Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 22, 1989 : Greenbook Part 2

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Confidential (FR) Class III FOMC

August 16,

1989

RECENT DEVELOPMENTS

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

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Labor markets. .................................................. .
.............
...............................
Industrial production..
Personal income and consumption..................................
Autos and trucks............ .....................................
.
Business fixed investment........................................
..............
Business inventories................................
Housing markets...................................................
Prices ............................................................
Agriculture.......................................................
Federal government................................................
State and local governments......................................
Tables
Changes in employment ... ..........................................
Selected unemployment rates.......................................
Selected measures of labor costs in the nonfarm business sector...
Employment cost index..............................................
Growth in selected components of industrial production............
Capacity utilization in industry .................................
Retail sales......................................................
Sales of automobiles and light trucks.............................
Business capital spending indicators..............................
Changes in manufacturing and trade inventories....................
Inventories relative to sales.....................................
Revision to real nonfarm inventories.............................
Private housing activity ..........................................
Recent changes in consumer prices.................................
Recent changes in producer prices.................................
Monthly average prices--West Texas Intermediate...................
Leading indicator properties of the PPI for intermediate
materials excluding food and energy..........................
Price indexes for commodities and materials.......................
Value of the output of selected farm crops........................
.
Indexes of crop conditions.......................................
Meat and poultry production...........................................
Administration federal budget proposals for FY1990,
midsession review..............................................
Administration economic assumptions...............................
Charts
Indicators of business fixed investment...........................
Ratio of inventories to sales, based on current-cost data.........
Ratio of inventories to sales, based on 1982 dollar data..........
New home prices ...................................................
Daily spot and posted prices of West Texas Intermediate...........
Index weights ....................................................
Spot prices for farm crops .......................................
Meat and poultry production....................... ...... ...........

1
7
11
12
13
17
23
25
31
35
37

2
2
4
5
6
8
10
10
14
18
18
21
22
24
24
26
28
29
30
30
34
36
36
16
20
21
22
26
29
32
34

Appendix
Annual revisions to the national income and product accounts......II-A-1

ii
III
DOMESTIC FINANCIAL DEVELOPMENTS
Monetary aggregates and bank credit..............................
Thrift institution legislation....................................
Treasury and sponsored-agency financing...........................
Business finance..................................................
Municipal securities..............................................
Mortgage markets..................................................
Consumer credit...................................................

3
7
9
9
13
15
17

Tables
Monetary aggregates..............................................
Commercial bank credit and short- and intermediate-term
business credit...............................................
Treasury and agency financing....................................
Gross offerings of securities by U.S. corporations................
Gross offerings of municipal securities..........................
ARM discounts.....................................................
Average ARM index values and initial rate spreads.................
Mortgage activity at all FSLIC-insured institutions...............
Mortgage-backed security issuance................................
Consumer credit...................................................
Consumer interest rates...........................................

6
10
12
13
14
14
16
16
18
18

Charts
Growth rate and opportunity cost of liquid M2 deposits............

INTERNATIONAL DEVELOPMENTS
IV
U.S. merchandise trade.............................................
Import and export prices...........................................
U.S. international financial transactions.........................
Foreign exchange markets...........................................
Developments in foreign industrial countries......................

1
4
6
8
12

Economic situation in major developing countries..................

Tables
U.S. merchandise trade: Monthly data..............................
Oil imports.......................................................
U.S. merchandise trade: Quarterly data............................
Import and export price measures..................................
Summary of U.S. international transactions........................
International banking data........................................
Japanese economic indicators.....................................
Major industrial countries
Real GNP and industrial production..............................
Consumer and wholesale prices...................................
Trade and current account balances..............................
German economic indicators.........................................
German inflation indicators.....................................

1
2
3
5
7
9
13
14
15
16
18
18

Charts

Weighted average exchange value of the U.S. dollar..................

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity appears to be expanding at a moderate pace.

Private

payrolls increased appreciably in July, and the unemployment rate remained
Consumer spending evidently was not so sluggish in

around 5-1/4 percent.

the second quarter as previously had been thought and is estimated to have
picked up somewhat in early summer.

Residential building activity has

revived a bit, buoyed by a decline in financing costs.

Meanwhile, wage

inflation appears to have leveled off, and consumer prices have begun to
decelerate with a reversal of the earlier upswing in oil prices.
Labor Markets
Hiring remained strong around midyear.

In July, private payroll

employment rose 204,000 on a strike-adjusted basis, while job growth in June
was revised upward to 256,000 (also strike adjusted).

These gains, like

those in April and May, were smaller, on average, than those over the
preceding six months, but they still were well above the pace consistent
with economic growth at its potential rate.

Almost all of the job increase

in July occurred in the service-producing sector, where especially large
gains were posted in health services and retail trade.

Employment also was

up sharply in the construction industry, where hiring had slowed during the
first half of the year.

In contrast, employment in manufacturing was

essentially flat in July after three months of declines.

Employment in the

auto industry fell 10,000 in July, bringing the total number of layoffs
since May to 30,000.

In part, these declines reflect earlier-than-usual

shutdowns for model changeover; seasonally adjusted employment may retrace

1. Strikes at eastern coal mines held down payroll growth by about 10,000
in both June and July.
II-1

II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1987

1988

1988
Q4

Q1
1

Q2
_

1989
May
_

June

July
_

--------------- Average Monthly Changes-------------Nonfarm payroll employment 2
Strike-adjusted

268
265 ,

276
275

297
291

264
274

224
229

209
210

250
261

169
179

241
238

248
248

279
274

239
250

192
198

148
151

245
256

194
204

Private nonfarm production workers
Manufacturing production workers

199
25

197
20

223
41

202
19

143
-12

111
-4

215
-21

153
22

Total employment3
Nonagricultural

257
252

189
191

213
207

376
371

135
172

102
93

326
343

-82
-205

Private
Strike-adjusted
Manufacturing
Durable
Nondurable
Construction
Trade
Finance and services
Total government

1. Average change from final month of preceding period to final month of period
indicated.
2. Survey of establishments. Strike-adjusted data noted.
3. Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1987

1988

1988
Q4

1989
May

June

July

Civilian, 16 years and older

6.2

5.5

5.3

5.2

5.3

5.2

5.3

5.2

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

16.9
9.7
4.8
4.8

15.3 14.6
8.7
8.7
4.2
4.1
4.3
4.2

15.0
8.4
4.0
4.0

15.1
8.3
3.9
4.3

15.2
7.7
3.7
4.4

15.6
8.9
3.7
4.4

14.7
8.6
3.7
4.4

White
Black

5.3
13.0

4.7
11.7

4.6
11.3

4.4
11.6

4.5
11.2

4.4
11.0

4.5
11.9

4.6
10.9

Fulltime workers

5.8

5.2

5.0

4.9

4.8

4.9

Memo:
Total National

6.1

5.4

5.3

5.1

5.2

5.1

5.2

5.Z

1. Includes resident armed forces as employed.

II-3

some of these losses in coming months as automakers begin production of the
1990 models.
Readings on labor demand in the July household survey were mixed.

The

unemployment rate remained at 5-1/4 percent in July and has changed little,
on net, since the beginning of the year.

A straightforward interpretation

of this continued flatness would be that the economy is growing at roughly
its potential rate.

Other indicators of continued growth in labor demand in

July include a third consecutive monthly decline in the number of
individuals involuntarily employed part-time and a continuation of the labor
force participation rate at a high level.

However, signs of slowing were

evident in higher numbers of job losers and individuals unemployed for 15
weeks or longer.
Average hourly earnings--the most current information on wages--jumped
3/4 percent in July after showing little change in May and June.

Smoothing

through the monthly fluctuations, however, growth in average hourly earnings
remains in the neighborhood of 4 percent at an annual rate.

Compensation

per hour, as measured by the more-comprehensive employment cost index, rose
4-1/2 percent over the twelve months ending in June; this 12-month change
has been relatively stable since mid-1988.

Increases in benefit costs

continued to outstrip gains in wages and salaries, led by further increases
in health care costs; excluding health insurance, benefit costs rose only
3-3/4 percent over the twelve months ending in June.

The growth in benefits

appears to have leveled off in the goods-producing sector, while a further
acceleration is evident in service-producing industries.
Relative to their pace in the second half of 1988, increases in ECI
wages and salaries (on a 12-month basis) picked up a bit in the first six

II-4

SELECTED MEASURES OF LABOR COSTS IN THE NONFARM BUSINESS SECTOR
(Percentage change at annual rates)

1988
1987

1988

1989
Q2

July
Monthly

Employment cost index1
Compensation, all persons
By occupation:
White collar
Blue collar
Service workers
By sector:
Goods-producing
Service-producing
By bargaining status:
Union
Nonunion
Wages and salaries, all
persons
Benefits, all persons

Monthl-

3.3

4.9

3.9

4.8

4.5

4.7

3.7
3.1
2.4

5.0
4.4
5.3

4.3
2.8
5.3

5.7
3.8
4.8

5.5
3.5
3.9

4.8
4.6
4.2

3.1
3.7

4.4
5.1

2.9
4.3

3.5
5.9

3.6
5.5

4.3
5.1

2.8
3.6

3.9
5.1

3.1
4.2

2.4
5.8

2.6
5.2

4.1
4.7

3.3
3.5

4.1
6.8

3.7
4.1

5.0
4.9

3.9
7.0

3.9
6.4

3.4
5.5
2.0

1.9
5.9
3.9

-1.3
4.8
6.2

5.2
4.9
-.3

2.3
5.9
3.5

2.1
3.1
1.0

2.4
2.5
.1

2.5
2.9

2.6
2.6

3.2
2.7

3.7
2.8

3.5
2.7
4.9

4.4
3.4
5.2

3.6
2.6
5.4

4.0
2.2
6.1

3.0

3.7

Labor costs and productivity, all persons
Nonfarm Business Sector

Output per hour
Compensation per hour
Unit labor costs
Manufacturing
Output per hour
Compensation per hour
Unit labor costs

2.5
4.0
1.5

1.7
4.9
3.1

3.8
2.4
-1.4

Major collective bargaining agreements3
First-year wage adjustments
2.2
2.5
Total effective wage change
3.1
2.6
A
6

Average hourly earnings, production workers2
Total private nonfarm
3.0
3.7
Manufacturing
2.3
3.0
4.7
4.9
Services

Hourly earnings index, wages of production workers4
Total private nonfarm
2.6
3.5
2.9

1. Changes are from final month of preceding period to final month of period
indicated at a compound annual rate. The data are seasonally adjusted by FRB
staff.
2. Changes over periods longer than one quarter are measured final quarter of
preceding period to final quarter of period indicated at a compound annual rate.
Seasonally adjusted data.
3. Agreements covering 1,000 or more workers; not seasonally adjusted. The
numbers reported are cumulative averages from the beginning of the year through
the indicated quarter.
4. Values for the HEI after 1988 were produced by FRB staff.

II-5

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

Dec.

1989
Mar. June

4.5

4.9

4.6

4.5

4.8
4.3

4.5
4.4

4.4
5.1

3.5
5.3

3.6
5.2

3.3

3.7

4.1

4.2

4.1

3.2
3.4
3.2

3.5
3.6
3.5

3.8
3.8
4.0

3.3
3.3
3.9

3.1
3.0
3.8

3.1
3.1
3.6

3.2
3.3
3.1

3.5

3.1

3.7

3.9

4.7

5.1

4.7

1.2
5.4

-.4
4.8

2.6
4.9

2.4
4.8

6.3
5.0

7.4
5.2

7.6
5.3

Private industry workers

3.5

5.8

6.4

6.7

6.8

5.4

5.6

By industry:
Goods-producing
Service-producing

2.9
4.0

6.4
5.3

7.0
5.8

7.2
6.1

7.1
6.6

4.6
6.1

4.5
6.7

1987
Dec.

Mar.

June

Private industry workers

3.3

3.9

4.5

By industry:
Goods-producing
Service-producing

3.1
3.7

4.4
3.6

3.3

1988
Sept.

Total compensation costs:

Wages and salaries:
Private industry workers
By industry:
Goods-producing
Manufacturing
Construction
Service-producing
Finance, insurance,
and real estate
Services
Benefits:

II-6
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1989
1987

1988

1989
r

-Annual rate-

May

Juner

July e

---Monthly rate----

5.8
5.8

5.0
5.0

2.1
2.1

2.6
2.1

-.1
-.1

-.1
-. 2

Ex. motor vehicles

5.9

4.9

2.3

3.3

Products

4.9

5.4

4.3

4.1

3.2

6.0

4.1

2.6

-. 4

Motor vehicles

4.4

8.8

Ex. motor vehicles
Durables excluding
motor vehicles
Nondurable goods

3.0

5.6

4.0
2.8

Business equipment
Motor vehicles
Computers
Other

Total Index
Previous

Consumer goods

-6.1

-2.2

-1.9

-4.5

4.6

3.7

3.9
6.0

5.0
4.5

6.1
3.2

.4
.0

.5
.3

-1.1
.4

7.0
3.9
9.4
6.4

8.3
10.7
8.7
8.0

9.6
-14.1
28.6
5.5

8.8
-12.3
18.4
7.2

-3.8
.3
1.2

.0
-2.6
-1.1
.7

-8.1
.2
.9

Defense and space

1.9

-3.7

-6.2

2.8

Construction supplies

4.7

5.2

-1.0

-1.7

-.6

-. 4

7.2

4.6

-1.3

-. 4

8.0
1.8
6.3
21.3

6.9
9.0
6.8
3.6

-1.7
-3.9
1.3
-9.2

-.3
-2.0
4.4
-9.9

-. 4
1.0
.2
-4.1

-.1

-1.6
.0
1.6

-. 8

Nondurable

8.1

4.1

3.0

2.6

Energy

4.5

-.1

-5.2

-.9

Materials
Durable
Consumer durable parts
Equipment parts
Basic metals

-. 2

-1.0

.9
1.9

-1.8

1. From the fourth quarter of the previous year to the fourth quarter of the year
indicated.
r--revised
e--estimated

II-7
months of 1989, owing mostly to larger increases in the service-producing
sector (table).

Wages and salaries continued to grow rapidly in finance,

insurance, and real estate, where gains in late 1987 and early 1988 were
held down in the wake of the stock market crash.

In addition, wages in the

service industry, where employment growth has been strong, were up
5-1/4 percent.

In the goods-producing sector, growth in wages and salaries

was unchanged from its pace in the second half of last year.
Output per hour in the nonfarm business sector is estimated to have
been virtually unchanged in the second quarter after declining in the first
quarter.

The weakness in productivity growth in the first half of this year

is not surprising given the sharp slowing in output growth, and it seems
consistent with the normal adjustment lags between changes in production and
aggregate hours.

A similar pattern is evident in manufacturing, where the

rise in productivity over the first half--2 percent at an annual rate--was
below the 3-1/2 percent trend observed during the 1980s.2
Industrial Production
Total industrial production increased 0.2 percent in July, after
slipping 0.1 percent in May and June.

Although IP has shown an erratic

pattern in recent months, in part owing to swings in output of motor
vehicles, on balance production appears to be rising at a moderate pace:
about 2-1/2 percent at an annual rate.

2. Productivity data were revised by the BLS, as is the case each year, to
reflect the new NIPA estimates of output. Productivity also was redefined
to reflect a change in the hours concept from hours paid to hours actually
worked. Although the redefinition raised the overall level of productivity
since 1947 by 5 to 10 percent, revisions to the trend in productivity growth
were small. Revised data indicate that productivity in 1988 was a bit
stronger than previously estimated at 1.7 percent in the nonfarm business
sector and 3.7 percent in manufacturing.

II-8

CAPACITY UTILIZATION IN INDUSTRY 1
(Percent of capacity; seasonally adjusted)
1973
Ave.

1978-79
Ave.

1988
July

May

1989
June

July

81.6

87.9

85.0

83.7

83.9

83.6

80.7

87.0

84.4

84.0

84.2

84.0

83.9

Primary processing
Advanced processing

82.0
80.2

91.3
85.1

86.3
83.3

87.8
82.2

86.1
83.4

85.9
83.1

86.3
82.8

Durable manufacturing
Primary metals
Iron and steel
Nonferrous metals
Fabricated metal products
Nonelectrical machinery
Motor vehicles & parts
Autos
Aerosp. & misc. trans. eq.

78.8
79.9
79.0
81.5
78.0
78.2
78.2
76.1
78.1

86.2
96.6
97.9
94.2
84.0
86.6
94.5
89.3
75.4

83.5
87.8
88.2
87.1
84.6
83.2
83.6
81.7
77.6

82.3
89.5
89.7
89.3
83.8
82.4
81.5
71.4
86.7

82.8
83.8
80.8
87.8
83.6
86.6
82.5
73.1
87.4

82.6
84.0
80.8
88.3
83.3
86.4
80.2
69.6
87.9

82.3
85.3
82.4
89.1
83.3
86.6
76.2
61.8
89.0

Nondurable manufacturing
Textile mill products
Paper and products
Chemicals and products
Petroleum products

83.6
85.2
88.8
79.3
86.9

88.1
90.1
94.2
86.9
97.1

85.7
86.7
89.4
81.4
87.8

86.4
90.2
95.9
88.1
85.2

86.2
92.8
91.6
87.5
86.1

86.1
93.4
90.2
87.5
87.6

86.2
93.9
91.1
87.5
88.

86.5
86.7

91.4
92.8

90.5
85.3

82.5
81.5

81.4
82.3

80.6
81.2

80.9
81.8

82.3
80.7
87.8
92.0
81.3
88.9

91.1
100.4
93.8
96.8
91.1
93.7

86.7
90.7
94.0
92.1
85.9
89.4

84.4
95.1
100.8
100.0
88.8
86.2

83.7
83.7
98.4
93.2
88.9
85.2

83.2
85.4
99.6
92.3
89.1
83.7

83.4
89.3
100.1
92.9
89.2
83.9

1967-88
Ave.

