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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class II FOMC March 21, 1984 SUMMARY AND OUTLOOK Prepared for theFederal Open Market Commmittee By the staffof the Board Governors of of the Federal Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Recent Developments. Economic activity appears to have expanded at a considerably more rapid rate in early 1984 than in the last quarter of 1983. Private domestic spending, especially for housing and automobiles, has been very strong, and there have been substantial gains in industrial production. Part of the surge in demand is being met by foreign supply, however, and it appears that the trade deficit is reaching a new record high. Inflation rates have moved up from last year, been concentrated in the food sector. but the rise has Wage increases have thus far remained moderate despite firming labor market conditions. Industrial production rose 1.2 percent in both January and February, considerably above the monthly gains in the fourth quarter. output were widespread across products and materials. Increases in Production of all major categories of consumer goods expanded strongly, but auto output was about unchanged in February at an annual rate of 8 million units. Output of defense equipment and construction supplies increased rapidly in both months, and the increase in business equipment also was strong. In February the rate of capacity utilization in manufacturing rose to 81 percent, its highest level since May 1981. The expansion in output in January and February generated substantial gains in employment. Payroll employment rose 385,000 in February, consider- ably above the 290,000 average monthly increase during the preceding six months. The factory workweek, which jumped half an hour in January, remained unchanged at its highest level since 1967. The strong growth in labor demand was associated with some speedup in labor force, growth, reflecting higher participation of both teenagers and adult females. The civilian unemployment rate continued to fall 0.2 percentage point each month; at 7.8 percent in February, the jobless rate was nearly 3 percentage points below its peak in December 1982. Reflecting both continuing high levels of consumer confidence and large gains in income, through February. consumer spending continued at a high level Retail sales soared 3.3 percent in January and fell back only slightly in February. The February sales pace was about 4 percent above the fourth-quarter average, across expenditure categories. with gains generally widespread Sales of domestic autos, which averaged nearly 8.5 million units at an annual rate for the two months, especially strong. were This pace, the best performance since 1979, was well above the 7.3 million unit selling rate in the fourth quarter of last year. Between January and February sales of foreign units declined from a 2.6 to 2.2 million unit annual rate, reflecting in part tight supplies of Japanese cars as the export-restraint year ends in March. Housing activity has strengthened considerably since the beginning of the year. After jumping 17 percent in January, housing starts tacked on another 11 percent gain in February, reaching a 2.2 million unit annual rate, the highest monthly figure in six years. building permits have exhibited nearly as much strength. New Sales of new and existing homes also continued strong through January, and are now at their highest level since 1980. reflects a number of factors: The rapidly expanding housing market rising family income, been postponed during the recession, demand that had and the increasing use of adjustable- rate mortgagee which often carry discounted initial rates. I-3 Business fixed investment also appears to be increasing vigorously. Although shipments of nondefense capital goods fell 5.6 percent in January after two months of substantial increases, there was a huge rise in imports of capital goods in January, indicating that domestic demand for equipment is still rising. rose further. New orders for nondefense capital goods Nonresidential construction put in place also has been strong, rising 2.7 percent in December and 0.7 percent in January, with the expansion concentrated in commercial and industrial construction. Finally, compared with the autumn results, the latest surveys of investment plans show considerable upward revisions in spending plans for 1984. With sales and shipments increasing briskly, inventory accumulation in January was again modest: manufacturing and trade inventories rose at an annual rate of $5 billion in constant-dollar terms, less than the investment in the fourth quarter of last year. The accumulation has occurred mainly at trade outlets other than auto dealers; little restocking has taken place so far in this recovery in the manufacturing sector. Wage increases have remained moderate in recent months. The index of hourly earnings for production workers rose only 3-1/4 percent at an annual rate in the three months ending in February. increased about 4 percent. effective In 1983, this measure Changes in payroll taxes for social security January 1 will add almost 2 percentage points (annual rate) to the first quarter's hourly compensation figure. Inflation rates moved higher in early 1984. The PPI rose at a 6 percent annual rate in January and February, after being little changed in the final months of 1983, while the CPI increased at a 7-1/2 percent annual rate in January, with sharply higher food prices a major factor. Excluding food and energy, the CPI rose at a 6-1/2 percent pace, somewhat above the nearly 5 percent increase during 1983. Outlook. The staff estimates that real GNP will increase about 8 percent at an annual rate in the first quarter, an acceleration from the 5 percent rate of expansion in the final quarter of 1983. (The Commerce Department's flash estimate for first-quarter growth is 7-1/4 percent.) Spurred by