Greenbook/Tealbook

Prefatory Note

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1

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May 12, 1978 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

TABLE OF CONTENTS

THE DOMESTIC NONFINANCIAL ECONOMY

Page

Retail sales................ ..................... Consumer sentiment and buying conditions...........

THE DOMESTIC

1 1

FINANCIAL ECONOMY TABLE:

Interest rates...................................

3

CORRECTIONS & UPDATES Monetary

aggregates

......

,.......................

4

APPENDIX Regional survey of recent business

lending

A-1

SUPPLEMENTAL NOTES

after 1.1 per cent rise shown a month ago), More

Retail sales rose

sales.

Retail

in March (revised down from

than two-thirds of the April rise was

Sales by general merchandise stores and

the second consecutive months, 2 per cent.

sharply further

Sales by in April,

Sales of gasoline service clined

per cent

1.9

according to the advance Census Bureau estimate. accounted 6.7

by automotive products dealers, which rose

than

in April,

2 per cent

increased sales by

furniture and the

for by sales from March.

per cent

1.2 per cent

food

for

stores rose more

appliance outlets declined

second month of large decline.

stations also are indicated

to have de-

sharply again. Total retail sales in the first quarter are now indicated

to have edged

down slightly,

and sales

at

stores other than auto-

motive grouping and the building materials, hardware, garden supply, and mobile home dealers were about unchanged. retail

stores were 2.0 per cent

April

sales at all

above the average in the

quarter, with that increase in sales at automotive dealers, merchandise and apparel

stores, and

Consumer sentiment sentiment

first general

food and eating places.

and buying conditions.

in April recovered about half of the 5.5

Consumer point March

decline in the University of Michigan Survey Research Center's index of consumer sentiment. improved

attitudes about

improvement

reflected

present and expected personal

conditions, buying conditions expected business

This April

conditions

for

financial

large household goods, and

12-months hence.

Of the index

-2-

questions, only evaluations of business conditions in the next 5-years deteriorated. This survey indicated a record-high proportion of respondents

reported that the

household goods,

present is

a good time to buy large

with a record-high proportion expressing a buy-

in-advance-of-price-increase psychology. increase from the was

previous month in evaluations that

a good time to buy a house. for cars are

conditions although

down somewhat

The Domestic

There was

The proportion

also an the present

thinking that

now favorable continued relatively high, from March.

Financial Economy

No textual

addendums to the Greenbook were required, but

the usual updating of interest rate developments

is contained in

the table on page 3.

CORRECTIONS & UPDATES Page III-6:

buying

onetary aggregates table (see

attached

page 4).

INTEREST RATES (One day quotes--in per cent)

1978 May 11

Lows

Apr. 17

7.32(5/10)

6.58(1/11)

6.78(4/19)

7.32(5/10)

6.68(1/11) 7.02(5/11) 7.28(5/8) 7.94(5/9)

6.09(4/24) 6.63(1/6) 6.70(1/6) 7.00(2/8)

6.10 6.79 6.80 7.25

6.32 7.02 7.25 7.75

7.13(5/10)

6.65(1/4)

6.83(4/12)

7.13(5/10)

7.01(5/11)

6.43(1/4)

7.08(5/10)

6.66(1/5)

6.55 6.84

7.01 7.05

7.63(5/10)

6.85(1/4)

7.23(4/12)

7.63(5/10)

7.26(5/11)

6.53(1/4)

6.83

7.26

7.75(5/10)

7.05(1/4) 3.55(3/3)

7.40(4/12) 3.90(4/14)

7.75(5/10)

8.08(5/8) 8.25(5/8) 8.45(5/8)

7.38(1/4) 7.71(1/5)

8.00(1/5)

7.74 7.99 8.27

8.07 8.24 8.43

8.66(5/10) 9.47(5/10) 8.93(4/21)

8.58 9.30 8.88(4/14) 8.84(4/14)

8.66(5/10)

8.93(5/11)

8.28(1/3) 9.09(1/3) 8.61(3/24) 8.48(1/6)

Municipal Bond Buyer index

5.99(5/11)

5.58(3/16)

5.74(4/13)

5.99

Mortgage--average yields in FNMA auction

9.52(5/1)

9.13(1/9)

9.44

9.52(5/1)

