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CONFIDENTIAL (FR)
CLASS III - FOMC
February 2, 1990
SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
By the Staff
Board of Governors
of the Federal Reserve System
TABLE OF CONTENTS
Page
THE DOMESTIC NONFINANCIAL ECONOMY
Employment and unemployment.
Average hourly earnings. . .
Purchasing managers' survey.
Consumer surveys . . . . . .
Manufacturers' inventories .
Addenda. . . . . . . . . . .
.
.
.
.
.
.
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. . . . . . .
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...
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1
2
3
3
4
4
. . .
...
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. ..
. ..
. .. .
5
5
6
7
11
11
13
. .
. . .
. . .
. ..
. . .
. ..
Tables
Changes in employment. . . . . . . . . . . . .
Selected unemployment rates. . . . . . . . . . .
Average hourly earnings. . . . . . . . . . . .
Summary of survey of purchasing managers . . .
Changes in manufacturing and trade inventories
. . . . . . . .
Inventories relative to sales
Business capital spending indicators . . . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
. . . .
Charts
.
Purchasing managers. . .................
.
Average lead time. . . . . . . . . . . . . . . . . ...
Consumer attitudes . . . . . . . . . . . . . . . . ... .
... . . . . . . .
Ratio of inventories to sales . ..
Nonresidential construction and selected indicators. ...
..
..
.
..
..
8
9
10
12
14
Summary of responses to the January 1990 senior loan
officer opinion survey . . . . . . . . . . . . . . . ... .
15
.
THE FINANCIAL ECONOMY
Tables
January senior loan officer opinion survey
. . . . . . . . . . .
Monetary aggregates
Commercial bank credit and short- and
intermediate-term business credit
. . .
Selected financial market quotations . . .
. . . . . . ... .
.
. . . . .....
19
24
. . . . . ...
.
.
. . . . . . ...
25
26
APPENDIX
Federal budget developments. . . . . . . . . . . . . . . ...
A-i
Tables
Estimates of total budget. . . . . . . . . . .
Administration and CBO economic assumptions. .
CBO baseline budget projections. . . . . . . .
Composition of Administration budget proposals
Administration budget projections. . . . . . .
.
.
.
.
.
.
.
.
.
.
. ...
..A-i
. . . ...
A-3
. . . .. .A-4
. . . .. .A-5
. . . .. .A-6
.
... . .
Chart
Federal outlays. . . . . . . . . . . . . . . .
-ii-
. .A-8
SUPPLEMENTAL NOTES
THE DOMESTIC NONFINANCIAL ECONOMY
Employment and Unemployment
Despite sizable temporary layoffs in motor vehicles and related
industries, the civilian unemployment rate was unchanged in January at
5.3 percent, and nonfarm payroll employment was up 275,000.
The gain in
jobs reported in the business survey and the 0.6 percent rise in aggregate
hours of production workers probably overstate to some extent the underlying
strength in labor demand:
Those over-the-month changes were bolstered by
large increases in construction--associated with unseasonably warm weather-and in retail trade--associated with problems in estimating seasonal swings
in holiday staffing.
Asexpected, the payroll employment report showed a steep decline in
manufacturing jobs in January:
About 90,000 of the drop occurred at motor
vehicle facilities, but stampings and tire production also were affected,
reducing employment by another 25,000 in fabricated metals and rubber.
Elsewhere, smaller declines continued in the primary metals, machinery,
furniture, apparel, and textile industries.
The only notable gain in
factory jobs occurred in the lumber industry and may have been associated
with an unusually brisk pace of construction activity last month.
Indeed,
construction employment jumped more than 100,000 last month, more than
offsetting the drop of 50,000 that occurred in December when weather was
unseasonably harsh.
-2In the services and finance industries, January's increases in
employment were about in line with recent trends.
Within services, growth
in business services has slowed, on average, in recent months, but health
services continue to expand at a rapid rate, adding almost 50,000 jobs again
last month.
January.
In trade, employment was shown to have increased 141,000 in
However, 25,000 of the gain reflects the reversal of December's
reported drop in jobs at general merchandisers, suggesting that these
retailers recently have expanded employment little, on net, apart from
holiday hiring.
Over the past year, employment at general merchandisers has
risen only 22,000; automotive dealers and service stations also have seen a
similar small gain.
In contrast, employment gains have continued to be
sizable at food stores and eating and drinking establishments.
In the household survey, total employment, which can fluctuate widely
from month to month, edged down in January after a small increase in
December.
Unemployment declined as well; the number of job losers did jump
85,000, reflecting the industrial layoffs in early January, but the impact
on the overall jobless rate was obscured by an unusually steep decline, of
almost 170,000, in the count of unemployed entrants to the labor force.
That drop also was reflected in a small decline in the labor force
participation rate in January.
Average Hourly Earnings
Average hourly earnings of production workers edged up 0.1 percent in
January to a level 3.7 percent above a year earlier.
Average hourly wages
apparently were held down last month by the hiring of a sizable number of
relatively low wage construction workers and by the absence of laidoff auto
-3workers.
Hourly earnings in construction were down 2 percent over the
month, and wages in durable manufacturing were off 1 percent.
Purchasing Managers' Survey
The purchasing managers' survey in January indicates that activity in
the industrial sector remained sluggish.
After verging into the positive
range in December, new orders apparently weakened last month, with the
number of purchasing managers reporting declines in orders exceeding those
reporting increases by 9 percentage points.
Survey readings on production
and employment remained in the negative range.
Some items, though, were
reported to be in short supply, in part because of disruptions caused by the
record cold in late December.
Thus, while the margin of suppliers making
faster deliveries still was running above those reporting slower deliveries,
the margin in January was not as great as in previous months.
Similarly,
although purchasing managers who paid lower prices in January still
outnumbered those who paid higher prices, the net difference of less than
2 percentage points contrasted sharply with the 12 to 13 percentage point
spread reported in the preceding several months.
Also, lead times allowed
by purchasing managers in ordering production materials and maintenance and
repair supplies were up a bit from the low December levels.
Consumer Surveys
The Michigan survey of consumer sentiment edged up in January, while
the Conference Board index dropped back sharply.
The rise in the Michigan
measure was attributable to a sharp increase in respondents' perceptions of
current buying conditions for large household goods; expectations of future
business conditions and personal financial situations were down somewhat
from December.
Respondents to the Conference Board were more pessimistic in
-4their appraisal of both present conditions and the outlook six months hence.
The Michigan Survey measure of inflation expectations over the next 12
months increased 3/4 percentage point to 5.4 percent, the highest reading
since last May.
Manufacturers' Inventories
In current-cost terms, manufacturers' inventories fell at an annual
rate of $16 billion in December, following moderate increases in October and
November.
For the fourth quarter as a whole, the current-cost data show
that factory stocks rose only $2.3 billion at an annual rate--considerably
slower than the average increase of $22-1/4 billion during the first three
quarters of last year.
The December inventory reduction was apparently
quite widespread; outside of aircraft, most major industries reported
inventory declines.
A 0.5 percent drop in factory shipments left the manufacturers'
inventory-to-shipments ratio at 1.60 months at the end of December.
The
ratio remained largely unchanged at this level all through the fourth
quarter, after following a gradual uptrend over the first three quarters of
last year.
Addenda
The attached table on business spending indicators and the chart on
nonresidential construction and selected indicators have been updated to
include data through December on construction put-in-place and revised data
on shipments and orders for durable goods.
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1989
1988
1989
Q2
Q3
1989
Q4
Nov.
1990
Dec.
Jan.
