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Confidential (FR) Class II FOMC

Part 2
January 26, 1996

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III
FOMC

January 26, 1996

RECENT DEVELOPMENTS

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

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS
As 1996 began, the economy appeared to be expanding, but only
slowly.

Data are lagging because of the December and January

government shutdowns, but the available information indicates fairly
clearly that manufacturing activity has been on the soft side
recently--owing in part, we suspect, to efforts by businesses in a
number of sectors to curb inventory accumulation.

Even so, the

labor market remained fairly taut, at least through December, with
growth in jobs continuing at a moderate clip; hourly earnings
figures last year hinted at some firming in wages.

Because of the

delays in the PPI and CPI releases, we have no timely statistical
information on broad price movements; apart from pressures in
agricultural and energy markets, however, the price inflation
picture still appears fairly calm.
Labor Market Developments
Labor market conditions were little changed in December and
remained in line with those generally prevailing over the second
half of 1995.

Nonfarm payroll employment expanded 150,000, and the

unemployment rate stayed at 5.6 percent.

Although aggregate hours

of private production or nonsupervisory employees fell 0.2 percent
last month, the increase in the quarterly average of this measure of
labor input, 2.1 percent, was about the same as that in the third
quarter.
Several statistical problems raise some uncertainty about the
reliability of the estimated changes in payrolls for recent months.
Because of the federal government shutdown, the BLS was unable to
incorporate the additional responses to the November payroll survey
into revised levels of employment, hours, and earnings for November.
However, in estimating the change in employment from November to
December, the BLS was able to match the expanded set of responses

II-1

II-2

CHANGES IN EMPLOYMENT1
(Thousands of employees; based on seasonally adjusted data)
1995
1994

Nonfarm payroll employment 2
Private
Manufacturing
Strike-adjusted
Durable
Transportation Equipment
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Business services
Total government

1995

----------294
141
273
132

Q2

Q3

1995
Q4

Oct.

Nov.

Dec.

Average monthly changes--------82
128
128
66
166
151
70
116
126
73
183
122

30

-12

-32

-35

0

-21

-30

52

31
25
2
5
30
75
4
117
46
21

-13
3
-3
-16
11
27
6
92
25
9

-33
-12
-5
-20
-9
24
-3
87
6
12

-34
-8
-5
-27
11
42
9
88
52
12

-4
14
-2
-14
14
22
14
64
14
2

7
-7
-25
-14
25
11
20
29
7
-7

-29
-16
-20
-14
2
91
13
94
6
-17

11
65
40
-13
14
-37
9
69
30
29

Private nonfarm production workers
Manufacturing production workers

242
31

111
-10

54
-31

103
-26

91
3

111
-25

48
-13

113
46

Total employment
Nonagricultural

326
289

28
47

-263
-181

218
278

-79
-90

259
77

-389
-210

-106
-136

Memo:
Aggregate hours of private production
.4
workers (percent change)
34.7
Average workweek (hours)
12.0
Manufacturing (hours)

.1
34.5
41.6

.0
34.4
41.5

.2

.0
34.5
41.5

.6
34.6
1.5

-. 4
34.5
41.5

-. 2
34.4
41.4

34.5

41.5

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

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)
1995

1995
1994
Civilian unemployment rate
(16 years and older)
Teenagers
Men, 20 years and older
Women, 20 years and older

Full-time workers
Labor force participation rate
Teenagers
Men, 20 years and older
Women, 20 years and older

1995

6.1

5.6

17.6
5.4
5.4

17.4
4.8
4.9

Q2

Q3

Q4

5.7

5.6

5.6

17.2
4.9
5.0

Oct.

Nov.

Dec.

5.5

5.6

5.6

17.8

17.8

17.1

4.8
5.0

4.8
4.8

4.5
5.0

17.9
4.9
4.8

18.3
4.9
4.6

6.1

5.5

5.6

5.6

5.5

5.4

5.6

5.5

66.6

66.6

66.6

66.6

66.4

66.6

66.4

66.3

52.7
76.8
59.3

53.6
76.7
59.4

54.0
76.8
59.3

53.6
76.5
59.6

52.8
76.3
59.5

53.0
76.4
59.7

52.7
76.3
59.6

52.8
76.2
59.3

II-3
for November with a relatively good initial set of December reports
that the states had taken more time to collect and verify during the
delay.

Thus, the reported estimates of November-to-December changes

in the payroll series may be more reliable than the levels reported
for either month.

Nonetheless, because the BLS had to deviate from

its normal procedures in processing the data, we suggest
interpreting all the recent payroll series with some caution,
although we have no basis for thinking the alternative approach has
biased the estimates either up or down.
On a different statistical issue, the BLS suggested that some
seasonal hiring that would normally have been captured in December
may have been picked up by the relatively late November survey,
tending to inflate the October-to-November change in employment and
to understate the November-to-December change.

Although this effect

is modest overall--perhaps 25,000--it is most significant for
several series that are particularly sensitive to seasonal hiring,
such as retail trade and amusement services; for these, the net
change from October to December should provide a more reliable
estimate of recent trends.
Although job growth in the private sector from November to
December may have been understated, because of the timing of the
November survey, it was also boosted by the return of 40,000
striking workers to Boeing and Caterpillar payrolls. 1

On net,

private employment expanded in December roughly in line with the
average monthly gain during the second half of 1995 of around
120,000.

Factory employment edged up 11,000 (strike-adjusted) after

having declined almost 30,000 per month (strike-adjusted) over the
1. Although 10,000 strikers returned to jobs at Caterpillar, we
understand from our industry contact that these rehires are not
intended to represent an expansion of the workforce. The gain in
employment in December will be retraced as replacement workers who
were temporarily employed during the prolonged labor dispute are
laid off.

II-4

Unemployment Insurance
(Weekly data; seasonally adjusted; BLS basis)
Initial Claims
Thousands

State programs
incl. EUC adjustment*

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Insured Unemployment
Millions

i

Incl. EUC
adjustment"

All regular programs

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Note. Only the state program components of these series are seasonally adjusted.
SBeginning July 18, 1992, Includes Initial claims filed under the emergency unemployment benefits program by indviduals also eligible
to ile under regular programs. The EUC program ended on April 30, 1994.
"Includes staff estimates of emergency benefits recipients who are also eligible to file under regular programs.

II-5
previous eight months.

All of the gains occurred in durable goods

industries, such as lumber, furniture, motor vehicles, fabricated
metals, and electrical equipment; jobs in nondurables, such as
apparel

textiles, and chemicals, continued to contract.

in the goods-producing sector

Elsewhere

employment in contract construction

rose 14,000, despite reports of unfavorable weather, owing to gains
in "indoor" special trades.
Employment in the services industry rose at a relatively
moderate pace; excluding the seasonally sensitive amusement
industry, which lost 44,000 jobs between October and December,
employment in services rose about 100,000 per month in each of the
past two months.

Growth remained solid in health, engineering and

management, and computer services, but employment in help supply
services, which had expanded sharply in both 1993 and 1994, was
little changed in December and posted a net gain of only 39,000 for
all of 1995.

Elsewhere, employment at retailers was up 34,000, on

net, between October and December, although major job losses
occurred at department stores

(-55,000) and apparel and accessory

outlets (-22,000)
In December, average weekly hours dropped to 34.4 hours, the
low end of the range within which this measure has fluctuated since
July 1995

The fall in hours was widespread.

Both average weekly

hours and average weekly overtime hours in manufacturing fell

0.1 hour in December, to 41.4 and 4.3 hours respectively.

Over the

year, the factory workweek dropped 0.8 hour from its exceptionally
high level at the end of 1994.
The household survey showed the aggregate unemployment rate
holding steady, with employment and unemployment falling 106,000 and
32,000 respectively,

Because of the government shutdown, the

nonresponse rate in December's Current Population Survey was

II-6
AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)
1995
1994

1995

Q2

Q3

1995
Q4

Oct.

-Annual rateTotal private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Finance, insurance,
and real estate
Total trade
Services

Nov.

Dec.

-Monthly rate-

2.8

3.2

3.2

3.9

3.2

.3

.0

.4

2.2
2.0
2.3
2.4

2.9
2.1
3.8
1.9

2.3
.3
3.9
5.5

3.6
4.1
3.5
1.1

2.9
1.9
4.9
-.8

.2
.0
.6
.0

.2
.1
.1
.3

.3
.4
.5
-.5

2.3

2.9

4.6

2.8

2.8

.9

.1

-.3

3.4
3.0
2.9

4.4
3.3
3.5

4.7
3.2
2.9

5.0
4.5
3.6

2.9
4.0
4.6

.9
.2
.7

-.6
.0
-.3

.4
.8
.7

1. Annual and quarterly changes are measured from the final month of
the preceding period to the final month of the period indicated.

Earnings of Production and Nonsupervisory Workers
(Twelve-month change)
Percent

1985

1987

1989

1991

1993

1995

II-7

somewhat above average--9.2 percent versus a norm of 6.2 percent to
7 2 percent

Although the estimates have greater sampling error

than usual, BLS uncovered no signs that the quality of the data was
significantly compromised.

Unemployment rates for major demographic

groups were little changed at 4.9 percent for adult men, 4.6 percent
for adult women, and 18.3 percent for teenagers.

The labor force

participation rate edged down another 0.1 percentage point, to
66.3 percent, the lowest reading in 1995
Recent data on unemployment insurance claims suggest little
change in labor market conditions between mid-December and midJanuary.

The four-week moving average of state initial claims has

fluctuated narrowly since the week ending December 9 between 362,750
and 378,500, and stood at 374,000 for the week ending January 20.
Delayed filings in areas affected by the East Coast storm likely
caused the wide fluctuations in initial claims during the latest two
weeks

The number of beneficiaries reported as insured under state

programs was less affected by the weather and, at 2 77 million for
the week ending January 13, was up about 150,000 from its midDecember level
Average hourly earnings increased 0.4 percent in December after
having been unchanged in November

On a year-over-year basis, this

wage measure was up 3.2 percent in December
rise of 2.8 percent.

compared with its 1994

During the second half of 1995, the trend in

average hourly earnings accelerated to a rate somewhat above the
trend in the ECI for wages of nonproduction workers.

(The ECI for

December 1995, which was originally scheduled to be released on
January 30, is now scheduled for release on February 13.)

II-8

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1995

Proportion

1995:Q4

19941

19951

1995

Q3

Q4

Oct.

Nov.

Dec.

-Annual rate- --Monthly rate--Total index
Previous

6.6

100.0

6.6

Manufacturing

86.5
5.5

Motor veh. and parts

Aircraft and parts

7.6
8.6

1.7

1.5
-17.2

-7.9

2.6
.6
-9.0

-2.7

1.7
-. 4
-. 8
-2.5
-43.6 -11.2

.2
.6

-4.5

.1
.3

4.1

Manufacturing excluding
motor vehicles,

aircraft, and parts

79.2

8.0

2.3

3.1

3.3

Consumer goods
Durables
Nondurables

23.1
3.7
19.4

4.7
6.4
4.4

.0
-. 2
.1

2.7

4.4

-. 3
4.6

-1.2

2.4

-1.1

-. 1

Business equipment
Office and computing

13.7
3.0

13.1
29.6
8.6

7.9
35.4
3.4

7.4

9.3
41.7
2.4
-. 4

.7
3.3

Industrial
Other

4.3
6.1

8.4

23.9
6.4
2.2

.9

.1

.3

.0

-.1
1.2
-.3

-. 4
.9
-. 7

.6
2.2

.1
-.4

.9
3.4
.5
.4

-1.5

-2.0

-1.0

.6

.8

.5

-. 1

-. 3

-. 3
-. 1

Defense and
1.7

space equipment

Construction supplies

-10.5

-2.6

-. 7

1.1

4.6

-. 4

8.0

5.3

Materials
Durables
Nondurables

-6.9

28.8

10.5
12.1

-15.2

2.3
8.2

5.3
8.4

-. 2

-9.5

-1.3

1.1

1.4
-1.4

-2.0

-. 3

8.2

6.9

3.6
6.4
-2.4

6.0
7.6

1.2
.2

-2.3
6.7

-1.8
14.2

-9.5

11.3

20.7

21.6

21.0

.2

23.5

20.3

Mining
Utilities

-. 3

.5

-,3

.3

-. 2

1.5

.4

Memo:

Information-related products 2

1.8

1.8

1.0

1. From the final quarter of the previous period to the final quarter of the period
indicated.
2. Includes computer equipment, computer parts, semiconductors, communications
equipment, and selected instruments.

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

1967-95

1994

Avg.

Q4

Q3

Q4

Oct.

Nov.

Dec.

1995

1995

Total industry

84.9

82.1

84.7

83.6

82.9

83.0

83.0

82.8

Manufacturing

85.2

81.4

84.3

82.6

82.0

82.2

82.1

81.8

89.0
83.5

82.6
80.7

89.3
82.1

86.5
80.9

86.1
80.3

86.1
80.5

86.3
80.3

86.0
80.1

Primary processing
Advanced processing

II-9
Industrial Production
Industrial production is estimated to have edged up just
0.1 percent in December

The end of the strike at Boeing at mid-

month and an increase in motor vehicle assemblies propped up the
December index a bit

Excluding these factors, factory output was

lackluster, on balance, at year-end.

Production of nondurable

consumer goods and industrial equipment declined last month, and the
expansion of output of information-related products, mainly
semiconductors, slowed.
The factory operating rate dropped to 81.8 percent in December,
about 1/2 percentage point above its long-term average.

Since the

beginning of 1995, utilization rates for most major manufacturing
industries have eased, the exception being the industrial machinery
and computer equipment industry.

However, utilization in primary

processing industries remained at a relatively high 86.1 percent
rate in the fourth quarter, with operating rates above 1988-89 highs
for primary metals and petroleum products.
After increasing for a second consecutive month in December to
11.9 million units (annual rate)

motor vehicle assemblies appear to

have dropped back sharply in January.

Weekly production data

through January 26 suggest that assemblies are running at a
10.9 million unit rate, well below plans that stood at 11 7 million
units earlier this month.

While a small part of the downshift in

output, about 200,000 units (annual rate)

occurred during the

blizzard, the bulk of the change in assemblies was the result of
plant shutdowns later in the month to control inventories, which
were uncomfortably high at the end of 1995.

2

Our contacts in

2. Part of the December decrease in days' supply, shown in the
table, is due to the use of sales reports that were inflated by
extending the reporting period into January. In this instance, a
more reasonable representation of the industry's inventory position
at year-end is a comparison of end-of-period stocks to average sales
for the quarter

II-10

Manufacturing Activity
Manufacturing Industrial Production
excluding Motor Vehicles, Aircraft and Parts

Ratio scale, 1987=100

® Quarterly average

_
1993

1995

Motor Vehicle Production
Millions of units

FRB Seasonals

F

--

13.6

* Quarterly average

12.8

12

D Jan. est.

11.2

10.4

I

II

1993

1994

1995

II-11
the motor vehicle industry indicate that scheduled production of
11.9 million units (annual rate) in February and March is being
revised.

At this point, we have only been able to confirm that

Chrysler will shave 170,000 units

(annual rate) from its February

plan; Ford and GM have not yet provided official figures.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)

Nov.

1995
Dec.

Q4

Jan.e

U.S. production
Autos
Trucks

11 7
6.1
5.6

11.9
6.1
5.8

11 7
6.1
5.6

10.9
5.5
5.4

Days' supply
Autos
Light trucks

71 7
72.2

65.5
66,7

69.3
71,8

n.a.
n.a.

1996
Feb-Mar.
11.9
6.0
5.9

n.a.
n.a.

Note: Components may not sum to totals because of rounding;
figures for days supply for Q4 are end of year stocks
relative to sales for the quarter,
e Staff estimate based on four weeks of data.
s Schedules as of January 19.
n.a. Not applicable.
Anecdotal reports and available statistical indicators suggest
that industrial activity outside the motor vehicle sector remained
sluggish in January.

The forward-looking orders components of the

national and regional purchasing managers indexes released early in
the month pointed to a further slowing of the manufacturing sector
early this year

With four weeks of estimates available for

January, our weekly index of indicators of non-auto physical
product, which covers about a sixth of the IP index, is likely to
edge down; declines in electricity generation, coal

paper, lumber,

and appliances appear to be offsetting increases in steel and
petroleum products.

Nevertheless, IP in January will be boosted

II-12

SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate; FRB seasonals)

1995

1995

1994

Oct.

Nov.

Dec.

14.7
14.7

14.4
14.4

15.0
14.7

15.0
15.0

14.1
14.4

14.8
14.7

15.9
16.0

8.8
5.9

8.7
5.7

9.2
5.9

8.9
6.0

8.6
5.6

8.7
6.0

9.4
6.5

12.8
7.1
5.4
1.7
5.7

12.5
6.9
5.3
1.6
5.5

13.2
7.5
5.6
1.9
5.7

13.1
7.3
5.5
1.8
5.9

12.4
7.0
5.5
1.5
5.4

13.0
7.1
5.4
1.7
5.9

14.0
7.7
5.5
2.2
6.3

2.1
2.0
.2

Foreign produced
Autos
Light trucks

Q4

12.9
7.3
5.7
1.5
5.7

North American 2
Autos
Big Three
Transplants
Light trucks

Q3

9.2
5.8

Autos
Light trucks

Q2

15.0
15.0

Total
(BEA seasonals)

1995

1.9
1.7
.2

2.0
1.8
.2

1.9
1.7
.1

1.8
1.7
.2

1.7
1.6
.2

1.8
1.6
.2

1.9
1.8
.2

Note: Data on sales of trucks and imported autos for the most recent month
are preliminary and subject to revision.
1. Components may not add to totals because of rounding.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry.

Domestic Light Vehicle Inventories
Days
Millions of units

GM and Ford Fleet and Retail Auto Sales
Millions of units
CONFIDENTIAL
5

4

80

3

70

2

Retail

90

60

Dec.
Fleet

1
-

1993

I...
WII'~' ..
1994

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

'

1995

~

"

*.

0
19 96

1993

1994

1995

- 2
1996

II-13
about 1/4 percentage point by the return to full production at
Boeing.
At this point, we do not believe that the blizzard that struck
the East Coast at mid-month will seriously depress industrial
production for January:

Most businesses contacted by staff of the

Board and the five Reserve Banks on the East Coast indicated that
much of any weather-related downtime likely would be made up later
in the month.

Important exceptions were motor vehicle producers, as

noted above, and makers of home appliances, televisions, and
lighting and wiring products who do not intend to make up storminduced output losses.

In addition, and unrelated to the storm,

industry contacts noted the persistence of outsized inventories for
aluminum mill products and coated paper and softer demand for basic
capital goods.
Motor Vehicles
Sales of light vehicles reportedly surged in December to a
15.9 million unit annual rate, from the 14.8 million unit rate
registered in November

The reported increase in total light

vehicle sales last month was overstated by roughly 1/2 million units
because major firms (except Ford) extended their December reporting
periods by one or two days into January; reported January sales will
be held down as a result.

Even after adjustment of December sales

for variations in reporting periods, the estimated pace of sales
last month--closer to 15-1/4 million units--was relatively robust.
Consumer incentives helped push up automobile and truck sales of
General Motors, Chrysler, and Japanese models.
incentives were less generous, fell a bit.

Sales at Ford, whose

Confidential data from

automakers suggest that Ford relied on fleet sales last month to
keep total sales from falling further, while GM experienced gains in
3. The level of production in December retraced only one-fourth
of the cumulative drop during the strike that began last October

II-14

Personal Consumption Expenditures
Total Real PCE
Billions of chained (1992) dollars
4700

Nov.
4600
4500
4400
4300
4200
--..
I-

1992

. . . .-. . .. .

1993

1994

4100

1995

Real PCE for Durable Goods
Billions of chained (1992) dollars
610
Nov.

Afl-

/Iv

580

550

520

490

1992

1993

S1994

1994

460

1995
1995

Real PCE for Nondurable Goods and Services
Billions of chained (1992) dollars
4100
Nov.
4000

3900

3800

3700

1992

199

199
1993

199
1994

1995I IL~
1995

3600

II-15
both retail and fleet sales.

Sales of light vehicles totaled

14.8 million units for all of 1995, compared with 15.0 million units
in 1994.
Producers indicate that underlying demand weakened in January,
mainly for autos rather than light trucks.
to abandon generous incentive packages.

Many firms are reluctant

Ford has recently joined

the others by offering a package of incentives on about 60 percent
of its volume, including the 1996 Taurus; Chrysler is poised to
sweeten its incentive package on autos to match Ford.

The

preliminary report from the January Michigan Survey bear out the
producers' sense that demand has softened.

Households' appraisals

of buying conditions for cars plunged after having held in a
reasonably favorable range throughout most of 1995.

The survey's

respondents cited less-favorable economic conditions among reasons
for their sour views on car buying.

In the December Conference

Board Survey, the percentage of respondents planning to buy a new
car remained unchanged.
Personal Income and Consumption
One notable casualty of the government shutdown is the
availability of timely data on non-auto consumer spending.

Real

personal consumption expenditures increased 0.9 percent in November
after a 0.6 percent decline in October, and estimates of total PCE
growth in August and September were revised downward.

The level of

total real PCE in November was about 1/2 percent above the thirdquarter average.

After two months of decline, spending on durable

goods jumped sharply in November owing to large increases in
spending on both motor vehicles and other durable goods.

Real

spending on nondurables, although up in November, was only
fractionally above its third-quarter level

However, spending on

services moved noticeably above the recent trend because of the

II-16

PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)
Nov. 93
to
Nov. 94

Nov. 94
to
Nov. 95

1995

1995

Q2

Q3

Oct.

Nov.

