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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Content last modified 6/05/2009. CONFIDENTIAL (FR) CLASS II - FOMC September 16, 1977 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS THE DOMESTIC NONFINANCIAL ECONOMY Page Industrial production............... ...... .......... . 1 1........ Capacity utilization in manufacturing......................... 2 Personal income..... ..... .. .... .. ........... . ... .. .... ..... Retail trade inventories................. ...... ....... ...... . 3 3 TABLE: Industrial production. ................ ............... .. 2 THE DOMESTIC FINANCIAL ECONOMY TABLE: Interest rates.. ..... .. . .. ...... .... ...... .. .............. 5 ERRATA Part I... . .......... ............ . ...... .. ........ . .. Part II........ . ..... ......... ................. .... . .... 4 4 APPENDIX Changes in bank lending practices.............................. A-i SUPPLEMENTAL NOTES The Domestic Nonfinancial Economy Industrial production declined 0.5 per cent in August to 138.2 per cent of the 1967 average. This reduction in output was concentrated in auto production and electric utility power generation-both of which had increased very sharply in July, but declines in output were widespread among other products and materials. production, The drop in the first since the weather-related reduction in January 1977, was largely associated with the declines in employment and a generally shortened workweek in manufacturing industries in August and, to a limited extent, with effects of increased strike activity. Output of consumer goods declined markedly last month. Production of durable goods fell 1.7 per cent, as auto assemblies seasonally adjusted, dropped to a 9.4 million unit annual rate after allowance for model changeover; this drop followed the very high 10.0 million unit annual rate of assemblies in July. Production of home goods such as appliances and furniture decreased slightly in August. Output of consumer nondurables declined 0.7 per cent, following a large rise in the preceding month. Production of business equipment last month was reduced 0.4 per cent, after several months of relatively large advances. Output of durable goods materials declined slightly in August, as small increases in raw steel and equipment parts were more than offset by strike-reduced iron ore production. materials production was almost unchanged. Nondurable - 2 - INDUSTRIAL PRODUCTION (seasonally adjusted) May 1977 June July (p) Aug. (e) Per cent changes Month Year QI to Oil ago ago Total 137.0 137.9 138.9 138.2 - .5 5.3 2.5 Products, total 136.5 137.5 138.8 137.9 - .7 6.0 2.0 Final products Consumer goods Durable goods Nondurable goods Business equipment 134.7 143.1 152.2 139.5 148.9 135.5 143.7 155.5 139.0 150.3 136.9 145.5 158.1 140.5 151.6 135.7 144.1 155.5 139.5 151.0 - .9 -1.0 -1.7 - .7 - .4 6.0 5.2 7.8 3.9 9.7 2,2 1.5 3.4 .7 3.7 Intermediate products Construction supplies 143.5 138.7 144.5 139.2 145.9 140.4 145.8 140.6 - .1 .1 5.3 4.2 1.1 1.7 137.8 138.5 138.9 138.7 - .2 4.3 3.4 Indexes, 1967=100 Materials p -- e -- preliminary estimated Capacity utilization in manufacturing declined in August to 82.7 per cent from a revised 83.2 per cent in July, the first monthly reduction since January. Most of the decline reflects curtailments of production in the advance processing sector, particularly in nonelectrical machinery and transportation equipment. Slowdowns in primary processing industries producing nondurable goods also contributed to the over-all decline. The