current business statistics - Bureau of Economic Analysis

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neighborhood of $28 billion for this fiscal year; the January budget message showed estimated deficits of $38% billion for fiscal 1972 and $25% billion in fiscal 1973. (For details, see the article beginning on page 14 of this issue of the SURVEY.) These figures generated concern among market participants over the prospective volume of Federal financing demand. However, these fears appeared to abate quickly and conditions in long-term markets were improving as this issue of the SURVEY went to press in the third week of February. Interest rate differential A large backlog of potential longterm credit demands is a major reason why bond yields have not shown much response to easier conditions. Whenever yields do decline, the result is apparently to stimulate new security offerings by corporations and State and local governments. The volume of new issues, which swelled immensely in 1971, has remained very large in recent months. This, as well as the persistence of inflationary expectations, has kept bond prices depressed and yields high. Moreover, cautious business attitudes have kept a damper on investment in fixed assets and inventories, so that a considerable part of the proceeds from long-term borrowing has been used to purchase short-term financial assets and to fund short-term liabilities. This has had the effect of increasing the demand for and reducing the supply of short-term financial assets, thereby exerting considerable downward pressure on short-term interest rates and contributing to the short-long yield spread. Heavy buying of Treasury bills and special Treasury issues by foreign central banks was an important force pushing down bill rates last year. This buying reflected the fact that private foreign (and domestic residents, too) were shifting out of dollar assets and into other currencies, and foreign central banks were investing in Treasury issues the dollars they accumulated supporting exchange rates. This sort of shift out of dollar assets probably put upward pressure on rates and yields SUEVEY OF CUEEENT BUSINESS February 1972 in various sectors of the U.S. financial markets, while foreign central banks buying of Treasury issues put downward pressure on the bill rate. Foreign central bank buying of Treasury issues has continued but the volume of buying has moderated since the establishment of new exchange parities last December. Given the unusually wide spread that currently prevails between short- and long-term rates, it seems quite possible that short-term rates will move somewhat higher and that they can do so without transmitting pressures to longterm rates. Business is expanding plant and equipment investment and is expected to accelerate inventory investment. An expansion of physical asset acquisition will employ funds that have ,been used to acquire liquid assets. As economic expansion continues, loan demands will strengthen and bank credit growth will center more in loans and less in investments, and this, too, should exert upward pressure on short rates. Also, the projected volume of Federal borrowing in the months ahead is considerable and this will add upward pressures to short-term interest rates. Moreover, the huge volume of bond and stock issues that had already occurred suggests that long-term interest rates will not be sensitive to some moderate firming in short-term rates. Also, moderation of inflationary expectations would facilitate downward adjustments in long-term rates in the months ahead. Furthermore, it is possible that demands for long-term credit will be moderated by the expected big increases in profits and cash flow. Commercial banks The move toward a more stimulative credit policy has been reflected in the growth of member bank reserves, which are the base for money and credit expansion. After showing no growth in October and November, nonborrowed reserves increased moderately in December and strongly in January (chart 1). As a result, bank credit expansion has accelerated sharply. After recording average monthly gains of $3}£ billion (seasonally adjusted) from August to November, total loans and investments at commercial banks rose $4% billion in December and $7 billion in January. Until January, loan expansion was sluggish and bank credit expansion was heavily concentrated in investment in State and local securities. Since last August, banks have added nearly $8 billion to their portfolios of State and local securities and were a major support factor in this market. On the other hand, since August, banks have reduced their holdings of U.S. Government securities by about $1 billion. This development reflects the strong demand and relatively short supply of these securities that has depressed their yields and made them a relatively unattractive investment for the banks. Loan demands were very sluggish in the closing months of last year, and the loan component of bank credit grew very little. Consumer and real estate loans were showing fairly sizable gains but this was largely offset by weakness in business loans. After showing modest growth in the summer, business loans were unchanged in the closing quarter of last year. Business loans remained weak in January but the aggregate loan component of bank credit surged $5% billion. The expansion was broadly based; consumer and real estate loans showed further sizable gains and loans to security dealers and nonbank financial institutions accelerated strongly. Deposit expansion at commercial banks has mainly been in time and savings deposits, which showed a seasonally adjusted increase of $17 billion to $274.4 billion (16 percent at an annual rate) from last August. Growth has been strongest in recent months and has centered in consumer type deposits, reflecting the relatively attractive rates paid on such deposits. Though interest rates on savings deposits have declined somewhat in recent months, they have not come down nearly as far as have other shortterm rates. Consequently, savings accounts and "consumer type" certificates of deposit have become a relativety more attractive outlet for funds. Private demand deposits have not increased since last August. Demand
