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FEDERAL RESERVE BAN K
OF ST. LO UIS
MARCH 1975

EIG HT H
DISTRICT
d

mcmrnio

LITTLE ROCK




The 1975 National Economic
Program: Another Exercise
in Fiscal Activism .............................

2

Prospects for Food and Agriculture
in 1975 ................................ ........... 13

The 1975 National Economic Program : Another
Exercise in Fiscal Activism
KEITH M. CARLSON
1. HE Administration recently announced its na­
tional economic program for 1975 to Congress and
the public. The general nature of the program was
disclosed in the President’s State of the Union message
and the details were provided later in three documents
— the Federal Budget, the Economic Report of the
President, and the Annual Report of the Council of
Economic Advisers. These three documents present
(1) Federal budget plans for the 21-month period end­
ing September 30, 1976, (2) economic projections for
the years 1975 through 1980, and (3) general sug­
gestions as to the appropriate course for monetary
actions.
Economic goals for 1975 are stated in the Annual
Report of the Council of Economic Advisers (CEA)
and represent the CEA’s estimate of the most likely
outcome, given economic and policy forces already set
in motion, along with a future plan for monetary and
fiscal action. Economic projections for 1975 include
growth in GNP of 7.3 percent which is distributed as
a 3.3 percent decline in real product and a 10.8 per­
cent advance in prices. The unemployment rate is
projected to average 8.1 percent in 1975. These pro­
jections are to be viewed within the perspective of a
longer-range economic projection extending to 1980.1
This set of long-range projections is a major innovation
that recognizes the long lags that are inherent in the
economic process, and provides a set of economic
assumptions that is consistent with attaining the ulti­
mate goals of full employment and price stability. In
addition to these well-known goals, a third economic
goal is introduced as a part of the economic program
— energy independence.
As a part of the overall economic program, a very
ambitious plan for Federal budget action is proposed.
Included in this Federal budget plan is an increase of
projections for the years 1976 through 1980 are not found
in the CEA Report but are found in The Budget o f the
United States Government, Fiscal Year 1976, pp. 40-42. The
projections for 1975 and 1976 are classified as forecasts of
probable economic conditions, but the projections for 1977
through 1980 are called simply “projections consistent with
moving gradually toward stable prices and maximum feasible
employment.”
2
Page


Fi sc al M e a s u r e s

1967

1968

1969

1 970

1971

1972

1973

197*

1975

Federal expenditures (national income accounts basis)
of 15.5 percent in calendar 1975, which reflects an
allowance for increased costs of energy to Federal,
state, and local governments, cash payments to indi­
viduals who do not pay taxes, and a proposed reduction
in spending relative to what it would otherwise be. In
addition, many tax changes are proposed. Among
these changes are: (1) a one-shot tax rebate to individ­
uals on 1974 incomes; (2) an investment tax credit for
corporations; (3) a windfall-profits tax on oil com­
panies; (4) a reduction in tax rates on individual and
corporate income; and (5) an increase in the excise
tax on oil and natural gas.
Although the emphasis of the Administration’s pro­
gram is on fiscal actions, the CEA Report provides
some subtle recommendations for monetary policy. In
contrast to last year’s Report, no specific guidelines
are offered. The recommendation consists of the gen­
eral statement that “monetary policy must be con­
ducted so as to encourage a near-term recovery in the
economy and a resumption of sustainable economic
growth.”

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

The purpose of this article is to summarize and
evaluate the Administration’s 1975 economic program.2
Even though the Budget and the CEA Report en­
compass many economic issues, the focus of this article
is on the stabilization aspects of the economic pro­
gram. As background, economic events in 1974 are
summarized and examined along with Administration
projections that were made in February 1974. The
Federal budget program is then examined in some
detail along with the general recommendations for
monetary policy. Finally, the economic program is
analyzed in terms of its feasibility, given the Adminis­
tration’s policy recommendations, and its internal con­
sistency with reference to GNP, prices, and output.

M A R C H 1975

Table

1

CEA PROJECTION ACCURACY OF GNP
CEA
Projected
Change

Ac t u a l
Change*

1962

9 .4 %

6 .7 %

1963

4 .4

5 .4

Error* *
2 .7 %
-1 .0

1964

6.5

6 .6

-0 .1

1965

6.1

7.5

-1 .4
-1 .7

1966

6.9

8.6

1967

6.4

5 .6

0 .8

1968

7.8

9 .0

-1 .2

At the outset of 1974, the U.S. economy was caught
between the crosscurrents of high inflation and a slow­
down in real product growth. In addition, the energy
crisis was a factor complicating the assessment of the
economic outlook. After growing very rapidly in real
terms in 1972 and in early 1973, output growth slowed
in the second quarter of 1973. Despite the slowdown
in output, inflation continued at very high rates and
shortages of basic materials were common, with wage
and price controls still in effect at the outset of 1974.
The objective of Administration policy in early 1974
was to avoid extreme policy actions while aiming
toward a resumption of real growth and a decline in
the inflation rate. The CEA felt that both monetary
and fiscal actions had become less stimulative in the
second half of 1973 and recommended a continuation
of this moderate policy stance. In general, for the first
half of calendar 1974 the CEA projected little change
in output along with continued high inflation, followed
in the second half by a resumption of real growth and
a sharp decline in the rate of price advance. Under­
lying this projection was the assumption that the bulk
of the adjustment to higher energy prices would be
completed in the first half of the year.

7 .0

7 .7

-0 .7

1970

5 .7

4 .9

0 .8

19 71

9.0

7.5

1.5

1972

9 .4

9 .7

-0 .3

1973

REVIEW OF
THE 1974 ECONOMIC PROGRAM

1969

1 0.0

11.5

-1 .5

1974

7.9

7.9

0 .0

A v e r a g e a b so lu te e rro r

1.1

•Based on data given in the CEA R ep ort for the year following
the forecast year.
**N o adjustment is made for deviation of policy realizations from
plans, or for m ajor strikes.

actly as the CEA projected — 7.9 percent. This is the
most accurate projection of GNP since the CEA
started giving quantitative forecasts in 1962 (see Table
I).3 The accuracy of the projection was all the more
remarkable when account is taken of the uncertainties
which prevailed at the beginning of the year relating
to the energy crisis.
The composition of the GNP forecast along with the
outcome is shown in Table II. As is typical of most any
accurate projection of GNP, the total reflected off­
setting errors in the components. Personal consumpTable

II

PROJECTED A N D ACTUAL CHANGES IN GNP
A N D COMPONENTS: 1973 TO 1974
( B i ll i o n s of

D o ll a r s )

CEA
Projection *

Actual**

The 1974 CEA Report projected an increase in GNP
for the year of 7.9 percent. Based on preliminary data
for the fourth quarter the realized increase was ex-

16.0

1 2 .8

3.2

2.1

-2 .0

4.1

R esidential Cons tr uc ti on

Economic Projections vs. the Record

$ -6 .8

-8 .5

-1 1 .2

2.7

F e de r al Purchases

11.1

9.8

1.3

State a n d Local Purchases

2 0.7

22.6

-1 .9

Consumption

Business Fi x ed In ves tm ent
C h a n g e in In ven tor ies

N e t Exports
GNP

$

6 5 .0

$

Err or

71.8

Pers on al

-4 .6

-1 .9

-2 .7

$ 10 1.8

$ 10 1.8

$ 0.0

♦Estimated by this Bank and based on 1974 CEA R eport.
♦♦Based on preliminary data in 1975 CEA R eport.

2The Administration’s program is analyzed in the form in
which it was presented in early February 1975. Indications
at this time are that Congressional actions on expenditures
and taxes will certainly modify the Administration’s program
as originally presented. This article makes no attempt to
allow for the effects of pending legislation.



3For a more detailed analysis of past CEA projections, see
Geoffrey H. Moore, “Economic Forecasting — How Good a
Track Record?,” T he Morgan Guaranty Survey Qanuary
1975), pp. 5-8.
Page 3

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

M A R C H 1975

tion, state and local purchases, and net exports were
all underestimated. Overestimated were business fixed
investment, inventory accumulation, residential con­
struction, and Federal purchases. Nevertheless, rela­
tive to past projection experience, the CEA’s 1974
forecast of nominal magnitudes was quite accurate
even when examined on a component-by-component
basis.
More significant from the standpoint of economic
policy is the distribution of the GNP change between
prices and output. As indicated in Table III, the CEA
projected a 1 percent advance in output, which was
predicted to take the form of a decline in the first
half of the year followed by a relatively strong ex­
pansion in the second half. The pattern of output
changes during the year deviated substantially from
this forecast. Output fell in each quarter, with the
first and fourth quarters showing large annual rates of
decline of 7 and 9 percent, respectively. From 1973
to 1974 output declined 2.2 percent on an annual
average basis. However, the extent of the decline is
obscured by comparing averages for the two years,
as output fell 5 percent from fourth quarter 1973 to
fourth quarter 1974.
Table

III

PROJECTED A N D ACTUAL CH A N G ES IN
EC O N O M IC ACTIVITY: 1973 TO 1974
CEA
Projection

Actual

Error

GNP

7 .9 %

O utput

1.0

-2 .2

3 .2

Prices

6 .9

10 .2

-3 .3

U n e m p l o y m e n t Rate

5 .6

5 .6

0.0

7 .9 %

0 .0 %

There was also substantial error in the CEA’s pro­
jection of prices. The projection of a 6.9 percent ad­
vance compares with the realized increase of 10.2
percent. Again, the average for the year obscures the
extent of the error. The CEA expected rapid inflation
in the first half of the year followed by a slowing in
the second half. The actual pattern of price advance
was one of double-digit inflation throughout the year,
or 11.8 percent when measured from fourth quarter
1973 to fourth quarter 1974.

