Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 17, 1994 : Greenbook Part 2

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Confidential (FR) Class III FOMC

May 11.

1994

RECENT DEVELOPMENTS

Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System

DOMESTIC NON
DEVELOPMENTS

FINANCIAL

DOMESTIC NONFINANCIAL DEVELOPMENTS

The indications

from the labor market are that the economy has

maintained a strong forward momentum this year, interrupted only
briefly by

severe winter weather.

Average monthly

employment during the first four months

gains in payroll

of the year exceeded the

improved fourth-quarter pace, workweeks lengthened, and the
unemployment rate continued to move lower.

Figures on expenditures

have not exhibited comparable strength;

subsequent data may

eliminate this

it is certainly

seeming discrepancy, but

conceivable that

productivity growth slowed markedly after

in the latter half of 1993.

surging

To date, higher interest rates and

lower share prices have left little clear imprint on the recovery
with the possible exception of a modest effect in the housing
market.

Wage and price trends have thus far remained favorable

despite the tightening of markets--with the exception of industrial
and construction materials prices.
Employment and Unemployment
Labor demand has displayed substantial strength this year.
After adjustment for Teamsters and other workers on strike, nonfarm
payroll employment advanced 341,000 in April, raising the average
monthly increase in 1994 to more than 260,000--up from about
at the end of 1993.

200.000

The official unemployment rate edged down

further last month, to 6.4 percent,

and other indicators usually

associated with weak labor demand--the number of persons working
part time for economic reasons and the proportion of the unemployed
who had lost jobs--also fell.
in payroll employment in April were concentrated in three

Gains
sectors.

In two

places--the

cases--construction and retail eating and drinking

sizable increases

weather-related weakness

likely represented rebounds from

earlier in the year.

II-1

In addition, the

II-2

CHANGES IN EMPLOYMENT1
(Thousands of employees; based on seasonally adjusted data)
1993
1993

1994
Q4

1994
Jan.

Feb.

Mar.

Apr.

----------Average monthly changes------Nonfarm payroll employment2
Strike-adjusted

169
169

134
136

203
196

237
237

-31
-31

278
278

464
464

267
341

154
-15
-9
-6
17
47
7
99
25
39
16

101
-24
-12
-12
6
31
9
86
24
31
33

192
13
18
-5
24
43
15
92
21
54
11

234
19
17
3
22
53
6
123
28
46
3

-6
31
33
-2
-12
-3
-4
-26
20
-1
-25

273
14
10
4
-3
74
10
170
17
57
5

434
13
7
6
82
89
13
226
48
83
30

248
3
10
-7
64
96
9
146
34
75
19

Private nonfarm production workers
Manufacturing production workers

142
-4

94
-14

167
22

220
29

-25
39

292
29

394
20

220
10

Total employment 3
Nonagricultural

209
219

127
106

364
363

459
349

1310
1074

287
228

-221
-256

301
269

Memo:
Aggregate hours of private production
.3
workers (percent change)
Average workweek (hours)
34.5
Manufacturing (hours)
41.5

.0
34.5
41.4

.5
34.5
41.7

.4
34.6
41.7

.7
34.8
41.8

-1.3
34.2
41.2

1.8
34.7
42.2

.2
34.7
42.2

Private
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Health services
Business services
Total government

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
3. Survey of households.

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)

1993

1994

1993

6.8

6.7

6.5

6.6

6.7

6.5

6.4

19.0
10.5
5.8
5.4

18.2
10.4
5.8
5.3

18.3
9.7
5.5
5.3

18.0
10.6
5.3
5.3

18.4
11.0
5.4
5.4

17.9
10.0
5.4
5.1

17.8
10.9
5.1
5.4

19.9
9.9
5.0
5.1

6.8

6.7

6.4

6.7

6.8

6.6

6.4

Labor force participation rate

66.2

66.1

66.2

36.6

66.7

66.6

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

51.5
77.1
76.2
57.1

51.5
77.0
76.2
57.1

51.1
76.7
76.2
57.5

52.7
77.0
76.3
58.0

53.3
76.2
76.5
58.0

52.4
77.5
76.2
58.2

52.3
77.4
76.1
58.0

54.0
76.7
75.9
57.9

Civilian unemployment rate
(16 years and older)
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
Full-time workers

Jan.

Feb.

Mar.

Apr.

1. Data for 1994 are not directly comparable with earlier values due to a
redesign of the CPS in January 1994.

services industry added 146,000 jobs; more than a third were at
personnel supply services firms.

In manufacturing, a rise in the

number of production workers narrowly exceeded a decline in the
number of supervisory workers.

Apart from the striking Teamsters,

the employment increase in transportation and public utilities also
was small.
The average workweek of production or nonsupervisory workers
remained at an unusually high level in April, suggesting that the
March surge in hours reflected more than a temporary rebound from
the weather-depressed level of February.

The overall manufacturing

workweek and the level of factory overtime were at postwar highs in
March and April.
As noted above, the unemployment rate continued its descent in
April.

Adjusting for the possible bias in seasonal adjustment, the

jobless rate in April likely was 6.6 percent compared with a rate of
about 7 percent, as estimated by the parallel survey in the fourth
quarter.

The BLS projection of the old unemployment rate, based on

payroll employment and insured unemployment, moved similarly; that
projection places the current rate at about 6.1 percent--down from
6-1/2 percent in the fourth quarter.
Productivity in the nonfarm business sector currently is
estimated to have risen 0.5 percent, at an annual rate, in the first
quarter of 1994, after surging at a 6.4 percent rate in the previous
quarter. 1

Over the past four quarters, nonfarm business output

per hour rose 2-1/2 percent--down from the 3-1/2 percent pace

1. The data used to calculate labor productivity include the
hours of supervisory as well as production workers, unpaid family
workers, and self-employed persons in the nonfarm business sector.
The hours of unpaid family and self-employed workers are derived
from the household survey. Rather than allow a break in the hours
series as a result of the CPS redesign, the BLS made judgmental
estimates of growth in the hours of the self-employed and of unpaid
family workers.

II-4

LABOR PRODUCTIVITY
(Nonfarm Business Sector)
$1987/hour

1973

1976

1979

1982

1985

1988

1991

1994

LABOR PRODUCTIVITY AND COSTS
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)

1993

1994
-

19921 1993 1

Total business
Nonfarm business
Manufacturing

Nonfinancial corporations2

1993:Q1
to

1994:Q1

3.8
3.6
4.8

2.2
2.0
5.2

.0
-. 4
6.0

3.3
4.0
3.0

7.1
6.4
7.4

.5
.5
6.6

2.7
2.6
5.7

4.4

2.4

3.9

3.7

6.1

1. Changes are from fourth quarter of preceding year to fourth
quarter of year shown.
2. The nonfinancial corporate sector includes all corporations doing
business in the United States with the exception of banks, stock
and commodity brokers, and finance and insurance companies; the sector
accounts for about two-thirds of business employment.

II-5

earlier in the recovery but still well above our estimate of the
cyclically adjusted trend growth rate.
Industrial Production
The index of industrial production evidently rose appreciably
in April but probably less than the average pace of around
1/2 percent per month in the first quarter.

On a quarterly average

basis, output grew at a 7.7 percent annual rate in the January-March
period, boosted, in large part, by another spurt in assemblies of
motor vehicles and by a weather-related boost to electricity
generation.

Output of other consumer goods and business equipment

excluding office and computing equipment grew slowly during the
first quarter, as weather-related stoppages early in the year were
only partly offset by a strong rebound in March.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)

U.S. production 1
Autos
Trucks
Days' supply
Autos
Light trucks
Medium and
heavy trucks

Jan.

Feb.

Mar.

1994
Apr.

12.8
7.0
5.9

13.9
7.6
6.3

13.0
7.2
5.7

12.5
6.9
5.6

61.2
55.2

60.9
55.7

58.2
55.3

58.1 e
57.8 e

60.0

65.9

63.8

64.5 e

Q2
-scheduled11.9
13.2
6.5
7.3
6.0
5.4

1. Components may not add to totals due to rounding.
e Staff estimate.

In April, a sizable increase in manufacturing output excluding
motor vehicles and parts was partly offset by a 500,000-unit decline
in motor vehicle assemblies and a slowing of electricity generation.
Because automakers stepped up production sharply at the beginning of
the year and are operating close to capacity, second-quarter
production schedules are substantially lower than first-quarter
output on a seasonally adjusted basis.

(The number of vehicles

II-6
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1993:Q4
19931

1993

1994

Jan.

Feb.

Mar.

-Annual rate- --Monthly rate---

Total index

100.0

4.2

6.7

4.3

6.7

7.7

Manufacturing
Motor vehicles and parts
Mining
Utilities

85.2
5.6
6.9
7.9

5.0
16.6
-. 8
.9

8.4
91.4
2.1
-6.5

7.8
45.8
4.7
9.4

.1
2.2
.0
3.5

.7
5.4
1.8
-1.2

.6
-4.2
1.0
-1.8

Manufacturing
excl. motor vehicles and parts

79.6

4.3

4.4

5.5

1.0

21.4

-1.1

5.8

4.6

1.7

-.3

3.7

1.4

-. 1

17.7

-.4

-2.2

1.8

-.4

14.9
4.2
3.9
6.8

9.1
33.9
4.2
.3

7.6
35.5
.2
-2.2

11.0
34.8
4.6
1.4

.6
2.2
-.5
.1

.5
2.4
.0
-.4

1.5
2.3
1.3
1.1

2.8
5.2

-9.5
5.9

-9.7
11.0

-12.0
.3

-.8
-1.1

-1.5
-1.0

-1.1
1.1

39.0
19.8
9.2

4.3
7.4
3.8

5.3
9.0
4.9

7.4
10.2
2.5

.3
.5
-. 9

.4
.2
.4

.8
1.2
.6

6.6

1.0

Consumer goods

Durables
Nondurables
Business equipment
Office and computing
Industrial
Other
Defense and space equipment
Construction supplies
Materials
Durables
Nondurables

Energy

-1.0

10.0

-1.3

1. From the final quarter of the previous period to the final quarter of the period
indicated.

NEW ORDERS FOR DURABLE GOODS
(percent change from preceding period, seasonally adjusted)
1993
Share
1993
H2

1994

1994
-

Jan.

Feb.

Mar.

100.0

6.4

5.4

4.3

-1.8

67.0

5.5

2.9

-. 8

3.8

Nondefense capital goods
excluding aircraft and computers

17.0

10.4

1.9

-9.0

6.4

1.0

All other categories 2

50.0

3.9

3.2

2.3

-1.6

4.8

6.2

2.2

-. 9

3.7

Total durable goods
Adjusted durable goods orders1

3
Real adjusted durable goods orders

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle
parts.
2. Includes primary metals, most fabricated metals, most stone,clay, and glass
products, computers, and electronic, components, household appliances, scientific
instruments, and miscellaneous durable goods.
3. Nominal adjusted durable goods orders were deflated with a PPI for durable goods
excluding transportation equipment and the BEA deflator for office, computing
and accounting machinery.

II-7
CAPACITY UTILIZATION IN INDUSTRY

(Percent of capacity; seasonally adjusted)
1967-93

1988-89

1993

1994

Avg.

High 1

Feb.

Total industry

81.9

84.8

82.3

83.3

83.4

83.6

Manufacturing

81.2

85.1

81.5

82.5

82.8

Primary processing
Textile mill products
Lumber and products
Pulp and paper
Primary chemicals 2
Petroleum products
Stone, clay and glass
Primary metals
Iron and steel
Nonferrous metals
Fabricated metal products

82.2
86.2
83.1
92.2
83.3
85.5
77.9
80.1
79.8
80.9
77.2

89.1
92.1
93.3
98.1
92.3
88.5
83.7
92.9
95.7
88.9
82.0

85.5
89.8
91.1
93.0
84.9
93.2
78.6
89.4
91.5
86.2
78.8

86.0
90.0
90.5
94.1
85.2
91.3
77.8
90.3
92.1
87.7
80.2

85.8
89.7
90.1
94.0
85.1
91.4
77.2
90.2
92.2
87.2
79.8

86.4
90.4
90.4
95.1
85.0
92.0
78.7
90.7
92,5
87.9
80.7

Advanced processing
Furniture and fixtures
Advanced chemicals 3
Nonelectrical machinery
Electrical machinery
Motor vehicles and parts
Aerospace and misc.
transportation equipment
Instruments

80.6
81.7
77.3
80.8
80.4
75.7

83.3
86.8
82.0
83.7
84.9
84.5

79.9
81.0
78.0
85.7
84.1
84.4

81.1
81.3
78.9
87.4
85.0
91.7

81.2
81.3
78.9
87.0
84.9
94.7

81.3
81.8
79.4
88.0
85.5
90.4

75.5
82.0

88.3
81.2

64.2
72.6

62.6
73.1

62.4
72.9

62.2
73.3

Mining

87.4

87.0

87.8

88.9

89.2

90.1

Utilities

86.7

92.6

86.1

87.8

87.9

86.2

Mar.

1. The historical highs shown are specific to each series and did not occur
in the same month.
2. Primary processing chemicals includes industrial organic and inorganic
chemicals, synthetic materials, plastics resins, and fertilizers.
3. Advanced processing chemicals includes drugs and toiletries, soaps and
detergents, paints and allied products, pesticides, and other miscellaneous
chemical products.

II-8
SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate; BEA seasonals)
1993

1994

1992

1993

12.83
8.38
4.44

13.89
8.71
5.17

13.56
8.60
4.96

14.55
8.95
5.60

North American 2
Autos
Big Three
Transplants
Light trucks

10.49
6.28
5.09
1.19
4.21

11.73
6.74
5.46
1.29
4.99

11.40
6.63
5.09
1.53
4.77

Foreign produced
Autos
Light trucks

2.34
2.11
.23

2.15
1.97
.18

.72
.63

.74
.65

Total
Autos
Light trucks

Memo:
Domestic nameplate
Market share, total
Autos

1994
Feb.

Mar.

Apr.

15.54
9.49
6.05

15.47
9.38
6.10

15.85
9.86
5.99

15.30
9.47
5.83

12.54
7.07
5.70
1.37
5.47

13.36
7.46
6.03
1.43
5.90

13.33
7.39
5.97
1.41
5.94

13.51
7.67
6.12
1.55
5.84

13.16
7.48
5.97
1.51
5.68

2.16
1.97
.19

2.00
1.87
.13

2.18
2.03
.15

2.15
1.99
.16

2.34
2.20
.14

2.14
1.99
.15

.71
.61

.75
.65

.74
.64

.75
.65

.73
.63

.74
.64

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 because of rounding.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry; prior to January 1994, some vehicles produced in Mexico were
also excluded.

GM AND FORD DOMESTIC AUTO SALES
(Seasonally adjusted annual rate; FRB seasonals)
Millions of Units
-I 4
Ap

Retail

Fleet

1991

1992

Note: Data are confidential. Retail includes consumer leasing.

1993

1994

II-9
assembled at U.S.

plants per working day--not seasonally adjusted--

has been fairly constant so far this year and is not scheduled to
change significantly for the remainder of the current quarter.)
Recent indicators of industrial activity remain very favorable.
Production worker hours edged up 0.1 percent in April and factory
labor productivity has been trending upward sharply.

The available

weekly production data for April show further growth in mining as
well as improvements in lumber and appliances.

The staff's series

on real adjusted durable goods orders spiked 3.7 percent in March,
after leveling off earlier in the year.

Purchasing managers'

reports on orders and production in April remained firmly in
positive territory.
Capacity utilization rates have increased rapidly in recent
months and are now very high in motor vehicles, petroleum refining,
lumber, and primary metals industries.

The Commerce Department's

winter survey of capital spending plans indicates that these
industries have revised their planned investment rates up
substantially.

The Federal Reserve's estimate of manufacturing

capacity growth for 1994 was revised up to 3.2 percent from
2.7 percent in the March release because of changes in these and
other source data.
Motor Vehicles
Sales of cars and light trucks remained robust in April.

The

officially reported numbers show that sales of new light vehicles,
which had risen sharply through March, declined more than
1/2 million units in April, to a 15.3 million unit annual rate.
However, industry sources indicate that the reporting period for
March sales was extended, owing to the timing of the Easter holiday,
perhaps shifting some reported sales from April to March.

The

average sales pace for the two months still represents a high-water
mark thus far in this economic upswing. 2
According to confidential data, fleet purchases of new cars.
which were boosted by a rebound in sales to rental companies earlier
this year, have eased recently.

This pattern of sales suggests that

the shortfall in purchases that occurred during the second half of
last year owing to limited supplies has been recouped (chart).

The

need to satisfy pent-up demand for fleet cars explains part of the
surge in auto assemblies at the turn of the year.
ANNUAL ASSEMBLY CAPACITY
FOR THE U.S. MOTOR VEHICLE INDUSTRY

(Model years; millions of units)
1992

1993

1994

1995

Total motor vehicles

13.60

13.89

13.94

14.36

Autos
Trucks
Medium and heavy
Light
Previous

8.19
5.41
.45
4.96

8.24
5.65
.45
5.20

8.11
5.83
.45
5.38
(5.30)

8.35
6.01
.46
5.55
(5.36)

Source: FRB staff compilation from industry sources.
Motor vehicle producers have recently expanded U.S. production
capacity for both parts and assemblies.

Light truck capacity has

been increased by about 50,000 units for the current model year, and
plans have been announced to substantially boost production
capability for the 1995 model year.

For both years, this increased

capacity will be achieved mainly by adding shifts.

In addition,

Ford and Chrysler have begun assembling new light truck models in
Canada and Mexico this quarter, which will add about 0.3 million

2. Anticipation of a 2 percentage point increase in the Michigan
sales tax in May may have given sales a small lift in March and
April.

units to annual North American production capacity. 3

Most of

these vehicles will likely be exported to the United States.
Personal Income and Consumption
According to BEA's advance estimate, real PCE rose 3.8 percent,
at an annual rate, in the first quarter.

As noted above, sales of

cars and light trucks grew substantially throughout the quarter.
Spending on goods other than motor vehicles was erratic from month
to month and posted a comparatively small increase for the quarter
as a whole.

The deceleration occurred because outlays for durable

goods such as furniture, appliances, and other household equipment
were little changed in the first quarter after soaring in the second
half of last year.
Outlays for services were boosted during the first quarter by
unseasonably strong demand for energy services in January and
February.

Because of the high volume of activity in financial

markets, brokerage and investment counseling services were up
sharply in January and remained near that elevated level in February
and March.

A number of other major categories of service spending,

such as housing, transportation, and medical services, posted more
moderate gains.
Real disposable personal income is estimated to have increased
2-3/4 percent, at an annual rate. during the first quarter after
rising 5.4 percent in the fourth quarter.

Excluding the

estimated effects of the Northridge earthquake, however, real DPI
3. Ford has just introduced its new Windstar minivan, which is
produced in Canada, and believes that domestic sales will average
about 200,000 units at an annual rate. Chrysler has begun
production of an extended-cab pickup in Mexico at an annual rate of
about 100,000 units, which will also be available for sale this
quarter.
4. We would not be surprised if this July's annual revisions to
the national income and product accounts include significant changes
to the estimates of personal income growth to take account of shifts
in income from the first quarter of 1994 to the fourth quarter of
1993 in response to the removal of the category on wages subject to
Medicare taxes that was part of OBRA-93.

II-12
REAL PERSONAL CONSUMPTION EXPENDITURES
(Percent change from the preceding period)
1994

1993
1993

Jan.

Feb.

Mar.

---Monthly rate---

---Annual rate--Personal consumption
expenditures

1994

3.2

4.4

3.8

Motor vehicles

5.9

-2.9

22.3

26.3

4.2

1.5

2.5

Goods excluding motor vehicles
Durables
Nondurables

3.3
9.3
1.7

6.0
14.8
3.7

4.4
11.0
2.7

1.9
.0
2.4

-1.2
-2.8
-. 7

1.7
1.3
1.8

.0
.5
-. 1

Services
Excluding energy

2.9
3.0

3.9
3.1

2.6
2.9

3.1
3.0

.6
.3

.1
.1

-. 0
.3

1.1

1.6

5.4

2.7

-1.0

1.5

4.0

3.8

4.0

3.7

3.2

3.9

4.1

Memo:
Real disposable personal income
Personal saving rate
(percent)

PERSONAL INCOME
(Average monthly change at an annual rate; billions of dollars)

1993

1994

1993
Q3

Jan.

