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Confidential (FR) Class III FOMC

May 14, 1986

RECENT DEVELOPMENTS

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

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Industrial production...........................................
Employment and unemployment .................................
Autos ........
.......
....... .....................................

1
2
4

Personal consumption and income................................

Business fixed investment.......................................
Housing.......................... ..............................
Business inventories............................................
Federal government ..........................................
.
State and local sector..........................................
Prices .............
................................ ..............
Wages and labor costs............................................

9
13
15
15
19
21
23

Tables
......................
Changes in employment...................
Selected unemployment rates.....................................

3
3

Auto sales, production, and inventories.........................
Personal income and expenditures..............................

5
7

Retail sales....................................................

Business capital spending indicators............................
Changes in manufacturing and trade inventories..................

11
12

Inventories relative to sales...................................
Private housing activity........................................
Real federal purchases........................................
Senate-passed budget resolution.................................

12
14
17
18

Recent changes in consumer prices..............................
Recent changes in producer prices...............................
Selected measures of labor costs
in the nonfarm business sector.............................

22
22
24

Charts
The market for domestic automobiles
Nonresidential construction and new commitments.................

DOMESTIC FINANCIAL DEVELOPMENTS

5
11

III

Monetary aggregates and bank credit.............................

Business finance................................................

Treasury and federally sponsored agency finance.................

Tax-exempt markets..............................................

Residential mortgage markets....................................

Consumer installment credit.....................................

DOMESTIC FINANCIAL DEVELOPMENTS-continued
Tables
Monetary aggregates

...........................................

Commercial bank credit and short-'and intermediate-term
business credit......................... ................

Gross offerings of securities by U.S. corporations..............
Net increase in taxable corporate bonds of nonfinancial

corporations................................................
Treasury and agency financing..................................

11
12

Gross offerings of tax-exempt securities.......................
New issues of mortgage-backed pass-through securities

15
20

by federally sponsored agencies...........................

Mortgage activity at FSLIC-insured institutions.................

Consumer installment credit....................................

Charts
Monthly inflows to retail interest-bearing deposits and
market-bank rate spreads ...................................

Monthly bank rate spreads and deposit inflows..................

Home mortgage financing.........................................................

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets......................................

U.S. international financial transactions........................

1
5

U.S. merchandise trade.......................................
.
Foreign economic developments ................................

10
13

Economic situation in major developing countries................

Tables
Summary of U.S. international transactions...................

International banking data .....................................
U.S. merchandise trade..........................................
Oil imports.....................................................

9
10
11

Major industrial countries
Real GNP and industrial production...........................
Consumer and wholesale prices.................................
Trade and current account balances............................

14
15
16

Growth in export volume.. ...............

.........................

Charts
Weighted average exchange value of the U.S. dollar..............
Selected dollar exchange rates................................

2
2

May 14, 1986
II - T - 1
SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)

Period

Latest data
Release
Data
date

Percent change from
Three
Preceding
periods
Year
earlier earlier
period
(At annual rates)
1.5
6.7
2.8
2.2
-1.7
3.1

1.7
7.3
2.8
3.0
-.5
3.9

35.0
8.74

35.2
8.67

35.0
8.54

40.6
82.7

40.7
2.9

41.0
-4.3

40.2
-4.6

04-15-86
04-15-86
04-15-86
04-15-86
04-15-86

125.1
122.7
140.2
177.4
115.0

-5.7
-7.8
-11.0
7.5
-4.2

-4.1
-4.8
-3.4
-7.3
-3.1

Mar.
Mar.
Mar.

04-22-86
04-22-86
04-22-86

326.3
323.8
314.1

-5.1
4.5
1.1

-2.0
4.0
-1.4

Producer prices: (1967-100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

Mar.
Mar.
Mar.

04-11-86
04-11-86
04-11-86

288.6
316.
222.9

Personal income ($ bil.) 2

Mar.

04-11-86

3,406.5

Civilian labor force
Unemployment rate (%)1
Insured unemployment rate (%)1
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
1
Average weekly hours (hr.)
Hourly earnings ($)1
Manufacturing:
1
Average weekly hours (hr.)
Unit labor cost (1967-100)

Apr.
Apr.
Dec.
Apr.
Apr.
Apr.

05-02-86
05-02-86
03-13-86
05-02-86
05-02-86
05-02-86

117.2
7.1
3.0
100.0
19.4
80.7

Apr.
Apr.

05-02-86
05-02-86

35.0
8.74

Apr.
Mar.

05-02-86
04-29-86

Industrial production (1977-100)
Consumer goods
Business equipment
Defense & space equipment
Materials

Mar.
Mar.
Mar.
Mar.
Mar.

Consumer prices all items (1967-100)
All items, excluding food & energy
Food

-12.8
-15.0
-11.7
2.1

-13.0
-12.4
-28.0
2.6

-1.2
-2.6
-7.7
4.6

(Not at annual rates)
-2.1
4.8
-5.2
45.1

-1.8
.4
-10.3
46.1

6.1
13.2
.7
67.4

1.40
1.46
1.35

1.37
1.42
1.33

1.35
1.42
1.29

1.38
1.47
1.29

04-30-86

.523

.525

.536

Apr.
Apr.

05-13-86
05-13-86

116.8
26.1

.5
.2

-. 5
3.3

2.2
6.5

Apr.
Apr.
Apr.

05-05-86
05-05-86
05-05-86

11.1
8.0
3.1

14.2
15.9
10.0

-3.3
-7.6
10.1

1.0
-7.5
32.5

1986
1986
1986

04-16-86
04-16-86
04-16-86

395.13
151.84
243.28

Mar.
Mar.

04-16-86
04-29-86

194.9
176.6

3.6
1.4

5.4
5.4

Mfgrs. new orders dur. goods ($ bil.) Mar.
Mar.
Capital goods industries
Mar.
Nondefense
Mar.
Defense

04-30-86
04-30-86
04-30-86
04-30-86

Inventories to sales ratio: 1
Manufacturing and trade, total
Manufacturing
Trade

Mar.
Mar.
Mar.

05-14-86
04-30-86
05-14-86

Ratio: Mfgrs.' durable goods inventories to unfilled orders1

Mar.

Retail sales, total ($ bil.)
GAF3
Auto sales, total (mil. units.)
Domestic models
Foreign models

105.6
37.9
27.4
10.4

Plant and equipment expen.
Total nonfarm business
Manufacturing
Nonmanufacturing

Housing starts, private (thous.)
Leading indicators (1967-100)
1.
2.
3.
4.

Actual data used in lieu of percent changes for earlier periods.
At annual rates.
Excludes mail order houses.
Planned-Commerce for January through March 1986 survey.

DOMESTIC NONFINANCIAL DEVELOPMENTS

Economic activity in the aggregate appears to be expanding gradually,
but with marked contrasts across sectors and geographical regions.

Lower

interest rates are spurring strong gains in purchases of new homes, and
the underlying determinants of consumer spending appear favorable.

the same time, however, the industrial sector remains relatively weak,
owing in part to sharp cutbacks in oil drilling.

Aggregate price measures

have declined further, reflecting plummeting prices for petroleum products,
while nominal wage increases have been restrained.
Industrial Production
The index of industrial production apparently edged up in April,
after declines in February and March, as small gains in motor vehicle
assemblies and steel output offset a further plunge in oil and gas well
drilling.

Over the first four months of the year, total industrial

production declined.

The sharp cutback in auto assemblies in March

contributed importantly to the weakness, but production of business
equipment, excluding motor vehicles, also has been weak in recent months,
reflecting continued import pressures and weak order levels.
Although auto assemblies were up slightly in April, automakers
intend to cut production during the second quarter as a whole.

Using

seasonal factors developed for the index of industrial production,
current assembly plans call for cars to be built at a 7.9 million unit

annual rate in the second quarter, down from an 8.3 million unit pace in
the first quarter.

The Commerce Department's estimate of auto production,

which incorporates alternative seasonal adjustment factors, places planned
II-1

II-2

auto assemblies at a 7.4 million unit annual rate in the second quarter,
compared with an 8.9 million unit rate during the first three months of
this year.

The sharp drop in the Commerce Department's estimate of auto

assemblies should have a substantial downward effect on real GNP growth
in the second quarter, reducing it by roughly 1-1/2 tp 2 percentage
points at an annual rate.
With declines in output widespread, capacity utilization in total
industry dropped 0.6 percentage point in March to 79.4 percent, its
lowest level since December 1983.

Utilization rates in manufacturing and

mining dropped 0.6 and 0.9 percentage point respectively in March, while
the rate for utilities edged down.

In April, overall capacity utilization

apparently remained about unchanged.
Employment and Unemployment
Nonfarm employment, as measured by the establishment survey, continued
to expand in April, but, as in the first quarter, job gains were unbalanced
across industries.

In recent months, the service-producing sector has

accounted for much of the overall growth, adding more than 900,000 jobs
since December.

Hiring at construction sites also has picked up this year,

reflecting the boom in housing activity and increased highway construction.
In manufacturing, however, widespread employment losses took place in
recent months in both durable and nondurable goods industries, and the
factory workweek slipped from the very high levels reported at the end
of last year.

Employment in oil and gas extraction, after drifting

downward throughout 1985, plummeted during the first four months of this
year as firms adjusted drilling activity to lower oil prices.

Since

II-3
CHANGES IN EMPLOYMENT1
(Thousands of employees; based on seasonally adjusted data)
1985
1984

1985

1986
Ql

1986
Mar.

Apr.

178
189

206
203

-17
-16
-15
-18
3
33
111

-27
-24
-50
-47
-3
-13
93

-36
-34
-27
-10
-17
84
56

28
152
-9

47
83
2

Feb.

--Average monthly changesNonfarm payroll employment 2
Strike adjusted
Mining
Oil and gas extraction
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance and
real estate
Services
Total government
Private nonfarm production
workers
Manufacturing production
workers

Total employment 3
Nonagricultural

327
329

250
248

248
254

-2
-2
-14
-14
0
25
72

-4
-1
-40
-37
-3
28
50

24
100
36

27
100
80

27
98
20

30
98
9

253

173

148

231

190

103

122

183

-16

-27

-15

-6

-41

-8

269
265

163
183

306
347

229
184

194
149

-394
-190

227
38

104
167

290
289

249
242

160
160

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments. Strike-adjusted data noted.
3. Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)

1985
Q3
Q4

1986
Q1

Feb.

1986
Mar.

Apr.

7.0

7.1

7.3

7.2

7.1

18.3

19.0

18.5

19.0

18.2

19.6

11.0
5.3
5.9

10.8
5.2
5.5

10.6
5.3
5.7

10.8
5.5
5.9

10.6
5.5
5.9

10.9
5.2
5.8

6.2
15.1

6.2
14.8

6.0
15.1

6.1
14.6

6.4
14.8

6.2
14.7

6.1
14.8

7.2

6.9

6.7

6.9

6.7

7.4

7.1

7.0

6.9

7.0

7.2

7.1

7.0

1984

1985

7.5

7.2

Teenagers

18.9

18.6

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

11.5
5.7
6.0

11.0
5.3
5.9

White
Black

6.5
15.9

Civilian, 16 years and older

Fulltime workers
Memo:
Total national1

1. Includes resident Armed Forces as employed.

II-4

January of this year, nearly 20 percent of the jobs in this sector have
been lost.
The unemployment rate, which stood at 7.1 percent in April, has
shown no improvement from the levels that prevailed in late 1985.

Although

jobless rates in most states were little changed in the first quarter,
there were signs of deteriorating labor market conditions in those states
most closely tied to the oil and gas industry.
Autos
Domestic auto sales continue to be influenced by changes in the
sales terms offered by manufacturers.

In late March, GM announced list

price increases averaging about 3 percent, possibly in response to higher
prices for imported cars or perhaps to window-dress future incentive
programs by allowing for larger discounts from list prices.

Ford and

Chrysler declined to follow this strategy for cars, but did raise list
prices for some other vehicles.

In mid-April, when most of the early

spring incentives were due to expire, the major domestic automakers
launched a new series of sales incentives, followed by some additional
shaving of finance rates around the end of the month.
Reflecting the efforts by consumers to beat GM's announced price
increases and the enticements of the incentive programs, sales of domestic
cars rose to an 8.0 million unit annual rate in April from their sluggish
6.9 million unit pace in the previous month.

However, this sales pace

still fell a little short of assemblies in April, further increasing the
already-bloated level of auto inventories.
Sales of foreign cars were at a 3.1 million unit annual rate in
April, compared with the 2.8 million unit average pace of sales during

II-5

AUTO SALES, PRODUCTION, AND INVENTORIES
(millions of units at an annual rate, FRB seasonals)

1985
Q4

1986
01

Jan.

1986
Feb. Mar.

Apr.

12.3

10.2

10.7

11.4

10.8

9.7

11.1

Domestic

9.4

6.8

7.8

8.6

8.0

6.9

8.0

Imported

2.9

3.4

2.8

3.1

8.2

7.8

8.3

8.4

8.7

7.7

8.1

1.31

1.67

1.81

1.66

1.74

1.81

1.85

Total auto sales1

Domestic production
Dealers' stocks
Days' supply 2

1. Components may not add to totals due to rounding.
2. Days' supply for the quarter are based on end-of-quarter stocks and average
sales for the quarter.

THE MARKET FOR DOMESTIC AUTOMOBILES
(SEASONALLY ADJUSTED,

ANNUAL RATES)
MILLIONS OF UNITS

SALES

APRIL

APRIL
INVENTORIES

I
1984

I
1985

I
I
1986

-4 8

II-6

the first quarter of this year.

An increase in sales of Japanese cars

during April, the first month of the new quota year, accounted for most
of the rise.
Personal Consumption and Income
Recent consumer data generally have shown strong gains in income,
wealth, and spending.

Personal consumption expenditures, in real terms,

rose more than 4 percent at an annual rate in the first quarter of 1986
after almost no growth in the fourth quarter of last year.

Although

outlays for durable goods were little changed, on balance, in the first
quarter, real spending for nondurables surged ahead at almost an 8 percent
annual rate, and expenditures on services posted a sizable gain.

April, the preliminary estimate of retail sales for goods excluding
autos fell back from its March pace.

Outlays for general merchandise

were up more than 1 percent in April, continuing the substantial gains
posted in previous months, while spending declined for food and household
durables.
Disposable personal income in constant dollars advanced 5.6 percent
in the first quarter, after little growth in the second half of 1985.
Declines in consumer prices in February and March, coupled with moderate
gains in nominal personal income, have accounted for most of the recent
improvement in real income.

With total personal consumption expenditures

increasing less than disposable income in the first quarter, the saving
rate rose to 4.3 percent from 4.0 percent in the final three months of
1985.

II-7
PERSONAL INCOME AND EXPENDITURES
(Based on seasonally adjusted data)
1985
1985

1986
Q1

Jan.

