Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 20, 1997 : Greenbook Part 1

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Strictly Confidential (FR) Class

II FOMC

Part 1
May 15, 1997

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Summary and Outlook

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

Strictly Confidential (FR) Class II FOMC

May 15, 1997

SUMMARY AND OUTLOOK
~____~~~

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

Domestic Developments
Overview
The U.S. economy has produced an abundance of good news thus far this year.
Growth of real GDP in the first quarter greatly outstripped everyone's expectations.
The unemployment rate, catching up with the gains in output since last summer,
plunged to about 5 percent in April. And although the tightness of the labor market
has resulted in some bidding up of wages in the past year, there are few signs of a
general pickup in inflation.
Activity in the opening months of 1997 clearly was boosted to an extent by
special factors, including mild weather and a recovery in auto production after the fall
strikes. Moreover, a substantial portion of the acceleration of output was attributable
to inventory restocking. Under the circumstances, it is not surprising that there are
indications of a softening in the early spring, exacerbated by renewed labor
skirmishing in the auto industry. Our guess is that real GDP growth this quarter will
drop to around 1-3/4 percent.
More important, we are once again projecting that growth will proceed on a
generally temperate track in subsequent quarters, owing both to moderation of
domestic demand trends and to ongoing drag from net exports, which will continue to
be affected for a while by lagged effects of the 1996-97 appreciation of the dollar.
We offer this projection, however, with the same caveats that accompanied our
previous, incorrect, predictions of imminent moderation. Businesses and households
are in an upbeat mood. So, too, are the financial markets. After slumping earlier in
the intermeeting period, partly because of the System's 25-basis-point tightening
action, the stock and bond markets have rallied of late. There is no shortage of
liquidity in the economy, and people have huge reserves of wealth that they can tap
for spending. Consequently, although we believe that we have made reasonable
assumptions about the spending propensities of consumers and firms, we again
underscore the risk that the surge of recent quarters could be generating a selfreinforcing momentum that will require a sizable degree of monetary restraint to rein
in. Nonetheless, in framing this baseline forecast, we have assumed that no additional
firming of money market conditions will occur until well into 1998.
We continue to believe that a substantial slowing of the expansion is necessary
to avoid an upturn in the underlying trend in price inflation. Already, a variety of
measures point to a step-up in wage and total compensation increases in the past year
or so; although not sharp enough to impress many observers, that acceleration is
consistent with what might be expected when the economy is operating only a little
beyond full employment. Prices, of course, have been quite well behaved. But there

Part 1: Summary and Outlook, May 15, 1997

can be little doubt that the appreciation of the dollar has helped to damp domestic
inflation. In addition, the reported increases in the CPI have been held down by the
series of technical changes to the index.
Looking forward, the recent increase in labor utilization and our belief that the
dollar's rise likely has run its course lead us to expect that compensation inflation will
edge higher and that rising labor costs will soon begin to be passed along in larger
price hikes. With unemployment projected to be under 5 percent, we look for reported
core CPI inflation to edge above the 3 percent mark in 1998.
Background Factors in the Forecast
Our March forecast assumed that the federal funds rate would remain at or near
5-1/4 percent until next spring. We are now assuming that it will be held at
5-1/2 percent well into next year but then raised somewhat to avert a decline in real
money market rates as inflation rises. In the very near term, the combination of a
steady Fed stance and indications of more moderate growth should find favor among
bond traders, and we anticipate a further mild rally in fixed-income markets. We
might be too conservative on this score, for the predicted environment could be one in
which the bond market bulls regain ascendance. Our expectation, however, is that
market wariness about increased inflation, related in particular to the pressures in the
labor market, will contain such enthusiasm and that, after easing just a little from here,
bond yields will begin to firm again in the second half of the year as credit demands
grow. Long-term rates are projected to move a bit above the recent range as the
System tightens next year.
We previously had anticipated that a meaningful correction of the stock market
would not come until 1998, and to this point, that prediction does not appear to have
fared too badly. To be sure, share prices fell sharply after the March meeting, partly
on the prospect of rising interest rates, but they quickly regained the lost ground on
favorable reports of corporate earnings, good news about prices and the economy, and
hints that the FOMC was not necessarily committed to a sequence of firming steps.
The buoyant bond market that we are postulating over the near term could help carry
share values to new highs. In 1998, however, stock prices are still expected to decline
appreciably, as corporate profit margins are squeezed by higher costs and as actual and
anticipated Fed actions to combat inflation weigh on the market.
In the last Greenbook, we lowered substantially our expectations of what might
be contained in a budget agreement. Consequently, we were not greatly surprised by
the bargain that recently was struck by the President and the congressional leadership:

Domestic Developments

The agreement, which still has many details left to be filled in, is heavily backloaded
and does nothing to address the more serious budgetary problems that loom after 2002.
As we had assumed, the agreement does not provide for any additional reductions in
the deficit for fiscal 1997, and only small reductions are planned for fiscal 1998.
Thus, we still perceive the stance of discretionary fiscal policy to be only slightly
restrictive this year and next. Meanwhile, the strength of the economy and, from all
appearances, a rise in the effective tax rate have continued to push up federal receipts
at a remarkable clip, tilting near-term prospects toward substantially smaller deficits
than we had previously projected. We now expect the 1997 unified budget deficit to
be $57 billion, down from a projection of $101 billion in the last Greenbook. On the
assumption that whatever factors have been boosting receipts will largely carry over
into fiscal 1998, we have lowered the deficit forecast for that period as well--from
$119 billion in the previous Greenbook to $77 billion in this one.
The foreign exchange value of the dollar continued upward for much of the
intermeeting period, but it has recently dropped back. We are anticipating that it will
decline gradually over the remainder of 1997 and in 1998, ending up at the same point
as in the last Greenbook. Foreign GDP growth is expected to be close to 4 percent
both this year and next; this forecast is essentially the same as that of the last
Greenbook. Crude oil prices have behaved about as expected in recent months and are
assumed to hold near their recent levels through the end of 1998; West Texas
intermediate stays at about $19.50 per barrel over this period.
The Current Quarter
Although the international trade report for March still is outstanding and many other
first-quarter source data are subject to revision, the information in hand suggests that
BEA's initial estimate could be revised up to about 6 percent because of faster
inventory accumulation than the BEA had assumed. Nonfarm stocks appear to have
risen at an annual rate of more than 5 percent in the first quarter; this rate of growth
was significantly faster than that of the previous period, and the step-up is estimated to
have contributed about 2-1/4 percentage points to the annual rate of GDP growth last
quarter.
That very high rate of stockbuilding was a key consideration in our decision to
push the forecast for real GDP growth in the second quarter down to 1-3/4 percent.
While inventories appear to have been lean overall at the end of the first quarter and
business sales expectations reportedly are quite positive, we do not see concerns about
access to supplies giving an extra boost to desired stocks, as happened in 1994.

Part 1: Summary and Outlook, May 15, 1997

Consequently, we are predicting a slowing of growth in nonfarm inventory
accumulation to 3-1/2 percent at an annual rate in the current quarter; this pace largely
reflects desired restocking, although a little unanticipated building may occur at firms
whose sales fall short of more buoyant expectations. The slowing of inventory growth
from the first-quarter pace subtracts about 3/4 percentage point from growth of real
GDP this quarter.
Final sales also are expected to decelerate in the current quarter. Growth of
domestic final sales, while still relatively brisk, is likely to fall well short of the
unusually rapid pace of the first quarter, and a significant portion of this growth in
demand will probably continue to be channeled to foreign producers through strong
advances in U.S. imports. We project that the additional deterioration of net exports,
much of which is a response to past dollar appreciation, will subtract more than
1/2 percentage point from GDP growth in the second quarter; this drag is more than
the external sector exerted on average over the past year.
We are predicting that real personal consumption expenditures will move up at
an annual rate of about 2-1/4 percent this quarter. Spending got off to a weak start in
April, with a downturn in purchases of light motor vehicles and sluggish sales at nonauto retail stores. This lackluster performance appears to have left the April level of
goods expenditures a shade below the average for the first three months of the year in

Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
1997:Q2

1997:Q1
Measure

Mar.
GB

Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment

Business fixed investment

BEA
adv.

May
GB

Mar.
GB

May
GB

3.4
5.2
5.0
.9

5.6
7.1
6.4
5.5

6.0
6.7
5.8
6.4

2.9
3.8
3.2
1.7

1.8
3.5
2.2
1.3

7.6

11.9

12.2

7.7

12.2

Change, in billions of chained (1992)
dollars
Inventory investment

8.2

29.0

35.2

6.3

-13.3

3.8
-27.1

-1.8
-31.9

-.4
-30.1

.6
-11.9

6.3
-12.5

Government outlays for consumption
and investment
Net exports

Domestic Developments

real terms, and appreciable improvement in sales in May and June will be needed to
yield the moderate second-quarter gain that we have projected. However, as noted in
the overview, the fundamentals of income, wealth, and confidence are very positive.
Good weather this winter probably enabled homebuilders to push construction
ahead faster, and we therefore have assumed that some of the first-quarter gain in
residential investment was, in effect, "borrowed" from the second quarter. Still, the
demand for housing appears to be holding up well, with the restraint from the rise in
mortgage rates since last fall being largely offset by the effects of ongoing increases in
employment and income. Consequently, we project only a moderate drop-off in starts
this quarter and, given normal lags, a further small rise in actual construction
expenditures.
Business fixed investment retains considerable vigor, as best we can tell from
sorting through the anecdotal reports and the volatile monthly statistical indicators. In
the first quarter, the monthly bounces for computers and other high-tech equipment
translated into strong gains on a quarterly average basis, but the real news was perhaps
the reemergence of strength in orders for other types of machinery and equipment.
Although some of the shipments that those orders foreshadow will go to foreign firms,
we are projecting solid increases in domestic spending on equipment across a broad
range of categories, with outlays for aircraft likely to be particularly strong. The one
notable area of near-term softness that we foresee is a downturn in business purchases
of autos; they had surged in the first quarter. Contracts for nonresidential building
projects have slipped recently, but surveys of market conditions and other reports
suggest that the uptrend in construction remains intact.
As usual, our prediction of current-quarter output is importantly influenced by
our interpretation of the data from the labor market. In the present case, we have
something of a mixed bag. The 140,000 per month increases in payroll employment
in March and April were below the recent trend, dragged down in part by the
unwinding of the previous weather-induced runup in construction jobs. Still, these
gains are far from paltry, and initial claims for jobless benefits have remained low
enough to suggest that employment growth remained hefty through the May survey
week. On the other hand, the workweek dropped back in April from the
extraordinarily high February-March level, so that we probably are on track for only a
relatively modest increase in aggregate hours of production workers this quarter. We
are inclined to think that the sharp drop in the unemployment rate in April was mainly
a catch-up to the outsized GDP gains of the past two quarters (the rate having changed
little during that surge in growth).

