The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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) Class II FOMC February 2, SUMMARY AND OUTLOOK Open Market Committee Prepared for the Federal of the Federal Reserve System By the staff of the Board of Governors 1983 DOMESTIC NONFINANCIAL DEVELOPMENTS Recent Developments. at the turn of the year. Economic activity appears to have firmed Although real GNP declined in the fourth quarter, data received for December and January have provided some signals that a recovery is getting under way. Inventories were liquidated at a record rate in November, and this was followed in December by a leveling off of production and a slowing in the pace of job losses in the manufacturing sector. Activity in the household sector has strengthened, and orders for business equipment moved up slightly at year end. Inflation continued to slow in December, and all broad price measures rose less than 5 percent over the year. The index of industrial production edged down just 0.1 percent in December, after sigificantly larger reductions in the autumn. Con- tinued declines in output of business equipment and metal materials were largely offset by a 13 percent increase in auto assemblies and another large advance in the production of defense and space equipment. Auto assemblies rose again in January and production of raw steel advanced at the beginning of the year. The decline in nonfarm employment in December about matched the monthly average so far in this recession. facturing sector slowed considerably. However, job losses in the manu- Much of December's employment reduc- tion was concentrated in the trade sector, where retailers apparently hired fewer seasonal workers than usual. The unemployment rate rose one-tenth of a percentage point in December to 10.8 percent. Activity in the consumer sector has picked up in recent months. Response to interest rate concessions on domestic automobiles has remained strong as sales in the first 20 days of January averaged 6.3 million units at an annual rate. The pace of sales has been sustained above the 6 million unit mark for 2-1/2 months for the first time since early 1981. Real personal consumption expenditures for all goods except motor vehicles and parts rose 1 percent in December, with a relatively large increase posted for sales of furniture and other household equipment. For the fourth quarter as a whole, a surge in new car sales was coupled with a rise in real spending for other goods and services, and the personal saving rate fell to 5.8 percent. Housing market indicators generally showed continued improvement late in the year. Although total housing starts slipped to a 1.2 million unit annual pace in December, for the fourth quarter as a whole starts were 12 percent higher than their third-quarter rate. All of the recent improve- ment came in the single-family sector following a drop in the cost of mortgage credit to a more affordable level for many home buyers. Sales of both new and existing homes in the fourth quarter strengthened appreciably, with sales up 31 percent for new homes and 12 percent for existing homes. Business capital spending has continued to fall, although there are some indications that the decline in outlays for producers' durable equipment is abating. Shipments of nondefense capital goods leveled off over the past two months, and sales of heavy-weight trucks have firmed a bit. Orders for nondefense capital goods increased 2-1/2 percent in the fourth quarter, narrowing the longstanding gap between orders and shipments. Nonresidential construction spending resumed its downward trend in December; reductions are expected to continue, reflecting the substantial drop in the real value of contracts for new construction over the past year. Business inventories at manufacturing and trade establishments were liquidated at a record pace in November. While much of the drop resulted from a sharp correction in the auto industry, substantial progress in reducing stocks was made in other key industries, cutting the overall ratio of inventories to shipments and sales. Nonetheless, with sales still at depressed levels, stock-sales ratios remain relatively high in many sectors. Inflation continued to slow at year end. Consumer prices fell 0.3 percent in December; for the year as a whole these prices rose only 3.9 percent, less than half the 1981 pace. The deceleration in producer prices of finished goods was similar, slowing from a rate of about 7 percent over 1981 to 3-1/2 percent during 1982. Labor costs also moderated over the year; hourly compensation rose at a 6-1/2 percent annual rate, the smallest four-quarter increase since 1972. Increases in wages for production workers slowed to a 4-1/2 percent rate in the fourth quarter, with deceleration particularly pronounced in the manufacturing sector. In the fourth quarter, hours worked continued to fall at a faster rate than output, and labor productivity in the nonfarm business sector increased at a 2.7 percent annual rate. Outlook. The staff expects real GNP to rise at an annual rate of about 3-1/2 percent this quarter. Much of the increase can be attributed to a halt in the liquidation of domestic auto inventories; real final sales are projected to rise at a 1 percent annual rate, considerably less than last quarter. Consumption and housing expenditures are expected to increase in real terms, while government purchases and business fixed investment are 1-4- projected to decline. Real net exports are expected to remain about un- changed, ending the sharp decline in the last half of 1982. The