Feb.

Mar.

3.4

22.3

35.8

28.3

-47.0

98.9

33.1

Wages and salaries
Private

-8.3
-10.1

11.5
9.0

14.5
14.1

16.3
14.3

27.5
23.4

6.3
5.0

15.1
14.5

Other labor income

2.7

2.8

3.1

3.0

3.1

3.2

Proprietors' income
Farm

3.9
1.6

.8
-1.1

15.9
10.9

1.1
-.6

-16.1
-11.2

13.3
9.1

6.1
1.4

Rent
Dividend
Interest

1.4
.3
.0

2.0
.4
1.9

-.7
.1
-.5

4.5
.8
2.1

-59.6
.2
1.7

68.3
.7
2.2

4.9
1.6
2.4

Transfer payments

4.7

3.9

4.8

3.6

4.5

5.5

Less: Personal contributions
for social insurance

1.2

1.1

3.3

8.2

1.1

Less: Personal tax and nontax
payments

-.1

3.0

4.4

4.9

8.8

2.4

3.6

Equals: Disposable personal income

3.5

19.4

31.4

23.4

-55.7

96.4

Total personal income

29.5

growth was about 4-1/2 percent (annual rate) in the first quarter.
bringing the four-quarter increase, with adjustments for natural
disasters and income shifting, to 2-3/4 percent.5

Moreover,

increases in nominal wage and salary income averaged $16 billion per
month in the first quarter, a shade better than in the fourth
quarter of 1993; based upon the increases in employment and earnings
in April, moderate gains in pretax income continued early in the
second quarter.

The saving rate fell 1/4 percentage point to 3.7

percent in the first quarter; assuming the quake affected income but
not consumption, the saving rate would have risen about 1/4
percentage point in its absence.
The recent runups in interest rates have affected household
cash flows and balance sheets through a number of channels.

On the

negative side, higher mortgage rates have sharply reduced
refinancing activity and some adjustable rate mortgages already have
repriced at higher rates.

Household wealth also has suffered from

the declines in stock and bond prices; by the beginning of May, the
Wilshire 5000, a broad-based index of common stock prices, had
fallen 6-1/4 percent from its peak in late January, while a MerrillLynch index of nearly 4,000 investment-grade corporate bond prices
was down 10-1/2 percent from its peak in October.

On the positive

side, higher interest rates have begun to boost asset income.
Indeed, personal interest income has edged up in the past few months
after changing little, on balance, through most of 1992 and 1993.
Despite the declines in stock and bond prices--and the
publicity they have received--consumer confidence has remained

5. BEA estimates that the Northridge earthquake reduced nominal
rental and nonfarm proprietors' income nearly $22 billion (annual

rate) during the quarter.

This figure is $7-3/4 billion larger than

the preliminary estimate released last month. The adjusted income
calculation cited above also takes out the estimated after-tax
effects of income shifting between 1992:Q4 and 1993:Q1. the San
Francisco earthquake, last year's flood, and hurricanes Hugo,
Andrew, and Iniki.

II-14

KEY DETERMINANTS OF CONSUMER SPENDING
Real Disposable Personal Income
- - --

Four-quarter percent change

Actual
Adjusted for special factors

1991

1990

1992

2199
1994

1993

Stock and Bond Prices

index: Dec 1989.100

Wilshire 5000 Composite Stock Index

- - - - Merrill Lynch Corporate Bond Index

Apr

lllrl
' ' ''''''''''''''~'- iiiiii

- S60
1 )94

1992

1990

Consumer Confidence
- -

Michigan Index

120

- -Conference Board Index

-*4.^

Apr.
80

I
1990

1991
1991

1992
1992

i i

ImtIil
1993
1993

LLLLLELL L

Ii - 40
1!194

relatively upbeat.

The Michigan index of consumer sentiment rose

considerably around the turn of the year and has maintained that
elevated level in recent months.

Households' assessments of current

economic conditions have edged up a bit since January, and, even
though a record proportion of respondents last month reported that
they expected interest rates to rise over the next year. the
deterioration in expected business conditions has been modest.
Housing Markets
Housing starts and home sales rose in March from their weatherdepressed levels of January and February, but the size of the

rebounds suggests that higher mortgage rates may have begun to
constrain demand.
Single-family starts rose 11 percent in March yet remained
significantly below the pace of late last year.

The regional

pattern of starts in March hints that the weather explains at least
part of the gain.

Starts rose 30 percent in the Midwest, where the

weather in January and February had been severe and the falloff in
starts had been particularly large.

Permit issuance, however,

increased less in March than did starts, and the level of issuance
suggests slightly less construction than does the starts estimate.
Sales of new and existing homes also posted significant gains
in March but remained below their fourth-quarter averages.

Interest

rates on fixed rate mortgages rose about 50 basis points in March to
a level 130 basis points above the low recorded in October,
impinging on cash-flow affordability.
House prices firmed a bit in the first quarter.

The Census

Bureau's "constant-quality" price index for new homes rose
4.2 percent from a year earlier, and Freddie Mac's "repeat sales"
index for existing homes was up 2.6 percent.

These figures are near

the tops of the ranges of the past couple of years.

Increases in

II-16

PRIVATE HOUSING ACTIVITY
(Millions of units; seasonally adjusted annual rate)
1993

1994

1993

Anniin

1994
r

nL/

1.29
1.21

1.31
1.23

1.48
1.39

1.35
1.31

1.27
1.36

1.31
1.25

1.47
1.31

Starts
Permits

1.13
1.00

1.14

1.29

1.16

1.13

1.12

1.25

1.01

1.15

1.08

1.12

1.05

1.07

Sales
New homes
Existing homes

.67
3.80

.68
3.90

.77
4.17

.68
4.05

.64
4.25

3.84

.19
.24

.19
.23

"".mA

All units
Starts
Permits

.an

FPh

Mar

Single-family units

Multifamily units
Starts
Permits
p
r

.67

.74
4.06

.15
.24

.23

.24

Preliminary.
Revised estimates.

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions of units

--1 1.6

aI
-

I
.5

,. *IA

,h.

Mar.

.Multifamily

IIn
0.4

J _I
--

1981

1983

1981~~~~~~1985

19318
18
1987

99
1989

9119I
1991

l fltllfuii
n
ilm inallu
1993

materials costs apparently have been applying some pressure to tne
prices of new homes (chart).

In the first quarter, softwood lumber

prices--although quite volatile--averaged 11 percent above a year
earlier, and gypsum prices were 18 percent higher.

Costs of other

materials have increased less dramatically.
Direct measures of housing activity in April and May are not
yet available, and surveys of consumers, builders, and mortgage
lenders are sending mixed signals

(chart).

The proportion of

consumers reporting favorable homebuying attitudes declined again in
April, and the percentage of builders reporting current sales as
"good" continued to move down in early May.

But applications for

home purchase loans at mortgage bankers turned up late last month.
(The brief history of this series, however, makes seasonal
adjustment problematic.)
Mobile home shipments are a small component of total
residential investment spending, but one that has been growing
rapidly of late and, as measured by real expenditures, is now nearly
as large as multifamily construction.

The number of mobile homes

shipped last year exceeded the number of multifamily starts by an
unprecedented 50 percent (chart).

The recent strength in economic

conditions in Texas and other southwestern states (important markets
for mobile homes),

together with expanded financing opportunities

for buyers, appears to be behind the surge.
Multifamily housing starts in February and March averaged a bit
above the level that has held for the past few years, and a
substantial recovery still appears unlikely despite tightening in
some local markets.

For the nation overall, vacancy rates remained

high through the first quarter (chart), holding down rent increases.
Moreover, demand in this market is unlikely to grow fast enough to
whittle away many vacancies in the near term.

II-18
SOFTWOOD LUMBER PRICES

Index, June 1992 = 100
-240

Spot pice

180
May 10

120

Producer price index

/
_

1989

1990

1991

1992

___

1994

1993

PRODUCERS' PRICES OF CONSTRUCTION MATERIALS
Index, June 1992= 100
Mar.

130

Gypsum

120

110

iConcrete

*
- -ingredients

100
-

Asphalt
rooting

198
1989

199
1990

199

1991

199
1992

199 '
1993

I
-VJ 90

1 994

5/9/94

II-19
CONSUMER HOMEBUYING ATTITUDES*

Millions of units
(annual rate)

(Seasonally adjusted)

Diffusion index

Consumer homebuying attitudes (right scale)
Apr
Mar.

Single-family starts (left scale)

I
II

1987

1988

1989

1990

1991

1992

1993

1994

* The homebuying attitudes index is calculated by the Survey Research Center (University of Michigan) as the proportion of respondents
rating current conditions as good minusthe proportion ratng such conditions as bad.

BUILDERS' RATING OF NEW HOME SALES*

Millions of units
(annual rate)

Ciffusion index

(Seasonally adjusted)

Builders'

1.3

Single-4amily starts (left scale)

1987

1988

1989

1991

1990

1992

1993

*The index is calculated trom National Association of Homeullders data as the proportion of respondents rating current sales as good
to excellent mnus the prnporton rating them as poor.

Millions of units
(annual rate)

MBA INDEX OF MORTGAGE LOAN APPLICATIONS
(Seasonally adjusted)

March 16,1990
Purchase index (right scale)

A, - -

100

Apr. 29

1.3 1-

Sing

y stars lef scale)

Single-family starts (left scale)

1991
1991

1992
1992

1993
1993

1994
1994

II-20
MOBILE HOME SHIPMENTS AND MULTIFAMILY STARTS
Millions of units (SAAR)
--

Multifamily starts

1970

1974

-""

1978

94q1

Mobile sipments

S
^

1982

I
I
1986

bio
...I ...I ...I ..

I...i...I...I...i...I..
I. . .

1990

1994

MULTIFAMILY STARTS AND VACANCY RATE
Millions of units (SAAR)
1.6

Percent
-* 11

Multifamily rental vacancy rate (right scale)

1.2 1-

Multifamily starts (left scale)

I
0.8 /

A
I
/

'p.I

LQ
I

1970

1974

1978

ALI

1982

1986

I *rpItltuI1...

1990

1uut1

1994

II-21

Business Fixed Investment
Real business fixed investment continued to increase rapidly in
the first quarter, although at a less robust pace than in the fourth
quarter of 1993.

Outlays for equipment posted another hefty

advance, while spending for nonresidential structures, which had
been on an uptrend for about a year, retraced almost all of its 1993
gain.

A good part of this decline in construction outlays probably

was caused by severe weather.
Among fundamental determinants of capital spending, the recent
increases in long-term interest rates have had a noticeable effect
on the cost of capital for equipment excluding computers

(chart).

The cost of capital for these goods was about unchanged in the first
quarter compared with a year earlier; it had been trending down
since early 1991.

In contrast, the cost of capital for computing

equipment continued to decline rapidly, as the influence of higher
interest rates was more than offset by the downtrend in the relative
price of these goods.

The "accelerator effect." as proxied by the

four-quarter change in output growth, continues to have a positive
effect on investment, albeit less so than earlier in the expansion.
Finally, corporate cash flow has picked up impressively in recent
quarters, so that the need for external finance has remained modest.
On balance, these factors suggest that the climate for investment
remains favorable, if not quite so favorable as during the previous
couple of years.
The increase in equipment spending last quarter was widespread.
Business purchases of light motor vehicles increased further to a
level nearly 20 percent above a year ago, with strength in outlays
for both autos and light trucks.

Business demand for heavy trucks

remained strong, and the major domestic makers were producing at
capacity with large backlogs.

Elsewhere, real spending for

II-22
BUSINESS

CAPITAL SPENDING INDICATORS

(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1993

1994

Jan.

.6
3.4
9.4
1.7

7.1
8.0
5.2
8.8

.9
1.1
3.0
.5

-5.9
-5.4
-2.9
-6.1

2.9
5.0
3.5
5.4

1.6
-.9
2.6
-2.0

-39.5

34.1

10.1

-26.0

-26.4

111.0

Sales of heavy weight trucks

-1.1

8.5

-.1

10.6

-.7

Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories

-1.2
3.6
4.9
3.2

10.4
10.9
12.9
10.4

6.4
1.4
.0
1.9

4.5
-7.5
-2.1
-9.0

-.7
5.3
1.8
6.4

-.1
2.6
8.3
1.0

Construction put-in-place
Office
Other commercial
Institutional
Industrial
Public utilities
Lodging and misc.

1.2
-1.8
-.8
2.9
4.1
1.6
6.7

4.6
3.5
13.2
-2.2
6.4
3.1
-.8

-5.2
-4.0
-4.7
-6.4
-4.5
-6.8
-.4

-4.4
-10.1
-3.3
-6.2
-2.3
-6.3
10.6

-4.2
-5.2
-8.7
-1.8
-3.5
-1.4
-3.2

2.9
8.7
5.7
2.8
-.2
1.5
1.5

Rotary drilling rigs in use

14.2

-3.7

3.7

7.4
10.0
.3

22.5
26.0
12.2

5.5
13.5
-16.1

n.a.
n.a.
n.a.

Producers'

Feb.

Mar.

durable equipment

Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
All other categories
Shipments of complete aircraft1

Nonresidential structures

Memo:
Business fixed investment2
Producers' durable equipment 2
Nonresidential structures 2

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Based on constant-dollar data; percent change, annual rate.
n.a. Not available.

II-23

FUNDAMENTAL DETERMINANTS OF BUSINESS FIXED INVESTMENT
Cost of Capital

1964

Four-quarter percent change

1969

1974

1979

Acceleration of Business Output

1964

1989

:::::
:"
::i:i

n n:i
/G,

ii
::::::;
'''' '='''

1969

1974

1979

1984

Real Domestic Corporate Cash Flow

1964

1994

Change in four-quartergrowth rate

:::::?i!!!i:::: ::
-.
,.%-.

1984

1969

Note: Cash flow in Q1 is a staff estimate.

1989

1994

Four-quarter percent change

1974

1979

1984

1989

1994

II-24
RECENT DATA ON ORDERS AND SHIPMENTS
Office and Computing Equipment
---

Billions of dollars

Orders

S--Shipments

1988

1987

1989

1990

1991

1992

Other Equipment (excluding aircraft and computers)

Orders
Shipments

1987

1988

1989

1990

1993

Billions of dollars

1991

1992

1993

I-25
computing equipment advanced at an 18-1/2 percent pace last quarter.

the primary areas of strength reportedly continued to be PCs and
workstations.

Spending for most other types of equipment has

continued to trend up, including industrial machinery,

communications equipment, and capital goods for the service
industries.
Looking ahead, the recent data on orders received by domestic
manufacturers point to further advances in equipment spending in the
near term.

In particular, new orders for nondefense capital goods,

excluding computing equipment and aircraft, rose close to 2 percent
in the first quarter after a 10-1/2 percent increase in the fourth
quarter.

Orders for these goods have outpaced shipments, and, as a

result, unfilled orders expanded almost 10 percent over the past six
months.

Turning to nonresidential structures, the advance estimates
indicate that nominal construction put-in-place rose only
2.9 percent in March after falling 8.8 percent over the severeweather months of January and February.

However, construction

employment growth was strong in March and April, and some upward
revision to the construction put-in-place data would not be
surprising.
Among sectors, office construction in March was estimated to
have returned to a level similar to its fourth-quarter average.

the other hand, the more modest rebound in the industrial and other
commercial sectors (which includes retail stores) left the level of
construction in March noticeably lower than that in the fourth
quarter of last year.

Permits issued for these structures point to

continued near-term spending increases.
Construction outlays by utilities dropped sharply in the first
quarter after a small decline last year.

In the latest plant and

II-26

NONRESIDENTIAL CONSTRUCTION AND PERMITS1
Total Building

1984

1985

Index, Dec. 1982= 100, ratio scale

1986

1987

1988

1986

1988

1990

1992

1994

Industrial

1984

1990

1991

1992

1993

1994

Other Commercial

Office

1984

1989

1984

1986

1988

1990

1992

1994

1988

1990

1992

1994

Institutional

1986

1988

1990

1992

1 Six-month moving average for all series shown.

1994

1984

1986

II-27
equipment survey, utilities planned a 3-1/2 percent increase in
nominal spending for plant this year, considerably weaker than the
plans in last fall's survey.

The downward revision to spending

plans by electric utilities more than accounted for the overall
cutback in plans for utilities.

According to industry contacts,

electric utilities have pared back anticipated capacity expansion,
in part, because they perceive a more hostile regulatory
environment.

Nonetheless, according to analysts at the Edison

Electric Institute, investment in this sector is likely to be
sustained by spending to meet the provisions of the Clean Air Act.
Manufacturing and Trade Inventories
On balance, business inventories apparently were comfortable to
lean in most sectors at the end of the first quarter.

For

manufacturing and wholesale trade, sharp accumulations in February
were partially reversed in March; the current-cost data thus far
show that the first-quarter accumulation was about $14 billion
(annual rate) below BEA's advance estimate.
Excluding aircraft, manufacturers' inventories expanded further
in March at a $9.7 billion annual rate, after buildups averaging
$18.6 billion in January and February.

The accumulation in the

first quarter retraced a string of drawdowns in previous months and
appears to have been motivated by the relatively robust factory
orders.

A substantial part of the manufacturers' inventory buildup

during the first quarter was in the stocks of machinery producers,
especially in the computing and office equipment industry, where
orders generally have been firm in recent months.

In contrast,

inventories held by aircraft producers continued to decline last
quarter.

Inventory-shipments ratios in manufacturing have declined

further; although delivery times have lengthened and materials

II-28
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1993
Q3

1994
Q4

1994
Jan.

Feb.

Mar.

Current-cost basis
Total
Excluding auto dealers
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Retail
Automotive
Excluding auto dealers

16.1
23.5
-2.5
-.8
-3.3
1.5
12.0
6.6
-7.4
14.0

18.8
5.5
-13.1
-4.7
-4.5
-3.9
6.1
25.8
13.3
12.5

n.a.
n.a.
9.7
-4.5
-1.4
15.6
-1.6
n.a.
n.a.
n.a.

17.8
12.5
17.8
-.2
2.2
15.8
.8
-.8
5.3
-6.1

49.6
47.8
13.9
-3.1
-4.3
21.3
17.2
18.4
1.8
16.6

n.a.
n.a.
-2.7
-10.3
-2.1
9.7
-22.7
n.a.
n.a.
n.a.

16.4
23.5
3.1
8.5
4.8
-7.1
11.8

5.4
3.0
-5.3
-.4
11.1
2.4
8.6

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

4.2
1.4
16.5
-4.9
-7.5
2.8
-10.3

38.2
27.5
4.4
12.7
21.1
10.7
10.4

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

Constant-dollar basis
Total
Excluding auto dealers
Manufacturing
Wholesale
Retail
Automotive
Excluding auto dealers

INVENTORIES RELATIVE TO SALES1
(Months supply; based on seasonally adjusted data)

1994

1993
Q4

Jan.

Feb.

Mar.

Current-cost basis
Total
Excluding auto dealers
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Retail
Automotive
Excluding auto dealers

1.46
1.44
1.49
5.22
5.39
1.35
1.34
1.52
1.69
1.48

1.43
1.41
1.42
5.24
5.05
1.29
1.34
1.51
1.66
1.47

n.a.
n.a.
1.40
4.78
4.98
1.28
1.31
n.a.
n.a.
n.a.

1.42
1.40
1.41
4.95
5.07
1.28
1.33
1.52
1.65
1.48

1.41
1.39
1.40
5.24
5.49
1.27
1.32
1.50
1.61
1.47

n.a.
n.a.
1.38
4.69
4.62
1.27
1.29
n.a.
n.a.
n.a.

