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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) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee September 17, 1971 By the Staff Board of Governors of the Federal Reserve System SUPPLEMENTAL NOTES The Domestic Economy Housing starts. Seasonally adjusted private housing starts, which had already eclipsed the 2.2 million annual rate in July, edged higher in August as a 4 per cent further expansion for single family units offset a moderate dip in multifamily starts from the sharply accelerated pace registered in July. A factor in the stronger than expected August performance may have been the additional support available for subsidized starts under prevailing programs at this early stage of the new fiscal year. In the South, where reliance on such programs has tended to be most marked, starts showed a particularly strong further surge and accounted for an exceptional 45 per cent share of the total, compared with not much more than 40 per cent in most other recent years. Given the advanced level of commitments outstanding in recent months and the extremely high rate of building permits in August, indications are that starts in September may hold near the record summer pace, for a third quarter average at least moderately higher than the 2.1 million annual rate projected initially. With mobile home shipments in July running well above a 500,000 annual rate, this raises the possibility of a third-quarter "shelter" count in excess of the 2.7 million unit mark, or more than two-thirds above the low in the first quarter of 1970. -2- PRIVATE HOUSING STARTS AND PERMITS (Seasonally adjusted annual rates, in thousands of units) Starts Total 1/ 1970 - Annual Per Cent Single-family Per Cent 2/ FHA-insured(FHA Series) Permits 1,434 57 29 1,324 IIQ IIIQ 1,286 1,512 58 56 28 28 1,257 1,358 IQ 1,777 58 35 1,593 IQ 1,813 55 24 1,608 IIQ (r) 1,962 58 22 1,805 June (r) 2,000 59 24 1,847 July (r) August (p) 2,215 2,228 53 55 22 n.a. 2,052 2,008 1970 1971 1971 1/ Apart from starts, mobile home shipments for domestic use in July--the latest month for which data are available--advanced to a record seasonally adjusted annual rate of 531,000. This was more than a tenth above the expanded second quarter average. 2/ Based on unadjusted totals for all periods. FHA-insured starts include both subsidized and nonsubsidized units. -3- Personal income. Personal income advanced $8.8 billion in August to $868 billion (annual rate), with wage and salary disbursements accounting for $6.6 billion of the increase following little change in the previous month. In the government sector, most of the gain re- flected the $300 per employee one-time bonus payment to postal workers amounting to about $2.0 billion and another $0.5 billion to a pay raise. In the private sector, manufacturing payrolls increased $0.6 billion after declining in July, and in distributive industries rose $1.6 billion after showing no increase the previous month. Nonfarm payroll employment was about unchanged in August and payroll increases were due to higher hourly earnings and longer average weekly hours. Farm income rose again, by $0.9 billion, to $17.0 billion. PERSONAL INCOME Seasonally adjusted, annual rate, billions of dollars 1971 June Total Wage and salary disb. Net Change July-August July August 870.1 859.2 868.0 8.8 574.8 574.7 581.3 6.6 Government 123.0 123.6 126.7 3.1 Private Manufacturing Distributive Services Other 451.8 162.4 138.6 105.7 45.1 451.1 161.4 138.6 106.3 44.8 454.6 162.0 140.2 107.3 45.1 3.5 .6 1.6 1.0 .3 Transfer payments Other income 109.0 217.7 96.2 219.8 96.5 221.7 .3 1.9 -4- The Domestic Financial Situation Demand Deposit Ownership. Preliminary estimates of changes in demand deposit ownership in August suggest that reductions in balances held by businesses were primarily responsible for the marked slowing in the growth rate of the money supply during August. As may be seen in the table, nonfinancial business balances dropped much more sharply during August of this year than last year to account for most of the larger decline in total IPC demand deposits this year. Changes in other ownership categories were essestially similar to those which occurred last year. These developments would appear generally consistent with those explanations for the slower growth in money in August which contended that dollar outflows, stimulated by the foreign exchange adjustment process, were responsible for a significant part of the slowdown in money growth, since it had been assumed that nonfinancial businesses would be responsible for most of the dollar outflow. CHANGES IN OWNERSHIP OF GROSS IPC DEMAND DEPOSITS AT WEEKLY REPORTING BANKS (In $ billion, not seasonally adjusted) August 1970 Financial business - August 1971 .9 -1.0 Nonfinancial business -- -1.7 Consumer - - .1 Foreign All other TOTAL - .2 - .5 - -1.5 -3.2 .5 -5- INTEREST RATES Highs Lows 1971 Aug. 23 Sept. 16 Short-Term Rates Federal funds (weekly averages) 5.59 (9/15) 3-month 5.53 Treasury bills (bid) Bankers' acceptances 5.62 10.00 Euro-dollars Federal agencies 5.70 5.62 Finance paper CD's (prime NYC) Most often quoted new issue 5.75 Secondary market 6.05 6-month Treasury bills (bid) Bankers' acceptances Commercial paper (4-6 months) Federal agencies CD's (prime NYC) Most often quoted new issue Secondary market (7/19) 3.29 (3/10) 5.59 (8/18) 5.59 (9/15) (3/11) 4.75 (3/10) 5.62 4.82 (8/16) 3.22 3.88 4.94 3.27 3.62 (8/11) (8/18) 3.62 (3/24) 5.50 (8/18) 5.62 3.80 (3/17) 5.87 (8/18) 5.68 (8/23) (8/17) (7/30) (3/17) 8.70 (2/24) 4.84 (3/15) 5.38 4.85 5.50 8.11 5.23 5.38 5.75 (8/23) 5.88 (8/18) 6.02 (7/30) 3.35 (3/11) 4.00 (3/10) 4.00 (3/29) 3.53 (3/10) 6.00 (8/11) 6.40 (8/18) 4.00 (3/24) 5.62 (8/18) 5.75 3.70 (3/3) 6.15 (8/18) 6.22 5.84 (7/27) 1-year 6.01 (7/28) Treasury bills (bid) CD's (prime NYC) Most often quoted new issue 6.25 (8/11) Prime municipals 3.60 (8/12) 5.75 (e) 5.62 5.15 3.45 (3/11) 5.27 5.00 5.62 5.75 5.24 5.19 4.38 (3/3) 5.88 (8/18) 5.75 2.15 (3/24) 3.00 3.10 Intermediate and Long-Term Treasury coupon issues 5-years 20-years 6.56 (6/15) 4.74 (3/22) 6.33 5.69 (3/23) 6.22 6.13 6.08 Corporate Seasoned Aaa Baa 7.71 (8/13) 8.93 (1/5) 7.05 (2/16) 7.50 8.33 (2/25) 8.68 7.46 8.62 8.23 (5/20) 6.76 (1/29) 6.23 (6/24) 5.90 (6/30) 5.00 (3/18) 5.49 (8/18) 5.38 4.75 (2/11) 5.15 (8/18) 5.10 8.07 (7/26) 7,3 2 (4/12) New Issue Aaa Municipal Bond Buyer Index Moody's Aaa Mortgage--implicit yield in FNMA auction 1/ 7.03 (8/10) 7.33 (8/18) 7.56 - 7.88 (9/7) Yield on 3-month forward commitment after all owance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year e--estimated. loan amortized over 15 years. -6- International Developments Foreign exchange. Foreign exchange markets have been very quiet with little change in rates since September 15. The market's attention had been turned toward the G-10 meetings in London for some indication of the likely course of events in the international monetary arena in the near future. SPOT EXCHANGE RATES IN THE NEW YORK MARKET (Expressed as a Per cent over Par Values as of May, 1970) Aug. Sterling 13 Aug. 20 Aug. 27 Sept 3 Sept 10 Sept 17 .8 2.7 2.9 2.5 2.5 3.0 Canadian dollar 6.9 7.0 7.0 6.6 6.4 6.7 DM 8.2 6.8 7.6 8.1 8.2 8.7 Swiss franc 7.8 9.8 10.2 9.4 9.6 9.8 Dutch guilder 4.7 4.3 5.2 4.5 5.2 5.7 French franc commercial .8 .8 .8 .8 .6 .7 .8 3.3 4.9 3.8 4.0 financial Belgian franc commercial .9 2.0 3.6 3.8 3.7 4.4 financial 2.5 n.a. 3.5 3.7 3.7 4.4 Italian lira .8 3.1 2.2 1.8 1.8 1.9 .7 .7 6.4 6.5 6.7 Japanese yen* .7 * Quotes are from Tokyo market. There was little observable market reaction to press reports that the meetings of September 15-16 had ended without movement toward a resolution of the present impasse. -7- CORRECTIONS: Attached are Greenbook pages II-C-1 and II-C-2 inadvertently left out of the Greenbook. Page 11-22 footnote 2 should be SA (seasonally adjusted), not SAAR as indicated. GNP tables pages 11-6 and II-7 should be re-numbered II-7 and II-8. II-C-1 ECONOMIC DEVELOPMENTS - UNITED STATES 9/14/71 SEASONALLY ADJUSTED, RATIO SCALE BILS GNP INCREASE EMPLOYMENT BASIS ESTAB MILUONS OF PERSONS ANNUAL RATE, ARITHMETIC SCALE i CURRENT $ G1 205 AUG 706 S65 , ,I 1 II 11I 70 NONAGRICULTURAL 20 19 MANUFACTURING -18 AUG 185 PER ANNUAL RATE, ARITHMETIC SCALE HOURS 1958 $ - 42 WORKWEEK-MFG. - AUG 399 1 1969 1969 1969 1969 1971 1971 INDUSTRIAL PRODUCTION - I 40 1971 1967=100 -140 CONSUMER GOODS JULY1159 sTTOTAL JULY 1060 I l lI II I I I I I Ill II II 1969 HOUSING ANNUAL RATES,MILUONS OF UNITS STARTS JULY 222 SvPERMITS S9JULY 207 1969 1971 II-C-2 ECONOMIC DEVELOPMENTS - UNITED STATES 9/14/71 SEASONALLY ADJUSTED, RATIO SCALE MIL S PRICES AND COSTS BUSINESS INVESTMENT PLANT AND EQUIPMENT OUTLAYS ANNUAL RATE QZ 8242 MFG. NEW ORDERS JULY CAPITAL EQUIPMENT 1969 MANUFACTURERS' INVENTORIES RATIO TO UNFILLED ORDERS CAPITAL EOUIPMENT/ JULY 81 IMPORTS AUG 18 1.0 1969 1971 1971 PERCENT A - 1 SUPPLEMENTAL APPENDIX A QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES* Few responses to the August Survey of Bank Lending Practices, taken just before the President's announcement of sweeping new economic measures, indicated any dramatic changes in nonprice terms of lending. However, there were reports of firmer policies regarding compensating balances. Reflecting adjustments in the prime rate, firmer conditions concerning Indications also were given of a moderate interest rates were widespread. pick-up in loan demand over the summer months. Loans to Nonfinancial Business Overall, about a third of the respondents experienced some (See strengthening of demand for commercial and industrial loans since May. In addition, more than half of the respondents expected further Table 1.) moderate strengthening in the upcoming quarter, while tnere were virtually no expectations of any fall-off in demand. 1/ Corresponding to the changes in the prime rate during the preceding three months, interest rates at most banks were raised on loans to businesses. Citing the increased cost of funds as a partial cause for the move, about a fifth of the participants raised their compensating balance requirements. Some banks indicated a retrenchment in their accomodation of new and nonlocal customers, while accomodations of local established borrowers did not change significantly over the period. conscious applicant important indicated Bankers' reviews of credit applications reflected a more qualityFor a number of respondents, the value of the loan attitude. as a depositor or source of collateral business became a more A few of the comments that were offered determining factor. a greater selectivity in those designated as "prime" customers. Loans to Finance Companies Lending terms for finance companies, shown in Table 1, also tightened over the summer months--though to a lesser extent than the Only about a third of the banks tightening for nonfinancial businesses. raised their interest rates for finance companies, and enforcement of In the May Survey, most balance requirements increased to some extent. Preliminary statistical tests of previous Lending Practices Surveys, however, indicate that respondents have not been successful in forecasting growth in loan volume. * - Prepared by Marilyn Barron, Research Assistant, Banking Section, Division of Research and Statistics. 