Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 31-February 1, 1995 : Greenbook Part 2

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Confidential (FR) Class III FOMC

January 25, 1995

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

Economic activity was robust in late 1994, with real GDP
evidently posting its best quarterly gain of the year.

Although

rates of unemployment and capacity utilization pierced levels that
in the past had been associated with accelerating wages and prices,
inflation at the retail level had not yet picked up at year-end.
Employment and Unemployment
Job

growth evidently remained strong at the turn of the year.

In December, hiring continued at the brisk pace that has prevailed
since early last year; total nonfarm payroll employment rose
256,000, and private payroll employment was up 286,000.
Production-worker hours rose 0.3 percent in December, and for the
fourth quarter as a whole increased 5.3

percent at an annual rate.

Initial claims for unemployment insurance in mid-January were at
about the

same level that prevailed during the second half of last

year, suggesting that employment growth has continued to be
substantial.
Job gains were very broadly based in December.
diffusion index rose to 68.5
December

1988.

The three-month

percent--the highest reading since

In the goods-producing sector, manufacturing

added 54,000 jobs.

The increase marked the third consecutive month

of brisk hiring in the manufacturing sector, with demand for labor
particularly strong in metals, capital goods,
motor vehicles, and related areas.

electronic equipment,

For the year as a whole,

manufacturers added nearly 300,000 workers to their payrolls.
Construction payrolls slipped 6,000 last month after having
risen more than 70,000 in November.

In part, the November increase

1. The diffusion index is based on payrolls in 356 private
industries.
A reading of 50 percent indicates a balance between
industries with increasing employment and those with decreasing
employment.
II-1

II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1994
1993

1994

1994
Q4

Oct.

Nov.

Dec.

------------Average monthly changes-------Nonfarm payroll employment 2

194

290

345

284

302

162

488

256

179
-11
-7
-4
19
42
10
116
23
46
15

270
24
21
3
25
78
2
133
21
60
21

320
21
21
0
40
96
6
146
22
57
26

240
17
18
0
15
79
-1
124
20
59
44

298
46
33
13
23
91
0
128
20
64
4

193
46
29
17
2
64
-8
93
22
33
-31

414
39
38
1
73
106
4
180
8
104
74

286
54
32
22
-6
102
3
110
31
54
-30

Private nonfarm production workers
Manufacturing production workers

164
-1

238
28

300
24

199
19

244
48

168
42

344
43

219
60

Total employment 3
Nonagricultural

209
219

326
289

158
192

336
297

309
268

497
414

262
256

167
135

Memo:
Aggregate hours of private production
workers (percent change)
.3
34.5
Average workweek (hours)
Manufacturing (hours)
41.5

.3
34.6
42.0

.4
34.7
42.1

.2
34.5
42.0

.4
34.7
42.2

1.1
34.9
42.1

-.3
34.6
42.2

.3
34.6
42.2

Private
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Health services
Business services
Total government

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
3. Survey of households. Data for 1994 are not directly comparable with earlier
years because of a redesign of the CPS in January 1994.

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES 1
(Percent; based on seasonally adjusted data)
1994

1994
1993

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

1994

6.8

Oct.

Nov.

Dec.

5.6

5.7

5.6

5.4

16.7
8.9
4.4
4.5

17.1

15.8
9.1
4.4
4.6

17.2

9.0
4.5
4.6

6.0

5.6

5.8

5.6

5.3

66.5

66.6

66.7

66.6

53.2
76.9
75.8
57.9

52.3
76.9
75.9
58.2

52.5
77.2
76.2
58.2

52.7
77.3
76.1
58.2

51.8
77.3
76.2
58.3

52.9
77.1
76.3
58.0

6.1

6.2

6.0

19.0
10.5
5.8
5.4

17.6
9.7
4.8
4.9

18.1
9.7
4.8
5.0

6.8

6.1

6.2

66.2

66.6

51.5
77.1
76.2
57.1

52.7
77.0
76.0
58.1

17.5
9.7
4.7
4.8

8.6
4.3
4.3

1. Data for 1994 are not directly comparable with earlier years because of a
redesign of the CPS in January 1994.

II-3

and the December decline reflected the timing of the survey:

The

November survey reference week was relatively early in the month
whereas the December survey was relatively late.

Because

construction employment declines as weather conditions deteriorate,
the early November survey likely picked up fewer seasonal layoffs
2
than usual, whereas the late December survey picked up more.
In the private service-producing sector, substantial gains in
services and retail trade helped boost payrolls 240,000 in December.
Transportation added 24,000 jobs, apparently because demands for
trucking and passenger transportation exceeded seasonal norms.
Federal government employment was boosted by a larger-than-usual
addition of postal workers for the holiday rush.

However, local

government employment fell 50,000 as the jobs ended for temporary
election workers hired in November.
The December levels for the total workweek (34.6 hours) and the
manufacturing workweek (42.2 hours) were unchanged from November.
However, factory overtime hours edged back up to 4.8 hours, matching
the highest level in the forty-year history of this series.
In December, the civilian unemployment rate dropped another
0.2 percentage point, to 5.4 percent.

The January-to-December

decline in the unemployment rate was 1.3 percentage points--the
largest such decline since 1983.

The December drop in joblessness

reflected lower rates for both men and women aged 20 and over;
rose for teenagers.

rates

The labor force was little changed in December,

and the participation rate held at 66.6 percent.

Total household

employment rose 167,000, and the employment-to-population ratio
remained at 63 percent.
The table below shows the readings on several series from the
household survey for December 1994 and compares them with those for
2. Precipitation during the December survey week does not appear
to have exceeded seasonal norms.

II-4

Labor Market Indicators
Initial Claims for Unemployment Insurance

1984
1986
Note. Includes EUC adjustment.

1988

Thousands

1990

1992

Conference Board's Help Wanted Index

1984

1986

1988

Diffusion Index of Employment Change

1994

Index, 1967=100

1990

1992

1994

Percent

1984
1986
1988
1990
1992
1994
Note. Over a three-month span. A reading of 50 percent indicates an equal balance between industries with increasing
employment and those with decreasing employment

II-5
December 1993 and the annual averages for 1989, when, as measured by
the overall jobless figure, the labor market was as tight as it was
last month.

The pre-1994 data have been adjusted to be comparable

with data from the new Current Population Survey (CPS).3

shown in the table, jobless rates for adults declined substantially
during 1994, reaching levels by December quite comparable to those
that prevailed in 1989.

The rate for teenagers also moved down last

year, but it remained higher at year-end than in 1989.

Nonetheless,

despite the sharp drop in unemployment, the employment-to-population
ratio in December stood slightly below its 1989 level.
INDICATORS OF LABOR MARKET SLACK FROM THE HOUSEHOLD SURVEY 1
(Seasonally adjusted data)
1989

1993
Dec.

1994
Dec.

Total unemployment rate (percent)
Teenagers
Men, aged 20 and over
Women, aged 20 and over

5.4
15.6
4.6
4.8

6.5
18.4
6.0
5.8

5.4
17.2
4.7
4.7

Employment-to-population ratio

63.4

62.5

63.0

3.2

4.2

3.5

Permanent job losers
(percent of unemployed)

31.1

39.3

34.8

Labor force participation rate
Teenagers
Men, aged 20 and over
Women, aged 20 and over

67.1
54.7
78.3
57.8

66.9
51.8
77.0
59.9

66.6
52.9
77.0
59.2

Involuntary part-time workers
(percent of household employment)

Discouraged workers
(percent not in the labor force)

2
.69

.69

.67

1. Data for 1989 and 1993 have been adjusted, using
factors developed by the BLS, to be comparable with data
in 1994.
2. Data are for 1993:Q4.

3. The adjustment factors were developed by the research staff at
the Bureau of Labor Statistics (BLS). The estimates are the result
of analysis of data from the CPS and the parallel survey from
October 1992 through May 1994. Although the BLS made this research
public in December, the adjustment factors are not regarded as
official and should be interpreted with care.
II-5

II-6
Labor Market Survey Indicators
Conference Board Survey
Job Availability

Percent of households
S70

^ ..
_ S:.:

......

Jobs hard to get

0
40

- y^

^ --

/ -

,--

Jobs plentiful

1985

1987

1989

1991

1993

Employment Expectations

Index
-

Six months hence

120

::::-

1985
1987
1989
1991
1993
Note. Percentage of households responding "more jobs" minus percentage responding "fewer jobs" plus 100.

Expected Change in Unemployment University of Michigan Survey
Expected Change in Unemployment

Index

Next twelve months

200

.....

160

. :: :

120

.Jan.

1985
1987
1989
1991
Note. Percentage expecting "more" minus percentage expecting less" plus 100.

!
1993

Among the series for which adjustment factors are available are
a few others frequently used as supplemental gauges of labor market
tightness.

These include the percentages of involuntary part-time

workers and of the unemployed who are permanent job losers.

As of

December, both measures had improved markedly from year-earlier
levels but were still somewhat higher than their 1989 averages.
This tilt in the composition of employment and unemployment may
explain why households seem less ebullient about labor market
conditions than during 1989.
Another possible signal that labor markets are not as tight as
during 1989 is the lag in labor force participation rates,
particularly for adult men and teenagers.

However, the weakness in

participation is not readily attributed to a higher level of worker
discouragement over job market prospects or their personal
deficiencies --a series for which comparable data exist.
Indeed, survey data indicate that although household appraisals
of the current and future labor market became increasingly upbeat
during 1994, households still felt somewhat less positive than they
had in 1989 (chart).

This can be seen in responses to the

Conference Board survey's questions on the proportion of households
indicating that jobs were plentiful, the proportion viewing jobs as
hard to get, and expectations of employment opportunities six months
hence.

The index for expected unemployment over the next twelve

months from the Michigan Survey of Consumer Attitudes, which drifted

4. Individuals not in the labor force may offer a variety of
explanations for nonparticipation, including retirement, school
enrollment, and household responsibilities. The small category of
discouraged workers represents those available for work who say that
they think they cannot get a job because of discouragement over job
prospects or that they believe that they lack education or training
or are being discriminated against by employers because of age or
other factors.
II-7

II-8

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

1994

total
IP
1994:Q4

Q2
---

1994

Annual rate-----

Oct.
----

Nov.

Dec.

Monthly rate----

100.0

6.0
6.0

4.9
5.0

5.4

.4
.5

Major Market Groups:
Products, total

60.1

4.9

3.9

4.2

Consumer goods

27.4

2.1

1.9

-. 4

Business equipment

15.4

8.2

11.4

11.1

1.3

1.1

Defense and space equipment

2.4

-7.9

-1.8

-. 1

Construction supplies

5.5

11.4

9.7

7.0

1.0

39.9

7.7

6.5

7.3

1.3

86.8

7.3

5.5

7.3

81.1

9.3

5.5

6.4

Total index
Previous

Materials
Major Industry Groups:
Manufacturing
Manufacturing excluding
motor vehicles and parts
Motor vehicles and parts

5.7

-17.8

-16.1

.7
.5

1.0

5.1

21.2

2.2

Mining

6.1

5.7

-2.3

-3.3

-.5

Utilities

7.1

-6.7

3.1

-7.0

-1.3

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

1967-94

High

Avg.

1994

Oct.

Nov.

Dec.

Total industry

84.9

82.0

84.0

84.3

84.8

84.3

84.7

85.4

Manufacturing

85.2

81.3

83.4

83.6

84.4

83.8

84.4

85.1

89.0
83.5

82.5

87.8
81.6

88.1
81.8

89.2
82.5

88.3
82.0

89.3
82.5

90.0
83.1

Primary processing
Advanced processing

80.7

-9lower in January's preliminary report, is more in line with readings
for the late 1980s.
On balance, the strength in labor demand has absorbed a
significant proportion of jobless workers over the past year-including a sizable share of those on permanent layoff.

As a result

the measured margin of slack has dropped from well above to
noticeably below our notion of where pressures on wage and price
inflation are likely to begin to surface.

Nonetheless, despite the

acceleration in job creation last year, households may still be
uncertain about job security, given continued announcements about
corporate restructuring and downsizing.

These lingering concerns

may be giving the labor market less of an "overheated" tone than it
had in 1989.
Industrial Production
Industrial production expanded rapidly at year-end; a
1.0 percent gain in December followed an upward-revised 0.7 percent
increase in November.

Growth was widespread across manufacturing

industries, while a decline in utilities output was offset by an
upturn in mining.

The December surge in manufacturing output

boosted the factory operating rate to 85.1 percent, just below the
last cyclical peak in early 1989.
Output of motor vehicles and parts rose sharply in the fourth
quarter, as the production problems that had held down assemblies in
the third quarter were mostly resolved. 5

In addition, production

of Chrysler's popular minivans has been boosted to build up
inventories in anticipation of a lengthy changeover in the second

5. According to industry sources, production difficulties remain
only for the Cavalier/Sunbird and Cirrus/Stratus models, where
output still has not returned to the levels seen before last
summer's lengthy model changeover. Production of Ford's Explorer
underwent model changeover in late November and will not be back to
full production until next month at the earliest.
II-9

II-10
CAPACITY UTILIZATION RELATIVE TO PREVIOUS PERIODS
OF HIGH UTILIZATION

Difference between
current utilization and
Capacity
utilization
Dec. 1994

1967-94
Average

1979:Q1

1989:Ql

85.1

3.8

-1.7

0.4

Primary processing
Textile mill products
Lumber and products
Pulp and paper

90.0
92.6
93.3
95.7

7.7
6.6
10.2
3.4

2.5
4.8
8.8
4.7

2.1
2.8
4.2
0.7

Manufacturing

85.8

2.6

-1.6

-6.1

Petroleum products
Stone, clay, and glass
Primary metals
Fabricated metal products

92.9
83.0
96.4
85.2

7.5
5.1
16.4
7.9

6.3
-2.8
5.7
1.8

6.2
-0.3
7.9
3.5

Advanced processing
Furniture and fixtures
Chemicals 2
Industrial machinery
Electrical machinery
Motor vehicles and parts
Aerospace and misc.
transportation equipment
Instruments
Miscellaneous manufactures

83.1
81.8
78.6
91.7
91.4
89.1

2.4
0.1
1.2
10.8
11.1
13.4

-3.0
-3.1
-1.7
0.3
3.7
-0.7

-0.1
-2.2
-0.8
8.9
7.7
6.0

64.2
76.3
75.3

-11.6
-5.9
-0.2

-10.8
-15.7
-2.7

-20.3
-3.9
-4.1

Chemicals

1. Includes industrial organic and inorganic chemicals, synthetic materials,
plastics resins, and fertilizers.
2. Includes drugs and toiletries, soaps and detergents, paints and allied
products, pesticides, and other miscellaneous chemical products.

-11quarter. 6

By December, assemblies reached 12.7 million units

(annual rate),

compared with 11.8 million units in the third

quarter.
Current assembly schedules show a further step-up to a
13.0 million unit annual rate in the first quarter of 1995.

January, production is scheduled to remain at the high December
pace as firms seek to replenish dealer stocks from a relatively low
December level.7
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
Nov.

1994
Dec.

Q4
12.3
6.6
5.7

U.S. production
Autos
Trucks

12.3
6.5
5.8

12.7
7.0
5.8

Days' supply
Autos
Light trucks

60.0
62.6

1995
Jan.
Q1
-scheduled12.7
13.0
7.1
7.3
5.6
5.7

62.2
64.3

1. Components may not sum to totals because of rounding.
In contrast to other major areas of industrial production,
utilities output continued to be depressed in December by
unseasonably warm weather; the index of utilities output stood
2.7 percent below its average for the year.

Thus, with a return to

normal temperatures, utilities could contribute significantly to IP
growth in coming months.

6. This spring, plants producing Chrysler's popular minivans are
scheduled for a lengthy changeover to the production of a newly
designed van. Sources at Chrysler indicate that additional
production in the fourth quarter and output scheduled for the first
quarter should cover some of the 40,000 units (not annual rate) that
they expect to lose during down time at these plants.
7. Current schedules are 0.8 million units below those at the
beginning of January. The brief UAW strike last week at a key parts
facility disrupted production at several assembly plants, reducing
schedules by 0.1 million units. The remainder of the drop likely
reflects some production adjustments by firms in response to
softening sales as well as the correction of an error in Wards'
reporting which had overstated GM's assembly plans for January.

II-12
SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate; FRB seasonals)
1994

1994

1993

1994

Oct.

Nov.

Dec.

Total
(BEA seasonals)

13.9
13.9

15.1
15.1

14.8
14.8

15.1
14.6

15.3
15.4

15.4
15.3

15.2
15.4

15.3
15.6

Autos
Light trucks

8.7
5.2

9.2
5.8

9.1
5.7

9.3
5.8

9.2
6.1

9.1
6.2

9.1
6.1

9.3
6.0

North American 2

11.7

12.9

12.6

12.8

13.2

13.3

Autos
Big Three
Transplants
Light trucks

6.7
5.5
1.3
5.0

7.3
5.7
1.5
5.7

7.2
5.7
1.5
5.5

7.2
5.6
1.6
5.6

7.3
5.8
1.6
5.9

7.2
5.6
1.6
6.0

7.3
5.8
1.6
5.9

7.5
5.9
1.6
5.8

Foreign produced
Autos

2.1
2.0

2.2
2.0

2.0
1.8

2.2
1.9

1.9
1.8

2.0
1.8

Light trucks

.74
.65

.73
.63

.71
.61

.74
.64

.73
.62

.75
.64

.74
.64

Memo: Domestic nameplate market share
Total
Autos

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; before January 1994, some vehicles produced in Mexico were
also excluded.

GM and Ford Domestic Auto Sales
(Seasonally adjusted annual rate; FRB seasonals)
Monthly

Fleet

1991

1992

Note. Data are confidential. Retail includes consumer leasing.

1993

Millions of units

-13-

The output of consumer goods other than motor vehicles,
increased 0.7 percent in December, with solid gains in both the
durables and nondurables categories.

Producers of business

equipment posted a 1.2 percent increase in output last month.
Materials output moved up more than 1 percent--led by iron and
steel, metal stampings, and semiconductors--while construction
supplies edged up following faster rates of increase in the previous
two months.
The 6.7 percent rise in manufacturing output over the year has
pushed utilization rates to high levels, particularly in primary
processing, motor vehicles, and machinery-producing industries.
Manufacturing capacity utilization is 3.8 percentage points above
the 1967-94 average, 1.7 percentage points below its peak in 1979,
and 0.4 percentage point above its peak in 1989.
All primary-processing industries are operating at utilization
rates substantially in excess of their long-run averages.
Furthermore, most of these industries are operating above the
utilization rates they reached during the 1979 and 1989 peaks.
Advanced-processing industries display considerably more variation
in their utilization rates:

The machinery industries and the motor

vehicles and parts industry are operating well above their average
utilization rates, but the aerospace and miscellaneous
transportation equipment industry and instruments are operating at
rates notably below the 1967-94 average.
Motor Vehicles
Sales of new light vehicles in December were 15.3 million units
at an annual rate (FRB seasonals), about the same pace as has
prevailed since August.

To some extent, the recent strength in

sales has likely been sustained by a catch-up in purchases that were
postponed earlier in the year because of limited supplies.

II-14
RETAIL SALES

(Percent change from preceding period; seasonally adjusted)

1994
Q3
2.0

Total sales

Q4
2.3

Sept.

Oct.

Nov.

Dec.

1.2

1.3

1.2

.6
.6

.2
.3

.2
.7

-. 1

(Previous)

2.0

Retail control 1
(Previous)

1.9
1.9

1.1

1.6
1.9
.9

.7
.3
2.8

.5
.8
-.6

.1
-. 1
2.6

.1
-.2
.7

-. 1
-.2
-.3

1.6

-. 1

4.0

2.8

1.3

4.6

5.1

2.1

1.9

3.1

-.5

-.7

Nondurables
General merchandise
Apparel
Other 2

Durables
Furniture and
appliances
Other

1.1
.0
2.5

1. Total excluding auto dealers and building material and supply
stores.
2. Includes sales at food stores, gasoline stations, and other
nondurable goods stores.

Real PCE Goods Excluding Motor Vehicles
Billions of 1987 dollars
*

Quarterly averages
1470
Dec.

1400

1330

I
1989

I
1990

i
1991

Note. October. November, and December figures are staff estimates.

