Greenbook/Tealbook

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Content last modified 6/05/2009. CONFIDENTIAL (FR) SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System August 11, 1967 SUPPLEMENTAL NOTES The Domestic Economy Retail sales in July were one per cent above the record June level and about 5.5 per cent above a year earlier, according to the Census Bureau advance estimates based on a partial sample. July sales at durable goods stores were up more than 3 per cent while sales at nondurable goods stores as a group were little changed from the record June level. All major groupings of durable goods stores registered gains, with a 3.3 per cent rise lifting sales at furniture and appliance stores to a new high and a level nearly 3.5 per cent above the second quarter average. Among nondurable goods stores, sizable advances at apparel stores and gasoline service stations offset small declines at other types of stores. Although about unchanged from June, sales at nondurable goods stores in July were .7 per cent above the second quarter average. The Domestic Financial Situation Flows to nonbank depositary intermediaries. Preliminary data on savings flows in July indicate a record increase for mutual savings banks and the largest July inflow in eight years for savings and loan associations. These surprisingly large inflows represent a seasonally adjusted annual growth rate of 15 per cent for S&L's, in contrast to last July when there was a sizable net outflow; for savings banks, the net inflow was at an annual rate of 9 per cent in July as - 2- compared with a 6.7 per cent rate a year earlier. Data on the acquisi- tions of assets during July are not yet available for either S&L's or savings banks. SAVINGS FLOWS TO NONBANK DEPOSITARY-TYPE FINANCIAL INTERMEDIARIES (Millions of dollars) Savings SBanks July S&L's 1967 1966 1965 1964 1963 163 -1,508 -432 33 - 11 300 195 212 284 136 6,115 580 3,758 5,443 6,132 3,032 979 1,896 2,218 1,673 Banks Year to date 1967 1966 1965 1964 1963 Areas in which S&L's share capital are most interestsensitive--New York and California--experienced relatively larger inflows than the rest of the nation. The San Francisco Home Loan Bank District,primarily California, had an increase in share capital of $100 million, compared to an outflow of $154 million a year earlier, and the New York Home Loan Bank District, primarily New York City, had an estimated increase of $75 million, in sharp contrast to the outflow of $208 million in July 1966. Five of the twelve Home Loan Bank Districts did have outflows this July, but none experienced significant declines. - 3- While potentially sharp declines in savings flows, resulting from the high level of market rates, continue to concern some industry observers, both the U.S. total and regional data indicate that interest rate spreads were not sufficiently wide during July to induce significant switching from claims on intermediaries to market instruments. Continuing to reflect the very large savings flows relative to mortgage demands, S&L's again reduced the volume of their outstanding advances from the Home Loan Bank System. There was a contra-seasonal reduction of $80 million during July, and this brought the volume of outstanding advances down to $4.2 billion, compared to $7.3 billion at the end of July last year. During the first week of August, S&L's continued to reduce their indebtedness to the Home Loan Banks, suggesting that inflows will again be large this month. Also during the first week in August, New York City's 15 largest savings banks experienced about the same inflow as in the corresponding period a year ago. Year-to-year compari- sons for savings banks, it should be noted, will not be as dramatic for the remainder of this year as they have been thus far, since savings flows to these institutions had largely recovered by last August. Review of Flow of Funds in first half, 1967. Preliminary flow of funds estimates for the second quarter have been completed and permit a review of financial developments of the first half of the year in relation to the shifts in saving and investment since 1966. These shifts have been substantial, as indicated in Table 1 at the end of -4- the article, and they have been accompanied by comparably large shifts in financial flows. The changes in financial markets are quite different from those suggested by this table, however. As the bottom section of the table indicates, investment outlays by business fell more from 1966 than internal funds and tended to decrease the net financing requirements of business, while the sharp rise in Government deficits--mainly Federal-increased greatly the funds needed for Government operations. In financial markets, on the other hand, credit flows to business during the first half of 1967 were almost unchanged from the high 1966 rates, while the Federal Government reduced its debt outstanding at a $5 billion annual rate, seasonally adjusted. Federal Government. The contrast between these nonfinancial and financial developments arises mainly from accelerated profit tax payments by corporations, which were about triple the 1966 acceleration, and from the Treasury's heavy use