Highs Short-Term Rates Federal funds (wkly avg.) 3-month Treasury bills (bid) Comm. paper (90-119 days) Bankers' acceptances Euro-dollars CDs (NYC) 90 days Most often quoted new 6-month Treasury bills (bid) Comm. paper (4-6 mos.) CDs (NYC) 180 days Most often quoted new 1-year Treasury bills (bid) CDs (NYC) Most often quoted new Prime municipal note

4.10(5/5)

4.10(5/5)

Intermediate- and Long-Term Treasury (constant maturity) 3-year

7-year 20-year Corporate Seasoned Aaa Baa

Aaa Utility New Issue Recently Offered

9.47(5/10) 8.87p(5/12) 8.93p(5/12)

UPDATED

5/12/78

MONETARY AGGREGATES (Seasonally adjusted)1/ 1 9 7 7 QIII QIV

QI

1 9 7 8 Mar.

Net changes at

Apr.e

12 months ending Apr. 78e

annual rates, per cent

Major monetary aggregates 1. M 1 (currency plus demand deposits)

8.1

7.2

5.0

3.5

19.1

2. M2 (M 1 + time & savings deposits at CBs other than large CDs)

9.9

8.0

6.4

5.3

11.3

3. M 3 (M2 + all deposits at thrift institutions)

11.9

10.6

7.4

6.2

9.9

Bank time & savings deposits 4. Total

10.3'

13.0

13.1

11.4

8.1

12.2

5. Other than large negotiable CDs at weekly reporting banks

11.2

8.5

7.5

6.5

5.7

8.9

7.3

5.4

2.2

0.5

3.3

4.4

9.6

7.0

3.1

1.2

4.1

5.7

6.

Savings deposits

7.

Individuals 2

8.

Other 3/

9.

/

-17.1

-17.8

-8.0

11.4

12.0

12.2

7.9

2.7

11.0

10.1

29.9

14.3

5.1

28.1

8.8

7.7

7.9

12.4 13.1

14.6

Time deposits

10.

4/ Small time4/

11.

Large time

8.3

4 /

1.0

28.1

--Deposits at nonbank thrift

32.4

Savings and loans

14.

Mutual savings banks

15.

Credit unions

-8.2

-11.0 13.0

5/

Deposits at nonbank thrift institutions5/ 15.0 14.4 12. Total 13.

-16.2

16.2

15.4

9.0

8.0

7.9

9.5

9.9

5.2

3.6

4.5

20.1

20.0

18.2

20.0

14.7

7.8 19.9

Average monthly changes, $ billions MEMORANDA: 16. Total US Govt deposits 17. Total large time deposits

6/

18. Nondeposit sources of funds7/

0.2

0.2

-1.2

0.4

0.4

-0.2

1.7

6.2

4.5

3.7

1.8

3.5

1.4

1.3

1.9

0.3

- 1.7

1/ Quarterly growth rates are computed on a 2/ Savings deposits held by individuals and 3/ Savings deposits of business, government 4/ Small time deposits are time deposits in

quarterly average basis. nonprofit organizations. and others, not seasonally adjusted. denominations less than $100,000.

Large time deposits are time deposits in denominations of $100,000 and above excluding negotiable CDs at weekly reporting banks. 5/ Growth rates computed from monthly levels based on averages of current and preceding end-of-month data. 6/ All large time certificates, negotiable and nonnegotiable, at all CBs. 7/ Nondeposit borrowings of commercial banks from nonbank sources include Federal funds purchased and security RPs plus other liabilities for borrowed money, including borrowings from the Federal Reserve, Euro-dollar borrowings and loans sold, less interbank loans. e--estimated

APPENDIX A REGIONAL SURVEY OF RECENT BUSINESS LENDING* To aid in interpreting recent developments in business lending at commercial banks, a survey of individual banks was conducted in late April. Reserve Bank staffs in each District contacted a total of nine

