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Confidential (FR) Class III FOMC
May 8,
1991
RECENT DEVELOPMENTS
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS
Labor markets...........................
II
........ . .............
Page
.
1
Industrial production........................................... .
Personal income and consumption....................................
Motor vehicles.....................................................
Housing markets .. .........
.......
... ................. ... ..... .
Business fixed investment.........................................
Inventories.......................................................
The federal government.............................................
State and local governments.......................................
Prices ............................................................
Labor costs and productivity......................................
Probability of expansion....................................
.........
3
5
9
11
15
20
25
29
31
38
44
Tables
Changes in employment.............................................
Unemployment and labor force participation rates..................
Growth in selected components of industrial production............
Capacity utilization in manufacturing............................
Personal income..................................................
Real personal consumption expenditures............................
Sales of automobiles and light trucks.............................
Private housing activity...........................................
Business capital spending indicators.............................
Average lag from upturn in real GNP to pickup in real investment..
Changes in-manufacturing and trade inventories....................
Inventories relative to sales.....................................
Selected inventory-sales ratios...................................
Federal government outlays and receipts...........................
Cash and in-kind contributions for Operation Desert Shield/Storm....
Recent changes in consumer prices.................................
Recent changes in producer prices.................................
Monthly average prices, West Texas intermediate...................
Price indexes for commodities and materials.........................
Employment cost index.............................................
Average hourly earnings..........................................
Negotiated wage rate changes, collective bargaining settlements...
Effective wage change in major union contracts and its components.
Labor productivity and costs.....................................
2
2
4
4
6
6
9
12
16
20
22
22
23
26
26
32
32
34
36
40
41
42
42
43
Charts
Indexes of consumer attitudes....................................
Private housing activity..............................................
Builders' rating of new home sales................................
Consumer homebuying attitudes...................................
Existing home median price and constant-quality new home price ...
Months' supply of new homes and single-family housing starts......
Recent data on orders and shipments...............................
Nonresidential construction and selected indicators...............
Cumulative fiscal impetus around business cycle peaks.............
National defense outlays..........................................
State and local fiscal situation..................................
Daily spot and posted prices of West Texas intermediate...........
Index weights.....................................................
Commodity price measures..........................................
Employment cost index ............................................
Union wage developments ............................ ..............
8
12
13
13
14
14
17
18
24
28
30
34
36
37
40
42
Productivity............. .... .....
.............................
Composite index of leading indicators............................
Probability of expansion.........................................
III
DOMESTIC FINANCIAL DEVELOPMENTS
Monetary aggregates and bank credit........
Nonfinancial business finance.............
Financial firms. ..........................
Municipal securities......................
Treasury and sponsored-agency financing....
Mortgage markets............................
Consumer credit............................
. . . . . . . . . . . . ... .
. . . . . ..... . . . 0...
................
..............
.0
.................
.................
I................
Tables
Monetary aggregates...............................................
Commercial bank credit and short- and
intermediate-term business credit............................
Gross offerings of securities by U.S. corporations................
Gross offerings of municipal securities...........................
Treasury and agency financing....................................
Mortgage-backed security issuance................................
Consumer credit ...................................................
Consumer interest rates...........................................
Charts
Interest rate spreads for selected M2 instruments.................
Share of U.S. government holdings in total flow of bank credit....
Spread between prime and federal funds rates......................
Rate spread and relative stock price indexes.....................
Auto loan terms and payment experience at captive auto
finance companies .............................................
IV
INTERNATIONAL DEVELOPMENTS
U.S. merchandise trade....................... .....................
Prices of non-oil imports and exports........
U.S. international financial transactions.... ...................
Foreign exchange markets..................... ..................
Developments in foreign industrial countries. ..................
Developments in East European countries...... ..................
Economic situation in other countries........ ..................
.
..
..
..
.
...
.
..
...
..
. .
..
...
...
...
...
Tables
U.S. merchandise trade: Monthly data..............................
U.S. merchandise trade: Quarterly data...........................
Oil imports.......................................................
Major trade categories...........................................
Import and export price measures..................................
Summary of U.S. international transactions........................
International banking data.......................................
Major industrial countries
Real GNP and industrial production.............................
Consumer and wholesale prices..................................
Trade and current account balances.............................
Chart
Weighted average exchange value of the dollar....................
DOMESTIC NONFINANCIAL
DEVELOPMENTS
DOMESTIC NONFINANCIAL DEVELOPMENTS
Available information suggests that economic activity probably is in
the process of bottoming out.
Most notably, the housing sector appears to
be improving, and motor vehicle production is increasing.
However,
businesses remain cautious, and restraint in spending on inventories and
fixed capital is putting a damper on overall demand.
The increased slack in
labor and product markets this year has held down wage and price increases
in many sectors, although a variety of special factors have tended to
obscure the underlying trend of disinflation.
Labor Markets
Labor demand weakened further in April, although at a lesser pace than
in previous months.
Private payroll employment fell 99,000, with the job
losses less widespread than in the first quarter, and the unemployment rate
moved down 0.2 percentage point to 6.6 percent.
In recent weeks, initial
claims for unemployment insurance have dropped back below 500,000, and the
number of insured unemployed workers has leveled out at around 3.5 million;
these numbers suggest that payrolls probably have contracted somewhat
further since the April labor market survey.
Manufacturing employment fell 42,000 last month, a much smaller decline
than seen, on average, during the past two quarters.
The largest job losses
were reported in industrial machinery (15,000) and in transportation
equipment other than automobiles (15,000).
In the auto industry, employment
rose 13,000 as some employees on temporary layoff were called back to work.
The declines in construction employment (21,000) also moderated last month,
while payrolls at business service establishments turned up slightly after
II-1
II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1989
1990
1990
1991
Q4
Q1
1991
Jan.
Feb.
Mar.
Apr.
------------------ Average Monthly Changes-------------Nonfarm payroll employment2
193
52
-203
-239
-191
-286
-241
162
-16
-16
-0
5
16
15
32
9
100
41
30
20
-49
-39
-11
-19
9
-1
-3
4
79
51
31
-202
-109
-79
-30
-64
4
-13
-58
-7
44
53
-1
-257
-108
-85
-23
-64
-17
-26
-55
-1
15
41
18
-200
-78
-56
-22
-142
1
-39
12
0
49
43
9
-318
-153
-134
-19
25
-40
-21
-118
-5
-9
35
32
-253
-93
-64
-29
-74
-12
-19
-59
1
5
46
12
-99
-42
-28
-14
-21
-3
-15
-39
3
21
42
-25
Private nonfarm production workers
Manufacturing production workers
134
-17
7
-42
-186
-91
-235
-89
-197
-61
-292
-135
-217
-71
-70
-24
Total employment 3
Nonagricultural
Private wage and salary workers
Self-employed
148
148
125
5
-32
-38
-45
20
-103
-123
-193
29
-273
-222
-265
10
-652
-562
-391
-158
-4
-63
-227
138
-164
-40
-178
50
644
587
44
283
Private
Manufacturing
Durable
Nondurable
Construction
Transportation, public utilities
Wholesale trade
Retail trade
Finance, insurance, real estate
Services
Health services
Total government
-124
1. Average change from final month of preceding period to final month of period indicated.
2. Survey of establishments.
3. Survey of households.
UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; seasonally adjusted)
1990
1991
1989
1990
Q4
Q1
Jan.
Feb.
Mar.
Apr-
5.3
5.5
5.9
6.5
6.2
6.5
6.8
6.6
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
15.0
8.6
3.9
4.2
15.5
8.8
4.4
4.3
16.4
9.2
4.8
4.6
18.0
10.1
5.5
5.0
18.2
9.5
5.1
4.9
17.1
10.5
5.6
4.9
18.7
10.3
5.8
5.3
18.1
10.1
5.6
5.2
Labor force participation rate
66.4
66.4
66.2
66.1
66.0
66.1
66.2
66.4
Civilian, 16 years and older
1991
II-3
six months of decline.
In contrast, trade employment continued to slide in
April, with the loss of another 54,000 jobs; the decline more than offset
the higher employment at service establishments.
Aggregate hours of
production or nonsupervisory workers fell 0.3 percent in April, reflecting
the employment cutbacks in the nonfarm economy and a 0.1 hour drop in the
average workweek.
The decline in the workweek resulted from sharp falloffs
in the workweeks for wholesale and retail trade.
These declines were partly
offset by an increase of 0.1 hour in the average factory workweek.
In the household survey, employment soared 644,000 in April, and
unemployment fell almost 300,000.
The sharp increase in employment
reflected, in part, sizable increases in the reported numbers of government
workers and self-employed workers.
This sharp rise in government employment
clearly is suspect, given the payroll figures and the spending restraint
evident at all levels of government.
In addition, while an increase in the
number of self-employed workers, who are not included in the establishment
survey, often takes place during recessions as laid off workers seek to
maintain their incomes, it does not seem plausible that the rise would be so
heavily concentrated in one month.
Private wage and salary employment in
the household survey was little changed in April, and since the peak in
activity last July, it has matched the decline recorded in private payrolls.
Industrial Production
Industrial production probably was little changed in April after
dropping rapidly from October through March.
Following a small increase in
March, motor vehicle production rose about 10 percent in April, with a jump
in truck assemblies accounting for almost all of the gain; auto output rose
a bit, but the increase was considerably less than scheduled by the
II-4
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1990:Q4
19901
1990
---
1991
-
Q4
Q1
1991
Jan.
Feb.
Mar.
-Annual rate
Total index
100.0
0.3
-7.0
-9.3
-0.5
-0.9
-0.3
Excluding motor vehicles
and parts and utilities
87.7
1.0
-4.7
-8.2
-0.7
-0.6
-0.5
Products, total
Final products
Consumer goods
Automotive products
Other consumer goods
Durables
Nondurables
Energy
Other
61.4
46.9
25.7
2.2
23.5
3.0
20.5
2.7
17.8
0.6
1.1
-0.7
-7.3
0.0
-3.9
0.6
-2.3
1.0
-5.3
-5.3
-3.8
-37.6
0.4
-16.2
3.2
-2.4
4.1
-8.7
-7.1
-7.1
-27.9
-5.0
-11.7
-4.0
-4.8
-3.9
-0.5
-0.1
-0.2
4.3
-0.6
-0.4
-0.6
-0.1
-0.7
-0.9
-0.7
-0.9
-4.0
-0.6
-1.7
-0.4
-1.6
-0.3
-0.2
-0.0
0.4
0.8
0.3
-0.6
0.5
1.8
0.3
15.8
1.0
14.8
2.7
12.1
4.8
5.7
4.2
-9.4
5.3
9.0
4.5
-0.2
-4.6
-7.6
-49.8
-3.4
-3.8
-3.3
-4.7
-12.0
-6.3
-41.2
-3.5
12.2
-6.7
-9.1
-20.7
0.6
6.0
0.2
3.4
-0.5
-1.5
-3.3
-0.6
-5.3
-0.3
1.6
-0.7
-0.1
-1.3
-0.5
2.3
-0.6
0.3
-0.9
-0.5
-1.6
38.6
19.6
8.8
10.2
-0.1
-0.5
0.5
0.0
-9.7
-13.9
-5.5
-4.5
-10.2
-15.0
-6.4
-3.8
-0.6
-0.8
0.2
-0.7
-0.8
-0.8
-1.8
-0.2
-0.4
-0.7
0.1
-0.4
84.9
0.3
-7.4
-10.2
-0.5
-0.9
-0.5
81.0
0.9
-4.9
-9.0
-0.7
-0.8
-0.5
Business equipment
Motor vehicles
Other business equipment
Computers
Other
Defense and space equip.
Construction supplies
Materials
Durable
Nondurable
Energy
Memorandum:
Manufacturing
Excluding motor vehicles
and parts
quarter
1. From the final quarter of the previous period to the final
indicated.
of the period
CAPACITY UTILIZATION IN MANUFACTURING
(Percent of capacity; seasonally adjusted)
1967-89 1988-89
1991
1990
Avg.
High
Mar.
Jan.
Feb.
Mar.
Total industry
82.2
85.0
83.4
80.0
79.1
78.7
Manufacturing
81.5
85.1
83.0
78.9
77.9
77.4
82.3
81.1
89.0
83.6
85.3
82.0
80.4
78.2
78.9
77.5
78.4
77.0
Primary processing
Advanced processing
II-5
manufacturers.
All told, the increase in motor vehicle production added
directly about 1/4 percentage point to total IP in April, and, if the
automakers' current schedules for May are realized, the increase in
assemblies could contribute another 1/4 percent to IP growth that month.
Excluding motor vehicles, industrial production is expected to be off
only slightly in April, after posting sizable declines throughout last fall
and winter.
The output of some home goods, such as furniture, apparently
improved noticeably in April.
In addition, the production of construction
supplies, which fell more than 20 percent at an annual rate in the first
quarter, likely flattened; hours data for construction-related industries
were little changed, on balance, in April and physical indicators of lumber
and plywood production show signs of firming.
However, output of equipment
likely fell further last month, with evident weakness in industrial
equipment; hours worked in that industry were down, and new orders declined
further.
On the positive side, there are indications that the production of
textiles and paper improved last month.
Personal Income and Consumption
Data on consumer spending have given mixed signals of late.
After
falling sharply in January, real personal consumption expenditures moved
higher in February and March.
Increased purchases of new autos and light
trucks led the February and March advances.
Outlays in March also benefited
from a bounceback in spending for natural gas and electricity; they had
fallen below trend in January and February.
Excluding spending for motor
vehicles and for energy services, consumption rose 0.8 percent in February
and was little changed in March.
Expenditures on nonenergy services posted
II-6
PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)
1990
1991
1990
Q4
Q1
20.5
15.2
.9
Wages and salaries
Private
10.9
8.2
2.1
-.2
Other labor income
1.3
Proprietors' income
Farm
1991
Jan.
Feb.
Mar.
-17.9
8.8
11.7
-3.2
-7.2
-13.6
-20.1
-.2
-3.2
4.2
1.8
1.0
1.0
1.0
1.0
1.0
2.1
.5
4.9
4.8
.4
.4
-16.4
-13.3
9.2
7.6
8.5
6.8
Rent
Dividend
Interest
.7
.7
1.6
-. 6
.6
.5
-. 6
-. 6
-2.5
-. 8
.0
-1.8
-. 8
.4
-3.2
-. 1
-2.3
-2.6
Transfer payments
5.2
6.7
8.9
20.9
2.5
3.2
Less: Personal contributions
for social insurance
1.1
.1
2.5
7.1
.0
.3
4.0
1.9
-. 6
-2.5
-. 9
1.7
16.5
13.2
1.4
-15.4
9.7
10.0
-. 8
-1.1
-6.6
-24.4
-. 4
4.9
Total personal income
Less: Personal tax and nontax
payments
Equals: Disposable personal income
Memo: Real disposable income
REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)
1990
1990
1991
Q4
Q1
-Annual ratePersonal consumption
expenditures
1991
Jan.
Feb.
Mar.
---- Monthly rate----
.1
-3.4
-1.4
-1.0
.8
.5
.6
-2.1
.8
-. 3
.8
.0
Durable goods
Excluding motor vehicles
-1.8
-1.1
-12.3
-5.8
-10.8
-. 7
-4.4
-. 2
3.7
2.0
1.3
-. 3
Nondurable goods
Excluding gasoline
-2.4
-2.3
-6.5
-7.3
-2.9
-2.3
-. 7
-. 6
.8
1.1
-. 3
-. 6
2.5
3.1
1.8
1.9
2.6
3.8
-. 2
.0
-. 1
.5
.9
.4
4.6
-. 4
4.2
-3.5
4.1
-1.6
4.7
-. 8
4.0
.0
3.7
.2
PCE excluding energy services
and motor vehicles
Services
Excluding energy
Memo:
Personal saving rate
(percent)
Real disposable personal income
II-7
robust gains in both months, while spending for non-auto goods posted a
large rise in February before falling a bit in March.
Early indications for April are not encouraging.
Sales of new motor
vehicles fell back 6 percent in April, and spending generally is not
receiving a spur from greater personal income growth.
Indeed, the most
recent labor market data point to only a small uptick in private wage and
salary income in April after a weak first quarter.
Moreover, the effects of
the recession have depressed nonfarm proprietors' income and dividends.
And, declining market interest rates resulted in a sizable dropoff in
personal interest income.
To some extent, the weakness in nominal income
growth has been offset by falling energy prices; indeed, the decline in
retail gasoline prices alone added an estimated $13-1/2 billion (annual
rate) to consumers' real purchasing power during the quarter.
Nonetheless, with overall consumer prices up at a 3-1/4 percent pace in the
first quarter, real disposable income still fell at an annual rate of
1.6 percent.
The decline in consumption during the recession has been somewhat less
than the drop in disposable income, and the personal saving rate has fallen,
especially as spending firmed towards the end of the first quarter.
The
stock market rally has bolstered household wealth, possibly encouraging some
additional consumption relative to the decidedly weak income growth.
Moreover, a rebound in consumer sentiment from the low levels that had
prevailed since Iraq's invasion of Kuwait in August may be boosting
consumption recently by reducing precautionary saving.
Sentiment was down
1. That is, if real gasoline outlays in the first quarter were valued at
fourth-quarter prices, nominal gasoline expenditures would have been
$13.5 billion higher.
II-8
Indexes of Consumer Attitudes
Michigan Survey
Index,1966=100
-
120
110
Consumer Sentiment
100
K
90
V' "
-80
V
_Api
f(
\A
70
1
I
Consumer Expectations
\
60
'I
\
50
T;
40
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
*Equally weighted average of expected personal financial conditions and expected overall business conditions,
12 months and 5 years ahead
Conference Board
•A
index,1985=100
150
140
130
120
110
I
100
90
80
70
60
50
40
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
II-9
slightly in April from its March level, but remained substantially above the
February level.
Motor Vehicles
Total sales of autos and light trucks (domestic and imported) averaged
11-3/4 million units at an annual rate in April, down from the
12-1/2 million unit pace posted in March.
Sales of domestic automobiles
were especially weak, falling to a 5-1/2 million unit annual pace.
SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate; BEA seasonals)
1990
1990
Q3
Q4
1991
Q1
Feb.
1991
Mar.
Apr.
Autos and light trucks
Autos
Light trucks
13.86
9.50
4.36
14.18
9.72
4.47
12.95
8.98
3.97
11.79
8.22
3.57
11.93
8.33
3.60
12.49
8.73
3.76
11.72
7.93
3.79
Domestic total 2
Autos
Light trucks
10.84
6.90
3.95
11.30
7.21
4.09
10.18
6.59
3.59
9.25
5.99
3.26
9.36
6.10
3.26
9.63
6.18
3.45
9.00
5.50
3.50
3.01
2.60
.41
2.88
2.51
.38
2.76
2.38
.38
2.54
2.23
.31
2.57
2.23
.34
2.86
2.55
.32
2.72
2.42
.30
Import total
Autos
Light trucks
Note: Data on sales of trucks and imported autos for the current month
are preliminary and subject to revision.
1. Components may not add to totals due to rounding.
2. Includes vehicles produced in Canada and Mexico and vehicles made in
U.S. plants of foreign manufacturers.