exceptionally strong demand for autos, consumption spending appears to be expanding at about the same high rate as in the fourth quarter. Also, contributing to the sharp advance in output is a step-up in housing contruction, which had fallen off somewhat last quarter. Business fixed investment is also expanding rapidly, although at less than the astonishing fourth-quarter pace. In addition, a sizable swing is projected in inventory investment in both the nonfarm and farm sectors, with the rise in private farm inventories offsetting a reduction in recorded federal spending as CCC stocks are released under the PIK program. A moderate growth in exports is projected to be more than offset by a rapid rise in imports, and therefore net exports are anticipated to continue to weaken. The staff's assumptions about monetary policy are little changed since the last Greenbook. M1 and M2 are assumed to grow this year at rates around or a little above the midpoints of the FOMC's ranges, and then to slow a little over 1985. Because of the anticipated greater strength of aggregate demand in the economy in this forecast, interest rates are expected to reach higher levels over the projection period than previously thought. For fiscal policy, the staff expects that on a unified budget basis the federal deficit will run about $178 billion in fiscal year 1984 and roughly $186 billion in fiscal year 1985. Deficit- reduction efforts are expected to have no real impact in the current fiscal year, but the budget estimate for fiscal 1985 assumes a $20 billion package of revenue and spending measures. After rising 6-1/4 percent during 1983, real GNP is expected to increase about 5-1/4 percent over the four quarters of 1984, a higher- than-average rate of expansion for a second year of recovery. The above- average growth is concentrated in the first half of the year reflecting the acceleration in spending on automobiles and housing and the recent very strong pace of business fixed investment. The swing in inventory investment also boosts the growth in output in the first half. With inventory investment and auto demand leveling off, and housing activity edging down in response to higher interest rates, output growth is expected to moderate considerably in the second half of this year and during 1985, when real GNP growth is projected to slow to about 3 percent. The impetus for continued expansion should come from business fixed investment, government purchases, and with rising world economic activity and an expected further decline of the dollar, from export demand. Consumption is expected to rise about in line with income. The staff expects more rapid increases in wages and prices this year than last partly because of greatly diminished slack in labor and product markets. Also contributing to higher inflation are the large increase in Social Security taxes, higher food prices, and the projected further depreciation of the dollar. The small size of projected increases in energy prices, by contrast, should help moderate the inflation rate. On balance, during 1984 the gross domestic business product (GDBP) fixed-weighted price index is projected to rise about 5 percent, compared with the rise of about 4-1/4 percent last year. During 1985 the GDBP fixed-weighted price index is expected to rise about 5-3/4 percent as the unemployment rate is projected to be around 6-1/2 percent and the capacity utilization rate in manufacturing around 85 percent throughout the year. Hourly compensation is expected to accelerate to 6-1/2 percent after rising 5-3/4 percent this year. Rapidly rising import prices are projected to affect domestic inflation more significantly next year. In contrast, slowly rising energy prices are expected to hold down inflation, and no further food price shocks are projected. Excluding food and energy, the GDBP measure of inflation is expected to rise about 6 percent during next year, one percentage point above the expected increase this year. March 21, 1984 STAFF GNP PROJECTIONS Percent changes, annual rate Gross domestic business product fixed-weighted price index Nominal GNP Real GNP ----Total 1/25/84 3/21/84 1/25/84 3/21/84 1/25/84 Excluding food and energy 3/21/84 1/25/84 3/21/84 Unemployment rate (percent) 1/25/84 3/21/84 Annual changes: 1982 <1> 4.0 1983 <1> 1984 1985 7.7 9.7 8.6 -1.9 3.3 5.1 3.6 -1.9 3.4 6.3 3.3 6.9 5.1 4.8 5.2 6.9 5.1 4.8 5.7 9.7 9.6 7.7 7.2 9.7 9.6 7.2 6.6 6.7 3.5 5.6 5.0 6.7 3.5 5.6 4.4 10.4 10.1 9.4 10.4 10.1 9.4 8.5 8.5 Quarterly changes: 1983 Q1 Q2 Q3 Q4 <1> <1> <1> <1> 1984 Ql Q2 Q3 4 1985 Q1 Q2 Q3 Q4 8.2 13.3 11.5 8.6 8.2 13.3 11.5 9.1 10.1 8.8 8.8 8.6 13.1 10.3 8.9 8.4 8.8 8.4 8.4 8.4 8.7 8.1 8.8 8.9 Two-quarter changes: <2> 1983 Q2 <1> Q4 <1> 1984 Q2 Q4 1985 Q2 Q4 10.7 10.0 10.7 10.3 6.1 6.0 6.1 6.3 3.9 4.6 3.9 4.4 5.1 5.3 5.1 5.0 -. 5 -1.6 -. 5 -1.6 9.4 8.7 11.7 8.6 4.6 4.0 7.0 3.6 4.8 4.9 4.8 5.2 4.7 4.7 4.7 5.2 -. 7 -. 3 -1.3 -. 4 8.6 8.4 8.4 8.8 3.4 3.0 2.9 2.9 5.1 5.4 5.5 6.0 5.3 5.7 5.8 6.3 -. 2 -. 3 -. 2 -. 1 2.4 -2.1 -1.0 -. 5 2.4 -2.1 -1.7 -. 3 Four-quarter changes: <3> 1982 1983 1984 1985 Q4 <1> Q4 <1> 04 Q4 2.6 10.4 9.1 8.5 2.6 10.5 10.2 8.6 -1.7 6.1 4.3 3.2 -1.7 6.2 5.3 2.9 <1> Actual. <2> Percent change from two quarters earlier. <3> Percent change from four quarters earlier. March 21, GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and figures are billions of current dollars at annual rates.) CONFIDENTIAL - FR CLASS II FOMC income 1982 Q1 Q2 1984 1983 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final sales Private Domestic final purchases 3021.4 3047. 