Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 1-2, 1997 : Greenbook Part 2

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Confidential (FR) Class II FOMC

Part 2
June 25, 1997

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III FOMC

June 25, 1997

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
After surging in the first quarter, real GDP appears to be
headed toward only a moderate increase in the second quarter-primarily because of a slackening in consumer spending.

contrast, industrial production, which has been less volatile
recently, will likely post a third consecutive 4 percent to
5 percent (annual rate) gain this quarter.

Growth of payroll

employment subsided a bit recently, but the unemployment rate moved
down further.

Meanwhile, inflation remained modest despite high

rates of resource utilization, with the core CPI rising 2.5 percent
over the year ending in May.
Real GDP
According to BEA's preliminary estimate, real GDP grew
5.8 percent at an annual rate in the first quarter of 1997.

shown in the table, we expect data revisions, on net, to leave this
figure unchanged.

Among the components of GDP, the largest expected

change is to net exports, where annual revisions to the merchandise
trade data point to a smaller first-quarter rise in imports.
However, revised book-value data suggest that the pace of inventory
accumulation was slightly slower than BEA estimated at the time of
the preliminary release.
FIRST-QUARTER GROWTH OF REAL GDP
(Billions of 1992 chained dollars)
Category

BEA
preliminary

Real GDP
Inventory investment
Final sales
PCE
BFI
Residential structures
Government
Net exports
Exports
Imports
Memo:
Real GDP growth (percent,
annual rate)

Expected revision

98.8
34.3
64.9
66.2
21.8
4.0
.2
-28.4
23.1
51.6

.2
-4.3
4.8
-.5
-2.1
.1
.5
6.4
-.9
-7.4

5.8

II-1

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

1995

Nonfarm payroll employment I
Private
Manufacturing
Durable
Transportation equipment
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Help supply services
Total government
Private nonfarm production workers i
Manufacturing production workers

1996

1997

1996
Q4

Mar.

Apr.

May

------------ Average monthly changes--------185
212
168
213
228
182
323
138
176
198
142
213
218
184
290
166
-1
-5
-14
7
14
14
2
-5
11
5
-2
11
15
12
8
0
6
-6
-1
-1
1
-1
3
6
-4
-1
2
-6
-5
-12
-10
-11
10
24
11
27
29
5
-10
23
48
60
54
80
28
41
103
3
-1
11
9
12
10
12
27
11
113
98
77
88
97
85
146
125
10
13
13
3
17
25
-38
-17
9
14
25
0
10
-2
33
-28
151
-2

168
-5

116
-9

180
7

195
9

158
9

190
1

161
11

32
51

232
225

219
195

202
220

440
453

745
651

209
98

255
322

Memo:
Aggregate hours of private production
workers (percent change) 1
.1
Average workweek (hours)1
34.5
Manufacturing (hours)
41.6

.3
34.4
41.5

.1
34.5
41.7

.3
34.5
41.8

.3
34.7
41.9

.1
34.8
42.1

-. 4
34.5
42.1

.3
34.5
42.0

Total employment 2
Nonagricultural

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

Aggregate Hours of Production or
Nonsupervisory Workers
Index,1982=100

Average Weekly Hours
Hours
35

34.8

34.6

34.4

34.2

1993

1994

1995

1996

1997

1993

1994

1995

1996

1997

II-3

Labor Market Developments
Growth of payroll employment moderated just a bit from the fast
pace in the first

quarter, although after incorporating the annual

revisions to the establishment survey, it now appears that the
second

quarter began with greater strength in hiring than initially

reported.

In May, the unemployment rate fell to its

level

1973,

since

lowest

and the labor force participation rate, though

down from its historical high in March, was just under the previous
cyclical

peak reached in January 1990.

Nonfarm payrolls increased 138,000 in May, and employment
growth in April was revised up from 142,000 to 323,000.

Part of the

upward revision for April was a technical adjustment made as part of
the annual revisions.2
special factors,

But even netting out the effects of

employment growth averaged a little under 200,000

over the first two months of the

second quarter--not far from the

first-quarter pace.
The bulk of employment growth over the past two months has been
in services,

particularly health, hotel, and amusement

services.

One surprisingly weak industry has been help-supply, where
employment has

This

fallen 55,000 over the past two months.

weakness may reflect a lack of available workers,
slowdown in demand:

rather than a

Help-supply firms report no drop-off

orders but have had problems

filling them.

in new

In the goods-producing

sector, the pace of employment growth has slowed from the first
quarter.

expected, construction employment bounced back in May

from the weather-depressed

levels in March and April.

However,

averaging through the fluctuations, employment growth in
construction has dropped back from the

pace at the end

of last year.

1. The annual revisions to the data from the establishment survey
stemmed from four sources: the benchmarking of employment in March
1996 to levels derived from state unemployment insurance records;
the recalculation of bias adjustment factors for the period after
March 1996; the updating of seasonal adjustment factors; and the
reassigning, or "resizing," of surveyed establishments into size
classes based on their recent employment levels.
2. We estimate that this technical factor--the resizing
adjustment mentioned above--accounted for about 100,000 of the
However, this discrete adjustment
upward revision for April.
actually represents job growth that occurred over the course of the
previous year, and ideally it should be smoothed into the employment
data starting in April 1996 rather than entered all at once in April
In addition, payroll growth in May probably was understated
1997.
Using concurrent
because of seasonal adjustment difficulties.
seasonals, nonfarm payroll employment increased 155,000 in May.

II-4

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES

(Percent; based on seasonally adjusted data)

1996

Civilian unemployment rate
(16 years and older)
Teenagers
Men
Women
Full-time workers

Labor force participation rate

1995

1996

5.6

1997

5.4

5.3

17.3
4.8
4.9

16.7
4.6
4.8

16.6
4.5
4.7

5.5

5.3

66.6

66.8

1997
Mar.

Apr.

5.3

5.2

4.9

4.8

16.6
4.4
4.8

17.0
4.5
4.7

16.4
4.4
4.7

15.4
4.2
4.4

15.6
3.8
4.5

5.2

5.1

4.8

4.7

66.8

66.9

67.2

67.3

67.2

67.1

May

Unemployment Rates, Age 20+
Percent
Men

1995

1992

1989
Note. Series are adjusted for CPS redesign in 1994.
1986

Labor Force Participation Rate, Age 16+
Percent

Quarterly averages

May
0
/Q1

1985
1982
Note. Series adjusted for CPS redesign in 1994.

1988

1991

1994

1997

II-5

In addition, on a strike-adjusted basis, manufacturing employment
has changed little since March, compared with average monthly growth

of about 15,000 in the first quarter.
The average workweek of production or nonsupervisory workers
held steady at 34.5 hours in May, after averaging 34.7 hours in the
first quarter.

As a result, the average level of aggregate hours of

production or nonsupervisory workers in April and May was only
0.2 percent above the level in the first quarter.
In the household survey, the unemployment rate edged down to
4.8 percent in May, from 4.9 percent in April.

Declines were

particularly noticeable for adult men, while the rates for women and
teenagers rose slightly.

The tight labor market continued to keep

labor force participation at relatively high levels.

The

participation rate in May inched down to 67.1 percent after reaching
a record 67.3 percent in March.

But cutting through the monthly

wiggles, the participation rates of virtually all major demographic
groups have trended up over the past year.
Most other labor market indicators provide evidence of a strong
labor market.

According to the BNA survey, the share of employers

reporting some difficulty filling jobs rose further in the second
quarter for all three occupational categories included in the
survey.

The Manpower, Inc. survey of hiring intentions for the next

quarter showed a further strengthening of labor demand, with hiring
intentions now at the highest level since 1988.

(Although the

Manpower survey reports hiring intentions for the next quarter,
statistical evidence suggests that the reading is more closely
correlated with hiring strength in the current quarter).
Households' views of current job availability, as measured by the
Conference Board survey, moved to very positive levels in June.

The

one sign pointing toward moderation is the level of initial claims
for unemployment insurance.

Since the last Greenbook, the four-week

moving average of claims has risen slightly, to 335,000, after
dipping in early June.

Unlike the rise in mid-April, the recent

increase in claims does not appear to have been caused by special
weather- or strike-related factors.

3. On a concurrent seasonal basis, the unemployment rate fell
from 5.0 percent in April to 4.8 percent in May.

II-6

Labor Market Indicators
Some Jobs Difficult to Fill

SBureau

Percent
40

of National Affairs' Survey of Personnel Executives

Office/Clerical

v
S

1985

1987

1989

1991

1995

1993

1997

Note. Seasonally adjusted by FRB staff.

Net Hiring Strength

Current Job Availability
Percent

1985

1997

1993

1989

Percent of households

1985

1989

1993

1997

Note. Percent planning an increase in employment minus percent
planning a reduction.

Initial Claims for Unemployment Insurance

Thousands

SFour-week moving average

360
330
S300

1997

1996

335

1990
1988
1986
1984
Note. State programs, includes EUC adjustment.

1992

1994

~
1996

1998

-I 300

II-7

Industrial Production
Industrial output continued to grow briskly in the spring,
rising 0.4 percent in May after registering similar gains in the
preceding two months.

Manufacturing output posted a sizable

0.5 percent increase in May and mining was up 2.0 percent, while
utility production fell because of cooler-than-average temperatures.
On balance, the recent growth of factory output has been about in
line with the growth in capacity.

As a result, manufacturing

capacity utilization has held steady at slightly above
82-1/2 percent over the past four months.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
1997

1997
Q1

Q2 e

Apr.

May

Junee

U.S. production
Autos
Trucks

11.3
5.7
5.6

11.5
5.8
5.7

12.1
6.0
6.1

12.3
6.1
6.3

11.6
5.8
5.8

Days' supply
Autos
Light trucks

61.1
77.3

59.7
71.8

61.2
68.1

55.0
69.4

61.2
68.1

Q3
Sched.

12.3
6.2
6.0

Note. Components may not sum to totals because of rounding.
e--Staff estimates based on weekly data for June.
The motor vehicle and parts industry has been quite volatile in
recent months, owing mainly to strikes.

Production of motor

vehicles and parts bounced back 1.2 percent in May after falling
2.7 percent in April, when strikes curtailed assemblies at Chrysler
and General Motors.

However, with inventories still ample at the

end of May, only a part of the strike-related losses in production,
most of which were light trucks, is likely to be made up.

At the

end of May, the days' supply of light trucks was just above 70 days,
a little on the high side, while the days'
running about 60 days.

supply of autos was

Assemblies appear to be increasing a little

more rapidly in June than in May, rising just above 12 million units
(annual rate);

only one strike at a truck assembly plant has

affected June output.

Total assemblies for the second quarter are

expected to be 11.6 million units at an annual rate, compared with
12.3 million in the first quarter.
Outside of motor vehicles, the production of consumer goods
edged down in May, as a decline in consumer nondurables offset a

II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)

Proportion
1996

1996

1997

19961

1997
Mar.

Apr.

May

-Annual rate- --Monthly rate---

Total index
Previous

100.0

Manufacturing
Durables
Motor veh. and parts
Aircraft and parts
Nondurables

3.9
3.9

4.5
4.5

4.4
4.7

4.1

4.3

5.3

5.7
-1.6
34.5

39.4

2.3

81.6

4.5

Manufacturing excluding
motor vehicles and parts

86.5
47.1
4.9
2.3

Mining
Utilities

2.8
-15.2
33.0
6.0

.3
.0
.2

8.2

.6
-2.7
1.6

14.1
18.1
2.0

5.6

3.4

.4
.6

-. 2

4.8

8.0

1.3

-.5

2.0

-7.1

-. 3

2.3

-1.9

1.4

9.5

2.6

6.4

-.4

3.0
2.5

.0
7.9

4.3
-. 3

2.3
.3

-1.4
-. 2

9.1
10.8

9.3

11.1
12.4
2.6

IP by market group, exluding motor
vehicles and parts and energy
Consumer goods
Durables
Nondurables

22.7

Business equipment
Information processing
Industrial
Transit
Other

12.7

4.1
18.7
5.8

Construction supplies
Materials
Durables
Semiconductors
Basic metals
Nondurables

7.5
1.1

1.6

33.3

1.0
2.1
1.1

14.4

3.4

4.5
1.2
1.3

53.1

5.7

-.4

2.5

5.2

5.4
4.9
17.8
7.2

7.2
7.6

-. 2

30.4
21.5

4.0
3.4
9.0

48.4
12.3

3.6

6.3

16.0
2.6
2.8

1.2

-. 8

33.4
.2
6.3

6.3

1. From the final quarter of the previous period to the final quarter of the
period indicated.

CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)

Manufacturing
Primary processing
Advanced processing

1988-89

1959-96

1996

1997

High

Avg.

Mar.

Apr.

May

85.7

81.7

82.3

82.5

82.7

82.6

82.7

88.9
84.2

82.8
81.2

86.6
80.4

86.8
80.7

87.2
80.7

87.1
80.6

87.5
80.7

II-9

NEW ORDERS FOR DURABLE GOODS
(Percent change from preceding period, seasonally adjusted)
1996

1997

Share,
1996:H2
Total durable goods
Adjusted durable goods

Computers
Nondefense capital goods
excluding aircraft and computers
All other categories

1997

Mar.

Apr.
1.8

May
-.6

100.0

1.9

-2.8

68.0

4.5

-2.2

5.0

-.6

-1.0

5.5

16.0
46.0

-.8
.7

7.2
4.0

-2.2
-2.4

-1.7
2.0

-.8
1.0

4.7

-2.2

1.3

1.7

Memo:
Real adjusted orders2

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle
parts.
2. Nominal adjusted durable goods orders were split into two components, computers
and all other. These components were deflated and then aggregated in a chainweighted fashion.

Indicators of Future Production: New Orders Indexes
Diffusion index

1991

1992

1993

1994

1995

1996

Note. Indexes above 50 indicate orders are increasing, and indexes below 50 indicate orders are decreasing.

1997

II-10

rise in consumer durables.

After dropping in April, the production

of construction supplies rose again in May and is still a bit above
the high level attained late last summer.

Business equipment posted

another healthy gain in May, consistent with the ongoing strength in
the demand for producers' durable equipment.

The production of

information processing equipment registered another strong advance,
and the output of civilian aircraft grew rapidly, boosted by
Boeing's increased production of 737s and 777s.

The company's

announced production schedules suggest that the output of civilian
aircraft will continue to grow at an extraordinary pace throughout
the year before leveling off in 1998.

Consistent with the strong

pickup in orders registered earlier this year, the output of
industrial equipment jumped 2.1 percent in April and held that
higher level in May.

Until the recent surge in production, output

in this sector had changed little since mid-1995.
Materials production (excluding energy) also continued to grow
rapidly in May.

The output of semiconductors posted another hefty

gain, and the production of basic metals, mainly steel, picked up
further.

The output of nondurable materials was about unchanged.

Indicators of future production continue to be upbeat.

The

indexes of new orders from the National Association of Purchasing
Managers and the American Production and Inventory Control Society
(APICS) rose to high levels in May.

The comparable index from Dun

and Bradstreet retreated in May but remained at a level suggesting
that new orders are increasing.

Real adjusted durable goods orders,

the most volatile of the production indicators, continued to rise
sharply in April and May, following a large increase in the first
quarter.
Consumption and Personal Income
Consumer spending flattened out this spring after the large
run-up in the preceding two quarters.

However, the fundamental

determinants of consumer demand point to an early resumption of
spending growth:

Job gains are generating income, consumers are

extraordinarily optimistic, and household net worth has increased
enormously over the past few years.

II-11

Total nominal retail sales fell 0.1 percent in May.

stores in the "retail control" category, which excludes automotive
dealers and building material and supply stores, nominal spending
also edged down in May.

However, the data for the preceding two

months were revised down to show declines of 0.5 percent in April
and 0.1 percent in March.

We estimate that real personal

consumption expenditures (PCE) for goods other than motor vehicles
edged down 0.1 percent in May after declining 0.5 percent in April.
Unusually mild weather likely contributed to the first-quarter
surge in retail sales, and some slowdown in the second quarter was
to be expected as temperatures returned to "normal."

But, in the

event, April and May were cooler than average, reportedly depressing
sales of such items as seasonal apparel, air conditioners, and
recreational equipment.

Data on chain store sales and anecdotal

reports suggest some bounceback in overall sales in June.
Spending on services was up strongly in April--the last month
for which we have data.

Cool weather boosted real outlays for

energy services in that month nearly 5 percent (not at an annual
rate).

In contrast, spending on energy services probably fell

somewhat in May, as continued cool temperatures likely delayed the
usual onset of air conditioning use.

Real expenditures on non-

energy services rose 0.2 percent in April, with spending up across
most major categories.
Real disposable personal income was essentially unchanged in
April after three months of strong growth.

Both the aggregate hours

and the average hourly earnings of production workers rose in May,
suggesting another solid increase in income for the month.

The

saving rate moved back up to 5.1 percent in March and held at that
level in April.

4. On June 25, the Census Bureau published revised estimates of
growth in retail sales in March, April, and May. The revisions were
The
The new estimates incorporate updated seasonal factors.
small.
revisions for April reflect a redrawing of the sample of stores for
the Monthly Survey of Retail Trade (which is done every five years)
The estimates
and a shift from a rotating to a fixed panel.
published earlier this month were based on the old rotating sample;
to provide a transition to the new fixed sample, the revised
estimates average, by retail sector, sales growth from the old and
Because the sample changes do not affect the smaller
new samples.
advance sample, the advance estimates of sales growth for May
(before seasonal adjustment) were not revised; however, new seasonal
factors did induce some small changes to the growth in sales in May
on a seasonally adjusted basis.

II-12

RETAIL SALES

(Percent change; seasonally adjusted)
1996
Q3

1.3

2.7
2.8

1.1
.7

-.3
1.4

4.4
3.8

1.4

2.1
2.1

Apr.

-.3
.0

-.9
-.3

-.1

.0
-2.3

-.4
-.2

-.1
.0

-.5
-.2

-.1

3.1

-. 7

-. 4

-. 7
.5

1.5
-. 4

2.2
2.5

-. 9
-. 8

-.2
.8

-. 2
.6

-1.6

3.0

2.0

-.9

Retail control 2
Previous estimate
GAF
Durable goods
Furniture and appliances

Other durable goods
Nondurables
Apparel
Food

General Merchandise
Gasoline stations
Other Nondurables 3
Eating and drinking
Drug and Proprietary

1997
Mar.

Total sales
Previous estimatel
Building materials
and supplies
Automotive dealers

1997

1.5
-1.3

May

-1.0

-.8

1.4

2.1

-.6

-.0

-. 7
.9

-. 9
.9

2.4
.7

-1.4
.9

-1.0
-.7

.7
.2

.3
-2.5
.6
.1
2.2

1.2
2.6
2.1
1.9
2.2

3.6
1.9
2.2
2.1
3.2

-.4
-.5
.2
-.5
.4

-.7
-1.1
-.1
-.6
-.7

.4
-.6
-.5
-.9
.2

1. As of the May 13, 1997 release.
2. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.
3. Also includes liquor stores and mail order houses.

Cooling and Heating Degree Days
Degree days

PCE Goods Excluding Motor Vehicles
Billions of chained (1992) dollars
1950

Heating degree days

1900

May

1850

1800

1750

Cooling degree days
1700

1650

May
I

1600
1994

1995

1996

1997

Note. Data for first quarter, April, and May are staff
estimates.

1994

_
_.__'

1995

. ."
" ** **

1996

Note. Seasonally adjusted by Board staff.