Total personal income

27.1

27.3

23.2

22.5

45.2

11.5

Wages and salaries
Private

13.8
12.2

14.2
12.7

12.2
11.0

15.3
14.1

30.1
30.0

-3.3
-3.8

Other labor income

1.7

1.9

1.4

1.3

1.5

1.5

Proprietors' income
Farm

2.8
-.3

1.6
-.2

1.6
-. 1

1.9
.1

4.6
1.6

1.1
.6

Rent
Dividend
Interest

1.4
1.2
3.3

.2
1.2
3.7

1.1
.8
2.9

-2.0
1.5
1.4

3.7
2.1
1.0

3.5
2.4
.9

Transfer payments

4.3

5.9

4.2

4.4

4.0

5.3

Less: Personal contributions
for social insurance

1.5

1.4

.9

1.2

1.9

-. 1

3.5

5.2

5.5

4.6

4.4

-1.0

23.6

22.1

17.7

17.9

40.7

12.5

Less: Personal tax and nontax
payments
Equals: Disposable personal income

REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)

1995
1994

Q1

Q2

1995
Q3

----- Annual rate----

Personal consumption
expenditures

Oct.

Nov.

Monthly rate

3.0

.8

3.4

2.9

-.6

.9

Durable goods

7.0

-8.7

7.0

9.5

-1.6

2.5

Nondurable goods

3.6

2.4

1.9

.5

-.9

.7

Services

1.9

2.1

3.4

2.7

-.2

.7

3.8

4.8

4.0

4.1

5.2

4.5

2.6

3.6

.0

3.6

.5

.2

Memo:
Personal saving rate
(percent)
Real disposable income

II-17
effect of somewhat colder than average temperatures on outlays for
electricity and natural gas.
Anecdotal reports and statistical indicators from private
sources available for December indicate that the strength of holiday
spending varied appreciably among types of goods, with electronic
goods moving well but purchases of apparel sluggish.

Reports of

same-store sales at the major retail chains generally pointed to
weak holiday sales, but estimates of total chain store sales
suggested reasonably healthy spending.

However, no measure of chain

store sales has proved a very reliable indicator of the official
census estimates of retail sales in the past.

These indexes are

plagued by a variety of problems, including data collection errors,
inconsistencies in definitions, and seasonal adjustment
difficulties.

In addition, many tend to focus on only certain types

of stores or certain categories of merchandise.
Wages and salaries fell 0.1 percent in November, retracing only
a small part of their enormous October gain and leaving the November
level of real disposable income well above its third-quarter
average.

Among sources of nonlabor income, rental income rose

appreciably in October and November after having declined in the
third quarter

Most other categories of personal income posted

small to moderate gains in October and November

Nominal personal

income likely continued to trend upward in December, with the most
recent employment report indicating further gains in average hourly
earnings that more than offset the decline in aggregate hours,
Altogether, the available evidence on income and spending suggests
that the fourth-quarter saving rate was considerably above its
4.1 percent third-quarter average.

II-18

Consumer Surveys
Consumer Sentiment
Index

1978

1981

1984

1987

1990

1993

1996

p Preliminary.

Unemployment Expectations Indexes
index

1978
p Preliminary.

1981

Index

1984

1987

1990

1993

1996

II-19
The most recent data on consumer sentiment suggest mixed
prospects for spending.

According to the preliminary, partial

sample report, the Michigan SRC index of consumer sentiment declined
1 1 points in early January, with less optimistic appraisals of
future business conditions offsetting more favorable assessments of
current and future personal financial situations and current
appliance-buying conditions.

Although the overall Michigan index is

now a few points below its strong readings of the past summer, it
remains in a range that has historically been accompanied by solid
gains in consumer spending.

However, results not included in the

overall index pointed to somewhat greater pessimism in early
January, with unemployment expectations jumping sharply and
consumers expressing substantially less willingness to use credit
The SRC identified the winter storms as a possible contributor to
the concerns about joblessness--and the recent news of major
corporate restructurings, especially at AT&T
public perceptions.

may have affected

The shift in attitudes toward use of credit

could indicate that increased debt burdens--and perhaps the
publicity given them--may have made respondents more sensitive about
credit use; but this series is particularly erratic and several
times in the past few years has registered dramatic declines
followed by sharp recoveries.
The most recent Conference Board data point to a small
deterioration in confidence in December

Nonetheless, the level of

the Conference Board index remained in the narrow, generally
optimistic range that has prevailed over the past year.
an index based on the separate questions about employment
expectations held at a fairly positive level last month.

Likewise,

II-20

Private Housing Activity
(Millions of units; seasonally adjusted annual rate)
1995

Q2

Annualp

Q3r

Q4P

Oct. r

Nov.

Dec.p

All units
Starts
Permits

n.a.
n.a.

1.28
1.25

1.41
1.38

n.a.
n.a.

1.34
1.38

1.42
1.43

n.a.
n.a.

Single-family units
Starts
Permits
New-home sales
Existing-home sales

n.a.
n.a.
n.a.
3.81

1.01
.93
.67
3.58

1.12
1.04
.72
4.09

n.a.
n.a.
n.a.
4.02

1.10
1.05
.66
4.11

1.10
1.07
.65
4.04

n.a.
n.a.
n.a.
3.91

Multifamily units
Starts
Permits

n.a.
n.a.

.27
.32

.29
.33

n.a.
n.a.

.24
.33

.32
.36

n.a.
n.a.

Note. p Preliminary. r Revised. n.a. Not available.

Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units
--

I

I

1977

I

- -a
1979

II
L

I

I

1981

I

I.

1983

.

I

1

-1

1985

-

__

.
I

1987

*

I
I

1989

I
I

1991

I

1993

I

I
J _

1995

T 2.4

II-21
Housing Markets
Recent data on housing demand and building activity have been
mixed.

Total housing starts rebounded in November to 1.42 million

units at an annual rate, owing to a rise in multifamily
construction.

Single-family housing starts were unchanged in

November, but permits, which are measured more reliably than starts,
bounced back to their relatively strong September level.

Judging

from historical relationships, this volume of permits suggests that
the estimate of single-family starts may understate the actual trend
in construction activity.
On the other hand, sales of new and existing homes slipped a
bit at the end of last year after having surged in the summer.

New

home sales fell in November, and existing home sales fell a
noticeable 3 percent in December.

However, because most of the

latter transactions are recorded at closing, they do not really
represent a more current indicator of demand than new home sales,
which are counted primarily at the time the contract is signed.
The basic determinants of housing demand appear to favor
continued strength in home construction.

Rates on fixed-rate

mortgages in the first three weeks of January averaged more than
200 basis points lower than in the same period a year earlier, and
our estimate of the debt-service burden of home ownership in the
current quarter is just above the 1993 low.

Moreover, the most

recent indicators suggest that, on balance, demand for single-family
homes may have strengthened a bit again in the past two months.

In

particular, builders' ratings of new home sales turned more positive
in December and January, and applications for home purchase
financing have been on the rise (apart from storm effects).

The

4. According to analysts at the Census Bureau, the processing of
data on starts and permits was completed before the shutdown, making
these estimates fully consistent with earlier observations in the

series.

II-22
1-25-96

Indicators of Housing Demand
(Seasonally adjusted; FRB seasonals except sales)
New and Existing Home Sales
Millions of units, annual rate

Consumer Homebuying Attitudes
Diffusion index

Existing home sales (right scale)

1993

1994

1995

MBA Index of Mortgage Loan Applications
Index, March 16, 1990 = 100

1993

1994

1995

1993

1994

1995

Builders' Rating of New Home Sales
Diffusion index

1993

1994

1995

II-23

1-22-96

Cash-Flow Burden of Homeownership
Fixed Rate Mortgages
Percent

1975

1978

1981

1984

1987

1990

1993

1996

Note. Cash-flow burden is defined as the financing cost of a constant quality new home as a percentage
of average household disposable income. Data for 1996:Q1 is a projection.

Multifamily Rental Vacancy Rate
(Seasonally adjusted)
Percent

\_

II

1975
1975

LI

I

II

fr

ffIll

1980
1980

ffI

11

1985

1985

WIll.

I

1990

1990

I

I

Q3

I1995
1995

II-24

Fundamental Determinants of Equipment Spending
User Cost of Capital
Percent

1960

1965

1970

1975

1980

1985

1990

1995

Real Domestic Corporate Cash Flow
Percent

1960

1965

1970

Acceleration of Business Output
Percent

1975

1980

1985

1990

1995

Percentage points

1990
1995
1985
1975
1980
1970
1960
1965
Note. The accelerator is the eight-quarter percent change in business output less the year-earlier eight-quarter percent change.

II-25
exception is the decline in consumer assessments of homebuying
conditions in January, as measured by the preliminary Michigan
Survey--extending a downtrend that began in midsummer; less
favorable views of business conditions have played a role in this
slippage.
Multifamily housing starts rose sharply in November

However,

a continuation of starts at the November level seems far from
assured.

Although the rental vacancy rate has edged down a bit

during the past several years, progress in working down the excess
stock of apartments has been extremely slow, and real rents for
apartments have been stagnant for the past three years.
Business Fixed Investment
As is the case for other economic indicators, the publication
of data relating to business fixed investment is behind schedule.
On net, both the limited data received since the December Greenbook
and anecdotal reports suggest that demand for capital goodsespecially equipment--may have slackened somewhat recently.
In particular, growth of business investment in computers is
expected to slow from the very rapid pace earlier in the expansion,
but still to remain at double-digit rates.

Our contacts in the

computer industry were generally disappointed by sales in November
and December, but we believe that some of the earnings squeeze they
experienced may reflect lower margins rather than reduced output
The Semiconductor Industry Association's book-to-bill ratio--which
provides some leading information on computer shipments--also
dropped sharply in November and December, but it remains in a range
that historically has coincided with positive growth in nominal
computer shipments.

Given the rapid technical change in this

sector--and accompanying steep price declines--modest growth in

II-26
BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1995

1995
Q4

Oct.

Nov.

Dec.

.7
1.3
2.4
1.0

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

-1.5
-1.0
-.3
-1.2

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

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

-5.0

-7.3

n.a.

-41.2

77.6

n.a.

-3.6

-9.5

5.4

2.0

5.4

-4.8

-.3
.3
3.3
-.5

2.1
-.3
-.7
-.1

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

-7.4
-3.6
3.1
-5.5

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

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

Construction put-in-place
Office
Other commercial
Institutional
Industrial
Public utilities
Lodging and miscellaneous

2.4
3.9
-2.3
.3
5.6
15.0
1.5

2.6
6.0
2.0
.9
-1.6
3.6
11.9

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

2.8
3.5
4.7
.6
5.2
-2.8
14.1

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

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

Rotary drilling rigs in use

1.3

.8

-7.5

-5.3

-2.8

-.8

3.6
3.7
3.4

5.3
5.2
5.4

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

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

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

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

Q2

Q3

3.3
3.8
6.8
2.9

Shipments of complete aircraft 1
Sales of heavy trucks

Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories
Nonresidential structures

Memo:
Business fixed investment 2
Producers' durable equipment 2
Nonresidential structures 2

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Based on 1992 chain-weighted data; percent change, annual rate.
n.a. Not available.

II-27

Orders and Shipments of Nondefense Capital Goods
Office and Computing Equipment

Billions of dollars

Orders

Shipments

1987

1988

1989

1990

1991

1992

1993

1994

Other Equipment (Ex. Aircraft and Computing Equipment)

1987

1988

1989

1990

1991

1992

1995

Billions of dollars

1993

1994

1995

II-28

Nonresidential Construction, Permits, and Contracts
(Six-month moving average)
Total Building
Ratio scale, index
210

S--a

Construction
(through Oct.)
Permit
through Oct.)

t

1982

'

,
t

1983

1984

1985

1986

1987

1988

Office

1983
Industrial

1989

1990

1991

1992

1993

1994

1995

Other Commercial

1985

1987

1989

1991

1993

1995

1983

1985

1987

1989

1991

1993

1995

Institutional

1983 1985 1987 1989 1991 1993 1995
1983 1985 1987 1989 1991 1993 1995
Note. The underlying monthly data were indexed to Dec. 1982 = 100; a six-month moving average was applied to the indexed data.

II-29
nominal shipments would be consistent with healthy growth in real
outlays.

Business purchases of transportation equipment held up well in
the fourth quarter

The confidential information on light-vehicle

fleet sales for GM and Ford showed an increase of
percent.

roughly 5

Although new orders for heavy trucks plunged, sales in the

fourth quarter were about 5 percent above their third-quarter
average, as producers continued to work on a large backlog of
orders.
Looking ahead, Boeing's bookings surged dramatically in
December, with orders for 52 of their new 777s and for 21 747s;
orders rose further in January.

These bookings, which were placed

largely by foreign buyers but include some domestic orders, will
begin to affect deliveries in 1997
Data on contracts received since the December Greenbook suggest
that growth in construction expenditures is dropping back a bit from
the rapid pace in most of 1995.

Contracts increased significantly

in November, boosted by healthy advances in the office and
industrial sectors, and this rise roughly offset the October
decline.
Business Inventories
The only incoming statistics on business inventories, outside
of those held by motor vehicle dealers, since the December Greenbook
are the book-value figures for wholesale trade inventories in
November.

They show that stocks held by wholesalers were drawn down

at an $11.9 billion annual rate after having risen at a $24.9
billion rate in October; stocks expanded at a $17 billion rate
during the third quarter

The bulk of the November decline was in

nondurables, particularly groceries, farm products, and the
miscellaneous category.

Among durables, distributors of machinery

II-30

BUSINESS INVENTORIES
(Change at annual rates in seasonally
adjusted current cost; billions of dollars)
1995
Q1

1995

Q2

Q3

Aug.

Sept.

Oct.

Nov.

104.8

69.7

53.3

45.2

57.9

76.3

n.a.

Excluding wholesale and
retail motor vehicles

75.2

61.7

59.0

46.3

62.0

63.4

n.a.

Manufacturing
Trade, total
Wholesale
Ex. motor vehicles
Retail
Ex. auto dealers

41.1
63.7
35.0
28.9
28.7
5.3

31.7
37.9
25.4
19.1
12.5
10.8

24.7
28.6
17.0
19.9
11.6
14.4

8.7
36.5
-.5
1.8
37.0
35.8

36.4
21.5
12.6
17.7
9.0
7.9

19.7
56.6
24.9
29.3
31.8
14.5

n.a.
n.a.
-11.9
-9.9
n.a.
n.a.

Manufacturing and trade

Totals may not add because of rounding.

Inventory-Sales Ratios
Manufacturing
Ratio

Od.

II

Excluding AutosTrd

I

1987

1985

I

I

I

I

I

1

I

1995

1993

1991

1989

I

Trade Excluding Autos

Ratio
S-RelRetail

Oct.

S-'-Nov.

C,*
be'Clf

*/I

'Xel

~~%I

-a

r'

Wholesale
I
1985

I

I

1987

I

I

I

I

I
1989

1
1991

I

I

I

1993

I

I

1995

1.6
1.5

II-31
also reported a sizable liquidation, but that was more than offset
by a sizable accumulation of stocks at distributors of electrical
goods, which include household appliances.
Federal Sector
The federal unified budget deficit in November was $38
billion. 5

This figure brought the total deficit for the first

two months of fiscal year 1996 to $61 billion, a drop of about
$7 billion from the comparable period in fiscal year 1995.

Outlays

increased about $2 billion, while receipts grew about $9 billion, or
about 5 percent.
Outlays for the fiscal year through November were up only
slightly from the comparable period of fiscal 1995.

Outlays for

Medicare and health continued to rise at about their recent trends.
However, defense outlays continued to decline, and nondefense
outlays other than for major entitlement programs and net interest
fell sharply.

These "other" outlays were restrained in part by the

lack of appropriations and the stringent funding levels in the
continuing resolutions.

In addition, agricultural spending was held

down by a drop in crop subsidies this year.
BEA estimates that real federal consumption and investment
expenditures

(the category that replaces "purchases" in the NIPAs)

declined at an annual rate of 5-1/2 percent in the third quarter of
1995, compared with an increase of about 5 percent for purchases in
the advance release.

This marked change is largely attributable to

data received over the past several months and the switch to the
chain-type measures of price changes; the redefinition of government
accounts appears to have had a negligible effect.

BEA's

5. The December Monthly Treasury Statement, originally scheduled
for release on January 23, will be published on January 30.
6. The definitional changes in the comprehensive revision are
discussed in the appendix. They also imply revisions to the
estimated budget deficits for both the federal and the state and
local sectors.

II-32
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, except where otherwise noted)

Fiscal year to date
November
Dollar
change

Percent
change

1995

1996

Outlays
Deposit insurance (DI)

124.9
-1.3

128.5
-.8

245.3
-2.0

246.8
-2.0

1.5
.0

.6
2.1

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

126.2
22.4
18.2
26.6
22.2
16.2
20.6

129.3
21.2
19.1
27.9
24.2
18.1
18.7

247.3
41.2
36.9
53.3
41.9
31.4
42.4

248.8
39.6
39.6
56.0
46.6
32.7
34.4

1.6
-1.7
2.7
2.6
4.6
1.2
-8.0

.6
-4.0
7.3
4.9
11.0
3.9
-18.8

FY1995

FY1996

Receipts
Personal income and social
insurance taxes
Withheld
Nonwithheld
Other
Corporate income taxes
Other

87.7

90.0

176.7

185.6

8.9

5.0

71.4
1.9
1.5
1.5
11.4

74.5
2.1
1.1
1.7
10.6

142.3
6.2
2.1
5.0
21.0

151.7
7.9
2.1
3.9
20.1

9.4
1.6
-. 1
-1.1
-.9

6.6
26.3
-4.1
-22.0
-4.5

Deficit(+)
Excluding DI

37.2
38.5

38.5
39.3

68.6
70.6

61.2
63.2

-7.4
-7.3

-10.8
-10.4

Note. Components may not sum to totals because of rounding.

II-33
revision also contained sizable changes to data for other recent
quarters; nonetheless, on balance, they still show a substantial
decline in real defense spending over the past few years and little
net change in other real consumption and investment expenditures.
The two shutdowns of the government and the January blizzard
are likely to have noticeable effects on real government consumption
and investment expenditures in the NIPA in the fourth and first
quarters.

The effect comes primarily in real compensation, which

BEA derives mainly from estimates of hours worked.
quarter

For the fourth

we estimate that the mid-November furlough and the first

two weeks of the second furlough lowered the level of real
compensation (and thus expenditures) nearly $5-1/2 billion at an
annual rate.

For the first quarter

the level of real expenditures

was lowered about $1 billion during the last week of the second
furlough and about $2 billion because of the "Blizzard of

'96."

In

contrast, these developments have little effect on nominal
compensation in the NIPAs:

According to BEA's convention, wages are

measured on an accrual basis and the drop in real compensation is
offset by a corresponding rise in the government deflator.

For the

unified budget, which measures wages on a disbursement basis, the
second shutdown shifted some payments from December to January but
is expected to have little effect on fiscal year totals.
The Administration and congressional leaders have acknowledged
that prospects for major deficit reduction are slim, but they are
now considering enactment of a package of reductions on which they
previously agreed and a modest tax cut.

On January 25, the House

passed a fourth continuing resolution that would fund federal
agencies lacking appropriations through March 15

Detailed cost

estimates for the bill are not yet available, but the implied level
of outlays appears to be broadly similar to that in the previous

II-34

continuing resolution.

The Senate will consider the measure on

January 26, and the President is expected to sign it.
State and Local Governments
State and local government employment rose substantially in
December, but this followed two months of essentially no change, and
the average monthly increase for the fourth quarter was only about
10,000.

Over 1995 as a whole, employment growth averaged just

14,000 per month, the smallest rise since 1991.
The fiscal position of most states is quite good, and many
would like to cut taxes a bit this year.

However, they are being

cautious in light of the uncertainty about federal welfare and
Medicaid reform, the size and structure of other grants programs,
and changes in federal tax laws.

Notably, most states appear to be

basing decisions on programs that depend heavily on federal funding
(such as highways, waste treatment, community development, and
educational programs) on the lowest likely level of federal aid.
Moreover, although most states are in good fiscal shape, some
are not.

In a survey by the National Conference of State

Legislatures of the fiscal situation as of mid-fiscal year 1996, ten
states reported revenues coming in below projections, compared with
just two states last year.

Several states indicated that the

weakness was due to lower-than-expected sales and excise taxes,
while a few blamed smaller personal income tax collections.
states reporting problems are generally less populous:

The

Idaho,

Hawaii, Maine, Maryland, Nebraska, New Mexico, Rhode Island, South
Dakota, Vermont, and Wyoming.
Prices
No data on consumer or producer prices have been released since
the December Greenbook.

Commodity market developments have been

mixed and do not indicate that strong inflationary pressures are

II-35

present in the economy.

Weather-related tightness in oil and gas

markets could lead to some near-term volatility in energy prices,
but the potential increases do not appear significant enough to push
overall inflation in the next several months to alarming levels.
Turning to prices for industrial commodities, the Journal of
Commerce commodity price index has edged down since the last
Greenbook, owing in part to a fall in the metals component, which is
about 2-1/2 percent lower than in mid-December.

The CRB spot index,

which gives substantial weight to foodstuffs, dropped somewhat over
the same period.

Prices for aluminum have fallen 6 percent in the

weeks since the December Greenbook, and copper prices have plunged
roughly 15 percent.

Large shipments of copper into London Metal

Exchange warehouses appear to have eased traders' fears of a shortterm supply squeeze.
declines.

Prices for lead and tin have posted modest

The one exception to the general weakness in metals

prices is the price of steel scrap, which has risen about 8 percent
since mid-December; the price of steel scrap is slightly above the
average that prevailed in 1995.
Energy markets have been dominated by the below-normal
temperatures in recent weeks.

Weather-induced price increases for

natural gas were magnified by the relatively low levels of working
gas storage and by pipeline constraints; in some parts of the
country, spot wellhead prices in early January were nearly double
the levels observed in the fall.

