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The attached document represents the most complete and accurate version
available based on original copies culled from the files of the FOMC Secretariat at the
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text-searchable. 2 Though a stringent quality assurance process was employed, some
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gaps are the result of a redaction process that removed information obtained on a
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1
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Strictly Confidential (FR) Class II FOMC
May 15,
1985
SUMMARY AND OUTLOOK
Prepared for the Federal Open Market Committee
By the staff of the Board of Governors of the Federal Reserve System
DOMESTIC NONFINANCIAL DEVELOPMENTS
Recent developments.
Production growth has been slower in recent
months, as a larger share of domestic demand has been satisfied by imports.
Consumer spending has maintained upward momentum, and residential construction has increased considerably.
Business investment, however, slowed in
the first quarter, reflecting weakness in equipment spending.
Wage and
price increases generally have held in relatively moderate ranges.
The index of industrial production declined 0.2 percent in April,
as output in most major market sectors weakened.
Auto assemblies fell
slightly to 8.1 million units at an annual rate, and output of other consumer
goods also edged down.
Production of business equipment dropped for the
fourth consecutive month.
While industrial production has fluctuated in a
narrow range since last summer, industrial capacity utilization has trended
down, falling 1/2 percentage point last month to about 80-1/2 percent.
The decline in industrial production in April was associated with
further cutbacks in manufacturing employment.
The 45,000 reduction in
manufacturing jobs last month brought the cumulative loss in this sector
for the first four months of 1985 to 130,000.
Outside of manufacturing,
sizable job gains were reported in April in services and in construction.
On balance, however, total nonfarm payroll employment rose 215,000 last
month-less than the average gains reported in earlier months.
Growth in domestic spending has been well maintained, paced by household sector outlays.
Real personal consumption expenditures were up at
almost a 5 percent annual rate during the first quarter, with sizable gains
in both goods and services.
Retail sales, after declining in March,
rebounded in April; excluding auto dealers, gasoline stations, and building
materials outlets, nominal sales in April were 1/2 percent above the firstquarter average.
Sales of domestic cars since the beginning of April have
averaged about an 8-1/2 million unit annual rate-in line with the first-quarter
level and up considerably from last year's average pace.
Automobile sales
have been supported recently by below-market financing incentives offered
by manufacturers.
Activity in the housing sector also has continued to improve.
starts rose 16 percent in March to a 1.9 million unit annual rate.
Housing
In the
single-family sector, starts moved up to an annual rate of 1.15 million
units in March, nearly 20 percent above last summer's low; moreover,
sales of both new and existing homes rose sharply last month.
Starts of
multifamily units also were strong in March, despite high rental vacancy
rates in many areas.
Multifamily starts have been quite volatile of late,
however, and during the six-month period ending in March they were down
substantially from the previous half year.
In contrast to the strength in household sector outlays, growth in
business spending for fixed capital slowed markedly during the first quarter,
as expenditures on producers' durable equipment weakened.
Despite some
rebound in February and March, shipments by domestic producers of nondefense
capital goods fell 3.2 percent in the first quarter; at the same time,
imports continued to meet an increased share of business equipment demand.
In contrast to equipment spending, nonresidential construction expenditures
rose sharply in the first quarter of 1985, though such spending was off
noticeably in March.
Sizable increases in energy and automobile prices have pushed up
prices at the consumer level in recent months; indeed, a 3.6 percent rise
in gasoline prices and higher prices for new and used cars accounted for
most of the 0.5 percent increase in the March consumer price index.
However,
the influence of these factors on inflation is likely to be temporary.
Spot prices for gasoline began falling late last month, and motor vehicle
prices declined in the April producer price index.
In commodity markets,
spot prices of industrial materials declined sharply into early May.
Wage data thus far this year have given ambiguous signals.
The first-
quarter rise in hourly compensation in the nonfarm business sector-6 percent
at an annual rate-was about 2 percentage points higher than the annual
increases during 1983 and 1984.
Less than half of this acceleration can be
explained by one-time changes in social security taxes and higher employer
contributions for unemployment insurance.
By contrast, the first-quarter
increase in the employment cost index for wages paid in private industry
remained level at a 4-1/4 percent annual rate.
Moreover, during the first
four months of 1985, the hourly earnings index for production and nonsupervisory workers increased at an annual rate of 2.5 percent, slightly below
the 1984 average.
Preliminary estimates suggest that productivity in the nonfarm business
sector fell at a 1-1/4 percent annual rate in the first quarter.
