Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 4-5, 1992 : Greenbook Part 2

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Confidential (FR) Class III FOMC

January 30,

1992

RECENT DEVELOPMENTS

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

CONTENTS

II DOMESTIC NONFINANCIAL DEVELOPMENTS
Employment and unemployment.......................................
Industrial production and capacity utilization....................
Personal income and consumption...
............................... .
Business fixed investment..........................................
Business inventories.......................... .....
.............. .
Housing markets.......................... .........................
Federal sector.................................. ................. .
State and local government sector.................................
Labor costs............................................ .......... .
Prices.................................... ........................ .

1
7
11
15
19
22
27
31
33
37

Tables

Changes in employment.. ............................................
Unemployment and labor force participation rates..................
Selected labor market indicators..................................
Persons not in the labor force.....................................
Growth in selected components of industrial production.............
Capacity utilization...............................
............. ...
Production of domestic autos and trucks............................
Personal income................................................. ..
Retail sales ...............................................
.......
Sales of automobiles and light trucks..............................
Business capital spending indicators..............................
Changes in manufacturing and trade inventories....................
Inventories relative to sales .....................................
Private housing activity.........................................
..
Federal government outlays and receipts............................
CBO budget estimates............................... .............. .
Revisions to CBO's budget estimates for FY1992 and FY1993.........
CBO economic assumptions...........................................
Administration policy budget projections..........................
Administration economic assumptions ...............................
Employment cost indexes............................................
Negotiated wage rate changes under
major collective bargaining settlements.......................
Average wage change in major union contracts and its components...
Average hourly earnings..........................................
Recent changes in consumer prices.................................
Recent changes in producer prices................................
.
Monthly average prices--West Texas Intermediate...................
Inflation rates excluding food and energy.........................
Price indexes for commodities and materials.......................

2
2
4
6
8
8
9
10
12
13
14
20
20
23
26
26
28
28
30
30
34
36
36
36
38
38
40
42
43

Charts

Labor force participation rate.....................................
Consumer sentiment................................ ............... .
Recent data on orders and shipments.................................
Nonresidential construction and contracts.........................
Russell-NCREIF commercial property values.........................
.....
Ratio of inventories to sales.................................
Private housing starts............................................ .
Consumer homebuying attitudes.................... .................
Builders' rating of new home sales.................................
States expecting fiscal year 1992 budget gaps.....................
Labor cost measures................................ .............. ..
Daily spot and posted prices of West Texas Intermediate...........
Index weights.................................. ...................
Commodity price measures..........................................

6
10
16
17
18
21
23
24
24
32
35
40
43
44

III
DOMESTIC FINANCIAL DEVELOPMENTS
Monetary aggregates and bank credit................................
Business finance............................ ......................
Treasury and sponsored agency financing...........................
Municipal securities.............................. ............... .
Mortgage markets.................................. ............... .
Consumer credit.................................................. .

3
9
14
17
20
24

Tables

Monetary aggregates..............................................
Commercial bank credit and short- and intermediate-term
business credit................................................
Changes in selected unused commitments at banks...................
Gross offerings of securities by U.S. corporations................
Treasury and agency financing .....................................
Gross offerings of municipal securities ...........................
Mortgage market originations.......................................
..
Consumer credit ................................................
.
Consumer interest rates...........................................
Public securitization of consumer loans...........................
Charts
Certificate of deposit rates relative to savings rates............
Gross interest payments of nonfinancial corporations...............
MBA refinancing index vs. prepayment rates on
selected Fannie Mae coupons....................................
FRM mortgage-7 year Treasury spread and
7 year Treasury 120-day volatility.............................
Outstanding consumer debt and service payments....................
IV
INTERNATIONAL DEVELOPMENTS
Merchandise trade............................... .................
Prices of non-oil imports and exports .............................
U.S. current account..............................................
U.S. international financial transactions.........................
.
Foreign exchange markets.........................................
Developments in foreign industrial countries......................
Developments in the former Soviet Union
and East European countries....................................
Economic situation in other countries..............................
Tables
U.S. merchandise trade: Monthly data..............................
Major trade categories.............................................
....................
Oil imports...................................
Import and export price measures...................................
U.S. current account..............................................
Summary of U.S. international transactions........................
International banking data ........................................
Major industrial countries
Real GNP and industrial production...............................
Consumer and wholesale prices ..................................
Trade and current account balances...............................
Charts
Weighted average exchange value of the dollar.....................
Selected dollar exchange rates....................................

2
6
8
10
15
18
20
25
25
27
4
12
23
23
26

1
4
6
7
11
14
25
27
1
2
3
5
6
8
10
15
16
17
12
12

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS
The economy has continued to struggle.

In the fourth

quarter, the only bright spots in final demand were strong growth in
exports and the continued uptrend in homebuilding.

With real

incomes flat and confidence depressed, retail sales were weak during
the holiday shopping season.

Although there was a spurt in business

purchases of computers in the fall, overall investment spending
continued to be dragged down by weak nonresidential construction
activity.

In response to the sluggishness in aggregate final demand

and the emergence of some inventory imbalances, factory output was
flat in December and probably declined in January.

Slack in labor

and product markets has damped wage and price increases; underlying
inflation trends appear to be headed downward.
Employment and Unemployment
Labor market conditions remained poor in December.

Private

payroll employment fell another 35,000 in December, and the
unemployment rate moved up to 7.1 percent.

However, a lengthening

of the workweek led to a small rise in aggregate hours of production
or nonsupervisory workers in December, and the average level of
hours in the fourth quarter was about the same as in the third
quarter.
Payroll reductions were widespread in December.

Manufacturing

employment moved down another 32,000, the fourth consecutive monthly
decline.

Nearly all of the recent factory job losses have been in

durable goods industries.

Construction employment, depressed by

unseasonably severe weather in November, failed to recover much in
December; on net, this industry continued to lose jobs at a rapid
pace in the fourth quarter.

In retail trade, hiring for the holiday

shopping season was well below the seasonal norm.

The shutdowns of

Pan Am and Midway airlines led to sizable job losses in

II-1

II-2
CHANGES IN EMPLOYMENT 1

(Thousands of employees; based on seasonally adjusted data)
1991

------Nonfarm payroll employment 2

-123

Private
Manufacturing
Durable
Nondurable
Construction
Wholesale trade
Retail trade
Transportation, public utilities
Finance, insurance, real estate
Services

Total government
State and Local

-76

Total employment 3
Nonagricultural

Dec.

-265

-111
-36
-35
-1

-140
-62
-49
-13

-34

-263
-39
-34
-5
-88
-15

-34
-11
-53

-16
-39
-10
-5
27

-116
-44

1991
Nov.

Average monthly changes ------

-92

-11
1
37

-9
-5
-10

36
35

-2

17
13

Private nonfarm production workers
Manufacturing production workers

Oct.

64
15

-103
-22

-36
-21

-222
-32

-52
-12

-95
-95

60
61

-120
-87

-222
-143

-95
-163

-.2

-. 2

-. 8

34.4
41.0

34.3
40.9

34.4
41.0

34.5
41.1

Memo:

Aggregate hours of production or
nonsupervisory workers (percent)
Average weekly hours of production
or nonsupervisory workers (hours)
Manufacturing (hours)

34.3
40.4

34.3
40.9

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

UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; seasonally adjusted)

Civilian unemployment rate
(16 years and older)
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
Labor force participation rate

1990

1991
03

Oct.

1991
Nov.

Dec.

5.5

6.6

6.8

6.9

7.1

15.5
8.8
4.4
4.3

18.3
10.4
5.6
5.1

19.0
11.0
5.8
5.0

19.0
11.4
5.8
5.3

18.9
11.3
5.7
5.2

18.7
11.1
5.7
5.3

19.3
11.9
5.9
5.4

66.4

66.2

65.9

66.0

65.8

65.9

II-3

transportation.

Services was the only private industry to post

notable job gains in December, and health services accounted for all
of the advance.
Local government employment was reported to be up sharply in
December; however, figures for this sector are often revised
appreciably and, given the fiscal problems of local governments, the
size of the increase appears fishy.

But even discounting the

December figures, employment in local governments was up for the
fourth quarter as a whole, apparently reflecting continued hiring by
relatively healthy governments at the same time that many planned
layoffs have yet to materialize.
The monthly survey of households also pointed to continued
labor market weakness in December.

Total employment registered

another small decline, and the number of unemployed rose nearly
300,000, pushing the civilian unemployment rate up 0.2 percentage
point in December.
Sentiment about the state of the labor market--as evidenced,
for example, by the Conference Board's survey question about whether
jobs are plentiful or hard to get--is currently near the lows of the
1982 recession.

However, the data do not seem consistent with such

negative assessments.

To be sure, one should view the current labor

market indicators cautiously.

The BLS has recently indicated that

it anticipates a sizable downward revision to payroll employment
when it releases its benchmark revisions later this year.

addition, the dramatic slowing in labor force growth raises
questions about the interpretation of the recent behavior of the
unemployment rate.

The accompanying table presents a range of labor

market indicators for the fourth quarter of 1982

(the trough of the

last recession) and for the fourth quarter of 1991.

Virtually every

one of these indicators was weaker in 1982 than in 1991.

II-4

SELECTED LABOR MARKET INDICATORS, 1982:Q4 AND 1991:Q4
(Based on seasonally adjusted data)

Civilian unemployment rate (percent)

1982:Q4

1991:Q4

(1)

(2)

10.7

6.9

9.2
9.4
11.8
10.5

7.0
6.4
6.2
6.6

By occupation
Managerial, professional
3.6
Technical, sales, administrative support 6.8
11.6
Services
11.6
Precision production, craft, repair
17.9
Operators, fabricators, laborers
9.8
Farming, forestry, fishing

2.9
5.4
7.9
8.2
10.3
7.8

1,2

By region
Northeast
South
North Central
West

Other labor market indicators
Percent of civilian labor force
Discouraged workers
Part time for economic reasons
Unemployed fifteen weeks or longer
U-74 (percent)
Mean duration of unemployment (weeks)
Change from business-cycle peak
Household employment (percent)
Unemployment rate (percentage point)
U-7 (percentage point)
Labor force participation rate
(percentage point)

1.6
5.8
4.0
15.4
17.5

.9
4.9
2.1
10.4
14.9

-1.4
3.3
4.8

-.9
1.1
2.1

-.4

1. Based on not seasonally adjusted data.
2. Values in column (2) are average for October and November, 1991.
3. Values in column (1) are for 1983:Q1.
4. Unemployment rate that incorporates discouraged workers,
one-half of part-time jobseekers, and one-half of individuals working
only part time for economic reasons.

II-5
Perhaps most interesting are the regional data.

Even in the

Northeast--where the current recession has been the most severe, and
where the 1982 recession was the mildest--the current unemployment
rate is significantly lower than it was in 1982.

Similarly, all six

major occupational groups had lower unemployment rates in late 1991
than in 1982.

The same is true of the "U-7" measure of

unemployment, which adjusts the unemployment rate to take account of
discouraged workers and involuntary part-time workers.
The only labor market indicator to deteriorate more in the
current episode than in 1982 is the labor force participation rate,
which has fallen 0.4 percentage point since the business-cycle peak
in the summer of 1990.

The December labor market report provided

information on individuals who are out of the labor force--that is,
nonparticipants--during the fourth quarter (table).

Since the

fourth quarter of 1989 (when the participation rate reached its
peak), the number of nonparticipants has been growing more than
300,000 per quarter.

In contrast, during the three years of labor

market weakness ending in 1982:Q4, the number of nonparticipants
increased, on average, 191,000 persons per quarter.

The difference

is even more striking when it is recognized that the working-age
population was growing more rapidly in the earlier period.
The increase in nonparticipation relative,to the 1979 to 1982
period can be traced to those who report that they do not want a job
now, particularly those who characterize themselves as "at school"
or "ill."

Comparing the growth in nonparticipation during these two

recessionary periods with the growth during the long expansion from
1982 to 1989 makes clear that some of the components of
nonparticipation--even among individuals who claim not to want a job
now--display cyclicality.

For example, during the expansionary

period, stronger job prospects helped draw people out of school,

II-6

LABOR FORCE PARTICIPATION RATE
Percent

1972

1976

1980

1984

1988

1992

PERSONS NOT IN THE LABOR FORCE
(thousands)

Percent

distribution
1991:04
(1)

1979:Q41982:04
(2)

1982:Q41989Q:4
(3)

1989:Q41991:Q4
(4)

average quarterly changes
Not in labor force

100.0

191

304

Do not want a job now
Current activity:
School
Ill, disabled
Keeping house
Retired
Other

91.1

202

12.7
7.8
35.0
29.8
5.8

29
-47
-91
168
15

-15
25
-151
204
5

59
53
-119
173
37

Want a job now
Reason not looking:
Discouraged workers

8.9

117

-56

102

1.7

-33

School

2.1

-20

Ill, disabled
Home responsibilites
Other

1.6
1.9
1.6

-3
6
2

5
-3
-5

13
10
21

583
392

499
488

429
125

Memo:
Noninstitutional population
Civilian labor force

II-7

while the number of nonparticipants in school increased during the
two recessionary periods.

Also, the number of nonparticipants

keeping house declined at a faster rate when the economy was
expanding.

These findings suggest that, even though many

nonparticipants claim not to want a job now, some nevertheless will
enter the labor market when job opportunities improve.
Industrial Production and Capacity Utilization
Industrial production contracted somewhat in November and
December and finished the year at about the same level as it reached
in July when the recovery in the industrial sector faltered.

Output

has been held down in recent months by a decline in motor vehicle
production; assemblies were 9.3 million units at an annual rate (FRB
seasonals) in December versus 10.0 million in October.

In addition,

production at utilities has been held down since September by
unseasonably warm weather, which has damped the demand for natural
gas and electricity.
Total industrial production excluding motor vehicles and
utilities was essentially flat, on balance, in November and
December.

Output of consumer durable goods retraced part of the

gains registered during the summer, owing largely to a decline in
demand for appliances and other household goods such as carpeting
and furniture.

By contrast, output of nondurable consumer goods

continued to advance, reflecting increases in production of a wide
variety of items, including food, clothing, and chemicals.
Production of business equipment other than motor vehicles was
held down in November and December by a decline in industrial
equipment, reflecting an ongoing strike at Caterpillar, Inc.
However, production in other equipment-producing industries has
begun to firm in recent months after showing virtually no
improvement since its low in March.

In particular, computer

II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1990:Q4

1991

19901

Sep. 90Mar. 91
------------

Total index
Motor vehicles and parts
Utilities

100.0
3.8
7.6

.3
-9.9

90.2
51.5
37.1
22.5
3.0
17.8

Mar. July

1991

July Dec.

Average--------Monthly Rate------

-2.1

-. 9
-4.6
-. 6

.7
4.9
1.1

.8
1.5
2.6
.1
-3.9
1.0

-. 8
-. 5
-. 4
-. 3
-1.3
-. 1

.6
.2
.1
.5
1.6
.4

-. 5
.2
-1.2
-. 3

.1
.2
-. 1
.2

Nov.

Dec.

-Monthly Rate-

.0
-. 3
-. 8

-. 2
-4.5
1.3

-. 2
-1.1
-3.0

-. 1
.4
-. 9
.1

.0
1.0
-2.2
.7

.1
1.1
-. 2
-. 2

-. 5

-1.5

EXCLUDING MOTOR VEHICLES
AND PARTS AND UTILITIES:
Total index
Products, total
Final products
Consumer goods
Durables
Nondurables
Business equipment
Office and computing
Industrial
Other

14.8
2.7
4.3
7.8

Defense and space equip.

-. 2

Construction supplies
Materials
Durables
Nondurables

-. 6

-1.1
.8

-1.6

-4.6
27.3
18.5
8.8

-1.2
-1.5
-.7

-. 2

1.0
.9
1.3

-. 4
.0
-1.2

.5
.3
.8

-. 3

Memo:

Manufacturing

84.9

-. 9

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

CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89

1990

Avq.

Hiah

Dec.

Mar.

Oct.

Nov.

Dec.

Total industry

82.2

85.0

80.6

78.4

79.6

79.3

79.0

Manufacturing

81.5

85.1

79.4

77.2

78.6

78.2

78.1

82.4
81.1

89.0
83.6

81.5
78.5

77.9
76.8

81.2
77.6

80.7
77.2

80.9
77.0

1967-90

Primary processing
Advanced processing

1991

II-9
production has picked up noticeably, apparently reflecting steppedup production of IBM's new generation of mainframes as well as of
other types of information-processing equipment.
Total industrial production may have contracted appreciably
further this month.

Through late January, domestic producers are

estimated to have assembled autos and trucks at only an 8-1/4
million unit pace (FRB seasonals)--down sharply from the rate
recorded in December, and considerably less than makers' reported
schedules.

Domestic manufacturers are currently planning for a

rebound in motor vehicle assemblies in February to just a touch
under the level during the fourth quarter of last year.

Other

weekly measures of industrial activity for the first couple of weeks
in January were mixed:

Production of steel and lumber was up

slightly, while output of appliances continued to decline.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
1991
Q3

Oct.

1991
Nov.

Dec.

1992
Jan. Feb.
-schedules-

Domestic production
Autos
Trucks

9.4

9.6

10.0

9.5

9.3

8.7

9.5

5.8
3.6

5.7
3.9

5.9
4.1

5.7
3.8

5.6
3.7

5.4
3.3

5.7
3.8

Capacity utilization in manufacturing fell almost

1/2 percentage point during the fourth quarter of last year, after
rising somewhat from its earlier low in March.

The operating rate

for advanced processing industries has fallen back in the past few
months to a level that is about 4 percentage points below the
average during 1967-90.

The recent declines mainly reflect reduced

output of motor vehicles and nonelectrical machinery other than
computers.

Capacity utilization at primary processing industries

II-10

PERSONAL INCOME
(Percent change)
1991
Q1
Q2
Q3
Q4
------- Annual rate------

19901

19911

Total personal income

6.5

2.7

4.5

2.7

3.3

Wages and salaries

5.6

2.1

-1.0

4.4

3.2

2.1

Other labor income

7.0

6.1

6.3

6.2

6.1

5.9

Proprietors' income

6.4

4.8

-10.0

18.5

2.7

10.2

Dividend
Interest

3.9
6.5

1.9
-3.8

5.5
-3.6

-4.0
-4.5

4.1
-2.8

2.2
-4.2

Transfer payments

9.6

11.1

19.0

8.0

6.7

11.1

Less: Personal contributions
for social insurance

5.9

5.7

14.6

2.7

3.9

1.9

Less: Personal tax and nontax
payments

4.0

-1.4

-6.3

-2.2

1.0

2.1

Equals: Disposable personal income

6.9

3.3

1.3

5.6

3.0

3.5

Memo: Real disposable income

1.0

-1.7

2.6

Memo: Savings Rate (Level)

5.1

5.3

5.1

5.5

5.0

5.4

Percent change, fourth quarter to fourth quarter.

Consumer Sentiment

Index

S130

Michigan Survey
-

- Conference Board Survey

-116

I'/

- 109

A/\r

II
i

102
-95

AJ\A!

88
81
-74

in.

67
-60

1.-- 53

1980

1982

1984

1986

1988

1990

46
1992

II-11
has decreased relatively little since the summer and stands just
slightly below its 1967-90 average.
Personal Income and Consumption
Nominal personal income rose at a 3-1/4 percent annual rate in
the fourth quarter.

However, after adjusting for taxes and

inflation, real DPI increased only 1/2 percent, bringing growth over
the four quarters of the year to an anemic 0.4 percent.

Among the

components of nominal income, wages and salaries increased at about
a 2 percent annual rate in the fourth quarter, as increases in
hourly compensation and the workweek offset sizable job losses.
Although transfer payments increased rapidly in the fourth quarter
of last year, personal tax payments also were up.

Elsewhere,

personal dividend income posted a small increase, while personal
interest income continued to trend lower, reflecting the general
reduction in interest rates that has occurred over the past two
years.
Consumer confidence edged down in December and again in January
according to both the Conference Board and the Michigan Survey
Research Center (SRC) indexes, as consumers' assessments of expected
business conditions continued to weaken.

By contrast, according to

the SRC survey, consumers' appraisals of current buying conditions
for houses improved sharply in January, with respondents citing
lower interest rates as the main reason.

The appraisals of buying

conditions for cars also strengthened relative to their weak autumn
readings, although buying conditions for household durables remained
depressed.
The demand for motor vehicles was uneven in December and
appeared to worsen in the first twenty days of January.

