Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 26, 1985 : Greenbook Part 2

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Confidential (FR) Class III FOMC

March 20, 1985

RECENT DEVELOPMENTS

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

DOMESTIC FINANCIAL DEVELOPMENTS-continued
Tables
Monetary aggregates

.........................................

Commercial bank credit and short- and intermediate-term
business credit...........
....
................
........
Gross offerings of securities by U.S. corporations.............
Treasury and agency financing..................................
Gross offerings of tax-exempt securities........................
Mortgage activity at FSLIC-insured institutions.................
New issues of federally guaranteed mortgage
pass-through securities.....................................
Consumer installment credit....................................
Household financial positions...................................

5
8
10
13
16
16
18
19

Chart
Contract interest rates on conventional home mortgages..........

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets......................................
U.S. banks' foreign lending in the fourth quarter...............
U.S. international financial transactions........................

1
6
9

.............................

U.S. current account in 1984 ....................................
Foreign economic developments...................................
Individual country notes........................................

17
18
22

Debt situation in developing countries...........................

U.S. merchandise trade............

Tables

Claims on foreigners of U.S.-chartered banks.....................
Claims of U.S.-chartered banks on non-OPEC developing countries..
Summary of U.S. international transactions.......................

7
7
10

International banking data....................................

U.S. merchandise trade.........................................

U.S. current account............................................
Oil imports......................................................
Major industrial countries
Real GNP and IP...............................................
Consumer and wholesale prices.................................
Trade and current account balances............................

15
16
19
20
21

Charts
Weighted average exchange value of the U.S. dollar...............
Selected dollar exchange rates....................................

2
2

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Employment and unemployment ...................................

Industrial production and capacity utilization..................
Personal income and consumption..............................

3
3

Business fixed investment....
.............................
Business inventories...................
............... .. ......
. ..
Housing ...........................................
.... ...
Federal government . ...................................
.........
State and local sector............................................
Federal government..............................................
Exports and imports ..........................................

8
10
11
12
13
15
16

Prices........................................................
Wages and labor costs..........................................

16
17

Tables
Changes in employment..................................

.......

Selected unemployment rates.....................................

Industrial production.......................................
Capacity utilization in industry...............................
Personal income and expenditures.......... ....................
Retail sales...............................................
Auto sales, production, and inventories..............
.....

4
4
6
7
7

Business capital spending indicators..........................
Changes in manufacturing and trade inventories..................
Inventories relative to sales...................................

9
12
12

Private housing activity .......................................

Recent changes in consumer prices...............................
Recent changes in producer prices.............................

18
18

Hourly earnings index.........................................

Charts
Nonresidential construction, contracts, and permits.............

Private housing starts.........................................

DOMESTIC FINANCIAL DEVELOPMENTS

III

Monetary aggregates and bank credit.............................
Business finance...............................................

3
7

Government finance
Federal sector ...............................................

State and local sector........................................
Mortgage markets........

........................

......

Consumer credit ..................................
Household financial positions...................................

12
15

17
19

March 20,

1985

II - T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest data
Period

Release
date

Data

Percent change from
Three
Preceding
periods
Year
period
earlier earlier
(At annual rates)

Civilian labor force
Unemployment rate (%)1
Insured unemployment rate (%) 1
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hr.)1
Hourly earnings ($) 1
Manufacturing:
Average weekly hours (hr.)1
Unit labor cost (1967-100)

Feb.
Feb.
Nov.
Feb.
Feb.
Feb.

03-08-85
03-08-85
02-14-85
03-08-85
03-08-85
03-08-85

115.1
7.3
2.8
96.1
19.7
76.4

2.2
7.4
2.8
1.5
-4.7
3.1

Feb.
Feb.

03-08-85
03-08-85

35.0
8.49

35.2
8.45

35.2
8.42

35.3
8.23

Feb.
Jan.

03-08-85
03-01-85

40.0
82.7

40.6
-7.2

40.5
-3.4

40.9
-8.2

Industrial production (1967=100)

Feb.
Feb.
Feb.
Feb.
Feb.

03-15-85
03-15-85
03-15-85
03-15-85
03-15-85

164.7
161.9
188.8
147.0
159.9

-5.8
7.4
-4.4
9.0
-7.5

-. 2
-1.7
.8
13.5
-1.2

2.9
1.6
9.8
13.5
.3

Consumer prices all items (1967=100)
All items, excluding food & energy
Food

Jan.
Jan.
Jan.

02-26-85
02-26-85
02-26-85

316.6
308.2
307.7

2.3
4.7
2.0

2.5
3.7
3.0

Producer prices: (1967=100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

Feb.
Feb.
Feb.

03-15-85
03-15-85
03-15-85

292.1
324.7
250.4

-1.2
-5.9
-24.0

Feb.

03-20-85

3,141.2

Consumer goods
Business equipment
Defense & space equipment
Materials

Personal income ($ bil.)

3.9

.1
-2.2
-16.2

3.5
4.5
2.6
.7
.7
-3.7

5.6

(Not at annual rates)
Kfgrs. new orders dur. goods ($ bil.) Jan.
Jan.
Capital goods industries
ondefense
Jan.
Jan.
Dofense

03-05-85
03-05-85
03-05-85
03-05-85

103.9
32.7
23.1
9.5

1.8
-7.1
-13.2
11.7

8.1
7.8
-8.9
94.2

4.4
3.0
-7.9
44.4

Inventories to sales ratio: 1
Manufacturing and trade, total
Manufacturing
Trade

Jan.
Jan.
Jan.

03-14-85
03-14-85
03-14-85

1.37
1.48
1.27

1.35
1.46
1.26

1.37
1.50
1.26

1.29
1.41
1.18

Ratio: Mgra.' durable goods inen1
tories to unfilled orders

Jan.

03-05-85

.554

.553

.530

Retail sales, total ($ bil.)
WA3

Feb.
Feb.

03-13-85
03-13-85

112.1
23.8

Feb.
Feb.
Feb.

03-05-85
03-05-85
03-05-85

11.0
8.6
2.4

-1.2
1.0
-8.2

10.2
19.0
-12.8

3.7
2.0
10.1

1984-4

03-11-85
03-19-85
03-01-85

28,984
1,638
166.7

5.0
-11.0
1.7

Auto sales, total (nil. units.)
Domestic models
Foreign models
Capital Appropriations, Mfg.
Housing starts, private (thous.)
Leading indicators (1967-100)

Feb.
Jan.

1. Actual data used in lieu of percent changes for earlier periods.
2. At annual rates.
3. Excludes mall order houses.

1.4
3.6

2.4
1.6

19.5
-25.8
1.3

DOMESTIC NONFINANCIAL DEVELOPMENTS
Economic activity appears to have expanded at a moderate rate in early
1985.

Growth in domestic spending was quite strong, but a good deal of the

increased demand for goods was met by imports rather than domestic production.
Consumer spending rose substantially in February, and housing market activity

on average has picked up a bit.

Trends in business investment have been

mixed; spending on new equipment has been sluggish, while nonresidential
construction remains robust.

Recent price reports continued to be favorable.

Employment and Unemployment
Nonfarm payroll employment rose a moderate 120,000 in February, after
four months of very strong growth.

Retail trade and services posted further

strong job gains, but manufacturing employment fell 75,000.

About one-

third of the decline in factory jobs occurred in the auto industry; the
significance of this decline is questionable given that assemblies were
back to a very high level in early March.

Even so, many other manufacturers,

including those in thelumber, machinery, textiles, and apparel industries,
also reported job cutbacks.

In addition, the factory workweek fell six-tenths

of a hour, in large part owing to unusually harsh weather during the survey
reference week.

Bad weather probably hindered construction activity as

well and may explain the drop of 50,000 in construction employment.
The civilian unemployment rate edged down to 7.3 percent in February.
After falling rapidly over the first year and a half of the expansion, the
jobless rate has fluctuated in the 7.2 to 7.5 percent range since last
spring.

Most of the job gains over the past several months occurred among

adult women and teenagers; yet, because stong demand has drawn additional
II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1984
1983

1984

1984
Dec.

1985
Jan. Feb.

-Average monthly changesNonfarm payroll employment 2
Strike adjusted
Manufacturing
Durable
Nondurable
Construction
Trade
Finance and services
Total government
Total employment 3
Nonagricultural

282
282

305
307

224
216

291
304

184
211

312
270

119
118

92
70
22
22
69
96
3

55
47
8
31
87
97
16

-4
15
-19
10
61
63
72

62
46
16
28
112
100
-15

83
58
25
61
0
89
-63

4
6
-2
75
110
147
-27

-77
-55
-22
-52
114
130
4

331
338

270
266

1
17

293
271

341
290

118
183

294
274

1. Average change from final month of preceding period to final month of period
indicated.
2. Survey of establishments. Strike-adjusted data noted.
3. Survey of households.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1984

1984
Dec.

1985
Jan. Feb.

7.2

7.4

7.3

18.6
11.4
5.5
6.0

18.4
10.9
5.4
5.8

18.8
10.9
5.4
5.6

18.9
10.9
5.5
6.1

18.4
11.2
5.4
5.9

6.5
15.9

6.4
15.8

6.2
15.1

6.2
15.0

6.4
14.9

6.2
16.3

9.5

7.2

7.1

7.0

6.9

7.1

9.5

7.4

7.3

7.1

7.3

7.2

1983

1984

9.6

7.5

7.4

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

22.4
14.5
7.8
7.2

18.9
11.4
5.7
6.0

White
Black

8.4
19.5

Fulltime workers
Memo:
Total national1

Civilian, 16 years and older

Includes resident Armed Forces as employed.

II-3

women and youth into the labor market, their unemployment rates have remained
relatively flat.
Industrial Production and Capacity Utilization
Industrial production declined 0.5 percent in February, and output
gains during the three preceding months were smaller than previously estimated.
The overall industrial production index now is no higher than it was in
mid-1984.

The sluggishness in production during the past half year, reflects

a continued substitution of imports for domestically produced goods and
ongoing corrections of inventory imbalances in some industries.
Production cutbacks in February-attributable only in part to bad
weather-were widespread among products and materials.

The output of

consumer goods declined 0.6 percent, while production of business equipment
dropped for a second consecutive month.

Automobile assemblies-at an 8.2

million unit annual rate-fell short of planned schedules after reaching an
8.6 million unit rate in January.

Meanwhile, capacity utilization rates

generally have dropped back since last summer.

In February, the operating

rate for total industry fell to 80.7 percent compared with its recent high
of 82.7 percent in July 1984.

Personal Income and Consumption
Personal income grew $15 billion per month on average during the
first two months of 1985, the same as the fourth-quarter pace.

Income

growth in January was boosted substantially by annual cost-of-living adjustments
to government benefit programs, other factors affecting transfer payments,

and pay raises for federal civilian and military personnel.

Meanwhile,

growth in private wages and salaries, which represent roughly half of

II-4
INDUSTRIAL PRODUCTION
(Percentage change from preceding period;
based on seasonally adjusted data)
1984

1984
Q4

Q3
---

Annual rate----

--Monthly rate-

-2.1

-. 5

8.9
1.4
-1.0
2.4
23.1
13.1

2.8
-1.0
-3.6
.1
4.5
16.3

.5
-.1
-. 1
.0
.8
1.8

.1
.2
-. 1
.3
-.2
.8

-.3
-.6
-. 8
-.5
-.4
.8

-6.9

-.2

-.9

3.3
6.7
-1.8
2.4

-7.6
-5.8
-8.7
-11.2

-.3
-. 6
-.7
1.0

.6
.7
.1
1.5

-.6
-. 8
-1.0
.2

Construction supplies
Materials
Durable goods
Nondurable goods
Energy materials

1985
Jan. Feb.

6.3

Total
Final products
Consumer goods
Durable
Nondurable
Business equipment
Defense and space equipment

1984
Dec.

CAPACITY UTILIZATION IN INDUSTRY
(Percent of capacity,

1978-80

1982

seasonally adjusted)

1967-82

1984
Jan.

1985
Feb.

High

Low

Avg.

Dec.

87.3

69.6

82.4

81.3

81.4

80.7

Manufacturing
Durable
Nondurable

87.5
89.4
87.2

68.8
64.8
73.8

81.8
80.5
83.9

81.5
82.2
80.8

81.4
82.0
80.6

80.8
81.4
80.1

Mining
Utilities1

90.4
86.8

69.6
79.0

86.5
88.6

74.8
83.5

75.3
84.6

73.5
84.4

88.9

66.6

83.3

80.4

80.7

80.1

Metal materials
Paper materials

95.4
97.9

46.2
86.3

82.2
93.4

65.0
98.1

65.6
97.7

67.1
n.a.

Chemical materials

91.3

64.0

85.1

74.5

74.8

n.a.

Total industry

Industrial materials

1. The 1978-80 high is below the 1967-82 average because of the unusually
slow growth in demand for electricity.

II-5

total personal income, slowed noticeably.

Part of the recent slowdown in

wages and salaries was attributable to weakness in manufacturing payrolls,
reflecting the contraction in employment since December.
Nominal personal consumption expenditures rose at about a 9 percent
annual rate in the first two months of the year, compared with 6 percent in
the fourth quarter.

In January, outlays for services rose sharply, apparently

because unusually cold weather raised electricity and natural gas consumption,
while spending on goods other than autos declined.

In February, spending

on goods posted a strong gain, as almost all major types of stores reported
higher sales.

Excluding sales of autos, nonconsumer items, and gasoline,

retail outlays in February were 2.1 percent above the fourth-quarter average.
Consumer spending on new cars remained strong through early March.
Total auto sales averaged about 11 million units at an annual rate in
January and February-the highest level of sales over a two-month period
since the first half of 1979.

Sales of domestic models have averaged

around 8-1/2 million units at an annual rate thus far in the first quarter,
about a million units above the fourth-quarter pace.

Demand for foreign

cars also remains strong, but limited supplies of Japanese cars have curtailed
sales lately.

With the quota year drawing to a close on March 31, Japanese

producers have slowed deliveries to the U.S. in order to stay within their
export restraints.
Recent survey readings of consumer confidence were close to the high
levels reported earlier in the expansion.

In surveys taken during both

January and February, respondents expressed greater interest in buying
automobiles and household durable goods than they did late last year.

II-6
PERSONAL INCOME AND EXPENDITURES
(Based on seasonally adjusted data)
1984
1983

1984

1984
Dec.

1985
Jan.
Feb.

- - Percentage changes at annual rates - -1

Total Personal Income
Nominal
Real 2

7.5
4.3

9.2
5.8

8.7
4.2

6.6
4.1

Disposable Personal Income
Nominal
Real 2

8.5
5.3

8.9
5.6

8.4
3.9

6.0
3.5

4.0
6.1

Expenditures
Nominal
Real 2

9.0
5.7

7.5
4.2

5.0
.7

6.1
3.6

9.8
12.0

7.4
-.7

4.0
n.a.

8.5
.6

3.2
n.a.

9.0
1.0

9.0
n.a.

