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Strictly Confidential (FR) Class II FOMC
Part 1
December 12, 1996
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
Strictly Confidential (FR) Class II FOMC
December 12, 1996
SUMMARY AND OUTLOOK
_
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
_
DOMESTIC DEVELOPMENTS
Overview
As best we can tell, the economy has remained on a moderate
growth trajectory this quarter, buoyed by a rebound in consumer
spending after a summer lull.
The sustained momentum of the
expansion is most clearly evident in the continued solid
gains in
private payrolls in recent months, and reports of competition for
scarce labor abound.
Nonetheless, inflation remains almost
negligible in the markets for goods,
to
and the core CPI has continued
rise at little more than a 2-1/2 percent annual rate.
Our forecast for 1997-98 has been modified only slightly since
the last Greenbook; basically, under the assumption of stable money
market conditions,
real GDP growth is projected to average about
2 percent and overall CPI
inflation to
The main innovations in this
the level of
run at about 2-3/4 percent.
projection are an upward revision to
share prices and introduction of a fiscal policy path
more compatible with the goal of budget balance.
The new fiscal
assumption has led us to carry forward the recent lower range for
long-term interest
equity markets
rates,
and interest-sensitive expenditures.
In this economic
are
providing some ongoing support for the
scenario, pressures on productive resources
little changed over the next two years.
Unemployment is
projected to remain in the vicinity of 5-1/4 percent, and hourly
compensation rates are expected to
accelerate gradually through
1998, boosted in part by the further minimum wage hike late next
year.
Because of the high levels of investment in recent years,
physical plant capacity should not be a problem, but core price
inflation is likely to
drift upward as a consequence of rising labor
costs and a less favorable trend of import prices than experienced
in 1995-96.
Core CPI inflation is predicted to move up only about
1/4 percentage point over the forecast period, but the pickup would
be almost twice that amount were it not for the damping influence of
planned revisions to the index.
Key Background Factors in the Forecast
The record-setting performance of the stock market has been
perhaps the most striking development of the intermeeting period.
Once again, the rise in share prices has outstripped our
expectations.
Although third-quarter corporate profits were
stronger than we expected, market valuations
still seem rather
I-2
aggressive.
Our response has been to carry a higher level of share
prices through the projection period, but with a modest dip in the
next few quarters and no net gain between now and the end of 1998.
Whether even a mild setback is a realistic expectation is far from
clear, in the absence of a significant tightening of monetary policy
or a more serious erosion of corporate profitability than we
foresee.
Thus, we view the possibility of a more buoyant stock
market as posing an important upside risk to output and inflation in
the near term, with an associated risk of a subsequent hard landing
occurring in the wake of a policy tightening.
Although bond yields have been lower of late than we
anticipated in the last forecast, the term structure has not been
extraordinarily flat, and we have no reason to question the
sustainability of the lesser slope--particularly in view of our
modified fiscal policy assumptions.
In recent forecasts, we have
assumed some ongoing restraint on discretionary spending, but not
the kind of overall fiscal program required to put the federal
budget on a path to balance by the early part of the next century.
However, in light of the high priority that President Clinton has
assigned to eliminating the deficit, not to mention the possibility
that a Balanced Budget Amendment will be passed by the Congress, we
have shifted back to an assumption that the next budget agreement
will be framed in terms of a multiyear package that targets balance
by fiscal 2002.
Reaching this target would require a less ambitious
set of spending cuts than was thought necessary earlier this year,
because of a more favorable baseline outlook.
We assume that, by next fall, the Administration and the
Congress will have agreed on a set of further cuts in discretionary
spending programs and some moderate trimming of entitlements.
Our
package includes some tax cuts for individuals but also some
reductions in "corporate welfare."
The budget-balancing schedule
would be heavily backloaded, but the change in assumptions cuts the
better part of $20 billion from our projection of the fiscal 1998
deficit.
We now expect the unified deficit in fiscal 1998 to be up
only slightly from the $112 billion projected for the current fiscal
year.
We also see a modicum of restraint on effective demand coming
from credit supply conditions.
Although funds should remain readily
available to most creditworthy borrowers, we suspect that the easing
trend in terms and standards for loans to businesses will be drawing
I-3
to a close and that the recent tilt toward greater caution in
lending to consumers will carry a bit further.
The external sector is expected to remain a drag on domestic
growth--but less so than in 1996.
We are predicting that foreign
GDP growth will be between 3-3/4 percent and 4 percent in both 1997
and 1998, marginally faster than it appears to have been this year.
The dollar's average exchange value against the other G-10
currencies is assumed to remain near its recent levels, somewhat
higher than in the last Greenbook.
Our current-quarter forecast of the WTI crude oil price is
$24-1/2 per barrel, up a dollar from the projection in the last
Greenbook.
However, a renewed flow of Iraqi oil was initiated on
December 10--earlier than we had been assuming--and oil prices
weakened substantially in yesterday's trading.
We now are expecting
the spot price of WTI crude to fall to the $19 to $20 range by the
start of the second quarter of next year.
As in the last Greenbook,
prices, once down, are expected to be flat over the balance of the
forecast period.
Recent Developments and Prospects for the Current Quarter
Our guess is that growth of real GDP will be somewhere around
2-1/4 percent in the current quarter--in line with our estimate of
third-quarter growth.
Central to our assessment that GDP growth
will remain moderate this quarter is the fact that, with a further
small gain in December, aggregate hours of production and
nonsupervisory workers would be up nearly 1-1/2 percent at an annual
rate for the quarter.
We are expecting that productivity growth
will turn up again after flattening in the summer.
On the expenditure side, the key information is that on
consumer spending.
Owing in part to the negative effects of strikes
on auto supplies, sales of light vehicles have been off a little
from the third-quarter pace; however, the shortfall apparently hit
business fleets the hardest, as automakers have favored more
lucrative consumer transactions.
Meanwhile, retail sales, excluding
those of auto dealers and building supply stores, have posted a
solid gain since late summer.
Assuming that holiday sales are
reasonably brisk, we are projecting that real PCE growth will reach
3 percent this quarter.
A surprisingly sharp decline in single-family housing starts in
October has caused us to lower our forecast of building activity
this quarter.
Given the backdrop of healthy employment gains and
I-4
lower mortgage rates, we anticipate some rebound in starts over the
remainder of the quarter--but not one sharp enough to avert a fall
in real residential investment on the order of 10 percent at an
annual rate.
SUMMARY OF THE NEAR-TERM OUTLOOK
(Percentage change at annual rates except as noted)
Nov.
GB
2.5
Real GDP
Personal consumption
expenditures
1996:Q3
BEA
prel.
2.0
Dec.
GB
1996:Q4
Nov.
Dec.
GB
GB
2.3
1.8
2.3
.4
.6
.6
3.8
3.2
Residential investment
-6.6
-5.9
-5.9
-6.0
-9.8
Business fixed investment
16.2
16.9
16.9
3.6
5.0
Change in billions of chained (1992) dollars
Inventory investment
33.6
25.7
29.0
-18.1
-7.2
Government outlays for
consumption and investment -1.5
-.8
-.7
-2.4
1.7
-24.1
-24.5
6.1
6.5
Net exports
-18.9
After a tremendous surge this summer, real business fixed
investment appears likely to post a more moderate advance in the
current quarter.
Admittedly, this prediction is largely guesswork
at this point, because few data are available beyond October.
Through that month, trends in orders and shipments of nondefense
capital goods at domestic manufacturers were somewhat divergent-still quite positive for computers and communications equipment but
weakening for other, less high-tech machinery.
As noted above,
business purchases of motor vehicles apparently have been on the
soft side thus far this quarter.
Private nonresidential
construction-put-in-place was up smartly early in the fall, leading
us to expect another noticeable increase in the structures component
of BFI.
Given the data in hand, inventory investment apparently was a
little smaller in the third quarter than initially thought; at the
end of the quarter, stocks in most sectors remained at comfortable
levels relative to sales.
Fragmentary statistics for October show a
I-5
moderate rise in the inventories held by manufacturers and a
reversal of the September decline in the stocks held by wholesalers.
We are projecting that total nonfarm stocks will accumulate at an
annual rate of about 2-1/2 percent this quarter--somewhat less than
the third-quarter rate.
Incoming data on prices have been broadly consistent with the
assumptions that went into the November Greenbook.
We project that
the CPI excluding food and energy will increase at an annual rate of
about 2-3/4 percent this quarter.
The projected quarterly rise in
the total CPI--3-1/4 percent at an annual rate--is unchanged from
the forecast in the last Greenbook.
At earlier stages of
processing, industrial materials prices remain subdued, and the core
intermediate goods component of the PPI has been essentially flat
for several months.
However, average hourly earnings have risen at
an accelerated pace--4 percent at an annual rate over the past three
months--evidently boosted of late by the increase in the minimum
wage.
The Outlook for the Economy beyond the Current Quarter
As in the last Greenbook, we are projecting that real GDP will
rise about 2-1/4 percent over the four quarters of 1997; but we now
foresee a slightly greater slowing in 1998, with growth that year
expected to fall a touch short of 2 percent.
Consistent with our
revised stock market forecast, consumer spending for 1997 has been
raised a little.
By late 1997, however, effects of the revised
fiscal assumptions start kicking in, causing federal purchases to
fall at a steeper rate than we had predicted previously and
restraining the growth of private spending to some degree.
The
forecast of CPI inflation is a touch lower than last time, in light
of the more ample profit margins as of the third quarter and
indications that the prices of manufactured goods are still quite
subdued.
Consumer spending.
The prospects for consumer demand seem key
in the assessment of the macro outlook.
We have been surprised by
the reported increase in the personal saving rate this year, which
occurred in the face of an enormous increase in household net worth.
Perhaps this combination of events is simply an error in
measurement;
The widening of the statistical discrepancy in the
national income accounts could be revised away next summer, with
additional consumer spending filling the gap.
evidence to support that thesis.
But we have no
At this point, we must admit the
I-6
possibility that, in fact, people have not responded fully to the
increase in wealth or that their response has been overridden by
other influences. The truth likely involves a combination of these
two possibilities.
SUMMARY OF STAFF PROJECTIONS
(Percentage change, Q4 to Q4, except as noted)
1996
1997
1998
2.8
2.7
2.3
2.2
1.9
2.1
2.6
2.6
2.2
2.2
1.9
2.2
PCE
Previous
2.7
2.8
3.0
2.7
2.2
2.4
BFI
Previous
9.2
8.7
5.1
5.1
5.8
5.6
Residential investment
Previous
1.5
2.3
-1.2
-1.1
1.0
1.3
-47.7
-42.6
-35.8
-24.3
-22.0
-18.8
Real GDP
Previous
Final sales
Previous
Change in billions of chained
(1992) dollars
Net exports
Previous
A number of hypotheses can be marshaled to explain why the rise
in stock market wealth might have generated less spending than is
suggested by traditional rules of thumb.
For one thing, investors
may question whether all of the gains in their portfolios will be
permanent, yet may not be inclined to sell because they have been
persuaded that they cannot and should not attempt to time the
market.
Moreover, a greater portion of those shareholdings are now
in retirement accounts; psychologically, and in view of tax
penalties, owners therefore are probably more reluctant to tap them
for spending.
Meanwhile, as we have noted in previous Greenbooks, a number of
factors may be offsetting the effect of increased wealth.
First,
for a segment of the population, especially at the lower part of the
income distribution, improved access to credit may have contributed
to a surge in purchases of durables and a burdensome accumulation of
debt earlier in the expansion; more recently, banks have been
granting fewer credit lines to marginally qualified households.
I-7
Second, households may be giving greater attention to the need to
provide for retirement and medical expenses--a concern reinforced by
talk of cuts in federal entitlements. Finally, even though consumer
surveys point to widespread optimism about aggregate economic
prospects, job insecurity at the personal level may still be a
weight on spending decisions.