Total industry
Manufacturing

Mining
Utilities
Memo:
Industrial materials
Raw steel
Aluminum
Paper materials
Chemical materials
Energy materials

1. Data for iron and steel, nonferrous metals, textile mill products, paper and
products, chemicals and products, raw steel, aluminum, paper materials, and chemical
materials are unpublished estimates for July.

II-9
The output of motor vehicles and parts declined 5 percent last month,
which reduced growth in total IP 0.2 percentage point.

Auto assemblies fell

800,000 units in July to a 6.0 million unit annual rate (FRB seasonals), and
assemblies of light trucks, which have trended down since January, declined
nearly 4 percent.

Current schedules call for an increase in auto assemblies

to a 6.7 million unit rate in August, and a rebound in truck assemblies.

realized, these gains would provide a considerable boost--about
1/4 percentage point--to growth in total IP.
Excluding motor vehicles, production of capital goods has continued to
advance at a strong pace in recent months while output of consumer goods has
been rising moderately, on balance.

After a 7-1/4 percent (annual rate)

increase during the second quarter, production of capital goods excluding
motor vehicles and computers advanced 0.9 percent in July.

Output of

computers has been about flat since April, but, in recent months, strong
gains have been posted.in production of aircraft, capital goods for
manufacturing industries, and construction and mining machinery.

Output of

nondurable consumer goods increased 0.4 percent in July, after an upwardrevised gain of 3-1/4 percent at an annual rate during the second quarter.
Output of durable consumer goods excluding motor vehicles rose at a
5-1/2 percent annual rate during the first half of this year but declined
1 percent last month.

Output gains earlier this year apparently stemmed

from both strong domestic and foreign demand.
Output of materials, which declined, on net, over the first half of the
year, rose 0.5 percent in July.

Production of durable materials rebounded

last month, as increased production of metals and parts for capital goods
more than offset a further decline in parts for consumer durables.

Output

II-10
RETAIL SALES
(Seasonally adjusted percentage change)

-1

1989
1989
May

2.2

1.8

Retail Control1

1.5

1.7

2.1

Durable

3.3

-. 6

1.2
.9

1988

Total sales

-2.4

June

July

-. 1

1.2

-. 9

1.7

-.7

-1.0

2.7

1.3

-. 3

-3.8

1.0

Automotive dealers

4.2

Furniture and appliances

2.6

4.3

1.7

Other durable goods

-.9

3.3

2.2

4.6

Nondurable

1.6

1.4

2.1

1.0

Apparel

2.7

-. 2

3.8

1.9

2.5

1.9

Food

.4
-1.5

1.2

-. 2

-. 9

2.1

.5
.0

General merchandise2

3.4

Gasoline stations

-.3

1.5

8.2

2.9

-. 1

Other nondurables

-.5

-1.2

4.6

2.8

-1.5

1.6

3.0

1.5

-. 2

1.8

-. 2

Memo:
1.
2.
also
3.

GAF 3

Total excluding auto dealers, building material, and supply stores.
General merchandise excludes mail order nonstores; mail order sales are
excluded in the GAF grouping.
General merchandise, apparel, furniture, and appliance stores.

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

1989

1989
June

July

14.81
10.34
4.47

14.19
9.85
4.34

14.99
10.25
4.74

11.44
7.33
4.11

11.46
7.45
4.01

10.85
6.96
3.89

11.71
7.45
4.26

3.49
3.01
.48

3.35
2.88
.47

3.34
2.89
.45

1988

Autos and light trucks
Autos
Light trucks

15.45
10.64
4.81

14.34
9.82
4.52

14.93
10.33
4.59

Domestically produced2
Autos
Light trucks

11.74
7.54
4.21

11.02
6.98
4.04

3.70
3.10
.60

3.32
2.84
.49

Imports
Autos
3
Light trucks

May

3.28
2.79
.48

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.
3. Based on seasonals for domestic licht trucks.

II-11
of nondurable materials continued to advance in July, reflecting gains in
textiles, chemicals, and paper.

Production of energy materials edged up

last month, as coal production was unchanged after sharp declines earlier
this year, and electricity generation increased.
Capacity utilization in manufacturing edged down to 83.9 percent in
July, and has declined nearly 1 percentage point since January.

The

operating rate in primary processing industries has dropped nearly
2 percentage points since January.

Utilization in advanced processing

industries has eased about 3/4 percentage point since its recent peak in
April.
Personal Income and Consumption
Consumer spending evidently was not as weak during the second quarter
as previously had been estimated.

Other things equal, the revisions

contained in the latest retail sales report would imply second-quarter
growth in real PCE of about 2 percent at an annual rate--the same as in the
first quarter.

Much of the new-found strength in retail sales was at

nondurable goods stores--including food, apparel, and general merchandise
outlets--which had been puzzlingly weak in the earlier estimates.

The May

increase in sales at gasoline stations also was revised up substantially.
Outlays apparently continued to advance in July.

Spending in the

control category grew 0.4 percent in nominal terms according to the advance
estimate and probably posted a small gain in real terms.
new round of incentives boosted motor vehicle sales.

In addition, a

Meanwhile,

outlays

3. The control category consists of total retail sales less sales at
automotive dealers and building material and supply stores. It is the
component of retail sales used by the BEA to track spending on nonauto
consumer goods.

II-12
for electricity and natural gas likely recovered from their weatherdepressed June levels.
Consumer sentiment generally has drifted downward since the beginning
of the year according to the University of Michigan survey and has been
about flat as measured by the Conference Board; nonetheless, consumer
confidence remains quite strong according to both measures.
recent round of surveys, sentiment improved a bit.

And in the most

In the Michigan survey,

an improvement in respondents' assessments of the general business outlook
was responsible for the gain in the overall index, while survey participants
viewed their current financial condition slightly less favorably.

In the

Conference Board survey, respondents were somewhat more upbeat about the
current economic situation, but viewed the business outlook a bit less
optimistically in the most recent reading.
Autos and Trucks
Sales of domestically produced cars and light trucks picked up to an
annual rate of 11-3/4 million units in July from a 10-3/4 million unit pace
in June.

The gain in sales coincided with yet another enhancement of

consumer and dealer incentives by manufacturers.

In another step intended

to control inventories, the automakers extended shutdowns associated with
model-year changeover at a number of plants last month; reflecting these
more lengthy shutdowns, production fell to a 4-3/4 million unit annual rate
on a BEA-seasonal basis.

The magnitude of this slowdown in measured

production was amplified by BEA's seasonal adjustment factors, which
expected model changeover to be concentrated in August and September; as
full-scale production resumes somewhat earlier than usual, the seasonals
will overstate the underlying improvement in output.

These variations in

II-13
measured production likely will be reflected as exaggerated swings in BEA's
estimates of unit stocks.

Given current assembly schedules, and assuming an

average sales pace for the third quarter of 7-1/2 million units at an annual
rate (the July figure), stocks of domestically produced automobiles at the
end of the third quarter would stand at roughly 1.65 million units--a shade
higher than the automakers would prefer.
Early reports from the Big Three point to substantial increases in
sticker prices of 1990 model-year cars; some of the increase in sticker
prices will reflect the cost of mandatory passive restraint systems.

However, consumers may balk at these higher prices, and the autumn
production schedules could prove to be overly optimistic unless the new
models are discounted immediately upon introduction. 5
Sales of foreign-made cars and light trucks registered a 3-1/4 million
unit annual rate in July--about in line with the sales pace in May and June.
Most foreign automakers also are running incentive programs, as stocks
remain relatively high by historical standards.
Business Fixed Investment
Real business fixed investment rose 7-1/2 percent at an annual rate
during the second quarter, extending the strong resurgence begun in the

4. On a preliminary basis, Chrysler has indicated increases in sticker
prices of between 4 and 8 percent; Ford has announced hikes in the range of
5 to 7 percent and has stated that these increases will correspond to
2-1/2 percent on a comparably equipped car. GM has not announced sticker
prices, but has indicated that prices of comparably equipped cars will
increase about 2-1/2 percent on average, and that new safety equipment will
add nearly another percentage point.
5. Passive restraint systems will be considered a quality improvement by
the BLS and hence will not affect the CPI for new cars. However, any
enhancement of incentive programs caused by "sticker shock" associated with
the price increases from this new equipment would be picked up in the CPI.

II-14
BUSINESS CAPITAL SPENDING INDICATORS

(Percentage change from preceding comparable periods;
based on seasonally adjusted data)

1988
Q4

Apr.

.9
.8
-3.3
1.9

3.2
3.2
.0
4.0

2.8
2.8
5.8
2.1

3.0

-14.8
5.9

1989

1989
May

June

1.5
3.0
-.3
3.8

-.2
-.6
-.7
-.6

.2
-.3
5.1
-1.6

2.9

2.3

-.4

13.8

11.2

16.5

-3.6

-3.7

5.2

2.7

-3.3

Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
Weighted PDE shipments1
Shipments of complete aircraft2
Sales of heavy-weight trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
Weighted PDE orders1

.0
-2.3
-4.1
-1.8

5.3
4.9
-.1
6.1

-.5
1.0
1.2
.9

5.9
2.5
-4.0
4.2

-7.7
-2.3
-1.4
-2.5

.3
.7
-3.1
1.5

-.3

2.4

-2.5

-1.2

.2
-1.6
-4.2
2.0
2.9
3.6

2.1
4.5
2.7
-2.6
1.6
5.1

-.7
-2.5
-6.7
2.2
5.3
1.3

-3.4
-3.5
-12.9
1.7
3.6
-2.3

1.4
-1.1
5.7
.8
-1.1
2.1

2.1
1.5
2.5
.5
4.5
2.7

-5.4

18.2

8.2

1.1

3.9

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

-16.0

1. Computed as a weighted sum of 25 individual equipment series (excluding
aircraft) from the Census M-3 report with weights equal to the fraction of final
business spending for each type of equipment.
2. From the Current Industrial Report (CIR) titled "Civil Aircraft and
Aircraft Engines." Seasonally adjusted with BEA seasonal factors. To estimate
PDE spending for aircraft, BEA uses the aircraft shipments shown in that report,
not the corresponding Census M-3 series. The CIR does not provide information on
aircraft orders.

II-15
first quarter.

The strength in BFI in the first half was in equipment

purchases--particularly office and computing equipment.

Real outlays for

computers rose at almost a 30 percent annual rate during the first half of
this year--accounting for more than half of all PDE growth--after having
fallen in the second half of last year.
Real outlays for nonresidential structures fell at a 10 percent annual
rate in the second quarter, after decreasing 1 percent in the first quarter.
Declines were notable in the office and other commercial sectors.

contrast, construction spending in the industrial sector increased about
11 percent at an annual rate in the second quarter.

In the recent GNP

revision, outlays for industrial building were revised up, and now show
fairly steady growth since the middle of 1986, in line with the export-led
rebound in manufacturing.
The indicators of near-term equipment spending suggest a continuation
of growth in the third.quarter.

New orders for nondefense capital goods,

excluding the aircraft group and weighted to reflect the fraction in each
category of shipments that is allocated to business investment spending,
were unchanged in nominal terms in the second quarter, after a 2-1/2 percent
gain in the first quarter.

Orders for office and computing equipment

rose 1-1/4 percent in the second quarter (not at an annual rate); given the
declining prices for these goods, even flat nominal spending would be
6. 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. Construction put-in-place data also were
consistent with BEA's assumptions, and little revision to NRS is
anticipated.
7. The relationship between shipments and PDE is somewhat loose, given
that some shipments will be exported and a portion of PDE will be bought
from foreign manufacturers; however, little is known about the third-quarter
level or composition of net exports of capital goods.

II-16
Indicators of Business Fixed Investment

OFFICE AND COMPUTING EQUIPMENT

Billions of dollars

Shipments

Orders

1985

1986

1987

1988

1989

OTHER NONDEFENSE CAPITAL GOODS
(EX. AIRCRAFT & PARTS)

Billions of dollars

Orders

Shipments

I
1987

1986

1985

1989

1988

NONRESIDENTIAL CONSTRUCTION PUT-IN-PLACE
AND CONSTRUCTION CONTRACTS *

Index, 198204

100

180
Contracts

Six-month moving average

--'~'
*

\C
June

150

-120

Construction put-in-place
90

-I
1982

1984

1986

1988

SIndudes Industrial, commerdal, and institutional construction; deived from source data that are In current dollars.

II-17
translated into sizable gains in real terms.

New orders and backlogs for

nonelectrical machinery have continued to trend upward, suggesting that
manufacturing investment will continue to grow appreciably.
As for indicators of structures spending, the value of new construction
contracts has moved up recently for most categories except office
8
Nonetheless, to date the upturn has been unimpressive and does
building.
not, in itself, suggest that the generally sluggish pace of activity in
this sector has turned around.
Business Inventories
Business inventory investment appears to have moderated toward the end
In current-cost terms, inventories in all

of the second quarter.

manufacturing and trade rose at a $33 billion annual rate in June--well
below the $58-1/2 billion average rate of increase during the first five
months of this year.

Together with BEA's re-benchmarking of the NIPA

data--which showed sharp downward revisions to the level of nonfarm
inventories since 1986--the incoming information suggests that, on the
whole, businesses currently are not saddled with big overhangs of stocks.
In manufacturing, materials inventories declined further in June at
several industries, including some types of machinery and fabricated metal
products, processed food, and rubber and plastics.

The reduction in recent

months of materials inventories held by the manufacturing sector is in line
with the restrained pace of the growth in output and suggests a continued
tight control of stocks.

Work-in-process inventories held by the aircraft

industry continued to rise through June, as the industry tries to keep pace

8. Office vacancy rates remain around 20 percent on a national basis, only
slightly below their high-point in 1986.

II-18
CHANGES IN MANUFACTURING AND TRADE INVENTORIES 1
(Billions of dollars at annual rates;
based on seasonally adjusted data)

1988
Q4

38.7
41.3
25.5
5.4
7.8
-2.6
10.4

47.1
42.2
27.9
5.5
13.8
4.9
8.9

61.4
48.3
20.4
12.2
28.8
13.1
15.7

1989

1989
May

June

81.0
65.4
19.2
16.7
45.2
15.6
29.6

Apr.

33.0
30.7
14.0
1.5
17.6
2.3
15.3

Current-cost basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

70.0
48.6
27.9
18.5
23.6
21.4
2.1

INVENTORIES RELATIVE TO SALES2
(Months supply; based on seasonally adjusted data)

1988
Q4

1989
Q2

1.50
1.48
1.57
1.30
1.59
1.88
1.51

1.50
1.47
1.58
1.28
1.61
1.96
1.51

1.51
1.47
1.57
1.28
1.63
2.05
1.51

Apr.

1989
May

June

1.50
1.47
1.57
1.28
1.62
2.04
1.50

1.51
1.48
1.58
1.29
1.63
2.07
1.51

3
Range in
preceding 12 months:
Low
High
Current-cost basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

1.48
1.46
1.53
1.27
1.56
1.76
1.48

1.51
1.48
1.59
1.31
1.62
2.04
1.51

1.49
1.46
1.55
1.27
1.60
1.99
1.49

1. Constant-dollar data are under revision and not available at this time.
2. Ratio of end-of period inventories to average monthly sales for the period.
3. 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-19
with its mounting orders.

Inventories of most types of finished goods have

risen only moderately, despite some signs of slowing orders and shipments.
Although the inventory-to-shipments ratio for all manufacturing has moved up
somewhat this year after reaching a low in December, its level in June was
still quite low compared with those observed in recent years (chart, upper
panel).
In the trade sector, auto dealers' stocks have remained on the high
side, but apart from autos, troubling overhangs do not appear to be
widespread.

In June, stocks at retail establishments that carry mostly

discretionary consumption goods (general merchandise, apparel, and furniture
and appliances) expanded further after a sharp rise in May; however, sales
at these stores also picked up strongly, and the inventory-sales ratio for
stores in this grouping fell.

BEA's latest benchmark revision sharply

reduced the level of retail inventories since early 1986 (table).
The re-benchmarked data also showed a sharply lower inventory-sales
ratio for nonfarm businesses than had been estimated previously (chart).
Among the three major sectors in manufacturing and trade, the downward
revision was the largest for retail inventories, corroborating the recent
annual revision to the current-cost data in suggesting that the retailers'
constant-dollar ratios also will be revised downward substantially.

9. As shown in the table, a larger downward revision occurred for the
"other nonfarm" sector, which includes utilities, contract construction,
transportation, communication, pipelines, and service industries. Because
these industries are not included in the Census Bureau's monthly surveys, no
current monthly inventory data exist. As a result, it is not unusual to see
sizable revisions at the time of the annual re-benchmarking of these series.

II-20

Ratio of Inventories to Sales
(Based on current-cost data)
ALL MANUFACTURING

Ratio
2

1.85

1.7

1.55

1.4
1983

1985

1987

WHOLESALE

1989

Ratio
1.5

1.4

1.3

1.2

1.1
1983

1985

1987

RETAIL EXCLUDING AUTO

1989

Ratio
1.55

1.5

1.45

1.4

1983

1985

1987

1989

II-21
REVISION TO REAL NONFARM INVENTORIES
Revision to 1988-Q4 level
Billions, 1982$
Percent

Revised level
1988-Q4
Nonfarm

822.7

-30.3

-3.6

Manufacturing

327.3

-4.7

-2.6

Wholesale
Retail
Excluding autos
Other nonfarm

193.5

-1.6

108.2

-3.2
-7.7
-4.8
-14.8

Business final sales

3502.8

36.0

193.6
143.0

-3.8
-3.2
-12.0

Memo:

1.0

Ratio of Inventories to Sales
(Based on 1982 dollar data)
NONFARM INVENTORIES TO BUSINESS FINAL SALES

Ratio

Before revision

2.9

2.8

After revision

I
1983

I
1984

I
1985

I
1986

I
1987

I
1988

2.7

1989

NONAUTO RETAIL INVENTORIES TO PCE GOODS

Ratio
1.65

Before revision
,-----------

1.55

After revision

1.45

1.35

1983

1984

1985

1986

1987

1988

1989

PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates; millions of units)
1988

1988

May

June r

Julyp

1.33
1.36

1.35
1.31

1.31
1.42

1.27
1.43

.97
1.07

.91
1.00

.91
.98

.87
.98

.68
3.77

.63
3.48

.64
3.34

.64
3.21

.67
3.40

.48
.42

.40
.45

.42
.36

.44
.33

.43
.44

1.52
1.56

1.37
1.52

1.04
1.14

.68
3.59

.46
.41

1.46
1.49

Single-family units
Permits
.99
Starts
1.08
Sales
New homes
Existing homes
Multifamily units
Permits
Starts

1989

Annual
All units
Permits
Starts

1989

p--preliminary estimates.