I
1992

1993

1260

-15availability has improved for several of these vehicles, sales have
picked up.
However, signs of some slackening in demand are emerging.
Despite an uptick in January, the Michigan survey indicates that
consumer attitudes toward buying conditions for motor vehicles
remain well below the average level in the first half of 1994.
Apparently, any boost to consumer attitudes from the recent strength
in job growth and income has been damped by the cumulative effects
of interest rate hikes over 1994 and higher sticker prices.

Ford

reports an unanticipated weakening in dealer orders at the turn of
the year, and has cut its assembly schedules for January by 100,000
units (annual rate).8

GM has also cut January schedules by

0.7 million units, and special factors cannot explain all of the
cut.

Finally, stocks of Chrysler's minivans are currently above the

level targeted by the firm, even after incentives that had been
removed last fall were reinstated.
Personal Income and Consumption
Consumer spending posted another sizable increase in the fourth
quarter;

the data in hand suggest that the average level of real

spending on goods other than motor vehicles was almost 5 percent
(annual rate) above the level in the third quarter.

However, that

quarterly-average gain occurred, in large part, on the strength of
the sharp rise in spending in September, which provided a high
jumping-off point as the fourth quarter began.

The current

estimates of modest month-to-month changes in outlays for non-auto
consumer goods during the October to December period suggest that
spending decelerated abruptly.
The flattening in sales was a surprise to most analysts and has
raised questions about the accuracy of the retail sales report.
8. Our conversations with the motor vehicle manufacturers are
confidential.

II-16
PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)
1994
1993
Q1

Oct.

30.3

22.5

31.2

81.2

-8.0

Wages and salaries
Private

-8.8
-10.2

19.8
17.0

15.6
14.0

14.4
13.1

46.2
44.2

-5.7
-7.3

Other labor income

2.5

1.8

1.7

1.8

1.9

1.7

Proprietors' income
Farm

2.9
.7

.5
-1.7

-4.0
-5.5

1.2
-.8

19.8
16.5

-15.1
-17.1

1.9
.8
-2.7

2.3
.9
3.2

-1.9
2.1
7.5

.0
1.8
8.9

-1.0
2.0
9.9

-1.2
2.0
7.1

Transfer payments

4.6

4.9

2.8

4.1

5.6

2.7

Less: Personal contributions
for social insurance

1.1

3.1

1.3

1.1

3.1

-. 3

-.1

5.2

4.1

2.8

11.1

1.4

25.1

18.4

28.3

70.0

-9.4

-6.4

11.8

5.9

12.2

50.3

-11.5

Total personal income

Rent
Dividend
Interest

Less: Personal tax and nontax
payments
Equals:

Disposable personal income

Memo: Real disposable income

Nov.

REAL PCE SERVICES
(Percent change from the preceding period)
1994
1993
Q1

------ Annual rate----PCE services

Oct.

Nov.

Monthly rate

2.5

4.0

1.1

2.2

Energy

2.2

5.9

-3.4

-11.6

2.8

-1.7

Non-energy
Housing
Household operation
Transportation
Medical
Personal business
Other

2.5
1.6
1.1
4.8
2.5
3.5
3.1

3.9
1.9
1.2
3.4
2.4
8.1
7.4

1.3
1.9
4.1
2.8
3.6
-6.7
2.5

3.0
2.1
6.5
1.8
3.1
-1.5
7.3

.2
.1
.2
.7
.2
.2
.3

.2
.1
.2
.4
.2
-. 0
.6

-17examination of the revision history of the retail sales

series

reveals no systematic biases in the advance and preliminary
estimates;

so,

from that vantage point, we have no basis for

anticipating an upward revision.
that one hears are

Moreover, the anecdotal reports

often year-over-year comparisons

the Census report did show December

of sales, and

sales well above those in late

1993.

Spending on services advanced only moderately in October and
November; real PCE services increased 0.3 percent in October and
edged up 0.1 percent in November.

Expenditures for non-energy

services grew moderately in November, with healthy gains in
expenditures for recreation and transportation services and modest
increases elsewhere.

However, total outlays for services in

November were held down by a decline in energy spending owing to the
unusually mild weather; that weather-related softness may well have
extended into December.
Conceivably, some of the moderation in spending toward year-end

may have occurred because consumers wanted a breather in order to
rebuild household wealth.

The rapid expansion of credit in 1994

pushed the ratio of total household debt to disposable income to a
historically high level, while household assets declined slightly
relative to income.

As a result, the ratio of net worth to

disposable income fell somewhat.
Nonetheless, many of the fundamental factors influencing
consumer demand remain very positive.

Real disposable personal

income accelerated over the October-November period, paced by a
strong increase in wage and salary income.

The level of real

9. The uneven monthly pattern of income growth in October and
November largely reflected fluctuations in hourly earnings and the
In addition, two factors temporarily boosted
average workweek.
payments to farmers under the government's
income in October:
Conservation Reserve program and large bonus payments to workers in
the motor vehicles industry.

11-18

Consumer Sentiment
Michigan Index

Index
120

S 110

Jan.(p) -

Current conditions

100

- 90

A\ 1 A
\\\ \ /
I
1989

,
1990

- 60

- 70
- 60

Expected conditions

I
1991

I
1992

I
1993

I
1994

Conference Board Index

1995

Index
I

180

150

120

Expected conditions

Dec.

f \90

Current conditions

L/i

-j
1989

1990

1991

1992

1993

1994

1995

-19-

DPI in November was 1.4 percent (not an annual rate) above the
third-quarter average.

Furthermore, the December labor market

report indicated that wages and salaries rose moderately last month.
All told, given the available income and spending data, the personal
saving rate apparently increased considerably--perhaps about
This implied spurt

1/2 percentage point--during the fourth quarter.

could be interpreted as an indication that spending might actually
have been better than reported, or it may point to the possibility
that spending will pick up again early this year.

On the latter

score, sales reports for January have been positive overall.
Indeed, the recent information on consumer sentiment does not
suggest that households would be turning cautious in spending their
income.

The Michigan SRC index of consumer sentiment climbed

another 4 points in early January because of a marked improvement in
households' assessments of current conditions.

The respondents'

evaluation of the change in their personal financial situation over
the past year was the most positive since 1988.

The Conference

Board survey also showed a surge at the end of last year.
Many analysts have pointed to the record levels of household
indebtedness as a source of vulnerability for consumer spending.
One way to evaluate the likely effect of growing indebtedness on
consumer spending is to consider the effect on debt service
payments.

All else equal, a household with a high percentage of

income committed to debt service has less flexibility to absorb
adverse shocks to income.

Thus, households would tend to establish

comfort levels for debt service beyond which they would hesitate to
go; those levels would probably be influenced to some extent by
their perceptions of the security of their income flows as well as
by the size and degree of liquidity of their wealth.

II-20
Household Balance Sheet Indicators
Ratio of Debt to Disposable Income

Ratio

Q3
S-

0,9
- 0.8
- 0.7

I
1980

1982

1984

1986

I
1988

I
1990

1992

0.6

I
1994

Ratio of Assets to Disposable Income

Ratio

6.4

Q3
- 5.6

- 5.2

1980

1982

1984

1986

1988

1990

1992

Ratio of Net Worth to Disposable Income

4.8

1994
Ratio
- 5.4

5.1

1980

1982

1984

1986

1988

1990

1992

- 4.8

- 4.5

II-21
Debt Service Burdens
Ratio of Consumer

Installment Debt

Service to Disposable Income

Ratio
0.08

0.07

0.06

0.05

1980

1982

1984

1986

1
I

1990

1988

1992

0.04

1994

Ratio of Mortgage Debt Service to Disposable Income

Ratio
0.12

0.11

Q3
0.1

1980

1982

1984

1986

1988

1990

1992

1994

Ratio of Total Debt Service to Disposable Income

Ratio

0.2

0.18

0.16

0.14

1980
1980

1982
1982

1984
1984

1986
1986

1988
1988

1990
1990

1992

1994
1994

0.12

II-22
Other Potential Indicators of Financial Distress
Michigan Index of Current Personal Financial Situations

Index

Jan.(p)

1980

1983

1986

1989

1992

Delinquency Rates

1995

Percent of loans

f\\
-

Mortgages

-- .NVx

Consumer installment credit

1980

1982

1984

1986

1988

1990

1994

-23In the current situation, although the downward trends in the
ratio of installment debt service to disposable income and the ratio
of mortgage debt service to disposable income have come to an end.
neither ratio has increased appreciably in recent quarters.

As a

result, the ratio of total debt service to disposable income stands
well below its 1989 peak.

At the same time, consumer confidence in

job and income prospects appears to have improved and households'
appraisals of their current financial situations are very positive.
These attitudes suggest that consumers are comfortable with their
current debt burden and do not feel a need to reduce that burden by
curtailing spending.

Thus, household indebtedness currently does

not appear likely to be cramping consumer spending.
Certainly, we see no signs of actual household financial
distress.

The delinquency rates on consumer installment credit and

mortgages continued to decline in 1994, reaching their lowest levels
in more than ten years.

Given that fact and the generally upbeat

view of the economy, there is no prospect of a tightening of credit
by lenders.
Housing Markets
Although some indicators of housing demand have softened,
single-family starts and existing home sales both rose in December.
For the fourth quarter overall, the continuing recovery in
multifamily construction and resilient single-family homebuilding
lifted total starts to their highest quarterly level in six years.
Single-family starts rose 3 percent in December, to a 1.23
million unit annual rate; the level of permit issuance was in line
with starts.

Although December was unusually warm, the regional

pattern of starts suggests that favorable weather accounted for
little of last month's strength in construction.

II-24
PRIVATE HOUSING ACTIVITY
(Millions of units; seasonally adjusted annual rates)
1994
Annual

Q4p

Oct.r

Nov.r

Dec. p

1.44
1.40

1.55
1.39

1.53
1.40

All units

Starts
Permits

1.45
1.36

1.37
1.29

1.44
1.35

1.47
1.37

1.50
1.39

Single-family units
Starts

1.20

1.17

1.19

1.21

1.19

1.15

1.19

1.23

Permits

1.06

1.07

1.04

1.06

1.05

1.04

1.09

New-home sales

n.a.

.69

.66

.67

n.a.

.71

.69

n.a.

Existing-home sales

3.97

4.05

4.06

3.93

3.87

3.91

3.82

3.89

.26
.30

.20
.23

.25
.29

.26
.33

.31
.34

.28
.35

.35
.35

.30
.31

Multifamily units
Starts
Permits

r Revised.

Note. p Preliminary.

n.a. Not available.

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

liii

III
1978

1980

I~~L
1982

1984

~
1986

1988

I
1990

ilII
1992

1994

2.4

-25The most recent data on home sales are mixed.

New home sales

were off 2.5 percent in November and are at a level consistent with
a lower level of construction than was reported at year-end.

The

inventory of unsold new homes has risen steadily over the past two
years, but relative to sales,
historical standards

(chart).

stocks are not especially high by
Sales of existing homes

rose

1.8 percent in December, retracing most of the previous month's
decline.

Nonetheless, these sales, on a quarterly average basis,

have trended lower

since midyear.

The year-over-year increases in

transactions prices of new and existing homes sold in
November/December were 2 percent or less.

Constant-quality price

indexes--which control for the mix of homes sold--suggest that
prices in the third quarter were about 4 percent higher than a year
earlier.
Interest rates on both fixed- and adjustable-rate mortgages
rose more than 200 basis points during 1994.

However, by past

standards the responses of single-family starts and home sales were
mild.

In 1987,

for example, housing's reaction to that year's

mortgage rate increases was at least twice as large.

Clearly,

other

factors have worked to offset the effect of interest rates this
time.

Income and job growth have boosted consumer sentiment much

more than in

1987.

In addition, underwriting standards for home

mortgages appear to have eased slightly during the past year, and
market participants report that the availability of a widened
variety of fixed- and adjustable-rate mortgages has also sustained
activity.
Anecdotal reports since Thanksgiving, when FRM rates first
reached 9-1/4 percent and ARMs approached 6-1/2 percent, have
indicated further slowing in many local housing markets.

evaluating these reports, distinguishing a true slowing from

II-26

Sales of New and Existing Homes
(Seasonally adjusted annual rate)

Millions of units

Existing home sales (left scale)
\.

3.6 1-

,4f

1986

1988

1992

1990

1994

Inventory of Unsold New Homes
Thousands of units

1976

1979

1982

1985

1988

1991

1994

Months' Supply of New Homes on the Market
Number of months

(Three-month moving average)

1976

1979

1982

1985

1988

1991

1994

Indicators of Housing Demand
Consumer Homebuying Attitudes

(Seasonaly adjusted)
Diffusion index

Millions of units, annual rate

Consumer homebuying attitudes (right scale)

Jan. (p)

Single-family starts (left scale)

1987

1988

1989

1990

1991

1992

1993

1994

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

Builders' Rating of New Home Sales
Diffusion index

Millions of units, annual rate

Builders' rating of new home sales (right scale)

1.6 1-

\ 4-A

1-1

Single-family starts (left scale)
I

1987

1988

1990

1989

1991

1992

1993

1994

Note. The index is calculated from National Association of Homebuilders data as the proportion of respondents rating current sales as good
to excellent minus the proportion rating them as poor.

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

Millions of units, annual rate
Purchase index (right scale)

Jan. 13

-%-,

Single-family starts (left scale)

I
1991

I
1992

1993

1994

.-Dec.

-1 150

-28seasonal change is difficult.

Typically, the key housing indicators

fall 10 percent to 20 percent in November and an additional
7 percent to 15 percent in December.

But even after seasonal

adjustment, market assessments of both builders and consumers
softened in December and January.

Nonetheless, purchase loan

applications at mortgage bankers, which have held at a reduced level
since the middle of last year, appear to have firmed a bit in recent
weeks

(chart).
In the multifamily housing market, starts in December reversed

the sharp jump in November, which had lifted construction in this
sector well above the gradual recovery path observed since early
1993.

Despite firming in many apartment markets, rental vacancy

rates remain high for the nation overall, and rents as measured in
the CPI have not accelerated.

Until these conditions change, the

gains in construction should remain moderate.
Business Fixed Investment
Real business fixed investment grew at an annual rate of
11-1/2 percent over the first three quarters of 1994, and the data
in hand suggest that investment outlays may have advanced at an even
faster pace in the fourth quarter.

In addition, order backlogs and

strong permits suggest that considerable momentum is being carried
forward into the first quarter of 1995.
Equipment purchases have been rising rapidly for some time now,
underpinned by a strong set of fundamental determinants of business
investment.

Although interest rates have increased, moderate price

increases for capital goods--driven by declines in prices for
computers and other high-tech equipment--have been an offsetting
factor.

The cost of capital for equipment other than computers is

only now beginning to increase slightly, and the upturn is small
compared with the very large jumps experienced in past periods of

-29-

high resource utilization.
continues to decline.

The cost of capital for computers

In addition, accelerator and cash flow

effects continue to be positive:

In the past, these factors have

proved to be reliable indicators of business investment, tracking
reasonably well the accelerations and decelerations in spending.
In addition to tracking quarter-to-quarter capital spending,
the staff also monitors the cumulative effects of this spending on
the growth in the capital stock.

The sharp advances in business

purchases of capital goods have led to solid--but not
unprecedented--growth in the aggregate capital stock in real terms.
Early on in the current recovery, the level of capital spending was
barely high enough to offset depreciation, and net capital stock
growth was very low.

By the third quarter of 1994, however,

investment had climbed to a level well above replacement needs,
leading to growth of the capital stock roughly equal to the postwar
average.

While the current growth rate may be fairly typical, the

composition is not (chart).

The boom in equipment outlays accounts

for most of the recent acceleration:

Indeed, growth in the capital

stock of producers' durable equipment is now quite high by
historical standards.

On the other hand, growth in the stock of

nonresidential structures remains very low.
Turning to the recent spending indicators, shipments of
nondefense capital goods excluding aircraft advanced 1.5 percent in
November, with like-sized gains for computers and other types of
equipment.

Because this gain followed earlier advances, shipments

in the first two months of the fourth quarter were 2.3 percent (not
an annual rate) above their level in the third quarter.

Orders

10. In addition, net exports of capital goods dropped considerably
in the first two months of the fourth quarter, indicating that an
unusually large percentage of these shipments went to U.S. firms.

II-30

Fundamental Determinants of Business Fixed Investment
Cost of Capital

1964

Percent

1969

1974

1979

1984

1989

Acceleration of Business Output

1964

Percentage points

1974

1969

1979

1984

1989

Real Domestic Corporate Cash Flow
....Four-quarter change

1964

....

1969

1994

Percent

1974

1979

1984

1989

1994

II-31
Growth in the Capital Stock
(Change, annual rate)
Growth in the Total Capital Stock
|

-----

Average over period

1952

1959

Percent

1966

1973

1980

1987

Growth in the Stock of Producers' Durable Equipment

1994
Percent

S---------Average over period

1952

1959

1966

1973

1980

1987

Growth in the Stock of Nonresidential Structures

1994
Percent

------- Average over period

1952

1959

1966

Based on quarterly BEA real capital stocks, through 1994:03.

1973

1980

1987

1994

II-32

Orders and Shipments of Nondefense Capital Goods
Office and Computing Equipment
Billions of dollars

Orders

Nov.

Nov. -

-5

11
1991

1992

I
1993

Months

Ratio, unfilled order s to shipments

11
1991

1994

1992

1993

1994

Other Equipment (Excluding Aircraft and Computing Equipment)
Billions of dollars

Months
30

Ratio, unfilled o Jers to shipments

1991

1992

1993

-33continued to run well above shipments, thereby expanding backlogs,
especially for computers.
Shipments of transportation equipment were also up sharply in
the first two months of the fourth quarter.

Business purchases of

motor vehicles rose in November, boosted by a pickup in sales of
automobiles to rental car companies and increased heavy truck
sales.11

Sales of complete aircraft also jumped in November.

While aircraft purchases have declined to a relatively low level, a
number of deliveries to U.S. firms apparently were bunched in the
fourth quarter.
Recent construction data are consistent with the view that a
widespread recovery is under way in the nonresidential sector.
Construction put in place advanced 3.7 percent in November after
having climbed in each of the previous two months.

Thus, average

outlays in October and November were well above their third-quarter
levels in every category.

Office construction, where average

outlays in October and November were 10.9 percent above their thirdquarter level

(not at an annual rate),

and public utilities, where

outlays were 8.6 percent higher than their third-quarter average.
registered especially notable gains.

Permit issuance has, if

anything, been running ahead of construction.
With regard to prices, the National Real Estate Index (NREI)-now available through the third quarter of 1994--showed solid
increases in transaction prices for office, industrial, and other
commercial structures.

This signals a clear departure from the

pattern of large price declines experienced on and off since the
mid-1980s.

The Russell-NCREIF index, which measures assessed values

of real estate, has shown some signs of a leveling off in the office
and other commercial sectors and has registered a modest increase

11. For the fourth quarter as a whole, medium and heavy truck
sales rose 8 percent from third-quarter levels.

II-34
BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)

1994

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

1.0
1.2
3.3
.5

2.3
4.6
1.7
5.4

Shipments of complete aircraft 1

9.6

Sept.

Oct.

Nov.

3.4
3.2
2.5
3.4

1.6
1.4
4.6
.5

-.9
.1
1.2
-.2

2.2
1.5
1.3
1.6

-33.1

-4.5

11.6

-41.8

62.5

-1.0

5.3

1.3

-6.7

4.8

8.6

6.2
1.7
.8
1.9

.2
4.2
6.7
3.5

3.3
3.4
3.3
3.5

3.9
3.5
7.0
2.5

-2.0
.8
3.8
-. 1

8.4
-1.0
-6.9
.8

-3.1
-. 3
-6.0
-6.7

3.6
3.7
11.9
7.4

2.4
2.8
1.9
-1.3

3.2
2.0
5.3
2.7

1.5
4.9
-. 3
.1

3.7
6.0
2.2
3.6

Industrial
Public utilities
Lodging and miscellaneous

1.0
-2.2
-2.7

6.6
-4.5
-.6

3.5
5.4
-4.6

2.8
2.3
4.3

-1.4
5.8
-4.7

7.6
1.4
7.5

Rotary drilling rigs in use

2.2

-. 8

3.1

-4.9

-3.6

10.9
18.6
-11.8

9.2
6.1
20.6

14.1
18.1
1.6

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

Producers' durable equipment

Sales of heavy trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

Nonresidential structures
Construction put-in-place
Office
Other commercial
Institutional

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 constant-dollar data; percent change, annual rate.
n.a. Not available.

