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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. CONFIDENTIAL (FR) May 10, SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System 1978 SUMMARY AND OUTLOOK I - 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Economic activity has rebounded from the weather and strike depressed levels early this year, and the latest economic statistics suggest considerable near-term momentum. Employment, industrial production, and retail sales grew at brisk rates again in April. In addi- tion, March data point to a rebound in construction activity and a further rise in inventories. However, price increases continued at a rapid rate, with especially large rises for farm products and foods. Industrial production by about 1 per cent is tentatively estimated to have increased in April. Auto assemblies posted a further strong gain, and coal and steel mill output recovered from reduced, mainly strikeaffected March levels. Output of business equipment appears to have cont- inued to expand at a vigorous rate. Over-all industrial output has increased at about a 5 per cent annual rate over the last six months. Total employment ceeding a large rise in rose by more the labor than half force. a million in April, ex- The unemployment rate dropped to 6.0 per cent--its lowest level in 3-1/2 years. Nonfarm payroll employment increased by 465,000 (strike adjusted). industries, with a particularly Gains were widespread among the large rise in contract construction. Over the last six months, nonfarm payroll employment has increased by an impressive 2.3 million. Large employment and wage increases thus far in 1978 have led to sizable advances in total wage and salary disbursements, and consumer spending recently has shown renewed strength. Retail sales, boosted by an increase in new car sales to a 12.1 million rate, appear to have I - 2 advanced significantly further in April following large advances in February and March. Residential construction activity picked were at a 2.1 million unit annual rate, quarter pace. the advanced Sales rate 1977. March; starts slightly below the fourth of homes also rose in Marcn out of late mitments declined in up in Moreover, remained below outstanding each month of the first mortgage com- quarter. Business fixed investment spending was aaaped in the first quarter by bad weather but outlays strengthened at the end of the quarter. Orders for nondefense capital goods rose about 3-1/2 per cent in real terms in the first quarter--about 1977. Thei.cGraw-bill and the same as the average quarterly rise during errill Lynch spring surveys of capital spending plans for 1978 showed sizable upward revisions from spending increases anticipated last fall. manufacturers' inventories in book value terms grew at about a $15 billion annual rate in arch and during the first quarter. rapid growth, however, inventory-sales ratios in manufacturing edged still Despite this lower in Februry and March as shipments increased even more than inventories. federal government outlays, which fell short in the first quarter of anticipated amounts--and declined in real terms--are suggested by preliminary data to have fallen below agency expectations again during April. Fiscal caution continued to be exhibited in the State and local governent sector as expenditures again were below receipts. iet budget surpluses in this sector (including both operational and retirement have totaled aoout $30 billion over the past four accounts) quarters. to boost the over-all Large food price increases have continued Food prices rose at double-digit rates during the first inflation rate. production and in part because of declining meat quarter reduction fruit in and vegetable supplies. In addition, a temporary the earlier weakness of the exchange value of the dollar has led to somewhat higher car prices, and home financing costs nave risen due to higher mortgage interest rates. during the Consumer prices increased at a first quarter of 1978, 9 per cent annual rate the same rate as in about the first half of 1977 but double the rate in the last half of 1977. Government-mandated in increases the minimum wage as well as Social Security and unemployment insurance taxes contributed to a substantial increase in hourly compensation costs in quarter. This, in combination with a decline in in an exceptionally estimate of Gi'k severely in ment, in curtailed by weather GreenbooK. production, resulted the