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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
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Please note that this document may contain occasional gaps in the text. These
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1
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2
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Strictly Confidential (FR) Class II FOMC
Part 1
March 25, 1998
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
Strictly Confidential (FR) Class II FOMC
____
March 25, 1998
SUMMARY AND OUTLOOK
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Domestic Developments
Overview
Although we think it likely that real GDP has decelerated somewhat this quarter, the
evidence on that score is scarcely compelling. Our assessment hinges on expected
declines in inventory investment and net exports for which there is only fragmentary
statistical support at this point. Meanwhile, it is quite clear that domestic final
demand has surged once again. In particular, the continued confidence of households
and businesses in the prospects for sustained prosperity has been reflected in big
increases in consumer spending, residential construction, and equipment investment.
Under the circumstances, employers seem to be hiring just about every qualified--or at
least trainable--worker they can grab in a tight labor market, and increases in payrolls
and hours worked have outstripped all predictions. Fortunately, although the pressures
on labor supplies have produced an acceleration in wages over the past year, price
inflation has remained low--indeed, it has been virtually nil overall in the past couple
of months as a result of plummeting crude oil costs.
Favorable financial market conditions have encouraged the growth in aggregate
demand. Although bond yields have risen a touch in recent weeks, they have
remained low enough to encourage private and public borrowers to seek funding for
new outlays and to refinance old debts. Meanwhile, share prices have soared to new
highs, in the face of some trimming of near-term earnings projections; a sense of relief
that the worst may be avoided in Asia, partly based on the progress made in dealing
with Korea's financial problems, has helped to embolden equity investors.
These financial conditions should provide ongoing support for domestic
demand in the near term, but we nonetheless continue to expect a more significant
deceleration of activity. We believe that, consistent with many anecdotal reports, the
effects of the Asian economic slump and a high dollar exchange rate on the U.S. trade
position have yet to play out fully. In addition, the pace of inventory accumulation
appears to have remained much higher than would be expected in the steady state.
Importantly, over time, equity investors are likely to discover that their expectations
for profit growth have been unrealistic, and we have built a modest decline in share
prices into the forecast--albeit from a considerably higher level than before. All told,
we are looking for a slowing of real GDP growth to an average rate of around
2 percent per annum over the next few quarters, with only a little pickup in 1999.
That path for output implies that resource utilization rates should ease to some degree.
However, with the labor market remaining relatively tight--and oil prices, the dollar,
and other "special factors" less favorable going forward than they have been recently-we anticipate that there will be an upcreep in the underlying trend of inflation.
Part 1: Summary and Outlook March 25, 1998
Key Background Factors
We have maintained our assumption of a steady federal funds rate in this projection.
Regarding longer-term interest rates, we are not anticipating any major departures
from the range of recent months, but we continue to think that the predicted softening
of economic indicators in the next few months may provide the basis for at least a
brief penetration of the recent lows for Treasury bond yields. The sizable run-off of
Treasuries in the second quarter should also be constructive for the market, although
we expect that these supply effects will be modest for fixed-income securities prices as
a whole.
On the equities side, sentiment will be tested once again by the upcoming
round of quarterly corporate reports, which we expect will show a considerable
deterioration of earnings momentum. However, with all the warnings that have
already been issued by companies, especially in the "high-tech" sector, the reports may
not supply enough negative surprises to trigger a major market reversal. We are
projecting a path for corporate profits over coming quarters that suggests a
considerable shortfall from what analysts are talking about currently. But we are not
sure that such an outcome will alone be sufficient to prompt investors, now convinced
that a buy-and-hold equity strategy will almost guarantee returns well into double
digits, to turn to what they perceive to be low-yielding fixed-income instruments.
Consequently, we have built into our forecast only a modest slippage in the market,
one that will leave share prices through next year well above those anticipated in the
last Greenbook and price-earnings multiples at historically high levels.
Fiscal policy is expected to remain about neutral in terms of the impetus to
aggregate demand over the next two years. Although the prospect of budget surpluses
has sparked much talk of tax cuts or increases in spending, we expect that the
Congress will include offsets to the deficit effects of any such measures it enacts. In
this Greenbook, we have incorporated supplemental appropriations for fiscal year 1998
to fund ongoing military operations in Bosnia and the Persian Gulf as well as an
increase in grants in fiscal 1999 to state and local governments to finance highway
construction and mass transit. The stronger outlook for economic growth and some
technical reassessments have caused us also to boost our forecast of receipts, and we
are now projecting budget surpluses of $9 billion in fiscal 1998 and $5 billion in fiscal
1999.
Prospects for economic activity abroad are little changed from the January
Greenbook. Incoming information has been softer than projected for Japan, but the
Domestic Developments
evolution of activity in most other Asian economies--Indonesia being the notable, and
negative, exception--has been in line with our expectations. We are projecting that
foreign real GDP will rise about 2 percent in 1998 before strengthening to nearly
3 percent in 1999. The foreign exchange value of the dollar has continued to firm in
early 1998, but by a little less than we projected in January. We still anticipate that
the real value of the dollar will have peaked in the first quarter and that it will decline
about 3 percent on a broad import-weighted basis over the forecast period, as higher
inflation in Asia erodes some of the recent competitive gains of these currencies.
The projection for crude oil prices has been marked down considerably. Crude
prices have fallen sharply this quarter in response to unusually mild winter
temperatures, the UN accord with Iraq, weak Asian demand, and greater world oil
production. Major oil producers have now acted to curtail production, and prices have
firmed from their recent lows. But the likely prospect of increased Iraqi exports has
caused us to cut our longer-term crude oil forecast by $1 to $2 per barrel. We now
are projecting that spot WTI, which traded as low as $13.25 in the first quarter, will
stabilize at $16.50 per barrel in the second quarter and remain at that level over the
balance of the forecast period.
Recent Developments and the Outlook for the Current Quarter
Real GDP is projected to rise at a 3 percent annual rate in the current quarter-as compared with the 3-3/4 percent growth pace registered in 1997. The incoming
data from the labor market provide no hint of even this modest slowing: Nonfarm
payrolls increased sharply in the first two months of this year, initial claims have
remained low this month, and hours worked likely will advance at an annualized pace
of around 4 percent in the current quarter (even after, as discussed in Part 2, an
adjustment for an overstatement of the workweek in the reported figures). Our
estimate thus anticipates a dip in labor productivity, after a run of relatively hefty
gains.
Growth of industrial production has slowed this quarter. The demands on
utilities have been depressed by warm weather, while growth in manufacturing output
is projected to slow to a 4 percent rate, from almost twice that pace in the second half
of 1997. Motor vehicle assemblies have fallen--shaving half a point from the growth
of real GDP--and output has decelerated across a wide range of other industries.
On the expenditure side, private domestic final purchases are booming, while a
deterioration in net exports looks to be the most significant drag on production. Real
personal consumption expenditures likely increased at more than a 5 percent annual
Part 1: Summary and Outlook, March 25, 1998
rate in the first quarter. Light vehicle sales continued to run at about a 15 million unit
annual pace in the first two months of the year, but sales of other goods surged. With
the exception of the weather-related drop in energy consumption, expenditures on
services have also advanced rapidly.
Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
1997:Q4
Measure
1998:Q1
Jan.
Mar.
Jan.
Mar.
GB
GB
GB
GB
Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment
3.9
2.7
2.9
8.1
-.4
3.9
2.7
3.1
9.5
-2.2
2.7
5.4
4.7
1.7
11.7
3.1
6.2
5.3
14.2
9.3
Government outlays for consumption
and investment
.9
.4
-1.1
.0
Change, billions of
chained (1992) dollars
Inventory investment
17.9
24.5
-3.1
-7.5
Net exports
10.8
4.4
-30.2
-35.2
Housing markets were hot this winter. Stimulated by falling mortgage rates
and by briskly rising income and wealth, sales of single-family homes have
skyrocketed, and new starts averaged 1.24 million units (annual rate) in January and
February--well above the already healthy pace of the fourth quarter. Unusually warm
weather in northern areas likely contributed to these increases, but we believe that
underlying demand trends were a major element in the strength of building. After
having surged in the latter part of 1997, multifamily starts dropped back to 346,000
units in the first two months of this year--a pace more in line with the fundamentals in
this market. On net, real residential investment expenditures are estimated to have
risen at a 14-1/4 percent pace in the first quarter.
Business fixed investment is rebounding from its decline in the fourth quarter.
On the equipment side, orders and shipments were up sharply, on balance, over the
December-to-February period and are consistent with a return to a double-digit growth
rate for equipment spending. The acceleration was particularly impressive in office
Domestic Developments
and computing equipment, for which large nominal increases in shipments, coupled
with very marked price declines, imply extraordinary real growth in the current
quarter. The demand for communications equipment appears robust, but domestic
deliveries of aircraft are expected to fall sharply this quarter, as a greater share of
planes is exported. Despite anecdotal reports of a building boom and considerable
financing activity, the available data on construction point to little change in
investment in nonresidential structures in the current quarter. 1
After adding slightly to growth in the fourth quarter, a deterioration in real net
exports is projected to subtract 1-1/2 percentage points from the increase in real GDP
in the current quarter. The January trade report provides evidence that the economic
difficulties in Asia are starting to depress U.S. exports. The weakness we see this
quarter on the export side reflects a softening in services and in shipments of
agricultural products; the projected rise in import volumes is expected to occur mainly
in non-oil merchandise imports.
Inventory accumulation in manufacturing and trade excluding motor vehicles
was quite moderate in January. We have built in substantial increases for the ensuing
two months to keep our GDP estimate in reasonably comfortable alignment with the
indications from the labor input side. The resultant 4-3/4 percent growth rate of
nonfarm inventories implies some rise in the stock-sales ratio, for which there is little
corroborative information--but the tension is not great enough to set off any alarms
that we are on the wrong track.
The PPI has continued to decline, and the overall CPI has barely increased thus
far this year, thanks to the decline in energy prices. Meanwhile, the core CPI
increased about 1/4 percent per month on average in January and February--a smidge
faster than in 1997. Higher tobacco prices accounted for much of this pickup; excise
taxes have increased and producers have raised wholesale prices--nominally to finance
the cost of various legal settlements and awards. The only broad statistics on pay
developments this year are on average hourly earnings through February; the figures
suggest a continuation of the roughly 4 percent pace of production-worker wage
increase that has prevailed for some time--implying an acceleration of real wages.
Anecdotal reports of labor market conditions certainly point to tight supplies of
workers, but the compensation picture nonetheless remains quite mixed across
1. Construction put-in-place was up in January, but real NRS will be depressed as spending returns
to more normal levels after the purchase of the Elk Hills petroleum reserve from the federal government
in the fourth quarter.
Part 1: Summary and Outlook, March 25, 1998
industries and occupations; pay hikes are often rather precisely targeted at key workers
with "hot skills," and many of the increased employment costs that firms are incurring
do not show up in wages or benefits, as conventionally measured.
The Outlook for the Economy Beyond the Current Quarter
The further rise in equity prices and evidence of greater momentum in private demand
has prompted us to raise our forecast of real GDP growth in 1998 by 1/2percentage
point, to 2-1/4 percent, and growth holds at that pace in 1999. We continue to expect
that developments in the external sector will be an important restraint on the economy,
although their influence has been cushioned somewhat in this forecast by the lower
price of imported oil. Some correction in equity values is expected to induce a
softening in consumer demand over the projection period, and business investment also
is forecast to decelerate as expansion needs ebb and profitability declines. A slower
pace of inventory investment is expected to be a drag on production, as companies
bring their stockbuilding into line with the projected pace of sales. The
unemployment rate is expected to move up to about 5 percent by the end of next
year--a smaller increase than in the January Greenbook, owing to the faster output
growth in this forecast. Price trends deteriorate somewhat more in this projection as
the result of tighter labor markets and slightly higher non-oil import prices.
Consumer spending. We would be surprised if consumer spending were to
maintain the growth pace of the first quarter into the spring. That said, though, we
expect that gains will remain impressive on average for a while longer, and indeed in
this forecast, real PCE increases several tenths of a percent faster this year than does
real disposable income. This pattern is mainly a reflection of the wealth effect
associated with the huge run-up in share values over the past few years. But other
financial conditions also are supportive of consumer demand, and should remain so.
At prevailing interest rates, many households are reaping the benefits of refinancing
mortgages--lowering their debt-service burdens, reducing risk by shifting from ARMs
to FRMs, or taking out larger loans to liquify some accumulated equity. Consumer
lenders appear to be expanding the availability of credit with somewhat less fervor
than they displayed before delinquency and bankruptcy rates soared a couple of years
ago. Nonetheless, there are signs that the selective tightening measures they
instituted--along with a robust economy--have brought a halt to the deterioration in
repayment performance. Consequently, credit access should not be a problem for most
households.
Domestic Developments
All told, then, we are looking for real PCE to grow 4 percent this year--a little
more than in 1997. In the near term, a return to normal levels of energy use for
heating and cooling should add to a strong uptrend in services consumption. Although
we see sales of new light vehicles only remaining on the 15 million unit plateau of the
past several years, the prospects appear good for substantial growth in purchases of
other consumer goods. Rapidly declining relative prices are boosting the demand for
computers and other electronic goods, and the current strength in home sales likely
will translate into increased spending on furniture, appliances, and other household
durables.
Summary of Staff Projections
(Percent change, compound annual rate)
Measure
1997
1998
1999
3.8
3.8
2.3
1.7
2.2
1.9
3.2
3.3
3.0
2.4
2.1
1.8
PCE
Previous
3.7
3.7
4.0
3.5
2.4
2.1
Residential investment
Previous
5.7
5.4
3.0
.6
-1.8
-.3
BFI
8.6
9.1
9.5
7.7
6.2
5.4
1.0
1.1
.8
.6
.9
.9
Exports
Previous
10.2
10.5
1.3
.5
4.8
4.1
Imports
Previous
14.5
14.1
9.1
7.9
6.7
6.5
Real GDP
Previous
Final sales
Previous
Previous
Government purchases
Previous
Change, billions of chained (1992) dollars
Inventory change
Previous
Net exports
Previous
39.1
32.5
-52.7
-52.3
6.6
12.2
-54.1
-47.7
-91.9
-86.2
-35.4
-40.0
Part 1: Summary and Outlook, March 25, 1998
Growth in real PCE is projected to slow to around 2-1/2 percent in 1999. Our
forecast anticipates that share prices will begin slipping this spring, and that the lagged
effects of that reversal on consumer demand in 1999 will neutralize the effects of the
earlier market rise. The projected softening of the economy is rather mild, with
unemployment remaining quite low; even with the disappointing performance of
household equity portfolios, the scenario we are outlining does not suggest a drastic
deterioration in consumer confidence and a shift toward much more cautious spending
attitudes. Lenders may become a bit more concerned about credit risks, but probably
not enough to prompt more than a selective tightening of underwriting standards.