- Changes in billions of dollars - -3

Total personal income
Wages and salaries
Private
Manufacturing

I17.0

21.0
11.4
9.6
2.6

20.6
8.3
6.5
1.2

14.5
11.9
10.5
3.3

6.8

10.6

12.9

3.3

.6.3

17.2

18.2

9.9

.5.7
3.9
3.9
7.9

14.1
2.4
4.3
7.5

11.9
-2.9
4.0
10.9

5.1

6.1

6.3

.1.1
9.5
3.3

14.3
17.7
16.0
4.3

19.1
8.1
3.3
1.4

-2.3

20.5

2.4

8.8

18.8

7.1

10.6
6.1
.2
4.4

19.6
12.1
7.6
.0

18.2
-2.4
3.5
17.0

18.2
.7
11.0
6.6

6.2

5.7

5.2

10.3
8.5
6.2
-1.1

I
Other income
Disposable personal income

I
Expenditures
Durables
Nondurables
Services
Personal saving rate (percent)

1. Annual changes are measured from final quarter of preceding period to final
quarter of period indicated. Changes for quarterly periods are compounded rates
of change; monthly changes are not compounded.
2. Total personal income is deflated by the personal consumption expenditure
deflator.
3. Average monthly changes are from the final month of the preceding period to
the final month of period indicated; monthly figures are changes from the preceding month.
e--staff estimate

II-7
RETAIL SALES
(Percent change from previous period;
based on seasonally adjusted data)
1984

Total sales
(Real)1

Feb.
Q4

1984
Dec.

-.9

2.1

2.2

-.3

1.4

1.7

n.a.

-.2

n.a.

1.3

2.1

-.1

-.5

2.1

-.6

3.4

1.0

-4.3

3.6

-2.4
-4.4

4.8
5.9

2.8
4.6

-.2
-.9

1.4
4.1

.9
.4

1.4

5.2

1.9

-3.4

2.3

.0
-3.2
1.0
-.3
-3.4

.7
2.9
.0
2.9
.7

-.4
.0
-1.6
1.0
-2.4

.0
-6.7
2.7
-3.8
1.1

1.7
2.9
.4
4.3
-.2

-1.3

Total, less automotive,
gasoline and
nonconsumer stores
GAF2
Durable
Automotive group3

Furniture & appliances
Nondurable
Apparel
Food
General merchandise4
Gasoline stations

.5
1.9
-2.3
2.2
2.2
-.7

1985
Jan.
Feb.

1. BCD series 59. Data are available approximately three weeks
following the retail sales release.
2. General merchandise, apparel, furniture and appliance stores.
3. Sales of the automotive group frequently differ from sales of new
cars on a unit basis because of broader coverage (e.g. parts, used
cars, and servicing), seasonal factors, and sampling.
4. General merchandise excludes mail-order nonstores.
AUTO SALES, PRODUCTION & INVENTORIES
(Millions of units; seasonally adjusted annual rates)

Jan.

1985
Feb.

Mar.-

10.3

11.2

11.0

n.a.

Imports

2.4

2.8

2.6

2.4

n.a.

Domestic
Small
Intermediate & standard

7.9
3.7
4.2

7.5
3.5
4.0

8.5
4.1
4.4

8.6
4.2
4.4

8.3
n.a.
n.a.

Domestic production
Small
Intermediate & standard

7.5
3.6
3.9

7.7
3.6
4.1

8.6
4.0
4.6

8.2
4.0
4.2

8.5'
n.a.
n.a.

1.32

1.44

1.51

1.52

n.a.

1984

Total sales1

Domestic inventories
Days' supply2

1. Components may not add to totals due to rounding.
2. Quarterly days' supply are based on end of quarter stocks and
average sales for the quarter.
3. First 10-days.
e-estimated.
n.a.--not available.

II-8

According to the Michigan survey, the more favorable buying plans were due
to lower prices and interest rates.

In response to special questions

pertaining to the Administration's tax reform plans, most households thought
that, if proposed tax reforms were passed, the changes would have little impact
on their own personal finances.
Business Fixed Investment
Spending for business equipment has turned sluggish lately, after
rising rapidly earlier in the expansion.

Growth in expenditures on producers'

durable equipment in real terms slowed to just a 2 percent annual rate in
the fourth quarter, and more recent indicators of demand for domestically
produced equipment show considerable weakness.

Shipments of nondefense

capital goods by domestic producers plunged 10.4 percent in January, with
declines reported for nearly every category of equipment.

To some extent,

this weakness was counterbalanced by higher demand for equipment produced
abroad.

In addition, business purchases of motor vehicles remained quite

strong.
In contrast with equipment spending, construction spending still is
growing at a robust pace.

Outlays for nonresidential construction expanded

2.7 percent in January, continuing the brisk growth shown in the fourth
quarter.

Office and other commercial building activity remained especially

strong, although some weakness is still evident in the public utility and
institutional sectors.
Like the evidence on current spending, indicators of future business
spending also are mixed.

New orders for nondefense capital goods received

by domestic producers fell 13 percent in January, after showing no growth

II-9
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)
1984
Nov.

Dec.

1985
Jan. Feb.

2.7
-1.1
1.7

3.6
-3.5
-2.5

2.8
6.9
-.1

5.1
-1.9
-1.5

10.4
-13.2
-1.9

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

23.1 -17.9

1.0

-3.9

22.1

n.a.

Producers' durable equipment
Nondefense capital goods
Shipments
Orders
Unfilled orders
Imports of capital goods
excluding autos
Exports of capital goods
excluding autos

1.4

2.3

-8.5

12.1

Sales of heavy-weight trucks
(thousands of units, A.R.)

252

316

345

348

299

n.a.

316

Nonresidential structures

Nonresidential construction
Commercial building

1.3

4.9

1.3

2.5

2.7

n.a.

1.9

10.9

2.1

3.9

5.0

n.a.

NONRESIDENTIAL CONSTRUCTION,
CONTRACTS, AND PERMITS1
3 Month
oving A\ erag

Billions
of dollar
Construction
ut-in-4 80
place

-'""ij""

"""""""
. . . . .. .

. ...

'" i "'"'
'
*"
** " "
"> " ''T
:;::::::::
:::
::
......
°......
.
************
* * *' *' * '' ****

«---

'"""^""'

-U..-'~

.."

Contracts
Permits

Permits
U

I-1*.

I
1979

a
r

1981

Source: F.W. Dodge and Census.

.I-

ggaglm,,,gatiiialauisiggaaia111
L.
i^
........

1983

1985

II-10

over the second half of 1984.

Orders for office and computing equipment

were exceptionally low for the second month in a row, and there were widespread
declines among other equipment categories.

Although these data suggest

weakness in domestic production of capital goods in the near term, the
longer-term outlook for total investment spending-including purchases of
foreign and domestically produced equipment as well as construction expenditures-remains more favorable.

The value of new construction commitments

was still trending upward around the turn of the year (chart).

And, more

generally, surveys of anticipated spending on plant and equipment, the
latest of which is the February McGraw-Hill survey, point to an increase in
nominal outlays of about 10 percent in 1985, with especially large gains in
manufacturing.
Business Inventories
Investment in business inventories remained moderate in early 1985.
The book value of stocks at all manufacturing and trade establishments

increased at a $26 billion annual rate in January, roughly the same as in
the fourth quarter but considerably slower than the rapid rates maintained
over the first three quarters of 1984.

The more moderate inventory investment

in recent months reflects not only the need for some businesses to reduce
overhangs that first emerged last fall, but also continued caution toward

inventory investment fostered by high carrying costs and competitive pressures.
Recent changes in inventories varied considerably across industries.
In the manufacturing sector, the book value of stocks fell in January for a
third month in a row, largely in response to earlier weakness in orders and

shipments.

At the retail trade level, however, the book value of inventories

II-11

increased substantially in January for a second consecutive month.

Roughly

two-thirds of the January accumulation occurred at auto dealers, as car
manufacturers stepped up assemblies and shipments to dealers in an effort
to alleviate tight supplies of some models.

At general merchandise stores,

where stocks had been burdensome late last year, retailers managed to pare
their inventories in January, apparently through heavy discounting.

Moreover,

the strong increase in retail sales reported in February probably also
helped to bring stocks and sales into better alignment.
Housing

Housing activity strengthened somewhat in early 1985.

Housing starts

jumped sharply in January and then settled back to a 1.64 million unit rate

in February (chart).

Issuance of residential building permits, which tends

to be less volatile than the starts series, corroborates the recent pickup
in construction activity: permit issuance during the January-February

period averaged 5 percent above the fourth-quarter pace.
Housing starts for multifamily units were particularly volatile in the
winter months, with all of January's sharp increase being reversed in
February.

When averaged over this two-month period, multifamily starts were

16 percent above the fourth-quarter pace.

In light of several adverse

influences on multifamily construction, including the highest average
vacancy rate for rental housing in 10 years, a large number of units in the
production pipeline, and uncertainty about potential tax law changes,
the January level appeared unsustainable.

In the single-family market, sales of existing homes posted their
third consecutive monthly gain in January, while new home sales rose 3

II-12
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

Nov.

Dec.r

1985
Jan.P

25.9
-6.3
9.7
22.5
16.0
6.5

1984

1984
Q3

Book value basis:
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. auto

56.3
40.4
10.1
5.8
-4.3
10.1

54.4
30.8
16.8
6.7
1.8
4.9

23.4
.9
4.1
18.3
10.2
8.1

14.5
-7.1
15.3
6.4
10.2
-3.8

15.0
-5.0
-9.1
29.1
13.2
16.0

19.7
13.8

24.3
13.0

11.6
.3

8.7
-2.0

7.2
-1.2

4.1

8.8

3.7

8.5

-.6

1.7
-3.0

2.5
.4

7.6
5.6

2.1
5.7

8.9
5.1

2.1

2.0

-3.5

3.8

Constant dollar basis:
Total
Manufacturing

Wholesale
Retail
Automotive

4.7

Ex. auto

INVENTORIES RELATIVE TO SALES

1984
Q3

1984
Q4

Nov.

1985
Jan.P

Dec.r

Cyclical
Reference Points 2

Book value basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

81 low

82 high

1.39

1.53

1.33

1.36

1.37

1.36

1.35

1.37

1.60
1.06
1.36
1.59
1.29

1.77
1.28
1.43
1.88
1.35

1.47
1.09
1.34
1.37
1.33

1.49
1.14
1.37
1.46
1.35

1.48
1.15
1.38
1.49
1.35

1.49
1.16
1.35
1.43
1.33

1.46
1.14
1.38
1.49
1.35

1.48
1.15
1.39
1.49
1.36

1.62
1.91
1.34
1.34
1.49
1.28

1.75
2.11
1.52
1.44
1.81
1.37

1.51
1.76
1.30
1.31
1.27
1.33

1.55
1.79
1.36
1.34
1.32
1.34

1.55
1.78
1.37
1.36
1.41
1.34

1.55
1.78
1.37
1.35
1.39
1.34

1.53
1.76
1.36
1.34
1.37
1.33

Constant dollar basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

1. Ratio of end-of-period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily coincident.
r-Revised estimates.
p-Preliminary estimates.

II-13

percent after a relatively sluggish initial response to the declines in
mortgage interest rates recorded during the last half of 1984 and in early
1985.

With the improvement in sales, single-family starts generally have

trended higher since last October; in February, these starts were at a 1.12
million unit annual rate, or 7 percent above the fourth-quarter level.
House prices have continued to rise at approximately the rates observed
over the past year.

Controlling for changes in quality and regional mix,

new home prices in the fourth quarter were about 5 percent above a year
earlier.

Price behavior in specific markets, however, has varied considerably

from these national averages.

For example, very large increases in median

prices for existing houses were reported in New York City and Boston over
the past year, while prices were flat or down in some metropolitan areas in
California, Texas, and the Midwest.
State and Local Sector
Real outlays for goods and services by state and local governments

showed virtually no growth in the fourth quarter of 1984 and apparently
remained sluggish during the first two months of this year.

In January,

real outlays for construction continued to trend lower, as has been the

case since the third quarter of 1984.

And, through February, employment

had dropped from its fourth-quarter level.
On the whole, the state and local sector still is enjoying a sizable
operating surplus, and some states are contemplating decreases in tax

rates, especially personal income tax rates.

In particular, cuts are

expected in Minnesota, Wisconsin, and New York, where effective income tax

II-14

PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)
1984
Annual

Dec.

1985
Jan.
Feb.1

1.67
1.75

1.80
1.86

1.53
1.66

1.56
1.60

1.63
1.63

1.68
1.84

1.60
1.64

Single-family units
Permits
Starts

.92
1.08

.96
1.12

.85
.99

.84
1.05

.85
1.11

.92
1.07

.94
1.12

Sales
New homes
Existing homes

.64
2.87

.63
2.97

.61
2.76

.62
2.81

.60
2.87

.62
3.00

n.a.
n.a.

Multifamily units
Permits
Starts

.75
.67

.84
.74

.68
.67

.72
.55

.78
.52

.75
.78

Mobile home shipments

.30

.29

.30

.29

.28

.27

1984
Q4

All units
Permits
Starts

.66
.52
n.a.

1. Preliminary estimates.
n.a.-not available.

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions
of units

II-15

rates are high.

However, concerns about possible reductions in federal aid

to states and localities may damp enthusiasm for tax cuts.

Federal Government
The federal government recorded a deficit of $6-1/2 billion (unified
basis) in January, about $1 billion more than during the same month a year
earlier.

Over the first four months of fiscal 1985, the deficit totaled

$79 billion and continued to run about $10 billion larger than it was during
the comparable period of fiscal 1984.
On the outlay side, a cost-of-living adjustment in social security
and federal retirement programs, along with general pay increases for federal
civilian and military personnel, boosted January outlays about $1 billion
($12 billion at an annual rate).

On the spending side, indexation of tax

rates effective January 1 is estimated to have reduced liabilities on
personal taxes at a $9 billion annual rate, while a hike in social security
tax rates added about $6 billion (annual rate) to personal tax burdens.
January and preliminary February data also show that income tax returns
were being processed at a slower pace than in recent years.
In Congress, the Senate Budget Committee has completed markup on the
First Budget Resolution for FY1986.

The Committee's decisions call for a

slowing in the growth of defense spending, a "freeze" on many domestic
programs including social security COLAs and on federal pay and pensions,
and a reduction in spending for a number of other domestic programs, but no
tax increases.

According to the Committee's estimates, these actions would

reduce their baseline deficit by about $55 billion in FY1986 and approximately
$100 billion by FY1988.

The House Budget Committee is expected to take

the budget within the next few weeks.

II-16

Exports and Imports
The U.S. merchandise trade deficit widened substantially in January,
to $21 billion at an annual rate, after declining to a $92 billion annual
rate in the fourth quarter.

An increase in nonoil imports accounted for

most of the deterioration in the trade account, as imports of capital
goods, passenger cars from Europe, and consumer goods were up sharply.
Although monthly figures on nonoil imports tend to be volatile, their high
level continued to reflect the effects of the rising dollar and strong U.S.
demand.

Oil imports, in contrast, have declined steadily in recent months

in both price and quantity.