"' "'

1997

II-13

REAL PCE SERVICES
(Percent change from the preceding period;
derived from billions of chained 1992 dollars)

1996
1995

1996

- -Q4/Q4- -

Services
Energy
Non-energy
Housing
Household operation
Transportation
Medical
Personal business
Other

2.6
1.8
2.6
1.6
3.7
4.4
2.2
1.8
4.3

2.4
5.4
2.3
1.8
3.8
3.1
2.5
2.5
1.7

1997
Q4

Annual rate -

1.3
-11.4
1.9
1.3
.1
4.2
2.1
-3.0
6.4

1997

3.8
3.7
3.8
1.9
9.5
6.1
3.9
5.6
2.3

Feb.

3.3
-7.3
3.8
2.0
1.2
7.4
3.3
5.9
5.2

Mar.

Apr.

-Monthly rate- -

.1
-4.7
.3
.2
-. 1
.2
.6
-. 4
.6

.1
-. 2
.1
.1
.1
.6
.5
-. 3
-. 3

.4
4.9
.2
.1
.4
.0
.3
-. 2
.4

Note. Derived from BEA's advance estimates.

PERSONAL INCOME
(Average monthly percent change)

1995

1996

Q4/Q4

1996

1997

Annual rate

1997
Feb.

Mar.

Apr.

- Monthly rate -

Total personal income

5.6

5.7

5.4

7.3

Wages and salaries
Private

5.3
5.8

6.2
6.8

6.3
7.3

8.5
9.2

1.3
1.5

.7
.8

-. 1
-. 1

Other labor income

5.5

3.0

4.0

2.9

Less: Personal tax and
nontax payments

7.9

9.9

6.9

15.2

1.8

1.0

Equals: Disposable
personal income

5.3

5.1

5.2

6.1

3.1
4.6

2.7
4.9

2.6
5.1

4.3
4.8

.4
4.8

.5
5.1

-. 0
5.1

Memo:
Real disposable incomel
Saving rate (percent)

Note. Derived from BEA's advance estimates.
1. Derived from billions of chained (1992) dollars.

II-14

Household Indicators
Ratio of Net Worth to Disposable
Personal Income

1987

1991

1989

1995

1993

Debt Service Payments as a Share of
Disposable Personal Income

Ratio

1987

1997

1989

1991

1993

Percent

1995

1997

Note. Debt service payments estimated by Board staff.

Consumer Confidence
Index

1987

1989

1988

1991

1990

1992

1993

1994

1995

1996

1997

Expected Unemployment

Expected Employment

Index

Index
S 120
Conference Board
June

:::

110
110
100
90
80

1
1987

1989

I::::
I

1991

1993

1995

,. i,.

1997

Note. Percent expecting more jobs six months hence less those
expecting fewer jobs plus 100.

1987

1989

1991

1993

1995

1997

Note. Percent expecting unemployment to rise over next 12
months less those expecting unemployment to fail plus 100.

II-15

Recent indicators suggest that household balance sheets remain
in good shape overall.

Although the ratio of net worth to

disposable income edged down in the first quarter, the renewed surge
in the stock market has likely pushed the ratio to a new high.

The

ratio of total debt service payments to disposable personal income
held at 17.1 percent in the first quarter and has changed little
over the past year.
Consumer sentiment has been a real standout in recent months,
suggesting that the recent lull in spending is likely to prove
temporary.

In June, both the Michigan SRC and Conference Board

measures of consumer sentiment were at levels not seen since the
1960s.

Part of the recent strength in the Conference Board

index reflected respondents' upbeat assessments of current and
expected job availability--not too surprising, given the strong
growth in employment over the past year and favorable press reports
on the labor market.

Although it is not included in the overall

sentiment index, the Michigan series on expected unemployment also
has trended down since early last year.
Motor Vehicles
Sales of motor vehicles fell off in April and May after surging
in the first quarter.

Nonetheless, smoothing through the effects of

strikes and shifts in reporting periods, the underlying pace of
sales has remained around 15 million units

(annual rate)--the same

pace that has prevailed since the second half of 1995. Adjusting
for changes in reporting periods, vehicle sales increased about
200,000 units in May, to 14.7 million units.

However, sales were

held down last month--as much as 250,000 units--by the recent
strikes at General Motors and Chrysler.

GM's fleet sales bore the

brunt of its supply problems, contributing to a decline in total
fleet sales in May.6
To counteract the erosion of their market share by foreign
firms, the Big Three automakers have continued to provide generous
Indeed, incentives were sweetened during the second
incentives.

5. Although current sentiment levels are somewhat higher than
would be expected from the economic fundamentals, the divergence is
not dramatic. For example, the Michigan SRC index currently is
about 2-1/2 percent above the level that would be expected on the
basis of recent trends in income growth, unemployment, and
inflation.
6. The drop in fleet sales at General Motors was partially offset
Fleet and retail sales data
by a rebound in fleet sales at Ford.
from General Motors and Ford are confidential.

II-16
SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; FRB seasonals)

Total
Adjustedl
Autos
Light trucks
North American 2
Autos
Big Three
Transplants
Light trucks
Foreign produced
Autos
Light trucks

1995

1996

14.72
14.69

1997

1996
Q3

Mar.

Apr.

May

15.09
15.03

15.06
15.06

14.83
14.72

15.44
15.34

15.73
15.48

14.23
14.51

14.76
14.67

8.63
6.09

8.53
6.56

8.65
6.41

8.02
6.81

8.63
6.80

8.64
7.09

7.89
6.34

8.02
6.74

12.82
7.13
5.43
1.69
5.69

13.38
7.25
5.28
1.97
6.13

13.37
7.37
5.27
2.10
6.00

13.09
6.75
4.82
1.93
6.33

13.49
7.25
5.15
2.10
6.24

13.72
7.25
5.15
2.10
6.47

12.40
6.62
4.80
1.82
5.78

12.89
6.78
4.87
1.91
6.11

1.90
1.51
.39

1.71
1.27
.43

1.69
1.27
.41

1.74
1.27
.47

1.95
1.39
.56

2.01
1.39
.62

1.84
1.27
.56

1.86
1.24
.63

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

Total Industry Fleet and Retail Sales
(Millions of units; annual rate)

Marketing Incentives for Light Vehicles
(FRB seasonals)

Dollars
1300

1100

0
Planned
Q3
.

900

700

1996
1995
Note. Board staff estimate

1997

1995

Note. Data from J.D. Powers.

I
1994

1996

1997

500

II-17

quarter, and initial industry plans for the third quarter suggest
that they will remain relatively generous.
Other indicators also suggest that, barring any other major
strikes, sales should remain solid in the near term. According to
preliminary data from the Michigan survey, consumers' attitudes
toward car-buying conditions improved further in June, reflecting
more favorable views of the economy, falling motor vehicle prices,
and lower finance rates.
Housing Markets
Although single-family housing starts have fallen recently, the
underlying pace of housing activity has been well maintained overall
this year.

In May, single-family starts declined 2.5 percent, to

1.09 million units.

The decline was partly an aftereffect of the

unusually mild weather in February, which shifted starts forward
from the spring.

Permits for single-family units, which are

typically less volatile than housing starts, hardly changed in May-holding at a level well above the average of the past few quarters.
Indeed, based on an average ratio of starts to permits, the number
of permits issued in May would imply a level of starts closer to the
average of the March and April readings.
Existing home sales rose 4.4 percent in May to the highest
level since May 1996 and the fourth highest on record.

New home

sales dropped 7.7 percent in April but remained at a high level.
The Census Bureau has been modifying its procedures for collecting
data on new home sales, making it especially difficult to interpret
monthly movements.
Readings for a number of indicators from early June show
continued firm demand for single-family housing.

The builders'

rating of new home sales has strengthened in recent months to the
highest level since last August.

According to the Michigan Survey,

consumers' attitudes toward homebuying improved further in June,
reaching the most favorable level in three years.

Also,

applications for mortgages to purchase homes have remained high.
Multifamily housing starts dropped 12 percent in May from an
extremely high level in March and April.

Nonetheless, the

underlying pace of multifamily starts remained healthy, with the
April-May average noticeably above the 1996 level.

Meanwhile.

permit issuance in this sector continued to trend up.

II-18

Private Housing Activity
(Millions of units; seasonally adjusted annual rate)
1996
1996

1997

Q1r

Mar.r

Apr.r

May P

1.48
1,43

1.49
1.42

1.42
1.38

1.47
1.43

1.48
1.46

1.47
1.44

1.40
1.44

1.16
1.07
.76
4.09

1.18
1.06
.79
4.09

1.09
1.01
.76
4.00

1.17
1.05
.83
4.10

1.14
1.03
.84
4.16

1.12
1.06
.77
4.06

1.09
1.06
n.a.
4.24

Starts
Permits

.32
.36

.31
.36

.33
.38

.30
.38

.34
.42

.35
.38

.31
.39

Mobile homes
Shipments

.36

.37

.35

.37

n.a.

All units

Starts
Permits
Single-family units

Starts
Permits
New home sales
Existing home sales
Multifamily units

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

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

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

II-19

Indicators of Housing Demand
(Seasonally adjusted; FRB seasonals)
Builders' Rating of New Home Sales
Diffusion index

1989

1990

1991

1992

1993

1994

1995

1996

1997

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

MBA Index of Mortgage Loan Applications for Home Purchase
Index

1990

1991

1993

1992

1994

1995

1996

1997

Note. MBA index equals 100 on March 16.1990, for the NSA series.

Consumer Homebuying Attitudes
Diffusion index

1989

1990

1991

1992

1993

1994

1995

1996

Note. The homebuying attitudes index is calculated from Survey Research Center data as the proportion of respondents
rating current conditions as good minus the proportion rating such conditions as bad.

1997

II-20

BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1997

1997

1996

Mar.

Apr.

May

1.4
.8
2.6
-1.0

3.4
2.1
2.8
4.5

1.6
.4
-2.0
-4.1

.1
.6
2.6
2.9

1.2

2.4

-. 6

14.7

21.1

-7.8

40.7

5.5

n.a.

1.3

-.8

-5.6

6.0

3.5

1.8

-1.7

-6.4
-1.7
1.9
-8.7
-1.2

4.9
2.8
4.8
6.7
1.2

.2
-.8
-.6
3.7
-1.9

2.5
5.5
.1
12.4
5.9

-3.8
-1.7
.4
-5.0
-1.5

-1.7
-1.5
-1.0
-8.2
.0

.7
.6
5.5
6.4
-2.5

-.6

3.7

8.4

2.6

-1.4

-2.6

n.a.

8.3
-1.0
1.2
-8.0
.0

9.2
1.4
8.2
-1.0
4.5

8.4
7.7
9.4
10.0
6.6

3.8
3.3
5.0
-5.4
9.3

-6.1
.7
1.4
-5.8
2.9

-3.7
-6.4
5.3
1.9
-7.6

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

Rotary drilling rigs in use 2

9.9

-4.0

-1.6

16.2

8.8

2.5

Memo:
Business fixed investment
Producers' durable equipment
Office and computing
Communications equipment
Other equipment 3
Nonresidential structures

3.8
6.7
29.6
14.9
5.3
-3.7

17.5
20.9
42.3
28.2
2.0
8.4

5.5
-.9
28.9
-.7
-3.7
25.8

11.5
13.4
29.4
13.9
9.4
6.5

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

3.3
1.6
-.1
4.4

1.7
1.5
3.8
4.6

1.5
.8
-.7
4.1

1.6

-. 1

12.2

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

Shipments of complete aircraft I
Sales of heavy trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
Nonresidential structures
Construction put in place, buildings
Office
Other commercial
Institutional
Industrial
Lodging and miscellaneous

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. Percent change of number of rigs in use, seasonally adjusted.
3. Producers' durable equipment excluding office and computing,
communications, motor vehicles, and aircraft and parts.
n.a. Not available.

II-21

Business Fixed Investment
Real business fixed investment appears to have increased
further during the second quarter, as evidenced by the high levels
of orders and shipments.

Moreover, the fundamental determinants of

investment are consistent with vigorous growth:
to surge, and business output has accelerated.

Cash flow continues
Although the user

cost of capital for many types of equipment has changed little, the
falling user cost for office and computing equipment continues to
provide a substantial boost to high-tech investment.
Shipments of nondefense capital goods excluding aircraft and
parts--one of the building blocks for BEA's estimates of real
PDE--edged higher in May after substantial increases in earlier
months.

Nominal shipments of office and computing equipment

jumped 2.6 percent in May, more than reversing April's decline.
Shipments of communications equipment rose 2.9 percent last
month, while shipments of other equipment fell 0.6 percent, the
first decline after three months of robust gains.
Plummeting prices for computers will help to sustain
The computer component of the PPI

investment in the near term.

declined 4.6 percent in May, bringing the year-to-date drop to
28 percent at an annual rate.

Furthermore, price cutting is likely

to remain noteworthy in coming months.

Intel recently announced

that sharp reductions in the prices of Pentium processors will take
effect at the end of July.

In addition, several manufacturers of

switches and routers--essential equipment for building computer
networks--have cut prices 10 percent to 33 percent.

Also, IBM's

newest generation of mainframes, which provides substantially higher
performance at lower cost than previous lines, was introduced in
June.
Orders data suggest that the growth of expenditures on
equipment will remain brisk in coming months.

Orders for nondefense

capital goods excluding aircraft and parts increased 0.6 percent in
May after a 1.5 percent decline in April and a 5-1/2 percent gain in
the first quarter.

Orders for communications equipment rose

6.4 percent, while bookings for computers jumped 5.5 percent in
nominal terms; given the large computer price declines last month,
7. These figures reflect the Census Bureau's annual revisions to
The revision
data on manufacturers' orders and shipments.
benchmarked the data to the Annual Survey of Manufacturers and
corrected for late receipts, reclassifications, and data revisions.
Changes to orders and shipments of nondefense capital goods were
minor.

II-22

Fundamental Determinants of Equipment Spending
Acceleration of Business Output
Percentage points

Percent

":::::: 1 t
i::::i::::::
"
uit ri
i :
I I I.I
1975
1978
1981
1984
1987
1990
1993
1996
Note. The accelerator is the eight-quarter percent change in business output less the year-earlier eight-quarter percent change.
Real PDE is the four-quarter percent change.

I I
1963

1966

ri:::

1969

1972

Real Domestic Corporate Cash Flow
Percent

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

User Cost of Capital
Percent

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

II-23

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

Orders

1994

1995

1996

1997

Communications Equipment
Billions of dollars
S8

7
May

,'
i

S-

5
-

1994

1995

Other Equipment (Excluding Aircraft, Computing, and Communications

1996

3
1997

Equipment)
Billions of dollars

1994

1995

1996

-- 17
1997

II-24

Nonresidential Construction and Contracts
(Six-month moving average)
Total Building

Index, Dec. 1982 = 100, ratio scale

1982

1980

1984

1988

1986

Office

1984

1992

1994

1996

Other Commercial

1986

1988

1990

1992

1994

1996

1986

1984

1986

1988

1990

1992

1994

1996

1988

1990

1992

1994

1996

Institutional

Industrial

1984

1990

1988

1990

1992

1994

1996

1984

1986

Note. For contracts, total includes private only; individual sectors include public and private.

II-25

the latter increase likely was substantial in real terms.

Orders

for equipment excluding aircraft, communications equipment, and
computers dropped 2.5 percent in May but still remained at an
elevated level.
Business spending on motor vehicles edged up last month.

Sales

of light trucks rose in May from the low level in April but remained
below the first-quarter level.

Sales of medium and heavy trucks

were little changed in May, remaining at a relatively high level.
Sales of cars dipped, as General Motors directed vehicles in short
supply toward retail customers and away from fleet sales.
Domestic spending on aircraft is climbing.

Shipments of

commercial aircraft to domestic airlines jumped 40.7 percent in
March and rose 5.5 percent further in April.

Boeing is stepping up

production to meet heavy demand, which continues to mount.

In the

latest addition to its bulging order book, Boeing recently received
a commitment from Continental Airlines to purchase thirty-five new
wide-body aircraft, with an estimated value of more than $3 billion.
Delivery is set to begin in September 1998.
Expenditures on nonresidential structures have inched down in
recent months, with construction put-in-place slipping in March and
April from the lofty levels of earlier this year.

A drop in

spending on office and other commercial properties accounted for
most of the decline.
is bright:

Still, the outlook for nonresidential building

Contracts for private nonresidential buildings rose

sharply in April, with all major categories posting gains.

addition, vacancy rates for office space have declined steadily, and
prices for commercial real estate have been edging up.
Business Inventories
Business inventory investment resumed a vigorous pace in April.
On a book-value basis, inventories in manufacturing and trade
excluding motor vehicles rose at a $36.7 billion annual rate, after
a brief slowing in March.

The April inventory buildup occurred

against a backdrop of rather uneven sales across major sectors:
While factory shipments were quite firm (up 1.4 percent in April),
nonvehicle sales in the trade sector were generally lackluster.
Nonetheless, inventory-sales ratios for most types of business
establishments remained low by historical standards.

8. Nonvehicle sales in wholesale trade were little changed in
April, while sales in retail trade excluding auto dealers fell
0.4 percent in that month.

II-26

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1996
Q3

1997
Q4

1997

Feb.

Mar.

Apr.

Book value basis
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

32.9

16.0

35.8

51.4

17.7

41.1

18.8
11.5
8.8
-7.8
-4.9
29.2
17.0
12.2

22.2
7.0
2.5
4.1
6.0
4.9
-4.3
9.1

30.9
16.5
9.1
14.3
11.5
5.0
2.1
2.8

46.1
25.6
17.1
2.3
7.8
23.5
10.7
12.8

10.0
8.2
6.1
15.6
10.4
-6.1
2.5
-8.7

36.7
34.1
25.0
-21.0
-12.2
28.0
13.1
14.9

SELECTED INVENTORY-SALES RATIOS
(Months' supply, based on Census book-value data, seasonally adjusted)
Cyclical
reference points
1990-91
1994-95
high
low
Manufacturing and trade
Less wholesale and retail
motor vehicles

Range over
preceding 12 months
High
Low

April
1997

1.58

1.39

1.40

1.35

1.36

1.55

1.36

1.37

1.32

1.33

Manufacturing
Primary metals
Nonelectrical machinery
Electrical machinery
Transportation equipment
Motor vehicles
Aircraft
Nondefense capital goods
Textile
Petroleum
Tobacco
Home goods & apparel

1.75
2.08
2.48
2.08
2.93
.97
5.84
3.09
1.71
.94
2.83
1.96

1.38
1.46
1.91
1.49
1.50
.54
4.28
2.32
1.44
.87
1.92
1.69

1.39
1.71
1.94
1.49
1.60
.61
4.88
2.42
1.57
.83
2.16
1.73

1.36
1.61
1.79
1.33
1.48
.57
4.15
2.30
1.47
.75
1.94
1.66

1.35
1.60
1.78
1.39
1.56
.59
4.11
2.29
1.47
.83
2.06
1.65

Merchant wholesalers
Less motor vehicles
Durable goods
Nondurable goods

1.36
1.31
1.83
.96

1.28
1.25
1.54
.98

1.29
1.26
1.57
.99

1.22
1.20
1.50
.92

1.23
1.20
1.51
.92

Retail trade
Less automotive dealers
Automotive dealers
General merchandise
Apparel
G.A.F.

1.61
1.48
2.21
2.43
2.56
2.44

1.46
1.42
1.61
2.20
2.50
2.23

1.53
1.45
1.79
2.26
2.56
2.27

1.48
1.41
1.68
2.12
2.42
2.16

1.51
1.43
1.77
2.16
2.56
2.19

II-27

Much of the April upswing in inventory investment occurred in
the manufacturing sector, especially in durable goods industries
where production has been strong.

As in the preceding several

months, a significant part of the accumulation was in stocks of
capital goods.

Inventories of aircraft and parts expanded further,

continuing a trend that has been apparent for more than a year;
stocks of industrial machinery and office equipment also rose
briskly.

