Greenbook/Tealbook

Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. 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 July 12, 1974 SUPPLEMENTAL NOTES The Domestic Economy Retail sales. Retail sales in June were down .7 percent from May, according to the Census advance report, with all important groupings of stores--except gasoline stations--reporting lower purchases. Outlays for durable goods exhibited the greatest weakness, with sales of the automotive group down 2.1 percent, and furniture and appliance sales off 1.1 percent. Sales of nondurable goods were .3 percent lower than in May. Average sales in the second quarter were 2.5 percent above the first terms. quarter and, at best, this probably meant a slight increase in real In current dollars, a 4.5 percent recovery in the automotive group was significant, following two successive quarters of lower sales. Total sales less autos and nonconsumer items were up 2.3 percent in the quarter. RETAIL SALES (Seasonally adjusted, percentage change from previous quarter) 1973 1973 Q IV Total sales Durable Auto Furniture & appliance Nondurable Food General merchandise Gasoline Total, less auto and nonconsumption items GAF Real* -- QI II Q II .3 1.5 2.5 -3.4 -6.6 -1.0 -2.8 -8.1 4.2 4.5 4.2 2.2 1.9 1.2 2.3 3.5 4.3 3.8 3.9 1.9 1.2 1.8 8.1 2.0 3.6 2.3 3.8 1.6 -2.1 n.a. .7 -2.0 3.9 *Deflated by all commodities CPI, seasonally adjusted. 1974 April May June I .9 2.1 3.3 -1.3 .4 1.0 -1.4 2.6 .5 -2.3 .4 .7 - .7 1.8 2.3 1.8 -1.5 -2.1 -1.1 .3 .6 1.1 2.4 - .3 - .4 .7 .46 1.6 - .4 1.3 - .3 - .8 n.a. -2- Industrial production. Industrial production was estimated to be unchanged in June and at 125.5 percent of the 1967 average was virtually the same as the 125.6 percent of a year earlier. Declines in output of consumer goods and business equipment were offset by increases in production of intermediate products and industrial materials. On the basis of preliminary data, the second quarter average was .3 percent above the first quarter level. Auto assemblies in June were at an annual rate of 7.7 percent, the same as in May. Auto production schedules for the third quarter have been revised upwards to an 8.7 million unit rate, reflecting a decision to produce a larger number of 1974 models in July. Output of household appliances continued strong but production of other durable consumer goods declined, as did output of nondurable consumer goods reflecting, in part, a strike in the men's clothing industry. Production of business equipment declined about nearly one percent in June but it was still 4-1/2 percent above a year earlier. Output of inter- mediate products rose further. Production of durable goods materials rose as output of steel and consumer durable materials increased. Production of nondurable goods materials was unchanged as was output of the textile, paper, and chemical group. (Confidential until release June 16, afternoon.) -3INDUSTRIAL PRODUCTION (1967=100, seasonally adjusted) Percent change from 1974 1973 1973 Percent change from Month ago A year ago June April 1974 pMay Total index 125.6 124.9 125.5 125.5 0 - .1 Consumer goods 131.9 128.7 129.5 128.7 - .6 -2.4 Business equip. Defense equip. 122.5 80.1 128.3 80.6 129.1 81.7 128.0 81.4 - .9 - .4 4.5 1.6 Materials steel 129.0 119.9 128.5 116.4 129.0 117.5 129.4 118.3 .3 .7 .3 -1.3 eJune Autos* 10.2 7.7 7.7 7.5 *Seasonally adjusted annual rate, millions of units. Note: For release Tuesday, July 16, 1974. Real estate. 0 -24.5 Merchant builder sales of new single-family homes rose in May to the highest rate in below the peak in October 1972. almost a year, but were still well Even at the higher sales rate, however, the stock of unsold homes equaled nearly 9 months' supply. While the median price of new units sold showed little change, it continued above the rising median price of unsold homes. Sales of used homes in May were above a year earlier, although by a smaller margin than in April. The median price of such units increased to $32,130, almost 12 percent above May 1973. -4SALES, STOCKS AND PRICES OF NEW SINGLE FAMILY HOMES sold 1/ Median price of: Months' Homes Homes for sale 2/ Homes sold Supply (thousands (thousands of units) Homes for sale of dollars) 1973 7.0 7.7 30.4 32.7 29.4 31.2 453 9.6 33.5 32.1 483 446 11.1 34.0 32.9 QI(r) 527 453 10.3 35.0 34.0 January February(r) March 474 516 590 450 459 453 11.4 10.7 9.2 34.2 34.9 36.0 334 33.5 34.0 April(r) 582 449 9.3 35.7 34.3 601 440 8.7 35.8 34.7 QI QII 726 680 426 436 QIII 566 QIV 1974 May(p) 1/ Seasonally adjusted annual rate. 2/ Seasonally adjusted, end of period. Wholesale prices. The wholesale price index rose between May and June by 0.5 percent, seasonally adjusted (not at an annual rate), to a level 14-1/2 percent above a year earlier. another sharp rise in The increase reflected the index of industrial commodities and a further decline in the index of farm products and foods. The index of industrial commodities increased 2.2 percent, seasonally adjusted, to a level 22 percent above the year-earlier level. Increases were widespread and large with those for metals and metal products, fuels and power, machinery and equipment, and chemicals especially important. This was the sixth consecutive monthly increase of 2 percent or more. -5The index of farm