1986
Feb.

- - Percentage changes at annual ratesE
Total Personal Income
Nominal
Real 2

5.3
2.0

Disposable Personal Income
Nominal
Real

4.5
1.3

Expenditures
Nominal
Real

6.2
3.0

2.3
.1

-2.5
-4.5

6.8
4.6

Mar.
- -

6.9
2.5

5.3
.8
4.2e -2.4

5.0
10.3

2.1
4.2e

6.7
2.3

6.9
5.6-

4.4
1.4

5.8
10.8

3.1
4.9 e

4.5
.1

5.5
4.3

-4.6
-7.6

5.4
10.4

4.2
6.2e

3
- - Changes in billions of dollars - -

Total personal income

14.7

9.8

24.8

7.4

2.2

14.1

5.9

Wages and salaries
Priv ate
Manufacturing

10.1

7.8
1.3

7.6
5.8
.8

13.7
10.8
3.2

7.1
5.9
-. 4

4.8
4.6
-1.0

6.9
5.3
-2.2

9.6
7.8
1.9

6.1

2.7

12.0

1.9

l.J

7.6

-3.2

Disposable personal income

11.2

6.8

21.5

10.6

10.5

13.9

7.4

Expenditures
Durables
Nondurables
Services

13.9
1.7
3.8
8.3

22.1
13.7
4.4
4.0

11.1
-7.1
4.0
14.2

3.7 -10.2
-6.2 -4.2
.4
5.0
4.8
-6.4

11.9
-4.8
1.1
15.6

9.3
-9.6
13.6
5.3

4.6

3.7

4.3

4.2

Other income

Personal saving rate (percent)

4.0

4.3

1. Annual changes are measured from final quarter of preceding period to final
quarter of period indicated. Changes for quarterly periods are compounded rates
of change; monthly changes are not compounded.
2. Total personal income is deflated by the personal consumption expenditure
deflator.
3. Average monthly changes are from the final month of the preceding period to the
final month of period indicated; monthly figures are changes from the preceding
month.
e-BEA estimate prior to release of March CPI.

II-8
RETAIL SALES
(Seasonally adjusted percentage change)
1985

1986
Q1

Feb.

1986
Mar.

Apr.
.5
-

Total sales
Previous estimate1

2.2

-.8

1.0
1.2

-.1
.1

-.9
-.8

(REAL) 2
Previous estimate1

2.2

-1.6

1.3
--

.8
1.2

.5
.6

Total less automotive group,
nonconsumer stores, and
gasoline stations
Previous estimate1

1.2

1.4

1.2
1.3

.5
.7

.7
.6

-.8

1.5

1.6

1.3

1.4

1.6

Durable
Automotive group
Furniture and appliances
Other durable goods

4.3
6.1
2.1
.9

-3.6
-8.1
4.3
1.5

1.7
.9
1.0
6.3

-.5
-1.1
.0
1.3

-2.2
-4.6
1.3
19.2

2.8
4.1
-1.6
-17.6

Nondurable
Apparel
Food
General merchandise 4
Gasoline stations

.9
1.9
1.0
1.0
-.7

1.0
1.6
1.7
.4
.2

.6
1.2
1.3
1.5
-4.5

.1
1.4
-.3
2.1
-2.8

-.1
2.1
.6
1.5
-7.1

-.8
.0
-1.6
1.1
-2.3

GAF 3

1. Based on incomplete sample counts approximately one month ago.
2. BCD series 59. Data are available approximately 3 weeks following the retail
sales release.
3. General merchandise, apparel, furniture and appliance stores.
4. General merchandise excludes mail order nonstores; mail order sales are also
excluded in the GAF grouping.
--Data are unavailable because of a future release date.

II-9

Not only have households enjoyed stronger real income growth, but
household balance sheets, on the whole, have improved in recent months.
A strengthening in the prices of existing houses and the continuing boom
in stock and bond markets have contributed to increases in household
wealth.

In addition, although some indicators of debt service problems,

such as installment loan delinquency rates, have moved up, both lower
interest rates on closed-end installment debt and the ability to refinance
mortgage debt at lower rates are reducing payment burdens somewhat.
Apparently responding to these favorable factors, both the Michigan
Survey Research Center and the Conference Board reported extremely high
buying plans in their most recent surveys.

An exceptionally large proportion

of consumers, citing lower interest rates, viewed this as a good time to
buy autos and homes.

And almost half of the households surveyed reported

that their financial situations had improved during the past year; not
since the 1960s have consumers' assessments of their own financial progress
been this favorable for so long a period of time.

Detail in the Michigan

survey also suggests that some consumers may be attempting to buy in
advance of higher prices for imports; this seems to be affecting demand
for imported cars and electronic goods.

Nevertheless, fewer consumers

than at any time since 1966 commented about the erosion of living standards
due to inflation.
Business Fixed Investment
Real outlays for business fixed investment fell sharply in the first
quarter.

Overall, first-quarter spending for equipment declined at nearly

an 18 percent annual rate, about reversing a large fourth-quarter rise.
This recent volatility probably reflects two special factors that shifted

II-10

spending from the first quarter into the fourth quarter of last year.
First, IBM accelerated initial deliveries of its Sierra computer, apparently
to improve 1985 earnings.

Second, and more generally, fear of adverse

tax changes for equipment purchased in 1986 likely prompted firms to move
planned spending into late 1985.
In the case of nonresidential structures, first-quarter real spending
was depressed by a 40 percent (annual rate) plunge in drilling activity,
a contraction that apparently has continued.

In contrast, the remaining

categories of nonresidential structures posted a small advance on balance,
led in large part by gains in the "other commercial" sector (primarily
stores and warehouses).

The first-quarter retrenchment in equipment purchases

was reflected in a sudden plunge in shipments of nondefense capital goods
in January.

With the increases posted in subsequent months, shipments by

March had recovered to a level 3-3/4 percent above the quarterly average,
suggesting a single bounceback in second-quarter equipment outlays.
Looking further ahead, new orders for nondefense capital goods
have been lackluster, while new commitments for nonresidential construction
have edged off recently, probably reflecting excess capacity in the
industrial and office sectors.

More generally, fear of adverse tax

changes for fixed investment probably will continue to restrain spending.
Recent capital spending surveys, reflecting these concerns as well as the
contraction in the energy sector, point to no more than modest growth in
outlays for the year as a whole.

Although firms outside of the oil-producing

sector have strengthened their 1986 spending plans since last fall, these
gains have been offset by expectations of sharply reduced outlays in
petroleum and mining.

The most bearish of the surveys--conducted by

II-11
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable periods;
based on seasonally adjusted data)

1985
Q3

1986
Q1

Jan.

1986
Feb.
Mar.

Apr.

Producers' durable equipment
Nondefense capital goods
Shipments
Excluding office & store mach.
Office and store machinery

.2
1.9
-7.4

3.2
3.7
.5

-4.7
-2.2
-17.5

-10.6
-8.6
-21.7

5.0
4.7
6.7

Orders
Excluding office & store mach.
Office and store machinery

5.6
5.7
5.3

.0
3.2
-16.8

-3.1
-3.5
-.3

-19.7
-19.3
-23.0

17.7
7.2
121.7

-5.2
-2.1
-20.0

264

303

262

275

253

259

Nonresidential construction
Commercial building
Office
Other commercial
Industrial building

-1.1
-.3
-1.7
1.4
-5.8

.5
4.0
.7
7.7
6.9

.8
2.2
1.1
3.4
-5.7

-.9
-.2
-1.2
.8
-9.3

.1
-1.5
-2.5

-2.1
-.9

Rotary drilling rigs in use

Sales of heavy-weight trucks
(thousands of units, A.R.)

3.2
1.9
11.6

Nonresidential structures

-10.2

-.4

3.2 -11.1

-4.6

-21.0

-15.1

-17.5

NONRESIDENTIAL CONSTRUCTION AND NEW COMMITMENTS1

Index, 1982Q4 = 100
I

:::::::

I:::::::::::::::::::::
***.******************

I**,**',

:::::::.

*
*.*
....
......
•I:::::::a
*::'':

.*,*.*.
j- '::::
a.:
..
,
/-*K'i:::

::::::::::::::::::::
-. .... ,.,..

S...... °*..

:::::::::::::::::::::
.***.***
I*
I.. . ...... **,** .........

,:::::;:
.. ,.,..
,::::::.

150

(====..=======. =====*

.... I
:.....
* ::::::::::iini
:1 ::::::::::::
*************I******
.
/^ I::::::.ii:i. ":::::::
iiiii
5:1:::":"
::'
:::
""
...................
...... :'::::
***
.
.-::::
.****
°.°,^t
f I

.........
::::^

120
f....

*,.,....

ai.....°.°..I*

90
II...i...
m::.......I
/^;:::;::
CC~:::
I

ijjijj:

1°*.*,,*I
1°.''1-11
-.....

]

s:;:: :::: :::: ;;::

Construction Put-in-Place

--::::::::::::
i.*.....,.....,.I
c
I.
.?:i
.
a

:::::::::::::::::::::
.11
.
1
1111 °1

.........

L
1979

1980

1981

1982

1983

II
1984

1985

1. Source F.W. Dodge and Census.
2. Six-month moving average (sum of contracts and permits).

.1
-2.0

-18.0

II-12
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

1985
Q4

-5.6
-6.6
-2.1
3.1
-6.8
9.9

17.6
-8.6
6.1
20.1
19.9
.2

1.5
-4.0
3.3
2.2
-5.7
7.9

14.6
-10.5
4.5
20.5
19.9
.7

1986
Ql

Jan.

1986
Feb.r

Mar.P

Book Value Basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

18.4
-10.0
4.3
24.1
15.4
8.7

21.8
-18.3
8.2
32.0
14.7
17.3

2.5
-13.5
-.8
16.7
10.0
6.7

-------

25.7
-22.8
5.7
42.8
18.9
24.0

16.4
-8.0
4.6
19.7
16.5
3.3

30.7
1.6
5.5
23.6
21.6
2.0

Constant Dollar Basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

INVENTORIES RELATIVE TO SALES 1

1985

Book Value Basis:

1986
01

Jan.

1986
Feb.r

Mar.P

1.40
1.46
1.22
1.48
1.85
1.37

Cyclical
Reference Points 2
81 low
82 high

Total
Manufacturing
Wholesale
Retail
Automotive
Ex. Auto

1.39
1.60
1.06
1.37
1.57
1.31

1.53
1.77
1.28
1.46
1.90
1.37

1.36
1.46
1.18
1.37
1.34
1.39

1.36
1.42
1.18
1.43
1.65
1.37

1.38
1.43
1.20
1.47
1.79
1.37

1.35
1.41
1.18
1.43
1.65
1.37

1.37
1.42
1.20
1.45
1.70
1.37

1.58
1.88
1.26
1.38
1.54
1.31

1.72
2.04
1.45
1.49
1.90
1.41

1.53
1.76
1.31
1.37
1.15
1.44

1.54
1.72
1.31
1.45
1.51
1.43

------

1.54
1.72
1.30
1.46
1.52
1.45

1.54
1.72
1.32
1.47
1.60
1.44

Constant Dollar Basis:
Total
Manufacturing
Wholesale
Retail
Automotive
Ex. auto

1. Ratio of end-of-period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily coincidental.
r--Revised estimates.
p--Preliminary estimates.

II-13

McGraw-Hill in March and April-indicated a 1/2 percent decline in nominal
expenditures this year, which implies further declines in spending over
the rest of 1986.

In contrast, the latest Merrill Lynch survey, reported

a planned increase of 3 percent in 1986 spending, about in line with the
earlier Commerce Department survey.

Given the low first-quarter level of

outlays, these plans imply moderate spending gains by the end of 1986.
Because none of these three surveys has a distinctly better track record
than the others in predicting actual spending, their differing implications
underscore the considerable uncertainty about investment spending over
the rest of this year.
Housing
The pace of new residential construction remained vigorous during
March as private housing starts registered a 1.95 million unit annual rate.
Single-family starts were about unchanged from the previous month's high
level while multifamily starts dropped 7 percent from their advanced
February rate.

For the first quarter as a whole, total housing starts

were up 12 percent from the previous three-month period, and rose in all
regions except the South.

The dip in housing starts in the South is

attributable in part to earlier overbuilding as well as to economic
problems in some of the oil-producing areas.

Indeed, rental vacancy

rates in the South rose to a record 9.5 percent in the first quarter, and
remain well above those in other regions of the U.S.

Nationally, newly-

issued residential building permits picked up by 2 percent in March and
were up 6 percent for the first quarter-rising in all regions except the
South.

II-14
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)
1985
Q4
Annual

1986
Q1

Jan.

1986
Feb.

Mar. 1

All units
Permits
Starts

1.73
1.74

1.74
1.77

1.85
1.99

1.91
2.03

1.80
2.00

1.85
1.95

Single-family units
Permits
Starts

.95
1.07

1.06
1.25

1.09
1.34

1.02
1.20

1.05
1.21

Sales
New homes
Existing homes

.69

.70

.78

.74

.71

3.22

3.50

3.27

3.30

3.27

3.23

Multifamily units
Permits
Starts

.77
.67

.79
.70

.80
.74

.81
.70

.78
.79

.80
.74

Mobile home shipments

.28

.29

n.a.

.28

.27

n.a.

1. Preliminary estimates.
n.a.--Not available.

.90

II-15

Sales of new single-family homes jumped in March to the highest
level in the 23-year history of the series.

The robust first-quarter

sales pace left the inventory of unsold homes at its lowest level
in over a year and a half.

In contrast to new homes, sales of existing

homes showed no response through March to the falloff in mortgage interest
rates.

Sales were unchanged from February's pace and 7 percent below the

high fourth-quarter pace.
In many cases, consumers have responded to lower interest rates by
purchasing higher quality homes.

Although average new home prices increased

9 percent over the year ended in the first quarter of 1986, the constantquality new home price index rose only 2.5 percent during this period.
The average sales price of existing homes also rose 9 percent in the year
ended in March.
Business Inventories
The business inventory picture has changed little this year, apart
from the buildup in auto dealers' stocks.

In the manufacturing sector,

inventories declined in the first quarter, as they have since early 1985;
except for some special categories, however, such as petroleum and the
volatile aircraft series, recent changes in manufacturers' inventories
have been relatively moderate.

Overall, the evidence suggests that, with

goods prices flat, sales still sluggish, and materials in ready supply,
manufacturers have no desire to boost stocks.

Nonauto trade stocks rose

moderately early this year, and stock-sales ratios were little changed.
Federal Government
Real federal purchases declined at a 32 percent annual rate in the
first quarter, reflecting a marked slowdown in Commodity Credit Corporation

II-16

(CCC) acquisitions of agricultural inventories and a decline in defense
spending.

The pattern of CCC purchases in recent quarters largely reflects

problems in the agricultural sector.

Late last year, when a huge crop

harvest was depressing market prices, financially-strapped farmers turned
to the CCC in extraordinary numbers for loans to finance inventories.
(In the National Income Accounts, these loans are counted as part of
federal purchases.)

First-quarter CCC loan activity, although still

substantial, was at a much slower pace than in the fourth quarter.

To a

considerable extent, the fluctuations in CCC stockpiling in recent quarters
have been mirrored by opposite and largely offsetting changes in private
farm inventories, and thus have had little net effect on real GNP.
First-quarter defense purchases were reduced by slower than scheduled
deliveries of some big ticket items, such as the B-1 bomber, and delays in
the delivery of space equipment related to the Challenger shuttle disaster.
Spending for research and development services also declined.

It should

be noted that preliminary NIPA defense estimates were based on actual
federal outlay data for only January and February.