Indeed, as shown in the table below, the April buildup of

stocks of "other" nondefense capital goods far exceeded the pace
observed in recent months and, given the uptrend in orders and
shipments in recent months, likely was intended.

Elsewhere in

manufacturing, inventories in a few other durable goods industries
also expanded in April, while stocks held by nondurable goods
producers were little changed on net.
INVENTORY INVESTMENT IN MANUFACTURING
(Book value, billions of dollars at annual rate)
_ 1996
Q3
Q4
All manufacturing

1997
Q1

Feb.

1997
Mar.

Apr,

11.5

7.0

16.5

25.6

8.2

34.1

6.5
4.9
1.6
5.0

3.2
6.8
-3.6
3.8

9.4
8.0
1.4
7.1

15.3
12.4
2.9
10.3

3.9
4.9
-1.0
4.3

17.2
8.6
8.6
16.9

Nondefense cap. goods
Aircraft and parts
Other
Other manufacturing

In the trade sector, inventory developments in April appear to
have been influenced by the slowing of consumer demand.

wholesale trade, distributors carrying many types of consumeroriented merchandise--apparel, furniture, lumber and homeimprovement supplies, and hardware and plumbing--reported some
inventory backups in April.

Similar backups in stocks were reported

in the retail trade sector--notably apparel and general merchandise.
For most types of retail establishments, inventory-sales ratios rose
considerably in April, in contrast to the general downtrend in
recent months.

However, retail sales in the GAF category were up

again in May, and inventory-sales ratios for this grouping have
likely fallen back.

In a longer-term perspective, nonvehicle trade

inventories remained low relative to sales.
Federal Sector
According to the preliminary GDP release, real federal
purchases declined 3.1 percent (annual rate) in the first quarter of

II-28

Inventory-Sales Ratios, by Major Sector
(Book value)

Manufacturing

Ratio

Total

1980

1982

1984

1986

1988

1990

1992

1994

1996

Wholesale Excluding Motor Vehicles
Ratio

1980

1982

1984

1986

1988

1990

1992

1994

1996

Retail
Ratio

1980

1982

1984

1986

1988

1990

1992

1994

1996

II-29

1997--in line with the 3 percent annual trend rate of decline over
the past four years.
For the first eight months of fiscal year 1997, the unified
federal deficit, adjusted for shifts in the timing of payments and
excluding deposit insurance and spectrum auction proceeds, was
$39.4 billion (34 percent) below the level for the same period in
fiscal 1996.

Receipts were almost 8-1/2 percent higher than the

year-earlier level, while adjusted outlays were up 3-3/4 percent.
Spending growth was subdued across most categories.

Outlays for

income security programs were up only 2-1/4 percent, partly as a
result of the continued strong economy.

Spending on Medicare was

8-1/2 percent higher than in the first eight months of the last
fiscal year, and spending on Medicaid was only 4 percent above the
same period last year--both somewhat below their recent average
rates of growth.

Defense spending was almost 1 percent above its

year-earlier level, a reversal from its average downtrend of almost
3 percent per year over the past four years.
Congress recently passed the fiscal 1998 budget resolution,
which records its interpretation of the tax and spending changes
agreed upon with the Administration.

Although Congress plans to

balance the budget by 2002, spending over the near term is expected
to be somewhat higher than previously anticipated.

In particular,

Congress and the Administration agreed to raise the 1998
discretionary spending caps that had been enacted in OBRA93,
allowing discretionary spending in fiscal 1998 to run roughly
$8 billion above the OBRA93 caps

(as estimated by CBO).

The policy details underlying the budget resolution will be
implemented in separate reconciliation bills for taxes and mandatory
spending programs.

These bills have now been passed by the relevant

committees, and there are plans for them to be considered by the
full House and Senate before the July 4 recess.

In general, the tax

and spending bills follow the budget resolution closely, although
differences in policies between the House and Senate bills will need
to be reconciled.
State and Local Governments
Current data on spending by state and local governments are
sparse, but the indicators in hand point to modest growth in the
second quarter.

Employment by state and local governments rose

9. The strong defense spending reported in the Monthly Treasury
Statements for April and May likely will boost second-quarter real
federal purchases as reported in the NIPAs.

II-30

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars except as noted)
Fiscal year to date totals
Apr.-May
Dollar
change

Percent
change

1996

1997

277.6
-2.4
-1.4
281.5

1047.6
-6.6
-. 2
1054.4

1083.6
-12.5
-5.0
1101.1

36.0
-5.9
-4.8
46.7

3.4
N.A.
N.A.
4.4

293.6

323.1

939.2

1018.2

79.0

8.4

-19.4

-45.4

108.4

65.4

-43.0

-39.6

1996

1997

Outlays
Deposit insurance (DI)
(SA)
Spectrum auction
Other

274.2
-1.2
.0
275.4

Receipts
Deficit (+)

1
Adjusted for payment timing shifts
2
and excluding DI and SA

Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Other

268.4
47.0
40.8
58.2
31.3
17.0
4.7
40.8
28.6

274.3
45.9
42.3
60.7
33.5
16.1
4.7
40.9
30.1

1054.4
177.8
161.2
229.4
116.5
60.9
17.8
162.2
128.7

1093.9
179.1
164.8
239.6
126.3
63.5
18.8
165.6
136.3

39.6
1.3
3.6
10.3
9.7
2.6
1.0
3.4
7.7

3.8
.7
2.2
4.5
8.4
4.1
5.6
2.2
6.0

Receipts
Individual
Withheld
Nonwithheld
Refunds (-)
Social insurance taxes
Corporate
Other

293.6
137.4
84.3
95.8
42.7
109.3
27.5
19.4

323.1
165.0
93.7
116.8
45.5
104.9
31.7
21.6

939.2
431.0
365.7
147.0
81.7
340.2
91.7
76.2

1018.2
485.3
396.0
174.9
85.6
356.4
99.6
76.9

79.0
54.3
30.3
27.9
3.9
16.1
7.9
.6

8.4
12.6
8.3
19.0
4.7
4.7
8.6
.8

Deficit(+)

-25.2

-48.8

115.2

75.8

-39.4

-34.2

Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on a
weekend or holiday. The monthly and fiscal year to date outlays for defense,
Medicare, income security, and "other" have been adjusted to account for this
shift.
2. Excluding deposit insurance and spectrum auction proceeds.

II-31

Fiscal Situation of the States
(General-fund budgets)
Total Year-End Balances
Percent
---

Percentage of expenditures

1983

1985

1987

1989

1991

;

1993

a
1995

1997

Real General Fund Spending
Percent change

1981

1983

1985

1987

1989

1991

Note. 1997 data estimated by National Association of State Budget Officers (NASBO).
Source. The Fiscal Survey of States, NASBO, April 1997.

1993

1995

1997

II-32

CPI AND PPI INFLATION RATES
(Percent change)
From twelve
months earlier
May
1996

May
1997

1996

1997

-Annual rate-

All items (100.0) 1

1996
Apr.

May

-Monthly rate-

3.3

Food (15.9)
Energy (7.0)
CPI less food and energy (77.0)

2.5
6.2
2.7

Commodities (23.4)
New vehicles (5.0)
Used cars (1.3)
Apparel (4.8)
House furnishings (3.3)
Other Commodities (9.0)
Services (53.7)
Shelter (28.2)
Medical care (6.1)
Auto finance charges (0.6)
Other Services (18.8)

3.0
-2.7
2.5

4.7
10.2
2.7

0.3
7.3
2.2

-0.2
-1.5
0.3

0.4
-2.4
0.2

1.1

1.4

1.0

0.3

0.1

0.8

1.6
-0.1
0.2
0.2
2.7

-2.3
1.1
0.3
2.1

0.9
-1.8
2.1
0.1
2.2

-0.5
1.6
2.2
-0.7
1.7

.0
-1.6
1.1
-0.2
0.5

-0.2
-0.9
0.2
0.7
0.1

3.2

3.1

2.7

0.3

3.2
3.9
-8.6
3.2

3.1
3.0
0.3
3.5

2.7
2.9
-3.0
3.9

3.1
2.6
-1.8
2.1

0.3
0.3
0.7
0.3

0.3
0.3
-2.5
0.3

2.3

0.3

3.9

-0.7

-0.6

-0.3

2.7
5.2

2.7
-3.1

4.9
17.6

-4.1
1.6

-0.4
-2.6

-2.1

1.6

0.1

0.4

0.3

-0.1

-0.3

0.6
.0

0.3
0.5

.0
-0.4

-0.3
-0.2

1.0

-0.3

-0.2

6.4

6.8

-0.9

-28.1
76.4
1.0

-15.8
32.8
12.1

PPI
Finished goods
Finished
Finished
Finished
and

(100.0) 2

consumer foods (23.6)
energy (14.7)
goods less food
energy (61.6)

Consumer goods (38.1)
Capital equipment (23.6)
3
Intermediate materials (100.0)

1.8
1.2

0.3
-0.1

0.7

-0.7

12.7

-4.6

0.4

Intermediate materials
less food and energy (81.3)
Crude materials (100.0) 4

28.2
15.1
-12.4

Crude food materials (38.0)
Crude energy (42.4)
Crude materials less
food and energy (19.6)

-8.1
-2.3
-0.4

3.3
-5.2
-2.3

-1.
2.
3.
4.

Relative
Relative
Relative
Relative

importance
importance
importance
importance

weight
weight
weight
weight

for
for
for
for

CPI, December 1996.
PPI, December 1996.
intermediate materials, December 1996.
crude materials, December 1996.

-0.3
3.4
1.2

II-33

33,000 in April but retraced half that gain in May.

Real

construction spending by these governments slipped more than
2 percent in April, after advancing strongly in each of the two
preceding months.
According to a recent survey by the National Association of
State Budget Officers, states' year-end balances

(current surplus

plus accumulated surpluses from past years) have been remarkably
strong in recent years.

Indeed, since 1994, balances for state

governments as a group have topped 5 percent of expenditures--a
benchmark favorably regarded by bond market analysts.

For fiscal

1997. which ends June 30 for most states, the balance is projected
at 6.2 percent of expenditures, down a little from 6.8 percent in
1996, which was the highest reading since 1980.

With strong

underlying economic activity in recent years, revenue growth has
been robust despite widespread, though mostly small, tax cuts.

this environment, many governments have worked to rebuild reserves
partly by holding the line on spending programs.

Indeed,

expenditure plans have been conservative, with the public's desire
for a smaller public sector and concern about further cuts in
federal aid among the reasons cited.
Prices and Labor Costs
The incoming data on prices have continued to be very
favorable.

In May, the CPI edged up 0.1 percent for the third

consecutive month:

over the past twelve months, the CPI has risen

only 2-1/4 percent--down from a 3-1/4 percent pace at the end of
1996.

The deceleration reflects favorable developments in food and

energy prices, while the twelve-month change in the core CPI has
held at a 2-1/2 percent rate.
The CPI for energy in May continued to reflect declines earlier
this year in crude oil prices;

retail energy prices fell

2.4 percent, led by a 4 percent drop in gasoline prices.

In spot

markets for crude oil, prices climbed in May because of tensions in
the Middle East but have fallen back in June.

The spot price of

West Texas intermediate, for example, has averaged about $19 per
barrel in June after peaking at more than $22 per barrel in mid-May.
In addition, private survey data suggest that, on a seasonally
adjusted basis, the retail price of gasoline is continuing to
decline in June, albeit at a slower pace than in April and May.
Consumer food prices advanced 0.4 percent in May.

Coffee

prices surged for the third consecutive month, and prices of fruits

II-34

Daily Spot and Posted Prices of West Texas Intermediate
Dollars per barrel

Feb
Mar
Apr
Sep
Oct
Nov
Dec
Jan
July
Aug
Note. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal.

May

June

Monthly Average Prices of West Texas Intermediate
Month

Posted

Spot

July
August
September
October
November
December
January
February
March
April
May
June1

20.11
20.75
22.94
23.78
22.40
23.30
23.89
21.08
19.66
18.52
19.55
17.96

21.32
21.96
23.99
24.90
23.71
25.39
25.17
22.21
20.99
19.72
20.83
19.12

1. Through June 24, 1997.

II-35

and vegetables turned back up after a considerable drop in April.
Nonetheless, retail food prices have increased only slightly since
the start of the year, and pressures are not very evident at earlier
stages of processing.

The PPI for crude foodstuffs and feedstuffs

edged down in May after increasing substantially in the preceding
two months, and spot commodity prices for foodstuffs have declined
further in June.
Consumer prices excluding food and energy rose 0.2 percent in
May and were up 2.5 percent over the past twelve months.

The index

for commodities other than food and energy edged up 0.1 percent in
May and rose 1.1 percent from a year earlier.

Goods prices have

been held down this year by falling prices for new motor vehicles
and used cars.

Facing intense competition from foreign producers.

U.S. automakers are attempting to maintain market share through
generous incentive programs.

The declines in used car prices may

reflect these same pressures as well as a growing supply of vehicles
coming off leases.
The index for services excluding energy, which advanced
0.3 percent in May, was up 3.2 percent over the past twelve months-the same pace as in the year earlier.

The prices of shelter and

"other" services have accelerated a bit so far this year.

contrast, the index for medical services has continued to
decelerate.

In January 1997, the BLS introduced a new measure of

prices of hospital services, which account for roughly one-third of
the CPI for medical services.

As with PCE prices, which are based

on the PPI, this new measure attempts to price treatment paths
rather than inputs and has moved toward collecting transactions
prices rather than list prices for hospital services.

Since the end

of last year, CPI hospital services prices have increased
1.3 percent, compared with 0.4 percent for PPI hospital services
prices.

While differences are to be expected between these series,

the divergence in these measures this year reportedly reflects data
collection problems in the first few months of this year that have
now been resolved. 1 0
The deceleration in the growth of consumer prices since the end
of last year has been associated with a somewhat smaller decline in

10. Most of the increase in the CPI for hospital services so far
this year occurred in January and February. The BLS reported, on a
confidential basis, that they had encountered sampling problems for
hospital prices early this year, which resulted in part from the
deregulation of New York hospitals at the end of 1996.

II-36
BROAD MEASURES OF INFLATION
(Four-quarter percent change)

1994
Ql

1995
Q1

1996
Ql

1997
Q1

Product prices
GDP chain price index

2.3

2.4

2.2

2.5

2.1

1.8

2.1

2.4

1.6

2.2

Gross domestic purchases chain price index
Less food and energy

2.1
2.3

2.5
2.5

2.2
2.2

2.2
1.9

PCE chain price index
Less food and energy

2.2
2.5

2.5
2.6

2.0
2.0

2.5
2.1

PCE deflator
Less food and energy

2.2
2.5

2.6
2.6

2.0
1.9

2.2
1.7

CPI
Less food and energy

2.5
2.9

2.9
3.0

2.8
2.9

2.9
2.5

Median CPI

3.0

2.7

3.3

2.7

GDP deflator
Nonfarm business chain price index

Expenditure prices

1. Excluding housing

SURVEYS OF (CPI) INFLATION EXPECTATIONS
(Percent)
University of Michigan
Actual
inflation i

(1-year)
mean 2

(1-year)
median 3

Conference
Board
(1-year)

Professional
forecasters
(10-year)4

1995:Q1
Q2
Q3
Q4

2.8
3.1
2.6
2.7

4.1
4.1
3.9
3.6

3.1
3.1
2.9
2.8

4.2
4.2
4.0
3.9

3.3
3.4
3.2
3.0

1996:Q1
Q2
Q3
Q4

2.7
2.8
2.9
3.2

3.9
4.5
4.2
4.0

2.9
3.0
3.0
3.0

4.1
4.3
4.3
4.2

3.0
3.0
3.0
3.0

1997:Jan.
Feb.
Mar.

3.0
3.0
2.8

4.1
3.8
3.5

3.0
3.0
2.8

4.3
4.3
4.1

3.0

Apr.
May
June

2.5
2.2

3.7
3.7
3.3

3.0
2.9
2.8

4.1
4.0
4.0

2.9

1. CPI; percent change from the same period in the preceding 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 12 months?
3. Median increase for responses to the question above.
4. Compiled by the Federal Reserve Bank of Philadelphia.

II-37

short-term and longer-term measures of inflation expectations.

The

median expected price increase over the next twelve months, as
measured in the Michigan SRC survey, is about 1/4 percentage point
lower than the average rate expected at the end of 1996.

The

Conference Board's measure of inflation expectations over the next
twelve months and the Philadelphia Fed survey's reading on inflation
expectations over the next ten years also have ticked down since
last year.
Prices at earlier stages of processing remain subdued, with
no sign of a buildup in "pipeline" pressures that is likely to show
through in substantial finished-goods inflation in the near term.
The PPI for intermediate materials less food and energy has remained
nearly flat over the past twelve months, and while the PPI for core
crude materials advanced 1.2 percent in May, the index remains below
its year-earlier level.

Since mid-May, the Journal of Commerce and

KR-CRB spot industrial price indexes have been little changed, on
balance, as have metal prices.
We have received little new information on labor costs since
the last Greenbook.

Responding to tight labor market conditions,

average hourly earnings rose 3.8 percent in the twelve months ending
in May, up from 3.3 percent in the previous year.

Over the year,

gains have been particularly strong in the trade and services
industries and have been more moderate in manufacturing and
construction.

II-38

SPOT PRICES OF SELECTED COMMODITIES
--------------- Percent changel--------------Current
price
($)

Dec. 31
to
May 132

May 132
to
June 24

Memo:
Year
earlier
to date

1995

1996

-3.5
-6.6
-12.9

-18.3
-13.7
-9.8

10.3
18.9
8.1

4.2
.0
-4.6

-5.1
-8.8

-5.5
1.8

-3.0
-1.9

-7.0
-1.6

-3.6
14.5

9.4
19.9
-2.7
-7.8
.4

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

1.230
138.500
.707

Precious metals
Gold (oz.)
Silver (oz.)

338.350
4.770

1.7
7.2

372.000
355.000

-14.4
-6.1

66.0
1.6

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

17.810
.528
.513

16.8
7.7
22.6

25.9
24.3
16.1

-17.8
-6.1
-19.7

-8.4
-16.7
-9.2

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

63.000
61.500
.612

-5.7
27.5
10.7

.0
34.1
12.4

4.5
10.9
-9.4

-8.7
.8
7.9

8.6

-47.4
-41.2
7.0
-8.6
57.5

Forest products
Lumber (m. bdft.)
Plywood

(m. sqft.)

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

2.500
3.490
8.195
.722

57.4
24.0
29.0
-8.1

-29.5
-16.6
-7.1
-10.9

25.8
-2.1

-9.7
-23.0
-5.3
4.2

Other foodstuffs
Coffee (lb.)

2.260

-39.1

43.2

107.7

-20.0

-. 3

Memo:

JOC Industrials
JOC Metals
KR-CRB Futures
KR-CRB Spot

105.900
100.200
241.440
335.360

-1.7
-1.8
3.3
-3.5

-3.7
-7.7
-2.6
1.0

-. 4
-. 3
-3.9
-. 9

1. Changes, if not specified, are f rom the last week of the preceding year to
the last week of the period indicated.
2. Week of the May Greenbook.

18.3
.0
5.8
-12.1
-7.6

5.0
8.8
2.6

.3
9.2
-2.5
1.4

II-39

Commodity Price Measures
Journal of Commerce Index

110

Ratio scale, index, 1990--100
1
S 125

108

115

S 1

Total

105

105
102
I,,

1997
June 24

Metals

S104
103

100

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

KR-CRB Spot Industrials
Ratio scale, index, 1967=100

346

342
June 24
333

324

220

1985 1986

1987

1988 1989

1990

1991

1992

1993

1994

1995

1996

1997

S200

KR-CRB Futures
Ratio scale, index, 1967=100

I-

KR-CRB Futures

June 24

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

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

II-40

AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)

Twelve-month
percent changel
May
1995

Total private nonfarm
Manufacturing
Construction
Transportation and
public utilities
Finance, insurance,
and real estate
Total trade
services
1.

