Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 29-30, 1982 : Greenbook Part 2

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Confidential (FR) Class II FOMC

March 24,

SUMMARY AND OUTLOOK

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

1982

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Industrial production ...........................................
Employment ......................................................
Personal income and consumer spending...........................
Housing........................................................
Business fixed investment.....
...............................
Inventory investment............................................
Federal government...............................................
State and local government.......... ............................

1
3
5
9
13
17
19
22

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

Prices ...........................................................

TABLES:
Industrial production............................................
Changes in employment............................................
Selected unemployment rates......................................
Retail sales.....................................................
Auto sales....... ... .......................................... ..
Private housing activity.........................................
Business capital spending indicators............................
Business capital spending coitments..............................
Survey of plant and equipment expenditures.......................
Error history of annual surveys..................................
Capacity utilization rates: manufacturing and materials..........
Changes in manufacturing and trade inventories...................
Inventories relative to sales....................................
Selected measures of compensation, productivity, and costs in
the nonfarm business sector....................................
Recent changes in consumer prices................................
Recent changes in producer prices................................

2
4
4
7
7
10
12
12
14
14
15
16
16
20
25
25

CHARTS:
Consumer attitudes................................................
Changes in residential construction costs........................
Domestic automobile inventories..................................
APPENDIX II-A:

11
18

The Federal Budget

DOMESTIC FINANCIAL DEVELOPMENTS

III

Monetary aggregates and bank credit..............................
Business finance.................................................
Government finance...............................................
Federal sector................................................
State and local sector.........................................
Mortgage markets.................................................
Consumer credit................................................

3
7
11
11
13
15
17

TABLE OF CONTENTS (cont.)

Section
TABLES:

Page

III

Monetary aggregates. ................... .................... ......
Commercial bank credit and short- and intermediateterm business credit..........................................
Gross offerings of corporate securities.........................
Federal government and sponsored agency financing................
State and local government security offerings....................
Net change in mortgage debt outstanding..........................
Consumer installment credit.....................................

2
6
10
13
14
18

CHART:
Growth rate of consumer installment credit.......................
APPENDIX III-A:

The Senior Loan Officer Opinion Survey

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets........................................
Foreign lending by U.S. banks....................................
U.S. international transactions..................................
Merchandise trade................................ .....
........
International capital transactions.............................
U.S. current account in 1981...................................
Other capital flows in 1981....................................
Foreign economic developments...................................
Individual country notes........................................

1
6
9
11
15
17
18
19

TABLES:
Claims on foreigners of U.S. chartered banks .....................
U.S. merchandise trade..........................................
U.S. oil imports in 1981........................................
Summary of U.S. international transactions.......................
International banking data......................................
Major industrial countries:
Real GNP and IP.................................................
Trade and current-account balances.............................
Consumer and wholesale prices..................................

7
9
10
12
14
20
21
22

CHARTS:
Weighted-average exchange value of the U.S. dollar................
Net official purchases of dollars................................

2
2

- T - 1

March 24, 1982

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest data
Period

Release
date

Data

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

109.2
8.8
3.8
90.9
19.5
71.4

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

Feb.
Feb.
Feb.
Feb.
Feb.
Feb.

3-5-82
3-5-82
3-5-82
3-5-82
3-5-82
3-5-82

Feb.
Feb.

3-5-82
3-5-82

34.9
7.52

Feb.
Jan.

3-5-82
3-1-82

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

Feb.
Feb.
Feb.
Feb.
Feb.

Consumer prices all items (1967-100) Feb.
All items, excluding food & energy Feb.
Food
Feb.

3.2
8.5
4.0
1.3
-2.8
2.4

-.4
8.3
3.9
-2.6
-10.7
-. 3

1.0
7.4
3.2
-.4
-3.4
.5

34.2
7.51

35.0
7.45

35.2
7.04

39.1
230.3

37.3
34.9

39.3
22.8

39.8
13.6

3-16-82
3-16-82
3-16-82
3-16-82
3-16-82

141.8
140.9
173.3
107.7
138.1

18.9
19.9
6.3
25.0
22.1

-12.3
-8.6
-12.7
9.1
-18.0

-6.6
-4.7
-2.4
7.2
-10.5

3-23-82
3-23-82
3-23-82

284.1
270.0
283.2

3.0
4.5
7.2

Feb.
Feb.
Feb.

3-12-82
3-12-82
3-12-82

276.9
316.7
246.1

-1.7
-4.2
8.3

Feb.

3-18-82

3.7
4.9
5.6

7.7
9.2
4.5

2.8

8.3

Producer prices: (1967=100)

Finished goods.
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs
Personal income ($ bil.) 2/

2,509.9

5.9

(Not at annual

rates)

Mfrs. new orders dur. goods ($ bil.) Feb.
Capital goods industries
Feb.
Nondefense
Feb,
Defense
Feb.

3-19-82
3-19-82
3-19-82
3-19-42

79.3
30.1
21.6
8.5

1.5
2.9
-1.7
16.7

-. 9
5.1
-9,3
75.8

-7.2
9.8
2.0
36.4

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

Jan.
Jan,
Jan.

3-12-82
3-3-82
3-12-82

1.51
1.75
1.30

1.50
1.72
1.30

1.48
1.70
1.29

1.37
1.59
1.17

tories to unfilled orders 1/ Jan.

3-3-82

.596

.598

.597

.563

Retail sales, total ($ bil.)
GAF 3/

Feb,
Fb.

3-10-82
3-40-4

87.6
18.4

.4
-. 5

1.9
.9

Auto sales, total (mil. units.) 2/
Domestic models
Foreign models

Feb.
Feb.
Feb.

3-3-82
3-3-82
3-3-82

Plant & Equipment expen. ($ bil.)4/
Total nonfarm business
Manufacturing
Nonmanufacturing

1982
1982
1982

3-11-82
3-11-82
3-11-82

345.11
136.81
208.30

1981-Q4

3-8-82
3-16-82
3-1-82

22.6
.95
127.0

-14.7
6.5

Ratio:

Mfrs.'

durable goods inven-

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

Feb.
Jan.

8.5
6.2
2.3

5.9
10.1
-4.0

Actual data used in lieu of percent changes for eaier periods.
At annual rate.
Excludes mail order houses.
Planned-Commerce January and February 1982 Survey.

-. 6

10.6
14.8
.5

10.8
-1.2

-17.5
-15.8
-22.0

-13.5

-26.4
-6.1

DOMESTIC NONFINANCIAL DEVELOPMENTS

Several key indicators suggest that the recent decline in economic
activity has slowed.

Production, employment, and consumer demand in

February were only a little below their levels at the end of 1981, and
housing activity has edged up for several months.

Moreover, the volume

and rapidity of the inventory liquidation suggest a near-term rebound
in activity.

At the same time, however, outlays for business fixed

investment have continued to drop, and indicators of future business
spending suggest further weakness in that sector.

The price situation

has continued to improve, particularly in the energy area.
Industrial Production
The index of industrial production increased 1.6 percent in
February, reflecting some rebound in activity from the sharply curtailed
output levels in January that resulted in part from severe weather.
Following the February rebound, the index remained 1.0 percent below its
level at the end of 1981.

Although the overall picture is one of

continuing production adjustments, the rate of output decline from
December to February was notably smaller than during the preceding four
months.
Output of consumer goods increased 1.7 percent in February, almost
offsetting the January drop.

Autos were assembled at a 4.1 million unit

annual rate, still extremely weak, but up about 14 percent from the
January pace.

With dealer's stocks substantially reduced, industry

schedules for March currently indicate a rise in the assembly rate to
around 5.0 million units and a further increase in April.

Output of

durable home goods, such as furniture and appliances, also increased in
II-1

II-2

INDUSTRIAL PRODUCTION
(Percentage change from preceding period except where indicated;
based on seasonally adjusted data)

1981

Q4
- -

---annual rate-----

1981
Dec.

1982
Feb.
Jan.

Feb/Dec.

---monthly rate---

1.9

1.4

-16.7

-2.1

-2.5

1.6

-1.0

7.1
Final products
Consumer goods
6.3
14.5
Durable
3.4
Nondurable
9.4
Business equipment
Oil & Gas Well Dr.
39.6
Defense and space eq. 4.1

.8
-1.5
-8.9
1.4
3.9
6.4
4.3

-10.0

-1.0
-1.8
-5.0
-. 7
-. 3
1.4
1.6

-2.4
-2.0
-3.5
-1.5
-3.4
-. 6
-1.4

1.3
1.7
3.9
.9
.5
-3.6
2.1

-1.1
-. 4
.2
-. 6
-2.9
-4.2
.7

Construction supplies

-7.4

-8.6

-29.2

-2.2

-3.9

2.1

-1.8

-1.9
Materials
3.7
Durable goods
-1.7
Nondurable goods
-16.6
Energy materials
2.8
Cr. Oil & Nat. Gas

2.5
1.2
-5.7
22.4
-2.4

-24.1
-29.0
-23.0
-11.0
-5.1

-3.8
-4.9
-3.6
-. 9
1.0

-2.5
-3.7

1.8
2.1
2.1
.8
-2.2

-. 7
-1.6
-. 8
1.7
.5

Total

-13.7
-32.5
-5.7
-9.7
10.8
11.4

-2.8

.9
2.8

II-3

February, and was at a level slightly above that at the end of last
year.

For the materials group, production increased 1.8 percent in

February, recovering much of the January decline; output of energy
materials increased further, despite some drop in crude oil and natural
gas extraction.

However, production of business equipment continued

weak in February, rising only 0.5 percent following a sharp drop in the
preceding month; the February increase was damped in part by a slowing
in oil and gas well drilling activity.
Employment
Production adjustments over the December-February period were
mirrored in recent labor market developments.

Total employment was

virtually flat between December and February, following a period when
mounting layoffs, especially among manufacturing workers, had driven the
unemployment rate from 7.2 percent in July 1981 to 8.8 percent by the
end of the year.

By February, the adult male jobless rate had edged

lower, but this was offset by further increases in joblessness among
teenagers and minority groups, leaving the overall unemployment rate at
8.8 percent.

Since mid-February initial claims for unemployment

insurance remained high, suggesting that labor market conditions for
experienced workers are still quite unfavorable.
Declines in total payroll employment also moderated early this
year, although weakness persisted among many goods-producing industries.
Between December and February, nonfarm employment fell 175,000; during
the preceding three months job losses averaged 300,000 per month.
Construction employment, while rising in February, regained only a
portion of January's weather-related loss, leaving jobs in this sector

II-4
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1980

1981
Q3

1981
Q4

Dec.

1982
Jan. Feb.

-- Average monthly changes -Nonfarm payroll employment 2
Strike adjusted
Manufacturing
Durable
Nondurable
Construction
Trade

Finance and services
Government

34
28

14
13

139
122

-307
-318

-409
-408

-274
-271

97
97

-58
-47
-12
-12
12

-37
-30
-6
-16
22

24
11
13
-4
52

-253
-199
-54
-26
-46

-281
-218
-63
-36
-103

-208
-136
-72
-125
108

-46
-23
-23
78
62

79
13

61
-26

83
-45

27
8

29
4

-12
-28

54
-38

Private nonfarm production
workers
Manufacturing production
workers

-9

159

-337

-451

-250

127

-67

-45

-256

-283

-180

-2

Total employment 3
Nonagricultural

-27
-35

-2
22

-57
-61

-215
-165

-559
-396

-32
-234

9
47

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

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

1980

1981
Dec.
Q4

1982
Feb.
Jan.

1981

Total, 16 years and older

7.1

7.6

7.4

8.3

8.8

8.5

8.8

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

17.8
11.5
4.8

19.6
12.3
5.1

19.1
12.0
4.8

21.1
13.1
5.9

21.5
13.5
6.5

21.7
13.5
6.3

22.3
14.1
6.3

5.5

5.9

5.7

6.3

6.4

6.3

6.5

6.3
13.1

6.7
14.2

6.4
14.6

7.3
15.4

7.7
15.7

7.5
15.1

7.7
15.9

6.9

7.3

7.0

8.1

8.7

8.4

8.5

3.7
10.0

4.0
10.3

4.0
9.6

4.3
11.8

4.5
12.7

4.2
12.5

4.6
12.5

Women, 25 years and older
White
Black and other
Fulltime workers
White collar
Blue collar

II-5

45,000 below the December level.

At manufacturers, employment cutbacks

continued in February, but the decline of 45,000 was small in comparison
with an average monthly loss of 170,000 factory jobs between July and
January.

In the service-producing sector, employment rose 70,000 in

February despite the falling number of government jobs.

The manufac-

tures' workweek also recovered last month from the effects of January's
severe weather, rebounding to 39.1 hours, slightly above its December
level.

Nonetheless, the index of aggregate hours worked in the goods-

producing sector, which reflects changes in employment as well as weekly
hours of production workers, did not fully return to its December level.
Personal Income and Consumer Spending
Nominal personal income grew at only a 4-1/4 percent annual rate
over the first two months of this year.

Stagnant labor demand, declines

in proprietors' incomes, and a sharp rise in personal contributions for
social insurance, an item that is deducted in computing total personal
income, held down income growth in this period.

At the same time,

disposable personal income was boosted by reductions in nonwithheld
tax liabilities legislated last year.

In real terms, disposable income

in February appears to have recovered most of its January decline.

The

saving rate declined to 5.0 percent early this year--below its level
prior to last fall's tax cut--as consumption expenditures increased more
than disposable income.
February retail sales in real terms appear to be slightly below
the December level.

Outside the automotive area, sales of consumer items

rose more than 1 percent in current dollars in February, offsetting the
weather-related drop in January.

At auto dealers, sales of domestic

II-6

PERSONAL INCOME
(Based on seasonally adjusted data)
1980

1979

1981

1981
Q3

Total personal income
Wage and salary
disbursements
Private
Disposable personal income
Nominal
Real

1982
Feb.
Jan.

Percentage changes at annual rates 1 - -

12.3

11.0

10.2

12.9

7.5

2.7

5.9

10.8
11.6

9.0
9.2

8.9
9.2

8.9
9.5

6.6
5.1

5.2
4.7

6.0
6.8

11.7
2.0

10.9
0.8

10.1
2.2

11.8
2.6

9.4
1.6

5.4
-3.7

5.7
2.7

- - - - - Changes in billions of dollars2 - - - - Total personal income

18.3

18.7

18.0

26.1

9.8

5.8

12.1

Wage and salary disbursements
Private
Manufacturing

10.3
8.9
2.0

9.8
8.1
2.3

9.3
7.6
1.5

12.1
10.3
2.2

4.0
1.6
-2.7

6.6
4.8
0.3

7.7
7.0
3.2

8.9
2.8

9.6
4.1

9.9
2.9

14.7
5.5

6.1
2.3

2.8
1.2

5.3
1.9

Less: Personal contributions
for social insurance

0.9

0.8

1.2

0.7

0.4

3.7

0.8

Memorandum:
Personal saving rate

5.3

5.6

5.3

5.2

6.1

5.1

4.9

Other income
Transfer payments

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. 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.
n.a.--not available

II-7
RETAIL SALES
(Percent change from preceding period except where indicated;
based on seasonally adjusted data)
1981
Q3

Dec.

Jan.

1982
Feb. Feb/Dec

Total sales

4.6

-. 1

2.3

-1.3

-1.5

1.6

(Real)1

2.9

-1.7

-2.6

-1.6

n.a.

Total, less autos and
nonconsumption items

3.5

1.0

1.1

-. 8

1.1

Total, exc. auto group,
gasoline, and nonconsumption items

3.3

1.1

1.3

-1.2

1.4

GAF 2

3.1

1.1

-1.9

1.2

-. 7

Durable goods
Automotive
Furniture &
appliances

7.4
8.1

-3.1
-3.8

5.2
9.8

-6.0
-8.3

.8
1.3

-3.5
-5.1

3.0
4.2

-. 6
-1.0

4.4

-2.6

-. 9

1.0

-3.9

1.7

-2.2

Nondurable goods
Apparel
Food
General merchandise 3
Gasoline

3.3
5.1
2.1
1.8
4.9

1.0
2.3
2.1
.1
-. 1

1.0
-1.9
1.8
1.3
.0

.0
.6
.1
-. 2
-. 2

-. 6
.8
-2.0
-2.2
2.0

1.0
.1
1.2
1.4
-. 6

1.3
-. 5
2.2
3.2
.1

1. BCD series 59. Data are available approximately 3 weeks following the
retail sales release.
2. General merchandise, apparel, and furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales are
also excluded in the GAF composite sales summary.

AUTO SALES
(Millions of units; seasonally adjusted annual rates)

1981
Q3

Dec.

1982
Jan. Feb.

10.0

7.9

9.0

7.4

7.3

8.0

8.5

Foreign-made

2.7

2.3

2.1

2.2

2.4

2.3

U.S.-made

7.3

5.6

6.9

5.1

4.9

5.6

6.2

Small

3.9

2.9

3.5

2.6

2.3

2.7

3.3

Intermediate
& standard

3.4

2.8

3.4

2.5

2.6

2.9

Total

Note:

Components may not add to totals due to rounding.

.4
.9
-. 9
-. 8
1.4

II-8

CONSUMER ATTITUDES

Conference Board Index
of Consumer Confidence

-vV
IA

Michigan

SSurvey Research

Center Index of
Consumer Sentiment

1978

1979

1980

1981

1982

*Michigan Survey Research Center Index of Consumer Sentiment (1966
Q1=100) and Conference Board Index of Consumer Confidence (19691970=100). Bases of indexes are derived from responses (favorable
minus pessimistic) to five equally weighted questions. Questions
in the two indexes are different. Beginning May 1981 the sample
includes all types of households, prior to that families only.