Temporary
declines in measured productivity often occur when output growth slows
sharply, as it did in the first quarter, because firms continue to hire
based on longer-run sales and production expectations.
Declining produc-
tivity coupled with rising compensation growth resulted in a sharp jump in
unit labor costs last quarter.
Outlook.
The staff is projecting a 2-1/4 percent annual rate of
growth in real GNP during the current quarter.
Domestic final demand is
expected to register another quarterly increase on the order of 3-1/2 to
4 percent.
Outlays for residential construction are likely to post solid
gains, while business fixed investment consumption expenditures are
expected to continue to expand.
Imports are projected to retrace a bit of
their first-quarter surge in the current quarter, so that more of domestic
final purchases will be reflected in domestic production.
However, some of
the rise in final sales is likely to be offset by a slowing in the pace of
inventory accumulation, most notably at automobile dealers.
The fixed-weighted
price index for gross business product is anticipated to rise at a 3-1/2
percent annual rate this quarter-about the same rate as in the first
quarter.
Policy assumptions are little changed from the March Greenbook.
M1
growth is assumed to be in the upper part of the Committee's range for this
year and to slow in 1986.
Interest rates are expected to change relatively
little over the remainder of 1985 and to trend lower in 1986.
On the fiscal
policy front, the current fiscal-year deficit is projected at $206 billion
on a unified basis, falling to $185 billion in FY1986 on the assumption
that a deficit-reduction package of about $50 billion will be adopted.
On
a structural basis, the federal deficit is expected to remain essentially
unchanged through the remainder of 1985 and in 1986.
In this policy environment, growth in aggregate demand is expected
to be moderate through the end of the projection period.
Real GNP growth is
expected to pick up to a bit more than 3 percent on average during the
second half of this year, but then to slow to around 2-1/2 percent in
1986.
With increases in real household income likely to be considerably
smaller than earlier in the expansion, consumption expenditures are anticipated
to rise less rapidly, especially in the case of durables.
Advances in
business fixed investment also are expected to remain well below the pace
of 1983-84.
In the equipment area, outlays for high-technology items
propably will register further increases as firms continue to seek gains in
efficiency and update products.
However, with output growth slowing and
capacity utilization not rising much above current levels, the cyclical
impetus to investment spending is likely to be damped considerably.
Moreover,
record-high vacancy rates for office buildings in many locales suggest that
the boom in commercial construction will not continue.
By contrast,
activity in single-family housing markets is expected to pick up in response to lower mortgage credit costs.
And with the dollar already well
below recent peaks and with further moderate declines projected, strengthening
of export demand is anticipated for next year.
Given the growth path for
real GNP, the unemployment rate is projected to level off at 7 percent in
1986.
The outlook for inflation is about as presented in the last Greenbook,
with the fixed-weighted price index for gross business product expected to
rise 3-1/2 percent this year and 4 percent in 1986.
The remaining slack in
labor and product markets should hold growth of wages and unit labor costs
in check during the next year and a half.
However, the anticipated depreciation
of the dollar will add somewhat to domestic inflation pressures, especially
in 1986.
Detailed data for these projections are in the tables shown on the
following pages.
May 15,
1985
STAFF GNP PROJECTIONS
Percent changes, annual rate
Gross domestic
business product
fixed-weighted