The more recent March

figures show some bounceback in defense outlays.
On May 1, the Senate passed a budget resolution that would reduce
the fiscal 1987 deficit (based on the economic assumptions in the Congressional
Budget Office baseline) to the $144 billion limit mandated in the GrammRudman-Hollings Act.

Compared with the administration's February budget,

the Senate resolution calls for $7 billion more in 1987 tax increases and
$7 billion less in 1987 nondefense cuts.

The Senate budget also would

provide $19 billion less in new fiscal 1987 defense budget authority,

II-17

REAL FEDERAL PURCHASES
(Billions of 1982 dollars, SAAR)
1985
Q1
Total purchases

1986
Q1

304.3

305.9

331.1

349.0

316.7

77.6

74.3

87.9

107.7

79.7

3.8

13.0

33.7

6.7

73.8

74.1

74.9

74.0

73.0

226.7

231.5

243.3

241.3

237.0

Durable goods

67.9

69.6

76.5

72.4

71.7

Research and
development

23.4

24.1

25.3

27.2

24.9

Other defense

135.4

137.8

141.5

141.7

140.4

3.7

1.1

3.0

3.2

Real GNP excluding
CCC1

3.5

1.5

1.6

-1.6

6.4

Real GNP excluding
CCC and private farm
inventories1

3.2

1.4

2.5

Nondefense purchases
Commodity Credit
Corporation
Other nondefense
purchases
Defense purchases

Memo:
Real GNP1

1. Percent change from previous quarter at annual rates.

3.6

II-18

SENATE-PASSED BUDGET RESOLUTION
(Fiscal years, billions of dollars)
1987

1988

1989

182.7

166.8

143.9

-13.2

-20.2

-20.6

-2.0

-4.6

-22.3

-29.3

-1.2

-2.6

Total changes

-38.7

-56.7

-71.8

Senate resolution deficit

144.0

110.1

72.1

Baseline deficit 1
Proposed changes:2
Revenue increases
Defense cuts
Nondefense cuts
Net interest

-5.7
-37.4
-8.1

1. Estimated by CBO based on its February baseline economic assumptions
and updated (in March) technical estimates.
2. Sign on changes denotes direction of effect on deficit.

II-19

although outlay estimates are essentially the same as in the
administration budget owing to projections of higher rates of spending
out of existing budget authority.
On May 8, the House Budget Committee also approved a budget plan
that is similar in many respects to the Senate plan.

The principal

difference is a cut in defense outlays that is $6 billion larger, but
there also are some differences in the composition and size of nondefense
cuts; revenue proposals are about the same.

Action on this proposal by

the full House is expected later this week.
In other Congressional action, the Senate Finance Committee has
approved a comprehensive tax reform package, which is scheduled to be
considered by the full Senate during June; the House approved a somewhat
different reform package last December.

Both packages would lower marginal

individual and corporate income tax rates and eliminate various tax
preferences and loopholes that currently narrow the tax base.

The bills

also would shift tax burdens from individuals to corporations, with a
somewhat greater shift in the House bill.

Differences between the House

and Senate bills will have to be reconciled in a Senate-House conference
before a final bill is enacted.
State and Local Sector
Real outlays for goods and services in the state and local sector
rose 2.4 percent in the first quarter, about the same as the growth over
the four quarters of last year.

Most of the increase was in spending for

construction; real outlays for compensation rose only slightly.
Although the sector as a whole expanded during the first quarter,
some states, especially those dependent on agricultural and energy-related

II-20

sources of revenue, are experiencing hardships.

Oil-producing states

have faced shrinking revenues from severance taxes based on the quantity
or value of extracted natural resources.

A rough estimate indicates that

a $10 drop in the price of oil, about what has occurred so far this year,
has cost most of these states 5 to 10 percent of total expected revenue.
Secondary effects on energy-related community businesses and personal
income are likely to reduce revenues further.

In addition, the weakness

in farm income and related spillover effects on agricultural-related
businesses continue to affect many agricultural states.
It appears that most of the states facing erosion on their budget
positions are rapidly making adjustments, either through budget cuts
or tax increases.

Seventeen states already have reduced fiscal 1986

expenditures from planned levels (in particular, Texas, Oklahoma, and
North Dakota have cut spending substantially), while other states are
reducing budgets for fiscal 1987.

In addition, more than 40 states are

planning some sort of limitation on salary increases to employees, several
are limiting hiring, and a few states are likely to begin furloughing
state employees later this year.
Some states also are undertaking alternative measures to deal with
revenue shortfalls.

Alaska and Wyoming are transferring funds from their

reserve accounts, while other states are planning tax increases.

recent canvas indicates that 12 states are planning to raise taxes in
fiscal 1987, while only 4 are planning reductions.

As in recent years,

the preference seems to be for increases in sales and excise taxes,
especially for fuel and tobacco, and reductions in income taxes.

II-21

Prices
Major price indexes continued to fall in March, led by a further
drop in prices for petroleum products.

The consumer price index for all

urban consumers fell 0.4 percent for the second month, and producer
prices of finished goods were down more than one percent.

During the

first quarter of this year, the CPI and PPI fell at annual rates of about
2 and 12-1/2 percent, respectively.
Retail prices for both gasoline and fuel oil dropped further in
March, reflecting the continued passthrough of lower crude oil costs.

The

prices of both products fell almost 20 percent in the first three months of
this year, and private survey data indicate that pump prices declined
significantly further in April.

However, in the volatile spot market,

prices have turned up recently in response to tight near-term supplies of
refinery products and increased demand.
Food prices also helped to hold down inflation rates in the first
quarter.

They edged up at the consumer level in March, after a sharp

February decline, but are down on balance so far this year.

Recent

price movements for agricultural commodities suggest that the PPI for
crude foods probably declined in April for the fifth consecutive month,
but may turn up in May.
Increases in prices of imported goods have picked up recently, in
response to the substantial depreciation of the dollar over the past
year.

As measured by the BLS index, the prices of nonfuel imports rose

3.4 percent (not annualized) in the three months ended in March.

So far,

however, the higher import prices do not appear to have had much effect

II-22
RECENT CHANGES IN CONSUMER PRICES
(Percentage change; based on seasonally adjusted data)1
Relative
Importance
Dec. 1985

1985
1985

Memorandum:
CPI-W 4

Feb.

Mar.

--Monthly rate-

--Annual rateAll items2
Food
Energy
All items less food
and energy3
Commodities 3
Services 3

1986

1986
Q1

100.0
18.5
11.3

3.8
2.7
1.8

2.4
2.1
-3.2

5.3
5.9
3.3

-1.9
-1.4
-34.2

-.4
-.7
-3.8

-.4
.1
-6.5

70.2
25.9
44.4

4.4
2.1
5.7

3.4
1.1
4.8

5.4
3.6
6.5

4.1
.3
6.5

.2
-.1
.4

.4
-.1
.6

100.0

3.6

2.0

5.2

-2.7

-.5

-.6

1. Changes are from final month of preceding period to final month of period
indicated.
2. Official index for all urban consumers, based on a rental equivalence
measure for owner-occupied housing after December 1982.
3. Data not strictly comparable. Before 1983, they are based on unofficial
series that exclude the major components of homeownership; beginning in 1983,
data include a rental equivalence measure of homeowners costs.
4. Index for urban wage earners and clerical workers, based on a rental
equivalence measure for owner-occupied housing after December 1984.

RECENT CHANGES IN PRODUCER PRICES
(Percentage change; based on seasonally adjusted data) 1
Relative
Importance
Dec. 1985

1985
1985

1986
Q1

1986
Feb.

Mar.

--Annual rate-

-Monthly

rate-

100.0
24.5
12.5
40.3
22.7

1.8
.3
.0
2.7
2.7

-2.4
-2.9
-11.3
.0
-.9

9.2
15.0
22.2
4.5
5.3

-12.4
-6.6
-68.0
2.7
.9

-1.6
-1.6
-9.4
-.1
.1

-1.1
.3
-13.4
.8
.3

Intermediate materials 2
Exc. energy

95.3
79.6

-.1
-.2

-1.3
-.7

2.7
-.3

-11.8
-.9

-1.4
-.2

-1.3
.0

Crude food materials

52.5

-6.4

-20.6

47.0

-25.2

-3.6

-1.0

Crude energy
Other crude materials

31.6
15.9

-4.3
-4.5

-5.9
-4.4

-2.0
1.0

-51.1
-3.2

-8.2
-3.0

-8.9
2.6

Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment

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

II-23

on the pricing behavior of domestic producers or on price trends at the
retail level.

In the CPI, the price index for commodities excluding food

and energy edged down for the second month in March, while in the PPI, the
prices of capital equipment were little changed, on net, in the first
quarter of this year.
The CPI for services excluding energy picked up in March, with
large increases for rents, auto insurance, and medical services.

This

index was up 6-1/2 percent at an annual rate in the first quarter, a bit
faster than the average rate of increase over the past two years.
Wages and Labor Costs
Available measures of labor costs provide differing indications of
the current rate of wage inflation, but all point to continued restraint so far
this year.

The hourly earnings index (HEI) was unchanged in April and rose

only 0.8 percent at an annual rate in the first four months of this
year.

In contrast, a more comprehensive measure of wages, the employment

cost index (ECI) continues to show wage increases in the 4 percent range,
primarily reflecting larger increases for nonproduction and supervisory
workers excluded from the HEI.

Advances in the ECI measure of hourly

compensation costs, which includes employer costs for employee benefits as
well as wages and salaries, decelerated by about 1/2 percentage point over
the past 12 months, largely reflecting employers' efforts to reduce insurance
and pension costs.
In the union sector, wage adjustments for workers covered by major
union settlements have continued to be particularly small.

These lower

union wage adjustments in recent years, coupled with somewhat larger increases

II-24
SELECTED MEASURES OF LABOR COSTS IN THE NONFARM BUSINESS SECTOR
(Percentage change at annual rates)

1985
1984

1985

1986
Q1

First four
months

Hourly earnings index, wages of production workers1
Total private nonfarm

3.3
3.0

Manufacturing
Nonmanufacturing

Employment cost index,

2.0

3.3

2.4

2.0
2.0

2.3
3.8

3.0
2.1

2.3
.2
1985 Q1
to
1986 Q1

wages and salaries of all persons 2

Total
By occupation:
White collar
Blue collar
Service workers
By bargaining status:
Union
Nonunion

1986
Year to date

5.3

2.3

3.9

5.9
4.7
6.3

3.2
1.0
1.0

4.1
3.7
4.5

3.6
6.0

1.9
2.3

2.9
4.5

5.2

2.2

4.5

Employment cost index, compensation of all persons 2
Total

First three
months

Major collective bargaining agreements
-

First-year wage adjustments
Total effective wage change

----

1985 Q1
to
1986 Q1

Labor costs and productivity, all persons1
Compensation per hour
Output per hour
Unit labor costs

3.8
.8
3.0

.8
2.4

3.7
-.6
4.3

2.8
.4
2.4

3.2
-4.1
7.6

2.4
3.4
-1.0

1. Changes are from final quarter of preceding period to final quarter of period
indicated. Quarterly and year-to-date changes at compound rates. Seasonally
adjusted data.
2. Changes are from final month of preceding period to final month of period
indicated. Quarterly changes at compound rates; not seasonally adjusted.

II-25

in the nonunion sector, have reversed about one-half of the widening in the
union-nonunion wage differential that occurred between 1976 and 1982.
Although compensation trends have been generally favorable,
unit labor costs have been rising at a somewhat faster pace than earlier in
this expansion, largely owing to sluggish productivity performance.

Output

per hour was up nearly 3-1/2 percent in the first quarter of this year, but
this rise did not quite offset the sharp drop in output per hour in the
fourth quarter.

Indeed, productivity has been essentially flat over the

past year and a half.

As a result, all of the recent increases in compensation

per hour have been passed directly through into higher unit labor costs, a
marked contrast to the offset provided by rapid productivity growth during
the earlier stage of this business expansion.

III-T-1
SELECTED FINANCIAL MARKET QUOTATIONS1
(Percent)

1982/1983
Cyclical
lows

1984
Highs

1985
March
highs

1986
FOMC
Apr. 1 May 13

Change from:
1985
FOMC
highs Apr. 1

Federal funds 2

8.46

11.63

8.58

7.36

6.87

-1.71

-. 49

Treasury bills 3
3-month
6-month
1-year

7.08
7.62
7.73

10.67
10.77
11.13

8.80
9.13
9.25

6.33
6.32
6.30

6.09
6.10
6.20

-2.71
-3.03
-3.05

-. 24

Commercial paper
1-month
3-month

8.00
7.97

11.42
11.35

8.94
9.12

7.23
7.04

6.74
6.61

-2.20
-2.51

-. 49
-. 43

Large negotiable CDs 3
1-month
3-month
6-month

8.08
8.12
8.20

11.52
11.79
12.30

8.89
9.29
9.92

7.12
7.00
6.92

6.69
6.67
6.67

-2.20
-2.62
-3.25

-. 43
-. 33

Eurodollar deposits 4
1-month
3-month

8.68
8.71

11.89
12.20

8.89
9.58

7.34
7.23

6.83
6.74

-2.06

-. 51

-2.84

-.49

10.50

13.00

10.50

9.00

8.50

-2.00

-. 50

10.58
10.74

5.94
5.84

6.03
5.83

-4.55
-4.91

.09
-. 01

U.S. Treasury (constant maturity)
9.33
13.49
3-year
10.12
13.99
10-year
30-year
10.27
13.94

11.22
12.02
11.97

7.01
7.37
7.47

7.18
7.63
7.42

-4.04
-4.39
-4.55

.17
.26
-. 05

Municipal revenue5
(Bond Buyer index)

9.21

11.44

10.25

7.69

7.76

-2.49

.07

Corporate--A utility
Recently offered

11.64

15.30

13.23

9.14

9.39

-3.84

.25

Home mortgage rates 6
S&L fixed-rate
S&L ARM. 1-yr.

12.55
n.a.

14.68
12.31

13.29
11.14
1985
March
highs

10.10
8.67

10.00
8.59

-3.29
-2.55

-. 10
-. 08

Short-term rates

Bank prime rate
Treasury bill futures
June 1986 contract
Sept. 1986 contract

-. 22
-. 10

-. 25

Intermediate- and long-term rates

1983

1984

1986
FOMC
Apr. 1

May
13

Percent change from:
1985
FOMC
high Apr. 1

Lows
Highs
Stock prices
-. 27
1790.11
1785.34
14.95
Dow-Jones Industrial 1287.20 1086.57 1553.10'
136.35
11.85
.36
99.63
85.13
121.90
135.86
NYSE Composite
11.08
2.24
267.43
273.41
246.13
249.03
187.16
AMEX Composite
3.34
386.66
18.91
325.16
374.15
328.91
225.30
NASDAQ (OTC)
4. Averages for statement week closest
1. One-day quotes except as noted.
to date shown.
2. Averages for two-week reserve maintenance period
5. One-day quotes for preceding Thursday.
closest to date shown. Last observation is average
6. One-day quotes for preceding Friday.
to date for the maintenance period ending
e--estimate
May 7, 1986.
3. Secondary market.

DOMESTIC FINANCIAL DEVELOPMENTS

The powerful securities market rally continued into mid-April before
faltering somewhat.

