The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Strictly Confidential (FR) Class II FOMC August 13. 1992 SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Overview Data received after the last FOMC meeting revealed that the economy entered the summer with even less forward momentum than the staff had thought. But taking account of the further easing of money market conditions in early July, the substantial rally in the bond markets, and the further depreciation of the dollar, we have shaved just a bit off our prior forecast of near-term output growth. Real GDP is now projected to increase at about a 1-3/4 percent annual rate in the current quarter--a half percentage point less than in the June Greenbook and little different from the average pace thus far in the recovery. Output growth still is expected to pick up moderately in subsequent quarters. We continue to think that the drags exerted for some time now by unusual financial constraints and sectoral imbalances will abate gradually, contributing, along with the monetary policy steps already taken, to the step-up in aggregate demand. The projected rate of expansion is sufficient to reduce the unemployment rate only slowly; we expect the unemployment rate still to be around 7-1/2 percent at the end of this year and to be 7 percent late next year. Given the higher level of slack, along with the surprisingly low reading on increases in labor costs in the second quarter, our projection of wage and price inflation has been revised down. In 1993, core inflation--proxied by the CPI excluding food and energy--is projected to be 3 percent, almost 1 percentage point less than in the first half of this year. Key Assumptions Reflecting the System's easing action in July, the federal funds rate, at 3-1/4 percent, is 1/2 percentage point lower than at the time of the previous Greenbook. We assume that the current I-2 lower level of the funds rate will be maintained through 1993. Long-term interest rates have also moved down since the June projection--indeed, more than we had anticipated--and we expect that they will decline further over coming quarters, given underlying softness in aggregate demand and favorable inflation trends. The assumed constant nominal federal funds rate is consistent with a small rise in the real rate, but any resulting restraint on activity should be offset by the attenuation of other growth-retarding financial forces, such as the urge to restructure balance sheets and constraints on credit supplies. M2 and M3 fell in June and July, and sluggish growth is expected for the rest of 1992 despite a temporary boost from the current resurgence in mortgage refinancing. A steep yield curve and slack demand by depositories for loanable funds is likely to continue to foster a flow of savings toward mutual funds and capital market instruments. Velocity is projected to rise further, and the monetary aggregates could well finish the year below their annual growth ranges. In 1993, money growth is projected to remain slow and velocity to rise appreciably, as a resumption of RTC activity and various restrictions imposed by FDICIA damp the effects on depository asset growth of a small pickup in the growth of nominal GDP. The fiscal projection has changed little. Policy is expected to be moderately restrictive in large part because of falling defense spending. Although the unified budget deficit is expected to rise from $309 billion in FY1992 to $351 billion in FY1993, the resumption next fiscal year of RTC resolutions accounts for the increase. Excluding deposit insurance outlays, the deficit is projected to be about $300 billion in both fiscal years. We have not incorporated any of the tax proposals currently being considered I-3 by the House and the Senate; the outcome of this legislation will not be determined until September and, at present, remains subject to considerable political uncertainty. Most of the items under consideration would have little effect on our projection of aggregate activity, though temporary subsidies, such as the tax credit for first-time homebuyers, could shift the timing of spending. The trade-weighted value of the dollar has fallen since the June Greenbook, largely in response to the recent decline in U.S. interest rates and some increase in European rates; the projected flat path of the dollar through next year is about 5 percent lower than that in the June Greenbook. However, in the near term, much of the added stimulus to export demand from the lower dollar is likely to be offset by a lower level of economic activity among our trading partners; growth abroad still is expected to pick up in 1993, boosting the volume of exports. With regard to oil prices, the posted price of West Texas intermediate crude oil is assumed to peak in the current quarter at $20.30 per barrel--about $1 less than our previous projection--before falling back to $19.50 by early 1993 and remaining flat thereafter. Recent Developments and the Current-Quarter Projection As noted earlier, we now expect that real GDP will increase at around a 1-3/4 percent annual rate this quarter. As has been the case throughout this recovery, most of the projected increase in output reflects gains in labor productivity; in the nonfarm business sector, output per hour is projected to rise another 1-1/2 percent at an annual rate, after even larger increases over the past three quarters. Although private payroll employment rebounded in July, it changed little on net over the past two months. Over the same period, the average workweek edged off, and aggregate hours I-4 declined; the level of production worker hours in July stood slightly below the second-quarter average. We expect only modest increases in private employment and hours worked over the remaining months of the third quarter. CURRENT-QUARTER PROJECTIONS (Percent change from preceding quarter annual rate) 1992 2 Q1 Q3 ---- actual---- Real GDP (previous) 2.9 2.4 1.4 2.0 1.7 2.3 Real PCE (previous) 5.1 5.4 -0.3 1.0 1.9 2.3 Real BFI (previous) 3.0 1.7 13.5 6.4 2.2 6.0 -2.9 -2.8 5.2 5.8 3.2 4.2 7.2 7.2 7.5 7.3 7.6 7.3 Industrial production (previous) Unemployment rate (previous) (level) We expect the unemployment rate to edge lower over the next several months; however, its level in July was considerably higher than we had anticipated at the time of the June Greenbook, and the third-quarter average now is projected to be 7.6 percent. The upward revision of 1/4 percentage point to the forecast is attributable both to surprisingly strong increases in labor force participation and to slower-than-expected employment growth in recent months. Output in the industrial sector appears to be heading upward, but at a pace less robust than that projected in June. Total industrial production in July just reversed its decline in June; the rebound was largely attributable to the mining and utility sectors, which had held down growth in earlier months. In the manufacturing I-5 sector, output is estimated to have edged lower in the June-July period. The recently announced reductions in scheduled motor vehicle production for the third-quarter had largely been anticipated in our June projection. Even making allowance for some further shortfalls from schedules, production of motor vehicles is expected to provide a small boost to IP in August; for real GDP in the current quarter, the pickup in output of motor vehicles contributes about 1/3 percentage point to growth. More broadly, orders for durable goods have risen sharply, on balance, in recent months, and with few signs that any inventory imbalances have emerged, manufacturing activity outside of motor vehicles is projected to register modest growth over the rest of this quarter. The slow pace of hiring and the generally weak growth of disposable income appear to be restraining consumer spending: Retail sales excluding auto dealers and building supply stores were up considerably in July, but unit sales of motor vehicles fell back from June's higher level. Real PCE in the third quarter is projected to grow at about a 2 percent annual rate, slightly less than projected in the June Greenbook. By contrast, housing markets are showing some signs of revival. Sales of new single-family houses increased 8 percent in June, and reports indicate that the recent decline in interest rates has stimulated a sharp rise in mortgage applications for new home purchases. However, in the absence of other, more direct evidence, we have been cautious in raising our near-term projection for construction. We anticipate single-family starts to rebound to 1.05 million units in the third quarter from 0.99 million units last quarter. The multifamily sector is expected to show only very gradual improvement. I-6 In the business have advanced principal area sector, new orders for nondefense capital goods in recent months. of strength, also been moving up. Although computers outlays for remain the industrial equipment have Nevertheless, we are looking for growth of real PDE to slow to about a 4 percent annual rate in the third quarter, compared with a 21 percent rate of growth in the second quarter; aircraft deliveries are anticipated to fall back from an unsustainably high level, and motor vehicle purchases are expected to drop because of the shift to June from July of some automobile purchases by rental car companies. Nonresidential construction activity is expected to move lower as continued declines in office building offset small increases in construction of institutional and public utility structures. Incoming data on both prices and wages have been favorable. the price front, the CPI excluding food percent in both June and July; low; On and energy increased 0.2 food price inflation has remained and the smaller-than-expected runup in crude oil prices has limited the anticipated surge in consumer energy prices. expect the CPI to increase 2-3/4 nearly 1-1/2 percentage points We now percent in