Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 25, 1997 : Greenbook Part 2

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Confidential (FR) Class

FOMC

Part 2

March 19, 1997

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments

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

Confidential (FR) Class III FOMC

March 19, 1997

RECENT DEVELOPMENTS

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

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS

Domestic demand has remained robust, and the economy
consequently has continued to register sizable gains in employment
in early 1997.

Although increasingly tight labor markets have been

mirrored in an uptrend in average hourly earnings, other signs of
inflationary pressure are still few and far between.

CPI inflation

has been modest in the past two months, with increases in "core"
prices running below even the reduced pace of 1996.
Labor Market Developments
Total nonfarm payroll employment grew briskly again in
February, and aggregate hours of production or nonsupervisory
workers on nonagricultural payrolls soared, more than reversing the
sharp weather-related decline in January.

In the household survey,

the civilian unemployment rate has continued to fluctuate narrowly,
averaging 5.3 percent over January and February.

The labor force

participation rate jumped to a historical peak of 67.2 percent in
January and then slipped back to 67.0 percent in February.
Three special factors buffeted the employment numbers for
January and February.

First, as a result of seasonal adjustment

problems associated with last year's January blizzard, employment
gains in several industries--most notably help-supply services--were
overstated this January and understated in February by approximately
80,000.

Second, changes in the monthly patterns of post-Christmas

layoffs resulted in a sharp drop in jobs at general merchandise
stores in January and an offsetting bounceback in February.1
Third, the BLS estimates that February's reported 109,000 jump in
employment in the construction industry likely overstated the true
strength in this industry by around 85,000.

Only a small portion

(perhaps 10,000) of this outsized gain represented a bounceback from
the poor weather in the Midwest and South, which held back
construction activity in January.

More important, the unseasonably

mild weather in February throughout much of 'the country led builders
to begin their spring hiring earlier than usual.

After netting out

these factors, nonfarm payrolls still expanded very rapidly in
1. The late timing of the January reference period likely
contributed to the odd monthly pattern in employment at general
merchandise stores because some seasonal layoffs normally picked up
in February were probably reported in January this year. The BLS
estimates that the reported numbers understated January employment
growth at general merchandise stores by about 50,000 and exaggerated
the February rise in employment by the same amount.
II-1

II-2

CHANGES IN EMPLOYMENT
(Thousands of employees; based on seasonally adjusted data)
1996

1996
1995

1996

Dec.

1997
Jan.

Feb.

------------Average monthly changes--------185
216
262
171
224
231
247
339
176
201
245
147
223
204
221
293
-12
-8
6
-19
10
8
16
-2
5
4
24
-7
12
16
20
5
-3
1
16
-4
4
4
11
-3
-17
-12
-19
-12
-2
-8
-4
-7
9
25
20
16
24
29
15
109
54
63
82
59
88
78
5
70
4
14
12
14
14
14
13
13
110
100
113
76
86
85
136
80
8
12
29
12
-3
17
72
-47
9
15
17
24
2
27
26
46

Nonfarm payroll employment I
Private
Manufacturing
Durable
Transportation equipment
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Help supply services
Total government
Private nonfarm production workers 1
Manufacturing production workers

152
-10

168
-8

213
5

120
-14

184
8

177
3

47
9

362
7

32
51

232
225

176
197

219
195

202
220

211
139

725
683

-150
26

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

.3
34.4
41.5

.5
34.4
41.7

.1
34.4
41.7

.3
34.6
41.8

.8
34.8
42.0

-1.6
34.2
41.7

2.7
35.0
41.9

Total employment 2
Nonagricultural

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

Average Weekly Hours

Hours
35.1
35
34.9
34.8
34.7
34.6
34.5
34.4
34.3
34.2
34.1

1985

1987

1991

Note. Value for 1997:01 is a monthly average of January and February 1997.

1993

1995

, , ,

1997

II-3

January and February, with job growth averaging more than 250,000
per month. 2
In February, average weekly hours of production or
nonsupervisory workers on nonagricultural payrolls soared 0.8 hour,
to 35.0 hours, more than reversing a dip in the preceding month.
The February increase in the workweek was widespread across major
industry divisions, with all but the manufacturing industry showing
a sharp jump in weekly hours.

But even in manufacturing, the

workweek increased 0.2 hour, to 41.9 hours--retracing much of its
0.3 hour January decline--and overtime hours turned up 0.1 hour to
4.7 hours per week.

Largely because of the February run-up in the

workweek, aggregate weekly hours of production or nonsupervisory
workers in private industry were up 2.7 percent in February after
falling 1.6 percent in January.

Smoothing through the monthly

volatility, the workweek has averaged 34.6 hours thus far in the
first quarter, little changed from its fourth-quarter level.

The

January-February average of the aggregate index of production worker
hours was up 0.5 percent (not at an annual rate) from its fourthquarter average.
On a quarterly average basis, the average workweek has
lengthened considerably since the end of 1995 and has now climbed
most of the way back to its most recent peak in 1994.3

The

lengthening workweek may be an indication that firms are constrained
in their hiring by a lack of suitable workers.
Other indicators of labor demand also remain on the strong
side.

Initial claims for unemployment insurance averaged just over

310,000 during the past four weeks--the lowest sustained level since
early 1989.

In addition, the Conference Board's index of help

wanted advertising--a crude gauge of the number of unfilled
positions--ticked up in January to its highest level in the past ten
years.

Meanwhile, respondents to the Conference Board and the

Michigan Survey Research Center

(SRC) consumer confidence surveys

perceive strong current and future labor market conditions
respectively.

The Manpower, Inc.,

survey of hiring intentions for

2. The Bureau of Labor Statistics also announced the results of
its annual benchmarking. With the release of the May 1997 data, the
BLS will increase job growth between March 1995 and March 1996 by an
amount that cumulates to 57,000 by the end of that period. The
relatively small size of the benchmark revisions will leave the
employment picture for 1995 and 1996 essentially unchanged.
3. This comparison excludes the workweek reported for the first
quarter of 1996 because it was held down by the East Coast blizzard.

II-4

Labor Market Indicators
Initial Claims for Unemployment Insurance

Thousands
600

moving average
500

400

Mar. 8
310

300

200
1985

1987

1989

1991

1993

1995

1997

Note. State programs, includes EUC adjustment.

Help Wanted Advertising

1985

1989

Index, 1990=100

1993

1997

Net Hiring Strength

1985

1989

Percent

1993

1997

Note. Series has been adjusted to take account of structural and
institutional changes, including consolidation of newspaper industry
and tendency to increase hiring through personnel supply agencies.

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

Job Availability

Expected Change in Unemployment

1985

Percent of Households

1989

1993

1997

1985

1989

1993

Index

1997

Note. Percentage expecting "more" minus percentage
expecting "less" plus 100.

II-5

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

1996
Q2

5.4

5.3

17.3

16.7

16.5

20 years and older
20-24 years
25-54 years
55 years and older

4.8
9.2
4.4
3.7

4.6
9.5
4.2
3.3

Women: 20 years and older
20-24 years
25-54 years
55 years and older

4.9
9.0
4.5
3.6

Full-time workers

Civilian unemployment rate
(16 years and older)
Teenagers
Men:

Labor force participation rate

1995

1996

5.6

1996

1997

Dec.

Jan.

Feb.

5.3

5.4

5.3

16.6

16.5

17.0

4.7
9.8
4.3
3.3

4.5
9.0
4.0
3.4

4.4
9.1
4.0
3.2

4.4
9.3
3.9
3.4

4.6
9.8
4.1
3.2

4.4
8.6
4.0
3.3

4.8
9.0
4.4
3.5

4.8
8.7
4.4
3.7

4.7
9.0
4.4
3.3

4.8
8.9
4.5
3.2

4.9
8.9
4.7
3.3

4.6
8.9
4.3
2.9

4.7
8.8
4.5
2.6

5.5

5.3

5.2

5.1

66.6

66.8

66.7

66.8

66.9

67.0

67.2

Labor Force Participation Rate

17.5

67.0

Percent
- 67.2

Quarterly Averages

66.6

-65.4

I ...

I .

1997
1995
1993
1991
1989
1987
1985
for
adjusted
rate
participation
force
Labor
1997.
February
Note. Value for 1997:Q1 is a monthly average of January and

the redesign of the CPS in 1994 and the introduction of updated population controls in 1990.

64.8
64.8

II-6

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1996
Proportion
1996

19961

1996

Dec.

1997
Jan.

Feb.

-Annual rate- --Monthly rate--Total index
Previous

100.0

3.9
3.8

3.3
3.3

4.5
4.3

.4
.5

-.1
.0

86.5
47.1
4.9
2.3
39.4

4.1
5.7
-1.6
34.4
2.3

5.0
6.0
2.7
21.3
3.7

4.3
2.9
-15.2
32.9
6.0

.6
.4
-.7
1.4
.8

-.2
.1
1.9
.7
-.6

.8
1.2
.8
1.1
.3

5.6
7.9

3.6
1.4

.8
-12.0

1.1
9.6

1.4
-1.6

-. 6
1.3

1.3
-3.5

Consumer goods
Durables
Nondurables

24.6
6.0
18.7

2.5
2.4
2.5

2.8
2.6
2.8

4.7
-4.9
7.9

.9
1.1
.8

-. 8
-. 9
-. 8

.5
1.3
.3

Business equipment
Information processing
Industrial
Transit
Other

13.9
5.8
4.5
2.3
1.3

7.9
10.7
-.2
21.4
3.5

8.1
9.5
-.1
22.2
6.4

5.4
7.2
1.2
5.9
11.8

.5
.7
.3
.3
1.0

1.0
.7
.4
2.3
1.8

1.1
1.3
.6
1.9
.4

5.7

5.8

9.3

-. 1

32.2
23.2
4.0
3.7
9.0

4.7
5.5
16.0
3.4
2.7

5.6
6.2
15.3
7.7
4.2

4.5
3.9
17.8
5.0
6.1

Manufacturing
Durables
Motor veh. and parts
Aircraft and parts
Nondurables
Mining
Utilities
IP by market group,

excluding energy:

Construction supplies
Materials
Durables
Semiconductors
Metals
Nondurables

-2.2
.9
1.0
2.9
1.4
.9

1.4

-. 4
-. 4
.6
-1.0
-.2

.9
1.3
2.1
2.4
-.3

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

CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89
High
Manufacturing
Primary processing
Advanced processing

1963-96
Avg.

1995

1996

1997

Dec.

Jan.

Feb.

85.7

81.9

82.3

82.5

82.1

82.5

88.9
84.2

83.0
81.3

86.2
80.5

86.6
80.4

86.6
80.7

86.0
80.3

86.6
80.6

II-7
the second quarter also paints an upbeat picture of labor demand;
experience suggests, however, that the reading may say more about
the strength of hiring in the current quarter than in the spring.
The strong demand for labor has been pulling additional people
into the labor market.

Looking through the zigs and zags of the

past two years, one can now discern something akin to a cyclical
pickup in labor force participation.

The labor force

participation rate has averaged 67.1 percent through the first two
months of the first quarter, up from 66.9 percent in the fourth
quarter of 1996, while the unemployment rate has held steady at
5.3 percent.
The flip side of the strong employment and workweek gains in
1996 was disappointing productivity growth.

The most recent

published data show that labor productivity in the nonfarm business
sector grew 0.9 percent over the four quarters of 1996.

This marked

the largest annual increase since 1992: nonetheless, the 1996
reading still left average productivity growth during the current
expansion below its long-run trend rate of expansion.
Industrial Production
Industrial production rebounded 1/2 percent in February after
declining a bit in January.

Increases were particularly sharp among

producers of durable goods, whose output advanced 1-1/4 percent
after changing little in January.

The February increase in total

industrial production was moderated by a plunge in the output of
utilities, reflecting the unseasonably mild weather last month, and
only a small gain in the production of nondurable goods.

The

upsurge in production brings the factory utilization rate in
February back to 82-1/2 percent, the upper end of the 82 percent to
82-1/2 percent range that generally has prevailed for more than a
year.
4. With the release of the January employment data, the BLS
attempted to correct the population weights used to construct
estimates of employment and the labor force from the monthly CPS for
a systematic undercounting of recent immigrants to the United
States, primarily Hispanic males. This change added 298,000 to
employment and 317,000 to the labor force in January but had no
perceptible effect on estimates of the unemployment rate or the
labor force participation rate.
5. As we discussed in the January Greenbook, the gap between the
product-side and income-side measures of output growth has been
Along with other
sizable over the past several years.
considerations, the large gap suggests the possibility that the BEA
will revise up its estimates of GDP and of nonfarm business sector
output growth over 1993-96 when it releases its annual revisions
this summer.

II-8

Manufacturing IP and NAPM New Orders
Twelve month percent change
15 -

Percent
-30
Three month lag of
manufacturing IP
(left scale)

20
Feb.

5 -

New orders

10 -

(right scale)

1
1985

1988

1991

-I I--I 30

1994

1997

Note. Percent of respondents in the Purchasing Managers' Survey reporting increase innew orders minus those reporting
decrease innew orders, seasonally adjusted.

Manufacturing Capacity Utilization and Vendor Performance
Percent

Percent

90.7 -

performance

87.7 -Vendor

(right scale)

- 20

84,7 -

Feb.

81.7

78.7 -'

go
-

' Capacity utilization
(left scale)

75.7
72.7

1995
1993
1991
1989
reporting faster
those
minus
Note. Percent of respondents in the Purchasing Managers' Survey reporting supplier deliveries
deliveries, seasonally adjusted.
1985

1987

60
1997

II-9

The output of motor vehicles and parts rose further in
February, to a level more than 8 percent above the strike-related
low in October.
(annual rate),

Assemblies of light vehicles, at 12.4 million units
raised the days' supply at the end of the month

(based on February sales) only to a still comfortable 64 days.
Looking ahead, schedules call for production to be well maintained
over the remainder of the first half at an annual rate of slightly
more than 12 million units.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)

1997

1996
Nov.

Dec.

Jan.

Feb.

Mar.

--scheduled-U.S. production
Autos
Trucks

12.0
6.1
5.8

12.1
5.8
6.3

12.3
6.0
6.4

12.4
6.1
6.3

12.2
5.8
6.4

Days' supply
Autos
Light trucks

67.3
67.2

61.2
67.5

56.0
70.8

59.6
69.4

12.1
5.9
6.2

Note. Components may not sum to totals because of rounding.
The output of aircraft and parts, an area of ongoing strength,
rose further in February, with a sharp 3 percent gain in the
production of commercial aircraft.

Underpinned by the strength in

orders, mainly from foreign airlines, Boeing's current schedule
calls for raising the output of completed planes from twenty-six per
month this quarter to forty planes a month by the fourth quarter of
This

this year--the company's highest ever monthly production rate.

planned increase would be consistent with growth of total commercial
aircraft output of more than 50 percent this year.
By major market group
consumer goods advanced

(excluding energy items),

the output of

1/2 percent in February, boosted by a

snap-back in the production of goods for the home, mainly appliances
and carpeting.

The output of business equipment rose 1.1 percent
The

further in February, with all major categories posting gains.

output of construction supplies, which was weak around the turn of
the year, rebounded in February and has, on balance, remained at the
high level reached last summer.

The output of durable materials

rose sharply, a result not only of a 2 percent advance in
semiconductor output but also of a rebound in the production of

II-10

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

Total
Adjusted 1
Autos
Light trucks
North American 2
Autos
Big Three
Transplants
Light trucks
Foreign produced
Autos
Light trucks

1997

1996

1996
1995

1996

Dec.

Jan.

Feb.

14.7
14.7

15.1
15.0

15.0
15.0

15.0
15.1

14.8
14.7

14.9
14.5

15.3
15.4

15.1
15.2

8.6
6.1

8.5
6.6

8.7
6.3

8.6
6.4

8.0
6.8

8.2
6.7

8.7
6.6

8.4
6.7

12.8
7.1
5.4
1.7
5.7

13.4
7.2
5.3
1.9
6.1

13.3
7.4
5.5
1.9
5.9

13.3
7.3
5.3
2.1
6.0

13.1
6.7
4.8
1.9
6.3

13.1
6.9
5.0
1.9
6.2

13.4
7.4
5.2
2.2
6.0

13.2
7.0
5.1
1.9
6.2

1.9
1.5
.4

1.7
1.3
.4

1.8
1.3
.5

1.9
1.4
.5

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

GM Fleet and Retail Sales (Confidential)
(Millions of units; annual rate)

1993

1994

1995

1996

1997

Big Three Auto Market Share
Percent

1993

1994

1995

1996

1997

II-11

basic metals.

Output of basic metals stepped up in the second half

of last year, raising utilization in some industries--particularly
raw steel and primary copper--to relatively high rates and likely
contributing to the recent firming of the spot prices of some basic
metals.
NEW ORDERS FOR DURABLE GOODS
(Percent change from preceding period, seasonally adjusted)
Share
1996:H2

Total durable goods
Adjusted durable goods'
Computers
Nondefense capital goods
excluding aircraft and
computers
All other categories
Memo:
Real adjusted orders

1996

1997

Nov.

Dec.

Jan.

100.0

1.7

-1.7

4.0

68.0
5.0

1.7
5.0

.1
.2

-2.5
-3.0

-1.6
10.4

4.5
-3.3

17.0

1.9

-.7

-1.9

-6.0

6.4

46.0

1.3

-2.7

-1.3

4.8

2.2

-2.4

-1.1

4.1

1. Orders excluding defense capital goods, nondefense aircraft, and
motor vehicle parts.
2. Nominal adjusted durable goods orders were split into two
components, computers and all other. These components were deflated
and then aggregated in a chain-weighted fashion.
Most of the indicators of economic
production pace in the next few months.

activity suggest a moderate
The staff's series on

adjusted orders for durable goods bounced back in January after two
months of significant negative growth, and the National Association
of Purchasing Managers'

(NAPM) diffusion index for orders increased

in February after having fallen in January.

With manufacturing

capacity estimated to be expanding at about a 4 percent annual rate,
a continuation of the recent pace of production, which to date has
not resulted in a deterioration of vendor performance, is unlikely
to put much upward pressure on the overall factory operating rate.
Motor Vehicles
Sales of light motor vehicles picked up to a 15-1/4 million
unit pace on average in January and February (annual rate).

The

increase reflects, in large part, a recovery in the supply of
vehicles, which had been disrupted last quarter by labor disputes at
GM and by model changeover difficulties.

On balance, sales in the

past five months averaged 15 million units, the same pace that
prevailed in the second and third quarters

of last year.

II-12
RETAIL SALES
(Percent change; seasonally adjusted)
1996
Q2

Total sales
Previous estimate
Building materials
and supplies
Automotive dealers
Retail control 1

1996
Q4

1997

Dec.

Jan.

Feb.

1.3

1.3
1.2

.5
.3

1.5
.6

6.5
-1.1

1.4
.7

-.7
1.5

-. 1
1.0

1.6
1.9

2.2
1.7

1.8

1.3

1.2

Previous estimate
Durable goods
Furniture and appliances
Other durable goods

3.2
2.2
4.1

-. 8
.7
-1.9

1.5
-.4
3.1

-. 5
-. 3
-. 7

.3
.4
.2

1.3
.3
2.2

Nondurables
Apparel
Food
General Merchandise
Gasoline stations
Drug stores
Other nondurables

1.5
1.7
.5
2.3
5.2
1.6
.5

.1
-. 7
1.0
.4
-3.1
2.3
.4

1.2
-1.1
.9
.8
2.5
2.3
2.1

.5
.8
.5
1.3
1.3
.2
-. 3

1.5
2.8
.4
3.0
2.0
1.9
1.2

.2
.4
-. 2
1.8
-. 2
.6
-. 3

1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.

REAL PCE SERVICES
(Percent change from the preceding period)

1996
1996

2.7

- -2.4

Energy

2.2

7.3

8.8

-11.4

5.4

Non-energy
Housing
Household operation
Transportation
Medical
Personal business
Other

2.7
1.6
3.7
4.3
2.5
1.8
4.4

2.2
1.6
-. 4
5.6
-.1
5.9
3.4

2.4
1.5
5.9
1.8
2.9
-1.1
5.2

1.9
1.3
.1
4.2
2.1
-3.0
6.4

4.3
2.1
9.4
5.8
5.2
5.5
2.7

PCE services

Annual rate - - - - 1.3
4.3
2.7

1996

1997

Dec.

Jan.

