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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. 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Confidential (FR) Class III FOMC June 29, 1994 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 Although conflicting signals in the flow of economic data are not unusual, the degree of tension in the second-quarter figures is exceptional. Spending indicators, to only a moderate increase in output, but labor market are indicative of a large signals, in the aggregate, seemingly point gain. indicators In balancing these conflicting our assessment is that the economy probably has another quarter of growth at least somewhat registered in excess of potential. The remaining slack in labor markets appears to have been taken up, and the prices the pressures of industrial commodities on manufacturing capacity. of final goods and acceleration; seemingly are reflecting services have not at worst, However, wages and prices exhibited any notable one can point only to a lack of further slowing in recent months. Labor Market Developments Labor demand has continued to strengthen. of payroll employment slowed in May, it was Although the growth still substantial. Moreover, the average workweek of production and nonsupervisory workers rose to 34.9 hours, the longest aggregate hours increased 0.9 percent first-quarter average. since 1987. All told, and were 2.1 percent above the Initial claims for unemployment insurance have averaged about 360,000 since the May survey week, a level that has been associated with payroll increases month during the past year. of roughly 200,000 per Inc.'s Looking forward, Manpower, is the most Employment Outlook Survey for the third quarter of 1994 positive reading in the series since the summer of 1989. In the payroll survey, the service-producing sector once again dominated hiring in May, accounting for 183,000 of the 191.000 II-2 LABOR MARKET INDICATORS Aggregate Hours of Production or Nonsupervisory Workers 1989 1990 1991 Index,1982=100 1992 1993 Initial Claims for Unemployment Insurance* Thousands 700 - Jun I I 1989 * I 1990 1 I 1992 I 1993 1994 Four week moving average including EUC adjustment Manpower Index of Net Hiring Strength Percentage points 94Q3 1989 1990 1991 1992 * Percent planning an increase inemployment minus percent planning a reducrion. 1993 1994 600 increment in total nonfarm jobs. jobs, The services industry added 80,000 even though employment in personnel supply services edged down and business services as a whole added only a few jobs. Elsewhere, transportation employment rose 84.000, as striking Teamsters returned to work. Retail and wholesale trade also grew, but more slowly than in recent months. Finance, insurance, and real estate lost 15.000 jobs, partly owing to the slower pace of home sales and refinancing. Net hiring in the construction industry slowed from its rapid pace of the preceding two months, and employment in manufacturing was about unchanged. The May labor market report also contained the annual revisions to payroll employment. The payroll data were benchmarked to a March 1993 job count derived primarily from unemployment insurance tax records, and the bias adjustment factors used to capture employment growth in small or newly created firms were updated. All told. employment growth since April 1992 was adjusted upward by about 25,000 per month, with a cumulative increment to nonfarm employment of more than 550,000 by February 1994. In the May household report, the civilian unemployment rate fell 0.4 percentage point to 6.0 percent. Employment rose 534,000. while the number of unemployed dropped 506,000 in May; this left the size of the labor force about unchanged last month. Determining the significance of movements in the unemployment rate has been especially difficult this year, owing to the introduction of the new Current Population Survey. Based on comparisons of the old CPS and the 1992-93 parallel survey, the BLS earlier this year estimated that the unemployment rate from the redesigned household survey would be comparable to rates about 1/2 percentage point lower under the old survey. Using this standard, the May unemployment rate of 6.0 percent would have been II-4 CHANGES IN EMPLOYMENT 1 (Thousands of employees; based on seasonally adjusted data) 1993 1992 1993 Q3 1994 Q4 Q1 1994 Mar. Apr. May ------------ Average monthly changes--------Nonfarm payroll employment 2 Strike-adjusted 96 95 194 194 184 186 229 223 229 229 379 379 358 432 191 121 76 -14 -1 10 4 179 -11 19 42 10 156 -17 12 41 10 219 3 24 47 11 222 13 23 44 4 354 10 61 71 5 327 12 87 121 9 194 -2 12 37 -15 1 78 31 20 4 116 46 15 -2 113 45 28 3 127 62 10 8 133 61 8 13 197 83 25 -58 159 74 31 84 80 6 -3 86 -3 164 -1 146 -5 185 12 211 22 346 17 318 23 221 -2 127 120 209 219 127 106 364 363 459 349 -221 -256 301 269 534 557 Memo: Aggregate hours of private production workers (percent change) .1 Average workweek (hours) 34.4 Manufacturing (hours) 41.1 .3 34.5 41.5 .1 34.5 41.5 .4 34.5 41.7 .4 34.6 41.7 1.4 34.6 42.1 .7 34.7 42.2 .9 34.9 42.1 Private Manufacturing Construction Trade Finance, insurance, real estate Transportation, communications and public utilities Services Business services Total government Private nonfarm production workers Manufacturing production workers Total employment 3 Nonagricultural 1. Average change from final month of preceding period to final month of period indicated. 2. Survey of establishments. 3. Survey of households. SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES (Percent; based on seasonally adjusted data) 1993 1994 1 1994 Q3 Q4 Q1 6.8 6.7 6.5 20.0 11.3 6.4 5.7 19.0 10.5 5.8 5.4 18.2 10.4 5.8 5.3 7.4 6.8 66.3 66.2 Teenagers 51.3 51.5 51.5 51.1 52.7 52.3 54.0 53.1 20-24 years old Men, 25 years and older 77.1 76.6 77.1 76.2 77.0 76.2 76.7 76.2 77.0 76.3 77.4 76.1 76.7 75.9 77.1 75.9 Women, 25 years and older 57.0 57.1 57.1 57.5 58.0 58.0 57.9 58.1 1992 Civilian unemployment rate (16 years and older) Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older Full-time workers Labor force participation rate 1993 7.4 Mar. Apr. May 6.6 6.5 6.4 6.0 18.3 9.7 5.5 5.3 18.0 10.6 5.3 5.3 17.8 10.9 5.1 5.4 19.9 9.9 5.0 5.1 18.3 9.4 4.6 4.9 6.5 6.2 6.7 6.6 6.4 6.0 66.1 66.2 66.6 66.6 66.6 66.5 1. Data for 1994 are not directly comparable for earlier years because of a redesign of the CPS in January 1994. II-5 equivalent to a rate of 5.5 percent on the old basis, nearly a full percentage point below the reading for December 1993. However, the actual decline in unemployment over this period likely is several tenths smaller. First, BLS analysts now believe that the difference between rates as measured by the old and new CPS may be less than 1/2 percentage point. BLS analysts also think that seasonal adjustment problems may have overstated the May decline in the rate and biased the May unemployment rate down slightly. Nevertheless, even after correcting for these factors, the unemployment rate has exhibited a sharp decline since late 1993, seemingly moving from the high end of the range of estimates of the "natural" rate to a point in the middle portion of the range of estimates. Relatively little additional information on wages and compensation has become available since the last Greenbook. Although average hourly earnings were reported to have increased 0.5 percent in May, after a 0.3 percent increase in April, their rise over the twelve months ended in May--2.7 percent--was about the same as the increase during the previous twelve-month period. Nor has there been any perceptible pickup in wage pressures in the incoming data on collective bargaining agreements. According to data from the Bureau of National Affairs, the median first-year wage increase negotiated between January 1 and June 23, 1994. was 3 percent, the same as the rise during the same period last year. 1. For one thing, unemployment rates among women early this year were considerably lower than was suggested by the parallel survey, even accounting for the continued improvement in labor market conditions. Moreover, the small "follow-on" survey that the BLS hoped would aid in linking the new survey to the old actually produced higher unemployment rates than those from the new CPS. suggesting the possibility that the higher unemployment rate shown in last year's parallel survey owed to sampling variation rather than to the redesigned questionnaire. Factoring in lump-sum bonuses also yields the same median increase this year as last. 2 AVERAGE HOURLY EARNINGS (Percentage change; based on seasonally adjusted data) 1991 1992 1993 1994 Feb. --Annual -Total private nonfarm Manufacturing Durable Nondurable Contract construction Transportation and public utilities Finance, insurance and real estate Total trade Services 1994 Mar. Apr. May --Monthly-- 3.3 3.2 3.3 3.4 1.5 2.3 2.7 2.7 2.8 1.1 2.8 2.3 2.3 2.1 1.6 2.7 2.6 2.6 2.6 1.7 .1 .5 .5 .4 .8 -.1 -.1 .0 -.1 -.5 .3 .0 .0 -.3 .3 .5 .1 -.1 .4 .5 2.7 1.4 1.6 1.7 .1 -.2 - 1 .4 4.6 3.2 4.1 2.4 5.6 2.7 4.8 2.5 -.5 -.3 .2 .0 .7 .3 1.0 .3 4.5 2.8 2.7 2.7 -. 1 -. 1 .4 .6 1. Annual change is measured from May of preceding year to May of year indicated. Industrial Production Total industrial production slowed early in the second quarter, after strong first-quarter gains. Much of the recent slowing reflects a dropback in motor vehicle production from the first-quarter pace. rapid Output in manufacturing excluding motor vehicle and parts has continued to expand briskly. Motor vehicle assemblies moved down in May to 11-1/2 million units at an annual rate, compared with an average of nearly 13 million units in the first quarter. Weekly data and preliminary industry estimates of actual production through the week ended June 25 suggest a further slight decline to 11.4 million units at an annual rate in June, a shortfall of about 300,000 units from the scheduled rate. 2. As reported in the last Greenbook, increases in ECI wages and salaries and in the total ECI including fringe benefits for the twelve months ended in March 1994 showed little change from the increases of a year earlier. II-7 PRODUCTION OF DOMESTIC AUTOS AND TRUCKS (Millions of units at an annual rate: FRB seasonal basis) 1994 Apr. May U.S. production Autos Trucks 12.2 6.7 5.5 11.5 6.3 5.2 Days' supply Autos Light trucks 58.4 58.0 59.9 61.7 Junee 11.4 6.0 5.4 Q1 12.9 7.1 5.8 Q2 e 11.7 6.3 5.4 Q3 11.8 6.2 5.5 59.8 55.2 1. Components may not add to totals because of rounding. e Industry estimates. s Scheduled. Excluding motor vehicles and parts, manufacturing output increased at an average monthly pace of 0.4 percent in April and May, similar to the rapid rate of growth in 1993 and only a bit less than the robust first-quarter pace. Ongoing strength in production of business equipment and construction supplies was moderated early in the second quarter by a slowing in the output of consumer goods. Indicators of industrial production point to substantial nearterm strength. The staff's series on real adjusted durable goods orders held at a high level in April and May, after climbing nearly 5 percent in March. Although new orders for nondefense capital goods except aircraft have retraced most of the March jump, the level of unfilled orders for these goods remains high, suggesting that strength in business equipment output will continue through June. Moreover, among other durable goods industries, orders for materials and consumer goods appear to have firmed recently. Weekly physical product data through mid-June show a surge in electricity generation, likely owing to unusually hot weather. II-8 GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION (Percent change from preceding comparable period except as noted) 1993 1994 Q4 Proportion in total IP 19931 1993:Q4 Q1 1994 Mar. Apr. May -Annual rate- --Monthly rate--100.0 4.2 4.2 6.7 6.7 8.1 8.1 Manufacturing Motor vehicles and parts Mining Utilities 85.2 5.6 6.9 7.9 5.0 16.6 .9 8.4 91.4 2.1 -6.5 7.6 37.9 4.8 15.8 .8 -4.2 .7 -1.5 Manufacturing excl. motor vehicles and parts 79.6 4.3 4.4 5.7 1.2 .3 Consumer goods Durables Nondurables 21.4 3.7 17.7 .6 5.8 -.4 -1.1 4.6 -2.2 2.5 1.9 2.7 1.2 .2 1.4 .1 .7 .0 Business equipment Office and computing Industrial Other 14.9 4.2 3.9 6.8 9.1 33.9 4.2 .3 7.6 35.5 .2 -2.2 11.7 33.4 5.4 3.1 1.0 .6 1.4 1.0 .7 2.0 1.0 -. 4 1.5 3.1 .6 1.0 -9.5 5.9 -9.7 11.0 -10.2 .2 -.1 1.2 -.1 1.7 -. 3 .9 4.3 7.4 3.8 -1.0 5.3 9.0 4.9 -1.3 7.7 9.2 3.6 8.6 1.1 1.8 1.2 -. 2 .0 .6 -.4 -.7 Total index Previous -. 8 Defense and space equipment Construction supplies 39.0 19.8 9.2 10.0 Materials Durables Nondurables Energy .6 .5 .1 .3 .2 .2 -1.6 -. 4 -.5 .2 -3.9 .4 -.3 .5 1. From the final quarter of the previous period to the final quarter of the period indicated. CAPACITY UTILIZATION (Percent of capacity; seasonally adjusted) 1988-89 1967-93 1993 1993 1994 High Avg. Avg. Q4 Q1 Mar. Apr. May Total industry 84.8 81.9 81.5 82.3 83.4 83.7 83.6 83.5 Manufacturing 85.1 81.2 80.6 81.5 82.5 82.8 82.8 82.8 89.1 83.3 82.2 80.6 84.0 79.1 85.5 79.9 85.8 81.1 86.2 81.4 86.4 81.3 86.6 81.2 Primary processing Advanced processing 1994 II-9 NEW ORDERS FOR DURABLE GOODS (Percent change from preceding period, seasonally adjusted) Share 1993 H2 1994 01 Mar. 1994 Apr. 100.0 5.4 .7 .1 Adjusted durable goods orders 67.0 3.2 4.6 -.7 Nondefense capital goods excluding aircraft 22.0 1.7 3.3 .3 2.5 All other categories 2 45.0 3.9 5.3 -.9 1.5 2.5 4.7 -. 5 0 Total durable goods Memo: Real May 9 3 adjusted durable goods orders . 1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle parts. 2. Includes primary metals, most fabricated metals, most stone, clay and glass products, electronic components, household appliances, scientific instruments, and miscellaneous durable goods. 3. Nominal adjusted durable goods orders were deflated with a PPI for durable goods excluding transportation equipment and the BEA deflator for office, computing, and accounting machinery. The rate 82.8 percent, of capacity utilization in manufacturing in May was roughly halfway between the long-run average operating high of rates for most major industry groups generally remain several percentage points below their 1988-89 highs; 85 percent. Operating rate of 81.2 percent and the 1988-89 the most noticeable exceptions are petroleum products and nonelectrical machinery, where earlier weakness in investment limited capacity. For some individual product lines--such as cellular phones, popular sport utility vehicles, and environmentally acceptable refrigerators-industry contacts report that capacity constraints output growth. are restricting II-10 CAPACITY UTILIZATION BY INDUSTRY GROUP (Percent of capacity, seasonally adjusted) (1) 67-92 Avg. (2) 1988-89 High (3) 1994 May (2)-(3) Difference Total industry 81.9 84.8 83.5 1 3 Manufacturing 81.2 85 82 8 2 3 Primary processing Textile mill products Lumber and products Pulp and paper Primary chemicals Petroleum products Stone, clay, and glass Primary metals Fabricated metal products 82.2 86.0 83.0 92.2 83.3 85.3 77.9 79.8 77.2 89.1 92.1 93.3 98.1 92.3 88.5 83.7 92.9 82.0 86.6 92.1 90.5 94.1 85.9 93.5 78.4 92.1 80.8 2.5 0 2.8 4.0 6.4 -5.1 5.3 .8 1.2 Advanced processing Furniture and fixtures Advanced chemicals Nonelectrical machinery Electrical machinery Motor vehicles and parts Aerospace and misc. transportation equipment Instruments 80.7 81.8 77.3 80.7 80.3 75.6 83.3 86.8 82.0 83.7 84.9 84.5 81.2 82.8 78.2 89.4 86.1 82.9 2.1 4.0 3.8 -5.7 -1.2 1.6 75.9 82.3 88.3 81.2 62.2 73.1 26.1 8.1 Mining 87.4 87.0 90.0 -3.0 Utilities 86.7 92.6 86.6 6.0 1 1. The historical highs shown are specific to each series occur in the same month. and did not Motor Vehicles Sales of new light vehicles, which had turned down in April after two quarters of annual rate of strong advances, eased further in May to an 14.6 million units. So far this of light vehicles have averaged about quarter, purchases 1/2 million units below the robust pace of the first quarter, with nearly all the decline occurring among vehicles produced by the Big Three. decline in sales reflects, The recent in part, the constraining effects of limited supplies of some popular models and a return to a more II-11 normal rate of fleet sales. However, some of the dropoff in sales may signal softening in the underlying strength of demand. Short supplies of some models, particularly of light trucks, have existed for several months and likely continued to impede sales of these vehicles in June. Producers have been unable to boost output to match strong demand, owing to capacity constraints at either the assembly line or at plants that produce parts. Further additions to capacity (primarily by adding shifts) are scheduled for the second half of this year, and supplies should increase a bit.4 However, overall production schedules for the third quarter are the same as in the second quarter. 5 Fleet sales, mainly those to rental car companies, returned to a more normal level in the second quarter, after surging in the first quarter. The first-quarter spurt in purchases by rental car companies reflected a catch-up for sales that had been delayed from the second half of 1993 because of supply shortages. According to Ford, the uptick in fleet sales in May may reflect some purchases that were moved forward from June.6 With regard to the underlying strength of demand for light motor vehicles, the highly favorable market fundamentals evident earlier this year have eroded somewhat. Prices have risen noticeably since the beginning of the year, and finance rates have 3. Auto sales by General Motors also have been limited somewhat by model-changeover problems at a key Canadian plant. Operations at the plant were scheduled to be back to normal in April, but still appear to be short of expected levels. 4. See the May Greenbook for a detailed discussion of capacity. Since then, we have learned that stepped-up production at a Chrysler light truck plant in Mexico, which was scheduled to begin during the current quarter, has not yet materialized. In addition, we have heard that an anticipated shortage of engines may limit production later this year, even after assembly capacity has been raised. 5. Four domestic auto plants are undergoing lengthy model changeovers this summer. These unusually lengthy downtimes will reduce the level of output in both the second and third quarters by about 2 percent (0.3 million units at an annual rate). 6. The information on fleet and retail sales from Ford and General Motors is confidential. II-12 SALES OF AUTOMOBILES AND LIGHT TRUCKS1 (Millions of units at an annual rate; BEA seasonals) 1993 1992 1993 12.8 8.4 4.4 13.9 8.7 5.2 13.6 10.5 11.7 6.7 5.5 Q3 1994 1994 North American 2 Autos Big Three Transplants Light trucks Q1 Mar. Apr. May 14.5 8,9 5.6 15.5 9.5 6.0 15.9 9.9 6.0 15.3 9.5 5.8 14.6 9.0 5.6 12.5 13.1 7.5 6.0 12.5 7.1 5.7 1.4 5.5 13.4 7.5 6.0 1.4 5.9 13.5 5.0 11.4 6.6 5.1 1.5 4.8 2.3 2.1 .2 Total Autos Light trucks Q4 2.2 2.0 .2 2.2 2.0 .2 2.0 1.9 .1 2.2 2.0 .2 .72 .63 .74 .65 .71 .61 .75 .65 .74 .64 6.3 5.1 1.2 4.2 Foreign produced Autos Light trucks Memo: domestic nameplate market share Total Autos 8.6 5.0 1.3 7.7 6.1 1.5 5.8 5.7 7.1 5.7 1.4 5.4 2.3 2.2 .1 2.1 2.0 .1 2.1 1.9 .2 .73 .63 .74 .64 .74 .64 1.5 Note: Data on sales of trucks and imported autos for the most recent month are preliminary and subject to revision. 1. Components may not add to totals because of rounding. 2. Excludes some vehicles produced in Canada that are classified as imports by the industry; prior to January 1994, some vehicles produced in Mexico were also excluded. GM AND FORD DOMESTIC AUTO SALES (Seasonally adjusted annual rate; FRB seasonals) Millions of Units Retail Fleet May ' '- 'a 1991 - -- -- 9,- U 1992 Note: Data are confidential. Retail includes consumer leasing. 