1 2417.3 2387.4 3070.2 3081.4 2449.8 2416.5 3090.7 3095.6 2439.9 2439.0 3109.6 3165.9 2486.2 2480.6 3171.5 3210.9 2533.5 2516.5 3272.0 3286.6 2603.2 2611.7 3362.2 3353.7 2655.4 2673.7 3436.2 3416.6 2717.6 2743.7 Personal consumption expenditures 1938.9 989.1 949.7 1972.8 997.6 975.2 2008.8 1010.0 998.9 2046.9 1025.1 1021.8 2073.0 1035.6 1037.4 2147.0 1077.3 1069.7 2181.1 1097.6 1083.5 2230.9 1123.6 1107.3 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 422.9 87.3 361.3 -25.7 -27.6 432.5 91.0 352.7 -11.2 -8.8 425.3 87.9 342.3 -4.9 -2.3 377.4 96.8 337.0 -56.4 -53.7 404.1 111.3 332.1 -39.4 -39.0 450.1 128.4 336.3 -14.5 -10.3 501.1 141.5 351.0 8.5 18.4 532.5 138.8 374.0 19.6 19.7 Net exports of goods and services <1> Exports Imports 29.9 358.4 328.5 33.3 364.5 331.2 .9 346.0 345.0 5.6 321.6 316.1 17.0 326.9 309.9 -8.5 327.1 335.6 -18.3 341.1 359.4 -26.1 346.5 372.6 Gov't. purchases of goods and services Federal <2> State and local 629.8 249.7 380.0 631.6 244.1 387.5 655.7 261.7 394.0 679.7 279.2 400.5 677.4 273.5 404.0 683.4 273.7 409.7 698.3 278.1 420.2 699.0 274.1 424.9 Gross national product in constant (1972) dollars 1485.8 1489.3 1485.7 1480.7 1490.1 1525.1 1553.4 1572.5 Personal Income Wage ad salary disbursements Disposable personal icome Saving rate (percent) 2528.1 1542.8 2127.9 6.1 2563.2 1563.8 2159.0 5.9 2591.3 1579.8 2191.5 5.6 2632.0 1586.0 2227.8 5.4 2657.7 1610.7 2255.9 5.4 2713.6 1648.4 2301.0 4.0 2761.9 1681.9 2361.7 4.9 2835.2 1717.3 2423.9 5.2 162.0 173.2 166.8 178.8 168.5 177.3 161.9 167.5 181.8 169.7 218.2 203.3 248.4 229.1 268.1 228.1 -108.5 -38.1 -113.2 -32.7 -158.3 -64.9 -208.2 -99.7 -166.1 -65.1 -187.3 -101.7 lExluding social insurmee fade 28.8 -3.5 32.0 -. 8 31.3 -2.1 32.9 -1.2 40.4 5.5 51.7 16.1 55.5 18.9 58.1 20.8 Civilian labor force (alloome) Unemploymnat rate (percent) NMofarn payroll eploymat (millio) Manufacturig 109.4 8.8 90.3 19.4 110.2 9.4 89.9 19.1 110.5 10.0 89.3 18.7 110.8 10.6 88.8 18.3 110.7 10.4 88.8 18.3 111.3 10.1 89.5 18.5 112.1 9.4 90.3 18.8 112.0 8.5 91.3 19.2 Industrial production (1967100) Capacity utillsatios all aIefctutiag (percent) materials (peremc) 141.7 72.9 73.0 139.4 71.6 70.7 138.2 71.1 69.4 135.2 69.0 67.2 138.5 70.7 70.1 144.5 73.9 73.5 151.8 77.4 77.5 155.4 78.9 79.6 1.27 8.57 6.00 2.49 1.64 8.46 6.06 2.40 Goods Services Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State -183.3 -72.3 -189.9 -110.9 nad local goverment surplus or deficit(-) (1.1.A. basis) Housing start.e prive (allion umits, A.L.) New auco sale (aIltli., .AA.) Domestic models Foreign model .88 8.12 5.90 2.22 .96 7.53 5.53 1.99 1.12 7.78 5.56 2.22 1.69 9.10 6.81 2.28 1.78 9.22 6.92 2.31 1.70 9.94 7.29 2.65 <1) Balance of paymnaCe data and details umderlyaig these eetitces are sheu in the laternational Developments section of this part of the Greebook. peMadiature aro shou in the federal Sector Acounts table <2) Components of purchess and total receiptu ad total which follow. mploymet rate. <3> stietee is table aTr evaluated at a 6.0 percent high employment 1-9 CONFIDENTIAL - FR CLASS II FOMC March 21, 1984 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1983 1982 Q1 Q2 Q3 Q4 -1.0 -1.5 -4.0 -. 9 -1.3 4.5 3.0 3.4 Q1 Q2 Q3 9.7 6.8 8.8 11.9 7.6 5.1 5.3 5.7 Q4 Constant (1972) Dollars Gross national product Final sales Private Domestic final purchases Personal consumption expenditures Goods Services Gross private domestic investment Residential structures Business fixed investment -5.5 -1.3 -1.6 .0 2.4 2.0 2.9 -34.1 -28.5 -5.9 1.0 -. 8 .1 .8 3.1 1.5 4.7 .9 -. 1 2.1 3.4 -5.8 17.9 -13.0 -14.3 -8.8 3.6 5.1 1.9 2.9 4.4 1.4 10.0 13.5 6.4 -34.6 53.2 -6.6 28.6 57.3 -1.5 49.8 79.5 7.9 -8.8 -18.0 6.5 -1.8 -1.1 Gov't. purchases of goods and services Federal National defense State and local -. 2 .2 -1.3 -. 5 -5.0 -14.0 13.0 1.3 9.4 26.3 14.0 -. 4 10.6 28.3 5.1 -. 1 Disposable personal income -3.4 1.9 -. 3 2.6 Gross national product Final sales Private Domestic final purchases -1.4 3.9 3.8 3.7 6.6 4.6 5.5 5.0 2.7 1.9 -1.6 3.8 Personal consumption expenditures Goods Services 7.5 4.4 10.8 7.2 3.5 11.2 7.5 5.1 10.1 45.1 35.9 18.7 -3.9 -8.4 7.8 -. 8 -2.8 7.4 .0 2.9 27.6 -6.9 27.2 3.5 6.5 8.0 13.3 9.8 11.5 16.0 11.5 8.4 8.3 9.8 9.1 7.7 9.7 10.9 15.1 17.1 13.0 6.5 7.8 5.3 Current Dollars Gross private domestic investment Residential structures Business fixed investment -37.8 -26.5 -6.7 9.5 18.2 -9.1 1.2 -8.7 18.0 8.1 Gov't. purchases of goods and services Federal National defense State and local 6.0 5.7 5.6 Disposable personal income Personal income Wage and salary disbursements -6.5 -13.0 -11.3 16.1 32.1 20.8 6.8 7.8 6.1 9.5 -38.0 46.9 -6.0 31.5 75.3 -5.7 53.9 76.7 5.1 53.6 47.5 18.8 27.5 -7.3 28.8 15.5 29.5 16.5 6.8 -1.3 -8.0 7.8 3.5 3.6 .3 10.7 5.8 9.0 6.6 3.6 10.7 .4 -5.6 10.5 4.6 11.0 7.3 8.4 10.9 11.0 8.7 6.1 4.5 4.2 6.8 6.4 1.6 -49.3 -59.6 12.4 13.6 4.1 -3.3 -14.8 -20.3 59.0 5.4 107.5 106.0 68.0 61.3 35.7 -1.7 Nonfarm payroll employment Manufacturing -3.0 -9.5 -1.8 -7.5 -2.7 -7.7 -2.3 -8.6 .1 -. 1 2.9 5.2 3.6 7.0 4.9 8.2 Nonfarm business sector Output per hour Compensation per hour Unit labor costs .1 10.0 9.9 -. 4 5.8 6.2 2.3 7.2 4.7 7.1 4.3 -2.6 2.3 3.8 1.5 4.3 5.6 3.7 3.8 5.5 3.3 4.9 5.8 3.8 4.5 6.4 5.5 5.8 5.4 7.3 3.8 3.9 1.5 3.6 6.7 .3 4.1 3.5 4.4 10.1 18.4 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production -11.8 -6.5 -3.4 -8.2 -- <1> Excluding the Federal pay increase, the rate of change in 1982-Q4 was 3.5 percent. <2> Uses expenditures in 1972 as weights. 