1/ A -2 banks had moved to somewhat easier lending policies, Survey the net responses indicated some firming. but in the current Other Types of Loans Bankers were more willing to make other types of loans than previously. They seemed to be particularly interested in making consumer installment loans, as well as mortgages on single-family dwellings. Other Factors Variations in responses by size of banks were mixed. (See Table 2.) More of the banks with deposits of less than $1 billion had adopted a firmer policy in reviewing the value of the customer as a depositor and as Larger banks also showed a somewhat a source of collateral business. greater willingness to extend single-and multi-family mortgage credits. Some regional variations, displayed in Table 3, were evident in the participants' responses. Banks in the New York and Boston Districts were not as firm with respect to interest rates as other banks throughout the country. Firmer policies on interest rates were displayed at West Coast banks than were typical for the nation as a whole, although some respondents at these banks told of holding the line on rates on consumer credit and mortgages. A-3 PAGE 01 TABLE 1 NOT FOR QUOTATION OR PUBLICATION QUARTERLY SURVEY OF CHANGES IN BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE U.S. 1/ COMPARED TO THREE MONTHS EARLIER) AUGUST 13, 1971 (STATUS OF 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 WEAKED BANKS PCT STRENGTH OF DEMAND FOR COMMERCIAL AND INDUSTRIAL LOANS (AFTER ALLOWANCE FOR BANK'S USUAL SEASONAL VARIATION) COMPARED TO THREE MONTHS AGO ANTICIPATED DEMAND IN NEXT 3 MONTHS 125 100.0 38 30.4 69 55.2 16 12.8 125 100.0 65 52.0 58 46.4 1 0.8 ANSWERING QUESTION BANKS PCT MUCH FIRMER POLICY BANKS PCT MODERATELY FIRMER POLICY BANKS PCT ESSENTIALLY UNCHANGED DOLICY MODERATELY EASIER POLICY BANKS BANKS PCT PCT LENDING TO NONFINANCIAL BUSINESSES TERMS AND CONDITIONS: INTEREST RATES CHARGED 100.0 2.4 63.2 33.6 COMPENSATING OR SUPPORTING BALANCES 100.0 0.0 22.4 76.0 STANDARDS OF CREDIT WORTHINESS 100.0 1.6 9.6 88.8 MATURITY OF TERM LOANS 100.0 0.0 6.4 88.C ESTABLISHED CUSTOMERS 100.0 0.0 4.8 90.4 4.8 NEW CUSTOMERS 100.0 1.6 9.6 79.2 9.6 100.0 0.0 4.8 90.4 4.8 100.0 1.6 11.4 81.3 5.7 REVIEWING CREDIT LINES OR LOAN APPLICATIONS LOCAL SERVICE AREA CUSTOMERS NONLOCAL SERVICE AREA CUSTOMERS 1/ SURVEY OF LENDING PRACTICES AT 125 LARGE BANKS REPORTING IN THE FEDERAL RESERVE CUARTERLY INTEREST RATE SURVEY AUGUST 13, 1971. AS OF MUCH FASIER POLICY BANKS PCT A -4 DAGE 02 TABLE 1 (CONTINUED) NOT FOR QUOTATION OR PUBLICATION MUCH FIRMER POLICY ANSWERING QUESTION PCT BANKS BANKS PCT MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODEIATELY EASIEQ POLICY BANKS BANKS BANKS PCT PCT PCT MUCH EASIE POLICY BANKS PCT FACTORS RELATING TO APPLICANT 2/ VALUE AS DEPOSITCR OR SOURCE OF COLLATERAL BUSINESS 124 100.0 20 1o.1 99 79.9 INTENDED USE OF THE LOAN 125 100.0 10 9.0 111 88.8 INTEREST RATES CHARGED 100.0 39 31.2 66.4 0.8 COMPENSATING OR SUPPORTING BALANCES 100.0 11 8.8 89.6 C.8 ENFORCEMENT OF BALANCE REQUIREMENTS 100.0 15 12.0 85.6 1.6 ESTABLISHING NEW OR LARGER CREDIT LINES 100.0 18 14.4 71.2 LENDING TO "NONCAPTIVE" FINANCE COMPANIES TERMS AND CONDITIONS: ANSWERING QUESTION BANKS PCT CONSIDERABLY LESS WILLING BANKS PCT MODERATELY LESS WILLING ESSENTIALLY UNCHANGED BANKS BANKS PCT PCT 12.0 MODEBATELY MORE WILLING BANKS PCT WILLINGNESS TO MAKE OTHER TYPES OF LOANS TERM LOANS TO BUSINESSES 100.0 99 79.8 13.7 CONSUMER INSTALMENT LOANS 100.0 91 74.0 21.1 SINGLE FAMILY MORTGAGE LOANS 100.0 91 74.6 18.0 MULTI-FAMILY MORTGAGE LOANS 100.0 106 67.6 5.8 ALL OTHER MORTGAGE LOANS 100.0 103 84.4 7.4 PARTICIPATION LOANS WITH CORRESPONDENT BANKS 122 100.0 0.0 107 87.7 LOANS TO BROKERS 121 100.0 0.0 106 87.6 21 FOR THESE FACTORS, FIRMER MEANS THE FACTORS WERE CONSIDERED MORE rocniT QFlIIFrTr. ANn FASIER MEANS THEY WERE LESS IMPORTANT. IMPORTANT IN MAKING DECISIONS FOR APPROVING CONSIDERABLY MORE WILLING RANKS PCT A-5 PAGE TABLE 2 NOT FOR QUOTATION OR PUBLICATION COMPARISON OF QUARTERLY CHANGES IN BANK LENDING PRACTICES AT BANKS GROUPED BY SIZE OF TOTAL DEPOSITS AUGUST 13, 1971, COMPARED TO THREE MONTHS EARLIER) (STATUS OF POLICY ON (NUMBER OF BANKS IN EACH COLUMN AS PER CENT OF TOTAL BANKS ANSWERING QUESTION) SIZE TOTAL $1 & OVER UNDER $1 OF BANK MUCH STRONGER $I G OVER UNDER $1 -- TOTAL DEPOSITS IN 1/ BILLIONS MOCFRATELY STRONGER ESSENTIALLY UNCHANGED MODERATELY WEAKER $1 £ OVER S &t UNDEP OVER $1 $1 & OVER UNDER $1 C3 UNDER st MUCH WEAKER $1 & OVER UNDFe $l STRENGTH OF DEMAND FOR COMMERCIAL AND INDUSTRIAL LOANS (AFTER ALLOWANCE FOR BANK'S USUAL SEA'SONAL VARIATION) COMPARED TO THREE MONTHS ANTICIPATED AGO DEMAND IN NEXT 3 MONTHS 100 100 57 54 11 100 100 52 43 0 TOTAL $1 E OVER UNDER $1 MUCH FIRMER $1 t OVER UNDER $1 MODERATELY FIRMER $1 & OVER UNDER $1 ESSENTIALLY UNCHANGED MODERATELY WEAKER $1 & OVER $1 & OVER UNDER $1 UNDER $1 MUCH WEAKER sl & OVER LENDING TO NONFINANCIAL BUSINESSES TERMS AND CONDITIONS: INTEREST RATES CHARGED 100 100 COMPENSATING OR SUPPORTING BALANCES 100 100 STANDARDS OF CREDIT WORTHINESS 100 10C MATURITY OF TERM LOANS 100 100 ESTABLISHED CUSTOMERS 100 100 NEW CUSTOMERS 100 100 LOCAL SERVICE AREA CUSTOMERS 100 100 NONLOCAL SERVICE AREA CUSTOMERS 100 100 REVIEWING CREDIT LINES OR LOAN APPLICATIONS 54 LARGE BANKS (DEPOSITS OF $I BILLION OR MORE) AND 1/ SURVEY OF LENDING PRACTICES AT $1 BILLION) REPORTING IN THE FEDERAL RESERVE QUARTERLY INTEREST RATE SURVEY AS OF 71 SMALL BANKS (DEPOSITS OF LESS THAN AUGUST 13, 1971. UNDER $1 NOT FOR QUOTATION OR PUBLICATION TABLE 2 OF BANK MUCH FIRMER POLICY SIZE NUMBER ANSWERING QUESTION $I C OVER FACTORS RELATING TO APPLICANT UNDER $1 100 100 INTENDED USE OF 100 100 100 100 BALANCES 100 100 BALANCE REQUIREMENTS 100 100 100 100 LENDING TERMS UNDER $1 -- TOTAL DEPOSITS IN BILLIONS MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATELY EASIER P"LICY $1 & OVER $1 & OVER $1 & OVFR UNDER $1 LOAN TO "NONCAPTIVE" FINANCE UNDER $1 UNDER $1 MUCH EASI PL ICY it E OVER L4'aF il COMPANIES AND CONDITIONS: INTEREST RATES CHARGED COMPENSATING OR ENFORCEMENT OF SUPPORTING ESTABLISHING NEW OR LARGER CREDIT LINES NUMBER ANSWERING QUESTION CONSIDERABLY LESS WILLING MODERATELY LESS WILLING ESSENTIALLY UNCHANGED $1 & OVER I$ & OVER MODERATELY MJRE WILLING $1 E OVER UNDER $1 TERM LOANS TO BUSINESSES 100 100 CONSUMER INSTALMENT LOANS 100 100 SINGLE FAMILY MORTGAGE LOANS 100 100 MULTI-FAMILY MORTGAGE LOANS 100 100 ALL OTHER MORTGAGE LOANS 100 100 