Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 20, 1991 : Greenbook Part 2

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Confidential (FR) Class III FOMC

August 14, 1991

RECENT DEVELOPMENTS

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

CONTENTS
II

DOMESTIC NONFINANCIAL DEVELOPMENTS

Employment and unemployment .......................................
Industrial production..............................................
Personal income and consumption ....................................
Housing markets........................ ..................
..........
Business fixed investment.......................................
.
.
Inventories.......................................................

1
7
11
15
21
27

Federal sector ........

...........

................

.........

.. . .....

State and local government sector.................................
Labor costs........................................................
Prices............................................................
Probability of expansion....................................................
Tables
Changes in employment .............................................
Unemployment and labor force participation rates..................
Behavior of key labor market indicators around cyclical troughs...
Unemployment insurance benefits...................................
Labor productivity................................................
Production of domestic autos and trucks..........................
Growth in selected components of industrial production............
Capacity utilization in manufacturing.............................
Personal income...................................................
Real personal consumption expenditures............................
Retail sales......................................................
Sales of automobiles and light trucks............................
Private housing activity........................ ............... .
Comparison of upturns in single-family starts, 1960 to present....
Median price of existing homes sold, U.S. and selected
metropolitan statistical areas................................
Business capital spending indicators...............................
.........
Office building construction......................... ..
trade
inventories...................
and
Changes in manufacturing
Inventories relative to sales............................. .......
Federal government expenditures and receipts......................
Federal government outlays and receipts.........................
Percentage of cities reporting expenditures exceeding revenues
in their general fund budgets..................................
Employment cost index
Percent change from preceding period.........................
Private industry workers...... ..................... ..........
Major collective bargaining...................................
Average hourly earnings ..........................................
Recent changes in consumer prices.................................
Recent changes in producer prices..................................
Monthly average prices--West Texas Intermediate ..................
Price indexes for commodities and materials........................
Recent data on coincident indicators...............................
Charts
Labor market indicators...........................................
Output per hour, nonfarm business..................................
.
Output per hour, manufacturing.................................
Private housing starts............................................
Builders' rating of new home sales................................
Consumer homebuying attitudes.....................................
.
Real business fixed investment..................................
equipment...........
computing
and
Orders and shipments for office
Nonresidential construction and selected indicators...............
Labor cost measures...............................................

33
35
40
47
2
2
4
5
6
7
8
8
10
10
12
14
16
19
20
24
26
28
28
30
30
35
36
36
38
38
42
42
44
45
50

4
6
6
16
18
18
22
22
25
37

Daily spot and posted prices of West Texas Intermediate.........
Index weights of price indexes for commodities and materials......
Commodity price measures..................... ..................
Composite index of leading indicators..........................
Probability of expansion..........................................
III
DOMESTIC FINANCIAL DEVELOPMENTS
Monetary aggregates and bank credit...............................
Nonfinancial business finance ...................................
Financial institutions............................................
Treasury and sponsored-agency financing..........................
Municipal securities..............................................
Mortgage markets..................................................
Consumer credit..................................................
Tables
............................................
Monetary aggregates...
Commercial bank credit and short- and intermediate-term business
credit .......................................................
Gross offerings of securities by U.S. corporations...............
Treasury and agency financing....................................
Gross offerings of municipal securities...........................
Gross public issuance of municipal short-term debt
by credit rating...............................................
Municipal long-term debt rating actions...........................
Mortgage-backed security issuance................................
Consumer credit...................................................
Consumer interest rates...........................................
Public securitization of consumer loans...........................
Charts
Opportunity costs and retail deposit flows.....................
Mortgage pricing..................................................
INTERNATIONAL DEVELOPMENTS
IV
trade..........................
merchandise
U.S.
and prices...............
Quantities
Oil imports:
and exports............
imports
Prices of non-oil
transactions........
financial
international
U.S.
markets........................
Foreign exchange
Developments in foreign industrial countries.....
Developments in East European countries.........
Economic situation in other countries............

..............
..............
..............

..............
..............
..............
......... I....

Tables
U.S. merchandise trade: Monthly data..............................
1U.S. merchandise trade: Quarterly data...........................
Major trade categories........................
Oil imports....................................
Import and export price measures ..............
Summary of U.S. international transactions.....
International banking data....................
Major industrial countries
Real GNP and industrial production........... ..............
Consumer and wholesale prices................ ........ I.....
Trade and current account balances........... ..............
Charts
Weighted average exchange value of the dollar.....................
Selected dollar exchange rates...................... .............

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS
The economy appears to have bottomed out during the early spring and to
have improved somewhat on balance since then.

Payroll employment and hours

worked, though off last month, have shown small net improvements since
April.

Rebounds in demand for motor vehicles and for single-family homes

have provided much of the impetus for the recovery to date.

In contrast,

business fixed investment has remained weak, and, as of June, the run-off of
inventories had shown only hints of abating.

Recent reports on price

inflation have continued to be favorable, although the deceleration in labor
costs appears to have stalled.
Employment and Unemployment
Labor demand was soft, overall, in July.

Private payrolls edged down

41,000, although, with fairly large upward revisions to May and June data,
private payroll employment remained 87,000 above the April level.

Aggregate

hours of production or nonsupervisory workers fell 1.4 percent in July,
mostly because the workweek retraced 0.4 hour of its rise during the
preceding two months (chart).

The decline in average weekly hours in July

was concentrated in the service-producing sector for which the data are more
volatile.
Changes in payroll employment in July were uneven across sectors.
Manufacturing added 13,000 jobs; gains in transportation equipment,
textiles, and apparel more than offset further cutbacks in machinery and
electrical equipment.

In addition, retail trade posted its third

consecutive monthly increase in July, and hiring continued in the health
services industry.

But construction employment moved lower and now stands

II-1

II-2
CHANGES IN EMPLOYMENT 1

(Thousands of employees; based on seasonally adjusted data)
_ ___

1990
1989

1990

1991

1991
Q2

May

June

July

------------ Average monthly changes-------Nonfarm payroll employment2

176

-164

-240

-12

151

-21

-172

-258

-18
-40

135
101

-7
-39

Private
Previous

-48
-39
-9
-23

Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services

-10

1
72
34
33

Health

Total government

-98 -102
-74 -81
-24 -21
-64
-59
-52 -87
-6
1
37
9
27
34
18
8

-22

-50

-17

-43

-51

-7

-5
-4
-24

-6
-13
-10

-11
50

31
6

43
-14

Private nonfarm production workers
Manufacturing production workers

119

-223

-6

-32

-14

-41

-83

-3

-13

Total employment 3
Nonagricultural

148

-32

-103

-273

-807

293

-172

148

-38

-123

-222

-27

-924

257

-102

-9 -169

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
3. Survey of households.

UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES

(Percent; based on seasonally adjusted data)
1990

1989

1990

Civilian, 16 years and older

5.3

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
Labor force participation
rate

1991

May

June

July

5.5

5.9

6.5

6.8

6.9

7.0

6.8

15.0
8.6
3.9
4.2

15.5
8.8
4.4
4.3

16.4
9.2
4.8
4.6

18.0
10.1
5.5
5.0

18.8
10.8
5.8
5.2

19.1
11.2
5.8
5.1

19.2
11.1
5.9
5.3

20.6
11.2
5.7
4.8

66.4

66.2

66.1

66.2

66.1

66.2

66.0

II-3
little changed, on average, since April.

Moreover, the number of jobs at

establishments providing various business and personal services apparently
dropped almost 60,000 in July after gains in the preceding two months.1
Employment in finance, insurance, and real estate continued to contract in
July; in this sector losses actually have been larger in recent months than
over the course of the recession.
The unemployment rate, which typically lags cyclical troughs, fell
0.2 percentage point in July to 6.8 percent, matching its March level and
the second-quarter average.

The drop in the unemployment rate apparently

reflected the net exit of jobless workers from the labor force rather than
into new jobs; household employment fell 172,000.
Following cyclical troughs, movements in key labor market indicators
often have been erratic.

That said, the performance of those indicators

since April--though well within the range of previous experience--suggests a
slower-than-usual takeoff in this recovery (table).

Specifically, between

April and July aggregate hours grew, on net, at about half the pace of the
previous four upturns.

The relatively small net gain in private payroll

employment in the recent period accounts for the smaller increase.

The

workweek, to date, has made its typical cyclical contribution, although, as
in earlier episodes, the monthly pattern has been uneven:

In May and June

of this year, average weekly hours rose 1/2 hour, and the decline in July
erased much of what seemed earlier to be an unusually sharp gain.

1. Health services account for more than one-fourth of the jobs in the
heterogeneous services industry; business services constitute slightly less
than a fifth. Other relatively large categories (5 to 10 percent of the
total) are engineering and management services, social services, membership
organizations, education services, and lodging places.

II-4

LABOR MARKET INDICATORS
Aggregate Hours'

100
-In

Index, 1982

Average Workweek

Hours
352

* Ouarterly averag
34.8
x

34.4
120.4

IIii

SliiIIiI
1989

1990

iiiiiiim
1989
1990
1. Monhly dat ssonaNy adusted.

1991

1. Monthly data; seaonaly dju4td.

1991

BEHAVIOR OF KEY LABOR MARKET INDICATORS

AROUND CYCLICAL TROUGHS
(Monthly data; seasonally adjusted)

-Mean change
three months
from trouah

Standard
Deviation

Change from
April to July 1991

Aggregate hours (percent)

.69

.87

.33

Private payroll
employment (percent)

.39

.52

.10

Average weekly hours (hour)

.10

.18

-.13

.28

Unemployment
rate (percentage point)

1. The mean change is over the four cyclical troughs since 1970.

33.6

II-5
Weekly filings for initial claims for unemployment insurance (UI) have
edged down, dipping to 418,000 (FRB seasonals) during the week ended
July 27.

Filings for initial claims peaked at 535,000 in late March and

fell off rapidly to a weekly pace of about 450,000 by early May (table).
By late June, claims had moved down into the neighborhood of 425,000,
where they remained through late July.
UNEMPLOYMENT INSURANCE BENEFITS1
(In thousands)
1991
Q1

May

1991
June

489

451

449

435

3,301

3,534

3,553

3,515

Initial claims
Insured unemployment

1. All regular programs; FRB seasonal adjustment.
than a week are averages of the weekly data.

July
426
n.a.

1991
July 20 July 27
425
3,382

418
n.a.

Data for periods longer

Output per hour in the nonfarm business sector rebounded 1.9 percent at
an annual rate in the second quarter.
rose at a 3.6 percent rate.

In manufacturing, productivity

Strong gains in productivity are typical for

the initial stages of a cyclical recovery, as employers are inclined to
boost output with their existing labor force before incurring the costs
associated with hiring.

Despite the increases last quarter, productivity in

the nonfarm business sector and in manufacturing stand only 0.4 percent and
1.4 percent, respectively, above their year-earlier levels, which suggests

2. Productivity and cost data released for 1991:Q2 incorporate annual
benchmark revisions to employment and revised seasonal adjustment factors
for data from 1986 forward. The effects of these revisions were small.
Revised data now indicate that productivity in the nonfarm business sector
fell 0.1 percent in 1990--an upward revision of 0.2 percentage point. In
manufacturing, productivity growth was revised down 0.1 percentage point in
1990, to 2.9 percent.

II-6
LABOR PRODUCTIVITY

LABOR PRODUCTIVITY

(Percent change from preceding period at compound annual rates;
based on seasonally adjusted data)
1990:Q2

1990
1989

1990

-1.4
.1

-.1
2.9

.6
6.1

1991
Q4

.0
-1.8

1.9
3.6

to
1991:Q2

Output per hour
Nonfarm business
Manufacturing

-.8
-2.2

.4
1.4

1. Changes are from final quarter of preceding period to final quarter of
period indicated.

Output per Hour, Nonfarm Business 1

I
I
I
I
I
I
I
*
*
I
I
Ir
I
II
II
*

Index, 1982I

r I
I
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I
i I
r I
I
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I
i
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I
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I
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100

I
r

i
I
i
I
I

I
I

J Itl

*
I

1. Quartedy daIa, 197091 - 1991:02; seasonaly adusted.

Index, 1982

Output per Hour, Manufacturing
r-

*
*
I
I
I
I
*
I
I
&
1
*
I
I
I
I
*
i
*

I I
I
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I
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* I
I
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I
I
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I
I
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I
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I
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I~

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r
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1
r
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r
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r
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III~__

-II[ilII

---

I
f

1979

100
-140

1981

1. Ouateiy data, 1979:01 - 1991:02 seasonaly adjusted

Ij;ll

1987

1989

1991

130

II-7
that employers have room to achieve further sizable increases in output per
hour in the second half of the year.
Industrial Production
Industrial production probably rose appreciably in July, although
perhaps a bit less than the average pace during the first three months of
the upturn in the index.

As typically occurs in the initial months of an

expansion, an increase in motor vehicle production and a firming in
industries that produce construction supplies have accounted for much of the
recent gains.
Assemblies of motor vehicles rebounded another 1/2 million units in
July to a 9.6 million unit annual rate (FRB seasonals) and now have retraced
about half of the steep decline that occurred between September and
February.

Last month's rise in motor vehicle production added directly

0.15 percentage point to growth of total IP. Current schedules for the
remainder of the year call for auto production to come in only a shade above
July's 6.0 million unit annual rate.

Truck production is scheduled to move

up more noticeably from its pace in July of 3.6 million units.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
1991

1991

Domestic production:
Autos
Trucks

5.1
2.6

5.2
3.4

6.2
3.9

Q4 1
6.0
4.1

June

July

Aug.

5.4
3.6

6.0
3.6

6.3
4.1

1. Figures for August through the remainder of the year are based on
current manufacturers' schedules.

II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP

1990:04

1990

19901

1991

April

May

June

------Annual rate---Total index

100.0

0.3

-7.0

-9.7

1.7

0.5

0.7

Excluding motor vehicles
and parts

96.2

0.8

-4.9

-8.6

0.1

0.2

0.5

0.6

Products, total
Final products
Consumer goods
Automotive products
Other consumer goods
Durables
Nondurables
Energy

61.4
46.9
25.7
2.2
23.5
3.0
20.5
2.7

0.6
1.1
-0.7
-7.3
0.0
-3.9
0.6
-2.3

-5.3
-5.3
-3.8
-37.6
0.4
-16.2
3.2
-2.4

-8.8
-7.3
-7.0
-24.6
-5.3
-10.9
-4.4
-5.5

1.5
2.5
5.1
38.0
2.5
10.3
1.5
4.6

0.4
0.6
0.7
5.9
0.3
1.7
0.1
-1.0

0.5
0.4
0.9
2.9
0.7
0.6
0.7
3.9

0.5
0.4
0.6
2.1
0.4
2.1
0.2
-0.5

Other

17.8

1.0

4.1

-4.3

1.0

0.2

0.3

Business equipment

15.8

4.2

-7.6

-7.4

2.8

0.9

0.2

1.0
14.8

-9.4
5.3

-49.8
-3.4

-42.2
-4.6

66.6
-0.3

10.0
0.4

4.2
-0.0

3.3
-0.0

6.6
4.3
4.8
5.7

5.1
1.3
-0.2
-4.6

0.4
-10.2
-4.7
-12.0

7.0
-14.2
-8.6
-21.2

1.8
-3.3
-10.1
-1.3

0.2
0.1
-1.5
1.0

0.3
-0.7
-1.0
0.4

-0.4
0.1
-0.3
1.8

Materials
Durable
Nondurable
Energy

38.6
19.6
8,8
10.2

-0.1
-0.5
0.5
0.0

-9.7
-13.9
-5.5
-4.5

-11.0
-16.7
-7.0
-3.0

1.9
1.9
-0.1
3.7

0.7
1.4
0.3
-0.3

0.9
1.0
0.3
1.2

0.9
1.0
1.0
0.9

Memorandum:
Manufacturing
Excluding motor vehicles
and parts

84.9

0.3

-7.4

-10.4

1.5

0.7

0.5

0.7

81.0

0.9

-4.9

-9.2

-0.4

0.4

0.3

0.6

7.5
7.6

2.4
-2.1

-1.4
-7.6

-4.0
-7.6

-3.6
7.9

-0.7
-0.6

-0.3
3.9

Motor vehicles
Other business equipment
Information processing
and related
Industrial
Defense and space equip.
Construction supplies

Mining
Utilities

1. From the final quarter of the previous period to the final quarter of the period
indicated.

CAPACITY UTILIZATION IN MANUFACTURING
(Percent of capacity; seasonally adjusted)
1967-89 1988-89

1990

1991

Avg.

High

June

April

May

Total industry

82.2

85.0

83.8

78.6

79.0

79.3

Manufacturing

81.5

85.1

83.1

77.5

77.7

78.1

82.3
81.1

89.0
83-6

85.6
82.0

78.3
77.2

78.8
77.2

79.8
77.4

Primary processing
Advanced processing

June

1.5
-0.5

II-9
Even adjusting for net imports from Canada and Mexico, auto production
has recently been below the level of sales.

As a result, dealer inventories

of cars have continued to decline, reaching an estimated 900,000 units in
July, or about 40 days' supply, which compares with a historical average of
nearly 60 days' supply.

Although dealers likely have been targeting a lower

desired level of stocks, current holdings of both autos and light trucks
probably are so low that, if sales are sustained, production schedules for
the remainder of the year could well be raised.
Excluding motor vehicles, the movements in industrial production in
July were mixed.

Output of construction supplies probably moved up further

after rising briskly in the second quarter.

By contrast, output of consumer

durables (excluding motor vehicles) likely edged down last month owing
mainly to a decline in production of appliances.

Production of consumer

durables (excluding motor vehicles) had rebounded at a 10.3 percent annual
rate during the second quarter; that increase, however, was somewhat less
than in the initial months of previous expansions.
Output of business equipment other than motor vehicles appears to have
flattened out in recent months after falling sharply in the first quarter.
However, no signs of firming have been apparent in most of the major
categories in this grouping--which on average continues to decline for five
months following the trough in the overall IP index.

Indeed, the recent

weakness in bookings for capital goods points to further sluggishness in the
near term.
The firming in output of final products in recent months appears to
have lifted activity at materials producers.

Output of steel has retraced

part of the steep decline that occurred in the first quarter.

Elsewhere,

II-10

PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)

1991
1990

Total personal income

20.5

Wages and salaries
Private

1991
Q2

Apr.

May

June

2.4

17.4

4.7

24.9

22.6

10.9
8.2

-2.7
-6.6

16.1
14.8

4.6
3.8

17.2
15.4

26.6
25.2

Other labor income

1.3

1.0

Proprietors' income

-. 1

-3.2

2.1

1.9

Farm

1.9

Rent
Dividend
Interest

.7
.7
1.6

Transfer payments
Less: Personal contributions
for social insurance
Less: Personal tax and nontax
payments
Equals: Disposable personal income
Memo: Real disposable income

-1.6

4.6

-3.5

-5.2

-1.1
-. 6
-3.2

.3
.1
-2.8

.3
-. 1
-3.2

.6
.4
-2.9

-. 1
.1
-2.3

5.2

9.6

3.9

4.1

5.3

2.2

1.1

2.5

1.1

1.2

1.7

4.0

-2.0

3.2

3.0

2.6

4.1

16.5

4.3

14.2

1.7

22.3

18.5

-. 8

-4.8

3.6

-5.3

4.9

11.1

-6.1

REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)

1991
1990

1991
Q2

-Annual ratePersonal consumption
expenditures

Apr.

May

June

---- Monthly rate----

-1.5

3.6

-. 7

Durable goods
Excluding motor vehicles

-1.8
-1.1

-11.7
-. 8

5.2
3.0

-4.3
-. 4

2.6
.8

1.9
-.2

Nondurable goods
Excluding gasoline

-2.4
-2.3

-1.8
-1.3

1.0
.8

-. 6
-. 6

.5
.8

-. 4
-.8

Services
Excluding energy

2.5
3.1

2.1
3.2

4.8
4.0

.3
.4

.5
.0

.5
.6

Memo:
Personal saving rate
(percent)

4.6

4.2

3.7

3.5

4.1

II-11
production of consumer durable parts and textile materials have posted
noticeable gains since the first quarter; these increases are partly related
to the improvement in motor vehicle production.
Capacity utilization in manufacturing, which fell 6 percentage points
between July 1990 and April 1991, rose about 1 percentage point from March
to June and probably inched up further last month.

Operating rates at most

primary processing industries have increased since March, especially steel,
textiles, lumber, and rubber and plastics.

Capacity utilization at advanced

processing industries has been little changed during this period:

A rise in

the operating rate for motor vehicles has been offset by further declines in
utilization for nonelectrical machinery and instruments.
Personal Income and Consumption
Nominal disposable personal income grew at about a 6 percent annual
rate in May and June, boosted by large increases in private wages and
salaries.

Relatively small increases in prices helped translate these gains

into an increase of 3-1/2 percent (annual rate) in real disposable personal
income over the two months.

However, the July employment report showed a

decline in aggregate hours worked and essentially flat average hourly
earnings, suggesting that the level of wage and salary income likely dropped
back somewhat last month.
Real personal consumption expenditures (PCE) rose even more rapidly
than income in May and June.

