Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 15-16, 1987 : Greenbook Part 2

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Confidential (FR) Class III FOMC

Part 2

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and unemployment.......................................
Industrial production and capacity utilization....................
Personal income and consumption..................................
Business fixed investment........................................
Business inventories..............................................
Housing markets.. .................................................
.
.....
Federal government...........................................
State and local governments......................................
Prices............................................................
Wages and labor costs.............................................

1
3
5
11
13
17
18
19
21
27

Tables
Changes in employment .............................................
Selected unemployment rates........................................
Industrial production.....................................
Capacity utilization in industry..................................
Personal income ..................................................
Real personal consumption expenditures............................
Sales of automobiles and light trucks..............................
Business capital spending indicators..............................
Consumer confidence before and after October 19...................
McGraw-Hill survey of plant and equipment expenditures............
Changes in manufacturing and trade inventories....................
Inventories relative to sales.....................................
Private housing activity......................................
Recent changes in consumer prices.................................
Recent changes in producer prices.................................
Spot prices of selected commodities ..............................
Hourly earnings index .............................................
Labor productivity and costs, nonfarm business sector..............

2
2
4
4
6
8
8
10
11
12
14
14
16
22
22
24
26
26

Charts
Income growth.....................................................
Nonresidential construction and new commitments...................
Private housing starts.................................... ...... .
State and local government sector.................................
Combined operating and capital accounts surplus (deficit).........
Commodity prices..................................................

6
12
16
20
20
24

ii
DOMESTIC FINANCIAL DEVELOPMENTS

III

Monetary aggregates and bank credit...............................
Corporate finance.................................................
Treasury and sponsored agency financing...........................
Municipal securities markets......................................
Mortgage markets...................................................
Consumer installment credit......................................

3
7
11
13
14
17

Tables
...
Monetary aggregates.....................................
Commercial bank credit and short- and intermediate-term
business credit...............................................
Gross offerings of securities by U.S. corporations................
Treasury and agency financing....................................
Gross offerings of municipal securities...........................
Mortgage activity at all FSLIC-insured institutions...............
New issues of mortgage-backed pass-through securities
by federally related agencies.................................
Consumer installment credit.......................................
Consumer interest rates................................... ... ..

INTERNATIONAL DEVELOPMENTS

4
6
8
12
14
16
16
18
18

Foreign exchange markets.........................................
U.S. international financial transactions.............;............
U.S. merchandise trade through 1987-Q3...........................
Developments in the foreign industrial countries.................
Economic situation in major developing countries..................

1
4
8
12
18

Tables
Official interest rates in selected countries.....................
International banking data.......................................
Summary of U.S. international transactions.........................
U.S. merchandise trade......................
.......
............
Oil imports.......................................................
Major industrial countries
Real GNP and industrial production.............................
Trade and current account balances.............................
Consumer and wholesale prices................................. .

2
5
7
9
10
19
20
21

DOMESTIC NONFINANCIAL DEVELOPMENTS

Available data point to appreciable further gains in output and
employment into November, with noteworthy strength in
sector.

ne manufacturing

The more limited data on domestic demand suggest that final

sales have softened, but so far there is little evidence of a significant spillover from the collapse in the stock market.

Although the

prices of intermediate materials and components have been registering
sizable increases in response to dollar depreciation and rising industrial activity, neither wages nor prices of final goods and services
have shown any clear acceleration.
Employment and Unemployment
The labor market surveys taken in mid-November indicated continued
strength in labor demand last month:
about 275,000.

nonfarm payroll employment rose

For the sixth consecutive month, substantial gains in

employment were seen in the goods-producing sector of the economy.
Manufacturing employment grew 70,000 last month and has risen nearly
300,000 since June.

Job gains have been widespread in both the durable

and nondurable goods industries with large increases in metals,
machinery, printing, and rubber.

The factory workweek edged down 0.1

hour in November, but, at 41.2 hours, still was at a very high level by
historical standards.

Elsewhere in the goods-producing sector, con-

struction employment increased by 34,000 in November as seasonal layoffs
were fewer than usual after weak summer hiring.
November employment gains in the service-producing sector were
concentrated in the services industry where more than half the increase
II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1986

1987
Q2

Sept.

1987
Oct.

Nov.

274
268

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

159
159

254
241

163
164

205
227

159
219

536
479

-14
-17
4
13
31
29
81
30

8
0
8
32
57
25
99
18

7
0
7
-8
35
20
80
18

51
31
21
-6
41
14
71
6

40
20
20
-17
66
5
16
2

76
52
24
55
101
15
116
156

Private nonfarm production
workers

105

199

112

143

298

142

Total employment 3
Nonagricultural

1 7 4e
17 4e

244
203

296
332

172
174

-309
-387

415
301

313
430

Manufacturing
Durable
Nondurable
Construction
Trade
Finance
Services
Total government

69
36
33
34
3
15
88
42

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.
e--Adjusted by Board staff to eliminate distortions caused by the
introduction of revised population estimates.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1987
Oct.

1986

1987
Q2

Sept.

Civilian, 16 years and older

7.0

6.7

6.2

6.0

5.9

6.0

5.9

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

18.3
10.7
5.4
5.5

17.9
10.4
5.2
5.1

17.0
10.0
4.8
4.6

15.9
9.4
4.6
4.7

16.3
9.3
4.4
4.7

17.4
8.7
4.5
4.7

16.8
8.9
4.4
4.7

White
Black

6.0
14.5

5.7
14.2

5.3
13.2

5.1
12.4

5.1
12.3

5.2
12.0

5.1
12.1

6.6

6.3

5.9

5.6

5.4

5.5

6.6

6.1

5.9

5.8

5.9

5.8

Fulltime workers
Memo:
Total national

1. Includes resident armed forces as employed.

Nov.

II-3
was in health services.

The layoffs in the securities industry had yet

to show through, as finance, insurance, and real estate employment rose
again.

Transportation and wholesale trade also showed gains.

However, retail trade employment fell somewhat, primarily because
holiday-related hiring in general merchandise stores was less than
seasonally expected.

Employment in state and local government grew

37,000 after an unusually large advance in October.
The civilian unemployment rate edged back down to 5.9 percent in
November and has been essentially flat since June.

Compared with the

first half of the year when declines in joblessness were widespread, the
improvement in unemployment since June has been concentrated among adult
men.
Industrial Production and Capacity Utilization
The index of industrial production rose 0.6 percent in October,
owing in large part to an uptick in auto assemblies.

Industrial output

apparently continued to expand at a moderate pace in November, as indicated by the labor market report and available physical product data.
The purchasing managers' survey also indicated continued expansion in
output through November, although the number of firms reporting increases in production exceeded that reporting declines by a smaller
margin than in previous months.

More respondents still are reporting

increases in orders and employment than are reporting decreases.

1. Although employment in the finance industry has grown almost 50
percent faster than total payroll employment over the past five years,
the industry still accounts for only about 3 percent of total
employment.

II-4
INDUSTRIAL PRODUCTION

(Percentage change from preceding period;
based on seasonally adjusted data)
1987
Q2

Aug.

--Annual rate-Total Index

1987
Sept.

Oct.

--Monthly rate--

4.2

8.3

Products
Final products
Consumer goods
Durable consumer goods
Nondurable consumer goods

3.6
3.0
1.5
-5.8
4.1

8.5
8.5
7.1
5.9
7.4

.2
.3
.2
.5
.2

.0
.1
-.6
-2.3
.0

.9
1.1
1.2
3.3
.4

Equipment
Business equipment
Defense and space eq.
Oil and gas well drilling

4.7
5.6
1.6
15.1

10.2
9.4
2.1
159.6

.4
-.1
.7
9.2

.9
.7
.7
8.2

1.0
1.3
.4
-.6

5.6
-2.0

8.4
9.5

-.2
-.7

-.4
.2

5.3
5.2
9.5
1.2

8.1
7.4
14.0
3.5

.4
.2
.3
1.0

-.1
-.3
.5
-.3

.1
.7
-.4
-.4

Intermediate products
Construction supplies
Materials
Durable goods materials
Nondurable goods materials
Energy materials

CAPACITY UTILIZATION IN INDUSTRY
(Percent of capacity, seasonally adjusted)
1978-80

Total industry
Manufacturing
Durable
Nondurable
Mining
Utilities
Industrial materials
Metals
Paper
Chemicals

1982 1967-86

1984

1987

High

Low

Avg.

High

Oct.

86.9

69.5

81.5

81.8

79.9

81.1

81.3

86.5
86.3
87.0
95.2
88.5

68.0
63.7
74.2
76.9
78.0

80.6
78.7
83.5
87.2
87.3

81.3
79.9
84.2
86.6
84.8

80.5
77.6
84.7
76.3
78.3

81.4
78.5
85.7
77.6
80.3

81.7
79.2
85.5
78.9
79.6

89.1
93.6
97.3
87.9

68.5
45.7
79.9
63.5

82.3
77.8
91.4
80.8

82.8
70.8
97.5
78.3

79.4
70.0
95.7
83.6

80.7
76.1
99.8
85.9

80.6
78.0
n.a.
n.a.

II-5
Capacity utilization has been rising over the past year, and the
overall rate in manufacturing is now above the 1984 high.

Among in-

dustrial materials producers, operating rates of nondurable goods
materials industries, particularly 'paper and chemicals, remain high by
historical standards; rates for certain metals continue to climb, but
are still short of the highs reached earlier in the expansion.

Although

output of business equipment has risen appreciably this year, operating
rates remain relatively low.
Personal Income and Consumption
Nominal personal income increased sharply in October, boosted by a
$36 billion rise (annual rate) in federal subsidy payments to farmers.
Even excluding subsidy payments, total personal income increased somewhat faster than the average pace in the third quarter. Wages and
2
salaries posted another strong gain, and BEA figures show a further
rise in personal interest income.

Now that personal tax payments are

not showing large month-to-month fluctuations as they had earlier this
year, the pattern of growth in disposable income has been similar to
that for personal income.

Nevertheless, increases in nominal income

continued to be substantially offset by increases in consumer prices,
and real disposable income in September was less than 1 percent above
the level of the fourth quarter of 1986.

2. Based on available data on average hourly earnings and hours of
production workers, wages and salaries apparently posted another strong
gain in November.

II-6
PERSONAL INCOME
(Average monthly change at an annual rate;
billions of dollars)

1986

1987
Q2

Aug.

1987
Sept.

Oct.

Total personal income

14.2

23.5

10.6

20.6

19.3

21.1

63.3

Wages and salaries
Private

7.5
5.6

12.9
10.1

8.6
6.6

14.2
12.1

19.1
17.1

12.6
10.5

15.3
13.3

Proprietors' income
Farm

2.6
.5

6.7
3.5

-2.9
-4.4

.5
-1.6

-4.0
-6.8

2.0
.9

Rent, dividends and
interest

1.7

2.7

2.3

4.5

4.7

5.0

5.8

Transfer payments

2.5

2.1

2.5

1.6

1.4

3.6

1.7

1.2

4.7

Other labor income

Less: Personal contributions
for social insurance
Less: Personal tax and nontax
payments

3.2

-1.2

7.0

3.8

5.0

3.9

Equals: Disposable personal
income

11.0

24.7

3.6

16.8

14.3

17.2

Memo: Real disposable income

6.3

6.1

-7.4

4.7

INCOME GROWTH*
[

Real Disposable Personal Income

HF
01
1985

58.6
--

Percent change, annual rate

Personal Income

]

38.1
34.1

1986

Based on quarterlyivernges annual percent changes are from 04 to 04.

03
1987

II-7
Consumer spending is estimated to have fallen in real terms in
October,

owing chiefly to lower spending on motor vehicles with the

expiration of manufacturers' incentives on September 30.

Outside the

motor vehicle sector, however, spending posted a moderate gain in real
terms, rising to a level 1/2 percent above the third-quarter average.
Purchases of durable goods other than motor vehicles picked up, more
than reversing two months of decline, and spending on services posted a
large gain, reflecting in part increases in electricity and natural gas
(owing to cold weather) and in brokerage services (owing to large trading volumes).

In contrast, outlays for nondurables remained sluggish.

Domestic auto sales were at a 6.8 million unit annual rate in
November, up from 5-3/4 million units in October.

The higher selling

pace last month largely reflects a sharp jump in sales during the final
10 days of the month, presumably related, to a new round of incentive
programs.

Although the incentives now cover roughly half of the domes-

tic manufacturers' output, the programs are neither as generous nor as
widespread as the round of price and financing incentives of a few
months ago.
Domestic auto sales have not kept up with production in recent
months, and inventories edged up again last month from a level that
already was regarded as high.

In addition to the new incentive

programs, automakers have reacted to this inventory problem by cutting
their production schedules.

Domestic auto production, which was 7.1

3. Estimates of real consumption spending in October are based on
actual nominal spending from the BEA, CPI data from the BLS, and staff
estimates of the translation from the CPI to BEA deflators.

II-8
REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from preceding period;
based on seasonally adjusted data)
1987
19861

1987
Q3

--Annual rate-Personal consumption
expenditures

Sept.

Oct. 2

-Monthly rate-

4.1

-.7

1.9

4.9

-.8

-.3

12.4
12.7

-21.2
-3.8

10.5
2.2

22.4
3.9

-2.7
-.5

-5.0
1.5

Nondurable goods
Excluding gasoline

2.9
2.4

1.3
2.9

-1.9
-3.2

-1.2
-.6

-.8
-1.0

.1
.1

Services
Excluding energy

2.4
2.8

5.4
6.6

2.1
2.1

4.1
3.5

-.2
-.1

.9
.5

Memo:
Personal saving rate
(percent)

4.3

4.4

3.0

2.8

3.0

4.7

Durable goods
Excl. motor vehicles

1. Percent change from fourth quarter of 1985 to fourth quarter of 1986.
2. Staff estimates based on actual nominal consumer spending data and
CPI data for October.