Interest rates fell during the first part of the

intermeeting period as market participants viewed the economy as expanding
sluggishly and inflation prospects as favorable, and expectations of another
reduction in

the discount rate became widespread.

cut by 1/2 percentage point on April 18.
after, however,

The discount rate was

A backup in

association with a sharp fall

rates occurred therethe value of the dollar

and an uptick in oil prices, events that reportedly led traders to reevaluate
prospects for further easing steps by the System.

Most long-term interest

rates are near their levels of the last FOMC meeting, while intermediate-term
rates have risen, and short rates are lower by 1/4 to 1/2 percentage point.
The monetary aggregates grew briskly in April as more rapid declines
in security yields than in deposit rates boosted inflows to the more liquid
components.

M1 soared farther above its 1986 range; this strength, combined

with accelerated growth in money fund shares, MMDAs, and savings deposits,
pushed M2 up into its target range for the first time this year.
near the center of its
damping its

target range, with flatness in

its

M3 remained

non-M2 component

expansion relative to the narrow aggregates.

Borrowing activity has mushroomed in the past few months; although it
is somewhat difficult to measure the net flows at this point, expansion of
domestic nonfinancial debt probably is picking up this quarter after a substantial slowing earlier in the year.

Corporate bond issuance has continued

to break records--despite a smaller volume of share retirements in connection
with mergers and other corporate restructurings, and a stepped-up pace of new
equity issuance in

response to record stock prices--as firms call older,
III-1

III-2
MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)1
1984:Q4
to

1985

1985:Q4

-1.
2.

11.9
8.6
7.7,

H1
M2

3. M3

Growth from

Apr.pe

Q4 1985 to
Apr. 1986P e

14
13
10

10
6-1/4
7-3/4

1986

pQl

Feb.

Mar.

Percentage change at annual rates -

10.7
6.0
6.4

7.7
4.2
7.3

13.9
6.3
6.6

Levels in billions
of dollars
Mar. 1986
Selected components
4.

Currency

7.5

7.4

7.5

7.0

6.9

173.9

Demand deposits

8.6

7.7

3.0

0.9

17.8

273.1

Other checkable deposits

22.3

18.8

15.0

17.3

13.8

185.2

M2 minus M12

7.6

4.6

3.1

2.3

3.9

1952.0

18.7

24.2

3.0

-7.1

9.3
9.1

0.9
5.2

11.1
7.1

22.3
2.8

35.1
6.9

186.3
854.8

19.0
-0.6
5.1

11.1
-1.6
1.4

8.7
5.2
4.4

1.3
4.7
6.3

10.4
2.8
6.7

465.9
388.9
867.1

13.7
-0.4

7.4
-2.9

1.3
6.6

3.7
8.2

6.7
6.7

13
3

361.4
505.7

3.8

8.0

19.8

15.9

7.4

-1

667.7

5.7
5.1
6.8

10.8
14.1
5.2

15.5
18.5
10.0

8.8
7.0
11.4

-1.9
-17.7
27.1

4
0
13

450.4
287.1
163.3

11.1
-4.4
-4.0

3.1
39.2
-6.0

26.8
47.2
2.5

7.1
31.5
40.7

44.3
18.8
24.2

67
-30
-13

70.2
71.4
80.9

8.
9.
10.
11.
12.
13.
14.
15.
16.

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, ISA
Comercial banks
Savings deposits, SA,
3
plus MMDAs, NSA
Small time deposits
Thrift institutions
Savings deposits, SA,
plus MMDAs, NSA3
Small time deposits
M3 minus M2

Large time deposits
5
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Tera Eurodollars, NSA

MEMORANDA:
23.
Managed liabilities at comercial
banks (24+25)
24.
Large time deposits, gross
25.
Nondeposit funds
26.
Net due to related foreign
institutions, NSA
6
Other
27.
28.

U.S. government deposits at comercial
bank7

-35.5

65.6

Average monthly change in billions of dollars -

2.3
1.0
1.3

6.4
2.3
4.1

484.2
347.6
136.6

0.3
1.0

0.8
3.3

2.4
1.9

0.2

0.9

-0.6

-0.4
0.9

1.5
7.7

2.1

-5.4

-7
-1

-19.5
156.2

1. Quarterly growth rates are computed on a quarterly average basis.
Dollar aaounts shown under memoranda for quarterly changes are calculated on an end-month-of-quarter basis.
2. Nontransactions nZ is seasonally adjusted as a whole.
3. Growth rates are for savings deposits, seasonally adjusted, plus money market deposit accounts (MMDAs), not seasonally adjusted.
Comercial bank savings deposits excluding MKDAs increased during March and April 1986 at rates
of 5.8 percent and 10 percent, respectively. At thrift institutions, savings deposits excluding HMDAs increased
during March and April 1986 at rates of 8.7 percent and 24 percent, respectively.
4. The non-M2 component of M3 is seasonally adjusted as a whole.
5. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
6. Consists of borrowings 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 borrowings from the Federal
Reserve and unaffiliated foreign banks, loan RPs and other minor items).
Data are partially estimated.
7. Consists of Treasury demand deposits and note balances at commercial banks.
pe-preliminary estimate

III-3

higher-rate bonds and repay short-term debt.

The municipal bond market

has reco-ered from its worst fears of tax reform, and issuance of taxexempt bonds in April exceeded the average monthly rate of every past year
but 1985.

Activity is hectic in the residential mortgage market, with a

torrent of refinancing applications reportedly delaying closings in

many

real estate transactions; available evidence suggests that overall household sector debt growth is

being restrained by a slowing in

installment credit expansion.

The Treasury has increased its

consumer
borrowing

sharply in the second quarter on a seasonally adjusted basis, after drawing
down high year-end cash balances in the first quarter.
Monetary Aggregates and Bank Credit
Ml rose in April at about a 14 percent annual rate for the second
consecutive month, raising this aggregate farther above its 3-to-8 percent
target range for 1986.

The sustained strength in narrow money last month

resulted primarily from an acceleration of other checkable deposits (OCDs).
Growth in currency and demand deposits moderated, though demand deposits
advanced at a still rapid 11 percent clip.

Recent declines in market

interest rates undoubtedly have contributed importantly to the acceleration
in Ml over the past two months.

M1 also likely was boosted a bit by larger

federal tax refunds this April than in recent years.
M2 grew at a 13 percent annual rate in April, its fastest pace since
June of last year.

After sluggish growth in the first quarter, this surge

pushed M2 just above the lower limit of its 1986 target cone of 6 to 9
percent.

III-4

MONTHLY INFLOWS TO RETAIL INTEREST-BEARING DEPOSITS
AND MARKET-BANK RATE SPREADS
PERCENT

S9.0

- 8.0
~.

3-MCNTH T-BILL RATE

-.
.4'

-7.0

N'-

RETAIL DEPOSIT RATE*

I
_ ___

I
____

6.0

1986

1985

BASIS POIN
-120

BILLIONS

S80
BILL RATE-DEPOSIT RATE SPREAD
60

-40
20

LD
RETAIL DEPOSIT INFRLOWS**

I__

I --

1985
1986
* Weighted average rate on OCDs, MMDAs, savings deposits, and small time
deposits at banks.
** Inflows to OCDs, MIDAs, savings deposits, and small time deposits at all
depository institutions.

III-5

That M2, even after the April surge, has recorded comparatively slow growth
may reflect in part the influence of rising investor interest in stock and,
especially, bond mutual funds.

Net sales of these funds have broken records

month after month.
The nontransaction component of M2 in April was boosted by inflows to
liquid retail accounts.

Tax refunds may have contributed to these inflows,

but the more important factor would appear to be interest rates.

Savings

deposits grew at their fastest monthly rate since late 1982 (when a temporary
bulge was created by heavy competition among institutions for funds in
anticipation of the introduction of MMDAs).

Ceilings on passbook savings

rates were removed on April 1, but in the prevailing environment depository
institutions generally did not move to raise their rates.1

Nonetheless,

the bulk of the increase in savings deposits likely reflects narrowing
yield spreads between savings deposits and alternative instruments.
Indeed, the acceleration of consumer-type deposits as a whole over the
past two months is consistent with changes in yield relationships.

Offering

rates on these deposits have not matched the sharp drop in market rates,
resulting in narrower, and in some instances even negative, spreads.

The

chart depicts the spread of market rates (represented by the 3-month Treasury
bill rate) over a weighted average of rates offered by commercial banks on
OCDs, MMDAs, savings deposits, and small time deposits, along with the inflows
into the sum of these accounts at all depository institutions.

Inflows to

these deposits clearly have been inversely related to the rate spread.
1. Reports from the Reserve Bank contact group indicate that few depository
institutions responded to the ceiling removal by offering higher rates, and
a scattering of institutions actually lowered savings rates. Share accounts
at credit unions, which are included in savings deposits but were unaffected
by removal of the passbook rate ceiling, accounted for a disproportionate
amount of the increase in savings deposits in April.

III-6

MONTHLY BANK RATE SPREADS AND DEPOSIT INFLOWS*
BASIS POINTS

150

6-MONTH SMALL TIME DEPOSIT RATE -

100

LIQUID INTEREST-BEARING RETAIL DEPOSIT RATE SPREAD**

I
11I

1986

1985

BILLIONS

Fs,

LIQUID INTEREST-BEARING
SMALL TIME

RETAIL DEPOSIT INFLOWS**

~4b

.9%j

'I
'I

1986
1985
* Spreads are for rates offered at cacmercial banks and are calculated from
FR 2042 data, except for April, which is estimated using data from the Bank
Rate Monitor. Inflows are to all depository institutions.
** Liquid interest-bearing retail deposits consist of OCDs, MDAs, and Savings
deposits. The rate on these deposits is a weighted-average rate.

III-7

Rate spreads also appear to be influencing the relative growth rates
of components of the aggregates.

The top panel of the chart shows the

spread at commercial banks between the 6-month small time deposit rate and
a weighted average rate on Super NOW accounts,

savings accounts,

and MMDAs.

Again, the responsiveness of deposit growth to rate spreads is apparent
in the lower panel; with small time deposit rates having adjusted comparatively rapidly to downward movements in market rates in the recent period,
funds have moved toward the more liquid deposit categories.
M3 expanded at a 10 percent annual rate in
growth in its M2 component.

April, with all of its

Increases in institution-only money funds and

large time deposits issued by thrifts were balanced by runoffs of large
time deposits and term RPs and Eurodollar deposits at commercial banks.
With strong core deposit inflows outstripping bank credit growth in
commercial banks further reduced their managed liabilities

April,

by advancing

about $7 billion to their foreign offices.
The weaker bank credit growth in April resulted from a deceleration
in

loans and and a continued run-off of security holdings.

Banks appar-

ently have been taking advantage of much higher securities prices to realize
capital gains by selling some of their U.S. government securities.
of tax-exempt securities also have continued to decline,
remain above the average level of last December,

Holdings

but they still

when banks were in

the

process of acquiring a large volume of tax-exempt securities amid uncertainty about 1986 tax reform.
April.

Real estate loans again showed strong growth in

Security loans, however, fell off sharply after an extraordinary

surge in March, and consumer loans decelerated.

III-8

COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)1

1985
Q3

-----------------1.

Total loans and securities
at banks

2.0

1944.8

-19.0

-12.0

444.0

-12.4

-14.3

264.8

-29.7

-28.6

-8.6

179.2

11.8

4.2

18.4

6.3

1500.8

5.5

6.6

2.7

16.5

5.0

504.2

-18.0

5.2

99.2

-36.2

186.6

-47.2

46.4

Real estate loans

11.2

13.0

11.7

12.4

14.2

13.5

440.5

Consumer loans

11.1

8.8

11.6

12.0

10.3

7.7

296.7

Other loans

12.3

13.5

8.1

9.1

4.5

213.0

9.7

4.1

19.6

3.0

4.0

9.0

-3.5

-4.0

28.1

18.8

61.3

13.8

7.4

9.4

2.4

12.4

U.S. government securities
Other securities
Total loans
Business loans
Security loans

----Business loans net of bankers
acceptances
2

12.

Loans at foreign branches

13.

Sum of lines 11 & 12

14.

Commercial paper issued by
3
nonfinancial firms

15.

Sums of lines 13 & 14

16.

Bankers acceptances:
4 5

-11.3

9.5

Short- and Intermediate-Term Business Credit -------

2.2

5.0

6.9

3.4

16.4

4.8

500.2

-4.1

-2.1

-41.5

-68.8

-53.0

-97.1

15.9

1.9

4.7

5.1

0.7

14.1

1.2

516.1

-1.5

55.5

-14.4

-2.7

-27.4

-40.7

82.6

1.6

11.4

2.1

0.4

7.6

-4.6

598.7

-6.7

-31.7

-9.8

-3.7

-18.6

n.a.

31.7 (Mar)

1.0

9.0

1.6

0.2

6.5

n.a.

632.8 (Mar)

3.1

19.2

n.a.

16.5

n.a.

155.2 (Feb)

1.5

10.9

n.a.

3.4

n.a.

784.6 (Feb)

U.S. trade

related ,

17.

Apr.P

Levels in
bil. of dollars
AprilP

Commercial Bank Credit ---------------

11.8

8.6

Securities

11.

Feb.

1986
Mar.

Line 15 plus bankers acceptances:
U.S. trade related

18.

Finance company loans to business

19.

Total short- and intermediateterm business credit (sum of
lines 17 & 18)

n.a.-not available.
p-preliminary
1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
3. Average of Wednesdays.
4. Based on average of current and preceding ends of month.
5. Consists of acceptances that finance U.S. imports, U.S. exports and domestic shipment and storage of goods.

III-9

Business Finance
Gross public bond offerings of nonfinancial firms, both here and
abroad, set records in April for the third consecutive month.

The torrid

pace of bond issuance in part reflects corporate efforts to lengthen the
maturity of liabilities.

More than half of new domestic issues in April

were for at least 20 years, and more than 40 percent of Euromarket issuance
was fixed-rate debt of at least 10 years' maturity.

In addition, outstand-

ing loans and short-term market paper probably contracted in April, as
bank business loan growth slowed and nonfinancial commercial paper fell
at a 40 percent annual rate.
Gross bond borrowing has been partly offset by retirements of existing higher-coupon issues.

Salomon Brothers estimates that $7 billion of

nonconvertible debt was called by nonfinancial firms in the first quarter,
and another $5 billion in April; this compares with about $8 billion for
all of last year, itself a very high total.

About half the calls have

been by utilities, generally under standard bond indentures allowing debt
to be refunded after five years at a small premium above par.

A few in-

dustrial firms have used "cash calls;" because the debt they are retiring
is nonrefundable, that is, protected from calls financed by new debt with a
lower coupon, these firms have had to use cash generated from asset sales,
stock sales, or accumulated earnings.

Even taking account of the stepped-up

level of retirements, though, the pace of net bond borrowing appears to
have increased greatly, as suggested by the table on page III-11.1
1. A large share-estimated at 40 to 50 percent-of the net increase is
accounted for by firms that have recently participated in mergers, LBOs,
or share repurchases.

