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The attached document represents the most complete and accurate version
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Please note that this document may contain occasional gaps in the text. These
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1
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2
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Strictly Confidential (FR)
Class II FOMC
Part 1
August 13, 1998
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Strictly Confidential (FR) Class II FOMC
August 13, 1998
SUMMARY AND OUTLOOK
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Domestic Developments
Overview
The period since the last FOMC meeting has been an eventful one in many respects,
and we have responded to developments by making some small, but notable, changes
in our economic projection. That said, however, we would emphasize the constancy
of the basic message between the last Greenbook and this edition: Real GDP growth
slowed markedly in the second quarter, and at current monetary policy settings, output
expansion over the next year and a half is likely to remain subpar on average; even
so, inflation will creep upward.
We are currently guessing that GDP grew in the second quarter at close to the
1.4 percent (annual rate) estimated by the BEA in its advance release--somewhat short
of the June Greenbook prediction. Domestic final sales exceeded our expectations,
but the difference was more than offset by sharper declines in net exports and
inventory investment than we had forecast.
The marked drop-back in inventory accumulation is probably a plus, on
balance, for future economic activity. We previously had seen a significant further
downshift in stocking as an appreciable drag on output growth over the second half of
this year. This is no longer the case: Although inventory accumulation should
diminish further outside the auto sector, the efforts of General Motors to restock its
dealers will provide an offsetting increase in investment. In contrast, however, the
recent disappointing performance of net exports appears to reflect a deeper slump in
the Asian economies than we had anticipated, and we do not see a quick turnaround;
indeed, we have trimmed our forecast of growth in that part of the world further,
especially in the near term. This situation, in combination with the additional recent
appreciation of the dollar, spells a weaker outlook for net exports. On net, however,
we are now looking for real GDP to expand at an annual rate of a little over
2-1/4 percent in this half-year, about half a point more than in the last Greenbook.
That upward revision is then reversed during 1999, owing to the less favorable
outlook for U.S. trade, a greater fall-off in motor vehicle assemblies from what
promises to be a very high level this autumn, and some caution in computer purchases
as the year 2000 draws near. Real GDP growth in 1999 is projected at just
1-3/4 percent.
To achieve this sort of sustained deceleration in activity, domestic final
demand will have to taper off substantially. We expect that in the near term the
lagged multiplier-accelerator effects of the inventory adjustment and of the slide in net
Part 1: Summary and Outlook August 13, 1998
exports will drain some momentum from employment and income growth. But a key
factor in our forecast of demand continues to be the stock market, which we believe
has played a major role in the household spending boom. Although, given our track
record, we hesitate at this point to count our chickens, the recent "correction" in share
prices has at least made more credible a scenario in which disappointing corporate
earnings lead to an abatement of stock market gains and the related wealth effects.
With the weaker output forecast, we expect that resource utilization will
decline more appreciably by the end of 1999. The unemployment rate is projected to
inch above 4-1/2 percent by the end of this year and above the 5 percent mark in the
latter part of next year. With lower rates of resource utilization and greater softness
in non-oil import prices, we are presenting a more optimistic view of the trajectory of
core inflation and nominal compensation rates over the next six quarters. Given the
upcoming technical changes in the index, overall CPI inflation is projected to be just
2 percent over that period, nearly 1/4 percentage point less than last forecast.
Key Background Factors
Once again, we are assuming that the federal funds rate will remain around
5-1/2 percent through next year. Intermediate- and long-term yields are projected to
move back up a bit from the current level as the rest of the world begins to look more
solid and safe-haven demands for Treasuries and other liquid dollar assets diminish;
however, we expect that, in the projected economic environment, concerns about Fed
tightening will be largely absent, and the yield curve will remain quite flat.
Up to now, any restraint on aggregate demand that might have been implied
by a fairly high and rising real short-term interest rate has been overridden by the
stunning advance of share prices. Our last forecast anticipated a moderate setback for
the market in the near term. Early in the intermeeting period, the market seemed to
be defying our analysis for the umpteenth time, but worries about deteriorating
corporate earnings trends did eventually bite. We expect that continued pressure on
profit margins will prevent the markets from sustaining a renewed advance over the
projection period. If anything, valuations still seem rich, and the market thus
vulnerable. However, in the absence of a monetary tightening or any other major new
shock, we have hesitated to include a significant further decline in equity prices in our
baseline forecast. That risk is addressed in the alternative simulations in a later
section.
Our fiscal policy assumptions have not changed. There doubtless will be some
election-year squabbling about the details of appropriations bills, but we do not
Domestic Developments
anticipate any significant delays in the passage of bills or breaches of discretionary
spending caps. Nor do we foresee any tax cuts that are not "paid for" with offsets
elsewhere in the budget. On those assumptions, we expect the budget surplus for
fiscal year 1998 to be $67 billion; the surplus should be about $62 billion in fiscal
1999. Notwithstanding the considerable magnitude of these surpluses, we gauge that
changes in discretionary fiscal policy will be exerting no more than a modest drag on
the growth of aggregate demand.
We have marked down our projection of foreign economic growth
1/2 percentage point in both 1998 and 1999. We now expect real GDP in the rest of
the world, on an export-weighted basis, to increase 3/4 percent (annual rate) in the
latter half of 1998 and 2 percent next year, as economies in Asia and Latin America
begin to recover. While we believe that this forecast balances the risks overall,
uncertainty about Japan and the continuing difficulties in a number of other
countries--including Russia and Brazil--suggest that those risks are considerable.
The dollar has moved higher recently--with especially large increases against
the yen and the Canadian dollar. On a nominal basis, the trade-weighted dollar is up
about 2 percent against the major foreign currencies since the last FOMC meeting, but
we continue to expect some depreciation over the forecast period. Compared with the
earlier projection, the level of the dollar is nearly 2-1/2 percent higher in the near
term and about 1-1/4 percent higher in late 1999. In terms of the broad exchange-rate
index adjusted for relative inflation, we anticipate that the dollar will decline about
2-3/4 percent by the end of next year, a bit more than in the June Greenbook.
In response to continued weakness in prices, OPEC agreed to an additional
round of production cuts just after we closed the June Greenbook. Although recent
press reports have raised questions about the effectiveness of the cuts to date, it takes
a bit of time to reduce production in an orderly manner, and we believe that some
analysts have been too quick to dismiss the significance of the agreement. Although
there are risks to this forecast, too, we expect the supply-demand balance ultimately to
shift more in favor of producers. Consequently, we expect WTI spot prices--currently
just under $13 per barrel--to rise to $17 per barrel by early 1999, about $1 higher than
in the last projection. In the very near term, however, prices are expected to remain
on the low side, restrained by the vast amounts of oil sloshing around in world
markets.
Part 1: Summary and Outlook, August 13, 1998
Recent Developments and the Outlook for the Current Quarter
We have raised our prediction of third-quarter real GDP growth from 2 percent to
2-1/4 percent, despite the prolongation of the GM strike. Importantly, last week's
employment report pointed to continued underlying strength in labor demand. Were it
not for the strike, the rise in payrolls last month probably would have been in line
with the robust first-half pace. Similarly, the stable unemployment rate in July,
despite the strike, along with the low level of initial claims for unemployment
insurance this month, indicate sustained firmness of labor demand.
On the expenditure side, the data for the current quarter are quite thin, with
just a few pieces available for the month of July. Sales of new light vehicles slid last
month after the termination of large incentives at midyear and as shrinking inventories
at GM dealers became a constraint; underlying demand appears to have remained
quite substantial, however. And today's retail sales report indicates that consumer
spending on other goods continued to trend upward on a steep trajectory into the early
summer. Owing to the sizable decline in auto sales this quarter, real PCE likely will
decelerate markedly, but we are projecting a still considerable 3-1/2 percent rate of
advance. Likewise, residential investment should post a less hefty increase this
quarter, given the leveling out of housing starts this spring; new home sales have
continued to trend upward, but widespread reports suggest that shortages of skilled
construction workers have inhibited a fuller production response in the short run.
Our predictions for other components of GDP are even more inferential. As
regards business investment, orders received through June by U.S. equipment
manufacturers are consistent with further strong gains in shipments, but real outlays
for producers' durables are likely to be held down this quarter by a drop-back in the
share of commercial aircraft deliveries going to domestic airlines and by a decline in
sales of light motor vehicles to businesses (both fleet sales and consumer leases). We
also expect that investment in nonresidential structures will increase only slightly,
with strength in office building offset in part by slipping factory construction.
As for inventories, the buildup of stocks evidently remained fairly sizable
outside the auto sector in the second quarter. Taken together, the incoming figures on
manufacturing and wholesale inventories through June were considerably below
BEA's assumptions. However, we have largely offset that shortfall by assuming that
the accumulation of retail stocks in June will be greater than the skimpy figure
anticipated by BEA, thereby holding total nonfarm inventory investment in the second
Domestic Developments
Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
1998:Q2
Measure
Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment
June
1998:Q3
Aug.
June
Aug.
GB
GB
GB
BEA'
GB
2.0
6.2
5.2
12.1
10.2
1.4
6.9
5.8
13.2
11.4
1.3
7.2
5.7
13.2
14.1
2.0
4.0
3.8
-.5
6.8
2.2
3.3
3.6
8.5
-.6
6.1
3.7
3.2
-.7
1.4
Government outlays for consumption
and investment
Change, billions of
chained (1992) dollars
Inventory investment
Net exports
-51.1
-35.0
-46.7
-54.4
-48.6
-57.3
-3.8
-23.3
7.6
-26.1
1. Advance.
quarter within hailing distance of the $37 billion figure in the advance release.1
Anecdotal reports of desires to trim stocks in some industries and the relatively tepid
performance of indicators of manufacturing activity recently (with due allowance for
the GM strike) suggest that we may be seeing a considerable further moderation of
inventory investment this quarter outside autos.
That inventory adjustment likely will be reflected partly in import volumes, but
we believe that exports will continue to decline, at least somewhat, this quarter.
Consequently, net exports are expected to fall further, albeit not so sharply as in the
first half of the year. We have projected a negative contribution of about
1 percentage point (annual rate) to GDP growth this quarter, less than half the recent
magnitude.
Real federal purchases are expected to fall 2-3/4 percent at an annual rate in
the third quarter; this decrease is a bit larger than the current trend rate of decline and
mostly reflects quarter-to-quarter lumpiness in defense spending. With a projected
increase of 3-1/2 percent in the third quarter, purchases by state and local
1. One of our motivations for building in this offset is that--given our forecast of corporate profits in
the second quarter-our estimate of the increase in gross domestic income substantially exceeds that of
gross domestic product, raising the possibility of a subsequent upward revision to GDP.
Part 1: Summary and Outlook August 13, 1998
governments are expected to make up for slower-than-usual expenditure growth in the
first half of the year.
On the price side, the incoming data for June were a touch more favorable
than we had anticipated for the core CPI, and we now project that these prices will
rise at a 2 percent annual rate in the third quarter, down about 1/4 percentage point
relative to our previous forecast. The projection for energy prices for the quarter also
has been revised down, reflecting news on gasoline and natural gas. However, the
near-term forecast for food prices has been bumped up, owing to some temporarily
higher costs for those products most affected by the heat and drought in the South.
Overall, the total CPI is expected to increase 1-3/4 percent in the third quarter, about
1/4 percentage point less than projected in the June Greenbook. As for wages, the
recent moderation in monthly average hourly earnings provides a hopeful sign that
wage inflation is leveling off, although the pattern of twelve-month changes certainly
does not let us say decisively that the upward trend has broken. The more
comprehensive Employment Cost Index for total compensation rose about
3-1/2 percent at an annual rate last quarter, matching the pace of the preceding year.
The Outlook for the Economy beyond the Current Quarter
The aftermath of the General Motors strike will leave its mark on the GDP growth
figures for the next couple of quarters. GM has set ambitious plans for production in
the near term. Given the likely problems of ramping up assemblies, though, we
expect that some shortfall will occur at first and that the motor vehicle sector will
subtract about 1/4 percentage point from GDP growth this quarter. But with vehicle
production reaching a very high level in the fourth quarter, we are looking for a
sizable positive contribution in that period--almost 1-1/2 percentage points--bringing
the overall GDP increase to about 2-1/2 percent. Still, we are expecting that GDP
growth will be held back by an underlying softening in demand trends that shows
through more clearly in 1999.
Our projection of the supply side of the economy is little changed from the
June Greenbook. The revised data now confirm that labor productivity increased
somewhat more rapidly over the past few years, although some of that is merely the
result of the adoption of geometric means in the calculation of price indexes (which
affects earlier measured trends as well). All told, we think it reasonable to adhere to
our previous hypothesis that, based on considerations such as the increased pace of
capital deepening, potential output growth has picked up since the middle of the
Domestic Developments
Summary of Staff Projections
(Percent change, compound annual rate)
Measure
1998:H1
1998:H2
3.4
3.7
2.3
1.8
1.7
2.0
4.1
4.2
2.4
2.4
1.8
2.1
5.9
5.7
3.3
3.6
2.6
2.6
Residential investment
Previous
14.4
14.3
5.5
-.8
-3.6
-2.8
BFI
18.1
14.1
5.6
6.7
4.8
6.1
.6
1.4
2.1
.6
1.1
.9
Exports
Previous
-5.8
-2.2
-1.4
1.0
3.0
3.8
Imports
Previous
13.9
13.0
7.5
7.7
6.5
6.5
Real GDP
Previous
Final sales
Previous
PCE
Previous
Previous
Government purchases
Previous
1999
Change, billions of chained (1992) dollars
Inventory change
Previous
Net exports
Previous
-23.7
-21.4
-.6
-20.7
-14.0
-9.5
-106.9
-83.8
-52.0
-41.2
-53.2
-45.0
decade to a rate in the vicinity of 2-3/4 percent per year. 2 Real GDP is projected to
increase appreciably less rapidly than potential next year, implying a slowing of
payroll growth and a significant rise in the jobless rate.
Despite this uptilt in unemployment, labor will remain in short supply, and we
anticipate fairly hefty increases in real compensation. But, with price increases
restrained by falling import prices this year and by below-average factory utilization
2. Adjusting for the methodological changes made by BEA, this figure is essentially equivalent to
the growth rate of potential output used in the last Greenbook. Also, note that, because of these
methodological changes, potential output is measured on a consistent basis from 1995 forward.
