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Confidential (FR) Class III FOMC
Part 2
August 14, 1997
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
Confidential (FR) Class III FOMC
August 14, 1997
RECENT DEVELOPMENTS
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
DOMESTIC NONFINANCIAL
DEVELOPMENTS
DOMESTIC NONFINANCIAL DEVELOPMENTS
Economic activity decelerated in the second quarter and appears
to be growing at a moderate pace this quarter.
has picked up after its spring lull, and
equipment investment
output was held
vehicles
remain quite
spending
indicators of business
favorable.
However, manufacturing
down in July by supply disruptions in the motor
industry, and the rapid accumulation of business
inventories
over the first half of the year is likely to restrain
activity in a few sectors.
at its
Consumer
Although the unemployment rate remains
lowest level in twenty-five years, price and labor
compensation measures have shown no sign of breaking out of their
recent
subdued trends.
Real GDP
According to BEA's
advance estimate, real GDP
at an annual rate in the
rose 2.2 percent
second quarter, following a downward-
revised 4.9 percent rate of increase in the first quarter.
The
reported deceleration in activity last quarter reflected a sharp
slowing in the growth of consumer spending.
In addition, although
inventory investment was up a bit from its already rapid
first-
quarter pace, the swing in stockbuilding contributed much less to
overall GDP growth last quarter than in the first quarter.
contrast,
gains in business
fixed investment and
investment were larger than in the
residential
first quarter, while
expenditures turned up sharply and more than
In
real federal
reversed last
quarter's
decline.
Since the publication of the advance GDP estimate, we have
received the usual monthly flow of data, including book-value
inventories for June.
add
$12
Taken at face value, the inventory data could
billion, in chained 1992
dollars, to the advance GDP figure.
However, the monthly inventory figures for wholesale and
trade are often revised substantially.
retail
Moreover, the second-quarter
estimate of nonmerchant wholesale and other nonfarm inventory
accumulation--which is based on relatively few hard data--seems much
too high to us
(especially coming on the heels of an even more
1. The downward revision to first-quarter growth was part of
BEA's annual revision to the national income and product accounts.
These NIPA revisions are discussed in detail in the appendix.
II-1
II-2
CHANGES IN EMPLOYMENT
(Thousands of employees; based on seasonally adjusted data)
1996
1995 1996
Q4
1997
Q1
1997
Q2
May
June July
Nonfarm payroll employment1
Private
Goods Producing
Manufacturing
Durable
Nondurable
Construction
Service Producing
Transportation and utilities
Trade
Finance, insurance, real estate
Services
Help supply services
Total government
-------- Average monthly changes------185 212 213 228 239 163 228 316
176 198 213 218 207 177
151 260
8
19
34
43
17
35
18
-4
-1
-5
7
14
10
3
22
-5
11
5
11
15
14
8
26
20
-12
-10
-4
-1
-4
-5
-4 -25
10
24
27
29
5
29
-4
3
177 192 180 185 223
128 210 320
8
9
-1
39
8
10
-1
31
48
60
80
28
52
5
55
94
-1
11
12
10
15
10
9
26
113
98
88
97 115
117
70 113
10
13
3
17
-17
-10
-2
4
9
14
0
10
32 -14
77
56
Private nonfarm production workers'
Manufacturing production workers
151
-2
168
-5
180
7
195
9
155
6
32
51
232
225
202
220
440
453
63
61
Total employment 2
Nonagricultural
Memo:
Aggregate hours of private production
workers (percent change)'
Average workweek (hours)1
Manufacturing (hours)
201
16
77
0
202
7
255 -275
322 -236
344
253
.1
.3
.3
.3
.1
.3
.4 -. 5
34.5 34.4 34.5 34.7 34.6 34.5 34.7 34.4
41.6 41.5 41.8 41.9 42.0 42.0 41.8 41.7
Note. Average change from final month of preceding period to final month of
period indicated.
1. Survey of establishments.
2. Survey of households.
Aggregate Hours of Production or
Nonsupervisory Workers
Index, 1982=100
Average Weekly Hours
Hours
35
34.8
34.6
34.4
34.2
34
33.8
1993
1994
1995
1996
1997
1993
1994
1995
1996
1997
II-3
REAL GDP AND
SELECTED COMPONENTS
1997:Q2
BEA
Staff
1997:Q1
advance
estimate
Percent change,
annual rate
Real GDP
4.9
2.2
2.7
.8
15.1
5.6
2.8
.8
15.3
7.5
-5.8
2.7
Federal government
State and local government
1.9
5.1
5.3
4.1
3.3
Private domestic final purchases
PCE
Business fixed investment
Residential investment
2.6
3.0
Final sales
2.2
8.4
1.3
8.4
1.1
Level, billions of
chained (1992) dollars
Nonfarm inventory investment
Net exports
58.3
-126.3
outsized increase in the first quarter).2
60.7
-147.9
64.7
-144.2
Given these
considerations, we are inclined to assume that real inventory
investment in the national accounts will eventually be revised up
only a bit;
Although BEA may report a larger upward revision in its
preliminary GDP estimate later this month, our best estimate of
second-quarter GDP growth is about 1/2 percentage point above BEA's
advance estimate.
Unless otherwise noted, the discussion of second-
quarter activity in the remainder of this section of the Greenbook
incorporates our expected revisions to the GDP data.
Labor Market Developments
Employment rose sharply in both labor market surveys in July,
and the unemployment rate moved back down to match its lowest level
of the current expansion.
At the same time, aggregate hours of
production workers fell last month, implying a considerable decline
in the average workweek to a relatively low level.
This pattern has
been repeated in the initial months of the past seven quarters,
raising the possibility of a seasonal adjustment problem.
We cannot
identify the source of such a problem, but we share the view
expressed by some other analysts that one should take care not to
2. Inventory accumulation in these categories was about $18.8
billion in the first quarter and $13.9 billion in the second quarter
This two-quarter
(both at an annual rate in chained 1992 dollars).
pace of accumulation is the largest on record.
II-4
SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)
1996
1995
1996
5.6
1997
1997
Q4
Q1
Q2
5.4
5.3
5.3
4.9
17.3
16.7
16.6
17.0
20 years and older
20-24 years
25-54 years
55 years and older
4.8
9.2
4.4
3.7
4.6
9.5
4.2
3.3
4.4
9.1
4.0
3.2
Women: 20 years and older
20-24 years
25-54 years
55 years and older
4.9
9.0
4.5
3.6
4.8
9.0
4.4
3.5
4.8
8.9
4.5
3.2
Civilian unemployment rate
(16 years and older)
Teenagers
Men:
May
June
July
4.8
5.0
4.8
15.9
15.6
16.8
16.4
4.5
9.1
4.0
3.3
4.1
8.1
3.7
3.0
3.8
7.5
3.5
2.8
4.2
8.2
3.8
3.1
4.0
8.1
3.6
2.9
4.7
8.9
4.4
2.9
4.4
8.9
4.0
3.0
4.5
8.9
4.2
3.0
4.4
8.6
4.0
3.2
4.2
7.2
4.1
3.0
Labor Force Participation
Percent
Percent
67.8
67.3
66.8
66.3
65.8
65.3
64.8
1985
1987
1989
1991
1993
1995
1997
Note. Labor force participation rate adjusted for the redesign of the CPS in 1994 and the introduction of updated population controls in 1990.
The percentage of the population not in the labor force but reporting that they want jobs is adjusted for the redesign of the CPS in 1994.
II-5
read too much into the July decline.
that
growth of labor
Thus, on balance, we think
demand maintained considerable momentum as the
third quarter began.
Private nonfarm payrolls advanced
260,000 in July, up from an
increase of 151,000 in June and well ahead of the average monthly
gain of 213,000 posted over the first half of the year.
The
service-producing sector more than accounted for the July rise in
private payrolls;
gains were widespread, and payroll increases
topped their first-half averages in all five major industry groups.
In particular, employment
rebounded
growth in the
services industries
smartly from its weaker-than-average June pace, and retail
trade posted a large gain.
In contrast, employment dropped 4,000
in
the goods-producing sector.
In the household survey, employment grew 344,000 in July, more
than offsetting the June decline.
Netting out the effects of the
introduction of new population weights in January, employment
gains
in the household survey have averaged 220,000 per month over the
first seven months of the year, only slightly below those in the
payroll survey.
The strong employment
gains pushed the unemployment
rate back down to 4.8 percent in July, 1/2 percentage point below
the plateau of late 1996 and early 1997.
The labor force participation rate has held steady at
67.1 percent over the past three months after peaking at
67.3
percent in March.
population weights,
Adjusting for changes in survey design and
labor
force participation is about even with its
Evidence is mixed on the
highest level
in the previous expansion.
prospects for
further increases in the participation rate.
hand, the percentage of workers not
they want a job has declined
in the labor
force but
On one
saying
sharply since early 1996 and now is the
lowest since the series was first published in 1970.
In addition,
anecdotal reports indicate that orders for temporary workers have
been going unfilled because of a shortage of workers with the
required skills.
On the other hand, the increases in participation
among some of the groups that accounted for much of the rise in the
aggregate rate over the past year--men and women aged 20
aged 55
to 24 and
and older, and women who maintain families--show, as yet,
sign of leveling off.
no
This upward trend has been offset in recent
months by some slippage in labor force participation among teenagers
and prime-aged men (aged 25 to 54).
If the labor market were to
remain strong, these declines might not persist.
II-6
Labor Market Indicators
Help Wanted Index
Current Job Availability
Index, 1990=100
1987
1989
1991
1993
1995
Percent of households
1997
1987
1989
1991
1993
1995
1997
Note. Series has been adjusted to take account ol structural and
institutional changes, including consolidation of newspaper industry
and tendency to increase hiring through personnel supply agencies.
Expected Change in Unemployment
Initial Claims for Unemployment Insurance
Thousands
Index
1987
1989
1991
1993
1995
1987
1997
Note. Percentage expecting "more" minus percentage expecting
'less" plus 100.
1989
1991
1993
1995
1997
Note. State programs, includes EUC adjustment.
LABOR PRODUCTIVITY AND COSTS
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1996
1997
1996:Q2
to
19951
19961
Q3
Q4
Q1
Q2
1997:Q2
Output per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial
corporations2
-1.1
-1.0
5.5
2.3
.7
.6
3.2
ND
1. Changes are from fourth quarter of preceding year to fourth quarter of year shown.
2. Nonfinancial corporate sector includes all corporations doing business in the
United States except banks, stock and commodity brokers, and finance and insurance
companies; the sector accounts for about two-thirds of business employment.
II-7
Other indicators we track confirm that labor demand is quite
strong. The Conference Board's index of help-wanted advertising
rebounded in June to a level that, when adjusted for the sharp rise
of temporary help agencies, is above the level seen in the late
1980s.
3
Similarly, workers perceive strong demand for labor; the
difference between the percentage of households believing jobs are
plentiful and those believing jobs are hard to get has widened in
recent months to its largest gap ever. Finally, the level of
initial claims for unemployment insurance has remained low, which is
consistent with robust employment growth in August.
Labor productivity in the nonfarm business sector rose
0.6 percent at an annual rate in the second quarter after an
increase of 1.4 percent in the first.
Smoothing through the recent
fluctuations, output per hour in the nonfarm business sector has
risen almost 1-1/4 percent at an annual rate in the last eight
quarters, compared with increases of less than 1 percent per year
from 1990 to 1995.
The better performance, even as highly
qualified workers reportedly have become hard to find, hints at the
possibility of a slight improvement in the underlying trend of late.
However, this was also a period of output acceleration, and a pickup
in labor productivity would be a typical pattern in that
environment.
As of Greenbook publication, the International Brotherhood of
Teamsters continued its strike against United Parcel Service (UPS).
The strike, which began on August 4, reflects two key issues.
First, UPS has offered its workers larger pension benefits in return
for pulling out of the multi-employer plan currently run by the
union.
But the union opposes this proposal, possibly out of fear
that, without UPS, the current Teamster-run pension plan may not be
viable.
Second, the Teamsters argue that UPS relies excessively on
part-time jobs and would like the company to convert 10,000 parttime jobs to full-time positions; approximately 60 percent of the
185,000 employees covered by the Teamsters' contract are classified
as part-time workers, who are paid substantially lower hourly wages
than their full-time colleagues.
If the strike were to continue
3. This difference could be even larger if some companies are
replacing newspaper advertising with help-wanted ads on the
Internet. We have little evidence on the extent of this use of the
Internet, however, or on whether Internet ads simply duplicate other
types of help-wanted advertising.
4. As is discussed in the appendix, the revision of the NIPAs did
not greatly alter the labor productivity pattern of recent years.
II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
_
__
__
__
1997
Proportion
1996
19961
1997
Q1
Q2
May
June
July
-Annual rate- --Monthly rate--Total index
Previous
100.0
3.9
3.9
4.4
4.4
3.7
4.3
86.5
47.1
4.9
2.3
39.4
4.1
5.7
-1.6
34.5
2.3
5.3
8.2
14.1
18.1
2.0
3.7
6.7
-16.1
19.5
.0
.1
.3
-1.3
1.1
.1
.3
-2.7
1.5
-. 2
-. 2
Consumer goods
Durables
Nondurables
26.1
4.1
22.0
2.6
3.0
2.5
-1.6
4.1
-2.6
2.9
6.4
2.3
-. 1
.9
-. 3
.3
1.8
.0
Business equipment
Information processing
Industrial
Transit
Other
12.7
5.8
4.5
1.2
1.3
9.1
10.8
11.1
12.9
4.9
23.2
14.6
.2
.7
-. 8
.8
1.4
2.0
-. 4
2.1
.3
5.7
5.7
2.5
.6
-. 7
Manufacturing
Durables
Motor vehicles and part
Aircraft and parts
Construction supplies
11.0
12.0
2.6
33.3
15.2
-. 2
53.1
3.6
3.0
.0
.2
.3
.3
.2
.1
2.1
-. 3
-. 5
-. 3
Materials
CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89
Primary processing
1996
High
Manufacturing
1959-96
1997
1997
Avg.
Q2
Q1
Q2
May
June
July
85.7
81.7
82.1
82.5
82.4
82.4
82.3
82.1
88.9
82.8
86.0
86.8
87.0
87.2
86.8
86.5
II-9
through Saturday, which seems likely at this point, nonfarm payroll
employment in August will be held down, on net, by disruptions from
the strike.
Industrial Production
Industrial production rose 0.2 percent in July after rising at
nearly a 4 percent annual rate in the first half of this year.
Although a return to more normal weather boosted electric utility
output in July, industrial production was held down by a
2-3/4 percent decrease in the output of motor vehicles and parts.
Manufacturing excluding motor vehicles and parts increased
0.2 percent for a third consecutive month.
Production of nondurable
consumer goods edged lower, while output of appliances turned up
and business equipment posted another solid gain.
The overall
factory operating rate edged down to 82.1 percent in July, the
lowest level since last October.
Production of motor vehicles and parts has been a volatile
component of industrial production throughout 1997.
In July,
production fell short of schedules made at the beginning of the
month by more than 1 million units at an annual rate.
Strikes at
General Motors accounted for about 400,000 units of the underbuild;
in addition, the company's start-up following the companywide
shutdown was slower than expected, in part because of quality
concerns.
General Motors and Chrysler also curtailed output of a
few models whose inventories were excessive; however, these losses
were more than offset by stepped-up production at transplants.
At
the end of July, stocks of light trucks were at about 68 days'
supply, just a little on the high side, while the days' supply of
autos was running at a lean 54 days.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
Q2
U.S. production
Autos
Trucks
July
1997
---------- scheduled---------Aug.
Sept.
Q3
11.5
5.7
5.8
11.0
5.8
5.2
12.8
6.3
6.5
60.6
78.6
54.3
67.9
......
........
13.0
6.4
6.6
12.3
6.2
6.1
Days' supply
Autos
Light trucks
Note. Components may not sum to totals because of rounding.
II-10
NEW ORDERS FOR DURABLE GOODS
(Percent change from preceding period, seasonally adjusted)
1997
1997
Q1
Q2
100.0
1.9
1.1
1.8
-. 4
2.4
69.0
4.5
1.4
.8
.6
.4
5.0
.1
-1.6
17.0
47.0
7.2
4.0
4.7
Share,
1997:H1
Total durable goods
Adjusted durable goods
1
Computers
Nondefense capital goods
excluding aircraft and computers
All other categories
Memo:
Real adjusted orders 2
1997
Apr.
May
June
-1.1
1.1
.3
2.2
-1.6
1.9
-1.1
1.1
3.3
-. 2
2.3
1.3
1.3
.2
-3.7
1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle
parts.
2. Nominal adjusted durable goods orders were split into two components, computers
and all other. These components were deflated and then aggregated in a chainweighted fashion.
Indicators of Future Production: New Orders Indexes
Diffusion index
1991
1992
1993
1994
1995
1996
Note. Indexes above 50 indicate orders are increasing, and indexes below 50 indicate orders are decreasing.
1997
II-11
After growing strongly in the first half of the year,
production of consumer durable goods outside of motor vehicles
surged another 2.1 percent in July, as output of appliances and
computers rose smartly.
In contrast, output of consumer
nondurables, which accounts for about one-fourth of total industrial
production excluding motor vehicles, contracted 0.3 percent in July.
The production of business equipment has continued to grow
briskly.
Although output of industrial equipment was down for a
third month, information processing equipment posted another
substantial gain, jumping 0.7 percent in July after increases of
more than 12 percent at an annual rate in the first half.
Transit
equipment, mainly civilian aircraft, also grew rapidly, in large
part because of Boeing's increased production.
Although the media
have reported that Boeing is facing difficulties in ramping up
production further, our contacts at Boeing reiterated that current
production is running as planned and that the 1997 schedules will be
met.
Construction supplies edged down again in July after growing
moderately in the first half of this year, but materials output
posted a strong gain, largely reflecting gains in semiconductors.
The various indicators of future production continue to be
upbeat.
The new-order index from the National Association of
Purchasing Managers for July was at a historically high level.
Likewise, new-order indexes from the American Production and
Inventory Control Society and Dun and Bradstreet also indicated that
orders are growing.
Additionally, recent data from the Bureau of
the Census continue to show an uptrend in new orders for durable
goods.
Motor Vehicles
Sales of new light vehicles in July, adjusted for shifts in
reporting periods, were 15.5 million units at an annual rate, well
above the second-quarter pace of 14.7 million units.
The dip in
sales in the second quarter and the subsequent spurt in purchases in
July reflected, in part, the effects on supplies of several UAW
strikes and the limited availability of some popular Japanese models
during the spring.
Cutting through the volatility in the monthly
data, the underlying trend of sales seems to have remained near
15 million units--the rate that had prevailed since the second half
of 1995.
Sales are expected to be buffeted by supply problems again this
month.
As noted earlier, overall production in July fell well short
II-12
SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; FRB seasonals)
1996
1997
1997
1995
Q4
Q1
Q2
14.7
14.7
Total
Adjusted 1
1996
15.1
15.0
14.9
14.7
15.3
15.2
8.6
6.1
8.5
6.6
8.1
6.7
12.8
7.1
5.4
1.7
5.7
13.4
7.3
5.3
2.0
6.1
1.9
1.5
.4
1.7
1.3
.4
Autos
Light trucks
North American2
Autos
Big Three
Transplants
Light trucks
Foreign produced
Autos
Light trucks
May
June
July
14.5
14.7
14.9
14.8
14.2
14.5
15.5
15.5
8.5
6.7
8.0
6.5
8.1
6.8
7.9
6.3
8.5
7.0
13.1
6.8
4.9
2.0
6.3
13.3
7.2
5.1
2.1
6.2
12.7
6.7
4.8
1.9
5.9
13.0
6.9
4.9
1.9
6.2
12.3
6.6
4.7
1.9
5.7
13.5
7.1
5.1
2-0
6.4
1.8
1.3
.5
1.9
1.4
.5
1.8
1.3
.6
1.8
1.2
.6
1.8
1.3
.6
2.0
1.4
.6
Note- Components may not sum to totals because of rounding. Data on sales
of trucks and imported autos for the most recent month are preliminary.
1. Excludes the estimated effect of automakers' changes in reporting periods.
2. Excludes some vehicles produced in Canada that the industry classifies as
imports
Incentives and Big Three Market Share
Percent
Dollars
1600
5.5
Total Industry Fleet and Retail Sales
(Millions of units; annual rate)
CONFIDENTIAL
Incentives per vehicle (right scale)
Big Three market share (left scale)
1400
1200
1000 3.5
400
1991
1993
1995
1997
1.5
1996
1995
Note. Board staff estimate
1997
II-13
of plans at the beginning of the month because of strikes and startup problems at General Motors.
Although lean inventories may
depress sales somewhat this month, these supply disruptions should
be short-lived; General Motors resolved many of its production
problems by the end of July and is, for the moment, strike-free. 5
Based on confidential data from General Motors and Ford, retail
demand so far this year seems well-maintained; through July, the
average pace of sales was nearly the same as in 1996.6
Overall
fleet sales so far this year are also little changed from the
strike-affected level in 1996, as some supply-related shortfalls in
sales continued at GM; according to GM, these sales are expected to
pick up later this year as these supply constraints ease.
The Michigan SRC survey indicates that consumers' attitudes
toward car-buying conditions remained upbeat in July, largely
because of favorable pricing.
We expect that pricing, from the
consumers' perspective, will remain favorable in the near term.
Incentives offered by the Big Three should continue to be generous
as these firms attempt to regain, or at least prevent further
erosion of, market share.
In addition, announcements of price
increases for the 1998 models have been quite modest so far.
For
example, Ford's overall vehicle prices will be unchanged, while
those for General Motors will increase an average of about
1.3 percent on a comparably equipped basis.
Moreover, design
modifications for some popular foreign nameplates will reduce their
prices, putting additional pressure on the Big Three.
Consumption and Personal Income
After a lull in the early spring, consumer spending has picked
up in the past couple of months.
Moreover, the fundamentals driving
consumption growth remain quite favorable:
Real income gains have
been strong this year, household net worth has continued to rise,
5. The UAW and GM reached an agreement over the past weekend,
averting a strike at a Cadillac assembly plant. At present, fewer
than ten UAW locals are without contracts. Of these, a couple of
key parts plants remain vulnerable to possible strikes. One of
these plants--a transmission facility in Ypsilanti, Michigan--faces
Another possible strike
a strike deadline on Friday, August 15.
The UAW
dispute is brewing at a Ford parts plant in Ypsilanti:
local has asked workers for a strike authorization vote in case
negotiations with Ford break down (main issues are health and
safety).
6. The retail and fleet figures are not corrected for shifts in
reporting period, which exaggerate the monthly volatility in both
series.
