cutting machine tools, shown in table 6, reached 11 months in November 1966, 45 percent longer than the backlog in December 1965.

With demand outstripping supply capacity, prices in the machinery and equipment industries rose significantly and labor market conditions tightened. Table 1 indicates that the wholesale price index for metalworking machinery in October 1966 was 7.8 percent above the level of July 1965 while the index for general purpose machinery was 6.8 percent above the July 1965 level. The rate of unemployment in nonelectrical machinery industries, shown in table 6, reached the low level of 1.8 percent in the third quarter of 1966 while the average amount of overtime in the first 9 months of 1966 rose 25 percent above the average in the comparable period of 1965. Similar pressures were evident in the field of commercial and industrial construction.

The growth of domestic orders for investment goods in excess of the capacity of domestic suppliers encouraged domestic equipment buyers to seek out foreign suppliers who promised earlier deliveries. This effect was intensified by the rise in prices which accompanied the very high rate of capacity utilization in the domestic equipment industries. As a result, imports of capital equipment rose by an average of 13 percent a quarter in 1965 and in the first three quarters of 1966. This development had an adverse impact on the balance of payments.

Suspension of the 7-percent investment credit and of the use of accelerated depreciation with respect to buildings not entitled to the credit was expected to moderate orders for plant and equipment. Suspension of these measures discouraged producers from undertaking marginal projects. This, in turn, was expected to reduce the pressures on the industries supplying these items and thereby encourage them to return to normal production schedules.

By reducing the demand for new capital goods, the suspensions were also expected to lead to a reduction in the demand for credit by business. As a result of this, pressures on interest rates would be reduced and more funds would become available to finance home mortgages. Furthermore, the suspensions were expected to strengthen the balance of payments by reducing domestic demand to the level of domestic supply and thus curtailing the demand for imported capital goods.

The impact of the suspensions was intensified by the fact that a definite date was provided for their termination, since producers were given greater incentive

TABLE 1.-Wholesale price indexes of machinery and equipment

to defer marginal projects. It was never intended, however, that the suspensions would remain in effect until December 31, 1966, if the underlying conditions changed and the suspensions no longer were necessary. For example, your coumittee's report on H.R. 17607, the bill which provided for suspension of the investment credit and accelerated depreciation on certain real property, stated:

"If military requirements in southeast Asia should decrease before Janu ary 1, 1968, or if for some other reason it should become apparent that sapension of the investment credit and suspension of the use of the accelerated depreciation methods with respect to buildings are no longer necessary : restrain inflation, the Congress can promptly terminate the suspensions. The administration has also indicated that it would recommend terminating the suspension period before January 1, 1968, under such conditions." Current situation

Current business plans for investment in new plant and equipment during 1967 indicate an increase of 3.9 percent above the level of such investment in 19% according to the quarterly survey conducted by the Department of Commerce and the Securities and Exchange Commission in January and February. This ante pated rate contrasts sharply with the increase of 16.7 percent in plant and equip ment investment which took place between 1965 and 1966. As shown in table 2 the lower rates of anticipated growth affect all industries. The railroad indus try anticipates an actual decline of 25.3 percent below the level of investment expenditures in 1966.

The quarterly survey conducted in November 1966 showed an estimated increase of 6.6 percent in anticipated expenditures on plant and equipment from the se ond quarter of 1966 to the second quarter of 1967. The most recent survey, made in February of this year, shows a further slowdown in planned expenditures as the increase covering the same period is expected to be only 3.6 percent. These data appear in table 3. The further slowdown apparently affects virtually a industry groups, except nondurable goods manufacturing industries which w anticipate a slightly higher level of investment during the first half of this year than they did 3 months earlier. In both surveys, all industry groups, however, anticipated smaller increases in plant and equipment investment expenditures in 1967 than in 1966.

On February 20, 1967, the White House released the results of a survey of the effects of the suspension of the two investment incentives. It showed that al business planned to reduce investment outlays by $330 million in 1966 and $224 million in 1967. These statistics are shown in table 4 and are reflected in the results described in the preceding discussion.

Significant reductions in the strain on productive capacity for durable gends have become evident since the beginning of this year, and presently there are indications that production is now proceeding at a sustainable high level. T.level of new orders for machinery and equipment, $4,555 million, was 7 perce:" below the September level of $4,906 million. (See table 5.) Shipments of file! orders exceeded new orders in January, and the backlogs of unfilled orders wer reduced for the first month since June 1963. In the electrical machinery industry new orders in January were 4 percent below the September level, and the oper TABLE 2.-Actual and anticipated business expenditures for plant and equipme=" investment, calendar years 1965, 1966, and 1967

Sources: Department of Commerce and Securities and Exchange Commission.