Monthly rate
.5
.3
-5.7
.6
.1
.5
2.0
.3
1.0
.7

3.6
.4
.2
.1
.3
.3
1.4
.3

II-13

Confidential data indicate that a step-up in sales to consumers
accounted for the strong performance in February, with fleet sales
having only partially recovered from November's strike-related
plunge.
In the near term, several factors are working to sustain the
strength in consumer demand.

The preliminary Michigan SRC survey

for March reported that consumers' attitudes toward car-buying
jumped back to the upper end of the favorable range that has
prevailed since early 1996.

The Conference Board consumer survey

for February also indicated that the proportion of households
planning to buy new automobiles moved up.

According to the Michigan

survey, consumers are finding the prices of new cars quite
attractive.

Indeed, sales incentives remain sizable, and news

reports suggest they will remain high or perhaps increase in the
second quarter.

The heavy incentives activity is being driven, at

least in part, by the recent deterioration in GM, Ford, and
Chrysler's market share of automobile sales.

While the Big Three's

market share has recovered from the strike-related fourth-quarter
plunge, it remains at the low end of recent experience.
Personal Income and Consumption
After a lackluster December, consumer spending picked up
considerably in early 1997, supported by continued solid growth of
income and highly favorable consumer sentiment.

According to the

advance report, total nominal retail sales increased 0.8 percent in
February and are now estimated to have increased 1-1/2 percent in
January.

Spending in the retail control category, which excludes

sales at automotive dealers and building material and supply stores,
rose 1.3 percent in January and 0.4 percent in February.

On the

whole, average nominal spending in the retail control category
during the first two months of this year was up 1.8 percent from its
fourth-quarter level--9 percent, at an annual rate.
Spending on services rose strongly in January, the latest month
for which estimates are available.
services jumped 3.6 percent

Real expenditures on energy

(not at an annual rate) because of

unseasonably cold weather in January.

However, energy spending

probably fell back last month, when, according to national weather
data, temperatures were milder than normal.

Non-energy services

rose 0.4 percent in January, reflecting the gains in brokerage
services that accompanied the large volume of equity trading.

II-14

PERSONAL INCOME
(Average monthly percent change)
1996

1996

1997

Dec.

Jan.

1995

1996

Total personal income

Wages and salaries
Private

.4
.5

.6
.6

.8
.9

.4
.4

.6
.7

1.1
1.3

-.1
-. 3

Other labor income

Less: Personal tax and
nontax payments

1.2

1.0

-1.9

Equals: Disposable
personal income

.3
4.7

.2
4.9

.4
4.3

.2
5.3

.2
5.1

.5
5.4

Memo:
Real disposable income1
Saving rate (percent)

1. Derived from billions of chained (1992) dollars.

REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)

1996
Q2

Estimated revision I

1997

Dec.

Jan.

1995

1996

1.9

2.7

3.4

1.9

2.7

3.4

3.6

1.0

- - - Annual rate -

PCE

1996

Monthly rate

1.3

5.2

11.4

-2.6

4.1

-. 3

1.7

Motor vehicles

-3.8

-.9

3.0

-10.0

-2.4

-1.4

4.2

Computers
Other durable goods

52.3
.4

57.2
2.1

113.6
5.6

40.8
-4.1

34.8
3.1

4.8
-. 7

3.9
-.4

Nondurables
Gas and oil
Clothing and shoes
Other nondurables

1.1
1.9
.7
1.1

1.7
-. 1
4.9
1.1

1.3
6.2
10.1
-1.2

.4
-3.2
3.2
.1

1.4
.6
-1.6
2.3

-.2
-. 7
.9
-. 5

.1
-. 8
-. 5
.4

Services
Energy
Non-energy
Housing
Household operation
Transportation
Medical
Other

2.4
5.4
2.3
1.8
3.8
3.1
2.5
2.1

2.7
2.2
2.7
1.6
3.7
4.3
2.5
3.2

2.7
8.8
2.4
1.5
5.9
1.8
2.9
2.2

1.3
-11.4
1.9
1.3
.1
4.2
2.1
2.0

4.3
5.4
4.3
2.1
9.4
5.8
5.2
4.0

.3
-5.7
.6
.1
.5
2.0
.3
.8

.5
3.6
.4
.2
.1
.3
.3
.8

Durables

Note. Derived from billions of chained (1992) dollars.
1. Staff estimate of revised PCE growth based on February retail sales report.

II-15

Consumer Sentiment

Consumer Surveys
Index

1979

1982

1985

1988

1991

1994

1997

Current Labor Market Conditions*
Index

* The index is defined as the proportion of respondents reporting that jobs are plentiful minus the proportion reporting
that jobs are hard to get, plus 100.

II-16
Private Housing Activity
(Millions of units; seasonally adjusted annual rate)

1996

1996
Q3

Q4r

Dec.r

1997
Jan.r

Feb.P

All units
Starts
Permits

1.48
1.43

1.50
1.44

1.49
1.43

1.42
1.40

1.35
1.42

1.36
1.40

1.53
1.44

Single-family units
Starts
Permits
New home sales
Existing home sales

1.16
1.07
0.76
4.09

1.19
1.10
0.74
4.21

1.18
1.06
0.79
4.11

1.09
1.02
0.77
3.95

1.02
1.02
0.80
3.86

1.12
1.05
0.87
3.94

1.22
1.08
n.a.
n.a.

Multifamily units
Starts
Permits

0.32
0.36

0.31
0.34

0.31
0.36

0.33
0.38

0.33
0.41

0.25
0.35

0.31
0.37

Mobile homes
Shipments

0.36

0.37

0.35

0.34

n.a.

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

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

I I

1977

1979

1981

1983

1985

1987

1989

1991

1993

I
I

1995

1997

II-17

Official estimates are available only through January, but
personal income growth is apparently continuing at a fast pace this
quarter.

Real disposable personal income rose 0.5 percent in

January after increasing the same amount in December.

The January

gain was largely attributable to a sizable increase in transfer
payments, primarily the result of annual cost-of-living adjustments
in federal transfer programs

(which are not seasonally adjusted),

but also boosted by changes to the earned income credit program.
Private-sector wage and salary disbursements actually declined in
January when average weekly hours dropped.

Nonetheless, the

substantial increase in aggregate hours in February suggests that
the January decline was more than reversed last month.
Readings of consumer sentiment have remained very upbeat.

January, the sentiment index from the Conference Board survey
reached its highest level since the late 1980s.

In February and in

March's preliminary report, the Michigan SRC survey followed suit-reaching the highest level since 1965.

Households reported

increasingly favorable views of their current personal financial
situation.
Although both sentiment indexes have registered solid gains in
the past year, the increase has been more dramatic for the
Conference Board index.

A key factor explaining its rise has been a

marked improvement in households' views of current employment
conditions:

The percentage of respondents saying that jobs are

plentiful rose from one-quarter in June 1996 to almost one-third in
February 1997.

In contrast, because the Michigan index does not

include a question about current employment conditions, it is not
directly affected by perceptions of the labor market.

Nonetheless,

the Michigan survey does ask a question, not included in the
composite index, about expectations for unemployment during the next
twelve months.

Here, also, households' views have improved

considerably since last summer, with the fraction expecting higher
unemployment dropping from 35 percent in June 1996 to 24 percent in
February and March.

Thus, both surveys provide evidence of receding

concerns about unemployment, enhancing the prospects for sustained
strength in household spending in the near term.

Further gains in

stock market wealth of course point in the same direction.
Housing Markets
As so often happens in the winter season, variations in weather
conditions have distorted month-to-month movements in building

II-18

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

1989

1990

1991

1992

1993

1994

1995

1996

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

Consumer Homebuying Attitudes
Diffusion index

1990

1989

1992

1991

1993

1994

1995

1996

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

MBA Index of Mortgage Loan Applications for Home Purchase
Index
Mar. 7

1990

1991

1992

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

1993

-I

1994

1995

1996

II-19

activity, obscuring underlying trends.

In December, adverse weather

depressed single-family housing starts quite noticeably; in
contrast, exceptionally mild weather boosted starts in February.
Putting greater weight on the permits figures, which ordinarily
provide a more reliable reading of the direction of activity than do
the starts numbers, we would judge that single-family construction
has been on a steady to slightly upward sloped course of late.
In addition to the potentially distorting effects of unusual
weather, a statistical break in the Census Bureau's series on sales
of new homes has made discerning current market conditions more
difficult than usual.

While reporting that sales of new homes

jumped in January to 870,000 units, the second-fastest pace on
record, the Census Bureau noted that new computerized data
collection methods that it began implementing last May seem to be
imparting an upward bias to the estimates.

The Census staff used ad

hoc procedures to counteract the overstatement of the January
estimate, but the accuracy of the resulting adjustments is difficult
to assess.

Until the Census Bureau accumulates more experience with

the new data collection methods, we will likely face considerable
uncertainty about the reliability of monthly estimates of new-home
sales.

Sales of existing homes also rose in January, offsetting

part of the December decline.
Other indicators are somewhat ambiguous about the strength of
demand for single-family homes.

Builders' assessments of new-home

sales increased in early March but remain at a moderate level, well
below their recent high in the second quarter of 1996.

In the first

half of March, homebuying attitudes, as measured by preliminary
readings from the Michigan SRC survey, dropped back to the lowest
level since September.

Applications for mortgages to purchase homes

have continued the erratic pattern they have exhibited since late
last year.

Smoothing through the sharp ups and downs, in recent

weeks the pace of applications is running at about the same average
level as was observed during most of last year.
Multifamily housing starts rebounded in February after plunging
abruptly in January.

Although the demand for multifamily units has

strengthened in some areas, the imbalance of supply and demand for
the sector as a whole has not improved noticeably.

The vacancy rate

for multifamily rental units has edged up over the past two years,
and residential rent remains at an eleven-year low in real terms
measured in the CPI).

(as

II-20

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

1996

1997

Dec.

Jan.

Feb.

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

-. 5
.8
3.7
-. 3
.0

2.9
1.5
-. 8
4.7
1.7

1.8
1.5
4.4
4.5
-. 3

1.5
1.0
-. 4
4.2
.6

1.5
1-1
5.8
-3.2
.6

-2.5
-2.6
.2
-7.8
-2.3

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

Shipments of complete aircraft1

1.4

12.2

14.7

21.1

20.4

-50.8

n.a.

-1.9

1.3

-. 8

-5.6

6.8

-.4

3.1
3.1
2.1
8.7
2.2

-6.5
-1.7
1.6
-8.5
-1.2

4.9
2.6
5.0
6.6
.8

.5
-.5
.2
3.8
-1.8

.0
-2.2
10.4
-35.9
2.3

5.3
3.9
-3.3
46.1
-. 5

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

.2
-6.6
3.0

-. 6
8.3
-1.0

3.7
9.2
1.4

8.2
7.6
7.9

-3.0
-3.8
-1.6

2.8
1.2
5.9

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

Producers' durable equipment

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

Nonresidential structures
Construction put in place, buildings
Office
Other commercial
Institutional

-2.9

1.2

8.2

9.0

-. 2

n.a.

Industrial
Lodging and miscellaneous

-1.6
10.6

-8.0
.0

-1.0
4.5

9.8
6.5

-6.9
-3.0

2.0
2.9

n.a.
n.a.

6.5

9.9

-4.0

-1.6

1.5

6.0

8.3

11.6
13.1
7.7

3.8
6.7
-3.7

17.5
20.9
8.4

5.5
-. 8
25.2

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

Rotary drilling rigs in use 2
Memo:
Business fixed investment 3
Producers' durable equipment 3
Nonresidential structures 3

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Percent change of number of rigs in use, seasonally adjusted.
3. Based on 1992 chain-weighted data; percent change, annual rate.
n.a. Not available.

II-21

Business Fixed Investment
Available indicators
investment

is continuing to grow at a healthy pace in the first

led by another large

quarter,

business fixed

suggest that real

gain in business purchases of

computers and by a further expansion of nonresidential construction
activity.
After large

increases at the end of

percent in January.

nondefense capital

goods fell

transportation and

information technology,

2.3

percent in January,

2.5

1996, nominal

shipments of
Outside of

shipments fell

and bookings were little changed.

Both

shipments and orders for these goods have been fluctuating around a
fairly stable level for the
In the office and

past year.

computing equipment component, nominal

shipments held at their high December
continued to
and the

businesses have

seek efficiency gains through advances

in automation,

reduced operating costs of the latest generation of servers

running Windows NT has
the

level;

steep

sparked a new wave of system upgrades.

price declines in this sector, the

to another large

Given

January reading points

increase in real spending on office and computing

equipment.
Shipments
the

of communications equipment fell substantially over

December-January period after posting large

Bookings

gains in

tend to be lumpy for the diverse products

1996.

grouped in this

category, but of late they have been even more volatile than usual.
Nonetheless,

underlying the month-to-month swings seems to be an

ongoing expansion of investment
by technological change.
Internet

in communications

equipment driven

For example, increased usage of the

is boosting capital spending on telecommunications

equipment, as

local phone

overloaded and

lines in some regions have become

on-line providers

struggle to meet

rising demand--

American Online being the most highly publicized case.
many states are

proceeding with telecommunications deregulation in

spite of the delays in implementation of the
Reform Act at the federal level.
developments. AT&T has

its entry into local

Telecommunications

Perhaps as a response to these

announced plans to almost double capital

spending on its network this year--to
phone markets.

multiyear, multiple-satellite
the demand for

In addition,

$9 billion--in anticipation of
In addition, a series of

orders in

satellites is strong.

recent months suggests that

II-22

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

Jan.

Orders

Shipments

1994

1995

1996

Communications Equipment
Billions of dollars

,'
It
I

I
1

F
-l

Jan.

1996

1995

1994

Other Equipment (Excluding Aircraft, Computing, and Communications Equipment)
Billions of dollars
r
r
r
I'
r
Irr
I
r
r

I'
I r
r
I
r
I
r

rl
r*

I
r
L

Jan.

1
I
1
1
r

r
r

r'
r
\r
~

r
,I
I

I
1994

1995

1996

II-23

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

1980

Index, Dec. 1982 = 100, ratio scale

1982

1984

1986

1988

Office

1984

1990

1992

1996

Other Commercial

1986

1988

1990

1992

1994

1996

1984

1986

1988

1990

IIlI

1992

1994

1996

1992

1994

1996

institutional

Industrial

1984

1994

1988

1990

1992

1994

1996

1984

1986

1988

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

1990

II-24

Nonresidential Construction Indicators
CB Commercial Vacancy Rates
Percent

Square footage available

FSre
Suburban office

Downtown office

SI
1990

1991

1993

1992

1994

1 10
1I997

1996

National Real Estate Price Index *
Percent

1986

1988

1990

1992

1994

1996

* Data are semiannual from 1986 to 1991 and quarterly from 1992 to present.

FDIC Survey

Diffusion index
60

F"In

general, how would you characterize the commercial real estate market?"
50
Q1
40

1991

1992

1993

1994

((percent reporting tight supply - percent reporting excess supply)/2) + 50

1995

0
19 97

II-25

Business purchases of motor vehicles have changed little, on
balance, in recent months.

Fleet sales of autos increased sharply

in December and January, partially recovering from strike-depressed
levels in October and November.

In contrast, sales of light trucks

to businesses--which were less affected by the GM strike--fell back
in December and January after outsized gains in the prior two
months.

After bottoming out in November and December, sales of

medium and heavy trucks turned up in January and were essentially
unchanged in February.
Even after rising very rapidly in the fourth quarter, outlays
for nonresidential structures appear to be increasing further this
quarter.

Construction put-in-place rose 2.8 percent in January, to

a level 1.7 percent above the fourth-quarter average.

Following

December declines, spending for office, other commercial, and
lodging and miscellaneous buildings resumed upward trends.

Other

indicators of demand paint a picture of continuing growth over the
coming quarters.

Contracts for construction remain at a high level

and point, in particular, to increased construction of office
buildings.

Vacancy rates for office buildings stand near their

lowest levels since the mid-1980s, and the National Real Estate
Index indicates that transactions prices for office buildings have
been rising since early 1994.

The FDIC real estate survey of senior

examiners and asset managers also reports a very upbeat assessment
of the strength of the commercial market.
Business Inventories
Modest inventory investment in January, following stock
drawdowns in November and December, left business inventories lean
early in the first quarter.

For most manufacturing industries and

trade groupings, inventory-sales ratios in January were near the low
end of their recent ranges.

On the whole, business establishments

appear to have some room for restocking in coming months.
Manufacturers' stocks were virtually unchanged in January.
Among industries producing capital goods, the sizable buildup in
inventories of aircraft and parts that began more than a year ago
continued;

stocks of several types of industrial machinery also

expanded.

In contrast, inventories of computing and office

equipment declined further in January (in book value terms),
ninth monthly decline during the past twelve months.

the

Stocks of

telecommunications equipment and construction machinery were little
changed.

In the consumer goods sector, producers of household

II-26

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1996
Q2

1996
Q4

Nov.

1997
Dec.

Jan.

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

13.2

36.4

13.2

-4.1

-14.1

16.4

6.0
-6.2
-10.7
-.2
11.3
7.6
8.2
3.5
4.6

22.0
11.3
8.6
.6
-9.2
-6.1
34.3
17.5
16.8

19.5
4.9
.5
1.2
4.6
6.6
3.8
-4.2
7.9

14.7
14.8
8.3
1.9
1.9
.8
-20.9
-20.0
-.9

-7.3
-17.4
-16.0
-.4
2.1
12.3
1.2
3.3
-2.2

13.4
2.7
-8.4
-9.7
32.3
20.6
-18.6
-8.8
-9.9

SELECTED INVENTORY-SALES RATIOS
(Months' supply, based on Census book-value data, seasonally adjusted)
Cyclical
reference points

Range over
preceding 12 months
January

1990-91
High
Manufacturing and trade
Less wholesale and retail
motor vehicles

1994-95
Low

High

Low

1997

1.58

1.40

1.44

1.39

1.37

1.55

1.37

1.41

1.35

1.34

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

1.75
2.08
2.48
2.08
2.94
.97
5.85
3.09
1.71
.94
2.83
1.96

1.39
1.45
1.88
1.52
1.59
.53
4.42
2.33
1.44
.88
1.99
1.70

1.46
1.62
1.94
1.60
1.87
.67
5.95
2.58
1.66
.88
2.18
1.89

1.38
1.56
1.77
1.46
1.65
.55
4.89
2.38
1.49
.76
1.93
1.67

1.37
1.54
1.79
1.52
1.73
.55
5.27
2.45
1.51
.79
1.69
1.69

Merchant wholesalers
Less motor vehicles
Durable goods
Nondurable goods

1.36
1.31
1.83
.96

1.28
1.26
1.54
.98

1.33
1.30
1.63
1.01

1.26
1.23
1.56
.95

1.27
1.24
1.57
.95

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

1.61
1.48
2.21
2.43
2.56
2.44

1.46
1.42
1.60
2.21
2.47
2.24

1.53
1.45
1.77
2.31
2.54
2.33

1.48
1.41
1.64
2.20
2.35
2.23

1.48
1.41
1.68
2.13
2.44
2.18

II-27

durables, nondurable home goods, and apparel all reported small
stock accumulations in January following little net change over the
fourth quarter.

However, inventories held by tobacco producers

posted an unusually large runoff in January, with the bulk of the
decline in stocks of materials and supplies.

Given the brisk pace

of shipments of finished tobacco in December and January and the
sizable decline in the inventory-shipments ratio for the industry,
the January runoff did not appear to have stemmed from a serious
overhang.

On the whole, manufacturers' inventories were

reasonably well balanced in January; the inventory-shipments ratio
for all manufacturing was at its lowest point in recent years.
In contrast to manufacturing, wholesale inventories expanded
substantially in January--up at an annual rate of $32 billion in
book-value terms--after generally moderate inventory buildups during
the fourth quarter.

While stocks of motor vehicles and accessories

accounted for about one-third of the January accumulation, nonvehicle stocks also showed widespread increases.

In particular,

inventories at wholesale apparel outlets expanded further in January
after increasing substantially in December.

In both months,

however, the accumulations were accompanied by very strong
shipments, and the inventory-sales ratio for apparel distributors
dropped to its lowest level in the current expansion.

Most types of

wholesale establishments appear to have had no serious inventory
imbalances.
Further downstream, non-auto retail inventories fell at a
$10 billion annual rate in January.

Large drawdowns occurred at

general merchandise stores, where sales surged in January, and at
outlets selling other durable goods.

