The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Strictly Confidential (FR) Class II FOMC July 3, 1985 SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System TABLE OF CONTENTS Section DOMESTIC NONFINANCIAL DEVELOPMENTS Page II Industrial production and capacity utilization.................. 1 Employment and unemployment..................................... 3 Personal income and consumption................................. 3 Business fixed investment. 8 .............................. Business inventories........................................... 10 ... Housing.................... ........ ........... .............. Federal sector................................. ......... ....... .................... Exports and imports....................... Prices ..... .................................. ................... Wages and labor costs........................................... 10 12 13 15 16 Tables Industrial production....................................... 2 Capacity utilization in industry................................ 2 . ................... Changes in employment..................... Selected unemployment rates..................................... 4 4 Personal income and expenditures................................ 6 Retail sales.................................................... 7 Auto sales, production, and inventories........................ Business capital spending indicators............................ Changes in manufacturing and trade inventories.................. 7 9 11 Inventories relative to sales................................. Private housing activity....................................... Fiscal-year-to-date budget proposals............................. 11 14 17 Individual estimated and final tax receipts since January 1.................................. ....... Recent changes in consumer prices............................... 17 18 Recent changes in producer prices.................... .......... Hourly earnings index ........................................... 18 19 Charts Nonresidential construction, contracts, and permits............. Housing starts and newly issued permits......................... DOMESTIC FINANCIAL DEVELOPMENTS 9 14 III Monetary aggregates and bank credit............................. 3 ... ...... 7 Business finance.................................... U.S. government securities markets.............................. Tax-exempt securities markets................................... Mortgage markets.............................................. Consumer installment credit.................................... 9 11 13 15 DOMESTIC FINANCIAL DEVELOPMENTS-continued Tables 4 Monetary aggregates........................................ Commercial bank credit and short- and intermediate-term business credit ............................................. 6 Gross offerings of securities by U.S. corporations.............. Treasury and agency financing................................... Gross offerings of tax-exempt securities........................ Mortgage activity at FSLIC-insured institutions................. New issues of federally guaranteed mortgage 8 10 12 14 pass-through securities..................................... .... . Consumer installment credit................................ 14 16 Charts Selected survey-based measures of real interest rates........... Commercial bank new-auto loans and 2 three-year Treasury securities.............................. 18 INTERNATIONAL DEVELOPMENTS Foreign exchange markets IV ....................................... U.S. international financial transactions....................... 1 3 . U.S. merchandise trade.................................. ....... U.S. current account, 1985:1................................... Foreign economic developments. ............................... 8 10 12 ... ..... Individual country notes............................ Economic situation in major developing countries............... 12 22 Tables Summary of U.S. international transactions...................... 4 International banking data..................................... U.S. merchandise trade.......................................... Oil imports.................................................... ........................................... U.S. current account Major industrial countries Real GNP and industrial production............................ Consumer and wholesale prices................................ Trade and current account balances............................. 6 8 10 11 13 14 15 Charts Weighted average exchange value of the U.S. dollar.............. Three-month interest rates...................................... 2 4 DOMESTIC NONFINANCIAL DEVELOPMENTS Recent developments. Economic growth appears to have picked up some- what in the second quarter, but sectoral imbalances persisted. Incoming wage and price data so far this year suggest that inflation is holding in the same range as during 1984. In the industrial sector, production edged down again in May, as a further decline in business equipment output and a small drop in consumer durables offset further gains in defense and space equipment and construction materials. Most major categories of output have shown little net change over the past ten months, and, overall, the capacity utilization rate has declined more than 2 percentage points since mid-1984, to a level of 80.3 percent in May. Employment in manufacturing also continued to fall in May, bringing the total reduction in factory jobs since the start of the year to more than 160,000. Nevertheless, with hiring remaining quite strong in the service sectors and in construction, total payroll employment increased nearly 350,000 in May, a larger gain than in most recent months. The civilian unemployment rate was 7.3 percent, about the same as during most of the past year. Growth in consumer spending remained strong into the spring quarter. Personal consumption expenditures, in