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Confidential (FR) Class III FOMC March 17, 1993 RECENT DEVELOPMENTS Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONTENTS II DOMESTIC NONFINANCIAL DEVELOPMENTS Labor markets................................... .................. 1 Industrial production............................... ............... 7 Personal income and consumption.................................. 9 Housing markets.................................. ................. 15 Business fixed investment.. ........................................ 19 Business inventories............................... ............... . 25 Federal sector.................................... ................ 27 State and local government sector................................. 30 Prices............................................................. 33 Appendix: President Clinton's economic program...................II-A-1 Tables Changes in employment... ......................................... . Unemployment and labor force participation rates.................. Private nonfarm employment in small-business-dominated. large-business-dominated, and indeterminate industries........ Productivity in the nonfarm business sector....................... Growth in selected components of industrial production............ Capacity utilization............................... ............... . Average hourly earnings............................................ Production of domestic autos and trucks........................... New orders for durable goods ...................................... Retail sales................................. ..................... Personal income.................................................. Sales of automobiles and light trucks............................. Private housing activity........................................... Business capital spending indicators............................. ...... ....................... FDIC survey of real estate trends.... Changes in manufacturing and trade inventories.................... Inventories relative to sales.............. ....................... Federal government outlays and receipts.......................... Recent changes in producer prices ................................. ........... Recent changes in consumer prices ..................... Inflation rates excluding food and energy......................... Price indexes for commodities and materials....................... Monthly average prices--West Texas Intermediate .................. 2 2 3 5 6 6 7 8 9 10 11 12 14 18 23 24 24 28 32 32 34 36 38 Charts Labor market indicators............................................ Consumer sentiment................................................. . Private housing starts............................................ Cash flow burden of homeownership................................ Lumber product prices............................................. Recent data on orders and shipments............................... Nonresidential construction and new commitments................... Ratio of inventories to sales....................................... Index weights................................... .................. Commodity price measures.......................................... . Daily spot and posted prices of West Texas Intermediate............ 4 11 14 16 16 20 22 26 36 37 38 ii III DOMESTIC FINANCIAL DEVELOPMENTS Interest rates.................................... ................ Monetary aggregates and bank credit............................... Business finance.................... ............................... Treasury and sponsored agency financing........................... Municipal securities........................ ... ................... Mortgage markets.................................. ................ . Consumer installment credit....................................... 2 2 7 11 13 14 18 Tables Monetary aggregates................................. .............. . Changes in bank credit and deposits............................... Commercial bank credit and short- and intermediate-term business credit............................................ . Gross offerings of securities by U.S. corporations................ Treasury and agency financing ..................................... Gross offerings of municipal securities........................... Mortgage-backed security issuance...................... ..... ....... Consumer credit.................................................... . Consumer interest rates .......................................... Charts MBA indexes of mortgage loan applications......................... Yield spread between fixed-rate mortgage and seven-year Treasury note...................................... Consumer loan delinquency rates.................................... IV 3 5 6 8 12 14 17 19 19 16 17 20 INTERNATIONAL DEVELOPMENTS Merchandise trade.................................................. Prices of exports and non-oil imports.............................. U.S. current account.............................................. U.S. international financial transactions......................... Foreign exchange markets........................................... Developments in foreign industrial countries...................... Individual country notes..................................... . Economic situation in other countries............................. Individual country notes ...................................... 1 4 6 7 11 15 16 28 28 Tables U.S. merchandise trade: Monthly data.............................. Major trade categories............................................. ........................................ Oil imports ................. Import and export price measures.................................. U.S. current account............................................... Summary of U.S. international transactions........................ ......................... International banking data........ Major industrial countries Real GDP and industrial production............................ Consumer and wholesale prices................................. Trade and current account balances............................ Japanese economic indicators........................ ............. Western German economic indicators............................... Charts Weighted average exchange value of the dollar..................... Selected dollar exchange rates.................................... 1 2 3 5 6 9 10 17 18 19 20 21 12 12 DOMESTIC NONFINANCIAL DEVELOPMENTS DOMESTIC NONFINANCIAL DEVELOPMENTS Available data suggest that the economy has expanded significantly further in the current quarter, but less rapidly than in the final quarter of 1992. Nonfarm payroll employment rose sharply in February after a modest gain in January, and the unemployment rate has moved down further. Industrial production has continued to advance at a fairly brisk pace. However, consumer spending and homebuilding have been less robust of late than they were in the latter part of last year. Meanwhile, recent inflation indicators have been less favorable than those of late 1992. Labor Markets Nonfarm payroll employment rose 365,000 in February, the largest monthly rise in four years, and the civilian unemployment rate edged down further to 7.0 percent. To some extent, the February gain reflects a reversal of special factors that, in prior months, had depressed job growth, especially in construction, services, and retail trade.1 Since the February survey week, initial claims for unemployment insurance (adjusted for the emergency unemployment program) have averaged around 380,000, a level consistent with further modest employment growth. The most recent Employment Outlook Survey conducted by Manpower, Inc., more optimistic. is It shows hiring plans for the second quarter strengthening sharply. This is the most positive reading since the first half of 1990. 1. Adverse weather, especially in the West, held down construction employment in December and January. The February gain in services followed an unusual decline in January. In the retail sector, less-than-usual seasonal hiring at general merchandisers in November and December may have resulted in larger gains on a seasonally adjusted basis in January and February. II-1 II-2 CHANGES IN EMPLOYMENT 1 (Thousands of employees; based on seasonally adjusted data) 1992 1991 1992 03 04 1i22 Dec. 1993Jan. Feb. ---------- Average monthly changes Nonfarm payroll employment2 -79 50 25 85 106 44 365 47 -10 -16 -36 98 5 139 10 139 52 307 2 130 122 71 79 196 182 247 194 -240 -170. 380 456 .2 34.5 41.2 -,7 34.3 41.2 Private Manufacturing Durable Defense-related Nondurable Construction Retail trade Finance, insurance, real estate Services Health services Business services Total government Private nonfarm production workers Manufacturing production workers Total employment' Nonagricultural -62 -53 Memo: Aggregate hours of private production workers (percent change) -. 1 Average workweek (hours) 34.3 Manufacturing (hours) 40.7 0 34.4 41.1 -. 1 34.4 41.0 .5 34.5 41.4 .5 34. 41. 1. Average change from final month of preceding period to final month of period indicated. 2. Survey of establishments. 3. Industries that are dependent on defense expenditures for at least 50 percent of their output. 4. Survey of households. UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES (Percent: seasonally adjusted) Q4 192 Dec. 1993 Feb. Jan. 7.5 7.3 7.3 7.1 7.0 20.0 11.3 6.4 5.7 20.3 11.5 6.5 5.8 19.4 11.1 6.3 5.8 19.2 11.3 6.2 5.8 19.7 11.1 5.8 5.8 19.6 11.2 5.9 5.3 66.0 66.3 66.4 66.2 66.3 66.0 66.0 51.7 76.8 76.7 56.5 51.3 77.1 76.7 57.0 51.6 77.4 76.7 57.1 51.2 77.0 76.4 57.1 51.6 77.5 76.3 57.1 51.0 77.3 76.1 56.8 52.1 77.4 76.2 56.8 1992 Civilian unemployment rate (16 years and older) Teenagers 20-24 years old Men. 25 years and older Women. 25 years and older Labor force participation rate Teenagers 20-24 years old Men, 25 years and older Women. 25 years and older 1991 1992 6.7 7.4 18.7 10.8 5.7 5;1 03 In the household survey, too, employment was up sharply in February. The 380,000 gain more than offset a 240,000 drop in the preceding month, and the level of household employment at last regained its pre-recession peak. fell another 137,000 in February. Further, the number of unemployed The number of persons working part-time for economic reasons was up nearly as much as household employment, but this measure is quite volatile from month to month. Since last June, involuntary part-time employment has been about flat, while total household-survey employment has increased nearly 1 million. The recent pickup in employment contrasts with the continuing announcements of layoffs by major corporations. However, these phenomena may be reconciled by reference to the oft-noted importance of small businesses in job creation, although the contribution is difficult to pin down precisely. The SBA publishes data that estimates employment growth in industries dominated by small firms-defined as industries in which at least 60 percent of employment is in firms having fewer than 500 employees. According to these data, PRIVATE NONFARM EMPLOYMENT IN SMALL-BUSINESS-DOMINATED BUSINESS-DOMINATED, AND INDETERMINATE INDUSTRIES (December-to-December change, percent) Year Small-businessdominated industries Large-businessdominated industries LARGE- Indeterminate industries Total 1990 1991 1.1 -.5 -.6 -1.4 -2.2 -1.7 .3 -.9 1992 .5 -. 7 -. 3 -. 1 1. Source: Small Business Administration. Small- (large-) business-dominated industries are those in which at least 60 percent of employment is in firms with fewer (more) than 500 employees. Indeterminate industries are the remainder. About 0.5 percent of employment could not be allocated to one of these categories. 2. Change from December to September, not at an annual rate. II-4 LABOR MARKET INDICATORS Initial Claims for Unemployment Insurance * Thousands S600 I in. Xo x 550 4::::::50 ::::::: ............... . ...... ::400 .. :...: Feb 27 ............ 1990 1991 350 1992 300 1993 'Adjusted for EUC program. Manpower, Inc. Index * Percent -25 - ...... . .... .. .. .0. % .. •. 1990 1991 1992 1993 - 720 00 S:.:.:..:....... .66I 1990 1991 1992 1993 II-5 industries dominated by small businesses have outperformed other industries during both the recession and the recovery.2 Unfortunately, the SBA data do not extend past September of 1992; at that point, however, the industries dominated by small business had boosted their employment by 1/2 percentage point in 1992, while the industries in which large firms are more prominent had continued to contract. According to revised figures, productivity in the nonfarm business sector soared in the fourth quarter, rising 4.8 percent at an annual rate. The gain reflected a 5.7 percent increase in output and a 0.9 percent gain in hours. The increase in hours, although still far from robust, was the strongest quarterly reading since the early-1991 trough. Over the four quarters of 1992, total hours worked were unchanged, while productivity increased 3.2 percent. Relative to prior trends, productivity growth last year appears to have been particularly impressive outside of manufacturing, perhaps the best in many years. PRODUCTIVITY IN THE NONFARM BUSINESS SECTOR (Percent change, annual rate) 1992 1990 ------Output Hours Output per hour -.9 -1.0 .1 1991 Q4/Q4 -.6 -1.9 1.3 1992 Q1 Q2 Q3 04 1.7 .1 1.7 3.5 .6 2.9 5.7 .9 4.8 - -- -- - 3.3 .0 3.2 2.3 -1.3 3.7 Little new information on labor costs has become available since the last Greenbook. Average hourly earnings of production or nonsupervisory workers increased 0.2 percent in February after a 0.4 percent rise in January. Over the past twelve months, average 2. A bit more then 50 percent of nonfarm payroll employment is in industries dominated by firms of fewer then 500 employees. II-6 GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION (Percent change from preceding comparable period) Proportion in total IP 1992:4 1992 1992 1 1992 Q3 Q4 -Annual rate- Total index Previous 100.0 99.9 Manufacturing Motor vehicles and parts Other Mining Utilities 2.2 2.3 2.1 2.3 85.1 4.4 80.7 7.1 7.8 Dec. 4.2 24.6 3.2 -1.1 11.5 2.4 2.1 2.5 2.7 2.9 4.3 4.4 4.7 -7.3 7.2 Jan. Feb. ----Monthly rate----.4 .2 2.1 -9.3 2.7 1.3 7.7 1993 .5 .4 .4 .8 4.6 .6 .3 -1.2 .4 -. 3 -2.1 -1.8 3.7 EXCLUDING MOTOR VEHICLES AND PARTS AND UTILITIES Total index Products, total Final products Consumer goods Durables Nondurables 87.8 54.7 42.0 22.7 3.7 19.0 Business equipment Office and computing Industrial Other Defense and space equipment Intermediate products Construction supplies Materials Durables Nondurables Energy .9 3.1 14.9 3.3 4.4 20.7 5.8 26.7 3.8 -1.7 -. 3 7.7 3.9 1.4 -10.0 1.4 -10.6 -. 1 -9.5 -1.1 3.8 .2 .3 .2 .7 .9 .1 12.6 5.4 1.7 3.2 33.2 18.4 1.8 3.0 9.0 1.8 .7 3.9 -2.7 -1.0 -. 9 5.9 .8 2.8 .4 6.1 21.2 .4 3.2 1.6 1.4 .4 .5 .5 -1.5 -1.6 1. From the final quarter of the previous period to the final quarter of the period indicated. CAPACITY UTILIZATION (Percent of capacity; seasonally adjusted) 1967-92 1992 1992 1992 1993 Avg. Avg. Q3 Q4 Dec. Jan. Feb. Total industry 82.0 78.8 78.8 79.3 79.5 79.7 79.9 Manufacturing 81.3 77.8 77.8 78.2 78.4 78.8 78.9 82.3 80.8 81.5 76.3 81.9 76.2 82.2 76.6 82.2 76.8 82.8 77.2 83.0 77.2 Primary processing Advanced processing II-7 hourly earnings have increased 2.5 percent, about 1/2 percentage point less than in the preceding twelve-month period. AVERAGE HOURLY EARNINGS (Percent change; based on seasonally adjusted data) 12 months ending in February 1991 1992 1993 Total private nonfarm Manufacturing Services Finance, insurance, real estate 1992 1993 Dec. Jan. Feb. --Monthly rate-- 3.1 3.3 4.1 3.0 2.8 4.1 2.5 2.6 2.7 -.2 .3 -.2 .4 .2 .6 .2 .4 .2 4.3 5.2 3.8 -.8 .9 .3 Industrial Production Industrial production rose 0.5 percent in January and 0.4 percent in February, making it likely that growth in the industrial sector during the first quarter will outpace the 4.4 percent annual rate of increase posted for the final quarter of 1992. In manufacturing, increases have been fairly widespread this year. Changes in mining and utilities output in January and February were mixed and about offsetting, on balance. Motor vehicle assemblies fell to 11.1 million units (annual rate) in February, from the relatively high January level of 11.6 million units. Truck production, after reaching near-record levels in January, declined to 4.9 million units in February. The rate of increase in light truck sales slowed in February, leaving the days' supply of light trucks little changed. Auto assemblies, at 6.3 million units, were about unchanged in February but days supply moved up noticeably. Manufacturers' announced plans call for car assemblies to increase slightly in March, but a substantial underbuild from the scheduled rate seems likely. Despite the drop in motor vehicle assemblies in February, production of automotive parts and related equipment and materials increased in that month; II-8 gains in these areas contributed substantially to industrial production growth in February. PRODUCTION OF DOMESTIC AUTOS AND TRUCKS (Millions of units at an annual rate: FRB seasonal b asis)1 1992 1993 Nov. Dec. Jan. U.S. production Autos Trucks 10.0 5.6 4.5 10.8 6.1 4.8 11.6 6.4 5.2 11.1 6.2 4.9 Days' supply 2 Autos Light Trucks 66.3 66.9 65.1 73.4 68.3 73.2 80.3 75.8 Feb. Mar. 02 ---scheduled--11.1 10.9 6.4 6.3 4.8 4.6 n.a. n.a. n.a. n.a. 1. Components may not sum to totals because of rounding. 2. BEA seasonal basis, end of month. Outside of motor vehicles, manufacturing output rose, on average, 1/2 percent in January and February, boosted by sharp gains in consumer durables and computers, as well as by increases in a number of other categories, including non-energy materials and construction supplies. Production of non-energy materials had substantially lagged the growth in output of final products in the fourth quarter of 1992, but it seems to have made up ground in the first quarter. Surveys suggest that new orders continued to increase through February, and the lean factory inventories early in the year--together with reports of lengthening delivery times--also point to further gains in production in coming months. Output in the mining and utilities sectors has been volatile in recent months. Unusually cold weather in February, which followed unusually warm weather in January, caused utility output to surge nearly 4 percent; that gain contributed 0.3 percentage point to the overall February rise in industrial production. Partially offsetting this increase was a sharp decline in mining, reflecting a coal miners' strike and reductions in drilling activity. II-9 NEW ORDERS FOR DURABLE GOODS (Percent change from preceding period; seasonally adjusted) Total durable goods 1 Adjusted durable goods Office and computing 2 Nondefense capital goods Other Share 1992: H2 Q3 100 66 -1.7 1.3 5 16 45 Memo: Real adjusted durable goods 1992 Nov. Dec. 1993 Jan. 6.9 3.2 -1.6 .4 9.7 5.1 -2.2 -.3 2.0 2.6 .8 1.9 5.0 2.7 9.5 -2.1 .4 3.1 8.8 4.0 3.7 -2.4 .0 2.0 3.3 1.0 4.7 -.2 Q4 1. Orders excluding defense capital goods, nondefense aircraft, motor vehicle parts, and those not reporting unfilled orders. 2. Excludes aircraft and computers. Personal Income and Consumption Consumer spending appears to be advancing at a solid pace in the early part of 1993, although not so rapidly as at the end of last year. Retail sales of items other than autos were strong in February after a weak January, but auto sales fell in February and consumer confidence has retreated somewhat from the high levels registered toward the end of last year. Total nominal retail sales increased 0.3 percent in February after no change in January. The acceleration in the retail control category, which excludes auto sales and sales at building material and supply stores, was larger, as sales rose 0.8 percent in February after staying flat in January. The January-February average of nominal sales in the retail control category was up 1.1 percent from the fourth-quarter average, not at an annual rate. Real disposable personal income was unchanged in January, after rising an average of 0.5 percent per month during the fourth quarter of 1992. Although a number of special factors affected January II-10 RETAIL SALES (Seasonally adjusted percentage change) 1992 Q2 Total sales Previous estimate .5 1992 1993 Q3 Q4 1.6 3.0 2.9 1.1 .0 .3 .3 .8 .0 .1 .8 Dec. Jan. Feb. Retail control1 Previous estimate .5 1.7 2.1 2.0 .9 .7 Total excl. automotive group Previous estimate .6 1.5 2.2 2.1 1.1 GAP 2 .0 3.4 2.4 2.3 .9 .8 1.0 1.1 -. 3 .7 1.9 4.5 4.2 2.1 1.2 .5 1.1 -. 5 .6 .2 -. 3 3.9 -. 7 1.7 3.2 4.6 3.7 6.1 -1.5 .4 -. 1 4.0 3.3 -2.2 3.8 -. 6 5.1 1.0 4.4 1.0 1.4 2.1 2.2 .6 .6 -.3 -. 1 .7 2.6 1.2 1.7 .5 1.1 -.3 -1.7 -. 3 -. 2 2.0 -. 5 4.1 .9 -2.2 Previous estimate Durable goods stores Previous estimate Bldg. material and supply Automotive dealers Furniture and appliances Other durable goods Nondurable goods stores Previous estimate Apparel Pood General merchandise 3 Gasoline stations Other nondurables 4 .4 .9 -. 1 .9 .1 -. 5 2.2 1.3 .3 1.6 .8 1. Total retail sales less building material and supply stores and automotive dealers, except auto and home supply stores. 2. General merchandise, apparel, furniture, and appliance stores. 3. General merchandise excludes mail order nonstores; mail order sales are also excluded in the GAP grouping. 