1993 1994 II-13 also moved up. The Conference Board series on car buying plans fell sharply in June, and the series on buying conditions in the Michigan survey was up in June but remained earlier this year. a bit below the All told, we believe that the levels seen recent changes in these market indicators are consistent with a slight easing in the strength of demand Personal in the near term. Income and Consumption Available data seem to indicate that growth in personal consumption expenditures slowed this spring, first-quarter advance. under way is not yet after a strong Whether a sustained slowdown in spending is clear. A large part of the slowdown in recent spending reflects declines in outlays for motor vehicles, where, as noted, supply constraints apparently have limited sales. part of the slowdown, at least early in the second quarter, was in energy services and was related primarily to swings conditions. in weather Moreover, although the weakness in stock and bond markets this year may have put least Another some households, the a dent in the spending plans of at underlying pace of income growth has been well maintained, and consumer confidence is holding at a high Willingness level. to borrow also seems high, as evidenced by the rapid growth of consumer credit in recent months and by early responses to the June Michigan SRC survey. Total nominal personal income rose 0.4 percent in April, but nominal disposable personal income fell 0.2 percent. Wage and salary income, which continued to advance in April, likely posted another solid gain in May, given the large increases in production 7. The April decline in disposable personal income reflects Under the Act, provisions of the Omnibus Reconciliation Act of 1993: high income individuals have the option of paying retroactive taxes in BEA three annual installments, the first of which was due April 15. estimates that these tax payments reduced disposable personal income The effect of these taxes on about 0.6 percentage point in April. spending, however, is likely to be spread out over a considerable period of time. 11-14 CONSUMER SENTIMENT Index Michigan Index - - - - Conference Board index \ Jun. (p) Jun. '-I I ~I _ 1990 1991 1992 1993 1994 PERSONAL INCOME (Average monthly change at an annual rate; billions of dollars) 1993 1993 1994 1994 Q3 Q4 Q1 Mar. 3.4 22.3 35.8 27.5 31.7 25.1 Wages and salaries Private -8.3 -10.1 11.5 9.0 14.5 14.1 16.6 14.3 14.5 13.9 11.8 10.5 Other labor income 2.7 2.7 2.8 3.1 3.2 3.3 Proprietors' income Farm 3.9 1.6 .8 -1.1 15.9 10.9 .6 -1.4 5.7 1.1 2.9 .8 Rent Dividend 1.4 .3 2.0 .4 -. 7 .1 4.1 .8 4.6 1.6 -1.8 2.4 Interest .0 1.9 -. 5 2.1 2.4 2.5 Transfer payments 4.7 3.9 4.8 3.4 .8 5.0 Less: Personal contributions for social insurance 1.2 1.1 3.3 1.0 .9 Total personal income .7 Apr. Less: Personal tax and nontax payments -.1 3.0 4.4 5.0 3.5 35.2 Equals: Disposable personal income 3.5 19.4 31.4 22.5 28.2 -10.1 -4.2 11.7 17.3 10.1 11.1 -17.7 Hemo: Real disposable income worker hours and average hourly earnings labor market report. reported in last month's The year-to-year increase in real disposable personal income in the first half of 1994 appears to have been well above 3 percent. In contrast to the recent downturn in consumer expenditures on motor vehicles, outlays solid gain in the on other second quarter. reflects developments around the retail sales at outlets goods are likely to post another However, the end of the increase first quarter. Nominal stores other than auto dealers and building supply (the "retail control" group) rose only 0.3 percent in May, after a 0.7 percent decline in April and a 1.0 percent March. largely increase in Combining these data with information on consumer prices, the staff estimates that real outlays for goods other than motor vehicles were little changed in May, and that the average level of real spending on these items in April and May was about higher, at an annual Within the rate, than in the first 3 percent quarter. retail control group in May, nominal sales were brisk at furniture and appliance stores "other durable goods" category. and at establishments in the In contrast, sales at stores in the nondurable goods category have fallen 3/4 percent over the past two months. The decline brought spending for that category back closer to trend after outsized gains in February and March. According to preliminary data, real consumer spending on services fell 0.2 percent in April after in March. Spending on energy services registering little change returned to normal levels in March after a weather-related surge earlier in the winter and then 8. Final estimates for the first quarter of 1994 show a rise in real outlays for goods excluding motor vehicles of 3-3/4 percent at an annual rate, an upward revision of about 1/4 percentage point from the preliminary estimate. 9. Nominal sales at gasoline stations fell 1 percent last month, but separate physical product data from the Department of Energy indicate that gasoline sales were up in real terms. II-16 RETAIL SALES (Percent change from preceding period; seasonally adjusted) 1993 Q4 1994 Q1 Mar. 3.1 (1.4) 1.5 (1.7) 1.8 (-.8) 1.4 1.0 1.0 (.8) -. 7 (-.4) .3 1.4 1.0 .8 -. 8 .1 General merchandise 1.3 1.9 .3 .2 .2 Apparel 1.0 Total sales (Previous) Retail control 1 (Previous) Nondurables Food 2 3 -1.3 1994 Apr. May -1.1 -. 2 -1.8 .0 -. 3 1.5 -. 7 .2 .1 1.9 .5 1.3 4.8 Furniture and appliances .9 1.6 Durables in retail control .7 .0 1.5 .2 1.7 .1 2.3 .8 .8 -1.9 Other 1 Total excluding auto dealers and building material and supply stores. 2. Includes items not shown. 3. Food stores and eating and drinking establishments. REAL PCE GOODS EXCL. MOTOR VEHICLES Billions of 1987 dollars 1500 * Quarterly averages 1450 May 1400 - 1350 1300 1250 1989 1990 1991 Note: March, April, and May figures are staff estimaes. 1992 1993 1994 II-17 fell further during mild weather in April. With temperatures close to normal in May but unseasonably hot in June, outlays for energy services likely increased in each of those months. The currently available data indicate that outlays for non-energy services rose less than 0.1 percent in April. However, today's release on GDP includes a sharp upward revision in first-quarter outlays on nonenergy services to an annual rate of 4.4 percent, and an updated assessment of the recent trend in these outlays awaits tomorrow's release on personal income. Housing Markets Housing activity has rebounded since the winter disruptions, but, apparently in response to higher interest rates, it has remained below the late 1993 pace. In the single-family sector, starts edged down in May after declining substantially in April. Interest rates on fixed-rate mortgages in May averaged nearly 2 percentage points above the low reached last October. As a result, cash-flow affordability of new homes has deteriorated, although it remains better than it was during most of the past twenty years. Similarly, starts, even at their reduced May level, exceeded the annual average of every year since 1978. Home sales, though down from their levels of late last year, also remain quite high by historical standards. Sales of new homes in April and May averaged about 6 percent below the fourth-quarter level. Existing home sales have fallen by less, but because most of these transactions are recorded at the "closing" and reflect loan commitments made earlier, this series is slower to respond to changes in mortgage interest rates. Prices of new and existing homes sold in April and May averaged 2 to 3 percent above their levels of a year earlier, roughly in line with the increases posted II-18 PRIVATE HOUSING ACTIVITY (Millions of units; seasonally adjusted annual rate) 1993 1993 All units Starts Permits 1994 Q4r Q3r Annualr 1994 1994 Mar. Apr r Mayp 1.29 1.21 1.31 1.22 1.48 1.38 1.37 1.29 1.52 1.31 1.47 1.38 1.51 1.36 Single-family units Starts 1.13 1.14 1.29 1.17 1.27 1.21 1.20 Permits 1.01 1.00 1.13 1.06 1.07 1.07 1.09 Sales New homes Existing homes .67 3.80 .68 3.90 .77 4.17 .69 4.05 .73 4.07 .71 4.12 .74 4.09 .16 .21 .17 .22 .19 .25 .20 .23 .25 .25 .26 .31 .31 .27 Multifamily units Starts Permits p Preliminary. r Revised estimates. n.a. Not available. PRIVATE HOUSING STARTS (Seasonally adjusted annual rate) Millions of units 1978 1980 1982 1984 1986 1988 1990 1992 1994 6/28/94 II-19 CASH FLOW BURDEN OF HOMEOWNERSHIP (Percent*) -i 70 Fixed-rate mortgages A Projected for Q2 -1 40 Adjustable rate mortgages I I I I I I ! 1 I I I I I I I I I I 1973 1976 1979 1982 1985 1988 Financing cost of a constant-quality new home as a percentage of average household income. 1 QI 1 1991 I I I 1994 NEW AND EXISTING HOME SALES (Millions of units; seasonally adjusted annual rate) Existing home sales (right scale) 1976 1979 1982 1985 1988 1994 II-20 6/24/94 INDICATORS OF HOUSING DEMAND (Seasonally adjusted annual rate) CONSUMER HOMEBUYING ATTITUDES* Millions of units Diffusion index 100 Consumer homebuying attitudes (right scale) 75 ,Jun. (p> .0 VC . May 50 Singfamiy starts (left scale) Single-family starts (left scale) I I I 1987 I 1988 I I I 1990 1989 1991 I I 0 1993 1992 25 1994 'The hometuying attitudes index is calculated by the Survey Research Center (University of Michigan} as the proportion of respondents rating current conditions as good minus the proportion rating such conditions as bad. BUILDERS' RATING OF NEW HOME SALES* Millions of units Diffusion index Builders' 1.3 1- 0.8 Single-family starts (left scale) 1988 1987 1989 1993 1992 1991 1990 1994 SThe index is calculated from National Association at Homebuilders data as the proportion of respondents rating current sales as good to excellent minus the proportion rating them as poor. MBA INDEX OF MORTGAGE LOAN APPLICATIONS Millions of units March 16, 1990 = 100 2 Purchase index (right scale) A - Jun. 17 0.8 Single-family starts (left scale) I I 1990 I I _I 1991 1992 1993 1994 II-21 6/28/94 HOUSING INDICATORS MULTIFAMILY RENTAL VACANCY RATE I I I I I I I JL I I 1 1974 1969 Percent -12 11 t1 1979 I I 1 1 1984 I I I I 1989 REAL RENT* I i IJ 1994 Twelve-month percent change /I 1969 1979 1974 1984 J-l 1994 1989 ' CP rent / CPI excluding shelter. TOTAL HOUSING STARTS, BY REGION Thousands of units (SAAR) -- 1200 I' South S\ SI %/ 4. \ ;- I "I I I~~t 1 , 1969 W 1 1974 Note: 1994:Q2 estimated from April/May data. U-I."I I l I a I I l a W W I I W W 1979 , , \ , est W ,'0 ' 1^/ U l West \, I / * I S I - , ^ ',,/ I I\ I a a W W I I l 1984 B W 1 W Northeast In 1994 II-22 in the first quarter by "constant quality" price indexes for these two markets The most recent data on single-family housing activity come from consumer and industry surveys fielded early surveys also indicate in June. some softening in the market. These Consumers homebuying attitudes have been progressively less favorable in each of the past four months. Similarly, homebuilders' assessments their current sales have been declining for some time. of Applications for home purchase loans have been a bit more erratic, but this indicator too has been lower, on average, in recent weeks. In the multifamily sector, the May highest level in 3-1/2 years, reports national increase in starts, to their is supported by recent anecdotal of market tightening in some localities. indicators of market conditions Nevertheless, the remain fairly negative. The vacancy rate for multifamily rental housing has stayed in the historically high range that has prevailed for the past several years. have With vacancy rates still high, rent increases in the CPI remained relatively low. construction has Most of the gain in multifamily occurred in the come down significantly. South, where vacancy One stimulative rates have influence for multifamily housing has been financing, which, by all accounts, has become more available in the past year. Investors once again have an appetite for multifamily projects, and depository institutions appear more willing to extend construction credit than at any other time since the mid-1980s. Business Fixed Investment The available monthly indicators point to a further rise in equipment spending in the second quarter, although the gain probably will be somewhat less strong than the very rapid seen during the past year or so. rate of increase Spending for nonresidential II-23 BUSINESS CAPITAL SPENDING INDICATORS (Percent change from preceding comparable period; based on seasonally adjusted data, in current dollars) 1993 1994 1994 Q3 Q4 Q1 Mar. Apr. May .6 3.4 9.4 1.7 7.1 8.0 5.2 8.8 1.0 1.2 3.3 .5 1.8 -.6 3.5 -1.8 -1.5 1.3 -2.1 2.4 1.2 2.2 1.2 2.5 -39.5 34.1 10.0 110.8 -57.6 n.a. Sales of heavy trucks -1.1 8.5 -.1 .1 2.8 1.5 Orders of nondefense capital goods Excluding aircraft and parts Office and computing All other categories -1.2 3.6 4.9 3.2 10.4 10.9 12.9 10.4 6.2 1.7 .8 1.9 -.7 3.3 10.7 1.2 -.8 -.3 .0 -.5 -.8 -2.5 .5 -3.4 Construction put-in-place Office Other commercial Institutional Industrial Public utilities Lodging and misc. 1.2 -1.8 -.8 2.9 4.1 1.6 6.7 4.6 3.5 13.2 -2.2 6.4 3.1 -.8 -4.1 -1.7 -3.6 -6.6 -4.3 -4.7 .4 4.6 17.4 8.9 3.1 -.3 1.8 1.7 2.7 -5.5 1.4 5.0 7.0 3.1 5.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Rotary drilling rigs in use 14.2 -3.7 .8 .5 1.9 -1.6 7.4 10.0 .3 22.5 26.0 12.2 6.1 16.1 -20.1 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Producers' durable equipment Shipments of nondefense capital goods Excluding aircraft and parts Office and computing All other categories Shipments of complete aircraft1 Nonresidential structures Memo: Business fixed investment 2 Producers' durable equipment 2 Nonresidential structures 2 1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines." Monthly data are seasonally adjusted using FRB seasonal factors constrained to BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using BEA seasonal factors. 2. Based on constant-dollar data; percent change, annual rate. n.a. Not available. II-24 ORDERS AND SHIPMENTS OF NONDEFENSE CAPITAL GOODS OFFICE AND COMPUTING EQUIPMENT Billions of dollars Billions of dollars --- Unfilled orders May 1991 1992 1993 1994 1991 1992 1993 - 1994 OTHER EQUIPMENT (EXCLUDING AIRCRAFT AND COMPUTING EQUIPMENT) Billions of dollars Billions of dollars Unfilled orders - . 1991 1992 1993 1994' 1991 May 1992 1993 1994 . 9 II-25 structures appears to be headed for a substantial quarter, rebound this after a weather-related slump earlier in the year. Shipments of nondefense capital goods excluding aircraft---an indicator of near-term equipment spending---posted a solid gain in May. The average level of these shipments during the first two months of the current quarter was 3-3/4 percent above the first-quarter average. Nominal shipments of computing equipment increased in May, partially retracing their April decline. The growth trend for these shipments appears to have moderated in recent months from about 2 percent, on average, per month in 1993, to a bit more than 1/2 percent per month so far this year. rate In addition, the of decline in the producer price index for computing equipment--a series that is designed to as well as changes capture quality improvements in nominal prices--has slowed. After dropping sharply last year, this index showed a comparatively small decline over the first seem to five months of Trade 1994.10 reports, by contrast, suggest that rapid decreases in performance-adjusted prices are ongoing. Excluding computing equipment nondefense capital goods have months, and the average level and aircraft, shipments of continued to trend up in recent of shipments in April and May was 4-1/4 percent above the first-quarter average. orders for these goods dropped about Looking ahead, 3-1/2 percent in May, reflecting fairly widespread declines. year, orders have cooled off noticeably: After bounding up late last The first-quarter gain was 10. This producer price index is the main source used by BEA in constructing the deflator for business purchases of computing The deflator for business purchases of computers fell equipment. 13-1/2 percent last year, but only 4 percent (annual rate) in the The level of the PPI for computers in May was less first quarter. than 1 percent (not at an annual rate) below the first-quarter average, suggesting that the deflator for business purchases of computing equipment will show another relatively modest decline in the current quarter. II-26 Nonresidential Permits <1> - - Six-month moving average Monthly TOTAL Millions of dollars, monthly rate OFFICE OTHER COMMERCIAL INDUSTRIAL INSTITUTIONAL 700 600 N I I Si 1984 1. Data are seasonally adjusted using FRB seasonal factors. Total includes alterations and additions. 1986 200 t 1988 1990 1992 1994 II-27 about 2 percent, and the level of these orders only 1/2 percent above the first-quarter backlogs have in average. April and May was Nonetheless. risen impressively since the middle of last year, suggesting further gains in shipments for at least the next few months. Spending for motor vehicles by businesses jumped in the first quarter to a record level, bolstered by the increased popularity of leasing and a surge in fleet sales. This quarter, however, business purchases of vehicles may be headed for a decline. Overall sales of light vehicles so far this quarter are lower than the first-quarter average, and the business share of auto purchases likely will recede from its unusually high reading earlier this year. Partially offsetting the decline, sales of heavy trucks during the first two months of the current quarter were up about 3 percent from the first-quarter average. Industry contacts report that demand for heavy trucks remains strong and that assemblies are at or near capacity. Business purchases of aircraft dropped further in the first quarter, and available monthly data suggest continued weakness in the current quarter. The problems that have been besetting domestic carriers do not appear to have abated to any significant degree, suggesting that domestic demand for new aircraft will remain languid for some time. Turning to nonresidential structures, data on construction putin-place rebounded in March and April after dipping sharply during the first two months of the year. Construction in April stood at a level slightly above the fourth-quarter average. Looking ahead, permits for these structures, which tend to lead construction by a 11. In the National Income and Product Accounts, vehicles purchased by businesses and leased to consumers are included in outlays for producers' durable equipment. II-28 INDICATORS OF PRICES OF NONRESIDENTIAL STRUCTURES OFFICE STRUCTURES F-- NCREIF ---- Four-quarter percent change NRE 1 1 * I 1 1991 . . I , 1992 . RETAIL STRUCTURES ---- I Four-quarter percent change , --- --- I I --- 1 ----- -,l 1991 1 -- I -- I -- I -- I -- 1992 Four-quarter percent change -NCREIF NREI I SI 1991 - 1993 WAREHOUSE STRUCTURES ---- I NCREIF NRE -- I,,---I . 