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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class II FOMC March 25, 1981 SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Summary Indications of a slowing of economic growth emerged in February. Industrial production and housing starts declined, and employment and income gains moderated; however, retail sales continued to expand. Favor- able developments in food prices have been offset to a large extent by a surge in energy prices, and, on balance, inflation appears to have continued at about last year's average rate. Industrial production, which had been growing at progressively slower rates in recent months, declined 1/2 percent in February. While auto assemblies were up, truck production declined and output of construction supplies dropped sharply; production cutbacks also were widespread among other industries. A rise in the output of energy materials reflected the stockpiling of coal in anticipation of a strike at the end of March. Following four months of declining home sales and extremely high mortgage-interest rates, housing starts fell sharply in February for both single and multifamily units. Total starts dropped by 400,000 (annual rate) to a 1.2 million unit pace in February--a level slightly lower than that of a year earlier. Permits also declined further. In line with slowing activity, manufacturing employment was little changed in February, and construction jobs declined. Work schedules were curtailed sharply in these sectors, although the reductions may have been exaggerated by adverse weather during the survey week. Hiring in private service-producing industries, however, continued to trend upward. The overall unemployment rate--at 7.3 percent--remained essentially unchanged from the levels experienced since last May. The rise in consumer spending in the first two months of 1981 exceeded the gains in household income. Excluding autos and nonconsumption items, nominal retail purchases grew 2.1 percent in January and 1.1 percent in February. The rate of domestic auto sales, which had averaged about 6-3/4 million units since the model year began, rose to 9 million units (annual rate) from late February to mid-March when widespread rebates were being offerred. Meanwhile, foreign car sales were at a near-record pace in February, bringing total sales to the highest level in a year. The surge in domestic car sales along with recent low production rates have trimmed dealer inventories, and auto makers increased assemblies further in March, by about 10 percent. Business investment in real terms increased during the fourth quarter and appeared to strengthen further at the beginning of the year. Construc- tion rose substantially in December and January, but shipments of equipment, after rising sharply in January, lost ground in the next month. On balance, commitments data such as contracts and orders suggest little change in the level of real outlays over coming months; although the Commerce Department survey, taken in January and February, implies a small increase in real outlays over the course of 1981. In January, the total book value of business inventories rose sharply at about a $53 billion annual rate. This increase, however, was accom- panied by brisk advances in shipments and sales, so that the overall inventory/sales ratios remained quite low. Moreover, the inventory buildup was concentrated in materials and work-in-process at factories suggesting that the buildup may represent manufacturers' anticipations of further increases in production and shipments. In the trade sector, January increases in book values of inventories were quite small, continuing the pattern of little accumulation of the fourth quarter. Inflation remained rapid in early 1981 and underlying labor cost pressures showed no clear sign of moderation. An easing of upward pressures on food and home prices was offset by the impact of oil decontrol. The moderation in food prices in recent months appears to be temporary; it has been concentrated in meat products--items for which fundamental supply developments appear to be unfavorable. The jump in energy prices in January and February reflected the direct effects of oil decontrol as well as the OPEC increases of late last year. Fuel supplies remain ample, and surveys suggest that retail energy price rises moderated substantially in early March. Outlook Despite the recent indications of slowing in the growth of activity, the average level of real GNP in the first quarter apparently was substantially above that of the fourth quarter. Real GNP is estimated to have risen about 5-3/4 percent (annual rate) in the first quarter, and nominal GNP probably advanced at a rate of about 15-1/2 percent. Real final sales are estimated to have advanced at a rate of almost 4 percent, and the inventory liquidation of late 1980 appears to be coming to a close. The GBP fixed-weighted price index is estimated to have risen at a 10-1/2 percent annual rate, higher than in the preceding quarter, but lower than shown in the last Greenbook. For the second quarter the staff projects a leveling out of real GNP, characterized by a weakening in all major sectors of final demand. Recent declines in housing starts and high mortgage-interest rates suggest further reductions in construction activity. Consumer spending growth is unlikely to be sustained at the first quarter pace as income growth is expected to slow and the saving rate is already at an unusually low level. Moreover, auto sales are projected to decline in the second quarter, following elimination of large price