Part 1: Summary and Outlook August 13, 1998
rates beyond that, these real pay gains are likely to be realized in the context of
diminishing nominal compensation increases. We now expect the ECI to increase
3.4 percent this year and 3.2 percent next year, the latter figure rising 0.3 percentage
point less than in the June Greenbook. We have also marked down our core CPI
projection, by 0.2 percentage point in 1999.
Consumer spending. The outlook for consumption has changed little since
the last Greenbook. Growth in real PCE is expected to slow markedly from its torrid
6 percent pace of the first half, to about 2-1/2 percent in 1999. We continue to
believe that wealth effects are a key factor behind the strength of consumption to date
and the associated decline in the personal saving rate. The recent drop in the stock
market should lead to an abatement of the positive wealth effects next year, resulting
in a further slackening in consumer demand.
Although the saving rate was revised down considerably in the annual NIPA
revision, our view of the magnitude and timing of wealth effects was not changed by
the new data. The revision mainly reflected an accounting change that removed
distributions of capital gains by mutual funds from personal dividend income--a
difference without much significance, as we see it, in terms of how households
probably perceive their spendable resources. 3
Real PCE growth is projected to average something under 3-1/2 percent over
the second half of this year. We expect to see considerable deceleration in outlays for
durables, particularly for motor vehicles; boosted by extra incentives, light vehicle
sales in the second quarter were at the highest level in this expansion. Given the
reduction in incentives and the limited supply of GM cars, we have light vehicle sales
dropping back to about a 14-1/4 million unit annual pace in the third quarter. Sales
should move up appreciably in the fourth quarter of this year and first quarter of next
year (though much of the increase will show up in business purchases) before drifting
down to an annual rate of roughly 14-1/2 million units by the end of 1999. Outlays
for nondurables and services are expected to increase more slowly in the second half
than in the first, as a stock market correction and a slowing economy begin to make
consumers a bit more cautious about discretionary spending on items like recreation
and travel, which have skyrocketed recently.
Looking ahead to next year, we anticipate that consumption growth will slow
to a 2-1/2 percent pace, as all major categories of spending decelerate. With an end
3. Distributions of capital gains by mutual fund companies were taken out of personal income, but
were added to corporate retained earnings. On empirical grounds, the FRB/US and other econometric
models have long included retained earnings in the income measure driving consumption.
Domestic Developments
to the rapid gains in share prices-and the absence of another slug of cash from
mortgage refinancings-spending should run much more in line with the growth of
income than it has in recent years. Demands for furniture, appliances, and other
household durables might moderate, especially given an expected tapering in the pace
of home purchases.
Residential investment. Residential investment has been a continued source
of strength, reflecting hefty gains in labor income and household wealth as well as
extremely attractive mortgage rates. This constellation of factors should provide some
momentum for building in the next few months; moreover, constraints on construction
have led to a backlog of demand that probably will continue to buoy housing starts
even as the demand fundamentals weaken.
By early next year, however, residential investment should begin to decline in
response to slower employment growth and diminished consumer confidence. In the
single-family sector, starts are projected to ease off from their current annualized pace
of 1.24 million units to a rate of 1.15 million units by the end of next year. The
implied increments to the supply of houses are sizable but, we suspect, not great
enough to prevent house prices from rising further relative to the CPI.
In the multifamily sector, we project that starts will slip only marginally from
their recent pace of 330,000 units at an annual rate. Even though the economy is
slowing, permits have been running above starts in this sector for some time,
indicating a backlog of projects waiting to be built. Declining vacancies and readily
available financing should also help to buttress activity.
Business fixed investment. Real business fixed investment is expected to
decelerate from an 11-3/4 percent increase in 1998 to a 4-3/4 percent pace next year.
Although in the near term the GM strike and variation in Boeing deliveries to
domestic airlines give rise to some quarterly noise, the underlying contour is one of
slowing in response to the deceleration of business output and weakening profitability.
After increasing at an annual rate of nearly 28 percent in the first half of the
year, real outlays for producers' durable equipment are projected to grow at a
7 percent pace in the second half and about 6 percent next year. Real spending for
computers is expected to decelerate from its 79 percent growth pace for the first half
to around half that over the rest of the year. Next year, growth in computer outlays
should step down somewhat further. Computer spending will continue to draw
strength from rapid declines in prices, a stream of new features and capabilities, and
an ongoing drive by many firms to improve efficiency. We expect the Year 2000
problem to give a boost to purchases this year and in early 1999 as some firms seek
I-10
Part 1: Summary and Outlook, August 13, 1998
to solve their potential problems by replacing equipment. However, later in 1999
many businesses may want to postpone purchases so that their IT staff can focus fully
on making last minute checks and fixes on existing systems. In other equipment
categories, the story of deceleration in spending also should hold, although the swing
in growth rates will be less dramatic than in the computer category. Spending on
communications equipment may be one of the best-maintained components of
investment, owing to the momentum of multi-year projects to update infrastructure
and the growing demand for the widening range of wireless communication services
that are becoming economically feasible. Outside of high-tech equipment, the
deceleration in business investment should be more clearly evident, with the demand
for many types of industrial equipment weakening substantially as a result of efforts
by manufacturers to curb the expansion of domestic capacity.
Although real outlays for nonresidential structures are reported to have
declined in the first half of this year, we continue to anticipate expansion in this
sector, with expenditures projected to increase at an annual rate of 1-3/4 percent in the
second half of this year and 2 percent next year. Among the major categories, office
construction is the fastest-growing in our forecast, as building responds to the
increases in rents and prices that have occurred in the past few years and the ample
availability of financing. In contrast, industrial construction is expected to continue
declining at a noticeable clip.
Business inventories. Even with a sizable step-down in the second quarter,
the pace of inventory accumulation outside the auto sector remained well above what
is consistent with sustainable growth in sales. Moreover, anecdotal reports suggest
that, owing in part to the sharp deterioration in international trade flows, stocks have
risen to uncomfortable levels in a few industries. In the fourth quarter, we expect a
further notch-down in inventory investment outside of motor vehicles that will be
partly offset by a positive swing in motor vehicle stocks. On net, nonfarm inventories
are expected to be an appreciable drag in the fourth quarter and a slight negative on
average in 1999. As an aside, we should note that some of the downside risk from
the inventory sector that seemed present in our previous forecast has been eliminated
by the recent revision of the NIPAs: Although inventory investment was trimmed
only a little, the higher level of final sales produced much less of a backup in the
aggregate inventory-sales ratios over the past year or so than was previously reported.
Patterns of farm inventory change also were altered in the NIPA revision.
However, the data still show substantial accumulation during 1996 and 1997, and
there were further sizable additions to stocks in the first half of 1998. Inventories of
Domestic Developments
grain are headed toward the highest levels of recent years. In the past, this kind of
inventory buildup would have prompted government action to coordinate a downward
adjustment of production by the nation's several hundred thousand commercial
farmers. Farmers this year, responding on their own to market signals, did reduce
their aggregate plantings by a small amount, and with adverse weather having
trimmed yields in some regions, crop production overall appears likely to decline
modestly. But, with farm exports sluggish, this decline in production has not been
sufficient to head off additional accumulation of stocks or to forestall the downward
pressures on farm prices. On the assumption that farmers will move toward greater
restraint on production, we are anticipating an appreciable slowing of inventory
accumulation next year. Absent a meaningful slowdown in stockpiling, pressure for
modification of the Freedom-to-Farm experiment, which now is in its third year of
seven, almost surely will continue to build.
Government spending. Real federal consumption and investment spending is
projected to decline at a 1-1/2 percent annual rate, on average, over the next six
quarters. Real defense purchases should fall at an annual rate of about 1-3/4 percent
over this period, while real nondefense purchases are expected to edge down, roughly
in line with the discretionary caps that allow nominal spending to increase a little.
In the state and local sector, real purchases are expected to increase at an
annual rate of about 3 percent over the next year and a half. Such an advance should
not strain government finances because state and local coffers have been filling up
with tax revenues. Even with these resources in hand, states have thus far been
relatively conservative about enlarging spending programs and, rather, have been
saving in "rainy day" funds or enacting small tax decreases. In the election
campaigns this fall, there could be some pressure for added spending increases or tax
cuts, but we have not yet seen any compelling evidence that state and local
governments will throw fiscal caution to the wind. As for the recent federal highway
legislation, the big step-up in the amount of money going to states is not likely to
occur until after 1999; thus, we do not anticipate a sizable effect on state highway
spending during the forecast period.
Net exports. With an upward revision to the dollar and a downward revision
to foreign growth, exports are expected to grow more slowly over the next six
quarters than in the last Greenbook. Exports drop at an annual rate of 1-1/2 percent
in the second half of this year--considerably less than the decline in the first half--and
then are expected to increase 3 percent next year as foreign growth picks up and the
dollar moves back down somewhat in real terms. Imports are projected to increase
I-12
Part 1: Summary and Outlook, August 13, 1998
The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
Measure
1997
1998
1999
Output per hour, nonfarm business
Previous
1.7
1.8
1.1
1.3
1.3
1.4
Nonfarm payroll employment
Previous
2.7
2.7
2.2
2.0
.8
.9
Household employment survey
Previous
2.1
2.1
.9
1.4
.4
.5
Labor force participation rate'
Previous
67.1
67.1
67.0
67.1
66.9
67.1
Civilian unemployment rate'
Previous
4.7
4.7
4.6
4.4
5.1
4.9
1. Percent, average for the fourth quarter.
close to 7 percent (annual rate) over the next six quarters, about the same as
anticipated in the June Greenbook. Overall, net exports are now forecast to hold
down real GDP growth by something over 1 percentage point in the second half of
this year and approximately 1/2 percentage point next year. (A more detailed
discussion is contained in the InternationalDevelopments section.)
Labor markets. With the benchmark revision of the labor productivity
figures now in hand, we have reviewed our assessment of the current trend. We
remain as comfortable as ever with our assertion that, while the acceleration of GDP
in the past couple of years played a key role in the resurgence of output per hour in
the nonfarm business sector, significant structural improvements played a role as well.
Therefore, we have retained our assumption that the cyclically adjusted productivity
trend is 1-3/4 percent for 1995-1999, up from just over 1-1/4 percent in the first half
of the decade.
Over the next six quarters, actual labor productivity should increase at well
below its trend pace, as firms adjust employment with a lag to slowing output growth.
In addition, productivity growth is expected to be hampered a little as employees are
shifted to work on Year 2000 problems.
Parsing out the GM strike effects, we believe that the current underlying pace
of payroll employment changes remained near its robust first-half pace through July.
We expect hiring to hold up well in the near term, owing to the efforts of some
employers to catch up with staffing needs that they have found difficult to fulfill to
Domestic Developments
I-13
date. However, as the economy remains on a more moderate expansion path, we
expect employers to scale back, with job growth slowing to about 150,000 per month
by the end of this year and to a little less than 100,000 per month in 1999.
Our projection for the unemployment rate is 0.2 percentage point higher, on
average, over the forecast period than in the last Greenbook. Unemployment rate
figures for June and July suggested a little more firming in that rate than we had
expected in the last Greenbook and, with essentially the same growth of output
relative to potential, the higher level of the unemployment rate carries forward.
Wages and prices. The incoming data on wages and prices since the last
FOMC meeting have, on balance, been a hair more favorable than we had anticipated,
and the further appreciation of the dollar implies greater disinflationary pressures from
falling import prices in the months ahead. In addition, as noted, the unemployment
rate path is slightly higher than in the last forecast. All these considerations have
encouraged us to trim our inflation forecast. The core CPI--on a consistently
measured basis--is now projected to increase at about the same pace next year as in
1998, rather than accelerating somewhat as in the June Greenbook.4
Outside the core, the food price outlook has not changed materially, but energy
prices rise somewhat faster next year than in the last projection, reflecting the larger
expected rebound in oil prices. Consequently, the downward revision to the forecast
for the total CPI has been less than that for the core component, and the index
accelerates to just over a 2 percent rate of increase, from 1-1/2 percent this year.
That acceleration would be a couple of tenths greater still, if not for the forthcoming
technical changes to the index.
The core PCE price index has been giving a much more favorable reading on
the trend of inflation in the past year. Indeed, it rose at an annual rate of just
1-1/4 percent over the first half of 1998--roughly half the pace of the increase for the
core CPI. On average over time, the PCE index tends to rise somewhat more slowly
than the CPI measure, reflecting the damping effects of ("upper level") substitution in
response to relative price movements that are not captured in the fixed-weight CPI.
But the two measures also differ in almost innumerable other ways, relating to
coverage and source data, making an insightful reconciliation of the shorter-term
4. At the beginning of 1999, the BLS will incorporate indexes aggregated with "geometric mean"
formulas in the official CPI. This methodology takes account of "lower-level" substitution possibilities
within narrowly defined product categories. BEA adopted this methodology in the July annual revision
of the NIPAs, which reduced increases in the PCE chain price index by an average of 1/4 percentage
point per year over the 1995-1997 period. As a result, PCE prices are now methodologically consistent
from 1995 onward.
Part 1: Summary and Outlook, August 13, 1998
I-14
Staff Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure
1997
1998
1999
1.9
1.9
1.5
1.7
2.1
2.2
Food
Previous
1.7
1.7
1.7
1.4
1.3
2.0
Energy
Previous
-1.0
-1.0
-7.2
-5.3
3.9
1.7
2.2
2.2
2.3
2.3
2.1
2.3
1.5
1.5
.9
1.3
1.6
1.9
1.6
1.5
1.3
1.7
1.5
1.9
GDP chain-weighted price index
Previous
1.7
1.8
1.1
1.5
1.5
1.7
ECI for compensation of private
industry workers'
Previous
3.4
3.4
3.4
3.6
3.2
3.5
Prices of core non-oil
merchandise imports
Previous
-.7
-.8
-2.9
-2.3
1.1
1.6
Consumer price index
Previous
Excluding food and energy
Previous
PCE chain-weighted price index
Previous
Excluding food and energy
Previous
Percentage points
MEMO: Adjustments for technical
changes to the CPI2
.4
.6
.2
Core CPI
1. December to December.
2. Adjustments are calculated relative to the methodological structure
of the CPI in 1994.
relative movements almost impossible. Our inspection of the components has not
yielded a strong signal about where things might go from here, although there are
some hints that erratic changes have tended to pull down the rate of increase in the
PCE index recently. However, that is sufficiently conjectural that we did not give it
much weight in our projection. Giving primary attention to the macro fundamentals,
we arrived at our prediction of a 1-1/2 percent rise in core PCE prices in 1999,
leaving a gap between that measure and the core CPI that is still relatively large by
historical standards.