Sharp increases in natural gas

prices spilled over to the petroleum market as some utility power
plants with dual-fuel capabilities switched to the less expensive
residual fuel oil for boiler fuel, boosting petroleum demand.
Prices for home heating oil also rose to new highs in early January.
Stronger-than-expected demand for motor fuels has bolstered gasoline
prices as well.

II-36
COMMODITY PRICE INDEXES

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

1993

Last
observation

PPI for crude materials 3

Percent change 1 -

Dec. 94
to
Dec. 122

Dec. 122
to
date

Memo:
Year
earlier
to date

1994

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

Nov.

0.1

-0.5

n.a.

n.a.

4.5

Nov.
Nov.
Nov.

7.2
-12.3
10.7

-9.4
-0.1
17.3

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

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

13.4
-1.4
-1.5

Nov.

10.5

17.6

n.a.

n.a.

-1.5

Commodity Research Bureau
Futures prices
Industrial spot prices

Jan. 23
Jan. 16

11.6
-0.0

4.8
29.1

3.3
-2.3

-0.8
-1.6

2.7
-4.9

Journal of Commerce industrials
Metals

Jan. 23
Jan. 23

-2.9
-1.8

22.1
31.9

-0.6
-0.9

-1.9
-2.4

-4.8
-8.2

Dow-Jones spot

Jan. 23

5.1

14.8

-0.3

-1.2

-2.8

2.4
-14.4
0.2

15.2
39.1
14.8

19.3
-8.1
3.7

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

19.3
-8.1
3.7

9.1
4.4

31.0
38.6

-6.2
-5.1

-3.7
-5.5

-11.3
-14.6

Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,
seasonally adjusted

3

IMF commodity index
Metals
Nonfood agricultural

Dec.
Dec.
Dec.

Economist (U.S. dollar index)
Industrials

Jan. 16
Jan. 16

Note.

Not seasonally adjusted.

Copyright for Journal of Commerce data is held by

CIBCR, 1994.

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

Index Weights
Energy

O

Precious Metals

Others'

C

Food Commodities

U

E2

PPI for crude materials
41

41

1

18

CRB futures
14

14

57

14

CRB industrials
Journal of Commerce index
88

12

Dow-Jones
58

17

25

IMF index
55

45

Economist
50
1. Forest products, industrial metals, and other industrial materials.

50

II-37

Commodity Price Measures
Total

Journal of Commerce Index
Ratio scale, index, 1990=100

1 19

116

125
115

110

105

95

L'
Nov.
1995

i

r

Dec.

'
ri
104
Jan.
1996

85
-

Metals
"^

109
-

65

55

Nov.
1995

106

-

Dec.

100

Jan.
1996

94

CRB Spot Industrials

-

351
345

-327

-309

196

1996

CRB Futures
Ratio scale, index, 1967=100

CRB Futures

251

.L

258

-

Dec.

-

239

Jan.

227

1996

S-

1983

1984 1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

199(

190

Note. Weekly data. Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the CRB spot price index consists entirely of industrial
commodities, excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.

II-38
SPOT PRICES OF SELECTED COMMODITIES
--------------- Percent change 1 - - - - - Current
price
($)

1993

------------Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)
Lead (lb.)
Zinc (lb.)
Tin (lb.)

1.190
144.500
.702
.454
.515
4.186

1994

To
Dec. 122

Dec. 122
to
Jan. 23

INDUSTRIAL COMMODITIES----------

-19.0
46.8
-10.7
3.0
-7.5
-14.1

64.9
2.9
73.5
20.7
23.6
21.4

-. 7
-6.6
-14.1
9.5
-11.7
7.6

-15.0
7.8
-6.0
-. 5
1.0
-2.0

-3.0
19.9

-2.2
4.3

-19.7
10.8

1.7
-9.8

Textiles and fibers
Cotton (lb.)
Burlap (yd.)

.816
.365

19.6
8.2

38.5
10.2

Miscellaneous materials
Sides (lb.)
Rubber (lb.)

.738
.785

1.3
-7.3

14.2
75.4

-- -- - - - --

Memo:
Year
earlier
to date

-------20.1
-1.7
-28.0
5.9
-19.2
-2.6
-8.3
25.0
-17.7
-12.3

---------------- OTHER COMMODITIES----------------I-----Precious metals
Gold (oz.)
Silver (oz.)
Platinum (oz.)

5.9
14.9

403.650
5.545
423.000

16.6
38.8
8.0

-1.7
-5.0
7.5

254.000
297.000

75.8
-6.3

-37.1
1.5

Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

17.360
.488
.532

-25.0
-31.0
-22.4

15.6
32.4
12.7

11.7
8.2
16.0

-8.1
-6.8

-3.6
-3.6
11.7

Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)

64.000

42.000
.582

-7.3
.6
6.1

-3.4
-12.9
-4.9

-4.3
28.2
8.9

-4.5
-7.7
8.9

-14.7
5.0
20.8
58.4
35.4

Forest products
Lumber (m. bdft.)

Plywood (m. sqft.)

1.3

-14.7
-7.0

2.0
-3.3
-. 4

U.S. farm crops
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)

5.365
7.230

41.7
5.8
24.5

-23.2
11.4
-19.6

51.0
25.9
26.3

5.9
-2.2
2.6

Other foodstuffs
Coffee (lb.)

1.130

-2.3

153.1

-35.4

7.1

Memo:
Exchange value of the
dollar (March 1973=100)
Yield on Treasury bill,
3-month 3

3.525

87.039
4.970

-5.5

247

-9.9
-8.9

32.7
-28.5

-5.0
-28

1. Changes, if not specified, are to the last week of the year indicated and from
the last week of the preceding year.
2. Week of the December Greenbook.
3. Changes are in basis points.

II-39
Prices for crude oil continued to move up in the weeks
following the December Greenbook, and the spot price for WTI crude
broke the $20 per barrel barrier during the recent snowstorms for
the first time since early May.

Although the recent oil price

increases were largely weather related, several other factors- the
current low levels of inventories, the illness of Saudi King Fahd,
and the possibility of a U.S. sanction against Nigerian oil
exports--may have intensified price pressures.

In recent weeks, oil

prices have dropped somewhat, in part owing to concern that Iraqi
oil might begin flowing into the market soon.

The WTI spot price

has retreated to the $18.00 to $19.00 range, a price we believe is
more in line with market fundamentals.
In agriculture, prices of wheat have been running at twentyyear highs; corn and soybean prices are at the highest level in
several years.

U.S. production of major agricultural crops--corn,

wheat, and soybeans--dropped sharply in 1995;

corn production was

down about 25 percent, soybean production dropped 15 percent, and
wheat production fell about 6 percent
only part of the story:

But weak U.S. production is

World production fell last year

while

world demand rose, bolstered by rising incomes in the developing
world,

Prospective stocks-to-use ratios at the end of the 1995 crop

marketing year--about the time of the 1996 harvest--are at twentyyear lows, indicating that supplies going into the 1996 crop
marketing year will be tight.

The markets are likely to respond

fairly strongly to any news about crop output, as they did in recent
weeks when the South American soybean crop seemed to be headed for
trouble and when the U.S. livestock herd was reported to be bigger
than traders had thought. 7

7 Livestock feed is a major source of demand for corn and
soybeans, and a somewhat less important source of demand for wheat

II-40

RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data) 1

Relative
importance,
Dec. 1994

1995
1993

1994

Q1

Q2

1995
Q3

----- Annual rate-----2

100.0
15.8
7.0

All items
Food
Energy
All items less food
and energy
Commodities
Services
Memo:
CPI-W

2.7
2.9
-1.4

2.7
2.9
2.2

3.2
.0
-1.1

3.2

-Monthly rate-

3.6
-11.5

77.2
24.1
53.1

3.2
1.6
3.9

2.6
1.4
3.2

4.1
2.6
4.8

3.0
.6

2.8
2.3

4.3

3.0

100.0

3

Nov.

1.8

3.6
5.4

Oct.

2.5

2.7

3.6

2.7

1.6

.3

.0

1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.

3. Index for urban wage earners and clerical

RECENT CHANGES IN PRODUCER PRICES
(Percent change; based on seasonally adjusted data) 1

Relative
importance,
Dec. 1994

1995

1995
1993

1994

Q1

Q2

Q3

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

Oct.

Nov.

-Monthly rate-

100.0
22.8
13.6
63.7
40.2
23.5

.2
2.4
-4.1
.4
-.4
1.8

1.7
1.1
3.5
1.6
1.4
2.0

3.2
-1.2
11.3
2.9
2.9
3.0

.6
-4.6
1.5
2.6
3.2
1.8

1.3
8.8
-14.3
2.3
2.3
2.1

-.1
.0
-. 9
.0
.1
-. 1

.5
1.2
-.5
.4
.4
.4

Intermediate materials
Excluding food and energy

95.6
82.9

.8
1.6

4.8
5.2

10.6
10.5

3.9
4.2

-.6
1.8

-.4
-.3

-.1
-.2

Crude food materials
Crude energy
Other crude materials

40.4
34.5
25.1

7.2
-12.3
10.7

-9.4
-.1
17.3

-4.6
-4.5
21.9

-. 8
14.6
4.6

42.3
-22.0
-18.2

2.1
-.4
-2.6

3.6
2.1
-2.1

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment
2

1. Changes are from final month of preceding period to final month of period indicated.
2. Excludes materials for food manufacturing and animal feeds.

II-41
Looking forward, futures contracts for corn and soybeans with
maturities in late 1996 have moved up somewhat since the December
Greenbook.

At the same time, futures contracts for livestock have

fallen a little, with futures prices for hogs down sharply in 1996
relative to 1995.

However, this favorable development in near-term

prices, if it holds up, will likely lead to higher prices for meats
in 1997 because farmers are likely to respond to lower prices by
liquidating part of the breeding herd.

II-42
INFLATION RATES EXCLUDING FOOD AND ENERGY
(Percentage change from twelve months earlier)
Nov.
1993

Nov.
1994

Nov.
1995

3.1

2.8

3.0

1.6

1.5

1.7

1.2
3.2
1.1
1.2
1.3
3.3
1.6
-4.7
8.3

1.3
3.4
-1.8
0.4
0.5
3.1
2.2
3.2
6.7

2.2
2.0
-0.4
0.2
5.4
1.8
2.4
3.4
5.1

3.7

3.5

3.6

3.0
2.0
3.1
14.5
5.9
3.7
-5.7
7.3

3.6
2.6
2.9
-5.6
5.2
3.0
17.5
5.9

3.4
2.4
4.4
7.7
4.6
3.4
6.6
5.6

0.3

1.6

2.7

-0.5

1.5

2.8

Capital goods, excluding
computers
Computers

2.3
-12.6

1.9
-7.0

2.6
-12.3

PPI intermediate materials

1.6

4.8

4.1

11.6

15.7

-1.5

ECI hourly compensation 2
Goods-producing
Service-producing

3.7
4.0
3.6

3.3
3.3
3.2

2.6
2.1
2.9

5
Civilian unemployment rate 3 ,4 ,

6.4

5.4

5.6

81.7

84.7

81.8

3.5
4.2

3.7
4.2

4.1
5.0

0.3

3.2

3.5

0.6
1.6

0.7
3.5

1.7
3.3

CPI

Goods
1

Alcoholic beverages (2.0)
New vehicles (6.6)
Apparel (6.6)
House furnishings (4.5)
Housekeeping supplies (1.4)
Medical commodities (1.7)
Entertainment (2.5)
Tobacco (2.1)
Used cars (1.7)
Services
Owners' equivalent rent (26.3)
Tenants' rent (7.5)
Other renters' costs (2.8)
Airline fares (1.3)
Medical care (7.7)
Entertainment (3.1)
Auto financing (0.8)
Tuition (3.4)
PPI finished goods
Consumer goods

PPI crude materials
Factors affecting price inflation

3

4

Capacity utilization ,
(manufacturing)

6 7
Inflation expectations ,
Michigan Survey
Conference Board

Non-oil import price 8
Consumer goods, excluding autos,
food, and beverages
Autos

1. Relative importance weight in CPI excluding food and energy.
2. Private industry workers, periods ended in September.
3. End-of-period value.
4. Latest reported value: December.
5. Data after 1993 are not directly comparable with earlier values
because of a redesign of the CPS in January 1994.
6. One-year-ahead expectations.
7. Latest reported value: January for the Michigan Survey;
December for the Conference Board Survey.
8. BLS import price index (not seasonally adjusted), periods ended
in September.

APPENDIX A

COMPREHENSIVE REVISIONS TO THE NIPA
Overview
On January 19, BEA released a comprehensive revision to the
national income and product accounts. The revision, which covers
data back to 1959, involved:
(1) the replacement of constant-dollar
figures with chain-type indexes as the featured measures of real GDP
and its components; (2) the separation of government purchases into
consumption expenditures and investment and a new definition of
government consumption; (3) improved statistical methods for
estimating depreciation, motor vehicle expenditures, and
contributions to private pensions; and (4) the incorporation of more
reliable and comprehensive source data.
The new source data include items generally incorporated only
with comprehensive revisions, most notably the 1987 input-output
tables, the 1991 Residential Finance Survey, and the 1992 economic
censuses. The data for more recent years also were affected by
items that generally are incorporated in the NIPA at the time of the
regular annual revisions, such as IRS tabulations of business tax
returns for 1992 and 1993. Census annual surveys of businesses and
government for 1992, 1993, and 1994, and BLS tabulations of wages
and salaries for 1994.
Revisions to Real GDP Growth
Over the 1960-94 period, growth of real GDP is now estimated to
have averaged 3.2 percent per year, 0.2 percentage point higher than
previously estimated. Revisions to current-dollar GDP had little
net effect on average growth rates (see table).
The move from a
fixed-weight to a chain-type formula for real GDP raised average
growth 0.2 percentage point over 1960-94; average growth was boosted
0.3 percentage point before 1988 and was lowered 0.2 percentage
By sector, the move to the chain index
point during 1988-94.
had the largest effects on growth in business fixed investment,
exports, and imports, a reflection of the large share of spending on
computers and related items in those sectors.
The cyclical timing of contractions and expansions in real GDP
However, the 1990-91
were little changed by the revision.
recession now shows a 2 percent peak-to-trough decline in real
output as opposed to the 1-1/2 percent drop previously estimated
using 1987 dollars. And average growth between the first quarter of
1991 and the third quarter of 1995 is now estimated at 2.5 percent,
0.6 percentage point less than in the previously published 1987dollar estimates.
With regard to these most recent years, real GDP growth was
unchanged at 3.7 percent in 1992 but was revised down nearly
1. These effects are calculated as the difference between the
growth rates in constant 1987-dollar GDP and the previously
published chain-weighted GDP index.
(1) The trough in real
2. Two minor changes are the following:
GDP during the 1969-70 recession now occurs in the first quarter of
1970 instead of the second quarter of 1970, and (2) the trough in
real GDP during the 1980 recession occurs in the third quarter
instead of the second quarter.
II-A-1

II-A-2
1 percentage point, to 2.2 percent, in 1993 and down 0.6 percentage
point, to 3.5 percent, in 1994. Over the first three quarters of
1995, real GDP growth was revised down 1.3 percentage points, to a
1.4 percent annual rate. The move to chain weighting accounted for
0.8 percentage point of the downward revision to growth in 1993,
0.4 percentage point of the revision in 1994, and 0.9 percentage
point of the lower growth estimate during the first three quarters
of 1995.
Revisions to current-dollar GDP
Annual levels of current-dollar GDP were revised up between
2-1/4 percent and 3-3/4 percent over the revision period. Between
1990 and 1994. the upward revisions averaged about $200 billion.
Definitional and classification changes--as opposed to new source
data--accounted for about 60 percent of these recent revisions and
for an even greater proportion of the changes further back in
history.
Among the components of current-dollar GDP, the largest
revisions occurred in the government sector and for the most part
reflect the definitional change of government consumption to include
the flow of services provided by government-owned structures and
These flows are set equal to the
equipment (including military).
estimates of the depreciation of government-owned assets; this
depreciation is now also included in the consumption of fixed
capital for the economy.
Accordingly, while the redefinition in
the government accounts results in higher gross domestic product,
the offset in consumption of capital implies that the new system has
no effect on net domestic product.
Personal consumption expenditures also were revised up. Much
of the revision begins to take place in the early 1980s and in large
part reflects the wedging in of new estimates of owner-occupied
housing services based on information from the 1991 Residential
Finance Survey. Spending on nondurables was revised up beginning in
the late 1960s, primarily because of higher spending on restaurant
meals. Outlays for durable goods were revised down starting in
1991, in part because of more accurate measures of average prices
paid for new cars. These revisions to motor vehicle purchases also
reduced outlays for producers' durable equipment, as did new
estimates of spending on communications equipment.
On balance, the revisions to exports and imports were
relatively small. Estimates of current-dollar inventory stocks
generally were revised down somewhat, which, along with the higher
figures for final sales, resulted in a lower level of the inventoryto-sales ratio. The current-dollar inventory-to-sales ratio moves
in the same general pattern as it did before the revision. However,
the revised ratio of real inventories to real final sales shows less
3. Measuring the service flows from government-owned assets with
the assets' depreciation implicitly assumes that the net rate of
return on these items is zero. BEA recognizes this conceptual
problem. However, they felt their estimates were the best they
could construct for now, especially given the lack of consensus on
the best way to measure the rate of return on government-owned
capital. And, overall, BEA believes that the improvements to the
NIPA from the changes in government accounting more than outweigh
the potential mismeasurement problems arising from the zero net
return assumption.

II-A-3
of a downtrend in the early 1990s and a more noticeable upward
movement in 1994-95 than did the previously published data (chart)
Revisions to the Income Side of the Accounts
A major revision to the income side of the accounts occurred in
the calculation of depreciation of equipment and structures.
In

computing equipment and motor vehicles, BEA is now using prices of
used equipment to estimate depreciation. Elsewhere, BEA replaced
their previous straight-line-type depreciation methodology with
geometric--or constant percentage--depreciation.
For long-lived
assets, such as housing, the new method tends to lower average
depreciation. For short-lived assets, such as many types of
business equipment, average depreciation is increased.
Because rental income is net of the depreciation of the housing
stock, the new depreciation measures (and the higher estimates for
space rent) boosted rental income significantly. Personal income
also was raised in the 1980s and 1990s by higher estimates of other
labor income, reflecting new estimates of employer contributions to
health insurance and pension plans.
BEA also recognized that
their prior estimates had not adequately captured voluntary pre-tax
contributions by employees to thrift savings plans. Revised
estimates of these contributions boosted wage and salary income
beginning in 1979, with the increases tapering off in recent years.
In 1994, however, wages and salaries were revised down significantly
on net, as a result of revised compilations from unemployment
insurance data. With the exception of 1988-90. personal income also

was reduced by lower estimates of nonfarm proprietors' income.
All told, the new estimates of income and outlays resulted in
upward revisions to the personal saving rate of roughly
3/4 percentage point between 1987 and 1991 and 0.4 percentage point
in 1992 and 1993, but they lowered the saving rate by 0.3 percentage
On balance, the saving rate was not revised
point in 1994 (chart)
much over the first three quarters of 1995. In contrast, the
increases in depreciation and other revisions lowered economic
profits over the bulk of the revision period (chart)
The changes in government sector accounting also affected the
NIPA definitions of the federal government's and the state and local
governments' surpluses and deficits. These concepts now explicitly
are defined on a current-account basis and are measured by the
difference between receipts and government consumption expenditures,
transfers, net interest, and other current expenditures. Relative
to the previously published deficit calculations, expenditures no
4. Studies of used equipment prices generally find that the
dollar value lost in the first year of operation exceeds the loss
during the second year, the loss in the second year of operation
exceeds that in the third year, and so on. The patterns of these
dollar losses generally are well described by a geometric--or
constant percentage--loss in value.
5. The higher estimates of health insurance contributions come
from revised estimates from the Health Financing Administration.
The new estimates of employer contributions to pension plans largely
result from BEA changing their source of pension contributions from
corporate tax returns to IRS Form 5500.
6. The revisions reflect the changes in depreciation,
incorporation of new tax return data, and updated estimates of tax
compliance.

II-A-4
longer include gross investment, but now include the depreciation of
government-owned capital. The changes were especially large for the
state and local sector, where gross investment generally exceeds
depreciation by a wide margin. After accounting for these and other
revisions, the state and local sector is now estimated to be showing
surpluses (excluding social insurance funds) equal to about
1/2 percent of GDP in recent years; earlier estimates had shown
deficits equal to about 1/2 percent of GDP (chart).
Revisions to Productivity
BLS will be releasing revised productivity figures based on
BEA's new estimates of output. The Board staff estimates that the
revised data will show that the growth of output per hour in the
nonfarm business sector (excluding housing) averaged 1.8 percent
per year during the 1960-94 period, 0.2 percentage point higher than
previously reported in the 1987-dollar-based series.
We estimate
that labor productivity growth over 1988-94 will be 0.9 percent at
an annual rate. 0.3 percentage point below the earlier
On balance, the lower growth reflects the switch
estimates.
from measuring nonfarm business output from the income side of the
accounts using constant 1987 dollars to measuring output from the
spending side of the accounts using chain-weighted data.

7. These figures are calculated using the currently published
data for hours worked in the nonfarm business sector. The hours
worked data are scheduled to be revised in June.

II-A-5

Revisions to Real GDP Growth
(Percentage points, annual rate)

Previously published
1960-94

Revised

1987-dollar Chain-type
3.0
3.2

3.2

Revision from
previously published
1987-dollar Chain-type
2
.0

1960-87

3.1

3.4

3.4

3

.0

1988-94

2.3

2.1

2.2

1

1

1990

.2

3

2

.4

.5

1991

3

1

.4

1

.3

1992

3.7

3.4

3.7

.0

3

1993

3.1

2.3

2.2

.9

1

1994

4.1

3.7

3.5

.6

2

19951
1

2.7
1.8
1.4
-1.3
Growth between 1994:Q4 and 1995:Q3, annual rate.