products and foods declined, for the fourth consecutive month, by 4 percent, seasonally adjusted. Lower prices for livestock, meats, fluid milk, and fresh vegetables accounted for most of the decline. This index for June was slightly (1.2 percent) below a year ago. WHOLESALE PRICES (Percent changes at seasonally adjusted compound annual rates) 1 / June 1973 to June 1974 Dec.1972 to June 1973 June 1973 to Dec. 1973 Dec.1973 to Mar.1974 Mar.1974 to June 1974 May 1974 to June 1974 5.7 All commodities 14.5 20.2 10.9 24.5 12.2 Farm products - 1.2 45.8 10.4 10.8 -29.3 21.9 42.3 10.6 23.0 10.9 40.4 32.3 88.7 35.7 26.9 10.4 14.0 24.1 15.5 12.4 17.1 12.2 6.3 5.4 6.7 11.7 7.1 5.3 8.1 32.6 43.7 23.1 13.2 25.9 28.3 25.3 28.5 25.0 25.6 24.8 22.9 7.9 8.5 4.5 11.3 2.8 40.4 30.9 15.0 26.6 13.6 Industrial commodities Crude materials Intermediate materials Finished goods Producer Consumer Nondurable, excl. foods Durable 11.3 27.2 -16.7 18.5 17.3 Consumer finished foods 8.3 27.0 Note: Farm products include farm products and processed foods and feeds. 1/ Not compounded for one-month changes. Capacity utilization. -47.6 -45.0 In the second quarter, overall major materials utilization remained essentially unchanged from the first quarter. This apparent stability masks a significant upswing in petroleum refining utilization offset by a downward movement in most of the remaining series. (Confidential until release July 16, afternoon.) -6- MAJOR MATERIALS UTILIZATION (Seasonally adjusted, percent) 1974 1973 I II II III IV Textiles (yarn, fibers, woven fabric) 94.0 93.5 92.9 92.5 90.3 Paper, pulp, board 95.6 98.0 96.4 95.1 96.4 Petroleum refining 97.5 95.3 92.8 84.7 89.5 Basic iron and steel 93.4 94.3 94.7 92.9 91.8 Metals* 91.3 92.3 92.6 91.3 91.0 Chemicals and petroleum 93.5 92.7 91.1 87.2 87.5 MAJOR MATERIALS 93.4 93.5 92.3 90.2 90.1 *Consists of basic iron and steel, aluminum, and copper. Retail trade inventories. Book value of retail trade inventories rose at a $9.1 billion annual rate in May (p), $1.3 billion rate in April. following an upward-revised All of the May increase was in the non- durable category (especially general merchandise) as a $1.9 billion decline in auto stocks and a smaller drop in lumber and building materials offset increases in furniture and jewelry. Excluding autos, retail inventories rose at an $11.0 billion rate in May and the April rise was $3.9 billion. The retail trade inventory-sales ratio edged up to 1.47 from 1.46 in April. For total manufacturing and trade, the May book value increase was $44.5 billion, annual rate, up sharply from the $24.0 billion April rate and from the $36.9 billion first quarter rate. and trade inventory-sales ratio edged up in May. release, Tuesday, July 16.) The total manufacturing (Confidential until - 7 The following tables supercede those in the July 10 Greenbook. Table 1 BUSINESS INVENTORIES (Change at annual rates in seasonally-adjusted book values, $ billions) 1974 1973 Manufacturing and trade Manufacturing, total Durable Nondurable Trade, total Wholesale Retail Auto QIII QIV QI May (p) 21.1 12.4 9.8 2.6 8.7 4.5 4.2 1.2 36.5 19.0 12.8 6.3 17.5 6.6 10.9 4.4 36.9 22.5 14.3 8.2 14.4 9.7 4.7 -2.5 44.5 27.9 17.2 10.7 16.6 7.5 9.1 -1.9 1974 May (p) Table II INVENTORY RATIOS 1973 Inventories to sales: Manufacturing and trade Manufacturing, total Durable Nondurable Trade, total Wholesale Retail Inventories to unfilled orders: Durable manufacturing April May April 1.44 1.59 1.91 1.21 1.44 1.59 1.90 1.21 1.44 1.62 2.04 1.17 1.45 1.62 2.02 1.18 1.30 1.13 1.42 1.30 1.15 1.41 1.27 1.04 1.46 1.30 1.08 1.47 .806 .786 .714 .700 CORRECTIONS: Table I-7, footnote 2/ should read as follows: Excluding Federal pay increases, rates of change in the GNP implicit deflator are: 1974-I, 11.4 percent; 1974-IV, 7.6 percent; 1975-1, 6.6 percent. -8- INTEREST RATES 1974 Highs Lows June 17 July 11 Short-Term Rates Federal funds (wkly. avg.) 3-month Treasury bills (bid) Comm. paper (90-119 day) Bankers' acceptances Euro-dollars CD's (NYC) 90-119 day Most often quoted new 6-month Treasury bills (bid) Comm. paper (4-6 mo.) Federal agencies CD's (NYC) 180-269 day Most often quoted new 1-year Treasury bills (bid) Federal agencies CD's (NYC) Most often quoted new Prime municipals 13.55(7/3) 8.81(2/27) 11.60(6/12) 13.34(7/10) 8.90(4/30) 12.25(7/11) 12.75(7/11) 6.93(2/6) 7.75(2/22) 12.25 12.75 13.75 14.06(7/9) 8.13(2/25) 8.25(2/18) 8.17 11.25 11.00 11.88 12.00(7/10) 7.88(2/20) 10.50(6/12) 12.00(7/10) 8.86(5/6) 12.13(7/10) 9.95(7/8) 6.80(2/19) 7.50(2/22) 7.16(2/19) 8.17 11.00 9.44 12.00 9.90 10.75(7/10) 7.50(2/27) 10.00(6/12) 10.75(7/10) 8.65(5/3) 9.59(7/10) 6.37(2/15) 9.75(7/10) 6.50(7/12) 7.00(2/27) 8.56(5/7) 7.32 7.89 8.04 9.08 8.06 9.57 9.00(6/12) 5.40(6/19) 9.75(7/10) 3.70(2/15) 7.01(2/19) 6.50(7/12) Intermediate and Long-Term Treasury coupon issues 5-years 20-years 8.34(7/11) 6.72(2/14) 7.40(1/4) 8.01 8.09 8.54 8.34 Corporate Seasoned Aaa Baa 8.67(7/11) 9.50(7/11) 7.73(1/2) 8.45 8.54(1/2) 9.33 8.67 9.50 8.05(2/13) 9.49(6/19) 10. 