All that said, we continue to believe that the increase in
asset values implies some upside risk to our spending forecast--even
with the noticeable decline in the wealth-to-income ratio implied by
our stock price path.
We have consumption expenditures growing
pretty much in line with disposable income over the next two years,
implying no significant retracement of the rise in the saving rate.
Real PCE increases 3 percent in 1997 and about 2-1/4 percent in
1998--in both cases appreciably faster than overall GDP, as the
labor share of total income moves up in a tight labor market and
personal taxes are cut.
Residential investment.
Single-family starts are expected to
decline from an average of about 1.17 million units (annual rate) in
the first three quarters of 1996 to a little less than 1.1 million
units by next spring and to remain at that rate in 1998.
recent
The most
(October) figures on starts, permits, and sales were on the
negative side, but they presumably reflected the lagged effects of
the upswing in mortgage rates that occurred earlier this year.
Rates on fixed-rate loans this week are down roughly 3/4 percentage
point from the peak of last summer, and this decline should
stabilize housing demand in coming months even as job gains moderate
further.
Multifamily starts are projected to drop back to somewhat under
300,000 units per year.
Market conditions in the multifamily sector
vary considerably across the country, but a rise in the aggregate
rental vacancy rate suggests that builders may be more cautious in
the period ahead.
Business fixed investment.
This past year brought another
large increase in real business fixed investment, probably on the
order of 9 percent.
We expect smaller gains in 1997 and 1998--more
in the neighborhood of 5 to 6 percent.
Although the cost of
external financing is expected to change little, on balance, and
prices on high-tech equipment should remain attractive, further
advances in investment outlays will be damped by a slowing in growth
of corporate profits and cash flow.
I-8
Business investment in most types of equipment already has
slowed substantially from the pace seen earlier in the expansion;
strength in aggregate investment this past year has come mainly from
outsized increases in just two categories--office and computing
equipment and communications equipment.
Looking ahead, we are
predicting annual increases in office and computing equipment of
"only" 20 to 25 percent in 1997 and 1998, after two years of gains
that were considerably larger.
We anticipate further large
increases in outlays for communications equipment and a surge in
commercial aircraft.
Gains in spending for other types of equipment
are expected to be quite modest, on balance.
We expect to see only small changes in nonresidential
structures investment over the next two years.
With no capacity
pressures looming in manufacturing, spending on industrial
structures is projected to drift lower in 1997 and 1998.
However,
we anticipate moderate increases in office construction and oil
drilling.
Inventory investment.
If production and final sales in the
fourth quarter are in line with our projections, firms should be
heading into early 1997 largely free of inventory problems, and our
longer-run inventory forecast is relatively uneventful.
Inventory-
sales ratios are expected to be roughly stable.
Farm inventories, which account for less than 10 percent of
total business inventories but are more volatile than the total, are
expected to rise moderately over the next two years.
Absent serious
weather problems, crop production should be large enough to permit
some further accumulation of crop inventories.
However, on the
livestock side, the drawdown in cattle inventories that began this
year will likely persist at least through 1997; past contractions in
the size of the herd commonly have lasted two years or more.
Government.
Federal outlays for consumption and investment are
projected to fall 2-1/2 percent in real terms over the four quarters
of 1997 and about 4-1/2 percent in 1998.
The 1998 decline is about
a percentage point larger than we were projecting in the last
Greenbook.
Substantial reductions are anticipated over the two-year
period in both defense and nondefense purchases.
Real purchases by state and local governments are projected to
rise 2-1/2 percent in both 1997 and 1998, about the same as in 1996.
These are larger increases than those seen early in the 1990s, but
they are not especially big by historical standards.
Although most
I-9
states and localities are in sound financial condition and are
likely to benefit from a growing tax base in the period ahead,
spending plans likely will be restrained by voter desires to keep
taxes down.
Hourly compensation of state and local employees has
risen less rapidly over the past year than hourly pay in the private
sector, and consumption outlays of state and local governments have
moved up less than 2 percent in real terms.
However, investment
outlays have been rising somewhat more briskly, spurred by the need
for more schools, prisons, and basic infrastructure--a pattern
likely to continue.
Net exports of goods and services.
GDP growth in foreign
countries is expected to be strong enough over the next few quarters
to keep exports moving up at a somewhat faster pace than they have
of late.
Growth of imports in 1997 is projected to be maintained at
about the same pace as in 1996, but growth slows somewhat in 1998.
Real net exports of goods and services continue to fall over the
next two years but at a slower rate than in 1996; negative effects
of the declines in net exports on real GDP growth in 1997 and 1998
are expected to be somewhat smaller than the projected drag of
0.7 percentage point this year.
(A more detailed discussion of the
prospects for net exports is contained in the International
Developments section.)
Labor markets.
As we have noted in recent Greenbooks, measured
productivity growth at this point in the expansion has been
sufficiently sluggish to call into question our assumption that the
cyclically adjusted trend is still 1 percent.
Part of the
explanation may be that, with labor markets tight, firms are having
to reach deeper into the pool of less-qualified labor for their new
hires.
However, this explanation would still seem to leave the
underlying trend rate of productivity increase surprisingly low at a
time when restructuring continues and high levels of investment in
new capital seemingly should have been boosting the efficiency of
workers.
We are left thinking that measurement problems could be
seriously distorting the data:
Notably, productivity growth during
the current expansion is somewhat stronger if gross domestic income
is used as the output measure in place of gross domestic product,
and the differences are especially striking in recent quarters.
For
the present, we are sticking with our assumption that, going
forward, productivity gains are likely to be close to the postulated
trend of 1 percent.
With gains of that magnitude and little change
I-10
in weekly hours, businesses would need to boost payroll employment
at an average rate of about 1-1/4 percent to achieve the rise in
output that we are predicting. If productivity gains continue to be
disappointing--and are accurately reflecting business realities-pressures on labor resources would likely be more intense than we
are predicting and the associated inflation pressures would be
greater.
LABOR MARKET PROJECTIONS
(Percent change, Q4 to Q4, unless otherwise noted)
1996
1997
1998
.8
.6
.9
.9
1.0
1.0
Nonfarm payroll employment
Previous
2.1
2.1
1.4
1.3
1.1
1.2
Household employment
Previous
2.0
2.1
1.3
1.1
1.0
1.1
66.9
66.8
67.0
66.9
67.1
66.9
5.3
5.2
5.2
5.2
5.2
5.2
Output per hour, nonfarm
business sector
Previous
Memo:
Labor force participation rate
Previous
Civilian unemployment rate 1
Previous
1. Average for the fourth quarter.
This past year, sizable employment gains were accompanied by a
pickup in growth of the civilian labor force, and the participation
rate has moved up.
As has happened in other cyclical expansions,
tightness of the labor market and the associated increases in wages
and other financial inducements apparently are pulling into the work
force persons who previously had been on the sidelines.
In contrast
to our earlier assumption that the participation rate would remain
flat through 1997 and 1998, we have boosted it slightly in this
forecast; a projected rate of 67.1 percent in the latter part of
1998 is two-tenths higher than the prediction in the last Greenbook.
Wages and prices.
Our thinking about the prospects for wages
and prices continues to be heavily influenced by the historical
relationship between labor market slack and inflation.
What gives
us pause in the present circumstances, however, is the striking
absence of capacity pressures in manufacturing.
We have responded
I-11
to these circumstances by putting less upward tilt into our price
forecast than we would have if our focus had been solely on the
unemployment rate.
Nonetheless, we still anticipate that the
general trend of the next two years will be toward gradual
acceleration of both hourly compensation and prices.
With the unemployment rate on about the same path as we
previously were predicting, the increases forecast for wages and
benefits also remain on about the same trajectories as before.
Hourly compensation, as measured by the employment cost index, is
projected to accelerate from 2.9 percent over the twelve months
ended in September 1996 to 3.4 percent and 3.6 percent respectively
during 1997 and 1998.
Growth of wages and salaries, which has
picked up noticeably this past year, is projected to increase a bit
further over the next couple of years.
We also anticipate that
increases in benefits will pick up somewhat, with the twelve-month
rise moving up from less than 2 percent over the twelve months ended
in September to almost 3 percent by the end of 1998.
Nothing that
we have heard in the anecdotal reports seems to seriously challenge
our view that acceleration of compensation is in progress, and
reports that the cost of medical benefits will turn up moderately
seem to be appearing with increased frequency.
Although many businesses say that this year's hike in the
minimum wage had only a limited effect on labor costs because wages
already were above the minimum, the recent data on hourly earnings
suggest rather strongly that effects have been present in some parts
of the economy, especially certain types of retail establishments.
We continue to anticipate that direct and indirect effects of the
legislated hikes will be filtering through the pay structure in 1997
and 1998, keeping hourly compensation rising a couple of tenths
faster than would otherwise be the case.
The rate of rise in the published core CPI is expected move up
only 1/4 percentage point between 1996 and 1998.
However, if
adjustment is made for technical changes that have been implemented
since the start of 1995 or are planned for the next two years, the
degree of acceleration is about twice as great; the cumulative
effect of the technical changes on the core inflation rate rises
from 0.2 percentage point this year to 0.4 percentage point in 1998.
Passthrough of rising labor costs is one factor that is expected to
push core inflation higher.
In addition, price competition from
abroad, which has helped to restrain domestic price increases this
I-12
past year, is expected to be less of a limiting influence moving
forward--we are projecting that the noticeable decline in non-oil
import prices seen in 1996 will be followed by a much smaller
decrease in 1997 and a small rise in 1998.
STAFF INFLATION PROJECTIONS
(Percent change, Q4 to Q4, unless otherwise noted)
1995
Consumer price index
Previous
Food
1996
1997
1998
2.7
2.7
3.2
3.2
2.7
2.8
2.7
2.8
2.6
4.2
2.8
2.7
Previous
2.6
3.9
2.9
2.8
Energy
Previous
-1.7
-1.7
7.4
7.1
.4
.3
.9
1.0
3.0
3.0
2.7
2.7
2.8
3.0
2.9
3.0
2.6
2.6
3.0
3.0
3.4
3.4
3.6
3.6
.8
.8
-2.9
-2.7
-.4
-.1
.8
1.0
Excluding food and energy
Previous
ECI for compensation of
private industry workers
Previous
Prices of non-oil
merchandise imports
Previous
Memo:
Adjustment to the core CPI
for methodology changes
Previous
- - .1
.1
- percentage points - .2
.2
.3
.3
.4
.4
1. December to December.
Like our path for crude oil prices, our forecast of retail
energy prices exhibits some changes in timing but otherwise is much
the same as the forecast in the last Greenbook.
Increases over the
very near term are expected to be somewhat larger than we previously
were forecasting, but, with oil prices dropping, declines should
start showing up later in the winter.
We continue to project that a
1996 rise in CPI energy prices of more than 7 percent will be
followed by only small increases in 1997 and 1998.
In response to incoming data, our food price forecast for 1996
has been raised a touch, to about 4-1/4 percent.
But looking
further ahead we continue to anticipate a sharp slowdown. Grain
prices are down substantially from the highs of last summer, and
signs of price deceleration or outright declines are starting to
I-13
show up in the markets for various livestock products.
On the
assumption that harvests in 1997 and 1998 will be large enough to
keep upward pressures on crop prices from resurfacing, we are
projecting food price increases of around 2-3/4 percent in both
those years, about in line with the rate of core inflation.
Monetary and Credit Flows
Growth of M2 appears to have been about 4-1/4 percent this
year, in the upper half of its annual range but a little slower than
growth of nominal GDP.
Expansion of this aggregate is projected to
pick up a bit in the next two years, to a pace about in line with
that of nominal GDP; although the opportunity costs of holding M2
are expected to be unchanged, household enthusiasm for equity mutual
funds is expected to diminish.
M3 is estimated to have grown
6-1/4 percent in 1996, exceeding the upper end of its range.
Over
the next two years, growth of this aggregate is expected to remain
fairly robust.