the current quarter-- less than in the previous projection. With respect to compensation, the employment cost index increased at just a 2-1/2 percent annual rate over the three months ended in June, as both wage and benefit costs with earlier quarters. slowed appreciably compared The second-quarter data on labor costs likely understate underlying trends--especially for benefits, where part of the second-quarter slowing reflected a probably transitory decline in pension fund contributions; however, we read the figures as suggesting that these trends are lower than we had previously thought, and we have reduced our compensation projection by about 1/4 percentage point in the third quarter. I-7 The Outlook for the Economy through 1993 We expect real GDP to increase at a 2-1/2 percent annual rate in the fourth quarter and then to increase at a 3 percent rate next year. Although recent indicators have been disappointing and some structural imbalances remain, the medium-term prospects for some pickup in real growth still seem positive. Interest rates have come down substantially, and credit supply conditions are expected to ease a bit. Households have made progress in improving their financial postures and should be in a better position to raise spending in line with gains in real disposable income. In the business sector, measures of profits and cash flow look strong, providing direct support for investment in plant and equipment and enhancing access to external sources of finance. Net exports should pick up a bit because of the lower dollar and an eventual acceleration of growth abroad. PROJECTIONS OF REAL GDP (Percent change; annual rate) 1992 Real GDP Final sales Consumer spending. 1993 Q3 Q4 H1 H2 1.7 2.5 2.9 3.2 1.9 2.1 2.6 3.1 Real personal consumption expenditures are expected to grow at an annual rate of 2-1/2 percent in the fourth quarter and about 3 percent next year. The projected parallel movement of consumption and income, compared with the rise in the saving rate so far in the recovery, is an important element lifting economic growth to a higher level. As time passes, sustained job growth and declining debt-servicing burdens should make consumers more willing to spend. I-8 Among the components to outstrip other of PCE, categories. purchases Spending of durables are expected on cars and light trucks, while remaining well below its rapid pace of the mid-1980s, is expected to rise considerably, boosted in part by some pent-up demand. Growth in the other components of personal consumption expenditures is projected to remain modest: nondurable Real outlays for goods rise at less than a 2 percent annual rate, whereas consumption of services advances at about a 2-1/2 percent annual rate. It may be noted that the recent revision of the national income accounts indicated that the personal saving rate has been trending upward since 1990, movement. rather than exhibiting a generally sideways These latest estimates obviously should not be taken as gospel, but they do accord with the long-prevailing sense that consumer caution has been a retarding force in the upturn. Recognizing the difficulty in gauging the balance sheet ratios that may make households comfortable, and the possibility that about job security may persist in an environment of still high unemployment, a downside risk to the GDP forecast uptrend in saving will continue for a while Residential investment. anxiety is that the longer. The combination of declining mortgage interest rates and some pickup in the growth of real disposable income should boost single-family housing construction. Starts in this market segment are projected to reach a 1.1 million unit annual rate in late 1992 and a 1.2 million unit annual rate toward the end of 1993; by contrast, single-family starts averaged only 0.8 million units in 1991. likely to In the multifamily market, high vacancy rates are restrain activity. Multifamily construction is anticipated to show only very gradual improvement, with starts I-9 expected to average 210,000 units in 1993, the same pace as that projected in the June Greenbook. Business fixed investment. After a pause in the current quarter, growth of real BFI is projected to exceed 6 percent at an annual rate over the next five quarters. With long-term interest rates falling and improved corporate profits and cash flow, the fundamental elements are in place to support the 9 percent growth rate expected for producers' durable equipment. While it is likely that outlays for computers will slow from the extraordinary pace of the first half of this year, equipment spending in other categories is expected to accelerate as the recovery gains momentum and sales expectations improve. The only major exception is aircraft, where shipments are expected to decline gradually because of excess capacity among domestic carriers. Nonresidential construction appears to be near its trough. Although real outlays were about flat in the first half of this year, we expect spending to fall a bit more over the next several quarters before bottoming out in mid-1993. The institutional and public utility components have been growing for several quarters, and investment in industrial structures is projected to begin advancing around the turn of the year. By contrast, office construction and oil and gas drilling remain significantly depressed, and outlays in these categories are expected to decline through 1993. Business inventories. No signs of any significant imbalances in inventories are apparent at present. Looking forward, we expect that businesses will continue to improve the efficiency with which they manage inventories; consequently, our projection assumes that the desired ratio of inventories to sales will decline gradually. Nonetheless, as final demand picks up, some increase in stocks I-10 should be required, and inventory investment is expected to make a slight contribution to real GDP growth next year. Government purchases. The outlook for federal purchases of goods and services is not materially changed from that in the June Greenbook. Real defense purchases are expected to fall about 5 percent in 1992--the same amount as in 1991--and to decline slightly more rapidly in 1993. Growth of nondefense purchases is expected to slow to 1-3/4 percent in 1993 from the 5-1/2 percent pace of 1991 and 1992, as the caps on discretionary spending established by the Budget Enforcement Act begin to bite. The fiscal positions of state and local governments are worse than we had thought at the time of the previous Greenbook. According to the annual NIPA revision, the sector's aggregate deficit, excluding social insurance funds, has remained near $40 billion since late 1990; the earlier data had shown a fairly steady improvement over the past year to about a $25 billion deficit. We project real state and local purchases to decline at a 3/4 percent annual rate in the second half of this year and to inch up 1/2 percent next year. With continuing pressures for spending in the areas of education, health services (especially Medicaid), corrections, and infrastructure, higher taxes now seem unavoidable, especially in 1993, and larger tax increases have been built into the projection. Despite these projected actions, the sector's deficit is anticipated to improve only to about $20 billion by the end of 1993. Net exports. The external sector is expected to provide a small stimulus to domestic production in 1993. The depreciation of the dollar that has occurred to date and a gradual acceleration 1. Comprehensive and consistent data for these myriad governments are available mainly from the annual Census of Governments. Preliminary tabulations for 1991, which form the primary basis of the NIPA revisions, were completed only recently. I-11 of activity abroad over coming quarters is expected to boost growth in exports of goods and services to nearly 8 percent in 1993, compared with 2-1/2 percent this year. As the U.S. economy improves in 1993, imports are also expected to pick up, but somewhat less than exports. A detailed discussion of these projections is contained in the International Developments section. Labor markets and prices. Only small gains in employment are expected through the end of 1992, given our projections of modest output growth and productivity gains that continue to be somewhat faster than trend as firms remain intent on containing labor costs. The unemployment rate is projected to edge down to about 7-1/2 percent by the end of this year and to 7 percent toward the end of 1993. Compared with the June Greenbook, the unemployment rate averages about 1/4 percentage point higher in the second half of this year and in 1993. Although part of this upward revision results from slower growth of output in the near term, some of it is also attributable to the surprisingly strong increase in labor force participation in recent months. The participation rate historically tends to vary with the business cycle, but the behavior of the labor supply over the current cycle has been exaggerated for reasons that we do not fully understand. Participation was considerably weaker than we had expected in 1990 and 1991, but the recent sharp rebound in participation has more than offset the earlier shortfall. We are now forecasting a gradual rise in participation in line with the moderate increase in employment. The dominant influence in the inflation projection--for both wages and prices--remains the degree of slack in resource utilization; energy and food prices are expected to be roughly neutral for overall inflation. As a result of a greater margin of I-12 underutilized resources in this forecast, the deceleration of wages and prices is a little more substantial than projected in the June Greenbook. Moreover, the starting point is a bit lower given recent wage and price news. ECI compensation, which increased 3.7 percent over the twelve months ending in June, rises at a 3-1/2 