Motor vehicle sales thus far this year are running well short of their
1990 pace--a year that was lackluster by recent standards.
2
No doubt, the
poor sales pace of recent months can be traced in large part to the general
weakness in the economy and, in particular, to declines in real disposable
2. During the expansion of the 1980s, sales of motor vehicles peaked in
1986 with sales of 16 million units. Between 1984 and 1989, sales averaged
15 million units at an annual rate.
II-10
income.
However, higher prices also may have contributed to poor sales.
The CPI for new cars was up at a 6-1/4 percent annual rate in the first half
of the 1991 model year, and car manufacturers pared back sales incentives to
consumers over the same period.
Automakers have provided daily rental car
companies with more attractive fleet repurchase agreements than were
available on 1990 models.
Since many of these rental cars come into the
market before long as "nearly news," the net effect on manufacturers' car
sales over time probably is negligible; some analysts have suggested that
one advantage, if there is any, is in terms of the ability of companies to
enhance revenues through segmentation of those buyers who have relatively
inelastic demands for new cars from those who are looking for a bargain and
are willing to buy a slightly used vehicle.
The manufacturers are souring
on this tactic, however; they are cutting back on special deals with the
rental car companies and apparently are moving to reverse a portion of
earlier consumer price hikes by expanding their incentive programs.
Ford
recently has switched back from dealer rebates to consumer rebates, which
tend to yield better bargains for the consumer, and General Motors has
announced plans to sweeten its dealers' carryover allowance for 1991 model
cars.
With production of domestic cars averaging only 5 million units over
the first four months of this year, dealers' inventories of new cars fell
from 1-1/4 million units at the end of December to 1 million units at the
end of April, when they amounted to about a 58-day supply.
Inventories of
light trucks fell sharply in recent months from about a 100-day supply at
the turn of the year to a 74-day supply at the end of April--a relatively
low level historically.
II-11
Housing Markets
Total housing starts fell back in March to an annual rate of
900,000 units, but several other indicators suggest that a modest pickup in
construction is under way.
Total issuance of building permits (which are
measured with less statistical error than starts) continued to increase in
March.
And, in the single-family sector, sales of both new and existing
homes held firm, after a large increase in February.
Furthermore, survey
evidence through April showed a sharp improvement in builders' perceptions
of new home sales and in consumer attitudes toward homebuying (chart).
Single-family starts retraced part of the February rise, while permit
issuance was little changed.
Relative to the volume of permits issued and
the pace of new home sales in March, single-family starts were 50,000 to
60,000 units lower than one might expect.
Historically, new home sales,
which rose 20 percent between January and March, have a very high
contemporaneous correlation with single-family starts.
Moreover, new home
prices rose in the first quarter, consistent with some strengthening in the
demand for single-family homes (chart).
The drag from excess inventories of unsold homes may be easing a bit.
In particular, the stock of new homes for sale declined about 19 percent
from its high in mid-1989 to 308,000 units at the end of March.
Moreover,
the current level of the months-supply ratio is relatively low by the
standards of the three most recent business cycles (chart).
All told, the
current overhang of unsold single-family homes does not appear to present
any unusual impediment to a recovery in construction activity in coming
months.
However, it is a distinct possibility that the response of starts
to sales will be dulled somewhat in this cycle by the hesitancy of lenders
II-12
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates; millions of units)
1990
All units
Permits
Starts
Single-family units
Permits
Starts
Sales
New homes
Existing homes
Multifamily units
Permits
Starts
Vacancy rate
Rental units
Owned units
1990
1991
r
1991
Q4
Q1
Jan.
Feb.
Mar.
1.04
1.13
.89
1.04
.85
.91
.80
.85
.86
.99
.88
.90
.80
.90
.76
.86
.68
.79
.66
.73
.61
.65
.69
.78
.68
.73
.53
3.29
.52
3.30
.47
3.12
.46
3.08
.41
2.90
.49
3.16
.49
3.18
.31
.30
.28
.28
.22
.26
.19
.20
.19
.20
.17
.22
.20
.17
9.1
7.2
9.5
6.6
9.0
6.6
9.4
7.6
Annual
Q3
1.10
1.19
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1. Percent. Owned units consist mainly of condominiums. All vacancy rate
data are revised.
r Revised estimates.
n.a. Not available.
p Preliminary.
Millions of units
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
II-13
BUILDERS' RATING OF NEW HOME SALES 1
Diffusion index
Millions of units, SAAR
-1
1.2
80
Builders' rating of new home sales (right scale)
V
I\
ngle-family starts
\
Apr.
Single-family starts (left scale)
Mar.
I
1987
I
1988
1989
i
1990
1 The index is calculated from the National Association of Homebuilders data as the number of respondents rating current sales as good
to excellent minus the proportion rating them as poor.
Millions of units, SAAR
CONSUMER HOMEBUYING ATTITUDES 2
Diffusion index
Consumer homebuying attitudes (right scale)
1987
1988
1989
1990
1991
2 The homebuying attitudes index is calculated by the Survey Research Center (University of Michigan) as the proportion of respondents
rating current conditions as good minus the proportion rating such conditions as bad.
II-14
EXISTING HOME MEDIAN PRICE (SA) AND CONSTANT-QUALITY NEW HOME PRICE (NSA)
Thousands of
dollars
Thousands of
dollars
148 -
102
-
144Existing home median price (right scal
- 96
140 93
136
90
Constant-quality new home price (left scale)
/
132 -
87
128
/
84
-/
/
12
124
I
4
1987
i
Ii
1988
1989
i
.I
.I " I
1990
1
81
1991
MONTHS' SUPPLY OF NEW HOMES AND SINGLE-FAMILY HOUSING STARTS
2000
Thousands of units, SAAR
Months
-
11.2
-
S
£
I
I1800
I
I
I
I
SMonths supply of new homes
I
(right scale)
1600
I
I
I
I I
I
I
1
I
I
I
Single-family starts
-
10.5
-
9.8
(eft scale)
- 9.1
1400 -
1200
1
I
I
I
I
/
/
II
V
I\'I
1
A
\
I
\/
-
I
\ II
I0
I
1973
1973
I
'
1976
I5.6
J
\
I1 7 I-L
1979
\/
v
I
1000
600
1-18.4
1
i\
I
1985I
IiI
1982
1985
Il
I
1988
-6
Illllll
1991
56
4.1991
II-15
to finance land acquisition and development and speculative building
generally.
In the multifamily sector, starts dropped 21 percent in March to a
170,000 unit annual rate, a new low for the series, which began in January
1959.
Building in this sector continues to be depressed by a serious
oversupply of rental and condominium units in some locales.
The national
vacancy rate for multifamily rental units was 9.4 percent in the first
quarter, a reading identical to its level both one and two years ago.
Business Fixed Investment
Real business fixed investment tumbled 14-1/2 percent at an annual rate
in the first quarter, after remaining flat in the fourth quarter; purchases
of both equipment and structures fell back substantially.
Contracts and
orders point to further weakness in the near term.
The plunge in equipment outlays in the first quarter followed a
moderate gain in the fourth quarter of last year.
3
Spending for
computers, motor vehicles, and most types of industrial equipment posted
especially sharp declines last quarter.
In contrast, outlays for aircraft
soared, perhaps reflecting a pickup of shipments of MD-11 aircraft (a newly
introduced widebodied airplane) by McDonnell-Douglas.
The recent data for orders received by domestic manufacturers point to
further declines in spending for most types of equipment in the current
quarter.
Excluding the aircraft group, where lead times are extremely long,
bookings for nondefense capital goods fell 6.3 percent in March (not at an
3. Revisions to shipments of nondefense capital goods for February and
March--released after BEA's advance GNP estimate--imply about a
$2-1/2 billion downward revision to PDE in the first quarter. All else
equal, these data would imply a decline in real PDE of 18 percent at an
annual rate.
II-16
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)
1990
1991
1991
Q3
Q4
Q1
Jan.
Feb.
Mar.
Shipments of nondefense capital goods
Complete aircraft
Excluding aircraft and parts
Office and computing
All other categories
1.2
16.2
-0.9
-1.1
-0.8
1.4
-3.2
2.2
4.2
1.6
-2.4
4.4
-3.5
-4.2
-3.3
-3.1
5.4
-1.6
-0.2
-2.0
1.6
-1.6
-1.3
-3.4
-0.6
-3.1
-15.6
0.2
0.5
0.1
Weighted PDE shipments1
-0.2
2.0
-4.6
-2.3
-1.1
-1.1
6.4
-10.8
-9.1
-11.5
3.4
-0.4
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories
4.5
-0.2
6.0
-1.9
5.3
0.8
-7.0
3.3
-6.5
-3.9
3.7
-6.0
-11.9
0.4
15.3
-3.4
-0.6
-3.6
-7.6
-2.4
-5.0
-6.3
2.5
-8.9
Weighted PDE orders 1
-1.4
1.4
-4.4
-0.1
-2.2
-6.2
Construction put-in-place
Office
Other commercial
Public utilities
Industrial
All other
1.1
1.6
-2.5
0.0
2.3
4.5
-5.5
-8.4
-9.3
1.4
-6.0
-6.0
-1.7
-4.0
-7.4
1.2
4.7
-2.4
-0.0
-1.8
-1.9
2.0
0.5
0.4
1.4
3.0
-3.8
4.7
1.4
1.0
-3.3
-6.5
-5.1
-2.0
-2.1
-1.5
Rotary drilling rigs in use
-2.8
-2.8
0.9
2.4
1.7
-3.5
Footage drilled 2
10.6
3.6
n.a.
-1.6
-13.9
n.a.
Producers' durable equipment
Sales of heavy-weight trucks
Nonresidential structures
Note: The Census M-3 report does not provide information on complete aircraft orders.
1. Computed as the weighted sum of 25 individual equipment series (excluding
aircraft) from the Census M-3 report with weights equal to the fraction of final
business spending for each type of equipment.
2. From Department of Energy. Not seasonally adjusted.
n.a. Not available.
II-17
Recent Data on Orders and Shipments
(Excluding motor vehicles and parts)
Office and Computing Equipment
Bllions of dollars
- 4
1985
1986
1987
1988
1989
Other equipment (excluding aircraft and computers)
1990
1991
Billions of dollars
Orders --
1985
1986
1987
1. Three month moving average used for all series shown.
1988
1989
1990
9 15
1991
II-18
Nonresidential Construction and Selected Indicators 1
(Dec. 1982 = 100, ratio scale)
Total building
175
150
125
100
75
50
1979
1987
1985
1983
1981
1991
1989
Other commercial
Office
290
-- n 160
Construction
240
-1 120
190
t
1
4*t r-*
ti
1
Pt2
-- 80
P
rermits
140
i'~,
t^
I
I
1983
I
1985
I
I
1987
I
t
I
90
1983
1989
1985
1987
1989
1991
Institutional
Industrial
---
New commitments
--,
-
240
180
180
150
120
120
Pt
90
Construction
I
1983
I
1985
I
I
1987
I
--A 60
I
1989
I
I
1991
60T
1983
1985
1987
1989
1991
1. Six-month moving average for all series shown. For contracts, total only includes private, while individual sectors include private and public.
New commitments are the sum of permits and contracts.
II-19
annual rate), pulled down by large declines in the communication and the
search and navigation categories.
For the first quarter as a whole, orders
outside of aircraft were down nearly 4 percent from the fourth-quarter
average, with sizable declines posted for most types of equipment.
Bookings
for computers, however, have held up fairly well in recent months after a
fourth-quarter decline, and they point to a small upturn in outlays in the
current quarter (chart); much of the recent strength apparently is in the
workstation segment of the market.
Expenditures for nonresidential structures fell 11-1/4 percent at an
annual rate in the first quarter, after a drop of more than 18 percent in
the previous quarter.
In the first quarter, spending was down notably for
office, other commercial, and institutional construction.
In contrast,
industrial construction rose, but it remained below its peak in the third
quarter of last year.
Reflecting lower prices for crude oil, outlays for
drilling and mining also posted a large decline in the first quarter, and in
the first four weeks of April, the Baker-Hughes rig count fell to a level
5 percent below its first-quarter average.
Forward-looking indicators for nonresidential construction continue to
paint a bleak picture.
Permits for office construction plummeted in March
(chart), and vacancy rates remain high.
The Coldwell-Banker metropolitan
office vacancy rate was 19.5 percent at the end of the first quarter, a bit
below its year-earlier level of 19.9 percent.
Indicators for other sectors,
particularly industrial and non-office commercial, also point to weak
construction activity in the near term.
In assessing the recent indicators of BFI, it is important to note that
movements in investment typically lag fluctuations in real GNP by a quarter
II-20
or two.
For example, in the seven cyclical upturns since 1950, real
business investment has, on average, turned up between one and two quarters
after real GNP (table).
4
Equipment spending typically turns up after
about one quarter, with similar lags for the major categories of equipment.
Spending for nonresidential structures turns up, on average, two quarters
after the cyclical trough, although there is greater volatility in the
response time; average lags range from one quarter for non-office commercial
building to five quarters for industrial construction.
AVERAGE LAG FROM UPTURN IN REAL GNP TO PICKUP IN REAL INVESTMENT
(Following recessions since 1950)
Category
Business fixed investment
Average lag
(quarters)
Standard deviation
(quarters)
1.3
1.0
Producers' durable equipment
Information processing
Industrial
Transportation
1.0
.9
1.6
1.0
.6
1.1
1.1
.8
Nonresidential structures*
Industrial
Office
Non-office commercial
2.3
4.8
3.3
1.0
1.4
2.3
2.5
1.0
* Data for industrial construction begin in 1958, while data for office
and non-office commercial construction begin in 1972.
Inventories
Business inventory developments were mixed in the first quarter.
Despite a continued decline in overall stocks, plummeting sales and poor
4. Although real equipment purchases typically lag the turn in economic
activity, orders for nondefense.capital goods (excluding aircraft) are more
nearly contemporaneous. In three of the four recessions since 1970, these
orders have bottomed out in the same quarter as real GNP; in the 1982
recession, the volatility of the orders data makes it difficult to identify
a trough.
II-21
demand prospects left many merchants and manufacturers with uncomfortable
inventory positions and prompted caution in orders and production.
In March, factory stocks were reduced at an annual rate of $26 billion
in current-cost terms, after little change over the preceding two months.
A
substantial portion of the March decumulation occurred in durable goods
industries, in particular in industrial machinery and equipment, fabricated
metal products, and motor vehicles and parts; by and large, these are
industries that have experienced declining orders and shipments in recent
months.
The sharp inventory drawdown coincided with a plunge in factory
shipments, and the inventory-shipments ratio for manufacturing moved up to
1.69 months in March, its highest level in recent years.
At present,
manufacturers' inventory imbalances appear to be largely limited to producer
goods--industrial machinery and equipment, and basic production materials
such as primary metals (especially steel), chemicals, and rubber and
plastics.
In retail and wholesale trade, sluggish sales led to some unintended
inventory buildup in January, especially at the wholesale level.
However,
much of the January runup was reversed over the latter part of the first
quarter, reflecting improved retail sales and reduced supply of merchandise
from both domestic and foreign sources.
In the retail sector, for the broad
range of stores that carry largely discretionary consumption goods (general
merchandise, apparel, and furniture and appliance), inventories at the end
of February were little changed from the level posted at the end of third
quarter of last year.
With a sharp, 4.3 percent gain in sales in February,
the inventory-sales ratio for stores in this category fell sharply to
2.41 months--near the low end of the range observed over the past year.
II-22
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
Q3
1991
1991
1990
Q1
Q4
Jan.
Feb.
Mar.
Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
58.8
39.7
26.5
9.2
23.1
19.0
4.1
-.8
9.1
-8.7
10.5
-2.6
-9.9
7.3
n.a.
n.a.
-10.1
8.0
n.a.
n.a.
n.a.
54.0
.47.9
-5.2
41.1
18.1
6.1
12.0
-31.1
-8.4
.9
-5.2
-26.9
-22.7
-4.2
n.a.
na.
-26.2
-11.9
n,a.
n,a.
n,a.
5.1
1.9
3.7
.6
.8
3.2
-2.4
-21.8
-11.4
-18.3
5.8
-9.3
-10.4
1.1
n.a.
n.a,
n.a.
n.a.
n.a.
n.a.
n.a.
36.0
46.7
-. 9
37.7
-. 9
-10.8
9.9
-22.9
-1.9
1.0
1.6
-25.5
-21.0
-4.5
na.
n,a.
na.
n.a.
n.a.
n.a.
n.a.
Constant-dollar basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data)
1990
Q3
1991
1991
Q4
Q1
Jan.
Feb.
Mar.
Range in
2
preceding 12 months:
Low
High
Current-cost basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
1.48
1.45
1.54
1.26
1.58
1.90
1.47
1.58
1.54
1.67
1.38
1.65
2.18
1.52
1.51
1.47
1.58
1.28
1.61
2.07
1.48
1.52
1.49
1.59
1.31
1.60
2.01
1.49
n.a.
n.a.
1.66
1.38
n.a.
n.a.
n.a.
1.58
1.54
1.66
1.37
1.65
2.18
1.52
1.57
1.54
1.67
1.38
1.60
2.02
1.50
n.a.
n.a.
1.69
1.39
n.a.
n.a.
n.a.
1.42
1.39
1.44
1.26
1.54
1.75
1.46
1.51
1.49
1.53
1.39
1.60
1.89
1.53
1.43
1.41
1,46
1.28
1.55
1,85
1.47
1.46
1.44
1.48
1.34
1.55
1.77
1.50
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
1.51
1.49
1.53
1.39
1.60
1.89
1.53
1.49
1.48
1.53
1.38
1.55
1.75
1,50
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Constant-dollar basis:
Total
Total excluding retail auto
Manufacturing
Wholesale
Retail
Automotive
Excluding auto
1. Ratio of end of period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily
coincidental. Range is for the 12-month period preceding the latest month for
which data are available.
II-23
SELECTED INVENTORY-SALES RATIOS
(Months' supply, based on seasonally adjusted Census data at current cost)
Cyclical reference points
1982 High 1983-84 Low
Manufacturing and trade
Range
Feb. 90 - Jan. 91
Feb.
1991
March
1.69
1.48
1,48
1.58
1.57
n.a.
Manufacturing
Primary metals
Nonelectrical machinery
Electrical machinery
Transportation equipment
Motor vehicles
Aircraft
Textile
Petroleum
Chemicals
Rubber and plastics
Home goods & apparel
1.99
3.33
3.49
2.53
2.70
1.20
5.34
1.84
1.11
1,73
1.72
2.14
1.67
2.02
2.60
2.08
1.85
.69
4,43
1.53
.93
1.44
1.36
1.76
1.54
1.85
2.13
1.80
2.07
.56
4.93
1.66
.69
1.27
1.33
1.84
1.66
2.09
2,28
1,89
2.74
.96
5.71
1.82
.89
1.35
1.62
2.03
1.67
2.19
2.31
1.80
2.54
.84
4.91
1.82
.84
1.38
1.62
1.88
1.69
2.28
2.32
1.80
2.69
.88
5.44
1.77
.86
1.42
1.61
1.86
Merchant wholesalers
Durable goods
Motor vehicles
Machinery
Nondurable goods
1.39
2.26
2.02
2.98
.81
1.18
1.69
1.30
2.33
.75
1.26
1.68
1.52
2.14
.84
1.37
1.90
1.88
2.47
.89
1.38
1.90
1.91
2.47
.90
1.39
1.90
1.87
2.50
.91
Retail trade
Automotive dealers
Retail ex. autos
General merchandise
Apparel
G.A.F.