Commerce Department's preliminary and over-all activity was more than had been anticipated strikes However, the latest measures of employ- sales, and construction suggest a strong rebound about 9 at a rate of activity in the second real GIP Thus, to for the first quarter, the previous productivity, large increase in unit labor costs. According Outlook. the first per quarter level as was projected last month. cent is in the current indicated to quarter. be at the same I - 4 The fiscal policy assumptions underlying the staff projections are unchanged from last month--basically they reflect the Administration's proposal for a $25 billion dollar tax cut effective October 1. Our estimate of Federal outlays are assumed to be $454 billion for FY 1978 and $500 billion for FY 1979. With regard to monetary policy, we continue to assume a 5-1/4 per cent annual growth rate of M- through mid-1979, and interest rates are still projected to rise substantially over the spring and summer months, particularly in short-term markets. Given the recent sharp increase of M-1, however, our projection of interest rates consistent with a 5-1/4 per cent growth rate for the policy period has been raised from that of last month.1 Following the current quarter rebound, real GNP growth is projected to average about 4-1/4 per cent over the last four quarters of the projection period--about 1/4 per cent less than last month. The downward adjustment is concentrated in residential construction, which had been a major source of strength during this expansion. Residential construction activity now is projected to decline more steeply, especially in the first half of 1979, reflecting tighter conditions in financial markets than anticipated last month. Consequently, real GNP gains decelerate noticeably in the first half of next year. Despite the additional support provided by the assumed tax cut, we continue to project a less expansive 1/ Projected federal funds rate ranges are shown in Appendix Table of the Bluebook. Our GNP projections assume interest rates toward the lower ends of those ranges. 1 I - 5 consumption pattern than earlier in the recovery; this reflects slower growth of real disposable income, together with rising debt burdens and efforts to increase savings. Although business fixed investment is expected to provide continued support --with real outlays growing 6-1/4 per cent over the four quarters ending in Q1I:1979--the projected increase is smaller than the rise during 1977. In the current projection, the unemployment rate declines only fractionally further to about 5-3/4 per cent in the first half of 1979. With compensation increases expected to be at a rapid rate and productivity gains likely to be moderate, cost pressures on prices are expected to continue to be intense. Inflation, as measured by the fixed-weighted price index for gross business product, is expected to be at about a 7 per cent annual rate over the projection period, about in line with the rate anticipated last month. Details of the staff projection are shown on the tables that follow. I-6 STAFF GNP PROJECTIONS Per cent changes, annual rate Gross business Nominal GNP 4/12/78 5/10/78 8.1 8.2 1974197519761 19771/ 1978 8.1 8.2 11.6 10.7 11.1 11.6 1977-IIIL/ / 19 77-I V- Real GNP 4/12/78 5/10/78 10.7 11.1 -1.4 -1.3 6.0 4.9 4.2 -1.4 -1.3 6.0 4.9 4.1 10.2 9.9 10.2 9.9 5.1 3.8 5.1 3.8 1978-1/ 1978I11 1978-III 1978-IV 8.7 14.5 11.4 12.0 6.5 17.4 12.2 1.4 6.7 4.4 4.6 11.9 10.8 11.5 10.5 11.8 Change: 76-IV to 77IV77-II to 78-11 77-IV to 78-IV 78-11 to 79-11 Actual. 9.5 10.4 9.5 6.0 5.4 6.0 6.6 6.4 5.4 5.0 5.4 6.9 6.6 4.6 4.1 7.3 6.9 5.8 5.8 11.8 5.7 6.1 -1.2 -1.2 10.8 10.9 4.2 6.1 -1.1 -1.2 11.6 11.9 4.2 11.5 11.4 4.4 7.2 -. 4 11.6 Memo: Growth Over Annual Policy Period: 78-I to 79-I 12.4 13.1 1/ 10.4 Unemployment rate (per cent) 4/12/78 5/10/78 -. 6 9.0 4.4 4.6 1979-I 1979-11 product fixed-weighted price index 4/12/78 5/10/78 5.1 5.7 5.7 I-7 CONFIDENTIAL - FR CLASS II FOMC May 10, 1978 GROSS NATIONAL PRODUCT AND RELATED ITEMS Expenditures and income (Quarterly figures are seasonally adjusted. figures are billions of dollars, with quarterly figures at annual rates.) 