4. Includes sales at eating and drinking places, drug and proprietary stores. II-11 PERSONAL INCOME (Average monthly change at an annual rate; billions of dollars) 1992 1992 1992 Q2 Q3 Q4 Dec. Jan. Total personal income 20.7 9.6 14.1 37.3 48.9 24.5 Wages and salaries Private 10.6 8.7 3.6 .9 7.5 7.5 20.2 18.0 21.1 18.7 19.1 7.7 Other labor income 1.4 1.4 1.4 1.4 1.4 1.5 Proprietors' income Farm 4.2 .5 -4.2 -5.9 5.3 2.6 8.5 3.5 15.1 10.2 -6.6 -10.1 1.4 1.2 -3.7 3.7 1.2 -.8 -. 6 1.5 -5.5 2.8 2.0 .0 .7 2.9 .1 1.2 1.4 -.1 Transfer payments 6.7 5.3 5.3 3.9 9.0 Less: Personal contributions for social insurance 1.1 1.4 1.5 Rent Dividend Interest Less: Personal tax and nontax payments Equals: Disposable personal income .6 .7 12.0 3.9 2.0 3.3 4.4 5.3 4.9 10.6 18.7 6.3 9.7 32.0 44.0 13.8 7.3 -1.9 1.9 19.5 36.6 -1.2 Memo: Real disposable income CONSUMER SENTIMENT Index -- Michigan Survey - - Conference Board Survey 1979 1981 1983 1985 1987 1989 1993 II-12 SALES OF AUTOMOBILES AND LIGHT TRUCK 1 (Millions of units at an annual rate; BEA seasonals) 1992 1991 1992 12.30 8.39 3.91 North American 2 Autos Big Three Transplants Light trucks Foreign produced Autos Light trucks Total Autos Light trucks Memo: Domestic nameplate Market share, total Autos 1993 Q2 Q3 Q4 Jan. Feb. 12.85 8.38 4.46 12.99 8.50 4.49 12.59 8.21 4.38 13.24 8.38 4.86 13.42 8.64 4.79 12.85 7.95 4.89 9.73 6.14 4.99 1.14 3.59 10.51 6.28 5.10 1.18 4.23 10.57 6.32 5.17 1.15 4.25 10.41 6.24 4.94 1.30 4.17 11.02 6.38 5.18 1.20 4.64 11.21 6.65 5.56 1.09 4.56 10.61 5.96 4.96 1.00 4.65 2.57 2.25 .32 2.34 2.11 .23 2.43 2.18 .24 2.18 1.97 .20 2.22 2.01 .21 2.21 1.99 .22 2.24 1.99 .24 .70 .63 .72 .63 .72 .63 .71 .63 .73 .64 .75 .67 .74 .65 Mar. 1-10 10.38 5.97 5.04 .93 4.41 Note: Data on sales of trucks and imported autos for the current month are preliminary and subject to revision. 1. Components may not add to totals because of rounding. 2. Excludes some vehicles produced in Canada and Mexico that are classified as imports by the industry. II-13 income growth, they were roughly offsetting in total. Personal income growth should pick up in February, as labor market data suggest that private wages and salaries grew substantially in that month. Sales of new cars and light trucks fell to a 12.8 million unit annual rate in February from a 13.4 million unit annual rate in January. The February decline in sales was concentrated in domestically produced cars. Sales of domestically produced light trucks rose a bit further last month, to a 4.7 million unit annual rate. Light vehicles sales averaged a bit higher during the first twenty days of February than in January but then plunged during the last reporting period, when several regions were affected by severe winter weather. In the first ten days of March, sales rebounded but remained below the average for February. Consumer sentiment registered a moderate decline in February as measured by both the Michigan and Conference Board surveys. The Michigan index had risen 15 points between the third quarter of 1992 and December; it now stands 5 points below that December peak. Among the components of the index, respondents' assessments of their current financial situation and of business conditions over the next year both worsened notably in February. Some analysts have attributed the drop in sentiment in February to reaction to President Clinton's economic policy speeches on February 15 and 17. However, it is interesting to note that, while people 3. During December, an increase in farm subsidies, bonus payments in the motor vehicle industry, and retroactive social security benefit payments all pushed up personal income growth; these factors then depressed January growth by an equivalent amount. Higher final tax payments associated with last year's change in withholding payments also lowered January growth, while cost-of-living adjustments in federal transfer payments and pay increases for Federal workers boosted January growth. 4. The timing of the drop within the month lends some weight to this argument, as comparison of the preliminary and final readings for February indicates that consumers were more confident in the (Footnote continues on next page) II-14 PRIVATE HOUSING ACTIVITY units; seasonally adjusted annual rates) (Millions of 1292 19192 2 AnnualC All units Starts Permits 3 4 r Dec. 193 _ eb p nr 1.20 1.11 1.14 1.05 1.18 1.09 1.25 1.16 1.29 1.20 1.18 1.18 1.21 1.14 Starts Permits 1.03 .92 .98 .88 1.02 .89 1.10 .99 1,13 1,04 1.06 1.00 1.05 .96 Sales New homes Existing homes .61 3.52 .56 3.42 .64 3.37 .64 3.87 .65 4.04 .56 3.78 .17 .19 .16 .17 .17 .20 .15 .17 .15 .16 .12 .18 Single-family units Multifamily units Starts Permits p Preliminary. r n.a. Revised estimates. n.a. n.a. .16 .19 Not available. PRIVATE HOUSING STARTS (Seasonally adjusted annual rate) Millions of units -1 -4i A t'\ .Single-famiiy /'- -] Multifamily 1 194 1984 I 18 1985 I 98 1986 I 18 1987 I 98 1988 I 99 1989 l \i 19 1990 ^ 1 91 1991 I 19 1992 I 0.5 II-15 may have viewed the medicine he prescribed as a little bitter, responses to a separate question on confidence in government policy improved in February. Housing Markets Housing activity have been surprisingly soft in the early part of 1993. Housing starts fell sharply in January and retraced only part of that decline in February; the average for the two months was about 4-1/4 percent below the average for the fourth quarter. Permit issuance also has declined. The slowing in activity has been concentrated in the single-family segment of the market. Multifamily starts are still bumping along the bottom, although they did move up in February from a historically low January reading. Other indicators of single-family housing demand also turned down in January, from high December levels. particularly sharply. Sales of new homes fell Unlike last year, when problems in imputing some sales led repeatedly to sharp upward revisions of the preliminary estimates, new procedures at the Census Bureau make it unlikely that the January sales figure will be substantially revised. Sales of existing homes also fell in January, but nonetheless remained near the thirteen-year peak recorded in December. Sales prices for both new and existing homes were soft relative to a year earlier. At least part of the softness in prices may have been the result of a shift in the composition of sales toward starter homes: Recovery in the trade-up market has lagged that for first-time buyers, as many current owners apparently remain reluctant to sell for what they perceive as temporarily low prices. (Footnote continued from previous page) first half of the month than in the second half. However, the Survey Research Center at the University of Michigan cautions that too few interviews are conducted in the second half of the month for the intra-month readings to be a reliable gauge of changes in sentiment. II-16 CASH FLOW BURDEN OF HOME OWNERSHIP* Percent 1992 1988 1984 1980 * Financing cost of a constant-quality new home, as a percentage of average household income. Financing cost calculated as scheduled payment of principal and interest on a fixed-rate mortgage for 80% of the purchase price. 1976 1972 LUMBER PRODUCT PRICES Index, June 1992 - 1 2.25 March 12th -42 Lumber spot p Lumber spot price A gi 'I at - I i9' I 197 1978 I I 19018 1980 I 1982 I 9418618 1984 I I 1986 I I 1988 I I 9019 1990 L 1992 I II-17 The softness in the recent indicators is at odds with the continued improvement that has been apparent in key determinants of housing activity. In particular, the continued downtrend in mortgage interest rates has brought rates down to the lowest levels in decades, and the standard measures of affordability indicate that the cost of homeownership has moved down further in 1993, after substantial improvement in 1991 and 1992 (chart). The recent pickup in employment should also be a plus for housing markets. Nonetheless, some negatives are evident on the supply side of the market and may be exerting drag on activity. Lumber prices have moved up dramatically in recent months, with quotes in some spot markets up more than 90 percent since September. If passed through to homebuyers, a cost increase of this size would boost the price of a typical new home roughly 4 percent and offset about half the gain in cash flow affordability resulting from declines in mortgage rates since last fall. However, the volume of lumber sales that has actually occurred at these spot prices is unclear, as an index of producer prices of variety of lumber products used in homebuilding has risen by a much smaller amount--14 percent--since September. Indeed, the absence of any firming in house prices suggests the rise in lumber prices probably does not explain much of the recent softness in activity. It is possible, however, that higher lumber prices are making speculative builders more cautious, and custom builders may be facing resistance from buyers unwilling to absorb the higher costs of lumber prices. Builders have also reported some shortages of lots ready for construction, but again, in the absence of home price increases, these shortages probably have not been, at least yet, of major importance. Weather in January and February does not appear to have been unusually adverse for housing; March II-18 BUSINESS CAPITAL SPENDING INDICATORS (Percent change from preceding comparable period; based on seasonally adjusted data, in current dollars) 1992 1992 Q2 Q3 Q4 1993 Dec. Jan. Feb. 4.4 n.a. n.a. 7.2 -3.4 -2.1 5.6 -4.3 Producers' durable equipment Shipments of nondefense capital goods Excluding aircraft and parts Office and computing All other categories 5.4 -. 5 n.a. n.a. -13.7 -18.1 -11.9 4.5 36.5 n-a. Sales of heavy weight trucks 5.9 2.0 6.8 -1.3 -.9 6.0 Orders of nondefense capital goods Excluding aircraft and parts Office and computing All other categories -. 4 .5 4.4 Shipments of complete aircraft 1 -. 6 -3.6 19.0 7.5 2.5 2.0 2.6 3.1 8.8 -10.1 -1.1 3.7 -2.4 n.a. n.a. n.a. n.a. Nonresidential structures Construction put-in-place Office Other commercial Industrial Public utilities All other .6 -6.7 -3.7 -11.2 .8 -2.3 3.8 -6.0 2.5 6.2 -2.0 4.9 -8.2 -2.3 -2.1 1.8 Rotary drilling rigs in use -2.5 2.6 Footage drilled 2 -3.7 3.1 16.1 24.1 -. 8 Memo: Business fixed investment 3 Producers' durable equipment 3 Nonresidential structures 3 -.8 -6.5 -4.6 -2.3 -1.5 -5.0 2.5 n.a. n.a. -4.6 n.a. n.a. n.a. n.a. 4.8 -. 1 -2.6 14.5 5.6 -1.8 -13.0 17.9 20.1 -5.6 n.a. 3.1 9.9 n.a. 14.4 n.a. n.a. n.a. n.a. 9.5 -11.3 -1.1 n.a. n.a. .9 .2 -. 2 n.a. n.a. 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. From Department of Energy. Not seasonally adjusted. 3. Based on constant-dollar data; percent change, annual rate. n.a. Not available. II-19 may be a different story, however, owing, especially, to the severe blizzard in mid-March. Business Fixed Investment Real business fixed investment, which posted a strong gain in the fourth quarter of last year, appears likely to repeat that performance in the current quarter, led by a jump in outlays for producers durable equipment. Shipments of computing equipment shot up in January to a level substantially above the fourth-quarter average. As has been the case for the past year or two, demand for computing machines, appears to be strongest for products in the middle and at the low end of the market, such as workstations and PCs. Part of this strength reflects upgrades from older machines with 286 processors to new machines with 386 and 486 chips.5 In the mainframe segment of the market, industry sources indicate that demand for large, highperformance mainframes is doing fairly well; however, demand for other types of mainframes reportedly is still weak, in part because of competition from less-expensive, but increasingly powerful, products such as workstations. Shipments of complete civilian aircraft also posted a solid gain in January, but the demand seems to be coming from abroad. Domestic shipments appear to be flat or down slightly so far this quarter, and the long-term picture for domestic aircraft purchases remains bleak. American Airlines has indicated that, to bolster its balance sheet, it will take as many as twenty-five planes out of 5. Industry analysts expressed some concern late in 1992 that clients would delay purchases in order to upgrade to the Pentium processor, which Intel was to have introduced early in the first quarter of 1993. Intel has since delayed the introduction of the chip, both because of technical problems and because the company is concerned that the Pentium chip would reduce the product life of the current-model 386 and 486 processors. Release of the chip is now scheduled for March 22, 1993. but our contacts report that supplies; will be limited. It now appears that very few Pentium-based machines will be sold in 1993. II-20 RECENT DATA ON ORDERS AND SHIPMENTS Office and Computing Equipment Billions of Dollars 18 Orders (solid tine) . . • - - J - 1987 M 1988 .. .. I . ..- . - -. . . 1989 Other Equipment (exct. aircraft and computers) Bitlion. of olla ýljl nl-n 17 16 S1 1987 19B7 1988 1988 1989· · I 1989 Ii- -- 1990 I 1990 ~ I·· · · 1· 281 1991 I·· ·- 1. '1992 Sn. 1 -I· 1 14 1993 II-21 service by eliminating unprofitable routes. As a result, American is expected to defer or cancel some existing orders. More generally, competition in the airline industry remains fierce and continues to put strain on the financial positions of the major carriers. However, not everyone is cutting back.. Non-airline firms, such as United Parcel Service and International Leasing Finance Corporation, are in healthier financial condition than the airlines and have stepped up orders for planes to be delivered after 1994. In part, this increase in orders stems from price discounts offered by producers in the face of slack demand overall. Business purchases of equipment excluding aircraft and computers posted a solid increase in the fourth quarter, after having been on a plateau for the previous couple of years. Manufacturers' shipments surged in December but fell back in January to about the level of the fourth quarter. Nonetheless, the January level of new orders for these goods was 2-1/2 percent above the average last quarter, suggesting further advances in shipments in coming months. Among components, new bookings for communications equipment appear to have cooled off in recent months, but orders for various other types of equipment have picked up noticeably. Outlays for structures were down slightly in the fourth quarter, as continued declines in industrial and office construction more than offset a spurt in the drilling sector and a further advance at utilities. Drilling activity was boosted late last year by the expiration of a tax credit at yearend. Since the beginning of this year, drilling rigs in use have declined appreciably. Elsewhere, data on construction put in place through January indicate continued weakness in a number of sectors. Industrial construction, which fell in both 1991 and 1992, dropped further in January of this year. Construction of office buildings, where II-22 NONRESIDENTIAL CONSTRUCTION AND NEW COMMITMENTS (Index,Dec. 1982 = 100, ratio scale) Total Buildings Office Other Commercial Industrial Institutional / (NC) jl 200 1 160 1Tr 200 150 100 80 (C) , 1984 1985 1986 1987 1988 1989 1990 1991 1992 SSix-month moving average for all series shown. New commitments equal the sum of contracts and building permits. 1984 1%85 1986 100 1987 1988 1984 1985 1990 1986 1987 188 1991 1989 19 1989 1990 1991 1992 II-23 excess supply still appears to be a major problem, also declined further in January. Construction in the other commercial sector, which consists mainly of retail and warehouse properties, advanced early in the fourth quarter but dropped back on net over December and January. Commercial real estate prices are still declining, but perhaps at a slower pace than before. In the FDIC's latest Survey of Real Estate Trends, the proportion of respondents reporting lower prices continues to exceed those reporting higher prices, but the margin has been shrinking. In addition, the margin of respondents reporting better conditions in the commercial market over those reporting worse conditions widened in the first quarter; possibly, however, respondents are merely saying that conditions are less bad than before. Meanwhile, the Russell-NCREIF index of appraised values of commercial properties continues to exhibit marked weakness: The national average value of office buildings fell 7 percent in the fourth quarter of 1992, while the average value of retail properties dropped 4 percent and that of warehouses dropped Because of its reliance on appraised values, the roughly 5 percent. Russell-NCREIF index may tend to lag a little behind the course of transactions prices. FDIC SURVEY OF REAL ESTATE TRENDS (Index) General direction of commercial market Direction of commercia1 real estate prices 1992 1993 Q1 1991 Q4 Q1 Q2 Q3 Q4 -4 -5 18 7 2 16 -41 -39 -27 -31 -29 -23 1. Percentage of respondents expecting better conditions less percentage expecting worse conditions. CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data) 1992 Q2 Q3 1992 1993 Q4 Nov. Dec. Jan. Current-cost basis Total Excluding auto dealers Manufacturing Defense aircraft Nondefense aircraft Excluding aircraft Wholesale Retail Automotive Excluding auto dealers 22.7 16.1 -1.5 -4.4 -3.5 6.3 6.1 18.1 6.6 11.5 14.3 16.7 6.1 -9.5 3.6 12.1 -1.1 9.3 -2.3 11.7 20.9 12.0 -21.9 -1.7 -3.5 -16.7 19.5 23.2 8.9 14.3 16.5 8.6 -29.3 -9.8 -3.2 -16.3 25.4 20.4 8.0 12.5 30.3 3.9 -28.1 1.3 -5.5 -23.8 11.8 46.6 26.4 20.2 -3.9 -14.1 -10.7 -3.8 -3.2 -3.7 -2.5 9.3 10.2 -.9 7.4 1.9 -6.5 2.1 11.8 5.5 6.3 10.1 8.5 3.9 -3.5 9.7 1.6 8.1 6.9 4.8 -16.7 12.0 11.5 2.1 9.5 6.2 4.8 -21.3 18.1 9.3 1.3 8.0 22.4 -3.3 -24.1 6.0 40.5 25.6 14.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Constant-dollar basis Total Excluding auto dealers Manufacturing Wholesale Retail Automotive Excluding auto dealers n.a. Not available. INVENTORIES RELATIVE TO SALES 1 (Months supply; based on seasonally adjusted data) 1992 Q2 Q3 1992 Q4 Nov. 1993 Dec. Jan. Current-cost basis Total Excluding auto dealers Manufacturing Defense aircraft Nondefense aircraft Excluding aircraft Wholesale Retail Automotive Excluding auto dealers 1.51 1.49 1.57 5.86 4.60 1.41 1.36 1.57 1.90 1.48 1.50 1.48 1.57 5.37 5.19 1.41 1.32 1.56 1.86 1.48 1.48 1.46 1.52 5.41 4.64 1.37 1.35 1.55 1.81 1.47 1.48 1.47 1.54 5.47 4.61 1.39 1.35 1.53 1.76 1.47 1.46 1.43 1.47 5.34 4.52 1.33 1.34 1.54 1.81 1.46 1.46 1,44 1.49 5.48 4.92 1.35 1.32 1.54 1.82 1.46 1.61 1.58 1.68 1.44 1.64 2.00 1.54 1.59 1.56 1.68 1.39 1.64 2.00 1.54 1.57 1.54 1.63 1.41 1.62 1.92 1.53 1.57 1.55 1.64 1.41 1.60 1.87 1.52 1.55 1.52 1.59 1.40 1.61 1.93 1.52 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Constant-dollar basis Total Excluding auto dealers Manufacturing Wholesale Retail Automotive Excluding auto dealers 1. Ratio of end-of-period inventories to average monthly sales for the period. n.a. Not available. II-25 Business Inventories Business inventories appear to have declined slightly in early 1993. For all manufacturing and trade, current-cost inventories were reduced at an annual rate of about $4 billion in January, and the corresponding inventory-sales ratio held steady at its low December level. Stocks in January appear to have been at satisfactory levels in most sectors and were quite lean in some. In manufacturing, sharp drawdowns of factory stocks during the fourth quarter left most industries with relatively low inventorysales ratios, and although the ratio for the sector as a whole rose slightly in January, its level in that month still was relatively low. Given the leanness of stocks early in the year and the strength in recent indicators of demand for manufactured goods, some producers may well be in a position in which inventory cuts will start to give way to moderate restocking. the aircraft industry: A notable exception is Inventories of aircraft and parts have been declining sharply for more than a year as prospects for the industry have deteriorated, and an end to the contraction may still be some way off. Excluding aircraft and parts, the January reduction in manufacturers' stocks was the smallest since last summer. In the trade sector, the inventory situation of merchant wholesalers improved further in January. Strong January sales drew down stocks at many types of wholesale establishments, in many cases reversing the large accumulation of the fourth quarter. For the sector as a whole, the inventory-sales ratio in January was near the bottom of the range seen over the past two years, and no serious overhangs were evident for any of the major groupings. In retail trade, inventories increased by a small amount in January after a large rise in December. Increases in auto dealers' stocks accounted for more than half the accumulation over the two-month period. II-26 RATIO OF INVENTORIES TO SALES (Current-cost data) Ratio - -2.05 Manufacturing S'I , - 1.45 SJan. ' Excluding aircraft 1980 1.85 Total *" , . ' ' - 1982 1984 * / '. 1986 . f 1988 * .'* ''" -- 1 1990 1.25 1992 Ratio 1.5 Wholesale 1.4 - Jan.