21.8 10.0 March 21, CONFIDENTIAL - FR CLASS II FOMC 1984 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) - -. Projected 1984 01 Q2 1985 Q3 Q4 QL Q2 Q3 Q4 Gross national product Final sales Private Domestic final purchases 3543.7 3496.7 2785.3 2820.8 3631.7 3585.4 2842.4 2893.8 3710.1 3659.8 2896.9 2957.3 3785.5 3740.5 2956.4 3020.9 3865.2 3823.2 3017.0 3082.6 3941.4 3902.4 3078.3 3143.2 4025.1 3987.1 3144.1 3207.5 4111.5 4073.5 3211.9 3271.9 Personal consumption expenditures Goods Service 2284.5 1157.7 1126.8 2335.8 1182.0 1153.8 2384.8 1203.0 1181.8 2436.5 1226.5 1210.0 2484.0 1246.5 1237.5 2532.0 1266.5 1265.5 2582.0 1286.5 1295.5 2634.0 1307.5 1326.5 Gross private domestic investment Residential structure Business fixed investment Change in business inventories Nonfarm 583.3 149.5 386.8 47.0 26.0 604.3 158.2 399.8 46.3 37.3 622.8 159.3 413.2 50.3 46.3 629.4 157.7 426.7 45.0 45.0 640.6 158.7 439.9 42.0 42.0 650.2 158.5 452.7 39.0 39.0 663.5 160.6 464.9 38.0 38.0 675.9 161.3 476.6 38.0 38.0 Net exports of goods and services <1> Exports Imports -35.5 360.1 395.6 -51.4 371.0 422.4 -60.4 380.7 441.1 -64.5 393.7 458.2 -65.6 408.7 474.3 -64.9 422.6 487.5 -63.4 438.6 502.0 -60.0 456.6 516.6 Gov't. purchases of goods and services Federal <2> State and local 711.4 277.6 433.8 743.0 299.5 443.5 762.9 309.9 453.0 784.1 321.1 463.0 806.2 333.4 472.8 824.1 341.0 483.1 843.0 349.5 493.5 861.6 357.7 503.9 Gross national product in constant (1972) dollars 1602.9 1626.3 1642.4 1655.2 1667.8 1678.7 1690.8 1702.5 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 2922.6 1759.4 2498.2 5.7 2977.4 1803.0 2541.1 5.3 3041.2 1844.9 2594.1 5.3 3107.8 3185.4 1886.7 1926.3 2649.2 2715.9 5.2 5.8 3248.4 1965.2 2767.4 5.7 3316.2 2004.4 2823.2 5.8 3381.8 2043.5 2877.0 5.7 278.2 240.5 281.1 242.6 285.0 243.3 288.2 243.5 263.6 234.9 286.7 234.0 297.1 240.4 309.1 247.4 -174.8 -110.7 -166.7 -113.0 -167.0 -119.4 -174.0 -129.1 -184.0 -141.6 -182.0 -140.2 -182.5 -141.2 62.9 24.3 63.4 24.3 62.9 23.3 61.2 20.9 58.5 17.6 55.7 14.2 52.8 10.7 50.8 8.0 112.6 7.8 113.2 7.2 1138t 6.9 114.4 6.8 116.9 6.7 115.4 6.6 115.9 6.5 116.4 6.5 92.2 19.5 93.3 19.8 94.3 20.1 95.0 20.3 95.8 20.5 96.4 20.6 97.0 20.7 97.6 20.7 Corporate profits with I.T.A. and C.C. AdJ. Corporate profits before tax Federal government asrplus or deficit (-) (N.I.A. baets) High eploymet surplus or deficit (-) <3> State and local governmet surplus or deficit (-) (.I.A. beals) xcluding social iauro ae ftsm Civilian labor forc (uillios) Unemployment race (percent) Nonfam payroll ampLoEas Manfaecturing Industrial prodele (197-100> Capacity titalMISa aU fs0aWstl r Materials (pefes) Bousain starts, priate (alliet Naw ato sales (mrllons, A.1.) Domestic modela Foreign odels -ite, (percem) A.R.) 159.9 80.9 81.6 164.0 166.9 85.9 171.2 84.8 86.5 172.8 85.0 86.9 174.2 85.2 87.2 175.0 85.2 87.4 1.75 11.10 8.50 2.60 1.75 11.05 8.60 2.45 1.70 11.25 8.70 2.55 1.70 11.45 8.80 2.65 1.70 11.60 8.90 2.70 82.6 83.3 83.6 169.3 84.3 84.8 2.06 1.85 10.75 10.70 8.30 2.40 1.80 10.75 8.20 2.53 8.45 2.30 -180.0 -138.0 <1> Balance of paymetn data and details uderlying thee estimates are ehoe in the Interational Developmenc section of this pert of te Grmeabook. <2) Compo est of purch oas d totl reaeipts total epeaitures are shen in the Federal Sector Accounts table which follos. <3> Estimate i table a re valmted at a 6.0 percent high emlomt unemployment rate. March 21, CONFIDENTIAL - FR CLASS II FOMC 1984 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) -Projected-----1984 1985 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final sales Private Domestic final purchases 8.0 4.7 5.9 7.9 6.0 6.6 5.0 5.5 4.0 3.7 3.3 3.3 3.1 3.8 3.3 3.1 3.1 3.5 3.2 3.0 2.7 3.0 2.9 2.5 2.9 3.1 2.9 2.5 2.8 2.9 2.8 2.2 Personal consumption expenditures Goods Service 5.4 8.5 2.0 3.7 4.0 3.4 2.5 2.1 3.1 2.8 2.8 2.9 2.4 2.0 2.7 2.2 1.8 2.6 2.1 1.6 2.6 2.1 1.6 2.5 Gross private domestic investment Residential structures Business fixed investment 42.5 30.6 15.6 8.6 19.6 11.0 8.2 -2.4 9.6 .3 -9.1 86 2.9 -2.9 8.0 1.7 -6.0 6.9 3.2 -. 7 5.7 2.2 -4.3 4.5 Gov't. purchases of goods and services Federal National defense State ad local -. 2 -4.1 11.5 2.5 13.8 31.4 10.9 3.3 5.5 9.3 9.3 2.9 6.0 10.3 8.4 3.1 4.8 7.6 6.8 2.8 3.6 4.4 5.7 3.0 3.7 4.9 6.5 2.9 3.3 4.1 5.4 2.7 8.2 1.6 2.5 2.7 4.6 2.0 2.3 1.6 Gross national product Final sales Private Domestic final purchases 13.1 9.7 10.3 11.7 10.3 10.5 8.5 10.8 8.9 8.6 7.9 9.1 8.4 9.1 8.5 8.9 8.7 9.1 8.5 8.4 8.1 8.5 8.4 8.1 8.8 9.0 8.8 8.4 8.9 9.0 8.9 8.3 Personal consumption Goods Services 10.0 12.7 7.2 9.3 8.7 9.9 8.7 7.3 10.1 9.0 8.0 9.9 8.0 6.7 9.4 8.0 6.6 9.4 8.1 6.5 9.8 8.3 6.7 9.9 investment Gross private domestoc Residential structures Business fixed investment 44.0 34.5 14.4 15.2 25.4 14.1 12.8 2.8 14.1 4.3 -4.0 13.7 7.3 2.6 13.0 6.1 -. 5 12.2 8.4 5.4 11.2 7.7 1.8 10.5 Gov't. purchases of goods Federal National defense State and local 7.3 5.2 23.3 8.6 19.0 35.5 13.7 9.2 11.2 14.6 15.0 8.8 11.6 15.3 14.3 9.1 11.8 16.2 16.4 8.7 9.2 9.4 11.3 9.0 9.5 10.3 12.7 8.9 9.1 9.7 11.5 8.7 12.9 12.9 10.2 7.0 7.7 10.3 8.6 8.8 9.6 8.8 9.1 8.9 10.4 10.4 9.1 7.8 8.2 8.3 8.3 8.6 8.2 7.8 8.2 8.0 -92.7 23.6 4.3 3.2 3.7 1.5 4.5 .3 -6.2 -13.4 4.4 -1.5 15.3 11.4 17.1 12.1 employment payroll Nonfarm Manufacturing 4.0 6.8 4.8 6.9 4.2 5.8 3.2 4.7 3.1 3.2 2.6 2.2 2.5 1.4 2.3 .9 Nonfarm business sector Output per hour Compenation per hour 1.8 6.1 1.4 5.5 .6 5.8 .1 5.9 .5 6.5 .3 6.2 .9 6.4 .8 6.5 4.3 4.0 5.2 5.8 6.0 5.9 5.5 5.7 4.8 4.1 4.7 5.1 3.4 5.3 5.7 5.9 4.8 4.6 5.3 4.8 4.9 5.1 3.1 5.0 5.6 5.3 5.3 5.6 5.4 3.7 5.6 5.6 5.9 5.7 5.9 6.2 3.9 6.1 6.4 6.0 11.8 10.7 7.3 5.9 4.6 3.8 3.3 1.8 Constant (1972) Dollars Disposable personal income Current Dollars expenditures ad services Disposable personal income Personal income Wage and salary disbursements Corporate profits with I.V.A. and C.C. Adj. tax before Corporate profits Unit labor costs GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production <1> Excluding Federal pay increase, the rate of change in 1984-Q1 is weights. <2> Uses expenditures in 1972 as 4.4 percent and in 1985-Q1 is 5.1 percent. March 21, 1984 GROSS NATIOIAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) CONFIDENTIAL - FR CLASS II FOMC -Projected1984 1985 1978 1979 1980 1981 1982 1983 Gross national product Final sales Private Domestic final purchases 2163.9 2137.4 1705.5 1706.6 2417.8 2403.5 1929.1 1915.9 2631.7 2641.5 2103.7 2079.7 2954.1 2935.6 2339.9 2313.6 3073.0 3097.5 2448.3 2430.9 3310.5 3316.9 2627.4 2636.4 3667.7 3620.6 2870.2 2923.2 3965.8 3946.5 3112.8 3176.3 Personal consumption expenditures Goods Services 1346.5 728.5 618.0 1507.2 813.5 693.7 1668.1 883.5 784.5 1857.2 970.0 887.1 1991.9 1005.5 986.4 2158.0 1083.5 1074.5 2360.4 1192.3 1168.1 2558.0 1276.7 1281.2 