II-9

models rose to a 6.2 million unit annual rate, 600,000 units above the
pace in January.

February sales

were boosted by fairly large rebates

available from all U.S. manufacturers, primarily on a wide variety of
compact and subcompact models.

Sales of these smaller cars increased

more than 20 percent in February, while sales of large and intermediate
cars remained unchanged.

Sales during the first 10 days of March were at

a disappointing 5.9 million unit annual rate, despite the continuation
of the rebate programs.

Foreign car sales in February, at a 2.3

million unit annual rate, remained close to their recent sales pace.
The continued sluggishness in growth of household spending is
consistent with the February surveys of consumer attitudes.

Both the

University of Michigan and Conference Board measures of confidence moved
lower in February, following some improvement around the turn of the
year.

Opinions about market conditions for buying homes and automobiles,

according to the Michigan survey, remained near the record lows of the
last year.

Pessimism about buying conditions centered on both high

interest rates and high prices.
Housing
Total private housing starts rose 6-1/2 percent in February to an
annual rate of 953,000 units.

And newly-issued permits for residential

building also were up slightly, the fourth consecutive monthly increase.
Most of these advances since the end of last year were in the multifamily sector.

For both of these indicators, the first two months of

1982 were above their recent lows registered in the final quarter of
1981, but housing activity has remained quite depressed.

Housing starts

in February were below the million unit annual rate for the seventh

II-10

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

1981

1982

Annual

Dec.

Jan.

Feb.1

All units
Permits
Starts

0.97
1.08

1.11
1.17

0.88
0.96

0.75
0.87

0.79
0.88

0.83
0.90

0.84
0.95

Single-family units
Permits
Starts

0.56
0.71

0.64
0.78

0.49
0.64

0.42
0.54

0.45
0.55

0.46
0.60

0.45
0.53

0.44
2.35

0.46
2.63

0.37
2.25

0.40
1.92

0.46
1.94

0.35
1.82

n.a.
n.a.

0.41
0.38

0.47
0.39

0.38
0.32

0.33
0.33

0.34
0.33

0.37
0.30

0.39
0.42

0.24

0.26

0.25

0.21

n.a.

Sales
New homes
Existing homes
Multifamily units
Permits
Starts
Mobile home shipments

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

II-11
CHANGES IN RESIDENTIAL CONSTRUCTION COSTS

Percent Change,
Q4 to Q4
Fixed-weight Price Index
for Residential Investment
16

-10

::0

2
X'

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

...
..
i~
~
.........
........ . ......

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

ii~ifii

.... ..

.... ...
:2~X
. ....
I

1976

1977

1978

1979

8ii~tii~i

if~.

iiiii~ii

il l

..
...

......

IIkliS~i~~i3

1980

1981

II-12

BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)
1981
Q2

1982
Jan. Feb.

Dec.

-.5

1.3

-7.9

Nondefense capital goods
shipments
Current dollars

3.2

Addendum: Sales of heavyweight trucks (thousands)

226

232

201

216

248

210

Nonresidential construction
Current dollars
Constant dollars

1.7
1.4

5.1
4.0

1.1
-.4

.6
-.9

.5
-.1

n.a.
n.a.

4.0

n.a.--not available
BUSINESS CAPITAL SPENDING COMMITMENTS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)
1981
Q2
Nondefense capital goods
orders
Current dollars

Machinery
Current dollars

Addenda: Ratio of
current dollar unfilled
orders to shipments
Total
Machinery
Nonresidential
building permits
Current dollars

n.a.--not available

Dec.

1982
Jan. Feb.

1.9

-6.4

-5.4

-2.4

-1.7

3.1

-1.3

-.2

-12.0

5.81
4.44

5.69
4.41

6.10
4.62

6.00
4.50

12.8

-16.9

19.2

6.14
4.66

-14.1

5.81
4.27

n.a.

II-13

straight month, by far the longest such period since World War II.

Both

new and existing home sales fell in January, reflecting bad weather in
many areas of the country and high mortgage interest rates.
The severity of the downturn in housing activity has had a strong
effect on house prices.

The trend in measured prices of houses sold has

been weakening for some time.

In January 1982, the average sales prices

of new houses and of existing houses sold were about 1 percent and 5-1/2
percent, respectively, above a year earlier; this compares with 11-1/2
percent increases for both measures over the preceding year.

The recent

moderation in house price increases reflects proportionately greater
purchases of smaller, less expensive units along with traditional demandinduced price adjustments.

Slack demand also has translated into a

slowing in the growth of construction costs, which increased less than
7-1/2 percent during the four quarters of 1981 (see chart).
Business Fixed Investment
Capital spending has weakened further, following a moderate fourth
quarter decline.

In the equipment category, shipments of nondefense

capital goods, a measure of about 80 percent of producers' durable
equipment, rose 4 percent in February, offsetting only about half
January's record decline.

Shipments of these goods were more than 2

percent below their already low fourth quarter average.

In addition,

sales of heavy trucks in February fell back to the low levels that
prevailed around the end of last year.

In the structures category,

overall expenditures on new construction held up fairly well through
January.

II-14
SURVEY OF PLANT AND EQUIPMENT EXPENDITURES
(Percent change from prior year)

Planned for 1982
1981

Commerce

Survey
(Actual)

All Business
Manufacturing
Durables
Nondurables
Nonmanufacturing
Mining
Transportation
Utilities
Trade and Services
Communications and
other
1.
2.
3.
4.

Department
Dec. Feb.

8.3

5.1

5.6

5.7

7.3
7.9
8.7
7.1
7.0
8.7
12.3
4.7
4.8

11.0

6.3

11.4

8.7

7.4

9.5

8.6

5.0
14.1

7.7

8.3
24.8
-.3

9.5
6.6
11.8

10.9

McGraw-Hill 2
Fall 1981

Merrill Lynch 2
Fall 1981

9.6
11.5

7.5
8.8
3.9
13.6
6.6
19.9
-6.3
3.6

12.2

10.1

12.9
8.3
24.8
18.6
5.2
4.73

n.a.

Growth in actual expenditures reported in the January Commerce Survey.
Not strictly comparable to Commerce Survey.
Includes only commercial category.
Includes commercial category.

ERROR 1 HISTORY OF ANNUAL SURVEYS

2
Year

Commerce
Dec.

1970*
1971
1972
1973
1974*
1975*
1976
1977
1978
1979
1980*
1981*
Mean Absolute Error

Department
Feb.

McGraw-Hill
Fall

2
Merrill Lynch
Fall

3.8
-. 5
.2
.1
-. 7
4.3
-1.3
-1.4
-3.2
-3.9
1.3
1.7

3.9
3.3
1.9
-. 5
-2.6
1.4
-. 6
-3.3
-4.3
-4.4
2.7
1.5

2.8
.5
2.6
-2.2
.9
11.5
2.0
.3
-2.2
-5.2
.2
3.1

1.5
1.1
.1
-2.8
-1.0
9.7
-3.9
.8
-3.1
-6.1
-2.2
-1.8

1.9

2.5

3.1

1. Anticipated minus actual percent change.
2. Fall Survey taken in October and November of the preceding year.
* Recession year

II-15

CAPACITY UTILIZATION RATES: MANUFACTURING AND MATERIALS
(Percent, seasonally adjusted)
-.

Manufacturing industries
Primary processing
Advanced processing
Motor vehicles & pts.

Materials producers
Durable goods mats.
Raw steel
Nondurable goods mats.
Energy materials

T..1978-80.
High

19801
..
1981
Low _
Q3
Q4

-- 1982
Jan.
Feb.

87.2

74.9

79.3

74.7

70.6

71.8

90.1
86.2
94.5

71.0
77.2
51.0

79.4
79.2
60.4

72.7
75.9
51.5

67.0
72.7
43.5

67.9
73.9
47.0

88.8

73.8

81.1

75.2

70.5

71.7

88.4
100.7
91.6
88.8

68.2
55.3
77.5
82.7

78.7
81.4
83.3
84.9

71.8
70.7
77.3
82.0

65.9
64.9
72.0
82.0

67.2
63.9
73.4
82.5

II-16
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

1979

1980

1981
Nov.

Dec.(r)

1982
Jan.(p)

49.0
31.5
23.7
7.8
10.3
7.2
1.4

31.0
16.4
10.2
6.2
11.7
2.9
-2.3

35.0
12.7
9.8
3.0
6.7
15.6
12.2

55.6
27.6
25.9
1.8
8.3
19.6
7.3

14.5
-.8
.3
-1.2
11.3
4.0
-1.7

41.8
13.2
6.7
6.6
24.8
3.8
-2.1

-40.9
-37.6
-24.6
-13.0
3.6
-6.9
-3.6

-18.0
-6.2
-5.4
-.8
3.1
-14.9
-4.5

7.2
6.8
.4
-.1
-.3

-2.5
-1.0
.6
-2.2
-1.2

11.0 12.5
.9
5.4
3.2
2.7
6.9
4.5
5.7
.0

1.0
-2.4
4.6
-1.1
-1.9

8.2
.0
9.6
-1.5
-3.0

-18.9
-12.5
1.6
-8.0
-1.3

-27.8
-13.1
-2.7
-12.1
-8.7

Book Value Basis
Total
Manufacturing
Durable
Nondurable
Wholesale Trade
Retail Trade
Automotive
Constant Dollar Basis
Total
Manufacturing
Wholesale Trade
Retail Trade
Automotive

INVENTORIES RELATIVE TO SALES 1
1974
Cyclical
Peak 2

1980
Cyclical
Peak 2

1.64
1.95
2.51
1.39
1.24
1.57

1.53
1.76
2.36
1.18
1.21
1.44

1.41
1.60
2.05
1.12
1.11
1.36

1.76
2.18
1.40
1.52

1.76
2.11
1.45
1.48

1.66
1.95
1.40
1.42

1981
Nov.
Dec.(r)

1982
Jan.(p)

1.44
1.63
2.13
1.11
1.14
1.39

1.49
1.70
2.26
1.13
1.18
1.42

1.49
1.73
2.29
1.15
1.17
1.42

1.50
1.72
2.28
1.14
1.20
1.41

1.51
1.75
2.37
1.15
1.20
1.42

1.69
2.00
1.43
1.43

1.76
2.10
1.46
1.47

1.76
2.12
1.44
1.48

1.76
2.12
1.47
1.46

1.79
2.17
1.48
1.47

Book Value Basis
Total
Manufacturing
Durable
Nondurable
Wholesale Trade
Retail Trade
Constant Dollar Basis
Total
Manufacturing
Wholesale Trade
Retail Trade
1.
2.
r
p

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

II-17

Commitments data indicate a further decline in capital expenditures in the near-term.

Contracts and orders for plant and equipment,

a leading indicator of overall capital spending, fell 2-1/4 percent in
nominal terms in January.

In the equipment category, orders for

nondefense capital goods declined 1-3/4 percent in February, the third
consecutive monthly decline.

Additionally, contracts for nonresiden-

tial building declined somewhat in January, and permits for nonresidential construction dropped over 14 percent.
A number of longer-term indicators also suggest continued weakness.
The Commerce Department's most recent survey of plant and equipment
expenditures reports that business plans to increase capital outlays
only 7.3 percent in 1982, implying a 1 percent decline in real terms.
McGraw-Hill also reported in a recent "checkup" on capital spending that
business plans to increase current dollar expenditures 6.9 percent in
1982, meaning a reduction in real terms.

The Conference Board's survey

of capital appropriations and expenditures reports that the nations'
1,000 largest manufacturers reduced their capital appropriations, net of
cancellations, 22 percent in the fourth quarter of 1981, following a
small reduction in the third quarter.

In addition, capacity utilization

in manufacturing in February, at only about 72 percent and extremely low
on an historical basis, indicates the lack of immediate need for
additional productive capacity.
Inventory Investment
Despite weakening final sales, production adjustments of the last
few months have resulted in a considerable reduction of inventories.
December and January, manufacturing and trade inventories were cut at

11-18

DOMESTIC AUTOMOBILE INVENTORIES

al Stocks

Millions ofj its
2.3

2.1

1.9

1.7

1.5

1.3

I
SI

Stocks Relative to Sales

1.1

Days Suply

I
1976

1978

1980

I
1982

II-19

annual rates of $18.9 and a record $27.8 billion 1972 dollars,
respectively.

However, the stock-sales ratio for total manufacturing

and trade actually rose to 1.79 in January, reflecting the 2.3 percent
decline in real shipments and sales.
In the manufacturing sector, constant dollar inventories fell at
about a $12-1/2 billion annual rate in December after rising for five
consecutive months.

Liquidation in January was at a $13 billion annual

rate, despite the sharp decline in shipments.

Most key industries,

especially those in the durable goods category, reported sizable
reductions in stocks in both months.
Retailers' inventories fell at a $12 billion annual rate in real
terms in January; this was the third consecutive monthly decline.
Reductions in retailers' inventories of automobiles and parts made a
major contribution to this liquidation as stocks of U.S.-made autos at
dealers fell by about 300,000 units between October and February--a
result of sharp production cutbacks and rebate programs.

In February,

stocks represented a 63 days supply.
Federal Government
The federal government deficit in January and February was smaller
than expected, and the Treasury has cut about $10

billion from the $41

billion of financing that it had originally scheduled for the first
quarter.

The lower deficit can be traced mainly to a slowing in federal

spending as well as somewhat earlier remittance of tax payments.

Growth

in defense spending was interrupted as outlays registered a substantial
decline from the peak recorded in the fourth quarter of 1981; the decline
was especially pronounced for operations and maintenance activities.

II-20

SELECTED MEASURES OF COMPENSATION, PRODUCTIVITY,
AND COSTS IN THE NONFARM BUSINESS SECTOR

(Seasonally adjusted annual rates)
1981-Q4
to

1981
1980

1981

Feb.

Wage rate measures:
Hourly Earnings Index - production workers1

Total private nonfarm
Manufacturing
Contract construction
Transportation and
public utilities
Trade
Services

9.6

8.4

9.6

8.3

7.3

6.4

10.9
7.6

8.8
8.0

9.3
9.2

9.7
4.9

8.5
8.9

7.6
9.1

8.6
4.9

9.4
8.8

8.6
7.2

9.4
9.6

11.0
7.1

6.8
8.0

7.4
4.2

7.8
4.0

9.5

9.2

9.8

8.5

8.8

9.8

5.8

Employment Cost Index, wages and salaries - all
Total
By Occupation:
White collar
Blue collar
Service Workers
By Bargaining Status:
Union
Nonunion

persons 2

9.0

8.8

10.9

8.8

8.5

6.9

n.a.

8.7
9.6
8.1

9.1
8.6
8.3

11.7
8.8
12.7

8.9
9.3
6.0

7.3
9.5

8.9
6.3

n.a.
n.a.

8.6

5.7

n.a.

10.9

9.6

8.6

10.8

10.4

8.5

n.a.

8.0

8.5

11.8

7.8

7.5

7.0

n.a.

8.2

8.1

n.a.

6.2

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

Compensation measures:
Employment Cost Index, compensation rates - all persons 3

Total

9.8

15.2

7.8

Labor Productivity and Costs - all persons I

Compensation per hour
Output per hour
Unit labor costs

10.1
.2
9.9

9.2
-0.8
10.1

11.7
4.4
7.0

9.6

9.5

1.4
8.1

-1.7
11.5

-6.8
14.0

1. Changes over periods longer than one quarter are measured from final
quarter of preceding period to final quarter of period indicated.
Quarterly changes are at compound rates; monthly changes are not
compounded.
2. Percent change from final month of previous period, compounded.
Seasonal adjustment by FRB staff.
3. Percent change from final month of previous period, compounded. Not
seasonally adjusted; series was introduced in 1980-Q1.

II-21

Commodity Credit Corporation loan activities also declined in February
and early March, following exceptionally high levels in January and
the fourth quarter of last year.
Outlays for a number of income assistance programs also have
remained constant or declined.

Cuts in benefit levels and tighter

eligibility standards enacted in last year's Reconciliation Act have
operated to offset the cyclical tendency for higher spending in these
areas.

However, unemployment compensation payments, which have by far

the greatest cyclical sensitivity, did increase steadily in January and
February, and daily Treasury data indicate additional increases in early
March.

The growth in these reflects the sharp increase in the number of

individuals receiving extended unemployment benefits, from about 40,000
at the end of December to 277,000 for the week ending February 27.

This

rise can be attributed in large part to an increase in the number of
states qualifying for extended benefits from 6 in late December to 29 by
late-March.
On the receipts side of the budget, both corporate and nonwithheld
individual income tax receipts were larger than expected early this year,
probably in response to a rise in the interest rate that the IRS charges
on late payments; this increase, from 12 to 20 percent, became effective
February 1.
The Administration unveiled its FY1983 budget in early February;
this indicated a FY1982 deficit of $99 billion and projected a deficit
of $92 billion for 1983.

The Budget is described in Appendix II-A, which

also discusses Congressional Budget Office estimates and other recent
budget proposals.

II-22

State and Local Government
Real purchases of goods and services by state and local governments appear to have fallen sharply since year end, after leveling off
in the final months of 1981.

Compensation for state and local

employees, which accounts for more than one-half of state and local
spending, probably declined in real terms in the first quarter, reflecting reductions in employment levels in the first two months of the year.
State and local construction decreased 3-1/2 percent in real terms in
January, as spending for water supply and sewer projects fell sharply.
The contraction in overall economic activity is causing budgetary
problems for numerous states.