-.4

Sources of Revisions to Real GDP Growth
(Percentage points, annual rate)
Revision from

Current-dollar

1960-94

1987-dollar
2

revision
.0

1960-87

3

.0

Change in
featured index
.2
.3

Other
.0
.0

1988-94

2

1990

1

1991

.0

1992

.4

1993

.2

1994

3

-.9
-. 1
-1.3
19952
1
Largely reflects revisions to prices.
Growth between 1994:Q4 and 1995:Q3, annual rate.
2.

-. 3

II-A-6

Ratio of Total Inventories to Final Sales
Current Dollars
Months
4.8

4.4
Previous
44
I

I
SI

'

A3.6
i\- \

I

3.6
2.4

t
I

-

1960

1965

1970

1975

1980

1985

1990

3.2

-

Revised

2.8

1995

S*

2.4

S
1960

I , 1965 I 1 3 1970 1 I
I I

I I
1975

,L , I
1980

, I 1985 I I t L L
I
I
1990

I

2.2

i
1995

Constant Dollars
Months
3.6

-

-

3.4

-

3.2

Previous (1987 dollars)
-

\

!

*

.

J\
SRevised

(chained

V

'-

3't-'

(1992) dollars)

-

-

t1 I11 , ,1
1960

1965

1_

.,,
1970

.

1

1975

1980

.

1985

1990

.i. i2
1995

2.4

II-A-7

Revisions to Personal Saving Rate and Profit Share
Personal Saving Rate

Percent
Percent
- 11

-10

9
1;

8

SRevised

I

/
/-

-\Previous

4

-

3
1959

1965

1971

1977

1983

1989

1995

Profits as a Share of GNP
Percent
13

-12
11
-10
9

/

V 71

/

-

/

S\

\Previous

/

7

Revised

v

\

10

6

5

4

1959..1L.1965
1959

1965

1971

1977

1983

1989

1995

II-A-8

Government Current Account Surplus
(As a percent of GDP)

Federal

1959

Percent

1963

State and Local

1967

1971

1975

1979

1983

1987

1991

1995

Percent

1959
1963
1967
1971
1975
1979
1983
1987
1991
1995
Note. Previous is the surplus of operating and capital accounts. The state and local surplus excludes social insurance funds.

APPENDIX B
EFFECTS OF THE GOVERNMENT SHUTDOWN
AND EAST COAST BLIZZARD ON DATA QUALITY
Summary
We have been querying the staffs at the Census Bureau and the
Bureau of Labor Statistics concerning the effects of the government
shutdowns and the East Coast snowstorm on the agencies' statistical
releases. Most releases will be published several weeks late
because of delayed surveys and lost processing time.
(The attached
table contains the current tentative release schedule.)
The delays ought to allow Census and BLS to process enough data
so that survey coverage and data quality will not be severely
compromised. However, a problem may arise with the CPI, PPI and
housing data:
Their monthly percent changes could be distorted
because some source data are being gathered at different times of
the month than they usually are.
Retail Sales
Data on retail sales for November (preliminary) and December
(advance) are scheduled to be released January 30, and the January
advance report is planned for February 28.
Both releases are a bit
more than two weeks later in the month than originally scheduled.
Our contact at Census indicated that normal procedures are being
followed and that the data will be in good shape.
Indeed, our
contact indicated that the advance data might be a bit better than
usual:
Because of the delay in collecting the data. Census should
be able to pick up some late reporters that otherwise would not have
been incorporated until the second estimate.
Business Fixed Investment
The reports on manufacturers' orders and shipments of durable
goods for November and December will be released together on
February 15.
About one-third of the respondents to the M-3 survey provide
their data using touchtone phones, and these responses were
unaffected by the government shutdowns and the snowstorm. The other
respondents fill in surveys mailed to them by the Census Bureau.
The November survey was mailed on time, and Census feels the monthand-a-half delay in publication will enable them to process
sufficient information to allow the November report to be the
"final" data for the month. The December survey was mailed January
Census feels the three-week
11, about two weeks later than normal.
delay in publication of these data will enable them to process about
as many responses as they usually do for a "preliminary" report,
Data on construction put-in-place for November and December
These data are
also will be published together on February 15.
Construction permits for November are
based on surveys of builders.
scheduled to be released January 25, and permits for December likely
Our contact indicated that a report in the Washington Post
1
suggesting that Census lacked retail sales data for December was
incorrect
II-B-1

II-B-2
will follow about two weeks after that. These data are based on
surveys of permit-issuing offices. The November surveys for both
construction-put-in-place and permits were mailed on their normal
schedule, but the December questionnaires went out about two weeks
late.
Inventories
Manufacturing inventories for November and December will be
released on February 15 in conjunction with the manufacturers'
orders and shipments data. The wholesale inventory data for
November were released on January 26, and the retail inventory data
for November are scheduled to be published during the week of
February 12.
Trade sector inventory data are collected in the same
surveys as those that gather the monthly sales data.
Our
contacts did not anticipate any problems affecting data quality.
Although the November retail surveys were mailed late, the
publication delay ought to allow Census to maintain at least the
usual survey coverage; in fact, our contacts felt the delays might
result in improved response rates. However, our contacts indicated
that they are far enough behind in processing data that the
wholesale and retail reports for December, January, and possibly
February also will be delayed.
Housing
Housing starts and permits for both December and January are
scheduled to be released on February 23.
The principal housing data stem from field samples of permit
offices (in permit-issuing places) and of housing starts (in nonpermit areas) by the Census Bureau. These surveys were delayed in
January by the government shutdown. Furthermore, the snowstorm may
have prevented some site visits in non-permit-issuing areas. The
storm also may have blocked some site interviews in permit-issuing
places that are used to augment the regular telephone follow-ups
that identify when construction on units with permits is started and
when units for sale are sold.
These delays and the missed sampling can cause a variety of
problems. First, smaller samples increase statistical noise.
Second, some permit offices have very poor recordkeeping, and our
Census contacts are concerned that the delays may make it more
difficult than usual to correctly allocate permits from these
offices between December and January. Finally, Census uses the
reported permit and start data to impute values for late responses
Similar
and for starts that occur before permit issuance.
imputations are made for sales of units that occur before permit
issuance. When sampling is delayed--as it was in January--Census
may receive more responses than usual, so that automatic application
of the regular imputation factors would result in an overestimate of
Census does not plan to change its imputation
starts and sales.
methods to account for this possibility.

2. In retailing, this survey is the one that also produces the
preliminary retail sales report. Response rates for inventories
generally are not as high as those for sales, however.

II-B-3

International Trade
The international trade data for November, originally scheduled
for publication on January 19, are now scheduled to be released the
week of February 5. Customs agents were at work during both
government shutdowns, and all import and export documents were
collected as usual
Pushing back the publication date will allow
for full compilation of all statistics (including late reporters)
with no reduction in data quality.
Prices
The December PPI will be released on January 31 and the
December CPI on February 1; these publication dates are about two
weeks later than usual. The January PPI is scheduled for release,
as originally scheduled, on February 14, but the January CPI likely
will be delayed about two weeks, to February 28.
Our CPI contact at BLS estimated that the number of price
quotes incorporated in the December CPI will have been only about
2 percent less than the number used in last December's index. Our
contact would not venture a guess on what the sample coverage would
be in the January index. To get as large a sample as possible, BLS
is allowing more than the usual amount of telephone interviewing in
place of on-site data collection when needed--for example, when snow
prevented site visits. Still, smaller sample sizes could increase
the statistical noise in the CPI.
The CPI also will be affected by changes in the timing of data
collection. In anticipation of the government shutdown, BLS
accelerated its data collection last month; in contrast, the
All else
shutdown is delaying data collection in January.
equal, these timing perturbations will trim the monthly percent
change in the CPI in December and February but boost the change in
January; however, given underlying inflation rates, the Board staff
estimates that the distortions ought to be less than 0.1 percentage
point per month. BLS will not make any statistical adjustments to
account for the timing problems, but it plans to include an
explanation of the procedural changes in the CPI press release.
Our PPI contact did not see any problems with the quality of
the December data: The forms went out on the usual schedule, and
since then, responses have "just been piling up in the mail room."
Some problems may occur in January, however. Normally, the forms
would have been in respondents' hands by the January 9 pricing date
for the PPI; instead the forms were mailed out between January 11
and January 19. This delay means that prices for the 9th will be
based on memory, which risks errors in recall or the substitution of
prices from later in the month. On the other hand, BLS does not
expect any sample attrition due to the late mailings or the
snowstorm.
3 Ordinarily, the CPI price quotes for January through October
are collected during the first eighteen working days of the month;
due to the extra holidays, data for November and December usually
are collected during the first fifteen working days of the month.
After accounting for weekends and holidays, without the shutdown,
last month's price quotes would have been collected by December 21
and this month's data would be in by January 26. Instead, the
December data probably were collected by the 15th, and the January
price quotes will be gathered between the 8th and the 31st.

II-B-4

Labor Markets
As noted in the labor market section, the government shutdown
prevented BLS from providing its usual revisions to the November
establishment survey. As a result, the levels of employment, hours,
and earnings in November and December may contain more statistical
noise than usual. The December establishment survey data were
transmitted late to the BLS by the state offices.
This delay
resulted in larger-than-usual response rates, which may have
improved the estimates of the change in employment between November
and December. On the other hand, the survey may have been affected
by the compressed time available to process the data by BLS staff.
Indeed, Board staff observed some anomalies in the four-digit SIC
manufacturing data used in the construction of the industrial
production index, and we are concerned that similar aberrations may
exist in the data outside of manufacturing.
The January establishment survey also was collected late, but
the follow-ups are on schedule. With short time, the process used
to review revisions to data in December will be slightly less
complete than usual. Otherwise, in the absence of another shutdown,
processing should proceed according to normal procedures. The
January labor market report is scheduled to be released on
February 2, its regular publication date.
The December household survey was collected according to the
usual schedule, and the follow-ups were completed on time. Although
the response rate was lower than usual, BLS considers the sample
coverage to be adequate.
However, the introduction of new
seasonal factors, which usually takes place in December, has been
postponed. The January household survey is being conducted this
week according to the regular schedule.
The employment cost index for the fourth quarter will be
However, because the data
delayed from January 30 to February 13.
are drawn from permanent payroll records, data quality should be
unaffected.

4. Because the data are based on permanent payroll records, BLS
does not expect the late transmission to result in response errors
such as those that might plague the PPI.
5. The household survey was collected during the week of December
5, but BLS ordinarily collects the December household survey a week
Still, the
early to avoid reporting problems around the holidays.
response rate to the December survey was somewhat lower than usual;
responses were unavailable from 9.2 percent of the households in the
CPS sample, as compared with the 6.2 percent to 7.2 percent
nonresponse rate usually experienced.

II-B-5
Statistical Release Schedule (Tentative)

Release
Housing starts
Internat'l trade
Employment situation
GDP
NIPAs
Personal income
and consumption
New home sales
Wholesale trade
Retail sales
PPI
CPI
Employment situation
Internat'1 trade
Retail inventories
ECI
PPI
Manufacturers'
shipments, orders
and inventories
Construction putin-place
Wholesale trade
GDP
Housing starts
Personal income
and consumption
CPI
Retail sales
Retail inventories
Investment plans
survey

Reference Date
November
October
December
1995:Q3 (prelim.)
Historical revisions
October
November
November
November
December (adv.)
December
December
January
November
November
1995:Q4
January
November (final)
December (prelim.)

Release Dates
Old
New
12/19
1/16

12/20

1/17

1/5
12/19
12/19
12/21
12/21
1/3
1/9
1/12
1/11
1/12
2/2
1/19
1/17
1/30
2/14
1/4
1/25

1/19
1/19
1/19
1/23
1/23
1/24
1/26
1/30
1/31
2/1
2/2
week of 2/5
week of 2/12
2/13
2/14
2/15
2/15

November
December
December
1995:Q4 (adv.)
December
January
December

1/2
2/1
2/7
1/26
1/18
2/16
1/29

2/15
2/15
2/15
2/23
2/23
2/23
2/26

January
January (adv.)
December

2/14
2/13
2/14

2/28
2/28
2/29

1996

2/23

week of 3/25

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

Selected Financial Market Quotations1
(Percent except as noted)
1994

1995

Instrument

1996

FOMC,

Change to Jan. 25,1996 from:
1994

1994

FOMC,

Jan. 25

Feb. 3

high

Dec. 18

5.46

2.39

-. 0
2

-.29

1.84
1.64
1.28

High

Dec. 18

5.75

Feb. 3

-.81
-1.47
-2.04

Short-term Rates
2

Federal Funds

Treasury Bills
3-month
6-month
1-year
Commercial paper
1-month
3-month

-.63
-.98

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

5.43
5.34
5.20

2.32
2.09
1.79

-.67
-1.05
-1.69

5.44
5.31

2.38
2.06

-.62
-1.07

8,50

2.50

.00

.03
1.25

-2.25
-142

Eurodollar deposits
1-month
3-month
Bank Prime Rate
Intermediate- and Long-term Rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year

Municipal revenue (Bond Buyer)5
Corporate-A Utility, recently offered
Home mortgages6
6.97
4.12

FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate

9.25
6.79

7.15
5.55

5242.84

1/24/96

2144.64

5075.21

5216.83

-.50

14325

NYSE Composite

332.63

1/12/96

154.00

323.66

330.55

-.63

114.64

NASDAQ (OTC)

1069.79

12/4/95

378.56

1002.56

1035.95

-3.16

173.66

Dow-Jones Industrial

-.86
122.31
6043.66
5915.97
1/12/96
2718.59
6096.11
Wilshire
1, One-day quotes except as noted.
2. Average for two-week reserve maintenance period closest to date shown. Last observation is average to date maintenance period ending January
31,1996.
3. Secondary market.
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6. Quotes for week ending Friday previous to date shown.

Selected Interest Rates
Short-Term
Percent
Monthly

Percent
Daily
FOMC
12/18

.----

Prime rate (daily)
Federal funds

--

Three-month Treasury bill

........

Discount rate (daily)

Federal funds

T-bi

Three-month

Three-month T-bilI
a

1

1990

a

1991

a

1992

I

I

1993

1994

I

1995

I

i

12/15 12/22 12/29
1995

I

I

115

1

1/12
1996

Long-Term
Percent
..-

-

Percent
Weekly/Daily
FOMC
12/18

Primary fixed-rate mortgage
Corporate bond (A-rated utility)

Thirty-year Treasury bond

Mortgage rate
(weekly)

Corporate bond
(weekly)

Thirty-year T-bond
(daily)
I

I
1990

I
1991

I
1992

I
1993

I
1994

I
1995

J-I
12/15

-

I
12/29

I
1/5

I
1/12 1119
1996

DOMESTIC FINANCIAL DEVELOPMENTS

Most market interest rates declined slightly in the wake of the
System's announcement at the close of the December FOMC meeting of a
25 basis point easing in the intended federal funds rate.

Major

commercial banks followed the System's action by lowering the prime
rate a quarter point

to 8-1/2 percent.

After this initial reaction, interest rates have fluctuated
widely in response to incoming news about the economy and the
federal budget

On balance, market participants seem to anticipate

at least a near-term dose of federal expenditure restraint and have
interpreted incoming data as suggesting only modest economic growth.
Consequently, they have built in greater likelihood for a further
easing in System policy, and interest rates have declined somewhat.
Treasury note and bond yields are currently down about 10 basis
points to 30 basis points.

Interest rate declines have helped

bolster stock prices; major equity indexes are up about 2 percent to
3-1/2 percent from their levels at the time of the December FOMC
meeting.
Gross public issuance of bonds by nonfinancial corporations
dropped off in late December but has bounced back in January

With

long-term interest rates remaining close to their recent lows,
corporations have continued to favor longer-term financing.
household sector

In the

survey data on loan applications point to a pickup

in home mortgage borrowing; however

growth of consumer credit in

November was somewhat less robust than in earlier months.

In the

state and local sector, the volume of outstanding tax-exempt bonds
contracted about $11 billion in the fourth quarter
borrowing was relatively weak last quarter:

III-1

Federal

spending was constrained

III-2

MONETARY AGGREGATES

(Based on seasonally adjusted data)
1995
1995

Q3

Aggregate or component
Aggregate

1.
2.
3.

1995
Q4
(p)

Oct.

Nov.

Dec.
(p)

Percentage change (annual rate)

M1
M22
M3

1994:Q4
Level
to
(bil. $)
Dec. 95 Dec. 95
(p)
(p)

1

-2.9
3.7
2.8

-4.5
5.7
4-3

-1.9
4.3
6.0

1124.8
3670.8
4584.4

Selected components
4. Currency

5.4

2.1

3.7

4.2

2.3

5.2

5.3

373.1

5. Demand deposits

1.4

5.7

-0.3

-4.0

0.6

4.9

1.6

389.9

-11.2

-11.7

-18.8

-27.1

-12.2

-24.6

-11-7

352.9

7.2

11.0

8.2

7.5

6.7

10.2

7.4

2546.0

-3.3
14.9
22.6

3.5
8.4
36.5

7.9
4.3
16.9

8.4
3.8
12.8

4.8
5.4
14.0

15.0
2.7
13.8

-2.2
14.1
22.2

1134.7
936.2
475.1

14.4

12.1

6.2

9.9

-0.8

-1.4

13.2

913.6

15.7

13.3

18.2

28.4

17.5

8.9

15.6

419.4

22.9
4.9
9.9

27.7
-5.6
12.9

9.3
-14.2
-7.8

10.3
-8.7
-9.0

2.1
-38.3
-32.2

12.9
-47.3
-17.2

22.0
0.9
7.2

226.4
177.8
89.3

1.0
7.1

2.4
4.4

3.1
3.0

0.8
4.1

4.7
5.7

4.0
4.6

434.4
3280.2

6. Other checkable deposits
7. M2 minus M1
8.
9.
10.
11
12
13
14.
15.

3

Savings deposits
Small time deposits
Retail money market funds
M3 minus M24
5

Large time deposits, net
Institution-only money market
mutual funds
RPs
Eurodollars
Memo

16. Monetary base
17. Household M26

4.1
4.6

Average monthly change (billions of dollars)

7

Memo
Selected managed liabilities
at commercial banks:
Large time deposits, gross
18.
19.
Net due to related foreign
institutions
20. u.s. government deposits
at commercial banks

435.5

6.4

6.4

3.2

-0.8

2.5

-0.1

4.9
4.7

5.1

3.9

-4.7

.

1.5

-1.8

1.9

0.6

4.2

.

.

.

.

258.3

21.7

1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages2. Sum of seasonally adjusted MI, retail money market funds, savings deposits, and small time deposits.
3. sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted separately.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5 Net of holdings of depository institutions, money market mutual funds, U.s. government, and foreign banks
and official institutions.
6. M2 less demand deposits
7. For the years shown, "average monthly change' is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
n.s.a.--Not seasonally adjusted.
p-Preliminary.

Note: Data incorporate revisions from the annual benchmark and seasonal review, as well as a redefinition
of the M2 aggregate, involving a shift of overnight RPs and Eurodollars to non-M2 M3-

III-3
by the federal budget impasse, and the Treasury placed greater-thanusual reliance on its cash balance because of the debt ceiling
constraint
Monetary Aggregates and Bank Credit 1
The growth rates of the broad monetary aggregates picked up in
December

but they remained below the levels posted in the spring.

M2 expanded at about a 5-3/4 percent annual pace in December, buoyed
by strong growth in savings deposits

(table) 2

Part of the surge

in savings deposits reflected a shift of funds from OCDs

(other

checkable deposits) resulting from new sweep programs at nine
additional bank holding companies.

Still

adjusted for sweeps,

savings deposits grew at a 5-1/2 percent annual rate.

Growth of

retail money market funds remained strong in December

as the spread

of rates on money market instruments over those on money funds
narrowed, and the continued flatness of the yield curve provided
little incentive for investors to turn to longer maturity
Growth in M2 appears to have increased a bit further

instruments.
in January.

M1 fell at a 4-1/2 percent annual rate in December, as the OCD
sweep programs cut 10 percentage points from the growth rate of this
aggregate.

The decline in OCDs offset increased strength in other

M1 components.

Demand deposits grew at a 5 percent pace, boosted in

part by an increase in mortgage refinancings (associated prepayments
of securitized mortgages are temporarily held in liquid deposits)

1 The monetary data in the Greenbook incorporate new benchmarks
and seasonal adjustments. In addition, the M2 data reflect a minor
revision of the definition of the aggregate, which involves a shift
of overnight Eurodollars and overnight wholesale RPs from M2 to nonM2 M3.
These data are scheduled to be published in mid-February and
are strictly confidential until that time.
2. On a fourth-quarter to fourth-quarter basis, M2 expanded
4-1/4 percent during 1995, using either the old or the new
definition

III-4

COMMERCIAL BANK CREDIT
(Percentage change; seasonally adjusted annual rate) 1
_

1995

Type of credit

1995

1995

1995

1995

1995

Q3

Q4

Oct

Nov

Dec

Level,
Dec

1995
(billions of S)

4

1. Total loans and securities

8.0

6.0

2.8

.9

1.5

1.2

3,573.9

2.

2.9

-3.0

.7

-1.3

-4.6

1.5

983.3

Securities

3.

U.S. government

-3.1

-2.0

1.9

8.1

0.0

-6.6

708.7

4.

Other 2

22.6

-5.6

-2.2

-25.4

-16.7

22.7

274.6

10.1

9.6

3.6

1.8

3.8

1.2

2,590.6

10.9

7.3

4.3

.9

8.4

4.1

711.0

8.3

9.1

2.7

3.1

1.7

-3.0

1,073.4

Home equity

5.5

6.7

3.6

0.0

6.1

4.6

79.4

Other

8.5

9.3

2.6

3.4

1.2

-3.5

994.0

Consumer

10.1

9.6

4.5

-.2

5.2

3.9

492.8

16.1

15.4

13.9

10.3

15.2

13.6

615.9

5.6

-18.4

-33.0

-11.3

-54.3

80.2

21.4

12.4

16.6

2.6

26.3

233.2

5.