concessions; as in the past, these rebates apparently have caused some buying to be shifted forward. Given the sluggish behavior of orders and contracts during recent quarters, we are projecting that real business fixed investment will resume a moderate decline. The staff's economic and financial projections continue to assume that in 1981 M-1B will grow 4-3/4 percent, the midpoint of the FOMC range, abstracting from the impact of the introduction of nationwide NOW accounts; during 1982, growth of 4-1/4 percent is assumed. To hold monetary expansion to these rates, while inflation is enlarging transactions needs, is expected to require a substantial rise in short-term interest rates in the months ahead--and very high rates on average throughout the projection period. This suggests considerable financial stress for many intermediaries and businesses. For fiscal policy, the staff continues to assume a 10 percent cut in personal income tax rates and in withholding schedules beginning midyear 1981, representing about $30 billion at an annual rate starting at that time. In contrast to the administration's proposal, no further personal tax rate reductions are assumed for 1982. Business tax reductions also are assumed, in the form of accelerated depreciation schedules (a modified 10-5-3) retroactive to the first of this year; this results in tax relief of about $6 billion for businesses in 1981. For fiscal year 1982, the staff has assumed nondefense budget reduction of almost $30 billion, or roughly 2/3 of the cuts requested by the administration. However, these reductions partially are offset by increased defense expenditures, projected to be $6 billion above the Carter budget and $4 billion higher than the previous Greenbook projection for FY 1982. Based on the staff's economic projections, other expenditures--particularly interest payments and unemployment insurance-are estimated to be higher than in the March Budget Revisions by the administration. The net result is an estimated unified budget deficit of $63 billion in FY 1981 and $77 billion in FY 1982, as compared with the administration's projected deficits of $55 and $45 billion, respectively. Following the expected lull in the second quarter of 1981, economic activity is projected by the staff to advance only very slightly-around 1/2 percent at an annual rate--over the subsequent six quarters. The weakness primarily reflects the relatively restrictive growth assumed for the monetary aggregates that will likely carry interest rates back to near-record levels later this year. Total government purchases are expected to increase at a modest rate with declines in state and local outlays about offsetting the rise in defense deliveries. Consumption, although boosted somewhat by the projected mid-year tax cut, is estimated to expand very slowly--by about 1 percent or less-as the saving rate increases toward more normal levels, and the growth of income is held down by sluggish activity in the private investment and government sectors. Total employment is projected to edge up only fractionally over the next two years, and even with a slowly rising labor force, the unemployment rate is projected to drift up to 8 percent by late 1981 and to almost 8-3/4 percent by the end of 1982. Wage and price pressures are expected to ease only modestly during 1981, but more substantial progress is projected during 1982, when the inflation rate is expected to edge below 8 percent. Energy prices are assumed to move more in line with the general rate of inflation in coming quarters. Food prices are projected to pick up again following their recent moderation. Detailed data for this projection are shown in the following tables. STAFF GNP PROJECTIONS Percent changes, annual rate Nominal GNP 1/28/81 3/25/81 Real GNP 1/28/81 3/25/81 Gross domestic business product fixed-weighted price index S Excluding food Total and energy 1/28/81 "3/25/81 1/28/81 3/25/81 Annual changes: 12.0 1979 1/ 1980 T/ 8.9 10.7 1981 T/ 1982 8.7 12.0 8.8 11.5 8.8 3.2 -.1 .6 .4 3.2 -.2 1.9 .5 9.6 9.7 10.1 8.3 9.6 9.6 9.6 8.4 Quarterly changes: 1980-Q1 I/ 12.6 1980-Q2 T/ -1.1 1980-Q3 T/ 11.8 1980-Q4 T/ 16.7 12.6 -1.1 11.8 14.9 3.1 -9.9 2.4 5.0 3.1 -9.9 2.4 3.8 10.2 9.5 9.8 9.6 10.2 9.5 9.8 8.9 15.5 9.0 9.5 9.6 1.3 -2.2 .6 .7 5.8 .0 .8 .5 12.9 9.9 8.9 8.0 10.5 9.6 9.3 8.9 .7 .3 .6 1.0 .3 .3 .6 1.2 8.1 7.9 7.8 7.5 8.3 7.9 7.8 7.5 -3.6 3.7 -.5 .6 .5 .8 -3.6 3.1 2.9 .6 .3 .9 9.8 9.7 11.4 8.5 8.0 7.7 9.8 9.4 10.0 9.1 8.1 7.7 1.7 .0 .1 .7 1.7 -.3 1.8 .6 9.4 9.8 10.0 7.8 9.4 9.6 9.6 7.9 198 1-Q1 1981-Q2 1981-Q3 1981-Q4 13.2 6.3 9.3 9.9 1982-Qi 1982-Q2 1982-Q3 1982-Q4 8.8 7.9 8.1 9.2 Two-quarter changes: 5.6 5.6 1980-Q2 1/ 13.4 14.3 1980-Q4 T/ 12.2 9.7 1981-Q2 1981-Q4 9.6 9.5 8.2 8.3 1982-Q2 9.0 8.6 1982-Q4 3/ Four-quarter 1979-Q4 1/ 1980-Q4 T/ 1981-Q4 1982-Q4 II 2/ 7/ changes: 9.9 9.8 9.6 8.5 9.9 9.4 10.9 8.6 Actual. Percent change from two quarters earlier. Percent change from four quarters earlier. Unemployment rate (percent) 1/28/8181 3125/81 I-8 March 25, 1981 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures tures and and income income figures are billions of current dollars at annual1 rates.) rates.) ___^ ____ 1919 19U8 Ql Q2 Q3 Q4 Ql Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2340.6 2316.2 1858.0 1838.1 2374.6 2341.5 1876.4 1868.2 2444.1 2430.8 1955.4 1937.5 2496.3 2497.1 2000.7 1993.1 2571.7 2569.1 2052.3 2044.1 2564.8 2557.4 2027.4 2010.3 2637.3 2653.4 2119.9 2075.4 2730.6 2748.0 2189.4 2166.1 Personal consumption expenditures Goods Services 1454.1 784.3 669.9 1478.0 793.8 684.2 1529.1 824.8 704.3 1582.3 855.3 727.0 1631.0 882.0 