monetary policy assumptions underlying the staff projection are little changed from the last Greenbook. After this quarter, M2 is assumed to grow at around an 8 percent annual rate in both 1983 and 1984. Short-term interest rates are expected to remain at around current levels throughout the projection period, with long-term rates edging downward in a manner consistent with continued reductions in inflation and inflation expectations. For fiscal policy, the federal deficit is now projected at about $200 billion on a unified budget basis for both fiscal year 1983 and fiscal year 1984. It is assumed that all of the recommendations of the President's Commission on Social Security will be enacted, including the six-month delay in the cost-of-living adjustment scheduled for this July. The larger farm subsidies and $7 billion of additional appropria- tions passed last December are also included for fiscal year 1983. For fiscal year 1984, it is assumed that smaller cuts in nondefense programs and deeper cuts in defense than proposed by the Administration will be enacted. In the aggregate, net deficit reductions of about $40 billion are assumed, compared with $46 billion in the President's Budget. The recovery is projected to gain momentum throughout this year and next, with real GNP rising 3-1/2 percent during 1983 and 4-1/2 percent during 1984. In 1983, increased purchases of houses and auto- mobiles, along with a reversal of the current inventory liquidation, are expected to offset declining capital spending, government purchases, I-5 and net exports, generating a relatively slow rise in production. Next year, as capital spending and exports turn around in response to increases in output and a lower the exchange rate, the recovery is projected to strengthen. However, even this acceleration in real GNP is expected to make only modest progress in reducing the unemployment rate; after hovering just below 11 percent for most of 1983, joblessness is expected to decline only to about 9-1/2 percent at the end of the projection period. The large amounts of slack projected for both the labor force and the capital stock are expected to continue to exert downward pressure on wages and prices. Compensation per hour, which rose 6-1/2 percent during 1982, is expected to rise about 4-3/4 percent in both 1983 and 1984. Coupled with a cyclical increase in productivity of about 2 per- cent per year, these relatively small wage gains are projected to generate increases in unit labor costs of less than 3 percent per year. Given these weak cost pressures and some reduction in world oil prices, the overall inflation rate is expected to slow again during 1983, with the gross domestic business product fixed-weight price index rising a little under 4 percent both this year and next. This reduction is expected despite a projected reversal of the 1981-82 dollar appreciation, which contributed to the improved price performance last year. Detailed data for these projections are shown in the tables that follow. I-6 February 2, 1983 STAFF GNP PROJECTIONS Percent changes, annual rate Gross domestic business product fixed-weighted price index Nominal GNP Real GNP Total 12/15/82 2/2/83 12/15/82 2/2/83 Unemployment --- 12/15/82 rate Excluding food and energy 2/2/83 12/15/82 2/2/83 (percent) 12/15/82 2/2/83 Annual changes: 9.4 6.9 4.5 .... 9.4 6.9 4.8 3.8 7.6 9.7 11.0 .... 7.6 9.7 10.8 9.9 -5.1 2.1 .7 -2.5 5.3 5.9 5.0 5.7 5.3 5.9 5.2 5.0 8.8 9.5 9.9 10.7 8.8 9.4 10.0 10.7 3.5 2.6 3.9 3.9 4.4 4.0 3.4 3.2 4.9 4.5 4.0 3.7 11.1 11.1 11.0 10.8 10.9 10.9' 10.8 10.6V .... .... 3.7 3.8 .... .... 3.9 3.7 .... .... .... 10.4 10.1 V 9.8' 11.6 4.1 6.1 .... 7.8 1.9 -1.9 1.4 .... 1.9 -1.8 1.8 4.1 -1.0 6.8 4.7 4.0 -1.0 6.8 5.8 1.7 -5.1 2.1 .0 -1.8 6.4 6.3 8.0 8.7 8.2 6.3 7.8 7.6 1.9 2.0 3.9 4.6 11.6 4.1 6.1 1981 <1> 1982 <1> 1983 1984 9.6 6.0 4.7 .... 9.6 5.9 4.3 3.9 Quarterly changes: 1982 Q1 Q2 Q3 Q4 <1> <1> <1> <1> 1983 Q1 Q2 Q3 Q4 1984 Q1 Q2 Q3 Q4 7.8 .... 4.2 .... 7.8 .... 4.1 .... 8.4 .... 4.4 .... .... .... .... 9.0 .... 4.6 .... -1.6 -.9 -1.6 -.9 4.2 5.6 4.2 5.3 5.6 5.4 5.6 5.1 1.2 1.2 1.1 1.3 1.9 4.3 3.0 3.9 4.5 4.0 3.8 4.1 4.2 3.3 4.7 3.8 .4 -. 3 .2 -. 3 .... .... 4.2 4.5 .... 3.8 .... 3.8 .... 3.9 .... 3.8 . 3.8 .3.8 3.9 3.9 9.5/ .... Twoquarter changes: <2> 1982 Q2 <1> Q4 <1> 2.8 4.4 : 1983 Q2 Q4 6.4 7.2 8.4 t.7 1984 Q2 Q4 .... 7.8 .... 87 .... -. 6 Four-quarter changes: <3> 1981 Q4 <1> 1982 Q4 <1> 1983 04 1984 Q4 9.6 3.6 9.& 3.3 .7 -1.2 .7 -1.2 7.4 .... 7.5 8.3 3.1 .... 3.5 4.4 <1> Actual. <2> Percent change from two quarters earlier. <3> Percent change from four quarters earlier. .... Not available. 8.9 4.9 8.9 4.8 4.3 3.9 .... 3.8 9.3 5.5 9.3 5.4 3.8 4.3 .... 3.8 .8 2.4 .1 .... .9 2.4 -.1 -1.1 I-7 February 2, 1983 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1981 Q1 Q2 1982 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2864.9 2852.7 2274.6 2243.4 2901.8 2877.2 2294.0 2270.3 2980.9 2949.1 2348.9 2323.0 3003.2 2989.9 2363.6 2340.1 2995.5 3031.1 2401.0 2369.7 3045.2 3061.4 2430.5 2395.6 3088.2 3083.5 2431.8 2424.9 3101.3 3139.8 2464.1 2471.0 Personal consumption expenditures Goods Services 1799.9 957.5 842.4 1819.4 960.0 859.4 1868.8 982.5 886.3 1884.5 976.1 908.3 1919.4 987.0 932.4 1947.8 995.7 952.1 1986.3 1008.7 977.6 2034.6 1030.0 1004.5 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 455.7 113.6 330.0 12.2 10.0 475.5 109.5 341.3 24.6 19.3 486.0 101.2 353.0 31.8 24.6 468.9 95.5 360.2 13.2 6.0 414.8 93.4 357.0 -35.6 -36.0 431.5 95.5 352.2 -16.2 -15.0 443.3 94.3 344.2 4.7 3.7 397.9 99.8 336.6 -38.5 -39.0 Net exports of goods and services <1> Exports