December, sales of cars and light trucks held up at a 12.3 million
unit annual rate because a jump in sales of domestically produced

II-12
RETAIL SALES
(Seasonally adjusted percentage change)

1991
Q2

Total sales
Previous estimate

-. 6

Retail control 1
Previous estimate

Total excl. automotive group
Previous estimate

2.2

Durable goods stores
Previous estimate

2.5

Bldg. material and supply
Automotive dealers
Furniture and appliances
Other durable goods
Nondurable goods stores
Previous estimate
Apparel
Food
General merchandise 3
Gasoline stations
Other nondurables 4

.4
.4

-1.0

-1.1

-2.4

4.6
2.9
1,9

12.3
8.4
3.9

.0
-. 3
1.6
-.

Dec.

-. 1
.0

-. 5
.3

-. 4

-. 3

.3
-. 2

-. 4

-1.1
-1.1

.1
.6

-1.4

-1.4
.0

-. 5

.1
.6
-1.0
.6
-1.4
.5

-. 9

-. 2

.5
4.4
1.0
1.3
-3.4

Nov.

1.3
-2.8
.6

-2.4

-. 6

Oct.

-. 4

GAF 2
Previous estimate

Memo:
Motor vehicle sales
Autos
Light trucks

1991

-2.2
-1.5

.6
-1.1

-. 8
-. 2

-. 1

-. 3

-3.2

-1.4

-. 7

-. 4

-. 5

-2.0
-1.6

-. 2
-. 9
-. 1

-. 1

.3
-2.2
-2.4
1.0

12.2
8.2
4.0

12.1
8.3
3.8

12.3
8.3
4.0

12.7
8.6
4.1

.6
.8

12.3
8.0
4.3

1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.
2. General merchandise, apparel, furniture, and appliance stores.
3. General merchandise excludes mail order nonstores; mail order
sales are also excluded in the GAF grouping.
4. Includes sales at eating and drinking places, drug and proprietary
stores.
5. Millions of units at an annual rate; BEA seasonals.

II-13
light trucks offset lower sales of cars.

This year-end surge of

light truck sales reflected intense competition between Ford and GM,
who enhanced their sales incentives in an effort to raise their
market share and become the nation's number one truck maker in 1991.
However, a payback occurred in the first twenty days of January as
sales of domestically produced light trucks dropped substantially.
Sales of domestically produced passenger cars appeared to weaken
further in early January; on average, sales in December and thus far
in January came in at a 5.85 million unit pace, weaker than in the
fourth quarter as a whole.
SALES OF AUTOMOBILES AND LIGHT TRUCKS1
(Millions of units at an annual rate, BEA seasonals)
1991

1991

1990

1991

Total
Autos
Light trucks
ks

13.86
9.50
4.36

12.30
8.39
3.91

12.34
8.43
3.90

12.69
8.60
4.09

Domestic tot al2
Autos
Light trucks
ks

10.84
6.90
3.95

9.73
6.14
3.59

9.70
6.11
3.59

3.01
2.60

2.57
2.25

.41

.32

Imports tota 1
Autos
Light trucks
ks
1.
2.
U.S.
3.

Nov.

Dec.

12.22
8.19
4.03

12.27
8.31
3.96

1 2.30

n.a.

7.98
4.32

n.a.
n.a.

10.06
6.31
3.75

9.79
6.06
3.73

9.84
6.18
3.96

9.98
5.94
4.04

9.27
5.77
3.51

2.64
2.32

2.63
2.29

2.42
2.13

2.43
2.13

n.a.

.32

.34

.29

.30

2.32
2.04
.28

Jan.

n.a.
n.a.

Components
nts may
may not
not add
add to
to totals
totals due
due to
to rounding.
rounding.
Includes
s vehicles produced in Canada and
and Mexico
Mexico and
and vehicles
vehicle s made
made in
in
plants of
pf foreign manufacturers.
manufactureres.
First twemty
days, FRB seasonals.
wenty days,
seasonals.
Widespread declines in nominal retail sales occurred in the

fourth quarter of last year.

In the retail control category, which

excludes spending at automotive dealers and at building material and
supply stores, sales fell, on average, 0.2 percent per month.

The

largest absolute reduction in sales during this three-month period
was at general merchandise, apparel, and furniture and appliance
stores; expenditures on items at these stores were lackluster

II-14
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)

1991

1991
Q2

Oct.

Nov.

Dec.

Producers' durable equipment

Shipments of CIR complete aircraft 1
Sales of heavy-weight trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

2.4
1.5
12.3
-1.4

-. 2

Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

-. 5

-2.0
.0

-6.4
-3.2
-10.0
-1.0

7.3

-4.5

-23.0

-9.7

-3.3

-30.5

-5.4

1.6

-1.8

-9.1

3.4

15.4

-13.6
-1.8
-1.6
-1.9

13.6

-2.7
.4
1.1
.1

3.4
-1.9
10.6
-5.1

12.2
.1
3.4

-16.6

-. 7
-2.3
-2.7
5.5

n.a.

-2.6

-2.3
-9.9
-4.1
.9
1.2
-1.8

2.8
-4.2
5.0

-. 8

-. 7

-14.5
3.5

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

-2.7
-5.4
-3.5
-4.2
1.4
-3.1

-5.6
-9.0
-8.8
-6.4
.3
-6.3

n.a.

Rotary drilling rigs in use

-8.4

-11.3

-12.6

-1.8

-3.3

-3.0

Footage drilled 2

-4.9

-10.2

n.a.

18.0

-18.3

n.a.

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

-. 2

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

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines".
Seasonally adjusted with BEA seasonal factors.
2. From Department of Energy. Not seasonally adjusted.
n.a. Not available.

II-15
earlier in 1991 as well.

By contrast, relatively small gains over

the final three months of 1991 were posted in sales of "other
durable goods."l
Given the weakness in retail sales and motor vehicles sales,
the goods component of real personal consumption expenditures is
estimated by the BEA to have declined 5.2 percent at an annual rate
in the fourth quarter.

However, real personal consumption

expenditures on services rose at a 2.3 percent annual rate; in
total, real personal consumption expenditures declined 1.1 percent
at an annual rate in the fourth quarter.
Business Fixed Investment
According to BEA's advance estimate, real business fixed
investment fell 2.4 percent at an annual rate in the fourth quarter,
as another sharp drop in nonresidential construction was offset by a
small rise in spending on equipment.

On the equipment side, a

40 percent jump in real spending for computers was offset by a
collapse in aircraft investment.

The surge in computer spending

largely reflected the initial deliveries of a new generation of IBM
mainframes, while an extraordinary drop in the share of aircraft
deliveries to domestic airlines pushed aircraft investment down to
its lowest level since the middle of 1984.

Real outlays for

nonresidential structures were estimated by BEA to have fallen at a
9.4 percent annual rate in the fourth quarter--led by another
double-digit decline in commercial construction.
Looking ahead, it appears likely that near-term growth in
equipment outlays will be modest.

Equipment investment tends to lag

overall economic activity; thus, the early recovery last spring was
followed by a brief resurgence in investment last fall, and the
recent deceleration of economic activity likely will damp investment

1. The "other durable goods" category includes sales of optical
goods, sporting goods, books, jewelry, and cameras.

II-16
RECENT DATA ON ORDERS AND SHIPMENTS
Office and Computing Equipment

Billions of dollars

K--Orders
----

Shipments

Dec.

1988

I...

1989

1990

1991

Other Equipment (excuding aircraft and computers)

----

Billions of dollars

Orders
Shipments

I-

1988

1989

1990

Orders of Boeing Commercial Aircraft by Domestic Airlines

1991

Index, 1987

100

200

Dec.

-1989

1990

II-17

Nonresidential Construction and Contracts <1>
TOTAL BUILDING

1980

Index, Dec. 1982 = 100, ratio scale

1982

1984

1986

1988

OFFICE

1984

1986

1990

1992

OTHER COMMERCIAL

1988

1990

1992

1984

1986

INDUSTRIAL

1988

1990

1992

INSTITUTIONAL

Is.

(C)

p
1984

1986

1988

1990

1992

1984

1986

I
1988

I
1990

I
1992

<1> Six-month moving average for all series shown. For contracts, total only Indudes private, while individual sectors Include private and public.
Contracts extend through December.

II1-18
RUSSELL-NCREIF COMMERCIAL PROPERTY VALUES
Nominal Office Property Values

Index- 100 in 1983:01
-140

-10(

Q3 - 80
- 60

1982

1980

1978

1984

1986

1990

1988

Nominal Retail Property Values

Index = 100 in 1983:01
-

I
1982

1980

1978

1984

1986

160

1990

1988

Nominal Warehouse Property Values

index - 100 in 1983:01
140

120
Q3

I
1978

I
1980

1982

I
1984

I
1986

I
1988

I
1990

II-19
during the first half of this year.

Indeed, in the fourth quarter,

(nominal) orders for nondefense capital goods (excluding aircraft
and computers) edged up only 0.1 percent from the third-quarter
level and point to little change in shipments during the current
quarter.

Moreover, new orders from domestic carriers for Boeing

jetliners have plummeted since midyear.

Although Boeing's backlog

of domestic aircraft orders is still quite high and new orders are
filled with a long lag, the current climate suggests that, even
after a rebound from the low fourth quarter, spending is likely to
remain cautious.

Finally, a slowing in the growth of computer

purchases has followed quickly on the heels of the early fourthquarter surge at IBM, with computer shipments dropping 10 percent in
December.
Indicators for nonresidential structures continue to paint a
bleak picture.

Total construction contracts have not deviated from

the steep downward trend that began in late 1989 (chart).
Commercial construction has borne the brunt of this decline, as the
persistent oversupply of existing space continues to depress
property values and curtail new construction.

Appraised values of

office properties trended down further in the third quarter of 1991
(chart) and have declined nearly 30 percent since 1985.2

For the

other commercial sector, which comprises primarily retail and
warehouse properties, values have been dropping steadily since 1989.
Business Inventories
Business inventories began to rise noticeably last fall after
months of substantial liquidation earlier in the year.

Total

manufacturing and trade inventories expanded at a $30.7 billion
annual rate (current cost) from September to November, with the

2. These data are compiled by the Frank Russell Company in
conjunction with the National Council of Real Estate Investment
Fiduciaries (Russell-NCREIF) and are based on appraised values of
commercial properties owned by major institutional investors.

II-20

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

1991

-29.3
-14.4
-11.3
4.7
-22.7
-14.9
-7.8

-50.0
-42.2
-24.1
-18.8
-7.2
-7.9
.7

Sep.

Oct.

Nov.

Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto

10.8
1.8
-4.5
-3.3
18.6
9.0
9.6

37.7
22.1
17.4
-15.5
35.9
15.6
20.2

38.8
28.7
-9.3
21.5
26.5
10.1
16.4

15.8
21.5
-. 4
13.7
2.4
-5.7
8.1

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

1991
Q1

1991

1.51
1.49
1.60
1.32
1.55
1.84
1.47

1.50
1.47
1.57
1.31
1.57
1.91
1.48

Sep.

Oct.

Nov.

Range in
2
preceding 12 months:
Low
High
Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto

1.49
1.47
1.54
1.31
1.54
1.82
1.46

1.58
1.55
1.69
1.38
1.65
2.18
1.52

1.56
1.53
1.66
1.37
1.58
1.96
1.48

1.50
1.47
1.56
1.31
1.57
1.87
1.49

1.50
1.47
1.54
1.33
1.59
1.88
1.51

1. Ratio of end of period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily
coincidental. Range is for the 12-month period preceding the latest month for
which data are available.

1.50
1.48
1.54
1.33
1.60
1.90
1.52

II-21

Ratio of Inventories to Sales
(Current-cost data)
Manufacturing

Ratio

2.1

1.9

1.7
A /

' ,

' *

To ta l

r-j

''z

Nov, -

1.5

Excluding transportation equipment
I
1979

1981

1983

1985

1987

I
I
1989

I
I
1991

Wholesale

1.3

Ratio
- 1.5

1.4
Nov.

1.3

1.2

1979

1981

FII

1983

1985

1987

1989

1991

Retail

-97
-

1979

1.1

Ratio
- 2.7

5197
,98 S-19A83~
S'
;
/,
/^v/
u

1981

1983

1985

Q.A.F.

1987

189

1
'; Nov.

1989

1991

1.5
--1.4
2.5

II-22

runup concentrated at retail and wholesale outlets.

Coming at a

time of sluggish sales, the stockbuilding has caused some
deterioration in trade inventory-sales ratios and points to the
possibility of paring in the coming months.
Among the major sectors, manufacturing inventories at present
are the leanest.

Although slowing shipments in October and November

led to some buildup in stocks of finished goods, especially in the
motor vehicle, chemical, and paper industries, manufacturers were
able to reduce their holdings of production materials and work-inprocess inventories.

As a result, except for a brief upsurge in

September, manufacturing inventories, on net, have continued the
downtrend that began in December of 1990.
Wholesale inventories expanded sharply in October and November,
rising at an average pace of $17-1/2 billion.

A sizable part of the

accumulation was in nonconsumer goods such as machinery, building
materials, chemicals, and farm products.

For most types of

wholesale distributors, inventory-sales ratios have moved up in
recent months, but have remained well below their recent peaks
posted last winter.
Outside of motor vehicles, retail inventories continued to
build through November, and the inventory-sales ratios of most types
of non-auto retailers, particularly that for the GAF grouping, have
been moving up since late summer.
appears to have slowed.

However, the pace of accumulation

Non-auto retail establishments reported an

$8 billion (current-cost, annual rate) buildup in November, less
than half of the $18.3 billion average pace reported in the previous
two months.
Housing Markets
Production and sales of homes continued to expand through yearend.

Furthermore, January surveys show improvement both in consumer

attitudes toward homebuying and in homebuilders' perceptions of home

II-23

PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates; millions of units)
1991
Annual

All units
Permits
Starts

Nov.r

Oct.r

.98
1.04

1.02
1.09

1.03
1.09

.99
1.08

.76
.84

.76
.83

.78
.87

.81
.92

.80
.89

.79
.91

1985

.84
.95

.51

n.a.

.52

n.a.

3.48

3.23

3.27

3.16

3.31

3.34

.20
.17

.20
.16

.20
.17

.22
.17

.23
.20

.21
.17

.21
.16

Revised estimates.

n.a.

Not available.

Milljons of units

1984

1.05
1.10

3.29

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)

1983

Dec.p

n.a.

Multifamily units
Permits
Starts
Preliminary.

Q4p

.96
1.00

Existing homes

1991

.96
1.01

Single-family units
Permits
Starts
Sales
New homes

1991
Q3

1986

1987

1988

1989

1990

1991

1992

II-24
Millions of units, SAAR

CONSUMER HOMEBUYING ATTITUDES 1

Diffusion index

1 The homebuying attitudes index is calculated by the Survey Research Center (University of Michigan) as the proportion of respondents
rating current conditions as good minus the proportion rating such conditions as bad.

Millions of units, SAAR

2
BUILDERS' RATING OF NEW HOME SALES

Diffusion index

(seasonally adjusted)

Builders' rating of new home sales (right scale)

Single-family starts (left sca)e)

1987
1988
1989
1990
1991
2 The index is calculate, Iom National Association of Homebuilders data as the proportion of respondents rating current sales as good
to excellent minus the pioporton rating them as poor.

II-25
sales.

Total housing starts rose 2.6 percent in December to

1.10 million units at an annual rate, because of an increase in
single-family home construction.

For 1991

as a whole, however,

starts totaled only 1.01 million units, the lowest annual average in
the postwar era.
In the single-family sector, starts increased 4.2 percent in
December, as continued declines

in mortgage interest

rates further

pared the cash flow burden of home purchases.

Also, starts for

November were revised upward by 20,000 units.

Permit issuance for

single-family homes

rose nearly 7 percent in December,

substantiating the increase in building activity.
homes

edged up

Sales of existing

about 1 percent in December to 3.34 million units,

the highest level since last June.

New home sales

unchanged after a moderate increase in October.

in November were

However, sales in

the Northeast plummeted an inexplicably large 45 percent in
November.
to

The sharp decline in new home sales

strong December increases

in marked contrast

in both total housing starts and

existing home sales in the Northeast.

This evidence suggests that

the national estimate of new home sales may bounce back in
December--or that the November
The early indications
January.

figure may be revised upward.

are that housing demand strengthened in

According to preliminary data, consumer attitudes toward

homebuying improved sharply

(chart).

Furthermore, builders' rating

of new home sales turned more positive in January, suggesting that
some households were acting upon the
attitudes

(chart).

improvement in homebuying

Most prominent among the reasons given by

consumers with a favorable view of homebuying conditions in early
January was the low level

of interest rates.

Conceivably, the very

recent mortgage rate backup may tip the balance for some potential
buyers even further in favor of purchasing now instead of waiting
for

further rate declines.

II-26
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, not seasonally adjusted,
except where otherwise noted)

October-December

Dollar

Percent

change

1990

1991

Outlays
Deposit insurance (DI)
Defense cooperation account
(DCA) contributions (-)

335.6
14.2

338.1
-5.0

2.5
-19.1

-4.3

-3.8

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

325.8
80.9
46.2
63.4
40.2
40.5
54.6

346.8
77.5
49.8
68.5
50.9
44.9
55.3

21.1
-3.4
3.6
5.1
10.7
4.4
.7

6.5
-4.2
7.8
8.1
26.5
10.8
1.3

Receipts
Personal income taxes
Social insurance taxes
Corporate income taxes
Other

249.4
114.3
85.8
25.4
23.8

254.9
113.0
90.9
24.4
26.6

5.5
-1.3
5.1
-1.0
2.7

2.2
-1.1
6.0
-4.0
11.4

86.2
76.4

83.1
91.9

-3.1
15.5

-3.6
20.3

Deficit
Deficit excluding DI and DCA
Note:

.7
-135.0
-12.5

Details may not add to totals due to rounding.

CBO BUDGET ESTIMATES 1
(Billions of dollars)

1992

1993

Fiscal years
1995
1994

1996

1997

Outlays

1454

1505

1523

1536

1593

1718

Receipts

1102

1179

1263

1342

1415

1492

Deficit

352

327

260

194

178

226

Deficit excluding deposit
insurance and Desert Storm
contributions

290

258

227

210

220

254

-16

-44

-28

Memo:
Deposit insurance
Desert Storm
contributions(-)

II-27
Multifamily housing starts dropped to 155,000 units at an
annual rate in December, a level just above the series low set last
May.

Multifamily starts averaged 173,000 units for the year, the

lowest since the 1950s.

Multifamily housing production continues to

be hampered by the persistence of very high vacancy rates on
apartment units and the resulting restraint on rents.

After

accounting for seasonal patterns, the multifamily vacancy rate
continued to edge up in the fourth quarter of 1991.
Federal Sector
In the fourth quarter of 1991, the unified budget deficit
totaled $83 billion (not at an annual rate), a bit less than its
level of a year earlier.

That figure is deceptive, however:

outlays for deposit insurance (DI) and contributions to the defense
cooperation account (DCA) are excluded, the fourth-quarter deficit
was up $15.5 billion from its year-ago level.

(With the recent

approval of a $25 billion appropriation for the RTC, which is
projected to satisfy RTC needs through the end of March, outlays for
deposit insurance are expected to rise substantially in the current
quarter.)

Outlays were boosted in the fourth quarter by continued

sizable growth in spending on social security, income security, and
medicare and health.

Revenues were up only about 2 percent relative

to a year earlier, as increases in social insurance and excise taxes
(boosted by legislation enacted in late 1990) were offset by
weakness in personal and corporate income taxes associated with the
weakness in economic activity.
The CBO released its economic and budget outlook on January 23.
CBO's baseline estimates show the federal budget deficit rising
$83 billion to $352 billion in FY1992, and then declining steadily
through FY1995 as economic activity strengthens, outlays for deposit
insurance decline, and spending reductions mandated by the 1990
Budget Enforcement Act take effect.

After FY1995, the deficit is

II-28
REVISIONS TO CBO'S BUDGET ESTIMATES FOR FY1992 AND FY1993
(Billions of dollars)

Actual
1991

January forecast
1993
1992

Change from
August forecast
1993
1992

Total revenues

1054

1102

1179

-39

-45

Total outlays
Deposit Insurance (DI)
Contributions to Defense
Cooperation Account (DCA)

1323
66

1454
67

1505
68

-49
-48

4
10

-43

-5

Deficit

269

352

327

-11

Deficit excluding DI and DCA

246

290

258

CBO ECONOMIC ASSUMPTIONS

1992

1993

Calendar years
1995
1994

1996

19.

-------- Percent change, year over year----Real GDP

1.6

3.6

2.7

2.5

2.6

Implicit GDP deflator

2.9

3.2

CPI-U

3.3

3.6

----------- Percent, annual average--------Civilian unemployment
rate

6.9

6.4

6.2

6.0

5.9

5.7

Interest rates
Treasury bills
Treasury notes

4.4
7.1

5.1
7.1

5.2
7.1

5.4
7.1

5.5
7.1

5.6
7.1

Source:

CBO, The Economic and Budget Outlook, January 1992.

