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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. CONFIDENTIAL (FR) January 31, SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System 1979 SUMMARY AND OUTLOOK I - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Economic activity continued to expand briskly in the closing months of 1978 with strong gains reported for employment, indus-. trial production,and retail sales. Real GNP is estimated to have increased at a 6 per cent annual rate in the fourth quarter. Over-all, prices continued to rise at a fast pace, although the rate of increase at the retail level moderated in the last two months of the year, due to apparently temporary factors. Employment rose appreciably further in December, but there was also a rapid expansion in the labor force and the unemployment rate edged up to 5.9 per cent. As in preceding months, employment gains in manufacturing and construction were particularly strong. Industrial production rose by 0.6 per cent--about the same as the average rate of increase throughout 1978. The capacity utilization rate in manufacturing rose to a relatively high 85.9 per cent. Retail sales rose substantially again in December following large increases in the two preceding months. Sales at general merchandise and furniture and appliance stores were particularly strong. Unit sales of domestic autos strengthened to 9.2 million (annual rate) in December from 8.8 million in the previous month, and maintained this pace through the first 20 days of January; sales of imported cars edged down slightly in December. I - 2 Orders for plant and equipment remained at high levels despite declines toward year end. New orders for nondefense capital goods fell about 9 per cent over the last two months of 1978, but buoyed by earlier increases, the level in the fourth quarter averaged 11-1/2 per cent higher than in the third. Bookings of the machinery component of such orders, which are generally indicative of the underlying trend in the demand for equipment, rose 6 per cent in the fourth quarter. The value of contracts for nonresidential construction in the fourth quarter remained around the third quarter nominal level. Some slowing of investment growth over the course of 1979 is implied by the Commerce Department's recent survey of business spending plans. According to the survey, firms plan to increase plant and equip- ment spending in 1979 by 11-1/4 per cent in nominal terms, and expect only a 3 per cent rise in real terms. In the last three years this survey has underestimated the actual outcome on average by about 1-1/2 percentage points. The book value of business inventories in November increased at the fastest rate in over six months. While the ratio of inventories to sales edged up, it remained low on an historical basis. The accumulation in November was quite widespread, but notable increases occurred in durable manufacturing and retail trade where automobile stocks held by dealers rose to 1.8 million units (seasonally adjusted); however, in terms of current selling rate, November auto stocks were still within the range of recent experience. I-3 The pace of housing starts remained quite robust at year end. Total starts in December--at a 2.1 million unit annual rate--reflected strength particularly in the single-family sector, with home sales in November holding at a high level. Housing starts for 1978 as a whole amounted to 2.0 million, virtually the same as in 1977. A rapid increase of Federal spending in the fourth quarter of 1978 reflected the 5-1/2 per cent Federal pay raise and a jump in Commodity Credit Corporation loans to farmers. State and local government outlays are estimated to have increased only moderately during this period. Consumer price increases in November and December moderated from the pace of the preceding months, but temporary factors played a role in each month. The advance of prices in November was held down by only a small increase in food prices; however, food prices again accelerated in December, and large price increases at the farm level in January is putting further upward pressure on consumer prices in coming months, In December the decline in California property tax bills-- due to Proposition 13--also held down the over-all price increase. Without the California tax reductions, prices for items other than food and energy continued to rise in December at about the same pace as over most of 1978. Energy prices at the retail level continued rising rapidly through year end with large price hikes for gasoline the main factor. I - 4 Outlook. Growth in real GNP in the final quarter of 1978 was appreciably larger than had been projected in the last Greenbook. Available information, however, has led to little change in our expectation of real GNP growth in the first quarter, now projected at a 4.0 per cent annual rate. Recent price data, however, suggest a deterioration in the near term price outlook especially for foods. The staff now estimates that the rise in the gross business product fixedweighted price index will be at nearly a 9 per cent annual rate in the first quarter--half a percentage point more than indicated in the last Greenbook. The staff projection, which has been extended through the end of 1980, assumes a growth rate of M-1 of approximately 3 per cent during 1979 and 4 per cent during 1980. The impact of automatic transfers is projected to be around 3 to 3-1/2 per cent during 1979 and around 2 to 2-1/2 per cent in 1980. Short-term interest rates are expected to change relatively little over the projection period--perhaps edging higher during the next few months and then gradually receding over the remainder of the period. The President's new budget has been largely incorporated in the staff projection. However, tax rebates associated with real wage insurance have not been included in light of