U.S. Economy in 1972 · The US. Economy in 1972 JL HE economic expansion in 1972 was broadly based...

The US. Economy in 1972

JL HE economic expansion in 1972was broadly based and strong all year,in contrast to the hesitancy throughmuch of 1971. Output increased verysubstantially from 1971 to 1972, withGNP in real terms up 6% percent andthe industrial production index up 7percent. Employment registered oneof the largest year-to-year increases onrecord but the unemployment ratedeclined only moderately because thecivilian labor force also grew verystrongly. In general, the rate of priceincrease slowed, but food prices, risingsteeply, were a marked exception.Profits increased substantially, espe-cially in durable goods manufacturing.Personal income also increased substan-tially, as the growth of wage and salaryincome accelerated.

Credit was amply available to sup-port the economic expansion in 1972,though monetary policy tightenedsomewhat in the closing months of theyear. Credit costs remained well belowthe levels reached in 1969 and 1970;short-term interest rates did move uprather sharply in the first half of 1972as a reaction to the steep decline thathad followed the institution of the"New Economic Program" in August1971. The existence during 1972 of thecontrol programs instituted under theNEP meant that the Federal Reservewas in a relatively favorable position foraccommodating economic expansion,for the control programs carried some ofthe anti-inflationary burden that themonetary authorities would otherwiseprobably have had to carry.

The control programs operating dur-ing 1972 consisted mainly of thoseadministered by the Pay Board andthe Price Commission, which set guide-lines for wage and price behavior andreviewed wage and price actions. It is

12

not possible to identify specifically theimpact that these controls had on thebehavior of wages and prices, for othereconomic forces were also at work. It iscertainly true, however, that the aver-age rate of wage increase providedunder new labor contracts in 1972 wasappreciably smaller than the averagein any of the preceding 3 years. Inmanufacturing, new contracts nego-tiated in the first three quarters of 1972provided an average wage-rate increaseof 5% percent over the contract life,compared with an average 7}{ percent

negotiated in 1971. In nonmanufactur-ing industries, the figures were 7 74 per-cent in 1972 and 9 percent in 1971.Also, there was a noticeable decelera-tion of price increases, outside theagricultural area.

Gross national productThe Nation's total output of goods

and services was $1,152 billion atmarket prices in 1972, up $101 % billionor 9% percent from 1971 (chart 6). Theincrease in real output was 6% percent,the strongest full-year advance since

Output Employment, and Income,Percent Change From Previous Year

CHART 6

12-GNP PERSONAL INCOME - 12

illill8 ™

Salaries

- 8

- 4

IMPLICIT PRICE OffLATOR PRETAX PROFITS

REAL m ?

4 -

CIVILIAN LABOR FORCE

- 16

- 12

- 8

- 4

- -8

- -12

n -16

1967 68 69 70 71

U.S. Department of Commerce, Bureau of Economic Analysis

72 1967 68 69 7 0 71 72

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

January 1973

January SUEVEY OF CURRENT BUSINESS 13

1966. The implicit price deflator fortotal GNP rose 3 percent, the smallestfull-year advance since 1966.

Inventory investment acceleratedduring 1972 but was nevertheless small.Capital investment increased quitestrongly, in line with the broad cyclicalrecovery of economic activity. Dis-posable income was dampened by over-withholding of Federal income taxesbut consumption spending neverthelessincreased strongly, led by autos andhousehold durables. The housing boompersisted with surprising strength. For-eign demand for U.S. goods and serv-ices was quite strong, but U.S. demandfor foreign goods and services waseven stronger so that a sizable shareof domestic demand was satisfiedby foreign rather than domesticproduction.

International position

Two major goals of U.S. economicpolicy in 1972 were to achieve a strongrate of economic growth and to reducethe rate of inflation. A third majorgoal was to develop a stronger inter-national position. In 1971, the long-termweakening in the U.S. balance-of-pay-ments position had been augmented bymassive speculative influences. Therewas a huge increase that year in out-flows of short-term capital, while thetrade balance moved into deficit andthe long-term capital accounts showedvery large outflows. These develop-ments in the international positionwere a major consideration in the movesthat launched the "New EconomicProgram" in August 1971. Converti-bility of the dollar was suspended anda temporary import surcharge wasimposed, while negotiations were under-taken for a general realignment ofexchange rates and new trade arrange-ments. As 1972 began, the surchargehad been lifted and a devaluation of thedollar relative to most major currencieshad been agreed on.

The merchandise trade balance never-theless deteriorated sharply from 1971to 1972. It showed a deficit of $7 billion(seasonally adjusted annual rate) forthe first 3 quarters of 1972 comparedto $2% billion for the full year 1971.

This swing partly reflected the initialperverse effect on the value of importsof the devaluation itself, as well as thefact that economic activity was ex-panding faster in the United Statesthan in most industrialized countries.

The long-term capital accounts, onthe other hand, improved significantlyfrom 1971 to the first 3 quarters of 1972.The outflow of long-term capital de-clined from $6K billion in 1971 to $1%billion (annual rate) in the first 3quarters of 1972. This shift about offsetthe deterioration in the current ac-count (which includes services andunilateral transfers as well as trade),so that the balance on current accountand long-term capital (the "basicbalance") was little changed. An im-portant factor in the swing of long-termcapital flows was the reversal of theexpectations about dollar depreciationthat had prevailed in 1971. Other in-fluences were the relatively low level ofcapital spending in 1972 by U.S. firms'

foreign affiliates, and a recovery inforeign purchases of U.S. stocks.

The most significant development inthe U.S. international position in 1972was the vast reduction of recorded and.unrecorded outflows of short-term capi-tal, from $20K billion in 1971 to littlemore than $1 billion (annual rate) inthe first 3 quarters of 1972. This partlyreflected a favorable change in interestrate differentials after the first quarterof 1972. More important was the over-all recovery of confidence in the dollarfollowing the devaluation in December1971 (although there was a flurry ofspeculation at midyear, associated withthe floating of the pound). With thebasic balance little changed from 1971to 1972, the official reserve trans-actions balance improved by just aboutthe same amount as the improvementin short-term capital flows. The officialbalance moved from a deficit of $29.8billion in 1971 to a deficit of $11.6billion—still a huge number—in thefirst 3 quarters of 1972.

labor Force, Employment, and Unemployment

EMPLOYMENT in 1972 recorded oneof the largest gains in the postwarperiod. The increase in the labor forcewas also substantial, but the rate ofunemployment nevertheless declinedduring the year. The rate had heldduring 1971 at close to the level of 5.9percent that marked the average forthat year as a whole; it averaged 5.6percent for the full year 1972, and inthe fourth quarter was down to anaverage 5.3 percent. The improvementin 1972 stemmed in good part from arebound of employment in cyclically-sensitive durable goods manufacturingindustries; employment in those indus-tries had fallen sharply in 1970 and1971. However, most of the increase in1972 occurred, as usual, in the service-producing sector, very largely in trade,services, and State and local govern-ment, all of which showed significantlylarger increases than they had in 1971.

From the fourth quarter of 1971 tothe fourth quarter of 1972, civilian

employment increased by 2.3 million(chart 7). The total labor force increasedby 1.6 million or 1.8 percent over thisperiod, and the civilian labor forcerose by 1.9 million, with the differencereflecting the reduction in the ArmedForces. The total labor force growthwas about as much as normally ex-pected, but considerably slower thanthe very rapid rise in the second half of1971. For the full year 1972, employ-ment increased by 2.3 million, com-pared to a gain of only 500,000 from1970 to 1971, and the civilian laborforce rose 2.1 million, compared withonly 1.4 million in 1971. The cutbackin the Armed Forces was about 370,000in both years.

The composition of labor force changein 1972 reflected the resurgence ofemployment in industries that areheavy employers of men. In mid-1971,after a year and one-half of relativelysmall changes, the civilian labor forcehad begun to expand vigorously, but


January 1973

14

for the rest of that year the increase wasnearly all among adult women andteenagers, whose rates of labor forceparticipation moved up appreciablyduring the period. There was littlechange in the number of adult men inthe civilian labor force, except for thegrowth resulting from the reduction ofthe Armed Forces. In contrast, adultmen accounted for nearly half of thecivilian labor force growth during 1972,while the rate of increase slowed mark-edly for women and teenagers. The per-centage of the adult male populationparticipating in the civilian labor forcehas a long-term downtrend. During1971, the participation rate was drifting

Employment and Unemployment

CHART 7

Million Persons88

86

84 -

82 -

80 -

76

74

6 -

CIVILIAN LABOR FORCE

Total

Employed

Unemployed

2 l i t i • • l i i M i h m i l t m i l l n u l l n i i l i m i l n t n l n m l

? I m n h i m l i i i t i l n i i i l i u n l m n i i i n i l n

1968 1969 1970Seasonally Adjusted

:e, Bureau of Economic Analysis

1971 1972

Data: BLS

73-1-7

SUEVEY OF CURRENT BUSINESS

down in line with the trend. During1972, however, adult men's participa-tion was roughly stable, reflecting thestrong rebound of demand for labor.

Nonfarm payroll employment

The number of workers on the pay-rolls of nonfarm establishments, whichprovides detail on employment trendsby industry, increased by 2.7 million,or 3.8 percent, between the fourthquarter of 1971 and the fourth quarterof 1972—the sharpest gain since theVietnam-related buildup in 1966. Pay-roll employment had been essentiallyflat during 1971. Close to one-fourth ofthe rise during 1972 occurred in dur-able goods manufacturing, where em-ployment had declined sharply in 1970and continued to drift down duringmost of 1971. The 1972 increase was690,000, which offset more than half ofthe 1.2 million decline recorded fromthe end of 1969 to the end of 1971. Theadvance was widespread in durablesmanufacturing; the sharpest rates ofgain, close to 8 percent, were in pri-mary metals, machinery, and electricalequipment—in part a reflection of therising demand for capital goods. Innondurables manufacturing, where em-ployment at the end of 1971 was 330,000below the end of 1969, there waslittle employment expansion in 1972.The only sizable advances were an 11percent gain in the rubber and plasticsindustry, and 5 percent in textiles. Thechanges in other nondurable goods in-dustries were generally small.

