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~ Reserve Bank of DaDas Business Review August 1976 MonetaIy Policy- Effectiveness of Alternative Approaches To MonetaIy Control This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) Monetary Policy- Effectiveness of Alternative Approaches To Monetary Control Some critics of Federal R eserve policy believe that short-run swings in monetary growth have been destabilizing for the economy. They reconunend that, to promote economic stability. the Federal Reserve should conduct policy to maintain a steady monthly growth in money consistent with the Sys· tern's long-run targets and that a new operating procedure be adopted to ensure more precision in monetary control. Currently. ranges of tolerance for the Federal funds rate are adjusted from month to month, and occasionally more often, to help achieve longer-tenn targets for growth in the monetary aggregates. But the critics contend that the System's shorter-tenn monetary targets should be more rigidly adhered to and a reserve aggregate should be substituted for the Federal funds rate as the operating variable for achieving such monetary controLl For example, in commenting on the failure of the Federal Reserve to hit its announced targets for monetary growth with complete accuracy, Milton Friedman recently asserted: Some observers have concluded from this failure to match the target that the Fed is a helpless giant and cannot achieve its targets and cannot control the money supply. There is a sense in which that is correct, but there's a more fundamental sense in which it is wrong. The sense in which it is correct is that given the way the Fed now operates it cannot achieve its targets. As long as it continues to use its present procedures it will fail to achieve its monetary growth targets, but there are alternative operating procedures that would enable it to achieve its targets. z Friedman says that the alternative procedure of controlling monetary growth through the use of a reserve aggregate would not yield precisely the desired rate of growth in money on a monthto-month basis. But he believes that the errors in following a reserve aggregate strategy would be smaller over a quarterly or annual period. This article presents in nontechnical terms some evidence bearing on the question of alternative approaches to monetary control. The evidence indicates, as have previous studies, that a Federal funds rate approach to monetary control is about as effective as the reserve aggregate approach.- It also suggests that althougb the ability to achieve monthly growth targets by using either approach is not very great, deviations from target tend to average out under both. The more fundamental problem in controlling money is not the appropriate choice of an operating variable but, rather, whether the practice of stabilizing money market conditions ought to be abandoned. The results of this study and others indicate that somewhat more precise monetary control could probably be achieved using either a Federal hmds rate strategy or a reserve aggregate strategy. But either approach would entail abandonment of the current practice of smoothing short-run fluctuations in interest rates. The more hmdamental problem in controlling money is, therefore, not the appropriate choice of an operat- 1. From February 1972 through March 1976, the Federal Open Market Committee did specify a range of tolerance for growth in bank reserves available to sUPJ)Qrt private nonba nk deposits (RPD's) in ita directive to guide open market operations. But during this period, actual RPD growth frequently fell outside ita range of tolerance, while the Federal fund s ra te was almost always within its target range. Currently, no range for growth in a reserve aggregate is specified in the directive, either as an expected outcome or as an operating variable. But the Committee has agreed it should consider rates of growth in several broader reserve measures like ly to be associated with its targeted rates of growth in the monetary aggregates. And it contemplates further experimentation and analysis to evaluate the relative usefulness of the several J"e>erve measures for operating purposes. 2. Statement of Professor Milton Friedman, University of Chicago, Department of Economics, before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, November 6, 1975, p. 37 3. The Federal funds rate strategy for hitting monetary targets that was tested in this study ill not identical to the actual interest rate strategy pursued by the Federal Open Market Committee (FOMC). Month-to·month, or even quarter-toquarter, control of the narrowly defined money stock, M" is not the sole aim of the Committefl. Other measures of "money" are also considered by the FOMC, as are movements in reserves and bank credit. And still other considerations enter into the final choice of the monthly range for the Federal funds rate. For example, temJ)Qrary shifts in the amount of money needed for a given volume of transactions, which would otherwise tend to destabilize interest rates for no useful purpose, usually are accommodated by the Manager of the System Open Market Account. Business Review I August 1976 1 Monthly Prediction Errors for Seasonally Adjusted Ml 2.0 PERCENT - - - - - - - - - - - - - - - - - 1.51.0- MONEY DEMAND APPROACH .5- -.5- -1.0 - , - - - - - - - - - , - - - - - - ' ' - - - - - - , . 