II-29
projected to begin an upward drift in response to increased
entitlement

spending.

Relative to CBO's August projections, the

forecast for the deficit excluding DI and DCA has been adjusted up
in FY1992 and FY1993 about $40 billion, reflecting lower receipts
estimates attributable to slower income growth and lower capital
gains realizations than were forecast in August.
CBO's projections assume adherence to the 1990 Budget
Enforcement Act, which for FY1993 requires that discretionary
defense and domestic

outlays be cut $12 billion and $9 billion

respectively from their FY1992 levels.
1995,

For fiscal years 1994 and

the spending caps apply to total discretionary spending, which

is slated to fall $7 billion in FY1994 and then remain flat in
FY1995.
CBO now projects that deposit insurance outlays in fiscal years
1992 and 1993 will remain essentially unchanged from their FY1991
level.

Over the next five fiscal years, the undiscounted total of

projected deposit insurance outlays is essentially unchanged
relative to CBO's

August projections, as higher projected spending

on the Bank Insurance Fund about offsets $30

billion of projected

RTC spending that has been pushed beyond the forecast horizon.
The Administration released its FY1993 budget Wednesday
morning.

OMB now expects the federal deficit to approach $400

billion in FY1992, before dropping to about $350 billion in FY1993.

The FY1992 deficit projection is up about $50 billion relative to
OMB's July mid-session budget review estimate, primarily because of
the effect on revenues of weaker income assumptions and lower
technical effective tax rate estimates.

These same factors,

addition to higher projections for deposit insurance and medicaid
outlays, have pushed OMB's FY1993 deficit up about $100 billion
relative to the level estimated in July.

II-30
ADMINISTRATION POLICY BUDGET PROJECTIONS
(Billions of dollars)
Fiscal

1 992

1993

1994
194

Fiscal

years
1995 -years

1996

1997

Outlays

1475

1516

1475

1536

1608

1684

Receipts

1 076

1165

1263

1344

1428

1502

Deficit

399

352

211

192

180

182

Deficit ex deposit insurance
and Desert Storm
contributions

324

276

236

219

202

214

-25

-27

-22

-32

394

228

212

319
Deficit ex policy changes,
deposit insurance, and
Desert Storm contributions

253

239

Memo:
Deposit insurance
Desert Storm
contributions(-)
Deficit ex policy changes

ADMINISTRATION ECONOMIC ASSUMPTIONS
1992

1993

Calendar years
1994
1995

1996

1997

------ Percent change, Q4 over Q4------Real GDP

2.2

3.0

2.9

2.8

GDP deflator

3.2

3.4

3.3

3.2

Consumer Price Index (CPI-W)

3.1

3.3

3.2

3.1

-------

Percent, annual average--------

Civilian unemployment rate

6.9

6.5

6.1

5.8

5.4

5.3

Interest rates
Treasury bills
Treasury notes

4.1
7.0

4.9
6.9

5.3
6.7

5.3
6.6

5.2
6.6

5.1
6.6

Source:
OMB, Budget of the United States Governmemt. Fiscal Year 1993,
January 1992.
16.43a(01/29/92)

II-31
The budget includes proposals to (1) exclude up to 45 percent
of capital gains from tax, the portion depending on the holding
period, (2) accelerate depreciation allowances for equipment
acquired in the remainder of CY1992, (3) make the 20 percent tax
credit for incremental R&D expenditures permanent, (4) create
flexible individual retirement accounts for low- and middle-income
taxpayers, (5) waive the penalty for early IRA withdrawals for the
purchase of a first home and for medical and educational expenses,
(6) grant a 10 percent tax credit (capped at $5,000) on a first home
purchase transacted during the remainder of CY1992,

(7) increase the

exemption for dependent children by $500, and (8) cut defense
spending by $50 billion over the next five fiscal years.

addition, the budget reports that the President has taken action to
permanently reduce withholding taxes by about 5 percent beginning in
March 1992, thereby reducing individual taxes by a projected $21
billion in CY1992.

Because a decrease in withholding results in

increased net final payments the following year, this change leaves
revenues in future years approximately unchanged.
State and Local Government Sector
The state and local government sector remains under budgetary
pressure.

Real purchases of goods and services were essentially

unchanged in the fourth quarter, and were down 1/2 percent over 1991
as a whole.

The slowing in purchases follows several years of

sizable increases; in fact, 1983 was the last year to show a gain
much below 3 percent.

Among the major components of spending, real

construction outlays continued to advance in the fourth quarter, but
compensation was essentially unchanged and purchases of other goods
and services fell.
Anecdotal reports and a national survey indicate that state and
local governments are continuing to experience grave fiscal
conditions, and another round of budget-balancing measures can be

II-32

STATES EXPECTING FISCAL YEAR 1992 BUDGET GAPS
(As of Mid-December, 1991)
_~__~~__

no problem

E revenue shortfalls

U
U

expenditures over budget

revenue shortfalls and expenditures over budget

Source: State FiscalOutlook for 1992, National Conference of State Legislatures,
Jan. 1992.

II-33
expected.

According to a December survey by the National

Association of State Legislatures, about thirty states are expecting
revenues--notably sales tax receipts--for FY1992 to come in below
target, and a similar number are experiencing expenditure overruns,
especially for medicaid (chart).

Moreover, many of these states

have relatively low reserves in their general and rainy-day funds.
Spending cuts are anticipated to be the most frequently used budget
remedy this year; a few state legislatures reduced outlays during
special sessions held in late 1991, and governors in several states
have ordered cuts.

Officials are looking to eliminate and

reorganize programs; for example, Michigan, California, and New
Jersey are revamping their medicaid and welfare programs.

addition, many states are likely to lay off or furlough employees
and to reduce aid to local governments.

So far, only a few states,

notably Maryland and Florida, are considering hikes in taxes;
efforts to roll back recent tax increases in Connecticut and New
Jersey failed.
Labor Costs
The incoming data on labor costs suggest that the rate of
increase in wages continues to trend downward.

The employment cost

index for hourly compensation in private industry rose 4.0 percent
at a seasonally adjusted annual rate in the fourth quarter, and
for 1991 as a whole, compensation costs were up 4.4 percent, only a
little less than in 1990.

This gradual deceleration was seen in the

wages and salaries component and in the benefits component, both of
which came down about 1/4 percentage point from their 1990 increase.
By industry, the deceleration in 1991 was evident in both the
goods-producing and service-producing sectors.

By occupation,

however, the slowing was most pronounced for white-collar workers.
Hourly compensation for this group of workers decelerated about
1/2 percentage point from its 1990 pace.

In contrast, compensation

II-34
EMPLOYMENT COST INDEXES
(Three month percent changes at compound annual rates;

1990

seasonally adjusted)

1991

Sep.

Dec.

Mar.

June

Sep.

Dec.

Private industry workers

4.7

3.8

4.9

4.5

4.1

4.0

By industry
Goods-producing
Service-producing

4.3
4.3

3.8
4.2

4.6
4.9

4.9
4.5

4.1
4.1

4.4
4.0

By occupation
White-collar
Blue-collar
Service workers

4.6
3.9
3.1

2.7
3.8
5.4

6.1
4.6
3.8

4.9
4.1
6.1

4.0
4.9
6.3

2.9
3.7
3.3

3.9
4.2

4.3
2.7

5.0
5.7

4.9
4.9

4.9
4.1

3.7
2.5

3.9
6.1

3.1
6.0

4.2
5.6

4.2
6.6

3.0
6.9

3.3
5.7

Total compensation costs

By bargaining status

Union
Nonunion
Memo:
Wages and salaries
Benefits

EMPLOYMENT COST INDEXES
(Percent change from year earlier; not seasonally adjusted)
Mar.

June

1991
Sep.

Dec.

4.6

4.4

4.5

4.4

4.3
5.1

4.8
4.6

4.4
4.5

4.4
4.4

4.5
4.5

4.6
4.3

By occupation
White-collar
Blue-collar
Service workers

5.2
4.1
4.4

4.9
4.4
4.7

4.7
4.3
4.2

4.5
4.1
4.8

4.4
4.4
5.5

4.5
4.3
4.8

By bargaining status
Union
Nonunion

3.7
5.1

4.3
4.8

4.1
4.5

4.5
4.4

4.8
4.3

4.6
4.3

4.1
6.1

4.0
6.6

4.0
5.8

3.7
6.2

3.7
6.4

3.7
6.2

1989

1990

Private industry workers

4.8

By industry
Goods-producing
Service-producing

Total compensation costs

Memo:
Wages and salaries
Benefits

II-35
LABOR COST MEASURES
EMPLOYMENT COST INDEX
Private Industry Workers

Percent change from year earlier

Total compensation

- - - - Wages and salaries
---- -Benefits

1980

1982

1984

1986

~
I

1988

ECI COMPENSATION PER HOUR
Private Industry Workers

-,
-

-C

1990

1992

Percent change from year earlier

Manufacturing

A>-

1980

- - -Servoe-producing sector

Mnfctrn

1982

1984

1986

1988

AVERAGE HOURLY EARNINGS
Production or nonsupervisory workers

1990

1992

Percent change from year earlier

Dec.

3.1

198198619881990199

1980

1986

1988

1990

1992

II-36
NEGOTIATED WAGE RATE CHANGES
UNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS
(Percent change)
1991

All industries
First-year adjustments
Average over life of contract
Workers affected (in thousands)

Q4 parties
under prior
settlements

1990

1991

4.0
3.2

3.6
3.2

3.4
3.0

3.8
3.3

3.2
2.8

2004

1744

437

353

---

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

AVERAGE WAGE CHANGE IN MAJOR UNION CONTRACTS AND ITS COMPONENTS
(Percent)

Total effective wage change
Contribution of:
New settlements
Prior settlemements
COLAs

1991

1987

1988

1989

1990

3.1

2.6

3.2

3.5

.7
1.8
.5

.7
1.3
.6

1.2
1.3
.7

1.3
1.5
.7

1.1
1.9
.5

AVERAGE HOURLY EARNINGS
(Percent change; based on seasonally adjusted data)
1990

1991

1991
03

--Annual rate-Total private nonfarm
Manufacturing
Excluding overtime

3.7
3.6
3.7

3.1
3.0
2.6

5.2
5.2
3.8

1.6
2.2
1.9

3.5
2.5
2.2

Oct.

1991
Nov.

Dec.

--Monthly rate--.1
.1
.1

.3
.4
.3

1. Changes over periods longer than one month are measured from final
month of preceding period to final month of period indicated.

.7
.2
.2

II-37
gains for blue-collar and service workers were about the same in
1991 as in 1990.
By bargaining status, the deceleration in hourly compensation
was most marked for nonunion workers; in contrast, union
compensation gains were a bit higher in 1991 than in 1990.

Data on

major collective bargaining agreements from the BLS indicate that
the overall wage change in contracts covering 1,000 or more workers
remained about the same in 1991 as in 1990.

However, average first-

year adjustments slowed from 4 percent in 1990 to 3.6 percent in
1991, and the contribution to total union wage inflation from new
settlements was smaller last year.

(The contribution from deferred

increases under existing contracts was somewhat greater.)

Data from

Bureau of National Affairs (BNA; a private publishing company) on
settlements covering fifty or more workers also point to some
slowing in first-year wage adjustments, although not as much as in
the BLS data.

After factoring in lump-sum provisions, the BNA

series estimates median first-year settlements at 4.0 percent in
1991, down from the 4.3 percent average increase negotiated in 1990.
Prices
The consumer price index rose 0.3 percent in December, while
the producer price index--held down by declines for food and
energy--fell 0.2 percent.

Excluding food and energy items, these

measures registered moderate increases of 0.3 percent and
0.2 percent respectively.

On a twelve-month basis, aggregate

inflation rates slowed sharply from their elevated pace in 1990,
reflecting the swing in energy prices, a marked deceleration for
food, and continued slack in labor and product markets.

The CPI

rose only 3.1 percent in 1991, half the increase in the preceding
year, while the PPI edged down.
Food prices toward year-end continued to reflect volatility in
the prices of fruits and vegetables.

The rise in the CPI for food

II-38
RECENT CHANGES IN CONSUMER PRICES
1
(Percentage change; based on seasonally adjusted data)

Relative
importance
Dec. 1990

1991

1991
1990

1991

Nov.

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

All items 2

Dec.

-Monthly rate-

100.0

6.1

3.1

3.0

3.3

3.2

16.2
8.2

5.3
18.1

1.9
-7.4

5.1
-1.2

-3.2
1.6

3.3
5.6

.6
.8

.3
.4

75.6
24.5
51.1

5.2
3.4
6.0

4.4
4.0
4.6

3.2
3.2
3.0

4.6
4.1
4.6

3.1
.9
4.3

.3
.4
.3

.3
-. 1
.5

100.0

6.1

2.8

3.3

2.7

3.3

Food
Energy
All items less food
and energy
Commodities
Services
Memorandum:

CPI-W 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
(Percentage change; based on seasonally adjusted data)1

Relative
importance
Dec. 1990

1991
1990

1991

1991
Q4

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

Nov.

-Monthly rate-

100.0
23.7
16.8
59.5
36.4

5.7
2.6
30.7
3.5
3.7

-. 1
-1.6
-9.6
3.1
3.4

.7
-. 6
.0
1.5
1.2

.3
-6.3
5.3
1.5
2.4

2.3
-. 3
1.0
4.0
4.2

.2
-. 1
.0
.3
.4

23.1

3.4

2.5

1.6

1.0

2.9

2
Intermediate materials
Excluding food and energy

95.2
78.5

4.6
1.9

-2.7
-. 8

-. 7
-1.0

.4
-. 3

-. 3
.3

.1
.1

Crude food materials
Crude energy
Other crude materials

34.4
50.7
14.9

-4.2
19.1
.6

-5.6
-16.7
-8.0

-12.5
.5
-13.3

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods

Capital equipment

-8.1
.0
-4.0

-1.9
4.2
-10.1

Dec.

-. 2
1.2
-1.8

-.2
-. 4
-1.4
.2
.1

.2
-. 1
.1
-. 4
-3.9
-. 4

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-39
slowed to 0.3 percent in December, as price increases
vegetables were down sharply after their November
year,

for fruits and

climb.

Over the

CPI for food rose only about 2 percent, after three years

increases in the 5 to 5-1/2 percent range.

In large part,

this

slowing owed to a decline in meat prices; but even excluding
livestock products
CPI for food),

and fruits and vegetables

(about 30 percent of

average food price increases slowed nearly

2 percentage points from their 1990 pace.

The rise for food away

from home was the smallest in more than twenty-five years,

likely

reflecting soft demand, slowing in labor costs, and reduced prices
for

inputs of food products.
The CPI for energy rose 0.4 percent in December, less

than in

November, as prices dropped back for heating oil and natural
However,

electricity rates turned up.

More recent information

points to a marked near-term decline in prices
products.

Private survey data for

gas.

of petroleum

January indicate lower prices
retail levels.

gasoline at both the wholesale and

Moreover,

wholesale prices for heating oil were down sharply as of midJanuary.

The recent steep declines in prices of heating oil

likely

reflect the high inventory levels, in part as a result of relatively
warm weather during the fourth quarter, and lower

crude oil costs.

Excluding food and energy, goods prices edged down in the
December CPI.

Apparel prices fell 0.6 percent, mainly reflecting a

large decline for
changed.

jewelry, while prices of new vehicles were little

The index for tobacco products posted another large

increase, but prices declined for

a second month for house

furnishings and recreational goods.

In contrast to goods, the rise

in prices of nonenergy services picked up to 0.5 percent in
December, boosted by large increases for airfares and
town.

lodging out of

II-40

Daily Spot and Posted Prices of West Texas Intermediate 1

Dollars per barrel

d',
I

Spot

I'
Si

,
--

Hq I I
I

,'*. -. , ."A

.
.*I

•~i

t5t'

^A
1

•

J....

II*

Posted

Feb

Mar

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

1. Posted prices are evdauated as the mean of the range isted in the Wall Street Journal.
MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Year and Month

Posted

Spot

1921
February
March
April
May
June
July
August
September
October
November
December

19.61
18.66
19.56
19.99
19.04
20.15
20.40
20.55
21.96
21.40
18.47

20.52
19.86
20.82
21.24
20.20
21.42
21.69
21.86
23.23
2247
19.52

17.63

18.81

1992

January
1. Price through January 29.

II-41
On a year-over-year basis (table), deceleration was evident
last year in the underlying measures of inflation, reflecting
continued slack in product and labor markets (and the associated
slowing in compensation), smaller increases in import prices, and
markedly lower inflation expectations.
deceleration was uneven.

However, the pattern of

The CPI excluding food and energy rose

4.4 percent in 1991, 3/4 percentage point less than in the preceding
year; services more than accounted for this slowing.

Rent increases

eased markedly last year as a result of the weakness in housing
markets, and auto financing costs fell 7 percent as interest rates
declined.

Despite the year-end pickup, airline fares registered a

net decline of 6 percent--after a surge in 1990--in response to the
dropback in fuel costs after the Gulf War as well as sluggish
demand.

Prices for medical care and several labor-intensive

services also rose less than in 1990 (not shown).
In contrast to services, the CPI for goods other than food and
energy rose more in 1991 than in 1990--4 percent compared with
3.4 percent.

About half of the pickup can be attributed to higher

excise taxes, mainly the hike in federal taxes early last year on
alcoholic beverages, cigarettes, and luxury cars.

A swing in prices

of used cars, which declined in 1990, can account for the remainder
of this acceleration.

The prices of new vehicles were up

3.2 percent in 1991, compared with an increase of 2 percent in 1990.
However, there was a marked slowing for some other goods, notably
apparel.

This pattern--acceleration for cars and slowing for other

consumer goods--also is evident in import prices (lower part of
table).
At the producer level, the PPI for finished goods less food and
energy rose 3.1 percent last year, 0.4 percentage point less than in
1990.

Deceleration was limited for consumer goods but notable for

capital equipment excluding motor vehicles; prices of imported

II-42

INFLATION RATES EXCLUDING FOOD AND ENERGY
(Percent change from tweleve months earlier)

Dec.
1989

Dec.
1990

Dec.
1991

4.4

5.2

4.4

2.7
2.9

3.4
3.7

4.0
4.0

4.8
2.4
.7
2.5

4.2
2.0
5.0
4.2

9.9
3.2
3.4
2.7

5.3

6.0

4.6

5.1
4.2
5.5
4.3
5.3
8.6

4.8
4.1
14.4
.0
22.7
9.9

3.7
2.9
8.1
-7.1
-6.0
8.0

PPI Finished goods

4.2

3.5

3.1

Consumer goods

4.4

3.7

3.4

Capital equipment excluding
motor vehicles

4.0

3.5

2.2

1.9

-.8

-3.6

-8.0

CPI
Goods
excluding used cars
Alcoholic beverages
New vehicles
Apparel
Personal care commodities
Services
Owners' equivalent rent
Tenants' rent
Other renters' costs
Auto finance charges
Airline fares
Medical care

PPI intermediate materials
PPI crude materials

Factors Affecting Price Inflation
ECI hourly compensation

4.8

4.6

4.4

Civilian unemployment rate1

5.3

6.1

7.1

Inflation expectations

4.6

5.5

4.0

Non-oil import prices3
Consumer goods excluding autos,
food and beverages
Autos
Capital goods excluding automotive
and computers

1.4

2.4

3.6
1.6

3.6
.2

.4
5.1

1.8

5.1

1. End-of-period value.
2. University of Michigan Survey, tweleve-month horizon.
3. BLS import price index, tweleve-month period ending in September.

II-43
PRICE INDEXES FOR COMMODITIES AND MATERIALS

Memo:

Last
obserIra i

..-

-A-

Dec. 10, 19913
to
date
_1i

991

1990

891

Dec.

7.1

6.0

Dec.
Dec.
Dec.

2.8
.9
-3.6

-4.2
-2.7
.6

Dec.

-3.6

Jan. 28
Jan. 28

-9.0
-5,9

-2.7
.6'

Jan. 28
Jan. 28

1.3
-7.2

-2.4
-3.9

Dow-Jones Spot

Jan. 28

-10.1

-1.7

-12.1

1.5

IMF commodity index4
Metals
Nonfood agriculture

Dec.
Dec.
Dec.

-12.9
-23.4
-4.6

-5,6
-3.0
-3.5

.2
-10.4
1.3

n.a.
n.a.

.2
-10.4
1.3

Economist (U.S. dollar index)
Industrials

Jan. 21
Jan. 21

-22.8
-23.8

-4.4
-3.2

-9.1
-14.9

1.9
3.1

-6.2
-10.5

PPI for crude materials

Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,
seasonally adjusted
Commodity Research Bureau
Futures prices
Industrial spot prices
urnal of Commerce industrials
Metals

1.
2.
3.
4,
n.a.

-11.6

Year
earlier
to date

n.a.