----------Ave-age monthly changes-------Nonfarm payroll employment 2
Strike-adjusted
2.76
275
204
206
240
245
163
177
151
127
281
278
96
22
275
273
248
248
29
20
9
14
64
11
118
27
176
177
-8
-13
5
8
47
12
99
28
198
203
-10
-12
2
10
32
11
137
42
115
128
-30
-29
-1
14
38
15
76
48
152
128
-23
-23
-0
-7
42
10
86
-1
294
291
-20
-18
-2
20
87
20
157
-13
63
-11
-28
-28
0
-50
-22
11
71
33
277
275
-112
-101
-11
104
141
10
106
-2
Private nonfarm production workers
Manufacturing production workers
197
20
142
-11
151
-14
94
-27
120
-20
277
-31
24
-18
235
-107
Total employment 3
Nonagricultural
192
193
146
145
165
181
-41
-68
156
164
251
288
52
15
-25
37
Private
Strike-adjusted
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Total government
1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments. Strike-adjusted data noted.
3. Survey of households.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1989
1988
1989
5.5
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
White
Black
1989
Q2
Q3
Q4
5.3
5.3
5.3
15.3
8.7
4.2
4.3
15.0
8.6
3.9
4.2
15.0
8.4
3.9
4.2
4.7
11.7
4.5
11.5
Fulltime workers
5.1
Memo:
Total nationall
5.4
Civilian, 16 years and older
1990
Nov.
Dec.
Jan.
5.3
5.3
5.3
5.3
15.0
8.7
3.9
4.2
15.2
8.9
4.0
4.3
15.3
9.0
4.0
4.2
15.2
8.9
3.9
4.3
14.5
8.5
4.2
4.1
4.5
11.3
4.5
11.3
4.5
11.8
4.5
11.9
4.6
11.8
4.5
11.3
4.9
4.9
5.0
5.0
5.0
5.0
5.0
5.2
5.2
5.2
5.3
5.3
5.3
5.2
1. Includes resident armed forces as employed.
AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data) 1
1989
1988
Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Finance, insurance
and real estate
Total trade
Services
Memo:
Hourly earnings index 2
1989
Q2
Q3
1989
Q4
Nov.
1990
Dec.
Jan.
-Annual rate-
-Month-y rate-
3.7
3.9
4.0
4.1
3.8
.0
.5
.1
3.0
2.8
3.1
2.3
2.7
2.4
3.4
3.2
2.2
2.3
2.5
3.2
3.6
4.1
3.3
2.1
2.2
1.0
4.4
4.0
.2
.0
.2
.6
.3
.3
.5
.7
-. 4
-1.0
.4
-2.0
2.0
2.1
1.8
2.7
1.0
-. 6
.3
.7
5.3
4.1
4.9
4.5
4.0
5.6
6.0
4.0
6.1
5.6
4.1
5.7
4.5
4.3
5.2
-1.0
.0
-. 4
1.2
.5
.8
-. 2
.4
.4
3.5
3.5
3.8
3.9
3.5
-. 1
.6
.0
1. Changes over periods longer than one quarter are measured from
final quarter of preceding period to final quarter of period indicated.
2. The Hourly Earnings Index after 1988 was produced by FRB staff.
February 1, 1990
SUMMARY OF SURVEY OF PURCHASING MANAGERS
FOR INDUSTRIAL FIRMS
1989
Q2
- - - - - New orders
Increases
Same
Declines
Net change (n.s.a.) <1>
Net change (s.a.) <1>
New export orders
Increases
Same
Declines
Net change (n.s.a.) <1,2>
1989
Q3
1989
Q4
1989
Oct
1989
Nov
- - - - - Percent reporting - - - - - -
29
56
15
14
7.8
26
52
22
4
4.0
24
69
7
17.4
24
70
6
17.7
*
20
51
29
-9
-9.3
Production
Increases
Same
Declines
Net change (n.s.a.) <1>
Net change (s.a.) <1>
Employment
Increases
Same
Declines
Net change (n.s.a.) <1>
Net change (n.s.) <1>
Prices paid
Increases
Same
Declines
Net change (n.s.a.) <1>
Net change (s.a) <1>
Inventories
Increases
Same
Declines
Net change (n.s.a.) <1>
Net change (s.a.) <1>
Vendor performance
Slower
Same
Faster
Net change (n.s.a.) <3>
Net change (s.a) <3>
Average lead times, number of days, seasonally adjusted
MRO supplies
29
25
26
Production materials
56
58
54
Capital goods
174
171
172
<1> Increases minus declines.
<2> Data on export orders available only since January 1988.
<3> Slower less faster.
19
54
27
-7
-.7
19
73
8
11.0
16
7,
5
11.0
1989
Dec
1990
Jan
2/1/90
Purchasing Managers*
(Seasonally adjusted)
Percent
Percent
New orders
I
an.
______I
l lI
1984
1986
1988
1984
1986
1988
Percent
-
-
1-1984
1l1-----75
1988
1986
1990
Percent
50
1990
Percent reporting increases are netted with those reporting decreases.
**Positive entries represent slower deliveries.
1984
1986
1988
1990
2/1/90
-9-
Average Lead Time
(Monthly, seasonally adjusted)
MRO SUPPLIES
-- 20
I
I
I
1980
I
I
I
I
I
I
1982
I
I
1988
1990
1988
1990
PRODUCTION MATERIALS
1980
1982
1984
1986
CAPITAL GOODS
S"
I
I
1980
I
I
1982
I
I
1984
I
I
1986
Source: Calculated by FR staff from monthly purchasing managers reports.
Jan.
I
I
I
1990
February 2, 1990
Consumer Attitudes
Index
Conference Board Index of Consumer Confidence
120 [
/'
Jan
Ii
i
I
iF,
90I
iI
I\
F',
/
80Michigan Survey Research Center Index of Consumer Sent iment
V
I4 I (I
1989
The base of the Michigan Index is February 1966; the base of
the Conference Board Index is the annual average for 1985.
Both indexes are an average of five equally-weighted questions
that relate to current and expected economic conditions.
However, the questions in the two surveys are different and
the timing of the surveys in the field varies.
-11
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1989
1989
Q2
Q3
Q4
Oct.
Nov.
61.2
47.6
21.4
11.5
28.3
13.6
14.7
39.1
30.0
17.6
20.1
9.1
11.1
-2.3
-----
31.0
67.1
9.9
38.7
-17.6
-36.0
18.5
41.3
41.7
13.2
11.7
16.4
-.4
16.8
16.2
19.2
8.3
5.2
2.6
-3.0
5.7
9.9
18.9
12.0
-.5
-1.6
-9.0
7.4
--------
46.7
43.0
1.1
30.6
14.9
3.6
11.3
38.9
34.3
11.6
11.7
15.6
4.6
11.0
Dec.
Current-cost basis:
Total
Total excluding auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
7.4
-16.1
Constant-dollar basis:
Total
Total excluding auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
--
INVENTORIES RELATIVE TO SALES <1>
(Months supply; based on seasonally adjusted data)
1989
Q2
1989
Q3
Q4
Oct.
Nov.
Dec.
Range in
preceding 12 months:<2>
High
Low
Current-cost basis:
Total
Total excluding auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
1.48
1.46
1.53
1.27
1.59
1.87
1.49
1.54
1.51
1.64
1.31
1.64
2.06
1.53
1.51
1.47
1.57
1.28
1.63
2.05
1.51
1.52
1.49
1.60
1.28
1.64
2.04
1.52
--1.60
-----
1.53
1.49
1.60
1.29
1.64
2.03
1.53
1.52
1.49
1.60
1.28
1.64
2.04
1.53
1.48
1.46
1.52
1.31
1.51
1.70
1.44
1.52
1.51
1.63
1.36
1.56
1.93
1.47
1.50
1.47
1.57
1.33
1.55
1.88
1.46
1.49
1.48
1.58
1.32
1.52
1.72
1.46
--------
1.51
1.49
1.59
1.33
1.55
1.81
1.47
1.51
1.49
1.59
1.32
1.56
1.84
1.48
1.60
Constant-dollar basis:
Total
Total excluding auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
<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
coincidential. Range is for the 12-month period preceding the latest month for
which data are available.
