Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 21, 1993 : Greenbook Part 2

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Confidential (FR) Class III FOMC

December 15,

1993

RECENT DEVELOPMENTS

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

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS

The incoming data point to a sizable increase in economic
activity in the fourth quarter.
solid

Employment

has continued to post

gains, and the unemployment rate dropped in November to its

lowest level since January 1991.

The pickup

in output in the

industrial sector, spurred importantly by developments in the motor
vehicle industry, has been especially impressive.

Wage and price

data received since the last Greenbook do not point to any break in
underlying trends.
The Labor Market
Labor market indicators exhibited notable strength in November.
In the establishment survey, payrolls rose about 200,000 after a
gain of roughly 150,000 in October.

The household survey reported

a second straight gain in excess of 450,000,1 and the civilian
unemployment rate dropped 0.4 percentage point to 6.4 percent.

The increase in payroll employment in November was widespread.
In the goods-producing sector, construction posted a second monthly
gain of about 30,000--bringing the increase so far this year to
almost 200,000 jobs and setting the stage for the first over-theyear increase since 1989.

In addition, manufacturing employment

posted back-to-back increases in October and November after
declining steadily between February and September.

Most of the

hiring was in durable goods industries--particularly those related
1. Movements in household and payroll employment often diverge
considerably over short periods of time. However, during the past
year both household and payroll employment have grown by roughly
similar amounts. Total payroll employment has increased 1.9 million
while household employment (adjusted to match the payroll concept)
has risen 2.2 million.
2. Using concurrent seasonal adjustment factors, which take into
account the data through the latest month, the unemployment rate was
6.7 percent in October and 6.5 percent in November. The labor
market report for December will incorporate the revision that BLS
makes every six months to the seasonal factors for the household
survey. As a result, we expect the revised data to show a smaller
decline in the unemployment rate for November.
II-1

11-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1993
1991

1992

1993
Q3

Sep.

Oct.

Nov.

------------ Average monthly changes--------Nonfarm payroll employment 2

-72

162

179

134

197

147

208

-88
-44
-39
-5
-33
-30
-9
39
30
4
17

59
-26
-22
-5
-5
20
-2
78
29
31
22

155
7
3
5
7
62
0
77
29
31
7

167
-55
-44
-10
31
51
5
140
26
41
12

101
-24
-12
-12
6
31
9
86
24
31
33

102
-20
0
-20
-1
51
14
52
31
14
95

165
12
14
-2
33
6
18
96
28
80
-18

194
30
24
6
27
-6
27
105
32
25
14

Private nonfarm production workers
Manufacturing production workers

-71
-29

74
-13

149
16

156
-39

94
-14

84
3

197
18

145
41

Total employment 3
Nonagricultural

-62
-53

130
122

85
145

218
237

79
56

-253
-367

471
574

453
307

Memo:
Aggregate hours of private production
workers (percent change)
-.1
34.3
Average workweek (hours)
40.6
Manufacturing (hours)

.1
34.4
41.1

.1
34.4
41.3

.4
34.5
41.4

.0
34.5
41.4

-. 9
34.3
41.5

.9
34.5
41.6

.2
34.6
41.7

Private
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Health services
Business services
Total government

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
3. Survey of households.

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)
1993

1993

1991

1992

6.7

7.4

7.0

18.7
6.4
5.7

20.0
7.1
6.3

19.6
6.5
6.0

6.5

7.1

Labor force participation rate

66.0

Teenagers
Men, 20 years and older
Women, 20 years and older

51.7
77.4
57.9

Civilian unemployment rate
(16 years and older)
Teenagers
Men, 20 years and older
Women, 20 years and older
Fulltime workers

Sep.

Oct.

Nov.

6.7

6.8

6.4

20.1
6.5
5.9

17.9
6.4
5.7

17.4
6.3
5.7

19.4
6.3
5.9

18.1
5.8
5.8

6.7

6.6

6.5

6.4

6.0

66.3

66.0

66.2

66.1

66.0

66.3

66.2

51.3
77.3
58.4

51.5
76.9
58.2

51.9
77.0
58.3

51.5
76.9
58.4

51.0
76.7
58.3

51.3
77.1
58.6

51.2
76.7
58.7

II-3
to motor vehicles, capital goods, and construction.
workweek and overtime hours

The factory

(at 41.7 hours and 4.4 hours,

respectively) both reached postwar highs last month.
Employment in the private service-producing sector increased
138,000 in November.

In services, employment rose 105,000, with

gains in business and health services leading the way.

Jobs also

were added in transportation and public utilities, wholesale trade,

and in finance, insurance, and real estate (FIRE).

In retail trade,

however, employment fell 17,000 on a seasonally adjusted basis,
reflecting relatively slow hiring at the outset of the holiday
shopping season.
The increases in employment do not appear yet to have drawn a
great many more workers into the labor force.

The labor force

participation rate has been fluctuating in an essentially trendless
fashion over the past year or so.

Most demographic groups

experienced some decline in unemployment last month, but the
decrease was most striking among adult men (aged 20 and over), whose
jobless rate dropped to 5.8 percent, after declining gradually over
the first ten months of the year.

The decrease in adult male

unemployment in November was exaggerated by a drop in that group's
participation rate: it also likely reflected the pickup in hiring in
the goods-producing industries, where adult men make up a greaterthan-average share of employment.3

The unemployment rate for

adult women has fluctuated between 5-3/4 and 6 percent since
February.
Most other indicators also suggest sustained strength in the
labor market.

The Manpower Survey, taken in the last two weeks of

October, indicates that hiring is likely to continue at about its
3. Adult men account for more than 65 percent of payroll
employment in manufacturing and about 90 percent in construction.
Unemployment rates in these sectors have declined appreciably in
recent months.

II-4

LABOR MARKET INDICATORS
Unemployment Rate

Percent
-

-15

ii::ili

""""

...-...

1979

1981

1983

.:..:.Nov

1985

1987

1989

1991

Labor Force Participation Rate

1993

Percent
69
.. . ........

68
67

66
Nov
.-.-.-...-...-

1979

1981

1983

......

1985

1987

1989

1991

Unemployment Rate

1993

Percent
15

Adult men*
-

- Adult women'

X..
1979

1981

UAged 20 and over.

1983

1985

1987

1989

1991

Nov
1993

II-5
recent pace; plans are especially upbeat in durable goods
manufacturing, FIRE, and services, and the outlook also is good for
construction and retail trade.

A survey conducted by the Bureau of

National Affairs (BNA) on hiring plans for January through March of
next year also suggests a continued improvement in employment
opportunities.

In addition, although initial claims for

unemployment insurance moved back up to 345.000 during the week
ended December 4, that reading was among the lowest for the current
expansion.
AVERAGE HOURLY EARNINGS
(Percent change; based on seasonally adjusted data)
1991

Total private nonfarm

FIRE
Trade
Manufacturing

1992

1993
03
Q1
Q2
Annual rate

1993
Oct.

1.9

2.9

2.2

3.8

1.1

4.3
3.0
3.0

3.5
2.1
2.3

4.4
4.9
2.8

5.5 4.3
.5
.9
2.1 4.2

Nov.

Monthly
rate
.6

1.1
.7
-.1

.3
.1
.4

1. Changes over periods longer than one month are measured from
final month of preceding period to final month of period indicated.
Average hourly earnings edged up 0.2 percent in November, after
rising 0.6 percent in October.
industry last month.

Small increases were widespread by

Over the twelve months ended in November,

hourly earnings were up 2.2 percent--1/2 percentage point less than
over the preceding year.

Data collected by the BNA suggest that

wage growth in the union sector has also continued to slow this
year.

The median first-year wage adjustment through November was

3 percent, compared with a gain of 3.4 percent in 1992.

Includes settlements involving 50 or more workers.

II-6

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1992:4
19921

1993

Sep.

Oct.

Nov.

---Annual rate--- --Monthly rate--Total index
Previous

100.0

3.2
3.2

5.5
5.5

Manufacturing
Motor vehicles and parts
Mining
Utilities

84.6
4.9
7.3
8.2

3.7
10.2
-.9
2.0

6.4
37.4
-5.7
4.6

Manufacturing
excl. motor vehicles and parts

79.7

3.3

4.7

4.3

Consumer goods
Durables
Nondurables

22.0
3.6
18.4

2.0
3.7
1.7

1.9
15.4
-.6

Business equipment
Office and computing
Industrial
Other

14.5
3.2
4.0
7.1

9.9
31.1
6.1
4.2

Defense and space equipment

3.3

Construction supplies
Materials
Durables
Nondurables

2.3
2.3

2.6
2.4

.4
.4

.7
.8

3.4
2.4
-9.5 -19.3
3.2 -3.2
-7.5 10.5

.4
3.9
2.1
-2.1

.7
8.2
.5
.2

1.0
6.7
-.3
.3

3.9

.1
3.4
-.5

1.7
4.2
1.2

.1
.0
.1

.5
1.4
.3

.2
.5
.2

8.9
31.5
5.6
.8

12.5
41.4
8.0
2.9

11.4
33.1
8.1
2.8

.9
1.9
.4
.6

.1
2.0
-.1
-.9

.8
2.5
.5
-.1

-7.8

-7.7

-8.8

-7.5

-.6

-.8

-.3

4.8

4.5

6.2

2.9

8.2

1.1

28.2
18.9
9.0

3.2
3.6
2.3

7.4
9.4
4.2

5.0
4.1
7.1

3.8
6.0
.4

.2
.8
-1.3

.5
.4
.4

.
1..

1. From the final quarter of the previous period to the final quarter of the period
indicated.

CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1967-92

1993

1992

Avg.

Sep.

Oct.

Nov.

Total industry

81.9

79.8

79.2

81.6

81.8

81.9

82.4

83.0

Manufacturing

Q1.2

78.8

78.1

80.8

80.9

81.1

81.5

82.2

82.2
80.7

82.2
77.3

81.8
76.6

84.3
79.2

84.6
79.3

84.4
79.6

84.7
80.2

85.5
80.8

Primary processing
Advanced processing

II-7

RECENT UNION SETTLEMENTS
Median first-year adjustments1
(in percent)

All industries
Manufacturing
Construction
Other

1990

1991

1992

4.0
3.5
3.9
4.8

3.9
3.4
3.7
4.5

3.4
2.5
3.0
4.0

1993 2
3.0
2.7
2.5
3.1

1. Includes all scheduled adjustments during the first twelve
months of the contract but excludes potential gains under COLA
clauses. Each contract carries equal weight in computing medians.
2. Covers contracts ratified between January and November.
Bureau of National Affairs.
Source:
Industrial Production
Industrial production rose 0.9 percent in November, after
increasing 0.7 percent in October; this is the largest two-month
advance in a year.

Increases in manufacturing accounted for all of

the gain in total output last month, as mining output dropped a bit
and utilities output ticked up.

With the steep rise in industrial

production, the capacity utilization rate moved up to
83.0 percent.
Assemblies of motor vehicles rose to an annual rate of
12.0 million units in November, with increases for both autos and
trucks.

The higher output of motor vehicles and parts directly

contributed 0.4 percentage point to the growth in industrial
production, and increases at upstream industries likely added a bit
more.

Looking ahead, schedules call for assemblies of 12.4 million

units in December and more than 13 million units, on average, in the

5. Revised indexes of industrial production and rates of
capacity utilization will be published in February 1994. The
revisions to production will reflect primarily the incorporation of
more comprehensive source data, review of production factor
coefficients, and updated seasonal factors. The revisions to
capacity utilization will reflect improved estimates of capital
stocks and preliminary results from the Census Survey of Plant
Capacity for 1991 and 1992. These revisions probably won't lead to
large changes, but the work is still in process.

II-8

MANUFACTURING SECTOR
CAPACITY UTILIZATION

Percent

Primary Processing

Advanced Processing

1985

1986

1988

1987

1989

1990

1991

PRODUCER PRICES

1992

1993

Percent change, year earlier

Excl.Food and Energy

Intermediate materials
Finished goods

1985

1986

1987

1988

1989

1990

1991

1992

1993

VENDOR PERFORMANCE

Percent

1
1985

1986

I
1987

II
1988

II
1989

II
1990

'Vendor performance is the percent of respondents in the purchasing managers

survey reportng slower sup lier deliveries minus those reporting faster
delivenes, seasonally adjusted.

Nov.

I,IIIIIIllMl
lhuu,,tlltIIIIIlu1uII1uluI
lll l
l l l
1I l11
I
1111
I

1992

1993

II-9
first quarter of 1994.

Despite the pickup in assemblies, the brisk

sales of the past few months have left dealer stocks very lean,
suggesting that the further scheduled increases may not be
unrealistic.

PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate: FRB seasonal basis)

Oct.
U.S. production
Autos
Trucks
2
Days' supply
Autos
Light trucks

1993
Nov.

11.0
5.9
5.2

12.0
6.6
5.4

55.2
59.0

56.2
56.5

1994
Dec.
Jan.
Q1
------ scheduled----12.4
13.5
13.2
6.8
7.4
7.3
5.6
6.1
5.9

1. Components may not sum to totals because of rounding.
2. Data for November are staff estimates.
Outside the motor vehicle industry, factory output climbed
0.6 percent in November, after a 0.3 percent increase in October.
Production of business equipment rose 0.8 percent in November, as
output of computers continued to surge and production of most other
types of capital goods other than aircraft and related equipment
continued to trend up.

With the improved pace of activity in the

construction sector, output of construction supplies rose
1.1 percent in November, bringing the increase over the past six
months to 6.4 percent at an annual rate.
The large increases in production in the last two months are
consistent with other indicators of manufacturing activity.

Real

adjusted durable goods orders rose 2.5 percent in October, the fifth
straight increase.

The Purchasing Managers'

Index increased to

55.7 percent in November, with notable gains in new orders and in
production.

II-10
NEW ORDERS FOR DURABLE GOODS
(Percent change from preceding period; seasonally adjusted)
Share
1993
HI
Total durable goods
1
Adjusted durable goods
Office and computing
2
Nondefense capital goods
Other
Memo:
Real adjusted durable goods

1993
Q2

Aug.

1993
Sep.
Oct.

100
65

-1.7
-1.0

1.2
3.7

2.5
.4

1.1
2.0

2.6
2.4

5
16
44

-.7
1.9
-2.0

4.9
3.2
3.8

1.1
1.8
-.2

-1.0
4.7
1.2

6.1
.8
2.6

-.8

4.3

1.8

2.5

1. Orders excluding defense capital goods, nondefense aircraft,
motor vehicle parts, and those industries not reporting unfilled
orders.
2. Excludes aircraft and computer industries.
With the sharp increase in industrial production, overall
capacity utilization rose 0.6 percentage point to 83.0 percent in
November.

In the past three months capacity utilization has risen

1.2 percentage points:

it is now 1.1 percentage points above its

long-term average of 81.9 percent, but still 1.8 percentage points
below the ten-year high hit in March 1989.

The utilization rate in

manufacturing climbed to 82.2 percent, with sharp gains posted in
both advanced and primary processing industries

(chart, upper

panel).
Typically, when operating rates in primary processing
industries become high, prices for intermediate materials firm, and
materials processors often ration deliveries through nonprice means.
So far. however, inflation in primary processing industries
generally has remained subdued and vendor performance, as measured
by the purchasing managers' survey, has not deteriorated (chart,
bottom panel).

II-11

Consumption and Personal Income
Consumer spending has continued to move higher, apparently at a
good clip.

Outlays for motor vehicles have been especially strong,

but spending for other goods has risen substantially as well.

contrast, spending on services was unchanged in real terms in
October because expenditures for utilities returned to trend after
spurting last summer and outlays for other services rose only
modestly.
Retail sales are estimated to have increased 0.4 percent in
nominal terms in November.

The retail control, which excludes auto

dealers and building material and supply stores, was up 0.5 percent,
after an increase of 0.8 percent in October.

The GAF group of

stores, which tend to sell discretionary items, posted another solid
gain in sales for November, reflecting sharp increases at furniture
and appliance dealers and at apparel stores: sales at general
merchandise stores dropped back after posting sizable increases over
the preceding several months.
was robust last month.

Spending on other durable goods also

Given the CPI data, the staff estimates that

real spending for goods other than motor vehicles rose 0.4 percent
in November to a level more than 1 percent (not at an annual rate)
above the third-quarter average.
Sales of light vehicles--both autos and trucks--have picked up
smartly this quarter.

After jumping to an annual rate of 14-1/2

million units in October, sales edged higher in November.

Sales of

vehicles produced in North America remained brisk in early December.
Sales in recent months have continued to be influenced by special
factors--notably the easing of the supply constraints that crimped
sales (especially fleet sales to rental companies) last summer.

addition, buyers are responding to the generous incentives offered
by Ford and General Motors as they compete to have the best-selling

II-12

RETAIL SALES
(Percent change from preceding period, seasonally adjusted)
1993
Q2

Q1
1.
2.

Total sales
(Previous)

Automotive dealers

Building material and supply

5.
6.

Retail control 1
(Previous)

General merchandise

Apparel

Furniture and appliances

Sep.

1993
Oct.

.2
(. 1)

1.8
(1.5)

5.0

-. 1
1.1

Nov.

1.8

1.6
(1.5)

4.2

3.3

1.3

3.2

2.7

1.9

3.4

1.0

.5
(.4)

.8
(.7)

2.2

1.7

2.6

1.1

-1.0

-2.4

2.4

1.4

2.4

3.6

1.3

3.7

5.1

3.0

-3.4

2.2

2.6

-3.4

-. 6

1.5

.8
-1.4

-1.3

10.

Other durables

11.

Gasoline stations

12.

Other

GAF 2

1.6

2.4

1.3

MEMO:
13.

1 Total excluding auto dealers and building matenal and supply stores.
2. General merchandise, apparel, furniture, and appliance stores.

REAL PCE GOODS EX. MOTOR VEHICLES

Billions of 1987 dollars
1440

* Quarterly averages
1400

1360

1320

1280

1240
1989

1990

1991

*The observations for September, October, and November are staff estimates.

1992

1993

II-13
SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; BEA seasonals)
1993

1993

1991

1992

Sep.

Oct.

Nov.

12.3
8.4
3.9

12.8
8.4
4.5

13.3
8.4
5.0

14.2
9.0
5.2

13.6
8.6
5.0

13.3
8.5
4.8

14.5
9.0
5.5

14.7
9.0
5.7

North American
Autos
Big Three
Transplants
Light trucks

9.7
6.1
5.0
1.1
3.6

10.5
6.3
5.1
1.2
4.2

11.1
6.4
5.3
1.0
4.7

11.9
6.9
5.7
1.2
5.0

11.4
6.6
5.1
1.5
4.8

11.2
6.6
5.1
1.5
4.6

12.5
7.1
5.8
1.3
5.4

12.7
7.1
5.7
1.4
5.5

Foreign produced
Autos
Light trucks

2.6
2.2
.3

2.3
2.1
.2

2.2
2.0
.2

2.3
2.1
.2

2.2
2.0
.2

2.1
1.9
.2

2.0
1.9
.2

Memo:
Domestic nameplate
Market share, total
Autos

.70
.63

.72
.63

.75
.66

.71
.62

.75
.66

.74
.65

Total
Autos
Light trucks

Note:
Data on sales of trucks and imported autos for the current month are
preliminary and subject to revision.
1. Components may not add to totals because of rounding.
2. Excludes some vehicles produced in Canada and Mexico that are classified
as imports by the industry.