1.5 PERCENT - - - - - - - - - - - - - - - - - 1.0- NONBORROWED MONETARY BASE APPROACHPREDICTED MULTIPLIER .5- -.5-1.0 - . - - - - - - - - , - - - - - - - - , - 2.5 PERCENT - - - - - - - - - - - - - - - - - - - 2.0- NONBORROWED MONETARY BASE APPROACHNAIVE MULTIPLIER 1.5- -1.0 - 1.5 - - 2.0 -,-----:::::-:----,------:-=---,.1974 1975 NOTE: Prediction aTrOlS ara computad as predicted minus aelual values. measured as II percentage ot the actual. ing variable but, rather, whether the practice of stabilizing money market conditions ought to be abandoned. Alternative approaches The question of whether more accurate control over the money stock could be achieved by targeting a reserve aggregate or the Federal funds rate has been debated for some time. An operational strategy focusing on either one or the other might be used in an effort to maintain steadier monetary growth. In either case, the Federal Reserve would simply conduct open market operations each month to achieve the operating target calculated to direct money along a steady growth path. regardless of the impact on money market conditions. In practice, however, one strategy might be more effective than the other if the relationship between its operating variable and the money stock was more predictable. In the case of an operational strategy using the Federal funds rate, monetary growth would be determined by the public's desire to hold money at the level of market yields associated with the Federal funds target. Consequently, deviations from intended monetary perfonnance would result from mistakes in forecasting money demand;' The public's demand for money balances is thought to depend importantly on the level of income and interest rates. Even if this relationship is well estimated, however, monetary growth may still deviate from expected performance because of random influences and errors in predicting the level of income or interest rates, given the Federal funds rate. For example, if income is less than predicted, the amount of 4. When a Federal funds rate strategy is used. the link between bank reserves and the money supply serves only w determine the amount of reserves that must be provided to support the quantity of money demanded at the Federal 2 money balances held by the public at the prevailing Federal funds rate will also be less than anticipated. so that accurate predictions are possible for ensuring fairly close monetary control. Test methodology To assess the advantages of adoptThe question of whether ing a reserve aggregate operational more accurate control over strategy for achieving steadier the money stock could be monetary growth, a comparison achieved by targeting a reserve aggregate or the Fed- was made between the accuracy of monthly money stock forecasts eral funds rate has been obtained from the multiplier debated for some time. framework and those from the alternative approach relating the money stock to the level of perAdvocates of steady monetary growth generally favor following a sonal income and the Federal funds rate. The errors in forecasting reserve aggregate strategy. Such a strategy involves estimating the money should be similar to the money multiplier in the expression deviations from target that would have occurred if either approach M = mR, where M is the money had been used to control money on stock, m is the multiplier, and a monthly basis. Consequently, R is the reserve aggregate. The the better either theoretical framemultiplier summarizes the influwork forecasts, the more accurate ence of all demand and supply should be the corresponding variables, besides the reserve approach to monetary control. aggregate, that detennine the money stock.~ For the multiplier framework, If an accurate prediction of the the nonborrowed monetary base multiplier can be made, the appro- was chosen as the operating variable to be used in implementing priate target for reserves can be monetary policy.s The Federal selected to keep money on its intended path. Proponents of the funds rate serves this function in reserve aggregate approach argue the alternative approach. Historithat the factors determining the cal values for the base and the multiplier change slowly over time Federal funds rate were used to 5. 6. 7. 