The volume of oil imported in January was 4.8

million barrels per day compared with an average of 5.8 million barrels per
day in the October-November period; the average price of imported oil
dropped 55 cents per barrel between November and January.

Nonagricultural

exports in January remained at their somewhat improved December level.
However, agricultural shipments abroad, which had benefited from a surge in
exports to Russia in the fourth quarter, dropped back.

(Further discussion

of international economic developments is included in Section IV).
Prices
Price reports have continued to be favorable early this year.

The

consumer price index rose 0.2 percent in January, while the producer price
index for finished goods was unchanged in January and then fell 0.1 percent
in February.
Price weakness in petroleum markets was again a factor in holding
down the inflation rate early this year.

The energy component of the CPI

was off 0.8 percent in January, the largest monthly decline in almost two
years, as gasoline and fuel oil prices fell markedly.

II-17

Retail food prices rose 0.2 percent in January, as lower
prices for livestock products partially offset increases in other categories.
At the producer level, prices for both finished and crude foods declined
for a second month in a row in February, despite sharp weather-related
increases for fresh fruits and vegetables.

Further price reductions for

meats and most livestock contributed to the overall declines in the PPI
food indexes.
Outside the food and energy sectors, consumer prices rose somewhat
faster in January than during the fourth quarter.

This acceleration occurred

exclusively in the commodities component and was attributable to large
price increases for cigarettes and used cars.

In contrast, prices of

nonenergy services rose at the same pace as in the two preceding months and

less than the average monthly rate during 1984.
Capital equipment prices picked up in January and February, largely
reflecting higher manufacturers' prices for cars and light trucks.

Never-

theless, the PPI index for capital equipment still is only 2-1/4 percent
above its level a year ago.

At earlier stages of processing, the index for

intermediate materials less food and energy continued to be relatively
flat, and prices of crude nonfood nonenergy materials fell substantially
further.
Wages and Labor Costs
Wage inflation in the private economy leveled off in late 1984 and
early 1985.

The hourly earnings index for production and nonsupervisory

workers rose 0.6 percent in February, after a decline the month before.

II-18
RECENT CHANGES IN CONSUMER PRICES
(Percentage change; based on seasonally adjusted data)1

Relative
Importance
Dec. 1984

1983

1984
Q3

1984

-Annual
All items 2
Food
Energy
All items less food
and energy
Commodities
Services
Memorandum:
CPI-W 3

1984
Dec.

rate-

1985
Jan.

-Monthly

rate-

100.0
18.7
11.5

3.8
2.6
-.5

4.0 4.3
3.8 3.8
.2
.8

4.5
3.9
.1

3.0
3.7
-.7

.3
.4
-.2

.2
.2
-.8

69.8
26.3
43.5

4.9
5.0
4.8

4.7
3.1
5.6

5.0
3.8
5.6

5.3
3.8
6.2

3.5
.9
5.0

.3
.2
.4

.4
.5
.4

100.0

3.3

3.5

2.6

7.5

1.6

1. Changes are from final month of preceding period to final month of period
indicated.

2. Official index for all urban consumers, based on a rental equivalence measure
for owner-occupied housing after December 1982.
3. Index for urban wage earners and clerical workers, based on a rental equivalence
measure for owner-occupied housing after December 1984.
RECENT CHANGES IN PRODUCER PRICES
(Percentage change; based on seasonally adjusted data)1
Relative
Importance
Dec. 1984

1983

1984

1984
Q3

-Annual
Finished Goods
Consumer foods

100.0
24.4

.6
2.3

1.8
3.8

2.8
3.3

1985
Q4

rate-

.0
4.5

-.2 -19.7

1.8
4.5

5.7

Jan.

-Monthly
.0
-.6

rate-. 1
-. 1

Consumer energy

11.5

-9.2

-4.1

Other consumer goods
Capital equipment

42.4
21.6

1.8
1.9

2.2
2.1

3.1
3.1

2.5
2.3

.0
.0

.6
.4

.3
.5

Intermediate materials 2
Exc. energy

95.1
80.1

1.4
3.0

1.7
2.0

3.5
3.0

-1.1
.9

1.1
1.3

.0
.0

-.5
-.2

Crude food materials
Crude energy
Other crude materials

53.0
31.7
15.4

8.0
-4.6
15.5

-.9
-1.0
-3.3

-6.2 -1.7
12.0
1.1
1.0 -7.0
7.4 -15.3 -10.7

-2.4

Feb.

-2.4
-2.2
-1.4

-2.5

-2.0
-.4
-4.3

1. Changes are from final month of preceding period to final month of period indicated.
2. Excludes materials for food manufacturing and animal feeds.

II-19

Although volatile on a monthly basis, the 12-month change in this wage
measure has fluctuated around the 3 percent mark since last autumn.

Average

wage adjustments in manufacturing have risen somewhat more in recent months
than they did earlier in the recovery when many union workers negotiated
new contracts with initial wage cuts and freezes.

Some of the step up

lately may be attributable to the reduced incidence of cuts and freeze
in the manufacturing sector, as profits generally have improved.

Meanwhile,

changes in the wage indexes for services and transportation and public
utilities have been quite moderate, on average, over the past several
months.
Productivity in the nonfarm business sector rose nearly 3 percent at
an annual rate during the fourth quarter of 1984 after a 1 percent decline
in the preceding quarter.

Over the four quarters of the year, productivity

was up 2-1/2 percent, compared with the strong, cyclical rebound of nearly
4 percent in 1983.

Rising productivity coupled with a moderate increase in

hourly compensation held the increase in unit labor costs to less than 2

percent last year.

II-20

HOURLY EARNINGS INDEX 1
(Percentage change; based on seasonally adjusted data) 2
1984
1983

1984

Q3
-Annual

Total private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities
Total trade
Services

Q4
rate-

1984
Dec.

1985
Jan. Feb.

-Monthly

rate-

3.9

3.1

2.7

2.9

-.2

2.7
2.1
3.9
1.5

3.3
3.0
3.7
.9

3.1
2.8
3.8
-.7

3.2
2.7
4.0
.3

.4
.5
.2
.6

.5
.6
.3
.2

.4
.4
.4
.9

4.3
4.7
4.9

3.0
2.6
4.0

2.7
2.0
3.9

2.4
3.0
3.7

.7
.5
1.1

-.3
-.5
-1.0

.5
.4
.8

1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime hours in manufacturing.
2. Changes over periods longer than one quarter are measured from final
quarter of preceding period to final quarter of period indicated.
Quarterly changes are compounded annual rates.

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)

1985

1984

1982/1983
Cyclical

Change from:
1984
FOMC
highs Dec. 13

Highs

FOMC
Dec. 18

FOMC
Feb. 13

8.46

11.63

8.34

8.52

8.58

-3.05

Treasury bills
3-month
6-month
1-year

7.08
7.62
7.73

10.67
10.77
11.13

7.81
7.98
8.30

8.24
8.30
8.49

8.55
9.02
9.21

-2.12
-1.75
-1.92

Commercial paper
1-month
3-month

8.00
7.97

11.42
11.35

8.06
8.13

8.47

8.80

8.56

4.95

-2.62
-2.40

8.08
8.13
8.20

11.52
11.79
12.30

8.18
8.29
8.47

8.51
8.70
9.05

8.84
9.13
9.75

-2.68
-2.66
-2.55

8.68
8.71

11.89
12.20

8.53
8.79

8.60
9.04

8.84
9.34

-3.05
-2.86

10.50

13.00

11.25

10.50

-2.50

10.11
10.86

12.82
13.20

8.66
9.43

8.77
9.64

9.25
10.08

-3.57
-3.12

U.S. Treasury (constant maturity)
9.33
13.49
3-year
10.12
13.99
10-year
30-year
10.27
13.94

10.24
11.29
11.35

10.44
11.39
11.31

11.19
11.99
11.93

-2.30
-2.00
-2.01

Municipal revenue
(Bond Buyer index)

9.21

11.44

10.445

9.965

10.255

-1.19

Corporate-A utility
Recently offered

11.64

15.30

12.80e

12.65e

13.24e

-2.06

Rome mortgage rates
S&L fixed-rate
S&L ARM. 1-yr.

12.55
n.a.

14.68
12.31

13.186
11.076

12.90
10.59

13.206
10.876

-1.48
-1.44

rates
Short-term
Short-term rates
Federal funds

low

Large negotiable CDe
1-month
3-month
6-month

Mar.

.33
.39

Eurodollar deposits 4
1-month
3-month
Bank prime rate
Treasury bill futures
June 1985 contract
Dec. 1985 contract

.24
.30

Intermediate- and long-term rates

1982

NASDAQ (OTC)

1984
FOMC

Percent change from:
FOMC
FOMC

1985
FOMC

Highs

Dec. 18

Feb. 13

Mar. 19

Dec. 18

Feb. 13

776.92
58.80
118.65

1287.20
99.63
249.03

1211.57
96.78
204.00

1297.92
106.08
231.22

1271.09
103.91
224.64

4.9
7.4
10.1

-2.1
-2.0
-2.8

159.14

328.91

243.44

288.32

278.85

14.5

-3.3

Lows
Stock prices
Dow-Jones Industrial
NYSE Composite
AMEX Composite

1983

.30
.28

1. One-day quotes except as noted.
2. Averages for two-week reserve maintenance pelriod
closest to date shown. Last observation is for
maintenance period ended March 13, 1985.
3. Secondary market.

4. Averages for statement week closest
to date shown.
5. One-day quotes for preceding Thursday.
6. One-day quotes for preceding Friday.
e-estimated.

DOMESTIC FINANCIAL DEVELOPMENTS

M1 growth strengthened in February, probably still boosted by previous declines in interest rates, bringing this aggregate near the upper
parallel band associated with its 1985 target range.

Growth of the broader

monetary aggregates, on the other hand, slowed in February, as spreads
between market interest rates and rates on retail deposits and money funds
widened.
Since the FOMC meeting in mid-February, federal funds have traded
primarily between 8-1/2 and 8-3/4 percent, somewhat above the prevailing
level earlier in the year.

Other market interest rates rose more markedly

during February, as the strength of M1, combined with indications of
tautness in reserve markets, apparently aroused concerns that System policy
had become or was about to become less accommodative.

More recently, these

interest rates have fluctuated in response to incoming data on the strength
of economic activity, which have given mixed signals.

On balance, yields

on Treasury securities have risen throughout the maturity spectrum since
the February FOMC meeting, by 30 to 75 basis points, and the yield curve
has remained quite steep.

Yields on corporate obligations generally have

increased in line with those on Treasury securities, while yields on taxexempt securities have risen less.

New commitment rates for conventional

home mortgages, after declining in early February, have begun to rise as well.
The collapse in early March of E.S.M. Government Securities, a nonprimary, monthly-reporting dealer, and the subsequent closing of privately
insured savings and loan associations in Ohio appear not to have significantly affected domestic financial markets.

Apart from the privately

insured S&Ls in Ohio, depository institutions apparently have not encountered
III-1

III-2

MONETARY

AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)1
Growth from
Q2
----6.5
7.1
10.5

1. Ml
2. M2
3. M3

1984
Q4

1985
Dec.

Jan.

Feb.

Q4 1984 to
Feb. 1985

Percentage change at annual rates 3.2
9.0
11.0

4.5
6.8
9.5

10.2
13.1
14.4

9.0
13.8
10.5

13.9
10.6
8.1
Levels in billions
of dollars
Feb. 1985

Selected components
160.6

4. Currency

7.5

7.3

5.1

6.1

5.3

5. Demand deposits

3.3

0.3

-1.0

8.8

2.4

12.0

251.6

11.3

9.0

8.5

16.7

24.7

22.6

151.7

7.2

7.6

10.8

14.1

15.4

9.5

1850.7

0.7
Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
15.5
9.0
Commercial banks
Savings deposits, SA, plus
4
5.1
MMDAs, NSA
13.1
Small time deposits
8.7
Thrift institutions
Savings deposits,
SA, plus
4
MMDAs, NSA
2.3
13.4
Small time deposits

2.8

2.1

-10.3

110.4

129.7

69.7

10.9
4.9

28.3
8.6

42.2
17.7

32.2
15.0

23.0
9.0

175.5
792.3

-3.6
13.4
4.7

10.6
6.9
7.3

28.0
7.8
9.4

38.2
-8.1
7.7

25.7
-8.4
6.5

410.7
381.7
821.6

-12.5
17.0

-4.1
14.8

6.5
11.4

23.7
-2.9

25.9
-5.6

327.1
494.6

24.9

20.3

18.9

19.0

-2.3

-1.2

622.1

30.4
21.8
48.1

25.7
19.3
38.1

18.8
12.2
31.3

16.3
3.6
39.0

1.7
-9.1
20.5

6.9
9.6
2.3

419.8
264.5
155.3

8.1
54.2
7.1

9.7
33.4
-22.1

97.4
39.6
-23.0

90.6
-17.0
19.0

44.0
-84.4
30.3

-51.7
18.5
5.9

62.2
65.8
81.5

Other checkable deposits

M2 minus M1 2

8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

M3 minus M25
Large time deposits
6
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA

MEMORANDA
23. Managed liabilities at commercial
banks (24+25)
24.
Large time deposits, gross
25.
Nondeposit funds
26.
Net due to related foreign
NSA
institutions,
7
Other
27.

9.0

Average monthly change in billions of dollars --

1.0
-0.9

-0.4
2.8

1.0
-0.4

-0.6
2.8
-3.4

-7.4
1.0
-6.4

11.5
0.6
10.9

438.5
325.4
113.1

1.1
-4.5

-4.5
-1.8

3.0
7.9

-33.5
146.6

28.

U.S. government
deposits at commercial
8
-. 7
0.6
0.0
-1.2
-I.A
-1.7
13.0
banks
13A
-ie7
-ItA
_ie2
Oeo
0*6
_0*7
1. Quarterly growth rates are computed on a quarterly average basis. Dollar mounts shown under memoranda for quarterly changes are calculated on an end-mnth-of-quarter basis.
2. Nontransactioon H2 is seasonally adjusted as a whole.
3. Overnight and continuing contract RtP issued to the nonbank public by commercial banks plus overnight Eurodollar
deposits issued by branches of U.S. banks to U.S. nonbank customers, both net of amouts held by money market mutual
funds.
Excludes retail UP, which are in the smll time deposit component.
4. Growth rates are for saving deposits, seasonally adjusted, plus money markat deposit accounts (MMDAs), not seasonally adjusted.
Comercial bank saings deposits excluding MDAs declined during January and February 1985 at
rates of 9.8 and 2.0 percent respectively, At thrift institutions, savings deposits excluding MHDAs increased in
January and February 1985 at rates of 7.2,and 7.9 percent respectively.
5. The non-t2 component of M3 is seasonally adjusted as a whole.
6. Net of large-denomination tism deposits held by money market mutual funds and thrift institutions.
7.

Consists of borrowings

from other than commrcial banks in

the

tom of federal funds purchased securities sold

under agrements to repurchase and other liabilities for borrowed money (including borrowings from the Federal
Reserve and unaffiliated foreign banks), loand sold to affiliates, loan RPs and other minor items. Data are partially
estimated.
8. Consists of Treasury demand deposits at coamrcial-banks and Treasury note balances.

