Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 24, 1982 : Greenbook Part 2

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Confidential (FR)

Class

IIFOMC

August 18,

RECENT DEVELOPMENTS

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

1982

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and unemployment...................................

Industrial production .....................................

Personal income and consumer spending.........................
Business fixed investment .....................................

5
7

Housing .......
........ ................................. ... ...
Inventory investment.........................................
Federal government...................... ...................
..

11
13
16

State and local government......................................

Prices ....

.........

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

Wages and productivity...........................

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

TABLES:
Changes in employment..........................................
Selected unemployment rates...................................
Industrial production. ......
...............................
Equipment output................ .... ..........................
Personal income .................. ..............................
.
Retail sales............ . ..................................
......... .......
Auto sales......................... .....

2
2
4
4
6
8
8

Business capital spending indicators............................
Business capital spending commitments........,................

9
9

Private housing activity.....................................

Changes in manufacturing and trade inventories..................

Inventories relative to sales..................................

Recent changes in consumer prices............................
Recent changes in producer prices.............................
Selected measures of compensation, productivity, and costs in
the nonfarm business sector.................................
Negotiated wage-rate changes under major collective

18
18

bargaining settlements...........

21
23

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

CHARTS:
Vacancy rates for commercial office space......................
Private housing starts........................................

Housing:

new and existing......................................

Effective wage change in major union contracts..................
APPENDIX:

10
14

The Federal Budget at Mid-Session

III

DOMESTIC FINANCIAL DEVELOPMENTS

Monetary aggregates and bank credit............................
Business finance............................

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

Government finance
... ...................
Federal sector..............
State and local sector....................................

3
7

11
11
12

Section

Page

III

DOMESTIC FINANCIAL DEVELOPMENTS
Mortgage markets ....................................

...........

Consumer credit.................................... .............

TABLES:
... ...

business credit........................................ .....

Monetary aggregates. ...................................

Commercial bank credit and short- and intermediate-term
Gross offerings of securities by U.S. corporations..............

Treasury and agency financing...................................

State and local government security offerings...................

Consumer installment credit .....................................

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets................................

.....

..................
U.S. international transactions...............
U.S. merchandise trade......................................... .
U.S. international capital transactions..........................
Foreign economic developments............................. ....
...

5
5
7
11

Individual country notes.........................................

TABLES:
U.S. .merchandise trade............................

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

....

Summary of U.S. international transactions.......................
Major industrial countries
Real GNP and IP...............................................
.........
Consumer and wholesale prices.....................
Trade and current-account balances............................

Oil imports...........

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

International banking data.......................................

20
21
22

CHARTS:
Weighted-average exchange value of the U.S. dollar ...............
Three-month interest rates..........................

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

2
2

- T - 1

August 18, 1982

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest data
Period

Release
date

Data

Percent change from
Three
Preceding
periods
Year
earlier
period
earlier
(At annual rate)

Civilian labor force
Unemployment rate (%) 1/
Insured unemployment rate (%) 1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($) 1/
Manufacturing:
Average weekly hours (hr.) 1/
Unit labor cost (1967=100)

July
July
June
July
July
July

8-6-82
8-6-82
8-13-82
8-6-82
8-6-82
8-6-82

July
July

8-6-82
8-6-82

July
June

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

110.5
9.8
4.7
89.8
18.8
71.0

3.6
9.5
4.6
-.2
-5.7
1.2

3.2
9.4
4.3
-1.1
-6.9
.5

1.7
7.2
3.4
-1.7
-7.6
.0

34.9
7.70

34.8
7.66

34.9
7.59

35.3
7.27

8-6-82
7-30-82

39.3
232.0

39.2
10.4

39.0
11.0

40.0
11.1

July
July
July
July
July

8-13-82
8-13-82
8-13-82
8-13-82
8-13-82

138.1
144.5
152.0
109.0
133.7

-. 9
6.7
-24.7
10.0
.0

-6.0
6.8
-31.3
6.7
-7.3

-10.3
-4.2
-17.7
6.2
-13.9

Consumer prices all items (1967=100) June
All items, excluding food & energy June
June
Food

7-23-82
7-23-82
7-23-82

289.7
277.0
287.2

12.6
10.5
7.6

9.0
10.2
7.1

7.1
8.5
5.1

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

July
July
July

8-13-82
8-13-82
8-13-82

281.3
316.0
253.4

6.9
6.1
-32.7

6.6
3.4
-3.1

3.7
1.2
-4.3

Personal income ($ bil.) 2/

July

8-18-82

2,592.3

11.7
(Not at annual rates)

Mfrs. new orders dur. goods ($ bil.) June
June
Capital goods industries
Nondefense
June
Defense
June

8-2-82
8-2-82
8-2-82
8-2-82

74.7
24.7
19.3
5.4

-1.9
-1.8
-5.2
12.6

-4.1
-15.7
-13.1
-23.9

-14.1
-14.2
-19.8
14.9

Inventories to sales ratio: 1/
Manufacturing and trade, total
Manufacturing
Trade

8-12-82
8-2-82
8-12-82

1.49
1.71
1.29

1.46
1.72
1.24

1.50
1.78
1.26

1.41
1.61
1.22

8-2-82

.618

.611

.608

.574

88.7
18.7

.5
1.6

1.6
2.0

7.3
5.1
2.2

1.3
-6.0
23.1

-10.3
-13.1
-3.2

37.3
2.2

16.4
-5.4

Ratio:

June
June
June

Mfrs.' durable goods inventories to unfilled orders 1/ June

Retail sales, total ($ bil.)
GAF 3/

July
July

8-11-82
8-11-82

Auto sales, total (mil. units.) 2/
Domestic models
Foreign models

July
July
July

8-4-82
8-4-82
8-4-82

Housing starts, private (thous.) 2/
Leading indicators (1967=100)

July
June

8-17-82
7-30-82

1/
2/
3/

1,211
127.9

Actual data used in lieu of percent changes for earlier periods.
At annual rate.
Excludes mail order houses.

33.7
.0

DOMESTIC NONFINANCIAL DEVELOPMENTS

The sharp decline in economic activity early in the year apparently
has ended, but there are few indications of an upturn.

Industrial produc-

Retail sales so far have

tion and employment were little changed in July.

shown only a little improvement from a depressed June level, and there is
evidence of a further weakening of capital outlays in the near term.

the positive side, housing starts rose substantially in July, and initial
claims for unemployment insurance benefits have been somewhat lower in
recent weeks.

Moreover, progress continued to be made in reducing the

underlying trend in inflation, with wage increases remaining moderate.
Employment and Unemployment
Nonfarm employment was about unchanged in July, as gains in trade
and services about offset the continued contraction in the goods-producing
sector.

However, manufacturing employment continued to show weakness,

falling another 90,000 in July, and mining was off 15,000.

The composi-

tion of the contraction in industrial employment has shifted since the
beginning of the recession when losses were concentrated primarily in the
construction and consumer durables industries.

The declines at these

industries and at their suppliers have tapered off during the last
several months while layoffs in oil- and gas-well drilling as well as
in the industry that builds drilling machinery have become particularly
large.

Overall, the layoff rate appears to be slowing.

Weekly claims

for unemployment insurance, a measure of layoffs and leading business
cycle indicator, have averaged 40,000 lower through late July than in
the preceding two months--although they remain at a high level.
manufacturing workweek also has edged up slightly.
II-1

The

II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1980

1982
June

1981
Q1

July

- - Average monthly changes - -

Nonfarm payroll employment 2
Strike adjusted
Manufacturing
Durable
Nondurable
Construction
Trade
Finance and services
Government
Private nonfarm production
workers
Manufacturing production
workers

Total employment3
Nonagricultural

14
8

-7
-8

-113
-111

-148
-134

-306
-280

-17
-31

-62
-46
-16
-19
0
81
11

-40
-32
-8
-22
16
56
-26

-119
-78
-41
-31
44
25
-19

-130
-95
-35
3
-18
43
-14

-186
-127
-59
-46
-50
63
-36

-90
-48
-42
-10
27
60
33

-23

-8

-90

-111

-226

-37

-69

-48

-103

-104

-140

-50

-27
-35

-2
22

-40
-87

91
87

-353
-223

-32
-134

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)
1980
Total, 16 years and older

7.1

1982

1981

June

July

9.5

9.8

7.6

8.8

Teenagers

17.8

19.6

21.9

22.8

22.3

24.1

20-24 years old
Men, 25 years and older

11.5
4.8

12.2
5.1

14.0
6.4

14.5
7.1

14.4
7.5

5.5

5.9

6.6

7.2

7.4

White
Black and other

6.3
13.1

6.7
14.2

7.7
15.9

8.4
17.1

8.7
17.3

Fulltime workers

6.9

7.3

8.6

9.3

9.4

9.5

3.7
10.0

4.0
10.3

4.5
12.6

4.9
13.7

5.0
13.9

4.9
14.4

Women, 25 years and older

White collar
Blue collar

II-3

The unemployment rate climbed 0.3 percentage point to 9.8 percent
in July with most of the increase occurring among labor force entrants.
Unemployment remained high in July among adult men, reflecting the cumulative job losses in the predominantly male industrial industries.
Although some adult women have continued to find employment in the stillgrowing service-producing sector, their unemployment also rose in July.
While layoffs may be slowing, the prospects for rehiring appear a bit
weaker compared with earlier cyclical troughs.

Only 19 percent of the

unemployed report that they are on layoff and expecting recall as compared
with 23 percent during the 1975 and 1980 recessions.
Industrial Production
Industrial production edged down 0.1 percent in July, following
declines that averaged 0.6 percent in the previous six months and that
have totaled about 10 percent since July 1981.

Business equipment pro-

duction, one of the weakest sectors in recent months, dropped another
2.1 percent in July.

Consumer goods output rose further, but this reflec-

ted mainly an increase in auto output.

Assemblies were at an annual rate

of 6.6 million units in July, well above the sales pace for a second
month; as a result, the industry has scheduled a sharp reduction in
August assembly schedules to a 5.5 million unit rate.
Over the past year business equipment output has declined about 18
percent--substantially more than in the two preceding recessions.

The

sharpest cutbacks have occurred in building and mining equipment, reflecting extraordinary curtailments in oil-well drilling activity over the
past seven months.

Office and computing equipment, a source of relative

strength in 1981 and early 1982, has been declining since March.

II-4
INDUSTRIAL PRODUCTION
(Average monthly changes; percent)

July to
December

1982
January to
June

July

-1.0

-.6

-.1

-.9

2.6
.3

-6.0
-.6

5.1
0

12.5
-.1

-.1

-1.6

-1.2

.6
.1

-.4
.9

-2.2
.2

-2.1
.8

1981
January to
June
Total
Consumer goods
Autos
Other
Equipment
Business
Defense and Space
Construction Supplies

-.2

-1.9

-.8

-1.6

-.6

Materials

EQUIPMENT OUTPUT
Proportion
of total
equipment
June 1982

Percent change
Average
recession1

Sept. 1974 to
Mar. 1975

July 1981 to
July 1982

-12.8

-14.2

-17.7

Building & Mining
Manufacturing
Power

11
15
7

-9.5
-15.0
-6.3

0
-15.0
-11.4

-32.4
-20.2
-15.6

Commercial
Transit
Farm

28
8
2

-10.3
-25.2
5.2

-19.0
-20.5
-4.7

-9.4
-14.62
-30.23

-6.8

-4.2

Business Equipment

Defense and Space
1.
May
2.
3.

6.2

Defined in terms of cyclical movements of total IP: Aug. 1957-Apr. 1958,
1960-Feb. 1961, Oct. 1969-Nov. 1970, Sept. 1974-Mar. 1975.
-29.0 percent since July 1979.
-45.4 percent since July 1979.

II-5

Production of manufacturing equipment, which includes items such as metalworking and general industrial equipment, has dropped about 20 percent
over the last year--about in line with other postwar recessions.
Capacity utilization in manufacturing edged downward in July to about
69-1/2 percent.

Utilization has fallen more than 10 percentage points

during the last year and is now close to its March 1975 low.

The amount

of slack is especially great among producers of industrial materials.
Personal Income and Consumer Spending
Mainly because of the estimated $25 billion cut in tax withholding
and an $11

billion Social Security cost-of-living adjustment, disposable

personal income rose at a hefty $44-3/4 billion annual rate in July.
Wages and salaries, which account for most of the cyclical variation in
income, increased $7 billion--only slightly faster than the monthly average
rise in the first half of the year.
Consumer spending in July did not appear to show much response to
the July tax cut.

Retail sales increased 1 percent, recovering only part

of a 3.3 percent June plunge.

Excluding sales at automotive outlets and

those with mainly nonconsumer items, spending in July increased 1/2 percent, and was

slightly above the second-quarter average.

Apparel and

general merchandise stores performed better than average in July, but
furniture and appliance sales were down.
Auto sales were a major factor in the swings in consumer spending
in both June and July.

Unit sales of domestic cars fell sharply in June

to 4.8 million units a year, the lowest selling pace yet during the
recession, and they recovered slightly to only a 5.1 million unit rate in
July.

General Motors started a new dealer incentive program in the last

II-6
PERSONAL INCOME

1980

1981

1981
Q4

1982
May June

July

- - - - Percentage changes at annual rates1 - - - 11.1

Total personal income
Wage and salary
disbursements
Private
Disposable personal income
Nominal
Real

10.4

2.6

7.0

10.2

4.6

10.7
12.1

1.6
.9

5.5
3.4

2.4
-8.4

24.8
n.a.