materials capacity utilization rate decreased marginally in August to 82.7 per cent. This rate now stands about I percentage point above its level one year earlier and remains about 10 percentage points below its 1973 peak. - 3- Personal income rose $8.0 billion, or at a 6-1/4 per cent annual rate, in August to a seasonally adjusted annual rate of $1,547.2 billion. Wage and salary disbursements rose at a 2.6 per cent annual rate last month; this was a considerably smaller rise than in recent months and reflects the smaller increase in employment and the generally shortened workweek in August. Payrolls in manufacturing declined because of the cutbacks in employment and workweek. A sizeable increase in government payrolls reflected a rise in public service employment at the State and local level. Rental income increased sharply last month, following the decline in July because of losses from flood damage. Income of farm proprietors declined sharply because of lower prices for farm products. The book value of retail trade inventories rose at a $14.7 billion annual rate in July (p)--fractionally above the June rate and up a bit from the almost $12 billion rate of increase in the first half of the year. Durable goods stocks increased at a $13.3 billion annual rate in July--triple the June pace and considerably above the $4.9 billion January-June rate. Automotive store inventories rose $8.7 billion in July--the most rapid gain since last August; excluding automotive, durables were up at a $4.6 billion annual rate--about double the pace of the first half. The rate of accumulation at nondurable goods stores slowed sharply in July ($1.4 billion) following the very rapid rates of increase in the spring. -4- The book value of all manufacturing and trade inventories rose at a $23.0 billion annual rate in July, appreciably less than the $32.7 billion rate in the first half of the year. Nondurable goods stocks which had been growing quite rapidly in the February-May period declined at a $3.0 billion annual rate in July; this decline was mainly in the wholesale farm products for which prices have been dropping for the last four months. The ratio of inventories to sales increased to 1.49 in July from 1.47 in June, largely reflecting a decline in total business sales. This ratio remains well below the 1966-76 average of 1.55 and the very high levels seen in 1974-75, although it has been rising steadily since reaching an eleven year low point in March. The Domestic Financial Economy No textual addendums to the Greenbook were required, but the usual updating of interest rate developments is contained in the table on page 5. ERRATA Part I: Page I-1, line 10: Part II: Page II-3: "two-fifths" should read "one-fifth." The following should follow the last line on the page--"further declines in farm proprietors' income. However, gains in wage and" -5INTEREST RATES (One day quotes--in per cent) 1977 1977 Aug. 15 Sept. 15 Highs Lows 6.05(9/14) 4.47(1/5) 5.94(8/17) 6.05(9/14) 5.90(9/13) 6.20(9/15) 6.20(9/14) 6.75(9/14) 4.39(4/28) 4.63(1/10) 4.66(1/3) 4.88(1/5) 5.54 5.88 5.99 6.50 5.87 6.20 6.20(9/14) 6.63 6.00(9/14) 4.50(1/5) 5.65(8/10) 6.00(9/14) 6.10(9/13) 6.25(9/15) 4.54(1/3) 4.63(1/7) 5.93 5.90 6.05 6.25 6.40(9/14) 4.65(1/5) 5.98(8/10) 6.40(9/14) 6.20(9/12) 4.66(1/3) 6.09 6.13 6.45(9/14) 3.30(8/19) 5.00(1/5) 6.10(8/10) 2.65(1/7) 3.20(8/12) 6.45(9/14) 3.10(9/16) 6.89(8/16) 7.35(5/11) 5.73(1/3) 6.50(1/3) 7.20(1/3) 6.88 7.33 7.72 6.82 7.20 7.56 8.13(3/14) 9.18(2/25) 8.34(5/18) 8.33(5/4) 7.87(1/5) 8.77(9/9) 7.90(1/5) 8.00 8.81 8.07(8/12) 