III-3

liquidity problems.

Some Treasury bill rates dropped sharply after the

announcement of the closing of the Ohio thrifts, but on balance yield
spreads between bank CDs and Treasury bills and between federal funds and
RPs have widened only marginally.
Borrowing by nonfinancial sectors in the first two months of the year
seems to have moderated relative to the fourth quarter of 1984.

Business

credit demands appear to have fallen off considerably from the strong
fourth-quarter pace, despite a likely widening of the financing gap in
the first quarter and continued net retirements of equity.

In addition,

offerings of tax-exempt bonds have declined by one-third from the record
volume brought to market in the fourth quarter.

And although the Treasury

continues to place very large demands on financial markets, its borrowing
too has been significantly below the fourth-quarter level.

Only in the

household sector does the growth of aggregate credit demands appear to have
remained close to the late-1984 pace.
Monetary Aggregates and Bank Credit
Ml growth surged in February to a 14 percent annual rate, with all
of its components contributing to this strength.

Inflows to Super NOW

accounts remained substantial, probably boosted by the January reduction
in regulatory minimum balance requirements; however, this does not appear
to have had a significant effect on M1 growth, as the primary source of
Super NOW inflows seems to have been ordinary NOW accounts.
strength of M

The continued

in recent months points toward a decline in velocity in the

first quarter as a whole, which probably is at least in part a lagged reaction
to the drop in interest rates over the fall and early winter.

III-4

In contrast to M,
February.

growth in the broader aggregates moderated in

M2 decelerated to a 10-1/2 percent pace, as growth in MMDAs and

M2-type money funds slowed and runoffs of small time deposits quickened.
The weakening of these components likely reflects changing yield relationships.

When market rates declined last fall and early winter, yields on

money funds, MMDAs, and small time deposits responded sluggishly, resulting
in strong inflows into these accounts, particularly to MMDAs and money
funds, whose yields became most favorable relative to market counterparts.
However, a further downward adjustment of these yields, followed by the
recent upturn in market rates, has tended to reverse this trend.

The

slowdown in M2 growth in February was tempered by a record increase in
overnight RPs and a rare increase in savings deposits.

The surge in RPs

financed substantial acquisitions of Treasury securities by bank security
dealers.
M3 growth slowed to an 8 percent annual pace in February, as the
level of its non-M2 component contracted a bit for the second straight
month.

The February decline was concentrated in institution-only money

funds, which registered outflows following the restoration of a positive
spread between market rates and money fund yields.

In addition, growth of

large time deposits at thrift institutions virtually ceased, owing both to

slower asset growth and increased reliance on Federal Home Loan Bank (FHLB)
advances.

Asset growth of FSLIC-insured institutions apparently is being

restrained by the implementation of new capital requirements for these

III-5

institutions by the Federal Home Loan Bank Board.1

Outstanding FHLB advances

increased $2-1/2 billion in February, perhaps reflecting an effort by some
thrifts to lengthen maturities of managed liabilities; the average maturity
of advances in recent months generally has exceeded 13 months.

In contrast

to thrift institutions, commercial banks resumed issuance of large time
deposits and term RPs in February after runoffs of these liabilities in
January, as core deposit growth slowed while credit growth picked up.
Credit growth at commercial banks in February increased to a 13 percent annual rate, more than double the January pace.
in both the security and loan components.

Strength was evident

Heavy acquisitions of U.S. govern-

ment securities more than offset a runoff in holdings of other securities.
The pickup in loan growth was accounted for by business loans and real
To a large degree, the strength in business loans appears to

estate loans.

have reflected an increase in the share of business loans booked at domestic
offices rather than at foreign branches, as the spread between the prime
and LIBOR narrowed by about 100 basis points in February.

Nonetheless, the

sum of business loans at domestic offices plus foreign branch loans grew at
a 6-1/2 percent rate in February, somewhat faster than the average rate
in the previous two months.

Growth in consumer loans slowed for the second

straight month.
1. On January 1, FSLIC-insured institutions became subject to new incremental requirements on minimum net worth, the size of which are based on
their rate of growth. In addition, those institutions with assets exceeding $100 million now must have regulatory approval to grow in excess of a
25 percent annual rate over two consecutive quarters. In January, total
assets of FSLIC-insured institutions were virtually unchanged, compared
with a monthly average increase of over $12 billion in the fourth quarter
of 1984.

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual races, based on seasonally adjusted data)

1984
Q4

Dec.

Jan.

1985
Feb.P

Levels in
bil. of dollars
Feb.P

Commercial Bank Credit
1. Total loans and securities
at banks
2.

Securities

U.S.

Other securities

government securities

Total loans

Business loans

Security loans

a.
9.

9.2

9.5

9.8

9.6

6.2

13.1

1742.2

-9.8

6.6

0.5

-1.2

6.3

12.8

406.8

-11.2

6.8

3.4

3.7

-1.4

24.9

265.3

-7.3

6.3

-4.8

-10.2

20.5

-9.3

141.5

15.7

10.5

12.7

12.9

6.1

13.3

1334.4

18.5

7.5

1.5

13.6

474.2

4.2

36.1

47.7

19.1

-11.3

31.6

Real estate loans

13.8

11.4

11.6

7.7

13.7

381.9

Consumer loans

21.5

20.9

16.7

15.1

257.8

14.2

Business loans net of hankers
acceptances
2

16.2
Short-

18.4

7.9

21.5

8.2
7.8

Loans at foreign branches

12.

Sum of lines 10 & 11

18.7

13.

Commercial paper issued by
3
nonfinancial firas

64.8

46.8

14.

Sums of lines 12 & 13

23.3

12.2

13.7

-16.1

-32.0

15.

Total bankers acceptances

outstanding

16.

Line 14 plus total bankers acceptances
outstanding

17.

Finance company loans to business
Total short- and intermediateterm business credit (sum of
lines 16 & 17)

47.0

and Intermediate-Term Business Credit

10.6

11.

18.

2.3

-13.4

10.

7.7

-76.0
6.6

469.8
20.7
490.5

37.3

72.9

-1.9

10.5

563.4

-28.2

-49.8

n.a.

71.6 (Jan.)

8.0

26.4

8.3

7.7

3.6

-7.6

n.a.

630.1 (Jan.)

15.2

9.8

23.2

25.8

32.5

n.a.

136.5 (Jan.)

24.5

8.5

10.3

7.4

-0.6

n.a.

766.6 (Jan.)

n.a.-not
available,
p-preliminary.
1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Loans at foreign branches are loans made to U.S. firma by foreign branches of domestically chartered banks.
3. Average of Wednesdays.

4. Based on average of current and preceding ends of month.
5. Reporting panel change in January, 1985 increased reported acceptances $2.1 billion.
adjusted to aliminate this break in series.

Growth rates have been

III-7

The rebound in business lending by commercial banks was accompanied
by a resumption of heavy commercial paper issuance in February after the
sharp runoff in January.

After contracting in January, the sum of bank

loans and commercial paper expanded at about a 10-1/2 percent annual rate
in February, still somewhat below the fourth-quarter pace.
Business Finance
Overall credit demands of nonfinancial firms strengthened in February
from January's sluggish pace, as the surge in borrowing from banks and in
the commercial paper market more than offset a decline in bond issuance.
New issues by nonfinancial firms in the domestic bond market were essentially unchanged from the previous month, but Eurobond offerings dropped back
after a bulge in January.
Taking the first two months of the year together, the volume of funds
raised in financial markets by nonfinancial corporations appears to have
fallen off considerably from the fourth-quarter pace, despite a likely
widening of the financing gap in
and in

the current quarter.

Borrowing from banks

the commercial paper market grew at only one-third the rate of the

fourth quarter, while in

long-term markets total bond offerings-here and

abroad-by nonfinancial firms were only about two-thirds the average monthly
volume in the fourth quarter.

Meanwhile, net retirements of equity-reflect-

ing mergers and other financial restructurings--have continued sizable.

$4-1/2 billion swap of debt for common stock and a $1/2 billion repurchase
of shares from the Pickens group by Phillips Petroleum are expected to take
place in late March.
Total bond offerings by U.S. corporations-financial and nonfinancial--declined sharply in February from the strong January pace.

Eurobond

III-8

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)

Year

1984
Q3

Qlf

Jan.P

1985
Feb.P

Mar.f

Corporate securities - total1

9.88

11.00

13.19

11.85

12.23

8.62

14.70

Public offerings in U.S.

8.00

8.77

10.40

8.78

7.15

6.00

13.20

Stocks--total 2
Nonfinancial
Utility
Industrial
Financial

1.89
1.08
.22
.86
.81

1.64
.84
.17
.66
.80

1.79
1.11
.20
.90
.69

1.93

1.40

2.20

.30

2.20
1.30
.50

.60
.50

.80
.90

Bonds--total1
By industry
Nonfinancial
Utility
Industrial
Financial

6.11

7.13

8.61

6.85

2.80
.87

3.30

1.93

2.42

3.31

3.83

1.85
2.11
1.06
.28

2.23

By quality3
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity based bonds 4
Mortgage-backed bonds
Variable rate notes
Bonds sold abroad - total
Nonfinancial
Financial

I-

.90

5.75

3.80

4.48
1.51
2.97
4.13

2.45

2.50
.50

1.45
3.30

2.00

2.79
1.19
.32

3.01
2.63
1.71
.28

1.50
3.50
.45
.20

.20
2.40
.40
.15

.62
.81
.72

.57
.60
1.29

1.30
.98
.51

1.88
.84
1.04

2.23
.97
1.26

2.79
1.08
1.71

.88

1.00

11.00

1.30

.15
.65
.08
3.07

p--preliminary, f--staff forecast.
1. Securities issued in the private placement market are not included.

5.08
1.86
3.22

2.62

1.50

.97
1.66

Total reflects gross
proceeds rather than par value of original discount bonds.
2. Includes equity issues associated with debt/equity swaps.
3. Bonds categorized according to Moody's bond ratings. Excludes mortgage-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants attached where the warrants
entitle the holder to purchase equity in the future.

III-9

volume dropped by half, and total bond issuance by financial firms fell by
more than half.

Offerings in the Eurobond market last month apparently

were held down by a large buildup of unsold issues at underwriters following
the very aggressive pricing of a record volume of offerings in January.
Bank holding companies accounted for much of the reduction in total bond
issuance by financial corporations, as a number of institutions approached
regulatory limits on the amount of mandatory convertible debt that can be
counted as primary capital for purposes of regulatory minimum capital
guidelines.1

Total bond issuance by U.S. corporations is expected to bal-

loon in March, bolstered by the Phillips restructuring; apart from this

transaction, bond offerings thus far in March are running close to the
pace in February.
Several stock price indexes reached record highs in early February,
before weakening with the backup in market interest rates, and equity
issuance picked up a bit.

Even so, equity issuance through the first two

months of the year remained at around the lackluster average pace of 1984,
despite the strong performance, on balance, of stock prices thus far in
1985.
Government Finance
Federal sector.

The staff is now projecting a combined (on- and

off-budget) deficit of $60 billion for the first

quarter.

The first-quarter

deficit has been reduced by as much as $5 billion by a slower-than-normal
pace of tax refunds, attributed to problems with new IRS computer systems.
The Treasury is

expected to meet its

financing requirements by borrowing

1. A more extensive discussion of activity in the Eurobond markets in
February appears in the International Developments section of the Greenbook.

III-10
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)

1984
Q4

1985
Jan.

Feb.P

Mar.f

Q1f

-8.0

-24.7

-27.6

-60.3

64.2

12.7

16.3

60.2
17.6
42.6
4.0

11.9
.1
11.8
.8

15.1
2.2
12.9
1.2

9.8
2.5
7.3
1.0

36.8
4.8
32.0
3.0

12.8

-8.9

9.3

7.7

8.1

17.6

26.5

9.5

Treasury financing

Combined surplus/deficit(-)

-71.5

Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments(-)
Bills
Coupons
Nonmarketable
Decrease in the cash
balance
Memo: Cash balance
at end of period
Other 2

FHLB

Farm Credit Banks

9.1

-5.5

Federally sponsored credit
agencies, net cash
borrowing 3

FNMA

17.2

10.8

-. 4

2.0

-. 8

1.2

3.6

-1.9

-. 6

FHLMC

-. 1

SLMA

39.8

12.4

1.0

-. 7

-. 1

-1.9

f--staff forecast. p--preliminary.
1. Data reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Excludes mortgage pass-through securities issued by FNMA and FHLMC.

III-ll

about $40 billion, net, from the public and by reducing its cash balance
by about $8 billion, leaving an end-of-quarter balance of $9-1/2 billion.

Continuing the pattern of recent quarters, the Treasury will raise the
bulk of its new money in auctions of marketable coupons.

Bill financing

is expected to total only $5 billion, with a cash management bill that the
Treasury had expected to be needed in March now likely to be deferred until
early April.

Borrowing by the federally sponsored credit agencies is declining in
the first quarter from the already low level in the final quarter of last
year.

Federal Home Loan Banks are borrowing relatively small amounts in

the current quarter, as advances to thrifts have been financed largely by
drawing down liquid assets.

The FHLBs continue to hold a relatively large

volume of liquid assets and thus are not expected to tap the financial
markets for new funds in the near term.

Borrowing by the Federal National

Mortgage Association moderated in the first quarter, but remains sizable.
FNMA's rapid growth reflects, in part, an effort to reduce the rate sensitivity of its portfolio by adding adjustable-rate mortgages.
The Farm Credit Banks will reduce their outstanding debt in the
first quarter by the same amount as in the preceding quarter.

Borrowing

by these institutions generally has been weak since 1982, but the recent
cutback in debt has been the sharpest over this period and coincides with
a decline in the demand for loans by the agricultural sector.

With heavy

debt burdens and declining land values, farmers have been increasing their
outstanding debt only slightly.
Thus far, the stress in the farm sector has had a limited effect on
the financial condition of the Farm Credit System.

A few of the local

III-12

cooperative associations that lend directly to farmers have been liquidated
and three of the 37 Farm Credit Banks have reported financial difficulty.1
However, the losses of these three banks can be covered by the others in
the System.

For 1984, the System recently reported aggregate net income of

$442 million, compared with $543 million in 1983, and its capital position
is strong.

Recent issues of securities by the System have not carried

additional risk premiums.

There have been reports that some investors are

attempting to pare their holdings of these securities, but the paydown of
debt by the System apparently has been sufficient to offset the selling
pressure from those investors liquidating their holdings.
State and local sector.

Issuance of tax-exempt bonds increased in

February to $9.5 billion but seems to be dropping back this month to about
the comparatively low $6.7 billion pace of January.

Not only have offerings

of long-term tax-exempts remained well below the record volume in the
fourth quarter, but offerings of short-term tax-exempt notes also have
remained light.

Interest rates on tax-exempt bonds have increased substan-

tially after reaching their lowest level since the spring of 1983 during
the third week of January.
The supply of new tax-exempt issues in February was augmented by a
surge of refunding bonds.