Policy Recommendations vs. Realizations
Any ex post evaluation of an economic forecast is
incomplete until the underlying policy assumptions
are also examined. An accurate GNP projection might
well be right, but for the wrong reasons. Furthermore,
a full evaluation of a forecast requires an understand­
ing of the underlying model, and, in particular, the
4
Page


role that policy actions play in that model. In the case
of the CEA projection, the underlying model is not
made explicit, though it is usually interpreted as more
of a judgmental model than an econometric model.
The CEA forecasters, however, are fully aware of
the results of other models, and their projections
probably are not fully independent of such models.
This section examines the Federal budget program
in retrospect, along with their recommendations for
monetary policy. The conclusion is that the CEA fore­
cast of GNP was accurate because monetary and fiscal
actions did not depart substantially from the course
envisioned by the CEA early in the year.
Fiscal Policy — The 1974 Federal budget program
is compared with the outcome in Table IV. Federal
expenditures were overestimated for the year, though
the amount was not substantial. At the time the 1974
CEA Report appeared there were reservations in some
quarters as to the likelihood of calendar 1974 Federal
expenditures increasing as rapidly as assumed.4
In contrast to expenditures, receipts were under­
estimated. The unexpectedly rapid advance of Fed­
eral receipts was attributable primarily to the pace of
inflation. Inflationary advances in incomes push tax­
payers into higher tax brackets and lower the real
value of standard deductions and exemptions. Con­
sequently, given the nature of the progressive income
tax, inflation acts as a tax increase, raising the average
4See Keith M. Carlson, “The 1974 National Economic Plan:
Riding Out the Storm,” this Review (March 1974), pp. 2-10.

M A R C H 1975

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

Table

IV

PLANNED A N D ACTUAL CH A N G ES IN THE
FEDERAL BUDGET: 1973 TO 1974
( B i ll i o n s o f

D o ll a r s )
Budget
Plan

N I A Receipts

Ac t u a l

Error

$

$32 .6

$ -2 .9

N I A Exp e n di tu re s

2 9 .7
4 0 .7

3 4.4

6.3

N I A S ur p lu s o r Deficit

$ -1 1 .0

M -8

$ -9 .2

H i g h - E m p l o y m e n t Receipts

$ 3e.4

$ 41 .8

$ -3 .4

3 8.0

3 2.6

5.4

.4

$ 9.2

$ -8 .8

H i g h - E m p l o y m e n t Ex pe n di tu re s
H i g h - E m p l o y m e n t S ur p lu s o r
Deficit

$

rate of taxation without accompanying legislation. In
the case of corporations, inventory profits (which were
substantial in 1974) are taxed like all other profits even
though they are temporary and tend to be eliminated
when inventories are replaced at higher prices.
Another factor working to transfer funds from cor­
porations to the Federal Government is the rate of
depreciation on plant and equipment allowable for tax
purposes. Depreciation calculated according to his­
torical cost increases accounting profits more rapidly
than economic profits when replacement costs exceed
depreciation allowances. Corporate taxes are assessed
against accounting profits, and thus the effective cor­
porate tax rate on economic profits increases during
periods of substantial inflation.
By overestimating the growth in Federal expendi­
tures and underestimating the increase in receipts, the
net budget deficit was overestimated by a substantial
amount. The original NIA budget estimate for 1974
was an $11 billion deficit, or on a high-employment
basis, approximate balance. The NIA deficit which
was realized was $1.8 billion, and on a high-employ­
ment basis there was a recorded surplus of $9.2 billion.
Consequently, it appears that the budget provided
more restraint than was planned. To a certain extent
such a conclusion is valid, yet the degree of restraint
is distorted by the inflation factor. The restraining
effect of inflation as reflected in budget receipts holds
only to the extent that effective tax rates are increased
because of inflation.
Monetary Policy - The CEA’s primary emphasis is
always on fiscal policy, but general recommendations
are made about monetary policy. The 1974 CEA Re­
port represented a departure from tradition in that a
specific recommendation was made. The role for mone­
tary policy was stated as follows:
T h e monetary expansion in the second half of 1973
can be described by an increase in the narrowly



defined money stock (M i) of somewhat under 5
percent and an increase in the broadly defined
money stock (M 2) of about 8 percent, at annual
rates. Continued growth in M 2 at approximately
this rate would be consistent with our expectations
concerning the increase in money GN P during 1 9 7 4 .5

The M2 definition of money rose 8.5 percent from
1973 to 1974, or somewhat more than recommended
by the CEA. Furthermore, the growth of M2 in 1974
was not steady throughout the year, growing at an 8.7
percent annual rate in the first half followed by a 5.8
percent rate of advance in the second half. Given the
nature of this path and the lags in the effect of policy,
the economic impact of realized M2 growth in 1974
was probably little different than if a steady 8 percent
growth had occurred. The effect of the slowdown in
M2 in the second half of 1974 will tend to be reflected
in the course of economic activity in early 1975.
Although the CEA tended to de-emphasize M1; a
steady 5 percent growth was considered as being con­
sistent with the CEA projection of GNP. Mi grew 5.6
percent in 1974. The pattern of rapid growth in the
first half followed by slower growth in the second
half was even more pronounced for M, than M2.
Mx rose at a 6.1 percent rate in the first six months
of 1974, and then the growth rate dropped sharply to
a 2.8 percent rate in the second half. Again, this
pattern of rapid money growth followed by sharply
lower growth probably had little effect on the in­
crease of GNP from 1973 to 1974 relative to a steady
5 percent rate, but such a slowing carries implications
for the advance of GNP in early 1975.
•
r,1974 CEA Report, pp. 31-32.
Page 5

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

M A R C H 19 7 5

offset the effect of the less-than-expected
growth of Federal spending. In general, how­
ever, the differences between the two ex post
simulations are small relative to the total
error implicit in the model. In contrast to the
St. Louis model, the CEA was generally suc­
cessful in predicting the slowing in the income
velocity of money which occurred in 1974.

Table V

PROJECTED CHANGES IN SPENDING, OUTPUT, PRICES
A N D UNEMPLOYMENT: 1973 TO 1974
(D o lla r

Amounts

in Bil li on s)

Output

GNP
C E A Projection

(2 /1 /7 4 )

Actual
St. Louis M o d e l Projections
C h a n g e s in M o n e y a n d
F e de ra l S p e n d i n g as
Ac tually Occurred
C h a n g e s in M o n e y a n d
Fe de ra l S p e n d i n g Cons is te nt
w it h C E A A s s u m p t io n s of
2/1/74

$10 1.8
101.8

7 .9 %
7 .9

1 .0 %
-2 .2

Prices
6 .9 %
1 0 .2

5 .6 %
5 .6

POLICY RECOMMENDATIONS
FOR 1975
115.3

111.5

8 .9

8 .6

-1 .4

-1 .7

10.5

10.4

Analysis Based on the St. Louis Model
Even though the CEA projection of GNP for 1974
was on target, there was some indication that policy
plans deviated from realizations. To provide an esti­
mate of the effect of these deviations some ex post sim­
ulations of the St. Louis model are summarized. Since
the CEA’s GNP projection was on target, the St. Louis
model has little to explain, but such simulations are
given for the record.
The results of two ex post simulations of the St.
Louis model are summarized in Table V. The first
projection uses money and high-employment Federal
expenditures as actually recorded. The second projec­
tion is the result of using money and high-employment
expenditures consistent with the CEA policy recom­
mendations at the beginning of 1974.
The ex post projection using the actual movement
in the policy variables shows that the St. Louis model
projected the increase in GNP at $115 billion, or $13
billion more than actually occurred. Virtually all of the
error was concentrated in real product, as the model
successfully captured the movement of prices.® Even
though output was overestimated, the simulated aver­
age rate of unemployment was close to the realized
value.
The ex post projection using planned values for the
policy variables indicates that the net effect of policy
realizations was positive, that is, the effect on GNP of
the greater-than-planned increase in money more than
,;In light of energy developments in 1974, the price equation
in the model was modified to include the direct effect of
rising oil prices on the general price level. For discussion of
the original form of the price equation, along with the other
equations of the model, see Leonall C. Andersen and Keith
M. Carlson. “A Monetarist Model for Economic Stabiliza­
tion,” this R eview (April 1970), pp. 7-25.
 6
Page


