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Confidential (FR) Class III FOMC
May 10,
1989
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
Page
II
Labor market developments .........................................
Industrial production and capacity utilization....................
Personal income and consumption ...................................
Autos and trucks ..................................................
Business fixed investment........................................
.
Business inventories..............................................
Housing markets.....................................
..............
Federal government................................................
State and local government sector.................................
Prices............................................................
1
7
10
14
16
20
24
26
28
30
Tables
Changes in employment..............................................
Selected unemployment rates.......................................
Employment cost index .............................................
Selected measures of labor costs in the nonfarm business sector...
Growth in selected components of industrial production............
Percent change in orders for durable manufacturing................
Capacity utilization in industry..................................
Personal income ...................................................
Real personal consumption expenditures............................
Sales of automobiles and light trucks.............................
Business capital spending indicators.............................
Surveys of plant and equipment expenditures.......................
Changes in manufacturing and trade inventories....................
Inventories relative to sales.....................................
Private housing activity...........................................
Recent changes in consumer prices.................................
Recent changes in producer prices..................................
Monthly average prices, West Texas intermediate...................
Price indexes for commodities and materials........................
2
2
4
6
8
8
9
12
12
15
17
21
22
22
25
32
32
39
41
Charts
Employment cost indexes: private industry..........................
Nonresidential construction and contracts.........................
The price of oil, and rigs in use.................................
Ratio of inventories to sales.....................................
Private housing starts............................................
Federal defense spending.........................................
.
Selected components of state spending
as a percent of personal income.................................
Recent inflation trends ...........................................
Consumer price indexes for food ...................................
Livestock prices ..................................................
Farm crop prices ..................................................
Daily spot and posted prices of West Texas intermediate...........
Index weights ....................................................
5
19
21
23
25
29
29
31
34
35
37
39
41
Appendix
Budget Update:
The Bipartisan Agreement and Budget Resolutions...
A-1
ii
DOMESTIC FINANCIAL DEVELOPMENTS
III
Monetary aggregates and bank credit...............................
Business finance..................................................
Municipal securities..............................................
Treasury and sponsored-agency financing...........................
Mortgage markets..................................................
Consumer installment credit .......................................
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 activity at all FSLIC-insured institutions...............
New issues of mortgage-backed pass-through securities
by federally related agencies.................................
ARM discounts.....................................................
Average ARM index values and initial rate spreads.................
Consumer credit ...................................................
Consumer interest rates...........................................
Charts
Net borrowing by Federal Home Loan Banks and the yield
on their securities relative to Treasury securities...........
FNMA required yield on FRMs less yield
on 10-year Treasury securities................................
INTERNATIONAL DEVELOPMENTS
3
5
9
11
13
21
2
6
8
10
12
16
16
18
18
20
20
14
15
IV
U.S. merchandise trade............................................
U.S. international financial transactions.........................
Foreign exchange markets...........................................
U.S. bank lending to foreigners..................................
Developments in foreign industrial countries......................
Economic situation in major developing countries..................
Tables
U.S. merchandise trade: monthly data..............................
U.S. merchandise trade: BOP basis.................................
Oil imports.......................................................
Import and export price measures...................................
Summary of U.S. international transactions........................
International banking data........................................
Claims on foreigners of U.S.-chartered banks......................
Japanese economic indicators......................................
.
Major industrial countries
Real GNP and industrial production..............................
Consumer and wholesale prices...................................
Trade and current account balances..............................
German economic indicators.........................................
German inflation indicators........................................
Chart
Weighted average exchange value of the U.S. dollar..................
Indicative secondary market prices of bank loans
for six of the Baker Initiative countries.....................
1
6
10
13
17
27
1
2
4
5
7
9
14
18
19
20
21
23
24
11
16
DOMESTIC NONFINANCIAL DEVELOPMENTS
Economic activity appears to have decelerated in recent months.
Employment gains diminished noticeably in March and April, and manufacturing
payrolls have declined since January as factory orders have moved lower.
Among domestic spending categories, housing activity has weakened
considerably, and there is evidence of a slackening in consumer demand; by
contrast, business fixed investment apparently has remained fairly buoyant.
The uptrend in price inflation has been exacerbated by sharp increases in
food and energy prices.
Hourly compensation gains also appear to be
trending upward, but at a surprisingly gradual rate, given the reported
tightness of labor markets.
Labor Market Developments
Nonfarm payroll employment increased 200,000 on a strike-adjusted basis
in March and 120,000 in April--compared with an average pace of 300,000 per
month in the preceding half year.
Nearly all of the April increase occurred
in the services industry, though even there gains in business and health
services were significantly less than those seen earlier in the year.
Elsewhere in the service-producing sector, jobs in real estate and finance
declined, and hiring at retail and wholesale trade establishments slackened
considerably.
Factory employment edged down last month as electrical
machinery suffered a loss for the fifth consecutive month and weakness
continued in the lumber and wood products industry, apparently reflecting
slowing in construction activity.
Moreover, revised data no longer show the
sizable rebound in manufacturing employment previously reported for March.
II-1
II-2
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1988
1987
1988
Q3
Q4
Q1
1989
Feb.
Mar.
Apr.
--------------- Average Monthly Changes-------------Nonfarm payroll employment2
Strike-adjusted
303
303
227
229
301
296
290
301
276
278
171
199
38
21
16
21
68
33
22
11
26
80
2
7
-6
19
52
64
38
26
22
73
16
1
15
16
116
-12
-19
7
-23
92
6
-14
20
-35
97
-9
-7
-2
6
16
16
99
28
10
112
28
4
88
51
16
111
3
7
101
24
24
127
57
4
101
-2
-6
99
-14
Private nonfarm production workers
Manufacturing production workers
208
30
217
22
124
-3
242
50
225
10
164
-8
146
2
60
-11
Total employment 3
Nonagricultural
257
252
189
191
123
105
213
207
376
371
142
219
283
300
-23
79
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance and
real estate
Services
Total government
286 ,
283
117
121
1. Average change from final month of preceding period to final month of period indicated.
2. Survey of establishments. Strike-adjusted data noted.
3. Survey of households.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1987
1988
Q3
Q4
Ql
Feb.
1989
Mar.
Apr.
Civilian, 16 years and older
6.2
5.5
5.5
5.3
5.2
5.1
5.0
5.3
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
16.9
9.7
4.8
4.8
15.3
8.7
4.2
4.3
15.3
8.5
4.1
4.4
14.6
8.7
4.1
4.2
15.0
8.4
4.0
4.0
14.8
8.1
4.0
3.9
13.7
7.7
3.8
4.0
14.4
8.4
4.2
4.1
White
Black
5.3
13.0
4.7
11.7
4.8
11.3
4.6
11.3
4.4
11.6
4.3
11.9
4.2
10.9
4.6
10.8
Fulltime workers
5.8
5.2
5.1
5.0
4.9
4.8
4.8
5.0
Memo:
Total National'
6.1
5.4
5.4
5.3
5.1
5.1*
4.9
5.2
1988
1. Includes resident armed forces as employed.
II-3
As a result, the level of manufacturing employment in April was down 15,000
from January.
As measured by the household survey, nonagricultural employment also
rose only modestly in April after expanding more than 1.1 million in the
first quarter.
Unemployment rose sharply, particularly among adult men.
As a result, the civilian unemployment rate moved back up to 5.3 percent.
This rise in joblessness apparently reflected the slower growth of job
opportunities as data on new claims for unemployment insurance do not
indicate an increase in layoffs.
Hourly compensation of private industry workers rose 4-1/2 percent in
the twelve months ended in March, according to the employment cost index
(ECI).
This exceeds the increase over the year ended March 1988 by about
3/4 percentage point.
Wage inflation has drifted up further to
4-1/4 percent, and benefits costs are still rising in excess of
5 percent.
Health insurance costs have continued to rise rapidly,
but the contribution of social security taxes to the rise in benefits is
much smaller this year than in 1988, when there was a jump in the payroll
tax rate.
In the service-producing sector, the rise in hourly compensation over
the past year has trended up to 5-1/4 percent.
Large increases occurred in
health services, where employment growth has continued strong and shortages
of workers are frequently reported.
Substantial gains also were recorded
for sales workers in finance, insurance, and real estate, in which pay is
1. The quarterly series on ECI wages and salaries that is seasonally
adjusted by the Board staff decelerated in the first quarter. This series,
however, has fluctuated widely over the past year, raising some question
about the quality of the seasonal adjustment.
II-4
EMPLOYMENT COST INDEX
(Private industry workers; twelve-month percent changel
)
1988
Sept.
Dec.
1989
Mar.
4.5
4.5
4.9
4.6
4.4
3.6
4.8
4.3
4.5
4.4
4.4
5.1
3.5
5.3
5.0
4.4
5.3
3.7
4.4
2.9
4.4
4.7
3.6
4.4
4.5
4.6
5.0
4.4
5.3
5.2
3.6
4.9
2.8
3.6
3.9
5.1
3.9
4.0
4.3
4.5
4.5
4.5
3.9
5.1
3.0
5.1
3.3
3.5
4.1
6.8
3.3
5.8
3.7
6.4
3.7
6.7
4.1
6.8
4.2
5.4
1987
1988
Private industry workers
3.3
4.9
3.9
By industry:
Goods-producing
Service-producing
3.1
3.7
4.4
5.1
By occupation:
White-collar
Blue-collar
Service workers
3.7
3.1
2.4
By bargaining status
Union
Nonunion
Mar.
June
Total compensation costs:
Memo:
Wages and salaries
Benefits
1. Changes are from final month of preceding period to final month of period
indicated.
II-5
Employment Cost Indexes: Private Industry
ALL INDUSTRIES
COMPENSATION BY SECTOR
12-month percent change
-7
12-month percent change
-
~
INDUSTRIES
COMPENSATION
--
5
--
3
WAGES & SALARIES
--
3
GOODS-PRODUCING INDUSTRIES
I
I
1984
I
I
1986
I
COMPENSATION BY OCCUPATIONAL GROUP
12-month percent change
1984
1986
I
I
1988
1984
I
I
I
I
1986
1988
COMPENSATION BY UNION STATUS
12-month percent change
1984
1986
1988
II-6
SELECTED MEASURES OF LABOR COSTS IN THE NONFARM BUSINESS SECTOR
(Percentage change at annual rates)
1988
1987
1988
Q1
Q2
Q3
Q4
Q1
3.3
4.9
5.4
5.3
3.9
4.8
4.3
3.7
3.1
2.4
5.0
' 4.4
5.3
4.6
6.3
4.9
5.5
4.8
6.0
4.4
2.8
5.3
5.7
3.8
4.9
5.4
3.0
3.4
3.1
3.7
4.4
5.1
6.5
4.3
4.5
6.0
2.8
4.4
3.7
5.9
3.2
5.1
2.8
3,6
3.9
5.1
5.8
5.1
4.4
5.4
3.0
4.2
2.4
5.7
2.3
5.1
Wages and salaries, all persons 3.3
4.1
3.3
4.6
3.7
5.0
3.7
Benefits, all persons
6.8
12.6
6.0
4.2
4.5
7.0
Labor costs and productivity, all persons
Nonfarm Business Sector
Output per hour
1.9
.7
4.1
4.8
Compensation per hour
Unit labor costs
2.1
4.0
3.4
3.5
.1
-2.4
4.2
6.8
2.0
5.7
3.7
1.0
5.2
4.1
.5
5.7
5.2
Manufacturing
Output per hour
Compensation per hour
Unit labor costs
3.2
5.4
2.2
3.7
3.0
-.7
5.2
4.8
-.5
1.6
5.1
3.5
3.8
4.1
.4
Major collective bargaining agreements 3
First-year wage adjustments
2.2
2.6
Total effective wage change
3.1
2.6
2.1
3.2
2.6
3.0
2.5
2.8
2.6
2.6
3.2
2.7
Average hourly earnings, production workers
3.7
3.0
Total private nonfarm
Manufacturing
2.3
2.9
Services
4.6
4.9
2.2
1.3
4.2
5.1
4.6
5.6
3.5
2.5
4.4
4.2
3.3
5.3
3.0
2.1
4.8
Hourly earnings index, wages of production workers
Total private nonfarm
2.6
3.5
3.1
3.8
2.9
1989
April
Monthly
4.1
Employment cost index 1
Compensation, all persons
By occupation:
White collar
Blue collar
Service workers
By sector:
Goods-producing
Service-producing
By bargaining status:
Union
Nonunion
3.5
3.4
1.6
-1.8
1. Changes are from final month of preceding period to final month of period
indicated at a compound annual rate. The data are seasonally adjusted by FRB staff.
2. Changes over periods longer than one quarter are measured final quarter of
preceding period to final quarter of period indicated at a compound annual rate.
Seasonally adjusted data.
3. Agreements covering 1,000 or more workers; not seasonally adjusted. The numbers
reported are cumulative averages from the beginning of the year through the indicated
quarter.
4. Values for the HEI after 1988 were produced by FRB staff.
II-7
heavily influenced by volatile sales commissions.
By contrast, the rise in
hourly compensation in the goods-producing sector slowed about 3/4
percentage point to 3-1/2 percent in the year ended in March.
Wage data for the second quarter are limited to average hourly earnings
in April, which increased almost 0.7 percent after moderate gains in the
first quarter of about 1/4 percentage point per month.
The sharpest
increases occurred in business and health services, and in finance,
insurance, and real estate.
Productivity in the nonfarm business sector was estimated to have risen
just 1/2 percentage point in the first quarter, and it has grown at a rate
somewhat less than our current trend estimate since mid-1988.
Although the
corresponding data on hourly compensation are not as reliable as the ECI,
the deterioration in productivity growth does suggest some upward pressure
on labor costs.
Industrial Production and Capacity Utilization
After rising rapidly through January, industrial production is
estimated to have flattened in the next two months.
Available data for
April, however, now suggest a moderate gain in industrial production.
part, this pattern has been influenced by the auto sector.
In
But more
fundamentally, a slowdown in industrial activity is consistent with the
softening in new orders for durable manufactured goods that emerged late
last year.
For April, the combination of a rise in auto assemblies from 7.1 to 7.4
million units (FRB seasonals) and an increase in truck production is likely
to add from 0.1 to 0.2 percentage point to the rise in industrial
production.
Other physical product data for April were mixed:
Electricity
II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1988
19871
19881
Q3
Q4
1989
Ql
---Annual rate--Total Index
Ex. motor vehicles
5.8
5.9
5.0
4.9
7.1
7.5
4.6
3.9
Products
Consumer goods
Motor vehicles
Other
4.9
3.2
4.4
3.0
5.4
6.0
8.8
5.6
6.4
6.6
-1.1
7.4
4.4
7.5
20.5
6.0
Business equipment
Motor vehicles
Computers
Other
7.0
3.9
9.4
6.4
8.3
10.7
8.7
8.0
9.4
1.3
.1
14.0
3.1
9.7
35.9 -14.6
.1 26.9
1.6
6.3
Construction supplies
4.7
5.2
.9
Materials
Durable
Consumer durable parts
Equipment parts
Basic metals
7.2
8.0
1.8
6.3
21.3
4.6
6.9
9.0
6.8
3.6
8.1
5.9
12.6
4.9
4.6
.0
5.1
Energy
Memo:
Manufacturing
7.1
4.9
6.5
8.6
1.9
8.8
.1
-.1
-5.3
1.9
-2.0
4.1
2.4
6.6
7.6
8.5
11.4
7.8
-.7
14.3
7.7
-1.7
-5.8
5.9
5.6
7.2
5.1
.0
.1
.0
.2
.6
.3
-1.5
.5
.2
.3
-.6
.5
-.1
-.4
-2.3
-.2
1.1
-4.7
2.1
1.3
.6
-1.6
1.2
.6
.1
-4.7
.1
.5
-.6
.4
.0 -.3
..
6
-.6
-.6
-.1
.8
.0
1.2 -1.1
.1
-.2
-1.8
.1
.0
.8
-.2
.1 -1.5
.4
.5
.5
.7
.8
6.0
1.7
7.0
-.1
Mar.
.4
.4
3.6
8.3
9.0
5.5
8.3
24.7
1989
Feb.
--Monthly rate--
3.0
3.3
4.5
Nondurable
Paper
Chemical
Jan.
.6
4.6
-2.2
.8
.2
.1
.4
-.1
1. From the fourth quarter of the previous year to the fourth quarter of the year
indicated.
PERCENT CHANGE IN ORDERS FOR DURABLE MANUFACTURING
(For industries that report unfilled orders; seasonally adjusted)
1989
Feb.
Q3
Q4
1989
Q1
Jan.
Orders for durable goods ex. civilian
aircraft, defense, and motor vehicles
2.9
1.6
.9
.9
-2.3
Nondefense capital goods excluding
excluding aircraft
4.5
-2.3
6.0
-2.6
1988
Note: Percent change from previous comparable period.
4.9
Mar.
-1.1
.9
II-9
CAPACITY UTILIZATION IN INDUSTRY 1
(Percent of capacity; seasonally adjusted)
1967-88
Ave.
Total industry
1973
Ave.
1978-79
Ave.
1988
Mar.
Jan.
1989
Feb.
Mar.
81.6
87.9
85.0
82.4
84.4
84.2
84.0
80.7
87.0
84.4
82.7
84.9
84.7
84.4
Primary processing
Advanced processing
82.0
80.2
91.3
85.1
86.3
83.3
86.9
80.7
88.7
83.2
88.5
83.1
88.2
82.8
Durable manufacturing
Iron and steel
Nonferrous metals
Fabricated metal products
Nonelectrical machinery
Motor vehicles & parts
Autos
78.8
79.0
81.5
78.0
78.2
78.2
76.1
86.2
97.9
94.2
84.0
86.6
94.5
89.3
83.5
88.2
87.1
84.6
83.2
83.6
81.7
80.6
83.2
84.3
82.4
79.0
79.3
65.8
83.4
92.2
89.2
84.6
84.3
86.6
75.7
83.3
89.1
88.9
84.4
84.7
85.4
72.9
83.0
88.9
88.9
84.1
84.7
82.4
71.7
Nondurable manufacturing
Paper and products
Chemicals and products
Petroleum products
83.6
88.8
79.3
86.9
88.1
94.2
86.9
97.1
85.7
89.4
81.4
87.8
85.8
95.1
85.0
88.5
86.9
95.1
89.3
87.5
86.6
93.8
88.9
88.6
86.3
94.1
88.7
86.4
86.5
86.7
91.4
92.8
90.5
85.3
80.6
81.0
82.3
80.5
81.2
82.3
81.6
81.8
82.3
80.7
87.8
92.0
81.3
91.1
100.4
93.8
96.8
91.1
86.7
90.7
94.0
92.1
85.9
82.4
86.5
99.2
97.8
87.5
84.8
93.3
100.2
98.1
90.7
84.3
87.6
99.2
96.2
90.8
84.2
87.8
99.6
96.5
91.0
Manufacturing
Mining
Utilities
Memo:
Industrial materials
Raw steel
Aluminum
Paper materials
Chemical materials
1. Data for iron and steel, nonferrous metals, paper and products, chemicals and
products, raw steel, aluminum, paper materials, and chemical materials are unpublished
estimates for March.
II-10
generation edged up; paper, paperboard, refinery products, and coal output
increased, but raw steel production declined.