- 1.3 1.2 SI 1980 i-iI1984 l 1982 1.1 1986 1988 1990 1992 Ratio 2.7- Ratio 1.7 - Retail , 2.5 - ',« ' ': t *4 ;: GAF group - \ 1.6 , d* 1.5 2.3 - 2.1 - 1980 - Total excluding auto .V 1982 1984 1986 1988 1990 1992 1.4 II-27 Excluding autos, retail stocks edged down in January, and the inventory-sales ratio for non-auto stores held steady at a point within the relatively narrow range observed over the past year. Ratios for furniture stores and stores selling general merchandise turned back down in January; the ratio for apparel stores edged up a bit further, however, and apparel sales fell in February according to the advance report on retail sales. Federal Sector The unified budget deficit amounted to about $90 billion in the first four months of fiscal year 1993 (FY93); this figure was about $9 billion less than the deficit in the first four months of the previous fiscal year. The smaller deficit is in large part a reflection of increased receipts from individual nonwithheld taxes, which for the fiscal year to date are up nearly a third from the level of a year earlier. The strength of these collections is traceable to the pickup of economic activity over the year, a tightening of the requirements on estimated tax payments, and last March's withholding change, which left some taxpayers having to make up a gap later on. The change in withholding schedules also is expected to hold down refunds significantly this tax season. As of March 5, however, refunds were running only slightly below the pace of last year, because greater use of electronic filing is speeding up the refund process. Outlays during the first four months of fiscal 1993 were about 2 percent greater than during the similar period of fiscal 1992, held down in part by a pickup in sales of RTC assets, which resulted in a reduction in net outlays for deposit insurance. In addition, defense expenditures have fallen more than 5 percent this year, and II-28 FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS (Unified basis, billions of dollars, except where otherwise noted) FY1992 Outlays Deposit insurance (DI) Defense Cooperation account (DCA) 458.5 -.9 Fiscal year to date Change FY1993 $Billions Percent 468.7 -9.0 -4.0 10.2 -8.2 2.2 932.5 3.9 -99.0 Outlays excluding DI and DCA National defense Net interest Social security Medicare and health Income security Other 463.3 103.6 67.2 92.2 67.3 63.1 70.0 477.8 98.0 67.0 98.2 72.2 67.4 75.0 14.4 -5.6 -.1 4.9 4.3 5.1 3.1 -5.4 -.2 6.5 7.2 6.8 7.2 Receipts Personal income taxes Social insurance taxes Corporate income taxes Other 359.0 174.8 122.8 26.4 35.1 378.0 195.3 123.8 29.7 29.2 19.0 20.5 1.1 3.3 -5.9 -5.3 11.7 .9 12.5 -16.7 Deficit(+) excluding DI and DCA 99.5 104.3 -8.8 -4.6 -8.9 -4.4 90.7 99.7 6.0 Note: Details may not sum to totals because of rounding. II-29 net interest outlays are essentially flat. Other categories of spending show increases of about 7 percent on average. The Clinton Administration released a preliminary description of its economic program on February 17.6 The program aims to provide short-term stimulus to the economy, expand various programs with the objective of raising long-term growth, and reduce the deficit substantially over the next few years. The short-term stimulus package includes an extension of emergency unemployment benefits, provision of a temporary incremental investment tax credit, and increases in grants to state and local governments for investment in infrastructure. The longer-run initiatives include a variety of proposals to increase training, research, and education and to encourage investment in real estate and small business plant and equipment. According to the Administration, the proposed deficit reduction measures would cut $473 billion from the cumulative deficit over the five-year period FY1994-FY1998. The reduction would be accomplished through a combination of tax increases and spending cuts. Tax rates would be increased for individuals with high incomes and for large corporations, and a new energy tax would be levied on the BTU content of fuels. and Medicare. Spending cuts would be largely borne by defense The Administration projects that, under the program, the deficit will fall to around $200 billion in FY1996 and FY1997. In FY1998, however, the deficit is expected to move back up to about $240 billion as a result of a projected continuation of the runaway growth in the Medicare and Medicaid programs, a leveling out of the deficit reductions in the President's program, and an assumed slowing in the baseline path of economic growth. 6. A more detailed discussion of the Administration's program is provided in an appendix to Part 2 of the Greenbook. II-30 CBO has released a preliminary analysis of the President's program. According to CBO, his proposals would reduce the deficit by $406 billion over the FY1994-FY1998 period, $67 billion less than estimated by the Administration. The budget committees in the Congress have taken account of the CBO assessment in shaping their budget resolutions for FY1994. Accordingly, they have altered the President's program by enough to produce the full amount of deficit reduction he had targeted, largely through bigger reductions in spending. The budget resolutions will be considered by the full House and Senate this week. The Administration has targeted August for passage of a budget reconciliation bill that would implement the longer-run deficit reduction and economic plan: passage of the individual appropriations bills should take place shortly thereafter. A portion of the short-term stimulus package has already been passed; the President has signed a bill further extending emergency unemployment insurance benefits, which had been due to expire March 6 and will now expire October 2. The Administration also plans to submit a major proposal for health care reform by May. State and Local Government Sector Real purchases by state and local governments appear to have dipped early this year after a small increase during 1992. Employment in January and February was about equal to the fourthquarter level, while real construction spending fell 4 percent at a monthly rate in January to its lowest level since mid-1991. The weakness in construction was widespread, with much of the reduction concentrated in the areas of educational facilities and highways and bridges. On a monthly basis, of course, these data are highly volatile and are subject to substantial revision. II-31 Many governments continue to face severe fiscal problems. The combined deficit of operating and capital accounts, excluding social insurance funds, as reported in the national income accounts, has exceeded $40 billion in each of the last two years. However, preliminary data for the fourth quarter showed moderate improvement. Also, recent data from the Center for the Study of the States suggest that state tax revenue in the fourth quarter of 1992, excluding the effects of legislated changes and adjusted for inflation, was up nearly 3 percent from the same period a year earlier, the largest gain since mid-1990. Recent survey information from the National Association of Counties provides additional perspective on budgetary problems at the county level. The projections for both revenue and expenditures by most counties were off target in 1992, and most have had to take a variety of actions to balance their budgets. On the receipts side, 91 percent of the counties reported lower-thanexpected tax receipts despite a stronger economy in 1992; counties depend largely on property taxes which do not necessarily respond to movements in aggregate economic activity and may respond to changes in real estate values only after a substantial lag. In addition, 94 percent of the counties stated that they received less staff aid than they had anticipated. Among budget-balancing measures taken by these counties, the most common were increases in taxes and fees. In addition, many dipped into reserve funds, and 77 percent cut programs or services. Outlay reductions most frequently cited were in the area of capital projects. The counties surveyed reported a backlog in The survey, taken between November 1992 and January 1993, 7. covered 66 urban counties, representing one-third of the nation's population. Most counties answered the survey in terms of fiscal year 1992, which ended in June for some and December for others. II-32 RECENT CHANGES IN PRODUCER PRICES (Percent change; based on seasonally adjusted data) 1 Relative importance, Dec. 1992 1992 1991 1992 Q2 1993 Q3 Q4 ----- Annual rate-----Finished goods Jan. Feb. -Monthly rate- 100.0 -. 1 1.6 3.3 1.3 -. 3 .2 .4 22.4 13.9 63.7 40.6 23.1 -1.5 -9.6 3.1 3.4 2.5 1.5 -.1 1.9 2.1 1.6 -.6 16.6 1.8 2.4 .9 4.3 -3.5 1.2 1.5 1.2 2.9 -9.8 .9 .9 .3 -.9 .9 .4 .4 .3 -.1 1.7 .3 .3 .5 Intermediate materials 2 Excluding food and energy 95.4 81.8 -2.7 -.8 1.2 1.1 5.0 1.7 .7 1.3 -1.4 -.3 .3 .3 .5 .5 Crude food materials Crude energy Other crude materials 41.2 39.5 19.3 -5.8 -16.6 -7.6 2.8 1.5 5.6 2.7 51.5 4.8 -4.8 19.8 2.2 4.3 -20.2 1.5 .3 .0 3.1 .1 -2.5 2.2 Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment 1. Changes are from final month of preceding period to final month of period indicated. 2. Excludes materials for food manufacturing and animal feeds. RECENT CHANGES IN CONSUMER PRICES (Percent change; based on seasonally adjusted data) Relative importance, Dec. 1992 1 1993 1992 1991 1992 Q2 Q3 Q4 ----- Annual rate-----All items 2 Food Energy All items less food and energy Commodities Services Memo: CPI-W3 Jan. Feb. -Monthly rate- 100.0 15.8 7.3 3.1 1.9 -7.4 2.9 1.5 2.0 2.6 -1.2 8.6 2.6 3.2 1.2 3.2 1.4 1.9 .5 .4 .5 .3 .1 -.4 76.9 24.7 52.2 4.4 4.0 4.6 3.3 2.5 3.7 2.9 2.5 3.1 2.5 1.8 2.9 3.8 1.5 4.7 .5 .5 .4 .5 .5 .4 100.0 2.8 2.9 2.7 2.3 3.2 .4 .4 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 II-33 infrastructure projects waiting for funding valued at $10 billion and covering a wide range of areas. The counties do not expect their fiscal situation to improve much in the year ahead. As the assessment cycle for real property is gradual, many counties fear that the full impact of declining property values on tax collections has not yet been felt. And many counties anticipate still further reductions in state aid. Prices After favorable reports on consumer prices in November and December, the most recent figures for the CPI have come in on the high side of the past year's trends. total CPI in January was in February. A jump of 0.5 percent in the followed by a further rise of 0.3 percent The CPI excluding food and energy rose a half percentage point in both months; its change over the twelve-month period ending in February was 3.6 percent, up from the low of 3.3 percent that was reached at the end of 1992, but still a little below the reading of a year ago. On the whole, the recent data would seem to suggest that the underlying inflation picture is not quite as favorable as it previously had appeared. At the same time, though, there has been little evidence of deterioration in the underlying determinants of price change. Despite recent gains in output and employment, substantial slack remains in labor and product markets. addition, non-oil import prices have remained subdued. In The signals on inflation expectations have been mixed in recent months, but there is as yet no evidence of a significant upward shift in price expectations. Nor has deterioration been evident in the recent qualitative reports on price- and wage-setting behavior in the business sector. II-34 INFLATION RATES EXCLUDING FOOD AND ENERGY Percent change from twelve months earlier Feb. Feb. Feb. 1993 1992 1991 5.6 3.8 3.6 4.2 2.9 2,8 11.6 3.0 4.7 .4 4.0 3.7 2.9 2.4 3.1 1.3 .6 2.5 2.3 2.4 2.5 .2 1.0 2.1 6.5 4.1 4.0 5.2 4.0 17.4 19.6 9.9 5.2 3.5 2.9 6.0 -7.6 7.9 4.0 3.3 2.4 3.1 12.7 6.8 3.3 PPI finished goods 4.0 2.5 2.0 Consumer goods 4.2 2.8 2.2 Capital equipment, excluding computers Computers 3.8 n.a. 2.8 -18.8 2.3 -13.4 CPI Goods Alcoholic beverages New vehicles Apparel House furnishings Housekeeping supplies Entertainment Services Owners' equivalent rent Tenants' rent Other renters' costs Airline fares Medical care Entertainment PPI intermediate materials 1.8 -.7 1.7 PPI crude materials 1.6 -6.1 9.7 ECI hourly compensation 1 Goods-producing Service-producing 4.6 4.8 4.6 4.4 4.6 4.3 3.5 3.8 3.2 Civilian unemployment rate 2 6.5 7.3 7.0 78.0 77.4 4.8 4.3 3.5 3.5 Factors affecting price inflation Capacity utilization 2 (manufacturing) 2.3 Inflation expections' Mean of responses Median, bias-adjusted Non-oil import price 5 Consumer goods, excluding autos, food, and beverages Autos 78.9 4.6 4.1 3.1 .2 .6 4.3 2.5 .9 2.7 2.0 .4 1. Private industry workers, periods ended in December of previous year. 2. End-of-period value. 3. Michigan Survey. 4. Median adjusted for average downward bias of 0.9 percentage points since 1978. 5. BLS import price index (not seasonally adjusted), periods ended in December of previous year. I mtJn naiailahl'_ II-35 Consumer food prices rose only 0.1 percent in February, after a jump of 0.4 percent in January. Vegetable prices, which had surged in January, dropped back a little last month; however, more recent information suggests that renewed increases may be in train, owing to planting delays in California early in the year and more recent flooding in certain regions of Arizona--areas that are important suppliers at this time of year. But, despite these--and other-- short-run supply problems that continue to arise in the food sector, the underlying trend in food price increases remains quite low; the cumulative increase over the twelve months ended in February amounted to just 1.7 percent. Consumer energy prices fell 0.4 percent in February, pulled down by declines for natural gas and electricity, the latter of which reportedly was a reflection of sizable rebates to customers in Virginia. Gasoline prices moved up somewhat further in February, after a large January rise. However, private survey data for early March suggest that retail gasoline prices may since have edged off a bit. For goods other than food and energy, retail prices increased 0.5 percent in February, the same as in January. Tobacco prices rose further last month, largely reflecting an increase in federal excise taxes. month. In addition, apparel prices surged for a second Fairly sharp price increases also were reported in January and February for other nondurables. By contrast, the prices of durable goods turned down 0.1 percent last month, reversing part of January's rise. Car prices were unchanged in February, as increases in manufacturers' list prices apparently did not feed through to transactions prices at retail. 8. Federal excise taxes on cigarettes rose 4 cents per pack at the beginning of the year. Because prices in most cities are sampled every other month for the CPI, the tax increase shows up in both January and February. II-36 PRICE INDEXES FOR COMMODITIES AND MATERIALS1 Percemt change Memo: Dec. 92 to Jan. 26 3 Last observation 4 1. PPI for crude materials la. lb. 1c. 1d. Foods and feeds Energy Excluding food and energy Excluding food and energy, seasonally adjusted 1991 1992 Feb. 11.6 Feb. Feb. Feb. -5.8 -16.6 -7.6 Feb. -7.7 2. Commodity Research Bureau 2a. Futures prices 2b. Industrial spot prices Mar. Mar. 16 16 -6.5 -11.3 3. Journal of Commerce industrials 3a. Metals Mar. 16 Mar. 16 -7.2 -7.1 4. Dow-Jones Spot Mar. 16 -12.1 4 5. IMF commodity index 5a. Metals 5b. Nonfood agriculture Feb. Feb. Feb. 6. Economist (U.S. dollar index) 6a. Industrials Mar. Mar. 1. 2. 3. 4. n.a. 9 9 2.9 Jan. to Year earlier date to date .9 -. 3 2.5 .8 .0 3.3 .4 -2.5 2.5 -.4 5.9 3.1 -2.9 -.7 -1.2 1.1 4.9 -.6 .9 .8 2.3 -1.1 5.0 -1.8 .4 3.1 7.2 .7 -2.1 2.1 -.4 -. 8 2.2 10.4 .7 -8.9 1.3 -2.6 -3.1 2.4 -9.1 14.9 1.6 4.5 9.6 -.5 .5 5.0 7.1 Not seasonally adjusted. Change is measured to end of period, from last observation of previous period Week of the January Greenbook. Monthly observations. IMF index includes items not shown separately. Not available Index Weights Energy Food Commodities Precious Metals Others' 0 0 U O3 PPI for crude materials 18 1 S"":"xxxxI': 41 41 CRB futures 14 14 57 14 CRB industrials 100 Joumal of Commerce index 12 88 Dow-Jones 58 25 17 IMF index 55 45 Economist 50 1. Forest products, indusria metals, and other industria materials. 2.3 9.7 50 -4.0 -7.2 5.7 3.7 6.2 II-37 COMMODITY PRICE MEASURES - ournal of Commerce Index, total - - Total 104 - Journal of Commerce Index, metals - 103 Ratio scale, index (1980=100) - , ," - 115 1 Mar 16 - 105 t \ I S SM^ 10 130 125 10 0 . Feb Metal ^ , Mar s 102 -- 101 95 S. 97 98 1983 I I A 21 1 111 1984 1985 1986 I 1987 I 1988 1989 1990 1991 1992 75 1993 Feb 1993 Mar 95 CRS Spot industrials Ratio scale, index (1967=100) 340 - 320 - 300 - 280 CRB industrials Mar 1 6 268 260 -240 2 40 F259 Feb 1993 Mar 259 220 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 200 1993 CRB Futures Ratio scale, index (1967=100) -- 320 310 CRB Futures -290 - - 211 270 208 -250 202 230 Mar16 " "196 Feb 1993 Mar 210 1983 1984 1985 1986 1987 1988 1989 1990 Weeoldy data, Tuesdays; Journal of Commerce data monthly before 1985 1991 1992 1993 Dotted les indicate week o Oreenbook last II-38 Daily Spot and Posted Prices of West Texas Intermediate 1 Dollars per barrel Apr May June July Aug Sep Oct Nov Dec Jan Feb Mar 1. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal. MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE Year and Month 1992 April May June July August September October November December 1993 January February March 1. Price through March 18. Posted Spot 19.20 19.90 21.46 20.77 20.32 20.83 20.77 19.38 18.40 20.24 20.94 22.38 21.76 21.35 21.90 21.69 20.34 19.41 18.01 18.92 19.38 19.08 20.05 20.59 II-39 Prices of non-energy services rose 0.4 percent in both January and February, after a stretch of several months in which the monthly changes had averaged about 0.3 percent. The indexes for both residential and owners' equivalent rent appear to have firmed a little, after very modest increases around the middle of last year. In addition, the index for airfares climbed by more than 5 percent over the first two months of the year, as some discounts that previously had been in place were scaled back or ended; recent reports appear to suggest that discounting of fares may have picked up again in March, however. In the past year, prices of capital goods have remained subdued, on balance. For the year ending in February, the PPI for capital goods was held down by computer prices, which dropped 13-1/2 percent during the preceding twelve months. Prices of other capital goods also continued to slow, rising just 2-1/4 percent in the twelve months ending in February, about 1/2 percentage point below the year-earlier pace. Although modest price increases for motor vehicles last year contributed to this slowing, the February PPI indicates that passenger car and light truck prices are accelerating at the manufacturers' level. Spot prices of industrial materials have risen, on balance, since the last Greenbook, consistent with the pickup in industrial activity. The Journal of Commerce index of industrial materials prices has increased about 2 percent since the end of January, and other indexes have moved up as well. To a considerable degree, the indexes are being driven by very large increases for a few products, rather than widespread price hikes. For example, the metals subcomponent of the Journal of Commerce index actually has fallen about 1 percent since the last Greenbook; higher prices for steel have been offset by declines for other metals. Elsewhere, lumber II-40 and plywood prices have rocketed this year, but the surge appears to have slowed a little in March. Turning to broader measures of materials prices, the PPI for intermediate materials continued to move up in February. The twelve-month change in that price measure has risen over the past year, but only to a rate of 1-3/4 percent. APPENDIX PRESIDENT CLINTON'S ECONOMIC PROGRAM President Clinton presented his economic program to the Congress in mid-February. In early April, he will deliver a formal budget containing detailed and revised budget proposals and updated budget estimates. Meanwhile, the Congress is considering the President's proposals in the context of developing a budget resolution for FY1994. The President's Program and the Budget Outlook Some of the President's proposals are aimed at stimulating economic activity over the near term, while others are geared to the achievement of longer-run economic and budgetary objectives. The Office of Management and Budget (OMB) projects that the proposed changes, on net. would increase the budget deficit $13 billion in FY1993 but reduce it significantly in subsequent years (table 1). By FY1998, the program is projected to lower the deficit, on net, by $148 billion ($53 billion from net reductions in spending on items other than interest, $73 billion from net increases in taxes, and Table 1 PRESIDENT CLINTON'S BUDGET PROJECTIONS (Fiscal years) 1993 1994 1995 ----------- Billions Current services deficit 1996 1997 1998 of dollars--------- 319 306 306 314 369 419 -- 5 11 16 23 29 319 301 296 297 346 390 2 36 39 12 39 _3 54 27 58 7 92 52 74 14 140 53 73 22 148 262 242 205 206 241 Less: "Bush" defense cuts Equals: Baseline deficit Less: Spending reductions (net) Revenue increases (net) Debt service savings Subtotal Equals: Proposed deficit -9 -4 _0 -13 332 ------------ Percent of GDP-----------Baseline deficit Proposed deficit 5.2 5.4 4.6 4.0 4.3 3.5 4.1 2.9 4.6 2.7. 