93

end of day

Net Change or Gross Offerings
Latest
Year Year to date
Period
data
ago
1980
1979
Credit demands
Business loans at commercial banks 1
Consumer instalment credit outstanding1
Mortgage debt outstanding (major holders)1 2
Corporate bonds (public offerings)

Municipal long-term bonds (gross offerings)
Federally sponsored agcy.

(net borrowing)

U.S. Treasury (net cash borrowing)
1/

August
July
June
July
August
July
July

4.9
-. 6

.6
5.3
4.0e
.6
9.7

Seasonally adjusted.

2/ Includes comm'l banks, S&Ls, MSBs, life ins. cos, FMA and GNMA.
e - Estimated.

4.3
2.4
8.9
2.2
4.3
3.1
4.8

10.6
-4.4
26.8
28.8e
31.8
15.1
34.2

33.1
22.7
51.6
15.9
28.9
14.9
10.8

DOMESTIC FINANCIAL DEVELOPMENTS

The narrow monetary aggregates expanded at record rates during
August as they continued to rebound from their decline early in the
second quarter.

Relative to increasing bank demands, the System's

provision of nonborrowed reserves became less accommodative, and the
federal funds rate climbed above 10 percent in late August, from around
9 percent at the time of the last FOMC meeting.

As the federal funds

rate rose above the discount rate, member bank adjustment borrowing
increased from minimal levels to over $1 billion in the first statement
week of September.
Other short-term market interest rates also have moved up on
balance since the last FOMC meeting--by about 1-1/4 to 1-1/2 percentage
points--initially sparked by market reaction to the sharp expansion in
the aggregates, and later in response to the increase in the funds
rate.

Continued unfavorable news on inflation, the apparent increased

likelihood of a tax cut, and some evidence that the recession might be
waning also exerted upward pressure on short-term rates.

Long-term

market rates have risen only about 1/4 percentage point further during
the intermeeting period but are about 1-3/4 points above the mid-June
lows.

Rates which had lagged earlier upward movements-the bank prime

rate and rates on new home-mortgage commitments-rose in August and
early September; consumer finance rates retreated in July-August from
record levels.
Borrowing by the private nonfinancial sectors apparently increased
a bit in August.

A sharp increase in short- and intermediate-term

business borrowing from banks outweighed a decline in commercial paper
III-1

III-2
SELECTED FINANCIAL MARKET QUOTATIONS
(Percent)
~n~n

FOMC

Mar-Apr

Oct. Oc.
5 1Hih
High

Low
Mid-June**
Low
a

FOMC
Aug..1 12
A

change from:

lMar-Apr Mid-June FOMC
Sept. 91 High
Low
Aug. 12

Short-term rates
Federal funds 2

11.91

19.39

8.99

8.85

10. 24 p

-9.15

1.25

1.39

Treasury bills
3-month
6-month
1-year

10.70
10.63
10.28

16.00
15.64
14.58

6.18
6.60
7.00

8.64
8.89
8.91

10.04

-5.96
-5.47
-4.53

3.86
3.57

1.40

3.05

1.14

Commercial paper
1-month
3-month
6-month

11.73
11.86
11.84

18.00
17.69

7.98
7.78

9.08

10.35

-7.65

2.37

9.17

1.27
1.34

7.59

9.23

-7.18
-6.72

2.73

17.25

10.51
10.53

2.94

1.30

12.09
12.50
12.80

17.87
18.59
18.47

7.96

9.26
9.51
9.84

10.36

2.40

1.10

3.01

11.30

-7.51
-7.68
-7.17

3.64

1.40
1.46

Eurodollar deposit 2
1-month
3-month

12.45

19.04

8.88

12.79

19.60

8.99

9.70
10.33

10.74
11.48

-8.30
-8.12

1.86
2.49

1.04
1.15

Bank prime rate

13.50

20.00

12.00

11.00

12.00

-8.00

1.00

10.01
9.60
9.36

14.53
13.65*
12.85*

8.56
9.47
9.49

10.16
10.98
11.01

11.08
11.19
11.05

-3.45
-2.46
-1.80

2.52
1.72
1.56

6.64

9.44

7.44

8.61

8.78

-. 66

1.34

10.22

14.22

10.53

12.03

12.25p

-1.97

1.72

10.25

14.12

10.79

12.10

12.41p

-1.71

1.62

11.35

16.35

12.35

12.25

13.03

-3.32

.68

FOMC
Aug. 12

Sept. 9

Large negotiable CDs
1-month
3-month
6-month

10.17
10.05

1.28

7.90
7.66

10.91

Intermediate- and longterm rates
U.S. Treasury
(constant maturity)
3-year
10-year
30-year
Municipal
4
(Bond Buyer)

Corporate Aaa
New issue5
Recently offered
Primary conventional
mortgages 6

FOMC
Oct. 5

Mar-Apr Mid-June
Low
High

Stock Prices
897.61 759.13
Dow-Jones Industrial
55.30
63.39
NYSE Composite
235.15 215.69
AMEX Composite
152.29 124.09
NASDAQ (OTC)
1. One-day quotes except as noted.
2. Averages for statement week closest to
3. Secondary market.

881.91
66.36
297.60
159.18

date shown.

4. One-day quotes for preceding Thursday.
5.

952.39
70.92
318.96
176.62

Averages for preceding week.

6. One-day quotes for preceding Friday.
*-- Highs reached on February 26.
**- Most lows occurred on or around June 13.
p-- preliminary.

934.73
71.64
331.44
184.84

Mar-Apr Mid-June FOMC
High
Aug. 12
Low
175.60
16.34
115.75
60.75

52.82
5.28
33.84
25.66

-17.66
.72
12.48
8.22

III-3

outstanding and a reduction in the still sizable volume of bond offerings.

Borrowing by households picked up in July, and probably firmed

further in August, as mortgage commitment and lending activity strengthened and the contraction in consumer credit was sharply curtailed.

the public sector, Treasury borrowing was still heavy in August when a
substantial portion of the large deficit for the quarter was funded;
little further Treasury financing has occurred in early September.
State and local government borrowing lightened in August, as many
issuers reacted to higher yields by cancelling or postponing offerings,
but the calendar for September is quite heavy.
Monetary Aggregates and Bank Credit
Growth in M-1A accelerated sharply in August to a record 17-3/4
percent annual rate, reflecting both faster currency expansion and a
surge in demand deposits which was widespread geographically and by class
of bank.

M-1B also grew at a record annual rate in August, despite some

moderation in the rapid growth of other checkable deposits.

Factors

underlying the strength in the narrow monetary aggregates likely included
a lagged response of money demand to earlier declines in interest rates,
some firming of economic activity, and perhaps some rebuilding of transactions balances following their substantial shortfall relative to nominal
GNP in the second quarter.

The earlier than usual mailing of social

security checks in August explained only a small part of the strength in
the narrow aggregates.
Growth in M-2 slowed to a 13-1/2 percent annual rate last month from
a 17-1/2 percent rate in July, as a marked deceleration in its nontransactions component more than offset the speed-up in M-1B.