1993 ' ' ' 1992 Note: Historical data for te NREI were recntly revised; only semiannmal observations are available for most yers. I ' ' 1993 II-29 few months, softened in the first quarter but have turned back more recently.. Recent data on prices for nonresidential structures indicate that the excess supply that had plagued this sector in previous years is slowly being worked off. (NREI), The National Real Estate Index which measures transactions prices, shows increases over the past year for retail structures and essentially no change over the year in the prices of offices and warehouses.. The Russell-NCREIF index (NCREIF), which is based on appraised values that tend to lag transactions prices, still shows declines but of a smaller magnitude than before, especially for retail structures. Roughly consistent with the pattern of property prices, the strongest component of construction activity during the past couple of years has been "other commercial" structures, which includes retail centers and warehouses. has been concentrated in the Within this category, the strength retail sector and includes both the construction of new stores and the modernization of existing space. Real estate investment trusts, which have grown substantially in recent years, have been important in providing the financing for mall construction. Manufacturing and Trade Inventories The pace of business inventory accumulation picked up slightly in early spring, with buildups largely concentrated in segments of the economy where market demand was robust. For all manufacturing and trade, inventories rose in April at an annual rate of $19.7 billion (current-cost), average. $2-1/2 billion above the first-quarter The pace remains quite moderate, however, and the inventory-sales ratio for manufacturing and trade was among the lowest in recent years. II-30 CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data) 1993 Q3 1994 Q4 Q1 1994 Feb. Mar. Apr. Current-cost basis Total Excluding auto dealers Manufacturing Total machinery Fabricated metal Wholesale Motor vehicles Excluding motor vehicles Retail Excluding auto dealers 16.1 23.5 -2.5 3.8 1.0 12.0 1.8 10.2 6.6 14.0 18.8 5.5 -13.1 4.5 -.8 6.1 1.6 4.5 25.8 12.5 17.2 14.6 9.4 10.8 -.9 1.8 -5.2 7.1 5.9 3.4 48.5 46.2 13.9 9.1 1.2 17.2 -3.1 20.3 17.4 15.1 -14.8 -14.9 -3.6 9.4 -3.5 -12.5 -10.0 -2.5 1.2 1.2 19.7 20.7 7.4 10.3 1.1 10.4 5.8 4.6 1.9 3.0 16.4 23.5 3.1 8.5 1.5 7.0 4.8 11.8 5.4 3.0 -5.3 -.4 1.3 -1.7 11.1 8.6 12.4 2.0 6.0 -4.1 -5.7 1.6 10.5 .1 35.8 25.6 7.0 9.6 -3.0 12.5 19.3 9.1 -4.9 -21.9 -6.8 -16.6 -11.6 -5.1 18.6 1.6 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Constant-dollar basis Total Excluding auto dealers Manufacturing Wholesale Motor vehicles Excluding motor vehicles Retail Excluding auto dealers INVENTORIES RELATIVE TO SALES 1 (Months' supply; based on seasonally adjusted data) 1993 Q3 1994 Q4 Q1 1994 Feb. Mar. Apr. Current-cost basis Total Excluding auto dealers Manufacturing Total machinery Fabricated metal Wholesale Motor vehicles Excluding motor vehicles Retail Excluding auto dealers 1.46 1.44 1.49 1.81 1.65 1.34 1.63 1.31 1.52 1.48 1.43 1.41 1.42 1.74 1.58 1.34 1.68 1.30 1.51 1.47 1.41 1.39 1.40 1.75 1.53 1.31 1.47 1.29 1.50 1.47 1.41 1.39 1.40 1.71 1.56 1.32 1.51 1.30 1.50 1.47 1.39 1.37 1.38 1.72 1.52 1.29 1.45 1.28 1.47 1.45 1.40 1.38 1.39 1.72 1.53 1.31 1.46 1.30 1.49 1.46 1.55 1.54 1.60 1.42 1.60 1.40 1.60 1.55 1.52 1.50 1.53 1.42 1.65 1.40 1.57 1.54 1.49 1.48 1.51 1.39 1.44 1.38 1.57 1.53 1.49 1.48 1.51 1.40 1.50 1.39 1.56 1.53 1.48 1.46 1.49 1.37 1.43 1.37 1.54 1.51 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Constant-dollar basis Total Excluding auto dealers Manufacturing Wholesale Motor vehicles Excluding motor vehicles Retail Excluding auto dealers 1. Ratio of end-of-period inventories to average monthly sales for the period. II-31 RATIO OF INVENTORIES TO SALES (Current-cost data) Ratio 2.2 MANUFACTURING 1.95 - 1.7 -DrTotal Excluding aircraft " Apr " " 1.45 1.2. 1979 1981 1983 1985 1987 1989 1991 1993 Ratio 1.5 5 WHOLESALE - 1.4 Apr. 1.3 1.2 11 1979 1981 1983 1985 1987 1989 1991 1993 Ratio 2.7 RETAIL Ratio 1.7 f 2.5 r* _ ,1 GAF group - 1.6 ' 2.3 Total excluding auto 2.1 1983 1985 1987 1989 1.5 1.4 •dud 1979 - 1993 II-32 In manufacturing, producers of industrial machinery and electrical and electronic equipment expanded their stocks further in April; in particular, inventories at computer and office equipment makers posted a substantial $2.3 billion increase, extending a long string of monthly buildups over the past year. In addition, stocks of metal fabricating companies, which produce many housing-related items and some consumer durables, also showed a sizable accumulation By and large, these are industries that have received strong orders in recent months. Elsewhere in manufacturing, inventories have shown little net change so far this year. The inventory-sales ratio in manufacturing still appears to be on a downward trend. In the trade sector, inventory changes have been moderate lately. Although stocks held by wholesale distributors of motor vehicles rose at a $5.8 billion annual rate in April, the increase retraced only part of the declines in the first quarter, when strong motor vehicle sales drew down stocks. For most other wholesale categories, inventory changes generally were small. In retail trade, inventories rose markedly at outlets selling furniture, appliances, and home furnishings, after a large drawdown in March. In contrast, stocks at general merchandise and apparel stores were little changed in April. Indeed, non-auto retail inventories as a whole posted only small net increases in March and April. The conservative stockbuilding has left most types of retail establishments unencumbered with excess inventories; at the end of April, inventory-sales ratios for most retail categories were well within the ranges observed over the past year. Federal Sector The incoming news on the federal budget for fiscal 1994 has been favorable. The unified deficit for the fiscal year through May II-33 was only $165 billion, $46 billion less than for the same period in fiscal 1993; the improvement reflected both strength in receipts and restraint on outlays. indicated that the Moreover, officials from OMB and CBO have estimates of the fiscal 1994 deficit that will be reported later this summer will be considerably smaller than those from last winter. Receipts have risen about 10 percent so far this fiscal year. with sizable increases in all major categories. have been especially robust, Corporate taxes rising more than 20 percent between the first eight months of fiscal 1993 and the first eight months of fiscal 1994. Moreover, Daily Treasury Statements for June suggest that corporate estimated tax payments were strong relative both to June 1993 and, after allowing for normal seasonal first quarterly payment that was patterns, to the due on April 15. personal and social insurance taxes were about during the comparable period of fiscal Meanwhile, both 8 percent higher than 1993. We have received little information since the May Greenbook that would allow us to refine our estimate of the effect of OBRA-93 on individual income tax liabilities for 1993. Taken together, the data from the Monthly Treasury Statements for April and May are identical to the daily data we reported last month. 12 Daily data for June suggest that payments of estimated personal taxes were appreciably higher than in June 1993, despite the relaxation of safe harbor provisions; the increase likely reflected a combination of solid growth in taxable incomes and the higher tax rates this year. Excluding deposit insurance, federal outlays during April and May were essentially the same as a year earlier; for the 1994 fiscal 12. In preparing its estimate of disposable personal income for April. BEA assumed that payments of the first installment of the increased 1993 tax liabilities added only about $30 billion (SAAR) to However, that estimate is based on personal tax payments that month. little hard information, and BEA has indicated that it may be revised as additional data become available. II-34 FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS (Unified basis, billions of dollars except as noted) Fiscal year to date April thru May FY1993 FY1994 FY1993 FY1994 Dollar change Percent change Outlays Deposit insurance (DI) 231.5 -4.9 239.5 1.7 941.5 -18.5 966.3 -5.1 24.8 13.4 Outlays excluding DI National defense Net interest Social security Medicare and health Income security Other 236.5 47.7 34.0 50.7 38.2 36.3 29.7 237.8 44.0 34.8 53.2 40.2 36.8 29.0 960.0 193.7 133.3 199.2 148.7 145.2 139.9 971.4 183.6 133.9 209.1 163.6 149.8 131.3 11.4 -10.1 .5 9.9 14.9 4.7 -8.6 1.2 -5.2 .4 5.0 Receipts Personal income taxes Social insurance taxes Corporate income taxes Other 202.7 73.8 91.5 20.2 17.2 224.9 84.4 96.9 23.4 20.2 729.8 320.7 283.2 63.4 62.5 801.0 346.1 306.3 77.1 71.6 71.2 25.5 23.1 13.7 9.1 9.8 7.9 8.1 21.6 14.6 28.9 33.8 14.6 12.9 211.7 230.2 165.3 170.4 -46.4 -59.8 -21.9 -26.0 127.6 60.9 36.9 137.8 67.9 38.9 534.1 113.9 69.2 573.4 122.4 70.3 39.3 8.5 1.1 Deficit(+) Excluding DI Note: Withheld + FICA Nonwitbheld + SECA Individual refunds Details may not add to totals because of rounding. 2.6 -72.6 10.0 3.2 -6.1 7.4 7.5 1.6 II-35 year to date, they are up only about Medicare 1 percent. Spending on and other health programs, which had shown accelerating earlier this fiscal year, has signs of slowed significantly over the past several months; on balance, these outlays seem to be trending up about plunging in the 10 percent per year. first quarter, Defense outlays, after dropped further in April and May. In the aggregate, spending on other programs has shown a small increase in fiscal 1994. 13 Various congressional committees continue to debate health reform, with details of the proposals Labor and Human Resources Committee changing daily. The Senate and the House Education and Labor Committee have reported out bills similar to that of the Clinton Administration. The House Ways and Means Committee is marking up a bill that contains employer mandates and small business subsidies; the committee is of this week. that The expected to vote on the bill by the end Senate Finance Committee is focusing on plans emphasize insurance reforms and subsidies for low-income groups: however, consensus remains elusive, with the employer mandate the main sticking point. State and Local Government Sector Indicators of state and local spending in the second quarter are mixed. Employment of state and local government workers edged up in May after a sizable rise the month before; most of the increase during the second quarter has been at local governments. Employment has been trending up at a fairly steady rate of about 1-1/2 percent per year for the past two years. State and local 13. The revised NIPA data released today continue to show that real nondefense purchases rose at an annual rate of about 18-1/2 percent in the first quarter. The surge in outlays, which more than retraced the decline in the fourth quarter, reflected increases in many programs, including the IRS. NASA, NIH, and FEMA. Large quarterly changes in nondefense purchases are not unprecedented, but the OBRA caps on discretionary spending should limit further increases in these outlays in the quarters ahead. II-36 STATE AND LOCAL SECTOR EMPLOYMENT 12-month percent change 1986 1987 1988 1989 1990 CONSTRUCTION (Commerce Put-In-Place Survey) 1990 *Last bar represents April 1994 data. 1991 1992 1991 1992 1993 1994 Billions of 1987 dollars, annual rate 1993 1994* II-37 construction spending fell level sharply in real terms in April, to a 2.4 percent below the first-quarter down appreciably from the level of late this year has been in outlays highways: average, which already was 1993. Much of the weakness for educational facilities and for both of these categories, which together account for nearly 60 percent of state and local building, construction had trended up through 1993 but has since moved back substantially. Despite continuing large budget deficits for the state and local sector as a whole, news about the fiscal situation of the states' general fund budgets, which represent 25 percent of the sector's spending, has been quite good of late. states were forced to make midyear adjustments to meet balanced budget requirements during fiscal in all but four states. This with that of recent years: in fiscal 1993, 1992. Indeed, just ten their 1994, which ends June 30 performance compares quite favorably Twenty-three states made midyear changes and thirty-five states made adjustments in fiscal Tax receipts, which have been coming in at or above target in most states, have been boosted by growth in tax bases owing to the economic expansion. State revenue in exclude legislated actions, first three quarters real terms, adjusted to rose 3.5 percent, on average, during the of fiscal 1994, compared with a 1.6 percent increase during fiscal 1993 and a small decline during the prior fiscal year. Prices The major price indexes suggest that the pace of inflation has remained relatively subdued in recent months. At the same time, however, the warning signs of inflation would seem to be flashing a bit more strongly, given the apparent exhaustion of labor market slack, the persistent increases in the prices of a broad range of industrial commodities, recent increases in crude oil prices, and II-38 RECENT CHANGES IN CONSUMER PRICES (Percent change; based on seasonally adjusted data)l Relative importance, Dec. 1993 1993 1992 1993 Q3 Q4 1994 -Q1 ----- Annual rate-----All items 2 Food Energy All items less food and energy Commodities Services 1994 Apr. May -Monthly rate- 100.0 15.8 7.0 2.7 2.9 -1.4 2.0 2.6 -4.2 3.3 4.9 1.2 2.5 -1.1 4.7 .1 .1 -.4 .2 .3 -1.0 77.2 24.4 52.8 3.3 2.5 3.7 3.2 1.6 3.9 2.1 .0 3.5 3.4 2.4 3.7 2.9 .6 4.2 .2 .1 .2 .3 .4 .2 100.0 Memo: CPI-W 3 2.9 1.5 2.0 2.9 2.5 1.4 3.1 2.5 .1 .1 1. Changes are from final month of preceding period to final month of period indicated. 2. Official index for all urban consumers. 3. Index for urban wage earners and clerical workers. RECENT CHANGES IN PRODUCER PRICES 1 (Percent change; based on seasonally adjusted data) Relative importance, 1992 Dec. 1993 1993 Q4 Q3 1994 1994 1993 Q1 ----- Annual rate------ Apr. May -Monthly rate- 100.0 22.9 13.3 63.7 40.3 23.4 1.6 1.6 -.3 2.0 2.1 1.7 .2 2.4 -4.1 .4 -. 4 1.8 -2.5 3.2 -7.4 -3.5 -6.4 2.2 -.3 5.2 -15.6 .9 1.5 .3 3.9 -. 9 16.6 3.3 2.3 4.6 -.1 -.5 -.1 .1 -. 1 .4 -.1 -.9 -1.0 .4 .4 .4 Intermediate materials 2 Excluding food and energy 95.2 82.3 1.1 1.2 .8 1.6 -1.0 1.0 -,3 1.6 2.8 1.6 .0 .2 .2 .3 Crude food materials Crude energy Other crude materials 44.1 34.4 21.5 3.0 2.3 5.7 7.2 -12.3 10.7 13.1 -28.1 -4.5 18.4 -22.1 15.4 -4.8 18.9 23.4 -1.1 -. 1 -.3 Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment -3.4 1.0 -1.1 1. Changes are from final month of preceding period to final month of period indicated. 2. Excludes materials for food manufacturing and animal feeds. the potentially less favorable recent depreciation in the outlook for import prices foreign exchange value of the in view of U.S. dollar. Consumer prices rose excluding food and 0.2 percent in May, and the energy was up in the preceding three months. 0.3 percent The index after similar increases increases since February in the index excluding food and energy have been large enough to forestall further deceleration in the twelve-month rate of change. durable goods, prices of new cars rose 0.3 light truck prices were up 0.8 percent. apparel prices increased 0.5 percent decline in April. in May; Among percent last month, and Among nondurable goods, in May after an equivalent In addition, tobacco prices were up 1.3 percent more than half of that increase reflected the one-time effect of higher taxes on tobacco products in Michigan. The prices of non-energy services rose equivalent rent and month. 0.2 percent in May. Owners' residential rent both posted small increases for a second The volatile airfares category dropped more than 5 percent, but auto finance costs surged nearly 4 percent, a second month of large increases. The CPI for food moved up 0.3 percent in May, the first monthly rise of any consequence since December. resulted from a 2.4 percent jump in fruit Most of the May increase and vegetable prices, which had fallen sharply, on net, over the first four months of the Prices of other food items only edged up in May, and have year. increased at a 2.2 percent annual rate since December. Consumer energy prices dropped 1 percent in May, as motor fuel, heating oil, and natural gas all months, crude posted sizable declines. energy prices have fallen nearly Over the past twelve 1-1/2 percent. However, oil prices have moved up sharply since April, pointing to more sizable increases in coming months. II-40 RECENT CHANGES IN FINISHED-GOODS PRICES CONSUMER PRICE INDEX LESS FOOD AND ENERGY Twelve-month change Thre-month change - - Percent change I ; I'I LA (\N '1 i '' i) U I II I1 I 1985 1986 1987 I I' # ~ j I I i SI "I1 1988 9 1990 1991 1992 1993 1994 PRODUCER PRICE INDEX LESS FOOD AND ENERGY - - Twelve-month change Three-month change Percent change II-41 INFLATION RATES EXCLUDING FOOD AND ENERGY Percent change from twelve months earlier May 1992 May 1993 May 1994 3.8 3.4 2.8 3.0 2.3 1.3 3.3 2.6 2.8 1.0 0.4 7.0 2.4 9.9 1.4 2.5 1.2 0.1 1.4 3.5 1.4 8.5 1.3 3.6 0.2 1.9 0.5 3.0 2.4 -7.3 4.2 4.0 3.5 3.5 2.5 6.0 2.9 7.9 3.5 -11.8 9.4 3.3 2.5 4.1 13.4 6.9 2.8 -9.7 8.4 3.2 2.3 3.5 3.3 5.0 4.1 2.9 6.8 PPI finished goods 2.8 1.8 0.4 Consumer goods 3.5 1.8 -0.7 Capital goods, excluding computers Computers 2.9 -19.4 2.5 -15.2 2.7 -7.5 PPI intermediate materials 0.4 1.6 1.5 -1.3 9.6 6.6 ECI hourly compensation1 Goods-producing Service-producing 4.2 4.6 4.0 3.5 4.0 3.2 3.3 3.2 3.4 Civilian unemployment rate 2 ,3 7.5 6.9 6.0 78.9 80.2 82.8 Mean of responses 4.2 4.8 3.9 Median, bias-adjusted 4.1 4.6 3.6 0.1 0.1 2.0 1.8 1.1 1.3 0.5 1.1 4.1 CPI Goods Alcoholic beverages New vehicles Apparel House furnishings Housekeeping supplies Medical commodities Entertainment Tobacco Services Owners' equivalent rent Tenants' rent Other renters' costs Airline fares Medical care Entertainment Auto financing Tuition PPI crude materials Factors affecting price inflation 3 Capacity utilization (manufacturing) Inflation expectations4 ,5 7 Non-oil import price Consumer goods, excluding autos, food, and beverages Autos 1. Private industry workers, periods ended in March. 2. End-of-period value. 3. Data for 1994 are not directly comparable with earlier values because of a redesign of the CPS in January 1994. 4. Michigan Survey one-year-ahead expectations. 5. Latest reported value; June. 6. Median adjusted for average downward bias of 0.9 percentage points, relative to actual inflation, since 1978. 7. BLS import price index (not seasonally adjusted), in March. periods ended II-42 COMMODITY PRICE INDEXES1 Percent change 2 -----------. -------------Last observation 1. PI for crude materials 4 la. lb. 1c. 1d. 2. 1992 Dec 93 May 103 to 3 to May 10 date 1993 May Foods and feeds Energy Excluding food and energy Excluding food and energy, seasonally adjusted 3.3 0.1 May May May 3.0 2.3 5.7 7.2 May 2.3 10.7 6.1 10.6 n.a. -1.9 5.3 5.6 3.9 -12.3 Kenmo Year earlier to date -2.0 n.a. na. Commodity Research Bureau 2a. Futures prices 2b. Industrial spot prices Jun 28 Jun 28 -2.9 -0.7 11.6 -0.0 -0.2 7.8 2.4 2.1 3. Journal of Commerce industrials 3a. Metals Jun 28 Jun 28 5.0 1.9 -4.0 -2.6 6.7 3.8 1.7 0.5 4. Dow-Jones Spot Jun 28 10.4 5.1 6.3 3.9 5. IMFcommodity index 4 5a. Metals 5b. Nonfood agricultural May May Kay May -2.6 -3.1 4.5 9.9 7.9 n.a. 6. Economist (U.S. dollar index) 6a. Industrials Jun 21 Jun 21 8.7 9.9 7.7 7.4 2.4 -14.4 0.2 2.4 1.6 4.5 9.1 4.4 n.a. n.a. 1. Not seasonally adjusted. 2. Change is measured to end of period, from last observation of previous period. 3. Week of the May Greenbook. IMN index includes items not shown separately. 4. Monthly observations. n.a. Not available. INDEX WEIGHTS Energy Food Commodities Precious Metals Others' O 0 C U PPI for crude materials 41 41 1 18 CRB futures 14 57 14 14 CRB industrials 100 Journal of Commerce index 12 88 Dow-Jones 58 17 25 IMF index 45 Economist 50 1. Forest products, industrial metals, and other industrial materials. 50 -3.0 -9.3 6.6 6.7 12.3 14.6 6.5 5.2 17.2 11.7 6.8 9.3 32.2 29.1 II-43 COMMODITY PRICE MEASURES * JOURNAL OF COMMERCE INDEX - Total Metals - Ratio scale, index (1980=100) 1994 *CRB SPOT INDUSTRIALS CRB Industrials 298 S288 i 1983 276 1984 CRB FUTURES Ratio scale, index (1967=100) 320 -310 CRB Futures - 240 290 - 235 - 227 270 250 Jun 28 S230 " May Jun 1994 219 S210 . . 