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 386.6 111.2 248.9 26.5 25.4 423.0 118.6 290.2 14.3 8.6 401.9 102.9 308.8 -9.8 -4.5 474.9 104.3 352.2 18.5 10.9 414.5 90.8 348.3 -24.5 -23.1 471.9 130.0 348.4 -6.4 -2.8 609.9 156.2 406.6 47.1 38.6 657.5 159.8 458.5 39.3 39.3 Net exports of goods and services <1> Exports Imports -1.1 218.7 219.8 13.2 281.4 268.1 23.9 338.6 314.8 26.3 368.8 342.5 17.4 347.6 330.2 -9.0 335.4 344.4 -52.9 376.4 429.3 -63.5 431.6 495.1 Gov't. purchases of goods and services Federal <2> State and local 431.9 153.6 278.3 474.4 168.3 306.0 537.8 197.0 340.8 595.7 229.2 366.3 649.2 238.7 390.5 689.5 274.8 414.7 750.3 302.0 448.3 833.7 345.4 488.3 Gross national product in constant (1972) dollar@ 1438.6 1479.4 1475.0 1513.8 1485.4 1535.3 1631.7 1685.0 Personal income Wage ad salary disbursemnts Disposable personal income Saving rate (percent) 1732.7 1106.3 1474.0 6.1 2165.3 1951.2 1237.6 1356.7 1828.9 1650.2 6.0 5.9 2435.0 1493.2 2047.6 6.6 2578.6 2742.1 1568.1 1664.6 2176.5 2335.6 4.9 5.8 )rporata profits with I.V.A. and C.C.Adj. Corporate profits before ta Federal govermnt surplus or deficit(-) (N.I.A. basis) Bigh employment surplus or defiit(-) State and local goverment surplus or deficit (-) (1.I.A. basis) Excluding social insurance fuand Civilia labor force (mtllions) Unemployment race (percent) Nonfar payroll employent (milliom ) Manufacturing Industrial production (1967r100) Capacity ucilisatio s: ll 1 -- faMur (p eMet) Materials (percent) Bousing starts, privato (Wllle mite, Nse auto sales (millms* A. t.) Daometic model Foreign models .&..) 3012.2 3282.9 1823.0 1964.8 2570.6 2795.9 5.7 5.4 192.4 229.1 194.8 252.7 175.4 234.6 192.3 227.0 164.8 174.2 229.1 207.5 283.1 242.4 294.1 239.2 -29.5 -29.2 -16.1 -18.6 -61.2 -36.0 -62.2 -26.0 -147.1 -58.8 -181.6 -87.5 -170.6 -118.0 -182.2 -140.2 30.3 10.0 30.4 6.6 30.6 3.5 35.3 4.4 31.3 -1.9 51.4 15.3 62.6 23.3 54.4 12.6 102.3 6.1 105.0 5.8 106.9 7.1 100.7 7.6 110.2 9.7 111.5 9.6 113.5 7.2 115.7 6.6 6.7 20.5 89.8 21.0 90.4 20.3 91.2 20.2 89.6 18.9 90.0 18.7 93.7 19.9 96.7 20.6 146.1 84.7 85.6 152.5 86.0 87.6 147.0 79.6 80.4 150.9 79.4 80.7 138.6 71.1 70.1 147.6 75.2 75.2 165.0 82.9 83.9 173.3 85.1 87.0 2.00 11.29 9.29 2.00 1.72 10.68 8.36 2.32 1.06 8.00 5.77 2.23 1.70 9.18 6.77 2.41 1.87 10.83 8.36 2.46 1.71 11.34 8.75 2.59 1.30 9.04 6.62 2.42 1.10 8.56 6.24 2.32 <1> Balace of paymnes data underlying these Cstistme ae m bon in the antermational Developmnts section of this part of the Greebook. <2 Components of purchswes sad total receipts sad tocal apenodiures arm hm i the Federal Sector Accounts tabl ~bich follow. March 21, FR CONFIDENTIAL CLASS II FOMC 1984 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS -- Projected1984 1985 1978 1979 1980 1981 1982 1983 Gross national product Final sales Private Domestic final purchases 5.0 4.9 5.6 5.5 2.8 3.5 4.0 2.9 -. 3 .5 .1 -1.0 2.6 1.8 2.0 2.7 -1.9 -. 7 -1.3 -. 1 3.6 2.8 3.4 5.0 6.3 4.9 5.3 6.6 3.3 3.6 3.2 3.0 Personal consumption expenditures Goods 4.5 4.2 4.8 2.7 1.9 3.7 .5 -1.4 2.7 2.7 2.1 3.3 1.4 .1 2.9 4.2 5.6 2.7 4.6 6.2 2.9 2.5 2.2 2.8 10.5 2.8 12.8 -. 2 -5.3 7.3 -11.8 -20.3 -2.4 9.2 -5.1 5.2 -14.5 -15.4 -4.8 12.6 39.4 1.4 25.5 16.0 15.4 3.2 -3.2 7.8 2.0 -. 1 .4 3.3 1.3 1.8 2.6 1.1 2.2 4.2 3.9 1.0 .8 3.8 5.2 -1.0 1.8 5.6 7.1 -. 5 .4 1.0 6.9 .1 3.2 4.8 8.4 2.1 5.2 8.4 7.3 3.0 4.9 2.7 .6 3.2 .5 3.2 5.3 2.8 Gross national product Final sales Private Domestic final purchases 12.8 12.8 13.6 13.4 11.7 12.4 13.1 12.3 8.8 9.9 9.0 8.5 12.2 11.1 11.2 11.2 4.0 5.5 4.6 5.1 7.7 7.1 7.3 8.5 10.8 9.2 9.2 10.9 8.7 9.0 8.5 8.7 Personal consumption expnditures Goods Services 11.8 10.9 12.9 11.9 11.7 12.2 10.7 8.6 13.1 11.3 9.8 13.1 7.3 3.7 11.2 8.3 7.8 8.9 .9.4 10.0 8.7 8.4 7.1 9.7 Gross private domestic investment Residential structures Business fixed investment 19.3 16.1 21.3 9.4 6.6 16.6 -5.0 -13.2 6.4 18.2 1.4 14.1 -12.7 -13.0 -1.1 13.8 43.3 .0 29.3 20.1 16.7 7.8 2.3 12.8 Gov't. purchases of goods and services Federal National defense State and local 9.7 7.1 8.0 11.2 9.8 9.6 11.5 9.9 13.4 17.1 17.3 11.4' 10.8 16.3 17.4 7.3 9.0 12.9 16.3 6.6 6.2 6.2 11.6 6.2 8.8 9.9 14.2 8.1 11.1 14.4 13.9 8.9 Disposable personal income Personal income Wage and salary disbursements 12.2 12.5 12.5 12.0 12.6 11.9 10.8 11.0 9.6 12.0 12.5 10.1 6.3 3.9 5.0 7.3 6.3 6.2 10.1 9.9 9.5 8.8 9.0 8.9 Corporate profits with I.V.A and C.C.Adj. Corporate protfits before tax 13.0 17.7 1.3 10.3 -9.9 -7.1 9.6 -3.3 -14.3 -23.2 39.0 19.1 23.6 16.8 Manufacturing 5.1 4.2 3.6 2.6 .6 -3.6 .8 -. 6 -1.7 -6.5 .4 -. 9 4.2 6.7 3.1 3.4 Nonfarm business sector Output per hour Compensation per hour Unit labor costs .6 8.6 8.0 -1.3 9.0 10.7 -.7 10.4 11.1 1.9 9.8 7.7 -.1 7.8 7.9 6.3 11.3 4.8 1.7 5.2 3.5 .5 6.2 5.6 GNP implicit deflator product Gross domestic business fixed-weighted price index <1> Excluding food and energy Consumer price index (all urban) 7.4 8.6 9.2 9.4 6.0 4.2 4.2 5.2 8.0 7.8 7.6 9.9 8.6 11.3 10.0 8.5 13.3 9.5 9.3 10.3 6.0 6.9 6.1 4.2 5.1 3.2 4.7 4.8 5.0 5.5 5.7 5.7 Industrial production 5.8 4.4 -3.6 2.6 -6.1 6.4 11.8 5.0 Constant (1972) Dollars Services Gross private domestic investment Residential structures Business fixed investment Gov't. purchases of goods and services Federal National defense State and local Disposable personal income Current Dollar Nonfarm payroll <1> employment ses expenditures in 1972 as weghts. 