Loans 3

6.

Business

7.

Real estate

10.

Adjusted 4

12.

Security

13.

Other 5

15.9

1. Monthly levels are pro rata averages of Wednesday data. Quarterly and annual levels (not shown) are simple
averages of monthly levels and levels for the fourth quarter respectively. Growth rates shown are percentage changes m consecutive
levels, annualized but not compounded.
2. Includes municipal securities, foreign government securities, corporate bonds, equities, and trading account assets.
3. Excludes interbank loans.
4. Includes estimates of consumer loans that have been securitized by banks and are still outstanding.
5. Includes loans to nonbank financial institutions, farmers, state and local governments, banks abroad, foreign
governments, and all others not elsewhere classified. Also includes lease financing receivables.

III-5
Currency growth also has picked up in recent months, after slow
expansion in the summer and early fall
M3 expanded slightly more than 6 percent during 1995, just
above the upper limit of its annual growth cone

Growth was more

modest last month, however, at about a 4-1/4 percent annual pace,
reflecting a drop in its non-M2 components.
deposits slowed further

Growth of large time

largely because of a drop at agencies and

branches of foreign banks, whose assets continued contracting in
December

M3 in January appears to have accelerated, boosted by

strong inflows to institution-only money funds.

Large time deposits

also appear to have picked up, and RPs have turned around.
Bank credit expanded quite sluggishly in December for the third
consecutive month (table)

Securities holdings increased, but the

gains were the result of revaluations rather than purchases.
Indeed

banks sold securities on net

likely reflecting in part a

temporary easing of the accounting rules regarding sales of
securities categorized as held-to-maturity. 3

Weakness in all

major categories reduced loan growth in December to a sluggish
1-1/4 percent annual pace.

Growth of business loans late last year

likely was held down in part by some substitution toward capital
market financing by nonfinancial businesses

Nonetheless,

preliminary data for January suggest that business loan growth has
strengthened noticeably,

Growth of real estate loans also appears

to have picked up in early January after having fallen at a
3 percent annual rate in December; the strength in January is
largely attributable to bank acquisitions of thrifts.

3. The Financial Accounting Standards Board allowed banks to make
a one-time reallocation of their investment account securities from
the held-to-maturity classification to the available-for-sale
category between November 15 and December 31
1995

III-6
In the January Senior Loan Officer Opinion Survey, banks
indicated no change, on net, in standards for approving home
mortgages and a slight increase in demand for these loans.
Nevertheless, a third of the domestic respondents indicated they had
experienced a slowdown in recent months in the growth of residential
mortgages on their books.

Banks indicating such a slowdown placed

equal importance on reduced originations--reflecting partly a
seasonally weaker housing market--and increased securitization of
real estate loans as reasons for the slowing.
Despite some market fears that declining asset quality could
constrain bank profitability, earnings at large bank holding
companies were strong last quarter.

Bank profits were buoyed by

loan growth, reduced deposit insurance premiums, and industry
efforts to cut costs.

The increase in loans helped support net

interest margins last year, as banks shifted their portfolios away
from securities, which generally carry lower yields.

Although

margins at the large holding companies narrowed some from the yearearlier quarter, average margins remained high by historical
standards.
balance.

Trading results were mixed but evidently improved on
On the down side, provisions for loan losses and charge-

offs of nonperforming loans increased at many banks, but the rises
were generally modest.
Mutual Funds
Net sales of long-term mutual funds increased in November and
December, largely reflecting continued strong inflows into equity
funds

(table).

Investor demand for domestic equity funds held firm,

and interest in international equity funds picked up.

Although a

sizable portion of the recent inflows is attributable to reinvested
distributions, mutual fund complexes report that net new sales of
stock funds also remained strong, despite the potential tax

III-7
liability from capital gains distributions.

Spurred by the highest

total returns since 1991, net sales of stock funds for all of 1995
totaled a record $144 billion, surpassing the previous high reached
in 1993.

Preliminary data indicate that stock fund inflows remained

heavy through mid-January.

NET SALES OF MUTUAL FUNDS

CLASSIFIED BY TYPE

(Billions of dollars, monthly rate, not seasonally adjusted)
1995

Memo:
Nov.

1994

1995e

Q_3

Q46

Nov.

Dec.e

Total stock
International
Domestic

11.0
3.8
7.2

12.3
1.2
11.2

14.1

17.0
1.7
15.2

15.0
1.2
13.7

26.3
3.6

1,243.5

22.6

1,053.0

Total bond
GNMA
Government
High-yield
Tax-exempt
Income
Other

-1.4
-1.3
-1.5
.2
-.7
2.2
-.3

1.8
-.3
-.4
.9
.1
1.5
-,1

2.5
-.2
-.2
.9

4.1
.2
.8
.9
2.3
.4

2.9
-. 3
-. 6
.8
.1
2.6
.2

790.1
55.3

.0

3.5
-.2
-.2
1.0
.4
2.3
.2

3.6
3.1
.5

11.3
10.4
1.0

11.3
10.3
1.0

9.5
8.3
1.2

15.9
13.7
2.2

.3
1.2
-. 9

762.4
635.5
126.9
--------

Total money fund
Taxable
Tax-exempt

1.3
12.8

.1
1.8

e Staff estimate.
Investment Company Institute.
Source.

-. 1

Assets
190.5

87.9

58.3
252.4
272.1
64.0

Income and high-yield bond funds accounted for virtually all of
the net sales of bond funds last year, and they continued to post
inflows in December and early January.

Funds in the income category

contain some equity exposure, which partly accounts for the strong
investor interest in such funds.

For the past year as a whole, bond

funds registered positive net sales, reversing the outflows in 1994
but falling far short of the record pace in 1993.

III-8

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS 1
(Billions of dollars; monthly rates, not seasonally adjusted)
1995
Type of security
All U.S. 2corporations
Stocks
Bonds
Nonfinancial corporations
Stocks 2
Sold in U.S.
Utility
Industrial
Sold abroad
Memo:
Initial public offerings 3
Bonds
Sold in U.S.
Utility
Industrial
Sold abroad
By quality 4
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown
Financial corporations
Stocks 2
Sold in U.S.
Sold abroad
Bonds
Sold in U.S.
Sold abroad
By quality 4
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown

1994

1995 P

Q3

Q4 P

Oct.P

Nov.P

Dec. P

40.62
5.50
35.11

45.59
6.03
39.56

46.26
6.41
39.86

48.35
7.59
40.77

50.71
9.57
41.14

55.42
7.63
47.79

38.94
5.57
33.37

3.13
2.92
-37
2.54
.22

4.37
4.03
.31
3.72
.34

4.60
4.31
.24
4.07
.29

5.67
5.24
.40
4.84
.43

7.33
6.47
.10
6.37
.86

5.46
5.18
.39
4.78
.28

4.23
4.07
.71
3.36
.16

1.14

1.70

1.26

2.56

3.69

2.17

1.81

7.35
6.44
2.19
4.26
.90

9.50
8.25
2.84
5.41
1.25

8.79
7.31
2.89
4.42
1.47

10.57
9.43
3.36
6.07
1,13

10.50
9.10
3.87
5.23
1.40

12.30
10.90
4.00
6.90
1.40

8.90
8.30
2.21
6.09
.60

.58
3.82
2.01
.01

1.14
5.12
1.95
.04

.66
4.43
2.12
.05

1.65
5.58
2.16
.04

1.74
4.84
2.51
.00

1.69
6.60
2.62
.00

1.53
5.31
1.35
.11

2.37
2.11
.25

1.66
1.64
.02

1.80
1.77
.03

1.91
1.87
.04

2.24
2.16
.08

2.17
2.13
.04

1.34
1.34
.00

27.77
23.98
3.78

30.06
24.91
5.16

31.07
25.52
5.55

30.20
26.37
3.83

30.64
25.64
5.00

35.49
30.99
4.50

3.72
9.02
.31
.10

3.90
9.60
.09
.25

4.50
8.54
.12
.11

2.92
8.65
.03
.38

2.45
11.64
.10
.20

2.82
7.40
.00
.43

24.47
22.47
2.00
3.49
6.91
.00
.49

1. Securities issued in the private placement market are not included. Total
reflects gross proceeds rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
3. Included in lines for stocks above.
4. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
p Preliminary.

III-9
Business Finance
Gross

public bond offerings by nonfinancial corporations were

light in the second half of December, reflecting the seasonal
slowdown in activity around the holidays
followed a spurt

(table).

This lull

of issuance during the fall, when companies took

advantage of the decline in bond

rates to lock in favorable long-

term funding and to repay short-term debt.

The

incentive to pursue

this strategy remains strong, and the pace of offerings has picked
up in recent weeks; moreover, the calendar of prospective issues is
quite heavy.
Credit quality in the nonfinancial corporate sector appears to
remain strong although there are

a few signs of deterioration.

Interest rate spreads on both investment-grade and high-yield bonds
have crept

up since early 1995,

historical standards
high-yield bonds
that

but they remain relatively low by

(chart, upper panels).

increased in 1995 to

The default rate on

2.7 percent of face value, but

rate is below the average over the past decade

left panel).

Balance

sheets at nonfinancial corporations

remain healthy on the whole;

In addition, 1995 was the

since the mid-1980s in which the value of debt upgraded

exceeded the value downgraded
said,

appear to

interest-coverage ratios and debt-to-

asset ratios remain in good condition.
first year

(chart, lower

rating changes in the

(chart, lower right panel).

fourth quarter alone were not

That
as

favorable as those earlier in the year, as Moody's upgraded only
$15

billion of nonfinancial debt while downgrading $27

billion.

Moreover, banks reported some small move toward tighter underwriting
standards for business

loans in the January Senior Loan Officer

Opinion Survey, owing to concerns about the economy.

[See the

appendix for a more detailed discussion of the survey results.]

III-10

Corporate Credit Quality
Investment-Grade Bond Spread over
30-Year Treasuries
Percentage points
(Moody's A-rated index)

High-Yield Bond Spread over 7-Year Treasuries
Percentage points
(Merrill Lynch Master II Index)

Monthly

Monthly

.

1986
1989
1992
*Average through January 25.

1995

i

1986

u

r

*

:-m

1989

S

1I

1992

I

I

I

1995

'Average through January 25,

Default Rate on High-Yield Bonds

Rating Changes for Nonfinancial Corporations
Percent

10

(Amt. of debt affected)

Billions of dollars

300

S200
8

Upgrades
100
+

6

0

100

4
-

Downgrades

200

2
-300

400

0
1986
1989
1992
Source. Edward Altman, CS First Boston.

1995

1986
Source. Moody's.

1989

1992

1995

III-11

Announced Stock Repurchase Programs at Nonfinancial Corporations
Billions of dollars

111111

111

11111
11.11111111.11

1985
1986
1987
1988
Source: Securities Data Company

1989

LIII

1990

1991

1992

1993

it

1994

Megamerger Activity of U.S. Nonfinancial Corporations 1
Billions of dollars
140

SStock swaps between domestic companies plus assumed liabilities
SPayments that result in equity retirements 2

120

100

H

m

80

60

40

20

0
1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1. Deals in which the value of the target is $1 billion or greater Excludes acquisitions in which the target company remains
an independent entity after the transaction.
2. Includes payments to target company's shareholders in the form of cash or debt, as well as stock swaps between a
foreign acquirer and a U.S. target.

III-12
Gross equity issuance by nonfinancial firms slowed in December
from the fast pace in October and November.

Issuance during the

first half of January also was modest, likely reflecting the
slowdown that typically occurs as underwriters wait to obtain yearend financial data from prospective issuers.

The pace of issuance

has picked up some of late, and market sources anticipate a
substantial flow of offerings in the near term.
The numerous stock repurchase programs under way, along with
share retirements through mergers, have continued to overwhelm gross
equity issuance.

Nonfinancial corporations announced repurchase

programs totaling nearly $70 billion in 1995, with $19

billion of

planned repurchases announced during the fourth quarter alone
(chart, upper panel).

Repurchases have been concentrated among

successful industrial companies whose profits continue to exceed
their needs for cash.

Indeed, in the fourth quarter, just four

companies together accounted for about one-third of the announced
repurchase volume.
Merger-related stock retirements have also continued to be
substantial

(chart, lower panel).

In 1995, megamergers

(deals in

which the target's equity is valued at $1 billion or more) resulted
in equity retirements at nonfinancial firms totaling almost
$55 billion.

(All told, megamergers accounted for about 60 percent

of merger-related equity retirements last year.)

Another $2 billion

in equity was retired during the first weeks of 1996, and recently
proposed megamergers would retire another $25 billion in equity.
Most of the recent deals have not sparked concerns about a slippage
in credit quality, reflecting both the limited amount of debt
financing and the potential for increased profits at the newly
combined firms.

Of approximately $100 billion in completed

megamergers last year, more than two-thirds of the combinations

III-13

Stock Price Indexes
Index, Jan. 6, 1995=100
Weekly through Dec. 15; daily thereafter
Dec 18

S&P 500

-

--

--

DJIA

-

Jan

.
Feb

Mar

Apr

May

June
July
1995

Aug

Sep

- .=

Oct

Nov

.

.=

Dec

I , 90
Jan
1996

Index, Jan. 6, 1995=100
-200
Weekly through Dec. 15; daily thereafter

-190
Dec 18
-180

NASDAQ Computer

170
5-

160
-150

-

-

I**--

7

-140

,'

-130

NASDAQ Composite

''

-

120
- 110
-100
90

Jan

Feb

Mar

Apr

May

June
July
1995

Aug

Sep

Oct

Nov

Dec

Jan
1996

III-14
occurred in just three industries that are undergoing structural
change--telecommunications and media, health care and
pharmaceuticals, and defense.
Most broad indexes of stock prices have risen 2 percent to
3-1/2 percent on net from their levels just before the December FOMC
meeting, boosted by the decline in long-term interest rates (chart,
top panel).

Stock prices sagged temporarily because of worries

about the strength of corporate earnings.

A number of companies,

mostly in the computer sector, warned analysts that earnings were
likely to be disappointing, and the warnings prompted some analysts
to revise down their estimates of fourth-quarter earnings ahead of
the formal announcements.

However, on balance, earnings reports to

date have come in somewhat above the revised forecasts.

Notable

positive surprises include IBM, Intel, and Microsoft; the latter two
helped the Nasdaq computer index to
decline around year-end

retrace part of its sharp

(chart, lower panel).

Treasury and Agency Financing
The staff expects the federal budget deficit to total close to
$100 billion in the first quarter.

The Treasury is expected to

finance the shortfall by borrowing a roughly equivalent amount in
the market, raising about one quarter of the amount in coupon
auctions and the remainder in bills.

The Treasury announced

reductions in the sizes of its weekly bill auctions for the third
and fourth weeks of January to make room under the debt ceiling for
the two-year and five-year notes that settle January 31.

However,

the staff expects that the Treasury will need to raise weekly bill
auction sizes by quarter-end to make up for the earlier paydown.
addition, the Treasury is expected to auction a sizable amount of
cash management bills.

The staff's assumptions for Treasury

In

III-15

financing are contingent upon some resolution of the debt ceiling
problem.
On January 22, Secretary Rubin notified the Congress that the
Treasury would take further steps to make room under the current
$4.9 trillion debt ceiling.

These steps include replacing

securities that are subject to the limit and currently held in the
Exchange Stabilization Fund

(about $4 billion) with obligations that

are not subject to the limit.

Additionally, about $9 billion of

securities of the Federal Financing Bank will replace Treasury
obligations held by various government trust funds.

The Secretary

also made the determination that the debt ceiling problem will last
somewhat longer than was projected in mid-November, which permits
him to disinvest an additional $6-1/2 billion of Treasury debt held
by the Civil Service Retirement and Disability Fund.

All told,

these actions lower debt outstanding subject to limit
$19-1/2 billion, making room for a like amount of issuance of
marketable debt.
The Treasury's need to borrow in the first quarter, however,
outstrips this additional scope for borrowing.

Absent further

steps, which Secretary Rubin has told the Congress are of
questionable legality, or an increase in the debt ceiling, the
Treasury has indicated that it will likely deplete its cash balances
and exhaust room under the current debt ceiling at the end of
February or early March.

It appears that the markets are expecting

that the debt ceiling will be raised or that the Treasury will turn
to other measures to avoid default, as Treasury prices do not appear
to contain a default premium.
Debt issuance by federal agencies appears to have increased in
early January from the moderate pace of the latter half of 1995.
Much of the new debt is intended to refinance securities that have

II1-16
been called.

New issues have been primarily noncallable debentures,

including the first-ever noncallable bond offering by the Tennessee

Valley Authority, but offerings of callable debt remain sizable.
Despite the pickup in issuance, spreads in the primary market for
noncallable debentures have remained stable.

NET CASH BORROWING OF GOVERNMENT-SPONSORED ENTERPRISES
(Billions of dollars)

1995
Agency
FHLBs
FHLMC

Q3

Q4

Oct.

13.8
3.1

6.3
8.4

-2.7
4.0

FNMA

6.3

22.0

3.4

Farm Credit Banks
SLMA

1.9
.4

1.6
n.a.

.7
.2

Nov.

Dec.

4.8
.0

4.2
4.4

9.2

9.4

.2
-1.4

.7
-3.0

Note. Excludes mortgage pass-through securities issued
by FNMA and FHLMC.
n.a. Not available.

State and Local Government Finance
Low long-term interest rates continued to boost gross offerings
of municipal securities in December (table).

For the fourth quarter

as a whole, both new capital issuance and refundings were at the
highest quarterly levels in roughly two years.

Market activity was

slow in early January, consistent with the usual seasonal pattern,
but issuance has picked up of late.
Gross issuance of tax-exempt bonds over all of 1995, was down
slightly from its 1994 level.

In contrast, retirements increased

last year, as a large volume of advance-refunded debt became
eligible to be called.

With the bulge in retirements, outstanding

long-term debt is estimated to have fallen more than $50 billion in

III-17
1995.

The downtrend in outstandings will probably persist for some

time, as a considerable amount of pre-refunded debt has not yet been
retired.

Market analysts expect that gross debt retirements this

year will again outpace gross offerings, with the range of estimates
centering on a decline in outstanding debt of about $30 billion.

GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)

1994
Total tax-exempt
Long-term
1
Refundings
New capital
Short-term
Total taxable

1995

Q2

Q3

1995
Q4

Nov.

Dec.

16.1

14.9

16.3

15.3

17.2

17.5

18.6

12.8
4.0
8.8

12.1
3.6
8.5

12.7
3.4
9.3

11.2
3.9
7.3

15.5
5.3
10.2

16.5
5.1
11.4

16.7
5.2
11.5

3.3

2.8

3.6

4.1

1.7

1.0

1.9

.7

.7

1.3

1.5

1.3

.7

.6

Note.
Includes issues for public and private purposes.
1. Includes all refunding bonds, not just advance refundings.
not just advance refundings.

Recent declines in municipal bond yields have about matched
those on Treasuries, leaving the long-term tax-exempt to taxable
ratio little changed from the elevated level that generally has
prevailed since last spring.

In contrast, the one-year yield ratio

has increased quite a bit since early December and now hovers around
0.71, compared with a low of 0.62 reached last fall.

Trade reports

indicate that most of this increase reflects concerns over the
Administration's budget proposal to eliminate a tax advantage for
corporations that typically buy short-term tax-exempt debt.

If

the proposal is enacted, many corporations will reduce their demand

4. The Administration would eliminate a rule that currently
allows corporations to deduct interest expenses on funds borrowed to
buy tax-exempt paper as long as their holdings of municipals are no
more than 2 percent of total assets.

III-18
for short-term paper, much as the 1986 tax reform reduced commercial
bank demand for municipal debt.
Credit spreads on long-term municipal bonds have changed little
on balance since the beginning of 1995.

The spread between the

Baa-rated general obligation bond and a comparable AAA-rated bond
stood at about 60 basis points in mid-January, about the same as in
December.
Mortgage Markets
Interest rates on home mortgages declined on net over the
intermeeting period.

The average contract rate on conventional

thirty-year fixed-rate mortgages dropped roughly 15 basis points,
while the average initial rate on adjustable-rate mortgages indexed
to the one-year Treasury constant maturity yield declined about
18 basis points.

The FRM-ARM initial rate spread remains near its

lowest level since August 1990

(chart, upper panel).

The flatness in the mortgage yield curve and the low absolute
level of FRM rates have contributed to a sizable FRM share of
conventional mortgage originations.

The Federal Housing Finance

Board reported last month that the FRM share climbed to 81 percent
in November, the highest since November 1993.

Signs that homebuyers

may be responding to lower rates are evident in the Mortgage Bankers
Association's

(MBA) index of applications for loans to purchase new

and existing homes.

Apart from a weather-related drop in mid-

January, the MBA's purchase index (seasonally adjusted by Board
staff) has fluctuated over much of the intermeeting period at the
highest levels in its six-year history (chart).

Refinancing

activity also appears to have increased, but it remains well below
the record levels reached in 1993.
In secondary mortgage markets, gross issuance of agency-backed
pass-through securities is estimated to have increased further in

III-19

ARM Origination Proportion and FRM-ARM Spread
(Not seasonally adjusted)
Percent
7

Basis Points

Monthly

Weekly

1986

1988

1990

1992

1994

1996

Issuance of Agency Mortgage Pass-Through Securities
(Not Seasonally Adjusted)
Billions of dollars
Monthly

Gross issuance

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

III-20

MBA Indexes of Mortgage Loan Applications
Purchase Index

1990

1991

1992

1993

1994

1995

1996

1. March 16, 1990 = 100.
2. Seasonally acdusted by FRB staff

Refinancing Index
2250
Weekly
----

--

Not seasonally adjusted 1
Seasonally adjusted 2

2000
1750
1500

1250

1000

Jan. 19

750

500
250
0
1990

1991

1.March 16, 1990= 100.
2. Seasonally adjusted by FRB staff.