9.9
9.6

8.4
8.7

5.1
3.4

2.8
2.1

3.9
3.7

11.0
.6

10.4
2.6

8.3
1.2

3.0
-1.8

7.3
3.6

4.2
.7

11.7

- - - - - Changes in billions of dollars 2 - - - - -

6.3

7.0

8.8
7.1
1.1

2.8
.4
-2.8

4.0
2.7
-.2

9.1
4.3

10.3
2.9

3.7
2.4

4.2
1.3

1.2

5.8

6.4

Total personal income

19.2

Wage and salary disbursements
Private
Manufacturing

10.8
8.5
2.4

Other income
Transfer payments
Less: Personal contributions
for social insurance
Memorandum:
Personal saving rate

17.9

7.5

16.2

21.6

9.9

6.6
5.4
.9

13.8
12.6
2.5

2.1
.9
.4

10.0
3.3

8.6
1.2

7.9
2.2

18.6
12.8

1.3

6.6

6.9

6.4

7.2

8.1

25.1
7.0
3.6
-. 5

1. Changes over periods longer than one quarter are measured from final quarter
of preceding period to final quarter of period indicated. Changes for quarterly
periods are compounded rates of change; monthly changes are not compounded.
2. Average monthly changes are from the final month of the preceding period
to the final month of period indicated; monthly figures are changes from the
preceding month.
n.a.-not available

II-7

part of July, and Ford followed suit in August, but sales in the first
ten days of August edged up only slightly further to a 5.3 million unit
annual rate.
Business Fixed Investment
Real outlays for producers' durable equipment fell at an 8-1/2 percent annual rate in the second quarter, as business purchases of motor
vehicles weakened and spending was cut back for nonelectrical machinery.
In contrast to equipment outlays, investment in structures edged up in
the second quarter, reflecting continued increases in commercial and
industrial building activity, and a reported rise in oil- and gas-well
drilling.

However, the data for energy drilling reported in the national

income accounts tend to lag new activity, and the second quarter gain
reflects earlier strength.

More recently, the number of rotary rigs in

operation, a series that leads reported drilling by about six months,
has been falling sharply.
Advance indicators of business fixed investment suggest further
weakness in the capital goods sector in the months ahead.

Orders for

nondefense capital goods, which have been below shipments for 11 of the
past 12 months, fell further in June to a level 15 percent below shipments,
and there are indications that the strength in commercial building activity
is waning.

Vacancy rates for commercial office space have risen to 7 per-

cent from 4 percent in 1980.

Although this is well below the level that

accompanied the collapse in commercial building in the mid-1970s, it does
suggest that there is diminishing incentive to undertake new commercial
building projects.

II-8
RETAIL SALES
(Percent change from preceding period except where indicated;
based on seasonally adjusted data)

1981

1982

July/Q2

May

June

July

Total sales

-1.3

2.7

-.3

2.9

-3.3

1.0

(Real) 1

-2.4

-.7

2.1

...

2.4

-4.6

...

1.7

-1.1

Total, less autos and

nonconsumption items

1.5

1.7

-1.3

-.1

-.3

1.4

3.9

-3.5

1.3

.0 7.0
.2 11.4

-2.3
-3.6

5.1 -7.9
7.4 -11.4

1.6
2.2

-2.8

.5 -3.1

-.9

Total, exc. auto group,
gasoline, and nonconsumption items

GAF 2
Durable goods
Automotive
Furniture &
appliances
Nondurable goods
Apparel
Food
General merchandise 3
Gasoline

-5.6
-7.3
-.8

-4.7

.7
-.9
1.7
.5
.4

.2
.8
4.3 -1.3
-.2
1.9
-.5
2.2
-2.1 -5.3

2.2

.6
1.5
-.7
.8
.6

1.8
5.4
2.1
4.5
1.4

-1.0
-4.0
-1.9
-3.4
.3

.7
2.6
.0
1.6
-.1

1. BCD series 59. Data are available approximately 3 weeks following the
retail sales release.
2. General merchandise, apparel, and furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales are
also excluded in the GAF composite sales summary.
AUTO SALES
(Millions of units; seasonally adjusted annual rates)
1982
Q2
Ql
Total

Apr.

1982
May

June

July

8.1

7.5

7.3

8.4

6.9

7.3

Foreign-made

2.2

2.0

1.8

2.0

2.2

U.S.-made

5.9

5.5

6.4

4.8

5.1

Small

3.0

2.5

2.4

2.9

2.2

2.4

Intermediate
& standard

2.8

3.0

3.5

2.6

2.7

Note:

Components may not add to totals due to rounding.

II-9
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)
1981
Q4

1982
Q1

Apr.

1982
May

June

July

Nondefense capital goods
shipments
Current dollars

-.4

-5.6

-3.3

-6.1

3.9

-3.0

Addendum: Sales of heavyweight trucks (thousands)

201

217

173

170

187

162

158

1.7

-.6

4.2

n.a.

34.9

40.8

42.8

42.4

37.1

n.a.

Nonresidential construction
Current dollars
Addendum: Oil and gas well
drilling (millions of feet)

34.9

BUSINESS CAPITAL SPENDING COMMITMENTS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)

Nondefense capital goods
orders
Current dollars
Machinery
Current dollars
Addenda: Ratio of
current dollar unfilled
orders to shipments
Total
Machinery
Nonresidential
building contracts
Current dollars

1982

1982
May

1981
Q4

Apr.

-6.5

-5.2

-4.9

2.0

-10.1

-2.7

-10.7

-4.2

3.5

-4.5

5.84
4.37

5.94
4.30

-16.9

5.86
4.26

5.9 -14.9

6.24
4.54

-27.3

5.87
4.34

14.9

June

-5.2

-10.1

5.90
4.30

-27.6

n.a.

I-10
VACANCY RATES FOR COMMERCIAL OFFICE SPACE

Vacant space as percent of total space available
S13

I
1970
Source:

I
1972

I
1974

I
1976

1978

Building Owners & Managers Association

I
1980

-4

-q

-4

I
1982

II-11

Housing
New residential construction pursued its zigzag recovery through the
early summer.

Total private housing starts jumped by a record 34 percent

in July to a 1.2 million unit annual rate; this rise more than reversed
the decline registered the previous month.

Both starts and building per-

mits last month were well above their second-quarter average, extending
the gradual upswing that developed during the first half of the year.
From the cyclical lows of late last year housing starts had risen 11 percent by the second quarter of 1982, and newly-issued permits were up 21
percent.

These increases were less robust--and less broadly based by

region and type of structure--than typical during the first two quarters
of recent housing upswings.
The upsurge in house sales that usually provides the basis for increased single-family starts has yet to materialize.

After rising a bit

late last year, sales of new units in the second quarter of 1982 dropped
to the lowest quarterly pace since data collection began in 1963.

The

market for existing houses has shown no sign of a recovery, and sales
have remained below the 2 million unit rate since last fall.
Average prices of both new and existing houses sold in June were
only 3 percent above a year earlier, even though many reported sales
prices may be overstated because they incorporate premiums for "concessionary" seller financing.

The rise in measured house prices has

decelerated in a period when the advance in construction costs has slowed
to 5 percent during the last four quarters from the 9 and 11 percent
recorded in the previous two years.

II-12
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)

1981

1982
May

June

July

0.92
0.95

0.94
1.07

0.93
0.91

1.10
1.21

0.45
0.59

0.49
0.60

0.49
0.63

0.52
0.62

0.50
0.61

0.40
1.92

0.39
1.93

0.36
1.92

0.40
1.90

0.34
1.95

n.a.
n.a.

0.42
0.38

0.34
0.33

0.37
0.33

0.43
0.35

0.46
0.44

0.41
0.29

0.60
0.60

0.24

0.21

0.24

0.25

0.26

n.a.

Annual

All units
Permits
Starts

0.99
1.08

0.76
0.87

0.82
0.92

Single-family units
Permits
Starts

0.56
0.71

0.42
0.54

0.44
2.35

Multifamily units
Permits
Starts
Mobile home shipments

Sales
New homes
Existing homes

1. Preliminary estimates.
n.a. Not available.

II-13
Multifamily housing starts more than doubled in July, after registering
the highest level in a year during the second quarter.

Ownership units in

multifamily structures (condominiums and co-ops) have fared relatively well
in current markets.

These units currently account for around two-fifths of

multifamily starts.

Part of the recent strength in this sector is apparently

due to the increase in starts under the HUD section 8 program, which provides
rental subsidies for low-income projects.

During the May to July period,

HUD reported such activity to be about double the depressed volume in the
same months of 1981.

New construction under this program is being terminated

at the end of the current fiscal year, and many projects left "in the pipeline" will be started in the next few months.
Inventory Investment
While sharp production cutbacks have resulted in a liquidation of
most of the inventories accumulated in the second half of last year, the
rate of stock runoff slowed during the second quarter, contributing to
the rise in GNP.

Moreover, with sales quite weak, stock-sales ratios in

the aggregate are still quite high.

In constant dollar terms, the manu-

facturing and trade inventory-sales ratio for June was 1.74--about halfway between the January peak of 1.80 and the prerecession level of 1.67.
Progress toward correction of inventory imbalances has been uneven.
Nondurable stocks seem to be more in line with sales than durable stocks.
Although most manufacturers have been successful in paring their stocks
through sharp production cutbacks, shipments in a few heavy industries,
particularly primary metals and nonelectrical machinery, have been so
weak that these industries have been unable to improve their positions
significantly.

II-14

PRIVATE HOUSING STARTS

Millions of units
-- 2.0

1.6

Total

July

1.2
I

/
.8
Multifamily
m

a
I
HOUSING SALES;

a
I

I
I

NEW AND EXISTING
Millions of units
5.0

4..0

3.0

2.0
1979

1980

1981

1982

II-15
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

1979

1980

1981
Q4

47.0
30.4
22.6
7.8
10.0
6.7

38.4
23.0
14.1
8.9
10.6
4.9

18.5
3.8
3.0
.8
9.5
5.3

-29.0
-12.3
-9.5
-2.9
-7.2
-9.4

4.8
5.2
.9
-1.3

-1.7
.9
5
-3.0

1.7
-3.6
4.8
.6

-15.5
-8.1
-3.4
-4.0

1982
Apr.

May (r) June (p)

Book Value Basis
Total
Manufacturing
Durable
Nondurable
Wholesale Trade
Retail Trade

-3.0 25.4
-19.8 -13.0
-7.0 -1.8
-12.8 -11.2
12.6 40.2
4.2 -1.9

-54.3
-30.4
-12.6
-17.9
-14.2
-9.7

19.9
-16.0
-6.6
-9.4
11.6
24.2

10.4
-5.3
14.9
.8

-19.1
-6.6
-9.8
-2.7

---

Constant Dollar Basis
Total
Manufacturing
Wholesale Trade
Retail Trade

----------

-----

INVENTORIES RELATIVE TO SALES 1
1974
Cyclical
Peak 2

1980
Cyclical
Peak 2

1.64
1.95

1.52
1.76

1.51
1.75

2.51
1.39
1.24
1.57

2.35
1.18
1.19
1.46

1.76
2.18
1.40
1.52

1.76
2.11
1.47
1.45

1981
Q4

1982
Apr.

1.51
1.79

1.49
1.73

1.52
1.79

1.46
1.72

1.49
1.71

2.35
1.16
1.16
1.45

2.41
1.18
1.14
1.42

2.35
1.12
1.17
1.40

2.41
1.18
1.19
1.40

2.33
1.13
1.14
1.35

2.34
1.11
1.17
1.42

1.76
2.12
1.45
1.47

1.76
2.15
1.43
1.46

--------

1.77
2.16
1.46
1.45

1.72
2.11
1.39
1.41

----

May (r) June (p)

Book Value Basis
Total
Manufacturing

Durable
Nondurable
Wholesale Trade
Retail Trade
Constant Dollar Basis
Total
Manufacturing
Wholesale Trade
Retail Trade

Ratio of end-of-period inventories to average monthly sales for the period.
Highs are specific to each series and are not necessarily coincident.
Revised estimates.
Preliminary estimates.

II-16

As sales fell in June, retailers increased their book-value inventories, returning their stocks to January levels after five consecutive
monthly declines.

The June buildup was largely in autos, but most non-

auto stocks rose, particularly those at general merchandise stores.
As a result, retailers' inventory position deteriorated.

The inventory-

sales ratio for retailers trade jumped to 1.42 at the end of June--not a
great deal better than its January peak of 1.46.
Wholesalers' mid-year inventories still appear to be burdensome.
By May, merchant wholesalers had liquidated only about one quarter of the
stocks they accumulated since the recession began, and book value data
for June show further worsening in their inventory position--a sizable
book-value increase accompanied by declining sales.
Federal Government
The tax cut and spending legislation that was passed last year, the
effects of the recession, and a sharp drop in spending for agriculture
price support programs by the Commodity Credit Corporation (CCC) combined
in the second quarter to hold down the increase of both federal receipts
and expenditures measured on an NIPA basis.

The federal deficit declined

slightly to $116 billion at an annual rate as expenditures increased more
slowly than receipts.
Aside from the swings in CCC, outlays continued their recent upward
trend in the second quarter.

Most nondefense purchases and grant programs

remain restrained by last year's budget cuts, but increased unemployment
outlays and a cost-of-living adjustment in Civil Service pensions helped
boost total spending in the second quarter.

Interest outlays also in-

creased due to a higher average effective interest rate and growth of the
national debt.

II-17

On the receipts side of the budget, revenues were constrained by
low nominal income growth and by the provision of last year's Economic
Recovery Tax Act (ERTA).

The accelerated cost recovery provisions of

the bill as well as declining corporate profits have contributed to declines in corporate profits tax accruals.