1983 i ,* , 1984 . 1 , s I, s i I . I 1985 1986 1987 1988 . I 1989 . , II ,I . n* 1990 1991 1992 * Weeky data, Tuesdays; Journal of Commerce data monthly before 1985 i , i ,, 1993 1994 ' 190 Dashed lins indicate week f last Greenbook. II-44 SPOT PRICES OF SELECTED COMMODITIES -------------- Percent change1-----------Memo: Current price ($) 1992 1993 To May 102 May 102 to Jun 28 -----------------INDUSTRIAL COMMODITIES---------------Metals: Copper (lb.) Steel scrap (ton) Aluminum, London (lb.) Lead (lb.) Zinc (lb.) Tin (lb.) 1.110 111.500 .648 .355 .485 3.616 4.1 1.1 9.9 -4.3 -10.3 6.5 -19.0 46.8 -10.7 3.0 -7.5 -14.1 18.1 Textiles and fibers Cotton (lb.) Burlap (yd.) .732 .275 -3.2 -9.6 Miscellaneous materials: Hides (lb.) Rubber (lb.) .885 .583 11.4 12.3 ---------------Precious metals: Gold (oz.) Silver (oz.) Platinum (oz.) Year earlier to Date ------24.0 18.3 .0 -1.5 12.4 9.9 -13.2 9.5 2.9 5.4 -1.6 19.6 8.2 25.6 -6.1 3.8 .0 38.0 12.2 1.3 -7.3 10.8 15.1 -7.9 .0 18.6 6.0 8.3 5.9 18.0 33.0 1.1 13.1 -OTHER COMMODITIES------------------I------- 386.550 5.305 398.750 -5.9 -5.7 5.5 16.6 38.8 8.0 -1.9 6.0 2.1 338.000 322.000 47.5 53.5 75.8 -6.3 -20.3 -. 9 Petroleum: Crude oil (barrel) Gasoline (gal.) Fuel oil (gal.) 17.000 .534 1.4 -2.9 21.9 -25.0 -31.0 -22.4 Livestock: Steers (cwt.) Hogs (cwt.) Broilers (lb.) 60.500 43.500 .509 10.6 10.4 -5.3 2.515 3.365 6.720 -16.1 -11.7 1.1 1.693 17.9 89.554 4.180 Forest products: Lumber (m. bdft.) Plywood (m. sqft.) .502 U.S. farm crops: Corn (bu.) Wheat (bu.) Soybeans (bu.) Other foodstuffs: Coffee (lb.) Yield on Treasury bill, 3-month 3 -8.6 3. .0 -. 20.7 34.5 10.2 4.3 7.1 4.2 -1.7 -2.0 -4.1 -7.3 .6 6.1 -4.8 6.7 20.2 -12.3 .0 -17.9 41.7 5.8 24.5 -13.4 -8.7 -5.1 1.2 -5.8 2.1 19.5 60.5 63.5 235.1 10.1 -2.0 -4.1 -4.0 -68 118 -6 115 Memo a Exchange value of the dollar (March 1973=100) 3.0 19.1 3.7 -2.3 I -20.4 -8.4 2.7 13.5 8.4 1. Changes, if not specified, are to the last week of the year indicated and from the last week of the preceding year. 2. Week of the May Greenbook. 3. Changes are in basis points. II-45 Consumer price expectations had shown signs of turning up earlier .in the spring, but those signs now seem to have dissipated The Michigan survey showed average expectations of inflation for the next twelve months rising to near 4-1/2 percent in March and April, but then falling back below 4 percent in May and June (preliminary) In addition, this survey's measure of inflation expectations over the next five to ten years rose above 5 percent in March and April, but then dropped back to the 4-1/2 percent range in May and June. In the Conference Board survey, expectations held about unchanged at around 4-1/4 percent throughout this period. That price expectations are so high after several years of substantially slower inflation remains a bit of a puzzle. The PPI for finished goods declined 0.1 percent in May. Food prices fell 0.9 percent--the fourth decline in the last five months--and energy prices moved down 1 percent after holding essentially flat in March and April. Excluding food and energy items, the PPI rose 0.4 percent in May. motor vehicle sector: Advances were led by the New car prices rose 0.8 percent last month, and light truck prices were up 2 percent. Tobacco prices shot up nearly 2 percent last month on a seasonally adjusted basis. In addition, computer prices were down only 0.2 percent in May; price declines in that component of the PPI have slowed dramatically in the past several months. Over the twelve months ended in May, the overall PPI declined 0.4 percent, while the PPI excluding food and energy was up 0.4 percent. Over the three months ended in May, the rate of rise in the PPI excluding food and energy picked up to a 2.8 percent annual rate, but this upturn may not be very meaningful given the short-run volatility of the series. At earlier stages of processing, the index for intermediate materials excluding food and energy posted a rise of 0.3 percent in II-46 FOOD COMMODITY PRICES BEEF AND CATTLE Three-month percent change 40 - 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 COFFEE Twelve-month percent CPI for roasted coffee (Right scale) 'V \~rc~v ,N.)I Spot price of Brazilin coffee, New York (Left scale) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 May. was The increase in this index over the twelve months ended in May a modest 1-1/2 percent. The index for crude materials other than food and energy moved down 1.1 decline in April that By in May, after a small followed six months of sizable increases Prices of logs and timber level. percent fell off slightly in May from a very contrast, prices of copper scrap, high cotton, and waste paper rose appreciably last month. Prices of industrial commodities generally have moved higher since the last Greenbook, with especially large increases nonferrous metals such as copper and aluminum. scrap and lumber have declined, on net, relatively high levels. prices has moved up The Prices of steel since mid-May but Journal of Commerce about 1-3/4 percent for remain at index of industrial since the last Greenbook, and the KR-CRB index for spot industrials has increased about 2 percent In the markets for food commodities, cross-currents have been evident in the some unusually strong recent price data, with the balance seemingly pointed toward increases in food prices over the near term and perhaps sharp increases Pass-through of a recent in the PPI. steep decline in cattle prices likely will be a restraining influence on retail prices for at least the next couple of months. However, retail coffee prices seem likely to climb a surge in raw coffee prices begin to show up at as the effects of grocery stores. Fresh vegetable prices may also exhibit a strong upward move over the very near term. After a stretch of several months in which the (not seasonally adjusted) wholesale prices of vegetables had remained in a low range, they recently have jumped sharply higher-at a time when seasonal factors in the CPI, PPI, want to see further sharp declines. and especially in the II-48 USDA WEEKLY RATINGS OF CROP CONDITIONS Percentage of crop Very Poor Date rated Poor Fair Good - - - - - - - - - - - 1994: Jun Jun Jun Jun Excellent Composite rating Yield 2 per acre Ratio: yield/ rating CORN - - - - - - - - - - - - - - - - 26 19 12 5 0 0 0 0 3 2 2 2 18 21 25 25 61 67 65 66 18 10 8 7 73.50 71.25 69.75 69.50 122.1 122.1 122.1 122.1 1.661 1.714 1.751 1.757 1993: Jun 27 1 6 36 51 6 63.75 122.7 1.925 Season ending 1993: Oct 3 1992: Oct 4 1991: Oct 6 1990: Sep 30 1989: Oct 1 1988: Sep 4 3 2 5 1 2 10 12 3 9 4 8 36 36 16 33 20 24 37 44 61 44 63 54 14 5 18 9 12 12 3 59.00 72.50 60.75 70.25 66.50 41.00 100.7 131.4 108.6 118.5 116.3 84.6 1.707 1.812 1.788 1.687 1.749 2.063 - - -- - - - SOYBEANS - - - - - - - - - - - - - - - 1994: Jun 26 Jun 19 1 0 3 3 25 29 63 63 8 5 68.50 67.50 35.0 35.0 .511 .51 1993: Jun 27 1 7 38 50 4 62.25 35.1 .564 Season ending 1993: Oct 3 1992: Oct 4 1991: Oct 6 1990: Sep 30 1989: Oct 1 1988: Sep 4 3 1 5 2 2 5 11 2 9 9 8 23 40 19 33 35 37 50 41 64 44 48 47 20 5 14 9 6 6 2 58.50 72.00 60.75 61.75 61.75 47.75 32.0 37.6 34.2 34.0 32.3 27.0 .547 .522 .563 .551 .523 .565 1. The composites, which are constructed by the Federal Reserve staff, are weighted averages of the percentages reported by the USDA. We have used the following weights: excellent - 1.00; good - .75; fair = .50; poor = .25; very poor = 0. As indicated in the right-hand column, an additional index point on the composite rating for corn appears to translate into a yield increment of about 1-3/4 bushels per acre. Similarly, an index point for soybeans translates into an increment in average yields of a bit more than 1/2 bushel per acre. 2. Yields are in bushels. Data for 1994 are the USDA's trend projections; those for June 1993 are the trend projections that were available as of that date. Other observations on yields represent the final outcomes for the years indicated. II-49 More important for the longer-term food price outlook is the progress of this year's grain and oilseed crops. Production of these crops was hurt last year by the Midwest floods and other lesser disasters, and stocks are now at unusually low levels Planting of this year's crops proceeded fairly smoothly during the spring, and the condition of the crops as of late June generally was good, with some improvement showing up as the month progressed. However, because July and August usually are the critical months for these crops, uncertainty about the potential size of the harvest could persist for several more weeks despite the favorable developments to date. DOMESTIC FINANCIAL DEVELOPMENTS III-T-1 SELECTED FINANCIAL MARKET QUOTATIONS (Percent except as noted) 1993 1994 Mid-Oct Instrument lows SHORT-TERM RATES 2 Federal funds 3 Treasury bills 3-month 6-month 1-year Change to Jun 28, 1994: FOMC.* Feb 1 From Mid-Oct 3 May 17 Jun 28 From From FOMC. lows Feb 3 May 17 .47 3.07 3.07 3.73 4.20 1.13 1.13 3.01 3.09 3.13 3.27 3.52 4.15 4.65 5.11 4.18 4.58 5.19 1.17 1.49 1.96 1.05 1.31 3.16 3.25 4.37 4.70 4.44 4.66 1.31 1.43 1.28 4.28 4.61 5.05 4.40 4.65 5.00 1.32 1.43 1.77 1.29 3.23 3.11 3.25 3.41 3.06 3.25 3.06 3.25 4.25 4.63 4.38 4.63 1.32 1.38 1.32 1.38 .13 .00 6.00 6.00 6.75 7.25 1.25 1.25 .50 4.06 5.19 5.78 4.60 5.81 6.31 6.40 7.24 2.40 2.07 1.75 1.86 7 46 6.46 7.26 7.53 .06 .02 .07 5.41 5.49 6.60 6.43 1.02 .94 6.79 7.35 8.20 8.41 1.62 1.06 .21 6.74 4.14 6.97 4.12 8.77 5.54 8.46 5.41 1.72 1.27 1.49 1.29 -.31 3.23 Commercial paper 1-month 3-month 3.13 3.23 3 Large negotiable CDs 1-month 3-month 6-month 4 Eurodollar deposits 1-month 3-month 3.08 3.22 Bank prime rate 1.67 1.41 1.40 1.59 .03 -.07 .08 .07 -. 04 .12 .04 -. 05 INTERMEDIATE- AND LONG-TERM RATES U.S. Treasury (constant maturity) 3-year 10-year 30-year 5 Municipal revenue (Bond Buyer) Corporate--A utility. recently offered 6 Home mortgages FHLMC 30-yr fixed rate FHLMC 1-yr. adjustable rate 1989 1994 1.45 1.22 -. 17 -. 13 Percentage change to Jun 28: Record high Stock exchange index Low. Level Dow-Jones Industrial NYSE Composite NASDAQ (OTC) Wilshire 3978.36 267.71 803.93 4804.31 Date Jan. 3 1/31/94 2144.64 2/2/94 154.00 3/18/94 378.56 2/2/94 2718.59 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is average to date for maintenance period ending Jul 6. 1994. 3. Secondary market. * Rates are as of the close on May 16. 1994. From record FOMC.* May 17 Jun 28 3671.50 245.78 711.91 4404.46 3669.64 245.80 702.05 4400.52 From 1989 Prom FOMC.* high low May 17 -7.76 -8.18 -12.67 -8.40 71.11 59.61 85.45 61.87 4. Bid rates for Eurodollar deposits at 11 a.m. London time. 5. Most recent observation based on one-day Thursday quote and futures market index changes. 6. Quotes for week ending Friday previous to date shown. -.05 .01 -1.39 -.09 Selected Interest Rates* (percent) Short-Term 10 Statement Week Averages -- i 12 --- - - 1- r Prime Rate (daily) Federal Funds 3-month T-Bil Discount Rate(dajly) 6 - 4 - I I 1990 I 1991 I 1992 Long-Term 1 1993 1994 5/13 5/20 27 6/3 6/10 1994 6/17 Friday Week Averages 6/24 WeeldyiDaly -i FOMC 5/17 PiR" Fixed-Rate Corpoaste Bond 0-Year T-Bond 10-Year T-Note (Dly) 1990 1991 1992 1993 * Statement weeks are plotted through Jun 22; Friday weeks through Jun 24.1994. 1994 s/13 /20 5/27 6/3 1994 6/10 6/17 6/24 10 DOMESTIC FINANCIAL DEVELOPMENTS Short-term interest rates rose slightly in the wake of the half-point increases of the federal funds and discount rates on the day of the May FOMC meeting, while intermediate- and long-term rates fell appreciably. Most observers interpreted the size of the action and the accompanying press release as implying that further tightening was unlikely soon. Major commercial banks followed the firming moves by boosting the prime rate 50 basis points, bringing the rate to 7-1/4 percent, and preserving its wide spread over the federal funds rate. Since that initial response, market interest rates generally have been buffeted by cross-currents in economic news and weakness in the exchange value of the dollar. In recent days, persistent downward pressure on the dollar has prompted a backup in long-term rates on renewed concerns about potential inflation and speculation about System tightening. The yield on the thirty-year Treasury bond, for example, has retraced its initial drop and now stands slightly above the level prevailing prior to the May FOMC meeting. Major equity price indexes are little changed to down 1-1/2 percent. Net inflows to stock mutual funds slowed a bit in May but appear to have increased in early June; flows to bond funds have turned positive in recent weeks, after three consecutive monthly declines. Retail money market funds have begun to run off, reversing the pattern of the past couple of months when investors moved from long-term funds into money market accounts. With the impetus from money funds gone and opportunity costs of holding deposits much higher, M2 growth was flat in May and appears likely III-1 111-2 MONETARY AGGREGATES (Based on seasonally adjusted data) 1994 1994 1993:Q4 to 1993 Q1 Aggregate or component Apr. May Jun (pe) Jun 94 (pe) S) May 94 Percentage change (annual rate) 1 Aggregate 1. 2 3 Q2 (pe) Level (bil 10.5 1 4 0 6 Ml M2 M3 6 0 1.8 0 2 1143 2 3590 4 4213 2 Selected components 3% 4. M1-A 11 7 5 6 10 3 13.3 11 9 7 7 8 4 -0.2 3 0 1 11 6 19 9 Currency Demand deposits 7 Other checkable deposits 8 M2 -2 minus M1 Overnight RPs and Eurodollars, nsa General-purpose and brokerdealer money market funds Commercial banks Savings deposits Small time deposits Thrift inscilucions Savings deposits Small time deposits 17 M3 minus Term RPs n s a Term Eurodollars, 8.7 -3.4 10.0 -9.6 10 2 11% 2 337 6 385 8 -7.0 6 .2 2 0 411 6 1 3.9 -0.5 0 2447 2 -43 -45 4 -5 7 93 7 45.1 -2 -2.9 -3 -3 1 12.0 -1.5 -6.2 62 -4.2 -1.9 -7.0 n s a 3 -7% 3.2 -2 6 -1.1 2.2 -6.2 -8 6 -9% 1.1 19.9 -4 -3% -7% -1.5 -3 1 5.9 -23% 16 16 -2 7 36 8 22.5 6 -34 -Y -1 -4 3i -8% 365 1 1248.2 784.1 464 0 736 9 431 7 305 2 -74 622 8 . 933.9 340.5 593.4 9.1 16.9 -27.5 -26 8 -16 5 5 2 Large time deposits 3 At commercial banks At chrift institutions Institution-only money market mutual funds 731.6 6 -4 7 -3 6 -9.5 -3 5 M2 -0.3 173 -2 1 -1 0 4.2 -8 6 -5.8 0 6 13 2 10 -2i 2.3 -52 2 -33.2 -2.5 % -3 14 Average monthly change (billions of dollars) 2 Memo 24 Managed liabilicies at com'l. banks (lines 25 + 26) 25 Large time deposits, gross 26 Nondeposit funds 27. Net due to related foreign institutions 4 Other 28. 29. U.S government deposits at commercial banks 5 5 5 -2.3 7.8 22.9 -3 3 26.2 103 2 8 36 6 0.4 36.2 -4.3 6.4 -10.7 -2 -1 -1 4.5 3.3 12.7 13.5 9 -1 14.9 21.4 1.4 -12.2 11 12 . 0.2 0.2 -9 . -M 10.1 -3.1 . . . 173.8 419.6 . 30.1 . . 1. For years, 'percentage change" is percentage change in quarterly average from fourth quarter of preceding year to fourth quarter of specified year. For quarters, it is the percentage change in quarterly average from preceding quarter to specified quarter, annualized. 2. For years, "average monthly change' is the dollar change from December to December, divided by 12. For quarters, it is the dollar change from the last month of the preceding quarter to the last month of the specified quarter, divided by 3. 3. Net of holdings of money market mutual funds, depository institutions, U.S. government, and foreign banks and official institutions. 4. Borrowing from other than commercial banks in the form of federal funds purchased, securities sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items). Data are partially estimated. 5. Treasury demand deposits and note balances at commercial banks. III-3 to decline in June. The weakness in M2 has shown through to M3, which declined over the two months. Business borrowing seems to have slowed slightly in the second quarter and a greater portion has been concentrated in shortermaturity securities and in bank and finance company loans. With long-term interest rates more than 1-1/2 percentage points above their October lows, gross public issuance of bonds by nonfinancial corporations has continued at a reduced pace. Bond offerings by state and local governments also remain subdued, with few new refundings coming to market. Treasury borrowing has declined a bit more than seasonally in the second quarter, owing to stronger tax receipts and continued weakness in growth of outlays. In the household sector, available data suggest some slowing in home mortgage borrowing, while consumer credit growth continued at a brisk pace in April despite a substantial slowdown in auto-related credit. Monetary Aggregates and Bank Credit M2 was flat in May and is estimated to have declined at nearly a 3 percent rate in June. The boost to M2 growth earlier in the year that likely resulted from net redemptions of bond mutual funds appears to have largely disappeared in recent weeks. Bond mutual funds again began experiencing net cash inflows in late May, and retail money funds have begun to run off. The falloff in money growth also owes to rising opportunity costs resulting from the increase in short-term interest rates since early this year and the usual sluggish response of liquid deposit rates. Some household balances have been diverted from liquid deposits to small time deposits and thus remain within M2, while a portion has left the monetary aggregates, as evidenced by a significant pickup in noncompetitive tenders at Treasury auctions (chart). While retail III-4 time deposits at banks posted increases in May and June, the first growth in more than three years, their acceleration falls well short of historical patterns, as depositories have not increased offering rates on them as quickly as in past episodes of increasing market rates. Demand deposits, and to a lesser extent money market deposit accounts, have been weakened not only by higher opportunity costs, but also by the continued slowing in mortgage prepayments associated with the backup in long-term rates over the past half year. Thus, despite sustained strong growth of currency. M1 grew at only a 2 percent rate in May and about a 4 percent rate in June, well below rate of growth over the past three years. its Net Noncompetitive Tenders for Treasury Bills (Average monthly flows) Millions of dollars 1500 1500 1000 1000 500 500 a 0 0 -500 -500 _ . ______ -1000 1991 P--preliminary 1992 1993 1994Q1 April May June -1000 III-5 The weakness in M2 has shown through to M3, which declined at a 2-3/4 percent rate in May and appears to have been flat in June. Institution-only money market mutual funds, whose rates have lagged the rise in market rates, have dropped sharply, but some of the weakness in the non-M2 part of M3 has been offset by increases in large time deposits at banks. Banks have resumed raising funds through issuance of large CDs, while use of nondeposit sources, which had grown quite rapidly earlier in the year, has slowed. Total bank credit is expected to expand at about a 4 percent rate in June, up a bit from the very weak May pace but well below growth registered earlier in the year. The weakness in bank credit in May and June mainly reflected runoffs of U.S. government securities at large domestic banks and foreign banks, after two months of substantial acquisitions. Securities sales at two domestic banks and one foreign bank in May accounted for a large fraction of the decline. Reported holdings of securities in May likely were also depressed by the revaluation of available-for-sale and trading account securities, as bond interest rates rose on balance over the month. Growth of other securities, meanwhile, remained strong in May, with all of the strength recorded at branches and agencies of foreign banks, several of which bought large amounts of foreign government securities. In June, holdings of government and other securities rose only slightly. Loan growth averaged 4 percent in the May-June period. Business loans slowed in May from a robust April pace and are expected to expand at only a 1 percent rate in June. The slowdown from earlier in the year mainly occurred at large domestic and 1. Under FASB 115, banks are required to mark to market government securities considered available for sale as well as those in trading accounts. According to the March 1994 Call Report, 60 percent of Treasury securities and 55 percent of agency passthroughs were classified as "available for sale," and about 4 percent of government securities were held in trading accounts. III-6 COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT1 (Percentage change at annual rate, based on seasonally adjusted data) Dec. 1992 to Dec. Type of credit 1994 Q2 p 1994 Q1 1994 Apr. 1994 May 1994 Jun. p 1993 Level, May 1994 ($billions) Comercial bank credit 1. 