.90
1.04

n.a.
n.a.

.37
.39

r--revised.

NEW HOME PRICES
$ Thousand

Average Sales Price /

Constant-Region2

Ct--/Qa
II /Constant-Quality

I
1982

1983

1984

1985

1986

1987

1988

1989

1. The constant-quality new home price series holds constant a variety
of new home structural attributes as well as the regional mix of new
home sales in accordance with their weights in the 1982 base year.
2. The constant-region new home price series holds constant only the
regional mix of new home sales.

II-23

Housing Markets
Housing activity has picked up in recent months.

Total private housing

starts averaged 1.42 million units at an annual rate in June and July--up
about 7 percent from the April-May average.
In the single-family market, starts strengthened to 1.04 million units
at an annual rate in July.

The upturn in starts occurred in the wake of the

June bounceback in the sales of both new and existing homes from the reduced
levels recorded earlier this spring.

The rebound in single-family activity

likely was spurred by reductions in housing finance costs.

Conventional

fixed-rate mortgage interest rates have fallen by more than a percentage
point since April and averaged just under 10 percent in July.

Initial rates

on ARMs also have declined recently, though not by as much as rates on
conventional fixed-rate loans.
In the multifamily sector, starts eased in July but remained somewhat
above their weak second-quarter average.

Rental vacancy rates in this

sector were about unchanged in the second quarter and remain relatively high
by historical standards.

Activity has been further damped in recent

quarters by a weakening of starts of multifamily condominium units, which
have fallen to the lowest levels since the late 1970s.
The constant-quality new home price index rose about 2 percent during
the four quarters ending in June.
prices increased about 11 percent.

Over the same period, average new home
The divergence between unadjusted

transaction prices and "constant-quality" prices mainly reflects the ongoing
"upscaling" of new home structural characteristics and within-region shifts
in construction to more expensive locations (chart).

II-24

RECENT CHANGES IN CONSUMER PRICES
(Percentage change; based on seasonally adjusted data)1
Relative
importance
Dec. 1988

1989
1987

1988

1989
Q2

-Annual rateAll items2
Food
Energy
All items less food
and energy
Commodities
Services

100.0
16.2
7.3

'4.4
3.5
8.2

4.4
5.2
.5

76.5
25.7
50.8

4.2
3.5
4.5

100.0

4.5

May

June

-Monthly rate-

6.1
8.2
10.2

5.7
5.6
24.8

.6
.6
1.6

.2
.2
-1.0

4.7
4.0
5.0

5.2
4.1
5.9

3.8
2.0
4.3

.5
.4
.5

.2
-.1
.4

4.4

6.2

5.7

Memorandum:
CPI-W

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. 1988 1987

1989
1988

1989

-Annual rate-

June

July

-Monthly rate-

Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment

100.0
25.8
8.8
39.6
25.8

2.2
-.2
11.2
2.7
1.3

4.0
5.7
-3.6
4.8
3.6

10.2
13.1
41.0
5.4
4.6

5.1
-2.0
31.0
5.3
4.1

-.1
-.8
-3.1
.7
.7

-.4
.1
-3.0
-.3
.0

Intermediate materials 2
Excluding energy

94.8
83.4

5.4
5.2

5.3
7.2

8.7
5.5

2.5
.3

-.2
-.2

-.3
-.2

Crude food materials
Crude energy
Other crude materials

43.8
36.9
19.3

1.8
10.7
22.6

14.2
-9.5
7.5

16.9
48.3
10.3

-18.7
22.3
-9.8

-2.6
-1.8
-1.3

-1.1
2.1
-1.5

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-25
Prices
Price inflation has slowed in recent months, in large part reflecting a
retracing of price increases in the food and energy sectors that boosted
inflation rates earlier this year.

The consumer price index increased only

0.2 percent in June, and producer prices of finished goods declined
0.1 percent in June and 0.4 percent in July.

Apart from food and energy,

the CPI rose at an annual rate of 4-1/2 percent over the first half of the
year, a bit below the pace in 1988.

In recent months, materials prices

(less food and energy) have declined somewhat, on balance, at the
intermediate level and have come down markedly at the crude stage.
The CPI for energy dropped 1 percent in June, with lower prices
registered for gasoline, fuel oil, and electricity.

Refinery prices of

petroleum products were down sharply in the June and July PPIs, and both
spot and posted prices of crude oil have retreated in more recent weeks
(chart).

These developments, which have been associated with high levels of

gasoline inventories and refinery output as well as unexpectedly weak
consumption, point to further declines in coming months in retail energy
prices.
Food prices rose 0.2 percent in the June CPI--after several months of
large increases--as prices of fresh fruits and vegetables dropped back,
offsetting most of the advances in other categories.

Producer prices of

finished foods fell 0.8 percent in June and were little changed in July.
Steep declines were posted for fresh vegetables and poultry, while price
changes for other foods were mixed.

At the farm level, prices of crude

foods have come down sharply over the past two months, led by big declines
for poultry.

II-26
Daily Spot and Posted Prices of West Texas Intermediate

Dollar per barrel

I
I

I'
I
i
II
iI

II
I t
II
I .i

e~l

,';
*

I
*r

'1
t

Spot

1
I

Sep

Oct

Nov

Dec

Posted

Jan

Feb

Mar

Apr

May

June

July

Aug

SPosted prices are eva'uated as the mean of the range listed in the Vall Street Joural.

MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Month

Posted

Spot

September
October
November
December
January
February
March
April
May
June
July
August*

14.33
13.29
12.98
14.55
16.68
16.79
17.93
19.46
19.35
19.07
19.25
17.37

14.47
13.80
13.98
16.27
17.98
17.83
19.45
21.04
20.03
20.01
19.64
18.29

* Price through August 15, 1989.

Compiled In the Economic Activity Section, Division of Research and Statistics.

II-27
At the producer level, prices for finished goods less food and energy
declined slightly in July, following a steep rise in June.

Swings in

tobacco prices accounted for part of this monthly pattern, as did a June
surge in ship prices and a sharp reduction in manufacturers' prices for cars
and light trucks in July.10 At earlier stages of processing, the PPI for
intermediate materials excluding food and energy fell in July for the second
month in a row and has been little changed since the first quarter, after
rising at about a 7 percent annual rate for more than a year.

This leveling

off appears consistent with the slowing in materials production, as well as
the higher dollar in the first half of the year.
The deceleration in the prices of intermediate materials excluding food
and energy is likely to be reflected in the prices of consumer goods fairly
quickly.

As shown in the table, movements in intermediate materials prices

lead CPI inflation, on average, by three months at inflation peaks and by
two months at inflation troughs, although there is a good deal of variation
in the individual observations, including some periods where turning points
in the PPI actually lag turning points in the CPI.11

Econometric evidence

is consistent with a relatively fast pass-through: an estimated 50 percent
of the effect of an increase in intermediate prices tends to be reflected in
consumer prices within two months.

The evidence also suggests that

10. In past years, automakers have offered inventory liquidation allowances
to dealers in September, and this behavior is built into the current PPI
seasonal factors. This year, GM introduced liquidation allowances in July,
and inappropriate seasonal factors exaggerated the extent of the price
decline. Unusually large price increases are expected in September when the
decline that is expected by the seasonals fails to materialize.
11. These results pertain to the CPI for commodities excluding food,
energy, and used cars; prices of services and used cars are excluded because
they are unlikely to be directly affected by rising materials costs.

II-28

LEADING INDICATOR PROPERTIES
OF THE PPI FOR INTERMEDIATE MATERIALS
EXCLUDING FOOD AND ENERGY

Inflation Peaks
Year

Inflation Troughs

Months Lead
----------

Year

Months Lead

Overall CPI -----------

1953
1957
1960
1966

7
11
5
2

1954
1958
1960
1967

6
9
-1
2

1969
1974
1980

-6
2
1

1972
1976
1983

-2
13
6

Average

3.1

Average

4.7

------ CPI commodities excluding food, energy and used cars ----1969
1975
1980
Average

-1
4
7
3.3

1972
1975
1982
Average

4
5
-2
2.3

1. "Months Lead" measures the number of months between the turning
point in the CPI inflation rate and the nearest preceding turning point
in the inflation rate for intermediate materials prices excluding food
and energy (prior to 1975, excluding food only).

II-29
PRICE INDEXES FOR COMMODITIES AND MATERIALS 1
2

Percent change

1989

Memo:
*

Last
Observation

1987

1988

June 27
To
Date

To
June 27

Year
Earlier
To Date

1. PPI for crude materials 3

July

8.9

3.1

6.8

-.2

6.6

1a. Foods and feeds
1b. Energy
1c. Ex. food and energy
1d. Ex. food and energy,
seas. adj.

July
July
July

1.8
10.7
22.6

14.2
-9.5
7.5

1.7
16.1
.6

-1.5
2.1
-2.0

-.4
17.2
1.5

July

22.8

7.6

-. 1

-1.5

1.6

2. Commodity Research Bureau
2a. Futures prices
2b. Industrial spot prices

Aug. 15
Aug. 14

11.7
19.2

8.5
7.3

-6.7
3.1

-5.1
-1.6

-9.7
1.4

3. Journal of Commerce industrials

Aug. 15

10.7

3.8

3.0

-.7

3.8

4. Dow-Jones Spot

Aug. 15

17.0

6.9

-6.8

-2.5

-1.9

5. IMF commodity index 3
5a. Metals
5b. Nonfood agric.

June
June
June

30.8
51.9
47.5

12.6
33.7
-9.4

-7.3
-15.6
-3.1

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

Aug.
Aug.

42.5
62.6

17.7
18.9

-13.7
-17.5

8
8

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

-7.6
-13.1
-5.8

-4.2
-.3

-11.7
-10.1

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

Index Weights
Energy

Food Commodities

[]

Others'

Precious Metals

PPI for crude materials
37

CRB Futures
10

CRB Industrials
100

Journal of Commerce Index
12

Dow-Jones
58

IMF Index
43

Economist
"Forest products, industrial metals, and other industrial materials.

II-30
VALUE OF THE OUTPUT OF SELECTED FARM CROPS
(Billions of 1982 dollars)

1986

19891

7.4
11.1
16.8
3.6
3.9

6.4
8.9
11.7
2.4
4.1

7.2
11.0
17.4
3.1
3.1

45.1

Total for these crops

1988

7.4
11.2
19.6
4.3
2.6

Wheat
Soybeans
Corn
Other feed grains 2
Cotton

1987

42.8

33.5

41.8

1. Derived from the USDA's August 10 projection of crop production.
2. Barley, oats, and sorghum.

INDEXES OF CROP CONDITIONS 1
(Range: 100=excellent; 0=very poor)

July 2

Week ended
July 16 July 30

Aug. 6 Aug. 13

Corn
(Previous year)

70.3
(47.5)

64.3
(38.0)

69.8
(39.8)

70.0
(38.0)

65.3
(38.3)

Spring wheat
(Previous year)

67.8
(26.3)

50.0
(22.0)

48.5
(25.0)

51.0
(25.0)

Soybeans
(Previous year)

65.3
(45.3)

61.5
(46.5)

65.8
(49.0)

65.8
(46.8)

61.0
(46.5)

Cotton
(Previous year)

56.8
(59.3)

57.3
(66.5)

56.3
(68.8)

58.3
(68.5)

58.8
(68.8)

1. Indexes are constructed by the staff of the Federal Reserve,
using data from the Weekly Weather and Crop Bulletin. The data in
that report show the proportion of respondents who characterize crop
conditions as excellent, good, fair, poor, or very poor. In
constructing the indexes these proportions have been weighted as
follows: excellent=1.0; good=.75; fair=.5; poor=.25; very poor=.0.
A crop that is viewed as excellent by all respondents in all locations
would thus have an index value of 100.0.

II-31
intermediate materials prices have their greatest influence on retail prices
during periods of high capacity utilization.
For the CPI excluding food and energy, prices were up only 0.2 percent
in June.

The commodity component edged down 0.1 percent, mainly reflecting

lower prices for apparel.

Over the first six months of the year, goods

prices rose at about a 3 percent annual rate, compared with 4 percent during
1988.

Slowing has been most evident in the apparel and housefurnishings

categories, where the effects of the higher dollar on import prices likely
have been a contributing factor.

In contrast, prices of nonenergy services

rose at an average rate of about 5 percent, similar to 1988.
The PPI for crude nonfood materials less energy has dropped back
notably since March, more than retracing its increase during the first
quarter.

The declines have been led by metal scrap and nonferrous ores.

of July, this index was only about 1-1/2 percent above its level of a year
earlier.

More recently, price changes have been mixed in spot commodity

markets for industrial materials, and the domestic commodity price indexes
based mainly on these materials have posted relatively small net declines.
Agriculture
Weather conditions since midyear have been reasonably favorable in the
agricultural regions, and, although the current situation differs a bit by
crop, the risk of a second year of low production has diminished greatly
since the last FOMC meeting in early July.

Based on conditions as of

August 1, the Agriculture Department is forecasting that total crop
production will be up 16 percent from a year ago, reversing most of the
drought-related drop of 1988.

The corn harvest this year is projected to

rise 49 percent from a year ago, and soybean production is expected to be up

II-32
Spot Prices for Farm Crops*
CORN

1985

$Ibushel

1986

1987

1988

WHEAT

1985

1989

Sushel
$/bushei

1986

1987

SA ratio scale Is used In all panels.

1988

1989

SOYBEANS

1985

$/bushel

1986

1987

1988

COTTON

1985

1989

$lb.

1986

1987

1988

1989

II-33
24 percent.

Output of spring wheat also is expected to be up substantially

from a year ago, despite some deterioration in the Upper Midwest over the
past few weeks.

Cotton production, however, is likely to be lower than a

year ago, owing both to cutbacks in acreage and to adverse weather in Texas
(too dry) and in the Delta

(too wet).

According to the USDA's weekly

qualitative updates, the conditions of the corn and soybean crops
deteriorated slightly in the first two weeks of August, while the spring
wheat and cotton crops improved somewhat since the beginning of the month.
With the increased likelihood that corn and soybean stocks will be
ample over the coming year, the prices of those commodities have come under
sharp downward pressure in recent weeks, and a sizable portion of the 1988
runup of prices has now been reversed (chart).

By contrast, wheat prices,

despite recent declines, still are at a relatively high level, reflecting
expectations that stocks will remain tight in coming months.

Cotton prices

have been rising over the summer, as the prospective supply-demand balance
in that market has continued to tighten.
In the livestock area, the picture for the balance of 1989 still
appears to be one of fairly stable supplies overall, but with some divergent
trends within the sector.

The USDA marked up its production forecasts for

pork and poultry in July and raised the poultry estimate further in midAugust.

However, the USDA projection for beef output over the second half

has been lowered.

For 1989 as a whole, the USDA now is projecting a total

gain in meat and poultry production of about 1-1/2 percent.

The agency's

initial projection for 1990 shows an annual rise of about 2-1/2 percent; all
of the expected gain is accounted for by another big increase in the

II-34

MEAT AND POULTRY PRODUCTION
(Millions of pounds)
USDA Projection
for 1989
for 1990
as of
as of
as of
July 12
Aug. 10
Aug. 10

1988
1.

Total red meat and poultry

61138

61125

62640

39763

Red meat 1

60350

39383

39313

39215

Beef

23424

22779

22706

22825

Pork

15623

15912

15915

15700

20587

21755

21812

23425

Poultry
1.

Includes veal and lamb, in addition to beef and pork.

Meat and Poultry Production
(Billions of pounds, seasonally adjusted)*
Quarterly, at annual rate (ratio scale)
* Projected annual total for 1990

1974

1977

1980

1983

USDA data, seasonally adjusted by the staff of the Federal Reserve Board.

1986

1989

II-35
production of poultry, which, in terms of poundage, will have supplanted
beef as the industry leader.
Federal Government
According to BEA's advance estimates, federal purchases excluding CCC
increased 1-1/2 percent in real terms in the second quarter, but they
remained within the narrow range of values seen over the last two years.
Defense purchases, which had trended lower in recent quarters, ticked up
2-3/4 percent at an annual rate in the second quarter, while nondefense
purchases excluding CCC fell 2-1/4 percent.

Taking into account the

positive swing in CCC inventories, total purchases rose in both real and
nominal terms.
On a unified budget basis, total federal outlays are up nearly
7 percent in the current fiscal year through June, compared with the same
period a year earlier.

However, owing to the revenue surge this spring,

receipts have increased even more

(10 percent),

and the deficit for the

fiscal year to date has totaled $106 billion--about $14 billion below the
comparable year-earlier figure.

Nevertheless, excluding the effects of

the thrift bailout, the deficit over the remainder of the fiscal year is
expected to be a bit larger than last year; revenue growth is expected to
slow, while outlays continue to increase at their recent rapid pace.
Indeed, the Administration, in its July Mid-Session Review, projected a
deficit of $148 billion for FY1989 on a total budget basis--only $7 billion

12. The July NIPA revisions suggested some explanation for the spring
receipts surprise. Although nonwage personal income was revised downward in
both 1987 and 1988, the revision was larger in 1987, implying stronger
income growth (and hence greater tax liabilities) between the two years.
This appears to account for only a part of the greater-than-anticipated
April-May payments, however.