III-10

GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)

Corporate securities - totall
Public offerings in U.S.
Stocks-total 2
Nonfinancial
Utility
Industrial
Financial
Bonds--totall
By industry
Nonfinancial
Utility
Industrial
Financial

1984
Year

1985
Year

9.90
8.02

1.89
1.08
.22
.86
.81

1986

1985
Q4

Q0P

Feb.P

Mar.P

Apr.P

16.12

19.29

27.78

28.14

33.40

40.35

12.97

14.86

23.76

23.90

29.90

33.00

2.96
1.61
.37
1.24
1.35

3.32
1.81
.38
1.43
1.51

4.19
2.11
.54
1.57
2.08

4.36
2.44
.74
1.70
1.92

4.80
1.90
.40
1.50
2.90

5.50
2.40
.20
2.20
3.10

6.13

10.01

11.54

19.57

19.54

25.10

27.50

2.80
.87
1.93
3.33

5.21
1.51
3.70
4.80

6.04
2.28
3.76
5.50

10.02
3.32
6.70
9.55

9.28
4.11
5.17
10.26

14.02
4.38
9.64
11.08

17.60
7.10
10.50
9.90

1.87
2.11
1.09
.25

2.37
4.58
1.42
.34

2.67
5.20
1.72
.39

5.60
7.75
2.74
.33

7.03
8.08
1.03
.44

6.57
10.28
3.28
.31

9.10
9.10
5.80

.63
.81
.72

.70
1.30
.87

.38
1.56
.56

1.17
3.15
.24

.90
2.96
.10

1.43
4.66
.70

1.73
3.20
.15

1.88
.84
1.06

3.15
1.26
1.89

4.43
1.73
2.70

4.02
2.04
1.98

4.24
2.56
1.68

3.50
2.15
1.35

7.35
4.05
3.30

By quality
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
4
Equity based bonds
Mortgage-backed bonds
Variable-rate notes
Bonds sold abroad - total
Nonfinancial
Financial

p--preliminary.
1. Securities issued in the private placement market are not included. Total reflects gross
proceeds rather than par value of original discount bonds.
2. Includes equity issues associated with debt/equity swaps.
3. Bonds categorized according to Moody's bond ratings. Excludes mortgage-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants that entitle the holder to
purchase equity in the future.

III-11

NET INCREASE IN TAXABLE CORPORATE BONDS OF NONFINANCIAL CORPORATIONS
(billions of dollars, seasonally adjusted annual rates)
1985
New issues
Estimated retirements
Net increase

1986 (Jan. - Apr.)

112
44
68

208
87
121

As the volume of bond issues has ballooned, the spread between the
Board's recently offered utility rate index and the yield on 30-year
Treasuries has widened to well above its 1985 average.

Some of this

widening may reflect revised investor valuations of the call options retained by debt issuers.

Some issuers have responded by offering securities

with tighter call and refunding provisions.
Businesses also have maintained a lively pace of issuance of new
shares and equity-linked debt in association with the strong stock market,
while merger and buyout activity and stock repurchases have slowed appreciably since the end of last year.

The preliminary GNP accounts for the first

quarter suggest an improvement in economic profits and aggregate after-tax
retained earnings probably more than offset stock retirements.
Treasury and Federally Sponsored Agency Financing
The staff is projecting a combined federal deficit for the current
quarter of $23 billion, a seasonally small deficit because of the large tax
collections in April.

The Treasury is expected to borrow about $46 billion

this quarter to finance this deficit and to add $14 billion to its cash
balance.

(Technical factors-in particular float and accrued interest--are

expected to absorb $9 billion.)

III-12

TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)
1986
Q1

Q2r

Mar.

AprP.

Maye

Treasury financing
Combined surplus/deficit(-)

-61.2

-23.0

-30.1

9.2

-36.2

37.1

46.2

8.4

14.3

35.3
-6.7
42.0
1.8

36.7
1.7
35.0
9.5

8.9
-4.3
13.2
-. 5

18.7

-14.1

14.1

-22.2

14.4

12.2

26.4

12.2

34.4

20.0

5.4

-9.1

7.6

-1.3

-1.2

2.3

1.8

2.0

0.2

5.6

2.0

1.9

1.7

Means of financing deficit:
Net cash borrowing
from the public

23.0

Marketable borrowings/
repayments(-)

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

21.1

7.8
13.3
1.9

Federally sponsored credit
agencies, net cash

borrowingS
FHLBs

-0.4
0.3

-2.0

FNMA

-1.5

-4.4

-. 8

-. 4

Farm Credit Banks

-2.9

-2.0

-. 3

-. 7

-. 5

FHLMC

2.4

1.5

SLMA

1.3

1.6

f--staff forecast
p--preliminary
e--staff estimate
1. Data reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Excludes mortgage pass-through securities issued by FNMA and FHLMC.

III-13

At its

mid-quarter refunding last week,

the Treasury issued $27

billion of new securities, evenly distributed among 3-, 10-, and 30-year
instruments, to raise $12.8 billion of net new funds.1
tary before the auctions was focused on whether,

Much market commen-

light of the weakness

of the dollar, foreign demand would be strong at prevailing interest rates.
In fact,

foreign investors'

orders reportedly were substantial,

particularly

for the 30-year bonds.
Borrowing by the federally sponsored credit agencies has been light
thus far in the second quarter, after a net paydown of outstanding debt in
the first quarter.

Fannie Mae's borrowing requirements have been reduced

somewhat by heavy mortgage refinancings,
the mortgage loans held by Fannie Mae.

which tend to reduce temporarily
The reduction in

the debt of the

Farm Credit Banks apparently is associated with weak demand for new credit
by the agricultural sector.
Borrowing by the Home Loan Banks has surged thus far in the second
quarter as the demand by S&Ls for advances--especially longer-term
advances-has picked up.
assets and liabilities;

The Banks seek to match the durations of their
thus, larger than normal portions of their recent

borrowing have carried maturities in

the range of 7 to 10 years.

The

interest rate spread over Treasury securities on these longer-term issues
has been in excess of 50 basis points, compared with the spreads of 25 or
1. The Treasury appreciably boosted the sizes of the 10- and 30-year issues
compared with recent refundings, because of its decision no longer to
offer 20-year bonds. This security never was popular with investors, and
this lack of of interest was reflected in a higher rate--typically 10 to
20 basis points more than the 30-year issue.
2. Borrowing by Fannie Mae may fall sharply in the months ahead, owing to
its recently announced plan to sell $10 billion of older mortgages from its
The exact timing of the sale was not specified, nor was the use
portfolio.
of the proceeds.

III-14

30 points that the Home Loan Banks normally paid on such securities in the
past.

The spreads were boosted primarily because of the large size of the

issues.

Also, investors may be concerned about the role the Home Loan

Banks are expected to play in financing the FSLIC. 1
Tax-Exempt Markets
Issuance of tax-exempt bonds has accelerated since early in the year.
Offerings in April totaled more than $12 billion, up from $8 billion in
March.

The surge in issuance of short-term securities in April reflected

the large annual spring financing by New York State; this year the financing raised $3.5 billion, $800 million less than in the two prior springs.
Nearly half of the volume in longer-term markets so far this year has been
refunding bonds, as governmental units seek to replace high-cost debt at
lower interest rates.

Public utilities have accounted for a large share

of the refunding, but states and localities also are refinancing publicpurpose bonds.
The stepped-up pace of tax-exempt issuance, and continuing uncertainty about the treatment of municipal securities in any tax-reform
legislation passed this year, evidently have put upward pressure on yields.
The ratio of yields on tax-exempt general obligation bonds to yields on
Treasuries of comparable maturity neared its 1969 record in mid-April, and
the Bond Buyer revenue bond index exceeded Treasury bond yields throughout
1. Under the current proposal, the FSLIC Funding Facility would be formed

with an initial capitalization of $3 billion from the Federal Home Loan
Banks; the Funding Facility also would raise $10 to $15 billion through
long-term debt securities. The Facility would purchase about $2 billion
of long-term Treasury zero coupon securities, which should be sufficient to
pay off the principal of the Facility's initial
debt issuance.
The interest
on the debt securities would be paid from the FSLIC's annual income.

III-15

the intermeeting period. 1
well,

Municipal-corporate yield ratios have risen as

though not to record levels.

GROSS OFFERINGS OF TAX-EXEMPT SECURITIES
(Monthly rates, not seasonally adjusted, billions of dollars)

Total
Short-term
Long-term
Refundings 2
New capital
Total housing 3
Single-family

1985
Year

19.82

16.29

1.97
17.85
4.84
13.00
2.11
.98

1985
Q1P

1986
MarP

AprP

37.69

4.92

8.52

16.20

2.67

.91

.63

.49

4.00

13.62
4.20
9.42
2.32
1.15

36.78
9.40
27.38
2.64
.99

4.29
2.34
1.95
0.0
0.0

8.03
5.44
2.59
0.0
0.0

12.20
4.36
7.84
---

p-preliminary.
1. Does not include tax-exempt commercial paper.
2. Includes all refunding bonds, not just advance refundings.
3. Data from the Department of Housing and Urban Development.

Issuance of municipal securities began to recover from tax-reform
concerns in March,

as bond counsels approved covenants in accord with the

requirements of the House tax-reform bill (H.R. 3838).2
the market came in

mid-March, when the House,

A further boost to

Senate, and Treasury agreed

to put off the effective date of several key restrictions on public-purpose
bonds until September 1, or until final passage of tax-reform legislation,
whichever comes first.

A few days later, trading in municipal securities

markets came to a virtual standstill when Senator Packwood proposed including
1. The 1969 peak of this ratio reflected at least in part Treasury and
Congressional efforts to restrict IDBs and arbitrage bonds, and a threat
to include municipal-bond interest in an alternative minimum tax.
2. The tax-exempt market also has begun to see a trickle of private-purpose
bonds. Most of these have been current refundings, i.e., offerings of
bonds whose proceeds will be used to refund outstanding bonds within 30
days; sales of these bonds would retain tax-exempt status under H.R. 3838.

III-16

all tax-exempt interest income under an expanded personal minimum tax.
Within a week, however, the full Senate Finance Committee rejected such a
provision.

Participants in municipal markets gained additional confidence

in April, as the difficulties of the Senate Finance Committee in shaping an
acceptable plan seemed to doom tax reform altogether.

This optimism con-

tinued despite Finance Committee approval of a draft plan.
The Finance Committee plan would preserve much of the tax-exempt
market; however, it would impose curbs on arbitrage and advance refundings,
and it retains the scheduled phase-out of single-family housing bonds and
small-issue industrial development bonds (IDBs).

The plan is less restrictive

than H.R. 3838: while H.R. 3838 would retain small-issue IDBs, the Finance
Committee plan allows a more generous definition of public-purpose bonds
and retains banks' tax deduction for 80 percent of the interest costs of
holding tax-exempt securities.

The final form of any tax legislation will

not be decided for several months, however, and many investors remain wary.
Residential Mortgage Markets
Refinancing has continued to surge.

Fully one-third of FHA home

loan applications in April were for refinancing, and refinancings in the
conventional loan market also appear to have experienced a sharp pickup.
Refinancing earlier this year likely did not result in large withdrawals
of equity from the underlying property, judging from the slowing in net
residential mortgage debt growth to an 8.5 percent annual rate in the first
quarter.
Widespread refinancing has not yet shown up in available data on
thrift institutions lending activity, which do not go beyond March.

Loan

retirements of $10.5 billion (SA) in March actually were down slightly at

III-17

S&Ls from their February pace, and loan originations declined in each of
the first three months of 1986.

However, there is a substantial time lag

between loan applications and closings--and reports indicate that this lag
is lengthening because of the crush of applications-so it may be that the
pickup in mortgage borrowing will not be reflected in the data until the
second quarter.
Vigorous activity is suggested by more current data on thrift institution liabilities.

Thrift institutions augmented stepped-up growth in core

deposits in April by boosting managed liabilities.

Over the past two months

large CD issuance at thrifts has proceeded at the fastest pace since 1984,
and advances surged by $4 billion in April.

Staff at the FHLBB report that

the demand for advances was widespread geographically and appeared to be
linked to both actual and anticipated increases in assets. 1
Mortgage interest rates are little changed on balance since the last
Despite a spread of 140 basis points in favor of adjustable-

FOMC meeting.
rate mortgages,

most homebuyers have been opting for the security of fixed-

rate financing, with rates on these instruments at their lowest levels in
seven years.

Only 29 percent of conventionally financed home purchases in

early April involved adjustable-rate financing, and market sources indicate
that an even smaller percentage of the recent refinancing volume carries
adjustable rates.

Issuance of mortgage pass-through securities accelerated

to a record pace in April; roughly 60 percent of the heavy volume of these
1. Some of this borrowing may be in response to prospective liability-based
capital requirements for FSLIC-insured institutions. A FHLBB proposal, now
out for public comment, would impose a 6 percent capital requirement on
incremental liability growth after the third quarter of 1986, but allow a
6-year phase-in of the capital requirement on then-existing liabilities.

III-18

HOME MORTGAGE FINANCING
Monthly averages
Percent
-20

Interest rates

-118
_

S
.1

\
\

Fixed-rate mortgages at S&Ls
(effective rate)

Y/,

-14
-'-N
\

*%~~S

-12

GNMAs

coupon)
Te -year
Treasuries

\
April

Percent

Spreads

Fixed-rate loans less Treasuries

April

-S

1
'

1982
1982

1983
1983

V
/

-V

1984
1984

GNMAs less Treasuries
GNMAs less Treasuries

1985
1985

1986
1986

III-19

instruments in the first quarter was linked to newly originated mortgages,
about the proportion of the past two years.
Mortgage rates in
nearly as much in
maturity.

the primary and secondary markets have not fallen

recent months as have Treasury yields of comparable

Some lag in

the adjustment of mortgage rates is

normal,

but other factors also are contributing to the widened spread.

Increased

investor concern regarding the risk of mortgage prepayments, given the
recent prepayment volume and greater interest rate volatility, appears
to account for some of the recent widening of spreads over Treasuries
observed on both current-coupon and premium-coupon mortgage pass-throughs.
In addition, a record volume of new issues of mortgage securities has been
marketed in

recent months,

and the market may well expect an even larger

supply to follow.
Consumer Installment Credit
Growth in consumer installment credit outstanding has slowed markedly,
to an 8 percent annual rate in

March.

New-car sales dropped in

manufacturers shifted to less attractive financing programs.

March, after

Growth in auto

credit was about unchanged for the quarter as a whole, however, and it was a
slowing in other categories that accounted for the bulk of the deceleration
in

total credit.

Data for consumer loans at commercial banks suggest a

continuation of more moderate growth in

April,

but the swings in market

share between banks and captive finance companies argue for some caution in
interpreting these numbers.
A combination of aggresive lending and economic weakness in certain
areas seems to be resulting in increasing problems of credit quality.
Consumer loan delinquencies at auto finance companies have continued to

III-20

NEW ISSUES OF MORTGAGE-BACKED PASS-THROUGH SECURITIES
BY FEDERALLY SPONSORED AGENCIES
(Monthly averages, billions of dollars, not seasonally adjusted)

Memo:
Period

Total

GNMAs

FHLMCs

FNMAs

FNMA and FHLMC
swap issues

1985-Q1
Q2
Q3
Q4 r

6.4
7.5
10.4
11.8

2.7
3.3
4.1
5.2

2.4
2.8
3.8
3.9

1.3
1.5
2.5
2.7

3.0
3.3
4.7
4.9

1986-Q1 p

12.3

5.1

4.1

3.1

5.3

1985-Oct.
Nov.
Dec. r

11.1
11.2
13.2

5.8
5.3
4.5

3.1
3.4
5.3

2.2
2.5
3.4

3.8
4.3
6.7

1986-Jan. r
Feb.
Mar. r
Apr. p

12.3
12.4
12.2
13.9

5.3
5.0
5.1
6.0

3.0
4.4
4.9
5.1

4.0
3.0
2.3
2.8

5.4
6.0
4.3
5.7

p-preliminary.

r-revised.