7.95(1/5) 8.05(8/12) 7.89(9/14) 8.79(9/14) 8.0 9 p(9/1 6 ) 8.07p(9/16) 5.93(2/2 5.55(6/16) 5.63(8/11) 5.51 8.79(5/31) 8.46(1/12) 8.75(8/8) 8.74(9/5) Short-Term Rates Federal funds (wkly. avg.) 3-month Treasury bills (bid) Comm. paper (90-119 days) Bankers' acceptances Euro-dollars CD's (NYC) 90 days Most often quoted new 6-month Treasury bills (bid) Comm. paper (4-6 mos.) CD's (NYC) 180 days Most often quoted new 1-year Treasury bills (bid) CD's (NYC) Most often quoted new Prime municipals Intermediate- and Long-Term Treasury (constant maturity) 3-year 7-year 20-year Corporate Seasoned Aaa Baa Aaa Utility New Issue Recently Offered 7.80(5/11) Municipal Bond Buyer Index Mortgage--average yield in FNMA auction A-1 APPENDIX A* CHANGES III BANK LENDING PRACTICES According to nearly half of the 121 senior lending officers of large banks that responded on the Lending Practices Survey taken in August, business loan demand had strengthened over the three months ending in August, fulfilling the expectations expressed on the previous survey taken in May. A majority of respondents (55 per cent) anticipated that business loan demand would strengthen further in the coming months, somewhat lower than the two-thirds of respondents expecting stronger loan demand in the spring survey. Changes in price and nonprice terms of lending were mixed, but on balance the survey suggests a continuation of the easing in nonprice terms which began early in 1976. The prime rate charged by major banks was raised shortly after both the May and August surveys and in a climate of rising rates, almost one-fifth of the panel in August reported firmer policies on interest rates charged. However, some of the bankers (10 per cent) reported easier rate policies, presumably meaning that the spread between the prime rate and loan rates to nonprime borrowers was lowered. Some firming of rates on loans to finance companies was also reported. On nonprice terms, 13 per cent of the respondents reported less stringent compensating balance requirements for their business customers, continuing the trend toward ease which became quite pronounced in the fourth quarter of last year when business demand for bank loans began to turn up. However, the most recent survey of lending practices shows that 5 per cent of the major banks are pressing business borrowers and finance companies a little harder for compensating balances. A similar pattern is apparent in bank policies regarding the maturity of term loans; most of the changes in policy in the August survey were in the direction of easing but a noticable minority of the lending officers reported that their banks were becoming more restrictive on the maturity of term loans. For established customers in the respondents' market area, almost all the respondents indicated that policies toward commitments and loan applications were either unchanged or were changed toward increased accommodation. Same easing was also reported toward new customers and borrowers located out of the banks' usual service area, but an appreciable minority of banks--more than those reporting easing--indicated that they had tightened approval standards for loans and commitments from new or nonlocal customers. Consumer instalment and single family mortgage lending remain very popular uses of funds at the survey banks, and some 15 per cent of the respondents reported that their banks had allocated more funds toward such lending. Participation loans with correspondents were also cited by 10 per cent of the respondents as loans toward which their banks had