Economic indicators ; Economic conditions - United States

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Research Papers in Economics

Economic Activity Weakens 0
GROWTH in total spending,
in the last half of 1966, slowed further in the early
part of this year. The weakness in total demand has
centered in the private sector of the economy, while
Government expenditures, especially for defense, have
tended to bolster total demand.
With a smaller rate of expansion in demand for
goods and services, the demand for credit has also
lessened. As a result interest rates have declined,
and other credit terms have been relaxed. With lower
interest rates on market instruments, banks and
other financial institutions have been able to attract a
larger portion of the community’s savings to improve
their liquidity and to grant moreloans.
Government stabilization actions have been mixed.
Fiscal policies have been expansionary in the last year
and are expected to continue to he stimulative in the
next few months. Monetary developments, which were
tight last summer and early fall, may have been less re-
strictive since November. The nation’s money stock
increased from last November to February after de-
clining in the previous six months.
Interest Rates, Monetary Policy, and
Reintermediation
Interest rates declined after reaching a peak last
September; at first the decline was moderate, but
from November to late January rates fell abruptly.
Page 2
In February most rates rose, offsetting a part of the
previous decline, hut in early March rates again
drifted lower.
The three-month Treasury bill yield fell from about
5.50 per cent in mid-September to 4.50 per cent in
early February and was 4.40 per cent in early March.
The 4- to 6-month commercial paper rate decreased
from 6.00 per cent in October to 5.38 per cent in early
February and remained at that level through early
March. Yields on long-term market instruments also
declined substantially. From mid-September to early
February the market rate on highest grade corporate
bonds decreased from 5.50 per cent to 5.00 per cent,
but in early March corporate Aaa bonds were yield-
ing 5.10 per cent.
Lower interest rates since last fall have been in
large measure a responseto slackened credit demands.
One reflection of weakened credit demand was the
decline in the prime rate, the interest rate charged by
banks for loans to their most credit-worthy customers.
From August 16 to about January 30 the prime rate
was 6 per cent, after rising from 5 per cent in early
December 1965. Beginning in late January of this year
most money market banks revised the prime rate
down~vard to 5% per cent.
The lower market rates relative to the legal maxi-
mum of 53-i per cent on large CD’s (those of $100,000
and over) at commercial banks have made these de-
posits more attractive to investors and have con-
tributed to the marked revival of this market. From
late December to early March the outstanding volume
of CD’s at major commercial banks more than re-
covered the $3 billion decline suffered from late
August to mid-December,
Savings and consumer-type time deposits of com-
mercial banks have continued to rise rapidly. From
December to February time deposits other than
large CD’s at major banks increased by about $2
billion or at an annual rate of 15 per cent. In the year
ending last December these deposits rose 7per cent.
The renewed growth of total time deposits has
tended to ease the reserve position of commercialQ
banks and to improve bank liquidity positions. These
SUBSCRIPTIONS TO THIS BANK’S
REVIEW are available to the public with-
out charge, including bulk mailings to
banks, business organizations, educational
institutions, and others. For information
write: Research Department, Federal
Reserve Bank of St. Louis, P. 0. Box 442,
St. Louis, Missouri 63166.Yields on Selected Securities
Per Cent Per Cent
6.5 6.5
0
1959 1960 1961 1962 1963 1964 1965 1966 1967
ii Monthly averages af daily figures.
ii Manthly averages af Thursday figures.
Saurces: Board al Gavernars af the Federal Reserve System and Maadys Investars Service
a decline at a 2.6 per cent rate in the
previous six months, after adjustments
for reserve requirement changes. Most
of the reserves have been used to
0 support the renewed bank intermedia-
tion. Reserves available for private do-
.5 mand deposits have risen at a 2 per
cent rate since November and have
5.0 changed little since mid-December.
Bank reserves are influenced by Fed-
.5 eral Reserve action and are important
because they set an upper limit on
4.0 bank deposits (the major part of the
money stock).
From Novemher to February total
commercial hank credit (loans and in-
3.0 vestments) increased at an annual
rate of 10 per cent compared with a
3.7 per cent rate from May to No-
vember. The composition of the
0 growth in bank credit has changed
since November as compared with
the earlier period. Loans increased at
an annual rate of 7 per cent from
November to February after rising at
an S per cent rate from May to November. Bank
holdings of U.S. Government securities increased at a
14 per cent annual rate during the period from No-
vember to February compared with a decrease at a
10 per cent rate from May to November. After a
period when banks were drawing down secondary
reserves in an attempt to meet a vigorous loan demand,
they have more recently been building up liquidity
positions.
The nation’s money supply (demand deposits and
currency) rose from November to February. This
apparent recent growth may in some measure be the
result of peculiarities of the February figures. From
May to November money declined. In the year end-
ing in May, the money supply increased 6 per cent
after going up at about a3per cent average annual
rate from June 1960 to May 1965. Demand deposits
rose moderately from November to February, while
currency outside banks increased rapidly. The lack