In contrast, stores selling

nondurables other than general merchandise, food, and apparel saw a
second large monthly accumulation of inventories.

Overall, the

inventory-sales ratio for non-auto retailers dropped to the low end
of the range of the preceding year.

However, at general

merchandisers, stocks fell to a twenty-year low relative to sales.
6. Output fell sharply in the tobacco industry in January, and
the precipitous drop in inventories of materials and supplies was
In addition, some U.S. tobacco
consistent with that decline.
manufacturers are reported to be taking steps to shift their
production operations overseas--partly to take advantage of the
lower labor costs and partly to escape the increasingly prevalent
anti-smoking sentiment in this country. Thus, a portion of the
January drawdown in materials inventories in the tobacco industry
may also reflect the initial downshift in tobacco manufacturing in
the United States as part of the industry's new global strategy.

II-28

Inventory-Sales Ratios, by Major Sector
Manufacturing

(Book value)

Ratio
2.2

1.95

Total

1.7

1.45
Excluding aircraft and parts
1.2
1980

1982

1984

1986

1988

1990

1992

1994

1996

Wholesale Excluding Motor Vehicles
Ratio
1.5

1.4

1.3

1.2

1.1

1
1980

1982

1984

1986

1988

1990

1992

1994

1996

Retail
Ratio

1.7

1.6

1.5

1.4

1980

1982

1984

1986

1988

1990

1992

1994

1996

II-29

Given the continued strength in sales at general merchandise stores
in February, some

rebuilding of stocks in coming months seems

likely.
Federal Sector
Real federal expenditures on consumption and gross investment,
as measured in the national income and product accounts, rose about
1-1/2 percent from the fourth quarter of 1995 to the fourth quarter
The rise was mostly an artifact of events in late 1995-

of 1996.

government shutdowns and restrictive continuing resolutions for
programs covered by unpassed appropriations bills--that held real
purchases to especially low levels.

The underlying trend of

federal consumption and investment expenditures probably is better
represented by the 2-1/2 percent average annual rate of decline from
the fourth quarter of 1994 to the final quarter of 1996.

Reductions

have occurred in both real defense purchases and real nondefense
purchases.
For the first four months of fiscal year 1997, the federal
unified budget deficit, adjusted for payment timing shifts and
excluding deposit insurance and spectrum auction proceeds, was
$2 billion higher than last year--a 4-1/4 percent increase.
Relative to last year, both receipts and adjusted outlays were up
about 6 percent.

One factor contributing to the rise in outlays was

increased spending on health programs, with Medicare spending
10 percent higher and Medicaid spending 11 percent higher than last
year.

While the growth in Medicare is in line with recent trends,

Medicaid growth far exceeds the 3 percent rate observed last year.
The rebound in Medicaid growth appears to indicate that last year's
slowdown in outlays for that program was only a temporary
phenomenon.

Other increases in outlays included a 4 percent rise in

adjusted defense spending and a 13 percent surge in outlays for
nondefense items other than net interest and social insurance
programs

(social security, health, income security).

In the first

7. The Bureau of Economic Analysis's $3.7 billion downward
revision from its advance estimate to its preliminary estimate of
real federal purchases in the fourth quarter of 1996 primarily
reflected the incorporation of additional data on defense purchases.
New detail from the Monthly Treasury Statement for December led the
BEA to reallocate the composition of total defense purchases so that
defense consumption was decreased and defense investment was
increased, although total defense purchases were unchanged. Also,
additional Department of Defense procurement and delivery data
caused BEA to revise down defense investment, thus reducing total
The new data included information indicating
defense purchases.
that one fewer C17 airplane than expected had been delivered.

II-30
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars except as noted)

Fiscal year to date totals
January
Dollar
change

1996

1997

1996

1997

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

123.5
-1.2
.0
124.7

137.4
-.4
.0
137.8

503.4
-3.9
.0
507.3

542.7
-6.9
-3.6
553.2

39.3
-3.0
-3.6
45.8

Receipts

143.0

150.7

467.1

496.7

29.6

-19.5

-13.4

36.3

46.0

Deficit

(+)

Percent
change

9.7

7.8
75.5
N.A.
9.0

26.6

Adjusted for payment timing shifts 1
and excluding DI and spectrum auction

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

131.8
22.1
20.8
28.7
15.5
6.7
1.9
19.3
16.8

137.8
22.1
21.1
30.4
16.3
8.3
2.5
19.6
17.6

514.4
86.8
80.3
113.2
57.0
28.8
8.4
71.5

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

143.0
86.2
55.4
31.2
.3

150.7
87.2

Deficit (+)

-11.2

42.2

5.2
9.5

55.4

33.6
1.8
48.8
4.8
9.9

-12.9

68.4

546.0
90.3
82.7
118.7
62.5
32.0
9.8
72.5
77.4

31.6
3.5
2.4
5.6
5.6
3.2
1.4
1.0
9.0

6.1
4.0
3.0
4.9
9.8
11.1
16.7
1.4
13.2

467.1
230.7
192.8
42.3
4.4
150.3
47.1
39.1

496.7
246.5
204.0
48.8
6.2
165.5
47.0
37.7

29.6
15.8
11.2
6.5
1.9
15.3

6.3
6.8
5.8
15.4
43.3
10.2
-.2
-3.5

47.2

-. 1

-1.4

49.3

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

II-31

four months of 1996,

spending out of many defense and nondefense

accounts was depressed by restrictive continuing resolutions.
The President's budget for fiscal 1998, which was released in
early February, incorporates proposals broadly similar to those he
offered last year.

According to OMB scoring, the President's

proposals would result in a narrowing of the deficit over the next
several years and would yield a $17

billion surplus in 2002.

The

proposals would reduce net spending--particularly discretionary
spending and Medicare--and step up the pace of spectrum auctions.
The President's plan also includes a set of tax provisions that on
net lead to a small revenue loss.

Measured relative to the OMB's

current-services baseline, the President's plan produces
$254 billion in aggregate deficit reduction

(including associated

lower debt-service payments) over six years, with about threequarters of the savings scheduled to occur in fiscal 2001 and 2002.
According to CBO scoring, however, the deficit under the
President's "basic" budget plan would be $69 billion in 2002,
$86 billion more than estimated by the OMB.

Differences in economic

assumptions underlying the baseline budget projections account for
almost two-thirds of the discrepancy between the OMB and CBO
projections.

The remaining one-third is due to differences in the

scoring of the President's policies; the largest differences are for
spectrum sales in 2002 and the President's Medicare proposals.
In anticipation of the CBO's less favorable assessment, the
President proposed a trigger mechanism that would be used if the
budget seems unlikely to reach balance in fiscal 2002.
would invoke a set of "alternative policies,"

The trigger

including maintaining

the scheduled suspension of the tax cuts after 2000

(raising an

additional $24 billion in 2002) and imposing additional spending
cuts in fiscal years 2001 and 2002
in 2002).

(reducing spending by $45 billion

In this scenario, essentially all of the aggregate 1998-

2002 deficit reduction would occur in the last two fiscal years.
The aviation excise taxes that had expired on December 31,
1996, were reinstated on March 7.

These taxes, which were included

in the President's proposals, are expected to raise a total of
$2.7 billion through the remainder of fiscal 1997.
State and Local Governments
State and local spending trends remained firm in early 1997.
Employment has expanded at a solid clip, rising 29,000 in January
and 49.000 in February; however, the BLS suspects that some of the

II-32

OMB ESTIMATES OF THE PRESIDENT'S BUDGET PROPOSALS
(Fiscal years, billions of dollars)

1. Current services deficit 1
2.

Cuts resulting from FY98 cap 2
(including debt service)

3. Capped baseline deficit 3
4.

Basic policies
(including debt service)

5. Resulting deficit

1997

1998

1999

2000

2001

2002

128

120

140

128

109

101

-5

-13

-10

128

114

127

118

-2

-10

-30

-63

126

121

117

-108
-17

1. Assumes that discretionary spending grows with inflation from
the 1997 level on. Based on economic projections that include the
fiscal dividend.
2. Reductions in 1998 necessary to meet OBRA cap; savings
thereafter from lower discretionary spending base.
3. Assumes that discretionary spending is equal to the OBRA cap in
fiscal 1998 and grows with inflation thereafter.

CB0 ESTIMATES OF THE PRESIDENT'S BUDGET PROPOSALS
(Fiscal years, billions of dollars)
1997

1998

1999

2000

2001

2002

115

121

145

159

142

153

-2

-24

-47

-84

3. Deficit with basic policies

116

145

142

135

Alternative policies 2

-17

-69

116

145

142

137

1. Baseline deficit 1
2.

Basic policies

5. Resulting deficit 2

1. Assumes that discretionary spending is equal to the OBRA cap in
fiscal 1998 and grows with inflation thereafter. Based on economic
projections that include the fiscal dividend.
2. Deficit effects of the budget's trigger mechanism. The $2
billion increase in the deficit in 2000 reflects a revenue loss from
timing effects in anticipation of the sunsetting of tax reductions.

II-33

State and Local Governments
Employment Growth by State
Dec. 1995 to Dec. 1996

U less than 0% I

0% to 2%

] more than 2%

Growth in Medicaid Grants
Percent
Federal fiscal year, NIPA basis

1996
1993
1994
1995
1990
1991
1992
1988
1989
1986
1987
Note. 1997 data are for the first four months of the fiscal year compared with the same period of the previous year.

1985

1997

II-34

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

Feb.
1997

1996

1996
Q4

-Annual rate-

Jan.

Feb.

-Monthly rate-

CPI
All items

(100.0) 1

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

1.0

(23.4)

New vehicles (5.0)
Used cars (1.3)
Apparel (4.8)
House furnishings (3.3)
Other Commodities (9.0)
Services

3.8
7.8
2.5

(53.7)

Shelter (28.2)
Medical care (6.1)
Auto finance charges (0.6)
Other Services (18.8)

5.6
-4.0
2.4

4.7
10.2
2.7

-0.3
0.8
0.1

0.4

1.4

0.1

2.0
2.7
0.1
0.3
2.7

1.3
-2.0
0.3
-0.2
1.9

2.9
-2.5
-3.8
-0.5
1.8

0.9
-1.8
2.1
0.1
2.2

-0.2
0.1
0.5
-0.4
0.1

3.4

3.1

3.6

3.1

0.1

3.4
4.1
-6.9
3.5

3.1
3.0
1.4
3.2

3.3
3.1
9.4
4.3

2.7
2.9
-3.0
3.9

0.3
0.2
0.1
-0-2

3.8

-0.3

-0.4

-1.0
-0.2

-0.3
-1.2

PPI
Finished goods
Finished
Finished
Finished
and

(100.0) 2

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

4.7
18.1

Consumer goods (38.0)
Capital equipment (23.6)
Intermediate materials

(100.0) 3

Intermediate materials
less food and energy
Crude materials

Relative
Relative
Relative
Relative

1.2

0.4

-0.1

(100.0) 4

importance
importance
importance
importance

-0.1

0.5
.0

.0
.0

-0.1
-0.1

0.2

-0.1

1.3

-0.5

0.1

(81.2)

10.5
18.8
-8.3

Crude food materials (38.9)
Crude energy (41.1)
Crude materials less
food and energy (20.0)

1.
2.
3.
4.

1.1

0.2

weight
weight
weight
weight

for
for
for
for

6.3

1.8

-3.7
24.2
-2.5

10.2
-2.6
-8.1

1.8
28.0
56.0
0.8

5.2
-1.0
12.9
2.0

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

-5.9
-1.9
-12.4
1.0

II-35

strength may be related to seasonal adjustment difficulties.
Construction outlays were up a bit further in January:

during the

fourth quarter, real spending on structures, on a NIPA basis, rose
In January, a large drop in

at a rapid 11.6 percent annual rate.

construction of sewer systems was more than offset by increases in
school and highway building.
The fiscal position of most states continues to look quite
strong.

More than half the states are reporting that revenues have

been coming in ahead of expectations;

few are requesting

supplemental appropriations to cover overruns, and about a third are
considering tax cuts.

Nonetheless, the budgetary picture in a small

number of states remains tight.

In particular, three states--Idaho,

Hawaii, and Tennessee--report that revenues are below expectations
so far this year.

More generally, with Medicaid costs having picked

up, many analysts caution that cost increases for health care may
once again become a budget problem for the states.
Prices and Labor Costs
Recent readings for core consumer prices extended the modest
increases seen over the past year.

For items other than food and

energy, the CPI rose 0.2 percent in February after increasing just
0.1 percent in January.

During the twelve months ended in February,

the core CPI increased 2.5 percent, down from the 2.9 percent pace
recorded in the year-earlier period.

Within the core, the

deceleration was most noticeable in the goods category, while prices
of services rose only a bit less than over the previous twelve
months.

Among goods, prices decelerated for motor vehicles, house

furnishings, and a range of other items such as personal care goods.
Because many of these products are produced outside the United
States, their prices can be heavily influenced by non-oil import
prices, which have decelerated considerably over the past several
quarters as the dollar has strengthened.

This constellation of

developments suggests that the downswing in import prices helped
restrain core consumer prices in the past year.
Consumer energy prices rose 0.3 percent further last month, a
pace considerably more moderate than in the previous several months.
Crude-oil prices have largely reversed last year's run-up, relieving
much of the pressure on gasoline and heating oil prices.

With mild

weather in many parts of the country as the heating season draws to
8. During the four quarters of 1996, non-oil import prices
dropped 2.8 percent--a notable turnaround from the 0.8 percent
increase for 1995 and the 2.8 percent advance for 1994.

II-36

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

Apr

May

June

July

Aug

Sep

Oct

Nov

Dec

Jan

Feb

Note. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal.

Monthly Average Prices of West Texas Intermediate
Month

Posted

Spot

April
May
June
July
August
September
October
November
December
January
February
March 1

22.10
20.12
19.19
20.11
20.75
22.94
23.78
22.40
23.30
23.89
21.08
19.33

23.57
21.26
20.45
21.32
21.96
23.99
24.90
23.71
25.39
25.17
22.21
20.62

1. Through March 13, 1997.

Mar

II-37

a close, heating oil prices dropped 1.9 percent further in February.
Although retail gasoline prices were unchanged in February,
developments at earlier stages of processing suggest that the bad
news on gasoline prices is now receding in the rear-view mirror.
Similarly, although natural gas prices rose further in February,
lower wellhead prices will likely ease pressure on prices paid by
consumers.

However, consumer electricity prices were up 0.5 percent

in February after subsiding over the preceding four months.
After a couple of months of favorable news,

consumer food

prices turned up 0.3 percent in February as the January freeze in
Florida began to push up prices of fresh fruits and vegetables.
Increases in the prices of other food items appear largely to have
returned to a modest trend, with a couple of exceptions.

The price

of raw coffee beans has surged about 50 percent since the end of
December; inventories have been low for some time, and weather and
other factors have caused delays in getting the harvest to market.
Even with futures prices pointing down sharply over the summer,
substantial increases in retail coffee prices appear to be in train
for the next few months.

In a more favorable development,

McDonald's recently announced that it will cut the price of Big Macs
to 55 cents beginning April 25 and will establish discounts on some
breakfast items at the beginning of April.

Because the company's

domestic sales amounted to an estimated 6-1/2 percent of total food
purchased in restaurants last year, these hefty price cuts could
show through to the CPI for overall food.
For items other than food and energy, prices were up
0.2 percent in February.

Airfares dropped further, likely a result

of the sale initiated by American Airlines after the pilots' strike
was averted in mid-February.10 This month, airfares may be
boosted by the reinstatement of the ticket tax on March 7.

However,

while these excise taxes will likely be passed on to consumers in
the long run, the short-run effect on airfares may be muted because
prices for airline tickets are constantly changing in response to a
host of other factors.

Observers have noted that not all airline

9. A very rough estimate by the staff suggests that these price
cuts could shave roughly 0.1 percentage point off the increase in
the food price index this year.
10. Because airfares are sampled only every other month in some
cities, the expiration of the airline ticket tax at the end of last
year would be picked up in these cities only in February. Thus, the
expiration of this tax may also have contributed to the February
decline in airfares.

II-38

SPOT PRICES OF SELECTED COMMODITIES

-------------Percent changel---------------

Current
price

($)

1995

1996

-3.5
-6.6
-12.9

-18.3
-13.7
-9.8

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

1.170
136.500
.730

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

346.300
5.150

1.7
7.2

Forest products
Lumber (m. bdft.)
Plywood (m. sqft.)

376.000
335.000

Dec. 31
to
Jan. 282

Jan. 282
to
Mar. 18

8.4
14.2
6.2

-4.9
-1.8
.3

-5.1
-8.8

-4.2

-14.4
-6.1

66.0
1.6

.7
-3.2

-10.0
9.8

19.070
.630
.564

16.8
7.7
22.6

25.9

-4.7
-2.0
-5.2

-15.4
-4.8
-15.5

68.000

.0
34.1

.543

-5.7
27.5
10.7

-1.5
3.6
-4.8

4.6
-15. 8
-8.8

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

2.875
4.543
8.125
.707

57.4
24.0
29.0
-8.1

-29.5
-16.6
-7.1
-10.9

Other foodstuffs
Coffee (lb.)

2.050

-39.1

43.2

108.500
100.300
244.340
340.750

-1.7
-1.8
3.3
-3.5

Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)
Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)

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

48.000

1. Changes, if not specified, are f rom the
the last week of the period indicated.
2.
Week of the January Greenbook.

24.3

16.1

12.4

Memo:
Year
earlier
to date

4.2

4.7
.9
7.0
.9

15.1

-2. 1
3.5

-12.4
-6.8
31.0
14.3
-5.9
3.2
-26.2
13,3
-3.0
6.3

7.7
-1.0
10.4
-1.0

-25.9
-15.6
16.3
-13.2

31.0

63.0

-3.7
-7.7
-2.6
1.0
last week of the preceding year to

-1.4
-1.5
-2.2
3.2

II-39

ticket prices fell when the taxes expired at the end of last year;
some airlines increased their fares when the tax cut expired.
Similarly, many airlines are reported to have lowered their base
(pre-tax) ticket prices following the tax reinstatement so as to
reduce the impact on consumers.

Outside of airfares, most items

registered small price increases last month. 1 1
At the producer level, the recent news on finished goods prices
has been quite favorable.

The PPI for finished goods declined

0.4 percent in February; the index for food continued a string of
monthly declines, and lower prices for crude oil fed through to a
1.2 percent decline in the index for finished energy items.

Prices

of finished goods excluding food and energy ticked down 0.1

percent

last month, with prices decreasing for both consumer and capital
goods.

Among consumer goods, price declines were widespread across

a range of durable and nondurable items.

Within the capital goods

component, computer prices posted an extraordinary plunge of
5.2 percent at a monthly rate, the largest drop since the series was
added to the PPI in 1991.

Over the twelve months ended in February,

the core PPI rose only 0.5 percent, down from a 2.1 percent increase
in the prior twelve-month period.

Although the producer price index

covers only domestically produced goods, prices of some of those
items likely have been restrained in the past year by competitively
priced imports.
Although broad measures of prices remain relatively tame for
the time being, some prices at earlier stages of processing have
moved up, perhaps reflecting scattered capacity pressures.

balance, metals prices have trended up since the end of last year,
with the Journal of Commerce metals index rising an additional
2.7 percent since the last Greenbook.

Price increases have been

sharpest for steel scrap, although copper and aluminum prices have
risen as well.

Moreover, the purchasing managers' index of prices

paid moved up in February; more respondents reported paying higher
prices for metals as well as some other items.

Among other

industrial materials, plywood prices have moved higher since the
last Greenbook; lumber prices have eased recently but are still up
significantly from their average last year.

Considering basic

11. With the release of the January CPI, the BLS initiated new
procedures for measuring hospital prices, moving in the direction of
On the assumption that
the treatment-path approach used in the PPI.
the new CPI for hospital services moves similarly to its PPI
counterpart, this shift in methodology should shave about
0.05 percentage point from the change in the CPI over 1997.

II-40

Commodity Price Measures
Total

Journal of Commerce Index

112

- 111

Ratio scale, index. 1990=100

108
IL
Jan.

I I
Feb.
1997

I I
Mar.

Metals

S-

I
Jan.

Feb.
1997

105

103
102

Mar.

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

KR-CRB Industrials

1985

1986

1987

1988

1989

1990

1991

1992

1993

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

KR-CRB Futures

,
1985

1986

1987

,
1988

'
1989

1990

1991

1992

1993

1994

1995

'
1996

1997

1 230

Jan.

