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Strictly Confidential (FR) Class II FOMC

February 6, 1985

SUMMARY AND OUTLOOK

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

DOMESTIC NONFINANCIAL DEVELOPMENTS

Recent developments.

Domestic output strengthened at year-end,

reflecting the substantial progress businesses made adjusting inventories
and a drop back in imports after the third-quarter surge.

Moreover, con-

sumer demand firmed, and business spending remained relatively vigorous.
The environment for further growth remained positive, especially as inflation
continued moderate.
Industrial production rose 1 percent over the November-December
period, and preliminary indications suggest an additional 1/2 percent
gain in January.

The advance in December was broadly based.

Output

of consumer goods rose 0.6 percent, and production of business equipment
was up 0.7 percent.

Automobile assemblies rebounded sharply from

their strike-affected levels of the early fall and are estimated to have
risen further in January to an 8-3/4 million unit annual rate.

Industrial

capacity utilization moved up to 81.9 percent in December, but it remained
almost a point below its recent high reached in mid-1984.
Labor demand has strengthened in the past several months.

Nonfarm

payroll employment (strike-adjusted) was up a substantial 300,000 in January,
about the same as average increases during the fourth quarter.

The bulk of

the payroll growth in January was in service-producing industries, while
manufacturing payrolls rose a more moderate 23,000.

Nevertheless, the

household survey reported a rise in unemployment in January, with the
civilian jobless rate increasing 0.2 percentage point to 7.4 percent.
Personal income rose briskly in the final quarter of 1984, paced by
sizable advances in wages and salaries.

With continued income gains, real

personal consumption expenditures rose by 4 percent at an annual rate
last quarter.

Outlays for discretionary items such as general merchandise,

apparel, and furniture and appliances were particularly strong.

Sales of

domestic autos averaged an 8.3 million unit annual rate during December
and January; this pace was a million units above that of the preceding two
months when short supplies had constrained sales of some popular models.
Business fixed investment rose 11 percent in real terms in the fourth
quarter--a bit slower than the rate of growth in the third quarter.

The

fourth-quarter gain reflected a sizable rise in shipments of nondefense
capital goods as well as a rapid advance in spending for commercial
and industrial buildings.

However, new orders for nondefense capital goods

at domestic producers fell in December.

Although the December drop reflected

an unusually steep--and likely temporary-decline in the office and computing
machinery component, new orders generally were sluggish throughout the
second half of 1984.
Inventory accumulation by businesses slowed significantly late in the
Stocks at all manufacturing and trade establishments were little

year.

changed in November, after rising sharply in each of the preceding four
months.

Manufacturers' inventories declined in real terms in November for

the first time in 10 months, and preliminary book-value data indicate
another decline probably occurred in December.

At the retail level, strong

sales in November as well as aggressive Christmas marketing and price
discounting helped to correct imbalances that emerged in late summer and

early fall.
Housing markets, as yet, have shown little response to the decline in
mortgage credit costs since last summer.

While single-family starts were

up a bit in the final quarter of the year, multifamily starts fell sharply.
Overbuilding in some key markets and uncertainty regarding future tax
treatment of investment properties probably discouraged new construction of
rental units.
The rate of inflation has continued to reflect moderate labor costs,
low-priced imports, and reduced energy prices, with the consumer price
index up only 0.2 percent in both November and December.

These increases

brought consumer prices at the end of 1984 to a level 4 percent above a
year earlier-little different from the increase in 1983.
developments continued favorable during the past year.

Food and energy

Moreover, prices of

consumer goods excluding food and energy advanced only 3 percent in 1984.
Prices of consumer services, in contrast, rose 5-1/2 percent last year,
reflecting notable increases in rents, auto finance charges, and the price
of telephone service.

The producer price index for finished goods was up

0.1 percent in December and rose only 1.8 percent during the 12 months of
1984.
Wage inflation in the private nonfarm economy moderated further in
1984, with the employment cost index decelerating from a 5 percent increase
in 1983 to 4 percent last year.

Wage adjustments under union wage contracts

signed last year, excluding COLAs, will average 2.4 percent in the first
contract year and 2.3 percent annually over the contract life; both of these
figures were new lows for the 17-year history of the series.

Reflecting the

slower rise in productivity last year, unit labor costs rose about 2 percent,
after remaining unchanged in 1983.

Outlook.

The staff is projecting an increase of close to 4 percent

in real GNP in the current quarter, and all major components of private

domestic spending are expected to contribute to the rise.

Continued gains

in employment and income are anticipated to support a further increase in
consumer expenditures; moreover, business investment spending--while
decelerating somewhat--is expected to post a sizable advance.

At the same

time, residential construction is projected to edge up after two successive
quarters of decline.

Inventory investment also is likely to pick up early

in 1985, as businesses respond to rising sales.

However, in the external

sector exports are expected to be lower, and imports are expected to rebound.
The fixed-weighted price index for gross domestic business product is
projected to rise 3-3/4 percent at an annual rate during the current quarter.
The policy assumptions underlying the staff projection for 1985 are
little changed from the last Greenbook.

Regarding monetary policy, M1

growth is assumed to be in the upper part of the Committee's tentative
range this year and to moderate a bit next year.

Interest rates are

expected to be unchanged or rising somewhat during 1985.

For fiscal

policy, the staff estimates that the federal budget deficit in the
current fiscal year will be $206 billion on a unified basis. 1

For 1986 the

staff has assumed enactment of a deficit reduction package on the order of
$50 billion, primarily reflecting reductions in outlays from current service

levels.

As a result, the federal deficit in FY 1986 is projected to drop

to around $189 billion.
After two years of vigorous expansion, economic activity is expected
to grow moderately during 1985 and 1986.

Real GNP is projected to rise about

1. The Budget Document now emphasizes the combined unified and off-budget
deficits, estimated at $222 billion in FY 1985 and $180 billion in FY 1986.
The corresponding staff estimates of the combined deficits are $218 billion
and $194 billion, respectively.

3-1/2 percent this year and 2-3/4 percent next year.

The ongoing expansion

in capital spending is expected to continue during 1985, with real investment
projected to rise 7 percent.

The increase in business investment is expected

to slow a bit over the course of 1986.

Continued gains in real disposable

income should support further, sizable advances in consumption this year.
Thereafter, household spending is expected to slow somewhat, as employment
and income gains moderate.

Housing starts during this year and next are

projected to average about the 1.75 million unit pace recorded in 1984.
With businesses remaining relatively cautious regarding inventories, the
staff anticipates no substantial change from current, historically low
inventory-sales ratios.

The anticipated decline in the foreign exchange

value of the dollar is expected to contribute to an increase in export
demand and a considerable slowing in imports by 1986.
Economic growth in both this year and next should be accommodated
without any undue pressure on capacity in either product or labor markets.
Unemployment is expected to decline to the 6-3/4 percent range during the
course of 1985, as continued gains in employment outstrip labor force
growth.

In 1986 the jobless rate is expected to be little changed.

On the production side, industrial capacity utilization is projected to
rise a bit this year and then to flatten out.
The outlook for inflation in 1985 has improved from the last Greenbook,
with the fixed-weighted index for gross business product now expected to
rise only 3-3/4 percent.

