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

February 5, 1971

SUPPLEMENTAL NOTES The Domestic Economy Labor market.

Conditions continued slack in the labor

market in January. As expected, employment rose in transportation equipment industry (by 60,000) and some allied manufacturing

industries such as rubber, reflecting the further recovery in auto production.

Outside the auto group, however, most other manufacturing

industries reported small employment declines and manufacturing employment was about unchanged over the month.

However, manufacturing

was still nearly down half a million from the September 1970 prestrike level.

Outside of manufacturing, the major increase was trade,

which rose 185,000.

But that increase merely offset a decline of

about the same amount between October and December. An uptick of 40,000 in transportation and public utilities employment was due to the return of strikers.

Thus, while there was an indicated rise of

225,000 in total nonfarm payroll employment, there was little evidence of a sustainable strengthening of demand for labor.

CHANGES IN NONFARM PAYROLL EMPLOYMENT (Seasonally adjusted, in thousands)

Total

Manufacturing Nonproduction workers Production workers

Jn 17Jan. 1970-

Dc

Jan. 1969Jan, 1970

Jan. 1971

Jan. 1971

-505

223

-5

-1,213 -223 -990

-9 -5 -4

-941 -272

-3 -6

8 3

- 5 -168

145

- 24

525

76 89 316

-5 -85 40 184 12 62

121 -126

134

Mining Contract construction Transportation & public util. Trade

161 490

Finance

Service Government Federal State and local

1970-

Dec,

1,640

- 5

Durable Nondurable

90

Ja.16-

313

424

-46

- 59

359

487

24 8 16

At 6.0 per cent, seasonally adjusted, the overall unemployment rate was down slightly in January from an upward revised December

rate of 6.2 per cent,

The change was related to the seasonal adjust-

ment method rather than to any significant improvement in the unemployment situation in January.

In fact, the change on the

unadjusted number of unemployed between December and January this year was almost identical to that of last year when the adjusted rate rose.

Unemployment rate changes from December to January for

the various age-sex groups are subject to the same problems of seasonal adjustment.

Compared to a year earlier, however, all rates

are much higher, with the largest relative increases for men.

- 3 UNEMPLOYMENT RATES (Seasonally adjusted)

Jan.

Dec.

1971 Jan.

3.9 6.1 2.1 3.7 13.7

6.2 10.9 3.7 5.8 17.8

6.0 10.4 3.5 5.7 17.6

1970

Unemployment rates: Total Men 20 to 24 years old Men 25 and over Women 20 and over Teenagers

Industrial production.

The industrial production index

in January is still tentatively estimated to be about 165 in January, up about 1 point from the December level as reported in the Greenbook (11-7).

Additional information becoming available since the Green-

book seems roughly consistent with this estimate. The Domestic Financial Situation Monetary aggregates.

The narrowly defined money stock (M1 )

is now estimated to have increased in January at an annual rate of 2.8 per cent little changed from the 3.0 per cent rate indicated in the

Greenbook (III-3).

Growth in M2 (M1 plus time and savings deposits

other than large CD's) is essentially unchanged at an annual rate of 12.6 per cent, and initial data for M3 (M2 plus savings deposits at Mutual Savings Banks and Savings and Loan Associations)

indicate that

it rose at a 15.5 per cent rate in January. Growth in total time and savings deposits in January has not been changed, but CD's are now estimated to have increased at a 51

per cent annual rate (instead of 56 per cent) while the increase in

other time deposits was raised slightly to an annual rate of 22.9 per cent.

Growth in the adjusted credit proxy for January has been

reduced very slightly to an annual rate of 10.9 per cent.

Savings

deposits at Mutual Savings Banks and Savings and Loan Associations

indicate that these deposits rose at a 21 per cent rate in January. Bank credit.

Commercial bank credit, adjusted for transfers

of loans between banks and their affiliates, is now estimated to have increased at an annual rate of 13.8 per cent rather than at the 12.7 per cent annual rate shown in the Greenbook (II-6). Expansion in total loans was revised upward, more than offsetting downward revision in investment growth. It now appears that total loans expanded at about a 7.0 per cent annual rate (rather than 3.7 per cent).