II-14
RETAIL SALES
(Percent change; seasonally adjusted)
1997
1997
Q1
Q2
2.7
-. 9
-. 9
4.4
3.8
June
July
-. 3
-.3
.7
.5
.6
1.9
-2.8
-.4
-1.0
.9
1.4
.9
1.0
2.1
-. 4
-.4
.0
.0
.4
.4
.5
GAF
3.1
.3
.7
.7
.3
Durable goods
Furniture and appliances
Other durable goods
2.2
2.5
2.0
-.7
2.1
-3.0
-. 5
.5
-1.3
.5
.2
.7
-.0
-.4
.3
Nondurables
Apparel
Food
General merchandise
Gasoline stations
Other nondurables 2
Eating and drinking
Drug and proprietary
2.1
2.4
.7
3.6
1.9
2.2
2.1
3.2
-. 3
-.4
-. 5
-. 2
-3.3
.8
-. 6
.8
.1
1.3
-. 2
.6
-1.7
.4
.0
.2
.4
1.2
-.2
.8
-.1
.5
.4
.3
.6
.2
.4
.7
.8
.7
.4
.9
Total sales
Previous estimate
Building materials
and supplies
Automotive dealers
Retail controll
Previous estimate
May
1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.
2. Also includes liquor stores and mail order houses.
PCE Goods
Billions of chained (1992) dollars
2200
e Quarterly average
2150
2100
2050
2000
1950
1900
1850
1
a
1995
1994
Note. Data for second quarter, May, June and July are staff estimates.
1996
1. I
.
.I
I
I
1997
I
1800
II-15
REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)
1996
1995
1996
2.2
2.7
Q4
-
PCE
1997
Ql
-
-
Q2
Annual rate -
3.3
1997
5.3
-
May
-
June
Monthly rate
.8
.1
.8
Estimated revision 1
.3
.3
.1
Durables
Motor vehicles
Other durable goods
3.0
-. 4
5.3
3.9
-1.6
7.5
3.5
-3.1
7.6
14.1
9.9
16.5
-5.7
-17.2
1.5
.8
1.9
.2
-. 4
-1.9
.4
Nondurables
1,0
1.8
2.1
4.7
-2.1
.2
.3
Services
Energy
Non-energy
Housing
Household operation
Transportation
Medical
Other
2.7
7.4
2.4
1.7
4.3
4.9
2.2
2.3
2.8
.7
2.9
1.7
2.0
4.2
2.5
4.3
3.9
10.5
3.6
1.8
7.1
3.3
4.3
3.8
3.9
-12.4
4.7
2.0
.3
4.8
4.2
8.3
3.7
13.9
3.3
2.1
6.5
1.4
3.7
3.7
.3
2.9
.2
.1
.7
.0
.3
.1
.2
-1.7
.3
.2
.6
.5
.3
.1
Note. Derived from billions of chained (1992) dollars.
1. Staff estimate of revised PCE growth based on July retail sales report.
PERSONAL INCOME
(Average monthly percent change)
1996
1995
1996
- Q4/Q4
Q4
1997
Ql
1997
Q2
May
June
- - Monthly rate - -
Annual rate
-
Apr.
Total personal income
5.2
5.8
4.8
8.0
5.1
.2
.3
.6
Wages and salaries
Private
5.0
5.4
6.4
7.1
6.0
6.9
8.3
8.9
5.4
6.0
.0
.0
.3
.4
.8
1.0
Other labor income
-. 9
.7
.7
3.2
2.8
-. 1
.4
.5
Less: Personal tax and
nontax payments
8.9
12.5
11.8
15.1
11.5
.6
.9
1.1
Equals: Disposable
personal income
4.7
4.8
3.7
6.8
4.0
.1
.3
.5
2.4
4.8
2.0
4.3
.7
3.9
4.6
3.7
3.0
4.2
.0
4.2
.3
4.1
.4
4.4
Memo:
Real disposable incomel
Saving rate (percent)
Note. Derived from BEA's advance estimates.
1. Derived from billions of chained (1992) dollars.
II-16
Household Indicators
NIPA Personal Saving Rate
Percent
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Consumer Confidence
Index
1987
1988
1989
1990
1991
Expected Unemployment
Index
1988
1991
1994
1997
Note: Percentage expecting more unemployment over
the next 12 months minus those expecting less plus 100.
1992
1993
1994
1995
1996
Mean of Expected Inflation over
the next 12 months
1988
1991
1994
1997
Percent
1997
II-17
and
consumer sentiment is buoyant.
In addition, credit is readily
available to most consumers.
In the second quarter, PCE edged up just 0.8 percent at an
annual rate after an increase of more than 5 percent in the
quarter.
first
The deceleration was most evident in consumer durables,
but spending on nondurables also dropped back after a strong firstquarter advance.
In contrast, spending on services maintained the
brisk rise observed
in the previous two
quarters because a rebound
in spending on energy services offset some slowing in consumption of
non-energy services.
The only spending data available for the third quarter are for
goods.
Total nominal
retail sales moved up 0.6
percent in July.
Nominal outlays in the retail control category, which excludes sales
at automotive dealers and at building material
rose 0.5 percent.
The July retail sales
and supply stores,
report, together with the
data on motor vehicles sales, suggests that real
personal
consumption expenditures for goods rose 1.2 percent in July, to a
level about 1-1/2 percent above the
Real disposable personal income
second-quarter average.
rose at a 3-3/4 percent annual
rate over the first half of the year, but it likely was held down in
July by the weakness in weekly earnings.
Nonetheless, the
substantial rise in payroll employment in July suggests that the
underlying trend in real
monthly gyrations
income growth remains
sound despite the
in the data.
Over the past year
and a half, capital gains from the
stock
market have continued to push up the ratio of household net worth to
disposable income.
personal
The revised NIPA data now show a decline in the
saving rate over this span,
a wealth effect
spurring spending.
consistent with the
presence of
Moreover, with the wealth-to-
income ratio moving up further recently, household financial
conditions appear likely to remain a factor supporting spending over
the coming quarters.
Consumer sentiment has also continued to climb in recent
months, with the Michigan SRC index posting another historical high
in July.
Respondents to this survey continue to view their personal
financial situations and business conditions very favorably.
addition, they remain optimistic
In
about both business conditions and
labor market prospects over the coming year.
One factor presumably
underlying consumers' buoyant outlook is lower expected inflation.
The mean expected inflation over the next twelve months continued
II-18
Private Housing Activity
(Millions of units; seasonally adjusted annual rate)
1996
1996
1997
Q4
Q1 r
Q2P
Apr. r
May r
June.P
All units
Starts
Permits
1.48
1.43
1.42
1.38
1.47
1.43
1.44
1.42
1.48
1.44
1.39
1.43
1.45
1.40
Single-family units
Starts
Permits
New home sales
Existing home sales
1.16
1.07
.76
4.09
1.09
1.01
.76
4.00
1.17
1.05
.82
4.10
1.11
1.05
.79
4.15
1.13
1.06
.76
4.06
1.08
1.05
.77
4.25
1.11
1.05
.82
4.14
Multifamily units
Starts
Permits
.32
.36
.33
.38
.30
.38
.33
.37
.35
.38
.30
.38
.34
.35
Mobile homes
Shipments
.36
.35
.35
n.a.
.37
.36
n.a.
Note. p Preliminary. r Revised. n.a. Not available.
Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units
-7
I19 I
1977
I 1
1979
1I I
1981
I
I
1983
I
1
1985
1
I
1987
I
I
1989
I
I
1991
I
I
1993
I
I
1995
I
1
1997
II-19
its recent downward trend and was 3.4 percent in July, almost a full
percentage point below its July 1996 level.
And although the median
expected inflation over the next twelve months was down less than
the mean, the latest reading, at 2.7 percent, in July is one of the
lowest in the past twenty years.
The Conference Board index of
consumer sentiment pulled back a bit in July but remained at a very
high level.
Housing Markets
Housing activity maintained a healthy pace last quarter.
Starts in the single-family sector averaged 1.11 million units in
June and for the second quarter as a whole.
This level is somewhat
below the average for the two preceding quarters--a reference point
that balances out most of the weather-induced volatility in starts
seen late last year and early this year--and might be interpreted as
a sign of some deceleration in this sector.
However, permit
issuance for single-family construction, which we view as a better
indicator of construction activity, held at a robust 1.05 million
unit rate in the second quarter.
Recent indicators of housing demand have also been relatively
favorable.
The Census report on sales of new homes is still subject
to some question.
But, taken at face value, sales, which were
at their strongest pace in eighteen years in the first quarter, fell
back in April and May before rebounding in June.
Cutting through
the ups and downs, which may reflect, in part, the swings in
mortgage rates last spring, new-home sales in the second quarter
averaged 785,000 units at an annual rate, 3-1/2 percent above the
1996 pace.
Sales of existing homes
(measured mainly at settlement,
rather than contract) declined a bit in June, but the average level
of these sales during the second quarter was up about 1-1/2 percent
from the strong 1996 pace.
Among the indicators for July, builders'
rating of the strength of new-home sales and consumer attitudes
toward homebuying edged down, although each of them remained at a
relatively healthy level.
In addition, applications for mortgages
to finance home purchases reached a record high in mid-July and
continued to be strong in early August.
7. With the release of new-home sales figures for June, the
Census Bureau has completed the transition to a new data collection
procedure. During the past year or so, while this transition has
been in progress, the reliability of the new-home sales figures has
been uncertain.
II-20
Indicators of Housing Demand and Supply
Attitudes toward Homebuilding and Homebuying
Diffusion Index
I
---.----.
1990
Builder Attitudes
Consumer Attitudes
1991
1992
1993
1994
1995
1996
1997
Months' Supply of Homes for Sale
Number of Months
-
New Homes
Existing Homes
--------
June
M
1990
1991
1992
1993
1994
June
1997
1996
1995
MBA Index of Mortgage Loan Applications for Home Purchase
Index
-------
1990
Aug. i
4 week moving average
weekly
1991
1992
,
1993
1994
1995
.
1996
.
1
1997
II-21
The strength of home sales has reduced the stock of both new
and existing homes for sale, but the decline in new-home inventories
has been especially notable.
According to Census data, the months'
supply of new homes for sale fell to 4.2 months in June, one of the
lowest observations on record.
However, information from Census
Bureau analysts suggests that the extent of the inventory decline in
recent months may be overstated.
Part of the decline stems from
the Census Bureau's new data collection procedure, which identifies
some units that were included in the "for sale" inventory but that
no longer were on the market.
These units should have been removed
from the inventory of new homes for sale in years past, but Census
was unable to identify them until it introduced its new procedures.
Multifamily housing starts jumped nearly 13 percent in June,
offsetting most of the falloff that occurred in May.
For the second
quarter as a whole, these starts were about 5 percent above the
average pace in the preceding two quarters.
However, permit
issuance for multifamily units declined about 2 percent in the
second quarter, suggesting that the recent strength in these starts
may not be sustainable.
Business Fixed Investment
Real business fixed investment accelerated in the second
quarter, increasing at an annual rate of 14-1/2 percent following a
downward-revised first quarter advance of 4 percent.
8
The
acceleration in the second quarter owed almost entirely to a surge
in real outlays for producers' durable equipment.
Underlying the
surge was continued healthy growth in corporate cash flow and the
delayed effects of the acceleration in business output around the
turn of the year, along with the ongoing price declines for
computing equipment and a pickup in aircraft deliveries.
Real business purchases of office and computing equipment
posted another large gain in the second quarter, rising at a
32 percent annual rate.
The rapid growth in real outlays on office
and computing equipment seems likely to continue into the current
quarter:
Demand for personal computers and networking equipment
remains strong, and the steep price declines that have been driving
8. Both NRS and PDE were revised down in the first quarter. The
a change in BEA's
PDE revision largely reflected two factors:
seasonal factors for aircraft, and the smaller weights given to the
fast-growing computer and computer parts components under BEA's new
quarterly chain aggregation due to the rapid decline in the relative
price of computers. Changes in NRS were basically caused by the
annual revision to the construction put-in-place data.
II-22
BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1996
Q4
Producers'
1997
Q1
1997
Q2
Apr.
May
June
1.3
2.4
.6
1.8
3.3
durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
1.5
.8
-.7
4.1
.5
1.4
.8
2.6
-1.0
.6
5.1
3.7
.5
6.1
4.3
1.6
.4
-2.0
-3.8
2.4
-.1
.3
1.6
5.1
-1.3
Shipments of complete aircraft I
21.1
-7.8
30.6
5.5
2.0
-15.8
Sales of heavy trucks
-5.5
7.3
-1.8
-.4
.8
-11.9
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
.2
2.5
-.9
-1.7
1.1
-. 8
5.5
-. 1
-1.5
-. 6
5.4
1.7
-.6
3.7
-1.9
.1
12.4
5.9
-1.6
4.6
-.8
-1.1
-8.0
.1
1.1
8.1
-3.4
-3.7
13.8
.4
5.2
2.2
5.6
1.8
4.1
2.7
-1.4
-4.3
-5.4
-2.5
-4.9
-6.0
4.4
4.0
5.8
-2.8
3.1
-8.6
7.5
4.6
6.8
4.6
-4.2
2.7
5.4
-2.7
5.9
7.5
-3.5
-2.4
-4.2
5.6
12.1
-3.6
1.3
-2.2
-1.6
16.2
11.9
.8
2.5
2.2
5.9
2.6
31.0
-5.6
-2.8
15.3
4.1
6.7
27.9
10.3
6.0
-2.1
15.1
20.4
32.6
5.3
20.1
2.3
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Nonresidential structures
Construction put in place, buildings
Office
Other commercial
Institutional
Industrial
Lodging and miscellaneous
Rotary drilling rigs in use 2
Memo:
Business fixed investment
Producers' durable equipment
Office and computing
Communications equipment
Other equipment 3
Nonresidential structures
1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Percent change of number of rigs in use, seasonally adjusted.
3. Producers' durable equipment excluding office and computing,
communications, motor vehicles, and aircraft and parts.
n.a. Not available.
II-23
demand for some time are set to continue.
In particular, Intel's
recent round of price cuts for Pentium processors, which went into
effect at the beginning of August, will be even deeper than
previously expected and will include price reductions of 40 percent
on the newer MMX chips;
computer manufacturers already have begun to
cut prices aggressively on complete systems.
Growth in real outlays for communications equipment slowed to a
5-1/2 percent increase at an annual rate in the second quarter.
However, orders for communications equipment were up sharply in May
and June, suggesting the potential for a larger gain in outlays in
the current quarter.
Telecommunications deregulation should
continue to have a positive impact on spending on communications
equipment.
Although long distance providers have thus far realized
little revenue from their local market operations, markets are
opening and investment expenditures by these companies have
proceeded apace.
In particular, despite a recent U.S. Appeals Court
ruling against the FCC's pricing rules for the fees that local phone
companies can charge competitors for access to local networks, Bell
Atlantic-Nynex has agreed to follow FCC guidelines, a move that is
likely to speed up the process of increasing competition in local
and long distance phone markets.
Outside of information technology, expenditures on capital
goods excluding motor vehicles took off in the second quarter,
expanding at a 33 percent annual rate.
This increase was partly due
to a sizable pickup in domestic deliveries of aircraft; but even
excluding aircraft, expenditures in this category--which had grown
slowly over the previous two years--rose at a 22 percent annual
rate.
Orders for this category also remain strong, suggesting that
the second quarter's robust growth of shipments will continue in
the current quarter.
In contrast to the strength in equipment spending, the growth
of expenditures on nonresidential structures has weakened this year.
The annual revision to the data on construction put-in-place showed
some significant changes in the timing of expenditures over the past
year--revising expenditures up over the earlier part of 1996 and
showing a flatter pattern over the first half of 1997.
As a result,
BEA's advance estimate shows little net change in outlays over the
first half of this year.
In addition, June's construction put-in-
place data--not available for BEA's advance estimate--reported a
2 percent decline for nonresidential structures.
We now estimate
II-24
Fundamental Determinants of Equipment Spending
Acceleration of Business Output
Percentage points
Percent
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
Note. The accelerator is the eight-quarter percent change in business output less the year-earlier eight-quarter percent change.
Real PDE is the four-quarter percent change.
Real Domestic Corporate Cash Flow
Percent
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
User Cost of Capital
Percent
Other equipment
-
1963
1966
1969
1972
1975
1978
A
1981
1984
1987
1990
1993
1996
II-25
Orders and Shipments of Nondefense Capital Goods
Office and Computing Equipment
Billions of dollars
June
Orders
~ '
It
r
*
I
-
f I-
Shipments
1994
1995
1996
1997
Communications Equipment
Billions of dollars
Ji
June
,1
I'
/'"I
I'
1994
1995
1996
Other Equipment (Excluding Aircraft, Computing, and Communications Equipment)
Billions of dollars
1994
1995
1996
1997
8
II-26
Nonresidential Construction and Contracts
(Six-month moving average)
Total Building
1980
Index, Dec. 1982 = 100, ratio scale
1982
1984
1986
1988
1986
1988
1990
1992
1994
1996
1994
1996
1986
1984
1986
1988
1990
1992
1994
1996
1988
1990
1992
1994
1996
Institutional
Industrial
1984
1992
Other Commercial
Office
1984
1990
1988
1990
1992
1994
1996
1984
1986
Note. For contracts, total includes private only; individual sectors include public and private.
II-27
that expenditures in this category fell at a 1-1/2 percent annual
rate in the second quarter.
Available indicators paint a mixed picture for future growth in
nonresidential construction activity.
Smoothing through their large
monthly swings, contracts for construction have been relatively flat
over the first half of the year, with contracts for office buildings
down noticeably from their peak of late last year.
indicators remain strong:
But other
Vacancy rates have declined, and prices
for commercial real estate are edging up.
Business Inventories
Nonfarm businesses continued to accumulate inventories at a
rapid rate in the second quarter.
However, while this pace clearly
is unsustainable, there are few signs of imbalances at this
juncture.
In manufacturing, inventory investment slowed to a $16 billion
annual rate (book value) in June--about half the average pace
observed in April and May.
For the second quarter as a whole,
manufacturers invested a robust $25
billion.
However, the inventory
situation varied somewhat by industry last quarter.
Inventories
held by producers of aircraft and parts continued to rise at a brisk
pace.
Inventories of other nondefense capital goods also generally
expanded over the second quarter, despite a dip in June.
Nonetheless, orders and shipments of nondefense capital goods were
generally robust, and the June inventory-shipments ratio for goods
in this category was the lowest in recent years.
Outside of capital
goods, stocks held by producers of motor vehicles and other
automotive products were drawn down substantially, while inventories
in several consumer goods-oriented industries--fabricated metal
products, food, textile, and apparel--expanded.
Although factory
stocks at midyear generally were well-aligned with orders and
shipments, inventory-shipments ratios for several nondurable goods
industries appeared a bit high in June.
In wholesale trade, nonvehicle inventories rose sharply in June
after little net change in the preceding two months.
In addition to
a substantial buildup in stocks of business equipment, inventories
held by some distributors of consumption goods--lumber, hardware and
plumbing, alcoholic beverages, and drug store supplies--also posted
significant increases.
Despite a sizable jump in June, the
inventory-sales ratio for the wholesale trade sector remained in the
relatively narrow range seen over the past year.
In retail trade,
II-28
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1996
Q4
1997
Q1
1997
Q2
Apr.
May
June
Book value basis
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers
16.0
35.8
50.3
45.3
22.5
83.0
22.2
7.0
2.5
4.1
6.0
4.9
-4.3
9.1
30.9
16.5
9.1
14.3
11.5
5.0
2.1
2.8
49.1
25.0
20.0
18.2
13.5
7.2
-3.5
10.6
46.8
35.4
29.3
-16.1
-8.2
26.0
6.4
19.7
35.1
23.4
22.0
11.8
6.4
-12.7
-18.0
5.3
65.4
16.1
8.5
58.8
42.3
8.1
1.2
7.0
SELECTED INVENTORY-SALES RATIOS
(Months' supply. based on Census book-value data, seasonally adjusted)
Cyclical
reference points
1990-91
1995-96
high
low
Range over
preceding 12 months
High
Low
June
1997
1.58
1.37
1.39
1.35
-1.37
1.55
1.34
1.36
1.32
1.34
Manufacturing
Primary metals
Nonelectrical machinery
Electrical machinery
Transportation equipment
Motor vehicles
Aircraft
Nondefense capital goods
Textile
Petroleum
Tobacco
Home goods & apparel
1.75
2.08
2.48
2.08
2.93
.97
5.84
3.09
1.71
.94
2.83
1.96
1.36
1.49
1.80
1.41
1.48
.56
4.15
2.31
1.44
.75
1.92
1.67
1.39
1.71
1.89
1.48
1.61
.62
4.88
2.39
1.54
.84
2.16
1.72
1.35
1.60
1.78
1.33
1.49
.57
4.09
2.29
1.47
.75
1.94
1.65
1.36
1.61
1.77
1.34
1.58
.59
4.27
2.29
1.54
.85
1.94
1.69
Merchant wholesalers
Less motor vehicles
Durable goods
Nondurable goods
1.36
1.31
1.83
.96
1.24
1.22
1.53
.93
1.28
1.25
1.57
.98
1.22
1.20
1.50
.92
1.25
1.23
1.55
.93
Retail trade
Less automotive dealers
Automotive dealers
General merchandise
Apparel
G.A.F.
1.61
1.48
2.21
2.43
2.56
2.44
1.50
1.43
1.68
2.21
2.42
2.23
1.53
1.45
1.79
2.27
2.56
2.27
1.48
1.41
1.68
2.12
2.43
2.16
1.51
1.43
1.73
2.13
2.53
2.16
Manufacturing and trade
Less wholesale and retail
motor vehicles
II-29
Inventory-Sales Ratios, by Major Sector
(Book value)
Manufacturing
Ratio
2.2
1.95
-
..
I
I
1980
Total
I
1982
I
1984
I
. I
1986
I
-
I
1988
I
I
1990
I
,,I
1992
1
I
1994
I
I
1.7
1.7
1.2
I
1996
Wholesale Excluding Motor Vehicles
Ratio
S1.5
- 1.4
1.3
June
1.2
1.1
1982
1980
1984
1986
1988
1990
1992
1994
1996
Retail
Ratio
-
2.8 -
2.6 -
i
,
GAF group (left scale)
A
"
-
.1.5
it
2.2
2.
2.2
June
- 1.4
Total excluding autos (right scale)
1980
1982
1984
1986
1988
1990
1992
1.7
1994
1996
II-30
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars)
Fiscal year to date totals
June
1996
117.7
-. 5
.0
118.2
Dollar
change
Percent
change
(DI)
(SA)
Receipts
(+)
1996
1997
118.8
-.3
-5.2
124.4
1165.2
-7.1
-. 2
1172.6
1202.4
-12.9
-10.3
1225.5
37.2
-5.7
-10.1
53.0
3.2
n.a.
n.a.