RATIO OF INVENTORIES TO SALES
(Current-cost data)
Manufacturing
Wholesale
1.9
--
-
Excluding motor vehicles,
farm and groceries
I,
'p
- I
Total manufacturing
2~'
'*
I "'N '
t i
N
*'
'
St I
N
4
It
-
I.'-
'it-
Excluding transportation equipment
Total wholesale
I
I
1985
I
1986
I
1987
I
1988
Total Retail
1985
II
Ratio
1986
1987
1988
1989
I 1 8
I
19 I
1985
1989
1986
1987
1988
Retail Excluding Autos and Food
1985
1986
1987
1988
1989
Ratio
1989
1.6
-13-
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)
Q2
1989
Q3
Q4
Oct.
1989
Nov.
Dec.
2.2 -2.3
-.2
-.8
-1.0 -3.5
.0 -.2
-4.4
-1.9
-7.9
-.4
-.1
1.2
2.2
.9
.7
1.5
1.3
1.6
-.5
1.7
-.8
n.a. -43.7
-26.1
n.a.
Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
3.0
3.0
6.1
2.3
Weighted PDE shipments'
3.1
1.2
Shipments of complete aircraft 2
14.7
46.2
Sales of heavy-weight trucks
-3.7
-2.2
-4.7
10.4
-11.2
-.3
1.0
2.9
1.8
3.1
-2.5
-4.2
6.5
-6.6
6.0
1.7
-4.2
3.2
1.8
-4.1
-9.2
-2.7
8.1
4.7
1.4
5.5
18.0
1.9
-4.7
3.5
.8
-.4
2.2
-2.8
2.8
1.4
-.8
-3.4
-6.5
3.8
3.9
.3
1.9
-3.5
5.4
-1.8
7.0
5.3
-.5
-2.0
1.4
-.8
2.3
-2.5
-.1
-2.1
5.7
-.9
-1.0
-2.6
-.1
-.3
-1.5
.5
.4
.6
-2.9
-.7
-7.7
.6
-1.8
-4.3
16.2
3.0
-3.1
-3.2
-.4
-3.1
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
Weighted PDE orders'
.6
Nonresidential structures
Construction put-in-place
Office
Other commercial
Public utilities
Industrial
All other
.otary drilling rigs in use
1. Computed as a weighted sum of 25 individual equipment series (excluding
aircraft) from the Census M-3 report with weights equal to the fraction of final
business spending for each type of equipment.
2. From the Current Industrial Report (CIR) titled "Civil Aircraft and
Aircraft Engines."
Seasonally adjusted with BEA seasonal factors. To estimate
PDE spending for aircraft, BEA uses the aircraft shipments shown in that report,
not the corresponding Census M-3 series.
The CIR does not provide information on
aircraft orders.
n.a. Not available.
-14-
NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS <1>
Index, Dec. 1982 = 100, ratio scale
1980
1982
1984
1986
1988
Office
Other Commercial
Industrial
Institutional
(P)
(NC)
-'^-
-
4
t
,'
-4,
*C
(c)
1986
1988
I
1984
I
I
I
1986
I
1988
<1> Six-month moving average for all series shown. Data end in November for
all series except contracts, which go through December.
<2> Varies by panel: either permits (P), contracts (CN), or new commitments(NC).
THE FINANCIAL ECONOMY
Summary of Responses to the January 1990 Senior Loan Officer Opinion Survey
The January 1990 Senior Loan Officer Opinion Survey on Bank Lending
Practices focused on credit standards and lending terms for different types
of C&I loans and whether various price and nonprice terms on new loans had
been tightened recently.
Respondents were asked about their loan policies
with respect to different categories of C&I loans that are believed to pose
different degrees of credit risk; these included merger-related loans,
nonmerger-related loans to investment-grade C&I customers, nonmerger-related
loans to below investment-grade firms, C&I loans to new customers, and real
estate loans for acquisition, land development, and construction (ADC
loans).
In addition, respondents were asked to rank various factors that
may have led them to alter their loan policies toward C&I and ADC customers,
and what percent of their loans in this latter category would have been made
by savings and loan associations in the absence of recent problems in the
thrift industry.
The survey indicated that many banks reported tightening their credit
standards and nonprice terms of credit for the riskier types of C&I loans,
but not for nonmerger-related loans to their investment-grade borrowers.
Survey results also revealed that a large majority of respondents had become
less willing to make ADC loans.
Nevertheless, a number of banks indicated
that they were making such loans to customers that had formerly borrowed
from thrifts.
Policy Changes for C&I Loans in General
About one-fifth of respondents reported a decreased willingness to
extend overall business credit during the past six months.
All of these
banks cited a less favorable economic outlook as a reason, followed, in
order of importance, by industry-specific problems, a deterioration in the
quality of their overall loan portfolio, pressures on their capital
positions, and regulatory pressures.
About one-sixth of banks indicated
that their willingness to extend business credit to new as opposed to
existing customers had declined over the past half year.
Policy Changes for Specific Categories of C&I Loans
Changes in policy over the past six months toward different types of
C&I loans were far from uniform.
Nearly three-fourths tightened their
credit standards for reviewing loan applications for merger-related loans
and over half did so on nonmerger-related loans to below investment-grade
firms.
By contrast, less than one-tenth of respondents tightened their
credit standards on nonmerger-related loans to investment-grade firms.
That
a decline in the general economic outlook was the most important factor
motivating tighter lending policies for overall C&I loans and that standards
were mainly tightened for riskier types of loans is consistent with the
notion that increases in downside risk tend disproportionately to affect the
perceived credit risk of highly leveraged firms and of noninvestment-grade
firms.
Banks also were asked whether they changed specific price and nonprice
terms for these three types of C&I loans in the last six months.
Virtually
all respondents indicated that they either tightened or left unchanged these
terms, but for investment-grade customers not involved in merger activity,
there was relatively little restriction.
Over half of the respondents
reported tightening loan covenants for merger-related loans and for
nonmerger-related loans to noni-vestment-grade firms.
(Such covenants help
limit loan losses by preventing excessive risk-taking by borrowers and by
providing banks more leeway in working out problem loans.)
For these two
types of loans, nearly two-fifths reported increasing loan rate spreads with
respect to base rates.
With respect to credit lines, over one-half of
surveyed banks reduced maximum line sizes for merger-related loans and about
two-fifths, for nonmerger-related loans to below investment-grade firms.
For nonmerger-related loans to investment-grade borrowers, one-eight of
respondents reported lowering sizes of maximum credit lines, one-tenth
reported increasing loan rate spreads, and about one-tenth indicated that
they tightened loan covenants.
The difference in the frequency of
tightening loan covenants across the different loan types may reflect, in
part, the greater risks posed by borrowers involved in merger-related
activity and by noninvestment-grade businesses relative to the risks posed
by investment-grade firms borrowing for nonmerger-related purposes.
Loan Policy Changes for ADC Loans
Nearly four-fifths of respondents reported a reduced willingness to
make ADC loans compared to six months ago.
Of these banks, nearly three-
fifths reduced permissible loan-to-value ratios, and substantial proportions
reported restricting credit for income-generating properties (nearly onehalf) and for single-family homes (nearly one-third) that were not sold
prior to construction.
About one-third of the banks reporting less
willingness indicated that they had lowered loan sizes and about one-third
imposed limits on loans outside of their geographic area.
Only about one-
fifth reported widening the spread of loan rates over base rates, and about
one-seventh reduced the maximum maturity
additional limits on loan participations.
f these loans or imposed
Nearly two-fifths of banks
reporting a reduced willingness to make these loans indicated that they had
cut off credit to some customers and one-fifth had denied loans to new
customers.
Almost all banks that were less willing to make these loans cited a
less favorable economic outlook as a reason, and nearly three-fourths
mentioned industry-specific problems as a factor.