become more favorably disposed. *Prepared by Paul W. Boltz, Economist, Banking Section, Division of Research and Statistics. The results of the August Lending Practices Survey were, then, in broad outline similar to those taken over the preceding year, except that in previous surveys there were few, if any, signs of tightening of nonprice terms of lending. The most recent survey confirms a continuation of unchanged or easier lending policies at the large majority of banks, but a few banks took some moves toward firming of lending practices. TABLE NOT FOR QUOTATION OR PUBLICATION (STATUS OF PAGE 01 1 QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE U.S. 1/ COMPARED TO THREE MONTHS EARLIER) AUGUST 15, 1977 POLICY ON (NUMBER OF BANKS & PERCENT OF TOTAL BANKS REPORTING) MUCH STRONGER TOTAL BANKS PCT BANKS PCT MODERATELY STRONGER ESSENTIALLY UNCHANGED MODERATELY WEAKER BANKS BANKS BANKS PCT PCT PCT MUCH WEAKER BANKS PCT STRENGTH OF DEMAND FOR COMMERCIAL AND INDUSTRIAL LOANS (AFTER ALLOWANCE FOR BANK'S USUAL SEASONAL VARIATION) COMPARED TO THREE 121 MONTHS AGO ANTICIPATED DEMAND IN NEXT 3 MONTHS 100.0 54 44.6 59 46.8 7 5.6 0 0.0 121 100.0 66 54.5 54 44.7 0 0.0 0 0.0 MUCH FIRMER POLICY ANSWERING QUESTION BANKS PCT BANKS PCT MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATELY EASIER POLICY BANKS BANKS BANKS PCT PCT PCT LENDING TO NONFINANCIAL BUSINESSES TERMS AND CONDITIONS: 100.0 17.4 71.9 100.0 5.0 81.0 STANDARDS OF CREUIT WORTHINESS 100.0 2.5 95.0 MATURITY OF TERM LOANS 100.0 5.0 81.0 ESTABLISHED CUSTOMERS 100.0 0.8 95.1 4.1 NEW CUSTOMERS 100.0 6.6 89.3 4.1 100.0 0.0 93.4 5.6 100.0 9.1 83.5 6.6 INTEREST RATES CHARGED COMPENSATING OR SUPPORTING BALANCES 9.9 13.2 1.7 1i.4 REVIEWING CREDIT LINES OR LOAN APPLICATIONS LOCAL SERVICE AREA CUSTOMERS NONLOCAL SERVICE AREA CUSTOMERS 1/ SURVEY OF LENDING PRACTICES AS OF AUGUST 15, 1977. AT 121 LARGE BANKS REPORTING IN THE FEDERAL RESERVE QUARTERLY INTEREST RATE SURVEY MUCH EASIER POLICY BANKS PCT NOT 1 TABLE FOR QUOTATION OR PUBLICATION ANSWERING QUESTION BANKS PCT MUCH FIRMER POLICY BANKS PAGE 02 (CONTINUED) PCT MODERATELY FIRMER POLICY BANKS PCT ESSENTIALLY UNCHANGED POLICY MODERATELY EASIER POLICY BANKS BANKS PCT PCT MUCH EASIER POLICY BANKS PCT FACTORS RELATING TO APPLICANT 2/ VALUE AS DEPOSITOR OR SOURCE OF COLLATERAL BUSINESS 121 100.0 105 86.6 INTENDED USE OF THE LOAN 121 100.0 120 99.2 100.0 110 90.9 COMPENSATING OR SUPPORTING BALANCES 100.0 115 95.0 ENFORCEMENT OF BALANCE REQUIREMENTS 100.0 110 90.9 ESTABLISHING NEW OR LARGER CREDIT LINES 100.0 115 95.0 LENDING TO "NONCAPTIVE" FINANCE COMPANIES TERMS AND CONDITIONS: INTEREST 4 RATES CHARGED ANSWERING QUESTION BANKS PCT CONSIDERABLY LESS WILLING BANKS PCT MODERATELY LESS WILLING BANKS PCT ESSENTIALLY UNCHANGED BANKS PCT MODERATELY MORE WILLING PCT BANKS CONSIDERABLY MORE WILLING BANKS PCT WILLINGNESS TO MAKE OTHER TYPES OF LOANS TERM LOANS TO BUSINESSES 121 100.0 0 0.0 3 2.5 96 79.3 22 18.2 0 0.0 CONSUMER INSTALMENT LOANS 120 100.0 0 0.0 1 0.8 101 84.2 1d 15.0 0 0.0 120 100.0 0 0.0 5 4.2 96 80.0 16 13.3 3 2.5 119 100.0 0 0.0 5 4.2 110 92.5 3 2.5 1 0.8 ALL OTHER MORTGAGE LOANS 120 100.0 0 0.0 4 3.3 105 87.6 10 8.3 1 0.8 PARTICIPATION LOANS WITH CORRESPONDENT BANKS 121 100.0 1 0.8 0 0.0 106 87.7 13 10.7 1 0.8 LOANS TO BROKERS 121 100.0 1 0.8 7 5.8 102 84.3 10 8.3 1 0.8 SINGLE FAMILY MORTGAGE LOANS MULTI-FAMILY MORTGAGE 2/ LOANS FOR THESE FACTORS, FIRMER MEANS THE FACTORS WERE CONSIDERED MORE IMPORTANT CREDIT REQUESTS, AND EASIER MEANS THEY WERE LESS IMPORTANT. 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