3.9 -1.4 March 21, 1984 SECTOR ACCOUNTS FEDERAL (Billions of dollars) Unified budget receipts Unified budget outlay Surplus/deficit(-), unified budget Surplus/deficit(-), off-budget 3 agencies Combined deficit to be financed Means of financing combined deficits: Netborrowing from public Decrease in cash operating balance Cash operating balance, Memo: and of period Sponsored agency borrowing5 - 9Iw1l/lI ifeil lear 19* as. 1 601 79 -119 670 -12 -200 mFT1Pr'21Z MsT aid9u. 8steffl IS Staff CY 1983* Fa Staff _I ~ -- CTIW4- Ma taff estimtes Calendar quart er; not seasonaly adjusted 83 IV* 1 I I II IV I 1985 II Ill -184 673 51 -179 74 925 -10 750 936 -186 613 803 -190 693 873 -181 149 213 -63 161 210 -49 186 214 -28 177 215 -38 169 235 -66 171 231 -60 214 236 -21 196 234 -38 -16 -o00 -12 -190 -II -195 -15 -201 -10 -201 -16 -196 1 -62 -3 -52 -5 -33 -5 -43 -3 -68 -3 -62 -5 -26 -5 -43 212 183 171 193 199 187 200 -4 17 17 0 0 8 -3 3 0 3 2 2 6 -1 46 -5 2 65 5 -2 54 5 4 39 -10 -3 41 0 3 37 20 20 20 20 12 15 20 1 10 20 20 -3 3 15 41 18 1 15 4 4 5 5 631 816 275 197 691 876 293 224 699 873 290 220 779 948 340 257 776 957 336 253 645 826 275 200 721 892 302 229 Seasonally adjusted annual rates 715 731 748 768 785 880 898 922 952 967 299 310 321 333 341 225 233 240 250 257 75 77 81 84 85 580 588 601 619 626 -167 -167 -174 -184 -182 804 987 349 264 85 637 -183 -113 -141 854 4 NIA Budget Receipts Expenditures Purchases Defense Nondefense All other expenditures Surplus/deficit(-) High Employment (H.E.) evaluated as the 6 percest 78 69 70 83 84 75 73 541 -186 583 -184 383 -175 600 -169 621 -181 551 -182 590 -171 658 847 274 206 68 573 -190 -O a.. -113 -88 -118 -111 -111 surplus/deficit(-) unemployment rate of -'actual a.. -138 -129 -142 -140 3. Includes Federal inancing bank, Fostal Service Fund. Rural Electriftcat ion and Telephele Revolving Fund, Rural Telephone Bank and Strategic Petroleum Leserve. 4. Checka ssued less checks paid, accrued Iteas and other transactions. 5. oet add to totals due to realdle. -119 ,,.a.--not available *--eatieted 1. Budiet of tlh Utted State Govorment. Fiecal ler 1985 (Febrary 1984). 2. Tke 0 baMeas -budget etletee atW revten of $643 billio and $733 billion, outlays of $852 bil a lo 9 illon a deficite of $189 billion *ad $197 billion is fiscal years 1904 ad 1985 respeteirly (An Analysis of the resident's ludgetary Proposale. February 1984). Mote: Datells ay 692 867 278 217 60 590 -175 M staff aetilatee and actuael include Federal Home Loan Banks. FHL4C (excluding participation certificates), PNIA (excluding mortgage-backed securitee). Federal Lad Bank*, Federal Intermedlate Credit Banks for Cooperatives, and Studest Loan Narketing Aeociation marketable debt n, a paymeat bease. F1I and Administration estimates are not strictly comparable. DOMESTIC FINANCIAL DEVELOPMENTS Recent Developments. Since the last FOMC meeting, have risen throughout the maturity spectrum. interest rates Short-term rates have reacted to incoming data suggesting a stronger economy than had been forecast, which dashed hopes of a near-term easing of reserve positions. The federal funds rate moved from the 9-3/8 to 9-1/2 percent area into the 9-1/2 to 9-3/4 percent area for most of the intermeeting period, with recent trading in the neighborhood of 10 percent. Other short-term market rates are up about 75 to 100 basis points, and very recently major banks raised their prime rates by 1/2 percentage point, to 11-1/2 percent. Long-term rates backed up about 80 basis points, amid renewed concerns about the outlook for inflation and pessimism regarding deficit reductions. Stock prices have declined further on balance over the intermeeting period. Ml growth strengthened in the opening months of this year--to about an 8-1/2 percent average annual rate over January and February-from the subdued pace of the latter part of 1983. The recent pickup in M1 growth--which has placed this measure near the top part of its annual range--has been concentrated in its OCD component. It that M1 velocity has registered a sizable increase in ter, as predicted by models of money demand in appears likely the current quar- light of the acceleration of GNP growth and rising interest rates. Despite the stronger expansion in moderated over the first its M1 component, two months of the year. M2 growth has Growth in M2 during January and February averaged 7 percent at an annual rate, placing this I-15 I-16 measure in the center of the FOMC's annual range. The slowing of non- transactions M2 has been in core deposits, as larger inflows to MMDAs were more than offset by a sharp deceleration in small time deposit growth from the elevated pace of the second half of 1983 and by a faster runoff of savings deposits. Money market fund inflows, by contrast, picked up appreciably in early 1984. With continued strong credit demands pressing against weaker growth of core deposits, depository institutions in the opening months of this year issued a substantial volume of managed liabilities in M3. Issuance of CDs by thrift institutions strengthened over the first two months of this year, evidently accompanying continued heavy acquisition of mortgage assets by S&Ls. With M3 expansion averaging 8 percent over January and February, this aggregate has expanded at an 8-3/4 percent rate since the fourth quarter of last year, leaving it near the upper end of its annual range. Commercial bank credit continued to grow in January and February at around the brisk pace of last year's fourth quarter. over those two months strengthend as it three quarters of 1983. Loan growth had done steadily over the last The demand for business and real estate loans picked up from the fourth quarter while consumer loans continued to soar at the fourth-quarter pace. The growing commercial bank share of consumer lending reflects a greater willingness by banks to lend in this market as evidenced by more competitive bank lending rates. Heavy borrowing by households in early 1984 has reflected a quickened pace of retail purchases, especially of automobiles, and strong housing activity. boosted in Business borrowing has picked up in recent months-- part by growing external financing needs, as growth in capital spending has outstripped improvement in funds. internally generated In addition, business credit demands have been enlarged by a curtailment of equity offerings--as stock prices have sagged--and, in February, by merger-related financing. Public bond offerings by non- financial corporations have risen somewhat from the meager volume of the fourth