749.0 1626.8 858.4 768.4 1682.2 883.0 799.2 1751.0 926.8 824.2 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 408.3 116.7 267.3 24.3 20.8 423.2 117.2 272.9 33.1 29.2 421.7 119.8 288.5 13.3 7.8 410.0 120.6 290.2 -4.4 415.6 115.2 297.8 2.5 1.5 390.9 93.6 289.8 7.4 6.1 377.1 99.2 294.0 -16.0 -12.3 397.7 113.0 302.1 -17.4 -14.0 Net exports of goods and services 1/ Exports Imports 19.9 259.1 239.2 8.2 266.8 258.6 17.9 293.1 275.2 7.6 306.3 298.7 8.2 337.3 329.1 17.1 333.3 316.2 44.5 342.4 297.9 23.3 346.1 322.7 Gov't. purchases of goods and services Federal 2/ State and local 458.2 164.8 293.4 465.1 163.6 301.6 475.4 165.1 310.4 496.4 178.1 318.3 516.8 190.0 326.8 530.0 198.7 331.3 533.5 194.9 338.6 558.6 212.0 346.6 -.8 Gross national product in constant (1972) dollar 1479.9 1473.4 1488.2 1490.6 1501.9 1463.3 1471.9 1485.6 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1864.6 1194.8 1580.2 5.3 1906.3 1218.6 1612.8 5.6 1972.3 1248.6 1663.8 5.4 2032.0 1282.2 1710.1 4.7 2088.2 1314.7 1765.1 4.9 2114.5 1320.4 1784.1 6.2 2182.1 1341.8 1840.6 6.1 2256.2 1397.8 1897.0 5.1 Corporate profits with I.V.A. and C.C. Adj Corporate profits before tax 201.9 253.1 196.6 250.9 199.5 262.0 189.4 255.4 200.2 277.1 169.3 217.9 177.9 237.6 183.0 249.2 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -11.5 -4.6 -8.1 5.1 -15.2 -2.3 -24.5 -7.1 -36.3 -17.1 -66.5 -21.5 -74.2 -21.2 -68.0 -13.5 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) all mfg. (percent) Capacity utilization: Materials (percent) 29.5 7.1 21.9 -1.7 102.3 5.8 102.4 5.7 89.1 21.1 152.7 86.9 88.4 Housing starts, private (million units, A.R.) 1.64 11.56 New autos sales, (millions, A.R.) Domestic models 9.30 2.25 Foreign models 1/ 2/ 26.5 2.1 28.9 4.0 26.6 1.3 23.9 -1.7 28.6 .9 104.7 7.3 105.0 7.5 105.2 7.5 37.1 8.1 103.2 5.8 103.7 5.9 104.2 6.2 89.7 21.1 90.2 21.1 90.6 21.0 91.1 21.0 90.5 20.3 90.1 19.9 90.9 20.3 152.3 85.9 87.5 152.6 85.3 87.2 152.5 84.4 86.3 152.5 83.4 85.5 144.6 77.9 78.7 142.1 75.7 74.9 149.1 79.2 80.0 1.84 10.65 8.16 2.49 1.79 1.59 10.79 8.63 2.16 9.80 7.43 2.37 1.23 10.65 7.87 2.77 1.06 7.68 5.53 2.14 1.39 8.80 6.51 2.29 1.54 9.04 6.57 2.47 Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I-9 March 25, 1981 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1979 Q91 Q2 1980 Q3 Q4 Ql Q2 Q3 Q4 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports -1.7 -2.5 -3.0 -1.6 4.1 7.2 8.7 5.5 .6 2.9 2.2 1.9 3.1 3.1 2.2 -.4 -9.9 -10.4 -13.3 -14.4 2.4 4.1 6.5 4.6 3.8 4.4 4.9 8.5 Personal consumption expenditures Goods Services -1.2 -4.6 3.0 4.7 6.0 3.1 3.6 4.2 2.8 .8 -.3 2.1 -9.8 -17.7 .0 5.1 4.0 6.4 7.0 10.2 3.7 Gross private domestic investment Residential structures Business fixed investment 1.7 -10.8 -9.9 -3.6 13.4 -17.8 -3.1 -5.4 -5.6 -24.2 2.2 -28.9 -60.2 -10.0 16.0 -1.5 11.1 64.2 4.0 1.2 -3.6 3.9 6.1 13.1 2.4 6.9 18.9 .6 2.5 11.9 -2.8 -5.0 -13.1 .3 2.2 2.0 2.3 .8 1.3 -4.9 4.1 2.9 -. 4 Gov't. purchases of goods and services Federal State and local -. 5 -7.9 4.0 .5 Disposable personal income 3.5 -19.9 Current dollars Gross national product Final purchases Private Excluding net exports 5.9 4.4 4.0 6.7 12.2 16.1 17.9 15.7 8.8 11.4 9.6 12.0 12.6 12.0 10.7 10.6 -1.1 -1.8 -4.8 -6.5 11.8 15.9 19.5 13.6 14.9 15.0 13.8 18.7 Personal consumption expenditures Goods Services 6.7 4.9 8.8 14.6 16.6 12.2 14.7 15.6 13.5 12.9 13.1 12.7 -1.0 -10.3 10.8 14.3 12.0 17.0 17.4 21.4 13.1 Gross private domestic investment Residential structures Business fixed investment 15.4 1.8 8.6 -1.5 9.1 25.0 -10.6 2.8 2.3 5.6 -16.7 11.0 -21.8 -56.4 -10.4 -13.3 25.7 6.0 23.7 68.5 11.5 Gov't. purchases of goods and services Federal State and local 6.2 -2.9 11.6 9.2 3.7 12.2 18.8 35.4 10.6 17.5 29.5 11.2 10.6 19.8 5.6 2.6 -7.5 9.1 20.2 40.2 9.7 Disposable personal income 8.5 13.3 11.6 13.5 4.4 13.3 12.8 Personal income Wage and salary disbursements 9.3 8.2 14.6 10.2 12.7 11.2 11.5 10.5 5.1 1.8 13.4 6.6 14.3 17.8 -10.1 -3.4 6.0 18.9 -18.8 -9.7 24.8 38.6 -48.9 -61.8 21.9 41.4 12.0 21.0 2.4 .6 2.3 -. 6 1.7 -1.7 2.5 -.8 -2.7 -11.7 -1.6 -7.2 3.6 6.4 -.9 10.9 11.9 -1.9 10.0 12.1 -1.4 8.1 9.7 -.3 9.6 9.9 .0 9.9 9.9 -3.0 11.2 14.6 3.8 9.3 5.3 -1.9 9.6 11.8 8.4 7.8 7.8 8.1 9.3 9.8 9.2 10.7 9.5 7.5 10.2 9.2 7.2 12.5 9.5 6.8 14.0 9.3 7.4 14.3 10.2 7.7 16.5 9.5 9.3 13.1 9.8 9.3 7.7 8.9 8.5 12.9 5.4 -1.0 .8 -. 3 .0 Corporate profits with IVA & C.C. Adj. Corporate profits before tax Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator 1/ Gross domestic business product fixed-weighted price index 2/ Excluding food and energy Consumer price index (all urban) Industrial production I! 2/ - Excluding Federal pay increases, rates ot change were: 9.2 percent; 1980-Q4, 9.7 percent. Uses expenditures in 1972 as weights. iL y-Qi, -19.2 -6.7 .3i percent; I9/v-q4, 7.a percent; ivk-Ql, 21.2 I-10 March 25, 1981 CONFIDENTIAL CLASS II FOMC FR GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of current dollars at annual rates.) 1981 1982 Projected Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2830.8 2830.5 2259.4 2235.7 2892.3 2885.3 2305.2 2278.8 2958.6 2952.6 2358.1 2331.9 3026.9 3022.9 2411.2 2381.7 3088.3 3084.8 2461.6 2429.5 3148.6 3144.6 2509.5 2476.9 3211.4 3206.9 2560.3 2527.8 3286.5 3282.0 2615.5 2580.3 Personal consumption expenditures Goods Services 1810.4 964.0 846.4 1856.9 986.4 870.5 1906.5 1012.0 894.5 1950.9 1034.4 916.5 1992.6 1054.1 938.5 2032.2 1072.7 959.5 2073.2 1091.7 981.5 2114.5 1110.5 1004.0 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 425.6 114.0 311.3 .3 .2 428.9 107.0 314.9 7.0 7.0 431.4 107.0 318.4 6.0 6.0. 