2. 5.3 Securities 7.9 5 10.1 8.5 Total loans and securities 17.2 7 21.2 3 18.0 22 33.8 3. U.S. government 9.6 11.5 4. Other 4.4 39.5 5. 4 3,198.2 -1.7 2 965.5 -10.4 2 752.2 2 213.3 30.0 4.0 Loans 6. Business 7. Real estate 4.5 8. Consumer 9. Security 10. 2.1 4 -1.8 8 .1 10.6 10 35.1 -18.3 -.6 Other 1 606.6 6 944.7 3 410.7 9.4 79 77.5 -12.9 -20 193.2 3 9.0 13.5 6.3 -3 1 -9 -8 2,232.8 8.0 Short- and intermediate-term business credit 11. Business loans net of bankers -2.1 7 21 45.1 7 12.6 -2 -11.0 1 11.4 597.1 acceptances 12. Loans at foreign branches 2 13. Sum of lines 11 and 12 14. Commercial paper issued by nonfinancial firms 15. Sum of lines 13 and 14 16. Bankers acceptances, U.S. trade-related 3 ,4 -12.1 -7.4 -2.5 4.4 -12.2 22.4 16.3 1 -15.8 21 5 -1.1 619.5 149.5 769.0 -12.2 17.9 n.a. 11.4 n.a. n.a. 21.2 -. 5 9.4 n.a. 15.3 n.a. n.a. 317.0 -1.2 5.6 n.a. 10.0 n.a. n.a. 5 17. Loans at finance companies 18. Total (sum of lines 15, 16, 1,104.6 and 17) 1. Except as noted, levels are averages of Wednesday data and percentage changes are based on averages of Wednesday data; data are adjusted for breaks caused by reclassification; changes are measured frcm preceding period to period indicated. 2. Loans to U.S. firms made by foreign branches of domestically chartered banks. 3. Acceptances that finance U.S. imports, U.S. exports, and dcaestic shinment and storage of goods. 4. Changes are based on averages of month-end data. 5. April 1994. p Preliminary. n.a. Not available. III-7 foreign banks, which apparently had benefited from business credit demands deflected from capital markets. the Survey of Terms Preliminary evidence from of Bank Lending suggests that loan pricing for some very large loans continues to be aggressive, but overall are little changed from a year ago. loan spreads Consumer lending slowed in both May and June, largely reflecting a strong pickup in securitizations. Adjusted for securitizations, consumer loans expanded at a double-digit pace in both months. Growth of real estate loans slowed in May to near a 2 percent rate but are expected to rise in June at about a 6 percent pace. This would bring growth in the second quarter to about 3 percent at an annual rate, Report following a flat first quarter. shows that the weakness in real quarter was attributable mainly to its The March Call estate lending in the first residential mortgage component, although commercial lending edged down over the period. Part of the increase in real estate loans at banks since the end of the first quarter may owe to increased consumer demand for adjustable-rate mortgages, which banks and savings institutions prefer to hold in portfolio rather than to sell off. In addition, now that opportunities for cashing out home equity provided by last year's mortgage refinancing activity have come to an end, growth of home equity loans has picked up to the fastest pace since April of last year. Mutual Funds The weakness in mutual funds continued through mid-May, but inflows appear to have since picked up. Data for May and for early June show a substantial increase in net sales of equity funds, with bond funds posting inflows for the first time since March. Among equity funds, net sales of international funds stabilized in May, after declining in each of the preceding two months. Trade III-8 reports attributed the change to renewed interest in funds that invest primarily in the Japanese market. Net sales of domestic equity funds slowed in May, but appear to have edged up in early June and on average remain near the healthy pace of recent quarters. NET SALES OF MUTUAL FUNDS CLASSIFIED BY TYPE (Billions of dollars, monthly rate) 1993 Memo: Assets 1994 Q2 Q3 Q4 Q1 Apr. May e Total stock and bond 22.8 23.8 24.2 17.6 8.7 7.5 Total stock International Domestic 10.6 2.2 8.4 10.9 4.1 6.8 14.7 5.8 8.9 13.8 6.2 7.6 11.7 3.0 8.7 9.5 3.2 6.3 784.7 136.3 648.4 Total bond GNMA High yield Tax-exempt International Other 12.2 0.6 1.1 4.1 0.3 6.1 12.9 0.4 0.3 3.9 1.2 7.1 9.5 -0.9 1.1 2.7 0.7 5.9 3.8 -1.6 0.0 1.0 0.4 4.0 -3.0 -1.4 -0.4 -1.0 -0.5 0.3 -2.0 -1.1 0.9 -0.9 0.0 -0.9 725.8 63.8 45.8 240.1 37.3 338.8 Type of fund April 1994 e Estimate. Source: Investment Company Institute. Bond funds continued to contract in May, as further outflows from mortgage and government bond funds offset a modest turnaround at high-yield bond funds. Weekly data for late May and early June show small net inflows to total bond funds, the first since February of this year. The turnaround in net sales owes mostly to income and tax-exempt funds, as mortgage and government funds again experienced outflows. Outflows from the latter are associated in part with losses on investments in derivative securities. In some instances, the funds' advisors have been forced to compensate shareholders for derivative losses and have had to buy derivative securities from the III-9 funds to prevent further losses. SEC staff suggest that the published incidents are not isolated cases. Losses requiring assistance from advisors also were recorded for some money market mutual funds, banks. including a few advised by Most notably, BankAmerica disclosed in June that it had injected $17.4 million into its institutional money fund, after the fund had to sell assets at a loss to meet heavy redemptions. Without this injection, the net asset value of the money fund would have dropped below the one dollar per share mark. 2 Business Finance Yields on corporate bonds have risen slightly on net over the intermeeting period and are now about 1-1/2 percentage points above their lows last October. As a result, issuance in the bond market generally remained subdued, and offerings of nonfinancial firms were concentrated in short to intermediate maturities, with greater reliance on floating-rate issues. Gross public issuance of bonds by nonfinancial corporations picked up a bit in May and June, but at $7-1/2 billion, is about $3 billion short of the first-quarter pace and less than half the average monthly pace of last year (table). Offerings in the investment-grade sector have tended to come back somewhat, but with issuers returning to the sidelines during intermittent periods of market volatility. Junk bond issuance 2. Representatives at the SEC indicate that certain types of variable-rate notes have been especially troublesome for money funds. During periods of high interest rate volatility, structured products such as "range notes" or "range accruals" and "index amortizing notes," for which the note holders may receive zero interest if rates move past a certain level in effect, can turn into principal-only instruments and expose a fund to high levels of market risk. There is a concern that investments in such derivative securities could possibly lock a mutual fund into a liquidity spiral; that is, as investors redeem shares, the fund is forced to sell liquid securities, leaving a greater proportion of the fund's assets in these risky securities. The SEC may deem these securities to be unsuitable investments for money funds. III-10 GROSS OFFERINGS OF SECURITIES BY U.S CORPORATIONS 1 (Billions of dollars; monthly races, not seasonally adjusted) 1993 Type of security 1992 1993 All U.S. corporations Stocks 2 Bonds 40.84 7.04 33.80 53.46 9.60 43.86 51.78 10.89 40.89 4.42 4.03 .87 3.16 .39 5.28 5.12 1.06 4.00 .16 13.67 12.83 5.33 7.50 .84 Nonfinancial corporations Stocks 2 Sold in U.S. Utility Industrial Sold abroad Bonds Sold in U.S. Utility Industrial Sold abroad By quality 3 Aaa and Aa A and Baa Less than Baa Unrated or rating unknown Financial corporations Stocks 2 Sold in U.S. Sold abroad Bonds Sold in U.S. Sold abroad By quality 3 Aaa and Aa A and Baa Less than Baa Unrated or rating unknown Q4 1994 Q1p Aprp Mayp Jun 53.00 8.35 44.65 33.28 7.48 25.80 37.41 3.91 33.50 31.00 5.00 26.00 6.08 6.08 1.60 4.48 .00 4.56 3.99 .65 3.34 .56 5.55 3.63 .18 3.45 1.92 2.45 2.23 .37 1.86 .22 3.50 3.10 n.a. n.a. .40 16.20 15.56 7.34 8.22 .64 12.41 12.10 5.15 6.96 .31 11,20 10.46 4.57 5.89 .74 6.77 6.00 2.50 3.50 .77 7.47 6.50 2.00 4.50 .97 7.50 7.00 n.a. n.a. .50 2.18 7.74 2.86 .09 2.56 8.71 4.17 .09 1.78 5.78 4.45 .10 .80 5.52 3.91 .00 .70 3.39 1.75 .00 1.05 2.92 2.40 .00 n.a. n.a. n.a. n.a. 2.62 2.51 .11 4.61 4.16 .45 5.30 4.73 .57 3.79 3.52 .27 1.92 1.72 .21 1.46 1.35 .12 1.50 1.40 .10 20.13 18.67 1.46 27.66 25.10 2.56 28.48 26.05 2.44 33.45 29.08 4.37 19.03 17.00 2.03 26.03 22.00 4.03 18.50 17.00 1.50 1.55 6.77 .31 .04 1.87 8.99 .49 .08 1.57 8.78 .69 .13 3.27 11.17 .66 .02 4.19 5.79 .12 .17 1.78 8.70 .10 .03 n.a. n.a. n.a. n.a. 1. Securities issued in the private placement market are not included. Total reflects gross proceeds rather than par value of original discount bonds. 2. Excludes equity issues associated with equity-for-equity swaps that have occurred in restructurings. 3. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds. p Preliminary. e Staff estimate. III-11 rebounded slightly in May and strengthened further in early June, as inflows into junk bond funds resumed, bringing yield spreads in a bit. Junk issuance, however, still remains low relative to last year's monthly volumes. Bond offerings by utilities have slowed markedly of late, as negative indications regarding utility sector prospects continue to trickle out. Moody's issued a report that suggested that the current cost of generating electricity varies across utilities much more than previously believed, suggesting that many of them will be hard-pressed in a more competitive environment. Separately, Moody's downgraded about $5.3 billion of Long Island Lighting Company's debt, citing high costs and economic difficulties in the company's service area, as well as concerns about the company's overall financial flexibility. Several major California utilities remain on Standard and Poor's CreditWatch with negative implications; electricity prices in California are expected to come under downward pressure owing to the state utility commission's plan to spur competition by allowing customers to choose among suppliers. Gross public equity issuance by nonfinancial corporations dropped sharply in May, to $2.5 billion, about half the pace of the first four months of the year. There were no large issues, and while the number of initial public offerings remained sizable, all were very small. Prices and volumes of IPOs have generally come in well below issuers' expectations. Equity issuance appears to have edged up somewhat in June, but offerings remain sporadic. Issuance by financial firms in June is expected to be lifted a tad over the May pace by some large REIT offerings. Stock prices were quite volatile over the intermeeting period, but, on balance, most major indexes are little changed from mid-May levels. The NASDAQ index, however, has lost ground since mid-May. III-12 reflecting weakness Small in prices of small cap bank stocks have held up well, and high-tech businesses. spurred in part by the anticipation of further consolidation within the industry. Among the industrials, the basic materials group--which includes producers of steel, aluminum, and paper--registered the only gains since mid- May. State and Local Government Finance Gross issuance of long-term tax-exempt debt was $12.4 in May, slightly above April's sluggish pace of about $10 billion billion. The volume of new offerings thus far in June suggests issuance for the month as a whole will total roughly $12 billion. As a consequence, the second quarter will likely post the lowest level of gross issuance since the first quarter of 1991. reflects a sharp drop in advance refundings. The slowdown The volume of offerings to raise new capital appears to be up slightly in the second quarter from the reduced level recorded in 1993. In line with past seasonal patterns, short-term volume is estimated to have jumped in June to about than $1 billion in May. $6-3/4 billion from less Short-term issuance will likely continue to be heavy throughout the summer months before declining sharply over the remainder of the year. This pattern largely reflects the adoption of budgets at this time of the year by many state and local government units that, in turn, authorize these entities to borrow to cover working capital needs in the new fiscal year. 3. Attracting considerable attention in June was an offering of 100-year revenue bonds by the Port Authority of New York and New Jersey. The bonds are noncallable for thirty years and reportedly were sold to a handful of institutional investors. The issue is thought by market observers to be the first 100-year bond during this century, although it is not the longest on record. In the late 1860s and early 1870s, a small municipality outside New York City, in anticipation of being annexed by the city, sold noncallable bonds maturing in 2147 to finance road construction. III-13 GROSS OFFERINGS OF MUNICIPAL SECURITIES (Monthly rates, not seasonally adjusted, billions of dollars) 11994 Q2p April May p Junep 14.5 11.0 13.4 19.1 17.7 15.5 7.4 8.1 2.2 14.2 11.5 2.9 8.6 2.7 10.7 10.1 2.0 8.1 .6 13.2 12.4 3.3 9.1 .8 18.7 12.0 3.5 8.5 6.7 .8 .3 .3 .2 .4 1992 Total taxable Q1 27.8 24.4 18.5 21.2 17.9 7.9 10.0 3.3 27.1 23.3 15.7 7.6 3.8 23.6 21.5 13.7 7.8 2.1 .6 Total tax-exempt Long-term Refundings New capital Short-term Q4 21.8 Total offerings 1 1993 .7 .8 1. Includes issues for public and private purposes. 2. Includes all refunding bonds, not just advance refundings. p Preliminary. From the last FOMC meeting through early June, yields on taxexempt bonds generally declined relative to those on taxable bonds. Investors began to focus on the implication of an estimated $29 billion of bond retirements in July. Retirements of this magnitude would represent nearly 2-1/2 percent of the outstanding stock of tax-exempt bonds and would be more than double the level of retirements experienced during July in the past two years. 4 A 4. These retirements largely represent bonds reaching their first call date that were issued in the mid 1980s, a period of Most of these bonds have been preexceptionally heavy issuance. Those that have not refunded and thus are scheduled to be redeemed. been pre-refunded are likely to be called and refinanced with current offerings, as bond yields now are well below those January and July are the most prevailing during the mid 1980s. common anniversary months for tax-exempt bonds, and thus the level of retirements swells during these two months relative to those in other months. III-14 TREASURY FINANCING1 (Total for period: billions of dollars) 1994 1994 Q2 p Q3P Apr. May Junep 3.2 -57.4 17.5 -32.1 17.7 Net cash borrowing/repayments(-) 9.8 Nonmarketable 2.2 Marketable 7.6 Bills -23.1 Coupons 30.7 50.8 .7 50.1 12.4 37.7 -21.8 1.3 -23.1 -15.8 -7.3 27.7 1.0 26.7 -5.1 31.8 -7.8 6.1 -4.1 21.5 -5.1 .4 8.5 -17.1 3.6 52.4 46.3 48.7 27.2 52.4 Item Total surplus/deficit (-) Means of financing deficit: Decrease in the cash balance 3.9 -. 1 4.1 -2.2 6.3 -25.3 2 Other Memo: Cash balance, end of period 1. Data reported on a payment basis. 2. Includes checks issued less checks paid, accrued items, transactions. p--Projected. Note: Details may not add to totals because of rounding. and other NET CASH BORROWING OF FEDERALLY SPONSORED CREDIT AGENCIES 1 (Billions of dollars) 1993 Agency Q3 1994 Q1 Q4 1994 Apr. May FHLBs 5.4 8.9 5.7 6.2 -- FHLMC 17.1 -2.7 12.9 2.7 5.7 FNMA -- 19.3 5.3 15.3 2.4 Farm Credit Banks -.1 1.5 -.7 .2 SLMA -. 1 1.0 1.3 0 0 0 FAMC2 -- -.1 -- 0 1. Excludes mortgage pass-through securities issued by FNMA and FHLMC. 2. Federal Agricultural Mortgage Corporation. 0 III-15 reduction in the pace of selling by tax-exempt bond funds also contributed to the better performance of municipal bonds. More recently, however, renewed selling pressure from bond funds, which apparently has come despite modest inflows of new cash, has caused tax-exempt yields to back up more than long-term Treasury rates. Moody's Investor Service has placed its Aa rating of California's bonds under review for a possible downgrade. The rating agency has expressed concern that the proposed budget for fiscal year 1995 does not include satisfactory remedies for the $3 billion shortfall accumulated from the past two years and a projected $1 billion deficit in the upcoming fiscal year. The governor's budget plan calls for the deficit to be covered with short-term borrowing that would not be paid off fully until the 1996 fiscal year. However, the state's attorney general has stated that this would constitute deficit financing and therefore is illegal. Yields on outstanding California bonds were not affected by Moody's announcement, as the bonds already trade as if they carry a lower rating. Standard and Poor's rates California's bonds as A+. Federal Finance The federal budget is projected to run a small surplus in the second quarter, reflecting the seasonal inflow of federal tax receipts. Nonetheless, the Treasury added to its cash balance by borrowing about $7-1/2 billion in the market, raising $31 billion in coupon auctions while paying down $23 billion in bills. The Treasury had pared weekly bill offerings in mid-June to $22 billion, but more recently increased auction sizes again to $24 billion, ahead of a sizable deficit projected for the third quarter. The staff currently projects a third-quarter budget deficit of roughly $57 billion, which the Treasury is expected to finance through III-16 $50 billion of marketable borrowing, once again concentrated in coupon offerings; bills are expected to raise only $12 billion. During the intermeeting period, yield spreads on governmentsponsored agency securities have stabilized, but they remain above levels prevailing before the System's tightening actions. Spreads on ten-year issues are now about 30 basis points above Treasuries, roughly 10 basis points greater than the fourth-quarter average. while spreads on one-year to two-year securities have more than doubled to near 15 basis points. Debt issuance by government- sponsored agencies has slowed recently from the rapid first-quarter pace, primarily because of a drop in offerings by FNMA and FHLMC. However, gross issuance by the two housing agencies is expected to be boosted in coming months by sales of global debentures. sold $1.5 FNMA billion of global debentures in late June, the first ever by a government-sponsored agency. FHLMC recently announced plans to offer $1.5 billion of five-year global notes in July. Mortgage Markets Interest rates on conventional, thirty-year, fixed-rate mortgages have declined roughly 30 basis points on net since the last FOMC meeting. Initial rates on one-year, adjustable-rate mortgages, meanwhile, have declined about 15 basis points. The initial rate advantage of ARMs when compared to FRMs now favors ARMs by more than 3 percentage points. Thus, with long-term interest rates remaining well above their lows of last year, the ARM share of loan originations at most major institutional lenders has surged. According to the Federal Housing Finance Board, 36 percent of conventional mortgage loans closed in May carried adjustable rates, up from 31 percent in April and 23 percent in March. share is the highest proportion since June 1989. The May ARM III-17 A sign that higher mortgage interest rates may have discouraged some homebuyers is evident in the Mortgage Bankers Association's index of applications for loans to purchase new and existing homes, which has continued to edge lower in recent weeks. Growth of total real estate loans at banks slowed in May but appears to have strengthened in June, boosting the average for the second quarter to about a 3 percent seasonally adjusted annual rate. In the secondary mortgage market, spreads on thirty-year conventional, mortgage-backed pass-through securities have fluctuated in recent weeks but have changed little, on net, high volatility (chart), despite a flatter yield curve, and the lack of significant demand for REMIC collateral. These factors, which typically would be expected to exert upward pressure on mortgage-toTreasury yield spreads, have been offset for the most part by a dwindling supply of new pass-through issues. agency pass-throughs slowed again in May volume declined further and to ease. (chart), as refinancing single-family housing activity continued Net issuance edged up below the first quarter's Gross issuance of in April and May but remains well record pace. The pickup in net issuance owes in part to the slowdown in early repayments on existing mortgage securities. With the rise in mortgage interest rates since late last year, prepayments on agency mortgage-backed securities have slowed sharply in recent months (chart). The Mortgage Bankers Association's refinancing index, meanwhile, has continued to trend downward, suggesting that prepayments will probably slow a bit further in coming months. In the multiclass sector, GNMA brought to market in late May its first ever REMIC issue, backed by $500 million of 8 percent GNMA coupons. The issue was priced at spreads 5 to 10 basis points tighter than on REMICs backed by GNMA collateral issued by either III-18 Mortgage Yield Spread and Implied Volatility Percent Basis Points 1992 1993 1 Yield spread is the FNMA 30-year mortgage-backed security current coupon less average of the yields on the 10-year and 7-year Treasury bonds. 