price index
Nominal GNP
Real GNP
Total
3/20/85
5/15/85
3/20/85
Excluding food
and energy
Unemployment
rate
(percent)
5/15/85
3/20/85
5/15/85
3/20/85
5/15/85
3/20/85
5/15/85
Annual changes a
1983
1984
1985
1986
<1>
<1>
7.7
10.9
7.1
6.4
7.7
10.8
6.5
6.3
3.7
6.9
3.6
2.8
3.7
6.8
2.8
2.7
3.8
4.0
3.5
3.8
3.8
4.0
3.7
3.7
4.6
4.3
4.1
4.1
4.6
4.3
4.3
4.0
9.6
7.5
7.0
6.7
9.6
7.5
7.2
7.0
Quarterly changes
1984
Q1
Q2
Q3
Q4
<1>
<1>
<1>
<1>
14.9
10.7
5.6
7.8
14.9
10.7
5.6
7.1
10.1
7.1
1.6
4.9
10.1
7.1
1.6
4.3
4.2
4.1
4.0
3.2
4.2
4.1
4.0
3.5
3.4
5.4
4.9
3.8
3.4
5.4
4.9
3.9
7.9
7.5
7.4
7.2
7.9
7.5
7.4
7.2
1985
Q1 <1>
Q2
Q3
Q4
7.4
6.4
6.5
6.7
6.7
5.3
6.3
6.3
3.1
3.5
3.3
3.3
1.3
2.3
3.5
3.0
3.1
3.5
3.5
3.7
3.7
3.5
3.3
3.5
3.7
4.3
3.8
3.8
5.1
3.7
3.6
3.7
7.3
7.1
6.9
6.8
7.3
7.3
7.2
7.1
1986
Q1
Q2
Q3
Q4
6.2
5.9
6.6
6.8
6.5
6.0
6.3
6.8
2.4
2.4
2.8
2.6
2.6
2.5
2.5
2.5
3.9
3.9
4.1
4.3
3.8
3.9
4.1
4.3
4.1
4.1
4.4
4.4
4.0
4.1
4.4
4.4
6.8
6.8
6.7
6.7
7.0
7.0
7.0
7.0
12.8
6.7
12.8
6.4
8.6
3.2
8.6
2.9
4.2
3.7
4.2
3.8
4.4
4.3
4.4
4.4
-1.0
-. 3
-1.0
-. 3
Two-quarter changest <2>
1984
Q2 <1>
Q4 <)>
1985
Q2
Q4
6.9
6.6
6.0
6.3
3.3
3.3
1.8
3.3
3.3
3.6
3.6
3.4
4.0
3.8
4.4
3.6
-. 1
-.3
.1
-. 2
1986
Q2
Q4
6.0
6.7
6.3
6.5
.4:
2.7
2.6
2.5
3.9
4.2
3.8
4.2
4.1
4.4
4.1
4.4
.0
-. 1
-. 1
.0
.3
5.7
2.5
2.5
3.7
4.0
3.4
4.0
3.7
4.0
3.5
.
4.4
4.4
3.9
4.3
4.0
44
4.
4604.'
-. 1
-1.3
-. 4
-. 1
-2.1
-1.3
-. 1
-. 1
Four-quarter changest <3
1983
1984
1985
1986
Q4 <1>
Q4 <1>
Q4
Q4
10.4
9.7
6.8
6.4
ti
.5f
6,1
6.4
6.3
5.
3.3
2.3
6.
<1> Actual.
<2> Percent chauge from two quartare earlier.
<3> Percent change from four quarters earlier.
May 15,
CONFIDENTIAL - FR
CLASS II FOMC
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and
figures are billions of current dollars at annual rates.)
1985
income
1983
1984
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Gross National Product
Gross domestic purchases
Final sales
Private
Domestic final purchases
3173.8
3154.2
3216.8
2538.0
2518.4
3267.0
3273.4
3286.4
2604.2
2610.7
3346.6
3363.0
3350.9
2661.1
.2677.5
3431.7
3461.5
3419.0
2727.6
2757.4
3553.3
3604.8
3479.5
2775.1
2826.6
3644.7
3703.4
3594.1
2850.4
2909.1
3694.6
3785.2
3622.8
2861.8
2952.4
3758.7
3814.8
3722.1
2941.6
2997.6
Personal consumption expenditures
Goods
Services
2070.4
1034.6
1035.8
2141.6
1073.0
1068.6
2181.4
1095.8
1085.7
2230.2
1122.8
1107.5
2276.5
1152.2
1124.4
2332.7
1179.0
1153.7
2361.4
1178.6
1182.8
2396.5
1192.8
1203.8
Gross private domestic investment
Residential structures
Business fixed investment
Change in business inventories
Nonfarm
405.0
113.3
334.6
-42.9
-32.6
449.6
129.8
339.3
-19.4
-5.4
491.9
142.3
353.9
-4.3
11.6
540.0
143.4
383.9
12.7
14.1
623.8
151.2
398.8
73.8
60.6
627.0
155.6
420.8
50.6
47.0
662.8
155.3
435.7
71.8
63.7
637.8
153.5
447.7
36.6
27.2
Net exports of goods and services <1>
Exports
Imports
19.6
328.5
308.9
-6.5
328.1
334.5
-16.4
342.0
358.4
-29.8
346.1
375.9
-51.5
358.9
410.4
-58.7
362.4
421.1
-90.6
368.6
459.3
-56.0
367.2
423.2
Gov't. purchases of goods and services
Federal <2>
State and local
678.8
273.0
405.8
682.2
270.5
411.6
689.8
269.2
420.6
691.4
266.3
425.1
704.4
267.6
436.8
743.7
296.4
447.4
761.0
302.0
458.9
780.5
315.7
464.8
Gross national product in
constant (1972) dollars
1491.0
1524.8
1550.2
1572.7
1610.9
1638.8
1645.2
1662.4
Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)
2662.8
2714.4
1608.1 1642.1
2261.4
2302.9
4.2
5.7
2763.3
1671.3
2367.4
5.0
2836.5
1715.4
2428.6
5.3
2920.5
2984.6
1755.7
1793.1
2554.3
2502.2
5.7
6.1
3047.3
1819.5
2606.4
6.3
3096.2
1847.6
2644.5
6.2
Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-) <3>
State and local goverment surplus or
deficit(-) (N.I.A. basis)
Excluding social insurance tfud
Civilian labor force (ai4lions)
Uneaployment rat* ( Preeask
Nonfarm payroll mUqlymt
Manufacturing
Industrial produetioa (1967100)
Capacity utilisatio: all matuacturing (percent)
Materials (percent)
Rousing starts, private ( illoa ults, A..L)
New auto sales (millions, A.R.)