Feb.
1997

Mar.

190

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

II-41

materials prices over a longer horizon, the PPI for crude materials
other than food and energy has continued to accelerate; this index
has increased 3.2 percent over the past six months, compared with a
decline of 5.6 percent over the preceding half-year period.
Despite assorted factors that have buffeted consumer prices,
inflation expectations have continued to show no signs of picking
up.

Indeed, the mean expected price increase over the next year, as

measured by the Michigan SRC survey, is now running lower than it
On the other hand, median inflation
12
expectations have been little changed.
Similarly, other survey

was six months ago.

measures of inflation expectations--over both short and long
horizons--have remained flat or have edged off in recent months.
Turning to labor markets, employers' hourly wage costs have
continued their moderate acceleration despite only small increases
in January and February.

Over the twelve months ended in February,

average hourly earnings of production or nonsupervisory workers on
nonagricultural payrolls increased 3.8 percent, up from 3.0 percent
and 2.6 percent during the twelve-month periods ended in February
1996 and

1995,

respectively.

Compensation per hour in the nonfarm

business sector--which includes estimates of nonwage benefit costs
as well as wages and salaries--was up 3.6 percent at an annual rate
in the fourth quarter.

On a fourth-quarter over fourth-quarter

basis, hourly compensation increased 3.6 percent in 1996, about the
same rate of increase as in 1995.13

12. In recent months, the decline in mean inflation expectations
relative to the median reflects drops in the inflation forecasts of
survey respondents at both the upper and lower ends of the
distribution.
13. In this environment of tightening labor markets, American
Airlines and its pilots continue to negotiate an end to their
In addition to differences in wage demands--the pilots
dispute.
were demanding an 11.5 percent increase over four years while the
airline was offering 5 percent--the major point of contention is the
company's proposal to have lower-paid pilots from a different union
fly smaller jets on routes serviced by its American Eagle
subsidiary. The two sides are in the middle of a sixty-day coolingoff period imposed by the President, which ends on April 16: a
three-member "emergency board" is mediating the dispute. Were the
pilots to strike at the end of the cooling-off period, 75,000 to
90,000 American Airlines workers would likely be put on leave
without pay; a strike could also have many ripple effects on
employment in regions served predominantly by American and at
American's hubs.

II-42

SURVEYS OF (CPI) INFLATION EXPECTATIONS
(Percent)

Actual
inflation I

University of Michigan
(1-year)
(1-year)
Mean 2
Median 3

Conference
Board
(1-year)

Professional
forecasters
(10-year)4

1995-Q1
Q2
Q3
Q4

2.8
3.1
2.6
2.7

4.1
4.1
3.9
3.6

3.1
3.1
2.9
2.8

4.2
4.2
4.0
3.9

3.3
3.4
3.2
3.0

1996-Q1

2.7

3.9

2.9

4.1

3.0

1996-Apr.
May
Jun

2.9
2.9
2.8

4.5
4.9
4.2

3.0
3.0
2.9

4.2
4.5
4.3

3.0

Jul
Aug.
Sept.

3.0
2.9
3.0

4.3
4.1
4.3

2.9
3.0
3.2

4.2
4.3
4.4

3.0

Oct.
Nov.
Dec.

3.0
3.3
3.3

4.2
4.0
3.9

3.0
3.0
3.0

4.3
4.3
4.1

3.0

1997-Jan.
Feb.
Mar.

3.0

4.1
3.8
3.3

3.0
3.0
2.9

4.3
4.3
3.0

1. CPI; percent change from the same period in the preceding year.
2. Average increase for responses to the question: By about what percent do you
expect prices (CPI) to go up, on the average, during the next 12 months?
3. Median increase for responses to the question above.
4. Compiled by the Federal Reserve Bank of Philadelphia.

II-43

AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)
Percent change
to Feb. 1997

Twelve-month
percent changel
Feb.
1995
-

Feb.
1997

Feb.
1996
-

Aug.
1996

-Annual rate- -

1997

Nov.
1996

Jan.

-Monthly rate-

Feb.

2.6

3.0

3.8

3.7

3.4

Manufacturing

2.2

2.5

3.6

2.0

2.5

-. 1

Contract construction

2.7

1.8

3.2

3.3

5.0

Transportation and
public utilities

1.6

2.8

1.5

1.1

1.2

-1.1

Finance, insurance,
and real estate

3.7

4.2

3.7

3.9

2.5

-. 4

1.1

Retail trade

2.4

3.1

4.6

4.8

3.5

Wholesale trade

2.8

4.6

5.2

5.0

-. 6

1.0

Services

2.9

3.3

4.4

5.3

3.7

-.2

Total private nonfarm

Uses not seasonally adjusted data.

LABOR PRODUCTIVITY AND COSTS
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1996
Ql

1995:04
to
1996:Q4

19951

19961

-. 1
-. 1
3.7

1.2
.9
4.2

2.1
1.9
4.3

1.2
.6
2.1

.3
.0
5.9

1.2
1-1
4.4

1.2
.9
4.2

1.5

1.3

1.5

4.1

3.7
3.7
4.2

3.7
3.6
3.4

3.2
3.4
.4

4.3
3.9
5.8

3.8
3.3
4.6

3.7
3.6
2.8

3.7
3.6
3.4

3.5

2.7

3.9

4.1

3.8
3.7
.5

2.5
2.7
-. 8

1.1
1.5
-3.7

3.1
3.3
3.6

3.4
3.3
-1.2

1.9

1.5

2.4

Output per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial
2
corporations
Compensation per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial
2
corporations
Unit labor costs
Total business
Nonfarm business
Manufacturing
Nonfinancial
2
corporations

2.5
2.5
-1.6
ND

2.5
2.7
-. 8
ND

1. Changes are from fourth quarter of preceding year to fourth quarter of year sho wn.
2. Nonfinancial corporate sector includes all corporations doing business in the
United States except banks, stock and commodity brokers, and finance and insurance
companies: the sector accounts for about two-thirds of business employment.

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

Selected Financial Market Quotations
1996
Instrument

Feb.

1997
July

FOMC,*

low

high

Feb. 5

Mar. 18

5.15

5.39

5.33

4.76
4.67
4.55

5.21
5.40
5.64

5,27
5.12

Change to Mar. 18, from:
Feb.

July

FOMC,*

low

high

Feb. 5

5.27

.12

-. 12

-.06

4.97
5.08
5.25

5.11
5.26
5.45

.35
.59
.90

-. 10
-. 14
-. 19

.14
.18
.20

5.50
5.59

5.43
5.44

5.47
5.52

.20
.40

-. 03
-.07

.04
.08

5,21
5.12
4.99

5.44
5.59
5.83

5.32
5.40
5.50

5.40
5.52
5.65

.19
.40
.66

-.04
-. 07
-. 18

.08
.12
-15

5.13
5.13

5.38
5.56

5.31
5.41

5.38
5.50

.25
.37

.00
-.06

.07
.09

8.25

.00

4.98
5.58
6.02

6.62
7.06
7.19

6.02
6.45
6.72

6.38
6.72
6.96

1.40
1.14
.94

-.24
-.34
-.23

.36
.27
.24

U.S. Treasury indexed bond

n.a.

3.33

3.45

n.a.

.12

Municipal revenue (Bond Buyer) 5

5.67

6.24

6.02

.35

-.22

.00

Corporate-A utility, recently offered

7.18

8.23

7.92

8.11

.93

-. 12

.19

High-yield corporate

9.57

10.36

9.71

9.59

.02

-.77

-. 12

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

6.94
5.19

8.42
6.01

7.88
5.55

7.84
5.61

.90
.42

-.58
-.40

-.04
.06

Short-term rates
Federal fundsZ
Treasury bills
3-month
6-month
1-year

Commercial paper
1-month
3-month
Large negotiable CDs'
I-month
3-month
6-month
Eurodollar deposits
1-month
3-month
Bank prime rate
Intermediate- and Long-term Rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year

Record high

Stock exchange index
Dow-Jones Industrial
S&P 500 Composite
NASDAQ (OTC)
Russell 2000

1996

1997

July

FOMC,*

Percentage change to Mar. 18, from:
Record

July

FOMC,*

Level

Date

low

Feb. 5

Mar, 18

high

low

Feb. 5

7085.16

3/11/97

5346.55

6833.48

6896.56

-2.66

28.99

.92

816.29

2/18/97

626.65

789.26

789.66

-3.26

26.01

.05

1388.06

1/22/97

1042.37

1373.75

1269.34

-8.55

21.77

-7.60

370.65

1/22/97

307.78

368.32

354.93

-.68

19.61

-3.64

-.98
23.26
7517.90
-3.52
7592.64
2/18/97
6099.34
7792.57
Wilshire
1. One-day quotes except as note<
2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date for maintenance period
ending March 26, 1997.
3. Secondary market.
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6. Merrill Lynch Master II high-yield bond index composite.
7. Quotes for week ending Friday previous to date shown.
* Figures cited are as of the close on February 4.

Selected Financial Market Data
Selected Short-Term Interest Rates

Percent

Statement Week Averages

Federal Funds*
8

Daily

6 -

Federal funds

Jan. 24

Discount rate

, l

Percent
8

Mar. 18

'Vertical lines indicate end of reserve perWd.

3-month Treasury bills

3-Month T-Bills
6.0 -

Percent
6. 0

Daily

Feb. 4

5.5

3
1

I I

Il II
1996

I I

I 1

r II

II
1997

Selected Long-Term Interest Rates

5.0

4.5

- 4.5

4.0

Jan. 24

Percent

-i

Weekly

Friday

Mar. 18

Percent

-5.5

Feb.4

Corporate bonds
A utility
recently offered

Corporate

Treasury bonds
30-year constant maturity

8
•

%e.

30-Yr. Treasury'

.. ..

Municipal

6
Municipal bonds
Bond Buyer Revenue
(Thursday)

5
,

[

* *--.......*

1996

r
•

i I

1997

51 I

Jan. 24

Mar. 18

"Daily freauency.

Selected Stock Indexes
1400
i

Weekly

NASDAQ
(left scale)

1300

P
.

1200

* .
*%*

1100
1320

1000
S&P 500
(right scale)

900

1280
800
700

1240 LL
1996
BAMMA:kmd

1997

Jan.24

760

Mar. 18

DOMESTIC FINANCIAL DEVELOPMENTS

Interest rates have increased since the February FOMC meeting,
responding to both economic news and the Chairman's Humphrey-Hawkins
testimony.

In the opening weeks of the intermeeting period, market

participants generally interpreted incoming data as implying subdued
inflation and reduced odds of Federal Reserve tightening (chart, top
panel).

However, rates rose markedly after the Humphrey-Hawkins

testimony, in which the Federal Reserve was seen as more concerned
about potential inflation and more willing to take preemptive action
to restrain it than markets had thought.

Against this background,

rates also increased after the March 13 report on retail sales,
which seemed to provide some rationale for a policy tightening, but
then eased slightly on the release of favorable February data for
producer prices.

On balance, Treasury bill rates have moved up 15

to 20 basis points, and longer-term yields 25 to 35 basis points.
Current quotes on short-term interest rate futures suggest that,
allowing for liquidity premiums, the market places the odds of a
25 basis point System tightening at about 50 percent in March and
roughly 70 percent by May (bottom panel).
With interest rates rising, stock prices flattened out or
turned down over the intermeeting period.

The S&P 500 index was

essentially unchanged, and the NASDAQ and Russell 2000 indexes fell
7-1/2 percent and 3-1/2 percent respectively.

Nevertheless, price-

earnings ratios remain generally quite high.
Private debt growth appears to have stepped up a bit in the
first quarter from its fourth-quarter pace.

Borrowing by

nonfinancial corporations, in particular, seems to have
strengthened.

Commercial paper issuance has turned positive on net,

C&I bank loans have grown briskly, and bond offerings have remained
close to the fourth-quarter average.

Meanwhile, preliminary data

suggest that household borrowing may have ticked up in the first
In contrast, government debt issuance weakened in the
quarter.
early part of the year, with federal debt growth slowing further and
state and local government debt flattening out.
Business Finance
Business activity in credit markets has been strong in the
first quarter.

Gross bond issuance by nonfinancial corporations in

January and February was close to the fourth-quarter pace (table).
The run-up in interest rates since December apparently damped sales

III-1

III-2

Selected Short-Term Futures Rates and Treasury Yields
Ten-Year Treasury Yield
Percent

Daily
FOMC

Jan.
Empl.

Jan. Jan.
Retail PPI,
Sales IP

Jan.
HumphreyHousing starts, Hawkins
Initial claims

Feb. Feb.
Retail PPI,
Sales IP

Jan.
Feb.
New home Empl.
sales

I
II
/

I
II
I

IlrI
I

3/4

2/13 2/14

2/7

2/4

II
I

Federal Funds Futures

3/7

3/13 3/14

Eurodollar Futures (3-Month)

Percent
-1

Percent

6.5

3/18/97

3/1 8/97
2/04.97
-"" 2/04/97

........

Mar
SMT:kmd

2/04/97

Jun
Apr
May
Contract months

Jul

6/97

I
9/97

I
12/97

I
3/98

Contract months

6/98

III-3

of investment-grade bonds, but offerings of speculative-grade bonds
have been brisk.

Fully a third of the nonfinancial bonds issued in

the first two months of the year were rated B or lower (lower left
panel).

Despite the heavy issuance of junk bonds, spreads between

their rates and Treasury yields have continued to narrow and are now
at their lowest point since data collection began in the mid-1980s.
The market has been supported by sizable flows into junk-bond mutual
funds, as investors appear to have less concern about credit risk.
Among the new investment-grade issues by nonfinancial companies
were a few 100-year bonds.

Although the yields on "century" bonds

are somewhat higher than other long-term yields, companies believe
that these bonds can lower their overall borrowing costs by raising
their profile among investors.

However, sales of these bonds may

soon come to a halt because of the President's proposal to eliminate
the tax deductibility of interest paid on bonds of such long
maturity.
The flattening of the yield curve in late 1996 encouraged
companies to pay down commercial paper by selling bonds, but the
recent backup in long rates has stemmed this practice.

As a

consequence, nonfinancial commercial paper outstanding has risen
moderately this quarter after contracting sharply in the fourth
quarter of last year (lower right panel).

Quality spreads on

commercial paper have been largely unaffected by the default of
Mercury Finance, a subprime auto lender.
Corporate credit quality remains quite good overall.

Moody's

downgraded slightly more nonfinancial debt in January and February
than it upgraded, but the largest downgrade (of $6 billion of JC
Penney bonds) was related to a merger that many analysts believe
will prove to be successful.

Moreover, possible upgrades exceed

downgrades on Moody's Watchlist, both by number and volume, and the
default rate on speculative-grade debt so far this year has trailed
last year's already low pace.

In contrast, business failures appear

to have picked up appreciably in December and January, although the
figures are preliminary and subject to possibly large revisions.

1. Another recent innovation in capital markets was the issuance
of inflation-indexed securities by several financial corporations
shortly after the first Treasury auction of indexed government debt.
However, these companies quickly swapped the debt with dealers, who
have been unable so far to find counterparties interested in bearing
the inflation risk.
Instead, the dealers have purchased inflationindexed Treasury bonds to hedge their positions.

III-4
GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS
(Billions of dollars; monthly rates, not seasonally adjusted)
1996

1997

Type of security

1995

1996

Dec.

Jan.

Feb.

All U.S. 1 corporations
Stocks
Bonds

47.7
6.1
41.6

58.5
10.3
48.2

50.8
7.0
43.8

60.2
13.0
47.3

53.7
12.0
41.8

56.5
12.3
44.2

48.6
8.0
40.6

Nonfinancial corporations
Stocks 1
Initial public offerings
Seasoned offerings

6.3
2.8
3.6
10.8

Bonds

2
By rating, bonds sold in U.S.
Investment grade
6
Speculative grade
3
Public
2
Rule 144A
1

Financial corporations
Stocks
Bonds

1.7
30.8

12.5
6.3
4.8
2.3
2.5
3.5
35.7

4.6
.6
4.0

0.4

13.6

10.8

12.0

5.4
3.6
1.8
1,8

7.6
4.9
1.4
3.5

7.3
3.0
.8
2.2

6.1
4.3
3.2
1.0

2.2
33.4

6.6
33.7

7.7
31.0

7.7
32.2

6.7
6.5
1.4
5.1
2.4
26.4

Note. Components may not sum to totals because of rounding. These
data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
1. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
2. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.

Nonfinancial Corporations
Junk Bonds

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

f
-

Share of bonds rated B or lower
(right scale)
Rate spread over Treasurys*
(left scale) ,

IiiL
iV
1JLO.,LJL ii.LI.
LI
1987
1989
1991
1993
1995
*Merrill Lynch Master II Index less 7-year
Treasury yield.
*January and February

1994
1995
"Staff estimate

1996

1997

III-5

Moving beyond the securities markets,

businesses have acquired

substantial new funds through bank loans in the first quarter.
Commercial and industrial loans at banks increased about 11 percent
on average in January and February, slightly below the fourthquarter increase but above the growth rate for 1996 as

a whole.

The pace of new equity offerings in January and February fell
back from the fourth-quarter rate, with the decline attributable
entirely to a drop in initial public offerings.
prospective

IPOs have edged off as well.

The

Registrations of

IPO market has

cooled

substantially, with new issues being priced below the intended range
more often than above it and first-day trading returns down sharply
from last year

(top panel).

Nonfinancial corporations have

continued to retire equity on net since year-end.
retirements alone in January and February, at $10.5
gross

issuance.

Merger-related
billion, equaled

Data on completed share repurchases are available

only through the third quarter of last year; however, announcements
of new repurchase programs have moved up from last year's already
high level.
Stock prices have slipped a little, on balance, since the last
FOMC meeting, but valuations generally remain rich by historical
standards.

For the

S&P 500, the ratio of expected twelve-month-

ahead earnings to price is low relative to the thirty-year Treasury
yield

(middle panel).

Stock prices have been buoyed by expectations

of long-term nominal earnings growth that are above their peak in
the early 1990s and have been revised higher in recent months
(bottom left panel).
more dramatic

The run-up in expected earnings

growth is even

in real terms because long-term inflation expectations

(for example, as measured

in the Philadelphia Fed survey) seem to

have declined about half a percentage point in the past few years.
Part of the explanation for this favorable outlook may be the

surge

in profits from overseas operations since late 1994: Analysts'
earnings projections for S&P 500 firms with significant foreign
operations exceed expectations for other firms
the

in the S&P 500, and

gap has widened noticeably over the past two years

(bottom right

panel).
The markets for commercial real estate and commercial mortgages
continue to be strong.

In the January FDIC survey of federal

examiners and asset managers, significantly more respondents
reported increases in demand for new office space than reported
decreases, compared with three months earlier

(top left panel).

III-6

Stock Market and Earnings Expectations
Net Percent of IPOs Completed
Above Filing Price

IPOs: Average First-Day Price Change
Percent

Percent
An

1994

1995

-J 40
1997

1996

1994

1995

190
1997

1996

Stock Valuations
Percent

30-year Treasury yield

1985

1987

1989

1991

1993

1995

1997

Analysts' Expectations of Three-to-Five Year Earnings Growth for S&P 500 Firms
Percent

Percent
15
Firms with significant foreign operations

1990 1991

1992 1993 1994 1995 1996 1997

Source. I/B/E/S.

1994

1995

1996

1997

III-7

Commercial Real Estate Trends
Demand Conditions

Net percent

Sales Price

I
1993

1991

1995

1997

Note. Percent reporting greater demand less percent reporting less demand
Source, Federal Deposit Insurance Corporaton.

l I

l t

1991

Net percent

l l l

1993

Commercial mortgage rate spread
3-month centered moving:average*

Il.
L

1993
1992
1991
1990
1989
Note. Barron's/Levy Commercial Mortgage Rate less 10-year Treasury yield.
*Last value equals average of current and previous months' observations.

Basis points

Monthly

1988

Note. Percent reporting higher prices less percent reporting lower prices
Source Federal Deposit Insurance Corporation.