434.8 108.5 322.3 4.0 4.0 440.4 110.0 326.9 3.5 3.5 448.7 112.0 332.7 4.0 4.0 459.1 115.5 339.1 4.5 4.5 470.3 120.0 345.8 4.5 4.5 Net exports of goods and services 1/ Exports Imports 23.7 370.0 346.2 26.4 380.4 354.0 26.2 389.2 363.0 29.5, 400.4 370.9 32.1 410.1 378.0 32.6 417.6 385.1 32.5 425.2 392.6 35.2 434.4 399.3 Gov't. purchases of goods and services Federal 2/ State and local 571.1 217.6 353.5 580.1 220.0 360.1 594.5 228.0 366.5 611.7 238.8 372.9 623.2 244.6 378.6 635.1 250.6 384.5 646.6 256.4 390.2 666.5 270.6 395.9 Gross national product in constant (1972) dollars 1506.8 1506.9 1509.8 1511.6 1512.7 1513.9 1516.2 1520.8 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 2318.0 1440.6 1944.6 4.3 2376.2 1467.4 1989.8 4.1 2446.1 1497.9 2072.7 5.5 2499.8 1527.4 2113.8 5.1 2551.2 1554.9 2156.5 5.0 2606.1 1582.3 2199.3 5.0 2669.2 1606.7 2251.3 5.4 2724.8 1639.9 2293.9 5.3 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 184.3 251.0 182.2 242.5 185.8 245.5 187.5 246.7 181.9 240.6 178.9 237.8 186.0 244.7 197.6 256.3 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) 3/ -34.6 17.1 -37.5 22.3 -83.1 -19.4 -81.4 -11.5 -77.3 -1.0 -77.9 4.6 -91.4 -2.2 -96.0 34.6 5.0 33.9 3.7 36.4 5.6 34.7 3.3 33.7 1.5 33.2 .3 33.2 -. 5 34.0 -. 5 105.7 7.4 106.0 7.5 106.3 7.7 106.5 7.9 106.8 8.1 107.1 8.3 107.4 8.5 107.6 8.6 91.6 20.4 91.6 20.3 91.7 20.3 91.6 20.2 91.6 20.2 91.7 20.1 91.7 20.1 91.7 20.2 151.0 79.0 80.6 151.5 78.7 80.1 151.8 78.3 79.7 152.0 77.9 79.2 152.2 77.4 78.7 152.5 77.0 78.2 153.1 76.8 77.9 1.25 8.90 6.40 2.50 1.25 8.80 6.40 2.40 1.25 8.70 6.30 2.40 1.30 8.75 6.40 2.35 1.30 8.80 6.50 2.30 1.35 8.70 6.40 2.30 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) all mfg. (percent) Capacity utilization: Materials (percent) 151.0 79.6 81.2 Housing starts, private (million units, A.R.) New autos sales, (millions, A.R.) Domestic models Foreign models 1.35 10.10 7.40 2.70 -. 3 1.35 8.65 6.35 2.30 I/ Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. 2/ Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. 3/ Estimates in table are evaluated at a 5.1 percent high employment unemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $37.2 billion in 1980-Q4 and a deficit of $37.1 billion in 1981-Q4, and a deficit of $27.4 billion in 1982-Q4. I-11 March 25, 1981 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) CONFIDENTIAL - FR CLASS II FOMC 1982 1981 Projected Ql Constant (1972) Q2 Q3 Q4 Q1 Q2 3 Q4 Q dollars Gross national product Final purchases Private Excluding net exports 5.8 3.8 4.1 3.9 .0 -. 8 -. 7 -1.1 .8 .9 .9 .6 .5 .7 .7 .3 .3 .4 .2 .3 .3 .3 .2 .3 .6 .5 .6 .8 1.2 1.2 1.3 1.2 Personal consumption expenditures Goods Services 4.1 8.0 1.6 .8 .2 1.8 1.5 .3 2.0 .7 -. 2 1.5 .5 -. 1 1.2 .3 .2 .8 .5 .4 1.1 .8 .8 1.8 Gross private domestic investment Residential structures Business fixed investment 19.3 -4.4 6.0 -3.3 -28.5 -2.7 -3.7 -2.3 -1.7 -1.5 -2.4 -. 7 .8 -. 7 .6 2.4 4.5 1.2 2.8 7.7 1.5 2.5 7.2 -. 3 -1.6 -3.3 -. 5 .7 2.9 -. 6 1.1 4.3 -. 8 .9 4.8 -1.4 .4 3.3 -1.3 .3 3.2 -1.5 1.2 5.7 -1.6 .5 -. 1 7.5 -. 6 .1 .3 1.9 .4 Gross national product Final purchases Private Excluding net exports 15.5 12.6 13.4 13.5 9.0 8.0 8.4 7.9 9.5 9.7 9.5 9.7 9.6 9.9 9.3 8.8 8.4 8.4 8.6 8.3 8.0 8.0 8.0 8.0 8.2 8.2 8.4 8.5 9.7 9.7 8.9 8.6 Personal consumption expenditures Goods Services 14.3 17.0 11.2 10.7 9.6 11.9 11.1 10.8 11.5 9.6 9.2 10.2 8.8 7.8 10.0 8.2 7.2 9.3 8.3 7.3 9.5 8.2 7.1 9.5 Gross private domestic investment Residential structures Business fixed investment 31.2 3.7 12.7 3.1 -22.4 4.7 2.4 .0 4.5 3.2 5.7 5.0 5.3 5.6 5.8 7.8 7.5 7.3 9.6 13.1 7.9 10.1 16.5 8.1 Gov't. purchases of goods and services Federal State and local 9.3 11.0 8.2 6.5 4.5 7.7 10.3 15.4 7.3 12.1 20.3 7.2 7.7 10.1 6.3 7.9 10.2 6.4 7.4 9.6 6.1 12.9 24.1 6.0 Disposable personal income 10.4 9.6 17.7 8.2 8.3 8.2 9.8 7.8 Personal income Wage and salary disbursements 11.4 12.8 10.4 7.7 12.3 8.6 9.1 8.1 8.5 7.4 8.9 7.2 10.0 6.3 8.6 8.5 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 2.9 3.0 -3.9 -12.9 8.1 4.9 3.0 2.1 -11.4 -9.5 -6.4 -4.7 16.8 12.1 27.4 20.4 Nonfarm payroll employment Manufacturing 2.8 2.4 .3 -1.3 .1 -. 8 .0 -. 8 .0 -. 8 .0 -. 8 .0 -. 4 .4 .8 3.3 12.1 8.5 -. 4 9.1 9.5 .7 8.8 8.0 .3 8.4 8.1 .3 9.2 8.9 .5 7.9 7.4 .4 7.7 7.3 .9 7.7 6.7 9.1 8.9 8.7 9.0 8.0 7.7 7.6 8.3 10.5 11.5 9.6 8.6 11.6 9.3 8.1 11.9 8.9 7.9 10.5 8.3 7.7 8.6 7.9 7.4 8.0 7.8 7.3 7.8 7.5 7.1 7.5 5.2 .0 1.3 .8 .5 .5 .8 1.6 Gov't. purchases of goods and services Federal State and local Disposable personal income -4.3-7.6 -2.1 Current dollars Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator 1/ Gross domestic business product fixed-weighted price index 2/ Excluding food and energy -8.3 Consumer price index (all urban) Industrial production 1/ 2/ Excluding Federal pay increases, the rates of change are: 98 8.0 percent; 1 2-Q4, 7.4 percent. Uses expenditures in 1972 as weights. 1981-Q1, 9.1 percent; 1981-Q4, 8.3 percent; 1982-Q1, I-12 March 25, 1981 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) Projected 1981 1982 1975 1976 1977 1978 1979 1980 1549.2 1556.1 1216.2 1189.4 1718.0 1706.2 1344.1 1330.4 1918.0 1897.0 1502.5 1506.7 2156.1 2133.9 1701.3 1701.9 2413.9 2396.4 1922.6 1909.2 2626.1 2632.0 2097.3 2074.0 2927.2 2922.8 2333.5 2307.0 3183.7 3179.6 2536.7 2503.6 Personal consumption expenditures Goods Services 976.4 539.5 437.0 1084.3 598.5 485.7 1205.5 657.8 547.7 1348.7 729.1 619.6 1510.9 814.5 696.3 1672.8 887.6 785.2 1881.2 999.2 882.0 2053.1 1082.2 970.9 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 206.1 55.3 157.7 -6.9 -10.5 257.9 72.0 174.1 11.8 13.9 322.3 95.8 205.5 21.0 20.2 375.3 111.3 242.0 22.2 21.8 415.8 118.6 279.7 17.5 13.4 395.3 105.3 296.0 -5.9 -4.7 430.2 109.1 316.7 4.3 4.3 454.6 114.4 336.1 4.1 4.1 Net exports of goods and services 1/ Exports Imports 26.8 154.9 128.1 13.7 170.9 157.1 -4.2 183.3 187.5 -. 