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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class II FOMC August 18, SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System 1982 DOMESTIC NONFINANCIAL DEVELOPMENTS Recent developments. Economic activity appears to have leveled off, but there is little evidence as yet that a significant recovery is under way. Employment and industrial production showed little movement overall in July. At the same time, retail sales rebounded somewhat from the depressed June level, and housing activity showed signs of improvement, at least in some sectors. However, capital outlays and commitments for new investment spending were still falling through mid-year. Progress continues to be made in reducing underlying cost pressures on prices. Nonfarm employment was little changed during July. Sizable declines in industrial employment--manufacturing, construction, and mining--were about offset by hiring at trade, finance, and service establishments. The weakness in industrial labor demand partly reflects severe layoffs recently in the energy extraction component of the mining sector as well as at manufacturers of oil- and gas-well drilling equipment. The un- employment rate rose 0.3 percentage point in July to 9.8 percent; however, in recent weeks the average number of new claims for unemployment insurance has moved down a bit. Industrial production edged down 0.1 percent in July. Production of business equipment continued to decline sharply, while consumer goods output--particularly autos--increased further. Auto assemblies rose 12 percent in July to a 6.6 million unit annual rate, but industry assembly schedules call for about an equivalent reduction in August as new car inventories have backed up on dealers' lots. The July tax cut and social security cost-of-living increase boosted disposable personal income by an estimated $36 billion (annual rate) in 1-1 Nonetheless, consumer spending increased only moderately, with July. retail sales reportedly rising just 1 percent following the downward revised 3.3 percent drop in June. Part of the July rise in consumer spend- ing reflected a pickup in auto sales, which rose from a 4.8 million unit annual rate in June to a 5-1/4 million unit annual rate in July and early August. Excluding the automotive group, retail sales were up 1/2 percent in July, after declining 1 percent in June. Total private housing starts jumped nearly 35 percent in July to a 1.2 million unit annual rate--the highest since April 1981. All of the rise was in the multifamily sector and partly reflected an increase in federally-subsidized units. similar picture. Permits for residential buildings showed a Single-family starts were essentially unchanged in July, and sales of both new and existing single-family homes remained weak in June. Business fixed investment continued to decline through mid-year, and Over- most leading indicators suggest a further contraction in spending. all, business fixed investment in real terms fell at an 8-1/2 percent annual rate in the second quarter, with producers' durable equipment down at nearly a 13 percent rate. Signs of further declines ahead include weak orders for nondefense capital goods, a plunge in oil-well drilling, declining construction contracts, and a rise in the vacancy rate for commercial structures. The book value of manufacturing and trade inventories rose at a $20 billion annual rate in June, following a sharp reduction in May. Much of the June increase occurred in the auto sector, raising the day's supply of new domestic autos to the highest level since last December. Excluding I-3 autos, the book value of inventories fell at a $7-1/2 billion annual rate in June, as widespread liquidation at manufacturers more than offset increases at trade establishments. In aggregate, real factory stocks have now been reduced to prerecession levels, but problem areas still exist-particularly at producers of primary metals and electrical machinery. The general trend of inflation remains below that of recent years, despite increases of 1 percent in the CPI in each of the past two months. Most of the recent surge reflected an acceleration in the volatile energy and homeownership components. Excluding these items, as well as food, consumer prices rose at an annual rate of 7 percent in the second quarter of this year, still well below the 9-1/2 to 10 percent range of 1980 and 1981. Moreover, gasoline prices appear to have leveled off, and recent data on prices of raw agricultural commodities suggest that food price increases may be a bit smaller in coming months. Decelerating labor cost increases have been an important ingredient in the slowing of inflation, and the further moderation of wage gains seen so far this year should support continued progress. The hourly earnings index for production workers rose at a 6.2 percent annual rate over the first seven months of 1982, compared with increases of 8.4 percent during 1981 and 9.6 percent over the preceding year. A cyclical improvement in productivity during the first half of 1982 also contributed to slower growth in unit labor costs. Outlook. The projected growth of economic activity in the third quarter has been lowered, with real GNP now expected to rise at a 1 percent annual rate, compared with the 2-1/2 percent rate shown in the last Greenbook. The change in the near-term outlook partly reflects the recent data that showed less-than-anticipated strength in consumer spending. We expect that this will lead to a more sluggish rise in the production of goods over the near term and a less pronounced