Expenditures for services posted large

increases over the two-month period, boosted, in part, by a high level of
spending on energy services.

But the greatest stimulus was from purchases

of durable goods, especially new cars and trucks.

Revised estimates of

II-12

RETAIL SALES
(Seasonally adjusted percentage change)
1990
Q4
Total sales
Previous estimate

1991
Q1
-1.0

Retail control l
Previous estimate

-. 3

Total excl. automotive group
Previous estimate

-. 3

GAF 2
Previous estimate

-2.0

Durable goods stores
Previous estimate

-1.3

Bldg. material and supply
Automotive dealers
Furniture and appliances
Other durable goods
Nondurable goods stores
Previous estimate
Apparel
Food
General merchandise
Gasoline stations
Other nondurables 4

.6
-2.0

-2.9
-. 7
-2.4

-. 6
-3.4
-1.2

-. 6

1.9

-. 4

-3.0
.5

-1.4
9.2
.3

.3
1.8
-9.8
1.3

1991

May

1.4
1.1

1.2
.8

June

July

1.1
.9
1.0
.8

1.1
.9

-. 5

2.2
2.6

.9
1.1

-1.4
-.8

2.5
2.2

1.1
.8

-. 0

-.3
1.5
.2
1.8

1.2
.8
4.5
1.1
1.4
-3.1
.7

.5
1.5
1.3

2.4
.6

.3
-.3
.9
-.8
-. 6

-.3
-.

.1
-. 3

-2.0
.4

2.8
-1.0

1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.
2. General merchandise, apparel, furniture, and appliance stores.
3. General merchandise excludes mail order nonstores; mail order sales
are also excluded in the GAF grouping.
4. Includes sales at eating and drinking places, drug, and proprietary
stores.

II-13
retail sales in May and June show even higher spending at both auto and nonauto outlets than was incorporated in the earlier PCE estimates.

As a

result, the staff anticipates that BEA's preliminary estimate of real PCE in
the second quarter will come in a few billion dollars above the advance
estimate.
Nominal retail sales posted another increase in July; in the retail
control category, which excludes spending at automobile dealers and at
building material and supply stores, sales rose 0.4 percent.

Outlays at

automotive dealers continued strong, and sales at general merchandise,
apparel, and furniture outlets (the GAF grouping), where expenditures are
thought to be largely discretionary, more than offset their sharp June
decline.

However, declines in outlays at stores selling durable goods other

than furniture and automobiles provided some offset to those strong gains.
The drop in nominal spending at gasoline stations apparently reflected
falling gasoline prices.
Sales of autos and light trucks rose rapidly in May and June, and edged
up further in July to 13.3 million units (annual rate), well above the
first-quarter pace.

The improvement largely has been limited to

domestically produced vehicles; imports have risen only slightly since the
first quarter.
Although motor vehicle sales have not yet recovered to their prerecession level, sales have grown rapidly in the past three months relative
to income, which is typical of the early stages of a recovery.

In the

current case, the strong recovery in motor vehicle purchases relative to
income probably benefited from a substantial decline in financing costs in
May and June, when automakers sweetened their financing incentives

II-14

SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; BEA seasonals)
1989

1990

1990
Q4

14.51
9.90
4.61

13.86
9.50
4.36

12.95
8.98
3.97

Domestic total
Autos
Light trucks

11.19
7.08
4.11

10.84
6.90
3.95

Import total
Autos
Light trucks

3.33
2.82
.50

3.01
2.60
.41

Autos and light trucks
Autos
Light trucks

1991
Q1

May

1991
June

July

11.80
8.22
3.57

12.35
8.46
3.89

12.29
8.43
3.86

13.07
9.02
4.05

13.24
9.14
4.10

10.18
6.59
3.59

9.25
5.99
3.26

9.68
6.10
3.57

9.64
6.09
3.55

10.43
6.72
3.71

10.60
6.84
3.76

2.76
2.38
.38

2.54
2.23
.31

2.67
2.36
.32

2.66
2.34
.32

2.64
2.30
.34

2.63
2.30
.33

Note: Data on sales of trucks and imported autos for the current month are
preliminary and subject to revision.
1. Components may not add to totals due to rounding.
2. Includes vehicles produced in Canada and Mexico and vehicles made in U.S.
plants of foreign manufacturers.

II-15
(including incentives on consumer leases) and market interest rates were
declining.

(Most of the existing incentive programs will not expire until

late September.)

At the same time, sticker prices, net of rebates and

direct incentives, have been little changed in recent months.
Another factor that may have allowed motor vehicle sales to recover
relatively quickly is the increased promotion of automobile leasing as an
alternative to direct purchase.

A variety of explanations have been

proposed for the expanded use of leasing.

First, lease companies have

certain financial advantages that may enable them to pass savings on to
lessees:

Firms can depreciate the autos and can deduct interest payments,

which individuals no longer can do.

Second, consumers are said to perceive

that leasing is "easier" than buying in several senses:

No down payment

need be accumulated; leases can involve less negotiation with car dealers;
some lease contracts require the lease company to arrange and pay for
maintenance and repairs; and monthly payments on a lease are substantially
lower than those on a financed loan.
Housing Markets
An appreciable but uneven recovery in the housing sector continued
through June.

Real residential investment expenditures rose at an annual

rate of 3.7 percent rate in the second quarter, spurred by a 15 percent
increase in single-family housing starts.

In sharp contrast, multifamily

residential expenditures declined 40 percent at an annual rate in the second
quarter.

In June, multifamily starts edged up to a 172,000 unit rate, only
slightly above the 30-year low recorded in May.

Despite the sharply lower

level of multifamily building in the past few years, the vacancy rate for

II-16
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates; millions of units)
1990

1990

Annual

All units
Permits
Starts
Single-family units
Permits
Starts
Sales
New homes
Existing homes
Multifamily units
Permits
Starts
Vacancy rate
Rental units
Owned units

1991

1991
Q1r

Apr.

May r

.90
1.04

.86
.92

.96
1.00

.91
.98

.97
.99

.79
.90

.67
.79

.67
.73

.76
.84

.74
.80

.76
.84

.53
3.30

.47
3.12

.47
3.09

.51
3.48

.51
3.31

.49
3.54

.32
.30

.23
.26

.19
.19

.20
.17

.17
.18

.21
.15

.23
.i7

9.1
7.2

9.0
6.6

9.4
7.6

9.4
7.1

n.a.
n.a.

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Milions o0 units

1986

1964

1.00
1.04

1.11
1.19

1. Percent. Owned units consist mainly of condominiums.
Preliminary.
r Revised estimates.
n.a. Not available.

1962

JuneP

1966

19 67

1986

1989

190C

1_1

.78
.87

.53
3.59

II-17
multifamily rental housing units remained at 9.4 percent in the second
quarter--not far below the record highs in 1987 and 1988.

Given the adverse

conditions in the market for multifamily housing in many areas, multifamily
starts likely will grow only slowly at best, and will limit the expansion of
total residential expenditures.
Most indicators of conditions in the market for single-family homes
suggest continued improvement.

In June, single-family starts reached

868,000 units (annual rate), the highest figure in nearly a year.

Moreover,

permit issuance for single-family homes--which is subject to considerably
less statistical error than starts--also increased further in that month.
The rebound in single-family housing starts between the first and second
quarters equaled or exceeded the growth rate during the initial quarter of
recovery in all but one of the upturns in single-family starts dating from
1961 (table, column 4).

Furthermore, the proportion of the preceding

cyclical decline in starts that has been reversed by the increase in starts
in the second quarter also equaled or exceeded the relative strength of the
rise in starts in all but one of the previous upturns (column 7).
Measures of housing demand also have been encouraging.

New home sales

rose in June to 525,000 units at an annual rate, the highest monthly reading
since last August.

Similarly, sales of existing homes moved up to a

3.59 million unit rate in June, the highest level since early 1989.
Further, in July, both homebuilders' ratings of new home sales (chart, upper
panel), and the University of Michigan's monthly sampling of consumer
attitudes toward homebuying (lower panel) remained at the improved levels
3. This comparison is for the first quarter of recovery in single-family
housing starts; those turning points roughly coincide with the beginning of
business-cycle expansions.

II-18

BUILDERS' RATING OF NEW HOME SALES'
Millions of units, SAAR

Diffusion index

ullders' rating of new home sales (right cae; seasonaly adjusted)

Single-farnly stars (let seale)

1987

1988

1989

1990

1991

1 The index Is cajculaed from the National Associaton of Homrebtuders data as the number of respondents rating current sales as good
to excellent minus the proporon rating them as poor.

Millions of units, SAAR

ndex I .

EBUYIN ATffusion
CONSUMER H
ATTITUDES 2
HOMEBUYING

CONSUMER

Consumer homebuying atlludes (right scale)

1987

1988.

1989

1990

1991

2 The homebuying antttudes index Is calcdulaedby the Survey Research Center (University of Michigan)'as the proportiort ofrespondents
ratng current condttions as good minu the•proportlon rating such conditons.as. bad.

II-19
seen in the past few months.

The past relationships of these series to

single-family housing starts suggest support on the demand side for further
increases in home construction.
COMPARISON OF UPTURNS IN SINGLE-FAMILY STARTS, 1960 TO PRESENT

Business
cycle
trough

Associated
low in starts
Period Number
(2)

(1)

Percent change
in starts in
first quarter
of upturn

(3)

(4)

Previous high
in starts
Period Number

Percent of
decline
offset in
first quarter
of upturn

(5)

(6)

(7)

1961:01

1960:Q4

904

1959:Q1

1,302

1970:Q1

687

1963:Q3

1,064

1975:01

1975:Q1

734

1972:Q3

1,345

1980:03

1980:Q2

691

1977:Q4

1,505

1982:Q4

1981:Q4

541

1980:Q4

979

1991:Q2

1991:Q1

726

1987:Q1

1,237

1970:Q

1. The trough of the 1990-91 recession is assumed to be 1991:Q2.
2. Thousands of units, at a seasonally adjusted annual rate.

House price developments have been mixed.

The Census Bureau's

constant-quality price index for new homes in the second quarter was
1.7 percent above its level of a year earlier. 4

On the other hand, actual

transactions prices for new homes have declined, with the mean and median
sales prices in the second quarter down 1.1 and 5.5 percent, respectively,
from their year-earlier levels.

Part of the reason for the decline is that

4. Unlike transactions prices for new and existing homes, constant-quality
new home prices are adjusted for changes in the geographic composition and
in the structural characteristics of new homes sold.

II-20

MEDIAN PRICE OF EXISTING HOMES SOLD,
U.S. AND SELECTED METROPOLITAN STATISTICAL AREAS
(Percent change from a year earlier)

1990

U.S.

Total

South
Atlanta
Dallas
Houston
Jacksonsville
Memphis
New Orleans
Oklahoma City
Washington, D.C.

1991

1989

1990

4.3

2.6

1.8

n.a.
2.9
7.9
2.4
2.4
-3.4
-4.8
9.0

2.9
-4.2
6.0
4.5
.0
-4.0
-.6
4.0

2.5
-4.1
1.8
4.2
.8
-5.5
-.9
3.3

.0
-7.4
9.7
.1
-2.1
-8.4
-3.3
.8

1.1
-4.1
1.0
-.7
5.8
2.8
7.3
.4

.1
-3.6
5.6
-2.2
5.5
8..4
4.1
3.4

.4
10.7
-1.0
-.3
1.5
-.3

-4.2
6.5
-5.2
-4.5
4.6
-1.8

-4.0
3.5
-5.4
-3.8
9.5
-1.7

-7.9
-1.7
-7.2
-6.0
-2.1
-6.8

-9.7
.8
-6.8
-4.8
2.1
-1.4

-2.8
2.4
-3.5
-1.9
1.0
-2.8

4.5
20.1
-1.5
8.9
2.5
22.4
22.3

1.1
-.9
6.6
13.4
.0
-.5
23.5

-.8
-4.7
11.7
14.6
1.0
-3.1
24.9

-1.7
-3.1
7.7
11.0
-1.5
-4.9
10.6

-1.7
-3.6
2.1
12.6
.1
-6.6
2.2

3.4
1.2
1.9
8.5
8.1
.6
-2.6

20.2
8.8
8.7
.8
7.7
1.6
2.3
-1.5

9,2
5.3
7.2
4.1
5.1
3.5
1.7
-.3

11.0
5.3
7.7
1.7
4.1
9.4
.5
5.4

-.2
7.6
5.2
3.8
4.6
-.9
3.1
2.5

6.3
4.7
6.1
2.3
5.5
5.1
2.1
-5.9

_1
.4

Q2
4.7

Northeast
Boston
Buffalo
Hartford
New York City
Philadelphia
Providence

West
Denver
Los Angeles
Phoenix
Portland
Salt Lake City
San Francisco
Seattle

Midwest
Chicago
Cincinnati
Cleveland
Detroit
Indianapolis
Kansas City
Minneapolis
St. Louis

n.a.--not available
Source: National Association of Realtors

3.6
4.9
5.7
.1
1.9
2.7
.1
3.8

II-21
a smaller proportion of all new home sales have been occurring in the
relatively expensive Northeast region this year.
In the market for resales, the median price in the second quarter was
4.7 percent above its level of a year earlier.

Data from major metropolitan

areas indicate that, in the second quarter, most areas experienced larger
year-over-year price increases, or smaller price declines, than was the case
in recent quarters.

The shift from falling to rising prices was

particularly noticeable in the West.

In the Northeast, price declines

moderated in several metropolitan areas.
Business Fixed Investment
Real business fixed investment fell in the second quarter.

Outlays for

equipment fell modestly as reduced purchases of industrial and
transportation equipment more than offset a rebound in spending for office
and computing equipment. 5

In the nonresidential construction sector, a

drop in drilling and mining accounted for the decline in outlays shown in
the advance GNP estimates.

Data on the value of construction put-in-

place--which were not available in time for the advance estimate--fell
3 percent (not annual rate) in the second quarter.

These data imply about a

$3 billion downward revision to the level of real NRS in the second quarter,
producing a decline of about 14 percent at an annual rate compared with the
reported drop of 4.5 percent. 6

Among specific categories, large downward

5. The recent revisions to shipments of nondefense capital goods during
May and June were small and suggest little change in BEA's estimate of PDE
spending in the second quarter.
6. Further, the data for construction put-in-place also were revised down
for earlier months. These revisions imply an additional $3 billion downward
revision to real NRS in the first quarter. This revision will be
incorporated in the NIPA with the November benchmark.

II-22

REAL BUSINESS FIXED INVESTMENT
(Four-Quarter Percent Change)

Percent
40

S 30

I
1

I
II

I
20

20
1975

1972

1978

1981

1984

1987

ORDERS AND SHIPMENTS FOR OFFICE AND COMPUTING EQUIPMENT

7
-6
1990
Billions
of dollars

SJune

-4

1985

1986

1987

1988

1989

1990

II-23
revisions in the second quarter are likely for construction of hotels,
motels, and offices.
Since the middle of last year, investment in nonresidential structures
has turned down in a fairly typical fashion, although from a much weaker
position at the business-cycle peak.

In contrast, the cyclical decline in

equipment investment has been moderated by growth in spending on office and
computing equipment, which has risen $11 billion in 1982 dollars during the
past year.

Excluding computers, real equipment spending has fallen

9.9 percent since the cyclical peak in 1990:Q3; this decline is a shade less
severe than the postwar average.
Looking ahead, recent indicators suggest that business investment will
post little or no growth in the near term.

With regard to equipment, the

nominal value of orders for nondefense capital goods (excluding aircraft)
fell 1-3/4 percent (not an annual rate) in the second quarter, after a drop
of 4 percent in the first quarter.

These declines reflected reduced orders

for virtually every category of machinery and should result in lower
current-quarter outlays in these sectors.

However, these declines are

likely to be offset by increased spending on computers and motor vehicles.
Although nominal computer orders and shipments have appeared soft recently,
computer prices have been falling rapidly because of competitive pressures
and further advances in technology; as a result, real gains in spending are
likely in the current quarter.

Moreover, with total auto and light truck

7. The "cutthroat" price competition on PCs and mainframes apparently has
continued unabated in recent months, as computer manufacturers, notably IBM,
attempt to maintain or regain market share. As a result, the July level of
the PPI measure of electronic computer prices was 6.8 percent (not at an
annual rate) below the second-quarter average.

II-24
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)
1990

1991

Shipments of nondefense capital goods
Aircraft and parts
Excluding aircraft and parts
Office and computing
All other categories

1.4
-2.2
2.2
4.2
1.6

-2.2
2.9
-3.3
-3.9
-3.1

Shipments of complete aircraft
Weighted PDE shipments (incl. air) 1

-3.2
1.8

4.4
-3.6

1991
Q2

Apr.

May

June

Producers' durable equipment

Sales of heavy-weight trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

-10.8
5.3
.8

-7.0
3.3

1.0
9.3
-1.0

1.3
1.8
1.1
-1.6
1.9

8.8
1.6

17.8
3.3

6.8
1.3

-9.1

-7.6

-2.8

3.3

-6.6
-4.0
3.6
-6.1

-13.6
-1.8
-1.5
-1.9

-10.0
3.9
-5.3
6.9

-2.5
2.9
8.8
1.2

4.7
-4.5
-2.0
-5.3

-7.4
-12.1
-5.0
-2.9
-15.7
-4.4

-2.3
-4.8
-6.2
2.3
4.8
-6.5

-,7

Nonresidential structures
Construction put-in-place
Office
Other commercial
Public utilities
Industrial
All other
Rotary drilling rigs in use
Footage drilled 2

-5.5
-6.0
-11.0
1.3
-6.0
-5.7
-2.8
6.0

-4.4
-6.6
-10.6
-. 7

.6
-4.0
.9
-7.0

-2.9

-6.5
-3.1
.4
-3.2
-3.0

-8.4

-6.0

-3.0

3.7

-14.1

-11.1

-6.4

4.7

1. Computed as the weighted sum of 26 individual equipment series from the
Census M-3 report, with weight for each type of equipment equal to the ratio of
final business spending to shipments.
2. From Department of Energy. Not seasonally adjusted.
n.a. Not available.

II-25
NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS *
(Index, Dec. 1982 = 100, ratio scale)
Total Building

1979

1981

1983

1985

1987

1989

1991

1981

1983

1985

1987

1989

1991

Office

1979

Industrial
r--

Other Commercial
(NC)

1 I

240

,,O
S.,--

1983

i I
1989

II
1991

1983

1985

1987

1989

1991

'Six-month moving average for all series shown. For contracts. total only Includes prvate, while individual sectors include private and public
New comrrilments are the sum of permits and contracts.

II-26

OFFICE BUILDING CONSTRUCTION

Percent change in contracts
from 1990:HI to 1991:HI

Region
Total

Vacancy rate 2
(percent)

-44

19.4

-63

18.8

-54

17.7

-66

16.7

-64

17.8

-26

18.8

East South Central
(AL, KY, MS, TN)

21.3

West South Central
(AR, LA, OK, TX)

-31

24.6

-54

13.8

-26

18.8

New England
(CT, ME, MA, NH,

RI,

VT)

Middle Atlantic
(NJ, NY, PA)
West North Central
(IA, KS, MN, MO, NE,

ND,

SD)

East North Central
(IL, IN, MI, OH, WI)
South Atlantic
(DE, DC, FL, GA, MD,

NC,

Pacific Northwest
(AK, ID, MT, OR,

WA,

Pacific Southwest
(AZ, CA, CO, NV,

NM, HI,

SC,

UT)

VA, WV)

1. Contracts measured in square footage. Data are from F.W. Dodge
Division of McGraw-Hill.
2. Calculated from the March metropolitan vacancy rates in region
weighted by existing metropolitan office square footage.

II-27
sales having picked up, business purchases of motor vehicles are likely to
average higher this quarter as well.
Advance indicators for nonresidential structures paint a much bleaker
picture.

Construction permits and contracts have trended down during the

last year in most sectors (chart).

The office sector has been hit

especially hard as the recession highlighted and exacerbated the existing
abundance of supply.

Despite recent cutbacks in office construction, the

Coldwell-Banker office vacancy rate for metropolitan areas stood at
19.4 percent in March, little changed from its historic highs of the past
8
few years.
Given this persistently high vacancy rate, appraised nominal
values of office properties have dropped more than 20 percent since their
peak in late 1985, according to the Russell-NCREIF index.

In light of

high vacancies and falling property values, construction activity is
plummeting.

Indeed, new contracts for office building in the first six

months of this year were 44 percent below the level for the first half of
1990.

On a regional basis, the situation is much the same across the

country (table).

Although the New England and North Central (Great Lakes)

states have experienced particularly severe declines in new office
construction contracts, almost every major region has faced double-digit
declines.
Inventories
Business inventory liquidation continued through the spring.

On a

current-cost basis, manufacturers and non-auto trade establishments drew
8. The June vacancy data will be available next week.
9. NCREIF is the National Council of Real Estate Investment Fiduciaries.
NCREIF also reports indexes on appraised values of retail and warehouse
properties. While these indexes have fallen from their peaks in late 1989
and early 1990, the declines are much smaller than in the office sector.