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

Autos and light trucks
Autos

Light trucks
Domestically produced 1
Autos
Light trucks

Imports
Autos
Japanese
Korean
European
Light trucks

1986

1987
Q3

Oct.

16.1
11.5

13.8
9.7

15.0
10.3

16.4
11.4

13.7
9.1

4.7

4.2

4.8

5.0

4.6

4.8

12.0
8.2
3.7

10.2
6.9
3.4

11.0
7.2
3.8

11.9
7.8
4.1

9.6
5.8
3.8

10.8
6.8
4.0

4.2
3.2
2.4

3.6
2.8
2.0

4.0
3.1
2.1

4.5
3.6
2.4

4.1
3.3
2.2

4.1
3.3
2.3

.2
.7
.9

.2
.6
.8

.3
.7
.9

.5
.7
.9

.3
.7
.8

7.8

7.1

6.3

7.3

7.1

Nov.
14.9
10.1

Memo:
Auto production

1. Includes vehicles produced in Canada and Mexico for General Motors,
Ford, and Chrysler as well as foreign makes produced in the U.S.

II-9
million units in November, is scheduled at approximately 6-3/4 million
units in December and in the first quarter of next year.
Sales of imported cars were at a 3.3 million unit annual rate in
November, about the same as in October.

Domestic light truck sales rose

to 4.0 million units, close to the brisk pace seen in the third quarter;
sales of imported light trucks, meanwhile, held steady at 800,000 units.
Data through October on total consumption spending and through
November on auto sales give no clear indication of immediate consumer
reaction to the stock market collapse.

Nonetheless, the risks of some

retrenchment are pointed up in both the Conference Board and the
University of Michigan surveys of consumer attitudes, which show a sharp
deterioration in the overall indexes of sentiment.

The change in the

Michigan measure is attributable mainly to much less favorable assessments of both expected personal financial conditions and business conditions in general.

Perhaps because stock holdings are so concentrated,

assessments of current personal financial conditions are off only
slightly since before the crash.

Nonetheless, more consumers reported

that it is a bad time to make purchases on credit or out of savings.

addition, sales of major chain stores--up 7.6 percent in nominal terms
over the 12 months ended in November--posted their smallest gain in
several months; this series, however, has not proven to be a good
predictor of the broader retail sales figures published by the Commerce
Department, which will be released on Friday.

II-10
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)

01
_

1987
02
__

1987
03
I_

Sept.
__r_

Oct.
___

Producers' durable equipment
Nondefense capital goods
Shipments
Aircraft
Excl. aircraft
Office & computing equip.

-3.2
-13.7
-1.8
-3.3

2.7
4.1
2.5
2.4

5.1
-1.0
5.8
6.2

4.3
27.1
1.8
1.9

-3.0
-16.5
-1.2
1.6

Orders
Aircraft
Excl. aircraft
Office & computing equip.

-3.8
-26.2
.6
-10.3

9.0
30.5
5.9
13.4

3.3
-5.3
4.9
4.3

.7
-21.8
4.2
.9

1.3
24.8
-1.4
5.5

277

312

327

-3.8

Sales of heavy-weight trucks
(thousands of units, A.R.)
Nonresidential structures
Nonresidential construction

Commercial building
-5.4
Office
-5.2
Other commercial
-5.5
Industrial building
-13.8
Public utilities, institutional,
and other
.1
Rotary drilling rigs in use

3.4

4.4

-1.3

-. 2
-4.0
3.5
6.6

2.5
5.0
.1
7.7

-2.7
.0
-5.3
5.9

1.8
-2.0
-7.5

5.5

-1.6

-1.1

6.8

16.3

-1.4
-. 1

-1.5

II-11

CONSUMER CONFIDENCE BEFORE AND AFTER OCTOBER 19

Survey

September

University of Michigan
Conference Board2

October
Before crash After crash

93.6
115.7

92.5
116.9

November

82.4
110.4

83.1
96.3

1. February 1966=100.
2. 1985=100.
Business Fixed Investment
Shipments of nondefense capital goods fell 3 percent in nominal
terms in October, but because of earlier gains, the level of shipments
still was slightly above the third-quarter average.

Shipments for of-

fice and computing equipment, however, continued to rise briskly, up
another 1-1/2 percent in nominal terms.

Moreover, the sizable increases

in nominal shipments of computers in recent months have understated the
growth in real outlays because of the continued downtrend i
of these items.

the prices

In contrast, outlays for motor vehicles fell sharply in

the past two months, reflecting both a post-incentive slump in
automobile purchases and a sharp drop in heavy truck sales in October.
Real spending for nonresidential structures jumped 23 percent at an
annual rate in the third quarter, after trending down for the past
couple of years.

Much of the increase reflected a sharp expansion of

petroleum drilling.

Drilling activity declined slightly in October and

November but remained about 2 percent above the third-quarter average.
The value of nonresidential construction put-in-place

(which excludes

petroleum drilling) fell in October after posting a strong gain in the
third quarter.

II-12

Nonresidential Construction and New Commitments

SIX-MONTH MOVING AVERAGE (NOMINAL TERMS)

Index, 198204 = 100

New commitments <1>

1981

1979

1983

1985

1987

(1) Sum of contracts (from F.W.Dodge) and permits (from Census) for industrial, commercial,
and institutional construction.
(2) Includes only the building components of nonresidential construction, i.e., industrial,
commercial, institutional, and hotels and motels.

MCGRAW-HILL SURVEY OF PLANT AND EQUIPMENT EXPENDITURES 1
(Percent change from previous year, seasonally adjusted)
1987

1988

3.1

6.2

Manufacturing

5.1

8.8

Durables

1.6

10.8

Nondurables

8.5

7.6

1.9

4.6

All business

Nonmanufacturing

1. Based on the September-October Survey; in nominal terms.

II-13
While we have little hard information about the effects of the
stock market crash on the demand for capital goods, the anecdotal
evidence does not suggest an immediate response.

Earlier information

shows that new orders for nondefense capital goods excluding aircraft
dropped 1.4 percent in October but were still 0.6 percent above the
strong third-quarter average.

For construction, new commitments

remained firm through October.
The McGraw-Hill survey, which collected responses in September and
October, indicates that firms expected nominal outlays to increase
6-1/4 percent next year, with increases in nearly all industries.
However, given the steep uptrend in investment since early this year and
the likelihood of some increase in investment prices, achieving a 6
percent year-over-year gain in nominal BFI for 1988 as a whole would
require only small increases in real outlays in coming quarters.
Business Inventories
Inventories in manufacturing and trade rose modestly in the third
quarter, up at an annual rate of $3 billion in 1982 prices, compared
with the average pace of $27 billion over the first half of this year.
However, the slowing was largely due to the liquidation of auto dealers'
stocks.

Excluding autos, the pace of inventory expansion in the third

quarter was not much different from that observed during the first half
of this year and, on the whole, was in line with growth in shipments and
sales.
Manufacturers have been building up their stocks since June.
During the third quarter, factory inventories expanded at an annual rate

II-14

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1987

1987

Sept.

Aug.

Oct.

Current Cost Basis:
Total

41.2

47.0

31.5

Manufacturing
Wholesale

7.7
8.8

6.1
14.1

20.2
.8

Retail
Automotive
Ex. auto

24.8
19.9
4.8

26.7
9.3
17.4

10.5
1.8
8.7

8.4

50.3

24.7
-17.1

15.3
24.9

.8
-3.2
4.0

10.1
.0
10.1

21.5

Constant Dollar Basis:
Total

34.1

20.7

2.9

-19.5

6.9

Manufacturing
Wholesale
Retail
Automotive

5.3
3.6
25.2
21.3

-4.4
9.6
15.5
3.0

11.9
-2.3
-6.6
-12.6

6.3
-18.6
-7.2
-4.6

8.7
17.1
-18.9
-28.1

Ex. auto

3.9

12.5

5.9

-2.6

9.2

INVENTORIES RELATIVE TO SALES 1

(Months supply; based on seasonally adjusted data)
1987

1987

Aug.

Sept.

Oct.

Range in
Preceding 12 months: 2
Current Cost Basis:
low
high
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

1.47
1.61
1.21
1.44
1.33
1.43

1.57
1.73
1.29
1.59
2.12
1.49

1.51
1.65
1.24
1.58
2.03
1.46

1.51
1.63
1.23
1.60
1.96
1.49

1.49
1.62
1.20
1.59
1.86
1.50

1.48
1.62
1.18
1.57
1.81
1.49

1.47
1.59
1.18
1.59
1.88
1.50

1.49
1.62
1.24
1.43
1.42
1.43

1.54
1.67
1.30
1.57
2.05
1.49

1.51
1.64
1.26
1.55
1.97
1.44

1.51
1.63
1.27
1.57
1.88
1.49

1.49
1.63
1.23
1.54
1.67
1.50

1.49
1.63
1.21
1.54
1.71
1.49

1.49
1.61
1.22
1.55
1.69
1.51

1.59

Constant Dollar Basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

1. Ratio of end-of period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessary coincident.

II-15
of $12 billion in real terms, and preliminary data for October show
further accumulation.

Recent stockbuilding, which was fairly widespread

both by industry and by stage of processing, generally coincided with
even larger gains in shipments, and inventory-sales ratios continued to
trend down.

Lead times for production supplies--the number of days that

orders are placed in advance of expected delivery--remain short, having
edged down slightly in November after only small increases in the previous two months.

Most manufacturing purchasing managers evidently do

not yet feel anxious about their ability to obtain inputs as they need
them, even though some materials reportedly are in short supply.
In the trade sector, merchant wholesalers' inventories were drawn
down in the third quarter as shipments from wholesale distributors advanced briskly, up 2.4 percent in real terms.

In contrast, some nonauto

retail establishments, especially those carrying discretionary consumption goods, have experienced significant inventory accumulation in
recent months.

In particular, inventories at retail apparel stores have

been rising steadily since the beginning of this year, and the
inventory-sales ratio for these stores reached an unusually high level
in September.

However, some adjustment appears to be under way.

Retailers appear to have been cautious in placing orders with domestic
producers of home goods (apparel and household durables), and preliminary data indicate that apparel sales picked up in October.

In addi-

tion, there have been reports of widespread discounting in recent weeks.

II-16

PRIVATE HOUSING ACTIVITY

(Seasonally adjusted annual rates; millions of units)
1986
Annual

1987
Q2

Aug.

1987
Sept.

Oct.

All units

Permits
Starts

1.75
1.81

1.68
1.80

1.54
1.61

1.50
1.61

1.50
1.59

1.50
1.65

1.45
1.51

Single-family units
Permits
Starts

1.07
1.18

1.15
1.26

1.04
1.14

1.00
1.15

1.02
1.11

.99
1.19

.98
1.10

Sales
New homes
Existing homes

Multifamily units
Permits
Starts

.67

.66

.75

.72

.67

.69

3.57

3.62

3.61

3.43

3.41

3.45

.68

.54

.50

.4:

.48

.51

.47

.63

.54

.47

.46

.47

.46

.41

3.56

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions
of units

2.4

2.0

1.6

* .
*

1%
I
I

c
%,

*D.

.**.

i. ''
I,

*.
'a

**t*

1.2

..
-

Single-family

Il\

Multifamily

I
1981

1982

1983

1984

1985

9
1986

1
1987

II-17

Housing Markets
Residential construction activity slowed further during October,
reflecting, in part, the effects of rising mortgage interest rates,
which peaked at 11-1/2 percent (for conventional fixed-rate loans) in
mid-October.

Total housing starts were off 8 percent, to 1.51 million

units at a seasonally adjusted annual rate, and permits edged down.
In the single-family market, starts fell back in October to a 1.10
million unit rate, 3-1/2 percent below the third-quarter average, and
new home sales edged down further.

A survey of home builders fielded at

the end of that month did not indicate any general falloff in sales
after the stock market crash, but some trade reports indicate a weakening of demand at the upper end of the price distribution.

The 12-month

rise in the median new home price moderated to 8 percent in October,
perhaps in part because of this reduced top-end demand.

In the resale

market, transactions picked up a bit in October but remained below the
sales volumes recorded during the first half of the year when mortgage
interest rates were considerably lower.
Multifamily housing starts were down sharply in October to 410,000
units at a seasonally adjusted annual rate, the lowest monthly pace in
more than five years.

The continued slowing of multifamily construction

stems from two negative factors specific to the multifamily sector--a
20-year high in rental vacancy rates seen during 1987-Q3 and changes in
tax laws that eliminated an important stimulus for multifamily construction.

Until the vacancy rate turns down in response to the recently

lower construction levels and other stock adjustments, rents and

II-18

profitability of new construction will remain depressed in many market
areas.
Federal Government
Congress has begun the process of enacting the measures agreed upon
by the President and the bipartisan leadership in the compromise of
November 20th; but much remains to be done, with major steps likely to
be worked out in House-Senate conferences not yet under way.

The com-

promise calls for deficit reductions that total $30 billion in FY19
and $46 billion in FY1989.

Taxes are to be raised by $9 billion this

year and $14 billion next year; spending cuts, user fees, and asset
sales are to account for most of the remainder of required actions.
It is contemplated that Congress will incorporate the measures in
two bills.

One will be a budget reconciliation bill that will include

the tax increases, changes to entitlements, and a number of miscellaneous alterations to existing laws.

The second bill will be an om-

nibus continuing resolution that will set all FY1988 appropriations
levels consistent with the compromise.
At present, appropriated programs are operating under a temporary
continuing resolution.

Both bills are expected to go to the President

for his signature or veto before that temporary continuing resolution
expires on December 16.