Domestic Developments
1-15
Although our price forecast would appear optimistic relative to most private
predictions, we see it as reasonably balancing the risks at this point, given the
expected levels of resource utilization. The projection we are presenting actually is
slightly above what is predicted by our core set of models that use the unemployment
rate as a measure of slack, if one begins the simulation in the third quarter of this
year. Those models have tended to overpredict inflation in the past few years, and we
have in effect allowed for the possibility that there could be some reversal of this
pattern. Among other things, it may be that elements exogenous to the models have
worked in a favorable direction to date and could turn adverse in the period ahead--for
example, the effects of structural changes in the medical care market. On the other
hand, the pattern of overprediction may reflect a misspecification that could cause
the models to continue erring in the same direction--implying that our forecast is too
high. For example, as we've noted previously, it may be that the factory utilization
rate is more important than we have allowed for; indeed, a model using capacity
utilization instead of unemployment as the slack variable would have done a better
job of predicting prices in the most recent period and would point to a slowing of
inflation through next year.
As regards the labor market, as noted earlier, recent developments have not
contradicted our prediction that compensation increases would level out, despite the
continued low level of the unemployment rate. The central thesis was that a low level
of price inflation would mute the pressures on nominal wages, while real wages
would continue to climb at a rate well in excess of labor productivity. In this
projection, we have tilted a bit further in the direction of this logic by eliminating the
previously predicted pickup in the ECI this year and having the index decelerate in
1999. Relative to the models embodying this relationship, we have been quite
conservative: They point to a sharper deceleration. Not only the overall changes in
the ECI but also their composition have provided some grounds for optimism with
respect to the outlook. A disproportionate amount of the acceleration in the ECI over
the past year has reflected a huge step-up in pay in the finance, insurance, and real
estate sector, where compensation has been boosted in part by commissions and
bonuses associated with soaring activity. There is likely to be some reversal of this
pattern in the projected economic environment. And, more generally, we see flexible
pay devices as having taken on a greater importance in the economy, suggesting that
slowing growth and weakening profitability could damp workers' compensation
appreciably in 1999.
I-16
Part1: Summary and Outlook August 13, 1998
All told, our compensation forecast has been revised down about
1/4 percentage point relative to the June Greenbook both this year and next. We
believe that this lower trajectory better balances the risks to the outlook as articulated
by many of the models of wage determination that we follow. Our forecast continues
to be below the projections of so-called "wage-wage" models in which lags of
compensation inflation serve as proxies for shifts in wage aspirations. In contrast, our
ECI forecast lies well above projections from standard "wage-price" specifications
where lags of price inflation seek to model the evolution of price expectations.
Money and Credit Flows
The total debt of the domestic nonfinancial sectors is expected to advance at about an
annual rate of 5 percent over the second half of this year and to decelerate further in
1999 to about a 4-1/4 percent pace. The federal government is expected to end this
year with a significant surplus and to record another surplus next year. As a result,
federal debt is expected to contract by about 1 percent this year and a little more next.
The deceleration in total debt going forward is driven mainly by the outlook for the
nonfederal components, with slower growth anticipated in the business, household,
and state and local sectors.
Sizable merger-related financing needs and a widening gap between business
capital expenditures and internally generated funds are expected to drive continued
strong borrowing by nonfinancial corporations through the forecast period. However,
this borrowing is expected to run well below the breakneck pace of the first half.
Responses to the August Bank Lending Practices Survey suggest that domestic banks
have not yet tightened their underwriting standards and have reduced further the rate
spreads on C&I loans. We would expect to see some move toward greater caution as
business profits continue to sag. In the junk bond market, credit spreads have already
widened a bit. in light of disappointing earnings news and a modest uptick in defaults.
The anticipated trajectory of household borrowing in the forecast is similar to
that for the business sector. The waning effects of the runup in household wealth, a
slowing in personal income growth, and a weaker labor market are expected to trim
the growth of household debt over the forecast period in keeping with the slowdown
in consumption spending and some cooling of the housing market. In the near term,
credit supply conditions are expected to remain generally favorable. Recent readings
on household financial conditions, including declines in various measures of
delinquency rates and a leveling off in personal bankruptcy filings, suggest an easing
in the financial strains among some households. Responses to the August BLPS
Domestic Developments
I-17
suggest that domestic respondents have remained quite willing to extend credit to
households on balance, although they have tightened terms and standards a bit further
on credit card loans. However, as employment and income growth slows next year,
lenders may become more cautious. As in the business sector, credit restraints will
likely be most pronounced for lower-rated household borrowing in the "subprime"
credit markets.
In the state and local sector, advance refundings and new debt issued to
finance capital expenditures were exceptionally strong over the first half of this year,
largely in response to falling interest rates. However, given the rate outlook
embodied in this forecast as well as prohibitions on multiple advance refundings,
borrowing in this sector is projected to slow markedly.
The rapid growth in M2 evident over the first half of this year is not expected
to continue. Evidently, the combined effects of a flatter yield curve and efforts by
households to rebalance their portfolios in light of the runup in equity prices helped
spur the acceleration in M2 over the first half of this year and the accompanying
sizable decline in M2 velocity. Such portfolio shifts are expected to keep M2 velocity
moving downward over the balance of this year and in 1999 but not nearly so steeply
as over the first half of this year.
The slower projected expansion of household and business credit demands in
the forecast is expected to result in more subdued growth in bank credit. Moreover,
the assets of the branches and agencies of Japanese banks operating in the United
States are projected to continue contracting. The deceleration in bank assets is
expected to be mirrored in a more sluggish expansion of bank wholesale liabilities
included in M3. As a result, M3 growth is expected to taper off over the second half
of this year and to slow somewhat relative to M2 growth over the forecast period.
Alternative Simulations
Our alternative, model-based simulations assess the implications of different
assumptions about interest rates and the stock market. In the first alternative, the
federal funds rate rises 25 basis points per quarter beginning in the third quarter of
this year, reaching 100 basis points above the baseline in the second quarter of 1999;
the funds rate is assumed to remain at that level thereafter. This tightening of policy
reduces real GDP growth 0.1 percentage point in 1998 and 0.8 percentage point in
1999. Consequently, the unemployment rate rises to about 5-1/2 percent by the end
of next year, reducing pressures on resources. The increase in the core CPI next year
is 0.3 percentage point below the baseline forecast. The second, symmetric,
I-18
Part 1: Summary and Outlook, August 13, 1998
Alternative Federal Funds Rate
and Stock Market Assumptions
(Percent change, Q4 to Q4, except as noted)
Measure
1997
1998
1999
3.8
3.8
3.8
2.9
2.8
3.0
1.7
.9
2.5
3.8
3.8
3.0
2.8
2.2
1.3
Baseline
4.7
4.6
5.1
Higher funds rate
Lower funds rate
Constant stock market wealthto-income ratio
10 percent lower stock prices
4.7
4.7
4.6
4.6
5.4
4.8
4.7
4.7
4.6
4.6
4.9
5.2
2.2
2.2
2.2
2.3
2.3
2.3
2.1
1.8
2.4
2.2
2.2
2.3
2.3
2.1
2.1
Real GDP
Baseline
Higher funds rate
Lower funds rate
Constant stock market wealthto-income ratio
10 percent lower stock prices
Civilian unemployment rate1
CPI excludingfood and energy
Baseline
Higher funds rate
Lower funds rate
Constant stock market wealthto-income ratio
10 percent lower stock prices
1. Average for the fourth quarter.
alternative assumes a 100-basis point decline in the funds rate between now and the
second quarter of 1999. In this scenario, the unemployment rate reaches only
4-3/4 percent by the end of next year, and core consumer price inflation moves up to
2.4 percent in 1999.
The third alternative assumes that the ratio of stock market wealth to income
holds steady over the projection period, rather than declining as we are anticipating in
the baseline forecast. In this scenario, real GDP growth is 0.1 percentage point higher
than the baseline forecast this year and 0.5 percentage point higher in 1999. The
unemployment rate is a bit lower next year in this simulation, while core CPI inflation
is little changed. As we have noted before, the effect on prices under this type of
alternative is small because the unemployment rate change is modest and because, in
Domestic Developments
I-19
the FRB/US model, inflation expectations move slowly in the absence of a significant
change in the stance of monetary policy.
For this Greenbook, we have added a fourth simulation that considers the
impact of a 10 percent lower path for stock prices relative to the baseline. In this
simulation, real GDP growth is 0.1 percentage point lower than the baseline forecast
this year and 0.4 percentage point lower next year. The unemployment rate is a touch
higher next year than in the baseline, while core CPI inflation differs little from the
baseline for the same reason as in the other stock market simulation.
Strictly Confidential <FR>
Class II FOMC
August
STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT
(Percent, annual rate)
13,
1998
ANNUAL
1995
1996
1997
1998
1999
QUARTERLY
1996
Q1
02
Q3
Qa
1997
01
02
Q3
04
1998
01
Q2
Q3
04
1999
Q1
Q2
Q3
04
3.4
3.4
3.9
4.0
3.0
2.B
3.2
3.6
1.5
1.8
2.2
2.3
1.2
1.4
1.8
2.2
1.9
1.6
1.6
1.7
1.7
1.4
1.4
1.4
2.4
2.2
2.2
2.2
2.4
2.1
2.0
2.0
4.6
4.7
4.B
4.9
4.7
4.9
5.0
5.1
3
TO-QUARTER
1996
Q2
Q4
6.2
4.9
6.5
5.0
3.8
2.7
4.7
3.2
2.3
2.3
1.8
1.7
3.5
2.9
3.5
2.9
-0.2
-0.1
-0.2
-0.1
1997
Q2
6.3
4.9
6.4
4.8
4.1.
3.4
1 1
3.6
2.1
1.4
2.2
1.2
1.8
2.0
1.8
2.0
-0.4
-0.2
-0.4
-0.2
5.1
3.5
4.3
3.B
3.7
1.8
3.4
2.3
1.4
1.6
0.9
1.4
1.3
2.1
1.2
1.9
-0.4
0.1
-0.3
0.3
3.4
4.0
2.9
3.4
1.6
2.3
1.3
2.0
1.8
1.6
1.6
1.4
2.3
2.2
2.2
2.0
0.3
0.2
0.3
0.3
4.0
5.6
5.6
4.2
5.8
5.6
4.0
3.1
1.6
3.2
3.7
2.7
2.0
2.1
3.9
3.8
2.9
1.7
2.4
2.3
1.8
1.5
1.7
2.1
1.8
1.7
1.1
1.5
2.6
3.2
1.9
1.7
2.2
2.6
3.2
1.9
1.5
2.1
0.0
-0.3.
-0.6
-0.3
0.5
0.0
-0.3
-0.6
-0.1
0.5
04
1998
Q2
04
1999
42
04
Ot
FOtR-QUARTER
1995
1996
1997
1998
1999
1.
2.
3.
4.
04
Qa
Q4
Q4
Q4
4.3
3.7
For all urban consumers.
Level, except as noted.
Percent change from two quarters earlier; for unemployment rate, change in percentage points.
Percent change from four quarters earlier; for unemployment rate, change in percentage points.
Strictly Confidential <FR>
Class II FOMC
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)
August 13,
Item
1
1998
Projected -
1991
1992
1993
1994
1995
1996
1997
1998
1999
5916.7
6079.4
6244.4
6244.4
6558.1
6389.6
6947.0
6610.7
7269.6
6761.7
7661.6
6994.8
8110.9
7269.8
8476.2
7515.0
8748.3
7646.3
0.4
0.0
-0.4
-0.8
3.6
4.0
3.9
4.9
2.4
3.0
2.1
3.7
3.3
3.6
2.7
3.7
2.1
1.6
2.7
2.9
3.9
4.2
3.7
4.4
3.8
4.4
3.4
4.5
2.9
4.6
3.2
5.8
1.7
2.1
1.8
2.6
expenditurea
-0.2
-3.1
-1.0
0-9
4.2
9.4
3.4
3.6
2.7
7.4
1.6
2.3
3.1
6.3
3.0
2.5
2.6
4.5
1.7
2.6
3.3
5.8
2.8
3.0
3.7
7.4
2.0
3.8
4.6
7.9
4.3
4.0
2.6
3.4
1.8
2.8
Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures
-6.0
-2.6
-12.6
1.0
5.5
9.6
-3.4
16.9
9.9
12.2
4.5
7.8
7.6
10.2
1.1
4.2
7.3
9.1
2.7
-1.4
11.7
11.B
11.6
5.4
9.8
12.7
2.5
4.2
11.7
16.9
-1.4
9.9
4.8
5.9
2.0
-3.6
8.6
4.1
4.1
7.4
4.6
10.2
10.0
12.3
10.5
5.6
10.3
11.8
9.6
14.0
-3.7
10.7
3.0
6.5
-0.7
-3.1
-5.3
1.0
1.7
1.3
-1.3
2.0
-1.4
-6.1
-6.9
2.0
0-1
-3.9
-6.0
2.7
-0.9
-5.6
-5.0
2.1
2.1
1.1
-0.1
2.8
1.4
-0.6
-1.4
2.6
1.3
-0.9
-3.1
2.6
1.1
-1.9
-2.4
2.7
-3.0
-1.2
-22.3
7.0
2.1
-29.5
22.1
29.5
-70.2
60.6
49.0
-104.6
27.7
37.7
-96.5
30.0
23.2
-111.2
63.2
58.8
-136.1
56.7
49.2
-261.1
31.7
27.1
-346.8
% change
3.8
6.3
5.0
5.8
4.2
5.8
5.6
4.0
3.1
Nonfatr payroll employmnt
Unemployment rate
Millions
108.3
6.8
108.6
7.5
110.7
6.9
114.1
6.1
117.2
5.6
119.6
5.4
122.7
4.9
125.8
4.6
127.3
4.9
Indstrial
prod. index
Capacity util. rate - mfg.
c change
-0.0
77.9
3.7
79.4
3.3
80.5
6.5
82.5
3.3
82.8
4.2
81.4
5.8
81.7
1.7
80.5
1.3
79.4
Units
EXPENDITURES
Nominal
Bill.