II-28
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)

1990

1991

-. 8
9.1
-8.7
10.5
-2.6
-9.9
7.3

-29.3
-14.4
-11.3
4.7
-22.7
-14.9
-7.8

-42.7
-33.7
-22.6
-15.7
-4.4
-9.0
4.5

-21.8
-11.4
-18.3
5.8
-9.3
-10.4
1.1

-20.0
-2.3
-1.3
6.0
-24.7
-17.6
-7.1

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

Apr.

May

June

-32.7
-27.4
-10.0
-20.2
-2.4
-5.2
2.8

-62.2
-56.6
-39.2
-17.0
-5.9
-5.5
-. 4

-33.3
-17.1
-18.4
-9.9
-4.9
-16.1
11.2

-9.7
-9.7
2.6
-13.0
.8
.1
.7

-37.5
-35.3
-26.3
-5.2
-6.1
-2.2
-3.9

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
Constant-dollar basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto

INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data)

1990
04

1991

1991
01

Apr.

May

June

Range in
2
preceding 12 months:
Low
High
Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto

1.48
1.45
1.54
1.26
1.55
1.87
1.46

1.58
1.55
1.69
1.38
1.65
2.18
1.52

1.52
1.49
1.59
1.31
1.60
2.01
1.49

1.56
1.53
1.66
1.37
1.58
1.96
1.48

1.51
1.49
1.60
1.33
1.55
1.83
1.48

1.54
1.52
1.64
1.35
1.57
1.91
1.48

1.51
1.49
1.60
1.34
1.55
1,87
1.46

1.51
1.49
1.59
1.33
1.54
1.81
1.47

1.42
1.39
1.44
1.26
1.50
1.64
1.46

1.51
1.49
1.55
1.40
1.60
1.89
1.53

1.46
1.44
1.48
1.34
1.55
1.77
1.50

1.49
1.48
1.53
1.39
1.52
1.68
1.48

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

1.47
1.45
1.50
1.35
1.51
1.66
1.48

1.45
1.43
1.48
1.34
1.50
1.65
1.47

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

Constant-dollar basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto

1. Ratio of end of period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily
coincidental.
Range is for the 12-month period preceding the latest month for
which data are available.

II-29
down their stocks another $17 billion (annual rate) in June and almost
$34 billion for the second quarter as a whole.

Although our translation of

these figures to constant-dollar changes is imprecise, the staff estimates
that they imply a somewhat greater liquidation of real nonfarm inventories
in the second quarter than shown in BEA's advance estimate, which was based
on monthly data through May.
Manufacturers reported sharp reductions in stocks from March to May.
However, the pace of inventory liquidation appears to have slowed in June in
a number of industries where market demand had improved and production had
started to pick up in recent months--most notably motor vehicles, steel, and
fabricated metal products.

On the other hand, liquidation continued apace

in nonelectrical machinery and several nondurable materials industries
(chemicals, paper, and rubber and plastics).

Although inventory-to-

shipments ratios for the latter group of industries declined in the past few
months, their levels in June were still above the recent lows observed last
year.
In the trade sector, wholesale inventories were estimated to have been
pared substantially, at a $16 billion annual rate in current-cost terms
during the second quarter.

But the drawdown was notably slower in June than

in the preceding three months.

The bulk of the recent wholesale inventory

reduction occurred in durable goods categories--motor vehicles, machinery,
and electrical goods--where inventory-sales ratios late in the spring were
near the high end of their ranges over the past year.
At retailers, non-auto stocks rose at an annual rate of $11 billion in
current-cost terms in June and $4-1/2 billion over the second quarter as a
whole.

The June accumulation was largely at stores selling nondurable

II-30
FEDERAL GOVERNMENT EXPENDITURES AND RECEIPTS
(NIPA basis, billions of current dollars at annual rates)
1990
03

02
Expenditures

1991
04

1272

1311

1261

1321

Defense purchases
Nondefense purchases ex SPR and CCC
Strategic Petroleum Reserve and
Commodity Credit Corporation

310
114

313
114

325
115

331
115

325
118

-2

-3

Domestic transfer payments
Transfers to foreigners

491
19

496
17

509
9

534
-72

542
-31

208

203

219

212

1106

1126

1135

11471

166

146

184

127

1741

Grants to states and localities
ex Medicaid
Medicaid
Other expenditures
Receipts
Deficit

1. The corporate profits tax component of receipts is estimated by the
staff.

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, except where otherwise noted)
Second Quarter
Percent
1990
1991
change
Outlays
Deposit insurance (DI)

October-June
Percent
FY1990 FY1991 change

331.2
28.4

333.1
13.9

0.6
-51.1

940.2
41.8

967.4
30,3

2.9
-27.4

302.8
76.4

319.2
68.6

5.4
-10.2

898.4
226.5

937.1
198.7

4.3
-12.3

76.4
45.1
65.7
40.3
36.8
38.6

80.6
48.6
71.0
46.4
42.2
42.4

5.5
7.8
8.1
15.1
14.7
9.8

226.5
135.4
186.0
114.2
112.9
123.5

237.6
144.8
201.2
128.2
129.3
134.9

4.9
7.0
8.2
12.2
14.5
9.2

319.4
Receipts
Withheld income taxes
180.4
plus FICA
Individual final payment 58.4
-35.8
Individual refunds (-)
31.0
Individual declarations
33.5
Corporate income taxes
51,9
Other

307.3

-3.6

776.6

789.9

1.6

183.4
52.4
-40.6
29.7
31.9
50.6

1.7
-10.4
-13.3
-4.4
-4.9
-2.5

538.7
70.6
-68.0
55.0
72,5
108.8

559.2
64.1
-74.1
53.4
76.4
110.9

3.8
-9.2
-9.0
-2.9
5.4
1.9

11.8

25.8

118.6

162.6

177.5

9.2

-16.6

11.9

Outlays Ex DI
National defense
ex foreign
contributions
Net interest
Social Security
Medicare and health
Income security
Other

Deficit
Deficit Ex DI

Details may not add to totals due to rounding.

120.8

147.2

21.9

II-31
goods--especially apparel outlets and general merchandisers whose sales
retreated somewhat; their inventory-sales ratios moved up as a result.
Nonetheless, the inventory-sales ratios for most types of retail
establishments, including the ratio for stores in the GAF grouping, were
considerably lower at the end of the second quarter than at their peaks
posted around the turn of the year.

With the recovery in sales reported for

July, retailers' inventory positions likely improved.
Federal Sector
BEA's advance estimates for the federal sector indicate that fiscal
policy remained restrictive in the second quarter, even though several
special factors produced a large increase in nominal spending and in the
deficit.

Much of the restraint is embodied in a 9.2 percent (annual rate)

decline in real defense spending; this decline reflects both the downward
trend in real spending that has been enacted in recent defense budgets and
the tailing off of procurement related to Operation Desert Storm.
The large spending increases occurred in categories that do not have a
direct influence on aggregate demand.

Smaller foreign contributions for

Operation Desert Storm increased transfer payments; these contributions are
recorded as negative transfers to foreigners in the national income
accounts.

Swings in spending by the Strategic Petroleum Reserve and the

Commodity Credit Corporation (that represented shifts in inventory between
the public and private sector but not current production) increased
nondefense purchases.

Much of the rise in grants appears to reflect

increases in the rate at which the federal government reimburses states for
Medicaid programs; this rise in grants ought to be largely offset by smaller

II-32
state deficits.

On the revenue side, the small increase reflected the

effects of the recession on income growth.
The federal government's unified deficit was $25.8 billion in the
second quarter, $14 billion higher than in the second quarter of 1990;
excluding deposit insurance outlays, the increase from a year earlier was
$28.5 billion.

Recession-related weakness in receipts, particularly a

$10.8 billion decline in net final settlements on 1990 individual income tax
liability (individual final payments less individual refunds), accounts for
much of the increase.

The weakness in net final settlements by individuals

can be traced to excessive withholding on wages and salaries of individuals
during calendar year 1990.

This probably occurred because taxpayers had

taxes withheld and made estimated tax payments before the extent of their
lower income became apparent, either in the form of lost wages or of lower
profits, dividends, and capital gains.
The Office of Management and Budget released its Mid-Session Review of
the Budget in July showing a $282 billion unified deficit estimate for
FY1991 (a downward revision of $36 billion from the February budget
estimate), and a $348 billion deficit estimate for FY1992 (an upward
revision of $67 billion from the February estimate).

Revisions to estimates

of outlays both for deposit insurance and for Operation Desert Storm
accounted for much of the shift in the deficit projection from FY1991 to
FY1992; and technical changes in estimates of receipts increased both the
FY1991 and the FY1992 deficit projections.

Because current budget rules are

based on the economic and technical assumptions made in the Administration's
February budget, these deficit estimate revisions place no additional
constraints on current budget legislation.

II-33
The Congress adjourned on August 2. Of thirteen appropriations bills,
the House has passed all thirteen, the Senate has passed seven, and three
await the President's signature.

Both houses of the Congress have passed

"emergency" legislation mandating extended unemployment benefits projected
to cost approximately $6 billion.

The "emergency" designation allowed the

bill to contain no compensating spending reductions or tax increases, as
last year's budget agreement otherwise would have required.

Press accounts

indicate that the President will sign the legislation but will not sign the
"emergency" designation, thereby rendering the bill inconsequential.
State and Local Government Sector
Real purchases of goods and services by state and local governments
were unchanged in the second quarter, after falling 2 percent in the first
quarter.

Construction spending declined for the second consecutive quarter

to a level 6.5 percent below its high at the end of last year; most of the
weakness during the first half was in road and bridge construction.

Also,

real outlays for employee compensation and other services slowed noticeably
in the second quarter.

On the receipts side, tax collections have slowed in

recent quarters; but, as noted earlier, the pace of federal grants has
picked up.

On balance, the recent cutbacks in spending, combined with the

upward tilt in grants, appear to have helped move state and local budgets
part of the way toward balance; the deficit of operating and capital
accounts, excluding social insurance funds, is estimated to have shrunk to
$32 billion in the second quarter, the lowest level in three quarters.
Budget problems at the state level have been widespread.

An unusually

large number of states--nine in all--did not have a budget in place at the
start of fiscal year 1992, which began July 1 for most states; by early

II-34
August, however, all except Connecticut had resolved the difficulties that
led to the delays.

With revenue shortfalls widely apparent, many states

have increased taxes or cut spending.

Tax hikes in about 35 states are

expected to boost receipts around $20 billion during fiscal year 1992, the
largest gain as a percent of revenue in at least two decades.

Among the

states, the biggest increases are in California ($7-1/2 billion) and in
Pennsylvania ($3 billion).

On the spending side, states have delayed

payments to pension funds and vendors, particularly those providing health
care under Medicaid; they also have postponed paychecks to employees or
furloughed workers and have cut aid to local governments.

However, all

states have paid debt service on time.
A recent survey by the National League of Cities also documents
substantial budgetary strains among local governments. 10

Indeed, about

60 percent of cities expected their general fund expenditures to exceed
revenue, up substantially from recent years.

To cope, most cities raised

the level of fees and charges, and more than half reduced the growth rate of
outlays for day-to-day operations.

Other frequently used adjustment

techniques included increases in property tax rates and reductions in the
actual level of capital spending.

10. The survey was sent to about 500 large cities (with populations over
50,000) and to about 1,000 small-to-medium cities (with populations of
10,000 to 50,000).
Five hundred ten usable responses were received.

II-35

PERCENTAGE OF CITIES REPORTING EXPENDITURES EXCEEDING REVENUES
IN THEIR GENERAL FUND BUDGETS
(Fiscal Years)

1984

1985

1986

1987

1988

1989

1990

1 9 9 1e

Source:
e

City Fiscal Conditions in 1991, and earlier issues,
National League of Cities.
Estimate.

Labor Costs
A sharp increase in benefit costs and the April minimum wage adjustment
boosted labor costs in the second quarter and stalled the downtrend in
hourly compensation that developed last year.

Compensation per hour for

private industry workers, as measured by the ECI, rose 4.9 percent at an
annual rate over the March to June period, up from a 4.6 percent rate in the
first quarter.

Benefit costs accelerated last quarter to a 7 percent annual

rate, the largest increase since the first quarter of 1990.

The surge in

benefit costs owed not only to further large increases in health care
expenses but also to step-ups in contributions by employers for workers'
compensation and unemployment insurance.
The wages and salaries component of the ECI increased 4.2 percent at an
annual rate in the second quarter, the same as in the first quarter.

Wage

change apparently was buoyed by a sizable increase in the federal minimum
wage from $3.80 to $4.25 an hour in April; the staff estimates that this
increase added roughly 0.4 percentage point (annual rate) to wage growth.
Wage inflation slowed from its first-quarter pace in a number of industries.

II-36
EMPLOYMENT COST INDEX
(Percent change from preceding period at compound annual rates;
based on seasonally adjusted data 1)
1990

1991

Mar.

June

Sept.

Dec.

Mar.

June

Private industry workers

5.6

5.1

4.3

3.8

4.6

4.9

By industry:
Goods-producing
Service-producing

6.0
5.2

5.1
5.1

4.3
4.3

3.8
3.8

4.6
4.9

4.9
4.5

By occupation:
White-collar
Blue-collar
Service workers

6.8
5.2
4.8

5.5
4.7
5.1

4.6
3.9
3.5

2.7
3.8
5.0

6.1
4.6
4.2

4.9
4.1
6.4

By bargaining status:
Union
Nonunion

6.0
6.8

3.1
5.5

3.9
4.2

4.3
2.7

5.0
5.7

4.9
4.9

4.4
8.0

4.3
6.2

3.9
6.5

3.1
5.7

4.2
5.2

4.2
7.0

Total compensation costs:

Memo:
Wages and salaries
Benefits

1. Changes are from final month of preceding period to final month of
period indicated. Percent changes are seasonally adjusted by the BLS.

EMPLOYMENT COST INDEX
(Private industry workers; 12-month percent changes)
1991

1990
Mar.

June

4.6

4.4

5.0
4.8

4.8
4.6

4.4
4.5

4.4
4.4

5.5
4.7
4.9

5.2
4.5
4.5

4.9
4.4
4.7

4.7
4.3
4.2

4.5
4.1
4.8

4.3
4.8

4.1
5.5

4.2
5.1

4.3
4.8

4.1
4.5

4.5

4.0
6.6

4.5
6.9

4.2
6.8

4.0
6.6

4.0
5.8

1990

June

Sept.

4.8

4.6

5.2

4.9

By industry:
Goods-producing
Service-producing

4.3
5.1

4.8
4.6

5.2
5.2

By occupation:
White-collar
Blue-collar
Service workers

5.2
4.1
4.4

4.9
4.4
4.7

By bargaining status:
Union
Nonunion

3.7
5.1
4.1
6.1

1989

Dec.

Total compensation costs:
Private industry workers

Memo:
Wages and salaries
Benefits

4.4

II-37

LABOR COST MEASURES
Employment Cost Index
Private industry workers

Percent change from year earlier

Total compensation
- - - -Wages and se'aris

enaet

It
II

It
'

I I

ll.

-I

__I

workers

1980

1982

Percent change from year

1984

1986

1988

1990

1992

II-38

MAJOR COLLECTIVE BARGAINING
(Covering 1,000 or more workers; percent change)

All industries
First-year adjustments
Average over life of contract
Effective wage change

1989

1990

1991
first six months

4.0
3.3

4.0
3.2

3.6
3.3

3.2

3.5

3.41

1. Change during the four quarters ending June 30.

NONFARM COMPENSATION PER HOUR
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1990:Q2

1989
Nonfarm business
Manufacturing

2.5
3.1

1990
4.6
3.8

1990

1991

to
1991:Q2

5.0
4.8

3.7
3.7

4.2
2.6

4.5
6.4

4.4
4.4

1. Changes are from fourth quarter of preceding year to fourth quarter
of year shown.

AVERAGE HOURLY EARNINGS
(Percent change; based on seasonally adjusted data) 1
1989

1990

1990
Q4

1991
Q1

--Annual rate-Total private nonfarm
Finance, insurance
and real estate

4.0

3.7

2.8

5.2

4.6

5.3

4.0

6.8

June

1991
July

Monthly rate
.5
1.4

-.1
-. 9

1. Changes over periods longer than one month are measured form final
month of preceding period to final month of period indicated.

II-39
However, a large pickup occurred in transportation and public utilities,
where wage gains were unusually low in the first quarter.

In addition,

wages accelerated about a percentage point in retail trade, which has a
relatively high percentage of minimum wage workers.
Over the twelve months ended in June, the ECI for compensation
increased 4.4 percent; a year ago, the twelve-month change stood at
5.2 percent.

The wage and salary component also has decelerated

3/4 percentage point from its year-ago reading to 3.7 percent.

Benefit cost

increases are down as well, but remain at a rapid 6.2 percent.
Data from the ECI indicate that the year-over-year change in
compensation per hour was about the same for union and nonunion workers.
This contrasts with the pattern over the latter half of the 1980s when
nonunion gains consistently outpaced those of union workers.

The narrowing

in the gap between the increases in union and nonunion wages reflects a
marked slowing in wage changes of nonunion workers and a modest pickup in
union wage gains.

That pickup has not been apparent, however, among workers

covered by major collective bargaining settlements.

For that group, the

average effective wage change for all contracts currently in force was
3.4 percent in the four quarters ending in June--virtually the same as the
1990 average. 11 First-year wage adjustments for the 876,000 workers
reaching new contracts averaged 3.6 percent over the first two quarters of
1991, slightly smaller than in recent years.

11. The average effective wage change measures the change in wage rates
during the reference period for all workers covered by large contracts,
resulting from settlements in the current period, deferred increases, or
COLAs.

II-40
Compensation per hour in the nonfarm business sector, as measured by
the series based on BEA compensation estimates, increased at an annual rate
of 4.5 percent in the second quarter.1 2

Over the four quarters ending in

June, nonfarm hourly compensation rose 4.4 percent--the same as the ECI.

the manufacturing sector, hourly compensation grew at an annual rate of
6.4 percent last quarter, apparently reflecting, in part, increased earnings
from overtime.
Moving beyond the second quarter, average hourly earnings of production
or nonsupervisory workers fell 0.1 percent in July.

The decline follows

several months of large increases, which had pushed the change in average
hourly earnings from March to June to more than 5 percent.

Hourly earnings

in July were held down by declines in trade, services, and finance,
insurance, and real estate, which had posted large gains in preceding
months.

Over the 12 months ended in July, hourly earnings increased

3.1 percent.
Prices
Recent inflation reports have been favorable, owing mainly to declines
in the prices of energy and food.

The CPI rose 0.2 percent in both June and

July, while the PPI for finished goods was down in both months.

Meanwhile,

the core inflation rate appears to be slowing, but only gradually.

In July,

the CPI less food and energy was 4-3/4 percent above its level of a year

12. Compensation data released for 1991:Q2 reflect annual benchmark
revisions to employment as well as revised seasonal factors for data
beginning in 1986. The effect of the revisions was small and was
concentrated in the most recent years. Revised data indicate that nonfarm
compensation per hour increased 4.6 percent in 1990--0.2 percentage point
higher than originally reported. In manufacturing, growth in hourly
compensation was revised down 0.1 percentage point in 1990 to show an
increase of 3.8 percent.

II-41
earlier, compared with an increase of 5 percent over the preceding twelve
months.
The CPI for energy was down markedly in June and July, after briefly
turning up in May.

Gasoline prices have retraced their May spurt as

inventories were built up rapidly in June, easing concerns about supplies of
summer-quality motor fuel. 13

However, private survey data indicate that

retail gasoline prices started to move up in early August, and further
upward pressures on prices well could emerge in the near term.

unexpectedly strong recovery in demand for gasoline has brought gasoline
inventories in recent weeks back nearly to their low May levels, and has
pushed up spot prices.

Moreover, spot and posted prices of crude oil have

held since mid-July at levels about $1 or more per barrel above their
average level in June.

Crude oil prices have been supported by production

problems in the North Sea, as well as by the higher demand for gasoline.
The CPI for food rose 0.5 percent in June but dropped 0.6 percent in
July; a big swing in the prices of fresh fruits and vegetables was the main
factor in both the June rise and the July decline.

Prices of other foods

were little changed, on balance, over the two months with declines for
livestock products about offsetting increases for other foods.

Year-over-

year, CPI food inflation moved down to less than 3 percent in July; the
increases in food prices had exceeded 5 percent in each year from 1988
through 1990.
Over the near term, food prices seem likely to be held in check by the
ample supplies of a number of livestock products.

The inventory of cattle

13. Excise taxes on gasoline were up, on average (not seasonally adjusted),
about 1/2 cent in July.

II-42

RECENT CHANGES IN CONSUMER PRICES

(Percentage change; based on seasonally adjusted data) 1

Relative
importanoe

Dec.

