V FEDERAL RESERVE BANK OF NEW YORK 243

The BuineBs Situation

Strikes in the automobile industry had a significant im- would reach $48.7 billion at an annual rate, up $2.0 bil- pact on most business indicators in October and November, lion from the rate now expected for the final quarter but thesc arc now settled and the underlyingstrength of the of 1964. domestic economy appears sufficient, on balance, to sup- While the settlements in the automobile industry have port further expansion. Work stoppagesarising out of removed some significant uncertainties from the economic labor-management disputes arc always difficult to evaluate picture, other problems—including important labor nego- in terms of their impact on business trends, current and fu- tiations—still lie ahead. The most immediate question con- ture. While strikes are in progress, output, sales, and pay- cerns the possibility of an East and Gulf Coastdock strike rolls in the industry involved are of course lower than would on . In the somewhat more distant future, otherwise be the case, and when settlements arc finally there is, of course, the possibility of a strike in the steel in- reached there may be attempts to make up for lost produc- dustry after April 30. The results of these various negotia- n; Only after some passage of time arc these distortions tions are certain to have an important bearing on the out- dually removed. In addition, both the strikes and devel- look for a continued orderly economic advance and for opments after their settlement may influence production price st.ability. With regard to recent price movements, the and employment in other industries not directly involved, consumer price index in October edged up by 0.1 per- and these influencesmay have secondary effects on prices, centage point to reach 108.5 per cent of the 1957-59 aver- inventory behavior, and expectations. age. For the year through October, the consumer price Whatever the net effect of all these forces may be, it index advanced by I per cent from the average for the remains true that with the settlement of the strikes at both final quarter of the year before, compared with a rise of General Motors and Ford the entire automotive industry 1.2 pcr cent in the corresponding 1963 period. Specific is now producing cars and allied products at peak ratcs price announcements related to industrial commodities and should provide a substantial push to economic activity Cofltifluc mostly on the up sidc, and weekly data for No- in the months to come. At the same time, the economy is vember suggest that the industrial component of the whole- moving into the Christmas season amid expectations of sale price index moved up further in that month,foHowing record sales even after allowing for seasonal influences. a modest advance the month before. The Census Bureau's October survey of near-term con- sumer buying plans, moreover, would generally seem to PRODUCYION,TNEw ORDERS. AND EMPLOYMENT support the outlook for further improvementsin sales per- formance at retail outlets over the coming weeks. Aside Reflecting the lost production at General Motors, the from strike effects, personal income and employment have Federal Reserve Board's seasonally adjusted index of in- continued to advance. Leading indicators of activity in the diistrial production dropped by 2.3 pcrcentagc points in residential construction industry in September and Octo- October to 131.7 per cent of the 1957-59 average (see ber, moreover, appeared somewhat stronger than had Chart I). Excluding the substantial drag exerted by the been the case in earlier months. The latest Department of motor vehicles and parts component, however, the over- Commerce-Securitiesand Exchange Commission survey of all index would have shown a slight rise. Iron and steel businessmen's capital spending plans, conducted in No- production rose by 1.3 per cent, reflecting broadly based vember, also points to further near-term strength. In par- demands. Despite the decline in truck production, total ar, the survey indicated that total business spend- output of business equipment advanced by 1 per cent to a for plant and equipment for the first half of 1965 new high. Weekly data for November suggest that auto- 244 MONTHLY REVIEW, DECEMBER 1964

strike at Oueu I dustry, again reflecting the wider impact of the with and RECENT BUSINESS INDICATORS General Motors. Meanwhile, employment state S.osonolly adjusted local governments continued its long-sustained advance, P,T (SOt PS and the service and trade groups also showcd further mod- erate In to the household 130 gains. November, according industrialproduction survey, both total employment and the civilian labor force 123 125 —----IIndujitlolproduction rose, with the gain in the number of people finding jobs .° .icludmg motor - 120 than the in the civilian labor vehiclesand pa,ts considerably larger expansion - ( i,,It,itt,ti, lic force. As a result, the aggregate unemployment rate fell Bill ns .4 dollars BilIlui .5 do Igv; 22 22 to 5.0 per cent, which has been bettered only once since I 20 20 . The unemployment rate for married men also showed marked improvement in November, dropping 18 to 2.5 per cent. Teen-agers, however, remain a serious 16 16 problem; their unemployment rate stood at 14.9 per cent 14 - Monuloctur.rinew durable. order, 14 in November, compared with 14.4 per cent the month •,icIudngmotor vehicles iriji,.,,, is, .,..,,,,.,.. iii. 12 before.