Imports 31.2 365.4 334.2 23.7 368.9 345.1 25.9 367.2 341.3 23.5 367.9 344.4 31.3 359.9 328.6 34.9 365.8 330.9 6.9 349.5 342.5 -6.9 323.7 330.6 Gov't. purchases of goods and services Federal <2> State and local 578.1 217.0 361.1 583.2 218.2 365.0 600.2 230.0 370.1 626.3 250.5 375.7 630.1 249.7 380.4 630.9 244.3 386.6 651.7 259.0 392.7 675.7 276.1 399.6 1507.8 1502.2 1510.4 1490.1 1470.7 1478.4 1481.1 1471.7 2330.0 1452.8 1958.7 5.4 2380.6 1479.4 1996.5 6.1 2458.2 1512.3 2060.0 6.5 2494.6 1531.2 2101.4 7.5 2510.5 1541.6 2117.1 6.6 2552.7 1556.6 2151.5 6.7 2592.5 1570.0 2198.1 6.9 2623.2 1572.3 2223.5 5.8 Gross national product in constant (1972) dollars 'ersonal income Wage and salary disbursements Disposable personal income Saving rate (percent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 200.3 253.1 185.1 225.4 193.1 233.3 183.9 216.5 157.1 171.6 155.4 171.7 166.2 180.3 165.7 178.0 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> -39.7 10.4 -40.5 21.9 -58.0 6.0 -101.7 -20.4 -118.4 -16.9 -119.6 -8.2 -156.0 -36.9 -197.6 -60.2 31.3 11 32.9 1.7 33.5 1.2 29.1 -4.2 27.7 -6.8 32.1 -3.6 32.3 -4.5 35.5 -2.7 Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing 108.2 108.8 7.4 91.2 20.3 108.6 7.4 91.4 20.3 109.1 8.3 91.0 19.9 109.3 8.8 90.4 19.4 110.1 9.4 90.0 19.1 110.6 10.0 89.4 18.7 111.0 10.7 88.7 18.2 Industrial production (1967-100) Capacity utilisation: all anufacturing (percent) Materials (percent) 151.8 152.5 79.8 81.2 153.0 79.2 81.2 146.3 74.8 75.2 141.7 71.6 72.0 139.4 70.3 69.6 138.2 69.7 68.1 135.1 67.6 66.0 .92 8.12 5.90 2.22 .95 7.53 5.53 1.99 1.12 7.78 5.56 2.22 1.25 8.57 6.08 2.49 State and local government surplus or deficit(-) (N.I.A. basis) Excluding social insurance funds Housing starts, private (million units, A.l.) New auto sales (millions, A.R.) Domestic models Foreign models 7.4 90.9 20.2 79.9 82.2 1.40 9.96 7.31 2.66 1.17 7.89 5.63 2.25 .96 9.04 6.90 2.14 .87 7.36 5.13 2.23 <1> Balance of payments data and details underlying these estimates are shos in the Interational Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expeoditures are shown in the Federal Sector Accounts table which follows. <3> Estimates in table are evaluated at a 5.1 percent high employment nemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $43.5 billion in 1981-44, and a deficit of $85.2 billion in 1982-44. February 2, 1983 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1981 1982 Q1 Q2 Gross national product Final purchases Private Excluding net exports 7.9 5.4 5.5 4.7 -1.5 -4.0 -4.0 -2.8 Personal consumption expenditures Goods Services 4.4 6.9 1.5 -2.7 -5.1 .1 Gross private domestic investment Residential structures Business fixed investment 25.0 1.0 8.0 14.9 -17.4 1.1 Gov't. purchases of goods and services Federal National defense State and local 5.2 12.2 8.0 1.3 -4.1 -3.2 11.5 -4.6 3.6 14.8 7.6 -2.7 7.0 20.4 10.1 -.8 -2.9 -5.5 -7.9 -1.1 -5.3 -13.5 21.4 .4 8.4 23.1 13.0 -. 2 11.3 28.4 3.2 1.0 3.7 .6 4.8 1.2 -1.9 3.1 1.3 -. 2 Gross national product Final purchases Private Excluding net exports 19.6 14.6 14.8 13.4 5.3 3.5 3.5 4.9 11.4 10.4 9.9 9.6 3.0 5.7 2.5 3.0 -1.0 5.6 6.5 5.2 6.8 4.1 5.0 4.4 5.8 2.9 .2 5.0 1.7 7.5 5.4 7.8 Personal consumption expenditures Goods Services 13.0 14.7 11.1 4.4 1.0 8.3 11.3 9.7 13.2 3.4 -2.6 10.3 7.6 4.5 11.0 6.1 3.6 8.7 8.1 5.3 11.2 10.1 8.7 11.5 Gross private domestic investment Residential structures Business fixed investment 52.2 11.3 16.7 18.5 -13.4 14.5 -13.3 -38.8 -20.8 -8.4 8.4 -3.5 17.2 9.4 -5.3 11.4 -4.9 -8.7 -35.1 25.1 -8.6 Gov't. purchases of goods and services Federal National defense State and local 13.7 20.9 15.4 9.7 3.6 2.2 22.1 4.4 12.2 23.5 10.8 5.7 18.6 40.7 36.7 6.2 2.4 -1.4 -1.8 5.0 .6 -8.3 26.4 6.7 13.8 26.3 15.6 6.5 15.6 29.2 14.3 7.2 12.3 7.9 13.4 8.3 3.0 6.7 8.9 4.7 Personal income Wage and salary disbursments 13.0 12.0 9.0 7.5 13.7 9.2 6.1 5.1 2.6 2.7 6.9 3.9 6.4 3.5 4.8 .6 Corporate profits with I.V.A. ad C.C. Adj. Corporate profits before tax 49.3 12.2 -27.1 -37.1 18.4 14.8 -17.7 -25.8 -46.7 -60.5 -4.3 .2 30.8 21.6 -1.2 -5.0 1.8 1.3 1.0 2.8 .8 .1 -1.8 -8.1 -2.4 -9.0 -1.7 -7.2 -2.9 -7.8 -3.0 -9.7 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 4.9 11.8 6.6 -1.3 7.1 8.6 -.3 9.0 9.3 -3.5 7.3 11.2 .6 7.7 7.1 .8 6.1 5.2 3.4 6.6 3.1 2.7 6.0 3.2 GNP implicit deflator <1> 10.9 6.8 9.0 8.8 4.3 4.6 5.0 4.3 10.4 8.4 11.0 8.6 9.4 7.8 9.3 11.0 11.8 7.4 8.6 7.7 4.4 5.3 3.2 3.8 5.9 4.6 5.9 5.2 7.7 4.7 5.0 2.6 8.4 1.9 1.4 Q4 Q1 2.2 1.0 .4 2.2 -5.3 -2.3 -4.4 -3.6 -5.1 .2 1.0 .9 2.1 -.9 .2 .6 2.9 4.0 1.7 -3.3 -6.2 .0 2.5 2.0 3.0 2.5 2.5 2.4 Q3 Q2 Q3 Q4 .7 -1.3 -3.5 -.9 -2.5 3.2 1.2 3.5 Constant (1972) Dollars Disposable personal income 6.9 -31.9 9.3 -22.6 -36.5 15.0 -25.3 -10.2 12.9 .6 -5.0 -11.8 7.9 -5.3 -7.6 -37.2 23.7 -9.0 Current Dollars Disposable personal nacom Nonfara payroll employment Manufacturing Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production <1> Excluding Federal pay increases, rates of change were: 1981-Q1, 1982-01. 4.2 percent; 1982-04, 4.0 percent. <2> Uses expenditures in 1972 as weights. 