About one-half of such
banks indicated that a deterioration in the quality of their loan portfolio
was a factor in changing their attitude and about one-seventh cited
pressures on their bank's capital position.
Impact of the Thrift Crisis on Bank ADC Lending
Approximately one-third of respondents indicated that their ADC loans
were higher than they would otherwise be owing to the thrift crisis.
Of
these banks, the vast majority estimated that less than ten percent of such
loans made in the last six months would have been made by savings and loan
associations in the absence of problems in the thrift industry.
Geographically, these banks were concentrated in the Philadelphia, Richmond,
and San Francisco Federal Reserve Districts.
Several of these banks
mentioned that they lent only to the higher-quality former thrift customers
that sought credit.
TABLE 1
SENIOR LOAN OFFICER OPINION SURVEY ON BANK LENDING PRACTICES
AT SELECTED LARGE BANKS IN THE UNITED STATES
(Status of policy as of January 1990)
(Number of banks and percent of banks answering question)
(By volume of total domestic assets, in $ billions, as of September 30,
l.a.
Has your bank's willingness to extend credit to C&I customers decreased
Yes
----------Banks Pet
b.
All Respondents
$10.0 and Over
Under $10.0
5
3
2
(2.0)
(1.7)
(2.5)
5
2
3
Less
favorable
economic
outlook
----------Banks Mean
58
26
32
46 (79.3)
20 (76.9)
26 (81.3)
(2.0)
(1.5)
(2.3)
12
c
6
Industry
specific
Regulatory
problems
-----------
Banks Mean
Banks Mean
8
4
4
(2.4)
(2.0)
(2.8)
4
2
2
Has your bank's willingness to lend to new C&I customers decreased relative to its
lend to existing customers over the last six months?
No
----------Tanks Pct
10 (17.2)
4 (15.4)
6 (18.8)
All Respondents
$10.0 and Over
Under $10.0
Other
pressures
-----------
(1.6)
(1.7)
(1.5)
Yes
---------Banks Pet
b.
Total
Banks
If you answered yes to question 1.a, which of the following were important reasons? (Please rank by
importance.)
Pressures Deterioraton bank
ion in
capital
quality of
portfolio
position
----- --------Banks Mean Banks Mean
2.a.
over the last six months?
No
---------Banks Pet
12 (20.7)
6 (23.1)
6 (18.8)
All Respondents
$10.0 and Over
Under $10.0
1989)
2
Banks Mean
1
1
1
(3.5)
(2.r)
(5.0)
(1.0)
( 0)
(1.0}
willingness to
Total
Banks
48 (82.8)
22 (84.6)
26 (81.3)
58
26
32
If you answered yes to question 2.a, which of the following actions have been taken with respect to new
customers relative to existing customers?
(More than one answer may apply.)
Credit
standards
tightened
Banks
All Respondents
$10.0 and Over
Under $10.0
Pct
9 ( 90.0)
3 ( 75.0)
6 (100.0)
Maximum
loan size
or credit
line
reduced
Banks
Pet
4 (40.0)
1 (25.0)
3 (50.0)
Spreads
over base
rates
widened
Banks
Pet
2 (20.0)
1 (25.0)
1 (16.7)
Credit to
new
customers
generally
cut off
Banks
0
0
0
Other
-------Banks
Pct
2 (20.0)
1 (25.0)
1 (16.7)
1
As of September 30, 1989, 27 respondents had domestic assets of $10 billion or more; combined
assets of these banks totalled $690 billion, compared to $907 billion for the entire panel of
60 banks, and $2.80 trillion for all domestically chartered federally insured commercial banks.
2
Average rank calculated using 1 for most important, 2 for next most important, and so forth.
Total
Banks
10
4
6
3.
Please indicate how your bank's credit standards for approving loan applications related to mergers and
("Credit standards" should be interpreted to encompass
acquisitions have changed in the last six months.
requirements with respect to ability to repay, ability to weather an economic downturn, quality of balance
Please report changes in enforcement
sheets, collateral requirements, as well as credit/business history.
Merger-related loans include those made to finance
of already existing terms as changes in standards.
leveraged buyouts, other mergers and acquisitions, and defensive restructurings--such as equity and debt
buybacks--related to mergers and acquisitions.)
Eased
considerabEased
Essentially
ly
somewhat
unchanged
-------------------------------Total
Pct Banks
Banks Pet Banks Pct Banks
Tightened
considerab- Tightened
somewhat
ly
-------------------Banks Pct Banks Pet
5 ( 8.6)
1 ( 3.8)
4 (12.5)
All Respondents
$10.0 and Over
Under $10.0
4.
37 (63.8)
18 (69.2)
19 (59.4)
With respect to merger-related loans your bank currently is
terms have changed in the last six months with respect to:
16 (27.6)
7 (26.9)
9 (28.1)
willing to approve,
58
26
32
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
please indicate how
a. maximum size of credit lines
Essentially Somewhat
Somewhat
Significanincreased
unchanged
reduced
tly reduced
---------------- ---------------------Pet
Banks Pct Banks Pet Banks Pet Banks
All Respondents
$10.0 and Over
Under $10.0
- - - - - - - - - - - - --.-
23 (39.7)
10 (17.2)
9 (34.6)
5 (19.2)
14 (43.8)
5 (15.6)
.-.
--.- - - - - --..-
Significantly
increased
----------Total
Banks Pet Banks
1 ( 1.7)
24 (41.4)
0 ( 0.0)
12 (46.2)
1 (3.1)
12 (37.5)
--.-.
- --.- --.-
0
0
0
- --
( 0.0)
( 0.0)
( 0.0)
- - --.-
58
26
32
--
b. spreads of loan rates over base rates
Somewhat
Significanwidened
tly widened
-------------------Banks Pct Banks Pet
All Respondents
$10.0 and Over
Under $10.0
c.
2 ( 3.4)
0 ( 0.0)
2 ( 6.3)
Essentially Somewhat
narrowed
unchanged
--------------.--Pct
Banks Pct Banks
36 (62.1)
20 (34.5)
18 (69.2)
8 (30.8)
18 (56.3)
12 (37.5)
---.- - --.- --.- -- --.-
0 (
0 (
0 (
-.-
Significantly
narrowed
----------Total
Banks Pet Banks
0 ( 0.0)
0.0)
0 ( 0.0)
0.0)
0 ( 0.0)
0.0)
--.-.- - - ---.-
58
26
32
-.
loan covenants
Tightened
considerably
Banks
All Respondents
$10.0 and Over
Under $10.0
Pet
5 ( 8.8)
1 (3.8)
4 (12.9)
Tightened
somewhat
--------Banks Pet
27 (47.4)
10 (38.5)
17 (54.8)
Eased
considerabEased
Essentially
somewhat
ly
unchanged
------------- ----------Banks Pct
Pct
Banks Pct Banks
25 (43.9)
15 (57.7)
10 (32.3)
0.0)
0
0.0)
0
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
Total
Banks
57
26
31
-215.
Please indicate how your bank's credit standards for approving loan applications from investment-grade
C&I customers (other than those related to mergers and acquisitions) have changed in the last six months.
("Credit standards" and "merger-related loans" should be interpreted as in question 3.)