1.53
1.92
1.45
2.56
2.79
2.60
1.42
1.48
1.40
2.39
2.50
2,42
1.56
1.89
1.47
2.43
2.44
2.38
1.65
2.18
1.52
2.56
2.65
2.53
1.60
2.02
1.50
2.46
2.45
2.41
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
3.83
3.04
2.55
2.69
2.60
2.69
Memo:
Nondefense capital goods
(manufacturinq)
II-24
CUMULATIVE FISCAL IMPETUS AROUND BUSINESS CYCLE PEAKS
Percent of real GNP
1.5
I
1969:4
E
1973:4
E
1981:3
1.2
0.9
1990:3
0.6
6 quarters
"*
preceding peak
0.3
+ stimulus
0
- restraint
1
I
I
I
I
I
0.3
:
I
2 quarters
following peak
0.6
0.9
1.2
* Fiscal mpetus is the weighted difference between discretionary changes In spending and in taxes.
II-25
From a longer perspective, however, the GAF stock-sales ratio looks far from
lean, and probably is one indication of the excess capacity existing in
retailing.
The industry consolidation underway may contribute to a lowering
in the inventory-sales ratio over time.
The Federal Government
Federal fiscal policy, as measured by the staff's indicator of
discretionary fiscal impetus, has remained restrictive since the cyclical
peak in the third quarter.
This fiscal stance contrasts with recent
recessions, when policy generally turned stimulative within the first two
quarters following the peak.
The restraint largely reflects the spending
cuts and tax increases embodied in last fall's budget agreement.
BEA's advance estimate of real federal purchases, excluding CCC, fell
at a 3 percent annual rate in the first quarter.
Real defense purchases
declined at a 1 percent pace as increases for military personnel and
installation support were offset by decreased purchases of petroleum
products.
Nondefense purchases, excluding those of the CCC, fell at a
9 percent rate, reflecting the Strategic Petroleum Reserve's sale of
$2 billion of oil; excluding SPR activity, nondefense purchases were flat.
On a unified budget basis, the federal government recorded a
$65 billion budget deficit in the first quarter, bringing the deficit for
the first half of the 1991 fiscal year to $152 billion, about the same as in
the first half of the 1990 fiscal year.
Over the first half of this fiscal
year, the deficit-increasing influences of the economic downturn have been
offset by the savings in the 1990 budget agreement, as well as by foreign
contributions for Operation Desert Storm, a slowdown in deposit insurance
outlays, and lower interest rates.
II-26
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Billions of dollars,
except where otherwise noted)
FY1990
October-March
Net
FY1991
change
Percent
change
Outlays
National defense
ex-DCA
Net interest
Social Security
Medicare and health
Deposit insurance
Income security
Other
609.0
150.1
150.1
90.3
120.3
73.9
13.4
76.1
84.9
634.3
130.1
157.0
96.2
130.2
81.8
16.4
87.1
92.5
25.3
-20.0
6.9
5.9
9.9
7.9
3.0
11.0
7.5
4.1
-13.4
4.6
6.6
8.2
10.7
22.6
14.5
8.8
Receipts
Personal income taxes
Social insurance
contributions
Corporate income taxes
Excise taxes
Other
458.2
204.9
482.6
204.4
24.5
-.5
5.3
-.2
171.8
39.0
16.3
26.2
188.3
44.6
18.6
26.7
16.5
5.6
2.3
.5
9.6
14.3
14.1
1.9
Deficit
150.8
151.6
.8
.5
CASH AND IN-KIND CONTRIBUTIONS FOR OPERATION DESERT SHIELD/STORM
(Billions of dollars)
Received
Country
Saudi Arabia
Kuwait
Japan
Germany
United Arab Emirates.
Korea
Total
Commitments
16.8
16.0
10.7
6.6
4.0
.4
54.6
1 Through April 30, 1991.
2. Through March 31, 1991.
Cash
4.5
9.3
8.8
5.8
3.6
.1
32.0
Future
In-kind2 Total
3.1
.0
.7
.8
.2
.0
4.8
7.6
9.3
9.4
6.6
3.8
.2
36.8
receipts
9.2
6.7
1.3
.0
.2
.2
17.8
II-27
Net receipts totaled $483 billion in the first half of the 1991 fiscal
year, about 5 percent above the year-earlier total.
Personal income tax
collections were little changed from a year earlier, and daily data for
April and early May indicate that nonwithheld taxes are running about
$5 billion below last year's pace--consistent with the weakness in nonwage
income shown by the personal income data.
In contrast,
social insurance
taxes and corporate income taxes appear stronger than a year earlier.
Excise taxes, only 4 percent of total receipts, were significantly higher
than a year earlier, reflecting the increased tax rates enacted in
last
fall's budget agreement.
Defense outlays have changed little, on balance, over the past yearand-a-half, apart from a
Shield procurement.
So
jump in March associated with a bulge in Desert
far in this fiscal year, the costs of the unplanned
military action have about equalled the planned reduction in baseline
spending.
However, after the
$27 billion of foreign financial
for Operation Desert Storm are netted against
contributions
gross spending, national
defense outlays for the first half of the fiscal year were $20 billion below
a year earlier.
6
Net deposit insurance outlays were only $2 billion in the first
quarter, after net spending of $14 billion in the
fourth quarter.
to the administration's February estimate that deposit insurance
Relative
outlays
would total $111 billion for FY1991 as a whole, the shortfall appears
5. Nonwithheld taxes in April and May represent final payments on 1990
personal income tax liability and 1990 self-employment tax liability as well
as the first quarterly payment on estimated liabilities for 1991.
6.
In-kind aid--not recorded in the MTS or NIPA--was another $5
billion,
and an additional $5 billion in financial contributions was received in
April.
The $37 billion total received since August is about two-thirds of
the pledged amount.
II-28
NATIONAL DEFENSE OUTLAYS
(Monthly rates, not seasonally adjusted, billions of dollars)
1989
1990
National defense function adjusted for pay date shifts and excluding foreign contributions
II-29
substantial and has occurred both at the RTC and the FDIC-BIF.
RTC resolved
only 22 thrifts in the first quarter--about one-quarter of last year's
pace--hindered, in part, by a lack of funding.
was enacted in late March.
Additional funding for RTC
Legislation to approve additional funding for
FDIC-BIF is now before Congress.
Both branches of Congress have approved budget resolutions for FY1992
similar to the President's budget proposal, with only minor shifts among
domestic spending programs.
State and Local Governments
Fiscal difficulties are restraining state and local government spending
this year.
Real purchases of goods and services by state and local
governments fell at a 1.4 percent annual rate in the first quarter after a
big rise in the fourth quarter.
Outlays for public structures fell
16 percent at an annual rate, and the growth in real outlays for other
durable goods slowed sharply.
In addition, growth in compensation for state
and local employees has been restrained by the slow pace of new hiring.
Despite the reduction in purchases in the first quarter, the deficit of
operating and capital accounts, excluding social insurance funds, appears to
have remained at about its sizable fourth-quarter level (chart).
The continued weakness in the fiscal position of the sector this year
has resulted from both overruns in expenditures and lower-than-expected
revenue collections.
Regarding outlays, 45 states are expected to spend
more on Medicaid or AFDC than was anticipated for fiscal year 1991, which
II-30
STATE AND LOCAL FISCAL SITUATION
Sector Operating and Capital Accounts Surplus (Deficit)
1984
1985
1988
1987
1986
Billions of Dollars
1990
1989
1991
Source: NIPA. Excludes social insurance funds.
* Staff estimate.
State General Fund Spending Increase
1984
1985
1986
Percent Change
1987
Source: National Association of State Budget Officers, April 1991.
Estimated by NASBO.
1988
1989
1990
1991*
1992
II-31
ends for all but four states at the end of June.
On the receipts side,
all of the three major state revenue sources--personal income, corporate
income, and sales taxes--have generated less funds than originally expected,
reflecting the deterioration in economic activity.
Overall, state general
fund receipts are now anticipated to be nearly $10 billion less in fiscal
year 1991 than was expected as recently as September.
To cope with the
weakness this year, states have cut, or have planned cuts, totaling $8
billion, and expenditures are expected to rise only 5.2 percent from
FY1990--the smallest increase since the early 1980s (chart, lower
panel)--instead of the 7.8 percent increase originally planned.
Estimates
for FY1992 suggest another year of budgetary distress, and further budget
cuts and tax increases have been proposed.
Prices
Inflation appears to be on a downward path.
Consumer prices edged down
in March as energy prices retreated further, food prices rose moderately,
and prices of other goods and services increased only marginally.
Although
the CPI excluding food and energy rose at a 6-3/4 percent annual rate over
the first three months of the year, this elevated pace almost certainly
exaggerated the underlying inflation trend.
The CPI for energy fell about 2-1/2 percent in March, the fourth
consecutive month of decline.
Prices of gasoline and fuel oil were down
about 5 percent and 6-3/4 percent, respectively.
Private survey data for
7. The increases from Medicaid largely result from greater caseloads,
owing in part to federal mandates expanding coverage to more children and
raising the income cutoffs for pregnant women and infants to 133 percent of
the poverty level.
II-32
RECENT CHANGES IN CONSUMER PRICES
1
(Percentage change; based on seasonally adjusted data)
Relative
importance
Dec. 1990
1991
1990
1989
1990
Q3
1991
Q1
Q4
Feb.
------ Annual rate-----
All items 2
Food
Energy
All items less food
and energy
Commodities
Services
Mar.
-Monthly rate-
100.0
4.6
6.1
8.2
4.9
2.4
.2
-.1
16.2
8.2
5.6
5.1
5.3
18.1
4.6
44.2
3.9
18.0
2.4
-30.7
-. 2
-4.0
.2
-2.6
75.6
24.5
51.1
4.4
2.7
5.3
5.2
3.4
6.0
6.0
3.3
7.2
3.8
2.3
4.8
6.8
7.9
6.4
.7
1.0
.6
.1
-. 1
.3
100.0
4.5
6.1
8.4
5.0
1.5
.1
-. 1
Memorandum:
CPI-W3
1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.
3. Index for urban wage earners and clerical workers.
RECENT CHANGES IN PRODUCER PRICES
(Percentage change; based on seasonally adjusted data) 1
Relative
importance
Dec.
1990
1990
1989
1990
Q3
Q4
Q1
------Annual rate----Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment
1991
1991
Feb.
Mar.
-Monthly rate-
100.0
23.7
16.8
59.5
36.4
23.1
4.9
5.2
9.5
4.2
4.4
3.8
5.6
2.5
29.8
3.5
3.6
3.4
11.3
2.3
118.7
3.5
3.5
3.6
4.4
1.3
17.7
3.5
3.1
3.3
-3.9
.6
-35.4
4.4
5.6
3.2
-. 6
.2
-5.1
.4
.5
.2
-. 3
.2
-3.2
.2
.2
.2
Intermediate materials 2
Excluding food and energy
95.2
78.5
2.5
.9
4.6
1.9
13.4
4.0
3.8
2.0
-9.2
-1.6
-. 9
-. 1
-1.1
-. 4
Crude food materials
Crude energy
Other crude materials
34.7
50.4
14.9
2.8
17.9
-3.6
-3.6
18.6
.4
-7.8
305.8
5.9
-5.3
-20.2
-18.5
-1.1
-52.7
-2.4
.0
-15.9
.2
1.2
-7.3
-1.1
1. Changes are from final month of preceding period to final month of period indicated.
2. Excludes materials for food manufacturing and animal feeds.
II-33
April show modest, less than seasonal, increases in gasoline prices at
retail; early May data indicate that gasoline prices were rising rapidly.
Gasoline stocks are reported to have declined in April to their lowest
levels of the past decade.
This reduction reflects a drawdown of the
supplies of "winter" gasoline preparatory to the switchover to cleaner
gasoline mandated for the summer months in order to control air
pollution.
8
According to the Department of Energy, new gasoline stocks
should be built up relatively quickly, given moderate demand, higher
imports, and a smooth pickup of refinery activity after scheduled
maintenance.
However, any major disruptions of refinery operations would
pose a near-term risk for gasoline supplies.
Food price inflation has proceeded at a fairly steady--and
moderate--pace so far in 1991, apart from some sharp ups and downs in the
prices of fresh fruits and vegetables.
Increases in the CPI for food,
including fruits and vegetables, averaged 0.2 percent per month through the
first quarter; excluding fruit and vegetable prices, the monthly increases
averaged 0.1 percent.
The price index for meats and related products
changed little on net over the first quarter, and dairy prices declined.
The index for food away from home, which accounts for nearly 40 percent of
total food in the CPI, rose at an annual rate of only 2.4 percent from
December to March; the twelve-month rate of change in this series dipped to
3.6 percent, matching the previous low of the past twenty-five years.
In April, changes in food prices appear likely to be dominated by a
steep upswing in the prices of fresh vegetables.
Vegetable acreage was cut
8. Since 1989, all "summer" gasoline sold must meet stricter EPA and
individual state standards that limit volatility (as measured by Reid Vapor
Pressure, or RVP).
II-34
Daily Spot and Posted Prices of West Texas Intermediate 1
Dollars per barrel
Spot
Posted
June
July
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
1. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal.
MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
F
Year and Month
1990
June
July
August
September
October
November
December
1991
January
February
March
April
May 1
1. Price through May 7.
Posted
Spot
16.15
17.23
24.99
31.10
34.82
31.32
26.32
16.87
18.64
27.17
33.69
35.92
32.30
27.34
23.74
19.61
18.66
19.56
19.96
24.96
20.52
19.86
20.82
21.42
II-35
back this spring in several regions, and progress of the crops was delayed
by wet weather in both California and Florida.
As a result, vegetable
prices soared in the wholesale markets from mid-March through the third week
of April; prices since have turned down, however, suggesting that the supply
gap is closing and that the anticipated surge in vegetable prices at retail
may be of relatively short duration.
Excluding food and energy, the CPI rose only 0.1 percent in March,
after increases of 0.8 percent in January and 0.7 percent in February.
Apparel prices, which had climbed 2-3/4 percent on a seasonally adjusted
basis from December to February, dropped back 1-1/4 percent in March.
This
monthly pattern reflects the earlier-than-usual introduction in January and
February ("expected" by the seasonal factors in March and April) of spring
and summer clothing into the CPI sample.
Changes in BLS methods and related
seasonal adjustment problems also have affected the behavior of the CPI for
lodging out of town.
This index declined 1 percent in March, retracing a
small fraction of its climb in preceding months.
The CPI excluding food and
energy also was affected in the first quarter by higher federal excise
taxes, a jump in postal rates, and some bunching of price increases early in
the year for items that are not seasonally adjusted by BLS.
These special factors are estimated to have accounted for as much as
0.5 and 0.4 percentage point, respectively, of the increases in January and
February, but, on net, reduced the March advance by 0.1 percentage point.
Although it would be misleading to suggest that none of the price increases
in those categories reflected general inflation pressures, this arithmetic
9. The BLS does not seasonally adjust items with excessive irregularity in
seasonal patterns nor, as yet, those for which the 1987 revision represented
important changes in coverage.
II-36
PRICE INDEXES FOR COMMODITIES AND MATERIALS 1
Percent change
1991
To
Mar.
Last
obser-
Memo:
Mar. 19
to
date
Year
earlier
vation
1989
1990
Mar.
7.1
6.0
-8.1
n.a.
-3.8
Mar.
Mar.
Mar.
2.8
17.9
-3.6
-3.6
18.6
.4
1.5
-17.1
.2
n.a.
n.a.
n.a,
-4.5
-1.8
-1.1
Mar.
-3.6
.4
-. 6
n.a.
-1.1
2. Commodity Research Bureau
2a. Futures prices
2b. Industrial spot prices
May
May
-9.0
-5.9
-2.7
.6
-1.8
-3.7
-1.3
.5
-12.1
-6.6
3. Journal of Commerce industrials
3a. Metals
May
May
1.3
-7.2
-2.4
-3.9
-4.4
-2.2
2.1
-1.4
-5.6
-10.7
4. Dow-Jones Spot
May
-10.1
-1.7
-. 3
2.9
-5.1
5. IMF commodity index 4
5a. Metals
5b. Nonfood agric.
Mar.
Mar.
Mar.
-12.9
-23.4
-4.6
-5.6
-3.0
-3.5
.1
-1.3
-4.8
n.a.
n.a.
n.a.
-5.6
-10.3
-5.5
6. Economist (U.S. dollar index)
6a. Industrials
Apr.
Apr.
-22.8
-23.8
-4.4
-3.2
-2.7
-4.4
-1.4
.3
1. PPI for crude materials 4
la.
lb.
Ic.
Id.
Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,
seasonally adjusted
193
3
to date
-16.0
-13.9
1. Not seasonally adjusted.
2. Change is measured to end of period, from last observation of previous period.
3. Week of the March Greenbook.
4. Monthly observations. IMF index incl.udes items not shown sepaiately.
n.a. Not available.
Index Weights
Energy
Food Commodities
Precious Metals
Others
0
E
El
O1
PPI for crude materials
17
42
41
,• ..! '
f•.,/
1bzf
)rf ,.
•"f" ,"L..
"•,';,"
,•.',, ,,'"t
l)::..;::•::·;:.ii::j::)~::-i::
CRB futures
10
14
62
14
CRB industrials
100
Journal of Commerce index
12
88
Dow-Jones
58
17
25
IMF index
55
Economist
,4 .7,
-,
," .t,//*
45
.4-. .///
II-37
COMMODITY PRICE MEASURES *
Journal of Commerce Index, total
- - - Journal of Commerce Index, metals
Total
Ratio scale, Index
(1980=100)
Mar
Apr
1991
CRB Spot Industrials
CRB Futures
CRB Futures
, -
Mar
* Weekly data, Tuesdays; Journal of Commerce data monthly before 1985
223
Apr
1991
Dotted lines indicate week of
last Greenbook.
II-38
supports our notion that the underlying trend of consumer price increase
already has dropped well below the pace suggested by the 5-1/4 percent rise
in the CPI excluding food and energy in 1990.
At the producer level, the PPI for finished goods declined 0.3 percent
in March, as energy prices continued to recede.
Excluding food and energy
items, the PPI rise slowed to 0.2 percent from 0.5 percent and 0.4 percent,
respectively, in January and February.
Reflecting passthrough of lower
crude oil costs, producer prices of intermediate materials (nonfood,
nonenergy) fell 0.4 percent in March, led by further declines for
petrochemicals, plastics, and other petroleum-based materials.
Declines
also were registered in products of several industries with soft demand,
notably for metals and paperboard.
The PPI for crude nonfood materials less
energy fell about 1 percent, mainly owing to declines for metal scrap and
ores.
Price movements in spot markets for industrial commodities have been
mixed since mid-March.
