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. January 16, CONFIDENTIAL (FR) CLASS II - FOMC SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 1976 TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Industrial production.................................... Merchant builder sales of new single-family homes.................................... Inventories............................................ TABLES: Industrial production................................... Home sales.............................................. THE DOMESTIC FINANCIAL ECONOMY Mortgage market.......................................... TABLES: Average rates and yields on newhome mortgages........................................* Interest rates........................................... CORRECTION............................................... APPENDIX Highlights of the revision of the income in product accounts............................. SUPPLEMENTAL NOTES The Domestic Nonfinancial Economy Industrial production increased an estimated 1 per cent in December following a rise of 0.4 per cent in October and an upward revised 0.5 increase in November. At 118.5 per cent of the 1967 average, the total index is about 8 per cent above the April low and 9 per cent below September 1974. Gains were strong and widespread among consumer goods, business equipment, and materials. Final products. Output of durable consumer goods increased further in December reflecting some rise in autos and continued strength in home goods such as appliances and household furnishings. Auto assemblies were at an annual rate of 7.8 million units in December and production in the first quarter of 1976 is currently scheduled to be raised to an 8.0 million unit annual rate. Output of nondurable consumer goods declined more in this cycle than usual, but has more than recovered the 5 per cent loss. Production of business equipment also rose strongly in December, but the level remains only slightly above the springtime low. Output of construction producers is estimated to have advanced further in December. Materials. Production of durable goods materials including steel increased in December from a November level which was revised upward substantially. Nondurable goods materials advanced further and have now recovered most of the 20 per cent decline which ended in March 1975. The textile, paper, and chemical group has advanced an - 2- estimated 30 per cent since the spring low. With the recent recovery in materials, inventory reduction of these goods has apparently ended and some accumulation is underway in selected industries. INDUSTRIAL PRODUCTION (Seasonally adjusted) Sept. Oct. 1975 Nov. (p) Dec. (e) Total 116.2 116.7 117.3 118.5 1.0 .9 2.9 Products, total 116.9 117.0 117.8 118.9 .9 .2 1.6 Final products Consumer goods Durable goods Nondurable goods 116.9 126.8 118.3 130.2 116.9 127.2 118.0 130.6 117.6 128.3 118.6 132.0 118.6 129.6 120.1 133.2 .9 1.0 1.3 .9 .3 5.0 9.1 3.7 1.3 1.9 1.8 1.9 Business equipment 115.6 115.5 116.2 117.2 .9 -7.8 1.3 Intermediate products 116.6 Construction products 112.0 117.2 112.4 118.4 113.1 120.0 114.5 1.4 1.2 - .4 -3.2 2.7 3.2 116.4 116.7 117.9 1.0 2.7 5.3 Indexes, 1967=100 Materials 115.1 Per cent changes Month Year QIII to QIV ago ago p--preliminary. e--estimated. Merchant builder sales of new single-family homes increased 9 per cent further in November from the upward revised October figure. At a seasonally adjusted annual rate of 660,000 units, new home sales were the highest in nearly 3 years and more than 70 per cent above the recent low last December. The rise in November may have been due, in part, to the closeness of the year-end expiration of the 5 per cent tax credit. -3- The stock of unsold new homes declined 2 per cent and by the end of the month represented about 7 months' supply at the November sales rate. Existing home sales continued at a record pace in November. The seasonally adjusted index of unit sales volume rose to 124 (1972= 100)--2 per cent above a month earlier. HOME SALES Median Prices of Homes Sold Sales Indexes of Unit Volume New Home Sales and Stocks Existing Months' (1972=100,seasonally adjusted) New Homes Homes homes homes Existing New sold 1/ for sale 2/ supply (thousands of units) homes 3/ homes (thou. of dollars' 1974 QI QII 523 550 452 436 10.4 9.5 73 77 106 105 35.2 35.6 30.9 32.2 QIII 490 414 10.1 68 99 36.2 32.8 QIV 417 400 11.5 58 93 37.3 32.2 QI 426 396 11.2 59 95 38.1 33.8 QII 571 378 7.9 80 108 39.0 35.4 QIII(r) 568 383 8.1 79 112 38.8 36.1 Aug.