2 MONTHLY REVIEW,JANUARY 1965

The Business Situation

Economic activity was continuing a rise of almost four sion in the first quarlcr of 1965. Capital spending plans years' duration as 1964 drew to a close, and most fore- for 1965, on the other hand, appear to have strengthened casts pointed to fuither gains in 1965. Production, employ- since the initial surveys early last fail. ment, and personal income all recovered in November Economic developments in the months ahead will, of from the depressing effects of widespread strikes in the course, also be intluenced heavily by the Administration's automobile industry in the preceding months, and output budgetary decisions that are about to be revealed. Most in both the auto and steel industries continued to climb in business analysts seem to believe that these decisions will December. Unusually heavy Christmas shopping re- result in some net expansionary impact on the economy sulted in an appreciably greater than seasonal rise in and thus will help extend further the current over-all retail sales in December, and businessmen's outlays for advance. new plant and equipment apparently were also increasing. On the other hand, residential construction still showed RECENT INDICATORS someweakness. Price developmentscontinued to be a cause for some concern. Both consumer and industrial wholesale After a strike-induced dip in October, industrial produc- prices rose slightly in November, and some additional rise tion rose strongly in November: the Federal Reserve in the industrial component of the wholesale price index Board's seasonally adjusted index advanced by more than apparently occurred in December. Moreover, a number of 3 full percentage points to 134.9 per cent of th 1957-59 further price rises announced by the steel industry in late average (see Chart I). The bulk of this advance was at- December undoubtedly added to the recently emerging tributable to the return of most automobile workers to climate in which busincssmcn sccm to be less reluctant to their assembly lines, though final scifiemein of issues at a probc markets to dctcrmine whether price increases can be number of local Ford Motor Company plants was not made to stick. reached until late in November. In addition, most other Assessment of the economic outlook for the new year is, industries—including primary metals, furniture and lix- of course, beset with the usual collection of complicating tures, and machinery—registered moderate increases in uncertainties, not the least of which is the possibility of output in the month. In December, most of the automotive disruptions as a result of labor disputes.The strikeof East industry mustered everything at its command in an effort and GulfCoast dock workers will have serious effectsunless to work down the backlog in consumer orders and to re- it proves to be of short duration. There arc also the lingering stock dealers' showrooms. December data indicate that as- possibilities of a nationwide railroad tie-up during the semblies rose about 6 per cent above the pit-strike level winteras well as of a strike in the steel industry on or after and 12 per cent over December 1963. The stepped- May 1. Another determinant of the course of over-all up pace of activity in the automobile industry also influ- activity in the months ahead is likely to be business spend- enced steel ingot production, which continued to rise in ing. A Commerce Department survey taken in November, December. Steel ingot output for the year as a whole is which may not fully reflect the possible hedge buying of now estimated at 127 million tons, 9 per cent more than steel, indicated that manufacturers already anticipated a the previous record reachedin 1955 and 16 per cent above substantial increase in their inventory holdings in the final 1963. Strength in over-all production during the months quarter of 1964 and a somewhat more moderate cxpan- ahead is suggested by the high level of unfilled orders on Monthly Review FEDCRAL REBERVC DANK OF

Index for the Year 1964

Guide to Page Numbers issue Month issue A'fonrlt of jssue Page.s Month of issue Pages Month of Pages of Pages 121 — 140 October . 185 —204 January 1 —20 April .... 65 — 80 July — 141 — 160 November 205—240 February 21 —44 May . 81 96 August March 45 —64 June 97 — 120 September 161 — 184 December 241 — 256