6 219.8 220.4 13.4 281.3 267.9 23.3 339.8 316.5 26.5 385.0 358.5 33.1 421.8 388.7 Gov't. purchases of goods and services Federal 2/ State and local 339.9 122.7 217.2 362.1 129.2 232.9 394.5 143.9 250.6 432.6 153.4 279.2 473.8 167.9 305.9 534.7 198.9 335.8 589.3 226.1 363.2 642.8 255.5 387.3 Gross national product in constant (1972) dollars 1233.9 1300.4 1371.7 1436.9 1483.0 1480.7 1508.8 1515.9 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1265.0 806.4 1096.1 8.6 1391.2 889.9 1194.4 6.9 1538.0 983.8 1311.5 5.6 1721.8 1105.2 1462.9' 5.2 1943.8 1236.1 1641.7 5.2 2160.2 1343.7 1821.7 5.6 2409.9 1483.2 2030.1 4.8 2637.8 1595.9 2225.2 5.2 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 110.5 132.1 138.1 166.3 164.7 192.6 185.5 223.3 196.8 255.4 182.6 245.5 185.1 246.6 186.1 244.8 Federal government surplus or deficit (N.I.A. basis) High employment surplus or deficit (-) -69.3 -29.2 -53.1 -20.1 -46.4 -23.0 -29.2 -15.7 -14.8 -2.2 -61.2 -18.3 -59.2 2.1 -85.7 .3 26.7 2.9 29.1 2.1 34.9 4.4 33.5 .2 Gross national product Final purchases Private Excluding net exports State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 5.5 -7.6 16.6 .9 28.1 10.1 29.0 9.0 Civilian labor force (millions) Unemployment rate (percent) 92.6 8.5 94.8 7.7 97.4 7.0 100.4 6.0 Nonfarm payroll employment (millions) Manufacturing 77.0 18.3 79.4 19.0 82.5 19.7 86.7 20.5 89.9 21.1 90.7 20.4 91.6 20.3 117.8 Industrial production (1967=100) all manufacturing (percent) 72.9 Capacity utilization: 73.4 Materials (percent) 130.5 79.5 81.1 138.1 81.9 82.7 146.1 84.4 85.6 152.5 85.6 87.4 147.1 79.1 79.8 151.3 78.9 80.4 1.16 8.66 7.08 1.58 1.54 10.12 8.63 1.50 1.99 11.13 9.07 2.06 2.02 11.28 9.29 1.99 1.75 10.70 8.38 2.32 1.29 9.04 6.62 2.42 1.27 9.12 6.62 2.50 Housing starts, private (million units, A.R.) New auto sales, (millions, A.R.) Domestic models Foreign models 1/ 2/ 102.9 5.8 104.7 7.1 106.1 7.6 107.2 8.4 91.7 20.1 152.4 77.3 78.5 1.32 8.72 6.41 2.31 Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I-13 March 25, 1981 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1Projected 1979 1978 1975 5 1976. 1977 -1.1 .3 -.1 -.6 5.4 4.2 5.3 6.2 5.5 5.2 6.0 6.5 4.8 4.7 15.4 5.2 Personal consumption expenditures Goods Services 2.2 1.3 3.3 5.6 6.7 4.3 4.9 5.2 4.5 Gross private domestic investment Residential structures Business fixed investment -20.8 -12.5 -12.1 19.2 21.3 5.3 15.7 18.5 11.9 1980 1981 1982 3.2 3.5 4.0 2.9 -.2 .7 .2 -1.0 1.9 1.5 1.8 2.0 .5 .5 .5 .4 4.7 4.2 5.4 2.9 1.9 4.1 .5 -1.4 2.6 2.7 -2.1 2.5 7.6 2.9 9.1 1.3 -5.2 6.5 -12.5 -18.6 -3.0 2.9 6.3 1.0 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports 1.4 -3.4 -. 3 .7 .1 1.3 -1.2 -3.3 -. 6 Gov't. purchases of goods and services Federal State and local 2.1 .8 2.9 .0 -.7 .5 2.1 4.1 .9 2.0 3.7 1.5 1.9 1.2 Disposable personal income 2.0 3.6 3.6 4.4 3.1 .7 1.7 1.1 8.0 9.6 9.0 7.9 10.9 9.6 10.5 11.8 11.6 11.2 11.8 13.3 12.4 12.5 13.2 12.9 12.0 12.3 13.0 12.2 8.8 9.8 9.1 8.6 11.5 11.1 11.3 11.2 8.8 8.8 8.7 8.5 Personal consumption expenditures Goods Services 9.9 9.0 11.1 11.1 10.9 11.2 11.2 9.9 12.7 11.9 10.8 13.1 12.0 11.7 12.4 10.7 9.0 12.8 12.5 12.6 12.3 9.1 8.3 10.1 Gross private domestic investment Residential structures Business fixed investment -9.9 -4.7 .8 25.1 30.2 10.3 25.0 33.1 18.1 16.5 16.1 17.7 10.8 6.6 15.6 -4.9 -11.3 5.8 8.8 3.7 7.0 5.7 4.8 6.1 Gov't. purchases of goods and services Federal State and local 11.8 10.6 12.5 6.5 5.3 7.3 8.9 11.4 7.6 9.7 6.6 11.4 9.5 9.5 9.6 12.9 18.5 9.8 10.2 13.7 8.2 9.1 13.0 6.6 Disposable personal income 9.8 9.0 9.8 11.5 12.2 11.0 11.4 9.6 Personal income Wage and salary disbursements 8.2 5.3 10.0 10.4 10.6 10.6 12.0 12.3 12.9 11.8 11.1 8.7 11.6 10.4 9.5 7.6 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 16.5 -3.3 25.0 25.9 19.3 15.8 12.6 15.9 6.1 14.4 -7.2 -3.9 1.4 .5 -. 7 Nonfarm payroll employment Manufacturing -1.7 -8.8 3.2 3.7 3.9 3.6 5.1 4.2 3.7 2.8 .9 -3.4 1.0 -.4 -. 7 2.1 9.6 7.4 3.2 8.1 4.7 2.0 7.6 5.5 -. 2 8.5 8.7 -. 8 9.6 10.4 -. 6 9.7 10.4 .7 10.0 9.2 .4 8.5 8.1 9.6 5.2 5.8 7.3 8.5 9.0 9.4 8.3 9.0 9.5 9.1 5.4 5.8 5.8 6.3 6.3 6.5 7.8 7.2 7.7 9.6 8.1 11.3 9.6 8.0 13.5 9.6 8.4 11.2 8.4 7.7 9.2 5.8 5.8 4.4 -3.5 2.9 .7 -. 9 .4 1.0 .0 .6 3.5 -1.2 Current dollars Gross national product Final purchases Private Excluding net exports Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator Gross domestic business product fixed-weighted price index 1/ Excluding food and energy Consumer price index (all urban) Industrial production I/ Uses expenditures in 1972 weights. -8.9 10.8 .5 .1 FEDERAL SECTOR ACCOUNTS (billions of dollars) March 25, 1981 FY 1982 e/ Admin. F.R. I/ Board 1980* [ FRB Staff Estimates 8e/ Calendar quarters: unadjusted data F.R. 1980 1981 Board III* IV* I II III IV I 596.3 659.3 650.3 695.3 650.6 727.1 533.0 601.1 613.6 690.8 135.2 150.5 127.0 160.6 135.0 166.6 181.8 163.1 152.5 169.0 144.3 192.2 -54.9 -63.0 -45.0 -76.5 -68.1 -77.2 -15.4 -33.6 -31.6 18.7 -16.5 -14.2 -73.8 -23.6 -78.5 -22.1 -85.1 -16.7 -61.7 -17.5 -94.0 -15.3 -83.4 -21.2 -98.4 -4.9 -20.3 -2.2 -35.8 -5.2 -36.8 -7.7 11.0 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 3/ 70.5 3.2 0.1 71.0 6.0 1.5 75.6 6.0 3.5 60.0 0.0 1.7 91.7 0.0 2.3 79.3 3.6 0.5 87.5 0.3 10.6 '27.1 -6.9 0.1 27.7 8.7 -0.6 35.5 -2.3 3.6 Cash operating balance, end of period 21.0 15.0 15.0 15.0 15.0 12.3 12.0 21.0 12.3 Memo: 21.4 18.2 21.5 24.9 20.1 24.3 17.9 2.2 9,1 527.3 578.2 190.2 126.1 64.1 388.0 -58.9 