Un­
em ploy­
ment
Rate

5 .5

The Administration’s projections for 1975 of
a 10.8 percent rate of inflation and a 3.3 per­
cent decline in real product represents one
5 .6
of the gloomiest forecasts made by any CEA
since it was created in 1946. The 1975 forecast ap­
parently reflects to a considerable extent the very
dismal performance of the economy in the fourth
quarter of 1974. With unemployment rising sharply
and rapid inflation continuing, the data for the
fourth quarter provided little basis for optimism. The
inflation projection, however, is less pessimistic than
G e n e r a l Price Index*
R a tio S e a l*
1958=100
195

R a tio Sc ale
1958=100
195

/

19 0

/

185

/

18 0

19 0
185
180

?0 % //

175

7 7 .9 4 -------

17 0

175
170

165

165

I,

16 0

160

155

155

15 0

150

+4 9%

135

135

13 0

^

-

130

125

125

120

120

i

i

a

£

C
T

2nd qtr

♦
1967

T
1968

♦
1969

t

t
1970

1971

t
1972

♦
1973
1974
1 975
U.S. Deportment of Commerc

*As used in National Income Accounts.
Percentages are annual rates of change for periods indicated.
Latest data plotted: 4th quarter 1974; dashed line indicates half-year estimates
from the 1975 Annual Report of the Council of Economic Advisers

the 10.8 percent figure would indicate, since it reflects
the Administration’s plans to increase excise taxes on
oil and gas in an effort to encourage less dependence
on imports of petroleum. Even in the absence of an
energy program, the Administration estimates that
prices would presumably rise by 8 to 9 percent. The
CEA does not indicate what output would be in the
absence of increased excise taxes.
In general, the Administration’s projections for 1975
are very similar to actual experience in the previous

FE DE RA L . R E S E R V E B A N K O F ST. L O U I S

M A R C H 1975

year, as shown in Table VI. This similarity not only
holds for the change in GNP, output and prices, but
for most of the components of GNP as well. Projected
growth of purchases of goods and services by Federal,
state, and local governments is little different from
what actually took place in 1974. Personal consump­
tion is projected to advance slightly more rapidly,
presumably in response to proposed tax cuts and in­
creased transfer payments.
Table

VI

CH A N G ES IN GN P & COMPONENTS:
1974 & 1975
(D o lla r Amounts
1974
Pers on al C o n s u m p t i o n

$ 71.8

in Bil lio n s)
Actual
8 .9 %

Business Fi x ed Inve stm en t

1 2 .8

9.4

C h a n g e in Inve nt ori es

-2 .0

—

Residential Constru ction
Fe der al Purchases

-1 1 .2

-1 9 .6

1975
$ 85 .1
6 .0
-1 8 .3
-2 .3

Projected*
9 .7 %
4.0
—
-5 .0

9.8

9.2

9.9

8 .5

State a n d Local Purchases

2 2.6

1 3 .3

23.1

1 2 .0

N e t Exports

-1 .9

—

-2 .3

—

GNP

$ 10 1.8

7 .9 %

$10 1.3

7 .3 %

* Estimated by this Bank and based on 1975 CEA R e p o r t.

Projections of investment are somewhat different
from 1974, with the change in inventory representing
the biggest deviation. In 1974, the rate of inventory
accumulation declined by $2 billion, but in 1975 the
CEA projects liquidation of inventory at a rate of $18.3
billion. As indicated in the CEA Report, a large part
of the inventory overhang consists of manufacturer
and dealer stocks of automobiles. Other investment
activity is also projected to be relatively weak in 1975.
Despite proposed increases in the investment tax
credit and decreases in corporate taxes, business fixed
investment is forecast to grow by only 4 percent in
1975. Residential construction activity is expected to
decline further, though the extent of the drop is much
smaller than in the previous year.

Federal Budget Program, for Calendar 1975
The budget program for 1975 is one of the most
ambitious ever developed during peacetime in U.S.
history. Normally, such a degree of fiscal activity oc­
curs only during wartime. However, the budget pro­
gram for 1975 represents an attempt to aggressively
and simultaneously attack the problems of unemploy­
ment and energy dependence. Inflation receives con­
sideration in the budget recommendations to the ex­
tent that expenditure increases are less than they
would otherwise be.



This section presents quantitative details of the
Federal budget program on an N basis for calendar
LA.
1975. For the first time, the Federal budget provides
considerable quarterly detail on the nature of the
budget program and underlying economic assump­
tions for the immediate future.7 In addition, long-term
projections through 1980 provide insights into the time
path envisioned by the Administration for key eco­
nomic variables. This presentation of additional in­
formation was not required for this budget according
to the provisions of the Congressional Budget and
Impoundment Control Act of 1974, but will be in
the future.
Expenditures — The budget program calls for an
increase in Federal expenditures of $46.3 billion in
1975, or an increase of 15.5 percent over 1974. Federal
expenditures rose 13 percent in 1974 and at a 7.8
percent average rate from 1968 to 1973. If the recom­
mendations are realized, Federal expenditures would
rise to 23 percent of the nation’s GNP in 1975, com­
pared to 21.4 percent in 1974 and 18 percent in 1965.
These measures provide an approximation of the de­
gree of growing involvement of the Federal Govern­
ment in the U.S. economy. Not fully captured by such
measures is the extent of direct Governmental regula­
tions of economic activity in the form of product
reliability, occupational and consumer safety, and en­
vironmental control.
Defense spending is expected to increase 5.1 per­
cent in 1975, representing a continuation of the 5.6
percent increase in 1974. By way of contrast, defense
spending had declined at a 1 percent average rate
from 1968 to 1973, with most of the decline concen­
trated in 1970 and 1971. The projected increase in
defense spending reflects an attempt to meet the
higher costs of maintaining forces and stocks of equip­
ment and supplies as well as an effort to modernize
weapons systems and equipment.
Nondefense spending is projected to advance by
19.2 percent in 1975, compared to 16 percent in 1974
and a 12.6 percent average rate of increase from 1965
to 1973. The increase of nondefense spending in cal­
endar 1975 reflects primarily a massive increase in
transfer payments of $26.7 billion. Of this total, $11.1
billion represents an increase in unemployment bene­
fits. The proportion of Federal expenditures in the
form of transfer payments has grown from 26.3 percent
in 1965 to an estimated 41.7 percent in 1975.
7This quarterly detail on the budget is found in The Budget
o f the United States Government, Fiscal Year 1976, Special
Analysis A.
Page 7

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

M A R C H 1975

T able

VII

PLANNED CHANG ES IN FEDERAL (N IA )
1974 TO 1975*
(B i ll i o n s
N IA

of

BUDGET:

D o ll a r s )

Receipts

$ -8 .4

C h a n g e d u e to g r o w t h

4 7.3

C h a n g e d u e to cycle

-3 6 .0

C h a n g e d u e to tax rate adj us tm en ts

-1 9 .7

N I A E x pe n di t ur e s

4 6.3

C h a n g e in defe ns e

4 .0

C h a n g e in n on d e fe n se

42.3

Du e to cycle

li.i

D ue to e x is t in g n o n d e fe n s e p r o g r a m s

31.2

N I A S ur p lu s o r Deficit
H i g h - E m p l o y m e n t Receipts
H i g h - E m p l o y m e n t E x pe n di t ur e s
H i g h - E m p i o y m e n t S ur p lu s o r Deficit

$ -5 4 .6
2 7.6
4 0 .1
$ -1 2 .5

* Estimated by this Bank from the Federal Budget for fiscal 1976.

R eceipts— Federal receipts on an NIA basis are
projected to decline by $8.4 billion in 1975. By com­
parison, such receipts rose $32.6 billion in 1974, or 12.6
percent. This sharp turnabout in receipts results pri­
marily from the forces of recession, though the Ad­
ministration’s program also contributes to the decline.
Table VII provides estimates of the sources of
change in the Federal budget from 1974 to 1975. If
the economy were operating continuously at highemployment, it is estimated that at projected inflation
rates Federal receipts would rise by $47.3 billion. The
projection of further deterioration of real economic
activity is estimated to have the effect of reducing
revenues by $36 billion, while the effect of the Admin­
istration’s tax proposals is to reduce revenues by an
additional $19.7 billion.
Proposed tax changes consist of (1) a temporary tax
reduction in the form of a tax rebate on 1974 income
for individuals; (2) permanent reductions in the rate
structure for individuals and an increase in the mini­
mum standard deduction; (3) a temporary increase
in the investment tax credit for businesses; (4) a per­
manent cut in corporate income taxes; (5) increased
excise taxes on oil and natural gas; and (6) a windfall­
profits tax on oil companies. In addition, as a result
of past legislation, the tax base for social security
contributions was increased from $13,200 to $14,100
effective January 1, 1975.
Surplus/Deficit Position — The combined effect of
rapidly rising expenditures and declining receipts is
a huge increase in the budget deficit. As indicated in