Monthly Showroom Traffic
(Seasonally adjusted)
Weekly potential customers per dealer

1988

1989

1990

1993

Source: Chrysler Corporation
Note: Showroom traffic is defined as the number of potential customers
that a dealership's sales staff greets in a week. An individual who
visits a dealership more than once will be counted each visit. The
showroom traffic survey is made up of selected Chrysler, Dodge,
Jeep/Eagle, Chevrolet, Ford, and Toyota dealerships throughout the U.S.

II-14
PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)
1993
1992
Total personal income

1993
Q3

Sep.

Oct.

44.2

-72.7

28.1

21.3

8.0

33.2

Wages and salaries
Private

32.4
30.4

-96.0
-98.6

36.7
35.0

11.8
9.5

-2.6
-5.4

15.6
17.2

Other labor income

2.0

2.7

Proprietors' income
Farm

2.9
.2

12.1
11.9

-13.1
-15.3

.5
-1.1

2.7
1.6

9.2
5.3

.5
2.5
-1.0

2.8
.6
-. 5

1.3
.3
-1.1

2.2
.4
1.2

2.0
.3
1.4

.5
.1
2.5

6.0

4.0

3.3

1.3

3.6

1.1

2.7

-. 3

1.1

6.0

-15.4

7.7

3.3

4.7

Equals: Disposable personal income

38.2

-57.4

20.5

18.0

7.1

28.5

Memo: Real disposable income

21.6

-56.2

10.3

10.5

4.2

8.2

Rent
Dividend
Interest
Transfer payments
Less:

Personal contributions
for social insurance

Less: Personal tax and nontax
payments

Payments of Principal and Interest on Consumer Debt

1964

1969

1974

"Payments as a percent of disposable personal income

Percent

1979

1984

1989

1994

II-15
pickup truck in America in 1993.

More fundamentally, sales

apparently are being boosted by the replacement needs and deferred
demand of households that put off buying vehicles during the 1990-91
recession and the early recovery period.

Financing terms remain

favorable, and price increases on the 1994 models--at least adjusted
for quality improvements--are relatively small.

Indeed, showroom

traffic remained heavy through November, and the Michigan survey
reading on consumers' views of buying conditions for cars surged in
early December.
Real disposable income is likely to post a sizable gain in the
fourth quarter:
quarter average.

In October, it stood 3/4 percent above the thirdHowever, much of the pickup is attributable to a

rebound in farm income after the crop losses last summer.

And,

although the firmer employment gains of late should help to buoy
labor income, underlying income does not appear to be growing faster
than the moderate uptrend of the past several quarters.

Meanwhile,

the personal saving rate has continued to hover in the 3-3/4 to
4 percent range after falling sharply over the first half of the
year.
The sizable advance in consumption in recent quarters has been
accompanied by a stepped-up pace of borrowing.

It is uncertain

whether that trend will continue, but three years of declining
interest rates and improving balance sheets may have made that
option more viable.

Payments to service consumer debt

(including

mortgages) declined from a peak of 18.3 percent of disposable income
in the fourth quarter of 1989 to an estimated 16.1 percent in the
third quarter of 1993

(chart).

Housing Markets
Housing demand and residential construction continued to expand
early in the fourth quarter.

Housing starts rose for the third

II-16
PRIVATE HOUSING ACTIVITY
(Millions of units: seasonally adjusted annual rates)

Annual
All units
Starts
Permits

1993

1992
Q1

Q 3r

Aug.

1.20
1.11

1.16
1.11

1.23
1.11

1.31
1.23

1.03
.92

1.03
.93

1.08
.92

1.14
1.01

Sept.r

Oct.

1.33
1.24

1.36
1.27

1.40
1.31

1.18
1.02

1.16
1.05

1.22
1.10

Single-family units
Starts
Permits
Sales
New homes

Existing homes
Multifamily units
Starts
Permits

Preliminary.

.61

.60

.65

.67

.63

.73

.68

3.52

3.54

3.58

3.87

3.81

3.94

4.08

.17
.19

.13
.18

.15
.19

.17
.21

.15
.23

.20
.22

.17
.21

Revised estimates.

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

Single-Family
"I

-__
1983

,''

"S ",.J

It'
,

I1983
1
19518~ ~
1985

_
,

Multifamily

I~ I ~ I
1987

98~

1989

9119liiiiiiiiiiiliiiiiiiiiiili'
1991
1993

II-17
consecutive month in October, reaching their highest level since
February 1990.

Permit issuance rose about in line with starts--

confirming the uptrend in production.
In the single-family segment of the market, starts were at a
six-year high in October.

New home sales in October remained near

their cyclical peak, despite a falloff following September's
15 percent gain.

Sales of existing homes broke the 4 million mark

in October for only the second time since the 1970s.

The stock of

single-family homes has grown about 20 percent since then, however,
so the turnover rate has yet to approach the high level attained in
the late 1970s

(chart).

Surveys of builders, consumers and lenders suggest that singlefamily housing activity remained robust in November and early
December.

Home builders gave the most positive assessments of

current sales in the nine years that this survey has been fielded by
the National Association of Home Builders.

Similarly, a record

percentage of the consumers in the Michigan survey reported positive
home buying attitudes in early December, and the proportion of home
owners

reporting that "It's a good time to sell" has increased as

well.

Applications for home purchase loans backed off in late

November and early December, according to the Mortgage Bankers
Association, but the seasonally adjusted index remained near the
high readings of the past several months.
All four regions have contributed to the recovery in housing
since the cyclical trough in early 1991

(chart).

The percentage

gains have been largest in the South and Midwest, and smallest in
the Northeast.

In the West, a housing boom in several Mountain

states has been partially offset by recent weakness in California.
where both production and prices are off significantly from a year
earlier.

II-18

12/9/93

NEW AND EXISTING HOME SALES
(seasonally adjusted)
New Home Sales

Millions of units, annual rate

3-month moving average

Actual

1988

1986

1990

1989

1992

Existing Home Sales and Turnover Rate*
Annual rate

Millions of units, annual rate

Sales of existing homes (nght scale)
0 08

0.06

/ \

Turnover rate (letscale)
I
V
\'I
Turnover rate (left scale)

/
lh

1969

1973

* Turnover rate - sales f stock.

I --------------I
I
I

1977

1981

1985

---- I

1989

I--

1993

12/13/93

II-19

REGIONAL HOUSING INDICATORS
(Seasonally adjusted annual rate; data through October 1993)
New Home Sales
--

Total Housing Starts

Thousands of units

Northeast
-Midwest
- -South

,d'jW "AI

------- West

- Northeast
- - - - Midwest
-- South
-------.. est

I'V
IV
,w

1993

1992

Existing Home Sales

1990

1991

1992

1993

Percentage Change
1991Q1 - October 1993

Thousands of units
2000

Northeast
Midwest

.-----

------

1600

West

1200

800

tic
400

1991

Northeast

Midwest

South

West

%,I..\
'

1990

Existing
Home Home
Starts Sales Sales
New

South

1992

1993

II-20

BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period, except where noted;
based on seasonally adjusted data, in current dollars)
1993
Q1

1.1

1.0

1993
Q3

Aug.

Sep.

Oct.

-1.3
3.1

-. 7

Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories
Shipments of complete aircraft1
(Billions of dollars, annual rate)
Sales of heavy weight trucks
(Millions of units, annual rate)

1.5

.8
-2.2
1.7

33.8

31.3

19.0

.30

.34

.33

3.3

10.1

Orders for nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

3.8
27.7

-1.2
3.6
4.9
3.2

-1.0

16.9

21.4

.34

-3.1
3.4
-1.0
4.7

4.8
2.0
6.1
.8

.8
-7.1

-. 9

Nonresidential structures
Construction put-in-place
Office
Other commercial
Industrial
Public utilities
All other

.2
-2.2
4.9

Rotary drilling rigs in use

-8.3

Footage drilled 2
Memo:
Business fixed investment 3
Producers' durable equipment 3
Nonresidential structures 3

6.2

2.7
-. 3

3.4

-5.4

-1.8
-.

3.6
.1

1.0

-2.7
4.5
1.3

3.3

5.7

.4
3.5
-4.3

2.2

-1.4
2.9

1.2
-1.0

.8
.8

-5.3

14.9

7.3

4.1

-3.1

4.3

-5.4

8.9

4.2

1.0

-9.8

14.4
19.9
.5

16.6

7.4

n.a.

10.0

n.a.
n.a.

-4.3
-. 4

2.4
10.0

19.8
8.1

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors.
2. From Department of Energy.
3. Based on constant-dollar data; percent change, annual rate.
n.a. Not available.

II-21
House prices continue to increase less than prices in general.
In the new home market, transactions prices of new homes in October
were actually down from a year earlier.

Most other measures showed

small price gains, including sales prices for existing homes and
"constant quality" price indexes for both new and existing homes.
Multifamily housing starts, which were boosted in September by
the reinstatement of the tax credit for low-income rental housing,
fell back in October.

Permit issuance edged down further in

October, providing additional evidence that much of the tax stimulus
was transitory.

Moreover, vacancy rates and rents have yet to show

any generalized tightening that might signal a sustained recovery in
multifamily construction.

During the past year, this market segment

has accounted for less than 5 percent of total residential
investment spending--the lowest share in at least 35 years.
Business Fixed Investment
The strong expansion in real outlays for producers' durable
equipment likely continued in the fourth quarter.

Shipments of

computing equipment, which jumped 9-1/2 percent in the third
quarter, edged up in October to a level 1-1/2 percent above their
average in the third quarter, and reports in the trade press suggest
that demand for PCs, workstations, and related equipment remains
strong.

Shipments of nondefense capital goods other than computers

and aircraft fell 1 percent in October; however, this decline
followed large increases in August and September, and the level of
October shipments was 1-3/4 percent above the third-quarter average.
Moreover, new orders and order backlogs for these goods have been
rising, which suggests that shipments will increase further in
coming months.
As for transportation equipment, the increase in light vehicle
sales in October and November probably reflects stronger demand from

II-22

FUNDAMENTAL DETERMINANTS OF BUSINESS FIXED INVESTMENT

Cost of Capital

1963

Four-quarter percent change

1968

1973

1978

1983

Real Domestic Corporate Cash Flow

1963

1968

1993

Four-quarter percent change

1973

1978

Acceleration of Business Output

1963

1988

1983

1988

1993

Change in four-quarter growth rate

1973

1978

1983

1988

1993

II-23
both businesses and households.

The demand for heavy trucks is

strong, although increases in deliveries are being limited by
capacity constraints.

Data from Boeing suggest that domestic

outlays for aircraft, which fell last quarter, will be about flat in
the fourth quarter.

Nonetheless, a sharp contraction in aircraft

outlays is almost certain next year, a point underscored by Boeing's
recent announcement of further cuts in production rates.
Equipment investment probably has been boosted in recent
quarters by a number of factors (chart).

Notably, the cost of

capital has continued to decline--especially for computers, where
quality-adjusted prices have dropped rapidly.
flow generally has been strong.

In addition, cash

On the other hand, the impetus

from the 1991-92 acceleration in output probably is beginning to
wane.
Outlays for nonresidential structures were about unchanged last
quarter after a gain of more than 4 percent at an annual rate during
the first half.

The imbalances in this sector appear to have been

alleviated somewhat during the past year or two, reflecting both a
sharp contraction in new supply and a moderate increase in demand.
Construction put-in-place for buildings increased 1/2 percent
in October and has been on a decided uptrend since late last year.
Among sectors, office construction still is declining.

However.

construction in the "other commercial" sector, which includes retail
outlets, has been increasing for more than a year, although its
current level still is well below that

seen in the late 1980s.

Elsewhere, construction in the institutional sector, which includes
structures related to health care and private educational buildings,
has been trending up, and industrial construction has flattened out.
The office sector still appears to be plagued by excess
capacity:

According to CB Commercial. vacancy rates for office

II-24

SELECTED INDICATORS OF MARKET CONDITIONS IN NONRESIDENTIAL STRUCTURES

Percent

Office Vacancy Rate, Downtown Market*

1983

1984

1985

1987

1986

1988

1989

1991

1990

1992

1993
Percent

Industrial Vacancy Rate, National Market*

S17
1983

1984

1985

1986

a
1987

18
1988

19
1989

1
1990

1
1991

Russell-NCREIF Property Value Indexes

1983

1984

1985

1986

1
1992

1993

Index. 1977a100

1987

1988

1989

1990

1991

1992

1993

*Vacancy rate data are from CB Commercial. The national downtown office vacancy rate from 1988:04 onward is a wdighted average of regional
weights; prior to that time, the rate was based on an unweighted average.

II-25
buildings have edged down this year, but are still quite high by
historical standards, especially in downtown areas

(chart).6

Consistent with high vacancy rates, the Russell-NCREIF index of
appraised values for office properties still is declining.

Among

regions, prices for office buildings recently have stabilized in the
South and appear to have firmed some in the Midwest and the
Northeast; however, property values still are plunging in the West.
The industrial vacancy rate also is quite high relative to the
levels seen in the early and mid-1980s, although it has come down a
bit during the past year or two.

The Russell-NCREIF index of the

value of industrial structures has been falling since mid-1990.
Appraised values of retail space declined substantially in 1991
and 1992, but recent data indicate some firming of prices, and
retail construction activity is perking up.

Analysts have

attributed part of the pickup to the aggressive expansion efforts of
retail

"super stores."

such as Walmart and Sam's.

Although vacant

retail space is available, most of the existing structures are not
large enough to accommodate these behemoths, which require massive
amounts of floor space and large parking lots.

The uptrend in

institutional construction has been driven by the health-related
component, mainly hospitals.

These outlays have been primarily for

large-scale renovations or expansions of existing facilities.
Hospitals are revamping their facilities to accommodate the latest
technology; they also appear to be competing to attract patients.
many of whom seem to choose hospitals largely on the basis of
amenities rather than cost.

6. In June of this year. CB Commercial introduced a change in the
method it uses to aggregate office vacancy rates across metropolitan
areas. Revised data are available only back to the fourth quarter
of 1988.

II-26
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1993
Q1

1993
Q3

Aug.

Sep.

Oct.

Current-cost basis
Total
Excluding auto dealers
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Retail

Automotive
Excluding auto dealers

39.9
20.6
1.2
-4.4
.0
5.6

20.5
20.9
7.1
-.2
-3.1
10.5

12.7
22.3
-2.5
-.8
-3.3
1.5

27.9
27.4
-2.0
1.6
-13.7
10.1

17.5
15.6
-8.4
-1.1
2.5
-9.8

5.1
33.6

6.2
7.2

12.2
3.0

23.5
6.5

-1.2
27.1

19.3
14.3

-.3
7.5

-9.6
12.7

.5
6.0

1.9
25.2

4.8
15.1

23.0
6.4
-.8
-.1
24.0
16.6
7.4

14.0
14.4
5.0
5.9
3.0
-.5
3.5

15.8
26.0
.6
13.5
1.7
-10.2
11.9

5.9
27.9
3.0
18.2
-15.4
-22.1
6.7

31.6
21.2
-10.3
9.9
32.0
10.5
21.6

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

2.9
-1.9
-5.3
-8.1
-3.2
6.0
-11.7
19.8

Constant-dollar basis
Total
Excluding auto dealers
Manufacturing
Wholesale
Retail
Automotive
Excluding auto dealers

INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data)
1993

1993
Q1

Aug.

Sep.

Oct.

Current-cost basis
Total
Excluding auto dealers
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Retail
Automotive
Excluding auto dealers

1.47
1.44
1.48
5.07
5.08
1.34
1.33
1.60
1.99
1.49

1.47
1.44
1.49
5.25
4.87
1.35
1.32
1.58
1.90
1.49

1.47
1.45
1.49
5.22
5.39
1.35
1.34
1.56
1.78
1.50

1.46
1.44
1.49
5.52
4.45
1.35
1.33
1.54
1.76
1.48

1.46
1.43
1.46
5.11
5.71
1.32
1.34
1.55
1.78
1.49

1.45
1.43
1.46
4.73
5.29
1.33
1.34
1.53
1.71
1.48

1.56
1.53
1.59
1.42
1.64
1.91
1.56

1.56
1.54
1.60
1.42
1.62
1.85
1.55

1.56
1.55
1.59
1.48
1.59
1.74
1.55

1.55
1.55
1.59
1.47
1.57
1.69
1.54

1.55
1.53
1.57
1.47
1.59
1.75
1.54

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

Constant-dollar basis
Total
Excluding auto dealers
Manufacturing
Wholesale
Retail
Automotive
Excluding auto dealers

1. Ratio of end of period inventories to average monthly sales for the period.

II-27

Business Inventories
Business inventories were little changed in current cost terms
in October, as reductions in manufacturing and wholesale stocks were
about offset by increases in the retail level.

On the whole,

inventories seem to be in line with market demand; no major
imbalances were apparent at the end of October.
Manufacturers' inventories decreased moderately further in
October.

The decline was concentrated at producers of aircraft and

parts, where stocks have been contracting for more than two years.
Inventories held by most other durable goods producers expanded in
October: buildups in stocks of industrial machinery and electronic
and electrical equipment, where orders have been firm since late
summer, were especially notable.

Stocks in most nondurable goods

industries were either little changed or continued to decline.
In the trade sector, wholesale inventories posted widespread
reductions in October, and the September estimate, which previously
had shown a sizable increase, was revised to show essentially no
change.

In retail trade, inventories rose further in October, after

a considerable increase in the preceding month.

However, despite

the recent buildups, the inventory-sales ratio for nonauto retailers
has been virtually unchanged since March.

For stores in the general

merchandise, apparel, and furniture and appliance (GAF) grouping,
inventories have risen persistently over the past several months.
but sales have also been brisk.

A good part of the recent GAF

inventory accumulation was in furniture and appliances--a category
in which retail sales have been quite vigorous lately, in line with
the pickup in housing activity.
Federal Sector
The federal budget deficit, on a unified basis, narrowed
to $45.3 billion in October from last year's level of $48.8 billion.

II-28

RATIO OF INVENTORIES TO SALES
(Current-cost data)
Ratio
- 2.05

Manufacturing
-1

1.85

Total
I

Excluding aircraft

1979

1981

1983

1985

1987

1989

- 145

1991

I I--

1.25

1993

Ratio
1.5
Wholesale

S1.4

oct.
- 1.3

1.2

I
1979

1981

1983

1985

I
1987

L I
1989

1
1991

1.1
1993

Ratio
1.7
-

Ratio
2.7Retail
GAF group
gr

2.5 -"'

-u 1.6
Oct

,2.1ti ,.
2.1

1979

, -

2.3 -

1983

Total excluding auto

1985

1987

1989

1991

1.5
1.4

Total excluding auto

j*
I

1981

1993

1.4

II-29
However, the October 1992 deficit was boosted by a shifting forward
of payments from November: for example, military personnel received
three bi-weekly paychecks last October.

Adjusting for these extra

payments and excluding deposit insurance, the deficit was nearly
unchanged:

Receipts in October were only 2-1/2 percent above their

year-earlier level, while outlays grew even more slowly-1-1/2 percent.

The increases in both receipts and adjusted outlays

were well below the trends evident in FY1993: however, the monthly
data are volatile and it would be unwise to read much into these
numbers.
As the 1993 legislative session closed, Congress enacted and
the President signed several important budget-related bills.
including the thirteen regular appropriations bills for FY1994.
According to the OMB's sequestration report, they are within the
discretionary spending limits established in the 1993 reconciliation
act; there also will be no need to sequester mandatory spending to
meet the pay-as-you-go constraints on mandatory spending and
receipts.