of its own cash balances during the half-year, and the connections among these transactions are seen most easily by a brief review of individual sector transactions. For the Federal Government, in Table 2, the relation is straightforward: faced with a public debt rising close to statutory limits, the Treasury stayed out of credit markets and managed to cover operations from its internal resources. Acceleration of profit tax payments was of major assistance to this policy, and in Table 2 this appears as a $12 billion reduction in a balance-sheet claim for taxes receivable, consistent with the accrual basis of tax receipts in the NIA surplus. Further help came from the loan programs, where Home Loan Banks received funds at more -5- than a $6 billion rate from loan repayments and deposit inflows. Beyond these sources, the Treasury made heavy use of its cash holdings during the six months, ending the fiscal year with a balance of about $7 billion as against $12 billion in 1965 and 1966. By the end of June debt subject to the limit stood at $326 billion, well below the ceiling for the period. Business. For nonfinancial business, in Table 3, the accelerated tax payments were a $12 billion use of funds to be financed from other sources, and while June data are not yet available for corporations it appears that the payments were matched by a comparable reduction in liquid asset holdings. Although business borrowing in credit markets held up at the 1966 rates during the first half of 1967, credit does not appear to have been an important source of tax-payment financing. A borrowing rate of $33 billion per year is high histor- ically, but the relation of business borrowing to net capital outlays during this six months was very close to the 1962-64 pattern and does not appear out of line for a period of relative ease in credit markets. In Table 3 it is 1966 that is severely out of line with recent history of credit flows to business. With business borrowing at no more than a normal rate for the period, the effect of the tax acceleration has been to push down corporate liquidity ratios a further notch on the rather steep trend of 1965 and 1966, when liquid assets remained static in the face of growing short-term liabilities. Whether this further drop in liquidity - 6- ratios is significant or not may depend on whether corporate managements think it is. To the extent that some part of liquid assets has been earmarked specifically for the purpose of paying taxes, elimination of both the asset and the liability produces an arithmetic drop in liquidity ratios that leaves corporations as well off as before for meeting other obligations. An extreme form of this viewpoint is the concept of "free liquidity"--liquid assets net of tax liabilities--and in terms of this concept the liquidity ratio remained almost unchanged over the first half of the year. Borrowing, that is, was sufficient to arrest the declining trend of the ratio but not improve it significantly. Without the extra tax payments liquid assets would have risen at roughly the $6 billion rate that is needed to maintain the relation of liquidity to both the volume of activity and the growing level of current liabilities outstanding. A position somewhere between the extremes of total liquidity and "free" liquidity suggests that borrowing by business was normal during the half year in terms of ordinary credit needs but might usefully have been somewhat higher to offset part of the tax payment and in any case should continue strong if any concept of liquidity ratio is to be improved. Other sectors. Table 4, on households, shows that the rise in saving of this sector has been closely matched by an increased flow into financial markets, with capital outlays and borrowing both held back by residential construction conditions. Within the financial - 7- investment total there is a clearly marked liquidation of the security purchases of 1966 and a transfer of funds back into deposits. State and local governments, in Table 5, also shifted to deposits, using funds from borrowing in excess of nonfinancial needs during the period. Summary tables. Table 6 pulls together the mixed credit demands discussed above and completes the statement of total flows into and out of credit markets. As shown in the lower part of the table, private nonfinancial sectors as a group increased their total investment in deposits and securities over the 1966 rates in spite of the drop in total credit flows and in spite of the heavy tax payments. The shift out of securities and into deposits was of unprecedented proportions in terms of this table because of the extreme forms of the patterns in both 1966 and 1967 and appears to have been somewhat of an over-correction for 1966 in its effects on levels of deposit and security holdings. Taken as a sum, however, these holdings rose during the half year just about enough to keep the total closely in line with the longer run trend of private financial assets. Table 7 on direct sources of credit shows that the shift into deposits raised the proportion of credit from intermediaries from 60 per cent of the total in 1966 to over 100 per cent in 1967. Banks did somewhat better than nonbank intermediaries despite the lack of funds from Treasury balances and supplied almost 50 per cent of the total credit flow, well above the 35 per cent average for 1962-65. - 8 - Table 1 DOMESTIC NONFINANCIAL SECTORS-SAVING AND INVESTMENT First half Year 1966 1967, SAAR Net Change Net savinga / Households Nonfinancial business Governments 71.6 50.0 22.2 - .6 56.3 55.2 18.9 -17.8 -15.3 5.2 - 3.3 -17.2 Net capital outlays! / Households b/ Nonfinancial business 69.9 28.9 41.0 54.7 22 3 32.4 -15.2 - 6.6 - 8.6 Nonfinancial surplus c / Households Nonfinancial business Governments 1.8 21.2 -18.8 - .6 1.7 33. 