2 5p(7/10) New Issue Aaa Utility 10.25(7/10) Municipal Bond Buyer Index 6.95(7/10) 5.16(2/6) 6.13(6/19) 6.95(7/10) Mortgage--average yield in FNMA auction 9.65(7/1) 8.43(2/25) 9.54 9.65(7/1) SUPPLEMENTAL APPENDIX A* THE INDUSTRIAL COMPOSITION OF BUSINESS LOAN GROWTH AT LARGE BANKS IN THE FIRST HALF OF 1974 Business loans at all commercial banks grew at a 23 per cent seasonally adjusted annual rate in the first While data are not available on the breakhalf of 1974. down of loans by industry for all banks, the industrial large Weekly Reporting Banks composition of loans at 15[8] that account for about for about 60 per cent of all business loans indicates that a substantial part of the not seasonally adjusted growth of business loans was to manufacturing firms, both durable and nondurable. See Table 1. Business loan growth, however, was broadly based by industry category, as it was over the same period in 1973 when CID constraints on advances in the prime rate sharply increased the relative attractiveness of bank loans. Business borrowing at banks was large in the first half of 1974 in part because corporate profits after inventory valuation adjustment and taxes were declining in most major industry sectors. Further, there was rapid accumulation of inventories that required financing some of the inventory growth was unintended, as consumer sales slowed in the first part of the year, but some could also be traced to voluntary stockpiling of materials and finished goods in reflection of fears of future Working capital needs were scarcity and higher prices. also inflated by rising prices, particularly for energy, as the adjustment of prices of final output to the surge of oil and coal prices was delayed in many industries by regulatory processes. While in the entire first half of 1973 business loans were inflated by rate-induced shifts from the commercial paper markets, in 1974 shifts between the commercial paper market and bank loans occurred intermittently For and were induced by both rate and nonrate factors. example, in March-April, as the increase in market rates outstripped the rising prime rate, borrowers shifted from the commercial paper market to bank loans in large volume. In the May-June period, however, increasing quality consciousness in the commercial paper market made it virtually impossible for nonprime borrowers to issue paper, and bank * Prepared by Paul W. Boltz, Economist, Division of Research and Statistics. Banking Section, A - 2 loan demands were increased as such borrowers were forced to draw on their bank lines--despite a relatively high And, throughout the first half of 1974, bank prime rate. loan demands reflected some borrower unwillingness to pay high capital market rates, and most recently unsettled conditions in money and capital markets have resulted in large shifts of credit demands to New York City and Chicago banks, as postponements, reductions, and cancellations of scheduled bond and stock issues became widespread. Table 2 shows the growth of business loans in two-month intervals which roughly coincide with the changing character of business loan growth in the first half of In the first two months of the year business loan 1974. growth was sustained by heavy borrowing by trade concerns At (wholesale and retail firms and commodity dealers). that time, commodity dealerfinancing needs rose sharply in response to the speculative surge in commodity markets, the delayed marketing of 1973 farm crops, which had been postponed until after the turn of the year for tax and price reasons, and interruptions to the flow of farm commodity Firms in wholeexports due to transportation difficulties. what appeared for sale and retail trade required financing to be unintended inventory accumulation as consumer sales, In especially of durable goods, slumped early in the year. addition, mining companies (the category that includes oil extraction firms) stepped up their borrowing at banks in January and February, in part related to financing of payments to the Federal Government for oil leases. The composition of loan growth changed in March and April, and in these two months business loans at all commercial banks rose far more rapidly than in January Loans to commodity dealers declined and and February. those to mining companies slowed, though wholesale and retail trade firms accelerated their borrowing for inventory purposes. Durable manufacturing firms began to borrow very heavily in this period and have continued to expand their This likely reflects bank loans into the present period. financing needs arising from increased capital expenditures in nominal terms and the accumulation of raw materials and goods in process; firms which manufacture machinery have been consistently large borrowers throughout the first half. A - 3 While the higher cost of energy was adding to working capital needs of virtually all nonfinancial businesses, the impact on transportation companies and public utilities was acute, and in March and April many of these companies turned to bank loans to finance increased costs until rate adjustments could be made. In addition, some of the capital financing of utilities was being diverted to banks from the bond market where rates were becoming unattractive and buyers of bonds were becoming skeptical of the ability of utilities to pass through their rising costs. In May and June public utilities and manufacturers of durables continued their rapid pace of borrowing. Construction loans rose sharply in this period as cost overruns and lagging sales of completed