Legislation implementing the compromise is

intended to replace the Gramm-Rudman-Hollings sequester now in effect.
The sequester specifies defense and domestic discretionary outlay cuts
of $23 billion.

The recent compromise also results in about $23 billion

II-19

of deficit-reduction for FY1988 under the Gramm-Rudman-Hollings accounting rules, which do not allow inclusion of asset sales and some other
items contemplated in the bipartisan agreement.
Meanwhile, the federal government recorded a deficit of nearly $31
billion in October, up sharply from the deficit of $25 billion a year
earlier.

A number of events boosted outlays in October.

Foremost among

these was a coincidence of two payments for a portion--about $2.8
billion--of military salaries.

Legislation aimed at curbing the FY1987

deficit had changed some military pay from the last day of the month to
the first day of the next month beginning with the payment made on
October 1. Moreover, because November 1, 1987, fell on a Sunday, the
salaries due on that date were paid on October 30.

In November,

military pay will, of course, be about $2.8 billion lower than otherwise.

Spending in October also was boosted by large outlays by the FDIC

and the Department of Agriculture (for price supports and related
programs).

Payments in these categories tend to be lumpy and do not

necessarily foretell of higher or lower spending in subsequent months of
the fiscal year.

There were few surprises on the receipts side of the

budget; neither this October nor last October was affected by tax-reform
changes.
State and Local Governments
Growth in purchases of goods and services by state and local
governments appears to be picking up in the fourth quarter, after two
quarters of relatively small gains.

Real construction outlays in

October rose to a level somewhat above the third-quarter average.

II-20

STATE AND LOCAL GOVERNMENT

SECTOR

CONSTRUCTION SPENDING AS A PERCENT OF EXPENDITURES

Percent
-

Annual

-H 20

I11
1I I

liillI _
11111111111111111
11
I 1
L
1962

1960

1956

1964

1968

1 I I L i1111111
1 1I _ _I
1972

1976

1980

COMBINED OPERATING AND CAPITAL ACCOUNTS SURPLUS (DEFICIT)
-

I I_ Ill1
__
1984

10
1988

Billions of dollur
-32

Annual
-

24
16

-8

-8
16

1962
Note:

1956

1960

1964

1968

1972

1987 is the average of three quarters.

1976

1980

1984

1988

II-21

addition, employment of state and local workers increased 37,000 in
November, after rising appreciably in the preceding month.
Despite the slowdown in purchases during the middle of the year,
the fiscal condition of the state and local government sector remained
In the third quarter, state and local governments recorded a $6.4

weak.

billion (annual rate) deficit in their operating and capital account
(excluding social insurance funds), the fourth consecutive quarterly
deficit.

And even though many states took action during their 1987

fiscal years to deal with eroding budgetary positions, further adjustments appear to be under way.

In particular, budget cuts are expected

in Louisiana and New York City, and tax hikes are being discussed in
Idaho, Michigan, and Ohio.
The deterioration in the budgetary position of the state and local
sector cannot be attributed to strength in public construction, which
tends normally to be financed more by borrowing than by current taxation.

In the 1950s and 1960s, large deficits were associated with a

high level of spending for construction, amounting to around one-quarter
of total expenditures.

But, over the past year, operating and capital

account deficits have persisted, even though nominal outlays for construction have edged down, and accounted for only about 10 percent of
total expenditures.
Prices
Price measures continued to show a mixed picture in October.

The

consumer price index for all urban consumers was up 0.4 percent--similar
to its average monthly pace over the first three quarters.

Producer

II-22
RECENT CHANGES IN CONSUMER PRICES

(Percentage change; based on seasonally adjusted data)
Relative
Importance
Dec. 1986

1986

1987
Q2

Monthly rate

--Annual rate-All items 2

Food
Energy
All items less food
and energy
Commodities
Services

1987
Sept.
Oct.

100.0

1.1

6.2

4.6

3.6

16.2
7.4

3.8
-19.7

2.5
26.1

6.5
7.9

1.4
5.0

.5
-. 5

.4
-. 9

76.4
26.1
50.3

3.8
1.4
5.2

5.2
5.1
5.3

4.0
3.8
3.8

3.7
3.0
4.2

.2
.3
.1

.5
.5
.5

6.3

4.8

3.8

Memorandum:

CPI-W3

100.0

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

RECENT CHANGES IN PRODUCER PRICES
1
(Percentage change; based on seasonally adjusted data)

Relative
Importance
Dec. 1986

1986

1987
Q2

--Annual rate--

1987
Sept.
Oct.
Monthly rate

Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment

100.0
26.3
8.6
40.6
24.5

-2.3
2.9
-38.0
3.0
2.1

4.3
-6.7
59.8
4.2
.4

3.9
12.7
5.5
-. 2
1.2

2.7
-1.7
2.0
4.9
4.4

.3
1.1
-3.7
.6
.7

-.2
-. 1
-1.0
.0
-.4

Intermediate materials
Exc. energy

95.0
82.9

-4.5
.1

7.8
3.3

5.7
4.6

4.6
5.0

.0
.5

.5
.9

Crude food materials
Crude energy
Other crude materials

42.5
40.9
16.6

-1.4
-27.5
1.7

-10.3
50.0
15.9

34.8
11.4
31.9

-6.2
6.1
37.1

.5
-2.7
3.8

1.3
-1.7
4.1

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

II-23
prices turned down 0.2 percent for finished goods but rose substantially
for crude and intermediate materials less food and energy.
The CPI for food rose 0.4 percent in October, after advancing 0.5
percent in September.

Some large increases, particularly for fresh

fruits, beef, and dairy products, more than offset declines in prices of
fresh vegetables, eggs, poultry, and other items.

At the farm level,

prices of crude foods advanced more than 1 percent in October.

However,

after the mid-October PPI pricing date, spot prices of hogs dropped
sharply, suggesting a significant decline in the November PPI for crude
foods.
Energy prices were down at all levels in the October price reports.
The CPI decline for energy, of 0.9 percent, mainly reflected lower
electricity prices associated with the switch to winter rates.

recently, spot prices of crude oil have weakened somewhat, apparently in
response to the buildup of stocks resulting from high levels of OPEC
production.
Excluding food and energy items, the CPI subindexes for both commodities and services rose 0.5 percent in October.

The commodities

component was boosted for the second month by large, probably importrelated, increases in apparel prices.

In addition, new car prices were

up 0.6 percent in October, reflecting increases on 1988 models--which
are phased into the CPI over several months in accordance with sales
patterns--and the ending of incentives on most of this year's models.

4. The changes are not fully captured by the seasonal factors owing to
a change last year in the sample used by the BLS to measure electricity
prices. The new sample is more sensitive to the seasonal rate changes.

I-24

Commodity Prices
(Not Seasonally Adjusted)
Index, 1980=100, ratio scale
--

Index, 1967=100, ratio scale

Index, 1967=100, ratio scale
-310

240

105

230

220

210

JFMAMJJASONDJF
1987

200
JFMAMJJASONDJF
1987

SPOT PRICES OF SELECTED COMMODITIES
Percent change
Dec. 30, 1986 to
Oct. 13, 1987 to
Dec. 8, 1987
Oct. 13, 1987
Aluminum (COMEX futures)
Copper
Steel scrap
Rubber
Hides
Cotton

68.2
41.1
64.6
20.0
50.0
12.3

-6.5
35.4
-9.9
-. 4
-8.2
-5.5

Gold
Silver
Platinum

18.1
46.3
23.3

5.5
-12.9
-14.1

6.0

-5.1

-4.3

10.1
13.4
7.8
10.3

6.8
11.5
11.0
-20.8

Oil (Brent)
Lumber
Wheat
Corn
Soybeans
Hogs

II-25

The termination of incentive programs also affected the services component of the CPI, as auto finance charges increased sharply.

In addi-

tion, owners' equivalent rent and entertainment service costs registered
large increases.
The PPI for finished goods less food and energy fell 0.2 percent in
October, after a large September increase of 0.6 percent.

On net, the

average increase in this index over the two months was little different
from its pace earlier in the year, and it appears that problems with
seasonal adjustment were partly responsible for the September-October
monthly pattern.

In October, declines were posted for a number of con-

sumer and capital equipment categories, notably for light and heavy
trucks.

However, prices of new cars increased 1.6 percent, reflecting

manufacturers' increases on the 1988 models--net of cost-based adjustments for the estimated value of quality changes--as well as the removal
of sales incentives.
At the intermediate materials level, the PPI excluding food and
energy items rose nearly 1 percent further in October, with large increases for metals, chemicals, plastics, and textiles.

Prices of crude

nonfood materials less energy were up another 4 percent in October, led
by hikes for scrap metals.
Developments in spot commodity markets since the stock market began
its plunge in mid-October have been mixed.

Among industrial materials,

copper prices have continued to surge, reportedly in response to tight

5. In contrast with the CPI, prices of new cars in the PPI are based on
current-year models through September, and on new models thereafter.
The adjustments for quality changes are similar for the two measures.

II-26
HOURLY EARNINGS INDEX 1
(Percentage change; based on seasonally adjusted data)

1986

1987
Q2

Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Finance, insurance
and real estate
Total trade
Services

1987
Oct.

Nov.

--Monthly rate--

--Annual rate-Total private nonfarm

Sept.

2.3

2.1

2.6

2.7

1.7
1.3
2.3
2.2

1.5
.3
3.5
-2.7

2.1
2.1
2.2
3.4

2.1
2.6
1.2
.2

.7
.6
1.0
-.4

-.2
-.2
-.3
.4

.2
.2
.2
1.1

2.8

3.2

3.5

-.2

4.4
1.8
3.1

9.7
.7
4.2

.5
2.5
3.2

-.3
.7
-.1

.2
-.2
.9

1.4
.3
.7

3.4
3.5
4.6

1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime hours in manufacturing.
2. Annual changes are measured from fourth quarter to fourth quarter.
Quarterly changes are at compound annual rates.

LABOR PRODUCTIVITY AND COSTS
NONFARM BUSINESS SECTOR
(Percent change from preceding period at compound annual rates;
based on seasonally adjusted data)

1985

1986

1986
Q4

Output per hour

1.0

1.5

Compensation per hour

4.8

3.4

4.0

Unit labor costs

3.7

1.9

4.0

1987
Q2

1986 Q3
to
1987 Q3

1.4

3.6

1.3

3.0

3.8

3.0

1.1
.8

1.5

1. Percent changes are from fourth quarter to fourth quarter.

1.6

II-27

near-term supplies, while prices have receded for aluminum, steel scrap,
and some other industrial materials.

Prices of precious metals also

have been mixed; a net increase over the period for gold contrasts with
net declines for silver and platinum, which have more industrial uses.
Spot prices of crude oil and of lumber also have weakened since midOctober.

Among food commodities, crop prices have continued to firm,

particularly for corn and soybeans, but hog prices are down sharply, as
indicated above.

Both the Journal of Commerce index of industrial

materials prices and the CRB spot price index for raw industrials have
declined somewhat, on balance, over the past eight weeks.
Wages and Labor Costs
Wage inflation continued at a moderate pace in recent months with
most measures showing little sign of change in underlying pay patterns.
Wage rates, as measured by the hourly earnings index, rose 0.5 percent
in November after a small gain in October.

The gains were concentrated

in services (0.7 percent) and construction (1.1 percent),
gains in other industries.

with small

Over the past 12 months, this measure of

wages has risen 2-1/2 percent for the nonfarm sector and 2 percent in
manufacturing.
Published numbers show a substantial pickup in hourly compensation
in the nonfarm business sector--to 3-3/4 percent at an annual rate last
quarter.

However, the apparent acceleration is associated with an ar-

tificially low reading for September hours because of the unusual occurrence of the Labor Day holiday during the labor market survey week in
September.

The staff estimates that the Labor Day influence, which will

II-28

be reversed in the fourth quarter, added as much as a percentage point
to the increases in compensation last quarter.

Making a similar adjust-

ment to productivity, the staff estimates that productivity in the nonfarm business sector rose about 2-1/2 percent at an annual rate.

Unit

labor costs, which are not affected by the timing of Labor Day, were
essentially unchanged in the third quarter.

III-T-2
SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)

1987

Jan.-Feb.
lows
Sept. 3 Oct

Change from:

FOMC
16

Nov. 3

Dec.
8
---

Oct. 16

FOMC
Nov. 3

Short-term rates
5.95

6.85

7.59

6.81

6.86

-. 73

5.30
5.31
5.35

6.19
6.98

6.93
7.58
7.74

5.63
6.08
6.42

5.86
6.43
6.72

-1.07
-1.15
-1.02

5.81
5.73

6.88
6.97

7.94
8.65

6.93
7.36

7.66
7.57

-. 28
-1.08

5.85
5.80
5.78

6.90
7.01
7.35

7.92
8.90
9.12

6.93
7.46
7.51

7.80
7.72
7.73

-1.18
-1.39

Eurodollar deposits 6
1-month
3-month

6.00
6.00

7.01
7.11

7.79
8.69

7.08
7.73

7.54
7.71

-. 25
-. 98

.46
-. 02

Bank prime rate

7.50

8.25

9.25

9.00

8.75

-. 50

-. 25

U.S. Treasury (constant maturity)
3-year
6.34
10-year
7.01
30-year
7.29

8.48
9.29
9.47

9.52
10.23
10.24

8.02

8.91
9.03

8.15
9.09
9.26

-1.37
-1.14

Municipal revenue
(Bond Buyer)

6.92

8.47

9.59

8.78

8.40

-1.19

Corporate A utility
(recently offered)

8.78

10.60e

11.50

10.60e

10.51e

-. 99

-. 09

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

9.10
7.52

10.63
7.84

11.58
8.45

10.97
8.20

10.60
7.95

-. 98

-.37

-.50

-. 25

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

6.30

.05

Commercial paper
1-month

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

.73
.21

-.12

Intermediate- and long-term rates

1986
Record
highs

1987
FOMC
Nov. 3

-. 98

Change from:
Record
FOMC
highs
Nov. 3

-.39

Dec. 8
Year end
Stock prices
Dow-Jones Industrial 1895.95
2722.42
1963.53
1868.37
-31.37
-4.85
NYSE Composite
138.58
187.99
140.11
131.42
-30.09
-6.20
AMEX Composite
263.27
365.01
255.49
236.57
-35.19
-7.41
NASDAQ (OTC)
348.83
455.26
320.66
297.96
-34.55
-7.08
1. One-day quotes except as noted.
'5. Secondary market.
2. Day prior to increase in discount rate on
6. Averages for statement week closest
September 4, 1987.
to date shown.
3. Last business day prior to stock market
7. One-day quotes for closest Thursday.
decline on Monday, October 19, 1987.
8. Quotes for week ending Friday
4. Average for two-week reserve maintenance
closest to date shown.
period closest to date shown, except Jan.-Feb.
e--estimate.
low, which is one-week average ending Feb. 25,
and Sept. 3 which is one-week average ending
Sept. 2. Last observation is average to date
for week ending Dec. 9, 1987.