nominal terms, rose 0.7 percent in in May, after an even larger gain the month before. Consumer outlays for nondurables rose rapidly in both months, and sales of foreign-made autos surged in May to the highest level in several months. Domestic car sales I-2 also held up well in May, but with the phasing out of special financing programs, sales were lower in the first 20 days of June. Overall, the gains in consumer spending sofar this year have been running well ahead of income growth, and the personal saving rate has averaged around 5-1/4 percent, toward the lower end of its range over the past decade. Activity in the housing sector still appears to be trending upward. Although the average pace of housing starts in April and May was about the same as the improved first-quarter rate, newly-issued building permits have continued to move up, and sales of new homes rebounded in May to a level above the first-quarter average. Qualitative reports generally indicate that the decline in mortgage interest rates over the past three months should provide the underpinnings for future increases in homebuilding. After declining in the first quarter, business fixed investment appears to be rising again, but at a much slower rate than in 1983 or 1984. Spending for nonresidential construction remained strong into the second quarter, as the value of construction put in place rose almost 5 percent in April and another 1 percent in May. In contrast, shipments of nondefense capital goods by domestic producers have shown little net change since last fall, and new orders also have remained weak. The Commerce Department's latest survey of capital spending plans suggests that nominal outlays for fixed investment this year will be roughly 9 percent above the 1984 average. Firms have maintained a tight rein on inventories so far this year. Real factory inventories showed little net change from December to April, and the book value of manufacturers' stocks fell sharply in May. In the trade sector, auto dealers' stocks rose rapidly in the first quarter, but more recently sales have outpaced production. Excluding autos, trade inventories have generally continued to rise at a somewhat slower rate than during 1984. On balance, stocks do not appear to be excessive in the trade sector, with the possible exception of nondurable retail outlets where inventory-sales ratios have been on the high side of historical experience. After picking up a little early in the year, the rate of increase in prices and wages has slowed in recent months. The consumer price index rose 0.2 percent in May, its smallest advance since January. A rebound in gasoline prices, which had boosted the CPI in March and April, began to dissipate, and food prices declined for the second month in a row. Prices of commodities other than food and energy were little changed in May at both the consumer and producer levels. Service prices, however, rose faster than in previous months, mainly because of a spurt in the CPI rent index. On the wage side, increases in the hourly earnings index have been small in recent months, after a temporary period of acceleration around the turn of the year. In addition, incoming reports suggest that union wage settlements have remained moderate. Outlook. The broad contours of the staff's economic forecast have changed little since the last Greenbook. Real GNP is estimated to have risen at about a 2 percent annual rate in the quarter just completed, after increasing at only a 0.3 percent rate in the first quarter. As in many re- cent quarters, the growth in domestic final demand appears to have been well-maintained in the second quarter. However, with a further drop in exports and a reduced rate of inventory accumulation, domestic output growth has lagged. For the first and second quarters combined, domestic final demand is estimated to have risen at more than a 4 percent rate-2-1/2 percentage points faster than real GNP. Prices, as measured by the fixed-weighted price index for gross business product, are estimated to have risen at a 3-3/4 percent annual rate in the second quarter, not much different from the rates of the two previous quarters. The staff's assumptions regarding monetary growth rates have changed somewhat since the last Greenbook. In particular, the increase in M1 for the year as a whole is expected to be above the upper end of the Committee's present range. cent. For 1986, M1 expansion has been assumed at around 5-1/2 per- Interest rates are expected to remain near current levels over the forecast period, and thus a bit lower than projected in the last Greenbook. Regarding fiscal policy, the staff continues to assume that a $50 billion deficit-reduction package will be adopted and that the federal budget deficit, on a unified basis, will be nearly $210 billion in fiscal 1985 and around $185 billion in fiscal 1986. After four years of rapid growth, the structural deficit is likely to show little change over the next year and a half. As in the last Greenbook, growth in real GNP is expected to average about 3-1/4 percent in the second half of this year and then slow to about 2-1/2 percent during 1986. Gains in domestic final demand are projected to moderate over the forecast period, reflecting a waning of fiscal stimulus, a diminishing backlog of pent-up demands, and the damping influence of slow output growth on business investment spending. Recent declines in interest rates are expected to stimulate more housing activity than was projected in the last Greenbook. At the same time, the forecast for business fixed investment has been revised down slightly this month, owing to less favorable prospects for equipment outlays. I-5 With respect to the external sector, the staff is projecting that the exchange rate of the U.S. dollar will remain on a moderate downward trajectory, similar to the path assumed in the last Greenbook. With the dollar falling and the U.S. economy