Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 26-27, 1984 : Greenbook Part 2

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Confidential (FR) Class I FOMC

March 21,

RECENT DEVELOPMENTS

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

1984

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Industrial production ......................................
Employment and unemployment ...................
...........
Personal income and consumption.................................
Business fixed investment .....................................
Business inventories...........................................
Housing markets ...............................................
Government spending: federal, state and local..................
Exports and imports ............................................
Prices............................................................
Wages and labor costs...........................................

1
3
5
8
11
13
16
17
18
20

Tables
...................................
Industrial production.......
Capacity utilization in industry ...............................
Changes in employment..........................................
Selected unemployment rates....................................
Personal income and expenditures...............................
...................................
Retail sales
Auto sales and production.......................................
Business capital spending indicators............................

2
2
4
4
6
7
7
9

Changes in manufacturing and trade inventories..................

......................
Inventories relative to sales.............
Private housing activity .......................................

12
14

Recent changes in producer prices...............
Recent changes in consumer prices................
Selected measures of labor costs

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

in the nonfarm business sector...............................

19
19
22

Charts
..

closed by major lenders......................................

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

Effective first-year interest rates on conventional loans

DOMESTIC FINANCIAL DEVELOPMENTS

III

Monetary aggregates and bank credit............................

Business finance...................................************
Government finance
Federal sector.................................. **** ..
State and local sector.......................................
Mortage markets ................ .............. ...... *********
Consumer credit..............................*****************

5
7
9
12
17

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 securities by state and local governments....
Mortgage activity at federally insured savings and
loan associations............................ ................

2
6
8
10
11
14

New issues of federally guaranteed mortgage
pass-through securities.....................................
Consumer installment credit....................................

INTERNATIONAL DEVELOPMENTS

14
16

Foreign exchange markets........................................
U.S. international financial transactions.......................
U.S. merchandise trade..........................................
U.S. current account in 1983....................................
Foreign economic developments....................................
The debt problem in selected developing countries................

1
7
12
14
16
27

Tables
Claims on foreigners of U.S.-chartered banks.....................
Claims of U.S. chartered-banks
on non-OPEC developing countries..............................
......
..................
International banking data.......
Summary of U.S. international transactions.......................
U.S. merchandise trade...........................................
U.S. oil imports.................................................
U.S. current account.............................................
Major industrial countries
Real GNP and IP..............................................
Consumer and wholesale prices.................................

Trade and current account balances............................

6
6
8
11
12
13
14
17
18

Charts
Weighted-average exchange value of the U.S. dollar.............
Three-month interest rates......................................

2
2

March 21,
II

1984

- T - 1

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest data
Period

Release
date

Data

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

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

Feb.
Feb.
Dec.
Feb.
Feb.
Peb.

03-09-84
03-09-84
02-29-84
03-09-84
03-09-84
03-09-84

112.7
7.8
3.2
92.2
19.5
72.8

Peb.
Feb.

03-09-84
03-09-84

35.4
8.23

Feb.
Jan.

03-09-84
02-29-84

Industrial production (1967=100)
Consumer goods
Business equipment
Defense & space equipment
Materials

Feb.

5.1
8.0
3.3
5.0
6.8
4.6

2.3
8.4
3.4
3.9
6.7
3.2

1.8
10.4
5.0
3.9
6.9
3.2

35.5
8.22

35.2
8.13

34.5
7.91

41.0
88.1

41.0
-6.8

40.6
-3.6

39.2
-9.4

03-15-84
03-15-84
03-15-84
03-15-84
03-15-84

159.9
161.1
169.2
129.2
158.8

14.4
11.3
7.9
16.0
18.4

11.8
12.8
12.4
16.8
11.1

15.8
12.3
18.6
11.3
17.7

Consumr prices all ites
(1967-100) Jan.
All items, excluding food & energy Jan.
Food
Jan.

02-24-84
02-24-84
02-24-64

305.8
294.9
300.2

7.5
6.5
19.5

Producer prices: (1967-100)
Finished goods
Intermediate aterials, nonfood
Crude foodstuffs 6 feedstuffa

Feb.
Feb.
Feb.

03-16-84
03-16-64
03-16-84

290.2
322.0
261.3

4.6
1.9
-36.9

Personal income (S bl.)

Feb.

03-19-84

2,922.6

8.6

Feb.

Feb.
Feb.
Feb.

4.9
5.2
9.1

4.1
4.8
3.9

12.6

(Not at annual rates)
nfgrs. new orders dur. goods ($ bl.)Jam.
Capital goods industries
Jan.
Nondefensa
Jan.
Defene
Jan.

03-02-84
03-02-84
03-02-84
03-02-84

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

Jan.
Jan.
Jan.

03-14-84
03-02-64
03-14-84

Ratio: Ntgrs.' durable goods iaven
tories to unfilled orders 1/

Joa.

aRtail salea,
GAY 3/

cotal (8 bil.)

Auto sales, total (nIl. omte.) 2/
Domestic models
Foreign models
Plant and equipment expen.
Total nonfarm business
Manufacturing
Nonamnufacturing

2.7
-5.1
-25.8
2.3

8.0
1.4
18.7
-2.2

1.30
1.41
1.21

1.31
1.40
1.24

1.35
1.48
1.24

1.47
1.66
1.31

03-02-64

.521

.530

.538

.562

Feb.
Feb.

03-13-84
03-13-84

106.0
22.3

-. 2
.3

3.9
3.5

16.3
14.6

Feb.
Feb.
Feb.

03-05-84
03-03-64
03-05-84

10.6
8.5
2.2

1984
1984
1984

03-12-84
03-12-84
03-12-84

343.57
129.72
213.86

1963-Q4
Feb.
Jan.

03-14-84
03-16-84
02-29-84

25,071
2,197
164.7

100.9
32.0
6.6
25.4

-3.2
.5
-15.2

10.0
20.0
-16.8

22.5
6.3
-31.5

24.0

25.9
39.7
-8.7

Capital Appropriations, Mfg.
Housing starts, private (thous.)2/
Leading Indicators (1967-100)

1. Actual data used in lieu of percent changes for
2. At annual rates.

arller periode.

3. Exeludes mail order houses.
4. Planed-Commrce November and December 1983 Survey.

13.6
16.3
12.0
12.9
11.2
1.1

27.0
1.2

16.7
28.8
13.4

DOMESTIC NONFINANCIAL DEVELOPMENTS

The pace of activity picked up vigorously early this year.

Housing

activity surged, auto purchases and other retail sales rose strongly, and
industrial production advanced rapidly in both January and February.
The acceleration in output was reflected in stronger employment growth,
and the unemployment rate declined 0.2 percentage point per month.

Part

of the growth in domestic expenditures for goods was met by imports,
the trade deficit reached record proportions.
inflation generally remained quite moderate,

and

While wage and price
prices for food and some

industrial goods began to advance more rapidly.
Industrial Production
Following smaller increases in

the closing months of 1983,

output expanded by 1-1/4 percent in both January and February.

industrial
Gains

were widespread among most product and material categories, with especially
large increases evident in construction supplies and durable goods materials.
Apart from autos, where large car production is bumping against capacity
constraints,
sharply.

output of most major categories of consumer goods advanced

Auto assemblies in February were unchanged at an annual rate

of 8 million units--and March schedules are at the same level.1

Production

of business equipment increased moderately in February with especially
large gains in manufacturing,

power,

commercial,

and transit equipment;

but these increases were partially offset by declines in mining equipment,
as oil and gas well drilling dropped.

Output of defense equipment recently

has advanced 1-1/4 percent per month--faster than its

average 1983 pace.

Auto production is scheduled to decline in the second quarter because
1.
of some earlier-than-usual model changeovers.
II-1

II-2

INDUSTRIAL PRODUCTION
(Percentage change from preceding period;
based on seasonally adjusted data)
1983

----- Annual rate-----

Total

18.4

21.8

10.0

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

15.0

5.0

17.7
16.9
29.7
12.3
23.2
10.2

Construction supplies

30.8

Materials
Durable goods
Nondurable goods
Energy materials

22.0
34.0
20.9
-2.5

19.0

37.0
12.9
11.4

1983
Dec.

1984
Jan. Feb.

--Monthly rate--.5

1.2

8.1
1.6
5.7
0.8
21.4
11.6

1.0
.8
1.6
.5
1.5
1.4

1.3
1.5
3.3
.7
.9
1.4

31.3

8.3

-. 1

2.2

1.9

25.2
31.4
18.3
21.0

12.5

17.9
11.3
0.7

.1
.5

1.2
1.9
.6
.2

1.5
2.0
1.2
.8

-1.7

1.9

1.2

__
CAPACITY UTILIZATION IN INDUSTRY
(Percent of capacity, seasonally adjusted)
1978-80
High

1982
Low

1967-82
Avg.

1983
Dec.

Jan.

Feb.

87.3

69.6

82.4

79.0

79.8

80.7

Manufacturing
Durable
Nondurable

87.5

68.8
64.8
73.8

81.8

78.9
77.4
80.9

80.0
78.8
81.5

81.0

Mining
Utilities1

90.4

Total industry

89.4

87.2

80.5

83.9
86.5

1984

80.1

82.2

86.8

69.6
79.0

88.6

74.7
84.5

75.1
83.0

74.7
82.2

Industrial materials

88.9

66.6

83.3

79.6

80.5

81.6

Metal materials
Paper materials
Chemical materials

95.4
97.9
91.3

46.2
86.3
64.0

82.2
93.4
85.1

66.6
99.4
77.1

68.1
99.5
77.7

70.1
n.a.
n.a.
n .a.

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

II-3

Capacity utilization rose in February to 80.7 percent--about the
same as the 1981 peak but still below the 1967-82 average.

There is a

wide dispersion of utilization rates among industries with a few, such
as paper and electronic components, pressing against capacity.

others, such as steel, copper, and mining, operating rates are still
very low.
Employment and Unemployment
Labor demand strengthened further in January and February and
weekly data on unemployment insurance claims suggest continued improvement through early March.

Payroll employment rose 385,000 in February--

well above the 290,000 average monthly gain during the preceding
six months.

Service industries accounted for more than a third of the

over-the-month gain.

In manufacturing,

employment growth continued at

its recent pace, rising another 110,000, and the factory workweek,
which jumped half an hour in January, held steady at its highest level
since 1967.

Some hardgoods industries, such as lumber, furniture,

electrical equipment, and automobiles, have recovered all of their
losses from the 1981-82 recession, but others, such as machinery and
metals, have shown a relatively slow recovery in employment.
The civilian unemployment rate fell 0.2 percentage point in February
for the third consecutive month.

The household measure of employment,

which has outpaced the payroll measure during the recovery, has grown
faster than during any recovery since 1954.

Unemployment rates have

fallen for most demographic groups, and it appears that employers now
are hiring increasing numbers of less experienced workers as the economy

II-4
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1983
1982

1983

Dec.

1984
Jan. Feb.

-Average monthly changesNonfarm payroll employment 2
Strike adjusted

-172
-170

245
245

343
340

336
344

249
243

244
239

264
251

386
378

Manufacturing
Durable
Nondurable
Construction
Trade
Finance and services
Total government
Private nonfarm production
workers
Manufacturing production
workers

-127
-99
-28
-20
-18
31
-13

91
71
20
23
44
86
1

105
76
29
59
48
124
-1

96
79
17
35
39
98
47

136
108
28
17
56
69
-30

108
86
22
-6
63
87
-6

105
68
37
88
65
31
-55

110
101
9
36
68
156
12

-146

213

327

245

239

205

245

306

-108

124

-51
-67

330
336

476
445

378
435

355
339

335
236

249
333

702
578

Total employment 3
Nonagricultural
1.
of
2.
3.

Average change from final month of preceding period to final month
period indicated.
Survey of establishments. Strike-adjusted data noted.
Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1983

Civilian, 16 years and older
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
White
Black
Fulltime workers
Memo:
Total national1

1984
Jan. Feb.

1982

1983

9.7
23.2
14.8
7.5
7.3

9.6
22.4
14.5
7.8
7.2

10.1
23.3
15.0
8.2
7.6

9.4
22.4
13.9
7.6
7.0

8.5
20.6
12.9
6.8
6.3

8.2
20.1
12.2
6.5
6.3

8.0
19.4
12.5
6.2
6.2

7.8
19.3
11.6
6.1
6.1

8.6
18.9

8.4
19.5

8.8
20.4

8.1
19.4

7.4
17.9

7.1
17.8

6.9
16.7

6.7
16.2

9.6

9.5

10.0

9.3

8.3

8.0

7.8

7.5

9.5

9.9

9.3

8.4

8.1

7.9

7.7

1. Includes resident Armed Forces as employed.

Dec.

II-5

continues to expand.

The number of long-term unemployed also declined

significantly, resulting in a drop in the median duration of unemployment.
In addition, the labor force, which had shown little growth in the
first year of recovery, picked up in February as participation rose
among both teenagers and adult females.
Personal Income and Consumption

Income growth was well maintained in January and February.
Total personal income grew at an average $32 billion annual rate in the

first two months of the year--slightly more than the average monthly
rate of $25 billion in the fourth quarter.

Gains in wages and salaries

were associated with rising employment and a 3-1/2 percent COLA for
government workers in January.

In addition, the PIK program contributed

substantially to farm income.
Bouyed by rising income and a willingness to use installment
credit, personal consumption expenditures rose 1.9 percent in January
before declining somewhat in February.

February outlays are estimated

to have been 2.2 percent above the fourth-quarter average.

The gains

in total consumption expenditures and in retail sales since late 1982
have been about average for a recovery period.

In the last three

months, however, spending on durable goods, the most credit-sensitive
component of expenditures, has been strong.

Retail sales in the GAF

grouping of largely discretionary items was 3.8 percent above the
advanced fourth-quarter level.

The personal saving rate averaged

about 5-1/2 percent in the first two months of the year--up slightly
from the second half of 1983.

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

1982

1983

1983
Q4

Dec.

1984
Jan.
Feb.

- - Percentage changes at annual rates1 - Total Personal Income
Nominal
Real 2

4.6
-.3

7.7
4.2

7.3
3.0

11.0
8.2

11.1
8.2

17.7
11.0

8.6
-

Disposable Personal Income
Nominal
Real

5.1
.2

8.8
5.2

11.0
6.5

10.9
8.0

11.1
8.5

18.7
11.7

8.9
-

Expenditures
Nominal
Real

7.5
2.5

8.9
5.4

6.5
2.2

9.4
6.5

13.5
10.8

22.7
15.7

-8.4
-

3
- - Changes in billions of dollars - -

Total personal income
Wages and salaries
Private
Manufacturing

26.1
10.7
9.1
2.1

42.1
22.1
18.1
7.7

20.9
8.8
7.2
4.4

6.6

15.2

15.9

25.4

12.6

17.2

21.9

22.2

22.4

38.1

18.4

12.0
2.5
1.9
7.6

16.0

10.0

-. 3

19.1
25.0
9.7
18.3
1.4 -6.1
8.1 12.9

42.6

4.3
4.0
7.8

-16.1
-8.1
-7.8
-. 3

5.8

4.9

17.9

6.0

7.5

Disposable personal income

10.0

Expenditures
Durables
Nondurables
Services

Other income

Personal saving rate (percent)

16.3
10.3
8.8
4.0

26.0
11.4
9.9
2.8

10.6
5.1
3.4
-.6

11.2
9.7
3.7

3.2
7.1

5.2

5.1

10.2
28.4

3.9
4.8

6.1

1. Changes over periods longer than one quarter 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.

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

Q1
Total sales

1983
Q3

Dec.