1992

1993

1994

1995

1996

III-21
December

boosting total offerings in the fourth quarter to the

highest quarterly figure in more than a year.

Still

gross issuance

remained well below the average quarterly pace of $142 billion in
1993.

For 1995 as a whole, gross issuance of agency pass-throughs

totaled $269 billion, owing largely to the historically low volumes
registered in the first two quarters of the year

Issuance of

agency-backed CMO (collateralized mortgage obligation) and REMIC
(real estate mortgage investment conduit) securities totaled
$23 billion last year, just a fraction of the roughly $120 billion
issued in 1994
Consumer Credit
Consumer installment credit outstanding grew at a seasonally
adjusted annual rate of 10-1/2 percent in November
13-3/4 percent in October (table)

down from

While fluctuating from month to

month, growth of consumer credit appears to have slowed noticeably
since earlier in 1995

This slowing reflects a sharp deceleration

in revolving credit from rates above 20 percent earlier in the year
to under 12 percent in the second half

Some drop-off in revolving

credit was expected, given rising debt burdens and softness in
retail sales.

Auto credit

in contrast

recent months than earlier last year

grew a bit more rapidly in

as manufacturers' incentives

(lower financing rates and rebates) apparently induced some
consumers to switch from leasing to outright purchase of autos,

The

January survey of loan officers indicated that banks, on net, have
not changed the terms on auto loans or credit cards over recent
months.

But some respondents reportedly had tightened standards for

approving such loans

(appendix)

Interest rates on new cars and personal loans at commercial
banks were unchanged between August and November

while the average

new-car rate at "captive" finance companies edged down slightly.

III-22

GROWTH OF CONSUMER CREDIT
(Percent change; seasonally adjusted annual rate)
Memo:
Outstanding
Nov. 1995
(billions
of dollars)

1993

1994

H1

1995
,
H2

Installment
Auto
Revolving
Other

8.1
9.0
11.0
3.7

14.2
13.1
16.7
12.5

15.0
8.5
22.6
13.1

10.7
12.5
11.5
7.4

9.6
12.6
10.5
4.6

13.7
12.4
16.0
12.1

10.4
11.2
9.2
10.9

1,013.8
347.9
390.1
275.8

Noninstallment

-4.7

10.1

11.7

9.3

26.4

-41.0

-5.2

63.2

7.2

14.0

14.8

10.4

10.6

10.3

9.4

1,077.1

Type of credit

Total
*
r
p

1995
Q3

Oct. r

Nov.p

Through November.
Revised.
Preliminary.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)

1995
Type of loan
1993

At commercial banks
New cars (48 mos.)
Personal (24 mos.)
Credit cards

1994

Feb.

May

Aug.

Oct.

Nov.

8.1
13.5
16.8

8.1
13.2
16.2

9.7
14.1
n.a.

9.8
14.0
n.a.

9.4
13.8
n.a.

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

9.4
13.8
n.a.

2

Credit cards
All accounts
Accounts assessed
interest

n.a.

n.a.

16.1

16.2

16.0

n.a.

15.8

n.a.

n.a.

15.3

16.2

15.9

n.a.

15.7

11.9
15.1

11.4
14.8

10.9
14.2

At auto finance
companies
New cars
Used cars

3
9.5
12.8

9.8
13.5

10.9
14.1

10.8
14.0

Note. Annual data are averages of quarterly data for commercial bank rates and

of monthly data for auto finance company rates.
1. Average of "most common" rate charged for specified type and maturity durin g

the first week of the midd.le month of each quarter.

2. The rate for all accounts is the stated APR averaged across all credit card
accounts at all reporting banks.
The rate for accounts assessed interest is the
annualized ratio of total finance charges at all reporting banks to the total
average daily balances against which the finance charges were assessed (excludes
accounts for which no finance charges were assessed).
3. For monthly data. rate for all loans of each type made during the month
regardless of maturity.
n.a.
Not available.

III-23
Over the full year, loan rates declined much less than did yields on
Treasury securities of comparable maturities, so rate spreads rose
substantially from very low levels to above-average levels (chart).
Still, new-car loan rates, at about 9-1/2 percent at banks, are in a
historically low range, at least in nominal terms.

From 1972, when

the series began, until 1993, rates had never broken below
10 percent.
Preliminary data suggest that securitization of consumer loans
continued apace in the final quarter of 1995.

Fourth-quarter

issuance of credit card, auto, and "other" asset-backed securities
is estimated at about $25 billion, bringing the total for the past
year as a whole to $81 billion--well above the previous record total
of $51 billion in 1994.
Despite statistical and anecdotal evidence of rising
delinquency rates for credit card accounts, investors do not appear
greatly concerned about the risk of holding such securities.
Rate spreads on credit-card-backed securities were at historically
low levels late last year (chart), notwithstanding a large volume of
supply.

The current market reaction is in contrast to that in 1991,

when rising delinquency rates contributed to a steep rise in rate
spreads.
Several factors may help explain the market's limited concern
about credit quality.

One is that although credit card

delinquencies have risen considerably in anecdotal reports and some
statistical measures, Moody's delinquency rate series on securitized
credit card receivables was quite low in October (latest available
reading),

although up a little from its lowest point

(chart).

5. The only securities currently of concern seem to be those
associated with certain troubled specialty retailers, which account
for only about $1 billion of a nearly $130 billion market.

III-24

Rate Spread on Consumer Loans at Commercial Banks
(Consumer rate less yield on three-year Treasury notes)
Percent

1975

1978

1981

1984

Spread on Credit-Card Backed Securities

1987

1990

1996

1993

Delinquency Rate on Securitized Cards

Over three-year Treasury notes
Basis points

Percent

Monthly

1990

1991

1992

1993

1994

1995

1990

1991

1992

1993

1994

1995

III-25
Also, experience in the 1990-91 recession, when virtually every
credit-card-backed security survived without a mishap, may have made
investors more comfortable with holding such securities when
delinquency rates are rising.

Moreover

by comparison with some

other possible investment vehicles, card-backed securities may look
quite attractive.

Investor disaffection with CMOs, for instance,

after several well-publicized cases of large investment losses in
1994, is likely boosting demand for card-backed securities.
by foreign investors reportedly has been particularly strong.

Demand

APPENDIX
THE JANUARY SENIOR LOAN OFFICER OPINION SURVEY ON
BANK LENDING PRACTICES

The January 1996 Senior Loan Officer Opinion Survey on Bank
Lending Practices posed questions about changes in bank lending
standards and terms, changes in loan demand by businesses and
households, the recent weakness in home mortgage lending, and the
response of the banks to a temporary opportunity to reclassify their
investment account securities.
Fifty-eight domestic commercial
banks and twenty-two U.S. branches and agencies of foreign banks
participated in the survey.
The survey results are consistent with a slight firming of
credit standards over the past three months.
Small net fractions of
banks indicated that they had tightened lending standards for
commercial and industrial firms of all sizes.
Standards for
commercial real estate loans were also tightened, while standards on
home mortgage loans were unchanged, on net.
In response to new
questions, banks indicated that they had tightened standards for
credit card accounts and auto lending, even though they indicated a
slightly increased willingness to make consumer installment loans.
While standards for most types of loans firmed a bit, a few
banks indicated that they had eased some loan terms.
Banks eased
terms on business loans slightly, on net, although the shares that
reported having done so were the smallest in several years.
There
was little change in terms on credit card debt or auto loans.
The change in demand for credit over the past three months was
Banks reported that demand for business
mixed across loan types.
loans from large and middle-market firms was little changed, on net,
but demand from small businesses had increased.
Banks also reported
increased demand for commercial and residential real estate loans.
Demand for consumer installment loans weakened, however.
Commercial

and

Industrial Loans

The January survey found a modest tightening of standards for
approving business loans other than for mergers over the past three
months.
Between 5 and 10 percent of domestic and foreign banks
indicated that they had tightened standards for loans to large,
middle-market, and small businesses.
This is the first survey to
report a net tightening of standards on business loans in the past 3
years.
Significant fractions of banks reported an easing of terms on
A quarter of the domestic respondents reported a
these loans.
decrease in the spreads of loan rates over market rates for loans to
large and middle-market firms, while fewer than 10 percent reported
As has been the
a decrease in spreads on loans to small businesses.
case for some time, smaller fractions of respondents eased other
terms, including the cost of credit lines, the size of credit lines,
loan covenants, and collateralization requirements.
The pace at
which banks are easing terms appears to be slowing:
This is the
third consecutive survey in which the share of banks reporting
easier terms has fallen.
Indeed, for collateralization requirements
for small and middle-market borrowers, more banks tightened than

III-A-1

III-A-2
eased standards, the first such net tightening since 1993.
Foreign
branches and agencies indicated no change, on net, in terms.
Those banks that tightened their lending standards or terms on
business loans attributed this foremost to a less favorable economic
outlook. Those that eased standards or terms did so because of
increased competition from other banks and, to a lesser extent, from
nonbank lenders.
Banks reported little change in demand for loans from large and
middle-market firms, but an increase in demand from small
businesses. Many of the banks that experienced an increase or
decrease in demand for business loans attributed it, in part, to
changes in the financing needs of their customers for inventory and
equipment investment.
However, banks that experienced increased
demand from large firms attributed much of the increase to merger
and acquisition financing.
Commercial Real Estate
Small fractions of both domestic and foreign respondents
reported tightening standards on loans for commercial offices and
for industrial structures, while about 20 percent indicated they had
tightened standards on construction and land development loans and
on other nonfarm nonresidential real estate loans.
On balance,
standards for commercial real estate loans were tightened by a net
share of banks that was larger than at any time since the beginning
of 1992.
Demand for these loans likely increased over the past
three months, as a few more banks indicated an increase than a
decrease in demand for commercial real estate loans.
However, the
net share of banks reporting an increase in demand was below the
levels reported since May, when this question was added to the
survey.
Lending to Households
About a quarter of the banks, on net, indicated they had
tightened standards over the past three months for approving new
credit card accounts, and a sixth tightened standards on auto loans.
Banks attributed the tightening to many factors including, in
decreasing order of importance, increased delinquency rates, an
increased willingness of households to declare bankruptcy, increased
household debt burdens, and a less favorable economic outlook.
On
net, about 5 percent of banks indicated a greater willingness to
make consumer installment loans. Although this result seems at odds
with the tightening of standards reported for these loans, the
fraction of banks reporting increased willingness, while up slightly
from last quarter, remains relatively low. Terms on credit card
loans were little changed:
A couple of banks reduced credit limits,
but a similar number reduced spreads over market rates and reduced
the minimum fraction of outstanding balances required to be repaid
each month. Banks reported essentially no change in terms on auto
loans.
On net, respondents reported a small decline in demand for
consumer installment loans.
Banks indicated no change in standards for approving home
mortgages, and about 15 percent, on net, experienced an increase in
demand for these loans. A series of special questions explored the
reasons for the recent slowing of the growth in real estate loans on
banks' books. A third of the domestic respondents indicated they
had experienced such a slowdown. Those banks that had encountered a

III-A-3
slowdown attributed it to an increased rate at which they were
securitizing these loans, reduced loan originations, and increased
repayments of loans refinanced elsewhere. Respondents attributed
the increased rate of securitization to demand from households for
fixed rate mortgages, which are more likely to be securitized, and
to a need for funds by their bank. They attributed the slowdown in
originations of these loans to a weaker housing market in their
region.
Investment Account Securities
Several questions asked the domestic and foreign respondents
about the recent SFAS 115 reassessment, which allowed banks to
reallocate, on one occasion between November 15 and December 31
1995, their investment account securities between "available for
A large
sale" and "held to maturity" without penalty.
proportion of the domestic respondents reported a substantial shift
of securities into the available-for-sale category. Three-quarters
of the respondents indicated that the resulting shift increased the
share of their investment account securities that are available for
sale by 20 percentage points or more. In most cases the banks held,
rather than immediately sold, the securities that were reclassified.
Those banks that reclassified securities did so because of a desire
for increased liquidity and flexibility
and also because gains and
losses on available-for-sale securities are not reflected in equity
for regulatory purposes.

1 The Financial Accounting Standards Board's Statement of
Financial Accounting Standards 115 requires banks, effective January
1 1994, to classify securities held outside of trading accounts as
"available for sale" or "held to maturity."
The former are marked
to market while the latter are evaluated at amortized cost.
Those
securities classified as held to maturity cannot be sold without
penalty.
2. The decision to exclude these gains and losses from regulatory
capital was announced after banks were required to declare which
securities in their portfolio would be held to maturity

III-A-4

Measures of Supply and Demand For C&I Loans, by Size of Firm Seeking Loans
Net Percentage of Domestic Respondents
Tightening Standards for C&I Loans

Percent

-

1990

1991

Large
Medium
Small

..
--

1992

Net Percentage of Domestic Respondents
Increasing Spreads of Loan Rates Over Base Rates

Percent

.....
--

1990

1991

-

Large
Medium
Small

1992

Net Percentage of Domestic Respondents
Reporting Stronger Demand for C&I Loans

1992

1993

Percent

1994

1995

III-A-5

Measures of Supply and Demand For Loans to Households
Net Percentage of Domestic Respondents
Tightening Standards for Mortgages to Individuals

I

S9
1990

91
1991

I

1992
1992

Percent

1993
1993

1994I
1994

Net Percentage of Domestic Respondents Indicating
More Willingness to Make Consumer Installment Loans

f SMik
1

I
1995

Percent
--

AnPvA

--

1 111

........
1.......1 1 11

Net Percentage of Domestic Respondents
Reporting Stronger Demand for Loans to Households

1993

1 1 1 1 1 1

Percent

1994

80

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
U.S.

International Trade in Goods and Services
The deficit for U.S. international trade in goods and services

was $8.0 billion in October, slightly smaller than in the previous
two months, and less than averages recorded in the second and third
quarters.

Imports declined a bit more in October than exports

declined.

The 1 percent decrease in imports was largely in oil

(especially quantity) and automotive products.
however, recorded another strong rise.

Computer imports,

For exports, a drop in

agricultural and automotive shipments from relatively strong levels
was partly offset by an increase to record levels in machinery
exports.

Data for November are now scheduled to be released during

the week of February 5.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
Monthly rates

Ann.ual rates
1994.
. .......
Real NIA_1../.._
Net exports of G&S

... Q1

1995 ..
... 2 .

.Q3

Aug ..

1995
_S p

Qct
-

-108.1

-119.0

-126.8

-114.1

--

--

-106.2
-166.1
59.9

-116.0
-178.4
62.4

-133.7
-195.2
61.5

-110.3
-173.9
63.7

-8.2
-13.5
5.3

-8.2
-13.7
5.5

Nominal.BQPO....
Net exports of G&S
Goods, net
Services, net
1.
In billions
Source.
U.S.

-8.0
-13.7
5.6

of chained (1992) dollars.
Dept. of Commerce, Bureaus of Economic Analysis and Census.

In the third quarter, the deficit was significantly less than
in the second quarter.

Exports of goods and services rose 1 percent

with increases recorded in most major categories of trade. Imports
declined 1 percent, with most of the decrease occurring in
categories of trade that had increased sharply in the second
quarter.
Oil Imports
The quantity of oil imported in October declined due to lower
oil consumption and to a seasonal inventory drawdown. The amount
IV-1

1-24-96

IV-2

U.S. International Trade in Goods and Services
(Seasonally adjusted annual rate)
Net Exports
Billions of dollars

NIPA Exports and Imports
Ratio scale, billions of chained (1992) dollars

I'
I

h-

SNIPA basis
\
chained (1992) dollars

It

, Currentdollars
i

r

I

|

*
,'I
I

II

.

.
'1\1 I .

*

.

-

*

*

1994

1993

It
Ii

t

I

'*

'**

-------

1992

r

1995

Selected Exports

1992

1993

1994

1995

Selected Imports

Ratio scale, billions of chained (1992) dollars

Ratio scale, billions of chained (1992) dollars

Machinery

Industrial supplies

-C

Automotive

I

\r

-

I

1992

I

1993

.
I

.
I

1994

.

I

.

.

1995

1992

1993

1994

1995

IV-3

U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)
Amount._
Change 1/

Levels

_

1995

1995

_02

Q3

._995
Q2

Sep

._
Q3

1..
995...
S....Set_pI _O....._c.t.
...

Exports of G&S

778,4

790.1

809.5

801.0

19.9

11.7

12-6

-8.6

Goods exports
Agricultural
Gold
Computers
Other goods

571.4
53.6
7.7
37.1
473.0

580.9
58.8
3.4
41.4
477.4

597.3
62.4
3.6
41.5

588.0
60.4
5.2
43.0
479.4

17.4
-2.5
2.1
0.7
17.0

9.5
5.2
-4.4
4.3
4.4

8.3
2.6
1.0
-1.2
5.9

-9.3
-2.0
1.6
1.5
-10.5

31.1
32.6
129.9

23.6
35.6
134.5

20.8
37.0

22.4
36.9
141.6

5.9
2.6
4.7

-7.5
3.0
4.6

-6.7
1.4
2.9

1.6
-0.1
4.2

58.8
31.3
6.5
21.0

61.0
32.3
6.7
22.1

57.2
32.1
7.9
17.2

-4.7
-4.5
-0.7
0.5

2.2
1.0
0.2
1.1

4.0
-4.6
-0.7
9.3

-10.0
-0.1
1.0
-10.9

Ind supplies
Consumer goods
All other

131.8
64.5
24.2

133.2
64.8
24.7

135.7

65.9
26.0

133.5
65.6
22.3

1.4
0.3
0.5

1.5
-0.3
5.0

Services exports

207.0

209.1

212.2

212.9

912.1

900.3

908.5

897.5

37.6

-11.8

12.6

-11.0

766.6
58.3
10.8
53.0
644.5

754.8
56.2
2.5
58.8
637.3

762.3
57.4
3.3
62.0

751.8

639.6

51.0
4.9
63.5
632.4

34.2
6.0
6.4
2.2
19.6

-11.8
-2.1
-8.3
5.8
-7.2

11.2
2.8
0.9
2.9
4.6

-10.5
-6.4
1.7
1.5
-7.2

Aircraft & pts
Semiconductors
Other cap gds

11.2
37.2
117.9

10.4
42.1
117.0

10.7
43.5
115.8

12.0
44.8
114.9

0.6
5.3
5.4

-0.8
4.9
-0.9

0.2
1.7
0.6

1.3
1.3
-0.9

Automotive
from Canada
from Mexico
from ROW

128.6
42.8
17.6
68.2

123.5
43.7
18.2
61.7

125.1

-1.3
-5.5
-0.2
4.4

-5.0

20.0
60.0

114.1
44.8
23.0
46.3

0.9
0.6
-6.5

-0.2
-6.7
1.7
4.8

-11.0
-0.2
3.0
-13.7

Ind supplies
Consumer goods

127.6
32.7
26.2

123.2
161.5
33.3
26.3

122.6
161.5
33.8
26.6

123.3
160.2
34.0
29.1

4.8
4.0
-1.4
2.1

-4.4
-1.6
0.5
0.1

0.8
0.1
0.7
0.7

0.6
-1.3
0.2
2.5

Services imports

145.5

145.5

146.2

145.6

3.4

-0.1

1.3

-0.5

Memo:
Oil qty (mb/d)
Oil price ($/bbl)

9.10
17.55

9.61
16.01

9.90
15,88

8.81
15.84

0.15
1.55

0.51
-1.54

Aircraft & pts
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW

Imp.orts_
__S_

..

Goods imports
Petroleum
Gold
Computers
Other goods

Foods
All other

163.1

489.9

137.4

67.2
32.2
6.9
28.1

45.0

0.51
-0.06

1. Change from previous quarter or month.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.

-2.1
-0.3
-3.7

-1.09
-0.04

IV-4
imported in October was less than in any month since last April.
Preliminary Department of Energy statistics indicate that in
November imports should move back up reflecting a build-up in oil
inventories.
The price of imported oil increased slightly in November after
declining in October.

The general decline in prices from May

through October reflected concern in world spot markets about an
over-abundant world oil supply.

In November, prices increased

because of loss of output in Mexico from late hurricanes, fear of
oil workers' strikes in Venezuela and Brazil, and the decision by
OPEC to maintain existing production quotas.
sharply in December

Spot WTI prices rose

(by over $1.00 per barrel to average $18.77 per

barrel) because of colder than normal weather in North America,
Japan, and Europe, and uncertainty about Saudi Arabian oil policies
given the poor health of King Fahd.

Spot WTI rose above $20.00 per

barrel in early January as the cold weather persisted and King Fahd
temporarily turned over power to Crown Prince Abdullah.

Spot WTI

fell back below $18.00 per barrel when Iraq requested a reopening of
negotiations with the United Nations for a limited sale of oil, and
when the temperatures in the Northern Hemisphere appeared to be
returning to normal.
Prices
of

Non-oil Imports
and

Exports

Prices of U.S. non-oil imports increased slightly in November
after falling during the previous two months.
of imported capital goods and foods

Increases in prices

(both following two months of

sizable declines) were partly offset by a drop in the price of
imported industrial supplies

(primarily metals and selected building

supplies).
For October-November combined, compared with the third
quarter, prices of non-oil imports declined 1-1/2 percent at an

IV-5

PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)
Annual rates
1995
Q03Q4e/__

_C____Q2

Merchandise
Oil

---------BLS
8.5
-1.7
36.3
-29.7

imports

Non-oil
Foods,

Monthly rate__
1995
Oct
Sep,

prices
-1.4
-3.0

Nov

(1990=100)----------0.0
-0.4
0.2
1.9
-1.6
0.9

5.8
feeds,

-0.3

0.8

-7.6

-1.3

-1.3

0.3

5.5
-1.9
0.1
1.8
1.2

0.2
-6.7
-2.6
1.9
-0.9

0.4
-0.8
-0.6
0.3
-0.2

-0.1
-1.5
-0.4
0.3
-0.2

-0.4
0.5
0.4
0.0
0.1

7.1
17.0
6.0

0.9
21.7
-1.6

-0.4
19.7
-2.9

0.1
3.0
-0.3

0.1
1.9
-0.2

-0.2
2.2
-0.5

13.8
-2.4
3.9
-0.2
2.9

Ind supp ex ag
Computers
Capital goods ex comp
Automotive products
Consumer goods

-0.2

10.4
-4.4
9.5
5.2
3.4

Merchandises
ports
Agricultural
Nonagricultural

-1.4

-3.8

bev.