growing less rapidly than in 1983 or 1984, import growth is expected to slow over the next year and a half. Moreover, the dollar depreciation is projected to have a beneficial effect on U.S. exports, so that the net influence of the trade sector on domestic production growth is expected to become slightly positive for 1986 as a whole. Given the growth path projected for real GNP, the staff expects that the unemployment rate will decline only slightly through the end of 1986 and that the remaining slack in the labor market will help restrain wage inflation. However, rising costs associated with the assumed depreciation of the dollar are expected to lead to some upward pressures on prices, mainly in 1986. Reflecting these influences, the fixed-weighted price index for gross business product is projected to increase 4 percent during 1986, after a rise of 3-1/2 percent during 1985. Detailed data for these projections are in the tables shown on the following pages. July 3, 1985 STAFF GNP PROJECTIONS Percent changes, annual rate Real GNP Nominal GNP 5/15/85 7/3/85 5/15/85 7/3/85 Gross domestic business product fixed-weighted price index ------------------------Total Excluding food and energy 5/15/85 7/3/85 5/15/85 7/3/85 Unemployment rate (percent) 5/15/85 7/3/85 Annual changes: <1> <1> 1983 1984 1985 1986 7.7 10.8 6.5 6.3 3.7 6.8 2.8 2.7 3.7 6.8 2.5 2.7 10.1 7.1 1.6 4.3 10.1 7.1 1.6 4.3 1.3 2.3 3.5 3.0 .3 2.1 3.5 3.0 2.6 2.5 2.5 2.5 2.7 2.3 2.3 2.5 8.6 2.9 8.6 2.9 4.2 3.8 4.2 3.8 Quarterly changes: 1984 Q1 Q2 Q3 Q4 <1> <1> <1> <1> 14.9 10.7 5.6 7.1 Q1 <1> Q2 Q3 Q4 1986 Q1 Q2 Q3 Q4 Two-quarter changes: <2> 12.8 6.4 1984 Q2 <1> Q4 <1> 1985 Q2 Q4 6.0 6.3 5.3 6.3 1.8 3.3 1.2 3.3 3.6 3.4 3.7 3.3 4.4 3.6 1986 Q2 Q4 6.3 6.5 6.2 6.5 2.6 2.5 2.5 2.4 3.8 4.2 3.8 4.2 4.1 4.4 -1.0 -. 3 -1.0 -. 3 4.3 3.8 .1 -. 2 .1 -. 2 4.1 4.4 -. 1 .0 .0 .0 -2.1 -1.3 -. 1 -. 1 -2.1 -1.3 -. 1 .0 Four-quarter changes: <3> 1983 1984 1985 1986 Q4 <1> Q4 <1> Q4 Q4 10.4 9.5 6.1 6.4 10.4 9.5 5.8 6.3 <l> Actual. <2> Percent change from two quarters earlier. <3> Percent change from four quarters earlier. July 3, I-7 CONFIDENTIAL - FR CLASS II FOMC 1985 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1983 1984 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross National Product Gross domestic purchases Final sales Private Domestic final purchases 3173.8 3154.2 3216.8 2538.0 2518.4 3267.0 3273.4 3286.4 2604.2 2610.7 3346.6 3363.0 3350.9 2661.1 2677.5 3431.7 3553.3 3604.8 3479.5 2775.1 2826.6 3644.7 3703.4 3594.1 2850.4 2909.1 3694.6 3785.2 3622.8 2861.8 2952.4 3758.7 3814.8 3722.1 2941.6 2997.6 Personal consumption expenditures Goods Services 2070.4 1034.6 1035.8 2141.6 1073.0 1068.6 2181.4 1095.8 1085.7 2230.2 2276.5 1152.2 1124.4 2332.7 1179.0 1153.7 2361.4 1178.6 1182.8 2396.5 1192.8 1203.8 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 405.0 113.3 334.6 -42.9 -32.6 449.6 129.8 339.3 -19.4 -5.4 491.9 142.3 353.9 11.6 540.0 143.4 383.9 12.7 14.1 623.8 151.2 398.8 73.8 60.6 627.0 155.6 420.8 50.6 47.0 662.8 155.3 435.7 71.8 63.7 637.8 153.5 447.7 36.6 27.2 Net exports of goods and services <1> Exports Imports 19.6 328.5 308.9 -6.5 328.1 334.5 -16.4 342.0 358.4 -29.8 346.1 375.9 -51.5 358.9 410.4 -58.7 362.4 421.1 -90.6 459.3 -56.0 367.2 423.2 Gov't. purchases of goods and services 678.8 273.0 405.8 682.2 270.5 411.6 689.8 269.2 691.4 420.6 266.3 425.1 704.4 267.6 436.8 743.7 296.4 447.4 761.0 302.0 458.9 780.5 315.7 464.8 1491.0 1524.8 1550.2 1572.7 1610.9 1638.8 1645.2 1662.4 2662.8 2714.4 1642.1 2763.3 1671.3 2367.4 5.0 2836.5 1715.4 2428.6 5.3 2920.5 1755.7 2502.2 6.1 2984.6 1793.1 2554.3 5.7 3047.3 1819.5 2606.4 6.3 3096.2 1847.6 2644.5 6.2 Federal <2> State and local Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State and local government surplus or deficit(-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment Manufacturing Industrial production (1967=100) Capacity utilization: all manufacturing (percent) Materials (percent) Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 1608.1 2261.4 5.7 2302.9 4.2 -4.3 3461.5 3419.0 2727.6 2757.4 1122.8 1107.5 368.6 179.1 161.7 216.7 198.2 245.0 227.4 260.0 225.5 277.4 243.3 291.1 246.0 282.8 224.8 291.6 228.7 -185.7 -80.9 -167.3 -74.2 -180.9 -102.5 -180.5 -113.1 -161.3 -113.3 -163.7 -129.6 -180.6 -146.1 -197.8 -169.3 34.1 -1.9 43.9 7.0 47.4 9.5 51.2 12.0 53.9 13.4 54.5 12.6 47.6 4.3 55.6 11.1 110.7 10.4 111.2 10.1 112.1 9.3 112.1 8.5 112.7 7.9 113.5 7.5 113.8 7.4 114.2 7.2 88.8 18.1 89.6 18.3 90.5 18.5 91.8 18.9 93.0 19.2 94.0 19.4 94.9 19.5 95.8 19.6 138.5 70.7 70.1 1.64 8.46 6.06 2.40 144.5 73.8 73.5 1.67 9.10 6.81 2.28 151.8 77.4 77.5 1.79 9.22 6.92 2.31 155.5 78.9 79.6 1.72 9.94 7.29 2.65 159.8 80.7 81.6 163.1 81.8 82.7 165.6 82.5 82.9 164.7 81.6 80.7 1.95 10.52 8.22 2.30 1.86 10.60 8.23 2.38 1.66 10.30 7.94 2.36 1.60 10.29 7.50 2.79 <1> Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Account table which follows. <3> Estimates in table are evaluated at a 6 percent high employment unemployment rate. July 3, 1985 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) CONFIDENTIAL - FR CLASS II FOMC 1984 1983 Q1 Q2 Q3 Q4 Q2 Q3 7.1 7.9 10.3 8.5 9.5 1.6 5.4 -1.0 4.6 7.8 1.2 7.9 10.7 4.6 .7 -1.9 3.8 Ql Q4 Constant (1972) Dollars Gross national product Gross domestic purchases Final sales Private Domestic final purchases -2.4 2.3 3.6 3.8 3.3 10.0 12.6 7.3 3.8 5.4 2.1 34.1 64.5 .0 52.5 78.1 9.6 38.4 31.6 18.7 37.0 4.0 30.6 71.6 21.3 20.6 -2.2 1.2 21.3 24.9 -4.6 13.7 -8.2 -2.6 -5.9 7.6 -.2 -. 