Commercial Mortgage Yield Spread

1995

1994

1995

III-8

Consumer Credit

1997

1996
1995

1996

8.3

7.7

Nov

Dec

5.4

4.9

3,9

Jan p

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

8.1

8.4
3.8
20.6
-2.6

10.6
22.0
9.2

7.6
11.7
4.8

1103.3

1194.6

1155.1

1178.6

1194.6

1190.8

1194.6

1203.0

350.8
413.9
338.6

377.3
462.4
354.8

367.7
445.4
341.9

374.5
453.7
350.4

377.3
462.4
354.8

376.7
460.4
353.7

377.3
462.4
354.8

378.6
470.3
354.1

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

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

9.6
13.9
16.0

8.9
13.5
15.4

9.0
13.6
15.6

Auto finance companies 4
New cars
Used cars

11.2
14.5

9.5
13.5

10.3
13.6

8.6
13.4

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

8.95
13.5 5
n.a.
7.2
12.9

III-9

also a wider gap between the percentage of respondents

There was

reporting increases in prices and the percentage reporting decreases
(top right panel).

Meanwhile, the Barron's/Levy February survey of

primary commercial mortgage lenders indicated that interest rate
spreads on ten-year mortgages remained in the relatively favorable
range that has prevailed over the past

few years

addition, spreads on commercial-mortgage-backed

(bottom panel).
securities

(CMBSs)

have slipped to historically narrow levels.
Over the past two years, outstanding commercial mortgage credit
has grown very rapidly, with net lending increasing from close to
billion in 1995

zero in 1994 to $35

and $61

billion in 1996.

The

surge of lending activity reflects stronger nonresidential
construction, a greater willingness to lend, and reduced loan
chargeoffs.

Gross issuance of CMBSs

soared in 1996,

raising the

securitized share of commercial mortgage originations to about
55 percent.

These securities are being purchased by insurance

companies and mutual funds, among other investors.
Household Finance
The growth of household debt appears to have edged above the
fourth-quarter rate.

Fragmentary data for home-mortgage borrowing--

including the Mortgage Bankers Association index of mortgage
applications to purchase homes--indicate a fairly steady expansion.
Consumer credit growth picked up in January, although a slowing in
lending at banks

(adjusted for securitization) in February suggests

some subsequent easing in overall consumer credit growth.
The January rebound in consumer credit was driven by a jump in
revolving credit

(table).

However, swings

in this category are

especially large during the holiday season, so seasonally adjusted
growth rates are very sensitive to small variations in the pattern
of monthly charge volume or repayments.
November through January,

Averaging growth rates for

revolving credit

expanded about

12 percent

at an annual rate, approximately the same as for 1996 as a whole.
Firms
troubles

specializing in subprime auto loans have encountered

of late.

Intense competition has led to some erosion of

credit standards and smaller margins, which have

reduced profits and

resulted in acute liquidity problems for some subprime specialists.
The difficulties

of Mercury Finance and Jayhawk Acceptance have

received the most publicity.

After Mercury announced that

"accounting irregularities" had inflated the firm's profits for the
past few years,

rating agencies downgraded the company's debt,

III-10

Household Sector Loan Delinquency Rates
Commercial Banks
Percent
6

SQuarterly

Credit card

Other consumer

Home mortgage

1992

.--

1994

1995

1996

Source. Call report.

Auto Finance Companies
Percent

1973

1977

1981

1985

1989

1993

1997

III-ll

leaving it unable to sell new commercial paper to repay maturing
paper and forcing it to default.

Mercury recently won a loan

extension from Bank of America through early June, which will allow
it to continue operations and look for long-term financing.

Jayhawk

reported a fourth-quarter loss related to substantially increased
provisions for loan write-offs, which placed the company in
violation of bank loan covenants and prompted it to file for
bankruptcy.
The problems of subprime auto lenders have been concentrated in
firms that focus on the highest-risk category of subprime debt,
which accounts for less than 10 percent of all subprime auto debt
and a minuscule share of total auto loans.

In consequence, these

problems have had little impact on the availability or terms of
credit in the broader market for auto credit.

New- and used-car

loan rates at the three captive auto finance companies in January
averaged well below their fourth-quarter values, while maturities
and loan-to-value ratios were in line with recent experience. 2
The average new-car loan rate at banks in early February was
marginally below its level last fall.
Household loan delinquency rates deteriorated somewhat further
in the fourth quarter of last year and the beginning of 1997
(chart).

According to the Call Report, delinquency rates at

commercial banks increased in the fourth quarter for residential
real estate loans, credit cards, and other consumer loans.

The

American Bankers Association series for delinquencies on credit
cards and other consumer loans also moved up.

Moreover, the average

delinquency rate on loans at captive auto finance companies
continued to trend upward in early 1997, reaching another new high
at 3.6 percent in January

(chart).

Contacts at these companies have

said that the recent uptrend in delinquencies had been anticipated
and in part reflected earlier efforts to stimulate sales by making
credit more broadly available. 3
The uptrend in credit card delinquencies and chargeoffs has
significantly affected some issuers' profitability and has also led
2. The steep drop in the interest rate for new cars partly
reflects deeply discounted rates at GMAC subsidized by the parent
company.
3. The delinquency rate also has been boosted somewhat--perhaps
0.10 to 0.20 percentage point in the past few years--by the shift
(Leases are not included in the auto
toward leasing from loans.
loan delinquency rate.)
Lease customers have tended to be better
credit risks on average, so their withdrawal from the loan market
has left a somewhat-higher-risk customer base for loans.

III-12

TREASURY FINANCING
(Billions of dollars; total for period)

1996

Item

Total surplus/deficit

(-)

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

1997

Q1 p

Jan.

Feb.e

Mar.

-33.0

-59.3

-69.9

13.4

-50.7

-32.5

39.4
-1.0
40.3
-12.4
52.7

48.7
7.4
41.3
16.2
25.1

45.5
4.1
41.4
5.0
36.3

-16.8
1.5
-18.2
-14.8
-3.4

36.2
0.2
36.0
-0.4
36.4

26.0
2.5
23.5
20.2
3.3

-6.2

11.4

14.3

-3.8

21.4

-3.3

-0.2

-0.8

10.1

7.2

-6.8

9.7

44.2

32.8

18.5

36.6

15.2

18.5

in cash balance

Other 1
Memo:
Cash balance, end of period

Note. Data renorted on a pavment basis. Details may not

sum to totals

because of rounding.
1. Accrued items, checks issued less checks paid, and other transactions.
e Estimate.
p Projection.

NET CASH BORROWING OF GOVERNMENT-SPONSORED ENTERPRISES
(Billions of dollars)
1996
Agency
FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA

5.7
3.6
10.8
-2.1
0.2

8.5
10.0
12.1
-0.1
-0.2

1997
Nov.
-1.0
9.7
3.3
0.1
-0.2

Dec.
10.5
-1.2
6.9
0.3
-2.2

Jan.
-6.3
6.2
2.0
7.6
n.a.

Note. Excludes mortgage pass-through securities issued
by FNMA and FHLMC.
n.a. Not available.

III-13

Advanta Corporation, a

to tighter lending standards at many banks.

large "monoline" credit card issuer, announced this week that it
But industry contacts

anticipated a substantial first-quarter loss.

have suggested that Advanta was late in addressing its more serious
problem areas and has just begun to take steps that many card
issuers had initiated as early as last spring.

Consequently, these

contacts expect other issuers to report better earnings than
Advanta's and to have less need for additional restrictive
measures.

Indeed, the most recent Senior Loan Officer Opinion

Survey showed a smaller share of banks tightening credit card
standards in February than last November.
Treasury and Agency Finance
We anticipate that the first-quarter federal budget deficit
will be somewhat larger than in the previous quarter.

This increase

will be financed by a larger drawdown of cash balances and some
quirks in the government's cash flow, leaving borrowing from the
public little changed at

about $45

billion

(table).5

However,

the composition of marketable borrowing will be substantially
different from that in the fourth quarter, with a sharp decline in
bills offsetting a pickup in coupon issuance.
Since the February FOMC meeting, interest rates on inflationindexed Treasury securities have generally moved with nominal rates,
but they have been decidedly less volatile.

The spread between the

two rates has widened about 15 basis points over the period.

This

pattern is consistent with an increase in expected inflation or
greater uncertainty about future inflation, as well as some backup
in real rates, but the thinness of the market--in terms of both
amount outstanding and trading volume as a share of that amount-argues for caution in interpreting the relative rate movements.
Federally sponsored agencies have been active borrowers of
late.

Fannie Mae, the Federal Home Loan Banks, and the Federal Home

4. The magnitude of Advanta's expected loss surprised some
investors: In the two days after the announcement, its stock price
The share prices of other credit card
dropped nearly 25 percent.
specialists also declined, but by less than 5 percent. The rating
agencies downgraded some of Advanta's debt obligations, but its
asset-backed issues retained their triple-A ratings, reflecting the
substantial investor protections provided by the spread accounts and
other enhancements.
5. These quirks include a drop in student loan disbursements
(which affect required borrowing dollar-for-dollar but change the
deficit only by the expected present value of the loss on the loans)
and various smaller factors.

III-14

Loan Mortgage Corporation (Freddie Mac) have recently issued socalled global bonds, which are sold simultaneously in the United
States, Europe, and Asia.
one currency:

These transactions can involve more than

for example, Freddie Mac sold bonds for yen but will

redeem them in pounds sterling.

Agencies have also launched their

first issues of inflation-indexed debt, with three-year to ten-year
notes recently sold by the Student Loan Marketing Association, the
Tennessee Valley Authority, and others.
State and Local Government Finance
State and local governments' issuance of long-term tax-exempt
debt remained light in January and February, as most municipalities
had tapped the market heavily in the fourth quarter to take
advantage of relatively low interest rates

(table).

Meanwhile,

short-term debt issuance rebounded in February from a weak January,
as governments borrowed in anticipation of tax receipts and other
seasonal revenue streams.
A number of state and local governments have announced plans to
sell taxable debt and to use the proceeds to reduce their unfunded
pension obligations.

These governments appear to believe that the

pension funds can purchase assets whose return will over time exceed
the yield on the bonds being sold.

In general, tax laws prohibit

the issuance of tax-exempt debt to purchase taxable assets.

New

Jersey recently announced that it will sell $2.9 billion in taxable
pension bonds in March, the largest issuance of taxable municipal
debt on record.

GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Billions of dollars; monthly rates, not seasonally adjusted)
1996
Total tax-exempt
1
Long-term
Refundings
New capital
Short-term
Total taxable

1994

1995

1996

Jan.

1997
Feb.

16.1
12.8
4.0
8.8

14.9
12.1
3.4
8.7

17.9
14.3
4.9
9.4

17.3
11.9
4.1
7.8

18.7
16.2
5.2
11.0

11.3
10.4
4.1
6.3

13.2
10.9
3.5
7.4

3.3

2.8

3.6

5.4

2.5

2.3

1.5

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

III-15

Commercial

Banking Developments

With fourth-quarter data now available, the Call Report

shows

that domestically chartered commercial banks had another good year
in 1996

(top panels).

above 1.2 percent,

Return on assets reached a new high just

and return on equity stayed close to the elevated

levels of the past several years.

The share of loans in total

assets continued to rise last year, helping to boost the net
interest margin slightly, and net non-interest income also improved
a bit.

Despite the industry's well-publicized problems with

consumer loans,

overall asset quality remains excellent, and

provisioning last year again was on the low side.

Delinquencies and

charge-offs on other types of loans are near their lowest levels in
a decade, leaving the total loan portfolio in very good shape
(bottom panels).
With good asset quality and solid capital cushions, banks
continued to bid aggressively for large-dollar loan business, as
shown in the latest data from the Survey of Terms of Bank Lending,
taken in the first week of February

(chart).

between the rates on loans over $1 million

Even though the spread

(those most likely to

involve investment-grade borrowers) and the intended federal funds
rate ticked up,
last decade.

it remained at the lower end of the

range of the

Spreads for smaller loans held steady at the lowest

levels in several years.
Favorable supply conditions combined with strong demand to
produce another rapid expansion of business loans in February
(table), with large increases at both domestic and foreign banks.
The robust pace of mergers and acquisitions
the faster February loan growth.

likely contributed to

Real estate lending expanded at a

6 percent annual rate in February, with the home equity component
remaining below the elevated fourth-quarter pace.

Reported consumer

loans ran off in February because of heavy securitizations, but even
with the securitized amounts added back in, consumer loans showed
only a weak expansion.
In the securities

category, growth in adjusted securities

holdings picked up in February despite a drop in U.S.
securities.

government

The acceleration is partly attributable to the

acquisition by some banks of other banks' CDs for trading purposes.

II-16

Commercial Banks
Profitability
Percent

Percent

Return on equity (left scale)

n'*R
on a

Return on assets (right scale)

''
"'

Income and Expenses (percent of assets)
Items

Net interest
income

3.90

3.79

3.73

3.76

Net
noninterest
income

-1.82

-1.75

-1.62

-1.55

Loss
provisioning

-.47

-.28

-.30

-.38

Other items
incl. taxes

-.41

-.59

-.62

Net income

1.20

1.15

1.18

1.21

15.34

14.64

14.71

14.60

1994

1995

1996

(ROA)
Memo:Return
on equity
1970
1970

1975
1975

1980
1980

Delinquency Rates

1985
1985

1990
1990

1995
1995

Percent of loans

Charge-Off Rates

Percent of loans

1989 1990 1991 1992 1993 1994 1995 1996

Source. Call Report.

III-17

Commercial and Industrial Loan Rates
(Spreads over intended federal funds rate, by loan size)

All Loans

1986

1987

Percentage points

1988

1989

1990

1991

1992

1993

1994

1995

More than $1,000,000

1996

Percentage

1989

1990

$100,000 to $1,000,000

Percentage points

Less than $100,000

Percentage points

-I
5.0
4.5

1986

Source. Survey of Terms of Bank Lending.

t:I

1993

4.0

III-18

Commercial Bank Credit
(Percent change; seasonally adjusted annual rate)
1996
Type of credit

1. Bank credit: Reported

1996

1997
Dec

Jan

Level,
Feb
Feb
1997
Feb
(billions of $)

4.1

1.7

6.6

8.8

11.2

12.6

3,845.8

Adjusted'

4.7

2.6

6.7

6.1

9.4

3,753.4

Securities: Reported

-1.5

-5.4

3.0

12.5

15.8

20.3

1,022.6

0.4

-2.6

3.1

2.2

-4.3

8.2

930.2

Adjusted 1

U.S. government

-0.6

-2.6

1.1

-0.8

-2.2

-4.9

703.2

Other2

-3.6

-12.6

7.9

46.8

60.6

79.7

319.4

6.2

4.3

7.9

7.4

9.5

9.9

2,823.2

Loans 3

Business

9.1

8.4

14.4

16.7

6.3

14.9

800.9

Real estate

3.9

2.1

4.3

5.5

6.2

6.0

1,137.4

86.4

10.

Home equity

6.7

4.0

18.4

15.7

7.0

8.4

11.

Other

3.7

2.0

3.3

4.6

6.0

5.9

1,051.0

5.8

6.6

4.3

0.5

5.1

-1.4

520.6

11.1

10.8

8.7

10.3

5.4

2.4

694.8

8.2

-1.2

10.7

3.1

35.4

26.9

364.3

12.

Consumer: Reported
Adjusted 4

13.
14.

Other5

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

III-19

MONETARY AGGREGATES
(Based on seasonally adjusted data)

1996

1997

1996

Dec.

Jan.

Feb.

1996:Q4
Level
to
ibil. $)
Feb. 97 Feb. 97

Aggregate or component
Percentage change

Aggregate

-4.6

-6.5

(annual rate) 1
-1.6
5.3
7.4

0.9
5.1
10.7

8.3

5.5

10.6

5-4

1.2

2-1

-29.8

29.4

-8.7

8.8

7.7

1.0.2

11.7
1.3
17.1

8.4
2.2
16.3

12.1

15.5

4.6
6.9

3-4
5-4

4. Currency

5.7

7.6

7.7

5. Demand deposits

2.7

-0.9

-23.1

1080.6
866.3
5010.0

Selected components

6. Other checkable deposits
7. M2 minus M13
8.
9.
.0.

Savings deposits
Small time deposits
Retail money market funds

11. M3 minus M2

12.
13.

Large time deposits, ne t
Institution-only money market
mutual funds

14.

RPs

15.

Eurodollars

8.0

400.5

7.2

3.3

404.3

10.5

23.3

-16.1

267.1

10.0

7.9

6.8

8-2

2785.8

3.8
1.7.2

11.4
1.4
21.6

10.9
1.0
13.0

7.3
1.9
13.9

10.0
1.6
15.6

1290.3
946.7
548.7

12.7

20.4

23-8

14.9

29.9

21.6

1143.6

17.6

16.4

25.5

29.3

26.2

32.4

28.3

524.4

19.8
4.1
17.4

20.6
-4.7
8.7

19.8
2.1
34.7

30.0
13.6
48.5

12.0
16.8
34.7

36.9
21.5
13-7

16.8
9.1
27-1

305.4
198.7
115.1

5.4

3.6

5.0

9.5

4.0

7.7

7.0

1264.4

3.8
4.8

5.4
4.1

5,1
6.0

9.1
7.2

2.9
6.1

5.8
6.2

5.7
6.4

456.2
3462.6

Memo
Sweep-adjusted M16
Monetary base
Household M27

Average monthly change (billions of dollars)"
Memo
Selected managed liabilities
at commercial banks:
18. Large time deposits, gross
19. Net due to related foreign
institutions
20. U.S. government deposits
at commercial banks

8.5

15.3

15.7

10.8

2.1

2.0

5.1

-7.6

-9.8

0.0

1.0

0.0

-4.8

3.0

14.7

0.1
-4.5

579.1

219.7
15.2

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

III-20

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

Memo:

1997

1995

1996

Dec

Jan

Febe

Jan
assets

10.7

18.6

13.8

14.2

11.8

29.4

19.5

1854.8

9.7

14.7

11.0

11.4

9.8

23.4

15.0

1559.3

3.1

4.7

3.5

3.2

3.1

5.7

2.4

292.2

3.1

3.9

2.7

1.5

6.1

2.9

512.9

3.7

6.2

4.9

5.6

5.3

11.6

9.7

749.6

1.0

3.9

2.8

2.7

2.0

6.0

4.5

295.5

Bond funds

-0.4

1.1

0.3

1.1

2.4

2.9

2.0

897.7

High-yield

0.7

1.0

1.3

1.8

1.6

80.7

Income

0.9

1.6

0.8

1.5

2.3

3.2

0.4

362.5

Other

-2.0

-1.5

-1.8

-1.7

0.1

454.5

Stock funds
Domestic

Aggressive growth
Growth
Growth and income
International

-2.1

1. Includes precious metals funds, not shown elsewhere.
2. The sum of "Growth and income" and "Income equity" funds.
3. The sum of "International " and "Global equity" funds.
e Aggregate stock and bond figures are ICI estimates. Components are staff estimates.
Source. Investment Company Institute.

Net Sales (Excluding Reinvested Distributions) and Liquidity Ratio of Domestic Stock Funds
Percent

Billions of dollars

Monthly
r
.

Liquidity ratio (left scale)

'
~s.
*
;
''

,..

Net-sales (right scale)

1986

1987

1988

1989

1990

1991

1992

Note. Liquidity ratio is cash and short-term securities as a percent of total assets.
Source. Investment Company Institute.

1993

I
1994

1995

-I
1996

-1 0
1997

III-21

Monetary Aggregates
Growth in the broad monetary aggregates has been
brisk in recent months--especially M3.

relatively

Banks have continued to

issue substantial amounts of large time deposits, partly to finance
credit expansion and partly to substitute for offshore borrowing.
This shift

in funding patterns has been particularly strong at

foreign banks, where it may be related to an expansion of funding
operations in the United States.

M3 has also been boosted by rapid

expansion of institution-only money funds

(table).

month growth of institutional money funds

is influenced heavily by

fluctuations

The month-to-

in short-term market interest rates, but over the

longer term, the growing share of these

funds in M3 partly reflects

their more widespread use by nonfinancial corporations.
Nonfinancial businesses now hold about a third of institutional
money fund shares, up from a sixth in 1989, and institutional money
fund shares now make up 14 percent of the liquid assets of such
businesses,

compared with 4 percent in 1989.

These trends suggest

that firms may view money funds as a cost-effective substitute for
in-house cash management.
M2 expanded at about a 5 percent annual rate in February, quite
close to the pace

recorded in the fourth quarter.

Retail money

funds again grew more rapidly than deposits, as has regularly been
the

case for several years.

M2 growth apparently has tracked the

growth of nominal GDP fairly closely, a "normal" velocity pattern in
a period of minimal change in opportunity costs.
Mutual Funds
Net

sales of stock and bond mutual funds declined somewhat in

February from January's torrid pace

(table).