Receipts from personal taxes

have remained about unchanged as some cuts in nonwithheld income tax payments offset slower income growth.
The second stage of the withholding reductions that implement the
personal income tax cut portion of ERTA went into effect on July 1.
Although the legislation specified a 10 percent reduction in liabilities,
calculations based on the new withholding tables suggest that the cut in
withholding was only about 8.5 percent.

However, this smaller-than-

specified cut should not result in larger refunds next April since the
withholding reductions that implemented the first stage of the tax cut
on October 1, 1981, were too large--about 5.8 percent instead of the 5.0
percent specified in ERTA.

For the year as a whole, withholding should

be about as contemplated in ERTA, and the tax tables that individuals
will use to compute their 1982 returns show a full 10 percent cut.
The administration released its Mid-Session Review of the 1983 budget
in late July.

The Review assumes implementation of the aggregate deficit-

reducing measures in the congressional First Budget Resolution and projects
deficits of $109 billion for FY 1982 and $115 billion for FY 1983.

Action

on two bills that implement the tax increases and a part of the outlay
reductions assumed in the First Budget Resolution has been completed by
House-Senate conferences, and votes on these bills are expected in both

II-18

RECENT CHANGES IN CONSUMER PRICES 1
(Percentage change at annual rates; based on seasonally adjusted data) 2
Relative
importance
Dec. 1981
100.0
All items
16.6
Food
11.1
Energy 3
26.1
Homeownership
All items less food,
energy, homeownership 4 49.8
3.3
Used cars
19.9
Other commodities 4
26.6
Other services 4
Memorandum:
Experimental CPI 4

100.0

1981
May

June

1.0
3.9
-8.0
-2.4

9.3
7.3
12.9
19.8

11.4
10.2
19.4
22.0

12.6
7.6
49.2
16.9

9.4
20.3
6.1
10.6

5.4
5.5
4.8
6.3

6.9
3.5
3.7
8.0

4.4
1.2
2.9
7.7

8.3
2.5
4.6
7.2

8.5

2.7

5.8

7.0

12.0

1980

1981

12.4
10.2
18.1
16.5

8.9
4.3
11.9
10.1

9.9
18.3
8.1
10.3

10.8

1. Based on index for all urban consumers.
2. Changes are from final month of preceding period to final month of
period indicated; monthly changes at simple annual rates.
3. Include home maintenance and repairs items of homeownership costs.
4. BLS experimental index for "All items"-CPI-U-X1--which uses a rent
substitution measure for homeownership costs.

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1
Relative
importance
Dec. 1981
Finished goods
Consumer food
Consumer energy
Other consumer goods
Capital equipment
Intermediate materials 2
Exc. energy

1982
1980

1981

100.0
21.9
12.7
44.6
20.8

11.8
7.5
27.8
10.4
11.4

7.1
1.4
14.1
7.1
9.2

.9
6.1
-18.5
3.9
2.4

94.7
77.6

12.4
10.1

7.4
6.6

June

July

4.1
11.5
-15.7
5.3
6.2

12.6
5.5
49.1
8.3
9.5

6.9
-17.7
69.0
3.6
5.6

-1.8
.1

-1.4
.4

3.8
-1.7

6.1
-1.2

Crude Materials

Food

50.7

8.6

-14.0

23.3

24.3

-7.8

-32.7

Energy
Other

33.6
15.7

26.9
7.5

22.8
-11.4

-5.8
-40.3

2.0
24.9

12.1
-4.0

11.5
12.6

1. Changes are from final month of preceding period to final month of
period indicated; monthly changes at simple annual rates.
2. Excludes materials for food manufacturing and animal feeds.

II-19

houses later this week.

A summary of these bills and of recent budget

actions leading to the Mid-Session Review is included in appendix II-A.
State and Local Government
Outlays by state and local governments continue to be weak.

Pre-

liminary second quarter data show real purchases virtually unchanged
after falling at an annual rate of 1 percent in the first quarter.
tion activity continued to drop; in real terms

Contruc-

the cumulative decline

in new construction from January to June has been 5.1 percent.
Budget problems are still plaguing a number of states despite retrenchment on the spending side and numerous tax and fee increases.
Although only a few states actually expect to end fiscal year 1982 with
a deficit, reserves have declined from 4.5 percent of expenditures in
fiscal year 1981 to an estimated 1.5 percent in fiscal year 1982, according
to a survey by the National Governors Association and the National Association of State Budget Officers.
sidered to be a safe margin.

Generally, a reserve of 5 percent is conPartly as a result of budget-balancing

measures, state and local personal taxes increased at a 6.6 percent annual
rate in the second quarter and indirect business taxes rose at a 12.2
percent annual rate.
Prices
Despite increases in the CPI of 1 percent in each of the past two
months, this year's moderation in inflation continues to be fairly broadbased.

The rapid rise in consumer prices in May and June reflected a

sharp bounceback in gasoline prices and very large increases in the CPI
measure of house prices.

Excluding the volatile food, energy, and home-

ownership figures, inflation in the consumer sector since December was the

II-20

lowest half-year rate in more than four years.

At the producer level,

price increases for investment goods also have slowed dramatically in
the face of deteriorating sales in the capital goods industries.

More-

over, a decline in materials costs during the first half of 1982, along
with sharply reduced labor cost increases, promises further improvement
in the inflation picture.
Homeownership costs continued to boost the official CPI in June,
but the home price index has become increasingly unreliable.

The CPI

home price index rose 12 percent at an annual rate in the first half of
1982, far more than the 3 percent rise indicated by more comprehensive
measures.

The CPI mortgage interest rate index has remained near an

implied level of 15 percent for several months.
Food price increases in May and June were larger than in the two
preceding months, owning mainly to sharp advances in retail meat prices;
but inflation rates remained very low for consumer foods other than

meats.

The spurt in meat prices appears to have lost some of its

momentum around mid-year as cattle prices plummeted in the July PPI,

while hog prices also turned down.

In addition, at the farm level, grain

and soybean prices have tumbled as prospects for another good harvest
have become more certain.

If maintained, declines in crop prices will

help contain cost pressures in the food sector in the coming year, but

they are also cutting deeply into farm proprietors' profits.
Retail gasoline prices increased more than 5 percent in June, but
recent surveys indicate they have since been relatively stable.

Further-

more, spot prices of petroleum appear to have remained steady at levels

below the official OPEC prices.

II-21
SELECTED MEASURES OF COMPENSATION, PRODUCTIVITY,
AND COSTS IN THE NONFARM BUSINESS SECTOR
(Seasonally adjusted annual rates)
1981
1980

1981

1982
Q4

Dec. 1981July 1982

Hourly Earnings Index - production workers1
Total private nonfarm
Manufacturing
Contract construction
Transportation and
public utilities
Trade
Services

9.6

8.4

8.5

7.3

6.5

6.3

6.2

10.9
7.7

8.8
8.1

8.7
8.9

7.7
8.8

8.7
9.0

6.7
2.4

7.5
4.7

9.3
8.8
9.5

8.5
7.1
9.1

6.4
8.0
9.3

7.7
4.3
9.2

7.4
3.8
5.1

5.9
6.3
7.4

4.4
4.3
7.4
1981-Q4 to
1982-Q1

Employment Cost Index, wages and salaries - all persons 2
Total
By Occupation:
White collar
Blue collar
Service Workers
By Bargaining Status:
Union
Nonunion

9.0

8.8

8.4

7.7

8.7
9.6
8.1

9.1
8.6
8.3

7.5
9.3
8.5

9.1
6.9
6.5

10.9
8.0

9.6
8.5

10.4
7.7

8.9
7.7

n.a.

7.2

7.2
6.4
7.9

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

7.2
6.4
7.9

7.1
6.5

n.a.

7.1
6.5

10.6
.3
10.2

8.8
-.1
8.9

n.a.

1981-Q4 to
1982-Q2

Labor Productivity and Costs - all persons1

Compensation per hour
Output per hour
Unit labor costs

Year-todate

9.0
-.3
9.3

7.3
-3.5
11.2

10.1
2.6
7.4

8.0
2.4
5.6

1. Changes over periods longer than one quarter are measured from final quarter of
preceding period to final quarter of period indicated. Quarterly changes are at compound
rates; monthly changes are not compounded.
2. Percent change from final month of previous period, compounded. Seasonal adjustment
by FRB staff.

II-22

Wages and Productivity
A broad range of measures indicate a continued deceleration in
wages during 1982-H1 in response to unemployment rates that have now
exceeded 7 percent for more than two years, as well as to the drop in
inflation.

The rate of increase in the hourly earnings index, which

had slowed more than 1 percentage point during 1981, has decelerated
a further 2 percentage points to a 6.2 percent rate so far this year.
While this measure only covers the wages of production workers, the
latest quarter's data from the employment cost index show that the slowing also has occurred in salary rates for white collar workers.

The

broadest measure of labor costs, hourly compensation, which covers both
wages and fringes, is now rising about 1 percentage point slower than
last year.
Wage concessions, defined as any agreement significantly less than
traditional wage-setting practices, are one part of this slowing.

These

concessions have now affected more than 10 percent of the unionized workforce.

While scheduled adjustments have continued to boost union wages

by more than 4 percent a year, the contribution of both new settlements
and COLAs has declined dramatically.

Halfway through a heavy bargaining

year, increases in wage rates provided by new settlements have averaged
only 2.7 percent over the life of the contract (excluding COLAs); this
compares with the 7.7 percent increases these same parties received when
they last bargained almost three years ago.
A cyclical productivity rebound in the first half of 1982 also has
eased the pressure of higher compensation costs on prices.

Output per

II-23

NEGOTIATED WAGE-RATE CHANGES
UNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS 1
(Percent change)

Same parties
as during 1982 1982
under prior
First
1981 settlements 6 months

1980
All Industries
First-year adjustments
Average over life of contract

3.0
2.7

9.5
7.1

9.8
7.9

7.7
6.0

3787

2295

---

Contracts with escalator provisions
First-year adjustments
Average over life of contract

8.0
5.0

8.2
5.5

n.a.
n.a.

Workers affected (in thousands)

2268

612

11.7
10.3

10.8
9.1

n.a.
n.a.

7.2
6.8

1489

1683

---

516

Workers affected (in thousands)

Contracts without escalator provisions
First-year adjustments
Average over life of contract
Workers affected (in thousands)

1885

1.4
1.2
1369

1. Contracts covering 1,000 or more workers; estimates exclude potential gains
under cost-of-living clauses.

EFFECTIVE WAGE CHANGE IN
MAJOR UNION CONTRACTS
Contribution of:
COLA
New Settlements
Prior Settlements

n
1976

F""
1977

1978

ssg

1979

1980

1981

1982 HI1

II-24

hour grew 2-1/2 percent in both the first and second quarters.

A surge

in productivity growth is common during the latter stage of a recession
when output stabilizes while employers continue to cut labor input in
lagged response to earlier output declines.

Appendix II-A
THE FEDERAL BUDGET AT MID-SESSION

The Administration released its Mid-Session Review of the budget,
required by the Budget Act of 1974, late in July. This review updated
its February budget to take into account actual economic developments
thus far in the current year, and to incorporate minor program revisions
and technical re-estimates.
For 1983, the economic assumptions that
underlie the budget estimates were revised to reflect the rates of
growth of nominal and real income and the interest rates assumed by
the Congress in its First Concurrent Resolution on the budget. The
budget totals (but not individual components) also were adjusted to
reflect the aggregate amount of deficit-reducing measures in the Congressional budget resolution, as these involved both slightly larger
spending reductions and larger revenue raising measures than were
assumed in the Administration's original 1983 budget proposals. Table 1
compares the deficit-reducing measures in the Administration's February
budget and in the Congressional resolution.
At about the same time that the Administration released its MidSession Review, the Director of the Congressional Budget Office (CBO)
indicated in testimony that a preliminary review by CBO of the economic
outlook and budget prospects suggested that federal budget deficits in
fiscal years 1982 and 1983 would exceed those in the Congressional resolution. Tables 2 and 3 show that a major element in the upward revisions in the estimates of the deficits for these two years, by both the
Administration and CBO, has been a weaker economic outlook; forecasts
of inflation have also been lowered somewhat.
In the Mid-Session Review, the Administration emphasized that it
attached high priority to the achievement of the deficit-reducing meaSince the
sures contained in the Congressional budget resolution.
Mid-Session review was released, House-Senate Conference committee
action has been completed on two bills that implement parts of these
measures; votes on these bills are expected in both houses of the
Congress this week. One of these bills contains the revenue-raising
measures and the reductions in entitlements under the jurisdiction of
the Senate Finance and House Ways and Means committees. This bill is
reported to contain provisions that reduce spending for entitlement
programs by a cumulative amount of $15.2 billion (principally medicare
(It would also raise outlays by
and medicaid) over three years.
liberalizing extended unemployment compensation in high-unemployment
Revenues are reported to be raised by a cumulative total of
states.)
$98.3 billion over the same period. The revenue-raising provisions do
not change the reductions in personal income tax rates enacted last
year but do scale back some of the business depreciation, investment
tax credit, and leasing provisions in the Economic Recovery Tax Act
(ERTA) of 1981.