1. Includes related debt service ($4 billion in FY1998). 1. Estimates presented here are drawn from the Administration document A Vision of Change for America. II-A-1 5.0 3.1 II-A-2 $22 billion from savings on debt service).2 The savings are measured relative to a baseline that already incorporates the reductions in defense spending (with certain adjustments) proposed by President Bush in his January 1992 budget request but holds the rest of the budget at "current services" levels. Assumingcenactment of the President's program, the deficit is projected to expand from $290 billion in FY1992 to $332 billion in FY1993; it then narrows to the area of $200 billion in FY1996 and FY1997 before moving back up to $241 billion in FY1998. By comparison, the baseline deficit in FY1998 is estimated at $390 billion. The budget projections are based on essentially the same "technical" assumptions as were used in OMB's January budget document (with updated estimates for deposit insurance). In a break from convention, however, the Administration draws the economic assumptions underlying the budget projections from CBO's January Consequently, neither the economic assumptions Report (table 2). Table 2 ECONOMIC ASSUMPTIONS UNDERLYING THE PRESIDENT'S BUDGET (Calendar years) 1993 1994 ---------Real GDP GDP deflator Consumer price index 2.8 2.5 2.8 3.0 2.4 2.7 1995 1996 1997 1998 Percent change, Q4-to-Q4--------2.8 2.3 2.7 2.6 2.2 2.7 2.2 2.2 2.7 1.8 2.2 2.7 ---------- Percent, annual average--------Civilian unemployment Interest rates Treasury bills Treasury notes rate 7.1 6.6 6.2 6.0 5.8 5.7 3.2 6.7 3.7 6.6 4.3 6.6 4.7 6.5 4.8 6.5 4.9 6.4 2. Unlike the President. we classify the proposed rise in the share of social security benefits subject to income tax as a tax increase. Also note that savings from actions to shorten the maturity structure of the debt are included in the "spending reductions" line in table 1: the debt service savings are attributable entirely to the reduced size of the debt. 3. In contrast, when the Congressional Budget Office (CBO) constructs a baseline, it assumes full compliance with the Budget Enforcement Act (BEA) of 1990, which established limits on discretionary spending through FY1995. For years after 1995, CBO assumes that discretionary spending will grow in line with inflation. 4. The effects of the President's health care plan were not included in the economic program. However, he apparently expects savings from health care reform to help keep the budget deficit on a downward track after the mid-1990s. II-A-3 nor the projected deficits incorporate the effects of the President's program. Spending Provisions According to OMB estimates, the President's proposals will bring about a significant shift in the composition of federal spending while lowering appreciably its overall rate of growth (table 3). All told, enactment of the President's proposals would increase spending $9 billion, on net, in FY1993. However, by the late 1990s, outlays would be more than $50 billion below baseline levels. When interest savings are added in the net reduction in spending grows to $75 billion in FY1998. The President would provide appreciable new funding for socalled investment items (notably, human capital and public Such outlays are key elments of both the stimulus infrastructure). In the near term, package and the longer-run economic plan. they would go primarily for highways, mass transit, and airports and would be channeled through state and local governments. Over the longer run, the President would also direct money to furthering technology (for example, high-performance computing), expanding education and training programs, achieving environmental objectives, and improving public health programs. Meanwhile, outlays for other programs would be reduced nearly $100 billion below the President's baseline by FY1998. The largest cuts would be in national defense and in health care entitlements, but many smaller programs would be scaled back as well. With respect to defense, the Administration's proposals would reduce spending by FY1998 to a level $36 billion (more than 12 percent) below that proposed by President Bush in 1992. President Clinton's proposals would require further cuts in military and civilian DoD personnel, as well as in procurement and other aspects of the If the proposals are implemented, the resulting military budget. level of defense spending in FY1998 would be nearly 20 percent below (By FY1998, that needed to maintain 1993's real funding level. military personnel would be down to 1.4 million, and civilian DoD personnel to 832.000.) As for the health entitlement programs, the President's proposed reductions are essentially stopgap measures pending release of a comprehensive health care reform plan in May. The savings in Medicare would come primarily from restraints on payments to health care providers and, after 1995, from higher premiums for Supplementary Medical Insurance. If enacted into law, these changes would lower the level of Medicare spending more than 8 percent ($20 billion) by FY1998, but the program still would grow about 5. In A Vision of Change for America, the Administration provides an alternative economic forecast that is conditional on enactment of It shows both larger increases in real output its program: (notably, real GDP growth slows only to 2-1/2 percent per year in the late 1990s) and more inflation. When the more favorable economic assumptions are used, the Administration expects the deficit to shrink a bit more rapidly over the next few years and to remain essentially unchanged as a percent of GDP after the mid1990s. 6. The other major spending increase in the stimulus package is a further extension of the extended unemployment benefits program. It was passed by the Congress and signed into law in early March. II-A-4 Table 3 KEY SPENDING PROPOSALS (Change from baseline in billions of dollars, fiscal years) 1993 1994 1995 1996 1997 1998 Net change (excluding interest saving from change in debt service) 9 -2 -12 -27 -52 -53 Increases 8 15 22 33 39 45 Reductions 1 -17 -34 -59 -91 -98 Defense spending 0 -7 -12 -20 -37 -36 Nondefense discretionary spending Eliminate programs Higher user fees, lower subsidies Cuts to federal employment, pay Other -15 -2 -2 -5 -6 -20 -3 -23 -3 -2 Mandatory spending Medicare Higher SMI premiums Medicaid Fees and subsidies Federal retirees Other transfers Shorten maturity of debt -25 -10 -1 -2 -5 -2 -3 -3 -35 -15 -4 -2 -7 -3 -4 -4 -40 -20 -7 -3 -5 -3 -4 -5 -7 -14 -22 Stimulus proposals UI extension Summer programs Other Investment proposals UI extension Infrastructure Education and training Health and nutrition Net interest (due to change in debt levels) 0 0 -3 -2 -5 -10 1. Consists largely of grants for transportation, housing, and community development. -6 -12 II-A-5 10 percent per year, on average, between FY1992 and FY1998. The Medicaid program also would see some cuts, largely through a suspension of the federal requirement that states pay for at-home personal care services. Revenue Proposals A major theme of the President's economic program is a shift in the distribution of tax burdens: Upper-income individuals and businesses generally would face higher liabilities, while many middle- and low-income individuals would see little change in their overall tax payments. On net, the proposed changes to the tax laws would add slightly to the deficit in FY1993 but are expected to narrow it appreciably thereafter--by almost $75 billion in both FY1997 and FY1998 (table 4). In addition to new initiatives, the package contains the extension of several expiring provisions, but these would have only a small effect on the deficit. Table 4 KEY REVENUE PROPOSALS (Change from baseline in billions of dollars fiscal years) 1993 1994 1995 1996 1997 1998 -4 36 39 58 74 73 2 28 20 23 26 28 0 0 3 -1 6 -6 6 -6 7 -7 8 -7 0 3 6 6 7 7 0 0 -5 -1 0 8 2 -9 -1 0 5 3 -7 -2 1 6 3 -3 -2 2 6 4 -2 -2 3 6 4 -3 -2 3 0 0 2 0 9 0 16 3 22 3 22 3 Memo: Extensions of expiring provisions -2 -2 New provisions -2 38 -3 42 2 55 8 65 7 65 Net change Personal taxes Higher taxes on upper incomes Tax 85 percent of social security benefits Expansion of EITC Repeal of Medicare wage cap Business taxes Higher tax rate on large corps. Smaller deducts. for meals, etc. Investment tax credit Extension of R&E credit Compliance initiatives Energy taxes BTU tax Extension of gasoline tax Upper-income individuals would pay higher income and social insurance taxes under the President's plan. The increase in income taxes would be accomplished through (1) the addition of a fourth (36 percent) bracket for taxable incomes over $140,000 (joint returns) and $115,000 (single returns), (2) the imposition of a 10 percent surtax on taxpayers as their taxable incomes exceed $250,000 (on both joint and single returns), (3) the permanent extension of provisions that limit the itemized deductions and phase II-A-6 out the personal exemptions claimed by high-income taxpayers, and (4) adjustments to the provisions concerning the alternative minimum tax. However, the maximum marginal rate on capital gains would remain at 28 percent. Liabilities would be higher for calendar year 1993, but the additional payments would not be required until 1994. Also, beginning in 1994, the share of social security benefits (of well-to-do retirees) subject to income tax would be raised from 50 percent to 85 percent, and the wage base cap on Medicare taxes (currently at $135,000) would be repealed. Meanwhile, low-income families would benefit from an expansion of the earned income tax credit (EITC). The EITC, which provides a subsidy to low-income working Americans with children, would be expanded in 1994 to cover families with incomes of up to $30,000 per year (currently, the credit, which is indexed, is fully phased out when either adjusted gross income or earned income exceeds $23,050); the President also wants to increase the size of the credit. The expansion of the EITC, along with additional funding for food stamps and for energy assistance, will help offset the effects of the proposed energy tax on many lower-income households. On the business side, the largest revenue gains would come from an increase in the corporate tax rate, from 34 percent to 36 percent, on taxable incomes above $10 million; liabilities would be higher for calendar year 1993, but payments would not be required until 1994. In addition, deductions for business meals and entertainment would be reduced. On the other hand, businesses would be able to claim an investment tax credit (ITC) on outlays for producers' durable Large businesses would get a equipment made after December 3, 1992. temporary incremental ITC on investments made before the end of 1994; the credit would be worth up to 7 percent of outlays above a firm's fixed base. with the percentage depending on the service lives of the equipment purchased and the base related to the firm's Small businesses would receive a previous level of spending. permanent ITC applicable to all new investment; the credit would be up to 7 percent in the first two years and up to 5 percent thereafter. Among other key revenue provisions, a broad-based energy tax would be introduced. The tax would be implemented in equal annual installments over a three-year period beginning July 1, 1994, and would be based in part on a fuel's energy content as measured in When fully phased in, the tax would raise $22 billion per BTUs. Also, the current year (the figure for both FY1997 and FY1998). 7. Large businesses are those with annual gross receipts of at least $5 million; such firms account for about 85 percent of total outlays on producers' durable equipment. With respect to the base for the incremental credit, companies would have the option of averaging investments made during 1989-91 or during 1987-91. 8. The tax is specified as a dollar amount per million BTUs, is indexed to the GDP deflator, and is higher for oil than for other energy sources. The higher tax for oil is meant to improve air quality (oil burns dirtier than other fuels) and to discourage dependence on foreign energy sources. At current prices, the proposed BTU tax translates to ad valorem tax rates of 5 percent for gasoline, 4 percent for residential natural gas, 3 percent for residential electricity, and 8 percent for home heating oil. II-A-7 gasoline tax would be extended beyond its September 30, expiration date. 1995, CBO Re-Estimates On March 3, CBO released its preliminary analysis of the President's budget program (table 5). CBO expects the program to generate somewhat less deficit reduction than does the Administration; for example, CBO foresees savings of $132 billion in FY1998, compared with OMB's estimate of $148 billion. Nonetheless, the five-year budget projections of the two agencies are quite similar. The differences in the estimated effects of the President's proposals are not large, and they are roughly offset by differences in the CBO and OMB baselines (adjusted for conceptual differences). Table 5 CBO RE-ESTIMATES OF THE PRESIDENT'S PROPOSED BUDGET (Billions of dollars, fiscal years) 1993 1994 1995 1996 1997 1998 OMB deficit estimate 332 262 242 205 206 241 CBO re-estimates of the OMB baseline Revenues Deposit insurance Other outlays Subtotal 5 -14 -9 -17 0 -3 -2 -5 -6 13 -4 4 -16 -2 -2 -19 -28 -2 _0 -29 -4 0 0 0 0 -2 -6 9 2 1 1 0 -1 11 4 3 1 1 0 _0 10 6 3 0 1 1 _1 13 7 4 1 2 2 3_ 18 6 5 2 2 2 -1 16 308 268 257 222 205 CBO re-estimates of the President's plan Revenues Debt management Medicare Pay offsets (defense) Debt service Other outlays Subtotal President's budget as estimated by CBO -6 14 -26 229 1. Increases in revenues are shown with a negative sign -- ,- because they reduce the deficit. Several factors contribute to the differences in the estimates of the President's proposals. About one-third of the discrepancy is on the revenue side ($6 billion in F1998), where CBO adopts the Joint Committee on Taxation's view that the Administration is overstating the likely revenue gains from the proposed tax rate increases for high-income individuals and from compliance and enforcement efforts. On the outlay side, CBO identifies inadvertent errors in OMB's estimates of the savings in Medicare and defense ($4 billion combined in FY1998); also, because of the lack of specificity in the Administration's proposed changes in debt management policies, CBO chooses not to recognize the claimed II-A-8 savings. Finally, the smaller amount of deficit reduction estimated by CBO tempers the projected savings in debt service. The budget committees in the Congress have taken account of the CBO assessment in shaping their budget resolutions for FY1994. Accordingly, they have altered the President's program by enough to produce the full amount of deficit reduction he had targeted, largely through bigger reductions in spending. President Clinton has indicated his willingness to consider spending cuts in excess of those he proposed in February. Budget Process President Clinton wants to extend the Budget Enforcement Act (BEA), with limited modifications, beyond its scheduled expiration in 1995; he is expected to release detailed proposals shortly. In general, he would extend the caps on discretionary spending through 1998, carry the pay-as-you-go (PAYGO) provisions governing mandatory spending and taxes through 2003, support the use of sequestration to enforce compliance, and enhance the President's rescission authority. The President's program would lift nondefense discretionary spending in FY1993 above its BEA cap (as estimated by the staff). However, given the reductions in defense funding already in place, total discretionary spending would remain below the level implied by combining the defense and nondefense caps (table 6). In FY1994, when the separate caps disappear, total discretionary spending would exceed the aggregate cap by about $10 billion; a similar discrepancy In any event, the overruns for would be present in FY1995. discretionary programs in those two years would be more than offset by the proposed changes to mandatory spending and taxes, holding the deficits well below the levels implied by the BEA caps on discretionary spending. Table 6 THE PRESIDENT'S PROPOSED BUDGET AND THE BUDGET ENFORCEMENT ACT1 (Billions of dollars, fiscal years) 1993 1994 1995 Total discretionary spending Proposed by President BEA caps 556 560 548 538 555 543 Deficit Proposed by President Implied by BEA caps 332 332 262 292 242 279 1. BEA caps are staff estimates. with the Budget in April. Official caps will be released 9. The additional funding for extended unemployment benefits was given the "emergency" designation and thus did not require the adjustments to other mandatory spending or taxes normally required The Congress is expected to apply the emergency by the PAYGO rules. designation to the rest of the stimulus package as well. Under the BEA rules, when discretionary funding is considered to be for emergency purposes, the caps are adjusted to accommodate it. DOMESTIC FINANCIAL DEVELOPMENTS III-T-1 1 SELECTED FINANCIAL MARKET QUOTATIONS (percent) .................................................................................... 1992 1993 Change from: FOMC Feb 3 Mar 16 3.19 3.04 2.99 -.20 -. 05 Treasury bills 3 3-month 6-month 1-year 2.92 2.96 3.06 2.93 3.12 3.28 2.98 3.10 3.24 .06 .14 .18 .05 -.02 -.04 Commercial paper 1-month 3-month 3.22 3.22 3.19 3.23 3.17 3.19 -.05 -.03 -.02 -.04 Large negotiable CDs 1-month 3-month 6-month 3.06 3.06 3.11 3.10 3.16 3.30 3.11 3.12 3.23 .05 .01 .06 -.04 .12 -.07 Eurodollar deposits 1-month 3-month 3.31 3.31 3.06 3.19 3.06 3.13 -.25 -.18 .00 -.06 Bank prime rate 6.00 6.00 6.00 .00 .00 U.S. Treasury (constant maturity) 4.38 3-year 6.40 10-year 7.29 30-year 4.77 6.45 7.23 4.50 6.06 6.87 .12 -.34 -.42 -.27 -.39 -.36 Municipal revenue (Bond Buyer) 6.31 6.36 5.98 -.33 -.38 Corporate--A utility recently offered 8.06 7.96 7.64 -.42 -.32 7.84 5.15 7.86 5.06 7.47 4.78 -.37 -.37 -.39 -.28 Sept 4 FOMC Sept 4 Feb 3 Short-term rates Short-Term rates Federal funds 2 Intermediate- and long-term rates Home mortgage rates FHLMC 30-yr. FRM FHLMC 1-yr. ARM 6 1989 Record highs Date Lows Jan 3 Percent change from: 1993 FOMC Feb 3 Mar 16 -----------------------------------------.-.---------------------- Record highs 1989 lows FOMC Feb 3 -------------------------- Stock prices Dow-Jones Industrial 3478.34 NYSE Composite AMEX Composite NASDAQ (OTC) Wilshire 251.36 423.08 708.85 4475.25 3/10/93 2144.64 3373.79 3442.95 -1.02 60.54 2.05 3/10/93 3/16/93 2/4/93 3/10/93 154.00 246.45 248.81 305.24 414.89 423.08 378.56 708.67 695.47 2718.59 4419.76 4440.21 -1.01 .00 -1.89 -.78 61.56 38.61 83.71 63.33 .96 1.97 -1.86 .46 .............................................................................................. 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 March 17. 1993. Secondary market. Bid rates for Eurodollar deposits at 11 a.m. London time. Based on one-day Thursday quotes and futures market index changes. Quotes for week ending Friday previous to date shown. Selected Interest Rates* Short-Term Statement Week Averages Percent 12 S10 6 1-4 4 2/3 2/12 2/23 1993 3/4 Percent 1989 1990 1991 1992 1993 " Friday weeks are plotted through March 12 statement weeks through March 10. 1993. 2/3 2/12 2/23 1993 3/4 3/16 DOMESTIC FINANCIAL DEVELOPMENTS Money market conditions have been stable since the February FOMC meeting. Bond yields trended downward intermeeting period, however, significant over much of the responding to the prospect of a reduction in the federal deficit; concerns about heightening of inflation prompted some backup this month, but remain appreciably below their early February levels. possibility that yields rates Despite the fiscal restraint might lead to a weaker economy. on nonfederal securities have dropped as much as Treasury rates, maintaining the relatively narrow risk premia. Stock prices All major indexes, except the NASDAQ, moved up on a broad front. posted new highs before retreating slightly recently. The NASDAQ index reached a record high shortly after the last FOMC meeting, but it lately has been dragged down by weakness in share prices of health-related firms. The rally in the capital markets has sparked a heavy volume of and state and bond issuance by businesses mortgage borrowing by households--a repayment of existing local governments and also great share of which is for the Corporations also have tapped the debt. equity market in volume, in many instances using those proceeds to repay bank loans and other short-term debt. Growth of total domestic nonfinancial debt appears to be moderate this quarter--probably around the 5 percent pace observed on average in 1992. Weakness in the monetary aggregates persisted in February. turned down 1/4 percent at an annual rate, 3-3/4 percent. The contraction in M3 1-3/4 percent rate in February. have accentuated the latest Ml and M2 dropped slowed but still was at a Seasonal adjustment problems may declines, but underlying monetary growth III-1 III-2 has been weak at best, and the apparent large increase in M2 velocity is a significant departure from past patterns. Interest Rates The rally in the bond market pushed long-term Treasury rates in early March to their lowest levels in twenty years. Most private long-term rates also moved to near twenty-year lows; the thirty-year fixed-rate conventional mortgage, for example, recently dropped below 7-1/2 percent, the lowest level since April 1973. Spreads on fixed-rate mortgages, however, have widened about 10 basis points since mid-February because of a reassessment of prepayment risk and because of increased interest rate volatility. having shorter maturities have fallen less: Rates on securities The three-year Treasury rate is now at 4.50 percent--still 12 basis points above its low last September. The interest rate declines over the past year or so have translated into substantial reductions in costs for both businesses and households. According to one estimate, nonfinancial corporations saved $2-1/2 billion in interest expense in 1991 and 1992 by calling high-coupon bonds. This saving, however, was dwarfed by the direct effect of lower short-term rates, which produced a total estimated reduction in interest expenses, net of interest earned on short-term assets, of $27 period. billion in the two-year For households, the estimated savings on fixed- and variable-rate mortgage loans has amounted to more than $27 over the past two years. billion Neither of these estimates includes savings from debt refinancings taking place in 1993. Monetary Aggregates and Bank Credit M2 contracted in February at an annual rate of 3-3/4 percent, following declines of 1/2 percent and 3-1/2 percent in December and January. respectively. The weakness in February appears to have III-3 MONETARY AGGREGATES (based on seasonally adjusted data unless otherwise noted) 19921 -----------1. 