percent rate in the second half of this year and at slightly less than a 3-1/4 percent rate in the second half of 1993. Core inflation--proxied by the CPI excluding food and energy--falls from about 4 percent in the first half of this year to 3 percent in the second half of 1993. However, higher projected import prices--owing to the lower value of the dollar--and hikes in state and local indirect business taxes, which together add about 1/4 percentage point to CPI inflation in 1993, partly offset the effects on the CPI of our downward adjustments to labor costs. STAFF INFLATION PROJECTION (Percent change; annual rate) 1992 H1 1993 H2 ------ Consumer price index (previous) Excluding food and energy (previous) Employment cost index (previous) Memo: Unemployment rate (previous) (compensation) (end of period) Nonoil import price (previous) index H1 H2 projected------ 3.2 3.3 3.1 3.8 3.1 3.1 3.0 3.1 3.9 4.0 3.3 3.5 3.1 3.3 3.0 3.1 3.3 3.9 3.5 3.7 3.3 3.6 3.2 3.5 7.5 7.3 7.4 7.2 7.3 6.9 7.0 6.7 3.6 3.9 4.2 3.3 3.5 2.4 3.2 2.4 A Preliminary Note on 1994 For the first time, the Greenbook projection has been extended through 1994. The scenario depicted is essentially an extension of I-13 the trends visible in the 1993 numbers: Output growth is fast enough to push the jobless rate gradually lower but not so fast as to halt the disinflation process. We believe that, with financial stresses and sectoral imbalances diminishing, some rise in shortterm interest outcome. rates may be needed by 1994 to produce such an I-14 Strictly Confidential (FR) Class II FOMC STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT (Percent, annual rate) Consumer Unemployment rate (level except price index 1 as noted) GDP fixed-weight Nominal GDP Interval 6/24/92 8/13/92 Real GDP 6/24/92 price index 8/13/92 6/24/92 8/13/92 August 13, 1992 6/24/92 8/13/92 6/24/92 8/13/92 ANNUAL 19902 19912 1992 1993 1994 1.0 4.3 -. 7 4.0 2.9 2.9 1.8 2.8 n.a. n.a. 5.5 6.7 7.2 6.9 n.a. 3.3 3.3 2.4 6.5 6.7 2.6 2.7 5.4 4.2 3.3 3.3 n.a. QUARTERLY 1991 1992 1993 1994 Q12 Q22 Q32 Q42 -2.5 1.4 1.8 .4 5.4 2.1 3.6 6.8 6.9 Q12 Q22 Q3 Q4 2.4 2.0 2.3 3.4 2.9 7.2 2.7 2.8 2.9 3.6 4.1 3.4 7.3 Q1 Q2 Q3 Q4 2.8 2.9 3.1 3.4 3.0 7.1 2.7 3.1 2.7 6,9 6.8 3.2 2.6 3.1 3.1 Ql Q2 Q3 Q4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. TWO-QUARTER 1991 1992 1993 1994 2.7 n.a. n.a. n.a. n.a. .7 .7 .2 .2 3.2 3.7 .4 -.1 .6 -.1 2.9 3.1 -. 3 -.1 2.4 3.1 -. 2 -. 3 2.5 n.a. 2.1 n.a. Q22 Q42 3.5 3.5 3.1 3.4 -.6 1.1 -.7 .9 4.4 2.4 4.2 2.7 2.9 3.1 Q22 Q4 5.2 5.2 4.9 4.4 2.2 2.5 2.2 2.1 3.1 2.9 2.7 2.5 Q2 5.8 5.6 2.9 Q4 5.7 5.4 3.2 2,9 3.2 3.0 2.7 Q2 n.a. Q4 n.a. n.a. n.a. 3.1 3.0 n.a. n.a. Q42 Q42 Q4 Q4 Q4 6.7 3 FOUR-QUARTER 1990 1991 1992 1993 1994 7.3 7.2 2.9 3.1 n.a. n.a. 4 4.1 3.3 5.2 5.8 n.a. -. 1 .3 2.4 3.0 4.4 3.4 3.0 2.8 n.a. n.a. 6.3 3.0 3.5 3.1 n.a. For all urban consumers. Actual. Percent change from two quarters earlier, for unemployment rate, change in percentage points. 4. Percent change from four quarters earlier, for unemployment rate, change in percentage points. .6 .9 .3 -. 5 n.a. I-15 Strictly Confidential Class II FOMC (FR) REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES (Seasonally adjusted, annual rate) August 13, 1992 Projected Item Unit 1986 1987 1988 1989 1990 1991 1992 1993 1994 Nominal GDP Real GDP Bill. $ Bill. 87$ 4268.6 4404.5 4539.9 4540.0 4900.4 4718.6 5250.8 4838.0 5522.2 4877.5 5677.5 4821.0 5924.6 4904.4 6229.9 5033.4 6565.8 190n.7 Real GDP Gross domestic purchases Final sales Private dom. final purch. % change 2.2 2.1 3.3 3.0 4.5 3.9 2.7 1.9 3.3 2.5 4.2 4.2 1.6 .9 1.5 .5 -. 5 .1 -1.2 .6 -.8 -. 2 -. 6 -. 9 2.1 2.4 2.2 3.2 3.0 2.8 2.9 3.6 3.0 2.9 3.0 3.5 4.0 12.5 3.3 2.5 2.1 -2.6 1.4 3.7 4.2 8.5 3.2 3.7 1.2 2.2 5.6 1.5 1.9 2.9 6.6 2.0 2.5 2.9 5.1 2.3 2.7 -5.7 -14.1 11.1 3.0 2.4 4.4 -3.1 5.5 9.1 -1.2 .9 Exports Imports 9.9 6.7 12.6 4.7 Government purchases 4.1 3.8 3.7 4.4 EXPENDITURES Personal cons. Durables Nondurables Services expend. Business fixed invest. Producers' dur. equip. Nonres. structures Res. structures 1.2 1.7 -. 7 1.3 -. 4 -1.7 2.3 -7.7 -1.4 -. 2 -3.7 -14.7 -7.0 -3.5 -14.3 -. 1 6.1 9.2 -1.2 12.3 6.6 9.1 .0 6.9 6.2 7.2 3.4 5.8 13.5 3.6 11.3 2.6 7.2 .1 7.4 4.8 2.4 4.9 7.7 5.8 7.9 3.3 3.7 4.5 2.9 .2 -3.4 -3.2 2.9 2.0 2.8 3.0 1.5 2.7 -. 6 -2.3 -5.2 .7 -2.0 -5.0 .9 -1.3 -4.2 -6.8 .6 -. 4 -3.3 -5.5 1.4 8.6 10.6 -155.1 26.3 32.7 -143.0 19.9 26.9 -104.0 -9.3 -73.7 6.2 3.7 -51.8 -2.2 -1.4 -32.2 10.8 11.9 -29.9 17.0 18.4 -20.3 3.5 4.7 5.5 5.2 -. 7 Federal Defense State and local .2 -2.3 .0 -2.5 -1.5 1.6 -. 5 -. 6 -1.5 4.0 29.8 -. 3 Change in bus. invent. Nonfarm Net exports Bill. 87$ Nominal GDP % change 4.7 8.0 7.7 6.0 Nonfarm payroll employ. Unemployment rate Millions 99.5 7.0 102.2 6.2 105.5 5.5 108,3 5.3 109.8 5.5 108.3 6.7 108.6 7.4 Industrial prod. index Capacity util. rate-mfg. % change 1.4 79.0 6.5 81.4 4.5 83.9 1.1 83.9 .3 82.3 -. 5 78.2 1.81 11.45 8.22 3.24 1.62 10.24 7.07 3.18 1.49 10.63 7.54 3.10 1.38 9.91 7.08 2.83 1.19 9.51 6.91 2.60 4544.5 8.1 7.4 2.1 4.3 4908.2 7.8 7.1 3.2 4.4 5266.8 6.1 6.5 1.1 4.0 10.2 7.4 -6.3 6.9 29.9 4.1 -9.6 -21.8 6.2 EMPLOYMENT AND PRODUCTION Housing starts Auto sales in U.S. North American produced Other Millions 110.1 7.2 112.3 6.7 2.3 77.8 4.4 78.7 4.1 79.4 1.01 8.39 6.14 2.25 1.22 8.48 6.33 2.15 1.36 9.16 6.93 2.24 1.48 9,74 7.40 2.34 5542.9 4.2 6.3 .9 4.3 5694.9 3.1 3.3 .5 4.7 5945.2 4.8 4.7 2.0 5.0 6253.6 5.5 6.3 2.9 5.0 6590.5 5.2 5.7 2.9 5.1 -3.0 6.5 .9 6.1 6.6 7.0 4.8 7.1 INCOME AND SAVING Nominal GNP Nominal GNP Nominal personal income Real disposable income Personal saving rate Bill. S % change 4277.8 4.4 5.5 2.8 6.0 Corp. profits, IVA&CCAdj Profit share of GNP % change -7.1 6.4 29.7 7.0 -201.1 54.3 1.5 -151.8 40.1 -14.7 2.6 2.6 3.3 3.4 4.2 4.2 4.4 4.3 4.5 4.7 3.4 3.5 2.5 2.6 2.4 2.6 2.1 2.3 2.3 -1.3 3.9 3.9 4.5 4.3 4.1 4.3 4.5 4.3 4.6 4.4 5.3 6.3 5.3 2.8 3.0 4.5 2.9 3.1 3.6 2.7 3.0 3.0 2.4 2.5 2.5 3.2 3.3 4.8 4.8 4.6 4.4 3.4 3.2 3.0 1.2 4.6 3.4 .5 -1r 4 . .0 1.0 2.3 3.8 1.9 1.6 3.3 1.7 1.2 3.2 1.9 Bill. $ Federal surpl./def. State/local surpl./def. Ex. social ins. funds -136.6 38.4 -18.4 -122.3 44.8 -17.5 -166.2 30.1 -32.9 -210.4 17.1 -43.1 20.9 6.8 -289.2 16.3 -41.8 -264.5 28.2 -29.4 -244.0 44.2 -13.1 PRICES AND COSTS GDP implicit deflator GDP fixed-wt. price index Gross domestic purchases fixed-wt. price index CPI Ex. food and energy ECI, hourly compensation Nonfarm business sector Output per hour Compensation per hour Unit labor cost 2 % change % change 1.8' 3.8 3.3 quarter to fourth quarter. changes are PerCent changes 1. Percent 1. are from from fourth fourth quarter to fourth quarter. 3.2 3.1 6.1 3.8 4.6 6.2 2.7 1.0 2. Private-Industry workers. 2. Private-industry workers. I-16 Strictly Confidential (FR) Class II FOMC REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES (Seasonally adjusted, annual rate except as noted) 1990 Item Unit Q1 Q2 August 13, 1992 1991 Q3 Q4 Q1 5561.3 4833.8 5585.8 4796.7 Q2 1992 Q3 Q4 Q1 Q2 EXPENDITURES Nominal GDP Real GDP Bill. $ Bill. 87$ Real GDP Gross domestic purchases Final sales % change Private dom. final purch. Personal cons. expend. Durables 5445.2 4890.8 2.8 2.1 4.3 2.9 2.2 16.2 Nondurables Services Exports Change in bus. invent. Bill. 87$ -1.4 .1 .8 -3.9 -6.0 4838.5 5840.2 4873.7 5893.6 4890.5 2.9 3.0 4.7 5.5 1.4 2.6 .3 1.7 1.2 -5.0 1.7 1.7 1.3 1.5 2.0 -.7 1.3 3.0 1.5 8.1 -. 6 1.2 -3.1 -3.5 2.3 5.1 16.5 5.5 2.2 -. 3 -2.7 -1.6 1.0 -. 9 2.4 -. 5 1.4 .6 -. 4 .0 -. 4 .3 -3.0 -13.0 -3.2 -. 3 6.2 6.8 5.0 5.3 -6.6 -7.8 -4.1 -15.9 5.6 7.2 2.5 -22.9 -9.6 -6.1 -16.5 -22.4 -15.8 -16.7 -14.0 -26.9 -3.1 .7 -10.6 7.0 -3.4 6.0 -20.8 14.4 -5.2 -2.4 -11.5 11.3 3.0 3.2 2.7 20.1 13.5 20.7 -2.1 8.7 7.0 5.1 -. 2 1.5 11.6 -8.5 -5.0 -14.6 16.6 15.6 6.2 17.1 13.3 4.2 2.9 3.5 -3.8 6.3 1.1 2.1 .3 .4 -2.0 -7.2 -10.5 1.9 6.1 9.9 12.8 3.5 2.8 7.2 8.7 .2 -. 3 -5.6 .6 -2.3 -6.5 -9.4 .9 -3.0 -9.0 -13.0 1.4 1.7 -3.0 -7.7 5.1 .3 .3 -1.6 .1 .6 -1.0 -31.6 7.5 11.8 -20.5 32.8 27.9 -56.9 11.2 6.6 -59.3 % change 7.7 5.8 2.7 .1 Nonfarm payroll employ. Unemployment ratel Millions 109.8 5.2 110.2 5.3 109.9 5.6 Industrial prod. index 1 Capacity util. rate-mfg. % change .6 82.7 4.2 82.8 Housing starts Auto sales in U.S. North American produced Millions 1.46 9.95 7.16 2.79 Nominal GNP Nominal GNP Nominal personal income Real disposable income 1 Personal saving rate Bill. $ % change Corp. profits, IVA&CCAdj Profit share of GNP1 % change Federal govt. surpl./def. State/local surpl./def. Ex. social ins. funds Bill. $ Nominal GDP 5753.3 -3.0 -4.2 -3.2 -6.0 7.5 5.9 -58.4 Nonfarm Net exports 5713.1 4831.8 -3.1 -9.8 -2.8 -1.6 6.4 8.0 4.9 5.2 Government purchases Federal Defense State and local -1.6 5657.6 4817.1 1.7 -1.4 .8 3.1 10.7 2.6 Imports 1.0 .9 -1.1 -1.7 5559.6 4882.6 .1 -12.0 -. 5 3.7 -. 2 Business fixed invest. Producers' dur. equip. Nonres. structures Res. structures 5522.6 4902.7 -26.8 -25.6 -32.7 -. 1 -25.1 -24.7 -17.9 -20.4 -24.5 -17.4 1.8 5.2 109.3 6.0 108.6 6.5 3.9 82.9 -7.0 80.8 1.20 9.52 6.80 2.71 1.13 9.56 7.05 2.51 5464.1 7.6 9.5 4.2 4.4 5537.0 5.4 6.2 .8 4.6 5577.8 15.6. 6.7 19.1 6.9 -. 3 -12.6 -10.7 -21.5 1.0 .2 -35.9 4.0 2.8 6.2 108.2 6.7 108.3 6.8 108.2 6.9 108.1 7.2 108.4 7.5 -9.7 78.0 2.6 77.9 6.6 78.7 -. 7 78.2 -2.9 77.3 5.2 77.9 1.03 9.02 6.61 2.41 .92 8.36 6.13 2.23 1.00 8.43 6.10 2.33 1.04 8.56 6.28 2.28 1.10 8.21 6.06 2.15 1.26 8.31 6.07 2.24 1.15 8.50 6.32 2.19 5592.7 1.1 5.2 5614.9 1.6 .1 -2.6 4.7 5674.3 4.3 4.6 1.9 4.7 5726.4 3.7 3.3 .7 4.5 5764.1 2.7 5.1 2.2 5.1 5859.8 6.8 6.1 4.0 4.9 5914.4 3.8 3.3 .7 5.2 -6.8 6.0 7.1 6.0 49.8 6.6 21.3 6.8 3.7 EMPLOYMENT AND PRODUCTION Other INCOME AND SAVING -167.8 36.1 -27.3 -156.9 33.8 -29.4 3.0 4.6 -1.2 3.9 -. 