8. form monthly predictions of seasonally adjusted levels of M lover the 24 months ended December 1975. This period covers a cyclical downturn in business during which monetary control should have been especially difficult. Two sets of M 1 forecasts were generated in the case of the multiplier framework. In the first set, a naive forecast of the multiplier was made by assuming it remained unchanged from the previous month. In the second, the multiplier was predicted for the month ahead from a regression using the lagged three-month moving average of its past values plus seasonal dummy variables.? The regression used to form each prediction was estimated on the observations for the previous 48 months. For each month, the regression was reestimated by dropping the first of the previous 48 observations and adding the most recent month. For the alternative approach, the amount of MI demanded one month ahead was predicted by forecasting currency and demand deposits separately, given the value of the Federal funds rate for that month and a predicted value of personal income.- The prediction of personal income was made funds target. In contrast, when a reserve aggregate strategy is used, the direction of causation is reversed, with the money stock being determined by the amount of bank reserves being provided and the size of the money multiplier. The values for a money multiplier are determined by such factors as the public's willingness to hold demand deposits instead of other bank liabilities or currency, the willingness of banks to hold free reserves instead of earning aJl8ets, and the distribution of deposits between banks subject to different reserve requirements. The nonborrowed monetary base is comprised of currency in circulation plus nonborrowed reserves of member banks. It has been shown that, among a variety of possible reserve targets. nonborrowed member bank reserves and the nonborrowed base would be the easiest for the Open Market Trading Desk to control. This is because timely data are available to monitor their movements and the noncontrollable components of each are the least difficult to offset by open market operations. Since the empirical relationship between money and the nonborrowed base has been found to be the more predictable of the two, the base was picked as an operating variable in this study. For a discussion of criteria for selecting a reserve operating variable, see Richard G. Davis. "Short-run Targets for Open Market Operatiotll!," Monetary Aggre8ates and Monetary Policy, Federal Reserve Bank of New York. 1974. The regression procedure used to predict the multiplier is similar in most respects to that outlined in Albert E. Burger, "Money Stock Control," Controlling Monetary A88re8ateB 11: The Implementation, Federal Reserve Bank of Boston Conference Series, no. 9, September 1972. However, forecasts were improved in this 8tudy by predicting the change in the multiplier rather than its level. Because the regression residuals were randomly distributed, an adjustment for serial correlation was not incorporated into the forecasts. The theoretical framework linking the demand for money to the Federal funds rate and the level of personal income is a version of the Thomson-Pierce.Parry econometric model estimated on a sample from January 1968 through December 1973. An earlier version of thi8 model is described in Thomas D. Thomson, James L. Pierce, and Robert T. Parry, "A Monthly Money Market Model," Journal of Money, Credit, and BOTIking, November 1975. Business Review I August 1976 3 Estimated Ability t o Control Quarterly Average M , USI NG NONBOAAOWED MONET ARY BASE USING FEDERAL FUNOS RATE DOLLARS DOLLARS I 95" CONFIDENCE INTERVAL o 2 3 4 QUARTERS by simply extrapolating its growth from the month before. Results of test Forecasting accuracies of the multiplier and money demand frameworks were evaluated by comparing the size of their monthly prediction errors. There is virtually no difference in the size of the errors obtained from the predicted multiplier and money demand frameworks, while the errors for the naive multiplier are somewhat larger.e The average absolute error with the money demand approach is 0.478 percent of the money stock, while that for the predicted multiplier is 0.473 percent. That is, if either approach was used to control money on a monthly basis, it o 2 3 4 QUARTERS is estimated that the money stock would, on average, tend to diverge from its targeted value by about plus or minus 0.47 percent in any one month. The better either theoretical framework forecasts, the more accurate should be the corresponding approach to monetary control. This would not be an especially large error in relation to some targeted growth rate over a period of a year. Suppose, for example, money is targeted to grow at 5 percent over the year ahead. If the actual money stock diverged from the targeted money stock by plus 0.4 7 percent in the last month, a growth rate of approximately 5.47 percent would be achieved over the year. And if the error was minus 0.47 percent, a growth rate of 4.53 percent would result. Consequently, either approach would appear to allow reasonably close control of the growth rate of money over a year's time. The ability to hit a particular annualized rate of growth over a shorter period, however, is much less. Over a month, for example, an error of 0.47 percent is equal to an annualized rate