1977 1979 1978 Prolected III IV III IV I Gross National Product Final purchases Private Excluding net exports 1915.9 1892.2 1491.3 1498.8 1961.8 1948.2 1534.4 1552.6 1992.9 1976.4 1559.3 1581.9 2074.3 2051.3 1622.6 1639.5 2132.2 2108.2 1668.1 1679.5 Personal consumption expenditures Goods Services 1218.9 659.4 559.5 1259.5 685.9 573.7 1284.0 689.8 594.3 1328.1 716.8 611.3 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 303.6 92.5 187.5 23.6 23.1 306.7 99.7 193.5 13.5 9.0 314.4 100.2 197.7 16.5 15.5 Net exports of goods and servicesExports Imports -7.5 179.9 -18.2 170.6 187.4 188.8 Gov't. purchases of goods and services Federal 2/ State and local 400.9 413.8 148.1 252.9 II I II 2194.3 2168.8 1714.9 1725.4 2254.6 2227.3 k762.8 1771.8 2311.5 2283.0 1807.7 1816.9 1361.0 734.2 626.8 1399.9 756.4 643.5 1439.0 776.4 662.6 1476.1 794.5 681.6 334.4 104.7 206.7 23.0 22.0 342.5 213.3 24.0 24.0 351.0 105.2 220.3 25.5 25.5 360.1 105.2 227.6 27.3 27.3 369.3 105.7 235.1 28.5 28.5 -22.6 178.3 200.8 -16.9 189.3 206.1 -11.4 198.8 210.1 -10.5 206.8 217.2 -9.0 216.6 225.5 -9.2 224.0 233.1 153.8 260.0 417.1 153.1 264.1 428.7 155.1 273.6 440.1 159.0 281.1 453.9 165.5 288.4 464.5 169.0 295.5 475.3 172.7 1347.4 1360.2 1358.3 1387.9 1402.9 1418.9 1433.6 1447.0 1549.8 998.9 1323.8 1603.0 1029.1 1368.3 5.6 1636.7 1057.4 1400.5 5.9 1687.4 1091.2 1440.7 5.4 1736.4 1116.2 1479.7 5.6 1784.8 1146.1 1534.7 6.4 1828.1 1177.9 1574.0 6.2 1872.2 1205.4 1609.9 5.9 172.8 144.8 178.3 125.3 170.5 147.1 189.4 151.3 192.7 160.7 202.3 158.8 200.9 162.1 204.7 -58.9 -20.4 -60.0 -22.1 -60.5 -12.3 -49.0 -10.1 -44.7 -4.9 -61.0 -24.1 -54.1 -15.9 -49.1 -10.0 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 32.9 17.4 31.1 15.4 34.1 18.0 33.7 17.1 30.5 13.4 30.1 12.5 28.6 10.5 26.5 7.9 Civilian labor force (millions) Unemployment rate (per cent) 97.6 6.9 98.6 6.6 99.2 6.2 99.9 5.9 100.4 5.9 101.0 5.8 101.5 5.7 102.0 5.7 Nonfarm payroll employment (millions) Manufacturing 82.5 19.6 83.2 19.8 84.1 20.1 85.3 20.3 85.7 20.5 86.3 20.7 86.8 20.9 87.3 21.1 Industrial product (1967=100) Capacity utilization: all manufacturing (per cent) Materials (per cent) 138.4 83.0 82.3 139.3 82.9 82.2 139.5 82.1 81.4 143.5 83.5 83.3 145.9 84.2 84.1 148.6 85.0 85.0 151.0 85.5 85.8 153.1 85.9 86.4 Housing starts, private (millions, A.R.) Sales new autos, (millions, A.R.) Domestic models Foreign models 2.04 10.92 8.88 2.04 2.15 10.75 8.77 1.98 1.73 10.80 8.80 2.00 2.00 10.95 8.85 2.10 1.80 10.90 8.90 1.75 11.05 9.10 1.95 1.70 11.10 9.15 1.95 1.70 10.95 9.10 1.85 Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable income Saving rate (per cent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) 5.5 149.0 105.2 2.00 302.6 1/ Balance of payments data and projection underlying these estimates are shown in the International Developments section of this part of the Greenbook. 2/ Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I-8 May 10, CONFIDENTIAL - FR tS II FOMC 1978 CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1979 1978 1977 Projected III IV I ------Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Goods Services Residential fixed investment Business fixed investment Government Federal State and local GNP in constant (1972) dollars Final purchases Private II III IV I II Billions of dollars- 46.0 1.9 44.0 33.7 2.2 31.5 24.9 6.4 18.4 1.7 5.1 10.3 4.5. 5.9 45.9 -10.1 56.0 43.1 -10.7 53.8 40.6 26.5 14.2 7.2 6.0 12.9 5.7 7.1 31.1 3.0 28.2 24.9 -4.4 29.3 24.5 3.9 20.6 .5 4.2 3.3 -.7 4.1 81.5 6.5 75.0 63.4 5.7 57.6 44.1 27.0 17.0 4.5 9.0 11.6 2.0 9.5 57.9 1.0 56.9 45.5 5.5 40.0 32.9 17.4 15.5 .5 6.6 11.4 3.9 7.5 62.1 1.5 60.6 46.8 .9 45.9 38.9 22.2 16.7 .0 7.0 13.8 6.5 7.3 60.3 1.8 58.5 47.9 1.5 46.4 39.1 20.0 19.1 .0 7.3 10.6 3.5 7.1 56.9 1.2 55.7 44.9 -. 2 45.1 37.1 18.1 19.0 .5 7.5 10.8 3.7 7.1 16.7 14.3 10.3 12.8 19.7 16.7 -1.9 -4.6 -2.5 29.6 25.2 21.8 15.0 14.6 11.2 16.0 15.2 12.6 14.7 13.5 11.3 13.3 12.2 9.9 1/cent per yea,- _____In per cent per year Gross National Product Final purchases Private 10.2 9.9 6.5 17.4 11.6 12.2 11.5 10.5 9.9 12.4 9.6 12.1 5.9 6.7 16.1 17.3 11.6 11.7 12.0 11.7 11.2 11.6 10.4 10.6 "-sonal consumption expenditures ods 8.6 4.0 14.3 14.0 17.0 10.5 8.0 2.3 15.2 14.5 16.6 12.0 10.3 10.1 10.5 11.9 12.7 11.1 11.6 11.0 12.4 10.7 9.7 11.9 Gross private domestic investment Residential structures Business fixed investment 12.4 7.7 11.6 4.1 35.0 13.4 10.4 2.1 9.0 28.0 19.2 19.5 10.0 1.9 13.4 10.3 .0 13.8 10.8 .0 13.9 10.6 1.9 13.8 Gov't. purchases of goods and services Federal 11.0 12.9 13.5 16.3 3.3 -1.8 11.6 5.4 11.1 10.4 13.1 17.4 9.7 8.7 9.6 9.0 9.9 11.8 6.4 15.3 11.4 10.8 10.2 10.0 10.0 9.7 9.4 rvices State and local GNP in constant (1972) dollars Final purchases Private / GNP implicit deflator3 Gross business product fixed-weighted price index- 3.8 6.1 6.5 5.9 5.4 -. 