Page Page Accord Demand 57, 83. 143, 208 The "aecord"—-a landmark in the first fifty years See also Business Situation of the Federal Restive System, by Allan Sprout 227 Deposits 216 Balance of Payments Nec ecu Rank Credit, Commercial , Monetarypolicy and the balance of payments: Member Banks an address by William MeChesney Martin, Jr. 2 Ste u/co Foreign Exchange Markets: Discount Rates Hayes, Alfred; International Ranking and Foreign 77, 200 Finance; Monetary Policy Federal Restrve Banks (statement) 246 Credit and 214 Dollar Recent banking monetary developments Recent developments in the defense of the dollar: Federal Reserve accounts, nioftey supply. an address by Alfred Hayes 6 and bank credit 250 also Markets See otto Commercial Banks. Member Banks, See Foreign Exchange Money Market EconomicPolicy MeasuresAbroad, Recent 74, 197 Bond Market See Money Market FAge Act and AgreementCorporations in International BankIng and Finance Burgess, W. Randolph (Primary author: George H- Bossy) 88 Reflectionson the early development of openmarket policy 219 Employment IS. 56. 69, 84, lOS. 123, 144, 173, 191, 209, 243 BusinessSituation See also Business Situation Monthly article 14, 28. 56. 68, 83. 243 104. 123. 143. 172, 191,208, Exchange Foreign St'e Market Rates, also Capital Developments and Federal Reserve foreign exchange in the United Recent Treasury States. operations: two reports by CharlesA. Coombs 47, 162 Foreign exchange markets. July-December 1963 Canada and 1964 t28 The of the Canadian Commissionon January-June II, report Royal See also International Banking and Finance Banking and Finance: a review by Francis H.Sehott 151 Sn' also Foreign Exchange Markets Federal Reserse System in the Monthly arsicle. fiftieth annivemsary 19. 42. 61. 79. 93. Capital Market Dtwelopments 202. 237, 254 tinited States, Recent 178 I 19, 138. t56. 182. Treasury and Federal Reserve foreign exchange two CharlesA. Coomhs 47. 162 Capital Spending 16.70,125,192 operations: repoits by See also Business Situation Techniques of member bank borrowing at the Federal Reserve 66 Central Banks,New The Federal Reserve System after fifty years: Primaryautliot : DorothyB. Christelow) 133 an address by Willians F. Treiher 98 Intnmduction by Alfred Hayes to special articles Commercial Banks by %V. Randolph Burgess and 217 The banking system in 1914 42 The "accord"—a landmark in the first fifty years Early response of the coniiiiercialbanks 119 of the Federal Reserve System, by Allan Sproul 227 Reserve discount rate Recent banking and monetarydevelopments 214 Statement on Federal Bank supervision 2s4 and RegulationQ changes 246 See also Canada: Capital Market Developments in Statement on the defense of sterling 246 the , Recent; Currency; Federal See also Currency, Money Market Reserve System; Hayes, Alfred; Member Ranks; Securities and Securities Market Fiftieth Anniversary See Federal Reserve System Construction, Residential 16, 70, 106, 124, 174, 244 See also Business Situation Financingof Government Securities Dealers,The (Primary author: Louise Freeman Ahearn) 107 Consumer Spending 106. 124. 145. 179, 192, 210 See also Business Situation; Sales, Retail ForecastingCurrency In Circulation 36 Coombs, Charles A. (Primary author: Irving Auerbach) 'treasury and Federal Reserve foreign exchange operations: two reports 47. 162 ForeIgnExchange Markets Foreign exchange markets. July-December 1963 Currency and January-June 1964 II, 128 Forecastingcurrency in circulation 36 'Ireasury and Federal Reserve foreign exchange See also Foreign Exchange Markets; operations: two reports by Charles A. Coombs 47, 162 Hayes. Alfred: Money Supply See also International Ranking and Finance Page Page ForeignTrade Monetary Policy See Balance of Monetarypolicy and the balanceof payments: Payments; Hayes, Alfred; Jr. 2 InternationalBanking and Finance an address by William McChesneyMartin, Techniques of member bank borrowing at the Federal Reserve 66 GoM 47 79 162 economic measuresabroad 74. 197 Seealso International and Finance Recent policy Banking Monetarypolicy and a liberal international economy: anaddress by Alfred Hayes 187 GovernmentSecuritIes Market See also Canada, Dollar See Securities and Securities Market Money Market article 85. GovernmentSpending Monthly 17, 32, 59. 71, See Business Situation 116, 125, 147, 175, 193,211,245 Techniques of member bank borTowing at the Federal Reserve 66 Cross National Product The financing of Government securities dealers 107 See Business Situation Recent capital market developments in the United States 178 214 hayes, Alfred Recent banking and monetary developments Recentdevelopments in the defense of the dollar (an address) 6 Money Supply in our Moneysupply and time deposits 2)6 Liquidity expanding economy Federal Reserve accounts, money supply. (an address) - 23 and liberal international and bank credit 250 Monetary policy a See also economy (an address) 187 Currency introduction to special articles by Market W. and Allan 217 Open Operations Randolph Burgess Sproul Trea.surv and Federal Reserve foreign exchange operations: two reports by Charles A. Coombs 47. 162 Industrial Production Reflections on the early development of Domestic 15, 56, 69. 84, 105, 123, 144, 173, 191, 209, 243 open market policy, by W. Randolph Burgess 219 Abroad 74, 197 See also Federal Reserve System. See also Business Situation International Banking and Finance