PARTICIPATION LOANS WITH CORRESPONDENT BANKS 100 100 2 6 8 9 LOANS TO BROKERS 100 100 6 4 6 9 $1 & OVER UNDER $1 UNDER $1 UNDER 11 $1 C OVER UNDER SL WILLINGNESS TO MAKE OTHER TYPES OF LOANS 2/ 04 2/ VALUE AS DEPOSITOR OR SOURCE OF COLLATERAL BUSINESS THE Sl E OVER PAGE (CONTINUED) 0 0 FOR THESE FACTORS, FIRMER MEANS THE FACTORS WERE CONSIDERED MORE IMPORTANT IN MAKING DECISIONS FOR APPROVING CREDIT REQUESTS, AND EASIER MEANS THEY WERE LESS IMPORTANT. CONSIDERABLY MORE WILLING $1 & OVER UNDFR Il A - 7 NOT FOR QUOTATION OR PUBLICATION QUARTERLY TABLE SURVEY OF CHANGES IN STATUS OF POLICY ON ALL DSTS BOSTON 3 PAGE 05 BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE AUGUST 13, 1971 COMPARED TO THREE MONTHS EARLIER INUMBER OF BANKS) NFW YORK TOTAL CITY OUTSIDE PHILADEL. CLEVELAND RICHMIND ATLAN- CHICTA AGO U.S. ST. LnUIS 1/ MINNEAPOLIS KANS. CITY DAL IAS AN FRAN STRENGTH OF DEMAND FOR CCMMERCIAL AND INDUSTRIAL LOANS (AFTER ALLOWANCE FOR BANK'S USUAL SEASONAL VARIATION) COMPARED TO 3 MONTHS AGO 125 MUCH STRONGER MODERATELY STRONGER ESSENTIALLY UNCHANGED MODERATELY WEAKER MUCH WEAKER 1 38 69 16 I 0 0 7 1 0 0 5 14 1 0 0 2 7 0 0 0 3 7 1 0 0 3 2 0 1 0 1 6 4 0 0 4 5 3 0 0 5 5 0 0 1 7 6 1 0 0 2 5 2 0 1 2 0 0 3 6 0 0 00 3 4 2 0 4 7 ? 0 ANTICIPATED DEMAND NEXT THREE MONTHS 125 MUCH STRONGER MODERATELY STRONGER ESSENTIALLY UNCHANGED MODERATELY WEAKER MUCH WEAKER 1 65 58 1 0 0 3 5 0 0 0 11 8 1 0 0 6 3 0 0 0 5 5 1 0 0 5 1 0 0 0 4 7 0 0 0 9 3 0 0 1 7 2 0 0 0 7 9 0 0 0 6 3 0 0 O 1 2 0 0 0 5 4 0 0 0 3 6 0 0 0 4 9 0 0 0 4 4 0 0 0 8 12 0 0 0 3 6 0 0 0 5 6 0 0 1 3 1 1 0 0 10 1 0 0 0 9 3 0 0 1 7 2 0 0 1 8 6 0 0 0 6 3 0 0 0 3 0 0 0 0 6 3 0 0 5 4 0 0 0 10 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 28 95 2 0 0 8 0 0 4 16 0 0 2 7 0 0 2 9 0 0 2 3 1 0 2 9 0 0 3 8 1 0 4 6 0 0 3 12 0 0 1 8 0 0 0 3 0 0 2 7 0 0 4 5 3 10 0 0 0 LENDING TO NONFINANCIAL BUSINESSES TERMS AND CONDITIONS INTEREST RATES CHARGED MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY COMPENSATING BALANCES MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY 125 3 79 42 1 0 0 125 1/ SURVEY OF LENDING PRACTICES AT 125 LARGE BANKS REPORTING IN THE FEDERAL RESERVE QUARTERLY INTEREST RATE SURVEY AS OF AUGUST 13, 1971. 0 NOT FOR QUOTATION OR PUBLICATION TABLE ALL DSTS BOSNEW YORK TON TOTAL CITY OUTSIDE 3 °AGE C6 (CONTINUED) PHILADEL. CLEVELAND RICHMOND ATLAN- CHICST. TA AGO LOUIS MINNFAPOLIS KANS. CITY DALLAS SAN FPAN LENDING TO NONFINANCIAL BUSINESSES TERMS AND CONDITIONS STANDARDS OF CREDIT WORTHINESS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MOOERATLEY EASIER POLICY MUCH EASIER POLICY MATURITY OF TERM LOANS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY 125 2 12 111 0 O 0 0 8 0 0 0 1 19 C C 0 1 8 O 0 0 0 11 O 0 0 0 6 0 O 0 0 11 0 O 0 2 10 C 0 0 3 7 O 0 0 2 13 0 0 1 0 H 0 0 0 0 3 O 0 0 2 7 S 0 0 1 P 0 0 1 1 11 0 0 0 0 8 0 O C 0 19 1 0 0 0 9 0 0 0 0 10 1 O 0 0 6 0 0 0 0 11 0 0 0 2 10 0 0 0 3 7 0 0 0 1 14 0 0 0 0 6 3 0 0 0 3 0 0 0 0 7 2 0 0 1 7 1 0 0 1 12 0 0 0 1 7 0 0 0 0 19 1 0 0 0 9 0 0 0 0 10 1 0 0 0 5 1 0 0 1 10 0 0 0 0 10 2 0 0 2 8 0 0 0 0 15 0 0 0 0 9 0 0 0 0 .3 0 0 0 0 7 2 0 0 0 9 C C 0 2 11 C C 0 1 7 0 0 0 0 17 3 0 0 0 9 0 0 0 0 8 3 0 0 5 1 0 0 1 8 2 0 0 1 10 1 0 1 2 7 0 0 0 1 13 1 0 0 0 8 1 0 0 0 3 0 0 0 1 7 1 0 0 1 7 1 0 1 4 7 1 0 0 1 7 0 0 0 0 18 1 0 0 0 9 0 0 0 0 9 1 0 0 0 5 1 0 0 1 10 0 0 0 0 11 1 0 0 2 8 0 0 0 0 15 0 0 0 0 8 1 0 0 0 3 0 0 0 1 6 2 0 0 0 9 0 0 0 1 12 0 C 125 0 8 110 7 0 REVIEWING CREDIT LINES OR LOANS ESTABLISHED CUSTOMERS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED-POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY NEW CUSTOMERS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY LOCAL SERVICE AREA CUSTOMERS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY 125 0 6 113 6 0 125 2 12 99 12 0 124 0 6 112 6 0 A -9 NOT FOR QUOTATION OR TABLE PUBLICATION ALL DSTS NEW YORK BOSTON TOTAL CITY OUTSIDE 3 PAGE 07 (CONTINUED) PHILADEL. CLEVE- RICHLAND MOND ST. ATLAN- CHICLOUIS TA AGO MINNE- KANS. CITY APOLIS LENDING TO NONFINANCIAL BUSINESSES REVIEWING CREDIT LINES OR LOANS NONLOCAL SERVICE AREA CUST MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY FACTORS RELATING TO APPLICANT 2/ VALUE AS DEPOSITOR OR SOURCE OF COLLATERAL BUSINESS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY INTENDED USE CF LGAN MUCH FIRMER POLICY MODERATELY FIRMER,POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY LENDING TO "NONCAPTIVE" FINANCE COMPANIES TERMS AND CONDITIONS INTEREST RATES CHARGED MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY 2/ FOR THESE FACTORS, FIRMER MEANS THE FACTORS WERE CONSIDERED MORE IMPORTANT IN MAKING DECISIONS FOR APPROVING CREDIT REQUESTS, AND EASIER MEANS THEY WERE LESS IMPORTANT. DALLAS SAN FRAN A - 10 TABLE NOT FOR QUOTATION OR PUBLICATION ALL DSTS WILLINGNESS TO MAKE TYPES OF LOANS SINGLE FAMILY MORTGAGE MULTIFAMILY MORTGAGE LOANS LOANS CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING ALL OTHER MORTGAGE LOANS CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING PARTICIPATION LOANS CORRESPONDENT BANKS TO BROKERS CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING BANKS PHILADEL. CLEVE- RICHLAND MONO ST. ATLAN- CHICTA AGO LOUIS MINNE- KANS. APOLIS CITY OALLAS SAN FRAN 122 0 8 91 22 1 121 1 6 106 7 I 122 0 9 103 9 1 WITH CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING NUMBER OF PAGE 09 (CONTINUED) OTHER CONSIDERABLY LESS WILLING MODERATLEY LESS NILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING LOANS BOSNEW YORK TON TOTAL CITY OUTSIDE 3 122 0 5 107 10 0 121 0 6 106 9 0 125 0 0 7 1 0 0 0 17 2 0 0 0 8 .0 0 0 0 9 2 0 0 0 6 0 0 0 0 10 l 1 0 0 0 11 I 1 0 2 0 1 0 1 0 0 0 0 0 0 0 0 0 A - 11 NOT FOR QUOTATION OR PUBLICATION PAGE 09 TABLE 3 (CONTINUED) ALL DSTS BOSTON NEW YORK TOTAL CITY OUTSIDE PHILADEL. CLEVE- RICHLAND MONO ATLAN- CHICST. TA AGO LOUIS MINNF- KANS. APOLIS CITY DALLAS SAN FRAN LENDING TO "NONCAPTIVE" FINANCE COMPANIES TERMS AND CONDITIONS: SIZE OF