6 -1.3 -. 9 7.1 6.6 9.0 7.7 8.3 7.7 7.7 4.4 4.3 4.1 6.9 6.9 Personal income Wage and salary disbursements Disposable income 8.9 7.5 10.0 14.5 12.7 14.1 8.7 11.5 9.8 13.0 13.4 12.0 12.1 9.5 11.3 11.6 11.2 15.7 10.1 11.6 10.6 Corporate profits before tax -2.7 13.4 -16.4 52.2 7.3 21.4 -2.7 3.3 1.3 3.2 2.7 4.4 6.6 5.6 4.0 2.3 4.5 2.3 8.2 5.8 -3.3 13.2 17.0 3.9 7.7 3.8 2.6 22.2 -6.2 -4.8 -12.3 .6 -57.6 2.0 1.4 4.7 12.0 77.8 5.6 2.1 21.6 Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs Industrial production Housing starts, private Sales new autos Domestic models Foreign models 1/ 4.2 23.3 -24.1 -18.4 -43.9 Percentage rates are annual rates compounded quarterly. Excluding Federal pay increases rates of change are: 1977-IV, cent; 1979-I, 6.9 per cent. Using expenditures in 1972 as weights. 2.74.4 2.8 8.0 5.2 6.9 -34.4 -1.8 2.3 -17.7 7.6 -10.7 5.6 9.3 -9.6 2.4 4.2 2.3 4.0 2.1 11.6 9.5 1.9 8.2 6.3 6.6 -10.9 1.8 2.2 .0 5.7 .0 -5.3 -2.2 -19.0 5.1 per cent; 1978-I, 7.0per cent; 1978-IV, 6.6 per I-9 CONFIDENTIAL - FR CLASS II FOMC May 10, 1978 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of dollars.) 19 1971 1972 1973 1974 1975 1976 1977 1063.4 1057.1 823.4 821.8 1171.1 1161.7 908.6 911.9 1306.6 1288.6 1019.1 1012.0 1412.9 1404.0 1101.3 1095.3 1528.8 1540.3 1201.4 1181.0 1706.5 1693.1 1331.7 1323.9 1889.6 1871.4 1476.4 1487.3 2098.5 2076.2 1641.2 1656.6 Personal consumption expenditures -Goods Services 668.2 374.8 293.4 733.0 '410.5 322.4 809.9 457.5 352.3 889.6 498.3 391.3 980.4 542.2 438.2 1094.0 60t6 492.3 1211.2 660.5 550.7 1343.3 724.3 619.0 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 160.0 49.6 104.1 6.4 5.1 188.3 62.0 116.8 9.4 8.8 220.0 66.1 136.0 17.9 14.7 214.6 55.1 150.6 8.9 10.8 189.1 51.5 149.1 -11.5 -15.1 243.3 68.0 161.9 13.3 14.9 294.2 91.0 185.1 18.2 17.1 335.6 103.8 209.5 22.2 21.7 Net exports of goods and services Exports Imports 1.6 65.6 64.0 7.1 101.6 94.4 6.0 137.9 131.9 20.4 147.3 126.9 7.8 162.9 155.1 -10.9 174.7 185.6 -15.3 193.3 208.6 Gross National Product Final purchases Private Excluding net exports Gov't. purchases of goods and services Federal State and local Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable income Saving rate (per cent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -3.3 72.7 75.9 - Prolected 1978 233.7 96.2 137.5 253.1 102.1 151.0 269.5 102.2 167.3 302.7 111.1 191.5 338.9 123.3 215.6 361.4 130.1 231.2 395.0 145.4 249.6 435.0 158.2 276.8 1107.5 1171.1 1235.0 1217.8 1202.1 1274.7 1337.3 1392.0 859.1 579.4 742.8 7.7 942.5 633.8 801.3 6.2 1052.4 701.3 901.7 7.8 1154.9 764.6 984.6 7.3 1253.4 805.7 1084.4 7.4 1382.7 891.8 1185.8 5.6 1536.7 990.0 1309.2 5.1 1711.3 1102.7 1463.9 5.8 77.2 82.0 92.1 96.2 99.1 115.8 83.6 126.9 99.3 123.5 128.1 156.9 139.9 171.7 146.1 188.7 -6.7 -. 7 -10.7 17.1 -70.2 -20.3 -54.0 -10.4 -49.5 -8.7 -53.8 -12.8 -22.0 -5.3 -17.3 -5.9 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 3.7 -3.8 13.7 5.6 13.0 4.1 7.5 -2.9 5.9 -6.2 18.4 3.9 29.2 13.7 32.1 15.2 Civilian labor force (millions) Unemployment rate (per cent) 84.1 5.9 86.5 5.6 88.7 4.9 91.0 5.6 92.6 8.5 94.8 7.7 97.4 7.0 100.1 5.9 Nonfarm payroll employment (millions) Manufacturing 71.2 18.6 73.7 19.1 76.9 20.1 78.4 20.0 77.1 18.3 79.4 19.0 82.1 19.6 Industrial production (1967=100) 109.6 Capacity utilization: all manufacturing (per cent) 78.0 Materials. (peg cent) 83.1 119.7 83.1 88.0 129.8 87.5 92.4 129.3 84.2 87.7 117.8 73.6 73.6 129.8 80.2 80.4 137.0 82.4 81,9 144.4 83.7 83.5 Housing starts, private (millions, A.R.) Sales new autos (millions, A.R.) 2.36 10.93 9.32 1.61 2.05 11.42 9.65 1.77 1.34 8.91 7.49 1.42 1.16 8.66 7.08 1.58 1.54 10.12 8.63 1.50 1.99 11.13 9.07 2.06 1.82 10.93 8.91 2.01 Domestic models Foreign models 2.05 10.24 8.68 1.56 I - 10 May 10, 1978 .DENTIAL - FR ~S II FOMC CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1971 1972 ------ 1973 ----- 1974 1975 1976 1977 Prolected 1978 Billions of dollars 81.0 2.6 107.7 3.0 135.5 8.5 106.3 -9.0 115.9 -20.4 177.7 24.8 183.1 4.9 208.9 4.0 78.5 104.6 126.9 115.4 136.3 152.8 178.3 204.8 63.7 -2.3 66.0 49.4 25.2 24.3 13.0 3.6 14.8 .6 14.3 85.2 -4.9 90.1 64.8 35.7 29.0 12.4 12.7 19.4 5.9 13.5 110.5 10.4 100.1 76.9 47.0 29.9 4.1 19.2 16.4 .1 16.3 82.2 -1.1 83.3 79.7 40.8 39.0 -11.0 14.,6 33.2 8.9 24.2 100.1 14.4 85.7 90.8 43.9 46.9 -3.6 -1.5 36.2 12.2 24.1 130.3 -12.6 142.9 133.6 59.4 54.1 16.5 12.8 22.5 6.8 15f6 144.7 -18.7 163.4 117.2 58.9. 