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Fom Cropa 19770816

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  • FEDERAL RESERVE press release For Use at 4:00 p.m. September 23, 1977

    The Board of Governors of the Federal Reserve System

    and the Federal Open Market Committee today released the

    attached record of policy actions taken by the Federal Open

    Market Committee at its meeting on August 16, 1977.

    Such records for each meeting of the Committee are

    made available a few days after the next regularly scheduled

    meeting and are published in the Federal Reserve Bulletin

    and the Board's Annual Report. The summary descriptions of

    economic and financial conditions they contain are based

    solely on the information that was available to the Committee

    at the time of the meeting.



    Meeting held on August 16, 1977

    Domestic policy directive

    The information reviewed at this meeting suggested

    that real output of goods and services--which had increased

    at an annual rate of 6.4 per cent in the second quarter,

    according to preliminary estimates of the Commerce Department-

    was growing less rapidly in the current quarter. At the

    same time the rise in average prices, as measured by the

    fixed-weighted price index for gross domestic business

    product, appeared to be slowing from that of the second

    quarter, estimated to have been at a 7.0 per cent annual

    rate. Staff projections suggested that growth in real GNP

    was likely to remain less rapid over the remainder of 1977,

    and to slow a little further in 1978. The projections also

    suggested that the rate of increase in prices would moderate

    from that in the first half, but would still remain high.

    According to the staff projections, rising activity

    in a number of sectors would contribute to a continuation

    of the economic expansion over the year. Growth in consumer

    spending, which had slowed appreciably in the second quarter,

  • 8/16/77

    was projected to pick up gradually. Relatively strong

    growth was anticipated in business capital outlays, and

    inventory investment seemed likely to continue as an

    expansive factor, although much less so than in the first

    half of 1977. Increases in Federal purchases of goods and

    services were expected to remain substantial. Spending by

    State and local governments was projected to continue rising

    briskly, in part because of the stimulus of expanded Federal

    public works and job related grant programs. On the negative

    side, slow export growth and rising imports seemed likely to

    exert a drag on economic activity over much of the projection

    period. And the increase in residential construction activity

    was expected to level off as the period progressed.

    In July industrial production rose by 0.5 per cent,

    a little less than in June and roughly half of the substantial

    increase in May. The rate of capacity utilization in manufac

    turing edged higher, to an estimated 83.7 per cent. The July

    rise in production reflected sizable increases in the output

    of consumer durable goods and business equipment. Production

    of nondurable consumer goods changed little, and steel output

  • 8/16/77

    declined. Auto assemblies rose slightly, but it was expected

    that production schedules would be reduced more than usual in

    August by the beginning of the changeover to the new model


    Nonfarm payroll employment expanded by more than a

    quarter of a million in July, half again as much as in June,

    with factory jobs rising by 70,000. According to the house

    hold survey data, however, total employment--after increasing

    2-1/4 million between December and June--declined in July,

    due to a sharp reduction in agricultural jobs. The labor

    force also contracted in July, almost wholly as a result of

    reduced participation by teenagers, and the unemployment

    rate declined 0.2 of a percentage point, returning to the

    May level of 6.9 per cent.

    Personal income had advanced briskly during the first

    half of 1977 as a result of the large gains in employment.

    The rise in wage and salary payments slowed in June, but for

    the second quarter as a whole the increase was the largest

    since the first quarter of 1976. In July wage and salary

    payments apparently rose at a moderate rate, and growth in

  • 8/16/77

    personal income was bolstered by a cost-of-living increase

    for social security recipients.

    Available reports suggested that corporate profits

    had improved during the second quarter. Although comprehensive

    data were not yet available, the information at hand implied

    a second-quarter level of corporate profits that was signifi

    cantly above the relatively low levels recorded in the third

    and fourth quarters of 1976 and the first quarter of 1977.

    As a proportion of GNP, however, corporate profits still

    remained below their longer-run average and well below

    previous postwar peaks.

    The dollar value of retail sales had increased

    0.5 per cent in July, according to the advance report.

    However, data for June--which had initially indicated no

    change from May--had been revised to show a decline of

    1.3 per cent. For the second quarter as a whole the value

    of retail sales was now estimated to have risen 1.6 per cent,

    down from the earlier estimate of 2.1 per cent. In July

    there were sizable advances in sales at stores in the GAF

    (general merchandise, apparel, furniture and appliance)

  • 8/16/77

    grouping. But auto sales fell to an annual rate of

    10.8 million units, from the near-record pace of 11.8 million

    units in June.

    Businesses appeared to be making prompt adjustments

    to evidence of developing imbalances in inventories of

    nondurable goods. In June the book value of such inventories

    declined at both manufacturers and wholesalers--at the latter,

    for the second consecutive month--following large increases

    earlier in the year. Inventories of durable goods continued

    to rise at a relatively rapid rate at both manufacturers and

    wholesalers, but the growth was about in line with the advance

    in sales.

    Private housing starts declined to an annual rate of

    about 1.8 million units in June, the latest month for which

    data were available. This was close to the average rate that

    had prevailed since late 1976. In the second quarter as a

    whole, single-family starts--at an annual rate of 1.4 million

    units--were the highest for any quarter on record. Mortgage

    lending activity had remained strong in recent months; the

    rate of growth in mortgage debt outstanding was estimated to

  • 8/ 6/77

    have been at a record during the second quarter, and it

    appeared to have risen somewhat further in July.

    New orders for nondefense capital goods increased by

    about 5 per cent in June. Contract awards for commercial and

    industrial buildings--as measured in terms of floor space-

    edged off from the high May level; for the second quarter as

    a whole, however, they were 4.5 per cent above their level in

    the first quarter.

    The index of average hourly earnings for private

    nonfarm production workers rose in July at an annual rate of

    6-1/2 per cent--close to the average rise over the preceding

    18 months. Major collective bargaining settlements in the

    first half of 1977 provided for first-year wage increases

    averaging 8.0 per cent, compared with an average of 8.4 per

    cent under contracts negotiated in 1976. On the other hand,

    compensation per hour in the private nonfarm business sector

    rose at an annual rate of about 9.5 per cent in the first half,

    a little faster than in 1976.

    The wholesale price index for all commodities, which

    had declined in June, was about unchanged in July. Average

  • 8/16/77

    prices for farm products and foods--after having risen

    sharply in the early months of 1977--declined for the second

    successive month. Average prices for industrial commodities

    continued to advance but at a more moderate pace than in the

    earlier months of the year.

    The consumer price index in June rose 0.6 per cent-

    about the same as in the preceding 3 months. While the

    advance for commodities other than foods slowed to 0.2 per

    cent, the increases for foods and for services edged up to

    0.8 per cent.

    By the time of this Committee meeting, the average

    value of the dollar against leading foreign currencies had

    recovered more than 1 per cent from the low reached on July 25,

    but it was still below its late-June level. The strengthening

    of the dollar since late July reflected reaction in the foreign

    exchange markets to statements by U.S. officials indicating

    the importance that the United States attaches to maintaining

    the strength of the dollar, and also to the recent relative

    rise in interest rates on dollar-denominated assets. The

    dollar appreciated most sharply against the German mark and

  • 8/16/77

    the Japanese yen. It depreciated against sterling, however,

    after authorities in the United Kingdom elected to discontinue

    their earlier policy of maintaining a target ceiling rate for

    sterling defined exclusively in terms of the U.S. dollar.