4.5
152.0
Outlays
Deposit insurance
Spectrum auction
Other
Deficit
1997
173.4
1091.2
1191.5
100.3
9.2
-34.3
-54.5
74.0
10.9
-63.1
-85.3
Adjusted for payment timing shifts 1
and excluding DI and spectrum auction
Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Other
125.2
21.6
19.0
32.7
13.4
7.6
2.2
1179.6
199.4
180.1
15.3
131.6
22.7
19.5
34.1
15.0
8.0
2.6
13.4
16.3
Receipts
Individual income and
payroll taxes
Withheld
Nonwithheld
Refunds (-)
Corporate
Other
152.0
Deficit(+)
130.0
68.5
20.0
175.6
143.9
1225.5
201.8
184.3
273.7
141.3
71.5
21.3
179.0
152.6
45.9
2.4
4.2
11.7
11.3
3.0
1.4
3.4
8.7
173.4
1091.2
1191.5
100.3
9.2
105.4
76.3
31.2
2.1
37.0
9.6
121.9
87.8
35.9
1.8
39.4
12.1
848.8
737.4
195.2
83.8
128.7
113.7
936.2
227.9
87.4
139.0
116.3
87.4
58.4
32.7
3.6
10.3
2.6
10.3
7.9
16.8
4.3
8.0
2.3
-26.8
-41.8
34.0
-54.4
-61.5
13.4
262.0
88.4
795.8
3.9
1.2
2.3
4.4
8.7
4.3
6.9
1.9
6.0
Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on a
weekend or holiday. The monthly and fiscal year to date outlays for defense,
Medicare, income security, and "other" have been adjusted to account for this
shift.
n.a.
Not applicable.
II-31
INVENTORY INVESTMENT IN MANUFACTURING
(Book value, billions of dollars at annual rate)
1996
Q4
1997
Other manufacturing
Apr.
1997
May
June
16.5
25.0
35.4
23.4
16.1
3.2
6.8
-3.6
9.4
8.0
1.4
10.5
6.3
4.2
15.0
5.6
9.4
7.2
3.0
4.2
9.2
10.3
-1.2
3.8
Nondefense cap. goods
Aircraft and parts
Other
Q2
7.0
All manufacturing
Q1
7.1
14.5
20.4
16.2
6.9
stores in the GAF grouping reported an inventory buildup
of
$1.8 billion in June, bringing the second-quarter accumulation to
$5.5 billion;
quarters.
the buildup followed declines in the preceding two
The modest buildup in GAF stocks was apparently
consistent with recent increases in sales:
ratio for this broad
The inventory-sales
category of retail stores edged down further in
June to 2.16 months--among the lowest in recent years.
Federal Sector
The incoming news on the fiscal
been surprisingly good.
its usual
1997 deficit has once again
Neither OMB nor CBO has officially released
summer budget update.
However, President
Clinton
announced that OMB now expects a deficit of $37 billion, and CBO
announced an estimate of only $34 billion.
For the first nine months of fiscal
1997),
1997
the unified federal deficit, adjusted
(October 1996 to June
for payment timing
shifts and excluding deposit insurance and spectrum auction
proceeds, was $54
1996.
Receipts were more than 9 percent higher than the year-
earlier level;
continued to be
3.9
billion lower than for the same period in fiscal
in particular, individual income tax receipts have
extremely strong.
percent through June, roughly in
past couple of years.
Adjusted outlays were up only
line with their pace
over the
While defense has edged up this year, after
four years of decline, health spending has been quite subdued.
Two major pieces of legislation recently were enacted into
the Balanced Budget Act
(TRA) of 1997.
of 1997
law:
(BBA) and the Taxpayer Relief Act
The legislation is expected to have only moderate
effects on the deficit through fiscal 2001 but is expected to
reduce
9. Preliminary data from the Daily Treasury Statements indicate
that withheld income and payroll tax revenues were strong again in
July.
II-32
PRELIMINARY ESTIMATES OF THE DEFICIT EFFECTS OF THE
BALANCED BUDGET AND TAXPAYER RELIEF ACTS
(Fiscal years, billions of dollars)
1998
1999
Discretionary spending
8
-3
Mandatory spending
1
2000
2001
2002
-15
-33
-54
-12
-33
-19
-55
-118
-6
0
0
4
3
-16
-1
-2
4
3
-29
-2
-3
4
-3
-20
-3
-4
4
4
-41
-4
-12
3
-1
-112
-10
-21
20
6
9
9
26
30
18
92
3
3
-6
0
17
-6
-2
18
8
0
1
-6
-8
-4
22
9
3
1
4
-8
-5
21
10
3
2
5
-9
-2
21
10
3
2
0
-10
-8
85
39
3
6
19
-40
-20
0
1
0
-1
-4
-2
18
-5
-22
-23
-96
1998-2002
Effects on deficit
Medicare
Medicaid
Asset sales (spectrum)
Child health
Other
Revenues
Child credit
Education incentives
Capital gains/IRAs
Estate tax
Other misc. tax cuts
Excise Taxes
Other tax increases
Debt service
Total
-97
-125
Neither CBO nor OMB has released estimates of the effects of
However, CBO has
the reconciliation legislation on the deficit.
released its estimates of the effects of the BBA on mandatory
spending, and the Joint Committee on Taxation.has released estimates
of the effects of the legislation on revenues. We have estimated
the effects of the new caps on discretionary spending using CBO's
March baseline and have used unofficial CBO estimates of the effects
on debt service.
II-33
it by $96 billion in 2002.
Preliminary estimates from OMB (cited by
President Clinton at his August 6 press conference) suggest that the
legislation will result in a surplus of at least $20 billion in
fiscal 2002 and keep the budget in balance or in surplus for the
2003-2007 period.
Under the BBA, new caps are established for discretionary
spending.10 Although these caps raise discretionary spending
above the OBRA-1993 caps by roughly $8 billion in 1998 (according to
CBO's most recent published estimate),
total discretionary spending
is cut roughly $100 billion over the 1998-2002 period
(relative to a
baseline that has discretionary spending at the OBRA-1993 cap in
1998 and growing with inflation thereafter).
The BBA cuts mandatory
spending $118 billion over the five-year period, with the lion's
share of the mandatory cuts
spending.
($112 billion) from lower Medicare
Savings from Medicaid cuts and increased spectrum auction
proceeds approximately balance out increases in spending on a child
health initiative and other programs.
Finally, the TRA provides $92 billion in tax relief over the
1998-2002 period.
Gross tax cuts, consisting largely of a child tax
credit and new education tax incentives, total almost $150 billion.
These are partially offset by about $55 billion in tax increases,
representing about $40 billion in increased excise taxes on air
travel and cigarettes and about $15
billion in miscellaneous small
tax increases.
Earlier this week President Clinton struck three provisions of
the BBA and TRA, inaugurating the use of the line-item veto. 1 1
All together, these provisions would have cost about $600 million
over five years.
The line-item veto will likely be challenged in
the courts on the grounds that it is unconstitutional.
In addition,
several analysts have suggested that Congress may be able to protect
provisions from the possibility of veto by making minor technical
adjustments to the way that the legislation is introduced.
10. The BBA establishes separate caps for defense and nondefense
For fiscal 2000-2002,
discretionary spending for 1998 and 1999.
only total discretionary spending is capped.
11. The three provisions would have: (1) provided a tax break
granted to banks, securities firms, and insurers doing business
overseas; (2) allowed tax deferrals on the sale of certain food
processing plants to farmers' cooperatives; and (3) allowed the
state of New York to continue using "gimmicks" that boost federal
Medicaid matching payments.
II-34
EMPLOYMENT COST INDEX OF HOURLY COMPENSATION
FOR PRIVATE INDUSTRY WORKERS
1996
June
Sept.
1997
Dec.
Mar.
June
----- Quarterly percent change------(Compound annual rate)
Total hourly compensation1
Wages and salaries
Benefit costs
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation
White-collar
Blue-collar
Service occupations
Memo:
State and local governments
3.5
3.6
3.0
2.8
2.9
2.1
2.8
3.2
2.9
2.5
3.5
0.0
3.4
3.8
2.9
1.9
3.5
2.9
1.6
3.4
2.5
3.5
2.8
4.1
2.2
0.6
1.2
3.5
3.7
2.5
3.8
-0.3
5.9
3.4
2.8
4.6
1.3
2.8
3.4
5.2
-2.2
3.1
6.9
3.5
8.5
2.7
0.9
2.5
2.5
3.6
3.1
2.9
2.9
3.4
1.6
2.6
2.8
3.8
3.8
3.4
1.2
3.5
3.0
3.4
3.4
2.5
2.5
3.1
2.1
1.8
----- Twelve-month percent change---Total hourly compensation
Excluding sales workers
Wages and salaries
Excluding sales workers
Benefit costs
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation
White-collar
Blue-collar
Service occupations
Memo:
State and local governments
2.9
2.8
3.4
3.2
1.7
2.9
2.9
3.3
3.4
1.8
3.1
2.9
3.4
3.3
2.0
3.0
2.8
3.4
3.1
2.0
2.9
2.9
3.3
3.3
2.0
2.7
2.8
3.0
2.3
3.1
2.6
2.4
3.0
3.0
2.3
2.6
2.7
2.7
2.6
2.6
3.6
2.5
3.7
2.7
3.0
2.9
3.3
2.9
3.1
3.8
2.4
3.1
4.2
3.2
3.3
3.0
3.5
3.9
2.5
3.0
3.0
2.6
2.0
3.2
2.4
2.2
3.2
2.7
3.0
3.2
2.4
3.2
3.2
2.5
3.5
2.6
2.5
2.6
2.5
2.4
1. Seasonally adjusted by the BLS.
II-35
State and Local Governments
Total real consumption expenditures and gross investment by
state and local governments rose at a 1.3 percent annual rate in the
second quarter, about half the pace reported in the first quarter.
In the second quarter, consumption expenditures increased
2.1 percent, while investment fell 1.9 percent after rising almost
6 percent during the preceding quarter.
Construction put-in-place
for June, which became available after the GDP report, rose
0.4 percent in real terms at a monthly rate, well below the figure
assumed by BEA.
Meanwhile, employment in July increased 55,000,
after an even bigger rise in June.
Both months saw outsized
increases in the education component of local government employment:
Apparently, school systems have been moving to earlier start dates
and year-round sessions, and the seasonal adjustment factors for the
summer months have not yet adequately captured these shifts.
According to the National League of Cities, the fiscal position
of the nation's cities has improved in recent years, because of both
favorable economic conditions and sound budgetary policies.
Ending
balances as a percentage of expenditures increased in every fiscal
year between 1993 and 1996, and the balance is expected to remain
high during fiscal 1997
(which still has not ended for many cities).
As a result, cities have been expanding programs and adding to their
reserve funds, while revenue-raising actions have subsided.
Despite
the good news, many cities continue to be pressed by infrastructure
and public safety needs and the demands of growing populations.
Prices and Labor Costs
According to the employment cost index (ECI), hourly
compensation of private industry workers rose 3.4 percent at an
annual rate between March and June, following a 2.5 percent rise
during the first quarter.
This pickup resulted from a rebound in
benefit costs, seasonally adjusted, in the second quarter and
mimicked a similar pattern seen last year.
12
Because of this quarterly volatility, the twelve-month changes
in these series are probably more meaningful.
The rise in hourly
compensation over the twelve months ended in June was 2.9 percent-unchanged from the pace recorded in the prior two years.
Hourly
12. Prior to seasonal adjustment, benefits costs increased at a
slightly slower pace in the second quarter than in the first
quarter. The seasonal factors for the first quarter had expected an
even larger increase, reflecting the influence of earlier years when
first-quarter step-ups in benefit costs--especially for health
insurance--were more sizable.
II-36
Components of ECI Benefits Costs
(Private industry workers; twelve-month change)
Insurance Costs
Supplemental Pay
Percent
*
25
\ ,
.
20
s
Percent
.
Si
20
20
Nonproduction i
Sbonuses
10
-
1
/--',1
0
Total
1982
1984
1986
1988
1990
1992
30
1994
1996
-5
Paid Leave
1982
1984
1986
1988
1990
1992
1994
1996
-20
Retirement and Savings
Percent
14
Percent
15
10
10
1982
1984
1986
1988
1990
1992
1994
1996
2
Workers' Compensation Insurance
1982
1984
1986
1988
1990
1992
1994
1996
-0
-5
State Unemployment Insurance
Percent
Percent
15
25
,,20
10
*s
5-5
-5
1982
1984
1986
1988
1990
1992
1994
Note. Unpublished ECI benefits detail.
S
1996
-5
1982
1984
1986
1988
1990
1992
1994
1996
-10
II-37
wages and salaries were up 3.3 percent during the year ended in
June, while benefits rose 2 percent after an increase of 1.7 percent
in the previous twelve months. Although increases in employers'
costs for health insurance benefits have moved up a little over the
past year, their rate of increase is still subdued.
In addition,
declines continue to be reported in contributions to workers
compensation plans and state unemployment insurance funds.
By occupation, compensation growth has remained fairly steady
in white-collar and blue-collar jobs over the past year but has
accelerated briskly in service occupations. By industry, hourly
compensation has picked up noticeably in retail trade, the sector
with the largest concentration of minimum-wage workers, and in
business services, where labor shortages for both temporary workers
and computer specialists have been reported.
In contrast to these
areas of wage pressures, compensation growth in the health services,
FIRE, and transportation industries has diminished over the past
year.
Some analysts have noted that the ECI may be understating
labor cost increases because it does not pick up some of the methods
firms reportedly have been using to attract or retain workers in
this tight labor market.
For example, stock options, hiring
bonuses, and special training promises--the use of which reportedly
has increased over the past year or so--are excluded from the ECI.
Indeed, one measure that eventually captures some of these
alternative pay arrangements, hourly compensation in the nonfarm
business sector as reported in the Productivity and Cost release,
has risen somewhat faster than the ECI over the past few years.
This measure of compensation has increased 3.4 percent over the past
four quarters, up about a quarter point from the rate recorded a
year earlier.
Although more inclusive in measuring pay gains,
hourly compensation in the Productivity and Cost data tends to lag
on the benefit side, and it has been revised down in the past two
years to reflect a reduction in estimated employer contributions for
health insurance.
These revisions have eliminated some--but not
all--of the difference between the nonfarm and ECI measures of
compensation growth in the past two years.
The faster growth in the
productivity and cost measure of compensation relative to the ECI is
entirely in the wages and salary components of the two series.
Although this difference is consistent with the greater use of some
forms of compensation excluded from the ECI, it could also reflect
II-38
Compensation Per Hour
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1996
1997
Q1
1996:Q2
to
1997:Q2
19951
19961
2.8
3.6
3.3
3.6
2.9
3.5
3.3
3.7
4.5
5.2
3.1
n.a.
3.4
n.a.
2.6
3.4
3.2
3.4
3.4
4.0
2.9
3.3
4.3
4.8
n.a.
n.a.
n.a.
n.a.
Nonfarm business
Previous
Nonfinancial
corporations 2
Previous
Q3
Q4
Q2
1. Changes are from fourth quarter of preceding year to fourth quarter of year
shown.
2. The nonfinancial corporate sector includes all corporations doing business
in the United States with the exception of banks, stock and commodity brokers,
finance and insurance companies; the sector accounts for about two-thirds of
business employment.
Compensation per hour
(Four-quarter percent change)
Percent
Nonfarm compensation per hour
(Previous)
-
Employment cost index
I
1990
1991
i
I
1992
1993
IIILI
,
I
1994
1995
,ID.,II IITI
1996
Earnings of production or nonsupervisory workers
(Twelve-month change)
II
1997
Percent
ECI wages and salaries
,-
/
"
--
Average hourly
1990
1991
1992
1993
1994
1995
1996
1997
II-39
increases in hourly pay associated with the rise in increased use of
overtime hours or a higher incidence of job promotions.
Average hourly earnings of production and nonsupervisory
workers--the only wage data available for the third quarter--were
unchanged in July;
3.5 percent.
the twelve-month change held steady at
This series is also running slightly ahead of the
comparable ECI figure, likely reflecting the rise in overtime hours
evident over the past year.
The consumer price index rose 0.2 percent in July, following
four consecutive months of increases of 0.1 of a percentage point.
On a twelve-month change basis, the CPI has remained steady at
2-1/4 percent in recent months, down from 3 percent in July 1996.
The CPI for energy was little changed for a second month in
July after falling sharply over the first half of this year.
An
increase in the price of natural gas in July about offset price
declines for other energy products.
However, in coming months,
prices of petroleum-based energy products may start rising.
After
bottoming out at roughly $18.50 per barrel in mid-June, the spot
price of West Texas intermediate has averaged more than $20 per
barrel thus far in August.
Furthermore, private survey data suggest
that, on a seasonally adjusted basis, the retail price of gasoline
turned up early this month.
The price index
Consumer food prices rose 0.3 percent in July.
for fruits and vegetables was up in July for a third consecutive
month.
Retail coffee prices also moved higher again in July,
although futures prices and a decline in the PPI for coffee suggest
that prices will move lower in coming months.
Among other items,
prices for beef and eggs moved up in July, while the index for dairy
products fell further.
As of July, consumer food prices were
2-1/2 percent above the level of a year earlier; substantial
deceleration in the twelve-month rate of change has taken place
since the end of last year.
Although prices of crude foods edged up
in July, these prices were more than 14 percent below the elevated
levels of the previous year, when grain prices were peaking.
Although dry weather has hurt crops in some regions of the country
since mid-July, the USDA still is forecasting large crops overall.
Moreover, rain and cooler temperatures in the last week or so have
allayed some of the concern about crop conditions.
Our translation
of the recent data on futures prices suggests that year-to-year
declines in crude food prices will persist into 1998.
II-40
CPI AND PPI INFLATION RATES
(Percent change)
From twelve
months earlier
July
1996
July
1997
1997
Ql
1997
Q2
June
-Annual rate-
July
-Monthly rate-
CPI
All items
(100.0) 1
3.0
Commodities (23.4)
3.4
4.1
2.7
2.5
-1.0
2.4
1.4
Food (15.9)
Energy (7.0)
CPI less food and energy (77.0)
.9
.1
2.2
.3
7.3
2.2
.2
.9
-15.6
2.9
1.0
1.4
-. 2
-. 1
-.2
-7.4
3.6
.5
2.8
.0
-1.8
-. 3
-. 2
.0
.1
-1.1
.1
-. 6
.1
2.1
-.4
-.2
.1
2.6
Shelter (28.2)
Medical care (6.1)
Auto finance charges (0.6)
Other Services (18.8)
2.0
-. 5
1.6
2.2
-.7
1.7
3.1
2.7
3.5
3.3
3.7
-3.7
3.4
3.0
2.7
.0
3.4
3.1
2.6
-1.8
2.1
3.4
3.3
-1.0
3.9
.2
.1
1.6
.4
2.6
Services (53.7)
.3
-4.5
1.4
3.3
New vehicles (5.0)
Used cars (1.3)
Apparel (4.8)
House furnishings (3.3)
Other Commodities (9.0)
-.2
-. 7
-4.0
-. 1
-. 4
PPI
2
Finished goods (100.0)
Finished
Finished
Finished
and
.1
-1.4
-4.2
1.4
.0
-22.7
-.2
.0
consumer foods (23.6)
energy (14.7)
goods less food
energy (61.6)
.4
-. 6
-. 1
.5
.1
3
Intermediate materials (100.0)
Intermediate materials
less food and energy (81.3)
13.2
25.1
19.9
-13.9
Crude food materials (38.0)
Crude energy (42.4)
Crude materials less
-food and energy (19.6)
importance
importance
importance
importance
weight
weight
weight
weight
.1
-.1
.1
-.
1
-2.9
.0
-.2
.1
.0
.2
-1.8
Crude materials (100.0) 4
Relative
Relative
Relative
Relative
.0
-1.1
.7
Consumer goods (38.1)
Capital equipment (23.6)
1.
2.
3.
4.
.1
for
for
for
for
-7.3
-14.4
-3.8
3.0
1.3
-15.5
15.3
12.8
-24.7
-3.3
8.2
-56.6
-3.8
-5.4
-2.9
.4
CPI, December 1996.
PPI, December 1996.
intermediate materials, December 1996.
crude materials, December 1996.
II-41
The index for consumer prices excluding food and energy rose
0.2 percent in July, the same as the average monthly increase in the
first half of the year.
On a twelve-month basis, core consumer
prices increased 2.4 percent in July, down from the 2.7 percent pace
recorded a year earlier, but similar to the pace recorded in the
previous couple of months.
Falling import prices have helped hold
down the rate of change of core CPI commodities to 0.9 percent over
the twelve months ended in July, while prices of services other than
energy advanced 3.1 percent over this period.
PCE prices excluding food and energy have not decelerated over
the past year as have core CPI prices;
in contrast, core PCE prices
had decelerated considerably more in the preceding year.
Other
broad measures of prices show little sign of acceleration, and
short-term inflation expectations are lower than a year ago.
Furthermore, prices at earlier stages of processing remain
relatively subdued.
The PPI for intermediate materials less food
and energy has edged up a little over the past twelve months;
although the PPI for core crude materials turned down in July, the
index is now about 3 percent above its year-earlier level.
Since
mid-July, the Journal of Commerce and KR-CRB industrial price
indexes have turned up somewhat, reflecting the recent rise in
metals prices; both indexes, however, are little changed on balance
this year.
II-42
SPOT PRICES OF SELECTED COMMODITIES
Percent change 1
---------------
- - - - - - - - - - - - - - -
Memo:
Current
price
($)
1995
1996
Dec. 31
to
June 242
June 242
to
Aug. 12
Year
earlier
to date
---------------------------------------------------------
Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)
1.100
146.500
.780
Precious metals
Gold (oz.)
Silver (oz.)
326.150
4.410
1.7
7.2
Plywood (m. sqft.)
355.000
345.000
-14.4
-6.1
Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)
18.580
.680
.544
16.8
7.7
22.6
Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)
64.000
55.000
.646
-5.7
-3.5
-6.6
-12.9
-18.3
-13.7
-9.8
15.0
18.9
3.1
-5.1
-8.8
-8.4
66.0
1.6
25.9
24.3
16.1
-10.6
5.8
10.3
14.6
5.0
16.7
-3.6
-15.9
-7.5
-12.7
-10.4
12.7
-4.6
-2.8
-12.1
4.5
-24.7
-21.8
-27.1
28.7
6.1
-. 1
Forest products
Lumber (m. bdft.)
.0
27.5
10.7
34.1
-29.5
-16.6
-7.1
U.S. farm crops
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)
2.590
3.788
7.160
.724
57.4
24.0
29.0
-8.1
Other foodstuffs
Coffee (lb.)
