Funds supplied to the capital market by savings and loan associations also declined in 1969, as may be seen in a comparison of Table 2 and Table 3. While the growth of savings deposits both at savings banks and at savings and loan associations was much lower than in 1968, heavy borrowings from the Federal Home Loan Banks enabled the savings and loans to maintain the volume of funds placed in the mortgage market during 1969. Although capital market funds supplied by life insurance companies increased to $8.8 billion in 1969, the amounts invested in bonds and mortgages were limited by a $2.6 billion increase in policy loans shown in the all other" loan category in Table 3. Funds supplied by noninsured pension funds, largely in corporate bonds and stocks, decreased slightly from the 1968 level.

A substantial rise occurred in the funds flowing from U. S. government investment accounts in 1969, reflecting the accumulation of reserves in the social security system and similar trust funds which were largely invested in Treasury issues. The heavy demand from borrowers during 1969 brought forth a record supply of funds from "individuals and others," the residual category in these accounts. This group apparently supplied close to $17 billion to the money and capital market in 1969, up sharply from the preceding year and well above the previous record of $12 billion supplied by individuals and others during the credit squeeze of 1966.

Turning to the various uses of funds shown in Tables 2 and 3, corporate bonds accounted for $15 billion of the funds used in 1969, as business firms sought financing for the growth of working capital and a rapid expansion in plant and equipment outlays. State and local governments raised a net amount of $8.2 billion, a decrease from $10.2 billion in 1968, partly because statutory rate limits required many municipal borrowers to withdraw or postpone bond offerings in the face of mounting interest costs. The net increase in outstanding Federal government security issues during 1969 is estimated at $8 billion, a decline of more than $5 billion from the preceding year, as the Federal budget position improved substantially. In addition to Treasury securities, Federal agency issues drew an estimated $6.4 billion from the capital market in 1969, down from $7.0 billion in the preceding year.

In the mortgage market, the 1969 increase in 1-4 family mortgage debt is estimated at a record $16 billion, about $1 billion higher than in 1968. While new housing starts declined during the course of 1969, mortgage closings on funds committed earlier were responsible for the bigger increase in outstanding 1-4 family mortgage debt on a year-to-year basis. The 1969 increase of $11.4 billion in other mortgage debt, including multifamily and commercial mortgage loans, was off slightly from 1968.

The growth in business credit during 1969 was well sustained in spite of the severe monetary restraint in force during the year. Commercial bank loans to business rose by $8.7 billion, compared with an $11 billion increase in the previous year, while net trade credit extended by nonfinancial corporations remained close to the $9 billion level reached in 1968. Consumer credit, which had registered an all-time record growth of $11 billion in 1968, grew less rapidly with a net increase of about $9 billion in 1969, as spending for consumer durable goods leveled off in the latter part of the year.

Economic and Financial Outlook for 1970

The current outlook for economic activity in 1970 is for continued slowing in the growth of gross national product. In dollar terms, GNP is estimated to increase by $57 billion to a total of $990 billion for the year, compared with an advance of dollar GNP by $67 billion during 1969. In real terms, and measured from the final quarter of 1969, GNP is expected to advance less than 1 percent during the year ahead, as against a 2 percent rate of real growth during 1969. Thus, the bulk of the dollar increase in GNP in 1970 is expected to result from inflation, continuing at a rate of about 4-1/2 percent during the coming year.

This forecast implies a diminishing rate of real growth during the successive quarters of 1970, possibly reaching a zero rate of real growth during the latter part of the year. While rising prices are expected to remain a pressing problem for economic policy in 1970, the pace of inflation is expected to moderate through the year, from recent rates of over 5 percent, as the braking effects of fiscal and monetary restraint take hold.

The annual rate of GNP is expected to pass the $1 trillion mark sometime in the fourth quarter of 1970. This distinction will be dubious cause for rejoicing, however, since it will have been inflation rather than real growth in the output of goods and services which will have brought the dollar size of the economy to the trillion-dollar level.

In preparing the forecast for 1970, it has been assumed that Federal Reserve monetary policy will be maintained at about the present degree of restrictiveness for several months ahead, in order to avoid a premature easing that would reinforce inflationary expectations in the financial markets and throughout the economy. The forecast also assumes that the Federal government will keep a close rein on spending and limit or defer tax reductions that would bolster inflationary pressures by producing an expansionary budget deficit.