DOMESTIC FINANCIAL DEVELOPMENTS

Market rates of interest have shown mixed and, in most cases,
fairly small changes from their levels at the time of the November FOMC
meeting.

On a technical level, the fixed-income securities markets are

operating in a more normal fashion: bid-asked spreads have narrowed and
dealer financing is again available from the usual sources.

Nontheless,

sentiment has remained somewhat volatile, in part because of unresolved
questions about the potential extent of dollar depreciation and the
policy actions of fiscal and monetary authorities here and abroad, as
well as because of great uncertainty about the effects of the stock
market collapse.
Spreads between rates on U.S. government and private securities at
the short end of the maturity spectrum, which narrowed in the first part
of the intermeeting period, widened again sporadically in late November
and early December, as the dollar dropped to new lows, some commodity
prices rose, and the stock market encountered renewed selling that drove
major indexes temporarily below their October 19 lows.

Additional

pressure on very short private interest rates have come from positioning
for the year-end.

In longer-term markets, however, private rates have

declined while Treasury yields are up about 20 basis points.
What indications there might have been earlier of a heightened
demand for liquidity in the form of money balances seem to have disap-

peared.

After a late-October increase in the aftermath of the stock

market turbulence, M1 weakened in November, returning by the end of the

III-1

III-2

month almost to September levels.

The growth of the nontransactions

component of M2 also slowed in November and, consequently, M2 was about
flat; over the past two months, it fell further below its 1987 target
cone and has risen at only a 4 percent annual rate since the final
quarter of last year.

In contrast, growth in the non-M2 component of M3

picked up sharply in November; the somewhat stronger average expansion
of M3 in recent months has put its growth rate for the year at about
5-3/4 percent, just within its annual range.
Treasury borrowing has picked up in the current quarter, but borrowing by other sectors has remained relatively moderate.

Gross public

offerings of corporate bonds last month fell to the lowest level since
last spring's market downturn; junk bond volume has been minimal
recently.

After a small spurt in October, net borrowing by businesses

at banks and in the commercial paper market also appears to have
slackened in November.

Although buyout activity has diminished, share

repurchases and negligible gross equity issuance probably are driving
aggregate corporate sector leverage upward.

Tax-exempt bond issuance

continued relatively light in November, although up from the pace of the
previous two months.

In the household sector, consumer installment

borrowing diminished in October, as auto sales incentive programs
expired; non-auto installment credit growth also slowed somewhat.
Mortgage lending, especially by thrift institutions, continued in
October and early November to shift toward adjustable-rate loans.

III-3

Monetary Aggregates and Bank Credit
M1 contracted at a 6 percent annual rate in November, after growing
at a 15 percent pace in October.

This pattern largely reflected the

behavior of demand deposits, which jumped $11 billion in the last two
weeks of October, owing to a heavy volume of financial transactions.

mid-November, this buildup had reversed, and demand deposits had
returned almost to their average September level.

To a lesser degree,

OCDs also surged in late October and then ran off in November.

Currency

rose rapidly in late October and continued to advance into mid-November,
boosting monthly average expansion in November to nearly a 14 percent
rate.

However, smaller increases in recent weeks suggest that currency

growth is returning to more normal rates.
In addition to the runoffs of transactions balances, other liquid
deposit instruments also showed weakness in November.

Evidently, the

October plunge in stock prices has not resulted in a sustained flight to
liquid deposits.

MMDAs declined at a 14-1/2

percent average annual

rate over October and November, while savings deposits contracted at a
10-1/2 percent rate.

Runoffs were particularly strong at thrifts.

contrast, small time deposits at both thrifts and banks grew at their
fastest pace of the year in October and November.

In part, this

reflected the relatively wide yield spreads between rates paid on time
deposits and those paid on more liquid retail deposits; these spreads
increased in September and October when particularly sizable rate
increases were registered in long-term markets, and have been only
partly reversed more recently.

M2-type money funds slowed only a little

111-4
MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)
1985:Q4
to
1986:Q4

1.
2.
3.

-----15.3

Ml
M2
M3

9.0
8.9

1987
Sept.

Growth from
04 1986 to
Oct.

Percentage change at annual rates
6.4
0.0
0.3
15.0
2.3
4.3

3.1
5.2

5.7
6.0

7.1
8.0

Nov. 198 7P

Nov."

6
4
5-3/4

-6
0
5

Levels in billions
of dollars
Oct. 1987
Selected components
4.

M-A

Currency

Demand deposits

7. Other checkable deposits
8.
9.
10.

M2 minus M12

11.
12.

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
Co-mercial banks
Savings deposits, SA,

13.
14.
15.

plus MIDAs, NSA
Small time deposits
Thrift institutions
Savings deposits, SA,

16.

3
plus MMDAs, NSA
Small time deposits

17.

M3 minus M24

10.0

2.7

-2.2

-1.9

19.1

-6

503.6

7.5

6.6

6.7

8.1

10.5

196.2

11.6

0.0

-8.1

-9.3

25.7

-18

300.4

28.5

14.0

4.6

4.7

7.5

-8

257.2

6.9

0.9

4.2

7.5

4.2

2133.1

16.1

-24.3

18.0

56.1

39.1

-80

85.6

-1.1

6.1
1.7

20.9
0.3

15.5
2.4

13
7

219.3

-3.8
6.2
1.2

-8.4
18.6
0.0

-6
25
2

536.6
373.0
922.4

-25
25

412.8
509.6

17.3
6.8

-1.4

16.0

0.8

-4.2

-4.6

4.3

5.0

-2.4
8.0
3.6

12.0
-1.2

9.7
1.0

-3.9
10.1

-9.7
9.8

15.2
12.9

8.7

12.4

13.4

7.4

11.7

909.5

757.0

18.

Large time deposits

3.0

9.3

6.2

5.4

18.7

476.2

19.
20.
21.

At comercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA

2.7
3.4

18.3
-8.4

4.1
10.7

-0.4
17.2

13.0
29.4

24
28

317.0
159.1

30.3
31.1
3.1

-11.4
73.0
-0.0

1.9
26.4
29.0

-3A.8
2o.0.
69.2

22.
23.

13.4
-30.6
-12.1

81.6
106.9
98.0

-- Average monthly change in billions of dollars -MEMORANDA:
24. Managed liabilities at commercial
banks (25+26)

25.
26.
27.

Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions, NSA

28.
29.

Other
U.S. government deposits at commercial

banks

2.9
-0.8
3.7

12.4
-0.4
12.8

6.2
7.3
-1.1

553.5
377.8
175.7

0.6

1.5

4.3

12.2

-0.5

10.3

1.0

-0.9

-0.6

0.6

-0.6

165.4

0.4

3.4

-1.5

-5.8

12.3

35.6

1. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.
2. Nontransactions M2 is seasonally adjusted as a whole.
3. Growth rates are for savings deposits, seasonally adjusted, plus money market deposit accounts (MD)Aa) not
seasonally adjusted. Cosmercial bank savings deposits excluding MMDAs decreased in October and November
at rates of 3.4 percent and 3 percent, respectively. At thrift institutions, savings deposits excluding MMDAs
decreased in October and November at rates of 9.9 percent and 22 percent, respectively.
4. The non-M2 component of 3 is seasonally adjusted as a whole.
5. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
6. Consists of borrowings from other than commercial banks in the form of federal funds pur'hased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borzr.wings from the Federal
Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated.
7. Consists of Treasury demand deposits and note balances at c.nommrci1l banks.
pe--preliminary estimate.

III-5

in November as their yields continued to be attractive relative to liquid deposit rates.

Overnight RPs and Eurodollars contracted sharply in

November, in part due to seasonal influences (these items are not seasonally adjusted).
With core deposit inflows slowing, the non-M2 component of M3 accelerated to about a 25 percent annual growth rate in November, more
than twice the October pace.

Large time deposits grew at their most

rapid rate in three years in November; their robust expansion at thrifts
may reflect the greater weakness of core deposits at these institutions
as well as heavy demand for ARMs, which are more likely than fixed-rate
mortgages to be held in portfolio instead of sold into the market.
Owing to favorable rate relationships, institution-only money funds grew
at their fastest pace in about seven years.

With rapid expansion of

domestic managed liabilities and slowing of credit growth, banks paid
down net advances from their foreign branches in November; this paydown
likely contributed to the decline in the Eurodollar components of the
aggregates.
Bank credit declined slightly in November after three months of
relatively rapid growth.

Despite a runoff of U.S. government

securities, growth of investments picked up a bit as banks apparently
added in volume to their holdings of CMOs.

In part due to a reversal of

October credit demands associated with the stock market crash, bank
lending declined at a 1-3/4 percent rate last month.

Security loans,

which had increased by a huge $8-1/2 billion just after the stock market
collapse, ran off in the next two weeks and continued to contract

III-6
COMMERCIAL BANK CREDIT AND SHORT-

AND INTERMEDIATE-TERM BUSINESS CREDIT 1

(Percentage changes at annual rates, based on seasonally adjusted data)
1985:Q4
to
1986:Q4

Securities

Levels in
bil. of dollars
Oct.

9.8

7.7

7.3

9.7

10.4

14.2

4.4

8.5

6.4

0.5

U.S. government securities

11.9

3.3

18.7

11.3

2.2

Other securities

18.0

6.1

-7.9

-1.8

8.4

8.9

7.0

Total loans

Nov.

Nov.P

Commrcial Bank Credit -------

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

1. Total loans and securities
at banks

1987
Sept.

-0.8

2.3

2224.4
527.5

-5.1

330.9

-2.5

14.2

196.6

10.7

13.5

-1.7

1696.9

Business loans

6.6

4.6

1.9

10.6

11.4

3.4

567.3

Security loans

-3.7

40.7

26.5

27.3

10.7

-182.4

38.5

Real estate loans

14.1

19.3

13.6

10.4

17.5

13.4

570.6

Consumer loans

7.3

1.2

6.5

7.6

5.6

4.9

321.7

Other loans

5.4

0.2

0.0

13.3

22.2

10.

-25.9

199.1

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

Business loans net of bankers
acceptances

12.

2
Loans at foreign branches

13.

Sum of lines 11

14.

Commercial paper issued by
nonfinancial firms
Sums of lines 13 & 14

16.

Bankers acceptances:
related

4.0

1.4

10.9

11.0

25.5

-41.6

-21.6

3.4

2.1

9.1

11.4

17.6

-11.4

-3.1

1.5

-9.2

77.7

5.1

0.4

7.8

10.2

3.1

656.3

23.8

22.5

-6.7

n.a

6.1

1.5

7.1

n.a

684.8 (Sept)

17.9

14.2

10.0

n.a

n.a.

192.9 (Sept)

8.6

4.2

n.a

n.a.

877.7 (Sept)

-14.7

15.

17.

6.3

4.3

561.3
17.2
578.5

U.S. trade
-3.9

35.7

(Sept)

Line 15 plus bankers acceptances:

U.S. trade related
18.

Finance company loans to business

19.

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

5.8

7.7

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

III-7

rapidly into November, probably reflecting both the restoration of
normal financing channels for dealers and reduced securities issuance.
Real estate lending slowed to a 13-1/2 percent rate of growth, the same
pace as in the third quarter, and consumer loan growth remained
moderate.

Business loans decelerated markedly in November from the rate

of the preceding two months, with weakness centered at large banks and
foreign-related institutions.

The recent runoff of commercial paper

issued by nonfinancial firms resumed in November after a minor
interruption in October, and the sum of C&I loans and commercial paper
expanded at only a 3 percent rate.

Merger-related lending is estimated

to have accounted for all of the growth in this form of short- and
intermediate-term business credit last month.
Corporate Finance
After a brief flurry of sales of new high-grade debt in late
October when yields dropped, gross public issuance of all categories of
corporate securities was weak in November.

Junk-bond offerings were

extremely light because of continued investor caution.

The dispersion

of yields on low-rated bonds reportedly has widened substantially;
issues of firms that have largely completed their restructurings have
outperformed those of more recent issuers whose programs to sell assets
are only beginning.

New Eurobond borrowing by nonfinancial firms was

nil in November as foreign investors continued to be reluctant to acquire long-term dollar-denominated debt.
Bond issuance by financial corporations, too, was well below the
pace of earlier months.

The major element in the drop-off was slower

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)
1986
Year

1987
Q3

Sept

Oct.p

Nov.