1990

1990
---

1989

1990

1991

June

----- Annual rate---All items 2
Food
Energy
All items less food
and energy
Commodities
Servioes

July

-Monthly rate-

100.0
16.2
8.2

4.6
5.6
5.1

6.1
5.3
18.1

4.9
3.9
18.0

2.4
2.4
-30.7

3.0
5.1
-1.2

.2
.5
-1.0

.2
-. 6
-. 4

75.6
24.5
51.1

4.4
2.7
5.3

5.2
3.4
6.0

3.8
2.3
4.8

6.8
7.9
6.4

3.2
3.2
3.0

.4
.2
.4

.4
.4
.3

100.0

4.5

6.1

5.0

1.5

3.3

Memorandum:
CPI-W3

1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.
3. Index for urban wage earners and clerical workers.

RECENT CHANGES IN PRODUCER PRICES

(Percentage change; based on seasonally adjusted data) 1

Relative
importance
Dec. 1990

1989

1990

1991

1990

------Annual rate-----

June

July

-Monthly rate-

100.0
23.7
16.8
59.5
36.4
23.1

4.9
5.2
9.5
4.2
4.4
3.8

5.7
2.6
30.7
3.5
3.7
3.4

5.1
1.3
21.1
3.5
3.4
3.3

-3.5
1.0
-35.5
5.4
5.9
4.6

.7
-.3
.0
1.2
.9
1.3

-. 3
-. 6
-1.4
.0
-.2
.3

-.2
-. 8
-1.3
.2
.4
.1

Intermediate materials 2
Excluding food and energy

95.2
78.5

2.5
.9

4.6
1.9

4.2
2.3

-9.8
-2.3

-1.0
-1.0

.0
.0

-. 3
-. 1

Crude food materials
Crude energy

34.4
50.7

2.8
17.9

-4.2
19.1

-7.3
-18.8

.0
-54.0

-12.5
-1.5

.7
-3.5

-1.7
2.0

Other crude materials

14.9

-3.6

-18.1

-4.7

-13.0

-2.6

-.7

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment

1. Changes are from final month of preceding period to final month of period indicated.
2. Excludes materials for food manufacturing and animal feeds.

II-43
in feedlots at midyear was up 8 percent from a year earlier, and the spot
price of cattle recently has dropped to the lowest level in more than three
years.

Hog producers also have been boosting output, and hog prices, while

up seasonally, are well below the levels of a year ago.

Broiler production

also is moving up, albeit at a somewhat slower pace than in most recent
years.

Supplies of fresh vegetables, which were repeatedly disrupted by bad

weather in the first half of 1991, seem to have recovered around midyear,
and the wholesale prices of these products remained at low levels into
August.
By contrast, supply conditions have deteriorated for grains and
oilseeds since the start of July, owing to a worsening drought in parts of
the Midwest.

In the USDA's latest crop production report, which was based

on conditions as of August 1, the agency marked down sharply its projections
of the annual output of corn, soybeans, and a few other minor crops.
However, these losses are small relative to those seen during the severe
droughts of 1983 and 1988, and they come at a time when export demand for
farm crops is sluggish; increases in prices of these crops thus have been
fairly subdued.
Excluding food and energy items, the CPI for goods rose 0.4 percent in
July, with the largest price increases registered for used cars and
14
apparel. 14 Although average price increases have been modest since
February, on a 12-month basis, the inflation rate for goods at the retail
level remained in July about at 4.2 percent--3/4 percentage point above the

14. Increases in sales and excise taxes in several states contributed about
0.1 percentage point to the July rise and probably will add a similar amount
to the August CPI for commodities less food and energy. These taxes are
included in the CPI, but not in the PPI.

II-44

Daily Spot and Posted Prices of West Texas Intermediate 1

Dollars per barrel

S
S .

Sep

Oct

Nov

Dec

Jan

spot
S

Feb

· ca'

Mar

Apr

May

June

July

Aug

1. Posted prices wre evaluated as the mean of the range isted in the Waft Street Journal.

MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Year and Month

Posted

Spot

31.10
34.82
31.32
2632

33.69
35.92
32.30
27.34

23.74
19.61
18,66
19.56
19.99
19.04
20.15
20.24

24.96
20.52
19.86
20.82
21.24
20.20
21.42
21.47

1990
September
October
November
December
1991
January
February
March
April
May
June
July
August'
1. Price through August 13.

II-45
PRICE INDEXES FOR COMMODITIES AND MATERIALS 1
Percent change2

1991
Last
obser-

To
June

Memo:

June 253
to

Year
earlier

ration

1989

1990

July

7.1

6.0

-10.0

-. 1

-2.0

July
July
July

2.8
17.9
-3.6

-4.2
19.1
.6

-. 5
-18.0
-4.5

-2.3
2.0
-. 9

-9.1
12.2
-9.1

July

-3.6

-4.6

-. 7

-9.1

Aug. 13

-9.0

-2.7

-5.3

-1.0

-12.2

Aug. 12

-5.9

-1.5

-13.0

3. Journal of Commerce industrials
3a. Metals

Aug. 13
Aug. 13

1.3
-7.2

-2.4
-3.9

-1.6
-3.9

-2.2
-.4

-7.8
-12.4

4. Dow-Jones Spot

Aug. 13

-10.1

-1.7

3.5

-9.7

-12.4

5. IMF commodity index 4
5a. Metals
5b. Nonfood agric.

June
June
June

-12.9
-23.4
-4.6

-5.6
-3.0
-3.5

-1.1
-7.4
2.2

Aug. 6
Aug. 6

-22.8
-23.8

-4.4
-3.2

-4.5
-5.7

1. PPI for crude materials 4
la.
lb.
Ic.
Id.

Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,
seasonally adjusted

2. Commodity Research Bureau
2a. Futures prices

2b. Industrial spot prices

Economist (U.S. dollar index)
6a. Industrials

date

to date

n.a.
n.a.
n.a.

-5.3
-12.5
-1.1

-.4
-3.8

-14.2
-21.0

1. Not seasonally adjusted.
2. Change is measured to end of period, from last observation of previous period.
3. Week of the June Greenbook.
4. Monthly observations. IMF index includes items not shown separately.
n.a. Not available.

Index Weights

Energy

Food Commodities

Precious Metals

Others

PPI for crude materials
51

CRB futures

CRB industrials
100

Journal of Commerce index
12

Dow-Jones
58

IMF index
Economist
50
1. Forest products, ndustrial metals, and other industrial materials.

II-46

COMMODITY PRICE MEASURES

Joural of Comrmmo Index ttal
- - * Jouw l of Commew
ndex, imtal
Fltioear,lndex

Irl

9 1 91719
--

1983

Tal

1986

1984

1988

1987

1988

1989

1990

1991

Aug

Jul
1991

1992

910

Aug

CR Spot ndustrials
Rtio scale. index
(1 9 6 7 . 1 0 0)
340

12-

1983

184

L240 -. A

1986

1985

1987

- 220

,a0

1988

1989

1990

199

281

280
I I I I I 1,

S, , •,I
• I

LS,

280
-

CRFB Indutriai-

275

Au.&

192

CFB Futrw
Rat

smalo, index
(1967.100)
3
-

310

290

270

- 250
A

'WeUly data, Tuesdays; JoumJa of Comrrnew

. iyir

data montM Iy ors t985

230

214

CRB Futu

I, I

210

1 1

208

Dated ires Inrdte wek of
tut Groenbook.

II-47
rate over the preceding year--still reflecting the impact of higher federal
excise taxes early this year.

Nonenergy services prices rose 0.3 percent in

July as continued moderation was evident for both tenants' rent and owners'
equivalent rent.

As a result of the slowdown in these categories, the

12-month change in nonenergy services prices has fallen to 5.1 percent-3/4 percentage point less than the increase in the preceding year.
At the producer level, prices of intermediate materials less food and
energy were little changed over the last two months and--on net--over the
year.

Prices of crude nonfood materials less energy declined further and

were about 9 percent below their level of a year earlier.

More recently,

prices on spot commodity markets have retreated markedly for lumber,
plywood, and cotton, and in all cases have about retraced the respective
climbs seen earlier in the year. 1

By contrast, prices of industrial

metals--as indicated by the Journal of Commerce index--have posted a small
net decline since the week of the last Greenbook despite some firming (in
part seasonal) for steel scrap. 16
Probability of Expansion
The Commerce Department's composite index of leading economic
indicators rose 0.5 percent in June--its fifth consecutive monthly increase.
Translated into a probability forecast of the start of an expansion, the
June reading implies a 97 percent probability that a cyclical trough has
already occurred or is imminent (chart).

15. These runups reflected supply-related concerns--triggered, for lumber
and plywood, by logging restrictions in the Pacific Northwest and, for
cotton, by heavy rains that delayed planting in the Delta region.
16. The decline in the Journal of Commerce index total since late June has
mainly reflected the sharply lower prices of cotton and plywood.

II-48
COMPOSITE INDEX OF LEADING INDICATORS

Percent change
-- 16

II
II
II

I
I
I
I

I
1973

1976

IL'n I

I (LI

hI
.I
I

- I- t
1970

II
II

j AI

1979

I
II

I
1985

1982

-II I
1988

I
1991

PROBABILITY OF EXPANSION '

1990

1970

1973

1976

1979

I-

II
I
I
I
I
I
I
I
I

I
I
I
I
I
I
I
I
I

1982

1985

'Each probability represents the likelihood thal an expansion will begin dutring the next three months

1988

1991

II-49
Indeed, recent data on coincident indicators suggest that the economy
already has started a recovery phase, with income and retail sales bottoming
out in the first two months of the year, followed quite closely in later
months by production and employment (table).

Both March and April look to

be reasonable candidates for the trough month; the designation of a trough
The advance estimate of real GNP in the second
17
quarter was up only slightly, although real GDP turned up more decidedly. 17
quarter is more ambiguous.

17. In most countries other than the United States, real GDP is used as a
coincident indicator of economic activity rather than real GNP (see, for
example, P.A. Klein and G.H. Moore, Monitoring Growth Cycles in MarketOriented Countries: Developing and Using International Economic Indicators

(Ballinger, 1985). For the United States, the growth rates of these two
aggregates are usually very similar; however, in recent quarters, large
fluctuations in oil company profits earned from operations abroad have

caused clear differences in the movements of U.S. GNP and GDP.

II-50
RECENT DATA ON COINCIDENT INDICATORS

Composite coincident index

1991
Apr.
May

Jun.

Feb.

Mar.

127.3

126.6

126.0

126.2

126.6

127.0

June

July

Income
Personal income (billions $82)

3366.9

3366.5 3378.7

3372.4

3378.1

3391.7

Disposable income (billions $82)

2857.8

2858.9

2869.2

2863.9

2868.8

2879.9

Personal income less
transfer payments (billions $82)

2838.3

2837.0

2845.2

2837.5

2841.3

2853.7

117.1

119.7

120.3

119.8

120.7

121.0

2643.1

2660.1

2688.0

2669.2

2690.6

2701.8

457.1

459.1

457.0

465.3

469.5

106.6

105.7

105.0

105.5

106.2

106.9

80.0

79.1

78.4

78.6

79.0

79.3

Total civilian employment (millions)

116.9

116.8

117.4

116.6

116.9

116.7

Nonfarm payroll employment (millions)1

109.4

109.2

108.9

108.7

108.9

108.8

Nonfarm payroll hours of
production workers (index)

121.3

121.5

120.9

120.0

121.2

122.1

120.4

Total nonfarm payroll hours (billions)

200.8

201.2

200.4

199.4

200.4

201.2

Sales
Retail sales (billions $82)
PCE (billions $82)
Manufacturing and tradp
sales (billions $82)

Production
Industrial production (index)1
Capacity utilization (percent)

Esployment

1. Components of composite coincident index.
Note: Low values reached by indicators since July 1990 are in bold.

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS
(percent)
1989

March
highs

1991

1990

Dec
loss

Aug
highs

FOMC
Jul 3

Aug 13

Change from:
Aug 90 FOMC
highs Jul 3

"""""'~~"~~~"'

Short-term rates
Federal funda2

9.85

8.45

8.21

5.78

5.63

-2.58

-. 15

Treasury bills 3
3-month
6-month
1-year

9.09
9.05

7.53
7.29
7.11

7.59
7.51
7.45

5.56
5.69
6.00

5.29
5.40
5.46

-2.30
-2.11
-1.99

-. 27
-. 29
-. 54

10.05
10.15

8.51
8.22

8.10
8.05

6.05
6.13

5,70
5.70

-2.40
-2.35

-. 35
-.43

10.07
10.32
10.08

8.52
8.22
8.01

8.14
8.25

5.95
6.04
6.33

5.66
5.67
5.83

-2.48
-2.51
-2.42

-.29
-.37
-.50

Eurodollar deposits
1-month
3-month

10.19

10.50

8.38
8.25

8.13
8.19

5.94
6.06

5.63
5.63

-2.50
-2.56

-.31
-. 43

Bank prime rate

11.50

10.50

10.00

8.50

-1.50

.00

U.S. Treasury (constant maturity)
3-year
9.88
7.69
7.77
10-year
9.53
30-year
9.31
7.83

8.50
9.05
9.17

7.40
8.26
8.42

6.84
8.17

-1.66
-1.14
-1.00

-.56
-.35
-.25

Municipal revenue'
(Bond Buyer)

-. 73

-. 23

9.11

Commercial paper
1-month
3-month
Large negotiable CD
1-month
3-month
6-month

8.18

Intermediate- and long-term rates

7.91

7.95

7.28

7.80

7.30

7.07

Corporate--A utility
recently offered

10.47

9.29

10.50

9.52

9.24

-1.26

-. 28

Rome mortgage rates 6
S&L fixed-rate
S&L ARM, 1-yr.

11.22
9.31

9.69
8.34

10.29
8.39

9.67
7.25

9.27
7.14

-1.02
-1.25

-.40
-.11

------------------------------------------------------------------

---

1991

1989
Record

highs

Date

Lows
Jan 3

FOMC
Jul 3

Aug 13

Percent change from:
Record
highs

1989
lows

-.88
-.18
-7.40
.00
.00

40.29
38.55
20.45
35.88
37.36

FOMC
Jul 3

Stock prices
Dow-Jones Industrial 3035.33
213.75
NYSE Composite
397.03
AMEX Composite
514.40
NASDAQ (OTC)
Wilshire
3734.30

6/3/91 2144.64 2934.70 3008.72
154.00 204.47 213.36
8/7/91
10/10/89 305.24 358.41 367.65
378.56 474.32 514.40
8/13/91
8/13/91 2718.59 3563.19 3734.30

One-day quotes except as noted.
Average for two-week reserve maintenance period closest to
date shown. Last observation is average to date for the
maintenance period ending August 21, 1991.

2.52
4.35
2.58
8.45
4.80

3/ Secondary market.
4/ Bid rates for Eurodollar
deposits at 11 a.m. London time.
5/ Based on one-day Thursday quotes
and futures market index changes.
6/ Quotes for week ending
Friday closest to date shown.

Selected Interest Rates *
(percent)
Short-Term

Daily

lmmm

Prime Rate

Federal Funds

3-month Treasury Bill

1989

1990

8/13

S72

8/13

7/2

1991

Primary Fixed -

Rate Mortgage

1 (weekly)

(weeky)

30-year Treasury Bond -

(daily)

1989

1990

t*-Frday weeks through August 9, Wednesday weeks thrx• August 7.

1991

7/2
7/2

13
8/13

DOMESTIC FINANCIAL DEVELOPMENTS

In late July and early August, weekly data showing M2 approaching the
lower bound of its annual target range and some weaker-than-expected
economic statistics contributed to a mild rally in the fixed income markets.
On August 6, the Open Market Desk signaled an easing of reserve availability
and interest rates across the maturity spectrum fell further.

On balance,

most short-term rates have declined about 1/4 to 1/2 percentage point since
the July FOMC meeting, and benchmark bond yields have fallen roughly a
quarter point.

A major exception to this pattern is the yield on the

debentures of insurance companies, which in many cases were negatively
affected by adverse reports about asset quality and earnings performance.
With interest rates down, major stock price indexes generally advanced 3 to
5 percent despite heightened concerns that the economic recovery might be
faltering.

Pacing the advance were bank shares, boosted by merger

announcements and the easing of policy.
Continued stress in the depository sector likely has contributed to the
lagging growth of money since the July FOMC.

After recording a meager 1-1/2

percent rate of growth in June, M2 contracted at a 4 percent annual rate in
July.

Bank credit stalled last month, with acquisitions of government

securities offsetting runoffs of other assets.
Nor has there been any sign of a pickup in credit flows more generally.
Borrowing by nonfinancial corporations has remained subdued.

Business loans

at banks fell for the fourth consecutive month, more than offsetting an
increase in outstanding commercial paper; gross public bond offerings slowed
in July before picking up in early August with the decline in interest

III-1

III-2
MONETARY AGGREGATES
(based on seasonally adjusted data unless otherwise noted)

19901

1991
Q1

1991
Q2

1991
May

1991
Jun

1991
Jul p

Growth
04 90Jul 91p

------------ Percent change at annual rates--------------------1.
2.
3.

Ml
H2
M3

4.2
3.8
1.7

5.9
3.4
4.0

7.4
4.6
1.7

13.5
4.3
0.4

9.6
1.4
-2.3

2.0
-3.8
-4.6
Levels

----------

Percent change at annual rates------------

bil. $
Jul 91p

Selected components
4.
5.
6.

M1-A

7.1

Other checkable deposits

H2 minus M12

9.
10.
11.
12.
13.
14.
15.
16.

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares
Commercial banks
3
Savings deposits plus MMDAs
Small time deposits
Thrift institutions
3
Savings deposits plus MMDAs
Small time deposits

18.
19.
20.
21.
22.
23.

Large time deposits
5
At commercial banks, net
At thrift institutions
Institution-only
money market
mutual fund shares
Term RPs, NSA
Term Eurodollars, NSA

----

545.6

3.9
4.4

0.9
12.6

3.7
9.9

6.1
-8.5

258.9
278.9

6.1

13.7

25.0

15.2

8.5

314.4

3.7

2.6

3.7

1.2

-1.4

-5.8

2527.9

3.0

-42.3

-16.5

-34.7

-30.4

-66.1

61.8

11.0
9.9
7.5
12.4
-5.5
-2.2
-7.3

18.2
8.2
7.5
8.9
-6.3
-0.7
-9.8

6.6
7.3
16.6
-1.8
-1.4
18.6
-13.6

3.0
5.7
17.1
-5.8
0.1
22.9
-14.9

-2.6
8.7
16.3
1.0
-11.1
12.1
-26.3

-16.1
5.6
11.6
-0.8
-9.4
10.3
-22.7

359.4
1226.9
625.5
601.3
882.2
364.7
517.6

6.7

-10.6

-16.3

-17.9

-7.8

760.4

-6.4

17. H3 minus M24

-1.5

15.3
-2.5

11.0
-0.6

Currency
Demand deposits

6.4

-9.5
-3.5
-23.9

1.2
11.9
-32.1

-8.3
-0.6
-35.2

-9.5
0.9
-47.4

-12.9
-5.1
-42.5

-17.6
-12.1
-39.3

490.2
392.7
97.5

20.2
-12.0
-12.1

49.9
-32.8
7.9

23.0
-25.6
-31.2

4.9
-16.1
-47.5

-23.8
-34.1
-3.7

-12.6
24.4
16.5

141.8
80.3
66.2

Average monthly change in billions of dollars----

MEMORANDA:6
24. Managed liabilities at commercial
banks (25+26)
25.
Large time deposits, gross
26.
Nondeposit funds
27.
Net due to related foreign
institutions
7
Other
28.
29. U.S. government deposits at commercial

banks
1.
2.
3.

4.
5.
6.
7.
8.

-0.1
-2.6
2.4

-1.5
6.4
-7.9

-5.3
-0.1
-5.2

-3.1
1.2
-4.3

2.2
0.2

-1.5
-6.4

-3.7
-1.5

-4.8
0.4

0.3

3.1

-3.5

-6.6

-5.1
-4.5
-0.6

694.1
446.0
248.1

-6.9
-3.3

-0.7
0.2

18.5
229.7

8.1

-2.8

20.4

-11.8
-1.6
-10.2

Amounts shown are from fourth quarter to fourth quarter.
Nontransactions M2 is seasonally adjusted as a whole.
Commercial bank savings deposits excluding MMDAs grew during June and July at rates of 20.4
percent and 13.9 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew
during June and July at rates of 11.9 percent and 7.5 percent, respectively.
The non-HZ component of M3 is seasonally adjusted as a whole.
Net of large denomination time deposits held by money market mutual funds and thrift institutions.
Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.
Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities
for borrowed money (including borrowing from the
sold under agreements to repurchase, and other liabilities,
Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated.
Consists of Treasury demand deposits and note balances at commercial banks.

p - preliminary

III-3
rates.

Mortgage credit evidently remained weak in July, and installment

credit declined again in June.

While private-sector demands for credit

receded, the Treasury's borrowing needs were stronger than ever.

contrast, state and local governments reined in offerings of both short- and
long-term securities in July relative to June's heavy issuance.
Monetary Aggregates and Bank Credit
After edging up only slightly in June, M2 fell at a 4 percent pace in
July, placing it a shade above the lower bound of its target growth cone.
The compositional shift within M2 toward liquid retail deposits (OCDs,
savings and MMDAs) and away from money market mutual funds and small time
deposits continued.