-11.6

-5.6

n.a.

16.7
-8.0

n.a.
n.a.

-5.6
-16.7
-8.0

-8.1

-6.5
-11.3

.2
-2.1

-7.2
-7.1

-2.5
-3.8

n.a.

Not seasonally adjusted.
Change is measured to end of period, from last observation of previous period
Week of the December Greenbook.
Monthly observations.
IMF index includes items not shown separately.
Not available

Index Weights
Energy

Food Commodities

Precious Metals

Others'

PPI for crude materials
51
A ,. A

CRB futures

, ' ?

, ',?,A,
'',,m
'A

34
,

.''

CRB industrials
100

Journal of Commerce index
, ''",.'12
,, ,.' ,' ,,

Dow-Jones

, ,' ,',,' ,A'
A,,'/
/.,'
'.

88
," .,A'''

*.-.'./'A,
, u:-.<-:
t-.::f:.:

7' 7.

IMF index
55

Economist
so
1. Forest products, industrial metals, and other industrial materials.

-1.8

-10.8

-5.4

II-44

COMMODITY PRICE MEASURES *
-

Journal of Commerce Index, total
Journal of Commerce Index, metals

- -

- 95

Ratio scale, index
(1980=100)

94
-93
92

1992

Metals

II
Dec
1

Jan

1992

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

CRB Industrials

i-J 263
1992

-- 220
..

11.

1983

.1,,.1

1984

1985

1986

I.,tl.,

Isal...

1987

1988

1,,

1989

1990

,1,

1991

.onn

1992

CRB Futures
Ratio scale, index
(1967=100)

S320

S310

CRB Futures
270
- 250
230
Jan 28

207

1992

210

1983

1984

1985

1986

1987

1988

1989

1990

* Weekly data, Tuesdays; Journal of Commerce data monthly before 1985

1991

1992

Dotted lines Indicate week of
last Greenbook.

II-45
capital goods slowed even more sharply.

At earlier stages of

processing, in which labor costs tend to have a smaller effect,
prices of intermediate materials (nonfood, nonenergy) receded
0.8 percent last year--affected by sluggish activity in the
industrial sector and the pass-through of the climb and subsequent
dropback of petroleum-based materials costs associated with the Gulf
War.

The PPI for crude materials less food and energy fell

8 percent last year, in large part reflecting declines for scrap
metals, as industrial demand weakened and metal supplies remained
ample.
More recently, there are signs that some commodity prices may
be bottoming out.

Aluminum prices have picked up markedly from

their recent low levels, and large increases also were posted this
month for lumber, plywood, and silver.

The Journal of Commerce

index of industrial prices has turned up in the past few weeks,
largely reflecting the increases for aluminum and plywood; on net,
since the week of the last Greenbook, the index total moved up about
1 percent and the metals component 1-3/4 percent.

In contrast, the

CRB spot industrials index has continued to decline, reflecting
weakness in the prices of steel scrap and cotton.

The CRB futures

index, based mainly on foods and precious metals, turned up in
recent weeks but has registered little net change over the intermeeting period.

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS
(percent)

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

1989

1991

March
highs

FOMC
Dec 17

1992
Dec-Jan
Lows

Jan 29

Change from:
Mar 89 Dec-Jan
highs
Lows

FOMC
Dec 17

Short-term rates

Federal funds 2

9.85

4.49

3.94

4.01

-5.84

0.07

-0.48

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

9.10
9.11
9.05

4.11

3.72
3.76
3.81

3.86
3.92
4.01

-5.24
-5.19
-5.04

0.14

-0.25

0.16

-0.24

0.20

-0.16

4.16
4.17

Commercial paper
1-month
3-month

10.05

4.87

4.01

4.05

10.15

4.56

3.94

4.05

-6.00
-6.10

0.04
0.11

-0.82
-0.52

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

10.07

4.79

3.95

4.03

-6.04

10.32

3.89
3.89

4.03

-6.29

10.08

4.44
4.39

4.06

-6.02

0.08
0.14
0.17

-0.76
-0.41
-0.33

10.19
10.50

4.75
4.44

3.94
3.88

4.00
4.00

-6.19

0.06

-0.75

-6.50

0.12

-0.44

11.50

7.50

6.50

-5.00

0.00

-1.00

9.88
9.53
9.31

5.39
7.18
7.75

5.05
6.71
7.39

5.67

-4.21
-2.28

-1.56

0.62
0.54
0.36

0.28
0.07
0.00

7.95

6.90

6.53

6.70

-1.25

0.17

-0.20

Corporate--A utility
recently offered

10.47

8.74

8.46

8.63

-1.84

0.17

-0.11

Home mortgage rates 6
FHLMC 30-yr. FRM
FHLMC- 1-yr. ARM

11.22
9.31

8.53
6.23

8.23
5.79

8.56
5.90

-2.66

0.33

0.03

-3.41

0.11

-0.33

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
Municipal revenue
(Bond Buyer)

1989
Record
highs

Date

Lows
Jan 3

7.25
7.75

1991

1992

FOMC
Dec 17 Jan 29

Percent change from:
Record
highs

1989
lows

FOMC
Dec 17

-1.44
-2.25
-1.37
-2.30
-2.21

50.37
47.17
34.20
62.80
48.25

11.12
7.31
10.77
14.19
6.80

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

Stock prices
Dow-Jones Industrial 3272.14
231.85
NYSE Composite
415.32
AMEX Composite
630.82
NASDAQ (OTC)
4121.28
Wilshire

1/28/92
1/15/92
1/17/92
1/15/92
1/15/92

2144.64 2902.28 3224.96
154.00 211.21 226.64
305.24 369.81 409.64
378.56 539.70 616.31
2718.59 3773.53 4030.22

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

1/ One-day quotes except as noted.
2/ Average for two-week reserve maintenance period
closest to date shown. Observation for December 17
FOMC is average for week of Dec 18. Last observation.
is average to date for maintenance period ending
February 5. 1992.

Secondary market.
Bid rates for Eurodollar
deposits at 11 a.m. London time.
Based on one-day Thursday quotes
and futures market index changes.
Quotes for week ending
Friday previous to date shown.

Selected Interest Rates*
(percent)
Daily

Prime Rate

3-month
Treasury Bill
Federal Funds
I

1989

1990

1991

12/17

-49

Corporate Bond
(weekly)

Primary Fixed -

Rate Mortgage

S(wekly)
3so-yea T
t
1989
Friday weeks

1990

1991

re piled through January 24, staement week through Jnuary 29.

12/17

sury Bond
(daily)
i

2/4

o10

DOMESTIC FINANCIAL DEVELOPMENTS

Treasury bill rates have declined about 25 basis points since
the December FOMC meeting, responding primarily to the larger than
expected easing action by the System near the end of the year.
Following the full percentage point cut in the discount rate, major
banks slashed their prime rate by 1 percentage point, to 6-1/2
percent.

The federal funds rate decreased 1/2 percentage point in

association with the discount rate move, and most other private
money market rates have declined 1/4 to 3/4 percentage points.
Yields on Treasury securities and fixed-rate mortgages fell sharply
early in the intermeeting period, although subsequently most longterm yields have retraced those declines, as the market's
expectation for additional near-term easing has diminished and
prospects for a fiscal stimulus package have increased.
Equity market indexes are up 7 to 14 percent over the
intermeeting period; the major indexes set record highs in early
January, reflecting lower interest rates and growing optimism about
future corporate earnings.

Cyclical stocks posted significant

gains, while bank stocks benefited from lower interest rates and the
more positive tone of the industry's fourth-quarter earnings
reports.
Growth of M2 and M3 slowed further on average in January,
although both aggregates strengthened in mid-month after a period of
unusual weakness around year-end.

The nontransactions component of

M2 declined and large time deposits fell sharply.

M3 money funds

also weakened considerably from a brisk fourth-quarter pace.

Bank

credit growth slowed in December, as loans posted a small decline.
and early data for January point to anemic growth this month.

III-1

III-2
MONETARY AGGREGATES
(based on seasonally adjusted data unless otherwise noted

1991
Q3

1991
_

1991

1991
Nov

Growth
1992
Q4 912
Jan pe Jan 9 pe

------------ Percent change at arvnal
1.
2.
3.

1991
Dec

7.5
1.1
-1.1

Ml
M2
M3

-----------

11.1
3.3
1.3

14.3
5.0
2.6

rates------------------9.2
2.8
1.8

15
2

13
\

1
Levels
bil.
S
Dec 91

Percsnt change at annual rates------------

Selected components
4.
5.
6.
7.
8.

Mi-A
Currency
Demand deposits
other checkable deposits
M2 minus M12

11.
12.
13.

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares
Commercial banks
Savings deposits (including MMDAs)
Small time deposits

14.

Thrift institutions

9.
10.

15.
16.
17.
18.

19.
20.
21.
22.
23.

Savings deposits (including MMAs)
Small time deposits
M3 minus M2

Large time deposits

At commercial banks,

net 4

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

--MEMORANDA:
24.
25.

26.
27.

Managed liabilities at commercial
banks (25+26)
Large time deposits, gross

Nondeposit funds
Other'
U.S. government deposits at commercial
7

banks

4.4

8.7

11.2

7.1

564.9

8.4
3.4

6.9
2.6

7.4
10.0

5.4
16.1

5.4
7.9

9
15

267.2
289-5

12.5

12.9

15.1

19.6

333.2

1.5

-1.0

0.7

1.7

-2

2544.7

-8.1

-15.1

38.1

62.3

36.2

75.1

4.6
7.6
13.3
2.1
-6.9

-3.4
7.9
12.5
3.4
-10.5

-3.1
4.3
13.2
-4.8
-8.2

0.3
-0.2
14.0
-15.4

-4.4

-3
4
28
-22
-2

9.2

9.9

9.7

-1.0
0.0
14.3
-15.0
-4.4
13.7
-18.4

14.2
-19.0

-22

362.2
1258.9
660.4
598.5
844.0
377.2
466.8

-8.1

-2.6

-10

735.4

-16.5

-24.2

-6.1

-11.0

-21.2
-7.6

12.4
0.5

-12.7
-6.6
-31.7

-16.7
-10.4
-40.5-

-24.1
-20.6
-37.4

-20.8
-18.2
-31.6

-15.2
-118
-29.6

-28
-29
-26

436.6
353.6
83.0

33.4
-21.6
-8.1

11.4
-11.5
-2.5

37.0
-23.6
-0.6

38.5

-28.6
-11.4

38.0
-47.2
-26.8

20
-2
-27

179.1
70.9
61.4

Average monthly change in billions of dollars----

-1.2
-0.7

-2.4
-3.0

3.7
-5.7

-0.6
-3.4

8.7
-2.3

-0.5

0.6

9.4

2.8

11.0

0.6
-1.0

0.5
0.1

6.9
2.4

2.5
0.3

6.8
4.2

0
-5

41.3
241.8

0.2

-0.1

0.9

5.0

-7.7

26.5

706.9
423.8
283.1

Net due to related foreign

institutions
28.
29.

5.6

Amounts shown are from fourth quarter to fourth quarter.

2. Nontransactions Mz is seasonally adjusted as a whole.
3. The non-M2 component of 13 is seasonally adjusted as a whole.
institutions.
4. Net of large denomination time deposits held by money market ixutal funds and thrift
5. Dollar amounts shown under nmaorands are calculated on an rnd-month-of-quarter basis.
6. Consists of 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.
7. Consists of Treasury demand deposits and note balances at comercial banks.
pe - preliminary estima+a

III-3
In response to low interest rates and high stock prices,
nonfinancial corporations issued long-term bonds and shares in near
record volumes.

Public bond offerings soared in January to the

second largest monthly level ever; proceeds are targeted in many
cases for the repayment of short-term debt or callable bonds.

Much

of the equity issuance has been by firms seeking to reduce debt and
strengthen balance sheets, and it continues to include a substantial
number of reverse LBOs.

Commercial paper dropped slightly in

December but increased again in January, and bank business loans
declined in both months.

In the household sector, increased housing

activity near the end of the year and growth in real estate loans at
banks suggest some recovery in net mortgage borrowing in the fourth
quarter, while mortgage refinancing activity has soared.

Consumer

credit growth showed signs of firming in December following no
change in November.
Net borrowing by the federal government declined in the fourth
quarter on a not-seasonally-adjusted basis, and is expected to fall
somewhat further in the first quarter.

After raising significant

funds in November and December, state and local governments borrowed
much less in January.

Borrowing by the sector is expected to

accelerate, however, as the calendar for new municipal bonds has
begun to build.
Monetary Aggregates and Bank Creditl
M2 grew at a 3-1/4 percent annual rate in the fourth quarter,
leaving its fourth-quarter-to-fourth-quarter growth in 1991 at
3 percent--somewhat above the lower bound of its target range.

grew at a 1-1/4 percent annual rate in the fourth quarter and over

1. The monetary data in this document incorporate benchmarks and
updates to seasonal adjustment factors that should be treated as
confidential until their public release, tentatively scheduled for
February 13, 1992.

III-4
Certificate of Deposit Rates Relative to Savings Rates
Certificate of Deposit Rates at Commercial Banks

Percent
10

Monthly

9
One-Year /,'

Tree-Month
S

^^^

---4
7
6

^^<^^'\

Total Savings (including MMDAs)

1986

1987

1988

1989

1990

Spread Between Six-Month CDs and Savings Deposit Rates

1991

Percentage Points
M3

Monthly

1986

1987

1986198719881990196
1988

IIIIiiiiiiil1
1990

1991

III-5
1991 as a whole, also a bit above the lower bound of its target
range.

M2 and M3 continued to expand sluggishly in January.

M1 growth accelerated significantly in January, propelled by
higher growth rates in all three of its major components.

contrast, the nontransactions component of M2 declined at a
2 percent rate in January, after two months of slight gains.

After

a small increase in December, M2 money funds contracted again in
January, largely reflecting declines around year-end.

Runoffs of

small time deposits, which had occurred throughout 1991, picked up
this month, as interest rates offered on these deposits fell roughly
in line with market yields.

A substantial portion of these time

deposit outflows evidently was shifted to savings deposits
(including MMDAs), which have accelerated sharply in January.
M2 growth would have been stronger were it not for recent sharp
cuts in rates paid on OCDs and on savings deposits.

Rates on NOW

accounts and on total savings accounts (including MMDAs) fell by
more than 1/2 percentage point between October and December.

Since

mid-December, NOW account rates at commercial banks have tumbled
65 to 75 basis points to an average of just over 3 percent, while
rates on MMDAs have dropped another 60 basis points.

The reductions

in total savings deposit rates, which have brought them more in line
with retail CD rates (chart), may have been motivated in part by a
desire to limit internal shifts of funds.

Conversations with senior

bank financial officers indicate most banks are not concerned that
lower rates on savings deposits will result in a significant loss of
these funds; in the past, longstanding savings account customers
have not been sensitive to changes in relative interest rates.
The non-M2 portion of M3 declined at a 10 percent annual rate
in January.

The decline in large time deposits (net of money fund

holdings) accelerated to nearly a 30 percent annual rate, and

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT1
(Percentage change at annual rate, based on seasonally adjusted data)

Category

Dec.
1990
to
Dec.
1991

1991
Q3

1991
Q4

1991
Oct.

1991
Nov.

1991
Dec.

Levels
bil.$
1991
Dec.

--------------- Commercial bank credit--------------1. Total loans
and securities
at banks
2.

Securities

3.2

0.8

6.0

6.8

6.4

14.7

23.5

30.3

19.1

19.8

733.6

24.7

24.0

560.3

7.0

173.3

U.S. government

23.2

21.7

29.3

37.0

Other

-0.8

-5.3

5.9

9.8

0.7

-0.8

-3.6

0.2

-1.1

2.0

-3.9

-4.2

1.9

-2.8

1.8

1.1

Loans

-3.3

Business

Real estate

Consumer

-4.2

-7.2

-3.9

-8.5

Security

16.3

58.5

30.1

-10.2

5.0

10.

Other

0.2
----

-3.9

-4.4

-3.8

Loans at foreign
branches 2

-1.2

-3.4

41.2

13.

Sum of lines 11 and 12

-3.8

-4.3

-2.1

14.

Commercial paper
issued by
nonfinancial firms

-10.7

15.

Sum of lines 13 and 14

-5.1

16.

Bankers acceptances, 3
U.S. trade-related

17.

Finance company

12.

18.

-16.4

-3.9

-0.3

2,077.0

-6.0

616.8

1.3

857.0

-3.3

0.0

361.8

-2.7

71.2

20.7

47.2

0.6

10.6

3.7

194.1

0.0

3.1

Short- and intermediate-term business credit----

Business loans
net of
bankers acceptances

11.

2,810.6

16.6

4.8

-26.3
-8.4
-20.5

-5.3

0.6
20.6
1.3

-22.9

-2.7

-2.9

4.3

-4.9

-7.0

40.5

58.8

-3.2

-4.5

635.8

18.0

-10.6

134.3

0.5

-5.6

770.2

-4.3

-8.7

610.2
25.7

27.5

loans to business 4

n.a.

11.6

n.a.

11.4

8.2

n.a.

311.35

Total (sum of
lines 15, 16,
and 17)

n.a.

-3.4

n.a.

1.2

2.4

n.a.

1,113.05

1. Average of Wednesdays.
2. Loans at foreign branches are loans made to U.S. firms by foreign branches of
domestically chartered banks.
3. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic
shipment and storage of goods. Based on average of data for current and preceding
ends of month.
4. Based on average of data for current and preceding ends of month.
5. November 1991 data.
p--Preliminary.
n.a.--Not avaxlable.

III-7
institution-only money market funds contributed less strength.

money funds grew at a 20 percent annual pace in January, after
several months of very rapid increases spurred by a widening gap
between their own yields and Treasury rates.

However, money fund

balances plunged around year-end, in part as institutions
temporarily shifted funds into short-term money market instruments
to take advantage of an anticipated year-end spike in rates.

addition, some institutional holders reportedly moved funds into the
stock market so that on their annual financial statements they would
appear to be more heavily invested in equities.

The end-of-year

decline was more than recovered by a rebound in subsequent weeks.
Bank credit growth slowed in December to a 4-3/4 percent rate,
a touch stronger than its 3-1/4 percent advance for the year as a
whole.

As previously in 1991, bank credit growth in December was

due primarily to acquisitions of U.S. government securities, which
offset declines in total loans.

Business loans weakened further in

December and declined 4 percent for the year as a whole, in part a
result of an extraordinary pace of longer-term debt and equity
issuance by nonfinancial firms looking to strengthen their balance
sheets.

January data from the Survey of the Terms of Bank Lending

show that only a few respondents indicated any further tightening in
standards for approval of loan applications or the terms of business
loans.

Respondents characterized recent loan demand as having

weakened for firms of all sizes.
Real estate loans edged up in December and expanded in 1991 by
only 2 percent, the slowest rate in at least three decades, despite
a nearly 14 percent increase last year in home equity loans.
Reflecting an increase in consumer lending and a slower pace of
securitization, consumer loans on commercial bank balance sheets,
for the first time since last February, did not decline.

For the

III-8
year, consumer loans contracted but managed a small gain when
adjusted for estimated securitization.

Security loans advanced

briskly again in December, continuing a pattern of stronger growth
that began in July, likely as a result of increased security
positions during the rally in equity and bond markets.
suggest bank credit growth slowed further in January.

Partial data
Securities

acquisitions decelerated and, aside from security loans, growth of
the loan components remained sluggish.
Some evidence suggests that weak credit demand and restraint on
bank credit also were evident in off-balance-sheet items in 1991
(table).

For example, considerable weakness in commercial real

estate through the third quarter was accompanied by a 40 percent
drop in credit lines for this type of loan, as banks aggressively
tightened loan approval standards.

Similarly, unused lines for

CHANGES IN SELECTED UNUSED COMMITMENTS AT BANKS
($ billions, year ending September 30, 1991)
Percent
Change

Borrowing Category
Home Equity
Credit Cards
Commercial Real Estate
Other (includes C&I)
Standby Letters of Credit

12.3
22.3
-40.9
-1.3
-2.8

Outstandings
9-30-91
54.6
453.7
43.9
600.0
119.5

commercial and industrial (C&I) loans apparently also declined along
with outstanding balances.

On the other hand, growth in loans taken

down under home equity lines of credit was about matched in the
growth of unused lines, at least through the third quarter.
surge in available credit card lines may indicate continued
aggressive marketing of credit cards by banks.

The

III-9
Business Finance
Over the intermeeting period, financing by nonfinancial firms
continued to be dominated by balance sheet restructuring.

response to lower interest rates and higher stock prices, firms
issued long-term bonds and equity at near record levels.

Reflecting

this substitution into longer maturity financing, commercial paper
declined slightly in December and increased only modestly in
January, while bank loans in December ran off at a 6 percent annual
rate and in January apparently declined slightly again.