of growth of 5.64 percent (0.47 times 12). So, in an attempt to hit a 5-percent annual rate of growth over a month's time, the actual annualized rate of money growth achieved typically might be as much as 9. Earlier empirical studies also provide little basis for chooaing between reserves or the Federal funds rate to guide open market operations. For further details. consult: Richard G. Davis and Frederick C. Schadrack, "Forecasting the Monetary Aggregates with Reduced-Form Equations," Monetary Agg,.egates and Monetary Policy, Federal Reserve Bank of New York, 1974; Fred J. Levin, "E:ramination of the Money-Stock Control Approach of Burger, Kalish, and Babb," Journal of Mon ey, C,.edit, and B(Ulking. November 1973; and James L. Pierce and Thomas D . Thomson, "Some Issues in Controlling the Stock of Money," Controlling Monetary A ggregates ll: The Implementat ion, Federal Reserve Bank of Boston Conference Series, no. 9, September 1972. 4 Summary statistics on monthly prediction errors Prediction errors for both the money demand approach and the nonborrowed monetary base approach are computed as the predicted minus the actual value of seasonally adjusted Mh measured as a percentage of the actual Prediction errors using the money demand model are decomposed in the accompanying table according to source. For understanding this decomposition, a brief description of the basic structure of the money demand model may be helpful. In this model, the amount of demand deposits and currency demanded is dependent on past and present values of personal income, the interest rate on commercial paper, and the current value of the rate on other time and savings deposits. Monthly predictions for the commercial paper rate, along with those for rates on Treasury bills and certificates of deposit, are provided by this model through a set of structural equations relating money market yields to the Federal funds rate. And predictions for the rate on time and savings deposits are determined by an equation relating it to the yield on Treasury bills and a variable represent- ing Regulation Q interest ceilings. Personal income was predicted by extrapolating its growth in the previous month. The prediction error attributable to the demand equations for demand deposits and currency was estimated by taking the difference between the M 1 predicted by the demand equations, given actual interest rates and personal income for the period, and actual MI. This error occurs as a result of random influences on money demand or unreliable estimates of the equations. The prediction error due to the interest rate equations was calculated as the effect on predicted money demand flowing from the difference between interest rates predicted by the set of structural equations, given the Federal funds rate, and the actual interest rates that entered into the demand equations for money. Again, random influences or poor estimates of the underlying structure are the sources of this error. Finally, the prediction error due to the error in forecasting personal income is simply the effect on predicted money demand resulting from the difference between predicted and actual personal income in the period. Tota l error Mean absolute error ..... .... Standard dev iation of error ... Mean error ... .. .. .. ... .. 10.64 percent or as little as minus 0.64 percent. A more exact idea of the range of error may be obtained if it is assumed that the errors under either approach are normally distributed about a mean of zero. l O The probability of being able to hit a money stock target within any particular confidence interval .478 .590 .130 .454 .551 .123 .047 .054 .010 .061 .086 - .003 may then be calculated more exactly. For example, errors exceeding twice the standard deviation in a sample of the present size would occur only about 5 percent of the time. The standard deviation of the sample error is 0.590 percent of the money stock for the money demand approach and 0.557 per- .473 .557 .107 .776 .934 .199 cent for the predicted multiplier model. Two standard deviations are 1.180 percent and 1.114 percent, respectively, of the money stock. And this degree of error is not so large that the annual growth targets for M l-of the size the Federal Reserve currently usescould not be hit using either approach to monetary control. 10. The sample mean error for both approaches is slightly positive rather than zero. But a t test indicates that the difference from zero is not statistically significant at a 9O-percent confidence level in both CRses. Busineu Review I August 1976 5 For example, the Federal Reserve's current target for M 1 is a growth rate of 4.5 to 7 percent from the first quarter of 1976 to the first quarter of 1977. The midpoint of this range is 5.75 percent. If the Federal funds rate approach was used to attempt to keep money on a 5.75-percent growth path, the present results suggest that by the end of such a period, there would be a 95·percent chance that the monthly level of M 1 would fall within a range defining growth of 4.49 to 6.93 percent from the beginning of the annual period (plus or minus two standard deviations from the 5.75-percent path). It appears to be well within the Federal Reserve's ability to hit the current target range of 4.5 to 7 percent over a year's time on a quarterly average basis with either operating procedure. for a quarterly average, given that for monthly values, a 95-percent confidence interval for the quarterly average may also be computed. Under the usual assumptions, the standard deviation of a quarterly average is considerably smaUer-42 percent less-than that for a monthly observation.'