the unsympathetic Congressional reaction. We have assumed that some $2 billion of spending cuts requiring legislative action will not receive Congressional approval. I - 5 Finally, with our economic assumptions, the staff's translation of the budget implies a deficit of $33 billion in FY 1980, as compared with $29 billion in the official budget. The general contour of economic developments projected for 1979 is similar to that shown in the December Greenbook, with the rate of real GNP growth averaging 2 per cent during the four quarters of this year. Growth is projected to taper off steadily during 1979 and then to hold at an annual rate of about 1-1/2 per cent during 1980. The weak pace of economic growth over this period is associated with a reduced level of housing activity and a slowing of gains in business capital spending. Net exports, however, are projected to strengthen due to the lagged effects of the earlier depreciation of the dollar and the faster growth of major foreign economies relative to the United States. Unfilled orders continue to suggest moderate increases in business fixed investment early in 1979, but a reduction in real growth in this sector is assumed as the year progresses, consistent with recent surveys of business intentions and capital appropriations. The continued slowing of capital spending during 1980 is consistent with the expected sluggishness of overall demands. Housing starts are projected to bottom out at an annual rate of 1.65 million units in late 1979. Underlying demands for housing are projected to remain strong throughout the period, but tightening financial conditions are expected to take their toll at the margin. I -6 In the State and local sector, government purchases are expected to remain sluggish through 1980. Evidence continues to point to cautious attitudes regarding spending initiatives, and Federal grants in real terms are scheduled to decline substantially as counter-cyclical programs are reduced. These various developments are likely to produce a further slowing of gains in household disposable income. Thus, even though the saving rate is projected to remain quite low on a historical basis, growth in real consumption expenditures is expected to be considerably smaller than earlier in the expansion. The over-all output projection implies a reduced rate of employment growth and an increase in joblessness. The unemployment rate is projected to approach 6-1/2 per cent by the end of 1979 and to reach 7 per cent in late 1980. The emerging slack anticipated in capital and labor markets is expected to contribute somewhat to slowing the rate of inflation. Additional costs in 1980 from social security tax increases and minimum wages will be smaller than in the preceding years. The staff's price projection is also favorably influenced by the outlook for somewhat more ample agricultural supplies by late 1979, the diminishing influence of the 1978 dollar devaluation, and some compliance with the voluntary wage-price standards. As measured by the gross business product fixed- weighted price index, inflation is projected to slow to a 7-3/4 per cent rate by year-end 1979 and to a 7 per cent rate by late 1980. Detailed data for these projections are shown in the tables that follow. I-7 STAFF GNP PROJECTIONS Per cent changes, annual rate Gross business product fixed-weighted Nominal GNP 12/13/78 1/31/79 1976 1/ 11.2 11.0 11.7 11.4 11.2 11.0 11.6 11.9 9.0 1978-III 1/ 1978-IV 1/ 10.7 12.9 9.6 14.7 1979-I 1979-II 1979-III 1979-IV 12.1 9.3 8.5 8.9 13.3 9.8 8.2 8.9 12.7 12.9 9.7 10.1 1977 1/ 1978 T/ 1979 1980 1980-I 1980-II 1980-III 1980-IV Change: 77-IV to 78-IV 1/ 78-IV to 79-IV 79-IV to 80-IV 9.0 Memo: Growth Over Annual Policy Period: 78-IV to 10.1 79-IV 1/ Actual. Real GNP 12/13/78 1/31/79 price index 12/13/78 1/31/79 Unemployment rate (per cent) 12/13/78 1/31/79 I-8 CONFIDENTIAL FOMC CLASS FR - January 31, 1979 GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of current dollars at annual rates.) 1979 I II 1980 III Projected IV I II III IV Gross national product Final purchases Private Excluding net exports 2281.1 2265.2 1801.9 1800.9 2335.3 2316.4 1847.0 1845.6 2381.8 2364.4 1883.1 1883.8 2433.3 2416.9 1923.1 1923.2 2488.1 2473.7 1971.2 1963.6 2542.1 2528.7 2016.9 2005.6 2595.3 2582.9 2061.6 2047.9 2653.2 2641.8 2107.4 2091.3 Personal consumption expenditures Goods Services 1443.2 782.9 660.3 1482.5 803.2 679.3 1515.5 818.8 696.7 1548.4 834.4 714.0 1581.4 849.3 732.1 1615.5 864.9 750.6 1649.7 881.0 768.7 1685.2 898.0 787.2 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 373.6 115.5 242.2 15.9 15.9 382.0 114.3 248.8 18.9 18.9 385.7 113.3 255.0 17.4 17.4 391.2 113.8 261.0 16.4 16.4 396.6 115.3 266.9 14.4 14.4 403.5 117.5 272.6 13.4 13.4 410.6 120.0 278.2 12.4 12.4 417.5 122.8 283.3 11.4 11.4 Net exports of goods and services 1/ Exports Imports 1.0 233.9 232.9 1.4 242.5 241.1 -. 7 250.4 251.1 -.1 258.6 258.7 7.6 269.5 261.9 11.3 278.3 267.0 13.7 285.8 272.1 16.1 293.9 277.8 Gov't. purchases of goods and services Federal 2/ State and local 463.3 164.5 298.8 469.4 164.0 305.4 481.3 169.4 311.9 493.8 175.4 318.4 502.5 177.3 325.2 511.8 179.5 332.3 521.3 181.7 339.6 534.4 187.4 347.0 Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable personal income Saving rate (per cent) 1426.2 1433.4 1438.0 1442.3 1447.1 1451.9 1457.3 1462.9 1833.0 1180.4 1559.5 5.0 1878.5 1206.0 1597.1 4.7 1932.7 1231.4 1642.3 5.2 1978.2 1258.8 1679.4 5.2 2018.8 1285.7 1713.5 5.1 2061.2 1309.9 1748.2 5.0 2113.5 1335.2 1791.9 5.3 2160.3 1365.0 1829.2 5.2 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 185.4 234.3 189.0 238.0 185.6 232.6 186.4 232.9 187.9 237.1 192.4 242.7 195.1 244.4 198.9 248.2 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -18.6 7.0 -15.2 14.6 -26.9 8.0 -30.2 9.0 -23.6 21.5 -20.0 30.5 -24.2 31.5 -22.6 37.4 26.2 2.8 26.3 2.3 25.2 .6 25.0 -. 