Under the provisions of the revenue-raising bill:
o Individual income tax provisions would be tightened by
-- limitations on deductions for medical expenses and
insurance and uninsured casualty losses
-- an expanded alternative minimum tax (the add-on minimum tax would be eliminated)
-- limits on contributions and benefits available under
pension plans
o Excise taxes would be increased by raising the cigarette tax
from 8 to 16 cents a pack, raising the tax on telephone services from 1 to 3 cents for 1983-85 (after which, it would
be removed), and raising the airline ticket tax from 5 to 8
percent (plus increases in other taxes related to air travel).
o Corporate taxes would be raised by
-- reducing the depreciable value of investments by half
the amount of the investment tax credit (or reducing the
amount of the credit utilized) and cancelling the further
acceleration of depreciation scheduled to take
place in 1985 and 1986
-- limitations on leasing provisions in ERTA and expiration
of the ERTA leasing provisions entirely for property
placed in service after 1983; conventional leasing rules
would be liberalized after 1983
o Corporate tax revenues would also be raised by tightening
specialized provisions including
-- reduction by 15 percent in the value of certain tax preferences, including percentage depletion for coal and
iron ore, bad debt reserves, Domestic International
Sales Corporations, pollution control facilities, and
interest on debts used by financial institutions to
carry tax-exempt securities acquired after 1982
-- tighter limitations on the use of industrial development
bonds and disallowance of "small-issue" industrial development bond use after 1985
-- tighter provisions pertaining to mergers and acquisitions;
-- a requirement that businesses capitalize construction
period interest and taxes for nonresidential property;
-- restrictions on the deferral of taxes on income from
longer-term contracts
-- limitations on favorable tax treatment for life insurance
companies through use of co-insurance
-- some reduction in the tax advantages to companies operating in Puerto Rico
-- tightened treatment of original issue discount bonds

II-A-2

o Tax compliance would be increased by
-- imposing a withholding tax of 10 percent on interest and
dividends; exceptions would be made for low income individuals and most elderly and for interest of less than
$150 per year from any single institution
-- stricter reporting of restaurant tips
-- acceleration of corporate tax payments within the year
when the liability is incurred
This bill also would extend the targeted jobs credit for hiring certain
hard to employ groups; the credit, which had been scheduled to expire,
would apply to individuals who begin work before 1986.
The second bill that implements a portion of the outlay reductions
contained in the Congressional budget resolution would delay cost of
living increases for federal pensioners, limit price supports for farm
products, and make further cuts in the foodstamp program. Extremely
preliminary estimates of the outlay reductions that would result from
this bill are reported to total about $13 billion over three years.
The remaining outlay reductions assumed in the Congressional
budget resolution are to be achieved by limiting annual appropriations
below current services levels, administrative management measures to
reduce costs and the lower estimates interest costs below baseline
assumptions as a result of smaller deficits to be financed and a
projected response of interest rates to the improved deficit outlook.
Congressional action on the appropriations bills is in a very early
stage.

II-A-3

Table 1
BUDGET REDUCTION INITIATIVES
(unified budget; fiscal year; billions of dollars)

1983

Administration

7.8

Defense (excluding pay and retirement)
1.4

Federal pay

Congress

5.1

Discretionary appropriated programs

11.5

5.9

Entitlements

12.8

6.6

Management initiatives

13.4
1.2

User fees (offsetting receipts)

13.7
1.1
1.2

Other
40.3

Subtotal

41.4

2.7

14.5

43.0

55.9

Revenue Increases

12.8

20.9

TOTAL DEFICIT REDUCING MEASURES

55.8

76.8

Interest
Total Outlay Reductions

II-A-4

Table 2
REVISIONS OF THE ADMINISTRATION'S BUDGET ESTIMATES
(fiscal years, billions of dollars)

1982

1983

725.3

757.6

+4.7

+10.5

Outlays
February Estimate
Technical re-estimates and minor
program changes1
Economic assumptions
Unemployment compensation
Net interest
Social security (lower inflation)
Other
Subtotal, economic assumptions
Adjustment for Budget Resolution 2
Mid-Session Review Estimate

+0.7
+0.2
-0.4
+0.4
+0.9
731.0

+1.7
-2.5
-1.0
-0.7
-2.5
-4.1
761.5

626.8

666.1

+6.3
-11.0

-0-27.6

Receipts
February Estimate
Technical re-estimates and minor
program changes
Economic assumptions
Adjustment

for Budget Resolution

Mid-Session Review Estimate

+8.1

622.1

646.5

98.5
108.9

91.5
115.0

Deficit
February Estimate
Mid-Session Review Estimate

1. The largest component is upward revisions of Commodity Credit
Corporation outlays.
2. Includes effect on interest outlays of larger deficit reducing
measures.
Note:

Details do not add to totals due to rounding.

II-A-5

Table 3
CBO REVISIONS OF DEFICIT ESTIMATES

(fiscal years; billions of dollars)

Congressional Resolution target
Technical re-estimates1
Economic assumptions 2

1982

1983

-105.7

-103.9

-8.1

-12.5

Current CBO Deficit Estimate 3

-109 to -114

-25 to -35
-141 to -151

1. Re-estimates by CBO of those parts of the Congressional budget
resolution not based on CBO estimating techniques. These re-estimates
do not reflect new information received by CBO in conjunction with the
Administration's Mid-Session Review; that information is currently
being evaluated by CBO.
2. Reflects a preliminary CBO forecast made in July and subject to
revision and updating for subsequent data.
3. The deficit range for 1982 reflects CBO's assessment of data available
through mid-June on actual receipts and outlays for the year to date.

II-A-6

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

1981
Feb.
Highs

1982
FOMC
July 1

Aug. 17

20.06

15.61

14.81

10.28p

-5.33

-4.53

Treasury bills
3-month
6-month
1-year

17.01
15.93
15.21

14.57
14.36
13.55

12.55
12.90
12.72

8.05
9.39

-6.52
-4.97

9.84

-3.71

-4.50
-3.51
-2.88

Commercial paper
1-month
3-month

18.63
18.29

15.73

14.61
14.61

9.38
9.88

-6.35
-5.73

-5.23
-4.73

Large negotiable CDs3
1-month
3-month
6-month

18.90
19.01
18.50

15.94

14.87
15.16
15.29

9.87
10.16
11.00

-6.07

-5.00

16.14
16.18

-5.98
-5.18

-5.00
-4.29

2
Eurodollar deposits
1-month
3-month

19.80
19.56

16.36

15.66

10.80

16.53

16.28

11.58

-5.56
-4.95

-4.86
-4.70

21.50

17.00

16.50

14.50

-2.50

-2.00

14.46
14.20

14.18

12.84
13.03

9.40
11.20

-4.78
-2.82

-1.83

12.21
12.65
12.42

-2.95
-2.30
-2.38

-2.47

Highs

Change from:
Feb.
FOMC
July 1
Highs

Short-term rates
Federal funds

Bank prime rate
Treasury bill futures
Sept. 1982 contract
Mar. 1983 contract

15.61

14.02

-3.44

Intermediate- and longterm rates
U.S. Treasury (constant maturity)
16.59
3-year
15.84
10-year
15.20
30-year

15.16
14.95
14.80

14.68
14.40
13.90

Municipal (Bond Buyer)

13.30

13.44

12.58

11.864

-1.58

-. 72

Corporate--Aaa utility
Recently offered

17.72

16.34

16.00e

14.50p

-1.84

-1.50

18.63
1981

17,66

16.735
1982

16.445

S&L fixed-rate mortgage commitment

Highs

FOMC
July 1

Stock Prices
1,024.05
Dow-Jones Industrial
79.14
NYSE Composite
380.36
AMEX Composite
223.47
NASDAO (OTC)
1. One-day quotes except as noted.
. Averages for statement week closest to date
. Secondary market.

Aug. 17

-1.75
-1.48

-.29
-1.22
Percent change from:
FOMC
1981
July 1
Highs

+3.5
-19.8
831.24
-.2
-21.1
62.41
-2.0
-35.8
244.30
-4.9
-27.4
162.28
4. One-day quotes for preceding Thursday.
shown. 5. One-day quotes for preceding Friday.
p--preliminary. e--estimated.

803.27
62.51
249.40
170.60

DOMESTIC FINANCIAL DEVELOPMENTS

M1 was unchanged during July, and moved within the upper bound of
its 1982 growth range for the first time.

Although M2 and M3 continued

to exceed targeted levels, the weakness in transactions deposits resulted
in a substantial decline in adjustment borrowing at the discount window.
The System gave further impetus to an easing of money market conditions
through three one-half percentage point cuts in the discount rate.
Federal funds, which generally traded in the neighborhood of 14-3/4
percent at the time of the last FOMC meeting, most recently have been in
the 10 percent area.

Other short-term market rates have declined 3 to 5

percentage points during the intermeeting period, reaching the lowest
levels since the summer of 1980.

Taxable long-term bond rates have fallen

about 1-1/2 percentage points; about one-third of the decline occurred on
August 17.

The term structure of rates has assumed an extraordinarily

sharp upward slope in the maturity range under two years, evidencing market
expectations that security yields will be rising considerably in the months
ahead.
One reason for this bearish outlook is the trajectory of the federal
budget.

Treasury borrowing expanded sharply in July and early August in

order to help finance a record deficit for the third quarter and to build
up cash in anticipation of another massive fourth-quarter shortfall.

State

and local governments, meanwhile, have continued to borrow heavily, mainly
in the form of revenue bonds.

Nonfinancial business firms appear to have

continued raising funds in roughly the same volume as in the first half of
the year, with high bond rates remaining a deterrent to long-term financing.
Residential mortgage commitment and lending activity has remained quite
III-1

III-2
MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted) 1
1981
Q4

1982
Q1

-Percentage
Money stock measures
1. M1
2
2. (M1)
3. M2
4. M3
Selected components
5. Currency
6.

Demand deposits

7. Other checkable deposits
8.
9.
10.
11.
12.
13.
14.
15.
16.
1

M2 minus M1 (9+10+11+14)
3

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer
money market mutual fund shares,NSA
Commercial banks
savings deposits
small time deposits
Thrift institutions
savings deposits
small time deposits
minus M2 (18+21+22)
Large time deposits
4
at commercial banks, net
at thrift institutions
Institutions-only money market
mutual fund shares, NSA
Term RPs, NSA

28.

U.S. government deposits at commercial
7
banks

June

July

change at annual rates--

10.4
9.5
9.8
8.7

3.3
3.6
9.5
10.7

-2.4
0.8
10.7
10.9

-0.3
2.7
6.6
9.0

0.0
-3.7
9.3
12.5

5.0
4.7
9.6
10.3

4.3

7.9

9.3

10.5

9.4

3.7

8.2

-0.2

-0.5

-5.8

-2.1

-8.3

-2.1

-3.4

27.6

49.5

19.6

-21.7

6.9

-1.4

26.2

9.9

9.5

11.5

14.9

8.7

12.2

11.0

-44.1

63.6

-8.4

71.3

8.4

25.5

74.2
10.3
-11.9
20.8
1.5
-11.7
6.6

33.8
9.4
8.7
9.7
1.6
10.2
-1.5

20.9
17.2
2.0
23.8
6.0
0.6
8.1

17.8
14.2
-1.5
20.8
10.9
3.2
13.9

31.4
9.9
-4.5
15.8
2.4
-3.2
4.5

19.2
13.9
-21.8
28.5
10.0
-19.0
20.7

11.2

3.3

16.6

12.1

20.8

28.5

3.5
0.2
19.5

8.9
6.1
21.6

19.0
19.8
15.5

16.3
20.4
-4.1

25.8
26.9
20.5

26.3
31.3
4.0

17.2
17.4
16.4

132.8
0.0

-2.5
-29.9

15.2
3.7

49.5
-66.7

32.9
-48.3

106.8
-50.3

23.7
-22.0

-Average
MEMORANDA:
23. Managed liabilities at commercial
banks4 (24+25)
5
Large time deposits, gross
24.
5
Nondeposit funds
25.
26.
Net due to related foreign
5
institutions, NSA
5 ,6
Other
27.

May

QIV. '81
to
July '82

monthly change in billions of dollars-

0.2
-0.2
0.4

0.4
2.7
-2.3

6.3
5.8
0.5

10.9
8.3
2.6

6.4
10.7
-4.3

-2.3
2.7

-2.3
0.0

0.4
0.1

1.8
0.8

-4.6
0.3

0.8

1.9

-5.4

-1.4

-2.5

1.7

1. Quarterly growth rates are computed on a quarterly average basis. Dollar amounts shown under memoranda for
quarterly changes are calculated on an end-month-of-quarter basis.
2. M1 seasonally adjusted using alternative model based procedure applied to weekly data.
3. Overnight and continuing contract RPs issued to the nonbank public by commercial banks, net of amounts held
by money market mutual funds, plus overnight Eurodollar deposits issued by Caribbean branches of U.S. member
banks to U.S. nonbank customers. Excludes retail RPs, which are in the small time deposit components.
4. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
5. Adjusted for shifts of assets and liabilities to International Banking Facilities (IBFs) which affected
flows from December 1981 to June 1982.
6. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities
under agreements to repurchase and other liabilities for borrowed money (including borrowings from the
1 Reserve and unaffiliated foreign banks), loans sold to affiliates, loan RPs and other minor items.
are partially estimated.
7. Consists of Treasury demand deposits at commercial banks and Treasury note balances.

III-3

weak, while consumer installment credit has continued a pattern of slow
growth.
Although the shocks of recent business and financial institution
failures appear not to have significantly disrupted credit flows on a
macro level, financial markets have been marked by a considerable unease
and volatility.

Lenders have exhibited some heightened quality conscious-

ness, and risk premiums have increased in several sectors--most dramatically in the commercial paper market, where the rate spread between
medium- and highest-quality paper has become the widest since 1974.

contrast to 1974, however, there has not been a general closing of the
commercial paper or bond markets to lower-rated borrowers, and on the whole
non-price rationing by lenders has been limited to a fairly selective culling of questionable credits.
Monetary Aggregates and Bank Credit
During July, M1 was unchanged on a monthly average basis, after two
months of slight decline.1

Outflows from demand deposits slowed in July,

but currency growth decelerated from the pace of previous months and OCDs
declined slightly.

The recent behavior of M1, given the sharp drop in

short-term interest rates, suggests a continued unwinding of the bulge in
M1 demand that occurred during late 1981 and early 1982.
Concurrent with the weakening in OCDs, there has been a renewed runoff in regular savings deposits.

