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Economic Activity Expanding More Rapidly
Government Influence Very Stimulative
ost economicindicators accelerated markedly from
Mayto August, and apparently the automobile strike in
September has not materially slowed the advance.
Spending, production, employment, and income have
all turned upward in recent months. This faster paceof
activity has been fostered by very expansionary fiscal
and monetary conditions. The sharper growth in total
spending at a time when underlying demands were al-
ready strong is placing greater upward pressures on
prices and interest rates.
Consumers, businesses, and governments have all
recently increased their demands for goods and serv-
ices. Retail sales have risen at about a 15 per cent an-
nual rate since May, after going up about 5 per cent
in the previous twelve months.
The expansion in sales has followed a period when
purchases by ultimate users were already relatively
large. Demand for goods and services, except for in-
ventory change, rose at an 8.5 per cent rate in the first
half of this year, a pace which ultimately places up-
ward pressure on prices in view of a capacity growth
trend of about 4 per cent per year. Preliminary data
also show a high rate of expansion in final sales (lur-
ing the third quarter
Reflecting both the pickup in sales and a better
balance between business inventories and sales, in-
dustrial production turned up during the summer.
From June to August industrial output went up at a 10
per cent annual rate and remained at a high level in
September despite a major strike. By contrast output
contracted at an average 3 per cent rate from October
Production has now regained the
Industrial Production
80
170
160
150
140
30
20
110
100
To facilitate the recent increase in total economic
output. producers have hired workers at a rapid pace.
Total employment has risen at about a 6 per cent rate
since late Spring, after changinglittle earlierin the year.
Payroll employment has increased at a 4 per cent rate
from May to August, following little change from Jan-
uary to May. Unemployment has decreased slightly,
hut most of the new workers have come from an ex-
pansion in the labor force. Since population of
working-force age is rising at only a 1.5 per cent a year
rate, the rise in employment has been accomplished
last year to June.
level of a year ago.
Ratio Scale
1951-59’ 100
Ratio Scale
1957-59’lOO
959 1960 961 962 1963 964 1965 966 967
dtepl,!t~d:
Page 3primarily by drawing into the labor force a large
number of persons who were not formerly working
or seeking work.
As employment and economic activity in general
have risen, income has also gone up. Total personal
income increased at a9per cent rate from May to
August. Income rose 7 per cent in the previous twelve
months and at a 6 per cent trend rate from 1957 to
1966.
Although strengthening of total demand has been
accompanied by additional real output, prices have
also increased. Price increases have reflected the rising
costs associated with excessive demands for total prod-
uct a year ago. Consumer prices increased at a 4 per
cent annual rate from April to August after rising at a
2 per cent rate during the previous eight months. The
recent acceleration was primarily in food prices. Prices
of all consumer items except food have increased at a
3 per cent annual rate since April, virtually the same
as the rate of the previous eight months.
Ratio Scale
Wholesale prices, reflecting in considerable measure
developments in agricultural products and processed
foods, have increased at a 2.3 per cent annual rate
from April to August. This index had fallen at a 2 per
cent rate from last August to April. Wholesale prices
of finished industrial goods have risen at a 1,5 per cent
rate since April, about the same as in the previous
eight months.
Monetary expansion has been rapid since the begin-
ning of the year. Member bank reserves, a key mone-
tary variable which includes both deposits at Reserve
Banks and cash in vault and which provides a base for
both bank credit and the money supply, have gone up
at an 11 per cent annual rate in the past nine months.
This increase compares with a5per cent average rate
of growth from 1964 to 1966 and a trend rate of 3
per cent from 1957 to 1964. Member bank reserves, in
turn, arelargely determined by Federal Reserve credit.
This credit, adjusted for changes in reserve require-
ments, has increased at a 12 per cent rate in the past
nine months.
The nation’s money stock, which consists of private
demand deposits and currency in the hands of the
public, has risen at a 7 per cent annual rate in the last
nine months. This is the fastest rate of increase for
any nine-month period in over twenty years. Usually
there has been an acceleration of spending within a
few months after a marked and sustained increase in
the growth rate of money. Money grew at a4per cent
rate from 1964 to 1966 and at a 2 per cent trend rate
from 1957 to 1964.
Money plus time deposits in commercial banks, a
broader concept of money, has also risen rapidly. Since
last December this measure has increased at a 12 per
cent annual rate compared with an S per cent rate
from 1964 to 1966 and a 5 per cent rate from 1957 to
1964.
Ratio Scale