Overnight RPs

III-4
MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)1
Aug. '79

19Q0l

1L3

Q4
---Money stock measures
1. M-LA
2.
M-IB
3.
M-2
4.
M-3
Selected components
5. Currency
6.
Demand deposits
7. Other checkable deposits, NSA 2
8. M-2 minus M-1B (9+10+11+14)
9.
Overnight RPs and Eurodollars, NSA 3
1O.
Money market mutual fund shares, NSA
11.
Commercial banks
12.
savings deposits
13.
small time deposits
14.
Thrift institutions
15.
savings deposits
16.
small time deposits
17.
Large time deposits
18
at commercial banks, net 4
19.
at thrift institutions
20. Term RPs, NSA

June

July

Aug. e

Aug. '80

Percentage change at annual rates ---

4.5
5.0
7.1
9.1

4.8
5.9
7.2
7.8

-3.9
-2.3
5,5
5.8

11.4
14.9
18.2
13.4

7.8
11.0
17.6
13.2

17.7
19.8
13.4
13.3

4.2
5.6
9.1
9.3

8.5
2.9
12.6
7.8
-33.1
120.0
8.6
-16.5
32.1
3.7
-26.0
22.3
28.3
20.2
90.8
-16.0

8.3
3.4
29.3
7.7
-7.5
151.9
6.9
-19.3
29.1
-0.3
-22.5
12.0
17.8
9.9
72.6
-31.9

7.0
-8.3
34.1
8.1
-72.0
82.7
9.8
-22.6
33.9
3.7
-27.1
19.3
10.6
7.4
28.9
-19.4

9.8
12.1
77.4
19.3
67.6
132.9
10.9
32.9
-3.1
11.4
23.7
6.0
-22.0
-25.9
0.0
44.3

10.8
6.0
72.7
19.8
186.7
103.5
13.5
38.6
-3.1
8.9
37.6
-4.3
-21.3
-26.5
6.7
47.0

15.0
19.7
57.1
11.4
69.2
1.5
10.2
23.9
0.4
10.9
28.3
3.0
1.6
0.0
10.0
94.5

9.4
2.2
38.4
10.3
-3.8
158.7
9.2
-8.2
25.7
4.3
-12.9
15.1
12.4
6.5
5
-

-- Average monthly change in billions of dollars-MEMORANDA:
21. Managed liabilities at commercial
banks (22+23)
22.
Large time deposits, gross
23.
Nondeposit funds
24.
Net due to related foreign
institutions, NSA
25.
Other 5
26. U.S. government deposits at
commercial banks 6

-1.9
2.0
-3.9

8.0
3.1
4.9

-7.5
0.0
-6.5

-14.2
-5.0
-6.2

-4.9
-3.9
-1.0

n.a.
0.5
n.a.

n.a.
1.5
n.a.

-2.5
-1.4

1.6
3.3

-5.9
-0.6

-8.1
2.0

-4.2
3.2

n.a.
n.a.

-1.0

-0.2

0.4

-0.8

2.1

0.9

-0.1

1. Quarterly growth rates are computed on a quarterly average basis.
2. Consists of ATS and NOW balances at all institutions, credit union share draft balances, and
demand deposits at mutual savings banks.
3. Overnight and continuing contract RPs issued to the nonbank public by commercial banks,
net of amounts held by money market mutual funds, plus overnight Eurodollar deposits issued by
Caribbean branches of U.S. member banks to U.S. nonbank customers.
4. Net of large denomination time deposits held by money market mutual funds and thrift
institutions.
5. Consists of borrowings from other than commercial banks in the form of federal funds purchased,
securities sold under agreements to repurchase and other liabilities for borrowed money (including
borrowings from the Federal Reserve), loans sold to affiliates, loans RPs, and other minor items.
6. Consists of Treasury demand deposits at commercial banks and Treasury note balances.
e--estimated.
n.a.--not available.

III-5

and Eurodollars grew more moderately than in July, and there was virtually
no growth in money market mutual fund shares during August.

In fact,

outstanding shares in money market mutual funds dropped more than $2.5
billion between mid-August and early September, in response to a widening
gap between rates of return on MMMF shares and higher yields on alternative short-term instruments. 1

In contrast, the rising Treasury bill

rates in August induced a net increase in noncompetitive tenders at weekly
bill auctions after declines in each of the preceding three months.
Changing yield relationships also altered the pattern of inflows
to savings and small time deposits at banks and thrift institutions in
August.

As market-related interest rates on variable-ceiling small time

deposits rose relative to fixed ceiling rates on savings accounts, the
recent rapid growth in savings balances moderated, and small time deposits
increased slightly after declining in July.

The ceiling rate on MMCs

rose about 1-1/4 percentage points more than that on SSCs, eliminating
the spread in favor of SSCs by month-end.

Reflecting this change, data

for August indicate that at S&Ls outflows from MMCs diminished considerably, and even though inflows to SSCs slackened, overall growth in small
time deposits at S&Ls turned positive (end of month basis).
Preliminary estimates for August suggest that bank credit expansion
picked up during the month, continuing its recovery from the absolute
declines registered in the second quarter.

Bank acquisition of securi-

ties--especially U.S. government obligations--remained strong, perhaps
1. Managers of MMMFs had lengthened the average maturity of their portfolios in early April, thereby limiting the decline in their average net
yield to shareholders when interest rates were dropping sharply. In
August, however, MMMFs maintained their average maturity in the 45-50
day range; thus the increase in MMMF rates paid to shareholders lagged
the rise in rates available elsewhere.

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data) 1

'79
Aug.
to

Q198

1979

June

July

Aug.e

Aug. '80

Commercial Bank Credit
1.

Total loans and investments
at banks 2
Investments

Treasury securities

Other securities

Total loans 2

Business loans

Security loans

Real estate loans

Consumer loans

11.

12.

Total short- and intermediateterm business credit (sum of
lines 13,14 and 15)
Business loans net of
bankers acceptances 1
Commercial paper issued by
nonfinancial firms3

16.0

6.5

17.1

26.5r

23.2

11.2

10.6

30.4

48.2r

38.1

10.6

11.2

10.8

16.1lr

15.9

11.6

12.8

-9.4r

-9.2r

0.8

13.4

4.9

16.4

-8.9r

-7.6r

2.0

19.7

7.4

-32.8

-23.8r

O.Or

-60.8r

64.0

-31.3

5.3

9.1

-14.4r

n.a.

11.5

-4.4

-2.6r

3.5

7.3

11.0

-5.9

3.0

8.3

9.4

3.4
6.0
-88.5
14.2

5.5
-

10.

7.5r

3.4

11.9

3,7

1.0

-1.9

-21.5

-25.6

Short- and Interaediate-Ter

6.4

22.0

1.2r

6.3

17.6

-10.5r

-10.3r

15.5

76.2

86.9

87.7

4.5r

Business Credit --

2.9

n.a.

0.8r

20.4

7.2

16.9

2.9r

-41.7

53.3

12.3

11.4

13.

Sum of lines 11 & 12

7.0

23.1

-0.2r

14.

Finance company loans to
business 4

4.0

-2.8

-4.0

-6.9

n.a.

Total bankers acceptances
outstanding4

4.6

54.1

33.9

39.4

15.7

n.a.

15.

1.5r

1. Average of Wednesdays for domestic chartered banka and average of current and preceding ends of months for foreign-related institutions.
2. Loans include outstanding amounts of loans reported as sold outright to a bank's own
foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding
company (if not a bank), and unconsolidated nonbank nubsidiaries of the holding company.
3. Average of Wednesdays.
4. Based on average of current and preceding ends of months.
r--revised.
n.a.--not available.
e-estimated.

III-7

in part to satisfy customer demand for RPs and to provide required
backing for U.S. government deposits, which increased about $900 million.
Total loans grew rapidly in August after little change in July.
Business loan expansion was robust at large banks and foreign-related
institutions, bolstered in part by a further narrowing of the spread of
the prime rate over open market rates.

At small banks, business loans

showed a small growth following four months of decline.

Security loans

at banks also appear to have increased last month for the first time
since September 1979, concurrent with a rise in dealer inventories of
securities.

Real estate lending remained at the improved July pace,

while at large banks the contraction in lending to individuals eased
further.
With overall loan demands strengthening, commercial banks apparently supplemented strong inflows of core deposits in August with a large
increase in RP borrowing and a resumption of issuance of gross large time
deposits after two months of run-offs.

The elimination in late July of

the remaining marginal reserve requirement on managed liabilities and of
the supplemental reserve requirement on large time deposits also provided
banks a source of funds for loans and investments.

Banks further reduced

their net Eurodollar borrowing during the month.
Business Finance
Business demands for short- and intermediate-term credit increased
in August, on balance, as accelerated borrowing at banks more than offset
the sharp drop in nonfinancial commercial paper outstanding.

Offerings

of corporate bonds remained sizable though abating somewhat, and stock
offerings continued quite strong.

III-8
GROSS OFFERINGS OF CORPORATE SECURITIES
(Monthly totals or monthly averages, in millions of dollars)
1980
Q1
--------

Q2 P

July p

Aug.p

Sept.