Lower world oil prices have favorable implications

for the domestic rate of inflation in the near term.

Moreover, with the

dollar now higher and with the onset of its expected depreciation delayed,
the adverse effects of such an adjustment on domestic prices this year are

I-6

projected to be small.

The price outlook for 1986 is for only a limited

acceleration in inflation, mainly driven by the projected depreciation of
the dollar.

Increases in unit labor costs are expected to rise somewhat

less than prices during the next two years; wage increases are projected to
accelerate only slightly and productivity growth is expected to slow to
about trend rates.
Detailed data for these projections are in the tables shown on the
following pages.

February 6, 1985
STAFF GNP PROJECTIONS
Percent changes, annual rate
Gross domestic
business product
fixed-weighted
price index
Nominal GNP

Real GNP

2/6/85

12/12/84

2/6/85

12/12/84

rate

(percent)

Excluding food
and energy

Total

12/12/84

Unemployment

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

-

2/6/85

12/12/84

2/6/85

12/12/84

2/6/85

Annual changes:
1983
1984
1985
1986

<1>
<1>

7.7
10.8
7.2
6.7

3.7
6.7
2.7

3.7
6.8
3.6
3.0

3.8
4.1
4.1

3.8
4.0
3.7
3.9

4.6
4.4
4.5

4.6
4.3
4.3
4.3

9.6
7.5
7.1

9.6
7.5
6.9
6.6

14.9
10.7
5.7
5.5

14.9
10.7
5.6
6.4

10.1
7.1
1.9
1.3

10.1
7.1
1.6
3.9

4.2
4.1
4.0
4.3

4.2
4.1
4.0
3.3

3.4
5.4
4.9
4.4

3.4
5.4
4.9
3.8

7.9
7.5
7.5
7.3

7.9
7.5
7.4
7.2

7.1
7.0
7.0
6.8

8.1
7.4
6.8
6.6

2.4
3.2
3.2
2.8

3.8
3.6
3.5
3.3

4.0
4.0
4.2
4.3

3.7
3.7
3.8
3.8

4.3
4.3
4.3
4.4

4.4
4.3
4.1
4.1

7.2
7.1
7.1
7.0

7.2
6.9
6.8
6.7

7.7
10.7
6.8

Quarterly changes:
1984

Ql
Q2
Q3
Q4

1985

Ql
Q2
Q3
Q4

1986

<1>
<1>
<1>
<1>

Q1
Q2
Q3
Q4

6.7
6.7
6.6
6.6

4.2
4.4
4.5
4.5

3.8
4.0
4.3
4.5

2.8
2.4
2.7
2.8

6.7
6.4
6.7
7.0

Two-quarter changes: <2>
1984

Q2 <1>
Q4 <1>

1985

Q2
Q4

1986

12.8
5.6

12.8
6.0

8.6
1.6

8.6
2.7

4.2
4.2

4.2
3.7

4.4
4.7

4.4
4.4

-1.0
-. 2

-1.0
-. 3

7.0
6.9

7.8
6.7

2.8
3.0

3.7
3.4

4.0
4.2

3.7
3.8

4.3
4.3

4.3
4.1

-. 2
-. 1

-. 3
-. 2

Q2
Q4

.0
-. 1

4.3
4.5

3.9
4.4

2.6
2.8

6.6
6.9

Four-quarter changes: <3>
1983
1984
1985
1986

Q4 <1>
Q4 <1>
Q4
Q4

10.4
9.1
7.0

10.4
9.3
7.2
6.7

6.3
5.0
2.9

<1> Actual.
<2> Percent change from two quarters earlier.
<3> Percent change from four quarters earlier.

6.3
5.6
3.6
2.7

3.7
4.2
4.1

3.7
4.0
3.8
4.2

4.4
4.5
4.3

4.4
4.4
4.2
4.4

-2.1
-1.2
-.3

-2.1
-1.3
-.5
-. 1

CONFIDENTIAL - FR
CLASS II FOMC

February 6,
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of current dollars at annual rates.)
1983
Q1

Q02

1985

1984
Q3

Q4

Q

Q2

Q3

Q4

Gross National Product
Final salesPrivate
Domestic final purchases

3173.8
3216.8
2538.0
2518.4

3267.0
3286.4
2604.2
2610.7

3346.6
3350.9
2661.1
2677.5

3431.7
3419.0
2727.6
2757.4

3553.3
3479.5
2775.1
2826.6

3644.7
3594.1
2850.4
2909.1

3694.6
3622.8
2861.8
2952.4

3752.5
3721.4
2938.7
3003.0

Personal consumption expenditures
Goods
Services

2070.4
1034.6
1035.8

2141.6
1073.0
1068.6

2181.4
1095.8
1085.7

2230.2
1122.8
1107.5

2276.5
1152.2
1124.4

2332.7
1179.0
1153.7

2361.4
1178.6
1182.8

2398.6
1196.8
1201.8

Gross private domestic investment
Residential structures
Business fixed investment
Change in business inventories
Nonfarm

405.0
113.3
334.6
-42.9
-32.6

449.6
129.8
339.3
-19.4
-5.4

491.9
142.3
353.9
-4.3
11.6

540.0
143.4
383.9
12.7
14.1

623.8
151.2
398.8
73.8
60.6

627.0
155.6
420.8
50.6
47.0

662.8
155.3
435.7
71.8
63.7

635.5
155.4
448.9
31.1

Net exports of goods and services <1>

19.6
328.5
304.9

-6.5
328.1
334.5

-16.4
342.0
358.4

-29.8
346.1
375.9

-51.5
358.9
410.4

-58.7
362.4
421.1

-90.6
368.6
459.3

-64.3
364.7
429.0

678.8
273.0
405.8

682.2
270.5
411.6

689.8
269.2
420.6

691.4
266.3
425.1

704.4
267.6
436.8

743.7
296.4
447.4

761.0
302.0
458.9

782.7
316.1
466.6

Gross national product in
constant (1972) dollars

1491.0

1524.8

1550.2

1572.7

1610.9

Personal iacome
Wage and salary disbursements
Disposable personal income
Saving rate (percent)

2662.8
1608.1
2261.4
5.7

2714.7
1642.1
2302.9
4.

2763.3
2836.5
1671.3
1713.4
2367.4 2428.6
5.3
5.0

179.0
161.6

216.6
196.1

245.0
227.4

-18.8 -167.3
-40.9
-74.2

-180.9
-102.5

Exports

Imports
Gov't. purchases of goods and services
Federal <2>
State and local

Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-) <3)
State and local government surplus oc
deficit(-) (N.I.A. basis)
Excluding social inaurasne fan

2920.5 2984.5
3047.3
1755.7
1793.1
1819.5
2502.2
2554.3 2606.4
6.3
6.1
5.7
282.8
224.8

1661.1
3100.4
1846.1
2649.4
6.3
286.8
223.0

277.4
243.3

291.2
246.2

-180.3
-113.1

-161.3
-113.3

-163.9
-129.6

-180.6
-146.1

-199.9
-170.8

Nonfarm

payroll. emloya1a
Manutacturien

34.0
-2.0

43.8
6.9

47.4
9.3

51.2
12.0

54.0
13.3

54.3
12.4

47.6
4.3

52.0
7.5

111.2
10.1

112.1
9.3

112.1
8.5

112.7
7.9

113.5
7.5

113.8
7.4

114.2
7.2

88.8

Unemployment rate (peareea

ousing starts, private (mlltoe
New auto sales (mlltoL
, A.L.)
Domestic models
Foreign model*

1645.2

111.7
10.4

Civilian labor force (tn1liTaan.