COMPENSATING BALANCES MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY ENFORCEMENT OF BALANCE REQUIREMENT MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY ESTABLISHING NEW OR LARGER CREDIT LINFS MUCH FIRMER POLICY MODERATELY FIRMER POLICY ESSENTIALLY UNCHANGED POLICY MODERATLEY EASIER POLICY MUCH EASIER POLICY 125 1 11 112 1 0 0 0 8 0 0 0 0 20 0 0 0 0 9 0 0 0 0 11 0 0 0 1 4 1 0 0 0 11 0 0 0 2 10 0 0 1 1 8 0 0 0 3 12 0 0 0 0 9 0 0 0 0 3 0 0 0 1 8 0 0 0 1 8 0 0 0 2 11 0 0 0 0 8 0 0 0 2 18 0 0 0 0 9 0 0 0 2 9 0 0 0 0 5 1 0 0 1 9 1 0 0 2 10 0 0 1 1 8 0 0 0 4 11 0 0 0 0 9 0 0 0 0 3 0 C 0 1 8 C C 0 2 7 0 0 0 2 11 0 0 0 0 7 1 0 0 2 17 1 0 0 0 9 0 0 0 2 8 1 0 0 0 3 3 0 0 10 1 1 2 9 0 1 1 0 4 7 4 0 0 1 6 2 0 0 3 0 0 C 1 7 1 0 0 2 6 1 1 5 6 1 3 0 0 6 2 0 0 0 15 4 0 0 0 8 0 0 0 7 4 0 0 0 3 0 0 0 0 7 2 0 0 1 6 2 0 0 3 9 1 0 0 7 1 0 0 0 11 6 1 0 0 5 2 0 0 0 7 2 0 0 0 7 2 0 0 0 9 3 1 125 1 15 107 2 0 125 3 18 89 15 0 0 0 8 0 0 0 0 WILLINGNESS TO MAKE OTHER TYPES OF LOANS TERM LOANS TO BUSINESSES CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGEC MODERATELY MORE WILLING CONSIDERABLY MORE WILLING CONSUMER INSTALMENT LOANS CONSIDERABLY LESS WILLING MODERATLEY LESS WILLING ESSENTIALLY UNCHANGED MODERATELY MORE WILLING CONSIDERABLY MORE WILLING 124 0 8 99 17 0 0 0 0 9 2 0 5 1 0 0 0 10 2 0 2 7 1 0 2 13 0 0 0 0 0 0 9 0 0 0 0 123 0 2 91 26 4 0 0 6 4 1 0 0 4 1 1 0 0 9 2 0 0 0 10 2 0 0 2 7 1 0 0 10 5 0 0 0 7 1 1 0 0 0 3 0 0 0 CONFIDENTIAL (FR) Supplemental Appendix B STATE AND LOCAL GOVERNMENT LONG-TERM BORROWING ANTICIPATIONS AND REALIZATIONS: Summary-Fiscal Year 1971* The four FRB-Census quarterly surveys of State and local government long-term borrowing anticipations and realizations for fiscal year 1971 indicate that this sector was able substantially to fulfill its borrowing plans; financial markets thus did not act as a barrier to their capital spending.1/ A record volume of $23 billion in long-term tax-exempt issues was floated during this period which had generally been characterized by sharply declining interest rates and by strong demands for municipal securities by commercial banks. Actual borrowing fell only about $700 million below reported anticipations, in distinct contrast to the nearly $10 billion of net borrowing shortfalls in fiscal 1970.2/ Actual and Anticipated Long-Term Borrowing State and Local Governments#/ Fiscal 1965-1972 $ Billions 25 5 SActual 20 Anticipated - - 15 15 10 i0 I 1965 #/ 20 1966 1967 1968 1969 Fiscal Year -10 10 1970 1971 1972 Actual borrowing for fiscal years 1970 and 1971 is the sum of that part of borrowing plans successfully accomplished plus borrowing above reported plans. * Prepared by Paul Schneiderman, Economist, Capital Markets Section, Division of Research and Statistics. (Footnotes 1 and 2 are on the following page) CONFIDENTIAL (FR) Table 1 ANTICIPATED AND ACTUAL LONG-TERM BORROWING BY STATE AND LOCAL GOVERNMENTS BY TYPE OF UNIT Fiscal Year 1971 (Billions of Dollars) Local Govt. Anticipated borrowing1/ City or Special School All State Types Govt. Total County Town District District 23.80 8.34 15.46 1.79 6.77 2.56 4.34 2.05 .08 .96 .04 .97 Net shortfall in borrowing 2 / .74 Actual borrowing 23.06 9.65 13.41 1.71 5.81 2.52 3.37 .97 1.16 .87 .96 .86 .98 .78 (1.31)- Ratio of actual to planned 1/ Based upon anticipations surveys. 2/ 3/ Based upon realizations surveys, the net borrowing short-fall accountsfor borrowing below planned levels offset by borrowing above originally planned levels. Parentheses indicates borrowing above plans. Deviations from Borrowing Plans As indicated in Table 1, borrowing by the State and local sector was equal to 97 per cent of their reported borrowing plans (Footnotes 1 and 2 from page B1 ) 1/ The quarterly patterns of anticipations and realizations are analyzed individually in the appendix to the December 9, 1970 Green Book and in the appendices to the April 2, June 4, and August 20, 1971 Supplements. The results presented here correct for double counting. For example, the same borrowing may have been postponed in more than one quarter, or anticipations, if unrealized may have been pushed forward to a subsequent quarter. Here they are only counted once. The reported anticipations are based upon plans formulated at the beginning of fiscal year 1971 with allowance made for successive revaluations of such plans as the year progressed. 2/ Net borrowing shortfalls are actual shortfalls from updated plans (gross) less borrowing above reported plans. Gross shortfalls from reported plans in fiscal 1971 were $5.8 billion; borrowing above reported plans was $5.1 billion. B-3 CONFIDENTIAL (FR) during fiscal 1971. State units borrowed well above plans in response to what they viewed as favorable market conditions. Local governments shared this favorable borrowing experience, with the noticeable exception of school districts. Lacking the financial flexibility to take advantage of improved market conditions, and facing voter rejection of financings in light of a growing burden of taxes, school districts were able to realize only three fourths of their plans. Interest rate behavior induced one third of their net borrowing setbacks as did bond election defeats. Taxpayer reaction against adding to already high levels of debt service affected cities as well. Table 2 indicates the quarterly pattern of interest rate induced long-term borrowing postponements and cancellations. Gross borrowing setbacks3/ during fiscal 1971 of $1.14 billion amounted to less than one quarter of the cutbacks induced by the unfavorable market conditions prevailing throughout the previous fiscal year. Interest rate ceilings no longer were the borrowing constraint they represented during much of fiscal 1970. With many ceilings raised or suspended and with generally lower interest costs, rate ceilings accounted for no more than At the same time, almost ninety $150 million in gross borrowing setbacks. per cent of