May
1997

May
1996

- - -

- -

Percent change
to May. 1997
Nov.
1996

- -Annual rate- - -

1997

Feb.
1997
-

- -

Apr.

May

-Monthly rate-

2.3

3.3

3.8

3.5

3.0

2.3
2.6

3.3
1.9

3.0
3.7

2.8
4.5

2.5
3.6

.0
.4

.3
.4

2.2

2.7

2.6

3.8

4.4

3.4
2.5
2.7

4.1
3.4
3.2

3.2
4.6
4.3

2.6
3.8
3.5

2.2
3.4
2.7

-. 8
.1
.0

1.1
.2
.3

uses not seasonally adjusted data.

Average Hourly Earnings
(Smoothed twelve-month changes)
Percent
4.5
Total private
May -

- 3.5

2.5

1991

1990

1992

1994

1993

1997

1996

1995

Percent

Percent
6

anufacturing
3

Trade

2
1

1991

1993

1995

1997

2
'1f

1993

1995

1997

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

Selected Financial Market Quotation1
(Percent except as noted)
1996
Instrument

1997

Feb.

July

FOMC *

low

high

May 20

5.15

5.39

4.76
4.67
4.55

521
5.40
5.64

5.27
5.12

5.50

5.21
5.12
4.99

5.44

5.13
5.13

5.38

8.25

4.98
5.58
6.02

6.62
7.06
7.19

U.S. Treasury indexed bond

n.a.

Municipal revenue (Bond Buyer)5

5.67

6.24

Corporate-A utility, recently offered

7.18

8.23

High-yield corporate 6

9.57

10.36

6.94

8.42
6.01

Change to June 24, from:

June 24

Feb.

July

FOMC *

low

high

May 20

.11

.00

.10
.04

-.05
-.09

Short-term rates

Federal funds'
Treasury bills'
3-month
6-month
1-year
Commercial paper
1-month
3-month

5.59

Large negotiable CDs3
1-month
3-month
6-month

5.59
5.83

Eurodollar deposits4
1-month
3-month
Bank prime rate

5.56

Intermediate- and long-term rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year

.05

-.52

Home mortgages 7
FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate

5.19

Percentage change to June 24, from:

1997

1996

Record high

July

FOMC *

Record

July

FOMC

Level

Date

low

May 20

June 24

high

low

May 20

Dow-Jones Industrial

7796.51

6/20/97

5346.55

7228.88

7758.06

-.49

45.10

7.32

SAP 500 Composite

898.70

6/20/97

626.65

833.27

896.34

-.26

43.04

7.57

1452.43

6/24/97

1042.37

1341.24

1452.43

.00

39.34

8.29

6/19/97

307.78

366.57

393.30

-.80

27.79

7.29

Stock exchange index

NASDAQ (OTC)
Russell 2000

396.49

-.28
38.72
8460.86
7861.08
6/20/97
6099.34
Wilshire
1. One-day quotes except as noted.
2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date for maintenance period
ending June 25, 1997.
3. Secondary market.
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6. Merrill Lynch Master 1 high-yield bond index composite.
7. Quotes for week ending Friday previous to date shown.
* Figures cited are as of the close on May 19, 1997.
8484.51

7.63

Selected Interest Rates
Short-Term
Percent
8

Monthly

S
--

Percent

Daily

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

FOMC
5/19
-

Federal funds

Three-month T-bill

1991

I-

1992

1993

1994

1995

1996

1997

5/16

5/30

5/23

6/6
1997

6/13

6/20

Long-Term
Percent
Monthly

Percent
Weekly/Daily

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

FOMC
5/19

Corporate bond
(weekly)

Mortgage rate
(weekly)

Thirty-year T-bond
(daily)

I-

I
1991

I
1992

I
1993

I
1994

1
1995

1996

1997

I I-.
5/16

I
5/23

I
5/30

I
6/6
1997

I
6/13

I
6/20

DOMESTIC FINANCIAL DEVELOPMENTS

With recent data indicating a marked slowing of GDP growth this
quarter and a continuation of low inflation, most interest rates
have declined considerably since May 20; on net, nominal yields on
Treasury coupon issues are down 20 to 30 basis points. In contrast,
the yield on the Treasury's indexed bond was about flat, implying a
decline in inflation premia. Some concerns remained after the
FOMC's May inaction that the System might take another tightening
step or two this year in a preemptive strike against inflation. But
the events of the intermeeting period have erased such fears
(chart).
Yields on private money-market instruments are down about 5 to
15 basis points since the May FOMC meeting. However, Treasury bill
rates are off 20 to 30 basis points as this sector continues to
benefit from reduced auction supplies. The yield on the three-month
Treasury bill is now more than 1/2 percentage point below the
intended federal funds rate, compared with a historical average of
1/4 percentage point.
Equity markets have continued to rally in recent weeks, albeit

experiencing wide swings day to day. The shares of some companies
that announced their near-term earnings would be disappointing were
hammered, at least temporarily, but the decline in interest rates
has buoyed valuations more broadly. Following a sizable one-day
drop in late June, in the wake of remarks by Japan's prime minister,
stocks staged a rapid comeback, and, on net, the major indexes have
gained about 7 percent to 8 percent since the May meeting.
Borrowing by nonfinancial businesses has remained strong in the
second quarter. Growth of business loans at banks has eased
slightly from the first-quarter pace, but issuance of corporate
bonds has picked up appreciably. Offerings of speculative-grade
bonds have been at record levels, and offerings of investment-grade
bonds have strengthened. In the household sector, fragmentary data
suggest that the growth of mortgage debt has continued around the
relatively brisk first-quarter pace, while the growth of consumer
credit has slowed on balance. In the wake of April's surprisingly
large tax receipts, the Treasury built up its cash position and paid
Meanwhile, gross debt issuance by state and local
governments has been nearly matched by retirements. The monetary
down debt.

III-1

III-2

Selected Stock Market Indexes and Short Term Futures Rates
Selected Stock Market Indexes

Index*

FDaily

Ju
June
24 I

150

NASDAQ
-1120

- 110

S&P 500

I
1111

J
F
M
A
* Index: Dec. 29, 1995 = 100.

-- 100

I1111
J

I
N

I
D

I
J

I
F

I
M

1996

Federal Funds Futures

..........

I11

Percent
-- 6.5

06/24/97
05/19/97

A
1997

06/24/97
05/19/97

..- *
--

Percent

m. *

........

Eurodollar Futures

..........

...-

- ..- ****

'
"

5.0

June
BAMMA:kmd

July

Aug
Sep
Contract Months

Oct

4.5

9/97

12/97

3/98
6/98
Contract Months

9/98

III-3
aggregates were depressed in May by the drawdown of private deposits
that occurred as federal tax payments cleared, but growth has turned
up in June.
Business Finance
Gross issuance of nonfinancial corporate bonds increased in May
for both investment-grade and speculative-grade securities (table).
Investment-grade offerings were almost entirely merger related,
including Norfolk Southern's $4-1/4 billion issue to buy part of
Conrail. The Norfolk offering was the largest single investmentgrade issue ever. Speculative-grade offerings returned to the
record level of March, driven by efforts of telecommunications firms
to finance the creation of infrastructure for new wireless and cable
networks.

Over the first five months of this year, junk bonds
accounted for about 45 percent of total nonfinancial bond issuance,
The recent
the highest share on record (chart, lower left).
strength in junk bond financings reflects both firms' needs to
support ongoing capital spending and an apparent increased
willingness of investors to assume the associated credit risk.
Indeed, spreads of interest rates on these securities over those on
comparable Treasuries have narrowed a bit further in recent months.
Merger-related issuance also boosted the volume of nonfinancial
commercial paper in May and the early weeks of June, reversing some
of the April decline in outstandings (chart, lower right). Several
announced mergers and acquisitions are expected to lead to
additional commercial paper issuance over the near term.
Equity issuance by nonfinancial firms picked up somewhat in
May, but average issuance for April and May was about 30 percent
less than the first-quarter rate and more than 50 percent below last
year's rapid pace. Initial public offerings (IPOs) remained
sluggish in May but have strengthened in June. Moreover, initial
offer prices and first-day returns have firmed somewhat this month,
suggesting stronger investor demand than had been evident earlier
this year. Although some pickup in equity offerings may be under
way, net issuance of nonfinancial equity has remained negative.
Announcements of planned equity repurchases continued apace in April
and May, reflecting the cash-rich positions of large firms, and
ongoing merger activity.
Recent information on corporate credit quality has been mixed.
In April and May, Moody's downgraded $24 billion more nonfinancial
debt than it upgraded. Most of the net downgrade is attributable to

III-4

GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS
(Billions of dollars; monthly rates, not seasonally adjusted)
1996

1997

Type of security

1995

1996

Mar.

Api

All U.S. 1corporations
Stocks
Bonds

47.7
6.1
41.6

58.4
10.2
48.2

59.5
12.1
47.4

61.3
9.9
51.4

67.0
7.8
59.1

46.9
5.9
41.0

58.0
7.9
50.1

4.4

6.7

6.4

4.9

4.0

2.6

3.6

1.7
2.7

2.9
3.8

2.8
3.6

1.1
3.8

.7
3.3

1.0
1.6

.8
2.8

10.8

12.5

13.6

13.3

13.5

13.3

18.3

6.3
4.8
2.3
2.5

7.6
4.9
1.4
3.5

5.7
6.2
2.7
3.6

4.4
8.1
3.6
4.5

6.8
5.1
1.0
4.1

7.2
8.1
2.0
6.1

3.5
35.8

5.8
33.8

4.9
38.1

3.9
45.6

3.3
27.7

4.3
31.8

Nonfinancial corporations
i
Stocks

Initial public offerings
Seasoned offerings
Bonds

May

By rating, bonds sold in U.S.
Investment grade
6.5
Speculative grade
3.0
Public
2.0
Rule 144A
1.1
Financial corporations
Stocks i
Bonds

1.7
30.8

Note. Components may not sum to totals because of rounding. These
data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
1. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
2. 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.

Nonfinancial Corporations
Junk Bonds
Percentage points

[
12

Percent

Junk share of gross issuance
(right scale)
Rate spread over Treasuries*
(left scale)

1997"*
1995
1993
1991
*Merrill Lynch Master II Index less 7-year Treasury yield.
"Data through May.
Source. Securities Data Company.
1987

Commercial Paper
(Change in outstandings over period shown)
Billions of dollars, monthly rate

1989

1994

1995

*Staff estimate.

1996

1997

III-5

Stock Market and Earnings
Failed-Business Liabilities

Default Rate on Junk Bonds

(As a percentage of total liabilities)
Percent

Nonfinancial

(Ratio of junk bond defaults to junk bonds outstanding
at end of previous year)
Percent

1 10

I I

rpu

@X
l~f
I tfl
:f
%
^ %a
VI

____ ____ _ ____ _ __

Jan-Apr"
4
-1 1
;:::::

_ ___ _ ____ _ ____ .........

1990
1993
'At an annual rate.
Source. Dun & Bradstreet.

1~
:::

1
::

15-5

ILI. rrI

Jan-May7

1996

1990
1993
1996
*At an annual rate.
Source. Edward Altman, CS First Boston.

Corporate Profits
Percent change from 4 quarters earlier
S30

Expected Long-Term Earnings Growth
for S&P 500 Companies
Percent
13.5

Quarterly

13
110

12.5
12

NPA after-tax book profits

S0
•

11.5

,'
S

Operating eamings
for S&P 500"

1991
1993
'Source. Goldman Sachs.

920

1995

1997

10.5
1985
Source. I/B/E/S.

1989

1993

S&P 500 Forward Earnings-Price Ratio

Percent

Forward earnings-price ratio
Nominal 30-year Treasury yield

1988
1986
'Based on data through June 18.

1990

1992

1994

1996

III-6

merger-related transactions, with $22 billion reflecting downgrades
of CSX and Norfolk Southern in response to their accumulation of
debt for the buyout of Conrail.

Business failures in the

nonfinancial sector also picked up in the first four months of 1997
(chart, top left).
However, more positive signals continue to come
from Moody's Watchlist, which shows possible upgrades slightly
exceeding downgrades in both number and dollar value, and from the
continued low default rate on speculative-grade bonds (chart, top
right).
According to initial NIPA estimates, the growth of book profits
after-tax, the closest analogue to the earnings measure in financial
reports, slowed in the first quarter (chart, middle left panel).
This estimate of profits growth, however, looks low compared with
the gains implied by first-quarter financial reports (chart, middle
left panel), which are a more important source of earnings
information to stock market analysts.

Only a handful of companies--

those whose fiscal quarters end in May--have reported second-quarter
earnings thus far, and market attention has been drawn to preannouncements by firms expecting to report poorer-than-anticipated
earnings.

Thus, equity price indexes dipped when a few technology

companies warned recently about slower earnings growth.
Indeed, the recent dramatic rise in stock prices has been
accompanied by considerable volatility, as evidenced when concerns
about Japanese investors precipitated a 190-point drop in the Dow on
June 22 that was largely reversed the next day.
however, the market has continued its uptrend.

On balance,
Since the beginning

of the year, the Dow and S&P 500 have jumped roughly 20 percent, on
net, while the NASDAQ Composite and the Russell 2000 are up about
10 percent.

One important factor behind the current high level of

stock prices appears to be the market's expectation of robust
earnings growth over the next three to five years.

These

expectations currently are at a level not seen since the early
1980s, at the trough of a steep recession when earnings levels were
extremely low (chart, middle right).
With the recent rise in share prices, market valuations have
become even richer relative to bonds.

The yield on the thirty-year

Treasury bond currently exceeds the S&P 500 ratio of expected
twelve-month-ahead earnings to price by an amount last reached in
mid-1991

(chart, bottom panel).

At the time, the earnings-price

(E/P) ratio was depressed by the low level of earnings as the

III-7

economy emerged from recession; no such explanation can be offered
for the low E/P ratio today.
Household Sector
Growth of consumer credit increased in April from the sluggish
March pace. However, smoothing through the monthly gyrations, the
general pattern of gradual moderation evident since early last year
appears intact as growing repayments of seasoned loans constrain the
growth of debt outstanding (chart). Revolving credit--primarily
credit card debt--advanced at less than a 5 percent rate in both
March and April. The volatility of this component makes any twomonth period a tenuous indicator of trend; however, the slowing of
revolving credit growth over the past year may reflect, in part,
some firming of credit standards, as has been reported by banks in
surveys of lending.
Information on the growth of home mortgage debt for the current
quarter is still sparse. The rate of mortgage purchases and
securitizations at Fannie Mae and Freddie Mac in April and May
slowed appreciably from the first-quarter pace. However, the growth
of total real estate loans at commercial banks picked up a bit in
these months, partly reflecting continued strength in home equity
lending. Market reports also indicate that securitization of home
equity loans is at record levels and now exceeds that of auto loans
and credit card receivables.
Credit quality measures in the household sector continue to
send mixed signals. Delinquency rates for bank credit card accounts
and for car loans at captive auto finance companies hovered near or
at record levels in the first quarter--reflecting past
However, delinquency rates
liberalization of credit standards.
for other categories of consumer lending have shown only moderate
increases, and home mortgage delinquencies are still fluctuating
near twenty-year lows (chart).
According to the Call Report, credit card delinquencies at
banks flattened out in the first quarter, providing some hint that
the steps taken by card issuers in recent months to tighten credit
availability may be slowing the erosion of credit quality. The
credit card delinquency rate estimated by the American Bankers
Association, which had set new records in three of four quarters
last year, fell in the first quarter. Meanwhile, the charge-off
1. More recent data for April indicate that delinquency rates at
auto finance companies edged down only slightly from first-quarter
levels.

III-8

Consumer Credit

1996
1995

1996

1997
Q4

Feb

Mar

Apr

7.6

Credit outstanding, end of period
Growth rates
(percent, SAAR)
Total

14.2

(Previous)

(14.2)

Auto
Revolving
Other

8.1

7.8

5.3

6.7

3.0

(8.1)

(7.8)

(5.3)

(6.4)

(6.7)

(2.0)

10.6

6-9

6.2

1.9

0.4

0.7

-2.7

12.7

22.0
9.2

13.0
3.4

7.7
9.7

12.2
-0.1

12.8
5.4

12.7
5.1

3.9

8.0

4.3
6.6

1103.3

1193.2

1177.6

1193.2

1213.3

1210.2

1213.3

1220.9

350.8
413.9
338.6

375.2
467.9
350.2

373.4
454.0
350.2

375.2
467.9
350.2

375.5
482.8
354.9

376.4
481.3
352.5

375.5
482.8
354.9

379.5
484.6
356.9

9.6
13.9
16.0

9.0
13.5
15.6

9.1

9.0

13.4
15.7

13.6
15.6

8.9
13.5

n.a.
n.a.

15.9

n.a.

11.2
14.5

9.8
13.5

10.3
13.9

9.8
13.6

7.6
13.1

7.4

8.1
13.2

Levels
(billions of dollars, SA)
Total
Auto
Revolving
Other
Interest rates 1
(annual percentage rate)
Commercial banks
New cars (48 mo.) 2
Personal (24 mo.)2
Credit cards 3
Auto finance companies 4
New cars
Used cars

13.1

1. Annual data are averages of quarterly data for commercial banks and of monthly data for finance companies.
2. Average of most common rate charged for specified type and maturity during the first week of the middle month of each quarter.
3. Stated APR averaged across all credit card accounts at all reporting banks during the period.
4. Average rate for all loans of each type, regardless of maturity, made during the period.
p Preliminary. n.a. Not available.

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

8.6
13.3

III-9

Growth in Consumer Credit
Three-Month Moving Average

1972

1975

Percent, SAAR

1978

1981

1984

1987

1990

1993

1996

Loan Delinquency Rates
Percent

Home Mortgages

Bank Credit Cards

60 days past due

Percent

0 days past due

1.75

Call Report

1.5

American Bankers

1.25

/I \

%.\

r9
%

'VA'
_

1990
1992
1994
Source. Mortgage Bankers Association

lr ..

1996

----

1990

1992

I --

1994

1996

III-10

rate for credit cards at banks rose further in the first quarter,
indicating that weak accounts were still being purged from
portfolios.
Personal bankruptcy filings recorded another sharp increase in
the first quarter, rising at a 27 percent annual rate from the level
of filings in the fourth quarter. Bankruptcies exceeded 1 million
last year for the first time and are on pace to reach 1.3 million
this year. Still, the annual total represents only about 1 percent
of all households, and the accompanying financial disruption has
left no clear imprint on household spending. Carried to an extreme,
widespread use of bankruptcy could prompt severe curtailment of
credit supply, but there is little evidence that such a point is at
hand. For instance, while the profitability of credit card programs
at banks has declined recently, net returns on this line of business
as of the latest Call Report still exceeded the average net return
for all business activities of banks.
The marked deterioration in some measures of consumer credit
quality, together with warnings from credit rating firms about
emerging credit problems, has tempered investor enthusiasm in some
sectors of the asset-backed securities market. In addition,
concerns about the impact of poor credit performance on future
earnings have depressed equity prices of a number of participants in
the subprime sector of this market. The rate of issuance of
securities backed by auto loans and credit card receivables has
slowed sharply from last year's pace. Analysts report that one
factor contributing to the overall higher delinquency rate for
securities backed by auto loans is the increasing proportion of
used-car loans in securitized pools.