Orders, New 105, 123, 144, 173, 243 Interest Rates See also Business Situation See Deposit-s.Discount Rates, Money Market Prices 84, 1(16 InternationalBanking and Finance The business situation and recent price trends 28 Foreign exchange markets, July-December 1963 See aFro Business Situation; Economic and January-June 1964 Ii, 128 Policy Measures Abroad. Recent Treasury and Federal Reserve foreign exchange 246 operations:two reports by Charles A. Coombs 47, 162 RegulationQ Recent abroad 74, 197 economicpolicy measures Sales, Retail 15.69. 174. 244 Edge Act and Agreement corporations See also Business Situation in internationalbanking and finance 88 New central banks 133 Scbott,Francis H. Monetary policy and a liberal international The report of the Canadian Royal Commission economy: an address by Alfred Hayes 187 on Bankingand Finance: a review 151 See also Gold, International Monetary Fund Securities and SecuritiesMarket lntenamtmnnal Monetary Fund 196, 246 Governmentsecurities market t7, 34, 60, 72, 86, See also Economic Policy MeasuresAbroad. Recent; 117, 127, 148. 176. 195. 212, 248 Foreign Exchange Markets Other securities markets IS, 35, 60, 73, 87, 118, 127. ISO, 177, 195,213,249 tnventmtes 70 Techniques of memberbank borrowing See also Business Situation at the Federal Reserve 66 The financing of Governmentsecurities dealers 107 See also Money Market: Capital Market Investments 214 Developments in the UnitedStates, Recent; See also Bank Credit; Business Situation; Commercial Banks; international Capital Spending; Construction,Residential; Rankingand Finance: Member Banks; Inventories;Securities and Securities Market Open Market Operations Liquidity Sproul, Allan Liquidityin our expandingeconomy: The 'accord"—alandmark in the first fifty years an address by Alfred Hayes 23 of the Federal Reserve System 227 See also international Bankingand Finance Sterling 12. 51, 129. 164. 246 See also EconomicPolicy Measures Abroad. Recent; loans 214 Markets See also Bank Credit. Securitiesand Foreign Exchange Securities Market Trelber. WiUlam F. The Federal Reserve System after fifty years Mactin, WilliamMechesney, Jr. (an address) 98 Monetary policy and the balance of payments (an address) 2 Unemployment See Business Situation,Employment Member Banks Member bank reserves 17. 33, 59, 71, 86. IJnited States Treasury 116, 126. 148, 175, 194, 211. 247 Treasuryand Federal Reserve foreign exchange Techniques of member bank borrowing operations: two reports by Charles A. Coombs 47. 162 at the Federal Reserve 66 Namingof Reserve Banksas Treasury Recent banking and monetary developments 214 depositories and fiscal agents 202 See also Commercial Banks, Currency, Statement on the defense of sterling 246 Money Market.Open Market Operations, See also Federal Reserve System. Securities and Securities Market Securities and Securities Market FEDERAL RESERVE BANK OF NEW YORK 3

Cl,o,i I sharply curtailed sales of winter apparel. Personal income, RECENT BUSINESSINDICATORS however, recorded a considerable advance in November, S.oionolly with the result that Christmas shoppers were in good finan- Pa c.al cial shape to carry out the buoyant buying plans that had tall..1.1. 135 shown up in recent surveys. Glowing trade reports 130 130 sug- gest that heavy consumer spending did in fact occur. 12 125 Indeed, to the advance retail iOIp oduction according report, sales in De- 1957.5 -100 cember rose to a record $22.8 billion 120 120 (seasonally adjusted), 5 per cent higher than in November and 9 per cent above 115 I ill Ill III ill 115 i I1 '' December 1963. The substantial gain reflected largely a Si I a..______oldeli.,. tdIien. .1 dol ______marked pickup in durable goods sales. These, in turn, were sparked by a very considerable advance in automobile sales as new-modelcars were in bettersupply. Outlays for nonfarm residential construction in Decem- Un liedorder, r.c..ned by ber were off by less than I per cent. Such outlays edged downward in the closing months of 1964 but for the year 16 — 46 as a whole amounted to $26.6 billion, compared with $25.8 billion in 1963. Building permits issued rose 3 cent 11 - 44 by per 4B,ur7CnuIcctur2/'48 in Noveniber and the doliar value of residential construction

I I awards was 4? LI I II II II L.l Ii 111111 '2 up by 12 per cent, although nonfarm housing M I,Ons Mull0,,, el o1o p.ioni starts declined after moving up in the preceding two months. 58 I.rlo A recent forecast by the CommerceDepartment places non- iNonfopoyrol'lernpIo;rn.n,So farm housing outlays in 1965 slightly above the 1964 54 I liii I Ill! I 1.1. LI_I_I I I II I IIIIIIPI 54 figure. 1962 1963 1964

Sour...:bud .lGo,.,no,. aith. Federal i.c.r.. SysI.m;U,u,..dS.op.. Dipa'riisolComr.•r. e=d Labor. BUSINESS SPENDING PLANS