slowing in the pace of inventory liquidation. The staff has altered both the monetary and fiscal policy assumptions underlying the projection. The increase in M1 during the second half of 1982 is assumed to be somewhat larger, consistent with growth around the top of the FOMC's 2-1/2 to 5-1/2 percent target range for 1982. During 1983, growth of M1 still is assumed to be in the upper half of the target range. Short-term interest rates are projected to trend upward over the projection period, but pressures on long-term rates should be tempered by diminishing inflation expectations. On the fiscal side, calculations based on the new withholding tables suggest that implementation of the July 1, 1982,tax cut led to only an 8-1/2 percent reduction in withholdings, rather than the 10 percent reduction in liabilities called for in the Economic Recovery Tax Act (ERTA). The immediate impact of the tax cut on disposable personal income is now estimated to be $25 billion (annual rate), $8 billion less than in the previous Greenbook. For fiscal year 1983, it is now assumed that Congress will enact legislation, effective January 1, 1983, that will raise an additional $21 billion in revenues during fiscal year 1983, $6 billion more than assumed in the July Greenbook. The assumptions concerning deficit-reducing expenditure cuts remain unchanged from last month. Reflecting the staff's economic projections and fiscal policy assumptions, the deficit is expected to be $112 billion in FY 1982, rising to $159 billion in FY 1983. I-5 Beyond the current quarter, the contour of economic activity remains similar to that shown in previous Greenbooks. Real GNP growth is expected to increase somewhat in the fourth quarter as consumers respond with a lag to the personal income tax cuts, the improvement in housing starts is translated into construction spending, and the cyclical liquidation of inventories draws to a close. At the same time, business investment spend- ing is expected to continue falling, although at a less rapid rate. None- theless, the projected rise in real GNP falls far short of the typical cyclical recovery. Economic activity is projected to continue growing slowly in the first half of 1983. However, the implementation of the third stage of the tax cut next July will add an estimated $30 billion to disposable income. As a result, consumption outlays are expected to pick up again in the second half of 1983 and provide a boost to real GNP growth. With output rising at a 4 percent annual rate, the demand for capital goods is expected to improve, stemming the slide in business fixed investment. The moderate pace of activity projected for the next six quarters is likely to generate only small gains in employment as productivity shows a cyclical improvement. Consequently, the unemployment rate is expected to show little improvement, still averaging 9-1/2 percent by the fourth quarter of 1983. The considerable margin of unused capital and labor resources and moderate growth of aggregate demand should permit further progress in bringing down the rate of inflation. The recent slowing of inflation, combined with the wide margin of slack in the labor market, should lead to further reductions in the rate of wage increase and to continued improvement in the outlook for unit labor costs. Prices, as I-6 measured by the fixed-weighted index for gross domestic business product, are expected to rise at a 5-3/4 percent annual rate over the second half of this year, with the rate of increase then slowing to less than 5 percent during 1983. I-7 August 18, 1982 STAFF GNP PROJECTIONS Percent changes, annual rate Gross domestic business product fixed-weighted price index Nominal GNP Real GNP Total 6/23/82 8/18/82 6/23/82 8/18/82 6/23/82 Excluding food and energy 8/18/82 6/23/82 8/18/82 Unemployment rate (percent) 6/23/82 8/18/82 Annual changes: 8.8 11.4 5.4 7.5 1980 <1> 1981 <1> 1982 1983 8.9 11.6 4.7 7.4 -. 2 2.0 -1.1 2.5 -. 4 1.9 -1.6 2.4 9.8 9.4 6.2 5.2 19.6 5.3 11.4 3.0 8.6 -1.6 1.4 -4.5 7.9 -1.5 2.2 -5.3 10.5 8.2 9.9 7.5 10.1 9.6 6.1 5.1 Quarterly changes: 1981 Q1 Q2 Q3 Q4 10.4 8.6 9.3 7.4 <1> <1> <1> <1> 19.2 4.7 11.4 4.6 1982 Q1 <1> Q2 <1> Q3 Q4 .0 6.9 8.3 8.4 -3.7 .7 2.5 2.9 -5.1 1.7 1.0 2.3 4.7 3.8 6.6 5.7 4.4 4.3 6.5 5.2 1983 Q1 Q2 Q3 Q4 6.6 6.5 8.1 8.6 1.9 2.0 4.1 4.0 2.5 1.9 4.2 3.8 5.1 4.9 4.5 4.3 5.4 4.6 4.4 4.2 8.4 9.6 11.5 8.2 8.4 9.4 11.0 8.6 8.8 9.5 10.0 9.9 9.5 9.5 9.3 9.1 9.8 9.8 9.7 9.5 Two-quarter changes: <2> 1981 Q2 <1> Q4 <1> 11.7 7.9 12.2 7.1 3.4 -1.6 3.1 -1.6 9.2 8.7 9.5 8.3 9.0 9.8 8.9 9.8 -. 1 .9 -.1 .9 1982 Q2 <1> Q4 3.4 8.4 3.0 7.5 -1.5 2.7 -1.8 1.6 4.2 6.1 4.4 5.8 5.6 5.5 6.0 5.4 1.2 .0 1.2 .4 1983 Q2 Q4 6.6 8.4 6.8 8.1 1.9 4.1 2.2 4.0 5.0 4.4 5.0 4.3 4.8 3.8 4.9 3.8 .0 -. 4 -.1 -. 3 -.3 .9 .6 3.0 -. 7 .7 -.1 3.1 9.7 9.0 5.2 4.7 10.3 8.9 5.1 4.6 1.5 .8 1.2 -. 4 1.5 .8 1.6 -. 4 Four-quarter change: <3> 1980 1981 1982 1983 Q4 <1> Q4 <1> 04 04 9.4 9.8 5.8 7.5 9, 9, 5, 7, <1> Actual. <2> Percent change from two quarters earlier. <3> Percent change from four quarters earlier. I-8 CONFIDENTIAL - FR CLASS II FOMC August 18, 1982 GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of current dollars at annual rates.) 1981 1980 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2575.9 2576.6 2057.4 2043.4 25'3.4 2573.9 2037.9 2013.7 2643.7 2664.8 2126.3 2087.3 2739.4 2757.1 2197.3 2173.8 2864.9 2852.7 2274.6 2243.4 2901.8 2980.9 2877.2 2294.0 2270.3 2949.1 2348.9 2323.0 3003.2 2989.9 2363.6 2340.1 Personal consumption expenditures Goods Services 1618.7 871.4 747.3 1622.2 855.7 766.6 1682.0 886.4 795.6 1745.8 925.2 820.6 1799.9 957.5 842.4 1819.4 960.0 859.4 1868.8 982.5 886.3 1884.5 976.1 908.3 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 424.0 113.5 311.2 -. 