Seasonally adjusted ---------

Corporate securities--total

5,220

7,650

7,525

6,625

5,600

Publicly offered bonds

1,895

5,600

5,325

4,350

3,650

Privately placed bonds

1,740

800

Stocks

1,585

1,475

1,200

------

1,225

1,300

Not seasonally adjusted -------

Publicly offered bonds--total
By quality1
Aaa and Aa 2
Less than Aa
By type of borrower
Utility
3
Industrial
Financial

1,954

5,879

5,300

3,900

1,020
934

3.230
2,649

2,675
2,625

1,300
2,600

1,175
440
339

1,305
2,989
1,585

900
3,525
875

1,600
1,900
400

Stocks--total
By type of borrower
Utility
Industrial
Financial

1,518

1,278

1,200

1,300

549
866
103

700
400
100

p--preliminary. f--forecast.
1. Bonds categorized according to Moody's bond ratings.
2. Includes issues not rated by Moody's.
3. Includes equipment trust certificates.

3,600

1,200

III-9

After slowing their net issuance of commercial paper in July, nonfinancial corporations ran off such debt rapidly last month.

Dealers

reported that several customary issuers of commercial paper were shifting
emphasis to longer-term borrowing--selling almost $2.5 billion of longterm debt in August, in continued efforts to restructure balance sheets.
In addition, some lower-rated issuers were attracted to bank loans by the
comparatively favorable prime rate and by a slight easing of standards to
qualify for the prime rate (or for a given spread above prime) reported
by respondents to the Senior Loan Officer Opinion Survey in mid-August.
(See Appendix A.)
The further increases in corporate bond yields during August--to
about 2 percentage points above their lows in late June--contributed to
a reduced pace of public offerings overall.

Gross public bond offerings

in August totaled about $4.4 billion, seasonally adjusted, compared with
a $6.4 billion average for the previous three months.

Industrial corpo-

rations and financial concerns curtailed the amount of their public
offerings in August, while offerings by utilities increased.

Several

nonfinancial corporations structured their August debt offerings so that
note obligations carrying maturities of 10 years or less accounted for
the highest proportion of total offerings since March.
Most major indexes of stock prices have risen slightly further on
balance since the last FOMC meeting, setting new historic highs in the
intermeeting period.

The generally high level of share prices has con-

tinued to elicit a large amount of stock offerings, particularly by
industrial concerns; average monthly volume through August this year has

III-10
GOVERNMENT SECURITY OFFERINGS
(Monthly totals or monthly averages, billions of dollars)

Q2
----------

July

Aug. e /

Sept.f

Seasonally adjusted -----------

State and local government
securities, gross offerings
Total
Long-term
Short-term

4.71
2.73
1.98

6,55
4,63
1 92

7.81
4.96
2.85

6.63
3.78
2.85

6.45
5.24
1.21

9.55
3.06

4.87
1.60

12.84
1.21

8.92
-1.05

0.42
0.11

U.S. government securities,
net offerings
U.S. Treasury
Sponsored agencies

------- Not seasonally adjusted --------State and local government
securities, gross offerings
Total
Long-term

Housing revenue bonds
Single-family
Multi-family

Short-term

4.26

7.89

7.00

6.50

5.50

2.60
0.85
0.75
0.10

5.07
1.38
1.32
0.06

4.60
0.91
0.65
0.26

4.00
0.81
0.62
0.19

4.00
1.10
0.85
0.25

1.66

2.82

2.40

2.50

1.50

10.82
7.91
2.91

0.98
-4.18
5.16

11.25
8.66
2.59

12.37
4.76
7.61

0.00
-0.60
0.60

2.57

1.78

1.55

-0.61

0.80

U.S. government securities,
net offerings

U.S. Treasury
Bills
Coupons
Sponsored agencies
e--estimate. f--forecast.
1. Marketable issues only.

III-11

run at a record rate.

Initial public offerings-mostly by small indus-

trial firms-have been at their most rapid pace (through May--latest
data available) since 1972.
Government Debt Markets
The Treasury has a substantial deficit to fund this quarter, and
marketable borrowing from the public has been correspondingly high, currently estimated by staff at about $24 billion for the quarter.

A sizable

part of the borrowing was accomplished in August when the Treasury raised
over $12 billion.

Of this amount, $4-3/4 billion was raised in regular

bill auctions, a high proportion by past norms but lower than in previous
months this year.

Thus far in September, little further Treasury borrow-

ing has taken place in the markets.

Net changes in non-marketable debt

have also been minor.
Federally sponsored credit agencies are estimated to have run off
about $1 billion of debt in August on a seasonally adjusted basis.

Only

the Federal Farm Credit Banks raised net funds in August, in about the
same amount ($900 million) as on average in the first seven months of
1980.

The Federal Home Loan Banks ran off about $500 million of debt

last month.

This run-off reduced FHLB liquidity since advances to sav-

ings and loans in August rose by about $800 million, compared with reductions in advances of well over $1 billion in each of the previous three
months.

The Federal National Mortgage Association pared its indebtedness

about $1.5 billion during August, almost entirely in discount notes.

The

reduction was part of a restructuring of FNMA's liabilities that included
issuance of $1 billion in debentures in late July.

FNMA's mortgage hold-

ings changed little in August, as in other recent months, because deliveries

III-12
to FNMA under prior commitments have been sharply curtailed, mainly
reflecting the low levels of prices established in the auctions of 4-month
purchase commitments held earlier in the year.
Higher yields on municipal securities contributed substantially to
the cancellation or postponement of about $125 million of notes and a
record $976 million of bonds in August.

Nearly all of the bonds displaced

were revenue bonds, on which yields rose more than on general obligation
bonds, widening the average spread between them to about 95 basis points.
Over half of the unissued revenue bonds were for housing purposes.

Effec-

tive subsidies to the ultimate borrower have been reduced by the combination of higher interest costs on the mortgage revenue bonds and lagging
rates in primary mortgage markets.

As a result, financial institutions

and homebuyers have felt less incentive to participate in the programs. 1
In the wake of the large amount of displacements, the volume of
tax-exempt bonds offered for sale during August declined to about $3.8
billion (seasonally adjusted), considerably below July's total of nearly
$5 billion.

Housing revenue bonds, despite the difficulties encountered

by some issues, continued to account for about a fifth of the total
municipal bond volume.
Mortgage Markets
Mortgage interest rates have increased substantially since the
last FOMC meeting, while evidence has accumulated to confirm an upturn
in mortgage commitment and lending activity that was becoming apparent
1. A typical case was the cancellation of a $100 million New Orleans
mortgage bond issue that had attracted prior commitments of only
$38 million from financial institutions participating in the program.

III-13
INTEREST RATES AND SUPPLY OF MORTGAGE

Conventional home mortgages
Average rate on
Basis point
new commitments
change from
for 80% loans
month or
(percent)
week earlier

Period

FUNDS AT SELECTED S&Ls

Spread
(basis
points)

1980--High
Low

16.35
12.18

1980--Jan.
Feb.
Mar.
Apr.
May
June

12.88
13.03
15.28
16.33
14.26
12.71
12.19

-2
+15
+225
+105
-207
-155
-52

+118
-22
+139
+369
+258
+171
+78

8
15
22
29

12.25
12.25
12.55
12.80
12.95

+7
0
+30
+25
+15

+25
+15
+28
+44
+27

Sept. 5

13.03

+62

July

Aug.

Percent of S&Ls 2
with mortgage funds
in short supply

+385
-24

1. Average mortgage rate minus average yield on recently offered Aaa utility bonds.
2. Percent reporting supply of funds slightly or substantially below normal seasonal
patterns.
SECONDARY HOME MORTGAGE MARKET ACTIVITY
FNMA auctions of forward purchase commitments
Conventional
Government-underwritten
Amount
($ millions)
Offered Accepted

Period

1980--High
Low

Yield
to 1
FNMA

Amount
($ millions)
Offered Accepted

Yield
to 1
FNMA

Yields on GNMAguaranteed
mortgage-backed
securities for
immediate 2
delivery

426
54

133
24

17.51
12.76

644
199

324
89

15.93
12.28

13.84
11.03

4
11
18
25

205

107

13.31

643

355

13.58

226

112

14.00

420

274

14.26

11.99
12.41
12.46
12.48

Sept. 2
8

121

14.19

324

183

14.41

1980--Aug.