The Journal of Commerce index of industrial metals
prices has declined further, on net, and both this measure and the CRB spot
index for industrials have continued to move in narrow ranges over the
period.
However, the Journal of Commerce index total has moved up in recent
weeks, boosted mainly by increases for plywood, crude oil, and cotton.
Labor Costs and Productivity
Growing slack in the labor market appears to be restraining labor cost
increases, although, as with prices, the recent data have been affected by
special factors.
Hourly compensation as measured by the employment cost
index (ECI) rose 4.6 percent at a seasonally adjusted annual rate in the
first quarter (table), but this figure was boosted both by an increase in
II-39
the wage bases for social security and medicare taxes, and by a bounceback
in commission earnings.
On balance, compensation costs rose at about a
4-1/4 percent pace over the past two quarters, roughly 1/2 percentage point
below the pace recorded during the preceding 12-month period.
Wages and salaries advanced 4.2 percent at an annual rate in the first
quarter, well above the 3.1 percent rise in the fourth quarter.
This
quarterly pattern was shaped in large part by volatile earnings of sales
workers; their commissions fell off sharply in the fourth quarter, but were
boosted in the first quarter by strong earnings in the financial sector.
The average rate of increase for the two quarters was 3.7 percent at an
annual rate--1/2 percentage point below the average pace over the first nine
months of 1990.
Despite the rise in payroll taxes, growth in benefit costs
slowed further in the first quarter to a pace of 5.2 percent at an annual
rate; a smaller rate of increase of pension costs and nonproduction bonuses
offset additional large increases in health insurance premiums.
In the union sector, compensation gains have averaged about 4 percent
over the past year, roughly 1/2 percentage point below the increases posted
in the nonunion sector.
Bargaining so far in 1991 has been very light, with
only 215,000 workers covered by new major collective bargaining agreements.
Those settlements provided for wage adjustments averaging 4.5 percent in the
first contract year, up from the 4 percent first-year increases provided by
contracts reached in 1990 (table).
The pickup, however, largely reflected
the first-quarter settlements covering 24,000 steelworkers (mostly at USX),
in which earlier wage concessions were restored.
Average adjustments over
the life of new contracts signed in the first quarter were about
3-1/2 percent, similar to adjustments in settlements negotiated in 1990.
II-40
(Percent change from
based
EMPLOYMENT COST INDEX
preceding period at compound annual rates;
on seasonally adjusted data)
1990
1991
Mar.
1989
1990
Sep.
Dec.
Private industry workers
4.8
4.6
4.3
3.8
4.6
By industry:
Goods-producing
Service-producing
4.3
5.1
4.8
4.6
4.3
4.3
3.8
3.8
4.6
4.9
5.0
4.5
5.3
5.2
4.1
4.4
4.9
4.4
4.7
4.6
3.9
3.5
2.7
3.8
5.0
4.1
6.9
4.1
6.1
4.0
6.6
3.9
6.5
3.1
5.7
I
~ --
~---~-~--~---~l-~-~T~-------c~----~-~
--
19881
Total compensation costs:
By occupation:
White-collar
Blue-collar
Service workers
Memo:
Wages and salaries
Benefits
1. Changes are from December of preceding year to December of year
indicated.
Employment Cost Index
(Private industry workers; twelve-month percent change)
Compensation per hour
Percent
Wages and benefits
Percent
/ \
I
-1 5
/
Benefits
"
II
I/
A-
I
I
1987
i lI
1989
Il
1991
--
Wages and salaries
.
1987
--. ---. .
1989
,• ·
· I f F
1991
II-41
Data for April indicate that average hourly earnings jumped
0.5 percent--probably boosted by an increase in the minimum wage from $3.80
to $4.25 per hour, effective April 1. The effects of the higher minimum
wage are most apparent in retail trade, where average hourly earnings jumped
0.9 percent.
Over the twelve months ended in April, average hourly earnings
rose 3-1/4 percent, nearly 1 percentage point below the peak recorded two
years ago.
AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)
Total private nonfarm
1989
1990
1991
Q1
4.1
3.7
2.0
Jan.
.0
1991
Feb. Mar.
Apr.
.3
.5
.2
1. Changes are from preceding period indicated.
Productivity in the nonfarm business sector as a whole rose 1.0 percent
at an annual rate in the first quarter, and has shown little change, on net,
over the course of the recession.
In manufacturing, however, the cutbacks in hours generally have not
matched the sharp declines in industrial output since last September, and
output per hour fell an average 1 percent in the fourth and first quarters,
after rising at close to a 4-1/2 percent pace in the three quarters prior to
the business cycle peak.
While compensation growth in manufacturing has
slowed with the rising slack in the labor market, the productivity declines
over the past two quarters have boosted measured unit labor costs relative
to their pace over the prior two years.
II-42
Employment Cost Index
(Private industry; twelve-month percent change)
Compensation per hour
Percent
Percent
Wages and benefits, union workers1
Benefits
I
1
I
/
I
I
1987
1989
1991
Percent
Wages and salaEi
1987
1989
1991
1. Growth in union benefit costs are estimated by FRB staff.
NEGOTIATED WAGE RATE CHANGES
UNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS 1
(Percent change)
First-year adjustments
All industries
Average over life of contract
Manufacturing
Nonmanufacturing
Workers affected (in thousands)
1990
iame parties
under prior
lettlements
FiI'st three
months
1991
1988
1989
2.5
4.0
4.0
1.5
4.5
2.4
3.3
3.2
2.0
3.4
2.3
2.7
3.9
4.0
3.7
4.3
1799
1847
7.6
3.2
215
2004
1. Contracts covering 1,000 or more workers; estimates exclude lump-sum payments
and potential gains under cost-of-living clauses.
EFFECTIVE WAGE CHANGE IN MAJOR UNION CONTRACTS AND ITS COMPONENTS
Total
Contribution of:
New settlements
COLAs
Deferred increases
Over four
quarters ended
1991
1988
1989
1990
2.6
3.2
3.5
3.6
.7
.6
1.2
1.3
.7
1.3
.7
1.3
1.3
1.5
1.6
.7
II-43
Productivity
Output per hour, all persons
I
Nonfarm business sector
S-----Manufacturing
sector
I
I I
I II
/,i 4
I
SI
I
I
I I
-
I
I
Ii I
I
IL I
I
I
I
I
I
I
I
I mI
I
I I
r
II
II
I
I
II
I
I
I
I
a
f
I
LABORr PRODUCTIVIT
ro
ro
1
3
.Im
I
I
I
I
II
I
I
I
II
I
I
Im
I
Ia
1979
.9m
2.0
3.0
1
1985
AND
at COSTSI
5,3
-2.5
4.9
-
IIa
I
a
preceding period
at
r
indicatedbased
4.7
I
I
1991I
a
on seasonally
adjusted dataa
I based
I
II I
. I.3
. I I
3
3.9
2
/
m
8
I
II.0 .6
4.7
4.7
4.0
4
4.7
3.0I
m1.6a
a-1.3
6.1
4.4
3.1a
5.4
-1.3
I
4.1
I
.7
a
ompound afinal quarter of period
-. 9
on seasonally adjusted data)
Costs
are
fromafinal
quarter
of
preceding
period
21
2
I
I
I
1973
e from
Manufacturing
SCens
an per
Changes
I
-
I
1967
I t cae
1. Changes
ar
1.
I
I
SI Manufacturing
m
a
indicated.
I
I
1961
Labor
I
II
at
I
I
II
anuactuing
Unit
Labor
Costs
NonfaI
m business
Unit
I
I
I ,
output
perbusiness
hourI
Nonfarm
I
I
I
1955
S
on
Imm
I
I I
I I
I
I
a,
base
I
II
I
-
I
mm
ImI
TII
,l
I
$1982/hour
to
final
quarter
of
period
II-44
Probability of Expansion
The Commerce Department's composite index of leading economic
indicators appears to have bottomed out early this year.
In both February
and March, the index rose quite briskly, largely on the basis of increases
in the stock market, the money supply, and the Michigan survey index of
consumer expectations.
Furthermore, based on the available data for the
components, the composite index is likely to post a small increase in April.
Typically in the postwar period, troughs in the leading index have predated
general business cycle troughs by about 2 to 5 months.
Thus, the January
trough in the leading index suggests a business cycle trough by June.
More formally, recent movements in the leading index can be translated
into probability forecasts of the start of an expansion.
The average
cyclical lead time of a trough in the leading index is reflected in recent
probabilities.
The March reading puts the probability of an expansion
starting during the second quarter at 65 percent (chart).
wl/l91
11-45
COMPOSITE INDEX OF LEADING INDICATORS
Percent change
1970
1973
1976
1979
1982
1985
1988
1991
PROBABILITY OF EXPANSION *
Mar.
1990
1970
1973
1976
1979
1982
1985
'Each probability represents the likelihood that an expansion will begin during the next three months.
1991
1988
1991
DOMESTIC FINANCIAL
DEVELOPMENTS
1
III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS
-- -- - -- -- - -- - -- -- - -- - -- -- - 1989
March
highs
Dec
lows
(percent)
-- - -- - -- -- - -- - -- -- - -- -- - -- - -- -- - -- 1990
1991
Change from:
Aug
highs
FOMC
Mar 26
Aug 90
May 7
FOMC
highs Mar 26
-- - -- -- - -- -- - -- -- -
Short-term rates
Federal funds 2
9.85
8.45
8.21
6,13
5.79
-2.42
9.09
9.11
9.05
7.53
7.29
7.59
-0.36
-1.86
-0.21
7.45
5.50
5.65
5.78
-2.09
7.11
5.86
5.86
5.99
-1.67
-0.21
10.05
10.15
8.51
8.22
8.10
8.05
6.36
6.29
5.92
5.92
-2.18
-0,44
-2.13
-0.37
10.07
10.32
10.08
8.52
8.22
8.01
8.14
8.18
8.25
6.33
6.33
6.42
5.87
-2.27
5.89
5.99
-2.29
-2.26
-0.46
-0.44
-0.43
10.19
8.38
8.25
8.13
8.19
6.31
6.31
5.88
5.94
-2.25
-0.43
10.50
-2.25
-0.37
11.50
10.50
10.00
9.00
8.50
-1.50
-0.50
U.S. Treasury (constant maturity)
7.69
9.88
3-year
10-year
9.53
7.77
30-year
9.31
7.83
8.50
9.05
9.17
7.40
8.13
8.31
7.10
8.06
8.24
-1.40
-0.99
-0.93
-0.30
-0.07
-0.07
Municipal revenue
(Bond Buyer)
Treasury bills
-0.34
3
3-month
6-month
1-year
Commercial paper
1-month
3-month
7.51
Large negotiable CDs 3
1-month
3-month
6-month
Eurodollar deposits
1-month
3-month
Bank prime rate
Intermediate- and long-term rates
Corporate--A utility
recently offered
7.95
7.28
7.80
7.33
7.14
-0.66
-0.19
10.47
9.29
10.50
9.58
9.45
-1.05
-0.13
Home mortgage rates 6
S&L fixed-rate
9.69
10.29
9.59
9.47
-0.82
-0.12
11.22
8.34
8.39
7.44
-1.16
-0.21
S&L ARM, 1-yr.
9.31
7.23
-- -- - -- -- - -- - -- -- - -- - -- -- - -- -- - -- - -- -- - -- - -- -- - -- -- - -- - -- -- - -- 1989
1991
Percent change from:
Record
highs
Lows
Date
Jan 3
FOMC
Mar 26
May 7
Record
highs
1989
lows
FOMC
Mar 26
-2.89
-3.08
-8.59
-3.87
-3.22
36.04
34.19
18.89
29.84
32.83
0.09
0.54
1.68
2.70
0.83
Stock prices
Dow-Jones Industrial 3004.46
213.21
NYSE Composite
397.03
AMEX Composite
NASDAQ (OTC)
511.31
Wilshire
3731.48
4/17/91 2144.64 2914.85 2917.49
154.00 205.55 206.65
4/17/91
10/10/89 305.24 356.92 362.91
378.56 478.57 491.51
4/17/91
4/17/91 2718.59 3581.55 3611.16
One-day quotes except as noted.
Average for two-week reserve maintenance period closest to
date shown. Last observation is average to date for the
maintenance period ending May 15, 1991.
3/ Secondary market.
4/ Bid rates for Eurodollar
deposits at 11 a.m. London time.
5/ Based on one-day Thursday quotes
and futures market index changes.
6/ Quotes for week ending
Friday closest to date shown.
-
Selected Interest Rates *
(percent)
Daily
--
12
-i
11
Prime Rate
9
8
Federal Funds
Discount Rate
3-month Treasury Bill
1989
1990
5/7
3/26
-
Primary Mortgage
(weekly)
Corporate Bond
(weekly)
-
-4 10
--
30-year Treasury Bond
(daily)
1
1989
1990
*--Fddayweeks through May 3, Wednesday weeks through May 1.
3/26
1
I
1
1 1
5/7
9
DOMESTIC FINANCIAL DEVELOPMENTS
The accumulating evidence of continuing economic sluggishness and an
abatement in inflation pressures tipped the scales of policy toward further
ease at the end of April.
The discount rate was cut by 1/2 percentage point
to 5-1/2 percent, and System open market operations passed half that
reduction through to the federal funds rate, which fell to 5-3/4 percent.
Other money market rates are now 25 to 45 basis points below their levels at
the time of the March FOMC meeting.
The prime rate, which had remained high
relative to the cost of funds in recent months, was cut 1/2 percentage point
to 8-1/2 percent immediately after the drop in the discount rate.
Apparently looking past the near-term weakness in the economy, bond market
participants found less reason to bid up prices--especially in the wake of a
stronger-than-expected April labor market report.
Yields on Treasury bonds
are down only about 10 basis points on net over the intermeeting period,
implying a further steepening of a yield curve already exhibiting a
substantial upward tilt.
Major stock price indexes recorded all-time highs
in April but have dropped back to a bit above their March 26 levels, more
consistent with the modest gains in bond prices.
The cumulative decline in interest rates, elevated equity prices, and
narrower quality spreads kept open the window for corporate security
issuance and even enticed some offerings of upper-tier junk bonds.
Total
public offerings of bonds and stocks in April remained at the robust firstquarter pace, while the composition tilted toward more speculative issues.
Data from March and anecdotal evidence more recently suggest that demand for
these securities has been bolstered by a movement by retail investors toward
III-1
III-2
the bond and stock markets, in part through mutual funds and perhaps at the
expense of M2-type assets.
The growth of M2 slowed in April from the brisk pace of thepreceding
two months.
This deceleration and that of M3 also may have owed in part to
distortions associated with personal tax payments, as well as to the absence
of some special factors that had buttressed money growth earlier--the warrelated surge in the demand for U.S. currency and the adjustment of the
stock of large time deposits issued by branches and agencies of foreign
banks to the drop in reserve requirements.
Still, at 3 percent, the growth
of M2 kept that aggregate close to the midpoint of its target cone;
although M3 remained in the upper half of its annual range, its growth
nearly stalled last month, as bank funding needs dropped.
Bank credit
declined slightly in April, with net acquisitions of securities not quite
making up for the sizable drop in outstanding loans.
Overall net borrowing by nonfinancial sectors in April likely was in
line with the subdued pace of the previous months, the pickup in corporate
bond and commercial paper issuance being offset by weaker bank C&I loans and
a slowdown in governmental borrowing.
The seasonal inflow of tax payments,
a lull in RTC activity, and foreign payments supporting Operation Desert
Storm permitted the Treasury temporarily to pay down debt; borrowing by
state and local governments appears to have been about unchanged in April.
Information on household borrowing is scant, but available data give no hint
of a major change in the recent sluggish trend.
Monetary Aggregates and Bank Credit
The slowdown in money growth last month was most pronounced for M1,
which contracted slightly.
Currency growth stalled as net demands from
III-3
MONETARY AGGREGATES
(based on seasonally adjusted data unless otherwise noted)
1990
1
1990
Q4
1991
1Q
1991
Feb
1991
Mar
Growth
1991
Q4 90Apr pe Apr 91pe
------------ Percent change at annual rates--------------------1.
2.
3.
4.2
3.8
1.7
Ml
M2
M3
3.4
2.1
1.0
5.8
3.6
4.3
14.1
8.7
10.8
9.3
7.6
3.0
-1
54
3
4½
1
4
Levels
-----------
Percent change at annual
rates------------
bil.
$
Mar 91
Selected components
4.
S.
6.
Ml-A
Currency
Demand deposits
4.6
4.9
5.7
15.1
5.6
-3
542.0
11.0
-0.6
11.1
-0.7
15.3
-2.5
16.7
14.5
7.5
4.3
0
-6
256.7
277.2
7.
Other checkable deposits
3.5
0.7
6.0
11.8
16.6
4
300.9
8.
M2 minus M12
3.7
1.7
2.9
6.9
7.0
4
2535.7
9.
10.
11.
12.
13.
14.
15.
16.
Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares
Commercial banks
3
Savings deposits plus MHDAs
Small time deposits
Thrift institutions
3
Savings deposits plus HMDAs
Small time deposits
17. M3 minus M2
4
Large time deposits
5
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares
Term RPs, NSA
Term Eurodollars, NSA
3.2
-20.3
11.4
9.9
7.5
12.4
-5.5
-2.2
-7.3
11.2
7.8
4.1
11.5
-8.1
-7.4
-8.6
-6.4
-3.5
-9.5
-3.5
-23.9
-12.9
20.2
-12.0
-12.1
30.4
-25.9
15.9
-8.4
-26.3
-37.2
19.4
8.3
7.5
9.0
-6.6
-0.6
-10.2
7.2
1.0
11.7
-32.4
49.9
-29.4
10.2
----- Average monthly change in
MEMORANDA:
-10.0
-6.8
14.1
11.5
15.1
8.0
-3.3
8.9
-10.5
18.0
10.8
17.0
4.8
-3.1
15.9
-14.4
20.0
-16.2
-8
796.0
9.6
21.6
-30.5
-10.9
-36.6
-12
-7
-29
511.1
399.6
111.4
84.9
-12.2
16.7
23.3
-42.5
-16.4
30
-16
-30
142.0
84.5
72.0
billions
of dollars----
6
-3.9
22
70.7
365.9
1202.8
594.7
608.1
894.8
345.0
549.9
24. Managed liabilities at commercial
banks (25+26)
25.
26.
27.
28.
Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions
7
Other
-0.1
-2.6
2.4
-2.4
-3.9
1.6
-1.5
6.3
-7.8
-2.2
9.5
-11.7
-0.7
0.3
-1.0
715.1
450.7
2.2
0.2
4.3
-2.8
-1.5
-6.2
-8.7
-3.0
5.3
-6.3
-2
0
30.0
234.4
0.3
-0.5
3.1
7.7
0.4
-13
33.8
264.4
29. U.S. government deposits at commercial
8
banks
1. Amounts shown are from fourth quarter to fourth quarter.
2. Nontransactions M2 is seasonally adjusted as a whole.
3. Commercial bank savings deposits excluding MMDAs grew during March and April at rates of 15.3
percent and 16 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew
during March and April at rates of 14.1 percent and 20 percent, respectively.
4. The non-M2 component of M3 is seasonally adjusted as a whole.
5. Net of large denomination time deposits held by money market mutual funds and thrift institutions.
6. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis.
7. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the
Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated.
8. Consists of Treasury demand deposits and note balances at commercial banks.
pe - preliminary estimate
III-4
abroad evidently reversed with the unwinding of the Persian Gulf conflict.
Demand deposits declined, and growth in other checkable deposits dropped
from the double-digit rates of the preceding two months to just a 4 percent
pace, a weakness that coincided with the recession-induced falloff in
nonwithheld tax payments.
Extra caution is appropriate in analyzing
movements in transactions accounts at this time of year, however, because
the frequent changes in federal tax law have altered the size and timing of
April tax payments and refunds and made it difficult to identify the
seasonal norms in monetary behavior.
The weakness in M1 showed through to M2 and was augmented by a sharp
deceleration in money market mutual fund shares.
In the first quarter,
money funds were a major source of strength in the broader aggregate as
their average yield lagged behind rapidly declining short-term market rates.
But with short rates little changed for most of April, money funds proved
less attractive to investors who wanted to remain in short-dated
instruments.
Further, with the continued steepening of the yield curve
(chart), longer-term market instruments drew more attention.
Stock and bond
mutual funds posted brisk inflows in March, and informal reports from fund
managers point toward an even stronger April.
These funds also may have
grown at the expense of small time deposits, as depositors were faced with
rolling over their maturing CDs at substantially reduced interest rates.
Additionally, the narrowing rate advantage of retail certificates of deposit
over more liquid savings deposits and MMDAs took its toll on small time
deposits, which shrank at a 9 percent annual rate in April (chart); savings
deposits and MMDAs continued to increase rapidly last month.
With the lull
III-5
in
RTC activities, thrifts witnessed their first monthly net inflow of core
deposits since mid-1988.
Interest Rate Spreads for Selected M2 Instruments
Basis Poli.is
- 250
Monthly
6-Month Retail CD Less MMDA
20
-
SI
/
150
-
50
/
Sj
\
I
\
/
+I
\
\
;
+
<0
Il
\
\,
50
3-Year Treasury Note Less Money Market Mutual Fund
00oo
1989
1990
1991
M3 also decelerated in April, and its non-M2 component continued to run
off.
Large time deposits declined last month, as--after an initial
explosion in response to the elimination of reserve requirements on
nonpersonal time deposits--the growth of large time deposits issued by U.S.
branches and agencies of foreign banks ("Yankee CDs") tapered off.
This
slowing in issuance apparently related to window dressing at quarter-end,
marking only a pause in the continuing substitution for other liabilities.
The latest weekly data reveal renewed strength in Yankee CDs.
III-6
Preliminary data suggest that bank credit was off a bit in April, in
contrast to the 6-1/2 percent pace of expansion of the preceding two months.
In light of sluggish loan demand and concerns about credit quality, banks
continued to funnel funds into the U.S. government securities category,
which includes mortgage-backed securities.
Heightened purchases of
securities are typical around business-cycle troughs, as deposit inflows
revive before loan demand (chart).
While the shifting composition of asset
flows may be reminiscent of previous business-cycle troughs, in this episode
However, financial innovation may have
banks began to shift in mid-1989.
robbed such comparisons of some of their meaning.
In the current business
Share of U.S. Government Holdings in Total Flow of Bank Credit *
P
PT
T
T
P
Monthly
P
--
fix-
---1973
1976
1979
1982
*Ratio of six-month change Inholdings of US government securities
to six-month change Inbank credit
1985
1988
5
III-7
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)
1989:Dec.
to
1990:Dec.
--
1990
Q4
----------- -----------1.
2.
Total loans and securities
at banks
Securities
Feb.
Mar.
Apr.p
Commercial Bank Credit ---------------------
2.3
4.0
6.3
6.8
8.6
.5
12.5
7.4
25.7
9
3.6
15.0
10.3
34.8
8
-7.4
5.9
.0
2.0
-12
177.6
4.3
2.9
1.5
6.0
1.1
-5
2102.0
-9
646.0
U.S. government securities
13.9
4.
Other securities
-3.1
Total loans
Q1
5.3
3.
5.
Levels
bil.$
Mar.
1991
-1
2750.9
648.9
.
471.4
6.
Business loans
1.9
3.1
-. 7
.4
3.5
7.
Real estate loans
9.5
6.1
3.4
6.6
3.6
8.
Consumer loans
1.3
.6
-2.6
5.8
-4.8
-3
375.5
9.
Security loans
4.1
-7.8
-16.8
2.8
-122.5
-22
38.9
.0.
Other loans
-1.8
-4.6
11.6
21.0
20.0
-18
196.1
3
846.3
Short- and Intermediate-Term Business Credit ---------11.
Business loans net of bankers
acceptances
2
12.
Loans at foreign branches
13.
Sum of lines 11 & 12
14.
Commercial paper issued by
nonfinancial firms
15.
Sum of lines 13 & 14
16.
Bankers acceptances:
related '
17.
1.9
3.2
1.9
4.0
19.3
37.0
-13.7
-9.2
2.5
4.4
1.3
12.2
-3.2
-5.1
-15,1
4.2
3.0
-. 9
-1.8
2.2
17.8
-24.3
-7.3
-69.5
-9
-42
3.4
-3.2
640.1
25.8
-10
665.9
10
148.6
-7
814.5
U.S. trade
-9.6
n.a.
30.9
Line 15 plus bankers acceptances:
U.S. trade related
3.6
3.5
-1.8
-2.0
-. 6
n.a.
845.4
18.
Finance company loans to business 3
13.1
12.0
4.5
3.3
2.0
n.a.
294.3
19.
Total short- and intermediateterm business credit (sum of
lines 17 & 18)
5.9
5.6
-.2
-.6
.0
n.a.
1139.7
1. Average of Wednesdays.
2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
3. Based on average of data for current and preceding ends of month.
4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic
shipment and storage of goods.
p--preliminary.
i.a.--not available
III-8
cycle, the ability of banks to hold mortgage assets in the more liquid form
of mortgage-backed securities could have magnified the swing from loans to
securities while cushioning fluctuations in the flow of funds to the housing
sector.
Additionally, during the ongoing restructuring of the thrift
industry, banks have been acquiring the deposits of resolved thrifts but not
their assets; in the short run, government securities may have provided a
natural repository for those funds.
Real estate loans at banks grew at a 3 percent annual rate in April,
about the same pace as in March.
Consumer loans reported on commercial bank
balance sheets declined again in April, but they would have increased a bit,
absent securitization.
Business loans dropped at a substantial 9 percent
rate for the month; as the most recent survey of bank loan officers
indicated only a modest further tightening of lending standards over the
past three months,
this likely reflected weak loan demand.
Business
loans at both large and small domestic banks registered double-digit rates
of decline.
Growth at foreign-related banks slowed sharply, partly because
transfers of loans from offshore branches (which had boosted growth in both
February and March) stopped and partly because of a pullback by Japanese
banks, which likely owed to the implementation of risk-based capital
standards on March 31, the end of the Japanese fiscal year.
Pressures on the capital of domestic banks appear to have eased.
The
climate for bank issuance improved substantially over the past few months,
and a number of institutions took advantage by issuing equity or
subordinated debt.
Thus far in 1991, commercial banks have taken pains to
1. Further details on the senior loan officer opinion survey are
available in the Greenbook supplement.
III-9
guard their profit margins, keeping the prime rate high relative to the cost
of funds.
At 300 basis points above the federal funds rate for much of
March and all of April, the 9-percent prime was in a region often associated
with reductions--at least in the post-198 2 experience.
However, a longer
perspective shows that this spread typically widens in an economic downturn
(chart), perhaps reflecting heightened risk, banks' endeavors to protect
profits, and the sluggish adjustment to generally declining short-term
rates.
May Day's 1/2-percentage-point cut in the prime made up some ground
relative to the cost of funds, but a 275-basis-point spread still suggests
that banks are stressing margins and risk avoidance over volume and market
share.
Spread Between Prime and Federal Funds Rates
Percentage points
P T
PT
T
PT P
T
Monthly
P
6
4
0
11
-I2
J
1959
lII IIW IL
1965
JWLL
1971
NOTE: Most recent observation is the average to date for May.
1977
ILJ
983
L
LrLL
"
1989
III-10
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted,billions of dollars)
-1990Q4
------------- 1991-----------Q1p
Feb p
Marp
Apr
1988
1989
1990
Corporate securities - total <1>
Public offerings in U.S.
Stocks--total <2>
Nonfinancial
Utility
Industrial
Financial
22.41
20.39
3.54
1.15
0.24
0.91
2.39
19.86
17.79
2.69
1.08
0.29
0.79
1.60
19.80
17.66
1.95
1.03
0.35
0.68
0.92
22.09
20.66
1.33
0.56
0.36
0.20
0.77
25.74
23.71
2.22
1.26
0.47
0.79
0.93
28.63
25.80
1.80
1.06
0.34
0.73
0.74
31.03
28.95
3.95
2.17
0.60
1.57
1.69
27.83
24.31
5.31
3.72
0.52
3.20
1.59
Bonds
Nonfinancial
Utility
Industrial
Financial
By quality <3>
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity-based bonds <4>
Mortgage-backed bonds
Other asset-backed
Variable-rate notes
16.85
6.19
1.79
4.41
10.65
15.11
6.30
1.78
4.52
8.80
15.71
5.59
1.92
3.67
10.11
19.33
7.66
2.72
4.94
11.67
21.49
7.99
2.15
5.84
13.50
24.00
10.00
2.45
7.55
14.00
25.00
8.10
2.50
5.60
16.90
19.00
11.20
3.50
7.70
7.80
2.77
5.50
2.56
0.05
3.17
5.82
2.39
0.05
3.39
6.39
0.15
0.04
4.71
0.11
0.01
4.46
10.89
0.41
0.01
5.30
12.42
0.31
0.00
3.18
13.00
0.55
0.03
0.28
4.72
1.26
1.19
0.52
1.68
2.02
1.03
0.38
2.41
3.35
0.82
0.26
2.27
4.62
1.13
0.77
1.97
3.77
0.76
0.39
1.40
4.57
0.65
1.56
3.00
5.24
1.61
0.56
2.70
1.00
0.18
1.93
0.73
1.20
1.90
0.48
1.43
1.92
0.46
1.46
1.42
0.17
1.25
1.87
1.03
0.83
2.80
1.50
1.30
2.00
1.30
0.70
2.50
0.80
1.70
0.09
0.08
0.02
0.16
0.12
0.04
0.22
0.10
0.12
0.02
0.02
0.01
0.17
0.05
0.11
0.03
0.01
0.03
0.08
0.08
0.00
1.02
0.92
0.10
Bonds sold abroad - total
Nonfinancial
Financial
Stocks sold abroad - total
Nonfinancial
Financial
7.62
1. Securities issued in the private placement market are not included.
proceeds rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that
restructurings. Such swaps totaled $20.4 billion in 1989.
3. Bonds categorized according to Moody's bond ratings, or to Standard
by Moody's. Excludes mortgage-backed and asset-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants that
to purchase equity in the future.
p--preliminary.
3.50
9.50
2.3C
0.01
Total reflects gross
have occurred in
and Poor's if unrated
entitle the holder
III-11
Nonfinancial Business Finance
Despite the drop in bank C&I loans, total borrowing by nonfinancial
businesses may have picked up a bit during the intermeeting period.
Outstanding commercial paper of nonfinancial firms increased appreciably,
and public offerings of corporate bonds surpassed March's rapid pace.
The
continued heavy bond issuance owed in part to the further narrowing of
corporate bond spreads, which in turn attested to lessened investor concerns
about credit quality.
The strength in bond issuance also reached down to the below-investment
grade category, with RJR Nabisco and four other firms raising funds in the
junk bond market in April.
Three of the five bonds were convertible, their
attractiveness thus hinging in part on bullish stock market sentiment.
From
the issuers' perspective, the response was encouraging; for example, RJR
Nabisco was able to double their offering to $1.5 billion.
well the previous week:
(RJR had done
Its first public offering of common stock since its
1989 leveraged buyout raised $1.3 billion.
The combined proceeds will be
used to pay down part of the high-yield debt issued in the original LBO.)
Since January, junk bond spreads have contracted by about one-third,
placing one measure of return about 800 basis points above the ten-year
Treasury yield (chart).
Over that same period, prices of smaller
capitalization stocks, such as those reflected in the NASDAQ index, rose
relative to prices of larger capitalization stocks.
Evidently, the
III-12
prospects of smaller and more risky firms can be read either in relative
equity performance or the junk bond spread. 2
There remains a large amount of risk to be compensated for in this
economic downturn:
In the first quarter of 1991, thirty-two companies
Rate Spread and Relative Stock Price Indexes
Ratio
Percentage points
2.5 -
Daily 4/3/91
Thru 5/7/91
Weekly
2.4
14
'
High-yield bond less
10-year Treasury note*
f
/
2.3 -
-- 12
/
1
2.1
2.1 9
1
2
1.9
Ratio of NASDAQ to NYSE
'.
J ,
I
Aug
lI
Sep
l
I
I
Oct
II U
Nov
IIt.I l l
Dec
Jan
I
8
I
I L I
Feb
Mar
L
UI
Apr
l
*MenflrLynch 175 high-yield compoaite tI 10-year T-note.
2. A recently published study established this relationship more
precisely: From 1977 to 1989, the correlation between price movements of
low grade bonds and stocks was about one-half. To the extent that junk debt
is close to a residual claim on the value of a firm (because it is low on
the list of creditors), then junk spreads and equity prices (the value of a
truly residual claim) would be correlated. Additionally, junk debt with
convertible features becomes more valuable (the yield falls) when equity
prices rise.
7
III-13
defaulted on more than $8 billion of low-grade debt, compared to nineteen
companies and $5.7 billion in the same quarter last year.
Moreover,
corporate bond downgradings far exceeded upgradings in the first quarter,
278 to 39, largely reflecting the declining quality of low-grade issues.
Including RJR Nabisco, LBO alumni accounted for almost half of the
nonfinancial equity issuance in April, which was an exceptionally strong
$3.7 billion, the highest level of offerings since May 1986.
Major stock
price indexes reached record highs in the week of April 17 before retreating
somewhat.
Financial Firms
Prices of financial stocks outperformed the broader market this
intermeeting period, with money center and major regional bank stock indexes
gaining as much as 11 percent on the strength of not-as-bad-as-feared firstquarter earnings reports.
Securities firms, benefiting from the capital
market's ebullience, also reported enhanced earnings that were rewarded by
substantial gains in their equity prices.
Life insurance stock price indexes were little touched by the seizure
of units of the First Executive Corporation by the state insurance
commissioners of California and New York.
That insurer's problems, mostly
stemming from large holdings of distressed junk bonds, were well publicized
and the commissioners' actions were widely anticipated.
Both insurance
units have been placed in conservatorship and, although moratoriums were
declared on policy loans and surrenders, death benefits and annuity payments
likely will continue.
State guaranty associations are available to provide
partial protection for outstanding life policies and annuities, while
several insurance companies, in an effort to diffuse adverse publicity, also
III-14
may contribute beyond their allotments in the state funds.
The ultimate
disposition of the insurance companies is unclear, although some hope
remains that a foreign insurer may acquire them.3
However, nearly $2 billion of taxable municipal bonds are at risk from
these developments, as the proceeds of those issues had funded the purchase
of First Executive GICs.
With the insurer now enjoined from making interest
payments on the GICs, three of the outstanding issues have defaulted and
others are expected to follow.
Compounding bondholders' problems, many of
the GICs may not be covered by state guaranty funds.
One small issue is
insured by MBIA, which stands to lose more than $17 million.
Municipal Securities
Despite the general decline in interest rates, gross long-term
offerings of tax-exempt securities decreased slightly in April, owing to a
slowdown in both new capital issues and refunding volume.
Short-term
issuance picked up a bit in April, boosted late in the month by a $1.25
billion offering by New York City.
Just before the offering, Standard and
Poor's lowered the credit rating on the issue, citing concern about a
looming $3.6 billion deficit compounded by uncertainty over aid from New
York State.
In response to this deteriorating outlook, yields on the city's
short-term notes have increased nearly 300 basis points in recent weeks.
Such financial stresses are not unique to New York.
Downgradings of
tax-exempt units outnumbered upgradings by a 3-to-1 margin in the first
3. More recently, there are growing indications that the insurance
commissioner of California may take action against First Capital Holdings
Corporation, a Los Angeles-based insurer that is roughly half the size of
First Executive and similarly burdened with a depressed junk bond portfolio.
The commissioner is pressuring American Express, which holds a 28 percent
stake in the firm, to provide an infusion of capital.
III-15
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)
1991
1989
1990
1990
Year
Year
Q4
Q1
11.90
13.10
12.33
Total tax-exempt 11.65
12.85
Long-term
Refundings
New capital
Short-term
Total taxable
10.03
1.45
8.60
2.82
.25
Total offerings 1
9.47
2.47
7.01
2.17
.25
Feb.
Mar.
Apr?
11.39
13.77
12.21
12.14
11.96
11.25
13.44
12.16
12.00
10.24
1.01
9.23
1.72
.37
9.81
.77
9.04
1.44
.14
11.33
.93
10.40
2.11
.33
10.86
1.12
9.74
1.30
.05
10.07
.68
9.39
1.93
.14
p--preliminary.
1. Includes issues for public and private purposes; also includes
taxable issues.
2. Includes all refunding bonds, not just advance refundings.
quarter of 1991, with housing-related issues hit hardest.
Lowered ratings
of financial institutions providing credit enhancements have hastened the
process.
Recession-induced declines in tax revenues, as well as escalating
Medicaid costs, apparently are at the root of the financial problems of a
growing number of states and have led Standard and Poor's to place a record
seven states on its CreditWatch list.
Treasury and Sponsored Agency Financing
The staff projects a federal deficit of about $29 billion in the second
quarter, reflecting seasonal tax inflows that result in light financing
needs by recent experience.
Marketable borrowing is expected to raise $39
billion, with bills paying down roughly $12 billion and coupons raising $51
billion.
From February through mid-April, the Treasury cut back sharply on
the gross sizes of its bill and short-term coupon auctions in order to
offset the effects on its cash balance of the earlier-than-anticipated
III-16
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)
1991
Q1
Q2P
Apr.e
May p
June p
Treasury financing
Total surplus/deficit (-)
-65.2
-29.0
31.1
-58.3
-1.7
56.5
41.7
-10.6
28.4
23.9
52.9
39.2
-11.3
28.2
22.3
5.9
47.0
3.5
-11.7
50.9
2.5
-29.1
17.7
.7
-5.0
33.2
.2
22.3
0.0
1.6
.2
-6.0
-16.3
35.4
-25.1
38.0
Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments (-)
Bills
Coupons
Nonmarketable 2
Decrease in the cash
balance
Memo: Cash balance
at end of period
32.0
38.0
48.3
13.0
8.5
-6.7
-4.2
-5.4
3
Other
2.9
Federally sponsored credit
agencies, .net cash
borrowing
3.2
FHLBs
FHLMC
FNMA
-5.6
.5
1.5
Farm Credit Banks
-1.7
SLMA
1.6
REFCORP
6.9
--
-
--
-
--
-
1. Data reported on a not seasonally adjusted, payment basis.
2. Includes proceeds from securities issued by federal agencies under special
financing authorities and the face value of zero-coupon bonds issued to REFCORP
(the discount from face value is offset in other means of finance).