2. Implied volatility is volatility of option price on Treasury bond futures contract. 1994 Agency Issuance of Mortgage Pass-Through Securities Billions of dollars Monthly Net Issuance I I* , I ; I , * ii r: ! .' I ,I '~ 'S 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 III-19 Mortgage-Backed Security Prepayment Rates 1 (Seasonally adjusted annual rate) FNMA 30-Year MBS Percent - 60 FNMA 9.0 - - JASONDJFMAMJJA 1993 30 - JFMAMJ J ASONDJFMAMJJASONDJFMAMJ 1992 1991 50 20 1994 GNMA 30-Year MBS Percent GNMA 9.0 -GNMAo f / o" I 'l - I SGNMA 8.0 GNMA 7.5/ JFMAMJJASONDJFMAMJJASONDJFMAMJJASONDJFMAMJJA 1993 1992 1991 1. Prepayment rate is the annualized percentage of principal outstanding at the beginning of the month that prepays by the end of the month. Prepayment rates are shown for selected categories of MBS by security coupon rate. May 1994 50 III-20 GROWTH OF CONSUMER CREDIT (Percent change: seasonally adjusted annual rate) Type of credit 1993 1 r 19 1 QQ2 r Q4 1994 r Qlr 1994 Mar.r Apr.' dollars) 12.4 4.5 834.4 19.1 295.2 250.8 .2 -1.1 3.8 -2.0 9.3 9.3 11.2 7.3 11.6 13.8 12.3 8.4 12.9 10.4 15.4 13.0 20.1 16.7 24.1 19.3 6.2 -5.3 14.1 -3.6 .6 Total .7 8.3 11.8 11.9 Type of loan At commercial banks 1991 Installment Auto Revolving Other Noninstallment 1992 1993 Memo; Outstanding April 1994 (Billions of 18.9 1993. Nov. 13.5 -15.7 288.4 52.4 10.7 886.8 Feb. 1994 Apr. May New cars (48 mo.) 11.1 9.3 8.1 7.6 7.5 ... 7.8 Personal (24 mo.) 15.2 14.0 13.5 13.2 12.9 ... 13.0 18.2 17.8 16.8 16.3 16.1 ... 16.2 12.4 15.6 9.9 13.8 9.5 12.8 9.0 12.4 8.9 12.2 9.7 13.3 Credit cards At auto finance cos. New cars Used cars ... 1. Average of "most common" rate charged for specified type and maturity during the first week of the middle month of each quarter. 2. For monthly data. rate for all loans of each type made during the month regardless of maturity. Note: Annual data are averages of quarterly data for commercial bank rates and of monthly data for auto finance company rates. GROWTH OF CONSUMER INSTALLMENT CREDIT Originally published vs. revised (Percent change; seasonally adjusted annual rate) Period I Total I I o'ri Installment rin l gRevised , I tQria!ol I , Or-iin Aiutimnhi ~~~-~--. 1 -.5 .2 9.3 1.9 -2.7 -8.4 -.5 7.2 1.2 -3.3 -8.1 -1.1 9.3 1992:Q1 Q3 8.5 5.8 6.9 11.8 Q4 11.2 11.6 4.1 4.7 7.9 11.3 12.9 6.6 1994:Ql p Other Originall Revised 4.9 1.3 9.0 15.0 11.6 9.1 3.8 11.2 8.6 7.1 -,8 -1.0 -.8 1.2 -.4 -2.0 1.4 7.3 4.5 4.0 2.7 6.1 6.6 2.2 19891 1990 1991 1992 1993 1993:Q1 Q2 Revolving Original I Revised I ) perised 2.3 4.7 1.6 6.5 -5.3 -3.4 -1,7 7,2 -0.5 -1.6 -1.6 -4.4 14.9 12.1 9.4 4.4 10.7 3.0 8.9 10.5 13.8 8.4 5.7 15.7 11.4 10.1 7.0 13.6 12.3 1.7 -7,8 .9 10.8 4.1 4.6 11.3 8.4 10.4 10.2 15.4 10.4 13.0 III-21 FNMA or FHLMC. Zero-risk weighting for risk-based capital reportedly enhanced the willingness of insurance companies, pension funds, and banks the to pay a premium for the GNMA-issued REMIC, while full faith and credit guarantee attracted retail interest. Nonetheless, FNMA, not GNMA, was the largest issuer of REMICs backed by GNMA collateral. Out of a reported $2.6 billion in GNMA-backed REMICs priced in May. an estimated $2 billion were brought by Fannie. However, since that time, GNMA has brought to market four additional issues to market. Consumer Credit Growth of consumer installment credit slowed in April from the rapid advance recorded in March, but at 12-1/2 percent it remained close to its first-quarter pace. 5 Revolving credit again grew rapidly, while growth of auto and "other" credit slowed. Noninstallment credit contracted at a 15-3/4 percent annual rate in April. Interest rates on consumer loans at commercial banks edged up between February and May. The average "most common" rate on a forty-eight-month new car loan rose about 1/4 percentage point, to 7.8 percent--still quite low by historical standards. Rates on personal loans and credit cards also inched up over the period to 5. The consumer installment credit data, scheduled for publication on July 8, have been revised from 1989 forward to incorporate annual benchmark revisions and new seasonal factor Changes in consumer indebtedness estimates (table, bottom panel). in earlier years were little affected by the annual benchmark revisions; however, growth in 1992 now is estimated to have been a bit less than estimated previously, while that for 1993 and the first quarter of 1994 is significantly more robust. Revised estimates for the more recent periods owe to the annual benchmarking of some series to Call Report data and to revisions in other series that reflect new data sources, including more complete information on pools of securitized assets held by institutions outside of current reporting panels. The largest overall revisions occurred in the "other" category; securitizations data have been weakest in this area and have benefited from the additional information received for pools of securitized assets. III-22 COMMERCIAL BANK CONSUMER LOAN RATE SPREADS (Consumer Rate Less Yield on 3-Year Treasury Note) Auto Percent 14 S : :::: - :. 10 6 2 W 1973 1 1 1.I 1977 I IIII I 1981 1985 i 1989 ili il i o 1993 Percent Credit cards 14 12 10 8 4 2 1973 1977 1981 1985 1989 Personal 1993 Percent 14 . 12 S10 4 2 1.3 1973 1.7719 1977 . 1981 198ll19 1985 1993 1989 1993 III-23 levels just above their historic lows. However, spreads between consumer loan rates and yields on comparable Treasury securities narrowed further aggressively. (chart), as banks continued to price loans Reports from survey respondents in recent months indicate that banks have been actively seeking to recapture some of the auto lending business lost in recent years to the "captive" auto finance companies. Competition for credit card accounts also is reported to have increased. Most indicators of household financial distress have remained relatively favorable. In the first quarter, personal bankruptcy filings continued to decline, falling more than 9 percent at a seasonally adjusted annual rate after having dropped at a 17-1/2 percent pace in the fourth quarter of 1993. In addition, the share of closed-end consumer loans at banks that were thirty days or more past due was about unchanged in the first quarter, with delinquencies on auto loans declining slightly. Revolving credit delinquencies also were about unchanged. First-quarter delinquency data for residential mortgages presented a slightly mixed picture. Call Report data show a continued decline in delinquency rates for loans at banks (chart). In contrast, the Mortgage Bankers Association reported small increases in thirty-day delinquency rates for both conventional and government-backed mortgage loans at all lenders. However, both ratios remained close to the lowest levels of the past decade. In addition, the American Council of Life Insurance reported a small increase in first-quarter delinquencies in residential mortgage loan portfolios at life insurance companies. III-24 I _ _1 I <> . 5-- 1 . <- / S * ( cc ,m * - * 0 c 0 ID 0 C 0 I cc 073 li N ''"'~' ( 0, a? 0 S *1 ' ZO 0, NI c0E L 0) ! cO - co 1 o mC Es- -( 0 o > a". CC 0 U-2 ES o c >.' INTERNATIONAL DEVELOPMENTS INTERNATIONAL DEVELOPMENTS U.S. International Trade in Goods and Services In April, the U.S. trade deficit in goods and services was $8.4 billion, seasonally adjusted, larger than in March but smaller than in February. For the first four months of 1994, the deficit was $98 billion at an annual rate, significantly larger than that recorded in the fourth quarter of last year. NET TRADE IN GOODS & SERVICES (Billions of dollars, seasonally adjusted) Year 1993 Quarters 93Q3 93Q4 94Q1 (annual rates) Months Feb Mar Apr (monthly rates) Real NIPA 1/ Net Exports of G&S -76.5 Nominal BOP Net Exports of G&S Goods, net Services, net -75.7 -132.6 56.8 -86.3 -84.5 -100.8 -89.0 -79.9 -97.1 -146.0 -132.7 -147.8 56.9 52.8 50.8 -- -- -9.6 -13.5 3.9 -6.9 -11.5 4.6 -8.4 -13.3 4.9 1/ In billions of 1987 dollars, SAAR. Source: U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census Exports of goods and services were 3 percent less in April than in March; declines were recorded in most trade categories (especially capital goods and gold) and partly reversed the sharp runup in March. For the first four months of the year, exports (SAAR) were only slightly lower than in the fourth quarter, and were well above the level reported in any other previous quarter. The growth in exports since last fall has been led by shipments of machinery especially to expanding markets in Asia. Imports of goods and services were about the same in April as in March; increases in imported consumer goods, machinery, and oil were offset by declines in other categories. the value of oil was in price. All of the increase in For the first four months of the year, imports (SAAR) were about 2 percent higher than in the fourth IV-1 IV-2 U.S. International Trade in Goods & Services Net Exports of Goods & Services 1991 1992 Bil$, SAAR 1993 Selected Exports 1994 Bil 87$, SAAR Bil Machinery Ex Computers ------ Automotive Ind. Supp. (Nonag Ex Gold) 1991 1992 1993 NIPA Goods & Services 1991 1992 Ratio Scale, Bit 87$, SAAR 1993 Selected Imports 1994 Bil 87$, SAAR Machinery Ex Computers ------- Automotive -Consumer Goods 1992 1993 IV-3 U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES (Billions of dollars, SAAR, BOP basis) Quarters Months 93Q4 94Q1 Change 1/ Q4 Q1 Exports of G&S 665.1 656.8 32.9 Goods Exports Agricultural Gold Computers Other Goods 478.7 45.4 13.1 30.6 389.7 472.1 43.7 9.4 31.3 387.7 Aircraft & Parts Semiconductors Other Capital Goods 34.5 20.6 105.7 Automotive Products Levels Mar Apr $Chg 1/ Apr -8.3 696.9 674.2 -22.7 31.8 3.2 3.6 1.1 23.9 -6.6 -1.6 -3.8 0.7 -2.0 504.7 45.5 17.7 32.6 408.9 483.5 42.9 8.5 30.6 401.6 -21.2 -2.7 -9.1 -2.0 -7.4 34.2 23.5 105.6 7.8 0.9 5.5 -0.2 2.8 -0.1 35.7 24.2 115.2 37.8 23.4 109.9 2.1 -0.8 -5.3 55.0 54.4 4.6 -0.6 57.1 56.7 -0.4 29.4 8.4 17.3 29.0 7.9 17.5 1.9 2.2 0.5 -0.4 -0.4 0.2 31.4 8.8 16.9 31.5 7.9 17.3 0.2 -0.9 0.3 96.4 56.9 20.5 96.2 55.4 18.4 2.1 1.7 1.3 -0.2 -1.5 -2.1 101.8 58.6 16.3 98.3 56.2 19.3 -3.5 -2.4 3.1 186.4 184.7 1.1 -1.7 192.1 190.7 -1.5 Imports of G&S 745.0 753.8 23.8 8.8 779.4 774.9 -4.4 Goods Imports Petroleum Gold Computers Other Goods 611.4 47.6 10.0 40.3 513.6 619.9 41.6 8.8 41.8 527.7 18.5 -2.5 -1.6 1.4 21.2 8.5 -6.0 -1.2 1.5 14.2 642.1 44.0 12.5 42.0 543.6 643.2 46.5 6.3 43.6 546.8 1.0 2.5 -6.2 1.5 3.2 Aircraft & Parts Semiconductors Other Capital Goods 12.4 21.8 88.8 11.3 23.1 94.4 1.9 2.1 4.8 -1.1 1.3 5.6 14.3 22.5 94.8 11.5 23.8 96.9 -2.8 1.4 2.1 Automotive Goods from Canada from Mexico from Rest of World 105.9 38.0 13.0 54.9 108.1 36.9 13.4 57.8 4.4 0.7 2.3 1.4 2.2 -1.1 0.4 2.9 114.6 40.4 14.8 59.4 113.7 40.1 13.7 60.0 -0.8 -0.3 -1.1 0.6 Industrial Supplies Consumer Goods Foods, Feeds, Bev. All Other 95.9 137.9 28.9 22.0 101.3 137.8 29.4 22.5 3.4 1.3 0.9 2.3 5.4 -0.2 0.5 0.4 106.0 136.0 30.5 24.9 104.7 142.2 29.9 24.0 -1.3 6.1 -0.6 -0.9 Services Imports Memo: Oil Quantity (mb/d) 133.6 133.9 5.3 0.3 137.2 131.8 -5.5 9.24 9.00 0.22 -0.24 9.51 9.39 -0.12 to Canada to Mexico to Rest of World Industrial Supplies Consumer Goods All Other Services Exports Levels 1/ Change from previous quarter or month. Source: U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census IV-4 quarter: the growth of imports was led by capital goods (particularly machinery other than computers) and non-oil industrial supplies (especially metals) reflecting the strength of U.S. expenditures on business equipment and construction supplies. The quantity of imported oil fell only slightly in April from the strong March rate. For the first quarter, imports averaged almost 9.0 mb/d (one half of consumption) despite a larger than seasonal drawdown in stocks. Preliminary Department of Energy statistics for May suggest that consumption remained strong and that inventories were partially rebuilt, with imports remaining above 9.0 mb/d. Prices of U.S. Imports and Exports Prices of imported oil rose almost $1 per barrel in April and rose further in May, consistent with the pick-up in spot and futures prices that began in late March. In the last four months, the spot price for West Texas Intermediate (WTI) has increased almost $5 per barrel, with roughly $1.25 of the increase coming since the May Greenbook. Currently, the spot price for WTI is $19.15 per barrel. The increase in oil prices appears to be the result of a pick-up in economic activity in Europe and Japan coupled with OPEC production restraint, as well as some near-term supply difficulties in the North Sea and Yemen. Prices of imported oil should continue to move with spot and futures prices, reaching about $16 per barrel in June. Prices of U.S. non-oil imports in May rose slightly for the third consecutive month. For April-May combined, prices rose slightly more than in the first quarter but well within the 1-1/2 to 2-1/2 percent range recorded for the past four quarters. May, the largest increases were in foods. In April- Prices of non-oil industrial supplies also moved up in April and May, continuing a pattern of increases begun in February. IV-5 PRICES OF U.S. IMPORTS AND EXPORTS (percent change from previous period) Months Mar Apr May (annual rates) (monthly rates) ----------------BLS Prices---------------- 93Q4 Quarters 94Q01 94Q2e/ -0.7 -24.3 2.0 Non-Oil Foods, Feeds, Bev. Ind Supp Ex Oil Computers -2.1 -30.2 5.9 -0.9 Merchandise Imports Oil 0.7 5.5 -5.1 Automotive Products Consumer Goods Memo: Oil Imports ($/bbl) Merchandise Exports Agricultural Nonagricultural 2.3 6.9 0.9 14.09 -0.1 2.1 -0.1 Ind Supp Ex Ag Computers Capital Goods Ex Comp Automotive Products Consumer Goods -4.0 -6.9 2.3 1.2 - 0.7 5.4 0.3 0.9 0.9 -1.0 0.4 0.3 -0.1 10.9 3.8 -6.4 2.2 1.2 12.67 0.5 8.2 -0.6 0.2 -1.9 0.3 2.2 1.3 -6.1 Capital Goods Ex Comp 6.3 55.8 1.4 12.66 0.4 -0.4 0.2 0.1 0.2 1.1 11.1 0.2 1.7 0.0 -1.0 0.1 0.2 0.2 13.57 4.1 1.2 0.2 0.0 0.4 19.9 2.2 -5.4 0.7 -2.1 2.2 0.1 0.4 1.4 0.1 7.8 -10.0 6.8 -4.6 0.9 -0.4 1.3 1.5 0.7 0.8 0.9 0.6 0.2 -0.4 0.1 0.4 -0.2 0.9 -0.3 -0.2 -0.1 0.2 0.4 -0.8 0.0 0.2 0.1 -------- Prices in the NIPA Accounts-------Fixed-Weight Imports of Gds & Serv. Non-oil Merch Ex Comp Exports of Gds & Serv. Nonag Merch Ex Comp -2.1 1.2 4.4 2.9 0.7 0.5 e/ Average of two months. Oil Prices -- 1987 $ per bbl pot WTI tmport U.V. 1988 1989 1990 1991 1992 1993 1994 IV-6 Nonagricultural export prices increased slightly in May. For April-May combined prices rose 2.2 percent at an annual rate, the same as in the first quarter; most of the increase during both periods was in industrial supplies. Prices of agricultural exports continued to fluctuate, rising in May after falling in two of the prior three months. U.S. Current Account The U.S. current account deficit widened by $5 billion SAAR from 1993-Q4 to 1994-Q1. An increase in the deficit on goods and services was partly offset by lower unilateral transfers and a small reduction in the deficit on investment income. Merchandise exports declined 1 percent in the first quarter from a strong fourth-quarter level; merchandise imports rose 1 percent (primarily capital goods and industrial supplies) despite a sharp drop in the value of imported oil. Most of the weakening in net services derived from reduced receipts from foreigners traveling in the United States. Unilateral transfers dropped back in Q1 from U.S. CURRENT ACCOUNT (Billions of dollars, seasonally adjusted annual rates) Goods & Services Balance Investment Income net Transfers net Current Acct Balance Years 1992 1993 -40.4 -75.7 4.5 3.9 -32.0 -32.1 -67.9 -103.9 Quarters 1992-1 2 3 4 -15.5 -41.5 -51.2 -53.4 9.8 6.5 4.9 -2.9 -27.7 -31.1 -28.2 -41.2 -33.4 -66.2 -74.4 -97.5 1993-1 2 3 4 -57.7 -76.3 -89.0 -79.9 7.4 2.7 8.1 -2.4 -29.1 -28.8 -30.5 -40.1 -79.4 -102.4 -111.4 -122.3 1994-1 -97.1 -1.5 -29.1 -127.6 Source: U.S. Department of Commerce, Bureau of Economic Analysis IV-7 Q4 levels that were elevated by the annual payment of grants to Israel at the beginning of the U.S. fiscal year. Income receipts on U.S. assets abroad rose more than income payments on assets in the United States. Receipts on U.S. portfolio investments abroad rose with the general level of interest rates and large outflows from the United States of portfolio capital; payments to foreigners on portfolio investments in the the United States fell slightly as coupon-timing effects more than offset the impact of large capital inflows. Net direct investment income receipts continued strong at nearly $50 billion (SAAR) mainly reflecting strong gross receipts from U.S. businesses operating abroad. U.S. International Financial Transactions Banks and securities dealers again recorded large net capital inflows in April (line 3 of the Summary of U.S. International Transactions table). Part of the inflow was to fund a general expansion of bank credit during the month. In addition, about $6 billion of the inflow was attributable to increased borrowing by securities dealers under repurchase agreements. Finally, another $5 billion of the inflow reflected a reduction of U.S. bank claims on own foreign offices associated with the restructuring of Brazilian debt. The restructuring replaced loans booked at the offshore offices of U.S. banks with bonds now held by the parent banks in the United States. The swap of debt for bonds with Brazil accounts for nearly all of the net purchases of foreign bonds shown on line 5a. Apart from this transaction, and net sales of $1 billion in Mexican bonds, U.S. activity in foreign bonds was relatively small in April. This contrasts with the first quarter when large sales in the United Kingdom were more than offset by purchases in continental Europe, Canada, Mexico, and Japan. U.S. net purchases of foreign stocks IV-8 SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS (Billions of dollars, not seasonally adjusted except as noted) Quarter Year 1993 Month 1994 1992 Official capital 1. Changes in foreign official reserve assets in U.S. (+ - increase) a. G-10 countries b. OPEC countries c. All other countries 2. Changes in U.S. official reserve assets (+ - decrease) Private capital Banks 3. Change in net foreign positions of banking offices in the U.S.2 Securities3 4. Foreign net purchases of U.S. securities (+) 4 a Treasury securities b. Corporate and other bonds c. Corporate stocks 5. U.S. net purchases (-) of foreign securities a. Bonds b. Stocks U.S. C' -. w- Current iit -I--,-«4 fc^-i / . accoun Statistical discrepancy (s.a.) Q2 Q3 Q4 Q1 38.3 4.8 4.9 28.6 70.0 29.9 18.5 23.1 4.8 10.8 -5.1 17.3 17.8 -1.7 45.3 1.2 3.9 -. 