The manufacturing employment gainsin 1972 were largely among productionworkers. White-collar employment inmanufacturing had by year-end re-covered only one-fifth of its sharp dropfrom the late-1969 peak to the end of1971, while production-worker employ-ment had retraced about three-fifthsof its decline. The recession of 1970was the first in the postwar period withsizable cutbacks in white collar employ-ment. They were largely in the durablegoods industries, and were related pri-marily to declines in defense and spaceprograms.

The increases in weekly hours ofwork in manufacturing were largest in

January 1973

the industries with the greatest employ-ment gains. The average for durablegoods manufacturing at the end of 1972was 41.9 hours per week, 1 hour longerthan a year earlier and the longestsince 1966. In nondurables, the work-week increased about one-half hour, to39.9 hours—slightly longer than atany time since 1968.

Evidence of tightening in the supplyof factory labor is provided by the factthat job vacancies in manufacturingnumbered more than 150,000 in late1972, 80 percent above the late-1971low. Moreover, the layoff rate in manu-facturing declined in late 1972 to a 20-year low, while the quit rate returnedalmost to its 1969 level, as alternativejobs became easier to find. Similarly,the data on long-term unemploymentindicated that the least employablewere finding jobs more easily in 1972.Unemployment of 6 months or longerfell sharply after April, accounting fornearly half of the total decline in unem-ployment to December. The dropprobably reflected an increased willing-ness to hire workers previously turnedaway, along with improvement in long-depressed industries such as defenseand capital goods.

Employment in the other goods-producing industries, mining and con-struction, showed little change of sig-nificance in 1972. Mining employmentis normally steady, but construction hadrisen rather strongly in 1971, duringthe initial sharp expansion in residen-tial building; during 1972 it held atabout the level reached in late 1971.

In the service-producing sector, em-ployment rose 1.8 million from thefourth quarter of 1971 to the fourthquarter of 1972, compared with 1.0million in the preceding year. Withinthis sector, State and local governmentand services each rose by one-halfmillion in the 1972, and trade by600,000; increases in these sectors hadbeen 300,000 to 400,000 in 1971.State and local government employ-ment was affected in both 1971 and1972 by the Public Employment Pro-gram, designed to place unemployedpersons in jobs. Starting in August1971, employment under the programreached 89,000 by December and a


January 1973

January 1973

peak of 185,000 in July 1972, beforetapering off to about 150,000 at theend of 1972.

Unemployment

The changes in unemployment bysex, industry, and occupation during1972 were to a considerable degree areflection of the varying trends inemployment. Although the overall rateof unemployment held at 5.9 percentin 4 of the first 5 months of 1972,the same as the 1971 average, therewere marked declines in the ratesfor manufacturing workers, especiallyin durable goods, and also in the ratesfor occupations where factory workersare concentrated—blue collar workers,particularly operatives. Unemploymentrates in these categories continued todrop sharply through the rest of theyear.

The rate for blue-collar workers,which during 1971 had remained closeto 7.4 percent, fell steadily in 1972to an average of 5.8 percent by thefourth quarter; the sharpest declinewas in the rate for operatives. Incontrast, the rate for white-collarworkers, at 3.4 percent in the fourthquarter of 1972, was about the sameas a year earlier, although withinthis grouping the rates for professionaland technical workers and for clericalworkers declined somewhat.

Unemployment data by industryshow a drop in the rate for durablegoods manufacturing workers to anaverage of 4.3 percent in the fourthquarter of 1972, from 6.6 percent1 year earlier. The rate for non-durable goods manufacturing workersdeclined less, averaging 5.4 percentin the fourth quarter of 1972, com-pared with 6.4 percent 1 year earlier.On the other hand, there was nodecline in the rates for trade andconstruction workers, and very littlefor service workers.

Partly reflecting the concentration ofthe unemployment decline in the blue-collar and heavy industry sectors,unemployment rates fell much more foradult men than for women. The rate formen of prime working age—25 to 54—was 2.7 percent in the fourth quarter of1972, down a full percentage point from

SUKVEY OF CURRENT BUSINESS

1 year earlier, while the rate for womenin this range declined from 5.3 percentto 4.7 percent. The decline in the ratefor young men 18-24 became sharpafter midyear, partly reflecting the factthat the cutback in the Armed Forceswas completed by then. The overallunemployment rate for teenagers (ages16 to 19), in contrast to that of adults,actually increased somewhat in theearly months of 1972, probably becauseunemployed workers with experiencewere then still in plentiful supply.Later in 1972 the teenage rate fellsomewhat, but it was still 15% percentin the fourth quarter.

15

Most of the drop in unemployment in1972 occurred among persons seekingwork continuously since losing theirjobs. This group declined early in 1972,and by yearend numbered nearly 20percent fewer than 1 year earlier. Incontrast, unemployment of those re-entering the labor force declined veryslowly until the final 2 months of theyear, when they were 10 percent lessthan 1 year earlier. Unemployment ofworkers with no previous job ex-perience remained somewhat above itslevel 1 year earlier until the finalquarter of 1972, indicating the con-tinuing difficulties of inexperiencedworkers in finding jobs.

Personal Income

PERSONAL income in 1972 was $935%billion, up 8% percent from the 1971total of $86IK billion. Although thisadvance was appreciably stronger thanthe gains in 1970 and 1971, it wassmaller than those recorded in 1968 and1969 (table 1). The composition of the1972 income gain reflected the cyclicalexpansion of the economy. The increasein wage and salary income was farstronger in 1972 than in the previous 2years but the expansion of otherpersonal income components, in theaggregate, slowed down. The decelera-tion was especially sharp for unemploy-ment compensation. That componentaccounts for only a small share ofpersonal income but it had increased

very sharply in 1970 and 1971; in 1972,it declined. Farm proprietors' income,on the other hand, is estimated to haverisen very sharply in 1972 after 2 yearsof small gains.

Wages and salaries

Wage and salary disbursements inmanufacturing increased 9% percentfrom 1971 to 1972, following 2 years ofvery small gains. The expansion of fac-tory pay slowed in the third quarterbut was strong the rest of the year,reflecting not only the growth of em-ployment but also the lengtheningworkweek as well as higher rates ofpay. In the fourth quarter, manufactur-

Table 1.—-Annual Percent Change in Personal Income and Components

Personal income

Wages, salaries, and other labor incomeManufacturing wages and salaries..Other private wages and salariesGovernment wages and salariesOther labor income

Nonlabor incomeBusiness proprietors' incomeFarm proprietors^ income

DividendsRentInterest

Social security benefitsUnemployment compensationVeterans' benefits & other transfers.

1968

9.5

10.18.79.9

11.513.9

8.34.7

- . 7

10.3.5

10.2

17.9- 2 . 613.3

1969

9.0

9.78.0

11.18.8

11.8

8.01.8

13.6

3.06.6

12.1

8.94.3

12.4

1970

7.4

6.7

8.310.613.0

8.8- 1 . 0

1.2

2.03.1

11.0

16.781.120.8

1971

6.21.37.67.3

13.7

8.85.42.4

2.45.25.8

15.646.017.2

1972

8.6

9.59.79.49.1

10.4

7.35.7

13.3

3.94.54.7

12.8-4.311.0


January 1973

16 SUEVEY OF CUREENT BUSINESS January 1973

ing wages and salaries averaged about13 percent above the level in the fourthquarter of 1971 (which had been helddown by the freeze).

Wages and salaries in other privateindustries generally showed rates ofincrease during the year 1972 that wereclose to their year-over-year increasesfrom 1971 to 1972. In line with thetrends in employment, wage and salaryexpansion was strong in the distributiveand service industries (up 9% percentand 10% percent, respectively, from 1971to 1972) but modest in the nonmanu-facturing goods-producing industries(construction, mining, and agriculture).

Government wages and salaries alsorecorded a large increase in 1972. Forthe year as a whole, they were up 9 per-cent, compared with an advance ofalmost 9K percent in private wages andsalaries. A Federal pay raise for militaryand civilian personnel boosted the levelof wages and salaries about $1% billion(annual rate) in January. Apart fromthat, the increase in government paylast year was concentrated at the State-local level. This is in line with the trendof employment: Federal Governmentemployment was essentially flat lastyear but State-local employment wasrising at a substantial rate.

Special factors in 1972

One factor influencing income de-velopments in 1972 was, of course, thecontrol program instituted under theAdministration's economic stabilizationprogram. There was a rebound in wagesand salaries in the first quarter, follow-ing the freeze in late 1971. Also, theprocess of Pay Board approval ofchanges in wage rates resulted during1972 in a stream of retroactive wage andsalary payments—i.e., payments ofincome earned in an earlier period.Such payments occurred throughout theyear but were largest in the first quarter,when they added about $2K billion (an-nual rate) to personal income.

Social security beneficiaries receivedan across-the-board benefit increase of20 percent in October. This boosted thelevel of transfer income about $8billion (annual rate) when it went intoeffect, and thus swelled the incomechange that month and from the third

quarter to the fourth. However, theincrease occurred so late in the yearthat it had only a modest impact on theyear-to-year rise in benefit payments.Working in the other direction—toslow the income expansion—was anincrease in January 1972 in the maxi-mum amount of wages subject to socialsecurity taxation, from $7,800 to $9,000.This boosted the level of personalcontributions for social insurance—which are deducted in calculating per-sonal income—by about $1% billion(annual rate) at the start of 1972.