Debt of the domestic nonfinancial sector appears to have grown
5 percent this year, a little faster than nominal GDP.
In 1997 and
1998, overall debt growth is expected to soften somewhat and align
more closely with the expansion of nominal GDP.
In particular,
noticeably weaker borrowing should be evident in the household
sector, and federal borrowing is expected to moderate further.
Growth of consumer credit is projected to pick up only modestly
from the sluggish pace of September and October.
Moderate growth of
spending on consumer durables, at a pace well below that seen
earlier in the expansion when households were restocking, should
help to hold credit growth in check over the next couple of years,
as will continuation of the recent trend toward tighter consumer
loan supply conditions.
Although the recent uptick in mortgage
refinancings could give a little boost to net borrowing, as some
homeowners cash out a portion of their accumulated equity, the lower
level of homebuilding in 1997-98 is expected to be associated with a
reduced overall pace of home mortgage debt formation.
A risk,
however, is that--in an environment of moderate growth, fiscal
tightening, and inflation of less than 3 percent--a swing in bond
market sentiment could at least temporarily drive long-term rates
well below recent levels and trigger a sizable wave of refinancing.
This could give a significant added boost to consumer spending.
Growth of nonfinancial business debt has softened somewhat of
late; but looking ahead, the sector's financing needs are expected
I-14
to be boosted by slower profit growth and sustained increases in
capital spending.
A further hefty volume of merger and acquisition
deals is also likely to add to business borrowing over the forecast
period.
For the better-rated firms, borrowing conditions should
remain quite accommodative, with favorable terms and standards on
bank lending and continued narrow rate spreads in securities
markets.
Smaller businesses whose profits have already flattened
out and larger firms with lower debt ratings may experience some
gradual tightening in lending terms and widening in risk spreads on
their debt issues over the forecast period.
Growth of federal government debt is expected to edge down
further from its current moderate pace over the next two years; the
federal deficit is projected to change little on a calendar-year
basis, and we are not expecting further additions to the
government's cash balances.
Outstanding debt of state and local
governments is expected to remain about flat in 1997; retirements of
advance-refunded debt, which contributed to declines in indebtedness
in recent years, are expected to wane in the coming year.
Net
borrowing of state and local governments is projected to turn mildly
positive in 1998.
Alternative Simulations
Our alternative simulations depict the consequences of
different assumptions about the federal funds
rate.
In the first
simulation, increases in the funds rate begin at the start of 1997
and cumulate to a rise of 100 basis points by the end of next year.
The higher level is then maintained throughout 1998.
Under these
assumptions, growth of real GDP in 1997 is 0.4 percentage point less
than in the baseline forecast, and in 1998 it is 0.7 percentage
point less than in the baseline.
The civilian unemployment rate at
the end of 1998 is 1/2 percentage point higher than in the baseline
forecast.
The additional slack reduces CPI inflation by a small
amount in 1997 and more substantially in 1998.
The second
simulation assumes that the funds rate is lowered 100 basis points
during 1997 and then held steady in 1998.
Economic effects of this
alternative are symmetric to that in which the funds rate was
raised.
I-15
ALTERNATIVE FEDERAL FUNDS RATE ASSUMPTIONS
(Percent change, Q4 to Q4. except as noted)
1996
1997
1998
Real GDP
Baseline
Higher funds rate
Lower funds rate
2.8
2.8
2.8
2.3
1.9
2.7
1.9
1.2
2.6
Civilian unemployment rate
Baseline
Higher funds rate
Lower funds rate
5.3
5.3
5.3
5.2
5.3
5.1
5.2
5.7
4.7
CPI
Baseline
Higher funds rate
Lower funds rate
3.2
3.2
3.2
2.7
2.6
2.8
2.7
2.3
3.1
1.
Average for the fourth quarter.
Strictly Confidential <FR>
Class II FOMC
December 12,
1996
STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT
(Percent, annual rate)
ANNUAL
1994
1995
1996
1997
1998
QUARTERLY
1995
Q1
02
03
04
1996
Q1
02
Q3
Q4
1997
Q1
Q2
Q3
Q4
Q1
Q2
2.1
2.7
2.6
2.8
2.7
5.2
5.2
1.9
2.5
2.5
2.8
2.7
5.2
5.2
03
1.9
2.7
2.6
2.8
2.8
5.2
5.2
Q4
1998
1.9
2.7
2.7
2.9
2.8
5.2
5.2
2.9
2.1
3.2
2.2
3.2
2.2
0.1
-0.2
0.1
-0.2
TWO-QUARTER
3
3.5
4.1
3.5
4.1
0.6
2.0
0.6
2.0
2.9
2.1
5.4
4.1
5.4
4.1
3.3
2.2
3.3
2.3
2.2
3.5
3.5
-0.1
-0.1
04
1995
2.3
2.2
2.2
2.8
2.8
-0.2
-0.1
Q2
04
4.9
4.2
4.9
4.3
2.3
2.1
2.2
2.7
2.7
2.9
2.6
0.0
-0.1
2.3
2.4
2.3
2.7
2.7
0.0
-0.0
02
Q4
4.4
4.4
4.3
4.2
2.1
2.1
2.0
2.6
2.6
2.8
2.7
-0.0
0.0
1.9
2.7
2.6
2.9
2.8
-0.0
0.0
3.5
1.3
2.8
2.3
2.3
2.5
2.2
2.5
2.3
2.5
2.2
2.5
2.6
2.7
3.2
2.8
2.6
2.7
3.2
2.7
-1.0
-0.1
-0.3
0.0
-1.0
-0.1
-0.2
-0.1
1.9
2.7
2.6
2.8
2.7
-0.0
0.0
Q2
Q4
1996
1997
1998
Q2
FOUR-QUARTER
4
1994
04
1995
1996
1997
1998
04
Q4
04
04
1.
2.
For all urban consumers.
Level, except as noted.
3.
Percent change from two quarters
4.
Percent change from four quarters earlier; for unemployment rate, change in percentage points.
earlier;
for
unemployment rate,
change in
percentage points.
Strictly
Confidential
Class II FOMC
<FR>
I
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)
December 12, 1996
_~
- - -
Unitsl
Item
Projected - - -
1990
1991
1992
1993
1994
1995
1996
1997
1998
5743.8
6138.7
5916.7
6079.0
6244.4
6244.4
6553.0
6386.4
6935.7
6608.7
7253.8
6742.9
7571.0
6902.1
7925.5
7067.5
8268.1
7215.7
Priv. dom. final purchases
-0.2
-0.8
0.6
-0.6
0.4
-0.0
-0.4
-0.8
3.7
4.0
3.9
4.9
2.2
2.9
2.0
3.5
3.5
3.8
2.9
4.0
1.3
1.0
1.9
2.3
2.8
3.4
2.6
3.5
2.3
2.7
2.2
3.2
1.9
2.2
1.9
2.7
Personal cons. expenditures
Durables
Nondurables
Services
0.5
-3-2
-0.5
2.0
-0.2
-3.1
-1.0
0.9
4.2
9.4
3.4
3.6
2.5
7.3
1.5
2.1
3.1
7.0
3.5
2.0
1.9
1.3
1.1
2.4
2.7
6.0
1.6
2.5
3.0
4.9
2.6
2.8
2.2
2.7
2.0
2.2
Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures
-2.5
-2.0
-3.5
-15.1
-6.0
-2.6
-12.5
1.1
5.5
9.6
-3.4
16.9
8.5
11.5
1.6
8.1
10.1
12.6
3.6
5.7
6.4
6.9
5.1
-1.5
9.2
10.9
4.6
1.5
5.1
7.0
-0.2
-1.2
5.8
7.5
0.5
1.0
Imports
7.2
0.5
8.6
4.1
4.1
7.4
4.8
10.5
9.9
11.8
7.4
4.2
4.0
9.0
6.6
9.4
6.4
7.5
Gov't. cons. & investment
Federal
Defense
State & local
2.6
1.6
0.3
3.3
-0.7
-3.1
-5.3
1.0
1.7
1.3
-1.3
2.0
-0.5
-5.4
-6.8
3.1
0.0
-3.1
-5.7
2.2
-1.3
-6.7
-6.8
2.1
2.4
1.7
0.7
2.6
0.7
-2.5
-2.1
2.5
0.0
-4.4
-4.9
2.4
10.4
7.8
-61.9
-3.0
-1.2
-22.3
7.3
1.9
-29.5
19.1
26.4
-72.0
58.9
46.8
-105.7
33.1
37.2
-107.6
17.2
19.4
-122.6
30.3
26.6
-155.7
I
4
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
Gross domestic purchases
Final sales
% change
Exports
Change in bus. inventories
Nonfarm
Net exports
Bill.
Nominal GDP
% change
4.4
3.8
6.3
4.8
5.9
3.8
4.7
4.6
4.3
Nonfarm payroll employment
Unemployment rate
Millions
109.4
5.6
108.3
6.8
108.6
7.5
110.7
6.9
114.2
6.1
117.2
5.6
119.5
5.4
121.5
5.2
122.9
5.2
Industrial prod. index
Capacity util. rate - mfg.
% change
-0.2
81.3
0.2
78.0
4.0
79.5
3.2
80.6
6.6
83.3
1.6
83.0
4.0
82.0
3.1
81.9
3.1
81.8
Housing starts
Millions
1.19
14.05
10.85
3.20
1.01
12.52
9.74
2.77
1.20
12.85
10.51
2.34
1.29
13.87
11.72
2.15
1.46
15.02
12.88
2.13
1.35
14.74
12.82
1.91
1.46
15.01
13.32
1.70
Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
6 change
5764.9
4.6
6.4
1.0
5.0
5932.4
3.5
3.7
0.8
5.7
6255.5
6.2
7.3
4.0
5.9
6563.5
4.7
3.6
0.9
4.5
6931.9
5.7
5.2
2.7
3.8
7246.7
3.9
5.6
3.1
4.7
7562.1
4.7
5.5
2.5
4.9
7910.5
4.5
4.8
2.9
5.2
8245.7
4.2
4.4
2.1
5.0
Corp. profits, IVA & CCAdJ.
Profit share of GNP
(excluding FR banks)
t change
6.2
6.4
6.0
3.9
6.4
6.1
12.7
6.4
6.1
19.9
7.1
6.8
11.3
7.6
7.4
7.2
8.1
7.8
5.1
8.6
8.3
3.0
8.4
8.2
3.9
8.3
8.0
Federal surpl./deficit
State a local surpl./def.
Ex. social ins. funds
Bill.
-154.7
80.1
20.2
-196.0
75.8
11.5
-280.9
86.3
18.3
-255.6
94.9
28.0
-190.2
99.7
36.9
-161.7
95.0
36.8
-125.9
92.6
36.7
-128.1
87.0
32.4
-109.6
76.6
22.8
4.6
4.7
3.4
3.3
2.6
2.6
2.5
2.5
2.3
2.3
2.5
2.5
1.9
2.2
2.3
2.5
2.3
2.6
5.2
6.3
5.3
2.7
3.0
4.4
2.7
3.1
3.5
2.3
2.7
3.1
2.4
2.6
2.8
2.3
2.7
3.0
2.2
3.2
2.7
2.2
2.7
2.8
2.5
2.7
2.9
4.6
4.4
3.5
3.6
3.1
2.6
3.0
3.4
3.6
-0.6
5.8
6.4
2.2
4.8
2.5
3.6
4.6
1.0
0.3
2.3
2.0
-0.1
3.7
3.7
Ch. $
31.9
27.0
-182.1
EMPLOYMENT AND PRODUCTION
Light motor vehicle sales
North Amer. produced
Other
1.38
14.96
13.19
1.77-
1.36
14.71
12.98
1.73
INCOME AND SAVING
$
PRICES AND COSTS
% change
GDP implicit deflator
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI, hourly compensation
Nonfarm business sector
Output per hour
Comensation per Hour
Unit labor cost
1.