2.140
-39.1
108.300
103.600
243.090
ND
-1.7
-1.8
3.3
-3.5
12.4
-4.5
11.8
-2.2
-10.9
-2.0
-23.3
19.1
2.0
43.2
66.2
-3.7
-7.7
-2.6
1.0
4.3
-10.8
10.8
-9.1
-10.6
5.5
-3.0
-9.8
6.3
3.6
-47.5
1.6
-1.3
7.2
1.4
.1
8.5
-12.6
-25.6
-11.6
.2
-6.5
-5.3
50.7
Memo:
JOC Industrials
JOC Metals
KR-CRB Futures
KR-CRB Spot
rom the last week of the preceding year to
1. Changes, if not specified, are f:
the last week of the period indicated.
2. Week of the June Greenbook.
.1
11.6
-2.7
.2
II-43
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index, 1990=100
Metals
KR-CRB Spot Industrials
Ratio scale, index, 1967=100
KR-CRB Industrials
-^
-
347
335
June
1989
1990
1991
July
1997
Aug.
323
1992
KR-CRB Futures
Ratio scale, index, 1967=100
KR-CRB Futures
June
July
1997
1
Aug.
231
Note. Weekly data, Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the KR-CRB spot price index consists entirely of industrial
commodities, excluding energy. The KR-CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.
II-44
BROAD MEASURES OF INFLATION
(Four-quarter percent change)
1994
Q2
1995
Q2
1996
Q2
1997
Q2
Product nrices
2.6
GDP chain-type price index
Nonfarm business chain-type price index
1
2.6
Exnenditure prices
Gross domestic purchases chain-type price index
Less food and energy
2.7
2.7
2.0
1.8
1.8
1.9
PCE chain-type price index
Less food and energy
2.9
2.8
2.3
2.0
2.1
2.2
CPI
Less food and energy
3.0
3.0
2.8
2.7
2.4
2.5
3.0
3.1
2.7
2.8
Median CPI
I
SURVEYS OF (CPI) INFLATION EXPECTATIONS
(Percent)
1995-Q1
Q2
Q3
Q4
2.8
3.1
2.6
2.7
University of Michigan
(1-year) 2
(1-year)3
Mean
Median
Conference
Board
3.1
3.1
2.9
2.8
4.2
4.2
4.0
3.9
2.9
3.0
3.0
3.0
Actual
inflation i
4.1
4.3
4.3
4.2
3.0
2.9
2.8
4.1
4.0
2.7
4.0
4.1
4.1
3.9
3.6
Apr.
2.5
May
Jun
2.2
2.3
3.7
3.7
3.5
Jul
2.2
3.4
(1-year)
Professional
forecasters
(10-year)4
3.3
3.4
3.2
3.0
4.0
1. CPI; percent change from the same period in the preceding year.
2. Average increase for responses to the question: By about what percent do you
expect prices (CPI) to go up, on the average, during the next 12 months?
3. Median increase for responses to the question above.
4. Compiled by the Federal Reserve Bank of Philadelphia.
APPENDIX
ANNUAL REVISION TO THE NIPA
Background
On July 31 the BEA published revised national income and
product accounts for the period 1993:Q1 to 1997:Q1.
The revision
incorporated updated seasonal factors and more comprehensive source
data.
These data include federal budget data, IRS tabulations of
tax returns, BLS data on employer costs for health and life
insurance, BEA price data for certain types of high-tech equipment,
and Census Bureau annual surveys of consumption services,
manufactures, merchant wholesale trade and retail trade.
Most of
these sources run through 1995, although preliminary figures for
1996 are available in some cases, such as wages and salaries.
The revision also included an important methodological change.
When the BEA introduced chain-weighted Fisher aggregation last year,
it continued to use fixed prices to estimate real GDP for the most
recent quarters.
It has now decided to eliminate this so-called
Laspeyres tail by using quarterly Fisher aggregat on to construct
The new
the estimates of GDP in the most recent quarters.
approach will produce estimates that are on roughly the same
conceptual basis as those for earlier periods.
Before the change,
output growth in the most recent quarters tended to be slightly
overstated in the official statistics because the weights for some
fast-growing industries (notably, computers and semiconductors) had
been fixed when relative prices in these sectors had been falling.
We estimate that the elimination of the Laspeyres tail lowered
measured GDP growth about 0.1 to 0.2 percentage point over the past
year.
Revisions to Real GDP and Its Components
Growth of real GDP was revised up a bit in 1993, 1995, and
The estimate for the first quarter of 1997
1996, but down in 1994.
was revised down a full percentage point to 4.9 percent.
For the
period from 1992:Q4 to 1997:Q1 as a whole, real GDP growth was
revised up an average of just 0.1 percentage point per year.
The
new estimates of consumer spending on services and of investment in
business inventories are higher, while the new figures for consumer
1. The BEA does not use the data for a given calendar year to
construct annual weights until after they have passed through their
Thus, the annual revision that just occurred
first annual revision.
made data for 1996 available for use as annual weights, which allows
Under the previous
for annual Fisher aggregation through 1996:Q2.
procedures, spending aggregates for each quarter after 1996:Q2 would
Now,
have been calculated using fixed weights based on 1996 prices.
the aggregates for each of the recent quarters will be constructed
using weights from that quarter and the previous quarter.
2. The growth rates of the major components of output were
overstated by varying amounts, depending largely on the importance
For example, we
of high-tech equipment in the different sectors.
estimate that the elimination of the Laspeyres tail lowered measured
growth in PDE for recent quarters by more than 1 percentage point
and lowered growth in imports and exports by an even larger amount.
In contrast, measured growth in PCE was likely lowered less than
0.1 percentage point.
II-A-1
II-A-2
spending on goods, business fixed investment, and government
spending are lower. On balance, the changes leave inventory-sales
ratios for the revision period higher; in particular, the data no
longer show a sharp decline in the ratio of nonfarm inventories to
final sales of goods and structures over the past year.
Income-Side Issues
The revision only partially resolved the large and widening gap
between the product and income sides of the national accounts. The
difference between gross domestic product and gross domestic
income--the statistical discrepancy--remains large by historical
standards, amounting (in absolute value terms) to 0.8 percent of GDP
in 1997:Q1. However, the revision did narrow the difference between
the growth rates of real GDP and real GDI in the past two years; the
change owed about as much to downward revisions to income growth as
to upward revisions to output growth.
The staff at the BEA continues to believe that, at least for
the most recent years, the product measures of output are more
reliable indicators of economic performance. However, they
acknowledge that there are a number of places on both sides of the
accounts where measurement is especially difficult. Among other
things, these include the amount by which proprietors' income is
misstated in tax data and, on the product side, the volume of such
consumer services as Internet access, cellular phone service, and
gambling. Moreover, the source data throughout the accounts are
much less complete after 1995, leaving open the possibility of a
future narrowing of the statistical discrepancy over the past year
and a half.
The level of nominal national income was revised up by
Sizable
increasing amounts in each year from 1993 to 1996.
increases in the estimates of rental income, corporate profits, and
net interest all contributed to this pattern. The revision to
corporate profits accentuates the uptrend in profits as a share of
Compensation of employees was
GNP over the past several years.
revised down in 1995 and 1996 because of a reduction in estimated
employer contributions for health insurance (which are part of
As a result, the revised labor share of
"other labor income").
national income shows a much sharper decline over the past four
years, leaving the current level at the very low end of the range
seen since 1970.
The combination of revisions to income and outlays
significantly altered the contour of the personal saving rate over
Before the revision, the saving rate
the past several years.
appeared to have a slight uptrend beginning in 1995, but the new
data show a decline from more than 5 percent in the first quarter of
1995 to about 4-1/4 percent in the second quarter of this year.
Given the dramatic rise in the stock market over this period, the
behavior of the revised saving rate over the past two years is in
3. The GDP deflator--used to deflate both GDP and GDI--was
revised up by 1/2 percentage point in 1996. As a result, growth in
nominal GDI was revised up a bit even though growth in real GDI was
revised down. The GDP price index (discussed below) was not revised
up as much as the deflator because it had been overstated before
the elimination of the Laspeyres tail.
II-A-3
better alignment with what would be expected based on the historical
relationship between wealth and saving.
Revisions to Labor Productivity and Prices
The modest upward revision to output boosted the level of labor
productivity in the nonfarm business sector in 1997:Q1 by only a
small amount. Thus, average productivity growth since the last
business cycle peak in mid-1990 is little changed. However, the new
output data do hint at a slightly stepped-up rate of growth
beginning in the middle of 1995--1-1/4 percent (annual rate) over
the past two years, as compared with 1 percent in the first half of
the 1990s. Although our econometric models cannot determine whether
the higher growth rate is a cyclical response to the acceleration in
output growth last year or a more fundamental improvement in the
productivity trend, the data are consistent with the observed faster
growth of the capital stock relative to trend labor input as well as
the many anecdotal reports of a pickup in the trend rate of
multifactor productivity growth in recent years.
Finally, the annual revision to the NIPA data boosted very
slightly the average increase in the GDP chain-type price index over
the past four years. Upward revisions to prices for PCE services
and government spending more than offset downward revisions to
prices of some types of high-tech equipment.
4. If one assumed that no factors besides the appreciation of
stock prices influenced the saving rate, the decline in the saving
rate since the beginning of 1995 would imply that consumption rose
(with some lag) about three cents for every additional dollar of
stock market wealth. Econometric models of the relationship between
saving and wealth based on historical data suggest that the marginal
propensity to consume could be anywhere between zero and six cents
on the dollar, depending on the exact specification, with most
estimates clustered between three and four cents.
II-A-4
Revisions to Real GDP
Change in Real GDP
Percent
Annual rate
El Revised
I
Previous
1993
1994
1995
1996
1997
Note. Annual changes are Q4 to Q4.
Real GDP and Selected Components
(Annualized percent change from 1992:Q4 to 1997:Q1, except as noted)
-
Previous
Estimate
Revised
Estimate
2.7
3.1
2.3
8.8
-3.5
2.4
49.2
2.8
3.0
2.6
8.6
-3.8
2.1
58.3
1. Gross domestic product
2.
PCE goods
3.
PCE services
4.
Business fixed investment
5.
Federal spending
6. State and local spending
7.
Nonfarm inventory investment 1
1. 1997:01 level, billions of chained (1992) dollars.
Nonfarm Inventories Relative to Final Sales
Months
Nonfarm Inventories Relative to Final Sales
of Goods and Structures
Months
2.4
4.25
2.35
4.2
2.3
4.15
2.25
4.1
2.2
4.05
4
3.95
1990
1992
1994
1996
1990
1992
1994
1996
II-A-5
Statistical Discrepancy
billions of dollars
Real GDP and GDI Growth
(Percent change, annual rate)
1995
Previous
1. GDP
2. GDI
3. Difference
Revised
4. GDP
5. GDI
5. Difference
1996 1997:Q1
1.3
2.5
-1.2
3.1
3.7
-. 6
5.9
5.9
.0
1.6
2.2
-. 6
3.3
3.4
-. 1
4.9
5.1
-. 2
Note. Annual changes are 04 to Q4.
1990
1992
1996
1994
Revisions to National income
(Annual level, billions of dollars)
1993
1995
1996
28 .3
National income
Compensation of employees
Proprietors' income1
Rental income 2
Corporate profits1
Net interest
1994
55.5
2.2
7.2
12.3
16.4
17.4
83.4
-7.3
2.9
21.1
45.2
21.5
90.3
-21.6
-7.0
31.3
65.7
21.8
5 .4
14.9
3 .5
.7
1.6
1. With inventory valuation adjustment and capital consumption adjustment.
2. With capital consumption adjustment.
Labor Share of National Income
Profit Share of GNP
Percent
Percent
1990
1992
1994
1996
1990
1992
1994
1996
II-A-6
Personal Saving Rate and Wealth-to-Income Ratio
Ratio
Percent
1985
1987
1989
1991
1993
1995
1997
Productivity in the Nonfarm Business Sector
Chained (1992) dollars per hour
Revised
Q2
:::Q1
IPrevious
......
I
1985
-
l
I
1987
1989
1
1
1
1991
1993
1995
I
1997
Growth in GDP Price Index
(Annual rate)
1993
1994
Note. Annual changes are Q4 to Q4.
1995
Percent
1996
1997
DOMESTIC FINANCIAL
DEVELOPMENTS
III-T-1
Selected Financial Market Quotations'
(Percent except as noted)
1997
Instrument
Change to Aug. 13, from:
Mar.
Jan. 2
FOMC *
low
July 2
Mar.
Aug. 13
Jan. 2
FOMC
low
July 2
.27
-.09
-.35
-.20
Short-term rates
Federal funds 2
5.79
5.63
Treasury bills
3-month
6-month
1-year
5.05
5.14
5.28
5.04
5.10
5.33
5.48
5.47
5.63
5.64
5.39
5.42
5.50
5.59
5.68
5.81
5.38
5.44
5.56
5.63
8.25
8.50
6.13
6.54
6.75
6.19
6.45
6.74
U.S. Treasury 10-year indexed note
n.a.
3.63
Municipal revenue (Bond Buyer) 5
5.96
5.82
Corporate-A utility, recently offered
7.64
7.84
9.72
9.38
7.64
5.57
7.58
5.66
Commercial paper
1-month
3-month
Large negotiable CDs
3
1-month
3-month
6-month
Eurodollar deposits
1-month
3-month
Bank prime rate
Intermediate- and long-term rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year
High-yield corporate
6
Home mortgages 7
FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate
Change to Aug. 13, from:
1997
Record high
FOMC *
Stock exchange index
Record
FOMC *
Level
Date
Jan. 2
July 2
Aug. 13
high
Jan. 2
July 2
Dow-Jones Industrial
8259.31
8/6/97
6442.49
7722.33
7928.32
-4.01
23.06
2.67
S&P 500 Composite
960.32
8/6/97
737.01
891.03
922.02
-3.99
25.10
3.48
1630.44
8/6/97
1280.70
1438.25
1583.40
-2.89
23.64
10.09
420.73
8/6/97
358.96
394.13
411.64
-2.16
14.68
4.44
NASDAQ (OTC)
Russell 2000
4.07
7147.80
8441.43
8784.77
-3.57
22.90
9110,42
8/6/97
Wilshire
1. One-day quotes except as noted.
2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date for maintenance period ending
August 20, 1997.
3. Secondary market
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6. Merrill Lynch Master II high-yield bond index composite.
7. Quotes for week ending Friday previous to date shown.
* Figures cited are as of the close on July 1,1997.
Selected Interest Rates
Short-Term
Percent
Percent
Daily
Monthly
FOMC
6/30
7
7
:
Federal funds
6
-
-
-
.:
6
5
Three-month T-bill
4
I
1991
1993
1992
1994
1995
1996
6/27
1997
-
7/4
I
1
7/11
I
7/18 7/25
1997
I
I
8/1
8/8
Long-Term
Percent
-i
10
Percent
-
--
Weekly/Daily
Primary fixed-rate mortgage
- S- Corporate bond (A-rated utility)
-Thirty-year
Treasury bond
FOMC
6/30
10
Corporate bond
(weekly)
_
-..
Mortgage rate
(weekly)
Thirty-year T-bond
(daily)
-
1991
1992
1993
1994
1995
1996
1997
6/27
7/4
7/11
7/18 7/25
1997
8/1
8/8
DOMESTIC FINANCIAL DEVELOPMENTS
Over the four weeks immediately following the July FOMC
meeting, yields on intermediate- and long-term securities declined
as much as 1/2 percentage point.
The rally was spurred by incoming
data indicating subdued inflation and also by Chairman Greenspan's
Humphrey-Hawkins testimony, which was read by market participants as
expressing the view that inflation might remain in check without
further System tightening.
In the past two weeks, however, amid data for July indicating
strength in hiring and a vibrant manufacturing sector as well as a
weakening of the dollar on foreign exchange markets, bond rates
moved sharply higher
(chart, top panel).
This souring of market
sentiment made it more difficult for dealers to place securities
issued at the Treasury's August midquarter refunding, which may have
exacerbated the downturn.
On net, much of the decline posted
earlier in the intermeeting period was rolled back, and yields on
Treasury coupon securities ended the period about 10 basis points
lower.
The recent rise in interest rates contributed to a selloff in
equity markets
(chart, lower panel).
Still, major equity indexes
have increased 3 percent to 10 percent since the July FOMC meeting,
supported by generally favorable earnings reports.
Equity-price
volatility over the intermeeting period has continued on the slight
upward trend that began in 1996.
Borrowing by nonfinancial businesses was very strong in July:
corporate bond issuance posted record levels, and growth of business
loans also remained relatively brisk.
Of late, the financing
requirements of nonfinancial corporations likely have been boosted
by rapid expansion of capital expenditures even though, in the
aggregate, growth of internal funds has remained robust. By
contrast, borrowing by households shows further signs of moderation;
while home equity loans continue to grow strongly, the volume of
such lending has not been large enough to offset the deceleration in
consumer loans.
Reflecting the decline in the federal budget
deficit. Treasury borrowing remains light, but issuance of bills has
recovered. Net offerings of debt by state and local governments
remain on track for a moderate advance this year.
The expansion of
M2 was damped in July, in part because the strong performance of the
III-1
III-2
Selected Financial Market Quotes
Nominal and Indexed Ten-year Treasury Interest Rates
Percent
Percent
SDaily
July
PPI
FOMC
HumphreyHawkins
CPI
EMP
NAPM
GDP
ECI
PPI
RS
I
Nominal note
(right scale)
£
4.001-
4£
A
*
&
a
.
..
£
-- 16.00
I
*
a
£
a
a
1 0
S4
*
*
I I I
I
I .1
July 2
.
&
Indexed note
(left scale)
3.751-
I S,
A
&
I
4
July 11
S
I
.
July 22
July 16
ego
,
X,
July 29 July 31
Aug. 13
Selected Stock Market Indexes
Index: Dec. 29, 1995=100.
Daily
S&P 500
NASDAQ
J
F
M
A
M
J
1996
J
A
SO
N
D
J
F
M
A
M
1997
J
J
A
III-3
stock market attracted inflows to long-term mutual funds at the
expense of deposits.
Business Finance
Gross issuance of nonfinancial corporate bonds set successive
records in June and July (table) and remained brisk in the first
half of August.
Investment-grade borrowers took advantage of the
drop in long-term interest rates in July and boosted bond issuance
to its highest level in recent years.
A number of companies issued
100-year bonds to lock in those low rates and in light of the
withdrawal of legislation that would have limited the tax
deductibility of coupons on such bonds.
Speculative-grade offerings soared in July, almost matching the
torrid pace of June.
Most of these offerings were in the 144A
sector, which exempts firms from certain SEC filing requirements if
the securities are placed among only a limited number of
sophisticated investors.
Over the first seven months of this
year, junk bonds have accounted for almost half of total
nonfinancial bond issuance, higher than any previous annual
share
(chart, lower left).
The recent strength in junk bond
financing largely reflects firms' needs to support ongoing capital
spending--such as building wireless and cable networks.
Robust
inflows to junk bond mutual funds have helped to hold junk bond
spreads to near historic lows.
Net issuance of nonfinancial commercial paper remained positive
in July, though below the pace for the second quarter, when mergerrelated offerings accounted for more than half of net issuance
(chart, lower right).
While merger-related commercial paper
issuance remained strong in July, paydowns of existing paper with
proceeds from bond offerings increased.
The news on corporate credit quality has remained quite
favorable.
In the second quarter, Moody's upgraded $15 billion more
nonfinancial debt than it downgraded, and its Watchlist of companies
under review for a rating action suggests that there will be little
net change in ratings in the near term.
Also, the default rate on
speculative-grade debt fell in the second quarter from an already
low first-quarter rate.
In contrast, the rate of nonfinancial
1. Most 144A bonds have SEC registration rights, and firms
generally convert the bonds to public status shortly after issue.
The 144A market attracts firms that wish to raise funds more quickly
than they can with public issues, which require SEC registration
prior to issue.
III-4
GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS
(Billions of dollars; monthly rates, not seasonally adjusted)
1997
Type of security
1995
1996
Q1
Q2
May
June
July
All U.S. corporations
Stocks 1
Bonds
47.7
6.1
41.6
58.4
10.2
48.2
61.4
9.9
51.4
68.5
8.9
59.5
60.9
8.5
52.4
96.2
11.8
84.4
71.5
8.0
63.4
4.4
1.7
2.7
6.7
2.9
3.8
4.9
1.1
3.8
4.3
1.8
2.5
4.1
1.0
3.1
6.0
3.4
2.6
5.1
1.7
3.3
10.8
12.5
13.3
17.5
18.1
21.0
27.7
6.5
3.0
2.0
1.1
6.3
4.8
2.3
2.5
5.7
6.2
2.7
3.6
7.0
8.9
1.5
7.4
7.2
8.2
2.0
6.1
6.8
13.4
1.5
11.9
13.7
11.1
.8
10.3
1.7
30.8
3.5
35.8
5.0
38.1
4.7
42.0
4.4
34.3
5.8
63.4
3.0
35.7
Nonfinancial corporations
Stocks i
Initial public offerings
Seasoned offerings
Bonds
By rating, sold in U.S.
Investment grade
Speculative grade
Public
Rule 144A
2
Financial corporations
Stocks I
Bonds
Note. Components may not sum to totals because of rounding. These
data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
1. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
2. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
Nonfinancial Corporations
Commercial Paper
Junk Bonds
Percent
Percentage points
iJunk share of gross
12
-
(Change in outstandings over period shown)
Billions of dollars, monthly rate
issuance
(right scale)
Rate spread over Treasuries*
1997
1995
1993
1991
1989
1987
Note. Data for 1997 are through July.
*Merrill Lynch Master II Index less 7-year Treasury yield.
Source. Securities Data Company.
1997
1996
1995
1994
is a staff estimate.
Note. Value for July 1997
I-5
Stock Market and Earnings
IPOs: Average First-Day Price Change
Price-Earnings Ratios
Percent
Ratio
30
60
Monthly
Q2
July
-24
.-
NASDAQ
01
45
July - 18
2
Q34
-
1
v
-
12
30
July
S&P 500
15
S6
S
1994
1995
I
-0
1996
I
I I I
I
1988
1991
S 1994
Note. Based on trailing foiur-quarter earnings.
1997
Corporate Profits
Percent change from 4 quarters earlier
0
1997
Expected Long-Term Earnings Growth
for S&P 500 Companie 's
Percent
30
Quarterly
I
13.5
Monthly
13
12.5
12
11.5
11
10.5
1991
1993
*Source. Goldman Sachs.
1995
1997
1983
1987
Source. I/B/E/S.