12.57
12.59

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

III-14

prior to the August meeting.

The rebound in the volume of activity

has occurred primarily at depository institutions, where net mortgage
lending-particularly to finance the construction or purchase of homeshad fallen precipitously in the second quarter.
At commercial banks, net mortgage lending is estimated to have
grown in August at about the improved pace reached in July.

According

to the mid-August Senior Loan Officer Opinion Survey, the willingness of
banks to make mortgage loans had increased a bit between May and August,
particularly in the case of short-term construction and land development
loans.
At S&Ls, new mortgage commitments rose 60 percent in July, following a substantial rebound in June from the May trough.

Mortgage commit-

ments outstanding at S&Ls (including loans in process) also increased for
the second consecutive month, reaching $25 billion at the end of July; in
real terms (deflated by home prices), the commitments backlog recovered
to about the March level but remained a fourth below the recent highs of
last fall.

By early September, the proportion of S&Ls reporting mortgage

funds in short supply relative to normal seasonal patterns (FHLMC survey)
had fallen to 60 percent--the lowest ratio since the spring of 1979.
Average interest rates on new commitments for conventional home
loans at S&Ls, which bottomed out in July, have risen by about 3/4 of a
percentage point since early August.

Mortgage rates increased in all

areas of the country; in the West, the average rose by 1-1/4 percentage
points to 13-1/2 percent.

Mortgage yields in the secondary markets,

III-15

which turned up in mid-June along with bond rates, also have risen markedly in recent weeks.

With government-underwritten home loans and GNMA-

guaranteed passthrough securities selling at deep discounts in the
secondary markets, the Administration raised the ceiling for VA-guaranteed
as well as for level-payment FHA-insured home loans by 1/2 percentage
point to 12 percent, effective August 20.1

Even so, discounts in the

secondary markets were nearly 10 points in early September, posing substantial problems for borrowers and originators of FHA/VA loans (primarily
mortgage companies) and for sellers and builders of homes financed by
these credits.
Consumer Credit
Consumer installment credit outstanding contracted during July for
the fourth consecutive month.

However, it declined at only a 2-1/2 per-

cent annual rate, compared with more than 13 percent during May and June.
New extensions of installment credit rebounded during July, perhaps partly
a result of the Board's announcement on July 3 that the program of special
restraints on consumer credit was ending.
Finance rates on selected types of consumer credit at commercial banks were from 1 to 2 percentage points lower during early August
than in May.

Similarly, interest rates at major auto finance companies

began to come down during July after reaching a series high in June.
Data from the latest Senior Bank Loan Officer Opinion Survey suggested
greater bank willingness to extend consumer installment loans in
August than in May.

1. For the first time, a separate ceiling (12-1/2 percent) was established for FHA-insured graduated-payment home loans.

III-16
CONSUMER INSTALLMENT CREDIT 1

1980
1978

1979

Change in outstandings
Billions of dollars
Percent
Bank share (percent)

44.8
19.4
53.1

35.5
12.9
37.8

Extensions
Billions of dollars
Bank share (percent)

298.4
47.8

May

June

July

-35.5
-11.4
83.2

-41.2
-13.3
72.7

-41.6
-13.6
76.8

-7.3
-2.4
159.6

322.6
46.4

257.9
41.4

254.9
41.5

248.4
41.4

294.0
43.1

253.5

287.1

293.5

296.1

289.9

301.3

17.4

17.7

16.7

16.9

16.4

16.8

Change in outstandings
Billions of dollars
Percent

19.6
23.6

12.6
12.3

-14.9
-12.7

-16.1
-13.8

-20.9
-18.1

-1.1
-1.0

Extensions
Billions of dollars

89.0

91.9

62.8

62.3

57.2

Change in outstandings
Billions of dollars
Percent

7.8
20.7

8.1
17.9

-6.5
12.1

-5.8
-11.0

-9.0
-17.0

0.2
0.3

Extensions
Billions of dollars

104.6

120.8

120.1

121.1

115.6

126.3

Total

Liquidations
Billions of dollars
Ratio to disposable
income (percent)
Automobile credit

79.3

Revolving credit

1. Quarterly and monthly dollar figures and related percent changes are at
seasonally adjusted annual rates.

III-17

Indicators of household repayment difficulties continued to
climb through mid-summer.

The number of personal bankruptcy cases filed

reached a new high during July (see upper panel of chart on page 111-18),
continuing a 2-1/2 year uptrend that has accelerated this year under the
impact of recession and a revised federal bankruptcy statute more favorable to debtors.

By the end of June, installment loan delinquency rates

at commercial banks had risen to levels only slightly below the highs
reached in early 1975 (see lower panel of chart on page

III-18).

The overall financial standing of the consumer sector nevertheless has improved somewhat in other respects, judging from measures of
household income and balance sheet positions.

Since last fall, the aggre-

gate burden of repayments of mortgage and consumer installment credit has
dropped relative to disposable personal income.

At the same time, real

financial net worth per capita in the household sector has risen marginally, under economic conditions when it usually falls.

III-18

PERSONAL BANKRUPTCIES
(seasonally adjusted)
Cases per Month
(in thousands)
*

- 12

1975

1979

1978

1977

1976

19~O

COMERCIAL BAiK INSTALLMENT. CREDIT DELINQUENCY RATES
(percentage of loans delinquent 30 days or more)
Percent

3.0

Closed-end credit
2.5

'1
I
'I

V
2.0

1/%%/

I
I

Credit cards

I I II I II I Ijl
II. Ii11 I ii
II

1975

1.5

1976

*July data preliminary.

1977

1978

1979

1980

APPENDIX A
THE SENIOR LOAN OFFICER OPINION SURVEY ON BANK LENDING PRACTICES*

Responses to the August 15th Senior Loan Officer Opinion Survey on
Banking Lending Practices indicate a shift toward somewhat greater willingness to lend and toward some easing of non-price terms on business
loans since mid-May, after declines in willingness and tightening of nonprice terms reported in several preceding surveys.
In part, this shift
may have reflected the System's phase-out of both the marginal reserve
requirement on managed liabilities and the supplemental reserve requirement on large time deposits, which reduced the cost of funds to banks,
and the end of both the voluntary bank credit growth guidelines and the
special deposit requirements on increases in certain types of consumer
credit. At the time of the survey, market interest rates were at about
their levels of mid-May, although they had dropped below those levels
between survey dates. Over the same period, the prime rate declined
more than 5 percentage points, and the spread between the prime and the
commercial paper rate, which was extraordinarily wide at the time of
the previous survey, returned to more typical levels.
With the relative cost of bank credit declining and some non-price
terms easing, seasonally adjusted business loans resumed robust growth
by August after running off in the second quarter. Nevertheless, almost
one-half of the 120 respondents to the August survey reported an easing
of business loan demand since mid-May, while only 10 percent reported a
strengthening. 1 On the other hand, the proportion of respondents expecting weaker demand over the three months following the survey date declined
from two-thirds to one-quarter, and the fraction expecting stronger demand
rose somewhat.
For the first time since February 1978, respondents evinced somewhat greater willingness to make short-term fixed-rate loans. However,
continued uncertainty regarding long-run interest rate trends likely
prompted the further decline in respondents' willingness to offer fixed
rates on long-term loans.
A substantial minority of respondents reduced their compensating
balance requirements between surveys, while only a few increased them;
in contrast, earlier surveys indicated firmer or unchanged requirements.
Similarly, in August respondents on balance reported a slight easing of
standards to qualify for the prime rate or for a given spread above
prime, breaking the trend toward tighter standards.

* Prepared by Warren T. Trepeta, Economist, Banking Section, Division of
Research and Statistics.
1. Although the bulk of the August expansion in business loans occurred
early in the month, at the time of the survey banks may have discounted
this development as a temporary aberration.