Domestic odels
Foreiga models
179.1
161.7
216.7
198.2
245.0
227.4
260.0
225.5
277.4
243.3
291.1
246.0
282.8
224.8
291.6
228.7
-185.7
-80.9
-167.3
-74.2
-180.9
-102.5
-180.5
-113.1
-161.3
-113.3
-163.7
-129.6
-180.6
-146.1
-197.8
-169.3
34.1
-1.9
43.9
7.0
47.4
9.5
51.2
12.0
53.9
13.4
54.5
12.6
47.6
4.3
55.6
11.1
110.7
10.4
111.2
10.1
112.1
9.3
112.1
8.5
112.7
7.9
113.5
7.5
113.8
7.4
114.2
7.2
8.8
18.1
89.6
18.3
90.4
18.6
91.7
19.0
92.8
19.4
93.8
19.6
94.6
19.7
95.4
19.7
155.5
78.9
79.6
159.8
80.7
81.6
163.1
138 Sr
70.7'
78.1
1t44.,
73.8
73.3
1.64
8.46
1.67
6.06
2.4&
6.2
9.10
2.2«
151.5
77.4
77.5
1.79
9.22
6.S3
1.72
9.94
7.29r
2.31,
2.65
1.95
10.52
8.22
2.30
81.8
82.7
1.86
10.60
8.23.
2.38
165.6
82.5
82.9
164.7
81.6
80.7
1.66
10.30
7.94
2.36
1.60
10.29
7.50
2.79
<1> Ulane of payments data and details undrlying th=n -tImates afe lbows in the Intrateatieoal Drwlopments
section of this part of the Groebook.
<2> Components of purchases and total receipts and total eapenditures are sho
in the Federal Sector Account table
which follows.
<3> Estimates in table are evaluated at a 6 percent high employment uamployrmt rate.
I-8
May 15, 1985
CONFIDENTIAL - FR
CLASS II FOMC
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)
1983
Q1
Constant (1972)
1984
Q2
Q3
Q4
Q1
Q2
Q3
Q4
4.3
.9
7.9
8.4
4.0
Dollars
Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases
3.3
3.7
1.1
3.5
4.0
9.4
12.3
6.4
8.6
12.1
6.8
7.4
4.9
6.2
6.9
5.9
8.7
4.2
6.3
9.7
10.1
12.9
3.6
4.2
7.6
7.1
7.9
10.3
8.5
9.5
1.6
5.4
-1.0
-2.4
2.3
Personal consumption expenditures
Goods
Services
2.6
3.5
1.5
10.0
12.6
7.3
3.8
5.4
2.1
6.8
9.5
3.8
4.6
7.8
1.2
7.9
10.7
4.6
.7
-1.9
3.8
Gross private domestic investment
Residential structures
Business fixed investment
34.1
64.5
.0
52.5
78.1
9.6
38.4
31.6
18.7
37.0
4.0
30.6
71.6
21.3
20.6
-2.2
1.2
21.3
24.9
-4.6
13.7
-8.2
-17.4
6.8
-1.2
-2.6
-5.9
7.6
-. 2
-. 5
-5.3
-1.9
2.7
-4.3
-8.7
9.2
-1.4
1.0
-2.8
3.4
3.5
18.6
45.2
12.2
3.7
5.4
6.2
-2.3
4.8
5.9
15.2
17.5
-.7
2.1
3.3
7.7
8.2
8.6
6.3
3.9
3.5
Gross national product
Gross domestic purchases
Final sales
8.5
6.7
5.9
12.3
16.0
8.9
10.1
11.4
8.1
10.6
12.2
8.4
14.9
17.6
7.3
10.7
11.4
13.8
5.6
9.1
3.2
7.1
3.2
11.4
Personal consumption expenditures
Goods
Services
4.8
3.6
6.1
14.5
15.7
13.3
7.6
8.8
6.6
9.2
10.2
8.3
8.6
10.9
6.2
10.2
9.6
10.9
5.0
-. 1
10.5
6.1
4.9
7.3
Gross private domestic investment
Residential structures
Business fixed investment
34.3
79.3
-5.5
52.0
71.9
5.7
43.2
44.4
18.5
45.3
3.3
38.4