In addition, the Congress appropriated what is hoped to

be a final $18 billion for the cleanup of failed thrift institutions
by the RTC: the funds were obtained by retroactively lifting an
April 1, 1992, deadline for use of funds that had been appropriated
in November 1991, but were not spent before the deadline.
Meanwhile, emergency unemployment benefits for long-term
unemployed workers were extended until February 5. 1994.

The cost

of the additional outlays ($1.1 billion) is expected to be offset by
savings from state actions to move individuals off the unemployment

7. Congress did not appropriate any funds for the thrift
industry's new deposit insurance fund. the Savings Association
Insurance Fund (SAIF). which will start handling thrift failures in
1995. The Treasury and Sponsored Agency Financing section
(page III-13) discusses the circumstances under which unused RTC
appropriations can be transferred to SAIF.

II-30
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, except wnere otherwise noted)

Oct.
Oct.
FY1993FY1994

Dollar
change

Percent
change

Outlays
Deposit insurance (DI)

125.6
-2.6

124.0
.

-1.6
2.6

-1.3
n.m.

Outlays excluding DI
National defense
Net interest
Social security
Medicare and health
Income security
Other

128.2
27.2
16.5
24.3
19.0
18.3
22.9

124.0
24.3
17.1
25.5
20.0
17.3
19.7

-4.3
-2.9
.6
1.2
1.0
-1.0
-3.2

-3.3
-10.6
3.8
5.1
5.3
-5.4
-14.2

76.6

78.7

1.8

2.4

66.9
2.1

68.5
2.2

1.6
.

2.4
2 9

3.3

48.
1.4

45.
45.3

-3.4
-6.1

-7.
-11.9

Receipts
Personal income and
social insurance taxes
Corporate income taxes
Other
Deficit(+)

Excluding DI

Details may not add to totals because of rounding.
n.m. not meaningful

STATE AND LOCAL CONSTRUCTION
(Construction Put-In-Place)
Billions of 1987 dollars
-50

Highways

Oct.

--Education
----- *Other
-

clhe

4--

~
%-..

-4

Iiiiiiiitiii

SI
1990

1991

1992

1993

II-31
rolls faster and from tightening the criteria that allow recent
legal immigrants to qualify for Supplemental Security Insurance.
NAFTA is expected to be deficit-neutral, on net,
five years.

over the next

The combination of lost tariff revenues, assistance to

dislocated workers, and loan guarantees to finance the cleanup of
polluted border areas is expected to total nearly $3 billion.
However, the cost will be offset by increasing the fees paid by
cruise and airline passengers crossing U.S. borders and speeding up
the collection of tax receipts from Government Demand Deposit
accounts at depository institutions.

The Treasury will issue

regulations next year specifying how the speed-up in collections,
which will be phased in over the next five years, will be
implemented.
Finally, the House is considering a second round of budget
cuts.

Last month, it narrowly defeated a bill introduced by

Representatives Penny and Kasich that would have reduced the deficit
by a cumulative $90 billion over five years.

The Penny-Kasich bill

included sizable reductions in mandatory programs, which would have
been "locked in" by provisions preventing the savings from being
used to finance other entitlements; the bill would have also lowered
the caps on discretionary spending below the levels specified in
OBRA93.

Instead, the House approved an alternative plan backed by

the Administration that contains savings of $37
years.

billion over five

Most of the savings in the alternative plan are slated to

come from a reduction in the civilian federal work force of 252.000
employees (including the 100.000 jobs targeted for elimination in
the Administration's FY94 budget): unlike Penny-Kasich, this bill
has no mechanism to prevent the savings from being used to meet the
existing discretionary caps and to fund new initiatives.

II-32

State and Local Governments
Real purchases of goods and services by state and local
governments have picked up in recent quarters.

The NIPA data for

the third quarter were revised up to show an increase of about
3-1/2 percent at an annual rate, and the available information on
employment and construction points to a further rise in the fourth
quarter.

Employment of state and local workers has been erratic

from month to month but generally has continued to expand; in
November, it stood nearly 50.000 above the average level for the
third quarter.
Much of the growth in purchases has been in the volatile
construction category, where spending rose at an annual rate of
about 20 percent in real terms, on average, in the second and third
quarters, after declining over the preceding year.

Moreover,

according to the advance data. construction put-in-place rose
further in October.

Since early 1993. outlays for highways and

educational buildings have posted sizable increases, while spending
for other projects has continued to trend up at about the modest
pace that has been evident for the past couple of years.

Highway

construction has been particularly strong in the past couple of
months--especially in the Midwest, where roads are being rebuilt
after last summer's floods.
According to a recent survey by the National Association of
State Budget Officers

(NASBO). states are planning to raise their

general fund spending about 1 percent in real terms in fiscal 1994.
only a bit faster than the average increase over the preceding three
years.

Twelve states plan to reduce outlays for Medicaid this year,

and many are restructuring AFDC programs to provide greater
incentives for individuals to find jobs or go to school.

Twenty

states plan to trim their work forces (on a full-time equivalent

II-33
basis, the largest declines in percentage terms between fiscal years
1992 and 1994 are expected to be in Maine, California, and
Oklahoma); many are also reducing employee benefits.

Once again.

many states reportedly are cutting aid to local governments,
revamping management practices, and privatizing services.
Prices

Most price measures indicate that inflation has remained
subdued despite the recent acceleration in real activity.

Over the

twelve months ending in November, consumer prices increased
2.7 percent--down from 3.0 percent for the year-earlier period-while the twelve-month change in the CPI excluding food and energy
slowed to 3.1 percent, 0.3 percentage point less than over the
preceding year.

The PPI for finished goods was flat over the year

ending in November, but at earlier stages of production prices
firmed for some commodities and industrial materials.
Retail food prices rose 0.4 percent in November, after a jump
of 0.6 percent in October.

The CPI for fresh fruits and vegetables

rose sharply for the fourth month in a row, and meat prices advanced
for a second month.

By contrast, increases for other foods were

quite small--only 0.1 percent, on average.

The twelve-month change

in the CPI for food moved up a touch in November, but only to
2.6 percent, suggesting that flood and drought losses have had only
a small impact on food prices overall.

The potential for a larger

price response in 1994 still is present, however.

The USDA's

November crop report led to further sharp increases in the prices of
corn and soybeans, and with inventories of those crops likely to be
tight in coming months, agricultural markets probably will be
unusually sensitive to any developments that might hint at another
poor crop in the coming year.

II-34
RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data) 1

Relative
importance,
Dec. 1992

1993
1991

1992

1993
Q3

----- Annual rate-----All items2
Food
Energy
All items less food
and energy
Commodities
Services
Memo:
CPI-W 3

Oct.

Nov.

-Monthly rate-

100.0
15.8
7.3

3.1
1.9
-7.4

2.9
1.5
2.0

4.0
2.6
3.1

2.2
1.4
-3.8

1.4
1.7
-3.4

.4
.6
1.9

76.9
24.7
52.2

4.4
4.0
4.6

3.3
2.5
3.7

4.3
4.6
4.4

2.9
.6
4.1

1.9
-. 3
2.7

.3
.3
.3

.3
.2
.3

100.0

2.8

2.9

4.1

2.0

.2
.4
-1.3

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
(Percent change; based on seasonally adjusted data) 1

Relative
importance,
Dec. 1992

1993
1991

1992

1993
Q3

----- Annual rate------

Oct.

Nov.

-Monthly rate-

100.0
22.4
13.9
63.7
40.6
23.1

-.1
-1.5
-9.6
3.1
3.4
2.5

1.6
1.6
-.3
2.0
2.1
1.7

4.3
-1.6
16.6
3.6
3.2
4.4

.0
1.6
-3.0
.3
.6
.3

-1.9
4.2
-7.4
-2.9
-5.9
2.2

-.2
-.5
1.3
-.5
-.5
-.4

.0
.8
-2.7
.4
.3
.2

Intermediate materials 2
Excluding food and energy

95.4
81.8

-2.7
-.8

1.1
1.2

5.7
4.7

.3
.0

-.3
.6

-.1
.0

-.3
.1

Crude food materials
Crude energy
Other crude materials

41.2
39.5
19.3

-5.8
-16.6
-7.6

3.0
2.3
5.7

1.9
-10.1
24.3

-1.9
17.5
11.5

12.6
-26.5
-8.5

-1.5
4.9
.9

3.8
-3.8
1.7

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment

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-35
All of the major components of the energy index fell in
November, and overall energy prices slipped 1.3 percent.

The

declines among petroleum products have continued into December and
largely reflect developments in the world oil market--the sluggish
crude oil demand and strong non-OPEC production, especially from the
North Sea.

Downward pressure on prices has been exacerbated by

rumors of a possible re-entry of Iraq as an oil exporter and the
failure of the OPEC ministers to reach an agreement to restrict
production at their November 24 meeting.

The decline in world crude

oil prices has overwhelmed the additional costs of EPA requirements
to use oxygenated gasoline, which went into effect on November 1.
Excluding food and energy, the CPI moved up 0.3 percent last
month, after a similar increase in October.

Among nonfood nonenergy

goods, consumer prices increased only 1.6 percent in the year ending
in November, down from 2.5 percent for the previous twelve-month
period.

The decline in tobacco prices accounted for the bulk of

the slowing, although there also was a significant deceleration in
the prices of medical care commodities.

In contrast, increases in

the CPI for new motor vehicles picked up about 1/2 percentage point
over the past year.
Unlike goods prices, service prices have shown only slight
deceleration over the past year.

Airline fares increased almost

15 percent in the twelve months ending in November, with the
surviving carriers boosting ticket prices to stem their losses.
However, the carriers started a new round of discount fares in early
December.

Rent of shelter, which accounts for about half of

nonenergy services, slowed only about 0.2 percentage point from its
year-earlier pace.

Nevertheless, some service industries showed

significant deceleration from last year.

The twelve-month change in

prices of medical care services decelerated by more than a

II-36

Daily Spot and Posted Prices of West Texas Intermediate 1
Dollars per barrel

Jan

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

1 Posted prices are evaluated as the mean of the
range listed in the Wall Street Journal.

MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Year and Month

Posted

Spot

1993
January

18.01

19.08

February
March
April
May
June
July
August
September
October
November
December

18.92
19.20
19.24
18.91
18.05
16.79
16.87
16.33
17.10
15.55
13.71

20.05
20.35
20.27
19.94
19.07
17.87
18.01
17.51
18.15
16.68
14.80

1 Price through December 14.

II-37
percentage point, although it was still running double the core rate
of inflation, and tuition increases were down a percentage point.
Surveys of consumer price expectations have come down in recent
months.

The preliminary Michigan survey for December showed average

expectations of inflation for the next twelve months at 3.7 percent.
1 percentage point less than the third-quarter average for this
survey.

In the Conference Board survey, expected inflation fell to

4.3 percent in November from 4.8 percent a month earlier.
At earlier stages of processing, the PPI for intermediate goods
excluding food and energy was little changed for a third month in
November.

The index of prices of materials used in construction

continued to advance, but prices of materials for manufacturing
posted another month of little change.

Meanwhile, the index for

crude materials other than food and energy was up 1.7 percent in
November after a 0.9 percent increase in October.

Another large

increase was posted for prices of iron and steel scrap.

addition, prices increased for logs, bolts, copper ores, and cattle
hides.
Scattered price pressures continue to be evident in the
commodity markets.

Prices of steel scrap, which had risen sharply

earlier this autumn, have edged up a bit further in December,

The

current high level of steel prices probably is associated in part
with strong demand from the motor vehicle sector.

In addition,

lumber prices have continued to rise and are approaching the highs
reached last March--market participants reportedly have reduced
their assessments of near-term lumber supply in the face of
continued strong demand.

Prices for a number of other industrial

commodities also have risen since the week of the November
Greenbook, but generally by only small amounts.

Gold and silver

prices have strengthened recently, retracing declines that occurred

II-38
INFLATION RATES EXCLUDING FOOD AND ENERGY
Percent change from twelve months
earlier
Nov
1991

Nov
1992

Nov
1993

4.5

3.4

3.1

4.4

2.5

1.6

10.0
3.7
4.4
0.9
2.5
7.9
3.7
11.6

2.9
2.6
0.9
1.4
0.5
5.1
1.8
7.7

1.2
3.2
1.1
1.2
1.3
3.3
1.6
-4.7

4.5

3.9

3.7

3.7
3.1
7.8
-5.2
7.9
5.1
-5.6
9.8

3.0
2.5
5.9
9.0
7.3
2.8
-14.0
8.2

3.0
2.0
3.1
14.5
5.9
3.7
-5.7
7.3

PPI finished goods

3.1

2.0

0.3

Consumer goods

3.4

2.2

-0.6

Capital goods, excluding
computers
Computers

3.3
n.a.

2.7
-15.7

2.3
-13.7

PPI intermediate materials

-1.0

1.1

1.5

PPI crude materials

-8.3

3.0

11.3

4.5
4.5
4.5

3.4
3.9
3.1

3.7
4.0
3.6

6.9

7.3

6.4

78.0

79.7

82.2

4.0
3.7

3.3
3.7

3.7
3.9

0.4

2.8

0.3

0.6
4.3

4.0
2.3

0.6
1.6

CPI
Goods
Alcoholic beverages
New vehicles
Apparel
House furnishings
Housekeeping supplies
Medical commodities
Entertainment
Tobacco
Services
Owners' equivalent rent
Tenants' rent
Other renters' costs
Airline fares
Medical care
Entertainment
Auto financing
Tuition

Factors affecting price inflation
ECI hourly compensation 1
Goods-producing
Service-producing
Civilian unemployment rate
Capacity utilization
(manufacturing)

Inflation expectations3, 4
Mean of responses
Median, bias-adjusted 5
Non-oil import price 6
Consumer goods, excluding
food, and beverages
Autos

autos,

1. Private industry workers, periods ended in September.
2. End-of-period value.
3. Michigan Survey one-year ahead expectations.
4. Latest reported value: December.
5. Median adjusted for average downward bias of 0.9 percentage
points, relative to actual inflation, since 1978.
6. BLS import price index (not seasonally adjusted), periods ended
in September.
n.a. Not available.

II-39
during the summer and early autumn.

Indexes of commodity prices

have increased since the week of the last Greenbook, by 3 to
5 percent in most cases.

II-40

COMMODITY PRICE MEASURES

Journal of Commerce Index, total

- -

Journal of Commerce Index, metals

Total
Ratio scale, index
(1980-100)

130
- 125

ilb

15
Srr

Nov
1993

105

\Dec 14

Metats
95

98
94

a85
92
1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Nov
1993

Dec

CRB Spot Industrials
Ratio scale, index
(1967-100)

340

320

300

CRB Industrials
.

266
264

280
-

14258

260

S240

Nov

Dec 2

1993
I I, ' l ilt
1983
1984
,

Ii,

1985

1986

tI,,i

1987

1988

1990

1991

il,I "

I.I,
l|

1989

1992

1993

220
200

1994

CR8 Futures
Ratio scale, index
(1967.100)
--

320
310

290

270

250

CRB Futures

230
-- 226
222
218

Dec 14

230

Nov

Dec

214

- 210

S ,,
3

Weekly

8911984

data.

1985

Tuesdays;

1986

Joumal

1987

Commerce

1988

I
1989

data

monthly

,190
1990

before

1991

1985

1992

1993

1994

Dotted lines indicate week al
last Greerbook.

II-41
SPOT PRICES OF SELECTED COMMODITIES
------------- Percent change 2 ------Last
observation
1. PPI for crude materials
la.
lb.
1c.
1d.

Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,
seasonally adjusted

1991

1992

Dec 92
to
Nov 093

Nov 09 3
to
date

Year
earlier
to date

Nov

-11.6

3.3

1.6

n.a.

0.7

Nov
Nov
Nov

-5.8
-16.6
-7.6

3.0
2.3
5.7

4.7
-5.3
9.0

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

6.5
-9.8
11.3

Nov

-7.7

6.0

8.9

n.a.

11.3

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

Dec 14
Dec 14

-6.5
-11.3

-2.9
-0.7

7.8
-3.1

3.0
2.8

10.8
-1.1

3. Journal of Commerce industrials
3a. Metals

Dec 14
Dec 14

-7.2
-7.1

5.0
1.9

-4.1
-5.5

0.1
3.2

-1.8
-1.4

4. Dow-Jones Spot

Dec 14

-12.1

10.4

-0.7

3.7

2.2

0.7
-8.9
1.3

-2.6
-3.1
2.4

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

na.
n.a.
n.a.

-9.1
-14.9

1.6
4.5

2.1
-3.6

5.1
5.5

5. IMF commodity index
5a. Metals
5b. Nonfood agricultural

Oct
Oct
Oct

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

Dec 07
Dec 07

-3.1
-19.7
-2.5
9.5
5.0

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

Index Weights
Energy

Food Commodities

Others'

Precious Metals

PPI for crude materials
18

CRB futures

Z110 4

::::-:::I:::

CRB industrials
100

Journal of Commerce index
Dow-Jones
25

IMF index
4b

Economist
50
1. Forest products, industial metals, and other industrial materials.

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS
(Percent except as noted)
1992

1993

Instrument
Sept.
SHORT-TERM RATES
2
Federal funds
3
Treasury bills
3-month
6-month
1-year
Commercial paper
1-month
3-month

Mid-Oct
lows

FOMC.
Nov 16

Change to Dec 14. 1993
Dec 14

From Mid-Oct From FOMC.
Nov 16
lows

3.19

3.07

3.00

2.93

2.92
2.96
3.06

3.01
3.09

3.09
3.24

3.04
3.25

3.23

3.37

3.49

3.22
3.22

3.13
3.23

3.15
3.40

3.35
3.35

3.06
3.06
3.11

3.08
3.22
3.23

3.08
3.32
3.35

3.25
3.26
3.37

.17
-.06
.02

3.31
3.31

3.06
3.25

3.00
3.31

3.19
3.25

.19
-.06

6.00

.00

4.38
6.40

4.06
5.19

4.45
5.66

4.59
5.82

7.29

5.78

6.17

6.29

-14
.16
.12

6.31

5.41

5.69

5.60

-.09

8.06

6.79

7.27

7.36

.09

7.84
5.15

6.74
4.14

7.12
4.28

7.14
4.25

.02
-.03

-.14

-.07
-.05
.01
.12

.22
.12

.20
-.05

3
Large negotiable CDs
1-month
3-month
6-month
4
Eurodollar deposits
1-month
3-month
Bank prime rate
INTERMEDIATE- AND LONG-TERM RATES

U.S. Treasury (constant maturity)
3-year
10-year
30-year
5
Municipal revenue
(Bond Buyer)
Corporate--A utility.
recently offered
6
Home mortgages
FHLMC 30-yr. fixed rate
FHLMC 1-yr. adjustable rate
Record high
From

Stock exchange index
Level
Dow-Jones Industrial

3764.43
260.48
787.42
4701.68

NYSE Composite

NASDAQ (OTC)
Wilshire

Date

Low.

Jan. 3

12/13/93 2144.64
10/15193 154.00
10115/93 378.56
10/15/93 2718.59

1. One-day quotes except as noted.
2. Average for two-week reserv maintenance
period closest to date shown. Last observation
is average to date for maintenance period ending
December 22. 1993.
3. Secondary market.