Whereas respondents had reported stiffening their lending policies
toward new and nonlocal customers in earlier surveys, in August they
indicated an easier stance, especially toward new applicants. In addition, about one-fifth of respondents relaxed criteria applied to established and local customers; these criteria had remained virtually unchanged for quite some time.
Almost half of the respondents to the August survey indicated greater
willingness to make consumer installment loans, a substantial swing from
May, when about two-thirds indicated decreased willingness to make such
loans. Several respondents indicated that this shift was prompted by the
elimination of the special deposit requirement on increases in covered consumer credit. On balance, respondents expressed somewhat greater willingness to make most other types of loans, particularly secured construction
and land-development loans and participation loans with correspondents.
Exceptions, involving unchanged or slightly reduced willingness, included
residential mortgages and business loans with maturities exceeding five
years.

A-3
TABLE 1
SENIOR LOAN OFFICER OPINION SURVEY
BANK
ON
LENDING PRACTICES
AT SELECTED LARGE BANKS IN
U.S.
THE
(STATUS OF POLICY
ON AUGUST
15,
1980 COMPARED
TO
EARLIER)
MONTHS
THREE
(NUMBER
BANKS& PERCENT
OF
OF TOTAL BANKKSQUESTION)
ANSWERING

DEM

LOAN

AND

MODERATELY
STRONGER

MUCH

STRENGTH
COMMERCIAL
FOR
DEMAND
OF
(AFTER ALLOWANCE FOR
LOANS
INDUSTRIAL
BANKS USUAL SEASONAL VARIATION):
1.

EARLIER
MONTHS
THREE
TO
COMPARED

3MONTHS
NEXT
IN
DEMAND
ANTICIPATED

AND

EREST

RATE

STRONGER
BANKS

TO QUALIFY
PRIME
ABOVE
SPREAD
FOR

QUALIFY FOR PRIME
RATE

5.
6.

SHORT-TERM (UNDER
YEAR)
ONE
L0NG-TERM (ONE
LONGER)
OR
YEAR

PCT

FOR:

NEW CUSTOMERS

LOCAL SERVICE AREA CUSTOMERS

42.5

40.9

120

15.9

60.9

20.9

120

MUCH
FIRMER

MODERATELY

CUSTOMERS
AREA
SERVICE
NONLOCAL

ESSENTIALLY
UNCHANGED

MODERATELY

MUCH

BANKS

PCT

0.0

3.4

101

84.2

12.5

0.0

3.4

79.2

17.5

0.0

BANKS
3

PCT

PCT
3.

0.0

BANKS

PCT

MODERATELY
GREATER
BANKS

PCT

15.9

7.5

MODERATELY

10.

BANKS

10.0

BANKS

PCT

NONPRICE TERMS

ESTABLISHED CUSTOMERS

BANKS

LOAN
OF
LINES
CREDIT
REVIEWING
7.

PCT

0.0

CREDIT AVAILABILITY
AND
APPLICATIONS

BANKS

0.0

CONSIDERABLY
GREATER
WILLLINGNESS TO MAKE FIXED RATE LOANS:

BANKS
BANKS

BANKS

MODERATELY

P OLICY

STANDARDS
WORTHINESS:
CREDIT
OF

ESSENTIALLY
UNCHANGED

PCT

BANKS

PCT

ESSENTIALLY
UNCHANGED
BANKS
84
82

BANKS

PCT

BANKS

MODERATELY
LESS

PCT

MUCH
LESS

PCT

BANKS

PCT

70.0

8.4

2.5

68.1

10.0

14.2

ESSENTIALLY
UNCHANGED

MODERATELY
EASIER
BANKS

PCT

BA NKS

PCT

MUCH
EASIER
BANKS

PCT

BANKS

PCT

0.9

80.0

19.2

5.9

61.7

30.0

0.9

79.3

19.4

6.8

73.2

16.9

(

0.0

0
1

0.9
0.9

FOR:
REQUIREMENTS
BALANCE
COMPENSATIONG
11.

COMMERCIAL
LOANS
INDUSTRIAL
&

12.

LOANS TOCOMPANIES
FINANCE
CONSIDERABLY
GREATER

WILLINGNESS
LOANS:
OF
TYPES
OTHER
MAKE
TO
13.

BANKS
1

SECURED
DVLPMNT
LAND
&
CONSTRUCTION

PCT
0.9

MODERATELY
GREATER
BANKS
26

PCT
21.7

ESSENTIALLY
PCT

72.5

LESS

UNCHANGED
BANKS

BANKS
3

PCT
2.5

BANKS
3

SECURED
LOANS:
ESTATE
REAL

FAMILY

RESIDENTIAL
PROPERTIES

14.

1-4

15.

MULTI-FAMILY RESIDENTIAL PROPERTY

15.

COMMERCIAL
PROPERTY
INDUSTRIAL
&

17.

INSTALLMENT
INDIVIDUALS
TO
LOANS

COMMERCIAL
AND
18.

1-5

19.

OVER 5

20. LOANS
21. LOANS
TO
22.

OF:
LOANS
INDUSTRIAL

YEARS MATURITY

FINANCE

COMPANIES

SECURITIES
DEALERS
&
BROKERS

PARTICIPATION
WITH
LOANS
CORRESPONDENT BANKS

1
0

PCT

A-4
TABLE 2
CHANGES INBANK

COMPARITOSN
QUARTERLY
OF

(STATUS
ON
POLICY
OF
(NUMBER
EACH
ANSWERING
BANKS
OF

LENDING
PRACTICES AT BANKS GROUPED BY SIZE OF TOTAL DOMESTIC ASSETS
AUGUST
15, 1980 COMPAREDTO THREE MONTHS EARLIER)
QUESTION AS PERCENT
TOTAL
OF
ANSWERING QUESTION
BANKS
OF
NUMBER

SIZE
L

D O E A MN A

D
STMN52
0G

sT.1NW GTB oF DSAD FOP COIISECIAL AND
n:DSTInL LOAnS (IrT!2 AL,.OulIC
7FR
BANKS OSOtO S!ASONAL TlAIATIONI :

$5
f& T01

BANK

MODERATELT
STR201GZ

0WNDE
5

15
C OVR

TOTALDOMESTIC

U3DER
SS5

15
OVEt

UGDER
55

1/
BILLIONS
IN
ASSETS
BIL:35

1/
8 C2"

IODRAT LY

SSENT:1LI

C01!

."'C

23IDER

OuOIE

CONPAIED TO TEREE IOITHS ZARIZZE

100

ANTICIPATED DEMAID TI NEXT 3 BOTHRS

100

1C3

BODEISATEL
FM2B1s

IOCE
.'IR22

INTE2

I 1

STIIDAIIS

TO CUILTYI FOR

CUOAZIT

P 0 L

PRI
2

5
6 OVER

FOR SPREAD 1BOT8 PRINI

o1DEZ
S5

SOatT-zmR

LOIC-TIIE

[UwDE

Oni TAI)

ESTIBLISZED

IES CSTOES9S
LOCAL SERVIC1

10.

NOILOCAL SZTT.CZ

11.

COSBZCIIL

12.

LOAS

10 TIANICE

SECOREt

COIST2UCTIOI

100

OIE
15

Oon

C OT!

15
5 012!

100

L1SETTIll LLI
03cR0102 !D

01DER
$5

$5
& OVER

Ul DER
55

15
& OVE0

31RDA
IS

SOCH
EASIER

ODERtllTn.
1ASIER

$5
C OV7E

UlDER
15

OT15

UID'.S
I5

TOT&

CONSSID!EA8L!
LZSS

0C0RATZLI
LESS

in DOER
tsICB1AN11E
$5
01S
'15
6 OTZ1
C OTT
5

$5
100
100
UNDEP

TOT. L

85
01.1
OTE

15
100

100

10
10to

100

0
0

CONSIDETIBLT

MODERATILY

GRZATZE

GREATZ

6 OVER

TTPES

& 13D DILPHET

IIDER
15

5S
15
£ OVR
17

ISSENTI1LLYT
NC9AM2ED

aUDER
OOVER

S5
C OVEl

MODLERATI.

CONS:DEEABLT
LESS

LESS

NDOER
OVER
1
$5
C 01!!