Overall,

borrowing by nonfinancial firms probably weakened somewhat in
December, but firmed in January as a result of strong bond issuance.
Public bond offerings exploded in January, sparked by the drop
in long-term rates following the discount rate cut in December.
Total gross bond issuance by nonfinancial firms in January could
reach $16 billion, the second largest monthly issuance after the
record of April 1986.

Most of January's volume has been in the form

of large offerings of non-callable bonds issued by investment-grade
firms, including a number of utilities.

Despite the heavy issuance,

yield spreads on investment-grade bonds have remained relatively
narrow.

The favorable conditions for bond issuance currently appear

to extend at least into the higher grades of the junk bond market,
where spreads have narrowed somewhat since the last FOMC meeting.
Although still light relative to a few years ago, junk issuance in
December continued to show some strength; offerings in the final two
months of the year constituted almost 40 percent of total offerings
for 1991.

Currently, the market appears receptive to BB-rated

issuers and to certain B-rated issuers.
A desire to refinance more expensive debt at lower interest
rates has spurred much of the recent public bond issuance.

Of the

III-10
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)

------------1990

1991

1991------------Q4 P

Nov. p
-

Corporate securities - totall
Public offerings in U.S.

1992DecP
-

Jan?
-~--

19.88
17.75

31.77
29.05

30.72
28.26

32.96
30.65

34.32
31.55

28.77
27.52

39.25
35.50

1.95
1.03
0.35
0.68
0.92

5.44
3.72

8.48
6.07
0.36
5.72
2.41

9.05

3.30
1.72

4.94
3.50
0.16
3.34
1.44

7.52
5.51
0.29
5.22
2.01

5.50
3.30
0.30
3.00

15 .79
5.65
1.97
3 .69

23.61
9.61
2.98
6.61
14.02

23.31
9.27
2.73
6.54
14.05

22.17
9.67
3.37
6.23
12.57

22.50
9.80
3.40

30.00
16.00

12.70

20.00
10.50
3.50
6.80
9.70

6.49
0.15
0.04

3.59
11.91
1.03
0.01

2.80
11.16

2.90
10.96
1.91
0.00

2.50
12.46
2.54
0.00

3.70
8.99
2.38
0.00

5.00
16.51
1.50
0.14

0.40
2.43
3.27
0.82

-0.63
2.99
4.08
0.81

0.41

3.66
5.21
0.89

0.46
2.97
3.43
0.81

0.29
2.35
2.66
0.97

0.10
2.03
2.90
0,84

0 .87
5.00
1.85
0.00

Bonds sold abroad - total
Nonfinancial
Financial

1.92
0.46
1.46

2.26
1.05
1.22

2.11
1.04
1.06

1.81
0.50
1.30

2.00
0.50
1.50

1.00
0.30
0.70

3 .50
1.80
1.70

Stocks sold abroad - total
Nonfinancial
Financial

0.22
0.10
0.12

0.46
0.38
0.08

0.36
0.29
0.07

0.51
0.43
0.07

0.77
0.63
0.14

0.25
0.21
0.04

0.25
0.25
0.00

Stocks--total 2

Nonfinancial
Utility
Industrial
Financial
Bonds
Nonfinancial
Utility
Industrial
Financial
By quality 3
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity-based bonds 4
Mortgage-backed bonds
Other asset-backed
Variable-rate notes

10.14
3.43

0.42

0.47

0.01

6.47

0.26
6.21
2.58

6.40

1. Securities issued in the private placement market are not included.
gross proceeds rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that
in restructurings. Such swaps totaled $9.4 billion in 1990.
3. Bonds categorized according to Moody's bond ratings, or to Standard
unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants that
holder to purchase equity in the future.
e--staff estimate.
p--preliminary.

2.20

8.00

8.00
14.00

Total reflects
have occurred
and Poor's if
entitle the

III-ll
$38 billion of investment-grade nonfinancial corporate bonds that
will become callable in 1992,

call options on around $25 billion of

these bonds are "in the money" at current interest rate levels and
likely will be exercised.

To this end, firms already have announced

calls this year on $10 billion of outstanding issues.
Conversations with participants in the private placement market
suggest that much of the borrowing activity over the last half of
1991 was to refinance short-term bank loans.

In addition to locking

in low long-term rates, many borrowers at weaker banks reportedly
are concerned that their lines of credit may not be renewed.
Fueled by rising stock prices, equity issuance by nonfinancial
firms continued at a very strong pace over the intermeeting period.
December issuance totaled more than $5-1/2 billion, bringing the
fourth-quarter total to a record $18 billion.

As in the bond

market, much of the equity issuance has been by firms attempting to
raise funds to strengthen balance sheets, and it continues to
include a healthy number of reverse LBOs.

December's issuance

included reverse LBOs, each more than $500 million, by OwensIllinois and HealthTrust, Inc.

In both cases, proceeds were used to

retire outstanding high-yield bonds.

In addition, Goodyear,

Tenneco, The Marriott Corporation, and International Paper issued a
combined $1.5 billion of equity in December and January, devoted
primarily toward debt retirement.

Plans for additional initial

public offerings (IPOs) have been filed by a large number of
companies, and numerous reverse LBOs are on the calendar.

Foremost

among them is Burlington Industries' plan for an $850 million
offering, which, combined with a new bank line, would be used to
retire outstanding junk bonds.
The restructuring of balance sheets by nonfinancial firms is
beginning to show through to some measures of corporate financial

III-12
health. According to staff estimates, gross interest payments by
nonfinancial firms as a share of cash flow have declined to less
than 36 percent in the fourth quarter of 1991 from more than
39 percent a year earlier (chart).

The level of gross interest

payments itself appears to have peaked in the first quarter of 1990;
since then, it has fallen roughly $60 billion, or almost 20 percent.
Bond rating changes suggest that financial restructuring also
is paying off in credit evaluations.

According to Moody's,

downgrades among nonfinancial firms fell slightly from the third
quarter and were well below the levels of last winter and spring.
Upgrades increased from the third quarter.

Many of the upgrades

have stemmed from equity issuance or debt retirement, as well as

GROSS INTEREST PAYMENTS OF NONFINANCIAL CORPORATIONS
Percent of cash flow*

Quarterly
-

36
34

-w

30
28

----

26
-

24
-n22

S1972

1975

1978

1981

'Cash flow is profits before tax plus interest paymets and depredation.
Nde: Last observation Is for 1991: 04.

1984

20
1987

1990

II-13
actual or expected improvement in operating earnings.

The most

prominent upgrade of the quarter was RJR Nabisco, which returned to
investment-grade status after successfully restructuring its balance
sheet through a series of large equity offerings and substantial
high-yield debt retirements.
Reflecting lower interest rates and growing optimism about the
economic outlook, stock prices are up between 7 and 14 percent since
the December FOMC meeting, with the major indexes setting record
highs.

Over-the-counter stocks have performed especially well, with

trading activity on NASDAQ often exceeding that on the NYSE.

Bank

stocks, benefiting from lower interest rates and the more positive
tone of the sectors' fourth-quarter earnings reports, were up more
than 15 percent over the intermeeting period.
also have posted significant gains.

"Cyclical" stocks

Reflecting the high level of

the major stock indexes, the S&P 500 price-earnings ratio currently
is at an all-time high of 23.6, while the S&P dividend-price ratio
is at its lowest level since October 1987.

Some market analysts are

suggesting that corporate earnings will rebound sharply in 1992
after extraordinary chargeoffs in 1991.
Satisfying a regulatory requirement for approval of its
proposed merger with Manufacturers Hanover, Chemical Bank in late
January took advantage of the rise in stock prices and issued almost
$1.6 billion in common stock.

As part of its successful merger with

Security Pacific, BankAmerica in December issued $300 million in
preferred stock and announced plans to issue another $300 million
early in 1992.
Stock prices of the major life insurance companies rose less
than 4 percent over the intermeeting period, reflecting evidence of
continued financial problems.

Prudential announced plans to cut its

1992 dividend to policyholders by about 7 percent, citing lower

III-14
interest rates and weak real estate markets.

The announcement

followed dividend cuts by Metropolitan and Mutual Benefit in the
fourth quarter.

In addition. Prudential was downgraded by Moody's

in January from Aaa to Aal, primarily reflecting Moody's concerns
about Prudential's commercial real estate portfolio and its aboveaverage holdings of high-yield securities.

Another top-twenty life

insurance company, Nationwide, also was downgraded from Aaa to Aal
in January.
Treasury and Sponsored Agency Financing
The staff expects a first-quarter federal deficit of
$127 billion, financed by $80 billion of marketable borrowing and a
substantial drawdown in the cash balance.

Although first-quarter

marketable borrowing is projected to be about unchanged from the
fourth-quarter level, gross auction sizes will have to be increased
to repay a bulge in maturing debt.

The staff anticipates that

weekly bill auctions will be raised to $22 billion, from the current
level of $20.8 billion, and that coupon auctions will be raised
between $250 million and $1.25 billion.

A large cash management

bill likely will be needed in early March to bridge seasonal
declines in the cash balance before tax inflows in mid-April.

The

Treasury recently stated that it is considering cutting back on
thirty-year bond auctions and shifting its borrowing toward shorter
maturities.

Such a move would attempt both to lower borrowing costs

by taking advantage of the unusual steepness of the Treasury yield
curve, and to stimulate the economy by lowering long-term interest
rates.
In the market for government sponsored enterprise (GSE) debt,
spreads remain tight by historical standards as the total debt
outstanding continued to hover near the peak established in

III-15

TREASURY AND AGENCY FINANCING1
(Total for period; billions of dollars)
1992

1991
Q1

Jan.

Feb.

Mar.

-126.6

-13.7

-50.6

-62.2

81.9

11.0

21.8

49.1

83.3
24.3
59.1
-1.4

14.3
-3.7
18.0
-3.3

21.6
1.9
19.6
.2

47.5

60.4
-8.5

81.0
25.8
55.2
8.2

2.1

-7.3

36.9

-2.3

32.4

6.8

41.5

48.8

11.9

51.1

18.7

11.9

Q3
Treasury financing
Total surplus/deficit (-)

-91.3

-84.1

Means of financing deficit:
Net cash borrowing
from the public

95.0

'89.1

Marketable borrowings/
repayments (-)
Bills

Coupons
Nonmarketable

103.5
43.0

26.1
21.4
1.6

Decrease in the cash
balance

Memo: Cash balance
at end of period
2

Other

2.3

-5.8

5.0

-3.6

Federally sponsored credit
agencies, net cash

borrowing 3
FHLBs 4
FHLM2
FNMA

Farm Credit Banks
SLMA

5.1

3.6

.8
-1.2
2.7

2.7
.9
.3
.6

-.2
1.5

1. Data reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other transactions.
3. Excludas mortgage pass-through securities issued by FKMA and FHLMC.
4. Borrowilng reflects October and November only.
p--projected.
Note: Details may not add to totals due to rounding.

II-16
mid-1989.

A number of GSEs recently issued new debt on a

competitive-bid basis, rather than through their regular syndication
process.

The issues typically are in the $100 million to

$300 million range.

The bidding by dealers is reported to have been

quite aggressive, with some looking to enhance their overall bond
sales standings.

Indeed, some issues have been purchased at yields

10 basis points below comparable-maturity Treasury securities.
In January, the Securities and Exchange Commission imposed
fines on ninety-eight banks and broker-dealers that admitted to
overstating customer interest in GSE debt offerings.

The fines,

which ranged from $5,000 to $100,000 and totaled $5 million, were
based on the amount of business conducted with the GSEs rather than
on the level of infractions.

Salomon Brothers, whose admissions of

wrongdoing led to the SEC investigation, did not participate in the
settlement.
In late January, the Federal Reserve, the Treasury, and the SEC
released their joint study of the government securities market,
undertaken in response to the Salomon Brothers scandal.

The study

recommends more vigilant enforcement of auction rules, enhanced
surveillance of market rate movements to discern market
manipulation, and reopenings of outstanding securities to offset
unusually severe market shortages.

Such reopenings are expected to

reduce the need for added reporting or other restrictions to impede
market manipulation.

The study also supports accelerated auction

automation and experimentation with alternative auction formats to
broaden bidder participation, lessen the threat of manipulation,
and, perhaps, provide cost savings to the Treasury.

However,

underwriting premiums at recent Treasury coupon auctions have been
very slim, suggesting that bidding currently is extremely aggressive
and that potential cost savings from alternative auction formats

III-17
would be relatively small.

For the sixty-six coupon auctions from

January 1990 to September 1991, the average markup of the auctionaverage rate over the rate at which investors could have purchased
the same security in the when-issued market at the time of auction
was only 3/4 of a basis point, according to staff estimates.

With

regard to GSEs, the study recommended that their equity and
unsecured debt securities not be exempt from federal securities laws
and that they be required to register those securities with the SEC.
Municipal Securities
After heavy issuance in November and December, long-term
municipal bond sales declined in January, but nonetheless remained
strong.

With long-term municipal bond yields near twelve-year lows,

refunding issuance also remains strong.

The forward calendar has

begun to build again, pointing to a pickup in new offerings in
coming weeks.
For 1991 as a whole, gross issuance of long- and short-term
debt jumped 30 percent to about $204 billion, the second highest
annual total ever.

Reflecting widespread budget problems, short-

term issuance surged to a record level of nearly $45 billion.
Moreover, as many financially strapped state and local governments
turned to funding capital expenditures with bond proceeds rather
than tax revenues, long-term issuance surged 28 percent.

response to lower interest rates, refunding volume also picked up.
Changes in long-term debt ratings in 1991 present a mixed
picture of the overall direction of credit quality in the municipal
sector.

Upgrades by Moody's Investors Service exceeded downgrades

by a 2-to-1 margin.

Moody's tends to give considerable weight to

the long-term prospects of issuers, and, as a result, its rating
changes are not very sensitive to cyclical changes in financial
conditions.

In contrast, Standard & Poor's rating changes seem more

III-18
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)
1991
Nov.

Decp

16.88

18.41

18.39

20.23
13.54
3.12
10.42
6.69

16.50
14.95
3.34
11.61
1.55

18.25
17.74
4.24
13.50
.51

17.65
15.77
3.40
12.37
1.88

.81

.38

.16

1990

1991

13.10

16.99

21.04

Total tax-exempt 12.85
Long-term
2 10.03
Refundings
1.68
New capital
8.35
Short-term
2.82

16.57
12.87
3.09
9.78
3.70
.42

Total offerings1

Total taxable

.25

1992

Jan.

11.00

.74

p--preliminary f--forecast.
1. Includes issues for public and private purposes.
2. Includes all refunding bonds, not just advance refundings.
in line with the near-term cyclical financial difficulties of
issuers.

Based on preliminary figures, a total of $53 billion of

municipal debt was downgraded by Standard & Poor's, compared with
$8 billion upgraded.

Downgrades by Standard & Poor's exceeded

upgrades by a more than 4-to-1 margin.

General obligation issues

bore the brunt of Standard & Poor's downgrades.

Ratings on more

than $33 billion of general obligation debt were lowered in 1991,
including that of eight states. 2 Analysts at Standard & Poor's
emphasize that although credit quality eroded in 1991, it remains
relatively high for the sector as a whole.

For example, of the

forty-one states rated by Standard & Poor's, twenty-six are rated AA
or better and only one is rated lower than A-.
Standard & Poor's largest downgrade occurred in mid-December,
when it cut the rating of the State of California to AA from AAA,
affecting approximately $15 billion of state debt.

The credit

agency cited two consecutive years of operating deficits as the
primary cause of the downgrade.

The deficits resulted from rising

2. California, Illinois, Connecticut, New Jersey, Maine, New
Hampshire, Rhode Island, and Vermont were downgraded during the
year.

III-19
social service costs and reduced tax receipts; they led to
elimination of budget reserves and to sharp tax increases last July.
The credit agency expressed concern that the unpopularity of the tax
increases would hamper the ability of the state to take further
prompt action to correct the state's widening budget gap.

A recent

projection by the state indicates that California faces a
$2.2 billion deficit in the current fiscal year.

Market

participants were not surprised by California's downgrade; however,
they had thought it unlikely that California would drop below AA+.
Nevertheless, secondary market yield spreads on California issues
have widened only about 10 basis points since the downgrade.
Standard & Poor's joined with Moody's in lowering ratings of
Standard & Poor's dropped

New York State issues in early January.

the rating on the state's general obligation debt from A to A-.
Moody's action was less dramatic; the credit agency reduced the
rating of New York State appropriation debt--revenue debt backed by
leases--from A to Baal and placed the state's general obligation
debt on review for a possible downgrade.

Both credit agencies cited

the state's inability to formulate a plan to close the 1992 budget
gap, now estimated at $938 million, without resorting to borrowing.
The governor recently announced a package of $407 million of
spending cuts and $531 million of short-term note financing, thus
3
For
marking the fourth consecutive year of deficit financing.
the 1993 fiscal year, which starts on April 1, the state faces an
estimated budget gap of $4.8 billion.

Yield spreads on actively

traded New York State appropriation bonds have widened approximately

3. The accumulated general fund deficit stood at approximately
$6.2 billion at the beginning of the 1992 fiscal year, excluding
$800 million that was converted to long-term debt in the form of
Local Government Assistance Corporation bonds issued in fiscal year
1991.

III-20
30 basis points since the downgrades, while yield spreads on New
York State general obligation bond indexes have widened about
10 basis points.
Mortgage Markets
Despite a relatively weak housing market, residential mortgage
originations in 1991
(table).

reportedly topped $500 billion, a new high

The growth of mortgage originations, combined with the

contraction of the thrift industry, contributed to record issuance
of mortgage-backed pass-through securities in 1991 of $320 billion,
exceeding the previous record of $269 billion set in 1986.
impressive, new-issue collateralized mortgage obligations

More
(CMOs)

soared to $195 billion, a 75 percent increase over new-issue volume
the previous year.
Supporting the robust growth of the CMO market, issuance of
Fannie Mae and Freddie Mac mortgage-backed securities (MBSs) in 1991

MORTGAGE MARKET ORIGINATIONS
($ Billions)
Residential
Mortgage
Year

Loans

Pass-Through Securities
GNMA

FNMA

Agency

FHLMC

Private

Total

CMOs

1985

243.6

46.0

23.6

38.8

2.0

110.4

16.0

1986

454.8

101.4

60.6

100.2

7.0

269.2

48.3

1987

450.0

94.9

62.9

75.0

11.1

243.9

59.9

1988

375.6

55.2

55.0

39.8

15.4

165.4

78.8

1989

352.8

57.1

69.0

73.5

14.2

213.8

97.8

1990

439.2

64.5

96.7

73.8

24.4

259.4

111.7

1991 p

515.0

64.3

113.3

93.3

49.3

320.2

195.0

Includes privately issued CMOs.

p--preliminary

III-21
grew 21 percent to $207 billion.

Only new-issue Ginnie Maes were

unchanged from the previous year at $64 billion, a relatively anemic
performance due in part to higher mortgage insurance premiums and
downpayment requirements on FHA mortgages (the bulk of GNMA pools)
that became effective in the middle of 1991.

Prior to these

changes, mortgagors were allowed to finance up to 100 percent of
their closing costs and were required to pay only a one-time, upfront mortgage insurance premium.

Reflecting increased product

knowledge and investor preference for mortgage securities that
provide some measure of prepayment protection in an environment of
declining yields, nearly all new-issue conventional MBSs now are
repackaged in the form of CMOs.
The non-agency sector of the mortgage securities market issued
a record $49 billion in 1991, more than double the $24 billion
issued in 1990.

Non-agency MBSs generally are collateralized by

higher-yielding, nonconforming mortgages that are not eligible for
purchase by Fannie Mae or Freddie Mac.

These securities receive

their credit enhancement in the form of letters of credit, private
mortgage pool insurance, cash reserve accounts, or various forms of
senior/subordinated structures.

The Resolution Trust Corporation

was the largest issuer of private-label mortgage securities in 1991,
issuing $9.6 billion.
Over the intermeeting period, contract rates on thirty-year,
conventional, fixed-rate mortgages declined 25 basis points before
moving higher near the end of the period.

Initial rates on

adjustable-rate mortgages followed a similar pattern, but remain
about 30 basis points lower than at the time of the last FOMC
meeting.

In response to lower market rates, the ceiling rate on

VA-guaranteed loans was reduced 50 basis points to 8 percent.

III-22
Lower market rates continue to spur refinancings.

The latest

Mortgage Bankers Association's (MBA) weekly survey indicates that
applications for mortgage refinancing have nearly tripled since
weakening slightly during the year-end holiday period (chart).
Prepayments of high-rate mortgages also have soared.

Prepayment

rates on 10 percent Fannie Mae MBSs rose from 12 percent in
September to 41 percent in December (SAAR).