2 24.3 -1.5 23.3 -3.1 22.3 -4.7 22.5 -5.1 102.3 5.8 102.9 6.0 103.5 6.2 104.1 6.3 104.6 6.5 105.1 6.7 105.6 6.9 106.1 7.1 88.1 21.0 88.5 21.0 88.9 21.0 89.2 21.0 89.5 21.0 89.7 21.0 90.0 21.0 Industrial production (1967=100) 151.7 Capacity utilization: all mfg. (per cent) 86.2 Materials (per cent) 87.9 153.2 86.3 88.1 154.0 85.9 87.9 154.6 85.4 87.5 155.0 84.8 87.1 155.4 84.2 86.7 155.9 83.7 86.3 156.4 83.1 85.9 Housing starts, private (million units, A.R.) 1.95 10.95 New autos sales, (millions, A.R.) Domestic models 9.10 Foreign models 1.85 1.75 10.75 9.00 1.75 1.70 10.50 8.80 1.70 1.65 10.35 8.75 1.60 1.75 10.30 8.70 1.60 1.75 10.40 8.75 1.65 1.80 10.40 8.75 1.65 1.80 10.50 8.80 1.70 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (per cent) Nonfarm payroll employment (millions) Manufacturing 1/ Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. 2/ Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I- 9 January 31, IDENTIAL C ONF - FR CLASS II FOMC 1979 PER CENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1980 1979 I II III Projected IV I II III IV Constant (1972) dollars Gross national product Final purchases Private Excluding net exports 4.0 3.5 4.4 3.2 2.0 1.5 2.2 2.1 1.3 1.6 1.0 1.1 1.2 1.4 1.3 1.0 1.3 1.7 1.9 .8 1.3 1.5 1.6 1.1 1.5 1.7 1.8 1.5 1.6 1.7 1.8 1.5 Personal consumption expenditures Goods Services 3.2 3.1 3.5 3.0 2.5 3.5 1.8 1.0 2.8 1.4 .6 2.4 1.0 -.1 2.3 1.2 .4 2.3 1.6 1.0 2.2 1.8 1.3 2.3 Gross private domestic investment Residential structures Business fixed investment 6.4 -1.1 4.4 1.3 -13.6 3.2 -3.7 -13.0 2.3 -1.8 -7.5 1.9 -2.3 -4.2 1.5 -.7 -1.1 1.0 -.7 .7 .8 -.9 1.5 .0 Gov't. purchases of goods and services Federal State and local .1 -2.4 1.6 -1.1 -5.4 1.4 3.8 8.6 1.2 1.5 2.3 1.1 .8 -.5 1.5 1.2 .4 1.7 1.3 .3 1.9 1.4 .7 1.9 4.3 1.8 4.2 1.8 .6 .7 3.1 1.5 13.3 12.7 14.3 12.2 9.8 9.4 10.4 10.3 8.2 8.5 8.0 8.5 8.9 9.2 8.8 8.6 9.3 9.7 10.4 8.7 9.0 9.2 9.6 8.8 8.6 8.9 9.2 8.7 9.2 9.4 9.2 8.7 Personal consumption expenditures Goods Services 12.2 12.4 12.0 11.3 10.8 12.0 9.2 8.0 10.6 9.0 7.8 10.3 8.8 7.3 10.5 8.9 7.6 10.5 8.7 7.7 10.0 8.9 7.9 10.0 Gross private domestic investment Residential structures Business fixed investment 16-1 11.3 12.9 9.3 -4.1 11.4 3.9 -3.5 10.3 5.8 1.8 9.7 5.6 5.4 9.4 7.1 7.9 8.8 7.2 8.8 8.5 6.9 9.7 7.5 6.9 2.7 9.3 5.4 -1.2 9.1 10.5 13.8 8.8 10.8 14.9 8.6 7.2 4.4 8.8 7.6 5.1 9.0 7.6 5.0 9.1 10.4 13.2 9.0 Disposable personal income 13.3 10.0 11.8 9.3 8.4 8.4 10.4 8.6 Personal income Wage and salary disbursements 10.8 11.6 10.3 9.0 12.0 8.7 9.7 9.2 8.5 8.8 8.7 7.7 10.5 8.0 9.2 9.2 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 15.6 14.5 8.0 6.5 -7.0 -8.7 1.7 .4 3.3 7.5 9.9 9.7 5.7 2.9 8.0 6.2 3.6 5.7 1.8 2.1 1.6 1.1 1.8 -.5 1.5 -.8 1.2 -.2 1.1 .1 1.0 .3 1.7 12.0 10.1 .9 8.7 7.7 .6 8.6 8.0 .5 8.5 8.0 .9 9.9 8.9 1.0 8.3 7.2 1.1 8.3 7.1 1.0 8.2 7.1 8.9 8.9 7.7 8.4 6.8 7.6 7.6 7.7 7.9 7.8 7.5 7.6 7.0 7.1 7.6 7.1 6.0 4.0 2.1 1.6 1.0 1.2 1.2 1.4 Disposable personal income Current dollars ross national product Final purchases Private Excluding net exports Gov't. purchases of goods and services Federal State and local Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator 1/ Gross business product fixed-weighted price index 2/ idustrial production 1/ Excluding Federal pay increase rates of change are: 7.9 per cent; 1980 QIV, 7.1 per cent. 2/ Using expenditures in 1972 as weights. 1979 QI, 8.9 per cent; 1979 QIV, 7.1 per cent; 1980 QI, January 31, 1979 I - 10 CONFIDENTIAL CLASS II FOMC FR GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) ---- I I ---- 1*/7 I II III IV I II III IV Gross national product Final purchases Private Excluding net exports 1806.8 1796.5 1421.5 1430.0 1867.0 1850.0 1461.2 1467.1 1916.8 1894.9 1495.4 1502.4 1958.1 1945.0 1532.5 1555.7 1992.0 1975.3 1558.6 1582.7 2087.5 2067.4 1642.7 1648.2 2136.1 2122.5 1682.7 1693.4 2210.8 2198.4 1742.8 1749.7 Personal consumption expenditures Goods Services 1167.7 639.1 528.6 1188.6 649.2 539.4 1214.5 657.1 557.5 1255.2 684.1 571.1 1276.7 684.9 591.8 1322.9 717.1 605.8 1356.9 731.2 625.8 1402.2 760.4 641.8 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 272.5 81.6 180.6 10.3 11.1 295.6 91.4 187.2 17.0 16.5 309.7 94.3 193.5 21.9 22.0 313.5 100.2 200.3 13.1 10.4 322.7 100.3 205.6 16.7 16.9 345.4 105.3 220.1 20.1 22.1 350.1 109.0 227.5 13.6 14.6 359.9 112.5 235.0 12.4 13.1 Net exports of goods and services 1/ Exports Imports -8.5 170.9 179.4 -5.9 178.1 184.0 -7.0 180.8 187.3 -23.2 172.1 195.2 -24.1 181.7 205.8 -5.5 205.4 210.9 -10.7 210.1 220.8 -6.9 223.5 230.4 Gov't. purchases of goods and services Federal 2/ State and local 375.0 138.3 236.7 388.8 142,9 245.9 399.5 146.8 252.7 412.5 152.2 260.3 416.7 151.5 265.2 424.7 147.2 277.6 439.8 154.0 285.8 455.6 163.4 292.2 'ss national product in constant (1972) dollar 1306.7 1325.5 1343.9 1354.5 1354.2 1382.6 1391.4 1412.2 Personal income Wage and salary disbursements Disposable personal income Saving rate (per cent) 1470.7 946.4 1248.0 4.2 1508.6 973.4 1285.3 5.3 1543.7 993.6 1319.1 5.6 1593.0 1021.2 1359.6 5.4 1628.9 1050.8 1391.6 5.9 1682.4 1090.2 1433.3 5.3 1731.7 1113.2 14684 5.2 1786.4 1148.5 1511.4 4.8 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 129.9 164.8 143.7 175.1 154.8 177.5 148.2 178.3 132.6 172.1 163.4 205.5 165.2 205.4 178.8 226.5 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -37.3 1.0 -40.3 -6.8 -56.4 -25.8 -58.6 -27.5 -52.6 -15.0 -23.6 4.2 -22.8 6.6 -19.9 5.1 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 29.5 12.5 28.5 10.8 31.2 12.8 29.0 9.9 31.5 11.5 29.8 9.3 23.4 1.8 Civilian labor force (millions) Unemployment rate (per cent) 96.2 7.4 97.1 7.2 97.6 6.9 98.5 6.6 99.3 6.2 100.1 6.0 100.8 6.0 101.5 5.8 Nonfarm payroll employment (millions) Manufacturing 80.8 19.4 82.0 19.6 82.7 19.7 83.5 19.9 84.3 20.1 85.7 20.3 86.1 20.3 87.0 20.6 Industrial production (1967=100) 133.6 Capacity utilizationr all mfg. (per cent) 81.2 Materials (per cent) 80.4 137.0 82.7 82.6 138.4 83.0 82.3 139.3 82.9 82.2 139.6 82.1 81.7 144.0 84.0 84.5 147.0 85.0 86.0 149.5 85.7 87.3 Housing starts, private (million units, A.R.) 1.74 New autos sales, (millions, A.R.) 11.12 Domestic models 9.28 Foreign models 1.84 1.94 11.70 9.34 2.36 2.04 10.92 8.88 2.04 2.15 10.75 8.77 1.98 1.72 10.80 8.80 2.00 2.11 12.12 10.01 2.11 2.07 11.16 9.19 1.98 2.13 11.07 9.06 2.00 1/ 26.5 3.7 Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. CONFIDENTIAL - FR CLASS II FOMC 1979 January 31, I - 11 PER CENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1977 I 1978 II III IV I II III IV Constant (1972) dollars Gross national product Final purchases Private Excluding net exports 7.3 5.3 6.1 6.9 5.9 4.6 3.7 3.8 5.7 5.0 4.8 4.3 3.2 4.7 4.8 8.7 -. 