Poduction worker hours, which
are important indicators of activity in areas where physical product data
are unavailable, rose entirely because of a rebound in the workweek.
Weekly
hours, which have fluctuated in recent months, were affected in April by the
timing of Easter and probably do not provide a reliable signal of
production.
For the first quarter as a whole, production of business equipment was
an area of particular strength, consistent with the information on orders
for nondefense capital goods (table).
However, output of construction
supplies slowed considerably, and production of durable and energy materials
was down compared with its level at the end of last year.
The drop in
energy materials primarily reflected movements in coal mining and a fall in
crude oil extraction in March--in part a result of the Alaskan oil spill.
The weakness in durable materials stemmed from a decline in output of parts
for consumer durable goods (related to a decline in first-quarter auto
assemblies) and a sharp deceleration in the production of equipment parts.
Capacity utilization in manufacturing, mining, and utilities has
slipped since January, consistent with the flatness in industrial
production.
Within manufacturing, utilization rates for both advanced and
primary processing declined over the quarter.
At the same time, there have
been some indications of an easing of price pressures for intermediate
materials.
Personal Income and Consumption
Real disposable income was about unchanged in March, after posting big
gains in January and February.
The slowdown in March reflected a drop in
II-11
farm proprietors' income that came on the heels of sharp increases in
January and February, reflecting higher government subsidy payments and
BEA's assumption of a return to normal crop yields in 1989.
In March,
growth in wages and salaries--excluding special profit-sharing payments to
workers in the automobile industry--was moderate for a second month.
Meanwhile, the uptrend in short-term interest rates again showed through in
personal interest income, while transfer payments were lifted by retroactive
social security payments.
2
The large gains in real disposable income
during January and February brought growth on a quarterly average basis to
7-3/4 percent at an annual rate.
Personal consumption expenditures fell 0.4 percent in real terms in
March, owing in part to lower outlays for motor vehicles.
Based on advance
estimates of retail sales, spending in March also moved down sharply for
apparel and food.
For the first quarter as a whole, real PCE growth slowed
to 1-1/4 percent at an annual rate, compared with growth of 3-3/4 percent
over the four quarters of 1988.
In part, the first-quarter slowdown
reflected a weather-related dip in household energy expenditures and
lackluster automobile sales, both of which are likely to rebound in the
current quarter.
Although the monthly consumption data often are revised
substantially, they nonetheless provide some hint that the underlying
strength of spending has eased somewhat in recent months, coincident with
the slackening in labor markets.
As a result of the steep rise in disposable income and the slowing in
consumption, the saving rate jumped from 4-1/4 percent in 1988-Q4 to
2. The "retroactive" social security payments resulted from recalculation
of the earnings base underlying benefits for recent retirees.
II-12
PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)
1988
1989
1989
r
Feb.r
Mar.
71.1
43.7
34.1
20.8
17.3
29.7
23.8
11.6
9.1
21.0
18.9
1.0
1.0
1.0
1.0
-1.4
12.5
12.0
25.1
23.9
17.8
17.4
-5.5
-5.2
4.9
7.0
10.6
9.3
10.4
12.1
Transfer payments
3.3
2.7
8.2
14.5
3.5
6.7
Less: Personal contributions
for social insurance
2.0
1.2
3.4
8.5
.6
1.2
4.0
6.5
11.2
2.1
6.3
21.7
24.7
43.1
59.9
41.6
7.4
10.8
19.2
27.8
27.0
1988
Q4
Q1
Jan.
21.8
28.7
49.6
14.7
12.6
18.2
16.0
.9
Proprietors' income
Farm
.1
-1.5
Rent, dividends and
interest
Total personal income
Wages and salaries
Private
Other labor income
Less: Personal tax and nontax
payments
Equals: Disposable personal income
Memo: Real disposable income
.2
.9
1.0
27.8
2.7
r--Revised.
P--Preliminary.
REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from preceding period)
1988
1988
Q4
1989
Q 1p
---Annual rate---Personal consumption
expenditures
1989
Jan.r
Feb.r
Mar.
----Monthly rate---
3.7
3.5
1.3
.0
.3
-.4
Durable goods
Excluding motor vehicles
7.5
7.2
6.1
9.3
-3.2
4.6
-2.4
.3
-1.5
-.6
-1.1
.4
Nondurable goods
Excluding gasoline
1.9
1.9
1.3
1.1
2.0
3.0
1.0
1.0
.3
.6
-.8
-1.0
Services
Excluding energy
3.9
3.7
4.2
4.6
2.4
3.8
.0
.6
.8
.1
Memo:
Personal saving rate
(percent)
4.2
4.3
5.7
5.1
5.8
r--Revised.
p--Preliminary.
.0
.2
6.3
II-13
5-3/4 percent in the first quarter.
The rise in the saving rate over the
past several quarters could reflect, at least to an extent, the adjustment
of household spending to the lower level of net worth relative to income
that has prevailed since the stock market peaked in August 1987.
However,
the rise in the saving rate in the first quarter also reflects several
factors largely unrelated to longer-run saving and consumption decisions.
Among these factors, measured farm proprietors' income increased $31 billion
during the first quarter, reflecting an assumed absence of drought-related
influences.
3
Assuming that farmers smoothed their consumption relative to
the decline in NIPA income during 1988, the saving rate late last year
probably was understated relative to an underlying level--perhaps on the
order of 3/4 percentage point. 4
A second factor boosting the saving rate during the first quarter was a
$21 billion increase in transfer payments--roughly $12 billion of which
reflected cost-of-living adjustments in social security benefits and other
transfer payments.
Because future increases in transfer payments are not
expected to be as large as they were in the first quarter and because
measured spending is expected to adjust gradually, the saving rate should be
expected to decline, other things being equal, over the rest of the year.
Assuming these transitory increases in income are not repeated and that
3. The largest part of the increase in farm proprietors' income--roughly
$25 billion--is attributable to the assumed return of farm yields for 1989
to a level unaffected by the drought. An additional, indirect effect of the
drought is the fact that federal set-aside requirements have been relaxed,
leading to a higher percentage of land expected to be under cultivation for
the 1989 crop year.
4. Note that farm income in the NIPA is a measure of profits from current
production and, therefore, nets out the receipts from sales of farm inventories. The cash income of farmers, which includes the receipts from sales
of inventories, was much stronger last year than the NIPA measure. Thus, it
appears that farmers as a group were not cash constrained in 1988.
II-14
outlays for motor vehicles and energy consumption increase in the second
quarter, the saving rate could be expected to drop sharply. 5
Autos and Trucks
Sales of domestically produced cars picked up to an annual rate of 7.5
million units in April (BEA seasonals), reflecting the introduction of a new
round of incentive plans.
The latest batch of incentives is scheduled to
expire in late May at Ford and in early June at GM; Chrysler's program is
open-ended.
However, given the relatively modest gains in sales that have
accompanied the recent round of incentives, all three domestic automakers
likely will find it necessary to maintain incentives in some form through
the end of the model year.
GM already has supplemented the program less
than two weeks after implementing it, with the announcement of beefed-up
rebates on several particularly slow-selling models.
Despite the pickup in sales last month, inventories of domestic makes
remained on the hefty side.
Stocks at both GM and Ford have grown nearly
100,000 units (not seasonally adjusted) since the end of 1988.
Apparently,
all three domestic automakers intend to finish production of 1989 models
at relatively high rates while supporting sales with incentive programs.
Production plans for the second quarter have been trimmed only modestly in
recent weeks, from 7.3 million units as of the last Greenbook to 7.1 million
5. The saving rate in the second quarter also likely will be depressed by
an upsurge in income tax payments. This subject is discussed in greater
detail in the Federal Government section.
II-15
SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate, BEA seasonals)
1988
1988
Q4
1989
Q1
Feb.
1989
Mar.
Apr.
Autos and light trucks
Autos
Light trucks
15.45
10.64
4.81
15.15
10.49
4.65
14.21
9.72
4.49
14.38
9.85
4.53
13.84
9.54
4.30
15.82
10.78
5.04
Domestically produced 2
Autos
Light trucks
11.74
7.54
4.21
11.59
7.47
4.12
10.92
6.91
4.01 r
11.13
7.07
4.06 r
10.46
6.63
3.83 r
12.02
7.52
4.50
3.70
3.10
.60
3.55
3.02
.53
3.30
2.81
.49
3.25
2.78
.47
3.39
2.91
.47
Imports
Autos
Light trucks3
3.79
3.26
.53
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.
3. Based on seasonals for domestic light trucks.
r--revised not seasonally adjusted data.
II-16
units currently.
Plans for the third quarter call for an assembly rate of
7.2 million units. 6
Sales of light trucks recorded a strong pace of 4.5 million units in
April, while sales of imported automobiles also picked up to a 3.3 million
unit annual pace--the fastest monthly selling rate since early 1988.
Because of the softer sales in the first quarter, many of the foreign
automakers also are running incentive programs.
Indeed, only a few popular
foreign brand names, including Mercedes-Benz, Toyota, and Honda have managed
to keep dealers' supplies at levels well below the 60-day mark.
For the second year in a row, shipments from Japan during the twelve
months ended March 31 fell below the ceiling imposed by the Voluntary Export
Restraint
(VER).
Nissan accounted for most of the shortfall, but its
shipments picked up during the second half of the agreement year--with the
introduction of two new models.
Although the Japanese Ministry of
International Trade and Industry has decided to extend the VERs for another
year, individual company allotments have not yet been announced.
Business Fixed Investment
BEA estimated real business fixed investment to have risen
9-1/2 percent at an annual rate in the first quarter, rebounding from the
weakness apparent at the end of last year.
Purchases of equipment were
estimated to have increased 10-1/4 percent, after falling 3-1/2 percent in
the fourth quarter.
Real outlays for nonresidential structures rose at an
6. The automakers have scheduled model changeover earlier this year than
the BEA seasonal factors are expecting; as a result, the planned July
assembly rate registers only 4.9 million units on a seasonally adjusted
basis, while the August and September rates are 9.0 and 8.0 million units
respectively.
II-17
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)
1988
Q3
Q4
1989
Q1
Jan.
1989
Feb.
Mar.
.9
.8
-3.3
1.9
3.1
3.2
-.3
4.0
2.0
-.1
-1.9
.4
.4
1.1
-4.3
2.3
1.7
-.2
9.1
-2.2
-.2
Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
2.6
2.4
.7
2.8
Weighted PDE shipments'
2.2
.8
3.1
-1.3
2.0
Shipments of complete aircraft2
-8.8
-14.8
-
95.3
-27.6
Sales of heavy-weight trucks
-2.3
7.7
-3.0
10.0
-5.3
-9.6
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing equipment
All other categories
9.1
4.5
-.4
5.8
.0
-2.3
-4.1
-1.8
5.2
4.9
-.4
6.1
2.3
-7.8
6.0
-2.6
.5 -12.2
7.4
-.4
2.4
.9
18.7
-2.7
Weighted PDE orders1
4.1
-.3
2.5
.1
-. 9
.3
1.1
-1.4
-4.1
1.2
11.3
4.1
2.8
5.4
8.7
-5.7
2.6
6.0
.9
2.8
3.2
-6.7
5.6
4.4
-1.0
2.1
1.0
-2.5
-5.7
-1.7
3.7
.8
3.7
2.9
12.2
3.2
-16.0
-5.4
-6.8
6.0
7.9
Nonresidential structures
Construction put-in-place
Office
Other commercial
Public utilities
Industrial
All other
1.6
1.0
-2.4
10.1
.1
-3.4
Rotary drilling rigs in use
-8.5
1. Computed as a 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 the Current Industrial Report (CIR) titled "Civil Aircraft and
Aircraft Engines." Seasonally adjusted with BEA seasonal factors. To estimate
PDE spending for aircraft, BEA uses the aircraft shipments shown in that report,
not the corresponding Census series. The CIR does not provide information on
aircraft orders.
II-18
8 percent annual rate in the first quarter, after a 1 percent decline in the
fourth quarter.
However, data released since the BEA's advance estimate
suggest some downward revision to these figures.
March shipments of
nondefense capital goods were a bit weaker than BEA had assumed, implying a
downward revision--perhaps $1 to $2 billion, or about 1 to 2 percentage
points at an annual rate--to first-quarter PDE spending in the next
estimate.
Similarly, first-quarter construction put-in-place data were
lower than BEA had assumed and imply about a $1 billion downward revision,
or 3-1/2 percentage points, to spending on structures.
Despite the potential for some downward revision, the first quarter
still appears strong, reflecting sizable increases for most types of
industrial machinery.
Computers, for which spending fell sharply in the
fourth quarter in real terms, also posted a sizable increase in the first
quarter.
Among the major components of equipment spending, only business
purchases of motor vehicles, both automobiles and trucks, declined
significantly.
In addition, gains in nonresidential construction were
widespread, with notable strength in the office and other commercial
sectors.
Equipment spending should continue to post healthy increases in the
near term, as new orders for nondefense capital goods, excluding the
aircraft group, rose 5 percent (2-1/2 percent when weighted to reflect the
fraction of business investment spending across categories) in the first
quarter.
Furthermore, despite large monthly fluctuations, aircraft
7. One area of weakness has been in office and computing equipment, where
nominal bookings have been sluggish since late last summer. There have been
some reports that the weakness in computer demand may be the result of
buyers taking time to evaluate the new, more powerful workstations and PCs
hitting the market.
II-19
Nonresidential Construction and Contracts <1>
TOTAL
Index, Dec. 1982 - 100, ratio scale
-- Construction (C)
--------
.
Contracts (CN)
1982
1980
Mar.
-
1986
1984
1988
OTHER COMMERCIAL
OFFICE
1984
-''
1986
1988
1984
INDUSTRIAL
1986
1988
INSTITUTIONAL
-- i 270
(CN)
I
I
1984
I
II
1986
1988
<1> Six-month moving average for all series shown.
1984
1986
1988
II-20
orders have been very strong.
In that regard, the late April press
announcements of aircraft orders by United Airlines and the GPA leasing
company--the largest ever in U.S. commercial aviation--added to an already
considerable backlog.
The outlook is weaker for structures.
The value of new construction
contracts, a broad indicator of future building activity, has moved lower
since 1987, suggesting that it is unlikely that nonresidential construction
can continue to rise at its recent pace.
The primary exception is the
industrial sector, where new contracts have been increasing since late last
year--a pattern typical of periods of tight capacity.
In addition,
petroleum drilling also appears to have turned around in response to the
increase in oil prices.
In the past, drilling activity has tended to follow
crude oil prices with a relatively short lag.
The number of drilling rigs
in use in April was 16 percent above the first-quarter average.
The latest Commerce Department survey of business plans for plant and
equipment outlays, taken in January through March, indicates a 9.1 percent
rise in nominal outlays this year.
These intentions are stronger than the
plans reported in the survey taken last fall, and the upward revision was
widespread across industries.
Like the fall survey, a wide confidence
interval must be placed around this forecast.
Nevertheless, the strength in
investment spending suggested by this survey is broadly consistent with the
continued increase in new orders for a wide range of capital goods.
Business Inventories
In current-cost terms, manufacturers' inventories rose at a $27 billion
annual rate during the first quarter, similar to the average rate of in-
II-21
The Price of Oil and Rigs in Use
Number of Rigs
Dollars per Barrel
3600
2700
Price of Oil*
(Right Scale)
1800
900
0
1983
1985
1987
1989
Refiners'
of
cost
acquisition
oil.
crude
" Rotary dding dg. In operaion, easonaly adjustd.
SURVEYS OF PLANT AND EQUIPMENT EXPENDITURES
(Percent change from previous year, current dollars)
1988
Planned for 1989
Commerce
Commerce
(Jan.-Mar.)
(Oct.-Nov.)
10.3
6.0
9.1
13.6
4.3
7.8
Durable
10.0
2.0
5.8
Nondurables
17.0
6.4
9.6
8.3
7.0
9.9
Mean error
-.4
.4
Mean absolute error
2.6
2.9
All business
Manufacturing
Nonmanufacturing
Memo:
1. As estimated in the January-March Commerce Department Survey.
2. Estimated from 1970 to the present.
II-22
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
Q3
1988
Q4
1989
Q1
76.4
53.2
23.3
19.2
33.9
23.2
10.7
38.7
41.3
25.5
5.4
7.8
-2.6
10.4
--27.0
5.6
----
25.5
16.8
5.7
8.1
11.7
8.7
3.0
26.3
18.8
11.2
2.2
12.9
7.5
5.5
1989
Feb.
Jan.
Mar.
Current-cost basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. auto
73.0
64.6
39.5
17.4
16.1
8.4
7.7
40.0
37.2
19.2
.6
20.2
2.8
17.4
43.0
26.4
19.2
6.5
17.2
16.6
.6
3.7
-.6
-5.6
-2.3
11.5
4.3
7.2
22.3
-1.3
Constant-dollar basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. auto
---------
INVENTORIES RELATIVE TO SALES'
(Months supply; based on seasonally adjusted data)
Q3
1988
Q4
1989
Ql
Jan.
1989
Feb.
Mar.
Range in
2
preceding 12 months:
Low
High
Current-cost basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. auto
1.48
1.46
1.53
1.28
1.54
1.66
1.48
1.52
1.50
1.62
1.32
1.62
2.01
1.51
1.52
1.49
1.58
1.31
1.61
1.98
1.51
1.50
1.48
1.57
1.30
1.59
1.88
1.51
--1.57
1.28
----
1.48
1.46
1.54
1.28
1.59
1.93
1.49
1.50
1.47
1.57
1.29
1.61
1.98
1.51
1.50
1.48
1.55
1.30
1.55
1.70
1.50
1.52
1.51
1.62
1.33
1.62
2.03
1.53
1.52
1.50
1.59
1.33
1.61
1.93
1.52
1.52
1.49
1.58
1.32
1.61
1.94
1.52
--------
1.51
1.48
1.57
1.31
1.62
2.03
1.51
1.53
1.49
1.59
1.31
1.64
2.08
1.52
1.58
1.28
Constant-dollar basis:
Total
Total ex. auto
Manufacturing
Wholesale
Retail
Automotive
Ex. 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 coincident
Range is for the 12-month period preceding the latest month for which data are
available.
II-23
Ratio of Inventories to Sales
(Constant dollar basis)
MANUFACTURING & TRADE EX. AUTO
MANUFACTURING
Ratio
Ratio
2.1
1.55
1-
-1
I
1983
1985
1987
WHOLESALE
1983
1989
Ratio
1985
1987
1989
I
1983
I
I
1985
I
I
1987
RETAIL EX. AUTO
I
1989
Ratio
1985
1987
1989
1.7
II-24
crease observed last year.
A substantial part of the first-quarter accumu-
lation was in stocks of work-in-process in transportation equipment, likely
reflecting increased parts and components in the aircraft industry where new
orders and production remain on a,
distinct uptrend.
Elsewhere, the
inventory position of manufacturers does not appear to be much different
from late last year; despite some uptick in February and March, the overall
inventory-to-shipments ratio at the end of the first quarter was about the
same as that posted in the fourth quarter.
In the trade sector, current-cost figures for the first quarter show
that the expansion of wholesale inventories continued at about the modest
fourth-quarter pace.
Drawdowns of inventories of farm products partially
offset buildups in stocks of durable goods, especially motor vehicles and
electrical goods.