1991
1995
Percent
S&P 500 Forward Earnings-Price Ratio and Treasury Yield
SNominal 30-year Treasury yield
1987
1989
1991
1993
1995
1997
III-6
business failures so far this year has been somewhat above the low
levels in the preceding three years, with the failure rate in July
boosted by the bankruptcy filing of retailer Montgomery Ward.
Elevated price-earnings ratios have encouraged equity issuance
by nonfinancial firms, which was higher in July than in the first
half of the year although below last year's rapid pace.
The volume
of initial public offerings in July and the first week of August was
also up a touch over the first-half pace, likely reflecting stronger
investor demand, as signaled by the uptrend in first-day returns to
IPOs
(chart, top left).
Nevertheless, net issuance of nonfinancial
equity remained firmly negative, as it has been since 1994.
Both
retirements from mergers and announcements of share repurchases
continued to be strong in the second quarter, and the large number
of transactions currently pending suggests that retirements from
mergers and repurchases will remain robust in the near term. 2
With more than 90 percent of the S&P 500 companies' secondquarter financial reports now in, earnings rose about 10 percent
over the past four quarters, again exceeding analysts'
projections.
3
Although earnings growth slowed somewhat from its
four-quarter growth rate of nearly 15 percent recorded in the two
preceding quarters, the positive earnings surprises reinforced
investor enthusiasm for equities, pushing major stock price indexes
to new records in July and early August.
As has been true for some
time now, prices have been boosted by expectations of higher longterm earnings growth.
Indeed, the July reading on expected earnings
growth for the S&P 500 over the next three to five years stood at
its highest level since the start of the series in the early 1980s
(chart, middle right panel).
With the rise in share prices
accompanied by only a small net decline in long-term Treasury
yields, equity valuations became even richer relative to bonds over
the intermeeting period
(chart, lower panel).
Household Finance
The deceleration of personal consumption expenditures in the
second quarter of 1997 left its mark on demands for consumer credit.
2. Share repurchases are being offset partly by shares issued
when employees exercise stock options. The exercise of stock
However, companies
options has increased substantially since 1994.
have bought back about twice as many shares than needed to meet
current stock option exercises.
3. The growth in reported earnings continues to exceed that for
Still,
the closest analogue in the NIPAs--book profits after tax.
the recent upward revisions to NIPA profits narrowed the gap through
1997:Q1, the latest quarter with published NIPA data.
III-7
After a first-quarter spurt, borrowing in consumer credit markets
returned to the moderate pace posted at the end of last year
(table).
Consumer credit outstanding was unchanged in June, on the
heels of a sluggish gain in May, and grew at a 3-3/4 percent annual
rate for the quarter.
began early last year
This continues a trend of moderation that
(chart, top panel).
Revolving credit--
primarily credit card debt--grew at a 5-1/2 percent rate during the
second quarter, its slowest advance since the second quarter of
1993.
Data on consumer credit quality from the Call Report and the
American Bankers Association are not yet available for the second
quarter.
The limited information now in hand provides signs of
stabilization or even improvement in some market segments in which
payment performance had been problematic.
Both Moody's and Standard
& Poor's indicate that delinquency rates on securitized credit card
receivables have been edging lower since February
left panel).
(chart, bottom
In addition, some of the major bankcard issuers have
cited improved or stable delinquency rates on credit card
receivables in their second-quarter earnings reports.
For example,
Citicorp reported a delinquency rate of 2.7 percent, up from
2.4 percent in the year-ago period but unchanged from the first
quarter.
MBNA reported increased earnings and stable write-offs.
Similarly, auto loan delinquency rates at the finance "captives" of
the three major domestic automakers declined in the second quarter
after three years of virtually uninterrupted rise (chart, bottom
right panel).
Still, while delinquency rates have flattened out,
they remain on the high side of what is typical for an expansion.
Information on the growth in home mortgage debt is still
incomplete for the second quarter; partial data suggest that the net
flow may have edged off from the sizable first-quarter total.
The
rate of mortgage purchases and securitizations at Fannie Mae and
Freddie Mac slowed measurably, but growth in total real estate loans
at commercial banks picked up, partly reflecting continued strength
in home equity loans.
More recently, mortgage applications have
strengthened, according to indexes compiled by the Mortgage Bankers
Association, as mortgage interest rates have declined on net.
Applications for home purchase in July were at the highest level
recorded in the four years the series has existed, and applications
4. The consumer credit statistics have been revised from January
1985 to reflect the benchmarking of the finance company components,
but the effect on overall growth rates was quite small.
III-8
Consumer Credit
1996
1995
1997
1996
Q4
Q1
14.1
(14.2)
7.6
(8.1)
3.4
(5.1)
7.3
(6.3)
11.0
21.2
8.5
7.8
12.7
-0.3
3.5
10.9
-8.5
1100.7
1184.0
362.1
441.9
296.8
9.6
13.9
16.0
P
Apr
May
Jun
3.8
8.9
( 97)
2.5
(2.9)
0.0
0.1
9.2
13.4
4.0
5.6
0.6
11.7
6.8
8.8
0.4
4.1
2.5
-0.2
1184.0
1205.6
1217.0
1214.5
1217.0
1217.0
390.3
498.0
295.7
390.3
498.0
295.7
390.4
509.5
305.6
394.3
516.6
306.1
394.3
512.4
307.9
394.4
514.1
308.5
394.3
516.6
306.1
9.0
9.0
8.9
9.2
n.a.
9.2
n.a.
13.5
15.6
13.6
15.6
13.5
15.9
13.8
15.8
n.a.
n.a.
13.8
15.8
n.a.
n.a.
11.2
9.8
9.8
7.6
8.0
8.6
7.8
7.6
14.5
13.5
13.6
13.1
13.4
13.3
13.5
13.6
02
Credit outstanding, end of period
Growth rates
(percent, SAAR)
Total
(Previous)
Auto
Revolving
Other
5.8
-9.5
Levels
(billions of dollars, SA)
Total
Auto
Revolving
Other
Interest rates1
(annual percentage rate)
Commercial banks
New cars (48 mo.) 2
Personal (24 mo.) 2
Credit cards 3
Auto finance companies 4
New cars
Used cars
1.Annual data are averages of quarterly data for commercial banks and of monthly data for finance companies.
2. Average of most common rate charged for specified type and maturity during the first week of the middle month of each quarter
3. Stated APR averaged across all credit card accounts at all reporting banks during the period.
4. Average rate for all loans of each type, regardless of maturity, made during the period.
p Preliminary. n.a. Not available.
III-9
Growth in Consumer Credit
(Seasonally adjusted annual rate)
Percent
Three-month moving average
1975
1972
1981
1978
1984
1987
1990
1993
1996
Loan Delinquency Rates
(Thirty days past due)
Auto Loans at Finance Companies
Securitized Credit Cards
Percent
Percent
Monthly
I
I
I
I
I
I
1994
1991
Source. Moody's Investors Service.
I
I
1997
1991
Source. Company reports.
1994
1997
III-10
Delinquency Rates on Home Equity Loans
Securitized Loans and Loans Held by Banks
Percent
[Monthly
Securitized, open-end
Dec.
N0
-
Securitized, closed-end
Closed-end at banks
-
Open-end at banks
I
I
I
I
1
I
1995
1994
1993
1992
Mar.
1996
1997
Source. Moody's Investors Service, ABA.
Securitized Closed-End Loans, by Year of Origination
Percent
Monthly
1995
/
/
-1
8
1992-93
average
*-*
-- F
-1 6
-
I
I
Ii
I
iil
2
Source. Moody's Investors Service, ABA.
lii
I
1
3
Years since origination
111111
II
II
I
I
4
III-11
for refinancing, although well below peak levels, have
climbed
noticeably.
Home equity loans
in the
expansion in train since the
second quarter continued the rapid
spring of last year.
In addition to
the strong increase at banks, finance company holdings grew at a
14 percent rate.
The biggest gains occurred in pools
of securitized
home equity loans, which expanded at an estimated 76 percent rate
over the first half of the year.
Finance companies
and mortgage
companies have originated the bulk of recently securitized home
equity loans, most of which are closed-end loans classified as
"subprime" or "B and C"
quality loans.5
loans are frequently used to
The proceeds from these
consolidate other debt.
Indeed,
securitization has been the primary funding source for many of the
firms specializing in subprime home equity loans.
Heavy investor
demand for the securities has ensured a ready supply of
6
financing.
At the end of last year,
delinquency rates on securitized home
equity loans were around 8 percent compared with less than 2 percent
on those on bank books
(chart, upper panel).
The growing dominance
of lower-quality loans in securitized pools also shows through in
the time paths
of delinquency rates for pool cohorts by year of
origin (chart, lower panel).
The delinquency rate for closed-end
loans backing pools created in 1995 was much higher after two years
than it was for earlier cohorts at the same point in their
seasoning.
Information on more recently formed pools is still
fragmentary, but anecdotal reports suggest that the credit
performance of the 1996 cohort is similar to that of the
1995
cohort.
Treasury, Agency, and State and Local Finance
The staff forecasts that
the Treasury will borrow about
$30 billion in the market this quarter to fund a budget deficit of
similar size.
The Treasury announced that it will satisfy two-
thirds of its borrowing need through the issuance of bills and onethird through the issuance of notes and bonds.
5. In contrast, home equity lending by banks is about evenly
split between revolving lines--which typically are extended to
better credit risks--and closed-end loans.
6. According to market sources, institutional investors such as
hedge funds have been among the investors attracted to subordinate
classes, while banks and thrift institutions have sought the senior
certificates, which have received AAA ratings because of substantial
credit enhancements and the structure of the securities themselves.
III-12
TREASURY FINANCING
(Billions of dollars; total for period)
1996
1997
Q2
May
June
Julye
Q4
Q1
-58.9
-52.0
100.0
-48.5
54.5
Means of financing deficit
Net cash borrowing and
repayments (-)
Nonmarketable
Marketable
Bills
Coupons
48.7
7.4
41.3
16.2
25.1
48.0
4.0
44.0
7.9
36.1
-69.2
1.9
-71.1
-81.4
10.3
-19.1
-.4
-18.6
-21.7
3.1
-11.1
1.4
-12.6
-15.5
3.0
-1.2
-1.5
.4
1.8
-1.5
Decrease in cash balance
11.4
-.7
-17.8
72.5
-34.4
23.7
Otherl
-1.3
4.6
-13.0
-5.0
-9.0
32.8
33.5
51.3
16.9
51.3
Item
Total surplus/deficit
(-)
Memo:
Cash balance, end of period
27.5
Note. Data reported on a payment basis. Details may not sum to totals
because of rounding.
1. Accrued items, checks issued less checks paid, and other transactions.
e Estimate.
NET CASH BORROWING OF GOVERNMENT-SPONSORED ENTERPRISES
(Billions of dollars)
1997
Agency
Q1
Q2
FHLBs
FHLMC
FNMA
Farm Credit Banks
3.1
-3.4
4.9
.8
23.6
8.3
9.3
1.2
SLMA
-1.7
1.7
Apr.
May
June
11.4
9.3
5.6
.1
7.0
4.5
2.6
.4
5.2
-5.5
1.1
.7
5.4
-.9
-2.8
Note. Excludes mortgage pass-through securities issued
by FNMA and FHLMC.
III-13
At its midquarter refunding in August, the Treasury sold threeyear notes ($16 billion), ten-year notes ($12 billion), and thirtyyear bonds ($10 billion).
Customer demand at the refunding was
unexpectedly weak, and, as a result, dealers were awarded more
securities than they had expected, putting downward pressure on bond
prices after the auction. Demand for the thirty-year tranche of the
refunding was particularly weak, with the yield on that security in
the when-issued market shooting up 18 basis points after the
auction.
The Treasury indicated that in October it will reopen the justauctioned five-year indexed notes and confirmed that it will sell a
thirty-year indexed bond next year. With regular quarterly sales of
indexed debt all but guaranteed and net borrowing from the public
projected to be substantially smaller than in recent fiscal years,
the Treasury appears committed to raising a substantial fraction of
its anticipated net financing need with indexed debt.
A proxy battle at the Student Loan Marketing Association ended
with the replacement of the current management with a dissident
group of directors.
The new leadership favors direct origination of
loans to students, which the ousted management opposed.
is expected to become fully private soon.
Sallie Mae
Spreads between Sallie
Mae issued securities and Treasuries have held steady over the
intermeeting period.
Gross offerings of long-term municipal debt decreased to
$15 billion in July, from about $19 billion in June, reflecting a
typical seasonal decline in new capital issuance at the start of the
fiscal year of many municipalities
(chart, top panel).
However,
with long-term yields approaching the lows reached in late 1993,
refunding volume increased nearly 25 percent in July.
For the first
seven months of 1997, gross issuance of long-term municipal debt was
little changed from last year, while retirements declined about
15 percent, boosting net issuance from its 1996 pace.
The credit quality of municipal debt continued to improve.
In
the second quarter, Standard and Poor's upgraded nearly $16 billion
of municipal debt and downgraded less than $1 billion, attributing
the recent improvement in credit quality to the economic expansion,
coupled with better financial management on the part of state and
7. The legal status and attributes of all of the outstanding debt
obligations, including SEC and state tax exemptions, will be fully
preserved after the privatization. With minor variations, these
attributes are the same as for other GSEs.
III-14
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Billions of dollars; monthly rates, not seasonally adjusted)
1997
1994
Short-term
Total taxable
1996
Q1
Q2
June
July
16.1
12.8
4.0
8.8
15.4
12.1
3.6
8.5
17.9
14.3
4.9
9.4
13.7
12.1
4.3
7.8
20.8
16.9
4.4
12.5
28.9
19.4
4.4
15.0
22.0
15.5
5.7
9.8
3.3
Total tax-exempt
Long-term
1
Refundings
New capital
1995
3.3
3.6
1.6
3.9
9.5
6.5
.7
1.6
3.5
1.0
.7
.7
.8
Note. Includes issues for public and private purposes.
1. Includes all refunding bonds, not just advance refundings.
Rating Changes for Long-Term Municipal Debt
Billions of dollars
SIUpgrades
SDowngrades
n
n
mn
1991
1990
*Annual rate.
Source, Standard & Poor's
1992
1993
1994
1995
1996
1997
III-15
local governments
(chart, bottom panel).
General obligation bonds,
which are especially sensitive to the prospects for tax receipts,
accounted for most of the net upgrades in the second quarter.
Financial Intermediaries and Monetary Aggregates
The rally in the stock market over the intermeeting period was
again accompanied by heavy inflows to mutual funds.
Net sales of
stock funds are estimated to have increased in July, up 30 percent
from their second-quarter pace
(table).
July net sales of bond
funds are currently estimated to be at least twice as large as the
monthly pace in the second quarter.
Still, net sales of bond funds
remain small relative to those of stock funds.
Liquidity ratios for both domestic bond and stock funds were
about 5-1/2 percent at the end of June (chart).
For bond funds,
this figure is close to the average since 1990, while the ratio for
stock funds is well below the average.
The declining liquidity
ratio for stock funds reflects a growing reliance on backup lines of
credit and expectations of heavy future inflows of cash from new
investors, as well as the acquisition of liquid fixed income
securities with maturities beyond one year, which are not counted as
liquid assets by the SEC.
Credit provided by commercial banks, adjusted to remove the
effects of mark-to-market accounting rules, expanded at a
9-1/2 percent rate in the second quarter, fueled by strong increases
in both its business and real estate components (table).
Most
likely, some of that C&I lending helped firms to finance a further
buildup of inventories in the second quarter, while real estate
lending was supported by the strength in housing activity and the
attractiveness of home-equity loans.
appeared to be accommodative:
Supply conditions also
The August Senior Loan Officer Survey
indicated that a large fraction of banks eased terms on both C&I and
commercial real estate loans, and a significant share of
respondents, for the first time, eased standards on commercial real
estate loans.
Consumer lending, in contrast, was subdued in the
second quarter, even after adjusting for the effects of
securitization, in line with the marked slowdown in personal
consumption expenditures.
Results from the August Senior Loan
Officer Survey showed that banks continued to tighten standards on
consumer loans, especially on credit cards, but by notably less than
the previous couple of surveys.
Nonetheless, over 10 percent of
III-16
Net Sales of Selected Mutual Funds Excluding Reinvested Distributions
(Billions of dollars; quarterly and annual data at monthly rate)
1997
Memo:
1995
1996
Q1
Q2
May
June
July e
June
assets
10.7
18.6
19.3
17.6
20.5
16.6
23.0
2,125.6
9.7
14.7
14.9
12.6
16.1
12.0
17.9
1,767.4
3.1
4.7
1.9
2.4
3.8
2.0
3.2
315.0
3.1
3.9
3.7
3.1
4.3
3.0
5.6
573.2
3.7
6.2
9.3
7.4
7.9
7.2
9.1
875.1
1.0
3.9
4.4
4.7
4.2
4.6
5.1
358.2
Bond funds
-.4
1.1
1.2
1.9
2.8
2.1
4.0
941.8
High-yield
.7
1.0
.9
1.6
2.0
1.5
1.8
89.8
4
1.4
2.6
1.6
1.4
1.5
1.7
1.3
284.0
-4.7
-2.5
-1.3
-.8
-1.0
.9
568.1
Stock funds
Domestic
1
Aggressive growth
Growth
Growth and income
2
International 3
Balanced
Other
-1.1
1. Includes precious metals funds, not shown elsewhere.
2. Calculated as the sum of "Growth and income" and "Income equity" inthe ICI data.
3. Calculated as the sum of "International "and "Global equity" in the ICI data.
4. Calculated as the sum of "Income-Mixed", "Balanced", and "Flexible Portfolio" in the ICI data; these funds invest in both stocks and
bonds.
e Aggregate stock and bond are ICI estimates; components are staff estimates.
Source. Investment Company Institute.
Liquidity Ratios for Domestic Long-Term Mutual Funds
Percent
14
Monthly
Stock
12
10
'
St
t
1987
1988
1989
I
1990
VJune
4
I
1991
i
l
1992
Note. Liquidity ratio is cash and short-term securities as a percent of total assets.
Source. Investment Company Institute.
'
...-
Bond
1986
'
1993
1994
1995
1996
2
1997
III-17
Commercial Bank Credit
(Percent change; seasonally adjusted annual rate)
1997
Type of credit
1996
Q1
1997
Q2
May
Level,
July
June
July
1997
(billions of $)
1. Bank credit: Reported
Adjusted 1
2.
3.
Securities: Reported
Adjusted1
4.
3.9
9.9
7.5
2.4
6.8
4.5
7.3
9.5
5.1
7.7
-1.6
13.8
2.6
-21.3
-0.0
3.8
10.5
-12.4
10.1
3,956.7
6.2
3,870.9
-3.8
27.6
1,034.6
-1.0
13.0
948.8
1.3
725.8
5.
U.S. government
-0.7
0.7
9.6
-0.7
6.
Other 2
-3.7
47.4
-13.6
-69.2
-25.0
94.3
308.9
6.0
8.5
9.2
10.9
10.5
4.0
2,922.1
8.7
8.2
9.4
8.5
9.6
6.3
821.5
7.6
10.3
10.6
3.9
1,185.5
7.
Loans 3
8.
Business
9.
Real estate
10.
Home equity
6.9
11.9
16.6
14.8
18.6
13.1
92.6
11.
Other
3.8
7.3
9.7
10.3
8.4
3.3
1,093.0
5.5
-0.1
6.5
5.1
-1.4
520.0
1.4
4.5
4.3
2.4
701.2
20.7
22.2
23.4
7.0
395.1
12.
Consumer: Reported
Adjusted 4
13.
14.
Other5
10.8
7.9
24.6
Note. Adjusted for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates
shown are percentage changes in consecutive levels, annualized but not compounded.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115),
2. Includes securities of corporations, state and local governments, and foreign governments and any trading accoLnt assets that
are not U.S. government secuntes.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans, loans to farmers, state and local governments, and all others not elsewhere classified. Also includes
lease financing receivables.
III-18
respondents reported increased willingness to make consumer loans,
the largest fraction since May 1995.
Data for July indicate that the growth of total bank credit
slowed to a 6-1/4 percent rate. A deceleration across all major
loan categories was, in part, offset by an acceleration in
securities lending.
In particular, real estate loan growth was
anemic, except for the home equity component, and consumer loans
slowed to a 2-1/2 percent pace.
The expansion of business lending
eased off as well, perhaps because firms turned to market sources of
finance.
Earnings reports for the second quarter for the top 150 bank
holding companies suggest that profits expanded at about the
moderate first-quarter pace, despite the negative effects of
nonrecurring charges relating to the cost of mergers and
restructuring.
Indeed, non-interest income increased, and the
return on assets stayed at a historically high level.
Meanwhile,
loan-loss provisions remained stable as a percentage of average
assets even though the ratio of charge-offs to loans edged up.
M2 increased at a 4-1/2 percent annual rate in July, near its
pace in the second quarter (table).
The growth of M2 has been
restrained by ongoing sluggishness in household deposits.
Households continue to favor assets such as retail money market
mutual funds, which are included in M2, and stock and bond mutual
funds, which are not.
Growth in M2 from the fourth quarter of 1996
through July averaged just under 5 percent, near the upper end of
its annual growth cone.
M3 was particularly robust in July, registering a
10-3/4 percent advance.
Although bank credit slowed in July, M3 was
bolstered by heavy offerings of large time deposits at U.S. branches
of foreign banks, evidently to pay down borrowings from their
overseas offices.
Domestic banks also increased their issuance of
large time deposits, in part to counter the falloff in government
deposits held at these institutions.
Institution-only money funds
advanced rapidly in July, as they have done, on average, over the
last year and a half, apparently reflecting their appeal over inhouse money management by businesses.
Growth in M3 from the fourth
quarter of 1996 through July averaged 7-1/2 percent, well above its
annual growth cone.
III-19
MONETARY AGGREGATES
(Based on seasonally adjusted data)
1997
1996
Q1
1997
Q2
May
June
Aggregate or component
1996:Q4
Level
to
(bil. $)
July July 97 July 97
(p)
(p)
(p)
Percentage change (annual rate) 1
Aggregate
----
1. M1
2. M2 2
3. M3
-0.7
6.1
8.1
-5.5
4.3
6.9
-2.7
-0.1
1.5
0.6
4.6
5.7
-1.2
4.4
10.7
-2.5
4.9
7.6
1062.1
3934.2
5141.4
7.1
4.7
7.7
6.8
410.3
5.2
-3.3
-1.8
396.2
selected components
4.
Currency
5.7
2.7
8.
9.
LO.
savings deposits
Small time deposits
Retail money market funds
11. M3 minus M2
12.
13.
14.
15.