Billions of Dollars
Money Stock
MeetItIr A,e,e
9
e, .1 O&ly Ntet,.
S.es’,e
t
y A4;e,t.J
Ratio Scale
Billions af Dollars
l50~- 14-,
80
170
ISO
ISO
140
A~,et4 A,, AS Ap,.SA Dec.55 &pl.A7
II I 130
1959 1960 1961 962 1963 1964 1965 1966 967
teteect e,~e5’. eecr,eced,Sdkeledjhey etc ce,’’-’
5
I,’ eld it
e,epedegee,t,eceetd,e5epa,et,eeithe,,er,ecedc:
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Bank loans and investments have been rising sharply
this year. From December to August, total commercial
bank credit rose at a 14 per cent annual rate. By com-
parison, this credit had essentially no increase from
July 1966 to last December and rose at a 7 per cent
average rate from 1957 to 1966. Bank loans rose at a
7 per cent rate from December to May. Since May,
when business activity began quickening, they have
gone up at an 11 per cent rate. With hank reserves
Mt-dc
~±2
Ratio Scale
1957.59’/lOO
I2 0
Prices
1959 960 1961 1962 1963 1964 965 1966 1967
Ieee,,; US. O,eeeteetet et ‘bee
P,ee,ei,eeee,,,eee,l,,t,,,tetee,s,b.t.e,e, p.r;ed,iedke,,d.fleeyet, p’,eeetedee,idie
e,ep.,;e;,,esteee,etd,e,l,p,,etse;thp,st’te,’eds~
lee,.; Ieee elected; Ace,.; p,,ceilee,y
Page 4Bank Credit*
AtlCa,,mercial Banks
going up faster than customer demands for loans, the
recent sharp rise in bank credit has centered in net
purchases of securities. Consequently bank investment
portfolios have risen at a 26 per cent rate since De-
cember, compared with a 3 per cent trend growth rate
from 1957 to 1966.
Most interest rates have risen in recent months and
are at relatively high levels. A large amount of this
increase reflects not only strength in demands for
goods and services but also anticipatory demands for
credit. A year ago interest rates were relatively high,
but yields in the various maturity ranges have changed
significantly since then. Short-term yields, which are
most directly affected by bank credit expansion, are
substantially lower than a year ago. Yields on three-
month Treasury bills were about 4.50 per cent in early
October, down from 5.36 per cent in September a
year ago.
On the other hand, interest rates on most long-term
obligations, which are thought to he heavily influenced
by market expectations of future rates, are now well
above their year-ago levels. Rates on highest-grade
corporate bonds averaged 5,72 per cent in early Octo-
ber, compared with the 5.49 per cent peak in Septem-
ber 1966. Yields on medium-grade corporate securities
averaged 6.45 per cent in early October, up from 6.09
per cent in Septemberlast year.
Large increases in Government spending have been
adding more to the spending stream since mid-1965
than taxes and other Governmental receipts have been
withdrawing. Defense spending has increased at a 22
per cent average annual rate since mid-1965, and has
risen from 7.3 per cent of gross national product in
the second quarter of 1965 to about 9.5 per cent in the
third quarter of 1967. By comparison, defense outlays
accounted for 10 per centof GNP in 1957
Nondefense expenditures have also expanded rapid-
ly, accelerating an upward trend. Federal spending for
purposes other than defense has risen at a 13 per cent
average annual rate since mid-1965, or from 10.5 per
cent of GNP to about 11.7 per cent. In 1957 this type
of spending amounted to 8 per cent of GNP.
Federal Government Expenditures
National Income Acco,nts Basic
Cele,dse Yeses; Per Cent of GNP
20
15
to
Per Cent of GNP
25
~tal~der~y
B BI ense
~‘ ‘L
Ksedtlense
60 62
i_I
20
55
10
S
0
5
—<4
1948 50 52 54
Settee; t.& Dey,;eeece dccc,,;,
L,e,ted.eey~Aeeed;llb7estieetedbyPddeeel eeseec, seeketle. keel,
5966
Fiscal stimulus in the first three quarters of 1967
continued to stem from the spending side of the
budget as expenditures increased at an estimated 15
per cent annual rate from fourth quarter 1966 to third
quarter 1967. Growth in federal receipts slowed in the
first three quarters of 1967, largely reflecting declines
in corporate profits. To the extent that receipts reflect
a slowdown in the rate of increase of taxable income,
a rising deficit does not indicate expansionary fiscal
action. However, after adjusting for the effects of
economic activity on the budget by computing a
standardized high-employment estimate,1 fiscal actions
were still quite expansionary in the first three quarters
of 1967. The deficit in the high-employment budget
increased from $5 billion in late 1966 to an estimated
$12 billion in third quarter of 1967.
Prospects for the rest of 1967 are for a continuation
of large deficits and further fiscal stimulus to the
economy. Federal spending for defense and other
purposes is expected to continue its advance despite
efforts to cut outlays, and there now appears little
likelihood that a tax increase will take effect before
January 1, 1968.
an explanation of the high-employment budget concept,
see the June 1967 issue of this Review, pp. 8-14.
64
RatioScale
5960 1961 1962 1963 1964 5965 1966 1967 5968
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eeepe,Ieeee.etel,,ed,eelep,ettse5ttt ye.e~ee.tds.
dee, plett,d; Atcese etched teN
56 58
Page 5

Economic activity expanding more rapidly

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Economic activity expanding more rapidly

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