As the new year began, most business analysts were in- creasingly focusing attention on the probable course of business spending in 1965. One area of immediate inter- the books of durables manufacturers. Such backlogs rose est is investment in inventories, especially in view of indi- for the eleventh cations that consecutive month in November,to a level steel users have already begun to stockpile 13 per cent higher than a year ago. linished products in anticipation of a possible strike. A Reflccting the turnabout in production, nonfarni pay- Commerce Department survcy taken in November—which roll employmcnt also turned sharply upward in Novem- may not fully reflect the possible hedge buying of steel— ber, following a decline the month before (see Chart indicated that manufacturers already anticipated a sub- 1). Employment gains were scored by all major industry stantial $1.2 billion increase in their inventory holdings in groups, though the return to work in the automobile in- the final quarter of 1964 and a somewhat more moderate dustry accounted for two thirds of the over-all rise. Total expansion of $0.6 billion in the first quarter of 1965. At employment expanded further in December, according to the same time, manufacturers expected their sales in the the census Bureau's household final survcy, and the rise was quarter of 1964 to remain unchanged from the quarter somewhat greater than the expansion in the civilian labor before, but did anticipate a considerable risc in sales in the force. As a result, the over-all unemployment rate (season- first quarter of 1965. In October and Novemberinventories fell to 4.9 ally adjusted) per cent, a substantial improve- held by manufacturers recorded the two largest monthly ment over the 5.5 per cent figure for the final month of advances in the current upswing,which suggeststhat manu- 1963. For one of the most important groups in the labor facturers would actually carry (Jut fourth-quarter inventory force, the improvement has been relativelyeven more sub- building plans. if inventory and sales expectations for the stantial: the for jobless rate married men stood at only 2.7 first quarter of 1965 are realized, the inventory-sales ratio per cent in December, as against 3.3 per cent a year ago. for manufacturers at the end of the first quarter will he no Retail sales declined in November, the third successive Iigher than the reading for the third quarter of 1964, a month of slippage, as unusually warm weather apparently figure that was relatively low by historical standards. 4 MONTHLY REVIEW, JANUARY 1965

ii for a 4.2 per cent advance in 1964, compared with the 13.9 ACTUAL AND ANTiCIPATED per cent increase over 1963 now expected for 1964. 1962-64 PLANT AND EQUIPMENTSPENDING, There arc now other indications that capital spending BillionsI dolIms Seasonally odjuiied,eansol ,utøi Billions oldolfeirt ______dO will show strength through the first half of the new year. Qucrierly .ltimQtCI to a Commerce Department-Securities and Ex- Iroun According Novomb.rsurY.y Commission survey taken inNovember—i.e., some- 48 40 changc what later than the McGraw-Hill survey—businessmen's / spending plans for the first quarter of 1965 were $1.2 46 'p 46 billion above the expected figure for the final quarter of 1964. At the same time, businessmen expected their 44 44 spcnding for plant and equipment to expand by an addi- tional $0.8 billion in the second of 1965. The ,/ Quorlerfy 4ilmaios quarter fromAugusi wtvey in the first half of the was 42 42 indicated advance year pro- jected to come largely from the manufacturing sector. If the expected average gain in the first and second quarters 40 40 were to be extended over the rest of the year, the estimated Acluol year-to-year gain for 1965 would be approximately 10 38 38 per cent. The National Industrial Conference Board has recently its 36 36 reported that,according to survey,capital appropriations ______I I by manufacturerswere up strongly in the third quarter. 1962 / 1964 INS Such tend to lead two to appropriations capital spending by 5omc..Uniol Sins.. D.pcvtsni.f Corn n.,c.5.cn,jii.. ndbch., Coarn1unn. three quarters. Thus, manufacturers' plans for enlarged capital spending through the first half of 1965 may well be firm.

As in previous years, business capital spending in 1965 will be an important determinant of the course of business ______activity. Such outlays, of course, tend to increase pro- ductivity and to accelerate real economic growth, in addi- PERSPECTIVC ON 1904 tion to their immediate influence on aggregate economic each the Federal Reserve Bank of New with to course of Early year activity. The first clue regard the plant York review of and in 1965 was the fall publishes Perspective, a nine-page equipment spending provided by the course of the economy during the preced- 1964 McGraw-Hill survey of businessmen'scapital spend- businessmen find the booklet useful which to about a 5 cent over-the- ing year. Many ing plans, pointed per as a of the economic highlights for 1965. When this 1965 level of layman's summaiy year gain projected plant treated more in the Bank's Annual Report, and is with the $46.7 billion fully equipment spending compared available in mid-March. If would like to receive annual rate of now in the final you spending expected quarter without on I 964—it is available of 1964 Chart the advance amounts to 0.3 charge Perspective (see 11), only now—write to Public Information Fed- cent. the fall McGraw-Hill has in Department, per However, survey past eral Reserve Bank of New York, 33 Liberty Street, of uninterrupted business expansion tended to under- years New York, N. Y., 10045. state the mark on average by about 7 percentage points. For example, the 1963 fall McGraw-Hill survey had called