Loans to brokers and

dealers increased moderately rather than declined, and growth in loans to nonbank financial institutions now appears somewhat stronger.

In

contrast, adjusted business loan growth has been reduced to an annual rate of 5.4 per cent (instead of 7.6 per cent). The revised estimates indicate that the composition of the January expansion in investment holdings also differs from what was originally estimated.

Growth in holdings of U. S. Treasury securities

is now estimated to have been at an annual rate of 16.5 per cent (rather than 29.0 per cent) and holdings of other securities was increased a little to a rate of 35 per cent. Nonbank depositary intermediaires.

Savings and loan

associations received a deposit inflow during January of about $2.5

-5billion, not seasonally adjusted, which exceeds by two-and-one-half times the previous record January inflow and tops the inflow received net of dividends credited during any other month.

Seasonally adjusted,

such inflows expanded at almost a 27 per cent annual rate--a record since at least 1955--but the adjustment factor is influenced strongly by the net outflows incurred during four of the past five Januarys, and thus probably overstates the improvement.

Mutual savings banks

are estimated to have also exceeded, but by a small margin, the largest previous January deposit inflow; however, their deposit growth rate during January is estimated to have changed little from recent months. DEPOSIT GROWTH AT THRIFT INSTITUTIONS (Seasonally adjusted annual rates, in per cent) Mutual Savings Banks 1970

1971 p/ *

Savings and Loan Associations

Both

QI QII QIII QIV p/

2.4 6.3 6.6 8.8

1.4 7.1 11.5 12.0

1.7 6.9 10.0 11.0

December* p/ January* p/

9.5 8.3

14.6 26.8

13.0 20.8

preliminary Monthly patterns may not be significant because of difficulties with seasonal adjustment. The January mutual savings bank statistic is an estimate. The FHLBB, which continues to expect that about one-third

of its subsidized advances to associations will be repaid between April and June, now plans to pay down $2.7 billion of its own

-6outstanding debt obligations between now and June. The FHLBB is now (confidentially) considering increasing S&L liquidity requirements

by one percentage point; present requirements are exceptionally low, having been reduced in successive steps to free funds for mortgages during a period of weak deposit flows.

The possible new requirement

that liquid assets equal at least 6.5 per cent of the sum of deposits and borrowed money will probably not have much immediate impact since the aggregate ratio for the industry in December was nearly 10 per cent.

-7-

The following is a corrected version of the table that appeared on page 5 of Appendix C. STAFF ESTIMATE's OF FEDERAL SECTOR IN THE NATIONAL INCOME ACCOUNTS AND THE HIGH EMPLOYMENT BUDGET 1/

(Calendar years, billions of dollars, SAAR)

2nd half

1971 1st half 2nd half

1972 1st half

Total Receipts

194.5

202.8r

211.8r

na

Total Expenditures Purchases

208.1 98.5

222.2 97.3

229.6 98.4

243.0 106.1

Defense

75.2

73.0

71.8

76.3

Nondefense

23.3

24.3

26.6

29.8

109.6 62.2 24.8 22.6

124.9 72.6 29.2 23.1

131.2 76.9 32.8 21.5

137.0 80.0 36.0 21.0

-13.6

-19.4r

-17.8r

na

0

- 1.8

1.3

Other Expenditures Transfers to persons Grants All other Surplus/deficit (-) High Employment surplus/deficit (-) na--not available

-3.5

r--revised

1/ The staff estimate of expenditures for the projected period exceeds the budget estimate because (1)

the staff assumes a 10 per cent

increase in social security benefits in the first half of 1971 rather than the 6 per cent increase included in the budget; (2) the staff estimate includes a postal pay increase in the first half of 1972 that is not financed by an additional rate increase; (3) the staff projects a higher level of unemployment compensation expenditures because of projected higher rate of unemployment than assumed in

the budget.