22 22 RESIDENTIALCONSTRUCTION AND RETAIL SALES 20 20 for residential construction in November de- S Outlays 18 18 clined by 0.4 per cent (seasonally adjusted),thuscontinuing

16 Retail .ol.s - 16 the weakening first noted in the second quarter. The latest eticluding culetnelive group 14 .L..L_l I I I I I I L..LI I I I I I I I I I I I I I L 14 1962 1963 1964 * Auiordlng lull,. uJ..r.r.porl. Sour,.,. Boardof 0e..,nur, ,Ith.F.d.raiB.usrv. Syul.n U.ll.dSi,l., O II D.partn.,lat Comn.rce. CONSUMERINTENTIONS TO BUY NEW AUTOMOBILES AND HOUSEHOLDDURABI.ES WIIHIN SIX MONTHS ent Pmoust 5.5 5.5 mobile assemblies made a strong recovery toward the end NRW AUTOMOSILU of the month and that steel ingot production continued to so 50 at a modest rate. expand 4.5 45 New orders booked by durables manufacturers regis- tered a 2.1 per cent decline in October, following a modest 4.0- -40 2.9 per cent gain the month before (see Chart I). The october fall in these orders reflecteda sharp drop in orders 3.5 3.3 for motor vehicles and parts, also attributable to the labor 30 30 ia_s disputes at General Motors. Excluding the motor vehicles 18.5 HOUS8IIOLDDURABIS component, new orders edged up slightly, largely how- ever on strength from the aircraft and parts component which tends to show somewhat erratic month-to-month movements. With new orders above shipments in October, the backlog of unfilled durables orders advanced by 1.9 per cent (seasonally adjusted) to mark the tenth month in a row in which an increasehas beenposted. Nonfarm payroll employment in October moved down by 66,000persons, seasonally adjusted, to 59.0 million. The October decline represented the first time since that this series had turned down. The substantial Jøn Apr Jul Oct in which ac- snob...5 iselIl.. .dkal, 252,000 drop manufacturing employment, PtoN. Buøng pIes. o,. .upmi..d on Il,. ratIo .4 . .h. counted for the fall in the total, was for the most part they blondto bey to ,I,. on&e,.b.r of IesiISssbe th. Iury. Sewes, Uuø.d 5to$on of Ce.n..r Bu,.a.of Ii. Consul. centered in the transportation cquipment producing in- O.po,mmM I FEDERAL RESERVE BANK OF NEW YORK 245

Unit forward-looking indicators of housing activity, however, automotive group posted a good gain (2.7 per cent). to recover somewhat in suggest the possibilitythat the downtrend of the past several sales of new automobilesdid appear months may now be leveling out. In September, nonfarm November, but it will take a few more wecks to assess fully Consumer housing starts posted a modest 2.3 per cent gain after hav- the post-strike strength of automobile demand. Census Bu- ing moved down for two months in a row. In October, buying plans, at any rate, suggest strength. The moreover, nonfarm housing starts rose by 8.9 per cent and reau's mid-Octobersurvey of such plans shows that the pro- the building permits issued posted a slight increase following a portion of consumers planning to buy new cars within the considerable September decline. next six months was markedly above the proportion for Retail sales in October fell by 2.9 per cent, followinga second quarter as well as considerablyabove the correspond- much smaller movement on the down sidc the month before ing 1963 period (see Chart II). The chart also shows that (see Chart I). The October decline was fully accounted for the proportion of consumers planning to purchase house- by a 25 per cent drop in the automotive component, which hold durables within the next six months was even more in turn reflected the limited availability of new cars. As substantially above earlier readings than in the case is also apparent from the chart, retail sales excluding the of cars.

The Money and Bond Markets In November

the The high points of interest in the money and bond mar- City on November 30. The discount rate change was rates kets in November were important monetary policy changes first since , when Federal Reserve discount on both sides of the Atlantic, and a massive cooperative were raised from 3 per cent to 3½ per cent. The Boardof international effort in defense of the pound sterling—all of Governors also announced that effective November 24 it which occurred in the week beginning November 23. The was increasing the maximum rates that member banks are pound sterling had been under pressure in the inter- permitted to pay on savings deposits and time deposits, national markets for some time, and this pressure became while the Federal Deposit Insurance Corporation stated particularly intense on Friday, November 20. Against this that these new ceilings would also apply to insured non- background, the Bank of England on Monday morning, member banks. November 23, raised the bank rate from 5 per cent to 7 The Board noted that these actions were taken "to main- per cent in order to stem further speculative pressures. tain the international strength of thc dollar". The moves Yields in United States markets promptly rose on Monday were "aimed at countering possible capital outflows that as market participants, taken by surprise by the British might be prompted by any widening spread between interest also at action, generally anticipated that the Federal Reserve would rates in this country and the higher rates abroad and follow sooner or later with an increase in the discount rate. ensuring that the flow of savings through commercial banks After the close of business that afternoon, the Board of remains ample for the financing of domestic investment". Governors of the Federal Reserve System announced ap- (See box below for the full statement.) proval of actions by the Boards of Directors of the Federal On Tuesday, November 24, yields on Treasury bills, Reserve Banks of New York, Boston, Philadelphia, Chi- notes, and bonds rose further early in the day but then increase in the Bank cago, and St. Louis in raising these Banks' discount rates steadied at the higher rate levels. The from 3½ per cent to 4 per cent, effectiveNovember 24. On of Canada's rate to 4¼ per cent from 4 per cent had no securi- subsequent days, the other seven Federal Reserve Banks perceptible effect on the United States Government followedsuit: the Federal Reserve Bank of Atlanta on No- ties market. Sizable speculative pressure against the pound vember 25; the Federal Reserve Banks of Dallas, San sterling reappeared on the same day, however, and early Francisco, Richmond, and Cleveland on November 27; and on Wednesday yields again increased in the United States as investors sold on a mod- the Federal Reserve Banks of Minneapolis and Kansas Government securities market