Given the sharp declines in the opportunity cost of

holding liquid deposits (chart), it appears many individuals have chosen to
transfer maturing CDs into MMDAs and savings accounts.

It also is likely,

though, that individuals with substantial CD and money market fund holdings
are looking outside M2 for higher returns.
Flows into bond and equity funds, for example, have been strong
recently and, although they were a bit slower in June than in April and May,
anecdotal reports imply a robust July.

Given the steep slope in the yield

curve, it appears some investors also may have been lured by the relatively
high rates prevailing on longer-term Treasury securities.

Noncompetitive

tenders for Treasury notes were up in July.
These portfolio effects can account for only a portion of the recent
weakness in M2.

A host of other factors likely contributed to the slowdown.

The combination of low deposit rates and high consumer credit rates may have
encouraged some households to finance expenditures out of savings, including
M2 balances, rather than accumulate debt.

On the supply side, anecdotal

III-4

Opportunity Costs and Retail Deposit Flows
Three Month T-Bill Yield and Liquid Retail Deposit Opportunity Cost

Percentage Points
S12
10

6
4
2

UJILIILLLL
1984

1985

1987

1986

1989

1988

1990

M2 Component Flows

Billions of Dollars

Other M2 Assets

1984

1985

1989

1988

1987

1986

1991

1990

1991

'Small Time Deposits and Money Market Mutual Funds

Flows into Other M2 Assets and Bond Funds

Billions of Dollars
Other M2 Assets

n/
111·,111

.....---mi li

flh

,----

I-

/I.

-----

..-,
-

-----

^ .. inlll
..... .1... ..
...

II Net Inflows to Bond Mutual IFunds

l ii
-~iilli
' '' lll
'~'' l' ~ll' ' ·-l L ll
L· · Y L
1984

1985

1986

* Smll Time Deposits and Money Market MutualFunds

1987

1988

1989

1990

1991

III-5
information gleaned from conversations with advertising executives at
several major newspapers suggests banks and thrifts have not been
advertising deposits as aggressively over the past year.

There also is some

evidence that banks have increased the fees on deposits and some have begun
'reserve adjusting' their OCD rates (paying interest on the balance net of
reserve requirements).
M3 fell at a 4-1/2 percent rate in July, following its 2-1/4 percent
decline in June.

Institutional investors also may be responding to the

relatively more attractive yields on market instruments, especially on those
with longer maturities, as M3 money funds continued to contract in July.
Runoffs of large time deposits at commercial banks accelerated, while
thrifts continue to shed large time at a rate of $3 to $4 billion a month.
Term RPs and Eurodollars showed some strength after several months of steady
declines.
Bank credit remained at a standstill in July.

After a brief pause in

June, loan portfolios shrank again, offsetting additions to holdings of
government securities.

The failure of the prime rate to fall after the cut

in the federal funds rate suggests banks have continued to restrain lending.
Preliminary results from the most recent Survey of Bank Lending Practices
provides further evidence on this score, indicating that banks on balance
have tightened lending standards and terms a little further in the May to
August period.

However, the number of banks reporting tighter standards

dipped a bit compared to earlier surveys, and a handful of respondents
reported some easing.
In addition to the continued reluctance of banks to lend, a portion of
the weakness in July's bank credit numbers resulted from the FDIC's sale of

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)

1989:Dec.
to
1990:Dec.

-----

1991
Q1

Total loans and securities
at banks

5.3

Securities

1.0

-. 7

3.5

2758.3

8.6

1.2.5

10.5

7.3

12.9

16.2

675.0

1.5.0

17.9

13.8

19.8

23.9

502.7

-5.5

172.3

-5.0

2083.4

-6.3

626.4

-4.1

854.8

U.S. government securities

13.9

Other securities

-3.1

5.7

-9.3

-10.9

4.3

1.5

-2.0

-3.2

Total loans

July

4.0

June

Commercial Bank Credit - --------------------

--------1.

May

Levels
bil.$
July

Business loans

1.9

-. 4

-7,2

-7.5

Real estate loans

9.5

3.4

4.5

4.9

Consumer loans

1.2

2.6

-3.5

-1.6

-5.5

-7.4

369.4

Security loans

4.4

-2 7.7

-5.2

-45.2

106.5

41.7

.1.6

-9.4

-28.4

-22.2

191.1

LO.

Other loans

-2.4

She>rt11.

Business loans net of bankers
acceptances

12.

Loans at foreign branches2

13.

Sum of lines 11 & 12

14.

Commercial paper issued by
nonfinancial firms

15.

Sum of lines 13 & 14

16.

Bankers accetances:
related '

17.

1.9

3.9

29.7

and Intermediate-Term Business Credit----------

-7.2

-8.0

-35.7

-62.7

-8.3

-9.9

-5.7

-6.1

644.0

12.2

-5.1

-10.2

-34.4

-9.0

8.3

145.8

4.2

-.7

-8.7

-14.4

-6.5

-3.3

789.8

19.3
2.5

-6.3

-3.1

-5.7

-5.1

-6.5

620.4

23.5

U.S. trade

Line 15 plus bankers acceptances:
U.S. trade related

18.

Finance company loans to business

19.

Total short- and intermediateterm business credit (sum of
lines 17 & 18)

-9.6

-24.3

-22.0

-16.3

8.3

n.a.

3.6

-1.6

-9.2

-14.5

-6.0

n.a.

821.3

7.3

n.a.

297.7

-2.5

n.a.

1119.05

29.25
5

13.1

4.7

4.6

-5.6

6.1

-9.1

1. Average of Wednesdays.
2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
3. Based on average of data for current and preceding ends of month.
4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic
shipment and storage of goods.
5. June data.
p--preliminary.
n.a.--not available

III-7
the Bank of New England and the Connecticut Bank and Trust.

As part of the

resolution, the FDIC took on some loans of the two banks, and the acquiring
institutions received government securities as well as $3.3 billion in
promissory notes from the FDIC; FDIC notes are not counted in bank credit.
Even adjusting for the loans acquired by the FDIC, C&I loans fell at a 4-1/2
percent pace in July.

Much of the continuing weakness in C&I loans has been

concentrated at large banks, but more recently, growth in C&I loans at small
banks also has been unusually sluggish.

Continued softening in bank loans

may partly reflect business efforts to restructure balance sheets by issuing
long-term debt and equity.

Real estate loan growth was unusually weak, even

after the loans assumed by the FDIC are added back, likely held down in part
by heavy charge-offs of commercial loans at the end of June.

Adjusted for

securitizations, consumer loans increased in July at a 2-1/2 percent pace,
down from June but about the same pace as earlier in the year.
Nonfinancial Business Finance
The ongoing weakness in C&I loans is part of a broader picture of
subdued business credit growth.

Total borrowing by nonfinancial

corporations picked up a bit in July from the moribund pace in the second
quarter, but still remained sluggish.

While bank loans continued to run off

in July, outstanding commercial paper increased about 8 percent.

Gross

public issuance of bonds declined in July, although firms have taken
advantage of rate declines in August to step up issuance.
Business credit at finance companies grew about 7 percent in June,
about the same as in May.

Short-term credit, mostly working capital loans,

increased and auto leasing showed continued strength, while financing of
business equipment slowed.

In recent discussions, finance company officials

III-8

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)
----------------- 1991---------------Q1
Q2p
May P
JuneP
July

1988

1989

1990

22.41
20.39
3.54
1.15
0.24
0.91
2.39

19.87
17.80
2.69
1.08
0.29
0.79
1.60

19.86
17.73
1.95
1.03
0.35
0.68
0.92

28.34
26.10
2.22
1.29
0.47
0.82
0.93

34.86
31.07
6.12
4.01
0.70
3.31
2.11

38.37
34.72
7.42
4.70
0.85
3.85
2.71

31.26
28.42
5.62
3.53
0.77
2.76
2.09

21.23
19.18
2.68
2.32
0.21
2.11
0.35

Bonds
Nonfinancial
Utility
Industrial
Financial
>
By quality
Aaa and Aa

16.85
6.19
1.79
4.41
10.66

15.12
6.30
1.78
4.52
8.81

15.77
5.65
1.97
3.69
10.12

23.89
9.10
2.20
6.90
14.79

24.95
10.20
3.69
6.51
14.75

27.30
10.10
3.70
6.40
17.20

22.80
8.50
3.90
4.60
14.30

16.50
6.50
2.70
3.80
10.00

2.77

3.17

3.43

4.78

3.80

3.98

3.00

1.30

A and Baa

5.50

5.83

6.41

12.82

12.65

13.22

10.93

8.33

2.56
0.05

2.39
0.05

0.15
0.04

0.41
0.03

1.32
0.00

0.83
0.00

0.78
0.00

0.2
0..

0.28
4.72
1.26
1.19

0.52
1.68
2.02
1.03

0.38
2.41
3.35
0.82

0.77
2.04
3.84
0.75

0.78
3.32
3.86
0.84

0.71
2.62
6.65
1.01

1.03
4.22
3.87
1.19

0.54
2.50
3.88
0.12

Bonds sold abroad - total
Nonfinancial
Financial

1.93
0.73
1.20

1.90
0.48
1.43

1.92
0.46
1.46

2.07
1.04
1.03

3.00
1.56
1.43

2.83
1.49
1.34

2.30
1.20
1.10

1.50
0.85
0.65

Stocks sold abroad - total
Nonfinancial
Financial

0.09
0.08
0.02

0.16
0.12
0.04

0.22
0.10
0.12

0.17
0.05
0.11

0.80
0.75
0.05

0.83
0.77
0.06

0.54
0.54
0.00

0.54
0.37
0.18

Corporate securities - totall
Public offerings in U.S.
Stocks--total
Nonfinancial
Utility
Industrial
Financial

Less than Baa
No rating (or unknown)
Memo items:
Equity-based bonds
Mortgage-backed bonds
Other asset-backed
Variable-rate notes

1. Securities issued in the private placement market are not included.
proceeds rather than par value of original discount bonds.
Excludes equity issues associated with equity-for-equity swaps that
restructurings. Such swaps totaled $9.4 billion in 1990.
3. Bonds categorized according to Moody's bond ratings, or to Standard
unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants that
to purchase equity in the future.
p--preliminary.

Total reflects
have occurred in
and Poor's if
entitle the holder

III-9
indicated that business loan demand generally remains weak.

They noted,

however, that some businesses had turned to finance companies owing to
stringent terms at banks, and that some finance companies had purchased
lending subsidiaries directly from banking organizations that were
attempting to shrink their balance sheets.
Corporate bond spreads are mostly unchanged or up slightly over the
intermeeting period.

Investment-grade bond spreads are at especially low

levels for this stage in the business cycle.

In part, this may reflect the

effects of insurance companies shifting to acquisitions of higher grade
public corporate bonds from riskier and more illiquid investments.

However,

junk bond spreads have been fairly stable since the first quarter,
suggesting little pressure on this market from borrowers turned away by
insurance companies.
Stock issuance by nonfinancial firms remained strong in July, although
it has slowed a bit from its pace in the second quarter.

About 17 percent

of gross nonfinancial equity issuance in July was by companies issuing stock
for the first time since being taken private in LBOs.

Another 25 percent

was accounted for by other initial public offerings.

Stock issuance should

be even stronger in August; this month's volume already has been boosted by
Time-Warner's $2.5 billion rights offering.
Recent information on financial stress in the corporate sector is
mixed.

The number of firms reducing or omitting dividends in May, although

high, fell to its lowest level since March 1990, and the pace of debt
downgradings was less intense in the second quarter.

Moreover, the number

of business failures in June, though still high by historical standards,
was down from its April peak.

III-10
Financial Institutions
Despite mixed second-quarter earnings and recent weak economic data,
bank stock indexes have advanced about 19 percent since early July,
primarily because of merger announcements by NCNB/C&S-Sovran,
Chemical/Manufacturers Hanover, and Bank of America/Security Pacific.

These

announcements led to speculation that other bank mergers might soon follow.
Bank stock prices also benefited from the drop in interest rates following
the System easing in August.
In contrast to bank stock indexes, share prices for publicly traded
insurance companies dipped in July on concerns about the commercial real
estate exposure of many insurers and the potential for liquidity pressures
in the industry.

The market's concern followed an announcement that Mutual

Benefit Life, a $14 billion company, had been taken into conservatorship
after suffering large losses on its commercial real estate portfolio.
Mutual Benefit will be allowed to continue to pay death, disability, and
health benefits, along with all regular annuity payments.

However, the

payout on other claims against the company, including guarantees, is in
doubt.

For example, Mutual Benefit guaranteed about $1.4 billion of bonds,

of which approximately $650 million are CMOs, primarily consisting of
mortgages from the insurance company's own portfolio.

The remainder are

tax-exempt issues, including about $250 million of bonds issued by local
housing authorities on behalf of housing developers.

The bonds included

options allowing the holder to put the bond back to the beneficiary (the
developer in this instance).

About $145 million of the put options were

exercised, the developers defaulted in most cases, and Mutual Benefit could
not make good on its guarantees.

III-11
Mutual Benefit's problems, along with the recent downgrades of several
other life insurance companies, have caused spreads on insurance company
bonds to widen as much as 40 basis points relative to comparable Treasuries.
In addition, a few commercial paper investors reportedly were allowing
maturing insurance company paper to run off.

Commercial paper dealers

indicated that they had little difficulty placing insurance company paper
with other investors, although spreads have widened a couple of basis
points.
Life insurance companies have been taking steps to improve credit
quality and liquidity by reducing their exposure to commercial real estate
and speculative-grade corporate debt.

Data through March indicate a sharp

reduction in real estate loan commitments and little willingness to acquire
below-investment-grade bonds in the private placement market.

Recent

conversations with insurance company managers suggest they are still
involved in the private placement market but have become even more
selective.

Fearing heavy withdrawals, many firms evidently are taking

measures to build liquidity.

Although most companies expressed a desire to

shed riskier assets, illiquid markets likely have made this a difficult
process.
A sale of Executive Life (California) has been tentatively approved by
the California Insurance Commission.

Under the terms of the agreement,

Executive Life's junk bond portfolio would be sold to a subsidiary of
Credit Lyonnais, while outstanding claims on Executive Life would be placed
in a new company to be purchased by a group led by a French insurance
company.

Most policyholders reportedly would receive 81 cents on the

dollar; the standing of GIC holders, however, is still a subject of

III-12

TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)
1991
Q2

Julye

Aug.p

Sept. p

Treasury financing
-25.7

-92.6

-43.0

-46.5

-3.1

43.1

97.8

34.6

33.0

30.2

Marketable borrowings/
repayments (-)
Bills
Coupons
Nonmarketable

38.6
-11.7
50.3
4.5

100.6
42.9
57.7
-2.8

39.6
16.5
23.2
-5.0

30.8
13.4
17.5
2.1

30.1
13.0
17.1
.1

Decrease in the cash
balance

-11.6

-5.5

7.3

15.1

-27.9

49.7

36.9

21.8

49.7

1.1

-1.6

Total surplus/deficit (-)
Means of financing deficit:
Net cash borrowing
from the public

Memo: Cash balance
at end of period

44.2

Other
Federally sponsored credit
agencies, net cash
borrowing
FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA

-5.8

-7.1

-6.5
-2.6
1.7
-.2
.5

1. Data reported on a not seasonally adjusted, payment basis.
2. Includes proceeds from securities issued by federal agencies under special
financing authorities (primarily FSLI:C) and the face value of zero-coupon bonds
issued to REFCORP (the discount from face value is offset in other means of
finance).
3. Includes checks issued less checks paid, accrued items and other transactions.
4. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
p--projected.
e--estimated.
Note: Details may not add to totals due to rounding.

III-13

negotiation.

The transaction awaits approval by the state court overseeing

Executive Life's rehabilitation, and the state insurance commissioner is
allowing other investors to submit bids.

In addition, creditors who stand

to receive the least (such as GIC holders) are likely to challenge the
rehabilitation plan.

Finally, the IRS has filed a claim of $640 million for

back taxes that could upset the deal.
Treasury and Sponsored-Agency Financing
While private sector demands for credit apparently stalled in July, the
Treasury's borrowing needs were strong and growing.

The staff projects a

federal deficit of about $93 billion for the third quarter.

Over the

quarter, Treasury is expected to sell a record $101 billion of securities,
comprising $43 billion of bills and $58 billion of coupon securities.
Salomon Brothers Inc. announced on August 9 that it had discovered
"irregularities and rule violations" in its bidding at three Treasury note
auctions.

Treasury auction rules proscribe any bidder from acquiring more

than 35 percent of any Treasury issue; the investment firm admitted that its
violations had allowed it to circumvent the Treasury's 35 percent rule.
Yields on Treasury securities initially rose after the announcement.
In the market for agency debt, spreads generally have remained narrow
as overall issuance has continued to decline.

The government sponsored

enterprises (GSEs) ran off more than $2-1/2 billion of debt in June, the
latest month for which complete data are available, bringing the decline for
the second quarter to about $7 billion.

Most of the decline in agency debt

reflects the contraction in FHLB balance sheets as thrifts continue to pay
down FHLB advances.

III-14
Legislation that would increase the regulation of the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation moved
through the House Banking Committee.

This legislation would establish an

independent bureau within the Department of Housing and Urban Development to
oversee the financial safety and soundness of the two GSEs.

The minimum

capital levels required by the bill, however, are somewhat less stringent
than proposed by the Treasury.
Municipal Securities
Gross issuance of tax-exempt securities in July fell sharply from
June's elevated pace but was about on par with that in the second quarter.
Municipal short-term issuance should rebound in August, largely on the
strength of an expected $4 billion State of California issue.

The New

Jersey Turnpike Authority plans to refund a large portion of its outstanding
debt later this month, and this action would boost long-term issuance.
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)

1989

1990

Year

11.90

13.10

11.39

17.51

Total tax-exempt 11.65
Long-term
2
9.47
Refundings
2.47
New capital
7.01
Short-term
2.17

12.85
10.03
1.45
8.60
2.82

11.25
9.81
.79
9.02
1.44

.25

.14

Total offerings

Total taxable

.25

1991

June

July p

16.35

23.12

14.56

17.20
13.16
.68
12.48
4.04

15.91
14.75
.83
13.92
1.16

22.79
13.81
.46
13.35
8.98

14.50
10.41
.06
10.35
4.09

.31

.44

.33

.06

May

p--preliminary.
1. Includes issues for public and private purposes.
2. Includes all refunding bonds, not just advance refundings.

III-15
Yields on most municipal securities decreased over the intermeeting
period.

However, yields on bonds guaranteed by life and property-casualty

insurance companies rose sharply after Moody's downgraded several companies
that back municipal debt.

Insurance company guarantees account for only a

small portion of all guarantees on municipal debt; special purpose insurers
account for the bulk of the total.

One of the top special purpose insurers

is owned, in part, by a downgraded insurance company but the chances of this
having a significant effect on the muni market appear remote.
Municipal credit quality continued to deteriorate in the second
quarter.

Standard & Poor's lowered debt ratings of 74 state and local

government units while raising ratings of only 38.

In July and August,

moreover, Standard & Poor's downgraded New Jersey and Illinois, citing
budget problems.

The number of governmental unit downgrades in the second

quarter was largest in Northeastern states, including Vermont, New
Hampshire, Maine, and Rhode Island.

The deterioration in the financial

condition of state and local governments has been reflected in short-term
markets: In 1988, 98 percent of short-term issuance was rated MIG-1(Moody's
top rating); in 1991, only 57 percent of short-term issuance has been in the
top category.
In a case closely watched in the municipal security market, Bridgeport,
Connecticut's petition for relief under Chapter 9 of the bankruptcy code was
rejected by the bankruptcy court.

The city filed for bankruptcy with the

view that it might be insolvent in the current fiscal year and definitely
would be insolvent in the next fiscal year.

The court ruled that the city

was unable to prove insolvency in the current fiscal year.

In addition, it

III-16
GROSS PUBLIC ISSUANCE OF MUNICIPAL SHORT-TERM DEBT BY CREDIT RATING
(Millions of dollars, annual rates)
Credit
Rating*

1991-H1

1988

1989

1990

MIG-1
MIG-2
MIG-3
MIG-4

20,188
356
13
0

23,733
1,263
11
0

22,677
7.324
2
0

13,742
10,317
0
9

Total

20.557

25,007

30,001

24,068

*Moody's Investor Service.