residential units increased the size and term of financing needs. Overall the rate of growth of business borrowing has been decelerating gradually since March. By June the seasonally adjusted monthly rate of business loan growth at commercial banks was less than a third of the March rate, but in the last week of June and in early July business loan growth accelerated in New York and Chicago. With the outstanding volume of commercial paper declining sharply in early July, it appears that not only was the lagging adjustment of the prime rate to rising market rates encouraging the growth of business loans at banks, but also that increasingly unsettled money and capital market conditions were augmenting bank loan demand. Table 1 NET CHANGE IN COMMERCIAL AND INDUSTRIAL LOANS AT LARGE COMMERCIAL BANKS, BY INDUSTRY (In millions of dollars, not seasonally adjusted) Business of borrower 1971 Dec. 30June 23 1972 Dec. 29June 28 1973 Dec. 27June 27 1974 Dec. 26June 26 Loans Outstanding 12/26/74 343 -98 1,178 1,642 13,336 Total manufacturing Durable Metals Other durable Nondurable -634 276 45 231 -910 -250 -68 5,079 2,946 2,074 872 2,133 5,416 3,842 2,933 909 1,574 30,474 17,095 13,394 3,701 13,379 Mining -206 -203 Public utilities, communication and transportation -110 28 1,630 1,670 13,819 Construction 379 444 838 632 5,563 Foreign business concerns 265 213 554 632 4,073 All other -257 -262 2,701 1,627 20,956 Total commercial and industrial loans -220 -128 12,311 11,992 92,039 Total trade -408 340 -182 331 3,818 Table 2 NET CHANGE IN COMMERCIAL AND INDUSTRIAL LOANS AT LARGE COMMERCIAL BANKS, 1974 (In millions of dollars, not seasonally adjusted) Business siness of of borroweFeb. Total trade Dec. 2627 Feb. 27Apr. 24 Apr. 24June 26 BY INDUSTRY Dec. 26June 26 782 896 -36 1,642 190 308 273 35 -118 4,283 2,744 2,154 590 1,539 943 790 506 284 153 5,416 3,842 2,933 909 1,574 248 195 -70 373 -372 1,022 1,020 1,670 Construction -75 232 475 632 Foreign business concerns -56 329 359 632 -491 1,223 895 1,627 226 8,180 3,586 11,992 Total manufacturing Durable Metals Other durables Nondurable Mining Public utilities, communication and transportation All other Total commercial and industrial loans SUPPLEMENTAL APPENDIX B* MONTHLY SURVEY OF BANK LOAN COMMITMENTS MAY 1974 In May, growth in loans made under commitments at the 137 banks reporting on the Monthly Survey of Loan Commitments slowed from the accelerated rates in February, March, and April (Table 2), and this slowdown matched the deceleration of growth of loans at all commercial banks Smaller takedowns appear to have resulted in that month. in faster growth of unused commitments, which typically accelerate when the volume of takedowns falls (Table 1), total unused commitments rose more rapidly in May than Almost all the growth in any of the four previous months. of unused commitments in May was for commercial and Unused commitments to nonbank financial industrial loans. institutions showed negligible growth, and commitments for real estate mortgages declined. New commitments took a decided downturn in May, although they remained at a higher level than in any However, this series other month in 1974 except April. has moved erratically since the inception of the monthly and the contraction survey in the summer of last year, 1/ is not necessarily indicative of the posture of banks' commitment policies. The trend of utilization ratios has been upward this year, but in May utilization ratios generally fell, reflecting the slower pace of takedowns and the However, banks advance of unused commitments (Table 3). continued to restrain mortgage commitments, and the utilization ratios of real estate commitments advanced further in May. * Prepared by Paul W. Boltz, Economist, Banking Section, Division of Research and Statistics. 1/ Many banks on the panel were unable to provide complete information on commitments in the early months of the survey. To provide a consistent profile of commitments with the largest possible panel, only data since November are included in the tables. MONTHLY SURVFY OF BANK LOAN COMMITMENTS AT SELECTED LARGE U.S. BANKS 1/ (AS OF MAY. 31, 1974) NOT FOR QUOTATION OR PUBLICATION 1 - UNUSED COMMITMENTS TABLE IN BILLIONS) (DOLLAR AMOUNTS (9) (8) I (7) I (5) I (6) I I (4) I (3) TOTAL I REAL I I NON-BANK I C , 1 C I C I I C I ESTATE COMMITMENoI I FINANCIAL I OTHER CONFIRMED I kEVOLVING ITEPM LOANS St MORTGAGES ICOMMITMENTS I INSTITUTIONSI LINES IREV. CRFDITSI CREDITS 1% CHGI AMT 1% CHGI AMT IT CHGI AMT IX CHG AMT I% CHGI AMT I. CHGI AMT I% CHG AMT (1) 1 (2) CCI I C f I TERM FIRMS TOTAL LOANS I Z CHGI I1 CHGI AMT AMT NOVEMBER 30 83.61 0.01 5.31 0.01 19.01 0.01 24.31 0.01 54.91 0.01 I I DECEMBER 31 83.0) -0.71 I I JANUARY 31 FEBRUARY 28 MARCH 31 APRIL 30 MAY 31 85.01 1 85.71 2.41 I I 5.51 I 5.21 I 0.91 85.21 -0.71 I I 85.31 1 86.51 0.1( I 1.51 3.71 - 4.5l o.81 I 84.91 1 0.61 24.11 -0.81 23.51 -2.31 I I I 18.51 1.31 1 I 18.41 -0.51 24.01 I 24.21 2.11 I 0.71 I 54.61 -0.51 -2.51 7.11 57.01 0.31 4.71 1.81 28.31 I I 2.41 1.11 I I I I 4.81 56.21 -1.51 28.01 -1.31 I 3.41 55.51 -1.31 6.21 18.81 1.11 25.01 0.21 2.61 56.91 I I 56 0.61 56.01 I I I 2.81 27.01 4.61 25.01 5.71 4.31 -1.71 4.11 1.11 - 2.51 I 56.81 18.61 0.81I1 I I 27.71 0.01 I I I 0.01 I I 28.01 3.7TI I I 6.41 1 4.51 4 0I NOV 