II-36
ADMINISTRATION FEDERAL BUDGET FOR FY1990, MIDSESSION REVIEW
(Billions of dollars)

1989

1994

1179

1237

1288

1329

1381

1080

1152

1221

1298

1356

-148

Deficit(-)

1993

996

Receipts

Fiscal years
1991
1992

1144

Outlays

1990

-99

-85

-67

-30

-25

1993

1994

Source: OMB, Mid-Session Review of the Budget, July 18, 1989.

ADMINISTRATION ECONOMIC ASSUMPTIONS

1989
--------

1990

Calendar years
1991
1992

Percent change, Q4 to Q4----------

Nominal GNP

7.1

6.8

7.2

6.8

6.4

6.0

Real GNP

2.7

2.6

3.3

3.2

3.1

3.0

GNP deflator

4.2

4.1

3.8

3.5

3.2

2.9

---------- Percent, annual average---------Civilian unemployment rate

5.3

5.5

5.4

5.3

5.2

5.1

Interest rate
(3-month Treasury Bills)
(10-year Treasury Notes)

8.0
8.5

6.7
7.7

5.3
6.8

5.0
6.0

4.7
5.7

4.4
5.4

Source:

OMB, Mid-Session Review of the Budget, July 18, 1989.

Note: The President's budget for FY1990 incorporates the Bipartisan
Budget Agreement of this spring and the Administration's Financial
Institutions Reform Legislation. The budget totals for years beyond
1990 reflect the following:
(a) a rise, beginning in FY1991, to the President's February proposed
levels for defense (military) budget authority and outlays;
(b) higher spending for defense atomic-waste cleanup, beginning in
FY1991, than proposed in February;
(c) February proposals for savings in entitlements; those savings that
were not incorporated in FY1990 are assumed to begin in FY1991;
(d) a gradual return of budget authority and resulting outlays for
discretionary programs to the lower path proposed in February;
(e) the year-to-year pattern of receipts gains determined by the
President's specific February receipts proposals, including the
lowering of tax rates for capital gains.

II-37
less than last year.

The Mid-Session estimate did not include the

approximately $20 billion of on-budget spending recently authorized under
the new thrift legislation, which will bring the deficit to almost
$170 billion.

After fiscal 1989, spending under the new legislation will be

recorded off-budget.
For fiscal year 1990, the Mid-Session Review projected a deficit of
$99 billion on the assumption that the Bipartisan Budget Agreement would be
fully implemented in budget legislation (table).

Congress has yet to

complete the fiscal 1990 appropriations bills; although all thirteen of the
appropriation bills have been passed by the House, only four have been
passed by the Senate, and none has been reported from House-Senate
conferences.

Moreover, the House reconciliation bill, which implements

those spending and revenue measures in the Bipartisan Agreement that are not
covered by appropriations, has not been reported out of committee.
Nonetheless, it appears that all the legislation in train likely would
achieve the Gramm-Rudman deficit trigger of $110 billion by the final
deadline of October 15.
State and Local Governments
Purchases of goods and services by state and local governments
increased 1-3/4 percent in real terms at an annual rate in the second
quarter--about the same as in the first quarter, but only half as fast as in
1988.

The increase over the first half of the year was the slowest for any

two-quarter period since the first half of 1983, reflecting reductions in
construction spending.
Many state governments ended the 1989 fiscal year with stronger
positions in their general funds accounts than had been projected earlier,

II-38
owing to a revenue surprise this spring.

Despite the better-than-expected

fiscal condition of the sector as a whole, many states still face budgetary
pressure.

The dimensions of the problem were small enough for most state

governments, however, that relatively modest corrective measures were
sufficient--including drawing down past surpluses, implementing minor tax
increases

(especially on gasoline, cigarettes, and liquor),

reductions in expenditures from planned levels.

and some

APPENDIX
ANNUAL REVISIONS TO THE NATIONAL INCOME AND PRODUCT ACCOUNTS

The Commerce Department released its annual revision to the National
Income and Product Accounts on July 27.

This revision incorporated new

source data and revised estimates of seasonal factors back to the first
quarter of 1986.

On the expenditure side of the accounts, the changes

largely reflected revised data on U.S. international transactions, as well
as revisions to Census Bureau data on retail and wholesale trade, services,
construction, and state and local government.

Revisions to the income side

of the accounts were based primarily on information from the state
unemployment insurance system, business and personal income data from the
Internal Revenue Service, and farm statistics from the Department of
Agriculture.
The revision indicated that real activity was somewhat stronger in both
1987 and 1988 than previously estimated.

Real GNP growth was revised up

about 1/2 percentage point over the four quarters of each year, and it now
stands at 5.4 percent in 1987 and 4 percent in 1988 (excluding the effects
of last summer's drought).

In contrast, little adjustment was made to the

estimate of growth for 1986, which remains at about 2 percent.

Moreover,

inflation rates were not substantially affected by this revision.

The GNP

fixed-weighted price index continues to show a pickup in inflation from
about 2-3/4 percent in 1986 to 4 percent in 1987 and 4-1/2 percent in 1988.
The upward revisions to output growth in 1987 and 1988 were
concentrated in net exports, reflecting a combination of stronger U.S.
exports and less robust growth of imports.

II-A-1

Net exports also were revised up

II-A-2
for 1986, offsetting the small downward adjustment made to gross domestic
purchases.

As a result of these revisions to the import and export data,

the deficit in real net exports at the end of last year is now placed at
about $74 billion, compared with the earlier estimate of $105 billion, with
two-thirds of this improvement occurring on the services side of the
accounts.

Within services, the adjustment was the result of revisions in

the balance of payments (BOP) data extending back to 1980, as well as
changes in the deflator for service imports.

The BOP revisions reflect new

survey information on travel and passenger fares, the introduction of
estimates of foreign students' expenditures in the United States and those
of U.S. students abroad, and the introduction of survey data for a wider
range of business and professional services.
Because BEA did not work the revisions to the BOP data into the
national income accounts for years prior to 1986, the revised estimates of
exports and imports are not fully comparable with the data for the earlier
period.

Based on information provided by BEA, the Board staff estimates

that the trade deficit at year-end 1985 would be about $5 billion lower had
the revision been carried back.

Accordingly, the improvement in the trade

over the course of 1986 is overstated by the same amount in the current
data, and this distortion will persist until November 1990, when BEA
publishes a benchmark revision of the national income accounts.
To avoid double counting, some of the upward adjustments to the service
components of net exports were offset by a downward revision to personal
consumption expenditures (PCE).

For example, the spending by foreign

students in the United States previously had been picked up in surveys of
retail sales and services expenditures and thus had been included in PCE.

II-A-3
The revision reallocated these outlays to net service exports from the net
travel component of PCE services.

Overall, about $12 billion of the

$31 billion improvement in the level of real net exports as of year-end 1988
is offset by lower consumer spending on services.
Apart from net exports, the adjustments to GNP growth were rather minor
on balance.

Growth in gross domestic purchases was revised down slightly in

1986 and up a bit in 1987 and 1988, with little net change over the threeyear period as a whole.

Among the major components of domestic final

purchases, the revisions also tended to be small.

In addition, the

adjustments made to nonfarm inventory accumulation had a modest effect on
output growth, except for 1986, when the downward-revised pace of stockbuilding shaved about 1/4 percentage point from the advance in GNP.
However, the cumulation of these small changes in inventory investment
was enough to cause a substantial downward revision to the level of nonfarm
inventories.

Indeed, the 1988-Q4 level of total nonfarm stocks was adjusted

down roughly $30 billion--about 3-1/2 percent in real terms.

Although stock

levels were revised down in all major sectors, the bulk of the revision
occurred in the residual category of "other nonfarm" inventories, which
consists mainly of stocks held by construction companies and utilities, as
well as oil in transit to refineries.

When combined with the small upward

adjustment made to final sales, the revision to inventory levels implies a
marked reduction in the ratio of nonfarm inventories to final sales.
Because BEA will not publish revised sectoral data on real final sales until
late August, it is not yet possible to compute the revised inventory-sales
ratios for manufacturing, wholesale trade, or retail trade on a constantdollar basis.

Nonetheless, for the retail sector excluding autos--where

II-A-4

intermittent concerns about stock overhangs have arisen since the beginning
of last year--the level of stocks was revised down noticeably and the
inventory-sales ratio seems likely to be lowered as well.
On the income side of the accounts, the adjustments were small by
comparison with previous annual revisions.

The most significant change

occurred in corporate profits, which were adjusted down considerably during
1986 and early 1987, as the collapse of oil prices caused profits in the
petroleum industry to fall more sharply than was previously thought.

As a

result, the share of economic profits (both before and after tax) in GNP was
revised down about 1/2 percentage point during this period.

However, in

more recent quarters, the revision to the profit share turned out to be
slight.

The level of disposable personal income was little changed by the
revision, owing to offsetting adjustments to various income components.
Because even these minor revisions tended to be accompanied by similar
movements in nominal personal outlays, there was essentially no adjustment
to the saving rate, which continues to display a marked rebound from the
extremely low level recorded in mid-1987.

II-A-5

REAL GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Percent change from previous period)
1985-Q4 to
1986-Q4
1.9
(2.0)

1. Gross national product
Previous
la.
2.

1986-Q4 to
1987-Q4
5.4
(5.0)

Excl. drought effects
Previous

1987-Q4 to
1988-Q4
3.4
(2.8)
4.0
(3.5)

2.1
(2.4)

Gross domestic purchases
Previous

4.6
(4.4)

2.4
(2.2)

3.8
(4.2)

2.2
(1.8)

3.8
(3.7)

Personal consumption expenditures
Previous

Business fixed investment
Previous

-5.5
(-7.3)

8.5
(8.8)

4.2
(5.7)

Residential structures
Previous

11.6
(11.3)

-4.6
(-3.5)

3.2
(2.0)

Government purchases
Previous

3.1
(2.9)

2.1
(2.3)

1.8
(.4)

-10.1
(-17.1)

25.6
(16.4)

36.0
(20.6)

-135.4
(-142.4)

-109.8
(-126.0)

-73.8
(-105.4)

-10.9
(1.2)

55.6
(68.2)

31.9
(37.6)

ADDENDA:

Change in net exports 1
Previous

Net exports 2
Previous

Change in nonfarm inventories
Previous

10.

Nominal GNP
Previous

4.6
(4.8)

8.6
(8.3)

7.5
(7.2)

11.

GNP fixed-weight price index
Previous

2.7
(2.7)

4.0
(4.0)

4.6
(4.5)

12.

GNP implicit price deflator
Previous

2.6
(2.8)

3.0
(3. 1)

4.0
(4.3)

13.

Real disposable personal income
Previous

3.3
(3.4)

3.0
(3.0)

4.0
(3.6)

1.
2.

Over four quarters of the year, billions of 1982 dollars.
End of period, billions of 1982 dollars

II-A-6

REVISIONS TO THE NATIONAL INCOME ACCOUNTS
(Change in billions of dollars, fourth quarter to fourth quarter)
Revision to the change
1986
1987
1988
-------- 1982 dollars------GNP
Net exports
Gross domestic purchases
Consumption
Business fixed investment

-1.1

13.7

23.4

7.0

9.2

15.3

-8.1

4.5

7.9

-8.4

9.0

8.4

-.5

-6.6

-1.4

2.3

-12.1

-. 5

6.9

Farm inventory investment

1.8

-7.2

Federal purchases

1.9

-4.7

11.2

State and local purchases

-. 4

2.7

Residential structures
Nonfarm inventory investment

------ Current dollars-----National income
Compensation
Proprietors income
Rental income
Net interest
Corporate profits with IVA and CCA

Saving rate (annual average)

-23.5

21.4

6.1

5.4

3.4

-6.9

-5.0

7.7

1.8

6.3

4.2

-5.3

5.8

-. 2

-18.7

10.8

7.2

II-A-7

Revision to National Income
PERSONAL SAVING RATE

Percent
17

-4
After Revision
7

/'
Before Revision

-- 1 3

1986

1987

1988

I
1989

ECONOMIC PROFITS BEFORE TAX AS A SHARE OF GNP

Percent
--

7.5

S
S

6.5

Before Revision

After Revision

I
1986

I
1987

I
I

I
1988

I
1989

III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS
(Percent)

1987

1989
Jul-Aug -FOMC
July 6
lows

Oct.16

March
highs

7.59

9.85

8.97

9.56

6.93
7.58
7.74

9.09
9.11
9.05

7.63
7.34

Commercial paper
1-month
3-month

7.94
8.65

Large negotiable CDs
1-month
3-month
6-month

Aug 15

Change from:
Mar 89 Jul-Aug FOMC
lows July 6
highs

Short-term rates
Federal funds 3
Treasury bills
3-month

.07

-.
52

-1.06

.40

.26

.53

.32

7.75

-1.24
-1.30

.65

.34

9.18
8.92

8.91
8.71

-1.14
-1.44

.39
.47

-.27
-.21

8.45
8.26
8.12

9.17
8.99

8.78

8.90
8.80
8.72

-1.17
-1.52
-1.36

.45
.54
.60

-.27
-.19
-.06

10.19
10.50

8.44
8.31

9.25
9.06

8.94
8.88

-1.25
-1.62

.50
.57

-.31
-.18.

11.50

10.50

11.00

10.50

-1.00

.00

-.50

9.88

7.51

3.53

7.74

7.83

8.26
8.21
8.19

-1.62
-1.32

9.31

7.92
8.08
8.10

-1.12

.75
.47
.36

.34
.13
.09

9.59

7.95

7.17

7.32

7.37

-. 58

.20

.05

Corporate--A utility
(recently offered)

11.50

10.47

9.45

9.56

9.59

-.88

.14

.03

Rome mortgage rates 7
S&L fixed-rate
S6L ARM, 1-yr.

11.58
8.45

11.22
9.31

9.68
8.60

10.07
8.92

9.96
8.62

-1.26
-.69

.28
.02

-.11
-.30

9.04

-.
81

7.77

8.03
7.87

7.10

7.55
7.41

10.05
10.15

8.52
8.24

7.92
8.90
9.12

10.07

10.32
10.08

Eurodollar deposits 5
1-month
3-month

8.00
9.06

Bank prime rate

9.25

6-month
1-year

Intermediate- and long-term rates

U.S. Treasury (constant maturity)
3-year
9.52
10-year
10.23
10.24
30-year
Municipal revenue
(Bond Buyer)

1987
highs
Stock prices
Dow-Jones Industrial
NYSE Composite
AMEX Composite
NASDAQ (OTC)

lows

2722.42
187.99
365.01
455.26

1738.74
125.91
231.90
291.88

1989
FOMC
Aug 15
July 6
2462.44
179.82
361.11
439.57

1. One-day quotes except as noted.
2. Last business day prior to stock market

decline on Monday Oct. 19, 1987.
3. Average for two-week reserve maintenance
period closest to date shown except Feb.low
which is the average for the statement week
ended Feb. 10, 1988. Last observation is
average-to-date for maintenance period ending
August 23, 1989.

2687.78
192.08
379.82
460.91

Percent change from:
1987
FOMC
1987
July 6
highs lows
-1.27
2.18
4.06
1.24

54.58
52.55
63.79
57.91

9.15
6.82
5.18
8.00

4. Secondary market.
5. Bill rates for Eurodollar deposits
at 11 a.m. London time.
6. Based on one-day Thursday quotes
and futures market index changes.

7. Quotes for week ending Friday
closest to date shown.

Selected Interest Rates*
(percent)
- 12 Da

Statement Week Averages
SPrime Rate

._S10

SFederal Funds
A

I I I I I
1989

198

I
6/30

I I I
1987

d(daily)

I
8/15

Primary Mortgage
(mid-week)

Primary Mortgage

L
S\(wMy)
-

-""

ond (A Utility)

SCorporate

Bond
(weky)

>asury Bond

30-year Treasury Bond
(daily)
1987

1988

1989

*-Fdday wks through Augut 11. Wednedaywredw through August 9.

1 - 1

630

8/15

DOMESTIC FINANCIAL DEVELOPMENTS

Interest rates in the intermeeting period have swung with the market's
shifting perceptions of the economy's strength and the
Federal Reserve policy.

ikely course of

Short-termrates generally fell during July, as the

federal funds rate moved down to around 9 percent and incoming economic data
led to expectations of further easing by the System.

More recently,

stronger-than-anticipated reports on employment and retail sales put a
damper on those expectations and prompted a back-up in rates.

For the

period as a whole, key Treasury bill yields--perhaps boosted by added supply
to finance thrift resolutions--are up by about 25 basis points, while
private short-term rates remain down on balance, but by less than the
federal funds rate.

Most long-term yields are unchanged to up slightly.

Major stock price indexes rose to all-time highs before retreating somewhat
in recent days.
The monetary aggregates accelerated to 10 to 12 percent annual rates of
growth in July.

Compensating-balance arrangements were partly responsible

for a surge in demand deposits, a lagged response to the spring decline in
short-term rates.

The growth in M2 during the month reflected households'

restocking of liquid balances that had been drawn down earlier to make tax
payments--a process encouraged by substantial declines in the opportunity
costs of these balances.

The non-M2 components of M3 grew relatively slowly

in July, as the large buildup in core deposits in the past two months
lessened the need of depository institutions to tap managed liabilities.
The evidence on debt growth thus far in the third quarter is clearest
in the federal sector, where the thrift legislation has contributed to a

III-1

III-2

(based

MONETARY AGGREGATES
on seasonally adjusted data unless otherwise noted)

1988'

-----------1.
2.
3.