Part 1: Summary and Outlook, May 15, 1997

The rate of rise in the CPI in the second quarter is now projected to be only
about 1-1/4 percent at an annual rate. The second-quarter drop in consumer energy
prices is expected to be much larger than we had projected in the last Greenbook. In
addition, our forecast for consumer food prices has also been revised down
significantly; bad weather in Florida and California early this year ended up causing
barely a ripple in the food price data for late winter and early spring. We project that
the rate of rise in the core CPI will be boosted to an annual rate of almost 3 percent in
the second quarter by a moderate step-up in the prices of non-energy services; we are
anticipating that increases in the prices of goods will drop back again in coming
months after a blip in April.
The Longer-Run Outlook
We expect real GDP to expand at an average annual rate of close to 2-1/2 percent in
the second half of 1997 and 2 percent in 1998. Growth of household and business
expenditures is projected to slow over time, given already high rates of real asset
accumulation and the eventual emergence of less favorable financial factors. The
dynamics of the deceleration of activity are due in large part to the expected gearing
down of inventory investment from the unsustainable pace of the first quarter and to
the persistence of appreciable drag from the external sector. The unemployment rate
may well tick up in the near term from the low reading for April, but we think it
likely that the rate will drop back below 5 percent after midyear and generally remain
there through the end of 1998. This degree of tightness in the labor market is
expected to be accompanied by a moderate step-up in compensation increases between
now and the end of next year, giving impetus to an acceleration of prices.
Consumer spending. After rising at an annual rate of 4 percent in the first
half of 1997, real PCE is projected to increase at a rate of just over 3 percent in the
second half of this year. Spending growth is predicted to slow further in 1998 to
2-1/2 percent. Consumer outlays for electronic equipment are expected to continue
rising at an impressive clip but less rapidly over time. Moreover, purchases of motor
vehicles likely are topping out, and the anticipated softening in the housing sector will
damp demand for household goods. Moderation of income growth in coming quarters
brings about a slowing of consumer purchases more generally.
Our forecast of growth in real disposable personal income for 1997 has in fact
been knocked down a bit in this Greenbook. The trimming of DPI growth in the face

Domestic Developments

of stronger growth of real GDP was prompted by the surprising strength in
nonwithheld tax receipts, which led us to raise the ongoing level of taxes from that
shown in the last forecast. Given the lack of detail in the available data, we can only
conjecture about what lies behind the bulge in nonwithheld tax payments. But none of
the most likely explanations, such as an understatement of aggregate NIPA income, a
shift in the distribution of taxable income to high-bracket households, or a jump in
capital gains realizations, seem to point to a big hit to spending. Thus, we have felt
reasonably comfortable letting the higher tax payments come mostly out of personal
saving.
Our forecast has spending moving up a touch faster than DPI over the 1997-98
period. The two key elements in that story are the effects of the further rise in the
wealth-to-income ratio this year and the lagged response of consumer spending to the
strength of income in recent quarters. The trends in consumer loan delinquencies and

Summary of Staff Projections
(Percent change, compound annual rate)
Measure

1997:H1

1997:H2

1998

3.9
3.1

2.4
2.5

2.0
2.1

Final sales

3.2

2.8

2.0

2.7

2.6

2.0

PCE

4.0

3.1

2.6

4.1

2.9

2.5

3.8
1.3

-1.8
-1.7

-1.9
-1.2

12.2
7.6

8.2
7.0

5.6
5.7

1.3

1.4

Real GDP
Previous

Previous
Residential investment
Previous
BFI
Previous
Government purchases
Previous

Change, in billions of chained (1992)
dollars
-1.0
3.8

21.9
14.6

-13.6
-3.1

Net exports

-42.6

-11.5

-23.4

-39.0

-14.3

-23.6

Inventory change
Previous

Part 1: Summary and Outlook, May 15, 1997

personal bankruptcies continue to signal a certain amount of financial stress, but the
households that are seriously afflicted account for only a small proportion of total
income and expenditures, and lenders are expected to continue fine-tuning their
provision of credit rather than making sweeping cuts in consumer credit availability.
Residential investment. We are projecting that residential investment
expenditures will follow a path of mild contraction from mid-1997 to the end of 1998,
declining at an annual rate of roughly 2 percent over that period.
As noted above, we have not yet detected much response among households to
the upswing in interest rates since last fall. The relatively modest increase in shortterm rates--and thus in rates on many ARMs--has been one factor. But, in fact,
borrowers have not shifted away from fixed-rate loans, evidently because they view
30-year FRMs around 8 percent as attractive, especially in locales where house prices
have been rising appreciably. Strong employment growth and the surge in income
have permitted more families to qualify for fixed-rate loans and have made them more
confident about taking on the financial commitment.
After midyear, income growth slows, and conditions in mortgage markets
eventually turn less favorable. Consequently, starts of single-family units are projected
to decline moderately over the next several quarters. We also anticipate moderate
decreases in multifamily starts, not only because of the rise in interest rates and the
slowing of the economy but also because of the persistence of high vacancy rates that
are damping the opportunities for builders to profit from new construction.
Business fixed investment. Virtually all signs point to ongoing strength in
business fixed investment. The burst of sales over the past half-year has spurred
expansion plans, and falling prices for high-tech products continue to exert a favorable
influence on the cost of capital. Although the cost of external finance has been
boosted somewhat by the rise in long-term interest rates since late last year, continued
strength in profits and overall cash flow is enabling many firms to spend heavily on
new capital without tapping external sources. As the economy slows later this year
and in 1998, this set of influences will likely become somewhat less conducive to
growth of investment. Nonetheless, gains in real BFI are expected to continue
outpacing overall growth of the economy by a substantial margin: We are projecting
that a rise of 10 percent this year will be followed by an increase of about
5-1/2 percent in 1998.
Our forecast of equipment spending exhibits a trend of gradual deceleration
over the next several quarters. Growth of computer outlays, which has slowed to rates
of 25 percent to 30 percent in the past couple of quarters, is projected to proceed at a

Domestic Developments

fairly similar rate, on average, through the remainder of this year and then to taper
somewhat further in 1998. Moderation in the pace of economic growth should have
some effect on these outlays, especially with many businesses having invested heavily
in new hardware over the past two or three years. Still, computers will remain by far
the fastest growing major component of real BFI. We expect spending for
communications equipment to continue trending up briskly in response to regulatory
changes and the pressures to add capacity to accommodate the growth of networking.
Outside the high-tech categories, increases in 1997 are expected to be larger than those
of 1996; however, investment next year will be limited by the deceleration of output, a
flattening of profits, and higher interest rates.
Investment in business structures seems to have gained considerable
momentum, and we are looking for a string of fairly large gains over the next few
quarters. Construction of new office buildings probably will be especially strong.
With vacancy rates falling, owners of existing office buildings in many locales have
been able to boost rents substantially over the past year, and the prospect of profitable
investment in new structures has brought a strong response from builders and lenders.
Hotel construction also should be spurred by a scarcity of rooms in some major cities.
As has happened before, overbuilding may well ensue before the current upswing is
finished. Nonetheless, a boom mentality akin to that of the 1980s does not appear to
have reemerged yet among developers or financiers, and we do not see much risk of a
bust in the next couple of years.
Inventory investment. Our expectation is that, by the end of the current
quarter, firms generally will have refilled their production pipelines and restocked their
shelves. Consequently, inventories in the nonfarm business sector are projected to
grow at an annual rate of about 3 percent in the second half of 1997, and a rise of
2-1/2 percent is projected for 1998. The ratio of stocks to sales is expected to change
little over the forecast period from the low range into which it fell in the latter part of
1996 and early 1997.
The inventory forecast for the second half of this year makes allowance for
some further small increases in the stocks of motor vehicles, as production ticks up
from a second-quarter level that has been depressed a bit by strikes. Still more strikerelated disruptions to production could well occur in coming months, but we decided
not to factor those strikes into our baseline forecast as their effects on auto production
and real GDP would most likely be only transitory.
Farm inventories have remained relatively low despite last year's favorable
harvests, as demand from domestic and foreign buyers has been strong. We continue

Part 1: Summary and Outlook, May 15, 1997

to project moderate rebuilding of crop inventories this year and next as a result of
further increases in production. Acreage is increasing moderately in 1997, and the
planting of spring crops has gotten off to a fast start in most parts of the country. In
contrast to the outlook for crop inventories, livestock inventories are expected to fall
further as the long-run inventory cycle in the cattle business continues to unfold.
Government spending. Our 1997 forecast of real federal expenditures on
consumption and gross investment has been nudged up a bit since the last Greenbook,
a reflection of stronger-than-expected outlays over the near term. We now anticipate
that these outlays will decline about 1 percent over the four quarters of 1997. The
1998 drop is projected to be close to 4 percent. The declines in defense purchases this
year and next are not expected to be quite as large as those of many other recent
years, but declines in the nondefense area likely will be fairly sizable by past
standards.
Real purchases by state and local governments are projected to rise about
2-1/2 percent in 1997 and 1998, similar to the average gains of the past few years.
Although much larger gains have been sustained in some past expansions, we think
that political pressure for tax cuts will prevent outlays from accelerating much in this
one. A number of states reportedly are considering paring taxes in response to their
strengthening financial positions, and some are said to be keeping a lid on spending
out of concern that cutbacks in federal grants will impose future pressures on states'
financial resources.
Net exports. Even though we project real exports of goods and services to rise
fairly briskly from mid-1997 through the end of 1998, imports likely will continue to
move up even faster. On net, the changes in exports and imports from mid-1997
forward result in real GDP growth that is about 0.3 percentage point less than the
growth of gross domestic purchases. (A fuller discussion of the prospects for the
external sector is contained in the InternationalDevelopments section.)
Labor markets. The labor force participation rate has bounced around in
recent months, but, on average, it has maintained the marked uptrend of the past year.
This rise has again put it a shade above the path that we had anticipated, and we have
responded by raising our projection somewhat further. The rate, which barely rounded
up to 67.2 percent last month, is projected to edge upward to 67.4 percent in the latter
part of 1998. We have continued to slice and dice the data in an effort to understand
the recent upswing. More work needs to be done, but at this point we have concluded
that the rise should be viewed as primarily a normal cyclical phenomenon, around a
longer-run trend line that is essentially flat. Earlier in the economic expansion, a

Domestic Developments

perceived lack of job opportunities, and perhaps some discouragement among middleaged males displaced by corporate restructuring, resulted in a sag in the participation
rate; in the past year, more people have entered the market as job opportunities were
seen to be improving. Looking at the composition of the growth in the labor force,
we do not think that much of the recent rise has been caused by welfare reform, and
because the reforms will still be in their early stages by the end of 1998, we anticipate
only a small boost to participation from this source over the next year and a half.
Measured productivity growth got off to a strong start this year, with output per
hour in the nonfarm business sector probably up at an annual rate of around 2-1/2
percent in the first quarter. The renewed signs of life in productivity in the past two
quarters are encouraging, but a pickup is to be expected in a period of accelerating
output, and the gains came after a span of remarkably poor performance. Under the
circumstances, we hesitate to revise our assessment of the underlying trend of output
per hour despite anecdotes to the effect that businesses have entered a new phase of
efficiency improvement. We have raised our forecast of productivity growth for 1997
as a whole to 1-1/4 percent, but we are projecting a dropback to slightly under
1 percent in 1998, in part reflecting the notion that employers are having to hire (and
train) less-qualified workers in a period of unusually low unemployment.

The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
Measure

1995

1996

1997

1998

Output per hour, nonfarm business

-. 1

1.2

-. 1

1.0

2.0
2.0

2.2
2.2

1.9
2.1

1.3
1.4

Household employment survey
Previous

.6
.6

2.1
2.1

2.2
1.9

1.2
1.3

Labor force participation rate 1
Previous

66.5
66.5

66.9
66.9

67.3
67.1

67.4
67.2

5.6
5.6

5.3
5.3

4.8
5.0

4.8
4.9

Nonfarm payroll
Previous

Civilian unemployment rate
Previous

1. Percent, average for the fourth quarter.

Part 1: Summary and Outlook, May 15, 1997

Given our projection of output growth, the productivity forecast implies that
firms will need to boost labor input 2-1/2 percent in 1997 and about 1-1/4 percent in
1998. Because we have allowed for a slight lengthening of the average workweek in
1997, payroll employment grows roughly 2 percent, somewhat less rapidly than
aggregate hours. Next year, the workweek is flat, and payrolls expand
1-1/4 percent.
Wages and prices. Our basic story with respect to inflation is a simple one:
The economy has overshot full employment, and we are witnessing a gradual drift
toward higher inflation--that tendency having been muted to date by the appreciation
of the dollar and by certain structural shocks, perhaps most notably the changing
character of the medical care market. However, the data in hand do not provide
definitive support for this story, and we have once again reexamined the aptness of our
analysis.
The difficulty in getting a clear signal from the data is illustrated by the latest
information on labor compensation. The Employment Cost Index for the first quarter
showed a seasonally adjusted increase in hourly compensation of just 2.5 percent at an
annual rate, the smallest rise since the same period a year earlier. However, given the
quarterly noise in the series, it is wise to focus on the year-on-year comparisons. On
this basis, the change in the index for the period ended in March was 3.0 percent, right
in line with our previous projection and up 0.4 percentage point from its low at the
end of 1995.' At the risk of putting too fine a point on a change that, statistically, is
only marginally significant, we would note that this degree of pickup in compensation
is about what would have been expected from a Phillips curve model embodying a
NAIRU in the range of 5-1/2 to 5-3/4 percent.
Looking ahead, we are projecting a further small step-up in compensation
inflation this year, bringing the ECI increase for 1997 to nearly 3-1/2 percent. Several
factors support this prediction of further acceleration. One is the lagged effect of the
larger increase in the CPI in 1996, which will be feeding through to wages via formal
or informal cost-of-living adjustments. Another is the second increase in the minimum
wage. A third is our prediction of a jobless rate below 5 percent, which suggests that
the upward pressures on real compensation should be more intense this year than last.
In this analysis, we are not turning a blind eye to the possibility that
compensation practices have changed in ways that bring greater flexibility to company

1. The fact that the first-quarter compensation increase fell short of our prediction while the twelvemonth change did not is explained by a revision of seasonal factors in the latest ECI release.