In retail trade, the accumulation of inventories has
remained predominantly in the automotive area, but in February there also
was a fairly large rise in stocks at apparel and general merchandise
establishments.
With retail sales at apparel and general merchandise stores
sluggish, the inventory-sales ratios edged up.
However, the ratios for
these two types of retail establishments in February were still below the
recent highs set in early 1988, and as yet there are only scattered reports
of troubling imbalances.
Housing Markets
Housing activity, according to virtually every major indicator--starts,
permits, and sales--weakened over the course of the first quarter.
Total
housing starts averaged 1.52 million units, down 3 percent from the fourth
quarter, and building permits fell 10 percent to 1.38 million units.
of new and existing homes also moved lower in recent months.
Sales
The diminished
II-25
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates; millions of units)
1988
1988
1989
1989
Annual
Q3
Q4
Q1
Jan.
Febr
Mar.
1.45
1.49
1.43
1.47
1.53
1.56
1.38
1.52
1.51
1.68
1.42
1.48
1.22
1.40
Single-family units
1.00
Permits
1.08
Starts
.99
1.06
1.05
1.14
.98
1.08
1.06
1.20
1.00
1.03
.87
.99
.68
3.59
.70
3.66
.68
3.77
.64
3.45
.69
3.55
.63
3.48
.59
3.33
.45
.41
.43
.41
.48
.42
.41
.44
.44
.48
.42
.44
.35
.40
All units
Permits
Starts
Sales
New homes
Existing homes
Multifamily units
Permits
Starts
p--preliminary estimates.
r--revised.
PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions
of units
2.4
-
2.0
-- 1.6
Total
,
-4
"".
\ **.-
*
*
*1
Single-family
I
1981
1982
I
I
1983
1984
1985
0
I
1986
1987
1988
1989
II-26
pace of activity in housing markets likely reflects a response to higher
interest rates on fixed- and adjustable-rate mortgages, which are up, on
average, about 40 and 50 basis points, respectively, from the fourth quarter
of last year.
In March, total starts fell 5 percent to 1.40 million units, and
building permit issuance dropped 14 percent.
both the single and multifamily sectors.
to be weather related.
The weakening was evident in
The March declines do not appear
But even so, the figures look weaker than would
ordinarily be implied by interest rates and income growth, and some rebound
seems probable in the near term.
In the multifamily sector, vacancy rates
remained at 9-1/4 percent in the first quarter, suggesting that building
likely will remain damped in coming months.
Federal Government
According to BEA's advance estimate, real federal purchases fell at a
2-3/4 percent annual rate in the first quarter and, excluding changes in CCC
inventories, were down 6-1/2 percent.
A $6-1/2 billion drop in defense
spending more than accounted for the overall decline.
A generally weakening
(though uneven) pattern of defense expenditures has characterized the past
few years when military budgets have been constrained (chart).
Federal
compensation was boosted by the annual federal pay raise, while the annual
COLA in social security and some other indexed programs raised transfer
payments to persons.
On the receipts side of the budget, monthly Treasury data indicate that
withheld personal income taxes plus social security taxes rose 8-1/4 percent
in the first quarter on a year-over-year basis, up from 7-1/2 percent in the
fourth quarter.
Individual nonwithheld tax collections in the first quarter
II-27
were about 7 percent above year-earlier levels, but more recent daily data
show a surge in receipts that could lift this year's peak April-May collections as much as 20 percent above receipts from last year.
Moreover, refund
payments appeared to slow in April after a strong upswing in March.
At this
point, the causes underlying the higher revenues are not clear.
Comparing receipt and outlay figures on a total budget basis, data for
the first half of FY1989 show a deficit of $128.4 billion, up from
$119.6 billion a year ago.
The strength in receipts in April and May,
however, suggests a lower full-year deficit than would be implied by a
simple extrapolation from these numbers, even though higher interest rates
are boosting the cost of debt service.
Meanwhile, Congress is proceeding to lay the groundwork for the FY1990
budget.
The broad outlines were established in an April 14 bipartisan
budget agreement between the President and the joint leadership of the
Congress, which indicates deficit reduction amounting to roughly
$28 billion.
9
OMB estimates that the agreement is consistent with the
$100 billion Gramm-Rudmann target for the FY1990 deficit, based on the
economic projections used by President Bush in February.
More recently,
8. It also is not clear how BEA will treat these higher payments in the
NIPA. Normally, they seasonally adjust final tax payments and refunds,
which are heavily concentrated in the second quarter, effectively spreading
normal payments throughout the year. To the extent that BEA decides to
treat the recent strength in collections as reflecting continuing growth in
taxes owed--possibly from larger-than-estimated increases in nonwage income
or the base-broadening provisions of the 1986 Act--they will raise NIPA
personal tax payments in each quarter of 1989 to take account of this
spring's experience. However, if they treat some or all of the recent surge
as reflecting temporary, special factors--perhaps one-time responses to the
two-step phasing in of lower tax rates or to financial market developments-the transitory amount would be shown, at an annual rate, entirely in the
second quarter.
9. Further information on the leadership agreement and on the Senate and
House budget resolutions is presented in the appendix.
II-28
both the Senate and the House of Representatives have passed their
respective versions of the Congressional budget resolution, the first step
toward implementing the bipartisan agreement.
Once a single resolution is
adopted, the stage will be set for specific appropriations and other
substantive legislation.
State and Local Government Sector
BEA estimated that real purchases of goods and services by state and
local governments increased at a 4 percent annual pace in the first quarter,
quite a bit below the 6 percent gain at the end of last year, but still
robust.
More recent data, however, indicate that real state and local
construction expenditures declined at a 9-1/2 percent monthly rate in March
(based on BEA seasonals), a much greater decline than that assumed by BEA at
the time of the advance GNP estimates.
These data suggest that quarterly
growth in total real purchases will be revised down, probably to around
2-1/2 percent; this represents a downward revision to real purchases of
$1-1/2 billion.
For the first quarter as a whole, the fiscal situation for the sector
appeared to deteriorate further, as the deficit on operating and capital
accounts (excluding social insurance funds) probably increased to about
$18 billion or so (FRB staff estimate), compared with an annual average of
$13 billion in calendar year 1988 and less than $10 billion in 1987.
The
pressure on state and local budgets appears to have several origins.
Among
state governments, most categories of spending have increased relative to
personal income.
Spending in three key areas--Medicaid, corrections, and
education (chart)--is likely to be driven still higher by various government
II-29
Federal Defense Spending
Billions of 1982 dollars
(annual rate) -- I
Budget Authority (fiscal years)
1989
1988
1987
1986
1985
1984
1983
Selected Components of State Spending, as a Percent of Personal Income
0.7 --
Percent
Percent
--
2.5
Medicaid
0.6 -
-- 2.4
/
0.5 -- 2.3
0.4 r-
,
Elem-Sec. Education
0=
0.3
-1 2.2
_.-*
Corrections
"
-4
0.2
-
-_---
I
I
I
I
1979
I
I
I
I
I
I
1985
I
1987
Note: State spending from own sources, except for corrections which includes some spending from federal aid.
Source: National Conference of State Legislatures.
2.1
II-30
mandates already in place.10 As yet, few state governments have moved
aggressively to increase broad-based taxes or reduce spending in other
areas, raising the prospect that operating and capital accounts may remain
in deficit for some time.
Prices
The CPI for all urban consumers rose 0.5 percent in March, equal to the
average January-February pace.
The PPI for finished goods increased
0.4 percent in March, after surging 1 percent in each of the preceding two
months.
Over the first three months of the year, these measures rose at
annual rates of about 6 percent and 10 percent respectively.
Upward
pressures on food and energy prices were the principal factors boosting
inflation in the first quarter.
food and energy:
But the acceleration was not limited to
Price increases picked up for consumer services and, at
the producer level, for other consumer goods and for capital equipment.
Excluding food and energy, the CPI rose 0.4 percent in March, the same
as in February.
The commodities component increased 0.3 percent, as a
marked decline in prices for house furnishings offset much of an increase in
apparel prices associated with the introduction of higher-priced spring and
summer clothing.11 The seasonal pattern of recent years, which is not yet
fully reflected in the adjustment factors, suggests that the April CPI could
show another sizable increase for apparel.
10. Medicaid costs have increased owing to the escalation in medical
prices, and an expansion in the scope of federal coverage and services. In
the area of corrections, prison populations have swelled, partly in response
to stricter sentencing policies, and courts have been setting population
limits and other conditions on confinement. Similarly, for education, state
and local governments are faced with rising school enrollments along with
legislative pressures to improve educational achievement.
11. The drop in prices for house furnishings could reflect the lowering of
prices at Sears.
II-31
Recent Inflation Trends
Percent change from 12 months earlier
-
-r4.--
%
6
Services ex. energy
-- ^
---Mar.
4
Commodities ex. food & energy
-1 2
1
1985
I
I
1986
I
1987
1988
Percent change from 12 months earlier
Intermediate materials ex. food & energy
FI
I
Foe
,'
Finished goods ex. food & energy
1985
1986
1987
1988
II-32
So far this year, the CPI for nonfood nonenergy commodities has risen
at about a 4 percent annual rate, similar to the stepped up pace observed in
1988.
Recent data indicate that pressures from import prices have eased, at
least for the present, while prices of domestically produced goods have
continued to accelerate.
According to the latest BLS report, price
increases for imported consumer goods slowed considerably; over the twelve
months ended in March, these prices increased 3-1/2 percent, about half the
pace of the preceding year.
In contrast, domestic producer prices of
finished consumer goods (nonfood, nonenergy) accelerated more than
1 percentage point to a 6 percent annual rate during the first quarter.
Some of the first-quarter pickup reflects higher automobile prices and
likely will be reversed, at least in part, as the recent expansion of
incentive programs is reflected in the PPI.
Nevertheless, producer prices
accelerated in the first quarter for a variety of other consumer goods,
notably for recreational products, home electronic equipment, and alcoholic
beverages.
A pickup also was evident in the first quarter in the CPI for nonenergy
services, up at about a 6 percent annual pace, compared with a 1988 increase
of 5 percent.
The acceleration included a sharp jump for lodging out of
town, in part reflecting an atypical and likely temporary pattern of
seasonal rates.
12
But prices also accelerated in the first quarter for a
broad range of services, including the medical and entertainment categories.
Capital equipment prices were up about 5 percent in the first quarter,
compared with an increase of 3-1/2 percent last year.
Price increases were
12. One contributing factor was a late ski season in the West, so that "inseason" rates there remained in effect longer than usual.
II-33
particularly large for new cars, transformers, pumps and compressors, and
construction and paper industry machinery.
In contrast to greater price pressures among finished goods and
services, price inflation has eased a bit at the intermediate level, the
easing likely associated with the firmer dollar and some slowing in demand
for industrial materials.
The PPI for intermediate materials
(nonfood,
nonenergy) rose at a 6-1/4 percent rate during the first quarter, somewhat
below the average 1988 pace.
However, some renewed upward pressures could
emerge in the months ahead, as higher crude oil costs are passed through
into prices of petrochemicals and other petroleum-based products.
The PPI for crude nonfood materials less energy increased at nearly an
18 percent annual rate in the first quarter.
However, smoothing through the
considerable quarterly fluctuations, these prices have risen about 6 percent
over the past year.
Since March, prices in spot commodity markets have, on
balance, registered relatively small net changes, although the longer-run
trends still show these prices rising a bit faster than overall inflation.
The patterns among commodities have diverged widely, as prices rebounded for
aluminum, rose further for tin and cotton, and dropped back for hides and
zinc.
Food Prices.
Consumer food prices rose 0.8 percent in March, bringing
the year-over-year rise in the first quarter to a bit above 6 percent.
Some
of the recent runup in retail food prices is attributable to higher retail
prices for meats and produce.
These prices are especially sensitive to
changes in farm product values, which rose sharply in the first quarter. 1 3
13. The farm value of retail prices for meats is roughly one-half; and for
produce, farm product value added is about one-third.
II-34
Consumer Price Indexes for Food
(Percent change from year earlier)
TOTAL
-9
1988 Drought
1983 Drought
--
I
I
I
I
I
I
I
-
1986
1982
3
1988
FRUITS AND VEGETABLES
MEATS, POULTRY, FISH, AND EGGS
--
20
Share of CPI food (%): 18.9
20
Share of CPI food (%): 11.2
-
\\
10
- 10
+
_
I
0
I
I
10
1984
1982
1988
1986
1982
FOOD AT HOME, EXCLUDING MEATS
AND PRODUCE
1984
I
1986
1988
FOOD AWAY FROM HOME
9
Share of CPI food (%): 38.3
-4
1
1
1984
I
I
1986
I
I
1988
6
--
1982
6
3
3
I
I
t
1982
•
I
I
I
1984
I
I
I
I
1986
I
I
I
d
1988
II-35
Livestock Prices
(Not seasonally adjusted)
Ratio scale, $/cwt
Futures prices
as of Mar. 22
Spot price, Texas-Oklahoma
as of May 9
as of May 9
1984
1983
1987
1986
1985
1990
1989
1988
Ratio scale, $/cwt
Spot price, Omaha
Futures prices
as of May 9
7
-
as of Mar. 22
I
1983
I
I
1984
I
I
I
1988
1987
1986
50
-
40
I
1990
1989
Ratio scale, $/Ib
I
1983
I
1984
I
1985
I
1986
I
1987
I
1988
I
1989
1990
II-36
However, the upward pressures on retail food prices do not seem to have come
solely from farm prices.
Retail prices of foods other than meats and
produce, which account for more than two-thirds of the CPI for food and are
relatively more sensitive to changes in labor and packaging costs, have
accelerated nearly 4 percentage points from a year ago.
14
Prices for food
consumed away from home, for instance, are influenced more by labor costs
than by farm product prices and have accelerated about 1 percentage point
over the past year.
Looking ahead, the deterioration in underlying trends in food price
inflation is likely to be obscured by the more favorable developments at the
farm level, a pattern that is roughly consistent with that observed after
the 1983 drought and the more localized drought in 1986.
Sizable movements
of cattle into feedlots have helped depress spot and futures prices lately
and should ensure that supplies of beef will be ample in coming months.
However, futures quotes for hogs suggest that traders expect prices to
rebound from recent declines, partly reflecting seasonal price swings as
well as some diminished supply stemming from the current trimming of herds.
Retail prices for pork likely will follow a smoother path than spot prices
because retailers have maintained high margins for pork over the past few
months.
Although broiler prices have been strong this year, the USDA
forecasts that production will expand about 4 percent, which should push
prices down later in the year.
14. Of course, the lingering effects from last summer's drought may be
contributing to the relatively large increases in prices for foods such as
dairy products, cereal and bakery products, and fats and oils. However,
even for these food groups, farm inputs account for a relatively small share
of retail value, and the large price increases that have occurred this year
probably also reflect rising costs for nonfarm inputs.
II-37
Farm Crop Prices
(Not seasonally adjusted)
Ratio scale, $/bushel
--
5
Futures prices
CORN
-
as of Mar. 22
_
Spot price, Central Illinois
Corn Production
Yield
Ares
4
\
Acres
Yield
planted (bushels
(millions) per acre)
3
S....-1986
119.3
65.7
119.4
1988
67.6
84.6
1989
2
76.6
1987
as of May 9
73.3
n.a.
* Farmers' intentions, as
of March 1989.
1984
1983
1987
1986
1985
1990
1989
1988
Ratio scale, $/bushel
12
SOYBEANS
10
Futures pricesas of Mar. 22 .1planted
Mli ,r.
Soybean Production
-- r
. .--as of May 9
Acres
i
Y eld
1986
1987
1988
60.4
58.0
58.9
33.3
33.7
26.8
1989
Spot price, Central Illinois
61.7'
n.a.
(bushels
(millions) per acre)
8
6
* Farmers' intentions, as
of March 1989.
I
1983
I
I
I
1985
1984
1986
I
1987
I
I
1989
1988
___________
1990
Ratio scale, $/bushel
-
6
WHEAT
Futures prices
Wheat Production
as of May 9
Spot price, Kansas City
-Acres
as of Mar. 22
Yi(els
4
(millions) per acre)
1986
2
1983
1984
1985
1986
1987
1988
1989
1990
34.4
65.8
65.5
37.7
34.1
1989
3
72.1
1987
1988
74.3
n.a.
* Farmers' intentions, as
of March 1989.
II-38
At this early point in the current growing cycle, a significant rebound
in overall crop production seems likely, although drought still is affecting
some regions.
Acreage set-asides that are required for farmers to receive
government subsidies have been reduced this year, and the acreage that
farmers plan to devote to the major grain crops has increased.
moisture conditions have improved in several areas.
In addition,
However, the condition
of the winter wheat crop is poor in Kansas and fair elsewhere, and at this
time it appears that wheat stocks may remain relatively tight for another
year.
Moreover, with recent major grain purchases by the Soviet Union, and
with grain demand likely to remain strong for rebuilding inventories
worldwide, the runups in futures prices for delivery after the 1989 harvest
that resulted from last year's drought have not reversed.
Energy Prices.
Consumer energy prices rose more than 1 percent in
March and were up 5-3/4 percent at an annual rate in the first quarter.
On
a quarterly average basis, gasoline prices rose only 6-1/4 percent at an
annual rate in the first quarter.
In addition, prices for heating oil and
for natural gas have advanced sharply in recent months, rising at annual
rates of 23-1/4 and 9-1/4 percent respectively in the first quarter.
Recent developments suggest that energy prices will accelerate markedly
in the second quarter, followed by a partial reversal in the second half of
this year.
The Alaskan oil spill and a major platform accident in the North
Sea (both of which occurred after mid-March) have reduced non-OPEC oil
production, while OPEC countries have restrained output; the resulting
shortfall of crude oil has forced prices up to their highest levels since
early 1986.
The posted price of West Texas Intermediate (the benchmark
crude oil in the United States),
for instance, has risen from roughly $17
II-39
Daily Spot and Posted Prices of West Texas Intermediate
Dollar per barrel
Spot
i!
'I
SII
SPosted
P
te
I U-,,-,
June
July
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Posted prices are evaluated as the mean of the range Isted inthe Wall Street Journal.
MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
r
Month
Posted
Spot
June
July
August
September
October
November
December
January
February
March
April
May*
16.44
14.81
15.06
14.33
13.29
12.98
14.55
16.68
16.79
17.93
19.46
19.61
16.53
15.50
15.52
14.47
13.80
13.98
16.27
17.98
17.83
19.45
21.04
20.05
* Price through May 9, 1989.
II-40
per barrel in mid-March to just under $20 per barrel.
These higher crude
oil costs likely will be passed on to consumer prices in the next few
months.
It should be stressed, however, that crude oil production in the North
Sea is expected to return to full capacity by the end of May, and Alaska
production already has returned to full capacity; hence, the impact of these
accidents on crude oil prices probably will be temporary.
Consistent with
this view, futures prices for crude oil to be delivered in June have been
running about $3 per barrel higher than oil to be delivered in December.
On a somewhat different note, EPA's March ruling on gasoline Reid Vapor
Pressure (RVP), designed to control summertime smog problems, likely will
accentuate the pattern in energy prices this year.
(Moreover, seven
Northeastern states recently have been granted waivers to apply even tighter
RVP standards than those mandated in March.)
To produce less volatile
gasoline requires higher crude oil inputs, creating additional demands on
the U.S. refining industry at a time when refinery capacity already is
tight.