While the issuance of

securities backed by credit card receivables and auto loans has
slowed, the home equity loan sector of the asset-backed securities
market continues to experience near-record growth. In the first
quarter, four out of every five loans backing home equity loan
securitizations were classified as subprime.
Federal Government Finance
The Treasury has used the stronger-than-expected inflow of
federal tax receipts and higher surplus during the current quarter
both to make larger paydowns of bills and to build up its cash
balance even more than it had anticipated. Even though the Treasury
has slashed its weekly auctions of bills to under $15 billion, its
cash balance at the end of June is still expected to be about

III-11
TREASURY FINANCING
(Billions of dollars; total for period)
1996

1997

Item

Mar.

Apr.

May

Total surplus/deficit (-)

-33.4

-58.9

-52.0

-21.3

93.9

-48.5

Means of financing deficit
Net cash borrowing and
repayments (-)
Nonmarketable
Marketable
Bills
Coupons

39.4
-1.3
40.6
-12.4
53.0

48.7
7.4
41.3
16.2
25.1

48.0
4.0
44.0
7.9
36.1

28.8
2.2
26.6
23.1
3.4

-39.0
0.9
-39.9
-44.2
4.2

-19.1
-0.4
-18.6
-21.7
3.1

Decrease in cash balance

-6.2

11.4

-0.7

-18.3

-55.9

72.5

0.3

-1.3

4.6

10.8

1.0

-5.0

44.2

32.8

33.5

89.4

16.9

Other 1
Memo:

Cash balance, end of period

Note. Data reported on a payment basis. Details may not sum to totals
because of rounding.
1. Accrued items, checks issued less checks paid, and other transactions.

NET CASH BORROWING OF GOVERNMENT-SPONSORED ENTERPRISES
(Billions of dollars)
1997

1996

Agency

FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA

8.5
10.0
12.1
-0.1
-0.2

3.1
-3.4
4.9
0.8
-1.7

Feb.
-1.6
-1.6
-1.3
-7.5
-0.1

Mar.
11.0
-7.9
4.1
0.8
-5.6

Apr.
11.40
9.3
5.6
0.1
n.a.

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

n.a.

Not available.

III-12

$47 billion, roughly $12 billion above the intended level announced
in late April. Bills outstanding have fallen substantially and have
been associated with some downward pressures on the short end of the
yield curve, presumably reflecting a scarcity premium. To lessen
those pressures and to align its financing strategy with a smaller
expected deficit for the year, the Treasury recently announced that
it would remove the ten-year note from its auction calendar for July
and October, in effect reversing the debt-management changes
instituted last year.

The Treasury's decision makes room for a

higher volume of bill issuance in coming quarters and also gives it
more scope to sell inflation-protected securities (TIPS).

The next

offering of indexed debt, in mid-July, will be at the five-year
maturity, but the Treasury also announced plans to add a thirty-year
maturity to its menu in 1998.

The Chicago Board of Trade will

inaugurate futures and options on the five-year TIPS, coincident
with the start of when-issued trading in the five-year indexed note
early next month.
After slowing in the first quarter when interest rates were
rising, gross bond issuance by federal agencies appears to have
rebounded in April

(table).

Borrowing by the Federal Home Loan

Banks increased, in part to fund the strong demand for advances by
member institutions.

Fannie Mae and Freddie Mac also reported

increased borrowing to fund growth in their mortgage holdings.

Both

agencies have continued to tap global bond markets, with recent
offerings totaling a combined $820 million.
State and Local Government Finance
Gross issuance of long-term municipal debt eased some in May,
in part as borrowing to finance new capital dropped back from its
strong pace in April (table).

Long-term bond issuance thus far this

year is running about 2 percent behind the average pace set in the
first half of 1996.

Meanwhile, retirements through May were off

12 percent on a year-over-year basis, owing largely to smaller
paydowns of advance-refunded debt.

With fewer retirements, net

long-term issuance has totaled about $13 billion so far this year,
up from about $4 billion over the same period in 1996.
Tax-exempt bond yields declined, on balance, relative to
comparable Treasury yields in the first five months of 1997 as a
result of strong demand for municipal bonds.

The decline in recent

weeks partly reflects the market's anticipation of the seasonal

III-13

reduction of net supply resulting from the heavy bond redemptions
($40 billion) scheduled for June and July.

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

Total tax-exempt
Long-term
1
Refundings

New capital
Short-term
Total taxable

1994

1995

1996

1996
04

16.1
12.8
4.0

15.4
12.1
3.6

17.9
14.3
4.9

18.7
16.2
5.2

13.7
12.1
4.3

16.3
15.4
3.9

15.3
14.2
4.6

8.8

8.5

9.4

11.0

7.8

11.5

9.6

3.3

3.6

2.5

1.6

1.1

1.5

1997
April

May

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

Financial Intermediaries and Monetary Aggregates
Net sales of long-term mutual funds increased in May, posting
the largest net inflow since January (table).

Net sales of equity

funds accounted for most of the rise, boosted last month by stronger
inflows to aggressive growth funds and growth funds.

Sales of

growth and income funds--which invest in large, well-known
companies--remained robust and continued to account for a relatively
large share of inflows to domestic stock funds.

Inflows to bond

funds also increased in May, with high-yield and balanced bond funds
(which have some equity exposure) accounting for nearly the entire
net inflow.

Preliminary data suggest that sales of long-term mutual

funds continued strong in early June and remained tilted toward
relatively conservative stock funds and high-yield bond funds.
Growth of the monetary aggregates was weak in May but appears
to have rebounded in June (table).

M2 edged lower last month, a

result of the clearing of checks associated with the April 15 tax
date, which prompted a runoff of household liquid deposits.
Smoothing through the fluctuations caused by tax payments, M2 growth
appears to be running at about a 4-1/4 percent annual rate this
quarter.

The slowdown of M2 growth in May showed through to M3,

which grew at only a 1-1/4 percent rate.

M3 growth in May also was

held down by weakness in large time deposits, but the falloff in

III-14

Net Sales of Selected Mutual Funds Excluding Reinvested Distributions
(Billions of dollars; quarterly and annual data at monthly rate)
1996

1997

Memo:
April
assets

1995

1996

Mar.

Apr.

May e

10.7

18.6

14.2

19.2

10.7

15.7

18.5

1879.0

9.7

14.7

11.4

14.8

8.1

10.6

14.1

1566.8

3.1

4.7

3.2

1.8

0.1

1.4

3.5

271.5

3.1

3.9

2.7

3.7

1.4

2.0

3.3

509.5

3.7

6.2

5.6

9.2

7.0

7.2

7.1

781.4

1.0

3.9

2.7

4.5

2.7

5.1

4.5

312.2

Bond funds

-0.4

1.1

1.2

-2.0

0.5

2.5

903.1

High-yield

0.7

1.0

1.3

0.8

-1.2

1.3

1.5

82.9

1.4

2.6

0.6

1.7

1.4

0.8

0.9

263.9

-4.7

-2.5

-0.8

-1.3

-2.1

-1.5

0.2

556.3

Stock funds
Domestic

Aggressive growth
Growth
Growth and income
International

Balanced

Other

1. Includes precious metals funds, not shown elsewhere.

2. Calculated as the sum of "Growth and income" and "Income equity" in the ICI data.
3. Calculated as the sum of "Intemational" and "Global equity" in the ICI data.
4. Calculated as the sum of "Income-Mixed", "Balanced", and "Flexible Portfolio" in the ICI data; these funds invest in both stocks and
bonds.
e Aggregate Stock and Bond are ICI estimates, components are staff estimates.
Source. Investment Company Institute.

Net Sales of Long-Term Mutual Funds Excluding Reinvested Distributions
Billions of dollars
40
Monthly

Stock funds

1988

1989

Source. Investment Company institute.
e ICI estimates.

1990

1991

1992

-10
-10

Bond funds

1987

•;Maye

" '

1986

1993

1994

1995

1996

1997

III-15

MONETARY AGGREGATES
(Based on seasonally adjusted data)
1996
1996

1997
--Q1

1997
Mar.

Apr.

Aggregate or component

1996:Q4
Level
to
(bil- Sl
May
May 97
May 97
(p)
(p)
(p)

Percentage change (annual rate) 1

Aggregate

-0.7
5.9
7.7

-6.0
5.1
6.8

7.5

5.7

2.0

-4.2

-16.1

-25.6

8.5

9.4

-11.3
6.0
8.6

-2.7
-0.5
1.3

-3.3
4.7
6.8

1062.7
3900-2
5056.6

7.1

6-9

406.1

0.0

-2.8

395-3

-21.9

18.1

253-1

0.3

7.9

2837.5

9.7
1.7
14.8

1319.7
950-7
567.2

Selected components
4. Currency
5. Demand deposits
6. Other checkable deposits
7. M2 minus M13
8.
9.
10.

Savings deposits
Small time deposits
Retail money market funds

4
11. M3 minus M2

12.
13.
14.
15.

Large time deposits, net 5
Institution-only money market
mutual funds
RPs
Eurodollars

2.7
-23.1
8.8

-5.5
-29.4
10.1

-22.3
-17.4
12.6

11-7
1.3
17.1

12.1
3.8
17.2

10.7
1.1
16.3

12.8
-1.4
19.9

15.5
1.7
24.5

15.0

18.5

14.0

12.6

17.4

7.4

14.1

1156,4

16.1

20.1

12.6

21.2

30.6

4.6

15.8

521,6

19.8
4.1
18.8

19.8
1.9
39.9

15.6
7.8
28.2

25.1
-10.8
-17.3

-0.8
11.5
18.6

0.0
-9.0
66.2

12.6
4.4
28.0

311,6
198.7
124-4

5.3
4.4
5.8

1275.1
459,5
3505.9

Memo
Sweep-adjusted M1 6
Monetary base
Household M2 7

Average monthly change (billions of dollars) 8

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

8.5

15.3

12.7

10.3

-2.0

0.0

0.5

10.2

16.3

2.1

2.7

22.3

1.6

5.5

. .

- -

607.7
235.2

32.5

1. For the years shown, fourth quarcer-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. Sum of seasonally adjusted MI, retail money market funds, savings deposits, and small time deposits.
3. Sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted separately.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
6. Sweep figures used to adjust these series are the estimated national total of transaction account
balances initially swept into MMDAs owing to the introduction of new sweep programs, on the basis of monthly
averages of daily data.
7. M2 less demand deposits
8. For the years shown, "average monthly change" is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
p--Preliminary.

III-16

Commercial Bank Credit
(Percent change; seasonally adjusted annual rate)
1996
Type of credit
1. Bank credit: Reported
Adjusted1

Securities: Reported
Adjusted'

1996

1997
Q1

Level,

Mar

Apr

May

May
1997
(billions of $)
3,912.1

4.1

6.7

10.4

6.8

10.9

2.2

4.6

6.9

7.7

10.7

13.0

4.9

3,835.2

-1.7

2.2

14.0

-7.3

22.0

-21.2

1,015.5

-0.1

2.5

3.5

6.9

32.0

-12.1

938.6

U.S. government

-0.7

0.7

0.5

7.2

23.7

0.2

722.6

Other2

-4.0

5.9

48.9

-39.0

17.6

-71.3

292.8

6.3

8.3

9.1

11.9

6.9

10.6

2,896.6

Loans 3

Business

8.9

13.6

9.3

8.3

11.2

7.9

814.1

Real estate

4.0

4.6

7.6

14.2

8.9

10.1

1,172.5

10.

Home equity

6.8

18.9

11.9

18.0

16.4

16.1

90.4

11.

Other

3.7

3.5

7.3

13.8

8.3

9.6

1,082.1

12.

Consumer: Reported

6.3

0.9

-2.8

-4.6

6.5

522.5

13.

Adjusted 4

11.5

10.3

5.4

3.4

-1.2

7.6

703.2

8.5

12.1

25.4

33.3

7.6

23.4

387.6

14.

Other5

Note. Adjusted for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quartedy levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates
shown are percentage changes in consecutive levels, annualized but not compounded.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115).
2. Includes securities of corporations, state and local governments, and foreign governments and any trading account assets that
are not U.S. government securities.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans, loans to farmers, state and local governments, and all others not elsewhere classified. Also includes
lease financing receivables.

III-17

this component appears to have been reversed in June. On balance,
M3 appears to be running at about a 6-1/4 percent growth rate this
quarter, keeping the level of M3 above its annual growth cone of
2 percent to 6 percent.
Growth of credit provided by commercial banks slowed to a
5 percent annual rate in May, less than half the pace in April
(table). Much of the slowing last month is attributable to a runoff
in securities holdings. In response to large deposit inflows in
April--most likely tax-related--banks increased their investment in
U.S. government obligations. These purchases were mostly reversed
in May as deposits fell when payments cleared. Even so, averaging
across the two months, the annual growth rate of adjusted securities
holdings, about 10 percent, was still well above the first-quarter
rate, and data for early June suggest that growth of securities
holdings remains fairly strong.
Loan growth picked up in May as business and real estate
lending remained strong and consumer loan growth rebounded. The
recent bounceback in measured growth of consumer loans likely better
reflects the actual underlying rate of expansion, as growth of
consumer loans in March and April was damped by asset sales and onetime accounting rule changes for which no adjustments have been made
in the series. Partial data for June point to a continuation of
fairly brisk loan growth, about in line with the pace of the past
several months.
Anecdotal reports suggest that banks continue to offer
favorable terms on commercial real estate and business loans.
According to the Survey of Terms of Business Lending conducted in
the first week of May, the four-quarter moving average of the spread
of commercial and industrial loan rates over the intended federal
funds rate remained near its low for the decade (chart).

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
U.S. International Trade in Goods and Services
In the first

quarter, the deficit in U.S. international trade in

goods and services was substantially larger than that recorded in the
fourth quarter of last year.

The April deficit (at an annual rate).

however, was well below the first-quarter

level and somewhat below the

fourth-quarter level.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
1996

Annual rates
1996
1997
Q1
Q3
Q4

Monthly rates
1997
Feb

Mar

Apr

-7.8
-14.9
7.1

-8.4
-15.1
6.8

Real NIPA I/
-113.6

-137.4

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

-114.3
-187.8
73.5

-130.1 -104.8 -116.5
-210.0 -192.8 -199.1
79.9
88.0
82.7

In billions of chained

Source.

-98.4 -126.8

Net exports of G&S

-9.9
-16.8
6.9

(1992) dollars.

U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.

Exports of goods and services expanded 9 percent (SAAR) in
1997-Ql, led by a sharp rise in exports of capital goods and
automotive products to Canada

(from strike-reduced levels in the

Exports rose further in April, with most of the

fourth quarter).

increase in exports of machinery and aircraft.
Imports of goods and services grew 14 percent (SAAR) in the
first quarter.
imports

Almost half of the increase was in automotive

(largely a rebound from strike-reduced levels in the fourth

quarter).

The remaining increase was spread though other major

categories except oil, which declined in the first quarter from a
significantly upward-revised fourth-quarter level.

Imports in April

also rose strongly; increases were recorded in most major trade
categories (consumer goods, industrial supplies, capital goods, and
services).

As in the first quarter, the value of imported petroleum

products declined.

IV-1

IV-2

6-23-97

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

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

1989 1990 1991 1992 1993 1994 1995 1996 1997

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

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

Industrial supplies

Machinery
ex computers &

semiconductors

t..l.

l..i

1989 1990 1991 1992 1993 1994 1995 1996 1997

IV-3

U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)

1996
O4
C)4

Levels
1997
0111

_
1997

1996
04

Mar

Amount Chane
1997
1
M=.
-c-

/
199 7
_

Apr

Exports of G&S

878.0

898.1

938.3

940.3

37.7

20.1

45.9

Goods exports
Agricultural

631.4
61.8
3.7
565.9

650.1
57.3
6.7
586.1

685.9

615.8

691.5
57.2
10.9
623.4

28.3
1.4
-1.5
28.4

18.7
-4.5
3.0
20.2

41.6
-0.4
8.6
33.4

5.6
0.2
-2.2
7.6

36.7
43.3
37.0
148.2

39.6
46.3
37.8
152.2

51.7
48.2
37.1
159.5

52.8
49.4
37.9
165.9

9.9
-0.2
2.6
6.2

2.9
3.0
0.8
4.0

14.0
2.3
-0.5
8.1

1.1
1.2
0.7
6.4

67.0
35.1
9.7
22.2

70.9
38.7
10.4
21.7

74.7
40.0
11.2
23.5

74.2
38.5
11.6
24.1

0.8
-1.2
1.8
0.2

3.9
3.6
0.7
-0.4

3.9
1.5
0.3
2.0

-0.6
-1.6
0.5
0.5

Ind supplies
Consumer goods
All other

135.5
72.9
25.2

137.2
75.3
26.8

140.5
77.8
26.2

140.3
76.4
26.5

2.4
2.6
4.2

-0.2
-1.3
0.3

Services exports

246.6

248.0

252.5

248.8

Imports of G&S

982.8

1014.5

1031.4

1040.6

12.4

31.7

20.3

Goods imports
Petroleum
Gold
Other goods

824.1
82.2
3.4
738.5

849.3
76.7
8.7
763.9

864.4
73.2
18.7
772.5

872.8
69.7
12.1
791.0

11.1
6.0
-2.7
7.8

25.1
-5.6
5.2
25.4

19.0
-3.9
14.0
8.8

8.4
-3.5
-6.6
18.5

Aircraft & pts
Computers
Semiconductors
Other cap gds

14.0
62.8
33.6
121.1

13.6
65.5
34.7
123.5

13.4
66.2
36.7
128.7

14.5
70.0
35.2
128.1

1.0
1.1
-0.7
2.7

-0.3
2.7
1.1
2.4

-0.3
1.7
3.1
7.4

1.1
3.8
-1.6
-0.6

Automotive
from Canada
from Mexico
from ROW

128.9
42.5

142.2
52.6
24.2
65.4

140.2
49.9
24.9
65.4

136.6
49.0
25.5
62.1

-4.7
-6.4
0.0
1.6

13.3
10.2
1.0
2.2

-5.1
-3.9
0.2
-1.4

-3.6
-0.9
0.6
-3.3

Ind supplies
Consumer goods
Foods
All other

132.9
179.4
36.7
29.1

134.3
38.0
30.9

137.8
179.1
39.9
30.4

139.6
194.1
40.0
33.0

1.8
6.2
0.9
-0.3

1.4
1.8
1.3
1.7

5.6
-3.9
2.7
-2.2

1.8
14.9
0.0
2.6

Services imports

158.7

165.3

167.0

167.8

10.14
22.22

9.85
21.35

10.19
19.66

10.52
18.14

-0.56
2.74

-0.29
-0.87

0.35
-1.78

0.33
-1.52

Gold
Other

goods

Aircraft & pts

Computers
Semiconductors

Other cap gds
Automotive

to Canada
to Mexico
to ROW

Memo:
Oil qty

(mb/d)

Oil price

($/bbl)

23.3
63.2

181.2

57.0
13.1

-3.7

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

IV-4

Oil

Imports and Prices
The quantity of oil

imported declined 2-1/2 percent in 1997-Q1

from substantially upward-revised
April.

1996-Q4 rates, but rose sharply in

April imports were driven by a higher-than-normal

inventory buildup that offset

seasonal

the slight decline in oil consumption.

Preliminary Department of Energy statistics indicate that oil
imports remained strong in May due to a continuation of a strong
build-up in oil

inventories.

Deliveries of oil

from Iraq and mild weather put downward

pressure on prices during the first quarter;

prices of imported oil

declined substantially, partly reversing the very large increase
recorded in the fourth quarter of

1996.

In May, however,

concerns

about the renewal of the Iraq oil-for-food arrangement put
under those prices:
averaging $20.83
$19

Spot WTI rose $1.11

per barrel.

a floor

per barrel in May,

Spot prices have been trading near the

per barrel level since the U.N. announced the extension of

Iraq's

limited oil shipments.