4
5
Large time deposits, net
Institution-only money market
mutual funds
RPs
Eurodollars
-20.4
-22.8
-12.8
-13.4
-16.7
247.3
8.7
8.1
0.9
6.2
6.5
7.8
2872.1
11.7
1.4
17.1
10.7
1.9
16.3
9.3
2.6
14.7
-0.2
5.4
-4.2
4.1
5.7
12.1
6.3
3.1
12.6
8.8
2.8
14.4
1332.4
960.9
578.9
15.4
7. M2 minus M13
-16.1
8.8
6. Other checkable deposits
2.0
-23.1
5. Demand deposits
7.5
15.5
15.8
7.1
9.2
31.8
17.4
1207.2
16.6
12.9
20.6
3.4
23.8
43.1
21.0
553.3
19.8
4.1
21.5
15.6
7.8
40.5
12.5
1.6
27.7
0.0
-3.0
56.1
28.1
-15.0
-56.4
19.6
42.0
0.0
15.9
7.5
23.6
324.1
204.1
125.8
5.0
4.9
5.8
1279.9
464.3
3540.2
-6.8
Memo
16. Sweep-adjusted M16
17. Monetary base
7
18. Household M2
Average monthly change (billions of dollars) 9
Memo
Selected managed liabilities
at commercial banks:
18. Large time deposits, gross
19. Net due to related foreign
institutions
20. U.S. government deposits
at commercial banks
8.5
12.7
11.3
2.2
12.3
-2.0
-7.2
2.9
22.0
-4.2
-12.9
0.0
0.5
5.4
-9.1
-5.9
.
639.1
. . .
216.6
18.9
2.5
.
.
17.4
1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. sum of seasonally adjusted Ml, retail money market funds, savings deposits, and small time deposits.
3. Sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted separately.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
6. Sweep figures used to adjust these series are the estimated national total of transaction account
balances initially swept into MMDAs owing to the introduction of new sweep programs, on the basis of monthly
averages of daily data.
7. M2 less demand deposits
8. For the years shown, "average monthly change" is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
p--Preliminary.
APPENDIX
THE AUGUST SENIOR LOAN OFFICER OPINION SURVEY ON
BANK LENDING PRACTICES
The August 1997 Senior Loan Officer Opinion Survey on Bank
Lending Practices (covering, for the most part, changes over the
preceding three months) posed questions about bank lending standards
and terms, loan demand by businesses and households, and securities
backed by commercial mortgages. The responses suggest that banks
became even more accommodative lenders to businesses and that the
tightening of standards on loans to households slackened somewhat.
Increased competition for business credit apparently led large
percentages of surveyed banks to ease terms on C&I and commercial
real estate loans over the past three months.
Furthermore, a small,
but significant, share of banks reported easing standards on
commercial real estate loans. Demand for C&I and commercial real
estate loans strengthened at many of the respondents.
Banks again reported tightening standards on consumer loans,
but the percentage that tightened was lower than in recent surveys.
Moreover, several banks expressed increased willingness to make
these loans.
Demand for consumer loans reportedly declined.
Lending to Businesses
A small net percentage of the domestic respondents--about
5 percent--reported easing standards for C&I loans to large and
middle market firms and to small businesses over the past three
months (chart). About 40 percent, on net, narrowed spreads of C&I
loan rates over their bank's cost of funds on loans to large and
middle market borrowers, and about 25 percent, on net, narrowed
spreads on loans to small businesses.
Similar percentages indicated
lower costs of credit lines, and smaller percentages eased other
terms, including the maximum size of credit lines, loan covenants,
and collateralization requirements.
The degree of easing found in
the August survey is similar to that found in the January and May
surveys.
Those banks that eased said they did so because of
increased competition from other banks, and, to a lesser extent,
from nonbank lenders. Foreign respondents reported no change in
standards for C&I loans, and only a few indicated a change in terms.
Increased demand for C&I loans, on net, from large and middle
market borrowers and from small business borrowers was reported by
15 percent and 20 percent, respectively, of the domestic banks.
Respondents attributed the increased demand to greater customer
financing needs for mergers and acquisitions, plant and equipment
investment, and inventories. Foreign respondents reported
essentially no change in demand for C&I loans.
The survey results suggest that banks are cautiously increasing
their participation in the market for commercial real estate loans.
More than 10 percent of the domestic respondents, on net, reported
The
easing standards for these loans over the past three months.
three preceding surveys also found small net percentages easing
standards on these loans, and the August results mark the largest,
albeit still modest, net percentage easing since the question was
In addition, two-fifths of the
added to the survey in 1990.
domestic respondents narrowed spreads on these loans over the past
three months, and smaller fractions increased maximum loan sizes,
III-A-1
III-A-2
extended maximum loan maturities, and eased pre-leasing or pre-sale
agreements. The survey found little change in required loan-tovalue ratios, requirements for take-out financing, and debt-service
coverage ratios. Foreign respondents reported essentially no change
in standards and, other than a few that narrowed spreads, little
change in terms.
Increased competition was reportedly the principal
reason for the eased standards and terms, although many banks also
cited improvements in the condition of or the outlook for commercial
real estate. About 15 percent of the domestic and 25 percent of the
foreign respondents reported increased demand for commercial real
estate loans.
Lending to Households
The August survey was the seventh in a row that found a
tightening in standards for loans to households. However, the net
percentages tightening were smaller in August, suggesting that many
banks may now believe they have adjusted their lending stance
appropriately to the deterioration in the performance of these loans
that occurred over the past two years.
In August, less than
25 percent of the respondents said they had tightened standards for
credit card applications over the past three months and less than
10 percent, on net, had tightened standards for other consumer
loans.
These percentages, while significant, are about half those
found in May. One-fourth of the respondents also lowered credit
limits on credit card lines, although only small net fractions of
banks tightened other terms on consumer loans.
Despite these
tighter standards and terms, about 10 percent of the banks, on net,
said that their willingness to make consumer installment loans had
increased over the past three months--the largest net percentage
expressing increased willingness since the May 1995 survey (chart).
About 10 percent of the respondents, on net, reported decreased
demand for consumer loans.
Banks reported essentially no change in their standards for
approving applications for mortgage loans to purchase homes. Twenty
percent of the respondents, on net, reported increased demand for
these loans.
Commercial Mortgage-Backed Securities
Special questions on the survey asked about banks' issuance and
holdings of commercial mortgage-backed securities, which have grown
About one-fourth of the domestic
rapidly in recent years.
respondents, concentrated among the larger banks, and one-fifth of
the foreign respondents had securitized commercial mortgages.
Almost all the respondents that had securitized commercial mortgages
had done so, at least in part, through a conduit program. These
programs are typically arrangements sponsored by an investment bank
to package loans originated by correspondent lenders. The
investment bank establishes lending guidelines under which the
correspondents originate their loans, thus promoting uniformity in
the loans backing the securities.
About half of those banks that had securitized commercial
mortgages retained at least some of the servicing responsibilities
for them. Only a couple of the banks retained junior or senior
classes of the securities backed by the commercial mortgages they
had originated. However, about one-fourth of the respondents,
especially the larger respondents, did hold some commercial
mortgage-backed securities.
Measures of Supply and Demand for C&I Loans, by Size of Firm Seeking Loans
Net Percentage of Domestic Respondents Tightening Standards for C&I Loans
Percent
.....
1990
1991
1992
1993
Small
1995
1994
1996
1997
Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Banks' Cost of Funds
Percent
1990
1991
1992
1993
1994
1995
Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans
Percent
1993
1994
1995
1996
1997
Measures of Supply and Demand for Loans to Households
Net Percentage of Domestic Respondents Indicating More Willingness to Make Consumer Installment Loans
Percent
n
1966
ft
h
k,
1970
4n1vr\\
A
1974
1978
1982
I
1986
1990
1994
Net Percentage of Domestic Respondents Reporting Stronger Demand for Loans to Households
Percent
Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals
Percent
--
z~
I~
I
1
t
i
I
I
1991
i.
I
I
I
I
1992
III
I
I
1993
I
I
1994
i
_I
I
1995
I
i
1996
I
I
_
1997
I 40
INTERNATIONAL DEVELOPMENTS
INTERNATIONAL DEVELOPMENTS
U.S.
International Trade in Goods and Services
In May, the deficit
in U.S.
services widened, as exports fell
combined, the deficit
was slightly
level recorded in the first
1996.
international trade in goods and
and imports rose.
In April/May
smaller (at an annual rate) than the
quarter and a bit
larger than the deficit
for
Trade data for June will be released on August 20.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
1996
Annual rates
1996
1997
Q04
Real NIPA 1/
Net exports of G&S
-113.6
Nominal BOP
Net exports of G&S
Goods, net
Services, net
-111.0
-191.2
80.1
Monthly rates
1997
_Q2e/
Q1
-98.4 -120.7
Mar
May
...
n.a
-104.8 -116.5 -113.9
-192.8 -199.1 -195.4
88.0
82.7
81.6
Apr
-7.8
-14.9
7.1
-8.7
-15.5
6.8
...
-10.2
-17.0
6.8
1. In billions of chained (1992) dollars.
e. BOP data are two months at an annual rate.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.
Exports of goods and services expanded 3-1/2 percent in
April/May, relative to the first-quarter level.
The largest
increases were in exports of machinery and in exports of aircraft
and aircraft parts.
Most of the gains were due to increases in
volumes rather than in prices.
In contrast, agricultural exports
continued to fall, mostly because of declines in prices of
agricultural products.
Imports of goods and services grew 3 percent in April/May,
relative to the first-quarter level.
The strongest gain was seen in
imports of consumer goods, although imports of computers and other
capital goods
(mostly machinery) also posted sharp increases.
As
with exports, most of the strength in these import categories was
attributable to increases in import volumes.
Oil Imports and Prices
The quantity of imported oil in April/May was sharply
higher than rates recorded during the first quarter of 1997 and well
above rates recorded in 1996.
strong consumption --
Imports were driven by extremely
up 3.4 percent from rates observed a year ago.
Preliminary Department of Energy statistics indicate that oil
IV-1
IV-2
8-14-97
U.S. International Trade in Goods and Services
(Seasonally adjusted annual rate)
Net Exports
Billions of dollars, SAAR
NIPA Exports and Imports
Ratio scale, billions of chained (1992) dollars
1989 1990 1991 1992 1993 1994 1995 1996 1997
1989 1990 1991 1992 1993 1994 1995 1996 1997
Selected NIPA Exports
Selected NIPA Imports
Ratio scale, billions of chained (1992) dollars
Ratio scale, billions of chained (1992) dollars
1989 1990 1991 1992 1993 1994 1995 1996 1997
1989 1990 1991 1992 1993 1994 1995 1996 1997
IV-3
U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)
Levels
1997
Q1
Amount Change 1/
1997
1997
1997
Q2e/
Apr
May
Q1
Q2e/
Apr
May
Exports of G&S
898.1
930.7
934.6
926.8
20.1
32.7
-3.7
-7.8
Goods exports
Agricultural
Gold
Other goods
650.1
57.3
6.7
586.1
681.1
56.9
9.3
614.9
685.9
57.1
10.9
617.9
676.2
56.7
7.7
611.8
18.7
-4.5
3.0
20.2
31.0
-0.4
2.6
28.8
0.1
0.1
-2.2
2.1
-9.8
-0.4
-3.2
-6.2
39.6
46.3
37.8
152.2
48.4
49.4
38.0
162.2
47.6
49.4
37.8
164.8
49.1
49.4
38.2
159.6
2.9
3.0
0.8
4.0
8.7
3.0
0.2
10.0
-4.1
1.2
0.7
5.4
1.5
0.0
0.4
-5.3
70.9
38.7
10.4
21.8
72.5
38.2
10.7
23.7
74.1
38.5
11.6
23.9
71.0
37.9
9.7
23.4
3.9
3.6
0.7
-0.4
1.6
-0.6
0.2
1.9
-0.7
-1.6
0.5
0.4
-3.1
-0.6
-1.9
-0.5
Ind supplies
Consumer goods
All other
137.2
75.3
26.8
139.9
77.6
26.8
140.2
76.1
27.9
139.6
79.1
25.8
1.7
2.3
1.6
2.8
2.3
0.1
-0.3
-1.7
1.1
-0.6
3,0
-2.1
Services exports
248.0
249.7
248.7
250.6
1.3
1.7
-3.8
1.9
Imports of G&S
1014.5
1044.6
1039.6
1049.6
31.7
30.1
8.2
10.0
Goods imports
Petroleum
Gold
Other goods
849.3
76.7
8.7
763.9
876.5
70.3
11.4
794.8
872.3
68.0
12.1
792.2
880.7
72.6
10.7
797.4
25.1
-5.6
5.2
25.4
27.2
-6.4
2.7
30.9
7.9
-5.2
-6.6
19.7
8.4
4.6
-1,3
5.2
Aircraft & pts
Computers
Semiconductors
Other cap gds
13.6
65.5
34.7
123.5
15.5
70.3
34.9
129.7
14.6
70.0
35.1
128.5
16.5
70.6
34.7
130.9
-0.3
2.7
1.1
2.4
1.9
4.9
0.2
6.2
1.2
3.8
-1.6
-0.2
1.9
0.6
-0.4
2.4
Automotive
from Canada
from Mexico
from ROW
142.2
52.6
24.2
65.4
138.4
49.8
26.1
62.5
136.4
49.1
25.5
61.8
140.4
50.6
26.7
63.1
13.3
10.2
1.0
2.2
-3.9
-2.8
1.9
-2.9
-3.8
-0.8
0.6
-3.6
4.0
1.5
1.1
1.3
Ind supplies
Consumer goods
Foods
All other
134.3
181.2
38.0
30.9
138.9
194.1
40.6
32.4
139.7
194.6
40.3
33.0
138.0
193.6
40.9
31.7
1.4
1.8
1.3
1.7
4.6
12.9
2.6
1.5
1.9
15.4
0.4
2.6
-1.6
-1.0
0.6
-1.3
Services imports
165.3
168.1
167.3
168.9
6.6
2.8
0.3
1.6
Memo:
Oil qty (mb/d)
Oil price ($/bbl)
9.85
21.35
10.66
18.06
10.31
18.07
11.02
18.05
-0.29
-0.87
0.81
-3.29
0.12
-1.59
0.71
-0.02
Aircraft & pts
Computers
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW
e. Average of two months.
1. Change from previous quarter or month.
U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.
Source.
IV-4
imports remained strong in June and July due to continued high
consumption demand.
The price of imported oil rose 2.4 percent in June, following
a 1.1 percent rise in May.
The June price increase was induced by
concerns about the renewal of the Iraq oil-for-food arrangement.
Despite these recent modest price increases, the price of imported
oil in June was significantly below the level at the beginning of
the year, as sharp declines occurred between February and April in
response to deliveries of oil from Iraq and mild winter weather.
Spot WTI rose $0.46 per barrel in July, averaging $19.63 per barrel,
reflecting continuing market concerns about Iraq's shipments under
U.N. supervision and the interruption of exports from Colombia due
to repeated bombing of the oil pipeline by terrorists.
Prices have
been trading recently near the $20 per barrel level.
Prices of Non-oil Imports and Exports
Prices of U.S. non-oil imports increased slightly in June.
There were price increases in most major import categories; the
exceptions were imported prices of computers and consumer goods.
For the second quarter, non-oil import prices declined moderately,
continuing a downward trend that began in late 1995.
Declines were
recorded in all major end-use categories, with the exception of
imported food prices.
Prices of exports decreased slightly in June, following
slightly larger declines in April and May.
The decline was
attributable to lower prices for agricultural products, and, to a
lesser degree, decreases in prices of computers and semiconductors.
On average in the second quarter, export prices decreased
moderately.
Prices of agricultural products declined sharply.
Prices of nonagricultural exports were unchanged, on balance, with
decreases in computer and semiconductor prices offsetting price
increases in other major trade categories.
Trade prices for July will be released on August 19.
U.S. International Financial Transactions
Private foreign net purchases of U.S. securities were very
strong in June and for the second quarter
U.S. International Transactions table).
(line 4 of the Summary of
Net purchases for the first
half of 1997 are on a pace that would break the record set only last
year. Net private purchases of Treasury securities
(line 4a) and
IV-5
PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)
Annua l
1996
04
rates
1997
01
02
Monthly rates
_1997
Anr
May
.Tiun
----------- BLS prices (1995=100)----------5.3
-4.6
-8.2
-1.1
0.0
0.4
64.3
-45.6
-7.4
-23.8
1.1
2.4
-0.4
-2.3
-0.5
-3.2
-0.1
0.2
Merchandise imports
Oil
Non-oil
Foods, feeds, bev.
Ind supp ex oil
1.8
1.0
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods
Merchandise exports
Agricultural
Nonagricultural
-8.5
-15.0
0.1
0.1
-0.5
-4.2
-31.9
0.4
Ind supp ex ag
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods
0.8
-10.6
-3.6
1.2
1.3
0.9
9.1
-6.0
-17.6
-1.7
-3.7
-0.7
-0.9
-1.8
-0.9
-2.0
-2.2
-0.2
-0.2
0.0
1.6
0.3
-1.8
-0.4
-0.3
-0.3
0.2
1.1
0.2
-1.0
0.5
2.5
-2.9
-24.0
-0.2
0.1
0.0
-0.7
-6.9
0.1
-0.1
-1.9
0.1
0.6
1.5
-9.7
0.1
-0.6
0.0
0.1
0.3
0.1
0.1
-1.7
4.9
4.8
-13.8
-24.7
-5.6
0.1
-0.8
-9.4
-5.2
2.1
1.3
0.8
-3.0
0.9
1.4
0.3
-1.1
-0.1
-0.1
0.0
-0.1
0.2
1.3
0.4
0.5
-0.1
0.4
-0.5
-1.5
0.4
0.0
0.0
---Prices in the NIPA accounts (1992=100)-Chain-weight
Imports of gds & serv.
Non-oil merchandise
3.6
-4.1
-1.5
-2.5
Exports of gds & serv.
Nonag merchandise
-2.2
-0.9
0.1
-0.7
n.a
n.a
8-14-97
Oil Prices
Dollars per barrel
Spot West Texas intermediate
Import unit value
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
IV-6
U.S. agency bonds
(approximately 1/3 of line 4b) accounted for about
one half of the total; about $16 billion of the net private
purchases of Treasuries went directly to residents of Japan.
In
addition to the purchases of U.S. government securities, foreign net
purchases of corporate bonds remained strong in the second quarter,
and the revival of foreign interest in U.S. stocks continued (lines
4b and 4c).
Net purchases of U.S. stocks in the second quarter were
almost twice the total for the year 1996.
purchases in
Information on Eurobond
July indicates continued strong foreign interest in
U.S. corporate bonds.
U.S. net private purchases of foreign bonds were strong in
June, although modest for the quarter as a whole (line 5a).
Considerable interest was shown in Latin American bonds, most of it
coming in June.
U.S. investors continued moderate net purchases of
foreign stocks, both in June and for the quarter
(line 5b); net
purchases in Japan accounted for the bulk of the total in both June
and the quarter as a whole.
Foreign official holdings in the United States fell modestly
in June and for second quarter (line 1).
However, the net masked
large changes in the reserve holdings for several countries.
Chinese holdings in the United States fell very sharply in June -by about 30 percent.
It appears that China did not immediately
liquidate these dollar holdings, but only transferred them outside
the United States.
By contrast, Mexican reserves increased strongly
in June, probably in preparation for the planned prepayment in
August of notes backed by oil revenues.
Brazil, Russia, and Spain
also had significant increases for the second quarter.
Preliminary
information from the FRBNY for July indicates only modest changes.
Large outflows in June from banks almost offset inflows during
the rest of the quarter, yielding a small net inflow for the quarter
(line 3).
Monthly average data for July show continued outflows
from U.S. banking offices to own foreign offices and IBFs
the International Banking Data table).
(line 1 of
IV-7
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)
1996
1995
1997
1996
Q3
Q4
Q1
Q2
May
Jun
4.9
-5.7
Official capital
1. Change in foreign official reserve
assets in U.S. (increase, +)
110.0
121.7
23.4
32.8
28.4
-4.5
a.
G-10 countries
33.1
35.5
1.4
2.2
7.4
5.8
1.5
b.
OPEC countries
4.3
13.4
5.3
3.6
8.8
2.7
-1.3
c. All other countries
72.6
72.8
27.1
12.3
-13.2
2. Change in U.S. official reserve
assets (decrease. +)
-9.7
6.7
7.5
-. 3
4.5
-. 2
-30.9
-58.0
-4.6
-14.8
-25.0
2.5
24.6
-36.3
190.8
290.0
77.3
101.3
87.2
86.0
16.0
34.0
99.9
156.2
43.6
67.7
48.0
34.2
1.6
13.6
82.6
121.7
33.3
32.1
28.5
29.8
7.6
11.2
16.7
-5.8
-.1
Private capital
Banks
3.
Change in net foreign positions
of banking offices in the U.S.
Securities
4.
2
Foreign net purchases of
U.S. securities (+)
a.
b.
Treasury securities
3
Corporate and other bonds
4
8.2
12.1
.5
1.5
10.7
22.1
6.9
U.S. net purchases (-) of
foreign securities
-98.7
-105.9
-20.9
-30.4
-17.1
-17.3
-5.4
-13.5
a. Bonds
-48.4
-48.8
-14.2
-19.9
-5.3
-7.0
-1.3
-11.4
b.
-50.3
-57.1
-6.7
-10.5
-11.8
-10.3
-4.1
-2.1
-86.7
-87.8
-11.1
-30.9
-24.6
n.a
n.a
c.
5.
Corporate stocks
Stocks
9.2
Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7.
Foreign direct investment in U.S.
67.5
77.0
26.0
17.7
21.7
8.
Foreign holdings of U.S. currency
12.3
17.3
7.4
7.8
3.5
9.
Other (inflow, +)5
-23.9
-43.1
n.a
-19.5
U.S. current account balance (s.a.)
Statistical discrepancy (s.a.)
-10.6
-65.9
-129.1
-148.2
-42.8
-36.9
-41.0
-14.9
-46.9
-38.3
-3.3
-18.1
Note. The sum of official capital, private capital, the current account balance, and the statistical
discrepancy is zero. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies
plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing
and lending under repurchase agreements). Includes changes in custody liabilities other than U.S.
Treasury bills.
2. Includes commissions on securities transactions and therefore does not match exactly the data on U.S.
international transactions published by the Department of Commerce.
3. Includes Treasury bills.
4. Includes U.S. goverment agency bonds.
5. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere
plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1
through 5 since publication of the quarterly data in the Survey of Current Business.
n.a. Not available.
* Less than $50 million.
IV-8
INTERNATIONAL BANKING DATA1
(Billions of dollars)
1994
Dec.