Moreover, several recent refinery problems in the West have further
tightened gasoline markets, contributing to a drawdown in gasoline
inventories as we enter the summer driving season.15
The staff estimates, albeit with substantial uncertainty, that the
tighter summertime RVP standards will push gasoline prices up an additional
15. In March, an explosion at a refinery in California cut refinery
capacity by roughly 40,000 barrels per day. In addition, many of the
refineries along the West Coast typically process Alaskan crude, and they
were forced to operate at reduced levels following the Alaskan oil spill
until alternative crude oil supplies could be acquired. These events
contributed to a drawdown of gasoline inventories in the past month,
particularly in the West, creating further upward pressure on gasoline
prices.
II-41
PRICE INDEXES FOR COMMODITIES AND MATERIALS1
Percent change2
Memo:
1989
Last
Observation
To
Mar. 21
Year
Earlier
To Date
Mar. 21
To
Date
seas. adj.
2.8
6.3
n.a.
9.6
1.8
10.7
22.6
14.2
-9.4
6.0
3.8
9.7
4.9
n.a.
n.a.
n.a.
13.9
6.6
6.1
Mar.
1b. Energy
1c. Ex. food and energy
1d. Ex. food and energy,
8.9
Mar.
Mar.
Mar.
1a. Foods and feeds
1988
Mar.
1. PPI for crude materials 3
1987
22.8
5.9
4.2
n.a.
6.1
2. Commodity Research Bureau
2a. Futures prices
2b. Industrial spot prices
May
May
9
8
11.7
19.2
8.5
7.3
-2.0
5.0
3. Journal of Commerce industrials
May
9
10.7
3.8
2.6
.9
7.1
4. Dow-Jones Spot
May
9
17.0
6.9
-3.3
.0
5.5
5. IMF commodity index 3
Mar.
30.8
12.6
-1.2
n.a.
9.6
5a. Metals
5b. Nonfood agric.
Mar.
Mar.
51'.9
47.5
33.7
-9.4
-1.7
-.4
n.a.
n.a.
16.9
-2.6
42.5
62.6
17.7
18.9
-5.8
-7.8
2
2
May
May
6. Economist (U.S. dollar index)
6a. Industrials
2.0
9.6
-2.3
-1.0
3.4
-.7
-1.9
-1.6
1. Not seasonally adjusted.
2. Change is measured to end of period, from last observation of previous period.
3. Monthly observations. IMF index includes items not shown separately.
*Week of the March Greenbook.
n.a.--Not available.
Index Weights
Energy
Food Commodities
Precious Metals
Others'
On
1O
E
PPI for crude materials
44
37
19
CRB Futures
10
14
14
62
CRB Industrials
100
Journal of Commerce Index
12
88
Dow-Jones
56
17
25
IMF Index
57
43
Economist
50
*Forest products, industrial metals, and oth
industrial materials.
50
II-42
4 cents per gallon this summer, adding to the near-term acceleration in
energy prices.
However, because the new volatility measures apply only in
the summer, gasoline prices should retrace the RVP effects in the fourth
quarter, adding to the anticipated deceleration in energy prices in the
second half.
APPENDIX
BUDGET UPDATE:
THE BIPARTISAN AGREEMENT AND BUDGET RESOLUTIONS
The President and the bipartisan leadership of the Congress announced
on April 14 an agreement on the broad outlines of a budget plan for fiscal
year 1990. The deficit in this agreement is estimated to be $99.4 billion,
premised largely on the same economic and technical assumptions as used by
President Bush in his February plan. As shown in table 1, this deficit is
$8 billion above the corresponding deficit proposed by the President,
reflecting higher nondefense spending in the bipartisan agreement.
The structure of the recent compromise generally follows the pattern of
the 1987 budget summit. Like that agreement, this year's compromise
specifies a level of defense appropriations--$303.5 billion, little changed
in nominal terms from the FY89 level of $298.8 billion--and a level of
It also
outlays expected to be associated with these appropriations.
determines a level of discretionary spending for international affairs,
which allows for roughly $2 billion more gross discretionary spending than
in 1989. Finally, in the area of domestic spending, the agreement calls for
changes in a few entitlement programs, increases in user fees, and new sales
of asset, and caps the total amount of annual appropriations (and associated
outlays) for all domestic discretionary programs.
Given the planned deficit-reducing actions (shown in table 2), total
outlays are estimated in the agreement to rise by $23 billion from FY89
levels, about half the average annual increase registered during the current
cyclical expansion. The agreement trims $22 billion from the CBO baseline
(essentially current services) that will be used for keeping score of
2
In addition, the agreement calls
legislative actions in the Congress.
for $5.3 billion of unspecified revenue raising measures and assumes that
1. In deriving these outlays, the Agreement adopted CBO's slower spendout
rates. This lowers outlays for 1990 by $3.5 billion compared with OMB
estimates, as indicated in the estimating adjustments line of table 1
(second column), but would raise outyear spending correspondingly.
2. This baseline represents an extrapolation of current laws and policies
into FY90 using CBO's economic and technical estimating assumptions.
Receipts are projected for FY90 under current tax laws, implying
year-to-year growth of $86 billion, given CBO's assumed income growth.
Estimated spending for entitlements rises to allow for projected increases
in beneficiaries and for cost-of-living adjustments; all other spending
grows as implied by maintaining a constant real value of appropriations
between FY89 and FY90, except that about $1 billion was added for FY90 to
cover special program costs such as the decennial census. Total outlays in
this CBO baseline rise by $74 billion between FY89 and FY90. The deficit in
the agreement, calculated on the same assumptions as this baseline, would be
$19.9 billion higher than the $99.4 billion level shown using administration
assumptions (see the estimating adjustment in table 1, third column). Both
OMB and CBO estimates assume that resolution of the thrift problem will be
essentially off-budget, as proposed by the President.
II-A-1
II-A-2
strengthened tax enforcement would yield a further $0.5 billion. Taken
together with the spending constraints, the plan calls for $28 billion of
deficit reduction, measured from the CBO baseline.
Within the broad outlines of the bipartisan agreement, the Senate and
the House each have passed budget resolutions that ratify the levels of
spending for defense and international affairs, distribute domestic spending
across the other budget functions, and incorporate the planned increases in
revenues. The domestic spending priorities reflected in these resolutions
are indicated in table 3 by the pattern of small changes in domestic
discretionary spending from baseline levels. Both houses aim to raise
spending on science and to hold spending increases for such broad areas as
energy, resource management, transportation, and community development below
the rate of inflation. The House assigns higher priority to education,
while the Senate would put greater emphasis on criminal justice. Both
resolutions contain reconciliation instructions, directing other committees
of the Congress to formulate legislation that would reduce costs of farm
price supports and Medicare and raise user fees and general revenue.
Table 1
BUDGET PLANS FOR FY90
(Billions of dollars)
Bush
plan
(Feb. 9)
Bipartisan
agreement
(OMB est.)
Receipts
1065.6
1065.7
1074.4
+5.8
Outlays, total1
Defense
International
Interest
All other
1156.7
300.3
17.2
173.3
665.9
1168.7
299.2
16.72
173.2
679.6
1193.8
299.2
16.72
181.0
696.9
-22.2
-4.2
.0
-1.1
-16.9
-103.0
-119.4
+28.0
Deficit, before adj.
-91.1
less: estimating
adjustments
Deficit
n.a.
-91.4
Memo:
Deficit, ex. asset
sales
-94.8
CBO estimates
Bipartisan
Change from
agreement
baseline'
3.5
-99.4
-105.1
n.a.--not applicable.
1. With asset sales.
2. Includes estimated effects of loan repayments; discretionary component
of spending specified in agreement is $17.0 billion.
II-A-3
Passage of a single resolution by both houses of the Congress--once a
conference compromises the differences--will set the stage for enactment of
regular appropriation bills and of a reconciliation bill that will implement
aspects of the budget agreement. Achievement of an agreement at this time
is permitting the budget process to proceed more expeditiously than has been
the case in a number of recent years. However, several hurdles remain
before the intended deficit reduction is actually achieved and the budget
process for FY90 is completed. First, appropriations must be held within
bounds if budget targets are to be realized. The Congress has given some
recent indication of being serious about budget restraint by sending back to
committee a costly supplemental appropriation bill for FY89. Second,
agreement must be achieved on specific measures to meet the objective of
raising $5.3 billion of additional revenue. Third, specific steps must be
legislated to reduce entitlement spending and other types of outlays.
These steps may vary considerably in their economic consequences.
Putting the Postal Service off-budget is one action planned in the agreement
that will have no fundamental economic effect (and will not change the NIPA
accounts). Some reports have suggested that a significant proportion of the
remaining spending constraint also could be implemented by changes in timing
or accounting that would have little fundamental or lasting economic effect;
Table 2
COMPOSITION OF FY90 DEFICIT REDUCTION
(Deficit effect compared with CBO baseline, billions of dollars)
Outlay reductions from baseline
Defense
International affairs
Interest
Entitlements and mandatory spending
(gross)
Medicare
Agriculture
Pension and miscellaneous reforms
Other entitlements
Discretionary programs (gross)
User fees and offsetting collections
Asset sales
Postal service off-budget
Subtotal, outlays
Revenue measures and improved
collections
Total deficit reduction
4.2
.0
1.1
2.7
1.9
.7
1.1
.3
2.7
5.7
1.8
22.2
5.8
28.0
II-A-4
however, the exact nature of these measures will remain uncertain until the
legislative process is further advanced.
The bipartisan agreement specifies that $5.7 billion of deficit
reduction is to be achieved by further sales of assets; these sales, which
have tended to fall short of plans in the past, are a one-time deficit
reduction that does not count toward achieving Gramm-Rudman deficit targets.
Thus, the deficit foreseen in the current budget compromise, calculated on a
Gramm-Rudman accounting basis, is about $105 billion. This estimate implies
only a $5 billion margin for error in achieving legislative goals for budget
restraint--or for any upward reestimates in the August sequester report-if the $110 billion trigger for sequester is to be avoided.
On balance, the bipartisan agreement seems likely to provide a small
amount of additional fiscal restraint in 1990. (Some restraint already had
been set in place by the lagged effects of previous declines in real defense
Table 3
FY90 DOMESTIC SPENDING PRIORITIES1
(Discretionary spending, billions of dollars)
Change from CBO baseline
Senate
House
+.4
+.6
-.6
-.7
Commerce, transportation, and community
development
-.3
-.2
Education, health, income security, and
veterans (all excluding entitlements)
+.1
+.7
Justice and general government
Total
+.2
-.3
-.5
-.3
Science
Energy, natural resources, and agriculture
(excluding entitlements)
Memo:
FY89
FY90
Level of budget authority for domestic
discretionary programs
142.8
157.5
Level of outlays for these programs
170.2
181.3
1. Details may not add to totals because of rounding. Increases in
budget authority considerably exceed changes in outlays provided for
transportation, education, health, and justice in the Senate, and for
education, health, and income security in the House.
II-A-5
appropriations and the step up in social security tax rates scheduled for
the first of January.) Nonetheless, the agreement does not make much
progress on a multiyear budget strategy. Indeed, the President and
congressional leadership are committed in the agreement to continued
consultation on further deficit reduction.
III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)
1987
Oct. 16
1988
Feb
lows
1989
FOMC
Mar 28
1989
7.59
6.38
9.85
9.87
3.49
.02
6.93
7.58
7.74
5.59
5.77
6.10
9.07
9.12
8.99
8.50
8.50
8.47
2.91
2.73
2.37
-.57
-.62
-.52
Commercial paper
1-month
3-month
7.94
8.65
6.41
6.45
10.00
10.08
9.69
9.63
3.28
3.18
-.31
-.45
Large negotiable CDs 4
1-month
3-month
6-month
7.92
8.90
9.12
6.44
6.49
6.55
10.00
10.21
10.60
9.70
9.74
9.79
3.26
3.25
3.24
-.30
-.47
-.81
Eurodollar deposits 5
1-month
3-month
8.00
9.06
6.44
6.50
10.06
10.31
9.75
9.81
3.31
3.31
-.31
-.50
Bank prime rate
9.25
8.50
11.50
11.50
3.00
U.S. Treasury (constant maturity)
9.52
3-year
10-year
10.23
10.24
30-year
7.28
8.11
8.32
9.80
9.41
9.20
9.16
9.15
9.08
1.88
1.04
.76
-.64
Municipal revenue
(Bond Buyer)
9.59
7.76
7.95
7.63
-.13
-. 32
Corporate A utility
(recently offered)
11.50
9.63
10.40
10.36
.73
Home mortgage rates 7
S&L fixed-rate
S&L ARM, 1-yr.
11.58
8.45
9.84
7.59
11.22
9.30
10.97
9.36
May 9
Change from:
FOMC
Feb 88
lows
Mar 28
Short-term rates
Federal funds
Treasury bills
3-month
6-month
1-year
Intermediate- and long-term rates
1987
Record
highs
1989
FOMC
Mar 28
1989
1.13
1.77
-. 26
-. 12
-.04
-. 25
.06
Percent change from:
FOMC
Record
Mar 28
highs
May 9
Lows
Stock prices
-12.90
4.21
2371.33
1738.74 2275.54
Dow-Jones Industrial 2722.42
-9.14
4.22
170.80
163.88
187.99
125.91
NYSE Composite
6.03
-5.46
325.45
345.09
365.01
231.90
AMEX Composite
6.55
-5.7~
402.60
428.97
455.26
291.88
NASDAQ (OTC)
4. Secondary market.
1. One-day quotes except as noted.
2. Last business day prior to stock market
5. Bid rates for Eurodollar deposits
at 11 a.m. London time.
decline on Monday, October 19, 1987.
6. Based on one-day Thursday quotes
3. Average for two-week reserve maintenance
and futures-market index changes.
period closest to date shown except Feb. low
which is the average for the statement week
7. Quotes for week ending Friday closest
ended 2/10/88. Last observation is averageto date shown.
to-date for maintenance period ending 5/17/89.
Selected Interest Rates*
(percent)
Short-Term
- 12 Daly
12
Statement Week Averages
1
Prime Rate
-
11
-
11
Federal Funds
S1
fJ
-
9
-
-- 9
S3-month
Treasury Bill
_
8
I
7
7
Discount Rate
Discount Rate
(daily)
-- 6
6
asury Bill
19891989
3/23
12
5/9
-
12
--
11
Primary Mortgage
(weekly)
Primary Mortgage
/('Ar
\
-
-- 11
-
10
Corporate Bond
(weekly)
-
10
Corporate Bond (A Utility)
-9 9
-9
30-year Treasury Bond
Bond
0-y T
30-year Treasury Bond
I
II II
*--Frday weeks through May 5, Wednesday weeks through May 3.
989
I 1989 I
(daily)
I
28 I
3/23
I
I
I
I
I
1
5/9
8
DOMESTIC FINANCIAL DEVELOPMENTS
Federal funds have continued to trade generally in the 9-3/4 to 9-7/8
percent range, but other market interest rates have declined considerably
since the previous FOMC meeting in the wake of reports suggesting that
economic activity has decelerated.
Key Treasury bill rates have fallen more
than 1/2 percentage point, while yields on longer-term notes and bonds have
fallen 1/8 to 1/4 of a point.
Rates on private market instruments also have
declined across the maturity spectrum, but spreads between private and
Treasury yields have widened slightly.
Meanwhile, share prices have touched
new postcrash highs.
Expansion of the broader monetary aggregates remained sluggish in
April, and run-offs in M1 deposits quickened.
Among the nontransactions
components of the broader aggregates, the relatively liquid components
weakened further, while small time deposits accelerated from their already
rapid pace.
The opportunity costs of holding liquid accounts remain large,
but those on small time deposits have become quite small at banks and
disappeared at thrifts.
In addition, overall weakness in M2 growth may
reflect use of balances to meet unexpectedly large tax obligations and
shortfalls in refunds.
Overall demand for credit may have moderated in April.
In the
nonfinancial business sector, public bond offerings fell off sharply, while
borrowing from banks and issuance of commercial paper picked up from the
March pace.
Growth in total business credit appears to have slackened from
the first-quarter pace, with a drop-off in net equity retirements following
the bulge associated with the RJR-Nabisco deal.
Long-term borrowing by
state and local governments remains sluggish; the federal
III-1
III-2
MONETARY AGGREGATES
(based on seasonally adjusted data unless otherwise noted)
1988
19881
94
1989
Q1
1989
Feb
1989
Mar
Growth
Q4 881989
Apr pe Apr 89pe
------------ Percent change at annual rates--------------------1.
2.
3.
4.3
5.2
6.3
Ml
M2
M3
2.3
3.6
5.0
-0.4
1.9
3.8
1.7
1.5
2.9
-1.7
3.8
6.7
-5
2
4
Levels
------------ Percent change at annual
rates----------
bil.
$
Mar 89
Selected components
4.
5.
6.
-6
507.2
7.3
-2.1
2
-13
215.6
284.3
-2
279.1
2.5
Ml-A
Currency
Demand deposits
1.7
-0.2
3.6
1.7
8.1
-1.2
6.6
-1.8
7.0
-5.5
5.1
3.4
7.
Other checkable deposits
7.7
3.3
-0.7
-1.7
-7.7
8.
M2 minus M1l
5.5
4.1
2.7
1.4
5.7
4
2292.9
-5.9
-9.2
15.7
-38.2
-22.8
-23
77.6
7.4
6.9
1.4
14.7
4.6
-4.3
11.7
9.5
6.8
-1.7
18.0
0.3
-8.6
6.6
21.2
5.4
-8.4
22.4
-3.1
-14.0
4.2
28.8
4.5
-14.0
26.6
-5.2
-20.6
4.9
44.1
8.3
-9.2
28.6
-4.1
-15.3
2.9
17
8
-15
35
-2
-31
16
256.5
1000.7
528.7
472.0
961.1
372.4
588.6
10.6
10.0
10.7
8.0
17.2
11
875.2
11.0
12.2
8.8
11.3
13.0
8.0
12.5
17.8
1.2
15.7
24.0
-2.1
15.2
22.5
-0.7
19
21
13
558.4
385.1
173.3
-0.8
15.0
13.3
10.9
8.4
9.8
10.6
10.1
-4.2
4.0
29.3
-5.9
-26.8
24.0
62.7
4
-2
-37
87.6
132.5
106.8
9.
10.
11.
12.
13.
14.
15.
16.
Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
Commercial banks
3
Savings deposits, SA, plus MMOAs, NSA
Small time deposits
Thrift institutions
3
Savings deposits, SA, plus MMDAs, NSA
Small time deposits
17. M3 minus M2
4
Large time deposits
At commercial banks, nets
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA
----- Average monthly change in billions of dollars---MEMORANDA:6
24. Managed liabilities at commercial
banks (25+261
25.
Large time deposits, gross
26. Nondeposit funds
27.
Net due to related foreign
institutions, SA
7
Other
28.
29. U.S. government deposits at commercial
8
banks
4.7
3.2
1.5
5.3
5.8
-0.5
9.3
5.4
3.9
7.7
6.3
1.4
-0.4
2.0
-0.5
2.0
0.5
-1.0
2.7
1.2
-2.5
3.9
-7
3
8.1
204.9
0.0
0.5
-1.5
0.0
0.0
0
20.3
659.6
446.6
213.0
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 -10.7
percent and -21 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew
during March and April at rates of -10.8 percent and -24 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 estimate
8. Consists of Treasury demand deposits and note balances at commercial banks.
pe - preliminary estimate
III-3
government's need for cash has declined more than seasonally in the current
quarter, with heavier-than-expected net revenues during the April-May tax
period boosting the Treasury cash balance.