commercial banks, including three of the largest banks in their Districts, three moderately large banks, and three smaller banks.1/ Although the small sample is certainly not sufficient to produce firm conclusions on any of the issues considered, the responses are suggestive of current banking practices in each region. Issues examined include developments in term lending, below-prime short-term lending, the movement by money center banks into regional business loan markets, and several aspects of international banking that pertain to business loan developments. Term Loans Most respondent banks confirmed that the volume of term lending to businesses in early 1978 rose as a percentage of total commercial and industrial loans. For the most part banks did not actively seek to 2/ expand term loans, rather they responded to the demands of businesses.2/ Respondents characterized term borrowers as mainly medium to small-size firms.3/ Funds obtained through term loans were used for a wide variety of purposes, but included, in rough order of frequency, working capital, equipment, plant construction, and refinancing of debt. Pricing of term loans varied substantially among the respondents. A majority of banks reported a narrowing in 1978 of the spread of the rate charged on typical term loans to prime customers over the prime rate on short-term loans. However, a substantial number noted no change in the spread and banks in several Districts reported a wider spread. Although fixed-rate term loans were common at most banks, the proportion of these loans to total term loans had not risen during 1978, except at some large banks in Chicago and Philadelphia.4/ Only single banks in Chicago, Dallas, and San Francisco have actively sought fixedrate term loans. *

Prepared by John R. Williams, Economist, Banking Section, Division of Research and Statistics.

1/ The three largest banks contacted in each District are 416a reporters, the moderately large banks are other weekly reporters, and the smaller banks are nonweekly reporters. 2/ The exceptions included large banks in Chicago, a few banks in San Francisco, and small banks in Richmond and Atlanta. 3/ Large borrowers were the principal recipients of term loans only in San Francisco, Atlanta, and at one large bank in Chicago. 4/ Respondents reported that the proportion of term loans at fixed rates in early 1978 varied from 0 to nearly 100 per cent with a median of roughly 40 per cent. Data from the Survey of Terms of Bank Lending suggest that the proportion of term loans made at fixed rates in

February at all banks was about 45 per cent, little changed from the November survey.

A-2

Most large banks stated that their term lending policyespecially fixed-rate term loans--had been affected by competition from other banks, while most small banks indicated that their policy had not been affected. Competition from nonbank lenders was considered a factor in forming term lending policy at only a few banks, primarily at large banks in San Francisco and Chicago. Below-Prime Lending There was substantial evidence at large banks of recent below-prime lending based on money market rates. Even in cases where large respondents were not themselves offering such loans, most banks stated that the practice was prevalent in their areas. At least one sample bank in Chicago, San Francisco, Cleveland, and Richmond confirmed that it offered some loans based on money market rates. This evidence supports data reported on the Survey of Terms of Bank Lending, indicating spreading of below-prime lending. However, the practice of basing loans on a money market rate was viewed by respondents as no

more common in their Districts in early 1978 than it had been in 1977.5/ Such below-prime lending usually is available only to large creditworthy corporations as a back-up to commercial paper borrowing, or to highly valued long-time customers. In New York, foreign international borrowers were often the beneficiaries of special lending programs. Money Center Banks Lending in Other Regions Large banks in every District claimed to have experienced competition from out-of-town money center banks in the past year. However, while nearly all Districts contain banks that have lost a portion of their loan business to money center banks, in most cases the losses were judged insignificant. Responses of the money center banks were generally consistent

with the statements of the regional banks. New York bankers noted that their lack of success in acquiring a substantial volume of loans from such new customers stemmed from the existence of long-time relationships between local banks and borrowers. Several San Francisco and Chicago banks aggressive in other regions noted that they made such loans only

when a smaller correspondent bank in the given region was involved either as a participant in the loan or in servicing the loan. Lending to Large Corporations Expansion in the volume of lending to the largest corporations was mixed among the respondents in most Districts. However, a small majority of banks reported a decline in lending to such corporations as a percentage of total business loans. Such growth is consistent with 5/ Exceptions included a few large banks in Cleveland, Chicago, and San Francisco.

A-3 reports that the largest corporations continue to generate substantial amounts of internal funds, and, when necessary, to acquire external funds

in large part from nonbank sources. International Aspects of Business Loan Developments Large banks in San Francisco, New York, and Chicago all indicated that U.S. offices of foreign banks and foreign agencies were commonly pricing commercial and industrial loans based on money market rates. At least in New York, however, such offerings apparently have been confined to U.S. affiliates of firms that are based in the foreign banks' own countries.

For the large banks sampled in New York and San Francisco, loans booked at offshore branches were reported to have increased in the last year. Reasons given include the avoidance of certain taxes as well as a response to demands of foreign borrowers. However, it was not clear whether such loans were made primarily to foreign based firms or to foreign affiliates of U.S. corporations. In no District did bankers feel that this practice had substituted for domestic loan business. Nevertheless, data show a continued increase in the stock of offshore loans by New York banks, suggesting a possible relationship with the business loan weakness at New York City banks.