ECONOMIC

Partly as a result of the desire of business firms for increased liquidity,commercial and industrial loans at commercial banks declined throughoutthe first half of the year, as they have generally done during the recovery,but a marked upturn in business loans began in October 1976. As was trueof the temporary turnaround in late 1975, a large proportion of thisincrease was in the form of bankers' acceptances—short-term money marketinstruments counted as bank loans—an indication that the turnaround againmight be temporary.In 1976 internal financing covered about 90 percent of total capital outlaysfor nonfinancial corporate business compared with more than 100 percentin 1975 when inventories were being liquidated. The fraction, however,remains well above any seen since the mid-1960s, and business use of externalfunds remains relatively weak. As the growth of investment continues in1977, the internal financing fraction should continue to decline and thedependence on external finance should increase.Proportionately more of the increase in long-term funds raised from externalsources by business corporations in early 1976 was in the form of equities(Table 20), but this trend was interrupted in the third quarter. Stock marketprices were higher in 1976 than in 1975, although they remained relativelysteady during the year.Increased borrowing in the household sector absorbed most of the decliningshare of U.S. Government borrowing in 1976. Home mortgage borrowingincreased sharply in the third quarter and accounted for most of the netchange in total mortgages during this period. Flows into thrift institutions,especially into savings and loan associations, were stimulated by decliningmarket interest rates relative to deposit rates, and they provided the majorshare of funds to support this demand for mortgages.TABLE 20.—Funds raised in credit markets by nonfinancial sectors, 1971—76[Billions of dollars; quarterly data at seasonally adjusted annual rates]Sector and credit market instrument1971-74average1II1975IIIIV11976IIIIITotal funds raised _178.6156.9211.6222.0250.9233.6250.3258.8U.S. GovernmentState and local government _Nonfinancial business l ..15.116.682.959.611.743.3102.016.040.994.016.343.885.215.462.673.412.060.574.221.465.578.918.956.0Corporate debt instrumentsCorporate equities56.78.627.37.719.212.924.36.937.912.232.812.634.114.031.96.1Households 256.433.944.054.266.671.174.687.0ForeignHome mortgagesConsumer credit37.715.47.728.5.98.338.51.38.842.214.313.848.217.721.151.518.116.653.220.614.760.619.218.01 Also includes farm and nonfarm noncorporate not shown separately.2 Also includes mortgages other than home, bank loans n.e.c, and other loans.Note.—Detail may not add to totals because of rounding.Source: Board of Governors of the Federal Reserve System.83