Twenty-one states report that revenues

during the current fiscal year have fallen short of official forecasts,
which are generally on the conservative side.

More than half the states

expect to conclude the current fiscal year with deficits or only small
surpluses, increasing the chances that taxes will be raised or expenditures reduced in the next few months.
Wages and Labor Costs
Wage inflation has moderated during the past year;

in the first

two months of 1982 the hourly earnings index for production workers was
8 percent above a year earlier, down from a peak twelve-month rise of
nearly 10 percent from early 1980 to early 1981.

In comparison, there

was no appreciable slowing of wage increases in either the 1970 or 1980
recession.

During the 1973-75 recession, the year-over-year rise in the

earnings index moderated by about 2-1/4 percentage points, only slightly
more than the deceleration seen in the past year.

However, wage infla-

tion for white-collar workers, which may be less cyclically sensitive,
remained relatively rapid last year--rising more than 9 percent.

II-23

The recent wage concessions by union and nonunion workers at
financially-troubled firms have not yet had a significant impact on
aggregate wage series, but these new agreements should contribute to a
further slowing of wage increases in the years ahead.

The Teamsters'

settlement provided for wage increases during the next three years
that average less than inflation.

In addition, nonunion employees at

GM and Ford agreed to a pay freeze in 1982, and Ford's union workers
agreed to defer each of three-cost-of-living increases due this year
for 18 months and to eliminate usual annual improvement increases for
the next two years.

A tentative settlement containing wage and benefit

provisions similar to those arranged at Ford appears likely to be
accepted by UAW members at GM as well.
Hourly compensation, the measure of labor costs that most directly
affects prices, also moderated during 1981, despite a large increase in
Social Security taxes; compensation per hour rose 9.2 percent over the
year compared with a 10.1 percent increase over 1980.

However, there

were no productivity gains last year to offset the rise in labor costs.
Output per hour in the nonfarm business sector fell 3/4 percent in 1981,
in large part due to a huge drop at the end of last year.

The fourth

quarter decline was typical of those occurring at early stages of a
downturn when sharp production adjustments exceed cuts in employment.
Prices
Recent price reports indicate a further slowing of inflation
despite a pickup in the rate of increase in food prices.

The CPI rose

only 0.3 percent in January and 0.2 percent in February, while the PPI
for finished goods actually declined 0.1 percent in February after a

II-24

0.4 percent advance the previous month.

Falling prices of petroleum

and its products as well as rebates on motor vehicles have been
important factors in the recent price deceleration.

Nevertheless, the

moderation in other sectors appears significant and quite widespread.
In the energy area, crude petroleum prices dropped 8-1/2 percent
between their peak in February 1981 and January 1982.

This decline,

coupled with weakening demand for refined products, has led to large
reductions in gasoline prices in both January and February, a trend
which is likely to continue into the spring.
In contrast to energy, prices of farm products turned up early
this year, following steep declines through most of 1981; retail food
prices also have risen faster than in the fourth quarter.

Consumer

prices of fresh fruits and vegetables soared in January, as the freeze
in Florida and smaller harvests of some California crops curtailed
supplies; and rose further in February.

Bad weather and planned pro-

duction cutbacks have combined to push livestock prices up considerably
in early 1982, and began to boost prices at the retail level in
February.

Even with the recent upturn, farm product prices remain sub-

stantially below their year-earlier levels.
Outside the food and energy categories, the CPI rise in February
was held down by a drop in new car prices resulting from the widespread
rebates.

The rise in prices of consumer commodities excluding food,

energy, and houses was 0.2 percent in February, following increases
averaging about 0.5 percent in each of the preceding three months.
Prices of consumer services excluding energy and home financing, which
rose sharply throughout most of 1981, increased just 0.5 percent in
February, with the slowing fairly widespread.

RECENT CHANGES IN CONSUMER PRICES 1
(Percentage change at seasonally adjusted annual rates) 2
Relative
importance
Dec. 1981
All items
100.0
Food
16.6
Energy
11.1
Homeownership
26.1
All items less food,
energy, and homeownerships
49.8
Used cars
3.3
Other commodities 3
19.9
Other services 3
26.6
Memorandum:
Experimental CPI 4

100.0

1981

1982
Jan. Feb.

1980

1981

12.4
10.2
18.1
16.5

8.9
4.3
11.9
10.1

8.8
3.8
24.9
9.7

9.1
4.7
.3
10.4

3.4 3.0
8.6 7.2
5.2 -9.8
-.7 4.2

9.9
18.3
8.1
10.3

9.4
20.3
6.1
10.6

8.9
8.3
6.9
9.9

9.9
33.0
5.4
11.2

5.5
3.4
3.5
8.3

4.5
6.3
4.1
6.5

10.8

8.5

8.3

8.8

4.7

1.4

1. Based on index for all urban consumers (CPI-U).
2. Changes are from final month of preceding period to final month of period
indicated; monthly changes at simple annual rates.
3. Includes the home maintenance and repair items of homeownership costs.
4. BLS experimental index for "All items"--CPI-U-X1--which uses a rent
substitution measure for homeownership costs.

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data) 1
Relative
importance
Dec. 1981

1981
1980

1981

1982
Feb.
Jan.
5.2
13.3
-11.3
6.4
4.8

-1.7
5.6
-21.8
2.1
-4.8

Finished goods
Consumer food
Consumer energy
Other consumer goods
Capital equipment

100.0
21.9
12.7
44.5
20.8

11.8
7.5
27.8
10.4
11.4

7.0
1.5
14.3
6.9
9.2

9.9
4.3
27.3
8.1
10.8

4.3
-1.1
2.8
5.9
7.7

Intermediate materials 2
Exc. energy

94.7
77.6

12.4
10.1

7.4
6.7

10.8
8.6

4.0
4.7

3.0
.8

-4.2
.0

Crude Materials
Food
Energy
Other

50.6
33.6
15.8

8.6
26.9
7.5

-14.0
22.9
-11.3

-5.2
48.0
-9.4

-22.0
2.0
-11.4

52.8
-1.5
-40.6

8.3
-5.7
-61.3

1. Changes are from final month of preceding period to final month of
period indicated; monthly changes at simple annual rates.
2. Excludes materials for food manufacturing and animal feeds.

II-26

The homeownership component of the CPI has had little impact on
the overall index in recent months.

After dipping in January, the

house price, measure was up slightly in February.

At the same time, the

CPI measure of the mortgage rate has remained about unchanged since
November.
At the producer level, the index for finished goods excluding
food and energy items rose 0.5 percent in January and was unchanged in
February.

Lower prices for cars and light trucks cut the February rise

by about one percentage point.

Price increases for other items, notably

capital equipment, have slowed from the 1981-Q4 pace.

Prices of inter-

mediate materials excluding food and energy items have practically
leveled off over the last few months, as demand has weakened.

Appendix II-A*
THE FEDERAL BUDGET

Introduction

The Administration's federal budget proposals for fiscal years
1983, 1984, and 1985 were presented to Congress in February.
Projected
budget deficits under laws currently enacted are of unprecedented size.
Consequently, the Administration has proposed substantial further deficitreducing measures to supplement last year's nondefense program reductions.
Several alternative budgetary measures have been proposed by members of
Congress.
In the following section, current services estimates of outlays,
receipts, and the deficit, computed by the Administration and by the Congressional Budget Office (CBO), are presented.
In the final section,
Administration and Congressional proposals to reduce the current services
deficit are discussed.
II.

Current Services Budget

In order to provide a base against which budgetary alternatives
may be assessed, it is useful to have a benchmark that represents what
might happen to the budget if no changes in current laws or policies
were made. The "current services" budget provides such a baseline.
In the construction of this budget, the effects of projected inflation
on receipts and outlays are generally taken into account.
In the case
of discretionary (non-entitlement) programs, as well as formally indexed
programs, cost estimates are usually raised to provide maintenance of
the program levels in real terms. In previous budget projections, the
current services budget (in nominal terms) always showed a tendency to
move quickly into surplus. Revenue growth due to the combination of
relatively high tax rates and a progressive rate structure applied to
nominal incomes outpaced growth of outlays even though these outlays were
In contrast, this year's estiraised in pace with forecast inflation.
mates project rising current services deficits because the Economic
Recovery Tax Act of 1981 will sharply reduce the growth of taxes relative
to previous periods; additionally, the Administration has redefined current services outlays to include proposed increases in defense spending
that are thought necessary to achieve "adequate" levels.
A comparison of current services budgets of the Administration and
CBO is presented in Table 1; a comparison of the economic assumptions
underlying these budgets is found in Table 2. Between FY192 and FY1985,
the Administration and CBO both show current service revenues and outlays
falling as a percentage of GNP. In contrast, the current services deficit
as a percent of GNP rises over the period. This increase results from an
average annual growth in outlays of approximately 10 percent, which exceeds
the average annual growth in revenues of 7 to 8 percent. In the absence
of any subsequent policy changes, the 1983-1985 deficits would be the largest in post-war history, both in absolute terms and as a percentage of
*Prepared by Darrel Cohen, Economist, Government Finance Section, Division
of Research and Statistics.
II-A- 1

II-A-2

Table 1
COMPARISON OF CURRENT SERVICE BUDGETS
(fiscal years)

1982
Admin. CBO

1983 1
Admin.
CBO

-----------------

19841
Admin.
CBO

1985 1
Admin.
CBO

Billions of dollars---- ------------

Revenues

626.4

631

653.3

652

703.8

701

778.3

763

Outlays

727.7

740

799

809

868.6

889

946.3

971

Deficit

101.3

109

145.7

157

164.8

188

168

208

------------------

Percent of GNP---------------------

Revenues

20.3

20.6

19.0

18.6

18.5

18.7

18.3

Outlays

23.6

24.2

23.3

23.6

22.9

23.5

22.7

23.3

Deficit

3.3

3.6

4.2

4.6

4.3

5.0

4.0

5.0

1. The Administration's estimates are for "current services with adequate
defense"; the CBO estimates are a "baseline" that includes growth in
defense outlays only to the extent that it is provided in existing authorizing legislation.

Sources:

Budget of the United States Government, Fiscal Year 1983 and
Congressional Budget Office, Baseline Budget Projections for
Fiscal Years 1983-1987.

II-A-3

TABLE 2
PROJECTIONS OF ECONOMIC ACTIVITY 1
(Calendar year)
1982
Admin.
Gross National Product
current dollars:
Amount ($ billions)
Percent change
(year over year)

1983
CBO

1984

1985

Admin.

CBO

Admin.

CBO

Admin.

CBO

3160

3140

3524

3515

3883

3882

4258

4259

8.1

7.5

11.5

11.9

10.2

10.4

9.7

constant dollars:
Amount ($ billions)
Percent change
(year over year)

0.2

-0.1

5.2

4.41

5.0

3.6

4.7

3.5

Prices (percent change)
GNP deflator (year
over year)

7.9

7.5

6.0

7.3

5.0

6.6

4.7

6.0

CPI (year over year)

7.3

7.5

6.0

6.9

4.6

6.9

4.8

6.4

Unemployment rate (percent)
Yearly average

8.9

7.9

8.0

7.1

7.4

6.4

7.2

Interest rate, 91-day Treas.
11.7
(calendar average)

12.0

10.5

13.2

9.5

11.31

8.5

9.4

1. The Administration numbers for 1982 and 1983 represent forecasts for that
period while those for 1984 and 1985 are n ot forecasts but projections consistent
with economic policy objectives that assume steady progress in reducing unemployment, inflation, and interest rates. A si milar caveat also applies to the CBO
numbers.

II-A-4

GNP. As a result, the Administration and numerous Congressional members
have proposed substantial deficit-reducing measures.
III.

Alternative Budget Initiatives

The Administration's deficit reducing initiatives are summarized in
Table 3. On the revenue side, taxes are increased primarily through
proprosals such as a new corporate minimum tax and elimination of completed
contract accounting (in which contractors may defer tax on income until
the year that the contract is completed even when income is received
throughout the term of the contract).
In addition, there are proposals
to tighten the collection and the enforcement of existing taxes, such as
withholding on dividends and interest.
Outlay reductions (relative to a current services baseline) are
three to four times larger than the tax increases. Major outlay savings
are proposed through entitlement reform; this category includes sizable
reductions in cash assistance for food stamps and AFDC, civil service
and railroad retirement, and medicare reimbursements to physicians and
hospitals. Management initiatives such as accelerated Outer Continental
Shelf oil leasing and federal pay restraint also result in large outlay
savings. Reductions in discretionary programs relating to transportation,
job training, education, and energy research are another source of outlay
savings.
The Administration's proposed budgets, which include the effects of
these initiatives, are shown in Table 4. Outlays in nominal terms would
grow at an average annual rate of over six percent between FY1982 and
FY1985; this is roughly half the average annual rate of growth in outlays
over the past decade. In addition, the composition of outlays is changed.
Between FY1982 and FY1985, for example, defense spending rises from 25
to 33 percent of the budget, while the share of all programs other than
defense, social security, medicaid, medicare, and interest falls. Budget
receipts are projected to grow at an average annual rate of 8.0 percent
between FY1982 and FY1985 in contrast to an annual rate of growth of
11.5 percent during the decade prior to 1982. This growth over the past
decade has been associated with rising social insurance contributions
and individual income taxes as a share of total receipts and with a
declining share accounted for by corporate income taxes. In contrast,
in the new proposals social insurance contributions and individual income
taxes together are projected to fall as a share of total receipts (as
personal income tax cuts outweigh the future increases in social insurance
contributions) and corporate income taxes are projected to rise between
FY1982 and FY1985 when corporate profits are projected to grow strongly.
The large absolute size of the Administration's prospective budget
deficits has lead to the proposal of numerous alternative deficit-reducing
measures by members of Congress. On the revenue side, there have been
recommendations to change provisions of existing tax legislation perceived
as "loop-holes" and to modify or roll back those of the recently-enacted
Economic Recovery Tax Act of 1981. On the outlay side, proposals generally have focused on reducing the Administration's proposed rate of

II-A-5

TABLE 3
ADMINISTRATION BUDGET INITIATIVES1
(Effects on unified budget surplus in billions of dollars)

II.

1982

1983

1984

1985

7.2

13.5

REVENUE RAISING PROPOSALS
IN 1983 BUDGET
A.

Tax Revisions

Improved collection and
Enforcement

5.5

4.7

Other Initiatives (net)

Total of Receipts proposals

12.8

19.3

18.3

Memo: Effect of 1981 Tax Act

-38.3

-91.6

-139.0

-176.7

1.4

12.8

18.1

23.0

1.2

2.1

2.2

NONDEFENSE SPENDING INITIATIVES
IN 1983 BUDGET
A.

Entitlement reforms

User fees (negative outlays)

Discretionary Programs

14.2

26.1

35.3

Management Initiatives

1.1

14.8

18.5

19.2

Proposed Spending Increases

-0.2

-1.8

-2.1

-2.7

Total Spending Initiatives

2.4

41.2

62.6

77.8

Memo: Outlays enacted in 1981

27.1

45.0

47.5

48.0

96.0

III. NET EFFECT OF NONDEFENSE INITIATIVES
IN 1983 BUDGET
A.

1983 Budget initiatives

2.7

54.0

81.9

1983 initiatives plus
those enacted in 1981

-8.5

+7.4

-9.6

-32.6

1. Changes from "current services with adequate defense" baseline. Minus
sign denotes increase in the deficit; direct effects not taking into
account any second round effects on either aggregate demand or supply.
NOTE: Details may not add to totals due to rounding.

II-A-6

Table 4
ADMINISTRATION UNIFIED BUDGET
(Billions of dollars)

FY1982

FY1983

FY1984

FY1985

Outlays:
Current services outlays
Proposed net savings
Total

727.7
-2.4
725.3

799.0
-41.2
757.6

868.6
-62.6
805.9

946.3
-77.8
868.5

Receipts:
Current services receipts
Proposed net increases
Total

626.4
0.3
626.8

653.3
12.8
666.1

703.8
19.3
723.0

778.3
18.3
796.6

101.2

145.6

164.8

168.0

-2.7
98.6

-54.0
91.5

-81.9
82.9

-96.1
71.9

Deficit:
Current services deficit
Net deficit-reducing
proposals
Total
Source:

Budget of the United States Government, Fiscal Year 1983.

II-A-7

increase in defense spending and limiting cost-of-living adjustments for
entitlement programs. For example, Senators Domenici and Hollings both
have proposed to suspend, for 1982, the cost-of-living adjustment for
entitlement programs as well as to cap future inflation adjustments for
social security.
Both have also proposed to keep the growth rate of
real defense outlays below that contained in the Administration's budget.
On the receipts side, Senator Domenici has proposed the closing of tax
loopholes, while Senator Hollings has focused on scaling back the tax
cuts passed last year.
Senator Dole has also suggested modifications
to last year's tax bill as well as the tightening of several other
features of the existing tax code. Debate on these and other proposals
may crystalize in the next few months in light of April 15 deadline,
imposed by the Budget Act, for the First Concurrent Congressional Budget
Resolution and the expected May or June date for extension of the public
debt ceiling.

III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS
(Percent)
1I91
Nov.-Dec.