Jan.

1984
Feb.

5.9

1.2

3.1

3.3

4.9

2.7

2.8

1.3

2.9

2.0

1.8

-.7

4.1

-.5

1.2

4.2

1.1

3.8

1.3

1.9

Durable
Automotive group
Furniture & appliances

.4
-2.6
3.2

12.4
17.6
4.0

.1
-2.2
4.3

7.3
9.8
4.2

3.4
4.5
5.3

2.8
2.9
.6

1.0
.7
.4

Nondurable
Apparel
Food
General merchandise 3
Gasoline stations

.3
-. 4
-. 3
1.2
-4.3

3.0
7.2
2.6
3.1
3.8

1.7
-2.4
1.8
1.4
3.2

1.0
4.5
.0
3.4
-.6

-. 7
-2.1
-1.3
1.2
1.5

3.6
1.0
3.1
2.7
-1.1

-. 8
1.6
-. 9
-. 3
-1.0

(Real)

Total, less automotive,
gasoline and
nonconsumer stores
GAF 2

-. 2

1. BCD series 59.
Data are available approximately 3 weeks following the
retail sales release.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales
are also excluded in the GAF grouping.
AUTO SALES & PRODUCTION
(Millions of units; seasonally adjusted annual rates)
1983
Q1

Jan.

1984
Feb. Mar.

Total Sales

8.5

9.1

9.2

9.9

11.0

10.6

Imports

2.4

2.3

2.7

2.6

2.2

Domestic
Small
Intermediate & standard

6.1
2.5
3.6

6.8
3.0
3.9

6.9
2.8
4.1

7.3
3.2
4.1

8.4
3.8
4.6

8.5
3.8
4.6

8.11
-

Domestic Production

5.9

6.3

7.6

8.1

8.0

8.12

4.0

3.8

4.1

4.2

Small

Intermediate & standard

2.8

3.1

2.7

3.6

3.2

4.4

3.8

Note--Components may not add to totals due to rounding.
1. First Ten Days.
2. Scheduled as of March 20, 1984.

II-8

Total auto sales were at a 10.6 million unit rate in February--off

slightly from the 11.0 million rate of January.

Sales for the two

months were at the highest rate since early 1980.

Domestic units sold

at an 8.5 million annual rate last month, little changed from the 8.4
million rate in January.

Strong sales in recent months continue to

press production schedules as many of the large-car plants are operating
near capacity.

Foreign units sold at a 2.2 million unit annual rate,

down from 2.6 million units in January as supplies of Japanese cars
were extremely short; sales will continue to be restricted until the new
export restraint year begins in April.
Both the Michigan Survey Research Center and the Conference Board
found consumers very optimistic in February.

However, a rising number

of respondents thought interest rates would increase, and there was a bit
less optimism about employment prospects.

Nonetheless, households had

very favorable evaluations of personal finances and the greatest willingness
to use credit or draw down savings since the mid-1970s.
Business Fixed Investment
Business fixed investment is still expanding at a very vigorous
pace although less rapidly than in the second half of 1983.

Most

indicators of future outlays are consistent with a continued rapid
expansion of capital spending.
Although shipments of nondefense capital goods fell 5.6 percent in
January,

this followed sizable advances in

a result, January shipments were little
level.

However,

the two preceding months.

changed from their fourth-quarter

imports of capital goods jumped sharply, indicating that

domestic equipment demand is still increasing.

In addition, new orders

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

1983
Nov.

Dec.

1984
Jan.

5.1

6.5

-5.6

6.2

2.7

7.1

-4.0

1.0

8.0

-5.5

1.1

2.3

12.1

5.2

5.5

-4.9

2.8

0.9

1.5

1.9

-. 8

1.7

2.2

1.7

0.2

-. 9

180

181

199

193

221

190

Nonresidential construction
put in place

-2.5

2.7

3.7

4.8

2.7

Nonresidential building
permits

12.0

11.6

-2.1

5.3

2.2

6.3

6.1

4.6

Orders
Excluding aircraft &
parts

15.7

Unfilled orders
Excluding aircraft &
parts

Producers' durable equipment
Nondefense capital goods
Shipments
Excluding aircraft &
parts

Addendum:
Sales of heavy-weight
trucks (thousands of
units, annual rate)
Nonresidential structures

-5.1

-2.4

10.4

II-10

for nondefense capital goods continue to trend upward, although at a much
reduced pace from the end of the year.

Orders in January were about 1

percent above the robust fourth-quarter average, as a substantial increase
in the booming office and store machinery category offset declines for
a number of types of heavy industrial equipment.

Also, business spending

for motor vehicles continues to increase at a rapid rate.

Business construction also has been strong in recent months.
December construction spending was revised upward to show a 2.7 percent
increase, which was followed by another 0.7 percent gain in January.

substantial part of the recent strength has been in the building of
stores and restaurants, which increased 23 percent between October and
January.

Despite the continued rise in vacancy rates, construction of

office buildings increased over the latest three-month period by a
little more than 10 percent; meanwhile, industrial building began to
show some pickup from its extremely depressed level in 1983.

Near-term

commitments data, both contracts and permits, are running well above
their fourth-quarter levels.
The latest surveys report that investment plans for the year
have been scaled up.

The McGraw-Hill spending survey in

February

showed that business now expects to increase spending 17 percent in
1984, compared with about 10 percent reported in the fall

survey.

McGraw-Hill's respondents expect capital goods prices to rise 5-1/4
percent--the same expectation as in

the fall survey.

The February

Commerce Department survey of planned 1984 spending increases also showed
an upward revision from 10 percent last fall

to 14 percent in

March.

II-11

Business Inventories

Production appears to have been running only slightly above final
demands, and inventory investment has been modest.

Overall, manufacturing

and trade inventories rose at an annual rate of $5 billion in real
terms in January--about half of the pace of the fourth quarter of 1983.

The weakness in inventory investment has been concentrated in the factory
sector, where stocks have been slowly liquidated, while trade inventories
have expanded in recent months.

With shipments and sales up sharply,

the constant-dollar inventory-sales ratio fell further in January to
1.50, which was close to the record low of 1.47 in early 1965.
The total value of factory stocks has fallen since August of
last year, and their level at the end of January was still 4 percent below
that at the beginning of the current recovery.

The backlog of unfilled

orders has continued to rise, and firms seem to be directing their
production to satisfy waiting customers rather than to rebuilding
depleted stocks.

For the last several months, managers have been

reporting lengthening delivery lags.

The inventory-to-shipments

ratio for all manufacturing, at 1.70 in January, was more than 10
percent below the previous cyclical trough.

By stage of processing,

stocks were leaner in finished goods than in raw materials and work in
process.
In contrast to the factory sector, stockbuilding has occurred at
trade establishments over the past half-year.

Except for auto dealers'

stocks, trade inventories, relative to sales, are running close to their
pre-recession levels.

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

1982

1983

1983
Q4

Nov.

Dec.r

1984
Jan.P

Book value basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. Auto

-14.2
-17.4
1.8
1.4
.1
1.3

8.2
-4.1
1.6
10.7
4.3
6.4

9.2
.3
-3.8
12.7
2.7
10.0

33.4
10.5
11.1
11.8
5.9
5.9

27.4
3.2
9.5
14.7
11.7
2.9

25.5
2.4
-5.1
28.2
15.5
12.7

31.4
-2.2
16.0
17.6
18.6
-1.0

-8.2
-8.4

.0
-3.1

-2.1
-. 8

9.0
1.4

9.4
-. 5

10.0
.1

11.9
.0

-. 5
3.6

-2.9
1.7

3.8
3.8

3.6
6.3

1.3
8.6

4.9
7.1

23.1
1.0
6.4
15.7
-8.3
23.9

Constant dollar basis
Total
Manufacturing

5.0
-4.1

Wholesale trade
Retail trade

.6
-.5

Automotive

-.4

1.1

-1.6

2.3

4.1

4.0

4.6

1.0

2.5

3.3

1.6

2.3

4.6

2.5

5.4

Nov.

Dec.r

Jan.

1.34
1.44
1.15
1.35
1.49
1.31

1.31
1.40
1.13
1.35
1.50
1.32

1.30
1.41
1.10
1.32
1.42
1.30

1.54
1.75
1.39
1.35
37
34

1.52
1.71
1.36
1.34
1.33
1.35

Ex. Auto

INVENTORIES RELATIVE TO SALES
Cyclical
Reference Points 2

1981 Low

1982 HighP

2.6
6.5

1984

1983

1.37
1.48
1.17
1.37
1.56
1.33

1.34
1.44

1.57

1.55

1.80
1.40
1.36
1.37
1.36

1.75
1.39

Book value basis
Total

Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. Auto

1.42
1.59
1.07
1.37
1.61
1.30

1.54
1.78

1.39
1.53

1.31

1.19

1.45
1.92
1.37

1.36
1.45
1.33

1.62
1.92
1.35
1.33
1.44
1.27

1.77
2.14
1.56
1.45
1.79
1.38

1.60
1.84
1.42
1.36
1.34
1.36

1.15
1.37
1.57
1.32

Constant dollar basis

Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. Auto

1.36
1.40
1.35

1.50
1.70
1.34
1.32
1.29
1. 3

1. Ratio of end-of-period inventories to average sales for th. eriod.
2. Highs and lows are specific to each series and are not neceosarily coincident.
r-revised estimates.
p--preliminary estimates.

II-13

Housing Markets
Housing market activity has strengthened considerably since the
last Greenbook, as housing starts, permits, and home sales all have
posted substantial and surprising increases.

Private housing starts in

February--typically a volatile month-jumped 11 percent to a 2.2 million
unit annual rate, the highest in six years and 29 percent above the
average for 1983 as a whole; newly issued building permits rose 7 percent
further in February.

The February strength in starts came on top of a

January spurt of 17 percent.

Multifamily starts were responsible for

most of the February increase, whereas the strength in January was in the
single-family sector.
Sales of new and existing homes have continued to rise, and of late
have been the highest since 1980.

New home sales climbed 17 percent in

December before falling 8 percent in January;

existing home sales posted

a steady increase in each of the past two months--reversing a six-month
downtrend in sales volume.

Despite the surge in sales, prices of homes

sold have shown only modest gains in recent months.

New home prices

(adjusted for quality differences) were up at a 3.5 percent annual rate
during the last quarter of 1983, only slightly above the 2 percent average
increase for all of 1983.
The strength in housing market activity in recent months apparently has reflected both rising family income and the increasing
popularity of adjustable rate mortgages.

Adjustable-rate mortgages

(ARMs) have recently accounted for nearly 60 percent of all conventional
home loan originations compared with about one-third a year earlier.

II-14

PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)
1983
annual

1983
Q4

All units
Permits
Starts

1.59
1.70

1.65
1.78

1.61
1.70

Single-family units
Permits
Starts

.89
1.07

.88
1.07

Sales
New homes
Existing homes

.62
2.72

Multifamily units
Permits
Starts

Mobile home shipments

1984
Dec.

Jan.

Feb.1

1.55
1.69

1.82
1.98

1.94
2.20

.90
1.04

.90
1.02

1.00
1.31

1.11
1.36

.59
2.77

.67
2.76

.75
2.85

.69
2.99

n.a.
n.a.

.70
.63

.77
.71

.71
.66

.65
.67

.82
.67

.83
.84

.30

.31

n.a.

1. Preliminary estimates.
n.a.-not available.
PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions
of units

2.4

2.0

1.6

SI
"
r\N

.
\

'\.

1.2

Total

****

Single-family'
'"

*./

"A. ,

/
.4

Multifamil

I
1980

,1111
i ,l, in
,, , 11111

I
1982

1984

II-15
EFFECTIVE FIRST-YEAR INTEREST RATE
ON CONVENTIONAL HOME LOANS CLOSED
BY MAJOR LENDERS

Percent
117

-416
*

a
*

a
a
a
a

a
a
a

-415

a
a
a
ar

ra
a
a

iia
rra

-- 14

a
a

Fixed-Rate
Loans

-- 13

Loans
-f12

f1111 sisuat1a astaIaua

1980
1984
1983
1982
1981
Note: Separate fixed-rate loan series began in mid-1982.

II-16

ARMs have been offering a substantial first-year rate advantage relative
to fixed-rate loans.

Given this rate difference and the increasing

prevalence of ARMs, the average effective first-year rate paid by mortgage
borrowers has continued to decline--even while the average for fixed-rate
mortgages has held constant for several months (see chart).

Some of the

recent surge in ARM activity apparently has resulted from lender practices
of computing qualifying requirements based only on first-year payments
which are lower than payments based on the higher rates of fixed-rate
mortgages.

(See the domestic financial section for further discussion.)

Government:

Federal, State, and Local

Over the first four months of fiscal year 1984, the federal budget
deficit totaled $69 billion (unified basis--not at an annual rate), $9
billion less than for the same period a year earlier.

In part, the

strength of economic activity is contributing to the narrowing of the
deficit.

In addition, defense outlay growth continues to be below the

Administration's earlier projections.

However, a number of transitory

factors have exaggerated the decline in the deficit thus far.

These

include the delay of federal pay hikes from October until January and the
postponement of cost-of-living increases for social security and other
indexed programs from last July to January.

On the receipts side, personal

refund payments have been unusually slow during this tax-filing season.

Work on the FY1985 budget in Congress has begun to provide some specific
spending and tax targets, and the House and Senate Budget Committees may
report budget resolutions and reconciliation instructions by late March.
The House Ways and Means Committee has reported a tax reform bill that
would raise receipts about $9 billion in FY1985 and substantially more in

II-17

subsequent years.

Meanwhile, Senate leaders and the administration have

agreed on a deficit reduction package totaling $150 billion over the
1985-87 period (relative to current services) with roughly equal contributions
from defense spending, domestic programs, and taxes; in addition, the
package assumes smaller debt service payments owing to smaller deficits.
More recently the House leadership has endorsed a slightly larger plan
($185 billion) that includes greater cuts in defense expenditures.

Both

packages envision tax measures similar to those reported by the House
Ways and Means Committee and being considered in the Senate Finance
Committee.
Activity in the state and local sector remained little changed
early in the first quarter.