5 -5.3 -1.9 2.7 -4.3 -8.7 9.2 -1.4 1.0 -2.8 3.4 3.5 18.6 45.2 12.2 3.7 5.4 6.2 -2.3 4.8 5.9 15.2 17.5 -.2 2.1 3.3 7.7 8.2 8.6 6.3 3.9 3.5 Gross national product Gross domestic purchases Final sales 8.5 6.7 5.9 12.3 16.0 8.9 10.1 11.4 8.1 10.6 12.2 8.4 14.9 17.6 7.3 10.7 11.4 13.8 5.6 9.1 3.2 7.1 3.2 11.4 Personal consumption expenditures Goods Services 4.8 3.6 6.1 14.5 15.7 13.3 7.6 8.8 6.6 9.2 10.2 8.3 8.6 10.9 6.2 10.2 9.6 10.9 5.0 -.1 10.5 6.1 4.9 7.3 Gross private domestic investment Residential structures Business fixed investment 34.3 79.3 -5.5 52.0 71.9 5.7 43.2 44.4 18.5 45.3 3.3 38.4 78.0 23.6 16.5 2.0 12.1 23.9 24.9 -.6 14.9 -14.3 -4.7 11.5 Gov't. purchases of goods and services Federal National defense State and local -1.3 -8.9 7.9 4.2 2.0 -3.6 9.8 5.8 4.5 -2.0 3.3 9.0 .9 -4.3 13.2 4.4 7.8 2.0 12.5 11.5 24.3 50.5 14.7 10.0 9.6 7.8 -.8 10.7 10.7 19.4 22.1 5.2 4.3 3.6 5.6 7.5 8.0 8.7 11.7 7.3 7.3 10.7 11.0 11.0 12.7 12.4 9.7 8.6 9.1 8.8 8.4 8.6 5.9 6.0 6.7 6.5 94.8 16.0 114.3 125.7 63.4 73.3 26.8 -3.3 29.6 35.5 21.3 4.5 -10.9 -30.3 13.0 7.1 .5 -.9 3.4 5.0 4.2 6.2 5.8 7.8 5.5 6.4 4.3 4.5 3.9 2.4 4.0 1.1 8.1 3.5 -4.2 2.1 2.2 .1 5.5 3.7 -1.7 -1.1 3.6 4.7 2.2 3.7 1.4 18.4 21.8 8.6 6.3 Personal consumption expenditures Goods Services Gross private domestic investment Residential structures Business fixed investment Gov't. purchases of goods and services Federal National defense State and local Disposable personal income -17.4 6.8 -1.2 -13.1 -5.5 8.5 Current Dollars Disposable personal income Personal income Wage and salary disbursements Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production 10.1 10.2 11.5 <1> Excluding the federal pay increase, the rate of change in 1983-Q4 was 4.4 percent. <2> Uses expenditures in 1972 as weights. -2.3 July 3, 1985 I-9 CONFIDENTIAL CLASS II FOMC FR GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) Projected 1986 1985 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 3857.7 3951.8 3829.0 3022.2 3116.4 3917.7 4018.2 3886.3 3061.8 3162.2 3978.1 4082.8 3945.1 3108.0 3212.7 4040.5 4143.5 4006.2 3156.0 3259.1 4099.5 4204.2 Final sales Private Domestic final purchases 3810.6 3885.1 3770.0 2978.1 3052.6 3203.2 3307.9 4161.6 4267.7 4127.7 3253.6 3359.7 4229.7 4332.6 4196.0 3308.3 3411.2 Personal consumption expenditures Goods Services 2446.5 1212.1 1234.4 2493.5 1235.3 1258.2 2524.8 1245.8 1279.0 2559.8 1258.5 1301.3 2595.5 1272.0 1323.5 2634.3 1287.0 1347.3 2675.7 1302.9 1372.8 2716.7 1318.0 1398.7 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 646.8 155.2 450.9 40.7 34.1 651.6 160.0 462.9 28.7 22.9 668.8 168.0 469.4 31.4 29.0 685.9 176.5 476.4 33.0 31.0 697.9 180.0 708.2 183.0 490.6 34.6 33.6 718.0 186.0 498.1 33.9 32.9 728.2 189.0 505.5 33.7 32.7 Net exports of goods and services <1> Exports Imports -74.5 360.7 435.2 -94.2 351.3 445.5 -100.5 355.5 456.0 -104.7 360.3 465.0 -103.0 366.2 469.3 -104.7 374.1 478.8 -106.2 383.2 489.3 -102.9 395.7 498.6 Gov't. purchases of goods and services Federal <2> State and local 791.9 319.9 472.0 806.7 325.0 481.7 824.5 334.4 490.1 837.1 338.7 498.4 850.1 343.9 506.2 861.7 347.7 514.0 874.1 352.2 521.9 887.7 357.7 530.0 Gross national product in constant (1972) dollars 1663.5 1672.1 1686.6 1699.3 1710.7 1720.5 1730.4 1741.2 eersonal income Wage and salary disbursements Disposable personal income Saving rate (percent) 3143.8 1882.7 2654.8 4.5 3179.2 1908.3 2732.7 5.3 3237.8 3293.8 1939.0 1968.9 2760.0 2803.3 5.0 5.2 3451.1 2056.4 2938.8 5.3 3508.0 2086.6 2983.5 5.3 292.3 222.3 293.0 220.0 292.4 215.9 293.8 213.3 291.0 207.0 290.7 204.2 292.2 202.7 -165.1 -129.4 -210.5 -175.3 -197.8 -164.2 -194.8 -162.0 -192.3 -159.3 -191.3 -157.2 -190.2 -154.8 53.7 8.3 54.2 8.0 52.3 5.3 51.5 3.7 50.3 1.7 49.8 .4 50.4 .2 51.3 .3 115.2 7.3 115.4 7.3 115.9 7.2 116.3 7.1 116.8 7.1 117.2 7.1 117.7 7.1 118.2 7.1 96.6 19.6 97.4 19.5 98.0 19.5 98.6 19.6 99.1 L9.7 99.5 19.7 100.0 19.8 100.4 19.8 Industrial production (1967=100) Capacity utilization: all manufacturing (percent) Materials (percent) 165.5 81.1 80.7 165.5 80.4 79.8 166.4 80.2 79.6 167.6 80.0 79.5 168.7 79.9 79.4 169.7 79.8 79.3 170.9 79.7 79.3 172.0 79.7 79.2 Housing starts, private (million units, A.R.) 1.80 10.87 8.46 2.42 1.80 11.10 8.40 2.70 1.90 1.90 10.80 1.90 10.80 7.80 3.00 1.85 10.70 7.70 1.85 10.70 7.60 3.10 1.85 10.60 7.50 3.10 Gross National Product Gross domestic purchases Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State and local government surplus or deficit(-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment Manufacturing New auto sales (millions, A.R.) Domestic models Foreign moaels 11.00 8.10 2.90 7.80 3.00 483.6 34.3 33.3 4064.9 3345.3 3398.7 1998.0 2027.4 2855.2 2897.4 5.6 5.5 3.00 296.5 204.5 -191.2 -155.0 <1> Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenboek. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Account table which follows. <3> Estimates in table are evaluated at a 6 percent high employment unemployment rate. 1-10 CONFIDENTIAL - July 3, 1985 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) FR CLASS II FOMC Projected 1985 1986 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Gross domestic purchases Final sales Private Domestic final purchases .3 3.9 -.3 -. 4 4.1 2.1 3.1 3.8 3.9 5.2 3.5 3.6 3.3 3.1 3.2 3.0 3.0 2.9 3.1 3.1 2.7 2.4 2.6 2.8 2.5 2.3 2.0 2.4 2.6 2.2 2.3 2.0 2.4 2.5 2.2 2.5 2.0 2.6 2.7 2.0 Personal consumption expenditures Goods Services 5.2 5.4 5.0 4.2 5.7 2.4 2.2 2.2 2.2 2.1 2.2 2.1 2.1 2.2 2.1 2.0 2.0 2.1 2.0 1.9 2.1 1.8 1.6 2.0 Gross private domestic investment Residential structures Business fixed investment 3.1 5.3 -1.6 -1.1 10.4 9.0 8.2 17.9 4.1 7.6 17.5 4.1 4.1 4.5 3.8 2.8 2.9 3.1 2.2 2.5 3.1 2.4 2.5 3.0 .3 .7 -. 