4.3
5.2
6.2

Ml
M2
M3

1989
Q1

1989
Q2

1989
May

1989
JAt

1989
Jul p

Growth
Q4 88Jul 89p

Percent change at annual rates--------------------0.4
1.9
3.7

-5.6
1.2
2.9

-15.0
-3.6
-1.5

-4.3
6.1
5.7

10.4
12.4
9.7

-1.9
3.0
4.1
Levels

----------

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

bil. $
Jul 89p

Selected components
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

2.5

-0.2

-3.3

-6.4

-5.5

10.8

504.1

8.1
-1.2

7.0
-5.5

4.1
-8.7

2.8
-13.6

5.5
-13.8

2.8
17.5

217.9
279.0

Other checkable deposits

7.7

-0.7

-9.7

-31.0

-1.8

10.2

273.2

5.5

2.6

3.5

0.3

9.6

12.9

2341.8

-5.8

13.6

-29.8

-27.6

30.0

65.0

77.9

7.4
6.9
1.4
14.7
4.6
-4.3
11.7

20.8
5.4
-8.4
22.4
-3.0
-14.0
4.3

22.2
5.4
-14.9
29.0
-1.1
-24.6
14.0

-1.4
-1.1
-28.5
28.2
1.4
-33.5
22.5

29.1
6.2
0.7
12.1
6.2
-9.9
15.6

42.4
7.8
6.6
9.1
4.5
-3.1
8.6

275.6
1018.2
512.5
505.7
969.6
348.4
621.1

10.2

10.4

9.2

5.9

4.2

0.5

884.7

11.0
12.2
8.8

12.7
18.1
1.2

14.1
18.0
6.0

9.5
10.1
8.2

2.7
3.3
1.4

2.5
7.0
-7.5

574.8
399.3
175.5

-0.8
13.7
11.2

10.6
5.8
-1.2

12.2
0.6
-5.5

53.4
1.9
-9.4

45.9
0.0
-15.4

39.1
-53.8
4.8

98.2
121.5
100.1

Ml-A
Currency
Demand deposits

M2 minus M1

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

17. M3 minus M24
Large time deposits
5
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA
-----

Average monthly change in billions of dollars----

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

4.9
3.3
1.6

4.7
5.8
-1.1

7.9
4.0
3.9

6.9
4.1
2.8

17.8
1.9
15.9

7.0
2.9
4.1

688.7
461.6
227.1

-0.4
2.0

0.5
-1.6

-0.1
4.0

-3.0
5.7

8.0
7.9

3.3
0.8

11.2
215.9

0.0

-1.5

2.3

6.2

0.2

2.6

29.9

1. Amounts shown are from fourth quarter to fourth quarter.
2. Nontransactions M2 is seasonally adjusted as a whole.
3. Commercial bark savings deposits excluding HMOAs grow during June and July at rates of -5.9
percent and 2.6 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew
during June and July at rates of -9.2 percent and -6 percent, respectively.
4. The non-M2 component of H3 is seasonally adjusted as a whole.
5. Net of large denomination time deposits held by money market mutual funds and thrift institutions.
6. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.
7. Consists of borrowing from other than commercial banks in the fore 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.
8. Consists of Treasury demand deposits and note balances at commercial banks.
p - preliminary

III-3
sharp pickup in Treasury borrowing.

Businesses borrowed heavily from banks

in July, while turning away from the commercial paper market; gross public
bond issuance by nonfinancial firms has been running somewhat below th
strong pace recorded early in the summer.

Gross borrowing by state and

local governments continued in July near its first-half pace.

Sketchy data

for the household sector suggest no sharp deviations from the recent growth
paths of either mortgage or consumer credit.
Monetary Aggregates and Bank Credit
The monetary aggregates posted robust gains in July.

A surge in demand

deposits, after three consecutive months of double-digit rates of decline,
largely accounts for the 10-1/2 percent annual rate of growth in Ml in July.
Since compensating-balance arrangements typically relate business demand
deposits to lagged short-term interest rates, the bulge in demand deposits
in July would seem to reflect, in large part, the decline in market interest
rates that began in March.
Both M1 and M2 were propelled in July by large inflows to liquid
household-type accounts.

These inflows, which began slowly in June, helped

push M2 to a 12-1/2 percent annual growth rate in July, lifting this
aggregate just above the lower edge of its annual target cone.

Beginning in

June, and especially in July, households restocked liquid balances that had
been depleted by unusually large nonwithheld tax payments in April and May.
This rebuilding was encouraged by continued substantial declines in the
opportunity cost of holding liquid deposits.

As illustrated in the chart,

the opportunity cost of holding these balances has fallen approximately
150 basis points, to about two-thirds of its recent peak in March.

Average

M2 growth from March through July responded to the drop in interest rates

III-4

Growth Rate and Opportunity Cost of Liquid M2 Deposits 1

Percentage points

Basis points
400 -

80
o--

Spread Between 6-month Treasury Bill

and Rate on Lquid M2 Deposits 2

(Monthly)

360 -

320 -

2
28020

280 -A
240

Growth Rate of Uquid M2 Deposits
200

(Four Week Moving Average)
s.a.a.r.

160
February

60
March

April

May
1989

1. Consists of OCDs, savings deposits and MMDAs.
2. Yield on 6-month Treasury bills less weighted average return on OCDs,
savings deposits and MMDAs.

June

July

III-5
about as predicted by the staff's monthly money demand model, although the
month-to-month pattern was erratic, presumably reflecting the outsized tax
payments out of M2 in April and May and the more recent restocking.
Changing opportunity costs have affected other components of M2 as
well.

Assets of M2-type money market mutual funds soared in June and July

as money fund yields lagged the decline in market rates.

With rates on

small CDs declining relative to comparable Treasury yields, growth in small
time deposits eased somewhat from the explosive pace of earlier months.
Core deposit growth at commercial banks slightly exceeded growth at thrifts
This

during July, reversing two months of more rapid gains at thrifts.

monthly pattern is consistent with previous periods of declining market
interest rates, when shifts toward liquid deposits tended to benefit banks
at the expense of thrifts.
M3 grew in July at a 9-3/4 percent annual rate.

Despite the large

buildup of core deposits in the past two months, a strengthening of bank
credit in July implied the need for these institutions to continue to tap
managed liabilities, albeit at a much slower pace than in June.

At thrift

institutions, large time deposits ran off, possibly reflecting a further
trimming of asset portfolios in an environment of rising security prices, as
these institutions look ahead to their new capital requirements.
At banks, in contrast, credit growth is estimated to have rebounded to
a 10-1/2 percent annual rate in July, up from a 5 percent pace in June.
This pickup mainly reflects a surge in loans, especially business loans,
which expanded at a 14 percent rate after declining in June.

Consumer loan

growth was fairly sluggish, restrained by sizable securitizations of

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT

(Percentage changes at annual rates, based on seasonally adjusted data)
1987:Q4
to
1988:Q4

1989

198

Q
2

May

June

Commercial Bank Credit
1.

Total loans and securities
at banks

7.6
7.6

5.1

4.3

10.5

2518.7

-. 9

-.2

559.4

2.2

374.5

S2.2
8.2

5.4

9.1

1.0

Other securities

7.5

7.3

U.S. government securities

5.2

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

4.8

Securities

7.9
7.9

July p

Levels
bil.$
July p

-8.9

-8.2

-5.1

-3.9

-5.8

184.9

9.6

6.5

8.4

6.7

13.6

1959.3

-2.7

14.2

632.3

8.5

Total loans
Business loans

6.8

10.6

4.6

11.0

Security loans

-5.4

53.0

22.9

-60.0

97.9

-23.4

40.3

Real estate loans

14.3

11.8

L1.7

10.3

11.1

12.8

719.6

Consumer loans

8.4

5.5

and 6.0
I

8.3

2.0

3.6

367.1

Other loans

-. 4

-2.7

7.6

12.5

10.

1.2

41.6

200.0

Short- and Iintermediate-Term Business Credit ---------11.

Business loans net of bankers
acceptances

12.

14.

15.

Sum of lines 13 & 14

16.

Bankers acceptances: U.S. trade
related- '
Line 15 plus bankers acceptances:
U.S. trade related

17.

18.

Finance company loans to business

19.

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

10.7

-2.7

51.9

32.8

69.1

32.7

12.3

5.7

12.7

-1.3

15.5

Commercial paper issued by
nonfinancial firms

4.6

7.5

Sum of lines 11 & 12

11.0

30.3

Loans at foreign branches 2

13.

6.9

37.5

38.2

37.8

27.7

16.0

10.5

16.6

17.9

8.0

10.3

16.0

10.5

16.3

8.0

14.7

14.4

14.1

11.5

15.8

8.6

-6.8
7.8
3

12.3

8.8

3.3

17.0

14.1
.0
13.5

.0
11.3

629.5
26.4
655.9

124.0
779.9

n.a.

35.75

n.a.

808.45

10.8

n.a.

247.65

5.6

n.a.

1056.05

4.0

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
Note: Data have been revised to reflect new benchmark adjustments.

III-7

consumer receivables, while real estate loans expanded briskly despite the
first-ever packaging and sale of home equity loans.
Thrift Institution Legislation
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 (FIRREA) was signed into law by the President on August 9. The last of
the key provisions to be agreed upon by the House and Senate conferees
pertained to budgetary treatment of the borrowing required to deal with
current and future insolvent thrift institutions.

As enacted, FIRREA

contains both on-budget and off-budget financing.

The legislation puts $20

billion of spending (gross) on budget in fiscal 1989.

Outlays of $18.8

billion will be financed directly by the Treasury; the remaining $1.2
billion is to be financed by a transfer from the Federal Home Loan Banks, a
transaction that will show up as a negative outlay on the budget.

And, $30

billion of spending is to be financed off budget during the next two fiscal
years through bonds issued by the Resolution Funding Corporation (REFCORP),
a new government-sponsored agency.

Most of the interest on the REFCORP

borrowings will be paid by the Treasury and from the proceeds of asset sales
from failed thrifts, but a portion of the earnings of the Federal Home Loan
Banks also will be tapped.

The principal will be repaid with maturing zero-

coupon Treasury bonds to be purchased with an additional draw on the FHL
Banks, as well as by future deposit insurance premiums paid by thrift
institutions.

Funds for resolutions will be disbursed through the

Resolution Trust Corporation, managed by the FDIC.

III-8

Other key provisions of FIRREA include the following:
Deposit Insurance and Enforcement Powers
FSLIC is dissolved and replaced by the Saving Association Insurance
Fund (SAIF). This new deposit insurance fund and the enforcement
powers of the FSLIC are placed under administrative control of the
FDIC, and the Federal Home Loan Bank Board is dissolved. The
regulatory functions of the FHLBB are moved within the Treasury
Department to the Office of Thrift Supervision (OTS), which will
parallel the structure of the Office of the Comptroller of the
Currency. In contrast to the existing FHLBB, which has three members,
the OTS has a single director, who will be the primary supervisor for
all state- and federal-chartered thrifts.
Capital Requirements
FIRREA mandates that OTS establish capital standards for all SAIFinsured thrifts that are no less stringent than those applied to
commercial banks. In the event of failure to meet the new capital
standards by January 1, 1991, the legislation requires the OTS to
prohibit asset growth and impose restrictions on dividends and
compensation. As of the end of the first quarter, 23 percent of all
solvent SAIF-insured institutions, representing 42 percent of the
assets of these institutions, did not meet the new standards.
Investment Provisions
FIRREA defines a new qualified thrift lender (QTL) test that requires a
thrift to hold 70 percent of its portfolio in housing-related assets by
July 1, 1991. Failure to meet the QTL test will, in general, require a
thrift to convert to a bank and will effectively increase the cost of
borrowings from the FHL Banks. All junk bond investments must be
either liquidated or placed in separately capitalized subsidiaries by
July 1, 1994, and all future junk bond investments must be made only
through such subsidiaries.
Membership in the FHLB System
The act expands the types of institutions eligible for membership in
the FHLB System. Banks and credit unions can qualify for membership
and are entitled to borrow from the FHL Banks if these institutions
have at least 10 percent of their assets in residential mortgages. It
is not anticipated that many additional institutions will be attracted
to membership.

III-9

Treasury and Sponsored Agency Financing
The staff expects a third-quarter federal deficit of almost
$63 billion, compared with a $23 billion surplus registered last quarter.
In addition to the normal seasonal upswing, nearly $20 billion of this
projected increase in the deficit is attributable to the financing
provisions of FIRREA.

The Treasury likely will finance the unexpected

increase in cash requirements initially in the bill market, as well as by
drawing down its cash balance.

The Treasury increased the size of the

247-day cash management bill sold last week by $5 billion, to $15 billion,
and plans to tap regular weekly issues for additional cash, reversing a
general pattern of paying down bills in these auctions since the April tax
period.

On balance, $14 billion of the expected marketable borrowing of $38

billion in the third quarter may be done in the bill sector.
Passage of the thrift legislation had no immediately discernible
impact on rates in related agency markets, including the FHL Banks and FICO.
More generally, spreads on sponsored agency debt have been stable or
narrowed a bit since the July FOMC meeting.

The growth in total debt of

these agencies slowed sharply to $5-3/4 billion in the second quarter, after
a $15 billion increase a quarter earlier.

More than half of the slowing is

attributable to the Federal Home Loan Banks and reflects the ongoing paydown
of advances by FSLIC-insured thrifts owing to faster deposit growth and
declines in assets.
Business Finance
Total borrowing by nonfinancial firms probably has strengthened since
the last FOMC meeting, largely reflected in a pickup in bank lending to

III-10

TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)
1989
Q2

Q3p

Jul.e

Aug.p

Sept.

Treasury financing
Total surplus/deficit (-)

22.9

-62.8

-22.5

-27.2

-13.0

10.1

41.0

-4.1

34.3

10.9

5.4

10.0

Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments (-)

38.4

-4.4

32.8

Bills
Coupons
Nonmarketable
2
Other borrowing

-20.0
25.3
3.3
1.4

14.5
23.9
2.7
.0

-5.8
1.4
.2
.0

18.8
13.9
1.5
.0

Decrease in the cash
balance

-29.1

12.3

21.6

-3.7

-5.7

43.7

31.5

22.1

25.8

31.5

-3.9

9.5

5.0

-3.3

5.9

3.9
1.6

Memo: Cash balance
at end of period
Other 3

1.5
8.5
.9
.0

7.8

Federally sponsored credit
agencies, net cash
borrowing
FHLBs
FNMA

Farm Credit Banks
FAC
FHLMC
FICO
SLMA

.2
-1.7e
1.1
.5

1. Data reported on a not seasonally adjusted, payment basis.
2. Securities issued by federal agencies under special financing
authorities (primarily FSLIC).
3. Includes checks issued less checks paid, accrued items and other
transactions.

4. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
e--staff estimate.
p--projected.
Note: Details may not add to totals due to rounding.

III-11

business in July.

Corporate financings in the commercial paper and bond

markets, however, slackened in July and early August from the strong secondquarter pace.

After growing rapidly since last December, commercial paper

outstanding has been unchanged since early June.

Following heavy issuance

in June, new public offerings of investment-grade corporate bonds by
nonfinancial firms eased in July, as issuers evidently anticipated another
drop in market rates.

The junk bond market has continued to absorb a steady

supply of new issues in recent months, despite difficulties that have
increased spreads between junk bonds and less risky securities to their
highest levels in this decade.

Part of the deterioration in the junk market

may reflect provisions in the savings and loan legislation which require
federally insured thrift institutions to divest their junk bond holdings,
amounting to $14 billion, over the next five years.

In addition, recent

publicity about actual and projected losses on junk-bond portfolios and
unease about a slowdown in the economy raised concerns about the soundness
of investment in high-yield securities.
An increase in stock prices of about 7 percent since the last meeting
sent most market indexes to all-time highs before they retreated in recent
days (update on Wednesday).

Spurred by the runup in stock prices, new

issuance of equity by nonfinancial firms has staged a modest revival in
recent months, with the increase encompassing both seasoned and initial
public offerings.

Despite this increased issuance, net retirements of

corporate equities are expected to rise to about a $170 billion annual rate
in the third quarter, bolstered by retirements associated with the
Time-Warner deal.

III-12

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)
1989

1987

1988

Year

Q1p

Corporate securities - total1

24.08

22.23

Public offerings in U.S.

21.89

20.21

4.45
2.32
.57
1.75
2.12

3.53
1.14
.24
.90
2.39

1.47
.60
.16
.44
.87

17.44
6.61
2.02
4.59
10.83

16.68
6.08
1.77
4.31
10.60

14.78
4.57
.62
3.95
10.21

Stocks--total 2
Nonfinancial
Utility
Industrial
Financial
Bonds--total1
Nonfinancial
Utility
Industrial
Financial
By quality
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity-based bonds
Mortgage-backed bonds
Other asset-backed
Variable-rate notes
Bonds sold abroad - total

Nonfinancial
Financial
Stocks sold abroad - total

Nonfinancial
Financial

Q2p

Mayp

18.82

19.74

20.99

23.86 15.27

16.25

17.42

19.00

20.81 13.66

1.80
.95
.29
.66
.85
15.62
7.33
2.01
5.32
8.29

1.60
.90
.46
.44
.70

Junep Julyp

2.81 3.36
1.27 1.09
.15 .17
1.12
.92
1.54 2.27

17.40 18.00 10.30
7.60 5.20
10.30
.56 3.45 1.50
9.74
4.15 3.70
7.10 10.40 5.10

3.25
5.20
2.77
.07

2.68
5.57
2.51
.07

3.46
4.96
1.91
.02

3.12
6.29
3.82
.02

2.05
6.50
7.25
.00

3.58 2.20
7.70 3.90
2.85 2.45
.06 .10

.87
5.19
.96
1.88

.28
4.69
1.26
1.19

.12
2.85
1.58
.87

.59
.88
1.49
1.80

1.02
.50
1.10
3.52

.63 .11
1.30 1.00
2.51
.65
.89 .30

2.03
.94
1.09

1.93
.69
1.24

2.55
.89
1.66

2.28
.51
1.77

1.91
.22
1.69

3.00 1.50
.85 .15
2.15 1.35

.09
.08
.01

.02
.02
.00

.04
.04
.00

.08
.08
.00

.05
.05
.00

1. Securities issued in the private placement market are not included.
Total reflects gross proceeds rather than par value of original discount
bonds.
2. Excludes equity issues associated with equity for equity swaps that have
occured in restructurings. Such swaps totaled $2.2 billion in 1989 Q1 and
$4.2 billion in 1989 Q2.
3. Bonds categorized according to Moody's bond ratings or Standard and
Poors if unrated by Moody's. Excludes mortgage-backed and asset-backed
bonds.
4. Includes bonds convertible into equity and bonds with warrants that
entitle the holder to purchase equity in the future.
p--preliminary.