Tightened
considerab- Tightened Essentially
Eased
ly
somewhat
unchanged
somewhat
------------------------------- ----------Banks Pet Banks Pot Banks Pot Banks Pot
All Respondents
$10.0 and Over
Under $10.0
1 ( 1.8)
0 (0.0)
1 ( 3.2)
3 ( 5.3)
2 ( 7.7)
1 ( 3.2)
52 (91.2)
23 (88.5)
29 (93.5)
1 ( 1.8)
1 ( 3.8)
0 ( 0.0)
Eased
considerably
----------Total
Banks
Banks Pc'
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
57
26
31
6. With respect to loans to investment-grade C&I customers (other than merger-related loans) that your bank
currently is willing to approve, please indicate how terms have changed in the last six months with respect to:
a. maximum size of credit lines
Significan- Somewhat
tly reduced
reduced
------------------Banks Pet Banks Pet
2 ( 3.5)
I ( 3.8)
1 (3.2)
All Respondents
$10.0 and Over
Under $10.0
6 (10.5)
1 ( 3.8)
5 (16.1)
SignificanEssentially Somewhat
tly
unchanged
increased
increased
------------------- ----------Banks Pct Banks Pet Banks Pot
48 (84.2)
23 (88.5)
25 (80.6)
1 (1.8)
1 ( 3.8)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
Total
Banks
57
26
31
b. spreads of loan rates over base rates
SicnificanSomewhat
widened
tly widened
-------------------Banks Pet Banks Pot
All Respondents
$10.0 and Over
Under $10.0
1
0
1
( 1.8)
( 0.0)
( 3.2)
5
1
4
( 8,8)
( 3.8)
(12,9)
Esse-tiasll
niCangced
----------Banks Pct
48 (84.2)
23 (88.5)
25 (80.6)
Somewha
narrowed
----------Banks Pet
3 ( 5.3)
2 ( 7.7)
1 ( 3.2)
Significantl
nrrcoed
----------Banks Pot
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
Total
Banks
57
26
31
c. loan covenants
Tightened
considerab- Tightened
somewhat
ly
---------------Banks Pet Banks Pet
All Respondents
$10,0 and Over
Under $10.0
1 ( 1.8)
0 ( 0.0)
1 ( 3.3)
5 ( 8.9)
3 (11.5)
2 ( 6.7)
Essentially
Eased
unchanged
somewhat
-------------------Banks Pet Banks Pct
50 (89.3)
23 (88.5)
27 (90.0)
O ( 0.0)
0 ( 0.0)
0 ( 0.0)
Eased
considerably
----------Total
Banks Pet Banks
0 ( 0.0)
0 ( 0.0)
0
0.0)
56
26
30
7.
Please indicate how your bank's credit standards for approving loan applications (other than those
related to mergers and acquisitions) from below investment-grade C&I customers have changed in the last six
months.
("Credit standards" and "merger-related loans" should be interpreted as in question 3.)
Eased
Tightened
considerab- Tightened Essentially
Eased
considerably
somewhat
unchanged
somewhat
ly
--------------------- --------------------- ----------- Total
Banks Pct Banks
Pct Banks Pct Banks Pet
Banks Pct Banks
All Respondents
$10.0 and Over
Under $10.0
8.
4 ( 6.9)
2 ( 7.7)
2 ( 6.3)
29 (50.0)
11 (42.3)
18 (56.3)
25 (43.1)
13 (50.0)
12 (37.5)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0
0
0
( 0.0)
( 0.0)
0.0)
58
26
32
With respect to loans to below investment-grade C&I customers (other than merger-related loans) that
your bank currently is willing to approve, please indicate how terms have changed in the last six months
with respect to:
a.
maximum size of credit lines
Significantly
increased
----------- Total
Banks Pct Banks
SignificanSomewhat
Essentially Somewhat
tly reduced
reduced
unchanged
increased
----------------------------------- ----------Banks Pet Banks Pct Banks Pct Banks Pet
All Respondents
$10.0 and Over
Under $10.0
b.
4 ( 6.9)
2 ( 7.7)
2 ( 6.3)
20 (34.5)
8 (30.8)
12 (37.5)
34 (58.6)
16 (61.5)
18 (56.3)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
58
26
32
spreads of loan rates over base rates
Significantly
narrowed
----------Total
Banks Pct Banks
SignificanSomewhat
Essentially Somewhat
narrowed
widened
unchanged
tly widened
---------------------------------------Banks Pct Banks Pet Banks Pct Banks Pet
All Respondents
$10.0 and Over
Under $10.0
1 (1.7)
0 ( 0.0)
1 ( 3.1)
21 (36.2)
8 (30.8)
13 (40.6)
35 (60.3)
17 (65.4)
18 (56.3)
1 (1.7)
1 ( 3.8)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 (0.0)
58
26
32
c. loan covenants
Tightened
Eased
considerab- Tightened Essentially
Eased
considerably
somewhat
unchanged
somewhat
ly
------- -------------------- ----------- ----------- Total
Banks Pct Banks Pet Banks Pct Banks Pct Banks Pct Banks
All Respondents
$10.0 and Over
Under $10.0
9.
3 { 5.3)
2 ( 7.7)
1 ( 3.2)
28 (49.1)
9 (34.6)
19 (61.3)
26 (45.6)
15 (57.7)
11 (35.5)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
57
26
31
Roughly what percent of the construction and land acquisition and development loans that your bank has
made in the last six months would you estimate went to firms that would have borrowed from thrift
institutions absent recent adverse developments in that industry?
Between 10
Over 25
and 25
Essentially Under 10
none
percent
percent
percent
---------------------- -------------------Total
Banks Pct Banks
Pet Banks Pet Banks Pet Banks
All Respondents
$10.0 and Over
Under $10.0
34 (61.8)
13 (52.0)
21 (70.0)
19 (34.5)
11 (44.0)
8 (26.7)
2 ( 3.6)
1 ( 4.0)
1 ( 3.3)
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
55
25
30
SPlease indicate your bank's willingness to make construction and land acquisition and development
loans now as opposed to six months ago.
Somewhat
more
------Banks Pet
Much more
----------Banks Pct
All Respondents
$10.0 and Over
Under $10.0
11.
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
Somewhat
less
----------Banks Pet
Unchanged
----------Banks Pet
0 ( 0.0)
0 ( 0.0)
0 ( 0.0)
11 (19.3)
3 (12.0)
8 (25.0)
Much less
----------Banks Pet
35 (61.4)
19 (76.0)
16 (50.0)
Total
Banks
11 (19.3)
3 (12.0)
8 (25.0)
57
25
32
If you answered "less" to question 10 (answers iv.
or v.), please indicate which of the following
steps your bank has taken in this regard (more than one answer may apply).
i.)
ii.)
iii.)
iv.)
v.)
vi.)
vii.)
viii.)
ix.)
X.)
xi.)
xii.)
lowered the maximum amount that can be lent to a single borrower.
lowered the maximum size of loans generally.
reduced the maximum maturity of loans.
restricted the availability of credit to finance single-family
home construction prior to the homes having been sold.
restricted the availability of credit to finance the
construction of income properties prior to permanent
(takeout) financing having been arranged.
imposed additional limits on out-of-area lending.
imposed additional limits on loan participations.
reduced permissible loan to value ratios.
widened spreads over base rates.
cut off credit to some existing customers.
generally denied credit to new customers.
other (please specify).
Lowered
max. loan
to ind,
borrower
Pet
All Respondents
$10.0 and Over
Under $10.0
(30.4)
(27.3)
(33.3)
Lowered
max. size
of loans
generally
Banks
Pet
15 (32.6)
7 (31.8)
8 (33.3)
Reduced
may.
maturity of
loans
Restricted Restricted
credit to
credit to
single
const. of
homes
income prop.
Banks
Banks
Pet
7 (15.2)
3 (13.6)
4 (16.7)
Pet
Banks
14 (30.4)
7 (31.8)
7 (29.2)
Pet
21 (45.7)
9 (40.9)
12 (50.0)
Imposed
add. limits
Reduced
Imposed
add. limits
on loan
permissible
to out-of- participaloan/value
area loans
tions
ratios
Banks
Pet
Banks
15 (32.6)
7 (31.8)
8 (33.3)
Pet
Banks
6 (13.0)
4 (18.2)
2 (8.3)
26 (56.5)
10 (45.5)
16 (66.7)
(CONTINUED)
Cut off
credit to
some
customers
--------Banks Pet
All Respondents
$10.0 and Over
Under $10.0
12.