9.2 -27.0 14.3 -16.6 -11.8 -6.5 -3.4 10.8 percent; 1981-04, 7.8 percent; -8.6 February 2, 1983 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) ---------- Q1 Projected----------------Projected 1983 Q2 Q3 Q4 1984 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 3162.7 3182.7 2500.6 2507.6 3211.7 3210.7 2527.8 2550.8 3272.7 3263.7 2566.3 2596.4 3333.5 3317.0 2603.9 2641.0 3396.9 3372.9 2650.9 2692.3 3461.2 3433.2 2701.7 2742.4 3531.9 3501.9 2760.1 2795.9 3608.9 3576.9 2818.8 2850.6 Personal consumption expenditures Goods Services 2064.5 1038.5 1026.0 2099.0 1051.5 1047.5 2136.5 1069.5 1067.0 2173.0 1087.0 1086.0 2213.0 1104.5 1108.5 2251.0 1121.5 1129.5 2290.5 1139.0 1151.5 2330.0 1157.0 1173.0 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 423.1 110.8 332.3 -20.0 -20.0 452.8 118.3 333.5 1.0 1.0 468.9 123.8 336.1 9.0 9.0 484.5 129.3 338.7 16.5 16.5 503.3 134.8 344.5 24.0 24.0 519.4 139.8 351.6 28.0 28.0 535.4 145.3 360.1 30.0 30.0 552.6 150.3 370.3 32.0 32.0 Net exports of goods and services <1> Exports Imports -7.0 321.6 328.6 -23.0 322.0 345.0 -30.1 330.6 360.7' -37.1 341.0 378.1 -41.4 353.5 394.9 -40.7 370.1 410.8 -35.8 387.9 423.7 -31.8 405.2 437.0 Gov't. purchases of goods and services Federal <2> State and local 682.1 278.7 403.4 682.9 274.5 408.4 697.4 284.1 413.3 713.1 294.1 419.0 722.0 297.5 424.5 731.5 301.5 430.0 741.8 306.3 435.5 758.1 316.9 441.2 Gross national product in constant (1972) dollars 1484.4 1494.0 1508.3 1522.9 1538.7 1554.3 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 2692.3 2654.6 1596.0 1618.4 2260.9 2290.2 5.7 6.0 2739.2 1644.2 2336.9 5.9 2780.7 1673.9 2378.4 6.0 2823.8 1703.6 2423.5 6.0 2871.7 2919.1 2977.6 1733.8 1764.0 1803.4 2464.9 2506.3 2555.4 6.0 6.0 6.2 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) Capacity utilization: all manufacturing (percent) Materials (percent) Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 1571.3 1589.2 177.8 181.9 181.4 176.3 194.2 185.3 201.2 183.0 205.4 182.2 213.2 185.2 229.8 197.0 -190.0 -45.7 -180.6 -31.4 -196.4 -48.0 -206.0 -60.4 -204.4 -59.7 -201.0 -58.6 -198.5 -61.1 38.0 40.8 .4 43.8 2.1 45.3 2.3 111.7 10.9 112.0 10.8 112.5 10.6 112.9 10.4 113.3 10.1. 113.7 9.8 114.2 9.5 88.7 18.2 89.1 18.3 89.5 18.5 90.0 18.8 90.7 19.1 91.4 19.4 92.1 19.7 92.8 20.0 135.9 67.6 66.6 138.9 68.6 67.9 141.8 69.7 69.6 145.1 71.0 71.8 147.7 71.8 73.2 150.6 72.8 74.8 153.5 73.7 76.0 156.7 74.8 77.4 1.35 8.50 6.20 2.30 1.45 8.30 6.20 2.10 1.45 8.90 6.60 2.30 1.55 9.20 6.90 2.30 1.60 9.30 7.00 2.30 1.70 9.50 7.10 2.40 1.80 9.70 7.20 2.50 -1.2 111.3 10.9 1.55 9.20 6.80 2.40 46.9 2.4 48.6 2.9 51.0 4.0 242.1 204.0 -201.8 -67.7 53.8 5.3 <1> Balance of payments data and details underlying these estimates are shabw in the International Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expeaditure are shown in the Federal Sector Accounts table which follows. <3> Estimates in table are evaluated at a 5.1 percent high employment unemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $86.7 billion in 1983-Q4, and a deficit of $96.2 billion in 1984-q4. I-10 1983 February 2, CLASS II PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) FOMC -------- --- ---------- T------- - - - - --- ,- - - ---- Projected------------ 1983 1984 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 3.5 1.1 2.2 2.3 2.6 .0 1.4 2.5 3.9 2.9 2.6 2.6 3.9 3.0 2.8 2.8 4.2 3.3 3.9 3.8 4.1 3.7 4.2 3.7 4.4 4.2 4.8 4.0 4.6 4.4 4.9 4.3 Personal consumption expenditures Goods Services 2.3 2.8 1.7 2.1 1.8 2.5 2.4 2.9 1.9 2.6 3.0 2.1 3.3 3.3 3.3 3.1 3.3 2.9 3.1 3.1 3.0 3.2 3.2 3.1 Gross private domestic investment Residential structures Business fixed investment 22.9 46.6 -7.5 26.4 25.2 -1.3 11.2 15.1 .3 10.7 14.4 .7 12.9 13.4 4.2 9.8 10.9 5.3 9.6 11.7 7.3 10.8 9.7 9.7 Gov't. purchases of goods and services Federal National defense State and local -3.2 -5.5 10.2 -1.6 -5.7 -13.4 7.6 .0 4.2 10.4 11.7 .1 3.9 7.8 7.6 1.2 .9 .9 7.2 .9 1.5 2.3 6.3 .9 1.9 3.4 4.9 .9 2.6 4.9 5.7 1.0 3.1 .6 3,4 2.9 3.5 3.1 2.8 4.1 Gross national product Final purchases Private Excluding net exports 8.2 5.6 6.1 6.1 6.3 3.6 4.4 7.1 7.8 6.8 6.2 7.3 7.6 6.7 6.0 7.0 7.8 6.9 7.4 8,0 7.8 7.3 7.9 7,7 8.4 8.3 8.9 8.0 9.4 8.8 8.8 8.1 Personal consumption expenditures Goods Services 6.0 3.3 8.4 6.9 5.1 686 7.3 7.0 7.7 7.0 6,7 7.3 7.6 6.6 8.5 7.0 6.3 7.8 7.2 6.4 8.0 7.1 6.5 7.7 Gross private domestic investment Residential structures Business fixed investment 27.8 3.2 30.0 1.5 15,0 19.9 3.2 14.0 19,t 3.1 16.4 18.1 7.0 13.4 15,7 8.5 12.9 16.7 10.0 13.5 14.5 11.8 Gov't. purchases of goods and services Federal National defense State and local 3. 3A 153) .3 -5.9 12,4 5.1 .88 93 14.7 14.8 15.5 17.0 5.6 4.9 351 4.7 11.3 5.4 54 5.5 9.3 5.3 5.8 6.5 8.7 5.2 9.1 14.6 15.6 5.3 .%) 8.4 7.3 7.8 7.0 6.9 8.1 Constant (1972) Dollars Disposable personal income Current Dollars Disposable personal income 519* -uI4 3.9 1 6.2 5.4 5.7 7.2 6.5 6.2 7.4 6.3 7.3 7.0 7.3 6.8 7.2 8,3 9.2 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 32.4 9,1 8.4 -41,7 31,4 22.1 1353 -4 8.5 -1.8 16.1 68 35.0 28.0 23.2 15.0 Nonfarm payroll employment Manufacturing .3 -1.1 1.4 4.0 1.9 4,4 2.4 5.3 2.9 6.2 3.1 6.4 3.1 6.4 3.4 7.1 3.3 F.7 2.3 2.0 4.5 2.5 2.4 4.4 2.0 1.8 4.5 2.7 2.0 6.2 4.1 1,1 4.1 3.0 1.1 4.1 3.0 1.3 4.3 3.0 GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) 4.5 3.6 3.8 3.6 3.5 3.5 3.8 4.2 3.3 4.9 3.2 4,2 4.5 4.9 4.2 460 4.7 3.9 a.7 4.4 38 37 4.2 3.8 3,8 460 3.9 319 4.1 3.9 3.7 4.0 Industrial production 2.4 9.1 8.6 9.- 7.4 8,1 7.9 8.6 Personal income Wage and salary disbursements Nonfarm business sector Output per hour Compensation per hour Unit labor costs 4.9 <1> Excluding Federal pay increases, the rates of change are: 1983-Q1, 1984-Q1, 3.4 percent; 1984-Q-, 3.6 percent. <2> Uses expenditures in 1972 as weights. 