Early in the year, transfer incomewas temporarily boosted by a one-timespecial payment of dividends on vet-erans' life insurance. In November, itwas boosted by permanent increases inrailroad retirement benefits—20 per-

CHART 8

Personal IncomeBillion $ (Ratio scale)

,000

900

800

700

600

500

400

300

200

150

100

90

80

70

60

50

40

_

Total

\^» ' **"

-

— NonmanufacturingWages and Salaries

ManufacturingWages and Salaries

\

All Other Components* ^ - - ~

~ Proprietors' Income y^and Dividends J

Jf^ Transfers

-

Mini I I I IMI Imnl imi l

^

M . l i l l H l L

-

-

—

fs

-

-

. . . lu.u1968 1969 1970 1971 1972

Seasonally Adjusted at Annual Rates

*Rent, interest, and other labor income.

U.S. Department of Commerce, Bureau of Economic Analysis 73-

cent, or about $0.5 billion (annualrate)—and in veterans' educationalbenefits—$0.4 billion (annual rate);there was also a one-time speeduppayment of the veterans' benefits thatmonth, which put an extra $2.1 billion(annual rate) into November income.

The severe floods in the East in Junealso affected income expansion during1972. Losses to plant and equipmentand inventories owned by proprietorsand to houses were written off in June,an action that cut very sharply intoJune income. The estimated amountcut from proprietors' income thatmonth was $2% billion and from rentalincome $4J£ billion (both figures atannual rates). In July, the incomestreams moved back up to roughlynormal levels. During the second halfof the year, some government subsidieswere paid to homeowners who hadsuffered losses in the floods. These pay-ments, which were in effect a recoveryof some of the losses written off inJune, swelled the rental income com-ponent.

Disposable income

Disposable income expansion in 1972was significantly dampened by theoverwithholding phenomenon that re-sulted from introduction of new Federalincome tax withholding schedules inJanuary. For the year as a whole,disposable income increased $50%billion, or 6% percent, to a total of$795 billion. The increase in 1971 was$55 billion or about 8 percent. A roughestimate of the impact of overwithhold-ing on disposable income in 1972, netof some related reduction in quarterlypayments of estimated taxes, is about$9 billion. The available evidencesuggests that the amount of overwith-holding was fairly steady during theyear; thus, essentially all of its impacton the growth of disposable incomeoccurred in the first quarter, though itsimpact on the level of disposable in-come persisted through the year. Theoverwithholding far outweighed theeffects of a reduction in Federal incometaxes that went into effect January 1.The reduction, involving increased per-sonal exemptions and deductions, isestimated to have cut personal taxliabilities in 1972 by about $5K billion.


January 1973

January 1973 SURVEY OF CURRENT BUSINESS 17

Consumption and Saving

IN 1972, growth of consumer spendingaccelerated and figured importantlyin the faster growth of aggregatedemand. The acceleration reflected amarked improvement in consumer con-fidence, and was associated with arecord expansion of consumer credit.The saving rate declined from 1971 to1972; a good part of the decline wasthe result of the extra bite taken fromafter-tax income by the overwithholdingof Federal income taxes.

Personal consumption expendituresincreased $56K billion, or 8% percent,from 1971 to 1972, compared with$48 billion, or 7% percent, in 1971.In 1971, the dominant factor in theacceleration of spending growth wasincreased auto demand (partly theresult of late-1970 auto strikes thatshifted some purchases from 1970to 1971). In 1972, the increase inspending on autos was smaller thanin 1971 but the growth of other com-ponents of consumer demand wasgreater. In constant dollars, the ad-vance in consumer spending in 1972was far stronger than in 1971 for therise in prices of most consumer goodsand services except food productsslowed appreciably.

Spending on furniture and householdequipment recorded a much strongeradvance in 1972 than in 1971, anacceleration presumably associated bothwith the continuing housing boom andwith growth in the replacement demandfor home appliances. Spending formobile homes grew strongly in thefirst half of last year, fell back in thesummer, and advanced again in thefourth quarter. Spending for food,which accounts for about one-thirdof total consumer outlays for goods,increased much more in 1972 than in1971—in good part because of largeprice increases in 1972. The growth inexpenditures on gas and oil was strongall last year and spending on tobaccorose much more than in 1971. The1972 increases in consumer spending on

other categories of goods and on serv-ices were about in line with the steadyuptrends of recent years.

Auto sales

Automobile buying set a record in1972. In unit terms, new car salestotaled 11 million units, up from 10}£million in 1971; sales of domestic typestotaled 9% million, up from 8% millionin 1971, while sales of imports wereessentially unchanged at Y% million.Personal consumption spending on autosis estimated to have dropped slightly inthe fourth quarter but registered siz-able gains in the preceding threequarters (chart 9).

There are indications that salesvolume would have been even strongerin 1972 had it not been for inventoryshortages. Strong demand taxed dealerinventories of 1972 models as the modelyear was finishing, and caused shortagesof 1973 models as well. Also, productionlosses due to scattered work stoppagescut into the supply of new cars in thefall. As a result of these factors, themanufacturers closed the year operat-ing many plants on a 6-day week andwith sharply reduced holiday shutdownperiods.

Unit sales of foreign models held ina narrow range around IK million units(annual rate) all year, and the marketshare for imports, measured in terms ofunit sales, fell to 14# percent from 15%percent in 1971. There had been asteady uptrend in import sales prior tothe latter months of 1971, when thetemporary import surcharge and dockstrikes apparently cut heavily into sales.By the first quarter of 1972 the sur-charge was off and the strikes were over,but at the same time major currencyrealignments forced price increases onmost import models. This factor inparticular affected sales of the majorlow priced imports—VW, Toyota, andDatsun—that compete directly withdomestic subcompacts—Pinto, Vega,

and Gremlin. At least partly as a resultof their improved price competitive-ness, the domestic subcompacts en-larged their share of the low priced automarket in 1972, at the expense of theimports.

Sentiment, debt, and saving

The acceleration of consumer spend-ing in 1972 was consistent with theevidence from sentiment surveys. Theindex of consumer sentiment compiledby the University of Michigan SurveyResearch Center increased more than14 percent from the fourth quarter of

CHART 9

Consumption and SavingCHANGE IN CONSUMPTION SPENDING

Billion $

1968

Percent

1969 1970 1971

Change From Previous Quarter


SAVING RATE

1972

1968 1969 1970 1971

Seasonally Adjusted


1972


January 1973

18

1971 to the third quarter of 1972, astronger gain in those 3 quarters thanthe increase of 9 percent recorded inthe 4 quarters immediately followingthe recession low in the fourth quarterof 1970. The increase in consumeroptimism was presumably an importantfactor in the rapid growth of install-ment credit use (chart 10). The rate ofincrease in outstanding credit for autosand other consumer goods acceleratedsharply during 1972, and the full-yearincreases in the outstanding amountsof both types were far larger than the1971 increases. The "other consumergoods" category includes credit forfurniture and appliances and also formobile homes. The growth rate ofpersonal loans was erratic in 1972

CHART 10

Change in Consumer InstallmentCredit Outstanding

SURVEY OF CURRENT BUSINESS

(chart 10), but the expansion for theyear as a whole was nevertheless wellabove that for 1971.

The saving rate—the share of dis-posable income saved—edged down in1972 (chart 9). For the full year, therate averaged 7 percent. It had rangedfrom 8 to 8% percent during 1970 and1971, a high level by historical stand-ards, and a decline was generally ex-pected when consumer sentiment im-proved. However, the drop in the ratein 1972 was probably due in large partto the impact of overwithholding; thiscut into disposable income and likelywas reflected in a cut in saving fromwhat it otherwise would have been.

Withholding schedules were adjustedin January, and it was recognized thatsignificant overwithholding would resultif affected taxpayers did not offset someof the impact by increasing their ex-emptions for withholding purposes. Itappears that relatively few taxpayerstook the necessary action. As a result,most of the increase in tax payments inthe first quarter of 1972 was due tooverwithholding. Withholding in ex-cess of the amounts needed to coverliabilities is a form of saving; while the

PERSONAL LOANS AND OTHER*

, 1 , 1 , 1 , 1 , 1 M

1964 66 68 70


* Includes repair and modernization loans.

• October-November at a quarterly rate.


72

Data: FRB

January 1973

overwithholding probably had an im-pact both on consumption spending andon personal saving, it is likely that theimpact fell disproportionately onsaving. In the absence of overwith-holding, the saving rate probably wouldnot have declined in the first quarter—it dropped to 7.2 percent, from 7.8 per-cent in the fourth quarter of 1971—andvery likely would have increased.

Overwithholding in the rest of theyear evidently continued at about thesame level as in the first quarter, andthus had no substantial further effecton the growth of disposable income(though it continued to affect the levelof income). The saving rate fell sharplyto 6% percent in the second quarterand remained at that level in the third.This decline would presumably haveoccurred in the absence of overwith-holding, but the level of the saving ratewould have been higher all year. In thefourth quarter there was a huge gain inpretax personal income and disposableincome surged. Consumption spendingalso accelerated but less sharply thanincome, and the saving rate moved backup to 7% percent at yearend.

HousingTHE residential construction boomcontinued in 1972, sustained Dy readyavailability of mortgage credit andstrong underlying demand. New privatehousing starts (chart 11) reached a veryhigh rate early in the year, averaging2.5 million units (annual rate) in thefirst quarter. The rate dropped some-what in the spring and then ran at about2.4 million units for the rest of the year,higher than had generally beenexpected. Expectation of more weaken-ing was based on the fact that thestarts rate, rebounding from the de-pressed levels of 1969 and 1970, hadrisen to a level higher than that whichwas thought sustainable for any periodof time. At yearend, the rate was stillvery strong, but signs of softening indemand relative to supply had appearedin 1972 that signaled a future slowdownin housing activity.