.11
.11
.00

III-13
Municipal Securities
Issuance of long-term municipal securities slowed to $8 billion in
July, near the average pace of the first half of the year, after surging a
month earlier.

July's easing reflected a falloff in both bonds issued for

new capital and refunding issues, as yields on long-term municipal bonds
have lagged declines in other bond rates.

Market participants indicate that

issuers had been anticipating further declines in municipal yields, in which
event volume, especially refunding issues, would have picked up.
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)

1988
Year
Total offerings 1
10.88
Total tax-exempt 10.60
Long-term
2
9.01
Refundings
2.75
New capital
6.26
Short-term
1.59
Total taxable
.28

1988

1989

11.50
11.30
8.00
1.87
6.93
2.52
.23

11.58
11.21
10.09
2.91
7.18
1.12
.37

9.20
8.92
7.77
2.49
5.28
1.15
.28

13.09
12.95
9.56
2.20
7.36
3.39
.14

May

June

7.48
8.31
7.44
1.50
5.94
.87
.11

July p

18.28
18.15
13.78
3.70
10.08
4.37
.13

9.17
9.00
7.95
1.53
6.42
1.05
.17

p--preliminary.
1. Includes issues for public and private purposes; also includes taxable
issues.
2. Includes all refunding bonds, not just advance refundings.
3. Does not include tax-exempt commercial paper.
The Securities and Exchange Commission (SEC) recently adopted a
disclosure rule, effective next January, that requires underwriters of
municipal bond issues to review for accuracy and completeness the official
statements released by issuers prior to primary offerings of $1 million or
more.

In addition, underwriters must maintain copies of final official

III-14
ARM DISCOUNTS
(June 1989)
Average
initial rate
(percent)

Size
of discount
(basis points)
0
100
101
201
301
All

or fewer
- 200
- 300
or more
discounted loans

Average
base rate
(percent)1

Percent of
total

9.95
9.96
9.79
9.16
9.19
9.53

9.94
10.56
11.39
11.68
12.56
11.49

44
6
25
20
5
56

1. The base rate represents the rate to which the loan will adjust
following the discount period. If an index-plus-margin formula
determines the adjusted rate, the base rate uses the current value of
the index.
Source: FHLBB survey of conventional home mortgages closed during the
first five working days of the month.

AVERAGE ARM INDEX VALUES AND INITIAL RATE SPREADS
(Percent)

Initial
ARM rate
(2)

One-year
Treasury
(3)

FHLB 11th
District cost
of funds
(4)

10.04
8.42
7.82
7.90

8.43
6.46
6.76
7.65

9.52
8.24
7.38
7.69

1.61
1.96
1.06
.25

.52
.18
.44
.21

1988-Q1
Q2
Q3
Q4

7.66
7.71
8.00
8.22

6.78
7.30
8.00
8.53

7.59
7.55
7.70
7.92

.88
.41
0
-.31

.07
.17
.30
.30

1989-Q1
Q2

8.76
9.24

9.29
8.93

8.30
n.a.

-.53
.31

.46
n.a.

1989-Jan.
Feb.
Mar.
Apr.
May
June
July p

8.55
8.65
9.09
9.40
9.30
9.03
8.73

9.05
9.25
9.57
9.36
8.98
8.44
7.89

8.13
8.35
8.42
8.65
8.80
8.92
n.a.

-.50
-.60
-.48
.04
.32
.59
.84

.42
.30
.67
.75
.50
.11
n.a.

Period
(1)
1985
1986
1987
1988

ARM spreads
Treasury
llth District
(2)-(4)
(2)-(3)

1. Initial rate on ARMs indexed to the one-year constant-maturity
Treasury yield.

III-15

statements for distribution to initial purchasers and secondary market
customers of newly issued municipal securities.

The SEC's action is not

expected to have a noticeable effect on the new issue market:

a variety of

market participants believe that the new rule simply codifies market
practice.
Mortgage Markets
Mortgage lending data for the third quarter are sketchy; but the
pickup in single-family housing starts in July, together with the
11-1/2 percent annual rate of growth in real estate lending at banks last
month, suggests that home mortgage debt expansion early in the quarter at
least matched the second-quarter pace of roughly 8 percent.
Interest rates on fixed-rate mortgages declined during July before
turning back up in early August.

In the primary market, the average

contract rate on new commitments for 30-year fixed-rate conventional home
mortgages dipped about 40 basis points to 9.7 percent, the lowest level
since the spring of 1987, but has since returned to near 10 percent.
Initial rates on adjustable-rate mortgages (ARMs) indexed to the one-year
constant-maturity Treasury yield are down about 30 basis points over the
intermeeting period.

Data on ARM pricing indicate a continued falloff in

the availability of deep discount ARMs.

About one-quarter of all new ARM

loans originated in early June carried rate discounts of 2 percentage points
or more (table), down from half of all originations as recently as January.
Comparisons between initial ARM rates and common indexes provide additional
evidence that ARM lenders have become less aggressive in pricing loans.

III-16
MORTGAGE ACTIVITY AT ALL FSLIC-INSURED INSTITUTIONS
(Monthly averages, billions of dollars, seasonally adjusted)
Net change in
mortgage assets
MortgageMortgage
backed
Total
loans
securities

Mortgage transactions
Origina- Committions
ments
Sales
1986 r
1987 r
1988

21.9
21.1
19.9

19.8
20.0
19.4

14.1
10.5
8.8

4.6
6.1
4.8

1.2
2.4
3.8

3.4
3.7
1.0

1988-Q2 r
Q3 r
Q4 r

19.6
21.4
19.8

18.8
20.9
19.9

9.4
8.5
9.5

6.1
6.3
3.8

4.1
5.7
2.7

2.0
.7
1.1

1989-Q1 r
Q2 p

20.5
14.5

19.3
12.8

8.3
7.0

4.3
-1.2

2.5
1.4

1.7
-2.6

21.5
19.6
20.4
16.1
15.1
12.3

19.6
19.7
18.6
13.9
12.7
11.8

7.7
8.6
8.6
7.0
7.1
7.0

.8
5.7
6.3
3.0
-.3
-6.3

2.6
2.0
3.0
4.3
.5
-.5

-1.8
3.7
3.3
-1.3
-. 8
-5.8

1989-Jan.
Feb.
Mar.
Apr.
May
June

r
r
r
r
r
p

1. Net changes are adjusted to account for structural changes caused
by mergers, acquisitions, liquidations, terminations, or de novo
institutions.
MORTGAGE-BACKED SECURITY ISSUANCE
(Monthly averages, billions of dollars, NSA unless noted)
Federally related
pass-through securities
Total
ARM-

Multiclass securities
Private FNMA
FHLMC
issues

REMICs 2 REMICs

Agency
strips

backed

Total

21.6
19.6
12.6

.7
1.2
2.4

4.0
5.9
7.1

4.0
5.0
4.2

0
.1
.9

0
0
1.2

0
.8
.6

12.1
13.2
14.7

12.5
14.9
14.5

3.0
3.0
2.6

7.7
6.1
8.0

4.1
3.7
4.3

1.3
.7
1.2

1.2
1.1
1.8

.5
.6
.7

1989-Q1
Q2 p

16.0
13.6

13.7
13.8

3.1
2.8

6.9
5.2

2.5
.4

1.3
2.0

2.8
2.1

.4
.1

1989-Jan.
Feb.
Mar.
Apr.
May r
June p

14.6
16.2
17.1
14.8
13.0
12.9

12.1
13.7
15.4
13.9
12.4
15.2

.9
3.5
4.8
3.0
2.2
3.2

6.6
4.7
9.4
3.9
4.0
5.9

2.2
1.7
3.6
.4
.2
.7

.9
1.4
1.5
1.8
1.4
2.7

3.5
1.5
3.4
1.5
2.4
2.5

0
.2
.9
.2
.0
.0

(SA)

Total

1986
1987
1988

21.3
20.1
12.4

1988-Q2
Q3
Q4

1. Excludes pass-through securities with senior/subordinated structures.
2. FNMA's first REMIC, a $500 million strip security issued in January 1987,
is included in the FNMA REMIC category rather than in the strip category.

III-17

Thrift restructurings and expectations of sizable liquidations of
thrift mortgage-backed security (MBS) portfolios have continued to attract
considerable attention in secondary mortgage markets and have contributed to
the generally wider spreads of mortgage instruments to comparable Treasuries
since early this year.

Thrifts currently insolvent on a tangible GAAP basis

held approximately $46 billion of MBSs at the end of the first quarter, and
additional supply could come from other, thinly capitalized, thrifts.

The

combined holdings of these two groups account for around $120 billion of the
roughly $815 billion of mortgage pass-throughs outstanding.

Thrift holdings

of MBSs fell sharply in June; this selloff appears to have been mainly a
short-run response to the declines in interest rates during the month, which
boosted securities prices and allowed capital-hungry thrifts to book a
profit on the sales.
Mortgage originations and commitments at thrifts were down in June by
a bit more than recent home sales and construction levels would suggest.
The explanation may be that borrowers are responding to recent pricing
changes by shying away from adjustable-rate mortgages in favor of fixed-rate
contracts.

Only 31 percent of conventional loans originated in early July

for home purchase were ARMs, the lowest proportion in two years.

This mix

shift .would tend to reduce the thrift industry's share of total home
mortgage originations, because thrifts more than other mortgage lenders tend
to specialize in originating and holding adjustable-rate products.
Consumer Credit
Consumer credit growth remained moderate through early summer.

Installment credit expanded in June at a 5 percent annual rate, somewhat

III-18
CONSUMER CREDIT
(Seasonally adjusted)
Net change
(billions of
dollars)
1989

Percent change
(at annual rate)
1989

1989
1987

1988

Q11

Total installment2

6.2

8.5

8.7

5.8

7.3

Installment,
excluding auto

5.2

10.7

9.8

8.3

9.3

7.5
12.3
.1

5.7
13.6
8.3

7.1 2.2
16.1 14.8
4.7 2.8

7.6
4.7
5.1

12.7
3.5
7.5

3.9
10.0
11.1

Selected types
Auto
Revolving
All other
Selected holders
Commercial banks
Finance companies
Credit unions
Savings
institutions
Asset pools (NSA)
Memorandum:
Total

May.r Junep

7.6
8.3
9.0

4.5
13.0
6.2

Memo:
Outstandings
(billions of
dollars)
1989

Mavr

June P

5.1

4.22

2.99

701.1

9.6

3.13

3.25

410.6

-1.1
20.0
.8

1.09
2.00
1.13

-. 27

290.5
189.6
221.0

3.4
4.4
8.3

2.90
1.15
.56

10.9
9.5
7.5

June p

3.11
.15

324.3
146.1
90.5

6.6
n.a.

3.8
n.a.

4.1 -17.8 -11.8 -26.9
65.4 12.6
3.3 67.7

-. 61
.09

-1.37
1.85

59.9
34.7

4.9

7.3

10.0

2.18

1.08

765.1

3.5

3.4

1.7

1. Growth rates are adjusted for discontinuity in data between December 1988 and
January 1989.
2. Includes items not shown separately.
3. Savings and loans, mutual savings banks, and federal savings banks.
4. Installment plus noninstallment.
r--revised. p--preliminary.
Note: Details may not add to totals due to rounding.
CONSUMER INTEREST RATES
(Annual percentage rate)
1988
Aug.
Nov.

1989
Apr.
May

1987

1988

New cars (48 mo.)
Personal (24 mo.)
Credit cards

10.46
14.23
17.92

10.86
14.68
17.79

10.93
14.81
17.79

11.22
15.06
17.77

11.76
15.22
17.83

...
...
...

12.44
15.65
18.11

...

At auto finance cos.
New cars
Used cars

10.73
14.61

12.60
15.11

12.64
15.16

13.20
15.75

13.07
15.90

12.10
16.39

11.80
16.45

11.96
16.45

Feb.

June

At commercial banks I

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-19

below the reduced pace of the previous three months.

The annual growth rate

for the second quarter was just under 6 percent, compared with about
8-1/2 percent during the first quarter and for 1988 as a whole.

Bank data

for July suggest continuation of the recent growth rate in consumer credit.
Sluggish growth of automobile credit has held down the overall
expansion of consumer debt.

Auto debt outstanding declined slightly in

June, and grew at only a 2 percent rate during the second quarter.

Although

the auto manufacturers progressively sweetened their low-rate financing and
rebate programs during the quarter, new-car unit sales rose only moderately.
The fact that some form of incentive program has been in place almost
continuously over the past two years may account in large part for the tepid
reaction to the incentives.

With incentives apparently entrenched, the need

to respond quickly no doubt has seemed less urgent to consumers than when
the programs were first introduced.
Revolving credit, which reflects use of both credit cards and
unsecured personal lines of credit, continued to grow rapidly through June.
Outstandings increased at a 20 percent annual rate in June, raising the
second quarter's pace to almost 15 percent.

The rise at banks was quite

small, but this reflects a large volume of credit card securitizations,
which shift outstandings from originating lenders into the "asset pools"
category--rather than any slowdown in new borrowings through revolving
accounts.

Households also have been increasing their debt against lines of

credit secured by home equity (an element of mortgage debt rather than
consumer credit).

During the second quarter, this type of debt increased at

III-20

a 27 percent annual rate at commercial banks, the dominant lender in the
field with more than one-half of the total amount outstanding.
The delinquency rate on auto loans at the auto finance companies rose
somewhat further during the second quarter, continuing a gradual uptrend of
four to five years' duration, a period during which the promotional
financing schemes of these companies were typically accompanied by some
relaxing of credit standards.

At 2.6 percent, the delinquency rate is not

far below past highs, recorded mostly during business recessions.

The

experience of the auto finance companies appears out of step with that of
other lenders, however, and thus may not accurately reflect the financial
situation of households.

Other series on loan delinquencies are not yet

available for the second quarter, but through the first quarter there was
little evidence of any general upward trend.

INTERNATIONAL DEVELOPMENTS
U.S. Merchandise Trade
In May, the U.S. merchandise trade deficit was $10.2 billion
(seasonally adjusted, Census basis, customs valuation), compared with
$8.3 billion (revised) in April.

The widening of the deficit in May was

primarily the result of increases in oil and non-oil imports.

Data for

June will be available on August 17 and will be discussed in the
Greenbook supplement.
U.S. MERCHANDISE TRADE: MONTHLY DATA
(Billions of dollars, seasonally adjusted, Census customs basis)

Total

Exports
Nonag.
Ag.

Total

Imports
Oil Non-oil
(nsa)
32.5
3.6
34.0
3.3

Balance --8.7
-10.6

1988-May
Jun

27.4
26.7

3.1
2.8

24.3
23.9

36.1
37.3

Jul
Aug
Sep

26.6
27.5
27.6

3.1
3.3
3.4

23.5
24.2
24.2

35.1
37.6
36.8

3.2
3.4
3.1

31.9
34.2
33.7

-8.5
-10.1
-9.2

Oct
Nov
Dec

27.9
27.6
28.9

3.1
3.3
3.3

24.8
24.3
25.6

37.1
38.1
39.7

2.9
2.9
3.3

34.2
35.2
36.4

-9.2
-10.5
-10.8

1989-Jan
Feb
Mar

29.0
28.8
30.0

3.3
3.4
3.8

25.7
25.4
26.2

37.9
38.2
39.5

3.5
3.2
3.6

34.4
35.0
35.9

-8.9
-9.4
-9.5

30.7
30.5

3.6
3.5

27.1
27.0

39.0
40.7

4.0
4.7

35.0
36.0

-8.3
-10.2

Apr
May P

r--revised

p--preliminary

Exports in May were only fractionally less than in April, with
small declines in most major trade categories except industrial

IV-1

IV-2

supplies.

Imports in May increased 4 percent, the result of large

increases in imports of capital goods, foods, and petroleum and
products.

The volume of oil imports rose 10 percent in May and the

price of imported oil increased by 57 cents per barrel.
For April/May, the deficit was $111 billion at an annual rate
(balance-of-payments basis), little changed from the first quarter (see
table on the following page).

Exports rose 3 percent in both value and

volume in April/May, following strong growth in both the fourth quarter
By geographic region, most

of 1988 and the first quarter of this year.

of the increase in the value of exports was to Canada, Japan, and the
Asian newly industrialized economies (NIEs).
Both the value and volume of imports rose 2 percent in April/May.
The increase in value was accounted for entirely by the rise in the
value of oil imports.

The average price per barrel rose at an annual

rate of 60 percent in April and 10 percent in May; the increase occurred
Spot and

largely in response to accidents in Alaska and the North Sea.

posted prices peaked in April and have since fallen about $2.50 per
barrel, partly in response to increases in OPEC production.

The

quantity of imported oil increased in May from the pace recorded in both
the first quarter and April as inventories were replenished.
OIL IMPORTS
(BOP basis, seasonally adjusted, value at annual rates)
Year

1988

Value (Bil. $)
Price ($/BBL)
Volume (mbd.)

1989
April

May

39.31
14.39
7.48

40.99
15.20
7.37

39.10
14.24
7.50

36.87
12.85
7.84

43.34
15.53
7.65

50.90
18.35
7.60

58.90
18.78
8.59

IV-3
U.S. MERCHANDISE TRADE: QUARTERLY DATA
(Billions of dollars, seasonally adjusted annual rates)

Total

Exports
Ag.

Nonag.