4.5 percent; 1983-Q4, 3.2 percent; I-11 February 2, 1983 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) 1977 1978 1979 1918.3 1895.3 1501.5 1505.5 2163.9 2137.4 1705.5 1706.6 2417.8 2403.5 1929.1 1915.9 1204.4 657.0 1346.5 547.4 618.0 1507.2 813.5 693.7 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 324.1 95.8 205.2 23.0 21.9 386.6 111.2 248.9 26.5 25.4 423.0 118.6 290.2 14.3 8.6 Net exports of goods and services <1> Exports Imports -4.0 182.7 186.7 -1.1 218.7 219.8 Gov't. purchases of goods and services Federal <2> State and local 393.8 143.4 250.4 Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1980 -- Projected--1983 1984 1981 1982 2633.1 2643.1 2104.7 2079.5 2937.7 2917.3 2320.4 2294.3 3057.5 3078.9 2431.8 2415.3 ------3245.2 3243.5 2549.7 2573.9 - -------3499.7 3471.2 2732.9 2770.3 1667.2 884.7 782.5 1843.2 969.1 874.1 1972.0 1005.4 966.6 2118.2 1061.6 1056.6 2271.1 402.3 103.2 309.2 -10.0 -5.7 471.5 104.9 346.1 20.5 15.0 421.9 95.8 347.5 -21.4 -21.6 457.3 120.5 335.1 1.6 1.6 527.7 142.5 356.6 28.5 28.5 13.2 281.4 268.1 25.2 339.2 314.0 26.1 367.3 341.3 16.5 349.7 333.2 -24.3 328.8 353.1 -37.4 379.2 416.6 431.9 153.6 278.3 474.4 168.3 306.0 538.4 197.2 341.2 596.9 228.9 368.0 647.1 257.3 389.8 693.9 282.8 411.0 738.3 1369.7 1438.6 1479.4 1474.0 1502.6 1475.5 1502.4 1563.4 1540.4 983.2 1314.0 5.9 1732.7 1106.3 1474.0 6.1 2415.8 2569.7 2716.7 2898.0 1951.2 2160.4 1237.6 1356.1 1493.9 1560.1 1633.1 1751.2 1650.2 2029.1 2172.5 2316.6 2487.5 1824.1 5.9 6.5 6.1 5.8 6.4 5.9 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 167.3 194.7 192.4 229.1 194.8 252.7 181.6 242.4 190.6 232.1 161.1 175.4 188.6 181.6 222.6 192.1 Federal government surplus or deficit(-) (N.I.A. basis) High employment surplus or deficit(-) -45.9 -20.5 -29.5 -16.0 -16.1 -2.0 -61.4 -17.2 -60.0 4.5 -147.9 -30.6 -193.2 -46.4 -201.4 -61.8 28"10. 30.3 10.0 30.4 6.6 28.1 .9 31.7 -.1 31.9 -4.4 42.0 .9 '---I-------I--------Gross national product Final purchases Private Excluding net exports -- -- Personal consumption expenditures Goods Services State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 728.5 1130.5 1140.6 305.5 432.8 50.1 3.6 Civilian labor force (millions) Unemployment rate (percent) 9.O 7.1 102.3 6.1 105.0 5.8 106.9 7.1 108.7 7.6 110.2 9.7 111.9 10.8 113.5 9.9 Nonfarm payroll employment (millions) Manufacturing 82.$ 19.7 86.7 20.5 89.8 21.0 90.4 20.3 91.1 20.2 89.6 18.8 89.3 18.5 91.7 19.5 Industrial production (1967=100) Capacity utilization: all manfacturing (percent) Materials (percent) 138.1 81.9 82.7 146.1 84.4 85.6 152.5 85.6 87.4 147.0 79.1 80.0 150.9 78.4 79.9 138.6 69.8 68.9 140.4 69.2 69.0 152.1 73.3 75.4 Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 1.96 11.13 9.07 2.06 2.00 11.29 9.29 2.00 1.72 10.68 8.36 2.32 1.30 9.04 6.62 2.42 1.10 8.56 6.24 2.32 1.06 8.00 5.77 2.23 1.45 8.72 6.45 2.27 1.66 9.42 7.05 2.37 <1> Balance of payments data underlying these estimates are shoe in the lnternational Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditure are shown in the Federal Sector Accounts table which follows. I-12 February 2, 1983 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS -Projected1983 1984 1977 1978 1979 1980 1981 1982 Gross national product Final purchases Private Excluding net exports 5.5 5.1 6.0 6.5 5.0 4.9 5.6 5.5 2.8 3.5 4.0 2.9 -.4 .5 .0 -1.1 1.9 1.0 1.0 1.8 -1.8 -.6 -1.1 -.2 1.8 1.2 1.1 2.1 4.1 3.2 3.6 3.4 Personal consumption expenditures Goods Services 5.0 5.1 4.9 4.5 4.2 4.8 2.7 1.9 3.7 .3 -1.5 2.4 1.8 1.9 1.7 1.0 .3 1.8 2.6 3.0 2.1 2.9 3.1 2.7 Gross private domestic investment Residential structures Business fixed investment 16.1 18.6 11.7 10.5 2.8 12.8 -. 2 -5.3 7.3 -11.8 -20.1 -2.2 Constant (1972) Dollars 8.3 -4.9 3.6 -12.8 -10.9 -3.8 4.7 22.8 -5.5 11.9 13.5 3.6 Gov't. purchases of goods and services Federal National defense State and local 1.5 3.7 .8 .2 2.0 -.1 .4 3.3 1.3 1.8 2.6 1.1 2.3 4.3 4.0 1.1 .9 3.7 4.9 -.8 1.4 5.2 6.9 -1.0 1.5 4.0 9.3 -.1 1.8 3.2 7.3 .8 Disposable personal income 4.0 4.9 2.7 .2 2.5 1.1 1.8 3.1 Excluding net exports 11.7 11.1 11.7 13.2 12.8 12.8 13.6 13.4 11.7 12.4 13.1 12.3 8.9 10.0 9.1 8.5 11.6 10.4 10.2 10.3 4.1 5.5 4.8 5.3 6.1 5.3 4.8 6.6 7.8 7.0 7.2 7.6 Personal consumption expenditures Goods Services 11.1 9.8 12.7 11.8 10.9 12.9 11.9 11.7 12.2 10.6 8.8 12.8 10.6 9.5 11.7 7.0 3.7 10.6 7.4 5.6 9.3 7.2 6.5 7.9 Gross private domestic investment Residential structures Business fixed investment 25.7 33.1 17.9 19.3 16.1 21.3 9.4 6.6 16.6 -4.9 -13.0 6.5 17.2 1.7 12.0 -10.5 -8.8 .4 8.4 25.9 -3.6 15.4 18.2 6.4 Gov't. purchases of goods and services Federal National defense State and local 8.8 11.0 8.0 7.5 9.7 7.1 8.0 11.2 9.8 9.6 11. 9.9 13.5 17.1 7.175 11.5 10.9 16.1 17.0 7.9 8.4 12.4 16.1 5.9 7.2 9.9 15.6 5.4 6.4 8.0 12.3 5.3 Disposable personal income 10.0 12.2 12.0 10.5 11.2 7.1 6.6 7.4 Personal income Wage and salary disbursements 10.7 10.5 12.5 12.5 12.6 11.9 10.7 9.6 11.8 10.2 6.4 4.4 5.7 4.7 6.7 7.2 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 21.1 17.1 15.0 17.7 1.3 10.3 -6.8 -4.0 5.0 -4.3 -15.5 -24.4 17.1 3.5 18.0 5.8 Nonfarm payroll employment Manufacturing 3.9 3.6 5.1 4.2 3.6 2.6 .6 -3.6 .8 -. 