58.4 23.0 23.2 33.6 15.3 18.4 164.8 -4.4 169.3 132.1 63.8 68.3 12.8 24.4 40.0 12.8 27.2 32.2 63.6 63.9 -17.2 -15.7 72.6 62.6 54.7 29.9 60.8 56.8 -8.6 2.1 54.2 59.3 51.4 30.7 57.1 57.4 -13.8 -3.2 52.8 52.6 42.7 Gross National Product Final purchases Private 8.2 8.0 8.4 10.1 9.9 10.3 11.6 10.9 12.2 8.1 8.9 8.1 8.2 9.7 9.1 11.6 9.9 10.8 10.7 10.5 10.9 11.1 10.9 11.2 Personal consumption expenditures Goods 'ervices 8.0 7.2 9.0 9.7 9.5 9.9 10.5 11.4 9.3 9.8 8.9 11.1 10.2 8.8 12.0 11.6 11.0 12.4 10.7 9.8 11.9 10.9 9.7 12.4 .ss private domestic investment Residential structures Business fixed investment 13.6 35.5 3.6 17.7 25.1 12.3 16.8 6.6 16.4 -2.5 -16.7 10.8 -11.9 -6.5 -1.0 28.7 32.2 8.6 20.9 33.7 14.3 14.1 14.1 13.2 6.8 8.3 6.5 12.3 12.0 6.6 9.3 10.1 8.7 11.0 5.5 11.8 Gross National Product Inventory change Final purchases Private Net exports Excluding net exports Personal consumption expenditures Goods Services Residential fixed investment Business fixed investment Government Federal State and local GNP in constant (1972) dollars Final purchases Private - Gov't. purchases of goods and services Federal State and local .6 In per cent per year -- 6.1 .1 8.8 11.6 9.8 10.8 14.5 12.6 7.2 7.9 GOP in constant (1972) dollars Final purchases Private CGP implicit deflator . Gross business product fixed-weighted index- 3.0 2.8 3.7 5.1 4.4 5.7 5.5 6.7 4.1 3.3 5.5 4.9 6.3 5.8 5.7 -1.4 -.7 -1.4 9.7 10.4 -1.3 .2 -.3 9.6 9.5 6.0 4.5 5.6 5.3 5.4 4.9 4.7 5.3 5.5 6.0 Personal income Wage and salary disbursements Disposable income 7.2 6.0 8.3 9.7 9.4 7.9 11.7 10.7 12.5 9.7 9.0 9.2 8.5 5.4 10.1 10.3 10.7 9.4 11.1 11.0 10.4 11.4 11.4 11.8 Corporate profits before tax 14.7 17.3 20.4 9.6 -2.7 27.0 9.4 9.9 Nonfarm payroll employment Manufacturing .4 3.5 4.3 210 -1.7 3.1, 3.4 3.9 -4.0 2.8 5.1 -. 1 -8.5 3.3 3.2 4.2 2.9 6.6 3.0 5.8 1.7 7.8 -2.9 9.4 1.6 9.6 4.1 8.7 2.2 8.8 1.5 9.1 3.5 2.7 6.0 12.7 7.9 4.5 6.4 7.6 1.7 43.1 21.9 21.9 21.8 9.2 14.9 6.8 7.4 3.1 8.4 -13.2 -4.7 3.5 9.7 -.4 -34.6 -14.5 -22.4 -19.9 -8.9 -13.3 -2.8 -5.5 11.4 10.2 32.5 16.9 21.9 -5.1 5.5 29.2 9.9 5.1 37.2 5.4 -8.4 -1.8 -1.7 -2.1 Nonfarm business sector Output per hour Compensation per hour Unit labor costs Industrial production Housing starts Sales new autos Domestic models Foreign odels 1 Using expenditures in 1972 as weights. 10.9 4.1 3.9 4.0 6.7 6.4 FEDERAL SECTOR ACCOUNTS (billions of dollars) May 10, 1978 356.9 401.9 FY 1978 e/ Admin. F.R. I/ 21 Board 400.5 400.0 453.5 454.1 FY 1979 e/ Admin. F.R. 1/ Board 439.8 440.0 499.4 499.6 CY77* F.R. Board 365.2 416.1 F.R. Staff Estimates CY78e/ Calendar quartars; unadjusted data 1979 1978 F.R. 1977 IV I I* III IV* III* II II Board 93.8 96.6 84.9 124.7 105.9 133.3 91.3 84.5 409.3 125.4 463.6 103.4 113.3 110.7 112.7 117.4 122.8 121.3 -45.0 -53.0 -54.1 -59.6 -59.6 -50.9 -54.3 -12.2 -28.8 -25.8 12.0 -11.5 -29.0 -24.7 7.9 -13.7 -8.7 -11.5 -11.6 -12.5 -11.5 -10.4 -11.9 -4.9 -1.3 -3.6 -2.0 -4.6 -1.7 -3.9 -1.3 -4.6 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 4/ 53.5 -1.7 1.9 57.2 n.a. n.a. 52.0 8.0 5.7 74.7 0 -2.6 73.9 -0.9 -2.0 56.8 -0.6 5.3 61.3 0.3 4.7 19.6 -2.80.4 20.7 6.8 2.6 20.8 5.9 2.8 -1.4 -9.6 1.0 11.9 4.9 -0.7 30.0 -0.9 1.6 27.6 0 1.0 -4.7 0 -1.9 21.0 0 -2.7 Cash operating balance, end of period 19.1 12.0 11.1 12.0 12.0 12.3 12.0 19.18- 12.3 6.4 16.0 11.1 12.0 12.0 12.0 12.0 5/ 5.2 n.a. 19.7 n.a. 13.5 6.8 20.7 1.1 4.5 6.4 6.8 3.0 2.5 3.5 4.5 361.8&/410.9 /403.06451.6-/ n.e. 411.9 457.0 458.3 503.4 503.7 140.6 156.0 155.3 171.4 170.9 91.8 99.3 99.8 107.6 107.8 63.8 63.1 56.7 55.4 48.8 271.4 6301.0 303.06/332.0 332.8 n.e. -50.1--46.1 -55.3- -51.8 373.9 423.4 145.5 94.3 51.2 278.0 -49.5 415.6 469.4 158.2 101.4 56.8 311.2 -53.8 373.2 432.1 148.1 95.6 52.5 284.0 -58.9 429.8 490.8 165.5 104.5 61.0 325.3 -61.0 443,8 497.9 169.0 106.4 62.6 328.9 -54.1 457.0 506.1 172.7 109.0 63.7 333.4 -49.1 n.e. 520.0 176.5 111.4 65.1 343.5 n.e. FY 1977* Unified budget receipts Unified budget outlays Surplus(+)/Deficit(-), unified budget Surplus(+)/Deficit(-), off-budget agencies 3/ Memo: Sponsored agency borrowing Seasonally adjusted annual rates NIA Budget Receipts Outlays Purchases (total) Defense Non-defense All other outlays Surplus(+)/Deficit(-) High Employment Surplus(+)/ Deficit(-) (NIA basis) 7/ -- ie--estimated 2.0 III 116.4 130.1 -5.0 n.a. -12.3 -r--revised n.a. -13.0 -8.7 -12.8 -20.4 ------n.e.--not estimated 386.3 446.3 153.8 98.5 55.3 292.5 -60.0 391.1 451.6 153.1 99.2 .53.9 298.5 -60.5 411.1 460.1 155.1 100.3 54.8 305.0 -49.0 430.5 475.2 159.0 101.4 57.6 316.2 -44.7 -22.1 -12.3 -10.1 -4.9 ---n.a.