Consistent with the

usual time between application and closing, changes in mortgage
prepayment rates appear to lag by about two months changes in the
MBA refinancing index.
Conventional mortgage yield spreads to comparable-maturity
Treasury securities have widened about 30 basis points from a
relatively narrow 160 basis points last July (chart).

Much of the

wider spread compensates investors for the increased refinancing
risk, as measured by the volatility of seven-year Treasury yields.
The investor faces the risk that, should long-term yields decline
further, principal must be reinvested at lower yields.
Nevertheless, mortgage yield spreads appear unlikely to repeat their
experience of 1986, when significant declines in market yields and
unprecedented mortgage refinancings caused mortgage spreads to widen
by up to 150 basis points.

A larger secondary market, strong

investor demand, and the refinancing protection provided by some CMO
bonds should allow the market to handle the expected wave of
refinancings in a more orderly manner.
Significant rates of mortgage refinancing will help households
reduce total debt servicing burdens in 1992.

The staff has

estimated household mortgage interest savings using data from
individual mortgage pools on the actual and projected refinancing
4. Mortgage prepayment rates are measured by the Constant
Prepayment Rate or CPR. Quoted on an annualized basis, a 20 percent
CPR means that 20 percent of the principal outstanding at the
beginning of the year prepays by the end of the year.

III-23
MBA Refinancing Index vs. Prepayment Rates on Selected Fannie Mae Coupons
Percent CPR" (SAAR)

March 16, 1990

100
2000

1750

FNMA 10% Coupon
1500

/
I

/
//

1250

1000

750

i /

---

Refinancing Index**

500

250

*CPR: Constant Prepayment Rate

0
A

19 1

"Source: Mortgage Bankers Association

FRM Mortgage-7yr. Treasury Spread and 7yr. Treasury 120-day Volatility*
Percent

Basis Points
225

Mortaaae to Treasury Soread
200

175

150

125
1989
Volattlty figures are annualized.

1990

1991

III-24

experience of securitized residential mortgage debt.

Assuming

mortgage interest rates remain at year-end 1991 levels, total
interest savings on residential mortgage debt in 1992 from the
refinancing of fixed-rate mortgages and the resetting of adjustablerate mortgages are projected to be between $7 billion and
$10 billion.

However, refinancing transactions will be distributed

throughout the year, increasing the annual rate of interest savings
at the end of 1992 to be between $10 billion and $14 billion.
Consumer Credit
Outstanding consumer installment credit in November was
unchanged from its October level (table).

Revolving credit

continued to grow in November but at a slower pace than in October;
outstandings for auto and other consumer loans fell in November.
Total consumer credit (installment plus noninstallment) declined
again in November.
Over the eleven months from December 1990 to November 1991,
consumer installment credit fell at a 1/2 percent annual rate.
Should December prove to be anemic, which seems likely given weak
auto and retail sales, 1991 will be the first year since the end of
World War II in which installment credit contracted.

The decline in

1991 outstandings was mainly in automobile loans, which were
strongly affected by dismal auto sales and, to a lesser extent, by
shifts to alternative means of financing such as home equity loans
or leases.

Revolving credit, although it continued to grow,

probably posted its smallest annual increase since 1980, when credit
controls and a recession sharply curtailed consumer borrowing.
One consequence of this net repayment of consumer debt has been
a decline in the ratio of installment credit to disposable personal
income (chart; solid line).

After reaching a peak of 18-1/2 percent

III-25
CONSUMER CREDIT
(Seasonally adjusted)
Memo:

Percent change
(at annual rate)

Outstandings
(billions of
dollars)

1988
Installment

19891 1990

1991

Q42

Oct

Nov.p

Nov.

8.8

5.9

2.3

-1.2

-. 8

1.4

2.7

730.8

Auto
Excluding auto

6.9
10.2

1.3
9.2

-2.1
5.2

-7.1
2.5

-6.2
2.5

-2.6
3.7

-. 9
4.9

-4.2
2.6

269.1
461.8

Revolving

13.7

15.2

10.6

6.9

7.6

6.7

8.2

5.2

234.7

All other

7.4

4.5

-1.8

-2.6

1.5

-. 2.

227.1

Noninstallment

6.0

2.6

-4.9

Total

7.2

5.8

1.7

-8.7 -34.0
-1.8

-3.2

-44.4 -63.9

-26.3

48.1

-1.7

-1.6

778.9

-1.7

1. Growth rates are adjusted for discontinuity in data between December 1988 and
January 1989.
2. Q4 is the annualized rate of change from September to November.
r--revised. p--preliminary.
Note: Details may not add to totals due to rounding.

CONSUMER INTEREST RATES
(Annual percentage rate)
Sept.

1991
Oct.

Nov.

1989

1990

1991

Aug.

12.07
15.44
18.02

11.81
15.46
18.17

11.14
15.18
18.23

11.06
15.24
18.24

...
...
...

10.61
14.88
18.19

12.62
16.18

12.54
15.99

...
...

12.40
15.63

12.38
15.60

12.23
15.46

10.79
15.06

At commercial banks1
New cars (48 mo.)
Personal (24 mo.)
Credit cards

At auto finance cos.
New cars
Used cars

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

III-26
Outstanding Consumer Debt And Service Payments
(As A Percent Of Disposable Personal Income)

1970

1973

1976

1979

1982

1985

Percent

1988

1991

in 1989, the ratio had declined about 1-1/2 percentage points to
about 17 percent by late 1991.

However, the ratio remains high

relative to cyclical experience over the past twenty years.
The ratio of outstanding debt to income, of course, overstates
the actual current claims of principal amortization and interest on
current earnings.

Therefore, the dashed line on the chart presents

an estimate of the proportion of disposable personal income required
to service current debt levels.

Mainly reflecting the lengthening

of debt maturities during the 1980s, this latter measure is
considerably lower than the outstanding ratio.

To a lesser extent,

however, some of the difference also may be due to the increasing
proportion of revolving credit, which has relatively low minimum
monthly repayment requirements.

Although this debt service ratio

III-27

PUBLIC SECURITIZATION OF CONSUMER LOANS
Gross Issuance, in billions of dollars
19851987

1988

Total

20.17

15.39

22.50

34.48

36.78

129.25

Commercial banks
Finance companies
Savings institutions

4.53
13.84
1.74

8.06
3.04
2.14

11.03
7.70
1.10

21.91
9.61
.40

20.41
12.65
1.37

65.94
46.84
6.75

2.15

2.67

2.55

2.35

9.72

17.08
2.33
13.66
1.10

5.50
1.91
2.04
1.55

7.83
1.77
5.51
.56

10.47
2.37
7.70
.40

14.79
2.36
11.06
1.37

55.67
10.73
39.97
4.97

2.41
2.20

7.92
5.78

12.02
8.90

22.02
19.47

20.40
18.05

64.77
54.39

Retail firms

Auto loans
Commercial bank
Finance companies
Savings institutions
Credit cards
Commercial banks

1989

1991

Cumulative
total

.66

.21

2.15

2.67

2.55

2.35

9.72

Other loans

.61

1.97

2.65

1.99

1.58

8.81

Commercial banks

.38

.36

.08

Finance companies

.18

1.00

2.19

1.92

Savings institutions

.43

.59

.10

Savings institutions

Retail firms

Memo:
Home equity 1

.45

1990

2.70

5.54

.82

1.58

6.87

1.12

9.05

17.29

1. Home equity loans are not included in consumer credit since they are considered
mortgages. This line is included here only to indicate the securitization of a
specialized "consumer-type" asset.
Note: Details may not add to totals due to rounding.

III-28
rose during the 1980s, it never quite reached the peak level of 1970
and now stands at about the same level recorded in 1979 and 1986.
Gross public issuance of consumer asset-backed securities in
1991 reached a record $37 billion, up from the previous record of
$34.5 billion recorded last year (table); the number of new issues
in 1991 remained unchanged at 70.

Although credit card-backed

securities accounted for the largest dollar volume in 1991, the
$20.4 billion issued was down somewhat from 1990's record
$22 billion, reflecting concerns about the possible downgrade early
last year of several bank issues.

Securities backed by auto loans

increased to $14.8 billion in 1991 as all three of the domestic
captive finance companies returned to the market; Chrysler Financial
was most active, with a new issue about every other month.
Overall, fourth-quarter activity was the slowest since 1988,
following the very high issuance volume of the third quarter--the
second highest in seven years.

The issuance of new credit card

asset-backed securities (ABSs) slowed, particularly in December,
when retailers were completely absent from the market and banks
retreated after issuing $2.5 billion in November.

The slow December

credit card market may have been due, in part, to the wider yield
spreads that resulted from the scare caused by Senate passage of a
proposed interest rate cap on credit cards.

However, yield spreads

subsequently have narrowed and now are only slightly above the early
November levels.

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
Merchandise Trade
The U.S. merchandise trade deficit widened in September to $6.8
billion (seasonally adjusted, Census basis) from a revised deficit
of $6.5 billion in August, as imports rose more than exports.

Most

of the increase in imports in September was in consumer goods,
especially apparel and toys.

Data for October will be released on

December 19.
U.S. MERCHANDISE TRADE: MONTHLY DATA
(Billions of dollars, seasonally adjusted, Census basis)
Total

Exports
Ag. NonAg.

Total

Imports
Oil NonOil

Balance

1991-Jan
Feb
Mar

34.1
33.6
34.0

3.1
3.4
3.3

31.0
30.2
30.7

41.5
39.1
38.1

5.2
4.1
3.8

36.3
35.0
34.3

-7.4
-5.5
-4.1

Apr
May
Jun

35.6
35.3
35.0

3.2
3.3
3.1

32.5
31.9
31.8

40.1
40.1
38.8

4.1
4.6
4.2

36.1
35.4
34.5

-4.5
-4.8
-3.8

Jul
Aug
Sep

35.2
34.4
35.4

3.4
3.3
3.3

31.8
31.1
32.2

41.2
40.9
42.2

4.0
4.5
4.5

37.2
36.4
37.8

-5.9
-6.5
-6.8

Source:

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

In the third quarter, the trade deficit was larger than that
recorded in either of the two preceding quarters.

Exports were at

about the same record level as in the second quarter, well above
levels in previous quarters (particularly machinery exports).
Imports in the third quarter were 5 percent above the
second-quarter level.

Most of the increase was in consumer goods

and in automotive products from Canada and Japan.

Imports of

consumer goods rose 10 percent with strong increases recorded in
apparel, TVs and VCRs, toys, and household appliances.

Automotive

imports from Canada continued to rise steadily from the low recorded

IV-1

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

1990
Trade Balance

-108.1

1990

-115.0 -110.9

1991
Q2

$ Change
Q3-Q3
Q3-Q

-73.6

-61.6

-81.9

33.1

-20.4

Total U.S. Exports

389.6

386.6

402.3

403.6

417.0

418.1

31.6

1.1

Agricultural Export
Nonagric. Exports

40.2
349.3

39.3
347.3

37.8
364.5

39.8
363.8

38.2
378.8

40.6
377.5

1.4
30.2

2.4
-1.3

Industrial Suppl.
Gold
Fuels
Other Ind. Suppl.

96.7
3.0
14.0
79.6

95.4
3.0
13.9
78.6

106.0
4.4
18.1
83.5

105.1
4.1

101.8
3.3
13.0
85.5

100.4
3.4
12.8
84.2

5.0
0.4
-1.1
5.6

-1.3
0.2
-0.2
-1.3

Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery

153.8
32.3

156.0
30.9
26.4
98.7

155.8
30.8
27.3

170.5
38.9
27.3
104.4

166.2
35.6

25.9
95.6

153.1
31.6
26.5
95.0

104.0

13.2
3.9
0,2
9.1

-4.3
-3.3
-0.6
-0.4

Automotive Product
To Canada
To Other

37.4
22.6
14.8

38.4
23.5
14.9

37.1
21.5
15.6

34.2
19.5
14.7

40.3
22.3
18. 1

44.9
25.7
19.2

6.5
2.2
4.3

4.5
3.4
1.1

Consumer Goods
Other Nonagric.

43.3
18.2

42.8
17.6

45.8
19.6

45.9
22.9

44.5
21.6

44.8
21.1

2.0
3.6

-0.

Total U.S. Imports

497.7

501.6

513.2

477.2

478.5

500.1

-1.5

21.5

Oil Imports
Non-Oil Imports

62.1
435.6

61.8
439.8

72.1
441.1

52.9
424.3

51.7
426.9

52.0
448.1

-9.8
8.3

0.3
21.2

Industrial Suppl.
Gold
Other Fuels
Other Ind. Suppl.

82.5
2.5
3.6
76.4

83.3
2.8
3.5
77.0

83.9
3.3
4.3
76.4

80.4
3.3
3.9
73.2

80.8
3.0
4.3
73.5

80.5

-2.8
-0.5
0.4
-2.8

-0.3
-0.6
-0.5
0.8

Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery

116.4
10.6
23.0
82.8

116.2
9.9
23.0
83.3

120.2
12.8
23.3
84.1

119.3
11.2
24.2
83.9

121.1
12.4
26.0
82.7

122.1
12.5
27.6
82.0

5.8
2.6
4.6
-1.3

0.9
0.1
1.6
-0.8

Automotive Product

87.3
29.7
56.5

90.3
32.2
58.1

86.1

82.1
23.5
58.5

78.7
28.4
50.2

92.1

34.1
58.0

1.8
1.9
-0.1

13.5
5.7
7.7

106.2
26.6
16.4

106.6
25.8
17.5

106.9
26.0
18.1

100.5

100.3
27.9
18.0

110.5
26.3
16.6

3.9
0.5
-0.9

10.3
-1.6
-1.5

From Canada

From Other
Consumer Goods
Foods
All Other
Source:

27.3
58.8

16.8
84.2

97.7

25.6
16.6

26.7

2.3
3.9
74.3

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

0.3

IV-3

in the first quarter as Big Three producers began shipping for the
new model year.

The increase in automotive imports from Japan

partially reversed the sharp decline recorded in the second quarter
and reflected, in part, increased shipments of luxury cars.

Imports

of computers continued to climb in the third quarter, reaching a new
high.

Aside from computers, imports of machinery declined for the

third consecutive quarter.
The recent rise in imports appears to have been associated with
a large buildup in retail inventories, most notably in September.
Data on industrial production, retail inventories, and imports
suggest that more than three fourths of the increase in inventories
of apparel and miscellaneous non-durable goods (which include toys)
in September was imported goods.

To the extent that these

inventories might now be viewed by retailers as excessive (given the
recent slowdown in economic activity),

any inventory correction in

these categories is likely to be borne in large part by foreign
producers.
The value of oil imported in the third quarter was about the
same as recorded in the second quarter.

The quantity of oil imports

remained near 8.2 mb/d as an increase in domestic consumption was
offset by a lower rate of stockbuilding.

Weekly Department of

OIL IMPORTS
(BOP basis, seasonally adjusted annual rates)

Q1
Value (Bil. $)
Price ($/BBL)
Quantity (mb/d)
Source:

52.88
20.33
7.13

1991
Q2

51.69
17.31
8.18

Months
Q3

52.01
17.24
8.26

Jun

Jul

Aug

50.69
16.97
8.18

48.26
16.66
7.93

54.36
17.42
8.54

Sep
53.42
17.61
8.31

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

Energy data indicate that stocks were drawn down rapidly in October
(depressing imports), as market participants apparently expected

IV-4
prices to recede; this expectation was evidenced by a large discount
of long term futures relative to near-term futures over most of
October.
Spot oil prices have fallen almost $3 per barrel since late
October, likely reflecting strong production by OPEC coupled with
sluggish economic activity world wide.

However, given past

increases in spot prices and shipping and contract lags, import
prices are likely to have increased through November.
Prices of Non-oil Imports and Exports
Prices of non-oil imports (as reported by the Bureau of Labor
Statistics (BLS)) rose 0.5 percent in October, the second
consecutive month of increase.
of declining prices.

These increases followed five months

The largest increase in October was in

automotive imports and reflected introduction of the new 1992 model
year vehicles.

All other major categories of imports showed small

increases in prices with the exception of consumer goods, which
remained unchanged from September.
Prices of nonagricultural exports increased 0.2 percent in
October, with increases recorded in every major category.

October

was the second consecutive month of increase, following seven months
of flat or falling prices.

Prices of agricultural exports increased

3.5 percent in October, paced by an increase in the price of wheat.
National Income and Product Account fixed-weight prices will
not be available until December 20th.

The fixed-weight prices for

the third quarter from the BLS showed a 3.2 percent decline in
prices of non-oil imports and a 1.8 percent decline in prices of
non-agricultural exports.

Both non-oil imports and nonagricultural

exports showed the largest declines in the industrial supplies
category.

IV-5
IMPORT AND EXPORT PRICE MEASURES
(percent change from previous period, annual rate)

Year
1991-Q3
1990-Q3

Quarters
1991
Q1
Q2
Q3
(Quarterly Average, AR)

Months
1991
Sep
Oct
(Monthly Rates)

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

-0.4
3.1
-5.4
-2.4
0.7
4.2
0.4

-11.9
7.8
-40.4
-0.2
4.9
6.6
2.5

-7.2
3.1
-19.0
-4.5
-5.2
1.2
-4.3

-3.4
-3.5
-6.2
-7.2
-4.6
-1.1
-0.6

0.3
0.2
0.0
-0.7
0.1
0.4
0.7

0.6
0.1
0.6
0.0
0.8
1.3
0.0

-11.4
1.0

-73.1
3.7

-41.1
-2.7

-4.4
-3.2

1.5
0.2

1.7
0.5

0.3
-2.0
-4.0
3.1
2.8
3.3

0.6
8.3
-9.6
5.6
3.5
6.0

-1.2
8.1
-11.9
3.5
2.0
6.3

-2.5
-5.8
-8.0
1.5
2.1
-2.4

-0.1
-1.6
-0.4
0.4
0.0
0.5

0.6
4.0
0.3
0.1
0.4
0.1

-2.8
0.6

6.7
-0.6

6.6
-2.6

-8.5
-1.8

-1.2
0.1

3.5
0.2

Memo:
Oil
Non-oil
Exports, Total
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
Memo:
Agricultural
Nonagricultural
--

--------------- NIPA Prices ---------------------

Fixed-Weight+
Imports, Total
Oil

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

-1.8
-11.3
-0.5

-14.8
-76.1
1.1

-10.8
-47.3
-5.0

-2.8
-1.5
-3.1

-1.3
-2.4
-1.2

1.7
15.9
0.4

-2.6
-0.1
-2.8

-3.9
-6.3
-3.8

*/ Months not for publication.
+/ Fixed-Weight prices will not be available for the NIPA until
December 20th, the final revision to third quarter GNP.

IV-6
U.S. Current Account
The U.S. current account balance fell from a surplus of $12.1
(SAAR) billion in the second quarter to a deficit of $41.8 billion
in the third quarter, as the balance on both trade and transfers
deteriorated.

Net transfers declined by $36.3 billion (AR), largely

the result of a $28 billion (AR) reduction in cash grants from
coalition partners in Operation Desert Storm and the provision of
$11.6 billion (AR) in debt forgiveness to several countries,
including Poland.

(Approximately $1.2 billion (AR) of these grants

was used to pay interest arrears, boosting portfolio receipts).

Net

service receipts rose slightly with an increase in receipts from
foreigners traveling in the United States and a small gain in net
military transactions.
U.S. CURRENT ACCOUNT
(Billions of dollars, seasonally adjusted annual rates)
Trade Services
Balance
net

Net Income
Direct Portfolio
net
Invest.

Current
Transfers Account
Balance
net

1988
1989

-127.0
-115.9

10.3
22.4

36.8
42.5

-31.5
-39.8

-14.9
-15.5

-126.2
-106.3

1990

-108.1

26.4

52.7

-40.7

-22.3

-92.1

1990-1
2
3
4

-110.1
-96.4
-115.0
-110.9

23.6
26.4
25.6
29.9

51.9
43.6
53.5
61.7

-39.8
-43.6
-42.3
-37.2

-16.1
-18.8
-17.3
-37.1

-90.7
-88.7
-95.5
-93.6

1991-1
2

-73.6
-61.6

28.3
35.8

61.3
52.2

-41.8
-42.8

67.8
28.5

42.0
12.1

-81.9

37.9

51.1

-41.1

-7.8

-41.8

91Q3-91Q2

-20.3

2.1

-1.1

1.7

-36.3

-53.9

91Q2-91Q1
91Q1-90Q4

12.0
37.3

7.5
-1.6

-9.1
-0.4

-1.0
-4.6

-39.3
104.9

-29.9
135.6

$Change

Source:

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

IV-7
U.S.

International Financial Transactions
Banks and securities firms in the United States reported

substantial capital outflows in October, partially reversing the
inflows reported in the third quarter (line 1 of the Summary of U.S.
International Transactions table).
widely this year.