1 -1.6 -1.1 -1.0 8.7 8.6 11.0 7.7 2.6 3.7 2.8 3.7 6.1 6.6 6.9 6.3 Personal consumption expenditures Goods Services 5.1 5.2 4.9 1.4 1.2 1.5 4.1 2.4 6.1 9.0 13.5 3.9 -1.4 -8.1 7.0 6.0 9.7 1.9 4.1 2.6 5.9 6.8 9.9 3.1 Gross private domestic investment Residential structures Business fixed investment 32.8 10.2 19.0 25.7 37.8 7.5 9-7 5.2 5.3 -2.9 11.1 5.3 11.3 -5.2 4.2 15.2 2.7 21.3 -5.1 -1.6 3.5 1.4 1.1 5.4 -.2 -15.3 9.6- 7.2 14.3 3.4 5.1 12.0 1.3 5.1 Gov't. purchases of goods and services Federal State and local 2.4 5.1 .7 8.0 10.7 6.3- 5.8 6.4 5.4 4.2 2.9 5.1 -3.5 -8.9 -. 1 Disposable personal income 1.7 6.2 5.9 7.8 1.1 3.5 3.6 13.7 11.0 11.3 14.9 14.0 12.5 11.6 10.8 11.1 10.1 9.7 10.0 8.9 11.0 10.3 15.0 7.1 6.4 7.0 7.1 20.6 20.0 23.4 17.6 9.6 11.1 10.1 11.4 14.7 15.1 15.1 14.0 Personal consumption expenditures Goods Services 12.5 12.1 13.1 7.3 6.5 8.4 9.0 5.0 14.1 14.1 17.5 10.1 7.0 .5 15.3 15.3 20.2 9.8 10.7 8.1 13.9 14.0 17.0 10.6 Gross private domestic investment Residential structures Business fixed investment 48.0 25.1 25.9 38.5 57.8 15.3 20.5 13.5 14.1 5.1 27.3 14.8 12.2 .5 11.1 31.3 21.0 31.2 5.5 14.9 14.3 11.7 13.5 13.8 Gov't. purchases of goods and services Federal State and local 9.9 11.5 9.0 15.5 14.0 16.4 11.5 11.3 11.6 13.7 15.7 12.5 4.1 -2.0 7.8 7.9 -10.9 19.9 15.0 20.0 12.4 15.2 26.8 9.3 9.0 12.5 10.9 12.9 9.8 12.5 10.2 12.2 Personal income Wage and salary disbursements 11.7 12.0 10.7 11.9 9.6 8.6 13.4 11.6 9.3 12.1 13.8 15.9 12.2 8.7 13.2 13.3 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 26.4 29-1 49.8 27.5 34.7 5.6 -16.0 1.8 -35.9 -13.2 130.6 103.3 4.5 -.2 37.2 47.9 Nonfarm payroll employment Manufacturing 3.9 5.2 5.6 5.7- 3.6 1.5 4.0 3.2 3.8 5.7 6.9 3.1 2.1 -. 2 4.0 6.0 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 2.4 8.3 5.8 -1.4 6.5 8.0 3.7 8.1 4.2 .5 7.6 7.1 -3.1 12.2 15.7 1.7 8.2 6.4 2.3 9.6 7.1 2.3 9.1 6.7 GNP implicit deflator 1/ Gross business product fixed-weighted price index 2/ 6.0 6.7 7.7 7.9 5.1 4.7 5.5 6.3 7.2 6.7 11.0 12.1 6.9 8.0 8.1 8.3 6.3 10.5 4.4 2.5 1.0 13.1 8.6 7.0 Current dollars ross national product Final purchases Private Excluding net exports Disposable personal income ndustrial production 1/ Excluding Federal pay increase rates of change are: 7.2 per cent; 1978 QIV, 7.6 per cent. 2/ Using expenditures in 1972 as weights. 1977 QI,_5.9 per cent; 1977 QIV, 4.8 per cent; 1978 QI, I - 12 January 31, CONFIDENTIAL - FR CLASS II FOMC 1979 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) Projected 1979 1980 1973 1974 1975 1976 1977 1978 1306.6 1288.6 1019.1 1012.0 1412.9 1404.0 1101.3 1095.3 1528.8 1539.6 1201.2 1180.8 1700.1 1689.9 1330.4 1323.0 1887.2 1871.6 1477.6 1488.7 2106.6 2090.9 1655.8 1667.6 2357.9 2340.7 1863.8 1863.4 2569.7 2556.8 2039.3 2027.1 Personal consumption expenditures Goods Services 809.9 457.5 352.3 889.6 498.3 391.3 979.1 541.5 437.5 1090.2 599.2 491.0 1206.5 657.4 549.2 1339.7 723.4 616.3 1497.4 809.8 687.6 1632.9 873.3 759.6 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 220.0 66.1 136.0 17.9 14.7 214.6 55.1 150.6 8.9 10.8 190.9 51.5 150.2 -10.7 -14.3 243.0 68.2 164.6 10.2 12.2 297.8 91.9 190.4 15.6 15.0 344.5 106.8 222.0 15.7 16.7 383.1 114.2 251.7 17.1 17.1 407.0 118.9 275.2 12.9 12.9 Net exports of goods and services 1/ Exports Imports 7.1 101.6 94.4 6.0 137.9 131.9 20.4 147.3 126.9 7.4 163.2 155.7 -11.1 175.5 186.6 -11.8 205.2 217.0 .4 246.3 245.9 12.2 281.9 269.7 Gov't. purchases of goods and services Federal 2/ State and local 269.5 102.2 167.3 302.7 111.1 191.5 338.4 123.1 215.4 359.5 129.9 229.6 394.0 145.1 248.9 434.2 154.0 280.2 476.9 168.3 308.6 517.5 181.5 336.0 Gross national product in constant (1972) dollars 1235.0 1217.8 1202.3 1332.7 1385.1 1435.0 1454.8 Personal income Wage and salary disbursements Disposable personal income Saving rate (per cent) 1052.4 701.3 901.7 7.8 1154.9 1255.5 1380.9 1529.0 1707.3 764.6 805.9 890.1 983.6 1100.7 984.6 1086.7 1184.4 1303.0 1451.2 7.3 5.7 5.3 7.7 5.1 1905.6 1219.1 1619.6 5.0 2088.5 1323.9 1770.7 5.1 Gross national product Final purchases Private Excluding net exports 1271.0 99.1 115.8 83.6 126.9 95.9 120.4 127.0 155.9 144.2 173.9 160.0 202.4 186.6 234.5 193.6 243.1 Federal government surplus or deficit (N.I.A. basis) High employment surplus or deficit (-) -6.7 -1.3 -10.7 14.8 -70.6 -23.6 -53.8 -15.9 -48.1 -14.8 -29.4 .2 -22.7 9.6 -22.6 30.2 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 13.0 4.1 7.6 -2.9 6.2 -6.2 20.7 5.5 29.6 11.5 27.8 6.6 25.7 1.4 23.1 -3.6 Civilian labor force (millions) Unemployment rate (per cent) 88.7 4.9 91.0 5.6 92.6 8.5 94.8 7.7 97.4 7.0 100.4 6.0 103.2 6.1 105.3 6.8 Nonfarm payroll employment (millions) Manufacturing 76.8 20.2 78.3 20.1 76.9 18.3 79.4 19.0 82.3 19.6 85.8 20.3 88.3 21.0 89.6 21.0 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Industrial production (1967=100) Capacity utilization: all manufacturing (per cent) Materials (per cent) 129.8 87.5 92.4 Housing starts, private (million units, A.R.) New auto sales, (millions, A.R.) Domestic models Foreign models 2.05 11.42 9.65 1.77 1/ 129.3 84.2 87.7 1.34 8.91 7.49 1.42 117.8 73.6 73.6 1.16 8.66 7.08 1.58 129.8 80.2 80.4 137.1 82.5 81.9 145.1 84.2 84.9 153.4 85.9 87.8 155.7 84.0 86.5 1.54 10.12 8.63 1.50 1.99 11.13 9.07 2.06 2.02 11.29 9.27 2.02 1.76 10.64 8.91 1.72 1.77 10.40 8.75 1.65 Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbook. 2/ Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I - 13 January 31, CONFIDENTIAL - FR CLASS II FOMC 1979 PER CENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS Projected 1973 1974 1975 1976 1977 1978 1979 1980 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports 5.5 4.9 6.3 5.1 -1.4 -. 