MUNICIPAL LONG-TERM DEBT RATING ACTIONS
(Number of rating revisions by region)
1991
Q1

1984

1985

1986

1987

1988

1989

1990

20
8

12
14

86
74

31
41

13
22

28
25

39
48

6
31

6
19

4
8

22
8

19
55

19
76

10
41

16
8

11
48

16
32

1
10

0
4

0
6

8
9

11
11

1
2

1
6

16
8

8
2

3
2

8
45

20
19

189
62

20
30

26
43

50
22

27
92

5
18

4
16

15
8

22
39

30
67

27
73

27
46

45
13

29
101

8
14

13
4

16
15

27
19

31
27

47
37

37
31

30
64

18
168

5
29

11
25

63
88

103
105

363
294

155
268

114
185

170
138

140
465

49
126

38
74

Memo:
Ratio of
upgrades to
downgrades .72

.98

1.23

.58

.62

1.23

.30

.39

.51

Region
West
Up
Down
Southwest
Up
Down
Northwest
Up
Down
Midwest
Up
Down
Southeast
Up
Down
Northeast
Up
Down
Total
Up
Down

Source:

Standard and Poor's Credit Week

III-17
ruled that the city could not show insolvency in the next fiscal year
without an adopted budget.
News of a small surplus in New York City's 1991 budget led to a
favorable reception for its offering of $750 million of long-term general
obligation bonds in early August.

Yields were down significantly from those

on a similar offering in June, although they remain high relative to rates
on other Baa-rated municipal bonds.
Philadelphia, another financially troubled city, privately placed about
$100 million of tax and revenue anticipation notes this month at a yield of
10.7 percent.

A cool reception forced the city to raise the yield more than

100 basis points to attract investors, said to be largely tax-exempt money
funds.

The notes are the first phase of a bridge loan needed to finance the

city's 1992 deficit.

The city had expected to receive funds from the

Pennsylvania Intergovernmental Cooperation Authority, recently established
by the state to provide financial assistance to Philadelphia, but the
failure of the city to adopt a five-year fiscal plan has delayed issuance of
bonds by the authority.
Mortgage Markets

Available data suggest little pickup in mortgage credit expansion.
Real estate loans at commercial banks fell a little in July, but this is
probably largely accounted for by continued weakness in lending on

commercial properties and by end-of-quarter charge-offs.

Judging from the

recent increase in sales of new and existing homes, home mortgage debt
likely is firming a bit.
Refinancing activity, which increased significantly in the spring,
declined in early summer as bond and mortgage yields rose.

However,

III-18

MORTGAGE-BACKED SECURITY ISSUANCE
(Monthly averages, billions of dollars, NSA unless noted)
Federally related
pass-through securities
Total
Fixed- ARMbacked
Rate
(SA)

Total

Multiclass securities
Private FNMA
FHLMC
REMICS
REMICs
issues

Agency
strips

1989
1990

16.5
19.7

14.1
17.3

2.6
2.3

8.1
11.3

1.4
2.4

3.1
5.0

3.2
3.4

.3
.5

1990-Q1
Q2
Q3
Q4

21.5
19.9
18.2
19.1

18.4
16.3
17.5
16.8

1.4
2.2
1.6
4.1

11.3
11.1
12.1
10.9

1.6
2.9
2.7
2.3

5.0
4.7
6.6
3.9

3.8
3.0
2.3
4.5

.9
.4
.6
.3

1991-Q1 r
Q2 p

16.8
24.7

14.1
21.6

1.5
1.6

8.9
18.5

2.0
2.9

4.0
8.2

2.8
6.8

.1
.6

1991-Jan.
Feb.
Mar.
Apr.
May
June

15.7
16.2
18.5
19.3
26.7
28.2

13.0
14.1
15.2
16.8
21.7
26.2

0.7
1.1
2.8
1.1
1.0
2.6

5.3
8.3
13.2
15.0
17.6
22.6

1.5
1.4
3.2
3.1
2.6
2.9

2.4
3.2
6.3
5.9
8.1
10.6

1.2
3.6
3.7
6.0
6.9
7.6

.2
.2
.0
.0
.0
1.6

r
r
r
p

1. Excludes pass-through securities with senior/subordinated structures.
r--revised p--preliminary n.a.--not available.

Mortgage Pricing
Spreads over Comparable Maturity Treasuries
Basis Points
&

I \
L
N~
/
.\

Fixed-Rate Mortgages*

Adjustable-Rate Mortgages

J S
1984

D M

J S
1985

D M

*30yr FRM is bond-yield equivalent.

JSDM
1986

J S
1987

D M

J S
1988

D M

J S
1989

D M

J S
1990

D M

J S
1991

III-19
contract rates on fixed-rate mortgages (FRMs) have fallen about 40 basis
This

points in recent weeks to 9-1/4 percent, the lowest level since March.
may prompt a resumption in FRM refinancing activity.

Initial rates on ARMs

also have declined, but not by as much as FRM rates; the FRM-ARM spread has
narrowed about 20 basis points.

Although the initial FRM-ARM rate spread is

still about 2-1/4 percentage points, the Federal Housing Finance Board's
most recent survey of major institutional lenders reports that the
proportion of loans closed with adjustable-rate features remains below
25 percent.

Apparently, many home buyers fear that rates could go higher in

the future and are opting to lock in the relatively attractive long-term
rates available now.
Although conventional mortgage rates have fallen in recent months, the
fixed costs of obtaining an FHA mortgage have increased.

New and higher FHA

mortgage insurance premiums, as well as a 57 percent cap on the share of
closing costs that can be financed, became effective July 1.

The new fees,

set by the National Affordable Housing Act of 1990, are designed to
reinforce the financial strength of FHA.

Lenders are required to begin

charging the higher mortgage insurance premiums for all loans closed on or
after July 1, even if HUD had issued commitments prior to that date.

addition to the new annual premium of 0.5 percent on FHA loans, lenders must
continue charging the up-front mortgage insurance premium payment of 3.8
percent.

The new FHA rule implies a borrower with a $100,000 FHA loan

will pay an additional $1,000 at closing.

Moreover, about 15 percent of

1. The new 0.5 percent annual premium applies for five years for mortgages
with loan-to-value ratios of 90 percent or lower; eight years for loans with
LTV ratios between 90 and 95 percent; and 10 years for loans with LTV ratios
of 95 percent or higher.

II-20

CONSUMER CREDIT
(Seasonally adjusted)
Memo:
Outstandings
(billions of
dollars)
1991

Percent change
(at annual rate)
1990
1988
8.8

Installment

19891 1990
5.9

2.3

1991

-.2

-1.4

-1.1

Mav r
-2.2

6.9 1.3 -2.1 -1.5 -5.5 -9.3 -13.9
10.2
9.2 5.2
.5 1.1 4.0 5.1
8.6
5.2
13.7 15.2 10.6 1.9
6.9
2.9
7.4 4.5
.6 -.7 -6.0
3.2

Auto
Excluding auto

Revolving
All other
Noninstallment

6.0

2.6

Total

7.2

5.8

-4.9 -6.0 -14.2
1.7

-.7

-1.1

15.8

-1.1

-0.9

-2.4

Junep

June p

-3.0

730.5

-10.2
1.4
2.2

274.1
456.3
227.7
228.6

.5
-19.0

57.0
787.5

-4.2

1. Growth rates are adjusted for discontinuity in data between December 1988 and
January 1989.
r--revised. p--preliminary.
Note: Details may not add to totals due to rounding.
CONSUMER INTEREST RATES
(Annual percentage rate)
1991
At commercial banks 1
New cars (48 mo.)
Personal (24 mo.)
Credit cards

1989

1990

Feb.

12.07

11.81

15.44

15.46

18.02

18.17

11.60
15.42
18.28

12.62
16.18

12.54
15.99

13.16
15.90

Mar.

Apr.

May

June

11.28
15.16

18.22

At auto finance cos.
New cars
Used cars

13.14
15.82

12.77
15.74

1. Average of "most common" rate charged for specified type and maturity during the
first week of the mid-month of each quarter.
2. Average rate for all loans of each type made during the month regardless of
maturity.

III-21
banks in the August survey of Senior Loan Officers indicated some modest
further tightening in their standards for making conventional fixed-rate
mortgages.
In the secondary mortgage market, issuance of federally related passthrough securities was slightly more than $28 billion in June, just under
A large volume

the record pace of about $30 billion set in September 1986.

of new agency pass-throughs continues to be repackaged as REMICs, with June
issuance of mortgage-backed derivatives increasing for the fifth consecutive
month to an estimated record volume of about $22-1/2 billion.

Trade reports

indicate that investor demand for derivative securities remained strong in
July.

As a consequence, mortgage-to-Treasury yield spreads in the primary

market narrowed still further over the intermeeting period.
The RTC recently made its debut in the pass-through security market in
the form of two REMIC issues totalling about $1 billion.

The RTC issued the

REMICs directly, rather than through FNMA or FHLMC, because the underlying
loans lacked primary mortgage insurance, had high loan-to-value ratios, or
were too large to conform to the agencies' purchase limits.

The RTC

securities were well-collateralized and, despite the non-conforming features
of the underlying loans, the two issues earned a triple-A rating and sold
well in the market.
Consumer Credit
Consumer installment credit outstanding fell at a 3 percent rate in
June, following a downward-revised 2-1/4 percent rate of decline in May.
Once again, auto credit was the weakest component, following its 14 percent
decline in May with a 10 percent drop in June.

For the second quarter as a

III-22
PUBLIC SECURITIZATION OF CONSUMER LOANS
(Gross Issuance, in billions of dollars)

19851987

1988

19.39

15.40

22.51

34.48

18.50

100.28

Commercial banks
Finance companies
Savings institutions
Retail firms

4.38
13.32
1.74
--

8.07
3.04
2.14
2.15

11.03
7.70
1.11
2.67

21.92
9.62
.40
2.55

9.69
6.29
.67
1.85

55.04
39.97
6.06
9.22

Auto loans
Commercial bank
Finance companies
Savings institutions

16.57
2.33
13.14
1.10

5.50
1.91
2.04
1.55

7.84
1.77
5.51
.56

10.47
2.37
7.70
.40

7.18
.87
5.64
.67

47.56
9.25
34.03
4.28

Credit cards
Commercial banks
Savings institutions
Retail firms

2.21
2.00
.21
--

7.93
5.78
-2.15

12.02
8.90
.45
2.67

22.01
19.47
-2.55

10.67
8.82
-1.85

55.04
44.97
.66
9.22

Other loans
Commercial banks
Finance companies
Savings institutions

.61
-.18
.43

1.97
.38
1.00
.59

2.65
.36
2.19
.10

2.00
.08
1.92
-

.65
-.65
--

7.88
.82
5.94
1.12

2.70

5.54

5.11

Total

Memo:
Home Equityl

1989

1990

1991
Cumulative
(mid-July)
total

13.35

1. Home Equity loans are not included in consumer credit since they are considered
mortgages. This line is included here only to indicate the securitization of a
specialized "consumer-type" asset.
Note: Details may not add to totals due to rounding.

III-23
whole, installment credit outstanding decreased at a 1 percent annual rate-the third consecutive quarterly decline.

Total consumer credit

plus noninstallment) fell 1-1/4 percent in the second quarter.

(installment
Credit

appears readily available to consumers judging from, among other things,
competition in the credit card segment and responses of senior loan officers
at banks.
A portion of the continuing weakness in auto credit may stem from wider
use of alternative financing arrangements, especially auto leasing.

Leases

are relatively more attractive in the absence of deductibility of consumer
interest payments.

Moreover, favorable assumptions about residual values

seem to have become a popular way for auto manufacturers to cut prices
indirectly.
Banks, thrifts, and finance companies continued to securitize loans at
a rapid pace in the first half of 1991.

Public issuance in the first six

months of 1991 was $18.5 billion, about the same pace of issuance as last
year.

Most of this year's activity has been in securities backed by credit

cards, although auto-backed issues also have been fairly strong.
Spreads on asset-backed securities narrowed considerably relative to
Treasuries from January to early July of this year.

Moreover, since the

July FOMC, spreads have been fairly steady despite heavy issuance,
suggesting the market is comfortable with the degree of protection the
securities provide against charge-offs and unscheduled amortizations, even
though charge-offs have been trending up.

INTERNATIONAL DEVELOPMENTS

U.S. Merchandise Trade
In May, the preliminary U.S. merchandise trade deficit was $4.6
billion (seasonally adjusted, Census basis), about the same as the revised
April deficit of $4.5 billion.

Both exports and imports declined slightly

Most of the decline in exports was in commercial aircraft, which

in May.

eased somewhat from a very strong level in April; the decrease in imports
was spread across most major trade categories (except oil).

Preliminary

data for June will be released August 16 and will be included in the
Greenbook supplement.

U.S. MERCHANDISE TRADE: MONTHLY DATA
(Billions of dollars, seasonally adjusted, Customs basis)

Total

Exports
Ag. NonAg.

Total

Imports
Oil NonOil

Balance

1990-Jul
Aug
Sep

32.2
32.5
32.2

3.2
3.3
3.1

29.0
29.2
29.1

41.4
41.8
41.3

4.2
5.3
5.9

37.2
36.5
35.4

-9.2
-9.3
-9.0

Oct
Nov
Dec

34.6
33.6
33.6

3.1
3.3
3.1

31.5
30.3
30.5

44.5
43.1
39.9

6.3
6.5
5.3

38.2
36.6
34.6

-9.9
-9.5
-6.3

1991-Jan
Feb
Mar

34.2
33.6
34.0

3.1
3.4
3.3

31.1
30.2
30.6

41.5
39.1
38.1

5.2
4.1
3.8

36.3
35.0
34.3

-7.4
-5.5
-4.1

Apr
May

35.6
35.3

3.2
3.3

32.5
32.0

40.1
39.9

4.1
4.6

36.1
35.3

-4.5
-4.6

Source:

U.S. Department of Commerce, Bureau of the Census.

For April and May combined, the deficit improved moderately from the

first-quarter average.

The improvement reflects strong growth in the value

of exports (about 4 percent), and only a small increase in the value of
imports (about 1 percent).

The increase of exports was primarily in

machinery, automotive products, and aircraft.
IV-1

IV-2
The jump in exports of machinery in April/May was primarily in
quantity and was larger than in any quarter for the past two years.

The

rise was broad-based; there were strong increases recorded in oil drilling,
telecommunications, and scientific equipment, and a broad range of
The value of exported computers increased only

industrial machines.

slightly from the high level reached in the first quarter.

U.S MERCHANDISE TRADE: QUARTERLY DATA
Billions of dollars, BOP-basis

Years
1989
1990

Seasonally Adjusted AR
1990
1991
03
Q4
01
02-e

Memo: Percent Change
1991: Q2-e from
Year Ago Prey. Otr.

Exports

361

390

387

402

403

419

7.8

3.8

Imports
Oil
Non-oil

477
51
426

498
62
436

502
62
440

513
72
441

477
53
424

483
52
431

-0.3
1.8
-0.6

1.3
-0.8
1.6

-116
-65

-108
-46

-115
-53

-111
-39

-73
-21

-65
-12

Balance
Ex Oil

e--Average of first 2 months of quarter at an annual rate.
Source: U.S. Department of Commerce, Bureau of Economic Analysis,
Balance-of-Payments Accounts.

The increase in automotive exports in April/May reversed almost all of
the declines recorded since the second quarter of last year and reflected
events in the United States as well as in other countries.

Increased

shipments to Canada were primarily automotive parts that are used largely in
producing vehicles shipped back to the United States; exports of parts had
declined sharply in the fourth and first quarters as automotive sales in the
United States sagged.

Exports of automotive products to countries other

than Canada also rose significantly, accounting for about 60 percent of the
increase.

Exports of trucks increased sharply as record numbers were

shipped to Saudi Arabia and Kuwait.

IV-3
MAJOR TRADE CATEGORIES
(Billions of dollars, BOP basis, SAAR)
Year
1990

1990
03

1991
04

02-e

$ Change
Q2-Q2 Q2-Q1

Total U.S. Exports

389.6

388.4

386.6

402.3

403.4

419

30.2

15.1

Agricultural Export
Nonagric. Exports

40.2
349.3

40.8
347.5

39.3
347.3

37.8
364.5

39.7
363.7

39
380

-1.9
32.2

-0.8
16.0

Industrial Suppl.
Gold
Fuels
Other Ind. Suppl.

96.7
3.0
14.0
79.6

92.8
2.8
11.7
78.3

95.4
3.0
13.9
78.6

106.0
4.4
18.1
83.5

105.2
4.1
16.8
84.3

104
4
13
87

11.3
0.8
1.8
8.8

-1.0
-0.4
-3.3
2.8

Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery

153.8
32.3
25.9
95.6

155.3
34.6
25.1
95.5

153.1
31.6
26.5
95.0

156.0
30.9
26.4
98.7

155.9
30.8
27.3
97.7

169
37
28
104

13.4
2.1
2.4
8.8

12.8
5.9
0.2
6.7

Automotive Products
To Canada
To Other

37.4
22.6
14.8

38.7
23.8
14.8

38.4
23.5
14.9

37.1
21.5
15.6

34.1
19.5
14.7

40
22
18

1.3
-2.0
3.3

5.8
2.3
3.5

Consumer Goods
Other Nonagric.

43.3
18.2

43.8
17.0

42.8
17.6

45.8
19.6

45.9
22.6

45
22

1.3
4.8

-0.9
-0.8

Total U.S. Imports

497.7

484.7

501.6

513.2

476.9

483

-1.5

6.3

Oil Imports
Non-Oil Imports

62.1
435.6

51.3
433.4

61.8
439.8

72.1
441.1

52.6
424.3

52
431

0.9
-2.4

-0.4
6.7

Industrial Suppl.
Gold
Other Fuels
Other Ind. Suppl.

82.5
2.5
3.6
76.4

82.0
2.1
3.2
76.7

83.3
2.8
3.5
77.0

83.9
3.3
4.3
76.4

80.2
3.3
3.9
73.0

83
3
5
75

1.3
1.2
1.5
-1.4

3.1
0.0
0.8
2.2

Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery

116.4
10.6
23.0
82.8

115.6
10.7
22.9
82.0

116.2
9.9
23.0
83.3

120.2
12.8
23.3
84.1

119.0
11.1
24.2
83.7

122
12
26
84

6.6
1.3
2.8
2.5

3.2
0.9
1.5
0.8

87.3
29.7
56.5

87.3
31.0
56.4

90.3
32.2
58.1

86.1
27.3
58.8

82.5
23.5
58.9

78
29
50

-9.1
-2.4
-6.8

-4.3
5.1
-9.4

106.2
26.6
16.4

104.7
27.1
16.7

106.6
25.8
17.5

106.9
26.0
18.1

100.5
25.6
16.5

102
28
18

-3.2
1.0
0.9

1.0
2.6
1.1

Automotive Products
From Canada
From Other
Consumer Goods
Foods
All Other

e--Average of first 2 months of quarter at an annual rate.
Source:
U.S. Department of Commerce, Bureau of Economic Analysis.

IV-4
Deliveries of large jet aircraft in April/May continued at the
stronger rate begun in March.

McDonnell-Douglas began to deliver its new

MD-11 aircraft and foreign carriers accounted for a slightly higher
proportion of Boeing deliveries.

Most of the increase in exports of large

jets was to industrial countries, but there have also been increased
deliveries of the largest aircraft to developing countries, especially in
Asia.
Exports of consumer goods remained little changed in April/May.
Agricultural exports in April/May also declined slightly from the
first-quarter average; decreases in wheat and cotton were not fully offset
by increases in tobacco, soybeans, and other foods.
The value of imports turned up in April/May following a drop in the
first quarter.

While oil imports were about the same as in the first

quarter, non-oil imports rose slightly, with increases spread over most
major trade categories.
quantity as prices

All of the increase in non-oil imports was in

(fixed-weight) declined at an annual rate of 3 percent in

the second quarter.
Some of the sharpest changes in imports occurred in various categories
of automotive imports, which fell by about 2 percent on balance.

A sharp

rise in deliveries from Canada in April/May was more than offset by an even
greater drop in imports from other countries (particularly Japan).

A 20

percent increase in the value of automotive imports from Canada moved these
imports about two-thirds of the way back to levels recorded in the second
and third quarters of last year.
The value of imported automotive products from countries other than
Canada dropped sharply in April/May after having changed very little from
the third quarter of last year through the first quarter of this year.
of the drop in April/May was in passenger cars, primarily from Japan.

Most

IV-5
Japanese companies had continued to increase shipments of cars to the United
States through February despite sagging sales; only at the beginning of the
new "agreement" year on April 1 were shipments cut noticeably.

April/May, shipments from Japan were 12 percent less than for the same
period a year ago and 35 percent less than two years ago.

Passenger car

imports from Sweden, Korea, and Mexico declined much less over the same
period.
Imports of computers were another exception to the general pattern of
decline in the first quarter and moderate recovery in April/May evidenced
for non-oil imports; computer imports increased steadily in every quarter of
1990 and accelerated in the first quarter and into the second quarter of
1991.

In April/May the value of computer imports was 10 percent higher than

in the fourth quarter of last year; the deflator for computers dropped 6
percent over the same period, implying a nearly 18 percent increase in
imported computers in constant dollars.

This increase in the quantity of

imports of computers was large enough to push the level of total real nonoil imports slightly above levels recorded in the second half of 1990.

Oil Imports: Quantities and Prices.
The value of oil imports in April/May was about the same as in the
first quarter; a decline in prices in April/May was offset by an increase in
the quantity imported.
Relative to the first quarter, the price of imported oil in April/May
fell almost $3 per barrel.