1.55
1.54
1.60
1.42
1.60
1.76
1.55

1.52
1.50
1.53
1.42
1.57
1.67
1.54

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

1.51
1.50
1.52
1.41
1.57
1.65
1.55

1.50
1.49
1.51
1.41
1.56
1.64
1.54

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

Constant-dollar basis
Total
Excluding auto dealers
Manufacturing
Wholesale
Retail
Automotive
Excluding auto dealers

1. Ratio of end of period inventories to average monthly sales for the period.

II-29

RATIO OF INVENTORIES TO SALES
(Current-cost data)
Ratio
2.2

Manufacturing

1.95

1979

-I

1983

1981

-I

1985

-- I

1989

1987

1991

1.2

-I 1 --

1993

Ratio
-1.5

Wholesale

-1.3
mar.

1979

1981

1985

1983

1987

1989

-1

1991

1.1
1.2

1993

Ratio
1.7

Ratio
2.7Retail

2.3

2.1

2.3-

Feb1.
-1.5

Total excluding auto

1979

lIIt
e

1981

1983

1985

1987

1989

1991

1.~

1993

1.4

II-30

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis, billions of dollars, except where otherwise noted)
Fiscal year to datel

FY1993

FY1994

Outlays
Deposit insurance (DI)

709.9

726.8

-13.6

-6.7

Outlays excluding DI
National defense
Net interest
Social security
Medicare and health
Income security
Agriculture
Education
Other

723.5
146.1
99.3
148.5
110.5
108.9
14.5
25.4
70.3

733.6
139.6
99.1
156.0
123.4
113.1

Receipts
Personal income taxes
Social insurance taxes
Corporate income taxes
Other

527.1
246.8
191.7
43.3
45.3

576.1
261.7
209.4
53.7

Deficit(+)
Excluding DI

182.8
196.4

Dollar
change

Percent
change

16.9
6.8

2.4
-50.3

10.1
-6.5

1.4
-4.4

-. 2

7.5
12.9
4.2
-3.3
-4.6
.1

5.0
11.7
3.9
-23.0
-18.3
.1

9.3
6.0
9.2

51.4

49.0
14.9
17.7
10.4
6.1

24.1
13.5

150.7
157.4

-32.1
-39.0

-17.6
-19.8

11.1
20.8
70.4

Details may not add to totals because of rounding.
Note:
1. October through March

II-31
prices have been rising, companies apparently have continued to keep
a tight rein on stocks.
In the trade sector, wholesale inventories declined sharply in
March, more than retracing the buildups reported earlier in the
first quarter.

More than half of the March drawdown in wholesale

inventories was in the motor vehicle sector and may reflect the
robust sales of imported autos and light trucks during the first
quarter.

At retailers, inventories expanded substantially in

February, while sales posted robust gains.

The largest buildup was

in stocks at general merchandise stores, where sales also advanced
strongly.

On the whole, inventories in the trade sector, at both

retail and wholesale establishments, appear to be at satisfactory
levels.
Federal Sector
Real federal government purchases dropped at an annual rate of
12 percent in the first quarter of 1994.

The decline was greater

than the trend implied by recent legislation and reflects the large
quarter-to-quarter volatility of federal purchases.
The continuing reduction in military spending was responsible
for $9 billion of the $11
purchases.

billion decrease in real federal

About half of this decline was for durable goods and

storable nondurable goods, notably aircraft, ships, and ammunition.
Normally, volatility in these purchases does not translate entirely
to fluctuations in production (purchases are not recorded until the
military takes delivery); however, there was no direct evidence of a
buildup in the inventories of defense-related manufacturers during
the first quarter.
The unified federal budget deficit for the first half of fiscal
year 1994 was $151 billion, 18 percent less than for the same period
in fiscal 1993.

This deficit reduction reflects robust

II-32

DAILY NONWITHHELD TAX RECEIPTS IN APRIL AND EARLY MAY
(Business days)
Millions of
14000

- - --------

1994
- 1993
1992

12000

10000

8000

6000

4000

2000

Apr 15

Apr8

Apr29

Apr22

May6

CUMULATIVE NONWITHHELD TAX RECEIPTS IN APRIL AND EARLY MAY
(Business days)
Millions of dollars
90000

-----------

1993
1992

80000
-----------------L

----------

1992

70000

60000
SOOO

50000

40000

30000

20000

10000

0
Apr8

Apr 15

Apr22

Apr 29

May 6

Note: Nonwithheld taxes include final payments on prior year liabilities, estimated tax payments on 1994 liability, and SECA
(social security taxes from self-employed individuals). Dates shown are for 1994; the daily figures for 1993 and 1992 are
aligned to correspond to these dates.
Source: Fiscal Analysts Section

II-33

growth in receipts and a subdued increase in outlays excluding
deposit insurance.
last year.

All major categories of tax receipts are up over

In particular, individual income and social insurance

taxes combined are 7 percent higher, and corporate income taxes are
up 24 percent.

Outlays this fiscal year have been held down by

faster-than-expected declines in defense spending.

Indeed, much of

the anticipated decline for all of FY1994 already has occurred,
suggesting relatively flat defense spending for the remainder of the
fiscal year.

In addition, strong income growth has reduced income

security outlays;

continued declines in average interest rates paid

on federal debt have held interest outlays about flat in spite of
increasing debt levels: higher crop prices have reduced farm subsidy
payments; and accelerated repayments of Federal Financing Bank loans
by the Student Loan Marketing Association have offset education
spending. 6

The primary stimulus to federal outlays still comes

from spending on Medicare, Medicaid, and other health programs.
Health-related outlays are up about 12 percent for the current
fiscal year to date--a rise consistent with the growth last year but
much less than increases in 1990, 1991, and 1992.
Daily Treasury Statement data indicate that nonwithheld tax
collections from April 1 through May 6 totaled $66 billion,
$7 billion more than during the same period in 1993.
Nonwithheld taxes in 1994 include final payments on income tax
liabilities from 1993 and prior years, estimated tax payments on

6. The Sallie Mae repayments are scored on a cash basis because
the loans were extended prior to the effective date of the Federal
For federal loans extended after FY1992,
Credit Reform Act of 1990.
only the subsidy value of federal loans is scored as an outlay, and
loan repayments are scored as a negative outlay only to the extent
that repayments exceed expectations.
7. Estimated payment rules were tightened for 1992 and 1993 tax
liabilities, which increased estimated tax payments during CY1992
and CY1993 and decreased final payments in the springs of 1993 and
Starting this year, OBRA-93 partly reverses some of this
1994.
tightening.

II-34
1994 tax liabilities, and social security taxes from the selfemployed; the breakdown among these categories will not be known
until later this year.

Last year, about half of nonwithheld

collections in April and May were final payments on 1992's tax
liabilities.
These data on nonwithheld tax payments do not, by themselves,
provide much information about total personal income tax liabilities
in 1993 because they account for such a small and variable share of
total payments.

Nonetheless, when combined with the $24 billion

increase in withholdings in 1993, our estimate of a $2 billion rise
in estimated payments for 1993 over 1992, and essentially flat
refunds, they suggest that liabilities increased about 6 percent
between 1992 and 1993.

By comparison, the NIPA proxy for taxable

income increased about 4 percent.
The currently available data provide little insight on the
accuracy of our ex ante estimate that OBRA-93 would add about
$15

billion to 1993 liabilities.

Because individuals were allowed

to spread their incremental tax liabilities for 1993 evenly over
three years, any amounts that showed up in either final payments or
refunds this filing season would have been small in what are noisy
series in any event.

Reliable evidence on this issue will not be

available until final data on 1993 personal income tax liabilities
by income class are released by the IRS in about two years.
The Fiscal 1995 Budget Resolution was reported out by Senate
and House conferees, and was passed by the House on May 5.
resolution calls for discretionary spending to fall $13
below the spending caps over the next five years.

The

billion

This was a

compromise between the original Senate bill, which called for
$26

billion of additional cuts, and the original House bill, which

called for no additional cuts.

II-35
State and Local Government Sector
Real purchases of goods and services by state and

local

governments are estimated to have fallen at a 2.6 percent annual
rate in the first quarter, the first decline in three years and the
largest in more than a decade.
all of the drop:

Construction spending accounted for

increases in outlays for other goods and services

were in line with recent increases.

The sharp drop in construction

spending occurred in spite of quake-related construction in
California and
the

is presumably attributable to disruptions caused by

severe winter weather in January and February.

The advance

estimates for March--which are subject to considerable revision and
are

seemingly at odds with data

on construction employment--indicate

that construction spending continued to edge down despite betterthan-normal weather.
The deficit of operating and capital accounts, excluding social
insurance funds,
quarter as

appears to have widened considerably in the first

a sharp drop in federal grants more than offset the

decline in purchases.

The drop-off in federal grants was primarily

for Medicaid and reflected quarterly volatility rather than an
underlying trend.
Although aggregate NIPA data indicate continuing state and
local budgetary erosion, the fiscal picture for the states' general
fund accounts--which represent roughly a quarter of the sector's
total spending--has improved overall.

All but five states find that

revenues are at or above target, and hence fewer states than in 1992
and 1993 are having to make mid-year budget adjustments this year.
This improvement has

enabled many governors to propose tax cuts for

fiscal year 1995, primarily for personal income taxes.
In the spring legislative sessions, crime-fighting
initiatives--such as building more prison boot camps and imposing

II-36
EMPLOYMENT COST INDEX OF HOURLY COMPENSATION
FOR PRIVATE INDUSTRY WORKERS

1993
Mar.

----Total hourly compensation: 1
Wages and salaries
Benefit costs
By industry:
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation:
White-collar
Blue-collar
Service occupations

June

1994
Sep.

Dec.

Mar.

Quarterly percent change------(compound annual rate)

3.9
3.2
6.0

3.8
2.5
5.6

3.4
3.5
4.2

3.4
3.2
4.5

2.7
2.1
3.5

3.6
4.9
3.6

3.2
4.5
3.5

2.4
3.4
3.1

0.3
3.7
3.8

7.0
1.3
4.8
-0.3
2.4
4.5
4.0

4.2
4.2
4.2

Memo
State and local governments
----

3.5
3.8
3.1

3.8
3.4
2.4

3.4
3.4
2.7

3.4

2.0

2.7

3.4
2.0
3.4

Twelve-month percent change----

Total hourly compensation:

Excluding sales workers
Wages and salaries
Benefit costs
By industry:
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade

3.9
4.0
3.3

3.8
4.4
3.7

3.3
4.2
3.5

2.4
4.1
3.5

3.5
3.6
3.3

3.6
3.8
3.3

3.7
3.8
3.0

3.7
3.7
3.1

3.6

3.4

3.0

2.8

3.2
3.3
3.8

Retail trade
FIRE
Services
By occupation:
White-collar
Blue-collar
Service occupations
Memo:
State and local governments
1.

Seasonally adjusted by the BLS.

2.8

stiffer sentences--are getting a lot of attention.

In addition.

many states are proposing or implementing some type of welfare
reform, particularly with regard to work requirements.

In contrast,

interest in state universal health care plans has waned in many
states.
Labor Costs
Growth in labor costs continued to moderate in early 1994.

The

Employment Cost Index for private industry workers increased at an
annual rate of 2.7 percent in the quarter ending in March 1994.

the twelve months ending in March, hourly compensation rose
3.3 percent, down from 3.5 percent during the preceding twelve-month
period.

The slowing reflected more moderate growth in benefit

costs, while the rise in the wage and salary component remained
below 3 percent.

Costs for health insurance continued to increase

at a faster rate than benefit costs on average, but these and most
other benefit costs categories decelerated.
By industry, total hourly compensation during the first
quarter, measured at an annual rate, increased 2.7 percent in the
goods-producing sector.

Such compensation increased only

1.3 percent in manufacturing, but it rose 7.0 percent in
construction.

Although there have been anecdotal reports of

shortages of construction workers, unpublished data from the ECI did
not show any upward pressure on wages of skilled, blue-collar
construction workers; rather, the acceleration was primarily among
professional workers in the construction industry (for example,
engineers and architects).

The acceleration in construction labor

costs was concentrated in the benefits component and reflected a
sharp increase in nonproduction bonuses such as profit sharing and
lump-sum payments.

In the service-producing sector, total hourly

II-38
EMPLOYMENT COST INDEX OF HOURLY WAGES AND SALARIES
FOR PRIVATE INDUSTRY WORKERS
(Twelve-month percent changes)
1993

Hourly wages and salaries
By industry:
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation:
White-collar
Blue-collar
Service occupations
Memo:
State and local governments

1994

Mar.

June

Sep.

Dec.

Mar.

2.7

3.1

2.9

2.1
2.9
2.9

2.3
2.9
3.1

2.4
3.0
3.1

2.0
3.2
3.2

2.5
2.9
3.1

2.2
3.0
-0.2
3.4

2.3
2.9
1.0
3.2

2.9
2.9
3.8
3.2

2.6
2.9
4.2
3.0

2.0
2.3
4.0
3.2

2.7
2.6
2.1

2.8
2.5
2.2

3.4
2.7
2.1

3.3
2.9
2.1

3.1
2.8
2.5

3.0

2.8

2.9

2.7

EMPLOYMENT COST INDEX OF HOURLY BENEFIT COSTS
FOR PRIVATE INDUSTRY WORKERS
(Twelve-month percent changes)
1993

1994

Mar.

June

Sep.

Dec.

Mar.

5.6
7.7
8.1
3.6
5.4
3.4
4.9

5.8
7.2
7.8
4.3
6.6
3.7
5.3

5.4
6.8
7.2
4.8
4.6
3.7
4.6

5.0
6.4
6.9
2.8
4.9
3.4
4.4

4.4
5.1
5.7
5.3
9.5
2.9
3.7

By industry:
Goods-producing
Service-producing

6.3
4.8

7.0
4.9

6.3
4.4

5.6
4.5

4.2
4.5

By occupation:
White-collar occupations
Blue-collar occupations
Service occupations

5.3
5.7
5.4

5.4
6.3
6.3

4.8
5.9
5.5

4.6
5.5
5.5

4.7
4.0
4.1

Memo:
State and local governments

4.8

4.4

3.2

2.9

3.0

Hourly benefit costs 1
Insurance costs
Health care
Supplemental pay
Retirement and savings
Paid leave
Legally required

1. The detail on benefit costs is from unpublished data from the
BLS.

II-39
compensation rose at a 4.5 percent annual rate in the first
quarter--the same pace as in the second half of 1993.
ECI hourly compensation for union workers increased 3.5 percent
in the twelve months ended March 1994, down from a 4.2 percent
increase over the previous year.

This deceleration reflected

moderation in the benefits component of compensation; the twelvemonth change in wages and salaries for union workers was unchanged
at 3.0 percent.

Restraint in union wages is also apparent in the

data on major collective bargaining agreements:

the effective wage

increase for new and existing contracts was 2.9 percent in the first
quarter, essentially the same as in 1993.
The Teamsters' new Master Freight Agreement seems likely to
continue this moderate trend.

If approved by the rank and file, the

contract with Trucking Management, Inc., would raise base wages
about 8 percent over four years.

It also increases pension

benefits, allows the trucking companies to ship more freight by
rail, and permits greater use of part-time workers.

The

ratification vote is expected to take place in late May.
In contrast to the first-quarter ECI data, nonfarm compensation
per hour increased at an annual rate of 5.6 percent in the first
quarter, well above the increase of 2.8 percent in the fourth
quarter of 1993.

However, there are several reasons why this

measure of hourly compensation growth in the first quarter is
overstated.

First, the income estimates made by BEA allowed for the

fact that the labor market indicators for the February survey week
were not representative of the month as a whole; however, the hours
estimate was not modified, and this discrepancy probably caused the
growth in nonfarm compensation per hour for the quarter to be
overstated by more than a full percentage point.

Second, the NIPA

convention puts all of the increase in 1994 payroll tax bases

II-40
NEGOTIATED WAGE RATE CHANGES

UNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS1
(Percent change except as noted)
1993

19f

1991

1992

1993

3.6
3.2
1790

2.7
3.0
1608

2.3
2.1
2065

2.5
2.7
289

2.5
2.5
511

1.1
1.7
471

2.8
2.0
794

3.2
2.5
206

3.7
3.1
714

2.8
2.9
574

2.6
1.9
1162

2.4
2.6
134

1.5
1.5
140

2.5
1.5
190

2.9
1.9
698

2.6
1.7
75

Contracts without escalator provisions2
First-year changes
3.5

All industries
First-year changes
Average over the life
Workers affected (in thousands)
Contracts with escalator provisions 2
First-year changes
Average over the life
Workers affected (in thousands)

Average over the life

Workers affected (in thousands)

2.6

2.0

2.6

2.9

2.7

3.5

3.3

3.0

2.5

2.8

2.9

1.8

2.2

2.9

1077

1035

902

155

371

280

131

4.1

3.0

3.1

3.2

1.0

3.8

3.0

3.4
1179

3.1
919

2.4
1382

3.2
179

2.6
222

1.4
284

2.5
698

2.6
132

Memo:
Compensation rate changes, all
industries 3
First-year changes

Average over the life
Workers affected (in thousands)
1. Contracts
potential gains
2. Contracts
3. Contracts

covering 1,000 or more workers; estimates exclude lump smn payments and
under cost-of-living clauses.
containing cost-of-living adjustments and/or lump sUm payments.
covering 5,000 or more workers.

EFFECTIVE WAGE CHANGE IN KAJOR UNION CONTRACTS AND ITS COMPONENTS

Contribution of:
Total effective
wage change

Prior
settlements

New
settlements

COLAs

1978 - 1982
1983 - 1987

8.7
3.3

3.5
2.0

2.6
.7

2.6
.6

1988

2.6

1.3

1989

3.2

1.5

1.2

1990
1991
1992
1993

3.5
3.6
3.1
3.0

1.9
1.9
1.9
1.9

1.3
1.1
.8
.9

.7
.5
.4
.2

3.0

1.8

2.9
2.6

1.8
1.8

.7
.6

.4
.3

Q41

3.0

1.9

1994:01 1

2.9

1.8

1993:Q11

Q2 1
Q31

Changes over the four quarters ended this period.

II-41
LABOR COSTS
(Percent change from preceding period at compound annual rate;

based on seasonally adjusted data)
1993
19921 19931

1994

1993:Q1
to
1994:Q1

Compensation per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial

corporations 2

5.1
5.2
4.0

3.1
2.8
2.2

2.5
1.9
4.9

3.9
3.7
3.4

2.8
2.8
3.1

5.5
5.6
4.7

3.7
3.5
4.0

4.5

2.6

2.4

3.3

2.5

1.3
1.5
-. 7

.9
.8
-2.8

2.5
2.3
-1.0

.5
-. 4
.3

-4.0
-3.3
-4.0

5.0
5.0
-1.7

1.0
.8
-1.6

-1.5

-. 4

-3.4

Unit labor costs
Total business
Nonfarm business
Manufacturing

Nonfinancial corporations 2

and finance and insurance companies;

the sector

accounts for about two-thirds of business employment.

AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data) 1
1993
1992

1993

1994
Q4

-Annual rateTotal private nonfarm
Manufacturing
Durable
Nondurable
Contract construction
Transportation and
public utilities

1994
Feb.

Mar.

Apr.

-Monthly rate-

2.2

2.5

1.9

3.4

3.0

2.3
2.2
2.5
1.1

3.2
3.4
2.6
1.2

4.2
4.0
5.2
2.0

3.8
5.3
.4
-. 3

2.0
1.6
3.3
2.0

.6
.6
.5
1.1

-.2
-.2
-.1
-.6

.1
.1
-.2
.3

1.7

1.3

-. 6

2.7

4.7

3.5

5.2

4.3

6.1

3.2

-. 6

2.1
2.6

2.4
2.3

.9
2.2

3.3
2.6

3.3
3.0

.1
-. 1

-.1
.0

.3
.2

Finance, insurance
and real estate

Total trade
Services

1. Annual changes are measured from final quarter of preceding year
to final quarter of year indicated.

II-42
RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data)1
Relative
importance,
Dec. 1993

1993
1992

1993

1994
Q4

----- Annual rate-----All items 2
Food
Energy
All items less food
and energy
Commodities
Services
Memo:
CPI-W3

1994
Feb.

Mar.