78.0
23.6
16.5
2.0
12.1
23.9
24.9
-. 6
14.9
-14.3
-4.7
11.5
Gov't. purchases of goods and services
Federal
National defense
State and local
-1.3
-8.9
7.9
4.2
2.0
-3.6
9.8
5.8
4.5
-2.0
3.3
9.0
.9
-4.3
13.2
4.4
7.8
2.0
12.5
11.5
24.3
50.5
14.7
10.0
9.6
7.8
-. 8
10.7
10.7
19.4
22.1
5.2
4.3
3.6
5.6
7.5
8.0
8.7
11.7
7.3
7.3
10.7
11.0
11.0
12.7
12.4
9.7
8.6
9.1
8.8
8.4
8.6
5.9
6.0
6.7
6.5
94.8
16.0
114.3
125.7
63.4
73.3
26.8
-3.3
29.6
35.5
21.3
4.5
-10.9
-30.3
13.0
7.1
Nonfarm payroll employment
Manufacturing
.5
-. 9
3.4
5.0
3.7
7.0
5.&
9.t
4.8
7.5
4.5
4.5
3.3
2.1
3.8
1.1
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs
4.4
5.7
1.3
8.1
3.5
-4.2
1.0
4.1
3.0
2.9
6,1
3.1
5.5
3.7
-1.7
-1.1
3.6
4.7
5.0
Z.6
3.1
4.4
4,4
3.3
3.9
2.8
2.7
4.9
.4
3.9
3.5
4.3
4.5
5.4
4.2
3.5
3.8
4.2
4.
3.4
5.2
4.1
5.4
3.7
4.0
4.9
3.7
3.5
3.9
3.6
10.1
18.4
21.8
10.2
11.5
8.6
6.3
Gov't. purchases of goods and services
Federal
National defense
State and local
Disposable personal income
-13.1
-5.5
8.5
Current Dollars
Disposable personal income
Personal income
Wage and salary disbursements
and C.C.Adj.
I.V.A.
Corporate profits with
tax
before
Corporate profits
GNP implicit deflator <1>
Gross domestic busines product
fixed-weighted price index <2>
Excluding food and energy
Consumer price index (all urban)
Industrial production
<1> Excluding the federal pay increase, the rate of change in 1983-Q4 was 4.4 perc
<2> Uses expeditures in 1972 as weights.
.
-2.3
I-9
May 15,
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of current dollars at annual rates.)
CONFIDENTIAL - FR
CLASS II FOMC
1985
Projected
18Q
Q
Q
Q2
Q3
Q196
Q4
QI
Q2
Q3
Q4
QI
Q2
Q3
Gross National Product
Gross domestic purchases
Final sales
Private
Domestic final purchases
3819.9
3892.9
3773.3
2980.7
3053.7
3869.7
3942.0
3844.0
3031.0
3103.3
3929.2
4017.6
3893.3
3067.8
3156.1
3989.4
4083.2
3952.1
3112.5
3206.2
4052.6
4145.6
4018.0
3165.4
3258.4
4112.5
4206.6
4079.5
3215.6
3309.7
4176.1
4270.9
4143.8
3267.7
3362.5
4245.0
4337.7
4212.7
3322.9
3415.6
Personal consumption expenditures
2442.8
1211.0
1231.8
2479.1
1226.0
1253.1
2518.9
1242.0
1276.9
2557.2
1257.5
1299.7
2597.8
1273.9
1323.9
2637.5
1289.3
1348.2
2678.5
1305.0
1373.4
2719.6
1320.3
1399.3
Gross private domestic investmnt
Residential structures
Business fixed investment
Change in business inventories
Nonfara
657.4
155.0
455.9
46.6
40.5
649.9
161.5
462.7
25.7
23.4
673.1
166.5
470.7
35.9
34.3
686.3
171.0
478.0
37.3
37.3
695.2
174.5
486.1
34.6
34.6
705.2