For the year as a whole, investmentin residential construction rose about$11% billion, or 26% percent, to a levelof $54 billion. This increase was aboutthe same, in dollar terms, as the increasein 1971, when residential investmentwas the strongest component of demandexpansion.

Housing starts totaled 2.4 millionunits for the year, up from the previousrecord of 2.1 million started in 1971.Single family starts increased about 15percent over 1971 to 1.3 million units,and the number of units in multif amilystructures rose about 19 percent to 1.1million. Mobile homes are an importantsource of low cost housing Dut are atpresent treated in the national incomeand product accounts as durable goodsconsumption and not as residentialinvestment. Shipments of mobile homesrose about 17 percent from 1971 to


January 1973

January 1973

1972, to 570 thousand units. Mobilehome shipments and housing startstogether totaled just under 3 millionunits in 1972, compared to 2.6 millionin 1971.

The strength of the housing boom in1972 is all the more remarkable inlight of the drop in the level of supportprovided to private housing by Govern-ment subsidy. In 1970 and 1971,roughly one-fourth of all new privatelyowned housing units were started underone of several Federal subsidy pro-grams (rent supplements, mortgageinterest subsidies, etc.). Last year, someof these programs were cut back. Forfull year 1972, federally subsidized

CHART 11

Residential Construction andMobile HomesMillion Units (Ratio scale)

3.0

Multifamily

I I I 1 I I I I 1 I 1 1 1 I I I I I I 1 I 1 I 1 l I I I 1 I I I I I I 1 1 I I

SUEVEY OF CUREENT BUSINESS

housing starts are estimated to havetotaled only about 340 thousand unitscompared to 430 thousand units in1971, and comprised only about 14percent of total private housing starts.(These figures refer to the subsidyprograms of the Agriculture Depart-ment in addition to those of theHousing and Urban DevelopmentDepartment.)

Regionally, the starts expansion in1972 was strongest in the South and theNortheast, with gains of 23 percent and30 percent, respectively. The 1972increases in starts in the North Centraland Western regions, which had bothrecorded increases around 50 percentin 1971, were 5 percent and 9 percent,respectively.

In the rental market, vacancy ratesrose noticeably during the year, partic-ularly in the West and North Centralregions of the country. Vacancy rateshad been fairly stable at low levels in1971 but began to rise early in 1972. Bythe third quarter, the rental vacancyrate for the Nation as a whole had

.6

.5

.4

.3

.2

IS

_ MOBILE

-

1 1 1 1 1 1

HOME

y11 \ i

SHIPMENTS

/

11 i i i 1 i i 11

rjOct-Nov.

i I 11 i i i

average

1 M 1 1 I I 1

A'

-

-111

1963 67 69


19

risen to about 5% percent. This wasnot especially high by historical stand-ards, but the vacancy rate was expectedto continue to rise for some timebecause of the very large number ofunits started but not finished in multi-unit buildings. (Most multiunit struc-tures are for the rental market. Thoughincreasingly popular, cooperatives andcondominiums are estimated to haveaccounted in 1971 for no more than 10percent to 12 percent of units in newstructures with 5 or more units. Noestimate is available for 1972, whenthe share may well have increased.)

There were also some signs of soften-ing in the market for single-familyhomes, as the ratio of new one-familyhomes for sale to homes sold—an in-ventory-sales ratio—rose sharply in theyear. In the first quarter of 1972, thisratio averaged about 5%—i.e., homesfor sale averaged 5% months of sales.By late in the year the ratio wasaveraging over 6, the highest since early1970.

Nonresidential Fixed Investment

ta: Census


THE strengthening demand for output,some reduction of excess capacity, andthe accelerating growth of cash flow(which was stimulated by the invest-ment tax credit) were factors contribut-ing to the recovery of nonresidentialfixed investment in 1972. Followingvery small increases in 1970 and 1971,outlays rose 13% percent from 1971 to1972 to total $120% billion. The re-covery in investment outlays occurredduring a period when price increaseswere abating, and fixed investment inreal terms increased for the first timesince 1969.

Most of the recovery was in spendingfor producers' durable equipment.These outlays rose steadily during 1972and for the year as a whole were up 16percent, or $10% billion, from the levelin 1971. Prices for producers' equip-ment are estimated to have risen littlein 1972, and roughly four-fifths of the

spending increase represented increasedreal purchases.

The structures component of non-residential fixed investment rose 10percent ($3% billion) from 1971 to 1972,but much of that increase is estimatedto reflect higher costs. The spendingpattern was mixed during 1972: outlayswere up fairly sharply early in the year,showed little net change in the secondand third quarters, and were again onthe upswing in the fourth. Spendingfor industrial buildings declined forthe third consecutive year, and mostof the spending growth was for com-mercial, hospital and institutional, andprivately owned public utility struc-tures. The difference in behaviorbetween structures and producers' dur-ables in 1972 was probably due in partto the stimulative impact of theinvestment tax credit, which was re-stored in late 1971. The credit applies


January 1973

20

to equipment but not to structures.Also, capital investment in 197£ wasoriented toward modernization as dis-tinguished from expansion, and thiswould tend to channel spending moretoward equipment than toward plant.

The investment recovery got under-way at a time when there appeared to bea significant amount of excess capacityon hand. The Federal Reserve estimateof the capacity utilization rate inmanufacturing was only 74% percent inthe fourth quarter of 1971. However,as 1972 progressed, the utilizationrate moved steadily higher and stoodat almost 80 percent in the fourthquarter. The manufacturing utilizationrate calculated by McGraw-Hill in-creased from 76% percent in November1971 to 83 percent in November 1972;for durables manufacturing, the in-crease was from 70% percent to 80percent. Similarly, the evaluation of

CHART 12

Plant and Equipment ExpendituresBillion $ (Ratio scale]

Mining111 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

1 9 6 2 6 4 6 6 6 8 7 0


• Expected


72


manufacturers' capacity reported inBEA's quarterly surveys showed aclear tightening during 1972 (chart 13).

Plant and equipment survey results

BEA's regular quarterly survey ofplant and equipment spending, whichprovides industry detail on capitalinvestment, shows spending up 9 per-cent from 1971 to 1972. According tothe survey, outlays rose sharply earlyin the year, barely at all in the secondand third quarters, and were expectedin November to increase sharply againin the fourth quarter.

Nonmanufacturing industries under-took stronger investment expansion in1972 than did manufacturing industries.Outlays by nonmanufacturing in-dustries rose 12 percent in the aggregateand, as chart 12 shows, all major in-dustry groups contributed to the ad-vance. Most industries recorded year-over-year increases about in line withthat of nonmanufacturing as a whole.Within the transportation group, how-ever, there was sharp diversity: invest-ment by the airlines rose 34 percent—aturnaround from a decline of similarmagnitude in 1971—while investmentby the railroads rose 7% percent, andoutlays of the other surface carriers(trucks, ships, pipelines, etc.) only 2percent.

Assuming that the spending expecta-tions for the fourth quarter of 1972were realized, the increase in invest-ment by manufacturers last year was 4percent, only about one-third as largeas that by nonmanufacturing indus-tries. Spending by producers of non-durable goods declined about 1 percentfrom 1971 to 1972, but spending by themore cyclically sensitive durables pro-ducers rose about 9% percent—a turn-around from the 1971 decline of 10^percent. Within nondurables manu-facturing, increased outlays by therubber, textile, and paper industrieswere more than offset by cutbacks inthe petroleum, food-beverage, andchemical industries. In durables manu-facturing, all major industries recordedincreases in investment spending in1972 with the exception of the steelindustry, where the downtrend thatbegan in 1968 continued.

January 1973

A curious aspect of the plant andequipment survey findings last yearwas the shortfall of actual from expectedspending in the second and thirdquarters. Plans reported in May in-dicated a $4 billion (annual rate)advance in outlays in the secondquarter, and plans reported in Augustindicated an expected gain of $3}ibillion in the third, but spending infact changed little in either quarter.It is rather surprising to find sizableshortfalls during a period of accelerat-ing economic activity. However, theshortfalls apparently do not reflect ascaling back of investment programs;businessmen revised up their expecta-tions for the quarters immediatelyahead, suggesting that the shortfallamounts were at least partly shiftedinto the near future. Moreover, as theyear progressed, measures related tocurrent and prospective capital spend-ing—new and unfilled orders for capital

CHART 13

Manufacturers' Evaluation ofExisting Capacity*

Percent of Capital Assets Held by Respondents Reporting—

60

50

40

30

70

MORE CAPACITY NEEDED

-

t 1 1 1 1 1 1 1 1 1 1 1 1 1 I 1 t 1 . 1 . . . i . > . i . . . ] . . .

70

60

50

40

20

10

CAPACITY ADEQUATE

i i i I i i i 1 1 i i 1 i i i I i i

CAPACITY EXCEEDS NEEDS

i i i I i i i 1 i i i 1 i i i I i i i 1 i i i 1 i i i I i i i I i i i

1964 66 68 70 72

* Relative to prospective operations during the ensuing 12-month period.

U.S. Department of Commerce, Bureau of Economic Analysis 73-1-13


January 1973

January 1973

goods, manufacturers' capital appro-priations and backlogs, new projectstarts and carryover, construction con-tract awards—all were strengthening,


and the evidence at yearend stronglyindicated that a major capital spendingrecovery is underway, and that it willcarry well into 1973.

21

Inventories

THE expansion of business inventoriesaccelerated sharply during the lastthree quarters of 1972, but the advancefell considerably short of matching theexceptional rise in sales. Inventoryaccumulation as measured in GNPdeclined from the fourth quarter of 1971to the first quarter of 1972; then it rosefrom an annual rate of only $400 mil-lion in the first quarter to a rate of $10billion in the fourth quarter—thelargest dollar gain over a 3-quarterspan since 1961. Inventory accumula-tion accounted for about 11 percent ofthe increase in GNP from the firstquarter to the fourth, a higher pro-portion than in recent years but con-siderably less than in the recoveriesafter the 1954, 1958, and 1961 reces-sions, when it constituted about 25percent of the GNP increase.