-Monthly rate-

100.0
15.8
7.0

2.9
1.5
2.0

2.7
2.9
-1.4

2.0
2.6
-4.2

3.3
4.9
1.2

2.5
-1.1
4.7

.3
-.3
1.6

.3
.1
.4

77.2
24.4
52.8

3.3
2.5
3.7

3.2
1.6
3.9

2.1
.0
3.5

3.4
2.4
3.7

2.9
.6
4.2

.3
-.1
.4

.3
.3
.4

100.0

2.9

2.5

1.4

3.1

2.5

1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.
3. Index for urban wage earners and clerical workers.

RECENT CHANGES IN PRODUCER PRICES

(Percent change; based on seasonally adjusted data) 1
Relative
importance,
Dec. 1993

1993
1992

1993

1994
--Q1

-----Annual rate------

1994
Feb.

Mar.

-Monthly rate-

100.0
22.9
13.3
63.7
40.3
23.4

1.6
1.6
-.3
2.0
2.1
1.7

.2
2.4
-3.8
.4
-.6
1.9

-2.5
3.2
-7.4
-3.5
-6.4
2.2

-.3
5.2
-14.6
.9
1.2
.9

3.9
-.9
15.3
3.3
2.6
4.0

.5
-.4
2.8
.1
.2
.1

.2
.5
.0
.2
.1
.3

Intermediate materials 2
Excluding food and energy

95.2
82.3

1.1
1.2

.6
1.6

-1.0
1.0

-.7
1.6

3.1
1.6

.4
.0

.2
.2

Crude food materials
Crude energy
Other crude materials

44.1
34.4
21.5

3.0
2.3
5.7

6.6
-13.7
11.6

13.1
-28.1
-4.5

15.5
-26.8
19.6

-2.5
26.7
19.0

1.2
-6.4
2.0

-1.0
9.3
.9

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment

1.
2.

Changes are from final month of preceding period to final month of period indicated.
Excludes materials for food manufacturing and animal feeds.

II-43
stemming from OBRA-93,

as well as the normal increase

security tax base, into the

in the

first-quarter estimate while the

measures these increases as they become effective.
in treatment perhaps accounts

social
ECI

This difference

for another 1/2 percentage point

the gap between the two measures.

Third, increases

in the number of

overtime hours worked boost average nonfarm compensation per hour,
whereas the ECI increases only when overtime pay rates
Finally, the ECI
not.

rise.

is fixed-weighted, while nonfarm compensation is

This means that changes in the industrial and occupational

distribution of employment and hours affect nonfarm compensation but
do not affect the ECI.

BLS

estimates of the proportion of recent

monthly changes in average hourly earnings

attributable to mix

shifts suggest that such shifts were considerable in the first
quarter.
Average hourly earnings
on nonfarm payrolls,

of production or nonsupervisory workers

the only data on labor costs currently

available for the second quarter, increased 0.3 percent in April.
Over the twelve months ending in April, hourly earnings increased
2.6

percent, up slightly from the rate of increase one year earlier.

Earnings increases over this past year were within a tenth or two of
the gains posted over the same period of a year earlier in most
major sectors.

The exception was in finance, insurance, and

real

estate, where increased commissions produced a significant boost to
hourly earnings.
Prices
Price data for April will be released in the next two days.
Through March, however, inflation remained subdued.

Consumer price

increases were modest in March, as were producer price increases at
the final and

intermediate stages of processing.

materials prices have continued to

By contrast, crude

rise rapidly, as they did during

II-44
INFLATION RATES EXCLUDING FOOD AND ENERGY
Percent change from twelve months
earlier
Mar.
1992

Mar.
1993

Mar.
1994

3.9

3.4

2.9

3.1

2.6

1.0

Alcoholic beverages
New vehicles

3.2
2.4

1.8
2.2

1.3
3.6

Apparel
House furnishings
Housekeeping supplies
Medical commodities
Entertainment
Tobacco

3.6
1.8
0.4
7.8
2.3
8.0

2.1
-0.1
0.8
3.9
1.8
10.7

-0.4
1.1
2.1
2.7
1.6
-7.9

4.2

3.7

3.8

3.8
3.1

3.0
1.8

3.4
2.7

3.5
-2.7

4.1
9.2

3.5
12.7

Medical care

7.8

6.6

5.4

Entertaiment

4.2

3.0

4.8

Auto financing
Tuition

-12.5
9.3

-8.8
8.6

-4.4
6.8

PPI finished goods

2.6

1.9

0.4

Consumer goods

2.9

2.1

Capital goods, excluding
computers
Computers

3.0
-19.2

2.6
-15.7

PPI intermediate materials

-0.2

1.9

1.0

PPI crude materials

-3.1

7.9

10.9

4.2
4.6
4.0

3.5
4.0
3.2

3.3
3.2
3.4

7.3

7.0

6.4

78.3

80.1

82.8

3.7
4.0

4.1
4.0

4.5
3.9

0.1

2.0

1.8
1.1

1.3
0.5

1.1
4.1

CPI
Goods

Services

Owners' equivalent rent
Tenants' rent
Other renters' costs
Airline fares

-0.6
2.3
-9.9

Factors affecting price inflation

BCI hourly compensation
Goods-producing
Service-producing
Civilian unemployment rate*, 3 ,4
Capacity utilization
(manufacturing)

Inflation expectations 3,
Mean of responses
Median, bias-adjusted 6
Non-oil import price 7
Consumer goods, excluding
food, and beverages
Autos

autos,

1. Private industry workers, periods ended in March.
2. End-of-period value.
3. Latest reported value: April.
4. Data for 1994 are not directly comparable with earlier values
because of a redesign of the CPS in January 1994.
5. Michigan Survey one-year-ahead expectations.
6. Median adjusted for average downward bias of 0.9 percentage
points, relative to actual inflation, since 1978.
7. BLS import price index (not seasonally adjusted), periods ended
in March.
n.a. Not available.

II-45

much of 1993.

Crude material costs constitute a relatively small

part of the value of finished goods, however, and such cost
increases usually do not impart much thrust to finished goods prices
in the absence of more general cost pressures.
Consumer prices--both overall and excluding food and energy
prices--rose 0.3 percent in March.

Over the twelve months ended in

March, the CPI was up 2.5 percent, while the CPI excluding food and
energy advanced 2.9 percent; both of these increases were about
1/2 percentage point less than over the preceding twelve months.
Consumer food prices were little changed, on balance, in March.
Prices of fruits and vegetables--which had risen 9 percent during
the second half of 1993 but then retraced much of that increase in
January and February--moved up 0.6 percent.
posted small price increases.

But other food items

At the commodity level, spot and

futures prices of most farm products have dropped substantially
since the last Greenbook.

Livestock prices have been depressed by

high levels of marketings, and, with spring planting off to a rapid
start, futures prices for corn and soybeans have fallen sharply.
Because stocks of several crops remain unusually low, futures prices
will likely remain quite sensitive to changes in weather over the
next few months.

Meanwhile, a recent surge in the price of raw

coffee likely will be percolating through to consumers in coming
months.
Energy prices at the consumer level rose moderately in March.
The increase owed almost entirely to a 1.9 percent rise in natural
gas prices, while the other major energy components were little
changed on a seasonally adjusted basis in March.

However, crude oil

prices moved up sharply in April, pointing to more sizable increases
in energy prices in coming months.

II-46
PRICES OF SELECTED SPOT COMMODITIES
(Not seasonally adjusted)

Commodity (units)

Current
price
($)

Percent change
during week ended
Apr 26

May 3

Percent change from

May 10

March
151

1 year
ago

-----------------Industrial materials-----------------Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)
Lead (lb.)
Zinc (lb.)
Tin (lb.)

1.010
128.500
.592
.345
.460
3.676

3.3
.0
-.6
.0
-3.3
-.3

3.2
-1.8
2.1
.0
4.0
1.2

4.1
-4.8
1.0
.0
1.7
.4

5.2
-7.9
2.6
.0
4.2
2.7

16.1
20.7
15.4
3.0
-6.9
-2.1

Textiles and fibers:
Cotton (lb.)
Burlap (yd.)

.780
.275

-1.2
.0

5.3
.0

-3.8
.0

6.8
.0

38.2
12.2

Miscellaneous materials:
Hides (lb.)
Rubber (lb.)

.875
.515

1.2
.0

.0
.5

1.7
1.0

10.8
5.1

6.7
17.6

--------------------

Other commodities---------------------

Precious metals:
Gold (oz.)
Silver (oz.)
Platinum (oz.)

380.150
5.340
393.750

.3
.4
2.3

.2
1.2
1.0

1.3
1.9
-1.4

-1.8
-1.7
-2.4

7.0
24.8
3.8

Forest products:
Lumber (m. bdft.)
Plywood (m. sqft.)

370.000
322.000

-10.9
-.7

7.0
4.1

21.3
5.9

-10.8
7.3

33.1
3.9

Petroleum:
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

16.300
.499
.482

6.9
4.5
1.0

-1.2
-2.6
-. 6

1.6
1.4
1.8

14.0
10.8
.3

-13.5
-18.0
-13.7

Livestock:
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)

69.000
43.500
.620

-.7
-2.3
.4

-3.0
-3.5
-. 7

-4.2
4.8
10.5

-8.6
-4.4
10.9

-15.9
-5.4
1.2

U.S. farm crops:
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)

2.485
3.573
6.585

.8
1.8
1.7

.8
4.3
-1.1

-3.5
-1.9
.0

-9.5
1.5
-3.6

12.2
3.0
11.0

Other foodstuffs:
Coffee (lb.)

1.035

3.3

11.4

17.6

39.9

102.9

Week of the March Greenbook.

II-47
Excluding food and energy, the CPI increased 0.3 percent in
March after a similar rise in February.

Prices of new motor

vehicles were up 0.5 percent, about the same as in February,
reflecting strong demand in that industry as well as an expensive
yen.

However, prices of many other durable goods declined in

March.

Among nondurable goods, apparel prices increased 0.5 percent

in March after declining about the same amount over the previous two
months.

The slower-than-normal introduction of spring merchandise

likely caused seasonal adjustment problems during the first quarter,
exaggerating the size of the January and February declines and the
March increase.

The prices of non-energy services rose 0.4 percent

in March; shelter costs were up the same amount.

The volatile

airfares category moved up 1.4 percent in March, but auto finance
costs were unchanged after rising sharply in February.
INFLATION EXPECTATIONS
(Michigan survey of consumers)
Expected annual rate of inflation during the . . .

Next twelve months
Mean
Median

Next five to ten years
Mean
Median

1993:

Dec

3.8

3.2

4.8

3.8

1994:

Jan
Feb
Mar

3.5
3.7
4.4

2.9
2.8
3.0

4.8
4.7
5.4

3.2
3.2
3.6

Apr

4.5

3.0

5.0

3.2

Surveys of consumer price expectations have given mixed signals
over the past two months.

The Michigan survey showed average

expectations of inflation for the next twelve months rising to
almost 4-1/2 percent in March and April.

In addition, this survey's

measure of inflation expectations over the next five to ten years

8. In May, the Big Three firms announced additional price
increases on selected vehicles, mainly light trucks, ranging from
$100 to $330.

II-48
SPOT PRICES OF SELECTED COMMODITIES 1

Percent change 2 ------

-----------

Memo
Last
observation

1. PPI for crude materials 4
la.
1b.
1c.
1d.
2.

1993

1992

Dec 93
to
Mar 15 3

Mar 153
to
date

Year
earlier
to date

2.1

Mar

3.3

-0.5

4.4

n.a.

Foods and feeds
Energy
Excluding food and energy
Excluding food and energy,

Mar
Mar
Mar

3.0
2.3
5.7

6.6
-13.7
11.6

2.2
6.1
5.9

n.a.
n.a.
n.a.

5.3
-5.9
10.9

seasonally adjusted

Mar

6.1

11.6

4.4

n.a.

10.9

Commodity Research Bureau
2a. Futures prices
2b.
Industrial spot prices

May 10
May 10

-2.9
-0.7

11.6
-0.0

1.7
5.1

-1.9
2.6

8.1
10.8

Journal of Commerce industrials
3a. Metals

May 10
May 10

5.0
1.9

-4.0
-2.6

3.5
3.7

3.1
0.1

3.8
4.2

May 10

10.4

5.1

4.1

2.1

5. IMP commodity index
5a. Metals
5b. Nonfood agricultural

Mar
Mar
Mar

-2.6
-3.1
2.4

2.4
-14.4
0.2

2.9
4.4
6.5

n.a.
n.a.
n.a.

6.4
-4.8
5.2

6. Economist (U.S. dollar index)
6a. Industrials

May 03
May 03

1.6
4.5

9.1
4.4

5.3
8.7

-0.3
-5.0

12.9
8.5

4. Dow-Jones Spot
4

13.2

1.
2.

Not seasonally adjusted.
Change is measured to end of period, from last observation of previous period.

3.
4.

Week of the March Greenbook.
Monthly observations. IMF index includes items not shown separately.

n.a. Not available.

Index Weights
Energy

Food Commodities

Others1

Precious Metals

PPI for crude materials

CRB futures
14

CRB industrials
t100o
Journal of Commerce index
12

Dow-Jones
25

IMF index
5545

Economist
i. Forest products, industria metals, and other induia maerial.

II-49
stood at 5 percent in April. 1/4 point above its level in January
and February.

However, the median of expectations from the Michigan

survey--which is considerably less volatile than the mean--was
little changed over this period, both for the one-year and for the
five- to ten-year expectations.

Finally, in the Conference Board

survey, expectations for prices over the next year held about
unchanged at 4-1/4 percent in March and April.
The PPI for finished goods rose 0.2 percent in March.

Energy

prices were unchanged after their weather-related jump in February,
but food prices were up notably after declining in the preceding two
months.

Excluding food and energy items, the PPI also increased

0.2 percent in March.
increases:

Capital equipment prices posted the largest

the prices of heavy trucks jumped more than 2 percent

after posting no increase in February.

Over the twelve months ended

in March, the overall PPI increased only 0.2 percent, while the PPI
excluding food and energy was up 0.4 percent.
Spot prices of industrial commodities have increased further,
on balance, in the period since the last Greenbook.

Among the

metals, steel scrap prices have turned down since mid-March, but
prices of most other industrial metals have moved up.

In addition,

prices of other industrial materials, such as cotton and hides, have
increased notably.

Indexes of industrial commodity prices hesitated

a bit in early April but have since resumed their upward trends.
The Journal of Commerce index has moved up another 3 percent, on
net, since the last Greenbook, and the Knight-Ridder CRB spot price
index has increased by roughly the same amount.

Precious metals

prices declined moderately from mid-March to mid-April but have
since turned up.

II-50

COMMODITY PRICE MEASURES *
-

Journal of Commerce Index, total

- -

Journal of Commerce Index, metals

Ratio scale, index
(1980=100)

Metals

CRB Spot Industrials
Ratio scale, index
(1967.100)

Apr
1994

May

CRB Futures
Ratio scale, index
(1967-100)

CRB Futures

*Weekly data, Tuesdays; Journal of Commerce data monthly before 1985

Dashed lines indicate week at
last Greenbook

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS
(Percent except as noted)

___
I

1993

Instrument

SHORT-TERM RATES
2
Federal funds
3
Treasury bills
3-month
6-month
1-year
Commercial paper
1-month
3-month
Large negotiable CDs
1-month
3-month
6-month
4
Eurodollar deposits
1-month
3-month
Bank prime rate

Mid-Oct
lows

1994
Feb

Change to May 10. 1994

FOMC.*
3 Mar 22 May 10

From Mid-Oct
lows

From
Feb 3

From FOMC.*
Mar 22

3.07

3.22

3.75

3.01
3.09
3.23

3.13
3.27
3.52

3.52
3.87
4.19

4.24
4.76
5.18

1.23
1.67
1.95

1.11
1.49
1.66

.72
.89
.99

3.13
3.23

3.16
3.25

3.64
3.87

4.39
4.73

1.26
1.50

1,23

1.48

75
.86

3.08
3.22
3.23

3.11
3.25
3.41

3.54
3.80
4.07

4.38
4.69
5.10

1.30
1 .47
1.87

1.27
1.44
1.69

.84
.89
1.03

3.06
3.25

3.50
3.81

4.38
4.75

1.32
1.50

.88
.94

6.00

6.75

4.06
5.19
5.78

4.60
5.81
6.31

5.49
6.55
6.94

6.52
7.33
7.50

2.46
2.14
1.72

1.92
1.52
1.19

1 .03
.78
.56

5.41

5.49

6.06

6.58

1.17

1.09

.52

6.79

7.35

7.76

8.46

1.67

1 .11

.70

6.74
4.14

6.97
4.12

7.76
4.60

8.53
5.25

1.79
1.11

1.56
1.13

.77
.65

.68

.75

.53

.75

INTERMEDIATE- AND LONG-TERM RATES
U.S. Treasury (constant maturity)
3-year
10-year
30-year
5
Municipal revenue
(Bond Buyer)
Corporate--A utility,
recently offered
6
Home mortgages
FHLMC 30-yr. fixed rate
FHLMC 1-yr. adjustable rate

1989

1994

Percentage change to May 10

Record high
Stock exchange index
Level
Dow-Jones Industrial
NYSE Composite
NASDAQ (OTC)
Wilshire

3978.36
267.71
803.93
4804.31

Date

Low,
Jan. 3

1/31/94 2144.64
2/2/94 154.00
3/18/94 378.56
2/2/94 2718.59

1. One-day quotes except as noted.
2. Average for two-week reserve maintenance
period closest to date shown. Last observation
is average to date for maintenance period ending
May 11, 1994.
3. Secondary market.
*

Rates are as of the close on March 21. 1994.

FOMC.'
Mar 22

May 10

3864.85
259.91
797.30
4705.03

3656.41
246.94
725.00
4435.99

From

record
high

1989
low

From FOMC,
Mar 22

70.49
60.35
91.52
63.17

-5.39
-4.99
-9.07
-5.72

-8.09
-7.76
-9.82
-7.67

4. Bid rates for Eurodollar
deposits at 11 a.m. London time.
5. Most recent observation based on
one-day Thursday quote and futures
market index changes.
6. Quotes for week ending Friday
previous to date shown.

Selected Interest Rates*
(percent)

FOMC
3/22

3-month T-Bill

I
3/18

3/25

'l
4/1

I
I
Federal
Funds
-- 1 --- 1 -- 1
4/8 4/15 4/22 4/29 54
1994
I

Weekly/Daily

3/18 3/25
*Statement weeks are plotted through May 4; Friday weeks through
May 6, 1994.

4/1

418

4/15 4/22 4/29
1994

DOMESTIC FINANCIAL DEVELOPMENTS

Against a backdrop of two additional quarter-point
the

federal funds

rate,

increases in

release of data interpreted as showing

considerable strength in the economy, and weakness

in the

exchange value of the dollar, market interest rates
maturity spectrum during the intermeeting period.
rates are up 75 to 100 basis points.

foreign

rose across the
Money market

Major commercial banks

followed the System tightening actions with hikes

in the prime rate,

first of 25 and then of 50 basis points, bringing the rate to
6-3/4 percent and restoring the previous wide difference between the
prime rate and overnight

funding costs.

Longer-term interest rates are up 50 to 100 basis points since
the last FOMC meeting, with the sharpest gains occurring at
intermediate maturities.
announced on February 4,

Since the first move toward restraint,
the yield on the three-year Treasury note

has

risen 2 percentage points, while that on the thirty-year bond

has

increased 1-1/4 percentage points.

Major equity price indexes

are down 5 percent to 9 percent since the March meeting.
As mutual fund investors responded to the erosion of securities
prices, net inflows to stock funds have shrunk while bond funds have
suffered net

redemptions.

At times, bond fund managers have sold

securities in anticipation of redemptions, thereby contributing to
rate pressures, especially in the markets for junk bonds, tax-exempt
bonds, and mortgage securities.