Employment and real outlays for construction

are close to their recession lows.

Nonetheless, revenues of state and

local governments have been growing as a result of the rapid economic
recovery, and increases in federal grants for highways and environmental
projects are likely.

These factors,

combined with the pressing need for

infrastructure repair and construction, suggest growth in outlays in
the near term.
Exports and Imports
Domestic spending has continued to outstrip domestic production, and
the merchandise trade balance reached a record $96 billion (annual
rate) in January.

Non-oil imports rose 8 percent (not at an annual

rate) in the fourth quarter and in January jumped substantially further.
The increase in imports in recent months largely reflects the strength
of demand in the United States as well as the high exchange value of the
dollar.

Meanwhile, merchandise exports increased moderately in the

II-18

fourth quarter as economic activity in major trading-partner countries
strengthened somewhat towards the end of last year.

In recent months,

particularly December and January, exports picked up somewhat more strongly,
especially shipments to Canada and to the EEC.

(A more complete discussion

of international economic developments is included in Part IV.)
Prices
Inflation rates moved higher in early 1984, with the pickup mainly
in the food sector.

For most other finished goods and services, inflation

has continued at approximately the same pace as in 1983.

At the intermediate

stage of processing, prices of materials other than food and energy--a
broad grouping of manufactured inputs to the economy--continued to rise
very moderately, on average.

However, sharp increases have occurred for

products such as paper and gypsum that are in short supply.

In addition,

the general tightening in resource utilization, as well as the dollar
depreciation, is raising the potential for some buildup of underlying price
pressures.
Producer prices for finished goods rose about 1/2 percent per month
in January and February.

Items other than food and energy increased just

1/4 percent, however--about the same monthly rate as during last year.
Food price increases, along with a 5-1/2 percent increase in telephone
charges, contributed to a 0.6 percent rise in the CPI in January.
In the food sector, a combination of severe winter weather, avian
flu, and the lagged effects of last summer's surge in the price of grain

caused prices to advance steeply in early 1984.

The producer price index

for finished foods rose 2.7 percent in January, and the consumer price

II-19
RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data) 1
Relative
Importance
Dec. 1983
Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment

1982

1983

1983
Q3

100.0
24.0
12.0
41.8
22.2

3.7
2.1
-. 1
5.3
3.9

Intermediate materials 2
Exc. energy

94.8
79.3

.3
.6

1.5
2.8

-.3
2.1

4.0
3.6

Crude food materials
Crude energy
Other crude materials

52.8
31.3
15.9

1.5
2.6
-7.6

8.1
-4.6
15.8

3.3
-7.2
21.2

15.6
-1.7
16.6

.6
-.3
2.2
.7
-9.0 -12.6
1.8
1.6
2.0
1.9

2.0
2.5
-1.3
2.7
2.1

1984
Jan. Feb.

1.0
7.5
5.5 32.1
-9.5 -14.3
1.2
2.0
2.1
1.7
2.7
3.3

-.4
2.8

4.6
7.9
4.3
2.5
6.2
1.9
2.8

12.4 26.4 -36.9
-2.1
4.6
.3
3.4 -43.0
9.3

1. Changes are from final month of preceding period to final month of period
indicated; monthly changes are not compounded.
2. Excludes materials for food manufacturing and animal feeds.

RECENT CHANGES IN CONSUMER PRICES
(Percentage change at annual rates; based on seasonally adjusted data) 1
Relative
Importance
Dec. 1983

All items 2
Food
Energy
All items less food and
energy 3

1983
Q3

1984
Jan.

1982

1983

100.0

3.9

3.8

3.3

4.5

4.0

18.7
11.9

3.1
1.3

2.6
-0.5

2.4
-4.4

1.1
3.4

4.3
-1.7

19.5
-4.5
6.5

7.5

69.4

6.0

4.9

4.2

5.9

4.9

Commodities

26.5

5.0

4.4

6.8

4.6

2.9

Services

42.9

7.0

4.8

4.5

5.2

5.3

8.0

100.0

3.9

3.3

2.9

4.7

2.6

5.6

Memorandum:
CPI-W4

1. Changes are from final month of preceding period to final month of period
indicated; monthly changes are not compounded.
2. Official index for all urban consumers, based on a rental equivalence
measure for owner-occupied housing after December 1982.
3. Data not strictly comparable. Before 1983, they are based on unofficial
series that exclude the major components of homeownership; beginning in 1983,
data include a rental equivalence measure of homeowners costs.
4. Index for urban wage earners and clerical workers.

II-20

index for food increased 1.6 percent.

Price advances were particularly

steep for fresh fruits and vegetables and for meat and poultry products.
The PPI for finished foods did slow in February, and prices of crude
foods fell sharply.

However, recent data on spot prices suggest that

crude food prices will rebound in the March PPI.

Futures prices for farm

crops currently are trading below spot prices, reflecting anticipations
of good harvests this year.

Nevertheless, a number of other factors

including cutbacks in livestock herds, low inventories of some key crops,
rising consumer spending, and a depreciating dollar provide some potential
for continuing price pressures in the food sector.
Weather conditions also contributed to a surge in prices of heating
fuel, up about 2-1/2 percent (not annual rate) at the retail level in
January.

Although spot prices of fuel oil came down rapidly in February,

these declines may affect retail prices with some lag.
component in

The overall energy

the CPI actually fell in January because declines for gasoline

and natural gas more than offset the increase in the heating fuel price.
Wages and Labor Costs
Available information suggests that wage inflation remained steady
early in 1984.

The hourly earnings index--a measure of straight-time

wage rates paid to production and nonsupervisory workers in the private

nonfarm sector--was essentially unchanged in February and has risen at
just a 3-1/4 percent annual rate over the past three months.
this wage measure increased about 4 percent.

In 1983,

Recently, wages in manufac-

turing have been rising a bit faster than during 1983, when extensive
concessions by some major unions held the manufacturing index to an

II-21

increase of less than 3 percent.

However, in the trade and service

sectors, wage indexes have risen slowly in recent months.
Rising profits generally have damped demands for wage cuts and
freezes, but concession bargaining continues in a number of troubled

industries--notably airlines, meatpacking, and construction.

Recent

settlements at oil refineries and some western coal mines also were very
moderate, providing wage increases of only 2 percent annually.

Both of

these industries are experiencing sluggish demand, and their expiring

contracts had been extremely generous.
Hourly compensation, which includes fringe benefits and employers'
payroll tax contributions as well as wages, rose at a 4-1/2 percent
annual rate in the fourth quarter.

Although wage increases may remain

moderate, legislated changes in payroll taxes for social security,
effective January 1, will add perhaps 2 percentage points (annual rate)
to the hourly compensation figures this quarter.

Meanwhile, productivity

growth slowed to a 1 percent rate in the fourth quarter from higher
growth rates earlier in the year.

II-22

SELECTED MEASURES OF LABOR COSTS IN THE NONFARM BUSINESS SECTOR
(Percentage change at annual rates; based on seasonally adjusted data)

1981

1982

1983

1983
Q3

Latest
3 months
NovemberFebruary

Hourly earnings index, wages of production workers1
Total private nonfarm
Manufacturing
Contract construction
Transportation and
public utilities
Trade
Services

3.3

8.3

6.0

3.9

3.4

2.3

8.8
8.4

6.1
5.2

2.8
1.4

1.3
-. 2

1.8
-1.2

3.5
1.2

3.9
2.5

8.5
7.0
9.1

6.1
4.8
6.6

4.3
4.6
5.0

3.4
5.1
6.4

.9
3.7
3.7

4.8
4.8
6.2

2.1
1.7
3.5

Employment cost index, wages and salaries of all persons 2

Total

8.8

6.3

5.0

5.4

5.5

5.0

9.1
8.6

6.5
5.6

6.0
3.8

6.7
4.1

8.3

8.5

4.6

5.7

7.7
2.6
2.3

5.0
4.3
11.4

Union

9.6

6.5

4.6

4.8

Nonunion

8.5

6.1

5.2

5.7

4.7
5.9

2.8
6.2

By occupation:

White collar
Blue collar
Service workers
By bargaining status:

Major collective bargaining settlements, first-year wage
adjustments 3
All private industries
Contracts with COLAs
Contracts without COLAs

9.8

3.8

2.6

8.0

2.2

2.0

10.6

7.0

3.3

4.3
7.1

3.8
2.3

4.4
.9

-2.6

1.5

3.5

4.7

6.1

4.9

Labor costs and productivity, all persons
Compensation per hour
Output per hour
Unit labor costs

9.0
1.2
7.7

7.2
.8
6.3

4.8
3.5
1.3

6.4

5.7

Employment cost index, compensation 4
Compensation per hour

9.8

1. Changes are from final quarter of preceding period to final quarter of period
indicated. Quarterly changes at compound rates.
2. Seasonally adjusted by the Board staff.
3. Data are for contracts covering 1,000 or more workers.
4. Not seasonally adjusted.

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)
1982
FOMC
Highs Dec. 21

1983
1984
Spring
FOMC
FOMC
lows Dec. 20 Jan. 30 Mar. 20

Change from:
Spring FOMC
lows Jan. 30

Short-term rates
2

15.61

8.69

8.48

9.62

9.41

9.99p

1.51

14.57
14.36
13.55

7.90
8.01
8.11

7.96
7.97
7.95

9.04
9.24
9.27

8.89
8.97
9.00

9.80
9.87

1.84
1.91
1.92

15.73
15.61

8.48
8.43

8.17
8.13

9.83
9.78

9.14
9.13

10.00
10.03

1.83
1.90

15.94
16.14
16.18

8.59
8.62
8.78

8.26
8.26
8.29

9.97

9.23

9.86

9.31

9.95

9.43

10.08
10.33
10.61

1.82
2.07
2.32

16.36
16.53

9.44
9.56

8.68
8.71

10.39
10.36

9.53
9.70

10.24
10.48

1.56
1.77

.71
.78

17.00

11.50

10.50

11.00

11.50

1.00

.50

13.50
9.78

8.25
8.98

8.49
8.89

9.83
10.25

9.27
9.85

10.07
10.68

1.58
1.79

.80
.83

U.S. Treasury (constant maturity)
15.16
3-year
14.95
10-year
14.80
30-year

9.87
10.54
10.53

9.36
10.12
10.27

11.44
11.86
11.94

10.88
11.66
11.74

11.73
12.44
12.51

2.37
2.32
2.24

Municipal revenue
(Bond Buyer index)

14.32

10.814

9.21

10.564

9.954

10.414

1.20

.46

Corporate--A utility
Recently offered

17.47

12.90e

11.64

13.45e

12.90e

13.70e

2.06

.80

17.66
17.41
1982

13.635
11.135

12.55
10.54

13.425
11.605

13.295
11.405

1:3.375
1]1.805

.82
1.26

.08
.40

Federal funds

Treasury bills

3-month
6-month
1-year
Commercial paper
1-month
3-month

9.88

.86
.90

Large negotiable CDs3
1-month
3-month
6-month
Eurodollar deposits 2
1-month
3-month
Bank prime rate
Treasury bill futures
June 1984 contract
Dec. 1984 contract

.85
1.02
1.18

termediate- and long-term rates

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

FOMC

NASDAQ (OTC)

FOMC

Dec. 20 Jan. 30

Mar. 20

776.92
58.80
118.65

1248.30
99.01
246.38

1241.97 1221.52
94.12
93.64
217.40 217.53

1175.77
91.40
211.30

-5.8
-7.7
-14.2

-3.7
-2.9
-2.9

159.14

328.91

269.23

252.74

-23.2

-6.1

274.51

highs

Jan. 30

Highs

Lovw
Stock prices
Dow-Jones Industrial
NYSE Composite
AMEX Composite

Percent change from:
FOMC
1983

1984

1983

1. One-dy quotes
One-day
excep.
xcpt
quot
as not
. One-day quotes for preceding Thursday.
2. Averages for statement week closest to date shown. 5. One-day quotes for preceding Friday.
e--estimated. p-preliminary.
3. Secondary market.

DOMESTIC FINANCIAL DEVELOPMENTS

The monetary aggregates exhibited a mixed pattern of growth in the
opening months of 1984.

M1 growth in January and February was up noticeably

from the slack pace of last fall leaving it high in the FOMC's 1984 range;
on the other hand, M2 grew relatively slowly during the period, placing it
near the midpoint of the 1984 range.

M3 registered stronger gains than

M2 as thrift institutions continued to fund lending through heavy CD
issuance, and its growth through February put it close to the top of its
range.
The mounting evidence of strong economic growth and a heightening
of concerns about the federal budget deficit have contributed to upward
rate movements across the maturity spectrum.

Reserve market conditions

have tightened a bit, with federal funds trading during most of the
intermeeting period in a range of 9-1/2 to 9-3/4 percent, and more
recently at around 10 percent.

At least in the earlier weeks of the

period, the pressure on the funds rate appears in part to have reflected
a tendency among depository institutions to conserve their discount
window privileges as they accustom themselves to the new reserve requirement regime.
Yields on most taxable market instruments are about 75 to 100 basis
points higher than at the time of the January FOMC meeting,

and commercial

banks raised the prevailing prime rate to 11-1/2 percent on March 19.
On home mortgages,

secondary market yields have risen 40 to 60 basis

points since early February, while rates in the less sensitive primary
market are up by smaller amounts.

III-1

MONETARY AGGREGATES
1
(Based on seasonally adjusted data unless otherwise noted)
Growth

1984

1983
Q1

Jan.

Feb.

Percentage change at annual rates -

12.8
(13.2)
20.5
10.8

1. M1
2. (M1)2
3. M2
4.
M3

from

Q4 1983 to
Feb. 1984

11.6
(12.7)
10.6
9.3

9.5
(7.9)
6.9
7.4

4.8
(4.6)
8.5
10.0

10.7
(10.3)
5.6
6.0

6.6
(9.5)
8.4
10.0

7.3
(8.2)
7.4
8.8
Levels in billions
of dollars
Feb. 1984

Selected components
5.