1982
Intermtg.
Mar. 23
Low

Change from:
Nov.-Dec.
FOMC
Feb. 2
Lows

Highs

Lows

ONC
Feb. 2

Federal funds 2

20.06

12.04

14.77

13.86

14.66p

2.62

-. 11

Treasury bills
3-month
6-month
1-year

17.01
15.93
15.21

9.94
10.34
10.42

13.61
13.59
13.10

12.00
12.20
11.99

12.53
12.63
12.40

2.59
2.29
1.98

-1.08

18.63
18.29

11.17
11.04

14.91
14.65

13.30
13.15

13.81
13.67

2.64
2.63

-1.10

18.90
19.01
18.50

11.16
11.23
11.64

14.87
15.03
15.23

13.43
13.40
13.34

14.05
14.10
14.06

2.89
2.87
2.42

-.82
-.93
-1.17

19.80
19.56

11.86
12.16

14.84
15.24

14.34
14.41

14.88
14.95

3.02
2.79

.04
-.29

Bank prime rate
Treasury bill futures

21.50

15.75

16.50

.75

June 1982 contract
Dec. 1982 contract

14.46
14.20

10.58
11.07

13.86
13.93

12.03
12.43

12.41
12.75

1.83

-1.45

1.68

-1.18

13.70
13.59
13.35

14.09
13.72
13.36

1.55
.80
.60

-.60
-.75
-.90

1.56

-.16

Short-term rates

Commercial paper
1-month
3-month
Large negotiable CDs3
1-month
3-month
6-month
Eurodollar deposits
1-month
3-month

-.96

-.70

-.98

Intermediate- and longterm rates
U.S. Treasury (constant maturity)

3-year

16.59

12.54

10-year

15.84

12.92

30-year

15.20

12.76

14.69
14.47
14.26

Municipal (Bond Buyer)

13.44

11.43

13.154

12.53

12.994

Corporate--Aaa utility
Recently offered

17.72

14.52

1 5 .7 8 e

15.15

1 5 .0 0 e

18.63
1981

16.90

17.595
1982

17.19

-. 47
.22
17.125
Percent change from:

-.78

S&L fixed-rate mort-

gage commitment

Highs

FOMC
Feb. 2

Intermtg.
Low

1,024.05

852.55

795.47

Mar.

1981
Highs

FOMC
Feb. 2

-19.3

-3.0

Stock Prices

Dow-Jones Industrial

826.67

-4.2
-17.5
65.30
62.03
68.17
79.14
NYSE Composite
-9.3
-31.1
262.15
244.66
288.98
380.36
AMEX Composite
-6.7
-21.7
174.95
167.92
187.46
223.47
NASDAQ (OTC)
4. One-day quotes for preceding Thursday.
1. One-day quotes except as noted.
2. Averages for statement week closest to date shown. 5. One-day quotes for preceding Friday.
3. Secondary market.
e--estimated.
P--preliminary.

DOMESTIC FINANCIAL DEVELOPMENTS

M1 declined somewhat in February,

following three months of excep-

tional strength; growth in M2 and M3 slowed appreciably. The aggregates
have firmed in early March,

however,

and depository institution reserve

positions have eased only moderately on balance since the last FOMC meeting.
Over the intermeeting period, most short-term rates have fallen on
net by 3/4 to slightly more 1 percentage point and most long-term rates by
a little less.

Even with these declines, short-term interest rates remain

2 to 3, and long-term rate 1/2 to 1-1/2, percentage points above the lows
reached last fall.

Market participants evidently remain concerned about

the possibility that, especially as the economy begins to recover, money
demands will press hard against supplies restrained by Federal Reserve
policy.

Meanwhile, concerns about the impact of prospective large federal

deficits are weighing heavily on investor sentiment in the intermediateand long-term debt markets.
Weak cash flows have sustained business financing requirements even
as capital outlays--especially on inventories--have slackened.

In response

to continued high long-term rates, firms have concentrated their borrowing
in short-term markets, primarily from commercial banks, and have not begun
to repair their balance sheets as they typically do at this stage of an
economic cycle.

Federal borrowing has remained heavy in the first quarter

but, owing to a smaller than projected deficit, has been less than anticipated earlier; state and local government borrowing has moderated a bit
from the fourth quarter of last year.

Consumer credit remained sluggish

in January and probably again in February, but households may have stepped
III-1

MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)1
1981
02

1992

Dec.

Jan.

OLV.
Feb.

'81

to
Feb. '82

--Percentage change at annual races-Money stock measures
1. Ml
M2
2.
3. !3

0.3
8.3
11.2

5.7
8.8
9.2

12.4
8.4
7.3

4.7

4.3

12.8

21.0
12.2
8.8

-3.7
4.1
5.6

6.8

7.8

8.2

Selected components

Currency

Demand deposits

-11.0

-7.5

-0.2

3.6

14.7

-24.1

-2.4

Other checkable deposits

108.5

21.2

27.6

36.9

63.9

40.0

50.5

M2 minus Ml (8+9+10+13)

12.9

10.9

9.9

7.2

9.4

6.6

8.6

49.2

14.9

-44.1

35.7

163.8

-5.5

64.7

91.2
7.8
-22.7
24.3
1.2
-22.9
11.4

74.0
10.3
-11.9
20.8
1.5
-11.7
6.6

11.1
10.0
16.3

30.6
32.5
22.2

3.6
0.2
19.5

-0.8
-4.4
20.8

64.0
-1.1

69.0
-30.8

132.8
0.0

63.8
-6.7

7.9

Overnight RPs and Eurodollars, NSA

General purpose and broker/dealer'
money market mutual fund shares,NSA
Commercial banks
savings deposits
small time deposits
Thrift institutions
savings deposits
small time deposits

10.
11.
12.
13.
14.
15.

Large time deposits
3
at commercial banks, net
at thrift institutions
Institutions-only money market
mutual fund shares, NSA
Term RPs, NSA

125.7
7.2
-8.9
16.2
2.3
-7.0
6.3

-Average
MEMORANDA:
21. Manged liabilities at commercial
banks (22+23)
4
(Adjusted for shifts to IBFs)
Large time deposits, gross
22.
4
(Adjusted for shifts to IBFs)
23.
Nondeposit funds
4
(Adjusted for shifts to IBFs)
24
Net due to related foreign
institutions, NSA
4
(Adjusted for shifts to IBFS)
Other 5
25.
4
(Adjusted for shifts to IBFs)
26.

U.S. government deposits at commercial
6
banks

2.3
0.7
1.6

6.0
7.4
-1.4

0.8

-0.2

1.0

-2.4

-0.7

3.2
-2.5
5.3

9.2
5.9
24.3
-42.7
-98.3

19.8
19.4
21.6
-73.8
18.5

-15.1
-20.7

monthly change in billions of dollars--

-7.2
(0.2)
-0.2
(-0.2)
-7.0

(0.4)
0.8

7.8
11.6
S0.8
16.1

-9.1

-16.9

(5.7)

1.1

(1.4)

0.6

0.3

2.7

(0.8)
-17.5
(4.9)

(0.8)

(2.7)
-1.6
(-1.3)

21.8

(-2.2)
2.1

(-1.1)
4.4

(2.7)

(6.1)

0.8

-8.8

(-1.1)

-0.3

-9.1

(-1.9)
-11.1

(-4.6)
2.0
(2.7)
1.7

O.5
(1.1)
-2.4

(-2.4)
6.3

-6.5
(1.2)
1.0
(1.2)
-7.5
(0.0)
-8.4
(-1.5)
1.0
(1.6)
2.7

Dollar amounts shown under memoranda for
1. Quarterly growth rates are computed on a quarterly average basis.
quarterly and year over year changes are calculated on an end-month-of-quarter basis.
2. Overnight and continuing contract RPs issued to the nonbank public by commercial banks, net of amounts held
by money market mutual funds, plus overnight Eurodollar deposits issued by Caribbean branches of U.S. member
RPs, which are in the small time deposit components.
banks to U.S. nonbank customers. Excludes retail
3. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
to
4. Numbers in parentheses have been adjusted to remove the effects of shifts of assets and liabilities
International Banking Facilities (IBFs).
5. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities
for borrowed money (including borrowings from the
sold under agreements to repurchase and other liabilities
Federal Reserve and unaffiliated foreign banks), loans sold to affiliates, loan RPs and other minor items.
Changes since October 1980 are partially estimated.
6. Consists of Treasury demand deposits at commercial banks and Treasury note balance.

III-3

up their borrowing slightly in the home mortgage market.

Throughout the

private financial markets, signs of further erosion of credit quality and
financial strains continue to accumulate.
Monetary Aggregates and Bank Credit
M1 contracted in February at a 3-3/4 percent annual rate, offsetting
a small part of the November-to-January surge.

The decline last month was

concentrated in demand deposits; indeed, such accounts ran off at an extraordinary 24 percent annual rate, more than erasing the gain of the preceding few months.

A temporary draining of demand deposits may have occurred

in connection with the large increase in the Treasury cash balance in late
January and early February.

Seasonally adjusted inflows to other checkable

deposits slowed in February but showed no sign of reversing their recent
strength.1
Data available for M1 through mid-March point toward small--but positive--growth for the month. 2

For the first quarter as a whole, M1 expansion

is likely to be on the order of 10 percent at an annual rate, well above
that suggested by historical relationships among narrow money, economic activity, and interest rates.

The reasons for the recent gyration in M1 are

not much clearer today than they were at the time of the last Greenbook; it
still seems likely that demands for highly liquid balances were boosted for
1. The surge in other checkable deposits between November and February was
not associated with an increase in the rate of new accounts opened; the number of accounts grew during that period at about the same moderate pace as
in the preceding three months, according to survey data for commercial banks.
2. Recent weakness in narrow money does not appear to be related to increased
A survey by Reserve Bank staff taken around mid-March
use of deposit sweeps.
suggests that as yet only a handful of institutions offer deposit sweeping
arrangements, despite considerable publicity in trade publications. Many
institutions have been approached by vendors of sweeping services and reportedly are considering the service very seriously.

III-4

a while by concerns that interest rates might retrace some of their earlier
decline, and perhaps by other economic uncertainties.
M2 growth also slowed considerably in February, but data for early
March suggest a substantial pickup.

At 4 percent, the annual rate of M2

expansion last month was the weakest in more than a year.

The slowdown

reflected primarily the drop in M1; however, growth in the nontransaction
component of M2 decelerated to a relatively sluggish 6-1/2 percent annual
rate.
Inflows to general purpose and broker/dealer money market mutual
funds decelerated further in February as average money fund yields remained below market rates.

Normal lags in recorded funds returns explain

this relationship in part; in addition, money funds have pursued a more
cautious investment strategy since late last year, increasing relative
holdings of Treasury securities at the expense primarily of higher-yielding commercial paper.

There are, furthermore, indications that tax-exempt

money funds (not included in the monetary aggregates) have been drawing
cash from the taxable money funds, owing to favorable after-tax yield comparisons.
The overnight RP component of M2 leveled off in February, perhaps
because of restrictions on available collateral associated with the runup in U.S. government deposits; overnight Eurodollar deposits contracted.
Growth of savings and small time deposits speeded up after January.
Savings deposits declined a bit in February after rising in the preceding three months when other liquid balances also were strong, but the decline in savings flows was more than offset by a jump in small time deposits.

A good deal of the more rapid growth in small time deposits came from

III-5

a resurgence in MMC inflows in February, when their ceilings reached a
four-month peak.

Inflows into ceiling-free IRA and Keogh accounts, which

had attracted a considerable volume of funds in January when IRA eligibility was broadened, also remained sizable in February.

These accounts

totaled $5 billion at month-end, almost evenly divided between commercial
banks and thrift institutions. 1
Overall, however, commercial banks continued to post stronger retail
deposit flows than thrift institutions.

This trend emerged in 1979 after

the differential on MMC ceiling rates was effectively removed, but the gap
between bank and thrift retail deposit growth rates widened in 1981 when
the thrifts' earnings difficulties became widely publicized. 2
M3 growth also slowed in February, reflecting weakness in M2 only
partially offset by an acceleration in its non-M2 component.

While insti-

tution-only money fund balances ran off slightly faster in February than
in the previous month, term RPs resumed growth and the large time deposit
component of M3 strengthened considerably.

As bank lending picked up and

core deposit growth slowed, banks issued substantially more large time
1. Commercial banks and MSBs on average have been pricing ceiling-free IRA/
Keogh accounts about in line with open market yields on U.S. government
obligations of comparable maturity. Very little information is available
on S&L pricing of these accounts.
2. In 1981, FSLIC-insured S&Ls lost $4.7 billion after tax (-.74 percent of
average assets). One S&L was liquidated and 100 mergers were supervised by
the FSLIC; 23 of these mergers required financial assistance. Similarly,
FDIC-insured MSBs lost an estimated $1.4 billion after tax in 1981 (-.91
percent of average assets). Because of the somewhat stronger capital position of MSBs, only 14 mutual savings banks were merged with stronger institutions in 1981.
In contrast, insured commercial banks in the aggregate posted continued
strong profitability during 1981, with after-tax earnings of .76 percent
of average assets. Like thrifts, small banks--with assets below $100 million--experienced a rapid increase in interest expense associated with
their changing deposit mix; but in 1981 small banks acquired sufficient
money-market and variable-rate assets to maintain after-tax returns in
excess of one percent of average assets.

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)1
____

___~

1982

1981

Dec.

Jan.

Feb.

QIV '81
to
Feb. '82

10.5
(11.5)

3.2
(10.2)

--Commercial Bank Credit-1.

Total loans and investments
2
at banks
(Adjusted for shifts to

7.2

Treasury securities

Other securities

Total loans

(Adjusted for shifts to IBFs)
6.

IBFs)

-.1
(6.7)

4.6

-9.2
(11.0)

4.3
(10.5)

3.9

12.6

5.5

(5.3)

(13.6)

(5.2)

(7.6)

-8.1

6.5

35.7

10.5

14.4

7.0

13.5

-12.0

4.0

7.2

10.8
(11.5)

2.6
(4.7)

1.6
(3.1)

3.1
(2.6)

3.6
(4.3)

12.2

9.1

-1.7
(7.2)

-13.7
(12.9)

1.2
(9.5)

12.5
(13.7)

1.9
(11.1)

16.6

17.9

-2.1
(9.7)

-15.8
(19.4)

8.3

17.2

(17.4)

(17.5)

Business loans
(Adjusted for shifts to

6.8

investments

10.9
IBFs)

4.8

(16.0)

Security loans

28.6

-36.2

58.6

51.4

-71.2

11.7

0.0

Real estate loans

10.8

8.0

7.0

10.2

7.6

7.9

8.0

Consumer loans

1.3

4.4

-- Short10.

Total short- and intermediateterm business credit (sum of
lines 14, 15 and 16)

20.2

23.3

12.

13.

5.
6.

usiness loans net of bankers
acceptances
3
(Adjusted for shifts to IBFs)

16.2

Commercial paper issued by non4
financial firms
Sum of line 11 & 12
(Adjusted for shifts to IBFs)

Line 13 plus loans at foreign
5
branches
3
(Adjusted for shifts to IBFs)
Finance company loans to business 6
Total bankers acceptances outstanding

19.7

47.6

57.9

19.6

24.1

4.5

-1.3

and Intermediate-Term Business Credit--

6.5

(14.1)
11.

9.8

-3.0

6.4

(19.6)

(12.3)

-2.4

-16.8

(9.8)

(19.5)

21.3

25.3

-11.4

n.a.

9.6

16.9

5.2

(18.5)

(17.3)

(16.5)

2.3

47.2

26.9

8.6

20.9

7.9

(11.3)

(20.2)

(16.5)

(21.1)

(17.8)

8.3
(16.2)

20.2
(20.2)

8.6
(18.3)

19.3

25.9

4.1
(14.5)

-8.8
(21.9)

19.3

14.7

7.6

7.5

26.6

16.6

20.9

19.6

1.8

n.a.

1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. 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.
3.
Numbers in parentheses have been adjusted to remove the effects of shifts of assets and liabilities
to
International Banking Facilities (IBFs).
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.
n.a.--not available.

III-7

deposits; with Treasury balances having increased sharply, bank nondeposit
managed liabilities contracted.
Faster growth in loans fueled the acceleration in bank credit, which
expanded at an 11-1/2 percent annual rate after adjustment for the minor
estimated shifts of assets from domestic banking offices to International
Banking Facilities.

Consumer loans contracted during the month, but real

estate and security loans expanded.

Business lending activity continued

particularly brisk.
Business Finance
The total volume of funds raised from external sources by nonfinancial businesses has continued to be sizable thus far this year, though it
appears to be somewhat smaller than in the second half of 1981.

During

January and February the bulk of funds was raised in short-term markets-primarily through borrowing at commercial banks and sales of commercial
paper--as domestic bond issuance was depressed by the high level of longterm interest rates and equity issuance slowed in response to falling stock
prices. 1

In early March, however, public bond offerings picked up as bond

rates fell, and borrowing from large banks appeared to have moderated.

Al-

though the most common domestic public corporate offering continues to be
intermediate-maturity fixed-rate debt, several financial corporations recently have sold variable-rate issues in the public market.

Variable-rate

obligations had been out of favor among most potential public issuers since
1979, but they represented 10 percent of all direct placement commitments
made by life insurance companies during 1981.
1. U.S. corporations issued an average of about $1 billion per month in
Euro-market bonds this quarter, primarily in the form of zero-coupon obligations marketed in January and early February. Fourth quarter Euro-market
borrowing averaged $.7 billion per month.

III-8
GROSS OFFERINGS OF CORPORATE SECURITIES IN DOMESTIC MARKETS
(Monthly totals or monthly averages, millions of dollars)

1982

1981
Year

----------Corporate securities--total
Publicly offered bonds 1
Privately placed bonds
Stocks

5,758
3,134
582
2,042

---------Publicly offered bonds--total1
By industry
Utility
Industrial
Financial
By quality 2
Aaa and Aa
A and Baa
Less than Baa 3

Mar.