Bond funds stabilized in late

April, but renewed market turbulence in early May may have caused
further skittishness on the part of bond investors.

The weakening

of stock and bond fund inflows gave a boost to M2 as money moved
into retail money market mutual funds.

Although its deposit

components were weak, M2 grew moderately during the intermeeting

period, bringing it closer to the middle of its 1 percent to
5 percent growth cone.

This relative strength showed through to M3,

which was lifted above the bottom of its 0 percent to 4 percent
growth cone.
Gross public issuance of stocks and bonds by nonfinancial firms
has dropped substantially in response to deteriorating market
conditions.

Business borrowing has continued to tilt toward bank

and finance company loans and shorter-maturity notes.

Higher yields

also have contributed to a marked slowing in gross bond issuance by
state and local governments, while a drop in the federal deficit has
curbed Treasury borrowing.

In the household sector, consumer credit

has grown robustly, boosted by brisk sales of cars and mobile homes.
Data on home mortgage borrowing are sketchy, but available
indicators suggest some slackening of demand recently.
Mutual Funds
As net asset values of mutual fund shares declined, investors
reduced their purchases of bond and stock funds in March and April
(table).

This in turn exacerbated the decline in securities prices,

particularly in market segments heavily dependent on mutual fund
investment.

Bond funds accounted for most of the slowdown,

experiencing hefty net redemptions in each month.

Stock funds, in

contrast, had net inflows despite a substantial decline in major
share price indexes.
Among stock funds, net sales of international funds were down
in March and April from the pace of recent quarters.

Press reports

attributed much of the slowdown to funds that invest in the emerging
markets of the Pacific Rim and Latin America, areas that suffered
major market corrections.

Net sales of domestic equity funds were

little changed from the pace of recent quarters, reportedly on the
strength of inflows from IRA investors.

III-3
GNMA funds--which began to experience outflows last fall-posted the largest net outflows in March and April.

Redemptions of

shares from high-yield bond funds led to a liquidity shortfall for
some funds, forcing them to sell junk bonds; with this additional
pressure on the market, spreads on junk bonds have widened 40 to
50 basis points since the beginning of April.

Outflows from tax-

exempt bond funds over the March-April period exerted upward
pressure on municipal yields, but this pressure appears to have been
offset recently by a step-up in individuals' direct purchases in the
market.

NET SALES AND EXCHANGES OF MUTUAL FUNDS CLASSIFIED BY TYPE
(Billions of dollars, monthly rate)
Memo:
Levels in

1994

1993
01

March

Aprile

Mar. 1994

Total stock
International
Domestic

10.7
.9
9.8

10.6
2.2
8.4

10.9
4.1
6.8

14.7
5.8
8.9

13.8
6.2
7.6

8.0
1.8
6.2

9.9
3.1
6.8

766.2
130.7
635.5

Total bond
GNMA
High yield
Tax-exempt
International
Other

11.8
.7
1.2
4.5
-. 3
5.7

12.2
.6
1.1
4.1
.3
6.1

12.9
.4
.3
3.9
1.2
7.1

9.5
-.9
1.1
2.7
.7
5.9

3.8
-1.6
0.0
1.0
.4
4.0

-5.2
-2.7
-1.6
-1.4
-. 4
.9

-4.2
-2.0
-. 6
.1
-. 7
-1.0

734.9
66.0
47.1
241.4
38.1
342.3

e Estimated
Source:
Investment Company Institute

Money and Bank Credit
In April, M2 grew at a 3 percent annual rate, down somewhat
from the 5-1/4 percent pace recorded in March, placing this
aggregate near the midpoint of its growth cone.

MI contracted in

April, with NOW accounts falling at an 8 percent annual rate after

III-4
growing modestly the previous month.

The weakness in NOW accounts

probably reflected the slow adjustment of deposit rates to higher

market interest rates and some contribution from lower-than-expected
tax payments.

Rising opportunity costs and the fall-off of mortgage

refinancing activity contributed to a decline in demand deposits in
April.

Currency growth slowed noticeably in April, to 9 percent

from its double-digit pace of recent months.
The non-M1 part of M2 grew at a 5 percent annual rate in April,
principally on the strength of retail money market mutual funds as
many investors shied away from longer-term mutual funds.

Savings

and MMDAs, held down by sluggish upward adjustment in deposit rates
and the slowdown in mortgage refinancings, posted a small runoff in
April.

Small time deposits declined at only a 2 percent annual rate

in April, compared with rates of decline of 5 percent in March and
8 percent for the first quarter as a whole.

The slower runoffs in

this component reflected the faster adjustment of rates on retail
CDs, compared with rates on liquid deposits, to increases in market
rates.

In addition, the diminished appeal of bond and stock funds

lent some support to small time deposits.

M2 plus bond and stock

mutual funds was about flat over the March-April period, reflecting
capital losses on the mutual fund portion.
The growth of M2 carried over to M3, which expanded at a
3 percent annual rate in April following a 2-1/2 percent rate of
growth in March.

Despite declines in large time deposits and

institution-only money market mutual funds, increases in the term RP
and term Eurodollar components supported the non-M2 part of M3.
The rapid expansion of bank credit--10-1/2 percent in March and
11 percent in April--was largely attributable to exceptional growth
of securities holdings.

The growth of other securities was

primarily the result of an accounting change that limited banks'

III-5

(Based

MONETARY AGGREGATES
on seasonally adjusted data)
1993

1994

1993:Q4

to
1993

Feb.

Mar.

Aggregate or component
Aggregate
1.

Apr
(pe)

Level
$
Mar 94

(bil

Apr 94
ipe)

(Percentage change lannual rate)l
10.5
1.3
0.5

9.4
1.9
2.2

5.4
-1.2

4.0
5.2

-8.0

2.5

4. MI-A

11.7

10.6

9.6

10.0

5.
6.

10.3

9.0

11.9

14.4

13.3

12.1

7.9

6.2

-0.9

8.4

7.3

-0.3

-2.6

2.0

-2.4

-1.4

0.1

-4.2

9.9

30.4

22.4

-24.4

74.6

-2.1
-1.0
4.2

1.2
-0.6
3.6
-7.4
-5.3
-0.4
-12.0

0.0
0.7
4-3
-5.2
-4.4
0.7
-11.1

-14.1
-0.5
1.5
-3.9
-5.8
-0.8
-12.3

17.1
-2.2
-1.4
-3.6
0.8
5.6
-5.4

-10.6

-44.4

-12.5

-20.8
-24.1
-5.8

-10.0
-9.2
-15.6

-98.4
-39.7
57.1

3.4
19.2
-49.4

1142.4

3581.3
4209 3

Selected components

Currency
Demand deposits

7. Other checkable deposits
8. M2 minus M1
Overnight RPs and Eurodollars,
n.s-a.
General-purpose and brokerdealer money market funds

Commercial banks
savings deposits
Small time deposits
Thrift institutions
Savings deposits
Small time deposits
.7. M3 minus M2
Large time deposits
At commercial banks 3
At thrift institutions
Institution-only money market
mutual funds
Term RPs, n.s.a.
Term Eurodollars, n.s.a.

-8.6

-6-1
0.6
-13.8
-3.6

3.7

-6.9
-6.6
-8-2

-1.5
-0.6
-6.9

-4.5
-3.2
-9.5

-5.4
16-9
-1.3

8.8
-5.8
24.7

-26.8
-22.8
-12.9

11.7

730.6

9
-4

11%
4Y

332.4
390.1

-8

-1%

411.8

2438.9

-20

17%

97.4

46
-3
-4
-2
0
2

10%
-i
1%
-4
-3
1%

348.6
1252.8
790.2
462.6
738.9
431.9

-4

-8%

307.1

-10%
-6M
-6
-7

628.0
332.4
271.4
60.9

-22%
-8
-%

177.4
89.1
44.3

Average monthly change (billions of dollars) 2
Memo

24. Managed liabilities at com'l.
banks

25.
26.
27.

(lines 25 + 26)

Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions
28.
Other 4
29. U.S. government deposits at
commercial banks 5

0.1
2.1
-1.9

23.2
-3.3
26.5

13.4
-5.1
18.5

34.0
-6.3
40.3

37
1
36

-2.2
0.3

12.7
13.8

20.0
-1.4

21.5
18.7

411.3

-0.3

0.2

2.5

-2.9

23.1

.
.
.

902.8
333.7
569.1

157.8

1. For years, 'percentage change" is percentage change in quarterly average from fourth quarter of preceding
year to fourth quarter of specified year. For quarters, it is the percentage change in quarterly average from
preceding quarter to specified quarter, annualized.
2. For years, "average monthly change" is the dollar change from December to December, divided by 12.
For quarters, it is the dollar change from the last month of the preceding quarter to the last month of
the specified quarter, divided by 3.
3. Net of holdings of money market mutual funds, depository institutions, U.S. government, and foreign banks
and official institutions.
4. Borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the
Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items). Data are partially estimated.
5. Treasury demand deposits and note balances at commercial banks.

III-6
ability to net off-balance-sheet items, such as swaps, options, and
futures, when reporting the fair value of these contracts on the
balance sheet.
$25

This change accounted for virtually all of the

billion increase in other securities since the beginning of the

year and accounted for about 2 percentage points of total bank
credit growth in both March and April. 1

During March and April,

growth of U.S. government securities averaged more than 20 percent
at an annual rate.

According to the May Senior Loan Officer Survey

and informal contacts with bankers, some banks view intermediate
Treasuries as good buys that offer a sizable margin over the cost of
short-term borrowed funds.
Loan growth in March and April was led by the business and
consumer categories.

Business loan growth was boosted significantly

by the Paramount-VIACOM merger.

In addition, according to the May

Senior Loan Officer Survey, business loans, which resumed growing
this year, have been strong because of a pickup in external
financing needs.

Moreover, as long rates have risen and share

prices have fallen, some companies may have substituted bank credit
for bond and equity funding.

The survey also indicated a continued

easing of terms and standards on business loans for all sizes of
firms.
Consumer lending was robust in March and April.

Banks noted

the increase in demand for consumer loans while also reporting
increased willingness to extend such credit.

Real estate loans,

which have been quite weak since the beginning of the year,
accelerated only slightly in April.

Given the rise in mortgage

rates in the first quarter, some slowdown from the exceptionally

1. This accounting change, FASB Interpretation No. 39, was to be
adopted by all banks for their Call Reports on March 31, 1994.
Since the first of the year, banks have implemented the change at
different times, thereby boosting growth in each month through
April.

I-7
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT1
(Percentage change at annual rate, based on seasonally adjusted data)
Dec.

Type of credit

1992

to Dec.
1993

Level,

1994

1993
Q4

1994

1994
Feb.

Mar.

1994
Apr. p

Apr.
1994 p
($billions)

Commercial bank credit
1. Total loans and securities

5.2

4.1

8.5

2.8

Securities

5.5

10.5

11.1

3,195.1

17.2

6.9

25.7

23.0

968.2

0.0

25.2

18.8

759.4

7.9

U.S. government

9.6

3.7

11.6

Other

4.4

-. 7

39.3

33.0

27.3

38.6

208.8

4.0

4.7

4.0

4.9

4.1

6.1

2,226.9

-2.0

8.3

4.7

9.5

12.9

602.1

-. 1

-1.5

Loans

Business

Real estate

4.5

Consumer

9.0

Security

35.1

10.

Other

-1.8

-. 6

7.8

11.3
25.3
-10.8

10.6
-18.3

-. 3

2.8

942.9

10.1

12.7

17.9

407.3

19.3

16.1

-72.0

78.3

19.8

-14.0

7.7

9.9

196.3

Short- and intermediate-term business credit
11. Business loans net of bankers
acceptances

12. Loans at foreign branches2
13. Sum of lines 11 and 12
14. Commercial paper issued by
nonfinancial firms
15. Sum of lines 13 and 14
16. Bankers acceptances, U.S.
trade-related3,4

-2.0

-12.1
-2.5

-1.6

-7.4

10.6

592.3

-44.4

28.8

45.1

22.1

3.4

10.3

11.8

614.4

-11.0

151.5

7.8

-8.2

-12.2

-10.6

-29.8

-1.1

-3.0

3.6

2.1

-12.2

-22.5

17.9

23.6

17.4

n.a.

21.0

9.3

9.4

18.3

n.a.

312,9

5.5

3.3

6.9

n.a.

1,095.2

7.1

765.8

18. Total (sum of lines 15, 16,
and 17)

-1.2

.1
-2.5

Except as noted, levels are averages of Wednesday data and percentage changes are based on averof Wednesday data; data are adjusted for breaks caused by reclassification; changes are measured
preceding period to period indicated.
Loans to U.S. firms made by foreign branches of dcmestically chartered banks.

3. Acceptances that finance U.S.
goods.

5
5

-.5

1.
ages
from
2.

1.9

9.9

4.4

Loans at finance companies 4

17.

-1.7

imports, U.S. exports,

and domestic shipment and storage of

4. Changes are based on averages of month-end data.
5. March 1994.

p Preliminary.
n.a. Not available.
Note: Data have been benchmarked to the December 1993 Call Report.

strong fourth-quarter growth would have been expected.

Senior bank

loan officers attributed some of the deceleration to the slowdown in
mortgage refinancing, as the refinanced loans originated late last
year moved to mortgage pools.
Business Finance
With yields on corporate bonds up 70 basis points since the
last FOMC meeting, the opportunities to refinance outstanding debt
have diminished further.

As a result, gross issuance of public

bonds by nonfinancial corporations dropped to an estimated
$6-3/4 billion in April, compared with the $11
average in the first quarter of 1994.

billion monthly

Very little of the recent

issuance has been in maturities of thirty years or longer, and some
bonds were issued with put features designed to address investor
concerns about further increases in yields.

The volume of floating-

rate offerings by nonfinancial corporations picked up in the past
two months, as spreads on these instruments tightened.

In contrast,

spreads on fixed rate bonds widened a bit in the investment-grade
sector and quite sharply in the speculative-grade sector.
Several junk bond offerings were postponed because of adverse
market conditions.

Market reports suggested that the private

placement market was an alternative for some high-yield issuers, as
the improved financial condition of life insurance companies made
them more willing to invest in this sector.
Rising interest rates have been a major factor in the decline
of stock prices generally since the last FOMC meeting.

But not

surprisingly, some "interest-sensitive" industrial groups have been
especially hard hit.

The Dow Jones utility average has now fallen

more than 20 percent since the beginning of the year.

Stock prices

of securities firms also are sharply lower, partly reflecting
expectations of a loss in profits with the prospective end of the

III-9
1

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Billions of dollars; monthly rates; not seasonally adjusted)

--1993-1992

1993

-------

1994---------------

Q1p

Feb.p

Mar.p

Apr.p

All U.S. corporations
Bonds
Stocks

40.73
33.80
6.93

53.23
43.85
9.38

51.68
40.87
10.81

53.36
44.89
8.47

48.26
39.52
8.74

54.11
43.54
10.57

31.31
25.80
5.51

Nonfinancial corporations
Bonds
Sold in U.S.
Utility
Industrial
Sold abroad

13.67
12.83
5.33
7.50
0.84

16.20
15.56
7.34
8.22
0.64

12.41
12.10
5.15
6.96
0.31

11.11
10.60
4.64
5.97
0.51

10.27
10.00
4.10
5.90
0.27

9.81
9.50
4,45
5.05
0.31

6.77
6.00
2.50
3.50
0.77

2.18
7.74
2.86
0.09

2.56
8.71
4.17
0.09

1.78
5.78
4.45
0.10

0.80
5.89
3.91
0.00

0.62
4.95
4.43
0.00

1.03
6.15
2.32
0.00

0.84
3.42
1.75
0.00

4.42
0.87
3.55

5.22
1.06
4.16

6.08
1.60
4.48

4.62
0.95
3.67

4.68
1.03
3.65

5.90
1.46
4.44

3.63
0.18
3.45

20.13
18.67
1.46

27.65
25.09
2.56

28.46
26.02
2.44

33.78
29.19
4.59

29.25
22.20
7.05

33.73
31.50
2.23

19.03
17.00
2.03

1.55
6.77
0.31
0.04
2.51

1.87
8.99
0.48
0.08
4.16

1.57
8.78
0.66
0.13
4.73

3.27
11.29
0.64
0.02
3.85

1.31
8.93
0.94
0.06
4.06

3.46
9.37
0.58
0.00
4.67

4.22
2.61
0.12
0.17
1.88

By quality 2
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown
Stocks
Utility
Industrial
Financial corporations
Bonds
Sold in U.S.
Sold abroad
By quality 2
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown
Stocks

1. Securities issued in the private placement market are not included. Totals
reflect gross proceeds rather than par value of original discount bonds. Equity
issues associated with equity-for-equity swaps that have occurred in restructurings
are excluded.
2. Bonds categorized according to Moody's bond ratings, or to Standard and Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
Preliminary.
p

III-10
underwriting boom.

Evidence of reduced trading profits helped push

prices of money center banks down in recent weeks.

In early April,

prices of regional bank stocks rallied strongly on speculation about
potential mergers under prospective interstate branching
legislation, but then they fell back a bit.
Gross equity issuance by nonfinancial corporations fell to an
estimated $3.6 billion in April from nearly $6 billion in March.
Issuance last month was buoyed by RJR Nabisco's $1.6 billion
offering of hybrid preferred stock (PERCS) having a dividend yield
of 9-1/4 percent, an offering that had been reworked to address
investor distaste for the tobacco industry.

Initial public

offerings were off substantially in April in response to lower stock
prices and increased market uncertainty.

Because of a resurgence in

mergers and acquisitions, the first quarter of 1994 likely was the
first since 1991 in which net equity issuance was negative.
In the first quarter, Moody's Investors Service upgraded
twenty-seven domestic nonfinancial firms and downgraded thirty-nine,
reflecting continued weakness among investment-grade industrial
credits.

Several bank holding companies were upgraded, and none

were downgraded, leaving Bank of Boston Corporation as the only one
of the top twenty without at least an A rating.
State and Local Finance
Municipal bond yields, on balance, are up about 50 basis points
since the March FOMC meeting.

This increase is less than the rise

in yields on comparable Treasuries, resulting in a slight drop in
the ratio of tax-exempt to taxable yields.
An abatement of bond sales by tax-exempt mutual funds has
helped to reduce pressures on bond rates in recent weeks.

These

funds continued to face sizable share redemptions in April, but most
had raised enough cash through earlier sales to accommodate the

III-11

outflows without further liquidations.

The improved condition of

the market also reflected increased direct purchases by individuals.

GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Billions of dollars, monthly rates, not seasonally adjusted)

1994
Mar.
Feb.

Apr.p

17.3

11.0

1992

1993

1993
Q4

21.8

27.8

24.4

18.5

20.1

Total tax-exempt

21.2

27.1

23.6

17.7

18.8

16.5

10.7

Long-term

17.9

23.3

21.5

15.5

14.7

15.4

10.1

Refundings
New capital
Short-term

7.9
10.0
3.3

15.7
7.6
3.8

13.7
7.8
2.1

7.4
8.1
2.2

5.9
8.8
4.1

5.3
10.1
1.1

1.3

Total offerings 1

Total taxable

2.0
8.1
.6

1.
Includes issues for public and private purposes.
Includes all refunding bonds, not just advance refundings.
2.
p = Preliminary.

Last year, individuals generally preferred to invest through mutual
funds and ran off their direct holdings of municipal securities.
Mutual funds provided a convenient means of reinvesting interest and
any principal payments, and they were the preferred approach for
first-time investors.

With the decline in net asset values of tax-

exempt mutual funds this year, many individuals, who tend to be buyand-hold investors, saw direct purchases as the more attractive
alternative.
The net rise in bond rates significantly slowed the gross
issuance of tax-exempt securities.

In April, the volume of new

long-term offerings fell to an estimated $10 billion, the lowest
monthly total since October 1990.

Through the first four months of

this year, gross issuance was down nearly 35 percent from that in
the same period in 1993.

Refunding volume was a paltry $2 billion

III-12
last month.

Offerings to raise new capital declined to $8 billion

in April, from $10 billion in March, as several prospective
borrowers chose to postpone issues in light of the backup in
interest rates.