178.0
494.2
33.0
33.0
716.3
181.5
502.5
32.3
32.3
728.3
185.0
511.0
32.3
32.3
Net exports of goods and services <1>
Exports
Imports
-73.0
361.4
434.4
-72.3
362.1
434.3
-88.3
363.4
451.7
-93.8
367.8
461.6
-93.0
374.1
467.1
-94.1
382.6
476.7
-94.8
392.6
487.4
-92.7
403.6
496.3
Gov't. purchases of goods and services
Federal <2>
792.6
320.2
472.5
813.0
331.6
481.4
825.6
335.9
489.7
839.7
341.7
498.0
852.6
346.8
505.8
863.9
350.3
513.6
876.1
354.7
521.4
889.8
360.2
529.6
Gross national product in
constant (1972) dollars
1668.0
1677.5
1691.9
1704.6
1715.8
1726.3
1737.1
1747.8
Personal income
Wage and salary disbursements
Disposable personal lacome
Saving rate (percent)
3141.6
1882.6
2652.6
4.6
3186.1
1910.8
2734.4
6.0
3242.2
1943.0
2763.5
5.5
3298.1
1973.5
2806.7
5.5
3350.0
2005.8
2859.0
5.7
3404.1
3457.5
3514.1
2035.7
2095.3
2064.7
2901.5
2943.6
2988.4
5.5
5.6
5.5
298.1
227.7
296.9
223.9
296.3
220.3
293.8
214.8
292.1
209.1
292.9
206.9
296.4
208.4
299.7
209.7
-161.2
-128.3
-217.5
-185.2
-196.9
-168.7
-193.8
-165.0
-192.2
-163.3
-191.4
-162.1
-190.9
-161.0
-190.3
-159.5
56.4
11.0
56.7
10.5
54.8
50.9
3.1
49.8
1.2
49.7
.3
50.5
.3
51.2
.2
115.2
7.3
115.5
7.3
115.9
7.2
97.5
19.8
116.3
7.1
98.1
19.8
116.8
7.0
117.2
7.0
117.7
7.0
118.2
7.0
98.6
19.9
99.1
19.9
99.6
20.0
100.0
20.0
166.9
80.4
60.3
168.2
80.3
60.2
169.4
80.3
80.1
170.7
80.2
80.1
171.9
80.2
80.1
173.1
80.2
80.0
Goods
Services
State and local
Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or defici ('-)
(N.I.A. basis)
High employent surplus or deficit (-) <3)
State and local government surplus o
deficit(-) (N.I.A. basis)
Excluding social insurance funda
Civilian labor force (aillions)
Unemployment rate (poresmt)
Nonfarm payroll employe
Manufacturing
u
Industrial productiow (19~ 100)
Capacity utilizatloet
an seufftaet#ri
Materials (percent)
Bousing start, private (millioa uias,
New anto sales (millions, A.)
Domestic nodels
oreign models
96.12
19.8
165.8
(pereoat)
Ai.*)
of payaments dai
laii l aiiig
actieo of this part of the Gremhkho
<15> Blanc
96.9
19.7
80.3
164
2.44
2.4
ri
t-2
it
7.8
1.86
1.86
1.85
1.85
1.85
10.90) 10.90
10.70
10.80
10.80
7.90
7.90
7.80
7.70
7.60
3.00
3.00
3.00
3.10
3.10
ms08
Miite i=.
l ItaetoJ
R . Deivelopents
1.80
1.0
4*30
z.IG
11.00
8.10
2.90
.4tL
ii
ae
<2> Components of purchases sad total receipts end total xspealttu
aM
f
sho
i the Federal Setor Acouat table
which follows.
<3> Estimates in table are evaluated at & 6 percent high esployrst wempleymet rate.