Despite the acceleration during 1972,the accumulation rate at yearend wasnevertheless still quite moderate. The$10 billion rate in the fourth quarterwas equal to only about 0.8 percent oftotal GNP, compared with 1 percenton the average during the decade endingwith 1970. For the year as a whole,accumulation amounted to just under$6 billion, about one-half of 1 percentof GNP.

Book values

The book value of inventories inmanufacturing and trade, at $192%billion in the fourth quarter of 1972,was $10 billion or 5% percent higherthan 1 year earlier, with about two-thirds of the rise coming in the secondhalf of the year (chart 14). The increasewas less than half as great as theincrease in manufacturing and tradesales, which rose 14% percent from thefourth quarter of 1971 to the fourthquarter of 1972 with sharp gains in all

major sectors but especially in durablegoods.

Manufacturing inventories increase$5 billion, or nearly 5 percent, during1972. The gain was very unevenly dis-tributed. About four-fifths of it, or $4billion, occurred in durable goods in-dustries; nearly $3 billion consisted ofdurable goods in process of manufac-ture, of which about $2 billion was intransportation equipment manufac-turing and probably reflected the boomin motor vehicle production and signifi-cant recovery in the aircraft industry.In soft goods manufacturing, the in-crease in goods in process was abouttwice as large in percentage terms asthe expansion in either finished goodsor materials and supplies. A sharp risein output normally entails an increasein the volume of goods in process ofmanufacture.

The expansion of finished goodsstocks was probably held back in somesectors by the strength of sales. In-ventories of automotive retailers inparticular declined during most of1972, as sales outran even the highlevel of production. Late in the year,inventories increased somewhat, butdealers' stocks of new cars were stilllow in relation to sales.

The ratio of stocks to sales in manu-facturing and trade recorded in 1972its sharpest decline since 1950. InNovember 1972, the ratio was 1.46,down from 1.58 at the end of 1971 andabout equal to the 17-year low reachedin 1965 and early 1966. The 1972decline in the ratio for manufacturingalone was steeper. The ratio of manu-facturers' finished goods to sales wasabout the same in late 1972 as in 1965,but the ratio for materials and supplieswas lower while the ratio for work inprocess was significantly higher, atleast in durable goods.

An associated development was thedecline in the proportion of manu-facturers' inventories held by com-panies that considered their stocks as"high." It fell to about 15 percent atthe end of the first quarter of 1972and was little changed in the next twoquarters—holding a level about thesame as in 1965. In the same quartersof 1971, the proportion was 20 percent(chart 14).

CHART 14

Inventories

INVENTORY ACCUMULATION

Billion $

2.5

2.0

1.5

1.0

- .5

MANUFACTURING

1968 1969 1970 1971 1972Seasonally Adjusted

MANUFACTURERS' INVENTORY CONDITIONPercent40

30

PERCENT OF HOLDINGS CONSIDERED HIGH**

1968 1969 1970 1971 1972

•Accumulation in Oct. and Nov. expressed at a quarterly rate.

**Percent of total inventory book value held at end of quarterby companies characterizing their inventories as highrelative to sales and unfilled orders.



January 1973

22 SURVEY OF CURRENT BUSINESS January 1973

Exports and Imports

FOREIGN demand for U.S. goods andservices increased substantially from1971 to 1972 but there was an evenstronger gain in U.S. demand forforeign output. The preliminary esti-mate shows exports of goods andservices at $73% billion for the year,up $7K billion, or 11% percent, from1971. Imports of goods and servicesare estimated at $77% billion, up $12%billion or 19 percent. The balance ongoods and services deteriorated froma narrow surplus of $% billion in 1971to a deficit of $4 billion in 1972.

Merchandise trade accounted for thebulk of the deterioration in the goodsand services balance. For the first 11months of 1972, merchandise trade(calculated on the basis that BEAuses for the balance of payments andGNP accounts) was in deficit by $6%billion at a seasonally adjusted annualrate. The deficit for the year 1971 was$2% billion. The deterioration reflectednot only the fact that economic ex-pansion in 1972 was more rapid in theUnited States than in most industria-lized countries, but also the initialperverse effects on the value of importsof the appreciation of leading foreigncurrencies against the dollar. Also,there was an upsurge of shipmentsearly in 1972 following the lifting ofthe import surcharge and settlement oflate-1971 dock strikes; the post-strikesurge was apparently stronger forimports than for exports.

For the nonmerchandise elements ofexports and imports, detail is availableonly for the first 3 quarters of 1972 atthe time this review is being prepared.Relating those data, expressed at anannual rate, to data for the full year1971 shows some decline in the surpluson investment income, a sharp increasein the deficit on military transactions,and a small increase in the deficit ontravel and transportation transactions.

The surplus on investment incomedeclined from 1971 to 1972 as incomepayments on foreign investments in the

United States increased somewhat morein dollar terms than income receiptsfrom U.S. investments abroad. In per-centage terms, the increase in U.S.payments was far larger than theincrease in receipts. The sharp growthof income payments in 1972 centeredin payments on U.S. liabilities to for-eign official agencies. This reflects thehuge rise in foreign central banks'holdings of dollars during 1971 as theyattempted to hold exchange rates sta-ble in the face of market expectationsthat rates would change (as they infact did).

Direct defense spending abroad—animport item—was little changed from1971 to 1972. However, U.S. exportsunder military agency sales contractsdropped steeply, in good part becauseof reduced aircraft deliveries. Theresult was that the deficit on militarytransactions increased sharply from1971 to 1972. The deficit on travel andtransportation transactions increasedslightly as the dollar increase in U.S.payments for travel and transportationwas larger than the dollar increase inU.S. receipts. In percentage terms,however, the increase in payments wassmaller than the increase in receipts.

Export and import shares

The deterioration of the balance ongoods and services in recent yearsreflects the fact that while the share ofU.S. national output (GNP goingto fill export demand has edged up onlyslightly, there has been a markedincrease in the role of imports in fillingdomestic demand in the United States.

In 1972, on the basis of data for thefirst 3 quarters, the share of exportsin total U.S. production of goods andservices (GNP) held at the 1971 figureof 6.3 percent (table 2). The share ofgoods exports in total U.S. productionof goods moved up modestly followinga decline in 1971. The current valuesof both share figures are only moderately

above their values in the first half of the1960's.

Aggregate domestic demand is es-timated by subtracting gross exportsof goods and services from GNP—forexports go to fill foreign, not domestic,demand—and adding gross imports.In terms of the GNP, aggregatedomestic demand is the sum of thecomponents other than net exports.Table 2 shows the share of imports inselected categories of domestic demand.

Table 2.—Exports as Share of U.S. Produc-tion, Imports as Share of U.S. DomesticDemand

[Percent]

Exports:

1. Goods and services

2. Goods

Imports:

3. Goods and services4. Goods.5. Autos6. Nonautomotive capital

goods7. Food8. Nonfood, nonauto

consumer goods9. Industrial supplies and

materials.

Average

1960-64

5.57.6

4.64.8

2.1

3.04.2

2.4

2.5

1965-69

5.87.8

5.35.9

5.9

5.64.3

3.5

2.6

1970

6.48.9

6.17.0

11.4

7.44.7

4.6

2.7

1971

6.38.6

6.27.5

11.8

8.04.7

4.9

2.8

1972*

6.38.9

6.78.2

12.8

9.35.0

5.9

2.9

* First 3 quarters.

NOTE.—Export and import data used in lines 1-4 of thistable are as published by BEA in lines 1, 2,15, 16 of table 2of the regular balance of payments tables. The imports usedto calculate lines 5-9 of this table are, respectively, thoseshown on lines 94, 80, 61, 97 and 66 of balance of paymentstable 4. The denominators of the ratios shown here are, byline number: (1) GNP; (2) goods component of GNP;(3) GNP less net exports; (4) goods and structures compo-nents of GNP less net merchandise exports; (5) gross autoproduct less its net export component; (6) producers' durableequipment less autos, trucks, buses; (7) personal consump-tion spending on food; (8) personal consumption spending ongoods except food, autos, and gasoline; (9) goods and struc-tures components of GNP less net merchandise exports.

Total imports of goods and serviceswere 6.7 percent of domestic demandfor goods and services in 1972, up from6.2 percent in 1971. The increase inshare was sharper for goods alone—calculated as merchandise importsdivided by domestic demand excludingservices. The import shares in domesticdemand for autos, nonauto capitalgoods, and nonauto nonfood consumergoods all showed sizable increases. Im-ports of foods-feeds-beverages are re-lated in the table to personal consump-tion spending on food, and imports ofindustrial supplies and materials are


January 1973


related to total domestic demand ex-cluding services. These two shares showonly small increases in recent years,but the other share figures reflect aclear long-term growth in U.S. prefer-

ence for foreign output. (The categoriesof merchandise imports for which sharesare calculated in table 2 comprise about90 percent of total merchandiseimports.)

Federal Government

FEDERAL purchases of goods andservices amounted to $106 billion in1972, a gain of over $8 billion from 1971.Defense purchases, which had beendeclining since 1969, increased nearly$5 billion and nondefense purchaseswere up about $3% billion (chart 15).Other Federal expenditures increased$18 billion and receipts $29 billion, andthe deficit on the national income ac-counts basis declined from $21% billionin 1971 to $18}£ billion in 1972.