Seasonally adjusted -----------4,252
1,791
628
1,833

7,544
5,645
235
1,664

2,634
690
333
1,611

2,910
1,500
500
910

4,775
3,300
500
975

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

3,134

1,676

4,223

561

1,000

1,079
1,192
863

960
345
371

958
1,751
1,514

159
317
85

300
200
500

1,182
1,448
504

685
627
364

1,882
1,772
569

30
261
270

300
500
200

Memo items:
Convertible bonds
Original discount bonds
Par value
Gross proceeds
Stocks--total
By industry
Utility
Industrial
Financial

Feb.

Jan.

150

3,500

410
191

1,478
677

0
0

125
47

2,042

1,679

1,730

1,511

1,000

660
1,018
364

577
700
402

540
754
436

p--preliminary.
f--forecast.
1. Total reflects gross proceeds rather than par value of original discount
bonds.
Bonds categorized according to Hoody's bond ratings.
Includes issues not rated by Moody's.

III-9

In late March, the Board's series on recently offered Aaa utility
bonds stood at 15.00 percent, down 78 basis points from early February
and less than 3 percentage points from its all-time high last September.
In view of the persistence of historically high rates, the extent of
debt funding in long-term markets has been light relative to comparable
stages of previous economic contractions.

Businesses have preferred

short maturities or flexible terms in their loan agreements.

At large

domestically chartered commercial banks, term loans have declined as a
share of total business loans.

Recent survey results link this decline

to greater use of revolving credit arrangements, largely reflecting bank
accommodation of borrowers seeking assured financing terms while maintaining the flexibility to shift to the long-term markets when condtions improve. 1
The major composite stock indexes have fallen 4 to 9 percent since
early February and recently reached their lowest levels since the spring
of 1980.

The erosion in common stock values has been widespread, but the

fall in prices has been especially steep for oil-related companies.

Owing

to the weakness of the equity market, stock issuance remained depressed
in February and so far in March.

In the first quarter, gross new offer-

ings are expected to average little more than half the average monthly
pace of 1981.

Net stock issuance was negative for the fourth quarter in

a row as merger-related retirements continued to be large.
Evidence of financial stress in the corporate sector continues to
accumulate.

Preliminary data for early 1982 suggest that business failures

1. The results of the February Senior Loan Officer Opinion Survey are discussed in more detail in the appendix.

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

FY81

1981
Q4

1982
Mar.f
Q1f

Q2f

-15.0

-19.1

-26.0

-7.4

Feb.e

Treasury financing

Combined surplus/deficit(-)

-78.9

-51.8

Means of financing deficit:
(1) Net cash borrowing
from the public
Marketable borrowings/
repayments(-)
Bills
Coupons
Nonmarketable
(2) Decrease in the cash
balance
(3) Other means of finance 2
Federally sponsored credit
agencies net cash borrowing 3

e--estimated.

79.4

35.6

10.7

10.1

30.6

12.6

89.5
23.5
66.0
-10.1

37.4
21.6
15.8
-1.8

11.1
3.5
7.6
-.4

9.8
2.1
7.7
.3

31.3
11.1
20.2
-.7

15.2
-2.4
17.6
-2.6

2.3

6.7

4.0

-2.8

9.5

-.2

1.7

37.5

.5
-5.1

1.9

-3.5
-1.7

6.5

f--forecast.

1. Numbers reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Includes debt of Federal Home Loan Banks, the Federal Home Loan Mortgage
Corporation, Federal National Mortgage Association, the Federal Farm Credit
Bank System, and the Student Loan Marketing Administration.

III-11

adjusted for business population may well exceed the postwar peak reached
in 1961.

The number of downgradings of corporate bonds has increased and

in recent weeks some major U.S. corporations have been affected.1

There

also have been more downgradings of commercial paper issuers, some of whom
recently have utilized their commercial bank lines of credit. 2

Many cor-

porations have cut dividend rates in order to conserve cash resources.
Yield spreads between higher- and lower-rated corporate bonds, which have
been above normal for some time, have not widened recently; however, that
stability may simply reflect the promptness of changes by the rating agencies.
Commercial banks report a further weakening in the financial condition of their business loan customers.

More than two-thirds of large banks

surveyed in February indicated a deterioration since November in the financial condition of businesses to which they had loans outstanding.

National

banks--particularly those on the west coast and in the Chicago district-showed an increase in the fraction of their domestic-office business loans
"past due" in their year-end reports of condition.
Government Finance
Federal Sector.

The Treasury's first-quarter combined deficit is

expected to be about $26 billion.

This is somewhat below the Treasury's

1. Dow Chemical, Ford Motor, Ford Motor Credit, Gulf States Utilities,
Phelps Dodge, AMAX, American Motors, Montgomery Ward, and Carter Hawley
Hale Stores have suffered meaningful reductions in bond ratings by major
rating agencies. All of the affected nonfinancial firms recently have
reported either significantly lower profits or continuing large losses.
In addition, BankAmerica, Chase Manhattan, Chemical Bank, Citicorp, Continental Illinois, First Bank System, Manufacturers Hanover, Mellon,
National City Corporation and Northwestern Bancorporation all had their
senior debt downgraded to Aa by Moody's; their commercial paper ratings
were unaffected.
2. Ford Motor Credit Company is the most prominent issuer to have been
downgraded.

III-12

earlier estimate because tax receipts have been higher than expected and
expenditures have slowed temporarily.

By the end of the month, the Trea-

sury will have borrowed about $31 billion in the market in order to finance
its first-quarter deficit, $10 billion less than had been announced late
in January.

As of the end of February, the Treasury had already borrowed

nearly $22 billion--$9 billion in bills and $12.5 billion in coupon issues.
In March the Treasury is expected to borrow another $2 billion in bills and
almost $8 billion in coupons.
Additional bond financing may not be possible soon, since the Treasury has exhausted its exemption from the 4-1/4 percent ceiling on coupon
issues over 10 years and Congress is not expected to authorize another
exemption until later in the spring.

As a result, the Treasury increased

the amount of new cash raised at its mid-March auctions of 2- and 4-year
notes.
Federally sponsored credit agencies are expected to borrow only about
$2 billion in the first quarter as borrowing by the major agencies continues
to be weak.

FNMA's borrowing dropped to about $700 million.

The Federal

Farm Credit Banks are expected to borrow only about $500 million in the
first quarter, as farmers have turned to Commodity Credit Corporation loans
carrying more favorable interest-rate terms (in addition to the price-support feature) than loans from Farm Credit Banks.

Although the Federal Home

Loan Banks raised less than $300 million in the first quarter, this borrowing occurred in a period in which this agency usually pays down its outstanding debt.

Finally, the Student Loan Marketing Administration, which

no longer will borrow from the Federal Financing Bank, is estimated to have
borrowed $450 million in the first quarter.

III-13

State and Local Sector.
curities in March is
the volume sold in

Gross issuance of long-term municipal se-

estimated at $3-3/4 billion (s.a.), which is below

January and February.

Revenue securities continued

to account for about 70 percent of this total; most of the proceeds were
and by hospitals.

used by utilities

In the short-term sector,

the net

volume to date this year is about equal to the brisk pace in 1981, but
the gross volume has increased largely because maturities on H.U.D.

pro-

ject notes have been shortened.
STATE & LOCAL GOVERNMENT SECURITY OFFERINGS
(Monthly averages, billions of dollars)
1982

1981
Year

-----------6.70
3.90
2.80

Total
Long-term
Short-term

----

Total
Long-term
Housing bonds
Short-term
e--estimate.

Jan.

Feb.

Mar.

Seasonally adjusted ------6.40
3.50
2.90
-----

8.30
4.30
4.00

8.20
5.00
3.20

8.20
4.90
3.30

6.90
3.70
3.20

Not seasonally adjusted -----

6.70
3.90

6.40
3.40

7.50
4.50

6.10
3.70

6.20
3.30

6.80
4.20

.40
2.80

.25
3.00

.60
3.00

.10
2.40

.15
2.90

.50
2.60

f--forecast.

Rates on long-term municipal obligati ons receded during February and
early March, but have risen in the past cou ple of weeks.

The Bond Buyer

general obligation index--at 12.99 percent- -is only fractionally below its
level at the time of the last FOMC meeting.

Short-term rates have remain-

ed essentially constant at 7-1/2 percent over the intermeeting period.

contrast to the taxable market, the yield curve continues to be steeply upward sloping, reflecting strong preferences for short maturities by insti-

III-14
NET CHANGE IN MORTGAGE DEBT OUTSTANDING
(Seasonally adjusted annual rates, in billions of dollars)
1980
Mortgage debt

1981
Q3
Q2

Q4e

146
106
41

77
52
25

119
97
22

134
103
31

113
80
33

112
75
37

91
59
33

71
44
28

26
28
1
17
11
20
3
40

10
3
*
13
7
17
2
24

14
41
-1
11
3
18
4
29

24
41
1
9
7
15
2
35

21
33
1
10
*
15
2
31

28
25
-1
9
1
17
3
30

25
10
-1
8
8
10
1
30

16
-5
-2
5
6
6
6
36

By type of debt
Total
Residential
Other1
By type of holder
Commercial banks
Savings and loans
Mutual savings banks
Life insurance companies
FNMA and GNMA
GNMA mortgage pools
FHLMC and FHLMC pools
Other 2

1. Includes commercial and other nonresidential as well as farm properties.
2. Includes mortgage companies, real estate investment trusts, state and local
government credit agencies, state and local government retirement funds, noninsured pension funds, credit unions, Farmers Home Administration and Farmers
Home pools, Federal Land Banks, Federal Housing Administration, Veterans
Administration, and individuals.
e--Partially estimated. *--Between $0.5 billion and $-0.5 billion.

III-15

tutional investors, including commercial banks and the rapidly expanding
tax-exempt money funds.
Most measures of quality spreads in the tax-exempt market place risk
premiums between prime- and medium-grade general obligations at around 100
basis points--about the same as the relatively wide monthly average of the
second half of 1981 but well below the records set in 1976.

Depressed

economic activity and decreased revenues have prompted downgradings on general obligations of two states and one major city thus far in 1982.

Since

the beginning of 1980 there have been 17 such downgradings, representing a
significant deterioration in the standing of major issuers of general obligation debt.
Mortgage Markets
Mortgage lending activity remains weak but probably has increased
from the depressed fourth quarter pace.

Mortgage holdings of S&Ls increased

slightly in January after three months of attrition, and those of commercial
banks increased faster in January and February than in the fall.
Creative financing techniques--not fully captured in the reported
data--have become more commonplace in recent months.

On the basis of a

January survey of its members, the National Association of Realtors (NAR)
estimates that creative financing techniques were used in about 70 percent
of existing-home sales, up from 60 percent in October and 50 percent last
April. Assumptions of seasoned first mortgages combined with seller-financed
second mortgages continued to be the most frequently used creative technique in existing-home sales. 1
1. The NAR for the first time asked its members to describe the terms on
second mortgages in their most recent transactions involving such financing. For second mortgages provided by sellers, NAR members (contd.)

III-16

Activity in secondary markets for mortgage loans has strengthened
a bit since the last FOMC meeting, and may account for reports by mortgage bankers that the supply of funds for both conventional and FHA/VA
mortgage lending appeared to be loosening in late February and early
March.

FHLMC auction-based commitment activity increased in late Febru-

ary and early March, with the agency continuing to accept all of the
limited volume of offerings of conventional mortgages.
ty slackened again in mid-March.

However, activi-

Issuance of FHLMC-guaranteed mortgage

passthrough securities stepped up in January to its fastest monthly pace
ever; issuance of GNMA-guaranteed passthroughs grew slightly in February.
A considerable portion of FHLMC activity apparently consisted of recently introduced swaps of agency securities for low-rate mortgages. 1

These

swaps reduce the level of mortgage holdings reported by the participating lenders and thus cause an understatement of the net volume of lending actually accomplished by these institutions.
Primary market mortgage interest rates declined in late February
through mid-March.

The average contract interest rate on new commit-

ments for fixed-rate, level-payment conventional home loans at a sample
(contd.) reported a median interest rate of 11-3/4 percent--more than 5
percentage points below prevailing market commitment rates--a median term
of five years, an average loan-to-value ratio of 21 percent, and balloon
payments at maturity in more than three-fourths of the mortgages. Just
7 percent of home sellers planned to sell the second mortgages, according
to NAR respondents.
1. Since late last year, S&Ls and certain other mortgage investors have
swapped a large volume of low-rate conventional home mortgage loans for
somewhat lower-yielding securities backed up by the mortgages and underwritten by FHLMC or FNMA. These securities can be used by S&Ls as collateral for borrowing via repurchase agreements. The amount of swaps
arranged under these new programs has thus far exceeded $15 billion-more than $10 billion by FHLMC and about $5 billion by FNMA. Additional
swap volume seems likely, especially as FHLMC liberalized operating procedures, effective March 1, for its so-called "guarantor program."

III-17

of S&Ls was 17.12 percent around mid-March, 47 basis points lower than
at the last FOMC meeting. As the decline in market rates trimmed discounts on FHA/VA home mortgages, the ceiling rate on such fixed-rate
loans was reduced a full percentage point to 15-1/2 percent, effective
March 2.
In early February, as in January, almost 40 percent of the limited
number of conventional home mortgages closed by major institutional
lenders bore adjustable rate features. For this yield flexibility, lenders reportedly were willing to forgo initially around 50 basis points relative to yields on fixed-rate level-payment loans.
Consumer Credit
Consumer installment credit expanded in January at a 1-1/2 percent
seasonally adjusted annual rate following a slight contraction in December.

The entire gain was in personal cash loans and sales finance con-

tracts; automobile, revolving, and mobile home credit all declined. Credit held by finance companies declined for the second consecutive month,
while loans held by credit unions grew sharply, buoyed by their sizable
deposit inflows.

Some contraction in consumer credit may have occurred

in February, judging from weakness already estimated for retailer-held
credit and for large commercial banks.
The slowdown in consumer credit growth since September is consistent with the pattern typical during a recession.

Credit growth usually

tapers off prior to cyclical peaks in economic activity, and becomes
negative a few months into a recession (see chart on page 111-20).

Unlike

prior cyclical peaks, however, the ratio of debt repayments to disposable
income was very low--rather than near a peak--when the current contraction

III-18

CONSUMER INSTALLMENT CREDIT
(Seasonally adjusted annual rates)

1980

1981
Q3

Change in outstandings -- total

By type:
Automobile credit
Revolving credit
All other

0.5
0.4
2.5
-0.3

1981
Q4

Dec.

1982
Jan.

Percent rate of growth - - - - -

6.4

8.7

1.9

-0.1

1.6

8.2
8.1
4.1

16.7
5.8
3.0

5.3
2.8
1.3

0.7
1.2
-1.3

-1.2
-4.0
6.4

- - - - - Billions of dollars - - - - Change in outstandings -- total
By type:
Automobile credit
Revolving credit
All other
By major holder:
Commercial banks
Finance companies
All other

1.4

19.9

27.8

6.3

-0.4

5.3

0.5
1.4
-0.4

9.6
4.7
5.6

20.0
3.5
4.3

6.6
1.6
-1.9

0.8
0.7
-1.9

-1.5
-2.4
9.2

0.8
24.1
2.9

6.1
5.0
-4.8

13.9
-5.0
-9.3

0.1
-7.2
12.4

-7.2
8.4
0.2

2.3
13.1
4.5

Extensions -- total
By type:
Automobile credit
Revolving credit
All other

306.1

336.3

344.1

323.5

319.9

322.7

83.5
128.1
94.5

94.4
140.1
101.8

101.8
142.5
99.8

91.7
138.9
92.9

88.2
139.1
92.6

89.7
132.8
100.2

Liquidations -- total

304.6

316.5

316.3

317.2

320.3

317.3

16.7

15.7

15.5

15.2

15.3

15.1

Memo:
Ratio of liquidations to
disposable income (percent)

I-

----

III-19

began, because consumer credit growth had been sluggish for the preceding
year.
With the atypical behavior of the ratio of debt repayments to disposable income has come a smaller-than-normal increase in consumer loan
delinquency rates for this stage of a business cycle.

Delinquencies on

auto loans at major finance companies remained at an all-time low in the
fourth quarter.

Delinquency rates on closed-end consumer loans at com-

mercial banks rose in the fourth quarter of 1981, but remained near the
lower readings of the past eight years.

However, many large banks re-

sponding to the February Senior Loan Officer Opinion Survey reported that
mortgage and consumer loan delinquency rates were higher than in November,
and some reported having taken actions to repossess collateral and to restructure terms of original loan agreements.
rate at S&Ls set a record high in January.

The mortgage delinquency

GROWTH RATE OF CONSUMER INSTALLMENT CREDIT
Percent
.es

SAAR

Peak

(July)
20

Shaded areas indicate periods of cyclical contraction as determined by the NBER.