73 - MAY 74 AVERAGE -2.11 18.31 -1.61 4.81 5.51 5.71 18.61 4.41 18.61 I I -0.11 I I I 24.31 0.51 4.81 I -0.31 26.91 I I 4.61 -4.21 I I 4.61 0.91 26.91 I 4.61 0.91 5 I I 6.81 0.01 120.11 I I I 8.81 0.31 I I 8.61 -2.61 I I 8.51 -0.91 I I 8.21 -3.91 I -3.91 I 0.21 I I 27.50.5 27.51 -0.51 BANKS PARTICIPATING IN THE OF $100 MILLIfN OR MORE. MONTHLY LOAN v* NOTE: COMMITMENT SURVEY ARE SELECTED WFEKLY REPORTING MINOR INCONSISTFNCIES MAY OCCUR DUE -0.9 121.61 2.3 122.61 0.8 121.31 -1.0 0.21 120.31 -0.8 I I I 8.11 -1.51 121.51 I 1.0 I 8.51 -1.41 BANKS WITH TOTAL DEPOSITS TO ROUNDING. ** 116.91 1 6.21 NUMBER OF BANKS 1/ 0.0 120.91 0.2 NOT FOR QUOTATION OR PUBLICATION MONTHLY SURVEY OF BANK LOAN COMMITMENTS AT SELECTED LARGE U.S. BANKS 1/ (AS OF MAY. 31, 1974) TABLE 2 - LOANS UNDER COMMITMENTS 2/ (DOLLAR AMOUNTS IN BILLIONS) (5) 1 (6) I (7) (4) I (3) (6) (9) I C I I c c I C I CCI I NON-BANK I REAL TOTAL FIRMS TERl I REVOLVING ITERM LOANS I CONFIRMED I OTHER I FINANCIAL ESTATE I COMMITMENTS TOTAL I LOANS CREDITS IREV. CREDITSI LINES ICOMMITMENTS IINSTITUTIONSI MORTGAGES I AMT 1% CHG. AMT 1% CHGI AMT I. CHGI AMT 12 CHGI AMT 1% CHGI 1% CHGI AMT I CHG I AMT C CHG AMT CHGI AMT (1) CEI NOVEMBER 30 DECEMBER 31 JANUARY 31 FEBRUARY 28 I I I 0.01 I I 18.61 I 1 0.01 I 19.71 I I 72.11 2.11 19.11 2.71 I I 71.21 -1.31 1 I 72.61 2.01 I 77.31 6.51 I I APRIL 30 79.51 2.81 MAY 31 I 80.11 I 0.81 I I NOV 73 - MAY 74 I I 70.61 I I MARCH 31 (2) C & I 7'.5l I I 2.21 I I I 0.01 38.31 0.01 I I I I I I 25.91 0.01 o.41 0.01 16.11 0.01 I I I I I I I I 38.81 1.21 26.71 3.31 6.61 3.01 19.81 I I I I 25.61 -4.01 6.71 1.31 I 19.61 -0.21 I 19.01 -0.51 1 19.81 0.71 I I I I 19.31 20.31 2.41 39.51 2.11 26.61 3.01 29.91 12.41 I 1.21 I 19.51 1.31 I 20.61 I 5.51 I I I 21.21 4.71 I 21.41 I 1.01 I I 20.81 I 0.91 I ! 1 19.71 1 1.91 21.81 1.71 20. I I 20.71 I I 1.71 38.71 -0.11 I I 0.01 106.71 0.0 9.61 18.21 1.41 110.21 3.2 I I 18.41 -7.11 18.21 I I 3.71 I 18.01 1 I 0.01 107.81 -2.1 I 6.51 -2.91 18.41 -0.41 18.31 0.2) 6.71 19.41 18.41 0.61 109.31 1.3 115.11 1 1.41 118.8 5.3 I 40.71 3.71 5.61 I 42.01 I 42.61 I 3.21 I 1.31 3.61 I I 30.51 I I I I 40.41 31.01 1.81 28.41 -1.51 6.51 -3.21 I 7.0) I I 2.91 20.61 6.31 I I 20.51 -0.61 1 7.91 I I I I 6.71 1.61 I I 19.51 I I 2.21 18.61 I 18.71 I I 0.21 119.31 11. 18.41 0.61 113.41 NUMBER CF BANKS 1/ BANKS PARTICIPATING IN THE MONTIHY LOAN COMMITMENT SURVEY ARE SELECTED WFEKLY REPORTING BANKS WITH TOTAL DEPOSITS OF $100 MILLION OR MORE. 2/ LOANS UNDER COMMITMENTS ARE DEFINED AS ALL LOANS UNDER COMMITMENTS CURRENTLY OR PREVIOUSLY IN FORCE, LESS REPAYMENTS OF THE PRINCIPAL. THE REPORTED DATA ARE DISTORTED EY TAKEDOWNS OF LOAN COMMITMENTS BY OVERSEAS BRANCHES OF US BANKS AND LOAN SALES. MINOR INCONSISTENCIES MAY OCCUR DUE TO ROUNDING. ** 0.4 I AVERAGE ** NOTE: 3.1 I 1.9 NOT FOR QUOTATION OR PUBLICATION MONTHLY SURVEY OF BANK LOAN COMMITMENTS AT SELECTED LARGE U.S. BANKS 1/ (AS OF MAY. 31, 1974) TABLE 3 - UTILIZATION RATIO 2/ (PERCENTAGES) (1) C r I FIRMS TOTAL -I (2) C I TERM LOANS I (3) I (4) (5) C I I C c I C I REVOLVING ,TERM + REV.1 CONFIRMED CREDITS LINES I 1 I NOVEMBER 30 45.8 77.8 50.9 DECEMBER 46.5 77.7 JANUARY 31 45.6 FEBRUARY I I I I C I OTHER ICOMMITMENTSI I I (7) (6) C NO IN-BANK FI NANCIAL I NSTS. (8) REAL ESTATE MC ORTGAGES I (9) I TOTAL (10) SHORT -TERM TOTAL3/ I I.-- 61.2 32.0 59.4 39.5 67.2 47.1 39.8 51.4 61.7 32.9 60.5 42.3 67.4 48.1 41.1 78.4 52.0 62.1 31.1 59.2 39.7 68.0 47.0 39.6 45.9 77.8 52.2 62.2 31.8 58.0 39.3 68.2 47.1 39.8 MARCH 31 47.6 77.3 53.5 62.3 34.7 58.3 41.0 69.2 48.7 41.8 APRIL 30 48.3 76.4 53.5 62.7 35.8 57.6 43.4 69.5 49.7 42.9 MAY 48.1 77.0 53.6 63.0 34.9 60.5 43.2 69.8 49.5 42.7 46.8 77.5 52.4 62.2 33.3 59.1 41.2 68.5 48.2 41.1 31 28 31 NOV 73 - MAY 74 AVERAGE NUMBER 1/ 2/ 3/ OF BANKS BANKS PARTICIPATING IN THE MONTHLY LOAN COMMITMENT SURVEY ARE SELECTED WEEKLY REPORTING BANKS WITH TOTAL DEPOSITS OF $100 MILLION OR MORE. THE UTILIZATION RATIO IS THE RATIO, EXPRESSED AS A PERCENTAGE, OF LOANS UNDER COMMITMENTS TO THE SUM OF UNUSED COMMITMENTS AND LOANS UNDFR COMMITMENTS EXCLUDES REAL ESTATE LOANS AND TERM LOANS. ** NOTE: MINOR INCONSISTENCIES MAY OCCUR DUE TO ROUNDING. ** NOT FOR QUOTATION OR PUBLICATION MONTHLY SURVEY OF BANK LOAN COMMITMENTS AT SELECTED LARGE U.S. BANKS 1/ (AS OF MAY. 31, 1974) TABLE 4 - NEW COMMITMENTS (DOLLAR AMOUNTS (1) I (2) (3) I (4) (5) I (6) (8) I (9) I (7) I C I I C I I C I REAL TOTAL I C I I CSI I C I | NON-BANK I FIRMS I TERM REVOLVING ITERM LOANS I1 CONFIRMED I OTHER I FINANCIAL I ESTATE LOMMITMENTS TOTAL I LOANS CREDITS IREV. CREDITSI LINES ICOMMITMENTS IINSTITUTIONSI MORTGAGES AMT It CHGIl AMT 1%CHGI AMT 1t CHGI AMT I2 CHGI AMT It CHGI AMT It CHGI AMT It CHGI AMT IX CHGI AMT _L, CHG I I I I I I I I I I I I I I I I I 4.91 0.01 1.11 0.01 1.21 0.01 2.31 0.01 1.81 0.01 0.81 0.0 6.61 0.91 0.0 0.01 0.81 0.01 NOVEMBER 30 DECEMBER 31 5.01 I 4.81 JANUARY 31 I FEBRUARY APRIL 30 SMAY 31 -2.81 74 11.01 I I 6.51 I -6.11 I 5.61 I I 1.31 22.21 I I 0.81-39.51 I 7.01 I 1/ I I I 6.31 38.71 I I MARCH 31 NUMBER 1.41 4.51 -6.71 8? NOV 73 - MAY AVERAGE IN BILLIONS) I1 5.91 0.81 2.11 I 1.31 I 59.61 1.21 -8.71 I I 1.21 -(..31 I 1.11 -5.41 I 0.91-22.41 I I 0.91 5.71 I I 1.31 41.81 1.61 28.61 I 2.41 I 8.01 1.71-31.81 I 1.71 I 2.61 2.91 I 3.9q I 50.31 9.61 I 1.81 2.21 I 2.71 -4.01 I I 