Domestic Developments

wage structures. However, even if there is more targeting of pay increases to workers
with scarce skills, greater use of bonuses as opposed to base-pay increases, and so on,
these changes probably only buy companies some limited breathing room: When
workers are in short supply, employers will eventually have to pay more, one way or
another, for labor input. 2 Although the changes in pay practices may alter the timing
or magnitude of responses of compensation to changes in labor market slack, they are
not likely to negate that relationship entirely.
A similar observation can be made about the effects of worker insecurity: A
shift to a greater degree of insecurity would be expected to lead to a lowering of the
NAIRU, but that reduction does not nullify the usual inverse relationship between
unemployment and pay increases. On that point, a distinct risk in the forecast is that,
with availability of jobs perceived to be increasing, worker insecurity could wane,
reinforcing wage pressures. We have not made any special allowance for such a
development.
If compensation is accelerating, then prices, too, eventually will accelerate
unless productivity trends improve; the squeezing of markups will provide only a
temporary stopgap. Business people often say that, in today's competitive world, they
have no scope for raising prices and that any increments to wages will have to be
offset through gains in efficiency. But we question whether businesses can call forth
productivity advances in just the right measure to offset acceleration of hourly
compensation. Among other things, the notion that firms have a reserve of costreduction opportunities to tap does not seem to square with the image of companies
being quick to seize on every opportunity to maximize profits.
Of course, price dynamics might have changed, given the greater exposure of
firms to international or domestic competition and the anchor of a more credible
anti-inflation monetary policy. In the end, however, there is ample evidence that firms
still do raise prices when product markets are tight; and the passthrough of the rising
costs of labor or other inputs into prices is more likely when those pressures are
widespread, so that firms need not fear losing competitive position. Such conditions
prevail in the forecast: Not only are we anticipating that widespread acceleration of
compensation rates will be squeezing profit margins, but the pricing "leverage" of
firms is enhanced by an upturn in non-oil import prices as the dollar recedes. The

2. Not all of the cost increases associated with tight labor markets will necessarily show up in the
standard measures of compensation. For example, firms that hire workers with fewer skills may be able
to hold down wages, but their outlays for training costs will go up. The greater use of stock options in
recent years is another example of compensation that does not show up in the standard measures.

Part 1: Summary and Outlook, May 15, 1997

thrust of prices would be more substantial were it not for our expectation that
expansion of factory capacity, while slowing next year, will be fast enough to hold
utilization rates just above their historical averages.
All told, we continue to see gradual acceleration of core inflation as the most
likely outcome for the next year and a half. The CPI excluding food and energy is
projected to rise 2-3/4 percent in 1997, a little more than in 1996. Next year brings an
additional moderate pickup in this inflation measure; we are predicting that the
increase will be a little more than 3 percent on an official basis and 3-1/2 percent if
adjustment is made for the technical changes to the CPI since 1994.
We have not made any allowance for big shocks to the economy from the food
or energy sectors. After some further decline in the near term, retail energy prices are
expected to rise gradually and end 1997 at a somewhat lower level than in the fourth
quarter of 1996; in the last Greenbook, we had anticipated a net price change of zero
over the year. Next year, stable oil prices and a small increase in the combined

Staff Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure

Consumer price index
Previous
Food
Previous
Energy
Previous

Excluding food and energy
Previous

1995

1996

1997

1998

2.6
2.6

3.2
3.2

2.4
2.5

2.9
3.0

2.6
2.6

4.2
4.2

2.1
2.3

2.7
2.9

-1.7

7.6

-1.3

1.3

-1.7

7.6

3.0

2.6

2.7

3.1

3.0

2.6

2.8

3.2

2.6
2.6

3.1
3.1

3.4
3.5

3.6
3.7

-2.9

-.0

-2.8

-. 3

ECI for compensation of private
industry workers1
Previous
Prices of non-oil merchandise imports
Previous

Percentage points
MEMO
Adjustment to the core CPI for
technical changes
Previous
1. December to December.

.1
.1

.2
.2

.3
.3

.4
.4

Domestic Developments

margins of refiners and marketers lead to an uptick in the CPI for gasoline. Small
iincreases are also projected in the indexes for natural gas and electricity.
Food prices are projected to rise 2.1 percent in 1997, somewhat less than was
predicted in the last Greenbook. On net, these prices edged down a bit at retail over
the first four months of 1997, but moderate increases are anticipated over the balance
of the year. The forecast for 1998 has food price increases picking up from the 1997
pace, roughly in step with the pickup of inflation in general. We still expect to see
relatively sharp increases in beef prices in 1998, and even though the world seems to
have become more skilled over time at getting by with lean inventories of grains and
oilseeds, the present tightness of these stocks causes us some worry about potential
risks in the food price outlook if production falls short of current expectations.
We are projecting that the overall CPI will rise 2.4 percent over the four
quarters of 1997 after moving up 3.2 percent during 1996 when developments in food
and energy markets were adverse. Next year, the CPI increase is predicted to be back
up close to the 3 percent mark. As noted in previous Greenbooks--and in the
accompanying table--technical adjustments to the CPI are estimated to cancel out a bit
of the acceleration that we would otherwise have written down.
Monetary and Credit Flows
We are inclined to attribute the recent rapid growth of the monetary aggregates to the
unusually and unexpectedly large federal tax payments associated with the April filing
deadline. Households probably built up their money balances to meet these liabilities
and, when those payments clear, will not see fit to replenish them. Over the year as a
whole, growth of M2 is expected to be somewhat below that of nominal GDP, owing
to a rise in the opportunity cost of holding M2 resulting from the policy action taken
at the March meeting. Growth of M2 in 1998 remains slightly below the growth of
nominal GDP. Brisk growth of M3 is projected this year and next based on a further
solid expansion of bank credit and continued strong growth of money funds.
The surprising surge in tax receipts has enabled the Treasury to pay off debt
this quarter and is expected to pull down the growth of federal debt to only

3. We have pulled down the 1998 forecast for electricity by a percentage point in reaction to the
recent announcement that the California electricity market will be opened to greater competition starting
January 1 of next year, although the degree to which that development will lower prices--or be followed
by similar moves in other states--is not fully clear. Given the weight of electricity in the CPI--about
2-1/4 percent--this change to our forecast has only a small effect on the top line.

Part 1: Summary and Outlook, May 15, 1997

1-1/4 percent this year. In 1998, with the deficit expected to increase modestly,
growth of federal debt picks up to 3 percent.
Our assessment is that financial conditions will remain quite supportive to
business borrowing, with only a moderate widening of the narrow spreads now
prevailing in the securities markets and on bank loans. Firms are likely to be tapping
those sources in greater volume over the remainder of this year and next, in response
to the flattening of profits and a rapid expansion of fixed capital and inventories.
Those borrowing requirements will continue to be augmented by fundraising to
support the ongoing merger wave. Share retirements resulting from mergers and from
share repurchase programs are expected to remain well above the amount of new
equity issued by nonfinancial corporations.
Growth in household debt is projected to edge lower in 1997 and 1998 but to
remain at a pace above that of nominal income. Debt-service burdens creep up a bit
further over the forecast period, making it likely that delinquency rates will remain
elevated and thereby further restrain banks' willingness to provide credit. The
assumed ratcheting up of credit restraint, however, is only modest, and funds for
consumer outlays should be available on good terms to all but the weakest borrowers.
The growth of durable goods purchases is expected to flag, lessening somewhat the
demand for credit. Mortgage credit should remain plentiful, but the upturn in home
mortgage rates starting later this year is anticipated to put a dent in housing activity in
1998. As a result, the growth of mortgage debt is expected to soften over the forecast
period.
In the state and local government sector, debt growth should remain quite
modest in 1997 and 1998. The prevailing political consensus favoring fiscal restraint
should keep the capital spending of these jurisdictions on a slow growth track, and
with long-term interest rates drifting up, the opportunities to pre-refund debt will be
few and far between.
All told, the debt of the nonfinancial sector is anticipated to grow a little more
than 4-1/2 percent in 1997, placing it in the middle portion of its annual range but
below the expansion of nominal GDP. Debt in 1998 is projected to expand about 5
percent, somewhat faster than nominal GDP.
Alternative Simulations
The alternative simulations this month are based on different paths for the federal
funds rate. In the first simulation, the rate is held at its current level through the end
of 1998. Because this assumption about the federal funds rate differs from the

Domestic Developments

baseline assumption only for the latter half of 1998--and then only mildly--effects on
the economy within the forecast period are negligible. Real GDP in 1998 rises just a
tenth more than in the baseline forecast, and the effects on unemployment and
inflation are imperceptible. Nonetheless, we have reason for showing this simulation:
Although our baseline forecast has real GDP growth moderating in 1998, we do not
believe that maintenance of a stable nominal funds rate in the face of an upcreep in
inflation is likely to create a path for the real rate that is consistent with further output
deceleration in 1999. Consequently, the forces necessary to ultimately turn inflation
back down would not emerge.
The second alternative involves a more aggressive approach for capping
inflation--preemptive, as it were. The fed funds rate is raised 100 basis points further
in a series of steps over the remainder of 1997 and then held steady in 1998. Growth
of real GDP in 1998 is appreciably smaller in this alternative, the unemployment rate
ends up almost half a percentage point higher than it is in the baseline forecast, and
acceleration of inflation is forestalled. Given the high real rate prevailing at the end
of the period, the disinflationary trends emerging in 1999 might call for some easing
of the funds rate during that year to avoid greater restraint on aggregate demand than
would be needed to restore a clear downtilt to the inflation rate.

Alternative Federal Funds Rate Assumptions
(Percent change, Q4 to Q4, except as noted)
Measure

1996

1997

1998

3.1
3.1
3.1

3.1
3.1
2.9

2.0
2.1
1.2

Baseline
No further change

5.3
5.3

4.8
4.8

Tighter policy

5.3

4.9

5.2

3.2
3.2
3.2

2.4
2.4
2.4

2.9
2.9
2.5

Real GDP
Baseline
No further change
Tighter policy
1
Civilian unemployment rate

CPI
Baseline
No further change
Tighter policy
1. Average for the fourth quarter.