6 -1.6 -6.6 -.3 -2.1 2.7 5.8 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 2.2 7.5 5.2 .6 8.6 8.0 -1.3 9.3 10.7 -.9 10.2 11.2 1.4 9.7 8.1 .2 7.3 7.1 2.5 5.4 2.8 1.7 4.8 3.0 GNP implicit deflator Gross domestic business product fixed-weighted price index <1> Excluding food and energy Consumer price index (all urban) 5.8 7.4 8.6 9.3 9.4 6.0 4.2 3.6 6.1 6.3 6.5 8.0 7.8 7.7 9.9 8.6 11.3 10.1 8.6 13.5 9.6 9.4 10.3 6.0 6.9 6.1 4.3 4.8 4.3 3.9 3.8 4.3 Industrial production 5.9 5.8 4.4 -3.6 2.6 -8.2 1.3 8.3 Current Dollars Gross national product Final purchases Private <1> Uses expenditures in 1972 as weights. FEDERAL SECTOR ACCOUNTS February 2, I Fiscal Tear 1982* Unified budget receipts Unified budget outlays Surplus/deficit(-), unified budget off-budget Surplus/deficit(-), 2 agenciel Combined deficit to be financed Heans of financing combined deficit: Net borrowlng from public Decrease in cash operating balance 3 Other Cash operating balance, and of period NMemo Spoanored agency borrowar 4 FT1983e Admin. F.R. 1/ Board FTY984e Admin. F.R. 1/ Board CT 1982* CT1963*/ . P.R. Board | 1982 IIff I1V I 1983 fR Staff Estimates Calendar quartera; unadjusted data 1983 1984 1I IV I II I1 617.8 728.4 -110.6 597.5 805.2 -207.7 600.4 801.8 -201.4 659.7 848.5 -188.8 642.7 847.0 -204.3 608.8 739.5 -130.7 608.3 808.6 -200.3 149.3 185.5 -36.2 137.0 205.3 -68,3 137.2 198.5 -61.3 173.8 195.8 -22.0 152.4 202.2 -49.8 144.9 212.1 -67.2 149.3 211.3 -62.0 182.9 221.0 -38.1 165.6 202.6 -37.0 -17.3 -127.9 -17.0 -224.8 -17.0 -218.4 -14.0 -202.8 -12.2 -216.5 -14.9 -145.6 -18.1 -218.4 -6.0 -42.3 -1.1 -69.4 -4.4 -65.7 -5.8 -27.8 -5.7 -55.5 -2.2 -69.4 -2.8 -64.8 -3.1 -41.2 -4.1 -41.1 134.9 -10.7 3.8 215.0 9.4 0.4 212.6 10.3 -4.5 203.0 0.0 -0.2 214.1 -1.4 3.8 161.3 -7.8 -7.9 206.9 7.3 4.2 57.5 -18.4 3.2 62.0 9.6 -2.2 53.6 9.6 2.5 40.3 -12.5 0.0 56.7 3.6 -4.8 56.3 6.6 6.5 65.4 2.5 -3.1 50.3 -5.3 -3.8 42.1 -5.2 4.2 29.4 20.0 19.1 20.0 20.5 19.8 12.5 29.4 19.8 10.2 22.7 19.1 12.5 10.0 15.3 20.5 20.3 18.2 7.7 21.2 20.3 16.9 11.6 5.8 -0.4 -0.7 3.5 4.5 4.3 4.0 6.0 6.0 618.2 739.7 250.1 173.0 77.1 489.6 -121.5 627.9 829.0 279.0 199.4 79.6 550.0 -201.1 634.1 825.2 278.3 199.1 79.2 546.8 -191.1 685.6 877.3 302.5 229.0 73,5 574.8 -191.7 671.3 873.7 299.8 225.7 74.1 573.9 -202.5 614.7 762.6 257.3 178.5 78.8 505.3 -147.9 641.4 613.7 834.6 769.7 282.8 259.0 206.3 182.7 76.5 76.3 551.8 510.7 -193.2 -156.0 6183 815.9 276.1 188.9 87.2 539.8 -197.6 easonally adiusted annual rates 630.2 642. 5.4 647.6 665.9 820.2 822.9 841.8 853.6 870.3 278.7 274.5 284.1 294.1 297.5 196.0 201.8 209.9 217.6 223.5 82.7 72.7 74.2 76.5 74.0 541.5 548.4 557.7 559.5 572.8 -190.0 -180.6 -196.4 -206.0 -204.4 678.6 879.6 301.5 228.5 73.0 578.1 -201.0 692.9 891.4 306.3 233.3 73.0 585.1 -198.5 -46.4 -71.8 n.a. n.&. -60.0 -87.0 -30.6 -55.4 -58.6 -85.9 -61.1 -88.9 NIA Budget Receipts Expenditure Purchases Defense Nlodefense All other expeadtures Surplu/deficit(-) High Baploymet (.IE.) surplus/deficit(-) evaluated at 8.I. unemployment rate of 5.1 percent 6.1 percent -20.6 -45.0 n.a. n.. *-actual 1. The Bndl t of the United States Goverment Fiscal Tear 19 January 1983. 2. Includeas ederal Fiuancing aes , Foetal Service Fund, r11l lactrificatiom and Telephoe Rvolving Fund, Rural Telephone Bank and (beginning in FT982) tha Strategic etroleum Reserve. 3. Checks issued less checks paid, accrued items and other treasactlosa. NOTE: Quarterly figures uay not add to yearly totals due to rowedilg. -46.4 -72.2 e--estiated -36.9 -61.7 -60.2 -85.2 -45.7 -71.0 -31.4 -57.2 -48.0 -74.1 -60.4 -86.7 -59.7 -86.5 n.a.-not available 4. R staff estimates and actuals include Federal ome Loan Banks, FHIC (excluding participation certificates), PUMA (excluding mortgage backed securities), Federal Lend Sanks, rederal Intermdiate Credit Banks for Cooperatives, andStudent Loan Marketing Association marketable debt on a payment basis. RI and Administration estimates are not strictly comparable. DOMESTIC FINANCIAL DEVELOPMENTS Recent developments. rate in January. M2 growth surged to about a 30 percent annual A considerable part of this strength reflects the intro- duction and rapid expansion of the new money market deposit accounts (MMDAs), which reached the $200 billion level by late January. While the great bulk of these funds was shifted out of other nontransactions components of M2, a sizable share apparently came from non-M2 assets such as large time deposits and other market instruments. in M1. M2 growth was boosted also by a pickup The new super NOWs have grown rapidly, though much less spectacu- larly than the MMDAs. On balance, it does not appear that M1 growth was greatly influenced by the introduction of MMDAs and super NOWs. Despite the sizable runoff in large CDs, M3 growth, carried along by the surge of M2, also picked up sharply in January--to a 13 percent annual rate. In addition to paying down large CDs, commercial banks have used a considerable portion of the funds flowing into deposit accounts to increase loans to their foreign branches. Banks also have made substantial acquisi- tions of securities and increased their lending activities somewhat. Total bank credit growth accelerated to a 10-1/2 percent annual rate in December, and incoming data suggest that growth remained relatively strong in January. Business loans at banks appear to have resumed growing in January after two months of decline. But the commercial paper indebtedness of non- financial businesses continued to decline sharply, and, on balance, businesses apparently reduced their short-term indebtedness. This paydown results, in part, from continued efforts to restructure balance sheets, as gross offerings of bonds and stocks by domestic corporations remained historically high in both December and January. I-14 In addition, business needs I-15 for external funds continued to be small, primarily because of the sharp runoff of inventories. Credit flows to households appear to have strengthened recently. Consumer credit growth picked up significantly in November and likely increased somewhat faster in December, responding to relatively strong auto sales that were stimulated in part by below-market interest rates offered by manufacturers. The strengthening of residential construction and of house sales, fostered by lower interest rates, is also reflected in a rising volume of mortgage loans and commitments. Public sector demands for funds have remained strong. The