Passbook balances at all depository

1. The monetary aggregates table also includes an alternative seasonally
adjusted M1 now being published on an experimental basis. This alternative measure, which exhibits somewhat smoother month-to-month changes,
registered slower growth than the current M1 series in the first few
months of 1982. Since April, however, the alternative measure has
tended to grow more rapidly, despite a 3-3/4 percent rate of decline in
July.

III-4

institutions fell at an annual rate of more than 20 percent in July, the
first substantial outflow since last October.

However, a sharp increase

in small-denomination time deposits during July more than offset the weakness in savings balances and largely accounted for a pickup in the nontransactions component of M2.

As a result, M2 growth accelerated to a 9-1/4

percent annual rate in July--just a shade below the pace of the first half. 1
The surge in small time deposits was evident at both commercial banks
and thrifts, but commercial banks gained a proportionately larger share,
likely owing to their relatively better performance with 6-month MMCs.

Con-

cerns about the health of thrift institutions may have allowed banks to compete more favorably for these accounts, on which there is no rate differential.

General purpose and broker/dealer MMMF shares picked up sharply

towards the end of July and in early August, as their yields became attractive relative to more rapidly declining short-term market rates.
M3 growth accelerated to a 12-1/2 percent annual rate in July.

addition to more rapid expansion in its M2 component, this increase reflected continued heavy sales of large CDs and sharply larger inflows into institution-only MMMFs.

In July, rate spreads favored increased use by banks of

domestic CDs to fund assets booked at affiliated offices abroad.

In addi-

tion, some institutions reported seeking CD funds as a precaution against
1. M2 velocity likely will fall again in the current quarter, marking the
fourth consecutive quarterly decline. Substantial declines in M2 velocity of the sort seen in the past year have occurred earlier in the
postwar era only during periods of reintermediation when interest rates
fell below Regulation Q ceilings; however, the present composition of M2
suggests that this pattern may be much less important now. The emergence
of high real rates and the prevailing economic uncertainties may have
caused households to shift their portfolios toward financial assets in
general, and especially toward the relatively safe short-term assets
encompassed by M2.

III-5

possible liquidity problems in the wake of recent bank and security firm
failures.
A bulge in risk premiums that developed on CDs relative to Treasury
bills in late June and early July--around the time of the Penn Square failure--had largely disappeared prior to the Lombard-Wall bankruptcy announcements on August 12 when it widened again, but only briefly.1

In recent

weeks liquidity problems have not required an unusual amount of discount
window use.

Just a few of the thrift institutions that were uninsured

depositors in Penn Square have borrowed, and only Abilene National Bank,
which was merged with another bank on August 6 because of its own loan

problems, has required quantitatively significant assistance.

Adjustment

plus seasonal borrowing has averaged about $400 million (daily average
basis) thus far in August, versus $1.1 billion in the month of June.
Bank credit grew at a 6-1/2 percent annual rate in July, slightly
faster than in June but below the pace of earlier months.

The rise

involved a moderate increase in holdings of U.S. Treasury securities at
both large and small banks--with growth at large banks primarily in trading accounts--together with stepped up growth in consumer loans and the
first expansion in security loans since March.

The increase in consumer

1. However, some of the specific banks that had large loan losses associated with the Penn Square and Lombard-Wall failures reportedly still are
facing resistance in selling short-term liabilities, most notably Continental Illinois and, more recently, Chase Manhattan. In recent weeks, secondary market quotes on Continental's CDs have ranged from 50 to as much as
170 basis points above CD rates paid by top tier banks. As alternatives
to the CD market as a source of funds, Continental has tapped the Eurodollar
and the federal funds markets, and has obtained money through its Edge Act
subsidiary. Rates on Chase's CDs reportedly have been as much as 40 to 50
basis points above those of other top tier banks, in response to their
heavy issuance of CDs and also to reports of their losses related to the
Penn Square and Lombard-Wall problems.

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data) 1

____

1982

1vt I

June

May

-Commercial

July

QIV '81
to
July '82

Bank Credit--

1. Total loans and investments
at banks 2 '3

6.4

10.1

7.9

9.0

5.1

6.4

8.7

4.8

5.7

4.7

2.1

1.7

2.4

4.7

11.5

4.9

-3.1

-5.2

7.3

6.7

4.8

4.6

5.1

0.0

3.7

Investments

Treasury securities

-7.8

Other securities

11.2

Total loans2,3
3

2.8

6.9

11.5

9.0

11.3

6.4

7.6

10.0

9.2

16.8

14.9

19.1

14.5

9.6

15.0

-18.3

-26.8

-17.2

-64.1

92.3

1.4

2
Business loans ,

Security loans

Real estate loans

7.3

7.8

6.6

6.5

7.3

6.8

Consumer loans

4.1

2.8

3.0

3.2

2.6

5.7

3.7

58.6

-Short10.

11.
12.

Total short- and intermediateterm business credit (sum of
lines 14, 15 and 16)
Business loans net of bankers
acceptances 3
Commercial paper issued by non5
financial firms

and Intermediate-Term Business Credit--

15.2

13.1

18.5

10.6

n.a.

16.5

15.8

19.9

18.0

11.0

15.5

21.3

30.0

16.8

33.1

38.2

27.7

13.8
9.3

2.0

n.a.

13.

Sum of line 11 & 12

10.8

18.2

15.9

21.7

15.9

14.9

17.0

14.

Line 13 plus loans at foreign
6
branches

14.0

18.5

15.7

23.1

13.6

14.9

17.4

-1.5

10.5

n.a.

11.7

-6.6

n.a.

15.
16.

Finance company loans to business

7.6
7

Total bankers acceptances outstanding

20.9

1.0
11.7

1.5
10.2

1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Loans include outstanding amounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and unconsolidated nonbank
subsidiaries of the holding company.
3. Adjusted for shifts of assets and liabilities to International Banking Facilities (IBFs) which effected flows
from December 1981 to June 1982.
4. Growth of bank credit from the FOKC's December-January base through July 1982, not adjusted for shifts of asseti
from domestic offices to IBFs, was at an annual rate of 7.8 percent. Adjusted for such shifts after January, growtl
over this period was 8.6 percent.
5. Average of Wednesdays.
6. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
7. Based on average of current and preceding ends of month.
n.a.-not available.

III-7

loans was the largest since last December.

In contrast, real estate loans

showed almost no growth, and the pace of business lending slowed.
Business Finance
Nonfinancial firms continued to raise a substantial amount of funds
in credit markets during July, with the monthly pace probably approximating
the average for the first half of the year.

Most borrowing continued to be

concentrated in shorter maturities, but--as open market yields fell sharply
below the bank prime rate--there was a shift away from domestic banking

offices toward commercial paper and to a lesser degree foreign branches.
The prime rate has fallen from 16-1/2 to 14 percent; even so, it remains
at a large spread over commercial paper and CD rates.
Corporate bond issuance picked up somewhat in July; there are indications of another spurt currently in response to the recent market rally.
Public offerings reached almost $3 billion in July, on a seasonally adjusted
basis.

Most of this volume comprised issues by industrial and financial

concerns, and $1.1 billion of it was in the form of extendable notes. 1
Much of the conventional longer maturity bond financing was undertaken by
electric utilities.

Although the monthly volume of Eurobond offerings by

U.S. corporations in June and July was substantially less than during earlier months in 1982, the pace of such financings appears to have quickened
in recent weeks.
Stock prices declined in July and early August, but a large portion
of this drop was offset by the spectacular August 17 market rally.

Despite

1. The interest rate on an extendable note is reset periodically--most commonly every 1 to 3 years--and investors have a put option on those occasions.
If the maturities of such notes are categorized by the length of the extension intervals, then about two-thirds of public bond issues in July had
maturities of less than five years.

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly totals or monthly averages, millions of dollars)

1981
Year

1982
1qi

June

July

------------Seasonally adjusted---------Corporate securities--total
Securities sold in U.S.
Publicly offered bonds
Privately placed bonds
Stocks
Securities sold abroad 1

6,347

6,135

5,998

2,702

5,594

5,833
3,138
582
2,113

4,723
2,088
725
1,910

4,621
2,062
333
2,226

2,509
778
514
1,217

5,295
2,954
644
1,697

514

1,412

1,377

193

299

--Domestic offerings, not seasonally adjusted-Publicly offered bonds--total 2
By industry
Utility
Industrial
Financial
By quality 3
Aaa and Aa
A and Baa
Less than Baa
No rating

3,138

1,873

2,463

1,500

3,300

1,079
1,192
867

693
464
716

935
587
941

790
310
400

750
1,450
1,100

1,182
1,448
226
282

528
928
228
189

932
1,086
196
249

505
535
260
200

1,500
1,300
135
365

169

150

910
297

1,129
394

121
99

300
103

2,113

1,865

2,105

1,500

675
1,053
385

642
985
238

972
577
556

330
940
230

500
450
550

Memo items:
Convertible bonds
Original discount bonds
Par value
Gross proceeds
Stocks--total
By industry
Utility
Industrial
Financial

p--preliminary.
1. Notes and bonds, not seasonally adjusted.
2. Total reflects gross proceeds rather than par value of original discount bonds.
3. Bonds categorized according to Moody's bond ratings.

III-9

July's lower share prices, stock issuance rose last month on a seasonally
adjusted basis, mainly because of increased offerings by utilities and
financial concerns.

Banks in particular have been making a considerable

effort to raise primary capital over recent months, and two large issues
of preferred bank stock accounted for a substantial share of the financial
stock offerings.
New stock issues related to the retirement of outstanding bonds-transactions that reduce debt-equity ratios and that are known as debtequity swaps--averaged just under $300 million per month during the first
half of the year.
firms.

Most of these transactions were undertaken by industrial

Preliminary data for July indicate a considerable slowing in such

transactions, which became less attractive because of the rise in bond
prices and the general decline in stock prices then.

Some other companies

have removed debt from their balance sheets by "defeasance"--effectively
offsetting the liabilities with binding commitments of cash or other assets.
Both of these methods permit firms to boost current reported earnings by
realizing a capital gain on their outstanding deeply discounted debt, but
the transactions produce a smaller tax liability than would be incurred by
a straight liquidation of debt.
Ouality rate spreads on corporate security yields have exhibited mixed
movements against a backdrop of numerous dividend reductions and omissions,
adverse rating actions, and business failures.

The rate spread between

high- and medium-quality commercial paper has widened substantially since
the last FOMC meeting, reaching 163 basis points, but the quality spread
in corporate bond yields has not widened and lower-rated issuers still
appear to have access to the primary market.

III-10
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)

1982
July e

June

Aug. f

Q3 e

-8.2

-44.6

4.5

-20.7

-17.5

8.9

48.6

3.2

14.5

21.2

11.0
-.4
11.4
-2.1

50.5
24.0
26.5
-1.9

4.2
-.3
4.5
-1.0

15.4
6.2
9.2
-.9

21.7
11.4
10.3
-.5

2.0

-6.3

-3.1

11.0

17.3

11.0

10.4

2.3

-4.6

5.6

6.4

2.9

1.8

1.1

FNMA

2.6

Farm Credit Banks

1.7

1.2

-. 1

Treasury financing
Combined surplus/deficit(-)
Means of financing deficit:
(1) Net cash borrowing
from the public
Marketable borrowings/
repayments(-)
Bills
Coupons
Nonmarketable
(2) Decrease in the cash
balance
Memo: Cash balance
at end of period
(3) Other 2

-2.7

Federally sponsored credit
agencies net cash borrowing 3
FHLB

Other

3.0

-4.4

-. 2

2.9

-1.0

e--estimated.
f--forecast.
1. Numbers reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Includes debt of Federal Home Loan Banks, the Federal Home Loan
Mortgage Corporation, Federal National Mortgage Association, the
Federal Farm Credit Bank System, and the Student Loan Marketing
Association. Excludes mortgage pass-through securities issued by
FNMA and FHLMC.

III-11

Government Finance
Federal Sector.

The staff estimates the combined federal budget

deficit at $44.6 billion in the current quarter, a record amount for a
third quarter.

The Treasury intends to borrow about $50.5 billion in the

market during this quarter in order to fund the deficit and to build up
its cash balance in anticipation of another large deficit in the fourth
quarter.

The staff expects the Treasury to borrow still more heavily in

the market during the October-December period; action on the debt ceiling
will be required since the temporary increase in the ceiling to $1.1 trillion, enacted late in June, will expire on September 30.
Thus far this quarter, the Treasury has raised $32.6 billion through
marketable borrowing.

The Treasury has had to rely on sales of bills and

notes because the Congress has not yet raised the statutory limit on bonds
with coupons exceeding 4-1/4 percent.1

The Treasury has raised about $10.4

billion by enlarging its regular bill auctions, $4.5 billion through the
sale of cash management bills that will mature in September, and $17.7 billion in note auctions including the mid-quarter refunding. 2
Primary dealers have provided strong support to the market since midyear, as their overall positions in Treasury securities have registered a
1. Legislation to raise the limit from $70 billion to $110 billion is
attached to the tax bill, now moving toward final consideration in both
the House and the Senate.
2. Treasury Investment Growth Receipts (TIGRs)--a novel instrument introduced by Merrill Lynch--could enhance the demand for long-term Treasury
securities. The new certificates represent participation in a trust of
$500 million of 14 percent 30-year Treasury bonds due in 2011; they combine the features of zero-coupon bonds with the credit quality of U.S.
Treasury securities. The TIGRs will be sold in two forms--serial issues
corresponding to the coupon interest on the Treasury bonds through 2006,
and a 30-year callable issue corresponding to the last 10 interest payments and the principal of the Treasury bonds.