Industrial prodectio (197s1I^gr
Capacity utiltiis t
all midC;
Materials (percet)

260.0
225.5

1638.8

22.1

89.6
18.3

90.4
18.6

91.7
19.0

92.8
19.4

93.8
19.6

94.6
19.7

95.4
19.7

151.8
77.4

151.5
78.9
79.6

159.8
80.7
81.6

163.1
81.8
82.7

165.6
82.5
82.9

163.3
81.9
81.4

1.97
10.4&
8.16
2.3ft

1.90
10.68
8.26
2.42

1.66
10.32
7.97
2.34

1.56
9.77
7.01
2.76

1841
meat (pereese
unite, A.R.)

13545
7041
1.64

1.44
6.06
2.40

144.3
73.9
73.1:
1.69
9.10
6.1&
2.21

1.7
9.22
6.92
2.31

1.70
9.94
7.21
2.69

<1> Balance of paymnts data sad details uaderlyitg tin
estimate ae eho is the atratoile
Devmlopmnt
section of this part of the Greebook.
<2> Components of purchuass ad total receipts ad total. expediture are shown i the Faderal Sector Account table
which follow.
<3> Itimates in table are evaluated at a 6 percent high mloymmnt unemployment rate.

February 6,
CONFIDENTIAL - FR
CLASS II FOMC

1985

PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)

1983
Q1

1984

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Constant (1972) Dollars

Gross national product
Final sales
Private
Domestic final purchases

3.3
1.1
3.5
4.0

9.4
6.4
8.6
12.1

6.8
4.9
6.2
6.9

5.9
4.2
6.3
9.7

10.1
3.6
4.2
7.6

7.1
10.3
8.5
9.5

1.6
-1.0
-2.4
2.3

3.9
8.2
8.6
4.8

Personal consumption expenditures
Goods
Services

2.6
3.5
1.5

10.0
12.6
7.3

3.8
5.4
2.1

6.8
9.5
3.8

4.6
7.8
1.2

7.9
10.7
4.6

.7
-1.9
3.8

3.9
5.1
2.5

Gross private domestic investment
Residential structures
Business fixed investment

34.0
64.4
.2

52.5
78.5
9.5

38.4
31.6
18.7

37.0
4.0
30.6

71.5
20.8
20.5

-2.2
1.3
21.4

24.9
-4.6
13.7

-14.0
-1.7
11.1

-8.1
-17.3
7.0
-1.1

-2.6
-5.9
7.4
-.2

-.5
-5.3
-1.9
2.7

-4.3
-8.7
9.2
-1.4

1.0
-2.8
3.8
3.5

18.6
45.4
12.0
3.7

5.4
6.2
-2.3
4.8

6.6
13.7
14.4
1.9

2.1

3.4

7.7

8.2

8.6

6.3

3.9

4.2

Gross national product
Final sales
Private
Domestic final purchases

8.5
5.9
8.0
5.7

12.3
8.9
10.8
15.5

10.1
8.1
9.0
10.6

10.6
8.4
10.4
12.5

14.9
7.3
7.1
10.4

10.7
13.8
11.3
12.2

5.6
3.2
1.6
6.1

6.4
11.3
11.2
7.0

Personal consumption expenditures
Goods
Services

4.8
3.6
6.1

14.5
15.7
13.3

7.6
8.8
6.6

9.3
10.2
8.3

8.6
10.9
6.2

10.2
9.6
10.8

5.0
-. 1
10.5

Gross private domestic investment
Residential structures
Business fixed investment

34.3
79.4
-5.4

51.9
72.3
5.7

43.2
44.4
18.5

45.3
3.3
38.4

78.1
23.6
16.5

2.1
12.2
24.0

24.9
-.6
14.9

-15.5
.1
12.7

Gov't. purchases of goods and services
Federal
National defense
State and local

-1.3
-8.9
8.0
4.2

2.0
-3.6
9.8
5.8

4.5
-2.0
3.3
9.0

.9
-4.3
13.2
4.4

7.7
2.0
12.5
11.5

24.3
50.5
14.6
10.1

9.6
7.8
-.8
10.7

11.9
19.9
21.8
6.9

4.3
3.6
5.6

7.5
8.0
8.7

11.7
7.3
7.3

10.7
11.0
11.0

12.7
12.4
9.7

8.6
9.1
8.8

8.4
8.7
6.0

6.8
7.2
6.0

93.9
15.4

114.4
125.8

63.7
73.6

26.8
-3.3

29.8
35.5

21.4
4.9

-10.9
-30.5

5.6
-3.2

Nonfara payroll employment
Manufacturing

.5
-.9

3.4
5.0

3.7
7.0

5.8
9.1

4.8
7.5

4.5
4.5

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs

4.4
5.7
1.3

8.1
3.5
-4.2

2.9

5.5

6.1
3.1

3.7
-1.7

3.6
4.7

3.5
1.8

5.0

2.6

3.3

3.9

2.4

2.7
4.9
.3

3.9
3.5
4.4

4.1
5.4
3.7

4.0
4.9
3.5

3.3
3.8
3.9

8.6

6.3

-.8

Gov't. purchases of goods and services
Federal
National defense
State and local
Disposable personal income

Current Dollars

Disposable personal income
Personal income
Wage and salary disbursemnts
Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

GNP implicit deflator <1>
Gross domestic business product
fixed-weighted price index <2>
Excluding food and energy
Consumer price index (all urban)
Industrial production

10.1

18.4

21.8

10.2

11.5

<1> Excluding the federal pay increase, the rate of change in 1983-Q4 was 4.4 percent.
<2> Uss expenditures in 1972 as weights.

3.3
2.1

-1.1

3.8
1.2

1.7

CONFIDENTIAL - FR
CLASS II FOMC

I-10
February 6, 1985
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of current dollars at annual rates.)