2. 3. 14.3 2.0 0.5 Ml M2 M3 --------- 1992 Q3 1992 Q4 1992 Dec 1993 Jan 1993 Feb p Growth Q4 92Feb 93p Percent change at annual rates--------------------11.6 0.8 0.1 16.8 3.1 0-1 8.8 -0.5 -3.5 Perent change at anum 7.7 -3.4 -6.6 -0.2 -3.8 -1.8 l rates------------ 6.2 -2.2 -3.5 Levels bil. S Feb 93p Selected components 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. M1-A Currency Demand deposits Other checkable M2 minus MI deposits 2 Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares Commercial banks Savings deposits (including MMDAs) Small time deposits Thrift institutions Savings deposits (including MMDAs) Small time deposits 17. M3 minus M2 3 18. 19. 20. 21. 22. 23. Large time deposits 4 At commercial banks, net At thrift institutions Institution-only money market mutual fund shares Term RPs, NSA Term Eurodollars, NSA 13.7 12.2 15.3 7.3 6.2 3.9 646.8 9.1 16.0 11.1 13.3 10.3 19.6 10.4 4.9 10.3 3.9 8.5 0.0 296.9 342.0 15.4 10.8 19.3 11.3 10.3 -7.1 386.2 -2.4 -3.2 -2.3 -4.3 -6.0 -5.4 2449.9 2.0 15.1 3.8 -20.7 -22.7 16.5 73.7 -3.4 -0.1 14.5 -15.8 -5.5 14.8 -21.5 -7.3 -1.6 10.9 -17.4 -4.7 9.2 -18.5 -1.0 0.2 12.9 -17.2 -5.9 8.7 -21.7 -7.2 -1.2 5.7 -11.5 -6.6 5.6 -21.1 -10.0 -6.0 -3.2 -10.7 -6.7 1.1 -IS.5 -20.5 2.4 2.5 2.1 -16.0 -9.8 -23.4 340.0 1259.2 755.7 503.4 778.6 426.8 351.8 -6.6 -3.6 -14.3 -18.7 -23.3 9.1 661.8 347.6 282.1 65.5 -16.3 -15.4 -19.6 -17.9 -18.6 -14.7 -17.1 -18.3 -11.3 -12.6 -10.7 -21.0 -22.5 -26.9 -3.6 -10.9 -6.8 -28.6 18.2 7.8 -22.6 32.8 2.6 -19.5 -19.3 23.1 -28.5 -39.6 -10.3 -33.1 -27.3 -10.4 -60.1 25.5 40.6 55.0 ----- Average monthly change in MEMORANDA 201.9 82.6 45.6 billions of dollars---- 5 24. Managed liabilities at commercial banks 25+26) 25. Large time deposits, gross 26. Nondeposit funds 27. Net due to related foreign institutions 6 Other 28. 29. U.S. government deposits at commercial 7 banks 1. 2. 3. 4. 5. 6. -2.0 -4.6 2.6 1.1 -3.4 4.4 -4.3 -5.5 1.2 -1.7 -4.7 3.0 -6.6 -6.7 0.1 -4.9 -1.9 -3.0 668.0 358.0 310.0 2.7 -0.1 0.9 3.5 2.4 -1.2 2.3 0.5 3.1 -2.9 -2.0 -1.0 72.2 237.8 -0.5 -0.2 -1.2 -0.3 5.2 -2.0 23.6 Amounts shown are from fourth quarter to fourth quarter. Nontransactions M2 is seasonally adjusted as a whole. The non-M2 component of H3 is seasonally adjusted as a whole. Net of large denomination time deposits held by money market mutual funds and thrift institutions. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. Consists of borrowing from other than commercial banks in the form.of federal funds purchased, securities for borrowed money tincluding borrowing from the sold under agreements to repurchase, and other liabilities Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items . Data are partially estimated. 7, Consists of Treasury demand deposits and note balances at commercial banks. p - preliminary III-4 been magnified by the use of seasonal adjustment factors that now reflect nonseasonal movements in the aggregate in 1991 and 1992. In each of those years, M2 growth was buoyed in February by the lagged effects of earlier monetary easings, a factor not present in 1993. In addition, reflecting the pause in applications in late 1992, settlements of mortgage refinancing transactions have dropped off, thereby depressing liquid deposit holdings. The current wave of refinancing applications should result in a rebound in the spring. These phenomena especially affected Ml, which contracted at a 1/4 percent annual rate in February, a result of declines in both demand deposits and other checkable deposits. M1 would actually have posted a healthy gain, had the seasonal factors not reflected the unusual movements of the past two years. Similarly, the weakness in some of the more liquid nontransaction components of M2, such as savings accounts (including money market deposit accounts) and retail money market mutual funds, may have been overstated. Although an undistorted M2 as a whole might have grown a little in February. it would still be below the lower bound of its 1993 growth cone. Preliminary data for early March suggest only a small advance in M2. M2 velocity in the final quarter likely will rise well in excess of the 3-1/2 percent to 4 percent increases recorded through much of last year, even after adjusting for the special factors that have depressed the aggregate recently. In addition, staff money-demand models, embodying historical patterns of M2, income, and opportunity costs, have continued to overpredict M2 growth. The rechanneling of credit flows outside the depository system continues to be responsible, at least in part, for the increases in M2 and M3 velocity. Indeed, stock and bond mutual funds posted III-5 additional strong inflows in January, and net sales of long-term funds reportedly remained robust in February. Also damping money growth in recent quarters has been heavy reliance by banks on funds not in the broad monetary aggregates. Deposit inflows at commercial banks fell well short of the increase in bank credit in 1992--even more so than average in the 1990-91 period (table). Bank borrowing from abroad has been strong for some time now, and banks have also been relying more heavily on subordinated debt and equity. CHANGES IN BANK CREDIT AND DEPOSITS (Billions of dollars, Q4 to Q4) Bank credit Bank deposits1 1990 144.9 111.3 1991 1992 1993 95.0 107.2 0.1 99.0 35.2 -9.3 1. Demand deposits + OCDs + savings deposits + MMDAs + small time deposits + large time deposits. 2. Change on a seasonally adjusted basis from December 1992 to February 1993. M3, which contracted at a 6-1/2 percent annual rate in January, fell 1-3/4 percent in February, reflecting a rebound in institution-only money market mutual funds. Preliminary data suggest further weakness in M3 in March. Bank credit edged up in February after decreasing in the previous month, though the turnaround was more than accounted for by a bank acquisition of a large thrift institution in a private transaction. The effect of the acquisition was particularly evident in bank holdings of securities, which surged last month after a rare contraction in January. Consumer loans strengthened as well, partly reflecting tax-refund-anticipation loans. loans, by contrast, declined. Business and real estate III-6 COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT 1 (Percentage change at annual rate, based on seasonally adjusted data) 1991 Category Dec. to 1992 Level1 1992 Q3 1992 Q4 1992 Dec. 1993 Jan. 1993 Feb. p Dec. bil.$ 1993 Feb. p Commercial bank credit 1. Total loans and securities at banks 2. Securities 3.6 4.7 3.1 2.5 -1.6 1.6 2,940.1 13.1 16.2 7.9 6.9 -3.2 14.4 843.4 3. U.S. government 17.7 19.2 11.7 11.4 0.2 15.3 667.8 4. Other -1.1 5.7 -5.6 -9.5 -15.7 11.7 175.7 0.2 0.5 1.3 0.7 -1.0 -3.4 2,096.7 5. Loans 6. Business -3.1 -1.9 -1.6 -4.2 3.8 -2.0 597.4 7. Real estate 2.1 2.0 2.4 -0.3 -5.0 -2.4 887.2 8. Consumer -2.0 -1.9 -1.8 0.0 9.1 10.1 360.8 9. Security 19.0 3.1 6.3 11.2 -33.2 -22.8 62.0 1.0 4.4 8.4 17.5 -4.9 -30.9 189.2 10. Other Short- and intermediate-term business credit 11. Business loans net of bankers acceptances -3.1 -2.0 -2.3 -3.7 4.5 -4.7 589.7 12. Loans at foreign branches 2 2.0 0.0 11.4 24.2 4.7 -56.7 24.2 13. Sum of lines 11 and 12 -2.9 -2.0 -1.6 -2.1 4.3 -6.8 613.9 14. Commercial paper issued by nonfinancial firms 9.1 7.6 15.2 -9.5 -6.4 -3.2 149.2 15. Sum of lines 13 and 14 -0.8 -0.2 1.6 -3.6 2.2 -6.1 763.1 -16.9 -21.0 -6.8 0.0 -15.6 n.a. 22.8 1.4 8.6 0.5 2.8 -8.2 n.a. 303.4 5 -0.6 1.7 1.1 -1.8 -1.1 n.a. 16. Bankers acceptances, U.S. traderelated 3 ,4 17. Finance company loans to business 4 18. Total (sum of lines 15, 16, and 17) 1,093.2 1. Average of Wednesdays. Data are adjusted for breaks caused by reclassifications. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 4. Based on average of data for current and preceding ends of month. 5. January 1993. p--Preliminary. n.a.--Not available. 5 III-7 Evidence on credit availability to businesses has been mixed of late. Information from the Survey of the Terms of Bank Lending conducted in early February showed that nonprice lending terms had remained fairly restrictive and that spreads had remained wide, particularly for small prime-based loans.1 However, surveys of overall credit conditions for small businesses conducted by the National Federation of Independent Business have generally reported less tightness over the past year, although some backtracking was seen in the February survey. Business loans at small banks, which are thought to go mainly to small and medium-sized firms, rose in February for the second consecutive month after steady declines over the previous two years. To improve credit availability to small businesses, federal bank and thrift regulators announced on March 10 a program that would, among other things, lower the documentation required for small business loans made by strong and well-managed institutions and reduce the appraisal burden on small business loans secured by real estate. Business Finance The weakness in commercial and industrial loans and a further contraction in February in outstanding commercial paper of nonfinancial corporations are consistent with efforts by firms to extend the maturity of their debt in response to lower long-term interest rates. Nonfinancial firms publicly issued an estimated $19 billion of corporate bonds in February, only slightly less than the record $19.8 billion issued in January; volume in the first half of March also appears to be running close to a record pace. Nearly 1. These spreads, however, could be somewhat misleading. To the degree that banks may have become more accommodative toward marginal borrowers, such new borrowers would qualify for loans at larger spreads than others who had been receiving credit, tending to raise the average. A few banks responding to the Senior Loan Officer Survey in late January indicated a tilt toward accommodation. especially for smaller borrowers. III-8 GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS (Monthly rates, not seasonally adjusted, billions of dollars) --------- 1992--------- 1991 Corporate securities - total 1 Public offerings in U.S. 1992p Q3 Q4p Dec p ----- 1993- Jan p -- -- Feb p 32.15 29.37 40.81 38.01 42.28 39.88 38.34 36.14 39.78 37.95 51.29 47.73 57.07 54.59 Stocks--total 2 Nonfinancial Utility Industrial Financial 5.44 3.72 0.42 3.30 1.72 6.54 4.03 0.87 3.16 2.51 5.69 2.86 1.06 1.80 2.83 5.84 3.13 0.44 2.69 2.71 6.05 4.03 0.34 3.69 2.02 5.23 2.80 0.38 2.42 2.44 10.09 5.08 0.41 4.67 5.01 Bonds Nonfinancial Utility Industrial Financial 23.93 9.52 2.99 6.54 14.40 31.47 12.82 5.33 7.48 18.66 34.19 14.96 7.53 7.43 19.23 30.31 10.46 3.36 7.10 19.84 31.90 10.20 4.00 6.20 21.70 42.50 19.80 7.80 12.00 22.70 44.50 19.00 9.00 10.00 25.50 By quality 3 Aaa and Aa 3.72 A and Baa 12.09 Less than Baa 1.03 No rating (or unknown) 0.02 3.73 14.52 3.10 0.07 4.63 15.20 3.11 0.04 3.26 11.95 3.24 0.16 3.25 11.42 3.85 0.07 5.10 19.93 6.50 0.02 8.30 19.97 3.78 0.00 0.63 2.99 4.08 0.84 0.62 6.07 3.99 1.89 0.28 6.76 4.45 2.00 0.68 6.05 5.64 2.47 1.31 5.80 7.52 4.42 0.69 7.41 3.55 0.20 0.20 7.52 4.93 3.72 Bonds sold abroad - total Nonfinancial Financial 2.33 1.00 1.33 2.30 0.84 1.46 2.18 0.71 1.47 1.95 0.63 1.32 1.54 0.35 1.19 3.20 0.60 2.60 1.80 0.70 1.10 Stocks sold abroad - total Nonfinancial Financial 0.46 0.38 0.08 0.50 0.39 0.12 0.22 0.17 0.04 0.25 0.19 0.09 0.29 0.29 0.00 0.36 0.23 0.14 0.68 0.49 0.19 Memo items: Equity-based bonds Mortgage-backed bonds Other asset-backed Variable-rate notes 1. Securities issued in the private placement market are not included. gross proceeds rather than par value of original discount bonds. 2. Excludes equity issues associated with equity-for-equity swaps that in restructurings. Such swaps totaled $15 billion in 1991. 3. Bonds categorized according to Moody's bond ratings, or to Standard unrated by Moody's. Excludes mortgage-backed and asset-backed bonds. 4. Includes bonds convertible into equity and bonds with warrants that holder to purchase equity in the future. p-Preliminary. Total reflects have occurred and Poor's if entitle the III-9 40 percent of nonfinancial bond offerings thus far in 1993 carry maturities of more than fifteen years, the highest proportion since 1986, when 46 percent of offerings had maturities that long. The same measure averaged only about 17 percent over the 1987-91 period. In March. Texaco marketed a fifty-year bond, the first such issue by an industrial firm in fifteen years. Corporations have been refunding many bonds that were originally issued in the 1960s and 1970s. In the recent round of refinancing, firms also have called some bonds issued in 1986, when the last trough in rates occurred. Bond calls by nonfinancial corporations through early March have amounted to $23 billion; if interest rates hold near current levels, calls in 1993 could surpass last year's record $78 billion. With no widening in quality spreads, more than $12 billion of junk bonds have been issued thus far in 1993, compared with $37 billion in all of 1992. Two companies--Time Warner and News America--account for $5 billion of this year's volume. Time Warner used the proceeds to redeem preferred stock issued in its 1990 merger, while News America is paying down bank debt. Other below-investment-grade companies that have earmarked their 1993 bond offerings proceeds to pay off bank debt include Bally's Health & Tennis, Kaiser Aluminum and Chemical. Overhead Door. Cablevision Systems, Dial Page. Di Giorgio. BE Aerospace, Standard Pacific, and Weirton Steel. Net equity issuance by nonfinancial corporations appears so far in 1993 to be nearly matching the $27 billion pace of 1992. In February, gross issuance soared to $5 billion, the largest volume since last June. February's offerings included $1 billion of initial public offerings, mostly by small and medium-sized firms, and a $2 billion issue by Chrysler Corporation. Chrysler will III-10 reportedly use more than $1 billion of the proceeds to shore up its underfunded pension plan. 20 percent of Dean Witter. Sears raised $800 million by spinning off In March, equity issuance has remained strong, with initial public offerings already above the level of each of the previous two months. Recently, several prominent nonfinancial firms have sold large issues of convertible preferred stock in the private placement market. AMR Corp. UAL Corp. and Occidential Petroleum, for example, have raised $2 billion with private placements sold under SEC Rule 144A. In 1992, U.S. companies raised an estimated $25 billion in the 144A market (both debt and equity), up from $10 billion in 1991. Securities sold under Rule 144A are similar in many respects to those sold in the public bond and equity markets. As the private market has become more liquid, the yield difference between private and public securities has shrunk. Consequently, issuers have become more willing to place in the private market, where they can avoid the costs and delays of the SEC registration process. Banking firms have continued to improve their capital ratios in 1993 by issuing securities in the public markets--more than $500 million each of common and preferred stock, and more than $3 billion of subordinated notes. As the profitability of the banking industry has improved, rating upgrades have outnumbered downgrades, and yield spreads on subordinated notes, at about 100 basis points over comparable Treasury notes, have declined to their narrowest levels since early 1989. Over the intermeeting period. bank stock price indexes have risen about 6 percent. In contrast, the finance company subsidiaries of the Big Three auto companies have been downgraded, prompting them to fund assets with off-balance-sheet securitizations instead of unsecured commercial paper and medium-term notes. In 1993, the auto finance III-11 companies have already securitized almost $6 billion in auto loans, compared with a record $19 billion in 1992. To appeal to money market mutual funds, some of these securities have been structured with short maturity tranches. Asset-backed securities with floating interest rates have also become more common. In contrast to the auto companies, banks have securitized less than $1 billion in assets thus far in 1993. Treasury and Sponsored Agency Financing The $63 billion federal deficit in the first quarter is being financed with $53 billion of marketable borrowing and a $6 billion rundown in the Treasury's cash balance. Nonmarketable borrowing has remained weak, in part because of heavy redemptions of state and local government series debt (SLGs) issued by the Treasury to municipalities, as state and local governments have used marketable Treasury securities recently for defeasance of advance refunded bonds.2 Gross auction sizes have been pared back over the first quarter because tax receipts have been stronger than anticipated. So far, the Treasury has cut the size of the weekly bill auction from $24.4 billion to $22.4 billion, while the size of the coupon auction has been trimmed $250 million for two-year notes and $1 billion for thirty-year bonds. Despite all this, the staff anticipates that the Treasury will run into the debt ceiling in early April. 2. In an advance refunding, an issuer refinances an outstanding bond before its first call date by selling a new issue (the refunding bonds) and using the proceeds to defease the outstanding bonds through the purchase of Treasury securities. The cash flows of the Treasury securities are used to make the interest and principal payments on the outstanding bonds until they are redeemed on the call date. The municipal issuer is not allowed to earn a positive spread between the yield on the Treasury securities and the refunding bonds; a negative spread, however, can be incurred, as has been the case in recent months. The current steep Treasury yield curve means that interest rates on long-term refunding bonds generally exceed yields on shorter-term Treasury securities used for defeasance. III-12 TREASURY AND AGENCY FINANCING 1 (Total for period; billions of dollars) 1992 Q1p 1993 Jan. -120.5 -63.4 29.8 -51.3 -41.9 Net cash borrowing from the public 81.4 56.7 -8.4 30.2 34.8 Marketable borrowings/ repayments (-) Bills Coupons Nonmarketable 76.7 23.4 53.3 4.7 52.5 2.3 50.1 4.2 -7.0 -10.6 3.7 -1.4 27.3 1.4 25.9 2.9 32.1 11.6 20.6 2.7 Decrease in the cash balance 28.9 5.7 -16.4 27.2 -5.1 29.9 24.2 46.3 19.1 24.2 10.1 1.0 -5.0 -6.2 12.2 Q4 Feb.p Mar.p Treasury financing Total surplus/deficit (-)- Means of financing deficit: Memo: Cash balance at end of period 2 Other Government sponsored enterprises, net cash borrowing 7.9 FHLBs FHLMC FNMA Farm Credit Banks 3.9 -7.1 11.1 -0.8 SLMA -0.8 .0 FAMC -- ----- 4.8 -0.3 0.4 .0 1. Data reported on a not seasonally adjusted, payment basis. 2. Includes checks issued less checks paid, accrued items and other transactions. 3. Excludes mortgage pass-through securities issued by FNMA and FHLMC. 4. Federal Agricultural Mortgage Corporation. p-projected. Note: Components may not sum to totals because of rounding. 