1. Net claims of U.S.
banking offices
(excluding IBFs) on
own foreign offices
and IBFs
a. U.S.-chartered
banks
b. Foreign-chartered
banks
2. Credit extended to U.S.
nonbank residents
a. By foreign branches
of U.S. banks
b. By Caribbean
offices of foreignchartered banks
3. Eurodollar holdings of
U.S. nonbank residents
a. At all U.S.chartered banks and
foreign- chartered
banks in Canada and
the United Kingdom
b. At the Caribbean
offices of foreignchartered banks
1995
Dec.
-224.0 -260.0
1996
Dec.
-247.4 -231.2
-70.1
-86.1
-73.6
-153.9
-173.9
-173.8
23.1
26.5
29.2
31.9
78.4
86.3
83.4
86.3
94.6
86.0
92.3
MEMO: Data as recorded in the U.S.
international transactions accounts
4. Credit extended to U.S.
178.2
212.9
nonbank residents
5. Eurodeposits of U.S.
nonbank residents
Sep.
241.7
275.5
-66.4
Mar.
1997
May.
Jun.
Jul.
-220.4 -231.0 -225.7
-214.4
-72.5
-84.3
-79.8
-79.4
-164.8 -147.9
-146.7
-145.9
-135.0
32.9
33.6
33.4
33.8
79.4
82.7
n.a
n.a
n.a
103.4
119.5
128.3
136.1
131.2
129.7
109.4
122.2
135.6
n.a
n.a
n.a
244.1
239.1
243.9
n.a.
n.a.
n.a.
313.9
336.4
345.0
n.a.
n.a.
n.a.
1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in
timing from the banking data incorporated in the U.S. international transactions
accounts.
Lines la, lb, and 2a are averages of daily data reported on the FR 2950 and FR2951.
Lines 2b and 3b are end-of-period data reported quarterly on the FFIEC 002s.
Line 3a is an average of daily data (FR 2050) supplemented by the FR 2502 and end-ofquarter data supplied by the Bank of Canada and the Bank of England. There is a break in
the series in April 1994.
Lines 4 and 5 are end-of-period data estimated by BEA on the basis of data provided by
the BIS. the Bank of England, and the FR 2502 and FFIEC 002s. They include some foreigncurrency denominated deposits and loans. Source: SCB
IV-9
Foreign Exchange Markets
The dollar has appreciated against most currencies since the
first day of the July FOMC meeting.
The dollar's gains have come
unevenly, with increases of 5-1/2 percent against the mark, 4-1/2
percent against sterling, and 1-1/2 percent against the yen. Among
developing countries, the dollar has appreciated sharply against
several Southeast Asian currencies although it has depreciated 1-3/4
percent vis-a-vis the Mexican peso.
On a trade-weighted average
against the currencies of 18 countries (using weights based on
multilateral trade flows from 1992-1994) the dollar is up a bit more
than four percent.1
Continuing favorable economic developments in the United
States appear to have accounted for a portion of the dollar's
appreciation over the intermeeting period.
The July labor market
report and other signs of strong growth and subdued price pressures
have boosted the dollar.
Late in the period, the dollar weakened
with other U.S. asset prices on talk of renewed inflation concerns,
although the latest PPI and CPI releases appeared to allay these
concerns.
Most noteworthy among developed countries has been the
depreciation of the mark and other continental European currencies
against the dollar--a decline attributed to EMU-favorable
developments and the absence of official German action to curb the
mark's fall.
In mid-July, the mark fell on positive comments by
German officials regarding French deficit-reduction proposals
announced with the release of an audit of French government
finances.
Exchange market participants interpreted the continuation
of Bundesbank repo operations at unchanged interest rates as
evidence of German officials' acceptance of the mark's depreciation.
The mark also weakened on July's larger-than-expected increase in
unemployment.
The release of the August Bundesbank report, which
noted the risks to price stability presented by recent currency
developments, pushed the mark up 1-3/4 percent against the dollar in
the middle of this week.
1
Against the currencies of 10 industrial countries (using multilateral
trade weights based on trade flows from 1972-1976) the dollar has
appreciated 4-1/4 percent over the period.
IV-10
Weighted Average Exchange Value of the Dollar
Index, March 1973 = 100
Daily
August
July
June
May
Interest Rates in Major Industrial Countries
Three-month rates
July 1
Aug. 15
Change
Ten-year bond yields
July 1
Aug. 15
Change
Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden
3.02
0.70
6.81
3.55
3.29
6.81
3.25
3.13
1.44
4.11
3.20
0.58
7.13
3.70
3.32
6.88
3.54
3.36
1.38
4.32
0.18
-0.12
0.32
0.15
0.03
0.07
0.29
0.23
-0.06
0.21
5.72
2.38
7.06
6.32
5.59
6.75
5.78
5.58
3.23
6.39
5.67
2.14
7.05
5.98
5.60
6.58
5.76
5.62
3.30
6.37
-0.05
-0.24
-0.01
-0.34
0.01
-0.17
-0.02
0.04
0.07
-0.02
Weighted-average
foreign
3.58
3.70
0.12
5.48
5.39
-0.09
United States
5.68
5.61'
-0.07
6.45
6.32 P
-0.13
Note. Change is in percentage points.
P Preliminary.
IV-11
Movements of the yen against the dollar have largely been
attributed to two factors:
prospects for the Japanese current
account surplus and market perceptions of weak Japanese economic
performance.
The dollar rose sharply against the yen immediately
following comments by Ministry of Finance official Sakakibara that
Japan has no intention of using the exchange rate as a trade policy
tool.
Suggestions of flagging activity contained in the quarterly
report of the Bank of Japan and data releases for industrial
production, retail sales, and domestic auto sales have also weighed
on the yen.
Over the period, the Japanese 10-year interest rate has
fallen 24 basis points.
Sterling has retreated from five-year and eight-year highs
against the dollar and mark respectively on renewed concerns over
the prospects for British exports.
Uneven GDP growth in the second
quarter that pointed to a slowing export sector initiated the
decline in sterling.
Over the period, the Bank of England's
Monetary Policy Committee twice raised the repo rate 25 basis
points.
Following the second increase on August 7, the committee
noted the negative effect of sterling's rise and suggested that
exchange pressures should ease as interest rates have reached levels
consistent with the inflation target.
Since August 7, sterling has
lost 1/4 percent of its value against the dollar and 2-1/4 percent
of its value against the mark..
The dollar has appreciated against many Southeast Asian
currencies which until recently were closely linked to the dollar.
After several episodes of exchange rate pressure, the Thai baht was
allowed to float on July 2.
The baht depreciated 18 percent
initially and is now down 28 percent against the dollar since the
float.
The Philippines floated the peso on July 11, with the peso
depreciating 11 percent against the dollar since July 1.
Indonesia
widened and then abandoned the band on its managed float and the
rupiah has depreciated 14 percent.
Finally, Malaysia has imposed
capital controls and raised interest rates to counter pressures on
the ringitt, which has fallen 10 percent over the period.
Developments in these countries are discussed in Section IV.
In
contrast, the Mexican peso appreciated 1-3/4 percent against the
dollar over the past six weeks reflecting market satisfaction with
an election little tainted by fraud.
IV-12
The two interest rate increases in the United Kingdom over the
intermeeting period have pushed up the three-month interest rate
there more than 30 basis points.
Three-month rates in Belgium, the
Netherlands, and Sweden have increased a bit less in response to
domestic currency weakness.
Interest rates at the 10-year maturity
have fallen in most countries, on average almost matching the 13
basis point decline of the 10-year rate in the United States.
An
exception is the Canadian 10-year rate, which has shed 34 basis
points as the federal budget moves into surplus.
At the same time,
the Canadian dollar has lost 3/4 percent of its value against the
U.S. dollar.
Over the intermeeting period, gold prices have slipped more
than $6 per ounce on balance, having partly recovered from the $10
per ounce decline in early July following the announcement that the
Reserve Bank of Australia had sold two-thirds of its gold holdings
in the forward market over the first half of the year.
The Desk did not intervene in the
foreign exchange market over the intermeeting period.
Developments in Foreign Industrial Countries
Economic activity in the major foreign industrial countries
appears to have continued to expand at a moderate pace in recent
months, with all countries except Japan registering increases.
Indicators suggest that Canada and the United Kingdom grew at robust
rates, with falling unemployment, rising retail sales, and strong
business confidence.
The German and French economies also expanded,
but consumption appears to have been weak.
In Italy, second-quarter
data point to a pick-up in activity, following a first-quarter
decline.
The Japanese economy, by contrast, has contracted in
recent months, due to the effects of the April 1 hike in the
consumption tax.
Twelve-month increases in consumer prices remained below 2
percent in all major foreign industrial countries except the United
Kingdom, where a rise in gasoline excise taxes pushed inflation
(excluding mortgage interest) to 3 percent in July, a half
percentage point above the government's inflation target.
Individual country notes.
In Japan, economic activity has
weakened considerably, largely reflecting the effects of the April 1
IV-13
increase in the consumption tax from 3 to 5 percent.
Household
expenditure, retail sales, and new car registrations have all
declined sharply in recent months, reversing increases recorded in
the months before the tax hike, and housing starts have declined for
two consecutive quarters.
Industrial production during the second
quarter, however, was unchanged from its first-quarter level, as
rapid export growth offset weak domestic demand.
Machinery orders,
an important leading indicator, increased during the second quarter,
suggesting rising investment expenditures in coming months.
Unemployment reached 3.5 percent in May and June, matching a
record high set during the second quarter of 1996.
Employment,
however, continued to register year-over-year increases, and labor
force participation continued to rise. Inflationary pressures have
remained subdued, despite a jump in the price level following the
consumption tax increase.
JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio 1
Business Sentiment 2
CPI (Tokyo area) 3
Wholesale Prices 3
Apr
Q4
Q1
Q2
2.1
2.5
0.0
-0.5
4.3 -11.5
-5.2
-0.3
5.0
-3.1
6.0
2.0
10.6
2.3 -23.9 -28.7
3.3
3.3
3.4
3.3
0.75
0.74
0.73
0.71
-3
2
7
...
0.1
0.0
1.5
1.2
0.6
1.4
2.6
3.2
May
Jun
4.5
-3.1
2.7 -11.6
11.5
-1.9
14.7
-2.2
3.5
3.5
0.73
0.74
...
...
1.4
1.8
2.7
1.9
Jul
n.a.
n.a.
n.a.
1.6
n.a.
n.a.
...
1.4
1.8
1. Level of indicator.
2. Percent of large manufacturing firms having a favorable view of
business conditions less those with an unfavorable view (Tankan
survey).
3. Percent change from previous year.
Japan's current account and trade surpluses rose sharply
during the second quarter.
Import volumes declined, reflecting the
weakness of domestic demand, and export volumes surged as the lagged
effects of the yen's depreciation over the past two years
strengthened the competitive position of exporting firms.
Notably,
IV-14
Japanese vehicle exports increased over 30 percent from year-earlier
levels.
Economic activity in Germany continued to expand in the second
quarter, with strong increases in industrial production and orders.
Based on preliminary figures for June
(which are anticipated to show
a significant upward revision) production rose 2-1/2 percent at an
annual rate in the second quarter from its
quarter.
level in the first
Real manufacturing orders surged, boosted by orders from
both domestic and foreign firms.
The IFO business climate survey,
an indicator of current and expected conditions in industry,
continued to improve, with the index now firmly in the positive
range.
Conditions in the labor market remain stagnant, however,
with total unemployment above the 4.3 million (SA) level in July and
the all-German unemployment rate at 11.5 percent.
Consumer-price
inflation for the year ending in July rose to 1.9 percent,
reflecting higher prices for medical drugs in July due to an
increase in the consumer's share of medication costs.
GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1997
1996
Industrial Production
Orders
Unemployment Rate (%)
Western Germany
Eastern Germany
CapacityUtilization 1
Business Climate 1 ,2
Consumer Prices 3
Q4
-0.5
0.2
10.8
9.5
16.0
83.2
-3.3
1.4
Q1
0.3
1.0
11.2
9.8
17.1
84.1
1.3
1.7
Q2
0.6
3.8
11.3
9.9
17.5
85.1
6.0
1.6
Apr
0.3
3.5
11.2
9.8
17.2
......
5.0
1.4
May
-1.5
-1.4
11.4
9.9
17.6
Jun
Jul
1.4
1.5
11.4
9.9
17.8
n.a.
n.a.
11.5
9.8
18.2
7.0
1.6
6.0
1.7
n.a.
1.9
1. Western Germany.
2. Percent of firms (in manufacturing, construction, wholesale, and
retail)
citing an improvement in business conditions (current and
expected over the next six months) less those citing a deterioration in
conditions.
3. Percent change from previous year.
On July 11, the German cabinet approved a draft federal budget
for 1998 and a 1997 supplemental budget.
The supplemental 1997
budget involved no new measures to reduce Germany's general
IV-15
government deficit to 3 percent of GDP, the Maastricht Treaty's
reference value.
The supplemental budget is necessary, however,
because under Germany's constitution, the federal deficit may not
exceed government investment unless the higher deficit is necessary
to correct an economic imbalance.
The supplemental budget thus
declares that a federal deficit of DM71.2 billion (up from DM53.3 in
the draft budget approved last year) is required to combat the high
level of unemployment.
The supplemental budget also authorizes
additional privatization and the sale of government oil stocks in
order to reduce the federal deficit on a budget basis
(but not on a
national accounts basis, which is relevant for Maastricht
compliance).
Most analysts estimate that the deficit on a
Maastricht basis will be about 3-1/4 percent of GDP in 1997.
The
draft federal budget for 1998 pegs the deficit at DM57.8 billion and
incorporates a number of new tax initiatives, which are being
reviewed in a separate legislative process.
Following parliamentary
debate and possible revision, the draft budget for 1998 is likely to
be approved in early December.
In France, measured GDP in the second quarter is expected to
be boosted by favorable calendar effects and strong net exports.
Recent indicators suggest, however, that domestic demand was
relatively subdued.
Continued firmness in manufacturing output,
largely reflecting robust foreign orders and a strong bounce in
energy production, underpinned the 2-1/2 percent increase in
industrial production in April-May over its first-quarter average.
However, consumption of manufactured products declined during the
second quarter, due in part to weakness in car purchases.
The
unemployment rate edged up in June, while consumer-price inflation
remained subdued through July.
On July 21, an official audit of France's public finances
concluded that the 1997 trend deficit was on course to register
between 3.5 and 3.7 percent of GDP.
The same day, the government
IV-16
FRENCH ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Q4
Q1
Consumption of
Manufactured Products
Industrial Production
-3.5
0.8
-0.6
0.0
Capacity Utilization
81.4
81.1
Unemployment Rate (%)
Business Confidencel
Consumer Prices 2
12.5
3.3
1.7
12.5
10.3
1.5
1.
2.
Q2
May
Jun
Jul
0.8
-0.5
-2.9
n.a.
n.a.
3.1
-1.6
n.a.
...
12.5
8.0
0.9
-0.7
12.5
8.3
0.9
Apr
n.a.
n.a.
...
...
...
12.5
7.0
0.9
12.6
10.0
1.0
n.a.
11.0
1.0
Percent balance of manufacturing firms citing an improvement in the
outlook versus those citing a worsening.
Percent change from previous year.
announced a series of measures designed to contain the deficit to
between 3.1 and 3.3 percent of GDP.
Two-thirds of the projected
adjustment stems from a temporary increase in the rate of corporate
taxation (both the basic rate and the rate applied to long-term
capital gains).
The remaining savings measures consist of still
unspecified spending cuts.
Non-tax receipts are likely to be
enhanced by contributions from profitable state-owned enterprises as
well.
Economic activity in the United Kingdom remained robust in the
second quarter, but the pace of expansion continued to diverge
across sectors.
Real GDP increased 3.6 percent
(SAAR), with service
sector output estimated to have increased 5.3 percent.
Retail sales
registered another quarter of strong growth, led by purchases of
household goods.
The unemployment rate has continued to fall,
reaching 5.5 percent in July, its lowest level in seven years.
Manufacturing output was little changed during the second quarter,
while industrial production as a whole recorded a moderate increase.
After declining for several months, business confidence turned up in
July, apparently reflecting increased optimism that domestic orders
will offset weak export orders.
IV-17
UNITED KINGDOM ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Real GDP (AR)
Non-oil GDP (AR)
Industrial Production
Retail Sales
Unemployment Rate (%)
Business Confidencel
Consumer Prices 2
Producer Input Prices 3
Average Earnings 3
Q4
4.4
4.5
Q1
3.3
3.7
Q2
3.6
4.0
0.4
1.1
6.9
18.0
3.2
-4.6
4.2
-0.2
1.1
6.3
18.3
2.9
-7.1
4.6
0.4
1.8
5.8
17.7
2.6
-9.6
4.3
Apr
May
......
...
...
0.9
0.3
5.9
23.0
2.5
-10.9
4.5
-1.0
1.2
5.8
17.0
2.5
-9.3
4.3
Jun
Jul
...
...
1.4
0.6
5.7
13.0
2.7
-8.6
4.3
n.a.
n.a.
5.5
21.0
3.0
-9.0
n.a.
1.
Percent of firms expecting output to increase in the next four months
minus those expecting output to decrease.
2. Retail prices excluding mortgage interest payments. Percent change
from previous year.
3. Percent change from previous year.
The twelve-month rate of increase in retail prices excluding
mortgage interest payments jumped to 3 percent in July, a half
percentage point above the government's target.
Much of the
acceleration was due to higher gasoline excise taxes included in
last month's budget.
Although service-price inflation eased in
July, it remained higher than goods-price inflation, which has
benefitted from the strength of sterling.
The underlying rate of
increase in average earnings declined somewhat in May to 4.3 percent
and remained at that level in June.
Nonetheless, the most recent
rate is up from 3.75 percent a year ago, reflecting the tighter
labor market.
Chancellor of the Exchequer Gordon Brown presented the Labour
government's first budget on July 2.
As promised, the cornerstone
of the budget was the announcement of the "Welfare to Work" program
financed by a windfall tax on excess profits of privatized
utilities.
The budget deficit is projected to decline from 4
percent of GDP in 1996-97 to 1.5 percent in the current fiscal year
and 0.25 percent next year.
In its quarterly Inflation Report
released on August 13, the Bank of England projected a likely
slowing of the expansion in coming months due to recent monetary and
fiscal tightening, as well as to the appreciation of sterling and
IV-18
the unwinding of windfall gains in consumer income from building
society conversions.
The report concludes that the 100 basis point
increase in official rates since May has left monetary policy in a
position "at which it should be possible to pause in order to assess
the direction in which the risks
(to inflation) are likely to
materialize."
In Italy, real GDP declined a revised 0.7 percent
(SAAR) in
the first quarter, largely reflecting a drop in net exports and the
fact that there were fewer working days than in the previous
quarter.
On the positive side, household consumption increased, due
to tax incentives on auto purchases, and business fixed investment
rose modestly.
ITALIAN REAL GDP
(percent change from previous period, SAAR)
1995
1996
1996
GDP
Private Consumption
Investment
Government Consumption
Exports
Imports
Total Domestic Demand
Net Exports (contribution)
Q4/Q4
2.3
1.5
8.6
-0.7
4.6
5.2
2.3
0.0
Q4/Q4
0.2
1.0
-2.4
0.8
3.8
-0.7
-0.8
1.0
Q2
-1.8
1,2
-1.8
1.5
3.9
-16.0
-6.3
4.5
Q3
2.9
1.2
-1.5
1.4
11.3
10.9
2.5
0.6
1997
Q4
-1.9
1.4
-2.9
0.0
-4.5
12.5
1.8
-3.6
Q1
-0.7
2.2
0.8
-0.7
-14.9
-11.2
0.8
-1.4
Second-quarter monthly indicators generally point to a pick-up
in
activity.
Industrial production and capacity utilization
increased during the second quarter; both indicators currently stand
at their highest levels since the end of 1995.
Consumer confidence,
after improving significantly in the first quarter, remained strong
during the second quarter.
Positive calendar effects in the second
quarter will also provide a modest impetus to measured GDP, which is
not adjusted for this factor.
IV-19
ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Q4
Q1
Q2
Apr
0.7
...
...
108.1
16.0
1.7
-0.7
May
Jun
0.3
0.4
...
.
......
109.4 108.9
14.0
11.0
1.6
1.4
-0.2
-0.3
Jul
n.a.
Industrial Production
-1.0
1.4
2.3
Cap. Utilization (%)
75.1
76.2
77.7
Unemployment Rate (%)
12.0
12.2
12.4
Consumer Confidencel
104.7 109.2
108.8
114.1
2
Bus. Sentiment
(%)
1.3
20.0
13.7
n.a.
Consumer Prices 3
2.7
2.5
1.6
1.6
3
Wholesale Prices
1.8
0.6
-0.4
n.a.
1. Level of index, NSA.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.
Inflation remains low.
Consumer prices were up 1.6 percent
for the year ending in July, a slight increase from June due largely
to statistical factors.
Inflationary pressures are likely to remain
subdued given continued moderation in producer prices, a sizable
output gap, and lagged effects of lira appreciation.
Italian public sector balances are showing further signs of
improvement.
On August 1,
the government announced that the public
sector deficit through the end of July was slightly under $17
billion equivalent.
Although there is still uncertainty regarding
fiscal performance during the remainder of 1997
(historically, about
40 percent of total public expenditure is incurred during the last
four months of the year),
the end-July balance is generally in line
with the three percent Maastricht budget deficit criterion.
The Canadian economy continued to expand strongly in the
second quarter.
Real GDP at factor cost rose 0.3 percent
(SAAR) in
May after rising 0.9 percent in April, bringing the average for the
two months to a level 1 percent above the first-quarter average.
Employment gains boosted real disposable income, and consumer
confidence and retail sales have been very strong. Business
confidence reached a new high in the second quarter.
Preliminary indicators for the third quarter point to
continued expansion.
Employment, which rose substantially in the
second quarter, edged up again in July, while the unemployment rate
IV-20
declined to 9 percent, the lowest since October 1990.
The annual
survey of investment intentions reported an 11 percent expected
increase in firms' plant and equipment expenditures, which would be
the biggest rise since 1993.
Consumer price inflation rose slightly in June.
Weakness in
the Canadian dollar in late June prompted the Bank of Canada to
raise its Bank Rate by 1/4 percentage point to 3-1/2 percent.
CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
GDP at Factor Cost
Industrial Production
Manufacturing Survey:
Shipments
New Orders
Retail Sales
Housing Starts
Employment
Unemployment Rate (%)
Consumer Prices 1
Consumer Attitudes 2
Business Confidence 3
Q4
1.0
0.5
Q1
Apr
May
0.9
0.9
Q2
n.a.
n.a.
0.9
0.3
1.6
-0.0
-0.2
0.2
2.5
0.4
0.4
9.9
2.9
4.5
2.0
19.9
0.3
9.6
n.a.
n.a.
n.a.