Bill.
ODP
Real qDP
Real GDP
Gross domestic purchases
Final sales
Priv. dca.
final purchases
Personal cons.
Durables
$
Ch.
9; change
Nondurables
Services
Exports
Imports
Gov't. cons. & investment
Federal
Defense
State & local
Change in bus.
Non arm
Net exports
inventories
Nominal GDP
Bill.
Ch. $
EMPLOYMENT AND PRODUCTION
it
Millions
Housing starts
Light motor vehicle sales
North Amer. produced
Other
1.01
1.20
1.29
1.46
1.35
1.48
1.47
1.57
1.49
12.53
12.86
13.88
15.03
14.74
15.06
15.04
15.12
14.79
9.74
2.78
10.51
2.35
11.71
2.16
12.88
2.14
12.82
1.91
13.34
1.71
13.11
1.94
13.13
1.99
12.87
1.93
5932.4
3.5
3.5
0.7
5.6
6255.5
6.2
7.2
4,0
5.7
6576.8
5.1
4.0
1.2
4.4
6955.2
5.7
5.2
2.5
3.5
7287.1
4.4
4.6
2.1
3.4
7674.0
5.6
5.9
2.7
2.9
8102.9
5.2
5.4
2.9
2.1
8451.8
3.9
4.4
2.8
0.5
8707.3
3.0
3.5
2.3
0.2
4.5
6.9
6.6
11.3
6.8
6.6
19.0
7.5
7.2
14.1
8.2
7.9
14.6
9.2
8.9
7.7
9.8
9.5
7-7
10.1
9.8
-1.3
9.7
9.4
-2.9
9.0
8.8
-196.0
-280.9
-250.7
-186.7
-174.4
-110.3
-21.1
71.0
50.6
75.8
11.5
86.3
18.3
87.4
19.7
96.8
27.9
111.7
37.0
122.6
52.2
134.1
66.0
142.2
74.6
148.9
81.2
15.7
4.8
14.5
3.7
14.4
3.7
15.5
4.7
16.3
5.8
16.6
6.3
17.4
7.3
17.2
7.2
16.2
6.1
3.3
2.6
2.6
2.5
2.1
1.8
1.7
1.1
1.5
2.7
3.0
2.7
3.1
2.3
2.7
2.5
2.7
2.0
2.6
1.8
3.2
1.3
1.9
0.6
1.5
1.4
2.1
4.4
3.5
3.1
2.8
3.1
2.6
2.2
2.3
2.1
4.4
3.5
3.6
3.1
2.6
3.1
3.4
3.4
3.2
2.2
4.7
2.5
3.5
4.5
1.0
-0.4
1.6
2.0
0.1
2.1
2.0
1.2
2.8
1.6
2.1
3.7
1.6
1.7
3.9
2.1
1.1
3.9
2.8
INCOME AND SAVXG
Nominal
GNP
Bill. S
S change
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Corp. profits, IVA a CCAdj.
'
change
Profit share of 0P
Excluding FR Banks
Federal surpl./deficit
State & local surpl./def.
Ex.
social
ins.
Bill.
$
funds
Gross natl.
saving rate
Net natl.
saving rate
%
PRICES AND COSTS
GDP chn.-wt. price index
Gross Domastic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI,
hourly coopensation
Nonfarm business sector
Output per hour
Compensation per Hour
Unit labor cost
'
2
change
1. Changes are from fourth quarter to fourth quarter.
2. Private-industry workers.
Strictly
Confidential <FR>
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS,
Class II FOMC
QUARTERLY VALUES
August 13,
(Seasonally adjusted, annual rate except as noted)
1995
01
1995
Q2
1995
7170.8
6717.5
7210.9
6724.2
1.7
1.9
2.2
2.9
expenditures
Business fixed investment
Producers' dur. equipment
Noufes. structures
Residential structures
Item
Units
1998
1995
Q0
1996
Q1
1996
Q2
1996
Q3
1996
Q4
1997
Q1
1997
Q2
7304.8
6779.5
7391.9
6825.B
7495.3
6882.0
7629.2
6983.9
7703.4
7020.0
7818.4
7093.1
7955.0
7166.7
8063.4
7236.5
0.4
0.7
2.3
2.9
3.3
1-7
3.7
2.7
2.8
2.0
2.5
3.1
3.3
4.5
3.6
5.1
6.1
7.0
5.4
6.2
2.1
3.4
0.9
3.1
4.2
1.8
5.1
3.3
4.2
5.5
2.9
4.6
4.0
4.4
2.7
3.3
1.9
-1.0
2.3
2-3
3.4
5.9
1.6
3.8
2.6
8.3
0.7
2.4
2.3
4.8
2.0
1.9
3.7
5.8
2.2
4.0
4.7
12.7
4.8
3.0
1.8
-1.9
1.2
3.0
2.9
7.2
2.9
2.0
4.3
12.3
3.6
3.1
1.6
-1.5
-0.2
3.2
16.1
18.1
10.7
-8.8
6.9
7.6
5.1
-15.0
0.9
1.4
-0.4
10.1
6.1
10.1
-3.8
10.6
13.1
15.7
6.4
9.3
11.0
12.3
7.4
19.5
14.2
16.2
8.9
-1.7
8.8
3.2
24.5
-3.9
7.0
8.3
3.9
3.1
14.0
22.8
-6.2
6.1
9.2
9.8
5.4
7.2
17.8
2.0
10.2
3.5
3.7
13.1
5.8
13.5
2.1
13.6
32.0
7.0
8.3
18.6
0.1
-2.6
-1.6
1.8
1.2
-2.0
0.1
3.2
-0.8
-2.6
-5.4
0.4
-4.1
-14.7
-12.5
2.8
3.2
8.0
7.2
0.5
7.1
8.1
8.1
6.5
-1.6
-4.7
-6.3
0.3
0.0
-6.3
-8.3
3.8
2.1
-2.7
-9.9
4.9
2.1
3.6
9.1
1.3
54.3
62.5
-109.5
21.7
36.7
-114-7
14.7
30.6
-86.8
20.1
20.8
-74.8
14.4
10.4
-95.5
26.1
15.2
-113.5
47.5
38.6
-140.1
32.1
28-7
-95.9
56.3
56.2
-121.5
79.0
72.1
-131.6
03
EXPENDITUKES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
% change
Gross domestic purchases
Final sales
Priv. dam. final purchases
Personal conn.
Durables
Nondurables
Services
Exports
Ivports
Gov't. cons. & investment
Federal
Defense
State & local
15.5
17.9
Change in bus. inventories
Nonfarm
Not exports
Bill. Ch. $
Nominal GDP
% change
4.3
2.3
5.3
4.9
5.7
7.3
3.9
6.1
7.2
5.6
Nonfatm payroll employment
Unemployment rate
Millions
116.5
5.5
116.9
5.7
117.4
5.7
117.9
5.6
118-5
5.6
119.3
5.4
120.0
5.3
120.7
5.3
121.5
5.3
122.3
4.9
Industrial prod. index
Capacity util.
rate - mfg.
% change
5'
5.9
83.8
1.6
82.9
4.5
82.6
1.1
81.8
2.0
81.0
7.5
81.6
3.5
81.5
3.8
81.4
5.2
81.6
4.6
81.5
Bousing starts
Light motor vehicle sales
Millions
1.32
14.71
12.69
2.02
1.29
14.45
12.46
2.00
1.4421.42
14.78
15.00
12.93
13.22
1.85
1.78
1.47
15.11
13.44
1.67
1.49
15.17
13.45
1.73
1.49
13.00
13.32
1.65
1.42
14.94
13.18
1.77
1.47
15-32
13.40
1.93
1.46
14.54
12.67
1.87
Nominal GNP
Nominal GOP
Nominal personal inacom
Real disposable income
Personal Baving rate
Sill. $
' change
7189.3
5.3
4.7
7233.3
2.5
3.4
7313.2
4.5
4.3
7412.6
5.5
6.1
7515.0
5.6
6.6
7643.3
7.0
6.9
7708.6
3.5
5.5
7829.0
6.4
4.6
7952.4
6.5
7.3
8062.3
5.6
4.7
Corp. profits, IVA a CCAdj.
Profit mhare of GNP
Excluding PR Banks
% change
5h
Federal surpl./deficit
State
local surpl./def.
Ex. social ins. funds
Bill. $
EMPLOIENT AND PRODUCTION
North Amer. produced
Other
INCOME AND SAVING
Gross natl.
saving rate
Net natl.
saving rate
2.6
-0.6
2.7
3.9
2.9
2.1
4.4
1.3
3.3
2.9
4.1
3.1
3.1
3.3
3.2
2.6
3.1
2.6
2.4
2.6
7.7
8.8
8.5
16.6
9.0
8.7
30.3
9.6
9.2
5.4
9.5
9.3
16.9
9.8
9.5
6.9
9.8
9.5
3.8
9.8
9.5
3.5
9.7
9.5
18.1
10.0
9.7
11.1
10.1
9.8
-189.6
110.4
37.6
-177.9
112.6
37.7
-176.9
113.0
37.3
-153.0
110.7
35.5
-150.1
117.3
45.3
-112.6
129.1
58.2
-100.1
122.3
52.5
-78.3
121.7
52.9
-51.2
128.4
59.8
-34.8
130.1
61.6
16.2
5.7
16.0
5.4
16.3
5.7
16.8
6.2
16.6
6.0
16.4
6.2
16.8
6.6
16.7
6.5
17.0
7.0
17.6
7.6
2.5
1.8
1.6
2.8
2.2
2.7
3.3
1.5
2.6
2.7
2.1
3.3
2.7
2.2
2.0
2.2
2.9
2.8
2.8
2.5
PRICES AND COSTS
GDP chn.-wt. price index
Gross Domestic purchases
chn.-vt. price index
CPI
Ex. food and enargy
ECX,
hourly compensationl
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1. Private-industry workers.
I change
-0.4
2.0
2.5
2.6
3.5
0.9
4.1
2.6
-1.5
3.0
5.2
2.2
Strictly
Confidential <FR>
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
August 13, 1998
(Seasonally adjusted, annual rate except as noted)
Class II FOMC
-
-
-
-
-
-
-
-
Projected
-
-
-
-
-
-
-
-
-
-
1997
Q3
1997
Q4
1998
Q1
1998
Q2
1998
03
1998
Q4
1999
Q1
1999
Q2
1999
Q3
1999
04
8170.8
7311.2
8254.5
7364.6
8384.2
7464.7
8429.2
7489.3
8504.8
7530.0
8586.7
7576.1
8649.4
7598.6
8709.0
7625.0
8778.1
7659.6
8856.6
7702.0
4.2
4.6
3.0
3.2
5.5
7.8
1.3
4.0
2.2
3.3
2.5
3.5
1,2
1.9
1.4
2.1
1.9
2.2
2.2
2.4
5.8
7.2
2.1
2.9
4.3
8.5
3.8
7.2
1.8
3.3
2.9
4.2
1.5
2.6
1.6
2.4
2.0
2.5
2.3
2.7
6.2
16.8
5.1
4.7
2.8
3.1
-0.4
4.3
6.1
15.8
7.4
3.5
5.7
10.9
5.2
4.8
3.6
1.0
2.6
4.6
3.1
4.6
2.1
3.2
2.6
3.6
1.7
2.9
2.5
2.4
1.7
2.9
2.6
3.1
1.8
2.8
2.7
4.3
1.9
2.8
Business fixed investment
Producers' dur. eaguirant
onres. structurea
Residntilal structures
17.0
18.8
12.4
-0.4
1.8
2.2
0.9
8.2
22.2
34.3
-4.9
15.6
14.1
21.3
-4.1
13.2
-0.6
-1.1
0.9
8.5
12.2
15.8
2.6
2.7
5.3
6.3
2.4
-3.7
4.5
5.4
2.0
-4.4
4.7
5.8
1.7
-3.6
4.8
5.9
1.7
-2.8
Exports
Imports
10.6
13.5
4.4
6.3
-2.8
15.7
-8.9
12.1
-2.3
6.9
-0.5
8.2
1.2
6.9
2.7
7.6
3.8
6.4
4.4
5.0
OOv't. cons. & investment
Federal
Deatense
State & local
1.4
-1.2
-1.8
2.9
0.1
-2.1
-2.0
1.3
-1.9
-8.8
-18.5
2.1
3.2
7.0
9.4
1.3
1.4
-2.8
-4.1
3.6
2.7
1.6
3.0
3.3
0.2
-4.4
-6.3
2.8
1.8
0.0
0.0
2.7
1.5
-0.9
-1.3
2.7
1.1
-2.1
-1.8
2.7
51.0
44.0
-142.4
66.5
62.7
-149.0
91.4
85.9
-198.5
42.8
34.6
-255.9
50.5
42.2
-281.9
42.2
34.1
-307.9
36.4
29.7
-326.4
32.2
26.9
-344.1
29.8
25.9
-355.5
Item
Units
EXPENDITURES
Nominal GDP
Real GDP
Bill.
Real GDP
Gross domestic purchases
Final sales
Priv. dm. final purchases
% change
$
Bill. Ch.
Personal cons.
$
expenditures
Durables
Nondurables
Services
Change in bus, inventories
Nonfarm
Net *xports
Bill.
Nominal GDP
% change
5.4
4.2
6.4
2.2
3.6
3.9
3.0
2.8
3.2
3.6
Nonfarm payroll employaant
Unemployment rate
Millions
123.0
4.9
123.9
4.7
124.8
4.7
125.5
4.4
126.1
4.5
126.7
4.6
127.0
4.7
127.2
4.9
127.4
5.0
127.7
5.1
Industrial prod, index
Capacity util.
rate - mfg.
