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Talk By
Hugh D. Galusha, Jr., President
Federal Reserve Bank of Minneapolis
To
North Central Petroleum Credit Association
Radisson Hotel
Minneapolis, Minnesota
March 20, 1967
around.
Legislative remedies may cure the patient--but they sometimes
shortep^nis life.
* * * * *
the unknown, 1967, which, though, is what I foolishly promised I would do
at the otrtcat
fcs.
is left of 1967 than you do.
The truth is that I know no more about what
I sometimes get the uncomfortable feeling that,
as a Federal Reserve official, I am endowed by my friends (and enemies) with
a great gift of prophecy and that my casual remarks about coming economic
events are given great weight.
If 5
1
’ '
why this makes me acutely nervous.
For some little while now, as you know, the Federal Reserve has
been working toward greater monetary ease.
And for the obvious reason.
Inflationary pressures have become less strong.
Of course, the recent marked
decline in interest rates is not entirely the System's doing.
sector's appraisal of 1967 has changed.
The private
Most importantly, the President's
call for a tax rate increase triggered expectations of greater monetary
ease and, in consequence, interest rates declined.
done its part.
And happily, I would add.
did not enjoy 1966.
Still, the System has
Whatever our critics may say, we
This is most clearly revealed by the promptness with
which the System moved to a policy of greater monetary ease.
0
- 7 But it would be quite wrong to interpret the recent decline of
interest rates and the increase in credit availability as signaling a
recession.
In the Federal Reserve anyway, the dominant expectation would
seem to be that the end of 1967 will find the economy growing more rapidly
again.
This is what Chairman Martin told the Joint Economic Committee of
Congress in his appearance of a couple of weeks ago.
And apparently the
Administration is also expecting the present slow-down to be only temporary.
Otherwise the President would hardly have proposed his 6 per cent surtax.
With an economic outlook more optimistic than pessimistic, it is
perhaps not to be expected that interest rates will decline a whole lot
further.
rates.
As I have emphasized, we have already had a dramatic decline in
But beyond this, what can one say.
The difficulty, apparent enough,
is that what the Federal Reserve does in coming months must depend largely on
what the Congress does and what monetary authorities in other countries do.
In matters of taxation, the President proposes, but the Congress disposes.
And since the President has made his proposal, it is up to the Congress how
much freedom for maneuver the System is going to have.
In some lesser measure, it is also up to the monetary authorities
in other countries to decide how much freedom the System shall have.
Our
government could go further than it has in directly controlling international
flows of funds, but our present network of controls allows for the free
movement of short-term funds.
In consequence, the differential between
monetary conditions here and abroad still influences considerably our balance
of payments position.
Witness what happened in 1966, when a massive inflow
of Euro-dollars gave us a slight official settlements surplus.
Actually, the dollar has never enjoyed greater confidence than it
does today.
But to maintain confidence, we have got to be watchful of our
- 8 -
international payments position.
It could dissolve in a return to larger
deficits.
For good or bad, the Federal Reserve is therefore limited by world
monetary conditions.
monetary cooperation.
We have lately witnessed a marvelous instance in
In concert, Germany, the U.K. and the U.S. have worked
toward lower interest rates.
But whether domestic conditions in the several
countries will remain such as to allow the effort to continue is not easily
foretold.
* * * * *
I am>&uare of having been of little help on what the fjifctrfe holds.
For this, I have alrefc(4y offered my apologies.
I doJaotS^ though, that I
have made some small contribution to youi^trrtferstanding of why the System
has behaved as it has.
This i&^wtfa^SI. most wanted to do, for as I indicated
when I began these r^atfffcs, the Federal ReWrve does need your thoughtful
support,
fy p in might add, your thoughtful criticisms.
Both, though,
regvfre understanding of what the System has been trying^^o do and why.
(
9
II “ 9
Declines in orders are widespread among durable manufacturers, including
machinery, and especially orders for metal cutting and forming tools
which in January were 40 per cent below a year ago.
Autos,
Daily average sales of new domestic automobiles
continued to weaken in the first 20 days of February.
Assuming this
tendency continues through the remainder of the month, the seasonally
adjusted annual rate for February will likely be about 7.3 million
units, 7 per cent below the 7.8 million unit rate for January and about
one-fifth below the 9.2 million unit rate a year earlier.
The automobile industry's planned output curtailments in
February, along with severe snowstorms and a wildcat strike at the
General Motor's Fisher body plant, seem to have stopped the recent
expansion of inventories of new cars at about 1.5 million units.