of monetary growth last summer and fall probably had
a restrictive impact upon economic expansion. When
individuals and businesses have less money than they
desire to hold, current expenditures are reduced rel-
ative to receipts in order to build up cash balances.
On February 28 the Board of Governors of the
Federal Reserve System announced a reduction (from
4 per cent to 3 per cent) on reserve requirements
Page 3
Latest data platted: February
inflows of funds coupled with slackened credit de-
mands have allowed banks to become more active in
0 seeking uses for their funds.
Savings and loan associations and mutual savings
banks, along with commercial banks, have been
benefitting from the relative decline of market in-
terest rates. From October to December 1966 out-
standing savings and loan shares increased at an
annual rate of 12 per cent compared with a 1.7 per
cent rate from January to October. Mutual savings
banks have shown a similar pattern of deposit growth
for these periods. From 1961 to 1965 savings accounts
at these institutions increased rapidly: savings and
loan association shares increased at an average annual
rate of 12 per cent, while deposits at mutual savings
banks increased at an 8 per cent rate.
Large inflows of savings during the past few months
have allowed nonbank depository institutions to im-
prove their liquidity and to be more competitive in
granting loans in markets in which their lending is
specialized. Mortgage markets in particular have felt
benefits which will probably have an expansionary
effect on new residential construction.
Most monetary indicators have recently been less
restrictive than they were last summer and fall. From
November to February total member bank reserves rose at about a 13 per cent annual rate compared with
~ -v.
State and Local Aaa Bonds
4~MonthTreasury Bills LII
-~ m
2.5
Tagainst savings deposits and the first $5 million of
other time deposits at member banks. (Each member
bank is still required to hold reserves of 6 per cent
against its time deposits in excess of $5 million.) The
requirement on those time deposits affected was
scheduled to become 3% per cent on March 2 and S
per cent on March 16. An initial effect of the change
was to free an estimated $850 million of reserves,
permitting further expansion in deposits.
Fiscal (londi tions
The Federal Government, according to conventional
measures, is providing a substantial stimulus to the
economy in the first half of 1967.’ The national income
accounts budget is scheduled to move from a $2.6
billion deficit (i.e., expenditures greater than receipts)
in the last half of calendar 1966 to about a $5 billion
deficit rate in the first half of 1967. This budget
adjusted for cyclical movements in economic activity
(the so-called high-employment budget) is the most
expansionary budget in more than a decade. By com-
parison it averaged about an $8 billion surplus from
1961 to 1965.
Sates, Inventories, and Production
Total spending (GNP in current dollars) increased
at an annual rate of 7 per cent in the last threequar-
Annual Report of the Council of Economic Advisers, January
1967. For an evaluation of planned fiscal policy see, “The
Federal Budget and Economic Stabilization,” in the February
1967 issue of this Review. Also, see Federal Budget Trends,
a quarterly release ofthis Bank.
High-Employment Budget
(+}Surplus; (-)Deficit
-20
1956 1958 1960 1962 1964 1966
Sources:lJ.S. DeportmentofCommerce, Council ofEcanamic Advisers, and the Federal
Reserve Bank ofSt. Louis
Latestdata platted: 1967 estimated far half years by Federal Reserve Bankofst. Louis
from Fiscal 1968 Budget
Page 4
ters of 1966 compared with a 10 per cent rate in the
previous five quarters. Although a7per cent rate is
large relative to growth of productive capacity, weak-3
nesses in key areas of private demand developed in
the last half of 1966 which have continued into the
early part of this year. These weaknesses have stem-
med from a reduced rate of spending by the private
sector, while Federal Government expenditures have
continued to increase.
Retail sales declined at an annual rate of 4.5 per
cent from September to January after rising at a5
per cent rate in the preceding 10 months. The recent
decline consisted primarily of a reduction in sales of
automobiles and other durable goods. The smaller
spending on appliances and autos may be partially a
reaction to the decline in new house purchases as
well as a reflection of the rapid pace of auto purchases
in the past several years. Consumers may also be
attempting to build up their liquidity by spending a
smaller share of their incomes. Such cutbacks usually
occur in durable goods since existing stocks continue
to be usable.
Although business spending has remained large,
there are indications that it also has been one aspect
of the weakness in aggregate demand. The large
business outlays in late 1966 were áccounted for in
considerable part by an acceleration of inventory
accumulation. Business inventory holdings increased
at a $16.4 billion annual rate in the last quarter of
1966 compared with accumulation at a $10.4 billion
annual rate in the first three quarters of 1968 and $9.1
billion in 1965.
The highrate of inventoryaccumulation is
unsustainable, which suggeststhat a substan-
tial amount of this accumulation has been
20 involuntary. If this is the case, firms experi-
encing large inventory accumulation may
attempt to bring them into line by reduc-
ing the rate of output and purchase of pro-
10 duetion goods. Such adjustments tend to re-
duce sales, income, and employment.
During the initial periods of cyclical up-
0 swings in business activity, inventories are
usually drawn down relative to sales as
sales increase at a more rapid pace than
-10 production. Inventories frequently reach
undesirably low levels relative to sales dur-