7 .7 391.0 91.2 300.2 -.4 4.0 384.1 97.6 307.8 -21.2 -15.4 410.3 110.5 317.5 -17.7 -12.3 455.7 113.6 330.0 12.2 10.0 475.5 109.5 341.3 24.6 19.3 486.0 101.2 353.0 31.8 24.6 468.9 95.5 360.2 13.2 6.0 Net exports of goods and services <1> Exports Imports 14.0 335.7 321.7 24.2 337.3 313.1 39.0 337.2 298.2 23.5 346.7 323.2 31.2 365.4 334.2 23.7 368.9 345.1 25.9 367.2 341.3 23.5 367.9 344.4 Gov't. purchases of goods and services Federal <2> State and local 519.2 189.6 329.6 536.0 198.8 337.2 538.5 193.3 345.2 559.8 207.0 352.8 578.1 217.0 361.1 583.2 218.2 365.0 600.2 230.0 370.1 626.3 250.5 375.7 Gross national product in constant (1972) dollars 1494.9 1457.8 1463.8 1479.4 1507.8 1502.2 1510.4 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 2086.8 1319.7 1766.9 5.5 2109.6 1332.1 1781.0 6.1 2185.3 1360.5 1845.5 6.1 2260.0 1412.2 1902.9 5.5 2330.0 1452.8 1958.7 5.4 2380.6 1479.4 1996.5 6.1 2458.2 2494.6 1512.3 1531.2 2060.0 2101.4 6.5 7.5 195.3 268.2 172.2 217.6 177.8 238.1 181.2 245.9 200.3 253.1 185.1 225.4 193.1 233.3 -39.7 -18.3 -67.5 -20.0 -73.1 -19.0 -65.2 -10.5 -39.7 10.8 -40.5 22.4 -58.0 5.3 29.1 3.3 23.3 -2.8 27.1 -1.0 33.0 3.9 31.3 1.1 32.9 1.7 33.5 1.2 29.1 -4.2 106.5 6.3 106.8 7.3 107.2 7.6 107.5 7.5 108.1 7.4 108.8 7.4 108.7 7.4 109.2 8.3 90.9 20.9 90.3 20.3 89.9 19.9 90.5 20.1 90.9 20.2 91.2 20.3 91.4 20.3 91.0 19.9 Industrial production (1967-100) Capacity utilization: all meafacturing (percent) Materials (percent) 152.7 83.4 85.8 144.5 77.9 78.9 142.3 75.9 75.2 148.8 79.1 80.1 151.8 79.9 82.2 152.5 79.8 81.2 153.0 79.2 81.2 146.3 74.8 75.2 Housing starts, private (million units, A..) New auto sales (millions, A.R.) Domestic models Foreign models 1.25 10.65 7.87 2.77 1.06 7.68 5.53 2.14 1.39 8.80 6.51 2.29 1.50 9.04 6.57 2.47 1.40 9.96 7.31 2.66 1.17 7.89 5.63 2.25 .96 9.04 6.90 2.14 .87 7.36 5.13 2.23 Corporate profits with I.V.A. and C.C. Corporate profits before tax Adj. Federal government surplu or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State and local goverment smrplus or deficit(-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unmployent rate (percent) onfarm payroll employmt (millions) Maaufacturing 1490.1 183.9 216.5 -101.7 -21.2 <1> Balance of payments data and details underlying these estimate are shown in the Internatioal Development section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditures re shown in the Federal Sector Aceounts table ubich follows. <3> Estimates in table are evaluated at a 5.1 percent hih employment nemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $30.7 billion in 1980-Q4, ad a deficit of $43.8 billion in 1981-Q4. I-9 August 18, CONFIDENTIAL - FR CLASS II FOMC 1981 1980 Q1 Constant (1972) 1982 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) Q2 Q3 Q4 Q1 Q2 Q3 Q4 Dollars 1.5 -9.6 1.6 Excluding net exports 1.6 .8 -1.3 -9.6 -12.4 -13.7 3.3 5.4 5.7 4.3 3.7 4.7 7.6 7.9 5.4 5.5 4.7 -1.5 -4.0 -4.0 -2.8 2.2 1.0 .4 2.2 -5.3 -2.3 -4.4 -3.6 Personal consumption expenditures Goods Services -. 7 -2.3 1.2 -8.7 -16.1 .4 5.4 5.7 5.1 5.7 8.6 2.6 4.4 6.9 1.5 -2.7 -5.1 .1 2.9 4.0 1.7 -3.3 -6.2 .0 Gross private domestic investment Residential structures Business fixed investment -4.5 -21.6 2.5 -32.5 -61.7 -20.4 -5.1 20.4 3.5 22.6 59.8 6.6 25.0 1.0 8.0 14.9 -17.4 1.1 6.9 -31.9 9.3 -22.6 -25.3 .6 5.2 12.3 13.2 1.2 3.1 10.5 .5 -1.1 -4.7 -12.5 -2.5 .3 -. 3 -2.6 -2.1 1.0 5.2 12.2 8.0 1.3 -4.1 -3.2 11.5 -4.6 3.6 14.8 7.6 -2.7 7.0 20.4 10.1 -. 8 1.1 -6.6 5.2 3.0 3.7 .6 4.8 1.2 Gross national product Final purchases Private Excluding net exports 12.2 11.8 10.2 9.5 -. 4 -. 4 -3.7 -5.7 11.4 14.9 18.5 15.4 15.3 14.6 14.0 17.6 19.6 14.6 14.8 13.4 5.3 3.5 3.5 4.9 11.4 10.4 9.9 9.6 3.0 5.7 2.5 3.0 Personal consumption expenditures Goods Services 10.7 9.4 12.3 .9 -7.0 10.7 15.6 15.1 16.0 16.1 18.7 13.2 13.0 14.7 11.1 4.4 1.0 8.3 11.3 9.7 13.2 3.4 -2.6 10.3 Gross private domestic investment Residential structures Business fixed investment 7.1 -14.0 13.3 -27.6 -58.2 -13.3 -6.8 31.0 10.4 30.1 64.5 13.3 52.2 11.5 16.7 18.5 -13.4 14.5 9.2 -27.0 14.3 -13.3 -20.8 8.4 Gov't. purchases of goods and services Federal National defense State and local 18.5 29.5 28.8 12.7 13.6 20.8 10.4 9.6 1.9 -10.5 1.7 9.8 16.8 31.3 25.3 9.2 13.7 20.9 15.4 9.7 3.6 2.2 22.1 4.4 12.2 23.5 10.8 5.7 18.6 40.7 36.7 6.2 Disposable personal income 12.7 3.2 15.3 13.0 12.3 7.9 13.4 8.3 Personal income Wage and salary disbursements 10.7 11.4 4.4 3.8 15.1 8.8 14.4 16.1 13.0 12.0 9.0 7.5 13.7 9.2 6.1 5.1 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 29.4 34.2 -39.6 -56.7 13.7 43.4 7.9 13.8 49.3 12.2 -27.1 -37.1 18.4 14.8 -17.7 -25.8 Nonfarm payroll employment Manufacturing 1.8 -2.3 -1.8 -1.2 -10.4 -7.5 2.7 4.2 1.8 1.3 1.0 2.8 .8 .1 -1.8 -8.1 Nonfarm business sector Output per hour Compensation per hour Unit labor costs -. 4 11.9 12.4 -4.6 10.2 15.5 3.4 10.4 6.8 3.1 9.8 6.5 4.9 11.8 6.6 -1.3 7.1 8.6 -. 