Prices of Non-oil

Imports and Exports

Prices of U.S. non-oil imports dropped slightly in May,
continuing a downward trend that began in late 1995.

The declines

were in automotive products, computers, semiconductors, and
capital goods.

other

Increases were recorded in other categories.

For

April-May combined, non-oil import prices declined at a moderate
rate, about the same as in the first quarter, with decreases in all
categories except foods.
Prices

of exports decreased slightly in May following a

slightly larger decline in April.

The decline in May was

attributable to lower prices for agricultural products, and, to a
lesser degree, decreases in prices
automotive products.

of computers, semiconductors, and

For April-May combined,

export prices

decreased moderately, whereas prices of agricultural products
declined sharply.
changed in April-May

Prices of nonagricultural exports were little
(as in the previous two quarters) with moderate

increases spread among major trade categories with the exception of
computers and semiconductors.

IV-5

PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)

Annual rates
1997
0194
04
01
02e/
--

Monthly rates

Mar

1997
Anr

May
"~ '

----------- BLS prices (1995=100)-----------9.1
5.3
-4.6
-1.3
-1.2
0.0
64.3
-23.7
-46.7
-8.6
-7.0
1.2
-0.4
-2.3
-3.8
-0.4
-0.1
-0.6

Merchandise imports
Non-oil
Foods, feeds, bev.
Ind supp ex oil
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods
Merchandise exports
Agricultural
Nonagricultural
Ind supp ex ag
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods

6.6
-6.9
-19.6
-2.9
-4.0
-0.9
-0.9

2.9
-1.3
-1.5

0.1
-0.5

4.8
-14.2
-24.7
-5.6
0.1
-0.8

-4.2
-31.9
0.4

0.5
2.4
0.1

-2.7
-21.4
-0.1

0.1
1.4

0.6

0.7
-6.7
-0.9
0.4
1.5
0.5

1.8
1.0
-8.5
-15.0
0.1

0.8
-10.6
-3.6

1.2
1.3
0.9

4.9

-9.5

-5.2
2.1
1.3
1.1

2.5
-0.7
0.1
-0.6

-1.8
-0.9
-2.9
-2.0
-0.2
-0.2
0.0

1.7
0.1
-2.1
-0.5
-0.3

-0.2
0.2

-0.1

-0.7
-6.9
0.1

-0.2
-1.1
-0.1

0.0
-0.7
-0.2
0.0
0.2
-0.1

0.1
-0.5
0.0
0.1
0.3
0.1

0.0
-0.9
-0.1
0.0
-0.1
0.1

---Prices in the NIPA accounts (1992=100)-Chain-weight
Imports of gds & serv.
Non-oil merchandise

3.6

-4.2

n.a

...

-1.5

-2.7

n.a

.....

Exports of gds & serv.

-2.2

-0.0

-0.9

-1.0

n.a
n.a

Nonag merchandise

...
...

Average of two months.
6-23-97

Oil Prices
Dollars per barrel

Spot West Texas intermediate

Import unit value

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

IV-6

U.S. Current Account
The U.S. current account deficit increased $16.4 billion
(SAAR) in the first quarter of 1997.

An increase in the deficit on

trade in goods and services and a shift to a deficit in net
investment income more than offset a decrease in unilateral
transfers.

The shift in net investment income was primarily due to

larger payments on foreign assets in the United States, while income
on U.S. assets abroad was virtually unchanged.

The reduction in net

unilateral transfers in the first quarter reflected lower U.S.
government grant disbursements, which were boosted in the fourth
quarter by the annual payment of grants to Israel.
As is customary each June, estimates of U.S. international
transactions were revised to incorporate updated source data and
improved methodologies.

These revisions lowered the deficit $15

$19 billion in 1994 through 1996 and had much smaller effects on the
deficit in 1986 through 1993.

For 1996, more than half of the $17

billion downward revision to the current account deficit was
accounted for by substantial increases in net investment income,
mostly owing to higher estimated U.S. holdings of foreign securities
(discussed further in the next section) and, hence, larger receipts
on those holdings.

There were also significant increases in exports

of services and decreases in unilateral transfers.
U.S.

International Financial Transactions
Massive foreign private net purchases of U.S. securities

continued in April.

(See line 4 of the Summary of U.S. Inter-

national Transactions table.)

Demand for U.S. Treasury securities

(line 4a) was strong, particularly from the Far East.

Demand for

U.S. government agency bonds also was strong in April; agency bonds
accounted for more than half of private foreign net purchases of
U.S.

corporate and other bonds

(line 4b).

Private foreigners also

continued to add to their holdings of U.S. corporate stocks in April
(line 4c),

with purchases in the first four months of 1997 exceeding

the total for all of 1996.
In contrast, U.S. residents were net sellers of foreign
securities
5a),

(line 5) in April.

Net purchases of foreign bonds (line

which were modest in the first quarter of 1997, turned to

substantial net sales in April, largely to the United Kingdom.

U.S.

IV-7

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)
1996
1995

1997

1996

13.4

23.2

Mar

33.0

28.3

8.9

Apr

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

121.7

G-10 countries

33.1

35.5

1.4

2.2

7.9

OPEC countries

4.3

13.4

5.3

3.6

8.2

72.6

72.8

16.5

27.3

12.2

c. All other countries
2.

110.0

Change in U.S. official reserve

-9.7

6.7

7.5

-. 3

4.5

-30.9

-58.1

-12.6

-5.4

-14.1

-25.9

-11.1

190.8

290.9

61.7

78.9

100.5

81.8

21.6

34.5

99.9

156.2

31.8

43.6

67.7

43.4

14.1

18.1

82.6

120.9

23.6

33.4

31.1

27.8

5.3

10.5

13.8

6.3

2.0

1.7

10.7

2.3

6.0

-107.4

-20.2

-22.4

-30.4

assets (decrease. +)
Private capital

Banks
3.

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

Securities
4.

foreign not purchases of
U.S. securities (+)

a. Treasury securities

12.3

Corporate and other bonds

Corporate stocks

U.S. net purchases (-)

8,2
of

-98.7

-17.1

-6.8

2.1

foreign securities
a.

Bonds

-48.4

-48.8

-2.8

-14.2

-19.9

-5.3

-3.0

6.2

Stocks

-50.3

-58.6

-17.4

-8.2

-10.5

-11.8

-3.8

-4.1

6. U.S. direct investment (-) abroad

-86.7

-87.8

-23.6

-11.1

-30.9

-24.6

7. Foreign direct investment in U.S.

67.5

77.0

17.4

26.0

17.7

21.7

Foreign holdings of U.S. currency

12.3

17.3

4.5

7.4

Other (inflow.+

-10.6

-65.2

16.3

-23.0

-43.1

-13.1

-36.9

-41.0

Other flows (quarterly data. s.a.)

U.S. current account balance (s.a.)
Stariatical discrenancv (s.a.)

-129.1
-14.9

-148.2

-35.6

-42.8

-46.9

-20.8

-38.3

7.8

-3.3

n-a

n.a

3.5

-18.1

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

IV-8

U.S. CURRENT ACCOUNT
(Billions of dollars, seasonally adjusted annual rates)

Goods & services
balance

Investment
income, net

Transfers,
net

Current acct
balance

Years
1994

-104.4

9.7

-38.8

-133.5

1995
1996

-101.9
-111.0

6.8
2.8

-34.1
-40.0

-129.1
-148.2

1995-1
2

-113.2
-123.2

8.2
12.9

-33.8
-32.5

-138.8
-142.8

3
4

-95.5
-75.5

-1.6
8.3

-35.4
-34.5

-132.5
-102.2

1996-1
2

-98.2
-111.1

8.2
3.5

-42.6
-34.8

-131.5
-142.3

3
4

-130.2
-104.8

-5.5
5.0

-35.8
-47.7

-171.3
-147.5

1997-1

-116.5

-12.6

-34.8

-163.9

Quarters

Memo:
$ Change
Q3-Q4

25.4

10.5

-11.9

23.8

Q4-Q1

-11.7

-17.6

12.9

-16.4

Source.

U.S. Department of Commerce, Bureau of Economic Analysis.

net purchases of foreign stocks

(line 5b) continued at a substantial

pace in April: Japan and the United Kingdom accounted for more than
half the total.
Foreign official holdings in the United States (line 1)
declined modestly in April. in contrast to generally large increases
during the previous two years.

The decline was more than accounted

for by countries outside the G-10 or OPEC
Singapore and Argentina.

(line Ic),

particularly

Preliminary data from ERBNY suggest only

modest changes in official holdings in May as well.
Banks in the United States reported net capital inflows in
April

(line 3) on a month-end basis.

On a monthly-average basis,

banks reported an increase in net liabilities to their own foreign
offices and IBFs in May.
Data table.)

(See line 1 of the International Banking

Both domestic and foreign-chartered banks shared in

the May net inflows.

IV-9
INTERNATIONAL BANKING DATA
(Billions of dollars)

1994
Dec.
1.

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

2. Credit extended to U.S.
nonbank residents
a. By foreign branches
of U.S. banks
b. By Caribbean
offices of foreignchartered 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 foreignchartered banks

1995
Dec.

1997
Feb.

Mar.

Apr.

May.

-224.0

-260.0

-247.4

-231.2

-230.3

-220.4

-210.5

-231.0

-70.1

-86.1

-73.6

-66.4

-79.5

-72.5

-74.4

-84.3

-153.9

-173.9

-173.8

-164.8

-150.8

-147.9

-136.1

-146.7

23.1

26.5

29.2

31.9

32.1

32.9

33.1

33.6

78.4

86.3

83.4

79.4

n.a.

82.7

n.a.

n.a

85.6

91.2

101.4

113.0

121.2

120.0

118.8

125.3

86.0

92.3

109.4

122.2

n.a.

135.6

n.a.

n.a

244.1

239.1

n.a.

243.9

n.a.

313.9

336.4

n.a.

345.0

n.a.

MEMO: Data as recorded in the U.S.
international transactions accounts
4. Credit extended to U.S.
178.2
212.9
nonbank residents

5. Eurodeposits of U.S.
nonbank residents

__1996
Sep.
Dec.

241.7

275.5

1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in
timing from the banking data incorporated in the U.S. international transactions
accounts.
Lines la, Ib, and 2a are averages of daily data reported on the FR 2950 and FR2951.
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-ofquarter 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. They include some foreigncurrency denominated deposits and loans. Source: SCB

IV-10

Data recently released by BEA indicate that both foreign
direct investment in the United States and U.S. direct investment
abroad were very strong in the first quarter.
the Summary of U.S.

(See lines 6 and 7 of

International Transactions table.)

Mergers and

acquisitions across international borders continue to contribute to
the strength of these flows.
BEA revised up substantially its estimate of the increase in
U.S. nonbanks' deposits at banks outside the United States in 1996.
The outflow for 1996 now amounts to more than $60 billion.
line 5 of the International Banking Data table.)

(See

Partial

information suggests that outflows have continued in 1997.

(See

lines 3a and b for more up to date Federal Reserve data.)
BEA also has introduced a number of improvements and revisions
in the data on U.S. international transactions. They incorporated
the results of the Treasury Department's Benchmark Survey of U.S.
Ownership of Foreign Long-Term Securities as of March 31,

1994 in

their estimates of the international investment position of the
United States

(scheduled to be released June 30) and, as discussed

above, in their estimates of income on portfolio investments and the
current account.

However, they have not revised the historical data

on U.S. net purchases of foreign securities because they have no
firm basis to establish the extent to which their underestimates of
U.S. holdings were the result of unreported capital outflows or
underestimated capital gains.
BEA also has included an estimate of changes in foreign
holdings of U.S. currency in the U.S. international accounts
of the Summary of U.S. International Transactions table).

(line 8

As a

result of the recording of these previously unrecorded capital
inflows, the statistical discrepancy in the accounts has been
revised down substantially in recent years.

It was negative $46.9

billion in 1996.
Foreign Exchange Markets
The weighted-average value of the dollar in terms of the other
G-10 currencies has risen 1/4 percent since the day before the
May 20 FOMC meeting.

The dollar strengthened 3/4 percent against

the mark and most other European currencies, and 1-1/2 percent
against the Canadian dollar.

However, the dollar depreciated

1-3/4 percent against sterling and 2 percent against the yen.

IV-11

Weighted Average Exchange Value of the Dollar
index. March 1973 = 100

May

April

March

June

Interest Rates in Major Industrial Countries
Three-month rates
Change
June 25
May 19

Ten-year bond yields
June 25
Change
May 19

Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

3.09
0.57
6.38
3.39
3.27
6.75
3.18
3.16
1.63
4.17

3.05
0.63
6.75
3.27
3.26
6.75
3.30
3.13
1.31
4.09

-0.04
0.06
0.37
-0.12
-0.01
0.00
0.12
-0.03
-0.32
-0.08

5.76
2.52
7.06
6.52
5.63
7.06
5.77
5.60
3.35
6.65

5.69
2.54
7.12
6.13
5.60
6.75
5.78
5.58
3.22
6.45

-0.07
0.02
0.06
-0.39
-0.03
-0.31
0.01
-0.02
-0.13
-0.20

Weighted-average
foreign

3.51

3.53

0.02

5.54

5.49

-0.05

United States

5.73

5.66 P

-0.07

6.71

6.43 P

-0.28

Note. Change is in percentage points.

P Preliminary.

IV-12

The dollar was supported against the mark and other European
currencies by growing perceptions that Italy, Spain, and Portugal
will be included in the charter group of EMU members in 1999.

These

three countries are seen as having more tolerance for inflation than
Germany, and thus their inclusion in monetary union raises market
concerns that the euro initially will be a weak currency.
Perceptions that EMU will be launched with a softer currency were
reinforced by the confluence of the leftist victory in the French
parliamentary elections and the aborted attempt by the German
government to transfer the capital gains from revaluation of the
Bundesbank's gold reserves this year.

The platform of the French

Socialist party called for the inclusion of Italy, Spain, and
Portugal in first-round EMU membership.

The ill-fated gold

revaluation plan followed news of a shortfall in German tax revenues
and was seen as signalling German willingness to employ fiscal
gimmicks as a means of meeting the EMU convergence criteria, a
development that would make it more difficult to deny others
admission to EMU.

Further German budget proposals are expected in

July.
The dollar weakened against the yen as economic indicators in
the United States generally suggested a slowdown in U.S. economic
activity in the second quarter.

The yen was supported on June 25 by

the stronger-than-expected Tankan report.

In addition, market

concerns over prospects of a ballooning Japanese current account
surplus reportedly contributed to the yen's stronger tone.

Since

the last FOMC meeting, the yen has appreciated 3 percent against the
mark and 2-1/2 percent on a multilateral trade-weighted basis.
During the intermeeting period short-term interest rates were
little changed in foreign G-10 countries except in the United
Kingdom and Switzerland.

The nearly 40 basis point rise in U.K.

short-term rates reflects the 25 basis point increase in official
rates by the Bank of England on June 6, and expectations of further
near-term tightening by the Bank.

Monetary authorities in

Switzerland guided Swiss short-term rates about 30 basis points
lower following the appreciation of the Swiss franc, brought on by
EMU jitters, in late May.
Favorable inflation data in Italy and Spain, as well as the
increased likelihood that those countries will be included in EMU

IV-13

in 1999, contributed to the

1/4 percentage point decline in Italian

and Spanish long-term interest rates over the intermeeting period.
Despite more favorable odds of broad-based EMU, long-term rates were
little changed in Germany and other "core" European countries.
Japanese long-term rates declined early in the period as softerthan-expected data on industrial production, machinery orders, and
employment led market participants to conclude that the pace of
Japanese economic activity in the second quarter slumped more than
initially expected, albeit following stronger-than-expected growth
in the first quarter.

However, Japanese long-term rates backed up

following the release of the stronger-than-expected Tankan report,
and ended the period little changed on balance.

Canadian long-term

interest rates declined 1/2 percentage point due largely to the
victory by the Liberal Party in the federal election on June 2 and
the subsequent reappointment of Finance Minister Martin, which
reinforced market perceptions that fiscal consolidation will
continue in that country.

The Desk did not intervene in the
foreign exchange market over the intermeeting period.
Developments in Foreign Industrial Countries
Indicators for the second quarter suggest that, on average,
economic activity has continued at a healthy pace in the major
foreign industrial countries.

Expansions remain robust in the

United Kingdom and Canada following strong first-quarter
performances.

Improving growth in Germany, France, and Italy

appears to have offset a temporary slowing in Japan that was
associated with the increase in the consumption tax in April.
Inflationary pressures generally remain subdued in the foreign
industrial countries.

CPI inflation is under 2 percent in Germany,

France, Italy, and Canada.

In Japan, the increase in the

consumption tax was responsible for a rise in the twelve-month
change in the CPI to about 1-1/2 percent.

In the United Kingdom,

CPI inflation has eased, largely reflecting a decline in food and
energy prices and recent sterling appreciation.
On June 1, a coalition of Socialist, Communist, and other
leftist-parties won control of the French National Assembly,
ushering in a period of "cohabitation" with Conservative President

IV-14

Chirac.

The leftist-government remains committed to EMU. but with

broad membership and a more flexible interpretation of the
Maastricht criteria.

In Canada's June

2 federal election, the

Liberal-Party government was returned to power by a slim majority;
the new government
Individual
first

quarter,

continues to emphasize fiscal deficit reduction.

country notes.

In Japan, GDP surged during the

led by strong consumption growth.

The rise in

consumption was the largest in over 30 years as households frontloaded expenditures in anticipation of the April
consumption tax from 3 percent to 5 percent.
by contrast, fell sharply.

1 increase in the

Aggregate investment,

Increased machinery and equipment

investment was more than offset by the sharp decline in residential
investment and a 40 percent drop in public investment.
continued to make a positive contribution to GDP;
of imports and

Net exports

the growth

rates

exports, however, were below those registered in the

fourth quarter.
JAPANESE REAL GDP
(Percent change from previous period, SAAR)1

1995

1996

1997

1.3

3.8

6.6

GDP

2.6

3.0

-1.1

Total Domestic Demand

4.0

2.9

-0.3

0.4

2.2

6.3

Consumption

3.0

2.0

-3.9

-0.7

4.8

19.6

Investment

5.6

5.8

9.9

1.4

-1.5

-14.4

Government Consumption

3.2

2.9

0.4

5.5

2.6

0.3

+Inventories (contribution)

0.2

-0.3

-0.9

-0.2

-0.4

0.1

Exports

3.8

6.1

0.5

6.5

21.5

2.8

Imports

17.3

5.5

7.6

-1,1

7.5

0.7

Net Exports (contribution)

-1.3

0.1

-0.8

1.6

0.3

0.9

Annual changes are Q4/Q4.
Economic activity during the second quarter has slowed as

consumers have curbed expenditures following the first-quarter
surge.

In April, industrial production continued to decline,

unemployment rose slightly, and new car registrations plummeted.
The current account surplus increased to $8.1 billion, from $3.9
billion in March, and the trade surplus widened in April and May.
Import volumes declined from year-earlier levels, reflecting
sluggish domestic demand in the aftermath of the consumption tax

IV-15

increase, and export volumes rose sharply.

As expected, however,

indications suggest that the current weakness in economic activity
is temporary. Private machinery orders, a key leading indicator,
increased strongly in April, led by export orders.

New car

registrations in May regained about half of April's decline. The
Bank of Japan's June survey (Tankan) showed an improving outlook for
large manufacturing firms, with the diffusion index rising to 7.
The diffusion indices for other classes of firms remained negative,
but were generally stronger than anticipated in the previous survey.
Underlying inflationary pressures appear to remain subdued, despite
a jump in the price level after the consumption tax increase.

JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Q4
Q1
2.1
2.5
4.3 -11.5
5.0
-3.1
10.6
2.3
3.3
3.3
0.75
0.74
-3
2
0.1
0.0
0.6
1.4

Q2
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
7
n.a.
n.a.