(r) 576 379 7.9 80 111 38.2 36.3 Sept.(r) 574 Oct.(r) 604 Nov.(p) 660 383 386 377 8.0 7.7 6.9 80 84 91 119 122 124 39.6 40.7 40.8 35.8 35.4 35.7 1975 1/ Seasonally adjusted annual rate. Seasonally adjusted, end of period. Converted to 1972 index for comparison with existing home sales, which are not available on any other basis. -4- Inventories. Book value of retail trade inventories fell at an annual rate of $9.6 billion in November, having risen at a $19.1 billion rate in October and at a $8.8 billion average annual rate in the third quarter. Wholesale trade inventories also dropped in November, at a $2.7 billion annual rate, after rising in October at a $1.1 billion annual rate and averaging a $3.1 billion annual rate of increase in the third quarter. For manufacturing and trade the rate of inventory decline in November was $9.9 billion following increases at a $21.4 billion annual rate in October and at a $5.4 billion average annual rate in the third quarter. Nevertheless the manufacturing and trade inventory-sales ratio edged up to 1.53 in November from 1.52 in October. - 5- The Domestic Financial Economy Mortgage market. According to the HUD (FHA) opinion survey, average interest rates on new commitments for conventional new- and existing-home mortgages declined during December by 5 basis points, Yields on FHA-insured new-home mortgages for immediate delivery in the private secondary market fell by 9 basis points to 9.32 per cent. These rate movements are generally consistent with the primary and secondary market yields cited in the Greenbook. AVERAGE RATES AND YIELDS ON NEW-HOME MORTGAGES (HUD-FHA Field Office Opinion Survey) Primary market Conventional loans Level 2/ Spread 4/ End of Month (per cent) 1974-Low High 8.55 (Feb.) 9.80 (Sept.) -66 (Sept.) 45 (Feb.) 1975-June July Aug. Sept. Oct. 9.00 9.00 9.15 9.25 9.25 -37 -25 -34 -45 +30 9.06 9.13 9.32 9.74 9.53 -31 -12 -17 + 4 +31 9.20 9.15 --- 9.41 9.32 --- Nov. Dec. 1/ 2/ 3/ 4/ (basis points) Secondary market 1/ FHA-insured loans Level 3/ Spread 4/ Discounts (per cent) 8.54 (Feb.) 10.38 (Sept.) (basis points) (points) - 8 (Sept.) 44 (Feb.) 2.3 (Feb) 6.3 (July, Sept) 4.3 4.8 6.2 5.5 4.0 3.1 2.4 Any gaps in data are due to periods of adjustment to changes in maximum permissible contract rates on FHA-insured loans. Average contract rates (excluding fees or points) on commitments for mortgage loans, rounded to the nearest 5 basis points. conventional first Average gross yield (before deducting servicing costs) to investors mortgages for immedion 30-year minimum-downpayment FHA-insured first ate delivery in the private secondary market (excluding FNMA), assuming prepayment in 15 years. Average gross mortgage rate or yield minus average yield on new issues (There were no of Aaa utility bonds in the last week of the month. issues of Aaa bonds during the last week of November and December.) CORRECTION: Page II-10, line 2: "highest" should real "second highest". -6INTEREST RATES (One day quotes--in per cent) 1975 Highs Lows Dec. 15 1976 Jan. 15 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 7.70( 1/8) 6.90( 9.00( 9.00( 10.25( 5.13(5/21) 5.17(12/17) 4.76(1/14) 4.88(6/16) 5.56 6.00 4.84 1/2) 1/2) 1/1) 1/3) 5.38( 6/2) 5.40(5/30) 5.69(5/21) 9.00( 1/1) 5.80 6.63 5.13 5.05 5.50 5.38(6/11) 6.00(12/10) 5.00(1/14) 7.05(3/25) 8.75( 1/2) 7.67( 1/2) 5.18(6/11) 5.10 5.68(6/12) 5.95 6.13 6.40 5.25 n.a. 8.38( 1/1) 5.75(6/18) 6.50(12/10) 5.38(1/14) 7.35(8/21) 3.00(8/25) 5.37( 2/5) 6.03(2/20) 6.30 6.95 5.44 n.a. 4.00( 1/1) 5.00(3/12) 4.35(8/15) 3.40( 7.00(12/10) 3.70(12/12) 6.25(1/14) 3.20 3.56(9/16) 8.71(9/16) 6.93(2/19) 7.58(2/21) 7.87 8.30 7.41(1/14) 7.99(1/14) 5.38(5/23) 2/7) Intermediate and Long-Term Treasury coupon issues 5-years 20-years Corporate Seasoned Aaa Baa New Issue Aaa Utility 9.02(4/30) 10.63(1/20) 9.80( 4/3) .35 8.57(2/26) 10.27( 4/3) 10.38 .839( 8.59 10.35 2/6) 9.37(12/11) 8.53p Municipal Bond Buyer Index 7.67(10/2) 6.27(2/13) 7.34(12/11) 7.09 Mortgage--average yield in