Appendix III-A*
SENIOR LOAN OFFICER OPINION SURVEY

Of the 60 large commercial banks responding to the February 15,
1982 Survey of Senior Loan Officer Opinion on Bank Lending Practices, twothirds expressed the view that business loan demand during the next three
months would not ease. These expectations came at a time when business
loans at all large commercial banks were growing at more than a 20 percent annual rate for the third consecutive month. In the survey taken
last November, when large bank loan growth had been weak, only about half
of the participating banks expected business loan demand at their banks
to at least maintain its then-current strength.
Most respondents indicated that they were maintaining the standards
they had established last November for business borrowers to qualify for
the prime rate or for a given spread above prime.
At that time, there
was some indication of an easing in standards to qualify for the prime.
At the time of the February survey, the spread of the prime rate over the
commercial paper rate was as low as it had been in many months.
Compensating balance or fee requirements for commercial and industrial loans were eased by about the same fraction of respondents--onefourth--as in November. Almost two-thirds had not altered their standards
over the three months ended February. Nearly all respondents were maintaining standards that prevailed in the three months prior to the February survey for lending to new and nonlocal commercial and industrial
firms.
As in the November survey, more than 70 percent of respondents indicated no change in their willingness to make installment loans to individuals. In contrast to the previous survey, however, the number reporting
less willingness in February exceeded that reporting greater willingness.
Of the two large banks indicating greater willingness to make consumer installment loans, one had recently initiated variable interest rate consumer loans.
The three supplemental questions retained from the previous two surveys indicate further deterioration by February in the credit quality of
More than two-thirds of the respondents reported a
outstanding loans.
weakening in the financial condition of businesses to which they had
Increases in mortgage and
loans outstanding, up somewhat from November.
consumer installment loan delinquency rates were reported by two-fifths
of the respondents, double the proportion in the November survey.
Surveyed banks took a variety of measures in response to deterioration in the quality of their business, mortgage, and consumer installment
For the majority of cases involving business borrowers,
loan portfolios.
payments were restructured either alone or in combination with increases
in collateral, as in November. In the case of consumer installment loans,
*

Prepared by Barbara Negri Opper, Economist, Banking Section.

III-A-1

III-A-2

about the same number of banks as in November indicated that they were
repossessing collateral, restructuring payments, or both. In November,
no banks reported repossession of real estate as the sole response to
mortgage loan delinquencies, but in February a few of those with increased delinquency rates indicated having done so. Another one-third of the
respondents with increased mortgage delinquencies in February were repossessing real estate and restructuring payments.
There was little change from November in the number of respondents
observing a decline in the financial condition of new business loan applicants. At both times, about one-third of the banks--and over twofifths of the large banks--reported observing a deterioration.
Autos and auto dealers were the most frequently cited sector where
financial deterioration had been perceived, in the case of both existing
borrowers and new applicants. The housing, construction and real estate
sector was mentioned nearly as often, and these two sectors combined
accounted for half of the industries in which credit weakening had been
detected. There seemed to be little difference in experience among local, regional, or national firms overall, although certain of the most
frequently named industries undergoing strains are local by nature.
Earlier this year, term business loans at all large banks as a
group fell in relation to total business loans. However, only two-fifths
of the surveyed banks indicated, in answer to a supplemental question,
that they had experienced a similar maturity shift. Those banks that had
seen a relative increase in shorter maturities attributed greater use of
revolving credit arrangements as the predominant source of increase in
short-term business loans. Most of the banks reporting increased use of
revolving credit loans indicated that they were accommodating borrowers
who were seeking assured financing terms that offered them the flexibility to shift to the long-term bond market if conditions there improved.
Some banks indicated that they viewed revolving credit loans as tantamount to variable rate term loans--even though the borrower had great
flexibility to vary the actual outstanding balance--and some further indicated that the revolving credit agreements carried options available to
the borrowers to convert to term loans after a specified period. A few
banks reported actively inducing enlarged use of revolving credit arrangements by offering especially favorable terms; they did this either as a
way to manage interest sensitivity for assets relative to that for liabilities or as a way to minimize fixed-rate term loans.

III-A-3

SENIOR LOAN OFFICER OPINION SURVEY ON BANK LENDING PRACTICES
AT SELECTED LARGE BANKS IN THE U.S.
(Status of policy on February 15, 1982 compared to three months earlier)
(Number of banks and percent of total banks answering 1question)
(By size of total demestic assets, in billions )
CORE QUESTIONS
Much
Stronger
Banks
Pct
1.

Strength of demand for commercial
and industrial loans anticipated
in next 3 months (after allowance
for usual seasonal variation):
All respondents
$5 and over
under $5

1
1
0

1.7
4.0
0.0

Much
Firmer
Banks
Pct
2.

14
5
-9

23.3
22.0
25.7

Moderately
Firmer
Banks
Pct

26
11
15

43.3
44.0
42.9

Essentially
Unchanged
Banks
Pct

Moderately
Easier
Banks
Pct

19
8
11

31.7
32.0
31.4

Moderately
Easier
Banks
Pct

Much
Total Banks
Easier
Answering
Banks
Pct

0
0
0

0.0
0.0
0.0

60
25
35

Much
Easier
Banks
Pct

0
0
0

0.0
0.0
0.0

7
2
5

11.7
8.0
14.3

48
22
26

80.0
88.0
74.3

5
1
4

8.3
4.0
11.4

0
0
0

0.0
0.0
0.0

60
25
35

Standards to qualify for spread
above prime:
All respondents
$5 and over

0
0

0.0
0.0

6
3

10.0
12.0

47
21

78.3
84.0

7
1

11.7
4.0

0
0

0.0
0.0

60
25

0.0

8.6

74.3

17.1

0.0

Stance on C&I lending to new and
nonlocal customers:
All respondents
$5 and over
under $5

0
0
0

0.0
0.0
0.0

6
1
5

10.0
4.0
14.3

53
24
29

88.3
96.0
82.9

0
0
0

0.0
0.0
0.0

1
0
1

1.7
0.0
2.9

60
25
35

Compensating balance or fee
requirements for C&I loans:
All respondents
$5 and over
under $5

0
0
0

0.0
0.0
0.0

9
3
6

15.0
12.0
17.1

37
16
21

61.7
64.0
60.0

14
6
8

23.3
24.0
22.9

0
0
0

0.0
0.0
0.0

60
25
35

Moderately
Considerably
Greater
Greater
Pct
Pct Banks
Banks
6.

Essentially
Unchanged
Banks
Pct

Standards to qualify for prime
rate:
All respondents
$5 and over
under $5

under $5

Moderately
Stronger
Banks
Pct

Willingness to make installment
loans to individuals:
All respondents
$5 and over
under $5

0
0
0

0.0
0.0
0.0

5
2
3

8.5
8.3
8.6

Essentially
Unchanged
Pct
Banks

44
20
24

74.6
83.3
68.6

Moderately
Less
Pct
Banks

10
2
8

16.9
8.3
22.9

Much
Less
Pct
Banks

0
0
0

0.0
0.0
0.0

59
24
35

1. As of June 31, 1981, there were 25 banks having domestic assets of $5 billion or more. Their combined assets totalled
$463 billion compared to $562 billion for the entire panel and $1.6 trillion for all insured commercial banks.

III-A-4
SUPPLEMENTAL QUESTIONS

S.l.a

With regard to commercial and industrial lending, has there been a change over the
condition of customers to whom your bank has loans outstanding?

last three months in

the financial

Total

No Change
Banks Pct
All respondents
$5 and over
under $5
S.1.b

18
9
9

30.0
36.0
25.7

Improvement
Banks Pdt
0
0
0

0.0
0.0
0.0

Banks
Answerin

Deterioration
Banks Pct
42
16
26

60
25
35

70.0
64.0
74.3

If there has been deterioration, how has your bank responded?
Add

Collateral
Add
Collateral
Banks Pct

Restructure
Payments
Banks Pct

Other
Banks Pct

and
Restructure
Banks Pct

Add
Collateral
and Other
Banks Pct

Add
Collateral,
Restructure
Payments,
and Other
Banks Pct

Total
Banks
Answering

All respondents
$5 and over
under $5
S.l.c

If there has been deterioration, in which industries has the above-normal deterioration been concentrated?

Across
the Board
4
Banks Pct

Housing,
Real Estate
and
Construction
Banks Pct

Autos
and
Auto
Dealers
Banks Pct

Retail
Banks Pct

Agribusiness
Banks Pct

Finance
Banks Pct

Total
Indust
Citation
Manufacturing
Banks Pct

All respondents
$5 and over
under $5
S.2.a

With regard to commercial and industrial lending, has there been a change over the last three months in the average
financial condition of applicants for new loan extensions from your bank?

No Change
Banks Pct
All respondents
$5 and over
under $5
S.2.b

39
13
26

66.1
54.2
74.3

1
0
I

1.7
0.0
2.9

Deterioration
Banks Pct
19
11
8

32.2
45.8
22.9

If there has been deterioration, how has your bank responded?
Increased
Rejections
Banks Pct
All respondents
$5 and over
under $5

S.2.c

Improvement
Banks Pct

Total
Banks
Answering

14
7
7

73.7
63.6
87.5

Total
Banks
Answering

Other
Banks
Pct
5
4
1

26.3
36.4
12.5

If there has been deterioration, in which industries has it been concentrated?

Across
the Board
Banks2 Pct
All respondents
$5 and over
under $5

Housing,
Real Estate
and
Construction
Banks Pct

Autos
and
Auto
Dealers
Banks Pct

Retail
Pct
Banks

Agribusiness
Banks Pct

Finance
Banks Pct

Total
Industry
Citations
Manufacturing
Banks Pct

26.7
27.8
25.0

2. The number of times an industry was cited is shown under the heading "Banks". This number as a percent of total
Both farming and forest products are included in agribusiness.
citations is shown under the heading "Pct".

industrv

III-A-5

S.3.a.

With regard to mortgage and installment loans to individuals, have there been increases over the last three months in
the delinquency rates at your bank?

No Change
Banks Pct
Mortgages
All respondents
$5 and over
under $5

S.3.b

Improvement
Banks Pct

Deterioration
Banks Pct

25
9
16

45.5
37.5
51.6

6
4
2

10.9
16.7
6.5

24
11
13

43.6
45.8
41.9

55
24
31

Installment Loans
All respondents 21
$5 and over
9
under $5
12

36.8
39.1
35.3

11
7
4

19.3
30.4
11.8

25
7
18

43.9
30.4
52.9

57
23
34

If there has been deterioration, how has your bank responded?

Restructure
Payments
Banks Pct

Repossess
Collateral
Banks Pct
Mortgages
All respondents
$5 and over
under $5

S.4.

Total
Banks
Answering

Repossess
and
Restructure
Banks Pct

Other
Banks Pct

No Response
-Banks Pct

3
2
1

12.5
18.2
7.7

2
2
0

8.3
18.2
0.0

8
3
5

33.3
27.3
38.5

2
1
1

8.3
9.1
7.7

9
3
6

37.5
27.3
46.2

Installment Loans
All respondents
2
0
$5 and over
under $5
2

8.0
0.0
11.1

1
1
0

* 4.0
14.3
0.0

8
3
5

32.0
42.9
27.8

6
1
5

24.0
14.3
27.8

8
2
6

32.0
28.6
33.3

All respondents
$5 and over
under $5

Total
Banks
Answering

23
9
14

18
7
11

78.3
77.8
78.6

5
2
3

Total
Banks

Answering
23
9

21.7
22.2
21.4

What are the main reasons that borrowers are substituting revolving credit for longer-term loans?
Expect
Long-Term
Rates to
Fall Soon
Banks Pct
All respondents
$5 and over
under $5

S.5.b

60
25
35

38.3
36.0
40.0

If there has been a decline at your bank, does it reflect a greater use of revolving credit arrangements?
(b)
(a)
Greater
Greater
Use of
Use of
Revolving
Short-term
Loans
Credits
BanKs Pct
Banks Pct
All respondents
$5 and over
under $5

S.5.a

Recently, for all banks, C&I carrying original maturities one year or longer have accounted for a falling share of
all C&I loans. Number of banks reporting:
Decline in Share
of Long-Term
C&I Loans
Banks Pct

S.5.

Total
Banks
Answer
ering

6
1
5

33.3
14.3
45.5

Flexibility of
Revolving
Credit
Banks Pct
5
3
2

27.8
42.9
18.2

BankInduced
Banks Pct
4
2
2

22.2
28.6
18.2

Other
Banks Pct
3
1
2

16.7
14.3
18.2

Total
Banks
Answering
18
7
11

lance between
between
Has the growing use of revolving credit facilities affected your bank's ability to maintain a desired balance
the average maturity of assets relative to the average maturity of liabilities?

No Answer
Banks Pct
All respondents
$5 and over
under $5

1
1
0

5.6
14.3
0.0

Change
Encouraged
by Bank for
This Reason
Banks Pct
2
0
2

11.1
0.0
18.2

No Impact
Banks Pct
15
6
9

83.3
85.7
81.8

Total
Banks
Answering
18
7
11

INTERNATIONAL DEVELOPMENTS
Foreign Exchange Markets
The dollar's foreign-exchange

value has been under considerable

upward pressure for most of the period since the last FOMC meeting.
On a weighted-average basis it

has risen three percent, as indicated

in the chart on the next page.
Movements in

the dollar's value over the last two months have

been influenced particularly by developments affecting current and
prospective interest rates on assets denominated in dollars and other
major foreign currencies.
a weighted-average

Dollar yields,

which had come to exceed

of comparable foreign interest rates by two per-

centage points at the time of the last FOMC meeting, are now nearly

three percentage points higher than their counterparts, having risen
in the interim to a differential of close to 4-1/2 points.

Movements

in U.S. rates accounted for most of the changes in such differentials;
foreign interest rates have continued fairly steadily along the declining
path they have been on since mid-December.
On average,

short-term interest rates abroad have fallen about

75 basis points since early February.

Rates in the Netherlands and

Switzerland have been lowered or allowed to fall by two and a half
percent or more,

and U.K.,

Belgian,

Swedish,

come down by about one percentage point.
allowed to ease,

and Italian rates have

German rates have also been

and the Bundesbank Council last week announced another

half-percent reduction in its special Lombard rate.

The German move

was co-ordinated with actions by Swiss and Dutch authorities to lower
their official rates by the same amount.

IV-1

Authorities in France have

IV-2

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR

March 1973-100
-

-Daily series

114

1112
,

Feb. 2

1982

IV-3
have recently moved to reverse the downward trend in

interest rates;

only there and in Canada, among major industrial countries, have rates
moved upward on balance over the last two months.
have center stage in explanations of

While interest rates still
recent exchange-rate movements,

a number of other developments have

tended to depress the value of one or another foreign currency and have
thereby helped account for some of the apparent upward pressure on the
dollar's value.

Announcements in

late February of significant reduc-

tions in oil prices by Iran and Mexico brought downward pressure
to bear on sterling and to a lesser extent the Canadian dollar.
the same time and again this week,

Around

the mark weakened as centrifugal

forces operating on the political coalition governing Germany intensified.

Unfavorable by-election outcomes and accusations of fund-

raising improprieties by two Cabinet ministers have raised the level
of political stress in

Germany over recent months.

Finally, the yen

has been under fairly steady downward pressure throughout the period,
though the cause is

not clear.

One explanation offered is

that threats

against Japanese trade from Europe and the United States might cut

into the trade surplus, and domestic and foreign pressures might induce
the Japanese government to stimulate economic activity.
On February 21 a realignment of currency values in the European
Monetary System was announced.

The central rates of the Belgian and

Luxembourg francs were lowered by 8-1/2 percent and the Danish crown's
central rate was moved down by 3 percent.
realignments,

Unlike most other EMS

these changes meant that prevailing market exchange

rates for the Belgian and Luxembourg currencies were above the range

IV-4
of permissible deviations from the new central rate,

Including additional downward
movement since the realignment, the Belgian franc is now 11 percent
lower in dollar terms than at the time of the last FOMC meeting.
In mid-February, the Mexican government announced temporary withdrawal of support for the peso.

The Mexican currency's dollar value

immediately fell about 30 percent and has since declined further to
a level about 40 percent below its pre-devaluation level.

The change

in the peso's value offsets most of the rise in Mexican prices relative
to those in the United States since the last devaluation in 1976.

IV-5

The apparent diver-

gence between current and prospective French and German economic
policies has led to widespread expectations that another adjustment
in EMS currency relationships will be required.

The price of gold has fallen more than 12 percent since the
last FOMC meeting.

The likelihood that the Soviet Union is selling

and will need to sell large quantities of gold over the foreseeable
future has increased because of potential retrenchments in the willingness of official and private Western lenders to supply credit on
a large scale.

Gold sales by Iran have also been foreseen as needed

to finance war efforts, and the extent of other Middle Eastern demand
for gold may have been decreased by recent oil-price developments.

Foreign lending by U.S. banks.

Claims on foreigners held by domes-

tic offices and foreign branches of U.S.-chartered banks rose $28 billion
in the second half of 1981, slightly less than in the first half of the
year.

(See accompanying table.)

Claims on the other G-10 countries and

Switzerland continued to slow down, as did claims on offshore banking
centers, while net lending to the smaller industrial countries and to the
non-OPEC developing countries continued to intensify.
The increase in total foreign claims in the second half of 1981 was
at an annual rate of about 15 percent, and thus was again within the
rather narrow range of 14-17 percent annual rate of increase shown in all
four half-yearly periods in 1980-81.

However, while the rate of overall

net lending has been quite steady for two years, the trends in lending to
various groups of borrowers have diverged.

Increases in claims on the

other G-10 countries and Switzerland, the largest borrowing groups, have
become progressively smaller, the increase in claims on this group accounting for only one-sixth of the increase in total foreign claims in the
second half of 1981.

This slowing has probably reflected the sluggishness

of economic activity in the major industrial countries abroad and the
consequent weakening of credit demands there relative to other areas of
the world.

In contrast, the rate of increase in claims on the smaller

industrial countries has accelerated in the past two years, reaching

$3.7 billion in the second half of 1981, although outstandings remain
relatively small.

Major factors in this development have been the growing

role of Australia as a borrower in the Eurocurrency markets, the resumption of U.S. bank lending to South Africa after several years of decline, and
the increasing share of U.S. banks in total foreign bank lending to Spain
as well as Australia.