quarter of last year, but business borrowing continues to be concentrated in the short-term area, mostly from banks. Business loans (including those booked offshore) and commercial paper of nonfinancial firms grew at a 10 percent annual rate in January and an 18 percent rate in February, with nearly half of the February expansion accounted for by the financing of Texaco's acquisition of Getty Oil. Although the federal deficit has narrowed somewhat in the current quarter, borrowing by the Treasury has risen from the fourthquarter level which had been damped by a large cash balance runoff. In contrast, offerings of securities by state and local governments have moderated in the first been dormant, quarter; issuance of private-purpose bonds has pending congressional action on the status of such issues, and a pickup in electric utility only a partial offset in revenue-bond offerings has provided financing volume. ing by the private and Treasury sectors, cial sector debt is Reflecting heavier borrow- aggregate domestic nonfinan- estimated to have accelerated in the current quarter. Outlook. Over the spring, heavy credit demands likely will accompany continued robust economic expansion, placing further upward I-18 pressure on market rates of interest. Success in enacting significant deficit reduction measures could--through expectational effects--relieve some of this pressure, especially on intermediate- and long-term rates; the staff's forecast, however, does not assume such a dramatic development. The Treasury will place substantial demands on credit markets over the second quarter, despite the seasonal pickup in receipts. Borrowing by the Treasury is expected to be around $40 billion, primarily in marketable coupon issues, to finance a combined (on- and off-budget) deficit of about $33 billion. Financing over this period may well be complicated by the current debt limit, which according to staff projections will be reached by mid-quarter. local governments over the spring is Meanwhile, borrowing by state and likely to remain near the reduced pace of recent months, in the absence of congressional action on private-purpose municipal securities. Credit demands by businesses are expected to expand further over the coming months as the gap between capital spending and internal cash flow widens appreciably. External fund-raising by the business sector will also be boosted by additional large merger-related financing, although such activity should have only minimal effects on the overall availability and terms of credit. In the absence of a rally in the stock market, businesses will continue to raise the bulk of funds in credit markets, mostly through short-term borrowing. (Indeed, net equity issuance would remain deeply negative if giant merger deals continue to absorb large volumes of outstanding shares.) I-19 Borrowing by households is expected to remain strong. The rapid pace of housing starts and record level of mortgage commitments at S&Ls suggest heavy mortgage borrowing, which is concentrated in adjustable rate mortgages. ment borrowing is spending. likely to continue to be Similarly, consumer install- expected to remain robust in light of buoyant consumer INTERNATIONAL DEVELOPMENTS Recent developments. The dollar's value against major foreign currencies declined without much interruption from the end of January into the first week of March -- falling about 7 percent on a weighted Since then the dollar has reversed about one-half of average basis. that decline. Early in the decline a major factor was the strong performance of the German mark, which had been falling through most of 1983 because of concerns about political stability and rising East-West tensions. These concerns were easing by February. An additional factor in the dollar's weakeness was fear that the enlarged U.S. budget deficits would undercut efforts to resist inflation as the economy expands faster than expected. More recently the market seems to have been impressed by indications that monetary policy might be firming. Dollar interest rates have risen considerably against rates on foreign-currency assets. Over the whole period since the end of January the dollar has depreciated 3 to 6 percent against the continental European currencies, and 2 to 3 percent against sterling and the yen. As noted, the German mark has been particularly strong since January, while sterling has been under some pressure, perhaps because of rising trade deficits and some cuts in interest rates. The yen registered a small but sharp upturn early in March. T-20 1-21 Recovery abroad has continued and gathered some strength in several major industrial countries. Real GNP rose strongly in the fourth quarter of 1983 in the major industrial countries. The weighted average of fourth-quarter industrial production in the six major foreign countries was about 5 percent above the low-point a year ago, with January data pointing toward further gains. Japan, Germany and the United Kingdom are showing the strongest improvement, while Canada has slowed somewhat from its strong earlier performance and growth in France and Italy has remained weak. Unemployment rates abroad remain high despite recovering production. Several countries (France, Japan) are currently reporting record unemployment rates, and in others (Germany, United Kingdom) there is only slight improvement from the recent peaks of unemployment. Inflation in the major industrial countries, measured on a year-over-year basis, reached its lowest rate since the early seventies by the fourth quarter of last year. Data for January and partial data for February suggest some renewed upward pressure, resulting in part from the continued effects of the strong dollar on import prices. Recent policy actions have tended to confirm the generally restraining stance of foreign governments. The U.K. government budget for FY 1984/85 contains no.net fiscal stimulus and lowered monetary targets. The governments of France and Italy as part of their I-22 anti-inflation effort have attempted to tighten cost-of-living provisions in labor contracts, resulting in protests by labor. U.S.