7 -1.4 -2.3 -1.3 .2 -. 3 -1.0 5.7 4.3 5.5 6.4 4.9 4.7 5.3 6.0 3.9 3.8 4.3 4.4 3.6 3.6 4.0 3.5 1.4 1.6 1.6 1.1 Personal consumption expenditures Goods Services 4.7 5.0 4.4 -.9 -3.4 2.3 1.8 .7 3.2 5.8 6.4 5.0 4.7 5.0 4.4 3.9 3.3 4.6 3.8 4.1 3.5 1.5 .6 2.5 Gross private domestic investment Residential structures Business fixed investment 10.0 -3.7 12.2 -11.4 -24.6 -.3 -22.3 -13.9 -13.0 21.6 23.4 4.7 13.2 20.5 9.1 7.0 3.6 .7.8 1.7 -4.9 4.7 -1.6 -5.1 1.5 Gov't. purchases of goods and services Federal State and local -.2 -5.4 3.2 2.1 -.8 3.8 1.9 .7 2.6 .1 .1 .1 2.4 5.2 .8 2.2 -1.1 4.2 2.2 2.3 2.1 1.4 1.1 1.5 Disposable personal income 6.7 -1.5 2.1 3.5 4.1 4.2 3.7 1.7 Gross national product Final purchases Private Excluding net exports 11.6 10.9 12.2 11.0 8.1 8.9 8.1 8.2 8.2 9.7 9.1 7.8 11.2 9.8 10.8 12.0 11.0 10.8 11.1 12.5 11.6 11.7 12.1 12.0 11.9 11.9 12.5 11.7 9.0 9.2 9.4 8.8 Personal consumption expenditures Goods Services 10.5 11.4 9.3 9.8 8.9 11.1 10.1 8.7 11.8 11.4 10.7 12.2 10.7 9.7 11.8 11.0 10.0 12.2 11.8 11.9 11.6 9.1 7.8 10.5 Gross private domestic investment Residential structures Business fixed investment 16.8 6.6 16.4 -2.5 -16.7 10.8 -11.0 -6.5 -. 3 27.3 32.5 9.6 22.6 34.8 15.7 15.7 16.2 16.6 11.2 7.0 13.4 6.2 4.1 9.3 Gov't. purchases of goods and services Federal State and local 6.5 .1 10.8 12.3 8.7 14.5 11.8 10.7 12.5 6.2 5.5 6.6 9.6 11.7 8.4 10.2 6.2 12.6 9.8 9.3 10.1 8.5 7.8 8.9 Disposable personal income 12.5 9.2 10.4 9.0 10.0 11.4 11.6 9.3 Personal income Wage and salary disbursements 11.7 10.6 9.7 9.0 8.7 5.4 10.0 10.4 10.7 10.5 11.7 11.9 11.6 10.8 9.6 8.6 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 7.6 20.4 -15.6 9.6 14.7 -5.1 32.4 29.5 13.5 11.5 11.0 16.4 16.6 15.9 3.7 3.7 Nonfarm payroll employment Manufacturing 4.3 5.2 1.9 -.4 -1.7 -8.7 3.2 3.7 3.6 3.4 4.3 3.5 3.0 3.2 1.5 .0 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 1.7 7.8 6.0 -2.9 9.4 12.7 1.9 9.9 7.9 3.6 8.5 4.7 1.3 8.1 6.7 .6 9.4 8.8 1.5 9.6 8.0 .8 8.8 7.9 CNP implicit deflator Gross business product fixed-weighted price index 1/ 5.9 5.7 9.7 10.4 9.6 9.4 5.2 5.4 5.9 6.2 7.9 7.8 8.1 8.5 7.5 7.6 Industrial production 8.4 -.4 -8.9 10.2 5.6 5.8 5.7 1.5 Current dollars 1/ Using expenditures in 1972 as weights. January 31, 1979 FEDERAL SECTOR ACCOUNTS (billions of dollars) Unified budget receipts Unified budget outlays Surplus(+)/Deficit(-), unified budget Surplus(+)/Deficit(-), off-budget agencies 2/ Combined Deficit to be financed Fiscal Year 1978* 402.0 450.8 -48.8 -10.3 -59.1 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 3/ FY 1979 e/ Admin. F.R. Board 1/ 456.0 457.1 493.4 492.8 -37.4 -35.7 FY 1980 e/ Admin. F.R. Board 1/ 502.6 505.1 531.6 538.1 -29.0 -33.0 416.9 460.6 -43.7 CY 79 el F.R. Board 467.5 502.8 -35.3 CY 1978* FRB Staff Estimates Calendar quarters; unadjusted data 1978 1979 III* IV* II III 114.9 -8.1 123.2 -23.7 I 1UU.Z 122.2 -22.0 -3.5 -25.5 -4.0 11.4 -3.0 -8.4 .,,, lUO.o -- ,.,,, .-~h ,..,,.,,,,,,, 110.0 123.2 15.4 IV I 1980 132.9 -23.2 135.0 16.8 III 13j., 137.0 -3.3 -1.0 -24.3 -3.0 -26.2 -4.0 12.8 -3.5 -6.8 iu9. 124.2 133.2 -5.4 -23.3 LU1. I II .. ,~ 1i1.0 .,,, -12.0 -49.4 -10.7 -46.4 -12.0 -41.0 -11.5 -44.5 -9.1 -52.8 -11.5 -46.8 -3.1 -11.2 -0.1 -23.8 40.0 7.4 2.0 37.0 7.4 2.0 39.0 0.0 2.0 42.5 0.0 2.0 53.6 -4.0 3.2 42.5 -2.3 2.0 15.1 -4.9 1.0 15.2 6.1 2.6 14.5 8.3 2.7 -6.6 -4.0 -0.8 13.9 -3.0 -2.5 20.7 1.0 2.6 17.6 6.0 2.6 -6.8 -4.0 -2.0 11.0 -3.0 -1.2 Cash operating balance, end of period 22.4 15,0 15.0 15.0 15.0 16.3 14.0 22.4 16.3 8.0 12.0 15.0 14.0 8.0 12.0 15.0 Memo: 19.1 n.a. 19.6 n.a. 14.4 22.0 18.1 6.1 4.9 4.1 5.5 5.1 3.4 3.0 4.0 4.0 413.8 450.6 151.1 98.1 53.0 299.5 -36.8 464.3 496.3 166.0 105.1 60.9 330.3 -32.0 472.2 495.7 165.3 104.7 60.6 330.4 -23.4 513.8 539.2 178.2 115.4 62.8 361.0 -25.4 520.1 543.2 178.5 114.3 64.1 364.7 -23.1 431.6 461.0 154.0 99.5 54.5 307.0 -29.4 484.8 507.6 168.3 107.0 61.3 339.3 -22.8 Seasonally adjusted annual rates 441.7 462.6 469.8 480.2 489.6 464.5 482.3 488.4 495.4 516.5 154.0 163.4 164.5 164.0 169.4 99.6 102.1 103.6 105.6 107.5 54.5 61.3 60.9 58.4 61.9 310.5 318.9 323.9 331.4 347.1 -26.9 -22.8 -19.7 -18.6 -15.2 499.9 530.1 175.4 111.3 64.1 354.7 -30.2 513.2 536.8 177.3 113.3 525.1 545.1 179.5 115.3 64.2 365.6 -20.0 536.5 560.7 181.7 117.4 64.3 379.0 -24.2 -7.9 n.a. 8.7 n.a. 23.1 0.2 9.6 8.0 9.0 21.5 30.5 31.5 Sponsored agency borrowing 4/ NIA Budget Receipts 6/ Expenditures 6/ Purchases (total) Defense Non-defense All other expenditures Surplus(+)/Deficit(-) 6/ High Employment Surplus(+)/Deficit(-) (NIA basis) 5/ 1/ / 3/ 4/ / I/ 6.6 5.1 7.0 14.6 64.0 359.5 -23.6 * actual a--estimated r--revised n.a.--not available The Budget of the United States Government, Fiscal Year 1980, January 1979. Includes Federal Financing Bank, Postal Service Fund, Rural Electrification and Telephone Revolving Fund, Rural Telephone Bank, and Pension Benefit Guaranty Corporation. Checks issued less checks paid, accrued items and other transactions. Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Bahks, and Banks for Cooperatives. RB staff estimates are consistent with the Council's new potential GNP series as reported in the Economic Report of the President, January 1979. The fiscal year totals as published by the BEA "Fiscal Year 1980 Budget Translation," January 1979, are based on unadjusted data and do not conform to the average of four seasonally adjusted quarters. The FRB staff estimates, therefore, have been adjusted in order to make the BEA and the staff estimates comparable. I - 15 Comments on the Federal Sector Outlook The staff's fiscal projection has been revised this month to reflect new budget information. Federal spending in fiscal year 1980 (unified basis) is expected to be $538 billion, about $6-1/2 billion more than the Administration's recommendation. Differences between the staff and Administration's economic forecasts, because of higher projected unemployment, inflation, and interest rates, account for about $4-1/2 billion of this divergence. In addition, it seems unlikely that Congress will accept all of the President's proposals to reduce spending, especially some proposed cuts in social security benefits. Receipts are projected at $505 billion in fiscal year 1980, around $2-1/2 billion higher than the budget estimate. reflects several partly offsetting considerations, among them the exclusion of real wage insurance from the staff's fiscal policy assumptions and the impact of the staff's higher projected rates of inflation and nominal income growth on tax receipts. The staff expenditure and revenue estimates indi- cate a unified budget deficit in fiscal year 1980 of around $33 billion. This I - 16 For the current fiscal year, the staff's outlay forecast has been revised upward by $1-1/2 billion to about $493 billion. Receipts also have been revised upward and are now expected to be $457 billion, about $5 billion above the previous forecast. Higher projected corporate profits are primarily responsible for this increase. The resulting defi- cit for the current fiscal year is now expected to be almost $36 billion, and the total deficit to be financed (unified plus off budget) is projected at $46 billion. The Treasury has already raised $18 billion during this fiscal year, including $3 billion since January 1, 1979. Another $19 to $20 billion of additional new financing is expected in the market before the April 15 tax date. During the remainder of the second quarter, seasonally high tax receipts should enable the Treasury to pay down $16 to $17 billion of marketable debt. The high employment budget estimates have been revised this month to reflect the Council of Economic Advisers' reassessment of potential GNP. The Council's revisions affect the level of the high employment surplus but have smaller effects on period to period changes in the series. in Part II.) (See also Appendix B The staff and Council projections continue to show a sizable shift toward restraint between fiscal years 1978 and 1979. This trend toward greater restraint continues in fiscal year 1980 when the staff's high employment surplus increases by $14 billion. I - 17 DOMESTIC FINANCIAL DEVELOPMENTS Summary. Open market rates in late January generally were 25 to 75 basis points below their levels at the December FOMC meeting, as overall credit flows diminished. Slow growth in the key monetary aggregates continued despite strength in economic activity. The increases in short- term yields that occurred late in December when the Federal were generally more than reversed by declines in January. funds rate rose Since early January the spread of private rates over shorter-term Treasury bill rates has narrowed significantly, establishing a more normal yield relationship, as foreign official purchases of Treasury bills virtually ceased while sales by the Treasury and the Open Market Trading Desk increased the floating supply. In contrast, Treasury and municipal bond yields have fallen relatively more than corporate bond yields since year end. By late January, longer-term Treasury and municipal interest rates were 10 to 25 basis points below their mid-December levels. The average rate on S&L commitments to make conventional home mortgage loans rose only slightly over the intermeeting period. Stock prices edged lower in late December, but have rallied by 7 to 10 per cent since year end, as the improvement in the foreign exchange value of the dollar and larger than expected gains in profits at some major corporations buoyed investor sentiment. Needs for external credit at many nonfinancial corporations were likely reduced last quarter, as profit gains augmented gross internal sources of funds. More moderate growth in short- and intermediate-term business credit in December largely reflected flat business loans at commercial banks, I - 18 as commercial paper issuance and borrowing from finance companies by nonfinancial firms advanced at near the rapid month-earlier pace. Commercial bank business lending evidently resumed growth in January, but growth of nonfinancial commercial paper reportedly slowed. Corporations also cur- tailed longer-term borrowing, although apparently heavy takedowns of mortgage loans from insurance companies and commercial banks supplemented the light bond and stock financing. Net domestic offerings of marketable Treasury issues rebounded in January from the reduced December pace, when sales of non-marketables to foreign official institutions and foreign private investors were substantial. In contrast, gross borrowing by State and local governments declined in January, following an increase in December. Federally sponsored credit agencies maintained borrowing at a record high over the two months. In the household sector, home mortgage and consumer instalment credit apparently expanded somewhat less rapidly in December amid reports of a tightening in non-price terms for both types of borrowing. The household debt burden--measured by the ratio of debt repayments to disposable income-grew during the fourth quarter by a smaller amount than the sharp increases earlier in the year. M-1 expanded at only 1-3/4 per cent in December and remained flat through mid-January at a level only slightly above the September