Given the extended period of strong purchases of durables, that category of
expenditure is likely to register the sharpest deceleration--but not a downturn overall.
Residential investment. Housing construction is forecast to hold at a
relatively high level over the projection period. In the next few months, building
starts should drop back from the February pace, in part owing to a weather-related
"payback." But we still expect total starts generally to remain above the 1.5 million
unit mark for most of this year.
In the single-family market, with mortgage rates in the recent range, the cashflow affordability of home ownership will remain exceptionally good; we expect that
the relative price of houses will rise gradually, but the negative effects on demand
from that movement probably will be offset by the bolstering of the investment
incentive in those locales where real estate has slumped in the past decade. Moreover,
accumulated stock market gains should provide an ongoing boost to demand,
especially in the trade-up and second home segments of the market. Lower-income
buyers will continue to benefit from innovative programs of the GSEs and other
lenders to provide "affordable" financing. As a result, we expect single-family
housing starts to total 1.18 million units this year--up from the already substantial
volume of 1.14 million in 1997. With job growth slowing next year, single-family
starts are projected to slip to 1.13 million units.
Having retreated recently from the lofty level reached last fall, multifamily
starts are projected to average about 330,000 units (annual rate) over the forecast
period. Demand for multifamily units has been bolstered by the overall strength in the
economy, which undoubtedly has enabled more people to form households. Vacancy
rates are falling, and rents are rising again--but not enough to warrant a widespread
pickup in building. A risk in the outlook would be that the enthusiasm for REIT
stocks and other securities backed by such properties will create a supply of finance
Domestic Developments
that tempts developers to undertake more projects than are economically viable,
resulting in more construction during the projection period and a slump later.
Business fixed investment. Growth in real business fixed investment is
expected to pick up to a 9-1/2 percent pace in 1998 before slowing to 6-1/4 percent in
1999. Lagged accelerator effects are projected to stimulate capital spending for much
of this year, but investment growth should slow in 1999--declining absolutely in the
case of the manufacturing sector, where the weakening U.S. position in international
trade will have an especially marked effect. An increasing number of firms are likely
to find that they are less flush with internally generated cash, as rising unit labor costs
reduce profit margins and squeeze the internal funds available for investment.
Lenders may become a bit more concerned about credit quality, but the expected
deterioration in corporate income and balance sheet strength should not be great
enough to prompt more than a modest widening of risk premiums.
Equipment spending is forecast to grow 12-1/4 percent in 1998--the same as
the 1997 pace--but to decelerate to 7-1/2 percent in 1999. The deceleration should be
broad based, but sales of "high-tech" items for which product improvement is dramatic
and prices are falling rapidly are expected to maintain brisk growth. The boom in real
purchases of office and computing equipment shows no sign yet of letting up despite
warning signs by some major firms in the industry that earnings have leveled off.
These earnings disappointments have been attributed in some instances to excess
inventories as firms make the transition to new products or manufacturing processes;
they are expected to be temporary as overall demand for computers still is reported to
be very strong. Retooling associated with solutions to the Year 2000 problem may
give a little extra lift to sales. Similarly, the demand for communications equipment is
expected to grow at a double-digit pace over the next two years, spurred by
deregulation and the rapid increases in markets for Internet access and mobile phone
service.
Outside of the high-tech area, purchases of many types of equipment may level
out or decline over the next year or so. As suggested earlier, investment in basic
industrial equipment should be damped by a slide in factory capacity utilization and
pressure on profit margins. Orders for heavy trucks have skyrocketed in the past year,
and shipments are constrained at this point by production capacity; demand is likely to
flag as economic growth--and shipping traffic--moderates. Deliveries of new jet
aircraft to domestic airlines are expected to level off later this year and next, following
rapid growth in 1997.
Part 1: Summary and Outlook, March 25, 1998
In contrast to the anticipated slowdown in real PDE, investment in
nonresidential structures is expected to accelerate over the projection horizon.
Spending on new construction leveled off in 1997, but many indicators of prospects
for this sector are flashing decidedly positive signals. The strength in spending should
come from the office and other commercial markets, where vacancy rates have fallen
further and rents reportedly are moving up sharply in some areas. REITS and other
financial intermediaries are moving rapidly to finance new projects, and anecdotal
reports in the Beige Book and elsewhere suggest that speculative building is on the
rise. As a result, we are projecting that real NRS will increase 2-1/2 percent this year
and 3 percent in 1999.
Business inventories. After running at a high level in 1997, nonfarm
inventory investment is expected to downshift this year, reducing real GDP growth
2/3 percentage point. Overhangs are apparent in only a few industries at present, but
many businesses-especially those that are sensitive to international trade--project sales
to slow over the course of this year, and they are expected to cut the pace of their
inventory investment to hold stocks in close alignment with sales. Other firms simply
will be surprised and will have to catch up. This adjustment is expected to be
complete by the end of this year, though, and inventory investment is an essentially
neutral influence on economic growth in 1999.
As a result of favorable harvests, farm inventories were rebuilt somewhat last
year. It is still too early to make any meaningful judgment on the state of this year's
crops, and the forecast assumes that farm production will move in line with long-run
trends. Thus, we are not anticipating any major swings in farm stocks, although some
liquidation of livestock herds is likely as the year progresses.
Government spending. Real federal consumption and investment expenditures
are projected to decline slowly over the next two years. Real defense spending is
expected to fall 4-1/4 percent this year and another 2-1/4 percent in 1999. The rate of
decline is about the same as in the January Greenbook, as higher expenditures
associated with military operations in the Persian Gulf and Bosnia are offset by some
retreat in other spending following strength in the fourth quarter. Nondefense
consumption and investment expenditures are projected to rise 3-1/2 percent this year
before declining 1 percent in 1999. 2
2. The growth of real federal nondefense consumption and investment expenditures in 1998 was
revised upward by 2 percentage points in this forecast. The upward revision largely reflects the sale of
(continued...)
Domestic Developments
The projection of real state and local purchases is similar to the last
Greenbook. We have revised down the path for construction expenditures in 1998 to
better reflect softer trends in this sector: Construction expenditures rose less than
1/2percent in 1997 and appear to have declined in the first quarter of 1998. However,
construction growth is expected to rise in 1999, spurred by the additional federal funds
coming from the anticipated passage of new highway legislation. Rising state
surpluses have prompted many governors to propose tax cuts, and we expect numerous
small to moderate-sized tax cuts again this year. In addition, many state legislatures
are likely to salt away part of any revenue windfalls in "rainy day" funds. Thus, real
state and local government consumption and investment expenditures are projected to
increase 2.2 percent in 1998 and 2.4 percent in 1999--broadly in line with long-term
trends in this sector.
Net exports. Incoming data on international trade have been largely consistent
with our view that the downturn in key Asian economies would lead to a more
pronounced deterioration in our external balances. Real exports of goods and services
now are forecast to rise 1-1/4 percent this year and 4-3/4 percent in 1999. Export
growth is held down by the slowdown in foreign economic activity projected for 1998
and by the lagged effects of the appreciation of the dollar. Given the improved
competitive position of foreign products, imports of goods and services are projected
to increase 9 percent in 1998 and 6-3/4 percent in 1999. (A more detailed discussion
of the outlook for net exports is contained in the InternationalDevelopments section.)
Labor markets. With the current tightness in the labor market, many
employers report difficulties filling vacancies with qualified workers. Indeed, some
positions--especially for IT professionals--are going unfilled, and businesses are simply
making do with their existing staffs. This backlog of demand for workers is expected
to support hiring in the near term, even as domestic economic activity begins to slow.
Payroll employment gains are projected to average a little less than 200,000 per month
in the second quarter--below the 310,000 per month pace estimated for the first quarter
but still well above trend growth. However, as profit margins are squeezed and stock
prices decline, we expect corporate managements to feel extra heat to tighten down to
2. (...continued)
the Elk Hills petroleum reserve, which was not incorporated in the January Greenbook. This sale
temporarily depressed spending in the fourth quarter of 1997, and the 1998 growth rate is boosted as the
level of purchases returns to normal.
Part 1: Summary and Outlook, March 25, 1998
constrain costs, and employment gains slow to around 130,000 per month in the
second half of this year and to 110,000 in 1999.
In this environment, we are forecasting a slowdown in the growth of labor
productivity this year. Output per hour is projected to increase 0.3 percent in 1998
and 1.4 percent next year--in line with our estimates of the longer-term trend. 3 In
addition to the pent-up demand for labor noted above, labor productivity probably will
be held down by ongoing efforts to solve the Year 2000 problem. As we have noted
previously, getting a handle on the timing and size of the Y2K work is quite difficult,
but it seems obvious that resources are being devoted to this task, with little or no
payoff in terms of greater output. The allowance we have made in this forecast is on
the order of a tenth or two of a percentage point on growth in output per hour.
The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
1997
1998
1999
Output per hour, nonfarm business
Previous
2.2
2.3
.3
.8
1.4
1.5
Nonfarm payroll employment
Previous
2.5
2.5
2.0
1.3
1.0
.8
Household employment survey
Previous
2.1
2.1
1.3
1.0
.8
.7
Labor force participation rate 1
Previous
67.1
67.1
67.2
67.1
67.2
67.1
4.7
4.7
4.7
4.8
4.9
5.2
Measure
Civilian unemployment rate1
Previous
1. Percent, average for the fourth quarter.
Given the greater strength in economic activity in this forecast, the
unemployment rate is projected to rise to only about 5 percent by the end of 1999-several tenths less than in the last forecast. We expect the labor force participation
rate to edge off a tenth of point after jumping early this year and to hold near
67.2 percent over the forecast period. The pool of people still wanting a job has
3. We continue to assume trend growth in labor productivity of 1.2 percent on a consistently
measured basis. Allowing for technical changes in the CPI, the trend estimates are 1.3 percent in 1998
and 1.5 percent in 1999.
Domestic Developments
become quite shallow, making significant further increases unlikely--even with a
nudge from welfare reform.
Wages and Prices. We are projecting a bit more inflation than in the January
Greenbook. Core consumer prices are forecast to increase 2-1/4 percent in both 1998
and 1999--an upward revision of 1/4 percentage point. Adjusting for technical
changes, the core CPI accelerates almost 1/2 percentage point over the forecast period.
Rates of resource utilization are higher in this round, and the slowdown in productivity
growth also is expected to add to firms' costs. While, in general, we think that shifts
in the trend growth of labor productivity are the more important influence, empirical
results suggest that shorter-term productivity movements also play some role in
business pricing decisions. In addition to these domestic cost pressures, higher core
non-oil import prices give a slightly larger boost to inflation than in the January
Greenbook. We have not at this juncture incorporated any price hikes associated with
some form of national tobacco settlement. While there appears to be a strong desire
among the interested parties to reach an agreement this year, a compromise settlement
has yet to emerge. The possibility of a tobacco agreement that quickly raises cigarette
prices is an important upside risk to our price forecast-one that could potentially raise
the price of cigarettes by $1.50 per pack over the next two years and thereby add
directly 1/2 percentage point to core inflation in both 1998 and 1999.
Favorable trends in food prices are expected to be a slightly moderating
influence on inflation over the projection period. The CPI for food is forecast to rise
1-1/2 percent this year and 1-3/4 percent in 1999. Weather-related disruptions to
supplies of fresh fruits and vegetables could cause some near-term run-up in the prices
of these items, but such pressures are expected to be largely offset by the effects of
recent weakness in farm commodity prices. Futures prices for both crops and
livestock have declined further since the week of the last Greenbook, pushed lower by
ongoing concern about the prospects for exports and, in recent days, by talk of large
acreage increases for corn and soybeans. The markets remain relatively unperturbed
by El Niño as best we can tell. At this point, we are assuming that aggregate crop
production will increase roughly in line with longer-term trends, but a reduction in
beef supplies due to an inventory cycle in the cattle industry is projected to cause
some firming in meat prices later this year and in 1999.
Following the projected path of crude oil prices, the CPI for energy is forecast
to decline 4-1/2 percent this year and to increase 1-1/4 percent in 1999. Rate
reductions associated with electric power deregulation in California and Massachusetts
Part 1: Summary and Outlook, March 25, 1998
are expected to depress electricity prices in the first quarter of this year; we expect
price increases in this sector to remain below overall inflation over the projection
period, as more competition for electric power develops in other states.
Staff Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure
1997
1998
Consumer price index
Previous
1.9
1.9
1.7
1.6
Food
Previous
1.7
1.7
1.5
1.3
Energy
Previous
-1.0
-1.0
-4.6
-3.0
2.2
2.3
2.1
Excluding food and energy
Previous
2.2
1.6
1.5
1.6
1.6
1.7
1.9
1.9
GDP chain-weighted price index
Previous
1.8
1.9
1.6
1.7
ECI for compensation of private
industry workers1
Previous
3.4
3.4
3.4
3.2
-.8
-1.6
-1.5
-1.5
PCE chain-weighted price index
Previous
Excluding food and energy
Previous
Prices of core non-oil
merchandise imports
Previous
1.5
1999
1.8
1.1
Percentage points
MEMO: Adjustments for technical
changes to the CPI2
Core CPI
Core PCE
GDP chain price index
.2
.4
.6
.1
.1
.1
.1
.3
.2
1. December to December.
2. Adjustments are calculated relative to the methodological structure
of the CPI in 1994.
