FED'S M1 FÓR 1973

( prepared for July 28, 1977 Congressional Hearings)

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Book I

The Pleasure Of Statistical Narcissism

Fed's M1 - 1973

Chapter III

For our second booklet study of M1 as reported by the Federal Reserve Board on a seasonally adjusted basis, we will use 1973 as a base year. That was when oil prices were raised at the end of the year to aberrate all prices.

The year 1973 was not a normal one in the historical sense, although by comparison with more recent years it is not quite as aberrational.

1973 OVERALL ECONOMY WAS STILL GOOD

From the standpoint of straight government-compiled statistics, the 1973 economy was good, in fact, excellent by some observations.

Most signals were go, auto sales were high and in the orthodox sense, 1973 looked like nothing more than a continuation of the super boom of the previous year.

Beneath the surface though, it was not all that rosey.

BUT THE BOOM WAS ARTIFICIAL

The 1973 stage of the boom was artificial.

It was caused by hedge buying of autos and other consumer durables by people desirous of beating rising prices, before they knew about oil price rises.

And it was staged against a whopping three-tier drop in Sindlinger's measured consumer confidence triggered initially by the junking of the wage-price controls and the end of the Vietnam War in January and later in the year by the Arab oil embargo.

1973 was the last year for demand/pull inflation where money was in demand to fuel the hedge buying to beat the rising prices of inflation.

Fed's M1 For 1973

RECESSION WAS FORECAST IN APRIL 1973

We projected at the time that the hedge buying borrowing of cars from future model years, and the decline in confidence would lead to a recession in 1974. This forecast was made by Sindlinger in April 1973 as the economy was booming, from demand/pull inflation.

Nevertheless, the 1973 M1 figures, even on a seasonally adjusted basis, reflected the hefty input of funds by hedge buying consumers into the money supply.

The money growth trends were quite typical, with a normal post-Christmas decline in January.

The low point of the year was $254.3 billion in the week ended January, 31st, as originally reported.

From then on, M1 continued in a general upward trend with the year's peak of $269 billion registered in the week ended December 26th, the final full week of 1973.

(It is important to remember that seasonally adjusted figures are smoother than raw figures and generally show smaller week-to-week changes. Thus, such major bulges as those caused by Easter spending, vacations, and sending children back-to-school are already moderated.)

As the weekly table next page shows, M1 as originally reported seasonally adjusted had a low to high gain during 1973 of $14.7 billion.

During January 1974, as the 1973 seasonal adjustments were revised, the Fed said the low to high gain was $16.0 billion.

Then, three years later in January 1976 all 1973 M1 figures were revised again, the Fed had the low to high gain back down to $14.6 billion, near the original figure.

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Oil Price Rise

Wage/Price Freeze Junked January 11th To Unleash Inflation

3 1017 24 31 7 14 21 287 14 21 20 4 11 18 25 2 0 16 23 3 13 20 27 4 11 18 25 1 15 22 29 5 12 19 26 3 10 17 24 31 7 14 21 28 6 12 19 26
JAN
FEB MAR
SEP
OCT
NOV

APR

MAY

JUN

JUL

1973

AUG

DEC

HOW M1 LOOKED DURING 1973

The theory of the seasonal adjustment is to smooth out the
weekly fluctuations of the raw count i.e., the way people
use their M1 money by seasons, the way the bank counts it
each week.

Any financial market Fed Watcher with memory will well
recall the weekly gyrations in M1 during 1973. The press
wrote about it every week.

A weekly rise in M1, as Fed Watchers watch is a signal to
watch for a Fed monetary policy change if M1 grows, too
fast, the Fed might raise interest rates, to curb its growth.

And a weekly M1 decline is watched and read to mean the
Fed will not tighten up on policy.

A weekly M1 change of a few hundred million dollars, up
or down, made big financial news headlines.

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