FNMA auction 9.95(10/6) 3.78(3/10) 9.31 9.13(1/12) A - SUPPLEMENTAL APPENDIX A* HIGHLIGHTS OF THE REVISION OF THE INCOME AND PRODUCT ACCOUNTS Revised estimates of the national product and income accounts have now been released by the Department of Commerce. These revised estimates incorporate new statistical data of three types: (1) new benchmark data provided by the 1963 and the 1967 census of business; (2) new or revised data underlying the GNP and related figures for the period 1971 through 1974 which normally would be incorporated in the accounts in the usual July annual revision; and (3) revisions in some other underlying series extending back further than just three years. Besides the statistical revisions, revisions were made because of definitional and classificational changes in the accounts. The purpose of these conceptual revisions is to better measure economic developments and to permit clearer analysis of these developments. In some cases these conceptual changes make the components of the accounts more consistent with underlying data. Altogether, twenty definitional or classificational changes were incorporated in the revision. Some of these are controversial, and some changed earlier estimates of components significantly. While complete information on these revisions is not yet available, some general comments can be made that may be useful. First, the broad pattern of economic developments indicated by the revised estimates is not appreciably different than that depicted by the former estimates, but the growth in real activity since the mid1960's is a trifle less than indicated earlier and cyclical fluctuations--including the most recent one--have been toned down a bit. The overall effects of the revision raised nominal GNP for of 1975 by $24.1 billion, or 1.6 per cent, in annual third quarter the as a whole the upward revision was $9.7 billion, terms. For 1974 rate with $2.6 billion from statistical changes and $7.1 billion from definitional and classificational changes. Most of this upward revision occurred in the recent quarters. In 1972 and 1973 the statistical changes accounted for more than half the total upward revisions. One of the more significant statistical revisions is a shift in the base for the implicit price deflator to 1972 average prices from 1958 prices. Deflation of expenditures is now being made on a more detailed basis, and this should improve the measurement of changes in real activity as well as the measurement of over-all price movements. Because of the change of base, the revised GNP implicit price *Prepared by J. Cortland G. Peret, Assistant Adviser, Division of Research and Statistics. A - 2 deflator, of course, is lower than the former one. Quarter-to-quarter changes in the two series do vary considerably at times, but for longer periods they indicate about the same relative increase in average GNP prices. From the third quarter of 1972 to the third quarter of 1975-the period of particularly sharp price increases--both deflators indicate almost an identical increase of 27.0 per cent. The fixed-weighted price indexes will not be available for two to three weeks. The more recent price base has lifted the revised level of real GNP. As noted, real growth since the mid-1960's is now indicated to have been slightly less than indicated before, and the amplitude of recessions has been reduced a bit. Quarter-to-quarter per cent changes in real GNP are shown for selected periods in the attached table. The decline in real GNP from 1973-IV to 1975-I is at an average annual rate of 5.3 per cent compared with a decline of 6.3 per cent indicated by earlier estimates of real GNP; from 1974-III to 1975-1 the rates of decline are 8.4 per cent and 10.2 per cent, respectively. The rate of increase since the 1975-I low is now indicated at a 7.5 per cent annual rate, the same as by the former estimates with the second quarter rise now shown to be allittle faster (3.3 per cent compared with 1.9 per cent) and the third quarter a little slower (11.9 per cent per year, instead of 13.4 per cent). Statistical revisions were also made to inventory investment. The recent accumulation of inventories is now indicated to have been larger and to have come earlier than shown by the former