--not available -24.1 -15.9 -10.0 -p--preliminary -1.9 The Budget of the United States Government, Fiscal Year 1979, January 1978 and OMB Current Budget Estimates, March 1978. The Second Concurrent Resolution on the Budget (September 15, 1977) set the Congressional receipt and outlay targets at $397 and $458.3 billion, respectively. Includes Federal Financing Bank, Postal Service, U.S. Railway Association, Rural Electrification and Telephone Revolving fund, Housing for the Elderly or Handicapped Fund (until October 1977), and Pension Benefit Guaranty Corporation. Checks issues less checks paid, accrued items and other transactions. Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. Quarterly average exceeds fiscal year total by $1.7 billion for FY 1977 and by $1.8 billion for FY 1978 due to spreading of wage base effect over calendar year. Estimated by F.R.B. staff. Includes $2.5 billion of borrowing from the Federal Reserve on September 30 which was repaid October 4. NIA estimates consistent with the March Update. The Survey of Current Business, March 1978. I - 12 FINANCIAL DOMESTIC Summary. DEVELOPMENTS Since the last FOMC meeting most short-term market rates have increased by about 20 to 40 basis points, while yields on longer term securities have risen 5 to 35 basis points. Upward pressures were associated with an increase in the Federal funds rate by 50 basis points to around 7-1/4 per cent. In addition, market expectations were changed in the light of further rapid rises in the prices of goods and services, additional evidence of a strong pick-up in economic activity, and an acceleration in the growth of the monetary aggregates. However, interest rates did not increase as much as might have been expected, partly because of an anticipatory increase in rates prior to the April meeting and in part because of a continued scarcity of Treasury bills. Despite interest rate increases and indications of a deterioration in the outlook regarding inflation, stock prices rallied strongly in late April. The surge in equity values was associated largely with the rebound in economic activity and a strengthening of the dollar in foreign exchange markets. Even after some net decline in stock prices in recent days most major price indexes are now about 2-1/2 per cent above their levels at the time of the last Committee meeting. Growth in the key monetary aggregates increased markedly in April primarily due to a surge in M-1. This aggregate grew at an estimated 17 per cent annual rate in association with a rebound in economic activity and transitory tax factors--primarily due to delayed processing by the Treasury of checks for nonwithheld taxes. Inflows I - 13 into small time and savings deposits at banks and thrift institutions also picked up somewhat in April. The exceptionally strong growth in demand deposits, along with some increase in flows of small time and savings deposits, enabled banks to finance vigorous growth in loans and investments while reducing their reliance on managed liabilities, by contrast, thrift institutions had to continue relying heavily on borrowed funds and liquid assets to support mortgage lending, given continued relatively modest deposit inflows. Credit raised by most nonfinancial sectors apparently declined somewhat in April from the advanced harch level. Funds raised by non- financial businesses fell modestly, as did borrowing by households. The Treasury, reflecting a seasonal build-up of tax receipts, paid down outstanding debt on balance. However, State and local government borrowing picked up markedly as a result of New York State's spring financing. Outlook. Treasury borrowing over coming months is expected to follow usual patterns, remaining light over the remainder of this quarter and picking up noticeably over the third quarter. Large surpluses are expected to continue for many State and local governments. Issues of tax-exempt debt are likely to remain around current levels, but volume--particularly for advance refundings-may be strongly affected by interest rate developments. Yields on New York-related and on some other lower-rated issues could be influenced by concerns about the financial status of New York City's. I - 14 Even with the June 30 expiration date for the federal seasonal loan program rapidly approaching, no resolution of the city's financial plight seems in immediate prospect. In the private