3 9.0 9.3 -3.5 7.3 11.2 10.5 10.1 9.6 10.5 10.9 6.8 9.0 8.8 11.0 8.7 16.5 10.4 9.6 13.5 9.9 9.7 7.7 10.0 9.7 12.8 10.4 8.4 11.0 8.6 9.4 7.8 9.3 11.0 11.8 7.4 8.6 7.7 19.3 8.4 1.9 1.4 -16.6 Gross national product Final purchases Private Gov' t. purchases of goods and services Federal National defense State and local Disposable personal income Current Dollars GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production .4 -19.8 <1> Excluding Federal pay inereaes, rates of change were: 19-1, 1981-Q1, 10.8 percent; 1981-Q4, 7.8 percent. <2> Uses expenditures in 1972 as weights. -5.8 10.5 percent; 1980-Q4, 9.4 percent; I-10 CONFIDENTIAL - FR CLASS II FOMC August 18, 1982 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) Projected-----------1983 ------1982 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2995.5 3031.1 2401.0 2369.7 3047.4 3067.0 2435.1 2399.5 3102.8 3109.8 2468.9 2442.6 3160.2 Personal consumption expenditures Goods Services 1919.4 987.0 932.4 1950.8 999.1 951.6 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 414.8 93.4 357.0 -35.6 -36.0 Net exports of goods and services <1> Exports Imports Gov't. purchases of goods and services Federal <2> State and local Q1 Q2 Q3 Q4 2493.0 3218.2 3216.2 2547.9 2544.9 3266.5 3261.5 2581.9 2584.1 3330.7 3321.7 2630.0 2635.4 3396.6 3384.6 2678.0 2687.3 1998.8 1020.5 978.3 2044.2 1041.6 1002.6 2086.1 1059.6 1026.5 2119.1 1072.1 1047.0 2163.6 1091.6 1072.0 2206.6 1113.1 1093.5 429.1 94.7 354.0 -19.7 -19.2 436.8 98.7 345.1 -7.0 -7.0 444.3 104.0 460.8 112.0 346.8 2.0 2.0 470.0 116.7 348.3 5.0 5.0 480.8 119.2 352.6 9.0 9.0 492.7 121.2 359.5 12.0 12.0 31.3 359.9 328.6 35.6 360.9 325.3 26.3 350.4 324.1 342.6 329.2 3.0 343.2 340.2 -2.2 351.6 353.8 -5.4 364.7 370.1 -9.3 378.6 387.9 630.1 249.7 380.4 631.9 244.1 387.8 640.9 248.4 392.5 658.3 261.2 397.1 668.3 266.6 401.7 679.6 273.6 406.0 691.7 281.2 410.5 706.6 292.1 414.5 Gross national product in constant (1972) dollars 1470.7 1476.8 1480.4 1488.8 1498.0 1505.2 1520.6 1534.9 Personal income Wage and salary disbursments Disposable personal income Saving rate (percent) 2510.5 1541.6 2117.1 6.6 2549.5 1555.9 2151.9 6.6 2597.9 1573.9 2211.2 6.9 2645.8 1603.9 2251.6 6.5 2693.3 1629.8 2291.1 6.3 2739.0 1653.8 2326.4 6.2 2790.3 1681.1 2396.2 7.1 2837.9 1714.8 2433.2 6.7 185.3 192.1 187.2 188.1 189.4 183.2 203.0 189.1 210.8 187.3 -148.9 -18.4 -157.3 -21.4 -196.1 -64.9 -199.9 -68.9 3164.7 2506.4 344.8 -4.5 -4.5 13.4 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 157.1 171.6 167.0 179.2 180.5 193.4 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> -119.3 -21.2 -116.6 -8.5 -147.5 -32.6 -157.4 -36.0 33.1 -3.8 34.6 -3.5 36.4 -2.9 37,7 -2.8 40.7 -1.0 44.1 1.2 110.8 9.9 111.1 9.8 111:3 9.8 111.6 9.7 112.0 9.5 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) Capacity-utilization: all manufacturing (percent) Materials (percent) Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 27.7 -6.8 29.4 -6.3 109.1 8.8 110.2 9.5 90.4 19.4 90.0 19.1 89.8 18.8 90.0 19.0 90.3 19.2 90.5 19.4 90.8 19.6 91.3 19.8 141.7 71.6 72.0 139.2 70.2 69.6 138.4 69.4 68.8 140.6 70.3 70.0 142.3 70.8 70.9 144.3 71.4 71.9 147.9 73.0 74.1 150.4 73.8 75.5 1.15 7.90 5.60 2.30 1.15 8.40 6.10 2.30 .92 8.12 5.90 2.22 .95 7.53 5.53 1.99 110.6 10.0 1.20 8.60 6.30 2.30 1.20 8.80 6.50 2.30 1.20 9.20 6.80 2.40 1.20 9.20 6.80 2.40 <1> Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. <3> Estimates in table are evaluated at a 5.1 percent high employment unemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $58.7 billion in 1982-Q4, and a deficit of $93.3 billion in 1983-Q4. I-11 August 18, CONFIDENTIAL - FR 1982 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) CLASS II FOMC ----1982 Q1 Projected 1983 Q2 Q3 Q4 Q1 Q2 Q3 Q4 -5.1 .2 1.0 .9 1.7 -.6 .8 1.2 1.0 -.1 -.2 .8 2.3 2.0 1.9 3.3 2.5 1.8 1.9 3.1 1.9 1.6 1.5 1.7 4.2 3.7 4.0 3.7 3.8 3.5 3.9 3.8 Personal consumption expenditures Goods Services 2.5 2.0 3.0 3.0 4.1 1.9 3.3 2.4 4.3 4.1 4.5 3.6 2.9 2.7 3.1 1.8 1.1 2.5 4.0 3.8 4.2 3.7 4.3 3.0 Gross private domestic investment Residential structures Business fixed investment -36.5 -10.2 -5.0 10.9 3.3 -8.5 -3.1 13.4 -15.3 2.0 18.5 -4.5 10.2 28.7 -1.4 3.9 12.8 -1.6 5.9 4.3 2.1 6.5 2.6 4.5 Gov't. purchases of goods and services Federal National defense State and local -2.9 -5.5 -7.9 -1.1 -6.4 -16.1 7.1 .4 2.2 8.0 4.6 -1.3 1.1 4.8 6.4 -1.2 2.0 6.9 11.2 -1.2 2.5 7.3 12.1 -.7 1.6 5.3 9.4 -.9 Disposable personal income -1.9 3.1 4.5 2.3 1.7 1.6 7.7 1.9 Gross national product Final purchases Private Excluding net exports -1.0 5.6 6.5 5.2 7.1 4.8 5.8 5.1 7.5 5.7 5.7 7.4 7.6 7.3 6.2 8.5 7.5 6.7 6.4 8.6 6.1 5.8 5.4 6.3 8.1 7.6 7.7 8.2 8.2 7.8 7.5 8.1 Personal consumption expenditures Goods Services 7.6 4.5 11.0 6.7 5.0 8.5 10.2 8.8 11.7 9.4 8.5 10.3 8.5 7.1 9.9 6.5 4.8 8.2 8.7 7.5 9.9 8.2 8.1 8.3 Gross private domestic investment Residential structures Business fixed investment -38.8 -8.4 -3.5 14.5 5.7 -3.2 7.4 17.9 -9.7 7.0 23.3 -.3 15.7 34.5 2.3 8.2 17.9 1.7 9.5 8.8 5.0 10.3 6.9 8.1 2.4 -1.4 -1.8 5.0 1.2 -8.6 15.4 8.0 5.8 7.2 13.1 4.9 11.3 22.3 19.3 4.8 6.2 8.5 11.2 4.7 6.9 10.9 15.7 4.4 7.3 11.6 17.2 4.4 8.9 16.4 21.6 4.0 Disposable personal income 3.0 6.8 11.5 7.5 7.2 6.3 12.6 6.3 Personal income Wage and salary disbursements 2.6 2.7 6.4 3.8 7.8 4.7 7.6 7.8 7.4 6.6 7.0 6.0 7.7 6.8 7.0 8.3 -46.7 -60.5 27.7 18.9 36.5 35.7 11.0 -2.7 4.3 -7.9 4.7 -10.1 32.0 13.5 Nonfarm payroll employment Manufacturing -2.4 -9.0 -1.6 -7.2 -1.0 -5.1 .7 3.7 1.3 4.9 1.0 3.8 1.6 4.3 2.1 4.6 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 2.6 10.1 7.4 2.3 6.2 3.8 1.0 6.1 5.0 1.5 5.9 4.3 2.0 6.4 4.3 .9 5.5 4.6 2.3 5.5 3.1 1.5 5.4 3.8 4.3 5.3 6.4 5.2 4.9 4.1 3.8 4.2 4.4 5.3 3.2 4.3 6.7 4.6 6.5 5.7 8.2 5.2 5.0 4.3 5.4 5.6 5.5 4.6 4.2 4.8 4.4 3.9 4.8 4.2 3.7 4.6 -11.8 -6.9 -2.3 6.5 4.9 5.7 10.4 6.9 Constant (1972) Dollars Gross national product Final purchases Private Excluding net exports .3 3.5 6.7 -1.7 Current Dollars Gov't. purchases of goods and services Federal National defense State and local Corporate profits with I.V.A. and C.C. Adj. Corporate profits before ta GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production <1> Excluding Federal pay increases, the rates of change are: 1982-Q1, 1983-Q1, 4.9 percent; 1983-Q4, 3.6 percent. <2> Uses expenditures in 1972 as weights. 