Page 8


Table VII the deficit is projected to increase by $54.6
billion — from $7.6 billion in 1974 to $62.2 billion in
1975.
Another way to view the genesis of the deficit is to
note that trend growth of receipts and increases in
expenditures for defense and existing nondefense pro­
grams would produce a decline in the deficit of $12.1
billion (47.3 - 4.0 - 31.2 — 12.1). In other words, with­
out deepening recession and proposed tax cuts, the
net budget position would switch from a $7.6 billion
deficit in 1974 to a $4.5 billion surplus in 1975. How­
ever, the recession reduces receipts by $36 billion from
this hypothetical level and increases expenditures (un­
employment benefits) by $11.1 billion. So it is esti­
mated that without the proposed tax changes the
deficit would be $42.5 billion, but a $19.7 billion net
tax reduction pushes the deficit to $62.2 billion in
1975.
With the budget position obviously influenced by
recessionary forces, calculations on a high-employment
basis are also provided in Table VII. This measure
supposedly provides a more accurate indication of the
thrust of the budget on economic activity. According
to this measure, fiscal actions are planned to provide a
stimulus of $12.5 billion to the economy in 1975. It
should be noted, however, that this calculation is in­
fluenced in considerable measure by inflation. The
inflationary bias implicit in the calculation of the highemployment budget indicates that the budget is
planned to be even more stimulative than the $12.5
billion shift in the high-employment budget would

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

M A R C H 1975

indicate. There is no accepted method of correcting
the numbers for this inflation bias.8

L a b o r M a r k e t Trends

Monetary Policy Recommendations for 1975
The Administration’s focus is on fiscal policy, yet
there are some well chosen words spoken with regard
to monetary policy. In contrast to the 1974 CEA Re­
port, the latest report shied away from offering specific
quantitative recommendations for monetary policy.
The CEA makes the following statement about mon­
etary policy:
Monetary policy faces great difficulties in the year
ahead and will require careful and continuous eval­
uation by the Federal Reserve. The uncertainties
that underlie the outlook for 1975 add to the im­
portance of a flexible monetary policy. Monetary pol­
icy must be conducted so as to encourage a nearterm recovery in the economy and a resumption of
sustainable economic growth. Toward this end, rea­
sonable growth in money and credit will be required
— growth which, one hopes, will encourage a freer
flow of credit and lower interest rates in private
credit markets.9
This recommendation conveys little meaning since
imprecise words like “flexible” and “reasonable” are
used. Reference to a freer flow of credit, however, does
suggest a step-up in the rate of monetary and credit
expansion from the rates of late 1974. More subtle
recommendations for monetary policy, which appear
to be implicit in the overall economic program, are
discussed in the next section.

EVALUATION OF
1975 ECONOMIC PROGRAM
According to the CEA, “The most pressing concern
of policy is to halt the decline in production and
employment so that growth of output can resume and
unemployment can be reduced . . . . The policies that
we use to support the economy in 1975 must be con­
sistent with a further reduction in inflation in 1976
and thereafter.”10 Despite this primary emphasis on
stimulating the economy in the short run, the CEA’s
long-run projections through 1980 indicate that gains
in reducing unemployment are not expected to come
quickly, nor is the rate of inflation projected to drop
8For further discussion of the relationship between inflation
and the high-employment budget, see the 1975 CEA Report,
pp. 62-65. Included in this discussion is an alternative cal­
culation of the high-employment budget which includes al­
lowance for the effect of inflation on inventory profits.
»1975 CEA Report, p. 26.
101975 CEA Report, p. 19.



f .m .i

________ ________

Unemployment Bate_________________________ p . m . i

8.2

-

/

7

*

-

L

w

1967 T 1968 ^ 19 6 9
1 9 7 0 ^ 1971
1972 ^
H73
1 9 7 4 ^ 1975
•Data are revised from this point.
Source: U.S. Deportment of Labor
Percentages ore annual rates of change for periods indicated.
Latest data plotted: January

sharply. If forces have already been set in motion to
reduce the rate of inflation sharply in 1975 and 1976,
a given growth in GNP will be distributed more
heavily toward real product gains.
Playing a strategic role in such an assessment is
the rate of monetary expansion. Despite wide ac­
ceptance of the direct relationship between the trend
growth of money and the rate of inflation over ex­
tended periods, there is nothing in the CEA Report
or the Federal budget documents that provides an
inkling of what monetary assumptions underlie the
long-range projections. Yet the budget presents a
scenario for GNP, prices, and output for the period
1975 to 1980.
For purposes of gaining some insight into the ex­
pected effects of monetary and fiscal actions in 1975
and beyond, some simulation results of the St. Louis
model are presented and compared with the CEA
projections. Econometric models inevitably have seri­
ous shortcomings in providing information about the
probable course of future economic events; yet, being
based on the experience of the past, their implications
should not be overlooked.11 Model results have to be
given a liberal interpretation, because events of the
" F o r a discussion and evaluation of the forecasting perform­
ance of econometric models of the U.S. economy, includ­
ing the St. Louis model, see Carl F. Christ, “Judging the
Performance of Econometric Models of the U.S. Economy,”
International Econom ic Review (February 1975).
Page 9

FE DE RA L . R E S E R V E B A N K O F ST. L O U I S

last two years have all but destroyed the myth that
economic forecasting has become a precise science.
It is to be noted that the St. Louis model is a policyoriented model which is based solely on past experi­
ence. Being a small model, the options are quite
limited in dealing with the operation of special factors
like energy crises or variations in food supply. Never­
theless, with energy problems looming so large that
they cannot be sensibly ignored, the model has been
modified to capture some of the effects of rising energy
prices. This modification consists of two changes: (1)
adding an excise tax variable to the price equation,
except that excise tax is interpreted broadly to in­
clude the increase in the price of foreign oil in 1975
and 1974; and (2) changing the assumptions about
the level and growth of potential output to reflect the
adjustment of aggregate supply to increased energy
costs and environmental regulations.

M A R C H 1975

point of departure. It should be noted, however, that
at this time there appears to be little likelihood that
either a 6 or 8 percent growth of money will be
achieved in first quarter 1975.
The results of these combinations of policies are
shown in Table VIII. The assumption of 6 percent
money growth yields a projection somewhat less than
the CEA projection of 7.3 percent growth of GNP in
1975, but the difference is substantial in 1976. Where­
as the CEA has a projected increase of GNP of 12.6
percent, the St. Louis model indicates that a steady
increase in money at 6 percent would yield only a
7.6 percent increase in GNP.
Table

VI II

PROJECTED CHANG ES IN G N P
1975 A N D 1976
(D olla r

Amounts

in Bil lio n s)
1975

Within the context of the St. Louis model, the Ad­
ministration’s projected increase in GNP is examined
to determine if it is consistent with their policy pro­
posals. A second exercise consists of an evaluation of
the price and output projections given the forecast of
GNP. A comparison of Administration projections with
those of the St. Louis model is in no way capable of
producing definitive conclusions, yet it is important to
scrutinize these projections within the context of an
alternative model. The comparison is very tentative,
however, because the Administration’s model is not
made explicit.

Feasibility of GNP Projection
The Administration’s projection of an increase in
GNP of $101.3 billion in 1975, or 7.3 percent, is ex­
amined by comparing it with two simulations of the
St. Louis model. One simulation uses a 6 percent
steady rate of increase of
and the other uses an
8 percent rate. Both alternatives would represent an
acceleration from the 2.8 percent increase that pre­
vailed in the second half of 1974. Even though 1975
receives major emphasis, the CEA also makes a pro­
jection for 1976. The forecast for 1976, which, in­
cidentally, is presented in the Federal budget and not
discussed in the CEA Report, is for a $188 billion
increase in GNP, or 12.6 percent. This assumption of
a sharp increase in GNP growth requires further
examination.
Both simulations use the path of high-employment
Federal expenditures implied in the Federal budget.
The money assumptions use fourth quarter 1974 as a

Page 10


CEA

Projection

(2 / 4 / 7 5 )

$ 10 1.3

1976
7 .3 %

$ 18 8.0

12 .6 %

St. Louis M o d e l Projections
1)

W i t h 6 per ce nt g r o w t h in
M x a n d F e de ra l s p e n d i n g
b a se d on 1 9 7 6 b u d g e t

9 2.1

6.6

1 1 2 .7

7 .6

2)

W i t h 8 pe rc e n t g r o w t h in
M i a n d F e de ra l s p e n d i n g
b a se d on 1 9 7 6 b u d g e t

101.9

7.3

143 .0

9 .5

The assumption of 8 percent money growth gives
a GNP for 1975 that is only marginally above the
CEA projection. The faster monetary alternative also
comes much closer than the 6 percent case to the
CEA projection in 1976, though it still falls short by
a substantial margin.
These simulation results raise questions about either
the nature of the monetary policy recommendation in
the CEA Report or the reliability of the St. Louis
model. An interpretation of the CEA Report is that
they are most concerned about accelerating the rate
of monetary expansion in the short term. Such actions,
according to the St. Louis model, indicate that accel­
eration to 6 to 8 percent will provide the CEA fore­
cast increase in 1975, but realization of their 1976
forecast would require further acceleration of money
growth starting in late 1975. This pattern appears
inconsistent with the CEA objective of first stimulating
demand and then, once the recovery is underway,
shifting the focus of policy actions to controlling
inflation.
There is an alternative interpretation, however, and
that is that the CEA envisions a rapid advance in the
income velocity of money as the recovery gets under­
way. This is a plausible assumption, though the im­
plicit rise in velocity in 1976 for the 6 percent money

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

case is very high relative to past ex­
perience. Given the Administration’s
GNP projections, a 6 percent growth
of money would imply velocity growth
of 2 percent in 1975 and 6.2 percent in
1976. An increase in velocity of 6.2 per­
cent would be the largest for any one
year since 1951.