2 .0 3.6 3.9 8.5 3.4 4.3 6.8 9.2 2.4 2.0 1.3 2.1 2.4 1.8 1.6 1.7 2.0 1.3 .5 .8 2.0 1.9 1.9 2.5 1.9 2.3 2.9 4.1 1.9 8.3 1.2 2.9 4.0 2.0 1.4 1.7 5.6 7.6 5.2 5.0 7.0 6.4 6.4 6.9 6.1 6.3 6.6 6.2 6.4 6.1 6.3 6.0 6.0 6.0 6.2 6.2 6.3 6.7 6.2 6.8 Personal consumption expenditures Goods Services 8.6 6.6 10.6 7.9 7.9 7.9 5.1 3.4 6.8 5.7 4.1 7.2 5.7 4.4 7.0 6.L 4.8 7.4 6.4 5.0 7.8 6.3 4.7 7.8 Gross private domestic investment Residential structures Business fixed investment 5.8 4.6 3.0 3.0 12.9 11.1 11.0 21.6 5.7 10.6 21.8 6.0 7.2 8.2 6.2 6.0 6.8 5.9 5.6 6.7 6.2 5.8 6.6 6.1 Gov't. purchases of goods and services Federal National defense State and local 5.9 5.4 4.0 6.3 7.7 6.5 11.0 8.5 9.1 12.1 15.5 7.2 6.2 5.2 6.8 6.9 6.3 6.3 6.3 6.4 5.6 4.5 5.2 6.3 5.9 5.3 6.6 6.3 6.4 6.4 8.1 6.4 Disposable personal income Personal income Wage and salary disbursements 1.6 6.3 7.8 12.3 4.6 5.6 4.1 7.6 6.6 6.4 7.1 6.3 7.6 6.4 6.0 6.1 6.5 6.0 5.8 6.3 5.9 6.2 6.8 6.0 1.0 -10.7 1.0 -4.1 -.9 -7.3 2.0 -4.6 -3.8 -11.4 -.4 -5.2 2.0 -3.0 6.0 3.5 3.3 .0 3.2 -2.0 2.6 1.7 2.2 1.6 2.0 1.2 1.9 1.0 1.8 1.0 1.8 .8 -2.5 5.4 8.1 -.4 4.2 4.6 1.6 4.3 2.7 1.3 4.3 3.0 1.3 4.7 3.4 .6 4.3 3.7 .9 4.4 3.5 1.0 4.5 3.5 GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) 5.4 2.9 2.8 3.2 3.6 3.6 3.8 4.1 3.6 4.6 3.2 3.7 3.9 4.1 3.2 3.8 3.3 3.4 3.9 3.4 3.7 4.0 3.8 3.9 4.2 4.0 4.1 4.4 4.2 4.3 4.5 4.4 Industrial production 2.0 .0 2.3 2.9 2.6 2.6 2.6 2.8 Constant (1972) Dollars Gov't. purchases of goods and services Federal National defense State and local Disposable personal income -1.6 Current Dollars Gross national product Gross domestic purchases Final sales Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs <1> Excluding Federal pay increase, the rate of change in 1985-Q1 <2> Uses expenditures in 1972 as weights. is 5.0 percent and in 1986-Q1 is 3.5 percent. July 3, 1-11 CONFIDENTIAL - FR CLASS II FOMC 1985 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) 1979 1980 1981 Gross domestic purchases Final sales Private Domestic final purchases 2417.8 2404.5 2403.5 1929.2 1915.9 2631.7 2607.7 2641.4 2103.7 2079.7 2957.7 2929.8 2931.7 2335.2 2307.2 Personal consumption expenditures Goods Services 1507.1 813.4 693.7 1668.0 883.5 784.5 Gross national product 1982 1983 1984 3069.2 3050.2 3095.4 2444.9 2425.9 3304.8 3313.0 3318.3 2632.7 2641.0 3662.8 3727.1 3604.6 1849.1 966.1 883.0 1984.9 1002.6 982.2 2155.9 1081.5 1074.4 -Projected1985 1986 2857.2 2921.4 3891.0 3984.5 3857.6 3042.5 3136.0 4132.8 4237.0 4098.7 3230.3 3334.5 2341.8 1175.6 1166.2 2506.1 1237.9 1268.2 2655.6 1295.0 1360.6 713.0 184.5 494.4 34.1 33.1 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 423.0 118.5 290.2 14.3 8.6 401.9 102.9 308.8 -9.8 -4.5 484.2 104.3 353.9 26.0 18.2 414.9 91.3 349.6 -26.1 -23.9 471.6 132.2 352.9 -13.5 -3.1 637.9 153.9 425.8 58.2 49.6 663.3 164.9 464.9 33.4 29.3 Net exports of goods and services <1> Exports Imports 13.2 281.3 268.1 23.9 338.8 314.8 28.0 369.9 341.9 19.0 348.4 329.4 -8.3 336.2 344.4 -64.2 364.3 428.5 -93.5 357.0 450.4 -104.2 379.8 484.0 Gov't. purchases of goods and services Federal <2> State and local 474.4 168.3 306.0 537.8 197.0 340.8 596.5 228.9 367.6 650.5 258.9 391.5 685.5 269.7 415.8 747.4 295.4 452.0 815.1 329.5 485.6 868.4 350.4 518.0 1479.4 1475.0 1512.1 1480.0 1534.7 1639.3 1680.4 1725.7 1951.1 1237.6 2165.3 2429.4 2584.6 2744.3 3012.1 3213.6 1659.2 1804.0 1924.7 2340.1 2576.8 2737.7 6.1 5.0 5.0 3425.8 2042.1 2918.7 5.4 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 194.8 252.7 175.4 234.6 190.0 221.3 159.2 165.6 225.1 203.1 285.8 235.7 292.9 217.9 292.6 204.6 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -16.1 -20.8 -61.3 -36.4 -64.2 -31.3 -148.2 -61.6 -178.6 -92.7 -175.9 -139.6 -192.0 -157.7 -191.3 -156.6 30.6 6.8 30.6 3.5 37.6 7.8 32.9 -.8 44.1 6.6 52.9 10.4 52.9 6.3 50.4 .6 105.0 5.8 106.9 7.1 108.7 7.6 110.2 9.7 111.6 9.6 113.5 7.5 115.7 7.2 117.5 7.1 89.8 21.0 90.4 20.3 91.2 20.2 89.6 18.8 90.2 18.4 94.5 19.4 97.7 19.5 99.7 19.8 Industrial production (1967=100) Capacity utilization: all manufacturing (percent) Materials (percent) 152.5 150.9 79.4 80.7 138.6 71.1 70.1 147.6 75.2 75.2 163.3 81.6 82.0 166.2 80.4 79.9 170.3 87.6 147.0 79.6 80.4 Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 1.72 10.68 8.36 2.32 1.30 9.04 6.62 2.42 1.10 8.56 6.24 2.32 1.06 8.00 5.77 2.23 1.70 9.18 6.77 2.41 1.77 10.39 7.95 2.44 1.85 1.86 10.70 7.65 3.05 Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing 1356.7 1493.1 1568.7 1650.2 1828.9 2041.7 2180.5 5.9 6.0 6.7 6.2 86.0 10.94 8.19 2.75 79.8 79.3 <1> Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbeok. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. July 3, CONFIDENTIAL - FR CLASS II FOMC 1985 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1979 1980 1981 1982 1983 1984 13.7 41.7 2.5 31.2 12.1 19.8 -Projected-1985 1986 Constant (1972) Dollars Gross national product Gross domestic purchases -2.1 -1.2 Final sales Private Domestic final purchases -1.3 -. 7 -. 2 .5 -1.4 2.7 Personal consumption expenditures Goods Services Gross private domestic investment Residential structures Business fixed investment -. 2 -5.3 7.3 -11.8 -20.3 -2.4 2.0 1.7 2.3 10.7 -5.5 5.5 1.3 .4 2.5 -15.9 -14.8 -4.6 Gov't. purchases of goods and services Federal National defense State and local 1.3 1.8 2.6 1.1 2.2 4.2 3.9 1.0 Disposable personal income 2.7 .6 2.7 .9 Gross national product Gross domestic purchases Final sales 11.7 11.1 12.4 8.8 8.5 9.9 12.4 12.3 11.0 3.8 4.1 5.6 Personal consumption expenditures Goods Services 11.9 11.7 12.2 10.7 8.6 13.1 10.9 9.3 12.6 7.3 3.8 11.2 Gross private domestic investment Residential structures Business fixed investment 9.4 6.6 16.6 Gov't. purchases of goods and services Federal National defense State and local 9.8 9.6 11.5 9.9 13.4 17.1 17.3 11.4 10.9 16.2 17.2 7.9 9.0 13.1 16.8 6.5 Disposable personal income Personal income Wage and salary disbursements 12.0 12.6 11.9 10.8 11.0 9.6 11.6 12.2 10.1 6.8 6.4 5.1 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 1.2 10.3 -9.9 -7.1 8.3 -5.7 -16.2 -25.2 3.6 2.6 .6 -3.6 .8 -. 6 -1.7 -6.9 -1.5 9.0 10.7 -.7 10.3 11.1 1.5 9.6 8.0 8.6 9.2 9.6 6.0 3.8 9.9 8.6 11.3 9.9 8.5 13.5 9.7 9.4 10.3 5.9 7.0 6.1 4.4 -3.6 2.6 -8.1 2.0 6.1 '7.6 -. 6 2.0 4.8 6.5 -. 