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Research Papers in Economics

Private Demand Weakens
A CCREGATE DEMAND has continued to in-
crease in recent months but less rapidly than in 1965
and early 1966. Prices have risen more slowly, and
interest rates have declined. Economic stabilization
policy continues to combine an expansionary fiscal
situation and restrictive monetary developments.
Aggregate Demand
Growth in aggregate demand has slowed from the
rapid pace of 1965 and early 1966. Retail sales, a
major component of total demand, have increased
little since midsummer, after rising about 8 per cent
during the year ended in June, Reduced automobile
sales have been a major factor in the slower growth
of total retail sales. Personal income, however, has
continued to grow at about an 8 per cent annual rate.
Slackening in demand may also be reflected in the
relation of business inventories to sales. By October
1966 inventories had risen to 1.52 times the volume
of sales. From 1961 to early 1966 inventories trended
downward from about 1.60 times sales to about 1.43.
During periods of rapid growth in demand for
goods and services, inventories do not usually keep
pace with sales. Subsequently, when sales begin to
slow, firms usually do not adjust inventory accum-
ulation immediately with the result that inventories
tend to increase relative to sales. The ratio of inven-
torics to sales in October was about 3.5 per cent above
the trend relationship, roughly the same level as has
frequently occurred around peaks in business activity.
An impetus to inventory accumulation is provided
by rising prices if firms attempt to hedge against the
possibility of future price increases and shortages. Rel-
atively high interest costs are normally less of a
deterrent to inventory accumulation if debt repay-
ment is expected to he made in cheaper dollars.
Real Output and Prices
Output has recently increased at a reduced pace.
Industrial production rose at a 1 per cent annual rate
from August to November after advancing at a 7 per
cent rate from March to August and 9 per cent during
the year ended last March. Total production mea-
sured in constant dollars grew at a 8 per cent rate from
the first to the third quarter of 1966 compared with
a 7 per cent rate from late 1964 to early 1966. The
decline in the rate of increase of real product reflects
problems of resource bottlenecks resulting from near-
capacity utilization in some areas, and problems of
redirecting resources to the production of military
goods, as well as a reduced rate of
1.72 increase in total demand.
1.68 Upward pressures on prices
appear to have moderated, reflect-
1.64 ing less rapid growth in total de-
mand. Consumer prices increased
.60 at a 2.8 per cent annual rate from
Iso Augustto Novembercompared with
a 3.7 per cent rate from October
1.52 1965 to August. General wholesale
I 48 prices have declined since August
compared with an increase at a 4.3
.44 per cent rate from October 1965 to
August. The recent decline in these
1.40 prices is a reflection of price de-
1.36 creases in farm products and pro-
cessed foods accompanied by only
slight rises in industrial prices.
Inventories Compared With Monthly Sales
Manufacturina and Trade
1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967
Shododo,,o,repre,enIper~odsofbooi..e,,’eceSSioOo5defFfledbYtheNOIiOOoI Boreoc of Eco,omic Reeeo,ch.
bo,md or ,oo,o,o y,dj,st, 4 do,,, So,,,. US. Deportme,t ofCommerce
otest dot, potted; Octob,, p,eLI,&oo,y
Page 2Ratio Scale
1957-59=100
Prices
Ratia Scale
1957.59=100
120
1:
I—
fl~T,
~:::
~ .~ ., -o
‘950 .Oo, Oo&04
~
4,’
Od 65
ft 19 C
959 1960 1961 1962 1963 964 1965 1966
“to,, coo,o b,,,e,,,,,,,h,4,dk,t,d.
tote dot, plotted: N,,eobe, p,,lioi,o,y Soc,ce; U.S. Dopootm,o of Lob,,
From the first to the third quarter of 1966 an in-
crease in defense expenditures accounted for about 30
per cent of the rise in GNP compared with 2 per cent
in the previous three years. These data indicate that
115 a sizable shift of resources from the production of
~ civilian goods and services to military goods and
services took place in 1966. The current and imme-
110 diately prospective changes in Federal Covernment
expenditures will be crucial to the future course of
the economy.
105
Monetary and Financial Developments
100 Beginning in the spring of 1966 monetary develop-
ments provided some offset to the expansionary or
inflationary effects of the Federal budget. Since spring
~s the nation’s money stock has declined at about a 0.5
per cent annual rate compared with an increase of
6 per cent during the previous 12 months.
Fiscal Developments
The Federal Government has continued to provide
a major stimulus to economic activity primarily as