% change
6.0
81.6
7.2
82.2
1.2
81.6
1.9
80.9
0.1
79.8
3.8
79.8
1.2
79.6
1.3
79.4
1.3
79.3
1.6
79.3
Housing starts
Light motor vehicle sales
North Amer. produced
Millions
EPLOtMENT
Ch. $
28.3
25.8
-361.1
AND PRODUCTION
I'
Other
1.45
1.53
1.58
1.56
1.58
1.54
1.51
1.49
1.48
1.47
15.21
13.21
2.00
15.10
13.15
1.95
15.02
13.07
1.96
16.07
14.06
2.01
14.24
12.23
2.02
15.14
13.17
1.97
15.03
13.08
1.95
14.81
12.87
1.94
14.69
12.77
1.92
14.64
12.75
1.89
8811.2
INCOME AND SAVING
Nominal GNP
Nauinal GMP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
% change
8162.0
8234.9
8369.4
8408.0
8475.2
8554.8
8613.7
8669.6
8734.6
5.0
4.7
2.4
1.7
3.6
5.0
2.9
1.7
6.7
5.9
4.0
1.2
1.9
4.2
2.6
0.6
3.2
3.9
2.6
0.3
3.8
3.7
1.9
0.1
2.8
3.6
4.3
0.5
2.6
3.4
1.7
0.3
3.0
3.5
1,8
0.1
3.6
3.4
1.7
-0.1
Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding PR Banks
% change
13.1
-9.2
4.2
-1.8
-8.7
1.4
-8.3
-5.6
-0.6
3.2
10.3
10.0
9.9
9.8
9.5
9.5
9.2
9.0
8.9
8.9
10.0
9.7
9.6
9.6
9.3
9.2
8.9
8.8
8.7
8.7
Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds
Bill.
Gross natl. saving rate
nat natl. saving rate
tChange
$
-0.3
2.2
58.8
77.6
76.2
71.3
47.1
48.7
S3.9
52.5
136.6
68.7
141.4
73.8
140.2
72.7
131.8
64.1
145.1
77.5
151.6
83.9
151.4
83.7
148.8
81.1
146.4
78.7
148.9
81.2
17.5
7.5
17.3
7.3
17.7
7.8
17.2
7.2
17.0
7.0
16.7
6.7
16.6
6.5
16.3
6.2
16.1
6.0
15.9
5.8
1.1
0.9
-0.4
3.8
4.2
0.3
3.7
3.3
1.1
3.7
2.5
0.7
3.6
2.9
PRICES AND COSTS
GDP cin.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
' chaage
CPZ
Ex. food and energy
ECI, hourly compasation
1
1-0
2.3
-0.2
0.5
2.1
2.4
4.3
2.7
Nonfarm
business sector
Output per hour
Compensation per hour
Unit labor cost
1. Private-industry workers.
3.5
4.6
1.1
Strictly
Class II
Confidential
FOMC
<FR>
August 13,
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
1998
9704/
96Q4
1996
Q2
1996
Q3
1996
Q4
1997
Ql
1997
Q2
1997
03
95Q4/
9404
9604/
95Q4
3.3
4.5
6.1
7.1
2.1
3.5
4.2
1.9
4.2
5.5
4.0
4.4
4.2
4.7
2.1
1.6
3.9
4.2
3.8
4.4
3.6
4.2
5.4
5.0
0.9
2.5
5.1
2.7
2.9
3.8
2.7
2.7
5.7
5.9
2.7
2.4
3.7
3.6
3.3
3.7
0.4
0.4
0.8
3.2
1.0
1.0
1.2
1.3
-0.2
0.2
1.2
2.0
0.6
0.6
0.8
2.9
1.0
0.7
1.2
1.1
-0.1
0.0
1.3
1.7
0.4
0.3
1.0
0.1
0.1
0.0
0.4
0.6
0.7
-0.1
0.4
1.1
0.9
0.2
0.7
1.4
1.1
0.2
-0.1
0.9
0.2
0.6
-0.2
0.7
0.6
0.1
0.1
1.4
1.6
-0.2
0.2
0.7
0.6
0.1
Net exports
Exports
Imports
1.6
1.8
-0.2
0.7
1.1
-0.4
-1.1
0.4
-1.5
-0.9
0.7
-1.6
-1.3
0.2
-1.6
2.4
3.2
-0.9
-1.2
0.9
-2.2
-0.4
1.8
-2.2
-0.5
1.2
-1.7
0.5
1.1
-0.7
Government cons. & invest.
Federal
Defense
Nondefense
State and local
-0.1
-0.2
-0.3
0.1
0.0
-0.8
-1.1
-0.6
-0.5
0.3
0.6
0.5
0.3
0.2
0.1
1.3
0.5
0.4
0.2
0.7
-0.3
-0.3
-0.3
0.0
0.0
0.0
-0.4
-0.4
0.0
0.4
0.4
-0.2
-0.5
0.3
0.6
0.4
0.2
0.4
-0.1
0.2
0.2
-0.1
-0.1
0.0
0.3
-0.2
-0.4
-0.4
-0.0
0.3
-0.6
0.8
-0.3
-0.5
0.2
0.6
0.3
0.3
1.2
1,3
-0.1
-0.8
-0.5
-0.3
1.3
1.5
-0.2
1.3
-1.4
0.9
0.4
-1.5
0.1
-0.6
-0.6
-0.0
1995
03
1995
04
1996
3.3
1.7
2.8
2.1
3.7
2.2
2.5
2.6
Personal cons. expenditures
Durables
Nondurables
Services
1.8
1.6
0.7
0.2
1.0
Business fixed investment
Producers' dur. equip.
Nonres. structures
Residential structures
Item
Real GDP
Gross dom. purchases
Final sales
Priv, dom.
Change in bus.
Nonfarm
Farm
Note.
final purchases
inventories
Components may not sum to totals
01
because of rounding.
-0.1
-0.4
-0.2
-0.2
0.2
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
Strictly Confidential <FR>
Class II FOMC
August 13,
1998
7_
1997
Q4
1998
Q1
1998
02
1998
Q3
1998
Q4
1999
Q1
1999
02
1999
Q3
1999
Q4
97Q4/
9604
98Q4/
97Q4
9904/
9804
purchases
3.0
3.2
5.5
7.9
1.3
4.1
2.2
3.4
2.5
3.6
1.2
2.0
1.4
2.1
1.8
2.3
2.2
2.4
3.8
4.4
2.9
4.7
1.7
2.2
Priv. dA.n final purchases
2.1
2.4
4.3
7.0
3.9
6.0
1.8
2.7
2.9
3.5
1.5
2.2
1.6
2.0
2.0
2.1
2.3
2.3
3,3
3.7
3.2
4.8
1.B
2.2
1.9
0.3
-0.1
1.7
4.1
1.2
1.4
1.4
3.8
0.9
1.0
1.9
2.4
0.1
0.5
1.8
2.1
0.4
0.4
1.3
1.8
0.3
0.3
1.2
1.7
0.2
0.3
1.2
1.8
0.3
0.3
1.2
1.9
0.4
0.4
1.2
2.5
0.6
0.4
1.5
3.1
0.6
0.9
1.6
1.0
0.3
0.3
1.2
0.2
0.1
0.0
0.3
2.2
2.4
-0.1
0.6
1.5
1.6
-0.1
0.5
-0.1
-0.1
0.0
0.4
1.3
1.2
0.1
0.1
0.6
0.5
0.1
-0.2
0.5
0.4
0.1
-0.2
0.5
0.5
0.1
-0.2
0.5
0.5
0.0
-0.1
-0.3
0.5
-0.8
-2.2
-0.3
-1.9
-2.6
-1.1
-1.5
-1.1
-0.3
-0.9
-1.1
-0.1
-1.0
-0.0
0.1
-0.9
-0.7
0.3
-1.0
-0.4
0.4
-0.8
-0.2
0.5
-0.7
0.0
-0.1
-0.1
-0.1
0.2
-0.3
-0.6
-0.8
0.3
0.2
0.6
0.4
0.4
0.1
0.1
0.2
-0.2
-0.2
-0.0
0.4
0.5
0.1
0.1
-0.0
0.4
0.0
-0.3
-0.3
-0.0
0.3
0.3
0.0
0.0
0.0
0.3
0.3
-0.1
-0.1
0.0
0.3
0.2
-0.1
-0.1
-0.1
0.3
0.3
-0.0
-0.1
0.0
0.3
0.2
-0.1
-0.1
0.1
0.3
0.8
1.0
-0.1
1.2
1.2
0.0
-2.4
-2.6
0.1
0.4
0.4
0.0
-0.4
-0.4
0.0
-0.3
-0.2
-0.1
-0.2
-0.1
-0.1
-0.1
-0.1
-0.1
-0.1
-0.0
-0.1
Item
1
Real GDP
Gross dom.
Final sales
Personal conn.
exp*ndituresi
Durables
Nondurables
Services
Business
fined investment
Producers' dur. equip.
Nonres.
structure
Residential struatures
Net exports
Exports
Imports
Government cons.
Federal
Defense
Nondefense
State and local
Change in bus.
Nonfarm
Farm
Note.
a
invest.
inventories
Components may not sum to totals
because of rounding.
0.2
-0.1
-0.1
-0.0
0.3
Strictly Confidential (FR)
Class II FOMC
STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS
(Billions of dollars except as noted)
Fiscal year 5
Item
1996
a
1997
a
1998
1997
1999
Q1
a
Q2
a
August 13, 1998
1998
Q3
a
Q4a
Q1
a
Q2
b
1999
Q3
Q4
Q1
Q2
Q3
Q4
391
399
-8
-62
54
548
424
124
71
53
430
429
2
-11
12
414
445
-31
-66
35
Not seasonally adjusted
UNIFIED BUDGET
1
Receipts1
Outlays
Surplus/deficit1
On-budget
Off-budget
Surplus excluding
deposit insurance 2
Means of financing
Borrowing
Cash decrease
Other 3
Cash operating balance,
end of period
1453
1561
-107
-174
67
1579
1601
-22
-103
81
1719
1652
67
-39
106
1780
1718
62
-56
118
349
401
-52
-69
17
496
396
100
61
39
387
398
-11
-19
8
386
426
-40
-66
26
378
409
-30
-51
21
544
407
137
87
50
410
411
0
-9
9
-116
-36
62
58
-56
97
-12
-41
-31
136
-2
-56
-9
123
1
-32
130
-6
-16
38
1
-17
-50
8
-25
-47
-5
-11
48
-1
5
-69
-18
-13
11
8
-7
34
12
-6
26
4
0
-82
-45
-10
-28
37
-9
34
15
6
18
0
-10
-104
-15
-5
6
-5
-3
21
10
1
44
44
35
40
33
51
44
32
28
72
35
20
20
35
40
30
NIPA FEOERAL SECTOR
Receipts
Expenditures
Consumption expend.
Defense
Nondefense
Other expenditures
Current account surplus
Gross investment
Current and capital
account surplus
411
467
-55
-54
-1
Seasonally adjusted annual rate
1548
1677
447
301
146
1230
-129
68
1687
1728
458
306
152
1270
-45
61
1820
1766
459
300
159
1307
34
59
1876
1821
465
302
163
1356
35
59
1671
1722
457
304
153
1266
-56
60
1704
1738
465
310
154
1274
-37
58
1740
1740
460
306
154
1280
-11
61
1766
1763
460
305
155
1303
-12
60
1809
1750
451
293
158
1299
48
61
1843
1763
465
304
161
1298
43
55
1863
1787
459
299
160
1328
58
59
1881
1810
462
302
160
1348
56
60
1862
1815
464
302
163
1351
21
59
1873
1824
466
302
163
1359
26
59
1887
1833
466
302
164
1366
35
59
1901
1848
466
302
164
1383
36
58
-197
-106
-25
-24
-114
-99
-72
-71
-11
-18
-1
-3
-37
-33
-24
-22
-225
-163
-100
-83
-167
-160
-138
-141
-102
-76
-81
-84
-95
-83
-69
-64
-.8
-.2
-.3
-.1
-.3
0
-.5
-.3
.1
0
.1
-.1
-.2
-.1
.5
-.3
.8
.1
-1.6
-2.1
.8
-.7
1
-.3
-.5
-1.3
4
FISCAL INDICATORS
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent, cal. year
-.6
-.8
-2
-2.1
-1.9
1.4
1. OMB's May 1998 surplus estimates (assuming the enactment of the President's proposals) are $39 billion in FY98 and $54 billion in FY99. CBO's
July 1998 baseline surplus estimates are $63 billion in FY98 and $80 billion in FY99. 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 May 1998 surplus estimates (assuming the enactment of the President's proposals), excluding deposit insurance spending, are $35 billion
in FY98 and $51 billion in FY99 and CBO's July baseline estimates are $59 billion in FY98 and $76 billion in FY99.
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 current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of
potential output associated with an unemployment rate of 6 percent. Real potential GDP growth is assumed to be 2.8 percent beginning 1995:Q3.
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 chained (1992) dollars, scaled by real federal consumption plus
investment. For change in HEB and FI, negative values indicate restraint.
5. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to OMB fiscal
year totals.
a--Actual.
b--Preliminary.
Strictly Confidential Class II FOMC
August 13, 1998
Change in Debt of the Domestic Nonfinancial Sectors
(Percent)
Year
7.3
6.4
4.3
4.6
1989
1990
1991
1992
7.0
11.0
11.1
10.9
7.3
5.2
2.3
2.6
8.6
7.5
4.7
4.3
9.9
9.6
6.4
5.2
6.0
1.5
-1.3
0.5
Quarter
1997:3
4
1998:1
2
3
4
1999:1
2
3
4
Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 1998:Q1 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.