the interest rate induced gross, long-term borrowing postponements and cancellations were accounted for by units that felt interest rates were either too high or would fall significantly in the near future. On the other hand, other units viewed interest rate movements already sufficiently attractive to bring about $780 million to market above planned levels. The falling level of yields and expectations of higher yields respectively accounted for 70 per cent and 30 per cent of the amount such accelerations represented above anticipations. The resultant affect of interest rate induced behavior was a net shortfall of $360 million for the year. Effects of Borrowing Setbacks As an alternative to long-term financing of capital projects, units which could not or would not meet borrowing plans as originally scheduled turned to a number of alternatives to maintain levels of spending. Table 3 presents the distribution of such alternatives after allowing for borrowing postponed because of delays in the projects and not associated with problems of financing. The use of short-term borrowing as a temporary expedient in the financing of capital projects reflects the general trend of State and local use of short-term debt in anticipation of pending permanent financing or tax revenues. 3/ These borrowing setbacks are calculated by netting from quarterly shortfalls subsequently reinstated long-term borrowing as shown in Table 2. B-4 Table 2 LONG-TERM BORROWING BEHAVIOR INDUCED BY THE BEHAVIOR OF INTEREST RATES Fiscal Year 1971 (Billions of Dollars) Fiscal 1970 Fiscal 1971 1) Gross shortfalls in borrowing initiated for interest rate reasons as reported quarterly 7.37 1.84 .60 .45 .45 .34 2) Sale of offerings postponed in earlier quarters for interest rate reasons 2.21 .70 -- .11 .34 .25 3) Actual gross shortfall in borrowing induced by interest rate effects 5.16 1.14 .60 .34 .11 .09 Borrowing Experience Q3 Calendar 1970 4 Calendar 1971 Q1 Q2 4) Borrowing above plans induced by interest rates n.a. .78 .08 .34 .15 .21 5) Net interest rate induced shortfalls from (accelerations above) borrowing plans n.a. .36 .52 .00 (.04) (.12) CONFIDENTIAL (FR) As might be expected, capital spending reductions initiated as a result of borrowing setbacks induced by interest rate factors were minimal during fiscal 1971. Altogether they totaled less than $150 million, 10 per cent as much as for the previous year. Fiscal 1972 The borrowing outlook for fiscal 1972 is quite strong. In fact, survey units have already reported long-term borrowing anticipations above $20 billion. Judging from past experience, this amount will likely increase as the year progresses, unless market conditions become adverse. Table 3 LONG-TERM BORROWING SHORTFALLS OF FINANCING ALTERNATIVE MEANS Fiscal Year 1971 All Shortfalls Millions of Dollars Short-term Borrowing Per Cent Interest Rate Induced Shortfalls Millions of Dollars Per Cent 2,032 56.3 193 60.9 Use of Liquid Assets 784 21.7 122 38.5 Postpone Other Cash Outlays 342 9.5 2 0.6 Other 449 12.5 Total 3,607 100.0 317 100.0 Note: Delays in projects to be financed equaled $3.06 billion APPENDIX C FISCAL MEASURES CONTAINED IN THE "NEW ECONOMIC POLICY"* The fiscal incentives included in the New Economic Policy announced by the President on August 15 are intended to provide added stimulus to the private sector economy while temporarily slowing the growth of the public sector. To evaluate the overall impact of the President's new program, the effects of the wage-price measures and the impact of the whole policy package on consumer and business confidence would need to be added to the specific effects of the more active fiscal policy proposals. Such an overall evaluation-with possible effects on the consumer saving rate--is not attempted here. By itself the proposed fiscal package (excluding the import surcharge) appears to be moderately stimulative through the second quarter of 1972, and thereafter the impact appears to grow to more significant proportions. The import surcharge is excluded from the above analysis. Although it will raise Federal revenue, its restraining effects are more likely to fall on foreigners than on domestic production. Since the dollar magnitudes are about in balance, some analysts outside of government have suggested that the impact on private income and spending of the proposed tax cuts would be about offset by the proposed reduction in outlays. There is, however, no easy way to compare the dollar effects of programs that change incentives--such as the repeal of the excise tax on autos that would reduce the price of cars, and the investment tax credit--with cuts in government spending and with personal income tax cuts. As far as the expenditure cuts are concerned staff estimates suggest that the President's program includes some reductions in expenditures that would have been unlikely in any event. Furthermore, present indications are that the offset to the tax incentives arising from the recommended expenditure cuts will diminish somewhat in the second half of calendar 1972 because the spending cuts would be attained primarily through temporary postponement of planned expenditures, and because of the lagged effects of the tax cuts, particularly the investment tax credit. I. The Fiscal Program The Treasury's latest estimates indicate that the proposed tax cuts--all of which require Congressional approval--would reduce Federal revenues in the current fiscal year by $5.8 billion. The 10 per cent surcharge could offset as much as $2.0 billion of this * Prepared by W. Beeman, economist, Government Finance Section. -C2 Table I ADMINISTRATION ESTIMATE OF THE INITIAL IMPACT ON THE UNIFIED BUDGET OF FISCAL AND OTHER MEASURES PROPOSED BY THE PRESIDENT ON AUGUST 15th, (Billions of dollars) Fiscal Year 1972 A. Receipts Total Receipts, January Budget Document Reductions due to lower income assumptions and actions taken prior to NEP 1/ Total Receipts Without NEP Reductions due to NEP Investment tax credit Accelerated personal tax cuts Auto excise repeal Revenue increase from Import surcharge 217.6 -9.3 208.3 -5.8 2.7 .9 2.2 New Estimate of Total Receipts B. Outlays Total Outlay January Budget Document Additions to spending plans, due to overruns and Congressional action +2.0 204.5 229.2 7.7 Estimate of Outlays prior to NEP Reductions due to NEP Postponement of federal pay increase 1.3 Deferral of general revenue sharing2/ 1.1 Cut in federal employment .8 Deferral of welfare reform .6 Cut in foreign aid .2 Deferral of some special revenue sharing3/.5 Cut in HUD 4/ .3 Other .1 236.9 -4.9 New Estimate of Total Outlays 232.0 1/ Of this reduction, $2.5 billion is accounted for by postponement of the wage base increase until 1972 and $.3 billion by inclusion of public utility firms in accelerated depreciation. 