4.2 percent; 1982-Q4, 4.6 percent; 16.2 -3.8 I-12 CONFIDENTIAL - FR CLASS II FOMC August 18, GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) 1976 1977 Gross national product Final purchases Private Excluding net exports 1718.0 1706.2 1344.1 1330.3 1918.3 Personal consumption expenditures Goods Services Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 1978 1979 1980 1981 1982 -Projected1982 1983 1505.5 2163.9 2137.4 1705.5 1706.6 2417.8 2403.5 1929.1 1915.9 2633.1 2643.1 2104.7 2079.5 2937.7 2917.3 2320.4 2294.3 3076.5 3093.1 2452.8 2426.2 3303.0 3296.0 2609.4 2612.9 1084.3 598.5 485.7 1204.4 657.0 547.4 1346.5 728.5 618.0 1507.2 813.5 693.7 1667.2 884.7 782.5 1843.2 969.1 874.1 1978.3 1012.0 966.2 2143.8 1084.1 1059.7 257.9 72.0 174.1 11.8 13.9 324.1 95.8 205.2 23.0 21.9 386.6 111.2 248.9 26.5 25.4 423.0 118.6 290.2 14.3 8.6 402.3 103.2 309.2 -10.0 -5.7 471.5 104.9 346.1 20.5 15.0 431.2 97.7 350.2 -16.7 -16.7 476.1 117.3 351.8 7.0 7.0 13.8 170.9 157.1 -4.0 182.7 186.7 -1.1 218.7 219.8 13.2 281.4 268.1 25.2 339.2 314.0 26.1 367.3 341.3 26.6 353.4 326.8 -3.5 359.5 363.0 362.1 129.2 232.9 393.8 143.4 '250.4 431.9 153.6 278.3 474.4 168.3 306.0 538.4 197.2 341.2 596.9 228.9 368.0 640.3 250.8 389.4 686.5 278.4 408.2 Gross national product in constant (1972) dollars 1298.2 1369.7 1438.6 1479.4 1474.0 1502.6 1479.2 1514.7 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1391.2 889.9 1194.4 6.9 1540.4 983.2 1314.0 5.9 1732.7 1106.3 1474.0 6.1 1951.2 1237.6 1650.2 5.9 2160.4 1356.1 1824.1 5.8 2415.8 1493.9 2029.1 6.4 2575.9 1568.8 2182.9 6.6 2765.1 1669.9 2361.7 6.6 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 138.1 166.3 167.3 194.7 192.4 229.1 194.8 252.7 181.6 242.4 190.6 232.1 Federal government surplus or deficit(-) (N.I.A. basis) High employment surplus or deficit(-) -53.1 -17.4 -45.9 -20.6 -29.5 -16.0 -16.1 -1.8 -61.4 -17.0 -60.0 4.3 -135.2 -24.6 -175.6 -43.4 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 16.6 .9 28.0 10.1 30.3 10.0 30.4 6.6 28.1 .9 31.7 -. 1 31.2 -5.1 39.7 -1.4 Civilian labor force (millions) Unemployment rate (percent) 96.2 7.7 99.0 7.1 102.3 6.1 105.0 5.8 106.9 7.1 101.7 7.6 110.2 9.5 111.5 9.7 Nonfarm payroll employment (millions) Manufacturing 79.4 19.0 82.5 19.7 86.7 20.5 89.8 21.0 90.4 20.3 91.1 20.2 90.1 19.1 90.7 19.5 Industrial production (1967-100) Capacity utilization: all maufacturing (percent) Materials (percent) 130.4 79.5 81.1 138.1 81.9 82.7 146.1 84.4 85.6 152.5 85.6 87.4 147.0 79.1 80.0 150.9 78.4 79.9 140.0 70.4 70.1 146.2 72.3 73.1 Bousing starts, private (million units, A.R.) New auto sales (illions, A.R.) Domestic models Foreign models 1.54 10.54 8.63 1.92 1.96 10.69 9.07 1.62 2.00 10.92 9.29 1.63 1.72 9.91 8.36 1.55 1.30 8.34 6.62 1.72 1.10 7.98 6.24 1.74 1.04 8.02 5.78 2.24 Net exports of goods and services Exports Imports <1> Gov't. purchases of goods and services Federal <2> State and local 1895.3 1501.5 172.5 184.1 197.6 186.9 1.20 8.95 6.60 2.35 <1> Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greeabook. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I-13 August 18, 1982 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS -Projected- 1976 1977 1978 1979 1980 Gross national product Final purchases Private Excluding net exports 5.4 4.2 5.3 6.2 5.5 5.1 6.0 6.5 5.0 2.8 4.9 5.6 5.5 3.5 4.0 2.9 Personal consumption expenditures Goods Services 5.6 6.7 4.3 5.0 5.1 4.9 4.5 4.2 4.8 2.7 1.9 3.7 Gross private domestic investment Residential structures Business fixed investment 19.2 21.3 5.3 10.5 2.8 12.8 -. 2 -5.3 7.3 Gov't. purchases of goods and services Federal National defense State and local .0 -.6 -2.3 .4 1.5 3.7 .8 .2 2.0 -.1 .4 3.3 1.3 1.8 2.6 1.1 3.6 4.0 4.9 2.7 Gross national product Final purchases Private Excluding net exports 10.9 9.6 10.5 11.8 11.7 11.1 11.7 13.2 12.8 12.8 13.6 13.4 11.7 12.4 13.1 12.3 8.9 10.0 9.1 8.5 11.6 10.4 10.2 10.3 4.7 6.0 5.7 5.7 Personal consumption expenditures Goods Services 11.0 10.9 11.2 11.1 9.8 12.7 11.8 10.9 12.9 11.9 11.7 12.2 10.6 8.8 12.8 10.6 9.5 11.7 7.3 4.4 10.5 Gross private domestic investment Residential structures Business fixed investment 25.1 30.2 10.4 23.7 33.1 17.9 19.3 16.1 21.3 9.4 6.6 16.6 -4.9 -13.0 6.5 17.2 1.7 12.0 -8.5 -6.9 1.2 Gov't. purchases of goods and services Federal National defense State and local 6.5 5.3 3.6 7.2 8.8 11.0 8.0 7.5 9.7 7.1 8.0 11.2 9.8 9.6 11.5 9.9 13.5 17.1 17.5 11.5 10.9 16.1 17.0 7.9 7.3 9.6 14.1 5.8 Disposable personal income 9.0 10.0 12.2 12.0 10.5 11.2 4.6 Personal income Wage and salary disbursements 10.0 10.4 10.7 10.5 12.5 12.5 12.6 11.9 10.7 9.6 11.8 10.2 6.6 5.0 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 25.0 25.9 21.1 17.1 15.0 17.7 1.3 10.3 -6.8 -4.0 5.0 -4.3 -9.5 -20.7 Nonfarm payroll employment Manufacturing 3.2 3.7 3.9 3.6 5.1 4.2 3.6 2.6 .7 -3.6 .8 -. 6 -1.2 -5.4 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 3.2 8.1 4.7 2.2 7.5 5.2 .6 8.6 8.0 -1.3 9.3 10.7 -. 9 10.2 11.2 1.4 9.7 8.1 .5 7.7 7.2 5.2 5.8 7.4 8.6 9.3 9.4 6.4 5.5 6.1 5.7 6.1 6.3 6.5 8.0 7.8 7.7 9.9 8.6 11.3 10.1 8.6 13.5 9.6 9.4 10.3 10.7 5.9 5.8 4.4 -3.6 2.6 1981 1982 -.4 1.9 -1.6 .5 .0 -1.1 1.0 1.0 1.8 -.5 -.6 .1 .3 -1.5 2.4 1.8 1.9 1.7 1.4 .8 2.1 -11.8 -20.1 -2.2 8.3 -4.9 3.6 -12.0 -10.5 -3.9 2.3 4.3 4.0 1.1 .9 3.7 4.9 -. 8 -. 3 1.2 3.8 -1.3 2.5 1.6 Constant (1972) Dollars Disposable personal income 16.1 18.6 11.7 .2 Current Dollars GNP implicit deflator Gross domestic business product fixed-weighted price index <1> Excluding food and energy Consumer price index (all urban) Industrial production <1> Uses expenditures in 1972 as wights. 