II-35
Nonresidential Construction and Permits
(Six-month moving average)

Total Building

Index, Dec. 1982 = 100, ratio scale

Construction
Nov.
4?

1982

1983

1984

1985

1986

1987

1988

Office

1989

I-

1990

1991

1992

1993

70
1994

Other Commercial
175

270

125

220
170

75
120

25
1982

1984

1986

1988

1990

1992

1982

1994

1984

1986

1988

1990

1992

1994

Institutional

Industrial

250

200

200
150
150
100
100

1982

1984

1986

1988

1990

1992

1994

1982

1984

1986

1988

1990

1992

1994

II-36
Indicators of Real Estate Conditions
(Change, annual rate)

Office Sector
National Real Estate Index
[Price

1988

]

per square foot

1990

Russell-NCREIF Property Value

Percent

1992

Percent

1994

1988

1990

1992

1994

Industrial Sector
National Real Estate Index

Percent

Price per square foot

1988

1990

Russell-NCREIF Property Value

Percent

Q3-

1992

1994

1988

1990

1992

1994

Other Commercial Sector
National Real Estate Index

Percent

Russell-NCREIF Property Value

Percent

Price per square foot

^ -V03

1988

1990

1992

1994

1988

1990

1992

1994

-37for industrial structures.

Because it is based on assessed values,

this index tends to lag transaction prices somewhat, and the current
gap between the two series is roughly consistent with that seen in
12
previous episodes of increasing values.
Finally, vacancy rates
have declined, and the proportion of bank examiners surveyed by the
FDIC reporting price declines for commercial real estate has dropped
dramatically.
Inventories
Business inventory investment remained brisk through November.
In that month, stocks in all manufacturing and trade expanded at an
annual rate of $77 billion (book value), a pace similar to the
average in the preceding several months.

The November inventory

buildup was accompanied by a 1.0 percent gain in shipments and
sales, and inventory-sales ratios in major sectors remained in line
with their recent trend values.
As economic activity gained momentum over the past year,
business inventory investment in general shifted toward stocks of
producer goods, especially producers' durable equipment.

The

substantial accumulation of capital goods inventories probably
reflects expectations that strong demand for capital goods will
continue in coming quarters.

The relatively low inventory-sales

ratio for capital goods in 1994 is consistent with the view that
inventory buildups in this area have largely been intended. 1 3
To illustrate the shift in inventory investment toward stocks
of producer goods, stocks in manufacturing and trade can be grouped
into three broad categories: capital goods, materials and supplies,

12. As a cautionary note, some industry contacts are arguing that
the positive price movements may be reversing more recently. They
maintain that the run-up in interest rates may be leading firms to
apply higher discount rates to future rents.
13. One notable exception to this pattern of inventory expansion
is aircraft manufacturing, where stocks have continued to trend down
over the past year.

II-38
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at book value and annual rates;
based on seasonally adjusted data)
1994
Q1
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Automotive
Excluding auto dealers

1994
Q3

Sept.

Oct.

Nov.

18.4

75.6

70.6

50.8

79.6

77.1

21.1
9.4
-4.4
-1.4
15.2
3.1
8.3
5.9
2.6
3.4

58.9
13.3
-4.7
3.7
14.4
23.0
16.6
39.4
10.4
29.0

53.4
13.7
-2.3
-. 8
16.8
22.7
23.0
34.2
17.5
16.7

27.9
-5.8
-2.9
-4.7
1.8
14.1
11.7
42.5
20.5
22.0

80.6
18.4
-2.6
-2.4
23.4
41.4
35.4
19.8
-7.0
26.9

70.5
23.3
-4.1
-. 3
27.8
34.8
33.6
18.9
5.4
13.6

9.9
11.8
9.9
-2.0
3.0
2.0
2.5
-. 5

39.0
35.6
.7
16.0
10.8
22.3
-1.9
24.2

39.6
31.6
4.5
15.2
15.9
19.9
7.9
12.0

15.9
8.9
-13.4
7.6
6.0
21.6
4.3
17.3

20.6
25.3
3.3
8.7
5.4
8.6
-7.1
15.7

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

Constant-dollar basis
Total
Excluding motor vehicles
Manufacturing
Wholesale
Excluding motor vehicles
Retail
Automotive
Excluding auto dealers

INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data at book value)
1994
Q1
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Automotive
Excluding auto dealers

1994
Q3

Sept.

Oct.

Nov.

1.41

1.40

1.39
1.40
4.80
5.00
1.28
1.31
1.30
1.50
1.61
1.47

1.39
1.39
4.85
5.84
1.26
1.33
1.30
1.54
1.67
1.50

1.38
1.36
4.69
5.54
1.25
1.32
1.30
1.55
1.75
1.50

1.37
1.35
4.95
5.38
1.23
1.31
1.29
1.54
1.71
1.49

1.38
1.37
4.64
5.83
1.25
1.32
1.29
1.53
1.63
1.50

1.38
1.34
4.43
5.41
1.23
1.34
1.32
1.53
1.64
1.50

1.46
1.52
1.44
1.39
1.39
1.53
1.56
1.52

1.46
1.51
1.43
1.41
1.39
1.56
1.57
1.55

1.46
1.50
1.41
1.40
1.40
1.57
1.63
1.55

1.44
1.49
1.40
1.39
1.38
1.56
1.60
1.54

1.44
1.49
1.41
1.39
1.37
1.54
1.53
1.54

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

Constant-dollar basis
Total
Excluding motor vehicles
Manufacturing
Wholesale
Excluding motor vehicles
Retail
Automotive
Excluding auto dealers

1. Ratio of end-of-period inventories to average monthly sales for the period.

-39and all other goods (chart). 1 4

As shown in the upper panel, total

investment in stocks of capital goods held in both the manufacturing
and wholesale trade sectors rose sharply last year, in contrast to
the small net decline in 1993.

A similar pattern pertains to stocks

of materials and supplies.
Outside of capital equipment and production materials, stocks
have been rising at a modest pace.

Within this grouping, the

accumulation of consumer goods inventories at retail outlets appears
to have slowed lately.

In November, non-auto retail inventories

rose at a $13-1/2 billion annual rate in book-value terms, about
half the pace observed in the preceding three months.

Nevertheless,

inventory buildups at general merchandise stores remained
substantial in November. likely because of general merchandisers'
upbeat sales expectations for the holiday season.

The advance

retail sales report for December indicated that holiday sales at
general merchandise stores were below earlier expectations, and
recent anecdotal reports suggest that general merchandisers may have
resorted to aggressive discounting to move their merchandise in the
post-holiday period.

On the whole, though, no serious overhang of

inventories of consumer goods appears to have developed toward yearend.
Federal Sector
The federal government recorded a deficit of $4 billion in
December, bringing the deficit for the first three months of fiscal

14. Specifically, the regrouping is done as follows: (a) capital
goods, consisting of all stocks of machinery and capital equipment
in manufacturing, plus wholesale stocks in the categories of
machinery, professional and business equipment, and (one half of)
motor vehicles and accessories; (b) materials and supplies,
consisting of all manufacturing stocks in the "materials and
supplies" stage of processing, plus manufacturing stocks of finished
goods held at four material-producing industries (primary metals,
chemicals, rubber and plastics, and textiles), plus wholesale stocks
held by distributors of metals and minerals and farm product raw
materials; and (c) all other stocks not included in the above two
groupings.

II-40

Inventory-Sales Ratio, by Major Sector
(Book value)
Manufacturing
Ratio

S2.2

1.95

-1.7

1.45
Nov.
I

1980

1982

1984

1986

1988

1990

1992

1.2

1994

Wholesale Excluding Motor Vehicles
Ratio

1.5
1.4

Nov.
- 1.3

-1.2
1.1
I

1980

1982

1984

1986

1988

1990

1992

1994

Retail
Ratio
2.7 -

Ratio
1.7
2 .. ,,5/,,

2.5

*, ,,

GAF group (left scale)

1.6
S J1

2.1

INov

1980

1982

1984

1986

1988

1990

1.4

1992

1994

II-41

Inventory Change and Inventory-Sales Ratio, by Type of Goods
(Book value, seasonally adjusted annual rate)
Capital Goods
Ratio

Billions of dollars

Inventory change (right scale)

Inventory-sales ratio (left scale)
2.2 -

2 .

*...

2.1

I
......

1.9
1993

1994

Materials and Supplies
Ratio
2.8

2.7

Billions of dollars

2.6

2.5

2.4
..

.... .

2.3
1993

1994

All Goods Excluding Capital Goods and Materials
Ratio

Billions of dollars

1.22

1.2

1.18

1.16

1.14

1.12
1993
Note. 1994:04 estimated by average of October and November.

1994

-42year 1995 to $74 billion.

After adjusting for differences in the

timing of some payroll and benefits payments, the three-month
deficit was $12 billion lower than during the comparable period of
fiscal 1994.

This favorable trend in the deficit reflected a

combination of continued robust growth in receipts and relatively
small increases in outlays.
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, except where otherwise noted)
December
1993
1994
Outlays
Deposit insurance

Fiscal year to December
Dollar Percent
FY94
FY95
change change

133.1
1.0

134.9
-2.5

378.6
-.6

381.5
-4.4

2.9
-3.8

132.1
26.8
16.6
25.9
22.7
19.8
20.2

137.4
26.3
19.3
27.2
23.3
19.3
22.0

379.2
74.1
49.9
77.0
62.9
53.9
61.4

385.9
67.6
56.2
80.5
65.2
50.8
65.6

6.7
-6.5
6.3
3.5
2.3
-3.1
4.2

1.8
-8.8
12.6
4.5
3.7
-5.7
6.8

Receipts
125.4
Personal income and
social insurance taxes 88.1
Corporate income taxes
28.2
Other
9.0

130.8

287.2

307.5

20.3

7.1

90.1
31.9
8.8

228.9
32.6
25.6

241.2
36.5
29.8

12.3
3.9
4.2

5.4
12.0
16.4

4.1
6.6

91.4
92.0

74.0
78.4

-17.4
-13.6

-19.0
-14.8

(DI)

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

Deficit(+)
Excluding DI
Note.
n.m.

7.7
6.7

Components may not sum to totals because of rounding.
Not meaningful.

Receipts were about 7 percent higher for the current fiscal
year through December than in the comparable period for fiscal 1994.
Corporate tax receipts continued to be strong, although their
12 percent advance was only half that seen for the comparable period
a year before.

Personal income and social insurance taxes rose at

about a 5-1/2 percent rate through December, slightly less than
wages and salaries.

Data from the Daily Treasury Statements through

.8
n.m.

-43January 24 show that final quarterly estimated tax payments on
calendar year

1994 liabilities are apparently

$3 billion below January 1994's $35

billion.

running about
The decline has

occurred despite two factors that would tend to push up total

1994

tax liabilities--the solid income growth in 1994 and the effects of
the OBRA93 tax increases.

In contrast, for tax years

1994 and

thereafter, the "safe harbor" provisions, which specify when
taxpayers can avoid penalties for underpayment of estimated
taxes, were relaxed.
taxpayers to meet

The relaxed provisions allow some

a greater portion of their 1994 tax obligations

through final payments in April instead of through estimated tax
payments.
Adjusted for the timing shifts, outlays in the first three
months of fiscal 1995 were only about 2 percent higher than during
the comparable period of fiscal

1994.

Interest outlays rose

substantially because of both higher interest rates and the larger
outstanding federal debt.
Medicare

However, increases in outlays for

and Medicaid remained on the low side, and spending for

defense and for income security posted

outright declines.

The Congressional Budget Office has updated its projections for
the economic and budget outlook.
$176 billion in fiscal 1995,

The CBO now projects a deficit of

$13 billion higher than in its August

Report, and has raised its annual deficit projections

for the fiscal

15. Under current safe-harbor provisions, taxpayers with adjusted
gross income in 1993 of less than $150,000 can avoid IRS penalties
for late payments of 1994 taxes if payments in 1994 (including the
estimated payment in January 1995) are at least as great as the
lesser of 90 percent of 1994's tax liability or 100 percent of
1993's tax liability (the so-called "previous year's safe harbor").
For higher income taxpayers, the previous year's safe harbor is
These provisions are
110 percent of their 1993 tax liability.
looser than the law that applied to estimated tax payments due in
January 1994.
Under that law, taxpayers were denied the option of
the previous year's safe harbor if their AGI was greater than
$75,000, or if their AGI had jumped by more than $40,000, or if they
had paid estimated taxes or penalties for underpayment of estimated
taxes in any of the prior three years.

II-44
CBO BUDGET PROJECTIONS 1
(Billions of dollars, except where noted)

1995

1996

Fiscal years
1997
1998

1999

2000

Outlays

1531

1625

1699

1769

1872

1981

Receipts

1355

1418

1475

1546

1618

1697

176

207

224

222

253

284

Deficit (percent of GDP)
Total
2.5
Excluding deposit insurance 2.7

2.8
2.9

2.9
2.9

2.7
2.8

3.0
3.0

3.1
3.1

1999

2000

Deficit

CBO ECONOMIC ASSUMPTIONS
Calendar years
1995

1996

1997

1998

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

3.1

1.8

2.4

2.3

GDP deflator

2.6

2.8

CPI-U

3.1

3.4

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

5.5

5.7

5.8

5.9

6.0

Interest rates
Treasury bills
Treasury notes

6.2
7.7

5.7
7.0

5.3
6.7

5.1
6.7

1. The projections assume that revenues and outlays for major benefit
programs evolve according to laws in effect at the time the projections are
made, and that appropriations for other programs are consistent with the
discretionary spending caps through FY1998 and rise at the rate inflation
thereafter.
The projections include Social Security and the Postal Service,
which are off-budget.
Source:
Congressional Budget Office, The Economic and Budget Outlook:
Preliminary Report, January 5, 1995.

-451996-99 period nearly $30 billion, on average.

The largest changes

on the outlay side were in interest outlays, which were revised up
because of higher interest rate assumptions, and in spending for
Medicaid and Medicare, which was revised down.
for

The projected path

receipts was lowered somewhat to reflect both technical

adjustments and changes in economic assumptions.
The Congress has started to consider various elements of the
program that was outlined in the Republican "Contract with America."
The floor debate on the balanced budget amendment is under way in
the House, with a vote possible by the end of the week.

The Senate

Judiciary Committee has reported out a version, but floor action has
not yet been scheduled.
its fiscal

The Administration is expected to present

1996 budget to the Congress on February 6.

State and Local Governments
Real purchases of goods and services by state and local
governments

rose further in the fourth quarter of last year, but the

increase probably was smaller than the 4.3 percent advance
rate) in the third quarter.

(annual

The pattern of monthly changes in

employment was influenced in late 1994 by the hiring of election
workers

in November by local governments;

nonetheless, for the

quarter as a whole, employment rose 73,000, nearly as much as the
average during the first three quarters

of the year.

Real

construction spending fell in November, but a strong October
put the average October-November level
level in the third quarter.

gain

at 1.8 percent above the

With the exception of water and

facilities, outlays in all major categories

sewer

stood substantially

above their third-quarter levels.
Total federal grants to state and local governments have

reached a plateau when measured as a percent of nominal GDP, after
rising rapidly in the early 1990s (chart).

This pattern mainly

II-46
Federal Grants to States and Localities
(Percent of GDP)
Total

1970

Percent

1974

1978

1982

1986

1990

Grants for Entitlements

Percent

1982
1978
1974
1970
Note: Includes Medicaid, AFDC, WIC, and school lunches.

1986

1990

Total Excluding Entitlements

1970

1974

1994

Percent

1978

1982

1986

1990

1994

-47reflects the marked deceleration in grants for Medicaid and other
entitlements over the past several quarters.

Grants for

discretionary programs, which now account for less than half of
federal aid, have changed little as a percent of GDP since the midto late 1980s:

Grants for mass transit, waste treatment, and

community development and urban renewal have continued to decline,
while grants for education and highways have moved up.
Labor Costs
The only recent data on labor costs are the readings on average
hourly earnings of production or nonsupervisory workers in December.
This series indicates that wages rose 0.3 percent in December; over
the last three months of 1994. average hourly earnings increased at
a 3.3 percent annual rate, the same pace as during the preceding
three months.

Taking a longer perspective, the trend in average

hourly earnings--proxied by its twelve-month change--rose to
2.8 percent in 1994 from 2.6 percent in 1993 and 2.1 percent in
1992.
The more comprehensive data from the Employment Cost Indexes
for the final quarter of 1994 will not be available until
January 31.

Through September, the ECI--like average hourly

earnings--showed a slight uptrend in wages, from a low of
2.6 percent over the twelve months of 1992 to 2.9 percent in the
year ending last September.

However, the change in overall hourly

compensation remained fairly stable as the modest firming in wages
was offset by a further deceleration in employer costs for benefits.
Indeed, as of September 1994, the year-over-year change in ECI
benefits had dropped to 4 percent--the slowest pace since 1987.
Since 1992, the largest contributor to the slowing in benefits has
been the cost of employer-provided health insurance.

II-48
AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data) 1
1994
1993

1994

1994
Q4

-Annual rateTotal private nonfarm

Oct.

Nov.

Dec.

-Monthly rate-

2.6

2.8

2.2

3.3

-.2

Manufacturing

3.2

2.3

1.0

3.0

Durable
Nondurable
Contract construction
Transportation and
public utilities
Finance, insurance,
and real estate
Total trade
services

3.4
2.5
1.2

2.2
2.5
2.2

.0
1.4
5.6

3.5
2.5
4.2

2.5
2.9
-2.1

.0
.4
.6

.3
.0
-.7

.3
.3
-.5

1.3

3.0

-.3

3.2

6.8

1.0

5.5
2.3
2.2

3.2
2.7
3.0

1.7
2.3
3.0

5.2
2.3
3.3

2.7
3.7
3.6

1.4
.8
.9

-.7
-.3
-.4

-.1
.5
.4

1. Annual changes are measured from final month of preceding year
to final month of year indicated.

Average Hourly Earnings

1984

1986

Percent

1988

1990

1992

1994

-49In part, the deceleration in employers' health costs probably
reflects ongoing efforts by employers to shift costs to their
workers and to move away from traditional indemnity plans.

Data

from the Employee Benefits Survey of Medium to Large Firms (100 or
more employees) indicate that the proportion of health care plans
wholly financed by employers declined from 61 percent in 1985 to
35 percent in 1993.16

The percentage of employees participating

in employer-sponsored health plans declined from more than
90 percent in 1989 (a rate that had held for some time) to
82 percent in 1993.

The survey also reported a significant drop in

employee participation in traditional fee-for-service plans, from
74 percent in 1988 (the first year these data were collected) to
50 percent in 1993.

Preferred provider organizations experienced

the greatest increase in participation over this period, from
7 percent to 26 percent; enrollment in health maintenance
organizations also rose.
Slower increases in prices of medical commodities and services
have also constrained benefit costs.

For example, the implicit

deflator for PCE medical services rose 4 percent over the twelve
months ended in November--down 0.9 percentage point relative to the
twelve-month period ended in November 1993: the most recent peak in
growth in the deflator for medical services occurred in 1988, when
it increased 8-1/2 percent. 1 7
Despite the divergence of wage and benefit trends during the
past several years, the overall pace of hourly compensation does
not, on balance, look to have deviated significantly from the

16. The survey covers the same group of firms as contained in the
ECI. The most recent survey was conducted in 1993 and refers to
permanent, full-time employees.
17. Although the PCE deflator is based partly on the CPI measure
of list prices of a fixed basket of medical services, it also
incorporates information on transactions prices, which should make
it a better measure of costs paid.

II-50
Employment Cost Index
Percent

change

'4
l~.