3. Includes checks issued less checks paid, accrued items and other
transactions.
4. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
p--projected.
e--estimated.
Note: Details may not add to totals due to rounding.
III-17
Desert Storm receipts and the lull in RTC activities.
4
Over this period,
the weekly bill auctions were cut from $20 billion to $14.4 billion, while
short-term coupon auctions were scaled back by $500 million.
two weeks, however, the Treasury has reversed course:
In the last
The weekly bill
auction sizes have been boosted to $17.2 billion, while short-term coupon
auctions have been increased by $500 million.
Moreover, the May midquarter
refunding includes a record $37 billion of securities.
The staff
anticipates further increases in bill and coupon auction sizes, with weekly
bill auctions projected to reach $21 billion by the end of the quarter.
Congressionally mandated reports on the safety and soundness of the
GSEs were released by the Treasury and the Congressional Budget Office
on April 30th.
(CBO)
The General Accounting Office (GAO) has a similar report due
out on May 15th, and a Senate committee is scheduled to hear testimony on
all three reports on May 10th.
The CBO report discusses specific regulatory
options, including increasing the securitization fees charged by Fannie and
Freddie.
The GAO report will do the same and is expected to recommend the
formation of a so-called "super-regulator" to oversee all of the GSEs.
The
super-regulator would be given the authority to set capital standards that
would involve both "stress-test" simulations and minimum leverage ratios.
Treasury's report stressed the need for consistent regulation across
GSEs, which would include the authority to use private market methods to
evaluate portfolio risks, and regulators with sufficient stature to avoid
capture by the GSEs.
The report did not reaffirm the recommendation, made
4. The RTC resolved only one institution in April, at a cost of $1.8
billion, but has announced plans for 99 thrift resolutions in the second
quarter. The delay in obtaining funding, however, and the slow pace of
resolutions to date cast some doubt on the prospects for fulfilling these
plans.
III-18
in last year's report, that GSEs be required to obtain a triple-A credit
rating or risk the severing of all government ties.
Instead, the
Treasury report recommended (1) a separate "arms length" bureau of HUD be
created for financial oversight of Fannie and Freddie;
(2) Treasury be given
additional financial oversight authority for Sallie Mae; and (3) regulators
should have the authority to promulgate risk-based capital standards.
In
addition to its report, Treasury is required to propose specific
legislation, which is expected to be unveiled at the Senate hearing in May.
Mortgage Markets
Real estate loan growth at commercial banks ran at a 3 percent annual
rate in April, about at its first-quarter pace, while funding data suggest
that the runoff in mortgage holdings at SAIF-insured thrift institutions
likely has continued.
Although these data indicate little pickup in
mortgage lending thus far in the current quarter, survey and anecdotal
evidence point to some strengthening in mortgage activity.
Respondents to
the most recent survey of bank loan officers reported an appreciable
increase in mortgage loan demand over the past three months, while
prepayment rates on securitized FHA and VA loans rose markedly in April.
The average contract rate on conventional FRMs declined only a few
basis points over the intermeeting period.
With the continuing steepening
5. Treasury did, however, hire Standard & Poor's to assess the risk to
the government posed by the GSEs, and the report contains an appendix
describing the results of S&P's credit ratings of the GSEs. SLMA and the
FHLBanks have been rated at the high end of investment grade, FHLMC and FNMA
have been rated investment grade, and the Farm Credit System has been rated
below investment grade.
6. The FHA reported that refinanced loans accounted for 8 percent of the
number of FHA-insured applications endorsed for existing homes in March, up
from an average of about 5 percent in the fourth quarter of 1990. In
contrast, the refinancing wave of 1986-87 boosted the refinancing share of
both FHA-insured loans to more than 35 percent.
III-19
of the yield curve, the FRM-ARM initial rate spread has widened to around
215 basis points.
Nonetheless, borrowers continue to show an aversion to
ARMs, which accounted for only 19 percent of loans closed during early
March.
In the secondary mortgage market, issuance of agency pass-throughs
increased in March to $18.5 billion (table).
Spreads between yields on
agency pass-throughs and comparable Treasuries remain narrow nevertheless,
owing in part to heavy CMO volume boosting the demand for pass-through
collateral.
MORTGAGE-BACKED SECURITY ISSUANCE
(Monthly averages, billions of dollars, NSA unless noted)
Federally related
pass-through securities
Fixed- ARMTotal
backed
Rate
(SA)
Total
Multiclass securities
FHLMC
Private FNMA
issues REMICs REMICS
Agency
strips
1989
1990 r
16.5
19.7
14.1
17.3
2.6
2.3
8.1
11.3
1.4
2.4
3.1
5.0
3.2
3.4
.3
.5
1990-Q1
Q2
Q3
Q4 r
21.5
19.9
18.2
19.0
18.5
16.3
17.6
16.6
1.4
2.2
1.6
4.1
11.3
11.1
12.1
10.9
1.6
2.9
2.7
2.3
5.0
4.7
6.6
3.9
3.8
3.0
2.3
4.5
.9
.4
.6
.3
1991-Q1 p
16.8
14.1
1.5
8.4
1.5
4.0
2.8
.1
1990-Oct.
Nov.
Dec.
r
18.4
18.7
19.9
16.7
17.8
15.5
2.5
2.6
7.1
14.2
8.4
10.2
2.2
2.3
2.3
5.6
3.8
2.4
5.7
2.1
5.5
.6
.2
.0
1991-Jan.
Feb.
Mar.
r
r
p
15.8
16.1
18.5
13.1
14.0
15.2
0.7
1.1
2.8
4.9
8.3
11.7
1.5
1.4
1.7
2.4
3.2
6.3
1.2
3.6
3.7
.2
.2
.0
1. Excludes pass-through securities with senior/subordinated structures.
r--revised p--preliminary n.a.--not available.
Revised May 6, 1991
III-20
CONSUMER CREDIT
(Seasonally adjusted)
_
Memo:
Percent change
(at annual rate)
1990
1988
Total installment
19891 1990
1991
1991
Q3
04
8.8
5.9
2.3
2.8
-.2
10.2
9.2
5.2
7.6
.5
Outstandings
(billions of
dollars)
1991
Febr
01
__
-. 3
-1.8
Mar. p
Mar.
731.8
-1.5
Installment,
excluding auto
Selected types
Auto
Revolving
All other
Memorandum:
Total
1.3
15.2
7.4
4.5
-2.1
10.6
.6
7.2
5.5
1.7
6.9
13.7
-4.4 -1.5
1.9
13.3
2.3 -. 7
.8
-.7
.9
-6.0
8.5
-6.4
2.5
3.6
451.5
-4.7
-9.7
17.6
-9.9
280.3
224.8
226.7
-4.6
789.0
10.8
-5.5
-2.7
-.6
1. Growth rates are adjusted for discontinuity in data between December 1988 and
January 1989.
2. Installment plus noninstallment.
r--revised. p--preliminary.
Note: Details may not add to totals due to rounding.
CONSUMER INTEREST RATES
(Annual percentage rate)
At commercial banks
New cars (48 mo.)
Personal (24 mo.)
Credit cards
At auto finance cos.
New cars
Used cars
1989
1990
Nov.
12.07
15.44
18.02
11.81
15.46
18.17
11.72
15.69
12.62
16.18
12.54
15.99
12.74
16.07
1990
Dec.
Jan.
1991
Feb.
Mar.
11.60
15.42
18.28
18.23
12.86
16.04
12.99
15.70
13.16
15.90
13.14
15.82
1. Average of "most common" rate charged for specified type and maturity during the
first week of the mid-month of each quarter.
2. Average rate for all loans of each type made during the month regardless of
maturity.
III-21
Consumer Credit
In March, consumer installment credit contracted for the fourth
consecutive month, resulting in a 1-3/4 percent annual rate of decline for
the first quarter.
After slowing precipitously in the fourth quarter of
1990, revolving credit (which consists mainly of credit card receivables and
unsecured lines of credit) picked up briskly in February and March.
Earlier
weakness in revolving credit appears to be related to accelerated repayments
of outstanding debt.
A significant fall off in these repayments could
account for some of the rebound in revolving credit, although recent
contacts with retailers and banks paint a mixed picture concerning the
pattern of repayments.
Auto loans declined at a 9-3/4 percent rate in March and at a 6 percent
rate for the quarter as a whole, steepening the slide in auto credit that
began in the fall of 1989.
There is mixed evidence on apportioning the
first-quarter slowdown among weakened car sales, shifts toward leasing, and
tightened lending standards on the part of banks and auto finance companies.
Leasing evidently has become a bigger factor in the consumer sector as
8
With regard to
automakers recently have enhanced their attractiveness.
lending standards, little evidence is available for banks, but nonrate terms
at the auto finance companies do not appear to have tightened much this
year.
The average maturity on booked new-car loans has lengthened slightly
7. Since the last Greenbook, the consumer credit series have been
rebenchmarked, with revisions in some components carried back to 1988.
Revisions were relatively small on the whole, raising growth in total
installment credit about 1/2 percentage point for 1989 and reducing it
about 3/4 percentage point for 1990. The slowdown during 1990 now appears
more consistent with the varying pace of overall economic activity.
8. For example, in an effort to pare monthly payments, General Motors has
reduced the implicit financing rate and raised the residual value of the
vehicle for most leases.
III-22
since last summer, and loan-to-value ratios have moved a little higher since
the beginning of the year (chart).
On the other hand, some evidence
supports newspaper reports that the captives may have become less aggressive
in their loan pricing:
Average interest rates on loans at these companies
have risen almost a percentage point since September.
While the pinch of
rising delinquency rates last year may have led the auto finance companies
to lend more cautiously, delinquencies were no higher early this year than
they were in the fall of 1989, suggesting that loan rates rose on a riskadjusted basis.
III-23
Auto Loan Terms and Payment Experience
At Captive Auto Finance Companies
Maturities
1989
Months
1990
Interest Rates
1989
1991
Percent
1990
1991
Loan-to-Value-Ratio
1989
1990
Delinquency Rate
1989
Percent
1991
Percent
1990
INTERNATIONAL DEVELOPMENTS
INTERNATIONAL DEVELOPMENTS
U.S. Merchandise Trade
The U.S. merchandis
trade deficit narrowed to $5.3 billion in
February (on a seasonally adjusted, Census basis) from a revised deficit of
$7.2 billion in January.
The February figure was the smallest monthly
deficit registered since last June.
The narrowing reflected a fall in the
value of imports of 6-1/2 percent, with a drop in oil prices of nearly $4
per barrel accounting for more than half of the decline;
imports of
automotive products and industrial supplies also declined sharply.
In
addition, the value of nonagricultural exports dropped in February (largely
capital goods and automotive products to Canada), falling 3-1/2 percent from
the strong level recorded in January.
Data for March will be released on
May 17.
MONTHLY DATA
U.S. MERCHANDISE TRADE:
(Billions of dollars, seasonally adjusted, Customs basis)
Total
Exports
Ag. NonAg.
Total
Imports
Oil NonOil
(nsa)
Balance
1990-Jan
Feb
Mar
31.4
31.6
33.3
3.6
3.4
3.7
27.8
28.1
29.5
41.6
38.7
41.6
5.9
4.8
4.8
35.6
33.8
36.8
-10.2
-7.1
-8.4
Apr
May
Jun
32.1
32.8
34.2
3.3
3.3
3.6
28.8
29.5
30.7
39.4
40.5
39.6
3.9
4.4
3.9
35.5
36.2
35.7
-7.3
-7.8
-5.3
Jul
Aug
Sep
32.1
32.5
32.0
3.1
3.4
3.0
29.0
29.2
29.0
41.2
42.3
41.3
4.1
5.3
6,2
37.2
37.0
35.1
-9.1
-9.7
-9.3
Oct
Nov
Dec
35.0
34.2
33.3
3.0
3.3
2.9
32.0
30.9
30.4
46.0
43.1
39.6
7.0
6.4
5.4
39.0
36.7
34.2
-11.0
-8.9
-6.3
34.3
33.5
3.1
3.3
31.3
30.2
41.5
38.8
5.3
3.8
36.1
35.0
-7.2
-5.3
1991-Jan-r
Feb-p
p--preliminary.
r--revised.
Source:
U.S. Department of Commerce, Bureau of the Census.
IV-1
IV-2
QUARTERLY DATA
U.S MERCHANDISE TRADE:
Billions of dollars, BOP-basis
Years
1989 1990
1990 (saar)
02
03
04
1991
01-e
Memo: Percent Change
1990:04 from
Prey. Otr. Year Ago
Exports
360
389
386
385
402
403
4.5
9.5
Imports
Oil
Non-oil
475
51
424
498
62
436
479
49
431
504
63
441
517
75
442
487
56
431
2.7
19.6
0.3
7.3
40.4
3.2
Balance
Ex Oil
-115
-64
-109
-47
-93
-44
-119
-57
-115
-41
-85
-28
e--Estimate based on data for the first two months of the quarter.
Source: U.S. Department of Commerce, Bureau of Economic Analysis,
Balance-of-Payments Accounts.
On a balance of payments basis, the deficit for January-February
combined was significantly smaller than in the fourth quarter of last year,
reflecting a substantial decline in oil imports and a smaller decline in
imports of non-oil products.
The drop in oil imports was accounted for by
lower prices, as the price of imported oil fell almost $7 per barrel between
the fourth quarter and January-February.
The price of oil imports as
published by the BLS (shown in a table at the end of the text) indicates a
drop of about another $1 per barrel in March.
Most recently, spot prices of
West Texas Intermediate crude oil have edged up a bit, fluctuating between
OIL IMPORTS
(BOP basis, value at annual rates)
03
Value (Bil. $) 62.57
Price ($/BBL)
19.67
Quantity (mb/d) 8.65
1990
Q4
74.84
28.60
7.16
0l-e
54.75
21.46
7.15
Oct
Nov
Months
Dec
Jan-r
Feb-p
83.92
29.27
7.71
77.12
29.60
7.24
63.47
26.30
6.49
64.00
23.56
7.30
45.50
19.35
7.00
p--preliminary.
r--revised.
e--Estimate based on data for the first two months of the quarter.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
IV-3
$20 and $22 per barrel in April and early May.
The quantity of oil imported
during January-February did not differ significantly from that imported
during the fourth quarter of last year, as continued stock drawdowns
(especially in January) and weak economic activity restrained imports.
Much of the 3 percent drop in imports of non-oil products between the
fourth quarter and January-February was in consumer goods, automotive
products, and capital goods, and reflected weakening U.S. demand.
Exports
in January-February rose slightly from the strong level registered in the
fourth quarter, as increases in the value of exported consumer goods, fuels,
chemicals, computers, and agricultural products were largely offset by
declines in commercial aircraft and automotive products to Canada.
The
strength of exports in the fourth quarter was largely stimulated by the
cumulative gains in price competitiveness associated with the significant
decline in the dollar in 1989 and 1990.
Prices of Non-oil Imports and Exports
The fixed-weight price index for non-oil imports, reported in the GNP
accounts, rose 3.1 percent at an annual rate during the first quarter, a
slower rate of increase than recorded during the fourth quarter.
The
deceleration in prices was evident in most major end-use groupings, and
likely reflects in part the shift in the dollar from depreciation in the
fourth quarter to appreciation in the first quarter.
Prices of exports rose less rapidly, increasing only 0.7 percent at an
annual rate during the first quarter.
Prices of agricultural exports moved
up 7.8 percent at an annual rate, led by increases in the prices of exported
fruits, feedgrains, and rice.
In contrast, prices of nonagricultural
exports posted a decline, as price increases for exported capital goods,
consumer goods, and automotive products were more than offset by a decline
in the price of exported industrial supplies.
IV-4
MAJOR TRADE CATEGORIES
(Billions of dollars, BOP basis, SAAR)
Year
1990
1990
01
02
Q3
04
1991
Ql-e
$ Change
04-04 04-03
Total U.S. Exports
389.3
384.4
386.3
384.6
401.8
403
34.9
17.2
Agricultural Export
Nonagric. Exports
40.4
348.9
43.8
340.6
41.3
345.1
38.9
345.7
37.5
364.3
39
364
-3.4
38.3
-1.4
18.6
Industrial Supplies
Gold
Fuels
Other Ind. Supp.
97.4
3.8
13.9
79.7
94.0
2.6
12.6
78.7
92.6
3.6
11.0
77.9
95,3
3.7
13.7
77.9
107.6
5.1
18.1
84.4
108
5
19
85
18.6
2.9
5.9
9.7
12.3
1.4
4.4
6.5
Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery
153.9
32.3
26.0
95.7
153.0
32.3
26.5
94.3
154.5
34.5
24.9
95.1
152.4
31.4
26.2
94.7
155.8
31.0
26.2
98.6
153
28
27
97
15.1
5.0
1.4
8.6
3.4
-0.4
-0.1
3.9
Automotive Product
To Canada
To Other
36.6
21.9
14.7
34.9
21.0
13.9
38.7
23.6
15.1
36.5
22.1
14.4
36.3
20.9
15.4
35
20
14
0.7
-1.8
2.5
-0.1
-1.2
1.0
Consumer Goods
Other Nonagric.
43.0
18.1
40.6
18.0
41.9
17.4
43.6
17.9
45.7
18.9
46
22
7.8
-3.8
2.1
1.0
Total U.S. Imports
498.0
491.6
479.2
503.8
517.3
487
35.3
13.5
Oil Imports
Non-Oil Imports
62.1
435.9
62.4
429.2
48.7
430.6
62.6
441.2
74.8
442.4
56
431
21.5
13.8
12.3
1.3
82.3
2.5
3.4
76.5
80.3
1.7
3.1
75.5
82.1
2.1
3.1
76.9
83.3
2.8
3.4
77.1
83.7
3.4
3.9
76.4
82
4
4
75
0.5
-0.9
0.2
1.3
0.5
0.6
0.5
-0.7
Capital Goods
Aircraft & Parts
Computers & Parts
Other Machinery
117.2
10.6
23.0
83.6
115.6
9.2
23.1
83.3
115.6
10.5
22.8
82.3
116.7
9.9
23.1
83.7
121.1
12.9
23.2
84.9
120
11
24
85
4.5
2.3
-0.2
2.5
4.3
3.0
0.1
1.2
Automotive Product
From Canada
From Other
86.1
29.6
56.5
83.7
27.4
56.3
84.6
30.5
54.1
90.5
33.1
57.4
.85.7
27.4
58.3
84
23
61
2.7
-2.2
4.9
-4.8
-5.7
0.9
106.2
26.6
17.3
104.8
27.9
17.0
104.4
26.9
16.9
107.3
25.6
17.7
108.4
26.2
17.3
103
26
16
2.0
1.2
2.8
1.1
0.6
-0.4
Industrial Supplies
Gold
Other Fuels
Other Ind. Supp.
Consumer Goods
Foods
All Other
e--Estimate based on data for the first two months of the quarter.
Source: U.S. Department of Commerce, Bureau of Economic Analysis.