Many states sold general obligation bonds for

this purpose and two publicly owned utilities brought large refunding issues
to the market.

The total volume of refundings was nearly $2 billion, its

highest level since the spring of 1983.
1. The Farm Credit System issues debt on behalf of 37 Farm Credit Banks.
These banks then distribute these funds to local cooperatives that lend

directly to farmers.

III-13

GROSS OFFERINGS OF TAX-EXEMPT SECURITIES

(Monthly totals or monthly averages; billions of dollars)
1984
1983

1984

Q4e

Jan.e

1985
Feb.e

Marchf

------------- Seasonally adjusted ------------Total
Long-term

Short-term1

10.39
7.20

10.45
8.75

11.87
10.00

14.09
12.83

7.60
6.70

10.40
9.50

3.19

1.70

1.87

1.26

.90

7.60
6.80

.80

-------------Not seasonally adjusted ---------

Total

10.39

10.45

11.03

15.18

6.20

8.10

7.70

7.20

8.75

9.08

14.06

5.50

7.40

1.17

1.01

.78

1.29

.70

1.87

7.00
--

housing 3

.92

1.08

2.69

1.25

.07

.03

Short-term1

3.19

1.70

1.95

1.12

.70

Long-term

Refundings 2
Single-family

.70

e--estimate. f-staff forecast.
1. These figures do not include tax-exempt commercial paper.
2. Includes all refunding bonds, not just advance refundings.
3. Data from the Department of Housing and Urban Development.

On the demand side, households and mutual funds have continued to
be the major investors in tax-exempt bonds.

There is some evidence of

increased participation by commercial banks, primarily in shorter-term
markets, but property/casualty companies, once heavy participants in
the municipal market, have remained inactive, given record underwriting
losses.

Individuals' demand for municipal securities has been supported

by the increasing use of guarantees of various types.

In 1984, about 21

percent of long-term municipal securities was protected with private insurance, compared with 15 percent in 1983, and less than 4 percent as
recently as 1980.

Until 1983, AMBAC Indemnity Corporation and the Municipal

Bond Insurance Association provided most of the insurance for tax-exempt

bonds, but more recently two new firms have entered the market.

III-14

CONTRACT INTEREST RATES ON
CONVENTIONAL HOME MORTGAGES
Percent
S15

FRMs

".1

12
12

ARMs1
A"
'1

I
At Major Originators

I I

i10

Percent
--

n 14

Loans closed
(monthly)

1. One-year ARMs at S&Ls offering both FRMs and ARMs with the same
number of discount points. Data unavailable prior to 1984.

III-15

Mortgage Markets
Rates on new commitments for home mortgages have turned up since the
last FOMC meeting in both the primary and the secondary markets.

At S&Ls,

contract interest rates for conventional fixed-rate mortgages (FRMs) averaged 13.20 percent by mid-March, up 30 basis points from the latest low
in mid-February but still about 150 basis points below last July's high.
Initial contract rates on one-year adjustable-rate mortgages (ARMs) at the
same institutions have increased on balance by a similar amount.
Through early February, closing rates on both FRMs and ARMs had
continued to move down, but the cumulative declines in closing rates since
last autumn had been much smaller than cumulative declines in rates on new
commitments.

For FRMs and ARMs combined, average contract rates at closing

were off by only 57 basis points from last October's high.

In part, the

downtrend in the average closing rate on all conventional loans has been
moderated by a shift in the composition of lending toward FRMs and away
from ARMs that carry lower initial rates.1

Of all conventional mortgages

closed in early February, 46 percent carried adjustable-rate features-sharply below last October's near-record high of 64 percent and the lowest
proportion since late 1983.
Available evidence on demands for new mortgage credit early this year
has been mixed.

Net borrowing from commercial banks on all types of real

estate picked up sharply in February from the reduced January pace, but on
1. Deep discounting of ARM interest rates in the initial period--offered as
a promotional incentive-has apparently diminished considerably since last
fall, judging from staff estimates based on FHLBB data through early
February.

III-16

MORTGAGE ACTIVITY AT FSLIC-INSURED INSTITUTIONS
(Billions of dollars, seasonally adjusted)

Mortgage commitments

Net change in mortgage assets1
Mortgage Mortgage-backed

New Outstanding2
(1)
(2)

Total
(3)

20.1
18.8
18.1
16.6
15.9

70.3
71.3
72.3
71.4
70.5

Oct.
Nov.

16.9
16.9

Dec.
1985-Jan.

1984-May
June
July
Aug.
Sept.

loans
(4)

securities
(5)

10.9
10.9
8.8
9.0
6.4

8.4
8.3
8.2
6.6
5.9

2.5
2.6
.6
2.5
.5

69.2
69.2

5.5
4.5

5.2
5.9

.3
-1.4

17.5

69.6

3.4

2.8

16.8

68.7

3.9

4.3

-.5

1. Data are adjusted to account for structural changes through mergers,
acquisitions, liquidations, terminations, or de novo institutions.
2. End of month. Includes loans in process.

NEW ISSUES OF FEDERALLY GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
(Monthly averages, billions of dollars, not seasonally adjusted)
Total

GNMAs

FHLMCs

FNMAs

Memo: FNMA and
FHLMC swap issues

1983-Q1

7.1

3.8

2.0

1.3

2.2

Q2
Q3
Q4

7.4
7.6
5.7

4.8
4.8
3.4

1.4
1.5
1.7

1.2
1.2
.7

1.9
2.1
2.0

1984-Q1
Q2
Q3
Q4

4.9
4.0
5.1
6.0

2.7
2.3
2.2
2.0

.9
1.1
1.4
2.7

1.3
.5
1.5
1.2

1.6
1.5
2.7
3.5

5.8
4.2
6.2
4.7
7.0

2.4
1.9
2.5
1.4
2.1

1.6
1.1
2.6
2.0
3.7

1.9
1.1
1.1
1.2
1.3

3.3
2.1
3.4
2.7
4.4

1985-Jan. r

5.4

2.7

1.9

Feb. p

6.9

2.7

2.4

Period

Aug.
Sept.
Oct.
Nov.
Dec.

p--preliminary.

r--revised.

.9
1.8

2.1
3.3

III-17

balance real estate lending during those two months was in line with that
in the fourth quarter.

Moreover, the surge in real estate loans in February

occurred at large banks, where home mortgages historically have accounted
for less than half of total real estate loans.
At FSLIC-insured institutions-the largest mortgage originator group-new mortgage loans closed (for both construction and permanent financing)
increased in January at slightly above the fourth-quarter average rate;
however, with loan retirements at an all-time high, the volume of net

lending remained below its late-1984 average pace.
off holdings of mortgage-backed securities.

The industry also ran

Meanwhile, new commitments

dropped in January to the lowest volume since last September, reflecting
a large cutback in purchase commitments that more than offset a small
increase in origination commitments.

With originations higher and purchases

unchanged, mortgage loan commitments outstanding declined to the lowest
level since last spring.

Issuance of federally guaranteed mortgage-backed

securities strengthened during February as swap volume picked up to near
its fourth-quarter average.
Consumer Credit
Growth of consumer credit in the first two months of the year
appears to have remained substantial, associated with continued strength
in sales of autos and other consumer goods, as well as a further downward
drift, at least through early February, in consumer finance rates.

According

to the revised series, outstanding consumer installment debt increased at a
19 percent annual rate in January, up a bit from the 18-1/2 percent December
pace.

Consumer loan growth at commrcial banks slowed in February, but may

have been restrained by the introduction of concessionary financing for

III-18

CONSUMER INSTALLMENT CREDIT*
1984
1983
---Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

By major holder:
Commercial banks
Finance companies
All other

Personal, 24 mos.
Credit cards
At auto finance companies 3
New cars
Used cars

1984
Nov.
Dec.

1985
Jan.

ercent rate of growth, SAAR -------20.0

17.5

15.8

16.6

18.4

19.2

13.4
17.7
14.0

20.6
23.9
17.5

17.9

16.5
20.1
12.9

18.3

21.1

19.0
18.5
17.4

20.1
24.7
12.2

----

16.2
17.8

12.6

Billions of dollars, SAAR -----

48.7

76.8

72.9

68.7

73.0

81.8

86.7

16.9

28.2

27.3
18.2
23.2

30.6
19.4
23.0

32.2

19.5

29.5
19.6
27.7

34.6
23.5
28.5

19.5

40.4

28.8

9.3
27.1

19.3

33.1
4.0

24.8

31.6

29.8
9.3
33.8

36.3

9.3
20.0

12.4

--------

Interest rates
At commercial banks 2
New cars, 48 mos.

14.7

---

Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

1984

14.1
30.5

17.3
28.9

14.4
31.1

45.6
10.8
30.3

Annual percentage rate ----

13.92

13.71

16.68
18.78

16.47
18.77

14.08
16.75
18.81

13.91
16.63
18.82

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

n.a.
n.a.

12.58
18.74

14.62
17.84

14.95
17.93

15.22
18.28

15.24
18.30

15.24
18.34

15.11
17.88

n.a.

1. Includes primarily personal cash loans, home improvement loans, mobile
home loans, and sales finance contracts for non-automotive consumer durable
goods.
2. Average of "most common" rates charged, on loans of specified type and
maturity, during the first week in the middle month of each quarter.
3. Average rate for all loans of each type made during the period, regardless of maturity.
n.a.--ot available.
* Installment credit data reflect benchmark and seasonal revisions from
1980 forward.

III-19

certain automobile loans at the captive finance companies.

Growth of

installment credit in January was especially brisk in the automotive and
revolving credit categories.
Costs of most types of consumer credit continued to drift down
through early February.

At commercial banks, the most common rate on 48-

month new auto loans dropped 54 basis points between early November and
early February, reaching 13.37 percent.

Rates on closed-end personal

consumer credit also declined by about 40 basis points over the three-month
period, but rates on bank credit card plans continued to edge up to a
record 18.85 percent.

Rate concessions on small cars offered by AMC,

Chrysler, and Ford dealers are scheduled to remain in effect until various
dates from the end of March through the end of April.
Household Financial Positions
The increase in net consumer installment debt in January brought the
debt-to-income ratio to 17-1/4 percent, up from about 14-1/2 percent in
late 1982, but still below the late 1979 peak of 17-3/4 percent.

Never-

theless, the debt burden suggested by this measure does not appear to be
excessive, judging from other indications such as personal bankruptcies and
delinquencies on such debt.

Personal bankruptcy filings have shown no

tendency to increase for the last year and a half and are substantially
under the highs partly induced by the 1980 statutory changes.

The

percent of installment loans 30 days or more past due at both commercial
banks and finance companies increased at the end of last year, but it
remained well below the highs reached in 1980 and below the average levels
of the 1970s; indeed, the finance company rate remained near its historic
low achieved last year.

III-20

On longer-term home mortgage debt, though, the most recent data
suggest that delinquency rates stand at historic highs.

According to the

Mortgage Bankers Association, the delinquency rate on all mortgages 60 days
or more past due edged up to a record 1.88 percent in the fourth quarter.
In January, the corresponding rate at savings and loan associations also
increased, to a record 2.38 percent.

The runup in mortgage delinquencies

appears to be due, in part, to the sharp slowing in the rate of increase of
home prices since the last recession.

In addition, trade sources suggest

that delinquencies have been increasing on ARMs that had been made with
substantial first-year interest rate discounts.

INTERNATIONAL DEVELOPMENTS

Foreign Exchange Markets
The trade-weighted average value of the dollar has declined about
3/4 percent on balance since the last FOMC meeting.

The dollar was very

strong early in the intermeeting period, but it dropped back sharply late
in the period amid shifting assessments of the strength of U.S. economic
activity and the stance of U.S. monetary policy.

The exceptional

volatility of exchange-rate movements also has reflected varying market
concern about possible concerted intervention against the dollar,

The dollar appreciated 5 percent over the first two weeks of the
intermeeting period, boosted by unexpectedly strong data on U.S. economic
activity, together with a market perception that the Federal Reserve
might have begun to tighten reserve conditions, while the Bundesbank
continued to supply liquidity to the German interbank market at terms and
in volume viewed as generous.

Another factor cited in the dollar's

advance was President Reagan's criticism of artificial attempts to
depress the dollar, which reportedly alleviated market concern that the
United States might participate vigorously in coordinated intervention
efforts.
The dollar eased somewhat on Tuesday, February 26.

IV-1

IV-2
Chart 1

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S.
gDily series
FOMC
Feb. 12

3/19/85

DOLLAR

March

IV-3

Over the next two days,

additional favorable data on the U.S. economy helped the dollar rebound
from Wednesday's low

. In addition, the Desk purchased $257.5 million equivalent of
marks over three days,
. Desk activity was noted in the market, but was perceived as
moderate.

Including an operation in mid-February, the Desk's dollar

sales for the intermeeting period totalled $322.5 million divided equally
between the accounts of the System and the Treasury, with $306.1 million
sold for marks and $16.4 million for sterling.
Over the remainder of the intermeeting period,

, the dollar quickly recovered almost to its
late-February peak, but trading conditions continued to be volatile with
market participants wary of central bank action.

The dollar subsequently

weakened as new data on U.S. economic activity disappointed market expectations, and as some market participants conjectured that problems at
state-insured thrift institutions in Ohio might induce the Federal
Reserve to maintain an easier stance than it otherwise would.

The

dollar's slide turned into a steep drop as an increasing number of
participants expressed the view that fundamental imbalances in the U.S.
economy might at last be bringing a long-expected reversal of the
dollar's protracted rise.

IV-4

As illustrated in the bottom panel of the chart, the dollar has
depreciated 2-1/4 percent against the yen and nearly 5 percent vis-a-vis
sterling over the intermeeting period.

Sterling, notably, benefitted

from high U.K. interest rates, from a firming of spot prices for
Britain's North Sea oil, and from the ending of the year-long strike by
British coal miners.
basis.

The pound recovered 4 percent on a trade-weighted

Its recovery contributed to an easing of sterling interest rates

late in the period.

Major U.K. banks cut their base lending rates 1/2

percentage point to 13-1/2 percent, and the Bank of England made similar
reductions in its money-market dealing rates.
The Canadian currency has depreciated sharply against the dollar,
dropping 2-1/2 percent on balance since the last FOMC meeting.

Canadian dollar's recent weakness reflects several factors:

The

a market

perception that political conflict in Canada may inhibit fiscal
retrenchment and reform of regulations governing foreign investment; an
anticipated slowing of economic growth; and a belief that with
unemployment still high and capital formation weak, Canadian authorities
might resist increases in interest rates despite exchange-rate pressures.
Nonetheless, short-term Canadian interest rates have risen steeply, and

major Canadian banks recently raised their prime rates 1/4 percentage
point to 11-1/2 percent.

IV-5

Notable among the EMS currencies is the Italian lira, which has
depreciated 2-1/2 percent against the dollar and has dropped from near
the top of the EMS to the bottom.

Italy's trade deficit, which

established a record in 1984 and remained large in January, reportedly
has engendered speculation that the lira's parities against other EMS
currencies may have to be adjusted downward.