sector, business and household demands for funds are projected to be little changed through the third quarter. however, further tightening of terms of lending--particularly for mortgage credit--could begin to slow increases in household debt as thrift institutions continue to react to sluggish deposit inflows, less ample margins of liquidity, and greater reliance on comparatively high cost nondeposit sources of funds. Adjustments in deposit ceiling rates, depending on their nature and magnitude, could provide some relief. But given the wide spreads prevailing between open market rates and rate ceilings on most deposit accounts, flows into many account categories would probably remain relatively slow. Open market interest rates, moreover, are expected to rise further. Credit demands are likely to remain vigorous. Recent and prospective price increases, in addition, may raise inflation premiums in interest rates. Finally, the strong increases in nominal economic activity, now under way and in prospect, will augment transactions demands for money. Further upward pressures on interest rates then may result from System efforts to restrain growth in the monetary aggregates. I - 15 INTERNATIONAL DEVELOPMENTS Summary. The weighted average exchange rate of the dollar rose by about 2-1/2 per cent during the past four weeks. This strong advance appears to have been associated with a judgment by market participants of a shift in the focus of U.S. economic policy toward greater emphasis on curbing inflation. This view was reinforced by the sharp rise in U.S. interest rates over the past month. Over the month, the dollar appreciated against all major currencies, except the Canadian dollar, with the most pronounced advances recorded against the Swiss franc, the mark and the pound. The Canadian dollar firmed by about 2 per cent against the dollar, in response to the announcement of several large-scale foreign borrowings by the Canadian government to replenish declining reserves, as well as a continuing rise in Canadian interest rates. . The Desk acquired $461 million equivalent of marks during the period, which were used in part by the System and the Treasury to repay outstanding swap debt to the Bundesbank. The U.S. trade deficit declined in March to an annual rate of $41.5 billion, slightly above the rates of January and the fourth quarter of 1977. The record February imbalance raised the first-quarter deficit to an annual rate of $45 billion. I - 16 In addition to the large first-quarter trade deficit, net private capital outflows in the quarter reached about $7.5 billion. Bank- reported private capital transactions, adjusted for reporting bias, resulted in a net outflow of about $5 billion in March, bringing the total net (adjusted) outflow for the first quarter to about $8 billion. For 1977 as a whole, net private bank outflow was $4.7 billion. Foreign official assets in the United States (excluding OPEC holdings) increased by nearly $8 billion in March, . The net foreign inflow of $13.5 billion for the first quarter was nearly as large as the inflow in the final quarter of last year. In April foreign official holdings at the New York Federal Reserve declined by more than $3 billion, . Assets of OPEC official accounts in the United States increased by $1.3 billion in the first quarter. Preliminary data indicate that OPEC holdings showed little change in April. Total new borrowing on international capital markets (Eurocredit, Euro-bond, and foreign bond markets) in the first quarter of 1978 expanded at a record rate -- about one-third larger at an annual rate than the 1977 total of $67 billion. The sharp increase in medium-term Euro-credits reflected stronger demand for new funds by all major categories of borrowers. Loan spreads fell further, and the average maturity of credits lengthened considerably. There are still no clear signs of a widespread and sustained economic expansion abroad; indeed, latest statistics are somewhat I - 17 disappointing. In Germany, industrial production declined in March for the second successive monthly decline. While industrial production in Japan advanced in March, there is little evidence of a recovery of private domestic demand. quarter. Large current-account imbalances persisted in the first Japan recorded a $5.5 billion surplus (not annual rate), and preliminary data indicate no reduction in the German surplus. The U.K.'s external position worsened in the first quarter, with the