The

record January

inflow to stock funds was attributable partly to the seasonal peak
in investments in individual

retirement accounts and 401(k) plans.

Stock fund inflows have continued to shift away from the more
aggressive growth funds and toward the more conservative growth and
income funds, whose share of total domestic net equity sales climbed
to about 60 percent in February from 42 percent last year.
Preliminary data suggest that net

sales of stock funds weakened

somewhat in the first two weeks of March, with inflows again
concentrated in relatively conservative funds.

The liquidity ratio

of domestic stock funds was about unchanged in January at
5.3

percent, holding at the lowest level since 1977

(chart).

III-22

The

recent default of Mercury Finance on its commercial paper

obligations had a very limited impact on money market mutual funds,
as most funds apparently had little credit exposure to Mercury.
One fund management company bought Mercury's paper from the funds it
advises at par, thus maintaining the funds'
not "breaking the buck."

share prices at

$1 and

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
U.S. International Trade in Goods and Services
In December, the U.S. deficit in trade in goods and services
widened from levels recorded in the previous two months.

Exports

declined, particularly categories such as machinery and agricultural
products that had risen sharply in October and November.

Imports

increased in December, largely oil, consumer goods, and machinery.
Trade data for January will be released on March 20, and will be
described in the Greenbook supplement.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
Annual rates
1996
Q2
Q3
04

1996

Monthly rates
1996
Oct
Nov
Dec

Real NIPA 1/
Net exports of G&S

-114.0

-114.7 -137.4 -100.0

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

-114.2
-187.7
73.5

-115.8 -137.1 -105.4
-189.5 -207.5 -181.2
73.6
70.4
75.9

-8.0
-14.1
6.1

-7.9
-14.3
6.3

-10.3
-16.6
6.3

1. In billions of chained (1992) dollars.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.

For 1996-Q4, the trade deficit was significantly smaller than
in the third quarter, and was about the same as the average for the
first half of the year. Exports of goods and services were 5 percent
higher in the fourth quarter than in the third quarter.

The

increase was spread among all major trade categories except
automotive products
against GM).

(which were held down by the effects of strikes

Exports of aircraft and services rebounded from low

third-quarter levels.

Exports of machinery and industrial supplies

moved to new record levels.

Over the past year, the value of

merchandise exports rose 6 percent

(Q4/Q4).

Most of the rise went

to Mexico. Smaller increases went to Canada, South America, and
Asia.

Exports to Western Europe were about the same in 1996-Q4 as a

year earlier.
Imports of goods and services in the fourth quarter were only
slightly higher than in the third quarter.

Declines in automotive

imports from Canada (which were affected to a larger extent than
automotive exports by strikes against GM) nearly offset increases in
a wide range of other trade categories, especially imported consumer
IV-1

3-18-97

IV-2

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

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

1989 1990 1991 1992 1993 1994 1995 1996 1997

Selected NIPA Exports

Selected NIPA Imports

Net Exports

Ratio scale, billions of chained (1992) dollars

Ratio scale, billions of chained (1992) dollars
180

^-/ *

160

Consumer goods
140

", /
S

Tnd. supplies ex o

1989 1990 1991 1992 1993 1994 1995 1996 1997

Automotive
,.

/ -

120

100

Machinery
ex computers &
semiconductors

1989
1990 1991 19921993 1994 1995 1996 1997
1989 1990 1991 1992 1993 1994 1995 1996 1997

IV-3

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

1996

Amount Change 1/
1996
1996

1996

Nov

Dec

Exports of G&S

822.8

863.1

870.3

856.7

-13.5

40.3

9.6

-13.5

Goods exports
Agricultural
Gold
Other goods

600.6
60.1
5.2
535.3

633.5
61.7
3.7
568.1

639.5
66.3
3.2
570.1

625.9
59.3
3.6
563.1

-11.9
-0.3
-7.3
-4.3

32.9
1.6
-1.5
32.8

5.0
6.7
-1.3
-0.5

-13.6
-7.0
0.4
-7.0

26.7
42.9
33.7
141.0

36.8
43.3
36.7
150.4

33.7
44.5
37.2
152.4

39.7
36.0
147.8

-6.7
-0.3
-1.2
0.5

10.1
0.4
3.0
9.4

-3.3
0.4
0.4
1.4

6.1
-2.9
-1.2
-4.6

66.8
36.3
7.9
22.6

66.2
33.4
10.6
22.2

69.4
37.1
9.5
22.9

66.5
33.0
11.8
21.8

3.9
1.7
-0.0
2.2

-0.6
-2.9
2.7
-0.4

6.6
7.0
-1.0
0.6

-2.9
-4.1
2.3
-1.1

Ind supplies
Consumer goods
All other

128.9
69.1
26.2

135.4
73.4
25.9

132.4
73.2
27.3

134.9
72.3
24.3

-0.6
-1.3
1.4

6.5
4.3
-0.3

-6.2
-1.5
-3.6

2.5
-0.9
-3.0

Services exports

222.3

229.7

230.7

230.8

-1.1

Imports of G&S

960.0

968.5

965.5

980.2

Goods imports
Petroleum
Gold
Other goods

808.1
71.8
6.2
730.1

814.7
75.0
3.4
736.3

810.8
69.5
3.5
737.8

824.8
79.1
2.9
742.8

6.1
1.5
-8.4
13.0

6.6
3.2
-2.8
6.2

Aircraft & pts
Computers
Semiconductors
Other cap gds

13.1
61.5
33.4
117.6

13.7
61.6
32.6
121.9

13.5
61.1
32.5
122.0

14.8
62.8
33.6
123.4

0.4
0.9
-3.6
1.6

0.6
0.1
-0.8
4.3

0.7
0.8
0.7
2.6

1.3
1.7
1.1
1.5

Automotive
from Canada
from Mexico
from ROW

135.7
51.3
23.2
61.2

128.6
42.3
23.2
63.1

135.4
46.8
23.5

127.5
43.4
20.5

65.1

63.7

4.6
2.2
-0.9
3.3

-7.1
-9.0
-0.0
1.9

12.3
9.6
-2.2
4.9

-7.9
-3.4
-3.0
-1.4

Ind supplies
Consumer goods
Foods
All other

131.0
173.1
35.9
28.8

130.7
180.3
36.7
30.2

129.8
177.1
35.5
31.1

130.3
183.4
38.1
29.0

3.8
6.1
-0.1
-0.7

-0.3
7.2
0.8
1.4

-1.4
-1.7
-0.8
1.3

0.5
6.3
2.6
-2.1

Services imports

151.9

153.8

154.7

155.3

10.03
19.58

9.21
22.31

8.58
22.15

9.55
22.68

0.18
0.04

-0.82
2.73

-0.89
0.07

0.97
0.53

Aircraft & pts
Computers
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW

Memo:
Oil qty (mb/d)

Oil price ($/bbl)

41.6

03
Oll

Nov

TDhcr

Dec

4.6

8.8
7.2
-7.0
-0.4
14.5

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

14.7
14.1
9.6
-0.6
5.0

IV-4

goods, machinery (other than computers and semiconductors),
services.

Over the past year imports rose 8-1/2 percent

and

(Q4/Q4)

with the increases spread over most major trade categories.
Exceptions were imports of semiconductors, which declined sharply
through most of the year and have only recently begun to move back
up, and automotive products from Canada.
Oil Imports
The value of imported oil was slightly higher in the fourth
quarter than in the third quarter, as a drop in quantity was more
than offset by a sharp increase in price.
The quantity of oil imported fell 8-1/2 percent

(0.833 mb/d)

on average during the fourth quarter after rising 2 percent during
the third quarter.

A larger than normal stock drawdown --

particularly in the U.S. territories -- and an increase in crude oil
production offset higher consumption and led to the lower rate of
oil imports.

Preliminary Department of Energy statistics for

January and February indicate that oil imports into the fifty states
remain at the fourth-quarter rate.
The average price of imported oil in the fourth quarter was 14
percent above its third-quarter level.

The price of imported oil

rose another 1-1/4 percent in January placing it 38 percent above
its December 1995 level.

Skirmishes in the Kurdish region of

Northern Iraq, strikes in France that interrupted refinery
operations, and concern over the level of heating oil stocks in the
United States and Europe because of extremely cold weather in Europe
pushed prices up at the end of last year.

Spot WTI declined $0.22

per barrel in January and plummeted $2.96 per barrel in February.
Deliveries of oil from Iraq put downward pressure on prices during
January, offsetting the effect of the cold winter.

Mild weather in

February -- oil consumption was 0.7 mb/d below February 1996's rate
-- accompanied by the appearance of Iraqi oil on the spot market led
to the sharp fall in spot WTI.
$20-22 per barrel range.

Spot WTI is currently trading in the

The severe backwardation has disappeared

from the WTI futures market; the December 1997 futures quote is
currently just $0.80 below the current spot price.

IV-5
3-18-97

Oil Prices
Dollars per barrel

Spot West Texas intermediate

Import unit value

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)
Annual rates
1996
02
03
-----------

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

Monthly rates
1996
1997
Nov
Dec
Jan

BLS prices (1990=100)-----------

1.6
41.5
-2.4

-2.4
1.9
-2.8

5.0
60.4
-0.4

-0.2
-0.8
-0.1

0.1
0.2
0.1

-0.3
1.3
-0.4

11.4
-5.1
-16.9
-16.7
-2.7
-0.5
-0.8

-10.5
-5.3
-10.9
-15.4
-0.1
0.7
-0.8

3.6
0.8
-8.5
-14.9
-0.0
0.1
-0.5

0.2
0.4
-0.9
-2.6
-0.1
-0.1
-0.1

-1.2
0.7
-0.7
-2.1
0.2
0.2
0.0

-0.3
1.0
-2.0
-6.4
-1.2
-0.1
-0.1

2.4
31.5
-1.2

-3.5
-18.0
-0.9

-4.2
-31.9

-0.4
-2.3
0.0

0.0
-0.9
0.1

0.2
0.1
0.1

-4.9
-7.6
-5.5
2.4
0.3
1.3

-3.2
-11.9
-15.5
2.4
0.3
0.7

0.8
-10.2
-3.1
1.2
1.3
0.9

-0.4
-0.9
-0.2
0.1
0.2
0.0

0.2
-1.1
0.2
0.2
0.0
0.2

0.1
0.0
-0.2
0.2
0.2
0.1

0.4

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

0.7
-3.8

-2.0
-3.0

3.7
-1.4

Exports of gds & serv.
Nonag merchandise

1.4
-2.6

-1.8
-2.3

-2.2
-0.8

IV-6

Prices of Non-oil Imports and Exports
Prices of U.S. non-oil imports decreased slightly in January
after edging up in December.

The largest declines were for imported

capital goods, particularly computers and semiconductors.

Partly

offsetting these declines was an increase, for the third consecutive
month, in prices of imported industrial supplies.

For the fourth

quarter, non-oil import prices declined only slightly, as increases
in prices of industrial supplies and automotive products nearly
offset declines in other categories.
Prices of exports rose slightly in January.

Prices of

agricultural exports, which had declined in the previous seven
months, edged up in January
supplies).

(primarily agricultural industrial

Small price increases were recorded in most other major

trade categories.

In the fourth quarter, prices of agricultural

exports dropped about 30 percent at an annual rate.

Prices of

nonagricultural exports changed only slightly in the fourth quarter,
with increases spread among all major trade categories except
computers and semiconductors.
Price data for February will be released on March 21.
U.S. Current Account through 1996-Q4
In the fourth quarter of 1996, the U.S. current account
deficit narrowed $26 billion SAAR.

Smaller deficits for net goods

and services and net investment income were partly offset by larger
net unilateral transfers.
The deficit in goods and services narrowed $32 billion SAAR
largely because of the jump in exports.

For net investment income,

the increase in income receipts (primarily from U.S. direct
investment abroad) was larger than the increase in income payments
to foreigners (on foreign investment in the United States).

The

rise in unilateral transfers reflected U.S. Government grants to
Israel that are usually made during the fourth quarter of each year.
For the year 1996, the current account deficit was $165
billion, $17 billion larger than in 1995.

About half of the change

was from goods and services and the other half from unilateral
transfers.

Transfers were larger than usual for the year because

the Government shutdown at the end of 1995 pushed payment of some
grants to Israel from the fourth quarter of 1995 into the first
quarter of 1996.

IV-7

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

Goods & services
balance

Investment
income net

Transfers,
net

Current acct
balance

Years
1994
1995
1996

-104.4
-105.1
-114.2

-4.2
-8.0
-8.4

-39.9
-35.1
-42.5

-148.4
-148.2
-165.1

Quarters
1994-1
2
3
4

-90.8
-103.5
-113.8
-109.4

4.7
-2.5
-6.4
-12.4

-32.7
-38.0
-39.9
-48.9

-118.8
-144.1
-160.0
-170.6

1995-1
2
3
4

-118.1
-127.3
-97.3
-77.6

-3.6
-3.4
-17.4
-7.6

-34.6
-33.2
-36.0
-36.6

-156.2
-163.9
-150.8
-121.7

1996-1
2
3
4

-98.5
-115.8
-137.1
-105.4

1.2
-8.9
-16.4
-9.7

-43.8
-37.7
-37.9
-50.5

-141.1
-162.4
-191.4
-165.5

Memo:
L Change
QI-Q4

-21.0

8.8

-7.2

-19.4

Q2-Q1
Q3-Q2
Q4-Q3

-17.3
-21.3
31.7

-10.1
-7.5
6.7

6.1
-0.2
-12.6

-21.3
-29.0
25.9

Source.

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

U.S. International Financial Transactions
Private foreign net purchases of U.S. securities finished 1996
on a high note, with over $43 billion net in December, and continued
at a fast pace in January (line 4 of the Summary of U.S.
International Transactions table).

For the year, records were set

for private net purchases of Treasury securities ($156 billion) and
corporate and other bonds ($121 billion) (lines 4a and 4b).

Of the

record net purchases of corporate and other bonds in line 4b, about
$45 billion were for U.S. agency bonds.

Most of the net private

purchases of U.S. bonds reported in line 4 went to international
financial centers in the United Kingdom, the Caribbean, or Hong
Kong.

Japanese residents purchased net $14 billion in corporate and

other bonds and $24 billion in U.S. Treasury securities.

After the

first half of the year, foreigners showed virtually no interest on

IV-8

net in U.S. stocks (although there seemed to be some resurgence in
January;

see line 4c).

U.S. residents continued very strong purchases of foreign
stocks and bonds through December

(line 5).

In January, however,

stock purchases were low and there was a net selloff of $3.4 billion
in foreign bonds.

For the year 1996, U.S. net purchases of foreign

securities rose to $104 billion, a strong pace, but still below the
peak reached in 1993.
developed countries.

As usual, most purchases were made in the
Net stock purchases in Japan were over $10

billion in the first half of the year, but nothing thereafter;

U.S.

investors also sold foreign bonds net in Japan in the second half of
the year.
Foreign official reserve assets held in the United States
continued their robust growth in December and January (line 1);
partial information from the FRBNY for February indicates continued
For the year 1996, as was the case in 1995, only a

large increases.

moderate part of this growth was associated with exchange market
intervention by G-10 countries; in both years, G-10 countries
accounted for only about 30 percent of the increase in foreign
official holdings in the United States.
Banks and securities dealers reported a continuation of
capital outflows in December and January (line 3).

For the year,

net outflows through banks mounted to $60 billion; given the slower
growth in U.S. bank credit in 1996, banks relied more heavily on
domestic rather than foreign sources of financing.

Moreover, about

$18 billion of the outflow represented RP transactions of securities
dealers with foreign purchasers of U.S. Treasury securities.
Recently released data on direct investment capital flows show
that both outflows
1996.

(line 6) and inflows

(line 7) were strong in

Direct investment abroad was very strong in the fourth

quarter and finished the year close to the record total in 1995.
Much of the large increase in fourth-quarter outflow was the result
of a buildup of intercompany debt by finance affiliates in the
United Kingdom.

The direct investment inflow to the United States

was almost as strong as the outflow, with much of it financing
mergers and acquisitions.

IV-9

The statistical discrepancy for the year mounted to a negative
$53

billion,

during

significant unrecorded

indicating

capital

outflows

1996.

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

1997

1996

13.4

Dec

Jan

23.2

32.9

14.9

10.9

1.4

2.2

5.3

3.6

16.5

27.2

Officciacapital
1. Change in foreign official reserve
assets in U.S. (increase, +)
a. G-10 countries

c. All other countries
2.

121.6

52.2

33.1

35.5

28.5

4.3

OPEC countries

109.9

Change in U.S. official reserve
assets (decrease. +)

13.4

72.6

72.7

-9.7

6.7

-.8
24.5

7.5

-. 3

Private capital
Banks
3.

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

Securities
4.

-59.8

-25.6

-11.9

-8.4

-13.9

-5.4

-14.7

190.8

290.6

49.8

61.7

78.9

100.2

43.8

28.2

99.9

155.7

13.1

31.8

43.6

67.3

33.8

13.4

82.6

121.3

32.8

23.6

33.4

31.4

9.6

11.8

8.2

13.6

-98.7

-104.4

-34.4

Foreign net purchases of
U.S. securities (+)
a.

-33.1

Treasury securities

Corporate and other bonds

Corporate stocks

5. U.S. net purchases (-) of
foreign securities

3-8

6.3

2.0

1.5

-20.2

-21.1

-28.6

-16.6

3.0
2.4

Bonds

-48.4

-46.3

-11.9

-2.8

-13.0

-18.5

-10.7

3.4

Stocks

-50.3

-58.1

-22.5

-17.4

-8.1

-10.2

-5.9

-1.0

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

-95.5

-88.3

-23.2

-26.2

-9.1

-29.8

n.a

7. Foreign direct investment in U.S.

60.2

84.0

28.7

17.4

16.8

n.a

8. Other (inflow. +)5

-7.2

-32.2

-16.7

-9.3

n.a

Other flows (quarterly data. s.a.)

U.S. current account balance (s.a.)
Statistical discrepancy (s.a.)

-148.2

-165.1

31.5

-53.1

-35.3

4.5

16.2
-40.6

-9.3

21.1
-22.4
-47.9

-41.4

n.a

-21.8

-26.6

n.a

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

IV-10

Foreign Exchange and Foreign Financial Markets
The weighted average value of the dollar in terms of the other
G-10 currencies has risen 2-1/4 percent
February FOMC meeting.

since the day before the

The bulk of the dollar's

gains

came in

February, boosted in part by the Chairman's Humphrey-Hawkins
testimony.

Most recently, strong U.S. data releases for retail

sales and employment have solidified the dollar's gains, with the
dollar now trading at levels
The dollar's

last seen in February 1994.

gains came mainly at the expense of the mark and

other continental European currencies.

Movements in the dollar

against the mark appear to be related to changing views regarding
economic performance in Germany.

Reports that sluggish economic

activity was increasing the chance that Germany would fail to meet
the EMU criterion of a three percent government deficit to GDP ratio
dropped the value of the mark more than one percent.

Most of this

decline was reversed on the release of data showing strong growth in
M3 and a positive IFO survey.

Expectations of a large increase in

German unemployment for February weighed on the mark in early March.
Since the middle of March, prospects of a delay in the start of EMU
appear to have boosted the mark.

On balance, the dollar has

appreciated 2-1/2 percent against the mark since early February.
Other European currencies have lost value relative to the mark on
talk of an EMU delay.

Most notable are the declines

in the Swedish

krona and Italian lira against the mark, amounting to 2-3/4 and
1-1/2 percent

respectively.

Sterling depreciated vis-a-vis the dollar,
The drop in

largely in March.

sterling's value was prompted by remarks from Chancellor

Clarke who made it clear that there was

little chance of a rate

increase prior to the general election.

Subsequently, Bank of

England Deputy Governor Davies stated that the pound was overvalued
against the mark.

Prime Minister Major's announcement that the

general election would be held on May 1 also prompted sales
sterling.

Over the period as a whole, sterling declined 1 percent

against the dollar.
With regard to the yen, the dollar appreciated only slightly
over the past

six weeks.

Almost all

of these gains came early in

the period on reports of Japanese financial firm difficulties.
Since the middle of February, the yen has appreciated 1 percent.