0 -13.5 -17.8 a/ Net of capital consumption allowances. b/ Includes consumer durable goods. c/ Saving less capital outlays. - .1 11.8 5.3 -17.2 Table 2 U.S. GOVERNMENT Yr Year 1966 First half 1 1967, SAAR Saving (surplus, NIA basis) Credit market borrowing - .9 6.7 -15.4 - 5.5 -14.5 -12.2 Financial assets, net Deposits Taxes receivable Other, net 5.8 -. 1 - .5 6.4 -20.9 - 7.0 -12.1 - 1.8 -26.7 - 6.9 -11.6 - 8.2 Net Change -9Table 3 NONFINANCIAL BUSINESS First half N Net Year 1 1966 1967, SAAR Net saving 22.2 18.9 -3.3 Net capital outlays Credit market borrowing 41.0 33.0 32.4 33.2 - 8.6 .2 Financial uses of funds Deposits Credit ma.:ket instruments Tax liability reduction Other, net 14.2 .2 3.3 .4 10.3 19.7 2.0 - 6.4 12.0 12.1 5.5 1.8 - 9.7 11.6 1.8 Change Table 4 HOUSEHOLDS Net Change 1966 Hl/67, SAAR Net saving 50.0 55.2 Net capital outlays 28.9 22.3 - 6.6 Credit market borrowing 23.3 18.1 - 5.2 Financial assets 44.0 51.0 6.6 21.0 11.1 12.3 45.8 - 8.6 13.8 24.8 -19.7 1.5 Deposits Credit market instruments Other, net 5.2 - 10 - Table 5 STATE AND LOCAL GOVERNMENTS 1966 H1/67, SAAR Net Change -2.7 4.5 Saving Credit market borrowing .3 6.6 - 2.4 11.1 Financial assets, Deposits Other 6.9 2.9 4.0 8.7 4.9 3.8 net 1.8 2.0 - .2 Table 6 SUMMARY CF TOTAL BORROWING AND SOURCES OF CREDIT Year H1/67, Net 1966 SAAR Change 61.9 - 9.2 -12.2 .2 State and local governments Foreign 71.1 6.7 33.0 23.3 6.6 1.4 Sources of credit market funds 71. 1 61.9 Private domestic nonfinancial sectors 43.9 47.6 Deposits Demand deposits and currency./ Time deposits at commercial banks At savings institutions 22.5 2.9 12.3 7.3 56.4 9.7 28.1 18.6 U.S. Govt. securities Other credit market instruments, net 8.1 13.4 -14.7 5.8 -22.8 - 7.6 27.1 -. 5 7.5 14.2 - 7.5 2.3 6.1 13.5 -. 2 -12.9 - 7.0 - 5.2 6.9 .7 - 8.3 Total borrowing in credit markets U.S. Government Nonfinancial business Households Other sources of credit Market funds U.S. Govt. deposits U.S. Govt. loans Foreign funds Insurance and pension reserves Sources n.e.c.9/ .8 12.8 8.1 - 5.5 33.2 18.1 11. 1 4.9 - 5.2 4.5 3.5 - 9.2 3.7 33.9 6.8 15.8 11.3 a/ Includes mail float not allocated in b/ Part of the drop from 1966 reflects decline in bank borrowing from foreign branches and rise in deposit inflows to Home Loan Banks. preceding sector tables. - 11 - Table 7 DIRECT LENDING IN CREDIT MARKETS H1/67, SAAR Net Change 71.1 61.9 -9.2 43.6 64.3 20.7 3.5 18.2 21.9 3.8 29.8 30.7 .3 11.6 8.8 7.5 2.3 -5.2 Foreign -1.4 4.2 Private domestic nonfinancial 21.5 -8.8 Commercial bank credit as per cent of total funds raised 25.6 48.1 1966 Total funds supplied Financial institutions Federal Reserve Commercial banks Nonbank finance U.S. Government 5.6 -30.3 22.5 - 12 - Corrections: Page II-6a, GROSS NATIONAL PRODUCT AND RELATED ITEMS table. Housing starts, private (millions, A.R.) projected for 1967-IV should be 1.37. Page III-6, second paragraph. Put a period after word "weeks" and start a new sentence with "Since." Page 111-8. First line of second paragraph should read; Treasury bill rates moved up sharply, etc. Appendix A, page A-8, Table III. July 1967 total reserves NSA should be 23,906. Appendix A, page A-2. Table I, reproduced below, should be substituted for the one in the Greenbook. The last column of figures have been corrected. TABLE I FORMER AND REVISED SEASONAL FACTORS FOR CREDIT PROXY, MONEY SUPPLY,DEMAND DEPOSITS AND NONBORROWED RESERVES Credit Proxy Former 1966--Jan. Feb. Mar. Revised Money Supply: Demand Deposit Component Revised Former Nonborrowed Res Reserves Former Revised 101.3 99.8 99.7 101.3 99.7 99.7 103.9 100.0 99.2 103.9 99.8 99.2 102.3 99.3 99.1 102.3 99.3 99.0 Apr. May June July Aug. Sept. 99.8 99.7 99.9 100.2 99.2 99.7 100.1 99.7 99.9 100.3 99.1 99.6 100.8 97.7 98.3 98.6 97.9 99.2 101.0 97.6 98.6 98.4 97.6 99.4 99.6 99.0 99.6 100.0 98.6 99.7 99.7 99.1 99.6 100.1 98.4 99.7 Oct. Nov. Dec. 100.0 99.8 101.1 100.0 99.6 101.1 100.3 101.0 103.1 100.2 100.7 103.5 100.3 100.0 102.7 100.2 99.8 102.7 1967--Jan. Feb. Mar. Apr. May June July 101.3 99.8 99.7 99.8 99.7 99.9 100.2 101.3 99.7 99.7 100.1 99.7 99.9 100.3 103.9 100.0 99.2 101.0 97.6 98.5 98.5 103.8 99.6 99.4 101.0 97.7 98.7 98.4 102.3 99.3 99.1 99.6 99.0 99.6 100.0 102.3 99.3 99.0 99.7 99.1 99.6 100.1 

Federal Reserve (1967, August 14). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_19670815_part1

@misc{wtfs_greenbook_19670815_part1,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {1967},
  month = {Aug},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_19670815_part1},
  note = {Retrieved via When the Fed Speaks corpus}
}