Treasury raised nearly $30 billion of new money in December and another $8 billion in January to finance continued large budget deficits as well as a sizable net buildup of its cash balance. State and local governments borrowed record amounts in December as they endeavored to beat the passing of certain year-end deadlines, and though dropping off in January remained relatively substantial by historical standards. Market interest rates generally tended to move down after the December FOMC meeting, but have backed up in recent weeks as market participants reportedly have concluded that the growing signs of an economic recovery, continued large prospective federal deficits, and the sharp expansion of the monetary aggregates in January all suggest that the Federal Reserve is unlikely to take actions that would encourage a further easing in credit market conditions. On balance, interest rates on most market-traded instru- ments show little net change for the intermeeting period. Primary mortgage rates and bank prime rates, however, declined 50 basis points over the I-16 intermeeting period in lagged response to previous reductions in market interest rates and perhaps to the improved inflow of deposits. Outlook. With inventory liquidation continuing and corporate cash flow improving, businesses likely will have only a moderate need to raise net new money in financial markets in the next few months. At the same time, however, they probably will continue their efforts to fund short-term debt--through continued issuance of long-term bonds and common stock--since their basic debt structures remain strained. In the household sector, our projections of durable goods sales suggest that consumer installment credit growth will continue near the recent stronger pace. Takedowns of mortgages appear likely to increase in conjunc- tion with a further step-up in the construction and sale of houses, and institutional lending may be bolstered as well by further refinancing of loans made by home sellers over the past few years. The U.S. Treasury will continue to place massive demands on credit markets as it is expected to raise almost $55 billion of new money over the current quarter. State and local government borrowing, too, is expected to remain comparatively heavy by historical standards in the months immediately ahead. Governmental units are expected to accelerate some of their debt offerings to get ahead of the federal requirement that municipal bonds be registered, now scheduled to take effect on July 1, as well as to take advantage of current interest rate levels, partly for refunding of high-rate debt. Such borrowing may also be augmented by financing undertaken to cover large shortfalls in operating budgets. For the time being, it seems likely that credit will be available in sufficient supply to meet both the pickup in private borrowing and the I-17 continued large financing needs of governmental units without upward pressure on market interest rates. The staff is anticipating (in its economic forecast) that short- and long-term rates will remain near current levels into the spring. The markets likely will continue sensitive to incoming economic indicators, and they could be expected to rally on any signs of decisive slowdown in monetary growth, which would be viewed as providing an opportunity for further easing actions by the System. The expected continuation of good news on inflation should, in any event, tend to buttress the intermediate- and long-term sectors of the debt markets, although the prospects for the federal budget likely will remain a burden until and unless credible and decisive action is taken to cut deficits for future years. INTERNATIONAL DEVELOPMENTS Recent developments. Since the December FOMC meeting the weighted average value of the dollar has appreciated by about 2-1/2 percent. From a peak value in early November the dollar depreciated about 8-1/2 percent to a trough in early January; since then the dollar has appreciated by more than 5 percent. Most of the depreciation early in the two-month period has been attributed to the widely-recognized increase in current and prospective U.S. trade and current-account deficits. There was also some expectation in the the earlier part of January that dollar interest rates would decline further. However, interest- rate expectations changed after the middle of January when the Federal Reserve discount rate was not lowered as had been expected, and when market attention returned to the prospect of large U.S. budget deficits. Also strengthening the dollar were signs of political difficulties in Germany, and the disarray of OPEC, which raised the possibility of a major decline in oil prices, adding to the uncertainties in the world economic outlook. Much of the dollar's strength has been against sterling, which was weakened by the prospect of lower oil prices. The dollar has gained about 1-1/2 percent against the continental European countries since mid-December but, on balance, has declined 2 percent against the yen. Interest rates in other industrial countries have declined or held steady in recent months, except for the United Kingdom, where monetary conditions were tightened to support the pound. I-18 As the mark I-19 and the yen weakened against the dollar late in January, market expectations of some reductions in German and Japanese interest rates were side-tracked. Real GNP of the major ten foreign industrial countries declined in the third quarter of last year, with only Japan recording positive growth in the quarter. This weakness continued into the fourth quarter, with