FOMC.

Nov 16

3710.77
257.80
771.69
4642.64

Dec 14
3742.63
256.19
751.47
4593.41

From

record

1989

high

low

-. 58
-1.65

-4.57
-2.30

74.51
66.36
98.51
68.96

4. Bid rates for Eurodollar
deposits at 11 a.m. London time.
5. Most recent observation based on
one-day Thursday quote and futures
market index changes.
6.. Quotes for week ending Friday
previous to date shown.

From FOMC.

Nov 16
.86
-. 62
-2.62
-1.06

Selected Interest Rates*
(percent)
Short-Term

Statement
Week Averages

1
FOMC

tins

3-amrth T-

*.."•..A.".d**a•l*nmT *°4
Fedew

1998

1990

1991

1992

1993

1994

Lb112

*
11/19

*
16
193

,Funs IV

12/3

12110

Wwe-y

-q 9

FOMC
11it

Cpo**M

sond

(--My)

fYearT.Bentf
1YwT4mS

1 1 10-Yen
T-Nm

1989

199

1991

1992

1993

*Statement weeks are plottedd
through Dec8; Friday weeks
Dec 10, 1993.

through

1112

t11
I

11/26
19n1

120

12/10

DOMESTIC FINANCIAL DEVELOPMENTS

The federal funds rate has remained near 3 percent and longterm interest rates are up about 10 to 15 basis points on net since
the November FOMC meeting.

Early in the intermeeting period, the

yield on the thirty-year Treasury bond moved up about 20 basis
points, as incoming readings suggested a vigor to the economy that
sparked concerns about upcoming credit demands and the potential for
a pickup in inflation.

This rise was subsequently retraced, partly

in response to the drop in oil prices, but yields have turned up
again more recently.

Private rates have generally moved in line

with Treasuries, except for those on below-investment-grade
corporate bonds and on tax-exempt bonds, which have declined
slightly.
Most major stock indexes are down between 1 and 3 percent over
the intermeeting period.

The exception is the Dow Jones Industrial

Average, which is up from the November FOMC meeting and currently
near a record high.

Reflecting higher commodities prices, basic

materials stocks posted increases, while energy sector stocks have
declined on the weakness in oil prices.
M2 strengthened in November as Ml growth remained brisk and
savers cut back on purchases of bond funds at least partly in favor
of additional investments in money market mutual funds.

Faster

growth in M2 showed through to M3 which was also boosted by a surge
in term Eurodollar deposits.

Both M2 and M3 are now somewhat above

the lower bounds of their annual targets.
Incoming information suggests that net borrowing by the
nonfederal sectors is growing at a moderate pace.

The strongest

credit demands this quarter have come from households; consumer
credit evidently is continuing to expand at a brisk pace, while

III-2
MONETARY AGGREGATES
(Based on seasonally adjusted data except as noted)

19921

1993
Q22

1993
Q32

1993
Sep.

1993
Oct.

Aggregate or component
Aggregate

1993
Nov.
(pe)

1992:Q4
Level
to
(bil.)
Nov. 93 Oct. 9,
(pe)

Percentage change (annual rate)
---

---

14.3
1.7
0.2

10.5
2.2
2.3

12.9
3.1
1.2

4. Ml-A

13,7

13.1

14.2

16.5

9.3

705.9

5.
6.

9.1
18.0

9.7
16.0

11.6
17.2

14.6
18.5

6.8
11.2

6
17

10%
13%

318.2
379.9

7. Other checkable deposits

15.4

6.3

10.7

8.6

12.4

410.2

8. M2 minus M13

-2.7

-1.3

-1.1

-0.3

-3.6

-2%

2418.9

2.7

-10.3

36.1

50.6

35.3

-5.2
-0.1
14.5
-15.8
-5.8
14.8
-22-1

-0.7
-0.4
4.6
-7.9
-4.3
0.7
-10.4

-0.6
-1.0
5.3
-10.7
-4.0
2.9
-12.7

-6.8
-0.1
5.1
-8.5
-5.2
1.1
-13-4

10.4
0.8
2.0

10%
1%
X

1116.1
3535.0
4184.6

Selected components

9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.

Currency
Demand deposits

Overnight RPs and Eurodollars,
n.s.aGeneral-purpose and brokerdealer money market funds
Commercial banks
Savings deposits
Small time deposits
Thrift institutions
Savings deposits
Small time deposits
43 minus M2 1
Large time deposits
At commercial banks 4
At thrift institutions
Institution-only money market
mutual funds
Term RPs, n.s.a.
Term Eurodollars, n.s.a.

-6.7
-16.5
-15.8
-19.5

18.2
7.9
-22.6

3.3

-9.0

2.2
-2.9
1-2
-9.8
-5.4
0.0
-12.5

14
1
8
i10
-6
-1
-12

84.0

-2
-1
4%
-8%
-5%
1
-12%

333.0
1250.1
778.0
472.0
755.1
431.6
323 -

1.1

8.4

2.2
3.1
0.0

-7%
-7%
-8%

334.4
271.3
63.1

-5%
17%
8

196.6
95.0
46.0

-1.7
0.1
-10.3

-8.4
-8.8
-6.8

-5.7
-7.1
-1.9

0.4
38-8
7.7

-12.6
25.6
-31.9

5.0
-1.2
32.7

15.5
-15.0
18-5

Average monthly change (billions of dollars)
Memo

24. Managed liabilities at com'l.
banks (lines 25 + 26)
25.
Large time deposits, gross
26Nondeposit funds
27.
Net due to related foreign
institutions
28.
other 5
29. U.S. government deposits at
commercial banks 6

-2.1
-4.6
2.5

4.2
-1.0
5.3

8.3
-5.7
14.0

6.6
-4.2
10.8

4.3
0.0
4.3

-10

2.7
-0.2

2.4
2.9

11.2
2.8

4.4
6.4

5.0
-0.7

-3
-7

-0.5

2.4

-0.6

-5.2

-7.5

-1

. . -

717.5
335.5
382-0

.
.

123.6
258.4

16.7

1. 'Percentage change* is percentage change in quarterly average from fourth quarter of preceding year to
fourth quarter of specified year. "Average monthly change* is dollar change from December to December,
divided by 12.
2. 'Percentage change" is percentage change in quarterly average from preceding quarter to specified quarter.
*Average monthly change* is dollar change from the last month of the preceding quarter to the last month of
the specified quarter, divided by 3.
3. Seasonally adjusted as a whole.
4. Net of holdings of money market mutual funds, depository institutions, U.S. government, and foreign
and official institutions.
5. Borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the
Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items). Data are partially estimated.
6. Treasury demand deposits and note balances at commercial banks.

III-3
rising housing starts and sales probably kept home mortgage debt
growing at a good clip.

Business and state and local government net

borrowing appears to be subdued, with the backup in interest rates
from the October lows also damping refinancing activity in these
sectors.
Monetary Aggregates and Bank Credit
After pausing in October, the monetary aggregates grew
appreciably in November.

M2 expanded at a 5 percent rate, boosted

by double-digit growth in its Ml component and a step-up in flows to
money market mutual funds.

Growth in Ml was spurred last month by the recent wave of
mortgage refinancings. 1

Beyond its Ml components, only money

funds and commercial bank savings deposits added significantly to
the expansion of M2 last month.

M2-type money funds, which grew at

a 14 percent pace, likely benefitted from a slowdown in inflows to
long-term bond funds.

Returns on these funds were hit by the

decline in bond prices after mid-October.

Net purchases of bond

fund shares fell sharply in November from October's rapid
$12 billion pace.

The weakening in bond funds, however, was not

reflected in strength in time deposits, which continued to run off
at a rapid pace.
M3 increased at a 4 percent annual rate in November largely on
the strength of M2, after posting a 2 percent rate of growth in
October.

A spike in term Eurodollar deposits, one of the more

volatile components, also contributed to the expansion in M3.
Bank credit grew at a 6 percent annual rate in November after

1. Although applications for refinancings evidently have fallen
off in recent weeks, closings on earlier applications will remain
high for a few months.

III-4
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT1
(Percentage change at annual rate, based on seasonally adjusted data)

Type of credit

Dec.
1991
to Dec.
1992

1993
Q2

1993
1993
Q3
Sep.
billions)
($

1993
Oct.

1993
Nov. p

level,
Nov.
1993 p

Commercial bank credit
5.5

1. Total loans and securities
at banks
Securities

11.3

7.9

7.8

-5.5

1.9

899.7

13.1

8.3

9.1

-4.0

2.2

718.9

6.2

2.6

180.8

4.5

2.3

7.9

2,172.3

586.4

4.4

921.2

9.1

383.3

U.S. government

17.5

Other

-1.1

Loans

Business

Real estate

Consumer

-1.8

Security

18.4
1-2

10.

Other

3,072.0

13.0

6.1

-3.2

-1.1

-1.6

-5.5

-11.2

3.7

3.8

8.6

4.5

12.8

44.9

62.2

43.7

-48.0

112.1

86.6

12.0

-2.2

-1.8

-1.2

1.9

194.8

2.1

Short- and intermediate-tenm business credit
-1.3

-1.9

-5.2

-31.3

-3.1

-1.4

-3.0

14. Commercial paper issued by
nonfinancial firms

9.5

15.8

;

15. Sum of lines 13 and 14

-.8

2.0

11.

Business loans net of bankers
acceptances

-3.3

12. Loans at foreign branches 2
13. Sum of lines 11 and 12

16. Bankers acceptances, U.S.
trade-related3,4

-16.9

17. Finance company loans to
business 4
18. Total (sum of lines 15, 16,
and 17)

-14.2

-. 4

-. 5

1.0

2.2
-11.1

-3.9
-22.2

-1.2
5.7

1.5

22.5

577.

21.7

-1.0

2.4

599.3

-8.9

-. 7

160.4

-2.7

1.7

759.7

11.5

-5.7

n.a.

21,0

-4.6

1.6

3.0

-.1

-1.5

n.a.

305.8

1,085.4

1. Except as noted, levels ae averages of Wednesday data and percentage changes are based on averages of Wednesday data; data are adjusted for breaks caused by reclassification; changes are imaured
fran preceding period to period indicated.
2. Loans to U.S. firnn made by foreign branches of dsametically chartered banks.
3. Acceptances that finance U.S. imports, U.S. exports, and dccestic shipment and storage of
goods.
4. Changes are based on averages of month-end data.
5. October 1993.

p Preliminary.
n.a. Not available.

III-5
being flat in October.2

The expansion reflected a pickup in loan

growth, which posted its most rapid monthly rate since July, and a
rebound in securities acquisitions, albeit at a pace considerably
below that of the first three quarters of 1993.

Much of the

acceleration in bank loans was the result of very rapid growth in
the volatile security loan category.
The expansion of consumer loans on bank balance sheets slowed
from October's rapid pace, but, adjusted for securitizations,
consumer loan growth was still over 10 percent, about the rate
recorded in the third quarter.

Real estate loans continued to

increase at about the moderate rate of the previous two months.
Bank commercial and industrial loans were little changed in
November, as they had been in October.

Net of bankers acceptances

and including loans at foreign branches, however, business loans
rose at more than a 2 percent annual rate.

Lending by large banks

rose after four months of runoffs, consistent with a slackening in
the refinancing of bank loans with corporate bonds in response to
the backup in market interest rates.

November's Survey of Terms of

Bank Lending to Business. recent Senior Loan Officer Surveys and
other evidence continues to suggest that banks are becoming somewhat
more accommodative in their terms and standards on business loans.
According to call report data. banks increased their holdings
of municipal securities in the second and third quarters, after
having allowed these assets to run off since 1986.

The runoff was

in response to a provision in the Tax Reform Act that largely
eliminated the ability of banks to deduct interest for carrying taxexempt securities.

The recent net purchase of these securities

2. Growth in October was pulled down by Nationsbank's spinoff of
its primary dealer into a Section 20 affiliate; absent that shift,
bank credit would have expanded at about a 3-1/2 percent pace for
the month.

III-6

Delinquency and Charge-Off Rates at Large Banks, SA
(By Type of Loan)
Delinquency rates
Percent
Real estate

..-

Consumer

.II

~,
I

1982

1983

1984

1985

1986

1987

1988

1989

1990

.. .' ..I
~,~.
L
1991
1992 1993
E

Charge-off rates

Percent
Consumer

S·

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

III-7
appears to be partly in response to the unusually high ratio of taxexempt to taxable yields that has prevailed since mid summer.
Evidence on improving credit quality of bank asset portfolios
continues to accumulate.

Delinquencies on real estate and consumer

loans have fallen to the levels of the late 1980s. while rates for
business loans have reached a low for the more than ten-year time
span such data have been available (chart).

Charge-off rates have

also declined from their peaks.
Business Finance
Available data suggest that overall short- and
intermediate-term borrowing by nonfinancial firms has been subdued
in recent months.
about flat.

Issuance of nonfinancial commercial paper was

Together, bank business loans and commercial paper grew

at around a 1-1/2 percent annual rate, down slightly from the pace
recorded in the second and third quarters.

Finance company business

loans rose at a 1-1/2 percent annual rate in October, the most
recent month for which data are available.

Finance company lending.

while still somewhat sluggish, has been the strongest component of
short- and intermediate-term credit over the past few months, with
growth concentrated primarily in the equipment and auto leasing
sectors.
Gross public issuance of bonds by nonfinancial corporations
dropped in November to around $11 billion from October's $17 billion
rate.

Thus far in December. issuance appears to be around its

November pace.

The backup in long-term rates after mid October

appears to have slowed refinancing activity somewhat.

Although junk

bond issuance declined from its heavy October pace, it remains
strong.

Junk bond yields, in contrast to investment-grade bonds,

are little changed from two months ago, as spreads have narrowed
significantly.

Market participants report that substantial inflows

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS 1
(Billions of dollars: monthly rates, not seasonally adjusted)
-------------------- 1993-----------1991

All U.S. corporations
Stocks 2
Bonds
Nonfinancial corporations
Stocks 2
Sold in U.S.
Utility
Industrial
Sold abroad
Bonds
Sold in U.S.
Utility
Industrial
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown

1992

Q 3p

SEPP

OCTp

NOVp

32.14
5.90
26.24

40.81
7.04
33.77

50.18
8.30
41.48

57.41
11.91
45.50

65.64
11.74
53.90

55.32
12.67
42.65

50.15
12.35
37.80

4.09
3.71
0.43
3.28
0.38

4.42
4.03
0.87
3.16
0.39

5.01
4.73
0.99
3.75
0.27

6.21
5.11
1.05
4.05
1.10

6.46
5.79
1.39
4.40
0.67

6.23
5.21
1.25
3.96
1.02

7.31
6.73
1.62
5.12
0.57

10.52
9.52
2.99
6.54
1.00

13.65
12.81
5.33
7.47
0.84

16.28
15.32
7.25
8.08
0.96

15.35
14.43
7.64
6.79
0.92

14.13
12.53
7.65
4.88
1.61

17.40
16.80
6.80
10.00
0.60

11.18
11.00
4.60
6.40
0.18

1.89
6.61
1.01
0.02

2.18
7.73
2.84
0.09

2.71
8.57
4.00
0.05

1.86
8.70
3.60
0.11

2.16
7.67
1.95
0.26

3.73
6.96
5.95
0.16

1.77
6.76
2.45
0.02

1.81
1.73
0.08

2.62
2.51
0.11

3.69
3.52
0.18

5.63
4.73
0.91

5.09
4.61
0.48

6.40
5.29
1.12

4.78
4.41
0.37

15.72
14.39
1.33

20.13
18.67
1.46

25.20
22.45
2.75

30.15
27.29
2.86

39.77
36.48
3.29

25.25
23.20
2.05

26.62
24.00
2.62

1.83
5.48
0.11
0.02

1.55
6.77
0.31
0.04

1.77
8.07
0.44
0.05

2.98
8.01
0.55
0.08

2.10
8.65
0.19
0.03

2.50
8.00
0.47
0.03

1.50
6.70
1.01
0.01

Financial corporations
Stocks 2
Sold in U.S.
Sold abroad
Bonds
Sold in U.S.
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown.

1. Securities issued in the private placement market are not included. Total
reflects gross proceeds rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
3. Bonds categorized according to Moody's bond ratings, or to Standard and Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
p Preliminary.

III-9
to junk bond mutual funds over the last two months have sustained
robust demand for below-investment-grade issues.

Gross public

offerings of junk bonds are likely to top $50 billion this year,
versus the previous record of $42 billion in 1986.

Not included in

the total for the public market is perhaps another $6 to $7 billion
of public-like junk bond issuance in 1993 in the private, Rule 144A,
market. 3

Recently, firms have been taking advantage of the speed

with which their bonds can be offered in the private market and then
exchanged for otherwise identical publicly registered bonds in a
formal exchange offer.

This "registered exchange" technique for

accessing the public junk market has supplanted the traditional
method whereby private bonds are publicly registered with the SEC
and which involves much more burdensome regulatory requirements.
Gross public issuance of equity by nonfinancial firms hit a
record high in November at more than $6-1/2 billion and appears to
be almost as strong so far in December.

Volume in November was

buoyed by a number of large issues and strength in initial public
offerings (IPOs).

IPOs by nonfinancial firms exceeded $2 billion in

November. the highest for this year, and the IPO calendar reportedly
remains heavy.

Nonfinancial IPO volume this year has already

surpassed that in 1992.

Unlike previous years, however, only a

small proportion of total IPO issuance has been in the form of
reverse LBOs. spin-offs or divestitures by large firms: the bulk of
issuance has been from smaller companies tapping the public markets
for the first time (table).

The staff estimates that the surge in

gross equity issuance by nonfinancial firms in the fourth quarter is
likely to be roughly matched by increased retirements related to an

3. Rule 144A, adopted by the S.E.C. in 1990, permits unrestricted
secondary trading of private placements among sophisticated
institutional investors. Securities firms have since begun to
underwrite private placements on a firm commitment basis, sparking
the development of the new 144A market.

III-10
uptick in merger and acquisition activity; net equity issuance is
thus projected to remain around its heavy third-quarter annual rate
of $30 billion.

PUBLIC GROSS DOMESTIC NONFINANCIAL EQUITY ISSUANCE
(Billions of dollars, annual rates)
1993

1.
2.
3.

1990

1991

1992

4.0

11.9

15.0

15.2

22.6

3.2
.8

6.0
5.9

93
5.7

123
2.9

17.8
4.8

12.4

44.5

48.4

54.8

64.1

Total IPOs
Small company IPOs
Other IPOs

Memo:
4. Total equity issuance

H2*

*Data through November at an annual rate.
1. Reverse LBOs, spin-offs, divestitures and carve-outs.
Source: Federal Reserve Board

In response to a glut of new real estate investment trust
(REIT)

issues and the backup in

rates,

REIT prices have fallen,

damping investor enthusiasm for one of the hottest markets in the
second half of the year.

Several proposed REIT offerings have

recently been pulled from the market.
surging in recent months.

REIT equity issues had been

REIT offerings were $400 million in the

first six months of the year but have since topped $6 billion in the
second half of the year through November.

Until recently, equity

REIT managers reportedly had been aggressively acquiring more real
estate assets to take advantage of the perceived demand for REIT
offerings.
Reflecting the desire of financial institutions to slim
their balance sheets by year-end, issuance of asset-backed
securities

(ABS) was also strong in November, with a number of large

offerings backed by credit card receivables.