Data on the household sector are
sparse, but they suggest that the pace of growth in mortgage and consumer
credit was little changed last month.
Monetary Aggregates and Bank Credit
In April, M2 and M3 grew at estimated annual rates of 2 and 4 percent,
respectively, slower than in March but in line with their weak growth during
the first quarter.
Ml contracted at a 5 percent annual rate last month,
after edging down in the first quarter.
Relative to their annual target
ranges, M2 remained just below and M3 remained just above the lower bounds
of their cones.
The weakness in Ml was attributable both to sharp run-offs in demand
deposits and to a deceleration in currency growth.
Demand deposits have
contracted noticeably on net this year; the contraction likely reflects a
continuation of an underlying trend toward the use of fees in lieu of
compensating balances as well as the high short-run interest elasticity of
compensating balances.
Outflows from other checkable deposits (OCD)
moderated in April, because balances may have been boosted to cover income
tax payments.
The deceleration of M2 growth in April resulted primarily from the
weakness in M1, but growth in the nontransactions component also slackened
somewhat.
Outsized tax payments likely contributed to some weakness in M2.
Futhermore, the sluggish adjustment of rates paid on savings deposits and
money market deposit accounts
(MMDAs) since the spring of 1988 has greatly
increased the opportunity costs of holding these instruments.
Recent
III-4
declines in market interest rates have reduced these opportunity costs, but
they remain substantial at about 3-1/2 and 2-1/2 percentage points for
savings deposits and MMDAs respectively.
By contrast, spreads between
yields on market instruments and offering rates on small time deposits
apparently have narrowed at commercial banks and have shifted in favor of
small time deposits at thrift institutions, thereby likely contributing to
the robust growth of these components of M2.
Much of the strength in the non-M2 components of M3 resulted from
depositories substituting large time deposits for managed liabilities not
encompassed by the monetary measures.
At banks, net balances due to their
foreign branches continued to contract in April.
Several large, healthy
S&Ls reportedly replaced advances from the Federal Home Loan Banks (FHLBs)
with borrowings by their parent holding companies, which were downstreamed
as time deposits.
These funding decisions by large thrifts contributed to a
leveling-off of advances in April after five months of very large increases
that totaled about $30 billion.
Banks and thrifts continued to display marked differences in deposit
flows in April.
Although savings deposits and MMDAs fell at both sets of
depositories, they generally declined more at thrifts, particularly those
insured by the FSLIC.
Also, inflows to small time deposits were much more
rapid at banks than at thrifts, despite relatively more aggressive deposit
pricing by thrifts.
After dipping below 20 basis points in early March,
spreads between rates on 6-month retail CDs offered by thrifts and by banks
widened recently to about 50 basis points.
Nevertheless, the continuing
cloud cast by the FSLIC crisis likely offset some of the advantage implied
III-5
by this rate spread and damped growth of small time deposits at FSLICinsured thrifts.
On balance, thrift institutions lost core deposits again
in April, albeit at a slower rate than earlier this year.
In large part,
funds leaving thrifts apparently have gone either to commercial banks or to
MMMFs, so that effects on M2 probably have been quite small.
Bank credit expanded at an estimated 3 percent annual rate in April,
marking the second month of moderate growth since the February surge in
loans associated with the buyout of RJR-Nabisco.
off slightly, and loan growth remained modest.
paced by robust real-estate lending.
Holdings of securities ran
Total loans in April were
Merger-related financings boosted
business loans early in the month, but much less than they did in February.
Consumer loan growth picked up a bit despite securitization, which damped it
about 2 percentage points, and despite stiff competition for new-car loans
from auto finance companies.
The timing of consumer and home-equity lending
suggests such lending may have been bolstered by the need to cover
unexpectedly large tax payments.
Total loan growth was depressed by
declines in the volatile security loans and "other loans" categories.
Business Finance
Available data indicate that total net borrowing by nonfinancial
businesses in April was about in line with the reduced March pace, as faster
growth of commercial paper and bank loans offset a fall-off in new public
issues of corporate bonds.
For the second quarter as a whole, credit
demands stemming from corporate restructurings are expected to be
substantially weaker than in the first quarter.
With the bulk of the RJR-
Nabisco financings completed, net equity retirements are projected to total
III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)
Levels
bil.$
1987:Q4
to
1988:Q4
1988
Q4
Q1
1989
Feb.
Mar.
Aprilp
Aprilp
----------------------- Commercial Bank Credit------- --- ----------1.
Total loans and securities
at banks
7.3
6.1
7.8
14.4
6.4
3.0
2461.1
4.7
5.0
2.0
4.6
13.5
-1.7
557.3
7.4
10.4
8.7
5.3
22.8
.2
-5.1
-10.6
3.2
-4.5
-16.0
185.3
8.1
6.4
9.5
17.3
4.4
4.4
1903.8
Business loans
6.3
4.0
9.9
23.8
-3.9
5.7
617.4
Security loans
-6.2
13.1
52.8
227.0
-30.0
-100.7
39.3
8.
Real estate loans
13.4
11.0
12.4
12.7
12.6
15.8
694.4
9.
Consumer loans
8.6
8.3
5.2
3.0
6.7
7.7
362.2
.2
-5.9
-2.5
-. 6
5.6
-22.3
190.5
2.
Securities
3.
U.S. government securities
4.
Other securities
5.
6.
10.
Total loans
Other loans
-------11.
Business loans net of bankers
acceptances
Loans at foreign branches
13.
18.
Finance company loans to business
19.
-3.3
11.4
51.9
168.2
4.4
11.7
2.3
50.0
37.5
19.9
31.6
42.4
117.2
10.3
15.5
23.8
6.8
10.9
756.4
-6.8
11.0
16.7
28.3
34.95
7.4
10.3
15.5
24.0
784.55
12.3
12.1
8.0
4.1
238.85
10.8
13.7
19.3
8.2
Bankers acceptances: U.S. trade
related
Line 15 plus bankers acceptances:
U.S. trade related
17.
10.3
15.6
Sum of lines 13 & 14
16.
4.1
7.1
Commercial paper issued by
nonfinancial firms
15.
hort- and Intermediate-Term Business Credit----------
30.3
Sum of lines 11 & 12
14.
372.0
6.4
2
12.
5.5
3
615.0
24.2
639.3
Total short- and intermediate-
term business credit (sum of
lines 17 & 18)
8.5
9.3
n.a.
1023.35
1. Average of Wednesdays.
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 Smonth.
4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods.
5. March data.
p--preliminary.
n.a.--not available
III-7
about $125 billion (annual rate) in the quarter, down from $180 billion in
the first quarter.
Gross public offerings of corporate bonds slowed in April from the
heavy volume in March, when investment-grade firms issued nearly $10 billion
in bonds with maturities of five years or less.
Many firms had turned to
the swap market to transform these fixed-rate obligations into floating-rate
liabilities with rates below LIBOR.
In April, as spreads among these
obligations shifted and the profitability of such arbitrage declined,
issuance of bonds with shorter maturities dropped to $3 billion.
Although
yields on investment-grade corporate bonds have fallen only slightly since
the last FOMC, investor concerns about event risk and borrower expectations
that interest rates will fall further in coming months reportedly have
continued to deter issuance of investment-grade bonds with longer
maturities.
In contrast to yields on high-grade bonds, yields on junk bonds rose in
the intermeeting period.
Spreads between junk bonds and investment-grade
bonds widened 30 to 40 basis points by early May.
While the junk-bond
market apparently already had discounted the news of Drexel's settlement
with the SEC, several other developments depressed this market.
The market
faced a heavy calendar of new issues, notably impending offerings of up to
$4 billion by RJR-Nabisco as well as $2.3 billion of securities issued
directly to RJR shareholders in early May.
In addition, rumors surfaced of
substantial sales of junk bonds by an investment firm that has ties to
Michael Milken and by open-end mutual funds and thrift institutions.
Reports of the continued troubles of the Southmark and Fruehauf leveraged
III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)
1989
Mar.
1987
Year
1988
Year
1989
Corporate securities - totall
24.08
22.23
18.84
13.97
25.42
14.34
Public offerings in U.S.
21.89
20.21
16.55
11.96
23.41
11.84
Stocks--total 2
Nonfinancial
Utility
Industrial
Financial
Bonds--totall
Nonfinancial
Utility
Industrial
Financial
By quality
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity-based bonds
Mortgage-backed bonds
Other asset-backed
Variable-rate notes
Bonds sold abroad - total
Nonfinancial
Financial
Stocks sold abroad - total
Nonfinancial
Financial
4.45
2.32
.57
1.75
2.12
Q1
Feb.
Apr.p
3.53
1.14
.24
.90
2.39
2.20
1.33
.74
.59
.87
2.53
1.13
.03
1.10
1.40
.91
.61
.00
.61
.30
16.68
6.08
1.77
4.31
10.60
14.35
4.45
.60
3.85
9.90
9.43
2.24
.97
1.26
7.19
22.50
7.80
.20
7.60
14.70
3.25
5.20
2.77
.07
2.68
5.57
2.51
.07
3.34
4.83
1.91
.11
2.08
3.24
1.33
.03
5.90
8.90
2.27
.00
3.50
3.75
2.50
.05
.87
5.19
.96
1.88
.28
4.69
1.26
1.17
.17
2.63
1.53
.87
.31
1.57
1.18
.53
.40
3.61
1.82
1.19
.10
.60
.60
1.00
2.03
1.93
.69
1.24
2.28
.94
1.34
1.99
.78
1.21
2.00
1.00
1.00
2.50
.80
1.70
.09
.08
.01
.01
.01
.00
.02
.02
.00
17.44
6.61
2.02
4.59
10.83
.94
1.09
.84
.65
.11
.54
.19
11.00
4.00
2.00
2,00
7.00
.01
.01
.00
1. Securities issued in the private placement market are not included.
Total reflects gross proceeds rather than par value of original discount
bonds.
2. Includes equity issues associated with debt/equity swaps.
3. Bonds categorized according to Moody's bond ratings or Standard and
Poor's if unrated by Moody's. Excludes mortgage-backed and asset-backed
bonds.
4. Includes bonds convertible into equity and bonds with warrants that
entitle the holder to purchase equity in the future.
p--preliminary.
III-9
buyouts also may have caused investors to re-evaluate potential credit
losses on junk bonds.
Stock prices
11 percent
risen about
have
5 percent
since the first of the year.
since the last FOMC and about
The price-earnings ratio, as
index, has risen only slightly because reported
measured by the S&P 500
earnings generally have kept pace with the rise in
stock prices
have not
and April;
small
Higher
induced firms to tap the equity market, however;
issues of shares by nonfinancial
New offerings of
share prices.
new
corporations, in particular, remain light.
closed-end mutual
funds dropped off considerably in March
investors still seem to be shying away from equities,
investor demand for new shares in closed-end funds that
bonds also may have been weakened by setbacks in the
invest
and
in high-yield
junk-bond market.
Municipal Securities
Gross
issuance of
long-term municipal securities
slowed to $6.8 billion
in April, down from March's already light pace of $8.6
billion.
This
decline reflected primarily a fall-off of refunding issues in lagged
response to the run-up
end of March;
the
at
in yields
on long-term municipal
securities at the
$790 million, refundings were at their lowest level
since
summer of 1984.
Short-term issuance
surged to $4.9 billion in April, as New York State
issued $3.9 billion in tax- and revenue-anticipation notes.
Market
participants were surprised by the top ratings given the New York issues by
Moody's and Standard & Poor's;
the
agencies reportedly were impressed by the
short-run implications of the state's recently passed budget,
but they left
ratings on general obligation bonds unchanged at a notch or two below the
III-10
top because of continuing concerns about New York's long-run fiscal health.
Investor demand for the notes evidently was strong.
Over the intermeeting period, yields on tax-exempt securities have
declined about 1/3 percentage point, a bit more than 30-year Treasuries.
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)
1988
1988
Year
Q2
Q3
10.88
11.73
11.50
Total ta::-e::empt 10.60
2
9.01
Long-term
Refundings
2.75
New capial
6.26
Short-term
1.59
Total taxable
.28
11.41
9.20
3.18
6.02
2.21
.32
.80
Total offerings 1
Memo item:
Bank-qualified
.58
1989
Q4
1989
Q1
Feb.
Mar.
Apr.
11.58
9.20
9.56
10.43
11.97
11.30
8.00
1.87
6.93
2.52
.23
11.21
10.09
2.91
7.18
1.12
.37
8.92
7.77
2.49
5.28
1.15
.28
9.34
8.05
2.83
5.22
1.29
.22
10.01
8.63
2.14
6.49
1.38
.42
11.70
6.82
.79
6.03
4.88
.27
.63
.40
.42
.37
.52
.54
1. Includes issues for public and private purposes; also includes taxable
issues.
2. Includes all refunding bonds, not just advance refundings.
3. Does not include tax-exempt commercial paper.
4. Bank-qualified bonds are the only tax-exempt bonds that banks can purchase
and still deduct 80 percent of the carrying costs. Bonds are bank-qualified if
issued by local governments that do not expect to issue more than $10 million
of municipal bonds during the year.
p--preliminary.
III-11
The spread between the Bond Buyer revenue-bond index and general-obligation
index shrank to about 20 basis points in mid-April, its lowest level since
records were first kept in 1979.
The narrowing of this spread has been
attributed to the scarcity of new issues, which has caused investors who
otherwise might prefer general obligation bonds to purchase revenue bonds.
Treasury and Sponsored-Agency Financing
Taking account of an unusually strong seasonal pickup in tax receipts,
the staff is now projecting a $15 billion second-quarter federal budget
surplus, after the $61 billion deficit posted last quarter.
With reduced
financing needs, marketable borrowing is expected to fall by more than
three-fourths from its first-quarter level and should translate into an $18
billion increase in the Treasury's cash balance.
Nonmarketable borrowing
has tapered off because issuance of SLGs has ebbed in line with the sluggish
pace of offerings of municipal refunding bonds; "other borrowing" should
remain negligible because the FSLIC no longer is issuing notes.
As usual, most of the swing in borrowing needs is being accommodated in
the bill markets.
The outstanding stock of Treasury bills is declining
appreciably in the current quarter, reflecting maturation of a cash
management bill and smaller weekly bill auctions.
Gross sizes of these
auctions have been decreased in recent weeks from $14.4 billion to $13.2
billion.
Net issuance of coupon securities also is expected to decline in
the current quarter, but it will remain substantial at about $24 billion as
the Treasury follows its usual practice of maintaining regular and
predictible coupon auctions and letting the cash balance build up at midyear.
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)
1989
01
e
O2
p
Aor.
Mave
June
Treasury financing
Total surplus/deficit (-)
-60.8
15.3
-17.4
30.6
Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments (-)
Bills
Coupons
Nonmarketable
2
Other borrowing
Decrease in the cash
balance
Memo: Cash balance
at end of period
Other 3
Federally sponsored credit
agencies, net cash
borrowing
FHLBS
FNMA
Farm Credit Banks
FAC s
FHLMC
FICO
SLMA
37.9
32.0
3.0
29.0
6.0
8.0
8.9
-1.8
6.9
-2.6
-17.3
24.2
-7.0
4.4
.8
7.4
-4.1
11.5
2.7
2.1
-6.2
8.3
.0
.6
.0
-17.8
-38.9
26.3
-5.2
14.7
32.4
53.5
27.2
32.4
4.0
-6.4
10.1
-16.9
-. 2
2.0
.0
19.0
.6
.0
13.5
14.1
4 .2
p
-. 8
-.
.0
-1 .
1
.6
.2
.5
1.7
1. Data reported on a not seasonally adjusted, payment basis.
2. Securities issued by federal agencies under special financing
authorities (primarily FSLIC).
3. Includes checks issued less checks paid, accrued itemc and cther
transactions.
4. Excludes mortgage pass-through securities issued by FIMA and FHLMC.
5. Financial Assistance Corporation, an institution within Farm Credit
System, was created in January 1988 by.Congress to provide financial
assistance to Farm Credit Banks. It first issued bonds in July 1988.
e--staff estimate.
p--preliminary.
Note: Details may not add to totals due to rounding.
5/10/89
III-13
Borrowing by the Federal Home Loan Banks has remained heavy.
As demand
for advances to member institutions surged, indebtedness of the FHLBs
increased more than $31 billion from June 1988 through March of this year,
and accounted for nearly 80 percent of the net borrowing by all federally
sponsored credit agencies.
During most of that period, yields on FHLB
securities fluctuated without clear direction relative to those on Treasury
securities.
In the past two months, however, spreads on FHLB securities
have widened noticeably.
FHLB spreads typically have fluctuated more or
less with the Home Loan Banks' credit demands
(chart) and, on several
occasions, have approached or exceeded current levels.
For example, in mid-
1981, spreads on shorter-term issues were about 10 basis points higher and
those on intermediate-term securities more than 40 basis points higher than
they are currently.
The upward movement in FHLB spreads in March coincided with a step-up
in corporate borrowing, especially by investment-grade firms, that was
concentrated in the short- and intermediate-term maturities preferred by the
FHLBs.
Yields on Farm Credit System obligations, too, have moved up roughly
15 to 35 basis points relative to Treasury rates since February, despite the
agency's continued debt paydown during 1989.
Mortgage Markets
Participating in the recent rally in long-term capital markets,
secondary market yields on fixed-rate mortgage
(FRM) instruments declined
about 40 basis points on average since the last FOMC meeting.
However, the
spread of mortgage yields over the 10-year Treasury yield has continued the
upward trend that began late in 1988
(chart).
A major reason for the
increase in the spread has been the flattening of the Treasury yield curve,
III-14
Net Borrowing by Federal Home Loan Banks and the Yield on Its Securities
Relative to Treasury Securities
(Monthly data)
Billions of dollars
Basis points
8
90
S
80
6
70
FHLB 3-year spread
5 -
FHLB borrowing
60
4
50
I3
"
"-
IIt
,
i
40
S19
+
,,
','
s
,
t
30
2
,
+
20
II
;"
O
2
1981
I
1982
1983
I
1984
l
I
1985
1986
I
1987
i l
,l
1988
IllllI
Note: The spread is the difference between the yield on three-year FHLB securities and comparable Treasury securities at the
FHLB monthly offering. In some months, no three-year securities were issued.
0
III-15
FNMA Required Yield on FRMs Less Yield on 10-year Treasury Securities
(Mo .thly data)
Percent
3.3
3
2.7
2.4
S2.1
F\A
1987
-.-
1988
1989
1.8
III-16
MORTGAGE ACTIVITY AT ALL FSLIC-INSURED INSTITUTIONS
(Monthly averages, billions of dollars, seasonally adjusted)
Mortgage transactions
Origina- Committions
ments
Sales
Net change in
mortgage assets
MortgageMortgage
backed
Total
loans
securities
1985
1986
1987
1988
16.4
22.1
21.1
20.0
14.9
19.8
20.1
19.4
8.2
14.1
10.3
8.8
4.1
4.7
6.1
4.9
4.2
1.3
2.4
3.9
-.2
3.4
3.7
1.0
1988-Q1
Q2
Q3
Q4 r
19.0
19.6
21.4
19.8
18.0
18.8
20.9
19.9
7.9
9.4
8.5
9.5
3.0
6.1
6.4
4.0
2.9
4.1
5.7
2.8
.1
2.0
.7
1.2
1989-Q1 p
20.2
19.2
8.1
4.3
2.4
1.9
1989-Jan. r
Feb. r
Mar. p
21.3
19.6
19.8
19.3
19.9
18.3
7.6
8.6
8.2
.5
4.7
7.9
2.4
1.6
3.3
-1.9
3.0
4.6
1. Net changes are adjusted to account for structural changes caused
by mergers, acquisitions, liquidations, terminations, or de novo
institutions.