609.0 663.1 216.6 148.2 68.4 446.5 -54.1 611.5 667.3 219.4 149.0 70.4 447.9 -55.8 664.4 707.1 244.7 172.9 71.8 462.4 -42.7 655.4 737.4 247.6 173.5 74.1 489.8 -82.0 540.8 602.0 198.9 131.7 67.2 403.1 -61.2 High employment (H.E.) surplus(+)/deficit(-) evaluated at H.E. unemployment rate of: -16.7 5.1 percent -38.9 6.1 percent n.a. n.a. 1.6 -23.1 n.a. n.a. -2.5 -28.5 -18.3 -41.1 Unified budget receipts Unified budget outlays Surplus(+)/deficit(-), unified budget Surplus(+)/deficit(-), off-budget agencies 2/ Combined deficit to be financed Sponsored agency borrowing 4/ Fiscal Year 1980* FY 1981 e/ Admin. F.R. 1/ Board 520.0 579.6 600.3 655.2 -59.6 C III 147.0 166.4 194.1 182.5 165.2 186.1 -47.9 -19.4 11.6 -20.9 -7.0 -23.5. -1.3 -49.2 -4.7 -24.1 -5.4 6.2 -6.2 -27.1 -3.6 -5.4 -2.0 16.0 5.0 2.5 39.7 3.0 6.5 24.6 4.0 -4.5 -0.2 -4.0 -2.0 27.6 -3.0 2.5 14.6 20.0 15.0 12.0 8.0 12.0 15.0 2.5 4.7 5.3 5.4 5.0 5.0 627.3 686.5 226.1 155.2 70.9 460.4 -59.2 Seasonally adjusted annual rates 540.8 573.1 620.5 632.6 619.8 615.0 641.1 655.1 670.1 702.9 194.9 212.0 217.6 220.0 228.0 131.4 141.6 145.7 151.3 157.4 63.5 70.4 71.9 68.7 70.6 420.3 429.1 437.5 450.1 474.9 -74.2 -68.0 r34.6 -37.5 -83.1 636.3 717.7 238.8 166.2 72.6 478.9 -81.4 649.8 727.1 244.6 171.0 73.6 482.5 -77.3 661.1 739.4 250.6 176.0 74.6 488.4 -78.0 674.4 765.8 256.4 180.8 75.6 509.4 -91.5 2.1 -23.1 -21.2 -44.4 -11.5 -37.1 -1.0 -26.9 4.6 -21.5 -2.2 -28.6 NIA Budget Receipts Expenditures Purchases (total) Defense Nondefense All other expenditures Surplus(+)/deficit(-) 1982 II -13.5 -37.2 17.1 -7.5 22.3 -3.3 -19.4 -44.5 5.0 *--actual e--estimated n.a.--not available 1. Fiscal Year 1982 Budget Revisions, March 1982. In its report on the Second Concurrent Resolution, the Congress recommended receipts of $605.0 billion and outlays of $632.4 billion. 2. Includes Federal Financing Bank, Postal Service Fund, Rural Electrification and Telephone Revolving Fund, and Rural Telephone Bank. 3. Checks issued less checks paid, accrued items and other transactions. 4. FRB staff estimates include Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks and Banks for Cooperatives marketable debt on an offerings basis. Administration estimates are from The Budget of the United States Government, Fiscal Year 1982, January 1981. DOMESTIC FINANCIAL DEVELOPMENTS Summary. Short-term interest rates have declined substantially since the last FOMC meeting, as weakness through February in aggregates led to a moderated demand for reserves. the narrow monetary Although there has been some firming most recently as the money stock this month has strengthened, short-term rates of interest have declined on balance by 2 to 4 percentage points over the intermeeting period. bond yields are little changed. In the long-term sector, Home mortgage rates rose during February but during March primary rates on fixed-rate loans have leveled off and rates in the secondary market on balance have edged down. Available data suggest that borrowing by nonfinancial businesses has diminished in vious quarter. the first quarter of 1981 from the pace of the pre- Businesses stepped up their issuance of publicly- offered bonds and stocks--to about the average $5.2 billion monthly rate of 1980 as a whole--but this was more than offset by a slowing in their shorter-term borrowing. The composition of short-term bor- rowing also changed, as the failure of the prime rate to fall as rapidly as open market rates was reflected in a marked shift from bank loans to commercial paper issuance. Indeed, borrowing from domestic offices of large banks contracted from the end of January through mid-March, despite a pickup in below-prime lending. To some extent, borrowing from domestic offices of large U.S. banks was depressed by a sizable expansion in lending at their foreign branches to U.S. rates related to the Eurodollar rate. I-15 residents at I-16 In the household sector, the current quarter. pret in borrowing appears to have weakened in Home mortgage developments are difficult to inter- light of reports of greater reliance on "creative" methods of finance encouraged by near-record mortgage rates. Traditional lenders have become more reluctant to make long-term, fixed-rate loans. total loan commitments outstanding edged down further in February and mortgage holdings expanded at the slowest pace since July 1980. commercial banks, At S&Ls, At lending secured by all types of real estate rebounded in February to about the fourth quarter pace, although this expansion may have largely reflected lending for nonresidential and construction purposes. A moderate increase in consumer installment credit outstanding was registered at nonbank lenders in all commercial banks contracted in large banks in January, that month and declined further at February and early March. Commercial banks report an increasing reluctance to make consumer loans, at banks have moved higher. In while consumer loans at and consumer loan rates the automotive area, finance company subsidiaries of the major auto makers have absorbed the slack, at interest rates that have remained essentially stable since late last year. The government sector has placed heavy demands on credit markets in the first three months of the year. in marketable debt during the first in The Treasury issued $37 billion quarter. the issuance of mortgage revenue bonds, Despite a sharp decline borrowing by state and local governments was maintained at a pace only moderately below that of the strong fourth quarter. I-17 The narrow monetary aggregates continue to be considerably affected by flows into NOW accounts. in January, Following