- 8-

1970

1971

Jan. 11

Feb. 4

Highs

Lows

9.39 (2/18)

4.82 (12/30)

3.82 (1/6) 4.09 (2/3)

4.74 (12/17)

4.66 4.03 4.25 5.12 6.26 5.86 4.90 (1/8) 3.90 5.38 4.63

Short-Term Rates Federal funds (weekly averages)

3-months Treasury bills (bid) 7.93 (1/6) Bankers' acceptances 8.75 (1/13) Euro-dollars 10.50 (1/9) Federal Agencies 8.30 (1/9) Finance paper 8.25 (2/1) CD's (prime NYC) Most often quoted new issue 6.75 (10/30) Secondary market 9.25 (1/23)

5.25 (12/31) 6.50 (12/31)

4.81 (12/18) 5.38 (12/10)

5.38 (1/6) 5.62 (1/6)

4.50 4.65

4.69

4.08

5.25 (e)

4.38 (e)

9.13 (1/8) 8.50 (1/28)

4.78 (12/17) 5.50 (12/4) 5.63 (12/4) 5.12 (12/18)

5.38 5.10 (1/8)

4.63 4.22

7.00 (10/7) 9.38 (1/23)

5.50 (12/23) 5.50 (12/23)

5.50 (1/6) 4.50 5.68 (1/6)

4.80

7.62 (1/30)

4.74 (12/31)

4.59

4.08

7.50 (9/16) 5.60 (1/9)

5.50 (12/23) 2.95 (12/17)

5.50 (1/6) 4.50 3.00 (1/8) 2.45

5-years

8.30 (1/7)

20-years

7.73 (5/26)

5.85 (12/4) 6.15 (12/16)

6.01 6.28

5.73 6.09

8.60 (6/24) 9.47 (8/28)

7.47 (12/29)

8.57 (3/10)

7.43 8.86

7.10 8.45

9.30 (6/19)

7.68 (12/18)

7.59 (1/7) 6.91

7.12 (5/28) 6.95 (6/18)

5.33 (12/10) 5.15 (12/10)

5.74 (1/8) 5.27 5.40 (1/8) 5.10

9.36 (1/2)

8.366 (12/28)

6-month Treasury bills (bid) Bankers' acceptances Commercial paper (4-6 months) Federal agencies

7.99 (1/5) 8.88 (1/13)

5.50 (11/25) 5.38 (12/23)

CD's (prime NYC) Most often quoted new issue Secondary market

1-year Treasury bills (bid)

CD's(prime NYC) Most often quoted new issue Prime municipals Intermediate and Long-Term Treasury coupon issues

Corporate Seasoned Aaa

Baa New Issue Aaa Municipal Bond Buyer Index Moody's Aaa Mortgage--implicit yield in FNMA biweekly auction 1/

7.97 (1/25)

Yield on 6-month forward commitment after allowaance for commitment fee and required purchase and holding of FNMA stock. Asssumes discount on 30-year loan amortized over 15 years. e--estimated.

-9International Developments

Four foreign central banks reduced their discount rates in January.

CENTRAL BANK DISCOUNT RATES (per cent) Former rate Month Rate Effective

New rate Date Effective

Rate

Decreases: France

Oct. 1970

7.0

Jan. 8

6.5

Japan

Oct. 1970

6.0

Jan. 20

5.75

Denmark

May 1969

9.0

Jan. 20

8.0

Spain

Mar. 1970

6.5

Jan. 25

6.25

Increase: India

Mar. 1968

5.0

Jan. 9

6.0

Perhaps more important than any of these cuts, so far as the outlook for Euro-dollar interest rates is concerned, is the fact that neither Germany nor Britain have made any central bank rate reductions since December and April, respectively.

Three of the changes that were

made in January reflected some willingness of the authorities to shift financial policy a little from restraint toward ease.

Denmark, however,

is still much concerned about the current account deficit in its balance of payments and is not relaxing its policies. India has been experiencing increasing inflationary pressures over the past two years, following an interval of price stability during 1968.

- 10 -

CORRECTIONS: Page I-7, line 4 change "many" to some. Page

II-35, end of paragraph two change "each quarter" to last

quarter.