III-12

$9.7 billion swing, from a small net short to a large net long (including

cash, futures, and forwards) through August 16.

The Lombard-Wall failure

has heightened concerns about the RP market; besides highlighting again
the need for attention to credit risks, it has also brought to the fore
long-standing questions about the legal aspects of the RP contract.

Mar-

ket reports suggest that the tiering that emerged in the RP market after
the Drysdale failure has persisted, and that firms without strong capital

positions are finding themselves cut from the lists of former RP creditors.
Borrowing by federally sponsored credit agencies totaled $9 billion
in the second quarter, and about $4 billion is estimated for July.

FNMA

borrowing picked up to $2.9 billion in July in order to finance large net
purchases of mortgages and to build liquidity.

In contrast, FHLBank bor-

rowing fell off to $600 million as an increase in deposit flows at thrifts
reduced their demands for advances.
State and Local Sector.

Yields in the municipal bond market generally

have moved down about three-quarters of a percentage point since the last
FOMC meeting.

Yields on revenue bonds have declined by less than those on

general obligation bonds, perhaps owing to the unusually large quantity of
revenue bonds sold last month.

As a result, the spread between yields on

such bonds and on general obligations widened to about 100 basis points in
July, compared with 65 to 80 basis points during most of the first half of
the year.
Although the total volume of state and local government borrowing in
July receded from the record second-quarter pace, gross issuance of taxexempt bonds was $5.6 billion (seasonally adjusted), up slightly from the
second-quarter volume, with revenue securities accounting for an unusually

III-13

large 80 percent of the total volume.

Mortgage revenue bonds--proceeds

from which are primarily intended to finance single-family housing--totaled
about $2.5 billion in July, the largest monthly volume since December 1980.1
STATE & LOCAL GOVERNMENT SECURITY OFFERINGS
(Monthly totals or monthly averages, billions of dollars)
1981

1982
e

Year
--------------Total
Long-term
Short-term

Long-term
Mortgage revenue
bonds
Short-term
e--estimate.

July

f
August

Seasonally adjusted -------------

6.80

8.45

9.35

8.70

9.40

4.00
2.80

5.25
3.20

5.20
4.15

5.60
3.10

5.40
4.00

-----------Total

Not seasonally adjusted ------------

6.80

7.05

10.15

8.40

9.00

4.00
.60

4.40
.30

5.90
.95

5.40
2.35

5.20
2.00

2.80

2.65

4.25

3.00

3.80

f--forecast.

Demand for long-term municipal bonds by institutional investors has
remained relatively weak.

Individuals have been the major purchasers of

new municipal bonds, partly through investments in shares of unit investment
trusts (UITs), and of municipal notes through tax-exempt money market funds.
Sales of UITs in July were at a record $1.1 billion, and UIT assets have
increased 25 percent thus far in 1982 to about $31 billion at the end of
1. Issuance of mortgage bonds likely was stimulated in part by falling interest rates which increase the attractiveness of mortgages provided through
these programs. In addition, volume probably was boosted by a Treasury ruling that in effect increased the arbitrage income bond issuers can earn, as
well as by an IRS announcement that removed the uncertainty about the maximum amount of such bonds that can be issued in each state this year under
existing law.

III-14

last month.

Tax-exempt money market funds have grown even more rapidly dur-

ing 1982 to about $9 billion in assets--almost double the end-of-1981 total.
These funds have absorbed a major share of the growing volume of tax-exempt
commercial paper (currently about $1.7 billion outstanding).
Mortgage Markets
Interest rates in the primary and secondary mortgage market have fallen
since early July to the lowest levels of the year.

In the primary market for

long-term loans, the average contract rate on new commitments at S&Ls for 80
percent, fixed-rate level-payment conventional home mortgages has declined
more than 40 basis points, to 16.44 percent.

As discounts dwindled on mort-

gages underwritten by the federal government, the administration reduced
rate ceilings on standard FHA and VA home mortgages by one-half percentage
point to 15 percent, effective August 9.
With nontraditional financing techniques still prevalent in the primary market, interest rates paid at closing by many homebuyers appear to
have remained substantially below rates quoted on new commitments for conventional fixed-rate mortgages. 1

At major institutional lenders, the con-

tract rate on all types of conventional first home mortgages closed in
early July averaged 15 percent, more than 180 basis points below the average rate then prevailing on new commitments at S&Ls for conventional fixedrate home mortgages. 2
1. Many home sellers have continued to provide financing at concessionary
rates, likely in return for a premium incorporated in home sale prices. The
latest (April) survey by the National Association of Realtors estimated
that 70 percent of sales of existing homes involved one or more creative
financing techniques, with interest rates on loan assumptions, "buydowns,"
and seller "takebacks" typically 3 to 4 percentage points below the market.

2. This differential continues to reflect inclusion in the average closing
rate of below-market-rate loans such as those with "blended" rates and loans
financed with mortgage revenue bonds. Moreover, the closing rate itself

(continued on page III-15)

III-15

Mortgage commitment and lending activity at depository institutions
has remained weak.

At commercial banks, growth of real estate loans slowed

almost to a halt in July, and new mortgage commitments made by savings and
loan associations during June edged up only slightly.

Growth in S&L hold-

ings of mortgage loans and mortgage-backed securities in June remained at
less than one-third the average monthly increase during the first quarter.
Both FNMA and FHLMC continue to expand existing programs and to introduce new arrangements to accommodate innovations in the primary mortgage
markets.

FNMA recently announced that, beginning September 1, FHA and VA

mortgages will be eligible for its swap program, which allows an institution to exchange existing mortgages--typically bearing low rates--for more
liquid mortgage-backed securities guaranteed by the agency.

FNMA also has

begun to issue commitments to purchase graduated-equity home mortgages
(GEMs) for its own portfolio and has announced plans to issue and guarantee
securities backed by GEMs, beginning September 1.1

FHLMC has inaugurated

a program to issue and guarantee GEM participation certificates, with
Merrill Lynch and Salomon Brothers cooperating in the origination of the
mortgages and the sale of the certificates.

FNMA and FHLMC expect the

shorter maturity and more rapid cash flow of GEMs to attract investors who
wish to avoid very long-term investments in an environment of volatile
interest rates.
somewhat overstates the average rate paid by borrowers to the extent that
it incorporates the full contract rate on "buydowns," including the portion
of the contract rate paid by the home seller as well as that part paid by
the borrower.
1. GEMs are fixed-rate mortgages involving scheduled gradual increases in
monthly payments, with increases applied entirely to reduction of principal.
Compared with an otherwise equivalent 25- to 30-year conventional fixed-rate
loan, a GEM loan substantially reduces the total interest cost to the homeowner and enables homebuyers to own their homes outright sooner.

III-16

CONSUMER INSTALLMENT CREDIT
(Seasonally adjusted annual rates)

1980

1981

1982
Ql

May

June

- - - - Percent rate of growth - - - - - Change in outstandings -- total
By type:
Automobile credit
Revolving credit
All other

0.5
0.4
2.5
-0.3

6.4

1.8

4.8

5.1

4.9

8.2
8.1
4.1

-0.7
-0.3
4.9

5.8
10.4
1.5

9.1
10.8
-0.8

6.2
10.1
1.6

- - - - - Billions of dollars - - Change in outstandings -- total
By type:
Automobile credit
Revolving credit
All other
By major holder:
Commercial banks
Finance companies
All other

1.4
0.5
1.4
-0.4

19.9
9.6
4.7
5.6

6.0
-0.8
-0.2
7.0

0.0
1.5
4.5

15.7

16.8

7.4
6.2
2.1

11.5
6.4
-1.1

-0.1
10.2
5.6

-0.2
13.5
3.4

-1.2
10.5
6.9

16.2

-7.2
8.4
0.2

2.3
13.1
4.5

Extensions -- total
By type:
Automobile credit
Revolving credit
All other

306.1

336.3

326.0

350.5

350.4

356.8

83.5
128.1
94.5

94.4
140.1
101.8

87.8
139.8
98.4

97.9
153.2
99.3

101.2
150.3
98.9

98.2
160.3
98.3

Liquidations -- total

304.6

316.5

320.0

334.8

333.6

340.7

Memo:
Ratio of liquidations to
disposable income (percent)
Ratio of extensions to total
retail sales (percent)

16.7

15.7

15.1

15.6

15.5

15.8

32.3

32.7

31.3

32.7

32.2

33.3

III-17

Consumer Credit
Consumer installment credit outstanding expanded in June at about
the same 5 percent seasonally adjusted annual rate as in May.

For the

full second quarter, consumer credit grew at a 4-3/4 percent rate, up from
1-3/4 percent in the first quarter.

Indications of a rebound in credit

growth at banks suggest that the moderate overall advance continued into

July despite the likelihood of weaker expansion at auto finance companies
and retail stores.
The revolving credit component advanced at a 10 percent rate in June,
the third consecutive month of expansion at that pace.

Stepped-up increases

of such credit at commercial banks and retailers since February have outweighed sluggishness in gasoline-card credit that has reflected recent
actions taken by several gasoline companies to discourage or preclude the
use of gasoline credit cards.
Delinquency rates on consumer installment loans at commercial banks
dropped during the second quarter to their lowest level in nine years.

steady decline in this series since the third quarter of 1980 has been
interrupted only briefly by a small rise in the fourth quarter of 1981.
Delinquencies usually climb during a recession, but this pattern has not
been repeated in 1981-82, in large part because banks did not relax their
tightened credit standards following the 1980 recession.

Similarly, the

delinquency rate on auto loans at major finance companies fell in the
second quarter to its lowest level since the series was begun in 1966.
Personal bankruptcies also declined fairly sharply in the second quarter,
when the number of cases filed was 7 percent below the peak first-quarter
total.

INTERNATIONAL DEVELOPMENTS

Foreign Exchange Markets
As shown in

the upper panel of the chart on the next page,

the weighted average value of the dollar has shown substantial variability during the last several weeks but has remained almost unchanged
on balance since the last FOMC meeting.

While the direction of exchange

rate changes closely paralleled interest rate movements on a daily
basis,

overall there has been a substantial relative decline in

interest rates.

dollar

The strength of the dollar in spite of declining

interest rate differentials apparently reflected its attractiveness as

a safe haven currency in the face of market anxieties over the bankruptcy of Banco Ambrosiano in Italy and the insolvency of the German
firm AEG Telefunken, as well as the Mexican financial crisis.
As shown in the lower panel of the chart, the differential
between rates on U.S.

CD's and average foreign interbank rates declined

by about 500 basis points and turned negative for the first time since
November 1981.

Eurodollar interest rates on maturities up to 1 year

fell by 2-1/2 to 4 percentage points during July, and have fallen
an additional 1-1/2 to 2 percentage points following the recent discount rate cut.

Several countries,

in particular the United Kingdom,

Switzerland, Canada, Belgium, and France, have experienced declines
in short term rates of 1 to 2 percentage points during the last six
weeks, while no interest rate changes have occurred in Japan and
Germany.

IV-1

STRICTLY CONFIDENTIAL (FR)
Class II FOMC
8/18/82

IV-2

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

March 1973=100
122

Daily series

120

118

S116

FOMC
June 30

II1111i

11111ii
11111111
ill IIilniI

l111111 i l1 i

nIIImi iiii

II i

I IIIIII

3-MONTH INTEREST RATES

June

August

1982

114

112

110

lii l

Iil

108

IV-3

. The Desk intervened on one occasion,
purchasing $6 million equivalent of yen and $5 million equivalent
of marks.
In early August, the Mexican government substantially raised
administered prices on certain foods and gasoline, and this was quickly
followed by labor union demands for increased wages.

Conversions

from dollars to pesos accelerated and the Bank of Mexico found it
increasingly difficult to support the prevailing level of the peso.

. On August 5 the Mexican central bank announced
a new two-tier exchange rate system for the peso.

A preferential

rate was established for most food and other "priority" imports,
and some private debt servicing.

The preferential rate was set at

49 pesos per dollar (the previous market rate) and is

expected to

IV-4

be depreciated gradually.

The free market peso fell sharply following

the announcement, with prohibitive bid/asked spreads and virtually
no trading for several days.

The establishment of the two-tier

exchange rate system failed to stop the drain on Mexico's foreign
exchange reserves, as rumors that controls would soon be instituted
were widespread,
banks.

causing liquidation of dollar balances at Mexican

Consequently, the Mexican authorities announced on August 12

that foreign exchange markets in Mexico were being closed,

that banks

were prohibited from transferring Mexican dollar accounts out of the
country, and that withdrawals from Mexican dollar accounts could
only be taken in

pesos.

In U.S. markets,

the peso is

trading at about

85 per dollar, representing a 40 percent depreciation during August
and 70 percent since the beginning of 1982.
markets remain closed in
place in

Since formal exchange

Mexico, street trading has reportedly taken

excess of 100 pesos per dollar.

On August 17 the Mexican

Finance Minister announced that $3.5 billion of foreign credits had
been obtained or were in advanced stages of finalizing, including
$1 billion from advance oil sales to the United States, $1.5
billion from western central banks, and $1 billion from the Commodity
Credit Corporation.

IV - 5

U.S. International Transactions
U.S. Merchandise Trade.

In June the U.S. merchandise trade

deficit was marginally greater than in May but the deficit for the
second quarter as a whole ($20 billion at annual rate) was slightly
smaller than in the first quarter.

Exports in the second quarter were

about unchanged from low first quarter levels and imports declined
somewhat.
The value of agricultural exports increased slightly in the
second quarter, with the volume of shipments up by 4 percent (primarily
corn and soybeans) while the average export prices of most major
commodities continued to decline in response to large supplies and
moderate demand.