2. On a monthly average basis, total debt is projected to grow 5.7 percent in 1998 and 4.3 percent in 1999.
3. On a monthly average basis, federal debt is projected to grow -1.0 percent in 1998 and -1.8 percent in 1999.
4. On a monthly average basis, nonfederal debt is projected to grow 8.0 percent in 1998 and 6.1 percent in 1999.
2.6.3 FOF
6.7
3.1
-1.7
0.7
5.6
5.0
8.6
2.9
6.4
4.4
3.8
6.3
Strictly Confidential Class II FOMC
August 13, 1998
Flow of Funds Projections: Highlights
(Billions of dollars except as noted)
Seasonally adjusted annual rates
Calendar year
Category
1997
1998
1999
1996
1997
1998
1999
Q3
Q4
Ql
Q2
Q3
Q4
Net funds raised by domestic
nonfinancialsectors
I Total
2 Netequity issuance
3 Net debt issuance
663.6
-64.2
727.8
649.4
-114.8
764.2
623.3
-219.7
843.0
593.1
-87.1
680.2
703.7
-83.2
786.9
789.2
-144.1
933.4
862.8
-109.6
972.4
723.6
-126.8
850.4
569.3
-141,2
710.5
337.5
-501.2
838.7
Borrowing sectors
Nonfinancial business
4 Financinggap
5 Net equity issuance
6 Credit market borrowing
23.0
-64.2
195.8
78.3
-114.8
311.3
108.1
-219.7
390.3
126.7
-87.1
333.4
55.3
-83.2
311.5
87.4
-144.1
405.9
123.1
-109.6
419.6
93.5
-126.8
388.5
104.5
-141,2
391.2
Households
7 Net borrowing 2
8
Home mortgages
9
Consumer credit
10 Debt/DPI (percent) 3
372.7
261.0
88.8
89.8
350.3
262.3
52.5
91.8
409.5
318.9
45.4
94.8
341.8
280.7
27.8
97.0
381.5
337.8
50.5
91.9
388.1
303.5
28.8
92.7
458.3
333.7
62.0
93.6
398.8
320.0
40.5
94.5
State and local governments
II Net borrowing
12 Current surplus 4
14.3
141.4
79.5
134.9
93.1
158.7
65.1
162.1
63.6
116.8
98.6
170.7
124.6
157.8
Federal government
13 Net borrowing
14 Net borrowing (quarterly, n,s.a.)
15 Unified deficit (quarterly, n.s.a.)
145.0
145.0
110.9
23.1
23.1
2.4
-49.9
-49.9
-51.1
-60.1
-60.1
-86.4
30.3
10.6
10.9
40.8
33.7
39.7
Depository institutions
16 Funds supplied
232.9
336,9
272.7
252.4
188.9
Memo (percentage of GDP)
17 Domestic nonfinancial debt 5
18 Domestic nonfinancial borrowing
19
Federal government 6
20
Nonfederal
183.8
9.5
1.9
7.6
182.8
9.4
0.3
9.1
184.4
9.9
-0.6
10.5
187.4
7.8
-0.7
8.5
182.1
9.6
0.4
9.3
Q2
Q3
Q4
591.4
-96.8
688.2
547.0
-94.0
641.0
622.6
-79.6
702.2
611.2
-78.0
689.2
111.4
-501.2
361.9
116.5
-96.8
334.2
125.4
-94.0
337.0
130.9
-79.6
331.2
134.1
-78.0
331.0
395.4
315.2
39.9
95.3
385.7
306.7
39.0
96.1
364.0
294.7
33.0
96.2
341.9
281.7
28.1
96.8
335.5
276.7
25.7
97.4
325.9
269.7
24.5
97.9
134,0
147.5
57.4
161.3
56.5
168.3
68.8
168.7
67.5
156.7
64.4
164.9
59.9
158.0
-30.0
25.9
30.2
-70.9
-81.8
-136.9
-133.5
-28.0
0.2
34.7
34.0
55.4
-78.7
17.6
8.0
-105.4
.104.4
-124.0
-28.8
6.1
-1.7
-27.5
20.6
31.3
476.0
321.7
215.9
271.9
281.5
259.5
244.3
249.1
256.9
182.9
11.3
0.5
10.8
182.9
11.6
-0.4
12.0
184.6
10.1
-0.8
10.9
185.2
8.4
-1.6
9.9
185.7
9.8
0.4
9.4
186.6
8.0
-0.9
8.9
187.2
7.4
-1.2
8.6
187.7
8.0
-0.3
8.3
188.0
7.8
-0.3
8.1
Note. Data after 1998:Q1 are staff projections.
1. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.
6. Excludes government-insured mortgage pool securities.
2.6.4 FOF
QI
International Developments
Recent Developments
International financial markets again turned volatile toward the end of the intermeeting
period as concerns about developments in Asia, particularly in Japan, intensified and
exacerbated problems in Russia and other emerging-market economies. Since the
June-July FOMC meeting, the foreign exchange value of the dollar in terms of the
other major currencies has increased about 2 percent on balance. The dollar has
moved up against the yen, the Canadian dollar, and sterling but has declined slightly
against the continental European currencies.
The dollar's rise against the yen, more than 43/4 percent, reflected market
skepticism that the new LDP-led government is likely to resolve Japan's chronic
problems soon. The additional proposals for resolution of the troubled banking system
and the announcement of new fiscal initiatives failed to convince market participants
that the economy was about to recover. Data releases during the period indicated that
a further sharp decline in economic activity had occurred in the second quarter.
The dollar has appreciated 3 percent against the Canadian dollar since the
FOMC meeting as weakness in global commodity prices continued to weigh on the
currency.
Signs of weakening activity and the market's sense that the likelihood of
tightening by the Bank of England had decreased contributed to the fall in the pound
against the dollar during the period. In contrast, the dollar has depreciated about 1
percent against the mark and other euro-area currencies as economic prospects for
those countries appear favorable for the rest of the year and the transition to Stage III
of European Economic and Monetary Union seems to be proceeding smoothly.
Three-month and ten-year market interest rates moved lower over the period in
most of the major foreign industrial countries. The notable exceptions were Canadian
rates, which rose on expectations that the weakening of the Canadian dollar exchange
rate may prompt a tightening of monetary policy. The lower rates in Japan likely
reflect market pessimism about economic prospects. Declines in European rates in
part suggest further shifts in market preferences away from assets in emerging market
economies and toward those perceived to be safer. In addition, some rates trended
down as convergence proceeded within the euro-area ahead of the shift on January 1,
1999, to a single currency. Prices of equities in most industrial countries moved lower
I-30
Part 1: Summary and Outlook, August 13, 1998
over the period. Canadian equities fell the most, more than 11 percent, whereas
German equities dropped nearly 5 percent and Japanese equity prices changed little on
balance.
In terms of our broad index for the dollar's value against 29 currencies, the
dollar moved up 1 1/2percent over the intermeeting period. Against the currencies of
other Asian and Latin American countries included in the broad index, the dollar rose
more than 1/2percent. A sizable decline in the dollar against the Indonesian rupiah (11
percent) were offset by
percent) and a smaller decline against the Korean won (2 1/2
small increases against other Asian and Latin American currencies. Enlargement of
Indonesia's international financing package along with a rise in short-term interest
rates contributed to the stronger rupiah. Pressures on the Hong Kong dollar (which
remained pegged to the U.S. dollar) led to higher short-term interest rates there also.
Stability in exchange rates allowed short-term domestic interest rates to move lower
elsewhere in Asia, particularly in Thailand and Korea. However, spreads on most
dollar-denominated instruments moved up. Except in Korea, equity prices in the
region moved down, ranging from a 28 percent drop in Malaysia to a 21/2 percent
decline in Taiwan. Korean equity prices moved up nearly 2 percent. The Mexican
peso moved down toward the end of the period, registering a net decline of 21/2
percent since the previous FOMC meeting. Mexican short-term interest rates were up
about 2 percentage points from mid-July lows, and equity prices fell nearly 17 percent.
In Brazil, short-term interest rates are down on balance in response to monetary
easing, but spreads on Brady bonds are up.
Pressure on asset prices in Russia intensified again late in the period, with the
ruble falling outside its daily band. In response, Russian authorities announced on
August 12 the imposition of foreign exchange restrictions on domestic banks. The
announcement led to a sharp sell-off in government debt; rates on short-term rubledenominated government bills increased 40 to 140 percentage points. Over the
intermeeting period, the yield on Russian dollar-denominated debt rose 9 percentage
points. Russian equity prices tumbled more than 33 percent over the period.
The Desk
did not intervene.
Real economic activity continued to expand in the second quarter in most of
the major foreign industrial countries, albeit at a slower pace than during the first
quarter. The notable exception was Japan, where indicators such as industrial
InternationalDevelopments
production and household expenditures suggest that output declined further while the
labor market continued to deteriorate.
In contrast, activity apparently expanded further in Euroland, and business and
consumer confidence remained high. Industrial production slipped back in Germany
and Italy in the second quarter but was up in France on average in April and May.
Capacity utilization was high in all three countries.
Preliminary data show that in the United Kingdom real GDP grew 2 percent in
the second quarter, down slightly from the first quarter, as manufacturing output
changed little. Business confidence has declined to its lowest levels in six years,
reflecting concerns about both export and domestic orders. Data for Canada also
suggest some slowing of growth to a more sustainable pace. Average GDP at factor
cost was up a little more than 2 percent at an annual rate in April and May from the
first quarter, down from more vigorous growth in recent quarters, and new orders have
leveled off in recent months. Employment was down on balance from April through
July, partly as a result of the GM strike.
Inflation pressures in most of the major foreign industrial countries continue
to be quiescent. Japanese consumer prices in July were about unchanged from their
year-earlier level. In Germany and France, the inflation rate moved below 1 percent
for the year to July. Consumer price inflation remains near 1 percent in Canada. Only
in the United Kingdom are wages and prices tending to accelerate.
In most of the Asian emerging market countries, economic activity has
remained weak or has declined further. Output declined sharply in the second quarter
in Korea and Indonesia, and partial data suggest further contraction in Malaysia and
Thailand as well. In response to these developments, the targeted stance of fiscal
policy has been eased, with the approval of the IMF, in Korea and Indonesia while
Thailand is seeking to relax its fiscal stance further as well. Real output in China
registered a 7 percent increase in the first half of the year (from its year-earlier level),
the slowest growth since 1991. Consumer prices accelerated sharply through July in
Indonesia and, to a lesser extent, in the Philippines, but inflation remained low through
June in Taiwan.
External adjustment in Korea and the ASEAN countries most affected by the
Asian crisis continued through the second quarter, with most of the adjustment
occurring through reduced imports rather than increased exports. For these countries,
I-32
Part 1: Summary and Outlook, August 13, 1998
the improvement in their trade balances has been primarily with respect to trade with
the United States, Japan, and Europe.'
In Mexico and Argentina, indicators suggest some deceleration of economic
activity. Weak oil prices have undercut growth of nominal exports in Mexico and,
along with greater volatility in global financial markets generally, have put pressure on
Mexican financial markets. In response, the Bank of Mexico has tightened monetary
policy, and additional fiscal cuts have been announced to offset losses in government
revenue. In Brazil, economic activity apparently strengthened during the second
quarter, but disappointing news on retail sales in recent weeks prompted the
government to enact compensatory measures. Consumer price inflation decreased, but
remained high (12 percent, twelve-month change), in Mexico in July; inflation is
declining to low levels in Brazil (4 percent) and remains well contained in Argentina
(1 percent).
The U.S. nominal trade deficit in goods and services widened further in May.
For April and May on average, the deficit was substantially larger than in the first
quarter. Exports of goods and services declined noticeably in April-May from the first
quarter, with capital goods and agricultural products accounting for much of the drop.
Exports to all major areas except Canada declined; the largest decreases were to Asia
and western Europe. Imports of goods and services rose moderately on average in
April-May from the first quarter, as those of consumer goods and aircraft were
particularly strong. In real terms, exports of goods and services declined again in the
second quarter, whereas real imports again rose at an annual rate of more than 10
percent. As a consequence, real net exports of goods and services subtracted 2 1/2
percentage points from the annual rate of growth for the quarter. 2
The quantity of imported oil rose in April and May to a rate of nearly 12 mb/d,
primarily because of an acceleration in stockbuilding in apparent anticipation of a
recovery in oil prices; surprisingly strong consumption also contributed to the rise.
Preliminary Department of Energy statistics indicate that oil imports remained strong
in June and July, although below the April-May average.
The average price of imported oil rose slightly in April and May, following
five consecutive months of large declines, and then fell nearly sharply in June. On
1. For January-May 1998 compared with January-May 1997, the aggregate trade balances of Korea,
Thailand, Malaysia, and the Philippines improved $22 billion with the United States and $20 billion
each with Japan and Europe out of a total improvement of about $100 billion.
2. These preliminary second-quarter NIPA data contain a staff estimate for June that is slightly
weaker than BEA's. June trade data will be released on August 18.
InternationalDevelopments
average in the second quarter, the price of oil imports declined at an annual rate of
about 30 percent. The drop in June reflected the effects of the high levels of global
oil stocks and the reaction to the announcement of a sharp downward revision in the
figures for oil consumption in Asia during 1998:Q1. In July, the price of imported oil
fell significantly further. The spot WTI price rose $0.42 per barrel in July, declined
on balance through August 13, and is currently at $13.45 per barrel. The
announcement by OPEC of further planned cuts in crude oil production contributed to
the rebound in prices during the intermeeting period.
Non-oil import prices declined during the second quarter at an annual rate of
more than 31/2 percent, with decreases recorded in all major trade categories. In July,
the price of non-oil imports fell sharply. Prices of nonagricultural exports declined at
an annual rate of nearly 3 percent in the second quarter and moved down somewhat
further in July.
Outlook
The staff projects that total foreign output (weighted by U.S. nonagricultural export
shares), which was about flat during the first half of this year, will resume growing at
an annual rate of about 3/4percent during the second half of the year and will
accelerate to growth of 2 percent next year. Foreign output was significantly weaker
in the second quarter than we had expected, and financial markets abroad remained
volatile. In light of these developments, we have revised down foreign growth for
industrial and developing countries over the six quarters of the forecast period.