Currency

Demand deposits

11.1

10.2

9.1

9.7

15.4

2.4

150.2

1.7

4.2

4.0

-0.5

3.9

-3.4

243.8

42.3

28.5

21.2

9.6

17.7

29.4

133.9

23.0

10.2

6.1

9.6

4.0

9.0

1689.0

Overnight RFs and Eurodollars, NSA
30.3
General purpose and broker/dealer money
-56.3
market mutual fund shares, NSA
Commercial banks
56.5
Savings deposits, SA, plus
290.9
MMDAs,NSA5
Small time deposits
-48.7
Thrift institutions
15.6
Savings deposits, SA, plus
MMDAs, NSA5
175.4
Small time deposits
-51.5

48.0

-8.1

23.4

40.6

10.3

58.6

-44.4
18.4

-13.1
12.2

-1.2
12.4

-2.6
2.3

37.4
3.5

142.2
721.3

62.8
-21.2
11.9

11.0
13.7
7.3

5.9
19.3
7.3

5.3
-0.7
6.1

7.2
-0.3
6.6

368.5
352.8
772.3

53.8
-17.0

1.0
12.3

-7.0
18.8

-0.7
11.2

0.7
10.8

324.2
448.1

7. Other checkable deposits
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.

M2 minus M1

minus M26
Large time deposits
7
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RFs, NSA
Term Eurodollars, NSA

-27.1

3.8

9.8

16.6

7.7

16.8

521.9

-39.2
-48.8
0.6

-0.3
-14.6
51.2

11.9
-4.6
63.5

15.5
-0.4
57.6

25.8
6.4
69.4

23.4
5.3
63.3

339.4
227.8
111.7

-32.6
12.2
15.3

-41.7
40.4
28.9

-17.8
15.2
-1.7

16.6
50.9
-0.4

8.9
-61.9
-24.5

29.6
27.0
6.6

41.6
54.5
91.3

Average monthly change in billions of dollars -

MEMORANDA:

24.
25.
26.
27.
28.
29.

Managed liabilities at commercial
banks (25+26)
Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions, NSA
Other 8
U.S. government
deposits at commercial
9
banks

-19.0
-16.7
-2.3

-0.2
-4.3
4.1

-2.9
-1.2
-1.7

6.0
0.4
5.6

-4.4
-1.3
-2.9

.1
-1.7
6.8

385.8
281.9
103.9

-4.8
2.3

2.4
1.7

1.2
-2.9

2.9
2.7

-0.7
-2.3

1.9
4.9

-41.5
145.4

0.0

0.3

1.0

-1.2

3.4

4.1

20.6

amounts
shown under memoranda for quar1. Quarterly growth rates are computed on a quarterly average basis. Dollar
terly changes are calculated on an
end-month-of-quarter basis.
2. M1 seasonally adjusted using an experimental model-based procedure applied to weekly data.
3. Nontransactions M2is seasonally adjusted as a whole.
nonbankpublic by commercial banksplus overnight Eurodollar
4. Overnight and continuing contract RPs issued to the
deposits issued by branches of U.S. banks to U.S. nonbank customers, both net of amounts held by money market mutual
funds. Excludes retail RPs, which are in the small
time deposit component.
5. Growth rates are for savings deposits, seasonally adjusted, plus money market deposit accounts (MMDAs), not seasonally
adjusted. Commercial bank savings deposits excludingMMDAs declined during December, January, and February at rates of
declined during
13.2, 22.3 and 17.3 percent respectively. At thrift institutions, savings deposits exluding MMDAs
December, January,
February at rates of 6.7; 3.4 and 8.8 percent respectively.
and
6. The non-M2 component of M3 is seasonally adjusted as a whole.
7. Net of large-denomination time depositsheld by money market mutual funds and thrift institutions.
8. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold
under agreements to repurchase and other liabilities for borrowed money (including borrowings from the Federal
and unaffiliated foreign banks), loans sold to affiliates, loan RPs and other minor items. Date are partially
Reserve
estimated.
9. Consists of Treasury demand deposits at coamercial bank& and Treasury note balances.

III-3

So far in 1984, the Treasury has issued a large volume of debt,
reflecting the substantial first-quarter deficit.

Issuance of tax-

exempt securities, however, has slowed as a result of the expiration at
year-end of authority to issue single-family housing bonds and of pending legislative curbs on certain other private-purpose obligations.
Nonfinancial corporations continued to borrow heavily in short-term
markets during the first two months of 1984.

Public bond offerings picked

up slightly, but redemptions of stock in mergers exceeded by far the

gross issuance of new equity shares.

Growth in consumer installment

debt in January tapered off somewhat from its robust fourth-quarter
pace while mortgage debt formation continued strong.
Monetary Aggregates and Bank Credit
M1 grew in February at a 6-1/2 percent annual rate, well below
the advanced 10-3/4 percent pace of the preceding month but still above
the moderate rate of expansion that had been apparent since midsummer.
The recent strength in M1 has been concentrated in its OCD component
which accelerated to nearly a 30 percent rate of growth in February,
almost twice the already brisk January pace.

The expansion in OCD is

by far the most rapid since early 1983, when prior substantial declines
in interest rates and the introduction of Super NOWs contributed to
very strong inflows.
It appears likely that M1 velocity will show a significant gain
this quarter.

The Board's econometric models of M1 demand suggest that

the pickup in velocity is in line with what would be expected on the
basis of faster GNP growth and rising interest rates.

III-4

M2 growth moved up to an 8-1/2 percent annual rate in February
from January's 5-1/2 percent pace.

Growth in nontransactions M2

slowed in the first two months of this year as its small time deposit
component decelerated sharply, particularly at commercial banks. 1

The

more liquid components of nontransactions M2, on the other hand, have
grown rapidly over this period, accompanying the recent strength in
OCDs.

MMDA inflows amounted to $4-1/2 and $6 billion in January and

February,

respectively, and were accounted for entirely by personal

accounts; the small gain in

MMDAs over the second half of last year

was concentrated in nonpersonal accounts.

General purpose and broker/

dealer money market mutual funds expanded $4 billion in February,

far the biggest monthly increase since the introduction of MMDAs.
Reports indicate that investors have been moving toward more liquid
assets, reflecting in part positioning in anticipation of interest
rate increases as well as some shifting out of the stock market and
equity mutual funds,

although some of this strength may also be a

seasonal anticipation of tax payments.
After slowing in January, M3 expanded at its
last month.

fourth-quarter pace

Term RPs and term Eurodollars resumed growing in

and institution-only MMMFs surged.

February

Issuance of large time deposits

1. Although slowing from the rapid fourth-quarter pace, growth in small
time deposits at thrifts exceeded that at commercial banks in January
This comparatively stable growth may reflect the more
and February.
aggressive pricing by thrifts of small time deposits, particularly in
the longer maturities. While the rates offered by thrifts on short-term
accounts in January were 20 to 30 basis points higher than those offered
by banks, the rates offered on longer-term accounts were 70 to 90 basis
It is into these longer-term accounts that thrifts have
points higher.
been attracting the strongest inflows of funds.

III-5

remained robust during the first two months of the year; the strength in
these deposits was again concentrated at thrift institutions evidently
in association with continued strong growth in mortgage assets.
Growth in commercial bank credit has maintained the rapid pace of

late last year.

Both loans and investments rose briskly in January, but

in February a surge in loans was accompanied by a modest decline in

security holdings.

The pickup in loans reflected a ballooning of

security loans, likely related to the substantial midquarter Treasury
refinancing, and an acceleration in business loans, in part boosted by
merger-related borrowing.

Although slowing from the elevated January

pace, consumer and real estate loan growth remained vigorous.
Business Finance
The external financing needs of nonfinancial corporations
evidently have risen considerably in the first quarter.

Expenditures

for inventories and fixed capital appear to be running above internally
generated funds.

Moreover, business demands on credit markets have

been magnified by the swing to net redemptions of equity shares associated with merger activity.
Nonfinancial firms have continued to do a large portion of their
borrowing in short-term credit markets.

The combined growth of business

loans at commercial banks and commercial paper moderated in January as
companies reduced their outstanding commercial paper.

But growth in

total short-term financing picked up sharply in February, with most
of this gain attributable to Texaco's borrowing to acquire Getty Oil.
Still, excluding the estimated impact of the Texaco acquisition,

III-6
COMMERCIAL

BANKCREDIT AND

(Percentage

changes at annual rates,

SHORT-

AND

INTERMEDIATE-TERM

BUSINESS CREDIT

based on seasonally adjusted data) 1

Levels in
bil. of dollars
Feb. 1984P

1984

Dec.

Q4
-

Jan.P

Commercial Bank Credit -------(rounded)

1. Total loans and securities
at banks 3
2.

Securities

Treasury securities

Other securities

Total loans

Feb.P

(rounded)

9.9

8.6

12.4

13.7

1603.9

23.9

6.3

10.2

6.4

-3

439.4

53.5

13.3

25.1

11.6

-1

189.1

5.8

1.3

0.6

1.9

-4

250.3

4.8

9.5

12.9

16.4

1164.4

12.7

425.5

Business loans 3

-1.3

7.6

Security loans

-5.3

25.1

60.8

50.4

148

30.9

Real estate loans

9.7

11.6

11.5

12.6

344.3

Consumer loans

10.3

15.8

23.1

24.0

228.0

--10.

11.

Business loans net of bankers
acceptances

-0.4

Commercial paper issued by non4
financial firms

12.

Sum of lines 10 & 11

13.

Line 12 plus loans at foreign
branches 5

14.1

-2.7

25.9

41.6

-20.1

30.7

11.9

16.6

465.1

11.3

14.5

484.0

7.8

29.0

31.7

n.a.

-7.3

18.9

33.4

n.a.

14.7

19.3

n.a.

6.2

-1.7

Finance company loans to business

15.

Total bankers acceptances outstanding
Total short- and intermediateterm business credit (sum of
lines 13, 14 and 15)

9.5

-3.7

14.

16.

Short- and Intermediate-Term Business Credit -7.4

-22.6

6
6

9.2

-1.5

9.3

-43.4

n.a.

417.0
48.1

p--preliminary
n.a.--not available.
1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Growth rates for January and February 1984 have been estimated after adjusting for major changes in reporting
panels and definitions that caused breaks in series at the beginning of January. Data should be regarded as highly
preliminary.
3. Loans include outstanding amounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and unconsolidated nonbank
subsidiaries of the holding company.
4. Average of Wednesdays.
5. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
6. Based on average of current and preceding ends of month.

III-7

commercial bank business loan growth in February was roughly 11 percent, commercial paper expanded at an 8 percent rate, and the sum of
commercial paper and business loans at banks (including those booked
offshore) rose an estimated rate of 10 percent, about unchanged from
the pace of other recent months.
As the prospects for near-term interest rate declines began to
fade, nonfinancial corporations increased their gross public bond
issuance from the meager pace of late last year.

Although longer-term

bonds were not uncommon, most of the volume in early 1984 was accounted
for by intermediate-term maturities.

The overall level of corporate

bonds sold in the U.S. market strengthened considerably in early 1984
with financial firms continuing to account for the bulk of public
offerings.

Commercial banks and finance companies were heavy issuers,

while mortgage-related issues, at about 35 percent of the total,
remained the largest category.

In addition to domestic offerings, U.S.

corporations have increased sharply their bond issuance in foreign
markets.

In a recent innovation, a savings and loan sold Eurobonds

collateralized by GNMA securities, thus further linking the mortgage
markets to the broader capital markets.
Declining stock prices, meanwhile,

discouraged equity financings in

January and February, and gross stock issuance by nonfinancial firms in
the first

quarter probably will be the lowest since 1979.

The major

stock price indexes have declined about 3 to 6 percent since the last FOMC
meeting and about 7 to 12 percent from their most recent peaks in January.
Government Finance
Federal sector.

The staff is projecting a combined deficit of

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly totals or monthly averages, billions of dollars)

1983
Year

10.54

Securities sold in U.S.
Publicly offered bonds 1
Privately placed bonds
Stocks 2
Securities sold abroad 3
-Publicly offered bonds--total1
By industry
Utility
Industrial
Financial
By quality 4
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)

Q1f

Jan.P

Feb.P

Mar.f

Seasonally adjusted -----------

-------------Corporate securities--total

1984

9.14

9.12

9.49

9.84
3.94
1.55 e
4.35

8.51
2.65
1.76 e
4.10

8.54

3.54

7.97
4.97
1.50 e
1.50

.70

.63

.58

1.52

3.50
1.50 e

11.01

8.56

8.90

9.40
6.10
1.50e

7.60
4.90
1.50 e

1.80

1.20

6.90
3.90
1.50E
1.50

1.61

.96

2.00

Domestic offerings, not seasonally adjusted --3.94

2.65

.96
1.13
1.85

.87
.53
1.26

2.45

4.00

1.36
1.55
.53
.50

.89
1.14
.24
.38

1.59
.96
.49
.39

2.85

3.43

4.93

.60
.38

Memo items:
Equity based bonds 5

5.80
.60
1.20

2.30
.25
.40

5.00

4.00

.46
1.10
3.44

2.15
.86
.80
1.19

.36

Original discount bonds
Par value
Gross proceeds
Stocks--total2
By industry
Utility
Industrial
Financial

.53
.41

.38
.31

.15
.13

4.30

3.67

3.84

.80
2.27
1.23

.48
2.15
1.05

1.73

.81
1.31

.27
.20

1.48
1.04

1.53

1.80

1.30

.40
1.00
.40

.10
.50
.70

1.50
--

Total reflects gross proceeds rather than par value of original discount bonds.
Includes equity issues associated with debt/equity swaps.
Notes and bonds, not seasonally adjusted.
Bonds categorized according to Moody's bond ratings.
Includes bonds convertible into equity and bonds -,th warrants attached where
the warrants entitle the holder to purchase equity in the future.
p--preliminary, f--staff forecast. e--estimate.

1.
2.
3.
4.
5.

III-9

about $52 billion in the first quarter.

This figure is somewhat below

previous estimates and reflects higher revenues, owing to faster than
anticipated economic growth and a slower than normal processing of tax
refunds, along with a lag in spending, primarily for defense.

These

developments induced the Treasury to reduce the gross size of its weekly
bill auctions from the $12.8 billion level that had been maintained
since mid-December to $12.4 billion beginning in early March.

Only a

small share of Treasury net borrowing has, in any event, been done
outside the coupon sector.

The stripping of coupon issues to create

zero-coupon securities has been a growing business and a significant
factor in dealer demands for some new offerings.
Net cash borrowings of federally sponsored credit agencies are
expected to total about $2-1/2 billion in the first quarter of this
year, off slightly from the fourth quarter of 1983.

FNMA has issued

about $1-3/4 billion of notes and debentures to finance mortgage
purchases so far this quarter while the Federal Home Loan Banks have
run off $1-1/4 billion in securities, partly reflecting a decline
in advances.

Farm Credit Banks are raising about $1 billion this quarter

to finance mortgage purchases and farm loans, and the Federal Home Loan
Mortgage Corporation has issued its third Collateralized Mortgage Obli-

gation, totaling $525 million.
State and local sector.

Issuance of long-term tax-exempt securi-

ties has slowed after a year-end surge.

Gross offerings averaged

$5-1/4 billion (seasonally adjusted) during the first two months of
1984, down from an $8-1/2 billion volume in December, and likely will
be still lighter in March.

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

Q1e

Jan.