Even with the postponements, the thirty-day

calendar remains relatively small.
According to Standard and Poor's, the favorable trend in credit
quality that began last year extended into 1994.

In the first

quarter, upgrades outpaced downgrades by more than two to one.

state ratings were changed, but ratings were raised on general
obligation issues of numerous county and local governmental units in
response to improvements in their economies.

Several housing-

related issuers were upgraded, reflecting the better performance of
their mortgage portfolios.

Hospital-related issuers, in contrast,

posted more downgrades than upgrades.

In early May, the opening of

Denver's new international airport was postponed a fourth time.

The

delayed opening is costing about $1 million a day in lost revenue,
suggesting that additional borrowing will be required to service
outstanding debt.

As a result, Moody's lowered its rating on the

$3 billion of construction bonds that have been issued to one notch
above junk, and Standard and Poor's is reviewing its rating.
Federal Finance
The seasonal inflow of federal tax receipts is projected to
result in a budget deficit of only $9 billion in the second quarter.
The staff anticipates that marketable borrowing will total
$2-1/2 billion, as the Treasury runs off $27 billion in bills while
raising $29 billion with coupon issues.

Weekly bill offerings were

cut from $25.2 billion to $22.8 billion in April but have since been
increased to $24 billion.
be little changed.

Sizes of coupon auctions are expected to

The mid-quarter refunding, conducted earlier

this week, consisted of $17 billion of three-year notes and

III-13
TREASURY FINANCING1
(Total for period; billions of dollars)
1994
Jun. p

May p

Apr.e

-58.6

-8.8

13.0

-40.5

Net cash borrowing
from the public

51.2

5.3

-27.0

23.8

-3.5

Marketable borrowings/
repayments (-)
Bills
Coupons
Nonmarketable

54.0
6.8
47.2
-2.8

2.5
-26.6
29.1
2.8

-23.1
-15.8
-6.9
1.1

24.1
-6.9
22.0
-.3

1.5
-3.9
3.1
2.0

5.1

2.4

-4.1

31.0

-24.5

44.6

42.3

48.7

17.7

42.3

2.2

1.1

13.2

-14.3

2.3

Treasury financing
Total surplus/deficit (-)

18.7

Means of financing deficit:

Decrease in the cash
balance
Memo:
Cash balance
at end of period
2
Other

1. Data reported on a payment basis, not seasonally adjusted.
2. Includes checks issued less checks paid, accrued items, and other
transactions.
p--Projected.
e--estimated
NOTE: Details may not add to totals because of rounding.

FEDERALLY SPONSORED CREDIT AGENCIES
Net Cash Borrowing
(Billions of dollars)

FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA
FAMC 2

1994

1993

Jan.

Feb.

Mar.

5.4
17.1
19.3
-0.1
-0.1
0.0

8.9
-2.7
5.3
1.5
1.0
0.0

3.8
12.9
15.3
-0.7

-2.3
11.3
1.9
-0.5

-1.4
9.2
3.5
0.2

7.5
-7.6
9.9
-0.4

0.0

1. Excludes mortgage pass-through securities issued by FNMA
and FHLMC.
2. Federal Agricultural Mortgage Corporation.

III-14

$12 billion of ten-year notes; raising a little less than $1 billion
in new cash.
The Treasury also announced that it will continue to study its
experiment with uniform-price auctions of two-year and five-year
notes.

In the first twenty rounds of the experiment, the markups of

the average issuing rates over the when-issued rates at the time of
the auction have been little different from an earlier sample of
discriminating-price auctions, indicating unchanged underwriting
premiums.

However, a full examination of the success of this

experiment in lowering Treasury borrowing costs would have to
control for other factors, including changes in the relationship
between when-issued rates and other comparable rates.
During the first quarter, government-sponsored agencies
continued to issue debt at a brisk pace.

The rise in interest rates

raised concerns that short- and intermediate-term rates were headed
higher and inclined some agencies toward fixed-rate issues instead
of floating-rate debt.

Spreads over Treasuries on all issues have

widened 5 to 20 basis points, although they remain low by historical
standards.
Mortgage Markets
Interest rates on home mortgages have moved sharply higher over
the intermeeting period.

The average contract rate on conventional

fixed-rate loans was up about 3/4 percentage point, to 8-1/2 percent,
in the first few days of May.

As rates on fixed-rate loans moved

higher, lenders reported an increase in the share of originations
accounted for by adjustable-rate mortgages (ARMs).

First-year rates

on ARMs rose about 2/3 percentage point, to 5-1/4 percent, although
the rate on benchmark one-year Treasury securities increased a full
percentage point.

The narrowing of the ARM-to-Treasury spread

suggested that some portfolio lenders were holding first-year ARM

LLi-iD

Yield Spread on Fannie Mae 30-Year Mortgage-Backed Securities and
Implied Volatility of Options Prices on Treasury Bond Futures
(Daily)
Percent

Basis Points

Jan.

Apr.

Jul.

Oct.

MORTGAGE-BACKED
(Billions of dollars,

Jan.

Apr.

SECURITY ISSUANCE

monthly averages,

NSA unless noted)

Pass-through securities
Multiclass securities
Total
(SA)

Federal agency

Private

ARMFixedrate (SA) backed(SA)

Nonagency'

TNon-

agency 2

PNIMA
REMICs

FHLM
REMICs

Agency
strips

1990
1991
1992
1993

20.1
23.7
40.1
48.8

17.3
20.2
34.7
42.5

2.2
1.9
3.2
4.6

.6
1.6
2.2
1.7

10.6
18.1
30.4
37.1

1.4
2.6
5.3
6.2

5.1
8.5
12.9
14.0

3.4
6.0
11.0
12.0

.7
1.1
1.3
4.8

1993 Q2
03
Q4
1994 Q1

42.4
54.1
59.8
55.5

37.3
46.4
53.0
47.7

4.0
5.3
5.1
6.2

1.1
2.5
1.8
1.7

32.9
43.7
44.5
38.4

5.1
7.1
7.0
8.4

12.3
17.2
15.9
11.0

10.6
12.6
17.7
13.9

4.9
6.7
3.8
5.1

1994 Jan
Feb
Mar

63.0
59.2
44.8

55.2
49.9
38.3

7.2
7.0
4.5

.6
2.3
2.1

28.8
39.0
47.3

8.3
9.9
7.2

6.5
9.7
16.5

10.0
11.5
20.0

4.0
7.9
3.6

I- Collateralized by adjustable-rate
mortgages.
2. Collateralized by fixed-rate mortgages.

III-16

rates low to capture a larger share of the overall home mortgage
market.
On balance, the rise in fixed mortgage rates since last
October's low has paralleled changes in Treasury yields, but the
yield spread has varied, first narrowing and then widening by about
20 basis points

(chart).

Increased rate volatility was one reason

for the recent widening, but reduced demand by institutional
investors also played a role.

One source of this reduced demand was

a decline in first-quarter issuance of real estate mortgage
investment conduits

(REMICs) by Fannie Mae and Freddie Mac following

the record volume of the fourth quarter (table).

So far in the

second quarter, REMIC issuance is reported to have slowed further.
Issuance of new REMICs depends on the ability of Wall Street dealers
to sell the higher-risk classes of bonds designed to absorb much of
the prepayment risk of the underlying collateral. 2

The recent

forced liquidation of such high-risk REMIC bonds held by certain
hedge funds, market fears about additional liquidations from other
funds or dealer inventories, and the uncertainty about how to price
such bonds in a volatile market all reduced investor demand for
these high-risk securities and slowed the overall issuance of
REMICs.
A second source of reduced investor demand was mutual fund
sales of mortgage-backed securities to meet shareholder redemptions.
Net sales of Ginnie Mae funds turned negative last fall (chart), but
outflows have accelerated in recent months.

A third source of

reduced demand was the steadily declining purchases of new mortgages
by Fannie Mae and Freddie Mac for their own portfolios.

The

agencies had been large buyers through the end of last year,

2. REMIC issuance tends to bid up the prices for newly originated
mortgage collateral in the secondary market and to lower the
mortgage rates offered to households.

III-17

Net Flows to Ginnie Mae Mutual Funds and

Ginnie Mae 30-Year Mortgage-Backed Security Current Coupon Yield
(Monthly, not seasonally adjusted)
Percent

Millions of dollars
4000

3000
Net Flows to Ginnie Mae Mutual Funds

2000

1000
+

1000

2000

3000

4000
1985

1986

1987

1988

1989

1990

1991

1992

1994

1993

Gross and Net Issuance of Agency Mortgage Pass-Through Securities
(Monthly, not seasonally adjusted)

Billions of dollars

Gross

1985

1986

1987

1988

1989

1990

1991

1992

Net

II-18

financing these investments primarily with callable debentures.
Since the beginning of 1994. however, the two agencies have reduced
their combined net portfolio purchases in response to declines in
the spread they can earn over their cost of funds.
The effect on mortgage spreads of weaker demand from
institutional investors was partly offset by a decline in the supply
of agency pass-through securities (chart).

Although net issuance in

the first quarter exceeded that in the fourth quarter, net issuance
has been declining since the beginning of the year, reflecting both
the sharp decline in refinancing volume and the slowdown in housing
activity.
Consumer Credit
Interest rates on consumer loans have not risen as much as
comparable market interest rates since February.

The latest

observations of the Board's series on consumer loan rates at banks
are for February (the May survey is in process), but weekly data
from the Bank Rate Monitor (BRM) showed little movement over the
past three months.

Average rates on forty-eight-month new-car

loans, which typically track broad rate movements fairly closely,
were only 1/3 percentage point higher in early May than they were in
early February.

Yields on Treasury securities of like maturity rose

more than 150 basis points over this period.

As improvements in

loan quality have bolstered earnings and reduced the perceived risk
of auto loans, banks have waged vigorous price competition in this
market over the past several quarters.

Although many banks in the

BRM survey nudged auto rates up 1/4 to 1/2 percentage point during
April, reports of low-rate promotions continued to crop up in the
financial press.

III-19

INTEREST RATES ON 48-MONTH NEW-CAR LOANS AT BANKS
(Percent)

1994. week of:

1993
Nov.

Feb.

Mar.

Apr.

May

Federal Reserve

7.63

7.54

Bank Rate Monitor

7.55

7.65

7.77

7.97

Memo: 3-year Treasury

4.49

4.75

5.28

5.88

6.21

Series

Growth of consumer installment credit was strong in the first
quarter of 1994, though off a bit from the previous quarter's pace.
A sharp rebound in March saw installment credit increase at an
11 percent annual rate, resulting in a 9 percent rate of increase
for the quarter as a whole.

Revolving credit slowed in March but

still advanced at a 10-1/4 percent rate in the first quarter,
continuing a pattern evident since last summer.

Automobile credit

advanced strongly in March, reflecting vigorous sales of new cars.

III-20
GROWTH OF CONSUMER CREDIT
(Percent change, seasonally adjusted annual rate)

1993
Q4

Memo:
Outstandings,
March 1994
(Billions of

1994
Q1

Feb. r

Mar.p

1994

1992

1993

1.0

6.6

11.2

9.0

6.0

11.1

807.9

7.2

11.3

6.6

6.0

10.5

282.9

Revolving
Other

4.4
-.8

10.7
1.4

11.4
10.8

10.2
10.4

10.6
0.4

5.3
19.1

288.7
236.3

Noninstallment

3.0

-2.4

-4.9

-16.1

1.1

-43.1

48.8

Total

1.2

6.0

10.2

7.5

5.7

7.9

856.6

Installment
Auto

r
p

dollars)

Revised.
Preliminary.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)
1993
Aug.

Nov.

Feb.

1994
Mar.

At commercial banks
banks
New cars (48 mo.)
Personal (24 mo.)
Credit cards

1991
11.1
15.2
18.2

1992
9.3
14.0
17.8

1993
8.1
13.5
16.8

8.0
13.5
16.6

7.6
13.2
16.3

7.5
12.9
16.1

...
...

2
At auto finance cos.
New cars
Used cars

12.4
15.6

9.9
13.8

9.5
12.8

9.2
12.5

9.0
12.4

8.9
12.2

9.1
12.7

1. Average of "most common" rate charged for specified type and maturity during
the first week of the middle month of each quarter.
2. For monthly data. rate for all loans of each type made during the month
regardless of maturity.
Note: Annual data are averages of quarterly data for commercial bank rates and
of monthly data for auto finance company rates.

INTERNATIONAL DEVELOPMENTS

INTERNATIONAL DEVELOPMENTS
U.S. International Trade in Goods and Services.
In February, the U.S. deficit in international trade in goods
and services increased to $9.7 billion, seasonally adjusted. The
merchandise trade deficit widened in February, as exports declined
and imports increased.

Net service receipts also declined from the

level recorded in January.

For January-February combined, the

U.S. INTERNATIONAL TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
Year

1993
NIPA Real 1/
Net Exports of G&S

-76.5

BOP Nominal
Net Exports of G&S
Goods, net
Services, net

-76.8
-132.4
55.7

Quarters

9303
9304
94Qle
(annual rates)
-86.3

Months

Dec
Jan
Feb
(monthly rates)

-84.5 -104.2

-88.5
-80.3
-98.1
-143.9 -131.0 -151.4
55.4
50.7
53.3

-4.1
-8.7
4.6

-6.6
-11.4
4.7

-9.7
-13.9
4.2

1/ In billions of 1987 dollars, SAAR.
e/ BOP data are two months at an annual rate.
Source: U.S. Department of Commerce, Bureau of the Census and Bureau of
Economic Analysis.
deficit widened to over $98 billion (SAAR), substantially larger
than in any recent quarter.

A large decline in exports swamped a

smaller drop in imports.
Exports of goods and services in January-February dropped
nearly 4 percent from the unusually strong level recorded in the
fourth quarter of 1993, but still averaged slightly above the levels
recorded in the first three quarters of last year.

Exports fell in

virtually all major trade categories, with the largest declines
recorded in exports of machinery and industrial supplies.

One

exception was exports of semiconductors, which have risen steadily
since 1992.

Exports of services rose 1 percent.

IV-1

IV-2

U.S. International Trade in Goods & Services

Net Exports of Goods & Services

1993

1992

1991

Selected Exports
-----

NIPA Goods & Services

Bil$, SAAR

1991

1994

1992

Ratio Scale, Bit 87$, SAAR

Selected Imports

Bil 87$, SAAR

Machinery Ex Computers
- Automotive
Ind. Supp. (Nonag Ex Gold)

1994

1993

Bil 87$. SAAR

-M

Machinery Ex Computers

- -----

Automotive
Consumer Goods

*
> -"
Sllllllll

111IIIIII
1992

1993

1994

1993

1994

U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)
Quarters
Levels
SChange i/
9304
940dle/
Q4
ale/

Months
Levels
SChg 1
Jan
Feb
Feb

Exports of G&S

667.8

643.2

32.6

-24.6

651.5

634.8

-16.

Goods Exports
Agricultural
Gold
Computers
Other Goods

481.2
45.3
13.1
30.8
391.9

454.2
42.6
5.3
31.0
375.3

33.4
3.0
3.9
1.2
25.3

-27.0
-2.8
-7.8
0.2
-16.6

462.3
44.3
5.5
31.2
381.3

446.0
40.8
5.0
30.8
369.3

-16.4
-3.4
-0 5
-0.5
-11 9

Aircraft & Parts
Semiconductors
Other Capital Goods

34.5
20.6
107.4

33.4
23.6
100.0

7.5
0.8
5.4

-1.1
2.9
-7.4

36.4
24.5
101.1

30.5
22.6
99.0

-5.9
-1.8
-2.1

Automotive Products
to Canada
to Mexico
to Rest of World

55.6
29.5
8.4
17.7

53.5
27.9
7.5
18.1

7.2
3.6
2.2
1.5

-2.1
-1.6
-0.9
0.4

53.1
28.5
7.3
17.2

54.0
27.3
7.6
19.0

0.9
-1.2
0.3
1 8

Industrial Supplies
Consumer Goods
All Other

97.4
56.1
20.3

92.5
53.6
18.6

2.3
1.9
0.3

-4.9
-2.4
-1.7

94.5
54.2
17.6

90.6
53.1
19.6

-3.9
-1.1
2.0

186.6

189.0

-0.8

2.4

189.2

188.8

-0.4

Imports of G&S

748.0

741.3

24.4

-6.7

731.3

751.3

20.0

Goods Imports
Petroleum
Gold
Computers
Other Goods

612.1
48.0
10.0
40.5
513.6

605.6
40.9
6.9
41.4
516.4

20.5
-2.1
-1.6
1.5
22.7

-6.6
-7.1
-3.1
0.9
2.7

598.5
38.4
5.0
41.6
513.6

612.6
43.4
8.8
41.3
519.2

14.1
5.0
3.8
-0.3
5.6

Aircraft & Parts
Semiconductors
Other Capital Goods

12.5
22.0
88.7

9.8
23.8
93.8

2.0
2.4
4.6

-2.6
1.9
5.1

9.4
24.3
94.9

10.3
23.4
92.7

0.9
-1.0
-2.2

Automotive Goods
from Canada
from Mexico
from Rest of World

106.9
38.2
13.0
55.7

103.7
34.8
12.7
56.3

6.7
1.1
2.3
3.3

-3.1
-3.3
-0.4
0.6

101.6
35.6
12.0
54.0

105.9
34.0
13.3
58.6

4.3
-1.6
1.3
4.6

Industrial Supplies
Consumer Goods
Foods, Feeds. Bev.
All Other

96.0
137.3
29,0
21.4

99.0
136.2
29.0
20.9

4.2
0.1
0.7
2.0

3.1
-1.1
-0.0
-0.5

98.1
135.2
29.5
20.6

100.0
137.2
28.5
21.3

1.9
2.0
-0.9
0.7

Services Imports
Memo:
Oil Quantity (mb/d)

135.9

135.7

3.9

-0.2

132.7

138.7

5.9

9.24

8.86

0.23

-0.39

8.60

9.12

0.52

Services Exports

e/ Average of two months.
1/ Change from previous quarter or month.
U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census
Source:

Imports of goods

February.

and services

fell by

1 percent in January-

Nearly all of the decline in imports for these two months

was in oil imports, as both the price and quantity of imported oil
fell substantially in January.

Despite a large drawdown of domestic

stocks, the quantity of imported oil increased in February, as cold
weather in North America kept consumption at relatively high rates.
Preliminary Department of Energy statistics suggest that

were drawn down again in March.

inventories

Along with a small decline in

consumption, this implies that oil

imports fell in March.

Offsetting the decline in oil imports in January-February was a
continued steady increase in imports of machinery and non-oil
industrial supplies

(other than building materials).

Imports of

services were little changed from the previous quarter.
Prices of U.S. Imports and Exports
Prices of oil imports decreased 3.3 percent in March, following
a sharp increase in February.

The jump in February was the first

increase in 9 months, as frigid weather pushed up energy demands in
North America.

For the first quarter as a whole, prices of oil

imports declined 31.5 percent at an annual rate; this was the third
consecutive quarter in which import prices fell.

Most recently,

spot and futures oil prices have increased, with the near-term West
Texas Intermediate (WTI) contract currently trading near $17.60 per
barrel.

As a result, import prices should have increased in April

to around $13.50 per barrel.
Prices of U.S. non-oil imports rose slightly in March following
a small decline in February.

For the first quarter as a whole, non-

oil import prices rose by 1.2 percent at an annual rate, the fourth
consecutive quarter of moderate increases.

The largest increases in

the first quarter were for prices of non-oil industrial supplies and
automotive products.