111-13 Remarks made early-on by the Administration about projected savings from shifting the emphasis of borrowing away from the long bond initially were interpreted by market participants as suggesting the likelihood of drastic reductions in long bond supplies. However, more recent statements from the Treasury indicate that the matter is still under review. Nevertheless, the anticipation that the Treasury may cut back further on long-bond supplies appears to be a factor buoying prices at that end of the market. New debt issues of government-sponsored enterprises continue to be well received; spreads over Treasuries have remained narrow. ranging from 5 basis points for short maturities to 20 basis points for ten-year issues. The price of Sallie Mae's stock has declined about one-third since the Clinton Adminstration in February announced plans to shift funding of student loans from private capital lending to direct lending by the Treasury in order to reduce costs to the government. Municipal Securities The rally in the bond market has favored long-term tax-exempt securities, on which yields have fallen nearly 40 basis points since the February FOMC meeting. In the first several weeks after the President's State of the Union address, municipal bond yields fell relative to long-term Treasury rates, as high-income individuals and municipal bond funds stepped up purchases of tax-exempt securities from an already rapid pace. Offerings for new capital have fallen off sharply in the past two months, but refunding volume has surged with the decline in municipal bond yields. Refundings averaged about $11 billion per month over the past three months, compared with a record average of $8 billion per month in 1992. At current interest rates, refunding activity is likely to remain brisk, with many of the long-term bonds III-14 issued between January 1988 and June 1992 as likely candidates for refinancing. 3 The heavy calendar of bonds scheduled for sale over the remainder of March could swell long-term offerings this month to well over $20 billion, up from $16 billion in February. GROSS OFFERINGS OF MUNICIPAL SECURITIES (Monthly rates, not seasonally adjusted, billions of dollars) 1992 Total offerings 1 Total tax-exempt Long-term 2 Refundings New capital Short-term Total taxable 1991 1992 p 16.68 21.78 25.09 16.26 12.87 3.12 9.75 3.39 21.22 17.93 7.91 10.02 3.28 24.65 18.62 8.60 10.02 6.03 .42 .57 Q3 .44 1992 Q4p 1993 Dec. Jan. Feb.p 19.88 20.92 18.88 17.87 19.34 18.27 8.34 9.93 1.07 20.35 19.58 11.57 8.01 .77 18.60 17.58 10.65 6.93 1.02 17.63 16.13 11.25 4.88 1.50 .54 .57 .28 p-Preliminary. 1. Includes issues for public and private purposes. 2. Includes all refunding bonds, not just advance refundings. Mortgage Markets In addition to the drop in rates on conventional fixed-rate mortgages (FRMs), initial rates on adjustable-rate mortgages (ARMs) have declined about 30 basis points, to 4.78 percent, the lowest on record. However, with the yield curve flattening, the initial rate advantage of ARMs has narrowed slightly to around 270 basis points, and weekly survey data show that ARMs now account for only about 15 percent of the volume of all mortgage loan applications at mortgage banking companies, down from the 21 percent share recorded at the end of 1992. 3. Market observers suggest that refunding an outstanding issue is economically feasible when the difference between the coupon rate and the market rate exceeds 100 basis points. At current interest rates, refunding is feasible for an estimated $225 billion of outstanding bonds. .24 III-15 Applications in February for home purchase loans at mortgage bankers were at the highest pace recorded in the Mortgage Bankers Association's (MBA) three-year-old series (chart), pointing to increases in residential mortgage credit this spring. In addition, the MBA index of refinancing applications has nearly tripled since year-end and stands close to the level reached last July. Most loans underlying outstanding mortgage-backed securities have coupon rates above current mortgage rates. Indeed, according to industry estimates, almost a third of outstanding mortgage securities in the conventional market are backed by loans with rates two percentage points or more above current rates. An additional third have rates between one and two percentage points above current rates. Consequently, prepayment rates are expected to increase significantly this spring, and mortgage yield spreads in the secondary market have widened a bit in anticipation. In turn, the spread between initial rates on FRMs and Treasuries also has widened somewhat over the past month but remained well below levels experienced during the refinancing frenzy of 1986 (chart). The demand for home loans continues to be satisfied largely through issuance of mortgage-backed securities. Gross issuance of federally related pass-throughs slowed a bit in January from the rapid pace in November and December (table). However, issuance of total agency pass-throughs remained above the 1992 monthly average of $38 billion. In addition, issuance of total nonagency pass-throughs in January remained near the record $7-1/2 billion monthly rate of 1992. Data for February indicate that issuance abated somewhat from the January pace. Rated securities backed exclusively by nonperforming residential mortgages were brought to market for the first time in February, enhancing liquidity of mortgage assets further. EMC III-16 MBA Indexes of Mortgage Loan Applications Purchase index (Seasonally adjusted) March 16. 1990 = 100 KWeekly March 5. I I I I - AMJ J ASONDJ 1990 I I I I I FJMAMDJ I 1I I 9 1I 1 J ASOND 1991 i I I FMAMJ I 1 I 1 I 1 1 I 30 FMAMJ 1993 Refinancing index (Not seasonally adjusted) f t J ASONDJ 1992 March 16, 1990 100 - 1600 -- 1400 Weekly March 5. - 1200 1000 800 600 400 200 I AM I I I J J ASOND 1990 I I 1 1 I J FMAMJ I 1 1 I J ASON 1991 I I II D J FMAMJ I l1 1 I I1 I J ASON 1992 I I I 1 1 I 0o D J FMAMJ 1993 III-17 Yield Spread between Fixed-Rate Mortgage and Seven-Year Treasury Note Weekly Basis points 1986 1987 1989 1988 1990 1992 1991 1993 MORTGAGE-BACKED SECURITY ISSUANCE (Monthly averages, billions of dollars. NSA unless noted) Pass-through securities Agency Non-agency Total FRM ARM FRM ARM _(SA) (SA) 17.9 21.6 26.5 45.4 14.0 17.2 20.4 34.7 2.7 2.4 2.0 3.2 .5 1.4 2.6 5.3 .7 .6 1.6 2.2 8.4 11.5 18.4 30.8 1.6 2.4 3.0 6.1 3.1 5.1 8.5 12.9 3.2 3.4 6.0 11.0 .3 .6 .9 .8 38.0 47.4 41.9 54.2 29.1 36.8 30.3 42.8 2.0 3.6 3.2 4.0 4.9 5.4 6.1 4.6 2.0 1.6 2.3 2.8 23.5 33.9 36.1 29.7 4.8 6.6 6.8 6.1 11.1 13.9 16.7 9.9 7.0 12.4 11.5 12.9 .6 .9 1.1 .8 r r r r r 41.3 46.1 52.2 54.7 55.4 29.8 32.5 41.9 43.7 42.8 3.0 3.5 3.5 3.8 4.6 6.0 7.5 4.4 5.4 4.0 2.5 2.7 2.4 1.8 4.0 36.7 32.4 34.3 31.4 23.3 8.0 6.1 6.0 6.4 5.8 15.0 .15.4 14.5 10.7 4.6 12.9 9.9 13.5 13.2 11.9 .8 1.1 .3 1.1 1.0 1993-Jan. p 49.1 38.2 3.9 6.1 .9 25.5 5.4 13.6 5.4 1.1 1989 1990 1991 1992 r r r r 1992-Q1 02 Q3 Q4 r r r r 1992-Aug. Sep. Oct. Nov. Dec. .S Multiclass securities Privatel FNMA FHLMC Agency Total issues REMICs REMICs strips 1. Excludes pass-through securities with senior/subordinated structures. p-Preliminary. r-Revised. III-18 19st, a subsidiary of Bear Stearns, sold a $131 million issue carrying a AA rating from Fitch. The AA rating was based on credit enhancement in the form of over-collateralization. Separately, the RTC privately placed $52 million of securities carrying a BBB rating from Fitch: the package relied on a cash reserve fund for credit enhancement. Consumer installment credit Consumer installment credit outstanding increased at a 1-1/2 percent seasonally adjusted annual rate in January, after a 5-1/4 percent gain in December. the revolving credit category. The January advance was entirely in Auto loans declined in January, after posting a sizable increase in December. Despite the increases over the past few months, total installment credit remains below the year-ago level. Interest rates for consumer auto and personal loans at commercial banks were little changed in the first week of February from three months earlier. Even so, the average "most common" rate on a forty-eight month new car loan edged down 3 basis points to 8.57 percent in February, the lowest in the twenty-year history of the series. The average rate on credit card plans at commercial banks declined 12 basis points to 17.26 percent, the lowest rate since early 1980. The survey data may understate the decline in credit card rates, as the "most common" rate reported by banks does not reflect the lower rates made available over the past year to selected subsets of cardholders. At the captive auto finance companies, new car loan rates increased in January, in part reflecting the end of some incentive plans; used car rates also rose during the month. Data on consumer credit quality for the fourth quarter show further improvement. Delinquency rates on all closed-end loans at III-19 CONSUMER CREDIT (Seasonally adjusted) Percent change (Annual rate) 1992 _ ___I r 1993 JQQ-, Jan p Memo: Outstandings (billions of dollars) 1993 1990 1991 1992 Q2 Q4 Dec Installment 2.6 -1.0 -.2 -.5 2.5 5.3 1.5 727.6 Auto Revolving Other -2.4 11.9 .8 -7.6 8.9 -2.3 -1.1 3.5 -3.0 .1 4.2 -6.3 4.2 2.0 1.1 11.0 3.1 1.2 -2.5 9.4 -2.9 259.5 253.2 214.7 -3.5 -10.0 5.7 8.2 -11.1 -10.5 70.2 59.0 .2 .2 1.5 4.2 6.4 786.6 Noninstallment Total 2.1 -1.7 p Jan 1. Components may not sum to totals because of rounding. r-Revised. p-Preliminary. CONSUMER INTEREST RATES (Annual percentage rate) Aug. 1992 Nov. 9.29 14.04 17.78 9.15 13.94 17.66 8.60 13.55 17.38 ... .. ... ... ... ... 9.93 13.79 8.88 13.49 9.65 13.37 9.65 13.53 10.08 13.72 1990 1991 1992 11.78 15.46 18.17 11.14 15.18 18.23 12.54 15.99 12.41 15.60 Dec. 1993 Jan. Feb. At commercial banks New cars (48 mo.) Personal (24 mo.) Credit cards 8.57 13.57 17.26 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 maturity. regardless of Note: Annual data are averages of quarterly data for commercial bank rates and of monthly data for auto finance company rates. III-20 commercial banks declined 0.05 percentage point in the fourth quarter to 2.49 percent, according to the American Bankers Association (ABA). (Precise comparisons with data prior to 1992 are not possible because definitions have changed, but the ABA delinquency rates declined throughout 1992.) The ABA credit card delinquency rate fell 0.07 percentage point in the fourth quarter to 3.02 percent. The captive auto finance companies reported a 0.10 percentage point decline in past-due auto loans for the fourth quarter, bringing the delinquency rate to 2.35 percent, the lowest since the end of 1988. Call Reports for commercial banks also showed a 0.20 percentage point decline in delinquent consumer loans in the fourth quarter, lowering the rate to 3.81 percent (chart). CONSUMER LOAN DELINQUENCY RATES Percent Banks / / / /' / \ - 4 -3 -/ 2 Auto finance companies _I 1980 I JI 1982 II1984 I I I 1986 Source: Call Report (banks). Federal Reserve (finance companies). I ll I I 1988 1990 .ll.l U 1992 III-21 Delinquency rates on home mortgages declined to the lowest level in more than a decade, according to the Mortgage Bankers Association. The rate for loans delinquent sixty days or more, at 1.40 percent in the fourth quarter, matched the ten-year low that occurred in the second quarter of 1990. Call Reports also showed significant improvement in mortgage delinquency rates. Real estate loan delinquency rates at commercial banks dropped to 6.02 percent, the lowest since the third quarter of 1990. Loan delinquency rates on both one- to four-family and commercial real estate dropped nearly 25 basis points in the fourth quarter; loan delinquency rates on multifamily properties registered a small decline. INTERNATIONAL DEVELOPMENTS INTERNATIONAL DEVELOPMENTS Merchandise Trade The U.S. merchandise trade deficit narrowed slightly in December to $7.0 billion (seasonally adjusted, Census basis) from a revised November deficit of $7.3 billion. Exports increased 3.9 percent while imports increased 2.6 percent in December. The gain in exports was primarily in capital goods (aircraft and machinery). The rise in imports was spread among most trade categories, with the exception of oil. Data for January 1993 will be released on March 18 and will be included in the Greenbook supplement. U.S. MERCHANDISE TRADE: MONTHLY DATA (Billions of dollars, seasonally adjusted, Census basis) Total Exports Ag. NonAg. Total Imports Oil NonOil Balance 1992 Jan Feb Mar 35.5 37.7 37.1 3.6 3.7 3.5 31.9 33.9 33.6 41.4 41.1 42.8 3.7 3.3 3.5 37.7 37.7 39.4 -5.9 -3.4 -5.7 Apr May Jun 36.4 35.7 38.2 3.8 3.3 3.5 32.7 32.4 34.7 43.5 42.9 45.0 4.0 4.2 4.8 39.5 38.7 40.1 -7.1 -7.2 -6.8 Jul Aug Sep 37.8 35.8 37.9 3.9 3.6 4.0 33.9 32.2 33.9 45.2 45.0 46.6 4.8 4.6 4.8 40.3 40.3 41.8 -7.4 -9.2 -8.7 Oct Nov Dec 39.1 38.2 39.7 4.1 3.7 3.7 35.0 34.5 36.0 46.3 45.5 46.7 5.0 4.5 4.2 41.3 41.0 42.5 -7.3 -7.3 -7.0 Source: U.S. Department of Commerce. Bureau of the Census. As shown on the next page, in the fourth quarter of 1992 the trade deficit narrowed for the first time in three quarters (balance of payments basis). A 4 percent increase in exports was led by increased shipments of capital goods, both aircraft and machinery. There was also an increase in exports of automotive vehicles (especially to Saudi Arabia, Kuwait, and developing countries in IV-1 IV-2 MAJOR TRADE CATEGORIES (Billions of dollars, BOP basis, SAAR) 1991 Year 1992 1992 Q1 Q2 Q3 Trade Balance -73.4 -96.3 -70.7 -100.0 -110.5 Total U.S. Exports 416.0 439.3 430.5 428.6 Agric. Exports Nonagric. Exports 40.1 375.8 43.9 395.3 42.9 387.7 Industrial Suppl. Gold Fuels Other Ind. Suppl. 101.8 3.6 14.3 83.9 101.6 4.5 13.4 83.7 Capital Goods Aircraft & Parts Computers & Parts Other Machinery 167.0 36.4 27.3 103.3 Automotive Goods To Canada To Other Consumer Goods Other Nonagric. Q4 $ Change Q4-Q4 04-Q3 -103.9 -29.7 440.5 457.5 26.1 17.0 41.4 387.2 45.9 394.6 45.6 411.9 2.4 23.7 -0.3 17.3 99.6 3.8 13.8 82.0 100.1 3.5 13.4 83.3 102.4 3.6 13.3 85.5 104.4 7.2 13.3 84.0 4.4 3.6 -1.4 2.2 2.0 3.6 -0.0 -1.6 176.8 37.8 28.8 110.2 176.3 42.6 27.4 106.3 173.9 37.7 28.6 107.5 173.7 33.3 28.9 111.5 183.5 37.7 30.2 115.6 7.2 -3.1 2.2 8.1 9.8 4.4 1.2 4.1 40.0 22.5 17.5 46.7 23.4 23.2 42.4 20.7 21.8 45.7 23.5 22.2 48.4 24.3 24.1 50.2 25.3 24.9 8.5 2.2 6.3 1.8 1.0 0.8 45.9 21.0 50.4 19.8 47.9 21.5 48.5 19.0 51.2 18.8 53.9 19.9 5.7 -2.2 2.6 1.1 Total U.S. Imports 489.4 535.5 501.2 528.6 551.0 561.4 55.8 10.4 Oil Imports Non-Oil Imports 51.2 438.2 51.4 484.2 41.6 459.6 51.9 476.8 57.1 493.9 55.0 506.4 6.2 49.6 -2.1 12.5 Industrial Suppl. Gold Other Fuels Other Ind. Suppl. 80.9 2.9 3.9 74.0 88.4 3.8 4.3 80.2 84.3 2.3 4.3 77.7 88.2 3.6 4.5 80.2 87.8 2.7 4.3 80.8 93.2 6.7 4.2 82.3 9.9 3.7 -0.7 6.9 5.4 4.0 -0.1 1.5 Capital Goods Aircraft & Parts Computers & Parts Other Machinery 120.7 11.7 26.1 82.9 134.4 12.7 31.8 89.9 125.5 12.1 27.9 85.5 131.8 13.5 30.9 87.4 138.4 12.3 34.0 92.1 142.0 13.1 34.5 94.5 19.9 1.6 7.7 10.7 3.6 0.8 0.4 2.4 84.9 28.8 56.2 91.2 32.2 59.1 87.7 30.8 56.9 89.4 31.5 57.9 92.2 34.0 58.2 95.7 32.4 63.3 7.1 2.3 4.8 3.5 -1.6 5.1 108.0 26.5 17.2 123.0 27.9 19.2 116.4 26.7 19.0 119.5 29.0 18.9 128.8 28.2 18.5 127.3 27.6 20.6 8.6 1.3 2.8 -1.5 -0.6 2.0 Automotive Goods From Canada From Other Consumer Goods Foods All Other Source: U.S. Department of Commerce, Bureau of Economic Analysis. 6.6 IV-3 Asia). Exports and imports of gold both increased sharply in the fourth quarter, largely reflecting transfers of gold from the Federal Reserve Bank of New York out of the United States. Imports rose 2 percent in the fourth quarter as increases in imports of capital goods were partially offset by declines in imports of oil and consumer goods. By area, the largest gains in nonagricultural exports were in shipments to Asia (particularly China and Taiwan). Exports to these two areas increased 14 percent in the fourth quarter. By contrast. nonagricultural exports to industrial countries increased only 2 percent in the fourth quarter. Non-oil imports from industrial countries rose 7 percent in the fourth quarter, including a surge in imports from Germany. Non-oil imports from Asia eased slightly in the fourth quarter, after jumping sharply in the third quarter. Nonetheless, these were 18 percent greater in the second half of the year than in the first half of the year. The value of oil imports fell in December, almost entirely the result of a decline in price brought about by mild weather late in the year and strong OPEC production. was essentially unchanged. The quantity of oil imported For the fourth quarter, prices were down slightly, the lagged response to the decline in spot oil prices that began in mid-October. The quantity of oil imported was just below the third-quarter pace. Since the February FOMC meeting, spot West Texas Intermediate (WTI) has fluctuated between $19 and $21 per barrel as market OIL IMPORTS (BOP basis, seasonally adjusted annual rates) 1992 Q2 Value (Bil. $) Price ($/BBL) Quantity (mb/d) Source: 51.86 17.48 8.12 Q3 Q4 Sep 57.11 18.56 8.42 54.97 17.94 8.39 57.40 18.48 8.48 Months Nov Oct 60.12 18.74 8.78 54.71 18.23 8.19 Dec 50.08 16.75 8.16 U.S. Department of Commerce. Bureau of Economic Analysis. IV-4 perceptions of OPEC's willingness and ability to cut production have shifted. pushed Initial disappointment with the mid-February OPEC accord spot WTI to just above $19 per barrel, although prices climbed shortly thereafter on indications of actual production cuts. WTI now stands just below $20 per barrel. Prices of Exports and Non-oil Imports Prices of non-oil imports increased 0.2 percent in January. The largest increase was products. in the price of imported agricultural Prices of capital goods and automotive products slightly after two consecutive months of declines. were partially offset, however, edged up The increases by a decrease in the price of imported consumer goods. For the fourth quarter, on average, prices imports increased data; this rise was third quarter. consumer 1.4 percent at non-oil an annual rate according to BLS substantially smaller than that recorded in the The largest increases for the fourth quarter were in goods and automotive products; industrial of U.S. prices of imported supplies and capital goods declined slightly. Prices of U.S. nonagricultural exports edged up in January, as all major trade categories except capital goods posted price increases. These increases were almost offset by a 1.7 percent decrease in prices of computers, peripherals, and Prices of U.S. semi-conductors. agricultural exports rose 0.8 percent in January, with a large increase in the price of soybeans. In the fourth quarter, prices of U.S. exports declined percent at at an annual rate. Prices an annual rate of 0.8 percent. 1.0 of nonagricultural products fell Prices of agricultural products declined for the fourth consecutive quarter. IV-5 IMPORT AND EXPORT PRICE MEASURES (percent change from previous period, annual rate) Year 1992-Q4 1991-Q4 Quarters Months 1992 Q2 Q3 Q4 (Quarterly Average, AR) 1992 1993 Dec Jan (Monthly Rates) ---.------------------ BLS Prices---------------------Imports. Total Foods. Feeds. Bev. Industrial Supplies Ind Supp Ex Oil* Capital Goods 1.5 -1.7 0.3 1.4 2.3 0.7 -14.8 11.8 -0.7 -3.5 6.3 -1.9 9.8 2.3 8.2 0.6 1.5 -3.0 -0.5 0.0 -1.5 -2.0 -2.6 -0.6 -0.9 -0.3 2.2 -1.5 -0.1 0.1 Automotive Products Consumer Goods 1.2 3.7 -2.6 0.2 3.9 5.3 3.0 2.9 -1.1 -1.0 0.1 -0.1 -2.3 1.9 44.5 -2.5 25.5 4.5 -8.3 1.4 -6.6 -1.0 -3.7 0.2 -0.1 -5.2 0.3 0.7 1.6 2.8 2.1 -2.1 5.4 1.2 1.2 1.4 -0.1 -13.3 5.6 1.4 1.4 0.7 -1.0 -3.7 -2.7 -0.8 2.5 3.3 0.1 1.0 0.1 0.1 -0.3 0.1 0.2 0.8 0.3 -0.2 0.4 0.4 -3.5 0.8 -0.7 2.4 -7.1 2.3 -2.6 -0.8 1.4 -0.1 0.8 0.1 Memo: Oil Non-oil Exports. Total Foods. Feeds. Bev. Industrial Supplies Capital Goods' Automotive Products Consumer Goods Memo: Agricultural Nonagricultural ------------ Prices in-the NIPA Accounts-----------Fixed-Weight Imports. Total Oil Non-oil 1.4 -0.3 1.7 4.8 72.1 0.0 6.3 28.6 4.3 -0.7 -12.7 0.7 Exports, Total 0.3 1.5 0.4 0.0 Ag Nonag -3.8 0.6 -1.1 1.8 -8.2 1.8 -1.4 -0.7 Imports. Total -1.0 2.3 2.2 -0.9 -1.1 70.7 -2.3 26.9 -0.3 -13.4 -0.1 -1.4 -2.2 -1.3 -1.8 -1.6 -1.8 -1.5 -6.0 -1.3 -1.1 4.2 -1.5 Deflators Oil Non-oil Exports, Total Ag Nonag */ Months not for publication. -1.5 - - IV-6 U.S. Current Account The U.S. billion $63 current account balance recorded a deficit of $88 (annual rate) in the fourth quarter of 1992, compared with a billion deficit (revised) in the third quarter of 1992. For the year 1992, the balance was a deficit of $62 billion. U.S. Current Account (Billions of dollars, seasonally adjusted annual rates) Trade Balance Year 1989 1990 1991 1992 Services Investment Transfers net Income. net net Current Acct .Bal. Ex Special Pub. Grants 1/ -115,7 -108.9 -73.4 -96.3 25.8 32.1 45.3 55.1 14.4 19.3 16.4 10.1 -25.6 -32.9 8.0 -31.4 -101.1 -90.4 -3.7 -62.4 -101.1 -87.5 -41.0 -63.6 -73.3 -'65.6 -80.7 -74.2 37.4 43.1 48.1 52.5 27.9 15.7 12.3 9.8 56.8 16.5 -24.0 -17.1 48.8 9.7 -44.3 -28.9 -37.1 -36.3 -47.1 -43.5 55.3 50.5 62.9 51.8 17.6 7.4 11.9 3.4 -27.7 -31.0 -27.4 -39.3 -25.5 -73.1 -63.1 -88.1 -27.3 -76.1 -63.1 -88.2 Quarters 1991-1 2 3 4 1992-1-r -70.7 2-r -100.0 3-r -110.5 4 -103.9 1/ Excludes foreign cash grants to the United States to cover costs of the war in the Persian Gulf. These grants amounted to $4.3 billion in 1990. $42.6 billion in 1991, and $1.3 billion in 1992: they are shown in the accounts as positive unilateral transfers. Also excludes special U.S. grants to foreign countries amounting to $7.2 billion in 1990. $5.2 billion in 1991. and $0.1 billion in 1992. Source: U.S. Department of Commerce, Bureau of Economic Analysis. The widening of the deficit in the fourth quarter primarily reflected declines in net service receipts (from an unusually strong third-quarter level) and net investment income receipts. In addition, payments of U.S. government grants (part of unilateral transfers) increased, largely reflecting payments made to Israel. Net receipts from services had been boosted more than $11 billion at an annual rate in the third quarter by insurance payments recovered from foreign reinsurers for damage caused by hurricanes IV-7 Andrew and Iniki. the fourth quarter. Net insurance payments fell to normal levels in For other services, increases in receipts from foreigners traveling in the United States were offset by small declines in other categories. Investment income receipts fell at an annual rate of $7 billion in the fourth quarter. Direct investment receipts accounted for two-thirds of this decline as the earnings of U.S. companies abroad continued to fall in depressed foreign markets. A fall in U.S. government receipts from unusually strong third-quarter levels accounted for the remainder of the decline in investment income receipts. The rescheduling of Peruvian arrears had boosted third-quarter government receipts: there was also a decline in income from military loans. Portfolio investment payments picked up in the fourth quarter as semi-annual coupon payments were made on a large amount of U.S. bonds purchased in the second quarter of 1992. For 1992 as a whole, the U.S. current account deficit was nearly $60 billion larger than in 1991. Cash contributions from coalition partners in Operation Desert Storm amounting to $43 billion held down the current account deficit in 1991. Excluding special grants, the current account deficit widened $23 billion between 1991 and 1992. The merchandise trade deficit weakened and net investment income receipts declined; an increase in net receipts from service transactions only partly offset these movements. U.S. International Financial Transactions U.S. international financial transactions in December and January were marked by continued outflows through banking transactions and U.S. purchases of foreign securities. Private foreign purchases of U.S. securities slowed in January, but this slowing was offset by large inflows of official reserves. Banks in the United States reported a $4 billion outflow in December, which accelerated to $8-1/2 billion in January. 