! For quarterly average M h 95-percent confidence intervals around the midpoint of the current range would be consistent with growth rates over a year of 5.07 to 6.30 percent by using the Federal funds rate and 5.11 to 6.39 percent by using the nonborrowed monetary base. Thus, it appears to be well within the Federal Reserve's ability to hit the current target range of 4.5 to 7 percent over a year's time on a quarterly average basis with either operating procedure. But once again, the ability to hit such a target over a shorter period, such as a quarter, is considerably less. Similarly, a growth range of 4.63 to 6.86 percent from the beginning of the annual period could probably be achieved by using the nonborrowed monetary base as the operating variable. With either method, however, a 95-percent confidence interval on the estimated deviations from target generally falls outside the target range of 4.5 to 7 percent over a period of less than a year. l1 The Federal Reserve's current annual targets for monetary aggregates are actually stated in tenus of growth rates from one quarterly average to another. Solving for the standard deviation of the error Conclusion According to Milton Friedman, an operating procedure keyed to the Federal funds rate is inherently inferior to one based on a reserve aggregate for controlling monetary aggregates. For example, his March 10, 1975, Newsweek column asserted: "So long as the Fed tries to control monetary growth through the Federal-funds rate, it will fail." But the available empirical evidence indicates that the two approaches are about equally effective for controlling the money stock. It must be stressed, however, that the Federal funds rate strategy actually followed by the Fed- eral Open Market Committee differs significantly from the approach tested here. The test assumed that the Federal funds rate would be adjusted solely with a view to achieving a money stock as close as possible to the targeted path every month. But, in practice, if the money stock departs from this path, the FOMe usually attempts to bring it back on course only gradually because the alternative requires an adjustment in the Federal funds rate deemed too large and disruptive to be consistent with the maintenance of orderly financial markets. 13 The current approach to imple· mentation of monetary policy is designed to allow the FOMC to smooth short-nm changes in interest rates without impairing its ability to achieve longer-run monetary goals. The degree to which interest rates vary over the business cycle is not necessarily reduced, but week-to-week and even month~to-month fluctuations are smoothed. Despite such interest rate smoothing, the FOMe managed to hit its growth targets for M I and M 2 over the annual period beginning in the second quarter of 1975. While such short-run interest rate stabilization couId, in practice, be excessive and tend to interfere with the achievement of longer-term monetary targets, there is no necessary reason for it to do so. For example, despite such interest rate smoothing, the 11. The probability of the monthly value of M , falling within the target range of 4.5 to 7 pen:ent after one month tul'JUl out to be only about 14 percent. using either the Federal funds rate or the nonborrowed base as the operating variable; hut after four mOnth9, it increases to about 50 percent. 12. If the errors are independent of one another, the standard deviation of the average of n monthly errors can be 9hown to be equal to -..I(l/n) times the standard deviation of anyone monthly error. Therefore, the standard deviation for quarterly average data is O.58-v(l/3)-times the standard deviation of the monthly error. 13. For more on this point, see Raymond E. Lombra and Raymond G. Torto. "The Strategy of Monetary Policy," Economic Reuiew, Federal Reserve Bank of Richmond, September/October 1975. 