Ind supp ex oil
Computers
Capital goods ex comp
Automotive products
Consumer goods

1.8

-6.8
-6.9
2.2
0.9
0.7

-10.4
-7.0
0.9
5.0
0.7

-1.0
-0.4
0.1
0.2
0.0

-1.0
-0.8
0.1
1.0
0.1

-1.5
-0.6
0.1
0.2
0.2

--- Prices in the NIPA accounts

0.1

(1992=100)--

Chai n.-:type _ind e.x
Imports of gds & serv.
Non-oil merchandise

9.0
4.8

-2.3
0.8

Exports of gds & serv.
Nonag merchandise

5.5
4.8

0.8
-1.2

e.

--

Average of two months.
1-24-96

Oil Prices
Dollars per barrel
S40
35

30
25

Spot West Texas intermediate

20
- 15
Import un value

- 10
1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

IV-6

annual rate; this follows

10 consecutive quarters of price

increases. The largest declines were in capital goods and foods.
Prices of imported industrial

supplies were little changed on

average.
Prices of exports decreased slightly in November following two
months of very small increases.

The decline was attributable to a

drop (for the sixth consecutive month) in prices of exported
industrial supplies.

As in

the preceding two months, prices of

agricultural exports rose strongly (especially grains).
For October-November combined, compared with the third
quarter, prices of nonagricultural exports declined and prices of
agricultural exports increased sharply.

As was the case in the

third quarter, prices of nonagricultural exports declined as prices
of exported industrial supplies dropped sharply following doubledigit increases from mid-1994 through mid-1995.

Quarterly prices of

exported capital goods and consumer goods rose at annual rates of 3
percent or less in 1995.
Data for prices in December are now scheduled to be released
on February 14.
U.S. International Financial Transactions
Foreign private net purchases of U.S. securities rebounded
strongly in November, to resume the heady pace set earlier in the
year (line 4 of the Summary of U.S. International Transactions
table).

Private security purchases were dampened in October by

large sales of Treasuries in the United Kingdom and Japan, which
totaled more than $14 billion.
purchases of almost $2 billion.

In November these countries recorded
In both months the offshore centers

associated with U.S.-based hedge funds recorded large purchases of
Treasuries--in the $15 billion range.

This pattern is broadly

consistent with press reports stating that foreigners less closely
associated with the U.S. markets were particularly concerned about

IV-7

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)

1993

1994

1994
Q4

1995
Q1

Q2

Q3

Oct

22.4

37.2

39.4

-1.1

12.5

16.9

14.1

5.6
1.6

-. 6

Nov

Official capital
1. Change in foreign official reserve
assets inU.S. (increase. +)

70.3

37.7

a.

30.1

28.9

b.

OPEC countries

-5.1

-3.3

c. All other countries
2.

G-10 countries

45.4

-.8

12.1

Change in U.S. official reserve
assets (decrease, +)

-1.4

.4

-. 2

6.2

.3

5.1

27.5

-1.0
1.6

-5.3

5.3

23.2
-2.7

-1.9

.5

12.8
-. 2

Private capital
Banks
3.

Change in net foreign positions
of banking offices in the U.S. 1

15.5

103.1

10.6

-11.7

-24.8

-6.6

23.3

-20.9

Foreign net purchases of
U.S. securities (+)

105.8

92.8

36.4

45.9

51.3

68.6

5.8

31.3

a.

Treasury securities3

24.8

34.6

26.0

30.1

30.5

37.3

18.0

b.

4
Corporate and other bonds

61.4

53.9

12.9

19.3

18.5

26.0

10.2

c.

Corporate stocks

19.6

-2.4

-3.5

2.4

5.3

3.1

-56.6

-17.9

-7.7

-22.8

-35.1

-12.5

Securities
4.

5.

2

U.S. net purchases (-) of
foreign securities

-143.1

4.4

-8.1

a.

Bonds

-80.4

-9.3

-8.5

-3.5

-12.5

-13.0

-7.0

-4.6

b.

Stocks

-62.7

-47.2

-9.3

-4.1

-10.2

-22.1

-5.5

-3.5

-72.6

-49.4

-11.9

-22.5

-17.1

-21.7

49.4

19.6

17.2

12.9

-6.2

-18.8

-10.0

-43.3

-39.0

-43.2

Other flows (quarterly data. s-a.)
6.

U.S. direct investment (-) abroad

7.

Foreign direct

8-

Other (inflow. + )5

investment in U.S.

48.3

U.S. current account balance (s.a.)
- + 4cnl

1 IA4

rrnnr,

41.1

(

o

1

-99.9
36.0

-16.8
-151.2
-14.3

13.7

19.5

19.2

19.3
-. 8
-39.5
-23.3

n.a

n.a

Note. The sum of official capital, private capital, the current account balance, and the statistical
discrepancy is zero. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies
plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing
and lending under repurchase agreements). Includes changes in custody liabilities other than U.S.
Treasury bills.
2. Includes commissions on securities transactions and therefore does not match exactly the data on
U.S. international transactions published by the Department of Commerce.
3. Includes Treasury bills.
4. Includes U.S. goverment agency bonds.
5. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere
plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1
through 5 since publication of the quarterly data in the Survey of Current Business.
n.a. Not available. * Less than $50 million.

IV-8
the possibility that the U.S. Treasury might not meet its midNovember obligations.
Foreign net purchases of corporate and agency bonds also
picked up in November, after a modest slowing in October (line 4b).
Nearly all of the net purchases were in Europe; Japan recorded net
sales of almost $1 billion.

Foreign transactions in U.S. stocks

swung from modest net sales in October to net purchases in November.
Foreign official reserve assets in the United States increased
by $12-1/2 billion in November after a small reduction in October
(line 1).

The increase is attributable to countries outside the

G-10, with particularly large increases coming from China and
Thailand.

Partial data for December from the FRBNY indicate a small

reduction in official reserves in the United States.
The large inflows through official transactions and private
purchases of U.S. securities were partially offset by large outflows
through banking transactions and U.S. purchases of foreign
securities.

U.S. net purchases of foreign stocks and bonds both

declined between October and November, but the total remained above
$8 billion (line 5).

Bond purchases were concentrated in the United

Kingdom, providing little information about the residence of the
issuer.

Stock purchases were widespread with net purchases in Japan

totaling about $1/2 billion.
Banks and securities dealers reported large net capital
outflows in November (line 3).

About $7 billion, or one-third, of

this outflow is attributable to securities dealers' lending
associated with RP transactions.

The remaining $14 billion outflow

is attributable primarily to transactions between banks and their
related foreign offices.

The large outflow reported on an end-of-

month basis in the Summary table is largely consistent with daily
data reported on the FR 2950/51.

However, the FR data indicate that

this outflow was an end-of-month phenomenon and does not reflect the

IV-9
general pattern of funding.

On a monthly-average basis, U.S.-

chartered banks reported a relatively modest, $4 billion, net
outflow vis-a-vis own foreign offices in November while foreignchartered banks reported a $9 billion inflow (lines la and lb of the
International Banking Data table).

Bank positions vis-a-vis own

foreign offices changed little in December, on a monthly-average
basis.

IV-10

INTERNATIONAL BANKING DATA
(Billions of dollars)

1992
Dec.

1. Net claims of U.S.
banking offices
(excluding IBFs)
on own foreign
offices and IBFS
a. U.S.-chartered
banks
b. Foreign-chartered
banks

-71.6

17.0

1993
Dec.

-122.1

4.2

1994
Dec.

June

Sep.

1995
Oct.

Nov.

Dec.

-254.4

-259.0

-260.0

-224.0

-235.3

-244.3

-70.1

-88.7

-86.1

-89.7

-86.0

-86.1

-164.8

173.0

-173.9

-88.6

-126.3

-153.9

-147,6

-158.2

24.8

21.8

23.1

25.2

25.7

26.2

26.0

26.5

n.a.

90.9

78.4

85.3

86.4

n.a.

n.a.

n.a.

90.0

77.8

85.6

92.3

94.6

93.8

92.2

91.2

n.a.

79.2

86.0

108.9

n.a.

n.a.

n.a.

n.a.

MEMO: Data as recorded in the U.S. international transactions accounts
n.a.
205
187
191
4. Credit extended to U.S.
184
nonbank residents

n.a.

n.a.

n.a.

235

n.a.

n.a.

n.a.

2. Credit extended to
U.S. nonbank
residents
a. By foreign
branches of
U.S. banks
b. By Caribbean
offices of
foreign-chartered
banks
3. Eurodollar holdings
of U.S. nonbank
residents
a. At all U.S.chartered banks and
foreign-chartered
banks in Canada and
the United Kingdom
b. At the Caribbean
offices of
foreign-chartered
banks

5. Eurodeposits of U.S.
nonbank residents

230

288

n.a.

1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in timing
from the banking data incorporated in the U.S. international transactions accounts.
Lines la, Ib, and 2a are averages of daily data reported on the FR 2950 and FR 2951.
Lines 2b and 3b are end-of-period data reported quarterly on the FFIEC 002s.
Line 3a is an average of daily data (FR 2050) supplemented by the FR 2502 and end of quarter
There is a break in the series in
data supplied by the Bank of Canada and the Bank of England.
April 1994.
Lines 4 and 5 are end-of-period data estimated by BEA on the basis of data provided by the
BIS, the Bank of England, and the FR 2502 and FFIEC 002s. It includes some foreign-currency
SCB
denominated deposits and loans. Source:

IV-11
Foreign Exchange Markets
The weighted average value of the dollar has risen about 3
percent since just before the December 19 FOMC meeting.

Over this

period, the dollar has appreciated over 4 percent against the yen
and the mark while showing little net change against the Canadian
dollar.
One factor contributing to the dollar's strength against the
mark and other European currencies over this period appears to have
been market perceptions of a slowing of economic activity in most
European countries, leading to heightened expectations of further
moves toward monetary easing by European central banks.

The same

explanation cannot account for the dollar's strength against the
yen, since prospects for Japanese growth appear, if anything, to
have increased recently.

Some market commentary has focused on the

recent decline in Japan's external surpluses to explain the yen's
weakness.

The breakdown of U.S. budget negotiations early this

month put temporary downward pressure on the dollar, but this
pressure did not seem to be either intense or prolonged.
The most notable feature of industrial-country financial
markets since mid-December has been a general move by central banks
to reduce short-term interest rates.

Since the Bundesbank's

December 14 announcement of 50 basis point reductions in its
discount and Lombard rates and a 23 basis point reduction in its
repo rate, the German repo rate has declined an additional 20 basis
points in subsequent repo auctions, to a current level of 3.55
percent.

On reason for the Bundesbank's easing has been the slow

growth of the targeted M3 monetary aggregate.

In the fourth quarter

of last year, M3 was only 2.1 percent above its year-earlier level,
well below its 4 to 6 percent target range for this period.

After a

general initial rush to follow the Bundesbank's December 14 interest

IV-12

Weighted Average Exchange Value of the Dollar
(Daily data)
index, March 1973 =100

October

November

December

January

Interest Rates in Major Industrial Countries
Three-month rates
Dec. 18
Jan. 26
Change
Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

3.80
0.50
6.41
6.00
5.08
10.63
3.70
3.55

Ten-year bond yields
Dec. 18
Jan. 26
Change

-0.45
0.05
-0.22
-0.58
-0.58

6.03

5.91

2.80

3.10

7.40

7.43

7.37

7.24

6.69

-0.69

11.16
6.67

8.39

3.35
0.55
6.19
5.42
4.50
9.94
3.36
2.90
1.63
8.11

3.73
8.56

6.43
10.48
6.40
5.91
4.09
8.49

-0.12
0.30
0.03
-0.13
-0.26
-0.68
-0.27
-0.15
0.36
-0.07

Weighted-average
foreign

4.70

4.31

-0.39

6.47

6.37

-0.10

United States

5.67

5.34

-0.33

5.85

5.

1.69

-0.34
-0.65
-0.06
-0.28

III

Note. Change is in percentage points.

6.06

p. Preliminary

72

P

-0.13

IV-13
rate reductions, several other European central banks have continued
to move down money market intervention rates in recent weeks
including the Bank of England, which lowered its minimum lending
rate by 25 basis points to 6.25 percent on January 18.

On December

19, soon after the FOMC's announcement of a 25 basis point reduction
in the federal funds rate, the Bank Of Canada indicated that it was
reducing its target range for the overnight rate by 25 basis points.
Another 25 basis point reduction was announced on January 25
lowering the target range to 5.25 percent to 5.75 percent.
Consistent with this general move to monetary easing, short
term market interest rates have declined since mid-December in all
of the major industrial countries except Japan, where the short-term
rate has edged up slightly.
70 basis points.

The largest decline has been in Italy,

The German short-term rate has declined about 45

basis points over the intermeeting period, about 10 basis points
more than the reduction in the U.S. 3-month rate.
Long-term rates have also decreased in nearly all of the
foreign industrial countries over the past month, with the major
exception again being Japan, where the long-term rate has risen
about 30 basis points.

The largest decline in long-term rates, 70

basis points, has been in Italy, where apparently reduced prospects
for early elections may have reduced political uncertainty somewhat
The long-term rate in Germany has declined about 10 basis points on
balance, about the same as the reduction in the comparable U.S.
long-term rate over this period.
Since the December FOMC meeting, the Mexican peso has
appreciated about 4 percent against the dollar.

Over this period.

Mexican short-term interest rates have declined over 10 percentage
points to below 40 percent, and Mexican stock prices have risen over
10 percent

TV-14

Since mid-December, the gold price has risen 5 percent, moving
above the $400 level.

It is hard to explain the recent strength of

the gold price in terms of new fundamental factors.

Possibly the

lower interest rate atmosphere has contributed to the rise.
There has been no U.S. intervention during the intermeeting
period.

Developments in Foreign Industrial Countries
Recent data on real economic activity in major foreign
industrialized countries indicate that the pace of economic growth
has generally remained sluggish.

While the Japanese economy has

begun to show signs of a modest pickup, activity in Germany and
France has slowed further.

Only in Italy has growth been fairly

strong, although there too, recent monthly indicators point to some
deceleration.
Prices

Inflation pressures have remained generally subdued.

have fallen further in Japan, while consumer price inflation in
Canada has continued to decline from its peak in the first half of
last year.

In the United Kingdom inflation has fallen slightly

after being pushed up by temporary factors last summer.

Italian

inflation remains high but it is slowing after reaching a year-onyear peak of 6 percent in November.
Financial and economic uncertainties continue to be of concern
in some countries.

In Germany, the consolidated general budget

deficit widened to more than 3-1/2 percent in 1995, raising
questions about Germany's ability to meet the Maastricht deficit
criterion.

In Japan, worries about the health of the banking sector

persist, although the funding premium for Japanese banks in
Eurocurrency markets remains at a modest level.

In Canada, another

IV-15
referendum on Quebec sovereignty is unlikely before mid-1997
Nonetheless, uncertainty remains about the future of the Canadian
federal structure.
Individual country notes.

In Japan, available indicators

suggest that the long-stalled economy showed some improvement in the
fourth quarter

Industrial production turned up and housing starts

and machinery orders were particularly strong in October and
November
Prices have continued to fall

The December CPI for the Tokyo

area was 0.5 percent below year-earlier levels, while wholesale
prices were down 0.3 percent over the same period.

The GDP deflator

in the third quarter was 0.2 percent below its level four quarters
earlier.

JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995

Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratiol
Business Sentiment2
CPI (Tokyo area)3
Wholesale Prices3

Q2
0.0
.77
3.8
4.5
3.1
0.63
-16
-0.1
1.7

Q3
-2,3
1.2
0.7
5.1
3.2
0.60
-18
-0.2
-0.6

Q4
Sept
n.a,
-1 7
n.a.
7.7
n.a. -12.6
2.4
1 3
n.a,
3.2
n.a.
0.60
14
-0.8
-0.0
-0.1
-0.2

Oct
1 3
4.4
9.8
1.8
3.2
0.61

Nov
1.5
5.7
4.9
-1.4
3.4
0.63

Dec
n.a.
n.a.
n.a.
1.6
n.a.
n.a,

-0.9
-0.1

-0.9
0.0

-0.5
-0.3

1, Level of indicator,
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3, Percent change from previous year.
In the Bank of Japan's November survey

(Tankan)

the index of

business sentiment of major manufacturing firms (the percentage
having a favorable view of business conditions minus the percentage

IV-16
with an unfavorable outlook) registered -14, slightly less negative
than the previous survey taken in August.
The current account surplus has continued to decline,
registering $112 billion

(SAAR) in the year through November, down

about $17 billion from the same period the previous year.
year 1995 the merchandise trade surplus
down almost $14

In the

(SAAR) was $107 billion,

billion from 1994.

On January 11 the Diet elected Liberal Democratic Party

(LDP)

leader Ryutaro Hashimoto as Prime Minister to succeed Tomiichi
Murayama of the Social Democratic Party (SDP).

The ruling coalition

consists of the conservative LDP, the left-leaning Sakigake Party,
and the formerly socialist SDP.

The party leaders have stated that

they intend to keep the three-party coalition intact.

The change of

Prime Ministers is not expected to cause a major shift in policies.
Many observers are expecting a new election for the lower house of
the Diet around next summer.

In Germany, the "flash" estimate for real GDP shows growth of
only 1.9 percent in 1995, considerably less than the 3 percent
recorded in 1994.

Although the economic expansion held up in the

first half of last year, at a rate of roughly 2-1/2 percent

growth stalled in the second half.

(SAAR),

Reliable data for fourth-quarter

real GDP and its components will not be available until early March,
but it now appears likely based on the weakness of industrial

production and business confidence that real GDP declined in the
final quarter of 1995.
Concern about Germany's ability to meet the Maastricht deficit
criterion emerged with the announcement that the deficit of the
consolidated general government widened from 2.6 percent of GDP in

IV-17
GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995
Q2

Q3

Sept

Q4

Oct

Nov

Dec

Industrial Production

1.0

-0.5

n.a.

0.1

-1.4

0.1

n.a.

Orders

n.a.

1.5

-3.1

0.8

n.a.

9.5
8.4
14.3

9.6
8.4
14.3

9.7
8.5
14.7

-10.0
-5.0
1.6

-9.0
1.0
1.5

0.3

-0.4

Unemployment Rate (%)
Western Germany
Eastern Germany

9.3
8.2
13.7

9.4
8.4
14.0

Capacity Utilization 1

85.9

85.4

n.a.

3.0
-3.0
1.9

-4.3
-2.7
1.7

n.a.
n.a.
1.5

Business Confidence 1
'
3
Retail Sales
Consumer Prices1 '3

2

9.7
8.5
14.7

9.9
8.6
15.2

-

-5.0
-2.0
1.6

n.a.
n.a.
1.4

1. Western Germany.
2. Percent of firms expecting an improvement in business conditions during
the next six months less those expecting a deterioration in conditions.
3. Percent change from previous year.

1994 to 3.6 percent in 1995.

While the deficit had been expected to

increase somewhat in 1995 when Treuhandanstalt debt was brought onto
the books of the general government, additional fiscal slippage was
attributable to lower-than-expected tax revenues and higher-thanexpected social security expenditures.
Political tensions have been heightened by a public
controversy in the ruling coalition, with the Federal Democrats
(FDP) calling for the removal of the 7-1/2 percent solidarity
surcharge on income beginning of 1997.
Democrats

Chancellor Kohl's Christian

(CDU) and the Bavarian Christian Socialists (CSU) argue

that the surcharge cannot be removed until 1998 at the earliest.
This public debate has increased the likelihood of the dissolution
of the ruling coalition should the FDP receive little support in
three upcoming state elections in late March.
In France, monthly indicators available for the fourth quarter
point to slower growth, even excluding the impact of the public

sector strikes.

Industrial production in October-November fell 2.6

percent compared with the third-quarter average, and the December

IV-18
business survey by INSEE indicated that output growth remained weak.
The survey suggested that business confidence had deteriorated and
that inventories were above normal, pointing to a very weak fourth
quarter. The unemployment rate remained unchanged in October after
having risen slightly in September.
Real consumption of manufactured products

(equal to one-third

of total consumption) in the fourth quarter was down 1.8 percent
from its third-quarter average.

While such consumption rebounded in

November from its sharp decline in October
largest drop since January 1993),

(when it registered its

the 24-day public sector strikes

that extended through the first half of December reduced consumer
spending further.
institute),

According to INSEE

(the French statistical

consumer confidence in December fell to its lowest level

since January 1987.
Consumer prices in December were 2.1 percent above their yearearlier level.

A modest pick-up in inflation since August has been

due largely to a 2 percentage point increase in the VAT rate to 20.6
percent on August 1.
The French merchandise trade balance (SA) registered a record
surplus in November of $2.9 billion, compared with $1.3 billion in
October, on a sharp decline in imports.

During the first eleven

months of 1995. France's cumulative trade surplus registered $20
billion, almost $5 billion greater than the same period last year,
with about equal growth in both exports and imports.

IV-19
FRENCH ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995

Industrial Production

Q2
-0.1

Q3
1.0

Q4
n.a.

Sept
-1.9

Oct
-1.6

Capacity Utilization

84.8

84.9

n.a.