Summary of Staff Projections
(Percentage change from end of previous period)
Projection
Measure
Foreign output
June
Real exports
June
Real imports
June
1998
1997 [
1998
-
1999
Q1
Q2
Q3 |Q4
3.9
-0.5
0.2
0.5
1.1
2.1
3.8
-0.3
0.8
1.4
1.9
2.6
9.6
10.2
14.0
-2.8
-1.2
15.7
-8.9
-3.2
12.1
-2.3
0.3
6.9
-0.5
1.7
8.2
3.0
3.8
6.5
14.4
16.9
9.3
8.1
7.3
6.5
I-34
Part 1: Summary and Outlook, August 13, 1998
Our current forecast for the trade-weighted average foreign exchange value of
the dollar against the major currencies is higher in the near term than it was in the
June forecast, reflecting recent appreciation. We now expect the dollar to depreciate
at a slightly faster rate over the forecast period, but the projected path for the dollar
nevertheless remains above that in the June Greenbook through the end of 1999.
As a consequence of these elements, our projection for real export growth has
been revised down, with real exports projected to fall further during the remainder of
this year and to rise moderately next year. With U.S. GDP growth expected to slow,
we continue to project that real import growth will moderate from its recent very high
rates. Real net exports are now projected to subtract a bit more than 1 percentage
point from the annual rate of growth of real GDP in the second half of this year and
1/2
percentage point next year, slightly more drag from net exports in both periods
than in the June Greenbook.
The dollar. We project that the trade-weighted exchange value of the dollar
against the major foreign currencies will remain near recent levels through this year
but will decline nearly 4 percent in 1999. Compared with the previous forecast, the
dollar's path in terms of this index is about 2 1/2 percent higher in the near term,
reflecting the dollar's recent moves up against the yen, the Canadian dollar, and
sterling; but this difference shrinks to 1 1/4
percent by the end of 1999, consistent with
the view that at least part of the dollar's current strength is transitory. We expect that
the dollar will strengthen somewhat further against the yen this year as additional
uncertainties about the pace of resolution of difficulties in the Japanese banking sector
and additional fiscal stimulus weigh on that currency. Next year, however, the dollar
is forecast to give up those gains and to decline nearly 7 percent against the yen as
economic activity in Japan turns up and enlarged Japanese and U.S. external
imbalances begin to attract the attention of investors. The dollar is forecast to decline
moderately against the Canadian dollar, as the Bank of Canada raises interest rates
before the end of the year and as the severity of the effects of the Asian crisis
diminish next year. We continue to assume that the dollar will depreciate somewhat
against the mark and the other continental European currencies over the forecast
period as EMU developments continue on track and the European Central Bank (ECB)
tightens monetary policy in 1999.
The dollar's exchange value against the 29 currencies in the staffs broad
exchange rate index is projected to depreciate less than 3 percent in real terms over
the forecast period. Nominal dollar depreciation more than accounts for the real
adjustment against the major currencies, whereas for the Latin American and Asian
InternationalDevelopments
currencies in general, higher inflation is the source of real dollar depreciation. We
continue to project that the nominal renminbi/dollar rate will remain unchanged this
year but that the Chinese authorities will allow a gradual decline in that rate next year
and that the Hong Kong dollar peg will remain unchanged over the entire forecast
period. The Mexican peso is forecast in real terms to stay near current levels through
1999.
Foreign industrial countries. The staff projects that real GDP growth in the
foreign industrial countries (weighted by U.S. nonagricultural export shares) will edge
up to an annual rate of 21/4 percent over the forecast period from the estimated 1
percent growth recorded during the first half of this year, a somewhat weaker outlook
than in the June Greenbook. Most of the downward revision for this group of
countries is accounted for by Japan.
We now expect Japanese output to be flat on balance over the second half of
the year, following two quarters of decline at an annual rate of 5 percent or more.
Our expectation that Japan will reach the trough of its current slump later this year
depends critically on assumed large increases in government spending associated with
the fiscal policy measures announced earlier this year; other components of domestic
demand are expected to contract further, especially private investment spending. In
1999, Japanese real GDP is expected to grow at a low, 3/4percent annual rate as fiscal
stimulus makes a positive but diminishing contribution over the course of the year.
Net exports are projected to add only a few tenths to Japanese real GDP growth over
the forecast period as the positive effects of the weak yen are largely offset by the
effects of depressed activity in Japan's Asian trading partners. The substantial
downward revision to our forecast for Japan reflects our attempts to weigh several
factors. The surprising results of the election led to a new government and increased
uncertainty about the future course of policy. New initiatives have been announced,
including those for the banking sector, that have the potential to help resolve longstanding problems. However, doubts abound about the political will to implement
these initiatives promptly and comprehensively.
Real output growth in Euroland is expected to strengthen a bit during the
second half of this year and to average 2 3/4percent at an annual rate over the forecast
period. Strength in domestic demand (supported by accommodative monetary policy)
accounts for the continued expansion in continental Europe as net exports are
projected to make negative contributions throughout the remainder of the forecast
period in all the major continental European countries. One downside risk to our
outlook for Euroland is a worsening of financial market turmoil in Russia that could
1-36
Part 1: Summary and Outlook, August 13, 1998
impair its ability to meet foreign-currency obligations and spill over elsewhere in
eastern Europe.
Real GDP growth is projected to moderate over the forecast period in the
United Kingdom (average annual rate of 1 3/4
percent) and Canada (average annual rate
of 2 3/4
percent) from the more vigorous rates observed last year and earlier this year.
The effects of past and prospective monetary tightening and some continuing drag
from net exports explain the slowing.
Consumer price inflation in the major foreign industrial countries (weighted by
U.S. non-oil import shares) is projected to slip below 1 percent at an annual rate for
the second half of this year and to average about 1 percent next year. Projected price
declines in Japan and low inflation elsewhere explain this remarkably low average rate
of inflation. However, in the United Kingdom, where inflation is expected to remain a
bit above the government's target of 21/2 percent, inflation pressures are evident.
This forecast incorporates the assumption that short-term market interest rates
in Japan will remain very low over the forecast period. The ECB is assumed to
tighten somewhat next year, moving the stance of monetary policy from
accommodative toward neutral, as economic slack diminishes further; market rates are
assumed to rise about 50 basis points in response. Monetary conditions are expected
to tighten in the near term in Canada as official rates are raised 50 basis points to
counter the easing imparted by depreciation of the currency. One more upward move
of 25 basis points by the Bank of England is assumed later this year, followed by a
move toward ease late next year. Long-term market interest rates are assumed to rise
slightly over the forecast period in response to the strengthening of activity.
Other countries. Average real GDP of our major developing-country trading
partners is projected to decline somewhat more over the second half of 1998, with
output in the Asian developing countries contracting at an annual rate of about 3
percent. We revised down our outlook in light of the negative developments during
the intermeeting period and with the expectation that the continued effects from shocks
to currency and equity markets in these countries, along with the weaknesses in their
financial sectors, will exert a substantial drag on domestic demand that will be only
partially offset by improvements in their net exports. Our forecasts might have been
marked down even further but for the growing evidence that many of the Asian crisis
countries are easing monetary and fiscal policies in an attempt to cushion output
declines. We project that growth in most of these countries will resume in 1999, but
only at substantially below-trend rates. Inflation in the Asian developing countries is
InternationalDevelopments
projected to rise in 1998, reflecting the substantial depreciations of their currencies
since mid-1997.
We have also revised down our outlook for growth of real GDP in our Latin
American trading partners; output should expand slowly over the remainder of 1998
and accelerate to growth of 2 percent in 1999 as recovery begins in other emerging
market economies and as global commodity prices, including oil prices, rise.
Real net exports of goods and services. We have reduced further our
projection for growth of real exports of goods and services over the forecast period.
Weaker-than-expected export growth in the second quarter, projections of slower
growth abroad, and a higher level for the real value of the dollar over the next six
quarters produce both a lower level and a slower growth rate for the projected path of
real exports. Nonagricultural goods other than computers and semiconductors (core
exports) are now projected to drop at an annual rate of 4 1/2percent during the second
half of this year and to be about flat on balance next year. In the near term,
projected growth in real terms for computers and semiconductors has been lowered as
well. Total exports of goods and services are projected to decline at an annual
average rate of about 1 1/2percent over the remainder of this year and to rise 3 percent
next year.
We continue to expect that the growth of imports of goods and services will
slow as U.S. real GDP growth moderates over the next six quarters. Imports of nonoil goods other than computers and semiconductors (core imports) should decelerate to
an annual rate of growth of about 81/2percent during the second half of this year from
double-digit rates earlier and then slow to about 5 1/2 percent growth in 1999. Growth
of imports of computers and semiconductors should remain rapid. The quantity of oil
imports should decline during the second half of this year as inventories retreat from
the current unusually high levels. We project that oil imports will rise in line with
increases in consumption next year. Overall, real imports of goods and services are
projected to expand at an annual rate of 7 1/2 percent during the second half of this year
and about 6 1/2 percent next year.
Oil prices. The staff has lowered its projected path for the price of imported
oil about $0.10 per barrel in 1998 owing to the reassessment of our near-term outlook.
We have raised the projected price about $0.70 per barrel in 1999 in response to
planned cuts in oil production by OPEC that are greater than we had assumed in the
last Greenbook. After declining to an estimated $12.52 per barrel during the second
quarter, the oil import unit value is projected to rise above $14.00/b by early next year
1-38
Part 1: Summary and Outlook, August 13, 1998
and to remain around that level during 1999. Our outlook for a $14.33/b oil import
unit value in 1999 is consistent with the price of WTI spot crude oil of $17.00/b.
Although we see a weaker outlook for oil demand (ex ante) this year and next,
we are projecting that a group of OPEC and non-OPEC producers will cut back
production sufficiently that the market will be able to absorb additional barrels from
Iraq at a price for WTI near $17.00 per barrel next year. There is considerable risk to
this forecast. On the one hand, if producers are unable to sustain lower rates of
production, the spot WTI price could fall once again below $13.00 per barrel in the
near term. On the other hand, if Iraqi oil is withheld from the market again-especially if this occurs near the end of the year when Iraq is expected to be exporting
as much as 2.0 mb/d--spot WTI could rise above $20 per barrel.
Prices of non-oil imports and exports. With the dollar at a higher level
currently and throughout the forecast than in the June Greenbook, we now project that
non-oil import prices of core goods will decline a bit more during the remainder of
this year than we did in June. The restraining effects of past dollar appreciation
should fade during the first half of next year, and non-oil commodity prices are
expected to flatten. As a consequence, non-oil import prices for core goods should
reach a trough around the end of this year and begin rising moderately next year.
Nonagricultural export prices for core goods are projected to decline slightly further
this quarter but to begin rising very slowly over the remainder of the forecast period,
in line with comparable domestic prices.
Selected Trade Prices
(Percentage change from end of previous period
except as noted; seasonally adjusted)
Projection
Trade category
1998
1997
Q1
Exports
Nonagricultural (core)
Agricultural
Imports
Non-oil (core)
Oil (level, dollars per barrel)
0.5
-3.2
-0.7
17.72
I
-2.4
-16.2
-3.3
13.89
1999
Q2
Q3
Q4
9
-1.7
-5.9
-2.2
-11.5
0.3
-4.0
1.6
2.1
-2.3
12.20
1.1
14.33
-1.9
12.52
-4.1
11.75
NOTE. Prices for exports and non-oil imports of goods, excluding computers and
semiconductors, are on a NIPA chain-weighted basis.
The price of imported oil for multiquarter periods is the price for the final quarter of
the period.
InternationalDevelopments
1-39
Nominal trade and current account balances. The nominal trade deficit on
goods and services is projected to widen significantly further over the forecast period,
from an estimated $185 billion in the second quarter of this year to about $260 billion
in the fourth quarter of next year. The deficit on net investment income also is
projected to widen over the next six quarters. As a result, the current account deficit
is expected to widen from about $240 billion in the second quarter (2 3/4
percent of
GDP) to an average of about $330 billion for 1999 (3 percent of GDP, a bit above
the previous peak for this ratio that was reached in 1987).
Strictly Confidential (FR)
August 13, 1998
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)
Projected
Measure and country
1991
1992
1993
1994
1995
1996
1997
1998
1999
-0.3
2.5
-1.6
2.1
0.9
3.1
0.1
0.5
0.4
0.1
2.7
-0.1
4.5
0.8
4.9
3.4
0.8
2.4
2.0
1.5
2.0
3.4
2.6
1.9
4.0
-0.4
3.0
3.0
3.0
-2.6
2.0
2.5
-0,5
-0.2
0.1
4.1
3.4
2.5
0.3
0.7
2.6
2.3
2.1
-0.2
3.1
2.3
2.6
2.4
2.5
1.6
2.6
2.7
2.7
REAL GDP
Canada
Japan
United Kingdom
Euro-11 Average (1)
of which:
France
Germany (2)
Italy
1.4
3.3
1.9
-0.1
0.9
-0.8
Foreign G-7 Average
weighted by 1991 GDP
1.7
0.2
0.6
2.8
1.7
2.3
1.8
0.6
1.9
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
3.3
0.8
6.6
2.2
0.5
5.2
3.4
1.9
6.1
5.0
3.6
7.2
1.8
1.3
2.5
4.1
2.3
6.8
3.9
2.8
5.3
0.3
1.7
-2.2
2.1
2.2
1,8
4.1
3.2
5.7
NA
1.8
1.8
0.9
3.7
NA
1.2
2.7
NA
0.8
2.2
NA
2.0
0.1
3.2
2.0
1.0
2.1
2,8
1.4
1.2
-1.0
2.5
1.7
1.6
0.0
2.7
1.8
3.0
4.0
6.1
1.8
3.4
4.9
2.1
4.2
4.1
1.6
2.6
3.8
1.9
1.7
5.9
1.7
1.4
2.7
1.2
1.8
1.6
1.3
1.5
1.8
1.5
1.8
2.0
Foreign G-7 Average
weighted by 1991 GDP
4.1
2.4
2.5
1.8
1.6
1.5
1.8
0.8
1.3
Average weighted by share of
U.S. non-oil imports
3.9
1.9
2.0
1.0
1.1
1.3
1.7
0.5
1.1
CONSUMER PRICES
Canada
Japan
United Kingdom (3)
Euro-11 Average (4)
of which:
France
Germany (2)
Italy
-0.0
2.1
-0.8
2.9
2.7
1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. West German data through 1991; all Germany thereafter.
