FEDERAL RESERVE RANK OF' NEW YORK 95 The Business Situation Recent developments suggest that the economy may be of the Department of Commerce. Just as the previous resuming an expansionarycourse. Housing starts and build- quarter's GNP had been depressed by the General Motors ing permitsshowed renewed strength in March, suggesting strike, the first-quarter gain in GNP was swelled by the that further gains in residential construction spending are rebound of activity from the strike. The average quarterly likely to emerge in the coming months. Similarly, the con- increase in GNP over the two quarters was a modest tinued large volume of statc and local government bond $16.5 billion. Real GNP rose at a seasonallyadjusted financing indicates some additional spending thrust from annual rate of 6.4 perccnt in the first quarter in 1971. this sector. However, the extent of overall economic growth with the gain in automotive production more than ac- for the balance of the year depends critically on the counting for the increase. Over the two quarters ended behavior (If consumer spending. In the first quarter, in March. real (iNP rose at a very low annual rate of consumer expenditures as recorded in the gross national 1.1 percent. product (GNP) accounts posted a large increase which The first-quarter increase in final expenditures—that is, was primarily the result of the rebound in spending on GNP less the inventory component—amounted to almost motor vehicles from its strike-depressed fourth—quarter $30 billion, with 60 percent of that gain arising from the level. However, advancc retail sales data for March and consumer sector. The overall gain in consumer spending some sketchy data for April suggest that consumer outlays rcllectcd higher outlays for durable and nondurable goods for nonautoniotive durahlcs, as well as nondurable goods, as well as for services. The rise in consumer outlays for have been gaining some momentum. In the second quarter. services was in line with recent experience, while the gain a boost in personal income resulting from increasedsocial in purchases of nondurables was of modest proportions. security benefits may reinforce this apparent move toward On the other hand. durables spending increased by a large a stronger underlying pace of consumer spending. $10.8 billion, a gain of 12.7 percent. This expansion in Although there were some encouraging developments durable goods expenditures pushed the ratio of consumer during the first quarter, a clear trend toward a broad-based dtirabks outlays to disposable income to 13.4 pcrccnt. moderation of inflationary pressures has not vet emerged. In the past. similar movements in this ratio have tended On the positive side. the rate of incrcase in consumer to signify a cyclical strengthening in the economy (see prices slowed somewhat during the first three months Chart I). However, inasmuch as virtually all of the first- of the year. On the other hand, even allowing for the quarter strengthening in durables spending reflected the influence of special factors, the GNP deflator continued recovery in automobile sales from their strike-depressed to rise at a rapid rate. Prices of wholesale industrial com- fourth-quarter level, these first-quarter data do not indi- modities, moreover, spurted sharply in April after having cate a firm trend. There were indications, however, that modcratcd in the first quarter. Furthermore, compensa- consumer spending on nonautomotive durables as well tion per man-hour increased by about 7 percent over the as on nondurable goods was quickening toward the end past year. a rate of gain which has not abated despite the of the quarter. marked rise in unemployment. Although there was a large overall first-quarter gain in consumer spending, the savings rate declined by only (12 GROSS NATIONAL PRODUCT percentage point to 7.2 percent—still about I percentage point above its average level for the last two decades (see A $28.5 billion rise in the market value of the nation's Chart I). The high savings rate, coupled with the large total output of goods and services during the first quarter rise in consumer outlays. was made possible by the gain raised GNP to a seasonally adjusted annual rate of in disposable personal income in the first three months of S 1,018.4 billion, according to the preliminary estimates 1971. Indeed, fueled by higher personal income payments 96 MONTHLY REVIEW,MAY 1971 ChartI gage credit—amounted to a record 23 percent on a sea- PERSONAL SAVINGS AND DURABLE GOODS CONSUMPTION sonally annual rate basis. The effective interest AS A PERCENTAGE OF DISPOSABLE INCOME adjusted Seasonally adjusted annualrates rate on conventional mortgages declined to 7.66 percent Percent Percent in basis below record 8.52 8 March, 86 points the high of percent reached in August 1970. In addition, over this 7 7 seven-month period, the loan-price ratio on these mort- gages increased, indicating a lowering in downpa'mèn 6 6 requirementsfor