Feb
-3.5
-3.2
-5.0
-1.6
3.4
0.73
.
0.0
1.6

Mar
Apr
-0.3
-0.5
-2.6
-0.3
-1.7
2.0
-2.3 -28.7
3.2
3.3
0,73
0.71
.
...
0.0
1.2
1.6
3.2

May
n.a.
n.a.
n.a.
14.7
n.a.
n.a.

Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio 1
Business Sentiment2
.
CPI (Tokyo area) 3
1.4
Wholesale Prices
2.7
1. Level of indicator.
2. Percent of large manufacturing firms having a favorable view of
business conditions minus those with an unfavorable outlook (Tankan
survey).
3. Percent change from previous year.

In recent weeks, progress has been made in implementing Prime
Minister Hashimoto's "Big Bang" financial reform program and related
legal reforms.

In mid-June, the Diet gave final approval to the

Bank of Japan Reform Law enhancing the independence of the Central
Bank and increasing the transparency of its policymaking process.
Legislation transferring much of the Ministry of Finance's
responsibility for supervising financial institutions to a new,
independent regulatory authority was also approved in mid-June.
Finally, on June 13, three government advisory panels proposed a
timetable for further financial sector reforms, including

IV-16

liberalizing the activities of banks, brokerages and insurers by
2001, and lifting the prohibition on financial holding companies.
Economic activity in Germany expanded at an annual rate of
1.8 percent in the first quarter, a bounce-back from the tepid 0.3
percent growth registered in the fourth quarter of last year.

The

sources of growth in domestic demand were government spending,
investment in machinery and equipment, and inventories

(a pure

residual in the German national accounts and highly subject to
revision); strength in these components offset the significant
decline in construction that resulted from the harsh winter weather.
Although exports continued to rise at a healthy pace, the rise in
imports was nearly as rapid, and the external sector contributed
little on balance to growth.
GERMAN REAL GDP
(Percent change from previous period, annual rate; adjusted for
seasonal and calendar variation)
1995
1996
1996
1997

GDP

Q4/Q4
0.8

Q4/Q4
2.2

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

0.7
1.5
-2.0
2.6
-0.5
5.4
4.9
0.1

Exports
Imports
Net Exports (contribution)

Q2
6.1

Q3
3.0

Q4
0.3

Q1
1.8

1.3
0.9
2.8
1.5
0.6

4.6
2.2
30.0
3.2
-3.1

-0.3
0.5
3.6
3.2
-2.0

1.3
-1.1
0.7
-2.6
2.3

1.4
0.5
-9.8
12.0
1.1

9.4
5.7
1.0

1.4
-3.9
1.5

13.3
0.4
3.3

21.1
26.1
-1.0

9.3
7.8
0.4

Economic indicators available for the second quarter suggest
that the expansion is continuing at a healthy pace.

Industrial

production rose again in April and real manufacturing orders surged,
boosted by orders from both domestic and foreign firms.

The IFO

business climate survey, an indicator of current and expected
conditions in industry, continued to improve in April, with the
index firmly in the positive range for the first time in two years.
However, the labor market worsened again in May, as total
unemployment edged above the 4.3 million (SA) level and the allGerman unemployment rate rose to 11.4 percent.

Consumer price

IV-17

inflation in Germany remains subdued, with inflation registering 1.6
percent over the year to May.
GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Q3
1.2
0.6
10.4
9.2
15.4
82.6
-11.3
1.4

Q4
-0.5
0.1
10.8
9.5
15.9
83.0
-3.3
1.4

Q1
0.3
1.1
11.3
9.8
17.3
84.1
1.3
1.7

Feb
1.8
0.2
11.3
9.8
17.5

Mar
0.3
0.9
11.2
9.8
17.2
...
2.0
1.5

Apr
0.3
3.7
11.2
9.8
17.1
...
5.0
1.4

May
n.a.
n.a.
11.4
9.9
17.5

Industrial Production
Orders
Unemployment Rate (%)
Western Germany
Eastern Germany
Capacity Utilization1
...
2
Business Climatel'
3.0
n.a.
Consumer Prices 3
1.7
1.6
1. Western Germany.
2. Percent of firms (in manufacturing, construction, wholesale, and
retail) citing an improvement in business conditions (current and
expected over the next six months) less those citing a deterioration in
conditions.
3. Percent change from previous year.
Recent fiscal developments suggest that the government must
close a budgetary gap on the order of 1/4 to 1/2 percentage point of
GDP in order to reduce the general government deficit to the
Maastricht reference level of 3 percent of GDP this year.

Now that

the revaluation of the Bundesbank's gold and foreign exchange
reserves has been ruled out as a possible means of reducing the
deficit in 1997, it is not clear what initiatives will be pursued.
The government continues to reiterate its commitment to satisfying
strictly the Maastricht deficit criterion.

The Finance Ministry

could close a small budgetary gap with minor measures, such as a
freeze on federal expenditures and the shifting of payments to the
EU from the fourth quarter to the first quarter of next year.

the budgetary gap is on the high side, other more substantial
measures will be more difficult to implement without causing a
further rift in the government's ruling coalition.
In France, first-quarter real GDP increased 0.8 percent (SAAR)
after having expanded at the same pace in the fourth quarter.
Strength from net exports more than offset a decline in total
domestic demand.

Consumption retraced some of the fourth-quarter

decline associated with the expiration of a government car-buying

IV-18

incentive program.

Fixed investment by firms and households

declined, and inventories contributed negatively.

FRENCH REAL GDP
(Percent change from previous period, SAAR)1
1995
1996
1996

1997

0.3

2.1

Q2
-0.7

Q3
3.1

Q4
0.8

Q1
0.8

0.1
0.9
0.0
0.1
-0.4

1.2
1.7
-0.6
1.3
0.1

-0.9
-4.0
-5.6
0.9
2.5

2.5
3.4
6.5
1.2
-1.1

0.1
-1.9
0.2
1.3
1.0

-1.4
1.4
-5.1
0.8
-1.4

Exports
Imports

1.5
0.9

8.5
5.6

-2.6
-3.4

13.4
11.1

6.1
3.9

4.7
-2.3

Net Exports (contribution)
1. Annual changes are Q4/Q4.

0.2

0.8

0.2

0.7

2.1

GDP
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

Recent indicators point to a pick-up in economic activity this
quarter, coupled with favorable calendar effects that are expected
to boost measured second-quarter GDP growth.

Business surveys

suggest that manufacturing output strengthened further in April and
May, mostly on robust foreign orders, and inventory levels have
dipped below their long-run average.

Industrial production

increased sharply in April on continued strength in manufacturing
output and a strong bounce in energy production, which had damped
the overall index during the previous two months.
in April also expanded at a robust pace.

Consumer spending

In recent months, the

unemployment rate has held steady at a high level, and consumerprice inflation through May remained subdued.
In an apparent expression of discontent with fiscal austerity
and high unemployment, the French electorate ousted the previous
center-right majority in the National Assembly on June 1.
Conservative President Chirac must now "cohabitate" with a leftistcoalition government.

Socialist Prime Minister Jospin has formed a

cabinet that includes ministers from the Socialist, Communist, and
Green parties.

In his first address to the National Assembly on

IV-19

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

1996

Consumption of

1997

Feb

Mar

Apr

2.7

-3.5

0.7

-1.2

0.2

1.5

n.a.

1.0

-0.6

0.0

1.7

-0.6

3.0

n.a.

82.3

81.4

81.1

May

Manufactured Products

Industrial Production
Capacity Utilization

.. .

...

Unemployment Rate (%)
12.5
12.7
12.8
12.8
12.8
12.8
n.a.
Business Confidencel
4.0
3.3
10.3
13.0
7.0
8.0
9.0
Consumer Prices2
1.8
1.7
1.5
1.6
1.1
0.9
0.9
1. Percent balance of manufacturing firms citing an improvement in the
outlook versus those citing a worsening.
2. Percent change from previous year.

June 19, Jospin broadly outlined the new government's policy; the
government will respect the Maastricht Treaty timetable, present a
corrective mini-budget for 1997 this autumn, and organize a jobs
conference among unions and employers to address labor market
conditions.

The mini-budget will be based on the findings of an

audit of the public sector finances to be completed in July; this
budget will likely overshoot the Maastricht 3-percent reference
value.
Real GDP In the United Kingdom grew 3.8 percent (SAAR) in the
first quarter.

As was widely expected, the composition of

expenditure confirmed that domestic demand expanded at a robust
pace, while net exports subtracted from growth.
More recent indicators suggest that growth continues at a
robust pace.

Industrial production rebounded in April, with

manufacturing output rising 0.6 percent, as strong domestic demand
appeared to be offsetting sterling-related weakness in exports.
However, business confidence has fallen in recent months, largely on
expectations of weak export demand.

Consumer demand remains strong.

For April and May on average, retail sales were up 1.3 percent from
their average level in the first quarter.

Consumer confidence rose

sharply in May and somewhat further in June.

The unemployment rate

in May fell to its lowest level since September 1990.
The twelve-month rate of increase in retail prices excluding
mortgage interest payments remained 2.5 percent in May, meeting the

IV-20

UNITED KINGDOM REAL GDP
(Percent change from previous period, SAAR)
1995
1996
1996

1997

GDP
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

1.9
0.7
1.2
-1.9
1.4
0.0

2.6
2.2
4.0
2.3
1.7
-0.9

2.1
-0.9
2.9
0.6
1.5
-3.2

2.6
2.4
3.5
-5.7
1.5
0.8

3.4
3.6
3.5
9.5
4.5
-1.1

3.8
5.1
3.9
13.9
-0.6
0.5

Net Exports (contribution)
Non-oil GDP

1.0
1.7

-0.2
2.6

2.3
1.9

-0.9
2.6

0.9
3.0

-0.9
4.1

Annual changes are Q4/Q4.

government's inflation target for the second month in a row.

Goods-

price inflation remained more moderate than service-price inflation
in

part reflecting the strength of sterling.

The underlying rate of

increase in average earnings held steady at 4.5 percent
Nonetheless,
ago,

the most recent rate is

up from 3.75 percent

April.
a year

reflecting the tighter labor market.

UNITED KINGDOM ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Jun
May
Industrial Production
n.a.
n.a.
Retail Sales
1.0
n.a.
5.8
n.a.
Unemployment Rate (%)
17.0
13.0
Business Confidence
20.0
18.0
Consumer Confidence
2.5
n.a.
Consumer Prices 3
4
-9.1
n.a.
Producer Input Prices
n.a.
n.a.
Earnings
Average
1. Percent of firms expecting output to increase in the next four months
minus those expecting output to decrease.
2. Balance of opinion on general economic situation over next 12 months.
3. Retail prices excluding mortgage interest payments. Percent change
from previous year.
4. Percent change from previous year.
Q4
0.6
1.1
6.9
18.0
-0.7
3.2
-4.6
4.2

Q1
-0.2
1.1
6.3
18.3
2.0
2.9
-7.1
4.6

Q2
n.a.
n.a.
n.a.
17.7
13.0
n.a.
n.a.
n.a.

Mar
-0.3
0.6
6.1
25.0
2.0
2.7
-8.0
4.5

Apr
1.2
0.3
5.9
23.0
1.0
2.5
-10.8
4.5

As part of the reform of the Bank of England, Chancellor of
the Exchequer Gordon Brown appointed Professor Charles Goodhart,

IV-21

Dr. DeAnne Julius, Sir Alan Budd, and Professor Willem Buiter as the
outside members of the Bank's new independent Monetary Policy
Committee.

At the first meeting of the new Committee on June 6,

official interest rates were raised another 25 basis points.
Chancellor Brown also announced that supervision of Britain's
banking sector would be transferred from the Bank of England to a
newly strengthened Securities and Investments Board, which will be
chaired by current Bank Deputy Governor Howard Davies.

On June 12,

Brown announced that the government's inflation target would be 21/2 for underlying inflation, altering slightly the previous target
of under 2-1/2 percent.

However, if inflation diverges from the

target by more than one percentage point in either direction, a
public letter should be written by the Governor of the Bank of
England explaining the reasons why inflation has deviated from the
target, the policy actions being undertaken, and the period within
which inflation is expected to return to the target.
In Italy, real GDP declined a provisional 1.2 percent (SAAR)
in the first quarter.

(Details will not be available until July 4

when ISTAT will release final data.)

This was the second quarter in

a row in which a decline was registered.

Economic activity in the

first quarter was more sluggish than monthly indicators had
indicated.

Industrial production and business sentiment rose during

the quarter, and consumer confidence recovered somewhat in
January-February.

Given the pick-up in industrial production,

consumer spending and the improvements in the trade surplus, it is
likely that part of the first-quarter decline resulted from
Unfavorable calendar effects also

inventory decumulation.
contributed.

In the second quarter, monthly indicators, which are scarce at
this stage, point to a pick-up in activity.

Industrial production

rose in April to its highest level since 1995.

Business sentiment,

which had risen significantly in the first quarter, remained
relatively high in April.

Consumer confidence, after having

improved significantly in the first quarter, remained little changed
in the second quarter.

Moreover, positive calendar effects in the

second quarter will provide a modest impetus to measured GDP, which
is not adjusted for this factor.

IV-22

ITALIAN REAL GDP
(percent change from previous period, SAAR)
1995
1996
1996

GDP
Private Consumiption
Investment
Government Con sumption
Exports
Imports
Total Domestic Demand
Net Exports (contribution)

Q4/Q4
2.5

Q4/Q4
0.1

1.6

8.4
-0.5
5.5
5.6
2.4
0.1

Q2
-1.5

Q3
2.2

Q4
-0.9

0.9

1.0

0.9

1.0

n.a.

-1.9
0.4
3.4
-1.4
-1.0
1.1

-1.0
1.1
7.6
-16.0
-6.9
5.3

-1.4
1.3
14.1
11.8
1.2
1.0

-1.2
-1.1
-4.0
9.2
2.1
-2.8

n.a.

Inflation continues to decline.
rise in consumer prices

the late 1960s.

1997
Q1
-1.2

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

In June, the twelve-month

-- of 1.5 percent

-- was the lowest since

Inflationary pressures are likely to remain subdued

given continued moderation in producer prices, a sizeable output
gap, and lagged effects of lira appreciation.

ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997

Industrial Production

Q4
-1.0

Q1
1.4

Q2
n.a.

Cap. Utilization (%)

75.1

76.2

n.a.

Unemployment Rate (%)

12.0

12.2

n.a.

104.7
1.3
2.7
1.8

109.2
20.0
2.5
0.6

Consumer Confidence1
Bus. Sentiment2 (%)
Consumer Prices3
Wholesale Prices3

Mar
0.6
.
...

108.8 108.6
n.a. 17.0
1.6
2.2
0.3
n.a.

Apr
0.7
...

May
n.a.
.

June
na.
..

...

108.1
16.0
1.7
-0.7

109.4 108.9
n.a.
n.a.
1.6
1.5
n.a.
n.a.

1.
2.

Level of index, NSA.
Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.
On May 30, the Italian cabinet approved its three-year
financial and economic planning document.

If the stated objectives

are realized, the budget deficit as a share of GDP will fall from
6.8 percent in 1996 to 2.8 percent in 1998 and to 1.8 percent in
2000.

The document also contains details of deficit-cutting

IV-23

measures worth $15 billion equivalent (approximately 1-1/2 percent
of GDP) that will be implemented next year in order to reach the 2.8
percent deficit/GDP target.

Two-thirds of the $15

billion package

will come from spending cuts, and the remaining one-third from
revenue-raising measures.
Real GDP in Canada rose 3.4 percent (SAAR) in the first
quarter, following growth of 2.9 percent in the fourth quarter of
1996.

Final domestic demand rose 6.6 percent, driven by strong

gains in business investment in machinery and equipment, consumption
expenditures, and housing investment.

A decline in the pace of

inventory accumulation subtracted from growth, as did net exports.
Exports, which dropped in the fourth quarter owing mainly to the GM
strike, rebounded sharply as activity in the automobile industry
returned to normal.

However, imports also increased sharply, in

part due to a sharp pick-up in imports of automobile parts, but also
due to a surge in imports of computers and other machinery and
equipment.
CANADIAN REAL GDP
(Percent change from previous period, SAAR)1
1995
1996
1996

GDP
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)
Exports
Imports
Net Exports (contribution)
1.

0.7
-0.1
0.9
-1.8
-1.4
0.1
5.0
4.0
0.4

2.3
4.5
3.3
12.0
-1.6
0.3
1.3
6.6
-2.2

Q2
1.4
-2.1
0.6
-0.8
0.6
-2.5
8.4
-2.2
4.4

Q3
3.3
7.3
2.0
19.4
-3.9
2.8
8.6
18.8
-3.8

1997
Q4
2.9
10.3
5.6
20.8
-1.5
2.6
-10.1
7.4
-7.8

Q1
3.4
4.3
5.2
15.7
0.1
-2.3
23.2
23.8
-0.6

Annual changes are Q4/Q4.
Preliminary indicators for the second quarter point to

continued expansion.

Retail sales in April advanced strongly.

Employment edged up again in April and May, but the unemployment
rate remained elevated owing to an increase in labor force
participation.

Housing starts, however, fell on average in April

and May to a level about 4 percent below their first-quarter
average.
in May.

The rate of consumer price inflation continued to moderate

IV-24

CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996

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

2
3

Business Confidence

Q3
2.0

1997

Q4
0.5

Q1
0.6

Feb
0.1

Mar
-0.4

Apr
n.a.

May
n.a.

3.2
2.7
1.2
3.9
0.1
9.8
1.4

-0.2
0.2
2.5
0.4
0.4
9.9
2.0

3.0
4.5
2.0
19.9
0.3
9.6
2.1

0.5
-2.2
1.0
11.0
-0.1
9.7
2.2

0.2
-0.3
-0.8
-2.2
0.4
9.3
2.0

0.7
4.9
1.1
-7.8
0.2
9.6
1.7

n.a.
n.a.
n.a.
4.6
0.4
9.5
1.5

101.7

104.8

106.9

148.3

153.1

160.1

...

1. Percent change from year earlier.
2. Level of index, 1991 = 100.
3. Level of index, 1977 = 100.

In the federal election on June 2, Liberal Prime Minister Jean
Chrétien's government was re-elected with a slim majority.

The

Liberals won 155 of the 301 seats in Parliament, just four more
seats than needed for a majority, and far short of the 177 seats won
in the 1993 federal election.
new cabinet.

On June 11,

Chrétien announced his

Most notably, Paul Martin was reappointed as Finance

Minister, indicating that fiscal policy would continue to focus on
deficit reduction.

IV-25

EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1996

1996

1997

Q4
Q1
16.5 12.9
17.4 15.5

Jan
5.5
6.8

Feb
3.8
4.8

Mar
3.6
3.9

Apr
6.1
8.1

May

61.4
66.9

Germany: trade1
65.4
current account1 -14.3

19.0 14.5
-1.6 -5.4

3.4
-6.1

5.5
-0.9

5.8
1.7

n.a.
n.a.

5.9
8.9

2.2
3.9

2.0
3.4

1.7
1.6

n.a.
n.a.

-4.3 -3.2

Japan: trade
current account

France: trade
current account
U.K.: trade

18.0
21.9
-19.4

5.1
5.4

9.3
n.a.

-0.9

-1.3

-1.1

-0.3

1.3

n.a.

...

44.4
Italy: trade
current account1 41.1

10.5
9.4

n.a.
n.a.

3.2
3.2

3.1
2.3

n.a.
n.a.

1.2

n.a.

current account

Canada:

trade

current account

30.0

5.9

6.1

2.2

2.0

1.9

2.8

-0.4

-0.9

...

......