-chartered banks' claims on non-OPEC developing countries increased $2.3 billion in the fourth quarter of 1983, somewhat more than the very small quarterly increases earlier in the year. whole claims rose only $4.1 billion. For 1983 as a In the fourth quarter, claims on most individual non-OPEC developing countries changed only slightly; there were no absolute declines in claims on any major borrowers. At the end of November, Brazil drew the remaining $1.8 billion ($.7 billion from U.S. banks) on the $4.4 billion bank loan of February 1983, but the proceeds were almost entirely used up in repayment of the remaining $1.2 billion balance on the late-1982 bridge loans (about one half for U.S. banks) and in paying off interest and other arrears. In November and December Mexico drew the remaining $1.6 billion balance ($.6 billion from U.S. banks) available from the $5 billion loan of March 1983. Most of the deeply indebted countries are maintaining satisfactory relations with the IMF and their bank creditors, though several have been unable to meet some of the criteria in their initial IMF programs. However, the Argentine and Philippine situations are less than satisfactory, and neither country has yet offered a revised program meeting IMF approval. Brazil, Mexico and Chile have succeeded in their negotiations for "new" bank credit and Peru has reached agreement on a rescheduling of bank debt for 1984-85. Argentina has been reluctant to use scarce reserves to meet scheduled interest payments, while Venezuela, which has sizable reserves, has resisted submitting its new economic program for IMF approval, though steps are being taken to deal with rising debt arrearages. I-23 The U.S. merchandise trade deficit escalated to a record rate in January, following a reduced deficit rate registered in December. A moderate increase in the value of exports (both agricultural and manufactured goods) was swamped by a sharp increase in imports of a wide range of manufactures. Petroleum imports were below the fourth-quarter average in volume and price. Part of the January surge in imports of manufactures was probably temporary. U.S. banks reported a net capital inflow from banks abroad between December and February, but at a considerably slower rate than the inflow in the fourth quarter of last year. Other small inflows in the recent period resulted from a decline in Eurodollar deposits of U.S. nonbanks, and some increase in loans to U.S. nonbanks from U.S. banks' branches abroad. Other inflows in the early months of the year will probably show up in direct investments, as U.S. corporations increased their borrowings in European security markets. Outlook. Projections for both U.S. and foreign economic activity have been raised since January, though the U.S. revision is greater. Largely as a result of those changes the projections of both U.S. exports and imports have been raised, but with very little net effect on the projected trade and current account deficits. The projected trade deficits for 1984 and 1985 are $105 billion and $120 billion, respectively, with corresponding current account deficits of about $80 billion and $95 billion. The staff continues to project a depreciation of the dollar amounting to about 10 percent from the first-quarter average over the remainder of 1984, and a further 8 percent by the end of 1985. CONFIDENTIAL (FR) CLASS II FOMC MARCH 20, 1984 RELATED ITEMS NET EXPORTS AND U.S. OUTLOOK FOR SEASONALLY ADJUSTED ANNUAL RATES) (BILLIONS OF DOLLARS 1983 Agm. 1. 1984-P 1985-P aNN. AgN. 1983 1983 03 C4 1984-P 1984-P 1984-P 01 02 03 1984-P 04 1985-P 1985-P Cl 02 1985-P 04 GNP EXPORTS NET CURRENT $, NET EXPORTS OF G+S IMPORTS OF G+S INOITS C0f *S 18108T8 of01 TillS Cr Tls5 1/ (1972100) -9.0 335.4 344.4 -53.0 376.4 429.3 -63.5 431.6 495. 1 -18.3 341.1 359.4 -26.1 346. 5 312.6 -35.5 -51.4 360. 1 371.0 395.6 422.4 -60.4 380.7 11.8 136.7 126.9 -3.9 147.8 151. -1.1 159.2 160.3 11.5 140.7 129.2 2.0 140.6 137.8 -3.0 143.8 146. 9 89.2 90.1 87.8 87.2 91.2 93.0 -4.4 146.7 151.1 441.1 -64.6 393.7 458.2 -65.6 408.7 474. J -64.9 422.6 487.5 -63.4 438.6 502.0- -60.0 456.6 516.6 -4.4 148.6 153.2 -3.9 152.0 155.9 -3.1 155.0 156.1 -2.0 157.5 159.4 -0.6 160.5 161.1 1.4 164.0 162.6 87.9 87.8 87.7 87.6 90.5 88.9 88.1 - 2. LS. n5BC&NDBISI tlal SIILCI 2/ 3Xrons (SICL. *IUt.1 -60.6 -105.7 1) OBASDUCO&tIAL rimOL3 s ago p8OaoCTs S089 RBOLB8 3. 1985-P C3 U.S. CBUhNT ACCOiN BAiLA CI of 81CgiSVT iSA32Ll! IBCOis -120.3 -72.7 -75.2 -86.8 -103.3 -113.5 -119.3 -- -- -------- -121.1 -121.0 -120.4 -118.7 200.2 36.6 163.6 221.9 39.7 182.3 252.2 42.4 209.6 20 20.1206.7 317. 38.7 164.4 166.0 216.2 40.3 175.9 219.6 40.0 179.5 223.0 39.2 103.8 228.8 39.1 189.7 237.4 40.4 196.9 246.1 41.5 204.6 256.6 43.0 213.6 268.5 44.6 223.9 260.6 53.1 327.6 40.3 372.4 65.7 274.4 65.8 261.9 56.3 303.0 52.6 322.9 60.7 336.5 63.6 348.1 64.2 358.4 65.0 367.2 64.9 377.0 65.0 387.2 67.2 206.9 267.3 306.1 206.6 225.7 250.3 262.2 272.9 283.9 293.4 302.3 311.2 320.0 -40.6 -01.4 -95.6 -48.3 -61.2 -63.7 -76.9 -09.0 -94.2 -96.4 -96.8 -96.2 -93.8 24. 23.6 26.3 25.2 27.5 1.4 2.7 2.6 2.3 3.8 5.7 5.3 5.0 5.3 5.5 28.2 28.9 28.1 21.8 26.6 25.3 24.4 24.5 2.6 2.5 2.5 2.6 2.7 2.6 2.5 2.7 5.2 5.3 5.0 5.1 5.0 5.1 4.8 MSAL Gle, S CIAUGs, AIQUl CONSOI 88 BICIS, AsnIAL AXIS8 S CNa161 IVUDISB 81 6P 1/ SGP EXPOST IMPLICIT DEFLAtO 2/ IIt1i3ALtOI&L ACCOIIS BASIS 3/ 61IOMBTIC 31G6IS ISID TO aG6iaGsTs f01tlO6I sBMAM 46.40), (20.85), <susDEI f/ roJlKc8io JapaI 14.20), (13.631, iSACIE (13.111, S9311aL6aD (3.65) uI1 l IPrLICIT ----------- ---------- ---- 4.9 i3LlAlO SIL GNP AID CONSoU8 UNITED KINGDO ------------------------------------------------------------------------------- (11.81), ISICIS CANADA PIBCI8T SNAL (9.13), ITAL! 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