IV-7

CLAIMS ON FOREIGNERS OF U.S.-CHARTERED BANKS

(Billions of dollars)

Claims on

Yearly
1980 1981

Increase
Half-Yearly
1980
1981
1st H 2nd H 1st H 2nd H

Outstanding
Dec. 1981

Total, all countries

48.1

57.8

24.9

23.2

29.9

27.9

409.8

G-10 and Switzerland

23.7

10.2

15.8

7.9

5.7

4.5

172.3

1.3

3.2

3.7

28.5

Smaller industrial
countries
OPEC countries
of which:
Venezuela
Others
Non-OPEC developing
countries
of which:

1.7

6.9

-.2

1.7

-2.0

1.8

-.5

2.2

24.4

.4
-.8

.5
1.2

-.8
-1.2

1.2
.6

-.3
-.2

.9
1.3

9.6
14.8

4.7

9.7

7.2

2.3
.9
0
2.3
.5
1.0
.4
2.3

2.3
1.1
1.6
.6
0

14.4

Mexico
Brazil
Korea
Argentina
Philippines
Chile
Taiwan
Others
Eastern Europe
of which:
Bulgaria
Czechoslavakia
East Germany
Hungary
Poland
Romania
USSR
Yugoslavia

18.6

5.6
2.8
2.3
1.4
.9
2.1
.9
2.6
.1

11.4

21.5
19.0
9.4
9.3
6.0
5.8
5.1
19.9

1.1

-. 1

.1
-. 1

-. 2

-. 1

-. 1
.1
-. 1

-. 2

-. 1
.1

*/
-. 2

Offshore banking
centers

6.6

Miscellaneous and
unclassified

2.3

.1
.3

*/
.1
.2

15.3

4.4

*/ Change of less than $0.1 or -$0.1.

-.1

*/
*/f

-. 2

-. 1

3.9

2.7

12.0

2.6

-.3

1.7

96.0

*/
.1

.1
.1

*/
3.3

62.3

2.7

18.4

IV-8

Claims on the non-OPEC developing countries rose $11.4 billion in
the final six months of 1981, the sixth consecutive half-yearly period in
which net lending substantially exceeded the year-earlier level.

The

increases in claims on Mexico, Brazil, and Korea were markedly larger than

a year earlier, and for 1981 as a whole the increases in claims on those
countries and Chile were 35 to 180 percent greater than in 1980.

Much

higher spreads were an incentive to banks to increase their lending to
Brazil, despite already high exposure.

Argentina, whose credit standing

dropped in 1981 and which experienced a rise in spreads late in the year,
was the only major borrower in this group to which net lending was smaller
in 1981 than in 1980.
Claims on OPEC countries rose $1.7 billion in 1981 compared with a
slight absolute decline in 1980.

Net lending to Indonesia and Middle

East oil-exporting countries became positive again in 1981, after being
negative in 1980 when repayments exceeded new drawings.

Claims on Vene-

zuela rose further in 1981 and reached $9.6 billion by year-end, the third
largest amount of U.S. bank claims on any OPEC or non-OPEC developing
country (after Mexico and Brazil).

U.S. banks' claims on Eastern Europe

rose $0.5 billion in 1981, of which $0.3 billion was in the first quarter
of the year.

After the first quarter, net new lending to Eastern Europe

was confined largely to Hungary and the Soviet Union.

IV - 9
U.S. International Transactions
The U.S. merchandise trade deficit in January returned to the very
large deficit rate recorded in October and November of last year.

six of the past seven months there have been substantial swings in the
trade balance.
Exports in January were slightly less than the fourth-quarter rate.
The value of agricultural exports continued at about the same low rate
as was recorded during the second half of last year.

While the volume

of wheat and soybeans turned up in January after months of declines (and
prices of both rose somewhat as well),

these increases were offset by
particularly feedgrains (corn).

declines in a broad range of commodities,

U.S. Merchandise Trade* ...
Year

1 9 8 1

1981
Value (Bil. $. SAAR)
Exports
Agricultural
Nonagricultural
Imports
Petroleum
Nonpetroleum
Trade Balance

Volume
(Btl. 72$.

Months

Dec.81 Jan.82

236.3
44.3
192.0

50.8
193.2

21.5
44.2
197.3

231.7
40.1
191.7

228.0
42.0
186.0

221.7
40.1 39.4
181.6 184.3

1
77.6

262.6
83.1

269.1
84.7

259.8
71.6

265.0
70.9

233.4 272 5
58.4 79.7

186.5

179.5

184.4

188.2

194.1

174.9 192.9

-27.8

1.6

-28.1

-36.9

-117

18.1

19.5

17.4

16.8

18.4

17.7

70.3

73.1

73.2

69.5

65.9

64.2

n.a.
n.a.

5.9
71.9

6.3
67.6

6.2
70.6

5.6
73.4

5.6
76.1

4.6
68.2

n.a.
n.a.

SAAR)

Exports - Agric.

- Nonagric.
Imports - Petroleum
- Nonpetrol.

International Transactions and GNP basis.
estimated.

Monthly date are

IV - 10

The volume of corn exports, which rose in the fourth quarter of 1981,
dropped back in January to the low third-quarter rate; corn export prices
continued to fall.
Nonagricultural exports in January also declined slightly in value
The level of exports was held up by sharp

from the fourth-quarter rate.

increases in civilian aircraft deliveries and in petroleum exports.
Aircraft exports fluctuate widely from month to month and January exports
were unusually strong on a seasonally adjusted basis.

The sharp rise in

petroleum exports in January continued the increase begun last fall as a
result of the lifting (October 2, 1981) of restrictions on product exports.
The additional exports consisted largely on high-sulphur residual fuel

oil, of which surplus quantities had been accumulating on the West and
Gulf coasts.

Restrictions on exports of crude petroleum remain in effect.

Excluding aircraft and petroleum, the value of nonagricultural exports
declined in January as it did in almost every month since last summer.
These declines occurred in a broad range of commodity categories,
The sharp rise in imports in January from the fourth-quarter rate
was entirely the result of a rise in oil imports to 6.7 million barrels
per day (seasonally adjusted), well above the low December rate and the
average for the fourth quarter.

However, monthly oil import figures

tend to swing sharply and it is not expected that imports will remain at

1Q
Volume (mbd, SA)
Price ($/BBL)
Value (Bil. $, SAAR)

6.58
34.63
83.1

1981 U.S. Oil Imports
4Q
Nov.
2Q
3Q
6.52
35.62
84.7

5.90
33.27
71.6

5.99
32.42
70.9

6.82
32.48
79.3

Dec.

1982
Jan.

4.94
32.39
58.4

6.70
32.58
79.7

IV - 11

this high level.

The average price of oil imports in January was little

changed from the average price recorded during the fourth quarter.
Several oil producers have lowered oil prices in recent weeks.
The United Kingdom and Norway cut their prices by $5.50 per barrel, and
Mexico, Venezuela and Iran have also made price cuts.

Spot prices have

remained $5 per barrel below the official prices of most OPEC producers.
Last weekend OPEC formalized a production allocation program to try to
reverse the decline of spot market prices and preserve an effective price
of $34 per barrel of Saudi marker crude.
The value of nonoil imports in January was at about the same rate
as in the fourth quarter of 1981; increases in steel and smaller rises
in consumer goods and foreign passenger cars and trucks were offset by
declines in imports of food (largely sugar and coffee) and in other
industrial supplies.
U.S. International Capital Transactions.

Bank-reported private

capital transactions in December resulted in a large net outflow of $13
billion, bringing the cumulative net outflow for 1981 to $33 billion
excluding custody accounts -- $3 billion more than in 1980.
in the table on the next page.

See line 1

The December outflow is partially accounted

for by the borrowings of several Latin American and Asian countries to
bolster their end-of-year reserve positions.

Reserve holdings in the

United States of these countries rose $3.5 billion in December, compared
with a cumulative increase of $0.7
the year.

billion for the first 11 months of

IV - 12
Summary of U.S. International Transactions
(in billions of dollars)
1981
Year

_ -2

0--1981

-- 3

o-J4

rov.

Dec.

-5.9

3.8

-19.0

-5.1

-13.0

Jan.

Banks
1. Change in net foreign positions of banking

offices in the U.S. (+ = inflow)1/
Securities
2. Private securities transactions, net
a) Foreign net purchases (+) of U.S.
corp. bonds
b) Foreign net purchases (4) of U.S.
corp. stocks
c) U.S. net purchases (-) of foreign
securities
3. Foreign net purchases (+) of U.S. Treasury
obligations 2/

-33.0

-11.8

3.3

I_6
1.6

1.7

-2.5

-1.9

-.4

2.1

4.7

2.6

-5.2

-1.5

-2.9

-2.0

-. 7

.1
.3

-. 8

1.1

-.2

1.2

-2.9

-5.5

8.0

4.9

1.8
5.7
-2.1

-7.9
2.5
2.4

-5.6
2.5
-2.4

.9
1.9
5.1

7.2
-1.8

-2.1
-.9

-4.6
-. 9

4.6
3.4

2.5
2.4

2.0
3.0

-3.7

-. 4

-. 8

-. 9

2.5

1.5

5.0

5.4

-10.7
12.7
3.0
5.1
-. 1

Official

Changes in foreign official reserves assets
in U.S. (+ = increase)
a) By area
6-10 countries and Switzerland
OPEC
All other countries
b) By type
U,S. Treasury securities
Other 3/

5. Changes in U.S. official reserve assets
(+ = decrease) 4/
Other
6.
7.
8.
9.
10.

transactions (Quarterly data)
U.S. direct investment (-) abroad
Foreign direct investment (+) in U.S.
Other capital flows (+ = inflow) 5/ 6/
U.S. current account balance 6/
Statistical Discrepancy 6/

-3.3
-7.0

18.7
-15.7
6.6
24.6

-5.0
3.8
-2.3
1.2
7.9

-1.0

-6.9

-7.0

1.7
-1.1
1

.8
-2.5
*

n.a.
n.a.
n.a.
n.a,
n.a.

4.1

-2.0
2.1

-1.3

MEMO:
U.S. merchandise trade balance -- part of line 9
(Balance of payments basis, seasonally adjusted) -27.8

1/ Excludes

-4.7

-9.2

-3.6

-1.0

liabilities to foreign official institutons.

7/ Includes U.S. Treasury notes publicly issued to private foreign residents.
'/ Includes deposits in banks, commercial paper, acceptances, & borrowing under repurchase agreements .
7/ Includes newly allocated SDR's of $T.1 billion in January 1979; $1.2 billion in January 1980,; and
$1.1 billion in January 1981.
5/ Includes U.S. government assets other than official reserves, transactions by nonbanking concerns,
and allocations of SDRs, and other banking and official transactions not shown elsewhere.
6/ Includes seasonal adjustment for quarterly data.
T/ Less than $50 million.
NOTE:

Details may not add to total because of rounding.

-4.1

IV - 13

Most of the large December bank-reported outflow can not be linked
at this time to any specific factors.

Two possible explanations were

examined but neither appears to account for the outflow.

The intro-

duction in December of IBFs should have had no net effect on bankreported U.S. international capital transactions.

A staff review of

Federal Reserve and Treasury reports focusing on IBF-related items found
no evidence of misreporting.

The introduction of IBFs, therefore, is

not the source of the large December net bank-reported capital outflow.
The second possible explanation was the timing of acquisition-related
drawings by Marathon, Mobil and U.S. Steel on their Eurocredit loan
facilities, but there were no drawings on these loans in December.
A separate data source on banks' international position shows that
during January and February U.S. banks brought in about $5 billion from
their foreign offices (see line 1.a in the table on the next page which

shows positions vis-a-vis own foreign offices).

Loans to U.S. nonbank

residents from the foreign branches of U.S. banks, shown in line 2 of

the table, changed little from November through February and then rose
somewhat in March.

This rise in offshore borrowings reflects not only

current interest rate differentials but also may imply a somewhat stronger
anticipation of higher short-term rates in the near term than was previously
anticipated.

That is, by borrowing on LIBOR terms (a fixed rate) rather

than at the prime rate (a daily floating rate) the borrower is protected
against rising interest rates in the near term.
Eurobond offerings of U.S. corporations rose to $3 billion in

the first quarter of 1982, twice the quarterly average for 1981.

than half the value of such offerings were about 24 zero-coupon Eurobonds

IV - 14

International Banking Data
(billions of dollars)
1982

1980
19 8 1
Dec. Sept. Nov.
1. U.S. Offices' Banking
Positions Vis-a-vis Own
Foreign Offices 1/
6.5
(a) Total
-15.2
(b) U.S.-Chartered Banks
(c) Foreign-Chartered Banks 21.7
2. Credit Extended to U.S. Nonbank Residents by Foreign
Branches of U.S. banks 2/
3. Eurodollar Holdings of U.S.
Nonbank Residents /

Dec.

7.3 2.4 8.9 12.5
-12.5 -14.8 -10.2
-4.3
19.8 17.2 19.1
16.8

4.2

9.2

12.0

13.2

60.8

87.1

93.0

92.7

Jan. Feb. Mar.

12.9

14.1 n.a.

-2.1 n.a.
16.2 n.a.

12.9 13.5

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

1/ Averages of Wednesday, net due to own foreign office = (+)
2/ Daily Averages.
3/ Through March 10.

4] End of month.
corporate issuers, which were reportedly particularly attractive

of U.S.

to Japanese investors,

No zero-coupon Eurobonds have been offered since

authorities in Japan acted to discourage acquisition by Japanese of zerocoupon Eurobonds during the past several weeks.

Overall Eurobond

offerings, including a $400 million issue by AT&T, accounted for about
one third the total of U.S. corporate bond offerings in the first quarter

of 1982,

This was AT&T's first public issue in the Eurobond market --

AT&T has previously borrowed privately from OPEC investors.
Total Eurodollar holdings of U.S.

nonbanks rose by $6 billion in

the fourth quarter, reaching $93 billion at the end-of-the year.

Money-

IV - 15

market-mutual funds, which held one fifth of these Eurodollars, increased
their holdings by more than $1.5 billion over the January-February period.
This raised the share of Eurodollars in their portfolios to more than 12
percent, as compared with 11.5 percent at the end of 1981 and 9.5 percent
at the end of 1980.
Foreign official holdings of assets in the United States fell by
$1.7 billion in January,

. Data for changes in February holdings of

foreign official institutions at the Federal Reserve Bank of New York show
a $1.6 billion decrease in the holdings of G-10 countries and a $2.7
billion increase in holdings by OPEC countries.

U.S. Current Account in 1981.

For 1981 the US. current account

surplus was $6.6 billion, somewhat larger than in the preceding two years.
Higher net interest receipts from portfolio investments than in 1980 more
than offset a larger U.S. trade deficit and reduced net income from direct
investments abroad.
During 1981 the current account balance swung from surpluses in
the first three quarters to a small deficit in the fourth quarter.

This

elimination of the current account surplus largely resulted from the
rising U.S. merchandise trade deficit.

Exports declined through most of

the year in response to sluggish economic growth abroad and the effect of
the appreciation of the dollar between 1980 and 1981 that reduced price

IV - 16

competitiveness of U.S.

goods on world markets.

In addition, the value

of agricultural exports declined, primarily as world market prices fell.
Imports, which rose steadily during the first half of the year and
remained at fairly high levels through the end of the year, were sustained
by strong domestic demand at the beginning of the year and the appreciation
of the dollar.

Total imports remained strong in the second half of the

year even though oil imports fell (both price and volume).

U.S. Current Account
(billions of dollars, SAAR)
19 8 1
Q2
Q3

Year
1981
U.S.

Current Account Balance

6.6

133_

Change
81-80 Q4-Q3

-0.3

2.9

-8

-18.6 -27.6 -28.1
244.0 241.5 231.7
262.6 269.1 259.8

-36.9
228.0
265.0

-2.5
12.3
14.8

-8.8
-3,
5.

Merchandise trade, net
Exports
Imports

-27.8
236.3
264.1

Investment Income, net
Direct, net
Portfolio, net

36.8
22.5
14.3

36.3
25.1
11.2

35,1
24,1
11.0

37.0
21,8
15.2

38.6
18.9
19.7

4.1
-5.0
9.0

1.6
-2.9
4,5

Other Service Trans, net
Unilateral Transfers

4.4
-6.8

1.7
-6.1

3.4
-6.1

6.9
-7.3

5.5
-7.5

1.0
0,3

-1.4
-0.2

SOURCE:

U.S.

Department of Commerce Press Release, March 18, 1982.

Other (non-trade) current account transactions were dominated by
investment income flows.

Total net investment income receipts were 12

percent higher in 1981 than the year before, and rose slightly throughout
the year.

U.S.

particularly in

portfolio investment income, net, rose fairly sharply,
the second half of the year as a result of rising net

U.S. claims on foreigners and the high level of interest rates.
from U.S.

Income

direct investment abroad declined steadily during the year as

IV - 17

foreign ecnomies weakened, which depressed the earnings of manufacturing
and other businesses,

and as overseas earnings.of U.S.

oil companies fell

as a result of declining demand for petroleum products while the cost of
crude oil remained high.
Other Capital Flows in
1981 in net outflows for U.S.

1981.

There was a striking reduction in

direct investments abroad.

U.S.

direct

investments abroad were unusually small, reflecting in part borrowing
in

the Eurobond market by U.S.

parent companies via offshore finance

affiliates. (Borrowings by offshore financial subsidiaries rose sharply

to about $3 billion in the first quarter of this year.)

Foreign direct

investments in the United States were very large in 1981, particularly
in the fourth quarter.