ing the early phases of a business expan-
-20 sion. Consequently, businesses attempt to
build up their inventory stock so as to re-
gain a desired relation to sales, but, with
sales also rising, the inventory-sales ratio
BUhions of Dollars
2
Quarterlylatals atAnnual Rates
SeananallyAdjusted Btlltons oi Dollars
.10Changes in Business Inventories From 1961 to mid-1966 the inven-
tory-sales ratio declined steadily from
1.54 to 1.48, with the only interruption
20 occurring in 1962. This ratio increased
in late 1966 to 1.54. Such a marked
15 rise may be a signal that businesses
10 will begin to add to inventories less
~ rapidly. The effect of undesired in-
ventory levels is already taking place
0 according to some indicators, Unfilled
orders for durable goods have de-
clined slightly since September after
-10 rising steadily in the previous year.
-1 5 Recently, there have been production
1963 1964 1965 1966 1967 cutbacks in automobiles and some
appliance industries because of a
slowdown in sales and rising inventories of dealers.
Inventories Compared With Monthly Sales
Source: U.S. Departmentaf Commerce
Latest data platted: 4th quarter preliminary
usually remains low during most of the expansionary
phase of the cycle. Attempts to build inventories tend
to maintain or accelerate income and employment.
In the latter phases of an upswing, when growth
in sales slows, inventories usually rise markedly rel-
ative to sales. Businesses then attempt to reduce the
rate of inventory accumulation by limiting their
purchases. These actions, in turn, tend to lower con-
sumer and business incomes, which tend to “feed
back,” causing a further weakening in sales. Conse-
0 quently, an attempt to trim inventories to achieve a desired inventory-sales ratio is partially self-defeating.
1.72
1 .68
1.64
1.60
1.56
1.52
1 .48
1 .44
1.43
1.36
Growth in production has recently been at a decid-
edly slower rate than during most recent years. In-
dustrial production declined at a 2.5 per cent annual
rate from October to January compared with a 5
per cent rate of increase from June to October and a
9 per cent gain in the previous year. The current
slowdown may reflect in part adjustments associated
with the reallocation of resources from civilian to
military goods production during a period of near
full employment. It may also reflect a weakening of
consumer and business demand which may now be
Manufacturing and Trade
~iiii [1 1111111
4K r
~H~i ififif !
Tren’dtine
1.54 -
1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967
Shaded areas represent periods of business recession as defined by the National Bureau af Ecanamic Research.
‘Ratian based an seasonally adjusted data. Saucce; U.S. Department of Commerce
Latest data platted, Deceniberpreliminary
1.72
1.68
1.64
1.60
1.56
1.52
1.48
1.44
1 .40
1.36
Page 5
—1
.1
1959 1960 1961 1962Industrial Production
1 50
140
I 30
1 20
110
100
1959 1960 1961 1962 1963 1964 1965
Percentages are annual rates of change between months indicated.
Latest data platted: January preliminary
feeding on itself. For example, the 1966 decline in
new residential construction has been reflected in
output declines of the lumber industry and in little
change in the rate of furniture and fixtures produc-
tion. The decline in iron and steel production since
August may be associated with the decline in new
construction as well as the smaller automobile sales.
Employment, in contrast with most other measures
of economic activity, has continued to expand rapidly.
From August to January total employment increased
at a 3.7 per cent annual rate compared with a rise of
2.7 per cent during the year ending last August. Pay-
roll employment has also continued to rise substantial-
ly. From August to January payroll employment in-
creased at a 4.4 percent annual rate compared with 5.2
per cent in the previous 12 months. These rates of
growth may be compared with growth of population of
labor force age at a rate of about 1.5 per cent a year.
Page 6
Unemployment has remained at
slightly below 4 per cent of the labor
force. The average workweek in
manufacturing declined from 41.5
hours last September to 40.9 hours
in January.
Pri.ces
The smaller expansion in total de-
mand has reduced the demand-pull
pressures on prices, but cost-push
forces may he rising. The strong
demand for labor and for goods dur-
120 ing 1966 has not been fully reflected
in wages (and some other prices)
since many contracts have not come
110 up for renegotiation. Mark-ups in
these prices, in turn, increase costs of
~oo production and place cost-push pres-
sures on other prices.
160
150
140
130
S
Consumer prices increased at
about a 1 per cent annual rate from
October to January compared with 3.7 per cent during
the preceding 12 months. Most of the gain since
October has been in the cost of services; the prices
of commodities have changed little on balance, with
declines in food being nearly matched by mark-ups
in other nondurable goods.
Wholesale prices have declined since last summer
in contrast to the continued rise in consumer prices.
From August to January wholesale prices decreased
at an annual rate of 1.3 per cent compared with an
increase of 3.8 per cent in the preceding year. Farm
products and processed foods have contributed most
to this recent decline. Prices of these commodities
declined abruptly last fall, partially offsetting the 8
per cent rise during the 12 months ending last Sep-
tember. Industrial prices have continued to work up,
increasing since September at a 1.7 per cent annual
rate compared with a 2.4 per cent increase in the
previous year.
Ratio Scale
1957.59=100
180
170
160
Season atlvAdjus fed
Ratio Scale
1957.59=100
180
170
1966 1967

Economic activity weakens

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Economic activity weakens

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Research Papers in Economics