These month-end data have swung

Contributing to these swings have been sharp

movements in lending by securities firms to Bermuda and the
Netherlands Antilles to finance holdings of U.S. Treasury securities
by certain mutual funds.
There was a small net outflow of $4.1 billion on securities
transactions for the third quarter, which continued into October
A major element was the continued robust level of

(lines 2 plus 3).

net purchases of foreign securities by U.S. residents ($13 billion
for the third quarter and $6.5 billion in October, line 2c).

The

cumulative flow for the first three quarters has already surpassed
the previous annual record registered in 1990.

Two-thirds of the

third quarter outflow was for net stock purchases, but in October
the share shifted heavily toward foreign bonds.

In September and

October, a large share of the stock purchases was in Japan (a total
of $2.4 billion).

In October, purchases of foreign bonds by U.S.

residents rose to $4.2 billion; they were primarily from the United
Kingdom and, to a lesser extent, from Canada.
Foreign net purchases of U.S. corporate bonds were substantial,
for both the third quarter and October (line 2a). By contrast,
foreign net purchases of U.S. stocks were small in the third quarter
and virtually zero in September and October

(line 2b).

Foreign net

purchases of Treasury obligations were also very small (line 3).
Foreign official reserves in the United States fell by $6.2
billion in September, limiting the overall increase in the third
quarter to $3.5

billion (line 4).

For the quarter, substantial

IV-8
SUMMARY OF U.S.

INTERNATONAL TRANSACTIONS

(Billions of dollars)

Private Capital
Banks
1. Change in net foreign
1
positions of banking offices
in the U.S. (+ - inflow)

1989
Year

1990
Year

27.2

1990
04

36.6

15.7

-29.1

-7.8

-5.1

31.8

18.2

6.3

7.9

-13.7

-24.0

-31.8

30.1

-1.0

8.3

32.1

-5.2

10.0

8.6

10.1
3.4

1.2
20.8

-0.5
10.8

0.1
8.2

29.6
2.5

19.7
-0.8

-2.2

-1.1

-0.4

-11.9
4.3
1.0

1991
Q2

Sea.

1991
Oct.

Nov.

13.5

-9.1

9.4

3.4

-2.6

-1.8

-3.7

1.7

3.5

7.9

8.1

1.9

2.4

2.0

-5.0

1.8

7.7

2.3

-0.4

0.4

0.5

-9.0

-10.3

-12.2

-12.9

-3.3

-6.6

-0.8

-2.9

4.0

13.4

-1.3

-4.8

1.1

-1.4

18.9

6.1

-3.5

-6.4

6.7

-9..2

Securities

Private securities
2
transactions, net
a)

foreign net purchases

3
(+) of U.S. corporate bonds
foreign net purchases
(+) of U.S. corporate stocks

c)
3.

U.S. not purchases (-) of
foreign securities
Foreign net purchases (+) of U.S.
Treasury obligations

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

increase)

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

-11.4

0.3
17.3

7.1

-4.7
-2.9
4.1

-1.9
-4.4
9.7

-2.5
-1.5
-2.4

2.1
0.2
4.4

-2.3
-1.2

5.8
-2.4

2.7
-9.0

4.6
2.1

5.5

1.1

0.3

0.8

n.a.

By type
U.S. Treasury securities
4
Other
5. Changes in U.S. official reserve

-25.3

assets (+ = decrease)

Other
6.
7.
8.
9.
10.

5
transactions (Quarterly data)
U.S. direct investment (-) abroad
Foreign direct investment (+) in U.S.
6
Other capital flows (+ = inflow)
U.S. current account balance
Statistical discrepancy

MEMO:;
U.S. merchandise trade balance --

-33.4

-3.8

70.6

37.2

4.5

-5.3

-6.3

-2.2

-106.3

-92.1

-23.4

18.4

63.5

19.1

-108.1

-27,7

2.9
3.2

1.4

3.9

1.6

-5.9
1.4
-2.1

10.5

-10.5

-8.8

-0.4

part

of line 9 (Balance of payments basis,
seasonally adjusted)

-115.9

-18.4

-15.4

-20.5

1. 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 adjusted.
6. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and
In addition, it includes amounts resulting from adjustments to the data made by
official transactions not shown elsewhere.
the Department of Commerca 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.
Details may not add to total because of rounding.
NOTE

IV-9
increases were registered by Taiwan, Spain and Mexico, with
decreases in OPEC countries and Japan.

In October, official

holdings rose an additional $6.3 billion, with major increases
reported for the United Kingdom, the BIS, and Taiwan.
Recently released data show virtually no capital inflow in the
third quarter for foreign direct investment in the United States
(line 7); although the second quarter inflow was revised upward, the
total inflow in 1991 through three quarters

($13.2 billion) is less

than half of the corresponding inflow last year

($32.7 billion).

Direct investment outflows were $5.9 billion in the third quarter
(line 6); given the cumulative outflow through three quarters

($19.6

billion), it is likely that, for the year, U.S. direct investment
abroad will outweigh foreign direct investment in the United States.
The statistical discrepancy for the third quarter was
essentially zero, and the discrepancy for the second quarter was
revised downward by over $13

billion to $8.5 billion (line 10).

More than half of the revision was the result of the correction of a
reporting error, where a bank had reported its customers' claims in
lira rather than dollars.

INTERNATIONAL BANKING DATA
(Billions of dollars)

1989

1991

1990
Dec.

Mar.

June

Sept.

Nov.

Dec.

-15.6

-31.3

-23.8

-13.7

-14.1

-29.4

-38.1

5.7

5.5

7.6

5.4

11.0

6.9

6.1

-18.2

-21.3

-36.9

-31.3

-19.2

-25.2

-36.4

-44.2

21.8

22.2

24.0

24.7

26.0

23.9

23.7

24.5

24.4

110.6

106.5

109.1

116.1

114.6

105.8

100.8

103.8

104.0

Mar.

June

Sept.

Dec.

Mar.

June

-2.9

-3.9

-6.4

-5.5

-11.7

-11.0

20.4

19.2

14.9

19.2

12.2

7.2

-23.3

-23.1

-21.3

-24.7

-23.9

24.0

26.0

21.6

20.7

144.8

131.5

130.3

123.5

Sept.

1. Net Claims of U.S. Banking
Offices (excluding IBFS) on Own
Foreign Offices and IBFS

(a)

U.S.-chartered banks

(b)

Foreign-chartered banks

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

Eurodollar Holdings of
U.S. Nonbank Residents 1/

Note: These data differ in coverage and timing from the overall
Includes term and overnight Eurodollars held by money market mutual funds.
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.
1.

IV-l1
Foreign Exchange Markets
The weighted-average foreign-exchange value of the dollar, in
terms of the other G-10 currencies, has been highly volatile, rising
nearly 2 percent on balance since the December 17 FOMC meeting, as
shown in the accompanying chart.

The dollar has risen more than 2-

1/2 percent against the German mark, amid expectations that U.S.
interest rates have hit bottom and that German interest rates may
have passed their peak.

The dollar has declined more than 2 percent

against the Japanese yen, as markets focussed on the trade imbalance
between Japan and the United States.
Against the mark, the dollar has moved generally in line with
differentials between interest rates on U.S. and German assets.

The

dollar declined sharply following the Federal Reserve's easing
action on December

20, which came one day after the Bundesbank

raised its Lombard and discount rates by half a percentage point.
At its low point in early January, the dollar had declined 4 percent
against the mark and 3 percent on a weighted-average basis.

By that

time, the half-point reduction in the federal funds rate had been
fully passed through to U.S. three-month interest rates, and the
U.S. ten-year bond yield had declined by nearly that amount, while
the German three-month rate had risen 10 basis points and the German
bond yield had eased about 15 basis points.

Since early January,

the dollar has rebounded sharply against the mark as U.S. interest
rates have moved back up amid expectations of a turnaround in the
U.S. economy and German interest rates have moved lower in response
to signs of a German economic slowdown and favorable news on German
inflation.

The dollar's strength against the mark was tempered by

speculation about G-7 intervention to hold down the dollar and by
concern that accelerating German money growth may prompt the
Bundesbank to keep interest rates high.

IV-12

WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR
Daily

March 1973 = 100

FOMC
Dec. 17

December

SELECTED DOLLAR EXCHANGE RATES

October

November

January

October 1

December

January

100

IV-13
After the recent rebound in U.S. interest rates, the net
movement in long-term differentials over the period has been in
favor of the dollar.

The U.S. 10-year bond yield has risen 10 basis

points on net since December 17, while the Japanese bellwether bond
yield has declined 35 basis points and the German yield has declined
30 basis points.

Changes in short-term differentials are mixed:

German three-month rates are unchanged on balance, while U.S. threemonth rates have eased 35 basis points.

Japanese three-month rates

have declined a full percentage point, perhaps anticipating more
easing than the half percentage point decrease in the Bank of
Japan's official discount rate on December 30 and the subsequent 75
basis point decline in the Japanese call money rate.
Despite lower Japanese interest rates, the yen has strengthened
on balance since the last FOMC meeting.

The dollar weakened against

the yen ahead of President Bush's trip to Japan, with both U.S. and
Japanese officials indicating that an easing of the dollar against
the yen would help reduce trade imbalances.

The dollar subsequently

rebounded to above its December 17 level against the yen, prompting
the Desk to sell dollars against yen on January 17.

The

intervention surprised the market and drove the dollar sharply lower
against the yen, to a low of ¥122 in Asian trading the following
Monday.

Late in the period, the dollar rose somewhat after the G-7

communique on January 25 failed to call for a stronger yen.
The Canadian dollar has declined about 2-1/2 percent against
the U.S. dollar over the intermeeting period.

Canadian three-month

and long-term interest rates have declined about 10 basis points
more than U.S. rates.

Late in the period, the Canadian dollar was

hurt by the announcement of a large increase in the Ontario budget
deficit and by worries about a possible downgrading of Ontario
provincial debt.

IV-14

The only U.S.
intervention was the action on January 17, when the Desk sold $50
million against yen, evenly split between System and Treasury
accounts.

Developments in Foreign Industrial Countries
Recent data on economic activity in the major foreign
industrial countries suggest that relatively weak growth continued
into the fourth quarter.

Real GNP in Germany appears to have been

unchanged in the fourth quarter, although there have been some
positive monthly indicators.

Evidence continues to accumulate of an

uneven recovery in eastern Germany.

Recent monthly indicators show

weak activity in Japan and mixed performance in France, Italy,
Canada, and the United Kingdom.
Inflation appears to have remained steady or continued to
decline modestly in the foreign industrial countries.

In Japan, a

sharp decrease in consumer prices in December largely reflected a
weather-related fall in the price of perishable foods.

Consumer-

price inflation moderated in western Germany and the United Kingdom,
but high wage growth continues to be a concern for policymakers in
both countries.

Recent price data for Canada and France show

continued progress on inflation.
Individual country notes.

In Japan, most recent indicators

continue to suggest relatively weak growth in activity.

Industrial

production (s.a.) fell 0.9 percent in December and was 1.4 percent
below its year-earlier level.

New passenger car registrations

(s.a.) fell 8.1 percent in December, and new machinery orders (s.a.)
declined 13.9 percent in October.

Bankruptcies (s.a.) rose a

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted)
1
1991
Q4/Q4 Q4/Q4
1990
1991

1991

Aug. Sept.

Oct.

Nov.

Dec.

Latest 3 months
from year ago
2

Canada
GDP
IP

-1.1
-6.3

n.a.
n.a.

-1.2
-2.2

1.4
1.3

.2
1.0

n.a.
n.a.

1.8
-. 3

n.a.
n.a.

.3
.3

.7
1.3

.7
.5

n.a.
n.a.

5.3
5.4

n.a.
n.a.

2.4
2.0

-. 6
-. 1

-.5
-. 5

n.a.
n.a.

-2.1

.9
-3.8

n.a.
n.a.

.6
.4

.4
-2.1

.1
-. 1

n.a.
n.a.

-2.1

4.7
6.9

n.a.
-1.4

2.0
-. 1

.7
-. 7

.4
.3

n.a.
-.9

-2.5

-. 1

-. 7
-3.2

n.a.
n.a.

-. 9
-. 3

-. 7
-1.1

.2
.9

n.a.
n.a.

-1.8

X7
-. 7

-. 1

n.a,

-.6

n.a,

-. 4

-2.5

-. 1

-. 4

-. 6

n.a.

-. 8
-2.3

France
GDP

-1.4

1.2

-.6

n.a.

1.2

n.a.

-2.0

n.a.

West Germany
GNP
IP

Italy
GDP
IP

1.0
3.4

n.a.

-3.3

Japan
GNP
IP

-2.5

-. 9

4.1
-1.4

United Kingdom
GDP
IP

-2.2
n.a.

-1.4

-. 2

-. 8
-. 4

United States
GNP
IP

1.6

-. 1

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

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
1
(Percentage change from previous period)
1991

1990
Q4/Q4
1990

Q4/Q4
1991

4.9
1.9

4.1
-2.9

1.1
.2

1.4
1.2

2.9
-. 3

.7
-1.6

.6
-. 8

3.6
.7

2.9
n.a.

1.0
.2

1.0
1.1

.5
-. 5

.7
-1.3

n.a.

3.0
.9

3.9
n.a.

.4
.2

.9
.4

.8
.5

.9
.3

1.5
.7

6.3
9.9

6.1
n.a.

1.4
3.9

2.0
4.3

1.9
.2

1.4
-1.0

3.2
1.9

3.2
-1.3

.2
.0

1.2
.7

.8
.1

10.0
5.9

4.2
5.1

1.6
.9

1.6
1.1

6.3
6.5

2.9
-. 1

1.7
1.6

1.7
2.6

Q3
Q3

04
Q4

Q1
Q1

Q2
Q2

Q3
Q3

04
Q4

Oct.
Oct.

1991
Nov.
Nov.

1992

Dec.
Dec.

Jan.
Jan.

Latest 3 months
from year ago

Canada
CPI
WPI

-. 1
-. 3

.4
-. 1

-. 5
.1

n.a.
n.a.

.3
X

n.a.

.3
.3

.4
.5

.1
n.a.

.5
n.a.

1.0
.5

1.7
n.a,

.8
.6

.7
.9

.3
n.a.

n.a.
n.a.

.8
-. 4

.4
-. 4

1.1
-. 7

2.0
1.9

.4
.6

1.0
.6

4.1
-2.9

France
CPI
WPI

West Germany

CPI
WPI

4.1
1.3

Italy
CPI
WPI
Japan

CPI
WPI

.3
.0

-. 7
.0

n.a.
n.a.

3.2
-1.3

.4
.1

.4
.4

.1
.1

n.a.
n.a.

4.2

.1
.7

.4
.2

.3
-. 2

n.a.
n.a.

2.9

United Kingdom
CPI
WPI

.6
2.0

5.1

United States
CPI (SA)
WPI (SA)

1. Asterisk indicates that monthly data are not available.

--. I

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

1990

1991

1990
-------------

1991

1991
Sept.
Sept.

Oct.
Oct.

Nov.
Nov.

Dec.
Dec.

n.a.
n.a.

2.8
-2.9

2.3
-3.1

2.3
-4.8

2.6
-4.8

.9
-6.3

n.a.
n.a.

-9.3

-5.4

-8.0

n.a.

-3.6
-3.5

-3.1
-1.4

-2.6
-2.9

-1.4
-1.6

-1.9
n.a.

n.a.

65.2
47.3

n.a.
n.a.

16.0
9.4

10.1
8.5

4.4
-5.9

-1.1
-5.9

2.8
-6.1

n.a.
n.a.

.9
-1.0

1.3
-2.0

2.2
1.0

n.a.
n.a.

-12.1
-14.2

n.a.
n.a.

-3.2
.7

-3.5
-3.7

-1.2
-7.6

-4.2
-4.7

-5.3
n.a.

n.a.
n.a.

-1.6

-1.3

-1.6

n.a.

78.1
n.a.

14.2
7.0

8.5
6.4

17.4
17.8

18.8
18.8

20.8
19.4

21.2
n.a.

7.6
7.6

6.5
6.4

7.4
7.2

7.3
n.a.

-7.3
-4.8

-6.2
-4.1

-5.8
-5.0

-3.6
-1.3

-3.7
-2.5

-4.4
-2.8

-1.4

-1.5

-1.7

-1.3

-.9

-1.0

-1.1

-. 7

-28.8
-23.9

-27.7
-23.4

-18.4
10.5

-15.4
3.0

-20.5
-10.5

n.a.
n.a.

-7.0

-4.4

Canada
Trade

Current account

9.4
-14.0

n.a.
X

France
Trade
Current account

Germany

-. 5

1.2

.1
x

-. 8
X

Trade (NSA)
Current Account (NSA)
Italy

Trade
Current account (NSA)
Japan
Trade
Current account

51.8
35.8

United Kingdom
Trade
Current account

-32.0
-25.8

-17.4
-11.6

United States
Trade

Current account

-108.1
-92.1

n.a.
n.a.

n.a.
K

____~~~~~____
1. The current account includes goods, services, and private and official transfers. Asterisk indicates
that monthly data are not available.
2. Before July 1990, West Germany only.

IV-18
further 5.1 percent in November, making their 12-month increase 75.1
percent.

The index of leading indicators (s.a.) fell to its lowest

level in more than 11 years in November.

Only housing starts showed

some strength, increasing 4.3 percent (s.a.) in November, but they
remained 19.3 percent below their year-earlier level.
Reflecting weaker economic activity, the unemployment rate
(s.a.) edged up to 2.1 percent in November, while the ratio of job
offers to applicants (s.a.) declined for the seventh time in eight
months to a level 8.4 percent below that of November 1990.
Nonetheless, the unemployment rate remains near record low levels.
Underlying inflationary pressures appear to have remained
unchanged.

Consumer prices in the Tokyo area (n.s.a.) decreased 0.7

percent in December, and their 12-month increase slowed to 2.9
percent.

Much of the decrease was due to a weather-related fall in

prices for perishable foods.

Wholesale prices (n.s.a.) were

unchanged in December and showed a 12-month decrease of 1.6 percent.
The trade surplus (s.a.) narrowed slightly in December.

For

1991 as a whole, however, the trade surplus increased $26 billion to
$78 billion.
in 1991.

The volume of both imports and exports rose 3 percent

The unit value of imports in yen terms fell 8.2 percent,

reflecting the effects of yen appreciation and lower average oil
prices, while export unit value in yen terms declined only 0.5
percent.
On December 28, the Cabinet approved a budget for the new
fiscal year beginning in April.

The proposed FY1992 budget appears

to be about neutral in its macroeconomic impact.

Central government

spending is set to increase by only 2.7 percent.

However, spending

under the separate capital budget is up 7.2 percent.

The general

government balance, including social security, should remain in
substantial surplus.

At the time of President Bush's early January

IV-19
visit to Japan, Prime Minister Miyazawa agreed that the Japanese
government would monitor economic activity closely and consider
additional measures if growth falters.
According to preliminary data, real GNP in western Germany
increased 3.2 percent in 1991, compared with an annual average
increase of 4.5 percent in 1990.

Data for the fourth quarter will

not be released for about six weeks, but an official of the
Statistical Office stated that real GNP appeared to have been
unchanged in the fourth quarter.
Monthly indicators for the fourth quarter present a somewhat
more positive picture.

Industrial production in western Germany

(s.a.) increased 1.2 percent in November, following an increase of
0.2 percent in October.

The volume of retail sales (s.a.) in

western Germany increased 0.7 percent in both September and October.
Also, the volume of new orders for west German manufactured goods
(s.a.) increased 0.2 percent in November, reversing a decline of the
same magnitude in October.

Between September and November, domestic

orders increased 1.7 percent, while foreign orders fell 3.4 percent.
The west German unemployment rate (s.a.) fell 0.1 percentage point
to 6.2 percent in December.
Evidence continues to accumulate that an uneven recovery is
underway in eastern Germany.

Industrial production in eastern

Germany (n.s.a.) increased 8.4 percent in September, putting this
volatile series 10.3 percent above its April trough.

The pace of

new orders for construction in eastern Germany (n.s.a.) has
increased steadily since February, and September's level was almost
twice the average level for the second half of 1990.

Official east

German unemployment (n.s.a.) increased 0.1 percentage point to 11.8
percent in December, but it remained below the July peak of 12.1
percent.

The number of "short-time" workers subsidized by the

IV-20

government declined to 11.6 percent (n.s.a.) of the labor force in
December, its lowest level since July 1990.
Consumer prices (n.s.a.) increased 0.5 percent in January and
stood 4 percent above year-earlier levels, down from 4.2 percent in
December.