Projected
1985

1986

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Gross National Product
Final sales
Private
Domestic final purchases

3826.7

3787.5
2988.7
3063.7

3895.4
3859.2
3046.6
3128.5

3960.0
3925.2
3097.6
3192.5

4023.9
3989.5
3147.6
3251.2

4090.0
4055.8
3200.7
3305.9

4154.0
4119.4
3252.8
3359.8

4221.9
4187.4
3308.5
3418.4

4294.4
4259.4
3366.6
3477.9

Personal consumption expenditures
Goods
Services

2445.5
1219.1
1226.4

2493.2
1240.2
1253.0

2540.4
1261.1
1279.3

2585.4
1280.0
1305.4

2627.7
1296.9
1330.8

2672.0
1314.2
1357.8

2717.8
1332.2
1385.6

2762.6
1350.7
1412.0

Gross private domestic investment
Residential structures
Business fixed investment
Change in business inventories
Nonfarm

657.4
157.7
460.5
39.2

671.5
163.8
471.5
36.2
34.2

686.9
170.2
481.9
34.8
34.8

700.2
173.9
491.9
34.4
34.4

712.3
176.2
501.9
34.2
34.2

722.4
176.0
311.8
34.6
34.6

735.1
179.2
521.4
34.5
34.5

750.2
184.6
530.6

Net exports of goods and services <1>
Exports
Imports

-75.0
361.3

-94.9
370.1
465.0

-103.6
377.3
480.9

-105.2
384.4
489.6

-107.0
391.7
498.7

-109.9
400.6
510.6

-111.3
411.6

436.3

-81.8
364.3
446.1

Gov't. purchases of goods and services

798.8
323.8
475.0

812.5
329.2
483.3

827.6
335.9
491.7

841.8
341.9
499.9

855.1
347.3
507.8

866.6
350.8
515.8

878.9
355.0
523.9

892.8
360.6

1676.6

1691.6

1706.2

1720.1

1732.1

1742.6

1754.2

1766.5

3166.3
1884.1
2707.7
6.5

3221.5
3276.3 3338.6
3389.2
1918.2
1951.3
1985.4
2019.4
2753.0 2797.0 2847.1 2896.8
6.2
5.9
5.9
5.9

3447.4
2051.5
2945.8
5.9

3504.6

Federal <2>
State and local
Gross national product in
constant (1972) dollars

Personal income

Wage and salary disbursements
Disposable personal income
Saving rate (percent)
Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-) <3>
State and local government surplus or
deficit(-) (N.I.A. basis)
Excluding social insurance funds
Civilian labor force (millions)
Unemployment rate (percent)
Nonfarm payroll employment
Manufacturing
Industrial production (1967-100)

Capacity utilizations all manufacturing (percent)
Materials (percent)
Housing starts, private (million units, A.R.)
New auto sales (millions, A.R.)
Domestic models
Foreign models

35.2

35.0

35.0

522.8

532.2

3563.7
2116.6
2993.8
3043.1
5.8
5.8
2082.8

290.4
222.4

295.3
225.8

297.3
226.8

293.4
220.4

290.7
212.2

290.0
208.5

293.2
208.2

297.5
209.5

-200.7
-175.5

-200.3
-179.1

-199.1
-181.1

-194.8
-179.4

-191.6
-177.1

-192.6
-177.8

-193.7
-179.5

-194.1
-181.0

54.1
9.0

57.1
11.5

56.0
9.9

52.9
6.3

51.2
4.1

50.4
2.8

50.5
2.4

50.7
2.1

115.8
6.8

116.3
6.7

116.8
6.7

117.3
6.7

117.7
6.6

118.1
6.6

99.4
20.4

99.8
20.5

100.3
20.5

114.8
7.2

115.3
6.9

96.3
19.9

97.1
20.0

97.8
20.1

98.4
20.2

98.9
20.3

167.5
82.4
81.9

169.3
82.5
82.2

171.1
82.7
82.4

172.7
82.7
82.5

174.0
82.7
82.5

175.4
82.6
82.5

176.7
82.6
82.5

178.1
82.6
82.5

1.70
10.85
8.40
2.45

1.80
10.95
8.40
2.55

1.75
11.05
8.35
2.70

1.75
11.05
8.30
2.75

1.75
10.95
8.40
2.55

1.75
10.85
8.25
2.60

1.75
10.75
7.95
2.80

1.80
10.65
7.75
2.90

<1> Balance of payments data and details underlying these estimates are shown in the International Developments
section of this part of the Greenbook.
<2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Account table
which follows.
<3> Estimates in table are evaluated at a 6 percent high employment unemployment rate.

February 6,
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)

CONFIDENTIAL - FR

CLASS II FOMC

Projected
1985

1986

Q1

Q2

Q3

Q4

Q1

Q2

Gross national product
Final sales
Private
Domestic final purchases

3.8
3.0
3.3
5.4

3.6
4.1
4.3
5.3

3.5
3.8
3.8
4.7

3.3
3.4
3.5
3.8

2.8
2.9
3.1
3.1

2.4
2.5
2.7
2.6

Personal consumption expenditures
Goods
Services

4.9
6.0
3.7

4.5
5.3
3.6

3.8

3.3

2.7

2.6

4.4
3.1

3.6
3.0

2.7
2.7

2.5
2.7

Gross private domestic investment
Residential structures
Business fixed investment

11.9
2.8
8.7

5.6
12.2
7.4

6.1
12.4
6.6

4.9
5.1
6.1

4.1
1.5
5.5

2.6
-4.6
4.8

Gov't. purchases of goods and services
Federal
National defense
State and local

1.9
1.1
6.7
2.5

3.0
4.0
7.0
2.4

3.6
5.2
6.0
2.4

3.3
4.7
4.2
2.3

2.1
2.4
2.1
1.9

1.4
.6
1.2
1.9

Disposable personal income

6.0

3.4

2.6

3.4

3.1

2.6

Gross national product
Final sales
Private
Domestic final purchases

8.1
7.3
7.0
8.3

7.4
7.8
8.0
8.7

6.8
7.0
6.9
8.4

6.6
6.7
6.6
7.6

6.7
6.8
6.9
6.9

6.4
6.4
6.7
6.7

Personal consumption expenditures
Goods
Services

8.1
7.7
8.4

8.0
7.1
9.0

7.8
6.9
8.7

7.3
6.1
8.4

6.7
5.4
8.0

6.9
5.4
8.4

Gross private domestic investment
Residential structures
Business fixed investment

14.5
6.1
10.7

8.9
16.4
9.9

9.5
16.6
9.1

8.0
9.0
8.6

7.1
5.4
8.4

5.8
-.5
8.1

Gov't. purchases of goods and services

8.5
10.1
14.6
7.4

7.0
6.8
10.0
7.2

7.6
8.4
9.5
7.1

7.1
7.3
7.4
6.9

6.5
6.5
6.4
6.5

5.5
4.1
4.7
6.4

9.1
8.8
8.5

6.9
7.2
7.4

6.5
7.0
7.1

7.4
7.8
7.2

7.2
6.2
7.0

6.9
7.0
6.5

5.1
-1.1

7.0
6.3

2.7
1.7

-5.1
-10.7

-3.7
-14.1

-1.0
-6.9

3.7
2.7

3.2
2.6

2.9
2.3

2.6
2.0

2.1
2.0

1.3
4.4
3.1

.8
4.2
3.4

1.1
4.3
3.2

1.3
4.4
3.1

GNP implicit deflator <1>
Gross domestic business product
fixed-weighted price index <2>
Excluding food and energy
Consumer price index (all urban)

4.2

3.6

3.2

3.7
4.4
3.5

3.7
4.3
3.7

Industrial production

5.4

4.3

Q3

Q4

2.1

2.0

4.5
-.
5

6.0
2.5

1.9
1.4

1.8
1.4

1.9
1.4

1.0
4.9
3.8

.8
4.6
3.8

1.2
4.7
3.5

1.3
4.8
3.5

3.2

3.8

3.9

3.9

4.1

3.8
4.1
3.9

3.8
4.1
4.1

3.8
4.2
4.1

4.0
4.4
4.1

4.3
4.5
4.3

4.5
4.5
4.6

4.4

3.7

3.2

3.1

3.1

3.2

Constant (1972) Dollars

Current Dollars

Federal
National defense
State and local

Disposable personal income
Personal income
Wage and salary disbursements
Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

Nonfarm payroll employment
Manufacturing
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs

<1> Excluding Federal pay increase, the rate of change in 1985-QI is 3.7 percent and it
<2> Uses expenditures in 1972 as weights.