1984
Feb.P

Mar.e

-62.5

-51.8

-5.8

-22.4

-23.6

36.2

49.3

23.6

18.2

34.9

47.8

22.8
3.1

18.2
2.6
15.6
.0

1983

Q4
Treasury financing
Combined surplus/deficit(-)
Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments(-)
Bills

Coupons
Nonmarketable

3.0
31.9
1.3

41.3

25.3

-4.2

-16.7

11.8

16.0

28.5

1.0

6.7

-1.1

6.5
1.5

19.7
.8

6.8
.8
6.0
.7

Decrease in the cash

balance
Memo: Cash balance
at end of period
Other 2
Federally sponsored credit
agencies net cash borrowing 3

2.9

FHLB

-. 4

FNMA

3.3

Farm Credit Banks

-. 6

.8
-1.2

23.8
-. 5

FHLMC

SLMA

8.3

1.3

-. 4

-. 6
.1

16.0

1.2

p--preliminary.
e--estimate.
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-11

The reduction in

long-term municipal offerings so far this year

can be attributed to the near cessation in issuance of industrial
development bonds and mortgage revenue bonds for single-family housing.
Issuance of these and other types of private-purpose bonds has been
stalled by congressional inaction on legislation intended to reduce the
extent of tax-exempt financing for private use.
GROSS OFFERINGS OF SECURITIES BY STATE AND LOCAL GOVERNMENTS
(Monthly totals or monthly averages; billions of dollars)
1983

1983
Year

---- ----Total
Long-term

Short-term1

Refundings
Total housing 2
Short-term1

Q1r

1984
Jan.e Feb.e Mar.f

Seasonally adjusted -----------

10.28
7.09

9.33
6.01

10.52
6.77

7.83
4.83

8.20
5.40

7.70
5.00

7.60
4.10

3.19

3.32

3.75

3.00

2.80

2.70

3.50

----------

Total
Long-term

Not seasonally adjusted ------

10.28
7.09

9.33
6.01

9.77
6.77

6.50
4.17

6.70
4.50

5.80
3.80

7.00
4.20

1.16
1.45
3.19

.91
1.62
3.32

.79
1.79
3.00

--2.33

.76
.19
2.20

.72
.18
2.00

2.80

1. These figures do not include tax-exempt commercial paper.

2. Primarily mortgage revenue bonds for home ownership and multifamily
rental structures.
e--estimate.
f--staff forecast.
Note--figures may not add due to rounding.
Partly offsetting the reduction in offerings of private-purpose
bonds in the tax-exempt market has been an increase in the volume of
electric utility revenue-bond issues to finance continued construction

of both coal-fired and nuclear power plants.

The recent utility offer-

ings appear to have been well received by the market, in spite of the

WPPSS default last summer and publicized problems of nuclear projects
under construction.

III-12

Mortgage Markets
Residential mortgage interest rates generally attained their recent
lows in early February and have risen since then.

In the primary market

for conventional fixed-rate home loans, the effective yield on new commitments at large mortgage companies has increased 35 basis points
since the last FOMC meeting.

The average contract interest rate on

new commitments at a sample of S&Ls, responding to secondary market
signals with a relatively long lag, declined through mid-February
before backing up; on balance, this series has risen only 8 basis
points since the last FOMC meeting.

Secondary market yields on fixed-

rate instruments have moved up about 1/2 percentage point during this
period.

As a consequence, price discounts on GNMA-guaranteed securities

issued against pools of FHA/VA loans climbed above 5 points, and the
Administration raised the VA ceiling rate to 13 percent effective
March 21.1
Adjustable-rate mortgages (ARMs) have continued to represent a
majority of the conventional home loans made at financial institutions.
In early February, 57 percent of conventional loans closed at major
lenders contained adjustable-rate features, down only slightly from the
record proportion of a month earlier. 2

The wide acceptance of ARMs by

consumers apparently is attributable to large initial rate advantages
1. The ceiling rate on FHA-insured loans was eliminated December 1, 1983.
2. Among the lenders surveyed, thrifts, at 63 percent, reported the
highest proportion of conventional loans with adjustable-rate features
while commercial banks, at 30 percent, reported the lowest proportion.
Commercial banks apparently sell a large share of their fixed-rate
mortgages; according to a February survey of senior loan officers at
large banks, these institutions intended to sell roughly three fourths
of their fixed-rate mortgages originated that month.

III-13

vis-a-vis fixed-rate mortgages along with widespread use of caps that
limit borrower exposure to payment increases, at least for several

years. 1

Nearly two fifths of the ARMs closed at major lenders in

February carried an initial interest rate below 11 percent, and one
seventh had an initial rate below 10 percent. 2

The lower current rate

on ARMs is not only a result of formulas tying these rates to yields on
short-term market instruments, but is also due to special discounts on
the initial rates being offered by lenders in order to help overcome
remaining buyer resistance to this type of loan.

In a recent survey of

senior loan officers at large commercial banks, for example, roughly
half of the institutions that originated ARMs in February reported
offering borrowers special discounts on the initial interest rate, with
an average discount of nearly 140 basis points below the formula rate.
The large initial rate advantages on some ARMs, particulary those
with incentive discounts, have raised questions about the underwriting
standards employed by ARM lenders. 3

If the deeply discounted ARMs do

not contain payment caps, borrowers are vulnerable to severe payment
shocks in the future, which increase the likelihood of delinquency;
1. The ARM purchase programs of both FNMA and FHLMC, for example, incorporate a 7-1/2 percent cap on annual payment increases that remains in
effect unless negative amortization raises the principal balance of the
loan beyond 125 percent of the original loan amount.
2. The average spread between fixed-rate loans and adjustable-rate loans
with unlimited rate change was 147 basis points in February at all major
lenders.
3. According to the February 28 Senior Loan Officer Opinion Survey, in
determining borrower qualifications for ARMs, one half of those institutions originating such mortgages report considering payment-to-income
ratios based only on the initial interest rate; of these respondents,
only one third report applying more stringent payment-to-income requirements on ARMs than are being used for fixed-rate mortgage contracts.

III-14

MORTGAGE ACTIVITY AT FEDERALLY INSURED SAVINGS AND LOAN ASSOCIATIONS 1
(Billions of dollars, seasonally adjusted)

Mortgage commitments

New

Outstanding 2

Net change in mortgage assets
Mortgage Mortgage-backed

Total

loans

securities

(1)

(2)

(3)

(4)

(5)

1983-Jan.
Feb.
Mar.
Apr.

10.5
11.8
12.3
11.9

31.9
34.7
37.4
39.9

2.2
5.5
5.2
4.0

0.2
2.4
1.4
2.7

2.0
3.2
3.9
1.2

May
June
July

12.9
14.6
16.2

42.3
44.4
46.6

4.0
6.7
8.2

2.1
3.8
5.5

1.9
3.0
2.7

Aug.
Sept.

15.3
15.8

48.5
49.8

8.8
8.0

5.6
5.5

3.2
2.5

Oct.

14.0

51.0

6.4

3.7

2.7

Nov.
Dec.

15.2
15.0

53.8
56.5

6.5
6.0

5.6
5.7

1.0
0.3

17.1

58.1

6.5

6.4

0.2

1984-Jan. p

1. Insured S&Ls account for approximately 98 percent of the assets of all
operating S&Ls. Net changes in mortgage assets reflect adjustments to
account for conversions of S&Ls to savings banks.
2. Includes loans in process.
p--preliminary.
NEW ISSUES OF FEDERALLY GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
(Monthly averages, millions of dollars,

.a.)

Memo: FNMA and
FHLMC swap issues

All
issues

GNMAs

FHLMCs

1982-Q1
Q2
Q3
Q4

3194
3432
4773
6653

1067
1187
1305
1779

1436
1644
2249
2727

692
600
1218
2147

1963
2013
3149
3795

1983-Q1
Q2
Q3
Q4

7091
7459
7711
5831

3810
4930
4927
3501

1955
1392
1544
1673

1326
1136
1240
657

2203
1793
2115
1954

1984 Jan.
Feb.

4016
4445

2784
2507

981
812

251
1126

988
1311

Period

FNMAs

)

III-15

if payment caps are incorporated, negative amortization can occur,
increasing the probability of eventual default and foreclosure.

The

prospects for payment and default problems have led the largest private

mortgage insurance company to specify more stringent payment-to-income
requirements and to set limits on initial-period rate discounts for ARMs
that it insures.1

Furthermore, trade reports indicate that secondary

market investors have become more wary of deeply discounted ARMs with
negative amortization features; a recent industry survey suggests that
this type of ARM has been quite common at mortgage companies, which
typically sell all their loan production.
Mortgage commitment activity at federally insured S&Ls has been
quite strong in recent months, presaging strong mortgage acquisitions
during coming months.

New mortgage commitments picked up by about $2

billion in January as commitments to originate new loans and commitments outstanding both reached new highs.

The strength in commitment

activity apparently reflects the effect on fixed-rate loans of the somewhat lower interest rates that prevailed in January and the successful
marketing of ARMs.

A large volume of single-family mortgage revenue

bonds issued by state and local authorities during the latter part of
1983 also may have been a contributing factor. 2

The net increase in S&L

1. New rules established by Mortgage Guaranty Insurance Corporation (MGIC)
include a maximum initial payment-to-income ratio on ARMs of 28 percent
(compared with 33 percent on fixed-rate loans) and a maximum special
discount of 100 basis points on 1-year ARMs containing no limits on
payment increases. On payment-capped loans, MGIC will allow negative
amortization up to 125 percent of the original loan size.
2. Between August and October, $4.5 billion of these tax-exempt bonds
were sold. The authority of state and local governments to issue singlefamily tax-exempt mortgage revenue bonds expired December 31, 1983.

III-16
CONSUMER INSTALLMENT CREDIT

1982
---Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

1983

1983
Q4

Dec.

1984
Jan.

Percent rate of growth, SAAR ------

4.0

12.7

12.0

17.7

3.9
7.0
2.6

12.7
15.5
11.5

15.4
9.7
9.9

14.3
24.5

-------

17.9

21.2

13.7

16.8

21.0
8.1
9.6

29.3
21.5

Billions of dollars, SAAR -------

13.1

43.7

42.4

64.7

79.4

52.1

By type:
Automobile credit
Revolving credit
All other1

4.9
4.4
3.8

16.5
10.4
17.0

20.9

20.1

6.5
15.1

16.7

24.2
20.7

27.9

34.5

30.7
5.8
15.6

By major holder:
Commercial banks
Finance companies
All other

4.8
4.6
3.9

25.9
3.1
14.7

27.7
1.7
13.1

40.3

56.3
-0.3
23.4

31.9
1.1
19.2

Change in outstandings--total

------Interest rates
At commercial banks2
New cars, 48 mos.3
Personal, 24 mos.
Credit cards
At auto finance companies 4
New cars
Used cars

3.2
21.2

Annual percentage rate --------

16.83
18.65
18.51

13.92
16.68
18.78

13.50
16.28

n.a.

18.75

13.46
16.39
18.75

n.a.
n.a.

13.325
16.165
18.735

16.15
20.75

12.58
18.74

12.74
18.25

13.65
18.12

13.92
18.06

14.18
17.54

1. Includes primarily personal cash loans, home improvement 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. Data for 1982 are for new-car loans at a 36-month maturity.
4. Average rate for all loans of each type made during the period, regardless of maturity.
5. Data are for February 1984.
n.a.-not available.

III-17

mortgage loan holdings rose to a new high of $6.4 billion although
continued small net increases in holdings of mortgage-backed securities
left the net increase in total mortgage assets at around the $6.5
billion level that had prevailed in the fourth quarter.
The increased volume of ARM loans closed in recent months apparently has stunted new issues of federally related mortgage pass-through
securities, which are issued against pools of fixed-rate mortgages.1
February's new issue volume was only slightly above the previous month's

figure and in both months the volume was the smallest in a year and a
half.
Consumer Credit
Consumer installment credit expanded at a 13-3/4 percent annual
rate in January, down somewhat from the robust 17-3/4 percent fourthquarter rate.

Nevertheless, January's increase still appeared consis-

tent with the recent pattern of stronger than typical growth for the
current stage of the business cycle.

During the first four quarters

of the current economic recovery (i.e., through November) consumer credit
advanced 11-1/4 percent; the largest first-year consumer credit gains
of the previous five cycles were 9 percent and 7 percent following troughs
in 1970 and 1975 respectively.

Based on December and January data,

growth during the fifth quarter of the current recovery appears on track
for an increase well in excess of the 10-1/4 percent average rate for
fifth quarters of the previous cycles.

The comparatively strong growth in

1. FHLMC and FNMA currently have purchase programs for conventional ARMs
but neither offers an ARM pass-through security. GNMAs are issued only
against pools of FHA/VA loans, all of which have been fixed-rate contracts.

III-18

consumer debt has likely reflected a combination of an increase in new
loans made, associated with buoyant retail sales, and a relatively
small stream of repayments, reflecting quite moderate borrowing activity
for the entire 1980-to-1982 period.1
Heavier household demands for credit have coincided with an
increased willingness of banks to grant consumer loans.

After three

years during which commercial banks expanded their consumer loan portfolios by less than one percent per year, bank-held consumer debt grew
by 17 percent in 1983 and continues strong in early 1984.
The greater willingness of banks to make consumer loans has been
clearly underscored by recent Surveys of Senior Loan Officer Opinion.
In February, more than a fourth of the banks responding said they had
become more willing to make installment loans since November, even
though large proportions had already expressed greater willingness to
lend in the November and August surveys.

As reasons for increased

willingness to lend, respondents cited heavy deposit inflows and more
favorable margins with about equal frequency (some mentioned both
factors).
experience.

Several respondents also mentioned improved collection
Banks were asked also about measures taken to expand

consumer loan volume during the previous six months.

Of those that

answered the question, two thirds mentioned offering new types of
loans, most frequently a "home equity" loan or a plan involving a
1. Certain credit-oriented components of retail sales--those at auto
dealers, department stores, and furniture and appliance stores--were
particularly strong in the December-January period.

III-19

line of credit.1

Forty percent had lowered finance rates and a few

had liberalized nonrate loan terms.
Despite the recent rebuilding of debt obligations, consumers
appear to remain in reasonably sound financial condition, judging from
the amount of installment debt outstanding relative to disposable income,
and statistics on delinquent loans.

At 15.7 percent, the aggregate

debt-to-income ratio stands much closer to its cyclical low of 15.2
percent than to its high of 17.9 percent recorded in the fourth quarter
of 1979.

The delinquency rate on consumer loans at banks edged down a

bit more in the fourth quarter of 1983 to 1.9 percent, the lowest level
in more than 10 years.

Auto loan delinquencies at major finance com-

panies were at a record low of 1.33 percent in January.

Personal

bankruptcies also have been on the downtrend, dropping last year for
the first time since 1977, by almost 8 percent.

1. The responses indicating increased use of "home equity" loans suggest
there may be some misreporting of loan categories at commercial banks;
loans secured by real estate should be so classified. As a result,
recent bank consumer loan figures may be swollen somewhat while real
estate loans may be understated.