IV-11

Weighted Average Exchange Value of the Dollar
Index, March 1973 = 100

December

January

February

March

Interest Rates in Major Industrial Countries
Three-month rates
Feb. 3
Mar. 19
Change

Ten-year bond yields
Feb. 3
Mar. 19
Change

Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

3.05
0.53
6.19
3.17
3.23
7.38
3.01
2.90
1.63
4.03

3.18
0.55
6.19
3.29
3.28
7.50
3.48
3.15
1.81
4.28

0.13
0.02
0.00
0.12
0.05
0.12
0.47
0.25
0.18
0.25

5.72
2.42
7.34
6.48
5.58
7.17
5.80
5.56
3.67
6.65

5.88
2.31
7.55
6.63
5.78
7.68
6.04
5.76
3.49
7.25

0.16
-0.11
0.21
0.15
0.20
0.51
0.24
0.20
-0.18
0.60

Weighted-average
foreign

3.46

3.59

0.13

5.59

5.77

0.18

United States

5.42

5.52P

0.10

6.47

6.73'

0.26

Note. Change is in percentage points.

P Preliminary.

IV-12

The yen's largest gains came on announcements in mid-February and
mid-March by Japan's Finance Ministry that the government may
purchase jusen-related land and that such land would be eligible for
securitization.

Stock prices in Japan rose more than two percent on

both announcements.

The yen also strengthened on data releases that

showed strong retail sales and healthy increases in industrial
output.

A larger than expected increase in the Japanese current

account surplus for January, coupled with a statement from Treasury
Secretary Rubin that a sustained increase in the Japanese current
account surplus "was in nobody's interest," provided some further
support for the yen.
Short-term interest rates in the major industrial countries
are little changed on average, with a relatively large increase

(47

basis points) in Belgium, where rates have risen with the unfolding
of a political crisis involving bribery of government officials.

the Netherlands, official rates were increased twice, the latest
move coming on March 10, in an effort to maintain stability in the
guilder/mark exchange rate.

The repurchase rate in Spain was cut 25

basis points after the release of favorable consumer price data.

the other end of the maturity spectrum, long-term rate changes were
largest in Sweden, Italy, and Spain (averaging 48 basis points) on
prospects for a delay in EMU.

Italian long-term rates, up 51 basis

points, have also been pressured by concerns over the passage of a
mini-budget.

Ten-year interest rates in Switzerland fell roughly 20

basis points on continued lackluster economic performance.
The Mexican peso depreciated sharply in late February,
following the rise in U.S. interest rates and amid concerns over the
U.S. re-certification of Mexico as a drug-fighting ally.

Earlier in

the month, Bank of Mexico officials announced procedures to
accelerate the accumulation of foreign exchange reserves in the
event of a peso appreciation and to reduce the volatility of the
floating exchange rate in the event of a peso depreciation.

The

accumulation of reserves will be accelerated by a second, mid-month
sale of dollar put options in the event that put options sold at the
beginning of the month are fully exercised.

Volatility of a

depreciating peso will be reduced by an auction of $200 million on
any day when the peso depreciates by more than two percent.

Only

one part of the new program came into play in February, when a

IV-13

second tranche of $300 million put options was sold after the first
tranche was exercised.

The February 27 decline in the peso came too

late in the day to trigger an auction by the Bank of Mexico, and a
partial recovery of the peso prevented an auction the following day.

The Desk did not intervene in the foreign exchange market
over the period.
Developments in Foreign Industrial Countries
Recent information suggests that the pace of expansion
continues to diverge across the major industrial countries.

Japan,

Canada, and the United Kingdom posted strong GDP growth in the
fourth quarter, and first-quarter indicators generally have been
positive.

In contrast, GDP growth was sluggish in the fourth

quarter in continental Europe, although confidence indicators have
improved in the past few months.
Inflationary pressures have generally remained subdued.

Japan, wholesale prices have risen due to the depreciation of the
yen in recent months, but consumer price inflation remains near
zero.

In Germany and France, CPI inflation is running under 2

percent, while in Canada it is slightly higher, and in Italy, it is
less than 2-1/2 percent, about half the rate recorded a year ago.
In the United Kingdom, in contrast, the underlying inflation rate
remained above 3 percent in January.
Individual country notes.

In Japan, real GDP rose 3.9 percent

(SAAR) in the fourth quarter after registering an upward-revised 1.3
percent increase in the third quarter.

Fourth-quarter growth was

led by private consumption spending and a strong expansion of net
exports.

Total investment declined as a significant increase in

business capital formation was more than offset by a plunge in
public investment.

IV-14

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

1996

1996
Q1

GDP

2.6

3.1

8.4

-1.1

1.3

3.9

Total Domestic Demand

4.0

3.0

9.8

-0.3

0.4

2.3

Consumption

3.0

2.0

8.3

-3.9

-0.7

4.9

Investment

5.6

5.7

14.2

9.9

1.4

-1.9

Government Consumption

3.2

2.9

3.2

0.4

5.5

2.6

Inventories (contribution)

0.2

-0.3

0.3

-0.9

-0.2

Exports

3.8

5.4

-2.6

0.5

6.5

Imports

17.3

4.7

8.2

7.6

1.1

4.5

Net Exports (contribution)

-1.3

0.1

-1.3

-0.8

0.9

1.6

18.4

1. Annual changes are Q4/Q4.

Available indicators of economic activity for the first
quarter

suggest continued economic

expansion;

industrial production

and machinery orders rose in January, and new car registrations
picked up on average in January and February, reflecting brisk
items in advance of the April

spending on big-ticket
the consumption tax.

1 increase of

The latest surge of spending on consumer

durables is also related to last year's

strong housing cycle that

recently seems to have come to an end.

Housing starts

fell further to a level

in January

almost 9 percent below the fourth-quarter

average.

The unemployment rate of 3.3 percent in January is only
slightly below its postwar high of 3.5 percent in May and June 1996.
The job offers/applicants ratio remained at 0.76 in January.
However, these figures mask a distinct improvement in the labor
market; in January employment rose strongly, the number of
unemployed dropped for the third consecutive month, and job offers
remained firm.
Japan's current account surplus rose sharply in January, to
$81 billion (SAAR) compared with a surplus of $67 million for all of
1996 and $112 billion in 1995.

The surge in the current account

IV-15

JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted. SA)
1996
1997
Q2
Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio

-0.3
1.4
0.8
-6.0
3.5
0.69

Business Sentiment2
3

CPI (Tokyo area)
Wholesale Prices3

Q3
1.6
2.6
2.8
5.8
3.3
0.71

Nov

3.1
4.3
7.4
10.6
3.3
0.74

Dec

-1.4
0.1
-5.5
-6.3
-3.6 -17.7
4.2
0.4
3.3
3.3
0.74
0.76

Jan

Feb

5.6
-2.8
16.3
2.6
3.3
0.76

n.a.
n.a.
n.a.
-1.6
n.a.
n.a.

-3

-7

-3

...

0.1
1.3

0.0
0.7

0.1
0.6

0.1
0.5

0.2
0.9

0.0
1.0

0.1
1.6

1. Level of indicator.
2.

Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook (Tankan

survey).
3.

Percent change from previous year.

surplus in January mainly reflected greater investment income and a
rise in the volume of exports.
On March 5, the lower house of the Diet passed the budget for
fiscal year 1997

(beginning April 1).

The budget is in the upper

house for consideration, and should pass before the beginning of the
fiscal year.
Real GDP in Germany advanced at a pace of 0.3 percent
in the fourth quarter of 1996.
expanded 1.4 percent

(SAAR)

Taking the year as a whole, real GDP

(or 2.2 percent on a Q4/Q4 basis).

In the

fourth quarter, domestic demand was up modestly owing to a revival
of investment on machinery and equipment and inventory accumulation
(a residual in German GDP statistics).

Private consumption,

government spending, and construction contracted in the fourth
quarter.

While exports continued to grow rapidly (more than 20

percent at an annual rate in the fourth quarter),

a surge in imports

more than offset the increase in exports.
Only limited information is available for the first quarter.
Although industrial production dropped in January, output excluding
construction activity was up, and orders rebounded due to a surge in

IV-16

GERMAN REAL GDP
(Percent change from previous period, annual rate; adjusted for
seasonal and calendar variation)
1995
1996
1996
Q/QQ4/4
GDP

0.8

2.2

-0.4

6.1

3.0

0.3

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

0.7
1.5
-2.0
2.6
-0.3

1.3
0.9
2.8
1.5
-0.2

-0.5
2.0
-17.6
2.1
2.1

4.6
2.2
30.0
3.2
-3.1

-0.3
0.5
3.6
3.2
-2.0

1.3
-1.1
0.7
-2.6
2.3

Exports
Imports
Net Exports (contribution)

5.4
4.9
0.1

9.4
5.7
1.0

3.0
2.6
0.1

1.4
-3.9
1.5

13.3
0.4
3.3

21.1
26.1
-1.0

export demand.

Unemployment rose by a total of 150,000 (s.a.)

January and February, bringing total unemployment to just over 4.3
However,

million persons and the unemployment rate to 11.3 percent.
these figures likely are overstated because of effects from

unseasonably cold winter and a change in welfare registration
procedures.

Inflation on a 12-month basis ticked up in January,

primarily reflecting increases in energy prices.
According to official figures, the general government deficit
as a share of GDP widened to 3.9 percent last year from 3.5 percent
in 1995.

The Finance Ministry has revised its deficit forecast for

1997 to 2.9 percent of GDP (from 2.5 percent previously),

owing to

an upward revision to the government's forecast for unemployment.
Given the importance of meeting the 3 percent deficit target
proscribed in the Maastricht Treaty, it is quite likely that the
Finance Ministry will impose a freeze on large federal expenditures,
a measure that has been implemented in each of the past two years in
order to give the Kohl government more flexibility over spending.
In mid-January, the government announced its proposal for
reform of the tax system that seeks to reduce marginal tax rates for
individuals and businesses and broaden the tax base by eliminating
deductions and loopholes.

Altogether, the reform would provide tax

IV-17

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

Industrial Production
Orders
Unemployment Rate (%)
Western Germany
Eastern Germany

Q3
1.2
1.0
10.4
9.2
15.4

Q4
-0.2
-0.4
10.8
9.5
15.9

Oct
-0.6
2.7
10.6
9.4
15.6

Nov
0.9
-0.6
10.8
9.5
15.9

Capacity Utilization

82.6

83.0

...

Dec
0.8
-1.9
10.9
9.6
16.2
.

Jan
-1.7
2.4
11.3
9.8
17.3

Feb
n.a.
n.a.
11.3
9.8
17.4

. .

...

Business Climatel'
-11.3
-3.3
-2.0
-4.0
-4.0
-1.0
n.a.
Consumer Prices3
1.5
1.4
1.5
1.4
1.4
1.8
n.a.
1. Western Germany.
2. Percent of firms (in manufacturing, construction, wholesale, and
retail) citing an improvement in business conditions (current and
expected over the next six months) less those citing a deterioration in
conditions.
3. Percent change from previous year.

relief of roughly DM30 billion (including effects from a proposed
one percentage point increase in the value-added tax).
In France, real GDP rose 0.6 percent

(s.a.a.r.) in the fourth

quarter following an increase of 3.1 percent in the third quarter.
For 1996 as a whole, GDP increased 1.3 percent on average.

While

strength in consumption underpinned overall activity last year,
growth last quarter was restrained by a decline in private
consumption; this decline followed the third-quarter surge
associated with the expiration of a government car-buying incentive
program.

Negative calendar effects also restrained measured growth.

While growth of fixed investment slowed, owing to a slight decline
in business investment, inventories made a strong positive
contribution.

Export growth slowed sharply and net exports

subtracted marginally from GDP growth.
Economic activity is expected to accelerate during the first
half of this year.

Producers' expectations of future manufacturing

output improved further in January and February as foreign orders
strengthened; inventories appear to have returned to a more normal
level following a sizable decumulation last year.

Consumption of

manufactured products rose in January despite a continued decline in

IV-18

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

1995

1996
Q2

GDP

0.4

2.1

5.1

-0.5

3.1

0.6

Total Domestic Demand

0.4

1.5

2.5

1.0

1.8

0.8

1996
Q1

Consumption

1.1

1.9

10.3

-3.8

3.7

-2.0

-0.1

-2.9

-1.3

2.8

1.0

1.6

1.2

2.4

1.2

1.6

-0.4

0.1

-3.2

3.1

-1.2

1.5

Exports

0.5

7.8

19.6

-6.3

15.0

4.5

Imports

0.7

5.9

9.9

-1.5

10.2

5.3

-0.1

0.5

2.5

-1.5

1.3

-0.2

Investment
Government Consumption
Inventories (contribution)

Net Exports (contribution)
1.

Annual changes are Q4/Q4.

car purchases;

and consumer confidence has

albeit at a subdued pace.

continued to improve,

Twelve-month consumer-price inflation has

remained low, averaging about 1-3/4

percent through February, and

the unemployment rate was unchanged in January.

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

SA)

1996

1997

Oct

Nov

Dec

Jan

Feb

Consumption of

2.7

-3.5

-3.1

-0.7

-1.3

1.9

n.a

Manufactured Products
Industrial Production

1.9

-1.1

-0.6

0.0

0.6

n.a.

n.aI .

Capacity Utilization

82.3

83.0

...

Unemployment Rate (%)
Business Confidence2
Consumer Prices 3

12.5
-26.7
1.8

12.7
-19.7
1.7

1.
2.
3.

12.6
-23.0
1.8

12.7
-21.0
1.6

12.7
-14.0
1.7

12.7
1.0
1.8

n.aI .
6.C
1.6)

For the months of July and August, INSEE publishes a composite numbe:r
for industrial production.
Percent balance of respondents citing an improvement in the outlook
versus those citing a worsening.
Percent change from previous year.

In the United Kingdom, real GDP growth picked up in the fourth
quarter with a strong increase in consumption and a sizable
contribution from net exports.

However, fixed investment growth was

IV-19

weak for a second consecutive quarter following rapid growth earlier
in the year.
UNITED KINGDOM REAL GDP
(Percent change from previous period, SAAR)1
1995
1996
1996

GDP
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)
Net Exports (contribution)
Non-oil GDP

1.9

2.7

Q1
2.4

Q2
2.2

Q3
2.7

Q4
3.4

0.6
1.4
-1.9
1.4
-0.2

2.1
3.7
1.9
1.0
-0.7

3.6
4.8
6.8
-0.6
-0.4

0.5
2.6
8.3
0.8
-2.7

2.0
4.0
-7.6
2.7
0.3

2.5
3.5
0.9
1.0
-0.0

1.0
1.8

0.0
2.6

-2.2
2.3

1.7
1.9

-0.4
2.6

0.7
3.4

1. Annual changes are Q4/Q4.

More recent information suggests that domestic demand has
continued to expand rapidly.

Retail sales rebounded in January

following a drop in December and continued to rise in February; for
the two months on average, sales were 0.8 percent above the fourthquarter level.

In addition, consumer confidence returned in January

and February to the high level recorded in November.

Industrial

production was unchanged in January at a level about 1/2 percent
above the fourth-quarter average, as a rise in manufacturing output
was offset by a drop in the utility sector due to slightly warmer
weather.

Business sentiment improved in January and February

following a sharp fall in December, but the index remains below the
high levels recorded in the fall, reflecting reduced expectations
for exports in response to the recent sharp appreciation of
sterling. The unemployment rate has continued to drop, reaching 6.2
percent in February, its lowest level in over six years.
of the one-percentage point decline since October has been
attributed to a tightening in the rules for unemployment
compensation and the rest to new job creation.

About half

IV-20

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

Industrial Production
Retail Sales
Unemployment Rate (%)
Business Sentiment
Consumer Prices1
Producer Input Price2
Average Earnings2

Nov

Dec

Jan

Feb

0.3
1.3
7.7
14.0
2.8
0.0
3.8

0.3
0.9
7.5
21.3
2.9
-2.7
4.0

0.9
1.1
6.9
18.0
3.2
-4.6
4.2

0.6
1.0
6.9
21.0
3.3
-5.3
4.3

0.6
-0.9
6.7
13.0
3.1
-6.2
4.8

0.0
0.6
6.5
14.0
3.1
-6.5
5.0

n.a.
0.5
6.2
16.0
n.a.
-6.6
n.a.

1. Retail prices excluding mortgage interest payments. Percent change
from previous year.
2. Percent change from previous year.

Retail prices excluding mortgage interest payments rose 3.1
percent in January from a year earlier, well above the government's
target rate of 2-1/2 percent or less.

Goods-price inflation has

declined over the past year despite a surge in petrol prices, while
services prices have accelerated.

This trend continued in January.

Growth in average earnings has also picked up.

The underlying rate

of increase of average earnings was revised up to 4.8 percent in
December and increased further to 5 percent in January, although
financial sector bonus payments may have biased the recent figures
upwards.

However, producer input prices have dropped considerably

below year-earlier levels, in part a result of sterling's
appreciation over the past year.
Prime Minister Major announced March 17 that the next election
wil be held on May 1. The Labour Party is widely expected to win, as
recent polls show it having a lead of over 20 points.
In Italy, real GDP declined a provisional 0.4 percent

(SAAR)

in the fourth quarter, and growth for 1996 as a whole (year/year),
amounted to only 0.8 percent.
available until mid-April.

Complete details will not be

However, we do know that the

quarter-on-quarter drop was due, in part, to two fewer working days
than in the third quarter and to weaker exports.
Indicators for the first-quarter are very limited.

Business

sentiment that remained weak in the last three quarters of 1996,

IV-21

strengthened in January.

Consumer confidence, which remains below

its 1996 average, rose in January but declined slightly in February.

ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
1997
Q2
Industrial Production

-0.8

Q3
-0.5

Cap. Utilization (%)

76.6

75.6

75.1

Unemployment Rate (%)

12.2

12.1

12.0

113.8
-1.0
4.2
3.4

114.1
-1.0
3.4
2.0

104.7
1.3
2.8
1.8

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

Q4
-0.7

Nov
0.4
...

Dec
-2.2

Jan
n.a.

Feb
n.a.

...

102.7
-5.0
2.6
1.8

105.3
12.0
2.6
1.5

109.9
21.0
2.6
1.0

109.0
n.a.
2.4
n.a.

1. Level of index, NSA.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.

After remaining stable at 2.6 percent for three consecutive
months, the consumer price index rose, on a year-over-year basis.
2.4 percent in February, less than half the rate recorded twelve
months ago.

Inflation is very likely to remain stable in light of

continued moderation in wholesale and producer price increases,
reflecting both the appreciation of the lira over the past year and
a half and productivity gains due to containment of labor costs
since 1993.
In February, the government formally committed to presenting a
supplemental 1997 deficit reduction package by the end of March in
order to reach the Maastricht criteria on time.

On February 21, the

official statistical agency of the EU, Eurostat, ruled permissible
the Italian accounting of taxes on wage funds and guaranteed
enterprise debt.

As a result, Italy's 1996 budget deficit to GDP

ratio declined to 6.8 percent from 7.2 percent.
Economic activity in Canada expanded 2.9 percent
fourth quarter of 1996.

(SAAR) in the

Total domestic demand was very strong,

reflecting a rebound in consumption expenditures and residential
construction as well as continued strength in machinery and
equipment investment. Inventory accumulation also contributed to the

IV-22

quarter's growth, while net exports subtracted from growth.

Exports

fell sharply, and in large part reflected the GM strike early in the
quarter.

The increase in imports was accounted for largely by

computers and other machinery and equipment.

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

0.7

2.3

Q1
1.4

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

-0.1
0.9
-1.8
-1.4
0.1

4.5
3.3
12.0
-1.6
0.3

2.9
5.1
10.0
-1.8
-1.8

-2.1
0.6
-0.8
0.6
-2.5

7.3
2.0
19.4
-3.9
2.8

10.3
5.6
20.8
-1.5
2.6

Exports
Imports
Net Exports (contribution)

5.0
4.0
0.4

1.3
6.6
-2.2

-0.7
3.4
-1.7

8.4
-2.2
4.4

8.6
18.8
-3.8

-10.1
7.4
-7.8

GDP

Q2
1.4

Q3
3.3

Q4
2.9

1. Annual changes are Q4/Q4.

Indicators for the first quarter are limited but point to
continued strong growth.

Employment changed little in January and

February, and the unemployment rate remained 9.7 percent in both
months.

Housing starts picked up in January and February;

for the

two months on average, starts were up 17.5 percent from the fourthquarter average.

Manufacturing shipments recovered in January and

new orders increased sharply to a level 5.7 percent over the fourthquarter average.