2 4.6 -29.9 6.3 -8.2 6.2 6.7 6.2 -145.6 30.3 -32.5 -194.6 20.2 -42.2 -149.9 14.6 -46.6 -2.6 6.1 -212.2 16.5 -44.1 -221.0 15.4 -44.5 -258.7 22.0 -37.3 -289.2 16.6 -41.8 -295.4 15.9 -42.2 PRICES AND COSTS %change GDP implicit deflator GDP fixed-wt. price index Gross domestic purchases fixed-wt. price index CPI Ex. food and energy ECI, hourly compensation 2 Nonfarm business sector Output per hour Compensation per hour Unit labor cost Not at 1. Not 1. at an an annual annual rate. rate. 4.4 5.4 4.8 4.6 4.7 4.7 3.9 4.1 5.3 4.7 3.5 3.5 2.4 3.0 2.4 2.4 3.1 3.6 2.4 1.6 5.9 7.2 5.6 3.7 4.1 5.5 5.6 7.0 5.8 5.8 6.9 4.2 3.1 3.3 6.5 2.5 2.4 3.8 2.9 2.7 4.0 2.5 3.6 3.7 3.1 2.9 3.9 2.8 3.5 3.9 5.6 4.7 4.7. 3.8' 4.9 4.5 4.1 4.0 4.0 2.5 -.4 5.2 5.6 2.5 7:7 5.1 -1.3 3.1 4.5 1.3. 5.3. 3.9 1.7 3.7 2.0 2.5 3.1 .6 3.8 3.9 .1 2.3 2.7 .3 -1.9 6.1 8.2 2. Private-industry workers, 2. Private-industry workers. -.3 5.4 5.7 I-17 Strictly Confidential (FR) Class II FOMC REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES (Seasonally adjusted, annual rate except as noted) August 13, 1992 Projected 1992 Item 1993 1994 Units Q3 Q4 Nominal GDP Real GDP Bill. $ Bill. 87$ 5942.5 4911.4 6022.0 4942.0 6107.0 4975.9 6187.8 5012.9 6270.9 5052.1 Real GDP Gross domestic purchases % change Private dom. final purch. 1.7 1.7 1.9 2.3 2.5 2.4 2.1 3.3 2.8 2.6 2.6 3.5 3.0 2.7 2.7 3.4 Personal cons. expend. Durables Nondurables Services 1.9 3.9 .9 1.9 2.5 5.8 1.1 2.4 2.9 7.8 1.8 2.4 2.2 4.3 -2.9 10.3 6.0 9.5 -2.4 10.6 6.1 5.9 Q1 Q2 Q3 Q4 Q1 Q2 Q3 6354.0 5092.6 6445.8 5133.3 6526.8 5171.7 6605.5 5209.7 6685.1 5247.9 3.2 3.0 2.8 3.5 3.2 3.0 3.3 3.9 3.2 2.9 3.1 3.5 3.0 2.9 2.8 3.5 3.0 2.8 2.9 3.5 3.0 2.8 3.0 3.5 2.8 6.1 2.0 2.5 2.8 5.8 2.1 2.5 3.0 6.5 2.2 2.6 2.9 5.3 2.3 2.7 2.9 4.8 2.3 2.7 2.9 5.3 2.3 2.7 2.9 4.9 2.3 2.7 5.9 9.0 -1.7 7.0 6.4 9.2 -.6 4.6 6.6 8.9 .8 7.5 7.5 9.6 1.7 8.7 6.6 8.1 2.4 5.7 6.3 7.4 3.1 5.7 6.1 6.9 3.7 5.0 5.9 6.5 4.2 6.7 4.6 3.7 6.9 5.4 7.8 5.3 8.1 6.8 8.3 5.7 8.3 5.6 8.1 7.3 7.8 6.4 7.2 5.7 .1 -3.1 -2.1 -1.4 -1.2 -.5 -.5 -.4 -.4 .2 -5.5 -5.3 -4.5 -3.9 -3.2 -3.2 -3.3 -3.3 -3.3 -2.0 .0 -8.5 -1.4 -8.3 .0 -7.3 .6 -6.5 .6 -5.3 1.2 -5.4 1.3 -5.5 1.4 -5.5 1.4 -5.6 1.4 -. 8 1.5 -36.1 3.7 3.4 -35.2 6.2 6.7 -33.7 9.6 10.6 -30.7 14.1 15.4 -29.3 13.1 14.9 -25.9 14.7 16.3 -22.3 17.2 18.7 -21.4 18.0 19.3 -19.7 % change 3.4 5.5 5.8 5.4 5.5 5.4 5.9 5.1 4.9 Nonfarm payroll employ. Unemployment ratel Millions % 108.7 108.9 109.4 109.9 110.3 110.9 111.4 112.0 112.5 7.6 7.4 7.4 7.3 7.2 7.0 6.9 6.7 6.6 6.4 Industrial prod. index Capacity util. rate-mfg 1 % change % 3.2 77.8 4.0 78.1 4.2 78.4 4.3 78.6 4.4 78.8 4.6 79.0 4.5 79.2 4.3 79.4 3.9 79.5 3.8 79.6 Housing starts Auto sales in U.S. North American produced Other Millions 1.23 8.44 6.39 2.04 1.28 8.67 6.55 2.12 1.31 8.90 6.70 2.20 1.34 9.07 6.85 2.22 1.38 9.25 7.00 2.25 1.41 9.43 7.15 2.28 1.44 9.55 7.25 2.30 1.47 9.62 7.30 2.32 1.49 9.80 7.45 2.35 1.52 9.97 7,60 2.37 Q4 EXPENDITURES Final sales Business fixed invest. Producers' dur. equip. Nonres. structures Res. structures Exports Imports Government purchases Federal Defense State and local Bill. Change in bus. invent. Nonfarm 87$ Net exports Nominal GDP -.4 18.0 19.1 -17.6 4.9 EMPLOYMENT AND PRODUCTION 113.1 INCOME AND SAVING 5965.9 6040.6 6128.6 6212.3 6297.8 6375.8 6469.3 6552.6 6633.4 6706.6 % change 3.5 3.7 1.1 5.0 5.1 5.9 2.1 5.0 6.0 7.1 3.1 5.0 5.6 6.1 2.9 5.0 5.6 - 6.0 2.6 5.0 5.0 5.9 3.0 5.0 6.0 6.8 3.7 5.2 5.3 5.3 2.7 5.1 5.0 5.1 2.4 5.0 4.5 5.6 3.0 5.0 Corp. profits, IVA&CCAdj Profit share of GNP1 % change 1.3 16.2 6.7 9.6 1.9 8.4 9.6 9.8 -1.3 6.8 '6.9 7.0 7.0 7.0 7.0 7.1 7.1 7.0 7.0 Federal govt. surpl./def. State/local surpl./def. Bill. $ -290.0 15.7 -42.3 -282.3 16.8 -41.1 -278.6 20.2 -37.6 -269.4 22.8 -34.9 -256.8 32.9 -24.7 -253.3 37.0 -20.5 -257.1 41.9 -15.5 -248.8 42.1 -15.2 -235.9 46.2 -11.1 -234.2 46.6 -10.8 1.6 1.9 2.9 3.0 2.9 3.2 2.3 2.6 2.3 2.5 2.1 2.4 2.6 2.9 2.0 2.2 1.9 2.1 1.9 2.1 !.4 2.9 3.0 3.4 3.7 3.2 3.1 3.1 2,6 3.1 3.0 2.5 3.1 3.1 2.4 2.9 2.9 2.9 2.7 2.7 2.3 2.5 2.5 2.2 2.4 2.4 2.2 2.4 2.4 3.5 3.4 3.3 3.2, 3.2 3.1 3.1 3.0 3.0 2.9 1.6 3.0 1.4 1.5 3.4 1.9 1.4 3.6 2.2 1.6 3.3 1.7 -1.8 3.3 1.5 1.6 3.2 1.6 1.5 3.4 1.9 1.3 3.2 1.9 1.1 3.1 2.0 1.0 3.0 2.0 Nominal GNP Nominal GNP Bill. $ Nominal personal income Real disposable income Personal saving ratel Ex. social ins. funds 1.7 PRICES AND COSTS GDP implicit deflator GDP fixed-wt. price index Gross domestic purchases fixed-wt. price index CPI Ex. food and energy ECI, hourly compensation %change 2 Nonfarm business sector Output per hour Compensation per hour Unit labor cost rate. Not at 1. annual rate. at an an annual 1. Not 2.7 2. Private-industry workers. 2. Private-industry workers. NET CHANGES IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS 1 Strictly Confidential (FR) Class II FOMC (Billions of 1987 dollars) August 13, 1992 Proj. Item Q1 Q2 Real GDP Gross domestic purchases 34.1 25.1 11.9 10.4 -20.1 -17.7 -48.8 -75.4 Final sales Private dom. final purch. 51.5 28.3 -13.3 -17.4 1.4 8.4 -10.8 -51.1 Personal cons. 17.5 16.7 .6 -14.3 13.8 -1.$ -25.9 -11.1 expend. Durables Nondurables Services Business fixed invest. Producers' dur. equip. Nonres. structures Res. structures Change in bus. invent. Nonfarm Farm Net exports Exports Imports Q3 Q4 -.6 1.4 -1.2 16.0 2.0 13.4 -7.5 -7.3 8.1 5.9 2.2 2.7 -9.2 -7.3 -1.9 -8.9 7.3 6.2 1.1 -12.7 -13.6 -5.6 -8.0 -17.4 -25.3 25.3 -21.6 22.0 -21.3 7.9 3.2 -.2 -38.0 -32.2 -5.8 9.0 12.5 3.6 1.5 8.5 7.0 -2.4 -.3 2.1 Government purchases Federal Defense Nondefense State and local 1. Annual changes are from Q4 to 04. 1992 1991 1990 -4.6 -7.1 -7.8 .7 2.5 -11.6 26.6 14.2 -12.4 Q2 Q3 Q4 Q1 Q2 1989 1990 -37.1 -51.9 20.4 19.9 14.7 28.9 6.7 -4.4 35.2 36.2 16.8 31.2 77.0 41.7 -38.8 -60.2 15.6 14.6 -6.2 13.4 -.3 -4.3 55.4 52.5 3.2 17.0 73.1 28.8 -29.7 19.7 -31.8 -36.5 -24.5 15.8 -.7 3.3 13.3 11,9 8.1 -1.5 5.2 -2.2 -3.3 -9.2 10.4 40.3 16.2 14.0 9.9 -2.7 -3.0 -4.2 4.7 -4.0 .6 -4.6 2.8 -4.3 5.0 -9.2 5.7 -6.6 -2.1 -4.6 4.7 3.7 2.7 1.0 8.3 15.9 16.7 -. 8 3.9 21,0 23.5 -2.5 6.9 12.8 -5.8 -20.1 -22.5 2.3 13.6 10.9 2.6 11.1 17.2 6.0 -1.0 4.0 5.0 -14.4 -5.4 9.1 Q1 -14.6 -8.6 -1.3 -22.3 -15.9 -6.4 -13.4 1.7 .9 .8 14.8 -6.7 -21.5 .5 20.2 19.7 -14.2 8.1 22.3 6.6 6.8 6.0 .7 -7.1 -9.0 -. 2 1.9 -9.6 .6 39.1 -2.4 12.1 29.4 -2.1 -6.2 4.1 -17k3 4.0 .7 3.3 35.3 49.5 14.1 18.1 -2.3 -4.2 2.0 20.4 1991 1992 -22.9 4.7 -57.6 -7.5 103.'5 118.2 6.0 -10.2 -7.3 23.5 -7.4 -. 8 -6.6 -30.5 1.0 -10.5 -16.0 27.6 -37.2 -12.4 -24.8 -. 2 107.4 124.7 72.9 23.5 15.1 34.2 29.8 31.6 -1.8 21.9 -51.7 -56.8 5.1 34.3 37.4 -3.0 -3.8 -8.4 4.5 34.7 34.9 .3 12.2 38.8 26.5 -14.7 13.5 28.2 25.9 11.2 -5.4 -2.6 -7.7 -13.6 5.9 5.1 4.3 6.8 14.7 -9.1 -14.8 5.7 3.7 NET CHANGES IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS Strictly Confidential (FR) Class II FOMC 1 (Billions of 1987 dollars) August 13, 1992 Projected 1992 Item Q3 1993 Q4 1994 Projected Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Real. GDP Gross domestic purchases 20.9 21.1 30.6 29.7 33.9 32.4 37.0 34.0 39.2 37.8 40.5 37.2 40.7 37.1 38.4 37.5 37.9 36.2 38.2 36.0 Final sales Private dom. final purch. 22.7 22.7 26.1 32.5 31.4 34.9 33.6 33.9 34.7 36.0 41.5 39.4 39.1 36.6 35.9 36.0 37.1 36.3 Personal cons. expend. Durables Nondurables Services 15.2 4.1 2,3 8.7 20.1 6.2 2.9 11.0 23.9 8.4 4.7 10.9 23.4 6.7 5.2 11.4 23.5 6.5 5.5 11.5 25.1 7.3 5.8 12.0 24.7 6.0 6.1 12.5 24.3 5.6 6.1 12.6 2.7 7.5 7.5 8.3 8.7 9.9 8.9 Res. structures 3.8 -1.1 4.7 8.4 -.9 5.0 8.1 -.6 3.4 8.5 -.2 2.3 8.4 .3 3,7 9.3 .6 4.4 8.1 .9 3.0 Change in bus. invent. Nonfarm Farm -1.8 1.3 -3.0 4.5 1.9 2.6 2.5 3.3 -.8 3.4 3.9 -.5 4.5 4.8 -.3 -1.0 -.5 -.5 1.6 1.4 .2 2.5 2.4 .1 -.2 8.4 8.6 .9 6.5 5.6 1.5 9.6 8.1 3.0 11.0 8.0 1.4 11.7 10.3 3.3 12.2 8.8 3.6 12.5 8.8 .9 12.5 11.6 1.7 12.2 10.5 2.1 11.5 9.4 .2 .2 -1.3 1.5 .0 -7.3 -5.3 -5.8 .5 -2.0 -5.0 -5.0 -5.5 .5 .0 -3.3 -4.2 -4.7 .5 .9 -2.7 -3.6 -4.1 .5 .9 -1.2 -2.9 -3.3 .4 1.7 -1.1 -2.9 -3.3 .4 1.8 -1.0 -2.9 -3.3 .4 1.9 -.9 -2.9 -3.3 .4 2.0 -.9 -2.9 -3.3 .4 2.0 Business fixed invest. Producers' dur. equip. Nonres. structures Net.exports Exports Imports Government purchases Federal Defense Nondefense State and local 1. Annual changes are from Q4 to Q4. 1991 1992 1993 1994 4.7 -7.5 103.5 118.2 150.6 141.3 155.3' 146.9 38.2 36.9 -29.7 -36.5 107.4 124.7 141.2 144.1 150.4 145.9 25.1 6.2 6.2 12.7 24.9 5.9 6.2 12.8 1.0 -10.5 -16.0 27.6 72.9 23.5 15.1 34.2 95.9 28.8 21.3 45.8 99.1 23.7 24.7 50.7 8.7 8.5 8.4 34.4 34.5 7.2 1.4 2.7 6.9 1.6 3.6 -37.2 -12.4 -24.8 29.8 7.5 1.1 3.0 31.6 -1.8 34.3 .0 29.6 4.9 -. 2 21.9 13.8 12.3 .8 .6 .0 -.2 34.3 37.4 -3.0 -3.8 9.4 11.5 .2 .2 I 12.2 38.8 26.5 -8.4 4.5 -14.7 13.5 28.2 -5.4 -2.6 -9.1 -7.7 -14.8 5.7 3.7 -13.6 5.9 5.1 -2.1 4.9 4.2 .7 9.3 8.3 44.5 35.2 48.6 40.3 -12.2 -15.7 -3.9 -11.6 -17.6 1.9 -13.2 3.5 1.6 7.7 I , STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS (Billions of dollars except as noted) Strictly Confidential (FR) Class II FOMC Fiscal year Item 1991* 1992 1993 1992 1993 1994 Q1 a Q2 a 3 Q4 Receipts Outlays1 Surplus/deficit 1 On-budget Off-budget Surplus excluding 2 deposit insurance Means of financing Borrowing Cash decrease 3 Other Q1 Q2 1992 1994 03 04 Q1 Q2 Q3 Q4 Not seasonally adjusted UNIFIED BUDGET 1 August 13, 1054 1324 -269 1085 1394 -309 1148 1498 -351 1209 1538 -329 239 355 -116 322 350 -28 269 351 -82 258 376 -118 252 372 -120 347 375 -28 291 375 -85 267 388 -121 270 384 -113 372 387 -14 299 379 -80 281 386 -106 -322 -361 -406 -391 -121 -60 -82 -127 -128 -61 -90 -131 -123 -52 -85 -121 51 55 62 6 31 0 10 10 37 5 16 -300 -297 -292 -105 -25 -82 -105 330 0 83 29 62 -27 77 3 4 -7 20 47 52 -203 293 -1 311 -3 338 4 -23 2 8 41 44 40 -1 9 8 33 6 -106 -12 -71 -106 -104 -5 -77 95 16 109 8 55 -20 79 0 115 10 100 10 42 -20 74 0 91 10 2 7 3 -7 6 -3 3 6 5 44 28 20 40 40 30 20 40 40 30 -107 -8 Cash operating balance, end of period 40 rIPA FEDERAL SECTOR Rceipts Expenditures Purchases Defense Nondefense Other expenditures Surplus/deficit Seasonally adjusted, annual rate 1118 1313 447 326 121 866 -194 1145 1429 445 314 132 983 -283 1214 1486 445 304 141 1041 -272 1299 1548 443 294 148 1105 -249 1143 1433 445 314 131 988 -289 1151 1446 447 313 134 999 -295 1158 1448 449 313 136 999 -290 1176 1458 445 307 138 1013 -282 1210 1489 448 307 141 1041 -279 1227 1497 445 302 142 1052 -269 1243 1500 442 299 144 1058 -257 1263 1516 440 296 145 1076 -253 1294 1551 445 297 148 1106 -257 1312 1560 443 294 149 1117 -249 1327 1562 441 291 151 1121 -236 1344 1579 439 288 152 1139 -234 -158 -222 -212 -211 -230 -232 -223 -218 -216 -211 -203 -206 -216 -214 -207 -211 1.1 -. 