Domestic Developments
Regarding compensation trends, recent anecdotal reports certainly indicate that
many employers are offering more sizable pay increases in order to attract and retain
needed workers. This may suggest some upside bias to the risks surrounding our
forecast that increases in the ECI for hourly compensation--at 3.4 percent in 1998 and
3.3 percent in 1999--will differ little from that recorded in 1997. We believe that this
projection embodies a reasonable balancing of some important crosscurrents. With the
unemployment rate remaining so low, tightness in labor markets should be putting
upward pressure on real pay gains. However, this influence is expected to be offset
with respect to nominal compensation by the very favorable downward trend in price
inflation that has lowered workers' expectations of inflation significantly and will hold
down demands for cost-of-living catch-ups. In addition, we have assumed that there
will be no further significant hike in the minimum wage, a factor that raised labor
costs last year; there clearly is some non-negligible possibility that, although
congressional support appears limited at this point for the proposals that have been put
on the table, a boost will become part of some package deal later in this election year.
Growth in compensation per hour probably will be buoyed in the current
quarter by heavy payouts of commissions and bonuses in the booming financial and
real estate sectors, but that impulse will not be repeated quarter after quarter. Indeed,
with the expected slowdown in the economy and the associated deterioration in
corporate profits, we anticipate a decline in commissions, bonuses, and other forms of
supplemental pay in general. However, this moderating influence is offset by rising
costs for employer-provided health insurance. As has been noted in previous
Greenbooks, a turning point appears to have been reached in the underwriting cycle in
the health insurance industry. Profit margins have been squeezed significantly over
the past few years by rising costs and greater competition, and insurers are again
raising premiums. In response, some businesses will switch to managed care plans or
shift more of the cost burden to their employees. But in the aggregate, we still are
expecting employers' health insurance costs to rise noticeably this year and next.
As noted above, with compensation rising at a fairly steady pace but labor
productivity growth weakening, unit labor costs will be rising more rapidly and
squeezing profit margins. This is likely to be especially manifest in the manufacturing
sector, but other industries probably will suffer as well. We foresee a net decline in
NIPA economic profits on the order of 3 percent over the course of 1998 and 1999.
Translating this into numbers comparable to those cited in conventional EPS measures
is not a simple exercise, but we believe that our projection implies a noteworthy
Part 1: Summary and Outlook, March 25, 1998
shortfall relative to the predictions of both "top-down" and "bottom-up" analysts in the
investment community, who are talking about moderate to sizable gains in earnings
over the projection period.
Money and Credit Flows
The total debt of domestic nonfinancial sectors of the economy is expected to grow
about 5-1/2 percent this year and 4-3/4 percent in 1999. These increases exceed the
projected rise in nominal GDP in each year, putting the debt-to-GDP ratio on an
upward path after almost a decade of little net change. The uptrend would be sharper
still if not for the modest paydown of federal debt, which reflects the small budget
surpluses that we project through 1999. Among the other sectors, nonfinancial
businesses are expected to be recording the most rapid debt growth, but we anticipate
that the debt of households and state and local governments will also increase rather
briskly.
Nonfinancial corporate debt is estimated to have increased at an annual rate of
12 percent in the current quarter, the biggest bulge since 1986. In part, the recent
borrowing likely has been fueled by bond issues that were deferred last fall because of
turbulent market conditions. However, the heavy demand for credit, from both banks
and the markets, also reflects longer-term influences. In particular, merger activity
shows no sign of abating, and we anticipate that borrowing will remain brisk to
finance the equity retired through these deals. Also, given our forecast of a sharp
deceleration in corporate earnings, firms will need more outside funding to bridge the
widening gap between capital outlays and internal funds. Based on these
considerations, we expect nonfinancial business debt to expand 8-1/4 percent over
1998 as a whole and 6-1/2 percent next year.
Corporate credit quality has given hints of weakening a bit in recent months,
and we anticipate that this trend will continue as firms face somewhat heavier debt
burdens. In this environment, lenders may selectively tighten their standards, and
borrowing costs for lower-rated firms probably will move up. However, given our
projection of moderate economic growth and little change in interest rates, we do not
envision any severe deterioration in corporate financial positions or a material
restriction in credit supply.
Total household debt is expected to rise 7 percent this year, matching the
increase last year, and then to advance 6-1/4 percent in 1999. Mortgage debt has
grown briskly of late, reflecting the robust pace of home sales and what appears to be
a fair amount of "cash-out" refinancing. The growth of this debt should edge lower
Domestic Developments
over the forecast period as housing activity moderates and the pace of refinancing
returns to more normal levels. Even so, mortgage debt is projected to increase at an
average annual rate in excess of 7 percent through the end of 1999. This pace is more
than double the growth expected for consumer credit, which will be held down, in
part, by the ongoing shift to mortgage borrowing and, in 1999, by the slower rise in
purchases of consumer durables.
Although household debt is projected to grow more rapidly than disposable
income, the debt-service burden, while already elevated, is not expected to move
higher over the forecast period. Households will realize interest savings from
mortgage refinancing and will benefit from the shift toward mortgage debt, which
stretches out the period for debt repayment and carries lower rates than consumer
credit. Although lenders may become still more cautious in taking on exposure to the
riskiest borrowers, we do not foresee the kind of adverse shock that would prompt a
wholesale tightening of credit conditions.
The debt of state and local governments is projected to grow 5 percent this
year, a bit below the rise in 1997, and then to slow further next year. These
governments will be borrowing in large part to finance infrastructure projects, but we
also expect that low interest rates will continue to spur a considerable volume of
issuance to be used to advance refund existing debt.
The growth of M2 this quarter has far exceeded our estimate of the advance in
nominal GDP. We cannot fully explain the strength in M2, but the aggregate likely
has received a temporary lift from the high level of mortgage refinancing and the
faster payment of tax refunds resulting from electronic filing. Also, the flattening of
the yield curve late last year may have spurred inflows to money funds and other M2
assets. Looking ahead, we expect M2 growth to slow quite a bit, coming into rough
alignment with that of nominal GDP. We anticipate that M3 also will decelerate,
though it will continue to outpace M2. The relative strength of M3 reflects the same
factors we have cited for some time: the growing use of money funds for corporate
cash management, along with solid growth in bank credit.
Alternative Simulations
Our alternative, model-based simulations assess the implications of different
assumptions about interest rates and the stock market. They may also be used to
gauge the implications of certain obvious risks in the outlook. In the first alternative,
the federal funds rate rises 25 basis points per quarter through the first quarter of 1999
and remains a constant 100 basis points above the baseline forecast thereafter. The
Part 1: Summary and Outlook, March 25, 1998
higher interest rates pull down real GDP growth 1/4 percentage point in 1998 and
3/4 percentage point in 1999. The unemployment rate rises to 5-1/4 percent by the
end of 1999, 1/2percentage point higher than in the baseline projection, and consumer
price inflation comes in 1/2percentage point lower than baseline in 1999--virtually a
flat path for inflation, adjusted for technical changes to the index. Another way of
looking at this simulation is that, if one felt that the staff forecast has once again
understated the underlying momentum of aggregate demand-and that GDP growth
might remain around potential over the projection period--a prompt and substantial
tightening of policy might be needed simply to achieve the results in the staff baseline
forecast.
We have consistently underestimated the power of the bull market for equities,
and recent events have reinforced our concerns that a major and lasting correction
might not occur in the absence of a serious exogenous shock--such as a surprising
shift in monetary policy. Another alternative simulation assumes that the value of
equities remains constant relative to disposable income; this contrasts with an
appreciable decline in the wealth-to-income ratio in the baseline forecast, but it still
falls far short of anything like a continuation of recent stock market trends. The
federal funds rate is maintained at 5-1/2 percent. In this scenario, real GDP growth is
1/4 percentage point higher in 1998 and 1/2 percentage point higher in 1999; the
unemployment rate is 1/4 percentage point lower by the end of 1999. 4 The effect on
the CPI is slight not only because of the small unemployment effect, but also because
long-term inflation expectations remain low. In the FRB/US model, these expectations
are quite sluggish unless there is a significant change in the stance of monetary policy;
in essence, people have come to expect that policymakers will move to prevent an
acceleration in prices.
4. To carry out this simulation, we adjusted the FRB/US model to boost the speed with which
changes in wealth influence personal consumption expenditures, matching that used in the judgmental
projection; this provides a closer estimate of what the staff projection would look like under this
alternative stock-market scenario. Without such an adjustment, the FRB/US model would have projected
a delay of a large portion of these effects until 2000.
Domestic Developments
Alternative Federal Funds Rate
and Stock Market Assumptions
(Percent change, Q4 to Q4, except as noted)
1997
1998
1999
Real GDP
Baseline
Higher funds rate
Lower funds rate
No stock price decline
3.8
3.8
3.8
3.8
2.3
2.1
2.5
2.5
2.2
1.4
3.0
2.7
Civilian unemployment rate1
Baseline
Higher funds rate
Lower funds rate
No stock price decline
4.7
4.7
4.7
4.7
4.7
4.8
4.6
4.6
4.9
5.3
4.5
4.7
2.2
2.2
2.2
2.2
2.3
2.2
2.4
2.3
2.3
1.9
2.7
2.4
Measure
CPI excluding food and energy
Baseline
Higher funds rate
Lower funds rate
No stock price decline
1. Average for the fourth quarter.
Strictly
Class II
Confidential
FOMC
<FR>
March 25,
STAFF PROJECTIONS OF CHANGES IN GDP,
1998
PRICES, AND UNEMPLOYMENT
(Percent, annual rate)
ANNUAL
1995
1996
1997
1998
1999
OQUARERLY
1996
Q1
Q2
Q3
Q4
1997
01
Q2
03
04
1998
01
02
03
04
1999
Q1
Q2
Q3
Q4
Two-QUIMrR
1996
4.1
3.8
4.0
4.1
1.8
1.9
3.0
2.1
2.0
2.1
2.2
2.3
1.9
1.6
1.7
1.7
2.0
1.7
1.7
1.7
2.1
2.0
2.0
2.0
2.2
2.2
2.2
2.2
4.9
5.0
5.1
5.2
4.7
4.8
4.8
4.9
6.2
4.9
6.2
4.9
3.8
2.7
3.8
2.7
2.3
2.3
2.3
2.3
3.4
3.0
3.5
2.9
-0.2
-0.1
-0.2
-0.1
6.3
5.2
6.3
5.0
4.1
3.5
4.1
3.5
2.1
1.7
2.1
1.4
1.7
2.1
1.8
2.0
-0.4
-0.2
-0.4
-0.2
3
Q2
Q4
Q2
1997
3.7
3.5
3.7
3.8
Q4
1998
Q2
3.5
3.3
4.1
3.8
1.9
1.6
2.6
2.0
1.7
1.7
1.4
1.8
1.1
2.1
1.0
2.3
-0.0
0.1
-0.1
0.1
1999
Q2
3.6
3.7
3.9
4.1
1.8
2.0
2.0
2.3
1.8
1.7
1.9
1.7
2.1
2.0
2.2
2.2
0.2
0.2
0.2
0.1
0.0
-0.3
-0.6
0.1
0.4
0.0
-0.3
-0.6
-0.0
0.2
Qt
4
rooR-QUARTn
1995
1996
1997
1998
1999
1.
2.
3.
4.
04
Q4
04
Q4
Q4
urban consumers.
For all
Level, except as noted.
Percent change from two quarters earlier;
Percent change from four quarters earlier;
for uneployment rate, change in percentage points.
change in percentage points.
for unemployment rate,
Strictly Confidential <FR>
Class II
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS,
FOMC
ANNUAL VALUES
March 25, 1998
(Seasonally adjusted annual rate)
Item
1
-
-
Projected -
-
-
1991
1992
1993
1994
1995
1996
1997
1998
1999
5916.7
6079.4
6244.4
6244.4
6558.1
6389.6
6947.0
6610.7
7265.4
6742.1
7636.0
6928.4
8081.1
7189.5
8437.9
7393.2
8767.8
7544.8
0.4
0.0
-0.4
-0.8
3.6
4.0
3.9
4.9
2.4
3.0
2.1
3.7
3.3
3.6
2.7
3.7
1.6
1.2
2.2
2.5
3.2
3.6
3.1
3.8
3.8
4.4
3.2
4.4
2.3
3.2
3.0
4.6
2.2
2.4
2.1
2.7
expenditures
-0.2
-3.1
-1.0
0.9
4.2
9.4
3.4
3.6
2.7
7.4
1.6
2.3
3.1
6.3
3.0
2.5
2.2
3.0
1.0
2.7
2.7
3.9
1.8
2.8
3.7
6.8
1.4
4.2
4.0
6.9
3.0
3.9
2.4
2.9
1.6
2.7
Business fixed investment
Producers' dur. equipent
Nonres. structures
Residential structures
-6.0
-2.6
-12.5
1.1
5.5
9.6
-3.4
16.9
9.9
12.2
4.5
7.8
7.6
10.2
1.1
4.2
6.5
8.3
2.0
-1.9
11.7
12.2
10.3
3.9
8.6
12.3
-0.6
5.7
9.5
12.2
2.5
3.0
6.2
7.4
2.9
-1.8
8.6
4.1
4.1
7.4
4.6
10.2
10.0
12.3
10.3
5.6
9.3
11.8
10.2
14.5
1.3
9.1
4.8
6.7
-0.7
-3.1
-5.3
1.0
1.7
1.3
-1.3
2.0
-1.4
-6.1
-6.9
2.0
0.1
-3.9
-6.0
2.7
-1.4
-6.0
-5.9
1.4
2.0
1.5
1.1
2.2
1.0
-0.7
-0.7
2.0
0.8
-1.8
-4.3
2.2
0.9
-1.8
-2.3
2.4
-3.0
-1.2
-22.3
7.0
2.0
-29.5
22.1
29.5
-70.2
60.6
49.0
-104.6
27.3
35.7
-98.8
25.0
22.5
-114.4
65.2
57.3
-146.7
42.1
35.5
-228.6
30.9
25.9
-281-9
3.8
6.3
5.0
5.8
4.0
5.6
5.6
3.9
4.0
108.3
6.8
108.6
7.5
110.7
6.9
114.1
6.1
117.2
5.6
119.5
5.4
122.3
4.9
125.3
4.6
126.8
4.8
Unitl
Nominal GDP
Bill.
Real GDP
Bill. Ch. $
Real GDP
Gross domestic purchases
t
rinal sales
Priv. doc. final
Personal cons.