Finally,

these projections do not contemplate or allow for any increase in military outlays, either in Vietnam or elsewhere, during 1970.

Against this setting of projected economic activity, the LIAA economic research staff has prepared estimates of the sources and uses of funds in the money and capital markets for 1970. A detailed cross-section analysis for 1970 is presented in Table 4, while a summary tabulation of sources and uses in 1970 is set forth in Table 5 against the historical perspective of earlier years.

Table 5 shows a further decrease during 1970 in the total amount of funds flowing through the money and capital markets. From the $97.4 billion net flow estimated for 1969, a comparable flow of $92.5 billion has been estimated for the coming year. On the sources side of the ledger, declines are seen for funds supplied to the market by savings and loan associations and mutual savings banks, as they encounter further disintermediation of savings deposits. Life insurance companies, as well as noninsured pension funds, are expected to provide somewhat tore to the capital markets in 1970, in line with their continued asset growth State and local government funds, including retirement systems, are likewise expected to supply a larger volume of investment funds to the capital

trend.

market.

Table 4

Outlook for Sources and Uses of Funds in the United States Money and Capital Markets in 1970 (In billions of dollars)

The uses of funds measure the net changes in outstanding loans and securities; the sources of funds measure the net
changes in ownership.

Federal agency securities include participation certificates.
Because of rounding, components may not add to totals shown.

*$50 million or less.

Table >

Because of rounding, components may not add to totals shown.

Commercial banks, which cut back their credit expansion sharply in 1969, are estimated to supply approximately $15 billion in 1970. This estimate contemplates that the money supply will be allowed to grow somewhat faster in the latter half of the year, assuming that a sufficient slowdown in the economy has been achieved. However, the funds estimated to flow from the banking system in 1970 would be far less than the amounts supplied during the periods of rapid monetary expansion in 1967 and 1968, as shown in Table 5.

Funds provided by U.S. government investment accounts, primarily through Treasury security purchases, are expected to drop markedly in 1970, as social security benefits are increased and reserve accumulations are slowed. On the other hand, the supply of funds from Federal loan agencies, particularly in the form of mortgage lending, is expected to move higher during the year to cushion the decline in private funds available for new housing construction.

Net

Corporate borrowing through bond issues is expected to claim a larger amount of capital market funds in 1970, as business firms seek to finance higher levels of plant and equipment spending. The estimate of $15-1/2 billion for net corporate bond issues is bolstered by the presence of a substantial backlog of corporate offerings which were deferred in 1969 and also by the need for corporations to rebuild their working capital and liquidity positions. corporate stock issues are also expected to rise somewhat in the coming year. State and local government issues are projected to receive roughly the same amount of funds as in 1969, while Federal government securities outstanding are currently estimated to increase by $10 billion, compared with $8 billion in calendar year 1969. Reflecting the increased participation of Federal loan agencies in channeling funds to the capital markets, Federal agency issues are expected to increase by $8 billion in 1970, up further from the high levels registered in 1968 and 1969.

In the mortgage market, the net increase in debt on 1-4 family properties is estimated to decline in 1970 by $2 billion to a level of about $14 billion, as the supply of mortgage funds from savings institutions remains tight. Other mortgage credit, including multifamily residential loans, is expected to decline slightly from the 1969 level to $11 billion.

The supply of business credit from commercial banks is expected to increase somewhat during the course of 1970, offset by a lesser amount from nonfinancial corporations in the form of trade credit. Consumer credit in 1970 is expected to grow considerably less than in 1969, in response to softening demand for automobiles and other consumer durable goods in the face of a general economic slowdown.

The sources and uses estimates for 1970 presented in Tables 4 and 5 reflect a continuing shortage of funds in the capital markets relative to expected demand. Unless inflationary expectations can be dampened or reversed, borrowers will have an incentive to maintain their demands for whatever funds are available in the capital market, in the desire to purchase goods on credit today to avoid higher future prices and to repay their loans in later years with cheaper dollars. The anticipated slowdown in economic activity might seem to indicate a lessened demand for credit, but the substantial backlog of deferred borrowing on the part