IV-5
IMPORT AND EXPORT PRICE MEASURES
(percent change from previous period, annual rate)
Year
1991-01
1990-01
Quarters
1990
1991
03
04
01 I
(Quarterly Average, AR)
Months
1991
Feb
Mar
(Monthly Rates)
--------------------- BLS PricesImports. Total
Foods, Feeds, Bev.
Industrial Supplies
Ind Supp Ex Oil*
Capital Goods
Automotive Products
Consumer Goods
3.3
3.7
2.8
0.4
4.8
3.6
2.7
10.2
7.4
31.7
-1.5
3.8
3.3
-0.3
24.9
5.2
77.1
2.7
8.2
10.3
4.5
-12.3
7.6
-41.0
-0.3
4.8
6.5
2.3
-2.0
-1.0
-7.4
-0.2
0.1
1.5
0.1
-0.4
1.0
-2.2
0.0
0.7
0.6
-0.5
7.0
3.0
134.1
1.8
307.2
6.3
-73.9
3.6
-18.7
0.3
-6.6
0.2
2,0
-3.9
1.8
3.1
2.7
3.6
1.7
-13.1
5.2
3.3
1.9
1.6
4.4
-16.5
15,9
2.1
3.5
3.7
0.6
8.5
-9.8
5.6
3.5
6.0
-0.1
0.6
-1.1
0.4
0.3
0.4
-0.1
1.0
-1.2
0.4
0.4
0.1
-3.3
2.7
-11.9
3.9
-14.2
7.9
6.9
-0.7
0.4
-0.2
0.4
-0.3
Memo:
Oil
Non-oil
Exports. Total
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
Memo:
Agricultural
Nonagricultural
--------- Prices in the GNP Accounts------------Fixed-Weight
Imports, Total
Oil
Non-oil
Exports, Total
Ag
Nonag
Deflators
Imports, Total
Oil
Non-oil
Exports, Total
Ag
Nonag
15.8
135.7
3.9
34.4
346.2
5.3
-19.5
-76.3
3.1
2.2
-1.4
2.9
0.8
-10.1
3.1
5.7
-11.8
9.5
0.7
7.8
-0.5
1.0
1.9
-0.6
11.3
135.2
2.1
345.0
0.6
-19.5
-76.3
-4.0
0.2
-1.4
0.6
-3.9
-10.1
-3.1
3.6
-11.8
5.6
-3.3
7.8
-4.3
*/ Months not for publication.
27.1
IV-6
U.S. International Financial Transactions
In the first two months of the year, a very large net capital inflow
through official transactions and private foreign purchases of Treasury
securities was only partially offset by outflows through banks and U.S.
purchases of foreign securities.
Indicators for March point to sizable
outflows through banks and a reduction in foreign official holdings;
however, it is unlikely that these outflows will be large enough to offset
the earlier inflows and the current account surplus anticipated for the
quarter.
As a result, we expect a negative statistical discrepancy in the
first quarter, reversing in part the large positive discrepancy of 1990.
Official reserves in the United States rose more than $9 billion in
February, adding to the $8 billion increase in January (line 4 of the
Summary table).
Almost $8 billion of the February rise is attributable to
increases by Italy, Spain, and the United Kingdom.
The increase in U.K.
reserves held in the United States coincided with an increase in its total
reserves following an ECU 2-3/4 billion bond offering.
The increase in
Spain's holdings in the United States reflected further expansion of that
country's total reserves, while the increase in Italy's holdings apparently
reflected a shifting of dollar assets to the United States from other
markets.
Partial data for March from the FRBNY indicate official reserves fell
$12-1/2 billion in the month.
More than $11 billion of this decline was in
holdings of Japan and Germany, reflecting both Desert Storm payments and
intervention sales of dollars.
OPEC countries also reduced their holdings
in the United States in March as they made cash contributions for Desert
Storm.
IV-7
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)
1989
1990
Year
Year
Q1
Q2
Q3
27.2
30.7
8.1
2.3
21.4
-1
0
10.9
2.0
-4.4
15.4
-28.4
-7.6
-9.4
-3.9
-7.5
-6.0
-0.8
-5.2
32.0
16.4
4.7
5.8
-0.1
6.0
1.7
0.4
-0.5
7.9
-13.7
-3.1
-3.4
-2.3
-5.0
-1.1
-0.5
0.4
-24,5
-31.0
-9.3
-11.7
-1.6
-8.5
-6.6
-0.6
-5.0
30.1
1.6
-1.0
4.4
0.1
-1.9
-2.7
3.8
5.4
8.3
31.4
-6.7
4.7
13.6
19.9
3.4
8.2
9.4
G-10 countries
-5.2
9.8
-6.2
-0.9
8.6
8.4
4.0
-2.3
2.4
OPEC
10.1
1.8
3.1
*
-1.4
0.1
-0.8
0.4
0.6
3.4
19.8
-3.7
5.6
6.4
11.4
0.2
10.1
6.5
0.1
29.3
-5.8
2.5
11.8
20.8
6.9
6.6
7.4
8.2
2.1
-0.9
2.2
1,8
-0.9
-3.6
1.6
2.0
-25.3
-2.2
-3.2
0.4
1.7
-1.1
-0.6
-36.4
-9.3
-4.8
25.7
5.5
1990
1990
Q4
Dec.
1991
Jan.
Feb
Private Capital
Banks
1.
Change in net foreign
positions of banking offices
in the U.S. (+
=
inflow)
Securities
Private securities
2.
transactions,
a)
net
1
foreign net purchases
(+) of U.S. corporate bonds
b)
foreign net purchases
c)
U.S. net purchases (-) of
2
(+) of U.S. corporate stocks
foreign securities
3.
Foreign net purchases (+) of U.S.
Treasury obligations
Official Capital
4.
Changes in foreign official
reserves assets in U.S.
(+ = increase)
a)
By area
All other countries
b)
By type
U.S. Treasury securities
3
Other
5.
Changes in U.S. official reserve
assets (+ = decrease)
-0.5
0.7
n.a.
n.a.
4
Other transactions (Quarterly data)
6.
U.S. direct investment (-) abroad
7.
8.
Foreign direct investment (+) in U.S.
5
Other capital flows (+ = inflow)
9.
U.S. current account balance
10.
-31.7
72.2
-19.3
-11.0
-1.2
-99.3
-22.3
-22.7
-26.5
73.0
22.4
28.9
-108.7
-26.8
-23.2
3.9
-110.0
22.4
-3.0
1.1
11.9
14.1
-8.6
Statistical discrepancy
7.2
2.2
1.9
-27.8
19.4
MEMO:
U.S. merchandise trade balance --
part
of line 9 (Balance of payments basis,
-114.9
seasonally adjusted)
1.
-29.8
-28.9
These data have not been adjusted to exclude commissions on securities transactions and,
exactly the data on U.S.
n.a.
therefore,
do not match
international transactions as published by the Department of Commerce.
2. Includes all U.S. bonds other than Treasury obligations.
3. Includes deposits in banks,
commercial paper,
acceptances,
borrowing under repurchase agreements,
and other securities.
4. Seasonally adjusted.
5.
Includes U.S.
In addition,
the Department of Commerce and revisions to the data in
Survey of Current Business.
*--Less than $50 million.
NOTE:
transactions by nonbanking concerns, and other banking and
includes amounts resulting from adjustments to the data made by
lines 1 through 5 since publication of the quarterly data in the
government assets other than official reserves,
official transactions not shown elsewhere.
Details may not add to total because of rounding.
it
IV-8
Private foreign purchases of Treasury securities remained strong in
February at $5-1/2 billion (line 3), including a $2 billion purchase by the
World Bank.
Purchases by Japanese residents remained near their January
level of $1-3/4 billion.
In contrast to their net purchases of Treasury
securities, private foreigners sold corporate and agency bonds in February
(line 2a), despite large increases in both domestic and Eurobond issuances
by U.S. corporations.
Foreigners made net purchases of U.S. stocks in
February for only the second month since October 1989.
While the net
purchases were modest at $1/2 billion, the volume of transactions in the
month rose considerably to a level 50 percent above the average level in
1990.
U.S. residents purchased on net $5 billion of foreign securities in
February (line 2c).
Over $3 billion of the outflow was in purchases of
foreign stocks; most of these purchases were of Japanese stocks.
Banks reported net outflows of $4-1/2 billion in February (line 1).
Increased claims on nonbank foreigners outweighed net interbank inflows.
On
a monthly average basis, U.S. banks' claims on own foreign offices decreased
by $5 billion in March (line 1 of the International Banking Table),
indicating a net inflow of capital.
Data for most of April point to a
partial rebound in these claims, leading to little change between February
and April.
On an end-of-month basis, which is used in the balance-of-payments
accounts, banks reported a $7 billion outflow vis-a-vis their own foreign
offices in March.
This outflow was more than accounted for by changes at
the U.S. offices of foreign-based banks.
end of March was unusual.
The pattern of bank flows at the
In the past banks generally have reduced net
INTERNATIONAL BANKING DATA
(Billions of dollars)
1.
2.
Net Claims of U.S. Banking
Offices (excluding IBFS) on Own
Foreign Offices and IBFS
(a) U.S.-chartered banks
(b) -Foreign-chartered banks
Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks
3. Eurodollar Holdings of
U.S. Nonbank Residents 1/
Mar.
June
-2,9
20.4
-23.3
-3.9
19.2
-23.1
24.0
144.8
1991
1990
1989
Sept.
Dec.
Mar.
June
-6.4
14.9
-21.3
-5.5
19.2
-24.7
-11.7
12,2
-23.9
-11.0
7.2
-18.2
26;0
21.6
20.7
21.8
131.5
130.3
123.5
110.6
Sept,
Dec.
Feb.
Mar.
-15.6
5.7
-21.3
-31.3
5.5
-36.9
-18.9
16.5
-35.4
-23.7
7.6
-31.3
-20.0
6.1
-26.0
22.2
24.0
24.7
25.7
26.0
25.3
106.5
109.1
115.9
114.6
115.9
114.5
1. Includes term and overnight Eurodollars held by money market mutual funds. Note: These data differ in coverage and
timing from the overall banking data incorporated in the international transactions accounts. Line 1 is an average of
daily data reported to the Federal Reserve by U.S. banking offices.
Line 2 is an average of daily data.
average of daily data for the overnight component and an average of Wednesday data for the term component.
*
Data through April 22,
Line 3 is an
Apr. */
IV-10
claims on own foreign offices toward the end of the first quarter, to fund
an increase in their balance sheets for reporting purposes, and then
increased claims in early April.
This year foreign-based banks reversed the
pattern, perhaps as a result of the application of new capital adequacy
requirements at the end of Japanese banks' fiscal year in March.
Foreign Exchange Markets
The weighted-average foreign exchange value of the dollar has
appreciated only a bit more than 1 percent on balance since the March FOMC
meeting, despite large swings in the interim.
the dollar is up 15 percent.
Relative to its February low,
As illustrated in the accompanying chart, the
dollar depreciated in early April amid anticipations that the Federal
Reserve would ease monetary conditions in response to the March employment
report, which the market expected to show continued weakness.
In the event,
the Federal Reserve did not ease despite a poor report, and the dollar
stabilized temporarily.
The dollar began to rise sharply in mid-April, especially against the
mark and other European currencies.
Market expectations of a possible
tightening by the Bundesbank were unfulfilled, while the possibility of
further easing by the Federal Reserve was perceived as fading.
The mark was
further depressed by the loss in local elections of Chancellor Kohl's party
in Kohl's home state and the consequent loss of control of Germany's upper
house, and by escalating turmoil in the Soviet Union.
Late in the period, the dollar retraced most of its intermeeting gains
when the Federal Reserve unexpectedly eased monetary conditions at the end
of April after the G-7 meeting failed to produce a coordinated cut in
interest rates.
Subsequently, the dollar rallied temporarily following the
release of better-than-expected U.S. employment data for April.
IV-11
The dollar's movements against the yen were much less volatile than
against the mark.
Throughout most of the intermeeting period, the yen was
supported by perceptions that the Bank of Japan would delay any easing of
monetary conditions.
Once the Federal Reserve eased, some market
participants expected the Bank of Japan to follow, and the yen declined
somewhat.
For the intermeeting period as a whole, the dollar appreciated
1-1/2 percent against the mark, but depreciated 1/2 percent against the yen.
On balance, movements in bond yields in the United States and in major
foreign countries were small.
Three-month interest rates in the United
States declined by much more than those in Germany and Japan, though not as
much as those in the United Kingdom.
In mid-April, the Bank of England cut
its money market intervention rate by 1/2 percentage point to just below 12
percent, the fourth such move since early February.
In Germany, the
Bundesbank nudged up the rate at which it does its RP operations by 10 basis
points.
The Desk
did not intervene.
IV-12
WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR
March 1973 = 100
96
Daily
FOMC
March 26
93
90
87
84
81
February
March
April
IV-13
Developments in Foreign Industrial Countries
Economic activity in the first quarter continued to be weak in many
major foreign industrial countries.
The Japanese economy has been sluggish;
industrial production, housing starts, orders, and new passenger car
registrations have declined in recent months of data.
In Germany, recent
indicators have been mixed; industrial production showed strength in the
first quarter, while new orders have been weak.
The pace of activity also
slowed in France and Italy, and recessions in the United Kingdom and Canada
continued with little evidence of recovery.
With the exception of western
Germany, unemployment has risen in all these countries.
Despite lower oil prices in the first quarter, consumer price
inflation picked up in several foreign industrial countries.
Inflation
increased slightly in Germany, Italy, and Canada, but moderated in Japan and
France.
Special factors, such as higher excise taxes in the United Kingdom
and Canada, account partly for such increases in these countries.
Changes in foreign trade balances and current accounts were mixed.
Japan's trade surplus in the first quarter expanded (on a year/year basis)
for the first time since early 1989.
Germany tallied a current account
deficit in the first two months of the year owing largely to transfers
related to the Gulf War, although the trade surplus has also been lower.
Individual Country Notes.
In Japan, data released recently have
provided further evidence of a slowing of the pace of activity in the first
quarter.
Industrial production (s.a.) declined 1.3 percent in March and,
for the first quarter as a whole, was down 0.2 percent from the fourth
quarter.
New passenger car registrations (s.a.) dropped 8.2 percent in
March; their average in the first quarter was 1 percent below that in the
fourth quarter.
Housing starts (s.a.)
fell sharply in February and March,
and for the first quarter, the rate was 8.8 percent below that in the fourth
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted) 1
Q4/Q4 Q4/Q4
1990
Q33
Q4
Q4
1991
1Q1
Nov.
Nov.
1990
1989
1990
-Q2
Q2
2.9
-. 4
-1.0
-5.4
-. 2
-. 0
-. 3
-. 8
-1.0
-3.0
n.a.
n,a.
-1.7
3.9
2.8
2.1
-.4
.1
1.5
1.1
1.5
-. 1
-2.7
n,a.
na.
-1.9
3.2
4.8
4.8
5.4
-. 9
-. 9
1.7
3.0
3.0
n.a.
-.4
3.3
-3.8
-1.5
1991
Dec.
Dec.
Jan.
Jan.
Feb.
Feb.
Mar.
Mar.
-1.1
x
-.2
M
-.8
M
n.a.
M
M
-1.8
3.2
-.6
Latest 3 months
from year ago 2
Canada
GDP
IP
x
x
-1.0
-6.0
France
GDP
IP
3M
M
n.a.
2.1
.3
West Germany
GNP
IP
X
X
X
-. 4
-. 8
3.6
2.6
n.a.
.4
.4
n,a.
.7
n.a.
n,a.
x
1.4
-1.9
n,a.
-.7
.5
1.7
n,a.
-.2
X
x
x
X
X
-.8
-.8
1.4
-.5
-1.3
2.0
X
X
-2.0
1.2
4.8
4.5
Italy
GDP
IP
X
K
n.a.
x
n.a.
1.7
-3.8
Japan
GNP
IP
4.8
4.7
4.2
7.0
1.4
1.9
1.1
2.4
1.3
.2
-1.4
-3.4
.2
1.8
-1.3
-3.2
-1.0
-1.7
n,a.
na.
x
x
X
-1.5
-. 7
-.6
1.6
n.a.
1.8
1.1
.5
.3
.1
1.0
.4
1.0
-. 4
-1.8
-. 7
-2.4
M
-1.5
x
-1.0
x
-.5
M
-.9
M
-. 3
4.7
5.9
United Kingdom
GDP
IP
X
X
-1.4
-3.7
United States
GNP
IP
1. Asterisk indicates that monthly data are not available.
2. For quarterly data, latest quarter from year ago.
-. 6
-2.3
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period) 1
Q4/Q4
1989
---
Q4/Q4
1990
1989
---Q4
1991
1Q1
1990
--
Q-1
Q1
QZ
Q2
Q-3
Q3
Q44
1991
Jan.
------------------------Apr.
Feb.
Mar.
Latest 3 months
from year ago
Canada
CPI
WPI
.9
.3
5.2
.2
4.9
1.6
3.6
.9
3.6
.7
3.1
4.3
3.0
.9
.6
.3
1,1
-. 3
.5
.6
6.6
n.a.
6.3
10.0
1.8
3.2
1.6
1.4
1.2
-. 0
2.9
3.7
3.5
1.9
.4
-. 3
2.6
.0
1.1
-.1
1.4
1.0
2.9
.3
1.0
.2
1.0
1.1
.5
n.a.
.4
.2
.9
.4
.8
.5
1.4
3.9
2.0
4.4
1.9
n.a.
.7
.7
.9
.7
.2
.0
1.6
.7
.8
.1
1.0
.0
-.3
-.4
1.6
.9
1.6
1.
.5
.4
1.7
1.6
1.7
2.5
.2
-. 6
n.a.
-.5
France
CPI
WPI
.8
-1 .0
.4
S
.2
*
n.a.
3.4
.7
-.1
-.8
.5
n.a.
2.7
1.7
.3
n.a.
n.a.
n.a.
6.6
8.6
.4
n.a.
3.6
1.6
.4
.7
n.a.
n.a.
8.7
6.3
-. 1
-.3
n.a.
n.a.
5.3
3,4
.1
K
*
West Germany
CPI
WPI
.3
.3
Italy
CPI
WPI
Japan
CPI
WPI
United Kingdom
CPI
WPI
7.6
5.2
10.0
5.9
2.0
1.2
4.6
4.9
6.3
6.4
1.0
1.8
1.
2.1
1,8
1,6
United States
CPI (SA)
WPI (SA)
1.0
.1
1. Asterisk indicates that monthly data are not available.
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1989
1989
1990
1991
1990
1990
Q4
QI
Q1
Q2
Q2
03
Q3
04
Q4
01
Q1
1.4
-4.4
2.6
-3.6
2.8
-2.9
2.4
-3.1
n.a.
n.a.
-.5
-.2
-2.0
-2.4
-3.6
-3.0
-3.3
-2.3
-2.5
n.a.
-1.8
2.4
2.9
Dec.
Jan.
Jan.
1991
Feb.
Feb.
Mar.
Mar.