IV-5
PRICES OF U.S. IMPORTS AND EXPORTS
(percent change from previous period)

9303

Quarters
9304
9401
(annual rates)

Months
Jan
Feb
Mar
(monthly rates)

----------------- BLS Prices----------------3.0
-0.7
-2.3
0.0
0.4
0.0
-35.2
-24.3
-31.5
5.4
-2.1
-3.3
1.5
2.0
1.2
0.3
-0.1
0.3

Merchandise Imports
Oil
Non-Oil
Foods, Feeds, Bev.
Ind Supp Ex Oil
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods
Memo:
Oil Imports ($/bbl)

8.7

5.9
-0.9
-6.1
2.3
6.9
0.9

0.7
5.2
-5.1

14.12

12.62

12.22

13.01

4.0

0.6
2.5
0.4

0.1
-1.4
0.3

1.1

1.1
-0.9
0.0
0.0

-0.4
0.1

0.1

-0.2

-2.4
-10.6
5.3
2.2
1.0
15.21

0.2
14.8

Merchandise Exports
Agricultural
Nonagricultural
Ind Supp Ex Ag
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods

-1.5

0.5
8.2
-0.6

-2.9

-4.0

-7.0
0.9
-0.7
-0.5

-6.9

-0.2
2.2
-0.1

19.8
2.3
7.8
-10.0

2.3

0.9
1.8

1.3
0.7

0.8

0.5

0.6
-0.6
0.2
0.3
0.0

-1.4
0.2
0.4
0.3

-0.6
-0.2
-0.5

-0.2
-0.2
0.2

0.9
0.9

-1.0
0.5
0.2
-0.1

0.2

0.6
0.2

0.2
0.3

-------- Prices in the NIPA Accounts--Fixed-Weight
Imports of Gds & Serv.
Nonpet Merch. Ex Comp
Exports of Gds & Serv.
Nonag Merch. Ex Comp.

-3.2

-1.8
1.2

0.5

4.0

0.0
-1.8

2.5

Oil Prices
-

1987

$ per bbl
Spot WTI
Import U.V.

1988

1989

1990

1991

1992

1993

1994

Prices of U.S. agricultural exports in March resumed their
recent upward trend, bringing the total increase for the first
quarter to nearly 20 percent at an annual rate.

Large increases

were recorded in the prices of a variety of agricultural products,
particularly wheat, soybeans, and feedstuffs, the planting seasons
for which were affected by severe weather in the midwest this winter
and spring.
Non-agricultural export prices rose in both February and
March.

For the entire first quarter, prices of non-agricultural

exports rose at an annual rate of 2.3 percent, the first increase
since the second quarter of 1993.

Increased prices were recorded in

all major trade categories except capital goods.
U.S.

International Financial Transactions
Banks reported sizable net capital inflows in February and

March, leading to a net inflow for the first quarter of $28 billion
(line 3 of the Summary of International Transactions Table). The
total for the quarter was divided about equally between domesticand foreign-chartered banks; both substituted foreign-source funds
for domestic deposits.

Monthly average data reported on the

International Banking Data Table indicate a continuation in April of
inflows to banks from their own foreign offices and IBFs (line 1).
Private foreign net purchases of U.S. securities were strong
in February and March, finishing at over $30 billion for the quarter
(line 4 of the Summary table).

Purchases of Treasury securities

rebounded in February and March (line 4a): over $6 billion of the
net in the first quarter was purchased by financial institutions
located in the Netherlands Antilles.

Purchases of corporate and

agency bonds were moderate throughout the quarter (line 4b); about
$6.8 billion of the $13.7 billion total represented net purchases of

IV-7

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)
I

Quarter

Month

Year

1 1992
1992

I
official capital
1. Changes in foreign official reserve
assets in U.S. (+ - increase)
a. G-10 countries
b OPEC countries
c. All other countries
2. Changes in U.S. official reserve
assets (+ - decrease)
Private capital
Banks
3. Change in net foreign positions of
banking offices in the U.S.
3
Securities
4. Foreign net purchases of
U.S. securities (+)
4
a. Treasury securities
b Corporate and other bonds
c Corporate stocks

1993

I
I

119941
Q4

Q
I 01
I

1994
Jan.

Jan.

Mar

Feb

Mar

38.3
4.8
4.9
28.6

70.0
29 9
-5.1
45.2

17.3
17.8
-1.7
1.2

18.5
9 1
-3.1
12.1

23.1
4.8
-. 9
19.2

10.3
10.7
-2.6
2.2

9.8
6.0
-3 1
6.9

-2.1

3.9

-.7

1.5

-.5

-.7

-.1

-.2

-. 2

23.1

9.0

28.2

-7.6

21.0

21.4
36
14.9

30.2
9.4
13.7
7.0

17.0
9.0

14.8

46.5
8.2
26.1
12.2

3.7

--5

35.6

17.3

68.1
37.4
34.3
-3.7

106.7
25.5
61.6
19 6

14.8

2.8

-4.2

4 .5
3.5

-. 8

1.3

1.3
3.3
5

-2

14.8

4.3

3.8

5. U.S. net purchases (-) of

foreign securities
a Bonds
b. Stocks
Other flows (quarterly data, s.a.)
6. U s direct investment (-) abroad
7. Foreign direct investment in U.S.
8. Other (+ = inflow)
W.

r
e
. rii-r-n
curreat
account

b l-l-.
1

i
_=u t...
Is-ai)

Statistical discrepancy (s.a.)

-47.9 -124.3
-15.6
-61.0
-63.3
-32.3

-25.4
-11.7
-13 7

-34.8
2.4
13.0

-11.9
10.5
2.2

-8.3 -21.3
2.7
9 6
13.3 -8.0

n a.
n.a.
n.a.

n.a.
n.a.
n.a.

n.a.
n.a.
n.a

-27.2

-28.1 -31.5

n.a.

n a.

3.3

n.a.

-50.2
31.5
0.9

-66.4 -109.2
-12.2

26.7

14 4

-42.0
-21.6
-20.4

-.1

-31.6
-10.7
-20.9

-28.8
-11,0
-17 8

-15.3
-9.5
-5.9

-11.0
-4

-6 2

1 The sum of official capital, private capital, the current account balance, and the statistical
discrepancy is zero. Details may not sum to totals becuse of rounding.
2. Changes in dollar-denominated positions of all depository institutions and bank holding companies
plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing and
lending under repurchase agreements).
Includes changes in custody liabilities other than U.S. Treasury
bills.
3. Includes commissions on securities transactions and therefore does not match exactly the data on
U.S. international transactions published by the Department of Commerce.
4. Includes Treasury bills.
5. Includes U.S. government agency bonds.
6- Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere
plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1
through 5 since publication of the quarterly data in the Surve of Current Business.
n.a. Not available.
* Less than $50 million.

IV- 8
INTERNATIONAL BANKING DATA 1/
(Billions of dollars)

1. Net claims of U.S.
banking offices
(excluding IBFs)
on own foreign
offices and IBFS
a. U.S.-chartered
banks
b. Foreignchartered
banks

1991

1992

Dec.

Mar.

June

Sept.

Dec.

Mar.

April

-35.8

-71.6

-77.1

-80.4

-114.6

-122.1

-157.5

-168.5

8.9

16.8

12.5

-15.1

-20.2

-86.0

-97.2

-127.1

-126.3

-142.4

-148.3

23.5

23.1

21.4

21.8

21.4

22.1

-48.3

-88.6

1994

1993

4.2

2. Credit extended to
U.S. nonbank

residents
a. By foreign
branches of
U.S. banks
b. By Caribbean
offices of
foreign-chartered
banks
3. Eurodollar holdings
of U.S. nonbank
residents
a. At U.S.-based
banks in the
Caribbean and
at all banks in
Canada and the
United Kingdom
b. At the Caribbean
offices of
foreign-chartered
banks

23.9

24,8

n.a.

n.d.

106.5

101.1

95.9

90.9

n.a.

90.0

89.5

86.1

77.0

77.8

75.1

68.1

n.s.

91.6

80.2

82.4

79.2

n.a.

71.8

81.1

n.a.

102.9

n.a.

MEMO: Data as recorded in the U.S. international transactions accounts
72.7
70.5
66.2
4. Credit extended to
49.8
52,6
U.S. nonbank
residents
123.3
120.7
113.3
5. Eurodeposits of U.S.
136.6
128.9
nonbank residents

1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in timing from the
banking data incorporated in the U.S. international transactions accounts.
Lines la, 1b, and 2a are averages of daily data reported on the FR2950 and FR2951.
Lines 2b and 3b are end-of-period data reported quarterly on the FFIEC 002s.
Line 3a is an average of daily data for the overnight component (FR2050) and an average of Wednesday
data for the term component (FR2077) supplemented by theFR2502 and end of quarter data supplied by the
Line 3a includes holdings by money market mutual funds.
Bank of Canada and the Bank of England.
Line 4 is end-of-period data from the Treasury International Capital (TIC) Reports. Much of the increase
since December 1992 is the result of improved reporting ($31 billion in 1993 and $8.6 billion in 1994 Q1).
Line 5 is end-of-period data estimated by BEA on the basis of the FR2502 and information
provided by foreign central banks, supplemented by TIC reports of banks' custody claims. It includes
foreign-currency denominated deposits, but does not currently include estimates of deposits at foreignchartered banks in the Caribbean.

IV-9
U.S. agency bonds.

In March, foreigners sold U.S. stocks net.

butnet purchases for the quarter remained substantial
At close to $29

(line 4c)

billion, net purchases of foreign securities

by U.S. residents continued strong in the first quarter (line 5)
Of the $17.8 billion in net stock purchases

(line 5b),

almost $10

billion was from Japanese residents.
After January, total foreign official reserve assets in the
United States changed only marginally, increasing approximately $10
billion for the quarter (line 1).

Mexican holdings in the

UnitedStates fell sharply in March, after substantial increases
earlier in the quarter.
Foreign Exchange Markets
The weighted average foreign exchange value of the dollar
declined nearly 1 percent on balance since the March 22 FOMC
meeting.

The dollar depreciated 1-1/2 percent against the yen.

Concern that the political disarray in Japan would so preoccupy the
Japanese government as to make it impossible for the authorities to
negotiate more open trading relationships or to implement a more
stimulative fiscal policy prompted market speculation that U.S.
authorities would seek a stronger yen to help redress the bilateral
trade imbalance.

These perceptions by market participants seemed to

persist even after Treasury Secretary Bentsen indicated that the
United States was not seeking to devalue the dollar against the yen.
Against the mark, the dollar declined about 1/2 percent on balance,
despite the shift toward a tighter monetary policy stance in the
United States and a modest pickup in the pace of easing in Germany.
The two 1/4-point increases in the federal funds rate and a sequence
of reductions in the Bundesbank's RP rate totaling more than 50
basis points pushed three-month interbank rates up 80 basis points

IV-10
WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR
SDaily

March 1973 - 100

FOMC
Mar.

February

March

April

SELECTED DOLLAR EXCHANGE RATES
Daily

February 1 = 100

FOMC

German Mark

February

March

May

April

IV-11

in the United States and down 70 basis points in Germany.

The

three-month CD rate in Japan edged 10 basis points lower over the
period.

Long-term interest rates also moved in favor of dollar

assets--with the U.S.-German differential up about 60 basis points
and the U.S.-Japanese differential up 120 basis points.
The seemingly unwarranted decline in the dollar during the
intermeeting period prompted U.S. intervention operations on April
29 and May 4.

Operations on both days were accompanied by

statements from Secretary Bentsen acknowledging the intervention and
explaining the rationale.

On April 29, the Desk purchased $500

million against marks and $200 million against yen.
Japan also purchased dollars against yen on that day.

The Bank of
Secretary

Bentsen explained that the operations were to counter disorderly
market conditions, citing the previously articulated Administration
policy that recognizes that excessive volatility is
counterproductive to growth and announcing that the U.S. monetary
authorities stand ready to cooperate in foreign exchange markets.
On May 4, the Desk purchased $750 million against marks and $500
million against yen.

In his statement, the Secretary stated that

recent movements in exchange markets had gone beyond what is
justified by economic fundamentals and announced that the U.S.
operations were conducted in concert with operations by other major
countries.

In addition to the intervention on those two days, the Desk
purchased $213 million against a variety of currencies during the
Greenbook period, liquidating holdings of all foreign currencies
other than marks and yen in the System and Treasury accounts.

-12

In addition, news of the

creation of the North American Financial Group and the enlargement
of the U.S.-Mexican and Canadian-Mexican foreign exchange swap
facilities also appear to have contributed to the peso's rebound.
North of the border, the Canadian dollar declined another 3/4
percent against the U.S. dollar.

Canadian authorities moved to

offset the stimulative effects of the depreciation by pushing up
short-term interest rates in Canada even more than comparable U.S.
rates rose.

The differential between three-month interest rates in

Canada and the United States increased about 100 basis points during
the intermeeting period.

The long-term interest rate differential

was little changed.
On April 14 and again on May 11. the Bundesbank announced
reductions in its discount and Lombard rates.

The cumulative

decline in both rates was 3/4 percentage point, bringing the

IV-13

discount rate to 4-1/2 percent and the Lombard rate to 6 percent
Similar announcements of reductions in official interest rates in
many other major European countries followed the Bundesbank's moves.
In addition, short-term market interest
declined
Germany.

rates in Europe generally

in the wake of the easing of monetary conditions in
In particular, three-month interest rates in France and

Belgium declined 50 basis points or more during the period.

Long-

term interest rates in Europe were generally higher--with the 10year bond yield in the United Kingdom up more than 90 basis points
during the period and the comparable bond yield in France up nearly
60 basis points.

Political concerns in the United Kingdom,

especially after the local election results in May in which the
Conservative Party made a particularly poor showing, are in part
responsible for the rise in the yield there.
Developments in Foreign Industrial Countries
Monthly indicators point to some recovery in economic activity
in the first quarter in all the major foreign industrial countries.
In Japan, signs of recovery have been tentative, with the rebound in
industrial production from its low fourth-quarter level partially
overshadowed by declines in other indicators.

In continental

Europe, signs of recovery have been more apparent in forward-looking
indicators such as orders and business and consumer confidence.
Indicators of first quarter output, especially in Germany, have been
weaker.

In Canada and the United Kingdom, where recovery is more

firmly established, indicators continue to be positive.
Inflationary pressures remain subdued in the major foreign
industrial countries as wage and price inflation has continued to
slow in response to persistent economic slack.

In Japan, price

measures also have been depressed by yen appreciation.

New prime ministers were selected in Japan and Italy.

The new

Japanese prime minister. Tsutomu Hata, replaced Morihiro Hosokawa
who resigned in the wake of charges that he accepted improper loans.
In

Italy, the new prime-minister is Silvio Berlusconi head

the three parties that make up the Freedom Alliance.

The

of one

Freedom

Alliance won a major victory in elections on March 27 displacing the
Christian Democratic

party which had ruled Italy since World War

Individual Country Notes.
point to

In Japan, data

some recovery in economic activity

real GDP in the fourth-quarter.
Greenbook show that real GDP
fourth quarter of 1993
contribution from net

for the first quarter

following a decline in

GDP data released since last

(s.a.a.r.) decreased 2.2 percent in the

as the result of a large negative
Domestic demand remained nearly

exports.

unchanged, as increases in household and government expenditures
offset a sharp decline in private non-residential investment.
In the first quarter,

industrial production

(s.a.)

rose 1.7

percent from its low point in the fourth quarter, while capacity
utilization recovered from an historical low in the fourth quarter.
Other indicators were mixed, with new car registrations and housing
starts up and new machine orders down.
in the first

quarter edged up to

Consumer prices

(n.s.a.)

percent from a year ago.
(n.s.a.) in March to
largely reflects
In the first
$125

The unemployment rate

(s.a.)

2.8 percent.

in the Tokyo area in April were up

0.8

The decline in the wholesale price index

2.9 percent below its year-earlier level

recent appreciation of the yen.
quarter, the trade surplus

(s.a.a.r.)

registered

billion compared with $120 billion in 1993 as a whole, and the

bilateral surplus with the United States
billion compared with $51

(a.r.)

billion in 1993.

registered $50

REAL GDP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES

(Percentage change from previous period,seasonally adjusted 1/)
1993
----------------.--1992

1994
------

1993
-------------

1994
--------------------

1993
Q2

NOV

DEC

JAN

FEB

MAR

Latest
three
months
from
year
ago 2/

JAPAN
GDP
IP

-0.3
-7.7

0.0
-4.8

-0.5
-1.5.

0.3
0.1

-0.6
-3.7

1.7

0.7

-0.3

0.7

1.0

-0.5

*
2.2

*
-1.9

*
1.0

*
-0.1

*
4.0

0.0
-3.5

GERMANY
GDP
W. GERMANY
GDP
IP

0.0

-0.8

1.0
0.7

-0.7
-0.4

NA
0.5

-2.7

0.7
-0.0

-4.6

-1.3

1.3

0.6
-2.5

-0.3
-1.3

0.2
-0.6

0.3
0.9

0.1
-0.6

NA
NA

0.9

0.2
0.9

2.4
3.1

0.4
0.8

0.8
1.1

0.7
1.2

0.3
-0.6

0.4
-1.1

-0.4
0.8

0.8
-0.2

0.8
1.9

3.0
4.7

0.9
0.8

0.5
0.8

0.9
1.1

3.9
3.2

3.1
4.2

0.5
0.6

0.7
0.7

1.7
1.6

-0.3

-0.8
-0.3

-1.5

1.3

-0.2

0.6

-1.0

-0.2

0.6

-0.8

FRANCE

GDP
IP

-0.3
-0.0

UNITED KINGDOM
GDP

0.7
0.7

0.2

-0.6

0.8

0.6

-0.6

2.6
3.8

ITALY

GDP
IP

-0.4
-3.1

-0.7

1.0

-05

0.5

-0.6

0.6

-0.5

0.5

-0.6

0.3
-0.6

CANADA
GDP
IP

3.0
3.8

UNITED STATES
GDP

* Data not available on a monthly or quarterly basis.
1/ Yearly data are Q4 to Q4 percent change.
2/ For quarterly data, latest quarter from a year ago.

0.6
1.9

0.8

1.0

0.4

0.6

3.6

0.5

4.9

CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period 1/)
1993

1992
1992

1994

1993
Q4

1994
JAN

FEB
FEB

MAR
MAR

APR
APR

Latest
month
from
year
ago 2/

JAPAN
CPI
WPI

0.9
-1.5

1.2
-3.3

0.0
-0.9

0.0
-0.5

1.1
-1.4

0.5
-1.0

-0.4
-0.5

0.2
-0.3

0.1
0.1

0.1
-0.5

0.4
-0.2

0.0
NA

3.7
-1.9

3.7
-0.3

0.9
-0.8

1.8
0.7

1.0
0.1

0.4
-0.6

0.5
-0.5

1.4
NA

0.9
0.6

0.3
0.5

0.2
NA

1.8
-2.1

2.1
-1.6

0.5
-2.3

0.8
0.0

0.6
-0.8

0.2
-0.3

0.5
-0.5

0.4
NA

0.2

0.3

0.2

0.3

1.6

3.8

0.4
0.4

-0.7
1.3

1.6
1.7

0.3
0.4

0.3
0.3

0.1
0.8

-0.4
0.3

0.6
0.2

0.3
0.1

4.1
4.5

1.3
2.8

1.0
1.6

1.1
1.3

0.9
0.5

1.1
1.0

1.0
NA

0.6
0.5

0.4
0.4

0.2
NA

1.8
2.9

0.4
1.2

0.7
1.2

0.2
-0.0

0.4
0.5

0.5
1.2

-0.5
1.3

0.0
0.0

-0.8
1.1

-0.2
0.4

NA
NA

0.2
3.6

2.7
0.2

0.8
0.3

0.8
0.6

0.5
-0.8

0.7
-0.2

0.5
0.6

0.0
0.2

0.3
0.5

0.3
0.2

NA
NA

2.6
0.2

WEST GERMANY
CPI
WPI
FRANCE
CPI
WPI

1.7
-1.6

UNITED KINGDOM
CPI
WPI

NA
NA

2.3
2.7

ITALY

CPI
WPI

0.3
NA

CANADA
CPI

WPI
UNITED STATES
CPI
WPI

(SA)
(SA)

Data not available on a monthly or quarterly basis.
*
1/ Yearly data are Q4 to Q4 percent change.
2/ For quarterly data, latest quarter from year ago.