S5
6 OTTE

S5
5

OUNDE
$5
3

15
5OVER

ONE
$

100

B1EALESTATE LOANS:
RESIDIETIAL VROPUIT:ZS

1-41?1AIT

SLTTI-pBILTIRSIDENTIAL PIaPERTY
CCBEWCIeL

INDOSTRIAL PROPErTT

ISSIlLlENT LOANS TO 2D0IT22:ALS

COM:lECI:

-9.

0ND 2
S5EI

CCSPAKIZS

16.

18.

$5
& 0T!!

s5
& OVER

UNDER
10E
IS1

95
35
O!

?OR:

15.

17.

0DOER
S5

.LT
:D

SsECS2

2s131IT1

GREATER

C IIDUSTRIAL L01NS

;ILLI2--GSS2 TO XAKZ OTHER
C? LCONS:
13.

.ODEAT&.-LT

AREA CUSTO3E1S

COIBPESIaING BILASCE 3OQUI2IT-IS

TOTAL

55
& OVER

1A21 CUSTOEBS

oWrES
5

FIBESE

CUSTOIERS

55
C OVrES

HODEIRAT2.

v A I L A a I L : T'
2 ! 3' S
ICE
P

IRE!T1 ING CSZDIT LiIES 01 LOAN
APPLICiitOUs ?ON:

O0DE1
5

15
C OVER

(ON1 TZEt 0! LCXGES)
I

C R I D I
I
11

D R1AT L01OS:

5
C OT73

GRETER

SA1! Fm

EASWIER

I1WCHAISED

COISIDErIlLI

VILIGIESS T0

UOCH

OD RAT.L

ESSZRNTILL

ESS:

ORTI2

f0 CREDIT

1-5
OVER

L AND I1DOSTIIAL LOANS Of:
1

TIARS RATlrI TT
5 TRI S
tC ?IllC

BITURITT
CosPISI2S

20.

LOINS

21.

LOAIS TC SECBTTTSSS

22. ?R'1RCIA2AON
CORSEIPCDEt

LCANS
T RAIKS

c DEALERS
C0OKRS

WITY

2!!21 51NKS 1A1T9RG DOZISTIC ASSETS OF $5 3::-1IOO1 0! IC2!. TRHEI COSBI!D 30-SS::: ASSETS.
, THiERT
1/ AS 0C STPT. 30, 1973
:N :LL:CNS, TOTALLED 1325. CSOBPEIMD O $511 .0 T28 ZWTIS! P? IL OF REPORTISNG RANKS AND 51198 FOR ALL IHSOE!D COMSMRSCAL 31

100

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets
The dollar has fluctuated in a fairly narrow range since the last
Greenbook.

As the top panel of the chart on the following page indicates,

the dollar's weighted-average value has declined by 1/2 percent over
this five-week interval.

Against most individual currencies the dollar

has in fact appreciated by amounts ranging from 1/2 percent to 1
percent; its decline on the weighted-average basis was mainly a consequence of strong performances by the Japanese yen and the pound
sterling.
period.

The yen appreciated by almost 4-1/4 percent during this
Sterling rose by 2 percent, and in early September reached

the $2.42 level, its highest rate since early 1975, before dropping
back somewhat.
Exchange market participants focussed mainly on current and
prospective interest-rate developments during the inter-meeting
period.

As shown on the bottom panel of the chart, U.S. three-

month rates generally moved upwards, and the weighted-average of
rates in

foreign centers generally eased downwards,

between them closing somewhat further.

with the gap

However, the mid-August

announcement of a large increase in the money supply,

indications

that U.S. economic activity may be recovering and high producer price
figures appear to have led to some worsening in market sentiment about
the U.S. inflation outlook.

Exchange markets have watched the federal

funds and other interest rates closely to discern Federal Reserve
policy.

While nominal interest rates have continued to rise,

IV-1

market

IV-2

March

WEIGHTED
AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR
Series

FOMC --

Aug.

84
May

June

September

August

July

Percent per annur
14

RATES
kly Series

13
_«

Weighted Average
S-

.. Foreign

Rate

S-.-

11
*10

8
7
May

June

July

August

September

IV-3

participants appear to be skeptical whether these increases are
enough to hold real interest rates steady.
In general the dollar has risen slightly or held steady against
those foreign currencies, such as the German mark, Canadian dollar, and
French franc, where dollar interest rates have risen relative to the
foreign level.

The strong upward surge in the pound sterling may

be partly attributable to a recent firming of U.K. interest rates,
but also seems to be a consequence of certain oil-related developments
and renewed Middle East interest in sterling-denominated assets.
In the period since the last Greenbook Japanese interest rates have
eased --

for instance, the discount rate was lowered in mid-August --

but by less than the market was reportedly expecting.

The appreciation

of the yen has been attributed mainly to increased purchases of yen
assets by OPEC countries.

The French franc was at the top of
the EMS alignment for much of this period, but more recently has been
displaced by the Netherlands guilder and Irish punt.

There are per-

sistent rumors that an EMS realignment will take place before the
end of the year, probably after the German elections in October.

IV-4

The Desk purchased a little over $730 million equivalent of
foreign currencies since the last Greenbook, of which about $670
million equivalent was German marks,

around $50 million equivalent

was French francs, and the remaining $10 million equivalent was Swiss
francs.

The System's share of the
mark purchases came to $400 million equivalent.

During this period

the System repaid $424 million equivalent in swap debt with the
Bundesbank, leaving $409 million equivalent in outstanding swap
drawings.

The French franc purchases were used by the System to

repay swap debt with the Bank of France, and $112 million equivalent
now remains outstanding on this line.
added to balances.

The Swiss franc purchases were

IV-5

OPEC surpluses and investment flows.

The OPEC current-account

surplus increased substantially further to an estimated $61 billion in
the first half of 1980, compared with $24 billion in the first half of
1979 and $41 billion in the second.

Oil exports of $142 billion in the

first half of this year were up 75 percent from a year earlier and
18 percent from the last half of 1979, reflecting increases in average
OPEC official oil prices of 91 percent and 35 percent, respectively, and
declines in export volume.

OPEC imports, which were almost unchanged in

1979, began to increase again this year, and in the first six months are
estimated to have been 50 percent higher than in the year-earlier period.
OPEC net payments for services and private and official transfers are
believed to have continued to rise.

However, in absolute terms the

increase in OPEC imports and net payments for current invisibles in the
first half, relative to a year earlier, was only $24 billion, compared
with a $63 billion rise in OPEC exports.
OPEC investments in the United States in the first half of this
year came to about $9 billion; last year there was net disinvestment of
nearly $1 billion in the United States in the first half and net inflows
of close to $8 billion in the second (despite the Iranian crisis).

The

identified direct flows to the United States in the first half of 1980
equalled about 15 percent of the OPEC current account surplus in the
period, a somewhat higher percentage than for last year as a whole but
lower than for the second half of last year.

About two-thirds of the

total flow to the United States so far this year has been into longerterm securities, including Treasury bonds and notes

($4.4 billion), other

IV-6

ESTIMATES OF OPEC CURRENT ACCOUNT AND EXTERNAL INVESTMENTS
(Billions of dollars)
1978
Year

1979
Year
1

H st H st H

1980
Q-1

Q-2

Current account
1.

Exports
(Oil)
(Non-oil)

Imports

3.
4.

Trade balance (1-2)
Net services and
private transfers
Public transfers
Current account balance
(3 + 4 + 5)

5.
6.

141

213

(130)

(201)

(11)
100
41

149
(142)
(7)
62
87

74
(71)
(3)
30
44

75
(71)

(12)
101
112

86
(81)
(5)
41
45

-36
-3

-42
-5

-19
-2

-24
-2

-12
-1

7.0

-. 9

9.11

6.31

8.2

.9
-1.6
-. 2

3.6
6.0
-. 5

3.1
3.2
01

1.0

2.6

1.9

1.8
.6

.8
.2

2.5
.1

1.8
.1

3.11
1.21

2.5
.6

1.91

1.9

(4)
32
43

External investments

In United States
a. Treas. bills & bank
liabilities
b. Other securities
c. Other 2

In United Kingdom
a. Liquid sterling
assets
b. Other

-1.3

In Germany (long-term)
a. Private sector
b. Public sector

In Eurocurrency market 3

Int'l. organizations

Subtotal
6.