February 1972 SUEVEY OF CUEEENT BUSINESS deposits declined slightly from August to November, showed little change in December and rose slightly ($% billion) in January. Given the relatively strong expansion of economic activity in the closing quarter of last year and the accommodative posture of credit policy, the reasons for the very slugguish behavior of demand deposits are not at all clear. However, it seems highly probable that the growth of private demand deposits will accelerate in the very near future. The banks are amply supplied with reserves and credit is readily available, business activity appears to be on the rise, and the Treasury will be running down its cash balances. National Accounts in the Fourth Quarter On the basis of more complete source data, BEA has revised the estimates of national income and product for the fourth quarter of 1971. Total GNP for the quarter was unchanged but the components of GNP were subject to various revisions that proved to be offsetting in the aggregate. Use of additional price data that became available after the preliminary estimates were made resulted in generally small changes in the implicit deflators of the major GNP components. The net result was a small upward revision of the overall deflator and a small downward revision of total GNP in constant prices. The revised estimates show the deflator to have risen 1.7 percent at a seasonally adjusted annual rate and real GNP 5.8 percent. Estimated investment in producers' durable equipment, in current prices, was boosted nearly $2 billion in the revision process and investment in nonfarm inventories was raised $1 billion. Eevisions in other components of fixed investment, in consumption, and in government purchases were all very small. There was a downward revision of exports of goods and services and a rather sizable upward revision of imports. The December figures on merchandise trade, published late in January, indicated that trade in the quarter was even weaker than had been expected—imports were larger and exports smaller. The revised GNP estimates show exports of goods and services to have fallen $7% billion (seasonally adjusted annual rate) in the fourth quarter and imports to have fallen $3% billion; the preliminary estimates showed declines of $7 billion and $5 billion, respectively. The large fourth quarter declines in both exports and imports were one facet of the distortion of the trade data in the second half of 1971 because of actual dock strikes and shipments in anticipation of strikes. Balance of payments The revised estimates of exports and imports of goods and services indicate that the balance on goods and services moved from zero in the third quarter The unemployment rate was 5.9 percent in January, compared with 6.0 percent in December. It thus continued to run at the level that ha^ prevailed for the past year or more. The rates for the major age-sex groups were aho generally little changed from December to January, with the adults' rate down somewhat and the teenagers' rate up. With the release of the January figures on labor force and employment, the Bureau of Labor Statistics published the regular annual revision of the seasonal adjustment factors reflecting incorporation of one more year of data into the calculation of the factors. As is typical, the updating of the seasonal factors had little impact on the patterns shown by the data. The overall unemployment rate for 6 months of 1971 was unaffected; the revision was only Employment and Income in January to a $4% billion deficit (annual rate) in the fourth. Sufficient data are not yet available to calculate the full ^pectrum of measures of the U.S. external position in the fourth quarter; estimates of the balance on current account and the balance on current account and longterm capital will not be published until mid-March. The available data do indicate that the net liquidity balance and the balance on official reserve transactions both improved in the fourth quarter (i.e., the deficits shrank). This occurred because identified capital flows and transactions for which fourth quarter data are available showed sharp favorable shifts which outweighed the unfavorable shift in the balance on goods and services. However, the deficits were still very large. The net liquidity balance was in deficit by $4.5 billion (seasonally adjusted, not at an annual rate), compared with $9.3 billion in the third quarter. The official reserve transactions balance was in deficit by $6.1 billion, compared with $12.2 billion in the third quarter. Details and analysis of the fourth quarter balance of payments will appear in the March SURVEY. 0.1 percentage point in 5 months of the year and 0.2 percentage point in only one month (June, a month that had shown an unsually sharp decline of 0.6 percentage point to a relatively low rate of 5.6 percent). The revised data still show a strong rise in employment and the labor force in the second half of 1971. The January labor force estimates are also affected by an adjustment of the population survey on which they rest to population controls derived from the 1970 Census. This is a one-time upward adjustment in population, labor force, and the labor force components (employed, unemployed). The January estimates of labor force, employment, and unemployment were all raised by about the same percentage over estimates based on 1960-based population controls; therefore, the overall unemploy-
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