Strictly Confidential <FR>
Class II FOMC

May 15,

GDP chain-weighted
Nominal GDP
Interval

1997

STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT
(Percent, annual rate)

Real GDP

price index

Consumer
price index

Unemployment

rate

03/19/97

05/15/97

03/19/97

05/15/97

03/19/97

05/15/97

03/19/97

05/15/97

03/19/97

05/15/97

5.8
4.6
4.5
5.4
4.6

5.8
4.6
4.4
5.5
4.4

3.5
2.0
2.5
3.2
2.3

3.5
2.0
2.4
3.5
2.1

2.3
2.5
2.1
2.4
2.6

2.3
2.5
2.1
2.3
2.5

2.6
2.8
2.9
2.7
2.8

2.6
2.8
2.9
2.5
2.8

6.1
5.6
5.4
5.1
4.9

6.1
5.6
5.4
5.0
4.8

ANNUAL

1994
1995
1996
1997
1998

QUARTERLY

1995

01
Q2
Q3
04

3.8
3.1
6.0
2.3

0.4
0.7
3.8
0.3

3.3
2.4
2.1
2.1

2.7
3.5
2.1
2.4

2.7
3.5
2.1
2.6

5.5
5.6
5.7
5.6

1996

01
Q2
Q3

4.2
6.5
3.8
5.3

2.0
4.7
2.1
4.3

2.0
4.7
2.1
3.8

2.3
2.2
2.0
1.8

2.3
2.2
2.0
1.9

3.2
3.9
2.3
3.1

3.2
3.4
2.8
3.3

5.6
5.4
5.3
5.3

4.2
6.5
3.8
5.5

1997

Qg
Q2
Q3
Q4

6.4
5.3
4.5
4.4

8.1
3.9
4.6
4.5

3.4
2.9
2.5
2.4

6.0
1.8
2.5
2.3

3.1
2.5
2.2
2.2

2.8
2.1
2.3
2.4

2.5
2.1
2.6
2.9

2.3
1.2
2.7
3.1

5.3
5.1
5.0
5.0

5.3
5.0
4.9
4.8

1998

01
Q2
Q3
Q4

4.8
4.6
4.6
4.6

4.5
4.4
4.3
4.3

2.3
2.1
2.0
2.0

2.1
2.0
1.9
1.9

2.7
2.8
2.9
2.9

2.6
2.7
2.7
2.7

2.9
2.9
3.0
3.1

2.8
2.9
3.0
3.0

4.9
4.9
4.9
4.9

4.8
4.8
4.8
4.8

0.0
0.0

TWO-QUARTER
1995

Q4
1996

Q2
04

1997

Q2
04

5.9
4.4

6.0
4.6

3.1
2.5

3.9
2.4

1998

Q2
Q4

4.7
4.6

4.4
4.3

2.2
2.0

2.1
1.9

-0.2
-0.1

2.7
2.7

1.8
2.9

-0.2
-0.1

-0.3
-0.2

2.9
3.0

-0.1
-0.0

-0.0
0.0

Q4
Q4

1996

1997
1998

-0.1

2.3
2.7

FOUR-QUARTER
1994
1995

-0.2

Q4
Q4

urban consumers.
1. For all
2. Level, except as noted.

3. Percent change from two quarters earlier; for unemployment rate, change in percentage points.
4. Percent change from four quarters earlieri for uneasloyment rate, change in percentage points.

I-19

Strictly
Confidential
Class II FOMC

<FR>

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)

May 15,

Units

Item

1997

Projected -

1990

1991

1992

1993

1994

1995

1996

1997

1998

5743.8
6136.3

5916.7
6079.4

6244.4
6244.4

6553.0
6386.1

6935.7
6608.4

7253.8
6742.2

7576.1
6906.8

7991.7
7151.5

8344.8
7303.4

-0.2
-0.8
0.6
-0.7

0.4
0.0
-0.4
-0.8

3.6
4.0
3.9
4.9

2.2
2.9
2.0
3.4

3.5
3.7
2.9
4.0

1.3
1.0
1.9
2.3

3.1
3.3
3.1
3.6

3.1
3.8
3.0
4.3

2.0
2.2
2.0
2.7

expenditures

0.5
-3.2
-0.5
2.0

-0.2
-3.1
-1.0
0.9

4.2
9.4
3.4
3.6

2.5
7.3
1.5
2.1

3.1
7.0
3.5
2.0

1.9
1.3
1.1
2.4

2.7
5.4
1.8
2.6

3.6
7.2
3.1
2.9

2.6
4.3
2.3
2.2

Business fixed investment
Producers' dur. equipment
Nonres, structures
Residential structures

-2.5
-2.0
-3.5
-15.1

-6.0
-2.6
-12.5
1.1

5.5
9.6
-3.4
16.9

8.5
11.5
1.5
8.1

10.1
12.6
3.7
5.7

6.4
6.9
5.1
-1.5

9.5
9.7
9.0
3.8

10.2
11.6
6.5
1.0

5.6
6.0
4.4
-1.9

7.2
0.5

8.6
4.1

4.1
7.4

4.8
10.5

9.9
11.8

7.4
4.2

7.4
8.3

7.0
11.9

6.9
8.1

2.6
1.6
0.3

-0.7
-3.1
-5.3

1.7
1.3
-1.3
2.0

-0.5
-5.4
-6.8
3.1

0.0
-3.1
-5.7
2.2

-1.3
-6.7
-6.8
2.1

1.9
1.5
0.2
2.1

1.1
-1.0
-1.4
2.4

0.1
-3.9
-4.2
2.4

7.0
2.0
-29.5

19.0
26.4
-72.0

58.9
46.8
-105.7

32.7
37.2
-107.6

13.6
17.1
-113.6

39.9
39.0
-145.4

30.8
28.8
-173.3

6.3

4.8

5.9

3.8

5.0

5.3

4.4

110.7
6.9

114.2
6.1

117.2
5.6

119.5
5.4

122.0
5.0

123.8
4.8

3.0
80.8

5.7
83-1

1.8
83.1

3.9
82.1

3.9
82.5

2.0
82.1

EXPENDITURES

Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dos. final
purchases

Personal cons.

change

Durables
Nondurables
Services

Exports
Imports
cons.

Gov't.

& investment

Federal
Defense
State & local

3.3

Change in bus. inventories
Nonfaar
Net

Bill. Ch. $

exports

Nominal GDP

10.4
7.8
-61.9

% change

4.4

Nonfarm payroll employment

Millions

109.4

Unemployment rate

prod. index
Industrial
rate
- mfg.
Capacity util.

% change

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.0
-3.0
-1.2
-22.3

3.8

EMPLOYMENT AND PRODUCTION

108.3

5.6

6.8

108.6
7.5

-0.6
81.4

-0.0
78.0

79.5

3.9

1.19

1.01

14.05
10.85
3.20

12.52
9.74
2.77

1.20
12.85
10.51
2.34

1.29
13.87
11.72
2.15

1.46
15.02
12.88
2.13

1.35
14.77
12.85
1.91

1.48
15.03
13.32
1.70

1.42
15.09
13.20
1.90

1.35
14.91
13.10
1.81

INCOME AND SAVING

Nominal GP

Bill. $

5764.9

5932.4

6255.5

6563.5

6931.9

7246.7

7567.1

7969.4

8310.9

Nominal GNP

% change

4.6
6.4
1.1
5.3

3.5
3.7
0.8
6.0

6.2
7.3
4.0
6.2

4.7
3.6
0.9
4.8

5.7
4.9
2.4
4.0

3.9
5.6
3.1
4.6

4.9
5.7
2.7
4.9

5.1
5.3
3.0
4.8

4.3
4.9
2,7
4.7

Corp. profits,
IVA & CCAdj.
Profit
share of GNP
Excluding FR Banks

% change

5.5
6.9
6.5

4.5
6.9
6.6

11.3
6.8
6.6

18.8
7.5
7.3

9.6
8.0
7.7

6.2
8.3
8.0

6.7
8.9
8.6

10.0
9.3
9.0

0.6
8.9
8.6

Federal

Bill. $

-154.7
80.1
20.2

-196.0
75.8
11.5

-280.9
86.3
18.3

-255.6
94.9
28.0

-190.2
99.7
36.9

-161.7
95.0
36.8

-127.1
93.0
37.4

-76.4
96.0
43.4

-86.3
92.5
40.7

4.7

3.4

2.6

4.7

3.3

2.6

2.5
2.5

2.4
2.3

2.4
2.5

1.7
2.1

2.1
2.4

2.3
2.7

5.2
6.3

2.7
3.0

2.7
3.1

5.3

4.4

3.5

2,3
2.7
3.1

2.4
2.7
2.8

2.3
2.6
3.0

2.2
3.2
2.6

2.1
2.4
2.7

2.6
2.9
3.1

4.6

4.4

3.5

3.6

3.1

2.6

3.1

3.4

3.6

-0.6
5.8
6.4

2.2
4.8
2.5

3.6
4.6
1.0

-0.3
1.8
2.1

0.3
2.3
2.0

-0.1
3.7
3.7

0.9
3.6
2.6

1.2
3.7
2.5

0.9
3.8
2.9

Nominal personal income
Real disposable income

Personal saving rate

surpl./deficit

State & local surpl./def.
Ex. social ins. funds
PRICES AND COSTS
GDP implicit deflator
GDP chn.-wt. price index
Gross Domestic

% change

Purchases

chn.-wt. price index
CPI
Ex.
ECI,

food and energy
hourly compensation

Nonfarm business sector
Output per hour
Compensation per Hour
Unit labor cost

Changes are from fourth

quarter to

2. Private-industry workers.

fourth

quarter.

Strictly
Class II

Confidential
FOMC

<FR>

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate
except as noted)

May 15,

1994
Q1

1994
Q2

1994
Q3

1994
Q4

1995
Ql

1995
02

1995
Q3

1995

6776.1
6508.5

6890.5
6587.4

6993.1
6644.8

7083.2
6692.9

7149.8
6700.2

7204.9
6712.7

7309.8
6775.8

2.5
3.5
1.2
3.8

4.9
5.3
3.0
4.4

3.5
3.7
4.2
3.8

2.9
2.4
3.5
4.0

0.4
1.5
0.6
2.2

0.7
0.7
2.1
2.3

Personal cons. expenditures
Durables
Nondurables
Services

2.8
5.8
3.9

3.5
4.3
3.2

2.8
5.6
3.8

3.1
12.4
3.2

1.0
-8.9
2.4

1.6

3.5

1.6

1.3

Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures

7.3
15.5
-11.8
12.8

7.1
4.1
15.7
12.7

13.8
19.4
0.2
-1.8

-1.5
8.2

15.9
18.4

-4.3
-11.4
-17.4
0.7

1997

1996
Q1

1996
Q2

7350.6
6780.2

7426.8
6813.8

7545.1
6892.1

3.8
2.6
3.6
3.1

0.3
-0.7
1.4
1.5

2.0
3.0
3.0
4.6

4.7
5.2
4.1
4.0

3.1
7.0
1.8

2.4
9.3
0.5

1.1
-1.0
-0.4

3.5
8.2
3.7

3.4
11.4
1.3

2.4

3.0

2.0

2.3

2.4

2.7

12.2
11.9
13.0
-0.1

15.4
17.4
9.9
-6.3

3.5
3.5
3.4
-13.4

4.9
4.3
6.3
9.2

2.5
3.0
1.0
6.4

11.6
13.1
7.7
7.4

3.8
6.7
-3.7
16.3

9.7
10.7

16.5
10.3

2.6
11.2

5.9
4.5

10.7
-0.0

10.7
1.6

1.8
10.6

5.6
9.9

-0.8
-5.3
0.7
2.2

7.0
11.5
13.5
4.2

-1.4
-5.9
-16.1
1.6

-1.2
-6.5
-7.4
2.3

0.8
-1.4
0.6
2.1

-0.6
-5.6
-7.6
2.7

-4.3
-13.2
-12.3
1.5

1.6
6.0
4.1
-0.9

7.7
9.4
10.0
6.7

40.8
29.7
-99.3

74.7
54.0
-107.3

64.6
50.5
-111.7

55.6
53.0
-104.4

53.7
57.4
-122.5

29.9
33.7
-121.4

33.5
38.5
-101.6

13.7
19.0
-84.9

-3.5
2.9
-104.0

6.7
11.7
-114.7

change

5.3

6.9

6.1

5.3

3.8

3.1

6.0

2.3

4.2

6.5

Nonfarm payroll employment
Unemployment rate

Millions

112.6
6.6

113.7
6.2

114.7
6.0

115.6
5.6

116.5
5.5

117.0
5.6

117.4
5.7

117.9
5.6

118.5
5.6

119.3
5.4

Industrial prod.