Total

Imports
Oil

Non-oil

Balance

- - - - - - - BOP basis (current dollars) 1987
1988

410
446

367
407

-160
-127

1988-1
-2
-3
-4

440
440
444
463

399
399
405
426

-133
-126
-121
-128

1989-1
A/M

465
476

421
421

-110
-111

- - - - - BOP basis (constant 1982 dollars)
1988-1
-2
-3
-4

337
339
338
352

461
457
463
477

377
372
377
388

-124
-118
-125
-125

1989-1
A/M

368
378

473
482

384
388

-105
-104

Percent Change:
A/M/Q2
11.5
2.7
A/M/Q1
(not AR)

5.0
2.4

9.0
2.8

5.5
1.9

10.6
5.6

4.3
1.0

- - - - - - GNP basis (constant 1982 dollars) - - - - 1988-1
-2
-3
-4

336
339
344
359

296
300
308
323

460
457
468
483

377
372
382
393

-124
-118
-124
-124

1989-1
-2

373
384

333
343

477
486

389
392

-104
-102

14.3
3.0

6.3
1.9

Percent Change:
13.3
Q2/Q2
2.9
Q2/Q1
(not AR)

5.1
2.5

10.6
6.8

1. Constant dollar estimates are derived using deflators from the GNP
accounts.

IV-4

The value of non-oil imports was unchanged in April/May, while the
volume increased by 1 percent.

By region, declines in imports from

Japan and Western Europe were matched by increased imports from Canada.
Imports from developing countries were also unchanged, as increases in
imports from Mexico and the NIEs were offset by declines from other
developing countries.
Import and Export Prices
During the second quarter of 1989, the price of non-oil imports, as
measured by the Bureau of Labor Statistics, fell 3.1 percent at an
annual rate following a 2.2 percent increase in the first quarter.

The

net decline in non-oil import prices during the first half of 1989
follows a nearly 4 percent annual rate of increase in the second half of
last year, and results in a net increase of 1.4 percent since the second
quarter of last year.

The pattern of rising prices in the second half

of 1988 (when the dollar was depreciating) and flat or falling prices
more recently (when the dollar was appreciating) was evident across most
major categories of imports with the notable exception of consumer
goods, which continued to show price increases this year.

A large

proportion of imports of consumer goods come from developing countries,
especially in Asia, against whom the dollar has depreciated this year.
Prices of nonagricultural exports rose 0.7 percent at an annual
rate during the second quarter, and 3.1 percent over the year ending in
the second quarter.

Since the beginning of the year, prices of exports

of capital goods and industrial supplies have moved in tandem with their
counterparts in the Producer Price Index (PPI):

in both indexes prices

of capital goods increased at a fairly constant rate in the first two
quarters and prices of industrial supplies rose sharply in the first

IV-5
IMPORT AND EXPORT PRICE MEASURES
(percentage change from previous period, annual rate)
Year
1989-Q2
1988-Q2

Half-Yr
1988-Q4
1988-Q2

3.3
-1.8
2.4
0.0
2.0
2.4

1.4
-1.8
5.1
2.0
5.5
1.7

Quarters
1989
Q1
Q2

Months
1989
May June
(mont ly rates)

BLS Prices - - -

Imports, Total
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
Memo:
Oil
Non-oil

25.5
1.4

-21.7
3.4

7.3
-1.4
5.0
0.3
-0.3
4.1

3.4
-7.2
-5.4
-4.2
-2.5
1.9

0.7
2.0
2.2
-0.2
-0.2
0.2

-0.6
-3.1
-0.2
-1.1
-0.1
-0.1

104.4
2.2

97.9
-3.1

4.8
0.3

1.4
-0.8

-0.4

0.3

-0.3

3.9

Memo:
Agricultural
Nonagricultural

12.1
7.3
3.8
1.5
8.8

-11.4
0.0
2.7
1.9
1.0

5.7
3.5

Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods

6.2

13.2
0.5
2.7
5.6
4.2

Exports, Total

13.6
4.7

-5.7
0.7

3.5 -3.1
-0.4 -0.4
0.1 0.4
0.0 0.6
0.2 0.1
3.1
-0.2

-2.1
0.0

- - - - - - Prices in the GNP Accounts - - - -

Fixed-Weighted
Imports, Total
Oil
Non-oil

4.7
20.5
2.6

0.2
-28.6
4.5

11.3
114.9
2.6

7.6
92.7
-1.2

3.5
9.9
2.3

6.9
24.9
3.7

-0.8
-2.9
-0.3

1.1
-3.6
2.2

Deflators
Imports, Total
Oil
Non-oil

2.6
20.7
1.2

1.5
-28.3
5.1

6.0
113.1
-1.5

1.6
93.8
-3.4

Exports, Total
Ag.
Nonag.

4.1
9.9
3.5

5.2
24.9
3.3

5.2
-2.9
5.6

1.0
-3.6
1.8

Exports, Total
Ag.
Nonag.

IV-6

quarter and were essentially flat in the second quarter.

On the other

hand, prices of consumer goods in the PPI have risen smoothly in the
first two quarters of the year, but prices of exports of consumer goods
have shown an uneven pattern of sharp increase in the first quarter and
little change in the second quarter.
U.S. International Financial Transactions
Capital inflows into the United States in the form of net private
purchases of U.S. bonds continued in the second quarter, but at a slower
pace than in the first quarter.

Private foreign net purchases of U.S.

Treasury securities were $1.8 billion, down from $8.7 billion in the
first quarter.

(See line 3 of the Summary of U.S. International

Transactions Table.)

Large net purchases in May were reversed partially

in June; the bond market rallied substantially in both months.

Foreign

net purchases of U.S. corporate and government agency bonds were $6.2
billion in the second quarter, down from $8.8 billion in the first
quarter (see line 2a),

and with larger purchases in June than in May.

More recent data for July and early August indicate that new issues of
Eurobonds by U.S. corporations are down somewhat from the second quarter
pace.

Investor concern about takeovers has resulted in wide spreads

between rates on corporate and sovereign Eurobonds.
Foreign net purchases of U.S. corporate stocks were very large in
the second quarter, particularly in June (see line 2b).
Japan were the largest purchasers.

Residents of

U.S. net purchases of foreign

securities, particularly stocks, were also very large in the second
quarter (see line 2c).
net sales to Japan.

Purchases were mainly from Europe; there were

IV-7
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)

1987

1988

Year

1988
Q3

47.5

21.0

15.3

-0.5

9.1

36.4

15.5

10.9

5.8

26.4

26.9

8.9

16.8

0.4

-6.9

1989

1989
Q2

Apr.

May

June

-0.9

0.6

-3.3

4.2

-0.3

0.9

5.8

3.6

2.5

-0.1

6.4

9.0

8.8

6.2

3.6

0.4

2.2

1.1

1.3

-2.0

0.1

3.7

1.0

2.6

-11.8

1.0

-1.9

-6.1

-3.1

-6.2

-1.1

-1.4

-3.7

-7.3

20.6

5.6

3.5

5.5

8.7

1.8

-1.0

8.2

-5.4

47.7

40.2

6.5

-2.0

10.7

7.8

-5.4

-7.4

-4.2

G-10 countries (incl. Switz.)

38.8

15.5

-0.8

-6.8

5.3

2.6

-3.7

OPEC

-8.9

-3.4

-1.7

-0.8

0.7

-0.7

-0.4

1.2

All other countries

17.8

28.0

9.0

5.7

4.6

4.3

-3.3

2.3

43.2

41.7

5.9

-3.8

11.9

4.6

-9.8

-0.2

-5.4

4.5

-1.6

0.6

1.8

-1.3

3.1

4.4

6.4

-2.0

9.1

-3.6

-7.4

2.3

-12.1

-0.3

-6.5

Private Capital
Banks
1.

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

Securities

2. Private securities
transactions, net
a) foreign net purchases
(+) of U.S. corporate bonds
b) foreign net purchases
(+) of U.S. corporate stocks
c) U.S. net purchases (-) of
foreign securities
3. Foreign net purchases (+) of U.S.
Treasury obligations

1.2

Official Capital

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

6.2

a) By area
-7.6

b) By type
U.S. Treasury securities
2
Other

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

-4.0

-5.3

Other transactions (Quarterly data)

4
6. U.S. direct investment (-) abroad
4
7. Foreign direct investment (+) in U.S.
3,4
8.

Other capital flows (+ = inflow)
4

9. U.S. current account balance
4
10.

Statistical discrepancy

-44.2
46.9
5.7
-143.7

1.9

-17.5
58.4
2.5
-126.5
-10.6

2.4
13.9

-4.9

-8.9

11.9

23.0

14.4
-10.8

-3.7

-5.4

1.9

5.5

-33.5
-15.7

-32.3

-28.7
-19.4

-30.7

24.0

30.3

-32.0

-27.6

13.4

MEMO:

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

-159.5

-127.2

-31.4

n.a.

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 Commerce. Line 2a includes all U.S.
bonds other than Treasury obligations.
2. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities.
3. 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
my of Current Business.
icludes seasonal adjustment for quarterly data.
-ess than $50 million.
NOTE: Details may not add to total because of rounding.

IV-8

A small net inflow was reported by banks in the second quarter (see
line 1).

In addition, credit extended to U.S. residents by the foreign

branches of U.S. banks continued to expand through July, as the primeLIBOR spread continued to widen.

(See line 2 of the International

Banking Data Table.)
Official reserve assets in the United States declined substantially
in the second quarter, reflecting large intervention sales of dollars by
the G-10 countries.

(See line 4 of the Summary of U.S. International

Transactions Table.)

Partial information from FRBNY indicates little

further change in G-10 holdings in July.

U.S. foreign exchange reserves

(line 5) increased by $6.5 billion in May and $5.3 billion in June,
largely reflecting foreign exchange market intervention to limit the
appreciation of the dollar.
Foreign Exchange Markets
The weighted-average foreign-exchange value of the dollar in terms
of the other G-10 currencies, shown in Chart 1, has risen 2-1/4 percent
since the July FOMC meeting.

The dollar strengthened gradually to mid-

July, then declined as dollar interest rates moved lower.

In August, as

the likelihood of a continued decline in domestic interest rates seemed
to recede, the dollar began climbing again, especially after U.S. retail
sales figures were released on August 11.

Overall, the dollar has risen

more against the mark, about 3 percent, than against the yen, about 2
percent.
Foreign exchange market intervention was light during most of the
period since the July FOMC meeting.
the market until mid-August.

The Desk remained largely out of

Desk sales totaled $850 million:

million against yen and the remainder against marks.

$500

INTERNATIONAL BANKING DATA
(Billions of dollars)

1987

Dec.

Mar.

June

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

22.3
31.7
-9.4

-10.9
15.2
-26.1

8.7
27.8
19.0

-4.8
17.0
-21.8

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

16.8

15.8

19.1

124.5

132.6

128.9

Eurodollar Holdings of
U.S. Nonbank Residents

1989

1988

1986

Dec.

Mar.

Apr.

May

June

July

-4.9
16.6
21.5

-4.9
21.6
-26.5

-2.9
20.4
23.3

3.4
23.7
-20.3

1.6
22.7
-21.1

-3.9
19.2
-23.1

-4.1
17.2
-21.3

19.7

21.4

21.2

24.0

24.2

25.4

26.0

26.2

138.1

141.1

145.3

144.2

144.3

141.8

138.3

142.0

Sept.

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. Line 3 is an average of
daily data for the overnight component and an average of Wednesday data for the term component.

IV-10

Movements in interest rate differentials between dollar-denominated
and foreign-currency-denominated assets have shown a mixed picture in
the period since the July FOMC meeting.

Short-term interest rate

differentials have generally narrowed: some short-term rates in the
United States have declined, while Japanese short-term interest rates
have increased slightly and German short-term rates have changed little.
Long-term differentials have widened: long-term bond yields in the
United states have risen, while in both Japan and Germany, they have
declined by 10 to 15 basis points.

IV-11
WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

March 1973=100
S108

Daily series
-106

FOMC

July 6
-104

-102

-100

-98

-96

II1
May

June

July
1989

August

i1111111111
94

IV-12
Developments in Foreign Industrial Countries
Economic growth slowed significantly in the major foreign
industrial countries in the second quarter, following a robust first
quarter.

Much of the slowing was attributable to special factors that

affected growth in both quarters.

Industrial production in the second

quarter was flat in Japan and fell in Germany, largely because the
anticipated introduction in April of a sales tax in Japan and a mild
winter in Europe had boosted first-quarter growth in both those
countries to unsustainable rates.

Second-quarter growth in industrial

production was sluggish in the United Kingdom and moderately strong in
France, Canada, and Italy.
Inflation rates rose slightly in the major foreign economies in the
second quarter on average, but inflation appears to have been leveling
off by the end of the quarter.

Some of the acceleration in inflation

reflected currency depreciations against the dollar and increases in
indirect taxes in Japan and Canada.

The slowing at the end of the

quarter partly reflected an easing in energy prices.
Trade-balance developments abroad have been mixed recently.

Japan,

Germany, and Canada recorded smaller trade surpluses in the second
quarter, while the French deficit widened.

The trade deficits of the

United Kingdom and Italy narrowed, but remained relatively high.
Individual Country Notes.

The pace of economic activity in Japan

slowed substantially in the second quarter from a very rapid firstquarter rate.

This pattern was mainly the consequence of a bunching of

purchases in advance of the introduction of the 3 percent consumption

IV-13

tax in April.

The underlying rate of economic growth seems to have

remained fairly robust.
The substantial impact of the introduction of the consumption tax
Industrial

can be seen in the table on Japanese economic indicators.

production, retail sales, and the capacity utilization rate all jumped
sharply in March in advance of the tax, and then declined in April.
Later, all of these series resumed their upward movement and, as of
June, industrial production and retail sales were both well above yearearlier levels (7.8 percent and 6.6 percent, respectively).

The

unemployment rate fell in June to its lowest level in seven years.
JAPANESE ECONOMIC INDICATORS
(percent change from previous period except were noted, s.a.)
1988
Q4

Q2
--

1989
Mar. Apr.
--

May

Jun.

0.5
4.9

2.0
2.1

Real GNP

0.8

2.2

Industrial Production
Retail Sales

1.8
2.7

3.1
6.4

Capacity Utilization

1.6

0.0

5.3

-3.6

1.0

2.4

2.3

2.4

2.2

Unemployment Rate (percent)

0.0
-5.4

5.4 -3.8
17.0 -18.0

Prices increased sharply in the second quarter in Japan, due both
to the introduction of the consumption tax in April and the weakness of
the yen in May and June.

The 12-month increase in wholesale prices rose

from 2.5 percent in April to 3.7 percent in June, while the 12-month
increase in consumer prices in Tokyo moved up from 2.7 percent in April
to 3.3 percent in June.

With the strengthening of the yen in July, the

rise in consumer and wholesale prices moderated.

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted)
1
1988

Q4/Q4 Q4/Q4
1987 1988

-- --------Q3
Q4

1989
-----------

1989
----------------------------

Feb.

Mar.

Apr.

Latest 3 months

May

June

from year ago

Canada

GDP
IP

.8
.9

.7
-. 6

.9
.1

n.a.
n.a.

3.0
4.3

1.0
3.2

.5
-. 1

1.0
1.0

n.a.
n.a.

2.4
1.5

2.6
4.0

1.1
1.8

.3
.6

2.9
2.4

n.a.
-1.4

2.7
5.7

3.0
6.7

1.1
.2

1.0
4.4

.7
.1

n.a.
n.a.

1.9

-2.6

5.7
8.1

4.8
7.6

2.3
2.0

.8
1.8

2.2
3.1

n.a.
.0

-1.8

5.4

4.2
4.1

3.0
2.6

.3
1.6

.5
.2

.4
-1.9

n.a.
-. 8

-. 7

5.4
5.8

3.4
5.0

.8
1.7

.7
1.1

.9
.5

-. 2

6.5
8.5

4.0
2.5

2.6
3.2

-. 5

1.3

x
-. 6

3.4

n.a.

France

GDP
IP

-. 7

-2.2

n.a.

Germany

GNP
IP

-. 1

1.0

-4.6

2.3

Italy

GDP
IP

n.a.

-3.8

2.0

-1.2

-. 1

-. 2

Japan
GNP
IP

United Kingdom
GDP
IP

1.4
-. 9

United States
GNP
IP

.4
.5

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

2.8
4.0

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

Q4/Q4
1987

1989
------------Q1
Q2

1988

Q4/Q4
1988

-- ------------------------Q1
Q2
Q3

1989
--------------------------Apr.
May
June

July

Latest 3 months
from year ago

Canada
CPI
WPI

4.2
4.3

4.1
3.5

1.3
.9

1.1
1.0

3.2
2.6

3.0
7.5

.5
1.1

1.0
.8

.9
2.7

1.0
-. 7

1.5
2.7

.5
.1

.5
1.1

.1
.4

5.2

4.6

5.4

1.1
1.1

1.0
1.3

1.1
-. 6

1.5
-1.4

-. 2
-1.2

4.1
4.1

6.5
4.9

.5
1.1

4.4
2.5

4.3
3.4

.9
.6

.8
.5

.5
n.a.

n.a.
n.a.

n.a.

.2
-. 1

-. 2
-. 9

3.1

n.a.
n.a.

6.8
6.9

1.2
1.1

1.7
n.a.

.3
.1

1.0
.0

.8
2.1

1.2
n.a.

.4
1.2

1.6
2.7

1.0
1.7

.6
1.1

1.0
1.2

1.9
1.7

2.0
2.3

1.7
n.a.

.7
.5

.1
.9

1.0
-. 8

-.1

2.1

2.7

.6
.7

-. 1
.7

2.4
1.4

1.4
1.2

2.1
1.1

1.6
1.4

2.9
1.2

.6
.3

.3
.3

n.a.
.3

8.2
4.9

1.1
.8

1.2
1.1

1.1
.9

1.3
2.2

1.6
1.6

.6
.9

.2
-. 1

n.a.
-. 4

5.2
5.7

France
CPI
WPI
Germany
CPI
WPI

.2
.3

5.6

Italy
CPI
WPI

.4
.4

.5
n.a.