--

--

Unemployment Rate (%)
Consumption of
Manufactured Product
Consumer Prices 1

11.6
2.7

11.4
-1.0

n.a.
-1.8

11.5
-0.4

11.5
-4.4

1.

1.6
1.8
Percent change from previous year.
August 1, 1995

Nov
0.6

Dec
n.a.

-

n.a.
5.2

n.a.
-1.1

1.9
2.0
1.8
1.9
2.1
Includes the increase in the VAT on

In the United Kingdom, real GDP rose a preliminary 1.6 percent
(SAAR) in the fourth quarter.

Industrial production was little

changed on average in October and November relative to the thirdquarter level, partly as a result of a sharp contraction in output
in the energy sector in October due to unusually warm weather.
Manufacturing output continued to be sluggish as inventories were
being worked off.
UNITED KINGDOM ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995
Q1

Q2

Q3

Q4

Oct

Nov

Dec

Real GDP (a.r.)

1.9

1.9

1.5

1.6

Non-oil GDP (a.r.)

1.5

2.3

1.5

1.1

Industrial Production
Retail Sales
Unemployment Rate (%)

0.8
-0.7
8.5

0.3
0.9
8.3

0.5
0.1
8.2

n.a.
0.8
8.0

-0.7
0.1
8.1

0.5
0.9
8.0

n.a.
0.5
8.0

Consumer Prices 1
Producer Input Prices
Average Earnings 2

2.8
11.1
3.6

2.7
10.9
3.6

2.9
9.5
3.3

2.9
6.4
n.a.

2.9
7.8
3.3

2.9
6.1
3.3

3.0
5.4
n.a.

1.
2.

--

Retail prices excluding mortgage interest payments.
from previous year.
Percent change from previous year.

Percent change

IV-20
Targeted inflation, measured as the year-on-year change in
retail prices excluding mortgage interest payments, remained at 2.9
percent in the fourth quarter.

However, as suggested by the slowing

of 12-month producer price inflation during the fourth quarter,
upward pressure from earlier depreciation of the pound and this
summer's drought might be moderating.

Inflationary expectations

plus an inflation risk premium which can be interpreted as the yield
differential between regular and index-linked gilts, has declined
about 1/2 percentage point from its October level to just under 4
percent at the end of December.

The pace of the growth in average

earnings continues to be modest.
In Italy, third-quarter data (which are likely to be revised
substantially--as has occurred in past quarters) indicate that GDP
(SAAR) soared as a result of a large inventory build-up and a rise
in fixed investment following a slight decline in the second
quarter.

In recent quarters, Italian GDP growth and total domestic

demand have been subject to large fluctuations from changes in
inventories.

Nonetheless, final domestic demand growth at about 2-

1/2 percent has been relatively strong in the second and third
quarters.

Unlike the first two quarters of 1995, net exports made a

negative contribution to growth in the third quarter, as exports
declined and imports increased.

Government expenditures continued

to fall.
Available monthly indicators point to a slowdown of growth in
the fourth quarter.

Both consumer confidence fell: industrial

production declined while the unemployment rate remained high; and
producers likely partially worked off the large stock of inventories
in the fourth quarter.

IV-21
ITALIAN REAL GDP
(percent change from previous period,
1994
Q4/Q4

SAAR)

1994

1995

Q3

Q4

Q1

6.5

0.1

6.3

Q2

Q3

-0.4

8.0

GDP

2.9

Private Consumption

1.7

1.6

0.2

1.1

2.0

1.5

Investment

2.2

-2.5

6.1

11.6

11.4

4.0

Government Consumption

0.5

1.0

0.3

-1.8

-2.1

-0.5

Exports

10.0

19.6

1.7

32.9

17.3

-1.5

Imports

15.0

17.5

13.8

8.6

10.6

6.7

4.0

5.9

2.9

0.4

-2.4

7.4

-1.3

0.6

-3.3

6.5

2.0

-2.6

2.4

5.2

1.6

-2.1

-5.3

5.6

Total Domestic Demand
Net Exports (contribution)
Inv.

Change(contribution)

Inflation in Italy has stabilized but remains high.

In

December, the consumer price index was 5.8 percent above its yearearlier level, down from 6.0 percent in November.

Wage inflation in

October remained relatively moderate at 3.9 percent on a year-overyear basis, the same as the increase in September.

Wholesale prices

in November were 10.4 percent above their year-earlier level, down
from 10.8 percent in October.
On December 22, the Italian Parliament approved the 1996
budget.

It includes a $20 billion deficit reduction package that is

split between tax rises and reductions in public expenditure.

The

1996 budget deficit is projected to be 5.8 percent of GDP, down from
7.4 percent in 1995.
On January 11, Prime Minister Dini submitted his resignation.
Currently, President Scalfaro is meeting with political party
leaders to determine if an interim bipartisan government can be
formed or if early general elections need to be held.

Since the end

of December, interest rates declined by about 90 basis points
probably due to the passage of the 1996 budget and renewed optimism
that Dini will be given a second mandate.

IV-22
ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted,

SA)

1995

Industrial Production
Cap.

Utilization

(%)

Unemployment Rate (%)

Consumer Confidencel
Bus. Sentiment 2 (%)
Consumer Prices3
Wholesale Prices3

Q2
1.1

Q3
3.0

Q4
n.a.

78.6

77.5

n.a.

11.9

11.7

113.2
18
5.5
11.7

116.1
17.3
5.7
11.3

Sept
-4.4

Oct
-0.5

Nov
-0.5

Dec
n.a.

-

12.1

110.0 114.1
n.a.
13
5.9
5.8
n.a.
11.6

110.7
8
5.8
10.8

110.9 108.4
n.a.
n.a.
6.0
5.8
10.4
n.a.

1. Level of index, NSA.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.

Preliminary indicators suggest that economic activity in
Canada remained sluggish in the fourth quarter of 1995.

Although

employment in December retraced November's decline, employment for
the fourth quarter as a whole was flat, and consequently the
unemployment rate was little changed at 9.4 percent.

After

declining the previous two months, manufacturing shipments and new
factory orders increased in November, but the average for October
and November remained below the second-quarter average.

Retail

sales in October-November also remained below the average level in
the second quarter.

After rising to near the top of the Bank of

Canada's inflation target band of 1 to 3 percent in mid-1995,
consumer price inflation declined to below the mid-point of the band
in December.
Lucien Bouchard resigned from Parliament and will be sworn in
as Premier of Quebec on January 29.

He has said that another

referendum on Quebec sovereignty is not likely until after a
conference between the federal and provincial governments in April
1997.

IV-23
CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995

Industrial Production
Manufacturing Survey:
Shipments
New Orders
Retail Sales
Housing Starts
Employment
Unemployment Rate (%)
Consumer Prices1

Q2
-0.6

Q3
0.4

Q4
n.a.

Sept
0.1

Oct
-0.4

-1.3
-2.9
0.2
-14.9
0.1
9.5
2.7

1.1
1.2
0.6
-3.3
0.1
9.5
2.4

n.a.
n.a.
n.a.
-0.5
0.2
9.4
2.1

-0.2
-0.5
-0.0
1.4
0.2
9.2
2.3

-1.7
-0.9
-0.9
-10.7
0.1
9.4
2.4

Nov
n.a.

Dec
n.a.

1.3
1.5
0.2
7.5
-0.3
9.4
2.1

n.a,
n.a.
n.a.
6.6
0.4
9.4
1.7

1. Percent change from year earlier.

EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1994
1995
1995
Q2
32.7
30.9

Q3
25.3
29.6

Oct
4.8
5.4

Nov
8.8
8.4

Dec
8.2
n.a.

Japan: trade
current account

120.7
129.1

Q1
107.1 27.3
n.a. 28.8

Germany: trade1
current account1

45.4
-21.7

n.a.
n.a.

14.1
-3.5

17.7
-0.8

15.3
-9.3

6.0
-2.9

n.a.
n.a.

n.a.
n.a.

15.1

n.a.

5.7

6.0

4.1

1.3

2.9

n.a.

8.1

n.a.

7.0

4.9

1.8

--

France: trade
1

current account

U.K.: trade

-

-16.4

n.a.

-3.0

-5.1

-5.3

-2.6

current account

-3.0

n.a.

-1.9

-3.7

-2.1

--

Italy: trade
current account1

21.8
15.6

n.a.
n.a.

7.2
2.6

7.0
7.7

7.5
9.2

2.4
n.a.

n.a.
n.a.

n.a.
n.a.

Canada: trade

11.0

n.a.

4.2

4.1

5.3

2.0

n.a.

n.a.

-3.5

-2.5

current account

-16.3

n.a.

-3.4

1.

Not seasonally adjusted.

--

Data not available on a monthly basis.

--

n.a.

-

n.a.

-

--

-

IV- 24

1-26-96

Industrial Production in Selected Industrial Countries
(Monthly data; seasonally adjusted; ratio scale, index)

Japan

1987=100

W Germany

1987=100
-- I 130

1990

1990

1991

1992

1993

1994

1995

1991

1992

1993

1994

1995

1990

1991

1992

1993

1994

1995

United Kingdom

France
-- * 130

1

I

I

1990

1991

1992

1993

1994

I 19I

1995

1990

I 1

1991

1992

1993

1994

1995

1991

1992

1993

1994

1995

Canada

Italy

1990

---

1991

1992

1993

1994

1995

1990

130

IV- 25

1-26-96

Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Japan

W Germany

Percent

1991

1990

1993

1992

1995

1995

1990

1991

1992

1993

United Kingdom

France
--

I

I
1990

1994

1994
1992
1993
1990
1991
Note: Excludes mortgage interest payments.

1995

1994

Percent

I

I

I
1993

1992

1991

12

1995

1994

Canada

Italy
--

12

S9

+

0

S1-

1990

1991

I

I

I

1992

1993

1994

1990
1995

1991

1992

1993

1994

1995

1990

1991

1992

1993

1994

1995

IV-26
Economic Situation in Other Countries
Real GDP growth has been relatively weak in Latin America, and
may be slowing to more sustainable rates in Asia.

In Russia, the

rate of decline in GDP in 1995 was the smallest since reform began.
Latin American countries generally had strong trade performances in
1995 relative to 1994, with the exception of Brazil; in Asia, both
exports and imports surged, with trade balances improving in China
but falling in Taiwan and Korea.
Individual country notes.

In Mexico, monthly indicators

suggest that output may have grown marginally in the fourth quarter.
Real GDP increased about 1-1/2 percent in the third quarter on a
seasonally adjusted basis (not an annual rate), but for statistical
reasons, that increase was somewhat overstated.

The year-over-year

decline in industrial production was about 12 percent in October.
The unemployment rate

(n.s.a.) fell steadily from September through

December, although this decline in part reflects seasonal factors.
Seasonal factors also account for much of the increase in consumer
price inflation from 2.5 percent in November to 3.3 percent in
December.

The November decline in the peso and December increases

in public sector prices also contributed to inflationary pressures.
In part reflecting the continued weakness of the economy,
Mexico's trade performance remains strong.

Mexico registered a

trade surplus of $7.4 billion in 1995, compared with an $18.5
billion deficit for the same period in 1994; exports rose 31
percent, while imports fell 9 percent.
In mid-December, the Bank of Mexico announced its monetary
program for 1996.

The Bank anticipates that the monetary base will

grow by nearly 29 percent this year compared with expected nominal
income growth of about 24 percent.

The projected rise in the demand

for monetary base relative to nominal income is expected to reflect
a decline in inflation from 52 percent

(December/December) in 1995

IV-27
MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994
1995
Real GDP
Industrial Production (s.a.)
Unemployment Rate (%)
Consumer Prices 1
TradeBalance 2
Imports 2
Exports 2
Current Account

2

Q3
-9.6
-11.7

3.5
3.8
3.2
7.1
-18.5
79.4
60.8

Q4

Oct

--

-11.8

Nov

Dec

--

--

7.5
5.9
2.3
17.9
20.2

6.7
2.1
0.8
6.6
7.5

5.8
2.5
0.7
6.5
7.1

5.2
3.3
0.5
6.3
6.8

0.5

-28.9

5.9
8.0
2.0
19.4
21.4
--

--

--

--

1. Percentage change from previous period.
2. Billions of U.S. dollars, n.s.a.
to a targeted 21 percent in 1996.

Under the program, net domestic

credit creation will be limited to about 24 percent of the end-1995
monetary base, so that increases in money demand beyond that level
must be satisfied through balance-of-payments inflows.
In Brazil, economic activity may have begun to recover from a
decline in the second and third quarters of 1995, when real GDP fell
on a seasonally adjusted basis
year-over-year basis).

(though it remained positive on a

Inflation remains relatively low.

Brazil recorded a small trade surplus in the fourth quarter.
resulting in a cumulative deficit of $3.1 billion for 1995.
International reserves stood at $52 billion at the end of December
(liquidity definition), up substantially from its recent low of $34
billion in March 1995.
BRAZILIAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1995
1994
5.7
Real GDP
1
7.8
Industrial Production (s.a.)
5.1
Open Unemployment Rate (%)
1
929.0
Consumer Prices
10.5
Trade Balance 2
2
-1.5
Current Account
1. Percentage change from previous period.
2. Billions of U.S. dollars, n.s.a.

Q3
0.9
-3.5
4.8
3.1
0.8
-2.2

Q4

Oct
--

Nov
--

--4.7
0.3
--

1.1
5.1
1.4
0.3
--

-0.2
4.8
1.5
0.0
--

Dec

1.7
0.0
--

IV-28
In Argentina, real GDP fell an estimated 3.5 percent in 1995.
while inflation remained low:
December from a year earlier.

Consumer prices rose 1.7 percent in
The unemployment rate fell slightly

in October 1995 to 16.4 percent, down from the record 18.4 percent
in May.

However, this fall resulted mostly from a fall in the

participation rate, not an increase in employment.

In the first

eleven months of 1995, exports rose 31 percent from the year-earlier
period, while imports declined almost 9 percent.
monthly trade surplus peaked in June.

However, the

Gross international reserves

increased slightly in the last month and stood at $18.5 billion on
December 28.

This increase in reserves is due to a disbursement

from the IMF and the proceeds of bond placements, as well as to a
change in the definition of international reserves, which now
include repurchase and reverse repurchase agreements.

Of the $18.5

billion, $2.6 billion are in dollar-denominated Bonex bonds and $1.9
are in net repurchase agreements.

The monetary base was $13.1

billion, leaving $5.4 billion in excess reserves.
ARGENTINE ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1994
1995
Nov
Q4
Oct
Q3
-7.7
7.4
Real GDP
-10.1
--11.1
4.3
Industrial Production (sa)
Unemployment Rate (%)

2

11.7

--

16.4

Dec

16.4

1

0.1
0.3
-0.2
0.5
0.2
3.9
Consumer Prices
3
-0.0
0.0
-4.0
0.7
Trade Balance
----9.9
Current Account 3
1. Percentage change from previous period.
2. Unemployment figures available only in May and October of each year. The
figure for 1994 is the average of the two surveys.
3. Billions of U.S. dollars, n.s.a.,current account under Q2 is for the first
half of 1995.
Argentina met the fiscal and monetary targets under its IMF
program for 1995, which allowed the government to receive about $400
million in December.

However, real tax revenues fell nine percent

in 1995 from a year earlier.

The government is currently

IV-29
negotiating with the IMF for a new one-year $1 billion stand-by
program;

the current program runs out in March.

In Venezuela, real GDP grew an estimated 2 percent in 1995.
However, this performance resulted from the strong performance of
the oil sector, which grew 6 percent.

Economic activity in the non-

oil sector continued to decline, contributing to rising unemployment
in 1995.

Consumer price inflation picked up in the fourth quarter,

but the 57 percent rise in prices during 1995 was below the 71
percent rise for 1994.

Venezuela registered a merchandise (non-oil)

trade deficit of $4.8 billion for the first ten months of 1995, up
from a deficit of $3.1 billion during the year-earlier period,
reflecting an 18 percent increase in exports and a 34 percent
increase in imports.
Discussions with the IMF to establish a program are scheduled
to resume in late January.

Substantial disagreements remain between

the Venezuelan government and the IMF regarding increases in
gasoline prices and taxes.
VENEZUELAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1995
1994
Nov
Oct
Q4
Q3
---2.8
Real GDP
-8.5
-10.7
Unemployment Rate (%)
1
9.5
17.0
4.5
5.5
70.8
Consumer Prices
-1.9
--0.2
--3.8
Trade Balance 2
2
Current Account
3.6
--1. Percentage change from previous period.
2. Billions of U.S. dollars, n.s.a., non-oil trade balance.

In China,

authorities announced in

rose 10.2 percent in
surplus of $17
a year earlier.

late

1995 from a year earlier.

billion in

1995,

well above its

Dec
-6.0
---

December that real GDP
China ran a trade
surplus of $5

billion

Exports rose 23 percent from a year earlier,

reflecting a surge in exports in early 1995; in the fourth quarter.

IV-30
exports were unchanged from the year-earlier period.

Import growth,

by contrast, was relatively steady over the year, with growth of 14
percent from a year earlier.

Foreign direct investment into China

was $37 billion in 1995, up 10 percent from 1994.
CHINESE ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994
1995
Real GDP 1
11.8
Industrial Production
22.0
Consumer Prices
25.5
2
Trade Balance
5.2
1. Cumulative from the beginning of the year
2. Billions of U.S. dollars, n.s.a.

Q3
9.8
14.6
13.2
3.2

Q4
10.2
-10.1
0.8

Oct
-15.4
12.1
1.4

Nov
-14.4
11.2
0.6

Dec
10.1
-1.2

In Taiwan, industrial production declined slightly in the
fourth quarter of 1995 from a year earlier, while consumer prices
edged up.
from $12

The trade surplus declined in 1995 to $8 billion, down
billion in 1994; the value of exports rose 20 percent while

imports rose 21 percent.
TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994
1995
Nov
Oct
Q4
Q3
-6.5
6.0
Real GDP
5.6 -0.6
0.3
0.1
6.6
Industrial Production
4.6
2.9
4.2
2.6
2.0
Consumer Prices
1.4
1.4
2.4
4.1
12.0
Trade Balancel
Current Account 1

6.0

0.6

--

--

Dec
--4.6
1.3

--

--

1. Billions of U.S. dollars, n.s.a.
In Korea, growth in economic activity appears to be slowing to

a more sustainable rate, following two years of extremely rapid
growth.

Industrial production growth fell markedly in October and

November, and a substantial deceleration in imports of capital goods
during the second half of last year suggests that the investment
boom of 1994-95 is tapering off.

Export growth, although strong,

IV-31
also declined somewhat in the last quarter of 1995,

in part because

of the substantial appreciation of the Korean won against the yen
that occurred since mid-summer.

Consumer price inflation has

remained stable during the past year, and low compared with past
cyclical expansions:

Consumer prices were 4.7 percent higher in

December 1995 than their year-earlier level.
Both merchandise imports and exports increased by 35 percent
during the first eleven months of 1995 from their year-earlier
level. Because imports began from a higher base, this contributed to
a widening of Korea's current account deficit to $8.5 billion (2
percent of GDP) during the first eleven months of the year, up from
$4.6 billion over the same period a year earlier.
KOREAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1994
1995
Nov
Oct
Q4
Q3
Real GDP
8.4
9.9
---Industrial Production
10.7
13.0
-9.7
7.9
Consumer Prices
5.6
4.7
4.5
4.4
4.3
Trade Balancel
-3.1
-0.8
-0.0
0.2
1
Current Account
-4.7
-2.1
--0.1
-0.1
1. Billions of U.S. dollars, n.s.a.

Dec
-4.7
---

In Russia, monthly consumer price inflation during December
fell to 3 percent, a post-reform low.

Real GDP during 1995 declined

by 4 percent from a year earlier and industrial production was down
3 percent, following double-digit declines during the three previous
years.

In recent weeks, the ruble has remained relatively stable

within its 4550-5150 rubles per dollar band.
Russia has successfully completed two quarterly reviews and
eight monthly reviews under its IMF stand-by arrangement, satisfying

IV-32
RUSSIAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1994
1995
Nov
Q4
Q3
Q2
Real GDF
-15
-2
-1
-4
-4
Industrial Production
-21
-2
1
-5
-5
1
Consumer Prices
10
8
5
4
5
Ruble Depreciation 1
9
-3
0
1
2
Trade Balance 2

2.0

11.9

Dec
-6
-8
3
1

--

2

--0.8
-0.6
Current Account
1.Monthly Rate.
2.Billions of U.S. dollars, excludes intra-FSU transactions.

-

--

all of the program's performance criteria and quantitative
indicative targets through end-November.

The fiscal deficit during

October and November was larger than in previous months, reflecting
spending pressures as December's parliamentary election approached,
but the cumulative 1995 deficit remained below the program's
requirement.

The Russian government and the IMF are in the final

stages of negotiating a three-year Extended Fund Facility, as a
successor agreement to the stand-by that expires in the first
quarter of 1996.
The December parliamentary election resulted in a
significantly more conservative Duma.

The Communist Party and its

allies won 42 percent of the seats, almost twice their
representation in the old Duma.

Reformist parties won about a

quarter of the seats, while ultra-nationalist Vladimir Zhirinovsky's
party won 11 percent.

The remaining seats were split between small

parties and independent candidates.

In mid-January, the Duma

elected Communist Gennady Seleznyov as its Chairman, replacing
moderate Ivan Rybkin.
On January 16, First Deputy Prime Minister Chubais resigned,
after he was sharply criticized by President Yeltsin.
chief engineer of Russia's

Chubais, the

1995 stabilization program and the 1993-

94 voucher privatization campaign, was the government's leading

IV-33
economic reformer.

Analysts believe that Yeltsin is attempting to

strike a more conservative stance in preparation for June's
Presidential election.

This said, both Yeltsin and Prime Minister

Chernomyrdin have publicly stated that they intend to continue
economic reforms.


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