NEW ISSUES OF MORTGAGE-BACKED PASS-THROUGH SECURITIES
BY FEDERALLY RELATED AGENCIES
(Monthly averages, billions of dollars)
Period
Seasonally adjusted
Total GNMAs FHLMCs FNMAs
1985
1986
1987
1988
9.0
21.3
20.2
12.4
3.8
8.1
8.2
4.6
3.2
8.2
6.7
3.3
2.0
5.0
5.3
4.6
9.0
21.6
19.6
12.6
.3
.7
1.2
2.4
1988-QI
Q2
Q3
Q4
9.8
12.1
13.3
14.6
3.8
4.5
5.5
4.8
2.6
2.8
3.4
4.2
3.4
4.8
4.4
5.6
8.5
12.5
14.9
14.5
.9
3.0
3.0
2.6
1989-Q1 p
15.6
4.6
5.1
5.9
13.3
3.1
1989-Jan.
14.1
Feb.
15.9
Mar. p 16.9
4.6
4.7
4.5
4.8
5.7
4.8
4.7
5.5
7.6
12.1
13.7
14.0
.9
3.5
4.8
r--revised.
p--preliminary.
Not seasonally adjusted
Total
ARM-backed
III-17
which reduced the profitability of collateralized mortgage obligation (CMO)
arbitrage and consequently the demand for mortgage-backed securities (MBS)
as collateral for CMOs.
More recently, increased uncertainty about interest rates, which raises
the option value of the mortgage, and fears of future MBS liquidations by
thrifts have driven the spread even higher.
While press reports have
attributed the weakness in the MBS market to heavy sales by thrifts,
balance sheet data indicate that thrifts were net purchasers of such
securities in the first quarter (table).
However, if thrifts were to
experience pressure to liquidate MBS assets heavily in the future it would
have important implications for the MBS market.
Thrifts hold roughly one-
fourth of the $760 billion in outstanding MBSs, with $45 billion held by
insolvent institutions.
2
Markets might have difficulty in the short run
absorbing a liquidation of MBS holdings by these insolvent thrifts without
significant price declines.
Mortgage debt growth was robust in March at major lenders.
Net
mortgage assets at FSLIC-insured thrifts grew by $8 billion, the largest
increase since mid-1988.
The volume of mortgages closed at these
institutions was about $20 billion in March, equal to the 1988 average.
In March, the volume of new issues of mortgage-backed pass-through
securities by federally related agencies rose to $16.9 billion on a
seasonally adjusted basis, pushing the first-quarter average to the highest
1. A flatter yield curve lowers the value of shorter-term tranches
relative to the costs of the long-term collateral. The high risk
inherent in CMO residual tranches, along with well-publicized problems of
the primary investors (REITs and thrifts) in these instruments, has
impinged upon CMO arbitrage potential as well.
2. Insolvency is defined on a tangible capital basis, that is, capital
equals estimated GAAP net worth less goodwill.
III-18
ARM DISCOUNTS
(March 1989)
Size
of discount
(basis points)
0
100
101
201
301
All
Average
initial rate
(percent)
or fewer
- 200
- 300
or more
discounted loans
Average
base rate
(percent)'
Percent of
total
9.29
9.39
8.87
8.65
8.30
8.72
9.29
9.85
10.63
11.10
11.99
11.00
36
6
17
32
10
64
1. The base rate represents the rate to which the loan will adjust
following the discount period. If an index-plus-margin formula
determines the adjusted rate, the base rate uses the current value of
the index.
Source: FHLBB survey of conventional home mortgages closed during the
first five working days of the month.
AVERAGE ARM INDEX VALUES AND INITIAL
(Percent)
RATE SPREADS
Initial
One-year
FHLB 11th
District cost
Period
ARM rate
ireasury
of funds
Treasury
11th District
(1)
(2)
(3)
(4)
(2)-(3)
(2)-(4)
1985
1986
1987
1988
10.04
8.42
7.82
7.90
8.43
6.46
6.76
7.65
9.52
8.24
7.38
7.69
1.61
1.96
1.06
.25
.52
.18
.44
.21
1988-Q1
Q2
Q3
Q4
7.66
7.71
8.00
8.22
6.78
7.30
8.00
8.53
7.59
7.55
7.70
7.92
.88
.41
0
-.31
.07
.17
.30
.30
1989-Q1
8.76
9.29
8.30
-.53
.46
1989-Jan.
Feb.
Mar.
Apr.
8.55
8.65
9.09
9.40
9.05
9.25
9.57
9.36
8.13
8.35
8.42
n.a.
-.50
-.60
-.48
.04
.42
.30
.67
n.a.
ARM spreads
1. Initial rate on ARMs inde:ed to the one-year constant-maturity
---- ~
Treasury yield.
III-19
level in more than a year.
The increase over the previous month reflected a
pickup in issuance by FNMA, which also priced about $1 billion in new real
estate mortgage investment conduits (REMICs) in March.
FNMA and FHLMC have
become increasingly important issuers of REMICs in 1989, accounting for more
than half of the total issuance over the first two months of the year,
compared with less than 20 percent in 1988.
In the primary market, yields on fixed-rate mortgages moved in tandem
with those in the secondary market.
By contrast, initial rates on
adjustable-rate mortgages have not followed recent declines in short-term
rates and have risen a bit on balance in recent weeks.
The increase in the
ARM rate lowered the initial-rate advantage of ARMs over FRMs to 1.65
percent in April, the narrowest month-average spread since early 1987.
This
narrowing may reflect, in part, regulatory pressure on lenders to avoid
aggressive teaser rates on ARMs, as well as a recent decision by the FNMA to
halt the purchase or securitization of deeply discounted ARMs, which would
reduce their liquidity.
In any case, the declining initial-rate advantage
of ARMs, coupled with a reduction in FRM rates, likely will cause a drop-off
in the ARM share of loans closed.
ARMs indexed to the FHLB llth District cost of funds have declined in
popularity in recent months, as investors have found the sluggish behavior
of this index unattractive in an environment of rising rates.
If the
movement toward use of Treasury-indexed ARMs continues, the sensitivity of
ARM-holder payments to changes in short-term interest rates would increase
over time.
To date, the existence of loans indexed to the FHLB cost of
funds and loans with fixed-payment, adjustable-maturity features has helped
damp effects of rises in interest rates on household cash flows.
III-20
CONSUMER CREDIT 1
(Seasonally adjusted)
Percent change
Net change
Memo:
Outstandings
(at annual rate)
(billions of
(billions of
dollars)
dollars)
1988
1 9 87 r 1 98 8
r
1989
1989
Q 4r
.Q1
'2
Feb.
r
1989
1989
Mar.
Feb.r
Mar.
Mar.
Total installment 3
6.2
8.5
8.0
9.6
9.5
9.4
5.37
5.37
692.8
Installment,
excluding auto
5.2
10.7
12.0
10.5
9.1
13.3
2.99
4.42
403.1
7.5
12.3
.1
5.7
13.6
8.3
2.8
15.5
9.0
8.4
16.2
6.0
10.0
12.6
6.2
4.0
28.9
.6
2.39
1.85
1.14
.95
4.30
.12
289.7
182.9
220.2
7.6
4.7
5.1
12.7
3.5
7.5
11.3
6.0
5.7
5.5
10.0
11.3
6.2
13.7
9.9
4.2
-2.9
10.0
1.63
1.62
.72
1.13
-.35
.73
319.6
143.1
88.5
7.3
1.8
44.8 130.4
.24
1.08
.36
3.25
63.5
33.2
10.8
6.70
7.08
760.1
Selected types
Auto
Revolving
All other
Selected holders
Commercial banks
Finance companies
Credit unions
Savings
6.6
n.a.
Memorandum:
Totals
3.8
n.a.
4.9
institutions
Asset pools (NSA)
7.3
-2.6
8.8
n.a. 59.0
8.2
10.9
11.3
1. Details may not add to totals because of rounding.
2. Growth rates are adjusted for discontinuity in data between December 1988 and
January 1989.
3. Includes items not shown separately.
4. Savings and loans, mutual savings banks, and federal savings banks.
5. Installment plus noninstallment.
r--revised. p--preliminary.
CONSUMER INTEREST RATES
(Annual percentage rate)
1986
At auto finance cos.
New cars
Used cars
1988
May
1988
Aug.
Nov.
Feb.
Mar.
11.33
14.83
18.26
At commercial banks
New cars (48 mo.)
Personal (24 mo.)
Credit cards
1987
1989
10.46
14.23
17.92
10.86
14.68
17.79
10.55
14.40
17.78
10.93
14.81
17.79
11.22
15.06
17.77
11.76
15.22
17.83
...
...
...
9.44
15.95
10.73
14.61
12.60
15.11
12.29
14.81
12.64
15.16
13.20
15.75
13.07
15.90
13.07
16.12
2
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 Installment Credit
Growth in consumer installment credit strengthened during the first
quarter, averaging a 9-1/2 percent annual rate in March and for the quarter
as a whole.
The installment credit series have been restructured to show
securitized consumer loans as holdings of "pools" under the auto, revolving,
and "other" loan categories.
Previously, securitized loans were attributed
in these statistics to the originating institution, even though in most
cases the originator no longer carried these loans on its balance sheet.
3
A total of about $50 billion of consumer loans has been securitized
since this activity began in 1985.
Approximately $33 billion of these loans
are estimated to have been outstanding at the end of March.
New
securitizations were quite robust during the first quarter because of
several large offerings by Citicorp.
Credit card securitization had its
strongest quarter yet with issuance of $3.3 billion.
At the same time,
several scheduled issues were shelved; yields on two- and three-year paper,
to which yields on securities backed by consumer loans are typically pegged,
have risen relative to consumer-loan rates, and securitization has become
less attractive.
Most measures of consumer-loan delinquency are not yet available for
the first quarter, but data from the major automobile finance companies
3. Under the new treatment, wider month-to-month swings likely will
characterize the growth rates of loans for specific lender groups,
reflecting securitization activity as well as the volume of originations and
repayments on the stock of debt. Many securitizations have involved $500
million to $1.0 billion of consumer receivables. Frequently, this amount is
larger than the total of new loans less repayments for a given lender group
within a type-of-credit category. Thus, it is probable that such
subcategories as "revolving credit at commercial banks" will show negative
growth in some months (historically, a rare occurrence), although "total
revolving credit," incorporating an offsetting boost in pool holdings, would
show a normal pattern of growth.
III-22
reported to the Board show delinquencies on the rise.
The weighted-average
delinquency rate of the auto finance companies was up to 2.5 percent in
March, 1/2 percentage point higher than one year ago.
Nonetheless, this
measure remained below levels recorded at times during the 1970s, and, at
least through year-end 1988, had not been accompanied by any comparable
uptrend in auto-loan delinquencies at commercial banks.
The finance
companies put exceptionally large amounts of car loans on their books in
1986 under low-rate lending programs.
With this earlier bulge of lending
reaching the stage at which delinquency is most likely, and with the base of
outstanding loans contracting a bit last year, a rise in the delinquency
rate is not surprising.
INTERNATIONAL DEVELOPMENTS
U.S. Merchandise Trade
In February, the seasonally adjusted merchandise trade deficit was
$10.5 billion (Census basis, customs valuation), compared with an $8.7
billion revised deficit in January.
(The January deficit was first
reported as $9.6 billion; these data continue to be volatile and subject
to substantial revision.)
February exports were only slightly higher
than the revised January figure, while imports in February rose more
than 5 percent, almost reversing the decline recorded for January.
Data
for March will be available on May 17.
U.S. MERCHANDISE TRADE: MONTHLY DATA
(Billions of dollars, seasonally adjusted, Census customs basis)
Total
Exports
Ag.
Nonag.
Total
Imports
Oil Non-oil
(nsa)
31.7
3.1
32.1
3.6
3.3
34.6
Balance
-8.8
-8.3
-11.7
1988-Apr
May
Jun
26.0
27.5
26.3
3.3
3.1
3.0
22.7
24.3
23.3
34.8
35.7
37.9
Jul
Aug
Sep
26.5
27.5
28.0
3.1
3.4
3.6
23.4
24.1
24.4
34.5
38.1
37.2
3.1
3.4
3.0
31.4
34.7
34.1
-8.0
-10.6
-9.2
Oct
Nov
Dec
27.8
27.5
29.1
3.0
3.0
3.3
24.8
24.5
25.8
36.6
38.2
40.1
2.9
2.9
3.3
33.7
35.3
36.8
-8.8
-10.7
-11.0
28.7
28.9
3.2
3.3
25.5
25.6
37.4
39.4
3.5
3.2
33.9
36.2
-8.7
-10.5
1989-Janr
Feb P
r--revised
p--preliminary
Translating to a balance of payments basis, the deficit for
January-February combined was somewhat smaller than the deficit recorded
IV-1
IV-2
U.S. MERCHANDISE TRADE: QUARTERLY DATA
(Billions of dollars, seasonally adjusted annual rates)
Exports
Ag.
Total
- - - - --
-
Nonag.
Total
Imports
Oil
Non-oil
Balance
BOP basis (current dollars) -
1987
1988
250
320
220
281
410
446
-160
1988-1
-2
-3
-4
301
318
327
335
265
280
286
296
441
438
443
462
-141
-121
-117
-128
42
1989-1*
-
301
-127
42
425
-123
- - - BOP basis (constant 1982 dollars)
1988-1
-2
-3
-4
329
340
341
349
1989-1*
352
290
301
304
313
39
381
373
379
389
313
84
-134
-118
-124
-131
389
-121
Percent Change:
0.0
8.3
7.0
0.9
Q1/Q1
Q1/Q4
2.2
-1.3
2.4
-6.7
2.1
0.0
(not AR)
-
-
-
-
-
- GNP basis
(constant 1982 dollars)
381
374
384
395
1988-1
-2
-3
-4
1989-1
Percent Change:
9.3
Q1/Ql
2.2
Q1/Q4
(not AR)
38
-2.2
7.9
86
321
10.9
1.6
4.3
-0.6
5.0
-4.9
-134
-120
-125
-134
397
-123
4.2
0.4
*/ FR staff estimate of January and February data at annual rates.
1. Constant dollar estimates are derived using deflators from the GNP
accounts.
IV-3
in the fourth quarter of last year, but was not significantly different
from deficits in the second and third quarters.
Exports were about 2-1/2 percent higher for January-February
combined than in the fourth quarter; much of the increase was in
agricultural exports with the remainder spread across other trade
categories.
The increase in agricultural exports in the January-
February period was primarily in the volume of wheat and soybeans.
Shipments of wheat continued to be boosted by strong purchases from
China and the re-entry of the Soviet Union into this market.
Among
other categories, exports of consumer goods (including a wide range of
household durables) and industrial supplies (particularly nuclear fuels)
rose noticeably during this period.
However, the commodity breakdown of
the growth in exports during January-February was clouded by an
unusually large increase in undocumented exports to Canada.
By
geographical region, the increase in nonagricultural exports was
widespread; the largest rise was to Canada.
Imports in January-February were less than 1 percent higher than in
the fourth quarter.
Increases in imports of oil, other industrial
supplies, and capital goods were nearly offset by declines in imports of
automotive products, consumer goods, and foods. Non-oil imports from
Japan and the Asian NIEs declined, while non-oil imports from Canada and
Mexico increased.
The value of imported oil in January-February rose significantly,
as higher prices more than offset a decline in volume from the strong
fourth quarter pace.
Oil spot and import prices have risen
IV-4
substantially as a result of accidents in the North Sea, the oil spill
in Alaska, and the cut in OPEC production (which so far this year has
been reduced roughly 2-1/2 mbd from the rate of production in late
1988).
The average price of imported oil rose more than $0.60 per
barrel in February, following a rise of more than $1.50 per barrel in
January.
The cumulative increase has been about $2.80 per barrel since
the low recorded last November.
OIL IMPORTS
(BOP basis, seasonally adjusted, value at annual rates)
1988
1989
Year
Value (Bil. $)
Price ($/BBL)
Volume (mbd.)
Q1
Q2
Q3
04
Jan
39.29
14.34
7.49
39.84
15.24
7.15
41.03
15.16
7.39
39.35
14.21
7.57
36.94
12.89
7.83
42.83
14.84
7.91
Feb
40.47P
15.46P
7.17P
p--Preliminary
Import and Export Prices
Prices for total imports, as measured by the monthly index
constructed by the Bureau of Labor Statistics (BLS), increased 0.7
percent in March (n.s.a.), more than reversing the decline in prices
recorded in February.
The March increase was attributable to a
turnaround in the prices of imported industrial supplies (including oil)
and capital goods,
as well as to smaller price declines in other
categories.
For the first quarter of 1989, total import prices rose 7.0 percent
at an annual rate (n.s.a.),
only slightly lower than the 8.2 percent
rate of increase registered in
the fourth quarter of last year.
While
IV-5
IMPORT AND EXPORT PRICE MEASURES
(percentage change from previous period)
Months
1989
Mar
Feb
(monthly rates)
BLS Prices - - - - - - - - 0.7
-0.5
8.2
7.0
-5.0
Quarters (AR)
1989
1988
Q1
Q3
Q4
1989-01
1988-01
Imports, Total
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
5.1
0.2
9.3
2.9
4.4
3.5
-3.5
-10.2
-6.0
0.6
-4.1
5.4
5.1
10.6
10.6
7.9
-32.8
-2.5
-8.7
9.6
-2.5
-0.3
-0.9
-0.5
0.1
-0.7
2.6
0.6
-0.2
-0.1
n.a.
-0.8
n.a.
0.4
-0.4
-1.0
24.9
0
-0.3
3.5
0.5
Memo:
Oil
Non-oil
11.2
4.5
Exports. Total
6.3
9.1
-1.1
Foods, Feeds, Bev.
Industrial Supplies
Capital Goods
Automotive Products
Consumer Goods
22.4
5.5
3.3
3.6
4.8
63.5
1.4
2.3
6.6
2.6
-20.9
-0.3
3.1
4.6
5.9
11.4
6.6
3.8
1.5
9.2
-2.8
0.2
-0.2
-0.3
0.2
1.4
-0.2
0.7
0.6
1.1
Memo:
Agricultural
Nonagricultural
16.1
4.8
39.9
4.1
-20.2
2.9
12.5
4.7
-1.9
-0.1
1.2
0.4
-
Fixed-Weighted
Imports, Total
Oil
Non-oil
Exports, Total
Ag.
Nonag.
Deflators
Imports, Total
Oil
Non-oil
Exports, Total
Ag.
Nonag.