Headline consumer price inflation has picked up a

little in recent months but remains close to the midpoint of the
Bank of Canada's target range of 1-3 percent.

IV-23

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

Industrial Production
Manufacturing Survey:
Shipments
New Orders
Retail Sales
Housing Starts
Employment
Unemployment Rate (%)
Consumer Prices 1

0.5

2.1

2.4
2.5
0.3
10.0
0.2
9.6
1.4

3.2
2.7
0.8
3.9
0.1
9.7
1.4

Dec
-1.1

Jan

Feb

0.7

Nov
1.1

n.a.

-0.3
0.2
2.4
0.4
0.4
9.9
2.0

3.2
2.2
1.0
17.0
0.1
10.0
2.0

-0.6
1.0
-0.3
-1.5
0.2
9.7
2.2

2.2
4.3
n.a.
7.8
0.0
9.7
2.2

n.a.
n.a.
n.a.
9.6
-0.1
9.7
n.a.

1. Percent change from year earlier.

EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1996
1996
Feb
3.8
n.a.

4.6
-1.9

n.a.
n.a.

1.7
1.4

2.2
0.5

n.a.
n.a.

-1.7

-1.4

n.a.

61.4
66.9

15.9
17.4

Nov
6.9
7.4

Dec
4.4
5.1

Germany: trade1
64.8
current account -15.9

15.3 18.1
-3.7 -7.1

18.3
-2.6

6.5
0.3

6.4
5.4

7.1
4.1

-4.7 -4.6

-4.3

Japan: trade
current account

France: trade
current account
U.K.:

trade

23.8
20.6
-19.4

current account

n.a.

Italy: trade
current account

n.a.
n.a.

Canada:

trade

current account

4.6
3.8

Jan
5,5
6.8

Q2
Q3
13.4 15.0
15.3 18.9

-0.2

n.a.

...

12.4 9.6
11.1 14.3

n.a.
n.a.

3.9
4.1

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

0.7

25.0

7.3

7.1

4.7

1.5

1.7

n.a.

-1.2

0.8

0.2

-1.3

...

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

IV-24
MARCH 19, 1997

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

Japan

Percent

lill

.111I

1991

1992

1993

4111

1994

1995

Germany
Percent

11.1.

111111

1996

1991

France
Percent

I 1.

l1lt)1111

1992

1993

1994

1995

1996

United Kingdom
Percent
-

1991

,I
,

1992

I1 ,

,I, I

1993

1994

II I I I I

1995

1996

Italy
Percent

11 11111

1991

1992

I 1 111

1993

1994

111111

1995

1996

Canada
Percent

tJ
1...1

1991

1992

1993

1994

1995

1996

1991

I I.L

1992

II I

1993

1994

1 1

1995

1 I

1996

IV-25
MARCH 19, 1997

Industrial Production in Selected Industrial Countries
(12-month change)

Japan

120

Germany
--

1991=100

I I,

1991

1992

It
1993

1994

. I
I

1995

1996

1992

1993

1994

1995

1996

Italy

1991

1992

I, I
I,

,
II

I ..

1994

1995

1996

1993

1994

1995

1996

1993

1994

1995

1996

1993

United Kingdom

France

1991

1992

Canada

1992

199?

1994

1995

1996

1991

1992

120

IV-26

Economic Situation in Other Countries
In Latin America, the strong expansion in economic activity in
Mexico, Argentina, and Brazil continues.

In Venezuela, prospects

for a near-term recovery remain uncertain.

In Asia, output growth,

although high, has slowed somewhat in China, but prospects look
better for Taiwan, which seems to have recovered from a mild
slowdown in 1996.

The situation in Korea remains uncertain due in

part to recent industrial unrest and also due to the political
scandal after the second largest steel producer defaulted on a loan
payment.

In Russia, the economy seems to be on the verge of a

turnaround.
Inflation for 1996 in the developing economies varied across
countries, but generally the trend was lower.

The decline in

inflation rates for 1996 to single digits in Brazil and China is
notable.

In Russia, inflation is higher than target inflation, but

considerably lower than last year's inflation.

Prospects for a

further reduction in inflation in Venezuela disappeared after the
government agreed to public sector wage increases averaging 75
percent.
Korea.

External balances have worsened in Mexico, Brazil, and
For Mexico and Brazil, a pick up in aggregate demand is the

leading cause of this decline.

For Korea, the deterioration of the

current account in 1996 was further exacerbated in January by the
impact of industrial unrest on exports.

External balances have

improved in Argentina and Venezuela due to strong export growth in
Argentina (led by strong Brazilian export demand),
prices in Venezuela.

and high oil

In China, the trade surplus for 1996 was down

relative to 1995, but recently there has been strong export growth.
Individual country notes.

In Mexico, the economy has

recovered more rapidly than previously expected from the sharp
downturn that followed the December 1994 devaluation.

In the fourth

quarter of 1996, real GDP was 7.6 percent higher than the yearearlier quarter.

The increase was much higher than market

expectations of 5 to 5-1/2 percent.

The sharp increase over the

previous four quarters more than offset the 7 percent decline
(Q4/Q4) in 1995, putting the level of GDP in the fourth quarter of
1996 for the first time above its pre-crisis level.

For 1996 as a

whole, real GDP grew 5.1 percent from the previous year, following a
6.2 percent decline in 1995.

The industrial sector led the way

IV-27

during 1996, with a 10.4 percent increase in production from 1995,
while the service sector showed a more moderate increase of 3.1
percent.

On a seasonally adjusted basis, we estimate GDP to have

increased a robust 3 percent

(not at an annual rate) in the third

and fourth quarters.
Recent data revealed a moderate worsening in the Mexican
current account picture.

The current account deficit widened in the

fourth quarter of 1996 to bring the deficit for 1996 as a whole to
$1.8 billion, compared with a revised deficit of $1.6 billion for
1995

(previously reported to be only $0.7 billion).

Monthly data on

the trade balance showed some improvement in December and January,
largely due to a moderation in imports, which had been growing
rapidly in previous months.
MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1995
1996
1996
1997
Real GDP
Industrial Production (SA)
Unemployment Rate (%)
Consumer Prices 1
Trade Balance 2
Imports 2
Exports 2
Current Account 2

-6.2
-7.5
6.3
52.1
7.0
72.5
79.5
-1.6

5.1
10.4
5.5
27.7
6.3
89.6
95.9
-1.8

Q3
7.0
16.2
5.5
4.4
1.4
22.9
24.3
-0.8

Q4
7.6
12.8
4.7
6.1
0.7
25.5
26.2
-1.4

Jan

Feb

...
n.a.
4.5
2.6
0.5
7.7
8.1

n.a.
n.a.
1.7
n.a.
n.a.
n.a.

1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA

Consumer price inflation slowed in February to a monthly rate
of 1.7 percent, returning to the pace it exhibited last fall.

That

is in contrast to monthly inflation of 3.2 percent in December and
2.6 percent in January, when the seasonal effects of greater
spending and bonuses paid during the Christmas season were
exacerbated by increases in the minimum wage and public sector
prices.
On February 19, Mexico announced a pre-payment of $590 million
to the International Monetary Fund, continuing the Mexican strategy
of pre-paying external debt in order to diminish the concentration
of payments due in 1998 and 1999.

The funds for the pre-payment

represent half of the approximately $1.18 billion that Mexico will

IV-28

receive from two recent bond issues.

The other half of the bond

proceeds will be used to build international reserves.
In Argentina, the upturn in economic activity has gained
further strength, but there are signs that inflation may be
increasing a little.

Real GDP grew by a strong 9.2 percent in the

fourth quarter of 1996 compared with the same period a year ago,
bringing the year-over-year rate of growth for 1996 to 4.4 percent.
Industrial production was up 11.4 percent in January over a year
ago.

Monthly consumer price inflation was 0.5 and 0.4 percent in

January and February, respectively.

The January rise can be

attributed to a seasonal increase in tourism-related prices with the
onset of the Southern summer.

The February figure is partly due to

a telephone tax rate increase, but also reflects to some extent the
recent pick up in domestic demand (monthly inflation in February
1996 was -0.3 percent).
The recovery in activity led to growth in imports of about 11
percent in 1996, but exports, led by strong demand from Brazil, more
than kept pace and grew by 14 percent last year, resulting in an
increase in the trade balance surplus from $3 billion in 1995 to
$3.8 billion in 1996.

However, exports have fallen in January and,

according to preliminary data, the January 1997 trade balance shows
a deficit of $200 million, compared with a deficit of $70 million in
January 1996.
ARGENTINE ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1995
1996
1996
1997
Feb
Jan
Q4
Q3
Real GDP
Industrial Production (SA)

-4.6
-6.2

4.4
3.4

6.6
8.6

9.2...
11.7

Unemployment Rate (%)2

17.4

17.2

17.3

......

0.5
0.2
1.5
Consumer Prices 1
0.7
3.8
3.0
Trade Balance 3
3
n.a.
n.a.
-1.6
Current Account
1. Percentage change from previous period.
2. Unemployment figures available only in May and October
annual figure is the average of the two surveys.
3. Billions of U.S. dollars.
International reserves

0.3
0.3
n.a.

11.4

n.a.

0.5
-0.2
..

0.4
n.a.
...

of each year.

The

(excluding gold) were $16.5 billion at

the end of February 1997, higher than the year-earlier level of $14
billion.

Peso and dollar deposits have grown strongly recently and

IV-29

reached $55 billion by year-end 1996.

This represents a nearly 50

percent increase since June 1995, when deposits were at their lowest
point following the Mexican peso crisis.

The public sector deficit

in 1996 was $5.8 billion (under 2 percent of GDP) and in line with
the revised IMF-agreed target of $6 billion.

The January deficit

was $400 million, also roughly in line with the IMF-agreed target of
$1.04 billion for the first quarter of 1997.
In Brazil, real GDP grew at a revised 2.9 percent in 1996, but
this masks very strong growth over the last three quarters that
averaged 8 percent on an annualized basis.

Growth was led by strong

performance in the service sectors (especially communications),
while industrial output grew by only 2.3 percent.

Inflation has

continued to be remarkably low by Brazilian standards, despite the
lack of progress towards fiscal reform.

The fiscal deficit on an

operational basis (which removes interest payments eroded in real
terms by inflation) was 4.5 percent of GDP in 1996, slightly lower
than in 1995, but the improvement owed to lower real interest
payments on public debt.
BRAZILIAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1997
1996
1996
1995
Feb
Jan
Q4
Q3
...
...
5.4
6.5
2.9
4.2
Real GDP
1
n.a.
n.a.
5.3 n.a.
2.3
3.6
Industrial Production (SA)
n.a.
5.1
4.5
5.5
5.4
4.6
(%)
Rate
Open Unemployment
2
0.45
0.8
1.0
1.9
9.4
22.0
Consumer Prices
3
-1.6
-0.4
-3.9
-1.2
-5.5
-3.2
Balance
Trade
-2.7
-1.9
-3.7-10.7
-24.3
-17.8
Current Account 3
1. Annual data are from national income accounts.
2. INPC, Percentage change from previous period. Annual data are Dec/Dec.
3. Billions of U.S. dollars, NSA
Strong aggregate demand has contributed to continued trade
deficits.

The deterioration in the external balance in recent

months has put some downward pressure on the real/dollar exchange
rate.

So far, however, the real/dollar exchange rate has continued

to depreciate slowly, and the government has maintained that there
will be no large devaluation.

(As of mid-March, the real/dollar

exchange rate was 1.06 reais to the U.S.

dollar.) International

IV-30
reserves

stood at $59.4 billion at the end of February 1997,

slightly down from a peak of $60.5 billion in November

1996.

In Venezuela, developments in the labor market have fueled
further concerns about high inflation.

In January, the government

awarded a 164 percent pay rise to striking public
which fanned other wage demands
employees.

from the over

1 million public

The government relented in late February and has agreed

to wage increases averaging 75 percent.

The effects of this wage

over to the private sector as well.

settlement are expected to spill
Thus,

sector doctors,

despite mildly encouraging consumer price inflation of 2.6 and

2.3 percent monthly for January and February, respectively, analysts
believe the government will miss by a wide margin its
of 25 percent annual

current target

The IMF is expected to

inflation in 1997.

negotiate a new target inflation rate with Venezuela when it
concludes its

billion stand-by agreement

second review under a $1.4

expiring in mid-July.

The second review was underway in January

1997, but was suspended pending the outcome of the wage negotiations
and has not yet been renewed.

VENEZUELAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
Jan

Feb

n.a. n.a.

...

2.6
n.a.

2.3
n.a.

03
-1.6

2.2

Real GDP
Unemployment Rate (%)
ConsumerPrices 1
Trade Balance 2

1997

1996

1995

10.8

11.2

... 11.2

56.7
-6.0

103.3
n.a.

13.2 10.6
-1.6
n.a.

.
n.a..
2.6
Current Account 2
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA, non-oil trade balance.
According to preliminary data, real
year by 1.6 percent in 1996, with the oil

GDP declined year-oversector expanding by 4.9

percent, but the non-oil sector contracting by 3.6 percent.
recession has

led to a narrowing of the non-oil

over the period Jan-Sep 1996 was

trade deficit, which

$3.8 billion compared with $4.5

billion over the same period in 1995.
increased markedly during 1996

The

However, oil

exports

and are estimated at $18 billion,

compared with less than $14 billion in 1995.

The oil revenues have

also kept international reserves high, which at the end of January

IV-31

1997 stood at $12 billion (excluding gold),

compared with $6.7

billion a year ago.
In China, the 12-month consumer price inflation rate fell to
6.8 percent in January, a marked decline from the 25.5 percent
recorded in 1994. Strong export growth led to a trade surplus of
$3.8 billion in the first two months of 1997, compared with a
deficit of $0.4 billion in the year-earlier period.

The dollar

value of exports rose 21 percent, while imports fell 3 percent.

The

official budget deficit for 1996/97 equalled 1 percent of GDP (note
that this does not count the sizable subsidies to state-owned
enterprises through the banking system); the government had forecast
a larger deficit, but tax revenue grew faster than expected.
China's foreign exchange reserves rose to $110 billion at the end of
February, up from $75 billion at the end of 1995.
CHINESE ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1995
1996
1996
1997
Q3
Real GDP

Jan

Feb

10.5

9.7

9.6

9.7

...

Industrial Production

17.8

15.6

15.2

15.6

...

Consumer Prices

10.1

7.0

7.9

7.0

6.8

...

Trade Balance 2

16.7

12.2

7.3

4.0

1.7

2.1

1. Cumulative from the beginning of the year
2. Billions of U.S. dollars, NSA

The death in mid-February of China's supreme leader. Deng
Xiaoping, will likely have little effect on China's economy or the
pace of reform in the near term. Officially, the new leadership has
been in place for years, and leaders have pledged to continue
reforms.

Over time, however, renewed leadership struggles may

develop, and the outcome may help, or may hinder, economic
developments.

Financial markets reacted relatively little to the

news, which was widely expected.

For example, Hong Kong's Hang Seng

index--which had fallen slightly the previous week amid rumors of
Deng's ill health--rose 2 percent on the first day of trading after
the news, and has remained relatively flat since.
In Taiwan, economic activity recovered strongly in the fourth
quarter of 1996 from a mild slowdown earlier in the year, with GDP
rising 6.6 percent from the year-earlier period. The unemployment
rate was 2.7 percent in January 1997 and has fallen fairly steadily

IV-32

since reaching its ten-year high of 3.2 percent in August 1996.
Inflation remained low, with consumer prices rising 2.0 percent in
February.

Taiwan's trade surplus in the first two months of 1997

was $1.2 billion, compared with a surplus of $1.7 billion in the
year-earlier period.

The dollar value of exports fell 1 percent

from a year earlier, while the dollar value of imports rose 2
percent.

Foreign exchange reserves were $88.3 billion at the end of

February, up from its recent low of $83 billion in March 1996,
following Chinese missile tests near Taiwan.
TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1995
1996
1996
1996
Real GDP
6.1
Industrial Production
4.2
Consumer Prices
4.6
Trade Balancel
8.3
1
Current Account
5.0
1. Billions of U.S. dollars, NSA

5.7
1.6
2.5
14.3
10.5

Q4
6.6
4.8
2.5
4.0
2.8.

Q3
5.6
1.9
3.8
4.6
4.0

Jan

Feb

...
6.0
2.0
1.0

...
...
2.0
0.2
...

In Korea, the Hanbo Steel Company, the country's secondlargest steel producer, defaulted on loan payments on January 23.
So far, the investigation into the financial collapse has led to the
arrests of several prominent bankers and politicians on charges of
bribery in connection with loans extended to Hanbo Steel.

On March

5, President Kim appointed a new Prime Minister and a new Finance
Minister as part of a sweeping cabinet reshuffle intended to deflect
criticism of his handling of the Hanbo scandal.
Ruling and opposition parties struck a deal on March 10 on
amendments to controversial labor laws that had sparked widespread
industrial unrest for a month starting December 26.

The compromise

allows for the formation of multiple umbrella labor groups, which is
a move aimed at legalizing the outlawed Korea Federation of Trade
Unions

(KFTU)

however, the formation of more than two unions at one

work site would not be permitted until 2002.

Employers' groups have

accepted the amended bills, but the KFTU is threatening to wage a
general strike on May 1.
The impact of the labor unrest was reflected in the figures
for January's industrial production and external balances.

IV-33

Industrial production grew by 5.9 percent

(year-on-year) compared

with a 12.4 percent rise a year earlier.

Korea's trade and current

account deficits showed a sharp jump in January, in part due to the
adverse impact of the strikes on automobile exports.
KOREAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1995
1996
1996
Real GDP
9.0
Industrial Production
11.7
Consumer Prices
4.5
TradeBalancel
-4.7
Current Account 1
-8.9
1. Billions of U.S. dollars, NSA

6.8
8.4
5.0
-15.3
-22.6

Q3
6.4
7.9
5.2
-4.4
-7.3

Q4
6.6
9.8
4.8
-3.9
-6.2

1997
Jan Feb

n.a.
5.9
4.7
-2.2
-3.1

n.a.
n.a.
4.9
n.a.
n.a.

In Russia, both the economy and the health of President
Yeltsin seem to be on the verge of a turnaround.

January year-on-

year GDP growth was 0.1 percent, which was low but nonetheless the
first positive reading since the beginning of the reforms.
Similarly, Yeltsin made a strong showing at his first substantive
public appearance since his election nine months ago when he gave a
half-hour speech on the state of the country on March 6.
Yeltsin's return to full-time work may give a needed jolt to
economic reform, which had been stalled.

Yeltsin signed a 1997

budget in late February, but also said that he considered the budget
flawed and not achievable.

Moreover, on March 7 he initiated a

cabinet shakeup by naming the effective, but unpopular Anatoly
Chubais First Deputy Prime Minister.

During the past week, Yeltsin

made additional changes, shifting the cabinet composition toward
reformers.

Most notably, Chubais was also named Minister of

Finance, and the Economy Ministry absorbed the Defense Industry
Ministry and the Industry Ministry.

There now seems to be hope that

a sorely needed tax code may be passed sometime during 1997,
although it may not be implemented until 1999.
Inflation for the first two months of 1997 came in at 3.8
percent, higher than would be consistent with the targeted annual
rate of 12 percent but still lower than last year's inflation for
the same period (1996 inflation came in at 22 percent for the year).
The ruble-dollar exchange rate has continued to remain well within

IV-34

the corridor set by the Central Bank.

However, U.S. dollar

shipments to Russia remain higher than ever, and official Russian
statistics indicate that individuals spent one quarter of their
incomes on foreign currency purchases during the month of January,
1997.
RUSSIAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1995
1996
1996
Real GDP
Industrial Production
Consumer Prices'
Ruble Depreciation1
Trade Balance 2
Current Account 2
1. Monthly rate.
2. Billions of U.S. dollars.

-4
-3
7
2
18.3
5.7

-6
-5
1.7
1.5
n.a.
n.a.

Q3
-7
-8
0
2
4.9
n.a.

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

1997
Jan
0.1
0.3
2.3
1.3
n.a.
n.a.

Feb
n.a.
n.a.
1.5
0.8
n.a.
n.a.

Russia's three-year, $10 billion IMF Extended Fund Facility
was held up in October and November, but has been moving back on
track, with a double tranche released in January and another double
tranche expected soon.

The IMF and Russia are working now on a plan

for 1997; the chief concerns are structural changes, including
restructuring of the energy monopolies, and revenue collection.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 25, 1997 : Greenbook Part 2

FRASER