6.1 7.1 6.3 -7.2 1983 August 18, 1982 FEDERAL SECTOR ACCOUNTS FY1982e la-o. -Fr . I/ bard Fiscal Tear 1981* Unified budget receipts Unified budget outlays Surplus/deft.it(-), unified budget Surplue/def.cit(-), off-budget 3 agencies Combined deficit to be financed FY1983e/2/ Muan. F- . 1/ hard 1981* CY1982e/ Fr. Bard CT 198 IV*I 1982 FRB Staff Estimates Calendar quarters; unadjusted data i 198 IV I II III I* II* tI 599.3 657.2 -57.9 622.1 731.0 -108.9 618.1 730.5 -112.4 646.5 761.5 -115.0 630.0 789.0 -159.0 619.1 6916 -72.5 6153 730.1 -114.8 146.0 194.2 -48.2 143.6 167.3 -23.7 178.9 181.4 -2.5 149.7 187.7 -38.0 143.2 193.8 -50.6 143.9 197.2 -53.3 189.8 194.2 -4.4 153.1 203.9 -50.8 -21.0 -78.9 -19.3 -128.2 -17.9 -130.3 -14.9 -129.9 -17.3 -176.3 -22.4 -94.9 -18.1 -132.9 -3.6 -51.8 -2.0 -25.7 -5.8 -8.3 -6.7 -44.7 -3.8 -54.4 -5.3 -58.6 -4.1 -8.5 -4.2 -54.9 126.0 180.4 -2.1 -2.1 873 0.3 7.3 144.5 -3.0 -6.6 35. 6.7 9.5 324 -1.0 -6.1 8.9 2.0 -2.7 48.6 -6.3 2.3 54.2 2.3 -2.1 54.9 2.8 0.8 15. -4.2 -3.1 55.5 -3.0 2.3 HMan of financing combined deficit: Net borrowing from public Decresee i cash operating balauce 4 Other 79.4 2.3 -2. 126.7 (1.4 125.9 1.4 3.0 Cah operating balance, 18.7 a.a. 17.3 n . 19.4 12.0 15.0 12.0 13.0 11.0 17.3 15.0 12.2 16.4 19.4 35.7 46.6 21.1 50.1 26.8 30.0 23.7 4.0 1.6 9.1 6.4 6.6 5.8 7.3 7.1 a.. 615.4 na.. 736.7 na. 248.2 na. 170.7 n.. 77.4 n.e. 488.5 .a. -121.3 n.a. na. a.. na. n . n.. n.. 6403 805.3 270.6 194.9 75 534.7 -165.0 628.2 688.2 228.9 153.7 75.2 459.3 -60.0 613.6 749.0 250.9 175.4 75.5 498.1 -1353 62.7 727.4 250.5 166.9 83.6 476.9 -101.7 609.0 728.3 249.7 166.2 83.5 478.6 -1193 Seasonally adjusted annual rates 645.4 655.8 616.4 610.3 618 794.4 813.1 733.0 758.1 776.4 244.1 248.4 261.2 266.6 273.6 190.6 197.7 172.2 177.6 185.6 71.9 708 75. 76.0 75.9 488.9 509.7 515.2 527.8 539.5 -116.6 -147. -157.6 -149.0 -157.3 641.2 837.3 281.2 205.7 75.5 556.1 -196.1 a.*. n.e. an.. na . -35.2 -58 8 4.3 -18.0 -24.6 -47.1 anoi end of period Sponeored agency borrowings (3 MIA adget Receipts Expenditures urchases Defease Nondefense All other expenditures 8urplus/deficit(-) 615.3 6663 218.1 146.5 71.5 448.2 -50.9 Kgh eployment (HJ.) surplus/deficit(-) evaluated at B. . unaeploymuat race oft 7.0 5.1 percent -14.7 6.1 percent -20.9 -433 *-actul 1. OB WMid-Seesion Revew of the 1983 Madget, July 1982. 2. In the First Concurrent Resolutio on the udget - Fiscal Tear 1983, the Congress recomeded revenues of $665.9 billion and outlays of $769. billion. 3. Include Federal Financing Bank, Postal Service Fund. Rural Electrification and blephone Revolving Fund, hural llephone usak and 'beginning in FY1982) the Strategic Petroleum Resere. MOTEs quarterly figures may not add to yearly totals due to rounding. e--estiumted -21. .2 -43.8 -43. -8.5 -31.2 -32.6 -54.8 -36.0 -58.7 -18.4 -42.0 -21.4 -45.5 -64.9 -88.8 na.--not available 4. Checks issued less checks paid, accrued tems and other transactions. 5. FRI staff eatlistese nclude Federal Home Loan Banks, PHIMC (excluding participation certificates), FlMA (excluding mortgage backed securities). Federal Land Banks, Federal Intermediate Cedit Lanks for Cooperatives, and FRI Student loan Marketing Association marketable debt on a payment basis. and Adminietration estimates are not stricly comparable. DOMESTIC FINANCIAL DEVELOPMENTS Recent developments. the last FOMC meeting. Interest rates have fallen substantially since Reserve positions of depository institutions eased as M1 failed to grow, and the downward impetus to money market rates was reinforced by three one-half point cuts in the discount rate to 10-1/2 percent by August 13. The federal funds rate declined by about 4-1/2 percent- age points to around 10 percent, while short-term market rates in the 3to 6-month maturity range declined 4 to 5 percentage points. bond yields have fallen about 1-1/2 percentage points. Long-term A steep upward slope has emerged in the term structure of market yields, suggesting continuing concern about the prospects for credit market pressures as large Treasury cash needs compete with growing private demands. Public sector borrowing has been strong in July and August. The federal budget swung sharply into deficit in July, and the Treasury announced intentions to borrow a record $50 billion in the third quarter as a whole to finance the current quarter deficit and to increase its cash balance in anticipation of another sizable deficit in the fourth quarter. State and local governments continued to issue a large vdlume of tax-exempt bonds, particularly mortgage revenue bonds. Business borrowing in the aggregate has remained sizable. Growth in business loans at banks appears to have slowed in July and early August, but there has been an increase in issuance of commercial paper by nonfinancial firms and some pickup in bond offerings. Overall, nonfinancial cor- porations have continued to borrow more heavily than might be expected in light of the excess of cash flow relative to outlays for inventories and fixed capital--presumably reflecting the varying experience of individual I-15 I-16 firms and industries. Furthermore, new bond offerings have tended to be of shorter maturity than is typically the case suggesting little progress in strengthening corporate balance sheets. A cautious attitude regarding the strength of the economic upturn was reflected until very recently in a weak stock market. Share prices fell over most of the intermeeting period despite the decline in interest rates. Furthermore, indicators of corporate stress have not improved, and interest rate