' change

6.2
82.0

6.7
83.0

4.4
83.3

5.6
84.0

3.9
84.2

-0.7
83.1

3.2
82.9

0.8
82.3

1.6
81.7

6.2
82.1

Millions

1.39
15.05
12.92
2.13

1.47
14.86
12.71
2.15

1.45
14.95
12.74
2.21

1.47
15.20
13.15
2.05

1.32
14.72
12.68
2.04

1.29
14.42
12.46
1.96

1.42
14.94
13.08
1.86

1.41
14.98
13.20
1.79

1.46
15.19
13.51
1.68

1.50
15.02
13.32
1.70

Bill. $
% change

6781.0
5.4
-2.2
-4.0
3.3

6888.3
6.5
11.2
7.4
4.2

6986.9
5.9
4.6
2.6
4.1

7071.4
4.9
6.4
3.8
4.2

7146.8
4.3
7.2
3.7
4.8

7202.4
3.1
4.7
0.2
4.1

7293.4
5.1
4.8
4.3
4.5

7344.3
2.8
5.7
4.3
5.1

7426.6
4.6
4.9
2.0
4.8

7537.5
6.1
6.8
1.4
4.3

3 change

-33.6
7.2
6.9

74.5
8.1
7.9

12.9
8.3
8.0

10.4
8.4
8.1

-7.7
8.1
7.8

0.6
8.1
7.8

38.4
8.6
8.3

-1.1
8.6
8.3

22.6
8.9
8.6

6,8
8.9
8.6

-212.7
94.8
29.0

-169.6
105.2
41.1

-188.5
99.6
37.9

-190.1
99.3
39.4

-172.6
99.0
40.2

-161.1
99.0
40.9

-158.5
93.9
35.8

-154.5
88.1
30.5

-155.2
91.0
34.1

-126.7
101.0
44.6

0.4

-2.2

1.5

1.7

-1.2

1.9

3.3
2.9

2.9
5.3

4.0
2.5

3.7
1.9

4.0
5.2

Item

Units

EXPENDITURES

Nominal GDP

Bill. $
Bill. Ch. $

Real CDP
Real GDP
Gross domestic purchases

% change

Final sales
Priv. dam. final purchases

Exports
Irports

Gov't. cons. & investment
Federal
Defense
State a local
Change in bus. inventories
Nonfarm
Net

Bill. Ch. $

exports
t

Nominal GDP
EMPLOYMENT AND PRODUCTION

index

Capacity util. rate -

mfg.

Housing starts
Light motor vehicle sales
North Amer. produced
Other

INCOME AND SAVING

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate
Corp. profits,

IVA a CCAdj.

Profit share of GNP
Excluding FR Banks
Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill.

PRICES AND COSTS
% change
3' change

GDP implicit deflator
GDP chn.-wt. price index

Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI,

hourly compensation

2.4
1.9
2.9
1

Nonfarm business sector
Output per hour
Compensation per hour

Unit labor cost
1.

Private-industry

2.8
2.9

workers.

3.0

-1.8
2.9
4.9

3.4
1.5

Strictly
Class II

Confidential
FOMC

<FR>

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate
except as noted)
S1996
Q3

1996

7616.3
6928.1

May 15,

Projected

1997

1997
Q1

1997
Q2

1997
03

1997
Q4

1998
Q1

1998
Q2

1998
Q3

1998
Q4

7716.1
6993.3

7867.9
7095.3

7942.9
7126.7

8033.4
7171.6

8122.4
7212.5

8211.8
7250.2

8300.9
7286.9

8388.4
7320.9

8478.0
7355.8

2.1
3.3
0.5
2.3

3.8
1.6
4.9
3.3

6.0
7.6
3.8
6.7

1.8
2.4
2.6
3.5

2.5
3.5
2.3
3.7

2.3
1.9
3.4
3.2

2.1
2.7
1.8
2.9

2.0
2.2
2.0
2.7

1.9
2,7
1.6
2.6

1.9
1.4
2.7
2.7

expenditures

0.5
-2.6
0.4
1.3

3.4
5.0
1.8
3.8

5.8
17.7
5.2
3.6

2.2
-1.4
1.7
3.3

3.2
8.0
2.8
2.2

3.0
5.5
2.8
2.4

2.8
4.6
2.6
2.3

2.6
4.3
2.4
2.2

2.5
4.4
2.2
2.1

2.4
3.8
2.2
2.1

Business fixed investment
Producers' dur. equipment

Nonres. structures
Residential structures

17.5
20.9
8.4
-5.2

5.5
-0.9
25.8
-1.8

12.2
14.0
7.7
6.4

12.2
13.9
7.6
1.3

9.6
11-0
5.7
-2.0

6.9
7.5
5.0
-1.6

5.6
6.0
4.5
-2.0

5.6
6.0
4.5
-2.5

5.7
6.2
4.3
-2.7

5.5
5.9
4.1
-0.2

Exports
Imports

-0.9
9.3

25.0
3.3

7.9
20.8

7.9
12.2

2.1
9.2

10.3
5.9

4.2
8.0

9.4
9.8

3.1
8.8

11.1
5.9

Gov't. cons. & investment
Federal
Defense
State & local

-0.6
-3.5
-5.5
1.1

-0.9
-5.3
-6.9
1.9

-0.1
-3.5
-10.1
1.9

2.0
1.2
3.9
2.5

1.3
-0.9
0.4
2.5

1.4
-0.7
1.0
2.6

-0.0
-4.2
-5.5
2.4

-0.1
-4.6
-6.0
2.4

1.2
-1.0
0.0
2.4

-0.5
-5.8
-5.1
2.4

Units

Item

EXPENDITURES

Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases

% change

Final sales
purchases

final

dom.

Priv.

Personal cons.

Durables
Nondurables
Services

Change in bus.
Nonfarm

inventories

Bill. Ch. $

34.1

17.1

52.3

39.0

42.8

25.4

30.8

31.3

36.8

24.4

34.6
-137.4

19.3
-98.4

52.6
-128.5

38.3
-141.0

41.3
-159.5

23.7
-152.5

28.9
-163.9

29.2
-168.6

34.7
-185.0

22.4
-175.8

% change

3.8

5.3

8.1

3.9

4.6

4.5

4.4

4.3

Millions

120.0

120.5

121.2

121.8

122.3

122.8

123.2

123.6

124.0

124.4

5.3

5.0

4.9

4.8

\ change

3.3
82.3

4.5
82.3

4.7
82.6

3.7
82.5

4.1
82.6

2.9
82.4

2.4
82.3

2.2
82.2

1.6
82.1

2.0
82.0

Millions

1.49
15.07
13.38
1.69

1.42
14.82
13.07
1.75

1.44
15.45
13.50
1.95

1.43
14.78
12.91
1.87

1.42
15.11
13.22
1.89

1.40
15.03
13.15
1.88

1.38
14.92
13.10
1.82

1.36
14.91
13.10
1.81

1.33
14.90
13.10
1.80-

1.33
14.89
13.10
1.79

Nominal GNP
Nominal GNP

Bill. $
% change

7598.9
3.3

7705.6
5.7

7851.1
7.8

7923.4
3.7

8008.4
4.4

8094.8
4.4

8184.0
4.5

8267.7
4.2

8352.3
4.2

Nominal personal income
Real disposable income
Personal saving rate

5.7
4.9
5.3

5.4
2.6
5.1

7.3
4.6
4.9

4.7
3.1
5.0

4.6
2.2
4.8

4.7
2.0
4.5

5.2
4.6
4.9

4.5
1.8
4.7

4.5
1.7
4.5

5.4
2.6
4.5

Corp. profits, IVA & CCAdj.

% change

3.1
8.9
8.6

-4.2
8.7
8.4

48.5
9.4
9.1

-0.4
9.3
9.1

-0.4
9.2
8.9

-0.5
9.1
8.8

1.8
9.0
8.8

-1.6
8.9
8.7

-1.4
8.8
8.5

3.7
8.8
8.5

-69.1

-73.9

-95.5

-87.4

-83.0

-79.2

95.2
42.9

94.5
42.4

93.7
41.8

92.5
40.8

89.5
38.0

Net exports

Nominal GDP
EMPLOYMENT AND PRODUCTION
Nonfarm payroll employment

Unemployment rate
Industrial

prod.

index

Capacity util. rate - mfg.
Housing starts
Light motor vehicle sales
North Amer. produced
Other

INCOME AND SAVING

Profit

share of GNP

Excluding FR Banks
Bill. $

Federal sUrpl./deficit

-120.8

-105.9

-84.4

89.2
33.8

State & local surpl./def.

Ex. social ins. funds

90.9
36.9

96.3
43.4

0.0
3.3
3.3

1.1
3.6
2.5

2.6
4.7
2.0

PRICES AND COSTS
% change

GDP implicit
deflator
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index

CPI
Ex.
ECI,

food and energy
hourly compensation

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost

Private-industry

workers.

-78.1

96.9
44.2

95.6
43.1

8439.7
4.3

Strictly Confidential <FR>

CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELTED ITEMS

May 15, 1997

Class II FOMC

1996
Q4

Item

Real ODP
Gross dom. purchases
Final sales
Priv. dom. final purchases
Personal cons.
Durables
Nondurables
Services

1997
01

1997
Q2

1997
03

1997
04

1998
01

1998
02

1998
Q3

1998
Q4

96Q4/
95Q4

9704/
96Q4

98Q4/
97Q4

3.8
1.6

6.0
7.7

1.8
2.4

2.5
3.6

2.3
1.9

2.1
2.7

2.0
2.3

1.9
2.8

1.9
1.4

3.1
3.3

3.1
3.9

2.0
2.3

4.9
2.8

3.8
5.5

2.6
2.9

2.3
3.1

3.3
2.7

1.8
2.4

2.0
2.3

1.6
2.2

2.7
2.2

3.1
2.9

3.0
3.5

2.0
2.3

3.9
1.5
1.1
1.3

1.5
-0.1
0.4
1.2

2.2
0.7
0.6
0.8

2.0
0.5
0.6
0.9

1.9
0.4
0.5
0.9

1.8
0.4
0.5
0.8

1.7
0.1
0.4
0.8

1.7
0.4
0.4
0.8

1.8
0.5
0.4
1.0

2.4
0.6

1.8
0.4

0.7
1.1

0.5
0.8

1.3
1.1
0.2
0.1

1.1
0.9
0.2
-0.1

0.8
0.7
0.1
-0.1

0.7
0.5
0.1
-0.1

0.7
0.6
0.1
-0.1

0.7
0.6
0.1
-0.0

1.0
0.8
0.2
0.2

1.2
1.0

0.7
0.6

expenditures

Business fixed investment
Producers' dur. equip.
Nonres. structures
Residential structures

0.6
-0.1
0.7
-0.1

1.3
1.1
0.2
0.2

Net exports
Exports

2.2
2.6
-0.4

-1.7
0.9
-2.7

-0.7
1.0
-1.7

-1.0
0.3
-1.3

0.4
1.3
-0.9

-0.6
0.5
-1.2

-0.3
1.2
-1.4

-0.9
0.4
-1.3

0.5
1.4
-0.9

-0.2
0.9
-1.1

-0.2
-0.4
-0.3
0.0
0.2

-0.0
-0.2
-0.5
0.2
0.2

0.4
0.1
0.2
-0.1
0.3

0.2
-0.1
0.0
-0.1
0.3

0.3
-0.0
0.0
-0.1
0.3

-0.0
-0.3
-0.2
-0.0
0.3

-0.0
-0.3
-0.3
-0.0
0.3

0.2
-0.1
0.0
-0.1
0.3

-0.1
-0.4
-0.2
-0.2
0.3

0.4
0.1
0.0
0.1
0.3

-1.0
-0.9
-0.1

2.0
1.9
0.1

-0.7
-0.8
0.1

0.2
0.2
0.0

-1.0
-1.0
0.0

0.3
0.3
0.0

-0.7
-0.7
0.0

0.1
0.0
0.0

-0.5

-0.1

-0.3

-0.4

-0.3

Imports

Government cons. A invest.
Federal
Defense
Nondefense
State and local
Change in bus.
Nonfarm
Farm
GDP residual

inventories

Note. Components may not sum to totals because of rounding.