MORTGAGE ACTIVITY AT FSLIC-INSURED INSTITUTIONS
(Billions of dollars, seasonally adjusted)
Mortgage transactions
Originations
Sales

(1)

(2)

Net change in mortgage assets 1
Mortgage Mortgage-backed
Total
loans
securities

(3)

(4)

(5)

1985-July r
Aug. r
Sept.r
Oct. r
Nov. r
Dec. r

14.9
16.0
17.0
19.5
18.6
20.2

10.6
7.9
10.0
13.0
13.1
11.2

2.4
6.6
9.5
4.9
3.7
5.0

4.7
5.1
4.0
6.4
3.1
4.9

-2.3
1.5
5.5
-1.5
.6
.1

r
r
p

18.4
17.8
16.3

9.3
9.8
12.6

5.4
3.1
2.7

2.9
2.2
2.7

2.6
.9
0

1986-Jan.
Feb.
Mar.

1. Data are adjusted to account for structural changes through mergers,
acquisitions, liquidations, terminations, or de novo institutions.
p--preliminary.
r-revised.

III-21

increase, rising in March to 2.13 percent, the highest level in nearly
five years.

However, the uptrend began from an unusually low level, so

that this indicator still is not much above the midpoint of its historical
range.

Data on delinquency rates on consumer loans at commercial banks

are not yet available for the first
suggest that such rates,
upward trend.

quarter,

but anecdotal evidence would

especially for credit cards,

have maintained an

The rising credit card delinquencies are not surprising,

given the aggressive marketing techniques employed over the past couple of
years; the consequent pickup in charge-offs was to a considerable extent
predictable, and most banks evidently are finding the interest margins
adequate to absorb the losses.

Some notes of caution are being sounded,

but there is to date no sign of a pullback by lenders.

III-22

CONSUMER INSTALLMENT CREDIT
1984

1985

1985
Q4

1986
Ql

Jan.

1986
Feb.r

Mar.p

-------- Percent rate of growth, SAAR -----Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

20.6

18.0

14.5

12.2

17.2

11.1

8.1

18.7
25.7
19.7

19.3
20.1
15.6

15.8
15.6
12.6

15.4
13.2
8.6

24.3
14.1
11.9

15.3
10.4
7.3

6.1
14.6
6.5

-------

Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1
By major holder:
Commercial banks
Finance companies
All other

Billions of dollars,

77.3

81.5

74.7

65.5

91.9

60.1

44.6

27.2
20.1
30.0

33.4
19.8
28.4

31.3
17.8
25.6

31.8

50.2
16.6
25.1

32.2
12.5
15.4

13.1
17.6
13.9

39.8
10.0
27.6

31.6
24.0
25.9

29.0
20.7
25.0

18.4

29.5
43.5
18.9

17.0
27.4
15.7

8.6
17.1
18.9

---------Interest rates
At commercial banks 2
New cars, 48 mos.
Personal, 24 mos.
Credit cards
At auto finance companies 3
New cars

Used cars

SAAR ---------

15.6
18.1

29.3

17.8

Annual percentage rate ---------

13.71
16.47
18.77

12.91
15.94
18.70

12.39
15.61
18.57

12.29
15.52
18.48

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

12.29
15.52
18.48

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

14.62
17.85

11.98
17.59

11.40
17.24

10.07
16.66

9.99
16.60

9.70
16.74

10.51
16.63

1. Includes primarily personal cash loans, home improvement loans, mobile
home loans, and sales finance contracts for non-automotive consumer durable
goods.
2. Average of "most common" rates charged, on loans of specified type and
maturity, during the first week in the middle month of each quarter.
3. Average rate for all loans of each type made during the period, regardless of maturity.
n.a.-not available.
p--preliminary.
r-revised.

INTERNATIONAL DEVELOPMENTS
Foreign Exchange Markets
Since the April 1 FOMC meeting, the foreign-exchange value of the
dollar has declined by about 5 1/2
percent on a weighted-average basis.
Developments have been dominated by market participants' attempts to
discern the policies of the G-5 countries toward the foreign exchange
market, especially in connection with the Tokyo Summit in early May.
Attention during the first part of the intermeeting period was directed
particularly at the dollar's value against the mark, but in recent weeks
attention has shifted to the yen.

Since the previous meeting, the dollar

percent against the mark, with most of that
has fallen by about 6 1/2
decline coming in mid-April; against the yen the dollar has declined by
percent.
8 1/2

There was little net change in the differential between U.S.

interest rates and a weighted average of foreign interest rates -- both
short and long-term -- during the period.
During the first week of April, the dollar gained about 2 percent
on a weighted-average basis, as market participants reportedly took the
view that G-5 officials were no longer favoring a lower dollar.

Key

elements in this view were various statements, primarily by Japanese
officials, to the effect that the dollar may have fallen far enough and
limited but visible dollar purchases by the Bank of Japan.

At this time

the dollar was supported by a marked firming of oil prices as well.
Also during the first week of April, the French franc came under
very heavy selling pressure within the European Monetary System.

April 6, the EMS countries announced a new alignment of central exchange

IV-1

IV-2

Strictly Confidential (FR)
Class II-FOMC
5/14/86
March 1973=100
AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR
Chart 1

FOMC

February

March

April

May

SELECTED
DOLLAR EXCHANGE RATES

Jan.

German Mark
L1

^-\.

FOMC

February

March

April

May

IV-3

rates in which the French franc was devalued against the-mark by about 6
percent.

Changes in EMS central exchange rates in the April 6

realignment are summarized in Table 1.

In the weeks following the

realignment, both France and Italy relaxed some capital controls and
reduced official central bank lending rates.

Table 1.
Percentage Changes in Central Exchange Rates in
April 6 EMS Realignment
Germany
Netherlands
Denmark
Belgium
Italy
Ireland
France

3
3
1
1
0
0
-3

In mid-April, downward pressure on the dollar resumed, gaining
impetus in part from various statements by foreign officials that seemed
to suggest that G-5 authorities might take additional coordinated actions
to lower the dollar's value.

A modest package of measures designed to

stimulate the Japanese economy (but notably not including a cut in the
discount rate) and the relative steadiness of German short-term interest
rates -- together with some disappointing U.S. economic data and
continued declines in U.S. interest rates -

were factors in a strong

shift in market sentiment away from the dollar.

The dollar declined

steadily in mid-month, falling particularly steeply against the mark and
eventually reaching a five-year low of about 2.16 marks per dollar in the
last week of April.

Although the dollar's rate of decline against the

mark slowed by the end of the month, upward pressure on the yen continued
strongly throughout the second half of April.

IV-4

The dollar's downward trend was interrupted in the week before the
Tokyo Summit as trading was very light and market participants awaited
new developments.

Following the summit declaration on international

economic policy on May 6, the dollar resumed its decline, again mainly
against the yen.

Market participants reportedly concluded from the

summit declaration and other statements by officials that Japanese and
German hopes for joint action to slow the dollar's decline had not been
met.

The dollar/yen rate reached a post-war low below 160 yen per dollar

in trading on May 12.

IV-5

U.S. International Financial Transactions
Substantial net capital inflows during the first quarter, the
counterpart of continued large trade and current account deficits, took
the form of substantial foreign purchases of U.S. corporate stocks and
bonds, continued heavy purchases of U.S. Treasury securities, and
large bank-reported inflows.

These inflows were offset in part by

unusually heavy purchases of foreign securities by U.S. residents,
particularly in March.
Foreign purchases of U.S. corporate stocks totalled a record $6
billion during the first quarter (see line 2b in the Summary Table on
U.S. International Transactions).

This rate was 50 percent higher than

the brisk fourth-quarter pace, as investors abroad apparently were
attracted by the surge in the U.S. stock market.
Private foreign purchases of U.S. corporate bonds slowed
noticeably from an extremely rapid fourth-quarter pace, but remained
above the average quarterly rate for 1985 (line 2a).

New Eurobonds

issued by U.S. corporations accelerated in April, totalling over $7
billion through the fourth week of the month.

The pickup in April took

place as yields on longer-term instruments dipped close to or below 7
percent, and accompanied a very large volume of domestic issues.

growing proportion of the issues in the Euromarkets was in longer-term
maturities (10 years or more) at fixed rates. About one-third of the new
issues in March and April were denominated in terms of foreign currency
(largely Swiss francs and yen), but in most cases the bonds were issued
in conjunction with swap arrangements that eliminated the foreign
currency exposure of the U.S. issuers.

IV-6

U.S. net purchases of foreign securities (line 2c) totalled more
than $6 billion during the first quarter, nearly double the previous
high quarterly rate.

About one-third of the total was in foreign

stocks, including sizeable purchases of Japanese stocks.

The remaining

two-thirds was in bonds, reflecting, in part, a pickup in
dollar-denominated bond issues floated in the U.S. market by foreign
borrowers.

A sizeable proportion of U.S. purchases of bonds abroad

apparently was denominated in foreign currency, although firm data on
this breakdown is not available.

As further evidence of a possible

growing willingness on the part of U.S. investors to acquire
foreign-currency-denominated securities, U.S. bank holding companies and
other corporations have begun to float sizeable non-dollar security
issues in the U.S. market this year.

During January-April, $1.2 billion

equivalent was issued, denominated largely in Australian dollars, at
relatively high nominal interest rates.
Foreign purchases of U.S. Treasury securities (line 3) continued
to be heavy in the first quarter, but about half of the total was
accounted for by large purchases by the World Bank in March.

Most of

the rest was recorded as sales to residents of the United Kingdom and
Canada.

Sales recorded to Japanese residents fell to about $1/2 billion

in the first quarter, down sharply from a fourth-quarter total of $5
billion, repeating a pattern of first-quarter declines observed during
the past two years.

Independent survey data suggest that total Japanese

purchases of foreign securities (largely dollar denominated) remained
strong during the first quarter suggesting that Japanese investors
shifted from Treasury securities to Eurodollar bonds and U.S. corporate

IV-7

stocks during the period.

Total Japanese purchases of foreign

securities apparently accelerated in April.
Foreign official reserve holdings in the United States (line 4)
rose moderately in the first quarter.

The increase was largely in the

form of Treasury securities purchased by several major industrial
countries.
U.S. banks recorded a substantial net inflow in the first quarter,
most of it in January (line 1 in the Summary Table).

As indicated in

the International Banking Data Table (line 3a), a sizeable portion of
the inflow reflected a continued reduction in net claims of the U.S
offices of U.S. chartered banks on their foreign branches.

This flow

appears to have been reversed in April, in association with the increase
in the growth of domestic core deposits relative to a slowing in the
growth of loans and securities at banks.

IV-8
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)

1986
Ql

11.5

5.2

11.1

10.4

1.3

-0.5

4.9

10.0

21.1

12.8

4.9

4.4

3.6

46.0

6.7

10.3

18.4

12.9

3.3

4.4

5.2

-0.9

4.9

0.5

1.4

4.1

6.1

1.6

1.8

2.8

-5.0

-8.0

-2.3

-1.6

-1.4

-6.1

0.1

-1.7

-4.4

23.1

20.5

5.1

7.5

5.7

8.4

-0.7

1.4

7.7

2.6

-1.8

7.9

2.5

-1.6

2.3

2.0

-0.2

0.5

By area
G-10 countries (incl. Switz.)
OPEC
All other countries

3.1
-5.4
4.9

-0.4
-6.7
5.2

6.0
-2.1
3.9

2.4
-2.0
2.1

-3.3
-1.0
2.7

3.9
1.3
-2.8

2.1
1.1
-1.2

1.4
0.7
-2.2

0.4

By type
U.S. Treasury securities
Other 2/

4.7
-2.1

-0.5
-1.3

8.7
-0.8

-0.1
2.6

-2.0
0.4

3.3
-0.9

0.4
1.6

1.7
-1.9

1.1
-0.6

-3.1

-3.9

-0.4

-0.1

-3.1

-0.1

0.1

-0.1

-4.5
-19.1
22.5
16.3
-1.2
8.0
-107.4
-117.7
30.5
32.7

-5.1
6.7
4.9
-27.6
3.8

-7.1
6.0
-8.5
-29.3
7.5

-8.7
1.5
6.1
-36.6
10.4

-114.1

-28.5

-33.0

-39.5

Private Capital
Banks
1. Change in net foreign
positions of banking offices
in the U.S. (+ = inflow)
Securities
2. Private securities
transactions, net
a) foreign net purchases
(+) of U.S. corporate bonds
b) foreign net purchases
(+) of U.S. corporate stocks
c) U.S. net purchases (-) of
foreign securities
3.

Foreign net purchases (+) of U.S.
Treasury obligations 1/

1984
Year

1985
Year

20.6

31.3

-0.2

7.7

42.9

13.7

1985
03

Jan.

1986
Feb.

Mar.

Official Capital
4. Changes in foreign official
reserve assets in U.S.
(+ = increase)

Other
6.
7.
8.
9.
10.

Changes in U.S. official reserve
assets (+ = decrease)
transactions (Quarterly data)
U.S. direct investment (-) abroad
Foreign direct investment (+) in U.S.
Other capital flows (+ = inflow) 3/ 4/
U.S. current account balance 4/
Statistical discrepancy 4/

U.S. merchandise trade balance - part
of line 9 (Balance of payments basis,
saeasonally adjusted)
1.
2.
3.

-124.3

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

-35e

n.a.

Includes U.S. Treasury notes publicly issued to private foreign residents.
Includes deposits in banks, commercial paper, acceptances, & borrowing under repurchase agreements.
Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking
and official transactions not shown elsewhere.
4.
Includes seasonal adjustment for quarterly data.
*
Less than $50 million.
NOTE: Details may not add to total because of rounding.

INTERNATIONAL BANKING DATA
(Billions of dollars)

1981
Dec.

1982
Dec.

1983
Dec.

Dec.

Mar.

1985
June
Sept.

Dec.

Mar.

7.8

32.9

39.3

25.4

26.0

27.6

18.9

21.0

11.8

16.2

19.6
22.3
-2.6

49.1
40.0
9.1

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks

13.2

15.8

Eurodollar Holdings of
U.S. Nonbank Residents 2/

95.5

112.6

Net Claims of U.S. Banking
Offices (excluding IBFs) on Own
Foreign Offices
Net Claims of U.S. Banking
Offices on Own IBFs 1/
Sum of lines 1 and 2
of which:
(a) U.S.-chartered banks
(b) Foreign-chartered banks

1984

8.1

22.4
9.1

7.8

6.1

33.2
32.1
1.1

30.6
1.6

35.7
33.4
2.2

31.5
31.5

18.6

20.7

19.2

20.2

124.3

117.5

118.9

110.3

32.1

1986

10.1

1.0

Apr.

n.a.