1/
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)

1992

1993

1994

1993

1994

1993
MAR

DEC

JAN

FEB

11.1
10.4

10.9
11.2

10.5
11.0

9.9
9.9

NA
NA

5.0
-1.8

3.4

3.3

-1.5

-2.8

NA
NA

29.5

30.5
30.6

31.3

JAPAN
TRADE
CURRENT ACCOUNT

107.3
117.2

119.6

28.6
31.7

29.7

127.1

32.5

29.9
31.6

21.4
-22.2

36.4
-21.3

5.0
-3.5

5.9
-4.2

-3.8

5.6
3.7

16.9

1.3
2.9

2.5
0.4

3.9
1.7

32.3

32.2

GERMANY
TRADE (NSA)
CURRENT ACCOUNT

(NSA)

7.9

8.1

-9.9

14.4
-3.4

FRANCE
TRADE
CURRENT ACCOUNT

5.0
4.0

5.5
NA

NA
NA

2.8

0.5

0.9

-4.6
-2.7

-5.7
-3.8

NA
NA

-2.3

NA
NA

1.3
0.4

NA
-0.8

NA
NA

0.4

0.8

0.6

-4.6

-32.8

NA
NA

-8,8

UNITED KINGDOM
-23.5
-17.5

TRADE
CURRENT ACCOUNT

-20.2
-16.0

-6.6

-4.9

-5.0

-4.0

-4.6

-4.9

-1.4
*

ITALY
TRADE
CURRENT ACCOUNT

(NSA)

-10.5
-28.0

20.8
7.0

-1.5

4.5
-3.1

4.9

5.2

6.2

-5.6

2.0

3.6

4.5

7.4
-23.0

9.1
-19.6

2.9
-4.6

2.5
-5.2

2.3
-5.1

2.3
-4.7

CANADA
TRADE
CURRENT ACCOUNT

2.1

UNITED STATES
TRADE
CURRENT ACCOUNT

-96.1
-66.4

-132
-109

-26.0
-23.7

-29.3
-22.4

-34.4

-27.2

-36.0
-28.1

-31.5

* Data not available on a monthly or quarterly basis.
1/ The current account includes goods, services, and private and official transfers.

-11.3
*

-13.9
*

IV-18
JAPANESE ECONOMIC INDICATORS
(percent change from previous period except where noted, s.a.)

Machinery Orders
New Car Registrations
Job Offers Ratio*
Index Leading Ind.*
Business Sentiment *"
*
**

1993
1
2.3
-5.9
1.6
-3.3

1994

1993
li.
11.2
-0.6

-8.5

0.71
0.66
0.66
42.9
35.8
--51
-56
-56

1994

0.65
38.5

faP.

ffb

4.8
6.4

-7.3
-4.0

Mar
-11.9

0.67
0.65
63.6
45.0

0.66

Level of indicator.
Percent of manufacturing firms having a favorable view of
business conditions minus those with an unfavorable outlook.

On April 8, Prime Minister Morihiro Hosokawa

resigned, taking

responsibility for political turmoil associated with charges that
received improper

personal loans.

On April 25,

Deputy Premier and

Foreign Minister Tsutomu Hata became prime minister.

Immediately

thereafter, the Socialists pulled out of the coalition government in
response to the formation of a new parliamentary bloc by
conservatives in the coalition.

Hata, who previously has

served

both as farm minister and finance minister, is expected to continue
the policies

of the Hosokawa Administration.

However, he presides

over a weakened minority government that will face serious
difficulties implementing economic stimulus and reform measures.
In western Germany, monthly indicators for the first quarter
were mixed with more forward-looking indicators pointing towards
recovery but output measures remaining weak.
(s.a.)

in the

Industrial production

first quarter dropped 0.5 percent; however, commentary

accompanying the March data release indicated that it would be
revised upward.
percent.

In April, unemployment

(s.a.)

edged up to

Signs of recovery were apparent in retail sales

9.4
(s.a.),

which rose 1.5 percent in the first quarter from their fourthquarter level, and stronger manufacturing orders
abroad).

Survey data show that business

(largely from

confidence has improved and

IV-19

that inventories

have returned to levels considered close to normal

In eastern Germany, industrial production (n.s.a.) in February was
16.4 percent above its year-earlier level, due to strong increases
in the manufacturing and construction sectors.

WESTERN GERMAN ECONOMIC INDICATORS
(percent change from previous period except where noted, s.a.)

Manufacturing Orders
Capacity Utilization
Unemployment Rate (%)
Production Plans* (%)

1993
Q3
1.9
-0.6
8.5

-1.1
-0.1
9.0

1994
Q1
2.3
1.7
9.2

-21.7 -15.0

-8.0

Q2
0.3
-1.0
8.0

1994

Feb.

Mar.

3.3

2.9

Apr.

9.2

9.3

4.0

9.4

*Percent of mining and manufacturing firms that expect to increase
production minus those who expect to decrease it.
Consumer prices in western Germany (n.s.a.) in April rose 3.1
percent from their year-earlier level, down slightly from the
previous month.

The slowing of consumer price inflation is partly

due to relatively flat input prices.

In March, producer prices

(n.s.a.) increased 0.3 percent from their year-earlier level, while
import prices (n.s.a.) were 0.6 percent below their year-earlier
level.

Wage inflation (n.s.a.) slowed to 5 percent (year-over-year)

in January, compared with 9 percent one year ago.
The current account deficit (n.s.a.) widened in February to
$2.8 billion; exports have been about flat over the past year, while
imports have fallen more than 11 percent since February 1993.
German M3 increased 15.4 percent (s.a.a.r.) through March
relative to the fourth quarter of last year.

The magnitude of this

increase means that it is unlikely that M3 will drop back into its
target range of 4 to 6 percent before late in the year.

The

Bundesbank identified several special economic and statistical
factors that have inflated M3 growth: a sizable reflow of investment
funds from Luxembourg to Germany due to changes in the tax treatment

IV-20
of interest income; uncertainty about the outlook for bond and stock
markets;

a change in the tax treatment of mortgages on older homes

that has generated an increased demand for mortgages: and the
Bundesbank's method of calculating M3 growth that tends to
exaggerate the effect of a large change early in the calendar year.
These special factors explain why rapid M3 growth has not prevented
the Bundesbank from lowering official rates.

On May 11.

it cut the

discount and Lombard rates by 50 basis points, its second cut in
official rates in a month, citing improved prospects for lower
inflation as the reason.
In France, indicators for the first quarter point to continued
recovery in economic activity.

Industrial production (s.a.) rose

0.6 in February after registering a weather-related decline of 0.2
percent in January.

Consumption of manufactured products (s.a.),

roughly one-third of total consumption, rose 0.6 percent in the
first quarter.

These increases in production and consumption were

partly due to a subsidy of $1.000 equivalent for the purchase of new
cars that replace those 10 years old or older.

The unemployment

rate (s.a.) in March remained stable at 12.2 percent for the fourth
consecutive month.

Survey data for April show continued improvement

in business and consumer confidence and that investors expect to
increase investment this year.

Data for March show that domestic

and foreign orders increased and that inventories returned to normal
levels.
The consumer price index (n.s.a.) in April was 1.7 percent
above its year-earlier level, about unchanged from the increase in
the first-quarter average.
keep inflation low.

A slowing of wage inflation has helped

The January wage survey showed that hourly

wages (n.s.a.) in the fourth quarter were 2.4 percent above their
year-earlier level, down from 2.8 percent in the third quarter.

IV-21

The trade surplus (s.a.)
from $0.5

increased in February to $0.9 billion

billion in January due largely to lower energy imports.

In the United Kingdom, economic recovery appears to be
continuing at a modest pace.

Preliminary real GDP data

for the first quarter show an increase of 2.8 percent.

(s.a.a.r.)
However,

recently released March industrial production (s.a.) data that show
a decline of 0.6 percent suggest that this GDP estimate
revised down,

The average unemployment rate

quarter edged down to 9.8 percent.

may be

(s.a.) in the first

Indicators of business and

consumer confidence worsened in April after improving in the first
quarter.
In March, retail prices (n.s.a.) were 2.3 percent above yearearlier levels.
2.4 percent.

Excluding mortgage interest rates, the increase was

Producers' input prices

(n.s.a.) in March were below

their year-earlier level but remained 7.6 percent above their level
just prior to sterling's devaluation in August 1992.

Annual

earnings inflation (s.a.) slowed in February to 3.5 percent, up from
the low of 3 percent recorded late last year, but significantly
below the 5.8 percent increase registered in August 1992.
In January, the trade deficit
from $2.3 billion in December.

(s.a.) was $1.4 billion, down

Exports rose 4.7 percent on the

strength of exports to the EC, while imports fell 1.6 percent.
On April 13, Chancellor Clarke published the minutes of the
monthly monetary meetings between the Chancellor and the Governor of
the Bank of England for the first three months of this year.

Clarke

stated that in the future minutes would be published with a six-week
lag.

Previously, minutes were released with a 30-year lag.

This

policy change occurred in response to the House of Commons' Treasury
and Civil Service Committee report on the role of the Bank of
England that recommended a more timely publication of these minutes.

IV-22
On May 5, the Conservative Party suffered its worst defeat this
century in local council elections.

It received only 27 percent of

the vote compared with 41 percent received by the Labor Party.
In Italy,available indicators for the first quarter suggest
that the recovery apparent in recently released fourth quarter GDP
data continued.

Real GDP (s.a.a.r.) rose 3.2 percent.

In the first

quarter, consumer confidence orders for machine tools rose sharply.
Unemployment remained constant at 11.3 percent.
Inflationary pressures remain subdued.

Consumer prices in

April were 4.1 percent above year-earlier levels, down slightly from
4.2 percent in March.
In the general elections held in late March, the Freedom
Alliance, a coalition of three right-wing parties, claimed an
absolute majority in the 630-seat Chamber of Deputies, the lower
house of Parliament.

In the Senate, the Freedom Alliance fell 3

seats short of an absolute majority.

On April 28, President

Scalfaro asked Silvio Berlusconi, the leader of Forza Italia (one of
the parties in the Freedom Alliance) to form the next government.
On May 10, Lamberto Dini, Director General of the Bank of Italy, was
chosen to be Finance Minister.

This appointment suggests that the

new government is likely to maintain the budget deficit reduction
policies of the outgoing Ciampi government.

Italy's large budget

deficit will make it difficult for the Freedom Alliance to fulfill
its promise to reduce taxes.
In Canada, indicators suggest that growth continued at a
moderate pace in the first quarter.

In January and February,

industrial production (s.a.) was virtually unchanged on balance
while the two-month average of GDP at factor cost (s.a.) was 0.6
percent above its fourth-quarter average.

Retail sales (s.a.)

IV-23
through February
quarter average.

increased 2.1

relative to their fourth-

Indexes of business and consumer confidence surged

in the first quarter.
less encouraging:

percent

Data from the manufacturing survey has

shipments

in January and February.

been

and new orders both declined on average

The unemployment rate

percent in April from 10.6 percent in March.

(s.a.)

rose to

This increase was

mostly due to a sharp increase in labor force participation.

Total

employment was little changed in April after rising in the first
quarter to its highest level since
A large cut

1990.

in cigarette taxes in February was

a 0.8 percent decline in the consumer price index

responsible for

(n.s.a.) in

February, and is expected to keep measured inflation below 1 percent
for

1994.

Excluding cigarette prices,

the index for the first

quarter was 1.4 percent above its year-earlier level.

Economic Situation in Other Countries
The assassination of the government party's presidential
candidate on March 23 led to increased political uncertainty in
Mexico and severely disrupted financial markets.

The peso fell to

the lower limit of its intervention band,

The Bank also increased its offerings of
dollar-denominated securities, and lowered its offerings of pesodenominated securities, at its weekly auctions.
was a modest rebound in the peso.

By May 10, there

The Mexico City stock market

index, which had fallen sharply in the aftermath of the
assassination, has also staged a partial recovery.
In Brazil, economic activity appears to have moderated in the
first quarter of 1994, while inflation continues to be very high.
The first stage of Brazil's commercial bank debt restructuring was

IV-24
executed in April.

Cuts in payroll taxes and capital goods duties

buoyed industrial production in Argentina.
The prospects for monetary and fiscal reform in Russia appear
to have improved somewhat with the release of the second tranche of
IMF financing.

Economic growth remained strong in Korea and Taiwan.

but China's very rapid growth slowed slightly.
Individual country notes.

In Mexico a financial crisis erupted

following the assassination on March 23 of the government party
presidential candidate.

For four weeks thereafter,

the peso

hugged the lower limit of its fluctuation band against the dollar.

Interest rates on
peso-denominated securities, which ranged between 9.3 percent for
28-day bills and 11.3 percent for 364-day bills on March 23, surged
at three of the four ensuing weekly auctions.

At the April 20

auction, the yield curve had become inverted, and rates ranged
between 18 percent for 28-day bills and 16.8 percent for 364-day
bills.

The Mexico City stock market index was about 23 percent

lower on April 20 than on March 23.
On April 22, the Bank of Mexico announced that, at the April 27
auction, it would offer nearly seven times the amount of dollardenominated securities offered in previous auctions and less than
half the amount of peso-denominated securities offered in recent
auctions.

The markets greeted these changes favorably.

The Mexican

markets were further buoyed by news that talks with the Chiapas
rebels, suspended in March, would resume soon and by the joint
statement of April 26 by the Finance Ministers and Central Bank
Governors of Canada, Mexico, and the United States announcing the
establishment of a permanent trilateral foreign exchange swap

IV-25

facility in the framework of the newly created North American
Financial Group.

In late April, the peso appreciated by 3 percent

against the dollar, the Mexico City stock market
percent, and interest

index rose

rates on peso-denominated securities eased.

However, these movements were partially reversed

in early May,

leading the Bank of Mexico to increase further its offer of dollardenominated securities at the May 10 auction and to reduce its offer
of peso-denominated securities even more.

At this auction the Bank

sold $1 billion of dollar-denominated securities at rates ranging
from 8.17

percent for

91-day paper to 8.42

paper, compared with a range of 6.6 to 6.7
Bank also

sold 500 million pesos

percent for 364-day
percent on April 20.

The

($150 million) of peso-denominated

bills in only one maturity (28 days) at a rate of 16 percent,

198

basis points lower than on April

1.7

20.

On May 10,

the peso was

percent above the lower limit of its fluctuation band and the Mexico
City stock market index was 13 percent above its April 20 low.
In Brazil, the trade surplus for the first quarter of 1994 was
$2.7

billion, compared with a trade surplus of $4.1 billion in the

first quarter of

1993.

grew by 18 percent.

Exports declined by 4 percent, while imports

The fall in the trade surplus is attributed to

continued real appreciation of the cruzeiro and to
internal demand.

continued strong

However, anecdotal evidence indicates that

economic growth has slowed slightly in the first quarter of the year
from the 5 percent growth rate recorded in

1993.

Monthly inflation continues to be in the 40-45 percent range in
recent months.

The government has been maintaining that it will

enact a currency reform that would include new rules limiting the
central bank's ability to finance the deficits of the treasury.
Nevertheless, Congress's failure in early May to muster the twothirds majority needed to open the economy to foreign capital

IV-26

indicates that the political will needed to enact economic

reforms

is still lacking.
In mid-April, Brazil and creditor banks executed the first
stage of Brazil's $35 billion commercial bank debt restructuring
agreement.

Because Brazil did not qualify for an IMF program, it

purchased the 30-year zero coupon U.S. Treasury bonds needed for
collateral from its own reserves.

According to official estimates,

official reserves were $35.6 billion at end-February.
In Argentina, cuts in payroll taxes and capital goods duties
have stimulated higher investment and productivity in manufacturing.
Industrial production in 1993 was about 6 percent higher than a year
earlier, and industrial exports during the first two months of 1994
were up 28 percent compared with the year-earlier period.

However,

total merchandise exports grew at a more moderate rate of 4.4
percent during January and February from year-earlier periods,
mainly due to weak primary commodity prices and a poor grain
harvest.

Meanwhile, strong demand for capital goods and automobile

parts generated a 55 percent increase in merchandise imports,
resulting in a trade deficit of nearly $900 million during the first
two months of 1994. compared with a small trade surplus during the
year-earlier period.

The consumer price index rose by 4 percent

during the twelve months ending in April.
Economic activity in China appears to have slowed slightly in
the first quarter of 1994 amid tight restrictions on new credit.
Real GDP was 12.7 percent higher than the same period a year ago,
after growth of 13.4 percent in 1993.

Industrial production was

18.6 percent higher, compared with 24 percent growth in 1993.

Much

of the apparent slowdown was in state-enterprise output, which grew
only 2.2 percent in the first quarter of 1994.

Half of the state

enterprises reported losses in the first quarter.

Inflation remains

IV-27
high.

Retail prices were 20 percent higher than in the first

quarter of last year; urban prices in March were 25 percent higher
than a year earlier.
billion.

China's first-quarter trade deficit was $1.3

Exports rose 19 percent, while imports rose 18 percent.

In early April, the authorities established a national

interbank foreign exchange market.

The new regulations appear,

however, to segment the foreign exchange market into separate
markets for domestic enterprises and foreign-funded enterprises.
Foreign-funded enterprises are excluded from the new interbank
market, and must buy foreign exchange in the existing swap centers.
U.S. bankers in China have argued that the purpose of the new system
is to force foreign-invested enterprises to balance their foreign
exchange receipts and expenditures.

Both the IMF and the U.S.

Treasury have expressed concern that the new system lacks
transparency.
In mid-April, the State Development Bank, the first of three
planned policy-lending banks, began operations.

In early May. China

announced the establishment of a second policy-lending bank. the
Export and Import Bank of China.

The third bank, the Agricultural

Development Bank, has not yet been established. The three banks are
to take over the quasi-fiscal policy lending currently done by the
banking system.
Taiwan recorded a trade surplus of $590 million in the first
four months

of 1994, as exports grew strongly in April.

Overall,

exports were 2.3 percent higher than in the first four months of
last year, while imports were 7.2 percent higher. Industrial
production in March was 6.3 percent higher than a year earlier, and
consumer prices in April were 3.2 percent higher.

In early March,

Taiwan raised the ceiling on foreign investment by foreign
institutions in the stock market from $5 billion to $7.5 billion.

IV-28
This has led to a flood of applications by foreign institutions;
approved and pending applications by foreign institutions already
exceed the new limit.

Effective April 1, Taiwan abolished reserve

requirements for foreign currency deposits at commercial banks, in
an effort to reduce pressure for appreciation of the Taiwanese
dollar.
In Korea economic activity remains very robust.

The industrial

production index for manufacturing increased by 10.2 percent in
1994-Q1 from a year earlier, with particularly rapid growth in

electronics and automobile production.

However, concern about

inflation has led to a somewhat less accommodating monetary policy
since mid-February.

The consumer price index rose by 5.9 percent in

April from a year earlier.

A strong increase in investment demand

has induced a substantial rise in imports, especially of capital
goods.

Merchandise imports rose by 13.6 percent in 1994-Ql from a

year earlier, while exports grew only 6.8 percent.

This contributed

to a widening of the first-quarter current account deficit to $2.5
billion from $700 million a year earlier.
In Russia, the prospects for monetary and fiscal reform appear
to have improved somewhat.

On April 20, the IMF Executive Board

approved the release of the second $1.5

billion tranche of Russia's

Systemic Transformation Facility (STF).

In the supporting

agreement, the Russian government committed to reduce monthly
inflation to 7 percent by the end of the year, and limit the 1994
budget deficit to about 7 percent of GDP.
Industrial production during the first quarter of 1994 was 25
percent lower than in the first quarter of 1993, and real GDP
reportedly fell 17 percent below its year-earlier level.

The

increased cost of fuel and other raw materials, as well as mounting
inter-enterprise arrears, has restricted economic activity and led

IV-29
to plant closings.

Monthly inflation during February, March, and

April averaged only 9.4 percent, compared with over 20 percent a
month in 1993.
During the last two months, the ruble has depreciated against
the dollar at a steady rate of about 1 percent per week.
the ruble-dollar exchange stood at 1865.

On May 11,

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 17, 1994 : Greenbook Part 2

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