18 (39.1)
9 (40.9)
9 (37.5)
Generally
denied
credit to
new
customers
---------Banks Pet
9 (19.6)
1 ( 4.5)
8 (33.3)
Other
----------Banks Pet
12 (26.1)
8 (36.4)
4 (16.7)
Total
Banks
46
22
24
If you have tightened your supply of credit for construction and acquisition and land development
loans in the last six months, which of the following were important reasons? (Please rank in order of
importance.)
Pressures
on bank
capital
position
Banks Mean
All Respondents
$10.0 and Over
Under $10.0
7 ( 3.3)
2 ( 3.0)
5 ( 3.4)
DeterioratLess
ion in
favorable
quality of
economic
portf :olio
outlook
------ ----------Banks Mean Banks Mean
19 ( 2.1)
7 ( 1.9)
12 ( 2.3)
43 ( 1.6)
21 ( 1.6)
22 ( 1.6)
Industry
specific
problems
----------Banks Mean
34 ( 1.7)
16 ( 1.8)
18 ( 1.7)
Other
----------Banks Mean
7 ( 3.1)
4 ( 2.3)
3 ( 4.3)
Pet
Total
Banks
46
22
24
Widenene
spreads
over base
rates
Banks
Pet
10 (22.2
2 ( 9.5
8 (33.3:
-24MONETARY AGGREGATES
(based on seasonally adjusted data unless otherwise noted)
19891
1989
Q3
1989
Q4
1989
Nov
1989
Dec
Growth
1990
Q4 89Jan pe Jan 90pe
------------ Percent change at annual rates--------------------0.5
4.5
3.3
1.5
7.1
4.0
6.7
7.6
2.8
2.7
8.4
4.9
12.2
7.8
3.7
-2
4
2
------------ Percent change at annual rates------------
3
54
3
Levels
bil. $
Dec 89
Selected components
4.
5.
6.
0.4
MI-A
1.2
3.7
-1.9
Currency
Demand deposits
7.
Other checkable deposits
0.9
2.2
12.1
11.1
8.
M2 minus M12
5.9
9.0
7.9
10.3
1.1
-12.8
-16.5
9.
10.
11.
12.
13.
14.
15.
16.
Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
Commercial banks
3
Savings deposits, SA, plus MMDAs, NSA
Small time deposits
Thrift institutions
3
Savings deposits, SA, plus MMDAs, NSA
Small time deposits
17. M3 minus M2
18.
19.
20.
21.
22.
23.
9.9
4
Large time deposits
5
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA
16.1
16.7
-5
510.8
14
-20
222.1
281.2
2
286.7
5
2418.9
46
72.8
309.1
1064.5
543.3
521.2
968.9
354.8
614.1
-1.2
-7.0
-14.9
4.4
10.1
-7.7
-1.5
2.1
-9.8
-7.5
1.5
-28.2
-8.5
-12.1
40.1
6.5
8.9
9.4
-115.0
38.4
-4
822.8
----- Average monthly change in billions of dollars---MEMORANDA:6
24. Managed liabilities at commercial
banks (25+26)
25. Large time deposits, gross
26. Nondeposit funds
Net due to related foreign
27.
institutions
7
Other
28.
29. U.S. government deposits at commercial
banks 8
5.4
2.6
2.8
3.4
-0.3
3.7
0.0
2.8
0.7
3.0
-0.8
4.6
-1.2
4.5
-0.3
-1.2
-0.8
0.5
-1.6
-1.2
0.9
1
-8
7.2
242.3
-2
21.3
Amounts shown are from fourth quarter to fourth quarter.
Nontransactions M2 is seasonally adjusted as a whole.
Commercial bank savings deposits excluding MMDAs grew during December and January at rates of 11.5
percent and 6 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew
during December and January at rates of 3.8 percent and 6 percent, respectively.
The non-M2 component of M3 is seasonally adjusted as a whole.
institutions.
Net of large denomination time deposits held by money market mutual funds and thrift
Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.
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.
8. Consists of Treasury demand deposits and note balances at commercial banks.
pe - preliminary estimate
4.
5.
6.
7.
Note: Data on the monetary aggregates do not incorporate the results of the benchmark and seasonal review.
-25COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)
1988:.Q4
to
19 89:Q4
Q3
Q4
1989
Nov.
Dec.
Jan.p
Levels
bil.$
December
------------------ Commercial Bank Credit - -------------------S Total loans and securities
at banks
2.
5.
8.0
5.4
3.9
-2.8
5
2577.4
4.1
1.6
11.8
7.1
.8
7
588.2
U.S. government securities
0.3
5.4
19.1
17.8
-1.8
19
396.9
Other securities
7.3
-6.2
-3.5
-15.8
6.7
-21
181.3
8.1
9.9
3.6
3.0
-3.9
5
1999.2
Securities
S
4.
7.2
Total loans
6.
Business loans
6.4
8.3
-1.6
.9
-13.7
2
634.2
7.
Real estate loans
2.7
13.7
11.6
10.7
11.7
9
754.8
8.
Consumer loans
6.5
6.1
6.5
8.0
8
378.1
9.
Security loans
4.2
-6.8
-21.1
-26.2
-80.2
-41
37.8
Other loans
1.5
10.6
-9.6
-22.5
-30.1
1
194.3
10.
3.8
------ Short- and Intermediate-Term Business Credit ---------11.
Business loans net of bankers
acceptances
12.
Loans at foreign branches
13.
Sum of lines 11 & 12
14.
Commercial paper issued by
nonfinancial firms
15.
Sum of lines 13 & 14
16.
Bankers acce tances:
related '
17.
2
10.3
17.3
15.2
5.1
1.5
3.5
-1.1
-12.4
U.S. trade
5.8
Line 15 plus bankers acceptances:
U.S. trade related
18.
Finance company loans to business
19.
Total short- and intermediateterm business credit (sum of
lines 17 & 18)
4.9
3
-10.3
.9
2.9
14.1
n.a.
-2.3
7.0
n.a.
1.7
n.a.
n.a.
1078.96
1. Average of Wednesdays.
2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domesti cally chartered banks.
3. Based on average of data for current and preceding ends of month.
4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods.
5. November data.
p--preliminary.
n.a.--not available
SELECTED FINANCIAL MARKET QUOTATIONS 1/
(percent)
1987
Change from:
2/
Oct 16
March
Higs
FC
Dec 19 Feb 1
ar 89 FUC
Highs
Dec 19
Short-term rates
Federal funds 3/
9.85
8.50
8.24
Treasury bills 4/
3-rmnth
6-rnnth
1-year
9.09
9.11
9.05
7.67
7.48
7.20
7.76
7.71
7.54
7.94
8.65
10.05
10.15
8.75
8.39
8.23
8.14
7.92
8.90
9.12
10.07
10.32
10.08
8.76
8.43
8.20
8.18
8.20
8.23
Eurodollar deposits 5/
1-Minth
3-mDnth
8.00
9.06
10.19
10.50
8.81
8.50
Bank prime rate
9.25
11.50
U.S. Treasury (constant maturity)
3-year
9.52
10-year
10.23
10.24
30-year
Municipal revenue 6/
(Bond Bayer index)
Comercial paper
1-mnth
3-Month
Larg
-1.61
-0.26
-1.82
-0.52
-2.01
-0.25
8.19
8.25
-2.00
-2.25
-0.62
-0.25
10.50
10.00
-1.50
-0.50
9.88
9.53
9.31
7.73
7.78
7. 5
8.35
8.42
8.44
7.95
7.29
7.52
-0.43
0.23
11.50
10.47
9.36
9.75
-0.72
0.39
11.58
8.45
11.22
9.31
9.75
8.39
10.05
8.41
-1.17
-0.90
0.30
0.02
negotiable CD's 4/
T-nonth
3--month
6-month
Intermediate- and long-term rates
Corporate-A utility
Recently offered
Home nmrtgage rates 7/
Fixed-rate
ARM, 1-year
1989
Record
higs
Date
Lows
Jan 3
1990
FOC
Dec 19
Feb 1
Percent change fom:
Record
highs
1989
FOCM
Lows Dec 19
Stock prices
Dow-Jones Industrial
NSE Composite
AMER Composite
NASDAQ (TC)
Wilshire
2810.15
199.34
1/2/90
10/9/89
397.03
10/10/89
485.73 10/9/89
3523.47 10/9/89
2144.64 2695.61 2586.26
154.98 189.40 181.52
305.24
367.95
351.50
378.56 434.35 417.76
2718.59 3314.70 3166.40
One-day quotes except as noted.