TABLE 3.-Actual and anticipated business expenditures for plant and equipment investment, calendar quariers 1966 and 1967

Sources: Department of Commerce and Securities and Exchange Commission.

TABLE 4.-Estimated reductions in plant and equipment expenditures following suspension of the investment tax credit and accelerated depreciation, by major industry groups, 1966 and 1967

Sources: U.S. Department of Commerce, Office of Business Economics, and Securities and Exchange Commission.

ating rate fell by approximately the same percentage to 91.5 percent of capacity during the same time period. An analogous pattern developed in the nonelectrical machinery industry, as the level of new orders fell 9 percent from $3,715 million in September to $3,379 million in January. The operating rate was reduced only 1 percent to 95 percent of capacity from the peak level of last fall, but shipments of filled orders exceeded new orders in January and produced the first substantial decline in the level of unfilled orders in well over a year. In the machine tool industry, which is a key industry in the manufacture of producer's durable equipment, substantially higher shipments than new orders in December and January resulted in a 17-percent decline in the backlogs.

Similarly, extremely tight labor supply conditions have eased in the machinery industries. The unemployment rate of 2.3 percent in January-although still representing a tight labor market-was the highest unemployment rate in the past 11 months, underlining another facet of the lessening demand for the ouput of the machinery industries, as shown in table 6. Average overtime hours in the machinery industries in November and December 1966 were only 5 percent above the level in the same months in 1965. This marks a considerable decline from the very high levels of overtime worked during the first 9 months of 1966.

TABLE 5.-Manufacturer's new and unfilled orders, durable goods industries

Sources: U.S. Bureau of the Census, Department of Commerce; U.S. Bureau of Labor Statistics, Department of Labor.

The rates of increase in imported capital equipment slowed. The 4-percent rise in imports of capital equipment in the fourth quarter of 1966 was the smallest quarter-to-quarter increase since the middle of 1964 and substantia!! less than the average 13 percent rate of increase over the preceding 7 quarters These imports, the administration has reported, in part reflect orders that had been placed earlier in 1966. Domestic producers now are in a substantially improved position to fill such orders, and prospects have improved for a leveling off in capital equipment imports.

The indexes of industrial production for all industries have fallen from the peak levels reached in 1966. In February, the index of total industrial prod tion fell to its lowest level since May 1966. The indexes of consumer goods

began a slow decline in November 1966 which was accelerated in February. Production in the equipment industries fell for the first time in February, in contrast with continuing increases-although at much slowed rates-throughout the last three months in 1966.

There is growing evidence that conditions in the money market also are easing. Interest rates, shown in table 7, have fallen from their 1966 highs. For example, interest rates on 3-month Treasury bills reached a peak in October 1966 of 5.387 percent per annum. Since that time, interest rates on these bills have declined steadily. On March 13, the Treasury marketed 3-month bills with a rate of interest of 4.31 percent per annum, more than a full percentage point below the average October rate. Interest rates on other Treasury issues, municipal bonds, corporate bonds, commercial paper, and home mortgages have generally followed a similar pattern.

Recent actions by the Federal Reserve Board suggest that further monetary ease will be encouraged. The Reserve Board announced that the reserves required against savings deposits by member banks would be reduced from 4 percent to 3 percent of such deposits. This action increases the ability of the member banks to make loans. The first step in the program went into effect on March 1 and increased the free reserves of member banks to a "plus" free-reserve position of $165 million, the highest free-reserve position since December 1964. The free reserves of member banks reached a "minus" position of more than $400 million during the period of monetary stringency in 1966. The step taken by the Federal Reserve Board was made possible by a general easing of inflationary

1 Rate on new issues within period.

2 Selected note and bond issues.

April 1953 to date, bonds due or callable 10 years and after.

4 Weekly data are Wednesday figures.

Data for 1st of the month, based on the maximum permissible interest rate (6 percent beginning October 1966) and 30-year mortgages paid in 15 years.

Not charted.

Sources: Treasury Department, Board of Governors of the Federal Reserve System, Federal Housing Administration, Standard & Poor's Corp., and Moody's Investors Service.