figure. The cumulative effects of the sharp rises in open market interest rates since last summer apparently have caused demand depositors to economize on their holdings. In addition, the continued transfer of funds from demand deposits to savings deposits with the automatic transfer feature and the introduction I - 19 of NOW accounts in New York has lowered the monthly growth rate of M-1 by 3 to 3-1/2 percentage points. Even with these transfers, sizable net outflows of savings deposits have been recorded, more than offsetting inflows to small time accounts associated with sales of money market certificates (MMCs). These developments, combined with a sharply reduced issuance during December and early January of large time deposits included in M-2, produced a marked deceleration in growth of this aggregate. Despite strong growth of MMCs, deposit growth at nonbank thrift institutions has also remained below the reduced November pace, contributing to slower M-3 expansion. Aggregate credit flows into the spring are expected Outlook. to rise a bit from the reduced pace in December and January but remain below the fourth quarter average. With little change expected in cor- porate needs for external financing, total business borrowing is likely to be similar to the fourth quarter. Corporations are projected to place more reliance upon longer-term financing than recently. At the short-end, a pick-up in business lending by commercial banks from the recent pace is likely, and banks are expected to further tighten non-price lending terms as their balance sheet positions come under additional pressure. With deposit growth at nonbank thrift institutions projected to decline further, S&Ls will likely again pare the volume of their new mortgage commitments. FNMA and FHLMC purchase programs should, however, con- tinue to be sizable. Underlying demands for home mortgage funds, mean- while, promise to remain strong--reflecting projected real income growth, demographic factors, and the attractiveness of houses as a hedge against I - 20 inflation. Therefore, some further upward pressure on home mortgage interest rates is likely, which, together with usury ceiling constraints, should result in a reduction in the net volume of home mortgage borrowing over the next few months. A projected moderation in growth of personal consumption expenditures should lower expansion in consumer instalment credit. Demands on credit markets by governmental units are expected to be relatively strong through early spring. The Treasury is expected to issue about $18 to $19 billion of additional debt before the April 15 tax date, with about two-thirds of this total likely to be obtained in the bill market, mainly in cash management bills. Borrowing of Fedeally- sponsored agencies and State and local governments will likely remain near the levels of recent months. Demand and supply forces in credit markets are thus not likely to place significant upward pressures on market rates over the next few months. Any resumption of upward rate pressures is likely to depend more on adjustments in expectations or in monetary policy if renewed growth in the monetary aggregates is excessive or if inflation accelerates and the foreign exchange value of the dollar depreciates substantially. I - 21 INTERNATIONAL DEVELOPMENTS Summary. In mid-December, just before the last FOMC meeting, the dollar came under severe pressure in exchange markets in the wake of the announcement of larger-than-expected oil price increases. In the following four days the trade-weighted average value of the dollar fell about 2-1/2 per cent; selling pressure strengthened again toward the end of the year. Since the turn of the year the dollar's value has tended upward, though some setback occurred when German authorities suggested that their concern about inflation outweighed their concern with their exchange rate. U.S. authorities purchased (net) a small amount of foreign currencies. The average value of the dollar is now about 8 per cent above its low point last October. The U.S. merchandise trade deficit in the fourth quarter was close to $30 billion at an annual rate, about the level maintained since the second quarter. quarter rate. In December the deficit was at about the fourth- During the fourth quarter non-agricultural exports registered a sizable gain in volume, while the growth of decelerated. non-oil imports I - 22 Private capital movements reported by banks and securities dealers registered a net outflow of about $7 billion (not annual rate) in the fourth quarter (based on data for October and November and an estimate for December), compared to a net outflow of under $1 billion in the third quarter. Net foreign lending by banks was large in November and there are indications that it continued at a substantial rate in December. A sizable part of the outflow was reported as going to foreign non-banks, suggesting that some borrowing may have been for switching into foreign currencies in anticipation of dollar depreciation. Transactions in securities were relatively small, net, in the fourth quarter; U.S. purchases of foreign bonds picked up a bit but a major departure was the sale of the Treasury's $1.6 billion equivalent German mark issue to private investors in Germany. In January, the Treasury sold a $1.2 billion equivalent issue denominated in Swiss francs. Foreign official assets in the U.S. increased substantially in the fourth quarter, including about $16 billion for G-10 countries and $1 billion for OPEC countries. This was considerably above the $5 billion increase in foreign official assets in the United States reported in the third quarter. There was little change in the current account balance between the two quarters, but there was a sharp rise in private capital net outflows and an apparent rise in unrecorded net outflows. U.S. reserve assets in the aggregate were