Last business day prior to stock market decline on Monday
Oct. 19, 1987.
Average for two-week reserve maintenance period closest to
date shown. Last observation is average to date for the
maintenance period ending February 7, 1990.
-7.97 20.59
.9422.21
-11.47
-13.99
-10.13
20.54
14.74
21.93
-4.06
-4.16
-4.47
-3.82
-4.47
4/ Secondary market.
5/ Bid rates for Eurodollar
deposits at 11 a.m. London time.
6/ Based on one-day Thursday quotes
and futures-market index changes.
7/ Quotes for week ending
Friday closest to date shown.
APPENDIX
FEDERAL BUDGET DEVELOPMENTS
President Bush has submitted his FY1991 budget to the Congress,
with proposals that satisfy the Gramm-Rudman-Hollings requirements. The
budget projections hinge on assumptions of fairly robust economic growth
and falling interest rates, which cause the baseline deficit to fall
year by year. In contrast, the Congressional Budget Office (CBO) has
released estimates, based on less favorable economic assumptions, that
show the baseline deficit remaining in the neighborhood of $140 billion
through 1993.
Near-term Budget Developments and Prospects
This week's news contained much information about the prospects
for the budget in the near term, including updated estimates for FY1990.
As shown in table 1, the Administration now projects an FY1990 deficit
of $124 billion, compared with a figure of $99 billion in the July MidSession Review. Outlays were revised up nearly $20 billion, largely
because of legislation passed since midsummer. Most notably, FIRREA
contributed to an $8 billion upward revision in expenditures for deposit
insurance, which now are expected to total $11 billion in FY1990.
Spending on defense also was revised up. Changes to revenues were
smaller, on net, as a sharp reduction in projected taxes in response to
weak incoming data on corporate profits and tax payments was partially
offset by technical reestimates of other revenues. CBO, however,
estimates the FY1990 deficit at $138 billion.
Table 1
ESTIMATES OF TOTAL BUDGET
(Billions of dollars)
Administration
Mid-Session
Baseline
Review
Proposed
CBO
Baseline
--------------------FY1990-----------------Total deficit
Receipts
Outlays
99
1080
1179
124
1073
1197
124
1074
1197
138
1067
1205
-------------------- FY1991-----------------Total deficit
Receipts
Outlays
85
1152
1237
102
1156
1259
63
1170
1233
138
1137
1275
1. Includes extension of food stamp program, which is scheduled to
expire in 1991, and adjustments for other accounting anomalies.
The gap between the Administration and CBO baseline estimates
widens in FY1991. These estimates assume that budget authority for
discretionary programs is held constant in real terms at FY1990 levels
and that benefit programs and taxes evolve according to current laws.
In effect, they determine how much outlays will have to be cut, or
revenues raised, to reduce the deficit to the Gramm-Rudman FY1991 target
of $64 billion. According to the Administration, the baseline deficit
will decline to $102 billion next year; this level requires deficitreducing actions of at least $38 billion to meet the Gramm-Rudman
target. CBO's baseline deficit, $138 billion, is unchanged from 1990.
According to CBO's numbers, however, the package of cuts would have to
be roughly twice as large as that of the Administration.
The Administration's projection of a sizable decline in the
baseline deficit next year hinges largely on its favorable expectations
for economic performance in 1990 and 1991--that is, it forecasts robust
growth, stable inflation, declining interest rates, and booming profits
Notably, OMB anticipates an increase in real GNP of 2-1/2
(table 2).
percent for 1990 and 3-1/4 percent for 1991. CBO's assessment is less
optimistic: It expects real GNP to advance less than 2 percent in 1990
and about 2-1/2 percent in 1991, though, like OMB, CBO sees prices
continuing to rise about 4 percent per year. The interest rate
forecasts of the two agencies are similar for 1990, but OMB sees rates
dropping about a percentage point in 1991.
Longer-run Budget Prospects:
The CBO Baseline
As shown in table 3, CBO expects deficits to remain sizable
over the next several years but to decline somewhat as a share of GNP-from 2-1/2 percent in 1990 to 1-1/2 percent in 1995. With no real
growth in discretionary spending, outlays fall from about 22 percent of
GNP this year to less than 21 percent in the mid-1990s, while the
revenue share drops only a little. The CBO projection is based on real
GNP growth of about 2-1/2 percent per year through 1995, with inflation
remaining at roughly 4 percent. Interest rates, however, are projected
to decline--especially short-term rates, which fall to about 5-3/4
percent in 1995.
Table 2
ADMINISTRATION AND CBO ECONOMIC ASSUMPTIONS
Forecast
1990
1991
1992
----- Percent change,
Projected
1993
1994
1995
calendar year average-----
Real GNP
Administration
CBO
GNP deflator
Administration
CBO
CPI 1
Administration
CBO
---------
Percent,
calendar year average--------
Unemployment rate
Administration
CBO
rate
Three-month Treasury bill
6.7
Administration
6.9
CBO
Ten-year Treasury note rate
7.7
Administration
CBO
7.8
Corporate profits as a
percent of GNP
Administration
CBO
6.4
5.6
1. Administration forecasts the CPI-W; CBO forecasts the CPI-U.
Table 3
CBO BASELINE BUDGET PROJECTIONS
(Fiscal years)
1990
1992
1991
Gramm-Rudman
deficit targets
138
1067
1205
138
1137
1275
135
1204
1339
141
1277
1418
100
64
28
0
2.5
19.6
22.1
1995
130
1355
1484
118
1438
1555
As a percentage of GNP---------
-----------Total deficit
Revenues
Outlays
1994
Billions of dollars-----------
------------Total deficit
Revenues
Outlays
1993
2.4
19.6
22.0
2.2
19.5
21.7
2.1
19.4
21.5
1.8
19.3
21.2
1.6
19.3
20.8
The Administration Budget Proposals
President Bush's proposals are consistent, at this stage, with
the requirements of the Gramm-Rudman law. Given the underlying economic
and technical assumptions, his program meets the deficit target of
$64 billion in FY1991 and achieves balance by FY1993. President Bush
proposes a modest reduction--relative to the baseline--in defense
spending and some reallocation of resources among nondefense programs
over the next few years. He also continues to press for a cut in
capital gains taxes and proposes a new incentive to spur personal
saving.
Proposals for FY1991. The Administration is proposing deficitOutlays
reducing actions totaling $39 billion for FY1991 (see table 4).
1. Under the Administration plan, households filing joint tax returns
and earning less than $120,000 would be allowed to contribute $5000 per
year to a Family Savings Account (FSA); single filers with incomes below
$60,000 could put in $2500. Contributions would not be deductible, but
earnings on accounts held for more than seven years would be tax-exempt.
Because there is no upfront deduction for the contributions, the
estimated revenue loss to the Treasury in early years is small--reaching
only $1 billion by 1995. Allowable investment vehicles would be the
same as for current IRAs. Contribution limits on IRAs, 401Ks, and
Keoghs would not change under this proposal, but the Administration
would like to waive the penalty for early withdrawals of up to $10,000
from IRAs, if the withdrawn funds are used for first-time home
purchases.