-0.3

0.2

0.0
-0.8
0.9

-1.6
0.2

0.1

-0.1
-0.3
0.9

-1.2
0.0

-0.1
-0.1

-0.2
-0.2

-0.0
0.3

-0.1
0.3

0.1
0.1
0.1

-0.0
-0.0
0.0

-0.3

Strictly Confidential
Class II FOMC

STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS
(Billions of dollars except as noted)

(FR)

Fiscal year
Item

1995

1996a

1997

1996
1998

Qla

UNIFIED BUDGET

Q 1b

1998
Q3

399
422
-24
-31
7

384
476
-91
-104
12

Not seasonally adjusted

Receipts
i
Outlays
I
Surplus/deficit
On-budget
Off-budget
Surplus excluding
2
deposit insurance
Means of financing
Borrowing
Cash decrease
3
Other
Cash operating balance,
end of period

1352
1516
-164
-226
62

1453
1560
-107
-174
67

1570
1627
-57
-136
79

1610
1687
-77
-156
79

322
393
-72
-84
12

446
392
54
14
39

362
395
-33
-35
2

346
405
-59
-77
18

349
401
-52
-69
17

495
409
85
45
41

380
411
-31
-35
4

365
425
-60
-72
12

357
419
-62
-75
14

490
421
68
22
47

-182

-116

-69

-82

-75

-34

-66

-56

-32

-61

-63

-25

-92

171
-2
-5

130
-6
-16

53
4
0

96
0
-19

80
-1
-7

-23
-16
-14

39
-6
0

49
11
-1

48
-1
5

-86
-7
8

42
0
-12

45
10
5

60
10
-8

-48
-15
-5

40
-5
-11

68
10
13

NIPA FEDERAL SECTOR
Receipts
Expenditures
Consumption expend.
Defense
Nondefense
Other expenditures
Current account surplus
Gross investment
Current and capital
account surplus
FISCAL INDICATORS

May 15, 1997

1997

Seasonally adjusted annual rate
1459
1629
455
304
151
1175
-171
65

1544
1683
457
303
155
1226
-139
63

1661
1746
461
304
157
1285
-84
62

1720
1805
464
306
158
1341
-85
64

1523
1678
454
299
155
1225
-155
65

1576
1702
464
307
156
1239
-127
66

1582
1703
461
305
157
1241
-121
64

1619
1725
458
305
153
1268
-106
61

1653
1737
462
302
159
1276
-84
58

1676
1754
461
303
158
1293
-78
63

1697
1766
462
305
157
1304
-69
64

1715
1789
463
307
157
1326
-74
65

1704
1799
465
307
158
1334
-95
64

1722
1809
463
305
158
1346
-87
63

1739
1822
464
306
158
1358
-83
64

1761
1840
460
305
156
1379
-79
63

-236

-202

-146

-149

-220

-193

-185

-167

-143

-141

-133

-139

-159

-150

-147

-142

-257

-228

-213

-235

-239

-226

-221

-214

-210

-215

-213

-223

-245

-238

-234

-231

-.1

-.4

-.2

-.1

-5.5

-2

-2.5

1.8

-.4

-2.2

-.2

-.7

-.2

High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent, cal. year

-1.9

1.3

-1.3

-.4

0
-2.3

1. OMB's February 1997 deficit estimates (assuming the enactment of the President's proposals) are $126 billion in FY97 and $121 billion in FY98.
CBO's March 1997 baseline deficit estimates are $115 billion in FY97 and $122 billion in FY98.
Budget receipts, outlays, and surplus/deficit include
corresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and shown separately as off-budget, as
classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90.
2. OMB's February 1997 deficit estimates (assuming the enactment of the President's proposals), excluding deposit insurance spending, are $138
billion in FY97 and $125 billion in FY98. CBO's March 1997 baseline deficit estimates, excluding deposit insurance, are $128 billion in FY97 and $126
billion in FY98.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. HEB is the NIPA current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level
of potential output generated by 1.8 percent real growth and an associated unemployment rate of 6 percent. Quarterly figures for change in HEB and
FI are not at annual rates. Change in HEB, as a percent of nominal potential GDP, is reversed in sign.
FI is the weighted difference of discretionary
changes in federal spending and taxes in chained (1992) dollars, scaled by real federal consumption plus investment.
For change in HEB and FI,
negative values indicate restraint.
5. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to
OMB fiscal year totals.
a--Actual.
b--Preliminary.

Strictly Confidential Class II FOMC
May 15, 1997
Change in Debt of the Domestic Nonfinancial Sectors
(Percent)

Quarter
1995:1
2
3
4
1996:1
2
3
4
1997:1
2
3
4

Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 1996:Q4 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.
2. On a monthly average basis, total debt grew 5.4 percent in 1996, 4.6 percent in 1997, and 5.0 percent in 1998.
3. On a monthly average basis, federal debt rose 3.8 percent in 1996, 1.4 percent in 1997, and 2.8 percent in 1998.
4. On a monthly average basis, nonfederal debt increased 5.9 percent in 1996, 5.7 percent in 1997, and 5.7 percent in 1998.
2.6.3 FOF

Strictly Confidential Class II FOMC
May 15, 1997

Flow of Funds Projections: Highlights
(Billions of dollars except as noted)

1
I

Calendar year
--

Category

1995

1996

1997

1998

1996
Q3

|
Q4

Seasonally adjusted annual rates
1997
Ql

1998

Net funds raised by domestic
nonfinancial sectors
1 Total
2 Net equity issuance
3 Net debt issuance

645.6
-74.2
719.8

664.8
-82.6
747.4

590.4
-95.6
686.0

684.2
-90.8
775.0

586.2
-138.8
725,0

575.0
-72.0
647.0

630.6
-84.8
715,4

461.0
-74.0
535.0

627.5
-112.8
740.3

642.3
-110.8
753.1

647.9
-89.0
736.9

720.5
-92.6
813.1

Borrowingsectors
Nonfinancial business
4 Financing gap'
5 Net equity issuance
6 Credit market borrowing

57.7
-74.2
233.8

20.3
-82.6
193.9

51.0
-95.6
269,1

81.6
-90.8
289.3

29.9
-138.8
249.5

43.5
-72.0
155.5

34.6
-84.8
259.1

50.4
-74.0
286.9

62.8
-112.8
253.1

56.1
-110.8
277.3

74.8
-89.0
282.8

88.4
-92.6
295.7

Households
2
7 Net borrowing
8
Home mortgages
9
Consumer credit
10 Debt/DPI (percent) 3

381.1
197.7
141.6
91.2

395.3
278.7
94.4
93.9

348.8
252.2
74.7
95.4

345.2
247.2
77.5
96.4

375.7
255.8
98.0
94.5

301.1
234.7
66.2
94.9

354.7
252.2
76.1
94.8

349.0
252.2
73.3
95.2

344.8
252.2
74.3
95.7

346.7
252.2
75.0
96.1

342.7
247.2
76.5
96.1

347.7
247.2
78.5
96.8

State and local governments
11 Net borrowing
4
12 Current surplus '

-39.6
108.4

13.3
116.2

18.8
118.7

20.9
115.6

-61.6
113.9

73.9
112.0

7.8
117.7

51.4
114.5

-18.6
123.3

34.6
119.2

34.4
116.7

7.4
114.5

Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.sa.)
15 Unified deficit (quarterly, n.s.a.)

144.4
144.4
146.3

145.0
145.0
110,6

49.2
49.2
57.4

119.6
119.6
108.7

161.3
39.3
33.0

116.5
48.7
59.3

93.7
48.0
52.0

-152.3
-86.0
-85.3

161,0
42.4
30.8

94.5
44.8
59.9

77.0
11.4
-6.5

162.3
108.2
115.2

Depository institutions
16 Funds supplied

274.6

233.4

255.3

267.9

265.2

220.5

213,3

335.4

215.4

257.2

258.1

277.7

Memo (percentage of GDP)
17 Domestic nonfinancial debt 5
18 Domestic nonfinancial borrowing
6
Federal government
19
Nonfederal
20

186.6
9.9
2.0
7.9

188.3
9.9
1.9
8.0

187.5
8.6
0.6
8,0

188.4
9.3
1.4
7.9

189.0
9.5
2.1
7.4

188.7
8.4
1.5
6.9

187.3
9.1
1.2
7.9

187.5
6.7
-1.9
8.7

187.3
9.2
2.0
7.2

187.6
9.3
1.2
8.1

187.9
8.9
0.9
8.0

188.6
9.6
1.9
7.7

Note. Data after 1996:Q4 are staff projections.
1. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP,
6. Excludes government-insured mortgage pool securities.
2.6.4 FOF

International Developments
Recent Developments
The weighted-average foreign exchange value of the dollar in terms of the other G-10
currencies has declined 1 percent since the March FOMC meeting. The dollar rose
strongly in April on expectations of a further U.S. monetary tightening, but it has
fallen back in May as those expectations have ebbed and as market attention focused
on G-7 officials' concerns about exchange rates.
The dollar has depreciated 5-1/2 percent, on balance, against the yen but has
firmed slightly against major European currencies and the Canadian dollar. European
long-term interest rates have declined 20 basis points (Germany) to 60 basis points
(Italy and the United Kingdom). Japanese long-term rates have risen 20 basis points
on perceptions of some firming in Japanese economic activity. Short-term rates have
changed little in most cases. The Canadian dollar weakened when the Bank of Canada
did not follow the firming move by the Federal Reserve in March. Sterling rose
slightly late in the period and U.K. long-term interest rates fell sharply after the new
Labour government announced that the repo rate was raised 25 basis points to 6-1/4
percent and that henceforth the Bank of England would be given authority to set
official interest rates.
Considerable market attention has been focused on the prospects for official
intervention to restrain the dollar, especially late in the period in response to remarks
by German and Japanese officials expressing concern about the weakness of their
currencies against the dollar.
The Desk did not
intervene.
Data for the first quarter and some preliminary indicators for the second quarter
suggest that the growth of output has strengthened somewhat on average in the foreign
G-7 countries. Activity has been strong in the United Kingdom, Canada, and Japan,
and weak but improving in continental Europe. U.K. GDP rose at an annual rate of
4 percent in the first quarter, and business sentiment was strong through April.
Canadian industrial production and retail sales strengthened substantially in JanuaryFebruary and employment showed further gains through April. Recent data on activity
in Japan have been distorted by the April 1 hike in the consumption tax, with strong
activity in the first quarter followed by some weakening in April. German industrial
production turned up moderately in the first quarter, and export orders surged. French
consumption of manufactured goods grew modestly in the first quarter, and Italian
industrial output bounced back from sharp declines during the second half of 1996.

Part 1: Summary and Outlook, May 15, 1997

The twelve-month rate of consumer price inflation receded to 2.5 percent in the
United Kingdom in April as a result of declines in oil and food prices. CPI inflation
ranged between 1 percent and 2 percent in the other foreign G-7 countries. As
expected, Japanese inflation rose to a bit more than 1 percent in April reflecting the
consumption tax increase. Italian inflation declined to 1.7 percent in April, helped by
the appreciation of the lira over the past year.
Economic activity continued to expand rapidly during the first quarter in major
developing countries on average. Growth of industrial production slowed somewhat in
Latin America and China but picked up in Korea and Taiwan. Mexico's trade surplus
widened in the first quarter after having dipped to near zero in the fourth.
The nominal U.S. trade deficit on goods and services widened substantially in
January-February, fully reversing the large decline that occurred in the fourth quarter.
Exports of goods and services rose only slightly from their very strong fourth-quarter
level. Automotive exports recovered from strike-depressed levels of the fourth quarter,
but shipments of other goods (most notably aircraft and agricultural commodities)
dropped, though less than we had expected they would. At the same time, imports,
led by a surge in computers and semiconductors and a rebound in autos from Canada
and Mexico after the GM strike ended, rose even more rapidly than we had
anticipated. Oil imports fell in January-February as prices declined and volumes rose
only slightly. Preliminary Department of Energy statistics for March and April
indicate that the volume of oil imports rose as stocks were rebuilt. Oil prices
continued their rapid descent, however; the spot WTI price fell to just below $20 per
barrel in April--and remained there in early May--reversing most of the 1996 runup.
Deliveries from Iraq and mild weather tended to quell the oil market. Prices jumped
to $21 per barrel toward the end of the period because of increased tensions in the
Middle East.
The prices of non-oil imports fell moderately in the first quarter (for the sixth
consecutive quarter) as modest inflation abroad and the effects of the appreciation of
the dollar showed through. Declines in the prices of imported computers and
semiconductors accelerated in the first quarter. Export prices rose moderately, with
higher grain and oilseed prices.