2.
2
Changes are from fourth quarter to fourth quarter.
Private-industry workers.
-0.3
1.8
2.1
Strictly Confidential <FR>
Class II FOMC
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
December 12,
1996
1994
Q1
1994
Q2
1994
03
1994
04
1995
Q1
1995
Q2
1995
Q3
1995
04
1996
Q1
1996
Q2
6776.0
6508.5
6890.5
6587.6
6993.1
6644.9
7083.2
6693.9
7149.8
6701.0
7204.9
6713.5
7309.8
6776.4
7350.6
6780.7
7426.8
6814.3
7545.1
6892.6
2.5
3.5
4.9
5.3
3.5
3.7
3.0
2.5
0.4
1.4
0.7
0.7
3.8
2.6
0.3
-0.7
2.0
3.0
4.7
5.2
1.2
3.0
4.2
3.5
0.6
2.1
3.6
1.4
3.0
4.1
3.9
4.4
3.8
4.0
2.3
2.3
3.0
1.4
4.7
4.1
2.8
5.8
3.9
1.6
3.5
4.3
3.2
3.5
2.8
5.6
3.8
1.6
3.1
12.4
3.2
1.2
1.0
-8.9
2.4
2.4
3.1
7.0
1.8
3.0
2.4
9.3
0.5
2.0
1.1
-1.0
-0.4
2.3
3.5
8.2
3.7
2.4
3.4
11.4
1.3
2.7
7.3
15.5
-11.8
12.8
7.1
4.1
15.7
12.7
13.8
19.4
0.2
-1.8
12.2
11.9
13.0
-0.1
15.4
17.4
9.9
-6.3
3.5
3.5
3.4
-13.4
4,9
4.3
6.3
9.2
2.5
3.0
1.0
6.4
11.6
13.1
7.7
7.4
3.8
6.7
-3.7
16.3
-1.5
8.2
15.9
18.4
9.7
10.7
16.5
10.3
2.6
11.2
5.9
4.5
10.7
-0.0
10.7
1.6
1.8
10.6
5.6
9.9
-4.3
-11.4
-17.4
0.7
-0.8
-5.3
0.7
2.2
7.0
11.5
13.5
4.2
-1.4
-5.9
-16.1
1.6
-1.2
-6.5
-7.4
2.3
0.8
-1.3
0.6
2.1
-0.6
-5.6
-7.6
2.7
-4.3
-13.2
-12.3
1.5
1.6
6.0
4.1
-0.9
7.7
9.4
10.0
6.7
40.5
29.7
-99.3
74.5
54.0
-107.3
64.5
50.5
-111.7
56.1
53.0
-104.3
54.5
57.4
-122.5
30.5
33.7
-121.4
33.0
38.6
-101.6
14.6
19.0
-84.9
-3.0
2.9
-104.0
7.1
11.7
-114.7
change
5.3
6.9
6.1
5.3
3.8
3.1
6.0
2.3
4.2
6.5
Nonfarm payroll employment
Unemployment rate
Millions
112.6
6.6
113.7
6.2
114.7
6.0
115.6
5.6
116.5
5.5
117.0
5.7
117.4
5.6
117.9
5.5
118.5
5.6
119.3
5.4
Industrial prod. index
Capacity util. rate - mfg.
% change
8.4
82.2
7.0
83.2
4.6
83.4
6.4
84.3
3.9
84.3
-1.4
83.0
3.2
82.6
0.6
82.0
3.0
81.6
6.7
82.2
Housing starts
Light motor vehicle sales
North Amer. produced
Other
Millions
1.38
15.07
1.47
14.85
1.46
14.99
1.48
15.16
1.31
14.56
1.29
14.44
1.42
15.04
1.41
14.92
1.47
15.18
1.49
15.13
12.94
2.13
12.69
2.16
12.79
2.20
13.12
2.05
12.52
2.04
12.46
1.97
13.18
1.86
13.13
1.79
13.49
1.69
13.41
1.72
6781.0
5.4
-3.4
-5.4
2.7
6888.3
6.5
13.3
9.7
4.0
6987.0
5.9
4.9
2.9
4.1
7071.4
4.9
6.7
4.2
4.3
7146.8
4.3
7.1
3.7
4.9
7202.4
3.1
4.7
0.3
4.1
7293.4
5.1
4.9
4.3
4.5
7344.3
2.8
5.8
4.4
5.2
7426.6
4.6
4.8
2.0
4.8
7537.5
6.1
6.8
1.3
4.3
-35.4
82.5
14.8
13.5
-7.4
1.7
40.8
-0.5
23.6
6.8
6.8
7.8
7.9
8.1
7.8
7.8
8.4
8.3
8.7
8.7
6.5
7.5
7.7
7.8
7.5
7.5
8.1
8.0
8.4
8.4
-212.7
94.8
29.0
-169.6
105.2
41.1
-188.5
99.6
37.9
-190.1
99.3
39.4
-172.6
99.0
40.2
-161.1
99.0
40.9
-158,5
93.9
35.8
-154.5
88.1
30.5
-155.2
91.0
34.1
-126.7
101.0
44.6
1.9
2.5
2.2
3.4
2.4
2.1
2.0
1.9
2.4
2.1
3.3
2.4
2.1
2.1
2.2
2.3
1.8
2.2
2.3
2.8
2.9
3.0
3.6
3.1
2.0
2.4
2.3
2.8
2.7
3.3
2.8
3.5
3.3
1.6
2.1
2.8
1.9
2.4
2.7
2.3
3.2
2.7
2.1
3.9
2.7
3.4
3.3
2.3
2.9
2.9
2.6
2.6
2.9
3.2
1.0
1.7
1.8
0.4
3.3
-2.3
2.9
1.8
-1.2
1.9
0.6
3.7
4.0
3.4
3.9
0.1
2.9
5.3
1.9
5.2
1.5
3.3
Item
Units
r
r
EXPENDITURES
Nominal GDP
Bill. $
Bill. Ch. $
Real GDP
Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases
% change
Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures
Exports
Imports
Gov't. cons. & investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Net exports
Bill. Ch. $
Nominal GDP
4
EMPLOYMENT AND PRODUCTION
I'
INCOME AND SAVING
Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
' change
Corp. profits, IVA & CCAdJ.
'
change
Profit share of GNP
(excluding FR banks)
Federal surpl./deEicit
State & local surpl./def.
Ex. social in. funds
Bill.
$
PRICES AND COSTS
GDP implicit deflator
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI, hourly compensation
% change
1
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1.
Private-industry workers.
-1.8
2.9
4.9
1.3
0.3
Strictly Confidential <FR>
Class II FOMC
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
- - -
- - - - - - - - - - - - -
December 12, 1996
Projected - - - - - - - - - - - - - -
1996
03
1996
04
1997
Q1
1997
Q2
1997
Q3
1997
Q4
1998
Q1
1998
Q2
1998
Q3
7614.2
7698.0
7797.8
7883.7
7967.9
8052.7
8141.8
8225.8
8309.1
8395.6
6931.4
6970.4
7006.8
7047.4
7088.4
7127.6
7165.0
7199.3
7232.5
7265.9
2.3
3.6
0.5
2.4
2.3
1.9
2.7
2.7
2.1
2.6
1.9
3.3
2.3
2.7
2.5
3.2
2.3
3.1
2.3
3.3
2.2
2.5
2.3
2.9
2.1
2.3
2.0
2.7
1.9
2.1
1.9
2.7
1.9
2.4
1.9
2.7
1.9
1.9
2.0
2.6
0.6
-1.8
0.4
1.3
3.2
6.9
1.2
3.5
3.4
6.4
2.8
3.1
3.0
4.1
2.9
2.8
3.0
5.4
2.6
2.7
2.5
3.6
2.2
2.4
2.3
3.3
2.0
2.3
2.2
2.8
2.0
2.2
2.1
2.3
2.0
2.1
2.1
2.4
2.0
2.1
Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures
16.9
20,4
7.5
-5.9
5.0
4.2
7.4
-9.8
4.1
6.4
-2.3
-3.4
6.3
8.3
0.5
-2.8
4.7
6.2
0.5
0.8
5.4
7.0
0.6
0.7
5.6
7.3
0.4
0.5
5.6
7.3
0.5
0.9
6.0
7.7
0.5
1.2
6.0
7.8
0.5
1.3
Exports
Imports
-1.3
9.7
10.4
5.9
6.5
10.0
8.0
9.5
2.2
7.4
9.8
10.6
4.6
5.4
8.9
9.4
2.3
6.0
10.0
9.1
Gov't. cons. & investment
-0.2
-3.4
-5.2
1.4
0.5
-4.5
-5.3
3.6
-1.1
-7.0
-9.9
2.4
1.2
-1.0
-1.0
2.4
1.5
-0.2
0.3
2.5
1.1
-1.6
2.4
2.6
-0.3
-5.3
-6.3
2.5
-0.2
-4.9
-6.8
2.5
1.2
-1.1
-1.0
2.4
-0.6
-6.1
-5.3
2.4
36.0
36.2
-139.2
28.8
26.9
-132.7
31.7
28.4
-142.7
28.9
25.7
-149.1
30.5
26.8
-162.6
30.1
25.5
-168.5
32.3
27.7
-172.4
32.5
27.8
-177.3
32.4
27.3
-188.2
30.5
25.3
-190.4
% change
3.7
4.5
5.3
4.5
4.3
4.3
4.5
4.2
4.1
4.2
employment
Nonfarm payroll
Unemployment rate
Millions
120.0
5.2
120.4
5.3
120.8
5.2
121.3
5.2
121.7
5.2
122.1
5.2
122.5
5.2
122.8
5.2
123.1
5.2
123.4
5.2
prod. index
Industrial
- mfg.
rate
Capacity util.
I change
4.4
82.4
2.2
81.8
4.1
82.1
2.8
82.0
2.7
81.9
2.9
81.8
3.3
81.8
3.1
81.8
2.9
81.8
3.2
81.8
Housing starts
Light motor vehicle sales
North Amer. produced
Other
Millions
1.48
14.95
1.41
14.80
1.40
15.03
1.38
15.01
1.38
14.91
1.37
14.89
1.36
14.84
1.36
14.74
1.36
14.67
1.36
14.60
13.30
13.06
13.27
13.24
13.13
13.11
13.08
13.00
12.95
12.90
1.65
1.73
1.76
1.77
1.78
1.78
1.76
1.74
1.72
1.70
Item
Units
1998
Q4
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
% change
Gross domestic purchases
Final sales
Priv. dom. final purchases
Personal cons, expenditures
Durables
Nondurables
Services
Federal
Defense
State
& local
Change in bus. inventories
Bill.
Ch. $
Nonfarm
Net exports
Nominal GDP
EMPLOYMENT AND PRODUCTION
INCOME AND SAVING
Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Bill. $
I change
7597.2
7687.3
7786.1
7869.9
7951.9
8034.1
8123.6
8203.3
8285.3
8370.7
3.2
5.7
4.9
5.3
4.8
4.8
1.9
5.1
5.2
5.7
4.6
5.3
4.4
4.6
2.6
5.2
4.2
4.7
2.5
5.1
4.2
4.2
1.8
5.0
4.5
4.7
3.5
5.2
4.0
4.2
1.6
5.1
4.1
4.1
1.4
4.9
4.2
4.5
1.8
4.9
Corp. profits, IVA & CCAdj.