a result of the large defense expenditures for the
Vietnam conflict. On a national accounts basis ad-
justed for cyclical variation in economic activity, the
so-called high-employment budget, the Federal Gov-
ernment ran a $1 billion surplus during the year ended
in the third quarter compared with about an $8 billion
average surplus from 1961 to 1965. It is estimated that
in the fourth quarter of 1966 this budget measure
showed a $1.5 billion deficit. The lower this measure,
the more stimulative the budget, according to a view
expressed in several annual reports of the Council of
Economic Advisers.
8illion, of Dollar,
80
170
160
50
140 ~
Money Stock
BUhons of Dollar,
Moottly Aoo,,,go’ 0 Doily E1
0
,,eo
Se,o,,lly Adi,ct,d
‘ ISO
1705
~.-
1959 1960 1961 1962 1963 1964 1965 1966
ohooor boo,,, oootht Md;,,,od
too,,, doe, plotted; Do,eob ereotootod
140
0
This decline in money reflected a substantial re-
duction of member bank reserves available for private
demand deposits. Since spring these reserves, adjusted
for changes in reserve requirements, have declined
at a2per cent annual rate compared with an increase
of 5 per cent during the year ended in April. Total
reserves of member banks have followed a similar
course. Since spring these reserves, adjusted for
changes in reserve requirements, have declined at an
annual rate of 2.7 per cent compared with a 5 per
cent increase during the preceding 12 months.
These abrupt changes in the course of reserves re-
flected a marked change in the rate of expansion of
Federal Reserve credit, particularly a much slower
rate of Federal Reserve net purchase of securities.
Since late August this credit has remained about un-
changed. Since spring it has increased at an annual
rate of about 3 per cent compared with 8 per cent
during the previous year.
Page 3
High-Employment Budget
Cooed,, Yeo’l
B la ns
1956 1958 1960 1962 1964 1966
Sot,ces;Depo,tmeotolCoootetce,Cooocilot E,oeo,eic Adoioer,.o,d fed.,,
Reserve Bock otSe. Lot,
966 dot,; 4th qtotter estimoted by hi, bock
“0SELECTED INTEREST RATES Reserves of Member Banks
Billions of Dollars Mooehty Meroget ,f Doily fig,,., Billions af Dollars
Peeceetoge, ore ooo,rnt rote, of oh,,g. bet’,oeeemoolhsi,dicoted.
Loteot dot, ptootod; Deree,ho, ooOimote
Total bank credit (loans and investments) declined
at an estimated 1.2 per cent annual rate from August
to December after increasing 9 per cent during the
previous 12 months. The decline after August re-
flectecl slower growth of total loans and other se-
curities and accelerated liquidation of Government
securities.
100
90
80
70
60
Bank Credit
All Commercial Banks
Interest Rates and Time Deposits
Interest rates have declined since mid-September
after increasing rapidly during the summer. These
September Latest
1966
Prime bankers’ acceptance, 5.75%
3-month Treasury bill, 5.36 4.80
lang-term Government band, 4.79
Sfate and local Aaa bonds 3,93 3.74
Corporate Aaa bond’ 5.49 5.43
recent declines may represent in part reduced demands
for credit by business and individuals for the Federal
Government borrowed heavily.
Money Market Rates
Per Cent Mo,’hty .s,or0000otoo~~’ °iO’r’t
Some short-term market interest rates, through mid-
December, remained above the 5.5 per cent maximum
rate which commercial banks can pay on certificates
of deposit (CD’s) over $100,000. For example, the
prime 4- to 6-month commercial paper rate stood at
6 per cent, a half percentage point above the max-
imum CD rate. This continuing differential limited
the growth of time deposits. From mid-August to early
December time deposits at all commercial banks
changed little, remaining at about $157 billion com-
pared with a 12 per cent increase during the 12 months
ended in August. Large CD’s, a component of time
deposits, declined sharply from late August to mid-
December. Since these deposits are especially sensitive
to interest rate differentials, they might reverse their
recent decline and rise markedly if short-term market
rates were to decline further.
Available
5.50%
4.54
Apr
65
~Apo.66 DeC 0
~‘T.lo
1963 1964 1965 1966
‘U.S. Oooo,oooo, doo,oo’ depooit, depocitodcct, domottir come,ooiot book,,
lime cod t,~iogtdeposit,,
‘°o’po’il.otepobe’ book, ioct,ded io the ‘cccl dotieiti,, of th’oooey,,ppty.
°°°Adiostodto,esfiot,todolfe,t,t rosor,o reotoi,emee,ohoooe’.
Per Cent
6.0
Ratio Scale
Billions of Dollars
400
300
200
Ratio Scale
Billions of Dollars
1959 1960 1961 1962 1963 1964 1965 1966
Loteol doo plotted; December
1959 1960 1961 1962 1963 1964 1965 1966
Pe,c,efoges ore ee000l tote, of ,l0005e bet,oee,eoethtiodicoted.
etest dot, p lttt,d: Do,ee b or eotiooted
Page 4

Private demand weakens

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Private demand weakens

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