Implications of Total Spending
Projections
Given the CEA projections of GNP
for 1975 and 1976, aside from the mat­
ter of how they are achieved, leaves
open the question of how GNP growth
is going to be distributed between prices
and output. This question is, of course,
the critical one as evidenced by the
success that the CEA enjoyed in project­
ing the advance of GNP in 1974, but the
failure to accurately forecast its dis­
tribution between prices and output.

M A R C H 1975

Table

IX

PROJECTED CH A N G ES IN GNP, OUTPUT, PRICES,
A N D EMPLOYMENT: 1975 - 1980
(Percent)
1975
C E A Projection
GNP

1977

1978

1979

1980

1 0 .8

7.3

12.6

1 2 .4

1 2 .0

1 0 .8

Output

-3 .3

4.8

5.6

6 .5

6 .5

6.5

Prices

1 0 .8

7.5

6 .5

5.1

4.1

4 .0

8.1

7 .9

7 .5

6 .9

6 .2

5 .5

7 .3

9 .5

9.4

9.3

9 .0

8.8

-3 .2

2.8

5.2

6.3

6 .7

6 .6

U n e m p l o y m e n t Rate
St. Louis M o d e l Projection
(1 )

W i t h C E A B u d g e t Pla n, 6 %
M o n e y G r o w t h , a n d Ve lo c it y
G r o w t h of 2 . 9 %
GNP
O utput
Prices

1 0 .8

(2 )

Rate

6.6

4.1

2 .9

2 .2

2.1

8 .2

8 .8

8 .6

8.1

7 .3

6 .5

7 .4

Unem ploym ent

W ith Approxim ate C E A
G N P G r o w t h Path
GNP

1 2 .5

1 2 .4

11.9

1 1.0

10.7

Output

-3 .1

5.1

7.0

7.1

6 .6

5.2

Prices

10.7

7 .2

5.1

4.5

4.1

5.2

8 .3

8 .3

7.6

6.7

5 .8

5.3

Unem ploym ent

The task of projecting prices and output continues
to be complicated by the operation of special factors.
Even though the oil embargo was lifted last spring,
it appears that price and output adjustments to higher
energy prices are still taking place. Furthermore, the
Administration’s budget program contains an energy
package that will require further adjustments. Also,
even though wage and price controls were lifted in
early 1974, there is a question of the long-term dam­
age which this program imparted to the economy by
distorting the allocation of resources. And finally,
environmental regulations have become so pervasive
in their influence that they can no longer be ignored
in the determination of the growth in the nation’s
productive capacity.
To deal with these problems within the context of
the St. Louis model, assumptions had to be made
about the time path of potential output. Given the
energy program proposed by the Administration, it
was assumed that the course of potential output has
been, and will continue to be, affected by higher
energy prices and environmental regulations. The
growth of potential output was assumed to be 3 per­
cent.12 To provide perspective, simulations were con­
ducted through 1980 and compared with those of the
Administration.
Table IX contains the results of these simulations
of the St. Louis model. The first simulation uses a 6
12The 3 percent figure is mentioned as a possibility in the
1975 CEA Report, pp. 63-64.



1976

(2 / 4 / 7 5 )

Rate

percent growth in M1; but in contrast to Table VIII,
assumes a trend growth in velocity of 2.9 percent.1
3
Federal spending is assumed to follow the course
outlined in the budget. As noted earlier, the 1975
GNP projection for this case is essentially the same
as the Administration’s. In addition, there is virtually
no difference in the projections of prices, output, and
unemployment.
The picture in 1976 is much different, however,
since a 6 percent growth in money does not come
near generating the CEA’s projected increase. The
St. Louis model has the rate of inflation dropping to
6.6 percent in 1976, substantially below the CEA’s
projection of 7.5 percent. Because of the lower GNP
projection in 1976, the St. Louis model shows a weaker
13The reservations expressed about velocity growth in 1976
also apply to the Administration’s longer-term projections.
Given their 1980 GNP projection, the following combina­
tions of money and velocity growth would yield such GNP
growth from 1974 to 1980:
Money
Velocity
6% ........................................ 4.7%
7
3.7

8

2.8

9
10

........................................ 1.9
.................................... 1.0

Realized growth rates since 1950 are as follows:
1950-55
1955-60
1960-65
1965-70
1970-74

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

Money
3.3%
1.3
3.1
5.2
6.6

Velocity
3.7%
3.1
3.2
1.9
2.7
Page 11

M A R C H 19 7 5

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

recovery in real product, only 2.8 percent in contrast
with the CEA estimate of 4.8 percent. And because
real product would rise more slowly, the St. Louis
model indicates that the unemployment rate would
rise to 8.8 percent. On the basis of these policy as­
sumptions, however, both prices and unemployment
would improve each year from 1976 through 1980.1
4
In order to assess the validity of the CEA’s projec­
tions of prices, output, and unemployment, the CEA’s
projected GNP path is taken as given in a St. Louis
model simulation. This means that the question of
attaining GNP is set aside to concentrate on the price
and output projections. Since the 6 percent money
alternative (with accelerated velocity) for the model
was so close to the CEA projection for 1975, the
simulation using the CEA GNP path is little different
for that year. According to the St. Louis model, an
acceleration of GNP has its primary effect on output
in the short rim. As a result, with prices little affected,
say, compared to the case with 6 percent money, out­
put jumps sharply to a 5.1 percent rate of increase in
1976. The high rate of GNP growth keeps inflation
relatively high and produces an acceleration beginning
in 1980. In contrast, even with high GNP growth, the
CEA has inflation coming down steadily to 4 percent
by 1980.
These simulations, based on varying assumptions,
yield the following conclusions:
(1) The 1975 CEA projections of prices and out­
put appear to be consistent with the path of GNP
that they forecast.
(2) Shortly after 1975, there is an indication that
the CEA might be too pessimistic on prices, which
also leads to the possibility that output growth might
14It should be noted that these projections are based on an
updated version of the St. Louis model as originally specified
in 1970. According to the model, and despite recent ex­
perience with inflation, the price level is very slow to respond
to a sustained acceleration in the growth of money and total
spending. More recent work at the Bank indicates that a
maintained growth in money of 6 percent would produce
an inflation rate of between 5 and 6 percent by 1980. See
Leonall C. Andersen and Denis S. Kamosky, “The Appro­
priate Time Frame for Controlling Monetary Aggregates:
The St. Louis Evidence,” Controlling Monetary Aggregates
II: T he Im plem entation (Proceedings of a Conference Held
at Melvin Village, New Hampshire, Sponsored by the Fed­
eral Reserve Bank of Boston, September 1972), pp. 147-177.


Page 12


be greater in the short run under their GNP
assumptions.
(3)
By the end of the decade, it appears that the
CEA GNP path does not produce the steady decline
in inflation and unemployment that they expect. In­
flation stays high and, as a result, output growth is
correspondingly less than the CEA projects.

SUMMARY
The Administration has projected another year of
rapid inflation and declining output. A projected im­
provement is hidden in the averages, however, as out­
put is forecast to rise in the second half of 1975 and
the rate of inflation is expected to decline. The Ad­
ministration also offers a scenario for the rest of the
decade such that by 1980 the inflation rate is reduced
to 4 percent and the unemployment rate is reduced to
5.5 percent.
Despite the publication of long-range projections,
the Administration program focuses on fiscal actions
for the next 21 months. The budget program contains
considerable stimulus in the form of tax cuts and con­
tinued increases in Federal spending. However, the
monetary actions that they consider consistent with
their 1975 economic program are not made explicit.
Using the St. Louis model as an aid in evaluating
the economic plan, there was little basis for quarreling
with the 1975 forecast. Beyond 1975, however, some
questions were raised about the likelihood of boosting
the growth of GNP to the assumed rates without
setting in motion further inflation problems later on.
Rising inflation in the future also means that the
growth in output is correspondingly reduced.
The Administration is confronted with very serious
economic problems and has presented a program to
deal with these problems. Despite the urgency of re­
suming output growth, according to the analysis of this
article, the problem of inflation control continues par­
amount. There is little prospect for sustainable longrun growth until inflation is purged from the economic
system. It is this goal that provides the challenge to
the monetary authority to maintain a moderate ex­
pansion of money and credit in the face of huge
budget deficits.