Two examples of sizable foreign acquisitions

of U.S. companies were Santa Fe Industries by Kuwaiti interests and
Texas Gulf by Elf Aquitaine.

See line 7 in Summary table above.

IV - 18
Foreign Economic Developments.

Real GNP fell slightly in the

fourth quarter of 1981 in the six major foreign countries.

Following

slow growth in 1980, growth in 1981 (fourth quarter over fourth quarter)
was about 1/2 percent.

Fourth-quarter unemployment in each of the

six countries was higher than in the previous quarter, and has continued
to increase this year in Germany,

and France.

Inflation (CPI) in the fourth quarter of 1981 was lower abroad
than in

the previous three quarters,

except in Japan and Italy.

comparison of inflation in the most recent two months with that in
the previous two months indicate further improvement,

with slight

setbacks in Germany and France.
The estimated current-account deficit in the foreign G-10
countries plus Switzerland in
about $20 billion.

Strong improvements occurred in Japan, Germany,

and the United Kingdom,
in

1981 declined by about $30 billion to

while significiant deterioration occurred

the Canadian balance.
Moderate fiscal stimulation is

planned in Germany,

France has indicated that fiscal policy may

the United Kingdom.

become tighter than expected previously.

Central banks generally

have been lowering official interest rates since the first
year.

On March 3,

decrease in

its

Japan and

of the

the Belgian National Bank announced a one point

official rate to 13 percent.

On March 18, Germany,

Switzerland, and the Netherlands, in a coordinated move,
rates by 1/2 percent.

lowered

Exchange market pressures have forced the

Bank of France to reverse the trend for the quarter and to raise
its

rate.

IV - 19
The EMS has been strained in the last several months; one
realignment was required and another is

probable.

The Mexican

authorities withdrew support from the peso on February 17,

and it

depreciated by about 40 percent over the next few days.
Individual Country Notes.

Newly released data on fourth-quarter

real growth in Japan show that GNP fell by almost 4 percent (s.a.a.r.)

in the quarter.

This decline,which was the first such fall in almost seven

years, followed the previous quarter's 2.8 percent growth, and stemmed
largely from a rapid weakening of the external sector.

Growth in

domestic demand improved slightly but failed to offset fully a more
than 16 percent (s.a.a.r.) decline in real exports.

Private consumption

advanced in the fourth quarter by about 2 percent (a.r.).
Recent price developments have been generally favorable.
prices rose only marginally in February -

Consumer

the fifth consecutive month

in which the month-to-month change was below 2-1/2 percent at an annual
rate.

Wholesale prices recorded an abrupt 6 percent (a.r.) gain in

February, primarily because of the weakening of the yen last month.
However,

the February WPI was still

less than 3 percent above its

year-previous level.
The Japanese current-account position improved strongly in

January to a surplus of over $1 billion (s.a.) from December's roughly
balanced position, largely on the strength of a 13 percent increase in
exports.

Also in January, outward portfolio investment by Japanese

residents moderated only slightly from December's level and was still
about $1-1/2 billion.

Reacting to continued outflows in February -- in

particular, to heavy Japanese purchases of zero-coupon bonds issued by

REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted)

1980

1981

1980
Q3

1981
04

Oct.

1981
Nov.

Dec.

1982
Jan.
*
n.a.

Canada:

GNP
IP

0.0
-2.0

3.0
1.5

-1.0
-2.5

0.2
0.0

2.3
2.2

1.0
1.0

1.4
2.6

-0.9
-3.0

-0.5
-3.8

*
-1.4

*
-0.9

*
-0.5

France:

GDP
IP

1.5
-1.2

0.7
-2.2

-0.6
-2.0

0.2
-0.8

-0.1
-1.0

-0.4
-1.5

1.3
0.8

0.2
0.0

0.4
1.5

*
0.0

*
1.5

*
-3.0

1.7
-0.1

-0.5
-1.8

-2.0
-2.4

0.0
-1.8

-0.4
-1.2

0.4
1.2

-0.7
-0.6

0.9
0.0

-0.2
-0.6

*
0.0

*
-0.9

*
-1.9

*
1.9

-0.9
-2.7

-2.7
-7.6

2.0
5.3

0.6
0.7

-1.2
-2.5

-1.6
-4.3

*
-2.5

*
7.2

*
-6.0

*
n.a.

Germany:

GNP
IP

n.a.
5.5

Italy:

GDP
IP

4.0
5.6

n.a.
-2.9

Japan:

GNP
IP

4.2
7.1

3.0
3.0

0.2
0.2

1.2
-2.3

0.7
1.6

0.7
1.7

1.2
-0.3

0.7
1.6

-0.9
2.6

*
1.5

*
-0.3

*
-0.7

*
-0.1

-2.3
-6.6

-2.1
-5.3

-1.4
-3.0

-1.5
-3.0

-0.4
-2.4

-0.8
-1.4

-0.4
-0.5

0.4
0.9

0.4
0.5

*
1.7

*
-1.7

*
-1.3

*
-0.4

-0.2
-3.6

2.0
2.6

-2.6
-5.3

0.6
-1.5

0.9
4.5

2.1
2.0

-0.4
0.5

0.4
0.3

-1.1
-4.5

*
-1.6

*
-1.9

*
-2.1

*
-2.5
(Feb) 1.6

United Kingdom:

United States:

GDP
IP
GNP
IP

* GNP data are not published on a monthly basis.

TRADE AND CURRENT-ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIESa
(Billions of U.S. dollars; seasonally adjusted)

1980

1981

1981
Dec.

1982
Jan.

Feb.

1.1

n.a.

1981

Canada: Trade
Current Account

5.1
-5.6

2.0
-0.2

2.4
0.3

1.4
-1.2

0.8
-1.8

0.6
-2.1

2.8
-0.5

France: Trade
b
Current Account

-9.6
-8.5

-4.0
-2.1

-3.2
-2.0

-2.4
-2.6

-1.9
-0.5

-1.9
-2.3

-3.1
-2.9

Germany: Trade
Current Account (NSA)

11.9
-7.7

1.1
-7.1

0.9
-3.3

0.2
-4.4

3.1
-2.3

3.1
-4.9

5.5
4.0

-16.0
n.a.

-8.6
-1.0

-5.5
-2.9

-4.5

-4.8

-4.4

-2.3

-5.8

-2.3

0.3

n.a

20.1
4.6

1.4
-1.8

2.9
-0.2

3.3

5.5

6.3

5.0

-1.0

2.0

2.5

1.1

1.0
-0.1

2.1
1.1

n.a.
n.a.

1.5
2.1

3.0
4.5

n.a.
n.a.

1.4
2.3

0.6
0.9

n.a.
n.a.

-2.9
5.0

-5.6
1.4

Italy: Trade
Current Account (NSA)
Japan: Trade
b
Current Account
United Kingdom: Trade
Current Account
United States: Trade
Current Account
a
b
*

n.a.
n.a.
-27.8
6.6

n.a.
n.a.
-4.7
3.3

-6.9
1.2

-7.0
2.1

The current account includes goods, services, and private and official transfers.
Ouarterly data are subject to revision and are not consistent with annual data.
Comparable monthly current account data are not published.

-9.0
-0.1

0.6
*

-1.2
*

-1.2

-0.9

1.9
2.2

0.0
-1.3

n.a.
-0.3

-0,7

-1.3

n.a.

-1.0
*

-4.1
*

n.a.
*

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from preceding period)
-

---

MEMO:
Latest 3 Months

1980

1981

1981
Nov.
Dec.

1982
Jan.
Feb.

from

2.8
3.2

3.2
2.5

3.1
2.1

3.0
1.3

2.5
2.1

0.9
-0.1

0.4
0.4

0.7
n.a.

1.2
n.a

11.7
8.3

3.2

2.8

0.6

3.6

3.0
1.4

3.3
4.3

3.9
4.3

3.2
1.9

0.9
-0.4

0.6
1.3

1.0
0.6

1.0
n.a.

13.9
12.6

0.7
-0.2

0.8
0.7

2.2
3.9

1.8
2.3

1.2
2.1

1.2
1.8

0.5
0.5

0.3
0.0

0.9
1.8

Italy: CPI
WPI

4.2
2.2

5.3
3.8

5.2
5.0

4.4
5.1

3.0
3.5

4.6
4.0

1.8
1.7

0.9
0.9

1.3
1.3

1.3
n.a.

Japan: CPI
WPI

1.1
0.7

1.2
-0.7

1.1
-0.7

1.5
1.1

0.0
1.4

1.3
-0.1

0.2
-0.1

0.0
-0.1

0.2
0.0

0.1
0.5

United Kingdom: CPI
WPI

2.2
2.3

1.9
1.2

2.4

4.9

1.7

2.5

3.0

3.4

2.1

2.3

1.1
0.6

0.6
0.6

0.6
1.0

0.0
0.7

11.7
11.0

United States: CPI(SA)
WPI(SA)

1.9

3.1

3.3

2.2

2.6
2.5

1.9
2.3

2.8
1.1

1.9
1.2

0.5
0.4

0.4
0.3

0.3
0.4

n.a.
-0.1

9.0
6.3

Canada: CPI
WPI

2.8
2.8

France: CPI
WPI
Germany: CPI
WPI

0.2
-0.2

Year Ago

6.1
9.1
17.2
18.2
3.7
2.2

IV - 23
U.S.

corporations in

the Euro-bond market --

in early March,

the

authorities banned the sales of these bonds by Japanese securities
houses.
On March 9, the Japanese Diet approved the FY1982 budget, which
calls for a nominal expenditure increase of only 6.2 percent,
the smallest rates of increase in many years.
plan to take several measures,

However,

one of

the Japanese

including advancing government expenditure

to stimulate the domestic economy.
German real GNP declined by 0.5 percent last year, and by 0.8 percent
(s.a.a.r.) in

the fourth quarter.

From the data available so far this

year, there are no indications of strong revival.
in January, while up by 2 percent from December,
its

fourth-quarter average of last year.

was unchanged from its

Industrial production
was not higher than

The January volume of orders

December level and also only barely higher than

the fourth-quarter average of last year.

The rate of unemployment

continued to climb through February, when it
and is expected to rise further.

reached 6.8 percent (s.a.),

The German Federal Labor Office

estimates that real GNP would have to grow by 3 percent (twice the
officially forecast rate) in order to keep the rate of unemployment
from rising further.

The recently announced job creation program of

DM 12.5 billion (less than 1 percent of 1981 GNP) over the next three
years, financed by tax increases and off-budget borrowing,

not

expected to have a major impact on employment.
Inflation in

the first

two months of 1982,

due in part to

significant seasonal factors, was about 6-1/2 percent (a.r.) compared
with 6 percent for all of 1981 and 4.8 percent for the fourth quarter.

IV - 24
On March 8,

the first

major wage settlement of this year's round was

concluded with a 4.2 percent wage increase for metal workers, down from
4.9 percent in

1981.

This settlement,

real wages of about 1 percent,

which suggests a reduction in

expected to set the pace for the

remaining negotiations.
The German current account deficit declined from $16.5 billion
in 1980 to $7.7 billion in 1981.
the current account was in

surplus.

billion (n.s.a.) was recorded,
Bundesbank --

In the fourth quarter of last year,
In January, a deficit of $1.3

some of which --

according to the

was due to seasonal and technical factors.

The February

deficit was only $0.2 billion.
In the United Kingdom,
in

real GNP increased 1-1/2 percent (s.a.a.r.)

the fourth quarter of 1981.

The average level of industrial production

(s.a.) also increased in the final quarter of last year,

but the declines

and January

industrial production recorded in November,

indicate the weakness of the recovery in U.K.

December,

economic activity.

Consumer prices in February were unchanged from their January level.
During the six months to February 1982,
8 percent (a.r.);

consumer prices rose some

during the same period, wholesale-price inflation was

9-1/2 percent.
On March 9, Chancellor of the Exchequer Sir Geoffrey Howe presented
the Thatcher government's budget for the fiscal year beginning in April.
In his budget speech, Chancellor Howe announced new monetary growth
targets as well as several fiscal measures.

The tax changes announced

include a reduction in payroll taxes paid by employers, increases in
personal income tax allowances and brackets, and increases in various

IV - 26
months (a.r.),

Hourly wages in France rose by 15-1/2 percent from

October to October, giving a worker a gain in purchasing power of about
1 percent.

However,

over 4 percent,
the lowest paid.

minimum wage earners' purchasing power increased by

indicating a relative improvement in the position of
When the government announced its objective of increasing

the real wage of the poorest,

there was considerable doubt about the

likelihood of being able to constrain the increase in
from spreading.

the minimum wage

Apparently some success has been achieved.

Since the last Greenbook, nationalization has finally been approved
and new heads appointed for the nationalized industries (full transfer
of control occurs on July 1, 1982).
President Mitterand has asked the government to hold the budget
deficitin the 1983 budget below 3 percent of GDP; nearly the same ratio
is. expected for this year.

The government will be required to increase

its spending in 1983 by $10-15 billion less than some earlier expectations.
In the fourth quarter of 1981,

Italian IP rose by over 5 percent

to a level about .1 percent below that of the same quarter of the
previous year.

Business surveys suggest an upturn in the first part

of this year asorders
up,
are
goods.

especially for investment and intermediate

Consumer prices during the 3 months ending in February rose at

an annual rate of about 17 percent, down slightly in comparison with

the previous three-month period.

Wholesale price inflation has remained

high, with an increase in the 12 months ending in December of over
18 percent.
The trade account improved markedly in the final quarter of last
year, with deficit of $2-1/4 billion, compared with a $5-1/2 billion

IV - 27

Strong export growth and weak

deficit in the final quarter of 1980.

domestic economic activity accounted for this improvement.
The government's budget proposals, which call for a real reduction
in current government expenditure,

remain stalled in Parliament.

The

shakiness of the present coalition government has also hindered its
effort to alter the wage indexation system.
much of the 23 percent rise in
In Canada,

This system accounted for

industrial wages in 1981.

real GNP declined 2 percent (s.a.a.r.) in the fourth

quarter of 1981 after having declined 3.4 percent in the third quarter.
This yields an increase of 1 percent in real GNP from 19 8 0-Q4 to 198 1--Q4 .
The pace of inventory accumulation and residential investment slowed
considerably in

the fourth quarter.

signs that the Canadian economy is
There is
somewhat.

some evidence,

At the present,

there are no clear

near the bottom of the recession.

however,

that prices have begun to moderate

Inflation as measured by the CPI has eased during the

three-month period ending in January 1982,

as the increase in the CPI

slowed to 2.3 percent from 2.7 percent the previous three months.
The current-accourt deficit fell to $0.5 billion in the fourth
quarter from $2.1 billion in the third quarter of last year.

For 1981

as a whole the deficit was almost $5.6 billion compared with about
$1.6 billion in 1980.
In Belgium the continued weak pace of economic activity was
reflected in a further rise of the unemployment rate.

In December the

rate reached 15.4 percent (n.s.a.) of the insured labor force, compared
with 13.7 percent one year earlier.
accelerated further,

remains high.

Although inflation has not
In January and February the

IV -

consumer price index averaged 8 percent above the year earlier level,
The trade deficit similarly has not worsened recently,
high.

Through November,

but remains

the trade deficit totaled $6.3 billion.

response to these current macroeconomic problems,
recently adopted a major policy program.

the government has

In early February, Parliament

approved a measure whereby the government was authorized to rule by
decree for one year on certain economic matters.

On February 22 the

Belgian franc was devalued by 8.5 percent within the EMS.
time the government announced a wage and price freeze.

At the same

Wages are

frozen until the end of May for all but the lowest paid workers.
June until the end of 1982,

From

cost-of-living adjustments will take the

form of a flat-rate increase which will only partly cover inflation.
Prices are frozen until the end of March,

after which time increases

will be allowed only if necessary (primarily to meet increased costs
of imported inputs).

In addition, tax changes were announced that

encourage investment in Belgian equities.
On February 17,

the Bank of Mexico announced that it

was

temporarily withdrawing from the foreign exchange market in order to
let the quotation of the. peso vis-a-vis other currencies find a level
correspinding to current economic conditions.

In the next few days,

the peso's value in dollar terms fell about 40 percent (from about
3.74 cents to about 2.2Q cents) and since then has remained near this
rate.

Since the peso was last devalued, by 45 percent in

has followed generally expansionary policies.

1976,

As a result,

Mexico

economic

growth was more than 8 percent in each of the past four years, and
employment grew by more than 3 million,

but inflation averaged over

IV - 29

20 percent annually in 1977-80,

and 28 percent in 1981.

This policy

resulted in a widening of the current-account deficit from about
$2 billion in

1977 to about $12 billion last year, even though crude oil

exports increased from less than $1 billion in 1977 to about $14 billion.
Fears of a possible large peso devaluation emerged last year as
public awareness of the deterioration in the current-account position
increased.

Capital flight developed in early summer when the government

attempted to resist the downward trend in world oil prices and,
months,

sold only obout half as much oil as it

for two

had been selling.

While

capital flight abated somewhat after Mexican oil prices were brought
back into line with world quotations in August,

picked up momentum

once again late last eyar after the 1982 budget was announced, making
it

clear that the expansionary policies would be continued.

The potential

current-account deficit for 1982 widely forecast before the devaluation
greatly exceeded the amount of external finance thought likely to be
available from foreign and international lenders,
inevitability of a crisis.

pointing to the

When the outflow intensified early in February,

and reserves ran down rapidly, the authorities concluded that it
be too costly, if

not impossible,

to put off action.

would

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, March 29-30, 1982 : Greenbook Part 2

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