-6.3
0.9
9.4
0.7
-0.2
5.1
-2.4
2.0
104.8
153.1
2.1
108.0
160.1
1. Percent change from year earlier.
2. Level of index, 1991 = 100.
3. Level of index, 1977 = 100.
1.6
116.2
165.0
1.3
0.5
-8.7
0.2
4.5
9.6
9.5
1.7
1.5
0.4
Jun
I
Jul
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
-6.5
0.4
9.1
n.a.
1.8
n.a.
n.a.
n.a.
2.7
0.1
9.0
n.a.
IV-21
EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1996
1997
61.4
65.9
Q1
12.9
15.4
Germany: tradel
65.4
current account1 -14.3
14.7
-5.4
Japan: trade
current account
Feb
Mar
Apr
May
3.8
4.7
3.6
4.0
6.5
8.1
9.3
10.7
n.a. 5.5
n.a. -0.9
5.9
1.7
6.1
1.6
5.7
n.a.
n.a.
n.a.
8.2
n.a.
1.7
1.6
2.7
4.1
2.9
3.9
n.a.
n.a.
-1.1
-1.6
-0.8
n.a.
Q2
23.3
27.3
Jun
7.6
8.5
France: trade
current account
17.4
21.9
5.5
8.9
U.K.: trade
current account
-19.4
-0.3
-3.2
2.4
Italy: trade
current account 1
44.4
41.1
8.7
8.8
n.a.
n.a.
2.9
2.4
2.7
2.1
3.5
2.4
n.a.
n.a.
n.a.
n.a.
Canada: trade
current account
30.0
2.8
5.9
-0.9
n.a.
n.a.
2.0
1.8
1.2
1.5
n.a.
1.
2.0
3.4
n.a. -1.3
n.a.
Not seasonally adjusted.
... Data not available on a monthly basis.
IV-22
AUGUST 14, 1997
Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Japan
Percent
-- , 9
A
,L
I
1992
, ,J L
1993
1994
Germany
Percent
-A(
II i
1995
I* r
1996
I,,
*
1997
France
Percent
II IIII II
1992
1993
T
I
I
1994
I
I
I
1995
I
I
I
I
1996
I
I
I
1
1997
o
United Kingdom
Percent
b
3
1992
1993
1994
1995
1996
Italy
1997
Percent
1992
1993
1994
1995
1996
1997
Canada
Percent
-- 9
~-N1992
1992
1993
1993
1994
1994
1995
1995
1996
1996
1997
1997
1992
1993
1994
1995
1996
1997
IV-23
AUGUST 14, 1997
Industrial Production in Selected Industrial Countries
1991=100
Japan
1992
-- 120
1993
1994
1995
1996
1997
France
Germany
-i
1992
1991=100
--
1993
1994
1995
1996
120
1997
United Kingdom
-
120
v------
i i i I i T Ii t i i
1992
1993
1994
1995
1996
1997
1992
1994
i
i
>
1995
1996
1995
1996
>
i
1997
Canada
Italy
1
1992
1993
i
1993
1994
1995
1996
1997
1992
I
1993
I I
P'
1994
I r I P1
1997
90
IV-24
Economic Situation in Other Countries
In recent months, growth has generally remained strong in the
major Latin American and Asian countries.
Inflation rates in these
countries have generally been stable or moderated further.
Recent
movements in their external balance positions have been mixed, with
incoming data tending to show Argentina, Brazil, and Venezuela
moving toward deficit, while China and Korea move toward surplus.
There was intense exchange market pressure in the ASEAN
countries in July, resulting in de facto devaluations in Thailand
and the Philippines, a widening of Indonesia's exchange rate band,
and downward pressures on the currencies of Malaysia and Singapore.
These pressures spilled over, in varying lesser degrees, to several
other emerging market countries, including Korea, Taiwan, Brazil and
Venezuela.
Individual country notes. The turmoil in exchange markets in
the five major ASEAN countries intensified in July.
The central
banks of Thailand and the Philippines announced they would permit
greater market determination of exchange rates;
in both cases, the
announcements were followed by de facto devaluations of their
currencies.
Indonesia initially widened its exchange rate band from
8 percent to 12 percent, then allowed its currency to float.
currencies of Malaysia and Singapore came under pressure.
The
The
currencies of all five countries have depreciated over the past
month, despite substantial increases in overnight interest rates in
each of the countries.
Some of these countries have sought technical assistance and
financial help from international sources to help overcome potential
payments problems.
The Philippines will be able to draw on $1.1
billion under an extension of an IMF Extended Fund Facility.
The
Philippine authorities are also expected to reactivate a financing
arrangement with Japan's Export-Import Bank (JEXIM) for about $450
million.
Thailand has been offered a financial package of $16
billion, including a three-year IMF Stand-by Agreement totalling $4
billion, which is about five times Thailand's quota.
JEXIM will
provide $4 billion, and the remainder of the financing comes from
bilateral donors in Asia, Australia, and multilateral agencies such
as the World Bank and the Asian Development Bank.
IV-25
The announcement of the financial support for Thailand came
after its cabinet approved a package of measures, including actions
to reform the financial system.
The overall framework of the
package is similar to the one that the IMF had been working on with
the Thai authorities, but all the details of the program have not
been negotiated as yet.
As part of the reforms, the central bank
and finance ministry announced the suspension of operations of 42
finance companies, bringing the total suspended since June this year
to 58.
(There were previously 91 such companies.)
The suspended
companies are required to complete the process of due diligence and
submit a rehabilitation plan within 60 days.
Holders of promissory
notes and certificates of deposit issued by these companies can
exchange them for those of Krung Thai Bank, a large commercial bank
in which the government has a majority share.
A deposit insurance
scheme is being set up to insure the liabilities of financial
institutions "which can conduct their normal business." The Thai
authorities stated that "the Government will be responsible for any
financial obligations arising from this insurance undertaking."
Other elements of the plan to restructure the financial sector
include the setting up of new government agencies to rate the
credit-worthiness of Thai financial institutions in an attempt to
separate healthy institutions from troubled ones.
The setting up of
these agencies reduces the supervisory role of the Bank of Thailand.
On the fiscal side, the plan endorses further cuts in the
government budget for fiscal year 1997/98 (starting October 1),
an
increase in the VAT from the current 7 percent to 10 percent
(effective August 16), an increase in the excise tax on luxury
items, and reductions in subsidies to state enterprises.
Other
announced measures include a government pledge not to let gross
foreign reserves fall below $25 billion.
Thailand will continue the
managed float exchange rate regime introduced on July 2; the system
of capital controls imposed over the last several months will be
removed.
These steps are being taken with the stated goals of
reducing the current account deficit to 5 percent of GDP in 1997 and
3 percent in 1998
(compared with 8 percent in 1996),
limiting the
annual inflation rate to the 8 to 9 percent range, and achieving
real GDP growth of between 2 and 3 percent.
IV-26
In Taiwan, growth has been strong while inflation rose only
slightly in the first seven months of 1997.
Industrial production
in the second quarter continued the strength that started to become
evident in the second half of last year.
Consumer price inflation
rose sharply in July from the rates of earlier in the year,
reflecting poor weather that damaged crops, but remained relatively
moderate on a year-over-year basis.
Strong import growth
contributed to a narrowing of Taiwan's trade surplus in the first
seven months of 1997, compared with the comparable period last year.
Exports rose 5 percent over this period, while imports increased 11
percent.
Foreign-exchange reserves stood at $90 billion in June, up
less than $2 billion from the beginning of 1997.
TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted, NSA)
1996
1996
1997
1996
Q4
Real GDP
5.7
Industrial Production
1.6
Consumer Prices
2.5
TradeBalancel
14.3
Current Account 1
10.5
1. Billions of U.S. dollars, NSA
Q1
May
Jun
Jul
6.6
6.8
n.a.
...
...
...
4.8
2.5
4.0
2.8
5.4
1.1
1.8
1.9
6.2
1.8
1.7
n.a.
7.3
0.8
1.6
...
5.3
1.8
0.3
...
Q2
.
3.3
0.5
...
In the wake of turmoil in currency markets throughout Asia,
Taiwan's exchange rate depreciated about 1 percent against the U.S.
dollar in the last week of July ad the first week of August.
Taiwan's central bank has intervened actively in the currency market
in the past, but has vowed not to intervene now.
Most analysts have
not viewed the depreciation with alarm, seeing it as reflecting a
reasonable market response to the weakness of other Asian
currencies.
Korean conglomerates ("chaebols") have continued to experience
financial troubles.
On July 15, the nation's eighth-largest
chaebol, Kia Business Group, was placed under a "bankruptcy
protection pact" to prevent its imminent collapse.
The creditors
have decided to grant the troubled group a two-month reprieve to
repay its debts.
This is the fifth chaebol to experience financial
problems this year.
Citing the "deteriorating asset quality and
heightening industry risks faced by Korean banks" as a result of the
IV-27
financial difficulties of the chaebols, Standard and Poor's has
placed five banks on credit watch, and S&P has revised the Republic
of Korea's sovereign long-term rating outlook to negative from
stable.
There has been some pressure on the won in the wake of the
currency crises in ASEAN countries and the problems in the financial
sector.
KOREAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996
1996
1997
1997
Q4
Q1
Q2
May
Jun
Jul
n.a.
n.a.
Real GDP
Industrial Production
6.8
8.4
6.6
5.3
7.0
n.a.
n.a.
9.8
9.7
6.1
Consumer Prices
5.0
4.8
4.7
4.0
3.8
12.4
4.0
n.a.
3.7
-15.3
-3.9
-5.4
-0.8
-0.3
0.3
n.a.
-6.2
-7.9
-3.0
-0.9
-0.4
n.a.
Trade Balancel
Current Account1
-23.7
1. Billions of U.S. dollars, NSA
Korea's current account deficit narrowed sharply in the second
quarter.
The trade balance posted a surplus in June, the first
since December 1995.
the second quarter.
Industrial production grew at a robust rate in
Inflation remained moderate in July.
In China, growth in the first half of the year remained
steady, inflation continued to moderate, and the trade surplus
continued to grow.
In the first half of this year, the value of
exports rose 26 percent from the year-earlier period, while the
International reserves have risen
value of imports was unchanged.
steadily over this period.
In the first half of 1997, reserves rose
$16 billion to $123 billion, the second highest in the world after
Japan.
CHINESE ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1996
Q4
1
Real GDP
Industrial Production
Consumer Prices
2
1996
Ql
Q2
9.7
9.7
9.4
9.5
15.6
15.6
13.0
14.2
14.2
14.2
14.2
7.0
7.0
4.0
2.8
3.2
2.8
2.8
6.8
11.0
3.5
3.6
3.9
4.0
12.2
TradeBalance
1. Cumulative from the beginning of the year
2. Billions of U.S. dollars, NSA
1997
1997
Apr
May
Jun
......
IV-28
In Mexico, data on industrial production and retail sales
continued to show strength, with domestic demand emerging as the
driving force in economic growth.
Industrial production rose
strongly in May, confirming the rapid pace of growth shown in the
March-April period.
Retail sales, which had shown negative year-on-
year growth as recently as the first quarter, gained 6.6 percent in
May versus the same month in the previous year.
remained narrowly positive in May and June.
The trade surplus
Monthly consumer price
inflation remained just below 1 percent in July, moderated by the
continued stability of the peso and seasonal factors that usually
suppress inflation in the summer.
As expected, the July 6 midterm elections resulted in an
historic loss of majority for the ruling Institutional Revolutionary
Party (PRI) in the lower house of Congress.
The main immediate
impact of the opposition's congressional gains will be seen in
legislative consideration of the government budget this fall, with
both opposition parties calling for a reduction in the value-added
tax, while the PRI wants to maintain a nearly balanced fiscal
position.
MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1997
1996
1997
Q2
May
Jun
Jul
n.a.
9.0
n.a.
n.a.
3.9
3.9
0.9
3.4
0.9
n.a.
0.9
0.2
0.3
8.6
9.1
n.a.
n.a.
9.4
n.a.
Q4
Real GDP
Industrial Production
5.1
10.4
Q1
7.6
5.1
n.a.
12.8
6.2
4.3
5.6
2.9
1.4
23.5
24.9
0.5
26.7
27.2
4.7
5.5
Unemployment Rate (%)
1
27.7
6.1
Consumer Prices
0.7
6.3
Trade Balance 2
2
25.5
89.6
Imports
26.2
Exports 2
95.9
2
-1.4
-1.8
Current Account
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA
-0.4
n.a.
8.8
. .
.
..
.. .
On July 30, citing the continued real appreciation of the peso
and the possibility that this could reduce the attractiveness of
investment in the traded goods sector, the Mexican Exchange
Commission announced an increase in the amount of dollar put options
auctioned at the end of each month from $300 million to $500
million.
As before, if at least 80 percent of dollar put options
IV-29
are exercised in the first half of a month, there will be another
auction of dollar put options, and that amount was also raised from
$300 million to $500 million.
If all options are exercised, the
Bank of Mexico would acquire another $1 billion each month.
In the
first year of the dollar put options program, which began in August
1996, the Bank of Mexico has acquired $3.26 billion in reserves
through the program.
In Argentina, growth in economic activity continues to be
strong.
Industrial production in the second quarter and real GDP in
the first quarter both registered substantial year-over-year gains.
Despite high growth, inflation has remained subdued, likely the
result of the economy still operating at less than full-employment.
The recovery has increased job creation and is finally
beginning to alleviate Argentina's stubbornly high unemployment
rate.
Bringing unemployment down further is probably the biggest
economic challenge facing the government, but reaching an agreement
on labor reform has thus far proved difficult.
After failing to get
labor reform legislation approved by the Congress or implemented
through executive decrees
(which the court rejected),
ARGENTINE ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996
1996
1997
1997
Q2
Apr May Jun
Q4
Q1
Real GDP
4.3
8.8
8.1
n.a.
...
...
.
8.0
8.1 5.3 10.7
11.7
8.0
3.4
Industrial Production (SA)
Unemployment Rate (%)2
17.2
17.3
...
16.1
...
...
...
Consumer Prices 1
0.2
0.2
0.2
-0.2
-0.3 -0.1
0.2
0.3
0.1 0.2
0.1
1.6
0.0
-0.4
Trade Balance 3
...
-2.4
n.a.
..
...
-4.0
-1.7
Current Account 3
1. Percentage change from previous period.
2. Unemployment figures available only in May and October of each year. The
annual figure is the average of the two surveys.
3. Billions of U.S. dollars.
President Menem, in late May, negotiated a watered-down agreement
with major unions.
However, this agreement has been rejected by
business leaders and some break-away unions.
Polls indicate that
Argentines regard joblessness as the main problem facing the
country, and this could hurt the government in the upcoming
congressional elections in October.
IV-30
Strong economic growth has raised imports, but, until
recently, export growth, driven in part by strong Brazilian demand,
had been an offsetting force.
However, the current account moved
from a deficit of $1.4 billion in the first quarter of 1996 to a
deficit of $2.4 billion in the first quarter of this year.
Also,
over the first half of this year, the trade balance was roughly in
balance, compared with a surplus of $1.4 billion in the same period
a year ago.
International reserves remain high, at around $19
billion (excluding gold) at the end of July, roughly 30 percent
higher than a year ago.
In Brazil, July 1 marked the third anniversary of Brazil's
stabilization program, the Plano Real.
has fallen dramatically.
Under the plan, inflation
Consumer prices in July were only 4.9
percent above a year earlier, which is a marked contrast from the
2,000 percent inflation experienced in 1994.
Economic activity, on
the other hand, has been very uneven in recent months.
After
negative real GDP growth in the first quarter, industrial output
rose sharply in April, declined in May, and grew strongly in June.
The difficulty of gauging economic activity in recent months stems
in part from residual seasonal effects in the April data (because
the Easter holiday fell in March this year).
Industrial and retail
sales figures show similar seesaw patterns.
On the whole, however,
activity was stronger in the second quarter than in the first.
Brazil's external balance has continued to deteriorate.
The
trade deficit through the first seven months of this year was
already as large as it was for 1996 as a whole.
The widening trade
deficit plus higher interest payments has led to a growing current
account deficit, which reached 4.3 percent of GDP in the first seven
months of 1997.
The deterioration in the external balance plus the
fallout from the devaluation of the Thai baht in early July have led
to a rise in Brazilian domestic interest rates.
One-month CD rates
have risen by about 2 percentage points since early July; most of
this increase reflects investors' perceptions of an increased risk
of devaluation.
Brazilian stock prices plunged by nearly 20 percent
in early July but have since recovered about half of that decline.
(The real/dollar exchange rate has depreciated only very slightly in
recent weeks.)
In late July, the Brazilian government also removed
a tariff exemption on 3,700 capital goods imports that had been
IV-31
granted when trade liberalization began in 1990, making them subject
to tariffs of up to 17 percent.
High domestic interest rates plus other factors have helped
keep net capital inflows strongly positive.
There have been some
recent privatizations by the federal and state governments.
In
early July, the federal government awarded the rights to operate
cellular phone services in the Sao Paulo metropolitan region (the
largest market in Latin America) to a consortium led by Bell South
BRAZILIAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1996
1997
1996
Q4
1
Q1
-2.2
-1.6
6.0
2.0
-3.1
-6.9
1997
Jul
May
Jun
Q2
n.a....
...
...
-1.7
2.1
n.a.
1.3
n.a. n.a.
6.0
n.a.
0.2
0.3
0.1
1.0
-1.7
0.3 -0.5 -0.8
-2.2 -2.7 -2.8
-8.8
2.9
5.9
Real GDP, s.a.a.r.
2.3
0.0
Industrial Production (SA) 2
4.5
5.4
Open Unemployment Rate (%)
1.0
9.4
Consumer Prices 3
-5.5
-3.9
Trade Balance 4
-10.7
-24.3
Current Account 4
1. Percent-change from previous period.
2. Annual data are from national income accounts.
3. INPC, Percentage change from previous period. Annual data are Dec/Dec.
4. Billions of U.S. dollars, NSA
In late July, the state of Bahia sold Coelba, an
for $2.6 billion.
electrical utility, for $1.6 billion to a Spanish firm.
Aside from
these developments, indications are that firms in the financial and
nonfinancial sectors have been issuing a sizeable amount of bonds
abroad.
Central bank reserves stood at $60 billion at the end of
July, up slightly from the end of May.
On July 29,
Central Bank President Gustavo Loyola announced
that he will resign.
President Cardoso nominated Gustavo Franco,
head of the International Affairs Department of the Central Bank of
Brazil, to be the new central bank chief, and the Senate
overwhelmingly confirmed Franco, despite concerns that were raised
over the central bank's policy of maintaining very high nominal
real) interest rates.
One-month CD rates have recently been about
20 percent, and some consumer credit rates have been recently as
high as 80 percent.
Franco has been an outspoken advocate of
Brazil's fixed exchange rate policy and of maintaining a tight
monetary policy.
(and
IV-32
In Venezuela, indicators of aggregate demand continue to point
to a pick-up in economic activity.
According to the Minister of
Trade and Industry, economic growth over the first half of the year
was around 1.5 percent.
The twelve-month consumer price inflation
rate in July was around 40 percent.
The pick-up in economic
activity has been reflected in increased imports, and the non-oil
trade balance deficit was $2.5 billion in the period from January
through May this year, compared with a deficit of $1.7 billion over
the same period last year.
Including oil, the trade balance over
the period from January through April showed a surplus of $11
billion.
VENEZUELAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996
1996
1997
1997
Jun
May
Q2
Q1
Q4
Real GDP
-1.6
......
.........
Unemployment Rate (NSA, %) 11.8
12.4
12.6
n.a.
......
Consumer Prices1
103.3
10.6
6.6
7.5
3.1 1.8
2
Trade Balance
-4.7
-1.2
-1.4
n.a.
-0.5 n.a.
Current Account 2
7.6
..
1. Percentage change from previous period, NSA.
Jul
2.8
n.a.
2. Billions of U.S. dollars, NSA, non-oil trade balance.
Largely as a result of increased expenditures by the
government and the government-controlled state oil company,
Venezuela's money markets are currently suffering from excess
liquidity.
In an effort to mop up the excess liquidity, the central
bank has increased reserve requirements on commercial banks twice in
the last month and has tightened restrictions on inter-bank currency
trading.
The increase in liquidity and the perception by market
participants that the Venezuelan currency is overvalued have put
downward pressure on the bolivar.
The bolivar depreciated 2 percent
in July, compared with a depreciation of just 2.5 percent over the
entire first half of the year.
However, it is still within the
bands set by the government, which slide over time in line with the
government's inflation target.
Apparently as a signal to the market
that it intends to continue its strong bolivar policy, the
government, on August 8, lowered its monthly depreciation rate on
the foreign exchange bands to 1.16 percent from 1.32 percent.
In
IV-33
the short run, the government has adequate international reserves to
maintain the value of the bolivar; reserves
(excluding gold) at the
end of July stood at $13.2 billion, unchanged from a month ago, but
roughly 60 percent higher than a year ago.
In Russia, recent data continue to present a relatively
favorable picture.
After years of decline, output and industrial
production have stabilized so far this year.
Official figures show
real GDP in the first half of the year only slightly below the level
in the corresponding period last year.
Inflation has stabilized in
recent months, after declining earlier in the year.
In June, the
year-over-year consumer price inflation rate was 14.5 percent.
The
ruble-dollar exchange rate has remained well within the corridor set
by the central bank.
In an attempt to indicate confidence that
financial conditions will remain stable, the government has
announced its intention to redenominate the ruble at the beginning
of next year, with 1,000 old rubles equaling one new ruble.
RUSSIAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996
1996
1997
1997
May
Q1
Q2
Apr
Q4
Real GDP
-6
-5
0
-1
-1
0
Industrial Production -5
-5.4
0.9
0.9
0.5
0.2
Consumer Prices 1
1.7
1.5
1.7
1.0
1.0
0.9
1
Ruble Depreciation
1.5
0.9
1.0
0.7
0.3
0.4
TradeBalance 2
23.1
9.2
n.a. n.a.
n.a. n.a.
Current Account 2
9.6
5.3
n.a. n.a.
n.a. n.a.
1. Monthly rate.
2. Billions of U.S. dollars.
Jun
0
2.0
1.1
0.0
n.a.
n.a.
Recent developments in the fiscal situation have been mixed.
On the positive side, the government met its promise to pay all
pension arrears
(worth $2-1/2 billion) by the beginning of July, and
total tax revenues in the first half of 1997 were up 50 percent from
last year.
On the negative side, tax revenues in the first half
remained more than 10 percent below target, and substantial arrears
remained in many other areas (including tax payments by businesses
and wages to local government workers).
@FedFRASER