borrowers. ______ Improved capital market conditions were also instru- mental in the first-quarter surge in purchases of goods and servicesby state and local governments that amounted jIlIIliUjjJLLIfflILilfflIlIl!lIlIlllII 111111 to $4.9 billion. Indeed, while payroll costs of these-gov- 15 ernmental units continue to show a strong upward trend, the overall rise in has been added thrust 14 spending given by the record volume of debt that has been marketed in the last several months. For in the nine- 13 uroble t3 example, month interval ended in March 1971, the tax-exempt 12 12 bond market absorbed an estimated $16.8 billion in new state and local bonds, up 42 percent over the amount 11111 illIi iii 111111111ii 1111111Ii i1iii1ii I 11111111 Iii lip ii issued in all of 1969. Many of these issues had been 195354 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 scheduled for in 1969 or earlier in 1970 but Note: Shadedareas represent recession periods, accordingto the marketing Notional Bcreeoof EconomicResearch chronology. were postponed because of high interest rates and generally Soorce:United Stoles Deportmentof Commerce. unfavorable credit market conditions. The bonds issued over the last nine months have implications for spending well beyond their contribution to the first-quarter incre- ment in state and local outlays. Inasmuch as most of these issues are used to finance capital projects—newstructures, including the Federal pay boost and by the lower Federal roads, sewers, and the like—their full impact on spending income tax withholdings which took effect on January 1, involves a lag of at least several quarters. 1971, disposable income jumped by almost $18 billion. Business fixed investment spending rose by $3.8 billion In the current quarter, moreover, both personal income in the first three months of 1971, the largest such gain and disposable income will be stimulated further by the since the third quarter of 1969. Much of this strength was large increase in social security benefits that was recently merely a reflection of the rise in business purchases of signed into law. This added flow of income raises the automobiles and trucks from the strike-depressed fourth- possibility that consumer spending will provide additional quarter level. Apart from strike-related factors, business upward thrust to economic activity in the coming months. fixed investment expenditures were higher, primarily Residential construction spending and outlays by state because business outlays for structures posted a large gain and local governments,both of which have benefited from in the first quarter after having declined in four of the improved financial market conditions, were also major preceding five quarters. While these first-quarter data on sources of strength in the overall first-quarter rise in final business investment spending may show a bit of improve- demand. For example, spending on residential construc- ment relative to the experience of the last several quarters, tion rose by $3.2 billion, bringing the cumulative incrpase the underlying situation for this spending compone in this spending component over the last three quarters remains on the sluggish side. The latest surveyby McGraw to $7 billion or 25 percent. Moreover, additional gains Hill on corporation plant and equipment expenditures indi- in residential outlays are likely in the months ahead. For cated a modest 4 percent increase for this year. This incre- example, after having leveled off in February, housing ment is in line with the rise indicated in the recent survey starts and building permits showed renewed strength in by the Department of Commerce-Securitiesand Exchange March. Perhaps more importantly, the availability and Commission as well as the survey by Lionel D. Edie. cost of mortgage credit continued to improve dramatically. Net exports and Federal Government purchases of During the first quarter, deposit flows to the nation's goods and services, the remaining two components of final thrift institutions—themajor suppliers of residential mort- demand, were virtually unchanged in the first quarter. FEDERAL RESERVE BANK OF NEW YORK 97 Net exports expanded by $0.2 billion, while Federal in the first quarter. Over the first four months of 1971, purchases fell by $0.1 billion. The decline in Federal industrial wholesale prices advanced 3.7 percent on a outlays, which occurred in spite of the $2.2 billion pay seasonally adjusted annual rate basis, virtually the same increase that took effect in the period, reflected the con- as the increase registered in 1970 as a whole. tinuing decrease in defense purchases. The events of the past year with respect to the observed On the basis of preliminary data, the rate at which relationship between the rate of inflation and the level of businesses accumulated inventories declined slightly in unemployment seem to run contrary to the post-Korean e first quarter, thereby serving as a restraint on the war experiences.