U.S. Merchandise Trade*

Year

1981
Q3

236.3
44.3

230.8
39.8

230.4
42.4

222.4
42.0

222.5
42.4

228.8
43.8

229.1
41.6

192.0

191.0

188.0

180.4

180.1

185.0

187.4

264.1
77.6

262.2
72.6

267.1
72.4

246.7
62.6

242.9
53.7

254.7
50.4

259.2
61.4

186.5

189.5

194.7

184.1

189.3

204.3

197.7

-27.9

-31.4

-36.7

-24.2

-20.5

-26.0

-30.1

Volume (Bil, 72$, SAAR)
Exports - Agric.
- Nonagric.

18.1
70.5

16.7
69.3

18.6
66.6

18.5
62.6

19.2
63.0

19.9
64.4

18.9
66.2

Imports - Petroleum
- Nonpetrol.

5.9
72.1

5.7
73.9

5.8
76.3

5.0
69.8

4.5
72.5

4.3
78.2

5.1
76.8

Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Petroleum

Nonpetroleum
Trade Balance

1982
May

*/ International Transactions and GNP basis. Monthly data are estimated.

June

IV -

Nonagricultural exports were little changed in value or volume
between the first and second quarters.

In response to weak foreign

demand, lower primary commodity prices, and the decreasing competitiveness of U.S. goods as the dollar appreciated, various categories of
exports declined (civilian aircraft, metallurgical coal, construction
machinery) or continued at low first-quarter levels (other industrial
materials,particularly metals, paper, textiles). However, several items
increased strongly in the second quarter, particularly computers and
parts, and electrical/electronic machinery and parts.
The decline in imports in the second quarter was primarily the
The volume of oil imports dropped

result of a drop in oil imports.

10 percent from first quarter rates to the lowest level since the
second quarter of 1972

as U.S. demand slackened and as domestic stocks

were drawn down from high levels.

The average oil import price declined

about $1.65 per barrel to average $30.53 per barrel.

Spot prices for both

crude and products slipped to about $3 per barrel below official prices
of most OPEC countries.

OPEC failed to agree on a new pricing and out-

put structure at its meeting on July 9-10.

Despite the sluggishness of U.S. economic activity, nonoil imports
turned up in the second quarter.

Volume increases were particularly

Volume (mbd, SA)
Price ($/BBL)
Value (Bil. $, SAAR)

6.52
35.62
83.2

5.90
33.27
72.6

1982

1981
Oil Imports

5.99 5.33 4.82
32.4 32.17 30.53
72.4 62.6 53.7

Apr.

May

4.35
30.56
49.2

4.55
29.98
50.4

June
5.38
30.94
61.4

IV -

strong in foods and machinery (both from low first quarter rates).
Automotive imports from Japan decreased slightly while imports from
Germany and other countries rose somewhat from first quarter levels.
Partly offsetting these changes were declines in imports of consumer
goods and of industrial supplies (particularly steel and steel making
materials, other metals and natural gas).

While total steel imports

decreased somewhat in the second quarter,it appears that imports from
Common Market countries rose while imports from Japan and other
countries declined.
U.S. International Capital Transactions.

U.S. banking offices

(including IBFs) increased their net claims on their own foreign offices
by $2 billion in July and by $5 billion in early August (monthly average
basis, see line 1 (a) in the table below.)

A sizable increase in Euro-

International Banking Data
(billions of dollars)
1980
Dec.

1981
Dec.

Mar.

1 9 8 2
May June July

9.2
-8.9
18.1

11.0
-4.2
15.2

12.3
-0.7
13.0

16.6 14.6
2.8 1.7
13.8 12.9

9.6
-0.5
10.1

13.2
8.

13.8
9.1

14.9
10.0

14.2 14.4
9.7 10.1

15.7
10.9

93.( 103.9

113.3

Aug.4/

1. U.S. Offices' Banking

Positions Vis-a-vis Own
Foreign Offices 1/
6.5
(a) Total
-15.2
Banks
(b) U.S.-Chartered
(c) Foreign-Chartered Banks 21.7
2. Credit Extended to U.S. Nonbank Residents by Foreign
Branches of U.S. banks 2/
(a) Total
(b) New York Banks Only

4.2
2.7

3. Eurodollar Holdings of U.S.
Nonbank Residents 3/

60.8

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

1/ Average of Wednesdays, net due to own foreign office = (+).
2/ Daily averages.
3/ End of month.
4/ Through August 4.

IV - 8

dollar borrowing by one U.S. money center bank to offset runoffs of
its domestic CDs was exceeded by net outflows from both U.S. and foreignchartered banks.

The surge in net advances may have been prompted by

unusually high spreads between the cost of issuing domestic CDs and
returns available on placements in the Eurodollar interbank markets.
The functioning of the international interbank markets has been little
affected by either the Banco Ambrosiano scandal or the rumors of sizeable loan losses for Canadian and German banks.

In particular, U.S.

regional banks, which in the aggregate are large net placers of funds in
those markets, have not reduced advances to their foreign branches
over the last two months.
The Eurodollar CD market also continued to function smoothly.
At the end of July Continental Illinois was removed from the list of
prime names in the secondary market for Eurodollar CDs, but reportedly
no further tiering of rates paid by other U.S. issuers of Eurodollar

CDs has

developed.

There has been no evidence that investors have

run off Eurodollar CDs in a flight to quality.

Yields on prime Euro-

dollar CDs have remained at a level of 30 to 60 basis points above prime
domestic CDs.

Money-market mutual funds, which hold about 40 percent

of total Eurodollar CDs outstanding at London branches of U.S. banks,
have not reduced their holdings of such obligations.
Loans to U.S. nonbank residents at foreign branches of U.S.

banks have risen sharply over recent weeks as the LIBOR rate fell
sharply relative to the prime rate -- see line 3 in the table above.
These loans are concentrated at a small number of banks, mostly New
York banks, that follow a practice of booking LIBOR-priced loans in the

IV - 9

Caribbean and booking prime-priced loans at the head office.

As the

customers of these banks exercise their options under credit arrangements to switch pricing formulas,the booking location is also shifted.
During June, as the differential between the prime rate and the 3-month
LIBOR narrowed by 200 basis points, branch loans fell.

This decline

has now been reversed as the differential between LIBOR and prime
interest rates reopened.
Eurodollar holdings of U.S. nonbank residents continued to grow
at a rapid pace between March and May (most recent data available).

the first five months of the year such holdings increased by $20 billion
to a level of $113

billion.

In the March-May period holdings of Euro-

dollar CDs issued by London Banking offices increased particularly
rapidly, despite a cessation of the growth of holdings by money-market
mutual funds.

IV -

Summary of U.S. International Transactions
(in billions of dollars)
1981
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.
corp. bonds
b) Foreign net purchases (+) of U.8.
corp. stocks
c) U.S. net purchases (-) of foreign
securities
3. Foreign net purchases (+) of U.S. Treasury
obligations 1/
Official Capital
4.
Changes in foreign official reserves assets
in U.S. (+ = increase)

1982

1 9 8 1

Year
-34.7

3.3

1.4

-19.9

-1.0 -13.9

-2.5

Other 2/
5.

Changes in U.S. official reserve assets
(+ - decrease) 3/

Other transactions (Quarterly data)
6. U.S. direct investment (-) abroad
7.
Foreign direct investment (+) in U.8.
8. Other capital flow (+ = inflow) 4/ 5/
9. U.S. current account balance 5/
10.
Statistical Discrepancy 5/

-I

-4.1

Jun

-5.1

1.5

4.7

-. 1

-2.9

-5.5

-4.8

2.0

1.1

-. 7

1.6

-2.9

2.2

-1.2

1.5

2.0

.9
1.9
5.4

-6.8
5.0
-1.1

-4.6
2.7
4.1

-4.1
1.5
1.3

-1.0
.5
1.9

-4.6
-. 9

4.4
3.7

-1.3
-1.6

-2.1
4.3

-2.6
1.4

.1
1.4

.4
1.5

-3.3

-. 1

-. 4

-. 7

-1.6

-8.7
21.3
-13.9
4.5
25.8

-1.0
4.5
-1.6
0.9
-0.4

-1.0 -1.1
9.3
1.0
-3.3 -10.6
-0.9
1.2
11.2
9.5

n-e-

n.a.
n.a.

U.a.

n.a.

n.a.
na.e.

n.a.
n.a.

n.a.

n.e.

-7.8

-9.2

-5.1

-2.2

-2.5

2.5

-.8

5.1

-5.5

8.1

-10.8
12.7
3.3

-5.5
2.5
-2.5

5.0
.1

1.1

b) By type
U.S. Treasury securities

2.1

a) By area
G-10 countries and Switzerland
OPEC
All other countries

19 8_2
Apr.
a

n.a.

n.a.
n.a.
na..

n.a.

MEN0s

U.S. -rchandise trade balance - part of ine 9
(Balance of payments basis, seasonally adjusted) -27.9

-6.1

-0.4

vateor
n riden.
/ Includes U.S. Treasury notes publicly ssued o
A borrowing under repurchase agre uts.
Includes deposits tn banks, commercial paper, acceptaace.
7/ Includes newly allocated S'o
of $1.1 billion in Janary 1979; $1.2 billion in Jaary
1980, and
$1.1 billion in Janury 1981.
4/ Includes U.S. govermnt assets other than official reserves, transactions by naoabamkin concerns,
allocations of SDRs, and other bakig and official transactions not sbow elsewhere.
5/ Includes seasonal adjstment for quarterly data.
/ Less than $50 million.

NOTE:

Details may not add to total becase of rounding.

IV - 11

Foreign Economic Developments.

There have been no clear signs in

any foreign industrial economy that a recovery is underway.

However in

the United Kingdom, where industrial production (s.a.) increased .6 percent in

the second quarter, hut was negative in

activity may have bottomed out.

June,

the slowdown in

Industrial production (s,a.)

Italy, Germany and Japan in the second quarter of this year.
industrial production, though it

rose in May, is still

fell in

In Canada,

below its May

1977 level.
Although inflation abroad has eased substantially since last year,
the progress has not been uniform.

The first-half rate of increase in

the CPI for the 10 foreign industrial countries was about 8.5 percent,
compared with 10.5 percent for the first half of 1981.

In Canada and

France the rate of consumer price inflation in the second quarter was
virtually unchanged from the high rates reached in the second quarter of
last year.

In the other major industrial countries there have been sub-

stantial declines.
The sluggish state of economic activity abroad has been reflected
in an improvement in current-account positions in some of the major
foreign industrial countries this year relative to 1981.

In Japan, the

current-account surplus (s.a.) for the first half of this year was $3-1/2
billion as compared with $1 billion for the same period last year.
first-half surplus, however, was below many earlier forecasts.

The

In Ger-

many, the current account (s.a.) showed a small surplus in the second
quarter.

For the first half of this year the current-account deficit

was $0.4 billion as compared with $6.7 billion for the same period last
year.

Weak domestic demand is the primary factor behind the sharp rise

IV - 12

in Canada's trade surplus in the first half of this year.

In France

and the United Kingdom, however, both the trade and current-account positions showed some deterioration.
Individual Country Notes.

In Japan, the authorities have contin-

ued to struggle with the effects of weak demand in both domestic and
external sectors.

Although industrial production in June recovered the

ground lost in May's sharp drop, the average level for the second quarter was still 7

The

percent (s.a.a.r.) below the first-quarter level.

mid-July assessment of the economy by the Japanese Economic Planning
Agency (EPA) noted recent increases in inventories and deterioration of
labor-market conditions as particularly troubling developments that may
endanger a hoped-for recovery of domestic demand later this year.
June, unemployment reached 2,5 percent (s.a.),
years.)

(In

its highest level in 16

Stagnation in production and shipments of manufactured goods

was attributed primarily to reduced export demand.
The authorities appear to be stymied in the use of conventional
demand-management tools to stimulate domestic demand by concern over
budget deficits and weakness of the yen.

Recently released budget fig-

ures for the FY 1981 (which ended in March) revealed a revenue shortfall of some ¥3 trillion (about $11 billion equivalent); some of this
shortfall has been financed by controversial stop-gap measures including sales of long-term government bonds from the Ministry of Finance
debt consolidation fund directly to the Bank of Japan.

Although the

Bank of Japan has guided short-term interest rates upward in recent
months (by a total of about 80 basis points) and recent declines in
U.S. short rates have closed the short-term rate differential to about

IV - 13

percentage points, the yen has failed to strengthen.
3-1/2
Price developments in Japan continue to be favorable.

The CPI

fell in July by a full percentage point, and in recent months consumer
prices have been moving ahead at only slightly above a 2 percent annual
Wholesale-price inflation has been even more moderate at about 1

rate.

percent (a.r.).
The June trade surplus was virtually unchanged from that of May
at about $1.7 billion (s.a.), but the current-account surplus widened
in June by about $500 million to $1 billion.

An important element in

the June increase was improved net investment earnings that are related
to recent long-term capital outflows from Japan.

These capital outflows

continued strongly in June as Japanese purchases of foreign securities
and non-residents' sales of Japanese securities together produced a net
outflow of almost $900 million.
Industrial production in Germany declined again in June, the third
consecutive monthly decline.

The second-quarter average of the index

matches previous low points of the current recession.

The rate of unem-

ployment has continued to rise through July, when it reached 7.8 percent
(s.a.).

Recent survey data suggest that views on business conditions

have once more taken a turn for the worse.

Corporate insolvencies dur-

ing the first half of this year were 50 percent higher than in the comparable period last year.
The rate of consumer-price inflation, which earlier this year had
been slowing, has accelerated again in

the summer months averaging over

7 percent (a.r.) for the June-July period.
The current account (s.a.)

showed a small deficit in

June, after

IV - 14

small surpluses in

the preceding three months.