Out
put for the entire month of February is expected to be at a seasonally
adjusted annual rate of about 6.5 million units, down at least 10 per
cent from the preceding
month and 30 per cent below a year ago.
With
a sales rate of 7.3 million units, the seasonally adjusted inventory
level at the end of February would be slightly less than at the end of
January.
In relation to this year's lower sales rate, of course,
stocks are considerably above a year ago.
Prices of used cars remained virtually unchanged in January
at the lowest point in the last four years.
Consumer credit.
Consumer instalment credit continued to -
grow at a slow rate in early 1967.
Preliminary January data for
11 - io
consnercial banks, however, suggest a little faster rate than in
December but slower than in the fourth quarter as a whole.
Gir^
basis, and in H uliL u£ lumut auto and other sales information, we
project the rirst quan t a tixpausiuu at $4*0 billion, annual idle-.
To a large extent, the pattern of credit use last year
paralleled developments in consumption expenditures.
The second and
fourth quarters of 1966, for example, were periods of relative slack
in consumer spending, especially for autos and other durable goods, and
they were periods of slow growth in consumer credit as well.
The, low
point for the year was reached in December when the iiiLiuiroTr iu uuLi>
standing LLedlt woo at an annual rate of Q3.0 billion, the c m a H eot inr*
t^s, Ir*—
viii^T^ Lliau fouL1 veary.
For 1966 as a whole,
-r
n
II - 11
cratftL auiuuumd td $6.1" billion, dimply leaa tliaii Ltlfe record
>>
increase was a little less than 9 per cent, compared with a rise of
more than 13 per cent in 1965 and increases of 10 per cent or more for
all previous years of the current expansion.
Nuch of the sluggishness in consumer credit has been and
continues to be associated with slow sales of autos.
But demand for
personal loans and repair and modernization loans also has been slow.
The only area of strength has been in "other consumer goods", and this
probably reflects the inclusion in this category of an ever-widening
group of consumer items purchased on revolving credit plans.
The gap between new credit extensions and repayments on old
debt has narrowed.
Credit extensions were running at a $79 billion
annual rate early in 1966, they topped $80 billion briefly in the
summer months, and then they backed off again toward the end of the
year and apparently are continuing downward in the current quarter.
In the meantime, repayments expanded from an annual rate of just under
$72 billion in the first quarter to nearly $74 billion in the last and
are estimated at about that rate in the current quarter.
Consumer buying plans.
Consumer buying intentions have
continued to weaken in recent months according to the Census quarterly
survey in mid-January.
The proportion of households expecting to pur
chase new automobiles, household durables, and houses were all below a
year ago.
Declines in intentions to purchase new automobiles and houses
II - 12
began to show up in the surveys in the third quarter of last year, a
quarter later than the initial downturn in actual reported purchases.
Intentions to purchase new automobiles within the next
12 months fell to 9.4 perccent of reporting households from 9.8 per
cent a year earlier.
Intentions to buy used cars, however, were
8.0 per-cent in mid-January as compared with 7.4 per cent a year ago.
Reported intentions to purchase new or previously occupied
houses within 12 months decreased to 4.6 per cent in the current survey
from 5.3 per cent in January 1966.
There was also a decline in inten
tions to purchase one or more of 7 major household durables:
from
23.7 per cent to 22.7 per cent, with plans to buy television sets down
the most.
The proportion of households with higher incomes than last
year declined for the second successive quarter.
Expectations for
higher incomes in the next year, however, were up sharply:
27.3 per
cent expected their incomes to be higher, as compared with 25.8 per
cent a year ago.
These optimistic income expectations appear to con
tradict the restraint indicated in buying plans, since respondents
with higher income expectations also typically report higher intentions
to purchase new automobiles.
II - 1
.
_______________ THE ECONOMIC PICTURE IN DETAIL______________________
The Nonfinanela1 Scene
Gross national product. We have revised downward o u r / ^
projection of GNP for the first half of the year--estimating increases
of only $5 billion in the current and second quarters./'as compared with
gains of $14 billion in the fourth quarter and,ycm average, throughout
1966.
Despite a projecb^d slowing in prices from last year*s large
advance, real growth during tt^e first Jrfalf would be negligible--at an
annual rate of only 0.5 per cent^Kjrear.