A-5
are to be lowered $25 billion relative to baseline, with the largest
reductions slated for medicare ($6 billion), defense ($3 billion), and
Proposed changes in miscellaneous user fees-agriculture ($3 billion).
which are scored in the budget as offsets to outlays--amount to $6
billion.
Table 4
COMPOSITION OF ADMINISTRATION BUDGET PROPOSALS1
(Change from baseline in billions of dollars, fiscal years)
Outlays
Defense
Medicare
Agriculture
User fees
Other
Receipts
Capital gains
Social security
Excise taxes
Other
Deficit
1991
1992
1993
-25
-3
-6
-3
-6
-7
-37
-9
-8
-5
-4
-11
-53
-17
-11
-6
-5
-14
14
5
4
3
2
11
3
4
4
0
4
1
4
5
-6
-39
-48
-57
1. Excluding payments to the SSIDRF.
2. Extension of OASDI coverage to additional state and
local employees and HI coverage to all workers in the sector.
The budget also calls for $14 billion in new revenues in
FY1991. About $5 billion is projected to come from a revamped proposal
to cut the effective tax rate on capital gains; this proposal would
allow an exclusion from gross income of 30 percent of the realized gains
on certain assets held more than three years, with smaller exclusions
for assets held for shorter periods. According to the Administration,
enactment of this provision would result in an increase in realizations
large enough to add $5 billion, on net, to FY1991 receipts. The longerrun relationship between capital gains rates and tax collections, of
course, is uncertain; but the Administration projects small revenue
gains at least through 1995.
Much of the remaining FY1991 revenue would come from bringing
additional state and local employees under the social security system
(OASDI) and extending medicare coverage (HI) to all workers in that
sector. Similar proposals have been rejected by the Congress in the
past. The Administration is also requesting about $3 billion of hikes
in excise taxes, including the extension of the telephone excise tax,
which currently is scheduled to expire at the end of 1990.
The longer-run outlook. In contrast to CBO, the Administration
expects the deficit to disappear by the mid-1990s--whether measured on a
baseline or on a policy basis. However, the $9 billion surplus shown in
table 5 for the proposed budget in FY1995 unde-states the federal
government's total contribution to national saving by $102 billion
because it includes an outlay of that amount to a new off-budget fund,
the Social Security Integrity and Debt Reduction Fund (SSIDRF) which is
designed to protect the assets in the social security trust funds.
Excluding payments to the SSIDRF, the budget is projected to run a
surplus of $111 billion in FY1995.
Table 5
ADMINISTRATION BUDGET PROJECTIONS
(Fiscal years, billions of dollars)
1990
1991
1992
1993
1994
1995
Baseline deficit(-)
Receipts
Outlays
-124
1073
1197
-102
1156
1259
-73
1235
1308
-38
1324
1361
-10
1402
1412
17
1481
1463
Proposed deficit(-)
Receipts
Outlays
-124
1074
1197
-63
1170
1233
-25
1246
1271
6
1328
1322
11
1409
1398
9
1486
1477
Memo:
Payments to SSIDRF
Deficit excl. payments
to SSIDRF(-)
0
-124
0
-63
0
-25
14
20
54
64
102
111
The Administration projections assume that real GNP will
continue to grow about 3 percent per year and that inflation will
decline to about 3 percent by 1995. OMB assumes a somewhat steeper fall
in nominal interest rates than does CBO; but the two projections do not
show much difference in the levels of real rates by the mid-1990s.
Prospects for defense spending. One reason for the projected
improvement in the deficit path over this period is the lack of further
growth in real defense spending. In real terms, defense appropriations
have already declined 13 percent from their 1985 peak. And if they are
held constant in real terms over the next five years at FY1990 levels-the baseline assumption--nominal outlays will fall from about 5-1/2
2. See page II-A-7 for a detailed description of the proposed fund.
percent of GNP in FY1990 to about 4-1/2 percent in FY1995; by contrast,
the share averaged 6-1/2 percent between FY1985 and FY1987. The Bush
program incorporates small across-the-board reductions in defense
appropriations, which would shave another 1/2 percentage point off the
defense share of GNP by FY1995; in real terms, defense outlays would
decline about 2 percent a year. The proposed cuts are much smaller than
those reportedly under consideration a few months ago; ndeed, President
Bush this week announced that he is prepared to negotiate with the
Soviet Union about further troop reductions. For comparison, the
$180 billion package discussed a few months ago was widely interpreted
as consistent with declines in real defense spending of about 4 percent
per year.
Prospects for nondefense spending. The Bush program contains
sizable reductions in nondefense spending (excluding payments to the
SSIDRF) over the next five years. But the broad thrust of such spending
shows little change. Outlays on human resources programs (for example,
social security, health, and education) will continue at about 11
percent of GNP. Spending in other areas is expected to rise much less
rapidly than nominal GNP over the next five years, but this expectation
largely reflects an anticipated decline in net interest outlays. Among
the major programs, the growth in medicare is shaved under the Bush
proposals, with nominal outlays cut $15 billion below baseline by
FY1995, primarily through cuts in reimbursement rates to hospitals and
doctors. The budget also builds in large savings in agriculture but
does not specify how these will be achieved. Changes elsewhere are
relatively small; funding is increased relative to baselines for a few
programs such as NASA and Head Start, but the increases are more than
offset by reductions elsewhere.
The Social Security Integrity and Debt Reduction Fund (SSIDRF).
The Administration has proposed a mechanism that it believes will help
to move the overall budget into surplus after the early 1990s. The plan
is complicated. First, it would require the government to make annual
payments from the general fund into a new off-budget fund--the SSIDRF.
After a brief phase-in period, the payments would be equal to the
Thus,
projected annual surplus in the social security trust funds.
the SSIDRF would effectively neutralize the influence of the buildup in
the social security trust funds on the official budget statistics;
however, in the absence of other changes in outlays and revenues, it
would do nothing to reduce government demands on credit markets.
3. Payments to the SSIDRF between 1993 and 1999 would be based on the
annual balances (net inflows) in the OASDI trust funds, as projected in
1989 by the Board of Trustees of the Social Security System under
intermediate (II-B) economic and demographic assumptions. Payments
would increase from 15 percent of the projected balance ($14 billion) in
FY1993 to 85 percent ($102 billion) in FY1995; beginning in 1996, they
would equal the projected OASDI surplus.
FEDERAL OUTLAYS *
(As a percent of GNP)
National Defense
-
Baseline
-
Administration policy
.
Administration policy
I
I
I
I
I
I
I
I
I I
1986
1983
I
8
I
I
1989
I
I
I
1992
S13
Human Resources
-
12
Baseline
Administratio pol-------cy
Administratio. policy
---I 10
[..
I
___r.
I
I
II
I
I
I
I
I
I
I
Other (excluding Net Interest Outlays)
4
-
-1 3
- -
Baseline
2
Administration policy
-
I
1980
I
I
I
1983
I
I
I
1986
I
I
I
I
I1
1989
Source: OMB, Budget of the U.S. Government, FY 1991, January 190.
* Outlays exclude payments to the Social Security Integrity and Debt Reduction Fund.
I
1992
I I
-
A-9
Second, the proposal extends the Gramm-Rudman framework beyond
1993, with a target of zero in the official deficit in each year.
Noting that this measure of the deficit would include payments to the
SSIDRF, the proposal, in effect, requires that the non-social security
part of the budget--as conventionally defined--be brought close to
balance by the mid-1990s. Relative to the Administration baseline,
balancing the budget as defined under this proposal would require
sizable spending cuts and revenue increases. In FY1995, for example,
such actions would need to total roughly $100 billion. Relative to
CBO's baseline, achieving balance would require even greater cuts--more
than $200 billion, equivalent to roughly 3 percent of that year's
projected GNP.
@FedFRASER