For the first

half of

this year, the cumulative deficit was only $0.6 billion compared to a
deficit of $6.7 billion in

the first

half of last year.

The rate of growth of Central Bank Money continued in June near
the upper limit of the Bundesbank's 4 to 7 percent target range.
This year's negotiations among the government coalition partners
about the 1983 federal budget were concluded in July.
provides for only 2 percent growth in real spending,
percent in

1982,

DM34 billion in

The new budget
compared with 5.5

and new borrowing of DM28.5 billion, compared with
1982.

The budget contains large cuts in

spending on

social services such as unemployment benefits and pensions.
spending is

budgeted to rise by 4.1 percent.

of 3 percent real GNP growth is

Defense

The underlying assumption

considered optimistic by private fore-

casters.
In the United Kingdom,

percent (s.a.) after a

industrial production fell

percent rise in May.

June by 1-1/2

The June industrial pro-

duction level was the same as that recorded in June 1981.

Real GDP

growth has been positive but small in recent quarters, and the pace of
recovery in U.K.

economic activity has not been sufficient to lower the

unemployment rate.

In fact, the unemployment rate has continued to

climb and stood at 12.3 percent (s.a.)

in July -- 1.5 percentage points

higher than a year earlier, and nearly twice the rate prevailing in July
1980.
Latest data indicate a further slowing of inflation in the United
Kingdom.

Between April and July, consumer prices increased only 4 per-

cent (a.r.).

The July consumer price index was 8

percent higher than

IV - 15

its year-earlier level.
In the first six months of this year, the U.K.'s trade account
registered a surplus of $ 3/4 billion and the current-account surplus was
billion.

some $2

Be-

Both figures are down sharply from 1981 levels.

tween the second quarters of 1981 and 1982, export volume rose about 5
percent while the volume of imports increased over 14 percent.
In mid-July, the London clearing banks lowered their base rate
from 12

to 12 percent and at the beginning of August the rates were
percentage point.

reduced another

ered their base rates to 11 percent.

On August 18, clearing banks lowBank of England actions to lower

short-term money market rates preceded the recent declines in
ing banks'

the clear-

base rates.

French economic growth turned negative in the first
averaging nearly 3 percent (s.a.a.r.)

quarter, after

in the previous three quarters.

Growth in consumer expenditure remained strong at over 5 percent.

Ex-

ports and residential investment were very weak, with expenditure declining by well over 10 percent in each case.

Consumer-price inflation

in the second quarter accelerated to 13 percent from 11.8 percent in
the first quarter.
Although French economic policy had been slowly changing emphasis
since the first

of the year due to high inflation rates and external

payments problems, the French did not formalize the change until the
June devaluation of the franc.

Prices and wages will be frozen until

November and controlled for at least a year thereafter.

Deficits in

both the central government and social security budgets are to be reduced.

Investment is to replace consumption as the key sector through

IV - 16

which the economy will be stimulated.

No changes were announced for

monetary targets or credit controls.
Led by a sharp rise in exports, real GDP in Italy rose 1.4 percent
(s.a.) during the first quarter of this year.

However, part of this

growth is believed to reflect inaccurate seasonal adjustment.
tion has slowed down noticeably.

In June, wholesale prices were about

12 percent above their year-earlier level, compared with a 17
rise in the previous 12 months.
a smaller decline:
above its

Infla-

percent

Consumer-price inflation has registered

the year ending in

July, the CPI was 16

year earlier level, compared with a 19

percent

percent rise in

the

previous year.
On August 7 the Spadolini government fell as the Socialists withdrew from the coalition government.

One of the last acts of the govern-

ment was to present a package of indirect tax increases designed to reduce the 1982-83 budget deficits.

The tax changes involved increases in

various VAT rates, some production taxes,
sion contributions.

corporate tax rates and pen-

These tax increases are supposed to produce a gov-

ernment deficit of 60 trillion lire in 1982 (about 13 percent of GDP)
and 63 trillion lire

1983.

These changes were made by decree laws,

which are effective immediately and must be passed by the Parliament
within 60 days (in

this case, by September 30).

The dissolution of the

government will complicate the passage of these laws.
In Canada, industrial production (s.a.) rose almost 1 percent in
May --

representing the first

rise in this index in ten months.

ployment has continued to climb to new post-depression highs.

UnemIn July,

IV -

the unemployment rate jumped almost 1 percentage point to 11.8 percent.
Consumer-price inflation, which has been in double digits since
mid-1980, still remains high.

CPI inflation on a year-over-year basis

was 10.8 percent in July as compared with 11.2 percent in June.
In June,
$1.6 billion.

the Canadian trade balance (s.a.)

posted a surplus of

This brings the cumulative surplus for the first

half to

$6.6 billion, which is almost $1 billion more than the surplus for all
of last year.
The Belgian government has recently announced preliminary plans
for the 1983 budget.

In an effort to reduce the government borrowing

requirement next year to 10.5 percent of GNP,
curbed and indirect taxes will be raised.

public spending will be

This year the borrowing re-

quirement is expected to be over 11 percent.

At the end of July the

National Bank of Belgium announced a reduction in its discount rate of
one-half percent to 13.5 percent.

This change was in response to lower

market rates of interest.
Mexico.

The recent deterioration in Mexico's external financial

position had its origins in policies implemented since 1978.

At that

time expansionary policies adopted to promote employment yielded a
growth rate averaging over 8 percent in 1978-81, but led to large public
sector deficits, accelerating inflation, and high import growth.

A de-

cline in Mexico's international competitiveness, weakness in the world
oil market, a recession in the industrial countries, and an accelerated
rise in interest payments on the growing external debt as world interest
rates reached new highs, resulted in a current-account deficit of $12.9
billion in 1981, compared with. $7.6 billion in 1980.

IV - 18

In February 1982, the peso was finally allowed to depreciate sub-

stantially following a drain on Mexico's reserves.

However, no support-

ing stabilization program was adopted and, instead, steps were taken to
cushion the impact of the devaluation, including a large across-the-

board wage increase.

In the face of a renewed drain on reserves, the

Mexican authorities, on April 21, announced a program to reduce the
public sector deficit, tighten monetary policy, and bring down the cur-

rent-account deficit.

The program was not vigorously implemented and

skepticism mounted about its adequacy, as well as about the Government's
ability and willingness to take further steps before a new President
takes office in December.

When the Mexican government raised adminis-

tered prices on certain foods and gasoline early in August, fears of
rising wage demands and of possible controls were aroused, and capital
flight accelerated.
The peso was again allowed to depreciate substantially in August
and a dual exchange rate system was instituted, with a preferential rate
for certain imports and debt payments, financed primarily out of oil export earnings.

The reserve drain continued, and transfers from foreign

currency denominated accounts to banks outside the country were banned
and such accounts were ordered paid only in pesos at the free market
rate.
The growing concern of foreign banks over the outlook for Mexico
is shown by the hardening of terms on Mexico's Eurocurrency borrowings
since late last year and by a sharp reduction in the flow of new credits
to Mexico since June.

In June, a jumbo loan of $2.5 billion received a

IV -

poor response from the market and the lead managers were able to sell
down only about 15 percent of the loan.

Some banks are reported to be

refusing to roll over maturing obligations.

Mexico's total external

debt at mid-year was estimated at close to $80 billion, three-fourths
of which is owed to foreign banks.

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD, SEASONALLY ADJUSTED)

1980
01

1981
Q2
Q3

1.9
2.2

1.2
1.0

1.6 41.1
2.6 -3.1

-.2
iI.0

-.6
-1.5

1.2
.5

.2
.3

.5
.9

-. 5
-. 3

1979

1980

1981

GNP
IP

2.9
5.3

.5
-2.0

3.1
1.3

GDP
IP

3.7
4.5

1.1
-1.1

.2
-2.3

GNP
IP

4.4
5.3

1.8
-.1

-. 3
12.1

GDP
IP

5.0
6.9

4.0
4.5

-.2
-2.5

2.3
3.6

.8 +l.1 -1.7
-.7 1.5 -4.9

GNP
IP

5.2
8.3

4.2
7.1

3.0
3.0

.7
1.6

.7
1.7

1.2
1.3

UNITED
KINGDOM:

GDP
IP

1.7
2.7

-2.4
-6.6

-2.2
t-5.0

.9
t2.4

-.4
1.4

-.4
.1l

UNITED
STATES:

GNP
IP

2.8
4.4

-.4
r3.6

1.9
2.6

1.9

-. 4

11.3

2.0

i4.

CANADA:

Q4
'.9
-4.6

1982
Q2
01

1982
MAR.

APR.

MAY

]UN.

-1.2

-1.4

1.0

N.A.

N.A.
N.A.

-.8

1.6

N.A.

-. 2
1.3

N.A.
-. 6

1.9

1.4
1.0

N.A.
f1.4

,'1.6

>.1

r.6

-4.2

.8
-. 9

N.A.
t-1.9

1.4

N.A.

-. 4

-1.3
-3.1

.4
1 .8

r.8

$1.l

-2.0
-2.9

N.A.
N.A.

.7
1.5

-. 2
-2.5

.7
.1
.0 $1.2

1-q

FRANCE:

GERMANY:

ITALY:

JAPAN:

-1.2

*GNP DATA ARE NOT PUBLISHED ON MONTHLY BASIS.

.7
1.6

2.6
4.5
1.7
2.6

-. 9

'1.9

-. 9

-1.7

-1.9

1.7
*

-1.5
*

1.7
(JULY)

-. 7
-. 1

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD)

1981
Q2 Q3

1982
Q1 Q2

APR.

CANADA:

CPI
WPI

3.2
2.7

3.1
2.2

3.0
2.1

2.5
1.2

2.5
1.4

3.1
2.0

.5
1.0

FRANCE:

CPI
WPI

3.0

3.3

3.9

3.2

1.4

4.3

2.1

2.8
2.7

3.1
2.6

1.2
1.0

CPI
WPI

2.2

1.8

1.2

3.9

2.3

2.1

1.8

1.5
1.8

1.4
1.3

CPI
WPI

5.2

4.4

3.0

4.6

5.0

5.1

3.5

4.0

4.0
3.3

3.1
2.0

CPI
WPI

1.1

1.5

1.3

-.7

1.1

1.4

".1

UNITED
KINGDOM:

CPI
WPI

2.4
3.0

4.9
3.4

1.7
2.1

2.5
2.3

UNITED
STATES:

CPI (SA)
WPI (SA)

2.6
2.5

1.9
2.3

2.8
1.1

1.9
1.2

GERMANY:

ITALY:

JAPAN:

1982
MAY
JUN.
1.4
.4

.8
.1

1.0
.5

JUL.
.5
N.A.

.7
.3
.9 N.A.

3.2
1.7

11.3
6.9
13.1
12.3

.2
N.A.
1.1
.3

1.5
N.A.

1.0
.2
1.7
2.2

MEMO:
LATEST 3 MONTHS
FROM YEAR AGO

2.0
.6
.2
i.1

.7
.5

.3
.4

1.0 1.0
.0 1.0

N.A.
.6

15.7
13.4

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES#
(BILLIONS OF U.S. DOLLARS; SEASONALLY ADJUSTED)

1981
Q2 Q3

082

1981

6.7
-1.6

5.7
-5.2

1.4
.8
-1.2 -1.8

.6
-2.1

TRADE+
CURRENT ACCOUNT+

-14.2
- 4.2

-10.7
-4.8

-2.5 -1.9
.3
-1.7

-1.9 -3.1
-1.3 -2.1

GERMANY

TRADE
CURRENT ACCOUNT (NSA)

4.9
-16.5

11.9
-7.6

.2
3.1
-4.4 -2.3

3.1
-4.9

ITALY:

TRADE
CURRENT ACCOUNT (NSA)

-22.3
-8.4

k16.0
-9.1

"4.6 -5.0
-5.8 -2.3

-4.0 -2.5
.3
-. 9

JAPAN:

TRADE+
CURRENT ACCOUNT

2.1
"10.7

20.1
4.6

3.3
-1.0

5.5
2.0

6.3
2.5

5.0
1.1

4.4
.9

5.3
2.5

UNITED
KINGDOM:

TRADE
CURRENT ACCOUNT+

2.9
7.4

N.A.
N.A.

3.9
5.9

2.4
4.4

N.A.
N.A.

.9
2.6

.6
1.3

.1
.9

UNITED
STATES:

TRADE
CURRENT ACCOUNT

-25.3
1.5

-27.9
4.5

-7.8 -9.2
.8
-. 9

-6.1
1.2

CANADA:

TRADE
CURRENT ACCOUNT

FRANCE:

ES1RVICS

1980

-4.3 -6.5
3.2 1.4

ANT~DD
PRI

2.8
-. 2

5.5
4.1

APP.

THE

JUN.

2.9
.2

3.7
N.A.

1.0

1.2

1.6

-2.8
-2.0

-4.3
N.A.

-1.6

-. 5

5.0
-. 8

5.3
.4

1.1
.2

2.2
.4

2.0
-. 2

-6.0
K.A.

-1.8
N.A.

-.5

-5.1
N.A.

ATS(ttITTTACTD

ACCO
#

1982
fAY

CURRENT

+ OUARTEPLY DATA ARE SUBJECT TO REVISION AND ARE NOT CONSISTENT WITH ANNUAL DATA.
* COMPARABLE MONTHLY CURRENT ACCOUNT DATA ARE NOT PUBLISHED.

-1.2

-.2

1.9
1.0

1.7
.5

1.7
1.0

-. 2
.1

.0
.3

-. 4
*

k.)

-2.1

-2.2
*

-2.5
*

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, August 24, 1982 : Greenbook Part 2

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