3.01 .I I 5.91 1 1.21 1 7.01 1 2.31 2.31 I 1.11 I 0.81 21.01 I 21.11 0.91-11.81 I I I I 8.21 I I I 8.71 I 1.11 35.51 I I 0.91-15.41 I I 0.61-29.31 0.71-22.61 0.81 -7.61 I I 0.61 10.61 0.91 0.91 I I 0.61 -1.01 1.11 I 2.8( -6.11 I 6.01 I 0.71-10.81 I 2.81 32.41 I 1.11 23.31 2.11 -4.0! I 1.51 -6.61 I -1.31 I I 0.71 I 9.81 0.7 I 0.71 1.41 I I 0.1! I I 1.0 26.31 I 19.41 I 26.41 I I 9.81 11.81 I 0.91 MONTHLY ** 0.91 -2.31 I MINOR INCONSISTENCIES MAY OCCUR DUE TO ROUNDING. ** 9.01 10.9 8.81 -1.7 7.51 6.0 I I I 4.01 LOAN COMMITMENT SURVEY ARE SELFCTED WEEKLY REPORTING BANKS WITH TOTAL DEPOSITS NOTE: 6.11 -9.0 I 8.11 33.5 I OF BANKS BANKS PARTICIPATING IN THE OF 1100 MILLION OR MORE. 8.0 I 6.71 -6.0 I I 2.31 I 0.91 7.11 SUPPLEMENTAL APPENDIX C* TREASURY STUDY OF TAX AND LOAN ACCOUNTS The Treasury has just published a report on its study of the tax and loan account system. The purpose of the study was to evaluate the desirability of maintaining, eliminating, or modifying the current system. The basic issue under investigation was whether, or to what extent, the Government incurred a net monetary cost under the current arrangement, taking into account the implicit value of services provided by the banks to the Government on the one hand and the Government's loss of income from holding its funds in non-interest bearing deposits on the other. Critical data bearing on this issue were gathered from a sample of 600 banks (300 banks with the largest Summarized tax and loan accounts and a sampling of 300 other banks). below are the major findings of the study along with the Treasury's conclusions and proposals. Cost of services performed by banks In evaluating the services performed by banks, the Treasury decided that any service provided primarily as a service to customers, or as a marketing device, or for which the banks levy a charge to the individual recipient of the service, should not be compensable. For example, since the survey showed that most banks do not handle subscriptions to Treasury issues without a fee this "service" did not qualify for compensation. Using the criterion described above only two activities were judged to be compensable: the maintenance of the tax and loan account itself (assuming it were maintained in some form); and the issuance, redemption, and exchange of savings bonds. Employing data from the survey (which reflects calendar year 1972 figures), the Treasury estimated that in the aggregate it cost banks about $64 million to provide these compensable services. Earning value of tax and loan accounts The Treasury also developed estimates of the earning value of tax and loan account balances to commercial banks. Using the three month bill rate as a surrogate for the potential return to be gained from investing tax and loan account balances (and adjusting for reserve requirements and FDIC assessment) the Treasury estimated that banks received an implicit gross return of $325 million in 1972. * Prepared by Raymond Lombra, Economist, Division of Research and Statistics. Government Finance Section, C - 2 The Treasury emphasized that the excess of this figure over compensable costs, $260 million, probably overstates both the increment to bank profits derived from tax and loan accounts and the benefit that would accrue to the Federal budget from substantially modifying the present system. It is possible, for example, that banks pass on part or all of this excess to the public in the form of lower costs for banking services or to the Treasury in the form of lower borrowing costs on new issues with tax and loan account crediting. Further, to the extent bank profits rise, the corporate income tax recovers part of the excess. 1/ Treasury conclusions and recommendations After apparently considering a number of alternatives, the Treasury concluded that tax and loan accounts should be retained in order to minimize the impact of Federal financial transactions on the distribution and level of bank reserves and on the money market. Other schemes examined either raised administrative costs significantly or would have had undesirable effects on the money market. This conclusion coupled with the findings described above--that is, that the implicit bank return on the accounts is well above the costs of services provided--led the Treasury to recommend adoption of alternative procedures that would enable the Treasury to earn a return on its cash balances and provide banks with explicit reimbursement for services found compensable. On the investment side the debt managers plan to experiment with 30-day commercial bank time deposits. However, since the average "life" of a tax and loan deposit is usually about 10 days, the Treasury does not believe this innovation will be very productive. In addition to the above, the Treasury also plans to intensify its efforts to raise its operating balance at Federal Reserve Banks. This action will, other things remaining the same, also earn a return for the Treasury, because the System will have to purchase securities to offset the reserve effect of the Treasury's action, thus raising Federal Reserve earnings and, therefore, the System's payment to the Treasury. The most promising technique advocated by the Treasury was direct investment in money market instruments, such as repurchase agreements. This latter approach, however, will require enabling legislation, because the Treasury, while it has the authority to hold deposits cannot hold market instruments. 