May 15, 1985
CONFIDENTIAL - FR
CLASS II FOMC
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)
Projected
1985
1986
Q1
Q2
Q3
Q4
Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases
1.3
4.4
.4
.5
4.3
2.3
1.5
4.7
4.5
3.4
3.5
4.2
2.5
2.5
3.4
3.0
3.3
3.0
3.0
3.2
Personl consumption expenditures
Goods
Services
4.7
5.1
4.4
2.6
2.7
2.3
2.8
3.0
2.6
2.7
2.9
2.4
Gross private domestic investment
Residential structures
Buiness fixed investment
7.9
-. 8
3.5
-6.2
14.3
5.2
11.7
8.9
5.0
5.4
7.7
4.7
.2
-. 8
-2.4
.9
5.3
8.8
18.0
2.8
2.2
2.0
3.4
2.4
3.2
4.2
3.8
2.4
9.2
.6
2.9
Constant (1972)
Q1
Q2
Q3
Q4
2.5
2.2
2.7
3.0
2.6
2.5
2.2
2.7
2.8
2.4
2.5
2.1
2.5
2.7
2.2
2.6
2.8
2.4
2.2
2.2
2.2
2.0
1.9
2.1
1.8
1.7
2.0
2.4
4.5
4.4
2.7
4.3
4.0
3.2
3.9
4.0
3.5
3.7
3.9
1.7
1.3
1.2
2.0
1.8
1.7
2.5
1.9
1.8
1.4
4.1
2.0
3.7
2.0
1.6
1.7
Dollars
Gov't. purchase of goods and services
Federal
National defense
State and local
-1.8
Disposable personal income
Current Dollars
Gross national product
Gross domestic purchase
Final sales
6.7
8.4
5.6
5.3
5.1
7.7
6.3
7.9
5.2
6.3
6.7
6.2
6.5
6,3
6.8
6.0
6.0
6.3
6.3
6.3
6.5
6.8
6.4
6.8
Personal consumption expenditures
Goods
Services
8.0
6.2
9.6
6.1
5.0
7.1
6.6
5.3
7.8
6.2
5.1
7.3
6.5
5.3
7.7
6.3
4.9
7.5
6.4
5.0
7.7
6.3
4.8
7.7
Gross private domestic investment
Residential structures
Business fixed investment
12.9
3.9
7.5
-4.5
17.9
6.1
15.1
13.0
7.1
8.1
11.3
6.4
5.3
8.4
7.0
5.8
8.3
6.8
6.5
8.1
7.0
6.8
7.9
6.9
6.4
5.8
5.0
6.7
10.7
15.0
22.3
7.7
6.3
5.3
7.0
7.1
7.0
7.1
7.0
7.0
6.3
6.1
5.8
6.4
5.4
4.2
4.8
6.3
5.8
5.1
6.5
6.2
6.4
6.3
8.0
6.4
1.2
6.0
7.8
12.9
5.8
6.1
4.3
7.2
6.9
6.4
7.1
6.4
7.7
6.4
6.7
6.1
6.6
6.1
5.9
6.4
5.8
6.2
6.7
6.1
9.2
-1.7
-1.6
-6.5
-. 8
-6.3
-3.4
-9.6
1.1
-4.1
4.9
2.9
4.6
2.5
3.4
.4
2.9
-2.0
2.3
2.1
2.5
1.6
2.1
1.2
1.9
1.0
1.9
1.0
1.7
1.0
-1.2
6.0
7.3
.2
4.2
4.0
1.5
4.3
2.8
1.2
4,3
3.1
.9
4.8
3.9
.8
4.4
3.6
.9
4.5
3.6
1.2
4.6
3.4
GNPimplicit deflator <1>
Gross domestic business product
fixed-weighted price index <2>
Excluding food and energy
Consumer price index (all urban)
5.3
2.9
2.7
3.1
3.7
3.3
3.7
4.2
3.7
5.1
3.2
3.5
3.7
4.1
3.3
3.6
3.4
3.5
3.7
3.7
3.5
4.0
4.0
3.1
4.1
4.0
4.1
4.4
4.2
4.3
4.4
4.4
Industrial production
1.8
.9
2.8
3.2
2.9
2.9
3.0
2.8
Gov't. purchases of goods
Federal
National defense
State and local
and services
Disposable personal income
Personal income
Wage and salary disbursements
with
Corporate profits
I.V.A. and C.C.Adj.
Corporate profits before
tax
Nonfarm payroll employment
Manufacturing
Nonfarm business sector
Output per hour
Compnsation per hour
Unit labor costs
Dxcluh
i
Federal pay ncrease, the rate of change in 185-Q
<1)
<2> Un expeditures in 1972 as vwights.
-2.3
-10.2
is 4.9 percent ad in 1986-91 is 3.6 peret.
I-11
CONFIDENTIAL -
May 15,
GROSS NATIONAL PRODOCT AND RELATED ITEMS
(Expenditures and income figures are billions of current dollars.)