Profit share of GNP
(excluding FR banks)
% change
1.4
8.7
8.4
-8.7
8.4
8.1
17.5
8.6
8.3
-0.2
8.5
8.2
-3.0
8.4
8.1
-1.2
8.2
8.0
5.8
8.3
8.0
3.9
8.3
8.0
3.1
8.2
8.0
2.9
8.2
8.0
-120.2
89.3
33.9
-101.6
89.3
34.2
-131.2
91.1
36.2
-130.0
89.5
34.8
-128.5
86.6
32.1
-122.7
80.7
26.4
-120.7
79.3
25.2
-111.9
78.2
24.3
-105.8
76.5
22.8
-100.1
72.2
18.7
1.3
1.9
2.2
2.5
3.1
3.2
2.1
2.3
2.0
2.3
2.0
2.3
2.3
2.6
2.2
2.5
2.2
2.6
2.3
2.7
1.8
2.3
2.4
2.6
3.3
2.7
2.6
3.0
2,7
1.9
2.3
2.8
2.1
2.6
2.9
2.2
2.7
2.9
2.5
2.7
2.8
2.4
2.7
2.9
2.5
2.8
2.9
2.5
2.8
3.0
2.5
3.5
3.4
3.3
3.7
3.5
3.5
3.6
3.6
3.7
-0.0
3.4
3.4
0.6
4.0
3.3
0.4
4.0
3.6
0.7
3.5
2.8
1.2
3.7
2.5
1.2
3.8
2.6
1.1
3.6
2.5
1,0
3.6
2.6
1.0
3.6
2.6
1.0
3.6
2.6
Federal
Bill. $
surpl./deficit
State & local surpl./def.
Ex. social ins. funds
PRICES AND COSTS
change
GDP implicit
deflator
GDP chn.-wt. price
index
Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI, hourly compensation
1
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost
1.
Private-industry workers.
Strictly Confidential <FR>
Class II FOMC
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
1995
1996
1996
1996
1996
Item
Q4
01
Q2
93
04
Real GDP
Gross dom. purchases
0.3
-0.7
2.0
3.1
4.7
5.3
2.3
3.7
2.3
1.9
2.1
2.7
2.3
2.7
2.3
3.1
2.2
2.6
1.3
1.0
2.8
3.5
2.3
2.8
1.4
1.2
3.0
3.9
4.1
3.4
0.5
2.0
2.7
2.2
1.9
2.7
2.5
2.7
2.3
2.8
2.3
2.4
1.9
1.8
2.6
2.9
2.2
2.6
0.7
-0.1
-0.1
0.8
2.4
0.7
0.7
0.9
2.3
0.9
0.3
1.1
0.4
-0.2
0.1
0.5
1.1
0.9
0.2
0.3
0.4
0.5
-0.1
0.6
1.7
1.6
0.2
-0.2
0.6
0.4
0.2
-0.4
0.5
0.5
-0.1
-0.1
0.7
0.7
0.0
-0.1
0.5
0.5
0.0
0.0
0.6
0.6
0.0
0.0
0.7
0.5
0.1
-0.1
0.3
0.8
0.5
Final sales
Priv. do.
final purchases
Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Producers' dur. equip.
Nonres. structures
Residential structures
1997
December 12, 1996
01
1997
1997
1997
95Q4/
96Q4/
9704/
Q2
Q3
Q4
94Q4
95Q4
96Q4
1.3
0.1
0.2
0.9
Net exports
Exports
Iports
0.9
1.1
-0.2
-1.1
0.2
-1.3
-0.6
0.6
-1.2
-1.4
-0.2
1.3
0.4
1.2
0.8
-0.6
0.8
1.3
-0.4
0.9
1.3
-0.8
0.3
1.0
-0.3
1.2
1.5
Government cons. & invest.
Federal
Defense
Nondefense
State and local
-0.8
-0.9
-0.6
-0.3
0.2
0.3
0.4
0.2
0.2
-0.1
1.4
0.6
0.4
0.2
0.8
-0.0
-0.2
-0.2
0.0
0.2
0.1
-0.3
-0.2
-0.1
0.4
-0.2
-0,5
-0.5
-0.0
0.3
0.2
-0.1
-0.0
-0.0
0.3
0.3
-0.0
0.0
-0.0
0.3
0.2
-0.1
0.1
-0.2
0.3
-1.0
-1.2
0.1
-1.0
-0.9
-0.1
0.5
0.5
0.1
1.7
1.4
0.3
-0.4
-0.5
0.1
0.2
0.1
0.1
-0.2
-0.2
0.0
0.1
0.1
0.0
-0.0
-0.1
0.1
-0.6
-0.5
-0.1
GDP residual
-0.0
0.0
-0.0
0.1
-0.1
0.1
0.0
0.1
0.6
0.6
-0.0
-. 00
-0.3
Change in bus. inventories
Nonfarm
aram
2.0
0.4
0.5
1.1
Components may not sum to total due to rounding.
0.0
-0.5
0.8
1.3
-0.5
-0.3
-0.2
0.2
0.0
0.0
0.1
Strictly Confidential <FR>
CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS
December 12, 1996
Class II FOMC
1996
Q4
1997
Q1
1997
02
1997
Q3
1997
Q4
1998
Q1
1998
Q2
1998
Q3
1998
Q4
96Q4/
95Q4
97Q4/
9604
2.3
1.9
2.1
2.7
2.3
2.7
2.3
3.1
2.2
2.6
2.1
2.3
1.9
2.2
1.9
2.5
1.9
2.0
2.8
3.5
2.3
2.8
1.9
2.2
2.7
2.2
1.9
2.7
2.5
2.7
2.3
2.8
2.3
2.4
2,0
2.3
1.9
2.2
1.9
2.3
2.0
2.2
2.6
2.9
2.2
2.6
1.9
2.2
2.2
0.6
0.2
1.3
2.3
0.6
0.6
1.2
2.0
0.4
0.6
1.1
2.1
0.5
0.5
1.0
1.7
0.3
0.5
0.9
1.6
0.3
0.4
0.9
1.5
0.3
0.4
0.8
1.4
0.2
0.4
0.8
1,4
0.2
0.4
0.8
1.8
0.5
0.3
0.9
0.6
0.4
0.2
-0.4
0.5
0.5
-0.1
-0.1
0.7
0.7
0.0
-0.1
0.5
0.5
0.0
0.0
0.6
0.6
0.0
0.0
0.4
1.2
0.8
-0.6
0.8
1.3
-0.4
0.9
1.3
-0.8
0.3
1.0
-0.3
1.2
1.5
-0.2
0.6
0.8
-0.3
1.1
1.4
-0.6
0.3
0.9
-0.1
1.2
1.4
-0.7
0.5
1.2
-0.5
0.8
1.3
-0.3
0.8
1.1
0.1
-0.3
-0.2
-0.1
0.4
-0.2
-0.5
-0.5
-0.0
0.3
0.2
-0.1
-0.0
-0.0
0.3
0.3
-0.0
0.0
-0.0
0.3
0.2
-0.1
0.1
-0.2
0.3
-0.1
-0.3
-0,3
-0.1
0.3
-0.0
-0.3
-0.3
-0.0
0.3
0.2
-0.1
-0.0
-0.0
0.3
-0.1
-0.4
-0.2
-0.2
0.3
0.4
0.1
0.0
0.1
0.3
0.1
-0.2
-0.1
-0.1
0.3
0.0
-0.3
-0.2
Change in bus. inventories
Nonfarm
Farm
-0.4
-0.5
0.1
0.2
0.1
0.1
-0.2
-0.2
0.0
0.1
0.1
0.0
-0.0
-0.1
0.1
0.1
0.1
0.0
0.0
0.0
0.0
-0.0
-0.0
0.0
-0.1
-0.1
0.0
0.2
0.1
0.1
0.0
-0.0
0.0
0.0
-0.0
0.0
GDP residual
-0.1
0.1
0.0
0.1
0.0
0,0
0.0
0.1
-0.0
0.0
0.1
0.0
Item
Real GDP
Gross dom. purchases
Final sales
Priv. dom. final purchases
Personal cons,
Durables
Nondurables
Services
expenditures
Business fixed investment
Producers' dur. equip.
Nonres. structures
Residential structures
Net exports
Exports
Import s
Government cons. & invest.
Federal
Defense
Nondefense
State and local
Components may not sum to total due to rounding.
98Q4/
97Q4
1.0
0.9
0.1
0.1
-0.1
0.3
Strictly Confidential
(FR)
STAFF
PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS
Class II FOMC
(Billions of dollars except as noted)
Fiscal year
Item
1995
a
1996
a
5
1997
1996
1998
Qa*
Q2a
1997
Q3 b
Q4
l
Receipts
1
Outlays
Surplus/deficitl
On-budget
Off-budget
Surplus excluding
deposit insurance 2
1996
1998
I
Not seasonally adjusted
UNIFIED BUDGET
Means of
December 12,
I.
1355
1519
-164
-226
62
1453
1560
-107
-174
67
1525
1637
-112
-181
68
1575
1692
-117
-190
73
322
393
-72
-84
12
446
392
54
14
39
362
395
-33
-36
2
353
412
-59
-67
8
333
413
-80
-93
13
459
405
54
13
41
379
407
-28
-34
6
364
424
-60
-69
9
345
420
-75
-88
13
474
426
48
4
44
392
423
-31
-37
7
384
435
-51
-63
12
-182
-116
-120
-119
-75
52
-34
-65
-81
53
-29
-60
-75
48
-31
-52
financing
Borrowing
171
-2
-5
Cash 3
decrease
Other
Cash operating balance,
end of period
130
-6
-16
126
4
-18
146
0
-29
80
-1
-7
-23
-16
-14
39
-6
0
43
13
3
80
11
-12
-35
-15
-5
37
-5
-4
46
10
3
82
10
-18
-30
-15
-3
47
-5
-12
25
10
16
38
44
40
40
22
38
44
32
20
35
40
30
20
35
40
30
1660
1671
1783
1792
463
306
157
1320
-123
63
463
306
157
1329
-121
62
1690
1802
461
303
158
1341
-112
61
1709
1814
463
304
159
1352
-106
61
1728
1828
459
302
156
1369
-100
60
NIPA FEDERAL SECTOR
Receipts
Expenditures
Consumption expend.
Defense
Nondefense
Other expenditures
Current account surplus
Gross investment
Current and capital
account surplus
FISCAL INDICATORS
Seasonally adjusted, annual rate
1459
1629
455
304
151
1175
-171
65
1544
1683
458
303
155
1226
-139
63
-236
-268
1683
1798
462
305
1576
1702
463
307
156
1239
-127
66
1583
1704
462
305
157
1242
-120
64
1625
1727
461
303
157
1266
-102
63
1610
1741
459
301
159
1282
-131
61
1626
1756
461
301
1335
-115
61
1523
1678
454
299
155
1225
-155
65
-202
-177
-220
-193
-184
-165
-192
-191
-190
-186
-182
-172
-166
-160
-242
-249
-246
-233
-230
-217
-247
-250
-254
-253
-250
-241
-236
-230
.2
.1
-.2
0
-.2
.4
0
0
0
0
-. 1
-. 1
-. 1
-.2
-1.5
-1.9
-.2
0
-2.4
-1.9
-1.4
-.4
-2
158
159
1296
-130
61
4
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent, cal. year
0-5.6
-.4
-1.7
-5.5
1.3
1. OMB's July 1996 deficit estimates (assuming the enactment of the President's proposals) are $126 billion in FY97 and $94 billion in FY98.
CBO'S April 1996 baseline deficit estimates are $171 billion in FY97 and $194 billion in FY98. Budget receipts, outlays, and surplus/deficit include
corresponding Social Security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and shown separately as off-budget, as
classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90.
2. OMB's July 1996 deficit estimates (assuming the enactment of the President's proposals), excluding deposit insurance spending, are $134 billion
in FY97 and $96 billion in FY98.