Japan
CPI
WPI

3.4
3.4

United Kingdom
CPI
WPI
United States
CPI (SA)
WPI (SA)

1. Asterisk indicates that monthly data are not available.

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1988
1987

1989

1989
-------------

1988
01

1.6
-1.4

2.1
-1.7

2.6
-2.1

1.5
-3.2

2.0
-3.1

n.a.
.0

Apr.

May

June

July

Canada

n.a.

8.3
-8.0

7.8
-8.4

-5.2
-4.1

Trade
Current account

-5.4
-4.0

-. 9
1.4

-. 6
-. 7

-1.9
-1.1

-2.0
-3.6

-.6
1.0

-2.0
n.a.

-.6

-1.0

-. 4

65.9
45.6

72.8
48.7

15.0
9.7

19.9
14.4

17.0
8.7

21.0
15.9

19.4
15.8

17.7
13.6

5.3
4.1

5.4
4.4

7.0
5.1

n.a.
n.a.

-9.0
-1.6

-10.1
-5.4

-2.9
-5.2

-1.7
1.0

-2.4
.2

-2.9
-1.5

-4.4
n.a.

-3.4
n.a.

-1.2

-1.5

-. 8

n.a.

79.5
87.0

78.1
79.6

20.9
22.3

16.9
17.1

18.4
18.1

21.9
21.2

15.4
12.5

6.7
6.2

3.6
3.4

5.1
2.9

5.0
n.a.

-15.9
-4.7

-36.1
-26.3

-7.1
-5.1

-8.1
-4.9

-9.4
-6.3

-11.5
-10.0

-10.4
-8.4

-9.4
-7.5

-3.7

-2.8

-2.9

n.a.

-3.0

-2.2

-2.3

n.a.

-159.5 -127.2
-143.7 -126.5

-33.4
-32.0

-31.4
-33.5

-30.3
-32.3

-32.0
-28.7

-27.6
-30.7

n.a.
n.a.

n.a.
x

France
Trade
Current account

n.a.
M

Germany
Trade (NSA)
Current account (NSA)
Italy
Trade
Current account (NSA)
Japan
Trade
Current account

United Kingdom
Trade
Current account
United States
Trade 2
Current account

x
*

x
3*

x
*

1. The current account includes goods, services, and private and official transfers. Asterisk indicates
that monthly data are not available.
2. Annual data are subject to revisions and therefore may not be consistent with quarterly and/or monthly data.

IV-17
The Japanese trade surplus in July was $60 billion (s.a.a.r.),
virtually unchanged from June and below the average surplus rate so far
this year.

On a cumulative basis through July, the trade surplus rate

was $72 billion (s.a.a.r.), down slightly from the $75 billion surplus
rate in the first seven months of last year.
On July 23, the ruling Liberal Democratic Party (LDP) suffered a
severe defeat in elections for half of the seats in the upper house of
the parliament.

Following the elections, LDP Prime Minister Sosuke Uno

resigned, and the LDP chose former Education Minister Tashiki Kaifu as
the new Prime Minister.

Elections for the more powerful lower house of

the parliament are not required until next July, but the magnitude of
the LDP's defeat in the recent upper-house elections makes a lower-house
election within the next several months likely.
Economic growth slowed sharply in Germany in the second quarter,
following unsustainably rapid growth in the first quarter.

The see-saw

pattern of growth in the first half largely reflected a temporary boom
in construction activity, the result of a very mild winter.

Industrial

production (s.a.) fell in the second quarter to a level 3.4 percent
above its year-earlier level, down from a 5.5 percent year-over-year
rise in the first quarter.

In contrast, the volume of manufacturers'

new orders (s.a.) rose in the second quarter to a level 8.8 percent
above its year-earlier level.

In the labor market, the unemployment

rate (s.a.) has stabilized at just under 8 percent in recent months.
shortage of skilled workers has been reported in numerous industries,

IV-18
and virtually all short-time employment has been pulled into full-time
employment.

Moreover, capacity utilization in manufacturing rebounded

in the second quarter to its highest level since the early-1970s.
GERMAN ECONOMIC INDICATORS
(percent change from previous period except where noted, s.a.)
1988
Q4
0.6
-0.7

Q1
2.4
2.3

Q2
-1.4
3.0

Capacity Utilization

1.5

-0.9

1.1

Unemployment Rate (percent)

8.5

7.9

8.0

7.9

Industrial Production
Volume of Manufacturing Orders

1989
Apr. May
1.0 -4.6
1.7 -3.4

July
---

June
2.3
1.8

Inflation remains a key concern, but it has lessened somewhat in
recent months, as shown in the table below.

Most of the easing reflects

an appreciation of the mark (on a trade-weighted basis) since late-May
and a decline in energy prices.

A weak mark, rising energy prices, and

higher consumer excise taxes boosted inflation earlier in the year.
GERMAN INFLATION INDICATORS
(percent change from year earlier)

Consumer Prices
Industrial Producer Prices
Wholesale Prices
Import Prices
GNP Deflator

1988
Q4
1.5
1.7
2.7
2.2

Ql
2.6
3.1
5.4
6.1

Q2
3.1
3.3
6.1
6.6

1.9

2.6

1989
Apr. May
3.0
3.1
3.5
3.4
6.5
6.5
7.3
7.1
--

June
3.1
3.0
5.5
5.3

July
3.0
3.0
5.0
--

Germany's trade and current account surpluses (s.a.)--after
establishing new records in the first quarter--narrowed in the second
quarter.

However, on a cumulative basis through June, both the trade

surplus and the current account surplus remained somewhat larger than
their year-earlier levels.

Almost all of the rise in Germany's trade

IV-19
surplus this year reflects an increase in its surplus within the EEC;
its surplus with the United States has been more than halved.
The Bundesbank, still concerned about inflation, raised its
official lending rates in late-June for the fourth time since December.
Growth in M3 since the fourth quarter of 1988 eased from 6.1 percent
(s.a.a.r.) through April to 4.3 percent through June, putting M3 growth
below the Bundesbank's 1989 target of "about 5" percent.
Economic growth in France appears to have moderated in recent
months from the strong pace in the first quarter.

Industrial production

fell sharply in May, but was still 5.2 percent above its year-earlier
level.

The unemployment rate has remained at 10 percent for the past

three quarters.

In the second quarter, real consumption expenditures on

manufactures were nearly 2 percent (s.a.) below their first-quarter
level.

Inflation slowed in June, and consumer prices were only 3.6

percent above their year-earlier level.
After two consecutive months of larger trade deficits, the deficit
narrowed considerably in June, largely reflecting the sale of 14 Airbus
airliners.

The cumulative trade deficit for the first half of 1989 was

slightly larger than in the first half of 1988, but considerably
narrower than that registered in the second half of last year.
Evidence that economic growth has slackened in the United Kingdom
is mounting.

Total industrial production fell 0.8 percent (s.a.) in the

second quarter to a level 0.9 percent below its year-earlier level.
Manufacturing output has trended downward in each month of this year.
The volume of retail sales declined 2.3 percent (s.a.) in June and 0.6
percent in July, reducing the 12-month increase to only 0.2 percent, the

IV-20
lowest annual increase in more than six years.

Housing starts continued

to fall in June and were 25 percent below their level of June 1988.
According to the latest survey conducted by the Confederation of British
Industry, U.K. business optimism has fallen sharply, and investment
intentions were markedly lower than at the time of the previous survey
in April.
Producer-price inflation edged down from 5.2 percent in the year
The 12-month

to the first quarter to 4.8 percent in the year to July.

inflation rate in retail prices remained at 8.3 percent in June,
prompting government officials to contend that U.K. inflation may have
peaked.

However, wage pressures continued, as average earnings rose to

a level 9.5 above a year earlier in May.
The U.K. trade deficit (s.a.) rose slightly in June.

Through the

first half of 1989, the trade deficit average $39.6 billion (s.a.a.r.),
up from a rate of $30.6 billion in the first half of 1988, but down
slightly from its rate in the second half of last year.
There is mixed evidence of a slowdown in Canada.
investment has boosted some measures of activity.

Strong

Industrial production

rose 0.3 percent (s.a.) in May, following a 1.3 percent rise in April,
and manufacturers' new orders rose 2 percent (s.a.) in May.

Recent

investment surveys suggest that the business sector will increase
capital outlays by nearly 14 percent this year, stronger than earlier
surveys suggested.

In contrast, high interest rates have reduced

activity in other sectors.

Canada's unemployment rate rose from 7.3

percent in May to 7.5 percent in June.

Housing starts were unchanged in

June following three monthly declines, putting the second-quarter level

IV-21
down 13 percent (s.a.a.r.) from the first quarter, and auto sales
declined in July for the third consecutive month to a rate 13 percent
below that of a year earlier.
Higher federal and provincial sales tax rates contributed to a
sharp rise in inflation in May and June.

As a result, the 12-month

increase in consumer prices rose from 4.6 percent in April to 5.4
percent in June.

In view of the recent pickup in inflation and strong

growth, the Bank of Canada has allowed the differential between Canadian
and U.S. short-term interest rates to widen, thereby contributing to
upward pressure on the Canadian dollar.
Economic growth in Italy appears to have slowed during the early
months of 1989.

Real GDP grew 3 percent (s.a.a.r.) in the first

quarter, down from 4.2 percent in the previous quarter.

Industrial

production was essentially flat (s.a.) through April, but picked up late
in the second quarter, according to unofficial data.

The 12-month rate

for consumer-price inflation was 6.8 percent in the second quarter, up
from 5.2 percent in 1988 and 6.1 percent in the first quarter.

Much of

the rise in inflation during the first half was due to increases in
indirect taxes.

The Italian trade deficit narrowed, but remained large,

in the second quarter.
The new Italian coalition government--Italy's 49th since World War
II--is headed by Giulio Andreotti, who is Prime Minister for the sixth
time.

He has the support of the center and right wing factions in the

Christian Democratic party, which puts his government in a better
position to implement unpopular fiscal reforms.

The new Treasury

Minister is Guido Carli, a well respected Christian Democrat, who from

IV-22
1960 through 1975 was Governor of the Bank of Italy.

The shift in

control of the Treasury from the Socialist party to the Christian
Democrat party is significant because it strengthens the Treasury's
control over spending by other Christian Democrat ministers.
Economic Situation in Major Developing Countries
Mexico and its bank advisory committee reached agreement on July
23 on a comprehensive financial package that provides creditor banks
options of principal reduction, interest reduction, and new money.
Since the inauguration of President Carlos Menem on July 8, Argentina
has begun to implement a stabilization program, including a large
devaluation of the austral, hikes in public-sector prices, and a 90-day
price freeze.

Short-term interest rates have fallen in Mexico,

Argentina, and Brazil, and official reserves have risen in Mexico and
Argentina.

Colombia signed a $1.65 billion new-money loan on August 10

with its commercial bank creditors; the commercial banks began their
signing on July 23.

The Philippines has reached a substantive agreement

on a financing package, and Venezuela is actively negotiating a
financing package with its commercial bank creditors.
Individual country notes.

Mexico and its bank advisory committee

reached agreement in principle on July 23, 1989 on a comprehensive
financial package that provides creditor banks with three basic options:
principal reduction, interest reduction, and new money.

Depending on

the preferences of banks for these options, the package should provide
$7-$8 billion in financing over the next three years at current interest
rates.

Under the debt-reduction and interest-reduction options,

creditor banks would exchange their medium- and long-term loans for new

IV-23
30-year bonds to be issued by Mexico.

Principal-reduction (discount)

bonds would be issued in exchange for existing loans at a discount of 35
percent, with a floating interest rate of LIBOR plus 13/16 percent.
Interest-reduction (par) bonds would be exchanged for existing loans at
par, and would bear interest at a fixed rate of 6-1/4 percent.
Principal payments on the new bonds will be collateralized by 30-year,
U.S. Treasury zero-coupon obligations or comparable collateral purchased
by Mexico.

Interest payments will be supported on a rolling basis for

at least 18 months and up to 24 months by a collateral account
established by Mexico.

Support for both types of bonds will come from

$7 billion of enhancements from the IMF, the World Bank, Mexico, and
development loans from Japan.

Banks electing these options may be

eligible, beginning in July 1996, to "recapture" some of the lost value
of their former claims, depending on the level of Mexico's real earnings
from oil exports at that time.

Creditor banks electing to provide new

money will be asked to commit, over a four-year period, to new loans
amounting to a total of 25 percent of their existing medium- and longterm loans that are not exchanged for principal-reduction or interestreduction bonds.

The new loans will be repayable in 15 years, with 7

years of grace, and will bear interest at LIBOR plus 13/16 percent.

support of this agreement, the U.S. Treasury and the Federal Reserve
have agreed to work with other monetary authorities to develop a shortterm bridge loan of up to $2 billion.

A number of issues related to the

bank financing package still need to be resolved before a complete term
sheet can be circulated.

Discussions on these issues are continuing.

IV-24
In the aftermath of the financial agreement, the decline in
domestic interest rates underway since late June accelerated in Mexico.
At the August 8 auction, the rate for 28-day Treasury bills was 35.6
percent, compared with 57.5 percent on June 27.

There was a 12-

percentage point decline at the July 24 auction alone.

The return of

confidence that this represents was reflected in a reflow of capital
that enabled the Director General of the Bank of Mexico, Miguel Mancera,
to announce on August 3 that international reserves, including gold,
totalled $6 billion at the end of July, only about $600 million less
than at the end of 1988.

Mancera estimated the net repatriation of

private capital in the first seven months of the year at $2.3 billion,
much of it presumably having occurred in recent weeks.

He also

estimated the current account deficit in January-July at $2.5 billion,
reflecting the continued buoyancy of imports.
Since the inauguration of President Carlos Menem on July 8,
Argentina has begun to implement a wide-ranging stabilization program.
In the first two weeks of the new administration, the official austral
price of the dollar was doubled, public-sector prices and utility rates
were raised by as much as 500 percent, and a 90-day price freeze was
negotiated with Argentina's 300 leading firms.

Legislation currently

before Congress will enable the privatization of most state economic
enterprises, suspension of the costly industrial subsidies program,
revision of the central bank's charter to provide greater independence,
and consolidation and refinancing of the government's internal debt.

new system of dollar deposits has also been introduced in an attempt to
recapture flight capital and private residents' holdings of dollars.

IV-25
As a result of the substantial devaluation and hikes in publicsector prices at the beginning of the month, consumer prices soared a
record 197 percent in July, following monthly rates of 115 percent in
June and 79 percent in May.

However, inflation slackened considerably

in the latter part of July, and is expected to fall to the 40 to 60
percent range in August.

In response to the government's commitment to

keep the official exchange rate fixed for the next three months,
financial markets have stabilized dramatically.

Short-term interest

rates fell from over 100 percent per month at the end of June to about
15 percent in mid-July, and have remained relatively stable at that
rate.

The parallel-market exchange rate has also remained relatively

stable since mid-July, and its premium over the official rate has been
negligible.

As a result, sales of dollars to the central bank have

totaled roughly $1 billion since July 8, providing a much-needed
replenishment of international reserves, which are believed to have
fallen to as low as $100 million at the beginning of July.
Both the World Bank and the IMF have voiced support for the new
stabilization package, and talks on a new IMF program are currently
underway.

Toward this end, Argentina has made various payments to the

IMF in the last few months to eliminate arrears more than 60 days
overdue.

A letter of intent may be signed by late September.

Brazil's financial situation has also stabilized somewhat over the
last several weeks.

Consumer prices rose at monthly rates of 25 percent

in June and 29 percent in July, but earlier fears that the inflation
rate was going to continue to accelerate seem to have abated: the
overnight interest rate dropped from around 45 percent per month at the

IV-26
end of June to around 38 percent now, and the spread between the
official and parallel exchange rates narrowed from over 100 percent to
66 percent during the same period.

Industrial production was 4.4

percent higher in June than a year earlier.

However, because of sharp

declines in industrial production earlier in the year, industrial
production in the first half of 1989 was 2.1 percent lower than in the
first half of 1988.
Brazil continues to generate large trade surpluses.

The surplus

was $2.2 billion in June and $9.2 billion in the first half of 1989,
which was larger than last year's record pace over the same periods.
Despite the large trade surpluses, Brazilian officials claim that
reserve levels are under strain.

(At the beginning of August, the

president of the central bank said liquid reserves were about $6
billion.

Brazilian officials have stated several times that they will

not let liquid reserves fall below the $4-$6 billion range.)

As a

result, Brazil centralized most foreign exchange transactions at the
central bank on June 30 and devalued the cruzado 12 percent against the
dollar.

The government also failed to make payments of $812 million due

the Paris Club in late June and early July, citing its unwillingness to
draw on reserves.

Subsequently, Brazil resumed some payments to Paris

Club creditors, but is still in arrears.
Brazil is currently trying to negotiate a short-term IMF stand-by
arrangement.

Such an agreement would facilitate release in September of

the next $600 million tranche under Brazil's financing package from
commercial banks and Brazil's scheduled payment to banks of over $2
billion in the same month.

IV-27
On August 10, Colombia signed a $1.65 billion commercial bank newmoney loan, which will finance Colombia's amortization payments to
commercial banks during 1989 and 1990; the commercial banks began their
signing on July 23.
On August 8, the Philippines resumed debt negotiations with its
commercial bank creditors.

Substantive agreement has been reached on a

package that includes issuing new-money bonds that would be excluded
from future restructurings and a cash buyback of commercial-bank debt at
a deep discount--50-55 percent.

This package is to be premarketed.

September 12, the Philippines and its bank creditors are expected to
meet again to complete agreement on the financing package.
In July, Venezuela presented its first formal proposal for
reduction of its external public-sector debt to commercial banks.

The

proposal was for cash buybacks at a 60 percent discount and debt-forbond swaps with either the principal or the interest rate reduced by 50
percent.

The banks rejected the proposal because of the size of the

discounts and the exclusion of an option for lending new money rather
than participating in debt reduction.
continuing.

However, negotiations are

Venezuela's economic reform program remains on track;

inflation fell to a monthly rate of 2.5 percent in July from a peak of
21.3 percent in March.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 22, 1989 : Greenbook Part 2

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