1986-Q1 is 3.7 percent.

1985

CONFIDENTIAL - FR

CLASS II FOMC

February 6, 1985
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Expenditures and income figures are billions of current dollars.)
1979

1980

1981

1982

Gross national product
Final sales
Private
Domestic final purchases

2417.8
2403.5
1929.2
1915.9

2631.7
2641.4
2103.7
2079.7

2957.7
2931.7
2335.2
2307.2

3069.2
3095.4
2444.9

Personal consumption expenditures
Goods
Services

1507.1
813.4
693.7

1668.0
883.5
784.5

1849.1
966.1
883.0

1984.9

1983

1984

-Projected1985
1986

3304.8
3318.3
2632.7
2641.0

3661.3
3604.5
1856.5
2922.8

3926.5
3890.3
3070.1
3159.0

4190.1
4155.5
3282.1
3390.5

2342.3

982.2

2155.9
1081.5
1074.4

1165.7

2516.1
1250.1
1266.0

2695.0
1323.5
1371.6

2425.9

1002.6

1176.6

Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm

423.0
118.5
290.2
14.3
8.6

401.9
102.9
308.8
-9.8
-4.5

484.2
104.3
353.9
26.0
18.2

414.9
91.3
349.6
-26.1
-23.9

471.6
132.2
352,9
-13.5
-3.1

637.3
154.4
426.0
56.8
48.4

679.0
166.4
476.4
36.2
34.7

730.0
179.0
516.4
34.6
34.6

Net exports of goods and services <1>
Exports
Imports

13.2
281.3
268.1

23.9
338.8
314.8

28.0
369.9
341.9

19.0
348.4
329.4

-8.3
336.2
344.4

-66.3

363.6
430.0

-88.8
368.3
457.1

-108.3
397.1
505.4

Gov't. purchases of goods and services
Federal <2>
State and local

474.4
168.3
306.0

537.8
197.0
340.8

596.5
228.9
367.6

650.5
258.9
391.5

685.5
269.7
415.8

747.9
295.5
452.4

820.2
332.7
487.5

873.4
353.4
519.9

Gross national product in
constant (1972) dollars

1479.4

1475.0

1512.1

1480.0

1534.7

1639.0

1698.6

1748.9

Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)

1951.1
1237.6
1650.2
5.9

2165.3
1828.9
6.0

2429.4
1493.1
2041.7
6.7

2584.6
1568.7
2180.5
6.2

2744.3
1659.2
2340.1
5.0

3013.2
1803.6
z578.1
6.1

3250.6
1934.8
2776.2
6.1

3476.2
2067.6
2969.9
5.9

Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

194.8
252.7

175.4
234.6

190.0
221.3

159.2
165.6

225.1
203.1

284.6
234.3

294.1
223.9

292.9
209.6

Federal government surplus or deficit (-}
(N.I.A. basis)
High employment surplus or deficit (-)

-16.1
-20.8

-61.3
-36.4

-64.2
-31.3

-148.2
-61.6

-178.6
-92.7

-176.4
-140.0

-198.7
-178.8

-193.0
-178.8

30.4
6.8

30.6
3.5

37.6
7.8

32.9
-.8

44.1
6.6

52.0
9.5

55.0
9.2

50.7
2.8

105.0
5.8

107.0
7.1

108.7
7.6

110.2
9.7

111.5
9.6

113.5
7.5

115,5
6.9

117.5
6.6

89.8
21.0

90.4
20.3

91.2
20.2

89.6
18.8

90.1
18.5

94.2
19.6

97.4
20.0

99.6
20.4

Industrial production (1967-100)
Capacity utilization# all manufacturing (percent)
Materials (percent)

152.5
86.0
87.6

147.0
79.6
80.4

150.9
79.4
80.7

163.4
81.7
82.1

170.1
82.6
82.3

176.0
82.6
82.5

Rousing starts, private (million units, A.R.)
New auto sales (millions, A.I.)
Domestic model*
Foreign models

1.72
10.68
8.36
2.32

1.30
9.04
6.62
2.42

1.10
8.56
6.24
2.32

1.77
10.31
7.85
2.46

1.75
10.98
8.36
2.61

1.76
10.80
8.09
2.71

State and local government surplus or
deficit (-) (N.I.A. basis)
Excluding social insurance funds
Civilian labor force (millions)
Unemployment rate (percent)
Nonfarm payroll employment (millions)
Manufacturing

1356.7

138.6

71.1
70.1
1.06
8.00
5.77
2.23

147.6
75.2
75.2
1.70
9.18
6.79
2.39

<1> Balance of payments data underlying these estimte are -shown in the International Developments section of this
part of the Greenbook.
<2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table
which follows.

CONFIDENTIAL - FR

CLASS II FOMC

I-13
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

February 6, 1985

1979

1980

1981

1982

1983

1984

Gross national product
Final sales
Private
Domestic final purchases

2.8
3.5
4.0
2.9

-.3
.5
.1
-1.0

2.5
1.5
1.6
2.2

-2.1
-.7
-1.3
-.2

3.7
3.2
4.1
5.6

6.8
5.0
5.3
7.6

Personal consumption expenditures
Goods
Services

2.7
1.9
3.7

.5
-1.4
2.7

1.3
.4
2.5

4.8
6.0
3.4

5.3
7.2
3.2

Gross private domestic investment
Residential structures
Business fixed investment

-. 2
-5.3
7.3

10.7
-5.5
5.5

-15.9
-14.8
-4.6

13.7
41.7
2.5

31.1
12.3
20.0

.9
3.7
5.0
-.6

2.0
6.1
7.6
-.6

-. 3
-.7
7.1
.0

3.5
5.3
5.6
2.3

2.7

.9

3.5

6.8

3.8
5.6
4.7
5.1

7.7
7.2
7.7
8.9

-Projected1985
1986

10.8
8.6
8.5
10.7

Constant (1972) Dollars

-11.8
-20.3
-2.4

Gov't. purchases of goods and services
Federal
National defense
State and local
Disposable personal income

2.7

.6

3.6
4.2
4.1
4.9

4.3

2.8

Current Dollars

Gross national product
Final sales
Private
Domestic final purchases

11.7
12.4
13.1
12.3

8.8
9.9
9.0
8.5

Personal consumption expenditures
Goods
Services

11.9
11.7
12.2

10.7
8.6
13.1

10.9
9.3
12.6

7.3
3.8
11.2

8.6
7.9
9.4

8.6
8.8
8.5

Gross private domestic investment
Residential structures
Business fixed investment