October and November industrial production generally declining. The rate of unemployment abroad rose further in the fourth quarter, reaching 13 percent in December in Canada and the United kingdom, and about 9 percent in Germany, France, and Italy. Nevertheless some scattered indications that activity abroad may be moving up can be seen: residential construction has improved in Germany and Canada; new orders are up in Germany; surveys in Canada, France, and Germany show reduced pessimism by consumers and producers; and retail sales in the United Kingdom were up sharply in December. In U.S. international transactions, the trade balance in the fourth quarter was a deficit of nearly $50 billion, about the same as in the previous quarter. the quarter. Both exports and imports declined in On the export side, manufactured goods and coal showed the largest drops; on the import side the major decline was also in manufactures. Oil imports were down slightly in the fourth quarter as volume continued to decline while the price changed little. I-20 In the international capital accounts there was s sizable net outflow of banking funds from December to mid-January, largely in the form of funding of foreign branches by U.S. head offices. It seems likely that this represented new funding patterns associated with the introduction of the new money market deposit accounts, although the relevant data are still incomplete. Many foreign branches lost deposits as U.S. investors holding funds in the branches, or in mutual funds that held CDs of the branches, switched into MMDAs. In turn, head offices of the banks recycled these funds to their branches. More- over, U.S. banks may have found it advantageous to place any net new resources into Euromarket assets. Foreign investments in U.S. corporate securities remained subdued in November, but it appears that U.S. corporations stepped up their offerings of Eurodollar bonds in January, with most of the proceeds probably intended for use in the United Kingdom. Outlook. Activity in major industrial countries registered a small decline last year (fourth quarter to fourth quarter), but is expected to gain some momentum this year with growth of nearly 2 percent. This slow growth, and the decline in the import capacity of developing countries, are expected to lead to further declines in U.S. exports in the first half of this year, while non-oil imports are expected to rise in value, though not in volume. The value of oil imports should decline somewhat as prices fall further. The trade deficit for theyear is projected at about $65 billion -considerably lower than the last projection, mainly because recent I-21 data have indicated a lower volume of non-oil imports. ing current account deficit is about $37 billion. The correspond- On present assump- tions about economic activity and prices, these deficits are expected to increase further in the first half of next year. Incorporated in this set of forecasts is a 13 percent decline in the value of the dollar from the January average to the average in the fourth quarter of the year, and a further relatively minor decline into 1984. CONFIDENTIAL (FR) CLASS II FOMC FEBRUARY 1, 1983 OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES) 1982 ANN. 1983-P 1984-P ANN. ANN. 4982 03 1982 04 1983-P 1983-P 1983-P 1983-P 04 Q2 04 Q3 1984-P 1984-P 1984-P 1984-P 01 02 Q3 Q4 1. GNP NET EXPORTS CURRENT $, NET EXPORTS OF G+S IMPORTS OF G+S 16.6 349.7 333.1 -24.3 328.8 353.1 -37.4 379.2 446.6 7.0 349.5 342.5 -6.9 323.7 330.6 -7.0 321.6 328.5 -23.0 322.0 345.0 -30. 1 330.6 360.7 -37.0 341.0 378.1 -41.4 353.5 394.9 -40.8 370.1 410.8 -35.8. 387.9 423.7 -31.8 405.2 437.0 CONSTANT 72 $, NET EXPORTS OF G+S IMPORTS OF G+S 30.3 147.5 18.9 135.3 117.2 116,5 21.6 147.4 125.9 27.5 147.5 120.0 21.1 136.4 415.3 21.4 134.6 113.6 48.2 633.7 415.5 18.1 135.4 117.3 48.2 137.7 419.4 18.6 140.7 122.1 20.2 145.2 125.0 22.8 149.9 127.0 24.8 154.1 129.3 80.3 77.7 83.0 82.8 77.6 77.7 77.9 TERMS OF TRADE (1972=100) 1/ 83.4 82.6 .4 2. U.S. MERCHANDISE TRADE BALANCE 2/ EXPORTS (EXCL. MILITARY) AGRICULTURAL NONAGRICULTURAL IMPORTS PETROLEUM AND PRODUCTS NONPETROLEUM 3. U.S. CURRENT ACCOUNT BALANCE OF WHICH:NET INVESTMENT INCOME 4. FOREIGN OUTLOOK - - -- - 79.5 80.7 - -- - ---- --- 78.3 -- --- 4 77.7 - - - - - -36.1 -65.9 -81.6 -50.0 -47.6 -48.2 -62.5 -72.5 -80.4 -83.6 -83.1 -81.0 -78.5 211.2 37.4 173.8 192.9 36.3 156.5 225.7 39.7 186.0 209.3 33.6 175.7 192.9 32.1 160.9 189.8 34.6 155.2 189.3 36.1 153.2 192.9 36.9 156.0 199.4 37.7 161.7 207.8 38.6 169.1 218.6 39.3 179.3 231.4 40.1 191.3 245.1 40.9 204.3 247.3 61.2 186.1 258,7 60.6 498.1 307.3 69.8 237.5 259.3 65.8 193.5 240.5 62.8 177.7 238.0 55.4 182.6 254.8 59.0 192.8 265.4 62.3 203.1 279.8 65.9 213.9 291.3 67.4 223.9 301.8 68.5 233.3 312.4 70.3 242.1 323.7 73.0 250.7 -6.7 -37.3 -53.6 -17.1 -22.3 -20.8 -35.1 -42.5 -50.8 -56.4 -56.8 -52.4 -49.0 28.2 27.0 29.2 24.9 29.7 25.7 -------- i------ 24.8 28.4 29.2 27.8 27.4 29.9 31.5 TEN INDUSTRIAL COUNTRIES 3/ REAL GNP, % CHANGE, ANNUAL RATES CONSUMER PRICES, % CHANGE, ANNUAL RATES -0.2 8.1 0.9 2.6 -2.8 6.6 6.3 6.0 0.9 1.4 .. 8 1.7 3.0 2.9 2.3 2.7 3.0 6.3 7.6 6.2 5.8 5.8 6.9 6.3 6.1 6.0 I/ GIP EXPORT IMPLICIT DEFLATOR DIVIDED BY GUP IMPORT IMPLICIT DEFLATOR 2/ INTERAIIIONAL ACCOUMIS BASIS 3/ GEOITRIC BEIGHTS USED TO AGGBIGATE FOREIGN BEAL GMP AND COSUIBER PRICBS -- PERCBNT SBARB IN TBM-COOUNTR TOTAL IULTILATERAL TBAD1. GEBAIII (20.81), JAPAI (43.65), PRANCE (13.1%), UNITED KINGDOM (11.8X)CAL&A , (9.15), ITALY (9.05), TUB IBTHUELANDS (8.3%), BXLGIUN (6.41) SNEDEB (4.21), SNIItRLAIND (3.65) P/ JPOJECIED
@FedFRASER