We still are expecting a shar^Kf all-off in the rate of
inventory accumulation--reversing last year,
V Nlarge run-up— but there
is not much evidence/that it has begun to any gre^t extent.
The pro
jected moderate strengthening in final sales also is nbt yet evident
and, in facp^ final sales now appear a little weaker than w&a estimated
four we^KS ago, particularly consumer demands for goods . ____
Retail sales in January and February appear to have shown
little change from the reduced December level, with new domestic car
sales declining from an annual rate of 8 million units in December to
about 7.3 million in February (a fifth below the exceptionally high
year-earlier level).
Sales of household durable goods also appear to
have edged down over the period.
In mid-January, consumers* future
buying plans for durable goods, as reported by the Census Bureau,
remained on the weak side, although the intentions data do not neces
sarily imply further decreases in consumer takings from recent reduced
%
levels.
Altogether, we are now estimating a decline of $2 billion in
the annual rate of consumer purchases of durable goods in the current
quarter, and with nondurable goods estimated to rise only $1 billion,
consumers' total dollar spending for goods— which was virtually
unchanged between the third and fourth quarters— is expected to decline
slightly in this quarter.
In real terras, consumer takings of goods
appear to have declined moderately since last fall— after showing only
a moderate increase after early 1966,
Consumer spending on services,
however, apparently continues to expand rapidly— although much of the
dollar gain is being accounted for by price increases.
Totrarl consusop^
tion expenditures are projected_JiQ_xa^«r-$373n>Illion in the current
Quarter— as compg^edwith a lil;tle-iaere^han $4 billion in the fourth
Meanwhile, consumer income showed a surprisingly large rise
in January— with wages and salaries, transfer payments and other income
up by sizable amounts; despite the boost in social insurance contribu
tions effective January 1, the January rise in personal income was the
largest since last August.
Manufacturing employment and wages and salaries rose further
in January.
However, in February manufacturing employment is expected
to decline.
With weakness in manufacturing,a distinct slowing of the
rise in total employment is projected.
The increase in minimum wage
rates effective February 1 is presumably adding about $1 billion to
wage and salary disbursements and sizable wage rate increases are
expected to continue, but, with employment gains slowing markedly, the
II - 3
rise in total wages and salaries is projected at a much slower rate in
coming months.
Moreover^ tho rioe in tranafei pdymmica,'"Which has*been_
very sharp ^ jj^e-tjyQ^titution of
•?« H k ^ i y
—
jLaft&r -off-;— ^
Reflecting mainly the larger than anticipated January rise
in wages and salaries, the estimated levels of personal and disposable
income have been revised upward appreciably for the first quarter.
Dis
posable income now is estimated to show an increase of $10.5 billion in
the first quarter, and with consumer spending projected as rising only
about $3.5 billion, the saving rate is projected to rise sharply further
to 7.0 per cent--the highest rate since late 1958.
A further increase of only $5.5 billion--about half tl
first quarter rise--is projected for disposable income in th^r second
quarter, and consumer spending is believed likely to rise/about in
line with the increase in income.
The projected rise/an consumer spend
ing— while smaller tha^was estimated four weeks a^o— is somewhat larger
than the increase now estirasited for the current quarter, owing mainly to
the likelihood that durable goods purchases will tend to level off
following earlier declines.
NonduriH*Ie goods purchases are expected to
continue upward at a slow rate, wh^le service outlays should show a
large further gain.
It now sepms likely thatHhe saving rate will
remain high, probably at aJ*out the 7.0 per cent levfel.