3. CPI excluding mortgage interest payments which is the targeted inflation rate.
4. Harmonized CPI's for the Euro-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.
August 13, 1998
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, quarterly change at an annual rate)
------------------ Projected --------------
Measure and country
1997
------------ --------01
Q2
Q3
Q4
1998
----------------------Q1
Q2
Q3
Q4
1999
--------------Q1
Q2
Q3
-----Q4
REAL GDP
Canada
Japan
United Kingdom
Euro-11 Average
of which:
France
Germany
Italy
4.8
4.2
8.3 -10.6
2.3
3.5
1.5
5.0
4.3
3.2
3.6
3.3
2.8
-1.5
2.5
2.2
3.7
-5.3
2.2
2.6
2.8
-5.1
2.0
2.0
2.6
-1,3
1.7
3.0
3.0
1.4
1.8
2.6
2.8
0.7
1.8
2.7
2.8
0.7
1.8
2.8
2.7
0.7
1.9
2.8
2.7
0.7
2.0
2.8
1.0
1.3
0.2
4.6
3.9
8.0
3.7
2.9
1.9
3.0
1. 2
0.7
2.2
3.9
-0.4
2.6
0.6
1.5
2.3
2.7
4.0
2.3
3.0
1.5
2.4
2.7
2.5
2.6
2.8
2.5
2.6
2.7
3.0
2.7
2.7
3.0
Foreign G-7 Average
weighted by 1991 GDP
3.7
-0.5
3.1
0.8
-0.3
-0.6
1.4
2.0
1.9
1.9
2.0
2.0
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
5.2
4.5
6.5
3.7
1.1
6.5
4.4
3.8
5.6
2.4
1.7
2.7
-0.5
1.5
-4.3
0.2
0.9
-1.9
0,5
1.8
-1,6
1.1
2.5
-0.9
1.6
2.2
0.5
2.1
2.2
1.6
2.4
2.2
2.5
2.5
2.2
2.7
(1)
CONSUMER PRICES (2)
Canada
Japan
United Kingdom (3)
Euro-11 Average (4)
of which:
France
Germany
Italy
2.1
0.0
2.9
1.7
1.6
1.5
2.6
1.2
1.7
1.7
2.8
1.5
1.0
2.1
2.8
1.4
1.0
2.1
2.5
1.2
1.0
0.6
3.0
1.4
1.1
0.0
2.6
1.6
1.2
-1.0
2.5
1.7
1.3
-1.0
2.6
1.8
1.4
-0.5
2.5
1.8
1.5
0.0
2.8
1.8
1.6
0.0
2.7
1.8
1.5
1.7
2.4
0.9
1.6
1.6
1.3
1.9
1.5
1.2
1.8
1.6
0.7
1.2
1.7
1.0
1.3
1.8
1.3
1.4
1.8
1.3
1.5
1.8
1.4
1.7
2.0
1.5
1.8
2.0
1.5
1.8
2.0
1.5
1.8
2.0
Foreign G-7 Average
weighted by 1991 GDP
1.4
1.6
1.8
1.8
1.6
1,3
1.1
0.8
0.9
1.1
1.3
1.3
Average weighted by share of
U.S. non-oil imports
1.3
1.6
1.8
1.7
1.6
1.1
0.8
0.5
0.6
0.8
1.1
1.1
1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. Percent change from same period a year earlier.
3. CPI excluding mortgage interest payments which is the targeted inflation rate.
4. Harmonized CPI's for the Euro-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.
August 13, 1998
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1991
1992
1993
1994
1995
1996
1997
Projected
1999
1998
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S
0.4
0.8
-0.4
-0.4
0.4
-0.8
-0.6
0.5
-1.1
-0.4
1.0
-1.4
0.5
1.1
-0.7
-0.3
1.2
-1.4
-0.6
1.1
-1.7
-1.8
-0.4
-1.4
-0.5
0.3
-0.8
-3.7
0.2
-6.7
3.9
-2.7
-6.0
3..0
3.1
1.6
27.0
26.5
-0.2
6.5
1.5
2.2
25.9
26.8
5.4
Percentage change, Q4/Q4
2.3
4.6
4.1
-5.5
23.7
32.9
3.6
10.0
6.0
16.6
32.0
66.9
7.0
10.5
9.8
-4.3
55.5
79.6
5.8
10.3
7.5
4.8
35.9
46.2
8.0
9.6
1.5
2.8
40.7
21.0
11.6
7.4
1.4
12.1
45.1
42.0
5.4
10.2
3.2
10.0
39.4
34.2
9.4
12.3
1.4
-0,2
5.6
6.1
2.4
14.0
12.4
44.8
54.5
48.1
92.4
12.2
-1.2
11.8
5.5
7.9
24.4
57.6
10.4
4.0
30.3
32.7
13.0
10.7
4.2
1.2
31.6
-0.6
11.6
-96.5
792.6
889.0
-111.2
860.0
971.2
-136.1
970.0
1106.1
-261.1
971.7
1232.8
-346.8
977.0
1323.8
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
8.6
7.1
10.1
21.8
41.8
7.0
4.1
-0.8
10.6
25.1
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
4.1
-2.6
8.2
35.9
55.3
2.5
64.8
Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S
-22.3
599.9
622.2
-29.5
639.4
668.9
-70.2
658.2
728.4
-104.6
712.4
817.0
Billions of dollars
US CURRENT ACCOUNT BALANCE
-4.4
-51.4
-86.1
-123.8
-115.3
-134.9
-155.2
-246.9
-330.4
-183.6
-250.0
919.8
1169.8
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S .(BOP)
-30.9
581.2
612.2
-38.7
617.3
656.0
-71.9
643.2
715.2
-100.9
703.8
804.7
-99.9
795.6
895.5
-108.6
850,8
959.3
-110.2
937.6
1047.8
917.7
1101.3
Net Investment Income
Direct, Net
Portfolio, Net
21.5
55.6
-34.1
22.5
51.6
-29.1
23.9
55.7
-31.7
16.5
51.8
-35.3
19.3
63.0
-43,7
14.2
66.2
-51.9
-5.3
63.7
-69.1
-22.1
55.0
-77.1
-38.7
50.2
-88.9
5.0
-35.2
-38.1
-39.4
-34.6
-40.6
-39.7
-41.2
-41.8
Net Transfers
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
August 13, 1998
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1994
------ -- -
Q1
Q2
1995
-------------
Q3
-
Q4
'------------
Q1
Q2
1996
~---------------
~------------- - - - -
----
Q4
Q1
Q2
03
Q4
0.7
1.1
-0.4
-1.1
0.4
-1.5
-1.0
0.6
-1.6
-1.4
0.2
-1.6
2.4
3.2
-0.9
03
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.0
-0.2
-0.8
-0.3
1.7
-2.0
0.3
1.5
-1.2
-0.4
1.1
-1.5
-0.2
1.0
-1.2
-0.3
0.6
-0.9
1.6
1.9
-0.3
Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
-1.8
2.4
-25.2
21.4
111.8
-6.8
17.7
12.9
8.1
24.3
23.4
20.3
10.6
2.0
45.3
35.5
65.9
7.5
14.7
6.9
57.2
48.4
79.1
8.7
9,2
9.1
1.8
36.4
72.0
4.3
5.4
2.9
-13.4
33.8
100.8
1.4
17.8
21.7
5.0
86.6
96.2
9.4
10.2
6.4
-9.4
71.6
53.6
8.1
3.7
-4.0
22.6
57,6
23.8
0.1
5.8
10.3
-32.8
24.7
29.7
6.0
2.1.
-9:9
-1.6
27.7
30.2
5.7
32.0
39.8
48.7
35.9
118.6
21.3
7.6
2.7
-8.6
32.9
60.7
6.8
19.0
4.1
27.2
48.3
23.7
19.6
13.1
-0.4
33.5
42.3
74.4
10.3
9.9
-0.9
-36.2
57.0
64.3
12.6
9.8
20.5
-11.4
15.4
37.1
7.2
7.2
-3.3
15.4
51.6
105.5
1.5
2.0
3.1
31.4
62.7
128.2
-8.8
3.5
5.5
-18.2
69.3
113.3
-3.8
13.1
9.2
-9.8
22.5
38.7
13.9
13.5
4.3
68.9
22.9
8.9
10.5
13.6
9.9
3.5
18.8
50.1
13.5
7.0
-1.1
-14.0
33.8
172.1
4.2
-86.8
806.3
893.1
-74.8
826.1
900.9
-95.5
833.6
929.1
-113.5
845.5
958.9
-140.1
849.9
990.0
-95.9
911.1
1007.0
-115.5
-87.7
-112.9
-132.0
-161.6
-133.2
-112.8
845.3
958.2
-132.3
837.5
969.8
61.9
Billions of chained 1992 dollars, SAAR
Net Goods & Services
Exports of G&S
Imports of G&S
-97.6
676.0
773.6
-103.9
704.1
808.0
-111.1
722.1
833.2
-105.9
747.3
853.2
-109.5
763.9
873.4
-114.7
774.0
888.7
Billions of dollars, SAAR
-97.3
-118.5
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-85.9
668.0
-97.3
693.1
790.5
Net Investment Income
Direct, Net
Portfolio, Net
20.8
52.3
-31.5
Net Transfers
-32.1
US CURRENT ACCOUNT BALANCE
753.9
-135.9
-143.7
-123.7
-134.2
-111.2
-109.2
739.9
849.1
-109.3
765.4
874.7
-125.8
782.0
907.7
-90.0
809.7
899.7
-74.5
825.6
900.1
-92.4
833.6
926.0
14.2
24.0
714.3
825.5
-96.8
886.7
983.5
-33.1
14.6
52.2
-37.5
53.2
-39.0
20.1
59.9
-39.8
67.2
-43.2
10.2
56.5
-46.2
22.7
68.3
-45.5
21.4
64.8
-43.3
15.9
64.4
-48.5
-55.0
-60.9
-37.5
-39.2
-48.7
-34.5
-32.4
-35.8
-35.9
-41.9
-35.1
-36.2
-49,1
16.3
49.5
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
6.9
12.7
73,6
August 13,
Strictly Confidential (FR)
Class II FOMC
1998
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
--------------------------
Q2
Q1
Projected -----------------
1998
1997
Q3
Q4
Q1
-- -
---
-- -
1999
- --
---
Q3
Q2
-
- --.-
---
- --
Q4
Q1
Q2
-1.1
-0.1
-1.0
-0.8
0.1
-0.9
-0.7
0.3
1.2
2.7
3.2
1.6
---
---
Q3
---
-- -
Q4
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.3
0.9
-2.2
-0.4
1.7
-2.2
-0.5
1.2
-1.7
-0.3
0.5
-0.8
-2.3
-0.3
-1.9
-2.6
-1.1
-1.5
-1.1
-0.3
-0.9
-1,0
-0.4
-0.2
0.4
-0.8
0.5
-0.7
3.8
4.4
Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
8.3
15.5
10.6
-6.7
-16.1
70.2
41.3
13.8
11.8
-7.8
78.7
17.3
15.6
5.9
8.7
41.9
32.3
9.2
4.4
-4.0
32.8
-9.2
-2.2
8.0
-2.8
-1.2
-9.9
-15.5
-2.0
-1.6
-8.9
3.1
-25.7
2.6
-22.6
-12.7
-2.3
-1.1
11.5
10.4
-2.0
-5.1
-0.5
0.1
1.6
21.5
20.4
-4.0
18.6
17.8
-8.2
54.5
89.0
16.2
17.9
10.6
37.0
39.0
16.0
16.1
13.5
15.8
6.0
30.6
20.3
11.8
6.3
5.8
-12.2
2.9
17.6
8.1
15.7
9.3
8.8
38.8
9.9
16.1
12.1
0.4
41.1
31.7
-26.8
13.8
6.9
3.5
-15.9
28.6
-0.0
7.9
8.2
3.7
-18,7
27.4
21.6
9.0
1.7
-9.5
27.4
25.1
6.8
-281.9
963.6
1245.5
-307.9
962.3
1270.2
1.2
1.6
26.2
24.4
26.7
25.8
4.1
1.6
27.2
27.2
-2.2
-0.8
0.5
6.9
7.6
0.9
36.0
5.0
2.2
-18.9
27.4
26.2
6.4
1.3
9.2
25.1
27.4
5.1
4.9
4.9
-326.4
965.0
1291.5
-344.1
971.4
1315.5
-355.5
980.4
L335.9
-361.1
991.1
1352.2
3.8
1.6
27.7
28.6
1.6
23.9
28.6
Billions of chained 1992 dollars, SAAR
Net Goods & Services
Exports of G&S
Imports of G&S
-
31.6
-142.4
929.4
63.6
988.1
1050.9
3 95.2
1130.5
-121.5
-149.0
998.8
1147.8
-198.5
991.9
1190.4
-255.9
969.2
1225.0
Billions of dollars, SAAR
-148.0
-140.4
-152.4
-180.2
-188.8
-242.0
-262.7
-294.0
-304.6
-324.6
-337.8
-354.7
Net Goods & Services (BOP) -112.5
904.7
Exports of G&S (BOP)
Imports of G&S (BOP) 1017.3
-106.1
936.1
1042.1
-108.4
-113.8
-184.1
917.8
1101.8
-232.3
906.8
1101.4
-214.5
902.4
1116.8
-248.5
957.8
1071.7
-139.4
945.6
1085.1
-196.4
951.7
1060.1
-257.6
923.7
1181.3
-261.7
934.8
1196.5
-41.2
US CURRENT ACCOUNT BALANCE
1.8
905.0
1139.1
914.0
1162.5
Net Investment Income
Direct, Net
Portfolio, Net
0.1
64.2
-64.2
69.6
-67.8
-6.2
65.5
-71.7
-17.0
55.6
-72.6
-12.5
61.7
-74.2
-18.9
56.7
-75.6
-27.3
50.8
-78.1
-29.6
50.8
-80.4
-33.4
49.0
-82.4
-37.1
49.3
-86.4
-91.0
-43.0
52.6
-95.6
Net Transfers
-35.5
-36.1
-37.8
-49.3
-36.9
-39.0
-39.0
-50.0
-39.0
-39.0
-39.0
-50.0
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
49.9
@FedFRASER