6 FOMC managed to hit its growth targets for Ml and M2 over the annual period beginning in the second quarter of 1975. The Federal funds rate and the nonborrowed monetary base seem equally well suited as operating variables for achieving longer-term monetary goals. If closer monetary control over monthly intervals was desired, it could probably be achieved using either strategy but only at the cost of introducing a greater degree of short-run instability into financial markets. The fundamental problem in achieving closer short-run control over the money stock is thus seen to be not one of choosing the appropriate operating variable. Rather, it involves detennining the appropriate trade-off between the goals of more precise short-run monetary control and the maintenance of orderly conditions in credit markets. The benefits and costs of these two goals need to be understood better before a definitive resolution of the problem will be possible. -William R. McDonough New par banks Reunion Bank, Dallas, Texas, a newly organized insured nonmember bank located in the territory served by the Head Office of the Federal Reserve Bank of Dallas, opened for business July 12, 1976, remitting at par. The officers are: Roy C. Coffee, Jr., Chairman of the Board: Charles N. Brewer, President; William B. Wilson, Vice President: Diane M. Anderson, Cashier; Dorothy B. Wagley, Assistant Cashier; and Vickie E. Wright, Assistant Cashier. First State Bank & Trust Company, Plain Dealing, Louisiana, an insured nonmember bank located in the territory served by the Head Office of the Federal Reserve Bank of Dallas, began remitting at par July 26, 1976. The officers are: J. C. Allwns, Chairman of the Board: John J. Doles, Jr., President: E. D. Barnett, Vice President: James M. Peace, Vice President and Cashier: Beth S. Fernandez, Assistant Vice President; Judie H. Barnette, Assistant Cashier; and J. Davis McCall, Assistant Cashier. Business Review I August 1976 7 Federal Reserve Bank of Dallas August 1976 Eleventh District Business Highlights SUMMER TRAVEL Highway travel in Texas should reach another record level this summer vacation season. Better than 8 billion vehicle miles were estimated for June. That is over 400 million vehicle miles greater than the previous record for June, which was set last year. The peak month for driving, however, is July. And based on the miles covered in June, travel in Texas apparently reached an alltime record for July also. The increase in travel can be attributed to several factors. First, the economic recovery has increased the income of most Texans, with total personal income in the state up about 12 percent over a year ago. Moreover, inflation has slowed to near a 6-percent annual rate, suggesting real purchasing power has increased significantly in the past year so that CODsumers are better able to afford vacations this year. Also contributing to the increase in travel is the ready availability of gasoline. Refiners prepared for the summer increase in demand early this year, and gasoline supplies were at a fairly high level going into the vacation season. From last fall until spring, gasoline prices followed their typical seasonal pattern, declining steadily. In May, partly reflecting the rise in summer demand for gasoline, prices began a sharp upswing. Despite the sharp two· month increase, gasoline prices in cities in Texas remain well below those in the country as a whole. For exam· pie, the price of leaded regular gasoline in Dallas was 3.9 cents below the U.s. city average in June, and the price in Houston was 4.7 cents below. lEADED REGULAR GASOLINE ,............,........ 60 CENTS PER GALLON - - - - - 58 - ,.' ".; u.S. CITY, AVERAGE • ', • •' • 56 - --_, I 54 - , '..... I " 52 - I , II HOUSTON " " " / 50 -'O~,T07,r.05~O"oTON;r,Oo~I"T'<,r,'.~'~,T'M~o,eO1975 1976 Contributing to the record level of vehicle miles traveled in Texas is the large number of tourists streaming into the state. According to the Texas tourist bureaus, almost 211,000 out-of·state resi· dents visited Texas in June, or 8.6 percent more than a year earlier. Based on previous patterns, the influx most likely was led by tourists from Oklahoma, Louisiana, California, Florida, and Illinois. NATURAL GAS PRICES Higher ceiling prices for natural gas sold in the interstate market were announced by the Federal Power Commission on July 27. The FPC decision expands the old two-tier price system to a four-tier system. The ceiling price for newly discovered natural gas committed (sold on long-term contract) to interstate pipelines since January I , 1975, was raised from 52 cents per 1,000 cubic feet to $1.42. Moreover, the FPC will permit the ceiling price for this "new" gas to rise further at a rate of 1 cent per quarter beginning in October. For natural gas committed to the interstate market in the period from January 1, 1973, to January I, 1975, a ceiling price of $1.01 per 1,000 cubic feet was set. To obtain a higher price, producers will have to file with the FPC. There is no escalator provision for the ceiling price of this gas. The ceiling price of "old" gas (supplies committed before 1973) was not changed from 29.5 cents. But as the contracts for old gas expire, they can be renegotiated at a price of up to 52 cents. As a result of these changes, the FPC estimates the price of interstate gas could average 53 cents per 1,000 cubic feet at the wellhead a year from nowup from the prevailing average of 40 cents. Regulation of gas prices by the FPC began when gas supplies were in surplus. At the end