$
change
purchbaes
Durables
Nondureblae
services
Exports
Imports
Gov't.
cons.
& investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Not exports
Bill. Ch.
Nominal GDP
% change
NMPLOYMET AID PRODUCTION
Mont am
payroll employment
Uneployment rate
illions
Is
Industrial
prod. index
rate
- mfg.
Capacity util.
% change
-0.0
77.9
3.7
79.4
3.3
80.5
6.5
82.5
3.3
82.8
4.2
81.4
5.7
81.7
1.8
80.9
2.1
78.8
Bousing starts
Ligbt motor vehicle sales
North Amer. produced
Other
Millions
1.01
12.52
9.74
2.77
1.20
12.85
10.51
2.34
1.29
13.87
11.71
2.15
1.46
15.02
12.88
2.13
1.35
14.73
12.82
1.90
1.48
15.05
13.34
1.71
1.48
15.06
13.12
1.93
1.51
14.89
13.02
1.86
1.44
14.59
12.86
1.73
Bill. $
5932.4
3.5
3.7
0.8
6.0
6255.5
6.2
7.3
4.0
6.2
6576.8
5.1
4.2
1.5
5.1
6955.2
5.7
5.1
2.4
4.2
7270.6
4.1
5.2
2.4
4.8
7637.7
5.5
5.8
2.0
4.3
8061.2
5.3
6.0
3.7
3.8
8398.5
3.7
4.3
2.8
3.4
8719.5
4.0
3.9
2.4
3.1
4.5
6.9
6.6
11.3
6.8
6.6
19.0
7.5
7.2
14.1
8.2
7.9
11.0
8.9
8.6
9.1
9.6
9.3
10.0
10.0
9.7
-5.2
9.3
9.1
2.5
9.1
8.8
-196.0
75.8
11.5
-280.9
86.3
18.3
-250.7
87.4
19.7
-186.7
96.8
27.9
-174.4
103.1
32.5
-110.5
105.3
34.1
-28.8
107.8
36.4
10.2
116.0
44.5
-2.0
116.4
44.8
15.7
4.8
14.5
3.7
14.4
3.7
15.5
4.7
16.0
5.5
16.6
6.4
17.3
7.3
17.0
7.0
16.4
6.4
3.3
2.6
2.6
2.5
2.4
2.3
1.8
1.6
1.8
2.7
3.0
4.4
2.7
3.1
3.5
2.3
2.7
3.1
2.5
2.7
2.8
2.3
2.3
2.6
3.1
3.2
2.6
1.4
1.9
2.2
1.2
1.7
2.3
1.8
2.2
2.3
4.4
3.5
3.6
3.1
2.6
3.1
3.4
3.4
3.3
2.2
4.8
2.5
3.5
4.5
1.0
-0.2
1.8
2.0
-0.1
1.9
2.0
0.6
3.1
2.4
1.7
3.9
2.2
2.2
4.1
1.9
0.3
3.6
3.3
1.4
3.3
1.9
INCOME AMN SAVING
Nominal Gm
Nominal GP
Nominal personal income
% change
Real disposable income
Personal saving rate
Corp. profits,
IVAc
CCadj.
Profit
share of aGP
Excluding FR Banks
% change
Federal surpl./deficit
State & local suXpl.jdef.
Rx. social
ins. funds
Bill.
$
Gross natl. saving rate
net natl. saving rate
PRlICB
AND COSTS
GDP chn.-wt. price
index
Gross Dmestic Purchases
chn.-wt. price
index
CPI
Ex. food and energy
ECI,
2
hourly compensation
Nonfarm business sector
Output per hour
Coupensatimo per Hour
Unit labor cost
Schange
1. Changes are from fourth quarter to fourth quarter.
2.
Private-industry workers.
Strictly Confidential <FR>
Class II FOMC
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
Item
Units
March 25,
1998
1995
Q1
1995
02
1995
03
1995
Q4
1996
Q1
1996
Q2
1996
Q3
1996
Q4
1997
01
1997
Q2
7168.9
6703.7
7209.5
6708.8
7301.3
6759.2
7381.9
6796.5
7467.5
6826.4
7607.7
6926.0
7676.0
6943.8
7792.9
7017.4
7933.6
7101.6
8034.3
7159.6
0.9
1.3
1.8
2.5
0.3
0.2
1.9
2.2
3.0
1.9
3.3
2.7
2.2
1.3
2.0
2.5
1.8
3.1
2.6
4.4
6.0
6.5
5.2
5.5
1.0
2.4
0.2
2.1
4.3
2.5
4.5
3.2
4.9
5.9
3.0
5.1
3.3
3.7
2.5
2.9
EXPENDITURES
Nominal GDP
Real GDP
Bill. $
Bill. Ch. $
Real GDP
Gross domestic purchases
t change
rinal
sales
Priv. dom. final purchases
Personal cons.
Durables
Nondurable
Services
*xpenitures
Business fied
investment
1.5
2.9
2.6
1.8
3.1
3.7
0.5
3.3
5.3
0.9
-3.0
1.7
2.4
3.9
0.9
3.7
9.3
0.
2.2
2.0
0.7
2.3
4.8
1.7
3.5
9.7
2.6
3.1
-1.9
0.6
1.0
3.5
2.1
3.9
14.1
4.7
3.9
-5.4
-2.1
3.9
Residential structures
14.2
16.1
9.5
-7.0
5.7
6.2
4.3
-15.5
1.6
2.0
0.7
8.4
4.9
9.4
-5.8
8.5
11.7
13.1
8.2
8.3
13.0
14.9
7.9
17.9
16.5
19.1
10.0
-4.5
5.9
2.6
15.3
-4.3
4.1
6.7
-2.1
3.3
14.6
23.0
-4.7
7.4
Exports
Imports
7.2
9.3
13.5
11.5
1.7
9.6
1.9
25.5
9.9
10.0
7.7
2.3
2.4
13.1
14.1
13.2
6.8
17.9
0.6
-1.1
-0.1
-4.5
-0.7
-1.3
-5.4
-16.4
1.8
7.5
7.2
8.8
-1.1
-4.2
0.1
-5.2
-0.4
-5.8
-1.1
1.7
-1.6
2.6
-4.0
-0.4
-15.9
1.9
6.1
-1.4
11.0
6.3
-4.6
0.7
-7.1
3.3
-11.8
2.7
7.5
1.2
48.5
54.7
21.6
34.0
17.0
29.6
22.2
24.4
8.0
14.5
21.3
17.3
37.9
31.6
32.9
26.5
63.7
58.3
77.6
70.1
Producers' dur. equipment
HNoes.
structures
ov't. cons.
Federal
Dafense
& invemtment
State & local
Change in bus. inventories
Monfa=m
Bill. Ch.
Net exports
Nominal ODP
EMO lENT
$
18.4
20.5
3.1
6.6
-113.5
-112.8
-92.9
-76.1
-100.8
-112.6
-138.9
-105.6
-126.3
-136.6
% change
4.2
2.3
5.2
4.5
4.7
7.7
3.6
6.2
7.4
5.2
Millions
116.5
116.9
117.4
117.9
118.5
119.2
119.9
120.5
121.1
121.9
5.5
5.7
5.7
5.6
5.6
5.4
5.3
5.3
5.3
4.9
5.9
1.6
4.5
1.1
2.0
7.5
3.6
3.8
5.2
4.6
83.8
82.9
82.6
81.8
81.0
81.6
81.5
81.4
81.6
81.5
1.32
14.67
1.29
14.42
1.42
14.86
1.42
14.96
1.47
15.04
1.49
15.13
1.49
15.08
1.42
14.95
1.47
15.26
1.46
14.51
12.66
12.46
13.00
13.18
13.38
13.43
13.38
13.18
13.34
12.67
2.01
1.96
1.86
1.78
1.66
1.70
1.70
1.76
1.92
1.85
7175.1
4.5
7.4
4.5
5.3
7220.6
2.6
4.1
0.2
4.6
7298.3
4.4
4.3
2.6
4.5
7388.5
5.0
5.1
2.5
4.6
7475.3
4.8
6.8
3.5
4.7
7610.5
7.4
6.6
1.1
4.1
7669.1
3.1
5.1
2.7
4.5
7796.1
6.8
4.8
0.7
3.9
7919.2
6.5
8.0
4.6
3.7
8013.6
4.9
5.0
3.1
4.2
-2.9
8.5
0.2
10.0
8.7
8.4
31.7
9.2
8.9
7.9
9.3
9.0
20.0
9.6
9.3
12.1
9.7
9.4
0.6
9.6
9.4
4.5
9.6
9.3
18.1
9.8
9.6
8.2
9.9
9.6
-191.5
-179.5
-176.5
-150.2
-153.6
-111.6
-99.5
-77.1
-55.5
-36.8
107.7
37.7
105.6
35.3
101.1
30.3
97.8
26.8
104.1
33.2
114.4
43.1
102.6
31.1
100.4
28.9
104.7
33.5
104.9
33.3
15.8
5.4
15.7
5.1
16.0
5.5
16.6
6.0
16.3
6.0
16.5
6.4
16.9
6.7
16.7
6.6
16.8
6.7
17.4
7.4
AND PRODUCTION
Nonafan payroll employnmnt
Unmployment rate
ZodAtrial prod.
Capacity util.
rate - Mfg.
Bousing starts
Light motor vehicle
North Amer.
Other
a cange
index
Millions
&sles
produced
flMB AND SAVING
Maminal GNP
Nominal OP
Bill. $
4 change
Nominal personal incame
Real dsposable income
Personal saving rate
Corp. profits,
IVA & CCAdj.
t
t
change
Profit share of MNP
Excluding PR Bas
Feeral
surpl./deficit
State & local suzrl./daf.
Bill. $
Ex. social ins. fudA
Gross natl.
saving rate
Net natl. saving rate
PRICES AND COSTS
indte
GDP chn.-wt. price
Gross Do"mtic Purchases
chn.-wt. price index
CPI
tx. food and energy
ECI. hourly compensaticai
9 change
3.3
1.9
2.4
3.0
2.7
3.3
2.4
3.3
2.7
1.9
2.0
2.2
2.9
2.8
2.5
1.9
3.4
1.5
1.1
4.3
3.1
Nonfarm business sector
Output per hour
Comensation per hour
Unit labor cost
1. Private-industry workers.
-1.8
2.3
4.2
2.9
5.1
2.2
-0.7
3.3
4.0
2.3
3.2
0.9
Strictly Confidential <FR>
Class II FOMC
REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)
-- -- - - Item
Units
-
--
March 25,
Proj ctd-----
-----
-
1998
--
1997
03
1997
04
1998
Q1
1998
02
1998
Q3
1998
Q4
1999
QX
1999
Q2
1999
Q3
1999
Q4
8124.3
7214.0
8232.1
7282.9
8323.6
7338.0
8397.2
7375.5
8475.3
7411.4
8555.7
7447.7
8641.0
7484.1
0722.9
7522.8
8808.8
7564.1
8898.5
7608.1
3.1
4.3
4.7
7.1
3.9
3.6
2.6
2.7
3.1
4.7
3.5
6.2
2.1
3.1
3.1
4.7
2.0
3.2
2.3
4.2
2.0
2.0
3.0
3.4
2.0
2.7
1.3
2.5
2.1
2.3
2.3
2.6
2.2
2.9
1.8
2.7
2.3
1.9
2.9
2.8
EXPENDITURES
Nominal ODP
Real GDP
Bill. $
Real GDP
Gross domestic purchases
Final sales
purchases
Priv. dam. final
t change
Bill.
Ch.
expenditurea
Personal cons.
Durables
oandurables
Services
$
5.6
3.1
5.3
4.2
3.7
2.7
2.3
2.4
2.5
2.5
18.4
4.3
3.9
1.9
-1.1
5.4
15.9
3.2
4.3
5.3
3.2
4.5
3.8
3.4
3.8
3.0
2.2
2.9
2.4
1.5
2.6
2.9
1.6
2.6
3.1
1.7
2.7
3.2
1.7
2.7
19.2
24.1
-2.2
-2.3
9.3
12.8
9.6
11.9
9.6
12.0
9.7
12.2
6.0
7.2
6.4
7.7
6.0
7.1
6.3
7.6
6.7
-2.0
0.4
3.3
3.2
3.1
2.9
2.9
2.9
2.7
9.5
14.2
0.8
-1.5
-1.0
-2.3
-2.2
-1.8
-1.0
4.4
14.6
8.6
5.7
-3.5
9.5
3.0
11.1
-1.6
8.8
7.5
6.8
1.1
6.7
7.1
8.1
1.6
6.7
9.8
5.2
1.1
-1.1
1.2
2.3
0.4
-2.1
1.3
1.9
0.0
-3.2
-10,5
1.9
1.1
-1.2
-2.2
2.3
1.0
-1.4
-2.5
2.3
1.1
-1.3
-1.5
2.4
-0.2
-4.8
-6.7
2.4
1.7
0.4
0.7
2.6
1.3
-0.8
-1.2
2.4
0.8
-2.1
-1.8
2.4
47.5
38.3
-164.1
72.0
62.4
-159.7
64.5
55.5
-194.9
45.9
38.9
-219.0
38.8
33.3
-248.9
19.3
14.4
-251.6
32.0
26.9
-269.4
28.6
23.6
-277.0
37.0
31.9
-294.2
25.9
21.0
-286.9
% change
4.6
5.4
4.5
3.6
3.8
3.8
4.1
3.8
4.0
4.1
Millions
122.6
4.9
123.5
4.7
124.5
4.6
125.2
4.6
125.6
4.6
126.0
4.7
126.3
4.7
126.6
4.8
127.0
4.8
127.3
4.9
prod. index
Industrial
rate - mfg.
Capacity util.