In the secona quarter, we are now anticipatin^some upturn
in residential confrcruction activity— in line with gains in seasonally
adjusted housing/permits and starts reported through January— and
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II - 6
CONFID 2NTIAL -- FR
March 1, 1967
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Expenditures and income figures are billions of dollars
seasonally adjusted annual rates)
1966
1965
1966
I
II
III
IV
1967
Projected
I
II
Gross National Product
i.1
s<aies
681.2
672.1
739.6
727.7
721.2
712.3
732.3
720.0
745.3
735.4
759.3
743.1
764.3
752.8
769.3
764.3
Personal consumption expenditures
Durable goods
Nondurable goods
Services
431.5
66.1
190.6
174.8
464.9
69.3
206.2
189.4
455.6
70.3
201.9
183.4
460.1
67.1
205.6
187.4
469.9
70.2
208.1
191.5
474.1
69.6
209.2
195.3
477.4
67.7
210.4
199.3
482.6
67.5
212.0
203.1
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
106.6
27.8
69.7
9.1
8.1
117.0
25.8
79.3
11.9
12.2
114.5
28.6
77.0
8.9
8.5
118.5
28.0
78.2
12.3
12.1
115.0
24.8
80.3
9.9
10.4
120.0
21.9
81.6
16.4
17.6
115.6
21.9
82.2
11.5
12.0
110.2
22.4
82.8
5.0
5.0
7.0
4.8
6.0
4.7
4.2
4.1
5.0
6.0
Gov't purchases of goods & services
Federal
Defense
Other
State & local
136.2
66.8
50.1
16. 7
69.4
153.0
76.9
60.0
16.9
76.2
145.0
71.9
54. 6
17.4
73.1
149.0
74.0
57.1
16.9
75.0
156.2
79.0
62.0
17.0
77.2
161.1
81.7
65.5
16.2
79.4
166.3
85.1
68.3
16.8
81.2
J.70.5
87.5
70.3
17.2
83.0
Gross National Product in
constant (1S5S) dollars
GNP Implicit deflator(1958=100)
614.4
110.9
647.8
114.2
640.5
112. 6
643.5
113.8
649.9
114.7
657.2
115.5
657.7
116.2
658. 6
116.8
7.8
5.9
1.8
8.6
5.4
3.0
9.5
5.9
3.6
6.2
1.9
4.3
7.1
4.0
3.2
7.4
4.4
3.1
2.6
0.3
2.4
2. 6
0. 5
2.1
535.1
358.4
469.1
25.7
5.5
580.4
392.3
505.3
27.0
5.3
564.6
380.0
495.1
26.7
5.4
573.5
387.4
499.9
26. 6
5.3
585.2
396. 7
507.8
24.5
4.8
598.3
405.0
518.4
30.4
5.9
610.0
413.0
529.0
37.3
7.0
616.5
418.0
534.5
37.3
7.0
Total labor force (millions)
Armed forces
"
Civilian labor force
"
Unemployment rate (per cent)
77.2
2.7
74.5
4.5
78.9
3.1
75.8
3.8
78.1
2.9
75.2
3.8
78.4
3.1
75.4
3.8
79.1
3.2
76.0
3.8
79.8
3.3
76.5
3.7
80.4
3.4
77.0
3.8
80.6
3.5
77.1
4.0
Nonfarm payroll employment (millions)
60.8
63.8
62.8
63.6
64.1
64.8
65.3
65.5
Net exports
Per cent change, annual rate
GNP current dollars
GNP constant dollars
Implicit deflator
personal income
Wage and salaries
Disposable income
Personal saving
Saving rate (per cent)
Note: Labor force revised to exclude persons age 14 and 15. Quarterly data for 1966 also
reflect new seasonal factors; projections for 1967 reflect new definitions of unemployment.
3 - 3 - 0 'b y
Net Acquisition of Financial Assets by Households
(seasonally adjusted annual rates)
1964
.............. 1965................
IV
I
II
III
IV
13.9
6.3
.9
6.1
15.4
At commercial banks
11.2
13.5
9.8
15.8
13.9
At savings institutions
15.2
13.3
12.3
13.2
Total
26.4
26.8
22.1
29.1
16,2
15.0
16.4
1.0
-3.0
52.3
•...... 1966I
II
III
-1.9
-2.7
- 1.6
7.9
11.3
13.0
12.4
10.9
9.7
4.1
5.1
10.7
27.6
20.9
17.1
17.5
21.5
16.1
15.4
17.3
15.3
17.5
17.4
11.7
3.8
-1.9
13.8
18.3
15.3
-1.3
39.9
47.9
51*1
52.3
45.1
43.5
44.0
40.0
446.6
453.2
461.0
476.2
486.1
495.1
499.9
507.8
518.4
Ratio ♦•- Net Acquisition of
Financial Assets to Income
11.7
8.8
10.4
10.7
10.8
9.1
8.7
8.7
7.7
Ratio -- Net Acquisition of
Savings Accts. to Income
5.9
5.9
4.8
6.1
5.7
4.2
3.4
3.4
4.1
Demand Deposits & Currency
IV
Savings Accounts
Reserve -- Life Insurance
& Pension Fund
Cr. & Equity Mkt. Instr.
TOTAL*
Disposable Income
*
13.6
Includes net investment in noncorporate business in addition to items listed.
@FedFRASER