INTERNATIONAL
__
DEVELOPMENTS

Foreign Exchange Markets
For the First five weeks after the last FOMC meeting, the dollar
depreciated fairly steadily and by early March it was seven percent lower
in value, on a weighted-average basis, than it had been in late January.
More recently, an upturn in the dollar's value has retraced nearly half
of the earlier movement, as shown in the top panel of the chart.
Initially, the dollar's decline in value was part of a general
upward revaluation of the mark, which took the German currency to the top
of its agreed EMS range and,
, moved the entire band up two-to-three
percent in terms of all major currencies outside the EMS during the first
two weeks of February.

Traders' reassessment of the mark and, to a

lesser extent, other continental European currencies seemed to be based
primarily on improved prospects for economic recovery in Europe, which
suggested continued improvement in returns on financial assets there.

addition, the better economic prospect and a shift of attention away from
Europe's vulnerability to East-West conflict lessened concern about the
durability of the German government and the safety of assets held in
Europe.
The mark's continued widespread appreciation in late February contributed to the dollar's further decline in average value and also put
more strain on the EMS arrangement,
.

But the dollar began to

decline in value more noticeably in terms of other major currencies too,
except the yen and the Canadian dollar.
IV-1

This broad dollar depreciation,

IV-2
STRICTLY CONFIDENTIAL FRI
Class
II
FOMC

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR
I

Daily series

FOMC

January 31

MARCH

FEBRUARY

JANUARY

OECEMBER

1984

1983

3-MONTH INTEREST RATES

Percent per annum
-110.5

Ifu

Daily series

Janus ry 31
J~tul

-410.0

U.S. CO's

WEIGHTED AVERAGE
FOREIGN RATE

Ialiim

iii
A i
I
DECEMBER

1983

iI i

aiiitiIIIa IIIIIIl
JANUARY

II I 111111
IIII

FEBRUARY
1984

I il

a1111
I1111
MARCH

III

IIIII

IV-3

which occurred against the background of ongoing increases in absolute
and relative dollar interest rates (shown in the bottom panel of the
chart), suggested rising concerns among market participants about U.S.
inflation prospects as surprisingly strong U.S. economic activity was
revealed.

Congressional action to reduce prospective U.S. budget

deficits during the election year came to be regarded as more unlikely as
time passed, and concerns surfaced about Federal Reserve adherance to its
anti-inflation policies in that environment.
The dollar dropped suddenly vis-a-vis the yen in early March for
reasons that were not so clear.

A large Japanese trade surplus and a

record U.S. deficit in international trade during January had been
announced a few days earlier, but this contrasting pattern in trade
developments had been evident for some time.
In the last two weeks, signs of initial steps towards a budget
compromise and renewed indications of Federal Reserve determination to
maintain anti-inflation policies appear to have prompted some reassessment of prospects for the dollar's value.

In association with further

increases in dollar interest rates, the dollar has appreciated three-tofour percent in terms of most major currencies and about 1-1/2 percent
versus the yen and Canadian dollar.

IV-4

Foreign lending by U.S.-chartered banks.

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 in the first three quarters of the year.

(See table.)

For

1983 as a whole claims rose $4.1 billion, compared with $10.7 billion in
1982 and about $19 billion in 1981.
In the fourth quarter, claims on most individual non-OPEC
developing countries changed only slightly.

The largest increase was

$0.5 billion in claims on Korea; there were no decreases in claims on any
major borrowers.

At the end of November Brazil drew the remaining $1.8

billion on the $4.4 billion bank loan of February 1983 (U.S. banks' share
about $0.7 billion) but the proceeds were almost entirely used up in
repayment of the remaining $1.2 billion balance on the late-1982 bridge
loans (about half for U.S. banks) and in paying off interest and other
arrears.

U.S. banks' claims on Mexico increased only slightly.

November and December Mexico drew the remaining $1.6 billion balance
available from the $5 billion loan of March 1983 (U.S. banks' share about
$0.6 billion) but Mexico repaid the balance of private interest arrears
accumulated by January 31, 1983, amounting to $280 million (to both U.S.
and non-U.S. banks) and some other amounts to U.S.

banks.

Claims on the

Philippines were unchanged after declining $0.4 billion in the previous
two quarters.
Among other country groups, U.S. banks' claims on OPEC countries,
Eastern Europe, and the smaller developed countries increased somewhat in
the fourth quarter following decreases in one or both of the previous
quarters.

Claims on G-10 countries again declined but less than in the

IV-5

second and third quarters.

The slower drop, together with a shift from

decrease to increase in claims on offshore banking centers, largely
concerned interbank placements and seasonal factors.

For all areas

combined there was a larger increase in claims in the fourth quarter than
in preceding quarters of the year, but for the year as a whole there was
a net reduction in claims on foreigners.

IV-6

TABLE 1.

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

Claims on:

1982
Year

Change (no sign = increase)
1983

Year

Total, all countries

23.4

-2.9

2.0

Non-OPEC developing
countries

10.7

4.1

0.6

1.7

OPEC countries

2.6

Eastern Europe

-1.6

-0.5

Smaller developed
countries

5.3

G-10 countries and
Switzerland

4.2 -12.2

Offshore banking
centers

3.1

3.4

-0.9

-1.1

Miscellaneous

1.9

Q2
-4.1

Outstanding

12/31/83

-11.0

10 .2

435.7

0.6

2 .3

111.1

1.1

-0.3

-1.0

1 .9

29.1

-0.4

-0.1

-0.4

0i.1

5.4

0.2

0.5

-0.3

1.5

35.6

2.4

-5.4

-8.9

-0 .6

167.5

-0.7

1.2

-1.8

4 .7

70.2

-1.2

-0.6

0.7

16.8

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

Claims on:
Latin America
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Others
Asia and Africa
Korea
Philippines

Taiwan
Others
Total

1982

Change (no sign - increase)
1983

Year

7.7
-0.5
3.8
0.5

2.8
0.7
0.1
0.2

0.5

2.9

Outstanding

0.4
0.1
0.2
-0.3

0.3
0.4
-0.6
-0.2

1.2
0.1
0.4
0.4

0.1

-0.2

0.3

1.6

0.6

0.1

0.6

0.3

0.6

-0.2

0.2

-0.2

2.4

-0.1

0.3

0.2

0.1

-0.1

0.1

4.3

3.0

1.3

0.2

0.3

-0.6

1.4

36.0

1.4
0.3
0.1
1.2

0.5
-0.1
0.1
0.8

..
0.3
-0.1

..
-0.2
..
0.5

..
-0.2
0.1
-0.5

0.5
..
0.1
0.8

11.3
6.2
5.3
13.2

10.7

4.1

0.6

2.3

12/31/83

0.9
0.1
0.1
0.3

75.1
9.6
23.0
6.5
3.2

26.1

111.1

IV-7

U.S. International Financial Transactions
The U.S. merchandise trade deficit increased sharply in
January, but the capital account data currently available do not
give a full picture of how that deficit was financed.

Banks in the

United States did not increase their borrowing from their own
foreign offices and IBFs in January, although in February the trend
of increased inflows from their own foreign offices resumed.

(See

line 3 of International Banking Data table.)
Data on banks' transactions with unaffiliated foreigners are
still incomplete for January, due to unusually large late
revisions.

While the overall magnitudes are uncertain, it is clear

that there was a reduction in U.S. banks' claims on unrelated
nonbank foreigners.

Part of this was associated with a $4 billion

rundown in bankers acceptances financing third country trade.

Apart from bank flows, other capital flows in January were
small.

(See U.S. International Transactions table.)

Official

reserve assets in the United States fell by $1.9 billion in

January.

Partial information for February indicates that G-11

official assets in the United States increased by about $2.8

billion,

. OPEC assets at the FRBNY continued to
decline in February.

INTERNATIONAL BANKING DATA
(Billions of dollars)

8.2

Mar.

Dec.

33.2

49.2

43.7

42.3

38.8

37.0

35.6

11.8

16.2

14.6

12.8

10.5

5.2

7.8

7.0

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

20.0
22.5
2.4

49.4
40.3
9.1

63.8
53.7
10.0

56.5
50.0

44.0
40.4
3.6

44.7

6.5

52.8
47.1
5.7

5.3

42.6
38.2
4.4

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks

13.2

15.7

16.4

16.8

18.6

18.7

19.4

Eurodollar Holdings of
U.S. Nonbank Residents 2/

95.5

112.6

116.4

120.4

121.3

126.7

123.4

123.7

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

1982
Dec.

1983
June
Sept.

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

1981
Dec.

1984
Jan.

39.4

Feb.

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. Includes term 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 I 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 IDB 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-9

Foreign private purchases of U.S. Treasury securities were
$1.6 billion in January.

More than $.6 billion was accounted for

by the World Bank, whose holdings of Treasury securities tend to be
volatile.

Foreign official institutions also added $1.5 billion to

their holdings of U.S. Treasuries, while reducing their holdings of
other assets in the United States in January.
Although balance of payments data on direct investment capital
flows are not yet available for the first quarter of 1984, it is
likely that there were sizeable inflows from Netherlands Antilles
finance affiliates.

Estimated borrowing by U.S. corporations in

the Eurobond markets surged to about $4.5 billion in the first
quarter of 1984, double the rates for the last three quarters of
1983.

Some of these issues were not intended to raise funds for

use in the United States.

For example, several DM issues were used

to raise funds to reinvest in German government securities yielding
higher returns.

The firms intended to defease the issues, reaping

arbitrage profit and certain tax advantages, but the Financial
Accounting Standards Board has ruled against the use of defeasance
in these cases.

Nevertheless, these mark-denominated issues

underline the increasing internationalization of world financial
markets:
markets.

U.S. firms were performing arbitrage between two DM

IV-10

The March balance of payments press release provides more

complete information on certain capital flows in 1983.

U.S. direct

investment abroad resulted in an outflow of $7.6 billion during the

year, in contrast to the inflow of $3.0 billion recorded in 1982.

The reversal of the unusual inflow in 1982 was the result of
several factors.

Inflows into the United States from Netherlands

Antilles finance affiliates dropped from a record $9.5 billion to
$4.8 billion, because U.S. corporations chose to rely less on
Eurobond issues as a way to raise funds in 1983.

In addition,

increased economic activity abroad raised profits, much of which
were reinvested.

Foreign direct investment inflows into the United

States were down somewhat in 1983, but would rise substantially in
1984 if plans proceed to make Shell Oil Corporation a wholly owned
subsidiary of its Netherlands parent.
The statistical discrepancy in the balance of payments
accounts fell sharply in 1983 to only $7 billion from over $40
billion in 1982.

Presumably this swing reflects shifts in the

capital accounts, since large changes in the accuracy of reporting
current account transactions seem unlikely.

IV - 11

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

1982
Year

1983
Year

1983
7Q2
3

Nov.

Dec.

1984
Jn

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

-39.5
-6.9
-30.6

15.9
9.2
6.7

1.5
0.9
2.5

13.4
11.1
2.3

10.3
9.5
0.7

10.2
13.4
-3.3

-0.7
0.9
-1.6

a.a.

-1.6

1.1

-0.6

0.3

0.2

0.5

-0.4

0.b

2.8

2.2

0.9

0.5

0.7

0.4

0.1

3.6

6.4

1.7

1.4

0.4

0.3

-8.0

-7.5

-3.2

-1.5

-0.9

0.1

-0.9

0.5

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

6.5

8.1

2.9

0.9

1.5

-0.6

-0.2

1.6

Changes
in
foreign official
reserve assets in U.S.
(+ = increase)

2.9

1.3

-2.8

6.6

-0.6

-1.9

-12.7
6.9
8.8

6.4
-8.6
7.6

1.1
-3.6
3.8

0.8
-2.1
-1.6

1.8
-1.5
6.3

-0.7
-0.7
2.1

0.9
*
3.4

0.4
-0.2
-2.1

5.7
-2.7

7.2
-1.7

2.0
-0.6

-0.5
-2.3

2.7
3.9

-0.5
1.2

1.5
2.7

1.5
-3.4

-5.0

-1.2

0.5

-1.0

-0.6

-0.2

3.0
10.4
6.9
-11.2
41.4

-7.6
9.5
2.4
-40.8
7.1

-0.9
2.2
3.9
-9.7
-0.6

-4.5
3.2
-0.6
-12.1
1.7

-2.4
2.1
-4.9
-15.3
-2.9

n.a.
n.a.
O. .
n..
a..

n.e.
n.a.
n.s.
n.s.
n.a.

n..
n.e.
a.&.
a..
a.e.

-60.6

-14.7

-18.2

-18.8

-6.3

-4.4

-8.1

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
3.

By area
G-10 countries and Switzerland
OPEC
All other countries
By type
U.S. Treasury securities
Other 2/

Changes in U.S. official reserve
assets (+ = decrease) 3/

Other
6.
7.
8.
9.
10.

transactions (Quarterly date)
U.S. direct inve s t me n t (-) abroad
Foreign direct investment (+) in U.S.
Other capital flow (+ = inflow) 4/5/
U.S. current account balance 5/
Statistical discrepancy 5/

MEMO:
U.S. merchandise trade balance - part
of line 9 (Balance of payments basis,
seasonally adjusted)
1.
2.
3.
4.
5.
*

-36.4

Includes U.S. Treasury notes publicly issued to private foreign residents.
borrowing under repurchases agreements.
Includes deposits in banks, commercial paper, acceptances&
Includes newly allocated SDR's of $1.1 billion in January 1981.
Includes U.S. government assets other than official reserves, transactions by nonbanking concerns,allocations of
SD Rs, and other banking and official t r a nsactions not shownelsewhere.
Includes seasonal adjustment for quarterly data.
Less thau $50 million.
NOTE:

n.a.
n.a.

Details

maynot add to

total

because of

rounding.

-0.5

IV-12

U.S. Merchandise Trade
The January merchandise trade deficit was a record; it followed a
month in which the deficit was unexpectedly small.
exports and imports rose in January.

The level of both

While exports increased to a

rate 7 percent higher than recorded in the fourth quarter as a whole,
imports in January rose faster and were 13 percent above the
fourth-quarter average.
Part of the increase in exports in January came in agricultural
goods.

While there were increases in wheat and soybeans (primarily

volume), half of the export rise appears to result from higher prices
of items such as citrus fruits, poultry, eggs, and meat.
Most of the January increase in exports was in nonagricultural
manufactured goods, especially machinery (business machines),

U.S. MERCHANDISE TRADE 1/

Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Non-oil
Trade Balance
Volume (Bil 72$, SAAR)
Exports
Agricultural
Nonagricultural

1983
Year

200.2
36.6
163.6

195.0
34.9
160.1

201.7
37.4
164.4

260.8
53.8
206.9

253.8
51.6
202.2

-60.6

1983
Q4

Dec.