current-account returning to deficit following two Outlook. successive quarterly surpluses. The projected trade deficit for the year has been raised to $39 billion, nearly $2 billion higher than projected in last month's green book. The change in the projection is the result of a reassessment of recent published first-quarter trade data that showed Even though non-oil imports even higher than were projected last month. we expect non-oil imports to increase only marginally for the rest of the year (an increase more than accounted for by rising import prices), given the large increase in these imports in the first quarter, the value of imports for the full year is projected to be somewhat higher than was projected last month. This import increase is expected to be offset somewhat by slightly higher agricultural exports in 1978. a levelling off of the trade deficit at a rate of about We now expect $36 billion starting in the third quarter of this year. The staff's projection for the trade deficit for the next five quarters is substantially higher than what is generally anticipated currently by market participants. For this reason, the staff continues to expect a significant decline in the average value of the dollar in the year ahead from the higher level reached in recent weeks. CONFIDENTIAL (FR) CLASS II FOMC U.S. Net Exports and Related Items (billions of dollars, seasonally adjusted annual rates) 1 1976 1. 2. GNP NET EXPORTS - Intl Acct. data (GNP net exports - GNP Acct. data) 1/ 3. 19 7 7 r 1978P I II 9 7 7r III May 10, 1 9 IV I II 7 8P III 7.8 (7.8) -10.6 (-10.9) -13.5 (-15.3) -9.3 (-8.2) -5.5 (-9.7) -5.7 (-7.5) -21.7 (-18.21 -9.3 a) Merchandise Trade Balance 1978 -31.5 -39.1 -30.0 -27.3 -29.1 -39.6 -44.8* -40.3 -35,7 1 IV -20.8 -15.1 -9.5 -8.7 (-22.6*)(-16.9)(-11.4)(-10.5) 9 7 9 I II -7.2 (-9.0) -7.4 (-9.2) -35.6 -35.6 -36.2 4. 5. 6. Exports (excl. military) Agricultural Nonagricultural 114.7 23.4 91.3 120.5 24,4 96.1 133.6 26.3 107.3 117.9 24.9 93.0 122.4 26.1 96.3 123.9 23.8 100.1 117.7 22.6 95.1 122.3* 130.7 26.0* 26.4 96.4* 104.3 137.8 26.4 111.4 143.5 26.4 117.1 150.1 27.0 123.1 156.0 27.0 129.0 7. 8. 9, Imports Petroleum and petrol, productp Nonpetroleum 124.0 34.6 89.4 152.0 45.0 107.0 172.7 44.4 128.3 147.9 46.3 101.6 149.7 46.1 103.6 153.0 45.2 107.8 157.3 42.2 115.1 167.1* 171.0 39.9* 43.0 127.3* 128.0 173.5 45.5 128.0 179.1 49.1 130.0 185.7 50.7 135.0 192.2 52.2 140.0 / -14.3 2,7 1.0 17.4 2,5 2.6 20.3 2.7 1.7 17.6 1.4 .8 18.9 2.2 1.8 18.2 3.3 -.2 15.2 2.9 2.1 19.3 2.6 2.4 20.1 2,7 2.8 20.7 2.7 3.1 20.9 2.9 3.5 22.1 2.8 3.6 22,2 2.9 13. 14. 15. U.8, CURRET ACCOUNT BATANC a) GNP net exports (line 1.) b) U.S, Govt & private transfers ,1.4 7.8 -9.2 -20.5 -10.6 ,9.9 -28.5 -13.5 -15,0 -18.6 .9.3 -9.2 -15.0 -5.5 -9.5 -16.1 -5.7 -10.5 -32.2 -21.7 -10.5 -34.9 -20.8 -14.1 -29.7 -15.1 -14.6 -24.5 -9.5 .15.0 -24.9 -8.7 -16.2 -24.5 -7.2 -17.3 -25.3 -7.4 -17.9 16. 17. Constant (1972) dollars Merchandise exports (excl. military) (X change, annual rates) 10. 11. 12. b) Military transactions, net c) Investment income, net 3/ d) Other services, net 4/ 18, 19. 1/ 66,7 (3.4) Foreign Outlook - Halor Industrial Countrila Real GNP, % change, annual rates Wholesale Prices, % change, A.R. 21/ . . . . . 1/ Differs . . . I I - . . I1 i from Intl. Acct. date (lin . 69,0 (3,4) 66.2 (-7,0) 67.7 (9.1) 62,8 (22.5) Merchandise imports (% change, annual rates) 66.9 (0.4) 71,2 (13.4) 74.7 (4.8) 71.0 (33.5) 70.2 (-4.5) 5.3 10.4 .. .4 7.4 68.9 65.2 (7.4) (*24,8) 65.5 68.3 70.6 (2.8) (18.3) (13.9) 72.2 (9.5) 73.9 (9.5) 75.5 (9.1) 70.8 (3.7) 74.3 (9.1) 74.7 (2.0) 74.4 (-1.6) 75.2 (4.5) 76.1 (4.9) 77.6 (8.2) 4.9 4.5 4.5 6.1 4.1 5.7 4.1 5.7 4.5 5.7 4.1 5.7 0,8 3.7 72.7 (10,8) 3.7 2.8 m 'glq 1 1) in the inclusion of revisions a4 new data. ./ Excludes grants to Israel under military aesistance acts and exports financed by those grants, Z/ Excludes U.S. Govt, interest payments to fpreigners, which are included in line 15. A/ Includes travel, transportation, fees and royalties, and piacellaneous other service transactiopa. /1 Includes U.S. Govt. grants, U.S. Govt. interest payments to foreignars, remittances and pensions, and exports to Israel financed by U.S. tmitary assistance grants. - 6/ Weighted by the shares of Canada, France, Germany, Italy, Japan and the United Kingdom in the sum of the real GNP of the six countries in dollar terms. 7/ Data are largely manufactured goods prices. p/ Projected e/ Estimated */ Published data.
@FedFRASER