risk premiums, reflected in quality spreads between lowerand higher-graded commercial paper, have widened some, although remaining well below their peaks in the 1974 recession. In the household sector, growth of consumer credit in June remained at about the same 5 percent rate as in May, considerably above the depressed first quarter pace. Delinquency rates on consumer installment loans at banks and on auto loans at finance companies fell in the second quarter and personal bankruptcies also declined fairly sharply. activity has remained weak. Mortgage lending Rates on conventional, level-payment, fixed- rate mortgages declined more than 40 basis points since early July and FHAVA ceiling rates were cut 1/2 percentage point. It is difficult to tell, however, what if any effects recent declines in market rates have had on the rates on innovative mortgage financing arrangements involving home sellers. On the asset side of private sector balance sheets, the buildup of M1 balances that occurred early this year appears to have continued unwinding during July. M1 showed no growth after two months of decline and moved into the 2-1/2 to 5-1/2 percent target range for 1982. Outflows from other checkable deposits, which contributed to the flatness of M1 in July, were I-17 accompanied by sizable outflows from savings deposits. These outflows were offset by an even larger increase in small-denomination time deposits. Con- sequently, M2 growth accelerated somewhat in July to 9-1/4 percent (annual rate), as growth in the nontransactions component rose to a 12-3/4 percent annual rate, and M2 remains above the long-run target range. Growth of money market mutual funds also was strong particularly late in July and early in August. Commercial banks somewhat reduced their use of managed liabilities in the aggregate in August but use of negotiable CDs grew. On balance, the great majority of domestic banks encountered no difficulty in raising funds in the domestic CD market despite some difficulties or adverse rate spreads encountered by a few institutions prominently associated with large loan losses. Outlook. The staff expects that interest rates will remain around their recent lower levels in the near term but may begin to rise later in the year as the economic expansion proceeds. Short-term business credit demands are likely to abate as firms' cash flow improves and financing needs are reduced. The decline in long-term bond rates could prompt a sizable volume of bond issuance, however, partially offsetting reduced short-term borrowing as firms restructure their debt. Moreover, some modest strengthening of consumer and mortgage credit demands appears likely. Credit demands of the state and local government sector are likely to remain strong in part because of continued large issuance of mortgage revenue bonds. The federal sector is expected to borrow about $55 billion in the fourth quarter of this year, following the $50 billion issuance of marketable I-18 debt in the current quarter. Although the Treasury was not able to market a long-term bond in the recent mid-quarter refunding because the statutory limitation on long-bond financing had not yet been lifted, it is anticipated that this authority, and removal of the interest rate ceiling on savings bonds, will be enacted as part of the tax bill to be voted on in both houses of Congress this week. Orderly completion of the Treasury financing schedule for the current quarter also requires further action on the debt ceiling before the September 30 end of the fiscal year. Although financial markets are, in general, continuing to function fairly smoothly, an undercurrent of concern about credit quality is likely to remain. In such an environment, yield spreads between private and Trea- sury securities and between high- and lower-quality borrowers are likely to remain sizable and could be subject to occasional increases in the event of unanticipated business failures. INTERNATIONAL DEVELOPMENTS Recent Developments. The exchange value of the dollar reached a new post-1970 high in early July, but then eased off moderately to about its level at the last FOMC meeting. Demand for dollars has been strong over the period, despite a considerable drop in interest rate differentials, apparently based primarily on growing concern about economic and political difficulties abroad. These difficulties have included the failure of a large bank in Italy and a large industrial company in Germany, the fighting in the Middle East, and, most recently, the collapse of the Mexican peso. . The United States purchased minor amounts of yen and German marks in this period. A major feature of the recent period was the collapse of the Mexican peso, which was selling at 49 per dollar in early August and has fallen below 100 pesos per dollar in a disorganized unofficial market. The Mexican government raised administered prices on certain foods and gasoline early in August, and this seems to have touched off fear of demands for higher wages and a flight from the peso. After the government established a two-tier exchange rate system for the peso the I-19 I-20 demand for dollars accelerated, forcing the government to take measures to block the transfer of dollar accounts out of Mexico. The prolonged period of economic stagnation in foreign industrial countries persisted into the second quarter with little indication that recovery is imminent. Industrial production in the United Kingdom was up a little in the second quarter, but June was negative. In Germany, Japan, and Italy industrial production declined in the second quarter, and production in