The ABS calendar

III-11
reportedly remains heavy, but the widening of spreads over
treasuries that typically has occurred prior to the year-end has yet
to materialize.
Municipal Securities
Gross offerings of tax-exempt bonds totaled an estimated
$16.2 billion in November, down sharply from $21.5 billion in
October, as a runup in municipal bond rates in October and early
November put a dent in refunding volume.

Yields have since declined

a bit, but remain well above the lows of October and, consequently,
refunding volume has continued at a slower pace in December, as has
overall issuance.

Even if interest rates were to decline

significantly next year. the strong refunding activity witnessed in
the market this year has almost certainly run much of its course;
the vast majority of high coupon debt outstanding has already been
refinanced, and federal law limits most municipal bonds to only one
refunding.

GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)
1993
1991
Total offerings 1
Total tax-exempt
Long-term
Refundings
New capital
Short-term
Total taxable

1992

Sept

Oct p

Nov p

16.68

21.78

33.67

29.16

28.02

24.29

17.07

16.26
12.87
3.12
9.75
3.39

21.21
17.93
7.91
10.02
3.28

32.76
26.01
18.58
7.43
6.75

28.65
23.90
15.37
8.53
4.75

27.65
23.35
14.53
8.82
4.30

23.47
21.51
14.05
7.46
1.96

16.77
16.19
10.23
5.96
.58

.42

.57

.91

.51

.37

.82

.30

1. Includes issues for public and private purposes.
2. Includes all refunding bonds, not just advance refundings.
p -- preliminary.

III-12
The Municipal Securities Rulemaking Board has moved to end the
use of political contributions by dealers to influence the awarding
of business in negotiated offerings of new securities.

Under a rule

adopted in November, which also must be reviewed by the SEC. a
municipal securities dealer would not be allowed to conduct business
with any issuer for two years after the dealer or any of its
employees in its public finance unit made a contribution to an
official of the issuer.

The rule has drawn protests from numerous

elected officials and local governmental associations that are
concerned about its infringement on participation of individuals in
the electoral process.
This action by the MSRB is in response to ongoing
investigations of political influence peddling involving the
selection of underwriters and the awarding of business in negotiated
offerings.

The allegations of wrongdoing first surfaced last

spring, and since then a number of state and local governmental
units have announced plans to rely more heavily on competitive
offerings.

Only recently, however, have the first signs of these

plans become apparent.

In October and November, the dollar volume

of competitive offerings jumped to about 30 percent of all long-term
issuance, up from about 20 percent over the first nine months of the
year.
Competitive offerings are, however, unlikely to supplant
negotiated offerings altogether.

Underwriters indicate, for

example, that most advance refundings and offerings containing
derivative securities would have lower underwriting spreads in
negotiated offerings.

Such issues require considerable time and

expense for an underwriter to bring to market: if sold
competitively, commissions would likely increase to compensate for
the added risk of not winning the bidding.

Similarly, offerings of

III-13
infrequent and lesser-known borrowers would be more costly to issue
competitively because of the considerable pre-marketing effort
required to sell them.

Finally, negotiated offerings provide

issuers with greater flexibility to control the timing of issues.
which can be crucial in producing targeted interest savings in
advance refundings.
Treasury and Sponsored Agency Financing
The staff anticipates that the Treasury will finance the
projected $97 billion fourth-quarter budget deficit by borrowing
$88 billion in the market and by allowing the cash balance to
decline $15 billion.

With the elimination of the seven-year note

and the absence of a thirty-year bond from the November mid-quarter
refunding, the Treasury has relied heavily on bills, which are
expected to raise $56 billion this quarter.

Gross sizes of Treasury

bill auctions had been boosted from $23.6 billion at the beginning
of the quarter to $27.6 billion, although recent auctions have
fallen to $26 billion.

In contrast, the Treasury has raised only

slightly the size of coupon auctions and, in the case of the 5-year
issues, left them unchanged.
The latest data on STRIPS indicate that net stripping of
Treasury coupon securities averaged about $1-1/2 billion in October
and November, following net reconstitutions of $5 billion in
September.

Nevertheless, the most recent pace is well below the

$5-1/4 billion rate registered for the first eight months of the
year.

The strips market has been supported in part by strong

municipal bond defeasance demand for intermediate maturities and by
a demand for securities with long durations.
Congress has approved an additional $18.3 billion for the RTC
to resolve the remaining sixty-four RTC conservatorships and any
failures of SAIF-insured thrifts during the next twelve to eighteen

III-14

TREASURY FINANCING1
(Total for period: billions of dollars)
1993
Q3

Q4p

Oct.

-54.5

-97.1

-45.3

-42.8

Net cash borrowing
from the public

46.0

88.2

4.3

71.7

12.2

Marketable borrowings/
repayments (-)

44.5

84.8

3.3

69.7

11.8

-.9

56.3

10.3

40.5

5.5

45.4
1.6

28.5
3.3

-7.0
.9

29.2
2.0

6.3
-.4

8.1

14.8

33.6

-13.5

-5.4

52.5

37.7

18.9

32.3

37.7

-5.9

7.4

-15.5

Nov.p

Dec.p

Treasury financing
Total surplus/deficit (-)

-9.0

Means of financing deficit:

Bills

Coupons
Nonmarketable
Decrease in the cash
balance
Memo: Cash balance
at end of period
2
Other

2.2

1. Data reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
p-Projected.
NOTE: Details may not add to totals due to rounding.

FEDERALLY SPONSORED CREDIT AGENCIES
Net Cash Borrowing
(billions of dollars)
1993
FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA
FAMC

0.5
11.6
-0.5
0.3
-0.9
0.0

12.0
-5.6
10.7
0.1
0.1
0.0

5.3
17.1
19.3
0.0
-0.1
0.0

Jul.
-1.8
6.7
4.2
0.0
-1.1
0.0

Aug.
4.4
13.1
4.2
-0.2
0.6
0.0

Sept.
2.8
-2.7
10.9
0.2
0.4
0.0

1. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
2. Federal Agricultural Mortgage Corporation.

III-15
months.

The RTC is expected to use $8 to $12 billion to resolve

the remaining conservatorships; any leftover funds can be passed on
to SAIF under certain conditions.

One condition is that the FDIC

Chairperson certify that SAIF members are unable to pay higher
deposit insurance premiums without suffering adverse consequences,
and that the premium increases could reasonably be expected to
result in greater losses to the government.

The legislation also

permits the SAIF insurance fund to receive an additional $8 billion,
subject to Congressional appropriation, if these same conditions are
met.
Mortgage Markets
Contract rates on conventional fixed-rate mortgage loans are
about unchanged from the November FOMC meeting.

In the adjustable-

rate mortgage sector, the average initial rate on conventional loans
indexed to the Treasury one-year constant maturity yield has risen
about 8 basis points from a series low of 4.17 percent set in early
November.

However, the spread over the one-year Treasury yield has

narrowed, continuing the trend that began in late 1992, and
reflecting the need for ARM lenders to price adjustable-rate loans
fairly aggressively to offset the popularity of fixed-rate loans in
the current low interest rate environment.
The rise in the Mortgage Bankers Association's index of
purchase loan mortgage applications in the early autumn (chart),
along with other indicators of housing activity, point to growth in
total mortgage debt in the fourth quarter at around the stepped-up
pace of the previous quarter.

Available data show that real estate

loan growth at commercial banks averaged about 4-1/2 percent on a
seasonally adjusted basis in October and November, up slightly from

4. The Chairperson of the Thrift Depositor Protection Board will
select a date between January 1, 1995, and July 1, 1995, after which
the RTC can no longer accept conservatorships.

III-16

MBA Index of Purchase Loan Applications
March 16, 1990 - 100

JFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFM
1990
1991
1992
1993
1. Seasonally adjusted by Federal Reserve Board Staff.

MORTGAGE-BACKED
(Monthly Avrages,

billions

SECURITY ISSUANCE
NSA unless noted)
of dollars,

3.1
5.1
8.5
12.9

3.2
3.4
6.0
11.0

28.3
27.0
32.9
43.6

9.9
10.6
12.3
17.1

12.9
6.8
10.6
12.6

37.5
48.2
45.1
38.6

14.6

10.2
17.2
10.5
14.3

19«9
1990
1991
1992

17.4
20.1
23.7
40.1

14.0
17.2
20.2
34.7

7.4
10.6
18.1
30.4

1992 Q4
1993 01
02
03 r

47.4
39.8
42.9
53.7

41.4
33.2
37.8
45.9

1993 Jul
kug a
Sep I
Oct I

54.0
48.6
56.5
56.3

47.3
42.5
47.8
49.4

1.
2.
p

Collateralized by adjustable-rate mortgages.
Collateralized by fixed-rate mortgages.
Preliminary.
r Revised.

.6
1.4
2.6
5.3

16.5
20.2
14.3

.4
.7
1.1
1.3

III-17
the third quarter.

In the third quarter, total mortgage debt

outstanding grew at an estimated 6 percent annual rate, the largest
quarterly rise in 2-1/2 years. and was led by growth of about
8 percent in the single-family category.

In addition, the runoff in

mortgage debt outstanding on commercial properties slowed, while
mortgage debt on multifamily and farm properties edged higher.
In the secondary mortgage market, gross issuance of agency
pass-through securities has remained on a record pace so far in the
fourth quarter (table).

Issuance has been spurred by continued

heavy refinancing activity.

With large numbers of borrowers

refinancing into fixed-rate loans, a sizable volume of conforming
loans has been available for pooling.

However, with mortgage rates

up from their lows recorded earlier in the fall, applications for
refinancings have begun to diminish (chart).

Monthly data from

Freddie Mac's Primary Mortgage Market survey also show a drop-off in
refinancing applications.
Delinquency rates on home mortgages declined in the third
quarter, according to seasonally adjusted data from the MBA (chart).
As measured by mortgages over thirty days past due, delinquency
rates are now at their lowest level since the third quarter of 1974.
The less volatile sixty-day past due measure also edged down in the
third quarter.
The Federal Housing Finance Board announced last month that the
national average single-family house price in October 1993 was down
3.2 percent from a year earlier.

Federal law requires that

increases in the maximum size of home loans that may be purchased or
securitized by Fannie Mae and Freddie Mac be based on movements in
this series.

However, the law does not say that decreases in the

price series must also be matched by Fannie and Freddie.

III-18

Refinancing Indicators
(Not seasonally adjusted)
Percent of Applications

March 16, 1990 . 100
1800

1500

1200

900

600

300

0
1991

1992

1993

Home Mortgage Delinquency Rates at All Lenders
(Seasonally adjusted, quarterly averages)
8

0
1973
1969
Source: Mortgage Bankers Association.

1977

1981

1985

1989

1993

III-19
Consequently, both agencies have announced that they will retain the
current limit of $203.150, despite the drop in the home price index.
Consumer Credit
Consumer installment credit outstanding increased at a
12-3/4 percent seasonally adjusted annual rate in October,
continuing the brisker growth of the past few months.

Auto credit

more than doubled its third-quarter pace to grow at a 17-1/2 percent
annual rate, while revolving credit advanced at a 13-3/4 percent
rate, somewhat less rapidly than in the third quarter.
The resurgence in consumer installment credit has come later
than usual in the current economic expansion, and even the recent
pace has still been well below peak rates reached during earlier
expansions (chart).

Growth in installment credit normally starts to

climb in the first or second quarter of a recovery, reaching growth
rates of 15 to 20 percent at some point in the expansion.

During

the current upturn, installment credit continued to contract through
the fifth quarter of recovery; its growth rate did not attain double
digits until this latest reading.
An unusually slow pickup in spending on consumer durables was
the principal factor underlying the sluggish behavior of installment
credit in the early stages of the current expansion (chart).5

recent months, durable goods consumption has turned stronger,
providing a stimulus to growth in installment credit once again.
The effect of stronger sales on debt growth has been bolstered
by several other expansive influences (chart).

Interest rates on

5. Credit growth was also curtailed somewhat--up to an estimated
2 percentage points at an annual rate in some quarters--by shifts to
alternative means of finance, mainly home equity credit and
automobile leasing. Historically wide spreads in 1992 between
average interest rates consumers were paying on outstanding loans
and the interest rates they could earn on new financial assets
apparently further delayed the upturn in consumer debt, as some
people elected to pay down debts with maturing assets rather than
roll them over at extremely low yields.

III-20
CONSUMER CREDIT

(Seasonally adjusted)
Memo:
Outstandings
(Billions of
dollars)

Percent change
(Annual rate)
1993
_____1990

1991

Installment
Auto
Revolving
Other

2.0
-2.7
12.1
-.8

.7
-8.4
9.5
-1.0

Noninstallment

-4.6 -15.1

Total

1.5

-1.8

1993

0 3r

1.0
-.5
4.4
-.8

3.1
4.4
7.1
-3.1

8.6
8.0
15.7
.9

9.6
8.4
13.1
6.7

12.7
17.5
13.8
5.4

776.7
274.6
276.9
225.2

3.0

1.9

-8.7

34.6

-25.7

50.3

1.2

3.0

7.5

11.1

10.3

827.0

1992

Oct p

1. Components may not sum to totals because of rounding.
r Revised.
p Preliminary.

CONSUMER INTEREST RATES
(Annual percentage rate)
1993

91 0

129921

19921

Feb.-

May

I Aug.

Nov-

At commercial banks

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

11.78
15.46
18.17

11.14
15.18
18.23

9.29
14.04
17.78

8.57
13.57
17.26

8.17
13.63
17.15

7.98
13.45
16.59

...
...
...

7.63
13.22
16.30

12.54
15.99

12.41
15.60

9.93
13.79

10.32
13.90

9.51
12.61

9.21
12.48

9.25
12.58

..
..

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 middle month of each quarter.
2. For monthly data. rate for all loans of each type made during the month
regardless of maturity.
Note: Annual data are averages of quarterly data for commercial bank rates and of
monthly data for auto finance company rates.

III-21
CONSUMER INSTALLMENT CREDIT
(Percent change, seasonally adjusted annual rate)

Quarterly

Percent

1963

1968

1973

1978

1983

1988

1993

CONSUMER DURABLES CONSUMPTION, INCREASE FROM RECESSION TROUGH
Percent

Average of five previous expansions

T+2

T+8

T+10

III-22
FACTORS AFFECTING CONSUMER DEBT GROWTH

Consumer Interest Rates (banks)

1981

1985

1989

Loan Delinquency Rates

Percer

1993

Percer

1981
1985
1989
Staff esmnm s of schd•uled paymt at princip
and inuwtt retMoe
dapoabW paersona••
orne.

Bank Willingness to Lend

1993

IndE

AXt

1981

1985

1989

1993

1981

1985

1989

'Weied msponu of bwrts nn wmnm
g a tend
asMles w"l"ng lend.
tr"nu

1993

III-23
most types of consumer loans have dropped substantially over the
past few years (upper left panel).

Rates on auto loans at banks

averaged about 7-1/2 percent in November, based on survey data.
about 2-1/2 percentage points under the low recorded in 1972 shortly
after the series was begun.

Even the series on credit card rates,

which has typically shown very little movement, by November had
dropped 2 percentage points from its recent high in early 1991.6
The subdued growth of both mortgage and consumer debt over the
past few years combined with declining mortgage and consumer
interest rates, has reduced the ratio of scheduled debt service
payments to disposable income by nearly 2-1/2 percentage points from
the historical highs of late 1989 (upper right).

As a result,

individuals may feel more comfortable about taking on new debt
again; indeed, in recent months, the University of Michigan's survey
of consumer sentiment has indicated a fairly sharp rise in the
proportion of respondents willing to use credit.

Declining trends

in consumer loan delinquency rates (lower left), which suggest that
the burden of debt has eased in the household sector, likely have
had a favorable impact on lender attitudes as well.

According

to Senior Loan Officer Opinion Surveys, banks have significantly
increased their willingness to make consumer loans since early last
year (lower right).

6. The actual drop has probably been a bit larger than 2
percentage points, but the way the series is measured has not fully
captured the effect of lower rates that many card issuers have made
available to selected subsets of their customers. The selectively
lower rates generally have been based on good payment performance
and level of activity. The Board's survey obtains information only
on the "most common" rate charged by each respondent bank, and that
rate is usually the higher rate charged on the bank's standard plan.
A proposal to modify the report form to collect more comprehensive
data is currently in process.
7. The charted series is taken from bank call reports and the
Board's survey of auto finance companies. In addition, the American
Bankers Association series on delinquency rates showed a further
decline in the third quarter to levels not seen since the mid 1980s.

III-24
Another factor contributing to the surge this year in
revolving credit has been the heavy promotion of credit cards with
rebates and other incentives tied to the volume of transactions.
For example, outstanding debt on the General Motors MasterCard.
through which credits of up to $500 per year can be accumulated
towards purchase of a GM vehicle, increased from $2.8 billion in
April to around $4.8 billion at the end of October.

This $2 billion

expansion amounts to about 12 percent of the growth in total
revolving credit over that time.

APPENDIX

GROWTH OF MONEY AND CREDIT IN 1993

Summary
The broad monetary aggregates advanced in 1993 at about the
same sluggish pace as in 1992, even though nominal income growth
slowed and the earlier stimulative effects of falling short-term
interest rates were largely absent. From the fourth quarter of 1992
through November, M2 grew 1-1/2 percent, somewhat above the lower
bound of its 1 to 5 percent growth range. M3 grew 1/2 percent, also
somewhat above the lower bound of its 0 to 4 percent growth range.
Both ranges had been lowered at mid-year in light of the extent and
persistence of increases in velocity. With the slowdown in nominal
GDP, though, the rise in the velocities of the broader aggregates,
which had surged in 1992, moderated. As in 1992, M2 growth was held
down by massive flows into stock and bond mutual funds. Credit
growth at depositories remained lackluster in 1993, although a bit
higher than in 1992, and deposit rates fell further in response to
earlier declines in market rates. M3 was damped as well by banks
and thrifts turning to nondeposit sources for a larger share of
their funds. Although flows into transaction accounts slowed, as
opportunity costs edged up. M1 growth remained brisk.
From the fourth quarter of 1992 through October, domestic
nonfinancial debt expanded at a 4-3/4 percent annual rate, about the
same as last year, placing it in the bottom half of its 4 to
8 percent monitoring range. Federal debt, though scaled back from
last year, continued to grow faster than the total. Nonfederal debt
expanded at a slightly higher rate than last year, but growth
remained moderate by recent historical standards. Business debt,
which was essentially unchanged last year, edged up less than
1 percent, as investment expenditures were met by equity issuance
and internal cash flow. The trend of household borrowing, on the
other hand, turned up noticeably in the latter part of 1993. All
nonfederal sectors took advantage of the further decline in longterm interest rates by refinancing large amounts of existing debt.
M1
Ml continued to expand rapidly in 1993. but at a rate below
last year's near-record pace. Nonetheless, growth in Ml outstripped
growth in nominal GDP by a substantial margin for the third
consecutive year. With short-term market interest rates little
changed since last fall. the opportunity cost of holding demand
deposits held steady in 1993. The opportunity cost of other
checkable deposits rose, damping their growth, as offering rates
continued to fall in a lagged response to the earlier declines in
market rates. In 1992. by contrast, declines in market rates had
lowered opportunity costs and added to Ml growth. Again in 1993. a
large volume of mortgage refinancings raised the level and growth of
Ml. as mortgage servicers placed prepayments in demand deposits
until the funds were passed on to investors. Currency continued to
grow briskly in 1993. surging in the third quarter, as the effect of
shipments of currency abroad peaked. before beginning to slow early
in the fourth quarter. Even adjusted for various special factors
boosting Ml growth, the income velocity of this aggregate continued
to decline.
III-A-1

III-A-2

The monetary base expanded at about the same double-digit rate
as in 1992, buoyed by the rapid growth in currency, its main
component. The growth of total reserves was robust but
significantly slower than last year, as required reserves
decelerated along with transaction deposits.