1/ It should be noted on the other hand, however, that using the bill rate rather than, say, the funds rate, may bias downwards the estimated earning value of tax and loan accounts. C-3 Finally, with regard to the services provided by banks which were deemed compensable the Treasury proposed the following: (1) the issuance, redemption, and exchange of savings bonds should be compensated by fees paid from appropriations; and (2) costs related directly to the servicing of tax and loan accounts should be covered by the residual value of the accounts which will remain in banks. 1/ 1/ It is not clear from the report what type of "formula" will be used in determining the level of tax and loan balances which will remain in individual banks. SUPPLEMENTAL APPENDIX D* TAX-EXEMPT CORPORATE POLLUTION CONTROL BONDS Tax-exempt pollution control bonds for corporate purposes were authorized by Congress in 1968 as a special type of industrial revenue bond, as part of a package which severely restricted the use of industrial revenue bonds for other purposes. Since the first issue under this authority in April 1971, this method of financing grew to a level of over Earlier this year, 1974 volume was projected to be $2 billion in 1973. about $2.5 billion; however, actual volume will likely fall short of that Thirty-nine States have passed figure due to adverse market conditions. the major industrial States necessary enabling legislation, including all except Massachusetts and New Jersey. Pollution control bonds are, for practical purposes, tax-exempt corporate bonds. The bonds are issued by a State or municipal governmental unit, with the proceeds utilized to finance new, non-productive pollution control equipment or facilities for a specified corporation. The facilities are initially owned by the issuing authority, and leased or sold on an instalment basis to the corporation. Payments by the corporation are scheduled in such a way as to equal the required interest and principal payments on the bonds. Generally, when all the bonds mature, the corporation will either own the facility or have the option to buy it for a nominal amount. The corporation guarantees payments, and provisions are generally made so that bond-holders will be treated as senior creditors of the corporation in the event of bankruptcy. Thus, rating agencies grade these issues on the basis of the corporation's soundness, and debt ratings of the governmental unit are not affected. The primary benefit to corporations of pollution control bonds is, of course, the ability to borrow in the tax-exempt market, which in the current market translates generally into interest rate savings of 2 to 3 per cent. In addition, corporations are allowed to treat pollution control facilities financed by tax-exempt bonds as if Other benefits include they were owned for Federal income tax purposes. the ability to obtain 100 per cent financing, the lack of SEC registration requirements, access to new sources of financing, and in some cases favorable State and local tax treatment on such facilities. Despite the advantages, many companies, especially smaller firms, have determined that the time and expense of issuing tax-exempt * Prepared by Daniel Krabill, Economist, Capital Market Section, Division of Research and Statistics. D-- 2 bonds exceed the potential benefits. One reason is that these tax-exempt issues tend to be smaller than normal corporate issues, as pollution control expenditures at various plant locations must generally be Also, tax-exempt status must be financed by separate bond offerings. assured for each issue, on the basis of either a special IRS ruling or counsel's opinion based on established precedent. In addition to these financial reasons, some large companies have not used tax-exempt financing in order to avoid possible public criticism. Volume The volume of tax-exempt pollution control bonds grew rapidly from 1971 through the end of 1973, but has decreased somewhat during the first half of 1974, as shown in the following table. Tax Exempt Pollution Control Financing (billions)1/ 1971 1972 1973 1974 (first half) 1/ .1 .5 1.8 .8 Percentage of State and local Market1 / .4 2.4 7.7 6.2 Bond Buyer (excludes most private placements, and short-term bond anticipation notes). Private placements are generally excluded from the above figures. The Bond Buyer estimates that roughly $250-350 million in direct placements is excluded from their 1973 figures, but that this portion of the market has dried up considerably in recent months. The decline in volume during the first half of 1974 can be attributed primarily to market factors, despite a 14 per cent increase in long-term State and local financing over 1973 levels, and to a slowdown in new rulings on eligibility from IRS. The decline seems to be temporary, since the volume of planned issues has increased and now totals $2.1 billion, and the level of pollution control investment is expected to grow. D - 3 Publicly sold pollution control issues are generally term bonds with fixed maturities of 25 or 30 years, a very unusual type of instrument for the