I
$
S
I
II

a
I
~

10
'4

I
I

a
a

'4
I
I

Benefits

te~
I

I
I

Il
U

'4$

\. -

1984

1986

1994

1992

1990

1988

EMPLOYMENT COST INDEX OF HOURLY COMPENSATION
(Twelve-month percent change)
1994
02

1992

1993

3.5

3.6

3.3

3.4

3.3

Wages and salaries

2.6

3.1

2.9

3.1

2.9

Benefit costs
Insurance
Health insurance

5.2
8.1
8.6

5.0
6.4
6.9

4.4
5.1
5.7

3.9
4.4
5.0

4.0
3.9
4.3

Legally required

4.8

4.4

3.7

3.1

2.9

Retirement and savings
Supplemental pay
Paid leave

5.2
2.7
3.3

4.9
2.8
3.4

9.5
5.3
2.9

9.6
5.5
2.8

10.2
6.2
3.2

Total hourly compensation

-51predictions

of a typical Phillips-curve wage equation.

The versions

of these equations maintained by the staff generally overpredicted
the

3.3 percent rise in the ECI for the year ended in September 1994

by about 1/2 percentage point.

However, these overpredictions

offset roughly comparable underpredictions for the year ended
September 1993; both misses were within one standard error of the
models.

Prices
In reviewing the performance of the staff's

"price-price"

Phillips curves--equations that relate resource utilization directly
to prices--our conclusion is much the same:

We have little reason

to modify our views of the influence of labor market slack on
inflation.

The unemployment rate averaged 6.1 percent last year,

well within the range of NAIRU estimates generated by various
models.

Thus, the staff models of inflation interpret the year as

one of roughly neutral pressure on prices and--conditioned on the
unemployment rate--would have forecasted about flat inflation, just
under 3 percent for the CPI excluding food and energy, in 1994.

the event, actual inflation, measured by its change from four
quarters

earlier, slowed 0.3 percentage point between the fourth

quarters of 1993 and 1994.19

As models

go, this error is small--

especially considering that the same equations were very much on
target in 1993.
Most of last year's model error occurred during the fourth
quarter when CPI inflation
1/2 percentage point

(excluding food and energy) dropped about

(annual rate).

Most notably, the CPI for

consumer goods excluding food and energy was little changed.

Motor

18. These results, and those presented below for price-price
Phillips curves, were dynamic simulations with models that were
estimated over a period that ended in 1992:Q4.
19. On a December-to-December basis, the deceleration was
0.6 percentage point.

II-52
RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data)
Relative
importance,
Dec. 1993

1994

1994
1993

1994

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

All items 2

Dec.

-Monthly rate-

100.0

2.7

2.5

3.6

2.2

2.9
-1.4

2.9
2.2

2.8
-4.9

5.1
10.9

5.0
-1.1

77.2
24.4
52.8

3.2
1.6
3.9

2.6
1.4
3.2

3.1
4.2
2.4

2.6
.6
3.6

2.0
.3
2.6

.2
.1
.3

.1
.0
.1

100.0

2.7

15.6
7.0

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

Nov.

2.5

2.7

2.5

3.6

2.2

-3
.2
.7

.2
1.0
-. 3

1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.
3. Index for urban wage earners and clerical workers.

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

Relative
importance,
Dec. 1993

1994

1994
1993

1994

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

Nov.

Dec.

-Monthly rate-

100.0
22.9
13.3
63.7
40.3
23.4

.2
2.4
-4.1
.4
-. 4
1.8

1.7
1.0
3.4
1.6
1.4
2.0

-. 3
-5.5
-1.0
2.1
1.5
3.0

2.6
3.9
3.2
2.1
2.0
2.4

1.0
6.8
-2.6
-. 6
.3
-1.8

.5
.2
2.1
.1
.2
.1

.2
1.6
-1.5
.2
.1
.4

Intermediate materials
Excluding food and energy

95.2
82.3

.8
1.6

4.8
5.1

3.1
3.9

5.9
6.2

7.9
9.0

1.1
.9

.4
.6

Crude food materials
Crude energy
Other crude materials

44.1
34.4
21.5

7.2
-12.3
10.7

-9.3
-1.9
17.0

-20.6
21.0
-. 8

-12.9
-20.5
18.8

2.0
-12.3
30.7

1.5
-1.0
3.4

1.1
-2.3
2.5

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.

-53vehicle pricing is one of the few "special factors"
CPI late last year that we can readily identify.
motor vehicles declined 0.3 percent

three months.

affecting the

The CPI for new

(not annual rate) in the past

Light truck prices fell, partly reflecting stiff

competition between Ford and GM to sell the most pickup trucks
during calendar year 1994.

But the quarterly variations in motor

vehicle prices also appear to be reflecting a shift by automakers
away from their recent pattern of once-a-year price increases in
October in favor of several smaller increases distributed throughout
the year.

In the 1994 model year, below-trend increases posted in

1993:Q4 were followed by above-trend increases in the first three
quarters of 1994.

The drop in seasonally adjusted prices in 1994:Q4

may be the precursor of a similar pattern in the current model
20
year.
Favorable price developments in the fourth quarter were not
confined to motor vehicles.

Apparel prices fell sharply in the

second half of the year; as a result the apparel index declined
1.9 percent over 1994, after edging up in each of the preceding two
years.

Prices of house furnishings fell 2.1 percent last quarter,

ending 1994 unchanged from a year earlier; prices of appliances,
including electronic equipment, continued to fall at about a
2 percent annual rate.
Price changes for non-energy services excluding shelter in the
fourth quarter were slightly below the trend earlier in the year.
For the year as a whole, these prices slowed noticeably from their
year-earlier pace.

In addition, prices of medical care services

increased 1/2 percentage point less, and tuition charges
1.2 percentage points less, in 1994 than in 1993.

Most

20. Indeed, at the turn of the year, the Big Three automakers
raised prices for their best-selling models--largely light trucks
and sport utility vehicles. The announced increases came to 0.7
percent when averaged across the GM and Chrysler product lines.

II-54
INFLATION RATES EXCLUDING FOOD AND ENERGY
Percent change from twelve months
earlier
Dec.
1992

Dec.
1993

Dec.
1994

3.3

3.2

2.6

2.5

1.6

1.4

2.9
2.3
1.2
1.5
-0.2
5.2
1.8
8.1

1.5
3.3
0.8
1.5
1.9
3.1
1.9
-5.9

1.0
3.3
-1.9
.0
0.8
3.0
1.8
3.0

3.7

3.9

3.2

3.0
2.3
4.1
6.6
7.0
3.7
-13.9
8.5

3.2
2.2
3.7
17.0
5.9
3.5
-5.6
7.1

3.3
2.5
1.6
-9.5
5.4
2.7
23.0
5.9

PPI finished goods

2.0

0.4

1.6

Consumer goods

2.1

-0.4

1.4

Capital goods, excluding
computers
Computers

2.6
-14.9

2.3
-12.5

2.1
-6.7

PPI intermediate materials

1.2

1.6

5.1

PPI crude materials

5.7

10.7

17.0

ECI hourly compensation1
Goods-producing
Service-producing

3.4
3.9
3.1

3.7
4.0
3.6

3.3
3.3
3.2

Civilian unemployment rate 2 ,3

7.3

6.4

5.4

80.4

82.2

85.1

3.5
4.4

3.5
4.2

3.6
4.1

2.8

0.3

3.2

4.0
2.3

0.6
1.6

0.7
3.5

CPI
Goods
Alcoholic beverages
New vehicles
Apparel
House furnishings
Housekeeping supplies
Medical commodities
Entertainment
Tobacco
Services
Owners' equivalent rent
Tenants' rent
Other renters' costs
Airline fares
Medical care
Entertainment
Auto financing
Tuition

Factors affecting price inflation

Capacity utilization
(manufacturing)

Inflation expectations 4 ,5
Michigan survey
Conference Board
Non-oil import price 6
Consumer goods, excluding autos,
food, and beverages
Autos

1. Private industry workers, periods ended in September.
2. End-of-period value.
3. Data for 1994 are not directly comparable with earlier values
because of a redesign of the CPS in January 1994.
4. One-year-ahead expectations.
5. Latest reported value: January.
6. BLS import price index (not seasonally adjusted), periods ended
in September.

-55dramatically, air fares fell nearly 10 percent after rising
17 percent in 1993.

The exceptions to the pattern of slowing in

services prices were auto finance charges, which increased along
with interest rates, and "rent of shelter," which rose at the same
pace in 1994

(3 percent) as during the two previous years.
INFLATION EXCLUDING FOOD AND ENERGY
PPI

Crude

Inter.

CPI

Finished
Total Ex. tobacco

Commodities

Total

1992
1993
1994

------------------- December to December-------------------5.7
1.2
2.0
1.7
2.5
3.3
10.7
1.6
0.4
1.5
1.6
3.2
17.0
5.1
1.6
1.7
1.4
2.6

1994:H1
:H2

------ Six-month percent change at an annual rate ---------10.3
2.9
2.5
1.8
2.4
3.0
24.6
7.6
0.7
1.5
0.4
2,3

1. December to June, and June to December.

Price changes for finished producer goods (excluding food and
energy) remained modest throughout 1994.

Excluding the sharp swings

in tobacco prices, this index rose only about 1-3/4 percent. 2 1
While the measured decline in the PPI for computers was less steep
in 1994 than in 1993, the rise in prices of other capital goods
remained modest (2.1 percent), despite the strength in demand.

The

prices that motor vehicle manufacturers charge their dealers rose
2.8 percent in 1994--down 0.8 percentage point from the increases in
1993.

Producer prices of other consumer durables rose 1-1/2 percent

last year, the same as in 1993.

Among consumer nondurables, the

PPIs for apparel and tobacco were little changed; however, producer
prices for other finished nondurable items began to pick up in the

21. Excluding the index for tobacco prices is analytically useful
because the industry cut prices 24 percent in August 1993.
That
drop subtracted 1.1 percentage points from the rise in the PPI for
finished goods (excluding food and energy) during 1993. Finished
tobacco prices in the PPI rose 0.3 percent during 1994.

-56second half of the year and rose 1-1/4 percent for the year as a
whole.
Energy prices have generally been a slight moderating factor on
inflation over the past two years.
for West Texas

In recent months, the spot price

Intermediate has fluctuated in a fairly narrow

range--usually between $17

and $19

per barrel.

Prices of heating

oil and natural gas edged lower, in part because of the unusually
warm winter in the northeastern states.

In addition, natural gas

prices have been pushed down in the past year by abundant supplies
and by a regulatory change that reduced the market power of
interstate pipelines.

U.S. independents have maintained production

in the face of falling prices,
is high.

and the level of imports from Canada

In the week ended January 13,

stocks of natural gas were

71 percent of storage capacity--a high level for this time of year.
Although the EPA did not require retailers to sell reformulated
gasoline

(RFG) until January

1, about 55 percent of the gas stations

in the participating regions were selling RFG in December.

The BLS

estimates that RFG adds about 5-1/2 cents to retail prices in the
participating areas, and the agency made an equal-sized
adjustment to exclude this effect from the CPI.
quality adjustment,
higher last month;

quality

Without this

the CPI for gasoline would have been 0.9 percent
by January, the full adjustment will have lowered

the gasoline index by a cumulative

1.6 percent from what it

otherwise would have been.

For 1994 as a whole, consumer food prices increased at about
the same rate as other consumer prices; coffee accounted for about
one-fourth of the rise.
turned unfavorable.
December.

Recently, supply developments have again

Consumer food prices rose 1.0 percent in

While the indexes for most grocery store items fell last

month, the effects of tropical storm Gordon on prices of fresh

-57-

fruits and vegetables grown in the southeastern United States were
substantial; the recent flooding in California could further affect
prices of these products in the near term.
In contrast to prices of finished goods, inflation has clearly
picked up at the early stages of processing.

Prices of intermediate

goods excluding food and energy accelerated in the second half of
1994 at a 7.6 percent annual rate--4.7 percentage points more than
in the first half.

The acceleration was most notable among

materials used in durable and nondurable manufacturing.

Crude

materials excluding food and energy rose at almost a 25 percent
annual rate in the second half.
High rates of capacity utilization have become a source of
upward pressure on prices in a number of industries.

Among the

primary processing industries, paper and allied products, chemicals,
primary metals, and fabricated metals, all posted substantial price
increases in the fourth quarter.

In advanced processing, prices

were generally flat even in industries such as non-electrical and
electrical machinery where operating rates are high.
With one exception, the surveys of inflation expectations that
we monitor have been roughly stable over the past two years, a
pattern that mirrors the path of the total CPI.

But while the CPI

has been stable at 2.7 percent, most of the inflation surveys have
been stable at higher expected rates.

Both the University of

Michigan and the Conference Board surveys of one-year-ahead
expectations are hovering around 4 percent; the Livingston survey
(of one-year-ahead expectations), and the professional forecasters
survey (of ten-year-ahead expectations), is hanging around
3-1/2 percent.

In contrast, the five-to-ten-year-ahead expectations

reported by the Michigan Survey dropped about 3/4 percentage point
over the past year to around 4-1/4 percent.

II-58
SURVEY OF (CPI) INFLATION EXPECTATIONS
(Percent)
University of

Michigan
Professional

Michigan

Actual
inflation1

Mean
(1-year)2

Median
(1-year)3

Livingston
(1-year)4

Board
(1-year)

forecasters
(10-year) 5

(5- to
10-year) 6

1991-Q1
Q2

5.3
4.8

4.8
4.6

3.7
3.3

3.8

5.1
4.7

4.4
4.1

5.9
5.5

Q3
Q4

3.9
3.0

3.9
4.4

3.3
3.1

3.4

4.7
4.7

4.1
4.0

5.2
5.1

1992-Q1
Q2
Q3
Q4

2.9
3.1
3.1
3.1

3.4
3.8
4.0
3.8

2.7
3.1
3.0
2.9

4.6
4.6
4.5
4.5

3.7
3.9
3.8
3.6

4.8
5.0
4.9
5.3

1993-Q1
Q2
Q3
Q4

3.2
3.1
2.7
2.7

4.3
4.4
4.7
3.8

3.1
3.3
3.1
3.2

4.6
4.8
4.6
4.4

3.5
3.7
3.5
3.5

5.2
5.2
4.7
4.7

1994-01
Q2
Q3
Q4

2.5
2.4
2.9
2.7

3.9
4.2
4.5
4.1

2.9
3.0
3.2
3.1

4.3
4.2
4.3
4.2

3.5
3.5
3.5
3.5

5.0
4.8
5.0
4.3

1994-Jan
Feb
Mar

2.5
2.5
2.5

3.5
3.7
4.4

2.9
2.8
3.0

4.3
4.4
4.3

3.5

4.8
4.7
5.4

Apr
May
Jun

2.4
2.3
2.5

4.5
3.9
4.1

3.0
3.2
2.8

4.3
4.2
4.2

3.5

5.0
4.6
4.8

Jul
Aug
Sep

2.8
2.9
3.0

4.2
4.6
4.6

2.9
3.1
3.5

4.3
4.3
4.2

3.5

4.7
5.5
4.9

Oct
Nov
Dec

2.6
2.7
2.7

3.9
4.5
4.0

3.0
3.4
3.0

4.3
4.2
4.1

3.5

4.6
4.2
4.2

3.6

3.0

Conference

1995-Jan

3.6
3.4
3.4
3.2
2.9
3.5

2.9

3.5

1. CPI; percent change from the same period in the prior year.
2. Average increase for responses to the question, By about what
percent do you expect prices (CPI) to go up, on the average, during
the next twelve months?
3. Median increase for responses to the question above.
4. Average twelve-month-ahead forecast of the CPI by "informed" business
economists. Constructed by the Federal Reserve Bank of Philadelphia from
disaggregated Livingston data, data are for the last month of the period
indicated.
5. Compiled by the Federal Reserve Bank of Philadelphia.
6. Average increase for responses to the question, By about what
percent per year do you expect prices
the next five to ten years?

(CPI) to go up, on the average, during

4.0

DOMESTIC FINANCIAL
DEVELOPMENTS

SELECTED FINANCIAL MARKET QUOTATIONS
(Percent except as noted)
1993

Oct

Instrument

lows
SHORT-TERM
Federal

1994

1995

FOMC
Feb

3iDec 20 Jan 24

Change to Jan ^4,
From Oct 93
lows

i995

From
|Feb
3

i Frm FMC
i Dec 20

RATES

funds

3.07

3 07

5 44

5 41

2 34

Treasury bills
3 month
6-month
1-year

3 01
3 09
3 23

3 13
3 27
3 52

5 48
6.19
6.61

5 81
6 25
6 59

2 80
3 16
3 36

2 68
2 98
3 07

Commercial paper
1 month
3 month

3 13
3 23

3 16
3 25

6.10
6.27

5 91
6 22

2 78
2 99

2 75
2 97

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

3 08
3.22
3 23

3 11
3.25
3 41

6.01
6 27
6.77

5-89
6 22
6 65

2.81
3 00
3 42

2 78
2 97
3 24

Eurodollar deposits
1-month
3 month

3 06
3 25

3 06
3.25

6 00
6 25

5 88
6 25

2,82
3 00

2 82
3 00

Bank prime rate

6 00

8 50

2 50

4.06
5 19
5 78

4 60
5 81
6.31

7.68
7 81
7 85

7.71
7 86
7 93

3 65
2 67
2,15

3.11
2,05
1 .62

5.41

5 49

7 02

6 78

1 37

1 29

6 79

7 35

8.77

8 84

2.05

1 49

6 74
4 14

6.97
4.12

9.25
6.75

9 05
6.82

2.31
2.68

2.08
2,70

- 03

.00

INTERMEDIATE- AND LONG-TERM RATES
U S Treasury
3-year
10-year
30-year

(constant maturity)

5
Municipal revenue
(Bond Buyer)
Corporate--A utility,
recently offered
6
Home mortgages
FHLMC 30-yr
fixed rate
FHLMC
1-yr
adjustable rate

1989

1994

1995

Percentage change to Jan 24;

Record high
From

Stock exchange index
Level

Dow-Jones Industrial
NYSE Composite
NASDAQ (OTC)
Wilshire

3978 36
267.71
803.93
4804 31

Date

Low,
Jan
3

1/31/94 2144 64
154.00
2/2/94
378 56
3/18/94
2/2/94 2718.59

1
jne-day quotes except as noted
2 Average for two-week reserve maintenance
period closest to date shown Last observation
is average to date for maintenance period ending
Feb 1, 1995.
3. Secondary market

FOMC,
Dec 20

Jan 24

3767.15
249 80
728 51
4491 92

3862.70
253 70
763.20
4602.44

From

record
high

1989
low

-2.91
-5 23
-5 07
-4 20

80.11
64 74
101 61
69 30

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.

From FOMC,
Dec 20

2.54
1 56
4 76
2 46

Selected Interest Rates
Short-Term
Percent
Monthly

-........

Percent
-"
Daily
FOMC
12/20

Prime rate (daily)
Federal funds
Three-month Treasury bill
Discount rate (daily)

Three-month T-bill

Federal funds

I *I
10

1990

1992

1993

1994

12/16

12/23
1994

12/30

1/6

1/13
1995

Long-Term
Percent
.....
--

1990

Percent

Corporate bond (A-rated utility)
Thirty-year Treasury bond

1992

1993

1994

12/16

12/23
1994

12/30

1/6

1/13
1995

1/20

DOMESTIC FINANCIAL DEVELOPMENTS
The absence of policy action at the December 20 FOMC meeting
and in the weeks following has not greatly surprised market
participants.

Apparently, the financial stresses exerted by the

Orange County and Mexican crises were viewed as sufficient reason to
delay additional policy tightening.

Nonetheless, with the economy

still displaying considerable strength, the market continues to
expect a substantial increase in money market rates over the next
few quarters, including a 50 basis point firming at the upcoming
meeting.
On balance, interest rates have registered mixed changes since
the FOMC meeting.

One-month maturities registered declines as the

year-end premium disappeared and most three-month rates are off
slightly, on net.

Yields on Treasury notes and bonds have edged up

several basis points.
Quality spreads, on the whole, have remained narrow, suggesting
that investors foresee no near-term deterioration in the financial
wealth of borrowers.

Spreads on corporate bonds remain near

cyclical lows, and the ratio of tax-exempt to taxable yields has
retraced much of its earlier rise, as the municipal market has
mostly shrugged off the problems associated with Orange County.
Major equity indexes have advanced about 1-1/2 to 5 percent as news
on corporate earnings has been generally favorable.
Borrowing by businesses and households has strengthened
somewhat.

While gross public issuance of bonds by nonfinancial

firms remained subdued in December and early January, these firms
have again turned to banks and the commercial paper market in
volume.