It is unclear why

expectations of a realignment should have materialized so abruptly.

IV-6

U.S. banks' foreign lending in the fourth quarter.

U.S.-chartered

banks' gross claims on foreigners declined a slight $2 billion in the
fourth quarter.

The changes in claims on the various country groups

were all less than $1 billion except for a $2.5 billion (7 percent) drop
in claims on smaller developed countries.
countries again showed little movement.

Claims on non-OPEC developing
In this group, claims on Brazil

were unchanged and claims on Mexico fell $0.3 billion even though U.S.
banks disbursed about $300 million to Brazil and $350 million to Mexico
when those countries drew further on bank term loans signed in the
spring of 1984.
1984 was a year of sharp contraction in U.S. banks' claims on
foreigners that was motivated primarily by the banks' desire to improve
capital/asset ratios through a reduction in interbank placements as well
as by a decline in the relative attractiveness of lending to developing
countries and Eastern Europe.

The decrease for the year of nearly $30

billion (7 percent) followed a year of virtually no net change in 1983,
of moderate (6 percent) expansion in 1982, and of growth in the years
1976-81 averaging 17 percent annually.

Of the 1984 decline, $11-12

billion can be accounted for by the valuation effect of the higher
foreign exchange value of the dollar on the foreign branches' non-dollar
claims.

The dollar rose 12 percent, on a weighted average multilateral

trade basis, from December 1983 to December 1984.

About two-thirds of

the nominal decrease in the dollar value of total claims in 1984
occurred in the third quarter, when the dollar appreciated by eight
percent.

After adjustment for exchange rate changes, almost all the

decline in total claims was in interbank placements.

IV-7

TABLE 1.

CLAIMS ON FOREIGNERS OF U.S.-CHARTERED BANKS
(Billions of dollars)

Claims on:
Total, all countries

1983
Year
-1.4

Non-OPEC developing
countries

4.5

OPEC countries

1.5

Eastern Europe
Smaller developed
countries
G-10 countries
Offshore banking
centers

Change (no sign = increase)
1984

Year
-29.7
0.7

-2. 1

407.6

-5.0

-3.1

-5.0

-19.5

0.5

0.6

-0.8

0.4

112.3

-0.6

25.6

-0.3

-1.9

-1.7

-0.9

-0.8

-0.4

2.4

-2.3

-0.4

1.4

-20.5

-1.9

3.7

Outstanding
12/31/84

-3.1

-3.3

-11.7

-3.7

-8.5

2.5

. e

4.5

0.8

-2.5

33.8

-9.5

-0.6

147.5

-6.5

0.3

66.8

-0.

Miscellaneous

-0.9

0.2

-0.7

1.0

-0.1

17.2

TABLE 2. CLAIMS OF U.S.-CHARTERED BANKS ON NON-OPEC DEVELOPING COUNRIES
(Billionss of dollars)

Year

Change (no sign - increase)
1984
Year
3 (4
92
9L

2.6
0.6
0.2
0.1
0.1
1.6
-0.2

1.9
-0.8
3.2
0.6
-0.3
-0.3
-0.2

0.2

-0.3

1983
Claims on:
Latin America
Argentina
Brazil
Chile
Colombia
Mexico

Peru
Others

Asia and Africa
Korea
Philippines
Taiwan
Others
Total

1.9
0.4
-0.1

-1.2
-0.6
-0.2
.- 0.2
1.6 -0.2

4.5

0.7

Outstanding

12/31/84

1.6
..
2.0
0.1
-0.1
-0.5
-0.1
0.2

0.1
-0.3
0.3
0.2
-0.1
0.4
.
-0.4

1.0
-0.1
0.9
0.4
-0.1
0.1
-0.1
-0.1

-0.8
-0.4
..
-0.1
..
-0.3
..
..

76.8
8.7
26.3
7.0
2.9
25.8
2.2
3.9

-1.1
-0.2
0.5
-0.4
-1.0

0.5
0.1
-0.4
0.4
0.4

-1.8
-0.9
-0.4
-0.1
-0.4

1.2
0.4
0.1
-0.1
0.8

46.2
10.7
6.0
5.1
24.4

0.5

0.6

-0.8

0.4

112.3

IV-8

More than $20 billion of the 1984 reduction in claims was on the
G-10 countries, and consisted largely of cut-backs in interbank placements.

Small declines were shown in claims on most other groups, while

claims on non-OPEC developing countries were essentially unchanged.

shown in Table 2, for almost all the principal borrowers in this group
the change for the year was small and negative.
Brazil.

The main exception was

U.S. bank claims on Brazil rose $3.2 billion, of which about

$1.9 billion reflected disbursement of the U.S. banks' share (about 40
percent) of Brazilian drawings on the $6.5 billion new money
the banks signed in March.

loan from

Claims on Mexico declined slightly despite

disbursements of the U.S. banks' share of about $1.1 billion under the
$3.8 billion new money loan signed in April; the decline appears to have
reflected repayments of debts of private Mexican borrowers and perhaps
some write-offs of by banks private-sector debts.

IV-9
U.S. INTERNATIONAL FINANCIAL TRANSACTIONS
Large net capital inflows through several channels were
recorded in 1984.
Transactions.)

(See the Summary table of U.S. International

Substantial inflows of capital included unprecedented

net foreign private purchases of U.S. Treasury securities, sizeable
net foreign private purchases of U.S. corporate bonds, and large net
inflows reported by banks.
Foreign net purchases of U.S. Treasury securities totaled more
than $22 billion in 1984.

One development which contributed to the

large foreign net purchases of U.S. Treasury securities was the
Treasury's introduction in October and December of two $1 billion
issues of securities targeted for purchase by foreigners.

At the time

of the first issue in October the price of the foreign targeted
instrument was above that of the domestic companion issue.

Later

quotations in the secondary market, however, indicate this premium has
declined and even reversed.

While this development may signal that

market participants do not place great value on the degree of
anonymity provided by the foreign targeted issue it may also derive
from other differences between the two securities, in particular
differences in the size of the secondary markets.

An investor may

demand a higher yield on the foreign targeted issue to compensate for
the relatively greater uncertainty associated with disposition of the
foreign targeted security prior to its maturity.
While the foreign targeted issue may offer a higher yield to
compensate for secondary market asymmetries, the extent of the yield
differential is limited by the provision that a foreign targeted issue

IV-10

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)

1983
Year
Private Capital
Banks
1. Change in net foreign
positions of banking offices
in the U.S. (+ = inflow)
a) with own foreign offices
b) all other

1984
Year

1984
Q4

Nov.

Dec.

20.6

13.8

-0.8

8.8

-6.1T

-0

6.6

26.7

12.8

-0.7

13.4

1.1

3.8

1.6

8.2

2.1

-0.3

0.3

6.1

2.0

1.9

2.2

13.7

0.4

0.6

2.6

10.1

2.4

3.7

13.3

rTT

-2.7

6.3

-3.8

2.6

Jan.

-6.9
-6.1
-0.8

Securities
2. Private securities
transactions, net
a) foreign net purchases
(+) of U.S. corporate bonds
b) foreign net purchases
(+) of U.S. corporate stocks
c) U.S. net purchases (-) of
foreign securities

6.4

-0.8

1.0

-0.1

-1.0

-0.8

0.1

-0.4

-0.7

-7.0

-4.6

0.7

-0.8

-1.3

-3.2

-0.4

-1.3

-0.5

3. Foreign net purchases (+) of U.S.
Treasury obligations 1/

8.3

22.5

1.3

6.5

5.1

9.5

2.2

4.6

5.2

2.7

-3.1

-0.8

-0.7

7.0

2.0

2.4

6.4
-8.5
7.3

3.0
-5.3
5.0

2.3
-2.8
-2.5

-0.7
-2.4
2.4

-0.8
-0.7
0.8

2.2
0.5
4.2

1.8
-2.6
2.8

-1.0
3.0
0.3

0.1
-0.5
-3.7

7.0
-1.7

4.7
-2.0

-0.2
-2.7

-0.3
-0.5

-0.6
-0.1

5.8
1.1

3.2
-1.1

2.3
*

-0.8
-3.3

-1.2

-2.7

-0.7

-0.6

-0.8

-1.1

-0.4

-0.5

0.4

-8.6

-6.4

-10.1

Official Capital
4. Changes in foreign official
reserve assets in U.S.
(+ a increase)
a) By area
G-10 countries (incl. Swits.)
OPEC
All other countries
b)

By type
U.S. Treasury securities
Other 2/

5. Changes in U.S. official reserve
assets (+ * decrease)
Other
6.
7.
8.
9.
10.

transactions (Quarterly data)
U.S. direct investment (-) abroad
Foreign direct investment (+) in U.S.
Other capital flows (+ = inflow) 3/ 4/
U.S. current account balance 4/
Statistical discrepancy 4/

MEMO:
U.S. merchandise trade balance - part
of line 9 (Balance of payments basis,
seasonally adjusted)

-4.9
11.3
-1.3
-41.6
9.3

-6.0
21.2
5.1
-101.6
30.0

-3.5
2.4
1.4
-19.7
6.0

2.1
8.8
6.5
-24.7
3.3

1.9
5.3
-0.1
-33.6
13.8

-6.6
4.7
-0.2
-23.7
7.0

-61.1

-107.4

-25.8

-32.9

-22.9

1. Includes U.S. Treasury notes publicly issued to private foreign residents.
2. Includes deposits in banks, commercial paper, acceptances, & borrowing under repurchase agreements.
3. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other
banking and official transactions not shown elsewhere.
4. Includes seasonal adjustment for quarterly data.
*
Less than $50 million.
e/ Estimated.
NOTE: Details may not add to total because of rounding.

3.0

0.5

-A

may be converted into its domestic companion at any time beyond 45
days after the date of auction.

The Treasury reports that

approximately 25 percent of the foreign targeted securities which have
been issued have subsequently been converted into the domestic
companion securities.

This development may in turn increase the

relative uncertainty of dealing in the secondary market for foreign
targeted securities as the total stock of these securities outstanding

diminishes.
Foreign net purchases of U.S. corporate bonds totaled $13.7

billion in 1984, sharply higher than in 1983 [line 2a].

Much of the

increase occurred in the fourth quarter of 1984 when a $10.1 billion
net inflow was recorded.

Legislation to repeal the withholding tax on

interest payments to foreigners at mid-year and the clarification of

the TEFRA (Tax Equity and Fiscal Responsibility Act of 1982)
regulations in late August resulted in a shift in location for the
issue of Eurobonds by U.S. corporations from the Netherlands Antilles
to the United States.

Previously, the proceeds of Eurobond sales,

when repatriated to the United States, were recorded as a reduction in
U.S. direct investment abroad, (line 6) rather than as foreign net
purchases of U.S. corporate securities.
Eurobond issuance by U.S. corporations was strong through
January of 1985, but there are some signs of a slowdown in activity.
Several forces may combine to diminish the issuance of Eurobonds.
First, increased underwriting competition in recent months appears to
have eroded profit margins and there has been a large buildup of
underwriters' inventories.

In the absence of expectations that

interest rates will fall many underwriters may be reluctant to

IV-12

participate vigorously.

Second, in recent months, many large U.S. bank

holding companies have issued large amounts of mandatory convertible
securities in the Euromarkets to augment their primary capital, but several
of the large bank holding companies have reached, or are approaching, the
limit on the amounts raised in this manner that can be counted as capital
for regulatory purposes.

Finally, the decision of the Japanese government

to eliminate the foreign withholding tax on European bond issues by
Japanese companies as of April 1, removes an incentive for U.S. and
Japanese firms to issue yen and dollar bonds, respectively, in the
Euromarkets and then swap the payments obligations.
Turning now to other capital flows, banking offices in the United
States recorded a large net inflow in January, more than offsetting the
outflow at the end of 1984.

Foreign official holdings in the U.S. fell by

$4.1 billion in January of 1985, in part due to a $1.0 billion decline in
the holdings of Latin American countries.

Partial data from FRBNY for

February indicates that official reserve assets in the United States fell
substantially

INTERNATIONAL BANKING DATA
(Billions of dollars)

1981
Dec.
1.

Net Claims of U.S. Banking
Offices (excluding IBFs) on Own
Foreign Offices

1982
Dec.

1983
Dec.

32.9

39.3

Net Claims of U.S. Banking
Offices on Own IBFs 1/

11.8

16.2

Sum of lines 1 and 2
of which:
(a) U.S.-chartered banks
(b) Foreign-chartered banks

19.6
22.3
-2.6

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks
Eurodollar Holdings of
U.S. Nonbank Residents 2/

Mar.

35.3

June

32.2

1984
Sept.

30.2

Dec.

Jan.

25.4

29.9

1985
Feb.

25.5

5.2

4.1

4.4

6.3

7.8

7.9

8.9

49.1
40.0
9.1

44.5
40.8
3.7

39.4
36.9
2.5

36.6
34.7
1.9

36.3
35.7
.6

33.3
32.1
1.2

37.8
35.6
2.2

34.4
32.5
1.8

13.2

15.8

18.7

18.5

19.9

20.2

20.7

20.6

95.5

112.6

124.2
126.5
124.3
122.7
117.4
117.3
117.5
L
1. Corresponds to net claims of international banking facilities (IBFs) on all foreign residents, including all
banks whether related or not, and all nonbanks.
2. Include terms and overnight Eurodollars held by money market mutual funds.
Note: These data differ in coverage and timing from the overall banking data incorporated in the international
transactions accounts. Line 1 is an estimate constructed as the residual of line 3 minus line 2. Line 2 is data
for the last Wednesday of the month for the sample of monthly IBF reporters. Line 3 is an average of daily data
reported to the Federal Reserve by U.S. banking offices. Line 4 is an average of daily data. Line 5 is the
month-end value for data through September 1983. For dates after September 1983, the overnight portion is an
average of daily data and the term portion is an average of Wednesday data.

IV-14

U.S. Merchandise Trade
In January, the U.S. merchandise trade deficit increased from a
relatively low December rate; exports (other than agricultural
shipments) continued at relatively strong December levels, and imports
(other than oil) turned up after several low months.
The strength of nonagricultural exports in January, as in
December, was primarily in machinery (particularly office machines and
other electronic items) and in passenger car exports to Canada.
Industrial supplies contributed a smaller part of the recent strength.
Agricultural exports in January, especially wheat and soybeans, dropped
off from rates recorded in the fourth quarter; fourth-quarter shipments
had benefited from a surge in exports of grain to the U.S.S.R.
U.S. MERCHANDISE TRADE1 /

1983

Years
1984

Q1-r

Q2-r

1984
Q3-r

200.3
36.6
163.6

220.3
38.4
181.9

215.7
41.4
174.3

218.2
37.2
180.9

222.5
36.3
186.2

225.0
38.7
186.3

227.6
36.4
191.1

261.3
53.8
207.5

327.8
57.3
270.5

318.9
55.4
263.5

321.4
59.6
261.8

354.2
57.8
296.4

316.6
56.4
260.2

348.5
48.0
300.6

-61.1

-107.4

-103.3

-103.2

-131.8

-91.5

-120.9

Volume (Bil 72$, SAAR)
Exports
Agricultural
Nonagricultural

16.3
57.3

16.3
63.0

17.1
60.5

15.2
62.5

15.4
64.6

17.5
64.4

n.a.
n.a.