estimates; furthermore, the swing from accumulation to liquidation is now indicated to have been sharper. Several of the definitional and classificational changes made in the revision affect some of the more important expenditure and income components you hear about regularly, and brief comments about some of them might be of particular interest. Expenditures for mobile homes, $3.3 billion in 1974, have been transferred from consumer durable expenditures to residential The rental value of these units will be counted as structures. consumer service expenditures, a treatment which parallels that for Additionally, the allocation of autos and other types of housing. light trucks between consumer and business expenditures has been modified so as to more accurately reflect recent trends in these items. A- 3 Net interest paid by the Federal government to foreigners-which amounted to $3.2 billion in 1974--has been shifted from government purchases (or sales) and imports (or exports) to transfer payments. This shift does not affect total GNP, but the net exports component of GNP will no longer be, conceptually, a balance of payments equivalent. Another important conceptual change is the consistent measurement of depreciation of all capital goods in terms of current replacement prices of the capital goods depreciated. Consistency in depreciation measurement is obtained by basing service lives of all depreciable capital goods on IRS Bulletin F schedules and then calculating depreciation on these capital goods by the straight line method rather than by a combination of methods. And this depreciation is based on the estimated value of the capital goods in terms of current replacement costs in the period. Measuring depreciation consistently and basing depreciation estimates on current replacement costs introduces a new item in the accounts called capital consumption adjustment. This capital consumption adjustment item includes (1) an amount equal to the difference between depreciation on a consistency basis and a depreciation figure consistent (conceptually) with IRS tax depreciation (which is a component of the capital consumption allowance)--both based on historical costs of the capital goods, and (2) the difference between depreciation (consistency basis) on a replacement cost basis and historical cost basis. This new procedure is intended to provide better measures of gross net product, gross net income, and equity incomes from ownership of capital. This capital consumption adjustmet item affects estimates of personal income through proprietors' income--both farm and nonfarm and rental income. For 1974 it was rather large--a $10.3 billion reduction. Personal income in 1974 was not reduced by that amount because a $16.0 billion upward statistical adjustment for that year due largely to higher compensation more than offset the reduction from the capital consumption adjustment. The estimates of some concepts of corporate profits are affected by the capital consumption adjustment. The new profits series which takes account of this adjustment is called corporate profits with inventory valuation and capital consumption adjustments. This concept of profits is sometimes referred to as economic profits. Book profits vis-a-vis economic profits are augmented by a negative amount of either of them. The new figures indicate an even larger decline than before in the profit share from 1965 through 1974, but also more recovery since late 1974. A-4 REAL GNP Per cent change at annual rates Revised Estimates Former Estimates Quarter-to-Quarter Changes 1971:III IV 2.8 3.5 2.8 6.5 1972:I II 7.6 7.9 5.3 8.5 6.4 8.4 6.0 8.3 8.8 .2 2.7 1.4 9.5 2.2 1.6 2.4 III IV -3.9 -3.7 -2.3 -7.5 -7.0 -1.6 -1.9 -9.0 1975:1 II III -9.2 3.3 11.9 III IV 1973:1 II III IV 1974:I II -11.4 1.9 13.4 Changes in Selected Periods 1970:IV 1973:1 1973:IV 1975:1 1973:1 1973:IV 1975:1 1975:111 6.2 1.4 -5.3 7.5 2.1 -6.3 7.5 

Federal Reserve (1976, January 19). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_19760120_part2

@misc{wtfs_greenbook_19760120_part2,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {1976},
  month = {Jan},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_19760120_part2},
  note = {Retrieved via When the Fed Speaks corpus}
}