2/ This expenditure cut does not affect staff estimates because Staff projections did not include any general revenue sharing before the end of this fiscal year. 3/ Rural Transportation and urban community development. 4/ Sale of HUD mortgages and private financing of urban renewal projects. -C3 revenue loss, depending on the duration of the surcharge and the extent to which it curtails imports. On the expenditure side, the President has proposed a $4.9 billion reduction in expenditures, $3.8 billion in terms of prior Board staff projections. A. Revenue Measures. (1) The Administration proposes an investment tax credit, called the "Job Development Credit", equal to 10 per cent (or less depending on useful life) of the cost of new machineryand equipment acquired after August 15, 1971 and before August 16, 1972. The credit would drop to 5 per cent after August 15, 1972 except for property ordered before August 16, 1972 and put in service by February 15, 1973. No credit would be allowed for used property, for foreign-produced property or for property produced in the U.S. if more than 50 per cent of the value is attributable to imported materials. The Treasury now estimates that this measure would reduce Federal revenues by $2.7 billion in the current fiscal year and by $4.1 billion in fiscal year 1973. The impact on investment spending of the proposed tax credit is difficult to estimate as we have not previously had experience with a changing rate--10 per cent falling to 5 per cent-or with the foreign exclusion. Certainly the higher initial 10 per cent rate is expected to shorten the lagged effect on investment spending relative to the flat 7 per cent credit in effect earlier. One Staff simulation (FRB model) of the proposed investment tax credit indicates that the effect on investment spending would be a net increment of about $4.0 billion (annual rates) in the second quarter of 1972 and $10 billion in the 4th quarter of 1972. This estimate suggests a quicker response than previously experienced. While anticipating a significant boost in investment spending, the judgemental forecast suggests that such a quick response is not likely to be attained even with the added incentive of a higher initial rate, given the substantial amounts of available capacity now idle. Furthermore there are news reports that Congressman Mills favors a flat 7 per cent credit which undoubtedly would both delay and reduce the initial impact on investment. Other adjustments in the proposal that have been mentioned in the press, such as making the credit retroactive to April 1, 1972 and extending it to used as well as new equipment, probably would not greatly affect the economic outlook. There are also reports that the recently adopted liberalized depreciation may be dropped or reduced in favor of the more powerful investment tax credit. While such a development would partially offset the stimulus provided in the President's fiscal program, the -C4 two measures, as proposed, are not fully additive because an accelerated depreciation schedule can reduce the allowable investment credit as the full credit can be claimed only if the equipment has a useful life of at least 8 years. (2) The 7 per cent excise tax on domestic and foreign autos would be repealed, effective August 15, 1971. The initial effect of this measure is to reduce the GNP deflator and nominal GNP, since indirect business taxes are a component of GNP. This measure is also expected to reduce Federal receipts by about $2.2 billion in fiscal year 1972. By itself the repeal of the auto excise tax would reduce prices and increase sales of domestic and foreign autos. However, this tax cut in combination with the 10 per cent import surcharge (6.5 per cent on autos) is expected to produce a significant increase in the demand for domestically produced autos. (3) The President's proposal would also accelerate, to January 1972, previously legislated personal income tax relief that was scheduled to go into effect in 1973. The personal income tax exemption would increase $100 to $750 instead of the planned $50 increase and the standard deduction from 13 to 15 per cent ($2,000 maximum) instead of to 14 per cent. The initial impact on receipts of accelerating these personal tax relief measures is expected to be at least $.9 billion in Fiscal 1972 and $2.2 billion in calendar 1972. Recent news reports indicate that Congressman Mills favors a July 1, 1971 starting date for this speedup and also an increase in the minimum standard deduction. Assuming that the President's recommendation is enacted, as proposed, this acceleration of tax relief together with previously enacted reductions in personal taxes will have an initial impact on personal disposable income of $4.8 billion in the first quarter of 1972. Some of this stimulative effect will be offset by scheduled increase in social security taxes. B. Expenditure Measures. In his message the President also requested that the general revenue sharing and welfare reform programs be postponed for three months and