3 -.7 7.1 .0 3.5 5.4 5.8 2.2 3.5 6.7 3.0 10.8 12.5 8.6 6.2 6.9 7.0 13.7 44.7 .9 35.2 16.4 20.6 4.0 7.2 9.2 5.4 4.2 11.7 6.2 9.0 9.5 10.5 8.7 9.1 11.5 10.1 7.4 10.1 9.8 8.7 6.2 6.7 6.7 41.5 22.8 26.9 16.0 2.5 -7.6 .7 -1.8 4.7 5.3 3.4 .7 2.8 Current Dollars Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator Gross domestic business product fixed-weighted price index <1> Excluding food and energy Consumer price index (all urban) Industrial production <1> Uses expenditures in 1972 as weights. -5.0 -13.2 6.4 20.5 1.3 14.6 -14.3 -12.4 -1.2 8.6 7.9 9.4 6.5 6.3 7.7 6.7 -.1 -6.1 2.1 1.1 .2 1.0 4.3 4.2 4.4 3.4 3.8 3.6 3.4 3.7 4.6 3.2 4.0 4.3 4.3 3.7 4.3 3.6 3.7 4.1 3.8 6.4 10.7 1.8 2.5 July 3, 1985 FEDERAL SECTOR ACCOUNTS (Billions of dollars) FRB staff estimates I Fiscal Year 1984* Unified budget receipts Unified budget outlays Surplus/deficit(-), unified budget Surplus/deficit(-), off-budget 3 agencies Combined deficit to be financed FY1985e!2/ Admin. FRB Staff 1/ FY1986/2/ Adiin. -FRB Staff 1/ CY1985 FRB Staff CY 1984* 1984 IV* Calendar quarters; not seasonally adjusted . 1985 1986 I II III IV I* II III 666 842 -175 741 944 -203 732 940 -208 794 971 -177 784 969 -185 683 868 -184 740 948 -207 166 239 -72 174 230 -56 206 237 -31 187 235 -48 1 17 246 -72 184 241 -57 229 241 -12 197 242 -44 -10 -185 -10 -213 -11 -219 -1 -17/ -5 -189 -10 -195 -13 -220 1 -71 -3 -59 -5 -36 -4 -53 -1 -73 -1 -57 -2 -13 -1 -46 Means of financing combined deficit: Net borrowing from public Decrease in cash operating balance 4 Other 171 7 8 201 10 2 202 9 7 179 0 -1 187 1 2 199 -5 2 202 8 11 64 13 -6 42 4 13 45 -10 1 51 3 -1 64 11 -2 55 -5 8 21 -5 -2 48 0 -2 Cash operating balance, end of period 30 20 21 20 20 18 10 18 14 24 21 10 15 20 20 30 42 19 46 20 32 21 3 4 6 6 5 5 5 5 Receipts Expenditures Purchases Defense Nondefense All other expenditures Surplus/deficit(-) 688 860 283 215 68 577 -172 762 945 327 242 85 618 -183 751 941 324 239 85 617 -194 825 990 355 272 83 635 -165 806 994 346 259 87 648 -193 705 881 295 222 74 586 -176 767 955 330 244 86 625 -193 722 920 316 232 84 604 -198 771 937 320 234 86 617 -165 Seasonally adjusted annual rates 734 766 782 795 809 987 1000 944 963 976 339 344 348 325 334 249 253 257 260 240 85 86 86 87 88 619 629 637 643 652 -192 -191 -211 -198 -195 822 1012 352 264 88 660 -190 High employment surplus/deficit(-) evaluated at 6 percent unemployment -126 n.a. -160 n.a. -158 -140 -158 -169 -129 -175 -155 Memo: Sponsored agency borrowing 5 NIA Budget *--actual Note: Details may not add to totals due to rounding. -162 -159 -157 n.a.-not available e--estimated 1. O.M.B., Current Budget Estimates (April 1985) and B.E.A. translations to an NIA basis. 2. The CBO baseline budget estimates show revenues of $735 billion and $788 billion, unified outlays of $938 billion and $995 billion, and deficits of $203 billion and $206 billion in fiscal years 1985 and 1986, respectively. Off-budget outlays are projected to be $11 billion in fiscal 1985 and $9 billion in fiscal 1986. (The Economic Outlook, February 1985.) -164 Includes Federal Financing Bank, Postal Service Fund, Rural Electrification and Telephone Revolving Fund, Rural Telephone Bank and Strategic Petroleum Reserve. 4. Checks issued less checks paid, accrued items and other transactions. 5. Sponsored agency borrowing includes net debt issuance by Federal Home Loan Banks, FHLMC (excluding participation certificates), FNMA (excluding mortgage-backed securities), Federal Land Banks, Federal Intermediate Credit Banks, Banks for Cooperatives, and Student Loan Marketing Association marketable debt on a payment basis. The Administration's definition of borrowing by these agencies is somewhat broader. 3. DOMESTIC FINANCIAL DEVELOPMENTS Federal funds since the last FOMC meeting Recent developments. have traded primarily in the 7-1/2 to 7-3/4 range established shortly after the cut in the discount rate. Since the meeting, Treasury bill rates have dropped around 40 basis points, while most private short-term market yields are down marginally. Short-term yields had fallen substan- tially further by the time banks cut their prime rate 1/2 percentage point on June 18. Subsequently, rates backed up when prospects of another cut in the discount rate waned on incoming signs of stronger economic activity; private rates increased further when concerns intensified about difficulties within the financial system. The bond markets rallied strongly before giving up a part of their gains, but on balance yields on Treasuries and corporates still are off about 40 basis points since the May FOMC meeting, perhaps reflecting favorable oil price and inflation news as well as money market developments. The renewed decline in interest rates since mid-March probably has helped to boost demands for money. M1 growth spurted to a 16 percent annual rate over May and June combined, reflecting strengthening in all its components. June. M2 grew at an average rate of nearly 11 percent in May and The nontransactions component of M2 accelerated over this period, with sources of strength initially being overnight RPs and later MMDAs and money market mutual fund shares, as their returns lagged the downward movement in market rates. Also, savings deposits registered unusual increases in both months. I-14 I-15 Reflecting the rebound of M2, growth in M3 averaged more than 9 percent over the past two months. Within its non-M2 component, only institutional money market mutual fund shares and thrift large CDs have expanded since April. Large time deposits outstanding at commercial banks have declined as inflows of core deposits have surged. Business borrowing has been heavy in the past couple of months even though the underlying corporate financing gap probably has been of moderate size. Business loans at U.S. banks and foreign branches rose at about the moderate pace of the first four months of 1985, but commercial paper issuance by nonfinancial firms was stronger than it had been earlier. Furthermore, bond issuance by U.S. nonfinancial corporations soared-reaching an all-time high in June--as bond rates declined. A sizable portion of bond issues financed equity retirements associated with mergers, buyouts and share repurchases. Such retirements far