7 35.6 10.5 68.1 37.4 34.3 -3.7 106.7 25.5 14.8 61.6 14.8 -47.9 -15.6 19.6 1.5 -.2 -. 5 .5 9.1 -. 5 -. 7 -.1 .1 23.1 9.0 39.1 23.9 22.7 16.2 21.4 3.6 14.9 46.5 30.3 8.9 14.4 7.0 17.1 9.0 4.3 3.8 9.4 4.1 5.6 -11.4 2.8 8.2 26.1 12.2 -42.0 -31.6 -21.6 -10.7 -20.4 -20.9 -11.7 -63.3 -13.7 -41.0 9.9 -57.9 -17.7 21.4 8.9 57.1 16.7 -25.6 -27.9 9.7 -8.4 21.1 1.3 2.2 -25.4 -17.1 .2 -12.9 19.2 -61.0 ) -.6 1.3 Apr. -2.3 -67.9 -103.9 - 10.9 Mar. -. 9 -124.3 18.1 Feb. -3.1 12.1 -32.3 Other flows (quarterly data, s.a.) 6. U.S. direct investment (-) abroad 7. Foreign direct investment in U.S. Other (+ 9. Other (+ = =inflow inflow) Vt 1993 1994 -27.1 -9.0 -18.1 -2.0 -2.1 -11.0 -4.8 -6.2 -12.2 -9.8 3.1 -. 3 -1.5 -. 8 -6.9 5.2 -5 8 -6.0 -1.1 -13.5 n.a. n.a. n.a. n.a, n.a. n.a. n.a. n.a. n.a. -30.6 -31.9 n.a. n.a. n.a. 4.0 4.7 n.a. n.a. n.a. -6.3 -22.7 3.0 8.1 19.1 -5.1 -20.4 8.1 1. The sum of official capital, private capital, the current account balance, and the statistical discrepancy is zero. Details may not sum to totals becuse of rounding. 2. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes changes in custody liabilities other than U.S. Treasury bills. 3. Includes commissions on securities transactions and therefore does not match exactly the data on U.S. international transactions published by the Department of Commerce. 4. Includes Treasury bills. 5. Includes U.S. government agency bonds. G. 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-9 INTERNATIONAL BANKING DATA 1/ (Billions of dollars) 1991 Dec. 1. Net claims of U.S. banking offices (excluding IBFs) on own foreign offices and IBFs a. U.S.chartered banks b. Foreignchartered banks 2. Credit extended to U.S. nonbank residents a. By foreign branches of U.S. banks b. By Caribbean offices of foreign-chartered banks 3. Eurodollar holdings of U.S. nonbank residents a. At U.S.-based banks in the Caribbean and at all banks in Canada and the United Kingdom b. At the Caribbean offices of foreign-chartered banks 1992 Dec. June 1993 Sept. Dec. Mar. April May -35.8 -71.6 -80. -114.6 -122.1 -157.5 -168.4 -177.3 12.4 -48.3 17.0 -88.6 1994 16.0 12.5 4.2 -15.1 -20.2 -29.5 -97.2 -127.1 -126.3 -142.4 -148.2 -147.9 23.9 24.8 23.1 21.4 21.8 21.4 22.1 22.4 n.a. n.a. 101.1 95.9 90.9 88.6 n.a. n.a. 90.0 86.1 77.0 77.8 75.1 69.8 72.1 n.a. 80.2 82.4 79.2 84.2 n.a. n.a. 74.9 82.5 80.9 n.a. n.a. n.a. n.a. 102.9 n.a. MEMO: Data as recorded in the U.S. international transactions accounts 4. Credit extended to 49.8 52.6 76.4 70.3 U.S. nonbank residents 5. Eurodeposits of U.S. 262 252 nonbank residents 254 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 PR2950 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 for the overnight component (FR2050) and an average of Wednesday data for the term component (FR2077) supplemented by the FR2502 and end of quarter data supplied by the Bank of Canada and the Bank of England. Line 3a includes holdings by money market mutual funds. Line 4 is end-of-period data from the Treasury International Capital (TIC) Reports. Much of the increase nce December 1992 is the result of improved reporting ($38 billion in 1993 and $7 billion in 1994 01). inm 5 is end-of-period data estimated by BEA on the basis of data provided by the BIS and the Bank It includes some foreign-currency - England, supplemented by TIC reports of banks' custody claims. denominated deposits. IV-10 also slowed in April (line 5b). The most notable decline was in Japan where net purchases were less than $1/2 billion after averaging more than $3 billion per month in the first quarter. Private foreign transactions in U.S. securities swung from large net purchases in the first quarter to large net sales in April (line 4). The largest swing was in U.S. treasury securities which registered net sales of $11 billion. The swing was concentrated in the United Kingdom and offshore financial centers. Japanese residents purchased $1 billion in Treasuries in April, compared with net sales of $3 billion in the first quarter. Foreign purchases of corporate bonds slowed in April and the pace of net equity sales increased. Foreign official reserves in the United States declined sharply in April, more than reversing the $11 billion increase in the first quarter (line 1). About half of the decline in April is attribut- able to Mexico, reflecting exchange market intervention to support the peso after the assassination of presidential candidate Colosio in March. Significant declines were also recorded for Singapore, Taiwan, Spain, and Switzerland. Japanese official reserves in the United States rose in April, although by an amount less than their reported exchange market intervention. Partial data for May from the FRBNY record official inflows of about $7 billion. Increases in Japanese reserves account for about one-third of this inflow. Recently released data for the first quarter continue to show near-record U.S. direct investment abroad (line 6). However, a large part of this outflow was not related to the accumulation of plant and equipment. A few U.S. securities firms lent large amounts to their U.K. affiliates. Since a few U.S. securities firms also account for nearly all of the previously mentioned sales of foreign securities to the United Kingdom, it seems likely that a large part IV-11 of the direct investment lending went to finance U.K. affiliates' purchases of securities from their U.S. parents. Foreign direct investment inflows to the United States also remained high in the first quarter (line 7), although considerably less than the record levels reached in the late 1980s. Foreign Exchange Markets The weighted-average foreign exchange value of the dollar has declined about 4 percent on balance since the May 17 FOMC meeting. The dollar's weighted-average value showed little net change over the latter half of May and the first two weeks of June, but has declined sharply since then. Perceptions that recovery in several major foreign industrial countries is more firmly taking hold have contributed to a rise in foreign relative to U.S. long-term interest rates over this period. Since the May FOMC meeting, the weighted- average of long-term interest rates in the foreign industrial countries has increased about 55 basis points while the comparable U.S. long-term rate has risen only about 25 basis points on balance. The dollar's recent weakness also may have reflected in part concerns about possible increasing inflationary pressures in the United States, related to tightening U.S. labor market conditions. On June 21, the dollar briefly fell below 100 yen per dollar, a new post-war low. In response, the Bank of Japan made large-scale intervention purchases of dollars and Treasury Secretary Bentsen issued a public statement expressing concern about exchange market developments. The dollar remained weak against the yen and mark over the remainder of the week and, when the dollar began to fall further on June 24, the Desk joined concerted intervention other central banks in . The Desk purchased a total of $1,560 million--$950 million against marks and $610 against yen, IV-12 WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR March 1973 = 100 SFOMC May 17 Daily March April May SELECTED DOLLAR EXCHANGE RATES March April June March 1, 1994 = 100 May June IV-13 Shortly after the concerted intervention began, Treasury Secretary Bentsen issued a statement noting the cooperation between the United States and its G-7 partners in the day's actions, and saying that the operations "reflect a shared concern about recent developments in financial markets." The intervention opera- tion appeared to have little impact on exchange rates, and the dollar actually declined a bit further against the mark over the course of the day. The dollar has declined about 5-1/4 percent relative to the yen over the intermeeting period. Earlier in the period, the dollar was given some support against the yen when U.S. Trade Representative Mickey Kantor announced that the United States and Japan had reached understandings that would allow a resumption of the framework trade talks that had been broken off in February. However, the perception of somewhat improved U.S.-Japan trade relations was reversed and the dollar came under strong downward pressure against the yen following the June 7 statement by Mr. Kantor indicating that U.S. goals in terms of access to the Japanese market had not changed, and that the United States would open Japanese markets either through the framework talks or through U.S. trade laws. The political turmoil in Japan may also have contributed to the dollar's weakness against the yen by raising doubts about the government's ability to take measures to counter the yen's rise. Short-term interest rates in Japan have shown little net change over the period. The dollar has depreciated about 5 percent relative to the mark since the May FOMC meeting. The mark's strength appears to have reflected in part a growing market perception that the Bundesbank is unlikely to make additional cuts in official interest rates in the near-term or to reduce short-term market rates much further. A plethora of statements by Bundesbank officials over the period have IV-14 generally been seen as confirming this view, particularly a statement by Bundesbank President Tietmeyer interpreted as indicating that the May 11 lowering of the discount rate would be the last reduction in German official rates for the time being. Reinforcing the view that the Bundesbank will be unlikely to ease further has been the rapid growth of the targeted M3 monetary aggregate. As of May, M3 had grown at a 13.7 percent rate from its fourth-quarter base, well above its 4 to 6 percent target range. Reflecting the diminishing market assessment of the likelihood of further Bundesbank easing, the German three-month interest rate has eased only about 15 basis points on balance since the May FOMC meeting, despite continued weekly reductions in the Bundesbank's repo rate that have totaled 39 basis points over this period. Short-term interest rates in most other European countries have shown little net change over this period. The major exception has been Italy, where the three-month rate has increased about 75 basis points as the Italian lira has come under downward pressure relative to its EMS partner currencies. The only major foreign currency to decline against the U.S. dollar over the intermeeting period has been the Canadian dollar, which has depreciated about 1/2 percent on balance, apparently reflecting continued market concerns over the upcoming Quebec election and large government budget deficits. In response to the downward pressure on the Canadian dollar, Canadian authorities moved to raise the three-month interest rate about 30 basis points over the period. Long-term interest rates in all major foreign industrial countries have continued to move higher since the May FOMC meeting. The increases have ranged from about 40 basis points in Japan and Germany to about 125 basis points in Italy. In both Japan and IV-15 Germany, incoming data appear to have been generally interpreted by the market as signaling increased prospects of economic recovery, thus putting upward pressure on long-term rates. The especially sharp rise in the Italian long-term rate followed a ruling by the Italian Constitutional Court overturning legislation capping increases in second pensions, potentially substantially increasing the public sector budget deficit. With long-term interest rates rising sharply, equity prices have dropped in nearly all of the major foreign industrial countries since the May FOMC meeting. The declines have varied from about 7 percent in Canada to about 13 percent the Italy; German stock prices have fallen about 9 percent on balance over the period. The only exception to this general decline in equity prices has been Japan, where the Nikkei index has risen about 2 percent. Developments in Foreign Industrial Countries After following divergent paths in 1993, economic activity expanded in all the major foreign industrial countries in the first quarter of 1994. First-quarter data suggest that each of the countries is now past its trough. In Japan, western Germany, and France growth resumed, after contracting or remaining flat in the fourth quarter of last year. In Italy, monthly indicators suggest the moderate pace of recovery evident late last year continued, while growth in the United Kingdom and Canada remained at a healthy pace. IV-16 Despite the upturn in economic activity, considerable economic slack persists. Unemployment rates remain high even in countries where recovery is firmly established, although they have begun to come down in the United Kingdom and Canada. Slow wage growth and slack economic conditions have contributed to low or declining consumer price inflation. Individual Country Notes. In Japan, GDP data released since the May Greenbook show that real GDP rose 3.9 percent (SAAR) in the first quarter of 1994. Most of the increase came from domestic demand as strength in household and government expenditures more than offset a sharp decline in private investment. Net exports also rose, reflecting high export growth in excess of a strong increase in imports. Because high GDP growth in the first quarter of 1993, stimulated by government fiscal packages, was followed by a resumption of weakening, the performance of GDP in the second quarter of this year should provide key information on whether the recovery is established. JAPANESE REAL GDP (percent change from previous period, SAAR) 1992 1993 Q4/Q4 Q4/Q4 1993 Q3 Q4 1994 Q1 GDP -0.3 -0.1 1.1 -2.8 3.9 Consumption Investment Government Consumption Exports Imports 0.2 -2.0 2.0 1.8 -4.3 1.8 -0.6 2.8 -4.0 2.8 1.8 1.3 2.5 -1.9 -1.3 3.0 -5.3 3.7 -0.2 10.3 5.8 -3.7 1.8 8.8 8.5 0.7 -1.1 0.4 -2.6 0.8 Net Exports (contribution) Monthly data for the second quarter are mixed, but on balance are consistent with continued, albeit slower, growth. The Bank of Japan's May (Tankan) survey of business sentiment showed its first increase since 1989, and firms predicted a smaller decline in investment for FY 1994 than in the February survey. Industrial IV-17 production fell in April and May, but less than anticipated, the unemployment rate has remained essentially flat in recent months, and the job offers-to-applicants ratio declined slightly in May. JAPANESE ECONOMIC INDICATORS (percent change from previous period except where noted, SA) 1994 1993 --- Mar. 4.6 9.1 Apr. -1.9 -23.1 May -0.8 8.5 -- 11.9 -12.3 -4.6 0.66 -- 0.66 69.6 64.9 -56 -50 76.9 n.a. Industrial Production Machinery Orders Q4 0.1 -3.7 0.4 -0.7 _Q1 1.9 6.9 New Car Registrations 1.6 -3.3 Q3 Job Offers Ratio* Index Leading Ind.* Business Sentiment** * 0.71 0.66 42.9 35.8 -51 -56 Q2 0.66 0.64 -80.0 n.a. -50 Level of indicator. ** Percent of manufacturing firms having a favorable view of business conditions minus those with an unfavorable outlook. On June 23, the upper house of the Diet approved the budget for FY 1994, allowing it to be enacted into law. Since the start of the fiscal year on April 1, the government has been running on two successive stop-gap budgets. The passage of the formal FY 1994 budget reduces uncertainties concerning the government's ability to maintain its recent pace of fiscal stimulus, and also opens the door to additional stimulus packages, if necessary. On June 29, Socialist Party chairman Tomiichi Murayama was elected prime minister by the lower house of the Diet with the support of both Socialist Party and Liberal Democratic Party (LDP) members. Murayama succeeds Tsutomu Hata, who resigned on June 25 after only two months in office rather than risk a likely defeat in a vote of no confidence introduced by the LDP. Since Hata assumed the leadership of the minority government on April 25, the various opposition parties had pledged not to attempt to replace the government until after the budget was enacted. Real GDP in western Germany rose 2.2 percent (SAAR) in the first quarter, led by a surge in construction during the mild IV-18 winter. While real GDP (NSA) in eastern Germany increased 10.4 percent over the year-earlier level in the first quarter, data adjusted using west German seasonal factors show a decline of 5.8 percent (AR) from fourth-quarter levels. Accordingly, for total Germany, real GDP advanced 1.6 percent (SAAR) in the first quarter. WESTERN GERMAN REAL GDP (percent change from previous period, SAAR) 1992 1993 Q4/Q4 Q4/Q4 0.1 -0.8 3.4 -1.7 1994 1994 2.2 Consumption Investment Government Consumption Exports Imports 3.2 -1.1 2.5 -3.9 0.3 -1.1 -6.8 -1.2 -2.2 -9.5 5.3 2.5 5.2 6.6 5.6 0.2 -9.0 1.7 9.6 -0.7 0.0 16.4 -5.3 8.4 14.2 Net Exports (contribution) -1.5 1.9 0.7 3.2 -0.7 GDP 1993 Q3 Q4 Available data on production in the second quarter indicate that the recovery in western Germany is continuing. However, the volume of retail sales (SA) in western Germany slumped in April, declining more than 7 percent relative to the average level in the first quarter. In eastern Germany, industrial production (NSA) has continued to show strong gains, advancing 17.8 percent over the year ending in April. WESTERN GERMAN ECONOMIC INDICATORS (percent change from previous period except where noted. SA) 1993 Industrial Production Manufacturing Orders Capacity Utilization Unemployment Rate (%) Production Plans* 1994 0.7 -0.4 1.9 -1.1 78.2 78.1 8.5 9.0 Q1 0.0 2.6 79.4 9.2 -25.7 -21.7 -15.0 -8.0 3.3 Q1 -2.9 -1.0 79.5 7.6 Q2 0.0 0.3 78.7 8.0 Q3 Q4 Apr. May 2.5 0.6 n.a. 9.3 n.a. n.a. n.a. 9.4 6.0 n.a. * Percent of manufacturing firms planning to increase production in the next three months minus those that plan to decrease production. IV-19 Growth of the targeted monetary aggregate M3 has moderated since the early months of this year but remains high. In May, German M3 increased 13.7 percent (SAAR) relative to the fourth quarter of 1993, down from 15.4 percent in April. It appears highly unlikely that M3 will fall within its official target range of 4 to 6 percent this year. In its mid-year review on July 21, the Bundesbank Council is expected to evaluate this year's target range for M3 growth. In France, GDP growth recovered in the first quarter after registering zero growth in the fourth quarter. The rise was largely the result of a positive contribution from inventories as consumption was flat and investment fell while net exports made a large negative contribution. Although consumption of manufactured goods registered moderate growth, it was offset by a large drop in