2 0 .5 0 -. 1 -. 1 0 -. 1 -. 1 0 .2 0 -. 1 .1 -4.3 -3.9 -2.8 -2.5 .1 .1 -1 -. 8 -. 7 -. 4 -. 7 -. 7 -. 7 FISCAL INDICATORS 4 High-employment (HEB) surplus/deficit Change in HEB,percent of potential GDP Fiscal impetus (FI), percent, cal. year -. 4 -3.8 -1.3 -2 1. OMB's July deficit estimates are $334 billion in FY92, $341 billion in FY93 and $274 billion in FY94. CBO's August deficit estimates are $314 billion in FY92, $331 billion in FY93 and $268 billion in FY94. Budget receipts, outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and shown separately as off-budget, as classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90. 2. OMB's July deficit estimates, excluding deposit insurance spending, are $323 billion in FY92, $282 billion in FY93 and $253 billion in FY94. CBO's March deficit estimates, excluding deposit insurance spending, are $301 billion in FY92, $282 billion in FY93 and $251 billion in FY94. 3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities. 4. HEB is the NIPA measure in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of potential output generated by 2.1 percent real growth and an associated unemployment rate of 6 percent. Quarterly figures for change in HEB and FI are not at annual rates. Change in HEB, as a percent of nominal potential GDP, is reversed in sign. FI is the weighted difference of discretionary changes in federal spending and taxes (in 1987 dollars), scaled by real federal purchases. For change in BEB and FI, negative values indicate restraint. a--Actual. DOMESTIC FINANCIAL DEVELOPMENTS Recent Developments On July 2, after the weak employment cut in the discount rate, report for June and the interest rates moved sharply lower. market rates initially fell about cut their prime lending rate 30 basis Money points, and most banks 1/2 percentage point to 6 percent. Over the remainder of the intermeeting period, short-term market rates moved down another intermediate- and the declines 10 to 30 basis points. Rate declines in long-term markets have been as large, with some of coming late in the period as information was seen as confirming further tepid expansion and lower inflation. In equity markets, most broad indexes have risen slightly. The broad monetary aggregates contracted again in July, dragging both M2 and M3 farther below their annual ranges. Increases in compensating balances may have boosted demand deposits; however, the increases were offset in M2 by continued sharp in small time deposits and, additionally, in M3 in large time deposits. runoffs by a faster decline The slashing of rates paid on M2 balances by depositories has apparently prompted some holders to use these funds to pay down high-cost debt or to reach for yield on capital market instruments. Indeed, stock and bond funds experienced near- record inflows again in June, and flows were reported to be strong again in July, aided by the marketing of such funds by banks seeking to boost fee income. The lowering of retail deposit rates and the runoff of large time deposits at banks also reflect slack funding needs. In July, bank credit was at a standstill; a further increase in security holdings was more than offset by decreases in each of the major categories of loans. The drop in real estate loans over June and July likely owed in part to still-large commercial real estate loan I-21 I-22 charge-offs around quarter end. Business loans contracted for the ninth consecutive month, albeit more slowly than the average rate recorded over the first half of the year. The August Senior Loan Officer Survey again suggested that weak loan demand by businesses and consumers as the major factor restraining growth in bank credit. Respondents also noted that, in contrast to the tightening reported in previous surveys, price and non-price terms were unchanged. Moreover, although credit standards remain relatively stringent, a few respondents noted an easing. Overall, net borrowing by the nonfinancial business sector continued to be weak through July. In addition to the decline in bank loans, commercial paper contracted. The relatively attractive interest rates on bonds induced a record pace of public offerings in July; most of those funds, however, continued to be earmarked for repaying higher-rate issues of an earlier vintage or for paying down short-term debt. Conditions for debt restructuring appear to have been particularly attractive to lower-rated issuers; strong demand for high-yielding, speculative-grade investments kept issuance of junk bonds at the elevated pace of June. In contrast, investors in equity markets appeared more cautious, especially toward higher-risk issues. Equity issuance of nonfinancial firms fell sharply in July partly because of a slowing in the pace of IPOs, including reverse LBOs. Few signs of a pickup in household borrowing have appeared to date. Consumer credit contracted further in June; the drop in installment credit for the second quarter as a whole was the largest since the credit controls in early 1980. consumer loans At commercial banks, (adjusted for securitization) rose slightly in July, as they did in June. Mortgage debt expansion was also sluggish in the second quarter, and data on real estate loans at banks suggest I-23 languid borrowing in July. However, the drop in mortgage interest rates led to a surge in applications for refinancing and home purchase loans at mortgage bankers, foreshadowing some pickup in home mortgage borrowing in the months ahead. In the state and local sector, gross bond issuance was substantial in July and early August, buoyed in large part by continued refunding issues. down by heavy retirements. Net issuance of debt, however, was held Strong demand by investors and weak net supply have reduced yields in this market by more than yields on taxable instruments. Federal borrowing is expected to be sizable in the third quarter, even though RTC activity has been put on hold for lack of congressional appropriations. The Treasury's mid-quarter financing announcement indicated that the composition of auctions would remain unchanged from previous refundings, following speculation that the Treasury might favor shorter maturities. The Outlook As noted in the outlook for nonfinancial developments, the staff projection is predicated on short-term interest rates holding at current levels through 1993 and long-term rates falling further in coming months. This pattern still appears at odds with the expectations of rising rates embedded in many financial market quotes. However, subdued economic growth and more favorable news on the wage and price front is anticipated to at least delay the usual cyclical increase of interest rates. As before, credit availability is expected to improve gradually with the rise in business and household earnings and more comfortable bank capital positions. In 1994, as the economy approaches higher levels of resource utilization, short-term rates could come under some upward pressure, although we expect long-term interest rates to edge down further in I-24 tandem with inflationary expectations. Over the forecast period, mortgage interest rates are expected to decline by as much as bond rates, as prepayment risk premiums stabilize. In line with the forecast of slightly less rapid economic expansion, the staff has trimmed the projected growth of domestic nonfinancial debt in the near term. Debt growth is expected to run below a 5 percent pace in the second half of this year but then to strengthen to a 6 percent rate in 1993. In both years, the increase in debt is about in line with that projected for nominal GDP. Continued outsized budget deficits keep federal debt rising in the double-digit range, and the increase in overall debt growth reflects firming in private-sector borrowing. In the nonfinancial business sector, the staff expects debt to remain essentially flat over the rest of the year and then to climb gradually in 1993. To date, capital spending by corporations has been met largely through internal funds, and, even as investment increases, the financing gap is expected to widen only slowly from the revised lower levels. 1 At the same time, firms have been actively lowering capital costs and debt servicing burdens by refinancing high-cost debt, primarily through public bond markets. Until recently, these efforts frequently involved equity offerings as well. Lately, equity issuance has been less of a component of such financial restructurings, as the credit markets appear to be less insistent on an equity component, and we expect a diminished role for equity finance over the forecast period. Borrowing in the bond market should continue to dominate other forms of credit extension, given the lower long-term interest rates embedded in the forecast. Loans to businesses from banks are expected to begin 1. The upward revision to corporate profits in the National Income and Product Accounts implied a substantially lower financing gap for nonfinancial corporations over the 1989-91 period. I-25 increasing in early 1993 with some relaxation of stringent lending policies and as demand for short-term financing grows with inventory investment. Nonetheless, bank credit is projected to remain a relatively minor source for business financing over most of the forecast period. The growth of household debt is expected to pick up moderately in the second half of 1992, largely because of slow improvement in housing activity. The recent declines in interest rates should tend to boost mortgage debt as some homeowners elect to "cash out" equity when refinancing. However, given the continued reluctance of households to take