of World War II, a surplus of reserves in Texas made feasible the construction of large long-distance pipelines for interstate shipments. But over the years, reserves have fallen relative to production until they can no longer support nationwide demand for this fuel without seasonal curtailments for some users. The FPC is currently projecting that deficiencies for April 1976 through March 1977 will be 29.4 percent greater than in the April 1975-March 1976 period. Higher natural gas prices should have a significant impact on the economy of the Eleventh District. But in response to the announced price hikes, a coalition of consumer groups has succeeded in getting a federal court of appeals to stay the (Continued on back page) INDUSTRIAL PRODUCTION (SEASONALLY ADJUSTED) - TOTAL PRODUCTION - - 140 (1967=100) - - - - - - - - 130 - 120 - MANUFACTURING - 140 (1967=100) - - - - - - - - MINING - 120 (1967=100) - - - - - - - - 110 ,,,,'-,, ,- \ \ TEXAS'/ \ -V. . . . . \ ....... 1 U.S. '~":, LOUISIANA ',/ 110 - ••b,• ......./ \ 110 ;..' LOUISIANA \. -==.... '. 100 ,-;;;:;:;-,-;;;;.,-.... -;;;:;;;-.... 1974 1975 1976 80 -r~~,-~~~~~- 100 -r-:::= 1974 ....-:::;.,-.... 1975 1976 SOURCES: Board 01 Gov.rnors, F.deral R.serve F. d.r.1 Reserv. Bank 01 Dall . . 1974 S~slem 1975 1976 o Compar,ble baek dalll Irom Ih. 1976 revision are not ~et ,vanabl •. EMPLOYMENT AND UNEMPLOYMENT FIVE SOUTHWESTERN STATES' (SEASONALLY ADJUSTED, BY FR8) PRICES RECEIVED BY TEXAS FARMERS 9.0 MILLION - - - - - - - - - - - P E R C E N T 8 UNEMPLOYMENT RATE 8 .9 ."\ '" ( RIGHT SCALE) 240 270 (1967=100) - - - - - - - - - - - - - j'/ ..............\ -7 8.8- -6 8 .7 - \.. ..- " -- " ,, \ CROPS , .. -"'""-- .. " - \ v v' 180 150 LIVESTOCK AND _ ,-_~~--r-~L~'~V;ES~T~O~CTK~P~R~O~D~U~C~T~S~1974 -5 1975 1976 SOURCE: U.S. Oapartm.nt of AIJ,leultur. TOTAL EMPLOYMENT -4 (LEFT SCALE) 8 .4 8.3 , 210 120 8.68 .5 - v, ,--;;;:;:;--,-;;=-.... -=:;;--,_ 3 1974 1975 1976 t . Arizo"a, Loui siana, New Mexieo, Oklahoma, and T ....a. SOURCE: St. t e .mploym."t ag.ne l •• SAVINGS AND LOAN ASSOCIATION ACTIVITY AND HOME BUILDING IN TEXAS (SEASONALLY ADJUSTED, BY FRB ) 900 MILLION DOLLARS - - - - - - - PERCENT 100 900 WITHDRAWALS ·TO· 90 CONSUMER PRICES 600-' _. 180 (1967=100) - - - - - - - - - - - - 170 - --- ,.,,.,- US. HOUSTON ,.,_ - , 150 /.~ .•.•• "', 500 400-~'\ , , " 80 I ,. " 70 " 'l 60 _ _- 50 SAVINGS (LEFT SCALE) 300 ,,,"... .......... 160 , \ , , ' \ SAVINGS RATIO ,~ \ .. (RIGHT SCALE) ,,,'" 700 - i 1974 1975 1976 10.0 TH()U~ANI) - - - - - - - - - - - DALLAS 8 .0 HOUSING STARTS 6.0 4 .0 140 - 130 2.0 o 1974 1975 SOURCE: U.s. Bur.au ot Labor Statlstles 1976 SOURCES: Bureau 01 Bu.l"en R••• are .... Uninllity of T ...... Fed.fal Homa Loan Ba"k 01 Little Roek 40 CONDITION STATISTICS OF ALL MEMBER BANKS RESERVE POSITION OF MEMBER BANKS ELEVENTH FEDERAL RESERVE DISTRICT (CUMULATIVE CHANGES) ELEVENTH FEDERAL RESERVE DISTRICT (MONTHLY AVERAGES OF WEEKLY DATA) 2.0 BILLION-DOLLAR CHANGE - - - - - - - - 250 MILLION DOlLARS - - - - - - - - - - - 1.5 - 200 - LOANS -Z. / _7: .'. . /.1·~~··..... -........ 1.0 - .5 o ~-- lQ74........ -- ...... -----, " ..................................~.......... ~ ~..... ' - ... • I I I I 1975 I I 1.5 - INVESTMENTS ,o-~ _____ ----- -- 197;..... ;--- : : : : . ••m !\7:C: r A :. :: . !V\i\ ~: o 2.5 BILLlON·DOLLAR CHANGE - - - - - - - _ 2.0- BORROWINGS FROM FRB S ES t t - ~.'-'.~:' . .- ..... .. . . :., :: \J, \ ~ -50- -100- -,so -'--"=.7=-':--'--:':::.:::7:;5-'--'::."7::.'--'- 1974 ..... . 5-~..............................' ... · o I I I I I I 2.5 BILLION·DOLLAR CHANGE - - - - - - - 2.0 TIME DEPOSITS 1.5 - ,,;.::..:; 1974 ....,;. .................: .::,.-;;:;..;.. .... 1.0 -~ ....... _::":.:::.' -------,975 .5_",,,,, 1976 O~~'-'-~~r-r-~~~~ 2.0 BILLION-DOLLAR CHANGE - - - - - - - 1.5 - 1.0 - DEMAND DEPOSITS LOANS AT WEEKLY REPORTING BANKS ELEVENTH FEDERAL RESERVE DISTRICT (CUMULATIVE CHANGES) 800 MILLION-DOLLAR CHANGE - - - - - - - - ~.~~~••.•••.....•... 400 _ BUSINESS LOANS ................... ..... / ____ .. __ ~97~/ 1.!!!.... _--- o - ~ ..... ... -'00 -~=::;:.:....~~~~~~r-r-~~ 100 MILLION-DOLLAR CHANGE - - - - - - - - 50 - 1976 •••.••..•..•.. ····1·97. ....... ····· o ~~.,."..,..c.:::: _ -50 CONSUMER ' , - - __________ -1975 LOANS -tOO I J I F I M I A I M I J I J I A I I I SON i D CONSTRUCTION CONTRACTS FIVE SOUTHWESTERN STATES' (SEASONALLY ADJUSTED. BY FRB) FOREIGN TRADE 2.0 BILLION DOLLARS - - - - - - - - - - - HOUSTON CUSTOMS R£GION (SEASONALLY ADJUSTED. BY FRS) 1.6 - 1.4 BILLION D O L L A R S - - - - - - - - - - - TOTAL 1.21.2 - . 1.0- , ," I 1\ .8- .8 - ,.. , ..' NONRESIDENTIAL .4 .6 .4 _ o 1. Arilona, Louisi ana, New Muico, Oklahoma, and T.. ~as SOURCE: F. W. Dodge . McGraw·Hill, Inc. / I ,, ,J ,....... ... _ " , I I -"", "" IMPORTS" I ,I 1/ ., -,--=,--,----.,,=-,.