Imports
Oil
Nonoil

4.9
81.9

5.3
103.8

5.1
102.1

5.5
100.3

5.4
113.2

5.3
99.5

n.a.
n.a.

Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Nonoil
Trade Balance

r/
1/

Revised.
International transactions and GNP basis.

Jan.

IV-15

The rise in imports in January followed a decline in December.
Month-to-month movements in nonoil imports are very erratic.

However,

by averaging monthly developments, it appears that following a strong
surge in imports in the middle of the year (April through September),
imports eased in the fourth quarter, as did U.S. domestic demand.

January, nonoil imports increased from relatively low fourth-quarter
rates.

The rise in nonoil imports in January appears to have been

generally in capital goods (particularly office machines and other

electronic equipment), in passenger cars from Europe, and some
industrial supplies such as steel and textiles.
Oil imports have declined steadily in recent months in both

price and volume.

The volume of oil imported in January was 4.8

million barrels per day compared with 5.1 mbd in December and an
average of 5.8 mbd in the October-November period; between November and
January, the average price of imported oil dropped by about 55 cents
per barrel.
OIL IMPORTS

Years
Volume (mbd, SA)
Price ($/BBL)
Value (Bil. $, SAAR)

1984

1983

1984

5.20
28.42
53.80

5.60
27.95
57.31

5.40
28.05
55.40

Jan.

5.76
28.26
59.61

5.66
27.91
57.84

5.59
27.59
56.38

4.84
27.19
47.99

March 19, 1985
U.S. CURRENT ACCOUNT
(billions of dollars, SAAR)
1984
1983

1984

Qlr

Q2r

Q3r

$ Changes
Q4-Q3
Yr84-Yr83

-61.0

-107.4

-103/.3

-103.2

-131.8

-91.5

40.3

-46.4

Exports

200.3

220.3

215.7

218.2

222.5

225.0

2.5

20.1

Imports

261.3

327.8

318.9

321.4

354.2

316.6

-37.6

66.4

Investment income, net
Direct investment, net
Capital gains or losses 1/
Other D.I. income
Portfolio income net

23.5
14.0
-7.2
21.2
9.5

18.1
12.4
-8.0
20.4
5.8

31.0
23.6
0.2
23.4
7.3

13.8
7.5
-11.8
19.3
6.4

11.5
6.2
-15.1
21.3
5.3

16.2
12.1
-5.2
17.3
4.1

4.6
5.9
9.9
-4.0
-1.2

-5.4
-1.7
-0.8
-0.9
-3.7

9.
10.
11.

Military, net
Other services, net
Unilateral transfers

0.5
4.1
-8.7

-1.6
0.5
-11.2

-1.5
3.7
-8.6

-1.6
0.8
-8.6

-1.3
-1.4
-11.4

-2.2
-1.1
-16.1

-0.9
0.3
-4.7

-2.2
-3.6
-2.5

12.
13.

Current Account Balance
Excluding capital
gains or losses

-41.6

-101.6

-78.7

-98.8

-134.4

-94.7

39.7

-60.1

-34.4

-93.6

-78.9

-87.0

-119.3

-89.5

29.8

-59.3

9.3

30.0

23.8

13.2

55.0

28.0

-27.0

20.7

4.
5.
6.
7.
8.

Trade Balance

Memo:
Statistical discrepancy
1/

Gains or losses on foreign-currency denominated assets owing to their revaluation at current exchange rates,
and other valuation adjustments. Plus = gains; minus = losses.

IV-17

U.S. Current Account in 1984
For the year 1984, the U.S. current account balance was in deficit by
$102 billion; this compares with a deficit of $42 billion for the year
earlier.

About three-fourths of the increase in the deficit was attributable

to merchandise trade -- imports expanded faster than exports rose.

addition, net investment income receipts were reduced in 1984, largely a
result of interest payments on liabilities to foreigners increasing faster
than interest receipts from U.S. claims on foreigners; net direct investment
income receipts were also somewhat less in 1984 than in 1983.
in exports of military goods and services, increased U.S.

reduction

payments for other

services (travel abroad, transportation costs, etc.), and increased unilateral
transfers (importantly government grants) also contributed to the widening of
the current account deficit in 1984.

IV-18

Foreign Economic Developments.

Economic activity in the major

foreign industrial countries has continued to expand, but only Japan
has experienced robust growth.

Growth in Japan accelerated markedly in

the fourth quarter of 1984, in large part owing to increases in net
exports and spending on plant and equipment.

Growth of real gross

national product in the fourth quarter slowed in Germany, France, and
Canada.

Industrial production has declined in recent months in Japan

and Continental Europe, while it remained relatively unchanged in the
Canada and and rose in the United Kingdom.

The unusually cold winter

in Europe may have contributed somewhat to the recent decline in
output.
Unemployment remains at historically high rates in all countries,
with recent data indicating slightly higher unemployment in Germany,
France, the United Kingdom, and Italy than at the beginning of 1984.
Unemployment has been slightly lower than a year ago only in Japan and
Canada.

Inflation abroad remains low, although there is some

indication that further reductions in some countries' rates may be
difficult to achieve this year.
Record trade and current account surpluses were registered by
Japan and Canada in 1984, while the United Kingdom's trade deficit
narrowed in the most recent data.

Germany continued to be in surplus

on current account in January, and France's trade deficit in 1984 was
much less than in 1983.
deficit in January.

Italy experienced an increase in its trade

March 20, 1985
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES

(PERCENTAGE CHANGE FROM PREVIOUS PERIOD, SEASONALLY ADJUSTED)

CANADA
GNP
IP

Q4/Q4

1983

1984

1984
Q2 Q3

7.1
16.1

3.7
5.1

.8 1.6
.7
.2 1.5 3.2

.8
1.8

1.9
1.0

1.1 -.4
1.5 -1.3

.8
2.8

.3
-2.0

GERMANY
GNP
IP

3.0
6.0

2.9
3.9

1.2 -2.0
.6 -4.7

2.2
5.6

1.5
2.5

ITALY
GDP
IP

1.2
1.7

N.A.
1.6

.8
1.0

.7
.5

1.1
1.9

N.A.
-1.8

JAPAN
GNP
IP

3.9
8.6

6.3
10.7

1.4
3.2

1.8
2.8

.6
1.5

2.3
2.8

UNITED KINGDOM
GDP
IP

4.0
5.3

N.A.
-.0

6.3
15.0

5.9
5.9

DEC.

1985
JAN. FEB.
__

FRANCE
GDP
IP

UNITED STATES
GNP

OCT.

1984
NOV.

.8 -.8
.6 -2.1
2.4
2.7

1.7
2.1

2.3

1.5

N.A.

-1.5

3.6

-.4

-2.5*

-2.5
*

3.3

-1.0
*

.6 N.A.
.3 1.2
.4
1.6

1.2
-.5

*
-. 4

*
.2

-2.3
*

-1.6
*

-2.0

N.A.
*

N.A.

-.7

-. 7

-.2

N.A.

1.3

N.A.

*
.3

*
-. 5

LATEST 3 MONTHS
FROM YEAR AGO+
__

3.7
5.1
1.9
-2.0

2.9
2.4

3.2
1.6

6.3
9.5

1.8
-.1

5.9
4.3
__

* DATA NOT AVAILABLE ON A MONTHLY OR QUARTERLY BASIS.
+ IF QUARTERLY DATA, LATEST QUARTER FROM YEAR AGO.

March 20, 1985
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD)

1983

1984

Q4/Q4
1983

Q4/Q4
1984

CANADA
CPI
WPI

4.6
3.5

3.7
3.6

1.6
.9

.9
.4

1.2
1.6

.9
1.2

FRANCE
CPI
WPI

9.8
14.6

6.8
10.5

2.1
3.7

1.9
3.6

1.7
3.4

1.8
2.9

2.0
1.0

1.0
.9

.5
1.2

.9
1.7

2.9
3.2

GERMANY
CPI
WPI

2.7
.9

.6
N.A.

1.4
1.7

.5
.0
.8 -1.4

.7
.0

12.8
9.1

8.8
8.8

2.3
2.3

3.5
3.3

JAPAN
CPI
WPI

1.9
-3.3

2.4
.5

-.2
.2

1.4
-. 6

UNITED KINGDOM
CPI
WPI

5.1
5.6

4.8
6.0

1.3
.8

1.1
1.3

.6
1.8

2.0
2.3

UNITED STATES
CPI (SA)
WPI (SA)

3.2
.8

4.1
1.7

1.0
.6

1.0
.3

1.3
1.2

.9
.4

2.1
2.2

1985
JAN. FEB.

.9
.5
1.7
2.1

ITALY
CPI
WPI

1984
NOV. DEC.

1.2
1.2

.9
.6

3.7
3.6

.5
N.A.

.1
-. 6

.1
.1

2.2
1.9

-.2 1.2
.8 -. 3

LATEST 3 MONTHS
FROM YEAR AGO

-. 4
-. 2

.2
.1

.3
.3

-. 1
.4

.2
.3

.3
.2

2.1
.5

1.0
1.4

1.0
N.A.

8.6
8.4

1.0
.3

-.7
.3

2.6
.6

.2
-.0

N.A.
.5

4.8
6.1

N.A.
-.1

3.8
1.2

March 20, 1985
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1/
(BILLIONS OF U.S. DOLLARS; SEASONALLY ADJUSTED)
1984

OCT.

1984
NOV.

DEC.

1.9

1.4

1.1

1984

1983

CANADA
TRADE
CURRENT ACCOUNT

14.4
1.4

16.1
1.6

3.1
-.2

3.5
.0

FRANCE
TRADE 2/

-5.9

-4.9

-2.6
-.1

-. 6
.1

-. 2
.2

-1.5
-. 7

-1.1
-. 4

GERMANY
TRADE
CURRENT ACCOUNT (NSA)

16.4
4.1

18.8
6.0

3.7
-2.3

3.4
3.7

4.3
.7

3.2
-. 2

5.0
-. 6

6.3
6.0

ITALY
TRADE
CURRENT ACCOUNT (NSA)

-7.8
.6

-10.5
N.A.

-2.1
1.5

-1.3
-.1

-2.5
-1.7

-3.0
-1.0

-1.6
N.A.

-3.4
N.A.

-1.0
*

31.2
21.0

44.5
35.0

8.5
5.7

8.2
5.5

10.0
7.2

11.1
9.2

10.1
7.4

13.2
11.5

4.0
3.4

-. 8
4.4

-5.7
1.3

-.4
1.2

-.0
.9

-.2
.6

-1.8
.9

-2.1
-. 7

-1.6
.5

-25.8 -25.8 -32.9 -22.9
-19.7 -24.7 -33.6 -23.7

CURRENT ACCOUNT 2/

3.5
.0

4.1
.5

4.4
.6

4.1
.5

-. 4

.4
.9

-. 4

2.2
2.0

2.1
2.0

1985
JAN.

1.9
2.1

N.A.

-. 1

-1.3

5.2
4.3

4.0
3.8

4.9
4.2

-1.0

-. 2

-. 4

-.1

-7.9

-8.6

-2.3

JAPAN

TRADE 2/
CURRENT ACCOUNT

UNITED KINGDOM
TRADE
CURRENT ACCOUNT 2/
UNITED STATES
TRADE
CURRENT ACCOUNT

-61.1
-41.6

-107.6 -17.5 -19.4
-101.6 -11.8 -17.2

I/ THE CURRENT ACCOUNT INCLUDES GOODS, SERVICES AND PRIVATE AND OFFICIAL TRANSFERS.
2/ QUARTERLY DATA ARE SUBJECT TO REVISION AND ARE NOT CONSISTENT WITH ANNUAL DATA.

* COMPARABLE MONTHLY OR QUARTERLY CURRENT ACCOUNT DATA ARE NOT PUBLISHED.

-6.4
*

-10.1

IV-22

In Japan, real GNP last year rose by

Individual Country Notes.

6.3 percent on a Q4/Q4 basis, the highest rate of growth since 1972.
Domestic demand rose by 3.8 percent, compared with a 2.5 percent
increase in 1983.

Real growth in the fourth quarter accelerated to

9-1/2 percent (s.a.a.r.) from a downward revised 2-1/2 percent in the
third quarter.

A large part of the acceleration in the fourth quarter

can be attributed to the external sector.

Exports rose, while imports

slowed from the advanced pace of the third quarter.
indicators of activity are mixed.

More recent

Industrial production declined in

December and January after a total increase of 3-1/2 percent during
October and November.

On the other hand, an Economic Planning Agency

survey in December shows strong investment plans for the first half of
this year by major corporations.

Also, department store sales and

sales of passenger cars point to stronger consumer spending.
Inflation in Japan remains low.

The Tokyo consumer price

index in the first two months of this year was about 2-1/2 percent
above that of a year earlier.
the external accounts.

Large surpluses continue to be seen in

In the three-month period ending in January,

the trade and current accounts showed record surpluses of $56 billion
and $49 billion (s.a.a.r.), respectively.
In the face of such large external surpluses, the Japanese
government has become increasingly concerned about foreign perceptions
that its policies are protectionist.

The United States, for one, is

seeking to make the Japanese market more open.

Sector specific trade

talks are being held in the areas of telecommunications, forest

IV-23

products, electronics, and pharamaceuticals and medical equipment.
first

area is

the most urgent as the Japanese government is

The

now

drafting regulations and technical standards in association with the
April 1 deregulation of the telecommunications

industry.

There is

concern that these regulations will be drafted so as to inhibit foreign
competition.

There is

also reason to believe that the Japanese will

show some restraint on promoting exports.

In particular,

after the

elimination of the voluntary export restraints on automobiles, many
observers expect that the Japanese government will attempt to regulate
the increase in

such exports

to the United States.

Real gross national product in Germany grew by 2.9 percent from
the fourth quarter of 1983 to that of 1984.
end of 1984.

Growth decelerated at the

Industrial production in Germany fell 2 percent in

January to a level only slightly higher than in January 1984.
Unusually severe winter weather, which depressed construction activity
in particular, was an important factor in this setback.

However, the

volume of orders continued to grow in January, suggesting that the lull
in production activity may have been temporary.

The seasonally

adjusted rate of unemployment was unchanged at 9.2 percent in
February.
Although the consumer price index rose only 2.3 percent in the
twelve months preceding February, it accelerated in January and
February to an annual rate of increase of about 6 percent (n.s.a.), in
part reflecting seasonal factors.

Import prices have been rising

rapidly with the recent strength of the dollar against the mark.

IV-24

Wholesale and producers prices in January are also showing some
acceleration.
The current account showed a small surplus in the month of
January.

German exports to the United States and Canada rose by 42

percent in 1984, whereas imports rose by 13 percent.

North America's

share of total German exports rose from 8 percent in 1983 to 10.5
percent in 1984.