InternationalDevelopments

Outlook
The staff projection is little changed from that in the March Greenbook. Real output
in our foreign trading partners (weighted by bilateral shares in U.S. nonagricultural
exports) is expected to grow at about a 4 percent rate this year and next. We project
the dollar to drift down slightly over the forecast period. We have revised up slightly
the growth of real imports and exports, but the downward trajectory of real net exports
remains about the same as it was in March. Real net exports subtract about
3/4 percentage point from the annual rate of GDP growth in the current quarter and
about half that over the balance of 1997 and in 1998.
Summary of Staff Projections
(Percentage change from end of previous period)
1997

Measure

1998
Q1

Foreign output
Previous

4.0
3.9

3.9
4.1

3.9
3.9

3.9
3.8

Real exports
Previous

7.9
4.3

7.9
6.7

2.1
2.1

10.3
11.4

6.9
6.5

Real imports
Previous

20.9
16.0

12.2
10.9

9.2
8.0

5.9
9.2

8.1
7.8

The dollar. We project that the foreign exchange value of the dollar in terms
of the other G-10 currencies will weaken gradually over the forecast period as
widening U.S. current account deficits and Japanese current account surpluses depress
the dollar, particularly against the yen. We expect that the CPI-adjusted value of the
dollar in terms of the currencies of key developing countries will depreciate at a
moderate rate throughout the forecast period.
Foreign G-7 countries. Growth of real GDP in the foreign G-7 countries is
projected to average about 3 percent at an annual rate during the first half of 1997 and
a little less over the rest of the forecast period. Growth rates are projected to be
somewhat above potential (except in Italy), but unemployment should nevertheless
remain high in continental Europe.
Notwithstanding the difficulty of interpreting recent data in Japan, indicators
seem to have been slightly stronger than we had anticipated, and we have added a
tenth or two to Japanese GDP growth over the forecast period. We still expect
growth to slow in the current quarter in the wake of the consumption tax increase and
then to pick up to a 2-1/2 percent rate next year, somewhat less than last year's pace.

Part 1: Summary and Outlook, May 15, 1997

Growth will be held back this year by more contractionary fiscal policy and will pick
up over the forecast period as net exports strengthen, notwithstanding the recent and
anticipated further appreciation of the yen.
GDP in Germany and France should rebound in the current quarter from levels
depressed by poor weather earlier this year. We expect growth to be in the range of
2 percent to 3 percent over the rest of the forecast period, led by net exports and
investment. The projected recovery in Italy lags behind the expansions in Germany
and France because of the relatively large Italian fiscal contraction.
The continued strength of sterling has led us to shade down our projection of
U.K. GDP growth over the forecast period, and the recent and expected further
monetary tightening in that country should help to slow growth to near its potential
rate of a little over 2 percent. In Canada, continued rapid growth in investment
spending and relatively strong consumer demand should support vigorous output
expansion over the forecast period.
Inflation in the foreign G-7 countries (weighted by bilateral U.S. non-oil
import shares) is projected to rise a bit on average this year as lower inflation in
several of these countries is offset by the transitory effect on Japanese inflation of the
rise in the consumption tax. In 1998, average inflation in the foreign G-7 countries
should again edge below a 1-1/2 percent rate.
The forecast assumes that the average level of short-term interest rates in
foreign G-7 countries will be little changed for the balance of 1997 as rates in Italy
recede somewhat further and those in the United Kingdom are raised again. We
expect rates in 1998 to rise more broadly with economic recoveries gaining
momentum in most of the foreign G-7 countries. We assume long-term rates will
change little on balance over the forecast period, with higher rates in some countries,
particularly Japan, offset by some further declines in Italian rates. Italy's interest rates
should decline further as that country's expansion lags and as Italy benefits from
moving closer to EMU membership, but its rates will remain well above those in
Germany and France until its membership in EMU is assured.'
1. Our forecast continues to assume that Stage Three of the European Monetary Union will move
ahead as scheduled on January 1, 1999, at least with Germany, France, and several smaller European
countries included. Prospects for Italy's inclusion at this stage remain clouded by uncertainty about the
outlook for that country's budget deficits this year and next. Current budget plans in Italy (including a
recent supplemental budget) may well put the 1997 deficit close enough to 3 percent to allow for an
affirmative political decision on initial EMU entry. Based on budget performance alone, Portugal and
Spain appear to have a stronger claim than Italy to being included as initial members.

InternationalDevelopments

Other countries. We project that real GDP in our major developing-country
trading partners will increase at an annual rate of slightly less than 6 percent in
1997-98, a forecast about the same as that in the March Greenbook.
Real GDP in Latin America is expected to expand about 4-1/2 percent per year.
We expect growth in Mexico to remain relatively strong during 1997 and to slow a bit
in 1998. With strong GDP growth and a rise in the value of the peso in real terms,
Mexico's current account deficit is projected to widen from less than $2 billion in
1996 to $6 billion in 1997. Prospects for growth in Argentina this year have
strengthened somewhat in recent weeks given news of a record agricultural harvest,
while growth in Brazil is still expected to be in the vicinity of 3 percent.
Real output in our major trading partners in Asia is expected to expand at a
6-1/2 to 7 percent rate, a bit less than we projected in March because of downward
revisions to our forecasts for Taiwan and South Korea. In the case of Taiwan, "footand-mouth" disease in pig supplies will noticeably reduce exports and GDP in the near
term. In South Korea, an unfolding financial scandal and the near-bankruptcies of two
leading conglomerates have had an unsettling effect on business confidence. Problems
in Thailand manifested recently in exchange rate pressures could potentially have some
spillover effects on other economies, especially in Asia.
We project growth to remain near 10 percent per year in China and 5-1/2
percent in Hong Kong, assuming the upcoming return of Hong Kong to China on
July 1 does not disrupt ongoing financial and commercial relations. Financial markets
appear sanguine about the near-term prospects for Hong Kong.
We are expecting inflation in Mexico to continue to recede toward single-digit
levels over the forecast period. Inflation pressures could begin to build elsewhere,
however, particularly among some of the rapidly growing Asian economies.
U.S. real exports and imports. We project real exports of goods and services
to grow at about a 7 percent annual rate this year and next. Core exports (goods other
than agricultural products, computers, and semiconductors) are projected to slow from
about a 4 percent expansion this year to 2 percent next year, reflecting the lagged
response of these exports to the appreciation of the dollar over the past year. The
slowdown in core exports is offset by a speedup of agricultural shipments next year
and faster growth in service receipts. Service receipts, which tend to respond to
exchange rate changes with a shorter lag than core exports, should be depressed this

Part 1: Summary and Outlook, May 15, 1997

year but not next by the appreciation of the dollar. The projected growth of total
exports is elevated by the continued rapid expansion of real exports of computers and
semiconductors.
The growth of real imports of goods and services should come off its firstquarter highs as the expansion of U.S. domestic demand slows. Nevertheless, import
demand will continue to be stimulated for much of this year by recent declines in the
relative price of imports stemming from the strong dollar. Imports of computers and
semiconductors will slow from the exceptionally rapid expansion seen in the first
quarter but are nevertheless expected to continue growing strongly. On balance, we
see the growth of total imports slowing from an annual rate of 9 percent during the
last three quarters of 1997 to 8 percent in 1998.
We expect the quantity of oil imports to rise strongly this quarter as stocks are
rebuilt. Oil imports are projected to increase, albeit more slowly, during the remainder
of the forecast period as consumption expands with the increase in U.S. economic
activity and as U.S. production declines.
Selected Trade Prices
(Percentage change from end of previous period
except as noted; seasonally adjusted)
Projection
1997

Trade category

iI
ii1998

Exports
Nonagricultural
Agricultural

-.8
.7

-2.8
3.2

.1
2.3

.8
2.0

1.1
1.3

Imports

Non-oil

-2.4

-2.1

1.9

2.5

Oil (level, dollars per barrel)

21.37

17.82

17.22

17.10

17.00

NOTE. Prices for exports and non-oil imports of goods, including computers
and semiconductors, are on a NIPA chain-weighted basis.
The price of imported oil for multiquarter periods is the price for the final

quarter of the period.
Oil prices. The staffs projection for the price of imported oil is basically the
same as in the March Greenbook. We project the WTI spot price and the oil import
unit value to be near $19.50/b and $17.00/b, respectively, through 1998.
Prices of non-oil imports and exports. The appreciation of the dollar through
early May has had the beneficial effect of holding down the prices of non-oil imports.

InternationalDevelopments

Given the more recent depreciation and our projection of a gradual further decline in
the dollar, this beneficial effect will reverse. Prices of non-oil imports should drop
further in the current quarter as a result of the past appreciation of the dollar, but we
expect these prices to pick up noticeably in the second half of the year--not just
because of the recent depreciation of the dollar, but also because of increases in coffee
and metals prices. In 1998, a downturn in commodity prices and the projected slower
rate of depreciation of the dollar should damp the increase in non-oil import prices
next year to a rate below the increase in domestic prices.
Prices of nonagricultural exports are projected to decline somewhat through the
first half of this year and then to rise slowly over the remainder of the forecast period
in line with comparable U.S. producer prices. Prices of agricultural exports are
expected to rise moderately.
Nominal trade and current account balances. The nominal trade deficit for
goods and services is projected to widen over the forecast period from a little more
than $105 billion in the fourth quarter of 1996 to nearly $150 billion in the fourth
quarter of 1998. The deficit on net investment income is expected to widen this year
and next as well. Accordingly, the current account deficit, which averaged $165
billion in 1996, is projected to rise to about $225 billion, or 2-3/4 percent of GDP, in
1998.

Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)

May 15,

1997

--Projected-1990

1991

1992

1993

1994

1995

1996

1997

1998

-1.9
1.2
6.8
0.7
5.1
-0.7

0.0
1.3
3.3
1.9
2.5
-1.5

0.5
0.1
1.0
-0.8
0.1
0.3

3.1
-0.6
-0.2
0.1
0.4
2.8

4.9
4.4
3.4
2.7
0.8
4.2

0.7
0.3
0.8
2.5
2.6
1.9

2.3
2.0
2.2
0.1
3.1
2.6

3.5
2.8
2.2
1.5
2.3
2.7

3.2
2.4
2.9
2.1
2.5
2.4

Average weighted by 1987-89 GDP

2.7

2.8

0.2

0.7

2.8

1.7

2.2

2.4

2.5

Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries

2.5
0.6
6.2

2.9
1.5
6.4

1.9
0.3
5.1

3.2
1.8
6.0

5.0
3.8
7.0

1.7
1.3
2.1

4.0
2.4
6,8

3.9
2.9
5.8

3.9
2.8
5.8

Canada
France
Germany (1)
Italy
Japan
United Kingdom (2)

4.9
3.5
3.0
6.4
3.2
9.2

4.1
3.0
4.0
6.1
3.2
5.7

1.8
1.8
3.4
4.9
0.9
3.7

1.8
2.1
4.2
4.1
1.2
2.7

0.0
1.6
2.6
3.8
0.8
2.2

2.1
1.9
1.7
5.9
-0.8
2.9

2.0
1.7
1.4
2.7
0.1
3.2

1.4
1.4
1.6
2.0
1.5
2.6

1.6
1.9
1.6
2.0
0.7
2.8

Average weighted by 1987-89 GDP

4.7

2.6

2.4

2.5

1.8

1.7

1.5

1.7

1.6

Average weighted by share of
U.S. non-oil imports

4.3

2.8

1.9

2.0

1.0

1.1

1.3

1.6

1.4

Measure and country
REAL GDP
Canada
France
Germany (1)
Italy
Japan
United Kingdom

CONSUMER PRICES

1. West German data through 1991, all Germany thereafter.
2. CPI excluding mortgage interest payments which is the targeted inflation rate.