---::c;;---,1974 1975 1976 FPC decision. Therefore, the effect on the District's economy may be delayed for some time. The new ceiling prices may make new gas sold in interstate markets more competitive with gas sold in intrastate markets. The new FPC prices might even divert some intrastate gas supplies to interstate markets. As a result, new gas prices in the intrastate markets could rise. The average intrastate price now varies widely. FPC data show, for example, that intrastate prices for newly sold gas averaged $1.78 per 1,000 cubic feet in Texas, $1.57 in Oklahoma, $1.43 in Louisiana, and 88 cents in New Mexico in the first quarter of this year. The variation is related to the size of the industrial markets for gas in each st ate. Higher prices should stimulate exploration for gas. And some of the best prospects for finding more gas are in the southwestern states. Texas is the leading gas-producing state, accounting for about 38 percent of the nation's output. But the state's gas reserves have been declining steeply and now stand at little more than 60 percent of their 1967 peak. And in contrast to conditions just a few years ago, Texas now consumes more of its own production-some 62 percent. That is mainly because producers have committed much of their newly discovered gas reserves to the intrastate market, where prices have been significantly higher. Louisiana rivals Texas as a producer of natural gas and accounts for 36 percent of the nation's output. Much of Louisiana's gas is produced offshore in federal waters and, consequently, has had to be sold in the lowerpriced interstate market. Oklahoma and New Mexico are also major producers of natural gas. But their production accounts for only 8 percent and 6 percent, respectively, of the nation's output. While many marginal fields will likely become profitable and be sought after, the best gas finds recently have been in the offshore areas of Louisiana. And because offshore wells cost much more than wells drilled onshore, higher prices for the fuel should encourage more exploration in these areas. OTHER HIGHLIGHTS: • Preliminary figures show the Texas industrial production index, seasonally adjusted, declined in June for the second month in a row. The decline centered in manufacturing as mining posted a small advance. Gains in manufacturing, however, were evident in the primary metals, lumber and wood products, and printing and publishing industries. • The unemployment rate for the five states of the Eleventh District dropped sharply in June to 6.1 percent, following two consecutive monthly increases. Total employment, seasonally adjusted, was virtually unchanged, while the number unemployed was down substantially. The only categories showing gains in nonagricultural employment were government and mining. The number of workers in manufacturing fell for the second month In a row. • Loan demand at weekly reporting banks in the Eleventh District continued to improve in June. While demand for real estate loans remained sluggish, the demand for most other types of loans increased. Loans to businesses rose sharply for the second consecu tive month, mainly because of increased loans to mining firms. Manufacturers of nondurable goods also expanded their bank debt in June, but some weakness was noted in loan demand from the chemical and rubber industries, possibly because of the extended strike against tire manufacturers. Strong growth in consumer loans was evident in both May and June. • Construction activity in the five southwestern states strengthened in June. The value of all construction contracts rose after four consecutive months of decline. Most of the strength came from residential construction. Through June, the value of contracts for new housing each month this year has been well ahead of the same month last year. Further evidence of the continuing recovery in residential construction was the strong increases in new housing starts in Texas during May and June. Nonresidential construction, however, remains weak. Moreover, the total number of workers in con· struction jobs continues to fall. In June, construction employment in the sou thwestern states was down more than 4.5 percent from the January level. • Average prices received by Texas farmers and ranchers for all fann products increased slightly in the month ended June 15. An advance in crop prices, partially offset by a small decline in average livestock prices, accounted for the increase. Strong domestic and foreign demand, coupled with low supplies, pushed cotton prices up sharply. And increased livestock feeding and strong export sales strengthened wheat, corn, and sorghum prices. Altogether, the crop index was 4 percent higher than a month earlier. The livestock index declined moderately as sheep and lamb prices dropped sharply in response to large marketings. Increased slaughter of fed cattle and low fat cattle prices helped weaken feeder calf prices. Turkey and egg prices also declined, but hog and wool prices were slightly higher. Despite the lackluster price perfonnance in the May-June period, average prices for all farm products were 12 percent above the year-earlier level. The crop index was up 17 percent, and the livestock index 7 percent.
@FedFRASER