Other investments plus
net borrowings 4

-2.2

2.4

1.0

31.*

31.2

4.4

-.4

23.41 12.4

-. 3

.61
.61
*1
11.01
.3

41.1

4.3

39.2

20.3

18.9

23.9

19.7

21.8

10.7

11.1

Numbers may not add to totals because of rounding.
Note:
1. Staff estimate.
2. Liabilities of nonbanks, non-security liabilities of the U.S. Government,
and direct investment.
3. Including domestic currency bank deposits ir, countries outside United
States and United Kingdom.
4.
Including credit to oil companies reflecting payments lag.
*
Less than $0.5 billion.

IV-7

bonds ($1.3 billion) and stocks ($0.2 billion), and all of the
der has gone into Treasury bills and bank liabilities.

remain-

This was in

contrast to the pattern for the year 1979, when net liquidations of
Treasury bonds and notes ($1.1 billion) offset modest purchases of other
bonds ($0.4 billion) and stocks ($0.6 billion).

Most of the movement in

the "other" category (see table) in the past 18 months has

reflected

declines in U.S. Government liabilities other than securities, e.g.,
against military sales contrasts; these fell $1 billion in 1979 and
$0.3 billion in the first quarter of 1980.
OPEC investments in the United Kingdom increased to $2.6 billion
in the first half of 1980, somewhat more than in the entire year 1979.
These investments, which were mainly concentrated in the first quarter,
consisted primarily of purchases of Government bonds ($0.9 billion) and
additions to sterling deposits ($1.4 billion).

In Germany, long-term

(over one year) investments by OPEC countries in the first quarter of
this year amounted to $2.5 billion, the main element of which was a
DM 3 billion ($1.7 billion) Saudi Arabian purchase of a special issue of
Government bonds in March.

Long-term OPEC flows to the German private

sector in the first quarter were very largely in the form of credits and
loans, amounting

to $0.5 billion, while such flows in 1978 and 1979

($1 billion in each year) also included considerable amounts of direct
investment and portfolio investment.

The flow to Germany was probably

substantially smaller in the second quarter.
The largest OPEC investment flow in the first quarter was
$12.4 billion into the Eurocurrency market, an amount $1 billion less
than the quarterly average in the second half of 1979.

This flow may

IV-8

have diminished in the second quarter.

About $22 billion, or slightly

more than one-third of the estimated current account surplus, may have
flowed into unidentified assets in the first half of the year.
this flow is known to have been to Japan.

Some of

In the third quarter, reports

suggest strongly that the flow to Japan became much larger; however,
there are no official statistics and market reports do not give a complete picture.

IV-9

U.S. International Transactions
In July, the U.S. merchandise trade deficit was significantly
smaller than in June and below recent quarterly averages.

While exports

were essentially unchanged from the annual rate in the second quarter,
imports declined by $26 billion (see table on next page).
A sharp drop in the volume of oil imports accounted for virtually
all of the change in imports.

The volume of imported oil dropped by

over 25 per cent compared to the second quarter average (see table).
While part of the sharp swing may be due to the high volatility of
monthly data, the July decline also reflected a leveling off in
seasonally adjusted petroleum stocks that began in June as well as a
continued reduction in consumption because of the recession and higher
prices.

The unit value for petroleum imports has increased just over
Although average OPEC crude oil contract

2 per cent since April.

price increases of 8 per cent occurred during May and June, a small
decline in the price of petroleum products (20 percent of petroleum
imports) has offset much of the effect of these increases on the
average oil import unit value.
Oil Imports*
(seasonally adjusted)

Volume
(Mil. barrels/day)

Price
($/BBL)

Value
(Bil. $ AR)

1980 - 1
2

8.42
7.44

28.06
30.85

86.4
84.0

April
May
June
July

6.43
8.24
7.55
5.51

30.59
30.94
31.01
31.34

72.0
93.3
85.7
63.1

*/ International accounts basis (include imports into the U.S.
Virgin Islands.)

IV-10

U.S. Merchandise Trade1
(in billions of dollars, seasonally adjusted annual rates)
1979
Year

,I1980
4Q

EXPORTS
Agric.
Nonagric.

182 1
35.4
146.6

188.8
37.5
151.3

200.9

2181.8

41.7

41.5
177.3

IMPORTS
Oil
Nonoil

211.5

217 .0

64.4
152.7

237.8
75.4
162.4

262 3

60.0

86.4
17 .9

249.3
84.0
165.3

-28.2

-36.9

-4.5

-30.1

-25.1

-27.6

-40.3

-19.8

151.5

BALANCE
Memo: 2 /
Census
Basis
Balance

-24.7

159.2

219.2
38.8

180.4

June*

Jul 4/

219.0

219.9

38.1
181.0

179.8

247.0

86.0
161.0

-15.0

40.1

223.2
63.1
160.0

-11.0

1/ International Account basis.

2/ International accounts basis data differ in magnitude from press
release Census basis data (f.a.s. value), but the direction of the
month-to-month changes are generally consistent.
3/ While international account basis deficits are generally larger than
Census basis deficits (primarily because Census data exclude oil
imports into the U.S. Virgin Islands), occasionally differing-seasonal
factors for separate commodities cause the international Accounts
deficit to be smaller. This happened in January and July 1980.
*

Monthly international accounts basis data are subject to considerable
revision.

IV-11

Non-oil imports were about unchanged from June levels but were
about 3 per cent lower than the second quarter average.

Imports of

industrial supplies eased during recent months, particularly paper,
textile supplies, chemicals, steel and nonferrous metals.
a reduction in volume more than offset rising prices.

For steel,

These declines

were partly offset by increases in imports of cars and trucks.
half of the automotive rise was in prices.

About

The volume of new car

imports has just kept ahead of sales as U.S. dealers worked to replenish
their very low stock positions.

While in July foreign car sales jumped

up strongly, in August sales have dropped back to second quarter rates.
The increase in agricultural exports in July was concentrated
in higher volumes of wheat and soybeans.

The value of nonagricultural

exports in July was about the same as in the second quarter, with
declines in industrial supplies being offset by increases in capital
goods, consumer goods, and automotive exports.
In international financial transactions, the outflow of funds
through banks that has been underway since spring continued through
late August, though at a somewhat reduced rate.

As shown in the

accompanying table, banking offices in the United States reduced their
net Eurodollar borrowings by more than $3 billion, on a daily average
basis, between June and July, and partial data for August indicate
further reductions.

This outflow of funds has been occurring as

foreign demands for bank credit (from both industrial countries and
developing countries) have remained strong relative to domestic credit
demand.

Net Eurodollar Borrowing (+) by Commercial Banks in the United States
(billions of dollars, daily average)

1979
0-3 0

1 9 8 0

Q-2
Q - 2

Total net Eurodollar
borrowings

30.1

217

- Domestic-chartered
banks' net position
with own foreign offices
- Foreign-related banks'
net position with directly
related institutions

SM1980
Anr.

6.0

24.3

23.4

22.8

20.5

20.9

May

June

232

15.1

2.7

-5.2

-8.1

-9.6

20.5

20.2

19.8

n.a.

July

Aug.

n.a.

IV-13
Eurodollar CDs issued by the London branches of U.S. banks have
fallen slightly between mid-April and mid-July after a year of rapid
increase (see table).

Over the previous year, such deposits had

grown rapidly as their yield advantage over domestic money market
instruments induced investment by U.S. purchasers (including money
market mutual funds).

As interest rates declined during the second

quarter, the yield advantage of reserve free offshore deposits
decreased.
Eurodollar CDs of Banking Offices in the United Kingdom
(billions of dollars, mid-month)

April
14.6

1979
July
17.9

Oct.
24.9

Jan.
26.1

1980
April
29.3

July
28.0

All other banks

13.5

14.3

16.5

17.6

19.2

20.9

Memo:
Domestic
Negotiable
CDs of Weekly
Reporting Banks

87.5

80.9

89.7

92.4

94.2

90.0

U.S. banks

During the second quarter of this year, when the prime rate was
unusually high relative to market rates, corporate treasurers
exercised their options under commitments and borrowed at the Eurodollar rate.