on debt, this effect is likely to be small as many homeowners use the opportunity afforded by lower rates to reduce their servicing burden or to shorten debt maturity. Moreover, the forecast assumes that the present aversion of households to installment debt will linger for some time. Consumer credit is expected to grow more slowly than disposable personal income over the next year and a half, and, along with further declines in mortgage and consumer loan rates, debt-service ratios are likely to come down to levels of a decade ago. State and local government debt is expected to grow slowly. Although budgetary pressures are likely to force some additional borrowing, spending for new capital projects will be restrained by only moderate increases in revenues from income growth and by resistance to additional taxes on the part of voters. Also, redemptions of pre-refunded debt should remain hefty. To cover projected deficits, the federal government's debt is expected to continue rising at above an 11 percent rate over the forecast period. Appropriations for RTC activities are assumed to be approved in time to boost spending early next year. Borrowing for depository insurance activities raises total debt growth roughly 1/2 percentage point in 1993, compared with 1/4 percentage point in 1992. Confidential FR Class II August 13, 1992 GROWTH RATES OF DEBT BY SECTOR 1 (Percent, period-end to period-end) -----------------Domestic Nonfinancial Sectors------------------- -------Memo-------- ----- Households----Total 2 U.S. govt. Nonfederal Total Home mtgs. Cons. credit Business State & Private local govts. financial assets 3 Nominal GDP 4 1983 1984 1985 11.7 14.5 14.9 18.9 16.9 16.5 9.8 13.8 14.5 11.0 '12.9 14.0 10.4 11.6 11.8 12.6 18.7 15.9 8.7 15.6 11.6 9.7 9.1 31.4 12.4 12.9 12.5 11.0 9.1 7.0 1986 1987 12.7 9.3 13.6 8.0 12.5 9.7 13.2 11.7 15.9 14.0 9.6 5.1 12.2 7.1 10.6 13.4 9.0 8.6 4.7 8.0 1988 1989 1990 1991 1992 9.0 7.7 6.4 4.2 5.1 8.0 7.0 11.0 11.1 11.4 9.4 8.0 5.1 2.1 3.0 11.0 9.0 7.4 4.0 5.2 12.2 10.3 9.3 5.1 6.6 7.3 5.8 1.8 -1.5 -0.5 8.4 6.8 2.8 -0.3 0.5 7.0 8.4 5.2 2.9 2.7 8.5 6.9 4.1 0.5 1.3 7.7 6.0 4.1 3.5 4.7 1993 1994 6.0 6.5 11.6 11.1 4.1 4.7 6.1 6.7 7.4 7.9 2.1 4.1 1.8 2.5 2.9 2.9 2.7 3.9 5.5 5.2 Seasonally adjusted, annual rates - 01 4.1 8.0 2.9 4.6 5.5 -1.3 1.0 3.0 4.0 1.8 Q2 4.7 10.6 2.9 4.5 5.8 -2.0 1.1 3.2 0.7 5.2 Q3 Q4 4.2 3.5 14.0 10.3 1.2 1.3 2.9 4.0 3.8 5.0 -2.4 -0.3 -1.1 -2.2 2.3 2.8 -1.5 -1.3 4.0 2.8 1992 -- 01 Q2 03 Q4 5.2 5.0 4.8 4.9 11.4 12.3 10.6 9.6 3.2 2.6 2.8 3.3 4.8 4.6 5.3 5.8 5.9 6.5 6.6 6.9 0.2 -2.5 -0.4 0.5 1.4 -0.1 0.3 0.5 2.7 3.7 1.6 2.8 2.1 0.3 0.8 1.8 6.2 3.7 3.4 5.5 1993 -- Q1 Q2 6.3 5.5 5.6 6.2 13.5 10.0 9.8 11.0 3.7 3.8 4.1 4.4 5.8 5.8 6.1 6.4 7.0 7.1 7.3 7.5 1.1 1.8 2.4 3.0 1.2 1.7 2.0 2.3 2.8 3.0 2.7 2.9 2.4 3.1 2.4 2.7 5.8 5.4 5.5 5.4 1991 03 Q4 1. Published data through 1992 Q1. 2. Deposit insurance activity raises total debt growth .4, .2, and .4 percentage points in 1991, 1992, and 1993 respectively; the corresponding figures for federal debt growth are 1.6, .4, and 1.3 percentage points. 3. Sometimes referred to as the "Kaufman debt proxy"; includes liquid assets and credit market instruments. 4. Annual figures are Q4 to Q4. 2.6.3 FOF Confidential FR Class II August 13, 1992 FLOW OF FUNDS PROJECTION HIGHLIGHTS 1 (Billions of dollars, seasonally adjusted annual rates) Calendar year ----------- 1992----------Q1 Q2 Q3 Q4 ----------- 1993---------Q1 Q2 Q3 Q4 1990 1991 1992 1993 1994 Net funds raised by domestic nonfinancial sectors: 1 Total Net equity issuance 2 3 Net debt issuance 580.8 -63.0 643.8 467.8 17.5 450.3 602.1 29.8 572.3 719.3 10.0 709.3 810.8 5.0 805.8 638.0 51.0 587.0 607.8 36.0 571.8 573.4 17.0 556.4 589.0 15.0 574.0 748.8 13.0 735.8 668.3 11.0 657.3 692.2 9.0 683.2 767.9 7.0 760.9 Borrowing sectors: Nonfinancial business Financing gap 2 4 Net equity issuance 5 Credit market borrowing 6 42.0 -63.0 96.7 -0.1 17.5 -9.7 -12.4 29.8 18.6 13.7 10.0 63.5 41.8 5.0 90.0 -39.5 51.0 49.8 -6.0 36.0 -1.8 -2.1 17.0 9.8 -1.9 15.0 16.4 2.3 13.0 43.2 8.9 11.0 59.2 17.5 9.0 69.4 26.1 7.0 82.0 7 8 9 10 Households Net borrowing, of which: Home mortgages Consumer credit Debt/DPI (percent)3 257.7 218.8 14.2 91.5 157.3 138.6 -12.1 94.5 212.2 189.7 -4.3 94.0 262.3 225.5 16.5 94.2 303.8 256.9 33.1 94.9 196.5 167.9 1.7 94.2 190.9 189.0 -20.0 94.3 219.0 195.0 -3.0 94.7 242.4 207.0 4.0 94.7 248.3 211.5 9.0 94.7 249.8 220.5 14.0 94.7 267.1 229.8 19.0 94.8 284.1 240.0 24.0 95.0 11 12 State and local governments Net borrowing 4 Current surplus 42.6 -35.8 24.5 -39.6 24.2 -38.0 26.1 -33.7 27.5 -22.2 24.2 -35.4 32.7 -37.3 14.5 -37.7 25.4 -41.7 25.4 -38.7 27.0 -35.4 25.3 -33.0 26.6 -27.9 13 14 15 U.S.government Net.borrowing Net borrowing;quarterly, nsa Unified deficit;quarterly, nsa 246.9 246.9 236.4 278.2 278.2 266.8 317.4 317.4 343.8 357.5 357.5 353.7 384.6 384.6 313.2 316.5 83.4 115.5 350.0 62.4 28.4 313.1 76.6 81.6 289.8 94.9 118.3 418.9 109.0 119.7 321.3 55.3 28.0 321.4 78.7 84.6 368.2 114.5 121.4 Funds supplied by 16 depository institutions -29.6 -61.4 47.6 62.3 112.0 10.6 33.8 76.8 69.4 60.2 14.6 72.1 102.1 Memoranda: As percent of GDP:3 17 Dom. nonfinancial debt 18 Dom. nonfinancial 5 borrowing U.S. government 19 20 Private 187.9 11.7 4.5 7.2 193.4 7.9 4.9 3.0 193.8 9.7 5.4 4.3 194.5 11.4 5.7 5.6 196.1 12.3 5.9 6.4 194.2 10.1 5.4 4.6 194.8 9.7 5.9 3.8 195.6 9.4 5.3 4.1 195.4 9.5 4.8 4.7 195.6 12.0 6.9 5.2 195.8 10.6 5.2 5.4 195.9 10.9 5.1 5.8 196.3 12.0 5.8 6.2 Published data through 1992 Q1. For corporations: Excess of capital expenditures over U.S. internal funds. Annuals are average debt levels in the year (computed as the average of year-end debt positions) divided by nominal GDP. NIPA surplus, net of retirement funds. Excludes government-insured mortgage pool securities. 2.6.4 FOF INTERNATIONAL DEVELOPMENTS Recent Developments The weighted-average foreign-exchange value of the dollar, terms of other G-10 currencies, has declined about 2-1/2 percent on balance since the June 30-July 1 FOMC meeting. The dollar interest rates relative to depreciated with declines in U.S. interest rates in abroad and further evidence of weakness in the U.S. The depreciation has been concentrated against economic recovery. European currencies--including a decline of 4 percent against the mark--reflecting, in part, the rise in European interest rates in the wake of the 3/4 percent increase in the Bundesbank's discount rate. The dollar has fallen 1/2 percent against the Canadian dollar and has risen about 1 percent against the yen, as interest rates in Canada and Japan have declined during the intermeeting period. The Desk purchased a total of 11; $770 million on July 20, August 7, operations on the last two days were concerted. and August The Bank of Japan sold $475 million, net, over the period. Economic activity in the major foreign industrial countries has been weaker in recent months than we anticipated in June. estimate of average real GDP growth in the foreign G-7 Our countries (weighted by GDP shares) during the first half of 1992 has been revised down 1/4 percentage point percent; the downward revision has been concentrated in Japan, Canada, and the United Kingdom. declined at an annual rate, to about 1-1/2 In Japan, industrial production in the second quarter, and retail sales have moved down in recent months as reduced salary bonuses and I-28 overtime pay appear to I-29 have slowed consumer demand. In response to the further signs of economic stagnation, the Bank of Japan lowered its official discount rate 1/2 percentage point to 3-1/4 percent on July 27, and the overnight call money rate came down a similar amount. In Canada, activity has continued to move ahead slowly, although according to recent monthly data, GNP and retail sales have been sluggish. Better-than-expected price performance in Canada has given the Bank of Canada more scope to ease, and Canadian interest rates have declined significantly over the intermeeting period. In the United Kingdom, the recovery in GDP foreseen for the second quarter appears not to have materialized. U.K. industrial production declined in the second quarter, retail sales weakened in June, and, according to recent surveys, consumer confidence has deteriorated. Economic growth in continental Europe has slowed somewhat, but about in line with previous expectations. In western Germany, real GDP is estimated to have declined about 3 percent at an annual rate in the second quarter, in part because of statistical and seasonal factors that boosted recorded growth in the first quarter. Even allowing for these factors, most indicators, including new orders and sales, indicate a slow pace of economic activity, and German unemployment has crept up. Nevertheless, short-term interest rates in Germany have risen by a few basis points over the intermeeting period. The increase in the German discount rate has led authorities in most other EMS countries to raise their interest rates even in the face of relatively slow real domestic growth. Economic indicators in France and Italy have been mixed, but these countries appear to have maintained slow to moderate growth rates. Consumer-price inflation has continued to wane in the major foreign industrial countries. In many cases, decelerating wages indicate that underlying inflationary pressures have lessened. In I-30 some instances, lower measured inflation is also attributable to special factors. (For example, in Germany a substantial drop in year-over-year inflation in July was associated with the removal of the effects of increases in indirect taxes introduced in 1991.) Although several countries recorded larger current account deficits in June, major countries in deficit narrowed their external imbalances during the first half of the year, largely because of relatively sluggish domestic demand. In Japan, however, slower domestic growth during the first half helped widen the current account surplus to an