outpaced an enlarged volume of new equity offerings induced by higher stock prices. Net equity retirements are estimated at around $75 billion at an annual rate in the second quarter, which, though below the first quarter, is near the average pace of last year. In the household sector, growth of residential mortgage debt apparently picked up over the course of the second quarter in response to declining interest rates on home loans, which have fallen a further 3/4 percentage point since the last FOMC meeting. At the lower rate levels, fixed-rate mortgages in recent months have accounted for about half of all home loans originated, despite the initial rate advantage of ARMs, and nearly all of the increased volume of pass-through security issues was backed by fixed-rate loans. I-16 Consumer credit growth evidently continued robust through May-buoyed in part by interest rate subsidy programs for certain auto loans at the captive finance companies. In June, consumer lending is estimated to have slowed a little at commercial banks. Banks have continued to reduce consumer loan rates but by much smaller amounts than the declines in market yields; thus a more normal spread has been restored relative to other investments of comparable maturity. The federal budget deficit narrowed in the second quarter, but less than seasonally, and borrowings edged up, contributing to an increase in the Treasury's cash balance. State and local bond issuance was very strong in May and June, boosted by a surge in refunding issues in response to lower interest rates. Outlook. Market interest rates are not expected to change much from current levels over the next several months, in an environment of moderate economic growth and stable inflation. This projection assumes, however, that congressional deliberations on budget cuts do not founder and thereby reverse the favorable psychological impacts engendered by earlier legislative progress. The dimensions of the current federal fiscal imbalance will be underscored by the heavy Treasury borrowings slated for the third quarter. The pace of federal debt issuance will increase in the third quarter as the combined deficit rises and the current high cash balance level is maintained on balance in anticipation of even heavier funding needs in the fourth quarter. By contrast, state and local government borrowing is expected to move below the exceptional recent pace as the stock of I-17 outstanding debt obligations that are candidates for refunding at present interest rates is drawn down. Borrowing by households is expected to change little in the third quarter; a slight projected strengthening of mortgage flows accompanying the further step-up in housing activity is about offset by some moderation of consumer credit growth. The jump in consumer delinquency rates at commercial banks in the first quarter, to near the average of the past ten years, reportedly was not repeated in the spring, nor, as of the June survey, had the willingness of banks to make such loans abated. Even so, an easing of consumer credit expansion is expected to accompany the slowing of growth in consumer durables spending foreseen in the third quarter. Finally, business credit growth is likely to remain near the recent pace over the next three months. The corporate financing gap is anticipated to widen, but merger and financial restructuring activity is assumed to fall. Bond issuance is expected to continue relatively heavy, though below the extraordinary pace of June, while use of commercial paper and bank loans will be appreciable as well. INTERNATIONAL DEVELOPMENTS Recent developments. The weighted average foreign exchange value of the dollar has fluctuated within a range of roughly 3 percent since the last FOMC meeting, and remains about 10 percent below its peak of late February. Both U.S. and foreign short-term interest rates have eased slightly over the period, and the differential has changed little. . Foreign official accounts resumed net purchases of U.S. Treasury securities in April; there had been a large decline in official holdings of Treasuries in the first quarter, In April substantial purchases of Treasury securities were also made by Japanese private investors and by the World Bank, which together amounted to more than $2-1/2 billion. Since the beginning of 1984, private Japanese investors and the World Bank have accounted for close to half of the nearly $30 billion total foreign nonofficial purchases of Treasuries. Capital inflows to the United States in recent months have also taken the form of repatriations of Eurodollar deposits by U.S. nonbank investors, which have declined by more than $8 billion since March. The reduction in U.S. Eurodollar holdings has occurred mainly in deposits at the largest U.S. banks, which are funding themselves to a greater degree through retail U.S. deposits. The foreign assets of U.S. banks (consolidated to include their foreign branches) were unchanged in the first quarter. I-18 I-19 The U.S. merchandise trade deficit widened in May, and for the April-May period combined it reached the record $130 billion rate of the third quarter of 1984. The increase in the deficit for April-May from the first quarter reflected a widespread decline in exports, notably of agricultural products, capital goods and industrial supplies. For the year to date, nonagricultural exports to industrial countries have increased somewhat, but those to other countries have declined. Imports in the April-May period were about unchanged, and non-oil imports were somewhat below the first quarter rate. Declines occurred in imports of machinery and industrial supplies (particularly office machines and other electronic products), steel, clothing, diamonds, gold, and a range of agricultural products; these more than offset increases in imports of passenger cars from Japan, trucks, and coffee. Oil imports rose about 10 percent in volume from the