Defense spending was boosted byincreased military personnel costs,which reflected the full-year effect ofthe military pay raise effective in mid-November 1971, and a 5 percent payincrease for military and civilian per-sonjiel effective January 1, 1972. Theeffect of these pay raises was partlyoffset, however, by a year-to-yeardecline of about 300,000 in the size ofthe Armed Forces. Other types ofdefense spending also increased in 1972,particularly procurement of hard goodsand research and development.

Nondefense purchases, which in-creased nearly $5 billion in 1971,recorded another large gain in 1972,rising $3K billion. Continued increasesin payroll costs and accelerated spend-ing for other goods and services by mostcivilian agencies were major factors inthe advance. Net interest payments toforeigners were also a major factor,increasing by nearly $1 billion in 1972.(Government interest payments toforeigners are treated as a governmentpurchase but also as an import, and thustheir amount has no effect on the size ofGNP.) Offsetting these gains was alarge decline in the net purchases ofagricultural commodities by the Com-modity Credit Corporation largely be-cause of generally higher market pricesand the Soviet wheat sale.

Other types of Federal expendi-tures—transfers, grants, interest, andsubsidies—increased nearly $18 billionfrom 1971 to 1972, to a level of nearly$141 billion. Transfer payments andgrants accounted for about $17 billionof the increase.

Table 3.—Federal Nondefense Purchases[Change from previous year, billions of dollars]

TotalCCC PurchasesNASA PurchasesNet Foreign Interest PaidOther

1970

1.1- 1 . 8- . 3

.23.1

1971

4.81.2

- . 2.8

3.0

1972

3.4—. 6- . 1

.83.3

Transfer payments to persons rose$8% billion to $80% billion in 1972—anamount $4% billion higher than totaldefense purchases. The largest transfercategory, OASDI benefits, advanced byover $4% billion, of which about $2billion resulted from the 20 percentbenefit increase paid beginning inOctober. Unemployment benefits,which had increased nearly $2 billion in1971, fell slightly in 1972, as the averagenumber of insured unemployed de-clined about 300,000. Other transfericnreases occurred in veterans' benefits($1% billion), medicare ($1 billion),civilian pensions ($% billion), and foodstamps ($% billion).

Grants-in-aid to State and localgovernments advanced a record $8%billion to $37% billion. Of this increase,$2.6 billion came from the initial pay-ment of general revenue sharing inDecember. Public assistance grants(including grants for medicaid andsocial services) were up nearly $3% bil-lion; other increases were in emergencyemployment assistance ($1 billion) andeducation ($% billion).

Subsidies (net of the current surplusof government enterprises) advancednearly $1 billion to more than $6 bil-lion. The largest subsidy category, pay-ments to farmers, had declined in thepast few years but increased more than$% billion in 1972. A temporary pro-gram to aid homeowners and businesseswho suffered losses in Hurricane Agnesadded about %){ billion to subsidies in1972, but there was a $){ billion declinein the postal deficit. Net interest paidshowed little change in 1972 afterdeclining by $1 billion in the previousyear.

Receipts

Federal receipts increased in 1972 bya record amount of over $29 billion as aresult of (1) rapid growth in employ-ment and incomes, (2) overwithholdingof personal taxes, and (3) a highersocial security tax base. Higher incomesin 1972 accounted for nearly $26 billionof the gain in revenues while the neteffect of tax changes (including over-withholding) added $3% billion(table 4).

Table 4.—Breakdown of 1972 Change inFederal Receipts, NIA Basis

(Change from previous year, billions of dollars)

Increase in total receipts (NIA basis).

Amount due to higher incomes.Amount due to tax changes

Personal tax and nontax payments_.Amount due to higher incomes ...Amount due to tax changes 1

Corporate profits tax accrualsAmount due to higher incomes .Amount due to tax changes

Indirect business tax and nontax accruals .Amount due to higher incomesAmount due to tax changes —

Contributions for social insurance-Amount due to higher incomes..Amount due to tax changes

29.125.63.5

19.314.35.02.95.3

-2.4

- . 41.8

-2.2

7.44.33.1

i Includes impact of overwithholding.Source: Estimates by Bureau of Economic Analysis.

Personal tax receipts increased nearly$19 K billion, despite the fact thatliabilities were reduced under provisionsof the Revenue Act of 1971. This Actalso provided for a new withholdingschedule, effective January 1, 1972,which was designed to eliminate theunderwithholding that occurred in 1971.Individuals were expected to adjust


January 1973

24

their exemptions in order to match theirwithholdings under the new schedulewith their liabilities. However, it ap-pears that most individuals failed toadjust, resulting in $9 to $10 billion of

CHART 15

Federal Budget (NIA Basis)• Defense purchases move up, civilian spendingcontinues to increase

Billion $ (Ratio scale)

200

150

Transfer Paymentsand Other

EXPENDITURES

60

40

30

20

15

150

100

80

60 -

40 -

30 -

Defense Purchases

Nondefense Purchases

SUEVEY OF CURRENT BUSINESS

overwithholding in 1972. Final settle-ments paid in 1972 (on 1971 liabilities)were also up, reflecting the increase incapital gains realized in 1971. Estateand gift tax payments continued to:ncrease rapidly.

Corporate tax accruals rose about $3billion, the net result of a gain of about$5% billion from higher profits and a$2y2 billion reduction due to taxchanges, such as the investment credit,liberalized depreciation rules, and the"Domestic International Sales Corpo-ration'' provision that is intended topromote exports.

• Receipts, boosted by economic expansionand overwithholding, advance more than expenditures

RECEIPTS

Personal

ti

ll

1^ ^

. 1 .

Taxes

/ — ^

Contributions forSocial insurance

I . I . I

-7 :Less

Overwithholding^"

orporate and IndirectBusiness Taxes

. 1 . 1 .

The Federal deficit declines

1966 67 71 72*68 69 70

Half Years


*Data for second half are preliminary


January 1973

Indirect business taxes were slightlyover $20 billion in 1972, a decline ofabout %}i billion from 1971 reflectingthe full-year effect of the auto excisetax repeal and the fact that a customssurcharge was in effect for the finalmonths of 1971 but not in 1972.

Social insurance contributions re-corded another large gain last year, up$7K billion to about $63% billion. Theincrease in the taxable wage base forsocial security from $7,800 to $9,000,effective January 1, 1972, accounted forover $3 billion of the advance.

State and Local Government

PURCHASES by State and local gov-ernments increased $14 billion in 1972to almost $149 billion. This was alarger dollar increase than in 1971(table 5), but about the same per-centage gain—slightly over 10 per-cent—as in the last several years.

Employee compensation, which ac-counts for over one-half of total pur-chases, rose $8% billion (10% percent),the smallest growth rate since 1965.Compensation increased nearly 13 per-cent in 1970 and over 11 percent in1971. Total State-local employment in-creased nearly 4 percent in 1972 com-pared with 3.7 percent in 1971. Avail-able data show an acceleration ofgrowth in educational employment, es-pecially at the local level, after 3 yearsof deceleration. Other employment roseonly slightly.

Data now available indicate that1972 purchases of structures were onlyslightly above the 1971 total of $26J£billion. Spending in the first and fourthquarters, seasonally adjusted, was con-siderably above the 1971 rate butdeclines in the second and third quar-ters held down the annual average.

The stability in aggregate State-local construction activity was contraryto the general expectation a year ago,when an upsurge in 1972 was expected.Most classes of new constructionshowed little change from 1971 to 1972,including sewerage and water constuc-

tion, an area in which major increaseswere generally expected. Public hous-ing construction fell considerably. How-ever, preliminary data indicate that ed-ucational construction, which declinedsteadily in the 1968-71 period, increasedslightly in 1972.

Other purchases rose $5% billion in1972. Among the important factorscontributing to this large increase were:(1) higher spending on social services,particularly in the first half, largelyfinanced by expanding Federal grants;(2) outlays made necessary by Hurri-cane Agnes; (3) a 20 percent rise inpurchases by these governments ofmedical services on behalf of medicare/medicaid recipients, an increase roughlyas large as the 1969 and 1970 increasestaken together; and (4) spending bysome governments in anticipation ofrevenue sharing.

Transfer payments rose only $1^4

billion, well below the $2% billion in-crease in 1971. Welfare paymentsincreased only about half as much as in1971; the economic expansion and morestringent administration of programscontributed to this slowdown. However,other major types of transfer, such aspensions and injury compensation, rosesomewhat faster than in 1971.

Interest receipts exceeded interestpaid once again in 1972, resulting innegative net interest payments. Nega-tive net payments over the past few


January 1973


years are largely a reflection of therelatively strong financial position ofState and local government in theaggregate. Until 1969, interest expendi-tures had exceeded interest receipts inevery year since 1929 (the first yearsuch data were compiled in the nationalaccounts). However, since 1969, thesituation has reversed. In part, thereversal reflects the growing stock ofassets held by retirement and othersocial insurance funds, but generalgovernment holdings of financial assetshave also risen rapidly in recent years.

Receipts

State and local government receiptsincreased about $23 billion in 1972, withalmost $14% billion coming from theirown sources, and $8% billion from Fed-eral grants-in-aid. The initial revenuesharing payment in December ac-counted for $2.6 billion of these govern-ments' 1972 receipts. The 1971 advancein receipts was $16% billion, with Fed-eral grants responsible for $4% billion.

The spectacular increase in grantreceipts, which reached almost $38

percent, reflecting the imposition of newtaxes as well as changes in rates andbases of existing taxes.

Indirect business taxes rose more than$8 billion in 1972, somewhat more thanin 1971. About $1 billion of the 1972increase was due to increases in generalor selective sales tax rates enacted in1971 or 1972 (table 5). Many of theserate increases occurred during 1971,with their full impact felt in 1972. Therewas a significant slowdown in 1972 inlegislative action increasing sales taxrates.