103.2
1.6
Prices in the GNP Accounts -
4.6
2.9
4.8
-0.8
-22.0
2.4
2.0
-32.3
7.1
6.6
18.8
4.3
13.8
65.8
5.4
0.8
-5.8
2.2
3.3
2.9
3.5
-1.8
-21.9
0.1
5.3
-32.4
10.1
8.7
117.8
-0.1
6.7
18.8
5.2
9.9
65.8
4.1
1.0
-5.8
2.4
6.8
3.6
6.9
11.3
117.7
2.4
4.2
3.6
4.3
IV-6
the overall magnitude of the increases was little changed between the
fourth quarter and the first quarter, there were significant and
important differences in price movements among commodity categories.
The first-quarter increase primarily reflected the strong rebound in oil
prices, while the prices of most non-oil imports were about flat, after
having increased at nearly a 10 percent rate in the fourth quarter of
last year.
Monthly prices of exports have been influenced largely by the
movements in prices of foods, feeds, and beverages.
Export prices
declined 0.4 percent in February, in part because of a decline in grain
prices; the turnaround in export prices for March reflected price
increases in almost all trade categories, particularly agricultural
products.
For the first quarter as a whole, the price of total exports
resumed its upward trend following a slight decline in the preceding
quarter, largely due to a turnaround in the indices for food, fuels, and
crude materials.
The BLS price series for the first quarter as a whole were not
available when BEA constructed the preliminary estimate for first
quarter GNP.
These data will be incorporated in the revised estimate of
GNP due to be released on May 25.
The staff anticipates little change
in the BEA estimates of the NIA deflators for nonagricultural exports
and non-oil imports based on the BLS price information.
U.S. International Financial Transactions
The large capital outflow reported by banks in January was partly
reversed in February.
Transactions table.)
(See line 1 of the U.S. International
The inflow of $5.3 billion helped finance large
IV-7
SUMMARY
OF
U.S.
INTERNATIONAL TRANSACTIONS
(Billions of dollars)
1987
198B
Year
Year
Ql
02
03
47.5
23.2
-1.8
16.5
36.4
15.3
-2.2
26.4
26.9
1989
1988
04
Dec.
Jan.
-1.1
9.4
8.2
-15.7
10.9
5.7
0.9
-0.4
0.6
3.2
2.6
8.9
6.4
9.0
3.7
1.5
4.6
-0.3
Feb.
Private Capital
Banks
1.
Change in net foreign
positions of banking offices
in the U.S. (+ - inflow)
5.3
Securities
2.
Private securities
1
transactions, net
a)
b)
16.8
0.4
*
1.1
1.3
2.0
-1.2
0.2
U.S. net purchases (-) of
foreign securities
-6.9
-12.0
-4.9
1.0
-2.0
6.1
-2.8
-1.1
Foreign net purchases (+) of U.S.
Treasury obligations
-7.3
20.1
6.0
5.6
3.5
5.4
-3.6
2.4
4.8
47.7
40.1
25.0
6.4
-2.0
-0.8
-1.2
1.8
2.1
38.8
-8.9
15.5
17.7
-1.5
-0.8
-1.7
-6.8
-3.4
-0.8
5.3
0.7
-2.1
0.8
-2.0
0.4
0.3
3.8
17.8
28.0
8.8
8.9
5.6
4.8
0.2
3.4
-2.1
43.2
4.5
41.7
27.7
5.9
-3.8
1.9
2.1
-3.3
4.2
-1.6
-2.8
0.6
1.8
1.1
-3.3
5.1
-2.1
9.1
-3.6
1.5
*
-7.4
2.3
0.5
-1.9
-0.5
c)
3.
foreign net purchases
(+) of U.S. corporate bonds
foreign net purchases
(+) of U.S. corporate stocks
-1.1
Official Capital
4. Changes in foreign official
reserves assets in U.S.
(+
increase)
a) By area
G-10 countries (incl. Switz.)
OPEC
All other countries
b)
5.
By type
U.S. reasury securities
Other
Changes in U.S. official reserve
assets
(+ -
decrease)
Other transactions (Quarterly data)
6. U.S. direct investment (-) abroad 4
6. U.S. direct investment (-) abroad
7. Foreign direct investment (+) in U.S.
8. Other capital flows (+ " inflow)
4
9. U.S. current account balance
10. Statistical
10. Statistical discrepancy
discrepancy
-44.5
42.0
-20.4
42.2
1.9
-6.5
0.5
7.3
3.3
13.1
4.6
-154.0
18.5
-135.3
16.5
-37.0
4.4
-33.8
-160.3
-126.5
-35.2
-30.2
-6.6
-12.6
-5.2
8.4
7.0
-32.6
23.7
MEMO:
U.S. merchandise trade balance --
part
of line 9 (Balance of payments basis,
seasonally adjusted)
29.2
32.0
n.a.
n.a.
n.a.
1. These data have not been adjusted to exclude comissions on securities transactions and, therefore, do not match
exactly the data on U.S. international transactions as published by the Department of Commerce. Line 2a includes all U.S.
bonds other than Treasury obligations.
2. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities.
3. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and
official transactions not shown elsewhere. In addition, it includes amounts resulting from adjustments to the data made by
the Department of Comnerce and revisions to the data in lines 1 through 5 since publication of the quarterly data in the
Survey of Current Business.
SIncludes seasonal adjustment for quarterly data.
-Less than $50 million.
NOTE: Details may not add to total because of rounding.
IV-8
increases of merger-related loans at commercial banks.
However, monthly
average data for March and the first three weeks of April, reported on
the International Banking Data table (line 1), show a return to outflows
to own foreign offices and IBFs: $3.2 billion in March and $8.3 billion
through April 24.
Significant capital inflows in February were also reported in the
securities markets (lines 2 and 3 of the U.S. International Transactions
table).
The most important component of the net inflow in private
securities was a large increase in foreign net purchases of U.S.
corporate bonds of $4.6 billion (line 2a).
About half of this amount
was attributable to purchasers in Europe, with purchasers in Asia
accounting for almost as much; Japanese investors took $1.6 billion net,
with $1.3 billion of that in U.S. government agency bonds.
This last
figure underscores the fact that a growing percentage of the
transactions in the "corporate bond" category is for bonds issued by
U.S. government corporations and federally sponsored agencies.
Private
net purchases of such bonds totaled $3.1 billion in the first two months
of 1989, compared with $5.4 billion in all of 1988.
transactions included in this line is
A further class of
the purchase by foreigners of
bonds guaranteed by states and municipalities.
became the first state to issue a Eurobond.
In March, Kentucky
Its Development and Finance
Authority issued $76 million equivalent of yen-denominated bonds in
Japan; a swap transformed the obligation into a floating-rate dollar
obligation.
The net inflow into U.S. Treasury securities was also large in
February: $4.8 billion (line 3).
Slightly more than half of the flow
INTERNATIONAL BANKING DATA
(Billions of dollars)
1986
1987
1988
1989
Dec.
Sept.
Dec.
Mar.
June
Sept.
Dec.
Jan.
Feb.
Mar.
Apr. 2
22.3
31.7
-9.4
-8.7
12.6
-20.3
-10.9
15.2
-26.1
8.7
27.8
-19.0
-4.8
17.0
-21.8
-4.9
16.6
-21.5
-4.9
21.6
-26.5
-3.4
21.1
-24.5
-6.1
18.6
-24.7
-2.9
20.4
-23.3
5.4
24.7
-19.3
Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks
16.8
17.1
15.8
19.1
19.7
21.4
21.2
19.8
21.0
23.9
24.1
Eurodollar Holdings ofl
U.S. Nonbank Residents
124.5
141.1
132.6
128.9
138.1
141.1
145.3
143.9
143.1
146.1
145.2
1. Net Claims of U.S. Banking
Offices (excluding IBFS) on Own
Foreign Offices and IBFS
(a) U.S.-chartered banks
(b) Foreign-chartered banks
2.
3.
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. Line 3 is an average of daily data for the overnight component and an average of Wednesday data for the term
component.
2. Through April 24, 1989.
IV-10
went to Japanese buyers.
The large inflow came in a month when net
issuance of coupon securities by the Treasury rose to a six-month high
of $13.8 billion.
U.S. net purchases of foreign securities continued at a steady $1.1
billion pace in February (line 2c).
Foreign official reserve assets in the United States increased a
moderate $2.1 billion in February (line 4).
The total was more than
accounted for by the increase in OPEC reserves of $3.8 billion (line
4a).
G-10 official reserves in the United States were stable in
February, despite significant reported intervention sales of dollars.
Partial information for March from the FRBNY suggests an increase in
official reserves held in the United States in the $3.5 billion range,
with continued large increases of OPEC reserves.
Foreign Exchange Markets
The dollar strengthened, on balance, against most other major
currencies during the intermeeting period.
The trade-weighted foreign-
exchange value of the dollar in terms of the other G-10 currencies,
shown in Chart A, rose by about 1.0 percent.
Through mid-April, the
dollar fell as market participants perceived a renewed international
commitment to containing the dollar upon the release of the G-7
communique
.
The dollar
recovered by the end of the month, however, and strengthened further in
early May, aided, perhaps, by concerns about political factors in
Germany and Japan.
IV-11
WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR
March 1973=100
101
[Daily series
- 100
-99
-98
-97
-96
-95
-94
IIIIIIIIIIII I 93
February
March
April
1989
IV-12
The Desk's sales exceeded $1.7 billion, of which,
$1.15 billion was sold against marks.
The Desk also sold $550 million against yen.
Its initial
purchases of yen were made during the week of the G-7 meeting in
Washington and constituted its first yen purchases in the market since
autumn of 1985.
The Desk resumed purchasing yen in late April and early
May.
On April 20, the Bundesbank announced an increase in its Lombard
and discount rates of 1/2 percentage point.
The rise was followed by
increases in the central bank lending rates of Austria, the Netherlands,
Denmark, and Belgium.
The Bundesbank's action heightened expectations
of increases in official interest rates in a number of other countries,
including Japan, France, and Italy.
Since then, neither the yen, the
French franc, nor the lira has weakened against the mark, and official
interest rates have not been raised.
The dollar's overall strength occurred despite a continued
narrowing of short-term interest rate differentials between dollardenominated assets and both mark and yen assets.
U.S. short-term rates
IV-13
have fallen slightly while early declines in German rates were more than
offset by the increases which followed the rise in the Bundesbank's
official lending rates.
German short-term rates moved up by about 15 to
40 basis points, net, over the intermeeting period.
term rates have remained stable.
In Japan, short-
Long-term rates in all three countries
showed little net change over the period.
U.S. bank lending to foreigners
The dollar value of U.S.-chartered banks' claims (all currencies)
on all foreigners decreased by about $8 billion (2 percent) in the
fourth quarter of 1988, and by about $32 billion (8.5 percent) for the
year as a whole.
On average during the fourth quarter, the foreign
exchange value of the dollar in terms of other G-10 currencies fell by
5.2 percent.
Excluding estimated valuation effects due to changes in
the value of the dollar, total claims on foreigners declined by an
estimated $13 billion in the fourth quarter, and by an estimated
$26 billion for the year.
The aggregate decline in total claims for
1988, adjusted for exchange rate valuation effects, was roughly
equivalent to the average decline in such claims during the years 1985
through 1987.
The decline in U.S. bank claims on non-OPEC developing countries
also continued in the fourth quarter.
For 1988 as a whole, claims on
Latin America, Asia, and Africa, each fell by approximately 12 percent.
In the case of claims on Latin America, this percentage decline was
nearly 2-1/2 times the percentage decline in such claims (excluding
exchange rate valuation effects) for banks located in the 17 countries,
IV-14
CLAIMS ON FOREIGNERS OF U.S.-CHARTERED BANKS
(billions of dollars)
Out-
Changes (no sign = increase)
1987
1988
1988
1985
1986
Year
Year
Year
Year
Q1
Q2
-20.3
-0.3
-3.7
-32.4
-8.3
-20.5
4.3
-7.9
349.0
-7.6
-5.1
-1.4
-12.3
-3.7
-2.7
-4.3
-1.6
85.4
(Latin America)
-3.9
-0.6
-1.7
-9.0
-2.2
-2.1
-2.4
-2.3
(Asia and Africa)
-3.5
-4.4
0.1
-3.3
-1.0
-0.8
-2.3
0.8
OPEC countries
-3.6
-2.0
-2.2
-0.6
0.1
-0.8
1.2
Eastern Europe
-0.3
-0.9
-0.2
0.7
-0.1
0.2
-0.1
0.7
countries
-3.7
-4.2
0.5
-5.3
0.0
-2.5
-1.0
-1.8
20.9
G-10 countries
-2.1
10.6
3.4
-5.4
-3.3
-6.2
-1.0
5.1
154.6
-2.7
-1.6
-7.0
-8.6
0.3
-9.3
4.5
-4.1
45.7
-0.4
2.9
3.4
-1.4
-1.7
0.7
4.8
-5.2
21.8
-29
-11
-25
-26
-1
-17
5
-13
Total, all countries
standing
Q3
Q4
12/31/88
Non-OPEC developing
countries
of which:
-1.1
Smaller developed
Offshore banking
centers
Miscellaneous
Memorandum:
Total, adjusted for
exchange rate
changes (staff
estimate)
IV - 15
including the United States, that report international banking data to
the Bank for International Settlements.
Claims of U.S.- chartered banks on Mexico declined by $4.8 billion
(20 percent) for 1988 as a whole.
In part, this was a result of pre-
payments and debt-equity transactions, including, in the fourth quarter,
purchases of debt on the secondary market linked to the privatizations
of state enterprises in Mexico.
U.S. bank claims on Brazil declined by
$2.2 billion (9 percent) during 1988 as a whole.
In the fourth quarter,
however, these claims actually increased by $100 million, as Brazil
received a disbursement of $4 billion under its 1988 new money package,
approximately $1.2 billion (30 percent) of which came from U.S. banks.
Claims on other major country groups also declined in 1988, with
the exception of a $700 million increase in claims on Eastern Europe.
Although approximately one-half of the increase represented credit
extended to the Soviet Union, U.S. banks continue to have a small level
of exposure to that country ($700 million) relative to that of all banks
for which exposure is reported to the Bank for International Settlements
($36 billion).
For 1988 as a whole, BIS reporting banks extended
approximately $5.5 billion in credit to the Soviet Union, excluding
valuation effects due to changes in U.S. dollar exchange rates.
The secondary market prices of bank claims on the heavily indebted
countries declined on average by 17 percent during 1988, and continued
their decline through much of the first quarter of 1989.
However, as
indicated in the chart, the prices of claims on important debtor
countries rose in the aftermath of the announcement of the Brady plan on
March 10.
The notable exception was Argentina where a further
IV-16
Indicative Secondary Market Prices of Bank Loans
for Six of the Baker Initiative Countries
(as a percent of face value)
ARGENTINA
1987
1988
_
BRAZIL
1989
1987
1988
1989
1989
1987
1988
1989
CHILE
1987
1988
MEXICO
I
1987
I
1988
VENEZUELA
I
I
I
1989
1987
Data shown for dates up to April 27,
1989.
Vertical bars mark the announcement of the Brady
1988
Initiative,
1989
larch
10,
1989.
IV-17
deterioration in conditions may have led to questions about that country
qualifying for inclusion in the Brady plan.
Since the last data point
on the chart (April 27, 1989), there have been indications of partial
reversals of the March-April increases in the secondary market prices of
country debt.
Developments in Foreign Industrial Countries
Available indicators suggest that the pace of real economic growth
and inflation increased, on balance, in the major foreign industrial
countries in early 1989.
The combined external surplus of these
countries continued to rise.
Industrial production rose rapidly in
Japan in the first quarter, and unofficial estimates indicate that real
GNP growth in Japan and Germany was strong.
Italy.
Growth also was strong in
In contrast, industrial production rose slightly in France and
declined slightly in Canada.
In the United Kingdom, the tightening of
monetary policy appears to have contributed to a lower level of
industrial output in January and February.
Inflation rates increased in Japan, Germany, and Italy, partly the
result of tax-related increases in consumer prices and oil-price
increases.
Both Canada and the United Kingdom continued to record
relatively high inflation rates.
In France, inflation remained below
3-1/2 percent, raising the prospect of convergence of French and German
inflation by the end of the year.
Germany has continued to record a larger current account surplus on
a cumulative basis thus far this year than in 1988, while Japan's
surplus has remained at the increased rate recorded late last year.
Trade and current account deficits in the United Kingdom continued at
IV-18
near record rates and Italy's deficit widened.
The trade deficit in
France narrowed in the first quarter.
Individual country notes.
the first quarter.
Economic activity in Japan was strong in
As indicated in the table below, industrial
production rose sharply in March, bringing first-quarter growth to 2.8
percent (s.a.).
Retail sales increased sharply in February, the second
The rate of capacity utilization in
consecutive strong monthly advance.
in January.
manufacturing rose 0.3 percent (s.a.)
Consistent with the
strong pace of growth is evidence of further tightening in labor markets
in the first quarter.
The ratio of job offers to applicants increased
in the first quarter as a whole, despite a decline in March.
The
unemployment rate remained steady in March at its lowest level in more
than six years.
JAPANESE ECONOMIC INDICATORS
(percent change from previous period, s.a., except were noted)
1988
Q3
Industrial Production
Retail Sales
Capacity Utilization
Job Offers/Applicants
Unemployment Rate (level)
Q4
2.5
0.3
2.8
9.0
2.5
2.4
2.7
1.7
3.7
2.4
Q1
2.8
--1.8
2.3
Jan.
1989
Feb.
Mar.
0.9
1.4
0.3
0.9
2.3
-1.7
1.5
-0.9
2.3
4.2
---1.7
2.3
As expected, consumer and wholesale prices rose by about 1-1/2
percent in April, reflecting the combined result of the new 3 percent
consumption tax and the removal of excise taxes on a range of consumer
durable goods.
Consumer prices in the Tokyo area increased 1.5 percent
(n.s.a.) in April, boosting the 12-month inflation rate to 2.6 percent.
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
1
(Percentage change from previous period, seasonally adjusted)
Q4/Q4 Q4/Q4
1987 1988
Q2
QQ4
1989
Q1
Q1
.8
.6
.6
-. 0
n.a.
n.a.
-. 3
.6
-. 6
.0
n.a.
3.4
1.9
1.1
2.6
Q2
.4
-.2
n.a.
n.a.
3.8
-. 5
.9
-. 7
n.a.
2.9
4.9
1988
Q3
Q3
1988
Nov. Dec.
Jan.
1989
Feb.
Mar.
Nov.
Jan.
Feb.
Mar.
Dec.
Latest 3 months
from year ago
2
Canada
X
x
x
x
x
6.1
8.5
3.4
2.9
2.7
3.2
2.9
4.2
2.4
1.5
GDP
IP
2.6
4.0
-.1
1.1
.3
n.a.
.6
1.8
.6
2.2
-.4
2.0
1.3
.0
-. 9
n.a.
6.8
.8
-. 7
1.5
.1
n.a.
4.5
n.a.
n.a.
1.4
.5
n.a.
n.a.
n.a.
n.a.
2.8
2.8
.9
.9
-1.7
4.2
.0
-.8
-. 3
n.a.