In the household sector, consumer credit continued to

increase at double-digit annual rates late last year, and home
mortgage credit is estimated to have slowed only slightly from its
III-1

III-2

Based

on newly

MONETARY AGGREGATES
benchmarked & seasonally

adjusted

1994
1994

Aggregate or component
Aggregate

Q4
p)l

S -to
Oct

Percentage change

data

1993:Q4

1994

Level
S
Dec 94
:p

cil

Nov
annual

Dec
;p
rate]

94
(p}

Dec

2 4

-1-2

-2 9

2 2

1147 7

0 8
2.0

-0 3
1 7

-1.2
1 9

1 0

3613.9

1.5

4301 2

9.1

8.6

9.3

10.6

10 0

354 4

0.4

0.3

-4.2

-6.5

6,6

-1.3

0.2

381.9

-2.1

-1.4

-6.7

-10 0

4.7

-2.7

2.2

402.9

0-4

0-0

0-1

-0,4

1.1

Selected components
4. Currency

10.2

5. Demand deposits
6

Other checkable deposits

M2 minus MI
Savings deposits
Small time deposits
Retail money market funds
Overnight RPs, n.s.a.
Overnight Eurodollars, n.s.a.

13- M3 minus M2
14.
15.
1617.

-4.4
2.1
7.5
13.6
46.8

-7.1
5.0
5.0
15.2
100.8

4 8

2 1

0.5

-12-8

13.4

14.5

16.4

15.0

-5.1
3.1

6.8

9-9

14.2

7.8

29.5

-7 2
93.2

-2 9
-41.4

17.2
17.4
93.5

13.5
48.3

-11 6
13.2

-14.0

8.2

2466.2
1144.5
817 1
389.7
84 1
33 2

3,5
2

Large time deposits, net
Institution-only money market
mutual funds
Term RPs, n.s.aTerm Eurodollars, n.s.a.

8.5

12.7

18.9

8.9

11.8

4.1

687.4

7.2

11.9

18.8

19.7

15 4

8.1

363.4

-4.5
9.6
27.4

7.2
3.5
15.6

30.6
-2.4
20.7

-2.0
8.2
38.5

7.4
-0.2

6.5
0.0

6.7
-0.3

9-0
1.6

-7.5
7.0
12 1

180.8
104.1
52 6

8-0
0.5

2.0
17.5
-46.1

417.1
109 3

Memo
18. Monetary base
19. Household M2 3

8.3
0.4

1 7
1.3

(billions of dollars)

Average monthly change

Memo

20. Managed liabilities at commercial
banks

(lines 22 + 23)

Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions
24
Other 5
25. U-S government deposits at
commercial banks
21.
22
23.

15.6
2.3

3.9

38.1

. .

-11.1

6.3
10.2

4.4
33.7

. .

-6.1
5.0

13.4

1021.7
372.8
648 9

8.5
4.9

1 .8

-1

-6.5

12.5

2.3

-9.5

-4.7

21.2

. . .

-0.2

0.5

-0

0.7

1.0

220.9
428.0

21 0

1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
3. Sum of seasonally adjusted currency, retail money funds, and other checkable, savings, and small time
deposits4. For years, "average monthly change" is based on the dollar change from December to December. For quarters,
it is based on the dollar change across the last months of quarters.
5. Borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the
Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items) Data are partially estimated.
p Preliminary.
n.s.a. Not seasonally adjusted.

III-3
rapid rate of growth of the third quarter, with banks satisfying an
unusually large share of the demand.
Bank credit surged in December, reflecting both an acceleration
in lending and a cessation in the runoff of securities.

Survey

responses for early January indicated that some banks continued to
ease terms and standards on both business and consumer loans.

With

the growth of retail deposits still sluggish on balance, banks have
continued to rely heavily on managed liabilities to fund loan
expansion, and this has been reflected in a pickup in M3 growth.
Monetary Aggregates and Bank Credit
[The monetary data in the Greenbook incorporate new benchmarks
and seasonal adjustments, which are scheduled to be published in
early February and are strictly confidential until that time.]
The rate of expansion of the broad monetary aggregates picked
up somewhat in December as M2 grew at about a 1-1/2 percent annual
rate and M3 at a 3 percent pace.

Data through the first half of

January suggest a further strengthening this month.
The growth in M2 owed mostly to a turnaround in overnight
purchase agreements and Eurodollars at banks rather than to a
build-up in retail deposits.
deposits

As the opportunity cost of savings

(including MMDAs) has widened further, households have

continued to shrink their holdings of these assets.

Some of those

funds shifted within M2 to small time deposits and retail money
funds, whose rates adjust more quickly to market rates.

Households

also appear to have moved funds toward direct investments outside of
M2, such as Treasury bills and notes obtained by noncompetitive
tenders.

These tenders increased substantially in 1994 (chart).

1. From the fourth quarter of 1993 to the fourth quarter of 1994,
M2 grew 1 percent, coming in at the lower end of its annual range.
Over the same period, M3 expanded at a touch faster rate,
1-1/2 percent, to fall comfortably within its annual range of 0 to
4 percent.

III-4

Net Noncompetitive Tenders of Treasury Securities
Billions of dollars
Monthly

0-2 ,
I

1986

1987

1988

1990

1989

1991

1992

1993

1994

Note. A three-month moving average of total net noncompetitive tenders of Treasury bills, bonds, and notes. Net
noncompetitive tenders represent the increase in the amount of Treasury securities outstanding bought through noncompetitive
tenders. It is calculated by taking the difference between the amount of securities issued and the amount of securities
maturing that have been purchased via noncompetitive tenders.

The non-M2 component of M3 grew 12 percent in December, about
in line with the average for the last quarter of 1994.

To help

finance credit expansion, banks continued to rely on wholesale
funding, including large time deposits and nondeposit sources of
funds.

Some slowing in the growth of large time deposits seems

evident in January.
Growth in bank credit picked up noticeably in December from
previous months, bolstered by rapid growth of loans and a halt in
the runoff of securities holdings.

Bank holdings of U.S. government

securities fell only slightly as acquisitions by large banks mostly
offset run-offs at other banks.

The "other securities" component.

III-5

1
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage change at annual rate, based on seasonally adjusted data)

Dec.
1993
to Dec.
1994

Type of credit

1994
Q3

1994
Q4

1994
Oct

1994
Nov

1994
Dec

Level,
Dec
1994
($billions)

Commercial bank credit
7.0

1- Total loans and securities
2.

U.S. government

-1.3

Other

26.2

Real estate

9.5

-8.6

-. 1

3,323.3

-5.3

-12.5

-21.1

-13.2

-3.7

717.7

5.9

10.2

14.3

5.2

10.9

232.8

8.4

13.4

2,372.8

.0.0
1

9.2

644.3

7.8

11.6

1,000.0

11.2

10.5

11.6

10.3

11.5

6.3

Consumer

15.1

Security
10.

3.5

-13.0

10.4

Business

2.7

-7.2

8.2

Loans

5.2

-2.7

Securities

7.0

-12.7

Other

5.9

18.2

13.8

19.0

7.6

14.3

-37.3

43.4

52.1

20.0

54.0

21.6

1.8

950.5

-17.9

4.2

19.3

450.2
76.6

201.7

Short- and intermediate-tern business credit
12.8

11.1

9.3

635.7

11.6

11.2

17.9

-6.9

10.4

10.6

5.5

11. Business loans net of bankers
acceptances

11.8

10.5

11.0

10.9

9.4

658.6

5.3

22.9

10.6

12.

Loans at foreign branches

13.

Sum of lines 11 and 12

14.

Commercial paper issued by
nonfinancial firms

5.1

11.0

31.8

32.8

23.6

36.6

165.7

15.

Sum of lines 13 and 14

9.3

11.7

14.6

15.1

13.4

14.7

824.3

-37.8

-35.8

-30.8

-9.5

16. Bankers acceptances, U.S.
3 ,4
trade-related
17.

Loans at finance companies

18.

Total (sum of lines 15,
and 17)

16,

-3.9

-36.1

18.2

-50.5

n.a.

7.2

n.a.

17.0

15.0

n.a.

348.2

n.a.

10.1

n.a.

14.9

13.1

n.a.

1,181.5

1. Except as noted, levels are averages of Wednesday data and percentage changes are based on averages of Wednesday data; data are adjusted for breaks caused by reclassification; changes are measured
from preceding period to period indicated.
2. Loans to U.S. firms made by foreign branches of domestically chartered banks.
3. Acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of
goods.
4. Changes are based on averages of month-end data.
5. November 1994.
n.a. Not available.

III-6
which has exhibited considerably more volatility in the wake of an
accounting change

in 1994, expanded nearly 11 percent in December.

All major loan categories
estate loans

exhibited strength in December.

Real

rose briskly at domestic banks and were about flat at

foreign banks;

about 3 percentage points

of December's growth owed

to the acquisition of thrift assets by banks.

Consumer

loans also

grew smartly in December and would have been even more robust if not
for

securitizations.

Responses to the Senior Loan Officer Opinion

Survey in January indicated that the willingness of banks to extend
credit to consumers continued to

rise.

About 2 percentage points

of total loan growth in December reflected the rapid expansion of
loans

to purchase or carry securities; such loans are a small but

highly volatile component of bank credit.
Business loans

grew rapidly in December and early January as

both domestic and foreign banks continued to accommodate robust
demand from nonfinancial businesses.

Moreover, indications from the

January Senior Loan Officer Opinion Survey suggest that banks
continued to seek new business

loans by easing both standards and

terms of business lending, but the extent of easing lessened from
previous surveys.

Press reports also indicate that banks remain

aggressive in competing for better quality business credits:
Spreads on loan rates over market rates in the syndicated loan
market reportedly have returned to around 1989-1990 levels.

The

narrowing of spreads is reported to have slowed in the fourth
quarter, and spreads may be about as slim as can be expected for
investment- and near investment-grade credits.

The lower pricing

and eased covenants have occurred even as the maturities of
revolving loan agreements in the investment-grade syndicated loan
market have lengthened.

I11-7
Long-Term Mutual Funds
Investors' appetites for mutual funds
December and early January.

remained subdued in

Total net sales of stock and bond

funds were close to zero, but adjusted to take account of capital
gain distributions they showed a substantial

outflow.

Emerging-

market equity and bond funds with exposure to Mexico experienced
redemptions in the wake of the devaluation of the Mexican peso, even

NET SALES OF MUTUAL FUNDS BY TYPE
(Billions of dollars, monthly rate, NSA)
Memo:
Nov.

1994
Q3

Q4 e

Oct.

Nov.

Dec. e

Total stock
International
Domestic

11.2
3.9
7.3

6.6
1.8
4.8

9.4
3.3
6.1

3.4
0.7
2.7

7.1
1.4
5.7

858.5
163.4
695.1

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

-1.3
-1.0
-1.5
0.1
-0.1
1.7
-0.6

-7.5
-1.2
-1.9
-0.2
-2.9
-0.4
-0.9

-6.0
-1.3
-2.1
-0.3
-2.0
0.3
-0.7

-9.1
-1.3
-1.9
-0.4
-4.1
-0.4
-1.0

-7.3
-1.2
-1.7
0.2
-2.5
-1.1
-1.0

724.9
54.6
89.1
44.6
227.4
215.5
59.5

assets

e
Estimate.
Source:
Investment Company Institute.

though trade reports suggest that many investors are willing to ride
out the recent hit to asset values.
All major categories of bond funds continued to exhibit
outflows in December and early January, except high-yield funds,
which attracted modest inflows.

While redemptions of tax-exempt

shares have slowed since December, outflows from California-only
funds have been relatively somewhat larger than the rest of the
industry, owing to the Orange County debacle.

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS 1
(Billions of dollars; monthly rates, not seasonally adjusted)
1994
Type of security
All U.S. corporations
Stocks 2
Bonds
Nonfinancial corporations
Stocks 2
Sold in U.S.
Utility
Industrial
Sold abroad
Bonds
Sold in U.S.
Utility
Industrial
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown
Financial corporations
Stocks2
Sold in U.S
Sold abroad
Bonds
Sold in U.S.
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown

1993

1994p

Q4p

Oct.p

Nov.p

Dec.p

53.20
9.43
43.77

39.87
5.50
34.37

33.03
4.19
28.84

29.48
4.14
25.33

32.30
3.70
28.60

34.08
5.98
28.10

22.05
2.75
19.30

5.18
4.91
1.05
3.82
.27

3.11
2.89
.38
2.51
.22

1.79
1.65
.20
1.45
.14

2.94
2.71
.22
2.49
.23

1.99
1.93
.08
1.85
.05

4.60
4.12
.41
3.71
.49

2.22
2.08
.17
1.91
.14

16.19
15.55
7.34
8.21
.64

7.37
6.49
2.36
4.13
.88

5.71
4.90
1.14
3.76
.81

5.72
4.70
1.80
2.90
1.02

6.33
5.00
1.90
3.10
1.33

5.97
5.10
2.00
3.10
.87

4.87
4.00
1 50
2.50
.87

2.56
8.70
4.17
.09

.68
3.78
1.99
.00

.41
3.49
.93
.01

.92
2.67
1.11
.00

.85
3.61
.54
.00

1.25
2.32
1.53
.00

.66
2.08
1.26
.00

4.31
4-06
.25

2.40
2.14
.25

2.40
1.84
.56

1.21
1.17
.04

1.71
1.63
.08

1.37
1.35
.02

.53
53
00

27.58
25.02
2.56

27.00
23.42
3.58

23.13
20.15
2.98

19.61
16.73
2.88

22.27
19.00
3.27

22.13
18.20
3.93

14.43
13.00
1.43

1.78
9.01
.49
.08

3.40
8.77
.29
.06

2.48
7.41
.21
.00

1.52
6.53
.13
.09

2.27
6.99
.20
.00

1.28
7.95
.00
.00

1.00
4 65
.20
.28

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. 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 offerings of bonds by nonfinancial corporations
remained light in December and the first half of January.

Given the

current level of bond rates, an abundance of internal funds, and the
ready availability of bank loans, firms largely have continued to
shun the bond market.

Several speculative-grade firms delayed or

cancelled bond issues scheduled for December because investors
proved uncomfortable with the quality of the credits.

However, in

recent weeks inflows to junk bond mutual funds have picked up.
Spreads between yields on corporate bonds and those on
Treasuries largely were unchanged in December after narrowing on
balance over 1994.

Although the dearth of new corporate issues has

been a factor keeping spreads tight, the robustness of the economy
likely has been important as well.

Spreads on these bonds tend to

decline during periods of expansion and then widen either slightly
ahead of or coincident with the onset of a recession; throughout
1994, the spread on bonds rated Baa by Moody's hovered around the
lower end of its historic range

(chart).

In addition, investors

apparently remain confident about the creditworthiness of
speculative-grade firms:

Spreads on all but the weakest credits

closed the year at their lowest levels since the mid-1980s.
Gross public issuance of equity by nonfinancial corporations
picked up slightly in the fourth quarter from the depressed thirdquarter pace.

Even so, equity offerings for the fourth quarter were

off more than 50 percent from the volume in the same quarter of
1993, and they remained sluggish through the first half of January.
The staff estimates that net equity issuance was negative in the
fourth quarter and likely will remain so in the current quarter,
owing to merger-related share retirements and a high level of share
repurchases.

III-10

Interest Rate Spreads on Corporate Bonds
BAA Corporate Spread over Long-Term Treasuries

Basis points

450

400
350
300
250
200
150
100

0
1988

1981

1974

1967

1960

1953

1995

Note. Twenty-year Treasury bond rate used until 1977; thirty-year Treasury rate used thereafter.
Source. Moody's Investors Service.

High-Yield Bond Spread over Seven-year Treasuries

Basis points
4500

3600

2700

Salomon's CCC Bond Rate

1800

Lynch 175

II ,e

900

0
1981

1983

1985

1987

1989

1991

1993

Note. The Merrill Lynch 175 is constructed from yields on bonds currently rated B on average and frequently traded.
Sources. Merrill Lynch and Salomon Brothers.

1995

III-ll
Merger activity among nonfinancial firms has continued at a
hefty pace, with the announcement of four more transactions valued
at $1 billion or more since the last FOMC meeting.

Consistent with

the pattern throughout 1994, the recently announced mergers were
concentrated in a few industries--notably, telecommunications,
health care, and food products--in which firms hope to realize
efficiencies in operations or marketing.

For 1994 as a whole,

$80 billion of large nonfinancial mergers were completed, more than
three times the amount completed in
figure since 1989.
financed

1993 and the highest annual

The large mergers completed last year were

about equally by stock swaps and cash payments

latter often involving borrowing by the acquirer).

(with the

This 50-50 split

implies considerably less substitution of debt for equity than
occurred in the wave of highly leveraged mergers in the late
Lenders

1980s.

appear to be more selective in the 1990s, although they have

shown a greater willingness to fund mergers and acquisitions in the
past year or two as reflected in reportedly narrow spreads.
Overall,

the Senior Loan Officer Opinion Survey for January found

that merger and acquisition lending made up a slightly larger share
of bank business loans than a year ago.
Nonfinancial corporations continued to rely heavily on
commercial paper to finance mergers and acquisitions in December:
Overall, year-end

outstandings were 12 percent above the level at

the end of August, when the merger and acquisition upswing began.
Although some of the paper is very short-term bridge financing for
these mergers,

reports from dealers suggest that the bulk of the

2. The $80 billion total for merger activity in 1994 is
substantially less than the $350 billion figure presented in several
The larger figure incorporates several types
recent trade reports.
mergers among financial
of transactions omitted from our totals:
companies, nonfinancial mergers valued at less than $1 billion, and
transactions in which the acquirer obtains only part of the target
company.

III-12
this paper is expected to be rolled over in the market for some
time, before being paid down with internal funds

or replaced with

bond financing.
So far,

the surge in merger activity has had little effect on

the overall credit quality of U.S.

corporations.

Among the thirty-

four companies that either announced or completed mergers valued at
$1 billion or more during 1994. Moody's
companies for merger-related reasons.

downgraded the debt of six
The book value of the

downgraded debt was only $3-1/2 billion, roughly 3 percent of the
value of all nonfinancial debt downgraded in

1994.

According to ratings changes from Moody's, the credit quality
of U.S.

corporations more broadly was little changed on balance in

the fourth quarter.

In the nonfinancial sector, the pattern of

ratings changes was mixed:

The number of upgrades

exceeded the

number of downgrades, but a few large downgrades caused the value of
downgraded debt to exceed the value of upgraded debt.

Public

utilities accounted for nearly 90 percent of the value of all
nonfinancial debt downgraded last quarter.

As was the case

throughout 1994, the recent downgrades of utilities reflected
regulatory changes that have increased competition in the industry.
In contrast, industrial companies recorded a net improvement in
credit quality last quarter, with upgrades outnumbering downgrades
by a margin of 38 to

28; most of the improvement occurred at

investment-grade firms.
upgrades

In the financial sector, the number of

exceeded the number of downgrades for the eighth straight

quarter, but the net improvement in ratings was far smaller than
those recorded earlier this year; the upward momentum has waned
because credit ratings already reflect the stronger balance sheet
conditions at commercial banks and insurance companies.

III-13
Major stock market indexes rose about 1-1/2

to 5 percent over

the intermeeting period.

Transportation stocks rose more than

6 percent as airlines and

railroads exhibited strong gains.

corporations, fourth-quarter reports

For all

of earnings appear to be coming

in significantly higher than expected by private analysts, with
positive surprises

outnumbering negatives by more than two

For 1995, earnings

growth is expected to remain strong, but down

to one.

slightly from the previous year.
Municipal Markets
Municipal bond prices have continued to gain relative to
Treasuries, and the ratio of long-term tax-exempt to taxable yields
in mid-January was the lowest
(chart).

level since the end of October

In part, the yield ratio declined because the national

municipal market came to view the type of financial problems
encountered by Orange County as less widespread than had been
feared.

In addition, the decline in the yield ratio probably was

assisted by the slowdown in outflows from municipal bond funds,
after extremely large

redemptions in November, and by a further net

reduction in outstanding long-term municipal debt.

During December,

municipal issuers sold about $10 billion in long-term debt while
about twice that amount was retired.

For 1994 as a whole, long-term

gross issuance was down about 45 percent from 1993;
long-term debt is estimated to have fallen about $15

outstanding
billion, the

first annual decline since the beginning of the Flow-of-Funds series
in

1952.