24.33

26.50

30.26

19.73

12.08

26.81

22.23

23.73

28.00

18.50

11.60

5.15
2.51
.64
1.87
2.64

5.50
2.74
.74
2.00
2.76

5.70
3.45
.71
2.74
2.25

5.11
2.48
.64
1.84
2.63

6.00
2.70
.40
2.30
3.30

2.70
1.70
.10
1.60
1.00

19.33
9.62
3.61
6.01
9.71

21.31
8.98
2.05
6.93
12.33

16.53
6.07
1.54
4.53
10.46

18.62
6.60
2.43
4.17
12.02

22.00
6.85
2.60
4.25
15.15

15.80
5.60
2.55
3.05
10.20

11.00
2.50
1.10
1.40
8.50

By quality 3
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)

4.70
6.05
3.42
.20

3.30
7.31
3.06
.08

2.25
5.05
2.91
.22

2.78
4.36
3.67
.07

2.40
4.55
4.06
.08

7.54
4.01
1.25
.13

3.40
2.90
.40
.10

Memo items:
4
Equity-based bonds
Mortgage-backed bonds
Variable-rate notes

.86
4.14
1.02

1.37
7.26
2.43

1.29
5.18
1.65

.47
6.40
2.75

.67
8.65
3.40

.39
2.20
.68

.00
2.15
.80

3.55
1.50
2.05

2.92
1.14
1.78

1.82
.97
.85

2.50
1.27
1.23

1.65
.75
.90

1.09
.74
.35

.48
.00
.48

.15
.09
.06

.06
.06
.00

.28
.24
.04

.27
.16
.11

.61
.28
.33

.14
.14
.00

.00
.00
.00

28.18

'29.79

24.48

Stocks--total 2
Nonfinancial
Utility
Industrial
Financial
Bonds--totall
Nonfinancial
Utility
Industrial
Financial

Corporate securities - total 1
Public offerings in U.S.

Bonds sold abroad - total
Nonfinancial
Financial
Stocks sold abroad - total
Nonfinancial
Financial

.60
.50
.03
.47
.10

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

III-9
sales of CMOs and multi-class REMICs, which have become more difficult
to price because of increased prepayment uncertainty in the more volatile rate environment.
Gross offerings of new corporate equity shares have nearly dried up
since October 19.

Corporate restructuring activity has continued to

result in a net retirement of equity, but the volume of mergers and
acquisitions has been damped by higher costs of junk bonds and concerns
about the future climate for asset sales.

Two major LBO transactions

could not be completed as scheduled in November and the pace of new
proposals also fell off.

However, one of the LBO-related bond issues

which had been postponed--Southland Corp--was repriced in early December
and a successful sale of this issue could lead to some recovery in new
activity.

Corporate share repurchases are contributing heavily to

equity retirements, but the pace of activity is difficult to track.
More than 600 firms have announced buyback programs since the stock
market crash, but only a small share of the plans apparently have been
initiated; however, buybacks from previously announced programs
reportedly have accelerated somewhat.
Some return to normalcy has been seen in the operation of the
equity markets in recent weeks.

On November 9, the NYSE lifted

restrictions on member firms' use of the Exchange's automated order
delivery systems for computer-assisted program trading; and trading
hours, which were shortened during the initial hectic days after October
19, returned to normal on November 12.

The volume of trading in stocks

and derivative stock instruments has moved back down to ranges observed

III-10

in September and early October--still heavy by historical standards.
Nonetheless, equity markets remain uneasy and highly sensitive to
incoming economic indicators.

After fluctuating narrowly over much of

last month, share prices dropped sharply in late November and early
December, largely in response to weakness in the dollar.

A part of this

decline was reversed in more recent days, but most major indexes still
are roughly 6 percent below their November meeting levels and 30 percent
below August highs.
It still does not appear likely that any major securities firms
will fail as a result of the stock market turmoil. However, losses at
some firms evidently were sizable.

Four U.S. underwriters are estimated

to have lost between $70 and $80 million each, before tax, on the
British Petroleum offering and a number of firms reportedly lost large
amounts on their own trading positions or when customers could not cover
losses on leveraged accounts.

With earnings already trending down in

1987, these losses, along with more uncertainty about future profits,
contributed to sharply lower share prices for securities firms.

While

average stock prices for all U.S. companies have declined only 5 to 7
percent since the beginning of the year, equity prices of securities and
brokerage firms have declined over 30 percent.

These lower share prices

and an increased need for capital have spurred further consolidation in
the industry.

Shearson Lehman acquired E.F. Hutton in early

December, and a Japanese company, the Yasuda Mutual Life Insurance
Company, recently purchased a 25 percent share in Paine Webber.

III-11
Treasury and Sponsored Agency Financing
The federal deficit for the fourth quarter is estimated to be
nearly $81 billion, of which $62 billion is expected to be financed by
borrowing from the public.

Most of the borrowing will be in the form of

marketable coupon securities.

Apart from one set of weekly bill

auctions that was moved from September to October owing to debt ceiling
problems, bill offerings will contribute negligible net funds this
quarter.

Bill issues sold to foreign central banks on an "add-on"

basis, which increase issuance above the announced auction sizes, have
been considerably greater than usual; these sales have about offset
announced net paydowns.
The Treasury will finance the remainder of the deficit by running
down its enlarged beginning-of-quarter cash balance and through a pickup
in nonmarketable securities issuance, which almost entirely reflects a
surge in state and local government securities (SLGS). The sharp drop in
interest rates after the stock market collapse enabled some state and
local governments, which earlier had been able to purchase marketable
Treasury securities with the proceeds of tax-exempt refunding bonds
(while still meeting the arbitrage restrictions), to profit by selling
the marketable securities and purchasing SLGS.

The Treasury subse-

quently prohibited trading profits from being earned on similar conversions.
Borrowing by federally sponsored credit agencies is expected to
pick up a little in the fourth quarter.

On net, much of the increase is

attributable to the $1.2 billion raised by the Financing Corporation

III-12
TREASURY AND AGENCY FINANCING
(Total for period; billions of dollars)
1987
Q3

Q4 e

Oct. e

Nov. e

Dec. e

Treasury financing
Total surplus/deficit(-)

-28.7

-83.7

-30.7

-24.7

-28.2

21.9

61.1

27.3

22.7

11.0

16.9
-12.9
29.8
5.0

48.4
10.1
38.3
12.7

26.7
11.9
14.9
.6

12.3
.2
12.2
10.4

9.4
-1.9
11.3
1.6

3.6

19.4

-1.8

14.8

6.5

36.4

17.0

38.3

23.5

17.0

3.2

5.2

-12.8

10.8

7.8e

9.1

6.3

2.3

4.7
1.6
-1.0
.6e
.0
2.0

5.3
1.4
.0
.5
1.2
.7

3.7
1.7
.3
.2
.6
-.2

1.0
-.2
-.1
.2
.6
.8

Means of financing deficit:
Net cash borrowing
from the public
Marketable borowings/
repayments(-)
Bills
Coupons
Nonmarketable
Decrease in the cash
balance
Memo: Cash balance
at end of period
Other 2
Federally sponsored credit
agencies, net cash
borrowing 3
FHLBs
FNMA
Farm Credit Banks
FHLMC
FICO
SLMA

.6
.6
-.1
-.2
.1
.0
.1

1. Data reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
e--staff estimate.
Note: Details may not add to totals due to rounding.

III-13

(FICO).

FICO's first issue came to market in September and settled in

October; its second issue was priced in mid-November. Both issues had
yields around 90 basis points over Treasuries.
Excluding FICO, borrowing by the sponsored agencies is about
unchanged from the third quarter.

The steady paydown of debt by the

Farm Credit Banks (FCBs) that began in 1984 is expected to halt
temporarily in the fourth quarter, before resuming next year as
continued slack farm loan demand causes the FCBs to experience further
declines in their holdings of farm loans.

The Farm Credit System

reported a small profit in the third quarter, but this appeared to have
little effect on market sentiment; market participants also appear to
have been unimpressed by Senate

passage of an FCB assistance bill that

must be reconciled with a differing House-passed version.
Given large October and November increases in advances to savings
and loan associations, the Federal Home Loan Barks are expected to increase their borrowing during the fourth quarter.

Seasonal factors

primarily account for the decline in borrowing by Sallie Mae.
Municipal Securities Markets
Tax-exempt bond issuance rose somewhat in November, largely
reflecting a step-up in borrowing to raise new capital; however, bond
issuance, overall, has remained well below the pace of recent years.

1. The House bill provides $5.4 billion in assistance for the Farm
Credit System to be funded through the sale of Farmers Home Administration loans, while the Senate bill provides $4.0 billion to be funded
through the issuance of federally guaranteed securities by a new agency

of the System. Major differences also exist concerning the reorganization of the System; both would establish a new secondary market for
farm loans but they differ in many details.

III-14

Refunding volume fell to the lowest level since January 1986.

The

continued light volume has been accompanied by a series of announcements
of cutbacks in staffing of municipal finance departments at investment
and commercial banks, but these cutbacks seem to have had little if any
effect on the market's operation.
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)
1985
___Year

1987

1986
Year

Sept.

Oct.

Nov.p

Total tax-exempt

19.81

14.04

10.86

9.65

8.16

6.15

7.46

8.94

Short-term 1
2
Long-term
Refundings
New capital
Total taxable

1.96
17.85
4.85
13.00
.03

1.79
12.25
5.29
6.96
.38

.56
10.30
7.24
3.06
.27

1.83
7.82
2.98
4.84
.29

1.83
6.33
1.69
4.63
.15

.64
5.51
1.17
4.34
.22

1.20
6.26
2.16
4.09
.25

1.83
7.11
.99
6.12
.09

1. Does not include tax-exempt commercial paper.
2. Includes all refunding bonds, not just advance refundings.
p--preliminary.
Alter rising sharply in mid-October, the ratio of tax-exempt to
taxable bond rates has returned to around the level prevailing just
prior to the collapse of the stock market.

That level is still on the

high side, however, in part because various tax-related legislative
proposals have added significantly to investor concerns.

One of these

is a proposal in the House to require owners of non-original discount
bonds to pay taxes annually on the amortized discount, which would have
the greatest effect on the tax-exempt sector.
Mortgage Markets
Despite a small backup most recently, the average contract rate on
new commitments for fixed-rate conventional home mortgages has fallen

III-15

about 40 basis points since the last FOMC meeting to 10.60 percent.
Initial rates on adjustable-rate mortgages indexed to the one-year constant maturity Treasury yield also have declined during the intermeeting
period, though the decline has been smaller for ARMs than for fixed-rate
loans since mid-October.

In fact, the commitment rate advantage of ARMs

over fixed-rate loans has shrunk more than 1/2 percentage point.
Nevertheless, at more than 2-1/2 percentage points, this spread remains
historically high.
In early November, roughly 63 percent of conventional home purchase
loans closed had adjustable rates, the highest proportion since late
1984.

Mortgage origination activity at thrifts has been buoyed by the

renewed ARM popularity.

Though interest rates on fixed-rate mortgages

have increased a good deal since early this year and refinancing volume
has fallen further, the October origination volume at FSLIC-insured
thrifts was only 10 percent below the average monthly level during the
first half of the year.

The heavier ARM volume also has permitted S&Ls

to add a sizable amount of these loans to their portfolios.

Thrift

holdings of unsecuritized mortgages jumped by an unprecedented $8.2
billion in October; investment in ARMs accounted for all of this growth.
In contrast, lenders that traditionally have specialized in fixed-rate
mortgages, such as mortgage bankers, have experienced a more pronounced
falloff in origination business than have thrifts.
The drop in fixed-rate mortgage originations has resulted in a
continued slowing in the pace of mortgage pass-through security
issuance.

Issuance of mortgage-backed pass-throughs fell for the

III-16

MORTGAGE ACTIVITY AT ALL FSLIC-INSURED INSTITUTIONS
(Billions of dollars, seasonally adjusted)
1
Net change in mortgage assets
Mortgage-backed
Mortgage
securities
loans
Total

Mortgage transactions
Sales
Originations
1987-Jan.
Feb.
Mar.
Apr.
May
June r
July r
Aug. r
Sept.r
Oct. p

1.1
.3
2.2
7.9
11.9
1.5
3.3
4.9
9.7
10.0

13.7
12.1
11.6
14.8
11.9
11.4
12.3
9.5
8.4
7.1

20.1
21.3
22.7
24.2
22.4
23.2
21.8
18.5
19.5
19.9

4.5
.9
.4
6.3
8.7
-.7
2.8
2.3
5.5
1.8

-3.4
-.5
1.8
1.6
3.2
2.2
.5
2.5
4.2
8.2

1. Net changes are adjusted to account for structural changes caused by
mergers, acquisitions, liquidations, terminations, or de novo institutions.

NEW ISSUES OF MORTGAGE-BACKED PASS-THROUGH SECURITIES
BY FEDERALLY RELATED AGENCIES
(Monthly averages, billions of dollars,
not seasonally adjusted)

Period

Total

GNMAs

FHLMCs

FNMAs

1984
1985
1986

5.0
9.0
21.6

2.3
3.8
8.2

1.6
3.2
8.3

1.1
2.0
5.0

1987-Q1
Q2
Q3

24.0
24.8
17.7

10.4
9.6
7.9

8.4
8.4
5.2

5.2
6.9
4.6

25.2
22.2
24.5
28.8
23.2
22.5
21.5
17.0
14.7
12.1
11.1

10.6
9.7
10.7
11.9
8.4
8.4
8.8
8.2
6.5
5.4
5.7

8.2
7.8
9.1
9.9
7.8
7.4
6.8
4.7
4.2
2.9
2.7

6.4
4.7
4.6
7.0
7.1
6.6
5.8
4.0
4.1
3.8
2.6

1987-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug. r
Sept.r
Oct. p
Nov. p
r--revised.

p--preliminary.