9.4
6.6
16.6

-5.0
-13.2
6.4

20.5
1.3
14.6

-14.3
-12.4
-1.2

13.7
44.7
.9

35.1
16.8
20.7

6.5
7.8
11.8

7.5
7.6
8.4

Gov't. purchases of goods and services
Federal
National defense
State and local

9.8
9.6
11.5
9.9

13.4
17.1
17.3
11.4

10.9
16.2
17.2
7.9

9.0
13.1
16.8
6.5

5.4
4.2
11.7
6.2

9.1
9.6
10.5
8.8

9.7
12.6
11.8
7.8

6.5
6.2
7.0
6.7

Disposable personal income
Personal income
Wage and salary disbursements

12.0
12.6
11.9

10.8
11.0
9.6

11.6
12.2
10.1

7.3
6.2
5.8

10.2
9.8
8.7

7.7
7.9
7.3

7.0
6.9
6.9

Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

1.2
10.3

-9.9
-7.1

8.3
-5.7

-16.2
-25.2

41.5
22.8

26.4
13.3

3.4
-4.5

-.4
-6.4

3.6
2.6

.7
-3.6

.8
-. 6

-1.7
-6.9

.6
-1.5

4.5
5.9

3.4
2.3

2.3
1.8

-1.5
9.0
10.7

-. 7
10.3
11.1

1.5
9.6
8.0

.2
8.0
7.7

8.6

9.2

9.6

6.0

9.9
8.6
11.3

10.0
8.5
13.5

9.6
9.4
10.3

6.0
7.0
6.1

4.4

-3.6

2.6

-8.1

6.4

10.8

4.1

3.5

Nonfarm payroll employment
Manufacturing

12.4
11.0
11.0
10.9

Nonfarm business sector

Output per hour
Compensation per hour
Unit labor costs
GNP implicit deflator
Gross domestic business product
fixed-weighted price index <1>
Excluding food and energy
Consumer price index (all urban)

Industrial production
<1> Uses expenditures in 1972 as weights.

February 6, 1985
FEDERAL SECTOR ACCOUNTS
(Billions of dollars)

IFRB

staff estimates
Calendar quarters; not seasonally adjusted
1986
1985
I
II
III
IV
I
II

737
947
-210

735
941
-206

794
972
-178

787
976
-189

683
867
-184

745
953
-208

166
239
-73

172
234
-62

210
234
-24

188
235
-48

175
251
-76

182
242
-60

233
246
-13

198
237
-39

-10
-185

-12
-222

-12
-218

-2
-180

-5
-194

-10
-195

-14
-222

1
-72

-3
-65

-5
-29

-5
-53

-1
-77

-1
-61

-2
-15

-1
-40

62
-5
4

15
0
0

45
-5
0
20

CY
1984*

CY1985
FRB
Staff

-

FY19850/2/
Adaln.
FR
I/
Staff
_
____

666
;42
-175

Unified budget receipts
Unified budget outlays
Surplus/deficit(-), unified budget
Surplus/deficit(-), off-budget
3
agencies
Combined deficit to be financed

FY1986/2/
FRB
Admin.
I/
Staff
_

e

Year
10R4*
___

Fiscal

1984
IV*

|

II

Means of financing combined deficit:
Net borrowing from public
Decrease in cash operating balance
4
Other

171
7
*

201
10
10

198
15
5

173
0
7

195
-5
4

198
-5
2

205
7
9

end of period

30

20

15

20

20

17

10

17

10

12

15

10

15

15

30

42

20

46

20

32

21

4

5

6

5

5

5

5

688
860
283
215
68
577
-172

758
948
327
242
85
621
-190

745
945
326
242
85
619
-200

827
992
355
272
83
637
-166

807
1000
349
261
88
651
-193

704
880
296
221
74
584
-176

762
961
333
248
85
628
-199

718
917
316
231
85
601
-200

740
940
324
239
84
616
-201

Seasonally adjusted annual rates
755
770
785
801
814
955
969
980
993
1006
329
336
342
347
351
245
251
255
259
262
84
85
87
88
89
626
633
638
646
655
-200
-199
-195
-192
-193

827
1020
355
266
89
665
-194

-126

n.a.

-177

n.a.

-179

-140

-179

-171

-176

-179

-180

Cash operating balance,
Memo:

Sponsored agency borrotwng

5

NIA Budget
Receipts
Expenditures
Purchases
Defense
Nondefense
All other expenditures
Surplus/deficit(-)
High employment surplus/deficit(-)
evaluated at 6 percent unemployment
-

*-actual
1. Budget of the United States Government.
2.

Fiscal Year 1986 (February 1985).

The CBO baseline budget estimates show revenues of $735 billion
and $788 billion, unified outlays of $938 billion and $995 billion, and
deficits of $203 billion and $206 billion in fiscal years 1985 and 1986,
respectively. Off-budget outlays are projected to be $11 billion in
fiscal 1985 and $9 billion in fiscal 1986.
(The Economic Outlook, February 1985.)

Note: Details may not add to totals due to rounding.

e-estiumted

-181

-179

n.a.--not available
3.

4.
5.

-177

-178

---

Includes Federal Financing Bank, Postal Service Fund, Rural Electrification
and Telephone Revolving Fund, Rural Telephone Bank and Strategic Petroleum
Reserve.
Checks issued less checks paid, accrued items and other transactions.
Sponsored agency borrowing includes net debt issuance by Federal Home Loan
Banks, FHLHC (excluding participation certificates), FNMA (excluding
mortgage-backed securities), Federal Land Banks, Federal Intermediate
Credit Banks. Banks for Cooperatives, and Student Loan Marketing Association
marketable debt on a payment basis. The Administration's definition of
borrowing by these agencies is somewhat broader.

DOMESTIC FINANCIAL DEVELOPMENTS

Recent developments.

Growth in the monetary aggregates remained

strong in the December and January period.
cent annual rate in both months.

M1 grew at about an 11 per-

(All rates cited here are prior to

revisions for new benchmarks and new seasonal factors; the revised data
will appear in the Bluebook).

The strength in M1 late last year and early

this year appears to be associated with the pickup in economic activity
and the lagged effects of the lower level of short-term interest rates
that has prevailed since last fall.
M2 rose at 15 and 12 percent rates in December and January, respectively.

It does not appear that the reductions in minimum balances on

Super NOW and MMDA accounts, from $2,500 to $1,000 on January 1. contributed
to the growth of either Ml or M2.

The strength of the nontransactions

component of M2 apparently continued to reflect sluggish adjustments of
rates on MMDAs and money funds to market rate declines.

M3 growth slowed

from 14 percent in December to about 10 percent in January; growth in
large-denomination time deposits moderated, owing in part to the strength
in core deposits and slowing in bank credit growth.
Short-term interest rates were roughly unchanged through most of the
intermeeting period, while the federal funds rate traded mostly in an 8
to 8-3/8 percent range following the cut in the discount rate to 8 percent on December 21.