1. Not seasonally adjusted.
... Data not available on a monthly basis.

-1.6

n.a.

IV-26
JUNE 25, 1997

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

Japan

-1

A
i

Germany

Percent

1992

I i

1993

1994

Percent

A _f
I

* I

1995

1996

3
3

France
Percent
-

1993

1992

1994

1995

1996

United Kingdom
Percent

12
-

1992
1992

1993
1993

1994
1994

1995
1995

1996
1996

11..1.I

1992

1993

a11111111

1994

1995

1996

Canada
Percent

Percent

__1

...
1992

192193

1993

1994

1995

1996

II996.I

1992

1993

1994

1995

1996

IV-27
JUNE 25, 1997

Industrial Production in Selected Industrial Countries
Japan

1991=100

Germany

I II
1992

1993

1994

1995

1996

France

1992

Italy

,I
I
1993

tI I
1994

II,
1
1995

1 ,

1996

United Kingdom

,MI
1992

1991=100
-, 120

1993

1994

1995

1996

1992

-- 120

t Il..

I,1.

1993

1994

1995

1996

1993

1994

1995

1996

Canada

1992

IV-28
Economic Situation in Other Countries
Growth in recent months has been generally healthy in most
major Latin American and Asian countries.

In Argentina and Mexico,

growth remains strong, though it has slowed somewhat in Mexico, and
Venezuela shows signs of a recovery; growth has been uneven in
Brazil.

Industrial production has picked up recently in China,

Taiwan, and Korea.

In Russia, indications continue that the economy

is on the verge of a turnaround, as GDP and industrial production
appear to have leveled off in recent months.
Inflation performance
has been good in most cases other than in Venezuela and has been at
historic lows in Brazil.
Strong growth in imports led to a decline in the trade
balances of Mexico, Argentina, Brazil, Venezuela, and Taiwan.

contrast, strong exports led to an improvement in the trade balances
of China and Korea.

In Thailand, the government imposed capital

controls to counter the downward pressure on the currency.
Individual country notes.

In Mexico, we estimate that real

GDP grew at a 6 percent annual rate in the first quarter on a
seasonally adjusted basis (and adjusted for fewer working days due
to Easter week falling in March),

about half the torrid pace in the

second half of last year but still a bit stronger than had been
expected.

The industrial sector continued to lead the recovery

while the services sector lagged.

Industrial production rose 9.7

percent in the March-April period from the same period a year
earlier.

That is slower than the 12.8 percent growth rate in the

fourth quarter.
Further evidence for strength in domestic demand was provided
by a recent pickup in imports and consequent narrowing of the trade
surplus to $50 million in April and $88 million in May, compared
with $565 million in March.

Consumer price inflation moved below a

1 percent monthly rate in May for the first time since the December
1994 devaluation.

The stability of the peso has contributed to the

moderation in inflation, but also to the narrowing of the trade
surplus and to tensions in Mexico over exchange rate policy.
On June 3, the Mexican government announced a medium-term
program that outlined government objectives for key economic
variables through the year 2000.

The government's target for real

GDP growth rises steadily from 4.5 percent in 1997 to 5.6 percent in

IV-29

MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996

Real GDP
Industrial Production
Unemployment Rate (%)
Consumer Prices
Trade Balance 2

Imports 2
Exports 2
Current Account

1996

1997

Q4
7.6
12.8
4.7

Q1
5.1
6.2
4.3

Mar

Apr.

May

5.1
10.4
5.5

4.2
4.2

15.0
4.3

n.a.
n.a.

27.7

6.1

5.6

1.2

1.1

0.9

6.3

0.7

1.4

0.6

0.1

89.6
95.9
-1.8

25.5
26.2
-1.4

23.5
24.9
-0.4

8.2
8.7
...

9.1
9.1

8.7
8.8

1. Percentage change from previous period.

2. Billions of U.S. dollars, NSA
2000.

The GDP expansion is to be fueled primarily by investment and

exports, with consumption recovering gradually.

Investment as a

percent of GDP is targeted to increase from 20.9 percent in 1996 to
25.4 percent in 2000.

Part of that will be financed by domestic

savings, which are targeted to grow from 20.4 percent of GDP in 1996
to 22.2 percent in 2000, while the current account deficit is
expected to increase from 0.9 percent of GDP in 1996 to 3.2 percent
in 2000.

The government expects foreign direct investment to be

sufficient to finance the current account deficit.

Fiscal policy is

to remain tight, with the overall government budget deficit below 1
percent of GDP through 2000, and monetary policy is to be consistent
with a steady decline in the inflation rate target from 15 percent
in 1997 to 7.5 percent in 2000.

This medium-term plan is expected

to be the basis for a new Extended Fund Facility agreement with the
IMF.
The Mexican government announced on June 17 that it will
prepay in August all $6 billion of the five-year floating rate notes
that it issued in August 1996.

Those notes, like the U.S. Treasury

loans that they refinanced, are backed by the proceeds of Mexican
oil exports.

The funds for the prepayment will come from proceeds

of previous bond sales, new debt sales, and a commercial bank loan.
It is a significant indication of improved investor sentiment toward
Mexico over the past year that it can replace collateralized debt
with uncollateralized debt at lower cost and longer maturity.
In Argentina, economic activity continues to grow at a healthy
pace.

Real GDP grew 8.1 percent in the first quarter of 1997 from

IV-30

the same period a year ago, and has just now recovered to its level
reached in late 1994, before the recession induced in part by the
Mexican crisis.

Industrial production in May was up 5.3 percent

over a year earlier.

The recent growth in activity was led by

investment, which grew almost 30 percent in the first quarter over a
year ago. Despite strong growth, inflation remains subdued.
Consumer prices fell for the third consecutive month in May,
bringing the twelve-month inflation rate down to 0.6 percent.
Unemployment remains a problem, as evidenced by several recent
protests in different parts of the country against poverty and
joblessness. and it could hurt the government in the autumn
congressional elections.
ARGENTINE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
Q4
8.8
11.7

Q1
8.1
8.0

Mar
...
4.1

Apr

May

Real GDP
4.3
Industrial Production
3.4
8.1
5.3
(SA)
......
17.3
17.2
Unemployment Rate (%)2
Consumer Prices 1
0.2
0.2
0.2
-0.5
-0.3 -0.1
3
Trade Balance
1.6
0.0
-0.2
-0.1
0.1
n.a.
Current Account 3
-4.0
-1.7
n.a..
1. Percentage change from previous period.
2. Unemployment figures available only in May and October of each year. The
annual figure is the average of the two surveys.
3. Billions of U.S. dollars.
The pace of growth of exports has slowed somewhat but imports
continue to expand at a rapid rate.

As a result, the trade balance

moved from near zero in the fourth quarter of 1996 to a deficit of
$0.2 billion in the first quarter of 1997.
surplus of $0.1 billion.

In April, there was a

International reserves also continue to

recover and were about $18 billion (excluding gold) at the end of
May, roughly 30 percent higher than a year ago.
In other developments, the process of foreign buy-outs
continues in the banking industry, with two purchases of Argentine
banks by Spanish financial institutions in May.
In Brazil, inflation has remained at an historical low and
growth has been uneven, as declines in GDP and industrial production
in the first quarter were followed by a surge in industrial

IV-31

production in April.

Real GDP fell by 2.2 percent in the first

quarter (s.a.a.r.), after three quarters of very strong growth.
Strong growth in the service sector offset to some extent declines
in output in other sectors.

The seasonal adjustment for first-

quarter growth may not have completely accounted for the smaller
number of working days in March this year because of the Easter
holiday period.

This may explain in part the strong growth in

industrial output in April, when production grew 3.5 percent (s.a.
not at an annual rate).
Strong growth in both sales and output in
April were also boosted by purchases made in anticipation of new
taxes on credit and imports, which the government imposed in late
April and early May.

The taxes were aimed at reducing the demand

for autos and other durable goods, the two major sources of upward
pressures on imports.
The taxes contributed to an improvement in the trade balance
in May.

However, the current account deficit for the year through

May was nearly $13

billion, more than double the level reached over

the same period in 1996.

International reserves stood at $59.3

billion at the end of May, up by nearly $3 billion from April.
Reserves were boosted by capital inflows, which prompted the central
bank to purchase foreign exchange to mitigate upward pressures on
the real.
BRAZILIAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
May
Apr
Mar
Q1
Q4
Real GDP, s.a.a.r. 1
2.9
5.9
-2.2
...
...
Industrial Production (SA) 2
2.3
0.0
-1.5
-1.0 -3.5
n.a.
6.0
n.a. n.a.
5.4
4.5
6.0
Open Unemployment Rate (%)
Consumer Prices 3
9.4
1.0
2.0
0.7
0.6
0.1
0.3
-5.5
-3.9
-3.1
-1.0 -0.9
Trade Balance 4
Current Account 4
-24.3
-10.7
-6.9 ._ __ .-2.4 -3.9 -2.2
___
1. Percent-change from previous period.
2. Annual data are from national income accounts.
3. INPC, Percentage change from previous period. Annual data are Dec/Dec.
4. Billions of U.S. dollars, NSA
On June 4, Brazil issued about $2.8 billion (market value) of
a 30-year dollar-denominated bond at 395 basis points over U.S.
Treasury securities.

The government sold about one-quarter of the

bonds for cash, and the rest were swapped for three types of Brady

IV-32

bonds, with about $2.7
retired.

billion (face value) of Bradys consequently

These transactions were aimed at reducing Brazil's debt-

servicing costs.

Before this issue, the Brazilian government's

longest uncollateralized bond outstanding had been a five-year bond.
In early June, Congress approved an amendment to the
Constitution that allows an incumbent president to run for reelection, which paves the way for President Cardoso to run for a
second term.

Cardoso has been highly popular because of the fall in

inflation under the anti-inflation plan, the Plano Real.

Thus, the

prospect that Cardoso will be reelected has boosted the perception
that the economic reform process will continue in Brazil.
In Venezuela, one year after the announcement of an IMF-backed
package of free-market oriented reforms, there are signs that
economic activity is picking up.

While there is a lack of timely

data on output, indicators of aggregate demand point to a pickup;
automobile sales and imports are rising at a rapid pace and bank
Inflation is rising,

lending grew by 9.7 percent in May over April.

as expected, in the wake of recently authorized increases in public
and private sector wages, including a 44 percent rise in the minimum
wage.

Consumer prices rose 3.1 percent in May and have risen by

about 13 percent since the start of the year.

Several increases in

government-controlled prices are pending, which will put further
pressure on inflation for the rest of the year.
VENEZUELAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
Q4
Real GDP

-1.6

Unemployment Rate (NSA, %) 11.8
103.3
ConsumerPrices 1
2
-4.7
TradeBalance
Current Account

n.a.

Mar

.........

12.4
10.6
-1.2
...

12.6
6.6
-1.4
...

Apr

May

...

......
2.4
1.6
-0.5
-0.5
...

...

3.1
n.a.
...

1. Percentage change from previous period, NSA.
2. Billions of U.S. dollars, NSA, non-oil trade balance.
The government continues to follow a strong bolivar policy to
try to curb inflation, despite its negative impact on non-oil
exports.

This factor, together with strong import growth of nearly

40 percent in the first quarter, led to a non-oil trade deficit of
$1.4 billion in the first quarter of 1997, compared with a deficit

IV-33

of $0.8 billion in the same period last year.
reserves

International

(excluding gold) at the end of May were $12.6 billion,

compared with $6.4 billion a year previously.
In mid-June, the Venezuelan Congress gave its final approval
to a Labor Law reform bill that will increase labor market
flexibility in the long run, but increase government spending in the
short run because of the cost of liquidating the old severance pay
system.

Also in June, Venezuela launched a $315 million 10-year

Eurobond, which was priced at about 270 basis points over comparable
U.S. Treasury securities.

At about the same time, Standard and

Poor's raised its rating of Venezuela's long-term foreign currency
debt to B+ from B.
In China, inflation continued to moderate, and the trade
surplus continued to grow.

Twelve-month consumer price inflation of

2.8 percent in April was the lowest level since 1991. In the first
five months of 1997, the trade surplus was $13.9 billion, compared
with a deficit of $0.5 billion in the year-earlier period. The
dollar value of exports rose 26 percent, while the value of imports
fell by 1 percent.

Chinese reports continue to stress the

importance of base-year effects in explaining the export surge and
import fall: the first half of 1996 had the reverse pattern of
falling exports and surging imports, when China cut the VAT rebate
rate on exports.

International reserves were $117 billion in April,

up $10 billion from the beginning of the year.
CHINESE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
Q4
9.7
9.7
Real GDP 1
15.6
15.6
Industrial Production
7.0
7.0
Consumer Prices
2
12.2
4.0
Trade Balance
1. Cumulative from the beginning of the year
2. Billions of U.S. dollars, NSA

Q1
9.4
13.0
4.0
6.8

Mar

Apr

May

16.1
4.0
3.0

14.2
3.2
3.5

n.a.
2.8
3.6

In May and June, in response to rapid equity price increases
in 1996 and early 1997, China put in place various policies to try
to restrain the stock market.

First, it announced an increase in

the quota of new share issues for 1997.

Second, it banned state

enterprises and listed firms from short-term "speculative" stock

IV-34

trading.

Third, it began to tighten restrictions on bank

involvement in stock trading.

In the second half of May, all of the

share indices fell more than 10 percent from their mid-May peak
before leveling off.

As of June 24, however, domestic shares were

still up by 40 percent from the beginning of the year.
In Taiwan, strong growth continued in the first five months of
1997, while prices remained flat.

In the first quarter, real GDP

rose 6.8 percent from the year-earlier period, continuing the
economic recovery that was evident in the second half of 1996.
Industrial production growth continued robustly in April and May.
Consumer prices in April and May were less than 1 percent higher
than their year-earlier level.

Strong import growth contributed to

a narrowing of Taiwan's trade surplus to $3.2 billion in the first
five months of 1997, compared with a surplus of $5.3 billion in the
year-earlier period.
percent.

Exports rose 4 percent, while imports rose 10

Foreign-exchange reserves stood at $89 billion in April,

up less than $1 billion from the beginning of 1997.
TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted, NSA)
1996
1996
1997
1996
Q4

Mar

Real GDP

5.7

6.6

6.8

...

Industrial Production

1.6

4.8

5.4

10.0

Consumer Prices

Trade Balancel
Current Account

Apr

May
...

7.3

7.3
0.8

2.5

1.1

0.5

14.3

4.0

1.8

0.6

-0.2

10.5

2.8

1.9

...

1.6

...

1. Billions of U.S. dollars, NSA
On June 16, Korea's Finance Minister released the final draft
of the government's proposals for financial sector reforms.

Under

the proposals, three existing supervisory agencies for the banking,
securities, and insurance sectors will be integrated into a unified
agency under the Prime Minister.

Other proposals increase the

central bank's independence by stipulating that the Bank of Korea's
governor replace the finance minister as head of the Monetary Board,
the top monetary policymaking body, and by banning government
officials from sitting on the Board.

The central bank governor

would be asked to set annual targets for inflation and would be held

IV-35

responsible for meeting those targets.

The proposals have to be

approved by Parliament, and their prospects remain uncertain.
KOREAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
Real GDP
6.8
Industrial Production
8.4
Consumer Prices
5.0
Trade Balance 1
-15.3
Current Account 1
-23.7
1. Billions of U.S. dollars, NSA

Q4
6.6
9.8
4.8
-3.9
-6.2

Q1
5.3
7.0
4.7
-5.4
-7.9

Mar
n.a.
9.1
4.5
-1.4
-2.3

Apr
n.a.
10.7
4.3
-0.8
-1.7

May
n.a.
n.a.
3.8
n.a.
n.a.

The current account deficit on a non-seasonally adjusted basis
has been on a downward trend since the beginning of the year

($1.7

billion in April versus $3.1 billion in January); customs-cleared
trade numbers for May indicate a continuation of the trend.
Industrial production in April grew at a robust rate of nearly 11
percent (year-over-year), with strong growth registered in key
industries such as computer chips and automobiles.

Inflation

remained moderate at about 4 percent (year-over-year) in May.
Thailand's deputy prime minister and finance minister,
Mr. Amnuay Viravan, resigned on June 19 after the cabinet reversed
his decision to raise excise taxes to reduce the country's budget
deficit. Following news of the resignation, the stock market
declined by about 4 percent, and the baht depreciated by about 10
percent.

The minister was part of a five-member "dream team" of

skilled technocrats appointed after the elections last November to
remedy Thailand's economic problems. The economy has been in
disarray since mid-1996, with exports showing no growth, finance
companies and banks in trouble over imprudent lending to the
property sector, and the baht under attack. The new Finance
minister, Thanong Bidaya, has pledged to pursue the fiscal and
monetary policies of his predecessor, saying they were mostly on the
right track in tackling Thai economic problems.

Bidaya is

Thailand's sixth finance minister since 1995.
In mid-May, the government resorted to capital controls to
counter an attack on the baht.

By forcing Thai banks to stop

lending baht to foreigners without "genuine underlying business,"

IV-36

the Bank of Thailand segmented the onshore and offshore markets for
the baht.

However, these steps have undermined the government's

plan to lower interest rates;

overnight interest rates have remained

in the range of 13 to 14 percent, compared with an average of about
8 percent in the month preceding the recent crisis.

Spillover

effects of the baht crisis on other countries appear to be receding.
In Malaysia and the Philippines, overnight interest rates had shot
up to about 20 percent around the time of the crisis, but they have
since started to fall.
In Malaysia, overnight interest rates are
back to their pre-crisis levels, but are substantially above precrisis levels in the Philippines.
In Russia, recent data present a relatively favorable picture
of the economy.

After years of declines, output and industrial

production have been flat this year, while inflation has fallen
steadily and the ruble has remained stable.

During the first five

months of this year, year-on-year GDP growth rates hovered around
zero, while industrial production growth was positive, though less
than 1 percent.

Consumer prices rose only 0.9 percent in May from

April, and were 15 percent higher than a year earlier.

Also, the

ruble-dollar exchange rate continues to remain well within the
corridor set by the Central Bank.
RUSSIAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1997
1997
Real GDP
-6
Industrial Production
-5
1
Consumer Prices
1.7
1.5
Ruble Depreciation 1
2
Trade Balance
n.a.
Current Account 2
7
1. Monthly rate.
2. Billions of U.S. dollars.

Q4
-6
-5
2
1
n.a.
n.a.

Q1
0.2
0.9
2
1
n.a.
n.a.

Russia continues to have fiscal problems,
revenue

side.

Mar
-0.3
0.4
1.4
0.9
n.a.
n.a.

Apr
-1.0
0.5
1.0
0.3
n.a.
n.a.

May
-0.4
0.2
0.9
0.4
n.a.
n.a.

especially on the

Tax revenues are significantly below target

(less

than 70 percent of the target for the first quarter) and arrears
continue to accumulate.

There has been some progress in recent

weeks, however, as a result of increased government pressure on
enterprises.

Gazprom,

one of Russia's biggest debtors,

reportedly

IV-37

paid off all of its federal tax arrears, some $2.6 billion, in midJune

(they still owe money to other federal bodies such as the

pension fund) and arrangements are being negotiated with other
firms.

Two measures aimed at restoring fiscal balance are now under

consideration by the Communist-dominated Duma.

The first is a plan

to cut one-fifth (equivalent to $18.8 billion) of budgeted
expenditures, and the second is a new tax code that already forms
the basis for the government's 1998 budget.
The IMF resumed lending to Russia in mid-May with the
disbursement of almost $700 million equivalent.

In early June, the

World Bank approved nearly $820 million in loans for Russia, the
largest of which is a $600 million Structural Adjustment Loan that
will support wide-ranging reforms.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, July 1-2, 1997 : Greenbook Part 2

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