Canada is far below its 1980 level. Most large industrial countries have experienced some reduction in inflation in the most recent months, though the inflation rate is still high in several countries. For ten major countries, the CPI rose at an average 8-1/2 percent annual rate in the first half, compared with a rate of about 10-1/2 percent in the same half of 1981. The U.S. trade deficit in the second quarter of 1982 was about $20 billion (SAAR), down somewhat from the deficit rates in the first quarter and the last half of 1981. A sharp drop in petroleum imports was the largest factor contributing to this decline, with the volume of oil imports down by 10 percent from the first quarter, and prices down about 5 petcent. Imports other than petroleum were tending to rise in the second quarter, as the effect of a strong dollar offset weak domestic demand. Both agricultural and other exports held steady in the second quarter. With a slightly smaller trade deficit in the second quarter, it is likely that the current account balance registered a surplus somewhat larger than the $5 billion annual rate in the first quarter. I-21 U.S. banks increased the net balance due to their foreign offices by $4 billion in June, but then reduced these borrowings by about $2 billion in July, with a further drop in early August. These flows seem to reflect shifts in relative costs of funding in domestic CDs and the Eurodollar interbank markets. There is no indication that defaults by subsidiaries of an Italian bank, or rumors of losses by Canadian and German banks, have affected the functioning of the interbank market, cr that the Eurodollar CD market has experienced any difficulties. Credit extended to U.S. nonbanks by foreign branches of U.S. banks rose slightly in June and by a somewhat large amount in July. Data for Eurodollar holdings of U.S. nonbanks indicate that such holdings rose $20 billion for the year through May (latest data available), compared with a rise of $33 billion for the full year 1981. Outlook. A weak recovery in economic activity abroad is pro- jected during the second half of this year, with growth rates of the foreign G-10 countries averaging only 3 percent by the end of next year. However, this prospect has been clouded by the lack of any consistent signs of recovery, and by the possible shock to confidence if there are widespread failures of industrial and financial concerns. Primarily because of the higher average value of the dollar in recent months, and over most of the projection period, the U.S. current account balance is now projected to move more rapidly toward deficit than previously expected. The balance is now projected at about zero for 1982, and a deficit of about $30 billion in 1983. The higher exchange rate reduces exports considerably and raises imports somewhat, compared with the previous projection. I-22 The weighted average exchange value of the dollar is about 8 percent higher at this time than was assumed when the previous projection was made. The staff now expects that the recent strength will dissipate only gradually, but that as the U.S. trade and current accounts register large deficits later this year and during 1983 the dollar's exchange value will drop back to about its level at the beginning of this year. August 18, OUTLOOK FOR U.S. NET BXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS, SBASONALLY ADJUSTED ANNUAL RATES) CONFIDENTIAL (FR) CLASS IIFOMC S9 1981 AMI. 1. 1982 19821 AlI. 1983 ANN. 1982 Q0I 1982 Q I 1982 Q1u 4983 0Q 19821 Q IV 1983 QUI 1983 Q II 1983 f Q IV GP 1l2 EXPOATS ------------- COaa1T S, MlI EXPORTS OF G0S 1LPORTS 07 G6S 26.4 367.4 341.3 26.6 353.5 326.8 -3.5 359.5 363.0 3a.3 359.9 328.6 35.6 360.9 325.3 26.3 350.4 324.1 13.4 342.6 329.2 2.9 343.2 340.2 -2.1 351.6 353.8 -5.4 364.7 370.1 -9.3 378.6 387.9 CONSTANT 72 8, IBT EXPORTS Of G6S IIPOITS 01 G6S 42.0 158.4 116.4 33.5 149.3 115.8 25.8 146.8 120.9 37.0 151.7 114.7 35.5 152.3 116.8 32.7 148.7 116.0 28.9 144.5 115.6 25.5 142.7 117.3 25.0 144.5 119.5 26.4 148.1 122.1 26.8 151.7 124.9 79.0 83.9 81.6 82.9 85.4 84.3 83.3 82.9 82.2 84.2 80.4 TEBIS OF TRADE 11972-100) 1/ ------ 2. 3. 4. ------- -:f -- - - ------- ---------- eeeeee--- -27.9 -30.0 -65.3 -24.2 -20.5 -31.4 -43.8 -53.7 -61.8 -6.9.7 -76.1 EXPOSSS (BXCL. 8ILIXUTI) AGRICOULTRAL NIOAGRICULTURAL 236.3 44.3 192.0 214.9 42.0 172.9 208.5 46.3 162.2 222.4 42.0 180.4 222.5 42.4 180.1 210.3 41.1 169.2 204.4 42.4 162.0 204.0 44.4 159.9 205.2 45.4 159.7 209.4 47.2 162.2 .215.6 48.6 163.0 IMPORTS PfETOLOM ANID PIODUCTS NOIPTJPO81ZO 264.1 77.6 186.6 244.9 56.2 188.7 273.9 63.5 210.4 246.7 62.6 184.1 242.9 53.7 189.3 241.7 53.0 188.8 248.2 55.5 192.7 257.7 59.4 198.7 267.0 61.9 205.1 279.0 65.0 214.0 291.7 67.7 223.9 4.5 -. 7 33.0 28.9 32.4 .5 9.7 .7 8.4 2.3 7.4 U.S. BIRCBANDISE TRAID BALANCE 2/ U.S. COURlNT ACCOUNT BALANCE 01 I-- IC: 82 IIV--------SI1 CO- FOREIGI OUTLOOK - TN INDUSRAL COUBl2 REAL G1P, S CHA1GB, ANNUAL BAlIS COSOBER PRICES, S CHANGE, ANUAL JA9TE --- ------ -------------- -33.3 4.7 7.8 ! -1.7 -13.4 -23.3 -30.3 -36.4 -42.0 27.9 28.4' 29.6 29.8 29.0 30.8 34.1 35.6 .4 7.9 .5 9.0 1.4 7.2 2.4 7.7 2.8 7.8 2.5 6.9 2.6 6.3 3.0 6.7 S 3/ ------------------- 1/ GNP EXPORT IMPLICIT DIELATOR DIVIDED BI GUP IlPOT IMPLICIT DEILAICR. 2/ INTERNATIONAL ACCOUNIS BASIS. TOTAL BULILATBAL 3/ GBOMETRIC NEIGHIS OSED TO AGGREGATE FOREIGN REAL GNP AND CONSOMER PRICES -- PBCBENT SHARE IN f B-COOUNTl TRADE. GERaANI (20.8%), JAPAN (13.6), FRANCI (13.1), UNITED KINGDOM (11.91), CANADA (9.1), ITALY (9.01), THE NETHBELANDS (8.35), BBLGIOU (6.45), SsEDEI (4.2%), SUMIItRLAND (3.6). P/ PROJECTED.
@FedFRASER