III-17
seventh consecutive month in November to $11.1 billion (NSA), about half
of the average monthly pace during the first six months of the year.
ARM-backed issues continued to account for only a small fraction of
pass-through volume; new ARM-backed programs offered by the federally
sponsored agencies have yet to have much effect on volume.
Consumer Installment Credit
Consumer installment credit increased at a 7-1/2 percent annual
rate in October, off from September's rapid 13 percent pace.

The

primary reason for the deceleration was the end of auto sales incentive
programs.

Non-auto installment credit growth, although slowing,

remained above its 1987 average rate.

Revolving credit continued to

show strong growth for the fourth consecutive month and may be reflecting less substitution into home equity lines of credit.
Growth in home equity lines of credit at large banks has been slowing in recent months, dropping to an annual rate of perhaps around 40
percent in October and November from roughly 70 percent during most of
this summer.

The most often cited reason for this slowdown, among

respondents to the November Senior Loan Officer Opinion Survey, was that
banks have been marketing less aggressively; however, some banks also
attributed the slower growth to higher interest rates and asserted that
many qualified borrowers already had obtained home equity lines.
The October stock market plunge appears to have had little
immediate effect on the demand for home equity lines, with more than

III-18

CONSUMER INSTALLMENT CREDIT
(Seasonally adjusted)

Net change
(billions of

Percent change
(at annual rate)

Memo:
Outstandings
(billions of
dollars)

dollars)

1987

Total, excluding
auto
Selected types
Auto
Revolving
All other

Sept.r Oct. p

Oct.p

7.4

6.43

3.74

606.3

10.4

7.7

2.97

2.20

347.3

11.7
12.5
6.3

16.3
16.0
6.5

7.6
13.3
3.7

3.46
1.87
1.10

1.63
1.57
.64

259.1
143.3
204.0

2.1
2.3
7.0

7.2
13.4
13.7

14.7
16.7
12.4

7.9
4.0
12.5

3.26
1.96
.85

1.78
.47
.87

270.9
143.1
84.2

10.1

15.1

3.8

5.1

.20

.27

63.5

1986

17.1

10.5

3.5

10.1

12.9

14.9

5.7

3.0

8.8

20.7
22.5
10.6

17.8
10.6
2.6

4.1
3.6
2.5

15.7
26.3
9.9

8.1
20.7
8.0

30.0

10.7

Selected holders
Commercial banks
Finance companies
Credit unions
Savings
2
institutions

Oct.p

Sept.r

Q3 r

1985
Total 1

1987

1. Includes items not shown separately.
2. Savings and loans, mutual savings banks, and federal savings banks.
r--revised. p--preliminary.
CONSUMER INTEREST RATES
(Annual percentage rate)
1987
May

Aug.

1985

1986

Feb.

12.91
15.94
18.69

11.33
14.83
18.26

10.36
14.11
18.11

10.24
14.00
17.92

10.37
14.22
17.83

11.98
17.59

9.44
15.95

10.78
14.56

10.69
14.45

9.63
14.53

Oct.

Nov.

...
...
...

10.86
14.58
17.82

8.71
14.58

10.31
14.76

n.a.
n.a.

Sept.

At commercial banks 1
New cars (48 mo.)
Personal (24 mo.)
Credit cards

2
At auto finance cos.
New cars
Used cars

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

III-19

half of the surveyed banks reporting that the volume of applications has
stayed about the same as before the crash, and like numbers reporting
increases and decreases.
Over the period from early August to early November, most consumer
loan rates at banks rose roughly in line with other interest rates with
the exception of credit card rates, which fell slightly over this
period.

Rates for new cars and personal loans were at their highest

levels in over a year and showed their first back-to-back increases
since 1984.

INTERNATIONAL DEVELOPMENTS

Foreign Exchange Markets

The trade-weighted, foreign-exchange value of the dollar in terms
of the other G-10 currencies has declined more than 2-3/4 percent since
the last FOMC meeting and is now about 4-3/4 percent below the low of
early May.

Since November 3, the value of the dollar has declined about

2-3/4 percent against the mark and about 3-1/2 percent against the yen.
Selling pressure on the dollar was fueled intermittently by reactions to
efforts in the United States to reduce the fiscal deficit.

The dollar

was given some further downward impetus by indications from U.S. and
German officials that they were not willing to sacrifice domestic objectives to stabilize exchange rates, but has recently rebounded somewhat
following concerted interest-rate reductions in Europe.
As the dollar weakened, European central banks altered official
interest rates in their countries in three rounds of coordinated actions.

(See the table on Official Interest Rates in Selected

Countries.)

Early in the period, in an effort to ease strains within

the EMS generated by the strengthening of the mark, the Bundesbank
lowered the Lombard rate and announced a reduction in the rate for its
next repurchase tender, and the Bank of France raised its money-market
intervention and 7-day repurchase rates.

In the United Kingdom,

Switzerland, and the Netherlands, officials followed Germany by lowering
lending rates, presumably with the intention of contributing to the
stability of their currencies against the mark.

IV-1

In the second round,

IV-2

OFFICIAL INTEREST RATES IN SELECTED COUNTRIES

Level on
Nov. 3

Change in week ending:
Nov. 6
Nov. 27
Dec. 4

Germany
Lombard
Fixed-rate RP
T-bill selling
Discount

5.00
3.80
3.20
3.00

-0.50
-0.30*

United Kingdom
Money-market dealing

9.38

-0.50

France
Money-market
intervention
7-day RP

7.50
8.00

0.75
0.75

Switzerland
Lombard
Discount

5.00
3.50

-0.50
-0.50

Netherlands
Promissory notes
Advances
Discount

5.50
5.00
4.50

-0.25
-0.25
-0.25

Belgium
Advances
Discount
Austria
Lombard
Discount

Level
Dec. 4

-0.50

4.50
3.25
3.00
2.50

-0.50

8.38

-0.25
-0.25

7.75
8.25

-0.50
-0.50

4.00
2.50

-0.25
-0.25
-0.25

4.75
4.25
3.75

7.50
7.25

-0.25
-0.25

7.25
7.00

5.00
3.50

-0.50
-0.50

4.50
3.00

-0.25
-0.20

-0.25
-0.25

-0.25
-0.25
-0.25

*--Announced during week of Nov. 6, effective in week of Nov. 13.

IV-3
official lending rates in Germany, France, the Netherlands, and Belgium
were cut.

A third round of concerted actions came last week when the

Bundesbank lowered the discount rate 1/2 point to a record 2.5 percent;
the Bank of England cut official dealing rates 1/2 point, prompting an
equivalent decline in the major clearing banks' base lending rates; and
five other European central banks also lowered official rates, as shown
in the table.
Short-term market interest rates in Europe have responded to these
changes in official interest rates.

Since the beginning of November,

the multilateral weighted average of short-term interest rates in the
other G-10 countries has declined about 50 basis points, with threemonth interest rates in the United Kingdom down almost 70 basis points
and in Germany down about 50 basis points.
term inter st rates risen.

Only in France have short-

In Japan, the three-month gensaki rate is

about unchanged.
Stock prices in Germany and Japan continued to decline during the
intermeeting period, while stock prices in the United Kingdom have edged
up slightly.

Since the previous FOMC meeting on November 3, the index

of London stock prices has risen about 1/2 percent, while those in Tokyo
have dropped about 3 percent and in Frankfurt about 13 percent.

Consis-

tent with expectations that the Bundesbank would lower interest rates
and perhaps consistent also with a shift in investors' preferences from
stocks to long-term bonds, the average bond yield in Germany has declined about 25 basis points since early November to 5.93 percent.

IV-4
The average bond yield in Japan has also declined about 25 basis
points to 4.44 percent.

It appears that the bellwether government bond

in Japan is in the process of being changed.

The yield on the #89 bond

has risen about 50 basis points during the period, while the yield on
the #105 bond, issued in November, has fallen below that on the #89.
The yield on the #105 is currently 4.68, while the yield on the #89 is
5.07.
The Desk purchased a total of $433 million against yen and $864
million against marks during the intermeeting period.

U.S. International Financial Transactions
Foreign official reserve assets in the United States increased
sharply in October.

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

Transactions table.)

Holdings of the G-10 countries increased by more

than $8 billion,
Partial information
from the FRBNY indicates that G-10 reserves increased approximately
another $4 billion in November.

In contrast, OPEC reserves in the

United States continued to decline in October, bringing the total reduction during the first ten months of 1987 to $7.5 billion.

Holdings of

INTERNATIONAL BANKING DATA
(Billions of dollars)

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

1982
Dec.

1983
Dec.

1984
Dec.

1985
Dec.

1986
Dec.

Mar.

June

1987
Aug.
Sep.

49.1
40.0
9.1

44.5
40.5
4.0

33.0
32.1
.9

28.2
32.4
-4.2

22.3
31.7
-9.4

9.1
21.6
-12.4

5.0
16.3
-11.3

4.5
18.5
-14.0

-7.8
12.6
-20.3

-7.2
15.6
-22.8

15.8

18.6

20.7

18.7

16.8

16.0

15.6

17.2

17.1

17.0

112.6

124.3

117.6

111.1

124.5

134.0

135.7

136.8

145.0

142.2

Oct.

2. Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks
3.

Eurodollar Holdings of
U.S. Nonbank Residents 1/

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

Note: These
transactions
Line 2 is an
of Wednesday

IV-6
the rest of the world continued to increase rapidly, largely as the
result of reserve accumulation by Taiwan.

Partial information for

November indicates that Taiwan's holdings increased again by almost $2
billion.
Private foreigners sold U.S. Treasury securities net in October,
but continued to add to their holdings of U.S. corporate equities and
bonds.

Net sales of Treasury securities (line 3) were more than ac-

counted for by residents of Japan.

Despite the turmoil in the U.S.

stock market in October, private foreigners added net almost $2 billion
to their holdings of U.S. stocks (line 2b).

This total was down from

September, but still above the monthly average in the third quarter.
Japanese residents added $1.7 billion to their holdings of U.S. equities.

Net purchases of U.S. corporate bonds were $1.4 billion in

October (line 2a),

reflecting the weakness of new issues of Eurobonds by

U.S. corporations in September and October.

There was a further decline

in new issues of Eurobonds by U.S. corporations in November, reflecting
both a general reduction in new bond issues by U.S. corporations, and a
weakness in demand of Eurobond investors reportedly associated with
concerns about dollar depreciation, debt quality, and secondary-market
liquidity.
U.S. net purchases of foreign securities (line 2c) increased in
October, reflecting net purchases of bonds and net sales of equities.
U.S. residents sold net $2 billion in foreign equities in October; $1.7
billion was reported as sold to Japanese residents.

(Presumably, most

U.S. sales of foreign equities to Japanese residents involve Japanese

IV-7

OF
SUMMARY U.S. INTERNATIONAL
(Billions of dollars)

.185
s

l99
1

19W7

Tiar

3.6

12.4

2.A

-1

-2.0

3-0

rwitz.) -0.4
-6.9
6.3
-0.
-1.1

Private C ital
Banks
1. Cange ina et foreign
poitionr
of bahnir offices
in the U.S. (* s inflow)

TRANSACTIONS

at.
e.

Oct.

127

-6.0

32.

-3.7

-2.7

-2.1

-3.

146

1.7

IL.

32.6
-8.3
10.8

14.7
-2.9
2.8

0.9
-4.8
5.5

15.7
-2.8
2.2

13.0
-2.0
0.5

-6.8
-1.4
7.7

1.3
0.1
4.0

-1.0
-0.2
2.5

8.4
-1.4
4.9

3.1
-3.0

12.2
2.4

4.4
-2.8

12.1
2.9

11.1
0.6

.8
-.4

7.2
-1.8

-1.1
2.4

6.6
6.4

-0.8

o.4

n.a.

Securities
2. Private aurities
trarc
cti

a)
b)
c)

, ot

foreign not puraame
(+)of U.S. apow rate bed
forein net purnoae
(*) of U.S. omrporate stock
U.S. net puarbe
(-) of
foraian a-urities

Foreign net purcame
Trmry obli4ation

(+) of U.S.

Official COital
official
4. QC gee in foreai
esmervme awets in U.S.
(* z incue)
a)

by ar
G-10 ountries (incl.
CPBC

All other aoumtri
b)

By tpe
U.S. Treasury securitiOter <1>

Cane

smot

Other
6.
7.
8.
9.
10.

in U .8. official rer
(4+

demame)

transactir
(mrtmrly data)
U.S. direct invsm
(-) abrwed
Pareign direct invelamt (*) in U.S.
Other capital flor (+ inflow) y/ /
U.S. current aoomut blana e/
Statistio
discrepacy /

U.S. mactandise t ds balanoe - pzrt
of line 9 (Balane of pamnt bMis,
-ema l
adjurtd)
1.
2.

-I

5.8

-38.0
25.1
-4.9

-116.4
17.9

-141.4
23.9

-124.4

-147.7

-17.3
19.0

-6.7
6.1
1.4
-36.6

-8.5

-37.1

I S
LR

-3.8
-9.8 -4.6
7.7
7.2
12.6
-3.7
0.6
-2.0
-38.0 -36.8 -41.1
11.8
-5.5
17.6

-38.6

-38.8

-39.5

-1.8

a.&.
A.a.
U..
B.s.
B.k.

a.&.
a.&.
U.a.
U.S.
U.S.

a.a.

laclud depoaita in baca, amrcial ppr, scptanomm, barro.win undr rspamae agr*mmft, md other
securities.
ad otbar
by nrmaking c~aer,
btainacti
ets other tb official remsrm,
Inclues U.S. overmt
bnking mad official tImmtim not hmb alnere.
In additim, it inclr es ammunta rsultia fnm
1 throuh 5 inc pAbticatioc of the quartrly dat in the ~nrvr of Currat
evisies of the data in lie

3. Includesa sancal adjutlmat for quu-rterl data.
t
I~ than 150 millian.
NITE: Detal-s my not add to total bammA of rzading.

IV-8

stocks.)