a $16-1/4 billion increase other checkable deposits rose $8 billion in After adjustments for the effects an estimated $5-1/4 billion in March. of shifting into such accounts, M-1B is an 11 percent annual pace in March, average over the first rebound, February and estimated to be rising at about following essentially no change on two months of the year. Despite the March the narrow aggregates-which were about unchanged on a quarterly average basis--fell considerably short of levels predicted on the basis of historical relationships among money, GNP and interest rates. M-2 growth strengthened as the quarter progressed, percent rate of expansion in March. attaining a 19 Inflows to MMMFs surged as the average rate paid by MMFs remained high relative to that on MMCs. Much of the expansion in MMMFs appears to have been at the expense of deposit flows at commercial banks and thrifts, although a significant portion of the inflows likely came from the open market as institution-only funds expanded and noncompetitive bill tenders shrank. slightly faster than M-2 during the first quarter, was augmented during January and February by issuance of large time deposits. though, M-3, which grew In March, large time deposits have been declining at commercial banks, as loans and investments at large banks have been contracting, S&Ls, in and at part because concerns about earnings pressures have adversely affected market receptiveness. Outlook. Although the staff is projecting sluggishness in real GNP, inflation is expected to remain rapid, and transactions demands for money are likely to strengthen--absent a continuation of the I-18 extraordinary behavior of M-1 velocity that characterized the first quarter. Consequently, short-term rates of interest are likely to be under substantial upward pressure in the months ahead. External financing by businesses in continue at about the first business borrowing is bonds is quarter pace. coming months is expected to The maturity composition of expected to be roughly unchanged, as issuance of likely to remain sizable while short-term borrowing is to remain weak. likely In the short-term area, borrowing from domestic banking offices may strengthen and borrowing from foreign branches and the commercial paper market may slow in conjunction with establishment of a more normal relationship between the prime rate and open market rates. The Treasury is not expected to tap credit markets in months, since a seasonal increase in Indeed, the Treasury is coming receipts will outpace expenditures. expected to pay down about $4 billion in and may make sizable additions to its cash balance in State and local government credit demands, debt the second quarter. by contrast, are anticipated to continue strong. Borrowing by the household sector likely will slow somewhat from that of the first quarter, largely reflecting reduced mortgage formation accompanying a drop in construction activity and turnover of existing homes. Consumer credit flows are expected to be maintained at nearly their first quarter pace. INTERNATIONAL DEVELOPMENTS Summary. The weighted average value of the dollar has fluctuated over a wide range during the past eight weeks, rising about 2-3/4 percent over the period. The strength of the dollar was most pronounced against the pound sterling, recording somewhat lesser appreciations against the yen, the Swiss franc and the French franc. The German mark's steady decline against the dollar over the past few months ceased in mid-February following a sharp rise in German interest rates, and the mark has depreciated less than one percent over the eight-week period as a whole. The appreciation in the average value of the dollar since the last Greenbook occurred despite a significant narrowing of interest-rate differentials. Since the end of January foreign short-term interest rates have risen nearly 100 basis points on average while the rate on U.S. 3-month CD's have declined about 350 basis points. Sharp increases in interest rates in Germany, Switzerland and, towards the end of the reporting period, Italy were partly offset by smaller declines in rates in the United Kingdom, Japan, and Canada. The replacement of the regular Lombard facility in Germany on February 19 by a special and more restrictive overnight Lombard window led to a sharp runup of German interbank rates. Increases in discount rates by the Swiss, Belgian and Italian monetary authorities during February and March resulted in higher market interest rates in those countries. In contrast, in the past two weeks the Bank of England lowered its Minimum Lending Rate two percentage points and the Bank of Japan reduced its discount rate one percentage point. I- 19 I-20 . The weakness of the lira in recent months reflected market concern about Italy's large currentaccount deficit and continuing high inflation rates. On March 22, the lira was formally devalued by 6 percent against the other EMS countries. This adjustment in central rates was accompanied by a tightening of monetary policy, and the Italian government is considering the adoption of fiscal austerity measures in order to correct the internal and external imbalances plaguing the economy. U.S. intervention over the past eight weeks amounted to net purchases of $1.2 billion equivalent, nearly all in German marks. The pace of U.S. intervention activity has declined sharply in the past month, and in recent weeks the Desk has been virtually out of the market. There are no signs yet of a recovery in economic activity in Western European countries, and the recent tightening of monetary conditions in a number of these countries reduces the chances for a strong rebound in the near term. In Japan, where real growth has slowed but remains positive, some easing of policy is likely to contribute to renewed strength. Real activity in Canada has been surprisingly strong. Inflation has continued to abate in the United Kingdom and Japan, while Germany and Italy have shown an acceleration of inflation. 