CBO'S April 1996 baseline deficit estimates, excluding deposit insurance, are $175 billion in FY97 and $196 billion
in FY98.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. HEB is the NIPA current and capital account surplus
of potential output generated by 1.8 percent real growth
FI are not at annual rates. Change in HEB, as a percent
changes in federal spending and taxes (in chained (1992)
negative values indicate restraint.
in current dollars, with cyclically sensitive receipts and outlays adjusted to the level
and an associated unemployment rate of 6 percent. Quarterly figures for change in HEB and
of nominal potential GDP, is reversed in sign. FI is the weighted difference of discretionary
dollars), scaled by real federal consumption plus investment. For change in HEB and FI,
5. Fiscal 1995 data for the unified budget come from OMB, fiscal 1996 and quarterly data come from the Monthly Treasury Statement and may not sum to
OMB fiscal year totals.
a--Actual.
b--Preliminary.
t
Confidential FR Class II
December 12, 1996
CHANGE IN DEBT OF THE DOMESTIC NONFINANCIAL SECTORS 1
(Percent)
Nonfederal
Total
Federal
government
Households
Home
Total
mortgages
Consumer
credit
Business
State and local
governments
Quarter (seasonally adjusted annual rates)
1995:1
2
3
4
6.4
6.5
4.3
4.3
7.1
5.2
2.4
1.6
-4.9
-0.8
-10.0
-1.9
1996:1
2
3
4
6.3
4.9
4.7
4.4
6.6
1.7
4.3
2.5
-1.2
2.8
-7.1
2.7
1997:1
2
3
4
5.3
4.2
4.4
4.5
5.9
1.4
3.6
2.6
-0.3
1.7
-3.4
2.2
1. Data after 1996: Q3 are staffprojections. Changesare measuredfrom end of the precedingperiod to
end of period indicatedexcept for annual nominal GDP growth, which is calculatedfrom Q4 to Q4.
On a monthly average basis, total debt grows 5.1 percent in 1996, 4.7percent in 1997, and 4.8 percent in 1998.
Federaldebt rises 3. 7 percent in 1996, 3.4 percent in 1997, and 3.6 percent in 1998
Nonfederal debt increases5.6 percent in 1996, 5.1 percent in 1997, and 5.3 percent in 1998
2.6.3 FOF
Memo:
Nominal
GDP
Confidential FR Class II
December 12, 1996
FLOW OF FUNDS PROJECTIONS: HIGHLIGHTS 1
(Billions of dollars)
Calendar year
1995
1996
1996 1997
1998
Q1
652.5
-66.9
719.4
586.6
-97.9
684.5
638.9
-86.5
725.4
57.7
-73.8
241,5
16.0
-66.9
215.2
44.0
-97.9
248.3
372.4
198.1
126.3
88.9
383.1
198.4
141.6
91.0
372.4
253.9
82.9
93.5
62.3
106.7
-43.4
103.4
-48.6
108.4
Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.s.a.)
15 Unified deficit (quarterly, n.s.a.)
256.1
256.1
226.3
155.9
155.9
185.0
16 Funds supplied by depository institutions
140.6
Memo: (percent of GDP)
17 Domestic nonfinancial debt 3
18 Domestic nonfinancial borrowing
19
Federal government 5
20
Nonfederal
186.4
9.6
3.9
5.7
H2
Q3
Q4
789.3
-85.2
874.5
677.7
-16.0
693.7
572.0
-98.4
670.4
571,1
-68.0
639.1
616.7
-79.0
695.7
556.4
-116.8
673.2
71.0
-86.5
261.9
5.1
-85.2
186.2
2.5
-16.0
202.7
30.4
-98.4
255.9
25.9
-68.0
215.9
36.6
-79.0
251.5
51.4
-116.8
245.0
306.6
227,7
57.5
94.5
321.2
235,2
65.5
95.5
461.0
322.4
131.5
92.9
398.4
249.5
87.8
93.8
329.7
223.7
70.2
94.0
300.6
220.2
42.0
94.4
298.6
222.7
52.5
94.2
314.6
232.7
62.5
94.7
-7.7
109.2
0.6
107.7
17.8
100.6
-12.5
117.3
30.1
111.8
-76.5
101.0
28.2
106.7
7.8
109.7
-6.7
105.6
144.4
144.4
146.3
139.5
139.5
110.6
129.0
129.0
113.0
124.6
124.6
108.1
239.9
80.5
72.0
62.4
-23.5
-53.7
161.3
39.3
33.3
94.3
43.1
59.1
137.7
45.5
25.5
120.3
83.5
87.5
198.2
274.6
220,4
208.9
219.9
177.9
270.0
249.1
184.7
212.3
205.5
185,3
9.0
2.2
6.7
186,4
9.9
2.0
7.9
188.2
9.5
1.8
7.7
188.6
8.6
1.6
7.0
189.3
8.8
1.5
7.3
188.4
11.8
3.2
8,5
188.1
9.2
0.8
8.4
188.7
8.8
2.1
6.7
188.7
8.3
1.2
7.1
188,5
8.9
1.8
7.1
188.8
8.4
1.5
6.9
1994
Net funds raised by domestic
nonfinancial sectors
I Total
2 Net equity issuance
3 Net debt issuance
648.3
21.3
627.0
576.3
-44.9
621.2
646.6
-73.8
720.4
Borrowing sectors
Nonfinancial business
4 Financing gap 2
5 Net equity issuance
6 Credit market borrowing
3.8
21.3
52.7
2.4
-44.9
136.4
Households
7 Net borrowing, of which:
8 Home mortgages
9 Consumer credit
10 Debt/DPI (percent) 3
255.9
153.7
61.5
86.6
State and local governments
11 Net borrowing
12 Current surplus 4
1. Data after 1996:Q3 are staffprojections.
2. For corporations:Excess ofcapital expenditures over U.S. internalfunds.
3. Average debt levels in the period (computed as the average'ofperiod-end debt positions) divided by nominal GDP.
4. NIPA surplus less changes in retirementfund assets plus consumption offixed capital.
5. Excludes government-insuredmortgage pool securities.
2.6.4 FOF
-1997
HI
Q2
1993
DEVELOPMENTS
INTERNATIONAL
Recent Developments
The weighted-average foreign exchange value of the dollar in
terms of the other G-10 currencies has increased about 2 percent on
balance since the November FOMC meeting.
The dollar has risen
somewhat more against the mark and the French franc, partly in
reaction to statements by French and German officials concerning the
undervaluation of the dollar against those currencies.
The mark and
franc may also have been depressed by Italy's return to the ERM
currency arrangement on November 24 and somewhat improved prospects
for Italy's inclusion in the first round of EMU.
These developments
bolstered the lira but also raised fears about the ultimate strength
of the euro.
The dollar has risen 1-1/2 percent against the yen, which
weakened when a lackluster Tankan report for October and other data
releases seemed to further reduce the prospects for a firming action
by the Bank of Japan any time soon.
The Canadian dollar and the
pound also depreciated moderately against the dollar.
Foreign long-term interest rates moved in a wide range,
particularly late in the period, but ended about unchanged on
average.
Japanese long-term rates fell 20 basis points, Canadian
rates rose 30 basis points, and those of major European countries
were little changed on balance.
Short-term rates declined further
in Italy, rose moderately in Canada, and were little changed in
other major countries.
Stock prices
in the major foreign industrial countries
generally rose early in the period, fell sharply immediately after
Chairman Greenspan's remarks on December 5 concerning "irrational
exuberance"
in asset values, and subsequently recovered some of
those declines.
Continental European stock markets
finished up
1 to
3 percent on balance, while British stocks fell slightly and
Japanese stocks were down 3 percent.
The Desk did
not intervene.
Output growth in the foreign G-7 countries picked up on
average in the third quarter from the modest pace recorded in the
first half of the year but appears to have moderated a bit in the
fourth quarter.
Japan was an exception to this general pattern, as
GDP growth was sluggish in the third quarter, with a decline in
I-25
I-26
private consumption nearly offsetting substantial increases in
government consumption and exports.
production and orders picked up
However, Japan's industrial
strongly in October.
German GDP
advanced 3.3 percent at an annual rate in the third quarter, led by
a surge in exports.
Industrial production dipped in September and
October, suggesting that growth is likely to have slowed in the
fourth quarter.
However, orders and indicators of business
confidence strengthened in October.
French GDP grew at a 3-3/4
percent rate in the third quarter following a sluggish second
quarter, with private domestic expenditures as well as net exports
contributing to the pickup.
However, consumption of manufactured
goods turned down in October with the
subsidy on car purchases.
expiration of a government
Robust consumer expenditures pushed GDP
growth in the United Kingdom above 3 percent in the third quarter as
well, but retail sales grew only moderately in October.
Canadian
GDP also advanced at a rate of more than 3 percent in the third
quarter, as strong investment growth more than offset significant
declines
in net exports and government spending: preliminary
indicators for the fourth quarter suggest a more moderate pace of
expansion.
Inflation in the
low.
foreign G-7
countries has remained generally
Recent twelve-month rates of consumer price inflation have
been running near zero in Japan and between
percent in Germany, France, and Canada.
1-1/2 percent and 1-3/4
Italian inflation dropped
significantly further, to 2-1/2 percent in November, and U.K.
underlying inflation picked up to 3-1/4 percent in October-November.
Activity in key developing countries has been robust on
average.
In Latin America, growth rose sharply in the third
quarter, with that in Mexico and Brazil coming in considerably
stronger than was generally expected;
GDP was up 7-1/2 percent over
its year-earlier level in Mexico and 6-1/2 percent in Brazil and
Argentina.
In Asia, growth has moderated somewhat from the strong
pace recorded for
1995.
The nominal deficit in U.S.
international trade in goods and
services widened significantly in the third quarter as exports
declined and imports rose moderately.
Shipments of gold and
aircraft more than accounted for the decline in exports.
Most
other
categories of exports were little changed, with the notable
exception of automotive shipments, which rose somewhat.
Consumer
goods and automotive products accounted for most of the rise in
imports.
I-27
Prices of both exports and non-oil imports extended their
recent downtrend through October, with agricultural export prices
dropping further and a broad array of import categories registering
declines.
The price of imported oil rose another 6 percent in
October to a level 37 percent above that in October 1995.
Spot oil prices declined ahead of the return of Iraq to the
market on December 10 and declined substantially further
subsequently.
Spot prices had risen considerably in late November,
partly because of strike-induced disruptions to French refineries.
On balance, the WTI spot price has declined $0.50 per barrel since
the November FOMC meeting and is currently trading at $23.60 per
barrel;
the contract for March delivery has declined $0.60 per
barrel to $22.75.
(Percent
SUMMARY OF STAFF PROJECTIONS
period)
previous
of
end
from
change
------------
Projection-----------
1996
1997
1998
H1
Q3
Q4
Foreign output
Previous
2.9
3.1
4.3
3.5
3.5
3.6
3.9
3.9
3.7
3.6
Real exports
Previous
3.7
3.7
-1.3
0.4
10.4
11.7
6.6
6.7
6.4
6.3
Real imports
Previous
10.3
10.3
9.6
8.7
5.9
7.3
9.4
8.3
7.5
7.2
Outlook
The staff projects that growth of real GDP in our major
trading partners
(weighted by U.S. nonagricultural export shares)
will pick up to a 3-3/4 to 4 percent annual rate during 1997-98.
This outlook is little changed from that in the November Greenbook.
The projected path of the dollar is higher than it was in November
and has led us to mark down the path of real net exports a bit.
The
effects of some residual seasonality and the CAW/UAW auto strike
lead us to expect that real net exports will rise somewhat in the
fourth quarter.
Beyond the current quarter, however, we see net
exports resuming their downtrend and subtracting 0.5 percentage
point from the GDP growth rate during 1997, about two-tenths more
than we projected in November.
We project the foreign exchange value of the
dollar in terms of the other G-10 currencies to remain little
changed from its recent levels throughout the forecast period.
The dollar.
This
I-28
path is higher than that in the November Greenbook and 3 percent
higher than in the September Greenbook. We expect that the CPIadjusted value of the dollar in terms of the currencies of key
developing countries will depreciate at a moderate rate throughout
the forecast period.
Foreign G-7 countries.
countries
We project real GDP in the foreign G-7
(weighted by U.S. nonagricultural export shares) to expand
at an annual rate of around 2-3/4 percent during 1997 and 1998.