A 10 per cent reduction in foreign branch loans to U.S.

residents in recent weeks appears to reflect the narrowing of the
differential between the prime rate and other interesting rates.

IV-14

Foreign official reserve assets (excluding those of the OPEC
countries) in the United States rose by $5.8 billion during June and
July.

Most of this increase was accounted for by Japan ($2.1 billion).

Germany ($1.8 billion), and Belgium ($1.2 billion).

During August

there were large day-to-day changes in German official holdings in
the United States.

These swings were related to four mark-dollar

swaps by the Bundesbank with German commercial banks.

These swaps

were designed to influence domestic liquidity conditions within Germany
and did not alter the foreign currency position of the Bundesbank.
OPEC reserve holdings in the United :States rose by $3 billion
during June and July.

This increase brought to $7.3 billion the

cumulative increase in OPEC reserve holdings in the United States in
1980.

Of this increase, some $800 million represents the investment

of one OPEC country, through private placenents, in 3-7 year notes
of U.S. corporate borrowers.

In addition, OPEC reserve holdings at

the FRB-NY rose by almost $2 billion in August.
The bulge in the second quarter of "all other transactions and
statistical discrepancy" (line 21 in the U.S. International Transactions table) probably reflects a surge in capital transactions for
which we will not receive data.

However, at least in part, it reflects

certain unusual transactions that will be recorded in the complete
balance of payments accounts for the second quarter when they are
released later this month.

In particular, the loan to Ford by its

German subsidiary ($500 million), the completion of the Saudi Arabia
purchase of Aramco ($1.5 - $2 billion) and the increase in foreign
branch loans to U.S. nonbank residents ($2 billion) are the types of

IV-15

unusual financing activity

that are likely to be reported.

the unexplained capital

inflow will remain large by historical

However,
standards.

U.S. International Transactions
(in millions of dollars; receipts, or increase in liabilities, +)

RESTRICTED

1978
Year
1.
2.
3.

Trade Balance 1/
Merchandise exports
Merchandise imports

5.
6.

1980
QIV

May

1980
June

July

-3,927
18,083
22,010

-2.331
18,253
20.584

-277
18,322
18,599

-29.469
182,055
-211,524

-7,060
47,,798
-54, 258

-9.225
50,237
59,462

-10,875
54,708
65,583

-7.525
54,796
62,321

Change in net foreign positions of banking
offices in U.S. (excl. liab. to foreign official inst.)

-15,403

14,767

657

-5,016

8,975

-22,905

-6,524

-9,880

-2,952

Through interbank transactions with
a) Own offices in foreign countries
b) Unaffiliated banking offices in foreign countries

4,702
-4,725

20,733
3,783

-9

-2,321

6,442

7,119
2,788

-18,628
-1,854

-4,365
-1,386

-10,017
742

-1,618
1,147

-16,456

-12,002

-5,282

-3,664

-394

-3,372

-548

-2,480

-1,460

1,076

2,253

-19

1,313

-537

950

-225

1,876

-1,020

-909
929
1,689
-3,527

-3,445
274
1,037
-4,756

-1
-1,077
16
144
-2,137

-s58

1 ,58
585R

2.269

3.713

1 46o

9.
10.
11.
12.

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

13.

Foreign net purchases of U.S. Treasury obligations 2/

8 297

107

,10,

8
193
-1,159

351
1,999
-765

-700
211
408
-1,325

-493
r58
56
-491

-466
111
204
-781

609
135
175
299

-198

3.278

-1,227

-1-451

968

-463

-472

.397

(inc. by

Change
U.S.
assets
reserve
official
foreign
in

14.

1979
QIII

-33.759
142,054
-175,873

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

7.
8.

1979
Year

3.392

1,211
4,023
1,548

1,724
440
798

2,908
2,917
-434

2,562
191
639

-4,753
-2,643

5,146
1,636

2,591
371

4,894
494

2,639
953

-2.5354/

-452

-273

-26

26.027

9.706

6.344

15.
16.
17.

29,726
-1,170
2,682

-21,151
6,523
1,505

4,806
1,595
-795

-7,232
6,023
737

-10,689
3,262
31

8.
9.

By Type
U.S. Treasury securities
Other 3/

23,324
7,914

-17,974
4,851

6,181
-575

-3,609
3,137

662

-306

2,711

-399

15.902

27.835

-1.420

16.268

in U.S.

reserve assets (increase -)

Change

21.

All other transactions and statistical discrepancy

F---

7a92

5191

-13.123

20.

;

1 9h?

31.238

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

area)

;s~-

6.969

-~-----

-407

MEMO:

Current Account (bil. $ seasonally adj. annual rates)
1/
2/
3/
4/

-14.3

-. 8

International accounts basis, seasonally adjusted.
Includes U.S. Treasury notes publicly issued to private foreign residents.
Includes deposits in banks, commercial paper, bankers' acceptances, and borrowing under
Includes newly allocated SDR's of $1,150 million in January 1980.

-7.2

repurchases agreements.

-10.3

n.a.

IV - 17

Foreign Economic Developments.

The external accounts of the major

foreign industrial countries continue to reflect
oil-price increases.

the effects

of the 1979

four of the six major foreign industrial countries,

the annualized Cand seasonally adjusted) trade balances for the first
half of 1980 were substantially less than their 1979 trade balances.

France and Italy, the negative shifts have been particularly dramatic -some $11-12 billion.
quite large available,

In Japan and Germany, the shifts also have been

about $8 billion

and $3 billion,

respectively.

the data for July indicate that this

accounts has continued.

weakness in

Where

external

Of the six major foreign countries, only the

United Kingdom and Canada have experienced a

strengthening in

their trade

balances this year, and these two countries represent the two major
foreign industrial countries that are largely independent of (net) oil
imports.

These two countries also have experienced substantially slower

growth in real GDP than have most of their major trading partners.
The developments in the external accounts have occurred within the
context of a general pattern of weakening economic activity

the second

quarter along with some evidence of a deceleration in inflation rates.
In

each of the major foreign industrial countries other than Japan,

industrial production Cs.a.)
in

Japan it

fell in the second quarter of 1980, and

increased only 0.2 percent.

exhibit fewer signs of weakness,

The smaller industrial countries

but there are some indications that

economic activity is slowing in these countries as well.
Individual Country Notes.
slowdown in

activity

In recent weeks, signs of a significant

Japan have become increasingly evident.

Newly

released national income statistics revealed that real GNP rose by only

IV - 18

2.5 percent (s.a.a.r.)

percent rate achieved in

quarter and the government's official

the first

percent for the fiscal year beginning in the second

target rate of 4.8
quarter of 1980.

the second quarter, well below both the 7.2

Although exports and private fixed investment provided

some strength to the economy,
during the quarter,

private consumption remained virtually flat

while government expenditure fell by 2.5 percent.

These trends appear to have continued into the third quarter.
production declined slightly in

Industrial

July; the average for the three months

ending in July is below that for the previous three months by almost 2
percent (s.a.).
Recent price developments continue to show an easing of inflationary
pressure.

The wholesale price index in the three months since April, has

moved upward only marginally, while the August CPI declined by 0.2 percent.
In reaction to the weakening economy,

the government announced on

September 5 a modest package of measures intended to stimulate the
economy,

including a step-up in the phasing of government expenditure.

This followed the 0.75 percentage point reduction in the Japanese discount
rate announced on August 19.
The current-account deficit
$1.5 billion, as exports (in
rapidly than did imports.
the first

seven months is

s.a.) expanded slightly in July to

dollar terms) contracted somewhat more

The cumulative

current-account deficit for

almost $11 billion.

growth in Japan's export markets,

In part because of slower

export volume seems to have slowed

somewhat from its remarkable pace of 8.5 percent, s.a., in the second
quarter, but, nevertheless, export volume still appears to be moving
ahead strongly.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 16, 1980 : Greenbook Part 2

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