1 of the Summary of U.S. (See line International Transactions table.) The outflow in December was entirely attributable to U.S. chartered banks, which increased claims on their own foreign offices. Foreign chartered banks on net borrowed from their affiliates abroad during December to finance asset growth near year-end. In early January, however, foreign chartered banks began reducing their assets in the United States and by mid-month began reducing their net liabilities to affiliates abroad. Assets and net liabilities to affiliates continued to decline through February. (See line 1b of the International Banking Table.) Private foreigners continued to add to their holdings of U.S. Treasury securities in December and January. despite very large purchases at November's mid-quarter refunding (line 3). fourth quarter, net purchases totaled $21-1/2 billion. For the Foreign purchases of U.S. government agency bonds were also brisk in the fourth quarter, more than $6 billion, bringing net purchases of corporate and agency bonds to $8-1/2 billion (line 2a). The pace of net corporate and agency bond purchases fell off a bit in January, but still remained near $2 billion, as new issue activity in general, and Eurobond issuance in particular, remained at high levels. Foreign net purchases of U.S. stocks also increased in December, bringing total net purchases for the quarter to $4 billion (line 2b). Small net sales were recorded for January. U.S. residents' purchases of foreign stocks and bonds accelerated to $7 billion in December and remained near that level in January (line 2c). Stocks, in both Europe and Asia. accounted for most of the net purchases in December. In January, stocks in Asia and bonds in Europe accounted for most of the purchases. SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS (Billions Private of dollars) 1991 1992 Year Year 1992 Q1 Q2 Q3 Q4 Nov. Dec -e Z .i 2!.5 -0.9 21 4 -3 - -1 -0 -_4 _ Capital Banks 1. Change in net foreign positions of banking 1 offices in the U.S. (+ - -18 inflow) B 36.1 .5 Securities 2. Private securities 2 a) -10.9* net transactions, (+) of U.S b) .3 Li -117 -5 3 corporate bonds 3 25 7 34.7 7.7 11.8 6.8 10 1 -3.7 -2.8 -1.2 -3.8 -46.8 -50.7 -9.1 -8.9 -14.6 -18.1 -4.4 08 10.3 0 1. 8.6 1.2 3.9 1.8 4.2 1.3 2.4 -C. 1 foreign net purchases (+) of U.S. corporate stocks c) U.S. net purchases (-) of foreign securities 3. 20, foreign net purchases Foreign net purchases (+) 0 -6 16.3 2 0 2 -10.4 3 4 3.8 -5,4 3.9 2.9 -0.3 1.0 -4.7 -1.5 8.7 -7 0 of U.S. Treasury obligattons 19-3 37 .16.0 38 Official Capital Changes in 4. foreign official reserves assets (+ - a) in U.S. increase) b) j.5 -8j. 13 3 4.9 -17.6 4.8 2.4 3.4 -5.8 4.6 2.7 -2.5 All other countries 39.3 28.4 15.9 19.6 -14.9 14.8 18.5 14.0 11.2 -0.3 -7.4 -4.2 3.2 4.0 1.2 19.4 6.1 0.2 -7.9 12.0 -6.3 0.2 9.3 0.6 0.4 -0.3 By type U.S. Treasury securities Other Changes in U.S. official assets (+ - reserve decrease) 1 6. U.S. 7. Foreign direct investment 8. Other capital 9. U.S. -27.1 direct investment (-) abroad flow (+ - (+) in 11.5 U.S. 9.0 -3.7 -1.1 inflow) current account balance Statistical Z0 11 a -0.5 (Quarterly data) 5 Other transactions 10. 20.4 OPEC G-10 countries 5. 20 By area discrepancy -35.3 -3.9 19.5 -62.4 -15.5 -3.8 12.2 -6.4 -7.5 5.4 17.7 -11.3 -13.1 -7.5 -2a.8 -3.5 -2.6 -14.7 -15.8 15.0 -8.8 -3.0 4.3 -22.0 8.2 -25.0 -27.6 -25.0 HEM.: U.S. merchandise trade balance -- part of line 9 (Balance of paysmnts basis, seasonally adjusted) 1. Includes changes in positions of all depository between brokers/dealers and uaffiliated 2. -73.4 U.S. internatimal Lnstitutions, -17.7 bank-holdian companies, foreigners (particularly borrowing and lendint These data have not been adjusted to exclude xactly the data on U.3. -6.3 c•missions oa socu•tlos n.,. n.a. n.a. and certain transactions under repurchase agreemets.) transactions and. therefore, do not match transactions as published by the Deparltmt of COmerce. bonds other than Treasury obligations. 3. Includes all 4. Includes deposits iA banks, *oee-rcial paper. ecceptanoce. borotin ander repurchase agreemets, and other securities. 5. Seasonally adjsted. 5. Includes U.S. official gvernmet assets other than ofticial transactions not shown elsewhere. the Department of Coamerce and revisions I reserves, addition. to the data in Survey of Current business. *--Less WOZ: than $0 million. Details mWr not add to total because of ronding. it transectios includes lines by nbankin maus resultia concerns, end other banking and trm adjustments to the dlaa umde by I through 5 since publication of the quarterly data in the INTERNATIONAL BANKING DATA (Billions of dollars) 1993 1992 Mar. 1. Net Claims of U.S. June Sept. Mar. Dec. June Sept. Nov. Dec. Jan. Feb. Banking Offices (excluding IBFS) on Own Foreign Offices and IBFS (a) (b) 2. U.S.-chartered banks Foreign-chartered banks -23.8 7.6 -31.3 -13.7 5.4 -19.2 -14.1 -35.8 11.0 12.4 -25.2 -41.4 3.2 -44.6 -48.3 -56.8 -58.0 8.3 12.7 -65.1 -66.5 -71.6 13 5 -10.9 -80.0 17.0 -88.6 -73,1 17 8 -90.9 -71.5 12.4 -63 8 Credit Extended to U.S. Nonbank Residents by Foreign Branches of U.S. Banks 3. 23.9 23.7 23.9 23.3 24.5 24.8 25.1 24.8 24.6 24.0 114.6 105.8 100.8 102.9 100.3 91.2 86 3 88.6 90.5 89.4 89 Eurodollar Holdings of U.S. Nonbank Residents 1. 26.0 1/ Includes term and overnight Eurodollars held by money market mutual funds. overall banking data incorporated in the international transactions accounts. Reserve by U.S. banking offices. Line 2 is an average of daily data. average of Wednesday data for the term component. Note: Line Line 3 is an 1 These data differ is an in coverage average of daily average of daily data data for the and timing 4 from the reported to the Federal overnight component and an IV -11 Fcreign official reserve holdings in the United States rose $3-1/2 billion in December and another $13 billion in January (line 4). In December, large increases by Germany, Switzerland, and Canada were partially offset by declines in reserve holdings by the United Kingdom, Italy, and Taiwan. In January, large increases were recorded for Germany. Spain, and Singapore. The increase in German dollar reserves likely reflects the repayment of loans made during September and October under the Very Short Term Financing Facility of the European Monetary Cooperation Fund. These loans are due forty-five days after the end of the month in which they are drawn and can be repaid in currencies other than that in which they are drawn. Partial data from the FRBNY indicate official reserves held in the United States rose $5-1/2 billion in February. Reserves held by Germany fell while those held by the Netherlands. Spain, Singapore, and Argentina rose. Data for direct investment capital flows in the fourth quarter indicate a $9 billion increase in U.S. direct investment abroad (line 6). Asia. Most of the outflow was to Canada, Latin America, and Foreign direct investors reduced their position in the United States by $3 billion in the quarter (line 7). Substantial new equity inflows were more than offset by negative reinvested earnings and net outflows through intercompany debt transactions. The statistical discrepancy was a positive $8 billion in the fourth quarter, down substantially from the $15 the third quarter (line 10). billion recorded in Reduced net currency shipments to foreigners accounted for part of this decline. Foreign Exchange Markets The dollar's weighted average exchange value, shown in the accompanying chart, was about unchanged, on balance, during the IV-12 WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR March 1973 - 100 - 100 Daily FOMC Feb. 3 95 90 85 illl Illllll~lllllllllf Decemoer I)III1II11I1II1I11I111)11 January i11111111111111I February SELECTED DOLLAR EXCHANGE RATES December January I ll i I ll111111111111111 . March December 1 - 100 February March IV-13 intermeeting period. The dollar declined from mid-February, partly in response to data suggesting some slowing in the pace of U.S. economic expansion, and partly in response to the decline in longterm interest rates associated with the Clinton Administration's fiscal program. In early March. however, the release of labor market statistics that were far stronger than expected and the release of disappointing inflation data, provided the dollar with a substantial boost. The dollar posted a net gain of 1-1/4 percent against the mark over the intermeeting period. The dollar's fluctuations against the mark and other European currencies were mostly driven by changes in expectations about the pace of future Bundesbank easing. Early in February, the Bundesbank surprised the market by cutting the discount rate 25 basis points to 8 percent and the Lombard rate 50 basis points to 9 percent. The dollar initially rose following this action, but the mark rebounded in mid-February as it became apparent that the Bundesbank would only allow market rates to slip slightly following its cut in official rates. In late February, the mark began to decline on the perception that the Bundesbank would yield to pressures from the United States and Europe to allow rates to fall further. In early March the Bundesbank announced that its regular two-week RP on March 10 would be at a fixed rate. 1/4 percentage point below the rate of its previous two-week RP. Market participants interpreted this as a signal of an easier monetary stance by the Bundesbank. Three-month interest rates in Germany declined 70 basis points during the period. Three-month rates in other major European countries declined 30 to 100 basis points. Challenges to Boris Yeltsin's power by the Congress of People's Deputies, and the prospect of further political instability in IV-14 Russia. appeared to contribute modestly to the dollar's appreciation against the mark towards the end of the period. Between early February and mid-March, the dollar reached a new all-time low against the yen before recovering somewhat to post a net decline of 6-1/4 percent. The main focus of attention for the yen was whether Japan's trading partners would push for yen appreciation in an effort to limit Japan's trade surplus. Several remarks by prominent U.S. and European officials that advocated yen strengthening contributed to the yen's rise and led some market participants to expect that the G-7 would reach an agreement to strengthen the yen. In the period around the G-7 meeting on February 28. the dollar rebounded from its lows against the yen as U.S. and Japanese officials reiterated that exchange rate policy would not be used to reduce Japan's trade surplus. On February 4, the Bank of Japan lowered its official discount rate 3/4 of a percentage point to 2-1/2 percent. A rate decline of this magnitude had already been anticipated by the market, and the cut had virtually no effect on financial markets during the intermeeting period. Bond and equity markets rallied in most of Europe and Japan during the intermeeting period. The perception that interest rates in Germany are likely to come down sooner and by more than had been previously expected contributed to the bond market rally in Europe. In Japan and in most European countries long-term interest rates came down 30 to 70 basis points. During the period equity markets rose 3 to 8 percent in many European countries, and rose by more in France and Sweden. Exchange rate pressures reemerged for the Spanish and Portuguese currencies during the period on the perception that the existing parity arrangements may not be sustainable in light of IV-15 continued economic weakness in Spain, and high interest rates in Germany. The pressures on these currencies were reduced, but not eliminated, by the declines in German interest period. rates during the The French franc came under intermittent pressure during the period: this pressure increased towards the end of the period ahead of the upcoming French election on March 21. The Belgian franc also encountered moderate exchange rate pressure during the period as a result of political uncertainty surrounding the Belgian parliament's vote to reorganize Belgium as a federal state. The Italian lira declined about 4 percent against the mark during the period. A widening government corruption scandal, which has called the viability of the current governing coalition into question, has contributed to the lira's decline. Developments in Foreign Industrial Countries The level of activity in the major foreign industrialized economies slowed further in the fourth quarter, and domestic demand remained weak. GDP contracted in Japan, western Germany, and France, and it grew slowly in the United Kingdom. An acceleration in activity in Canada was entirely export driven. Available data for the current quarter have been generally negative for Japan and France, but more mixed for western Germany. There have been more positive signs in the United Kingdom and Canada that suggest recovery may be taking hold. Special factors have increased measured inflation rates in some countries, although they have generally remained low. Pass-through effects from last year's currency depreciation have affected some IV-16 price measures in Italy, Canada, and the United Kingdom. Recent tax increases are boosting west German and French inflation in early 1993. National elections will be held in France on Sunday. March 21. with run-off elections to follow on March 28. In Canada, the Progressive Conservative Party will choose a new Prime Minister on June 13 to lead the party in a general election that must be called by November. Individual Country Notes. In Japan, real GDP slipped 0.3 percent (s.a.a.r.) in the fourth quarter, its third consecutive quarterly decline. Private final domestic demand dropped 5.6 percent (s.a.a.r.). as consumption decreased 2.2 percent and private investment expenditure plummeted. However, net exports, public infrastructure spending, and inventory investment made positive contributions to growth. Preliminary indicators of activity in the first quarter suggest further weakness. In January, industrial production (s.a.) decreased 0.3 percent, housing starts (s.a.) dropped 1.2 percent, and retail sales registered a 12-month decline of 3 percent. New passenger car registrations (s.a.) rose 1.5 percent in February, but were still 5.4 percent below their year-earlier level. Although machinery orders (s.a.) increased for the third consecutive month in January, they were down 10.4 percent from January 1992. The Bank of Japan's Tankan survey of major manufacturing firms reported a further deterioration in business sentiment in the current quarter. The percent balance having a favorable view of business conditions declined from -44 to -49. the lowest level since August 1975. On average, firms predicted a 5.9 percent drop in investment in the current fiscal year and a further 4.2 percent decline in investment in the fiscal year that begins April 1. REAL GDP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES (Percentage change from previous period, seasonally :' ,ted) 1 ·I -- Q4/Q4 Q4/Q4 1991 1992 Q1 1992 1992 ------------------- ----------------Q2 Q3 Q4 Oct. Nov. 1993 --------Dec. Jan. Feb. Latest 3 months from year ago 2 Canada -.0 -1.4 GDP IP 1.3 2.4 .1 .1 K N M -. 2 .4 .1 .5 .8 M M n.a. n.a. 1.3 2.4 n.a. 1.0 -2.3 France GDP IP 1.6 1.8 1.0 -2.3 2.0 .1 .7 .3 .3 -. 0 .4 .1 -. 3 -2.6 .2 -4.7 1.6 2.7 -. 2 -1.9 -. 4 -1.3 -. 8 -4.2 1.7 -.5 n.a. n.a. .6 2.5 .2 -2.8 -.6 -2.5 n.a. n.a. 2.9 3.0 -1.6 .2 -7.7 1.0 -3.1 -. 2 -2.3 -. 5 .3 -. 1 -2.9 -2.9 -1.6 . -. 3 -. 1 K N -. 8 -. 4 .2 1.0 N .5 .3 .8 x -. 7 1.0 -.3 -. 2 -.4 .1 -. 5 3.2 2.2 .7 -.7 .4 1.3 .8 .6 1.2 1.1 S 4 .7 .6 .4 N .5 K -4.5 N -1.0 N M n.a. WEST GERMANY GDP IP M -2.1 N -1.8 M n.a. .2 -5.7 n.a. n.a. .8 -3.4 -. 3 n.a. .2 -8.1 K -2.8 2.9 n.a. -1.3 N Italy GDP IP w M .9 M JAPAN GDP IP -2.2 United Kingdom GDP IP . x n.a. .1 .8 UNITED STATES GDP IP 1. 2. Asterisk indicates that monthly data are not available. For quarterly data, latest quarter from year ago. .5 . .5 .4 3.2 4.0 CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES (Percentage change from previous period) 1 1991 Q4/Q4 1991 Q4/Q4 1992 Q3 Q3 1992 Q4 Q4 Q1 Q1 2 Q2 Q3 Q3 Q4 Q4 Nov. Nov. 1992 Dec. Dec. Jan. Jan. 1993 Feb. Feb. Latest 3 months from year ago Canada CPI WPI .6 -. 1 -. 9 -. 4 .4 .5 .5 .6 .4 .8 .4 1.2 2.2 n.a. .8 -1.0 .7 .2 .7 .4 .5 -.5 .3 n.a. 3.9 3.7 1.6 -1.9 .7 .2 1.2 .4 1.1 .5 .5 -2.0 6.1 1.1 4.8 3.0 1.0 .5 1.7 1.4 1.4 .0 1.2 .8 .7 -. 5 .9 -1.4 .4 -. 4 1 .1 -. 7 -,3 -. 4 1.3 .0 -. 1 -. 1 4.2 3.1 4.9 3.4 .4 .6 1.0 .5 .5 1.4 2.2 1.1 -. 1 .4 3.0 -. 1 3.1 1.4 .7 .0 .8 .4 .8 .8 4.1 1.8 -3.2 3.1 2.9 -3.6 .3 n.a. .4 n.a. France CPI WPI .0 .0 NM N .5 .0 .1 -. 4 .6 .9 .2 .5 .3 n.a. -. 2 .0 .0 -. 1 .4 .3 X West Germany CPI WPI 4.1 -1 .7 Italy CPI WPI 1.3 2.8 .4 n.a. Japan 3.2 -1.3 CPI WPI 1.1 -1.3 United Kingdom CPI WPI -. 9 .9 n.a. .4 .5 .2 n.a. .4 United States CPI (SA) WPI (SA) 1. .1 .8 Asterisk indicates that monthly data are not available. .7 .4 .8 .1 .1 .1 2.4 3.6 1 TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES (Billions of U.S. dollars, seasonally adjusted except where otherwise noted) 1991 1992 1991 ------------Q3 Q4 1992 -------------------------Q1 Q2 Q3 Q4 ---------Nov. 1992 1993 -----------Jan. Feb. Dec. Canada 5.0 -25.5 Trade Current account 7.8 -23.7 1.7 -6.2 1.7 -6.1 1.7 -6.3 2.7 -5.2 .8 .8 r x .4 1.1 .8 n.a. 1.9 n.a. 1.3 n.a. 1.4 n.a. M .9 -6.6 1.0 -7.3 -1 .5 -. 9 n.a. M n.a. » France -5.3 -5.8 5.6 n.a. (NSA) 13.6 -19.5 21.4 -25.3 2.9 -5.9 6.9 -2.2 4.4 -5.6 3.4 -6.1 8.6 -9.0 5.0 -4.6 1.1 -.4 .3 -3.2 n.a. n.a. n.a. n.a. Trade Current account (NSA) -13.0 -21.4 n.a. n.a. -4.4 -3.7 -3.3 -5.0 -2.2 -9.2 -4.3 -5.9 -2.4 -6.5 n.a. n.a. -.8 n.a. n.a. n.a. 78.5 73.1 107.3 117.2 21.0 19.5 21.2 22.9 28.0 28.6 24.5 28.8 26.2 28.1 28.6 31.7 8.7 11.6 9.5 9.6 9.8 8.9 10.2 n.a. -18.3 -10.0 -24.1 -20.6 -4.0 -2.1 -4.7 -3.1 -5.4 -5.1 -5.7 -5.6 -6.2 -4.2 -6.8 -5.8 -2.2 -1.8 -2.7 -2.4 n.a. n.a. n.a. n.a. -73.4 -3.7 -96.3 n.a. -20.2 -11.1 -18.5 -7.2 -17.7 -5.9 -25.0 -17.8 -27.6 -14.2 -26.0 n.a. -8.7 -8.4 n.a. n.a. Trade Current account Germany .1 .1 x n.a. x n.a. x 2 Trade (NSA) Current Account Italy K Kx N Japan Trade Current account United Kingdom Trade Current account United States Trade Current account 1. The current account includes goods, services, that monthly data are not available. 2. Before July 1990, West Germany only. and private and official transfers. X K K Asterisk indicates N IV-20 JAPANESE ECONOMIC INDICATORS (percent change from previous period except where noted, s.a.) 1993 1992 Q2 -14.3 -6.6 -9.6 Machinery Orders New Car Registrations Job Offers Ratio Business Sentiment* (%) Q3 11.4 -1.8 -9.4 -24 Q4t -17.2 -5.6 -8.5 -37 -44 Dec. 5.4 -2.2 -1.1 Q1 ---- -- -49 Jan. 7.1 8.4 1.1 Feb. 1.5 *Percent of manufacturing firms having a favorable view of business conditions minus those with an unfavorable outlook. Inflation pressures have Tokyo area (n.s.a.) rose 0.1 twelve-month increase was percent low. 1.5 prices in the Excluding perishable percent over this period. (s.a.a.r.) for January and February combined was $120 billion, about unchanged from the On March Consumer in February, and their only 1.2 percent. food prices, the CPI was up The trade surplus remained fourth quarter. 