FRENCH REAL GDP (percent change from previous period, SAAR) Q4/Q4 1992 1993 Q4/Q4 0.6 -0.5 1.8 -2.1 0.3 -4.4 Government Consumption 1.2 Exports Imports 5.6 2.3 0.8 GDP Consumption Investment Net Exports (contribution) 1993 Q4 1994 Q1 1.2 0.0 2.0 2.4 2.0 0.0 -2.4 0.0 -1.6 0.2 2.9 -0.2 2.5 2.6 -3.0 12.1 2.0 1.2 -3.6 -7.0 4.5 1.6 2.7 1.3 -3.3 Q3 FRENCH ECONOMIC INDICATORS (percent change from previous period except where noted, SA) 1993 1994 Q3 Q4 Q1 Q1 Industrial Production Consumption of * Manufactured Products Unemployment Rate (%) Q2 -1.0 -0.6 0.9 -0.5 -2.7 10.6 -0.6 11.5 1.9 11.7 -1.5 12.1 0.6 12.2 Apr. 0.7 * Roughly 1/3 of total real consumption 1.2 12.3 IV-20 energy consumption due to unusually warm weather. consumption of manufactured goods rose strongly. In April, Survey data from INSEE for May show continued improvement in business confidence and that businesses intend to increase investment, suggesting that the inventory rise occurred largely in anticipation of future sales. Activity in the United Kingdom appears to be holding up in spite of large tax increases that took effect at the beginning of April. Industrial production in April surged unexpectedly, and UNITED KINGDOM REAL GDP (percent change from previous period, SAAR) 1992 1993 Q4/Q4 Q4/Q4 0.2 2.6 Consumption Fixed Investment Government Consumption Exports Imports 1.3 0.7 -0.1 3.0 6.2 3.2 1.3 1.0 3.1 3.7 4.7 4.6 0.7 12.5 6.5 4.7 10.3 -1.1 2.3 11.3 2.3 8.5 2.3 9.3 3.2 Net Exports (contribution) Non-oil GDP -0.9 0.0 -0.3 2.2 1.3 3.3 -2.5 2.4 1.4 2.0 GDP 1993 Q3 Q4 3.6 2.7 1994 1994 2.6 UNITED KINGDOM ECONOMIC INDICATORS (percent change from previous period except where noted, SA) Industrial Production Retail Sales Average Earnings Q2 0.8 0.6 3.8 Production Plans* (%) 16.3 Consumer Confidence** (%) 5.3 Unemployment Rate (%) 10.4 RPI ex. MIP (NSA)*** . ° * 2.8 1993 Q3 1.2 1.0 3.3 1994 Apr May 1.6 n.a. 0.5 0.0 3.8 n.a. Jun Q4 1.2 0.8 3.1 Q1 0.7 1.0 3.8 12.0 9.7 -4.7 -12.0 10.4 10.0 20.7 -7.7 9.8 16.0 -22.0 9.5 23.0 -10.0 9.4 22.0 -10.0 n.a 2.7 2.3 2.5 n.a 3.1 2.7 n.a n.a n.a . . Percent of manufacturing firms planning to increase production in the next four months minus those that plan to decrease production. **Percent of individuals who expect the general economic situation to improve minus those who expect it to worsen. *** Retail prices excluding mortgage interest payment, percent change from year earlier. IV-21 retail sales have slowed less than expected. After falling in April, consumer and business confidence picked up considerably in May. Underlying inflation continues subdued, and labor costs, after accelerating in the first quarter, edged back somewhat in April. In elections for the European parliament in June, the Conservative Party received only 27 percent of the national vote. Despite the weak showing, the Conservatives did better than expected by retaining 19 of their current 45 seats. Following a strong performance in the fourth quarter, growth in Italy appears to have remained positive in the first quarter as industrial production continued to rise and capacity utilization and unemployment held steady. Available indicators for the second quarter suggest that economic activity likely has continued its gradual recovery. Industrial production on a year-over-year basis edged down in April, but there were two fewer working days this year compared with April 1993. Although the second quarter unemployment rate rose, business sentiment has continued to show strength, and consumer confidence recently has soared. ITALY ECONOMIC INDICATORS (NSA) Industrial Production* Capacity Utilization (%) Unemployment Rate (%) 1993 Q3 Q4 0.1 -2.7 73.7 74.4 10.3 11.3 Consumer Confidence Business Sentiment** 98.5 -3 (%) 1994 Q1 2.6 74.5 11.3 96.3 100.6 19 4 Mar. Q2 n.a. n.a. 11.6 Apr. 2.6 n.a. n.a. n.a. 103 n.a. 21 May -1.0 n.a. n.a. 108.3 25 n.a. n.a. n.a. 112.6 n.a. * Percent change from year earlier level. ** Percent of manufacturing firms having a favorable view of business conditions minus those with an unfavorable outlook. Since coming to power in May, the Berlusconi government has implemented a series of measures to boost employment. The government has reduced taxes for companies that create net new employment and initiated an investment tax credit. On the spending IV-22 side, the government plans to resume public works projects that were suspended by corruption investigations. Because project funds already were allocated, resumption will have no effect on this year's deficit. The government is negotiating with labor unions over proposals to make the labor market more flexible, such as more freedom for employers to hire and fire workers and less stringent rules on part-time and temporary employment. On June 14, Italy's highest court ruled that the government must make payments that may amount to nearly 2 percent of GDP for back years on second pensions. The government is considering options for compliance with the court ruling. In Canada, economic activity expanded at a vigorous pace in the first quarter of 1994, with consumption expenditure especially strong. A decline in construction offset a modest increase in Recent data suggest economic machinery and equipment investment. activity remains robust, although retail sales fell in April after Employment continues to grow at five consecutive monthly increases. a steady pace, with full-time jobs more than accounting for the increase so far this year. In 1993, full-time jobs accounted for only 30 percent of increased employment. The unemployment rate is still high as increased labor force participation has accompanied employment growth. CANADA REAL GDP (percent change from previous period, SAAR) 1992 GDP Consumption Fixed Investment Government Consumption Exports Imports Net Exports (contribution) 1993 Q4/Q4 Q4/Q4 0.5 3.2 1.3 0.6 -5.8 0.8 9.4 3.3 2.2 4,5 -0.1 10.9 11.1 1.7 3.6 -0.8 6.8 4.4 2.4 11.3 0.2 14.3 15.6 3.7 -1.2 -0.7 4.4 -2.9 1.7 -0.3 0.7 -0.7 2.7 1993 Q3 Q4 3.6 1994 Q1 4.2 IV-23 Excluding the effect of cigarette tax reductions in February and other excise tax changes in May, inflation in Canada in recent months has averaged less than 1.5 percent over the year-earlier level. Wage settlements remain moderate in early 1994, after the lowest annual increase on record in 1993. CANADA ECONOMIC INDICATORS (percent change from previous period except where noted, SA) 1993 1994 Q1 Industrial Production Retail Sales 1.8 1.2 Employment 0.8 0.9 0.6 2.1 Consumer Prices* 11.4 1.8 1.1 1.0 0.2 0.2 10.9 Unemployment Rate (%) 0.9 1.3 0.3 11.4 11.1 1.7 1.8 Apr. 0.4 n.a. 3.2 0.4 11.0 0.6 -1.7 0.0 11.0 0.2 May n.a. n.a. 0.5 10.7 -0.2 * Percent change from year earlier. EXTERNAL BALANCES (Billions of U.S. dollars, seasonally adjusted) Q2 1993 Q3 Q4 Q1 Mar. Apr. Japan: trade current accnt 29.9 31.6 29.5 32.3 30.5 30.6 31.3 32.3 10.0 9.9 11.6 12.5 8.5 n.a. Germany: trade* current accnt* 7.9 -3.8 8.1 -9.9 14.4 -3.4 10.2 -5.4 3.6 -1.3 3.5 -1.1 n.a. n.a. France: trade current accnt 3.9 1.7 5.0 4.0 1.5 1.3 n.a. U.K.: trade current accnt -5.1 -5.3 -4.8 -3.0 -5.3 -3.1 -1.8 n.a n.a. 4.9 2.2 5.2 3.8 6.1 6.4 n.a. 2.6 n.a 2.3 n.a. 2.8 n.a. n.a. 1.8 -5.7 1.7 -5.6 1.8 -6.1 1.8 -5.3 0.6 0.9 n.a. Italy: trade current accnt* Canada: trade current accnt * Not seasonally adjusted. 1994 5.5 n.a. 2.8 n.a. -4.6 -1.0 IV-24 Chart 1 June 29, 1994 Industrial Production for Major Foreign Countries Ratio Scale, Seasonally Adjusted, Monthly 1987-100 1990 1991 1992 1993 1994 1987=100 1990 1991 1992 1993 1994 - 130- t 130 United Kingdom France 4 120 120 v 110 - 110 100 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1990 1991 1992 1993 1994 1991 1992 1993 1994 130 Canada 12 120 - 1990 1990 1991 1991 1992 1992 1993 1993 1994 1994 1990 IV-25 Chart 2 June 29. 1994 Consumer Price Inflation for Major Foreign Countries Yearly Percent Change -Japan 12 W. Germany S9 6 - 6 I 1990 I I I 1991 1992 1993 1994 1990 1991 1992 1993 1994 1991 1992 1993 1994 1990 1991 1992 1993 1994 1993 1994 France 1990 Excluding mortgage inrest payments. - 2 Italy 9 3 - 199 0 1990 1991 1992 1993 1994 1990 1991 1992 IV-26 Economic Situation in Other Countries Mexican real GDP rebounded somewhat during the first quarter of 1994, and Mexican imports and exports have expanded significantly, due mainly to trade liberalization resulting from NAFTA. In other developing countries, economic activity has been generally robust. During the first quarter of 1994, real GDP grew (year/year) by 5.7 percent in Brazil, by 5.5 percent in Taiwan, and by 9.1 percent in Korea. Chinese industrial production during May was 17 percent above its year-earlier level. investment boom: Argentina continues to experience an construction expenditure and capital goods imports have increased sharply. Brazil will introduce a new currency on July 1, as part of a program to tame its 40 percent monthly inflation rate. Russian consumer prices increased by 8.1 percent during May, the smallest increase since October 1991. Venezuela, in the midst of a banking and financial crisis, implemented foreign exchange and price controls on June 27. Individual country notes. Mexico's real GDP was 0.5 percent higher in the first quarter of 1994 than in the same period last year. This is the first quarter of positive year-over-year growth following two quarters of contraction. Imports in January-April 1994 were 17.5 percent higher than in the same four months of 1993, reflecting in part the lowering of trade barriers as NAFTA went into effect. Exports in January-April were 15.7 percent higher than a year earlier (even though petroleum exports were 17.3 percent lower), as non-oil exports increased by 21.8 percent. As a result, the cumulative four-month trade deficit was $1 billion higher than a year earlier. IV-27 The monthly inflation rate was 0.5 percent in May, unchanged since February, leaving the May CPI 6.9 percent higher than a year earlier. The financial crisis that gripped Mexico after the leading presidential candidate was assassinated on March 23 abated in May. However, nervousness returned in June when the Chiapas rebels rejected the tentative peace agreement negotiated in February. Further volatility ensued when the chief government peace negotiator resigned June 16, complaining that his effectiveness had been undermined by critical comments from government party presidential candidate Ernesto Zedillo. As shown on the following table, which charts the behavior of Mexican financial markets, on June 28 the peso was only 0.3 percent above the lower limit of its fluctuation band against the dollar, having depreciated by 8.4 percent since mid-February. Also on June 28, the Mexico City stock market closed 22.5 percent below its February all-time high and 14 percent above its 1994 low. The rate on 3-month peso-denominated Treasury bills at the June 29 auction was 16.5 percent, up sharply from 9.1 percent in mid-February. In Brazil, economic activity remains robust. Real GDP rose by 5.7 percent in the first quarter of 1994 over a year earlier, led by strong performance in agriculture. Monthly inflation in May, however, was 42 percent, continuing the high level seen in recent months. The cumulative trade surplus for the year through April 1994 was $4.2 billion, down from a surplus of $4.9 billion over the same period in 1993. stagnated. Imports grew by 13 percent, while exports The deterioration in the trade balance reflects strong internal demand, trade liberalization, and a 12.5 percent appreciation of the real exchange rate between Q1 1993 and Q1 1994. IV-28 EXCHANGE VALUE OF THE MEXICAN PESO Peso/$ 3.5 Daily - "Lower" Limit ---- 34 - 3.3 - 3.2 Market Rate 3.1 "Upper" Limit I January I I February March April May 3-MONTH INTEREST RATE IN MEXICO I 3 June Percent 18 Weekly -16 14 12 10 January March February April May MEXICAN STOCK INDEX June 8 January 3., 1994 - 100 120 Daily -110 100 90 80 I January February 70 March April May June IV-29 On July 1, Brazil will introduce a new currency, the "real," part of its current anti-inflation program. as The government announced in mid-June that the real will be temporarily pegged to the dollar and will be backed "in part" by international reserves. Finance Minister Ricupero recently stated that the government is willing to commit as much as $10 billion in reserves to support the new currency. (Total international reserves were $38 billion at the end of April.) Nevertheless, in a recent survey of Brazilians, over half the respondents did not believe that the anti-inflation program would succeed. In Argentina, the ongoing investment boom is contributing to higher industrial output and a larger trade deficit. During the first quarter of 1994, gross fixed investment was over 30 percent higher than a year earlier, reflecting large construction expenditures and an increase of 110 percent in capital goods imports. Industrial production during January-April was about 7 percent higher than a year earlier, surpassing the previous cyclical peak reached in 1987. Consumer prices in May were 3.3 percent higher than a year earlier. According to preliminary estimates, exports during January-May were up about 9 percent (year/year), as strong manufactured exports swamped the influence of a poor wheat harvest. Soaring capital goods imports, however, generated a 46 percent increase in total imports during January-April, causing the trade deficit to widen to $1.85 billion from $186 million over the same period last year. Faced with weak grain exports and a burgeoning trade deficit, the Menem administration has announced tax measures to encourage the agricultural sector to increase exports. On June 14, authorities in Venezuela intervened and closed eight financial institutions holding more than 20 percent of the IV-30 public's deposits in the banking system. These institutions had received about $3 billion in credit from the deposit insurance agency and the central bank since January. Despite government assurances that all eight institutions would resume operations by June 20, only three banks had been reopened by the end of June. Continued large monetary emissions to the financial system stimulated a jump in monthly consumer price inflation to 5 percent in May and an estimated 5.5 percent in June, up from 3 percent per month a year earlier. Rising inflation and falling confidence in the banking system contributed to a renewed surge in capital flight and currency depreciation. The central bank spent an estimated $1 billion in foreign exchange in June (about 20 percent of its international reserves, excluding gold) to support the bolivar. Nevertheless, the bolivar lost 21 percent of its value over nine days, and closed at about 200 bolivars per dollar on June 23, down from 106 bolivars per dollar at the beginning of the year. On June 27, President Caldera announced the immediate adoption of foreign exchange and price controls and the suspension of various constitutional guarantees concerning civil and economic rights. The central bank suspended foreign exchange trading until currency control measures are implemented on July 6. Price controls were imposed on about 100 basic goods and services. In a nationally televised speech, Caldera also promised to provide public subsidies to reduce the cost of food and transport to low-income households. Since Caldera received strong support for the emergency measures from opposition party leaders, the Venezuelan congress is likely to expedite its approval of the decree. Growth and inflation in China remain high, while the trade deficit appears to be narrowing. Industrial production rose 17 percent in May over a year earlier, after an 18 percent increase in IV-31 April. Consumer prices were up 21 percent in May (year/year): in 35 major cities, prices increased by 23 percent. During the first five months of 1994, the trade deficit was $1.8 billion, down from $3.1 billion in the same period last year. Exports rose 24 percent, and imports rose 18 percent. Official reports indicate that China eased credit controls in May and June, largely in response to the number of state-owned enterprises (SOEs) that were unable to meet their payrolls. In June, Chinese authorities ordered most of the country's 40-odd futures exchanges to cease trading, and prohibited brokerages from placing orders on international markets. Many SOEs have been active traders on international futures markets, reportedly losing large amounts of money. Real GNP growth in Taiwan was 5.5 percent in the first quarter of 1994 (year/year), compared with 6.3 percent growth in the same period last year. Exports, through May, were up 3.7 percent over the same period a year earlier, while imports were up 7.2 percent. Consumer prices were 4.3 percent higher in May than a year earlier. In recent months, Taiwan has taken steps to liberalize its financial sector. It is opening the insurance market to all foreign insurers, and it has lifted its ban on foreigners establishing new commercial banks. The authorities also agreed to raise the ceiling on foreign investment in Taiwan's stock market to 10 percent of total capitalization, an increase of about 35 percent over the previous fixed-dollar limit. Economic recovery in Korea is firmly established. Real GDP increased by 9.1 percent in the first quarter of 1994 from a year earlier. Strong growth has been fueled, in part, by a recovery in fixed capital investment from the depressed levels recorded in the first half of 1993; capital investment during the first quarter of IV-32 1994 increased by 13.5 percent, compared with the same period last year. Despite strong growth, inflation has slowed somewhat. Consumer prices were 5.7 percent higher in May 1994 than a year earlier. Merchandise imports increased by 14.1 percent in the first four months of 1994 from a year earlier, while exports grew by 8 percent. This contributed to a widening of the current account deficit for the first four months of 1994 to $2.8 billion from $700 million a year earlier. In Russia, consumer prices increased by only 8.1 percent in May, a 30-month low. contract. Industrial production, however, continued to According to official statistics, industrial production during April and May was 28 percent lower than during the same period a year ago; the accuracy of these figures, however, is increasingly questioned, since they do not appear to capture the burgeoning growth of the private sector. Since late-February, the ruble has depreciated against the dollar at a steady rate of 1 percent a week. ruble-dollar exchange rate was 1992. On June 29, the MICEX During the last two months, the Central Bank of Russia has progressively lowered its monthly refinance rate from 17.5 percent to 14.2 percent, still well above the monthly inflation rate. In mid-June, the Russian government reversed a November 1993 decree prohibiting foreign banks from serving Russian customers. This reversal, however, applies only to banks from countries that have allowed Russian banks to enter. Since Russian banks have not satisfied regulatory requirements to enter the United States (indeed, only one Russian bank has made formal application for entry), U.S. banks are still banned from serving Russian customers. IV-33 On June 24, the Russian parliament approved the 1994 budget. The final version outlines a deficit estimated at 9.5 percent of 1994 GDP. (Russia's fiscal accounting procedures deviate from IMF conventions; the deficit falls to slightly below 9 percent of GDP when IMF conventions are used.) Russia's Systemic Transformation Facility with the IMF authorizes a deficit of only 7.2 percent of GDP. Nonetheless, the IMF has not criticized the budget, perhaps because the government showed significant commitment to fiscal discipline by rejecting the military's demands for large funding increases.
@FedFRASER