Stimulus to private domestic demand from declines in interest rates
should support moderate GDP growth in most countries despite ongoing
fiscal contraction. On the whole, this outlook is the same as that
in November, though there have been some offsetting changes across
countries.
Real GDP growth in Germany and France is projected to average
a little more than 2 percent at an annual rate over the forecast
period, with the composition of spending shifting from net exports
to private domestic demand, particularly investment.
Both countries
are expected to reduce their budget deficits to near 3 percent of
GDP next year.
Because the recent decline in Italian interest rates
probably will not be enough to offset the relatively large fiscal
contraction projected in that country, we expect Italian GDP growth
to be sluggish--a rate in the vicinity of 1-1/2 percent--over the
forecast period.1
We expect the recent strong growth of final
domestic demand in the United Kingdom to hold up through 1997 and
then to slow a bit in 1998 in response to a rise in interest rates.
Real GDP growth in Japan is expected to be boosted in the
first quarter of 1997 by consumer spending in anticipation of the
planned increase in the consumption tax on April 1; growth should
slow after the tax takes effect.
We project that Japanese net
exports will continue to make a positive contribution to GDP growth
in response to past depreciation of the yen.
However, prospects for
a larger fiscal contraction than we had previously assumed have led
us to reduce Japanese GDP growth for 1997 by several tenths.
In
Canada, robust investment stimulated by past declines in interest
rates is expected to sustain moderate GDP growth in the face of
ongoing fiscal cuts.
1
One cannot rule out the possibility that even sharper
cuts will be forthcoming. Under current policies, Italy will
not be able to get its budget deficit much below 4 percent of
1997 (even at that level, the improvement in the deficit from
level would amount to 3 percent of GDP).
budget
probably
GDP in
the 1996
I-29
We forecast that average consumer price inflation for the
foreign G-7 countries (weighted by bilateral U.S. import shares)
will rise, from a little less than 1-1/4 percent this year to about
1-1/2 percent next year as the Japanese price level jumps because of
the rise in the consumption tax. Average inflation in the foreign
G-7 countries is expected to move back below 1-1/4 percent in 1998.
We assume that average short-term market interest rates in the
major foreign industrial countries will decline somewhat in the near
term, with Italy accounting for most of the drop.
Rates in most
countries begin to rise by late next year and during 1998 as the
economic expansion abroad progresses.
One exception is Italy, where
we assume rates decline further through 1998.
Long-term rates
abroad on average are projected to remain little changed from recent
levels over the forecast period, with sizable further declines in
Italy offsetting increases in Japan.
Other countries.
Real GDP of major U.S. trading partners
among developing countries
(weighted by U.S. exports) is projected
to grow about 5-3/4 percent per year during 1997 and 1998, a bit
faster than in 1996.
Most of the pickup reflects faster growth in
Venezuela, which is expected to recover from this year's recession,
and moderate acceleration in Singapore and several other Asian
countries.
Real GDP in Latin America is expected to continue to
expand at about a 4-1/2 percent rate during 1997-98.
We project
Mexican GDP to grow about 4-1/2 percent per year over the forecast
period, about the same as in 1996.
We expect Asian growth to rise
from 6 percent this year to 6-3/4 percent over the next two years as
monetary policy is eased in some countries and as the negative
effects of past currency appreciations against the yen diminish.
U.S. trade in
goods and services.
We project growth of
exports of real goods and services to strengthen from 4 percent
during 1996 to about 6-1/2 percent during 1997 and 1998.
The
projection for the next two years is about the same as in November;
weaker outlooks for "core" exports
(nonagricultural exports of goods
excluding computers and semiconductors) and for service exports are
offset by stronger growth in exports of semiconductors,
In the fourth quarter, total exports are expected to rebound
from their decline in the third quarter, boosted by the return of
aircraft shipments to more normal levels and by a residual seasonal
increase in other categories that more than offset a decline in auto
shipments to Canada associated with the CAW/UAW strike.
Our projection for the growth of core exports has been revised
down a bit because of the higher path of the dollar. Nevertheless
I-30
growth of these exports should pick up in 1997, compared with its
average rate in 1996, because of stronger growth abroad and recovery
of automotive exports from strike-depressed levels in the fourth
quarter of 1996.
Exports of computers are expected to continue
growing rapidly in real terms.
Exports of semiconductors are
projected to recover from their slump earlier this year at a faster
rate than we had projected in November because of reports of
strengthening orders.
Growth of real imports of goods and services is projected to
slow somewhat over the forecast period from the rapid rate observed
earlier this year as the growth of U.S. domestic demand slows.
The
decline is less than projected previously because of the higher
level of the dollar in this forecast.
We expect import growth to slow in the fourth quarter
primarily as a result of the auto strike.
We believe the strike
depressed imports by more than exports and that shortfalls in both
will be made up in the first quarter.
Beyond the near-term, we
expect total import growth to pick up a bit in 1997 relative to 1996
as imports of semiconductors resume strong growth in real terms
after declining this year.
Imports of computers should continue to
expand rapidly, and oil imports will rise a bit faster than U.S.
economic activity as U.S. oil production trends down.
other ("core")
Imports of
goods and of services will be stimulated by declines
in the relative prices of imports in 1997 and less so in 1998.
In light of movements in spot oil prices over the
Oil prices.
past month, we have raised the projected price of imported oil for
the fourth quarter about $0.30 per barrel, to a little more than
$21.50 per barrel.
Thereafter, the import price is projected to
return to $18 per barrel by the second quarter and to $17
per barrel
by the fourth quarter of 1997, a level consistent with $19.50 per
barrel for WTI.
The near-term declines come a bit sooner than in
our previous projection in light of the earlier return of Iraqi
shipments.
We assume that increases in oil production will be
sufficient to hold oil prices about unchanged from their end-of-1997
levels during 1998.
I-31
SELECTED PRICE INDICATORS
(Percent change from end of previous period except as noted, AR)
----- Projection-------1997
1998
Q4
H1
Ag. exports2
Nonag. exports1
Non-oil imports1
Oil imports
(Q4 level, $/bl)
1.
1996
Q3
18.4
-2.4
-3.4
-12.99
-2.38
-3.15
-11.33
1.28
-1.60
-2.05
0.59
-0.42
4.07
1.58
0.83
19.52
19.57
21.55
17.00
17.00
NIPA chain-weighted basis, including computers and
semiconductors.
Prices of non-oil imports and exports.
Prices of
nonagricultural exports, held down by price declines for computers
and semiconductors, should be little changed over the second half of
this year and should rise only slightly over the remainder of the
forecast period.
Prices of agricultural exports are projected to
decline moderately through most of next year before turning up in
1998.
We anticipate that the prices of non-oil imports will decline
about one-half percent during 1997 and then rise only slightly in
1998 as inflation abroad remains very low.
Nominal trade and current account balances.
The nominal
trade deficit on goods and services is projected to narrow somewhat
in the near term from its third-quarter level of $135 billion and
then to widen to $145 billion by 1998.
The balance on net
investment income is projected to deteriorate slightly as well.
Accordingly, the current account balance should move from a deficit
of about $190 billion in the third quarter to more than $200 billion
in 1998.
This projection for 1998 is nearly $30 billion larger than
that in the November forecast, with roughly two-thirds of the
deterioration in goods and services and the remainder in investment
income and transfers.
Strictly Confidential
(FR) Class II-FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)
---- Projected --Measure and Country
1990
1991
1992
1993
1994
1995
1996
1997
1998
-1.9
1.5
6.8
0.5
5.1
-0.7
0.0
1.3
3.3
1.9
2.5
-1.5
0.5
0.0
1.0
-0.8
0.1
0.3
3.1
-0.6
-0.4
-0.0
0.4
2.8
4.9
4.2
3.7
2.6
0.8
4.2
0.7
0.4
1.1
2.4
2.6
1.9
2.0
1.9
2.2
0.5
2.7
2.6
3.2
2.4
2.1
1.2
2.3
3.1
3.1
2.1
2.3
1.8
2.2
2.4
Average weighted by 1987-89 GDP
2.7
1.6
0.2
0.6
2.8
1.8
2.1
2.3
2.3
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
2.4
0.7
6.0
2.5
0.8
6.1
1.9
0.3
4.8
3.0
1.8
5.3
5.0
3.8
6.9
1.8
1.3
2.4
3.4
2.2
5.4
3.9
2.8
5.8
3.7
2.7
5.8
Canada
France
Germany (1)
Italy
Japan
United Kingdom (2)
4.9
3.5
3.0
6.4
3.2
9.2
4.1
3.0
4.0
6.2
3.2
5.7
1.8
1.8
3.4
4.8
0.9
3.7
1.8
2.1
4.2
4.2
1.2
2.7
0.0
1.6
2.6
3.8
0.8
2.2
2.1
1.9
1.7
5.8
-0.8
2.9
1.8
1.5
1.4
2.8
-0.0
3.3
1.3
1.7
1.5
2.5
1.5
2.7
1.3
1.8
1.6
2.8
0.2
3.0
Average weighted by 1987-89 GDP
4.7
4.1
2.4
2.5
1.8
1.7
1.5
1.8
1.5
Average weighted by share of
U.S. non-oil imports
4.3
3.9
1.9
2.0
1.0
1.1
1.2
1.6
1.1
REAL GDP
Canada
France
Germany (1)
Italy
Japan
United Kingdom
CONSUMER PRICES
1. West German CPI through 1991, All German thereafter.
2. CPI excluding mortgage interest payments, which is the targeted inflation rate.
Strictly Confidential
(FR)
Class II-FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, quarterly change at an annual rate)
---------------------- Projected -------------------------
---Q1
1996
I---~~------------Q2
Q3
Q4
1.1
4.6
-1.6
1.7
8.4
2.3
1.2
-0.6
6.0
-1.6
-1.1
1.9
3.3
3.7
3.3
2.0
0.4
3.1
2.5
0.0
1.4
-0.2
3.3
3.1
3.5
2.5
2.2
1.5
3.7
3.2
2.9
2.2
1.9
1.5
1.3
3.2
3.0
2.4
2.1
1.0
2.1
3.0
3.2
2.3
2.3
1.0
2.0
2.8
3.1
2.1
2.3
1.5
2.4
2.6
3.1
2.2
2.3
1.5
2.3
2.4
3.1
2.2
2.3
2.0
2.1
2.4
3.1
2.1
2.3
2.0
2.0
2.2
Average weighted by 1987-89 GDP
3.7
0.6
2.2
1.9
2.9
1.9
2.2
2.2
2.3
2.2
2.3
2.2
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
3.9
2.7
6.9
2.1
1.0
2.5
4.3
2.7
6.9
3.5
2.4
5.4
4.0
3.3
5.8
3.7
2.4
5.9
3.8
2.6
5.8
3.9
2.7
5.8
3.9
2.7
5.8
3.8
2.7
5.8
3.7
2.7
5.7
3.6
2.6
5.7
1.4
2.1
1.6
5.0
-0.3
2.9
1.4
2.4
1.5
4.2
0.1
2.8
1.4
1.8
1.4
3.4
0.0
2.9
1.8
1.5
1.4
2.8
-0.0
3.3
1.6
1.9
1.4
2.7
0.0
3.2
1.3
1.8
1.5
2.8
1.5
3.0
1.6
1.7
1.5
2.5
1.5
2.8
1.3
1.7
1.5
2.5
1.5
2.7
1.3
1.8
1.5
2.8
1.5
2.7
1.3
1.8
1.6
2.8
0.1
2.8
1.3
1.8
1.6
2.8
0.2
3.0
1.3
1.8
1.6
2.8
0.2
3.0
Average weighted by 1987-89 GDP
1.7
1.7
1.5
1.5
1.5
1.9
1.8
1.8
1.9
1.4
1.5
1.5
Average weighted by share of
U.S. non-oil imports
1.1
1.2
1.1
1.2
1.1
1.6
1.7
1.6
1.6
1.0
1.1
1.1
Measure and Country
1997
-------- f--------------Q1
Q2
Q3
Q4
1998
------ ~--------------Q1
Q2
Q3
Q4
REAL GDP
Canada
France
Germany (1)
Italy
Japan
United Kingdom
CONSUMER PRICES (2)
Canada
France
Germany (1)
Italy
Japan
United Kingdom (3)