Fiscal position

The aggregate fiscal position of Stateand local governments improvedmarkedly in 1972. On a national incomeaccounts basis, which consolidates op-erating funds and social insurancefunds, a $12 billion surplus was re-corded, up from surpluses of $5 billionin 1971 and $3 billion in 1970.

The 1972 improvement centered inoperating funds, which showed a sur-plus for the first time since 1947. The$3y2 billion operating surplus in 1972followed deficits of $2% billion in 1971and $3% billion in 1970. Nearly half ofthe swing to surplus is attributable tothe December revenue sharing paymentwhich added $2.6 billion to 1972 re-ceipts, but had little impact on 1972expenditures. Social insurance fundshad a surplus of more than $8}£ billionin 1972, up more than $1 billion^ from1971.

The movement toward a surplusposition for operating funds can beattributed both to very rapid growth inFederal grants-in-aid, and consistentgrowth in State and local tax and non-tax revenues. In percentage terms,growth in these revenues matched orexceeded gains in expenditures in fourof the last 5 years.

Prices

Table 5.—State and Local GovernmentPurchases, Other Expenditures, andReceipts

[Change from previous year, billions of dollars]

Expenditures __Purchases of goods and services

Compensation _StructuresOther. __

Expenditures other than purchases...

ReceiptsLess: Federal grants-in-aid _ ,

Contributions for social insur-ance

Equals: Tax and nontax revenuesPersonal income taxes

Amount due to higherincomes

Amount due to lawchanges...

General and major selec-tive sales taxes.

Amount due to higherincomes

Amount due to lawchanges

All other tax and nontaxrevenues ....

Surplus or deficit

1970 1971 1972

13.111.37.9.1

3.41.8

15.24.2

1.010.11.1

.5

3.1

2.2

5.9

2.1

14.812.57.71.13.72.3

16.84.7

1.110.91.6

.7

2.8

2.1

6.5

2.0

15.414.08.5.2

5.51.4

22.78.3

1.413.13.0

2.2

.8

3.9

3.0

6.2

7.3

billion in 1972, has diverted attentionfrom the very large increases in revenuesraised directly by State and local gov-ernments. In every year since 1968,these governments' revenues from theirown sources have risen more than 10

ON the whole, prices rose substantiallyless in 1972 than in 1971 (chart 16).The major indexes indicated wide-spread moderation in price increasesfor industrial products and services, butan acceleration of agricultural priceincreases.

The implicit price deflator for theprivate economy—which measures theprices of the goods and services com-prising GNP excluding the governmentsector—rose 2.6 percent from 1971 to1972, the smallest annual increase since1966. (The overall GNP deflator, whichis heavily affected by government payraises, rose 3 percent for the year.) Withthe farm sector excluded, the privatedeflator rose even less, about 2.1 per-cent. Within the year, the privatedeflator rose 4J£ percent (annual rate)in the first quarter, partly as a resultof the lifting of the late-1971 pricefreeze, about 1% percent in the secondquarter, 2}{ percent in the third, and2% percent in the fourth quarter.

The implicit price deflator is an indexbased on shifting weights and its

changes reflect both price changes andthe changing mix of the goods andservices in GNP. A measure of pricechange for private GNP based on fixedweights rose more rapidly than theimplicit deflator throughout 1972, andfor the year as a whole was up 3.2 per-cent, compared with a 4.5 percent in-crease from 1970 to 1971. The differencebetween the 3.2 percent increase in thefixed weight index and the 2.6 percentincrease in the implicit deflator is dueto the decreasing importance in 1972 ofcertain products with relatively highdeflators and the increasing importanceof products with relatively low deflators.Most important was a shift of outputcomposition away from nonresidentialconstruction and toward durable goods,especially automobiles.

Consumer prices

Consumer price increases were gen-erally slower last year than in 1971.The overall consumer price index wasup 3.3 percent for the year, comparedwith a 4.3 percent rise in 1971. The


January 1973

26 SUEVEY OF CURRENT BUSINESS January 1973

increase in prices for food accelerated in1972, however. With food prices ex-cluded, the consumer price index in-creased about 3 percent for the year.Food price increases were concentratedin the meats-poultry-fish group and thefresh fruits and vegetables group.Strengthening demands pushed meatprices up strongly early in the year,and again in the early summer. In anattempt to increase supplies and easeprice pressures, import quotas werelifted at midyear; price increases didslow in the late summer, but by yearendprices were rising strongly again. Theincreases for fruits and vegetables weredue in large part to the effects ofadverse weather conditions.

Prices for nonfood commodities wereup 2.3 percent for the year 1972,

CHART 16

Price ChangesPercent Change

Based on Annual Averages

2 4

IMPLICIT PRICEDEFLATOR

Private, Total

Private Nonfarm

WHOLESALE PRICEINDEX

All Commodities

Industrials

CONSUMER PRICEINDEX

All Items

All ItemsLess Foods

* Based on Jan.-Nov. average for 1971 and 1972.

U.S. Department of Commerce, Bureau of Economic Analysis 73-

compared with an advance of 3.8 per-cent in 1971. The deceleration wasmainly in apparel prices (but not foot-wear), and in prices for new cars andhousehold durables. Services prices rose3.8 percent for the year, well below theincreases of other recent years. Thisdeceleration was due mainly to smallerincreases in prices of transportation,medical care, and household servicesother than rent (which include mainte-nance and repair, mortgage interestrates, utilities charges, and propertytaxes).

Wholesale prices

The rate of wholesale price increaseaccelerated in 1972, both for the yearas a whole relative to 1971 and duringthe year, but the acceleration was dueentirely to increases in prices of agri-cultural products. Prices of livestockwere responsible for much of the rise inthe spring, and vegetable prices wereincreasing rapidly in the spring andthe summer. Grain prices were risingsharply in the second half of the year;this was due both to the large wheatsales negotiated with the Soviet Unionearly in the summer and to wet weatherwhich seriously delayed harvesting in

the fall. Processed foods and feed pricesalso rose sharply late in the year, partlyas a result of increased costs of animalfeeds.

The industrial wholesale price indexrose 3.4 percent from 1971 to 1972,about the same as the increase in 1971.Most industrial commodity groupsshowed small or moderate price in-creases over the year. There were,however, two major exceptions to thisgeneralization all year—lumber andwood products, and hides-skins-leather.Demand for lumber was strong all yearas a result of the housing boom, andshortages developed, patricularly forsoftwood lumber. Late in the summer,the Price Commission imposed controlson many lumber companies which hadpreviously been exempt because of theirsmall size, and salvage operations inNational Forests were stepped up toincrease the supply of lumber and easeprice pressures.

Prices in the hides-skins-leather groupalso increased at a very rapid rate in1972. The major reason for the risewas the shortage of raw hides and skinsthroughout the world, and the con-sequent rising prices in world marketsfor which the United States is a majorsupplier.

Corporate Profits

THE recovery of corporate profits andcash flow, which began in early 1971,continued in 1972 (chart 17). In thethird quarter (the latest for whichdata are available) book profits wereat a seasonally adjusted annual rateof $95% billion. At that rate, profitsstood $12% billion above the fourthquarter of 1971 and $6% billion abovethe previous peak reached in late 1968and early 1969. Book profits increased$5 billion in the first quarter; $3%billion in the second, and a little morethan $4 billion in the third.

Profits in the second quarter wereaffected by writeoffs of physical assetslost in the June floods. BE A has esti-mated those losses at about $1% billion(annual rate) in that quarter, as a

result, the second quarter profits in-crease was $1% billion less than itotherwise would have been and thethird quarter increase was swelled by$1% billion.

Cash flow—undistributed profits andcapital consumption allowances—con-tinued to surge in 1972. From thefourth quarter of 1971 to the thirdquarter of 1972, cash flow rose nearly$10 billion to a seasonally adjustedannual rate of $95% billion.

Profits last year and in 1971 wouldhave been higher had it not been forthe liberalization of rules for calculatingdepreciation introduced in 1971 (theADR system). The effect of thatchange was to raise depreciation andreduce profits: 1971 profits were $1


January 1973


billion lower because of the introduc-tion of the ADR system and 1972profits $2% billion lower. There wereconsequent reductions in corporate taxliability, amounting to a little less than$& billion in 1971 and $1J£ billion in1972.

The Revenue Act of 1971 also rein-stituted a 7 percent tax credit forinvestment in machinery and equip-ment. That tax action lowered corporatetaxes by $l}i billion in 1971 and $3billion in 1972.

Book profits include gains or lossesdue to differences between the replace-ment cost of goods taken out of inven-tory and the cost at which these itemsare charged to production. The na-tional income profits figure measuresonly incomes arising from currentproduction and, consequently, inver

tory gains or losses are excluded. Therecovery of profits on the national in-come basis was less than the recovery ofbook profits; from the fourth quarter of1971 to the third quarter of last year,national income profits rose $10# billionto $89% billion.

Profits of financial institutions wereup $1% billion during the first 3 quartersof last year to a seasonally adjustedannual rate of $18}£ billion. Nonfinancialcorporations' profits increased $8}£ bil-lion to an annual rate of $71% billion.The profits of durable goods manufac-turers rose fairly sharply in the firsthalf of the year but declined slightly inthe third quarter, mainly because ofweakness in auto producers' profits. Onthe other hand, profits of nondurablesproducers increased only a little inthe first half of 1972 but rose sharply in

the third quarter as a result of big gainsin the petroleum and chemical indus-tries. In industries outside manufactur-ing, profits declined in the openingquarter of the year but increased fairlystrongly in both the second and thirdquarters.

The growth of profits of nonfinancialcorporations in 1972 was the result ofincreases both in the volume of realoutput and in profit per unit of out-put—i.e., profit margin. The 1972 risein profit per unit reflected moderategrowth in unit price and very littlechange in unit cost. Unit labor cost in-creased a little in the first quarter andshowed virtually no change in thesecond and third. Nonlabor cost perunit declined slightly during 1972 asexpanding volume spread fixed costsover more output.