virtually unchanged in the fourth quarter; holdings of convertible foreign currencies rose I - 23 by over $4 billion, with a roughly equivalent reduction in SDR holdings and the U.S. reserve position in the IMF. vention was about equal Large U.S. market inter- to the proceeds of swap drawings and market borrowing by the Treasury. Activity in international capital markets was on a greatly increased scale in 1978, with little change between the first and second halves of the year. The increase for the year occurred in announced medium-term Euro-credits by banks, which nearly doubled to a total of $64 billion. A large part of the increase represented refinancing of outstanding or maturing credits, often on improved terms. However, a number of countries (notably Canada and some of the OPEC countries) raised substantially larger amounts of new funds. Sales of Euro- bonds and foreign bonds, combined, totalled about $36 billion for the year, up slightly from the 1977 amount. Economic activity abroad scored moderate gains last year, with Germany in particular stepping up from a slow 1977 pace while Japan registered only a small gain over the 1977 performance. Some acceleration also appeared in the United Kingdom, France, Canada, and Italy, among the major countries. There was a fairly general pattern of deceleration of inflation rates in foreign industrial countries. Outlook. From the fourth quarter of 1978 to the fourth quarter of 1979 the staff expects the average rate of economic growth abroad to be about 3-1/2 per cent, considerably above the projected U.S. I - 24 growth rate for the same period. The pace of price inflation abroad is projected to rise somewhat from current rates, but on average to remain below the U.S. rate. The net effect of these factors, together with the depreciation of the dollar since late 1977, is expected to be a sizable reduction in the trade deficit. Partly offsetting these gains are a likely decline in military and other exports to Iran, and an increase in the cost and volume of oil imports. Taken together, these factors are projected to bring the trade deficit down to $28 billion in 1979 from the $35 billion result for 1978, with a further reduction to $20 billion projected for 1980. The corresponding current account deficit would be about $9 billion in 1979 ($17 billion in 1978) and would be eliminated by mid-1980. Given this outlook for the international accounts, the staff does not expect a further change in the dollar's value over the next year or so. GNP NET EXPORTS OF GOODS AND SERVICES 1. International Acct. data 2. (GNP account data 1/) a) Merchandise Trade Balance 3. January 31, Outlook for U.S. Net Exports and Related Items (billions of dollars, seasonally adjusted annual rates) CONFIDENTIAL (FR) CLASS II FOMC 1 97 8 e 1979P -11.0 (-11.8) 1.2 (.4) p 19 8 0 III 1978 IV P I 1.9 -6.0 -9.8 13.2 (12.2) (-10.7) (-6.9)* (1.0) 1 9 7 9 III II .2 2.3 (1.4) (-.7) IV .8 (-.1) I 1 9 8 0p II 12.2 8.5 (7.6) (11.3) 1979 III IV 17.0 14.6 (13.7) (16.1) -34.8 -27.6 -19.5 -32.2 -31.0 -25.6 -26.3 -29.1 -29.4 -23.3 -20.3 -18.3 -16.3 4. 5. 6. Exports (excl. military) Agricultural Nonagricultural 141.9 29.9 112.0 171.7 30.0 141.7 198.6 31.6 167.0 147.7 31.7 116.0 157.0 30.0 127.0 162.1 30.3 131.8 168.1 175.0 29.7 30.1 138.4 144.9 181.5 30.0 151.5 188.5 30.8 157.7 195.1 31.1 164.0 202.0 31.9 170.0 208.8 32.5 176.3 7. 8. 9. Imports Petroleum and petrol, products Nonpetroleum 176.7 42.8 133.9 199.3 49.1 150.2 218.1 54.6 163.5 179.9 43.3 136.6 188.0 45.0 143.0 187.7 42.2 145.5 194.4 204.1 45.8 52.6 148.6 151.5 210.9 55.8 155.1 211.8 52.6 159.2 215.4 53.8 161.6 220.3 55.8 165.0 225.1 56.9 168.2 23.8 19.9 3.9 28.8 23.6 5.2 32.7 25.1 7.6 22.4 19.1 3.3 25.0 20.8 4.2 27.5 23.2 4.3 28.6 23.5 5.1 29.3 23.7 5.6 30.2 23.9 6.3 31.8 25.0 6.8 32.5 25.3 7.2 32.9 25.1 7.8 33.3 25.0 8.3 -17.3 -11.0 -6.3 -8.5 1.2 -9.7 2.9 13.2 -10.3 -15.3 -9.8 -5.5 -13.8 -6.0 -7.8 -8.2 1.9 -10.1 -8.2 2.3 -10.5 -9.3 .2 -9.5 -8.5 .8 -9.3 -2.1 8.5 -10.6 1.5 12.2 -10.7 4.7 14.6 -9.9 7.4 17.0 -9.6 85.6 (6.6) 86.9 (6.1) 88.4 (7.0) 81.0 (.8) 81.7 (3.2) 82.3 (3.2) 3.5 6.1 3.8 5.8 4.0 5.7 b) 10. 11. 1i. Other transactions, net Investment Income, net 2/ Other, net 3/ 1). U.S. CURRENT ACCOUNT BALANCE a) GNP net exports (line 1.) 14. b) U.S. Govt & private transfers 4/ 15. 16, 17. 18, 19. 20. 21. Constant (1972) dollars Merchandise exports (excl. (% change, annual rates) military) Merchandise imports (7.change, annual rates) Foreign Outlook - Ten Industrial Countries 5/ Real GNP, % change, annual rates Consumer Prices, 6/ . change, A.R. / Lines 72.3 (7.9) 80.2 (10.9) 86.3 (7.6) 76.1 (7.2) 79.8 (4.8) 81.5 (2.1) 3.6 5.3 3.9 5.8 3.9 6.4 1 and 2 are defined identically but, data in line 2 differ from Intl. Acct. data (line 1) in that they usually lag the Intl. Acct. data in the inclusion of revisions and new information in published data. 2/ Excluding U.S. Govt. interest payments to foreigners, and reinvested earnings of incorporated affiliates. These are included in line 15. 3/ Includes travel, transportation, fees and royalties, miscellaneous other service transactions, and military transactions. Al Includes U.S. Govt. grants, U.S. Covt. interest payments to foreigners, remittances and pensions, exports to Israel financed by U.S. military assistance grants, and reinvested earnings of incorporated affiliates. 76.5 74.0 (6.1) (14.3) 77.8 (7.4) 77.6 79.0 77.1 (17.9) (10.4) (-7.0) 2.9 4.0- 4.7 4.5 3.7 5.9 79.2 81.0 (7.0) (9.5) 82.8 (9.5) 84.3 (7.4) 80.8 81.9 78.7 80.9 (5.7)(11.7) (4.9) (-5.3) 3.9 6.6 4.0 7.0 4.1 6.6 3.9 6.4 5/ Weighted by the shares of Canada, France, G;ermany, Italy, Japan, united Kingdom, Netherlands, Sweden, Belgium and Switzerland in the sum of the real GNP of the ten countries in dollar terms. 6/ Wholesale prices for Japan. 2/ Projected. e/ Estimated. */ Published data.
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