1984
Jan.

206.7
38.7
168.0

214.9
39.1
175.8

221.1
42.7
178.4

274.4
65.8
208.6

281.9
56.3
225.7

267.9
46.9
220.9

318.0
51.6
266.4

-58.8

-72.7

-75.2

-53.0

-96.9

16.3
57.3

15.9
56.0

16.3
57.6

16.0
58.8

16.1
61.9

n.a.
n.a.

4.9
81.7

4.8
80.0

6.0
82.3

5.2
88.3

4.3
85.5

n.a.
n.a.

Imports

Oil
Non-oil

1. International transactions and GNP basis.

IV-13

automotive products shipped to Canada, and chemicals.

By area, most

of the increase in total exports seems to have gone to Canada and to
the EEC.
All of the rise in imports in January from the fourth quarter
average was in items other than oil.

While the volume of oil imports

increased to 5.1 million barrels per day (mbd) in January (seasonally
adjusted) from an unusually low December level, the January rate was
still somewhat less than the 5.5 mbd rate imported during the fourth
quarter as a whole.

The sharp increase in U.S. domestic oil

consumption in January -- in part a result of unseasonably cold
weather -- came primarily from a large stock drawdown.

For the third

consecutive month, oil import prices declined somewhat in January.
Preliminary data for February suggest oil imports continued at the
low December-January rate as consumption dropped back to more average
levels (reflecting a return to normal weather conditions).
OIL IMPORTS

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

1983
Year

5.20
28.42
53.80

5.11
27.69
51.62

1983
Q3
6.37
28.29
65.85

Dec.

1984
Jan.

5.45
28.29
56.26

4.63
27.91
46.91

5.08
27.75
51.59

The increase in nonoil imports in January (from both December and
fourth-quarter levels) was in a wide range of manufactured goods,
ranging from industrial materials to such finished goods as machinery,
automotive products from Canada, and consumer goods.

IV-14

U.S. Current Account in 1983

The U.S. current account deficit was a record $61 billion (annual
rate) in the fourth quarter, an increase of $13 billion (annual rate)

from the rate recorded in the third quarter.

The change from the third
In

quarter was largely in services and unilateral transfers.

particular, receipts from U.S. direct investments abroad declined
(partly because there were large capital losses and other write-offs),
payments by U.S. travelers abroad rose 13 percent, and unilateral
government transfers increased sharply (as Israel drew its entire
fiscal-year appropriation in the fourth quarter).
For the year 1983, the current account deficit was $41 billion,
up from a deficit of $11 billion in 1982.

On a year-to-year basis,

most of the swing in the deficit was in merchandise trade, about

U.S. CURRENT ACCOUNT
(billions of dollars, SAAR)

$ Change
4Q83
1983

1983
Ql

-40.8

-14.7

-39.0

-48.3

-61.2

29.6

-60.6
200.2
260.8

-35.4

-58.8
195.0
253.8

-72.7
201.7
274.4

-75.2

206.7
281.9

-24.2
-11.0
-13.2

20.1
10.7
9.5

22.5
14.0
8.5

27.5
18.9
8.6

24.1
16.4
7.7

-3.7
-3.0
-0.7

-3.4
-2.5
-0.9

4.3
-8.6

2.1
4.8
-6.2

0.5
4.1
-7.3

-0.5
5.9
-8.5

-0.1
2.4
-12.4

0.3
-1.4
-0.6

0.4
-3.5
-3.9

7.1

35.4

-2.5

-11.6

-34.3

-18.

Year
Current Account Balance
Trade balance
Exports
Imports
Investment income, net
Direct, net
Portfolio, net
Military, net
Other services, net

Unilateral transfers

23.6

15.0

8.6
0.5

197.4

232.8

-1982

-3Q83
-12.9
-2.5
5.0
7.5

Memo Item:

Statistical Discrepancy

in the BOP account

7.0

IV-15

equally divided between lower exports and higher imports.

The lower

export figure reflects the effects of the sluggish economic recovery in
most major trading-partner countries during the year, and the reduced
price competitiveness of U.S. goods which resulted from the persistent
high level of the exchange value of the dollar.

up in the second half of the year.

Exports began to pick

The increase in imports was

entirely in nonoil items and largely reflected the strength of U.S.
economic activity plus, to a lesser extent, the enhanced price
competitiveness of foreign goods.

IV-16

Foreign Economic Developments.
gathered some strength in
Real GNP rose in

Recovery abroad has continued and

several major foreign industrial countries.

the fourth quarter in

Italy are not yet available.)

all major countries.

(Data for

The weighted average of fourth-quarter

industrial production in the six major foreign countries was about 5
percent higher than early last year, when recovery started in most of
these countries.

January data point toward further improvement.

Japan,

Germany and the United Kingdom are showing the strongest improvement,

while Canada slowed somewhat from strong previous performance and France
and Italy remained weak.

The unemployment picture abroad remains bleak

despite recovering production.

Several countries (France,

Japan) are

presently reporting record unemployment rates, and others (Germany,
United Kingdom) have shown only slight improvement from the recent peaks
of unemployment.

Inflation abroad on a year-over-year basis had reached its lowest
level since the early seventies by the fourth quarter of last year.

Data

for January and February suggest some renewed upward pressure resulting
in

part from the delayed effects

of the strong dollar on import prices.

Recent policy actions have tended to confirm the generally
The U.K.

restraining stance of foreign governments.

government budget

for FY 1984/85 contains no net fiscal stimulus and a lowered monetary
target.

In France and Italy the governments'

cost-of-living provisions has resulted in

attempted tightening of

increased labor unrest.

The

Belgian government raised the discount rate and announced plans for
expenditure cuts and tax increases.
Individual Country Notes.

The Japanese economy has continued to

March 21, 1984
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD, SEASONALLY ADJUSTED)

Q4/Q4
1982

Q4/Q4
1983

1983
NOV.

1983

OCT.

__
CANADA
GNP
IP

-5.0
-11.8

6.6
16.8

1.9
3.1

2.0
4.3

-. 3
.0

.5
1.0

-.3
.8

.6
.0

-.8

3.1

-.8

N.A.

.5
2.9

.6
1.0

1.1
2.1

.2
.4

1.3
2.3

-.1

2.0

N.A.
N.A.

3.2
6.4

.6 -1.7
.6 -4.7

.9
1.8

N.A.
1.4

1.5
3.3

.8
2.5

-1.8

GERMANY
GNP
IP

-2.0
-5.4

3.2
5.9

ITALY
GDP
IP

-2.4
-6.1

N.A.
-1.0

JAPAN
GNP
IP

3.8
-2.7

3.6
8.5

.2
.9

1.1
1.6

1.6
.2

3.1
3.9

1.6
1.2

-.7
.1

-1.7
-7.5

6.2
14.9

.6
2.4

2.3
4.3

UNITED STATES
GNP
IP

1.7
5.1

.5
1.8

UNITED KINGDOM
GDP
IP

LATEST 3 MONTHS
FROM YEAR AGO+

6.6
16.8

FRANCE
GDP
IP

1.2

1984
JAN. FEB.

DEC.

3.3

-1.6

6.8

-1.2
-1.2

2.1
2.1

*
.2

-. 1

1.9
5.1

1.2
2.4

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

1.1

1.0

N.A.

-6.8

N.A.

.5
.5

*1
1.1

1.2

N.A.

-. 4
-1.0

3.6
9.1

N.A.

1.2

6.2
15.4

March 21,

1984
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD)

Q4/Q4
1982

Q4/Q4
1983

1982
Q3 Q4

1983
Q2 Q3

1983
NOV. DEC.

CANADA
CPI
WPI

9.7
4.5

4.6
3.4

2.2
.8

1.6
.3

FRANCE
CPI
WPI

9.5
8.5

9.8
14.5

1.4
1.9

1.8
1.0

GERMANY
CPI
WPI

4.7
3.1

2.6
.9

1.1
.0

ITALY
CPI
WPI

16.6
12.4

13.0
9.1

JAPAN
CPI
WPI

.9
-1.0

UNITED KINGDOM
CPI
WPI
UNITED STATES
CPI (SA)
WPI (SA)

1984
JAN. FEB.

LATEST 3 MONTHS
FROM YEAR AGO

___

1.4
1.5

1.6
.8

.9
.4

2.7
2.5

2.8
4.0

2.1
3.7

1.9
3.5

.7
.0

.5
-2.0

.6
.8

1.0
.9

.5
1.2

4.1
3.2

4.5
3.3

3.6
1.6

2.9
1.6

2.3
2.3

3.6
3.3

1.0
.7

1.9
-3.3

.5
1.0

1.0
-.1

.9
2.7
-1.9 -1.0

-.2
.2

3.6
-. 6

6.2
6.5

5.1
5.5

.5
1.0

.7
1.2

.5
1.4

2.0
2.0

1.3
.8

1.1
1.3

4.4
3.6

3.2
.8

1.9
1.3

.4
.9

-.0
-.4

1.1
.2

1.0
.6

1.1
.4

.6
N.A.

.4
1.9

.3
.8

.7
1.4

.7
N.A.

5.1
3.7

9.1
15.4

2.8
3.3

.5
.9

1.2
1.4

N.A.
N.A.

12.7
9.4

-. 2 -. 5

1.3

2.4
-1.6

-.1

-. 1
.7

.4
.6

N.A.

March 21, 1984
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1/
(BILLIONS OF U.S. DOLLARS; SEASONALLY ADJUSTED)

CANADA
TRADE
CURRENT ACCOUNT
FRANCE
TRADE 2/

CURRENT ACCOUNT 2/
GERMANY
TRADE
CURRENT ACCOUNT (NSA)
ITALY
TRADE
CURRENT ACCOUNT (NSA)

1982

1983

14.8
2.4

14.6
1.3

1982
Q3 Q4

1983
Q2 Q3

1983
NOV. DEC.

4.0
.9

4.1
.9

3.3
.2

4.3
1.0

3.3
-.2

3.7
.3

1.5
*

1.3
*

1984
JAN. FEB.

1.7

N.A.

-14.0
-12.1

-5.9
-4.7

-4.2
-3.2

-2.9
-2.4

-3.5
-4.0

-1.7
-1.0

-.4
.3

-.3
.0

-. 2

-. 6

20.9
3.6

16.4
3.3

5.3
-1.6

5.0
4.7

5.1
1.7

4.1
.8

3.7
-2.6

3.4
3.4

1.1
.2

1.0
2.0

1.3
-.2

N.A.
N.A.

-7.8
N.A.

-3.0
.4

-2.6
-. 7

-3.0
-2.0

-1.4
.6

-2.1
1.0

-. 1

-. 8

-.4

N.A.

18.8
6.9

31.5
21.0

5.1
2.3

4.0
1.6

6.5
3.5

8.1
6.0

8.8
6.1

8.1
5.5

3.0
1.7

2.8
2.2

3.7

N.A.

2.9

N.A.

3.6
9.1

-.8
3.7

1.0
2.2

2.0
3.7

.3
1.8

-. 7
.1

-. 4
1.0

-.0
.9

-. 5
-.2

N.A.
N.A.

-36.4
-11.2

-60.5
N.A.

-8.1

N.A.

-12.8
-5.8

-1.3
N.A.

JAPAN

TRADE 2/
CURRENT ACCOUNT

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

-13.1 -11.4
-6.6 -6.6

-8.9 -14.7 -18.2 -18.8
-3.6 -9.7 -12.0 N.A.

-6.3
*

1/ 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.

-4.4
*

IV-20

move ahead in

recent months amid indications

domestic demand
(s.a.a.r.)

gaining strength.

the fourth quarter,

that the recovery in

GNP growth slowed to 3.1 percent

following 6 percent

growth in the

previous quarter, but the relatively strong showing of private fixed
investment and consumption are positive signs.
recorded an increase of 0.7 percent (s.a.)

Industrial production

in January and has been

advancing lately at a pace of almost 10 percent (s.a.a.r.).

Recent

surveys by the Economic Planning Agency and the Bank of Japan report both
a firming of domestic demand ---

particularly in private fixed investment

and continuing export strength.

Despite the improved outlook,

which was at a record level in January,

unemployment,

persistent problem.

remains a

Bankruptcies also have been numerous in

recent

months, mainly among smaller firms, but last month they included the
family-owned Osawa trading firm.
failures

recent years,

This was one of the largest business

and Osawa counted several foreign banks among

its important creditors.
Consumer prices moved upward sharply in January.

The 1.3 percent

increase was the largest monthly rise in almost 2-1/2 years and was a
marked deviation from the roughly 2 percent annual rate of advance of
recent months.

Wholesale prices also moved ahead,

but very slowly;

the

wholesale price level in Japan gained 0.2 percent in February but was
still

more than 1 percent below the level of a year ago.
On a seasonally adjusted basis the current account in January was

surplus by a record $2.9 billion.

surplus was a 5 percent

The main factor behind the large

increase in exports (s.a.).

IV-21

At the end of February,

shortly after the meeting in Tokyo of the

bilateral yen-dollar discussion group,

the Cabinet approved an omnibus

bill to implement several measures to liberalize Japanese capital imports
including the issuance abroad of foreign-currency government bonds,

the

elimination of the "designated company" system that limits direct
investment, and liberalization of foreign investment in Japanese real
estate.
Industrial production in Germany rose 0.8 percent in January to a
level 5.5 percent above a year ago.
percent

in January,

The volume of orders increased 2

suggesting a favorable outlook for the near future.

The rate of unemployment was 8.8 percent (s.a.)

a 9.5 percent peak last summer.

in February,

compared to

Most other indicators of economic

activity, such as capacity utilization, inventory surveys and business
climate measures have continued to reflect

improvement on balance.

There

is, however, some concern about possible labor problems as annual
contract negotiations are approaching their deadlines.

The national

union association's demand for a 35 hour work week with no reduction in
pay has so far been flatly rejected by management.

There has been one

minor strike and the Economics Minister has called for a labor-management
conference.
The consumer price index rose 0.3 percent in February.

On a

seasonally adjusted annual basis, the rate of inflation over the last
three months has been about 2-1/2 percent.

The strong acceleration of

import prices in the last three months is likely to exert some upward
pressure on the CPI in the months to come.

IV-22

In the United Kingdom recovery of real economic activity continues
and is

being more consistently reflected in

the various measures.

the fourth quarter shows growth of about 6

Provisional real GDP in

from the third quarter level.

percent (s.a.a.r.)

In January,

industrial

production rose 0.7 percent (s.a.) over an upward revised December figure
to reach a level 4 percent above that of January 1983.

Orders in January

were reported at their highest level since the onset of recession in
1979,

and all leading indicators point to continued recovery in

Unemployment did, however,

1984.

rise slightly in February to 12.6 percent

(s.a.), equal to its level one year earlier, but still close to the peak
unemployment rate for this recession.

The rate of inflation of consumer

prices has remained very steady over the past six months.