1-21 The U.S. trade deficit in January increased to a $35 billion annual rate, about $10 billion above the average monthly rate of the final quarter of 1980. The value of petroleum and nonpetroleum imports increased 12 and 7 percent, respectively, over the monthly average rate of the fourth quarter of 1980, reflecting largely the strength of U.S. economic activity in recent months as well as the rise in prices of petroleum imports. The value of non-agricultural exports recorded only a small gain over the levels of previous months. In international capital transactions, a net inflow through banks of close to $6 billion in January reversed a net outflow of a similar magnitude recorded in December 1980. A large part of this shift is attributable to year-end balance-sheet adjustments. In addition, during January and February U.S. non-bank residents obtained about $2.5 billion of credit from offshore banks, and in February the Ford Motor Company borrowed more than $1.2 billion from banks in West Germany and the United Kingdom through its subsidiaries in these countries. I- 22 OPEC reserve holdings decreased in January $0.2 billion, reflecting the unfreezing of Iranian assets; other OPEC countries increased their holdings about $1.4 billion. In February, OPEC holdings at the FRBNY rose $2.6 billion Claims on foreigners held by the domestic offices and foreign branches of U.S.-chartered banks increased somewhat less in the second half of 1980 than in the corresponding period a year earlier, following a sharp pickup in such foreign lending in the first half of the year. This moderate slowing of U.S. bank lending to foreigners was almost entirely concentrated in claims on industrial countries. Lending to the non-OPEC developing countries continued to increase. Outlook. The staff now projects that the U.S. current account will be in virtual balance in the next two years, following near balance in the past two years. The staff's present projection is a considerable downward revision from the sizable surpluses that were projected in the January Greenbook. changed outlook: Three factors have led to the the anticipated effects on U.S. imports resulting from the higher level of real U.S. GNP now being projected for 1981 and 1982, the anticipated effects on U.S. imports and exports from the considerably stronger exchange value of the dollar recorded in the first quarter of 1981, which is expected to prevail during the projection period, and expectations of somewhat lower direct investment income receipts in the next two years, primarily reduced earnings of oil companies. The staff expects no significant change from recent levels of the weighted average exchange value of the dollar over the projection period. While the altered outlook suggests that the current account no longer will be a particular source of strength for the dollar in exchange markets, maintenance of relatively high dollar interest rates should lend support to the dollar. CLASS II FOMC 1980 ANN. 1. March 25, 1981 OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS. SEASONALLY ADJUSTED ANNUAL RATES) CONFIDENTIAL (FR) 1981 ANN. 1982 ANN. 1981 1981 1981 1981 Q I Q II OIII QIIV 1982 0 1 1982 1982 Q II OIII 1982 0 IV GNP NET EXPORTS 358.5 33.1 421.8 388.7 23.7 370.0 346.2 26.4 380.4 354.0 26.2 389.2 363.0 29.5 400.4 370.9 32.1 410.1 378.0 32.6 417.6 385.1 32.5 425.2 392.6 35.2 434.4 399.3 51.0 167.5 116.4 52.4 171.0 118.5 49.4 164.4 115.0 50.5 166.4 115.9 51.5 168.5 117.0 52.8 170.6 117.8 52.7 171.1 118.4 52.5 171.0 118.5 52.1 170.8 118.7 52.5 171.0 118.5 74.7 74.9 74.4 74.6 75.1 75.2 75.3 75.4 CURRENT $, NET EXPORTS OF G&S IMPORTS OF G&S 23.3 339.8 316.5 26.5 385.0 CONSTANT 72 $. NET EXPORTS OF G&S IMPORTS OF G&S 52.0 161.1 109.1 72.7 TERMS OF TRADE (1972=100) 1/ 74.6 75.2 I--------------- ----------2. 3. -27.4 -30.6 -31.4 -30.0 -29.2 -32.0 -31.1 -30.2 -31.2 -32.7 -31.6 EXPORTS (EXCL. MILITARY) AGRICULTURAL NONAGRICULTURAL 221.8 42.0 179.8 242.5 47.5 195.1 258.5 51.7 206.8 236.6 48.0 1188.6 241.4 47.4 194.0 244.1 46.8 197.3 248.0 47.7 200.3 252.5 49.6 202.9 256.2 50.9 205.3 260.0 52.4 207.6 265.4 54.0 211.4 IMPORTS PETROLEUM AND PRODUCTS NONPETROLEUM 249.1 78.9 170.2 273.1 90.2 182.8 290.0 92.1 197.9 266.6 88.1 178.5 270.6 90.7 179.9 276.1 91.4 184.7 279.0 90.7 188.3 282.8 91.4 191.4 287.4 92.4 195.0 292.7 92.5 200.2 297.0 92.2 204.8 0.1 -2.3 -1.1 -2.8 -1.1 -3.1 -2.1 -1.1 -1.1 -2.0 -0.2 32.5 32.2 34.4 31.4 32.0 32.7 32.7 33.1 34.0 34.8 35.7 1.8 0.2 1.9 0 0.6 1.0 2.0 2.1 2.2 2.5 2.5 11.4 8.8 7.5 10.1 9.0 7.6 7.2 7.7 7.6 7.1 7.0 U.S. U.S. MERCHANDISE TRADE BALANCE 2/ CURRENT ACCOUNT BALANCE OF WHICH: NET INVESTMENT INCOME 4. FOREIGN OUTLOOK - TEN INDUSTRIAL COUNTRIES 3/ REAL GNP. % CHANCE. CONSUMER PRICES, ANNUAL RATES 4/. % CHANGE. ANNUAL RATES 1/ GNP EXPORT IMPLICIT DEFLATOR DIVIDED BY GNP IMPORT IMPLICIT DEFLATOR. 2/ INTERNATIONAL ACCOUNTS BASIS. 3/ GEOMETRIC WEIGHTS USED TO AGGREGATE FOREIGN REAL GNP AND CONSUMER PRICES -- PERCENT SHARE IN TEN-COUNTRY TOTAL MULTILATERAL TRADE. CANADA (9.1%), JAPAN (13.6%), UNITED KINGDOM (11.9%), GERMANY (20.8%), FRANCE (13.1%), ITALY (9.0%), BELGIUM (6.4%). THE NETHERLANDS (8.3%), SWITZERLAND (3.6%), SWEDEN (4.2%). 4/ WHOLESALE PRICES FOR JAPAN. P/ PROJECTED.
@FedFRASER