tax-exempt market. Placements with banks usually are structured more like loans, with maturities in the 3- to 10-year range and generally Some corporations with floating interest rates tied to the prime rate. make it a practice to limit maturities to the expected life of the pollution control facilities, while others maximize the maturity regardless of the expected life in order to maximize the benefits of tax-exempt financing. Sales of both public and privtely placed issues have previously been concentrated in a relatively narrow range of investors, primarily banks and casualty companies, who have recently cut back purchases of pollution control issues. In aggregate, banks and casualty companies have increased their holdings of tax-exempt issues; however, they seem to be purchasing the more standard shorter-maturity, fixed-rate serial bonds. It would Brokers have thus turned increasingly to individuals. seem that sales to individuals should increase significantly in coming months as brokers re-orient their sales strategies, especially in the light of the willingness of corporations to pay higher interest rates than are paid on municipal bonds with similar ratings and maturities. The use of pollution control bonds is concentrated to a large extent in a few industries. Electric utilities raised $712 million via this route in 1973. Other major industries in this market include metal processing and refining, paper, chemicals, and oil. Growth Potential The volume of pollution control financing in future years depends primarily on the level of capital investment which is eligible for such financing, which in turn is closely related to the requirements The of the Environmental Protection Agency and the various States. following table provides figures for actual and projected corporate investment in pollution control facilities, some portion of which is eligible for tax-exempt financing. Pollution Control Investment (billions) 1/ 1970 1971 2.5 3.2 1972 1973 4.5 5.7 1974 (projected) 7.4 1977 (projected) 9.3 1/ Annual McGraw Hill Surveys. D -4 Pollution control investment can be expected to turn down after 1977, when most existing standards will have been met, but will likely continue at a lower level due to new and changing Federal standards, State requirements, new technology, and additions to productive capacity. Assuming no major changes in EPA standards or in IRS policy, and no Congressional action similar to that taken in 1968 to limit industrial revenue bonds, the above figures indicate that the volume of pollution control bonds should recover from its current decline, increase over the next several years, perhaps to a level of $2.5-$3.5 billion, and then turn down in 1977 or 1978. One major unresolved issue, which could result in a significant increase in pollution control bonds, concerns the eligibility of investments to control radiological pollution from nuclear power plants. The industry is asking IRS for rulings that would make an additional $1-2 billion per year eligible for tax-exempt financing, a very large percentage of which would likely be financed in this market. Tax-Exempt "Commercial Paper" One recent innovation in tax-exempt financing that seems likely to grow is short-term tax-exempt financing for construction of pollution control facilities. The Virginia Electric and Power Company (VEPCO) innovated in this area in December 1973, and now has $44.5 million in taxexempt "commercial paper" outstanding, with rates paid holding at a constant ratio of 60 per cent of the prime rate. Two other utilities are known to be utilizing this method of short-term financing but, instead of selling this paper publicly through a commercial paper dealer, are placing it directly with banks. Effect on Market for Tax-exempt Securities The effect of pollution control bonds on the cost and availability of funds for other tax-exempt borrowers is very difficult to determine, but would seem to be greater for those issues with longer maturities. The substitutability of various types of debt securities for one another in the market, and thus the spreading of interest cost effects of an increase in volume of one type of security, is much less complete in the tax-exempt market than in other markets. Many corporate investors in such securities are limited in their purchases by the amount of their taxable income, and many large money market investors such as pension funds are tax-exempt and thus have no need for tax-exempt bonds. Thus, increased volume must be absorbed by a relatively small class of investors. D-5 As a result of the rapid growth of pollution control bonds, some pressure is being exerted, primarily by issuers of State and local government bonds, to eliminate tax-exempt status on these bonds. This activity parallels the events of 1968, when industrial revenue bonds were severely limited by Congress after they had grown to the point where they were affecting State and local borrowing. 

Federal Reserve (1974, July 15). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_19740716_part3

@misc{wtfs_greenbook_19740716_part3,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {1974},
  month = {Jul},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_19740716_part3},
  note = {Retrieved via When the Fed Speaks corpus}
}