M2 fell at a 1-3/4 percent annual rate in the first quarter of
1993, the first quarterly decline since the official series began in
1959. This exceptional weakness resulted from a sharp slowing in
liquid deposit growth. in part related to a temporary lull in
mortgage refinancing, large runoffs of M2 money fund assets,
continued declines in small time deposits, and some distortions in
seasonal factors.
Although M2 recovered to grow at a
2-3/4 percent rate over the remainder of the year, growth from the
fourth quarter of 1992 through November 1993 was 1-1/2 percent, in
line with last year's weak performance.
Within the non-M1 portion of M2, the pattern of the past two
years--increases in savings deposits and declines in small time
deposits--continued in 1993, but at reduced speeds partly because of
changes in opportunity costs. The rate of expansion of savings
deposits slowed dramatically, in part because rates offered on
savings continued to fall, in a lagged adjustment to previous
declines in market rates, while short-term market rates held steady.
Through November 1993, small time deposits ran off at about half the
rate for 1992 as a whole. Offering rates on these deposits edged
down further over the year, but, for maturities over one year, did
not keep pace with declines in intermediate-term market rates.
Through November, the non-M1 portion of M2 ran off further, as
M2 deposits continued to be diverted to the capital markets by
investors seeking higher yields. Net inflows to stock and bond
mutual funds occurred at about the same rate as last year. but
greater capital gains accounted for a noticeable acceleration in the
total value of these funds. These M2 substitutes now amount to
about $700 billion, almost as much as total small time deposits. In
part, this rechanneling of intermediation outside the depository
sector was facilitated by banks, themselves, as they sought new
sources of fee income and actively promoted the sale of mutual funds
to retail customers. Although the recent backup in market rates has
raised investor awareness of possible capital losses, and apparently
has slowed inflows to bond mutual funds, the sum of M2 plus retail
bond and stock mutual funds expanded at an estimated 6 percent rate
through November, up from the 4-1/4 percent rate for all of last
year.

M3
M3 also declined in the first quarter of 1993, but recovered to
grow at a 2 percent rate over the rest of the year. On balance.
growth from the fourth quarter of 1992 through November was
1/2 percent, about 1/4 percentage point above last year's pace.
Depository credit accelerated, but was not fully reflected in M3
growth since much of the additional credit growth was funded from
1. Policy easing in late 1990 and late 1991 engendered subsequent
increases in money growth that affected the seasonal factors used to
adjust incoming data for 1993. The upcoming annual revision of
seasonal factors likely will modify the first-quarter decline in M2.

III-A-3
sources not in this aggregate. Further hikes in premiums for
deposit insurance, associated with the implementation of risk-based
premiums in January, and continuing incentives to boost capital
contributed to this shift. At banks, for example, increases in
total deposits funded about one-sixth of the 1993 expansion of
credit through November. Increases in nondeposit sources accounted
for about one-half, as branches and agencies of foreign banks
substantially boosted their net borrowing from related foreign
offices and both banks and thrifts made more use of advances from
Federal Home Loan Banks. Increases in residual sources of funds
accounted for about one-third.
M3 growth was also held down by
a contraction in institution-only money market mutual funds.
In 1993, thrift assets ran off more slowly than in 1992. as the
health of the industry continued to improve and the trend toward
consolidation eased somewhat. RTC resolutions, which were quite
subdued in 1992, slowed even further as the agency was hampered by a
lack of funds. Bank lending picked up in 1993. Throughout the year
evidence emerged that banks were easing standards and terms on
business loans, particularly for larger, more creditworthy
borrowers. Even so. growth in business loans was retarded as firms
used internal funds and the proceeds of capital market issues to pay
down existing bank loans. Banks did, however, garner a substantial
share of increased credit demands by consumers.
Domestic nonfinancial debt
Through October 1993, domestic nonfinancial debt grew at a
4-3/4 percent annual rate, about at last year's pace. Reduced
growth in federal debt, from 10-3/4 percent in 1992 to 8-1/4 percent
so far this year, slightly outweighed a pickup in nonfederal debt
growth.
Through the first three quarters of 1993, household sector debt
grew at about the 5-3/4 percent annual rate recorded for 1992 as a
whole. Home mortgage borrowing rose over the year, as housing
construction and home sales picked up. Consumer credit ran well
above the depressed pace of 1992.
Nonfinancial business debt grew only slightly, after almost no
growth in 1992. Investment expenditures by corporations as a group
exceeded internally generated funds, leading to a slight increase in
external financing needs. Borrowing, however, was held down again
in 1993 by new issues of stock, which exceeded retirements by a wide
margin. Declines in long-term interest rates for most of 1993
provided firms with'further opportunities to substitute long-term
for short-term borrowing and to refinance higher-cost bonds. The
recent backup in long rates seems to have slowed activity in the
bond market somewhat.
Stimulated by low interest rates; gross debt issuance by state
and local governments rose to record levels this year. The bulk of
gross issuance was for refunding, however, leaving net borrowing
down from last year.

2. Residual sources include equity capital and other liabilities
minus cash assets, and other assets.

MONETARY AND CREDIT AGGREGATES
(Q4 to Q4 averages, seasonally adjusted unless otherwise noted)
Memo:
Recent
1
1989

1990

1991

1992

.6
4.7
3.7
7.8
7.5
-4.3

4.3
4.0
1.8
6.6
5.6
-8.1

8.0
.2.8
1.1
4.6
3.4
-11.0

14.3
1.7
.2
5.0
3.8
-5.4

4.5
10.1
-8.3
2.8

33.6
24.2
-1.7
10.2

65.9
20.4
9.3
36.5

Nontransactions M2
Savings & MMDAs
Samll time deposits
M2 money funds 2/
Overnight RPs 3/
Overnight Eurodollars 3/

145.0
140.5
-45.8
120.5
73.2
-7.5
.5

128.8
95.1
35.0
21.8
35.7
-1.8
4.3

Non-M2 component
Large time deposits
M3 money funds 4/
Term RPs 3/
Term Eurodollars 3/

142.6
-2.5
28.2
16.2
-16.4
-23.9

74.7
-53.9
-53.3

Aggregate

Growth

(percent)

Ml
M2
M3
Domestic nonfinancial debt
Bank credit
Thrift credit
Flow

10.7
1.6
.6
4.7
4.7
-3.1

1125.7
3547.9
4198.8
12178.9
3081.7
1314.3

127.3
24.3
51.8
50.6

108.5
29.9
46.5
32.4

1125.7
319.9
385.3
412.6

92.9
27.1
109.0
-90.6
14.7
-6.6
1.2

59.0
-68.3
150.2
-200.7
-18.8
.8
1.2

54.2
-54.3
35.6
-92.2
-7.2
13.2
-3.5

3547.9
2422.2
1214.6
788.1
336.9
67.9
17.2

45.1
-47.9
-64.6
44.1
-18.9
-7.3

9.9
-49.1
-71.5
31.8
5.9
-13.7

26.7
-27.5
-28.2
-10.7
13.9
3.3

4198.8
650.9
332.6
196.7
94.5
50.3

($ billions)

Ml
Currency
Demand deposits
Other checkable deposits
M2

1.
debt.
2.
3.
4.

1993

1993 1
levels
($ billions)

23.6

-13.2
-10.7

For monetary aggregates and bank credit, through November; for domestic nonfinancial
through October: for thrift credit, through September.
Assets of general purpose and broker/dealer money market mutual funds.
Not seasonally adjusted and net of holdings by money market mutual funds.
Assets of institution-only money market mutual funds.

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
Merchandise Trade
The merchandise trade deficit in September was $10.9 billion
(seasonally-adjusted, Census-basis).

slightly larger than in August.

The deficit for the third quarter as a whole was marginally larger
than in the second quarter.
Thursday, December 16,

Data for October will be released

and will be included in the Greenbook

supplement.
U.S. MERCHANDISE TRADE:
MONTHLY DATA
(Billions of dollars, seasonally adjusted. Census basis)

Total

Exports
NonAg.
Ag.

Total

Imports
NonOil
Oil

Balance

1993-Jan
Feb
Mar

37.5
36.9
38.9

3.5
3.7
3.6

34.0
33.3
35.3

45.2
44.8
49.3

4.2
4.1
4.5

40.9
40.8
44.9

-7.7
-7.9
-10.5

Apr
May
Jun

38.5
38.9
37.6

3.7
3.6
3.4

34.7
35.3
34.2

48.7
47.3
49.7

4.9
4.6
4.8

43.7
42.7
44.9

-10.2
-8.4
-12.1

Jul
Aug
Sep

37.1
38.1
38.9

3.6
3.4
3.6

33.5
34.6
35.2

47.5
48.1
49.8

4.4
4.0
4.3

43.2
44.1
45.5

-10.4
-10.0
-10.9

Source:

U.S. Department of Commerce, Bureau of the Census,

Exports rose 2 percent in September, but declined 1 percent
for the quarter as a whole.

The decline in the third quarter

primarily reflected a temporary drop in shipments of aircraft, along
with smaller declines in exports of automotive products and fuels.
In the automobile industry, model change-over and labor negotiations
affected both imports and exports in the third quarter, as shipments
between U.S. companies and their affiliates in Canada and Mexico
fell in July and then returned to more normal levels in August and
September.

Small gains were recorded in other export categories in

the third quarter, particularly consumer goods, computers,
semiconductors, and other machinery.

IV-1

By area, the largest declines

IV-2
MAJOR TRADE CATEGORIES
(Billions of dollars, BOP basis, SAAR)

Year
1992

1992
03

1993
Q2

Trade Balance

-96.1

Total U.S. Exports

440.1

438.0

456.0

446.1

452.5

Agric. Exports
Nonagric. Exports

44.0
396.1

44.7
393.3

45.5
410.4

43.4
402.7

Industrial Suppl.
Gold
Fuels
Other Ind. Suppl.

101.8
4.5
13.6
83.7

102.3
3.6
13.5
85.2

104.5
7.2
13.4
83.8

Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery

176.9
37.7
28.8
110.4

173.3
33.4
28.8
111.1

Automotive Goods
To Canada
To Other

47.1
23.8
23.2

Consumer Goods
Other Nonagric.

-110.4 -103.8 -117.2

-137.5 -145.1

Change
Q3-Q3 03-Q2
-34.7

-7.6

447.6

9.7

-4.8

43.1
409.4

42.4
405.2

-2.3
11.9

-0.7
-4.1

102.6
6.4
12.6
83.6

103.5
7.5
12.5
83.4

104.6
9.2
10.5
84.8

2.3
5.6
-3.0
-0.4

1.1
1.7
-2.0
1.4

182.0
37.1
30.0
114.9

177.8
33.1
28.8
115.9

183.3
36.4
28.0
118.8

178.6
27.1
29.6
122.0

5.3
-6.3
0.7
10.9

-4.6
-9.3
1.5
3.2

47.8
24.2
23.6

50.9
25.6
25.4

51.2
26.4
24.8

51.3
27.1
24.2

48.4
25.9
22.4

0.6
1.7
-1.1

-3.0
-1.2
-1.8

50.4
20.0

51.0
19.0

53.3
19.7

51.5
19.6

52.2
19.1

54.3
19.4

3.3
0.4

2.1
0.3

Total U.S. Imports

536.3

548.4

559.8

563.4

590.0

592.8

44.3

2.8

Oil Imports
Non-Oil Imports

51.6
484.7

57.2
491.2

54.9
505.0

51.0
512.3

57.3
532.7

50.3
542.4

-6.8
51.2

-6.9
9.7

88.6
3.8

88.3
2.7

93.5
6.7

94.1
5.3

98.8
8.4

103.4
11.6

15.1
8.9

4.6
3.2

4.6
80.3

5.0
80.6

4.7
82.1

4.5
84.2

4.8
85.6

5.5
86.4

0.4
5.8

0.6
0.8

134.2
12.6

137.8
12.3

141.8
13.0

142.6
10.5

150.7
11.8

152.7
10.5

14.9
-1.8

2.0
-1.3

31.8
89.8

33.6
91.9

34.6
94.2

35.9
96.2

37.2
101.7

39.1
103.1

5.5
11.2

1.9
1.4

Industrial Suppl.
Gold
Other Fuels
Other Ind. Suppl.
Capital Goods
Aircraft & Parts

Computers & Parts
Other Machinery

91.8

95.1

100.5

102.1

100.1

8.4

-2.0

From Canada
From Other

31.7
60.1

31.6
60.2

32.3
62.8

36.8
63.7

36.9
65.2

37.0
63.1

5.5
2.9

0.1
-2.1

Consumer Goods
Foods

123.0
27.9

126.7
28.1

126.5
27.6

128.9
27.4

132.9
27.5

138.3
28.4

11.6
0.3

5.4
0.8

19.3

18.5

20.6

18.9

20.6

19.4

0.9

-1.2

Automotive Goods

All Other
Source:

U.S. Department of Commerce, Bureau of Economic Analysis.

IV-3
in exports were to Canada (only part of which was automobiles) and
to Western Europe, reflecting continuing weakness in the continental
economies.
A 3 percent rise in imports in September was spread across all
major trade categories.

For the third quarter as a whole, imports

rose slightly, despite a sharp drop in the value of imported oil.

nearly $2 per barrel decline in oil prices accounted for almost all
of the 12 percent fall in the value of imported petroleum.

Non-oil

imports rose moderately, as small increases in imports of consumer
goods, computers, semiconductors, steel, and foods offset declines
in imports of aircraft and autos.

By area, a fall in non-oil

imports from Canada was partially offset by increased imports from
Asia, particularly China and Japan.
OIL IMPORTS
(BOP basis, seasonally adjusted annual rates)
01
Value (Bil. $)
Price ($/BBL)
Quantity (mb/d)
Source:

1993
02

Jun

Months
Aug
Jul

Sep

51.04
16.44

57.28
17.07

50.34
15.23

57.91
16.67

52.24
15.60

47.57
15.17

51.22
14.91

8.50

9.19

9.05

9.51

9.17

8.59

9.41

U.S. Department of Commerce, Bureau of Economic Analysis.

Oil Imports.

The quantity of oil imports reported by the

Commerce Department rebounded in September, returning to rates last
seen in June.

However, preliminary data for September from the

Department of Energy (DOE) indicate a drop

in quantity in September.

The two data sources have different geographic coverage, and the
discrepancy between the two suggests large stockbuilding activity in
Puerto Rico and the Virgin Islands.

Preliminary DOE data for

October show a large increase in oil imports on the strength of
stockbuilding in the continental United States.

IV-4
IMPORT AND EXPORT PRICE MEASURES
(percent change from previous period, annual rate)
Year
1993-03
1992-03

Quarters
1993
Q1
Q2
(Quarterly Average, AR)

-------------------Imports. Total
Foods, Feeds, Bev.
Industrial Supplies
Ind Supp Ex Oil
Capital Goods
Automotive Products
Consumer Goods

Months
1993
Sep
Oct
(Monthly Rates)

BLS Prices--------------------

-1.2
2.2

-5.1
-5.5

3.3

-6.6
-1.2

-9.2

4.5

-0.1
1.8
0.8

-1.9
-4.4
-2.8
-3.1

0.1
1.9

-2.4
2.5

5.1
2.3

-16.2
0.5

-23.6
-3.3

0.5

1.2

4.2
0.2
-0.3
0.9
1.5

5.7
1.9
1.6
-0.7
1.2
3.1

3.8
0.1

5.6
0.6

-3.1
8.7
-16.2

1.8
1.0

0.1
0.7
-0.4
0.2
0.0
0.3
0.3

0.6
1.1
0.2
-0.3
0.5
1.5
0.3

12.3
2.5

-35.3
1.4

-1.2
0.3

1.3
0.5

1.6
0.7

0.2
15.1
-3.0
-2.9

-0.1
-0.4

-0.7
-0.5

-0.5
0.2
0.3
0.1

0.0
-0.4
-0.4
-0.3
0.0
0.6
0.1

14.8
-1.4

-0.6
0.0

-0.3
0.0

3.2

Memo:
Oil
Non-oil

Exports. Total
Foods, Feeds, Bev.
Industrial Supplies
Ind Supp Ex Ag
Capital Goods
Automotive Products
Consumer Goods

4.7
5.6
0.1

0.5
0.3

-0.1

-0.5

Memo:
Agricultural
Nonagricultural

-1.4
1.9

------------- Prices in the NIPA Accounts-----------Fixed-Weight

Imports, Total
Oil
Non-oil
Exports, Total
Ag
Nonag

-1.1
-17.8
0.7
0.7
4.3
0.3

-28.9
-2.8

4.0
16.0
3.2

1.1
4.8

-2.1

0.4

2.6

-5.2

1.8

-3.2

-36.4
0.7

0.0
17.3
-2.2

Deflators
Imports. Total

Oil
Non-oil
Exports, Total
Ag
Nonag

-5.4

16.1
0.4

-6.6
-36.8
-3.1

-1.1
5.3
-1.6

0.8
-3.7
1.2

-5.0
9.7
-6.4

-3.6
-17.9
-2.0

-7.8
28.8

-1.5
3.8
-2.0

1.6

IV-5
The September drop in the oil import unit value continued the
decline that began in June.

Since the last Greenbook, spot and

futures oil prices have fallen about $1.50 per barrel; the near-term
West Texas Intermediate contract on the New York Mercantile Exchange
is currently trading at $14.52 per barrel.

The recent weakness in

oil prices stems from sluggish demand and strong production.

As a

result of these developments, the oil import unit value is likely to
continue to decline, reaching roughly $13.30 per barrel in December.
Prices of Exports and Non-oil Imports
Non-oil import prices (BLS) rose 0.5 percent in October, the
largest monthly increase since the preceding October.

The biggest

part of this increase was accounted for by automotive products, the
prices of which rose 1-1/2 percent at a monthly rate (passenger cars
rose 2-1/2 percent), reflecting the introduction of 1994 models.
This was partially offset by a drop in prices of non-oil industrial
supplies, particularly a continuing decline in prices of unfinished
metals.
Non-agricultural export prices remained unchanged on balance in
October.

The increase in export prices of automotive products was

offset by decreases in the prices of foods and industrial supplies,
particularly metals other than iron and steel.

Prices of

agricultural exports declined for the second consecutive month.
U.S. Current Account
The U.S. current account deficit in the third quarter of 1993
was $111.9 billion (seasonally-adjusted, annual rate), slightly
larger than the second quarter.

A worsening of the trade deficit

along with a small decline in the surplus on services outweighed a
sizeable increase in the surplus on net investment income.

IV-6
The merchandise trade deficit increased for the third
consecutive quarter, as exports declined and imports rose slightly.
The surplus on services transactions fell slightly, due to both
small increases in services payments (primarily services of
affiliated firms and financial services) and a small drop in
receipts (largely a reduction in military exports).
Net investment income receipts rose by $6.8 billion (SAAR) from
the second to the third quarter.

Receipts on U.S. direct investment

abroad increased, mostly as a result of increased earnings for
manufacturing affiliates in Latin America, while payments on foreign
direct investment in the United States fell, reflecting a decrease
in operating earnings by manufacturing affiliates in the United
States.