Prospects for Food and Agriculture in 1975
CLIFTON B. LUTTRELL and NEIL A. STEVENS

ONSUMERS can expect average retail food prices
to increase at an annual rate of about 10 percent in
the first half of 1975, according to the United States
Department of Agriculture (USDA). The projected
increase is based on prospects for a slight decline in
per capita supplies and a high but slowing rate of
demand growth. Cutbacks in production of most
animal products will lead to price increases for many
of these foods, and prices of most crop foods will also
increase.
Food price estimates for the second half of 1975
are less certain. Larger food crops this year and an
anticipated slower rate of increase in marketing
costs could lead to a reduction in the upward pres­
sure on retail food prices after mid-year.
Realized net farm income will likely be less than
the $27.2 billion estimated for 1974. Receipts from
farm product sales are expected to increase, but some­
what less than the rise in production expenses.
This article discusses the prospects for food and
agriculture this year. The material presented is based
primarily on reports given at the 1975 National Agri­
cultural Outlook Conference and other recent USDA
releases.

FOOD SUPPLY AND DEMAND
Farm product and food prices have risen sharply
during the past three years. Average farm product
prices rose at an annual rate of 18 percent from 1971
to 1974 while retail food prices rose at an 11 percent
rate. These rapid price increases can be attributed
largely to rising food demand, since production was
above the long-run trend (see accompanying chart).
Supply and demand forces a year ago indicated a
slowdown in the rate of increase of food prices.
Farmers, responding to the higher prices, imple­
mented plans to increase production of most crops
and livestock. However, adverse weather conditions
led to an 8 percent decline in overall crop production
and higher crop prices. Thus, despite some decline
in livestock prices, average farm product prices were
higher than a year earlier.



a slower growth in food prices than last year’s 15
percent rate. Bumper crops could lead to a significant
slowing in price increases in the second half of the
year. Also a reduction in the growth rate of the farmto-retail price spread should have a favorable impact
on food prices. Much of the food price increase in
1974 reflected higher marketing margins rather than
major increases in prices at the farm. The increase
in the farm-retail margin accounted for over 80 per­
cent of the increase in the average retail price. These
wider margins are attributed to an acceleration in
marketing costs and a recovery from the depressed
margins during the period of price controls and
sharply rising farm product prices in 1972 and 1973.
Marketing margins are expected to rise further in
the first half of 1975, but the increase is likely to be
at a more moderate rate than last year as the influence
of the recent period of price controls and the higher
petroleum prices subsides. On the other hand, the
threat of a reimposition of wage and price controls
may contribute to somewhat higher marketing margins
than would otherwise prevail.
As a result of a slower rate of monetary growth
since mid-1974, some moderation in the growth of
consumer spending may occur this year. Neverthe­
less, with a slight reduction in the per capita food
supply and rising prices, an increase in the percent­
age of consumer income spent on food is likely. The
Page 13

FE DE RA L . R E S E R V E B A N K O F ST. L O U I S

increase, however, will not be very large since con­
sumers will shift from higher-priced to lower-priced
foods. In the past two years consumer expenditures
for food have outpaced increases in consumer income,
thus reversing the long-run downtrend in the percent­
age of such income spent on food. Consumers spent
16.8 percent of their income on food in 1974, 15.9
percent in 1973, and a historical low of 15.4 percent
in 1972 (see Table I).

M A R C H 1975

Table I

Percent of Disposable Personal Income Spent on Food
D i s p o s a b le
Pers on al Inco me

Increases in exports to a number of developing
countries, including India and parts of Southeast Asia
and Africa, are in prospect. These nations are suffering
from extreme food shortages; however, they have little
means of financing food purchases and most ship­
ments to them will require subsidized financing
through Public Law 480.
As pointed out at the Outlook Conference1, part
of the food shortage problem in the less developed
portion of the world is the result of unwise farm
policies such as the artificially high support prices
pursued in the more developed nations during the
past two decades. The resulting surpluses were used
to provide large amounts of food aid to the less de­
veloped nations, which inhibited their food produc­
tion and led to further imbalances in their population-food production ratio. Consequently the reduc­
tions in world grain production in 1972 and 1974 and
the removal of most government price supports in
this country left the developed portion of the world
without surplus grain and the less developed nations
in an extremely vulnerable position.
1Harry Walters, The W orld F o od Situation (a speech delivered
at the 1975 National Agricultural Outlook Conference, Wash­
ington, D.C., December 9, 1974), pp. 4, 5, 8.

Page 14


Percent S pe nt
on
Fo od at H o m e

Percent S p e n t
o n T o t a l Fo od

1960

$ 35 0.0

1 6 .2 %

2 0 .0 %

1965

473 .2

1 4 .6

18.1

1970

6 9 1 .7

1 2.7

1 6 .2

19 71

Although export demand for farm products is ex­
pected to remain relatively strong in 1975, export
volume will likely be down about 20 percent from last
year as a result of reduced crop production last fall
and higher prices. The dollar value of such exports,
however, may be slightly above the record $21.3 billion
last year. The high export demand reflects reduced
world grain crops in 1974 coupled with the lowest
stock levels in more than two decades. Feed grain
exports are likely to be down about 25 percent from
the 44 million tons last year but will still total about
20 percent of 1974 production, only slightly less than
the percentage exported last year. On the other hand,
wheat exports are forecast at 1.1 billion bushels,
slightly less than a year ago, and rice exports are
projected at a record 74.5 million cwt., 50 percent
more than a year ago.

Year

( b i ll i o n s of
d o ll a r s )

746 .4

1 2 .3

1 5.7

1972

802 .5

12.0

15.4

1973

9 0 3 .7

1 2 .5

15.9

1974

9 7 9 .7

13.3

1 6 .8

Source: U .S. Department of Agriculture, N a tio n a l F o o d S itu a tio n
(February 1975).

The quantity of food available for consumption in
the United States in the first half of this year will
likely be somewhat less than a year ago, due to the
expected decline in livestock products. Beef supplies
will be relatively large, but pork, mutton, poultry,
eggs, and dairy products will decline. Somewhat
larger crop food supplies are in prospect, aided by a
larger supply of potatoes, rice, citrus fruits, dried
beans, and peas.
The quantity of food available to consumers in late
1975 will be determined in part by forces that affect
farmers’ production plans in the early part of the year.
These factors are mixed. On the one hand, farmers
have probably not fully adjusted to the recent crop
price increases and the lifting of Government supply
restrictions last year. This will tend to expand crop
acreages. On the other hand, such expansion will be
limited by rising production costs. Farmers, for exam­
ple, are faced with sharply higher fertilizer, machin­
ery, and land prices. Fertilizer prices in late 1974 were
82 percent above last March when the 1974 crop was
planned. Higher oil prices in the coming months are
also likely. The rate of increase of farm machinery
prices may slacken this year, but in late 1974 such
prices were 23 percent above those of a year earlier.
Pesticide supplies may be short in 1975 due to high
world demand and a lack of plant expansion in this
industry in recent years. Expansion of agricultural
output may also be hindered by increased uncertainty
about regulations, price controls, and the availability
of fertilizer and other inputs.

OUTLOOK FOR AGRICULTURE
The year 1974 was a turbulent one for feed grain
and livestock farming. A substantial reduction in
feed grain production and the production lag in live­

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

stock output resulted in producers of grains and live­
stock receiving radically different price signals. What
these signals mean in terms of prospective output
and prices for the feed grain-livestock sectors and
the outlook for important food crops are discussed
in this section.

M A R C H 1975

Table

II

Livestock and Poultry Feed Price Ratios
November
Ratio
Beef steer —

1972

c or n, O m a h a 1

Hog —

Feed Grains

c or n, O m a h a 2

Milk —

feed, U .S .3

1973

1974

24.9

16.5

1 0 .8

20.6

16.9

1 1.0

1 .7 5

1 .6 2

1 .22

B roi le r —

Feed grain production declined 20 percent last year
as a result of the worst crop growing conditions in
thirty years. This decline was one of the largest in
the post World War II period. It compares with other
major declines of 24 percent in 1947, and declines of
10 to 13 percent in 1949, 1961, 1964, and 1970. Each
of these declines reflected reduced yields per acre
except in 1961 when crop production controls were
more restrictive and the acreage planted was reduced.
Compounding the problems associated with lower
feed grain production last year were the relatively
low levels of beginning stocks. During the 1950s and
1960s large Government stocks, in addition to private
holdings, helped to offset the effects of production
shortfalls. For example, despite the production de­
cline of 12 percent in 1949 the total quantity of feed
grain available was actually larger than in the previ­
ous year. In 1961-62 the quantity available was down
only 2.3 percent, and in 1964-65 and 1970-71 the
quantity was down only 6.7 and 8.3 percent, re­
spectively. In contrast, this year the quantity is down
over 21 percent.
The cutback in the 1974-75 feed grain crop re­
sulted in sharp increases in feed grain prices last
fall. Feed grain prices have declined since the end
of the year, but they are still relatively high and
farmers are likely to increase the number of acres
of feed grain crops despite higher production
costs. Hence, with favorable weather, larger supplies
of crops are in prospect for 1975. For example, corn
yields should average 90 bushels or more per har­
vested acre, compared with 71.3 bushels last year;
with a moderate rise in acreage this would result
in a record crop. A total feed grain crop of 30 to
50 percent above last year’s 165 million tons is pos­
sible, and unless the livestock industry turns sharply
upward and exports rise by an unusual amount, this
record level of production would result in a build-up
of stocks for the 1975-76 marketing year.