May 15,

Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, quarterly change at an annual rate)

1996
-'----------------------

1997

------------------- Projected ------------------1997
1998
------ '----------------

---------

1---~---------

1.4
5.3
-0.4
0.8
8.4
2.5

1.4
-0.9
6.1
-1.5
-1.1
2.1

3.3
3.1
3.0
2.2
1.3
2.6

2.9
0.7
0.3
-0.9
3.9
3.4

3.8
0.8
1.4
1.0
3.4
3.9

3.4
4.5
3.5
1.4
1.4
2.3

3.5
3.1
2.0
1.8
2.1
2.4

3.3
2.7
2.1
1,8
2.3
2.3

3.2
2.6
2.8
2.0
2.5
2.2

3.2
2.4
2.9
2.0
2.5
2.4

3.2
2.3
3.0
2.2
2.6
2.5

3.1
2.3
2.7
2.2
2.5
2.4

Average weighted by 1987-89 GDP

4.0

0.7

2.3

2.0

2.5

2.3

2.5

2.6

2.5

Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries

4.8
3.0
9.0

1.8
1.2
1.6

4.6
2.7
7.7

4.9
2.6
9.3

4.0
3.2
5.7

3.9
2.9
5.8

3.9
2.8
5.8

4.0
2.8
5.9

3.9
2.8
5.9

3.9
2.9
5.8

3.7
2.8
5.8

1.4
2.1
1.6
5.0
-0.3
2.9

1.4
2.4
1.5
4.2
0.1
2.8

1.4
1.8
1.4
3.5
0.0
2.9

2.0
1.7
1.4
2.7
0.1
3.2

2.1
1.5
1.7
2.4
0.0
2.9

1.7
1.1
1.7
2.0
1.3
2.9

1.8
1.4
1.7
2.0
1.5
2.8

1.4
1.4
1.6
2.0
1.5
2.6

1,4
1.6
1.7
2.0
1.7
2.6

1.5
1.6
1.6
2.0
0.2
2.7

1.6
1.8
1.6
2.0
0.5
2.8

1.6
1.9
1.6
2.0
0.7
2.8

Average weighted by 1987-89 GDP

1.7

1.5

1.4

1.7

1.8

1.7

1.8

1.3

1.5

1.6

Average weighted by share of
U.S. non-oil imports

1.1

1.2

1.1

1.3

1.6

1.7

1.6

1.7

1.1

1.3

1.4

Measure and country
REAL GDP
Canada
France
Germany
Italy
Japan
United Kingdom

CONSUMER PRICES (1)
Canada
France
Germany
Italy
Japan
United Kingdom (2)

1. Percent change from same period a year earlier.
2. CPI excluding mortgage interest payments which is the targeted inflation rate.

Strictly Confidential
Class II FOMC

May 15,

(FR)

1997

OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS

1990

1991

1992

1993

1994

---- Projected ---1996
1997
1998

1995

NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S

0.6
0.6
-0.0

0.4
0.8
-0.4

-0.4
0.4
-0.8

-0.4
1.0
-1.4

-0.7
0.5
-1.1

0,3
0,8
-0.5

-0.2
0.9
-1.1

-0.8
0.9
-1.6

-0.3
0.9
-1.2

Percentage change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

7.2
8.9
-7.3
12.3
61.5
6.0

8.6
7.1
10.1
21.7
41.8
7.0

4.1
-0.9
10.4
25.2
64.8
2.3

4.8
3.9
-5.4
22.7
45.1
3.6

9.9
4.8
17.1
28.8
68.7
7.4

7,4
5.1
-3.0
49,5
29.7
5.3

7.4
3.0
3.8
32.7
4.9
7.7

7.0
2.3
-4.5
44.3
28.1
4.3

6.9
3.6
3.7
36.0
27.4
1.8

0.5
5.8
-15.8
2.9
60.9
-0.3

4.1
-2.7
8.1
35.9
55.3
2.5

7.4
1.5
12.1
45.1
42.0
5.4

10.5
3.6
10.1
38.8
44.9
9.5

11.8
0.8
-0.2
37.3
47.4
12.5

4.2
4.1
0.9
43.8
57,1
-1.2

8.3
4.7
-1.9
23.9
-13.6
10.1

11.9
5.6
8.5
40.3
47.7
8.0

8.1
2.5
4.5
28.7
31.1
4.4

-105.7
712.0
817.6

-107.6
775,4
883.0

-113.6
825.9
939.5

-145.4
900.0
1045.4

-173.3
958.8
1132.1

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-61.9
564.4
626.3

-22.3
599.9
622.2

-29.5
639.4
668.9

-72.0
658.2
730.2

Billions of dollars
US CURRENT ACCOUNT BALANCE

-94.7

-9.5

-62.6

-99.9

-148.4

-148.2

-165.3

-195.1

-225.5

Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)

-80.3
536.8
617.1

-29.9
580.7
610.6

-38.3
617.7
655.9

-72.0
643.0
715.0

-104.4
698.3
802.7

-105.1
786.5
891.6

-114.4
835.3
949.7

-132.0
889.5
1021.5

-150.9
937.5
1088.4

Net Investment Income
Direct, Net
Portfolio, Net

20.9
55.9
-35.0

15.8
55.6
-39.8

11.2
51.6
-40.4

9.7
55.9
-46.2

-4.2
47.4
-51.6

-8.0
57.5
-65.5

-8.4
64.4
-72.9

-21.3
68.9
-90.2

-32.9
72.4
-105.3

Net Transfers

-35.2

4.5

-35.5

-37.6

-39.9

-35.1

-42.5

-41.8

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

Strictly Confidential
Class II FOMC

May 15,

1997

(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1993
------- ----------Q2
Q3
Q1

- - - Q4

1994
Q1

1995

NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S

-1.1
-0.2
-0.9

-0.5
1.6
-2.1

-0.3
1.0
-1.3

0.4
1.7
-1.2

-1.1
0.3
-1.4

1.0
1.2
-0.2

-1.1
0.2
-1.3

-0.6
0.7
-1.3

-1.3
-0.1
-1.2

2.3
2.7
-0.5

10.7
18.7
16.4
79.0
28.8
0.7

10.7
-0.2
-4.5
61.1
27.6
13.4

1.8
2.6
9.2
58.8
-0.0

5.7
3.0
-34.1
20.6
-20.7
14.1

-0.9
-4.0
9.1
18.6
2.6

-2.8

25.0
10.8
48.1
36.7
48.8
26.7

-0.0
5.8

1.6
-2.4
-17.3
51.8
43.6
-2.2

-21.8
27.8
4.6
12.3

10.0
1.1
59.2
22.9
-38.5
11.7

9.3
2.5
7.3
22.1
-19.0
11.8

3.3
2.5
-30.6
22.9
6.8
4.6

-101.6
783.0
884.5

-84.9
803.1
888.0

-104.0
806.7
910.7

-114.7
817.9
932.6

-137.4
816.1
953.5

-98.4

-150.8

-121.7

-141.1

-162.4

-191.4

-166.2

-97.3
796.8
894.2

-77.6
814.5

-98.5
820.4
918.9

-115.8
835.9
951.7

-137.1

-106.1
862.2
968.2

-7.6

-8.9

-9.7
73.0
-82.7
-50.5

0.1
0.7
-0.6

Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

-1.6
0.8
-24.4
24.5
131.4
-6.6

15.9
9.7
6,8
16.6
16.2
20.2

9.7
3.4
43.0
45.8
6.6

16.5
5.5
62.9
48.6
106.7
11.0

8.2
1.8
-8.6
45.0
65.3
7.0

18,4
7,5
27,2
30.9
7.3
19.9

10.7
-1.6
33.5
24.8
43.4
9.5

10.3
-4.0
-36.2
49.9
85.8
14.1

27.6

2.6
-1.1
-0.6
33.0
0.0

5.9
4.0
-19.8
30.1
19.9
7.6

11.2
21.7
-2.4
29.6
49.3
6.9

4.5
-6.7
5.3
31,9
61.0
2.4

43.6

22.0

64.7
76.4
-10.8

-4.1

10.6
13.0

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-99.3
677.6
777.0

-107,3
703,1
810.4

-111.7
719.6
831.3

-104.3
747.6
851.9

-122.5
752.3
874.9

-121.4
763.2
884.6

862.9
961.3

Billions of dollars
US CURRENT ACCOUNT BALANCE

-118.8

-144.1

-160.0

-170.6

-156.2

-163.9

Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)

-90.8
662.3
753.1

-103.5
686,1
789,6

-113.8
708.3
822.1

-109.4
736.5
845.9

-118.1
755.9
874.0

-127.3
778.9
906.2

Net Investment Income
Direct, Net
Portfolio, Net

4.7
49.5
-44.8

-2.5

46,0
-48.5

-6.4
47.4
-53.7

-12.4
46.9
-59.3

-3.6
57.4
-61.0

-3.4
59.9
-63.3

-17.4
51.3
-68.7

61.3
-68.9

1.2
66.3
-65.1

-68.4

-16.4
58.9
-75.3

Net Transfers

-32.7

-38.0

-39.9

-48.9

-34.6

-33.2

-36.0

-36.6

-43.8

-37.7

-37.9

892.0

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

59.5

822.9
960.0

Strictly Confidential
Class II FOMC

May 15,

(FR)

1997

OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
--------------------------- Projected ----------------------1997
1998

1996

~---------------Q1

-----------

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

~---------

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

I----

NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S

-1.1
0.2
-1.3

-0.6
0.7
-1.3

-1.3
-0.1
-1.2

2.3
2.7
-0.5

-1.7
0.9
-2.7

-0.7
1.0
-1.7

0.4
1.2
-0.9

-1.0
0.3
-1.3

-0.6
0.5
-1.2

-0.3
1.2
-1.4

-0.9
0.4
-1.3

0.5
1.4
-0.9

Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

1.8
2.6
9.2
58.8
-0.0
-4.1

5.7
3.0
-34.1
20.6
-20.7
14.1

-0.9
-4.0
9.1
18.6
2.6
-2.8

25.0
10.8
48.1
36.7
48.8
26.7

7.9
3.5
-24.7
82.4
33.8
5.0

7.9
1.3
-13.4
33.5
26.3
8.9

2.1
1.9
10.8
33.5
26.3
-4.8

10.3
2.7
15.2
33.5
26.3
8.6

4.2
3.6
3.3
36.0
27.4
-2.4

9.4
3.8
3.3
36.0
27.4
6.5

3.1
3.6
2.4
36.0
27.4
-5.1

11.1
3.4
5.7
36.0
27.4
8.8

10.6
13.0
-21.8
27.8
4.6
12.3

10.0
1.1
59.2
22.9
-38.5
11.7

9.3
2.5
7.3
22.1
-19.0
11.8

3.3
2.5
-30.6
22.9
6.8
4.6

20.9
10.6
24.1
85.4
82.0
13.3

12.2
5.3
33.7
31.1
46.4
7.7

9.2
4.0
14.1
26.3
36.1
5.9

5.9
2.7
-26.8
26.3
31.1
5.2

8.0
2.4
6.3
28.7
31.1
4.6

9.8
2.5
40.8
28.7
31.1
4.5

8.8
2,4
15.6
28.7
31.1
4.4

5.9
2.6
-31.2
28.7
31.1
4.3

-159.5
901.0
1060.5

-152.5
923.3
1075.8

-163.9
932.8
1096.6

-168.6
954.0
1122.5

-185.0
961.3
1146.4

-175.8
987.0
1162.9

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-104.0
806.7
910.7

-114.7
817.9
932.6

-137.4
816.1
953.5

-98.4
862.9
961.3

-128.5
879.4
1007.9

-141.0
896.4
1037.4

Billions of dollars
US CURRENT ACCOUNT BALANCE

-141.1

-162.4

-191.4

-166.2

-182.2

-181.5

-204.8

-211.7

-211.3

-218.4

-235.6

-236.8

Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)

-98.5
820.4
918.9

-115.8
835.9
951.7

-137.1
822.9
960.0

-106.1
862.2
968.2

-127.4
877.6
1004.9

-123.9
886.4
1010.4

-141.7
886.1
1027.8

-135.0
907.8
1042.8

-145.4
915.0
1060.4

-147.1
934.4
1081.6

-161.5
938.8
1100.3

-149.4
961.9
1111.3

Net Investment Income
Direct, Net
Portfolio, Net

1.2
66.3
-65.1

-8.9
59.5
-68.4

-16.4
58.9
-75.3

-9.7
73.0
-82.7

-15.8
69.5
-85.3

-18.6
69.6
-88.2

-24.0
67.7
-91.8

-26.6
68.9

-32.3
70.6
-102.8

-35.1
72.4
-107.5

-37.3

-95.5

-26.9
72.2
-99.1

Net Transfers

-43.8

-37.7

-37.9

-50.5

-39.0

-50.0

-39.0

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

74.6

-111.9
-50.0

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, May 20, 1997 : Greenbook Part 1

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