Net issuance probably will be negative again in January as

new offerings remained sluggish through mid-month and another
sizable chunk of debt will be retired by month-end.

Short-term

municipal debt outstanding fell in 1994 from $39 billion to
$34 billion, and a further decline appears likely in January.

III-14

Yield Ratio on Long-Term Municipal Bonds
Tax-Exempt to Taxable
Weekly

1992

1993

1994

Note. Bond Buyer municipal thirty-year revenue bond yield to thirty-year Treasury bond yield.

GROSS OFFERINGS OF MUNICIPAL SECURITIES 1
(Billions
of dollars; monthly rates, not seasonally adjusted)
1994
1994

27.2

15.8

16.1

12.1

12.0

12.8

23.3
15.7
7.6

12.7
3.8
8.9

11.1
1.9
9.2

10.6
1.4
9.2

10.5
1.6
8.9

11.6
1.5
10.1

9.5
1.0
8.5

Short-term

3.9

3.1

5.0

1.5

1.2

1.7

Total taxable

1.1

2.4

Total tax-exempt
Long-term
2
Refundings
New capital

1.
2.

Oct

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

Nov

Dec

1993

11.2

III-15
Meanwhile, Orange County has initiated $40 million in budget
cuts for the year, but current estimates place this year's
shortfall at $172

million.

The county failed to set aside funds

required to meet payments due on taxable notes in June and,
in technical default.

cash
as

thus, is

The county has flip-flopped between

announcements that it intends to return to the capital markets to
raise funds to meet its obligations

and that it might delay making

payments on some debt obligations.
The financial adviser to Orange County has completed the sale
of all

the assets in the pool's original portfolio.

Most of the

assets were sold through auctions, but some were repurchased by
Fannie Mae and the Federal Home Loan Banks, the issuers of the
notes.

Sales in the market reportedly went well, and current

estimates place the total investment loss
$1.7

of the pool near

billion, about $300 million lower than previous estimates.

The

mix of maturities of assets in the pool now resembles a typical
money market fund.
Since the Orange County crisis came to light, other tax-exempt
entities--including San Diego, San Bernadino, Sacramento, and Texas
--have announced leverage-related losses.
the leverage in these cases was quite

However, the extent of

limited, and the losses were

small compared with those incurred by Orange County.
During 1994,

Standard and Poors downgraded about $37 billion of

municipal bonds and upgraded about $20

billion.

These figures are

skewed by the downgrade of $18.6 billion of California debt from A+
to A on July 15.

Excluding the California downgrades, the credit

quality of the municipal sector was little changed on balance last
year.

More recently, Standard and Poors has placed New York City's

$23 billion of outstanding general obligation bonds on Creditwatch

III-16
for a possible downgrade,

as the city's budget cuts were not viewed

as sufficient to this point.
Treasury and Sponsored Agency Financing
The staff anticipates that the Treasury will finance the
projected $95

billion first-quarter fiscal deficit partly by

borrowing $76

billion from the public and by drawing down its

balance by $2 billion.
includes

Because

cash

the upcoming mid-quarter refunding

an issue of thirty-year bonds, the Treasury is likely to

rely less heavily on regular bill sales.
financial needs,

To help bridge seasonal

the Treasury is expected to raise

$30 billion by

auctioning cash management bills that will mature after the April
tax date.

1
TREASURY FINANCING
(Total for period; billions of dollars)

1994

Item
Total surplus/deficit (-)

Qlp

1995
Jan.p Feb.p

-69.9

-95.2

3.4

-49.6

59.7

75.7

-2.9
62.5
36.4
26.1

-5.0
80.7
42.9
37.8

7.8
-6.4
14.3
3.5
10.8

27.2
-. 5

9.4

2.2

Mar.p
-49.1

Means of financing deficit:
Net cash borrowing/
repayments (-)
Nonmarketable
Marketable
Bills
Coupons
Decrease in the cash balance

-22.6

27.7
3.0
24.7

40.7
2.0
38.7
36.4
2.3

25.4

-.5
8.9

Other
Memo:
Cash balance, end of period

.9
26.6

17.3

11.4

-2.9

24.4

49.2

23.9

24.4

1. Data reported on a payment basis.
2. Includes checks issued less checks paid, accrued items, and other
transactions.
p Projected.
Note: Details may not add to totals because of rounding.

III-17
NET CASH BORROWING OF GOVERNMENT SPONSORED ENTERPRISES 1
(Billions of dollars)

1994
Agency

Nov.

13.6
10.6
11.4
0.6
1.8

FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA

Q4
-9.3
17.9
-1.2
0.6

8.0
2.0
5.2
1.2

Dec.
-2.6
9.5
-1.6

1. Excludes mortgage pass-through securities issued by FNMA and
FHLMC.

Overall, issuance of securities by the federally sponsored
credit agencies continued at a brisk pace in the fourth quarter.

The expansion of the portfolios of the mortgage agencies--Fannie
Mae, Freddie Mac,

and the Federal Home Loan Banks--appears to

reflect a decision to exploit the still narrow spreads on their debt
relative to the current spreads on pass-throughs.

To remain

successful in an increasingly competitive environment, Sallie Mae is
also moving to expand the range of its services.

In December,

Sallie Mae announced its intention to acquire HICA Holding, an
insurer of student loans, to enhance its ability to service the
student loans it buys.
Mortgage Markets
The spread between interest rates on fixed-rate and adjustablerate home mortgages narrowed further during the intermeeting period.
From a high of 350 basis points last April, the interest rate spread
between FRMs and ARMs has tightened to 225 basis points, with a
pronounced 95 basis point decline in just the past two months
(chart).
Last year, rising fixed mortgage rates and an unusually wide
spread between FRM and ARM rates fostered a resurgence of ARM
originations, which reached 55 percent of total mortgage

III-18

FRM-ARM Rate Spread
(Not seasonally adjusted)

1984

1985

1986

1987

1988

1989

1990

1991

Basis points

1992

1993

1994

1995

ARM Origination Proportion
(Not seasonally adjusted)

1984

1985

1986

1987

1988

1989

1990

1991

Percent

1992

1993

1994

1995

III-19
originations in November
banks alone reached 69

(chart).

The ARM proportion at commercial

percent in November.

In the secondary market, yield spreads over comparable
Treasuries on mortgage-backed securities collateralized by newly
originated conventional, fixed-rate mortgages have narrowed

sharply

in recent weeks, retracing much of the widening that occurred in
December

(chart).

Before the December spike, secondary market

spreads had narrowed fairly consistently since

the first quarter of

1994, owing to the continuing decline in security issuance over the
past year

(chart).

The widening of spreads in December reflected

spillover effects from the Orange County fiasco--namely, fears that
mortgage agency spreads would rise and that

liquidation of the

county's pools would hurt secondary market pricing for mortgagebacked securities.

Apparently, however, the orderly dismantling of

the county pool investment portfolio has provided some measure

calm to the market.
The nearly 2-1/2 percentage point rise in thirty-year mortgage
rates since October

1993 halted the decline in the average interest

rate on the stock of outstanding single-family mortgages;

the rate

remained relatively stable just below 8-1/4 percent through the end
of last year

(chart).

Because the stock of fixed-rate mortgages

dwarfs new originations, even abrupt increases in rates on new
fixed-rate loans

raise the average rate on the total stock

relatively slowly.

The average interest

rate on outstanding

adjustable-rate mortgages is estimated to have moved up about a
percentage point over the past year.
Preliminary data indicate that home mortgage growth in the
fourth quarter slowed only slightly from the pace recorded in the
third quarter.

Partial data for commercial banks indicate that

III-20

Yield Spread on FNMA New-Issue Mortgage-Backed Securities
(Not seasonally adjusted)
Basis points

1993

1994

1995

Note:
Spread of yield on FNMA securities backed by newly originated conventional fixed-rate mortgages over the yield
on Treasury securities of comparable maturity.

Issuance of Agency Mortgage Pass-Through Securities
(Not seasonally adjusted)
Billions of dollars
Monthly

Gross issuance

I
'I
5'

II
I
'I
If

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

III-21
mortgage loan growth so far in the new year remains at about the
pace of the fourth quarter.

Average Interest Rate on Fixed-Rate Mortgages
(Not seasonally adjusted)
Percent
11.5

10.5

9.5

1980

1981

1982 1983

1984 1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

Consumer Installment Credit
The growth of consumer installment credit outstanding continued
to be strong late last year, despite the upward creep in loan rates.
The November gain was the most rapid since August and brought the
annualized rate of increase through November to 15 percent, almost
twice the rise for 1993.

Revolving and automobile credit growth

also accelerated from their pace of November.

Only "Other"

III-22

GROWTH OF CONSUMER CREDIT
(Percent change; seasonally adjusted annual rate)

1994

Type of credit

1994
Oct.r
Nov.p

Memo:
Outstanding
Nov. 1994
(Billions
of dollars)

1992

1993

.4
-.7
4.9
-3.3

8.6
9.5
11.9
3.8

13.5
15.2
15.0
9.2

15.2
15.3
17.3
12.4

15.9
10.9
18.2
19.3

17.3
18.0
24.6
6.8

904.5
322.8
334.4
247.3

6.4

-4.9

-1.8

-8.7

2.4

-52.3

49.4

7.7

12.5

13.8

15.1

13.5

953.9

Installment
Auto
Revolving
Other
Noninstallment
Total
r
p

Revised.
Preliminary.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)

Type of loan
1
At commercial banks
New cars (48 mo.)
Personal (24 mo.)
2
Credit cards
All accounts
Accounts assessed
interest

At auto finance cos.
New cars
Used cars

1994
Oct.

1991

1992

1993

May

Aug.

11.1
15.2

9.3
14.0

8.1
13.5

7.8
13.0

8.4
13.3

na
na

8.8
13.6

15.9

15.7

12.4
15.6

9.9
13.8

9.5
12.8

9.9
13.5

10.3
13.9

10.4
14.0

10.5
14.2

Nov.

na Not available.
1. Average of "most common" rate charged for specified type and maturity during
the first week of the middle 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.
Note: Annual data are averages of quarterly data for commercial bank rates and
of monthly data for auto finance company rates.

III-23

installment credit slowed from its pace in November.

Total consumer

credit--installment plus noninstallment--rose at a 14 percent yearly
pace--about double the advance for 1993.
Although installment debt increased sharply in the past year,
available data do not yet suggest that consumers are overburdened.
Consumer delinquency rates continued to decline through the third
quarter of 1994.

The staff also estimates that the scheduled

monthly principal and interest payments on all types of non-mortgage
consumer loans have been virtually flat, after declining between
late-1990 and late-1992.
in the total

Although there likely

was a slight upturn

(mortgage and consumer) debt service burden in the

fourth quarter, this measure remained at a relatively low level
(chart).

Household Debt Service
Relative to Disposable Personal Income
Percent

. ...
1970

.
1970. 197.
1976

I
1
1982.19
1982

I.I
1968

I.
1994

INTERNATIONAL DEVELOPMENTS

U.S. International Trade in Goods and
The U.S.

Services

trade deficit in goods and services rose in November.

The October-November deficit was well-above the third-quarter
average.

In November exports reversed their slight decline in

October, while imports accelerated from a marginal rise in October.
Data for December will be released on February 17.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
Year
1993

Quarters
9402
94Q3
94Q4e
(annual rates)

Real NIPA 1/
Net Exports of G&S

-73.9

-111.8

-117.0

Nominal BOP
Net Exports of G&S
Goods, net
Services, net

-75.7
-132.6
56.8

-106.6
-166.5
59.9

-117.5
-178.0
60.5

Months
Sep
Oct
Nov
(monthly rates)
--

-123.8
-183.7
59.9

-9.4
-14.4
5.1

-10.1
-15.1
5.0

1/
In billions of 1987 dollars, SAAR.
e/ BOP data are two months at an annual rate.
Source:
U.S. Dept. of Commerce, Bureaus of Economic Analysis

Exports of goods and services in November rose sharply,

led by

Total exports rose more slowly in October-November than in

the third quarter largely as growth of exported industrial supplies
slowed.

Most of the rises in exports have been in quantity, with

the exception of industrial supplies
increase was

(where virtually all of the

in prices).

Imports rose sharply in November as automotive imports
continued to rise and computer and oil imports rebounded from their
decline in October.

For October-November combined, the rise in

imports was led by imported computers, non-oil industrial supplies,
automotive, and capital ex-computer and consumer goods,

reflecting

the strength of consumption and investment spending in the United

IV-1

-10.5
-15.6
5.0

and Census.

a rise in exported aircraft, other capital goods, and agricultural
goods.

IV-2
1/23/95

U.S. International Trade in Goods & Services

Net Exports of Goods & Services
Bil$, SAAR

1991

1992

1993

Selected Exports
------.
-

Bil 87$, SAAR

Machinery Ex Computers
Automotive
Ind. Supp. (Nonag Ex Gold)

I~
1991

1994

1992

Real NIPA Goods & Services
Ratio Scale, Bil 87$, SAAR

1991

1992

1993

Selected Imports
-

---------

Bil 87$. SAAR

Machinery Ex Computers
Auto motive
Consumer Goods

1 I IIIIIIIt

Iiiiiiiiiii/*t l--ll Il II
_
"
1993

1994

1992

1993

IV-3
U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)
Quarters
Levels
$Change 1/
Q4e/
Q3
94Q4e/
94Q3

Months
Levels
$Chg 1/
Nov
Nov
Oct

Exports of G&S

706.6

726.0

24.3

19.4

718.2-

733.9

15.8

Goods Exports
Agricultural
Gold
Computers
Other Goods

511.4
46.7
4.6
33.8
426.3

527.5
52.4
3.2
35.7
436.2

20.7
2.9
-1.1
1.8
17.1

16.1
5.7
-1.4
1.9
9.9

520.6
51.0
3.7
35.0
430.9

534.4
53.8
2.7
36.3
441.6

13.9
2.8
-1.0
1.3
10.7

28.6
25.3
119.4

28.7
27.2
117.9

-5.5
1.3
5.4

0.2
2.0
-1.5

24.8
26.7
116.2

32.7
27.8
119.6

7.9
1.0
3.4

58.1
31.1
7.6
19.3

59.8
33.6
8.7
17.5

2.1
0.5
-0.8
2.4

1.7
2.4
1.1
-1.9

60.4
33.2
9.0
18.2

59.1
33.9
8.4
16.8

-1.2
0.7
-0.5
-1.4

Ind Supplies
Consumer Goods
All Other

111.7
61.4
21.8

115.2
65.3
22.1

9.4
3.1
1.3

3.5
3.9
0.2

114.4
64.9
23.5

115.9
65.7
20.7

1.5
0.8
-2.7

Services Exports

195.2

198.6

3.7

3.3

197.6

199.5

1.9

Imports of G&S

824.1

849.8

35.2

25.7

839.3

860.3

21.0

Goods Imports
Petroleum
Gold
Computers
Other Goods

689.3

32.1
9.3
-1.9
2.8
21.8

21.8
-8.6
0.1
4.4
25.9

701.2
49.4
3.3
50.1
598.4

721.2

578.6

711.2
52.2
2.9
51.6
604.5

2.5
53.1
610.7

20.0
5.5
-0.8
3.0
12.3

Aircraft & Pts
Semiconductors
Other Cap Gds

9.8
27.0
103.9

11.4
30.8
107.6

-2.5
3.3
5.3

1.6
3.8
3.7

10.2
31.1
107.6

12.6
30.5
107.6

2.4
-0.6
0.1

Automotive
from Canada
from Mexico
from ROW

123.4
44.2
13.9

125.9
46.9
17.4
61.6

6.9
3.0
-0.3
4.2

2.6
2.7
3.5
-3.6

122.8
44.2
17.0
61.6

129.1
49.5
17.9
61.7

6.3
5.3
0.9
0.1

Ind Supplies
Consumer Goods
FFB
All Other

110.9
148.5
32.2
23.0

116.5

4.3
4.1
1.7
-1.3

5.6
5.9
-0.3
3.0

115.2
153.4
32.1
25.9

117.7
155.4
31.6
26.0

2.5
2.0
-0.5
0.2

Services Imports
Memo:

134.7

138.6

3.9

138.2

139.1

1.0

Oil Qty (mb/d)

10.24

-1.03

8.85

9.55

0.70

Aircraft & Pts
Semiconductors
Other Cap Gds
Automotive
to Canada
to Mexico
to ROW

60.7

2.8
47.1

65.2

154.4
31.9
26.0

9.20

0.65

54.9

e/ Average of two months.
1/ Change from previous quarter or month.
U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census
Source:

IV-4
The October-November rise in imports was less than that

States.

registered in the third quarter.
While rebounding in November from the sharp decline in October,
the quantity of imported oil in October-November averaged just over
9.0 mb/d.
quarter.

This was 1.0 mb/d less than the average for the third
Seasonal stock drawdowns reversed the inventory build-up

in the third quarter.

Preliminary Department of Energy statistics

indicate that in December imports should have remained near the
October-November average as higher consumption was satisfied by
higher production and stock draws.
Prices of Merchandise Imports and Exports
While little-changed in October, the price of imported oil
rose about $0.50 per barrel in November reflecting actual and
anticipated supply disruptions in the United States and increased
demand by European refiners coming off seasonal maintenance.

October-November, the price of imported oil averaged about $0.60 per
barrel below the third-quarter average.

Spot oil prices (West Texas

Intermediate) have risen on balance since mid-December.

Perceptions

of ample reformulated gasoline inventories have dissipated.

After

initially undermining crude prices, the unseasonally mild weather
has

underpinned a strong rise in prices as of late reflecting

higher demand for gasoline.
Prices of U.S. non-oil imports rose in November. led by a
strong advance in the price of imported industrial supplies.
Partially offsetting this rise was a decline in the prices of
imported foods, which fell for the first time since February.

For

October-November combined, non-oil import prices rose 5 percent at
an annual rate, about the same as in the third quarter.

IV-5
PRICES OF U.S. IMPORTS AND EXPORTS

(percent change from previous period)
Quarters

Months
Sep

9404e/

94Q3

94Q2

Oct

Nov

(annual rates)
(monthly rates)
BLS Prices-------------------------------Merchandise Imports
Oil
Non-Oil

7.4
67.5
2.8

Merchandise Exports
Agricultural

Nonagricultural
Ind Supp Ex Ag
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods

-8.7

-0.4
-7.4

5.0

0.3

37.8
8.6
-8.7
4.2
2.4
1.1

8.9
12.2
-5.4

0.7

14.67

16.21

15.52

15.40

1.4
-7.4
2.9

Foods, Feeds, Bev.
Ind Supp Ex Oil
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods
Memo:
Oil Imports ($/bbl)

16.0
4.4
-6.7
2.7
2.4
1.0

3.8

7.9
36.6
5.3

2.0
-14.4
4.4

4.7
2.7
4.9

9.4
-6.2
-0.2
0.9
0.4

17.1
-11.2
0.3
1.2
-0.5

14.9

--------

Prices

0.8
5.4
0.3

1.5
1.0

-1.3

-0.8
0.4

-1.3
0.2

1.1

0.2

0.1

0.2

15.29

15.74

0.3

0.5

0.5
0.3

-0.1
0.6

0.8
1.6

0.7
0.0

1.7
-0.5

1.8
-0.3

-0.1
0.1
0.2

0.0
0.5

0.2

1.1
0.1
-0.1

2.7
6.3
1.2

0.2
0.2

-6.0
0.1
2.3
1.4
in

0.7
0.7
0.7

1.5

0.6

0.1

0.0
0.1

the NIPA Accounts-------

Fixed-Weight
Imports of Gds & Serv.
Non-oil Merch Ex Comp
2.9
6.1

Exports of Gds & Serv.
Nonag Merch Ex Comp
e/ Average of two months.

Oil Prices

-import

1987

$ per bbl
Spot WTI
Unit Value

1988

1989

1990

1991

1992

1993

1994

IV-6

Prices of U.S. agricultural exports rose strongly in November,
the largest increases recorded since January, boosted in part by
robust demand from Asia (particularly China).

In November prices of

nonagricultural products continued to increase, led by prices of
exported industrial supplies which recorded their strongest rise of
the previous twelve months.