Canada
Trade
Current account
5.8
-14.1
9.3
-14.0
1.0
-4.0
-6.9
-3.8
-9.3
. -7.8
-2.1
-2.3-
71.6
55.5
65.2
47.3
16.6
13.5
22.4
18.5
16.7
10.9
16.0
9.4
10.1
8.5
n.a.
n.a.
-12.6
-10.9
-12.0
-15.0
-2.3
-1.5
-3.8
-9.1
-1.9
-2.6
-2.4
-1.6
-3.9
-1.7
n.a.
n.a.
64.5
57.6
52.2
36.2
12.2
9.2
15.6
15.3
13.5
8.0
14.7
7.0
8.5
5.9
17.6
17.8
-39.2
-32.1
-31.4
-28.2
-6.9
-6.1
-9.8
-7.6
-8.8
-8.3
-7.2
-6.6
-5.7
-5.7
-114.9 -108.7
-110.0 -99.3
-28.7
-26.7
-26.8
-22.3
-23.2
-22.7
-29.8
-26.5
-28.9
-27.8
X
.5
K
n.a.
X
-1.1
-. 5
-. 9
.1
France
Trade
Current account
Germany
x
X
x
X
2
Trade (NSA)
Current account
.9
-1.4
1.8
-1.1
n.a.
n.a.
Italy
Trade
Current account (NSA)
-2.2
-.2
n.a.
2.6
1.3
5.0
3.8
5.1
5.9
7.5
8.1
-5.6
-2.7
-1.6
-1.6
-2.5
-1.5
-1.4
-.4
-1.7
-.8
n,a.
n.a.
M
x
36
.8
Japan
Trade
Current account
United Kingdom
Trade
Current account
United States
Trade
Current account
-
M
x
3636
···-
1. The current account includes goods, services, and private and official transfers. Asterisk indicates
that monthly data are not available.
2. Before July 1990, West Germany only.
X
x
M
x
IV-17
quarter.
The volatile new machinery orders series (s.a.) showed a combined
January-February rate 3.3 percent below that in the previous quarter.
The
strongest indicator in the first quarter was retail sales (s.a.), which
increased 3.6 percent from the fourth quarter.
Latest monthly data showed
some easing of pressures on labor markets and industrial capacity.
Unemployment (s.a.) rose 0.2 percentage points to 2.2 percent in March, and
the capacity utilization rate (s.a.)
fell 2.9 percent in February.
However,
both measures continue to register near historical peaks of tightness.
Monetary growth has continued to decelerate, consistent with a slowing in
the pace of activity.
The 12-month growth rate of M2+CDs fell to 4.9
percent in March, and the average level of that aggregate in the first
quarter was slightly below that in the fourth.
Consumer prices in the Tokyo area (n.s.a.) rose 0.4 percent in April.
Their 12-month rate of increase eased to 3.3 percent, well below the 4.3
percent peak recorded in January.
Over the first four months of the year,
consumer prices excluding perishable items (s.a.) increased at only a 1.9
percent annual rate.
Wholesale prices (n.s.a.) increased 0.1 percent in
March, while the increase from year-earlier levels declined to 1 percent.
The "shunto" spring wage round is near its end.
Preliminary indications are
that agreed-upon wage increases have been held somewhat below last year's
5.9 percent rate.
The current account surplus (s.a.) increased to $8.1 billion in March.
The trade surplus (s.a.) also increased to $7.5 billion in March.
In the
first quarter as a whole, the trade surplus rate was higher than in any
quarter of last year.
First quarter indicators from Germany suggest modest strength in
current output but weakness in leading indicators of economic activity.
Total industrial production in western Germany was up 2.0 percent in the
IV-18
first quarter compared with the fourth quarter.
(s.a.)
Industrial production
increased strongly in January (3.6 percent) and again in March (1,2
percent), after falling 2.0 percent in February owing largely to a
weather-related drop in construction.
The volume of new orders for west
German manufactured goods (s.a.) increased 1.2 percent in March after
falling 5.0 percent in February.
For the first quarter as a whole, orders
were down 0.8 percent compared with the fourth quarter.
Domestic orders (up
0.1 percent in the first quarter relative to the fourth quarter) including
orders from eastern Germany continue to outperform foreign orders (down 2.8
percent for the same period).
In February the volume of retail sales (s.a.)
in western Germany fell 0.6 percent, after increasing 5.7 percent in
January.
The average level of retail sales in January and February was 4.9
percent above that in the fourth quarter.
Unofficial estimates (published by a private research institution in
Berlin) suggest that east German nominal GNP (n.s.a.) increased about 5
percent in the fourth quarter, after falling about 25 percent in the third
quarter.
Industrial production in eastern Germany (n.s.a.) fell 10.5
percent in December, after increasing 6.4 percent between August and
November.
For the fourth quarter as a whole, industrial production was 51
percent below year-earlier levels due to sharp declines in July and August.
West German unemployment (s.a.) was unchanged in March and April at
6.2 percent, the lowest rate in western Germany since 1981.
Official east
German unemployment (n.s.a.) was 9.5 percent in April, up from 9.1 percent
in March.
The number of workers engaged in government-subsidized
"short-time" work (n.s.a.) increased 0.3 percent in April to 22.7 percent of
the labor force.
West German consumer prices (n.s.a.) increased 0.5 percent in April,
after declining 0.1 percent in March.
On a year/year basis consumer price
IV-19
inflation increased from 2.5 percent in March to 2.7 percent in April.
West
German producer prices (n.s.a.) fell 0.1 percent in February and 0.3 percent
in March.
The combined German current account (n.s.a.) was in deficit by $13
billion (a.r.) in February, up slightly from January's revised deficit/of
$17 billion.
These figures compare with a surplus rate of $34 billion in
the fourth quarter.
Excluding payments related to the Gulf war, however,
the German current account was almost balanced in February.
The combined
German trade surplus (s.a.) was $22 billion (a.r.) in February, compared
with a surplus of $39 billion in the fourth quarter.
On May 5, employers reached agreement on a new one-year contract with
the metalworkers' union in the Stuttgart area.
The agreement calls for an
average wage increase of 6.7 percent, with additional benefits making the
whole package worth 7 percent.
week.
There is to be no reduction in the work
The agreement is expected to be a model for other negotiations
involving IG Metall, Germany's largest union, throughout western Germany.
Activity in France appears to have stagnated in the first quarter.
Although industrial production (s.a.) rebounded 3.2 percent in January from
December, it fell 0.6 percent in February.
Excluding energy and food
processing, manufacturing output fell 3.3 percent (s.a.)
in February.
On
the demand side, household consumption of manufactured products (s.a.) was
unchanged in the first quarter from the fourth quarter.
The unemployment
rate (s.a.) crept up to 9.3 percent in March from 9.0 percent in December.
French consumer price inflation (n.s.a.) remains moderate.
The CPI
was up 3.3 percent on a twelve-month basis in March, compared to 3.5 percent
in February.
Wage growth continues to run significantly ahead of price
inflation, with the average hourly wage up 5.1 percent (Q1/Q1) in the first
quarter.
IV-20
First-quarter weakness is evident in Italy.
After rising 0.4 percent
in January, industrial production (n.s.a.) declined 3.1 percent in February
from its year-earlier level.
a year ago.
Auto sales in March were off 4.5 percent from
Consumer prices (n.s.a.) stood 6.7 percent higher in April from
a year earlier, up slightly from the rate of inflation in March.
Wholesale
prices (n.s.a.) jumped to 9.7 percent in February (yearly basis) from 7.8
percent in January, reflecting a one-time increase in administered prices.
The trade deficit (s.a.)
in the first quarter was significantly below the
deficit registered in fourth quarter.
Prime Minister Andreotti successfully formed a new government without
an election, and no major changes in economic policy are expected.
The
Prime Minister also announced that the government's mid-year supplementary
budget must reduce expenditures by $12 billion because slower economic
growth has caused the projected 1991 budget deficit to exceed its target
level.
The recession in the United Kingdom appears to have deepened in the
first quarter of this year.
In February, manufacturing output (s.a.)
fell
1.6 percent, the biggest monthly decline in three years, to a level 5.8
percent below February 1990.
Retail sales
(s.a.) rose a provisional 3.7
percent in March in advance of higher VAT tax rates that took effect April
1.
Unemployment (s.a.)
rose for the twelfth consecutive month in March,
reaching a rate of 7.4 percent and pushing the total number of unemployed
above the politically sensitive level of 2 million.
Retail prices (s.a.) rose slightly in March to a level 8.2 percent
above a year earlier.
Excluding mortgage interest rates and the poll tax,
the underlying rate of inflation continued to fall from its peak of 8.4
percent in October to 7.3 percent in March.
However, the recent behavior of
producer prices shows less moderation of inflation.
Output prices for
IV-21
manufactured goods (n.s.a.) rose 0.7 percent in March, to give a 12-month
rise of 6.3 percent, up from 5.9 percent in December.
In the first quarter
of 1991, pay settlements in the manufacturing sector averaged 8.3 percent
after an average rate of pay increase of 8.9 percent in the last quarter of
1990.
The Conservative Party suffered sharp losses in local elections held
May 2, practically eliminating the prospects of a parliamentary election in
June.
Prime Minister Major is now likely to wait until there are clear
signs of recovery from the recession before calling the general election
that must be held by July 1992.
In Canada, the introduction of the Goods and Services Tax (GST) on
Retail sales
January 1 disrupted economic activity in the first quarter.
(s.a.) plummeted 4.0 percent in January, but rebounded 1.6 percent in
February.
Manufacturers' shipments (s.a.) were off 0.3 percent in February,
and orders (s.a.) fell 1.4 percent.
percent in February.
Industrial production (s.a.)
fell 0.8
Bankruptcies were 52.5 percent higher in March than a
year ago.
Consumer prices (n.s.a) rose 0.4 percent in March, pushing the
12-month measure of inflation up slightly to 6.3 percent.
The introduction
of the GST in January caused consumer price inflation to jump from 5.0
percent in December to 6.8 percent in January.
Excluding food and energy,
however, the CPI jumped from 6.0 percent in February to 6.4 percent in
March, owing mainly to higher federal and provincial taxes on tobacco.
Major wage settlements (n.s.a.) increased 5.6 percent (a.r.) in the fourth
quarter, down from 6.4 percent (a.r.) in the third quarter.
Prime Minister Mulroney reshuffled his cabinet on April 21.
The new
Finance Minister, Don Mazankowski, has pledged to continue the government's
IV-22
program of fiscal austerity to reduce the budget deficit and to support the
Bank of Canada's anti-inflation program.
Developments in East European Countries
The most notable development in Eastern Europe in the first quarter
was the switch in the CMEA trade regime from barter to hard-currency
clearing at international prices.
Contrary to predictions of large trade
deficits and despite a collapse of trade between CMEA members, Hungary
posted a trade surplus, and widening of trade deficits experienced by Poland
and the CSFR was relatively minor.
On the strength of surging exports, Hungary achieved a trade surplus
of about $150 million in the first quarter of 1991.
Despite having
negotiated an agreement with the Soviet Union designed to cushion the
transition from barter to hard-currency trade,
Hungary's exports to the
Soviet Union collapsed to only $85 million, just 1 percent of the target
level, as of the end of February.
The unemployment rate in Hungary rose to
2.5 percent in February, and monthly inflation was 4.4 percent (year-overyear, 32.6 percent).
To cushion the transition in CMEA trade to hard-currency clearing and
international prices, the CSFR negotiated an agreement with the Soviet Union
that was designed to maintain CSFR exports to the Soviet Union at about 40
percent of the volume of trade in 1990.
However, in the first six weeks of
1991, hard-currency exports to the Soviet Union were officially zero.
Industrial production in the CSFR fell 6.7 percent in the first two months
of 1991 with the recession relatively deeper in the Slovak Republic.
Prices
were freed on January 1 as part of the move to a market-oriented economy,
and the price level rose about 27 percent in January over December with a
further increase of 6 percent in February.
IV-23
Poland and the Soviet Union have yet to reach any agreement about the
conduct of trade in the post-CMEA era, and trade with the Soviet Union has
In the first quarter of 1991, Poland exported products worth
collapsed.
only $20 million and imported oil from the Soviet Union worth $300 million,
contributing in large part to Poland's trade deficit of $334 million in the
first quarter.
Sales of industrial goods in Poland dropped an average of
3.2 percent in January and February 1991 compared to 1990.
However, this
measure underreports private sector activity and is not adjusted for
workdays-per-month or for strike activity.
In fact, only 3 of 8 sectors
(machine-building, metallurgy, and building materials) experienced
Monthly inflation was 4.5 percent in March, down from the
downturns.
January and February monthly rates, but nearly double the 2.5 percent
projection.
The forecast for inflation for the year has been increased from
36 to 55 percent.
Economic situation in other countries
After months of protracted negotiations, in early April, Brazil
reached an agreement with bank creditors on the $8 billion in interest
arrears that had accumulated between July 1989 and December 1990.
Progress
of fiscal reform in Brazil is limited, and economic activity remains stagnant.
Argentina's latest stabilization program, announced March 20, has
drastically reduced inflation, but more fiscal reform is necessary for the
program to be sustainable.
its economic policies.
Mexico continues to enjoy investor confidence in
In Korea, the current account deficit rose to $3.9
billion in the first quarter of 1991 from $1.1 billion in the first quarter
of 1990.
In Taiwan, economic growth appears to be recovering somewhat from
the slowdown in 1990.
Individual Country Notes.
In early April, Brazil reached agreement
with bank creditors on the estimated $8 billion in interest arrears that had
IV-24
accumulated between July 1989 and December 1990.
The Brazilian legislature
must ratify the agreement, but no serious problem is expected.
Under the
agreement, Brazil would pay $2 billion in cash, $900 million shortly after
completion of the term sheet and $1.1 billion in eight equal monthly
installments beginning in May.
The remaining $6 billion of arrears would be
exchanged for 13-year bearer bonds, which would have a staggered amortization, including three years of grace.
options on the bonds.
Banks have two interest rate
The bonds would be issued once an agreement is
reached on a refinancing of the medium- and long-term debt.
Such an
agreement is unlikely to be reached quickly.
Brazil continues to accumulate interest arrears during 1991.
Brazil
paid about 30 percent, or about $400 million, of the interest due in the
first quarter of 1991.
The government has stated that it will pay 30
percent, or $210 million, of interest due in the second quarter.
An IMF mission is currently in Brazil for Article IV consultations,
but there are no plans for an IMF program soon.
Economic activity remains stagnant, and domestic investment is
reported to be down sharply in response to the disappointing pace of fiscal
reform and limited future prospects.
March, despite a price freeze.
Consumer prices rose 12 percent in
The government is finding it increasingly
difficult to finance fiscal deficits in domestic capital markets and has
been increasingly relying on monetary expansion and partial defaults on its
obligations.
The monetary base rose by 38 percent in February and 12
percent in March.
Regional courts in Brazil have recently ruled in favor of
Brazilian investors attempting to force the government to release $30
billion in assets that were frozen in March 1990.
The government has
appealed to the Supreme Court, which sided with the government in one
ruling, but that action sets no formal precedent for the other cases.
The
IV-25
frozen assets are scheduled to be released beginning in September.
April, 120,000 cases were pending.
In late
Fiscal pressures will continue to be
heavy over the next few months.
Brazil's trade surplus for the first quarter in 1991 was $3.4 billion,
compared with surpluses of $4.2 billion and $2 billion for the same periods
in 1989 and 1990, respectively.
Intervention has kept the spread between
the official and parallel market exchange rates steady at about 12 percent.
International reserves were $8.7 billion at the end of February.
In Argentina, the authorities announced a new stabilization program on
March 20.
Under the program, the central bank is obliged by law to support
the exchange rate at or below 10,000 australs per dollar and to keep foreign
exchange reserves, including gold, equal to or greater than the value of the
monetary base.
The program outlaws the use of inflation-indexation clauses
in contracts, which are viewed as leading to inertial inflation.
The
program also legalizes foreign currency contracts, including loans, in a bid
to stimulate domestic financial intermediation and economic recovery.
Since the program's announcement, the exchange rate has stabilized
Short-term interest rates have declined
to below 2 percent per month, the lowest rates in decades, in response to
expectations of close-to-zero exchange rate depreciation over the next few
months.
Consumer price inflation, which had been declining even before the
new program's announcement, fell from 27 percent (monthly basis) in February
to 11 percent in March and 5.5 percent in April.
To be sustainable, the new program must be accompanied by significant
fiscal adjustment.
The authorities have stepped up tax collection activity,
but it is too early to determine whether these efforts will generate
substantially more revenue.
Negotiations are under way with the IMF on a
IV-26
new program to replace the stand-by arrangement that became inoperative at
the beginning of this year, after Argentina missed its 1990 fourth-quarter
performance criteria.
On May 1, the World Bank approved a $300 million loan
to support public sector reforms.
Mexico's international reserves, excluding gold, rose by about $3.4
billion in 1990 and totalled nearly $10 billion at year end.
Indications
are that they continued to increase in the early part of 1991, although
figures are not available.
Reserves rose despite a $1.3 billion increase in
the current account deficit for the year.
The reserve gain was due to
growing private capital inflows, including direct and portfolio investment,
borrowings by both public and private sector entities on a voluntary basis,
and the repatriation of flight capital.
The $1.3 billion widening of the
current account deficit was larger than expected mainly because external
interest payments in 1990 were not as low as they had been expected to be
after last year's bank financing package.
The return of Mexican borrowers to the international capital market
has been taking place on increasingly favorable terms.
During the first two
months of 1991, external bonds issued by Mexican borrowers totaled nearly $1
billion.
In addition, some Mexican firms have gained access to foreign
stock markets.
New York market.
The conglomerates VITRO and FEMSA have issued ADRs in the
The VITRO issue was originally planned for $50 million,
but was increased to $73 million because of higher-than-expected demand.
On
May 15, the Mexican government will sell shares in the telephone system
worth nearly $2 billion in the U.S., Japanese, and European stock markets.
In Korea, the current account deficit rose to $3.9 billion in the
first quarter of 1991 from $1.1 billion in the first quarter of 1990.
Rapid
import growth was largely due to purchases of passenger aircraft and capital
goods and sharply higher oil imports.
In March, the Korean Ministry of
IV-27
Finance approved domestic branches for four foreign securities firms
(including two U.S. firms).
The Ministry denied entry to four Japanese
securities firms reportedly on the basis of two factors:
limited Korean
access to Japan's securities market and Korea's large bilateral trade
deficit with Japan.
Korean securities firms currently have only
representative offices in Japan.
In Taiwan, economic growth appears to be recovering somewhat from the
slowdown in 1990.
In the first quarter, industrial production was
4.6 percent above a year earlier.
This compares with declines in the first
three quarters of 1990 and an increase of 2.5 percent in the fourth quarter.
In the first quarter of 1991, the cumulative trade surplus (on a customs
basis) was $1.6 billion, slightly less than in the same period last year,
despite a large increase in heavy industrial and chemical exports.
Imports
of industrial raw materials, including crude oil, were sharply higher in the
first quarter of 1991.
Although the United States remains Taiwan's largest
export market, exports to the United States were lower in the first quarter
than one year earlier, while exports to Europe and Hong Kong (and indirectly
to China) were markedly higher.
@FedFRASER