annual rate near $115 billion. The preliminary U.S. merchandise trade deficit widened slightly in May and for April-May combined it was substantially larger than for the first quarter. Exports fell 3 percent in April-May from their rate in the first quarter; lower shipments of aircraft accounted for the bulk of the decline. By region, exports to Europe and Japan fell, while those to most other areas were flat; Mexico was a notable exception, as exports to that country continued to grow. U.S. imports were 4 percent above their first-quarter rate, as oil imports rebounded from first-quarter lows and a wide range of non-oil imports increased. The price of oil imports was up in the second quarter, but prices of non-oil imports fell nearly 3 percent at an annual rate, in lagged response to the appreciation of the dollar earlier this year. Outlook The staff projects growth of real GDP in foreign economies on average to remain sluggish during the second half of 1992, and then to turn up during 1993. The projected rate of expansion in the near term is noticeably lower than in the previous forecast. This outlook for slower foreign growth, along with the lower than expected level of U.S. net exports during the second quarter, has I-31 led us to revise down significantly the projected level of net exports through 1993. At the same time, the projected level of the dollar has been revised down, and the lower dollar produces a more positive tilt to the path of net exports over the forecast period. We now project that, after declining slightly further in the third quarter, real net exports of goods and services will increase moderately through 1993. The Dollar. The foreign exchange value of the dollar in terms of the other G-10 currencies is projected to remain at around current levels through the end of 1993. This path for the dollar is about 5 percent lower than that projected in the June Greenbook. There may be a downside risk to this forecast for the dollar, in the near term at least, as the market responds to mixed data on the U.S. economy and continued tight monetary conditions in Europe. On the other hand, the pickup in U.S. economic activity poses an upside risk over the forecast period. Against the currencies of key developing countries, the CPI-adjusted value of the dollar is expected to show a moderate depreciation on average through 1993. Foreign Industrial Countries. The apparent further weakening of real growth abroad during the second quarter and the disappointing performance of various leading indicators, have prompted us to reduce our projection for average GDP growth in the major foreign industrial countries. This downward revision has amounted to a little over 1/2 percentage point at an annual rate during the second half of 1992 and about 1/4 percentage point during 1993. We anticipate continued growth abroad at only about a 1-1/2 percent annual rate (on a GDP-weighted-average basis) over the next two quarters, followed by a more noticeable upturn to 2-1/2 percent during 1993. Our expectation of a pickup in growth abroad is reinforced by the recent additional monetary easing in Canada and I-32 Japan, an expected fiscal expansion in Japan, and the cumulative effect of improving household and business balance sheets in several countries (particularly the United Kingdom). Among individual countries, in Japan growth of real output is projected to be positive, but to remain below 2 percent until mid1993 and below its potential rate through the rest of 1993. In Germany, investment demand should support economic expansion, although German monetary and fiscal policies have become somewhat more restrictive and prospects for consumer demand have weakened a bit. In the United Kingdom, after eight quarters of decline, GDP is expected to show weak positive growth in the third and fourth quarters and to pick up somewhat more in 1993. In Canada, the timing of increases in GDP growth is likely to be similar to that in the United States. We project consumer-price inflation in the major foreign industrial countries to average 3-1/4 percent over the four quarters of 1992 and about 2-3/4 percent over 1993, a little less than in the June forecast. German inflation is expected to remain at about 3-1/4 percent over the forecast period, and inflation rates in most other major EMS countries are expected to converge to a narrow range near that figure. Inflation in Japan and Canada is projected to be less, in the 2 percent to 2-1/2 percent range. We expect short-term interest rates in major foreign industrial countries on average to decline about 50 basis points from current levels by the end of 1993. This trajectory is roughly the same as that in the previous forecast, as changes for individual countries have largely offset one another. The projected paths of interest rates in Japan and Canada over the next few quarters have been lowered about 50 basis points reflecting the recent greater-thanexpected declines in official and market rates in those countries. I-33 Offsetting those declines have been small increases in shortterm interest rates in most major European countries. The outlook for German short-term interest rates has been moved up about 20 basis points over much of the forecast period, reflecting the effect of recent changes in official rates; German interest rates are not expected to move down until early next year as money growth slows and the threat of inflation wanes. Projected interest rates in most other EMS countries have also been adjusted upward to varying degrees, with the greatest increases in Italy, where interest rates have been raised, on balance, in recent months to blunt downward pressure on the lira. Interest rates in the EMS countries, particularly Italy, reflect uncertainty attached to ratification of the Maastricht Treaty. The expected path for average foreign long-term interest rates shows a small decline over the forecast period. This path has been adjusted downward from that in the previous Greenbook by about 15 to 20 basis points, mainly reflecting recent declines in long-term rates in Canada and Japan. Developing Countries. The outlook for output growth in the developing countries that are major U.S. trading partners is slightly lower than that in the last Greenbook. Real GDP growth in these countries is projected to be 5-1/4 percent in 1992, the same as in 1991, and a bit higher in 1993. This pattern holds for Mexico and the newly industrializing Asian economies. The forecast assumes passage of the North American Free Trade Agreement that was announced on August 12. Over the forecast period, the economic effects of the NAFTA are expected to be positive and significant for Mexico, but negligible for the United States. Growth in Latin American countries other than Mexico is expected to slow slightly this year, on average, and to pick up again in 1993. Growth in the I-34 People's Republic of China is projected to rise to about 10 percent this year, from 7 percent in 1991, and to fall off somewhat in 1993. U.S. Real Net Exports of Goods and Services. We expect that real net exports of goods and services will be about unchanged in the third quarter after dropping substantially in the second quarter. Exports are projected to recover somewhat from their second-quarter decline, and imports are projected to continue expanding. Beyond the third quarter, we project the volume of trade to accelerate slowly, with goods exports growing somewhat faster than imports. Net service exports are also expected to expand. In light of the unexpected weakness of both merchandise exports and foreign economic activity during the second quarter, we have substantially revised down the projected level of real nonagricultural exports in the near term. However, our outlook for the rate of increase in these exports during the second half of 1992 from their depressed level in the second quarter remains about the same as that in the June forecast. In our judgment, the negative effects on export growth of weaker projected real GNP growth abroad in the near term are about offset by the positive effects of the significantly lower projected path of the dollar. In 1993, the lower dollar fosters somewhat higher growth of nonagricultural exports than that projected previously. agricultural commodities Prospects for exports of (particularly soybeans) have improved somewhat in the near term, but we expect agricultural exports to remain little changed in 1993. After having been fairly strong during the first half of 1992, the growth of non-oil imports is projected to slow during the third quarter, as domestic activity remains sluggish, and to pick up over the rest of the forecast period. The increase in these imports is somewhat below that in the previous forecast, in the near term I-35 because of lower U.S. growth and in the longer term because of the lower dollar. TRADE QUANTITIES (Percent change from preceding period shown, except as noted, A.R.) ------ 1990:Q4 to 1991:Q4 Nonag. exports Agric. exports Non-oil imports Oil imports Projection 1992 Q1 ------ 1993 Q2 Q3 Q4 Q4 8.8 11.3 0.2 6.4 -3.5 -11.8 5.1 11.0 7.4 -10.3 9.2 0.9 5.1 6.5 5.2 1.7 6.7 25.2 3.7 37.9 5.5 -7.9 6.1 8.8 * GDP basis, 1987 dollars. The quantity of oil imports is projected to increase substantially further in the current quarter before easing fourth quarter. Early indications in the third quarter point to strong growth of consumption, while in the fourth quarter, are likely to be drawn down more than enough to increases in consumption. as the U.S. in the stocks offset further We expect oil imports to increase in 1993 economy recovers and domestic oil production continues its secular decline. Oil Prices. Current trends in the spot and futures markets for crude oil are consistent with an average U.S. oil import unit value of $18.25 per barrel in the fourth quarter of 1992, roughly $1.00 per barrel below the level projected for the fourth quarter in the