Spot prices fluctuated in a narrow band during

April and May after falling throughout the first quarter, leaving the import
price around $17.50 per barrel for both months.

Spot prices have generally

firmed through July and early August as the market has focused on a
potentially tight winter supply situation (the result of the slow return of

IV-6
exports from Iraq and Kuwait).

For example, from the middle of June through

the middle of August the price of the January crude oil futures contract
rose by $1.20 per barrel.

These movements in spot and futures prices

suggest that import prices could increase by perhaps $1.40 per barrel from
June through August.

OIL IMPORTS
(BOP basis, value at annual rates)
1990
Q4
Value (Bil. $)
72.08
Price ($/BBL)
28.77
Quantity (mb/d)
6.86

Jan

Feb

Months
Mar

Apr

62.84
23.54
7.31

49.72
19.35
7.04

45.32
17.85
6.95

49.03
17.34
7.74

1991

Q2-e

52.63
20.29
7.10

52.21
17.47
8.18

May
55.39
17.59
8.62

e--Average of first 2 months of quarter at an annual rate.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.

U.S. oil imports increased by more than 1 mb/d in April/May from rates
recorded in the first quarter.

Although domestic oil consumption declined

slightly in April/May, stocks were built (at a very rapid rate) for the
first time since July 1990.

Preliminary Department of Energy data for June

and July suggest that oil consumption rebounded with the pick-up in economic
activity and that stocks continued to be built.

By the end of July, stocks

were above historical average levels.
Prices of Non-oil Imports and Exports
In June, according to the Bureau of Labor Statistics (BLS), the price
index for non-oil imports declined 0.5 percent.

A large decline in prices

of industrial supplies excluding oil, coupled with declines in prices of
capital goods and automotive products, swamped a three percent increase in
the price of consumer goods.

The price index for exports fell 0.1 percent

in June, as large declines in the prices of exports of consumer goods and
industrial supplies offset increases in prices of exports of capital goods

IV-7
IMPORT AND EXPORT PRICE MEASURES
(percent change from previous period, annual rate)
Year
1991-Q2
1990-02

Quarters
1990
1991
Q4
Q1
02
(Quarterly Average, AR)

Months
1991
May
Jun
(Monthly Rates)

--------------------- BLS Prices-------------------Imports. Total

2.9

24.9

-11.9

-7.4

-0.2

-0.9

Foods, Feeds, Bev.
Industrial Supplies
Ind Supp Ex Oil*

5.8
3.0
-0.9

5.2
77.1
2.7

7.8
-40.4
-0.2

3.0
-19.1
-4.4

0.1
-0.3
-0.1

-0.4
-1.9
-1.0

Capital Goods
Automotive Products
Consumer Goods

2.8
5.3
0.5

8.2
10.3
4.5

4.9
6.6
2.5

-5.4
1.2
-4.3

-0.6
0.2
-0.4

-0.8
-0.6
0.3

10.6
2.2

307.2
6.3

-73.1
3.7

-41.7
-2.7

-0.7
-0.2

-4.1
-0.5

1.4
-4.0
-0.8
3.6
2.7
4.4

4.4
-16.5
15.9
2.1
3.5
3.7

0.6
8.3
-9.6
5.6
3.5
6.0

-1.2
8.1
-12.0
3.5
2.0
6.3

-0.3
0.1
-1.2
0.3
0.2
0.2

-0.1
0.1
-0.6
0.4
0.4
-1.4

-3.7
2.1

-14.2
7.9

6.7
-0.6

6.7
-2.7

0.3
-0.3

-0.1
-0.1

Memo:
Oil
Non-oil

Exports, Total
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
Memo:
Agricultural
Nonagricultural

------------- Prices in the GNP Accounts------------Fixed-Weight
Imports, Total
Oil
Non-oil

3.3
9.0
2.6

34.4
346.2
5.3

-18.3
-75.0
4.0

-10.3
-46.3
-2.7

Exports, Total
Ag
Nonag

1.6
-2.1
2.3

5.7
-11.8
9.5

0.4
7.8
-1.0

-0.4
7.7
-1.8

Deflators
Imports, Total
Oil
Non-oil

-1.7
8.8
-2.7

27.1
345.0
0.6

-20.8
-75.0
-4.7

-16.7
-46.3
-8.7

Exports, Total
Ag
Nonag

-1.2
-2.1
-1.0

3.6
-11.8
5.6

-5.2
7.8
-6.6

0.8
7.7
0.6

*/ Months not for publication.

IV-8
and automotive products.

BLS price indexes for July will be released on

August 22.
The fixed-weight price index for non-oil imports, reported in the GNP
accounts, declined 2.7 percent at an annual rate in the second quarter,
following increases of 4 to 5 percent annual rate during the previous three
quarters.

The price declines, which occurred in most major trade

categories, reflected the appreciation of the dollar since March.
Prices of agricultural exports in the second quarter moved up 7-3/4
percent at an annual rate for the second quarter in a row, with prices of
exported wheat leading the increase.

In contrast, the average price of

nonagricultural exports declined in the second quarter following a smaller
decrease in the first quarter, as price increases for exported capital goods
and consumer goods were more than offset by declines in the prices of
exported industrial supplies.
U.S. International Financial Transactions
Banks continued to report substantial net capital outflows in June,
bringing the total for the second quarter to almost $30 billion (line 1 of
the Summary of International Transactions table).

Weak growth in bank

credit in the United States was probably a major factor behind the direction
of flow.

In addition, shifts in the funding pattern of U.S. offices of

foreign banks contributed to the net outflow;

capital inflows from foreign

parents to their U.S. offices fell, as these U.S. offices sharply increased
their issuance of large CDs in the U.S. market.

The net outflow for the

second quarter in line 1 of the Summary table is consistent in direction,
although not in size, with the outflow to own foreign offices and IBFs
reported to the Federal Reserve by foreign-chartered banks (line 1b of the

International Banking Data table).

These data suggest a continuing, but

small, outflow in July from U.S.-chartered banks (line la).

IV-9
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)
1990

1991

1989
Year

1990
Year

27.2

31.5

21.7

-1.4

1.6

-29.6

15.4

-28.4

-4.0

-7.3

-4.4

32.0

16.5

-0.1

6.2

7.9

-13.7

-2.3

-24.5

-31.3

30.1

Apr.

May

Jun.

-19.6

-3.3

-6.7

1.9

1.5

0.6

-0.3

3.8

7.8

1.6

2.7

3.6

-5.0

1.8

7.7

3.1

3.2

1.4

-1.7

-8.5

-10.0

-3.1

-5.3

-5.2

-0.2

0.2

-2.5

3.5

14.0

0.2

13.8

0.1

8.3

31.9

14.3

168.

5.6

-3.9

-5.4

6.3

G-10 countries

-5.2

10.0

8.6

-4.3

-6.3

2.1

OPEC

10.1

1.1

-1.4

-0.6

-2.8

-1.9

-0.3

-0.7

3.4

20.8

7.1

10.8

17.0

3.2

2.8

4.5

-4.1

0.1

29.6

12.3

19.7

2.4

-1.9

-2.0

3.4

-3.3

8.2

2.3

2.0

-0.9

3.2

-2.0

-3.4

2.9

-1.5

-25.3

-2.2

1.7

-1.I

-0.4

1.4

-0.2

1.8

-3.8

-8.5

n.a.

Private Capital
Banks
1.

Change in net foreign
positions of banking offices
in the U.S. (+ = inflow)

Securities
2.

Private securities
transactions,
a)

net

foreign net purchases

(+) of U.S. corporate bonds
b)

foreign net purchases

U.S. net purchases (-) of

(+) of U.S. corporate stocks
foreign securities
3.

-13.6

Foreign net purchases (+) of U.S.
Treasury obligations

Official Capital
4.

Changes in foreign official
reserves assets in U.S.
(+ = increase)

All other countries
b)

-11.7
0.3

By type
U.S. Treasury securities
3
Other

-,4.8

By area

Changes in U.S. official reserve
assets (+ = decrease)

4
Other transactions (Quarterly data)
6.

U.S. direct investment (-) abroad

7.
8.

Foreign direct investment (+) in U.S.
5
Other capital flows (+ = inflow)

U.S. current account balance

10.

Statistical discrepancy

-33.4

-17.8

70.6

37.2

7.1

-5.0

-7.8

-0.8

-106.3

-92.1

-23.9

18.4

63.5

1.5

4.5

n.a.

2.0

n.a.

-2.9

5.9

n.a.

-23.4

10.2

n.a.

19.1

-15.5

n.a.

-18.4

n.a.

MEM:

U.S. merchandise trade balance -- part
of line 9 (Balance of payments basis,
seasonally adjusted)

-115.9

-108.1

-28.8

-27.7

1. These data have not been adjusted to exclude commissions on securities transactions and, therefore, do not match
exactly the data on U.S. international transactions as published by the Department of Connerce.
2. Includes all U.S. bonds other than Treasury obligations.
3. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities.
4. Seasonally adjusted.
5. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and
official transactions not shown elsewhere.

In addition, it includes amounts resulting from adjustments to the data made by

the Department of Commerce and revisions to the data in lines 1 through 5 since publication of the quarterly data in the
Survey of Current Business.
*--Less than $50 million.
NOTE:

Details may not add to total because of rounding.

INTERNATIONAL BANKING DATA
(Billions of dollars)

1989

Net Claims of U.S. Banking
Offices (excluding IBFS) on Own
Foreign Offices.,and IBFS
(a) U.S.-chartered banks
(b) Foreign-chartered banks

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks

1990

Mar.

June

Sept.

Dec.

Mar.

June

1991
Sept.

Dec.

Mar.

June

-2.9

-3.9

-6.4

-5.5

-11.7

-11.0

-15.6

-31.3

-23.8

-13.7

-10.3

20,4

19.2

14.9

12.2

-23.3

-23.1

-21.3

19.2
-24.7

-23.9

7.2
-18.2

5.7
-21.3

5.5
-36.9

7.6
-31.3

5.4
-19,2

9.3
-19.6

24.0

26.0

21,6

20.7

21,8

22.2

24.0

24.7

26.0

23.9

23.3

144,8

131.5

130.3

123.5

110.6

106.5

109.1

115.9

114.8

105.4

102.6

Eurodollar Holdings of
U.S. Nonbank Residents 1/

1. Includes term and overnight Eurodollars held by money market mutual funds, Note: These data differ in coverage and
timing from the overall banking data incorporated in the international transactions accounts. Line 1 is an average of
daily data reported to the Federal Reserve by. U.S. banking offices. Line 2 is an average of daily data.
Lne 3 is an
average of daily data for the overnight component and an average of Wednesday data for the term component.
*

JuLy v

Data through July 29.

IV-11
Foreign purchases of U.S. securities of all kinds were very strong in
the second quarter, resulting in a capital inflow totaling $29.5 billion
(lines 2a, 2b, and 3 of the Summary table).

The increased foreign net

holdings of U.S. stocks that started in March continued at a robust rate
through June (line 2b).

Foreign purchases of U.S. corporate bonds increased

steadily throughout the quarter, reflecting high bond issuance both in the
United States and in the Euromarket; recent data indicate a slowing of new
issues of Eurobonds by U.S. corporations in July.

The large increase in

foreign holdings of Treasury obligations of $14.0 billion in the second
quarter (line 3) largely reflected net purchases from the Netherlands
Antilles and Bermuda; investment funds located in these jurisdictions were
participants in the squeeze in the May auction of 2-year Treasury notes.
Activity in the U.S. Treasury market originating in these countries has
increased markedly in the last year.
At $13.6 billion for the second quarter, U.S. purchases of foreign
stocks and bonds proceeded at a pace even faster than in the first quarter
(line 2c).

This total reflected $2.5 billion net purchases of Japanese

stocks, $4.5 billion net purchases of Canadian bonds, and over $2 billion
net purchases of Mexican stocks and bonds; the latter was related to the
privatization of the Mexican telephone system and other former state-owned
firms.
Foreign official reserve assets held in the United States declined $4
billion in the second quarter (line 4).

Among the G-10 countries, Germany,

Italy and the United Kingdom reduced their reserve assets in the United
States moderately.

Spain and, especially, Mexico increased their reserves

held in the United States.
The cumulative total of the presently known capital flows for the
second quarter appearing in the Summary table (lines 1 through 5) represents

IV-12
an outflow of about $16 billion.

Our present forecast for other net capital

flows (lines 6 through 9 on the table) suggests that the statistical
discrepancy for 1991:2 will be positive, but moderate -- reversing the
negative statistical discrepancy in the first quarter.

An important

contributing factor to this expected positive statistical discrepancy is the
shift, noted above, in the funding pattern of the U.S. offices of foreign
banks.

The reduction in the net capital flow from foreign parent banks to

their U.S. offices, registered in line 1 of the Summary table, was largely
matched by a $9 billion decline in commercial paper issued by the foreign
parents in the United States.

In principle, this reduced capital outflow

would appear in line 8 of the Summary table; however, it will probably go
largely unreported.

Responsibility

for reporting U.S. holdings of foreign

commercial paper is divided between custodians and investors; available
evidence indicates that reporting in these categories is inadequate.
Foreign Exchange Markets
The weighted-average foreign-exchange value of the dollar, in terms of
the other G-10 currencies, has declined about 4 percent, on balance, since
the July FOMC meeting, as shown in the accompanying chart.

The dollar rose

to a high near DM 1.84 early in the intermeeting period, before moving down
sharply on Friday July 12
The dollar continued to decline throughout
most of the period as news of sluggish U.S. money growth, lower-thanexpected second-quarter real GNP growth, and a decline in U.S. employment in
July built expectations of U.S. monetary easing that were later realized.
The dollar has declined about 5 percent against the mark.

The mark

was supported by the expectation that the Bundesbank would tighten German
monetary policy in response to a surprisingly sharp rise in German consumer
price inflation to nearly 4-1/2 percent in July.

New Bundesbank President

IV-13

WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR
|

March 1973

Daily

100
98

94
/
92

May

IWllI
August

June

SELECTED DOLLAR EXCHANGE RATES
Daily

11111
Hi

May 1

100
S110

FOMC
July 3
German Mark

105

hA
' -"

100
Japanese Yen

100

1 4%·~
'I

August

IV-14
Schlesinger made several statements indicating that a further rise in German
interest rates was necessary to correct for the inflationary impact of past
fiscal policy mistakes.

German three-month interest rates rose 30 basis

points during the period, and rates on the Bundesbank's one-month RPs rose
25 basis points, with the Bundesbank widely expected to make some upward
adjustment in its official rates at its Council meeting on August 15.
Market expectations are for an increase in the discount rate of a half to a
full percentage point and, probably, also a half point increase in the
Lombard rate.
The dollar has declined less against the Japanese yen (about 2
percent), as expectations formed that the Bank of Japan, which cut the
discount rate just before the last FOMC meeting, might ease again in the
next few months.

Japanese three-month interest rates declined more than 25

basis points during the period, and Japanese call money fell 50 basis
points.
yen.

Scandals within the Japanese financial system also weakened the

The scandal over the compensation of stock losses widened somewhat,

and another scandal surfaced over the issuance of false certificates of
deposits by some bankers to serve as collateral for real estate loans.
Within the EMS, sterling has changed little overall against the mark.
The political ramifications of the BCCI closure depressed sterling only
temporarily.

The Bank of England cut its base rate by 1/2 percentage point

during the period, but sterling was little affected by that widely
anticipated move.
The Canadian dollar has risen slightly, on balance, against the U.S.
dollar over the period.

Reports that kickbacks had been paid to government

officials led to a sharp decline of more than 1 percent in the Canadian
dollar, but the Canadian dollar rebounded after a temporary rise in Canadian
interest rates and little subsequent news about the scandal.

IV-15

The
Desk's only intervention was sales of $100 million

Developments in Foreign Industrial Countries
Recent data present a mixed picture of economic activity in the
industrial countries.

In the second quarter, economic activity appears to

have rebounded in Canada, while France and Italy showed tentative signs of
more rapid growth.

The pace of economic activity eased in Japan and

Germany, although there were indications of a return to stronger German
growth toward the end of the quarter.

Recession continued in the United

Kingdom, although June data contain signs of positive growth.
With the exception of Germany, inflation in the industrial countries
was nearly unchanged.

Wage inflation moderated in Canada and France,

although recorded consumer price inflation rose slightly in both countries.
Producer prices fell slightly in Japan and Italy.

Both consumer and

wholesale price inflation in Germany in July rose significantly, in part
because of tax increases.
Trade balances improved in the second quarter in most of the
industrial countries, except for in Germany, which posted a quarterly trade
deficit for the first time in a decade.

Japan's trade surplus widened, and

IV-16
for the first seven months of the year was running at an annual rate about
The U.K. trade deficit was nearly halved

$15 billion higher than in 1990.

in the first six months to an annual rate nearly $13 billion below 1990.
Individual Country Notes.

In Japan, the pace of activity appears to

have slowed somewhat from the rapid pace of the first quarter.

Industrial

production (s.a.) declined 0.6 percent in the second quarter, the second
consecutive quarterly decline.

Retail sales (s.a.a.r.) in the April-May

period showed no increase compared with their first-quarter level.

New

passenger car registrations (s.a.) were 0.9 percent lower in the second
quarter than in the first, the third consecutive quarterly reduction.
Housing starts (s.a.a.r.) showed a 7.2 percent reduction between the first
quarter and the April-May period.

Corporate bankruptcies (s.a.a.r.) jumped

22.2 percent over the same period.

The unemployment rate (s.a.), although

remaining near historical low levels, edged up to 2.1 percent in June, while
the ratio of job offers to applicants (s.a.) declined slightly.
Inflation rates have changed little recently.

Consumer prices

(n.s.a.) increased 0.2 percent in July, and their 12-month rate of increase
rose to 3.7 percent.
only 3.1 percent.

Excluding perishable foods, the 12-month increase was

The 12-month change in wholesale prices (n.s.a.) remained

at a low 0.6 percent in June.
The trade balance (s.a.) strengthened in June and declined slightly in
July.

For the first seven months of this year, the trade surplus (s.a.a.r.)

was $72.2 billion, well above the $57.5 billion surplus rate for the same
period last year.
Despite volatility in the data, monthly indicators for the second
quarter in western Germany indicate a softening of economic activity from
the robust rate in the first quarter.

Although industrial production in

western Germany (s.a.) recovered in June, the second quarter average was

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted) 1

Q4/Q4 Q4/Q4
1989 1990

1991
1990
----------- ----------Q2
Q3
Q4
Q1

1991

Latest 3 months
Feb.

Mar.

Apr.

May

June

from year ago

Canada
GDP
IP

-,3

-1.2

-1.7

n.a.

-.8

-3.1

-1.9

n.a.

-.8

-.6

1.4

1.1

n,a.

-3.4
-5.0

1.9
-.3

.9
1.4

-. 1
-2.7

.2
.3

n.a.
n.a.

-.9

-2.8

3.6

-.5

n.a.

-. 5

3.2
4.8

5.3
5.4

1.8
3.0

.6
.4

2.3
2.0

n.a.
-.5

1.4

-. 9

2.9
3.3

1.0
-3.8

-.1

n.a.

1.4

-1.9

n.a.

-.2

4.8
4.2

4.8
6.9

1.1
2.2

.6
1.7

2.7
-. 1

n.a.
-.6

-.4

1.3

-1.3

-1.5
-3.2

-. 8
-1.7

-.6
-.3

n.a.
-1.2

1.8

.4
1.0

-. 4
-1.8

-. 7
-2.5

.1
,4

-. 9

-. 7

-. 9

-. 7

2.9
-.4

-1.1
-5.5

3.9
2.8

France
GDP
IP

1.2

West Germany
GNP
IP

-2.0

-1.0

2.5

Italy
GDP
IP

-2.1

1.1

n.a.

.5
-2.5

Japan
GNP
IP

-2.1

2.0

5.9

-2.8

3.1

-. 3

3.0

-2.4
-6.2

United Kingdom
GDP
IP

-3.4

-2.6

United States

GNP
IP

1.8
1.1

.5
.3

1. Asterisk indicates that monthly data are not available.
2. For quarterly data, latest quarter from year ago.

-. 6
-3.0

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period)
1

Q4/Q4
1989

Q4/Q4
1990

5.2
.2

4.9
1.6

3.6
.9

3.6
.7

3.0
4.3

3.0
.9

6.6
n.a.

6.3
9.9

1990
1991
--------------------------- ----------Q2
Q1
Q2
Q3
Q4
Q1

1991

--------------------------Apr.
May

June

July

Latest 3 months
from year ago

Canada
CPI
WPI

1.1
-. 1

1.4
1.0

.9
-. 3

1.0
.2

1.0
1.1

.5
.6

.4
.2

.9
.4

1.2
-.0

1.4
3.9

2.9
.1

.7
-1.6

.5
-. 4

.5
-.2

n.a.
n.a.

n.a.

France

CPI
WPI

.7
n.a,

.5
.2

.4
.6

.5
.3

West Germany
CPI

WPI

.8
.5

.9
.3

1.0
.8

Italy

CPI
WPI

1.6
1.4

2.0
4.3

.5
n.a.