In February,

the retail price index was 5 percent above its level one year earlier.
The deterioration in
during 1983,

the U.K.

external balance, which occurred

has continued into January.

and current account balances were in deficit.
small rise in

that month both the trade
A decline in exports and a

imports produced a trade deficit of $480 million.

The

current account showed a deficit of $180 million.
On March 13 Chancellor of the Exchequer Nigel Lawson presented to
Parliament the U.K.

government's

budget for the fiscal year 1984/85.

Proposed expenditure totals imply no growth

government spending.
balance,

in the level of real

Numerous tax changes were announced which,

by themselves are neutral for this coming fiscal year.

Nevertheless,

because of expected income growth,

borrowing requirement

the public sector

forecast to decline from £10 billion (3-1/4

IV-23

percent of GDP)

the present

fiscal year to £7.25 billion (2-1/4

percent of GDP) in 1984/85.

The tax provisions included steady reductions in the rate of tax on
corporate profits from 50 percent in 1983/84 to 35 percent by 1986/87 and
elimination of the 1 percent employer's national insurance surcharge (on
wage payments)

as of October 1984.

The Chancellor also announced the new monetary targets to April
1985.

They call for 6-10 percent growth of £M3 and 4-8 percent growth

of M-zero (MO),

the monetary base.

percent growth of M1,

£M3,

and PSL2.

The current target calls for 7-11
Through February M1 and £M3

were within the target range while PSL2 was somewhat above the range.
Although no target was set for M1 or PSL2 for 1984/85,

the authorities

have stated that they will continue to observe these variables as
indicators of monetary conditions.
In France,
has been mixed.

recent

evidence as to the direction of economic activity

Real GDP increased by 0.6 percent in

the fourth quarter

Industrial production

and was 0.5 percent above its year-earlier level.

rose by 0.8 percent in January and was 3.1 percent above its level of
January 1985.

The unemployment

rate, after holding steady through most

of last year, has risen steadily in
unemployment

recent months.

rate was 9.5 percent (s.a.),

February's

up from 8.8 percent last

October.
Consumer prices

rose by 0.7 percent (s.a.)

year-over-year inflation rate at 9 percent.

in February,

leaving the

Negotiations over 1984 wage

increases for public employees have been under way since January.

IV-24

Holding down labor costs is

a key element of the government's program for

limiting inflation to 5 percent

in 1984.

Union demands for a return to

full indexation and compensation of real income losses in 1983 resulted
in a widespread strike by government workers

on March 8.

After reaching near balance late last year,
into deficit by nearly $600 million (s.a.)

French trade swung back

in both January and February.

In Italy industrial production rose in the second half of last year
from the trough in

the second quarter; the IP

index for the fourth

quarter was about 1 percent below that of a year earlier and 12 percent
below the peak of 1980 Q1.
9.9 percent (n.s.a.),

The official unemployment

virtually unchanged

rate in January was

from a year ago.

Consumer price inflation remains moderate by Italian standards.
the twelve month period ending in February,

consumer prices rose by about

12 percent; the last time a lower rate was observed was February 1976.
The trade deficit last year of nearly $8 billion represents

a decline of

over $5 billion from the year earlier, which in turn was $5 billion below
the deficit for 1981.
In an effort to reduce inflation in 1984 to 10 percent,
government on February 15 decreed a reduction in
adjustments (the scala mobile)

for 1984,

cost-of-living wage

imposed a 10 percent limit on

increases of administered prices and public sector tariffs,
rent increases on properties subject to rent control.
must be approved by Parliament within 60 days.

In the past,

and froze

This decree law

The government action

followed the breakdown of talks between the employ
three largest unions.

the Craxi

association and the

scala mobile changes were decided by

IV-25

labor and management

negotiations.

Strike activity has increased in the

wake of the government's action.
The Canadian recovery slowed in

the fourth quarter of 1983.

GNP grew at an annual rate of 3.5 percent in

the fourth quarter,

Real
less

than half the average rate of increase over the first three quarters.
The slowing of the recovery in Canada in the fourth quarter was largely
attributable to weak final domestic demand.
fell at a quarterly rate of 4.3 percent,
residential construction.

Business

fixed investment

including a 12 percent drop in

(Nevertheless, residential construction

remained 16 percent above the fourth quarter of 1982.)

Consumption

expenditures grew at an annual rate of 3-1/4 percent in the fourth
quarter,
quarters.

down from a 4.8 percent average increase over the first three
The unemployment rate rose for the second consecutive month to

11.3 percent in February after falling throughout most of 1983.

Other

leading indicators pointed toward a slowing of the recovery including a
December seasonally adjusted drop in

new orders and unfilled orders as

well as a substantial decline in the latest Conference Board's index of
consumer confidence.
The inflation rate continues to remain well below the double digit
rates experienced prior to the recent recession.
increased at a rate of 4-1/2 percent during 1983.

Consumer prices
In February,

the CPI

rose by 0.6 percent.
The major source of growth in

real activity in the fourth quarter

was the strong performance of merchandise exports,
volume,

8.5 percent at a quarterly rate.

which were up,

The current account showed a

IV-26

$1.3 billion surplus last year about half of the 1982 surplus.

Canada

registered a $14.6 billion merchandise trade surplus in 1983 of which
U.S.

trade accounted for 80 percent.
Pierre Trudeau, Prime Minister and leader of the Liberal Party for

almost 16 years,

announced his intention to retire after the Liberals

choose a new leader, a process which is expected to take about three
months.

Federal elections are likely to be held this Fall.

The

candidate for the progressive Conservative party and opposition leader,
Brian Mulroney, holds a large lead in the opinion polls over a number of
possible liberal candidates.
On March 15,

the Belgian government announced its plans to reduce

its budget deficit from over 12 percent of GDP in 1983 to 7 percent in
1987.

The proposed measures,

which include a 2 percent reduction in

unemployment benefits and public sector wages,
to $5 billion in annual savings.

are expected to provide up

These measures were taken as part of an

effort to restore confidence in the Belgian franc.

Pressure on the

Belgian franc had forced the Belgian National Bank to increase its
discount rate from 10 percent to 11 percent on February 15.

IV-27

The Debt Situation in Selected Developing Countries
Foreign banks have completed signing a $6.5 billion "new money"
facility for Brazil, and $3 billion is scheduled to be disbursed by
March 23.

After a waiver of some performance criteria, Brazil made

another drawing on its IMF Extended Fund Facility.

The negotiations that

Argentina is conducting with the IMF and its bank creditors are
proceeding slowly.

Mexico's $3.8 billion bank loan is over-subscribed in

amount but still under-subscribed in the number of participating banks.
The 1983 external accounts were better than projected, and economic
activity is still depressed.

Chile and Peru have both reached agreements

with the IMF, and both have completed negotiations with bank creditors
for financing in 1984 on better terms than their 1983 financing packages.
The new Venezuelan administration remains reluctant to negotiate with the
IMF, but it has implemented an austerity program of its own aimed at
reducing arrears and improving the current account.

The Philippines

continues to negotiate with the IMF on a new stabilization program, and
bank creditors will be asked to approve a third 90-day moratorium on debt

repayments starting April 16.
Brazil's current account deficit was $6.2 billion in 1983, substantially less than the IMF projection of $7.5 billion for the year,
primarily because of lower than expected service payments.

After decel-

erating in the last two months of last year, prices rose by about 10
percent in January and by more than 12 percent in February.

However, the

trade surpluses of $580 million and more than $800 million in January and
February were very encouraging in light of the fact that exports are
usually at seasonal lows in these months.

The monetary base, which grew

IV-28

by over 5 percent in January, was reduced by one percent in February as
the Brazilians restrained extensions of credit by both the central bank
and the Banco do Brasil, particularly towards the end of the month.
Under the present IMF program, the monetary base is to grow by only 2
percent in the first quarter if the net domestic assets target is to be
achieved.

Gross liquid reserves (primarily cash) were estimated to be $1

to $1.5 billion as of February 15.

On March 9, the IMF granted Brazil's

request for a waiver and modification of certain December 1983 performance criteria.

The waiver was granted primarily because Brazil's fail-

ure to meet performance criteria was traced to the slowness in completing
various aspects of the Phase II Brazilian/foreign bank financing plan.
The Brazilians drew $396 million under their IMF Extended Fund Facility
arrangement on March 15 and foreign banks have completed the signing of

the $6.5 billion "new money" facility.
being disbursed by March 23.

Of this total, $3 billion is

At present it is expected that the

Brazilians will clear all interest arrears to private creditors ($2.3
billion) by the end of March.

In addition, the monetary authorities have

announced that the current system of foreign exchange controls will be
abolished by the end of March.
The negotiations that Argentina is conducting separately with the
IMF and with foreign commercial banks are proceeding slowly.

The 1983

IMF stand-by arrangement was cancelled at Argentine request late in
January after large deviations from the agreement's quantitative performance tests in the fourth quarter made reinstatement of the agreement
impractical.

An IMF staff mission visited Argentina in February as a

preliminary step in developing a possible new IMF program.

Some

IV-29

Argentine officials have expressed the hope that a letter of intent may
be drafted and approved by the IMF management by late-March, but this is
unlikely.

An undisbursed balance of $1 billion remains under the 1983

commercial bank medium-term loan.

Discussions are under way with the

banks on proposals to release part of the balance upon completion of the
IMF letter of intent.

These funds would be used to help pay interest

arrears to banks, which date back to early October and may exceed $1.2
billion.

(Since year-end the Central Bank has been rebuilding its

reserves, which were nearly exhausted, in preference to reducing
arrears.)

The $350 million bridge loan payment originally due in January

has again been postponed and is now due on April 16, the date on which
the final $400 million payment on this loan is also due.

The government

is continuing to set wages, interest rates, and exchange rate changes in
relation to the projected rate of inflation.

When inflation exceeded the

projected rate in January and February, additional retroactive wage
increases were granted at the end of these months to restore a small
increase in real wages.

The free market premium for the dollar, which

was only about 10 percent in December, increased again in January and
February and was about 59 percent on March 8.
The 1984 foreign commercial bank loan for Mexico is now in syndication and subscriptions are more than the $3.8 billion goal.

However,

about 100 banks around the world have not yet indicated their participation.

The Mexican current account surplus for 1983 turned out to be

$5-1/2 billion, about $1 billion more than previously anticipated, and
the trade surplus was about $14-1/2 billion, about $1/2 billion more than
estimated in the

last Greenbook.

On March 7, Mexico repaid $450 million

IV-30

of the overdue private sector debts to foreign suppliers for which the
debtors made peso deposits in the Bank of Mexico between March 1, 1983,
and January 19, 1984.

To attract private foreign direct investment, new

guidelines have been announced, relaxing the prohibition against majority
ownership in many lines of activity.
in economic activity:

There are no signs of a turn-around

in the first ten months of 1983, industrial pro-

duction was 9.4 percent lower than in the same period of 1982.
government hopes to limit inflation in 1984 to 40 percent.

The

However,

monthly increases in the CPI since November have been somewhat larger
than in the previous five months, as a result of lumpy increases in
controlled prices and the 30 percent increase in the minimum wage on
January 1.

In February, the CPI was 5.3 percent higher than in January

and 73 percent higher than in February 1983.
Chile has agreed with the IMF on a program for the second year of
its stand-by arrangement, and it is expected to be approved by the IMF
Executive Board in early April.

The program allows for some fiscal

easing in 1984, reflecting the Chilean authorities' concerns about
sluggish economic activity, and reflecting the IMF staff's view that
Chile's basic economic policies are in the right direction and that most
of the necessary wage, price and exchange rate adjustments have been
made.

Inflation in January was only 0.1 percent, and the inflation rate

this year is expected to be kept under 20 percent.

In early February,

Chile agreed in principle with its bank creditors on a new loan of $780
million, to be disbursed in four equal installments over 1984.

The loan

will be for nine years with five years' grace, at LIBOR plus 1-3/4 percent or U.S. prime plus 1-1/2.

The terms are a significant improvement

IV-31

over Chile's 1983 credit of $1.3 billion.

Since Chile's 1984 maturities

were rescheduled as part of the 1983 financing package, this year's
agreement with the banks is for new money only.
Peru has signed a letter of intent with the IMF on a new, eighteenmonth stand-by arrangement to replace the Extended Fund Facility arrangement that Peru has failed to comply with since last September.

The

centerpiece of the program is a reduction of the fiscal deficit from 10
percent of GDP in 1983 to just under 4 percent this year.

The arrange-

ment is scheduled to go to the IMF Executive Board for approval in April.
However, political opposition to the adjustment measures is growing and
led to the March 19 resignation of Finance Minister Carlos Rodriguez
Pastor, so the future of Peru's relations with the IMF is now uncertain.
The signing of the letter of intent triggered the disbursement on March 8
of another $100 million of the $450 million credit from banks signed last
year.

Disbursements of that credit were suspended last fall since they

were contingent on compliance with the IMF program.

The final $100

million is expected to be disbursed when the new IMF program receives
Executive Board approval.

Peru has also agreed in principle with its

bank creditors on rescheduling $610 million in medium and long-term debt
maturing between April 1984 and July 1985, and $955 million in short-term
working capital credits.

The payments will be rolled into a 9 year loan,

with 5 years' grace, at LIBOR plus 1-3/4% or U.S.

prime plus 1-1/2%.

The terms are a significant improvement over Peru's 1983 rescheduling.
Venezuela's newly-elected government has announced an austerity
program aimed both at eliminating the $750 million in private-sector
interest arrears in the near term and at reducing the overall level ($34

IV-32

billion) of external debt.

Central to the success of the program to

eliminate interest arrears was the removal from office of the President
of the Central Bank, Mr. Diaz Bruzual, who had blocked these payments
The official exchange rate has been

under the previous administration.
devalued by 40 percent.

International reserves are currently $11.2

billion, and this cushion reduces the incentive to agree to an IMF
program.
The Philippines and the IMF are continuing their negotiations aimed
at reaching agreement on a new economic stabilization program.

An IMF

team was in Manila for two weeks in mid-February, but was unable to reach
complete agreement on a program.

The team will return to Manila again in

April to examine the progress being made toward reducing the budget
deficit and the amount of liquidity in the economy.

Recent data indicate

that the absolute level of the money supply was reduced 5-1/2 percent
during January, although the 12-month rate of increase (38 percent)
remains high.

The inflation rate continued to accelerate through

January, with consumer prices up 33 percent over the level a year
earlier.

Preliminary data indicate that the 1983 current account

deficit--at $3.3 billion--was little changed from 1982.

Prime Minister

Virata stated on March 13 that the Philippines will ask its creditor
banks for a third 90-day moratorium on the repayment of principal on
non-trade external debt before the current moratorium expires on
April 16.

Although the Philippine authorities plan to prepare a letter

of intent in April for the IMF, it appears unlikely the IMF Board will
approve a program before late June.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 26-27, 1984 : Greenbook Part 2

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