Scabange
6.0
81.6
7.2
82.2
2.8
81.9
2.8
81.5
0.5
80.5
1.3
79.8
2.1
79.3
1.9
78.9
2.0
78.6
2.5
78.4
Housing starts
Light motor vehicle sales
North Amer. produced
Other
Millions
1.45
15.34
13.31
2.03
1.53
15.10
13.14
1.94
1.56
15.08
13.09
1.99
1.51
15.02
13.13
1.90
1.50
14.77
12.96
1.81
1.48
14.68
12.92
1.76
1.46
14.59
12.86
1.73
1.45
14.59
12.86
1.73
1.43
14.58
12.85
1.73
1.43
14.58
12.85
1.73
Bill. $
8103.5
4.6
4.6
2.6
3.5
8208.5
5.3
6.4
4.5
3.8
8290.5
4.1
6.7
6.8
4.2
8360.3
3.4
3.7
2.0
3.7
8433.5
3.5
3.6
1.3
3.2
8509.6
3.7
3.3
1.0
2.7
8596.0
4.1
4.1
4.8
3.3
8676.2
3.8
3.9
1.6
3.2
8759.6
3.9
3.9
1.6
3.0
8846.0
4.0
3.7
1.5
2.7
% change
17.2
10.2
9.9
-2.2
10.0
9.8
-11.8
9.6
9.4
-8.6
9.3
9.1
-3.6
9.2
8.9
3.7
9.2
8.9
2.3
9.1
8.9
1.3
9.1
8.8
2.3
9.0
8.8
4.3
9.0
8.8
Bill. $
-10.8
111.4
40.0
-12.3
110.3
38.8
-0.9
118.2
46.7
8.7
114.8
43.3
17.9
113.5
42.0
15.2
117.4
45.9
-10.1
116.1
44.5
-5.2
116.8
45.2
3.5
116.0
44.4
3.7
116.9
45.3
17.4
7.5
17.5
7.5
17.7
7.8
17.2
7.2
16.7
6.7
16.4
6.4
16.5
6.5
16.4
6.4
16.4
6.3
16.2
6.2
1.4
1.5
1.4
1.5
1.8
1.3
1.8
1.9
1.4
2.3
2.1
0.4
0.5
2.5
1.1
1.5
2.2
1.7
2.3
2.3
3.4
4.9
3.5
3.4
3.4
3.6
3.8
0.2
1.8
5.2
3.4
-2.2
4.1
6.3
0.7
3.5
2.8
Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential *tructures
Exports
Imports
Gov't. cons.
Faderal
Daefense
State f
& investment
local
Change in bus.
aontfarm
inventories
Sill. Ch.
xports
Net
Naminal GDP
3.0
EMPLOYMENT AND PRODUCTION
Nonbtar
payroll Imployment
Unmplyment rate
INCOME AND SAVING
ondominal
Nominal
GP
IP
% change
Naminal personal income
Real disposable incoam
Personal saving rate
Corp. profits, IVA & CCdjI.
Profit
share of GNP
Excluding FR Banks
Federal surpl./deficit
State a local
Ex. social
surpl./def.
ins. funds
Gross natl. saving rate
Net natl.
saving rate
PRICES AND COSTS
GDP cha.-wt. price index
Gross Domestic Purchases
chn.-vt. price index
CPI
% change
Ex. food and energy
XCI, hourly compensation
1
Nonfaar business sector
Oatput per hour
Compensation per hour
Unit labor cost
1.
Private-industry
workers.
Strictly Confidential <FR>
Class II FOMC
Item
Real GDP
Grosa dom.
purchases
Final sales
Priv. do=.
final purchases
Personal cons.
IN REAL GROSS DOMESTIC PRODUCT AND
CONTRIBUTIONS TO GROWHTH
RELATED
ITEMS
March 25, 1998
1993
Q3
1995
Q4
1996
Q1
1996
Q2
1996
Q3
1996
Qa
1997
01
3.0
1.9
2.2
1.3
1.8
3.1
6.0
6.6
1.0
2.4
4.3
2.5
4.9
6.0
3.3
3.7
3.1
4.4
3.3
2.3
1.9
2.0
2.6
3.6
5,2
4.5
0.2
1.7
4.5
2.7
3.0
4.2
2.5
2.4
4.7
5.8
2.5
0.B
0.5
1.2
0.4
-0.2
0.1
0.4
1.3
1.0
0.2
0.7
1.6
1.3
0.3
-0.2
-1.3
0.2
-0.6
1.1
-1.4
0.2
emmnditurre
Durables
Nondurables
services
17
Q3
3.6
1.1
0.9
1.5
0.6
-0.5
-0.4
1.5
0.6
0.2
0.4
-0.2
0.4
0.3
-0.1
0.1
1.4
1.6
-0.1
0.3
1.8
2.7
-1.0
1.1
-0.4
2.0
-1.3
0.5
9504/
9404
9604/
9504
97Q4/
9604
1.6
1.2
3.2
3.6
3.8
6.4
2.2
2.0
3.1
3.1
3.2
3.6
1.5
0.2
0.2
1.0
1.8
0.3
0.4
1.1
2.5
0.5
0.3
1.7
0.6
0.6
0.1
-0.1
1.1
0.9
0.3
0.2
0.9
0.9
-0.0
0.2
-0.4
1.0
-1.4
-0.6
1.2
-1.8
Business fixed wjavaesmnt
Producers' dur. equip.
Nonres. *stuctuxes
Residential structuxes
0.2
0.1
0.0
0.3
Net exports
txports
Imports
1.1
1.4
1.0
1.2
-0.2
-0.3
-1.5
-1.7
-1.6
-0.8
-2.1
-2.5
-1.7
0.4
1.1
-0.7
Government cone. & invest.
Federal
Defense
Nondefense
State and local
-0.1
-0.1
-0.2
0.1
0.0
-1.0
-1.2
-0.8
-0.4
0.2
0.3
0.5
0.3
0.2
-0.2
1.3
0.6
0.5
0.1
0.7
-0.2
-0.3
-0.2
-0.1
0.1
0.0
-0.4
-0.3
0.0
0.4
-0.1
-0.4
-0.
0.2
0.3
0.6
0.4
0.3
0.1
0.1
0.2
-0.1
0.1
-0.1
0.3
-0.3
-0.4
-0.3
-0.2
0.2
-0.2
-0.2
0.0
0.3
-0.3
0.6
-0,8
-0.6
-0.2
0.7
0.1
0.5
0.8
0.8
0.1
-0.2
-0.2
-0.1
1.8
1.8
0.0
0.8
0.7
0.1
-1.6
-1.7
0.1
-0.6
-0.5
-0.1
Change in bus.
Nonfarm
Farm
Note.
Inventories
Components
may not sum to totals
0.5
0.6
-0.2
0.3
199
02
because of rounding.
Confidential <FR>
Strictly
Class II FOMC
Item
Real GDP
Gross da.
purchase
Final sales
Priv. dom. final purchases
Personal cons.
Durables
Nondurablea
oSrvices
expendl.tres
Busines fixed investment
Producers' dur. *euip.
Nower.
structures
Residential structures
Net sports
Exports
Imports
GoverIment cons. & invest.
Federal
Defense
Nondefeaie
State and local
Change in bus. inventories
Nonfnarm
Farm
Note.
Components may not sum to totals
CONTRIBUTIONS
GROWTH
TO
PRODUCT
IN REAL GROSSDOMESTIC
AND
RELATED
ITEMS
March 25,
97Q/4
96Q4
9SQ4/
97Q4
1998
1997
Q4
1998
01
1998
Q2
1990
Q3
1998
Q4
1999
01
1999
Q2
1999
03
1999
Q0
3.9
3.4
3.1
4.7
2.1
3.1
2.0
3.3
2.0
2.0
2.0
2.7
2.1
2.4
2.2
2.9
2.3
2.0
3,8
4.4
2.3
3.3
2.2
2.5
2.6
2.3
3.5
5.1
3.0
3.9
2.3
3.5
3.0
2.8
1.3
2.1
2.3
2.2
1.8
2.3
2.9
2.4
3.2
3.6
2.9
3.8
2.1
2.2
2.1
0.2
-0.2
2.1
3.6
1.2
0.6
1.7
-0.2
-0.2
0.9
0.9
-0.1
0.0
9941/
98Q4
2.5
0.5
0.3
1.7
1.0
0.9
0.1
-0.1
1.0
0.9
0.1
-0.0
0.6
0.6
0.1
-0.1
0.7
0.6
0.1
-0.1
0.6
0.6
0.1
-0.1
0.7
0.6
0.1
-0.0
0.9
0.9
-0.0
0.2
0.4
0.6
1.0
0.9
0.1
0.0
0.3
1.0
-0.7
-1.6
-0.4
-1.2
-1.0
0.3
-1.4
-1.3
-0.2
-1.1
-0.1
0.8
-0.9
-0.7
0.1
-0.9
-0.3
0.8
-1.0
-0.7
0.2
-0.9
0.4
1.1
-0.7
-0.6
1.2
-1.8
-1.0
0.1
-1.2
-0.3
0.5
-0.9
0.1
-0.1
0.1
-0.2
0.2
0.0
-0.2
-0.1
0.3
0.2
0.2
-0.1
0.
0.0
0.3
0.2
-0.1
-. 1
0.0
0.3
0.2
-0.1
-0.1
-0.0
0.3
-0.0
-0.3
-0.3
-0.0
0.3
0.3
0.0
0.0
0.0
0.3
0.2
-0.0
-0.0
0.0
0.3
0.1
-0.1
-0.1
-0.1
0.3
0.2
-0.0
-0.0
-0.0
0.2
0.1
-0.1
-0.2
0.1
0.3
0.2
-0.1
-0.1
-0.0
0.3
1.2
1.3
0.0
-0.4
-0.4
-0.0
-0.9
-0.8
-0.1
-0.4
-0.3
-0.1
-1.0
-0.9
-0.0
0.6
0.6
0.0
-0.2
-0.2
0.0
0.4
0.4
0.0
-0.5
-0.5
0.0
0.5
0.5
0.0
because of rounding.
Strictly Confidential
Class II FOMC
STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS
(Billions of dollars except as noted)
(FR)
Fiscal year 5
Item
1996
a
1997
a
1997
1998
1999
a
Ql
Q2
a
1998
Q3
Q4b
UNIFIED BUDGET
3
Receipts
Outlays1
Surplus/deficitt
On-budget
Off-budget
Surplus excluding
deposit insurance 2
Means of financing
Borrowing
Cash decrease
Other 3
Cash operating balance,
end of period
Q1
Q2
1999
Q3
Q4
Q1
Q2
Q3
Q4
Not seasonally adjusted
1453
1561
-107
-174
67
1579
1601
-22
-103
81
1679
1670
9
-85
95
1725
1721
5
-112
117
349
401
-52
-69
17
496
396
100
61
39
387
398
-11
-19
8
386
426
-40
-66
26
381
414
-33
-50
17
516
414
102
58
44
396
417
-20
-27
7
406
464
-58
-59
1
375
400
-25
-76
52
523
426
98
45
52
421
431
-10
-22
12
412
443
-30
-67
37
-116
-36
4
1
-56
97
-12
-41
-34
101
-22
-59
-26
97
-11
-31
130
-6
-16
38
1
-17
-5
4
-8
-11
0
6
48
-1
5
-69
-18
-13
11
8
-7
34
12
-6
22
6
4
-89
-10
-4
28
-4
-3
24
20
14
30
0
-5
-80
-15
-2
16
-5
-1
16
10
4
44
44
40
40
33
51
44
32
26
36
40
20
20
35
40
30
Seasonally adjusted annual rate
NIPA FEDERAL SECTOR
Receipts
Expenditures
Consumption expend.
Defense
Nondefense
Other expenditures
Current account surplus
Gross investment
Current and capital
account surplus
March 25, 1998
1550
1679
447
302
145
1232
-129
69
1692
1737
460
309
151
1277
-45
61
1791
1787
468
311
156
1319
3
59
1832
1831
471
310
161
1360
1
58
1675
1731
458
306
152
1273
-56
58
1709
1746
464
311
153
1282
-37
62
1742
1753
465
312
153
1288
-11
61
1767
1779
469
315
154
1311
-12
59
1783
1784
467
311
156
1317
-1
60
1798
1789
467
310
157
1322
9
60
1814
1796
468
309
158
1328
18
59
1832
1817
468
309
159
1349
15
59
1815
1825
470
309
161
1355
-10
58
1831
1836
472
310
162
1364
-5
58
1850
1846
473
310
163
1373
3
58
1867
1863
472
310
162
1391
4
58
-197
-106
-56
-58
-114
-99
-72
-71
-61
-51
-42
-44
-68
-63
-55
-54
-221
-169
-154
-150
-171
-169
-150
-163
-159
-152
-141
-142
-161
-153
-143
-.6
-.7
-.2
-.1
-.2
0
-.1
-.1
0
-1.9
-.7
.9
-.5
-.4
FISCAL INDICATORS*
High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent, cal. year
-2.3
-1.1
-1.1
0
-.2
1.5
.2
.2
-1.6
-1.4
-141
.2
-.1
-.1
0
.9
-.2
-.5
-1.1
1. OMB'S February 1998 surplus estimates (assuming the enactment of the President's proposals) are -$10 billion in FY98 and $10 billion in FY99.
CBO's March 1998 baseline surplus estimates are $8 billion in FY98 and $9 billion in FY99. Budget receipts, outlays, and surplus/deficit
include corresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and shown separately as off-budget,
as classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90.
2. OMB's February 1998 surplus estimates (assuming the enactment of the President's proposals), excluding deposit insurance spending, are -$15
billion in FY98 and $5 billion in FY99. CBO's March 1998 baseline surplus estimates, excluding deposit insurance, are $3 billion in FY98 and $5
billion in FY99.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. HEB is the NIPA current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level of
potential output associated with an unemployment rate of 6 percent. Real potential GDP growth is assumed to rise from 2.2 percent in 1996 to 2.5
percent in 1999, reflecting CPI modifications. Quarterly figures for change in HEB and PI are not at annual rates. Change in HEB, as a percent of
nominal potential GDP, is reversed in sign. FI is the weighted difference of discretionary changes in federal spending and taxes in chained (1992)
dollars, scaled by real federal consumption plus investment. For change in HEB and FI, negative values indicate restraint.
5. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to OMB fiscal
year totals.
a--Actual.
b--Preliminary.