Receipts on U.S. portfolio assets abroad increased, while

payments on foreign assets in the United States declined.
U.S. Current Account
(Billions of dollars, seasonally adjusted annual rates)
Trade Services Investment Transfers
Balance
net
Income, net
net
Year
1990
1991
1992

Current Acct.Bal.
Ex Special
Pub.
Grants 1/

-109.0
-73.8
-96.1

30.7
45.9
56.4

20.3
13.0
6.2

-33.8
6.6
-32.9

-91.9
-8.3
-66.4

-89.0
-45.6
-67.6

1992-1
2
3
4

-71.1
-99.2
-110.4
-103.8

56.2
54.6
61.1
53.7

17.7
3.6
6.8
-3.2

-29.6
-32.0
-28.6
-41.4

-26.7
-73.0
-71.1
-94.7

-28.5
-76.0
-71.1
-94.7

1993-1
2
3

-117.2
-137.5
-145.1

58.5
57.8
56.4

-0.1
0.2
7.0

-30.3
-29.2
-30.2

-89.2
-108.7
-111.9

Quarters

1/ Excludes foreign cash grants to the United States to cover
costs of the war in the Persian Gulf. These grants amounted to $4.3
billion in 1990, $42.6 billion in 1991, and $1.3 billion in 1992;
they are shown in the accounts as positive unilateral transfers.
Also excludes special U.S. grants to foreign countries amounting to
$7.2 billion in 1990 and $5.2 billion in 1991.
Source:
U.S. Department of Commerce, Bureau of Economic Analysis.

IV-7
U.S. International Financial Transactions
Banks reported large capital inflows in October of nearly $19
billion (line 1 of the Summary of International Transactions table).
More than three-fourths of the total was accounted for by inflows
into foreign agencies, branches, and their IBFs.

Monthly-average

data for November indicate that the inflows have not continued.
(See lines 1 and lb of the International Banking Data table).
In October, there were large net flows in all categories of
private security transactions (lines 2a, 2b and 2c of the Summary
table).

At $9.1 billion. U.S. net purchases of foreign stocks and

bonds continued high by historical standards, but fell off from the
August and September levels (line 2c); declines in the rate of
accumulation of foreign bonds more than accounted for the change.
Purchases of foreign stocks remained strong, with notable purchases
in Europe, Asia, and Latin America.

Foreign net purchases.of U.S.

stocks were also very strong (line 2b); $4.4 billion was the highest
monthly addition to foreign holdings since 1987.

Foreign net

purchases of U.S. corporate and agency bonds picked up to $9.1
billion; almost half of the total was for U.S. agency bonds, while
net purchases of lower yielding U.S. Treasury obligations were
minuscule.
Direct investment flows in the third quarter were heavily
influenced by changes in companies' financing patterns.

Capital

outflows associated with U.S. direct investment abroad moderated to
$5.6 billion (line 6); however, the overall figure was reduced by
approximately $5 billion by a one-time transaction between an
affiliate in the United Kingdom and its U.S. parent.

Direct

investment inflows into the United States were very modest at $1.9

IV-8

SUMMARY OF U.S.

INTERNATIONAL TRANSACTIONS
(Billions

1992

of dollars)

Year

1992
Q4

1993
Q2

35.8

-0.9

-6.7

-0.2

24.2

-21.1

-6.8

-17.5

-9.9

-29.5

8.5

6 4

14.8

4.2

3.9

0.4

-51.9

-19.5

-27 8

-25.1

37.4

21.4

14.2

-0.5

3811

11.4

17.3

1993

Aug.

Sept.

Oct.

26.1

-5

18.9

-5.2

-6.6

4.4

14.6

5 6

7 6

9 1

2.8

2.5

0.8

4 4

Private Capital

Banks
1.

Change in net foreign
1
positions of banking offices
in the U S

(+ - inflow)

Securities
2

Private securities
2

transactions, net
a) foreign net purchases
(+) of U S. corporate bonds
b)

foreign net purchases
(+) of U.S. corporate stocks

c) U.S. net purchases (-) of
foreign securities
3. Foreign net purchases (+) of U.S.
Treasury obligations

-46.9
3.8

-13.3

-15.0

-9.1

14.1

-13.9

0.7

11.2

8.8

-1.7

Official Capital
4
Changes in foreign official
reserves assets in U.S

- increase)

-4.7

-1.9

17,8

6 8

5.8

OPEC

1.7

0.5

-1.7

-3.1

-1.2

-0 1

All other countries

7.9

12.7

1.2

12.3

4 5

3.2

G-10 countries

Changes in U.S

18.5
19.7

-7.4

1.1

5.7

18.9

8.4

6.4

2.5

12.4

10.3

11.7

-0.5

L 8

2.5

-4.2

3.9

1.5

-1.0

1.5

-0.1

n.a.

official reserve

assets (+ * decrease)
S
Other transactions (Quarterly data)
6
U S. direct investment (-) abroad
7

Foreign direct investment

Other capital flows

U S

10.

9.1

By type

U S. Treasury securities
4
Other
5

By area

1-)in U.S.
6

(. - inflow)

current account balance

Statistical discrepancy

-34.8

-11.5

2.4

3.1

16.9
-66.4

-3 4
-23.7

-12.2

15.3

-8.3
8.6
12.7

-11.5
10.3

-0.5

-5.6
1.9

6.1

9.8

-27.2

-28.0

8.9

14.1

5.5

-29.3

-34.4

-36.3

-22.3

MEMO:

U S

merchandise trade balance -- part

of line 9

iBalance

of payments basis,

seasonally adjusted)
1

-96.1

-26.0

Includes changes in positions of all depository institutions,

bank-holding companies,

and certain transactions

between brokers/dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements.)
2. These data have not been adjusted to exclude commissions on securities transactions and, therefore, do not match
exactly the data on U.S.

international transactions as published by the Department of Commerce.

3 Includes all U S. bonds other than Treasury obligations.
4 Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other
securities.
5 Seasonally adjusced.
6. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other
banking and official transactions not shown elsewhere.

In addition, it

includes amounts resulting from adjustments to

the data made by the Department of Commerce and revisions to the data in lines 1 through 5 since publication of the
quarterly data in the Survey of Current Business.

--Less than $50 million.
NOTE:

Details may not add to total because of rounding.

INTERNATIONAL BANKING DATA 1/
(Billions of dollars)

1991

1992

1993

Dec.

Mar.

June

Sept.

Dec.

Mar.

June

1. Net claims of U.S.
banking offices
(excluding IBFS)
on own foreign
offices and IBFS
a. U.S.-chartered
banks
b. Foreignchartered
banks

-35.8

-41.4

-56.8

-58.1

-71.6

-77.1

12.4

3.2

8.3

12.8

17.0

-48.3

-44.6

-65.1

-70.9

2. Credit extended to
U.S. nonbank
residents by
foreign branches
of U.S. banks

23.9

23.3

24.5

102.9

100.3

91.2

3. Eurodollar holdings
of U.S. nonbank
residents 2/

Sept

Oct.

Nov. 3/

-80.4

-114.6

-123.1

-120.6

8.9

16.8

12.5

6.7

6.4

-88.6

-86.0

-97.2

-127.1

-129.8

-127.0

24.8

23.5

23.1

21.4

21.6

21.9

86.3

90.0

89.5

86.1

77.0

78.3

81.0

1/ These data differ in coverage and timing from the overall banking data incorporated in the international
transactions accounts. Line 1 is an average of daily data reported to the Federal Reserve by U.S. banking
offices. Line 2 is an average of daily data. Line 3 is an average of daily data for the overnight component
and an average of Wednesday data for the term component.
2/ Includes term and overnight Eurodollars held by money market mutual funds.
3/ Through November 29.

IV-10
billion, as a large number of affiliates reduced intercompany debts
to their foreign parents (line 7).
The statistical discrepancy for the third quarter was a
moderate $5.5 billion (line 10).

For the first three quarters of

the year, however, the cumulative statistical discrepancy has
mounted to over $28 billion.

A significant factor contributing to

the positive 1993 total has been a pickup in net shipments of U.S.
currency abroad by banks;

these shipments are not captured in the

balance-of-payments accounts.
Foreign Exchange Markets
The weighted average value of the dollar, shown in the chart,
traded in a narrow range during the intermeeting period, and ended
the period up 1/2 percent on balance.

The dollar rose by nearly 2-

1/2 percent against the yen, 1-1/4 percent against the Canadian
dollar, and 1/2 percent against the mark.
The yen declined on weak industrial production data, a poor
Tankan report, and heightened expectations for further monetary
easing.

This monetary stimulus is expected in part because of the

government's apparent inability to swiftly pass further fiscal

stimulus measures.
The Canadian dollar weakened on news that the 1993 and 1994
budget deficits in Canada would be much greater than had been
previously projected, and on rumors that the Province of Ontario's
debt would be downgraded.
The more dramatic exchange rate movements during the period
were within the EMS where the French and Belgian currencies
appreciated to trade within their 2-1/4 percent exchange bands
against the mark.

The French franc rose on recent progress in the

GATT negotiations that has reduced the likelihood that France will
be isolated within the European Community.

The Belgian currency

IV-11
strengthened after the government introduced a social pact designed
to reduce the Belgian debt and deficit.

The Belgian franc

appreciated even though the central bank has allowed short-term
rates in Belgium to decline 125 basis points.
In the rest of Europe short-term interest rates declined 10 to
50 basis points as the Bundesbank and other European central banks
guided their money market intervention rates lower.

Long-term rates

in Europe declined 10 to 40 basis points, reflecting the declines in
short term rates and reflecting further evidence of economic
weakness.

In Japan, short and long-term rates declined 25-40 basis

points in response to expected Bank of Japan easing and further
signs of economic deterioration.
The table below the exchange rate chart is a new addition to
greenbook that presents data on spot and futures three-month
interest rates for Germany and Japan.

Abstracting from liquidity

premia and costs of carry, the three-month futures rate is the
market's expectation of the three-month Euro-interest rate on the
settlement date.

The table is useful for examining whether economic

developments during the period have caused market participants to
revise the expected path of monetary easing that is embedded in
three-month futures rates.
For example, the table shows that although spot three-month
rates declined in Germany, neither these rate declines nor other
economic developments during the intermeeting period substantially
altered the expected path of three-month German interest rates
through June 1994.

By contrast, developments during the

intermeeting period did cause market participants to revise down the
expected path of three-month Japanese interest rates, by nearly 40
basis points through June 1994. and by more through December 1994.

IV-12

WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR

September

October

November

March 1973 - 100

December

3-MONTH SPOT AND FUTURES EURO-CURRENCY
DEPOSIT RATES

Spot
March 1994
June 1994
September 1994
December 1994

11/16/93

12/14/93

Change

11/16/93

12/14/93

Change

2.31
2.17
2.17
2.24
2.32

2.06
1.84
1.79
1.79
1.79

-0.25
-0.33
-0.38
-0.45
-0.53

6.13
5.37
4.91
4.70
4.54

6.00
5.47
4.90
4.52
4.52

-0.13
0.10
-0.01
-0.18
-0.02

IV-13
Equity markets

in Japan declined 4 to 5 percent during the

intermeeting period on evidence of continued economic weakness.
Japan's

stock market was highly volatile during this

period in part

because mixed comments by government officials have led to on-again
off-again speculation over whether the government would take steps
to prevent the stock market from falling.

Equity markets in most

European countries rose modestly during the intermeeting period.

Developments in Foreign Industrial Countries
Output has been rising in all of the foreign major industrial
countries in recent quarters, although early indications for the
fourth quarter suggest a return to negative growth in Japan and
Germany.

In Japan, real GDP increased in the third quarter,

reversing a second-quarter decline.

Output in western Germany,

France, and the United Kingdom grew moderately in the third quarter
following similar increases in the second quarter.

Canada's

relatively fast pace of growth slowed in the third quarter, and
output growth in Italy appears to have slowed from its high secondquarter rate as well.

Most foreign industrial countries have seen

small declines in inflation in recent months.
Individual Country Notes.

In Japan, real GDP rose 2.0 percent

(s.a.a.r.) in the third quarter after falling by the same amount in
the second quarter.
increase.

Domestic demand accounted for most of the

A moderate increase in private consumption and a surge in

residential investment more than offset the continued decline of
private non-residential investment.

The growth of public

investment, an important factor in slowing the decline of output in
previous quarters, fell from almost 18 percent in the second quarter

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

1992
------

1993

Latest
three

-.----- -------------------------.

months

1993
..-------------------

from

1991

1992
|

i JUL

year
AUG

SEP

OCT

NOV

ago 2/

JAPAN
GDP
IP

3.6
-1.8

-0.3
-7.7

-0.3

0.9

-0.5

0.5

-2.8

0.4

-1.5

0.1

2.7

0.0
-4.6

-1.0

-1.6

0.6

0.1

-4.1

-2.9

-0.0

0.7

-0.8

1.3
2.1

0.6
-2.5

-0.4
-2.2

-0.7
-1.0

0.2
-0.5

0.2
0.4

0.5

0.0

-0.3

0.5

0.0

-0.3

-1.6
-0.8

0.2
-0.5

0.3
0.6

0.5
0.1

0.5
1.0

0.6
1.0

1.0

1.7
-0.3

-0.3
-3.1

-0.5

-0.1

0.8

-0.3

-1.0

NA
0.6

-1.4

1.5

1.2

*-0.2

-0.2

-1.2*

-1.2

2.2

*-5.1

0.5

-5.1

-4.4

WEST GERMANY
GDP
IP

2.2

0.0

-1.4

*-0

-0.4

-5.0

FRANCE

GDP
IP

*
NA

-0.7

-3.3

UNITED KINGDOM
GDP
IP

-0.1

0.1

1.9
2.2

*0.7

0.7

ITALY
GDP

-1

-0.6
-2.1

CANADA
GDP
IP

-0.1

0.8

-1.1

1.9

0.7
1.5

0.8
1.9

0.9
0.8

0.6
0.8

3.9
3.2

1.4
1.6

0.2
1.4

0.5
0.6

0.7
0.7

-1.0

0.9

0.3

0.2

0.3

0.2

0 .4

3.0
5.1

2.8

UNITED STATES
GDP
IP

0.3
-0.3

* Data not available on a monthly or quarterly basis.
1/ Yearly data are Q4 to Q4 percent change.
2/ For quarterly data, latest quarter from a year ago.

0.7

0.9

4.6

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES

(Percentage change from previous period 1/)

1992

1993

.------------------- -------------------- .

1991

Latest
month

1993
--------------------------

1992

from

year
Q2

-0.1
-0.2

0.0
-0.9

0.0
-0.5

1.1
-1.4

AUG

SEP

OCT

NOV

0.5
-1.0

0.3
-0.6

-0.0
-0.0

-0.1
-0.2

-0.7
-0.1

0.0
-0.4

0.1
-0.5

0.2
-0.2

0.2
0.3

0.4

0.2

0.1

ago 2/

JAPAN

CPI
WPI

3.2
-1.7

0.9
-1.5

1.3
0.0

3.9
1.6

3.7
-1.9

1.1

0.5

0.9

1.8

1.0

0.4

0.5

-2.0

-0.8

0.7

0.1

-0.6

0.9
-3.4

WEST GERMANY

CPI
WPI

3.6
-0.3

FRANCE

CPI
WPI

2.9
-3.6

1.8

0.8

0.0

0.5

0.8

0.6

0.4

-0.4

-2.3

0.0

0.2
NA

0.0

-2.1

4.2
3.9

3.1
3.1

2.2
1.3

-0.1
0.1

0.4
0.7

-0.7
1.4

1.6
1.7

0.3
0.3

0.4

-0.1

0.0

0.2

0.0

1.4
3.6

6.1
1.1

4.8
3.0

1.2
0.8

0.7
-0.5

1.3
2.8

1.0
1.6

1.1
1.3

0.9
0.5

0.1

0.7

0.4

0.3

0.5
NA

4.2
6.6

4.1
-3.2

1.8
3.3

0.5
0.6

0.4
0.8

0.4
1.2

0.7
1.2

0.2
-0.0

0.4
0.5

0.1
0.5

0.1
0.2

NA
NA

1.9
2.7

3.0
-0.1

3.1
1.5

0.8
0.8

0.7
0.4

0.8
0.2

0.9
0.6

0.7
0.7

0.3
-0.7

0.3

0.0

0.4

0.6

0.2

-0.2

2.2
-2.3

UNITED KINGDOM
CPI
WPI
ITALY
CPI
WPI

CANADA
CPI
WPI

0.2
0.4

UNITED STATES
CPI (SA)
WPI (SA)

* Data not available on a monthly or quarterly basis.
1/ Yearly data are Q4 to Q4 percent change.
2/ For quarterly data, latest quarter from year ago.

0.2
0.0

2.7
0.3

TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES

(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1992
1991

1993

1992

1993

AUG

SEP

OCT

9.4
11.2

1(
1(

NOV

JAPAN
TRADE
CURRENT ACCOUNT

78.5
73.1

107.3
117.2

24.5

26.2

28.6

29.7

29.9

29.5

28.8

28.1

31.7

36.0

31.8

32.0

13.6
-19.5

21.4
-25.5

3.4
-6.4

8.6
-8.6

5.0
-5.2

5.9
-5.7

7.9
-3.8

8.1
-10.3

5.6
3.8

1.9

1.3

2.5

3.2

4.2
NA

1.7

0.1

3.9
NA

0.5

1.5

-23.4
-15.1

-5.3
-4.5

-6.1
-3.1

-6.8
-3.9

-4.7
-3.7

-3.6
NA

-0.5

8.9
9.5

GERMANY
TRADE (NSA)
CURRENT ACCOUNT (NSA)

2.2
-4.0

3.5
-1.4

NA
NA

FRANCE

-5.3

TRADE
CURRENT ACCOUNT

-5.8

-1.5

UNITED KINGDOM

TRADE

-18.3
-13.7

CURRENT ACCOUNT

-4.4
-3.6

-1.5
*

ITALY
TRADE
CURRENT ACCOUNT

(NSA)

-13.0
-21.7

-10.5
-26.8

-4.4
-5.7

-1.8
-6.8

-1.8
-4.8

4.6
-2.9

5.1
2.8

5.3
3.8

-0.0
1.8

2.0
-1.5

CANADA

TRADE
CURRENT ACCOUNT

4.3
-25.3

7.4
-23.0

1.4
-6.1

1.7
-5.6

2.9
-4.6

2.5
-5.2

2.3
-5.1

2.3
-4.8

0.6

-73.8
-8.3

-96.1
-66.4

-24.8
-18.3

-27.6
-17.8

-26.0
-23.7

-29.3
-22.3

-34.4
-26.9

-36.3
NA

11.5

0.8
*

UNITED STATES
TRADE
CURRENT ACCOUNT

* Data not available on a monthly or quarterly basis.
I/ The current account includes goods, services, and private and official transfers.

-13,0
*

IV-17
to 3.6 percent in the third quarter.

Real net exports rose strongly

as exports increased moderately and imports declined slightly.
Recent data point to a weakening of activity in the fourth
quarter.

In October, industrial production (s.a.)

declined 5.1

percent, while housing starts, machinery orders, and new car
registrations also fell.

Labor market conditions deteriorated

further in October as the ratio of job offers to applicants declined
again and the unemployment rate rose to 2.7 percent.