1. West German CPI through 1991, all German thereafter.
2. Year/Year changes.
3. CPI excluding mortgage interest payments, which is the targeted inflation rate.
Strictly Confidential
(FR) Class II-FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1990
1991
1992
1993
1994
1995
------- Projected ------1996
1997
1998
NIPA REAL EXPORTS and IMPORTS
percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S
0.6
0.6
-0.1
0.4
0.8
-0.4
-0.4
0.4
-0.8
-0.7
0.5
-1,1
-0.4
1.0
-1.4
0.3
0.8
-0.5
-0.7
0.5
-1.2
-0.5
0.8
-1.3
-0.3
0.8
-1.1
percent change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
7.2
8.9
-7.3
12.3
61.5
6.0
8.6
7.1
10.1
21.7
41.8
7.0
4.1
-0.9
10.4
25.2
64.8
2.3
4.8
3.9
-5.4
22.7
45.1
3.6
9.9
4.8
17.1
28.8
68.7
7.4
7.4
5.1
-3.1
49.4
29.7
5.2
4.0
1.2
-2.8
30.7
0.2
3.8
6.6
2.6
2.1
29.9
26.2
4.5
6.4
2.5
4.1
28.7
26.2
3.1
0.5
5.8
-15.8
2.9
60.9
-0.3
4.0
-2.7
8.1
35.9
55.3
2.5
7.5
1.5
12.1
45.1
42.0
5.4
10.5
3.6
10.1
38.8
44.9
9.4
11.8
0.8
-0.2
37.3
47.4
12.5
4.2
4.1
0.9
43.8
57.1
-1.2
9.0
4.8
6.9
24.5
-9.9
9.9
9.4
3.4
4.9
27.4
26.2
7.8
7.5
2.8
4.1
23.9
26.2
5,0
-107.6
775.4
883.0
-122.7
818.8
941.5
-155.7
868.6
1024.3
-182.1
923.4
1105.5
in billions of chained 1992$
Net Goods & Services
Exports of G&S
Imports of G&S
-61.9
564.4
626.3
-22.3
599.9
622.2
-29.5
639.4
668.9
-72.0
658.3
730.2
-105.7
712.0
817.6
in billions of dollars
-94.7
-9.5
-62.6
-99.9
-148.4
-148.2
-169.4
-185.6
-206.6
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-80.3
536.8
617.1
-29,9
580.7
610.6
-38.3
617.7
655.9
-72.0
643.0
715.0
-104.4
698.3
802.7
-105.1
786.5
891.6
-119.1
829.7
948.8
-131.3
871.1
1002.4
-145.0
927.9
1072.9
Net Investment Income
Direct, Net
Portfolio, Net
20.9
55.9
-35.0
15.8
55.6
-39.8
11.2
51.6
-40.4
9.7
55.9
-46.2
-4.2
47.4
-51.6
-8.0
57.5
-65.5
-9.9
61.9
-71.7
-16.8
68.0
-84.9
-24.1
70.2
-94.3
Net Transfers
-35.2
4.5
-35.5
-37.6
-39.9
-35.1
-40.4
-37.5
-37.5
US CURRENT ACCOUNT BALANCE
1/
2/
Merchandise exports excluding agricultural products, computers, and semiconductors.
Merchandise imports excluding oil, computers, and semiconductors.
Strictly Confidential
(FR) Class II-FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1993
'----~-----"---------------
Q1
Q2
Q3
---
Q4
1995
1994
--- '-------------------------
Q1
Q2
Q3
Q4
--
I-------------I------------
Q1
Q2
Q3
Q4
NIPA REAL EXPORTS and IMPORTS
percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.1
-0.2
-0.9
-0.5
1.6
-2.1
-0.3
1.0
-1.3
0.4
1.7
-1.2
-1.1
0.3
-1.4
0.1
0.7
-0.6
1.2
1.2
0.0
1.0
1.2
-0.2
-1.1
0.2
-1.3
-0.6
0.7
-1.3
-1.4
-0.2
-1.3
0.4
1.2
-0.8
percent change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
-1.6
0.8
-24.4
24.5
131.4
-6.6
15.9
9.7
6.8
16.6
16.2
20.2
9.7
3.4
43.0
27.6
45.8
6.6
16.5
5.5
62.9
48.6
106.7
11.1
2.6
-1.1
-0.6
33.0
43.6
0.1
5.9
4.0
-19.8
30.1
19.9
7.6
10.8
18.7
16.4
79.0
28.8
0.6
10.6
-0.3
-4.9
61.0
27.6
13.3
1.8
2.7
9.3
58.7
-0.0
-4.2
5.7
2.8
-33.7
21.0
-20.7
13.9
-1.3
-3.8
9.1
18.3
2.6
-3.7
10.4
3.3
13.0
28.7
23.9
10.5
8.2
2.8
-8.6
45.0
65.3
7.0
18.4
7.5
27.2
30.9
7.3
19.9
10.7
-1.6
33.5
24.8
43.4
9.5
10.3
-4.0
-36.2
49.9
85.8
14.1
11.2
21.7
-2.4
29.6
49.3
6.9
4.5
-6.7
5.3
31.9
61.0
2.4
-0.0
5.8
22.0
64.7
76.4
-10.9
1.6
-2.4
-17.2
51.8
43.6
-2.3
10.7
13.0
-22.2
27.7
4.6
12.1
10.0
1.3
59.9
23.0
-38.5
11.6
9.6
2.7
7.2
23.7
-19.0
12.0
5.9
2.9
-2.2
23.9
26.2
4.3
-101.5
783.0
884.5
-84.9
803.1
888.0
-104.1
806.7
910.8
-114.8
817,9
932.7
-139.2
815.1
954.3
-132.7
835.5
968.2
in billions of chained 1992$
Net Goods & Services
Exports of G&S
Imports of G&S
-99.3
677.6
777.0
-107.3
703.1
820.4
-111.7
719.6
831.3
-104.3
747.6
851.9
-122.5
752.3
874.9
-121.4
763.2
884.6
in billions of dollars
-118.8
-144.1
-160.0
-170.6
-156.2
-163.9
-150.8
-121.7
-139.5
-160.8
-191.8
-185.4
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-90.8
662.3
753.1
-103.5
686.1
789.6
-113.8
708.3
822.1
-109.4
736,5
845.9
-118.1
755.9
874.0
-127.3
778.9
906.2
-97.3
796.8
894.2
-77.6
814.5
892.0
-96.9
820.6
917.5
-114.3
836.0
950.3
-135.3
822.1
957.5
-129.9
840.2
970,1
Net Investment Income
Direct, Net
Portfolio, Net
4.7
49.5
-44.8
-2.5
46.0
-48.5
-6.4
47.4
-53.7
-12.4
46.9
-59.3
-3.6
57.4
-61.0
-3.4
59.9
-63.3
-17.4
51.3
-68.7
-7.6
61.3
-68.9
1.0
66.1
-65.0
-9.1
59.2
-68.3
-18.8
56.3
-75.1
-12.6
65.9
-78.5
Net Transfers
-32.7
-38.0
-39.9
-48.9
-34.6
-33.2
-36.0
-36.6
-43.6
-37.5
-37.7
-43.0
US CURRENT ACCOUNT BALANCE
1/
2/
Merchandise exports excluding agricultural products, computers, and semiconductors.
Merchandise imports excluding oil, computers, and semiconductors.
Strictly Confidential
(FR) Class II-FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
--------------------------------
----
Q1
1996
-------------------
Q2
-
Q4
Q3
Projected ------------------------------
1998
1997
- - - ----------------_ _ _ _ _
Q1
Q2
--
Q4
Q3
-------
QL
1-~------------
- --
- -
Q2
Q3
Q4
NIPA REAL EXPORTS and IMPORTS
percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.1
0.2
-1.3
-0.6
0.7
-1.3
-1.4
-0.2
-1.3
0.4
1.2
-0.8
-0.6
0.8
-1.3
-0.4
0.9
-1.3
-0.8
0.3
-1.0
-0.3
1.2
-1.5
-0.2
0.6
-0.8
-0.3
1.1
-1.4
-0.6
0.3
-0.9
-0.1
1.2
-1.4
percent change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
1.8
2.7
9.3
58.7
-0.0
-4.2
5.7
2.8
-33.7
21.0
-20.7
13.9
-1.3
-3.8
9.1
18.3
2.6
-3.7
10.4
3.3
13.0
28.7
23.9
10.5
6.5
2.1
-4.1
31.1
26.2
5.6
8.0
2.8
4.4
31.1
26.2
6.6
2.2
2.8
4.4
28.7
26.2
-3.5
9.8
2.7
4.1
28.7
26.2
9.8
4.6
2.7
4.0
28.7
26.2
0.2
8.9
2.7
4.0
28.7
26.2
7.6
2.3
2.4
4.0
28.7
26.2
-4.2
10.0
2.1
4.1
28.7
26.2
9.4
10.7
13.0
-22.2
27.7
4.6
12.1
10.0
1.3
59.9
23.0
-38.5
11.6
9.6
2.7
7.2
23.7
-19.0
12.0
5.9
2.9
-2.2
23.9
26.2
4.3
10.0
4.1
-17.6
28.6
26.2
10.9
9.5
3.3
44.9
28.6
26.2
5.1
7.4
3.0
14.8
26.2
26.2
4.2
10.6
3.1
-11.8
26.2
26.2
11.4
5.4
3.0
-5.5
23.9
26.2
3.0
9.4
2.7
32.8
23.9
26.2
5.7
6.0
2.8
13.8
23.9
26.2
1.9
9.1
2.9
-17.6
23.9
26.2
9.5
-162.6
869.9
1032.6
-168.5
890,6
1059.0
-172.4
900.6
1073.1
-177.3
920.0
1097.3
-188.2
925.3
1113.5
-190.4
947.6
1138.0
in billions of chained 1992$
Net Goods & Services
Exports of G&S
Imports of G&S
-104.1
806.7
910.8
-114.8
817.9
932.7
-139.2
815.1
954.3
-132.7
835.5
968.2
-142.7
848.8
991.5
-149.1
865.2
1014.3
in billions of dollars
-139.5
-160.8
-191.8
-185.4
-175.2
-175.8
-188.2
-203.3
-194.2
-201.3
-211.0
-220.2
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-96.9
820.6
917.5
-114.3
836.0
950.3
-135.3
822.1
957.5
-129.9
840.2
970.1
-126.7
852.0
978.7
-125.3
867.3
992.5
-135.3
871.7
1007.0
-137.9
893.3
1031.2
-139.1
904.1
1043.2
-142.0
924.6
1066.6
-150.3
929.9
1080.2
-148.6
953.1
1101.6
Net Investment Income
Direct, Net
Portfolio, Net
1.0
66.1
-65.0
-9.1
59.2
-68.3
-18.8
56.3
-75.1
-12.6
65.9
-78.5
-13.5
67.7
-81.2
-15.6
68.1
-83.6
-17.9
68.2
-86.1
-20.4
68.2
-88.6
-20.0
70.7
-90.7
-24.2
68.7
-92.9
-25.7
69.8
-95.4
-26.6
71.6
-98.2
Net Transfers
-43.6
-37.5
-37.7
-43.0
-35.0
-35.0
-35.0
-45.0
-35.0
-35.0
-35.0
-45.0
US CURRENT ACCOUNT BALANCE
1/
2/
Merchandise exports excluding agricultural products, computers, and semiconductors.
Merchandise imports excluding oil, computers, and semiconductors.
@FedFRASER