Strictly Confidential Class II FOMC
March 25, 1998
Change In Debt of the Domestic Nonfinancial Sectors
(Percent)
Year
1989
1990
1991
1992
7.3
6.4
4.3
4.6
7.0
11.0
11.1
10.9
7.3
5.2
2.3
2.6
8.5
7.5
4.8
4.5
9.9
9.6
6.4
5.2
6.0
1.5
-1.3
0.5
6.7
3.1
-1.7
0.7
5.7
5.1
8.4
2,0
6.4
4.4
3.8
6.3
1993
1994
1995
5.0
4.6
5.4
8.3
4.7
4.1
3.8
4.6
5.9
5.6
7.8
8.1
4.3
5.8
5.6
7.6
14.5
14.1
1.4
3.8
6.3
5.7
-3.9
-4.4
5.0
5.8
4.0
1996
5.2
4.0
5.7
7.9
7.9
7.9
4.6
0.1
5.6
1997
1998
1999
5.3
5.4
4.7
0.6
-0.4
-0.5
6.9
7.3
6.2
7.0
7.0
6.3
7.2
7.9
7.0
4.4
3.4
3.1
7.1
8.3
6.6
5.6
5.0
4.5
5.6
3.9
4.0
Quarter
1997:3
4
1998:1
2
3
4
1999:1
2
3
4
4.9
6.5
6.0
4.2
5.7
5.2
4.9
3.9
5.0
4.5
1.1
1.8
-0.7
-4.3
2.8
0.7
0.0
-3.4
1.6
-0.1
6.2
8.1
8.3
7.0
6.7
6.6
6.4
6.2
6.0
5.9
6.0
7.8
7.3
6.8
6.4
6.7
6.5
6.3
6.0
5.9
7.0
8.3
7.9
7.8
7.6
7.5
7,1
6.9
6.7
6.6
4.3
2.5
3.2
3.3
3.4
3.4
3.4
3,3
2.9
2.6
7.0
8.8
10.1
7.8
7.4
7.0
6,7
6.5
6.3
6.2
3.8
6.9
5.8
4.9
4.6
4.5
4.5
4.5
4.4
4.4
4.6
5.4
4.5
3.6
3.8
3.8
4.1
3.8
4.0
41
Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 1997:Q4 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.
2. On a monthly average basis, total debt grew 4.9 percent in 1997, 5.6 percent in 1998, and 4.8 percent in 1999.
3. On a monthly average basis, federal debt rose 0.6 percent in 1997, -0.2 percent in 1998, and -0.2 percent in 1999.
4. On a monthly average basis, nonfederal debt increased 6.5 percent in 1997,7.5 percent in 1998, and 6.3 percent in 1999.
2.6.3 FOF
Strictly Confidential Class II FOMC
March 25, 1998
Flow of Funds Projections: Highlights
(Billions of dollars except as noted)
Calendar year
Seasonally adjusted annual rates
1998
1997
1999
1996
1997
1998
1999
Q3
Q4
Ql
Q2
Q3
Q4
Ql
Q2
Q3
Q4
Net funds raised by domestic
nonfinancialsectors
1 Total
2 Net equity issuance
3 Net debt issuance
655.5
-64.2
719.7
678.9
-79.9
758.8
719.7
-100.5
820.2
653.7
-92.0
745.7
661.9
-60.4
722.3
886.1
-90.0
976.1
816.0
-100.0
916.0
560.1
-94.0
654.1
788,4
-106,0
894.4
714.4
-102.0
816.4
680.6
-98.0
778.6
542.1
-98.0
640.1
730.5
-86.0
816.5
661.4
-86.0
747.4
Borrowing sectors
Nonfinancial business
4 Financing gap 1
5 Net equity issuance
6 Creditmarket borrowing
6.5
-64.2
190.3
45.2
-79.9
311.7
84.0
-100.5
390.3
104.5
-92.0
334.4
25.1
-60.4
317.3
42.6
-90.0
405.9
74.2
-100.0
473.5
82.8
-94.0
377.0
92.2
-106.0
363,4
86.8
-102.0
347.1
98.2
-98.0
338.1
101.4
-98.0
335.1
113.0
-86.0
333.1
105.5
-86.0
331.1
Households
7 Net borrowing 2
8
Home mortgages
9
Consumer credit
10 Debt/DPI (percent) 3
383.0
258.2
88.8
89.6
364.1
251.0
53.8
91.5
387.6
297.5
42.7
93.3
375.7
284.2
40.1
95.4
322.2
254.6
53.0
91.8
425.8
304.8
31.5
92.1
404.6
298.4
41.1
92.1
383.3
297.9
42.5
92.9
372.0
296,8
43.5
93,7
390.5
296.9
43.8
94.5
385.1
287.4
44.0
94.5
380.1
284.4
43.0
95.2
370.6
281.4
38.5
95.8
367.1
283.4
35.0
96.3
State and local governments
I
Net borrowing
12 Current surplus 4
1.3
123.2
59.9
96.4
56.9
106.0
53.9
105.6
41.8
89.9
77.0
95.1
65.9
98.5
55.9
94.9
52.9
113,5
52.9
117.1
53.9
115.6
53.9
106.1
53.9
115.1
53.9
85.8
Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.s.a.)
15 Unified deficit (quarterly, n.s.a.)
145.0
145.0
110.9
23.1
23.1
2.4
-14.4
-14.4
9.2
-18.2
-18.2
-32.4
40.9
10.6
10.9
67.4
33.7
39.7
-27.9
22.5
32.8
-162.0
-88.6
-102.1
106.2
27.7
20.4
26.0
24.0
58.0
1.6
29.9
24.9
-128.9
-80.4
-97.6
59.0
15.9
9.9
-4.6
16.4
30.4
Depository institutions
16 Funds supplied
232.9
332.2
280.2
254.4
183.4
465.5
337.7
254.7
260.5
267.9
258.9
245.9
262.9
249.9
Memo (percentage of GDP)
17 Domestic nonfinanciat debt 5
18 Domestic nonfinancial borrowing
19
Federal government 6
20
Nonfederal
184.4
9,4
1.9
7.5
183,3
9.4
0.3
9.1
184.9
9.7
-0.2
9.9
186.9
8.5
-0.2
8.7
182.9
8.9
0.5
8.4
183.1
11.9
0.8
11.0
183.9
11.0
-0.3
11.3
184.6
7.8
-1.9
9.7
185.2
10.6
1.3
9.3
186.0
9.5
0.3
9.2
186.5
9.0
0.0
9.0
186,7
7.3
-1.5
8.8
187.0
9.3
0.7
8.6
187.3
8.4
-0.1
8.5
Category
Note. Data after 1997:Q4 are staff projections.
1. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.
6. Excludes government-insured mortgage pool securities.
2.6.4 FOP
International Developments
Recent Developments
Imports in the countries that have been the focus of the Asian financial crises have
fallen appreciably, causing a significant improvement in external balances. Economic
growth has also slowed sharply in those countries. But policy reforms are moving
ahead in most of the affected economies, and financial markets in Asian and other
emerging market economies have stabilized somewhat since the last FOMC meeting.
Japanese economic activity remains weak, with confidence further undermined by the
financial turmoil in the region and falling exports to Asia. Economic activity in
continental Europe appears to have picked up following a weak fourth quarter.
The dollar has appreciated 2-3/4 percent against the yen since the last FOMC
meeting, reflecting weakening growth and continued uncertainty about fiscal policy in
Japan. The legislative approval of the FY 1998-99 budget is almost complete, but the
terms of the much-anticipated supplemental stimulus package have yet to be set.
Interest rates are down 15 to 30 basis points in Japan.
The dollar has risen modestly against the mark and other continental European
currencies over the intermeeting period. Declining inflation in foreign industrial
countries, due in part to lower oil prices, and anticipated spillovers from the Asian
financial crises have contributed to declines in foreign long-term interest rates. On
average, long-term interest rates in foreign industrial countries are down 25 basis
points over the intermeeting period while comparable U.S. rates are little changed.
The dollar is down 2 percent against sterling on prospects of a further increase in U.K.
official interest rates. In spite of an expected slowdown in growth, the Bank of
England concluded in its February Inflation Report that a further modest rise in
interest rates this year "is more likely than not." The Canadian dollar has moved up
against the U.S. dollar since the increase of 50 basis points in the Bank of Canada's
Bank Rate on January 30. European stock prices have reached all-time highs as the
prospects of good economic growth this year have seemed more certain and long-term
interest rates have fallen.
Preparations for next year's launch of Stage III of EMU are on track. In a
report released today, the European Commission formally recommended that eleven
countries participate from the start.1 According to official estimates, these countries
had 1997 fiscal deficits equal to or less than the 3 percent of GDP reference value. In
1. The eleven countries that have been recommended to participate in the single currency from the
start are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal,
and Spain.
Part 1: Summary and Outlook, March 25, 1998
mid-March, the Irish punt was revalued, and the Greek drachma joined the ERM.
Interest rates in the European countries continue to converge. Italian short-term rates
fell 90 basis points over the intermeeting period while those of "core" EMU countries
changed little. Italian and Spanish long-term interest rates are now less than 20 basis
points above comparable German rates.
Exchange rates in most Asian emerging market economies have appreciated
against the dollar over the intermeeting period, and prices in their financial markets
have increased. This reflects substantial progress in several areas. The "exchange
offer" to restructure Korea's short-term foreign currency bank debts appears to have
been a success. Korea has closed ten of fourteen suspended merchant banks, and
significant progress has been made in labor market reform. The IMF approved the
release of the third tranche of Thailand's standby arrangement and commended the
Thai authorities for their progress in implementing reforms. Speculative pressures on
the Hong Kong dollar and the Chinese renminbi have subsided. The only major
exception to this pattern of improving financial performance is Indonesia. Suharto's
choice of a new cabinet has reinforced doubts about the path of economic and
financial policy in Indonesia, although some progress appears to have been made in
talks with IMF staff. While up on balance over the intermeeting period, the foreign
exchange value of the rupiah continues to be highly volatile.
The speculative pressures against currencies of emerging market economies
outside Asia have also subsided over the intermeeting period. Yield spreads on Brady
bonds issued by Argentina, Brazil, Mexico, and Poland, adjusted for the effects of
credit enhancements, declined 25 to 100 basis points over the intermeeting period.
Domestic interest rates have generally moved lower in these countries in response to
slowing economic activity and easing pressure on their currencies. One exception to
this pattern is Mexico, where the domestic interest rates have moved up as falling oil
prices have put downward pressure on the peso. In Russia, President Yeltsin
dismissed Prime Minister Chernomyrdin and the rest of his cabinet on Monday.
Russian financial markets initially sold off on the news, but most of the move has
been reversed. Yield spreads on Russian Brady bonds are down more than 170 basis
points since the beginning of February.
. The Desk did not
intervene.
Japanese GDP contracted slightly during the fourth quarter, and economic
indicators for the first quarter suggest that the economy remains weak. Auto
InternationalDevelopments
registrations have continued to decline, and housing starts remain near ten-year lows.
The effects of the Asian crises are now clearly visible in Japan's external trade, with
exports to Korea and Thailand down 40 percent in January and February from the
same period a year earlier, while exports to other Asian countries declined almost
5 percent.
For most other industrial countries the available data for the first quarter
suggest a modest pickup in activity led by domestic demand. In Germany, industrial
production jumped 2.5 percent in January, and orders for manufactured goods
increased 3.3 percent led by domestic orders. The unemployment rate has edged down
since December. Consumption of French manufactured products in January and other
recent indicators suggest that domestic demand remains robust in France. Indicators
for the British economy are mixed. Industrial production fell in January, but business
sentiment remains positive, as the outlook for domestic orders continues to offset
weakness in export orders. The Canadian economy appears to have recovered quickly
from the severe ice storm in January. Employment surged in February. On average
employment growth in 1998 has been as robust as it was at the end of last year.
Inflationary pressures have been subdued or nearly nonexistent in all foreign
G-7 countries except the United Kingdom. Falling prices of oil and other imports
have helped to hold down inflation. CPI inflation is near 1 percent in France,
Germany, and Canada and is just under 2 percent in Italy. After netting out the
effects of tax increases, inflation remains near zero in Japan. In the United Kingdom,
however, consumer price inflation remains slightly above the government's
2-1/2 percent target.
Growth continues to decline and external balances improve sharply in the
countries that have been directly affected by the Asian financial crises. We estimate
that Korean real GDP fell at a 1-3/4 percent annual rate in the fourth quarter, and the
Korean unemployment rate has nearly doubled since December. In January and
February, with imports falling 35 percent, Korea had a current account surplus of
$6.9 billion compared with a deficit of $5.5 billion in the same period last year. In
Thailand, industrial production was 13 percent below its year-earlier level in
December. Thailand's trade surplus widened somewhat further in January after a
substantial increase in the fourth quarter. Indonesia's trade surplus rose substantially
in the fourth quarter.
Inflation in most of the Asian economies affected by the financial crises has
increased, driven in large part by the sharp depreciations of their currencies. The
effect is most significant in Indonesia where consumer prices in February were
Part 1: Summary and Outlook, March 25, 1998
32 percent higher than the year-earlier level. In recent months consumer price
inflation has picked up noticeably in Korea, the Philippines, Malaysia, and Thailand,
but in all of these countries year/year inflation rates remain below 10 percent.
Economic activity appears to be slowing in several other developing countries
that have been adversely affected by speculative pressures related to the Asian
financial crises. In Brazil, tighter fiscal policy and elevated interest rates have
contributed to an increase in the unemployment rate from 4.8 percent in December to
7.3 percent in January. In early March, the Bank of Mexico tightened monetary
policy, hoping to contain upward pressures on Mexican prices from further
depreciation of the peso. In addition, government spending in Mexico may have to
fall, or taxes increase, to offset the impact of lower oil prices on government revenues.
In January, the U.S. trade deficit in goods and services widened to $12 billion
from an average monthly rate of $8.3 billion in the fourth quarter, as exports declined
more than imports. Exports were 2-1/2 percent lower in January than in December.
Most of the decrease was in civilian aircraft, reversing much of the sharp increase
recorded in December, and other capital goods. We estimate that exports to both
Korea and Indonesia in January were more than 30 percent below their fourth quarter
average on a seasonally adjusted basis. The decrease in imports in January was
concentrated in oil, capital goods, and automotive imports from Canada. 2
Early in the intermeeting period spot oil prices fell as the prospect of greater
supply, from OPEC and Iraq, confronted weak demand, due to the economic
slowdown in Asia and warm weather in the Northern Hemisphere. But spot WTI
rebounded to $16-1/2 per barrel on news in late-March that an agreement had been
reached among both OPEC and non-OPEC producers to cut production.