Livestock and Animal Products
High feed prices and rising prices of other inputs
coupled with relatively low livestock product prices



fe e d , U . S . 4

2.7

2 .5

2.6

Turkey —

fe e d ,

4 .5

5 .3

3.2

8.0

8.6

6.6

U.S.4

E g g ------f e e d , U . S . 5

b u sh els o f No. 2 yellow corn equal in value to 100 pounds of beefsteer.
2Bushels of No. 2 yellow corn equal in value to 100 pounds of
barrows and gilts.
3Pounds of concentrate ratio equal in value to one pound whole
milk.
4Pounds of feed equal in value to one pound poultry live weight.
5Pounds of feed equal in value to one dozen eggs.

last year resulted in a drastic reduction in the profita­
bility of livestock feeding. With rising costs and little
change in the price of meat, poultry, dairy products,
and eggs, major losses were realized in most feeding
operations. One indicator of this unprofitable situation
was the reduced livestock-feed price ratios. Last No­
vember the beef-corn price ratio stood at 10.8 ( bushels
of corn equal in value to 100 pounds of beef-steer),
compared with 24.9 and 16.5 in 1972 and 1973, re­
spectively. Most other livestock and livestock product
feed price ratios were also well below levels in late
1972 and 1973 (see Table II). This unprofitable situa­
tion for livestock production is leading to considerable
adjustments in the livestock industry. The farmer, in
planning production, weighs the expected returns
against the associated costs. If the profit outlook is
good, he will likely expand his operations. Conversely,
if profits look bleak, he will cut back or quit such
operations altogether.
Cattle — Cattle feeders had already made consid­
erable cutbacks last fall, having experienced financial
losses since late 1973. The number on feed in the
major feeding states was 37 percent less in February
than a year earlier, and fed cattle marketings de­
clined. Nevertheless, fed cattle prices have declined.
They rose last summer, but declined in the fall as a
result of rising non-fed beef supplies.
As demand for feeder cattle waned, cow-calf opera­
tors began to experience losses. Feeder cattle prices
fell from $49 per cwt. in early 1974 to $24 in early
1975. These price declines led to a sharp increase in
slaughter of non-fed cattle which more than offset the
decline in fed cattle slaughter. The increased slaughter
came from culled cows, calves, and a dramatic in­
Page 15

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

crease in non-fed and short-fed steers and heifers.
Nevertheless, with the largest inventory of cattle in
history, the number of beef cattle on farms and
ranches continued to build up. By early 1975 total
cattle numbers were up 4.2 million, or 3 percent
from a year earlier.
The number of cattle slaughtered this year may be
up 10 to 15 percent from a year ago, but the timing
will be dictated largely by pasture and range condi­
tions and feed prices. Marketings may decline during
the spring months as pastures improve, but beef sup­
plies for the year are expected to be larger than last
year despite some reduction in the average weights
of steers and heifers and increased calf slaughter.
However, the larger supplies of beef may not result
in much decline in beef prices as higher prices for
other meats will tend to place upward pressure on
cattle prices. Choice cattle prices may thus be some­
what higher this spring than the $37 per cwt. late
last year.
The lower weights of marketed cattle is the in­
dustry’s response to low feeding margins. By market­
ing cattle at reduced weights, more pounds of beef
can be produced with a given amount of grain, and
total beef production from the current cattle inven­
tory will be reduced. Nevertheless with the large
cattle inventory, next year’s calf crop is still expected
to be larger than this year’s, but the rate of increase
will be lower. Thus barring severe weather condi­
tions for pastures and feed production, cattle num­
bers will continue to increase through 1975 providing
a base for a greater beef production in the coming
years.
Hogs — The hog inventory has declined since 1971;
thus the adjustment problem for hog producers is not
as severe as for cattle producers. Hog producers re­
acted strongly to a reduction in profits last year and
began to reduce breeding inventories. Sow slaughter
last fall rose 50 percent from a year earlier, and 10
percent fewer sows were farrowed during the September-November period than a year earlier. Another
reduction is expected during the December 1974 May 1975 period.
The cutback in farrowing will lead to a reduction
in pork production. Pork production in the first quarter
of this year is likely to be down 8 percent from a
year earlier and 10 percent from the fourth quarter of
last year; further reductions are likely in the second
quarter. Since feed prices are likely to remain high
and the expected reduction in the December-May pig

Page 16


M A R C H 1975

crop is likely to be realized, higher hog prices are in
prospect throughout 1975.
Fall farrowing in 1975 may remain relatively low
even with large grain crops and lower grain prices,
since hog producers have traditionally not expanded
farrowings in the fall months. With significantly lower
com prices an expansion in farrowing might take
place early next year, resulting in a pick-up in hog
slaughter in the second half of the year.
Poultry and Eggs — Poultry and egg producers have
made cutbacks in egg, broiler, and turkey produc­
tion as a result of reduced profits. Ratios of poultry
and egg prices to feed prices during most of last
year were consistently unfavorable to producers rel­
ative to other recent years.
Egg production declined in the second half of last
year relative to a year earlier, and with the reduced
laying flock, production in the first half of 1975 may
average 5 percent below a year ago. Replacement
chicks for early 1975 are down from a year ago and
eggs in incubators to provide pullets for early
summer are also down. Thus lower egg production is
likely through most of 1975. Egg prices, however,
were somewhat lower than a year ago through the
first quarter of the year, and may show some further
decline in the spring.
Broiler production in 1974 averaged about the same
as a year earlier, although production was declining
in the last quarter. Broiler prices have been relatively
high for several months, but with high feed costs,
there is little incentive to expand output. Broiler
chicks and egg sets for January-March marketings
were down 8 percent from a year ago; production
during the first half of the year is likely to be down by
about the same percentage. As production declines,
prices are expected to move up through the first half
of 1975, and the profit level in the first half will de­
termine production in the second half of the year.
Turkey production in 1974 was slightly above a
year earlier, although production dropped below yearearlier levels in the latter part of the year. Turkey
output in the first half of 1975 will likely be down
substantially from a year ago and prices higher as
poult placements for marketing in early 1975 dropped
13 percent.
D airy— Milk production was estimated at 115.4
billion pounds in 1974, about the same as in 1973.
Milk output is expected to remain about the same
in early 1975 as a year ago, and output for the second

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

half of 1975 will largely depend on prospects for feed
grain production.

Food Crops
F ood Grains— Strong world demand for wheat
coupled with a relatively small increase in U.S. pro­
duction has resulted in a sharp reduction in wheat
stocks and higher average prices. U.S. production last
year was up only 5 percent from a year earlier de­
spite a 19 percent increase in acreage. Consequently,
the total U.S. wheat supply for 1974-75 is 5 percent
below that of last year.
High wheat prices last fall led to a 6 percent in­
crease in the acreage seeded to winter wheat, and a
moderate increase is in prospect for spring wheat
acreage. Spring wheat planting will be limited, how­
ever, by strong competition for cropland from other
crops.
In contrast to the relatively small increase in wheat
output, rice production increased 23 percent from
1973 to 1974. Rice prices in January were only twothirds as high as a year earlier, but lower world pro­
duction last year is likely to keep demand for rice
exports strong and prices firm.
Reflecting reduced production last year, soybean
supplies in the current marketing year are down 13
percent and soybean oil and meal supplies, the main
derivatives of soybeans, are down 6 and 7 percent,
respectively, from a year ago. Nevertheless, soybean
prices in early March were well below those of a
year earlier.
Soybean acreage this year may be up from a year
ago. The soybean-com price ratio is about 2 to 1
which will tend to encourage farmers to substitute
corn for soybeans. On the other hand, the price re­
lationship between soybeans and cotton tends to
favor the substitution of soybeans for cotton. Hence,
with normal weather and the expected higher yields
per acre, soybean production in 1975 could be well
above last year’s level.
Fruits and V egetables— The 1974-75 citrus crop
was about 6 percent larger than a year earlier and
slightly larger than the 1972-73 record output. Non­
citrus fruit production last year was about the same
as in 1973, but the supply of processed non-citrus
fruits is above a year ago.
Supplies of processed vegetables are moderately
larger than a year ago as a result of increased supplies
of tomatoes and some frozen vegetables. Fresh vege­



M A R C H 1975

table supplies were down last fall and this winter, and
prices were somewhat higher than a year earlier. Pro­
duction will primarily determine price movements
later in the year. A record fall potato crop has resulted
in lower potato prices, and a large dry bean and pea
crop induced by high 1973 prices has resulted in price
declines for these items.
Sugar — Sugar prices rose five-fold last year leading
to sizable price increases for all sugar-using products.
Both U.S. and world sugar prices exceeded 55 cents
a pound in late 1974, up from 11 cents a year earlier.
The United States imports about 50 percent of the
sugar it consumes; thus supply and demand conditions
in other nations are major factors in determining
domestic sugar prices.
Part of the sharp price increase can be traced to
ill-advised price and production regulations in the
major producing countries. World sugar consumption
has exceeded production for the past three years.
Stocks have been reduced to relatively low levels, but
output and consumption did not respond to declining
stocks and rising domestic prices as would have been
expected. Growers in some nations were compelled to
sell their sugar at artificially low prices and, conse­
quently, had little incentive to increase production.
Also, consumers in some nations were permitted to
purchase sugar at artificially low prices and had little
incentive to reduce consumption. In addition, rising
demand for sugar from the petroleum exporting
countries contributed to the upward price movement.
Sugar prices have tended to moderate since last fall.
However, they are still very high compared with
recent years and are expected to stimulate sugar pro­
duction this year in those nations that permit price
increases to be passed on to producers. For example,
U.S. sugarbeet growers on January 1 indicated that
they would increase their acreage planted to sugarbeets this year by 20 percent.