In the fourth quarter, consumer prices on a seasonally

adjusted basis increased at an annual rate of 3.3 percent.
German producer prices

(n.s.a.) fell 0.1 percent in November and

were 2.5 percent above year-earlier levels.
prices

West

West German import

(n.s.a.) fell 0.6 percent in November and are 2 percent below

where they were a year earlier.
Accelerating unit labor costs in western Germany continue to be
a source of concern.
(s.a.)

Average hourly earnings in western Germany

increased 8.3 percent in the year to October, compared with

6.5 percent at the end of 1990.
west German industry (s.a.)

In contrast, output per hour in

increased only 2.3 percent in the year

to October, compared with 3.8 percent at the end of 1990.
Wage negotiations for 1992 are continuing in the steel industry
with discussion focusing on a range of wage increases between 5-1/2
and 6 percent.

Although the steel workers union is relatively

small, these negotiations in the past have set a precedent for other
more important contracts.

Both the public sector employees and

metal workers unions are asking for wage increases of 9-1/2 percent
this year.
On December 19, the Bundesbank raised its discount and Lombard
rates by 1/2 percentage point.

This action was taken in response to

increased inflation since mid year, an acceleration in money growth,
and concerns over the outcome of current wage negotiations.
December, M3

Through

(s.a.) in western and eastern Germany had increased at

an annual rate of 5.7 percent in 1991, relative to the fourth

IV-21
quarter of 1990, up from 4.5 percent through September.

The recent

acceleration in M3 primarily reflects strong demand for bank loans.
In France, real GDP rose 2.8 percent (s.a.a.r.) in the third
quarter, following an increase of the same size in the second
quarter.

Moderate growth in consumption and exports, and a

significant amount of inventory accumulation contributed to the
third-quarter result.
mixed.

Monthly indicators for the fourth quarter are

Industrial production fell 0.6 percent (s.a.) in November,

partially reversing a 1.2 percent rise in October.

Consumption of

manufactured products also declined in November after rising sharply
in October.

The unemployment rate in December remained unchanged at

9.8 percent.
The consumer price index in December was 3.1 percent above its
level a year earlier.

A lessening of inflationary pressures was

evident in the 0.6 percent (n.s.a.) third-quarter increase in hourly
wages in the private sector, about half the second-quarter increase.
In December, France registered a trade deficit of $0.8 billion
(s.a.), following a small surplus in November.

The trade deficit

for 1991 was $5.4 billion, a significant improvement from the 1990
deficit of $9.3 billion, as the bilateral deficit with Germany
narrowed sharply.

Exports grew 3-3/4 percent, compared with 3

percent growth in 1990, while import growth declined to 2 percent
from 3.3 percent in 1990.
In Italy, the economy has stagnated in recent months, with no
sign of the recovery that was widely forecast for the second half of
1991.

Third-quarter GDP rose only 0.4 percent (s.a.a.r.), down from

a modest 1.6 percent rise in the previous quarter.

Fixed investment

was a source of strength, increasing 6.6 percent (s.a.a.r.) in the
third quarter following a 7.4 percent increase in the second
quarter.

Weakness was concentrated in net exports.

Industrial

IV-22
production (s.a.)

fell 2 percent in October.

The unemployment rate

(n.s.a.) rose to 11 percent in October, up from 10.6 percent in the
previous reporting month (July).
Inflation has eased in Italy but remains well above rates in
key EMS partners, Germany and France.

Consumer prices in December

were 6 percent above their level a year earlier, down from 6.2
percent in November.
above a year earlier.

Wholesale prices in November were 2.4 percent
The index of wages and salaries in major

union contracts was up 9.4 percent in September from a year earlier.
The 1992 budget, approved by parliament just prior to the
January 1 deadline, aims to reduce the 1992 central government
budget deficit

(including certain off-budget entities such as the

postal service) to 128 trillion lire, or 8.4 percent of GDP.

The

1991 deficit was 150-155 trillion lire, roughly 10-1/2 to 11 percent
of GDP.

Unfortunately, the new budget package once again puts off

major reforms.

Most outside observers project a deficit in excess

of 9 percent of GDP, in which case additional fiscal measures will
be needed after general elections occur this spring.

With public

debt now estimated to be over 100 percent of GDP, interest payments
consume over one-fifth of total government revenue.
In the United Kingdom, the latest data provide little evidence
of a strong recovery.

Real GDP grew 0.7 percent (s.a.a.r.) in the

third quarter, after contracting 2.8 percent in the second quarter.
In the third quarter, inventories contributed more than 4 percent
(s.a.a.r.) to growth as the runoff of inventories during the
previous three quarters came to an end.
1.6 percent
growth.

Government spending grew

(s.a.a.r.), contributing 0.3 percentage points to

Consumer spending remained flat and was down 3 percent from

its pre-recession level, while investment fell 2.5 percent to a

IV-23
level more than 15 percent below that preceding the recession.

Net

exports made a negative contribution to growth.
In November, manufacturing production

(s.a.) rose 0.1 percent

after several months of decline and was 1.1 percent below the thirdquarter average level.

Retail sales

(s.a.)

fell 1 percent in

December; the average for the fourth quarter was 0.3 percent below
the third-quarter average.

After increasing steadily since the end

of the Gulf War, consumer confidence has recoiled since October.
Business confidence about prospects for sales and orders has fallen
since September as well.

The unemployment rate

(s.a.) has continued

to climb, reaching 9 percent in December.
Consumer prices rose 0.1 percent in December, to a level 4.5
percent above December 1990.

The government's measure of underlying

inflation, which excludes mortgage interest rates, stood at 5.8
percent.

Producers' output prices rose 0.1 percent in December to a

level 5 percent above year-ago levels.

However, wages continued to

increase at an underlying rate of 7-1/2 percent in November.
The recession has contributed to a narrowing of Britain's
current account deficit.

The 1991 current account deficit was $11.6

billion compared with a deficit of $25.8 billion in 1990.
In Canada, monthly data for the fourth-quarter indicate that
the recovery that began in the second quarter remains tentative.
October, industrial production

(s.a.) dropped 0.6 percent, but a 0.1

percent increase in GDP at factor cost suggested some compensating
strength in the service sector.
goods markets, as retail sales

November saw more robust demand in
(s.a.) rose 0.7 percent, factory

shipments (s.a.) increased 0.6 percent, new orders rose 0.2 percent,
and unit sales of motor vehicles were up 9.6 percent.

In December,

further weakness was evident, as the unemployment rate

(s.a.) was

IV-24
unchanged at 10.3 percent, while total employment (s.a.)

fell 0.2

percent, and housing starts (s.a.) were down 3 percent.
The weaker-than-expected economy caused the federal government
budget deficit to increase in 1991.

On January 27, Finance Minister

Don Mazankowski announced a freeze on federal government hiring and
discretionary expenditure for the remainder of the fiscal year which
ends March 31.
Recent price data show that the government's anti-inflation
efforts have achieved some results.

The all-items consumer price

index (n.s.a) fell 0.5 percent in December, and twelve-month
consumer price inflation decreased from 4.2 percent to 3.8 percent.
The CPI excluding food and energy (n.s.a.) dropped 0.3 percent, and
has increased only 3 percent

(a.r.) since the 7 percent Goods and

Services Tax was introduced in January 1991.
prices

Industrial product

(n.s.a.) rose 0.1 percent in December, but stand 3.1 percent

lower than they were twelve-months earlier.

On average, wage

settlements increased only 3.7 percent (s.a.a.r.) in the first 11
months of 1991, compared with 5.7 percent in 1990.
The combined merchandise trade surplus for October and November
was only $2.3 billion (s.a.a.r.) compared with a $7.8 billion
surplus

(s.a.a.r) in the first nine months of the year.

Little progress has been made in discussions of the National
Unity Plan constitutional reform proposals announced by the federal
government last September.

The Cabinet intends to submit specific

constitutional amendments to Parliament by early April.

Should it

deem the revised proposals to be unacceptable, the provincial
government of Quebec has promised to hold a referendum this autumn,
in which voters may choose among alternatives including secession.

IV-25
Developments in the Former Soviet Union and East European Countries
On December 21,

1991,

Russia was

joined by all former

Soviet

republics except Georgia and the Baltics in forming the Commonwealth
of Independent States to replace the Soviet Union.

Despite initial

statements on coordination of economic policies, no agreement has
been reached on long-term monetary, banking, or

trade policies.

Russian central bank has essentially assumed the functions
former USSR Gosbank.

By all reports,

The

of the

monetary emission is

continuing to increase without control as the Russian central bank
attempts to meet the rising demand for rubles from each of the
former republics.
with plans

Some republics, such as Ukraine, are proceeding

to introduce their own currencies.

On January 2,

1992, the Russian republic proceeded with its

widely anticipated price reform measures;
notably Ukraine and Byelarus, followed.

other

republics, most

Prices on basic goods and

services were increased to three to five times their former

level.

Prices of items not subject to controlled increases are supposed to
find market-clearing levels.

However, reports indicate that

competitive pricing is still the exception rather than the norm in
state stores.
fallen about

Output in the Russian republic is estimated to have
9 percent of GNP in

1991.

The Russian government faces a formidable task in controlling
the budget deficit.

Expenditures are likely to be fueled by

promised wage increases and pressures to raise pensions to
the effect of increased prices.

soften

The government is hoping to

stabilize the budget deficit through a new value-added tax, cuts in
military expenditures, and reduced subsidies.

The budget deficit of

the Russian republic, including the portion of the former Soviet
Union budget taken over by the Russian republic, appears to have
exceeded 20 percent of GNP in 1991.

IV-26
The Russian central bank recently announced establishment of a
"market rate" of 110 rubles per dollar and a commercial exchange
rate of 55 rubles per dollar.

Selected export enterprises (mainly

agriculture, minerals, forestry, and chemicals) are obliged to sell
40 percent of their hard currency earnings to the Russian government
at the commercial exchange rate and will also be required to sell 10
percent of their foreign exchange proceeds at the market rate of 110
rubles per dollar.

In late January, the black market exchange rate

was quoted between 120 and 150 rubles per dollar.
Russia has applied for membership in the IMF, as have Ukraine,
Azerbaijan, Armenia, Kazakhstan, and the Baltic states.
Throughout Eastern Europe, the move to a market system has had
severe effects on measured economic activity.

From negligible

levels at the start of their reform efforts, reported unemployment
rates have moved steadily up to 11.4 percent in Poland, 11 percent
in Bulgaria, 8.3 percent in Hungary, 6.6 percent in Czechoslovakia,
and 4 percent in Romania.

Measures of real GNP and industrial

production for the region in 1991 are estimated to have fallen about
15 percent and 20 percent, respectively, with real GNP declines
ranging from about 8 percent in Hungary to 20 percent or more in
Bulgaria, Romania, and Yugoslavia.

However, these numbers

underreport activity in fast-growing private sectors.

In some

countries, increases in consumer prices have stabilized after large
increases in the initial stages of reform, and monthly inflation at
the end of 1991 was on the order of 1-2 percent in Hungary and
Czechoslovakia, and 3 percent in Poland.

Bulgaria, Czechoslovakia,

Hungary, Poland, and Romania have IMF programs (all but Poland are
adhering to the targets set out in those agreements), and Albania
hopes to receive its first IMF program in 1992.

IV-27
In Poland, in late December the Parliament approved the new
center-right government of Prime Minister
President Walesa's

recent nominee for

rejected by the Parliament,

Jan Olszewski.

However,

Central Bank President was

and the Central Bank has been without a

President since August 1991.

The fiscal deficit, which nearly

doubled in 1991 to 6 percent of GDP and caused Poland's

IMF program

to go off track in mid year, has been stabilized at that level for
the first quarter of 1992

through a variety of one-time measures

(mostly expenditure cuts or deferrals),

but longer-term goals of

creating a less-distortionary, broad-based tax system and imposing
discipline on state enterprise spending have not been addressed.
Economic Situation in Other Countries
The IMF approved a 20-month

$2 billion stand-by arrangement for

Brazil on January 29, following assurances by the Brazilian
government that court-ordered increases

in pensions would not be

allowed to throw the program out of compliance.
between Brazil and the Paris
are continuing.

Negotiations

Club and its commercial bank creditors

On December 20,

the IMF approved a modified stand-

by arrangement for Argentina, as well as a waiver for missing its
fiscal targets

in the third quarter of 1991;

preliminary data

indicate that Argentina met its fiscal targets in the fourth
quarter.

In Mexico, real GDP was 3.1 percent above its year-earlier

level in the third quarter of 1991,
increase in the second quarter;

down from a revised 4.9 percent

growth in all of 1991

estimated at 4.5 percent, up from 3.9 percent in 1990.

officially is
Mexico's

trade deficit for the first ten months of 1991 registered $5.1
billion compared with $0.5

billion in 1990.

The Philippines missed

its 1991 fourth quarter monetary targets under its

IMF program by a

small margin, prompting the IMF staff to delay its

report to the

Executive Board pending additional actions to be taken by the

IV-28
government in early February.

Venezuela's 1991 real GDP growth of

9.2 percent was among the world's highest.

Korea registered a

record $9.8 billion current account deficit in the first 11 months
of 1991, while consumer price inflation was 9.5 percent for the
year.

In Taiwan, both economic activity and the trade surplus

strengthened in 1991 while inflation remained about unchanged at 4.4
percent.
Individual country notes.

Brazil's request for a 20-month $2

billion stand-by arrangement was approved by the IMF Executive Board
January 29.

The Brazilian authorities have assured IMF management

that, despite fiscal pressures, including regional court orders to
increase certain social security pensions by 147 percent, they are
determined to adhere to the conditions of the standby.

underscore the government's commitment to fiscal discipline, on
January 20 President Collor issued a decree halting the pension
increases mandated by the courts.

While the decree was ruled

constitutional by the Supreme Court on January 22, the large states
of Rio and Sao Paulo are defying it.

The administration is moving

to negotiate with Congress ways to offset the increase in social
security spending.
The government has been maintaining real interest rates at very
high levels, in the 3-7 percent per month range, but is facing
intense pressures to reduce them.

Industrial production in October

1991, the latest available month, was 0.5 percent below its yearearlier level.

Monthly consumer price inflation registered 24.2

percent in December, down marginally from 26.5 percent in November,
but is expected to rise in January.
The trade surplus for 1991 was $10.6 billion, about the same as
in 1990.

The latest official estimate of liquid international

reserves is $7 billion as of the end of November, down from a recent

IV-29
peak of $9.2 billion in June.

However, according to unofficial

estimates, international reserves rose by $2 billion in December, as
high domestic interest rates have induced heavy capital inflows.
In mid-December, Brazil's bank advisory committee presented a
proposal to resolve the issue of whether interest on restructured
obligations would carry guarantees.

One option would have a portion

of the interest on the debt collateralized when the agreement is
signed, with the remaining collateral to be put up within a
specified time.

Under the second option, only a portion of the debt

would be restructured in the near future and have its interest
collateralized.

The proposal also would reduce the period for

rolling interest guarantees from 18 months to 15 months and would
decrease interest rates on the new instruments.

So far, Brazil has

not responded to this initiative.
Brazil has completed its payments of $2 billion in cash, out of
$8 billion in interest arrears that had accumulated between mid-1989
and December 1990, as agreed last April.

The rest of the arrears

will be converted into bonds when the overall restructuring
agreement is concluded.

Brazil recently announced that it will

continue to pay 30 percent of interest currently falling due and is
expected to continue partial payment until a commercial debt
restructuring package is completed.

Interest arrears accumulated

since January 1991 totaled an estimated $2.6 billion as of end-1991.
Paris Club creditors held a "preliminary" meeting in late
January to prepare for Brazil's formal request for a rescheduling,
possibly in late February.

Brazil has estimated total arrears of

about $8.5 billion (about $4.4 billion in interest) to official
creditors.
On December 20, 1991, the IMF approved a modification of
Argentina's stand-by arrangement and a waiver allowing Argentina to

IV-30

receive the second drawing under the arrangement, since a greater
fraction of the overall fiscal surplus for the third quarter was
derived from asset sales than was specified under the program.
Preliminary data indicate that Argentina met its performance targets
for the fourth quarter.

In consequence, considerable progress has

been made toward negotiation of a three-year Extended Fund Facility,
which would replace the one-year program approved in July 1991.

The

EFF, which is expected to be approved in early Spring, will provide
part of the financing necessary to support a restructuring of
Argentina's $31 billion in commercial bank debt, including about $8
billion in interest arrears.

Negotiations on this package started

at the end of January.
Economic conditions have remained stable since the last
Greenbook.

The monthly rate of CPI inflation edged up to 0.6

percent in December from 0.4 percent in November; it is expected to
register between 1 and 2 percent in January, due to transitory
upticks in food and services prices.

Industrial production in

October, the latest available month, was 12 percent above its yearearlier level, up from 9 percent in September.
Mexico's real GDP growth, year-over-year, slowed to 3.1 percent
in the third quarter of 1991 from a downward-revised 4.9 percent in
the second quarter.

The slower growth rate in the third quarter

reflected a reduction in liquidity in late August and September,
attributable mainly to the sale by the government of Mexico's
leading commercial bank, and the fact that third-quarter growth in
1990 was especially high.

The latest official estimate of growth

for 1991 as a whole is 4.5 percent, up from 3.9 percent in 1990.
The U.S. recession appears to have had only a modest impact on
Mexican exports.

Notwithstanding some slowing since mid-1991, non-

oil exports in the first 10 months of 1991 were 13 percent above

IV-31
their year-earlier values.

However, oil export earnings were 10.8

percent lower in the first ten months of 1991 than their yearearlier level, reflecting the decline in oil prices following the
end of the Gulf War.
only 5.5 percent.

As a result, the increase in total exports was

With imports 23.4 percent higher in the first ten

months of 1991 than in the same period of 1990, the ten-month trade
deficit was $5.1 billion compared with $544 million in 1990.
International reserves, including gold, are estimated to have
increased by about $8 billion during 1991 to $18
of December.

billion at the end

The floating peso/dollar exchange rate has tended to

remain in the lower half of its target zone,
The rate was about 3,073 pesos on January 27.
compared with a lower limit of 3,056 pesos and an upper limit of
3,102 pesos, and was about the same level as when the target-zone
system was adopted last November.

At the January 29 auction, the
28-day Treasury bill rate was 15.5 percent, compared with 16.1
percent on December 3.

The December-over-December rate of consumer

price inflation was 18.8 percent in 1991, down from 29.9 percent in
1990.
An IMF team that visited the Philippines in early January found
that the country had missed its end-December targets for base money
and broad money, although by relatively small amounts.

The staff

report to the IMF Board will be delayed until early February, by
which time the Philippine authorities should have enacted a second
increase in electricity prices (the first increase took place
January 5),

as required under the IMF program, and a group of

revenue measures now being considered by the Senate.

The Aquino

administration has promised to reduce government expenditures in

IV-32
1992 in order to meet the agreed IMF budget deficit target if the
Senate fails to act.
Venezuela was one of the world's fastest growing economies last
year.

According to preliminary data, real GDP rose 9.2 percent,

compared with 5.3 percent in 1990, based on sharp increases in
investment in the petroleum and construction sectors.

Inflation on

a December-over-December basis declined from 36 percent in 1990 to
31 percent in 1991.

Lower oil export earnings and a surge in

imports cut the current account surplus from $7.5 billion in 1990 to
an estimated $1.1 billion last year.

The consolidated government

fiscal account registered a surplus estimated at 1 percent of GDP in
1991, thanks to extraordinary revenues of 3.5 percent of GDP from
privatization of the national airline and telephone companies.
In 1991, Korean consumer prices were 9.5 percent higher in
December than a year earlier.

M2 rose 18.6 percent on average,

which was near the top of the central bank's targeted range of 17-19
percent.

Real GDP was 8.8 percent higher in the first three

quarters of 1991 than its year-earlier level, down from 9.8 percent
in the same period of 1990.

Korea's current account deficit was a

record $9.8 billion in the first eleven months of last year.
External debt increased $6.5 billion to $38.2 billion in the first
ten months of 1991.
In Taiwan, economic activity picked up in 1991 due to stronger
exports and rising public investment.

Industrial activity rose 7.2

percent after falling 1 percent in 1990.

Exports rose 13.3 percent

due in part to large increases in shipments to China

(through Hong

Kong); the cumulative trade surplus (on a customs basis) was $13.3
billion, up somewhat from $12.5 billion in 1990.

Consumer prices

were 4.4 percent higher in December than a year earlier, nearly
unchanged from the 4.6 percent increase in 1990.

On December 21,

IV-33
the ruling party won 78 percent of the seats in National Assembly
elections, the first general elections in Taiwan.

On January 8,

Taiwan's central bank lowered its rediscount rate 0.375 percentage
points to 5.875 percent, the fifth reduction in six months.
addition, reserve requirements were lowered further.

Despite these

moves, the NT dollar has continued to appreciate to record highs
against the U.S. dollar.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, February 4-5, 1992 : Greenbook Part 2

FRASER