The increase in exports to North America in 1984

amounts to about 1-1/4 percent of German nominal gross national
product.
By the third week in March, short-term market interest rates were
once again above the Lombard rate, which had been raised to 6 percent
on February 1 for the stated purpose of keeping that rate above market
rates.

The Bundesbank's infusions of liquidity necessary to keep

market rates low in February and early March were probably inconsistent
with the Central Bank Money target for 1985.

Central Bank Money growth

for January was well above the 5 percent upper limit of the target.
Economic activity in France has remained weak in recent months.
Industrial production declined by 3.9 percent (s.a.) in total in
December and January and was 4.5 percent below its level of a year ago.
Real growth of gross domestic product in the fourth quarter fell to 1.4
percent (s.a.a.r.), and the increase from the fourth quarter of 1983
was only 1.9 percent.

The unemployment rate rose a further 0.1

percentage point in January to 10.6 percent (s.a.).
Consumer prices increased by 0.5 percent (n.s.a.) in February as
the year-over-year inflation rate declined further to 6.4 percent.

The

IV-25

government announced that public sector wage increases would be limited
to 3-1/2 percent in 1985, in line with the government's inflation
target of 4-1/2 percent.
The targeted monetary aggregate M2R declined for the second
consecutive month in November, reducing its growth rate in 1984 to only
4.2 percent (s.a.a.r.), below the lower bound of its 5-1/2 percent to
6-1/2 percent target range for 1984.
The trade deficit in January was $400 million (s.a.) after a $60
million deficit in December.

For 1984 as a whole, trade was in deficit

by $2.6 billion, less than half the $5.9 billion deficit of the
previous year.
According to provisional data, real gross domestic product
(output measure) in the United Kingdom grew 4.2 percent (s.a.a.r.) in
the fourth quarter to achieve a growth rate of 2.1 percent on a Q4/Q4
basis.

Despite the depressing influence of the coal miners'

strike,

the industrial production index rose 1.3 percent (s.a.) in January to
reach the highest level since January 1980.

The year long strike ended

on March 4, 1985, when the National Union of Mineworkers voted to
return to work without reaching agreement with the National Coal Board
over the closure of loss-making pits.

At the time of the vote, over

half the miners were ignoring the strike call.

Although some union

leaders have threatened to wage some sort of unspecified "guerilla
warfare" until the issues leading to the strike are resolved, the
credibility of this threat is uncertain.

A resumption of normal

coal production would add an estimated 1 percent to measured gross
domestic product this year.

IV-26

The unemployment rate rose slightly to 13 percent (s.a.) in
February.

The retail price index in January was 5 percent above its

year-earlier level, an annual rate of increase similar to that prevailing for most of 1984.

The monthly trade deficit narrowed from $400

million (s.a.) in December to $90 million (s.a.) in January as a result
of lower imports.

After being in near balance in 1984, the monthly

current account in January was in surplus by $360 million (s.a.).
The U.K. government budget proposals for fiscal year 1985/86 have
just been presented to Parliament.

The new targets for money growth

during the fourteen months from February 1985 to April 1986 are:
sterling M3, 5 to 9 percent (a.r.); and MO (the monetary base), 3 to 7
percent (a.r.).
targets;

These ranges are slight reductions from the 1984/85

through January, sterling M3 is just above the top of its

current target range, while MD is near the middle.
have been proposed for taxes and expenditures.

Only slight changes

The tax measures

include increases in the real value of personal exemption amounts,
higher excise taxes for some goods (for example beer, wine, and
cigarettes), and some extension of the indexing provisions that apply
to capital gains.

As of October 1985, employment tax reforms will

lower the effective rate levied on low incomes and raise that on the
high incomes.

The net effect of the measures is forecast to be a

public sector borrowing requirement (PSBR) of £7 billion (2 percent
of GDP).

Expenditure overruns and expenses associated with the

prolonged strike by coal miners resulted in the PSBR for this fiscal
year rising to £10.5 billion (3-1/4 percent of GDP).

IV-27

Following the release of the budget message, Bank of England
official money market dealing rates were cut by one-half percentage
point.

At the same time, major London clearing banks announced

reductions in their base lending rates from 14 to 13.5 percent.

Canadian gross national product increased at an annual rate of
2.4 percent in the fourth quarter of 1984, slower than the third
quarter increase.

On a Q4/Q4 basis, growth was 3.7 percent.

Almost 95

percent of the increase in gross national product was accounted for by
increases in consumption expenditure and a record trade surplus.

Total

real investment expenditure increased slightly and by year end was 13
percent below the peak average quarterly pace reached in 1981.

The

unemployment rate in February was in 11.0 percent up from December's
10.8 percent.

The unemployment rate has been at or above 11 percent

for 29 of the last 31 months.
Inflation continued to be moderate.

Consumer prices were 3.7

percent higher in January than they had been a year earlier.

addition, the industry selling price index was only 3.3 percent higher
than a year earlier, compared with an annual rise of 3.6 percent in
December.

The trade surplus in 1984 was a record $16.1 billion,

compared with a surplus of $14.4 billion in 1983.

More recently, the

trade surplus was $1.12 billion in January up slightly from December's
$1.08 billion.

The current account showed a surplus of $1.6 billion in

1984, compared with a surplus of $1.4 billion in 1983.
The recovery in Italy continued at a moderate pace at the end of
1984.

Industrial production was 1.6 percent higher in the fourth

IV-28

quarter of 1984 than in that of 1983, but it has still not reached the
peak achieved in April 1980.

The year-over-year rate of inflation as

measured by the consumer price index in February was 8.6 percent.

This

rate has stopped coming down in the last three months, and there is
some concern that the government's official goal of a 7 percent rate
for the end of this year may be unattainable.

Still, the official

January household survey shows that consumers have increased confidence
in the general economic situation of the country.
The trade deficit in 1984 was $10.5 billion (s.a.), a greater
deficit than that of $7.8 billion (s.a.) in 1983; the January trade
deficit was more than $1.3 billion (s.a.).

In recent weeks, the lira

has been depreciating against the mark and the ECU, while the mark has
been falling against the dollar.

This depreciation of the lira is a

reversal of the situation of the last year, and some analysts feel that
the market has been reacting according to expectations of a devaluation
of the lira within the European Monetary System.
The Swedish government imposed an indefinite general price freeze
effective March 6. The freeze was introduced to keep inflation within
the government's 3 percent target for 1985.

Imports of goods and

intermediate inputs are exempt from the freeze, which could be lifted
if firms pledged not to raise prices beyond what the government
considers appropriate.

A price freeze had been imposed from April 17,

1984, to July 1, 1984; in spite of that freeze, prices in 1984 rose by
8.2 percent, more than twice the government's target of 4 percent.

January, consumer prices were 7.3 percent higher than a year earlier.

IV-29

Debt Situation in Selected Developing Countries
In Mexico, the rate of crawl of the peso was increased on March 6
from 17 to 21 centavos per day.

If this rate of crawl is maintained

until the end of 1985, the peso price of the dollar at year-end will be
about 38 percent higher than a year earlier.

However, most observers

expect the Mexican rate of inflation on a December-to-December basis to
be 45-50 percent.

The rates of interest on time deposits, which had

remained unchanged since mid-November and had turned negative in real
terms as inflation rose, were increased sharply on March 11 so as to
restore positive real yields.

Earlier, the authorities announced cuts

in public sector spending amounting to 1.4 percent of total budgeted
public expenditures and to about 0.5 percent of GDP.

This step was

taken in part to intensify efforts to reduce the public sector deficit
and in part to offset the loss of public revenues resulting from a $1.25
per barrel reduction in the export price of light crude oil announced at
the beginning of February.

Over a full year, the oil export price

reduction is estimated to reduce export earnings by about $300 million.
At the same time as they reduced the oil price, the authorities raised
the self-imposed ceiling on oil exports from 1.4 million barrels per day
back to 1.5 mbd.

The size of the 1985 public sector deficit has been an

issue in Mexico's discussions with the IMF on the terms of the program
for 1985, the last year of the IMF Extended Fund Facility agreement.
However, it is expected that the matter will be resolved shortly and
that a program will be presented to the IMF Executive Board in April for
consideration in May.

Drafting of the multi-year debt restructuring

agreement reached last September took longer than originally antici-

IV-30

pated, but the documentation was sent to the participating banks on
March 2 and final signing is expected to begin on March 29.

The Mexican

monthly rate of inflation bulged to 7.4 percent in January, but eased to
4.2 percent in February.

Real GDP growth in 1984 was 3.5 percent, well

above the 2-3 percent range mentioned most recently as likely to have
been reached.
Brazil must negotiate an amended IMF program for 1985 since monetary and fiscal developments in late 1984 and early 1985 have made the
targets of the agreement reached in November 1984 unrealistic.

Prelimi-

nary agreement on the terms of a multi-year rescheduling covering about
$45 billion in public and private sector debt due between 1985 and 1991
has been reached.

The terms include a maturity of 16 years, a grace

period effectively averaging six years, and a reduction in the average
spread from an average close to 2 percentage points to 1-1/8 for
Brazilian public sector debt and 1-1/4 for private sector debt.
However, the commercial banks will not complete the agreement on the
rescheduling until the IMF indicates its endorsement of the Brazilian
program and the new government of Tancredo Neves signals its approval. A
telex has gone out to the banks putting in place interim arrangements
and asking the banks to maintain their trade and interbank lines after
the February 19 expiration of existing commitments.

So far this year,

the Brazilian trade surplus has been below that recorded in the same
months of 1984.

In January and February the trade surplus averaged

$556 million, $177 million less than the January-February 1984 level.
Inflation moderated somewhat in February to a monthly rate of 10.2
percent; in the 12 months since February 1984 general prices rose 226

IV-31
percent.

In January, the comparable figures were 12.6 and 232 percent,

respectively.

However, recent monetary growth data seem to indicate

that the moderation of inflation could be short-lived.

Between February

1984 and February 1985, the monetary base grew 269 percent, up
considerably from the 220 percent rate registered during the 12-month
period ending January 1985.

On March 18, the new government announced

some measures aimed at limiting the growth in public spending and inflation.

The measures included a three-month moratorium on spending on new

public projects, a three-month suspension of government credit for
export, finance, and agricultural projects, a 10 percent cut in the
budget approved by the former government, and a two-month freeze on
government borrowing on the domestic money market.
Argentina has exceeded some of the quantitative performance limits
specified in its IMF stand-by agreement for the end of 1984 and would
require a waiver to be able to make the first-quarter drawing under the
stand-by.

If Argentina and the IMF are unable to agree quickly on the

steps necessary to put the program back on track, the bank package of
new money and debt rescheduling arranged with Argentina's bank advisory
committee at the end of November may well be at risk.

The deviations

from the program are in the fiscal area and in the "operating losses" of
the central bank.

Not only has public spending been excessive, in large

part as a consequence of the compensatory wage increases granted during
the fourth quarter, but in addition public sector revenues have been
weak and the adjustment of public sector prices has lagged inflation.
Monetary policy was eased in late December and the first two months of
1985, with the result that the free market premium for the dollar rose

IV-32

sharply while unregulated domestic interest rates declined almost to the

level of the regulated rates.

However, following the replacement of the

top leadership of the economic team on February 18, there has been some
reversal in monetary policy:

regulated interest rates have been raised

by 2 percentage points per month, and the degree of monetary ease has
been reduced somewhat, with the result that the unregulated interest
rates have risen by 5 percentage points per month (to 26.6 percent on
March 13) and the free market premium on the dollar has declined from
about 40 percent to about 34 percent between late February and March 13.
The CPI rose by 25 percent in January and by 20.7 percent in February,
when it was 804 percent higher than in February 1984.

The official peso

price of the dollar kept pace with prices in this period.

Beginning in

March, monthly wage increases are to be set at 90 percent of the previous month's inflation rate, with quarterly catch-up raises payable
early in the next quarter.
In the Philippines, the proposed signing on February 26 of loan
agreements with the creditor commercial banks for $925 million in new
credits and a rescheduling of about $4.8 billion in debts had to be
postponed.

This was attributable mainly to the reluctance of one bank

to participate in the new credit and rescheduling.

On March 4 an IMF

mission began its scheduled review of the Philippine economic situation.
The IMF team is reportedly concerned that the peso has shown too much
strength recently and that the country's export performance has been
poor.

During the fourth quarter of last year, exports were up only 2

percent over the same period a year earlier.

By the end of this month,

the Philippine authorities will be required to meet an important

IV-33

performance criterion for reserve money (a type of monetary base concept).

At the end of February, reserve money was 8 percent above the

end-March ceiling.

Last December, the Philippines exceeded the reserve

money ceiling and as a consequence became ineligible to make its second
drawing under the IMF program during March.
Venezuela and its bank advisory committee are nearing completion on
the terms sheet for the multi-year rescheduling agreement negotiated
last September.

Previous disagreements about provisions for currency

switching of dollar denominated debt and the obligation of the public
sector to provide foreign exchange to private sector debtors have been
essentially resolved.

The terms sheet should be completed by early

April, with circulation to Venezuela's 450 creditor banks beginning in
late April or early May. Before the final signing of the rescheduling
agreement, however, Venezuela must show further progress in the
registration of some $10 billion in private sector debt.

Roughly $7.5

billion of this private sector debt has been registered so far.

Vene-

zuelan officials claim that the entire private sector debt to financial
institutions will be registered by the end of this month.
In Peru, the government has continued to implement an adjustment
program, including an acceleration of daily devaluations, increases in
gasoline prices and sales taxes, and a halt or a slowing of public
investment projects.

In support of the program, the U.S. government

recently released $30 million in disaster aid from 1983 that had been
The

suspended when Peru fell out of compliance with its IMF program.
IMF may suggest a set of interim targets prior to negotiation of a
program with the new government to be elected later in the year.

IV-34

Interest arrears to commercial banks now approach $350 million.

How-

ever, Peru made a payment of $22 million in mid-February, and the
government has announced its intention to make similar payments each
month for the remainder of the present administration's term, which ends
July 28, 1985.

In return, the bank advisory committee has agreed to

recommend that trade credit lines be maintained at their present level
of between $300 and $350 million.

Maturing medium- and long-term debt

is being rolled over on a continuing basis for 30-day periods.
The Chilean government recently reached a tentative agreement with
the IMF on a three-year, SDR 750 million, Extended Fund Facility
arrangement.

Under the program, the public sector deficit for 1985 is

targeted at 3.5 percent of GDP (versus about 4.5 percent estimated for
1984).

The current account deficit is also forecast to drop from $2

billion in 1984 to under $1.4 billion in 1985.

The government is

confident that it can come close to meeting these ambitious targets
despite the damage caused by the major earthquake that struck Santiago
and surrounding cities on March 3.

The earthquake caused major damage

to roads, housing, and other infrastructure.

Chilean exports are likely

to decline temporarily since port facilities and copper mines and
refineries suffered significant damage.

The IMF has agreed to allow the

government deficit in 1985 to be "front-loaded" in order to speed the
recovery from the earthquake.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 26, 1985 : Greenbook Part 2

FRASER