In September,

the index of leading indicators fell significantly below its
boom/bust demarcation line of 50.

The Bank of Japan's November

Tankan survey indicated a significant further worsening of business
sentiment regarding future economic conditions.

Moreover, firms

predicted a 7.5 percent decline in investment in the fiscal year
that began in April.

JAPANESE ECONOMIC INDICATORS
(percent change from previous period except where noted, s.a.)
1993

Q1Q3

Q4Q2

Sept.

Nov.

Oct.

Machinery Orders

16.0

-9.5

2.3

7.3

-15.2

New Car Registrations

10.7

-11.8

2.1

6.4

-11.7

5.7

Job Offers Ratio*
Index Leading Ind.*
Business Sentiment**
*

0.91
0.80 0.70
--44
46.2
75.6
-56
-51
-49
-49

0.69
36.4
--

0.67
--

Level of indicator.

** Percent of manufacturing firms having a favorable view of
business conditions minus those with an unfavorable outlook.
Consumer price inflation in the Tokyo area (s.a.) continued to
ease, registering 0.9 percent on a 12-month basis in November.

The

decline partially reflected a reversal of the surge in fresh food
prices that had boosted consumer prices over the summer.

In part

due to appreciation of the yen, wholesale prices continued to
decline in November.

IV-18
The trade surplus (customs basis, s.a.) declined to $8.8
billion in November, although the cumulative surplus to date is
running well above last year's pace.

The current account surplus

(s.a.) declined to $10.4 billion in October; the current account
surplus for the first ten months of 1993 was $132 billion (a.r.), up
from $117 billion for all of 1992.
On December 8, the lower house of the Japanese parliament
passed a second supplementary budget for the fiscal year ending
March 1994, approving 709 billion yen (less than 0.2 percent of GDP)
in borrowing that in part will finance the expenditure package
announced in September.

Continued weak activity and the plunge in

the stock market have bolstered expectations of additional
government stimulus.

On November 19, a government advisory body

recommended a cut in personal taxes to be offset subsequently by an
increased consumption tax, but did not detail the magnitude or
timing of these changes.

More recently, government officials

announced that new economic measures would be considered
simultaneously with completion of the draft budget for the 1994/95
fiscal year starting next April.

However, efforts to achieve

parliamentary approval of political reform legislation may delay
completing the budget until early next year.

On December 14, the

government scored a symbolic victory for economic reform by
announcing a limited opening of its rice markets in the context of
Uruguay Round talks.
In the third quarter, west German real GDP grew 2.6 percent (at
a calendar and seasonally adjusted annual rate) after expanding 2.3
percent in the second quarter.

Unlike second-quarter growth, which

was largely accounted for by inventory accumulation, growth in the
third quarter was broadly based.

Private consumption grew 6.8

percent after contracting in the second quarter, public consumption

IV-19
continued to fall, and total fixed investment recovered 5 percent
after a 14.4 percent decline in the second quarter.

Net exports

also made a positive contribution to growth; exports were up more
than 10 percent in the third quarter while imports declined
slightly.
Data available for the fourth quarter point to a weakening
pace of activity.

Industrial production (s.a.) fell 0.4 percent in

October after stagnating in September, although it was still
slightly above the average third-quarter level.

Unusually cold

weather in November likely reduced construction output and may have
had a negative impact on industrial production.

Real retail sales

(s.a.) plunged 3.3 percent in October and were 4.0 percent below
their year-earlier level.

The volume of new orders for western

German manufactured goods (s.a.) fell slightly in October as
domestic orders dropped 2.7 percent while foreign orders rose 4.3
percent.

The unemployment rate rose further in November.
WESTERN GERMAN ECONOMIC INDICATORS

(percent change from previous period except where noted, s.a.)
1992
Q4

Capacity Utilization

-3.1

-2.4

-0.3

-0.5

Total Orders
Unemployment Rate (%)

-7.1
7.2

-0.9
7.6

0.5
8.0

1.5
8.5

Production Plans (%)

-33.3

1993
Sep.
Nov.
Oct.

Q3
2.2
8.6

-0.3
8.9

9.0

-25.7 -21.7 -15.0 -16.0 -11.0

*Percent of mining and manufacturing firms that expect to increase
production minus those that expect to decrease it.

Consumer prices (n.s.a.) in western Germany increased 3.6
percent on a 12-month basis in November, the fourth consecutive
decline.

Wholesale, producer, and import prices remained subdued in

recent months.

Preliminary readings on upcoming wage negotiations

have been quite positive.

In the first settlement of the current

IV-20
round of wage bargaining, the insurance industry agreed on a 2
percent increase for 1994.
In October. M3 was up a revised 6.9 percent (s.a.a.r) from the
average of the fourth quarter of 1992, slightly above the 6-1/2
percent ceiling of the target range.

The Bundesbank is expected to

announce its 1995 target range on December 16,

at its last Council

meeting of the year.
On November 26. the Federal budget for 1994 and the medium-term
financial plan were approved by the Bundestag.

While the plan holds

the Federal deficit to DM 69 billion in 1994 (about 2-1/4 percent of
GDP and down slightly from a record projected deficit of DM 73
billion, about 2-1/2 percent of GDP, this year),

it is based on

optimistic assumptions about next year's economic growth, and a
supplementary budget may be needed.

Further fiscal consolidation is

projected for 1995 and 1996.
In France, GDP rose 0.8 percent (s.a.a.r.) in the third
quarter, the same as in the second quarter.

This moderate recovery

is due largely to a 2.8 percent increase in consumption.

Net

exports made a small positive contribution in the third quarter
while investments and inventories made negative contributions.
Monthly indicators suggest, on balance, that growth has slowed in
the fourth quarter.

In October, consumption of manufactured

products, equal to one third of total consumption, fell 1.2 percent,
reversing much of the third-quarter gain.

The unemployment rate

(s.a.) rose to 12 percent in October from 11.8 percent in the
previous month.
The consumer price index in November was 2.2 percent (n.s.a.)
above its year-earlier level.

The increase in inflation from an

average of roughly 2 percent in the first half of the year reflects
increases in excise taxes on gasoline, tobacco, and alcohol.

IV-21
France's trade surplus (s.a.) widened to a record $4.2 billion
surplus for the third quarter.

Imports have remained roughly

constant throughout most of the year. reflecting the continued
weakness of the economy, while exports have risen at a moderate
The cumulative surplus for the first nine months of 1993 was

rate.

about $11 billion (s.a.), well above last year's pace.
In the United Kingdom, the preliminary estimate for real GDP
growth (s.a.a.r.) in the third quarter was revised up slightly to
2.5 percent.

The U.K. recovery appears to have continued into the

fourth quarter.

Industrial production (s.a.) in October was 0.7

percent above the third-quarter average, while retail sales (s.a.)
in November were 1.2 percent above the third-quarter average.

The

unemployment rate (s.a.) edged down slightly to 10.2 percent in
October.

In November, the Purchasing Managers' Index registered

another sharp increase in output, but new orders edged down
slightly.

Business sentiment in November was up from October but

unchanged from the third-quarter average.

In contrast, consumer

confidence in November remained at the October level, which was
considerably weaker than the second-quarter average.
In November, consumer prices (n.s.a.) were 1.4 percent above
year-earlier levels.

Excluding mortgage interest payments, consumer

price inflation was 2.5 percent on a 12-month basis, the lowest rate
in over 25 years.

Producers' input prices increased rapidly after

sterling's September 1992 devaluation but have fallen subsequently,
leaving input prices in November 5.7 percent higher than in August
1992.

Increases in labor costs have moderated as well.
The cumulative trade deficit (s.a.) for the first nine months

of the year was only $17 billion (a.r.) compared with $23 billion
for all of 1992, reflecting a reduction in the deficit with other EC
countries.

In October, the trade deficit with non-EC trading

IV-22
partners (the only figures available) fell considerably from the
third-quarter average due to a surge in export volumes.
In the first change since January, the government set a minimum
lending rate of 5.5 percent on November 23 that resulted in a 50
basis-point cut in base lending rates.

On November 30, Chancellor

of the Exchequer Kenneth Clarke delivered the British government's
first budget that consolidates tax and spending measures.

For the

current fiscal year, the projected public sector borrowing
requirement (PSBR) was left unchanged at nearly -50 billion (8
percent of GDP), but for the 1994-95 fiscal year beginning in April.
it was lowered to -38 billion (6-1/2 percent of GDP), primarily
through spending cuts.

The PSBR was projected to be eliminated

entirely by the end of this decade.

The government forecast real

GDP growth at 2-1/2 percent in 1994, with underlying inflation
(excluding mortgage interest payments) remaining within the
government's 1-4 percent target.
Although the recession in Italy appears to be ending, with real
GDP having grown 3.1 percent (s.a.a.r.) in the second quarter, there
are scant signs of a strong, sustained recovery.

Industrial

production (s.a.) rose only slightly in the third quarter after
declining in the second quarter.

The unemployment rate (n.s.a.)

dipped slightly to 13.6 percent in the third quarter.

Consumer and

business confidence have remained depressed, and real retail sales
have been flat.
Weakness in economic activity has helped to restrain inflation.
In November, CPI inflation registered 4.2 percent on a 12-month
basis, down from 4.8 percent a year earlier, despite the 22 percent
effective depreciation of the lira since September 1992.
The falling lira and weak economic activity have produced a
dramatic change in the external accounts.

Although the current

IV-23
account (n.s.a.) showed a $1.5 billion deficit in September, the
surplus for the year to date totals about $4 billion compared with a
$22 billion deficit over the same period last year.
In local elections on December 5, the ex-communists won the
mayoral races in the major Italian cities, giving them strong
momentum for the national elections, which likely will be held in
early spring 1994.
Economic activity in Canada was mixed in the third quarter.
Real GDP increased 2.4 percent (s.a.a.r.), down from a revised 3.8
percent rise in the second quarter.

As in the past several

quarters, much of the growth came from exports, which increased 7.8
percent, while imports fell following two quarters of strong growth.
Domestic demand remained weak, increasing only 1.2 percent.
Consumption expenditures rose 1.3 percent, well below their growth
in the previous two quarters.

Machinery and equipment investment

grew strongly, but declines in construction restricted total
investment to a 3.2 percent increase.

Government spending fell 1.5

percent.
Conditions in the labor market improved slightly on average in
the first two months of the fourth quarter.

Total employment fell

in October but rose in November to its highest level in three years.
About half of the November increase was in full-time jobs, reversing
the loss in full-time jobs in October.

The unemployment rate (s.a.)

fell to 11.0 percent in November from its 1993 peak of 11.6 percent
in July.
The industrial product price index rose 2.7 percent on a 12month basis in October, in part reflecting the over 6 percent
decline in the Canadian dollar against the U.S. dollar in the past
year.

However, weak domestic demand has helped restrain growth in

consumer price inflation.

The 12-month increase in CPI excluding

IV-24
food and energy was just over 2 percent on average in September and
October.
Paul Martin, the new Minister of Finance, announced that the
federal budget deficit for fiscal year 1992-93 was C$41 billion
(nearly 6 percent of GDP), considerably above the C$33 billion
estimate of last spring.

For fiscal year 1993-94, the deficit is

expected to increase to about C$45 billion.

Martin also announced a

revised official forecast for real GDP growth in 1993 of 2.5
percent, down from the previous estimate of 2.9 percent.
Economic Situation in Other Countries
Output growth slowed in a number of countries in the third
quarter.

Among major developing economies, only Korea appears to

have had stronger economic growth than in the previous quarter.
Mexico has largely surmounted the foreign exchange crisis
suffered before the vote on NAFTA.

Brazil signed an agreement with

creditor banks to restructure its $35 billion commercial bank debt.
It remains unclear, however, whether Brazil will qualify for an IMF
program, which would facilitate the implementation of the package by
the April deadline.
Venezuela elected a new president, Rafael Caldera.

Caldera

campaigned against recent free-market reforms and hinted that he may
seek to renegotiate foreign debt payments.

On December 12, Russians

approved a new constitution and elected members of a new
legislature.
Individual country notes.

Mexico has largely overcome the

foreign exchange crisis that erupted in early November over concerns
about the fate of NAFTA.

The peso. which had depreciated 4 percent

against the dollar at the height of the turmoil, is now back at its
end-of-October level.

Treasury bill rates, which rose sharply as

exchange-market pressures increased, fell to new lows for the year

IV-25
in mid-December.

The 28-day Treasury bill rate was 11.85 percent at

the auction of December 15, down 119 basis points from the October
27 level.

The stock market index, which fell 4 percent from late

October to early November, closed December 14 more than 16 percent
above its pre-crisis level.
Real GDP was 1.2 percent lower in the third quarter than in the
same period of 1992. reflecting tight monetary and fiscal policies
as well as reduced investment because of uncertainty about NAFTA.
For the first nine months of the year, real GDP was only 0.5 percent
higher than in the same period of 1992.
The slowing of real GDP growth has reduced import growth and
narrowed the trade deficit.

In the first nine months of 1993, the

trade deficit was $10.4 billion, $1 billion less than in the same
period of 1992.

Exports were up 11 percent from a year earlier,

while imports were up only 6 percent.

Lower oil prices in.1993 have

led to an 8 percent fall in petroleum exports; non-oil exports were
16 percent higher.
The economic stimulus package announced in October will likely
lead to an overall public sector deficit in 1994, surpassing the
small deficit expected for 1993.

Its effects, combined with the

ratification of NAFTA, should help to revive private investment.
In Brazil, growth in real GDP has slowed in recent quarters,
and was 2.3 percent lower in the third quarter than in the second
quarter.

Over the last 12 months, the general price index has

increased 1900 percent.
On November 29, the Bank Advisory Committee and Brazil signed
the restructuring package for the $35 billion commercial bank debt.
Creditor banks holding 93 percent of the debt had signed the package
as of early December.

It remains unclear, however, whether Brazil

IV-26
will qualify for an IMF program, which would facilitate the
implementation of the package by the April deadline.
In early December, Finance Minister Cardoso outlined an
economic package aimed at reducing the budget deficit and inflation
in 1994.

It is unclear whether Congress will approve the plan,

however, and several new political scandals have distracted
legislative attention from Brazil's pressing economic problems.
Argentina continues to experience falling inflation, slowing
industrial production, and a rising trade deficit.

Consumer prices

rose 7.7 percent during the twelve months ending in November, down
from 18 percent a year earlier.

Industrial production during the

first three quarters of 1993 was 2.4 percent higher than in the same
period of 1992, down from 9.8 percent growth a year earlier.
Merchandise imports through September were 8.4 percent higher than a
year earlier, while merchandise exports were 6.3 percent higher.
The automobile industry accounts for most of the recent growth in
industrial production and exports, reflecting strong domestic auto
sales and provisions in the bilateral trade agreement with Brazil.
A package of constitutional reforms has been approved by
leaders of both President Menem's Peronist Party and the opposition
Radical Party.

The reforms remove the current prohibition on

consecutive presidential terms, allowing Menem to run for reelection
in 1995.

The reforms also restrict the scope of presidential

decrees and increase judiciary independence.
In Veneuela, Rafael Caldera was elected President on December
5.

Caldera's campaign emphasized opposition to the scope and pace

of recent free-market reforms.

In his first press conference after

the election, Caldera stated that foreign creditors should
reconsider Venezuela's debt repayments because of low oil prices.
He also vowed to repeal the newly implemented value-added tax.

IV-27
Caldera's victory was widely expected, and financial markets have so
far declined only slightly.

Caldera inherits an economy with

falling production and rising inflation.

Preliminary reports

indicate that real GDP was 1.6 percent lower in the third quarter
than in the same period of 1992; consumer prices were 44 percent
higher in November 1993 than they were a year earlier.
In China, leaders appear at least temporarily to have abandoned
the economic retrenchment program begun in July, despite continuing
high rates of industrial production growth and inflation and further
increases in the trade deficit.

Industrial production was 19

percent higher in November than a year earlier.

Twelve-month

inflation, measured by urban prices, was 21 percent in both
September and October.

There was a trade deficit in the first 11

months of 1993 of $7.7 billion, compared with a surplus of $6.4
billion for the same period last year.

Exports were 6.2 percent

higher in value, while imports were 27.8 percent higher.

Despite

some evidence that policy disputes continue within the party
hierarchy, credit conditions have probably remained easy in the
fourth quarter.
China has announced a plan for major tax reform, to take effect
January 1994.

The plan, which aims to reverse the central

government's declining share of tax revenues, introduces a value
added tax and a graduated individual income tax, and unifies
corporate tax rates at 33 percent.

The authorities promise, though,

that foreign-invested enterprises will continue receiving
preferential tax treatment.

China's lax accounting standards and

lack of qualified auditors, however, are problems for implementing
the tax reform.
Taiwan's GNP growth slowed to 5.8 percent in the third quarter
from a year ago, compared with 6.1 percent growth in the second

IV-28
quarter.

This slowdown reflects continued slow export growth and

cutbacks in government infrastructure spending.

Inflation remains

low: in November, the CPI was 3.1 percent higher than a year
earlier.

Through November, Taiwan's

was $7.5 billion.

1993 merchandise trade surplus

Exports were 4.1 percent higher than in the same

period of 1992 while imports, which have slowed sharply in recent
months, were 6.8 percent higher.

The slower import growth helped

raise the current account surplus to $1.5 billion in the third
quarter, from $575 million in the third quarter of 1992.
Real GDP in Korea was 6.5 percent higher in the third quarter
of 1993 than a year earlier--Korea's strongest output growth in six
Fixed investment rebounded modestly, increasing 7.9

quarters.

percent in the third quarter from a year earlier after decreasing
2.4 percent in the first half.

The Bank of Korea allowed money

growth to surge in August and early September, in order to ease
temporary upward pressure on interest rates caused by the real name
reform.

The Bank significantly reduced money growth in October and

November.

Interest rates have stabilized in recent weeks, and
The consumer price index was 5.2

inflation remains moderate.

percent higher in November than a year earlier.
Merchandise exports were 6.3 percent higher in the first 10
months of 1993 than in the first
were only 0.6 percent higher.

10 months of 1992, while imports

This narrowed the current account

deficit through October 1993 to $740 million, from $4.8 billion over
the same period of 1992.
In Russia, industrial production fell only 2 percent in
October, after falling more than one-fifth between July and
September.
Preliminary data suggest that Russia tightened monetary policy
in September and October.

The average monthly growth of M2 was 7

IV-29
percent, compared with 15 percent monthly growth from January
through August.

In part, this slower growth reflects a reduction in

central bank credit to other FSU republics.

Monetary tightening

helped reduce inflation from 26 percent in August to 21 percent in
October and an estimated 15 percent in November.
The ruble depreciated 5 percent against the dollar over the
past six weeks, trading at 1247 per dollar in the Moscow MICEX
auction of December 15.

Armenia. Kazakhstan, and Uzbekistan

recently took steps to issue their own national currencies, because
they could not reach agreement with Russia on the terms of a new
ruble zone.
Elections for a new Russian legislature and a referendum on a
proposed new constitution took place December 12.

Half of the

members of the lower house of the legislature were elected from
party lists; half represent single-member districts.

The

constitution, which was approved, will significantly increase the
power of the Presidency relative to the legislature.

Incomplete

returns indicate that parties favoring rapid economic reform will
probably not command a majority in the legislature.

However, these

parties are likely to have enough votes to block legislative vetoes
of actions by President Yeltsin.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, December 21, 1993 : Greenbook Part 2

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