Non-oil import prices declined nearly 4-1/2 percent (annual rate) in the January
and February, compared with a decrease of 2-3/4 percent in the fourth quarter. Prices
moved lower in all major end-use categories, with the exception of automotive
products. Export prices dropped back more than 4-1/4 percent (annual rate) in January
and February, led by falling prices of agricultural products, industrial supplies,
computers, and semiconductors.
2. There was a small decline in quantity of oil imports, and the price dropped to
about $15 per barrel from an average of nearly $17.50 per barrel in the fourth quarter.
InternationalDevelopments
Outlook
We project that growth of total foreign real GDP (weighted by shares of U.S.
nonagricultural exports) slowed again in the first quarter of 1998 to just less than
1-3/4 percent at an annual rate. Foreign output growth is projected to remain around
2 percent this year, before recovering to nearly 3 percent in 1999. The projected pace
of foreign growth is essentially unchanged from the January forecast (see table).
The dollar, in nominal terms, is projected to remain near recent levels in terms
of the currencies of most of our industrial- and developing-country trading partners.
Inflation is projected to rise during 1998 and recede somewhat during 1999.
Accordingly, the dollar, adjusted for changes in prices, is expected to depreciate
somewhat over the forecast period. Compared to the January Greenbook, the level of
the dollar is, on average, modestly lower throughout the forecast period.
In light of new data and the changes to our outlook for foreign growth and for
exchange rates, we have increased the rate of real export growth from that projected in
the January forecast. Real non-oil imports are also expected to increase more rapidly.
We project that real net exports will subtract 1-1/2 percentage points from GDP
growth in the first quarter; this is a somewhat more negative contribution than that in
the January Greenbook. For 1998 and 1999 as a whole, real net exports are projected
to shave nearly 1 percentage point and about 1/3 percentage point, respectively, from
GDP growth, a somewhat lower projection than that in the previous Greenbook,
particularly in 1999.
Summary of Staff Projections
(Percentage change from end of previous period)
I
IProjection
3.8
3.2
1.7
2.0
2.1
2.1
2.3
2.3
2.9
2.9
Real exports
January
10.2
10.5
-3.5
-3.1
3.0
.0
2.8
2.6
4.8
4.1
Real imports
January
14.5
14.1
9.5
8.1
11.1
10.0
7.8
6.8
6.7
6.5
Foreign output
January
Part 1: Summary and Outlook, March 25, 1998
The dollar. As in the January Greenbook, the average real value of the dollar,
weighted by shares of non-oil imports and measured relative to the currencies of a
broad set of our trading partners, is projected to depreciate more than 4 percent over
the forecast period from its current level. The projected path for the dollar is 1 to
1-1/2 percent lower than in January, chiefly reflecting the appreciations of the Asian
currencies (other than the yen) against the dollar during the intermeeting period. We
expect the dollar to show little movement against the yen throughout the rest of this
year, before declining somewhat in 1999 as the Japanese economy improves and
concern over the magnitudes of the Japanese and U.S. external imbalances is
manifested. The same pattern is forecast against the mark, with the dollar weakening
slightly in 1999, in part because of rising interest rates on euro-denominated assets.
The dollar is expected to reverse some of its recent gains against the Canadian dollar
throughout the forecast period. Against other key Asian currencies, the dollar is
forecast to remain at current levels in nominal terms, but inflation in these Asian
countries is expected to erode some of the dollar's earlier appreciation in real terms.
Foreign G-7 countries. Real GDP in the foreign G-7 countries, weighted by
shares in U.S. nonagricultural exports, is expected to grow at a 2-1/4 percent (annual
rate) on average in the first quarter of 1998 and to grow roughly at that pace for the
remainder of the forecast period. The growth rate of foreign G-7 GDP is slightly
higher than was projected in the last Greenbook, reflecting faster growth in European
economies in1998.
Japanese GDP is expected to be little changed in the current quarter but to
grow thereafter at an annual rate of about 1-3/4 percent. We now expect fiscal policy
to add about 1/2 percentage point to growth in 1998, compared to our assumption of
neutral fiscal policy in the last Greenbook. 3 The additional fiscal stimulus is expected
to offset a downward revision to our forecast for private domestic demand.
Real GDP growth in Germany is expected to increase to 2-1/2 percent this year
and 3 percent during 1999. The contribution of domestic demand is projected to rise
as investment spending continues to be spurred by stimulative monetary conditions,
whereas the contribution of net exports tapers off. We expect a significant slowing in
the pace of activity in the United Kingdom over the next two years because of past
increases in interest rates, the strength of sterling, and considerably slower growth in
disposable income.
3. We assume that the Japanese government will enact a additional government spending measures
that will generate a fiscal stimulus in 1998 equal to about 1/2 percent of GDP
InternationalDevelopments
Average consumer price inflation in the foreign G-7 countries (weighted by
shares of U.S. bilateral imports) is projected to decline from 1-3/4 percent in 1997 to a
little more than 1 percent in 1998 and 1999. The drop in inflation between 1997 and
1998 is entirely accounted for by a return to zero measured inflation in Japan. This
primarily reflects the end of the transitory effect of the excise tax increase in April
1997 on twelve-month calculations of price change. The forecasts for inflation in
Germany and France in 1998 have been lowered by about 1/2 and 1/4 percentage
points respectively in response to data for January and February.
Our forecast incorporates the assumption that short-term market interest rates in
Germany, France, and most other continental European countries will edge down
slightly further over the course of 1998. Although market expectations regarding the
magnitude of the expected increase in short-term German interest rates have
diminished since early February, market participants continue to assume that the
Bundesbank will raise official interest rates slightly over the near term. In contrast,
we assume that the Bundesbank will hold official rates unchanged in 1998 and that
short-term interest rates in those European countries headed for monetary union will
converge to the current level of German rates by year-end. In 1999, short-term
interest rates in euro-area countries are expected to rise about 1/2 percentage point as
the European Central Bank responds to some firming of growth. Rates in Japan are
assumed to remain near current very low levels. With economic slack diminishing in
the foreign G-7 over the forecast period, we anticipate a slight increase in long-term
interest rates.
Other countries. The real GDP of major developing-country trading partners
of the United States is projected to increase about 1-1/4 percent on average during
1998, down from 5-1/4 percent in 1997. We project a slight decline in GDP for the
Asian developing countries on average in 1998, including significant declines in output
in Indonesia, Thailand, and Korea. Our view is that currency and equity markets in
the Asian developing countries will remain volatile in 1998 and that further
weaknesses in their financial sectors will become apparent. We expect both factors,
along with tightening of macroeconomic policies in some cases, to exert a substantial
drag on domestic demand this year that will be only partially offset by improvements
in net export positions. We project that growth in these countries will recover in most
cases next year, but only to substantially below-trend rates. Inflation in the Asian
developing countries is projected to rise significantly in 1998, but by somewhat less
than forecast in the January Greenbook, reflecting the partial recovery of their
currencies on average since January.
Part 1: Summary and Outlook, March 25, 1998
Our forecast for real growth in Latin America in 1998 also remains virtually
unchanged since the January Greenbook. We continue to expect growth in Mexico to
be a relatively robust 4-1/2 percent this year.
Oil prices. The staff has left its projected path for the price of imported oil
about unchanged in 1998 and lowered it $1-1/2 per barrel in 1999 since the January
Greenbook. We project that import prices will fall to $14 per barrel during the first
quarter because of the 0.75 mb/d increase in production by Saudi Arabia, Kuwait, and
the United Arab Emirates that began in January. However, we expect a set of OPEC
and non-OPEC producers will cut back production sufficiently that the market will be
able to absorb additional exports from Iraq at a price for WTI near $16.50 per barrel. 4
There is considerable risk to this forecast. If producers fail to restrain production as
agreed, then spot WTI could fall once again below $13.00 per barrel in the near term.
On the other hand, if Iraqi oil exports are interrupted again, spot WTI could rise above
$20 per barrel.
Selected Trade Prices
(Percentage change from end of previous period
except as noted; seasonally adjusted)
Projection
Trade category
1997
1998
1998:
1999
Q1
Q2
H2
-3.1
-15.1
-1.4
-2.8
.5
-1.7
1.3
.9
-2.9
13.80
.3
13.99
1.8
14.00
1
Exports
Nonagricultural (core)
Agricultural
0.5
-3.1
Imports
Non-oil (core)
Oil (level, dollars per barrel)
-.8
17.70
-3.7
14.11
NOTE. Prices for exports and non-oil imports of goods, excluding
computers and semiconductors, are on a NIPA chain-weighted basis.
The price of imported oil for multiquarter periods is the price for the final
quarter of the period.
Prices of non-oil imports and exports. Prices of imports of core goods are
projected to decline through the third quarter of this year before reversing course and
increasing at an annual rate of 1 to 2 percent thereafter. The path for core import
4. We assume Iraqi exports will reach 1.8 mb/d by the end of the year.
InternationalDevelopments
prices reflects the leveling out of the dollar's exchange value and the waning of the
lagged effects of declines in non-oil commodity prices. Relative to the January
Greenbook, core import prices are projected to decline somewhat more rapidly in 1998
despite a modestly weaker dollar. This adjustment reflects our ongoing reassessment
of the empirical relationship between exchange rates--particularly for currencies of
developing countries--and U.S. non-oil import prices. 5 The pickup in core import
prices in 1999 is somewhat greater than in our previous projection. This reflects a
stronger forecast for commodity prices in 1999. Prices of core exports of goods are
forecast to decline slightly over the near term and to rise slowly thereafter, in line with
comparable U.S. domestic prices.
Real exports and imports of goods and services. We project that exports of
nonagricultural goods other than computers and semiconductors ("core" exports) will
be about unchanged this year and expand about 2 percent during 1999, a significant
slowing from the 12 percent rise during 1997. The lagged effects of the dollar's
appreciation and lower foreign growth over the forecast period than in 1997 account
for much of the projected deceleration in core exports. The pace of core export
growth is somewhat higher in this forecast than in the January Greenbook primarily
because of the weaker dollar. We continue to project rapid growth of real exports of
computers and semiconductors. Putting all the pieces together, the growth of total
exports of goods and services is expected to slow to 1-1/4 percent this year and to
pick up to 4-3/4 percent in 1999.
Growth of non-oil imports of goods and services other than computers and
semiconductors ("core" imports) is projected to slow to 8-1/4 percent in 1998 and
5-1/4 percent in 1999. This path reflects the projected slowing of the U.S. economy
and the lagged effects of dollar appreciation. Relative to the January Greenbook, core
import growth is somewhat greater in 1998 due to higher-than-expected imports in
January and somewhat stronger U.S. growth. Real imports of computers and
semiconductors are expected to continue to grow rapidly. We expect the quantity of
imported oil, after declining slightly in the current quarter, to rise over the forecast
period in line with increases in consumption. As a result, total imports of goods and
services should grow 9 percent this year and 6-3/4 percent in 1999.
5. Further work on our model suggests that the passthrough to import prices of the
appreciation of the dollar vis-a-vis Asian currencies will take longer than previously
thought and be somewhat larger.
38
Part 1: Summary and Outlook, March 25, 1998
Nominal trade and current account balances. The nominal trade deficit on
goods and services is expected to deteriorate from $115 billion in the fourth quarter of
1997 to about $200 billion by the end of 1999. Over this period, the deficit on net
investment income is projected to widen by nearly $30 billion. As a result, we project
that the current account deficit will widen from about $180 billion in the fourth
quarter of last year to an average of roughly $280 billion, or 3-1/4 percent of GDP, in
1999.
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES:
(Percent, Q4 to Q4)
March 25, 1998
SELECTED COUNTRIES
---- Projected ---1991
1992
1993
1994
1995
1996
1997
1998
1999
Canada
Japan
-0.3
2.5
0.9
0.1
3.1
0.5
4.5
0.8
0.8
2.4
2.0
3.4
4.2
-0.2
3.0
1.3
2.6
1.7
United Kingdom
EU-11 Average (1)
of which:
France
Germany (2)
Italy
-1.6
2.1
0.4
0.1
2.7
-0.1
4.9
3.5
2.0
1.5
2.9
1.9
2.9
2.9
1.9
2.6
1.8
2.9
1.4
3.3
1.9
-0.0
0.9
-0.8
-0.7
-0.2
0.1
4.3
3.4
2.5
0.3
0.7
2.6
2.3
2.1
-0.2
3.2
2.3
2.8
2.1
2.5
1.9
2.5
3.0
2.9
Foreign G-7 Average
weighted by 1991 GDP
1.7
0.2
0.6
2.8
1.6
2.3
1.9
1.9
2.3
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
3.3
0.8
6.7
2.3
0.5
5.2
3.5
1.9
6.4
5.0
3.6
7.1
1.9
1.3
2.6
4.1
2.3
6.7
3.8
2.8
5.2
2.1
2.4
1.3
2.9
2.4
3.5
4.1
3.2
5.7
NA
1.8
0.9
3.7
NA
1.8
1.2
2.7
NA
0.0
0.8
2.2
NA
2.1
-0.8
2.9
2.7
2.0
0.1
3.2
2.0
1.0
2.1
2.8
1,4
1.6
0.0
2.8
1.9
1.8
0.0
2.9
2.0
3.0
4.0
1.8
3.4
2.1
4.2
1.6
2.6
1.9
1.7
1.7
1.4
1.2
1.8
1.2
1.9
1.6
1.8
6.1
4.9
4.1
3.8
5.9
2.7
1.6
2.1
2.5
4.1
2.4
2.5
1.8
1.6
1.5
1.8
1.3
1.4
3.9
1.9
2.0
1.0
1.1
1.3
1.7
1.1
1.2
Measure and country
REAL GDP
CONSUMER PRICES
Canada
Japan
United Kingdom (3)
EU-11 Average (4)
of which:
France
Germany (2)
Italy
Foreign G-7 Average
weighted by 1991 GDP
Average weighted by share of
U.S. non-oil imports
1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. West German data through 1991; all Germany thereafter.