Foreign issues of dollar bonds in the U.S. market were very

large in September and October.

Among the issuers were the World Bank,

the Export-Import Bank of Japan, and the Metropolis of Tokyo.
Banks reported virtually no net capital inflow in October, after
massive inflows in the third quarter (line 1).

Most of the third-

quarter inflow was accounted for by transactions with affiliated and
unaffiliated banks outside the United States.

These third-quarter in-

flows coincided with strong credit demands relative to core deposit
growth in the United States and followed a period when official monetary
authorities invested large dollar holdings acquired through intervention
in the Euromarkets.

While credit demands in the United States continued

to be strong in October, core deposit growth was up sharply, particularly after October 19, and banks apparently had little need to add to
their net Eurodollar borrowings.
U.S. Merchandise Trade Through 1987-Q3
The U.S. merchandise trade deficit for the third quarter of 1987
was $159 billion at a seasonally adjusted annual rate (balance-of-payments basis), about the same as in the second quarter.

The value of

exports increased 9 percent from the second-quarter level and the value
of imports rose 6 percent.

These increases were largely in terms of

volume as the implicit deflators of both exports and imports were little
changed on average.

Over the past four quarters, the volume of exports

has increased 15 percent, while the volume of imports has risen only 3
percent.

(See the table.)

Data for the month of October will be re-

IV-9
U.S. MERCHANDISE TRADE
(Billions of dollars, annual rates, BOP basis, seasonally adjusted)
Total

Exports
Ag. Nonag.

Total

ImpExorts
Oi1 Non-oil

Balance

1984
1985
1986

220
216
224

38
30
27

182
186
197

332
338
369

57
50
34

275
288
335

-112
-122
-144

1986-1
-2
-3
-4

216
228
226
228

28
25
27
28

187
202
200
200

355
362
375
383

41
31
32
32

314
332
343
350

-140
-135
-149
-154

1987-1
-2
-3

228
240
261

26
29
34

202
211
227

383
399
420

35
40
51

348
359
370

-155
-158
-159

from:
Percentchange
changefrom:
1982 dollars;
dollars; Percent
Constant
nstant 1982
Previous
evious quarter:
quarter:
3.5
4.3
1.8
5.0
9.7
1987-2
-3
8.3
18.0
6.9
5.6 21.5
Year
earlier:
ar earlier:
1987-3
14.8

30.8

3.0

12.6

1.0

leased by the Commerce Department on Thursday, December 10; a summary
will be included in the Greenbook Supplement.
Nearly half of the increase in the value of exports in the third
quarter was in capital goods.

The strong rise in exports of capital

goods was virtually all in volume (up 13 percent) and was concentrated
in a surge in exports of civilian aircraft (largely deliveries to Japan
and Brazil) and business machines.

While nearly 50 percent of exports

of business machines are shipped to Western European countries, the
increase in the third quarter went largely to developing countries in
the Far East and Latin America as well as to Japan.

Agricultural ex-

ports also increased substantially in the third quarter; all of the

IV-10

increase was in volume.

Most of the rise was in soybeans that were

shipped to Western Europe, Latin America, and South Korea.

Soybean

exports more than doubled in volume in the third quarter because of
sharply reduced supplies from Latin America, especially Brazil.

The

volume of wheat exports also rose noticeably (by 16 percent) due to
increased shipments to the Soviet Union.

The average prices of soybeans

Shipments of cotton to South Korea and

and wheat were little changed.

Taiwan increased and prices rose because of increased demand and lower
worldwide production in the current crop year.
About half of the rise in the value of imports in the third
quarter was accounted for by oil.

The volume of oil imports was up by

22 percent (to 7.67 million barrels per day) as both primary and tertiary inventories were built up.

The average price of oil in the third

quarter rose by 4 percent to $18.05 per barrel.

After having risen

steadily over the preceding 12 months, the price of imported oil then
dropped by about 85 cents per barrel in September, reflecting declines
in world spot market prices that began during the summer.
OIL IMPORTS
(BOP basis, seasonally adjusted, value at annual rate)
Year
Value (Bil. $)
Price ($/BBL)
Volume (mbd.)

33.76
14.18
6.52

1986
Q3
31.61
11.38
7.61

1987
Q4

Sept.

32.04
12.73
6.89

34.80
15.64
6.09

39.91
17.32
6.31

50.53
18.05
7.67

44.72
17.53
6.99

The volume of non-oil imports rose about 2-1/2 percent in the
third quarter (see the summary table above).

Most of the increase in

IV-11
the third quarter (as in the second quarter) was in capital goods, particularly business machines and other electronic and telecommunications
equipment; these increases were consistent with unusually strong rises
in U.S. producers' durable equipment expenditures in the second and
third quarters.

The volume of passenger cars imported from areas other

than Canada rose nearly 10 percent, with much of the increase from
Japan.

Despite these increases in the third quarter, the number of cars

Japan has shipped to the United States since the beginning of the current quota-year (April 1987 through October 1987) is about 80 thousand
cars (5 percent) less than was shipped during the same period a year
ago.

This year the data show a more even pattern of monthly imports

from Japan than in previous years.

In 1987, 54 percent of the quota was

shipped in the first half of the quota-year; this compares with 58 percent during the same period last year.

Changes in the volume of imports

among other non-oil import trade categories were generally small in the
third quarter:

small declines in the volume of consumer goods and food

imports were offset by small increases in imports of industrial supplies
(largely gold).
The implicit deflator for non-oil imports recorded only a 3 percent increase at an annual rate for the third quarter compared with a 6
percent increase in the second quarter.

The low rate of increase, and

the deceleration from second to third quarters, reflects importantly the
increasing share of capital goods in the total index; the implicit
deflator for capital goods is influenced increasingly by continued declines in the price of business machines as measured by BEA.

On a

IV-12

fixed-weighted basis, the price of non-oil imports increased at an annual rate of 8 percent in the third quarter, about the same as in the
second quarter.

By individual trade category, in addition to the de-

cline recorded by capital goods, there were rapid increases in prices of
imported foods (16 percent annual rate) and industrial supplies (21
percent),

and moderate increases in prices of imported consumer goods

percent) and automotive products (3 percent).
Developments in the Foreign Industrial Countries
Economic growth in the major foreign industrial countries increased markedly in the third quarter.

Real GNP surged in Japan in the
Meanwhile, GDP growth in

third quarter, and rose sharply in Germany.

the third quarter was strong in France and output growth increased from
an already strong pace in the United Kingdom.

Real growth in Canada in

1987 since the fourth quarter last year was the highest among the G-7
countries.

These data reflect economic developments that occurred prior

to the stock market declines and related events since October.
Inflation remained low, on average, in the major foreign industrial countries although it has increased in some countries.

Consumer

price inflation in Japan has not increased in recent months.

Germany, inflation has remained low, but the decline in import prices
may have temporarily lessened.

Price pressures in the United Kingdom,

Canada, and Italy continued to rise.
Except in Japan, where export volumes continued to decline and
import volumes continued to increase, the achievement of better external
balance in the major foreign industrial countries remains an elusive

IV-13
objective.

Germany's trade and current account surpluses through

October were above last year's, and through September growth in the
volume of exports surpassed growth in import volume.

Trade balances in

France, the United Kingdom, and Canada continued to deteriorate.
Coordinated reductions in central bank official lending rates
occurred in Germany, France, the United Kingdom, Switzerland, Belgium
and the Netherlands.
Individual country notes.

In Japan, real GNP increased 8.4 per-

cent (s.a.a.r.) in the third quarter, as domestic demand grew 7.6 percent and net exports (on a national income basis) made a small positive
contribution to growth.

Growth was strong in all components of domestic

demand, but particularly in residential investment.
pears to be continuing in the fourth quarter.

Strong growth ap-

Industrial production

(s.a.) rose 3.6 percent in the third quarter, and preliminary data for
October show an increase of 1.2 percent.

The unemployment rate (s.a.)

declined from its May peak of 3.2 percent to 2.7 percent in October.
Capacity utilization (s.a.) rose 1.9 percent in September but still
remains well below the recent peak reached in mid-1985.

Total new

machinery orders (s.a.) declined 4.9 percent in the third quarter, but
the Economic Planning Agency predicts that orders will rise 3.9 percent
in the fourth quarter, reflecting rising public sector orders in connection with public works projects.
third quarter were mixed.

Indicators of consumer spending in the

Growth in retail sales (s.a.) slowed to 0.2

percent, but real consumption expenditures of working households (s.a.)
increased 1.1 percent.

IV-14

Consumer price inflation, while higher than earlier in the year,
has not increased in recent months.

The Tokyo index of consumer prices

rose 1 percent relative to a year earlier in each of the three months
through November.

The all-commodities index of wholesale prices rose

0.6 percent in the 12 months ending in October, the first year-on-year
increase since May 1985.

Wage gains remain limited.

Japan's trade balance (s.a.) widened in both September and
October.

Still, for the first ten months of 1987, the cumulative trade

surplus annualized was $81.1 billion, little changed from the $82.5
billion surplus registered in 1986.

In the first ten months of this

year, export volume declined 2.2 percent and import volume increased 5.5
percent relative to the comparable period in 1986.

The current account

surplus narrowed in October bringing the cumulative surplus (s.a.a.r.)
to $86 billion for the first ten months of the year compared with a
surplus of $85.5 billion over the comparable period in 1986.
Monetary conditions remain relaxed.

M2+CDs grew 11.7 percent in

the 12 months through October, primarily due to portfolio demands for
more liquid assets in response to recent financial market instability.
In the fourth quarter, the Bank of Japan projects M2+CDs will increase
11 to 12 percent from a year earlier.
In Germany, real GNP increased 5.7 percent (s.a.a.r.) in the third
quarter (as measured in Bundesbank seasonally adjusted data), mainly the
result of strong domestic demand, though the external sector also contributed to growth.

The level of real GNP in the third quarter was

roughly 1.4 percent above the previous peak reached in the third quarter

IV-15

last year.

Industrial production increased 0.9 percent in October fol-

lowing an upward revised September decline of 2.2 percent.

The

September-October average of industrial production was slightly above
the July-August average and the comparable period last year.

Manufac-

turing orders declined in September after strong growth in August.

the third quarter, orders were about 3-1/2 percent above the secondquarter average level.

The unemployment rate remained at 9 percent in

November, slightly above rates observed during the first half of the
year.
Inflation remains low, but there are some signs that downward
pressure on domestic prices is waning.

In November, consumer prices

(n.s.a.) were unchanged after increasing slightly in October.
stood 1 percent above its level a year earlier.

The index

Import prices rebounded

in October, reaching a level 0.4 percent higher than a year ago, the
first twelve-month rise since July 1985.
The trade surplus (n.s.a.) declined in October.

However, through

the first ten months of 1987, the cumulative trade surplus was $51.3
billion, exceeding the $42 billion surplus for the same period in 1986.
The current account surplus (n.s.a.) rose in October bringing the cumulative surplus through October to $33 billion, compared with the $28
billion recorded during the first ten months of 1986.

Export volume

rose 2.7 percent and import volume declined 0.2 percent in September,
but through September export volumes were 1.1 percent and import volumes
were 4.2 percent ahead of comparable figures last year.

IV-16

On November 27, the Bundestag adopted a budget for 1988 raising
total federal expenditures 2.4 percent.

The projected 1988 budget

deficit is DM 29.5 billion, about 1.4 percent of GNP.

The budget will

be discussed and voted on in the Bundesrat on December 18, where it is
expected to be adopted (as it always has been in the 38-year history of
the FRG).

Government officials announced on December 2 a package of

stimulative economic measures.

A three-year program of DM 21 billion in

low-interest loans, beginning in 1988, will be provided through a statesupported lending unit (the Kreditanstalt fuer Wiederaufbau).

Low-in-

terest loans of DM 15 billion will be provided to municipalities for
investment in environmental projects and DM 6 billion will be provided
to small- to medium-sized firms for business investment.

The subsidy

may be as high as a 2 percentage point reduction from market rates and
is projected to cost the government DM 2.6 billion.

In addition, the

Bundespost, the federal postal and communications monopoly, plans to
increase investment DM 1.5 billion above previous plans bringing its
total investment to DM 20 billion in 1988.

Other parts to the program

were a pledge to deregulate the country's rigidly structured economy, a
promise to allow revenue shortfalls to occur, and a formal commitment to
privatize further.
Growth of Central Bank Money (CBM) from the 1986-Q4 target base
was 7.7 percent (s.a.a.r.) in October, up slightly from 7.6 percent in
September.

Continued growth of CBM above the current target range of 3-

6 percent was a factor in the Bundesbank's decision to raise the interest rate on repurchase operations in September and October.

However,

IV-17
following the recent stock market developments, official rates have been
reduced.

Early in November, the Bundesbank lowered the Lombard rate to

4.5 percent and the rate on its repurchase arrangements to 3.5 percent.
On November 23 the Bundesbank announced a further reduction to 3.25
percent in its next fixed-rate repurchase tender, in conjunction with
interest rate cuts in France, Belgium, and the Netherlands.

On December

3, the Bundesbank announced a 50 basis point reduction in the discount
rate to 2.5 percent, effective on December 4, again in conjunction with
cuts by other European central banks.
In France, real GNP increased 4.3 percent (s.a.a.r.) in the third
quarter, the result of strong domestic demand and exports.

The stock

market plunge has caused a slowdown in the government's privatization
program.

Public companies that were scheduled to be sold by the

government by the end of 1987 have had their sales postponed due to weak
market conditions.
In the United Kingdom, Chancellor of the Exchequer Lawson delivered the government's autumn statement on the economy on November 3.
The Chancellor raised previously announced spending plans for the coming
fiscal year, but predicted that, despite this increase, the government's
overall fiscal position would remain in near balance.