.4
.4
-. 0
-.0
1.1
1.1
France
GDP
IP
Germany
GNP
IP
Italy
2.7
5.7
GDP
IP
Japan
5.7
8.1
4.7
8.0
-.8
-. 2
2.3
2.5
.7
2.4
4.2
4.1
3.0
2.6
.2
2.4
.3
.7
.5
.2
5.0
5.8
GNP
IP
2.8
5.0
.7
1.1
.6
1.7
.6
1.1
United Kingdom
GDP
IP
n.a.
n.a.
x
)E
-1.2
United States
GNP
IP
1.4
.7
1. Asterisk indicates that monthly data are not available.
2. For quarterly data, latest quarter from year ago.
.4
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period) 1
1987
---Q4
1988
Q4/Q4
1987
Q4/Q4
1988
4.2
4.3
4.1
3.5
3.2
2.6
3.0
7.2
1.0
-. 7
1.5
2.7
5.2
5.2
4.6
5.4
1.7
1.2
1.1
1.1
1.1
-. 6
1.5
-1.4
.4
-. 4
-. 2
-1.2
4.1
6.5
4.1
4.9
4.4
2.5
4.3
3.4
Q1
Q1
Q2
Q2
Q3
Q3
1989
Q1
Q1
Q4
Q4
1989
--------------------------Jan.
Feb.
Mar.
Apr.
n.a.
.5
.7
.5
Latest 3 months
from year ago
Canada
CPI
WPI
.7
1.1
.8
1.1
1.3
.9
1.1
1.0
.8
.5
.5
1.0
1.0
1.0
.9
2.7
.6
.8
2.3
n.a.
.4
1.2
1.6
2.7
1.9
1.7
2.0
n.a.
1.2
n.a.
.5
.8
.7
.0
.5
n.a.
n.a.
n.a.
4.5
3.3
n.a.
3.4
7.2
France
CPI
WPI
.4
.3
.3
X
X
E
x
Germany
CPI
WPI
.6
n.a.
2.8
5.4
.5
n.a.
.7
n.a.
6.5
6.3
.5
.2
1.5
n.a.
.4
.3
n.a.
.5
7.7
5.1
n.a.
n.a.
4.8
5.0
Italy
CPI
WPI
1.0
1.3
1.0
1.2
.8
.8
.8
.8
Japan
CPI
WPI
.0
1.0
.9
-. 8
2.4
1.4
1.4
1.2
2.1
1.1
1.6
1.4
1.1
.8
1.2
1.1
1.1
.9
1-.3
2.2
United Kingdom
CPI
WPI
.5
1.1
.7
.3
United States
CPI (SA)
WPI (SA)
.9
.6
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)
1987
1987
1988
1988
Q4
Q1
Q1
02
Q2
Q3
Q3
Q4
Q4
1989
Q1
QI
1988
Jan.
Jan.
Dec.
1989
Feb.
Feb.
Mar.
Mar.
Canada
Trade
Current account
8.3
-8.0
7.4
-9.2
1.6
-2.6
1.7
-1.6
2.1
-2.3
2.6
-1.8
1.0
-3.5
n.a.
n.a.
-5.2
-4.1
-5.9
-4.0
-1.0
-2.3
-. 8
1.5
-1.0
-. 7
-1.9
-1.1
-2.1
-3.7
65.9
45.4
72.8
49.1
20.1
15.3
15.0
9.2
19.9
15.0
17.0
8.7
-2.9
-1.6
-2.6
-5.1
-1.8
1.1
18.3
20.7
20.9
22.3
-5.3
-3.5
-41.2
-33.5
.5
.7
S
X
.4
-. 5
n.a.
-. 8
-. 4
-. 1
X
X
X
21.0
16.1
19.5
15.5
7.7
5.7
6.4
6.1
6.1
4.6
-2.9
.4
-2.8
-. 8
n.a.
n.a.
-1.5
16.9
17.1
18.4
18.1
21.9
21.2
22.0
20.9
7.4
6.6
7.6
6.7
8.8
8.8
-7.1
-5.1
-8.2
-4.9
-9.4
-6.3
-11.5
-9.0
n.a.
n.a.
-3.0
-2.3
-3.7
-2.8
-3.8
-3.0
-35.2
-37.0
-30.2
-33.8
-29.2
-32.6
-32.0
-31.9
n.a.
n.a.
*
*
X
n.a.
X
France
Trade
Current account
Germany
I-
Trade (NSA)
Current account (NSA)
6.9
4.8
Italy
Trade
Current account (NSA)
-9.1
-1.1
-10.2
-4.4
-1.5
n.a.
n.a.
3E
X
S
Japan
Trade
Current account
79.5
87.0
78.1
79.5
5.6
5.4
United Kingdom
Trade
Current account
-15.9
-4.7
-36.2
-25.3
n.a.
n.a.
United States
Trade 2
Current account
-160.3 -126.5
-154.0 -135.3
*
*
1. The current account includes goods, services, and private and official transfers. Asterisk indicates
that monthly data are not available.
2. Annual data are subject to revisions and therefore may not be consistent with quarterly and/or monthly data.
<
r'
IV-22
Wholesale prices rose 1.6 percent (n.s.a.) in the first 20 days of
April, bringing the 12-month rate of increase to 2.7 percent.
Official
statements have continued to stress that inflationary pressures need to
be monitored closely in light of the continued strong pace of domestic
economic activity, rising oil prices, and the recent weakness of the
yen.
Japan's trade and current account surpluses narrowed in March,
reversing substantial increases in the previous month.
For the first
quarter as a whole, the trade surplus was $88 billion (s.a.a.r.),
somewhat higher than the $83.7 billion surplus rate in the first quarter
last year.
The current account surplus was $83.7 billion (s.a.a.r.) in
the first quarter, below the $89 billion surplus in the first quarter
last year, which was the highest quarter of the year.
On April 25, Prime Minister Takeshita announced his intention to
resign, prompted by further revelations of his involvement in the
Recruit Cosmos scandal and continued decline in support for his
government in public opinion polls.
been announced.
A new Prime Minister has not yet
On April 28, the ruling Liberal Democratic Party
unilaterally acted to pass its budget for the current fiscal year (which
began in April) through the Lower House of the Diet, the first such
action in over a century.
Opposition parties had boycotted legislative
action on the budget because of the Recruit scandal.
Final approval of
budget legislation by the Upper House of the Diet is expected before the
current temporary budget expires on May 20.
IV-23
The pace of economic activity increased in Germany in early 1989.
According to unofficial government estimates, real GNP growth could be
as high as 8 percent (s.a.a.r.) in the first quarter, the result of the
warm winter and seasonal adjustment problems.
Industrial production
rose 2.2 percent (s.a.) in the first quarter, despite a decline of
almost 1 percent in March.
Much of the rise in industrial production
also reflected the effects of unseasonally warm winter weather.
Most
affected was construction, which increased 25.4 percent in the first
quarter.
Excluding construction activity, industrial production rose
0.7 percent (s.a.)
in the first quarter.
Meanwhile, the volume of new
orders rose 3.1 percent (s.a.) in the first quarter (see table below).
Domestic orders were up 4 percent (s.a.) while foreign orders were up 1
percent.
After eight successive months of decline, the unemployment
rate edged up to 7.8 percent (s.a.)
in April.
The capacity utilization
rate in manufacturing edged down to just under 88 percent in the first
quarter.
GERMAN ECONOMIC INDICATORS
(percent change from previous period, s.a., except where noted)
Q4
Q1
Feb.
1989
Mar.
Apr.
4.1
4.1
3.2
8.8
-2.0
-2.4
0.2
8.5
3.1
4.1
1.0
7.9
2.6
1.9
5.1
7.9
3.3
3.6
2.1
7.7
7.8
87.4
88.7
87.9
-
1988
Q3
Volume of Manufacturing Orders
Domestic
Foreign
Unemployment Rate (level)
Manufacturing Capacity
Utilization Rate (level)
Inflation continued to increase in Germany in recent months, as
shown in the table below.
The across-the-board increase in inflation
IV-24
can be attributed largely to higher excise taxes in January, weakness in
the deutsche-mark, and rising oil prices.
Increased price pressures led
the Bundesbank to raise the discount and Lombard rates by half a
percentage point, effective April 21, to 4.5 percent and 6.5 percent,
respectively.
The Bundesbank's action, which was not expected in
financial markets, also reflected concern over the rapid pace of recent
monetary growth and possible increases in inflation and inflationary
expectations.
Through March, M3 growth was 6.2 percent (s.a.a.r.) from
the 1988-Q4 target base, still above the Bundesbank's
"about 5 percent" growth.
M3 target of
(M3 is currently being measured as a weighted
average of weekly reported numbers.)
GERMAN INFLATION INDICATORS
(percent change from year earlier)
Q3
1988
Consumer Prices
Industrial Producer Prices
Wholesale Prices
Import Prices
Q4
Jan.
Feb.
1989
Mar.
Apr.
1.2
1.5
1.4
1.2
1.5
1.7
2.7
2.2
2.6
2.9
5.1
5.9
2.6
3.2
5.4
5.9
2.7
3.4
5.8
7.2
3.0
----
Germany's external surplus has continued to rise in recent months.
The trade surplus in the first quarter was $19.4 billion (n.s.a.), above
the $15.0 billion surplus recorded in the first quarter of 1988.
The
current account surplus was $15.5 billion (n.s.a.) in the first quarter,
above the $9.2 billion surplus recorded in the first quarter of 1988.
Election losses in Berlin (in late-January) and in Frankfurt (in
March) and recent opinion polls have raised doubts about the political
longevity of the ruling coalition.
Partly as a result of that weakness,
IV-25
Chancellor Kohl executed a major change in the cabinet in April, and the
government abolished the controversial 10 percent withholding tax on
investment earnings, effective July 1.
The tax, which had gone into
effect in January, had been blamed for large capital outflows.
The tax
would have raised an estimated $2.3 billion in 1989; the revenue loss is
expected to be made up by higher income tax revenues from faster-thanexpected growth.
In France, economic activity has softened somewhat from the pace of
late last year.
Industrial production declined in February, reversing
some of the sharp increase in January, but was still almost 5 percent
above year-earlier levels.
10 percent (s.a.).
February unemployment moved down slightly to
Consumer price inflation slowed in the first quarter
to slightly less than 3-1/2 percent (a.r.).
Monetary data through
February show that French M2 has continued to expand at a moderate rate
within the target range of 4 to 6 percent for 1989.
Although French
short-term interest rates edged up following the surprise announcement
in late April of increases in the German discount and Lombard rates,
French intervention rates were left unchanged as the French franc
remained steady within the EMS.
In the United Kingdom, there have been increasing signs that the
monetary tightening that was initiated in the second half of last year
is slowing the pace of economic activity.
Industrial production
declined by 0.3 percent (s.a.) in February, the third consecutive
monthly decline, and retail sales volume in the first quarter was 0.4
IV-26
percent below that in the fourth quarter last year.
In contrast, the
unemployment rate continued to decline in March.
In the first quarter, consumer price inflation was just above 6
percent (n.s.a.a.r.).
Wholesale prices rose 6 percent (n.s.a.a.r.) in
April matching the inflation rate recorded in the first quarter.
The
underlying rate of increase in average earnings in the 12 months ending
in February was 9-1/4 percent, up 1/2 percentage point from the end of
last year.
In
1989.
Canada, real economic activity appears to have slowed in early
The unemployment rate rose to 7.8 percent in April back to the
level at the end of last year.
Inflation remains a concern, with
consumer prices rising in March to a level 4.6 percent above their level
a year ago, and with major wage settlements increasing 4.5 percent
(a.r.) in the fourth quarter last year.
On April 26, there was an embarrassing leak of the contents of
Canada's budget that was scheduled to be announced the following day.
The projected budget deficit for the 1989-90 fiscal year is C$30.5
billion (4.7 percent of GNP), up from about C$28.9 billion (4.8 percent
of GNP) this year.
Although additional corporate and excise taxes are
to be levied and expenditures are to be cut by C$5 billion, the deficit
will increase because of the higher interest costs of servicing
government debt.
A national sales tax and expenditure cuts of C$9
billion in fiscal year 1990-91 are projected to reduce the deficit in
that year to C$28 billion (4.1 percent of GNP).
IV-27
In Italy, preliminary annual data show that real GDP growth in 1988
was nearly 4 percent.
The source of this strength was investment,
Increased industrial production (n.s.a., not
exports and inventories.
shown in table) in the first two months of 1989 suggests that this
strength has continued.
Measured inflation at the retail level
increased during the first quarter, partly the result of an increase in
value-added taxes.
Meanwhile, the merchandise trade balance
deteriorated sharply in early 1989, the result of a slowing in export
growth.
On April 20, the Italian Parliament passed the enabling legislation
for the 1989 budget more than three months after the beginning of the
fiscal year when the budget itself was passed.
Included in the bill
were measures to reduce tax evasion, the indexation of tax brackets to
eliminate fiscal drag, a reduction in the number of tax brackets, the
higher value-added tax rates, and an increase in the taxing power of
local governments.
The cabinet voted to introduce by decree-law fees
for certain public health services that have provoked widespread
protests and led the unions to call a general strike for May 10.
Economic Situation in Major Developing Countries
In Argentina, a near collapse of the austral has led to a significant acceleration of prices, replacement of the government's economic
team, and new emergency stabilization measures as the May 14 presidential election draws near.
Mexico reached an agreement with the IMF on
April 11 for a three-year, SDR 2.8 billion EFF.
In Brazil, the govern-
ment announced new measures on April 17 in an effort to control
IV-28
inflation.
On March 29, the IMF Executive Board approved Venezuela's
request for a first-credit-tranche purchase of $453 million.
Nigeria's
early April deadline for clearing $30 million in interest arrears to
commercial banks under its $5.7 billion rescheduling arrangement that
was negotiated in March has been extended to June 7.
Individual country notes.
In Argentina, a near collapse of the
austral has led to a significant acceleration in inflation, replacement
of the government's economic team, and new emergency stabilization
measures as the May 14 presidential election draws near.
the free-market austral depreciated 75 percent.
During March,
The deteriorating
economic situation prompted the end-March replacement of Economy
Minister Juan Sourrouille with Juan Carlos Pugliese.
As a result of
continued austral depreciation and losses of foreign exchange reserves,
special exchange rates for commercial transactions were eliminated in
mid-April to unify the exchange regime.
However, the austral continued
to weaken, depreciating about 40 percent during April.
Monthly infla-
tion rose from 9.6 percent in February to 17 percent in March and to
33.4 percent in April.
By the end of April, nominal interest rates had
reached 100 percent for short-term instruments, and a severe shortage of
currency had developed as well.
At the beginning of May, new stabilization measures were announced,
including a revision of the export tax system in an effort to increase
the supply of dollars to the foreign exchange market, increases in
public sector prices, an indefinite freeze on most private sector
prices, and a temporary limit on withdrawals from bank deposits.
Although the government announced several measures to reduce the fiscal
IV-29
deficit, including the higher public sector prices, new taxes and
spending curtailments, it is not clear whether all these measures will
actually be implemented.
The authorities hope the program will stabi-
lize the economy until the elections, after which it may be easier to
develop support for policies that will permanently reduce the fiscal
deficit.
Since the announcement of the new package, financial markets
have remained volatile, and the austral has continued to depreciate
rapidly.
Mexico reached agreement with the IMF on April 11 on a three-year,
SDR 2.8 billion EFF arrangement.
The agreement basically endorses the
policies that Mexico has been following.
Performance criteria will be
adjusted for unanticipated changes in oil export prices and world
interest rates.
for May 26.
Executive Board consideration has been set tentatively
After the IMF agreement is approved, Mexico is expected to
seek a Paris Club rescheduling.
On April 19, Mexico opened negotiations with commercial banks with
the aim of reducing its principal and/or interest rates on its debt,
restructuring some debt maturities, and obtaining new money.
Negoti-
ations with the World Bank on a package of three policy-based loans
totaling $1.5 billion are near completion.
Oil export earnings were $640 million larger over the first quarter
than had been forecast at the beginning of the year.
The average price
over this period was $14.78 per barrel, and the average volume exported
was 1.33 million barrels per day.
Originally, official projections of
fiscal revenues and the current account assumed a price of $10 per
barrel and a volume of 1.25 million barrels per day.
IV-30
On April 3, the government removed controls on interest rates on
bank liabilities and restructured banks' portfolio requirements,
reducing them as a source of government financing.
Furthermore,
bankers' acceptances, issued by banks at market determined interest
rates, have grown rapidly in recent months, in part because banks are
not required to invest as much in government securities as they are
required to do on other bank liabilities.
So far, however, bank deposit
rates have remained at their pre-decontrol levels, which are well below
market rates.
The 28-day Treasury bill rate, which declined from late
December to mid-March, thereafter turned up and was 51 percent on May 2,
compared with 47 percent on March 14.
In March, the CPI was 1.1 percent higher than in February and 21
percent higher than a year earlier.
In Brazil, the government on April 17 announced new measures in an
attempt to control inflation.
Consumer prices rose 3.6 percent in
February, 6.1 percent in March, and 7.3 percent in April.
The measures
included a 3.2 percent devaluation of the cruzado against the dollar,
plans to reintroduce indexed government debt, and an increase in mandated prices for many goods.
The cruzado was devalued another 2 percent
on May 4.
The measures reflect the government's response to the deteriorating
economic performance and rising popular discontent in recent months.
Real GDP was reported to have fallen 0.3 percent in 1988.
Interest
rates have remained high in early 1989, although the central bank has
lowered interest rates in the overnight market in recent weeks.
Wide-
spread shortages have once again appeared in response to the price
IV-31
controls imposed in January.
Labor strikes increased in March and April
and have included workers at commercial banks and the central bank.
Although President Sarney announced measures limiting the ability of
unions to call strikes, the measures have so far not been enforced.
In contrast to the deteriorating domestic conditions, the trade
surplus reached an estimated $4 billion for the first three months of
1989, compared with a $3.1 billion surplus over the first quarter of
1988.
However, although exchange rate devaluations have improved
competitiveness, prices have risen faster since the devaluation in midJanuary.
The differential between the free-market dollar exchange rate
and the official rate surpassed 150 percent in early May.
In late April, commercial banks disbursed the $600 million second
tranche from the 1988 new money agreement, after Brazil cleared most of
its interest arrears.
On March 29, the IMF Executive Board approved Venezuela's request
for a first-credit-tranche purchase of $453 million.
Upon receipt of
the IMF funds Venezuela repaid a $450 million bridge loan that was
disbursed by the U.S. Treasury in mid-March.
Additional IMF and World
Bank disbursements are expected within the next two months.
ations with commercial banks have resumed.
for debt reduction and new money.
Negoti-
The government plans to ask
Venezuela has accumulated some
interest arrears on its bank debt, but to date has not allowed interest
payments on public sector debt to become more than 90 days overdue.
Consumer prices increased markedly in March and April compared with
earlier months, but the increases were mainly the result of the exchange
rate devaluation and unification in mid-March, the removal of price
IV-32
controls, and public sector price increases in late March.
Consumer
prices increased 21.3 percent in March and 13.5 percent in April,
compared with 35.4 percent over the 12 months of 1988.
Nigeria missed an early April deadline for clearing interest
arrears to commercial banks that had been agreed to under its $5.7
billion rescheduling arrangement negotiated in March.
Nigeria was
granted a one-time extension and now has until June 7 to eliminate
arrears totaling about $30 million.
Although a recent IMF mission was
unable to complete a mid-term review of its program with Nigeria, Fund
staff seem satisfied that difficulties can be resolved.
@FedFRASER