3. CPI excluding mortgage interest payments which is the targeted inflation rate.
4. Harmonized CPI's for the EU-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, quarterly change at an annual rate)
March 25, 1998
---------------------- Projected -----------------------
1997
------ --------
-- --
1998
- -- -- -- -- -- -- --
1999
~------- -
-- '--------
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Canada
Japan
United Kingdom
4.7
5.2
8.3 -10.6
2.1
3.5
3.9
3.2
3.6
3.0
-0.7
2.5
3.1
-0.2
2.8
3.2
1.9
1.8
2.9
1.7
1.6
2.9
1.6
1.6
2.6
1.5
1.6
2.7
1.7
1.6
2.6
1.8
1.9
2.6
1.8
2.0
EU-11 Average (1)
of which:
France
1.5
3.2
2.0
2.6
2.4
2.7
2.7
2.7
2.8
3.0
3.0
Measure and country
Q1
REAL GDP
5.0
1.3
4.7
3.7
3.1
2.3
2.0
2.2
2.1
2.4
2.5
2.6
2.6
1.5
0.1
3.8
7.8
2.9
2.6
1.1
0.7
2.8
1.8
1.9
1.8
2.6
2.0
2.7
2.0
2.8
2.5
2.8
2.5
3.2
3.3
3.1
3.3
Foreign G-7 Average
weighted by 1991 GDP
3.8
-0.5
3.2
1.0
1.6
2.0
2.1
2.0
2.1
2.2
2.4
2.4
Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries
4.6
4.6
5.5
3.9
1.3
7.3
4.5
3.6
5.9
2.3
1.9
2.4
1.7
2.3
0.5
2.1
2.5
1.2
2.2
2.4
1.5
2.5
2.4
2.3
2.6
2.3
3.0
2.8
2.4
3.4
3.0
2.4
3.7
3.2
2.4
4.0
Canada
Japan
2.1
0.0
1.6
1.5
1.7
1.7
1.0
2.1
1.3
2.0
1.4
0.5
1.5
0.0
1.6
0.0
1.7
-0.0
1.7
0.0
1.8
0.0
1.8
0.0
United Kingdom (3)
EU-11 Average (4)
of which:
France
2.9
1.7
2.6
1.2
2.8
1.5
2.8
1.4
2.6
1.4
2.6
1.7
2.7
1.8
2.8
1.9
2.9
1.9
3,0
1.9
2.9
2.0
2.9
2.0
1.6
Germany
Italy
CONSUMER PRICES
(2)
1.5
0.9
1.3
1.2
0.8
1.1
1.3
1.2
1.4
1.5
1.6
Germany
1.7
1.6
1.9
1.8
1.1
1.8
1.8
1.9
2.0
1.8
1.8
1.8
Italy
2.4
1.6
1.5
1.6
2.0
2.0
2.1
2.1
2.3
2.3
2.5
2.5
Foreign G-7 Average
weighted by 1991 GDP
1.4
1.6
1.8
1.8
1.7
1.4
1.3
1.3
1.4
1.4
1.4
1.4
Average weighted-by share of
U.S. non-oil imports
1.3
1.6
1.8
1.7
1.6
1.2
1.1
1.1
1.2
1.2
1.2
1.2
1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. Percent change from same period a year earlier.
3. CPI excluding mortgage interest payments which is the targeted inflation rate.
4. Harmonized CPI's for the EU-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.
Strictly Confidential (FR)
Class II FOMC
March 25, 1998
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1991
1992
1993
1994
1995
--1997
1996
Projected --1998
1999
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S
0.4
-0.4
-0.6
-0.4
0.4
-0.4
-0.6
-1.0
-0.3
0.8
-0.4
0.4
-0.8
0.5
-1.1
1.0
-1.4
1.1
-0.7
1.0
-1.4
1.2
-1.8
0.1
-1.2
0.5
-0.9
Percentage change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
8.6
7.1
10.1
21.7
41.8
7.0
4.1
-0.9
10.4
25.2
64.8
2.3
4.6
4.1
-5.5
23.7
32.9
3.6
10.0
6.0
16.6
32.0
66.9
6.9
10.3
9.0
-3.4
55.7
80.4
5.7
9.3
4.7
5.7
33.8
45.9
7.7
10.2
2.2
2.5
48.1
21.5
11.7
1.3
-0.9
-4.0
26.1
25.3
-0.5
4.8
3.4
1.9
31.0
31.9
1.9
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/
4.1
-2.7
8.1
35.9
55.3
2.5
7.4
1.4
12.1
45.1
42.0
5.4
10.2
3.2
10.1
39.3
34.2
9.5
12.3
1.4
-0.2
44.8
54.5
12.2
5.6
7.3
1.5
46.2
92.7
-1.3
11.8
5.0
8.3
23.6
57.9
10.6
14.5
10.9
7.4
44.4
32.7
12.8
9.1
3.6
1.0
36.6
18.6
8.3
6.7
2.6
2.3
25.7
32.3
5.2
-98.8
791.2
890.1
-114.4
857.0
971.5
-146.7
962.9
1109.5
-228.6
992.6
1221.2
-281.9
1029.8
1311.7
Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S
-22.3
599.9
622.2
-29.5
639.4
669.0
-70.2
658.2
728.4
-104.6
712.4
817.0
Billions of dollars
US CURRENT ACCOUNT BALANCE
-5.7
-56.4
-90.8
-133.5
-129.1
-148.2
-166.4
-230.2
-281.4
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-31.0
581.2
612.2
-39.2
617.5
656.7
-72.3
643.5
715.8
-104.4
699.6
804.1
-101.9
794,6
896.5
-111.0
848.8
959.9
-113.6
931.6
1045.2
-153.2
933.5
1086.7
-195.5
962.8
1158.3
Net Investment Income
Direct, Net
Portfolio, Net
20.3
55.6
-35.4
18.0
51.6
-33,6
19.7
55.7
-36.0
9.7
50.8
-41.0
6.8
60.0
-53.2
2.8
66.8
-63.9
-14.3
67.7
-82.0
-35.3
56.6
-92.0
-44.2
61.2
-105.5
5.1
-35.2
-38.1
-38.8
-34.0
-40.0
-38.5
-41.8
-41.8
Net Transfers
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
Strictly Confidential
Class II FOMC
(FR)
March 25, 1998
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
------
Q1
Q2
1996
1995
1994
~------~---
- --
Q3
---
Q4
--
-- "'~--------- ---------
Q1
--------
--
-- --
Q4
Q1
Q2
Q3
Q4
1.0
1.3
-0.3
-1.3
0.2
-1.5
-0.6
1.1
-1.7
-1.4
0.2
-1.6
1.8
2.6
-0.8
Q3
Q2
~~----~-----
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.0
-0.2
-0.8
-0.3
1.7
-2.0
-0.4
1.1
-1.5
0.3
1.5
-1.2
-0.4
0.8
-1.2
0.1
1.0
-0.9
1.2
1.4
-0.3
Percentage change from previous period, SAAR
-1.8
2.4
-25.2
17.7
12.9
8.1
10.6
2.0
45.3
14.7
6.9
57.2
7.2
6.0
-1.3
9.3
3.8
-17.5
13.5
20.3
19.7
11.5
6.6
-10.7
1.7
-3.8
12.5
9.6
9.7
-34.3
1.9
0.3
13:1
25.5
13.5
49.2
21.4
111.8
-6.8
24.3
23.4
20.3
35.5
65.9
7.4
48.4
79.1
8.6
34.9
72.0
2.9
41.0
97.0
8.1
89.6
100.3
0.9
63.1
56.2
10.9
46.2
19.9
-1.3
31.8
28.3
13.2
29.2
37.6
-2.9
28.7
113.8
24.2
7.6
2.7
-8.6
32.9
19.0
4.1
27.2
48.3
13.1
-0.4
33.5
42.3
9.9
-0.9
-36.2
57.0
10.0
24.4
-8.1
8.1
7.7
-4.0
12.5
57.3
2.3
8.4
28.0
65.8
2.4
2.2
-19.7
61.8
13.1
14.6
-7.6
6.4
14.1
2.7
67.2
30.7
13.2
1.2
10.6
26.9
6.8
2.1
-19.6
32.0
Semiconductors
60.7
23.7
74.4
64.3
29.6
108.0
157.1
98.8
30.4
10.3
75.5
146.4
Other Goods 2/
6.8
19.6
10.3
12.5
7.3
2.2
-10.0
-3.7
14.5
11.1
12.4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
4.6
Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S
-97.6
-103.9
-111.1
-105.9
-113.5
-112.8
-92.9
-76.1
-100.8
-112.6
-138.9
-105.6
676.0
773.6
704.1
808.0
722.1
833.2
747.3
853.2
760.4
873.9
777.4
890.3
802.4
895.4
824.6
900.7
828.2
929.0
847.4
960.0
851.4
990.2
901.1
1006.6
Billions of dollars
US CURRENT ACCOUNT BALANCE
-104.6
-128.0
-145.4
-156.1
-138.8
-142.8
-132.5
-102.2
-131.5
-142.3
-171.3
-147.5
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)
-90.6
662.5
753.1
-101.S
688.4
789.9
-114.0
710.9
824.9
-111.7
736.8
848.4
-113.2
761.5
874.7
-123.2
785.9
909.1
-95.5
806.4
901.9
-75.5
824.6
900.1
-98.1
828.4
926.6
-111.1
848.6
959.7
-130.1
840.3
970.4
-104.8
878.0
982.8
Net Investment Income
Direct, Net
Portfolio, Net
17.9
51.7
-33.8
10.6
48.9
-38.3
7.2
51.0
-43.8
3.3
51.5
-48.2
8.2
57.6
-49.4
12.9
64.1
-51.3
-1.6
53.9
-55.5
7.8
64.5
-56.7
8.2
66.2
-57.9
3.5
64.2
-60.7
-5.5
60.3
-65.7
5.0
76.4
-71.4
Net Transfers
-31.9
-37.1
-38.7
-47.7
-33.8
-32.5
-35.4
-34.5
-41.6
-34.8
-35.8
-47.7
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
March 25, 1998
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
-------------------------- Projected -------------------------1999
1998
1997
------ -----
Q1
Q2
---
Q3
---
---
Q4
--------'-----------------
Q1
Q2
--- '-----
~--------- -- --
Q4
Q1
Q2
Q3
Q4
-0.1
0.8
-0.9
-0.7
0.1
-0.9
-0.3
0.8
-1.0
-0.7
0.2
-0.9
0.4
1.1
-0.7
Q3
NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S
-1.0
1.1
-2.1
-0.4
2.0
-2.5
-1.3
0.5
-1.8
0.3
1.0
-0.7
-1.6
-0.4
-1.2
-1.0
0.3
-1.4
-1.3
-0.2
-1.1
Percentage change from previous period, SAAR
9.9
18.4
4.4
8.6
-3.5
3.0
-1.6
7.5
1.1
7.1
1.6
9.8
3.7
-27.6
72.3
39.0
12.4
3.2
-4.2
84.3
15.7
25.0
7.2
20.6
61.5
38.8
-4.6
-5.0
31.8
-6.3
-2.3
16.2
-5.7
-21.5
8.4
13.7
-2.4
-0.4
-0.8
31.1
26.2
1.6
0.7
8.2
33.5
31.1
-8.0
2.0
0.7
33.5
31.1
7.4
2.9
-5.5
31.0
31.6
-3.3
3.5
-1.0
31.0
32.1
6.2
3.6
10.6
31.0
32.1
-4.6
3.6
4.5
31.0
32.1
10.2
Imports of G&S
Services
Oil
Computers
Semiconductors
17.9
24.2
-10.8
51.3
71.2
20.5
8.9
44.5
71.1
19.3
14.6
10.1
6.3
53.0
44.3
5.7
1.3
-3.0
9.8
5.1
9.5
5.7
-15.8
51.8
-7.8
11.1
4.0
31.0
36.0
23.9
8.8
2.7
8.8
31.1
31.1
6.8
2.1
-13.3
28.7
32.3
6.7
2.6
-8.5
27.4
32.3
8.1
2.4
34.0
25.1
32.3
6.7
2.5
7.6
25.1
32.3
5.2
2.8
-17.1
25.1
32.3
Other Goods 2/
15.3
17.1
11.8
7.4
10.4
8.9
7.5
6.7
6.0
5.3
4.9
4.7
-248.9
988.0
1236.8
-251.6
1005.9
1257.5
-269.4
1008.7
1278.1
-277.0
1026.1
1303.1
-294.2
1030.1
1324.3
-286.9
1054.3
1341.3
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S
-126.3
922.7
1048.9
-136.6
962.5
1099.1
-164.1
973.0
1137.1
-159.7
993.3
1153.0
-194.9
984.5
1179.4
-219.0
991.9
1210.9
Billions of dollars
-159.7
-151.2
-172.5
-182.5
-197.5
-215.3
-246.4
-261.7
-264.7
-272.8
-290.9
-297.3
Net Goods & Services (BOP) -117.3
Exports of G&S (BOP)
896.3
Imports of G&S (BOP) 1013.6
-102.7
938.2
1040.9
-119.6
938.6
1058.2
-115.0
953.1
1068.1
-129.5
933.3
1062.8
-143.6
932.8
1076.4
-169.7
926.0
1095,7
-169.8
942.0
1111.8
-184.9
944.0
1128.8
-191.3
959.8
1151.1
-206.8
962.6
1169.4
-199.0
984.9
1183.8
US CURRENT ACCOUNT BALANCE
Net Investment Income
Direct, Net
Portfolio, Net
-8.1
69.3
-77.4
-13.1
70.9
-84.0
-16.5
66.1
-82.6
-19.4
64.5
-83.9
-29.0
59.2
-88.2
-32.7
57.4
-90.1
-37.7
55.4
-93.1
-41.9
54.5
-96.4
-40.8
58.9
-99.7
-42.6
60.6
-103.1
-45.0
62.2
-107.3
-48.3
63.3
-111.7
Net Transfers
-34.3
-35.4
-36.3
-48.1
-39.0
-39.0
-39.0
-50.0
-39.0
-39.0
-39.0
-50.0
1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.
@FedFRASER