.2
n.a.

1.9
.2

1.4
n.a.

.4
.2

.8
.1

.6
-. 4

.4
.1

-. 2
-. 1

.2
n.a.

.6
2.0

2,0
1.8

.3
.3

.4
.1

n.a.
.3

6.0
5.9

.2
-. 3

n.a.
-. 2

4.8
3.1

Japan
CPI
WPI

2.9
3.7

3.5
1.9

7.6
5.2

10.0
5.9

1.8
1.6

4,7
2.1

1.6
.9

1.6
1.1

4.6
4.9

6.3
6.5

1.8
2.1

1.0
.1

1.7
1.6

1.7
2.6

United Kingdom

CPI
WPI
United States
CPI (SA)
WPI (SA)
1.

Asterisk

indicates that monthly data are not available.

.5
-. 2

.2
-. 1

.3
.6

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)

1989

1990

1990
1991
--------------------------- ------------Q1
Q2
Q3
04
Q1
Q2

Apr.
Apr.

May
May

1991
June
June

July
July

Canada
Trade
Current account

5.8
-14.1

9.3
-14.0

1.4
-4.4

2.6
-3.6

2.8
-2.9

2.4
-3.1

1.8
-4.6

n.a.
n.a.

-.6
-.1

-1.7
-2.3

-3.6
-3.4

-3.1
-1.6

-2.6
-2.6

22.4
18.5

16.7
10.9

16.0
9.4

10.1
8.5

-3.5
-9.1

-1.9
-2.2

-2.9
.7

15.6
15.3

13.2
8.5

-9.8
-8.6

-27.5
-22.7

1.0

n.a.

-1.3
-2.2

-.4

-.3

-. 6

n.a.

4.4
-6.0

-1.1
-6.2

-. 8
-1.5

-. 5
-2.6

.2
-2.1

n.a.
n.a.

-3.8
-3.7

-1.2
n.a.

-4.2
n.a.

-1.9

-2.0

-.3

n.a.

14.7
7.0

8.5
5.9

17.4
17.8

18.8
18.8

6.0
7.8

5.8
5.9

7.0
5.1

5.9
n.a.

-8.8
-8.5

-7.2
-3.6

-5.7
-3.2

-5.4
-4.9

-3.7
-1.6

-1.5
-. 8

-1.6
-. 9

-.6
.0

n.a.
n.a.

-24.1
-22.2

-28.8
-23.9

-27.7
-23.4

-18.4
10.2

n.a.
n.a.

Nc
N

N
N

France
Trade
Current account
Germany

-6.9
-3.1

-9.0
-7.3

71.6
57.3

65.2
47.3

Trade (NSA)
Current account
Italy
Trade
Current account (NSA)

-12.6
-10.7

-12.1
-14.2

Japan
Trade
Current account

64.5
57.6

51.9
36.7

United Kingdom
Trade
Current account

-39.2
-32.1

-31.4
-23.8

United States
Trade
Current account

-115.9 -108.1
-106.3 -92.1

1. The current account includes goods, services, and private and official transfrrs. Asterisk indicates
that monthly data are not available.
2. Before July 1990, West Germany only.

IV-20
2 percent (a.r.) below the average for the first quarter.

The volume of new

orders for west German manufactured goods (s.a.) increased in June, but the
average level of total orders for the second quarter still was 10.6 percent
(a.r.) below that in the first quarter.

Domestic orders, which declined

more than 12 percent (a.r.) in the second quarter were especially weak.

The

volume of retail sales (s.a.) in western Germany fell in both April and May
with the average for the two months 8.4 percent (a.r.) lower than the first
quarter.
The west German unemployment rate (s.a.) moved up 0.1 percentage point
in July.

Official east German unemployment (n.s.a.) was unchanged in both

May and June at 9.5 percent but jumped to 12.1 percent in July as one-year
job guarantees given at the time of the economic merger one
expired.

year ago

The share of workers engaged in government-subsidized "short-time"

work (n.s.a.) also declined more than 2-1/4 percentage points to 18.3
percent of the labor force.
West German consumer prices (n.s.a.) increased 1 percent in July after
rising 0.5 percent in June.

On a year-over-year basis, consumer price

inflation increased from 2.7 percent in the first quarter to 4.5 percent in
July.

New excise taxes on energy products are estimated to have contributed

0.6 to 0.8 percentage point to the July increase in consumer price
inflation, but earlier weakness of the DM also was a factor in higher DM
prices in recent months.
West German wholesale prices (n.s.a.) increased 0.8 percent in July
after increasing 0.3 percent in June.

On a year-over-year basis, wholesale

prices rose 3.1 percent in July.
The average level of exports and imports (n.s.a.) in the second
quarter fell from first-quarter levels.

In June, imports fell more rapidly,

resulting in an improvement of the German trade position to a surplus of

IV-21
about $200 million.

For the second quarter as a whole, German trade was

deficit at about a $3-1/2 billion annual rate, compared to an $18 billion
annual rate in the first quarter.
The combined German current account deficit (n.s.a.) was about
unchanged in the second quarter at $25 billion (a.r.).

Excluding payments

related to the Gulf war, however (most of which were in the first quarter),
the German current account was in surplus by about $5 billion (a.r.) in the
first quarter.

The surplus for 1990 as a whole was $47 billion.

In its annual mid-year review of its monetary target, the Bundesbank
lowered its 1991 target range (set last December) for growth of M3 in
eastern and western Germany one percentage point to 3 to 5 percent.

The

Bundesbank said that the reduction in the target range was in response to
both slow monetary growth and large holding of M3 in eastern Germany.
The recently approved draft 1992 budget includes a 1 percentage point
increase in the VAT rate that will take effect at the beginning of 1993 and
cuts in west German subsidies that will save DM 30 billion over three years.
Under the new medium-term financial plan, growth of federal expenditures is
to be no greater than 2.3 percent per year in nominal terms.
Recent data on activity in France are mixed, but provide
evidence of the beginning of a pick up in growth.
(s.a.)

tentative

Industrial production

fell 0.5 percent in May, after rising 3.6 percent in April.

May data

were clouded by an unusually large number of public holidays, but industrial
production was still 3.1 percent above its December trough.
consumption of manufactured products (s.a.)

Household

fell 0.4 percent between the

first and second quarters; however, this early indicator of total household
consumption rose 2.0 percent in June, after decreasing in both April and
May.

Business confidence (s.a.), measured by near-term industrial

IV-22
production plans, fell slightly in July after three consecutive monthly
increases.

French inflation remained moderate.

The CPI was up 3.3 percent on a

twelve-month basis in June, after a 3.2 percent rise in May.

For the first

time since 1973, French inflation, in June, was lower than west German
inflation (by 0.2 percentage point).

Wage growth has moderated, with

average hourly wages growing 4.4 percent (Q2/Q2) in the second quarter, down
from 5.1 percent in the first quarter.
The merchandise trade deficit (s.a.a.r.) narrowed to $5.2 billion in
the second quarter from $10.4 billion in the first quarter, as imports fell
more than exports.
In Italy, first-quarter GDP increased 1.2 percent (s.a.a.r.),
following a 0.4 percent decline in the previous quarter, largely due to a
2.8 percent rise in private consumption.

Investment spending increased

slightly, after falling in the previous two quarters.

Industrial production

increased 1.1 percent (s.a.) in May and recently released non-seasonally
adjusted data for June indicate that industrial production rose slightly
from its level a year earlier (after an adjustment for working days).
Consumer prices rose 6.7 percent (s.a.) in July from their level a
year earlier, down from the 6.9 percent increase registered in the previous
month.

Producer price inflation continued to slow in May, rising 3.8

percent above the price level a year earlier, down from 4.0 in the previous
month.
Italy's trade deficit narrowed to $0.3 billion (s.a.) in June, from $2
billion in May, due to a surge in exports.

The cumulative trade deficit

(s.a.) through June roughly equals last year's rate.
In the United Kingdom, activity appears to have declined further in
the second quarter, although some June data suggest some strength.

The

IV-23
volume of retail sales (s.a.) fell by 0.9 percent in the second quarter, the
third consecutive quarterly decline, but June data were revised upward to
show a 1.5 percent increase.

Industrial production (s.a.)

in the second

quarter was 1.2 percent lower than in the first quarter, but rose a
surprising 3.0 percent in June, due mainly to higher oil output.

The

unemployment rate (s.a.) increased to 8.1 percent in June, its twelfth
consecutive monthly rise.
Inflation rates were little changed.

Retail prices (n.s.a.) rose 0.4

percent in June while the 12-month increase remained unchanged at 5.8
percent.

Producer prices (n.s.a.) were nearly unchanged in June, but rose

0.3 percent in July.

The year-over-year increase rose to 5.9 percent in

July from 5.7 percent in June.
The trade deficit (s.a.) was reduced further in June.

For the first

half of this year, the trade deficit was $18.1 billion (a.r.), compared to
$31 billion last year.
In Canada, economic activity rebounded in the second quarter, possibly
the first quarter of positive growth since the first quarter of 1990.
Retail sales (s.a.) rose 1.5 percent in May, up from 0.4 percent in April.
Industrial production (s.a.) increased 1.1 percent in May following a 1.4
percent April jump.

Nearly all other monthly indicators from the second

quarter show evidence of a recovery in economic activity.

Unemployment

(s.a.) remained at 10.5 percent in July.
Recent data on inflation present mixed signals.

Private sector wage

settlements (s.a.a.r.) decelerated to their lowest rate in four years,
increasing only 3.1 percent in May.

Industrial product prices (n.s.a.) fell

0.2 percent in June, the fifth consecutive monthly decline.

Consumer price

inflation, however, edged up slightly in June to 6.3 percent on a 12-month
basis.

IV-24
Canada's merchandise trade surplus widened in May to $1.0 billion as
both exports and imports fell off.
Developments in East European Countries
Trade data indicate that in the first half of 1991, trade between the
countries of Eastern Europe and the Soviet Union was only one-half the level
of the same period last year.

This dramatic decline in trade has

exacerbated employment problems brought on by the reform programs.
Unemployment rates jumped from 3.2 percent in May to 3.8 percent in June in
the CSFR, from 3.9 percent in June to 4.6 percent in July in Hungary, and
from 8.4 percent in June to 9.4 percent in July in Poland.
In Poland, industrial sales rose in June by 0.8 percent, responding to
the 14.4 percent devaluation of the zloty in May.

For the first half of

1991, industrial sales were off 9.4 percent compared with the first half of
1990.

Private sector sales increased 3.5 percent.
Exports responded strongly to the devaluation, increasing 30 percent

in May over April, and imports responded in June, dropping 8.8 percent over
May.

Trade surpluses recorded in May and June reduced the trade deficit for

the half-year to $140 million.
Monthly inflation jumped in June to 4.9 percent following five months
of declining monthly rates, mainly on account of the zloty devaluation and a
10 percent increase in the officially set price of gasoline.
The budget deficit climbed to 13 trillion zlotys (around 1 percent of
GDP) through the first six months of 1991 in part because of reduced tax
revenues from troubled Polish enterprises.

This figure exceeds the IMF

target, and Polish officials have requested a renegotiation of the threeyear IMF plan.

October parliamentary elections are likely to test the

Polish government's reform program, particularly tight monetary and wage
indexing policies.

IV-25
The World Bank granted a $200 million loan to modernize the banking
sector;

$150 million will be available immediately.

Hungary has been hard hit by the collapse of trade with the Soviet
Union and other Eastern European countries, and has renegotiated some barter
arrangements with the Soviet Union.

Industrial production fell 20 percent

over the first half of 1991, although this figure does not include output by
small companies, the most dynamic component of the Hungarian economy.
The return to some barter and an inflow of goods to joint-ventures
with no offsetting cash payment complicate the trade picture.

On a customs

basis, Hungary's trade deficit totalled more than $825 million for the first
half year.

On a cash flow basis, the trade deficit through June totaled

only about $150 million.

The European Community has extended an ECU 100

million (about $110 million equivalent) loan that is part of the G-24
balance of payments loan to Hungary.
Inflation continued to moderate on account of tight fiscal and
monetary policies as well as fewer changes in administered prices.

Prices

rose only 2.1 percent in June continuing the decline in monthly rates begun
in January.
Industrial production in the Czech and Slovak Federal Republic was
down 17.6 percent for the first six months of 1991 compared with the same
period in 1990.

Monthly inflation continued to decline and was only 1.8

percent for June; following price liberalization in January, prices have
increased 49 percent in the first six months of 1991.
The current account deficit totalled $330 million in May, much better
than expected, although the level of both imports and exports has fallen
about 20 percent.

The CSFR government and the World Bank signed a $450

million structural adjustment loan on July 31, with the first tranche of
$250 million available immediately.

IV-26
Economic situation in other countries
Mexico registered a trade deficit in the first five months of 1991.
The Mexican government converted nearly $1.2 billion of frozen interbank
credits owed to foreign banks into 10-year bonds.

Brazil paid $900 million

in July to commercial banks pursuant to an agreement on arrears.

In August,

banks holding a critical mass of Brazil's external debt granted waivers
allowing the agreement to move forward.

Argentina's macroeconomic situation

continued to improve, which facilitated IMF approval of a new stand-by
arrangement on June 29.

Fiscal pressures pushed monthly inflation in

Venezuela to its highest level this year in July, but new measures are being
taken to reduce the public-sector deficit.

Preliminary data indicate that

the Philippines may be out of compliance with its IMF program.

Korea's

current account deficit rose substantially to a record $5.8 billion in the
first half of 1991.

In Taiwan, the cumulative trade surplus for January

through July showed a modest increase compared with 1990.
Individual Country Notes.

Mexico had a trade deficit of $1.5 billion

in the first five months of 1991, compared with a surplus of $1 billion in
the same period of 1990.

Imports were 42 percent higher, with large

increases in all categories.

Exports were 16 percent higher, with oil

exports up 13 percent and non-oil exports up 17 percent.

Large capital

inflows are continuing, and reserves are reported to be growing further,
although no recent data are available.
Last month, the government auctioned $1.15 billion of 10-year bonds at
a 1.6 percent average discount in exchange for $1.17 billion in interbank
credit lines owed to foreign banks, which have been frozen since 1982.

The

bonds will be convertible into shares of Mexican banks that are being
privatized.
1982.

The frozen interbank lines amounted to about $5.2 billion in

They were repeatedly rolled over, but the amount held by creditor

IV-27
banks was reduced by various means, including secondary market sales, to
about $3.8 billion immediately before the auction.

The secondary market

discount on these lines ranged from 10 to 15 percent in early June,
depending on the market evaluation of individual debtor banks, but the
discount fell steadily after the auction was announced as bidders positioned
themselves to take advantage of the conversion option.

Most primary holders

of the claims expect to be paid in full by the privatized banks when the
current rollover expires in December 1992.
Three Mexican banks were privatized in June and July.

Winning bids

were announced for two other banks in early August and are to be announced
for two more on August 19 and August 26.

The announcement expected August

26 will deal with the National Bank of Mexico (BANAMEX), the country's
largest bank.
Interest rates rose slightly in late June and early July, but fell
back after mid-July.

At the auction of August 6, the 28-day Treasury bill

rate was 16.8 percent, compared with the previous low of 17.3 percent on
June 4.

The CPI rose by 1 percent in June and by 0.9 percent in July.

Mid-term congressional elections are being held in Mexico on
August 18.
On July 1, Brazil paid $900 million to commercial banks pursuant to an
agreement on arrears that was signed in April and ratified by the Brazilian
Senate in mid-June.

In mid-August, banks holding a 95 percent critical mass

of Brazil's external debt granted waivers that will allow the agreement to
move forward; Brazil will settle the remaining arrears with $1.1 billion in
cash and $6 billion in bonds.

Economy Minister Moreira recently stated that

negotiations on restructuring Brazil's $60 billion of medium- and long-term
bank debt are expected to begin in late August.

IV-28
Inflation continues to rise in response to the removal of price
controls and to the prospect of an increased fiscal deficit that the central
bank is expected to accommodate.

Official inflation data for June and July

are not yet available; however, one unofficial index indicates that prices
increased 10 percent in July, compared with 9.4 percent in June.
A principal source of impending fiscal and monetary pressure is the
need to issue money to finance the return of financial assets that the
government froze in March 1990.

Roughly $25 billion remains frozen.

late July, the government announced that it would return a small amount of
these assets in mid-August, a few weeks ahead of schedule.

The government

has pledged to return the rest in 12 equal monthly installments, beginning
in September 1991.

In addition, the federal government is continuing to

fund state government fiscal deficits, which have been a major source of
fiscal pressure.

Finally, legal problems that have recently come up in the

context of an attempt to privatize the USIMINAS steel mill have raised
doubts about the government's ability to divest itself of money-losing
public firms.
On June 29, an SDR 780 million ($1.04 billion) 12-month stand-by
arrangement for Argentina was approved by the IMF's Executive Board.

The

program replaces the stand-by arrangement that became inoperative at the
beginning of the year, when Argentina failed to meet its 1990 fourth-quarter
performance criteria.

Under the program, Argentina must achieve a primary

(non-interest) surplus of 3.5 percent of GDP, approximately sufficient to
finance the interest obligations on its non-bank external debt and continued
partial interest payments of $60 million monthly on its foreign commercial
bank debt.

The improvement in fiscal performance compared with 1990, when

the primary surplus registered only 2.2 percent of GDP, is to be achieved
through a combination of asset sales, tax rate increases, and intensified

IV-29
tax collections.

The fiscal adjustment effort will be supported by a $325

million World Bank Public Sector Reform Loan, which was approved July 30.
The macroeconomic situation has continued to improve following the
legal fixing of the exchange rate to the dollar in late March.

Consumer

inflation (monthly basis) rose to 3.1 percent in June from 2.8 percent in
May, but then declined to 2.6 percent in July and is projected at only about
1 percent in August.

Monthly short-term call

money rates of interest have fluctuated between 2 percent and 3 percent,
quite low relative to the experience of recent decades in Argentina.
Financial markets remain calm in the face of congressional and provincial
gubernatorial elections being held in August and September.

Even though the

majority Peronist Party is expected to lose some of these elections, no
change in the government's overall economic strategy is anticipated.
Consumer price inflation in Venezuela rose to 3.1 percent in July, its
highest level so far this year.

This increase is mainly due to rapid

economic growth spurred by a fiscal expansion in excess of that provided for
under Venezuela's IMF Extended Fund Facility.

Preliminary reports indicate

that real GDP may have expanded at an annual rate of as much as 10 percent
in the first half of 1991.

Agreement was recently reached with the IMF on a

revised program to curtail the excessive fiscal stimulus and reduce
inflation.

The revised program, expected to be approved by the IMF Board

next month, calls for achieving a 1991 fiscal surplus of 0.5 percent of GDP
by specific spending reductions and tax increases.
In light of a 1991 current account surplus that is expected to exceed
5 percent of GDP, the revised IMF program is expected to reduce the size of
the drawings permitted to Venezuela.

As a consequence, burden-sharing

IV-30
provisions in last year's commercial bank financing package will require
Venezuela to seek waivers from the banks supplying new money under the
package in order for the third and last new money tranche ($300 million) to
be released by the banks.
In mid-August, Venezuela's privatization program took a major step
forward with the sale of a controlling interest in the state-owned VIASA
airline to Iberia Airlines and a Venezuelan partner for $145 million.
The Philippines exceeded the ceiling for the growth of base money
under its IMF program at the end of June, according to preliminary data.

this is eventually confirmed, the Philippines will be out of compliance with
the program and, unless granted a waiver, will not be eligible to make
further drawings on the IMF.

In addition, a large emergency credit extended

to the National Power Corporation has increased sharply the size of the
government's budget deficit and has further threatened observance of the IMF
program.

An IMF mission will. visit Manila later this month, and a review by

the IMF Board of the Philippines program is expected in September.
Korea's current account deficit rose to a record $5.8 billion in the
first half of 1991 from $1.5 billion in the first half last year, as a steep
rise in imports of oil and capital goods more than offset a recovery in
exports.

Industrial production was 9 percent higher in the first four

months of this year than in the same period a year earlier.

In July, a

number of foreign currency regulations were loosened, including an increase
in the ceiling on corporate foreign-currency bank deposits to $100 million
from $10 million.

North and South Korea applied separately for membership

in the United Nations on July 8 and August 5, respectively.
In Taiwan, economic activity has picked up moderately this year as a
strengthening in exports has helped to compensate for continued weakness in
domestic demand.

GNP rose 6.7 percent in the first half of 1991, compared

IV-31
with 5.9 percent in the first half of last year.

In the first seven months

of 1991, the cumulative trade surplus (on a customs basis) rose to $6.9
billion from $6.4 billion in the same period last year.

On July 15,

Taiwan's central bank cut its rediscount rate by 3/8 of a percentage point
to 7-3/8 percent, the first cut since October 1986, in an effort to
stimulate domestic investment.

Taiwan granted licenses to 15 new private

commercial banks on June 26, the first approvals for new domestic banks
since 1975.

Nearly all of Taiwan's existing 16 domestic commercial banks

are owned by the government.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 20, 1991 : Greenbook Part 2

FRASER