relatively low first quarter rate, with most of the addition apparently being added to inventories. In industrial countries abroad, economic activity appears to have slowed temporarily in the first quarter. There was little growth in Japan in the first quarter, although recent data on industrial production suggest that this development was in part temporary. The level of activity fell in Germany and was flat in France, in each case in part as a result of the exceptionally severe winter. Canada, Italy and the United Kingdom continued to experience moderate growth. Unemployment remains high in major industrial countries except Japan, and only in Canada has it declined significantly this year. rates are broadly unchanged in recent months. Inflation I-20 Unemployment remains high in major industrial countries except Japan, and only in Canada has it declined significantly this year. Inflation rates are broadly unchanged in recent months. Developing countries are benefitting from reduced interest rates on floating rate debt. The average cost of LIBOR-based debt is currently about 9-1/2 percent (compared with an average 12 percent for. the year 1984), reflecting both the decline in LIBOR and reduced spreads under debt rescheduling agreements. The decline in interest rates may reduce external interest payments by Mexico by about $1-1/2 billion in 1985, approximately equal to the expected reduction in oil export earnings this year. Consumer prices in Mexico rose 2-1/2 percent in May, the smallest monthly rise in four years, and the year-over-year increase in the index is now 55 percent. Interest rates on short-term deposits were raised in late May and June, resulting in positive real annual yields of roughly 5 to 10 percent. On June 1, the minimum wage was raised 18 percent to a level 53 percent above a year earlier. The Mexican peso has been under pressure in the so-called super-free market, in part because of uncertainty about oil prices and in part because of increased concern about Mexico's economic policies. The dramatic monetary reform package announced by Argentina in mid-June, which includes an end of central bank financing of the government deficit, a wage/price freeze and the introduction of a new currency, has met an initially favorable public response: the parallel market exchange rate is close to the official rate, and some reflow of expatriate funds has occurred. Argentina has reached revised understandings with the IMF on reinstatement of its $1.2 billion I-21 stand-by arrangement, and Executive Board approval is expected in early August. In view of these developments the United States and 11 other countries arranged a bridge financing credit of $483 million which is to be repaid from IMF disbursements. Argentina drew $320 million on the bridge loan in late June and made interest payments of that amount to banks, bringing its interest on outstanding bank debt of the public sector current to end-February. Earlier in June, Argentina had made an interest payment of $250 million from reserves. Outlook. The staff continues to project a moderate depreciation of the dollar throughout the forecast period. The projection for economic activity in the major industrial countries for the remainder of the year is little changed, but as a result of the slow growth recorded in the first quarter GNP growth for the year as a whole is now estimated at slightly below 3 percent. Inflation rates in industrial countries are still expected to average around 4 percent. Based on recent data for merchandise trade, and also for certain service transactions, the staff has raised its projection of the U.S. current account deficit for 1985 to $130 billion, with some further increase projected in 1986. STRICTLY CONFIDENTIAL (FR) CLASS II FOMC JULY 2, 1985 OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES) ANNUAL 1984- 1985-P 1986-P 1984 1985 Q3-P Q3- Q4- Q1- Q2-P -90.6 368.6 459.3 -56.0 367.2 423.2 -74.5 360.7 435.2 -94.2 351.3 445.5 -30.7 145.7 176.4 -27.0 147.4 174.4 -13,4 147.1 160.5 -28.4 143.7 172.1 -32.9 139.9 172.8 -108.3 -135.9 -146.3 1-130.0 -98.2 -117.8 94-P Q1-P Q2-P 186 Q3-P Q4-P 1. GNP EXPORTS AND IMPORTS 1/ CURRENT $, NET EXPORTS OF G+S IMPORTS OF G+S -64.2 364.3 428.5 -93.5 357.0 450.4 CONSTANT 72 $, NET EXPORTS OF G+S IMPORTS OF G+S -15.0 146.0 161.1 -32.1 141.7 173.7 2. U.S. MERCHANDISE TRADE BALANCE 2/ -104.2 379.8 484.0 -136.9 -100.5 355.5 456.0 -33.4 141.0 174.4 -142.6 -104.7 360.3 465.0 -33.6 142.1 175.7 -146.4 -103.0 -104.7 366.2 374.1 478.8 469.3 -32.6 142.9 175.4 -31.5 144.4 175.9 -144.6 -146.8 -106.2 -102.9 383.2 395.7 489.3 498.6 -30.4 146.4 176.9 -28.3 149.3 177.6 -148.3 -145.4 EXPORTS AGRICULTURAL NONAGRICULTURAL 220,3 38.4 181.9 218.4 30.4 188.1 233.0 31.3 201.7 222.1 36.9 185.3 225.4 38.3 187.2 223.2 34.0 189.3 213.1 28.6 184.5 217.4 29.1 188.3 220.0 29.8 190.2 224.1 30.6 193.5 229.0 31.2 197.8 235.0 31.3 203.7 244.0 32.1 211.8 IMPORTS PETROLEUM AND PRODUCTS NONPETROLEUM 328.6 354.4 379.3 LI • 352.1 57.8 294.4 323.7 56.8 266.9 341.0 45.2 295.8 349.9 52.7 297.2 360.0 366.5 49.2 317.3 368.7 44.7 324.0 375.8 45.6 330.2 383.3 47.1 336.1 389.4 47.0 342.4 3. U.S. CURRENT ACCOUNT BALANCE OF WHICH: NET INVESTMENT INCOME 3.3 271.1 Y.0 40. I 304.8 333.2 -101.5 -131.2 -139.4 22.4 19.1 20.0 REAL GNP--TEN INDUSTRIAL 4/ REAL GNP--NONOPEC LDC 5/ 3.1 4.1 2.7 4.1 2.8 4.2 CONSUMER PRICES--TEN IND. 4/ 4.9 4.5 3.9 -130.0 -101.9 51.2 308.9 -120.0 -130.3 -133.7 -140.7 1-135.9 -139.0 -141.8 -141.0 16.0 10.5 20.9 24.3 24.2 23.2 22.9 22.0 21.3 4.6 4.5 3.9 4.1 0.7 3.9 3.8 3.9 3.2 3.9 2.8 4.0 2.7 4.0 2.6 4.4 2.6 4.7 2.6 5.0 2.6 4.8 5.4 5.5 2.8 3.7 4.4 4.2 3.3 3,7 13.0 4. FOREIGN OUTLOOK 3/ ECONOMIC ACTIVITY AND PRODUCT ACCOUNT DATA. INTERNATIONAL ACCOUNTS BASIS. PERCENT CHANGE, ANNUAL RATES. WEIGHTED BY MULTILATERAL TRADE-HEIGHTS OF G-10 COUNTRIES PLUS SWITZERLAND; WEIGHTED BY SHARE IN NONOPEC LDC GNP. PROJECTED PRICES ARE NOT SEASONALLY ADJUSTED.
@FedFRASER