29.0
32.4
-3.4

22.0
27.1

-5.1

29.3
31.1
-1.8

19.5

18.7

17.6

16.7

114.1

112.4

115.8

114.8

1. Corresponds to net claims of international banking facilities (IBFs) on all foreign residents, including all banks
whether related or not, and all nonbanks.
2. Include terms and overnight Eurodollars held by money market mutual funds.
3. Through April 28, 1986.
*/ Less than 50 million ().
Note:
These data differ in coverage and timing from the overall banking data incorporated in the international
transactions accounts. Line 1 is an estimate constructed as the residual of line 3 minus line 2. Line 2 is data for the
last Wednesday of the month for the sample of monthly IBF reporters. Line 3 is an average of daily data reported to the
Federal Reserve by U.S. banking offices. Line 4 is an average of daily data. Line 5 is the month-end value for data
For dates after September 1983, the overnight portion is an average of daily data and the term
through September 1983.
portion is an average of Wednesday data.

IV-10

U.S. Merchandise Trade
Revised U.S. merchandise trade figures for January and February
and very preliminary data for March suggest that on a
balance-of-payments basis the merchandise trade deficit in the first
quarter was smaller than in the fourth quarter of last year as exports
rose somewhat and oil imports declined substantially.
The rise in exports in the first quarter appears to come largely
from machinery (particularly broadcasting equipment and to a lesser
extent construction equipment and business machines) as well as aircraft
and consumer goods.

For all nonagricultural exports as a group, the

first-quarter increase was almost entirely in volume; prices of
nonagricultural exports rose on average by less than one-half percent.
U.S. MERCHANDISE TRADE 1/

Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Nonoil
Trade Balance
Volume (Bil 82$, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Nonoil
1/
e/

Year
1985

1985

214.0
29.2
184.8

220.8
32.8
187.9

214.1
28.6
185.5

209.1
26.1
183.0

211.9
29.3
182.6

220
28
192

338.3
50.4
287.9

314.3
41.8
272.4

328.1
52.2
275.9

340.9
50.1
290.8

369.9
57.4
312.5

362
42
320

-124.3

-93.5

-113.9

-131.8

-157.9

30.1
179.3

32.6
181.8

28.6
179.3

27.2
178.4

31.8
177.6

30
185

59.8
292.5

48.8
277.0

60.9
282.3

60.9
296.1

68.5
314.4

58
322

As published in the balance-of-payments accounts.
Staff estimate. Data are subject to possibly large revisions.

1986
Qle

-142

IV-11
The value of agricultural exports was at nearly the same level as
in the fourth quarter.

Prices of various export commodities rose

somewhat, especially corn, tobacco and oilseeds with a smaller price
increase for soybeans.

The volume of agricultural exports declined a

bit despite continued Soviet purchases of corn and record Soviet
purchases of soybeans.

Demand for U.S. agricultural commodities

continued to be affected by ample competing foreign supplies and U.S.
prices that were not competitive in world markets.

Later this year U.S.

price supports for various farm crops will be lowered significantly
reflecting provisions of the 1985 farm bill.
The value of imports appears to have declined moderately in the
first quarter.

A sharp drop in oil imports was offset by increases in

other import categories.

These data are preliminary and are subject to

revision.
Both the price and volume of imported oil dropped in the first
quarter. It is estimated that the average price of imported oil dropped
from $26.30 per barrel in December (on a balance-of-payments basis) to
about $18 per barrel in March in response to developments in world
markets.

The volume of oil imported declined moderately from

fourth-quarter rates; in the fourth quarter the volume of imports rose
as stocks of fuel oil were replenished.

OIL IMPORTS 1/

Year
1985
Volume (mbd, SA)
Price ($/BBL)
Value (Bil. $, SAAR)
1/
e/

5.24
26.37
50.40

1984
4
5.62
27.59
57.81

1985
q3

4.34
26.43
41.84

5.30
27.01
52.19

5.34
25.77
50.14

Q4
5.99
26.29
57.41

As published in the balance-of-payments accounts.
Staff estimate. Data are subject to possibly large revisions.

1986
Qle
5.2
21.75
42.0

IV-12

The increase in nonoil imports in the first quarter was spread
among various categories including machinery, consumer goods and items
such as gold and coffee; part of that rise in value appears to be in
prices.

As measured by the BLS index, prices of nonoil imports rose 3.4

percent (not an annual rate) in the three-month period ending in March
following a 2.3 percent increase during the fourth quarter.

Import

price developments sampled by BLS tend to lead changes in unit values
measured by recorded merchandise trade data (and implied in the tables
above).

IV-13
Foreign Economic Developments.

The pace of economic activity in foreign

industrial countries has been slow in recent months with the level of
industrial production so far this year generally below the fourth
quarter of last year.

This recent weakness has been most pronounced in

Japan, where production levels in the first quarter fell to a level only
1 percent above the first quarter of last year.

In Germany, where

industrial production also declined in the first quarter, the level
remained 3.5 percent above a year earlier.
Inflation abroad is slowing further under the influence of lower
oil prices and a weaker dollar.

Consumer price inflation was lower in

the first quarter than in the previous quarter in most countries.
Monthly rates for March and April, where available, were very low in all
countries.

In Germany, the monthly cost of living index in April was

below its year-earlier level for the first time in 27 years.
First-quarter external surpluses continued at record levels in
Japan and Germany.

Both countries' trade and current account surpluses

in the first quarter were approximately equal to their fourth-quarter
rates and substantially higher than a year ago.
Individual Country Notes.

In Japan, recent data on industrial

production suggest a continuation of the substantial slowing of the pace
of output growth that emerged in 1985.

Industrial production fell by

0.6 percent (s.a.) in March after a slight increase in February, so that
the average level of the index for the first quarter was below that of
the previous quarter and just 1.1 percent above its year-earlier level.
Reflecting this slowing of industrial growth, new private sector
machinery orders (s.a.) declined for the second consecutive month by 2.4

May 14, 1986
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period, seasonally adjusted) 1/

Q4/Q4 Q4/Q4

Q2
Q2

1985
Q3
Q3

Q4
Q4

1986
Q1
Q1

Nov.
Nov.

Dec.
Dec.

1985
Jan.
Jan.

Feb.
Feb.

Mar.
Mar.

1984

1985

4.3
4.4

4.9
5.0

.8
.9

1.7
2.7

1.6
1.8

2.0
1.5

1.0
.5

.6
2.0

.6
.0

n. a.
n.a.

2.2

-3.6

3.0
3.5

2.4
3.4

1.7
1.8

1.7
2.1

-. 1
.4

n.a.
-. 8

-. 7

-3.4

2.7

-1.3

2.9
2.1

2.3
1.0

1.4
.4

.3
-1.1

.6
.2

n. a.
n. a.

3.8

-3.9

2.0

2.5

5.7
10.6

4.4
1.2

1.4
2.7

.7
-.1

1.7
-. 7

n.a.
-.7

*
-1. 1

*
.6

*
-. 6

*
.1

2.6
-. 5

2.8
4.9

1.4
1.8

-. 2
.0

.5 n. a.
.2 n.a.

1.5

-2.1

4.7
7.2

2.1
1.8

.3
.3

.8
.5

-. 5

-. 7

-. 5

Latest 3 months
from year ago 2/

Canada
GNP
IP

1.3 n.a.
1. 1 n.a.

-. 7

*'r
n.a.

4.9
4.7

France

GNP
IP

-. 8

1.5

n.a.

2.0
1.5

Germany

GNP
IP

-. 3

Italy

GNP
IP

n.a.

2.3
1.7

Japan

GNP
IP

*-. 6

4.4
1. 1

United Kingdom

GNP
IP

1.7

n.a.

2.8
3.3

United States

GNP
IP

.2
.5

.8
.3

1. Asterisk indicates that monthly data are not available.
2. For quarterly data, latest quarter from year ago.

2.0
1.6

May 14, 1986
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(Percentage change from previous period)
1984

Q4/Q4
1984

Q4/Q
1985

-----Q4

1986
Q1
Q1

1985
Q1
Q1

Q2
Q2

Q3
Q3

Q4
Q4

1986

----------------------- Latest 3 months
Jan.
Feb.
Mar.
Apr.
from year ago

Canada
CPI
WPI

3.7
3.6

4.2
2.8

.7
.3

1.2
1.0

6.8
10.5

4.8
-1.2

1.4
1.6

1.8
.9

.9
-1.4

2.1
1.3

1.8
-1. 1

.7
.3

1.1
1. 7

.6
.3

-. 2
-2. 1

8.8

8.5

8.9

5.9

2.2
1.9

2.6
2.7

2.2
2.2

1.1
-. 1

2.3
.9

1.8
-. 5

2.4
.5

2.3
-3.7

.6
.4

.5
-. 7

.1
-1.0

1.0
-2.4

-. 1
-2.4

.5
-. 2

4.8
6.1

5.5
5.2

1.2
1.3

1.3
1.6

3.4
2.0

.3
.5

.5
.9

.7
1.5

.2
.6

3.9
1.7

3.6
1.6

.8
.1

.9
,.1

1.0
.6

.6
-. 2

1. 1
1. 1

.4
-1.4

.3
-: 7

.9
.2

.9
.8

1.2
n.a.

.5
.8

.4
-. 2

.2
n.a.

n.a.
n.a.

4.2
3.0

n.a.
n.a.

3.6
-1.2

France

CPI
WPI

.6
-2. 2

.1
n.a.

. 1

-. 2

n.a.

.3
n.a.

.0
-2. 1

.2
-. 1

-. 2
-2.2

-. 2
-1.0

Germany

CPI
WPI

-6.5

Italy

CPI
WPI

.7
-1.3

.2
n.a.

7. 1
2.5

.5
n. a.

1.5
-6.4

n.a.
.8

4.9
4.8

Japan
CPI
WPI

-. 3
-1.5

-. 5
-2.2

United Kingdom

CPI
WPI

.4
.4

.1
.6

United States
CPI (SA)
WPI (SA)

-. 4
-1.6

-. 4
-1. 1

n.a.
n. a.

May 14,

1986
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1/
(Billions of U.S. dollars, seasonally adjusted except where otherwise noted)
1984
1984

1985

1985
S--Q-- 2

Q3
Q3

-----4
Q4

1986
Q---Q1

Dec.
Dec.

1985
Jan.
Feb.
Jan.
Feb.

Mar.
Mar.

Canada
Trade
Current account

15.7
1.9

12.2
-1.4

4.2
.9

4.0
.5

-2.4
-. 8

-2.5
.5

-.5
-. 2

-1. 1
-. 6

18.7
5.9

25.4
13.9

7.2
6.0

4.2
1.7

3.4
.2

2.3
-1. 1

2.5
-. 9

1.8
n.a.

.1
*

France
Trade
Current account

.1
n. a.

2.9
1.8

2.9
2.9

-. 4
*

Germany
Trade (NSA)
Current account (NSA)

6.0
3.1

6.1
2.1

9.1
7.0

9.5
6.9

3.1
2.7

3.7-7
2.1c
I-

Italy
Trade
Current account (NSA)

-10.9
-2.9

-13.0
n.a.

-3.1
-2.2

-3.8
-2.9

-3.9
-2.4

-1.3
n.a.

-4.0
n.a.

-3.1
n.a.

-.6

17.5
15.6

-2.0
1.2

-. 0
.7

-1.6

-.7

6.2

6.0
5.5

5.3

5.9

-.7
*

Japan
Trade
Current account 2/

44.1
35.0

56. 1
49.3

13.2
11.3

11.5
9.4

13.1
12.2

14.1
12.1

17.3
15.6

-5.3
.9

-2.7
4.0

-1.6
.5

-1.4
-. 4

-. 3
1.7

-. 6
1.5

-. 3
1.3

-30.9
-31.8

-23.4
-24.2

-28.5
-27.6

-33.0
-29.3

-39.5
-36.6

6.2

4.4

5.6

-.5
.4

-1.7
-. 8

United Kingdom
Trade
Current account
United States
Trade 2/
Current account

-114.1
-107.4

-124.3
-117.7

n.a.
n.a.

*
*c

*
*;

1. The current account includes goods, services, and private and official transfers.
Asterisk indicates that monthly data are not available.
2. Annual data are subject to revisions and therefore may not be consistent with quarterly and/or monthly data.

*
*;

IV-17
percent in March.

There is also cumulative evidence of weakness in

other sectors of the economy.

Retail sales (s.a.) fell 5 percent in

February and rose 3 percent in March.

New housing starts (s.a.)

declined for the second consecutive month in March.

Growth in export

volume has slowed substantially in recent months, and in March and
April, the export volume index was below its year-earlier level.

As the

table below shows, the slowing of growth in export volume, which started
in early 1985, has been dramatic compared with the strong growth
experienced in 1984.

GROWTH IN EXPORT VOLUME
(percent change from year earlier)

1984

16.1

16.0

13.9

15.8

1985

6.9

6.8

4.0

1986

1.0

Jan.

2.3

Feb.

0.1

Mar.

-2.1

Apr.

-0.3

Inflation is slowing from its already low rate.

1.9

The Tokyo consumer

price index rose 1.2 percent during the 12 months ending in April.
Wholesale prices in March were more than 8 percent below their
year-earlier level, reflecting the recent sharp appreciation of the yen
and the drop in oil import prices.

IV-18
Although the demands of Japanese trade unions were quite moderate
during this spring's wage negotiations, the outcomes were still below
union demands.

For the third consecutive year, the unions gained only

modestly in terms of wages and hours.

The private sector wage increase

averaged 5.1 percent, only slightly above the increases of the previous
two years, and the government provided only vague promises to shorten
the work week.

Pressure for a lower wage settlement this year primarily

stemmed from the impact of the rapid appreciation of the yen on
export-oriented industries, including the traditionally pace-setting
sectors in wage negotiations such as the metal-working industries.
External surpluses continued at record rates.

In the first three

months of the year, the current account surplus was $62 billion
(s.a.a.r.), little changed from the fourth quarter of 1985.

The

trade balance in the first quarter was $70 billion (s.a.a.r.).
As part of its ongoing efforts to stimulate domestic demand, and in
light of the continued strengthening of the yen, the Bank of Japan
lowered its discount rate from 4 to 3-1/2 percent on April 21.

This was

the third discount rate reduction in four months.
In other actions, Prime Minister Nakasone announced the
recommendations of a specially appointed panel to study structural
adjustments required to reduce Japan's dependence on export-led growth.
The Maekawa Report recommended substantial changes in the Japanese
economy over the medium term, including a reduction in working hours,
growth in wages, abolition of the tax-free savings system on small
accounts, improved market access, and more flexible implementation of
fiscal policy.

No timetable for implementation has been announced, and

IV-19

some domestic opposition has emerged to the Maekawa Report.

association with the Report, Japanese authorities announced a package of
specific short-term measures to stimulate domestic demand.

These

measures include an acceleration of planned public works expenditure,
temporary reduction in retail prices of electricity and gas, and
promotion of housing and utilities investment.
Industrial production in Germany fell by 1.3 percent in February
and by 0.3 percent in March.

The average first-quarter result was

nearly 1 percent below the fourth quarter and 3.5 percent above a year
ago.
data.

The construction sector continues to hold down overall production
Building activity in the first quarter was 8 percent (s.a.) below

its fourth-quarter level.