Late in the period, however, the funds rate rose

briefly, and other interest rates backed up amid concerns about a tightening
of System policy in view of the rapid growth of money and resumed strength
in economic activity.

Longer-term market rates fluctuated rather widely

over the period but, on balance, these rates are about unchanged to down
I-15

I-16

about 20 basis points, for corporate bonds, in the wake of favorable
inflation news.
Growth in the debt of domestic nonfinancial sectors appears to have
slackened recently.

Federal borrowing in the first quarter of this year

is under less pressure from the need to refinance HUD project notes, and
borrowing needs are also reduced by the seasonal upswing in tax collections.
Net borrowing from the public (not seasonally adjusted) is expected to
decline from $64 billion in the final quarter of 1984 to about $49 billion
in the current quarter, but the reduction in pressures from the federal
sector is not as great as these figures would imply since part of the
deficit will be financed by a decline in the Treasury's cash balance.
In the tax-exempt bond market, financing demands also have been
reduced following the rush to market of private-purpose issues at the end
of last year.

Long-term debt issuance in January is estimated to have

fallen sharply from the December pace to a rate well below the average
for all of last year.

As a result of this decline, the ratio of tax-exempt

to taxable bond yields has fallen considerably from the peak at the time
of the last FOMC meeting.
In the private sector, consumer credit has continued to expand at
an exceptional pace.

In December, growth in consumer installment debt

may have exceeded the rapid pace of the preceding month, and this component
of bank credit growth was also quite strong in January.

Mortgage lending

activity at saving and loan associations, however, remained relatively
subdued through December and real estate loans at commercial banks,
through January, have shown no signs of acceleration.

Interest rates on

home loans have remained on a downward trend, in the case of fixed-rate

I-17

loans lagging earlier declines in other long-term credit markets.
There also seems to have been a slowing in growth of outstanding
business credit in December and January.

Despite what appears to be only

a slight decline in growth of merger-related debt, both short- and long-term
borrowing by nonfinancial businesses has slowed from the very rapid pace
in October and November.

In December, gross bond issuance by nonfinancial

corporations in domestic and Euro markets combined dropped to roughly
half the rapid November pace, perhaps because some firms were hoping for
a further decline in corporate bond rates.

Although the pace of bond

issuance picked up in January, particularly in Euromarkets, it remained
well below the fourth-quarter average.

Meanwhile, short-term credit

demands also slackened, with growth in both commercial and industrial
loans at banks and commercial paper dropping off despite two cuts in the
prime rate and lower short-term rates generally.

This slackening of growth

in business credit demands may reflect improved cash flows and reduced
needs to finance inventories at the end of the year.
Outlook.

The pace of credit growth for all nonfinancial sectors

combined may be somewhat slower, on a seasonally adjusted basis, in the
current quarter than last quarter.

However, fundamentals affecting

financial markets are likely to be little changed in the near term.

In a

number of sectors--the federal government, state and local, and nonfinancial
business-it appears that the drop-off in credit market demands will be
associated in good part with lessened accumulation of financial assets.
Federal credit demands are likely to remain strong as the fiscal
year deficit is expected to exceed last year's level. Similarly, although
the state and local sector is curbing its borrowing on behalf of the

I-18

private sector, general obligation borrowing does not seem likely to
to be reduced.
In the nonfinancial business sector, the gap between total capital
outlays (including inventories) and internal funds is expected to be
larger in the current quarter as a whole than in the fourth quarter of
last year, and is likely to rise somewhat further in the second quarter.
The recent lull in business borrowing, particularly in short-term financing,
is likely to come to an end soon.
In the household sector, growth in consumer credit seems likely to
decelerate somewhat, with new credit extensions slowing a bit relative to
spending--a typical cyclical pattern--while repayments pick up.

At the

same time, however, mortgage credit demands seem likely to strengthen in
response to the lower level of mortgage interest rates.
On balance, the outlook for credit demands and supplies suggests
that over the next few months short-term interest rates may remain a
little above the lowest levels reached early this year.

The same forces

also apply to long-term rates, but market psychology could be affected
considerably by prospects for the federal budget and the outlook for oil
prices and other factors having a major bearing on inflation.

INTERNATIONAL DEVELOPMENTS

Recent Developments.

The trade-weighted value of the dollar has

risen by more than 4 percent since the December FOMC meeting, to a
record level.
percent -

The dollar has risen most sharply -

by about 7

against sterling and the Swiss franc; it has risen 4

percent against the German mark.

Sterling has been under downward

pressure throughout the period, partly because of the importance of oil
to Britain's exports and the general softness of world oil prices, but
also because of a perceived initial unwillingess on the part of the
British government to tighten its policies in the face of high
unemployment.
developed -

Similarly, when downward pressure on the Swiss franc
for reasons that are not apparent -

Swiss authorities

were thought to be reluctant to jeopardize their monetary objectives by
intervening in exchange markets.

. The Desk made total dollar sales of $241.5
million -

$192.7 million against marks and $48.8 million against yen,

shared equally between the System and the Treasury.

The series of

highly visible and occasionally coordinated sales of dollars by a
number of central banks, following the G-5 announcement on intervention
on January 17, seemed to slow the dollar's rise for awhile.
A sharp decline in the deficit on merchandise trade in December
reduced the deficit for the fourth quarter to an estimated annual rate
I-19

I-20

of $92 billion, from a rate of $132 billion in the third quarter.

For

the full year 1984, the deficit was $108 billion -- about $45 billion
larger than in 1983.
Exports increased somewhat in the fourth quarter.

Much of the

rise in value comprised increased shipments of grain to the Soviet
Union, which experienced very poor harvests last summer.

The volume

of nonagricultural exports increased only slightly, but nevertheless
was 9-1/2 percent higher than in the fourth quarter of 1983.

The

volume of nonoil imports in the fourth quarter dropped from the
extraordinarily high rate in the third quarter, but was still 12
percent higher than a year earlier.
Recorded net capital inflows were large in October and November.
As recorded in the U.S. international transactions accounts, net
inflows into banks in the United States were $8 billion in
October-November.

Official reserve assets held in the United States

increased $5 billion.

G-10 countries and some developing countries --

including some in Latin America -- increased their holdings.

In

contrast, OPEC countries' holdings declined further in
October-November, with the decline totaling $8.2 billion in the year
through November.
Net foreign private purchases of U.S. corporate and Treasury
securities totalled $11.2 billion in October-November.

Although $2

billion of specially-targeted Treasury securities were sold to
foreigners in those months, secondary yields on these are now little
different from regular Treasury securities, indicating that the

I-21

Treasury is not likely to realize further cost savings by issuing such
instruments.
Both U.S. banks and nonfinancial corporations were active issuers
in the Eurobond market.

Of the almost $6 billion of issues by the 25

largest bank holding companies in 1984, about half were equity or
equity commitment notes, designed to add to banks' primary capital; an
additional $1.9 billion of Eurobonds were issued by these banks in
January.

Nonfinancial corporate issues were stimulated in part by

Japanese regulations that make it attractive for Japanese companies to
issue Eurodollar bonds and swap with U.S. companies who have issued
Euroyen bonds.
The pace of economic activity in the major foreign industrial
countries continues to be uneven.