Real growth was

forecast to slow to 2-1/2 next year from this year's rapid 4 percent
rate.
In Canada, third-quarter real GDP expanded 4.4 percent (s.a.a.r.)
after annualized growth of 6 percent for the first half of 1987.

All

IV-18
domestic sectors contributed to real growth while net exports continued
to deteriorate.
In Italy, the inability of the government, weakened by divisions
within the coalition, to address serious medium-term budgetary problems
was highlighted by the political crisis that occurred on November 13.
It was provoked by the small Liberal party that temporarily resigned to
protest the cancellation by the government of planned reductions in
income taxes and direct charges for health care.

This step was neces-

sitated by the Senate's rejection of the offsetting rise in the value
added tax as too inflationary.

On November 25 the Italian labor move-

ment, which over the past year has become increasingly assertive, held
its first general strike since 1985 to protest the revised budget.
Economic Situation in Major Developing Countries
The Presidents of eight Latin American nations met in Acapulco at
the end of November to discuss various issues including the servicing of
their external debts.

The summit communique included a call for in-

creased new lending and reduced interest rates, a proposal to decouple
commercial bank lending from compliance with IMF programs, and plans to
initiate negotiations with banks to take account of the debt's market
value.

While it called for "solidarity" with countries acting individ-

ually to reduce their debt burdens, no unilateral actions and no concrete plans for coordinating negotiations across countries were proposed.
Considerable progress has been made in completing a $4.5 billion
package, agreed to in early November between Brazil and its foreign

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted) 1/
Q4/Q4 Q4/Q4
1985 1986

1a6
Q4

1987

1 72
Q2

June

July

1.5
1.7

1.5
1.6

1. 1
2.2

*
1.3

*
-. 1

*
1.0

Aug. Sept.

Oct.

Canada
GDP
IP

4.0
4.4

1.8
-.5

France
GDP
IP

1.7
2.0

2.1
-.3

.2
-1.3

-.0
-. 3

1.0
2.3

1. 1
.6

Germany
GNP
IP

1.7
3.4

2.4
.5

-. 3
-1.0

-. 8
-2.1

1.0
2.2

1.4
.5

-1.7

Italy
GDP
IP

3.2
1.0

2.4
2.8

.2
1.6

.1
3.0

1.4
2.0

n.a.
-2.9

-2.9

JIPn
IP

4.4
.9

2.0
-. 5

.7
-.0

1.5
1.4

.0
-. 2

2.0
3.6

4.3

1.0

-1.1

3.1

1.2

United Kingdom
GUP
IP

2.7
4.3

4.3
2.6

1.2
.1

1.1
.9

.5
.4

n.a.
1.8

*
-1.1

*
2.2

*
.8

*
-1.3

United States
GNP
IP

3.3,
1.7

2.2
1.0

.4
1.0

1.1
.8

.6
1.1

1.0
2.0

.0
.6

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

*
-1.0

*
1.3

*
1.2

*
.0

1.0

-. 8

4.1

-2.2

*
n.a.
*

n.a.
*

-. 5

-4.0

3.2

n.a.

1.2

*
-. 1

Latest 3 months
from year ago 2/

*
n.a.
*
.6

2.2
3.7
4.3
6.1

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1/
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1985

1986
Q2

Canada
'rade
Current account

12.4
-. 4

7.5
-6.7

1986 -Q3

2.3
-1. 1

1.7
-1.5

-. 8
.5

.0
1.2

1987

1987
Sept.

1.8
-2.1

2.4
-1.3

2.2
-1.5

n.a.
n.a.

n.a.

-1.0
-.1

-2.2
-. 7

-1.1
n.a.

-. 5

-. 2

-. 4

-. 8

5.4
2.5

3. 5
1.3

6.3
3.6

5.6
3.8

July

Aug.

Oct.

France
Current account

-2.6
.1

Germany
Trade (NSA)
Current account (NSA)

25.5
15.8

52.5
37.7

12.5
8.3

14.1
8.6

16.2
13.8

15.1
10.9

15.4
10.7

15.2
7.4

-11.2
-3.5

-1.6
3.7

-. 7
.8

.7
5.4

.1
1.2

-1.4
-2.8

-4.5
-. 9

-1.2
n.a.

46.1
49.2

82.5
85.5

20.4
21.6

23.6
23.8

22.5
24.3

23.6
24.9

19.0
21.1

-2.6
3.9

-12.4
-1.5

-2.4
.2

-4.3
-1.3

-3.7
-1.4

-1.7
1.0

-3.9
-. 3

-122.1
-116.4

-144.3
-141.4

-33.6
-33.8

-37.1
-36.6

-38.6
-38.0

-38.8
-36.8

-39.6
-41.1

Traen

Italy

Trade
Current account (NSA)
Japan
Trade

Current account 2/
United Kingdom
Current account

United States
Trade 2/
Current account

.1
3. 7

-. 5

18.3
19.9

6.2

5.9

6.2

6.6

7.7

5.7

-5.0
-2.0

-1.5
-. 5

-2.4
-1.5

-1. 1
-. 0

-1.5
-. 5

-39.8
n.a.

*
*

-1.2

6.3

5.9

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

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

Q4/Q4
1985

Q4/Q4
1986

1986
Q3

Aug.

1987
Sept. Oct.

Nov.

Latest 3 months
from year ago

-Can
CPI
WPI

4.2
2.5

4.3
1.1

.8
-1.5

France
CPI
WPI

4.8
1.9

2.1
-3.4

.7
-1.4

1.8
-1.1

-1.0
-9.0

-. 3
-2.6

8.6
5.9

4.7
-2.4

1.1

Germany
CPI
WPI
wCI
WPI
Japan
GP1
WPI
United Kingdom
CPI
WPI
United Sttes

CPI (SA)
WP1 (SA)

2.0
-3.7
5.5
5.2
3.5
1.4

-10.5

3.4
4.2
1.3
-1.8

1.2
n.a.

.1
.6

.0
n.a.

.4
n.a.

n.a.
n. a.

1.2
.4

.6
n. a.

n.a.

-. 3
-1.6

.6
-. 2

.0
-. 4

-. 1
.3

-. 2
-. 8

1.2
.7

1.3
1.5

1.0
1.0

1.1
.8

.3
.4

.7
.5

-. 3
-. 5

1.2
-. 5

.2
.2

1.3
.8

1.2
1.2

1.5
1.1

1.3

1.2

1.0

1.1

1.0
.6

.9
-. 6

.7
-. 7
-. 5
-2.9

-1.8

.6
-. 8

.3
-4.2

-. 5
-2.8

1.3
1.6
-. 3
-1.2

1.2
1. 1

.1
.4

.0
-1.5

1. Asterisk indicates that monthly data are not available.

1.4
1.4

.2
.4

.0
n. a.

.8
-1.9

.9
n. a.

.3
n. a.

.7
-. 1

.1
.0

-. 4
n.a.

.3
.2

.5
.5

n.a.
n.a.

4.4
3.7

.5
.0

.2
.3

.4
-. 2

n.a.
n.a.

4.3
3.0

IV-22
creditor banks, to cover 1987 interest payments.
a $1.5 billion drawdown of Brazil's own reserves.)

(The package includes
Mexico's financial

markets have been disrupted by collapses in the stock market and in the
free-market value of the peso against the dollar; the government announced an anti-inflation program on December 4 in response to an acceleration of price increases.

Amendment of Argentina's IMF stand-by

arrangement received Executive Board approval on December 2. Ecuador
signed a letter of intent for an IMF stand-by program in early December,
and has resumed interest payments to banks; it also received a $31 million bridge loan to World Bank disbursements from the U.S. Treasury.
Individual Country Notes.

In early November, Brazil reached a

preliminary agreement with foreign creditor banks on a $4.5 billion
package to cover 1987 interest payments, which are currently in arrears.
Brazil has agreed to draw down $1.5 billion of its reserves while bank
creditors raise the remaining $3 billion.

The formal signing of the

interim financing arrangement is scheduled for December 15.

As part of

the agreement, Brazil agreed to seek an IMF program in support of its
economic program.

The Brazilian government maintains that it intends to

put together an economic program on its own and then seek IMF approval,
emphasizing that there should be no link between commercial bank disbursements and an IMF program.

An IMF team has recently returned from

Brazil.
A slowing in Brazil's real GDP growth to around 2 percent is expected in 1987, down sharply from the 8.2 percent growth registered in
1986.

Industrial production has fallen in recent months, plagued by

IV-23
weak consumer demand, rapidly rising input costs, and minimal investment.

Since prices were decontrolled in September, the CPI has reg-

istered a 9.2 percent increase in October, a 12.8 percent rise in
November, and is expected to jump 14 to 15 percent in December.

The

trade surplus for October was $1.2 billion, bringing the January-October
trade balance to $9.06 billion.
Brazil's operational public sector deficit (which excludes the
inflationary component of nominal interest payments) is expected to
approach 6 percent of GDP in 1987, a sharp contrast to the 3.7 percent
rate registered in 1986 and the 3.5 percent figure targeted for 1987 by
the Macroeconomic Plan announced in July.

Recently, the government

instituted measures aimed at achieving greater fiscal and monetary control and a new fiscal package is expected to be unveiled soon.
Since mid-October, the Mexican financial markets have been in
considerable turmoil.

The stock market index, which had risen by about

700 percent in the first nine months of the year, fell precipitously in
October and November, closing on December 7 about 72 percent below the
October 6 peak.

To stem a capital outflow related to the initial col-

lapse of the stock market, the authorities reversed their policy of
nudging interest rates down.

At the November 24 Treasury bill auction,

the nominal rate on 28-day bills was 24 percentage points higher than
five weeks earlier.

(At the December 1 Treasury bill auction, when the

authorities held the nominal rate unchanged from a week earlier, the
value of new bills sold accounted for less than 6 percent of the amount
of maturing bills.)

The authorities also raised the monthly rate of

IV-24
crawl of the controlled exchange rate from 4.5 percent in October, the
lowest in 27 months, to 7.3 percent in November.
The collapse of talks aimed at stabilizing the stock market, news
of a rising fiscal deficit, and rising domestic interest rates led to a
further plunge in stock prices on November 16.

As capital outflows

intensified, the Bank of Mexico, on November 18, withdrew its support of
the free market peso to conserve official reserves.

Between November 18

and December 7, the free market peso has depreciated by about 24 percent
against the dollar.
Widespread price increases have followed the peso's depreciation,
and organized labor has threatened a nationwide strike unless emergency
wage increases are granted.

In response, the government announced on

December 4 a tightening of price controls, increased subsidies on basic
foodstuffs, and a further easing of import controls.
Amendment of Argentina's stand-by arrangement with the IMF received Executive Board approval on December 2. The second drawing of
$225 million from the stand-by took place on December 7. Argentina will
also draw $250 million on its trade policy loan with the World Bank and
a $500 million disbursement of new money from commercial banks in upcoming weeks, probably by year-end 1987.

A $500 million bridge loan in-

volving the U.S. Treasury, the BIS (acting for 11 central banks),
Mexico, Colombia, and Uruguay was disbursed November 12, and is being
repaid with the proceeds of IMF and World Bank disbursements.
New tax legislation aimed at improving fiscal balance was introduced in the Argentine Congress in October but has yet to pass.

IV-25
President Alfonsin's Radical Civic Union party will lose its majority
(but retain a plurality) in the Chamber of Deputies on December 10 when
deputies elected in September take their seats.
Monthly CPI inflation in Argentina was 10.3 percent in November,
down from 19.5 percent in October and 11.7 percent in September.

For

October, industrial production (s.a.) is estimated to have declined by 6
percent and preliminary sales data (s.a.) show an 11 percent decline.
Ecuador has reached agreement on an IMF stand-by arrangement
providing SDR 75.4 million and an SDR 42.7 million drawing under the
CFF.

The program is expected to be approved by the IMF's Executive

Board by the end of December.

The terms sheet for the commercial bank

debt financing package agreed to in principle in mid-October has been
completed and distributed; it will provide $350 million in new money and
restructure $4.9 billion in old debt.

A pre-condition for the agreement

was Ecuador's resumption of interest payments, and these began on
November 16.

These payments will be facilitated by a $31 million loan

bridged to World Bank disbursements that has been provided by the U.S.
Treasury.
In November, the Venezuelan government significantly increased
sales of foreign exchange at preferential rates.

The free market ex-

change rate has appreciated from September levels of 35 Bs/$, moving at
times below 30 Bs/$.
30.1 Bs/$.

On December 8, the free market exchange rate was

Venezuela's $21 billion debt rescheduling agreement with

commercial banks became effective on November 13.

In mid-November, it

issued regulations improving incentives for new direct and portfolio

IV-26
investment by allowing some export earnings on these investments to be
retained abroad.
The Philippines has obtained an extension--from November 15 to
December 22--of the deadline for, all creditor banks to sign the July
1987 agreement to reschedule $13.2 billion in external debt.
of the 483 creditor banks have not signed the agreement.

A handful

If any of

these banks do not sign, part of the retroactive reduction in spreads
specified in the package will be rescinded, and the Philippines will be
required to pay an additional $93 million in 1987 interest.

A severe

deterioration in its trade deficit and increased buydowns by residents
of Philippine foreign debt have caused international reserves to decline
about $600 million to $1.9 billion in the three months through the end
of November.
Commitments to the "voluntary" $1.06 billion commercial bank loan
to Colombia (about the same magnitude as scheduled amortization payments
over the period from fourth quarter 1987 through year-end 1988) have
been almost completed.
Yugoslavia imposed wage and price controls in mid-November after
first raising sharply the prices of many necessities; monthly inflation
rose from 12.2 percent in October to 15.9 percent in November.

Some

wages were raised subsequently in response to widespread worker unrest.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 15-16, 1987 : Greenbook Part 2

FRASER