New order volumes in the first quarter were

almost 2 percent below fourth-quarter levels as domestic orders remained
sluggish and foreign orders dropped sharply in March.

The most recent

business climate survey reports a slight deterioration from a month ago
in the respondents' outlook over the next six months, but continuing
confidence in growth over the next five years.

The rate of unemployment

in April was 9.1 percent, only slightly lower than last year's average.
Employment, however, has continued to increase.
The cost of living index in April was 0.1 percent below April of
last year, marking the first year-on-year decline since June 1959.
Through April, the index this year has declined at an annual rate of
about 1 percent.
1985.

Import prices in March were 18 percent below March

Wholesale and producers prices are also below a year ago.

Excluding energy prices, the cost of living index in March was 1.8
percent above March 1985.

Another component that has contributed to the

IV-20

fall in the cost of living is food prices, which were 1.1 percent below
last year in March.

This reflects both the decline in prices of

imported food, especially in D-mark terms, and a decline in the prices
of domestic agricultural products.
The first-quarter trade surplus was $9.5 billion (n.s.a.) compared
with $4.2 billion in last year's first quarter.

The corresponding

results for the current account were $6.9 billion (n.s.a.) compared with
$1.7 billion last year.

This continued high level of the trade surplus

is due primarily to price effects.

In constant prices, the trade

surplus has declined from its peak in the second quarter of last year,
and the most recent data on foreign orders suggest that this decline is
continuing.
In France, industrial production increased by 1.5 percent (s.a.) in
February, but was unchanged from its year-earlier level.

The

unemployment rate rose by 0.1 percentage point in March to 10.6 percent
(s.a.), only slightly below the record high level of last January.
inflation rate has continued to moderate.

The

Consumer prices rose by only

0.3 percent (n.s.a.) in March as the year-over-year inflation rate eased
to 3 percent, not far above the new government's year-end inflation
target of 2.3 percent.
The trade balance in March moved into deficit by $370 million
(s.a.).

However, for the first quarter, trade was in surplus by $100

million, only the second quarterly trade surplus in seven years.
The new government of Prime Minister Chirac has begun to implement

its economic program.

In conjunction with the devaluation of the franc

within the EMS in early April, a partial lifting of exchange controls

IV-21
and price regulations was announced.

The government outlined a program

of extensive denationalization, to be carried out over a four-year
period.

Supplemental budget measures for 1986 involved relatively minor

tax and expenditure adjustments, leaving the expected budget deficit
unchanged at slightly below 3 percent of GDP.

The newly announced

monetary goal of holding M3 growth in 1986 below 5 percent is consistent
with the previous government's target range of 3 to 5 percent growth in
M3.

The Chirac government also indicated its intention to introduce

legislation increasing the autonomy of the Bank of France.
Economic activity in the United Kingdom continues to expand at a
moderate rate, although the rate of growth appears to be somewhat slower
than that experienced last year.

Industrial production rose 1.7 percent

(s.a.) in February, reversing its sharp December decline, after January
had seen only a slight increase.

Preliminary data indicate that

consumption was flat in the first quarter, although it is thought that
difficulties in seasonal adjustment may have obscured underlying growth.
Inflation in the United Kingdom continues to be moderate.

Retail

prices rose only 0.1 percent (n.s.a.) in March, lowering the 12-month
inflation rate to 4.2 percent.

The trade deficit in the first quarter

of 1986 was $7.8 billion (s.a.a.r.) and the current account surplus was
$5.0 billion (s.a.a.r.).

This compares with a trade deficit of $1.2

billion and a current account surplus of $5.2 billion (s.a.a.r.) in the
previous quarter.

Nearly all of the deterioration in the trade balance

occurred in March, when falling oil export revenues and rising imports
led to the largest monthly trade deficit on record.

IV-22

The Bank of England lowered its official lending rates by 1
percentage point in two steps in April.

Major U.K. clearing banks

announced similar reductions in their base lending rates, now at 10.5
percent.

On April 29, Chancellor of the Exchequer Nigel Lawson

announced that the government will permit the creation of a sterling
commercial paper market.

Permission to act as underwriters in this

market will initially be granted only to U.K.-licensed banks, although
U.S. investment banks will be allowed to seek special permission to
operate in this market from the Bank of England.
Economic expansion continued in Canada in early 1986.

The index of

gross domestic product increased 0.6 percent (s.a.) in February,
bringing the 12-month growth rate to 5.4 percent.

The increase was

broadly based among service-producing and goods-producing industries.
The index of industrial production increased 0.7 percent in February,
reversing the January decline.

Meanwhile, the unemployment rate

remained at 9.6 percent in April, unchanged from March, which was the
lowest value in four years.
Inflation has continued to be moderate in 1986.

Consumer prices

rose 4.1 percent in the 12 months ending in March, about the same
percentage change as during 1985.

In addition, Canada's industrial

product price index in February was only 2.9 percent above its
year-earlier level.

Canada's trade surplus fell sharply in February to

$0.1 billion, the smallest monthly surplus since September 1981.
Falling oil prices and slow auto sales in the United States resulted in
a drop in the value of merchandise exports; there was a 40 percent

IV-23

reduction in export revenues from crude petroleum and coal.

Meanwhile,

imports reached a new record.
Short-term money market rates declined on balance over the past few
weeks.

Chartered banks cut their prime lending rates by 50 basis

points, to 10.75 percent.

This was the fourth cut in the prime rate

since peaking at 13 percent in mid-February.
In Italy, real GDP increased 2.3 percent from the fourth quarter of
1984 to the fourth quarter 1985.

Growth of exports was particularly

strong at 7.8 percent in that period.

Industrial production in January

and February averaged only 0.6 percent above what it had been in January
and February 1985.

The unemployment rate rose to 11.5 percent in the

first quarter, a post-War record figure.
The consumer price index rose 0.2 percent (s.a.) in April, bringing
the 12-month inflation rate to 6.5 percent, the lowest such figure in
more than 13 years.

The wholesale price index in February dropped 1.3

percent (s.a.), bringing the 12-month rate of increase of wholesale
prices to 2.5 percent.

This drop resulted primarily from falling energy

prices.
The trade deficit in the first quarter was $3.1 billion, compared
with a deficit of $3.8 billion a year ago.

Lower energy prices were

largely responsible for the improvement.
On April 24, Italian authorities lowered the discount rate from 14
to 13 percent.

This is the second time in as many months that the

discount rate has been lowered.

The April auction of Treasury bills was

fully subscribed, as investors have responded to lowered inflation
expectations.

As the ceilings on commercial bank lending that were put

IV-24

into effect in January as a part of the package to support the lira are
value
to expire in June, commercial banks have already begun to lower
:heir prime lending rates.
The Netherlands government anticipates a decline of about $4.5
billion in its 1987 revenues derived from natural gas production owing
:o the general decline in energy prices, reduced export volume, and the
lecline in the dollar.

(Gas revenues are received by the Treasury with

a lag of about one year.)

The cabinet has approved a $3.7 billion

package of spending cuts and tax increases in response; however, if no
further action beyond the approved package is taken, the budget deficit
would rise from about 6-1/2 percent of GNP in 1986 to about 7-1/2
percent in 1987.

IV-25

Economic Situation in Major Developing Countries.

Several major

borrowing countries are encountering difficulties in fiscal management
and containment of inflation as they attempt to maintain an adequate
degree of macroeconomic discipline.

Argentina probably missed some of

the first quarter performance criteria of its IMF program, jeopardizing
an IMF drawing and a disbursement from commercial banks.

Prices and

wages have begun to rise at a somewhat faster pace than they did
immediately following introduction of the Austral Plan.

In Brazil,

prices remain steady two months into its stabilization program, but
signs of overheating may now be appearing.

Mexico's 1986 financing

plans continue to be complicated by the fall in world oil prices; a trip
by Mexico's Finance Secretary to Japan failed to generate commitments
for new external financing.

On April 23, the President of Venezuela

invoked the contingency clause of Venezuela's rescheduling agreement
with commercial banks, allowing a reconsideration of terms in the event
of a change in the country's economic situation (in this case, the
continued weakness in world oil markets).

In Peru, the Garcia govern-

ment has made a number of conciliatory gestures to its external
creditors, including token payments against its arrears to the IMF, the
U.S. government, and--for the first time--commercial banks.
Individual Country Notes.

Reports from Argentina suggest that

Argentina failed to meet some of the first-quarter performance criteria
of its twice-revised IMF program.

Such a failure could jeopardize the

disbursement of the last drawing of SDR 235 million under the IMF
agreement and of the remaining $600 million under the $4.2 billion loan
from foreign commercial banks signed last summer.

The government

IV-26

continued the partial relaxation of the freeze of prices, wages, and
On the basis of adjustments in

exchange rates introduced in June 1985.

early April, public and private sector workers are likely to receive
wage increases for the rest of the year in the 18-25 percent range.
Public sector prices were increased by an average of 5 percent and the
government announced that they would be increased each month in the
future by an average of 2 percent.

Also, a mini-devaluation policy was

announced, under which the official austral price of the dollar has been
increased by 6-1/4 percent in three steps since April 7.

The CPI rose

by 4.6 percent in March and by 4.7 percent in April--an annual rate of
nearly 60 percent--while wholesale prices rose by 3 percent in April
following a 1.4 percent increase in March.

In the previous eight

months, the average monthly rate of increase was 2.9 percent for the CPI
and 0.5 percent for wholesale prices.

In response to the increase in

inflation, in early May the central bank tightened monetary conditions
by increasing reserve requirements for commercial banks and resumed
selling central bank paper in the market.
In late April, Argentina and its bank advisory committee agreed on
a 180-day rollover of $3.9 billion of dollar-denominated bonds and
promissory notes coming due over the next four years and an estimated
$2.8 billion of other public and private sector debts coming due this
year.

A more permanent arrangement is to be negotiated this summer in

the context of Argentina's overall financing program for 1986.
As a result of the price freeze instituted in Brazil on February 28
as part of an anti-inflationary program, prices dropped by 0.1 percent
in March.

Preliminary reports indicate that prices rose by about 0.5

IV-27

percent in April.

However, there are indications that the economy is

overheating because of strong consumer and government demand, and
shortages of various goods have been reported.

Surveys indicate that

wage settlements have tended to be higher than the minimum set by the
government package and this is likely to contribute further to strong
consumer demand.

In March, the monetary base grew by 36 percent and M1

grew by 75 percent.

This surge in money growth may be largely due to a

new willingness to hold money balances in a period of expected price
stability.

Real GDP is now expected to grow by 7 percent in 1986, as

compared with earlier forecasts in the 4-5 percent range.
GDP grew by 8.3 percent.

In 1985, real

On the external side, the trade balance

remained strong with a surplus estimated at $3.7 billion in the first
four months of 1986 compared with a surplus of $2.9 billion in the
year-earlier period.
In late April, Mexico's Finance Secretary Silva-Herzog travelled to
Japan seeking financing of up to $1 billion for an oil pipeline and
refinery expansion project, a steel mill expansion, and an export
promotion project that would be co-financed by the World Bank.

He noted

that, as a result of the oil price decline and the appreciation of the
yen against the dollar, Japan would save about $1 billion this year on
its oil purchases from Mexico.

However, he did not obtain any

commitment.
Mexico is refraining from approaching its creditor banks with a
firm proposal for 1986 financing until negotiations are concluded with
the IMF for an expected two-year program and with the World Bank for a

IV-28

$500 million trade policy loan that would be conditional on new steps to
liberalize imports.
Since last November, when ceilings on bank lending were imposed,
domestic credit conditions in Mexico have been very tight and business
firms have brought back funds from abroad to meet local obligations.
This has helped to bolster international reserves and to narrow the gap
between the controlled and free-market exchange rates.
gap was 2.9 percent.

On May 12, the

As the gap narrowed, the rate of crawl of the peso

in the controlled market has slowed somewhat.

In April, it averaged 1

peso per day, after reaching a peak of 1.26 pesos per day in February.
On May 12, the peso price of the dollar in the controlled market was 137
percent higher than a year earlier.

In April, the CPI rose by 5.2

percent, and was 71 percent higher than a year earlier.
On February 26, 1986, Venezuela signed its long-delayed $21.2
billion rescheduling agreement with commercial banks.

As part of that

agreement, Venezuela was given additional time to make amortization
payments of about $900 million originally scheduled to be due in 1985
and 1986.

An additional downpayment by the government of $750 million

is expected to be made this summer.

On April 23, citing the continued

weakness in world oil markets, the President of Venezuela invoked the
"contingency clause" of Venezuela's rescheduling agreement that allows
it to ask for reconsideration of terms in the event of a change in the
country's economic situation.

This probably means that Venezuela will

request a rescheduling of public-sector principal payments scheduled for
1987 and 1988.

Separately, the Venezuelan government may attempt to

stretch out further the repayment of private sector debt.

IV-29

The IMF team that visited the Philippines in April made some
progress toward negotiating a new 18-month stand-by arrangement.

The

current stand-by arrangement-scheduled to run to June 13, 1986--has
become inoperative.

One problem area in the negotiations is the size of

the budget deficit.

The Philippine government would like to maintain

its current fiscal stance through the end of 1986.

The IMF staff argues

that a large deficit will tend to keep interest rates high and
discourage investment, and is seeking remedial actions under the
stand-by arrangement to reduce the deficit, which the Fund staff
believes could reach 5-1/4 percent of GDP in 1986 compared to 1-1/4
percent of GDP in 1985.

At present, it is expected that negotiations

might be completed in time for the IMF Board to approve a new stand-by
for the Philippines in August or September.

Recent positive develop-

ments include a net inflow of capital in January-April, which has
reportedly increased international reserves by about $400 million to
$1.5 billion, low inflation with prices in March only 3-1/2 percent
above a year ago, and a decline in the world oil price that is expected

to reduce Philippine oil import costs by about $500 million in 1986.

April 15, the country's creditor banks approved an extension, from June
30, 1986 to December 31, 1986, of the $925 million new money credit
facility; $350 million of the facility still remains to be disbursed.
In the last four weeks, Peru has made a number of conciliatory
gestures towards

its external creditors.

First, the Garcia government

made its first substantial payment (SDR 30 million) to the IMF since
August 1985, and it gave firm assurance that Peru's arrears to the Fund
(now about SDR 100 million) would be eliminated by August 15.

Because

IV-30

of this assurance, the IMF Executive Board decided not to declare Peru
ineligible to use IMF resources, but to invoke that penalty automatically unless Peru eliminates all arrears by August 15.

Second, Peru

made its first interest payment ($18 million) to commercial banks on
its medium- and long-term public sector debt since June 1985.

This was

the first payment made by the Garcia administration, which took office
in July 1985.

Peru's interest arrears on these debts were about $490

million at the end of April.

The government has indicated that it will

present to the bank advisory committee in early June a formal proposal
for rescheduling these debts.

Finally, Peru made its first payment to

the U.S. government ($15 million) since September 1985.

This payment

was sufficient to lift restrictions on disbursements of U.S. bilateral
assistance that are automatically imposed under U.S. law whenever
debt-service payments to certain U.S. government agencies are overdue by
more than one year.

These restrictions will again go into effect in

June if no further payments are made.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 20, 1986 : Greenbook Part 2

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