Profits and Cash Flow

CHART 17

Billion $

125

100

75

25

PROFITS

Before Tax Book Profits

Before Tax ProfitsPlus IVA

After Tax Book Profits

I i i i I i i i

100

75

50

CASH

i i

FLOW*

• ^ - ^

i i i i 1 t i i 1 i i i 1 i i i

1968 1969 1970 1971 1972


*Capital consumption allowances plus undistributed profits.


Financial Developments

MONETARY policy in 1972 accom-modated economic expansion, andcredit was readily available at an aver-age cost a little below that in 1971 andwell below the levels of 1969 and 1970.Nearly $159 billion (annual rate) wasborrowed in financial markets duringthe first 3 quarters of 1972, a little morethan the record volume raised in thefull year 1971. (Fourth quarter dataare not available as this issue of theSURVEY goes to press.)

Credit demands

The composition of borrowing lastyear differed from that in 1971 in anumber of important respects. First,there were noticeable shifts in thevolume of funds raised by maior bor-rowing groups, as governments (especi-ally the Federal Government) andforeigners did less borrowing than in1971 while nonfinancial corporationsstepped up their borrowing moderatelyand households significantly (table 6).Second, the reduction in Federal bor-rowing last year was slightly more thanoffset by an acceleration of private bor-rowing, comprising a modest increase inthe volume of funds raised in long-term

markets and a sizable step-up in short-term borrowing. Third, the increase inprivate long-term borrowing was dueentirely to growth of mortgage debt

Table 6.—Total Funds Raised in CreditMarkets by Nonfinancial Sectors

[Billions of dollars]

TotalNonfinancial business

Short-term debt .Corporate bondsM ortgagesStocks . . . . -

Households .MortgagesOther . -

U S Government2

State and local govern-ments - - .

Foreign -

1968

97.839.115.812.911.3- . 8

31.916.015.9

13.4

10.4

3.1

1969

91.750.823.912.110.4

4.3

32.617.515.1

- 3 . 6

8.7

3.3

1970

101.649.510.520.312.0

6.8

22.313.98.4

12.8

13.9

3.0

1971

156.363.09.1

19.420.913.4

41.625.915.7

25.5

20.6

5.6

19721

158.868.316.212.626. 712.8

60.236.923.3

11.2

16.8

2.2

1. First three quarters expressed at seasonally adjustedannual rates.

2. Does not include federally sponsored credit agencies.Source: Federal Reserve Flow of Funds Accounts.

of households and nonfinancial corpo-rations, as the volume of new bondissues fell below that in 1971. Newissues by State and local governmentsfell slightly, partly because, on a con-solidated basis, these governments ran


January 1973

28

big budget surpluses. New corporatebond issues were well below the peakvolume recorded in 1971, as corpora-tions had apparently ended the practiceof borrowing at long term for the pur-pose of rebuilding liquid asset holdingsthat had been depleted during the creditstringency of 1969 and early 1970.Fourth, corporations were willing to in-crease their short-term liabilities in 1972and money market borrowing increasedsignificantly for the first time since1969. The strengthening of short-termcredit demands that occurred last yearalso reflected a marked step-up in con-sumer borrowing, particularly in theuse of installment credit.

Credit costs

The year opened with interest ratescontinuing the steep decline that beganwith the introduction of the New Eco-

IHHHHHHBHHHHHHH CHART 18

Short-and Long-Term Interest Rates

Percent

0

8

6

4

2

/ /

-

i ^ Federal

\ 9 \ \

\ \ V3-Month V A

Treasury Bills ^

>

Funds Rate

-'Prime Commercial Paper

(4-6 Months)

\7 \

10

/> ^ ^ F H A New Home' \ Mortgage Yields

Long-Term state and Local(Bond Buyer)

1968 1969 1970 1971 1972

Data: FRB, HUD, Moody's, Bond Buyer & Treasury


SUEVEY OF CUREENT BUSINESS

nomic Program in mid-summer 1971.By late winter and early spring, how-ever, the accelerating pace of economicactivity resulted in a strengthening ofshort-term credit demands, and moneymarket rates began to move up (chart18). The rise in short-term ratesaccelerated somewhat after mid-sum-mer and especially so toward year-end, as credit demands intensified andas the monetary authorities movedtoward a less accommodative creditpolicy posture. As the year closed, theprime commercial loan rate—the ratebanks charge their most creditworthyborrowers—was raised from 5% per-cent to 6 percent. The prime rate was5}i percent in July and August and 4}£percent at its low from mid-Februaryto mid-March.

The rise in interest rates during 1972was confined to short-term markets aslong-term yields showed very little netchange. At year end, yields on corporateand State and local government bondswere a little lower than they had beenearly in the year, yields on long-termGovernment securities virtually un-changed, and those on FHA-insurednew home mortgages were a bit higher.

Monetary policy

The general guidelines for monetarypolicy in 1972 were made clear early inthe year: The monetary authorities didnot intend to allow the recovery of eco-nomic activity to falter for want ofmoney or credit, nor did they intendto release the forces of a renewed in-flationary spiral. The year began withthe monetary authorities pursuing astimulative policy, but by the springthe policy statements of the FederalOpen Market Committee indicated thatthe objective of policy had becomesomewhat less accommodative. By mid-summer, some tightening in money andcredit markets was evident and, as theyear drew to a close, that tighteningappeared to be intensifying.

The impact of monetary policy on theeconomy is only crudely reflected bythe behavior of the monetary aggre-gates. However, as may be seen fromtable 7, most of the aggregates grew at afaster pace in 1972 than in other recentyears except the easy credit year 1968.

January 1973

lyioreover, most of the aggregates grewat a fairly rapid rate throughout theyear with the exception of the thirdquarter, when growth of total reservesslowed and nonborrowed reserves de-clined slightly. (In table 7, the calcu-lations of percent changes in reservemeasures for the fourth quarter weremade with an adjustment to account forregulatory changes affecting reserve re-quirements (Regulation D) and checkcollection (Eegulation J) that becameeffective in early November.)

CHART 19

Bank Reserves and Bank Credit

Billion $ (Ratio scale)

40

35

30

25

NONBORROWED RESERVES

^ — • *

M l l l l l l " . , , , , , ! , , , , | M I I I

r

___

. . . M l . . . . .

600

500

400

360

320

280

240

220

120

100

80

60

50

40

BANK CREDIT ^

Total

—

7-

-

-

Total Loans

Business

OtherSecurities

^ -

Loans

y N- ^ U.S. G

Se

^ *

>

3vernment:urities

-

-

—

l l l l f , , i M I l l i , ,

1968 1969 1970 1971

Seasonally Adjusted


1972

Data: FRB

73-1-19


January 1973


Bank credit

The expansion of total loans andinvestments at commercial banksamounted to $68% billion from the endof 1971 to the end of 1972, a markedacceleration from the previous recordgain of a little less than $50 billion in1971. All of the acceleration in bankcredit expansion last year was due to astrengthening of loan demand, as thegrowth of the investment componentslowed sharply, particularly after mid-year (chart 19).

Bank loans increased $56 billion dur-ing 1972, nearly twice the advance in1971, with all major loan categoriesrecording big gains. Lending was notice-ably stronger in the second half of theyear than in the first, mainly becauseof an acceleration of growth in con-sumer and business loans. Borrowing by

consumers increased $6 billion in thesecond half of 1972 as compared to $4billion in the first half and businessloans rose $8% billion as compared to$5% billion.

The investment component of bankcredit rose nearly $12% billion during1972, appreciably less than the $21}£billion growth in 1971. Banks addedabout $11 billion to their holdings ofState and local securities but addedonly $1# billion to their holdings ofU.S. Government securities, all of whichoccurred in the first half of the year. Inorder to accommodate the strengtheningof loan demands, banks liquidated about$1 billion of U.S. Government securi-ties in the second half of 1972.

Savings and loan associations

Records were also set last year forthe growth of savings flows to the

savings and loan associations and theirmortgage commitments and mortgagelending. Savings flows to the S&L'stotaled $32% billion last year, some $4billion more than the record flow in1971. Inflows were strongest in the firstquarter ($10% billion, seasonally ad-justed) and weakest in the fourthquarter ($6% billion).

Mortgage debt holdings of the S&L'sincreased $31% billion last year, com-pared with $24% billion in 1971.Mortgage commitments also recordeda record advance, increasing $5% billionto $18% billion by yearend. However,the rate of increase slowed appreciablyas the year wore on; commitmentsincreased about $2 billion (seasonallyadjusted) in the first two quarters of1972, $1% billion in the third, and onlyabout $% billion in the fourth.

Table 7 .^Percent Change in Selected Monetary Aggregates 1

[Seasonally adjusted]

Total reserves

Nonborrowed reserves _

Keserves available to support private nonbank deposits3

Money stock (Mi)

Money stock plus time deposits at commercial banks other thanlarge CD's (M2) .

1968

10.0

8.0

10.9

7.8

9.3

1969

2.7

1.4

1.2

3.2

2.3

1970

4.1

7.2

5.9

5.4

8.1

1971

7.3

8.1

7.8

6.2

11.1

1972

10.6

7.5

10.2

8.2

10.7

1972

I

2.5

2.7

2.7

2.3

3.3

II

3.2

3.3

1.8

1.2

2.1

II I

0.9

— 5

2.5

2.1

2.3

IV 2

3.6

1.9

2.8

2.2

2.5

1. Change calculated from end of period to end of period.2. Percent calculations for reserves measures based on adjustment made for change in Federal Reserve Board Regulations

D and J, which became effective November 9,1972.3. Total reserves less reserves needed to support Government deposits and interbank deposits.

Source: Federal Reserve Board.


January 1973

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