For October-November combined, the

prices of nonagricultural products recorded the strongest advance of
the three previous quarters.
U.S. International Financial Transactions
Foreign official assets held in the United States fell
substantially in November (line 1 of the Summary of U.S.
International Transactions table).

Almost half of the $7 billion

decline was accounted for by Mexico.
Net banking flows were very small in November (line 3);
however, monthly average data in the International Banking Data
table show a substantial inflow in December in the $14 billion range
(line 1).

This inflows helped finance the robust growth in bank

credit in December.
Private foreigners' net purchases of U.S. securities were very
large in November (line 4 of the Summary table).

The large increase

in net holdings of Treasury securities (line 4a) was more than
accounted for by purchases of longer-term notes and bonds; most of
the increase went to international financial centers in the United
Kingdom, the Netherlands Antilles, and Bermuda, with another $2
billion to Japan.
Foreign net purchases of U.S. corporate and other bonds were
also strong in November (line 4b), about evenly divided between
corporate and U.S. government agency bonds.

Eurobond offerings by

U.S. corporations in December were down somewhat from November.

IV-7
1

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

1993
:

Year

I 1I

2. Changes in U.S. official reserve
assets (+ = decrease)
Private capital
Banks
3. Change in net foreign positibns of
2
banking offices in the U.S.
3
Securities
4. Foreign net purchases of
U.S. securities (+)
4
a. Treasury securities
5
b. Corporate and other bonds
c. Corporate stocks
5. U.S. net purchases (-) of
foreign securities
a. Bonds
b. Stocks

1993

38.3
4.8
4.9
28.6

70.2
29.9
-5.1
45.5

23.4
4.8
-.9
19.4

3.9

-.7

35.6

Month

1994
1

1992
Official capital
1. Changes in foreign official reserve
assets in U.S. (+ = increase)
a. G-10 countries
b. OPEC countries
c. All other countries

Quarter

1994

| Q1

Sept.

Oct.

Nov.

10.4

-7.3
-3.3

10.3

8.6

10.8
1.9

15.7
-4.7
-2.4

18.7
9.1
3.3
6.3

-.7

-.1

3.5

-.2

-.1

-.2

2.4

14.1

5.7

33.8

37.5

8.7

7.2

1.8

2.0

6.3
-7.3
14.8

19.7
5.2

5.9

16.4

5.3

9.6

13.3

1.7

5.6

-1.3

1.1

-2,3

68.1

105.7

45.8

31.1

37.4

24.7

8.1

9.5

34.3

61.3

25.5

13.7

-3.7

19.6

12.2

8.0

1.1

1.0

8-8

-4.9

1.1

-1.2

-9.6

-.5

-8.5

-4.4

-2.6

-1.2

-4.2

-1.9

-20.7

-24.4 -18.1
-6.0
-5.4
-18.5 -12.7

-7.0

-4.4

-2.6

-57.9

-22.7

-24.8

21.4

8.1

12.0

63.4

1.6

8.9

-8.0
5.4
7.0

-9.5
13.3
-4.7

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

n.a
n.a.
n a.

U.S.- current account balance ts.aj.

-67.9 -103.9

-30.6

-32.3

-37.9

n.a.

Statistical discreoancyv

-17.1

4.0

-14.5

-4.3

n.a.

Other flows (quarterly data, s.a.)
6. U.S. direct investment (-) abroad
7. Foreign direct investment in U.S.
6
8 Other (+ = inflow)

(s.a.)

-47.9 -133.4

-34.6

-15.6

-70.1

-13.9

-32.3

-63.3

-41.0

9.9
18.1

21.1

-41.7
5.3

1. The sum of official capital, private capital, the current account balance, and the statistical
Details may not sum to totals becuse of rounding.
discrepancy is zero.
2. 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.
3. Includes commissions on securities transactions and therefore does not match exactly the data on
U.S. international transactions published by the Department of Commerce.
4. Includes Treasury bills.
5. Includes U.S. government agency bonds.
6. 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
INTERNATIONAL BANKING DATA 1/
(Billions of dollars)

1991
Dec.

1992
Dec.

1993
Dec.

-35.8

-71.6

-122.1

12.4

17.0

-48.3

-88.6

-126.3

142.4

23.9

24.8

21.8

21.4

n.a.

90.9

102.9

90.0

n.a.

June

1994
Sep.

Nov.

Dec.

157.5

-175.4

-200.7

-210.3

-224.0

-15.1

-29.9

-53.0

-63.3

-70.1

-147.7

-147.1

22.2

23.2

22.9

23.1

88.6

83.9

79.5

n.a.

77.8

75.1

73.6

80.9

87.2

86.0

79.2

84.2

82.1

85.7

n.a.

MEMO: Data as recorded in the U.S. international transactions accounts
208
211
192
203
179
4. Credit extended to U.S.
nonbank residents

n.a.

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
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

n.a.

240

238

Mar.

235

-145.6

239

-153.9

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, lb, 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
data supplied by the Bank of Canada and the Bank of England. There is a break in the series in
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
denominated deposits and loans. Source: SCE

IV-9
U.S. net purchases of foreign securities moderated in November
(line 5).

Bond purchases from U.K. residents accounted for most of

the $1.9 billion total; stock purchases were widely dispersed.
None of the private capital flows in lines 3, 4, or 5 for
November showed any direct evidence of capital flight from Mexico -on the part of either Mexican or American investors.
As noted in the supplement to the December Greenbook, the
overall outflow of U.S. direct investment abroad in the third
quarter, at $9.5 billion, was roughly equal to that of the second
quarter (line 6).

For Mexico, the third quarter outflow from the

United States was $762 million, up considerably from a rather low
$227 million in the second quarter.

For the first three quarters,

the direct investment outflow to Mexico, at $2.4 billion, has
already matched the level for all of 1993 (and has exceeded the
levels for 1992 and 1991).
Foreign Exchange Markets
Since the December 20 FOMC meeting, the weighted-average value
of the dollar in terms of the other G-10 currencies, shown in the
chart, has declined 2-1/2 percent.

The dollar has declined less

than 1 percent on net against the yen.

Since the Kobe earthquake on

January 17, the yen has eased about 1 percent and Japanese stock
price indices have fallen about 6 percent.

The dollar has declined

nearly 4 percent against the German mark since the last FOMC
meeting.

The mark appears to have benefitted from safe-haven

inflows from troubled markets, particularly other markets in Europe.
In contrast, the dollar has been weighed down by concern over the
implications of U.S. financial support for Mexico.

In particular,

some market participants have worried that U.S. monetary
policymakers might hesitate to raise interest rates aggressively in
fear of exacerbating Mexican financial problems.

IV-10

The Mexican peso has lost about 40 percent of its value in
dollar terms since December 19, the day before the peso devaluation.
The initial 13 percent shift in the "lower limit" of the band to 4
pesos per dollar lasted only two days before heavy Mexican reserve
losses forced a floating and further depreciation of the peso.
Investor reluctance to roll over Mexican short-term government debt
has pushed up interest rates on that debt.

Rates on three-month

peso-denominated bills (Cetes) have risen from 15 percent before the
devaluation to 38 percent at the last auction.

Rates on three-month

dollar-indexed bills (Tesobonos) have risen from 7.4 percent before
the devaluation to nearly 25 percent at the last auction.

Even at

those elevated rates, the Bank of Mexico was only able to place $275
million out of $400 million of Tesobonos offered at the last
auction.

As shown in the second chart, the Mexican stock market has

fluctuated widely since December 19 and is currently about 6 percent
lower in peso terms.

In dollar terms, the Mexican stock index is

down about 45 percent.
The Mexican crisis has increased investor perceptions of risk
in other emerging markets.

Brady bond stripped yields, the yields

IV-11
Weighted Average Exchange Value of the Dollar
March 1973 = 100

October

November

December

January

INTEREST RATES IN MAJOR INDUSTRIAL COUNTRIES

Three-month Rates
Dec. 20
Jan. 24
Change

10-year Bond Yields
Dec. 20
Jan. 24
Change

Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

5.40
2.32
6.25
6.95
5.92
9.13
5.39
5.40
4.13
8.43

5.00
2.28
6.63
8.45
5.62
8.94
5.33
5.10
3.94
8.45

-0.40
-0.04
0.38
1.50
-0.30
-0.19
-0.06
-0.30
-0.19
0.02

7.51
4.53
8.53
9.10
8.12
12.36
8.39
7.65
5.34
10.87

7.58
4.63
8.77
9.56
8.25
12.26
8.50
7.76
5.32
11.12

0.07
0.10
0.24
0.46
0.13
-0.10
0.11
0.11
-0.02
0.25

Weighted-average
foreign

5.37

5.32

-0.05

7.75

7.88

0.13

United States

6.27

6.22

-0.05

7.81

7.86

0.05

IV-12

Latin American Stock Market Indices
December 19, 1994 = 100
December 19

November

December

January
1995

1994

Asian Stock Market Indices

December 19, 1994 = 100

December 19

November
1994

December

January
1995

IV-13
on the uncollateralized part of Brady bonds, have risen nearly 4
percent since December 19 for bonds issued by Mexico and about 2
percentage points for bonds issued Argentina and Brazil.

Stock

price indices in Argentina and Brazil have declined about 20
percent.

Prices in Asian emerging stock markets have declined about

10 percent, partly due to the Japanese stock market selloff and
concerns over the health of Chinese leader Deng.

The worst day for

Latin American financial markets was January 10, when the Mexican
stock market dropped 6 percent and Argentine and Brazilian stock
indices fell nearly 10 percent.

Latin American stock and bond

markets have recovered somewhat since January 11, when President
Clinton pledged further U.S. financial support to help Mexico meet
its short-term financial obligations.

Those markets have remained

volatile, however, amid indications that the passage of the loan
guarantees through Congress will not be smooth.
The Mexican crisis appears to have contributed to downward
pressure on currencies of industrial countries that are seen as
heavily dependent on foreign capital or that are subject to
political uncertainties.

In particular, market concerns have been

heightened over Canada's large fiscal and current account deficits
and the possibility of secession by Quebec.

The Canadian dollar

declined nearly 2 percent over the past month, to a nine-year low.
The Bank of Canada has responded by pushing up short-term Canadian
rates by 150 basis points in the past two weeks.

As shown in the

table, Canadian short-term rates are now more than 2 percentage
points above U.S. rates, after dipping below U.S. rates in October
and November.

IV-14
In Europe, the fallout of the Mexican crisis added downward
pressure to some of the more vulnerable currencies.

The Spanish

peseta, already pressured by political turmoil, declined 3-1/2
percent against the German mark over the past month.

The peseta has

fallen to about 10-1/2 percent below its central parity with the
topmost currency in the European exchange rate mechanism, the Dutch
guilder.

That is the closest any currency has come to the 15

percent limit of deviation since the ERM widened its bands in August
1993.

It has prompted speculation that the peseta might have to

leave the exchange rate mechanism or devalue its central rate for
the fourth time since 1992.

Developments in Foreign Industrial Countries
Recent information from the major foreign industrial countries
suggests continued growth in the fourth quarter of 1994, although
probably at a slower rate than observed earlier in the year.
Japanese economic indicators imply some deceleration from Japan's
strong third-quarter pace.

Industrial production and retail sales

in Europe have slowed, and forward-looking indicators such as orders
and both business and consumer confidence have been mixed.

Canada, recovery may have slowed slightly in the fourth quarter but
still appears to have sustained a healthy pace.
In Japan, consumer-price inflation has remained very low, and
wholesale prices have continued to fall.

Even after excluding the

effects of recent excise tax cuts, Canadian inflation has remained
subdued.

In the European countries with advanced recoveries or

depreciating currencies, there are early indications of emerging

IV-15

inflationary pressures.

In Germany, wholesale and import prices

have been trending up, while both consumer and wholesale price
increases have accelerated in the United Kingdom and Italy.
Although evaluations of the effects of the disastrous Kobe
earthquake on the Japanese economy are still incomplete, it is
estimated to have destroyed roughly 1/2 percent of the country's
capital stock (roughly equivalent to a $50 billion loss).
Disruptions caused by the earthquake likely will lower currentquarter output, but should lead to increased reconstruction demand
in subsequent quarters.

Japan's net exports likely also will be

less in the near term due to damage to production and shipping
facilities.
In Italy, Lamberto Dini, a former Bank of Italy Director
General, has been named Prime Minister-designate.

He replaces

Silvio Berlusconi, who resigned on December 22 rather than face a
likely no-confidence vote.
Individual country notes.

In Japan, data for the fourth

quarter suggest a continuation of growth, although at a slower pace.
In November, while industrial production rebounded, and housing
starts grew strongly, new orders rose only slightly.

Although the

November unemployment rate fell somewhat, the job offers/applicants
ratio was unchanged, suggesting that the labor market has not
recovered yet.
Consumer prices in the Tokyo area fell 0.5 percent in December
from a year earlier, and both the nationwide CPI and wholesale
prices continued to fall year-over-year in the fourth quarter
reflecting, in part, liberalization and increased competition in the
Japanese retail and wholesale sectors.

IV-16
JAPANESE ECONOMIC INDICATORS
(percent change from previous period except where noted, SA)

Q1
Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio*
Business Sentiment**

Q3
1.9
1.1
1.7
3.7
1.7
-1.7
6.9 -16.5
19.3
8.5
-7.5
8.9
2.8
2.8
3.0
0.66 0.64 0.63
-50
-39
-56

1994
Sept.
Q4
n.a.
-1.3
n.a.
-6.9
n.a.
3.4
n.a.
1.6
n.a.
3.0
n.a.
0.64
--29

Oct.

-0.6
1.4
-7.9
-12.2
3.0
0.64

Nov.
3.0
5.0
0.2
n.a.
2.9
0.64

* Level of indicator.
** Percent of manufacturing firms having a favorable view of
business conditions minus those with an unfavorable outlook.
The trade surplus in 1994 totalled $121 billion (SAAR), about
unchanged from its level in 1993, with the bilateral surplus with
the United States widening to $55 billion from $51 billion in 1993.
Through November, the current account surplus registered $130
billion (SAAR),

about equal to its value for all of 1993.

On January 17th, the Kobe region of Japan was hit by a
devastating earthquake that is estimated to have damaged about 0.4
percent of the country's capital stock, or roughly $50 billion
equivalent.

It is estimated that the disruptions caused by the

earthquake will lower current-quarter output, but will lead to
increased reconstruction demand in subsequent quarters.

Damage to

production and port facilities is expected to lower Japan's net
exports temporarily in the near term.
The west German economy continued to expand in the fourth
quarter, as industrial production in October and November was about
1 percent above the third-quarter level on average.

However, on the

spending side, retail sales dropped sharply in both October and
November, averaging about 2-1/4 percent below the third-quarter
level.
Forward-looking indicators are generally positive, although the
recent pattern of new orders suggests some moderation in the

IV-17
recovery.

Orders in October and November were 1.4 percent above the

third-quarter level after increasing at an average rate of just
under 3 percent over the previous three quarters.

The deceleration

has occurred primarily in domestic orders, while foreign orders have
picked up again in the past few months after a lull in the summer.
In contrast, the net percentage of firms planning to increase
production over the next three months doubled in December, while
firms' assessment of their inventory situation continued to improve
in the fall.
WEST GERMAN ECONOMIC INDICATORS
(percent change from previous period except where noted,

Q1
Industrial Production
Manufacturing Orders
Capacity Utilization
Retail Sales Volume
Unemployment Rate (%)
Production Plans*

1994
Q4
Sep.

0.4
2.6
1.1
n.a.
2.5
4.0
1.9
n.a.
79.5 81.4 82.9 84.2
1.3 -2.9
1.3
n.a.
9.3
9.2
9.1
9.2
3.3

7.7

8.7

15.3

1.1
5.4
--

Oct.
1.0
-1.2

SA)

Nov.
0.5
-0.3

Dec.
n.a.
n.a.

0.8
9.2

-2.9
9.2

-1.2
9.1

11.0

13.0

n.a.
9.1

11.0

22.0

e Estimated
* Percent of manufacturing firms planning to increase production in
the next three months minus those planning to decrease production.

The recovery still has had only a minor impact on the labor
market, as productivity growth has remained quite strong.

The

unemployment rate edged down to 9.1 percent in November, just twotenths below its

cyclical peak, and remained at that level in

December.
The year-over-year west German consumer price inflation rate
(NSA) was unchanged in December at 2.7 percent.

Wage growth

continues to be relatively moderate, but both wholesale and import
prices have begun to show some acceleration in the past few months.
Production in eastern Germany has continued to expand at a
rapid rate, with industrial production in October nearly 20
above its year-earlier level.

Orders

for manufactured goods

percent
surged

IV-18

in November and were 32 percent above their previous-year level.
Foreign orders showed a particularly large increase to a level 19
percent above that of the previous year.

The unemployment rate was

13.5 percent in December, about 2 percentage points below its yearearlier level.
At its December 22 meeting, the Bundesbank Council set a 4-6
percent target range for M3 growth for 1995, on a fourth-quarter-tofourth-quarter basis, the same as the 1994 target.

This range is

intended to be consistent with growth of 2-3/4 percent in potential
output, a maximum of 2 percent inflation, and 1 a percent trend
decrease in M3 velocity.
In France, third-quarter GDP growth was revised up to 3.3
percent (SAAR) from 2.8 percent.

The revision was largely the

result of stronger investment, which increased 6.1 percent (SAAR),
rather than the 3.5 percent reported in the preliminary release.
On balance, monthly indicators point to some slowing in
economic growth in the fourth quarter.

Industrial production rose

in November, partly reversing its October decline.

Business surveys

by INSEE and the Bank of France suggest that production increased
moderately in December, and that total orders were flat, while
foreign orders rose sharply.

Consumption of manufactured products

declined in the fourth quarter.

This suggests that growth in total

consumption also is likely to have been relatively weak since
manufactured products make up one-third of total consumption.

This

weakness is unlikely to persist, because it was largely due to a
sharp drop in automobile purchases as the impact of government
incentives to purchase autos wore off.
Consumer prices declined slightly in December and were only
1.6 percent above their year-earlier level, the lowest inflation
rate since 1956.

IV-19

FRENCH ECONOMIC INDICATORS
(percent change from previous period except where noted, SA)

Industrial Production
Unemployment Rate (%)
Consumption of
Manufactured Products
Consumer Prices (NSA)

Q1
Q2
Q3
1.2
2.7
1.8
12.5 12.6 12.6
0.7
1.5
1.5
0.4

0.6

0.1

1994
Q4
Sep.
n.a. -0.2
n.a. 12.7
-0.5
0.2
0.4

Oct.
-0.7
12.6
-1.9

Nov.
0.4
12.6
1.5

0.3

0.0

0.3

Dec.
n.a.
n.a.
0.7
-0.1

The Bank of France announced in mid-December that it would
maintain its medium-term growth target for M3 of an average rate of
It stated that this target was

5 percent over four years.

consistent with its commitment to limit inflation to less than 2
percent.

It also reaffirmed its commitment to the current exchange

rate parity vis-a-vis the DM.
In the United Kingdom, the pace of economic activity in the
fourth quarter has continued at about the same rate as in the third
quarter due to a surge in oil production.
preliminary 3.1 percent

Real GDP rose a

(SAAR) in the fourth quarter;

oil GDP slowed to 2.7 percent.

growth of non-

In November, industrial production

fell back to its third-quarter average level, while

growth of retail

sales in the fourth quarter slowed to 0.5 percent.

Producer

confidence improved in the fourth quarter, but consumer confidence
fell sharply.

In December, the unemployment rate fell further to

8.6 percent.
UNITED KINGDOM ECONOMIC INDICATORS
(percent change from previous period, SA, except where noted)
1994

Sep.

Oct.

Nov.

Q2
5.5
5.3

Q3
3.2
3.2

GDP
Non-oil GDP

Q1
4.4
3.7

3.1
2.7

n.a.
n.a.

Industrial Production
Retail Sales
Unemployment Rate (%)

1.1
0.9
9.8

2.1
0.9
9.4

1.2
0.7
9.2

n.a.
0.5
8.8

1.0
0.5
9.1

0.3
0.1
8.9

-1.0
0.0
8.8

2.7
-3.0

2.4
0.6

2.2
4.5

2.2
7.9

2.0
6.3

2.0
7.2

2.3
8.3

RPI ex. MIP *
Input Prices *
*

NSA;

percent change from preceding year.

n.a.
n.a.