June Greenbook. The unwinding of tensions associated with Iraqi compliance with U.N. sanctions combined with fairly robust production by members of OPEC in July has left spot and futures prices below the levels recorded at the time of the last Greenbook. Spot WTI prices are currently slightly above $21.00 per barrel, and we assume they will settle at $20.50 of 1993. per barrel by the first quarter I-36 Our longer-term assumption of an import unit value of $18.00 per barrel is consistent with the spot price of $20.50 per barrel and requires significant increases in OPEC production in 1993. Most of these increases are expected to come from Kuwait (where reconstruction continues rapidly) and Iraq. An absence of Iraq from the world oil market in 1993 would likely put upward pressure on oil prices, which most likely could only be partially offset by an expansion of Saudi Arabian output. SELECTED PRICE INDICATORS (Percent change from preceding period shown, except as noted. A.R.) 1990:Q4 to 1991:Q4 PPI (exp. wts.) -0.8 0.5 Nonag. exports* 0.5 Non-oil imports* Oil imports 18.04 ($/bl) -----1992 Q1 -0.3 0.1 2.1 Q2 3.7 1.9 5.8 Q3 2.4 2.5 4.8 15.27 17.37 18.95 Projection -----1993 Q4 Q4 1.6 1.8 2.0 2.5 4.5 3.6 18.00 18.25 * Excluding computers. Prices of Exports and Non-oil Imports. The fixed-weight price index for U.S. nonagricultural exports is projected to.increase at a moderate pace over the period ahead, roughly in line with U.S. producer prices. The prices of non-oil imports (excluding computers) are expected to increase at a 4-1/4 percent annual rate in the second half of 1992 and somewhat less in 1993. The rate of increase over the next forecast period is about 1 percentage point greater than in the June forecast as a result of the lower dollar. Nominal Trade and Current Account Balances. The staff projects the merchandise trade deficit to widen about $10 billion at an annual rate in the second half of 1992 from an estimated level of nearly $100 billion in the second quarter and to remain little changed during 1993. This projected level of the deficit over the next several quarters through mid-1993 is about $10 billion greater than that in the previous forecast. Most of the revision to the I-37 level of the projected trade deficit in the near term can be attributed to lower exports, as reflected in recent monthly trade data and the weaker near-term outlook for growth abroad. By the end of 1993, as the lower dollar boosts exports and damps imports, the change in the deficit is minimal. We project the current account deficit to widen from an estimated $45 billion in the second quarter to about $60 billion by the end of this year and then to narrow somewhat during 1993. Net services are expected to make a growing positive contribution to the current account and to real net exports over the next year and a half. Outlook for 1994. In extending the forecast beyond 1993 for the first time, we have projected the growth of real GDP abroad to pick up a bit more during 1994 to near growth rates of potential output on average. The dollar is projected to appreciate somewhat during 1994 assuming some firming of U.S. short-term interest rates. Real net exports continue to increase moderately in response to the lagged effects of the lower dollar and the slight increase in growth abroad, and the current account deficit recedes to about $35 for the year 1994. billion I-38 August 13, 1992 STRICTLY CONFIDENTIAL - FR CLASS II FOMC REAL GNP AND CONSUMER PRICES, SELECTED COUNTRIES, 1989-93 (Percent change from fourth quarter to fourth quarter) Projection Measure and country 1989 1990 1991 1992 1993 Canada France 1.5 3.4 -2.0 1.5 -0.0 1.7 1.9 2.6 3.4 2.8 Western Germany 2.8 5.2 1.8 2.5 2.4 Italy 3.0 1.6 1.8 1.6 2.0 Japan 4.8 4.7 3.2 1.3 2.5 United Kingdom 1.6 -0.7 -1.7 0.2 2.5 Average, weighted by 1987-89 GNP 3.3 2.5 1.6 1.6 2.6 Average, weighted by share of U.S. nonagricultural exports Total foreign G-6 3.3 2.5 1.8 0.5 1.7 0.8 2.5 1.7 3.5 3.0 5.2 4.9 5.2 5.2 5.7 Canada France Western Germany Italy Japan 5.2 3.6 3.0 6.6 2.9 4.9 3.6 3.0 6.3 3.2 4.1 2.9 3.9 6.1 3.2 2.5 2.8 3.2 4.9 2.5 2.6 2.8 3.3 3.5 1.9 United Kingdom 7.6 10.0 4.2 3.9 3.5 Average, weighted by 1987-89 GNP 4.4 4.8 3.9 3.2 2.7 4.2 4.4 3.8 2.8 2.5 REAL GNP Developing countries CONSUMER PRICES Average, weighted by share of U.S. non-oil imports August 12, 1992 Strictly Confidential (FR) Class II-FOMC OUTLOOK FOR U.S. CURRENT ACCOUNT AND REAL NET EXPORTS ,,,,,,I------,,-c,,---c-----------------(Billions of dollars, seasonally adjusted annual rates) Projection Projection GDP Net Exports of Goods and Services (87$) Exports of G+S Merchandise Services Imports of G+S Merchandise Oil Non-oil Services 1994 1993 1992 ANNUAL Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1992 1993 1994 -36.1 -35.2 -33.7 -30.7 -29.3 -25.9 -22.3 -21.4 -19.7 -17.6 -32.2 -29.9 -20.3 568.4 409.8 158.5 574,9 414.7 160.1 584.5 422.4 162.1 595.5 431.0 164.5 607.2 440.3 166.9 619.4 449.9 169.4 631.8 459.8 172.0 644.3 469.6 174.7 656.5 479.1 177,4 668.0 488.1 179.9 567.2 409.1 158.1 601.6 435.9 165.7 650.1 604.5 506.0 53.5 452.6 98.5 610.0 511.1 52.5 458.7 98.9 618.1 518.5 53.4 465.2 99.6 626.1 526.0 53.9 472.2 100.2 636.4 535,6 56.4 479.3 100.9 645.3 543.8 57.2 486.7 101.5 654.1 551.6 57.5 494.2 102.5 665.7 562.1 60.4 501.8 103.6 676.2 571.4 62.1 509,4 104.8 685.6 579.6 62.9 516.8 106.0 599.3 500.7 50.5 450.3 98.6 631.5 530.9 55.2 475.8 100.5 670.4 566.2 60.7 505.6 104.2 6.1 6.3 5.9 4.6 4.9 3.7 6.9 7.6 5.4 7.8 8.4 5.3 8.1 8.9 6.8 8.3 9.0 5.7 8.3 9.1 5.6 8.1 8.8 7.3 7.8 8.3 6.4 7.2 7.7 5.7 2.4 4.9 7.7 8.5 5.8 7.9 8.5 6.2 3.7 5.5 5.8 6.1 6.2 6.3 6.4 6.3 6.2 6.0 5.3 6.1 6.2 -53.2 -60.0 -52.4 -46.3 -41.5 -46.6 -37.4 -29.5 -36.4 474.2 176.0 Memo:(Percent changes 1/) Exports of G+S of which: Goods Imports of G+S of which: Non-oil Goods Current Account Balance Merchandise Trade, net -109.4 -110.3 -110.6 -110.5 -111.7 -111.5 -33.6 -109.5 -111.1 -113.0 -115.2 1.8 -44.7 -46.7 -34.2 -97.0 -111.0 -111.7 Exports Agricultural Nonagricultural 430.8 42.8 388.0 436.1 40.4 395.7 445.6 41.0 404.7 456.4 41.8 414.6 467.9 42.7 425.2 479,2 43.2 436.0 491.9 44.9 447.0 505.6 45.8 457.8 513.4 45.2 468.2 523.4 45.5 477.9 430.5 42.1 388.4 462.3 42.2 420.1 508.1 45.3 462.7 Imports Oil Non-oil 540.3 59.7 480.6 546.4 56.4 490.0 556.2 56.6 499.6 566.9 57.2 509.7 579.6 59.8 519.8 590.7 60.6 530.1 601.4 60.9 540.5 614.7 64.0 550.7 626.3 65.8 560.6 636.6 66.6 570.1 527.5 51.9 475.6 573.3 58.6 514.8 619.8 64.3 555.5 Other Current Account 33.6 32.5 37.4 40.4 44.1 43.9 49.4 52.5 56.3 56.1 32.4 41.5 53.6 Invest. Income, net Direct, net Portfolio, net 22.7 54.3 -31.6 17.8 51.8 -34.1 20.8 51.1 -30.3 23.7 55.7 -31.9 26.1 56.0 -29.9 21.0 54.4 -33.4 22.7 52.7 -30.0 25.0 57.3 -32.3 27.2 57.7 -30.5 20.7 55.2 -34.5 19.9 54.0 -34.1 22.9 54.3 -31.4 23.9 55.7 -31.8 Military, net Other Services, net Transfers, net 0.2 61.4 -28.0 0.4 63.3 -31.2 0.8 65.4 -28.8 1.0 68.2 -28.8 1.0 71.1 -28.0 1.0 74.1 -31.2 1.0 77.2 -28.8 1.0 80.3 -28.8 1.0 83.3 -28.0 1.0 86.3 -31.2 -0.2 60.5 -27.9 1.0 69.7. -29.2 1.d 81.8 -29.2 I/ Percent change (AR) from previous period; percent changes for annual data are calculated Q4/Q4. August 12, 1992 Strictly Confidential (FR) Class II-FOMC U.S. CURRENT ACCOUNT AND REAL NET EXPORTS (Billions of dollars, seasonally adjusted annual rates) 1990 1991 1992 ANNUAL Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 1990 1991 1992 -58.4 -56.9 -59.3 -32.7 -17.9 -17.4 -31.6 -20.5 -21.5 -35.9 -73.7 -51.8 -21.8 Exports of G+S Merchandise Services 500.2 363.5 136.7 508.7 368.7 140.0 508.4 366.7 141.7 522.6 375.3 147.3 515.9 377.4 138.5 536.1 390.1 146.1 544.2 395.2 149.0 561.4 565.4 408.1 157.3 560.0 471.8 343.8 127.9 510.0 407.3 154.0 368.5 141.4 539.4 392.5 146.9 Imports of G+S Merchandise Oil Non-oil Services 558.6 458.3 55.9 402.4 100.3 565.6 464.5 55.6 408.9 101.2 567.7 465.7 53.5 412.4 102.0 555.3 452.7 43.5 409.1 102.6 533.8 438.9 44.2 394.7 94.9 553.5 454.9 581.8 482.2 46.5 435.7 99.6 586.8 488.0 46.7 441.3 98.8 595.9 497.8 49.4 448.5 98.1 545.4 450.4 403.4 98.5 575.8 477.9 52.4 425.5 97.9 399.0 95.0 561.8 460.3 52.1 408.2 101.5 561.2 463.5 48.6 414.8 97.7 Exports of G+S of which: Goods Imports of G+S of which: Non-oil Goods 10.7 10.2 2.6 7.0 5.8 5.1 -0.2 -2.2 1.5 11.6 9.7 -8.5 -5.0 2.3 -14.6 16.6 14.2 15.6 6.2 5.3 17.1 13.3 12.8 4.2 2.9 0.8 3.5 -3.8 -4.3 6.3 11.3 10.2 2.6 7.2 5.8 0.1 7.4 8.5 4.8 -4.4 6.6 3.5 -3.2 -13.4 9.1 23.8 9.9 5.2 6.7 3.1 0.5 6.5 Current Account Balance -89.5 -85.3 -95.9 -91.0 48.8 9.7 -44.3 -28..9 r21.2 -44.5 -101.1 -90.4 -3.7 -99.2 -115.6 -111.1 -73.3 -65.6 -80.7 -74.2 -69.9 -98.4 -115.7 -108.9 -73.4 GDP Net Exports of Goods and Services (87$) 51.5 403.6 156.4 51.3 Memos(Percent changes 1/) Merchandise Trade, net -109.5 Exports Agricultural Nonagricultural 379.9 43.0 337.0 386.6 40.5 346.1 386.2 39.4 346.8 402.1 37.9 364.2 402.5 39.2 363.3 413.3 37.5 375.8 416.6 40.7 375.9 431.4 43.2 388.2 431.3 43.2 388.1 423.9 41.9 382.0 361.7 42.2 319.5 388.7 40.2 348.5 416.0 40.1 375.8 Imports Oil Non-oil 489.4 63.2 426.3 485.8 51.3 434.5 501.7 61.8 439.9 513.2 72.9 440.3 475.8 51.7 424.2 478.9 51.7 427.1 497.3 52.5 444.8 505.6 48.8 456.8 501.2 41.4 459.8 522.3 50.1 472.2 477.4 50.9 426.4 497.6 62.3 435.3 489.4 51.2 438.2 2.8 -10.0 94.2 59.6 24.0 35.5 29.8 33.6 0.2 -0.9 30.1 15.7 53.0 -37.3 12.3 48.3 -36.0 9.8 48.5 -38.7 18.8 54.9 -36.0 20.4 54.9 -34.6 14.4 47.8 -33.5 19.3 54.3 -35.1 16.4 52.9 -36.5 -5.7 -4.0 48.8 52.1 16.5 -24.0 -2.2 54.7 -17.1 -0.9 57.7 -27.0 -0.3 59.5 -25.6 -6.8 32.6 -25.6 -7.8 39.9 -32.9 -5.5 50.8 8.0 Other Current Account 2.7 Invest. Income, net Direct, net Portfolio, net 17.3 52.1 -34.8 Military, net Other Services, net Transfers, net -7.5 36.3 -26.2 1.1 -38.7 16.9 54.0 -37.1 59.7 -29.6 27.9 61.7 -33.9 -6.5 37.2 -29.6 -6.8 38.3 -28.8 -10.5 47.6 -47.1 -10.3 47.7 56.8 12.8 51.5 1/ Percent change (AR) from previous period; percent changes for annual data are calculated Q4/Q4. 53.3
@FedFRASER