6, the lower house of the parliament approved the government's proposed budget for the fiscal year that begins next month. The new budget provides no fiscal stimulus, but a supplementary fiscal package containing significant spending increases is widely expected. Real GDP in western Germany dropped 3.3 percent (s.a.a.r.) in the fourth quarter, its third consecutive quarterly decrease. However, total domestic demand (s.a.a.r.) reversed a two-quarter decline, expanding 3.2 percent, as a sharp drop in equipment investment was more than offset by a 5.6 percent surge in consumption induced by the January increase in the value-added tax. The external Exports sector made a large negative contribution to growth. (including exports to eastern Germany) declined and imports increased. Other recent indicators are consistent with continued weakness in west German activity. Industrial production (s.a.) has trended IV-21 down since early last year, but increased 0.4 percent in January relative to the fourth quarter. After plunging 7-1/2 percent in the fourth quarter, manufacturing orders (s.a.) increased almost 1 percent in January from their fourth-quarter average. In February, the unemployment rate rose from 7.5 percent to 7.7 percent, but is still low by historical standards. it Business confidence in January remained at a level typical of recessions. WESTERN GERMAN ECONOMIC INDICATORS (percent change from previous period except where noted, s.a.) 1992 1993 Q1 2.1 -0.6 Q2 -4 -1.4 Q3 -2.1 -2.2 Q4 -7.4 -3.2 Dec. -3.7 Jan. 5.7 Feb. Unemployment Rate (%) 6.2 6.5 6.7 7.2 7.3 7.5 7.7 Production Plans* (%) -3.7 -6 Machinery Orders Capacity Utilization -12 -33.3 -30 -25 Percent of mining and manufacturing firms that expect to increase production minus those who expect to decrease it. Activity growth has been somewhat stronger in eastern Germany. Industrial production expanded in September and October, but declined slightly in November to a level 0.4 percent below where it stood a year ago. Preliminary GDP estimates indicate that east German output grew 6.8 percent in 1992. Decreasing inflationary pressures in western Germany have been partially masked by a 1 percentage point increase in the value-added tax that was implemented January 1. Consumer prices increased 4.2 percent in February on a year/year basis, up from the 4 percent inflation registered in 1992. However, wholesale prices dropped 1.8 percent in the twelve months to February. Recent collective bargaining settlements have led to wage increases in the 3 to 3-1/2 percent range. Engineering employers in the regions of Saxony and Berlin-Brandenberg in eastern Germany recently abrogated contracts negotiated last year that called for a 26 percent increase in IV-22 nominal wages on April 1 and equalization of wages with those in western Germany by 1994. East German workers have held public demonstrations in protest of this move, and a strike appears imminent The pan-German current account deficit (s.a.) widened somewhat in the fourth quarter, and it totalled $25.3 billion for the year. about $6 billion larger than the 1991 deficit. In January, German M3 fell far short of the Bundesbank's 1993 target growth range of 4-1/2 to 6-1/2 percent, declining 2.3 percent (s.a.a.r.) relative to its base in the fourth quarter of 1992. However. M3 increased 7.3 percent on a 12-month basis. On March 14. the German federal government achieved an agreement with state and local governments on fiscal policy as part of Germany's "solidarity pact". The agreement proposes measures for sharing the burden of financing annual transfers of about $70 billion to eastern Germany, and it includes the reinstatement of a 7-1/2 percent income surcharge in 1995. Another feature of the "solidarity pact" is the recent moderation in wage increases. France appears to be following Germany into recession. In the fourth quarter. GDP (s.a.a.r.) fell 1.2 percent, as exports dropped 5.6 percent, fixed investment slipped 4.4 percent, and inventory accumulation decelerated. Consumption (s.a.a.r.) rose 2.8 percent. but in January, consumption of manufactured products (s.a.) about one third of total consumption, fell slightly below the fourth-quarter average. Unemployment remained steady in January at 10.5 percent (s.a.). The Bank of France's January business survey pointed to a further decline in industrial production and a decrease in factory orders, but a February survey suggested that production may have IV-23 stabilized. An INSEE survey of capital expenditure intentions indicated that firms plan to reduce investment 3 percent this year, Inflation continues to be moderate. The 12-month increase in consumer prices in February was 2.1 percent, the same as in January. Hourly wages in January stood 3.6 percent above their year-earlier level, down from a 3.8 percent increase in October. National elections scheduled for March 21 are expected to result in the accession of a center-right coalition. The leaders of this bloc -- Jacques Chirac of the Gaullist party and Giscard d'Estaing of the UDF -- have announced a platform that includes significant expansionary fiscal measures that would be phased in over several years. Although the package would be financed in part by expenditure cuts of roughly 1/2 percent of GDP and revenues from privatization. it would increase the 1993 budget deficit significantly above last year's shortfall of 3.2 percent of GDP. Italy has been in recession since last.summer, and recent indicators suggest continued weakness. A preliminary estimate of industrial production in the fourth quarter is about 3 percent below its 1991-Q4 level. In November, new orders dropped from their year-earlier level for the fifth consecutive month. The consumer confidence index (n.s.a.) declined 1.2 percent in December and registered a cumulative drop of 14.4 percent during 1992. The effects of last year's depreciation of the lira have begun to show up in prices. The twelve-month change in the consumer price index rose slightly to 4.4 percent in February, the first increase in this measure of inflation since May 1992. In December, the wholesale price index stood 4.3 percent above its year-earlier level, after a 2.4 percent rise in November. Since February 10. three cabinet members, including Finance Minister Giovanni Goria, have resigned because of the fallout from IV-24 the tangentopoli scandal. The scandal is related to kickbacks paid by business to the parties in return for public contracts. A national referendum will be held on April 18 if the Italian Parliament has not enacted electoral reform legislation by that time. On balance, recent data indicate that a mild recovery is underway in the United Kingdom. Real GDP grew 0.7 percent (s.a.a.r.) in the fourth quarter of 1992, after rising 1.1 percent in the third quarter. (s.a.a.r.). Total domestic demand fell 1.3 percent as fixed investment dropped 3.3 percent and inventory destocking accelerated. However, consumption increased 1.0 percent. and the external sector made a positive contribution to growth. Exports were up 3.0 percent, and imports dropped 4.5 percent. Available indicators for the first quarter show some promise for further growth. In January, a sharp drop in oil output took industrial production (s.a.) 0.6 percent below its fourth quarter average. However, manufacturing production rose 0.8 percent. Aggressive discounting helped retail sales (s.a.) in January and February, taken together, to surge 1.4 percent from their fourth quarter level. However, total unemployment (s.a.) rose for the 33rd month in a row in January, and stood at 10.6 percent of the labor force. Soft demand and lower interest rates have contributed to recent reductions in measured inflation. Retail prices (n.s.a.) fell 0.9 percent in January to a level 1.7 percent above a year earlier. Excluding mortgage interest payments, retail prices (n.s.a.) decreased 0.5 percent in January, lowering the twelve-month increase from 3.7 percent to 3.2 percent. Sterling depreciation has contributed to recent rises in the prices of firms' inputs and outputs. In February, the cost of materials and fuel (n.s.a.) stood IV-25 6.9 percent above the level of a year ago. Producers' prices (n.s.a.) rose 0.4 percent in February and were up 3.7 percent from February 1992. Despite continued weakness in domestic demand, the trade deficit (s.a.) has widened considerably in recent months. The cumulative current account deficit for 1992 was $20.6 billion. compared with a deficit of $10 billion in 1991. On March 16, Chancellor Norman Lamont presented the 1993-94 budget to Parliament. The public sector borrowing requirement (PSBR) is expected to rise to 50 billion pounds (8 percent of GDP) from 35 billion pounds in the fiscal year that ends March 31. Several tax increases were announced that will gradually reduce the PSBR to 6 percent of GDP in the 1996-97 fiscal year. Lamont also reiterated the government's pledge to keep underlying inflation between 1 and 4 percent per year. In Canada. strong external demand caused GDP to rise 3.5 percent (s.a.a.r.) quarterly increase. 21 percent in the fourth quarter, its seventh consecutive Merchandise exports to the United States jumped (s.a.a.r.), and total imports contracted sharply from their record high in the third quarter. demand slipped 0.8 percent. However, final domestic GDP is still 1.0 percent below the cyclical peak it reached in the first quarter of 1990. Most available indicators for the first quarter point to further growth, although the construction sector has weakened recently. Housing starts (s.a.) in January-February plunged 13.9 percent from their fourth-quarter average. However, total employment (s.a.) increased 0.5 percent over the same period. causing the unemployment rate (s.a.) to drop to 10.8 percent in February from its peak of 11.8 percent in November. In January, department store sales stood 3.4 percent above their year-earlier IV-26 level, factory shipments (s.a.) increased 0.7 percent from their fourth-quarter average, and new orders (s.a.) rose 1.2 percent over the same period. Recent price data show that inflation has remained moderate. The targeted 12-month change in the CPI excluding food and energy (n.s.a.) increased from 2.0 percent to 2.2 percent in January. The all-items CPI was up 2.0 percent over this period, and wholesale prices rose 3.9 percent. Wage settlements increased 2.1 percent in 1992, compared with 3.6 percent in 1991 and 5.6 percent in 1990. The current account deficit (s.a.) narrowed in the fourth quarter to $5.2 billion, as strong export growth helped boost Canada's merchandise trade surplus to its highest level since early 1989. At $23.7 billion, the current account deficit for the year was down slightly from a record high in 1991. On February 24, Prime Minister Brian Mulroney announced that he will step down later this year. On June 13, Mulroney's Progressive Conservative party will choose a new leader who will take over as Prime Minister on July 1. A national election must be called by November. On February 25. Trade Minister Michael Wilson introduced implementing legislation for the North American Free Trade Agreement (NAFTA) into the House of Commons. After a surge of inflation at the end of December and the beginning of January. price increases in Russia appear to have stabilized at a monthly rate of 25-30 percent. Consumer prices (n.s.a.) rose 27 percent in January and 29 percent in February. On February 26 press reports suggested that the Central Bank of Russia (CBR) was considering fixing the exchange rate. The ruble had appreciated slightly in the first three weeks of February. but it has since fallen about 16 percent from its February peak. IV-27 in response to its worsening balance of payments deficit. Russia has announced that it will impose new import tariffs. effective April 1. President Boris Yeltsin and the anti-reform Congress of People's Deputies (the highest political body) have been engaged in a bitter power struggle. On March 12, the Congress activated three constitutional amendments that undermine Yeltsin's authority. The Congress also cancelled a referendum, previously scheduled for April 11, on the division of powers between the executive and legislative branches of the Russian government. Yeltsin has vowed to poll Russian voters, independently of the Congress, on how they wish to be governed, but this poll would have no legal validity. In Poland the lower house of parliament passed the 1993 budget on February 12. enabling the IMF Executive Board to proceed with consideration of a new stand-by credit arrangement. loan program was approved by the IMF on March 8. A $655 million Poland has resumed negotiations with commercial bank creditors to reschedule approximately $13 billion of debt. Poland ceased interest payments on long-term commercial debt in 1989. and interest arrears now total $2.6 billion. In February. Poland unilaterally reduced interest payments on short-term revolving trade credits that had previously been serviced in full. In February, the unemployment rate rose 0.2 percentage points to 14.2 percent. The Czech and Slovak Republics began using separate currencies on February 8. following the collapse of the monetary union that was established when the CSFR split on January 1. Although the official exchange rate between the two currencies remains 1:1 and Slovak officials have refused to devalue the Slovak crown. Czech banks have begun trading the Slovak currency at a discount of about 20 percent. IV-28 Economic Situation in Other Countries Mexico recorded a trade deficit of $15.8 billion in 1992 compared with a deficit of $6.9 billion in 1991. Interest rates have apparently been high enough to induce capital inflows and allow the peso/dollar exchange rate to remain roughly stable since early January. Economic activity in Korea and Taiwan has continued to slow and industrial output in Argentina experienced no growth over the second half of 1992. Inflation declined in Korea. Mexico, and Argentina, and remained low and stable in Taiwan. In Brazil, economic activity remains depressed, and inflation has been high. reflecting deepening pessimism about the prospects for fiscal and monetary reform. Disputes between the economic team and President Franco over economic policies resulted in the resignation of the finance minister and central bank president in early March. Individual country notes. Mexico's merchandise trade deficit in 1992 was $15.8 billion, up from $6.9 billion in 1991. The growth of manufactured exports slowed while import growth increased; imports were 26 percent higher, while manufactured exports, which accounted for about two-thirds of total exports, were only 7 percent higher. Petroleum exports were less than 2 percent higher, and other exports were lower. to have been roughly $23 The current account deficit is estimated billion (9 percent of GDP) in 1992, up from $13.3 billion (5.4 percent of GDP) in 1991. Interest rates have apparently been high enough to induce capital inflows and allow the peso/dollar exchange rate to remain roughly stable since early January. On March 16. the exchange rate was 3.1175 new pesos per dollar. 3.1 percent above the gradually depreciating lower limit of its fluctuation band. In response to an unexpectedly high increase in the CPI for the first half of January. the Bank of Mexico tightened policy in mid-January. As a result. IV-29 interest rates, which had been declining since mid-October, turned up through early March. However, after the monthly increase in the CPI declined from 1.3 percent in January to 0.8 percent in February. monetary policy eased: at the March 16 auction, the twenty-eight-day Treasury-bill rate was 17.3 percent, down 70 basis points from two weeks earlier but still 79 basis points above the mid-January low. The February CPI was 10.9 percent higher than a year earlier. This compares with a 17.2 percent increase in the previous twelve months. Real GNP growth in Taiwan fell to 6.1 percent in 1992 from 7.3 percent in 1991. as recovering domestic investment failed to compensate fully for declining net exports. Both private and public investment grew by roughly 17.5 percent in 1992. Although government investment grew faster last year than it had in four years, growth was below initial targets and reflected delays in implementing Taiwan's six-year. $300 billion infrastructure program. The cumulative merchandise trade surplus through February was $500 million, down from the trade surplus of $1.3 billion over the same period in 1992. Cumulative exports through February were 4.5 percent higher than a year earlier, and imports through February were 12.6 percent higher than a year earlier. Consumer price inflation in January was 3.6 percent (year-overyear), consistent with recent trends once price increases from past weather shocks are accounted for. After more than a month of negotiations. Taiwan's President Lee Teng-hui secured approval from the ruling Kuomintang Party for a new Premier and cabinet in late February. The move further consolidates executive power into the hands of politicians with ethnic roots in Taiwan, rather than from mainland China. Taiwan's stock market reacted to the nomination of a new Premier by rising 28 percent IV-30 through March 12, more than making up for losses that followed December's legislative elections. In Korea, economic activity has continued to slow. Consequently, inflation has declined, and the trade deficit has fallen. Industrial production fell 6.4 percent in January 1993 from a year earlier, the largest decline in over 12 years. Some of this decline was due to business closings for the Lunar New Year, which fell in January this year, but in February last year. Consumer prices were 4.6 percent higher in February than a year earlier, down from a 7 percent increase in the previous twelve months. Korea's cumulative trade deficit (on a customs clearance basis) for January and February 1993 was $1.5 billion, down from a surplus of $3.1 billion over the same period last year. Cumulative exports through February were 7 percent higher than a year earlier, and imports through February were nearly 7 percent lower than a year earlier. In Brazil, economic conditions remain depressed and inflation has remained high. Real GDP fell by 0.9 percent in 1992, compared with an increase of 0.9 percent in 1991. and would have declined further had stimulative measures not been introduced in the fourth quarter. Monthly inflation had been in the 20 to 25 percent range since early 1992 and is expected to be 26 percent in March. The trade surplus in January 1993 was $1.1 billion compared with a surplus of $0.9 billion in January 1992. Between late January and end-February. Brazil and the Bank Advisory Committee (BAC) presented the $44 billion Brady-style commercial bank restructuring package to bank creditors. On March 16. Brazil announced that over 95 percent of the banks had indicated their selections among the options, with a large portion of the debt being allocated toward the par bonds. However, implementation of the bank package is not expected until Brazil either agrees to finance the full amount of the collateral needed for the par and discount bonds or qualifies for financing from the IMF and other multilateral institutions, Brazil is in non- compliance with the fiscal targets contained in its January 1992 IMF stand-by arrangement. The dim prospects for fiscal and monetary reform were underscored in early March, when Finance Minister Paulo Haddad and Central Bank President Gustavo Loyola resigned, citing their opposition to President Franco's selection of political appointees to technical posts at the central bank. Franco advocates reducing interest rates to stimulate the economy and had criticized the economic team for not moving more quickly to put an end to high inflation, which he blames on "oligopolistic forces." Franco selected Eliseu Resende to be the new finance minister and Paulo Cesar Ximenes to be the new central bank president. nomination must be confirmed by the senate.) (Ximenes' Speculation has intensified over the past few months that a new program will be implemented that will include wage and price freezes and a forced conversion of short-term internal debt into long-term debt. In Argentina. April Ist marks the second anniversary of the Convertibility Law, which established a fixed one-to-one exchange rate between the peso and the U.S. dollar. The CPI rose by 0.7 percent during February. with a cumulative increase of 4.5 percent over the past six months compared with an increase of 9,4 percent over the six months ending in February 1992. The real exchange rate against the dollar has appreciated by about 25 percent over the past two years. After rapid growth during the first half of 1992. the industrial sector has experienced no growth during the past eight months. The official unemployment rate has risen slightly over the period and was 6.7 percent in the fourth quarter of 1992. Prelim- IV-32 inary data indicate that merchandise imports fell to $900 million per month during January and February 1993. compared with a peak of $1.3 billion in October 1992. (Data on export revenues in 1993 are not available yet.) Argentina and its bank advisory committee have announced that the Brady-style debt restructuring agreement will be implemented on April 7. More than 99 percent of Argentina's commercial bank creditors have agreed to the restructuring package.
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