Only in Japan was there strong

growth of production in the fourth quarter, according to available
data.

Provisional data suggest strong growth of GNP in Germany in the

fourth quarter, but part of that still seems to reflect a rebound from
last summer's strike.

Inflation rates have slowed further; in most

countries, rates of consumer price inflation reached their lowest
levels since the late 1960s or early 1970s.

The Japanese and German

current account surpluses in 1984 reached $35 billion and $6 billion,
respectively, while both France and the United Kingdom had balances
near zero.
Despite the continued slow real growth, the strong external
positions, and the substantial slowing of inflation, monetary
authorities in the United Kingdom, Germany, and the Netherlands acted
to raise short-term interest rates.

The actions -- especially those by

I-22

the Bank of England -- were taken in response to downward pressure on
the exchange value of their currencies.
Among the developing countries, continued progress in achieving
the necessary economic adjustments is far from assured.

In Mexico, a

30 percent increase in the minimum wage and the announcement of a
planned public sector deficit for 1985 that is larger than earlier
envisaged suggest that the resolve of the authorities to follow through
on their adjustment program may have weakened.

Similarly, the

Brazilian IMF program may be in jeopardy; it now appears that Brazil
exceeded the ceiling for the public sector borrowing requirement for
the end of 1984, and growth in the monetary base in December -- at 37
percent -- was the largest monthly increase ever recorded.

The

Philippines has fallen out of compliance with an IMF stand-by
arrangement approved in December.

On December 28 the IMF approved a

15-month stand-by credit for Argentina, though there may have been some
slippage in the implementation of the program since the turn of the
year.

Some progress seems to have been made in Venezuela with regard

to private sector debt and the payment of interest arrears.

Paris Club

reschedulings for both Argentina and the Philippines have been agreed.
Outlook.

The staff forecast continues to be based on the

conviction that the current high level of the dollar cannot be
sustained over the long run.

As a consequence, a moderate depreciation

of the dollar has been projected to occur during the remainder of this
year and during 1986.
The staff projects real GNP to increase at annual rates just
under 3 percent (year over year) in foreign industrial countries in

I-23

1985 and 1986 (the same rate as in 1984) and at rates of about 3-1/2
percent in the non-OPEC developing countries (somewhat above last
year's rate).

Inflation rates in foreign industrial countries are

projected to be somewhat higher than in the United States in 1985, but
somewhat lower in 1986.
The staff now estimates that the U.S. deficit on current account
was just under $100 billion in 1984 and forecasts deficits rising to
about $110 billion and $130 billion in 1985 and 1986, respectively.
The principal forces acting to increase the deficit are the high value
of the dollar and the continuing strength of U.S. demand.
The staff forecast for the current account shows a significantly
smaller deficit in 1985 than was forecast in the December Greenbook.
Underlying the change are downward revisions in the level of imports
in the fourth quarter and in the outlook for U.S. oil import prices,
which are now assumed to fall about 10 percent from the fourth quarter
of 1984 to the fourth quarter of 1986.

This view assumes moderate

further increases in non-OPEC production and world oil consumption, and
the ability of OPEC to restrain their production.

STRICTLY CONFIDENTIAL
CLASS II FOMC

(FR)
FEBRUARY 6,

1985

OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS
(BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES)

1984

ANNUAL
1985-P 1986-P

1984
QI-P

QZ-P

1985
Q3-P

Q4-P

Q1-P

Q2-P

1986
Q3-P

Q4-P

1. GNP EXPORTS AND IMPORTS 1/
CURRENT $, NET
EXPORTS OF G+S
IMPORTS OF G+S

-66.3
363.6
429.9

-88.9 -108.4
368.2 397.0
457.1 505.4

-90.7
368.6
459.3

-64.4
364.6
429.0

-75.0
361.3
436.3

-81.9
364.2
446.1

-94.9 -103.6
377.3
370.1
465.0
480.9

CONSTANT 72 $, NET
EXPORTS OF G+S
IMPORTS OF G+S

-15.5
145.8
161.3

-27.1
144.5
171.6

-30.3
149.1
179.4

-27,0
147.4
174.4

-15.2
146.2
161.4

-22.5
143.4
165.9

-26.1
143.5
169.6

-29.2
144.8
173.9

-107.6 -112.7

-131.2

-132.4

-91.5

-99.8

2. U.S. MERCHANDISE TRADE BALANCE 2/

-105.9

-118.5

-30.7
146.3
177.0
-126.7

-105.2 -107.1 -110.0 -111.3
411.5
400.6
384.3 391.6
510.6 522.8
498.7
489.6
-30.9
147.2
178.2

-30.7
148.2
178.9

-30.3
149.6
179.8

-29.2
151.5
180.8

-128.4 -130.1 -132.5 -133.7

EXPORTS
AGRICULTURAL
NONAGRICULTURAL

220.3
38.4
181.9

227.6
34.9
192.7

244.2
37.7
206.5

221.9
36.3
185.7

225.3
38.6
186.7

224.9
35.2
189.8

226.2
34.8
191.3

228.1
34.6
193.5

231.1
34.9
196.2

235.0
36.0
198.9

239.9
37.1
202.8

246.7
38.3
208.5

255.4
39.5
215.8

IMPORTS
PETROLEUM AND PRODUCTS
NONPETROLEUM

327.9
57.3
270.5

340.3
53.9
286.3

375.4
57.1
318.3

354.3
57.8
296.4

316.8
56.4
260.4

324.7
52.8
272.0

332.1
51.3
280.8

346.6
54.7
291.9

357.8
57.0
300.8

363.4
55.1
308.3

369.9
54.9
315.0

379.2
57.8
321.4

389.0
60.6
328.4

-98.6 -108.9 -132.6

3. U.S. CURRENT ACCOUNT BALANCE

-131.4

-85.6

19.8

15.2

9.7

14.7

19.7

REAL GNP--TEN INDUSTRIAL 4/
REAL GNP--NONOPEC LDC 5/

2.8
3.2

3.0
3.6

2.8
3.6

4.3
2.3

CONSUMER PRICES--TEN IND. 4/

4.9

4.1

4.1

2.5

OF WHICH: NET INVESTMENT INCOME

-92.8 -100.9 -115.6 -126.5
9

-127.7 -130.6 -134.5 -137.7

16.2

15.7

14.9

14.1

11.1

10.1

9.1

8.4

3.8
3.5

2.9
4.3

3.0
4.2

3.0
3.8

2.7
3.5

2.8
3.2

2.8
3.5

2.9
3.9

2.9
4.3

4.7

4.1

4.5

3.9

4.2

4.0

4.3

3.8

4.1

4. FOREIGN OUTLOOK 3/

NATIONAL INCOME AND PRODUCT ACCOUNT DATA.
INTERNATIONAL ACCOUNTS BASIS.
PERCENT CHANGE, ANNUAL RATES.
WEIGHTED BY MULTILATERAL TRADE-HEIGHTS OF G-10 COUNTRIES PLUS SWITZERLAND.
WEIGHTED BY SHARE IN NONOPEC LDC GNP.
PROJECTED


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102