one year, respectively, and that two of the special revenue sharing programs (rural transportation and urban community development) also be postponed, one, for six months, the other for one year. The President proposed other expenditure cuts including: a six months postponement of the Federal pay raise scheduled for January 1972, a 5 per cent reduction in Federal employment and a 10 per cent reduction in Foreign Aid. The effect of these measures on Federal outlays is shown in Table I. -C5 Staff expenditure estimates for Fiscal 1972 are not affected by the postponement of general revenue sharing as Congress was not expected to appropriate funds for the projected period for this item. Thus the Administration's $4.9 billion reduction in Fiscal 1972 outlays amounts to a $3.8 billion change in the staff projection. Those measures which reduce Federal purchases--more than half of the $3.8 billion--are likely to have powerful near-term effects. The Staff has not completed detailed budget projections for the second half of calendar 1972 but because several expenditure hikes are scheduled to begin in July a relatively sharp increase in expenditures is expected. However, the full year postponement of welfare reform and the 5 per cent reduction in force, would still provide significant offsetting reductions in expenditures at that time. II. Measures of Net Fiscal Stimulus The latest Staff estimate of the high employment budget (see Table II) shows a modest surplus for the entire calendar year 1971 and no significant change in discretionary fiscal policy from the first to the second half of the year. A $3.8 billion shift toward deficit is expected in the first half of calendar 1972 but less than half of this shift is attributable to the President's new program. Preliminary staff estimates of high employment receipts and expenditures for the second half of calendar 1972 indicate a further shift toward fiscal stimulus. Administration estimates of the high employment budget on a basis comparable to the Staff estimate (NIA accounts) are not presently available. However, estimates made by Nancy Teeters for Brookings and by the Staff, prior to and after the New Economic Policy, are compared in Table II. While the Staff and Brookings projections employ different fiscal assumptions and estimating techniques, they both find that the net effect of fiscal policy is to shift the balance toward deficit in the first half of calendar 1972. In the second half of calendar 1972 Brookings estimates that discretionary budget policy will move sharply further toward stimulus, but that the stimulus would be greater in the half year without the New Economic Program. However, the Staff views expenditure estimates for the second half of 1972 as highly conjectural at this time. In the present circumstance these changes in the full employment surplus are especially difficult to interpret. For example, in both the Staff and Brookings estimates the surtax on imports adds about $2.0 billion, annually, to high employment receipts. The resulting appearance of fiscal restraint is misleading in so far as the effect is to reduce the demand for foreign products. -C6 In the Board's estimation of high employment receipts there is also the problem that price changes are based on past trends, a situation that is not analytically applicable during the present freeze and the transition period thereafter. This tends to bias the staff estimate of high employment receipts and surplus upward. The Administration's official estimate of a $8 billion high employment deficit in fiscal 1972 (unified budget basis) is not directly comparable to the NIA data shown in Table II on a number of statistical grounds. When several important and offsetting adjustments are made in budget programs at the same time, changes in the high employment budget balance are less useful as an indicator of fiscal impact because all dollar changes are given the same weight. In the present situation, however, other estimating techniques suggest that the staff's high employment budget projections correctly indicate the direction of the impact of fiscal measures embodied in the New Economic Policy. A simulation using the FRB model, for example, isolates the following net effects of the fiscal measures,alone, included in the New Economic Policy on real and nominal GNP. The negative effect on nominal GNP through the second half of 1971 is partially due to the fact that auto NET EFFECT OF FISCAL MEASURES 1/ (billions of dollars, annula rates) Impact on: Real GNP Nominal GNP 1/ 1971 H-II H-I 1972 H-II .6 -2.6 2.6 -3.2 12.2 9.9 Does not include effect of surtax on imports and wage-price freeze. excise taxes are included in indirect business taxes, a component of GNP. The postponement of the Federal pay raise also reduces the GNP deflator in the first half of 1972. Thus the effect on real GNP is a better indicator of the direction of impact of the Fiscal program, though the magnitudes shown do not include any stimulus as a result of improved consumer and business sentiment. -C7 Table II FRB STAFF AND BROOKINGS ESTIMATE OF THE HIGH EMPLOYMENT BUDGET SURPLUS OR DEFICIT (Billions of dollars, annual rates NIA accounts) Half Years 1972 1971 I II I Staff Estimate 1/ July 22 Greenbook Sept. 15 Greenbook 2.1 1.7 3.7 1.8 1.6 -2.0 Brookings Estimate 2/ Before NEP After NEP 3.2 3.2 8.0 5.0 -3.0 -4.0 II n.e. -5.0p -13.0 -11.0 n.e.--not estimated p--preliminary NEP--New Economic Program 1/ Most of the change in the staff estimate from July 22 to Sept. 15 is attributable to the NEP. 2/ The Staff and Brookings projections incorporate different assumptions on a number of undecided budget matters such as revenue sharing, the military pay raise and social security benefits and taxes. On a technical level the projections differ in the treatment of price changes and unemployment compensation adjustments.
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