Nonfood Crops
Cotton production in 1974 fell 10 percent from the
previous year as a result of adverse weather condi­
tions. Despite the lower production, cotton prices have
declined substantially from their peaks last winter,
reflecting a decline in demand. Demand for all fibers
declined as demand for textiles fell off, causing a
large buildup in textile inventories.
Prospects for cotton production in 1975 hinge on
the producers’ reaction to lower cotton prices relative
Page 17

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

to other crops, primarily soybeans, and the higher
cotton loan rate. The preliminary loan rate of 34.27
cents per pound for middling 1-inch cotton is up 9.01
cents from last year. Farmers may plant about 9.5
million acres this year, down from 14.25 million in
1974. On this basis upland production with average
yields would total 8.5 to 9.5 million bales, down from
11.7 million in 1974.
Tobacco production was up 12 percent in 1974, but
lower beginning stocks and strong demand led to ris­
ing prices. The 1975 marketing quota for flue-cured
tobacco of 1,492 million pounds is up 15 percent from
1974, and the burley marketing quota is up 10 percent.
The higher quotas combined with relatively high
prices will likely mean increased production in 1975.

Farm. Income
Net farm income is expected to be less than a year
ago. Cash receipts will probably increase again, re­
flecting somewhat higher average prices and perhaps
larger crops. Production expenses will continue to
rise, but the rate of increase should be less than the
high rates of the past two years.
Realized net income last year totaled $27.2 billion,
down from the record high $32.2 billion a year earlier.
Cash receipts, estimated at $95 billion, were up about
$6 billion from 1973. Realized gross income was up
5 percent, but farm production expenses were up 16
percent.


http://fraser.stlouisfed.org/
Page 18
Federal Reserve Bank of St. Louis

M A R C H 1975

SUMMARY
Further increases in food prices are projected for
1975, especially in the first half of the year. Leading
the list of those foods which will likely be higher are
crop foods in the first quarter and red meats and
poultry in the second quarter. Larger beef supplies
may prevent major increases in beef prices. The vol­
ume of food consumed per capita may be slightly less
than last year, with increases in crop foods partially
offsetting some decline in livestock and livestock pro­
ducts. Consumers will spend a somewhat higher pro­
portion of their incomes on food.
Livestock farmers should experience a somewhat
improved profit picture this year. Livestock prices are
expected to increase as smaller quantities of most
livestock products are marketed. Crop prices are be­
lieved to be sufficiently high to provide incentive for
major increases in production, given a normal grow­
ing season. Feed prices may thus decline further in
the second half of the year. With somewhat lower
feed prices, feeding margins should increase, leading
to higher profits and providing incentive for livestock
expansion in late 1975 and early 1976.
While the production and price outlook for both
livestock and crops this year is subject to much
uncertainty, both gross farm income and farm pro­
duction expenses are expected to rise. Expenses, how­
ever, may rise at a somewhat higher rate than income,
and net farm incomes are likely to be below the 1974
level.

F E D E R A L R E S E R V E B A N K O F ST. L O U I S

M A R C H 1975

Reprint Series
O V E R THE YEARS certain articles appearing in the R e v i e w have proven helpful to hanks,
educational institutions, business organizations, and others. To satisfy the demand for these
articles, our reprint series has been made available on request. The following articles have
been added to the series in the past six years. Please indicate the title and number of article in
your request to: Research Department, Federal Reserve Bank of St. Louis, P. O. Box 442,
St. Louis, Mo. 63166.
NUM BER
35.
36.
37.
38.
39.
4 0.
4 1.
4 2.
4 3.
44.
4 5.
46.
4 7.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
79.
80.
8 1.
82.
83.
84.
8 5.

T I T L E O F A R T IC L E

A Program of Budget Restraint
T h e Relation Between Prices and E m ploym en t: Tw o Views
M onetary and Fiscal Actions: A T e s t of T h e ir Relative Im portance in
E conom ic Stabilization — C o m m e n t and Reply
To w a rd s a Rational Exchange Policy: Som e Reflections on the
British Experience
Federal Open M arket Com m ittee Decisions in 1968 —
A Year of W atchful W aiting
C ontrolling M oney
T h e Case for Flexible Exchange Rates, 1969
An Explanation of Federal Reserve Actions (1 9 3 3 -6 8 )
International M onetary Reform and the "C ra w lin g Peg”
C o m m e n t and Reply
T h e Influence of Econom ic A ctivity on the M oney Stock: C o m m e n t; Reply;
and Additional Em pirical Evidence on the R everse-Causation A rgu m e n t
A Historical Analysis of the Credit C run ch of 1966
Elem ents of M oney Stock Determ ination
M onetary and Fiscal Influences on Econom ic Activity —
Th e Historical Evidence
T h e Effects of Inflation (1 9 6 0 -6 8 )
Interest Rates and Price Level Changes, 1952-69
T h e New, New Econom ics and M onetary Policy
Som e Issues in M onetary Econom ics
M onetary and Fiscal Influences on Econom ic Activity: T h e Foreign Experience
Th e A dm inistration of Regulation Q
M oney S u p p ly and T im e Deposits, 1914-69
A M onetarist Model for Econom ic Stabilization
Neutralization of the M oney Stock, and C o m m e n t
Federal Open M arket C om m ittee Decisions in 1969 —
Y e ar of M onetary Restraint
M etropolitan Area G row th: A T e s t of Export Base Concepts
Selecting a M onetary In d ic a to r— Evidence from the United States and
O the r Developed Countries
T h e “ C ro w din g O u t” of Private Expenditures by Fiscal Policy Actions
Aggregate Price Changes and Price Expectations
T h e Revised M oney Stock: Explanation and Illustrations
Expectations, M oney and the Stock Market
Population, T h e Labor Force, and Potential O u tpu t: Im plications for
the St. Louis Model
O bservations on Stabilization M anagem ent
T h e Im plem entation Problem of M onetary Policy
C ontrolling M oney in an O pen E conom y: Th e G erm an Case
T h e Year 1970: A "M o d e s t” Beginning for M onetary Aggregates
Central Banks and the M oney Su p p ly
A M onetarist View of Dem and M anagem ent: T h e United States Experience
High E m plo ym en t W itho ut Inflation: On the Attainm ent of A dm irable Goals
M oney Stock Control and Its Im plications for M onetary Policy
G erm an Banks as Financial D epartm ent Stores
Tw o Critiques of M onetarism
Projecting With the St. Louis M odel: A Progress Report
M onetary Expansion and Federal O pen Market C om m ittee
O perating Strategy in 1971
M easurem ent of the D om estic M oney Stock
An Appropriate International C u rrency — G old, Dollars, or SD R s
F O M C Policy Actions in 1972
T h e State of the M onetarist Debate
C om m e n ta ry: Lawrence R. Klein and Karl B ru n ner
T h e Russian W heat Deal — H indsight vs. Foresight
A C om p ara tive Static Analysis of Som e M onetarist Propositions
Balance-of-Paym ents Deficits: M easurem ent and Interpretation
Real M oney Balances: A M isleading Indicator of M onetary Actions
T h e Federal Open Market C o m m itte e in 1973




IS S U E
M arch 1969
M arch 1969
April 1969
April 1969
M ay 1969
M ay 1969
Ju n e 1969
Ju ly 1969
February 1969
Ju ly 1969
A u g u st 1969
Septem ber 1969
O ctober 1969
N ovem ber 1969
N o ve m b e r 1969
Decem ber 1969
Ja n u a ry 1970
Ja n u a ry 1970
February 1970
February 1970
M arch 1970
April 1970
M ay 1970
Ju n e 1970
Ju ly 1970
S eptem ber 1970
O ctober 1970
N o vem ber 1970
Ja n u a ry 1971
Ja n u a ry 1971
F ebruary 1971
D ecem ber 1970
M arch 1971
April 1971
M ay 1971
A u g u st 1971
S eptem ber 1971
Septem ber 1971
O ctober 1971
N o ve m b e r 1971
Ja n u a ry 1972
February 1972
M arch 1972
M ay 1972
August 1972
M arch 1973
S eptem ber 1973
O ctober 1973
Decem ber 1973
N o ve m b e r 1973
February 1974
April 1974

Page 19