Dec.
n.a.
n.a.
n.a.
0.5
8.6
2.5
8.3

IV-20
Rapid increases in manufacturers' input prices throughout 1994
were offset in large
both producer-price

part by falling unit

labor costs.

However,

inflation and underlying retail-price inflation

appear to have bottomed out in October.
In Italy, growth in the third quarter continued near the robust
pace set

in the second quarter.

Total domestic demand remained

strong as every component advanced except fixed privateinvestment,
which declined marginally.
percent

Exports and imports both grew over 20

(SAAR).

ITALIAN REAL GDP
(percent change from previous period, SAAR)

1992

1993

Q4/Q4

GDP

-0.6

Total Domestic Demand
Net Exports (contribution)

-1.7
1.2

1994

0.4

0.9

4.8

4.0

-3.4
4.0

-0.8
1.7

9.1
-4.1

3.7
0.3

More recent indicators suggest that activity may have
decelerated in the fourth quarter.

Industrial production, which

was essentially flat in October, fell in November due to strikes and
a severe flood, and the unemployment rate

(NSA) jumped to over 12

percent in the fourth quarter as employment in all sectors
economy fell.

of the

In addition, consumer and business confidence dipped

from highs recorded in September.
In October, wholesale-price and producer-price inflation (yearon-year) continued to move up, and consumer-price inflation in
December exceeded 4 percent for the first time

since May.

December 22 Prime Minister Berlusconi resigned rather than face a
likely no-confidence vote in Parliament.

On January 13 President

Scalfaro asked Treasury Minister and former Bank of Italy

IV-21
ITALIAN ECONOMIC INDICATORS
(non-seasonally adjusted except where noted)

Q3
3.7
75.8
11.0

1994
Q4
n.a.
n.a.
12.1

100.6 112.8 117.1
(%) 19
17
19

112.7
n.a.

0.1
Industrial Production*
Capacity Utilization (%) 74.5
11.3
Unemployment Rate (%)
Consumer Confidence
Business Sentiment**

4.6
76.0
11.6

Oct.

Dec.

Nov.

0.2
---

-0.4

112.0
16

n.a.
-

112.9
18

113.2
n.a

*
Percent change from earlier period (seasonally adjusted).
** Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.

Director General Lamberto Dini to form the next government.

Mr.

Dini passed a confidence vote in the lower house of parliament on
January 25th and faces a confidence vote in the upper house on
February 1.

The program of the Dini

government consists of a

supplemental 1995 budget, pension system reform, regional electoral
reform, and new rules

on media access for political parties.

Indicators for the fourth quarter suggest economic activity in
Canada continued to

The average volume of

expand at a healthy pace.

retail sales in October and November was 1.9 percent above the
third-quarter average, and manufacturing shipments and new orders
grew strongly in November.

After a surge in job

growth in November,

employment was unchanged in December as full-time job increases were
offset by a drop in part-time jobs.
Consumer-price inflation remains subdued.
effects of recent excise tax cuts,

Excluding the

12-month inflation was 1.6

percent in December.
As the Canadian dollar has come under increasing pressure this
month, the Bank of Canada has raised its target for the overnight
(call) rate by 50 basis points
increase on January 17

on three occasions.

set the range to 6.75

- 7.25

The latest
percent.

These

IV-22
moves came after two 25 basis point increases in November and
December.
CANADIAN ECONOMIC INDICATORS
(percent change from previous period except where noted. SA)

Q1
0.7
1.0

Q2
3.3
6.2
5.9

Industrial Production
2.2
4.6
Manufacturing Shipments
5.9
Manufacturing New
0.1
Orders
Retail Sales
3.3
1.3 0.4
Employment
0.3
0.8
1.0
Unemployment Rate (%)
11.0 10.7 10.2
Consumer Prices**
0.6
0.0 0.2
*

1994
Sept.
n. a. -0.3
n.a. -1.1
n.a. -0.5

Oct.
0.3
1.5
0.3

Nov.
Dec.
n.a.
n.a.

4.0
2.5

n.a.

n.a.
0.7
9.7
0.0

1.6
-0.2
10.0
-0.2

-0.3
0.7
9.6
-0.1

n.a.

-0.1
0.5
10.1
0.2

n.a.

0.0
9.6
0.2

NSA.

** Percent change from year earlier.

EXTERNAL BALANCES

(Billions of U.S. dollars, seasonally adjusted)

1994
Q1

Oct.

Dec.
10.6
n.a.

31.3
33.8

30.9
34.2

Germany:
trade
current account*

8.6
-6.6

12.8
10.0
-3.1 -16.3

France:
trade
current account

2.7
3.5

U.K.:
trade
current account

-4.4
-2.2

-3.7
-1.7

-2.4
1.3

-0.9
--

-1.0

Italy:
trade
current account*

6.8
1.3

5.9
3.5

5.4
5.5

2.2
1.0

1.6
0.5

-1.3

n.a.

Canada:
trade
current account

1.6
-5.5

2.0
-5.5

3.5
-3.7

1.6

1.5

n.a.

3.9
n.a.

8.6
8.0

Nov.

Japan:
trade
current account

3.7
n.a.

28.4
32.0

Sept.
8.5
10.5
3.3
-3.5

4.6
-4.7

1.7

2.1

11.1
10.9
n.a.

n.a.

1.3

n.a.
n.a.

n.a.

n.a.
n.a.

n.a.

* Not seasonally adjusted.
-- Data not available on a monthly basis.

n.a.
n.a.

1-25-95

IV-23

Industrial Production for Major Foreign Countries
(Ratio scale; seasonally adjusted; monthly)
1987=100

1987=100
130
W. Germany

120

110

100

I
1990

1991

1992

1993

1994

1990

I
1991

I
1992

1993

France

1994
-

130

United Kingdom

120

110

100

1990

1991

1992

1993

1994

1990

1991

1992

1993

1994

1991

1992

1993

1994

Canada

1990

1991

1992

1993

1994

1990

1-25-95

IV-24

Consumer Price Inflation for Major Foreign Countries
(12-month percent change)
9

W. Germany

Japan

6 -

I
1990

1990

1991

1992

1993

1991

1992

1993

1994

1990

1991

1992

1993

1994

France

9 I-

I
1990

I
1991

I
1992

I
1993

1994

* Excluding mortgage interest payments.
12 --

9 1-

3 -

1990

1991

1992

1993

1994

1990

1991

1992

1993

1994

IV-25
Mexico
On December 20, faced with continuing downward pressure on the
peso and declining international reserves, Mexico announced a
widening of the trading band for the peso, moving the lower limit
from about 3.5 pesos per dollar to roughly 4 pesos per dollar, an
increase of about 15 percent.

This action only accelerated downward

pressures on the peso, however, and as the exchange rate fell
quickly to its new lower limit, Mexico spent more than $4-1/2
billion out of its estimated $10-1/2 billion in remaining reserves
defending the peso on December 20 and 21.

On December 22 the

authorities decided to let the peso float, and it subsequently fell
to a low of 5.8 pesos per dollar on January 6.
the peso is at the rate of 5.7 pesos per dollar.

As of January 25,
On December 22,

the authorities also announced the activation of the North American
Swap Facility, consisting of $6 billion from the U.S. Treasury and
the Federal Reserve and C$l billion from the Bank of Canada.
On December 28, in response to the turmoil in financial markets
prompted by the floating of the peso, Finance Minister Jaime Serra
was replaced by Guillermo Ortiz, previously Secretary of
Communications and Transport.

On January 2, a $3 billion increase

in the swap lines provided by the United States was announced, along
with a C$500 million increase in the Canadian swap line, a $5
billion facility provided by the BIS, and prospective credit lines
from private banks of $3 billion, for a total international support
package of $18 billion.
On January 3, the government announced an emergency economic
program.

The program included:

- A guideline of 7 percent for wage growth in 1995, the same

as agreed to last September in the renewal of the annual
pact among representatives of government, business, and

IV-26
Some provision also was made for
labor.
growth based on productivity increases.

additional wage

Increases in the public sector prices of final consumer
goods (gasoline and electricity for households) of 10
Adjustment of the public sector prices of
percent in 1995.
energy products used by industry equal to 85 percent of the
change in the exchange rate.
A reduction in government expenditures of 1.3 percent
of GDP and in development bank lending of 2 percent of GDP.
A limit on credit creation by the Bank of Mexico of 12
billion new pesos, consistent with monetary base growth of
about 20 percent, the projected rate of increase of nominal
GDP in 1995.
Measures to promote structural change, including legal
reforms to privatize railroads and satellites, an increase
in the allowance of foreign investment in existing financial
intermediaries from 30 to 49 percent of capital, opening of
telecommunications to competition; continued privatization
of port operations; privatization of airports, electrical
power plants, and petrochemical plants; and continued
privatization of other public companies.
-

An $18 billion Exchange Stabilization Fund to enhance
credibility and support orderly conditions in financial
markets.

On January 6, the IMF began talks with Mexico on a stand-by
arrangement in support of Mexico's

economic program.

An IMF mission

departed for Mexico subsequently, and discussions on a stand-by are
continuing.

On January 12,

the Clinton Administration announced a

proposal to guarantee borrowing in the capital markets by Mexico

totalling $40 billion in order to raise investor confidence and
stabilize the Mexican economy.

Legislation authorizing this package

could be voted on by Congress during the week of January 23.
Consumer prices rose 7 percent on a 12-month basis in December,
up slightly from 6.9 percent in November.

Reflecting price hikes in

the wake of the peso's devaluation, prices in the first half of
January rose 2.3 percent above their level in the first half of
December, well above the 0.9 percent increase in prices registered

IV-27
from November to December.

The trade deficit grew to $15.4 billion

in the January-October period, up from $11.2 billion in the same
period last year.
Economic Situation in Other Countries
The fallout from the Mexican peso crisis has been limited
largely to other major Latin American developing countries, although
some effects have been felt in Asian stock markets.

Fears

concerning the sustainability of the fixed exchange rate regimes in
both Argentina and Brazil have led to a marked decline in the stock
markets and prices of Brady par bonds of both countries since
December 19.
Growth of real output appears to have been strong in the major
developing countries in 1994 with the exception of Mexico, discussed
in a previous section, and Venezuela.

In Argentina, real GDP growth

remained strong last year while inflation has reached its lowest
level in 40 years.

In Brazil, growth increased in 1994 and the new

stabilization plan has been successful so far in keeping inflation
low.

President Fernando Henrique Cardoso took office on January 1

and appointed Pedro Malan as finance minister and Persio Arida as
the new central bank president; both have been closely associated
with the disinflation program.
1994 with rising inflation.

Venezuela experienced a recession in

In China strong output growth last year

has been accompanied by a rise in inflation to its highest level in
almost 46 years.

Korea and Taiwan both experienced strong growth

with stable moderate inflation.

Russian real GDP contracted sharply

during 1994, but there are signs that it may now be stabilizing;
concerns over the budgetary impact of the war in Chechnya are
rising, however.
Individual country notes.
while inflation remained low.

In Argentina, growth was strong
Industrial production during the

IV-28
first ten months of 1994 was up 5 percent from a year earlier.
Consumer prices were 3.9 percent higher in December 1994 than a year
earlier.

However, despite strong growth in industrial production

and exports, the urban unemployment rate reached a record 12.2
percent in October's semi-annual survey, up from 9.9 percent in 1993
due to layoffs and restructuring in newly privatized enterprises.
The cumulative trade deficit for the first eleven months of
1994 widened to $3.9 billion compared with its year-earlier level of
$1.3 billion.

Mercosur, the regional trade arrangement including

Argentina, Brazil, Paraguay, and Uruguay, was inaugurated on
January 1.
Spillovers from the Mexican peso crisis have affected
Argentina's financial markets.

As of January 24, the stock market

has fallen 19 percent since December 19 and 26 percent since
December 30, 1993.

Prices of Brady par bonds have fallen 9 percent

since December 19.
Mexico's crisis has also prompted a shortage of liquidity in
Argentina's banking sector. Three relatively small financial
institutions, a merchant bank (Extrader) and two brokerage houses
(Finansur and Finmark) have suspended operations for 30 days until
they can arrange for financing.

In response the Central Bank has

adopted certain temporary measures such as: unifying and lowering
its minimum reserve requirements on all types of deposits from an
average of 24 percent to 21 percent, eliminating the requirement
that at least 70 percent of required reserves be in pesos, and
eliminated the small exchange band at which it used to transact
dollars from commercial banks (1.00 USD/0.998 Peso).

Banks can now

buy and sell dollars to the Central Bank at exactly one peso per
dollar.

Total official reserves in December are estimated to be

around $17 billion.

IV-29
Brazil's central bank sold an estimated $2.2 billion of its $40
billion in foreign reserves in late December and early January.

The

sales were made in the wake of the devaluation of the Mexican peso
and mark the first intervention episode since the central bank
committed to maintain the exchange rate at no more than one real per
dollar in July 1994; the real/dollar exchange rate has been at 0.85
since September 1994.

As of January 24, the Bovespa stock market

index has fallen 22 percent since December 19, but has risen 41
percent since December 30, 1993 in dollar terms.

Prices of Brady

par bonds have fallen 9 percent since December 19.
The recent financial turmoil has prompted some debate about
Brazil's exchange rate policy.

The Real Plan has been successful in

reducing inflation from 50 percent per month in June to less than 2
percent per month in December 1994, however, Brazil's currency has
appreciated 35 percent in real terms since the plan was implemented
in July, causing concern that Brazil's competitiveness may be
adversely affected.

Revised estimates for November and December

indicate that Brazil's trade deficits for the two months were
considerably higher than previously believed, bringing the trade
surplus for the year down from $13.1 billion in 1993 to $10.5
billion in 1994.
29 percent.

Exports grew by 12 percent while imports grew by

This news, plus skepticism that the government would be

able to contain the current account to a target deficit of no more
than 3 percent of GDP in 1995 (from roughly 0.5 percent of GDP in
1994) has heightened concerns about the sustainability of the
current exchange rate policy.

In addition, economic growth has been

strong; according to preliminary government estimates, real GDP grew
by 5.3 percent in 1994, up from growth of 4.1 percent in 1993.
In late December, the central bank took control of two banks
that are majority-owned by state governments, Banespa (Sao Paulo)

IV-30
and Banerj

(Rio de Janeiro).

second largest

Banespa is Brazil's

commercial bank.
Real GDP in Venezuela is estimated to have fallen by 3.3
percent for 1994 compared with a 0.4
year.

percent fall in the previous

The non-oil sector contracted by 5.4 percent, while the oil

sector expanded by 5.7 percent.

Consumer price inflation was

3.5

percent in December, down from 4.3 percent in November due in part
to the inclusion of five new products in the list of price
controlled items. The increase

in the official consumer price index

for 1994 was 71 percent, up from 46 percent in 1993,

and was the

highest annual inflation since 1989.
The contraction in activity, however, has contributed to the
improvement of Venezuela's external balances.

The

current account

went from a deficit of $2.2 billion in 1993 to an estimated surplus
of $4.1 billion in 1994.

The central bank's official

reserves,

excluding gold, stood at an estimated $8.5 billion at the end of
December

1994 compared with $9 billion at the end of 1993.

Venezuela's financial markets have not been affected very much
by the Mexican crisis, since the major force driving financial
markets is the lack of a consistent macroeconomic program to curb
inflation and restore growth.

However, conditions in the financial

system do not seem to be stabilizing.

On December

14, the

government took over Grupo Latinoamericana Progreso, one of the
nation's largest banking and insurance groups, bringing the total
number of banks under government control to

13.

The group's two

banks, Banco Progreso and Banco Republica. remained open to the
public.

On the other hand, Banco Latino International, the Miami

branch of Banco Latino de Venezuela,
became a full

reopened on December 15,

subsidiary of the Venezuelan bank.

and

IV-31
In China, real GDP rose 11.8 percent in 1994, according to
preliminary estimates.

Industrial value added rose 17.5 percent for

the year; output in the state sector rose 5.5 percent, while output
in the non-state sector rose 28 percent.

Consumer prices rose 26

percent in 1994, the highest annual inflation rate since the
founding of the People's Republic of China in 1949.
China ran a trade surplus of $5.3 billion in 1994, after
recording a trade deficit of $12.2 billion in 1993.

Exports rose 32

percent in 1994 from a year earlier, while imports rose 11 percent.
Foreign direct investment into China was reportedly $29 billion in
1994, up from $26 billion in 1993.

Foreign exchange reserves rose

$28 billion in 1994, reaching $49 billion at the end of December.
As of January 25, share price indices for China's official
stock exchanges were down between 5 and 16 percent for the year.
Although this may in part reflect a general reassessment of emerging
financial markets by investors, several other factors also appear to
be at work.
frictions.

The first is the escalation of U.S.-China trade
The United States announced on December 30 that it would

apply punitive tariffs on $2.8 billion of Chinese goods if China
fails to take sufficient steps to improve protection of intellectual
property rights by February 4: China has vowed to retaliate against
U.S. goods.

A second factor is that China raised some lending and

deposit rates early this month.

A third factor is renewed concerns

about the state of Deng Xiaoping's health.
In Taiwan, industrial production was 6.8 percent higher in 1994
than a year earlier, the highest annual growth rate since 1991.
Consumer prices rose 2.6 percent in 1994.

Taiwan ran a trade

surplus of $7.7 billion in 1994, down slightly from the 1993 surplus
of $7.9 billion.

Exports rose 9.4 percent from a year earlier,

while imports rose 10.8 percent.

IV-32
In Korea, concern that very rapid economic growth will lead to
a rise in inflation has induced further monetary tightening in
recent weeks.

Short-term interest rates have increased by about 130

basis points since the end of last year, with interest rates rising
a total of about 350 basis points since the Bank of Korea began
tightening liquidity in June.

The inflation rate has been roughly

stable during the past year.

The consumer price index in December

was 5.6 percent higher than a year earlier.
Merchandise exports increased by 14 percent during the first 11
months of 1994 from a year earlier.
20 percent over the same period.

However, imports increased by

This led to a widening of the

current account deficit to $4.3 billion through the first 11 months
of the year, compared with a deficit of $0.2 billion during the same
period of 1993.
Korea announced recently a plan that progressively eases
current restrictions on inward and outward portfolio investment over
the 1995-97 period.

The plan includes raising the ceiling on

purchases of foreign securities by domestic investors by a
substantial amount, and allowing Korean firms (especially those in
high-technology manufacturing) greater latitude in obtaining
offshore financing.
The economic situation in Russia has deteriorated in recent
months.

Consumer price inflation averaged 14 percent a month during

the fourth quarter, reaching 16.4 percent in December, and
preliminary reports suggest that inflation has remained high during
January.

The resurgence of inflation reflects numerous factors,

including uncertainty due to the war in Chechnya, monetary emissions
to finance the war, and credit creation to satisfy firms' year-end
liquidity needs.

These factors have also caused the ruble to

depreciate rapidly against the dollar; the ruble dropped by 9

IV-33
percent during December and has fallen another 10
first three weeks in January.
the

percent during the

In response to these developments,

Central Bank of Russia on January

refinance rate from 15.4 percent to

6 increased

its monthly

16.7 percent and on January 17,

raised reserve requirements slightly.
On December 23, Russia's parliament gave preliminary approval
to the government's 1995

draft budget, which outlines a fiscal

deficit of about 8 percent of GDP.

Parliamentary leaders, however,

are concerned about the budgetary impact of the Chechnya campaign.
The Ministry of Finance

estimates that the total cost

of conducting

the war and rebuilding Chechnya will be only 4 trillion rubles
percent of GDP),
rubles

(1.5

but unofficial estimates

percent of GDP).

(0.4

run as high as 15 trillion

The government intends to absorb

expenditures on Chechnya into the proposed budget, reducing other
expenditures as necessary to maintain an 8 percent of GDP deficit.
According to Russian official statistics,
percent
1993

real GDP fell

in 1994, and industrial production was 21 percent below its

level.

The private

These data also

sector now accounts for 62 percent of GDP.

suggest that economic

activity may have begun to

stabilize during the fourth quarter.
The Russian government and the IMF continue negotiations
stand-by arrangement.

on a

The IMF is reportedly encouraging the

government to limit the 1995 fiscal deficit to 7 percent of GDP and
to take rapid steps toward liberalizing the energy sector.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, January 31-February 1, 1995 : Greenbook Part 2

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