FR
CLASS II FOMC
1979
1980
1981
1982
1983
1984
1985
-Projected1985
1986
Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases
2417.8
2404.5
2403.5
1929.2
1915.9
2631.7
2607.7
2641.5
2103.7
2079.7
2957.8
2929.8
2931.7
2335.2
2307.2
3069.3
3050.2
3095.4
2444.9
2425.9
3304.8
3313.0
3318.3
2632.8
2641.1
3662.8
3727.1
3604.6
2857.2
2921.4
3902.1
3983.9
3865.7
3048.0
3129.8
4146.5
4240.2
4113.5
3242.9
3336.5
Personal consumption expenditures
Goods
Services
1507.2
813.4
693.7
1668.1
883.5
784.5
1849.1
966.1
883.0
1984.9
1002.6
982.2
2155.9
1081.5
1074.4
2341.8
1175.7
1166.1
2499.5
1234.1
1265.4
2658.3
1297.1
1361.2
Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm
423.0
118.6
290.2
14.3
8.6
401.9
102.9
308.8
-9.8
-4.5
484.2
104.3
353.9
26.1
18.2
414.9
91.4
349.6
-26.1
-24.0
471.6
132.2
352.9
-13.5
-3.1
637.8
153.9
425.7
58.2
49.6
666.7
163.5
466.8
36.4
33.9
711.3
179.7
498.5
33.1
33.1
Net exports of goods and services <1>
Exports
Imports
13.2
281.3
268.1
24.0
338.8
314.8
28.0
369.9
341.9
19.0
348.4
329.4
-8.3
336.2
344.4
-64.2
364.3
428.5
-81.8
363.7
445.5
-93.7
388.2
481.9
Gov't. purchases of goods and services
Federal <2>
State and local
474.4
168.3
306.0
537.8
197.1
340.8
596.5
228.9
367.6
650.5
259.0
391.5
685.5
269.7
415.8
747.4
295.4
452.0
817.7
332.3
485.4
870.6
353.0
517.6
Gross national product in
constant (1972) dollars
1479.4
1475.0
1512.2
1480.0
1534.7
1639.3
1685.5
1731.7
Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)
1951.2
1237.6
1650.2
5.9
2165.3
1356.7
1828.9
6.0
2429.5
1493.1
2041.7
6.7
2584.6
1568.7
2180.5
6.2
2744.2
1659.2
2340.1
5.0
3012.1
1804.0
2576.8
6.1
3217.0
1927.5
2739.3
5.4
3431.4
2050.3
2923.1
5.6
Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax
194.8
252.7
175.4
234.6
189.9
221.2
159.1
165.5
225.2
203.2
285.7
235.7
296.3
221.7
295.3
208.5
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-)
-16.1
-20.8
-61.3
-36.4
-64.3
-31.3
-148.2
-61.6
-178.6
-92.7
-175.8
-139.6
-192.8
-161.8
30.4
30.6
3.5
37.6
7.8
32.9
-. 8
44.1
6.6
52.9
54.7
8.1
106.9
7.1
108.7
7.6
110.2
9,?
111.6
9.6
113.5
7.5
115.7
7.2
89.8
21.0
90.4
91.2
20.2
.6
18.8
90.1
18.5
94.2
19.6
97.2
19.8
99.3
20.0
152.)5
86.0
147.0
79.6
136.6
80.4
147.6
75.2
7542
163.3
87.6
150.9
79.4
80.7
166.6
80.6
80.3
171.3
80.2
80.1
1.71
61,6
1.80
10.91
8.19
2,72
1.84
10.80
7.75
3.05
State and local goverment surplus or
deficit (-) (N.I.A. basis)
Excluding social insurance funds
6.6
Civilian labor force (millions)
Unemployent rate (percent)
Nonfarm payroll
Manufacturing
LOMI
employment
(millions)
Industrial production (1967=100)
Capacity utilization: all manufacturing (percent)
Materials (percent)
Housing starts, private
units, (million
Newauto sales (millions, A.R.)
Domestic models
Foreign models
<1>
A.R.)
10.6&
8.36
2.3a
aiaee of paaymetrs data ondrlyile aCse esteiad
part of tbhe remabook.
<2> Componts of purchaseu
which follow.
ad total rseipt
4ia
20.3
70.1
i2*3y'
2
ti
total 4%pedit1sw ae
81.6
82.0
1.e*
1.70
1.77
$41
9.18
6.77
Z.41
10.43
7.97
8.31
9.01
6.682
2..4
ti une 1
71.1
10.4
sai>l
lDevlopmat
laiel
AbMte i
2.46
t
ftm
al
-191.2
-161.5
50.3
.5
117.5
7.0
section of this
Sectr Aconts table
I-12
May 15,
CONFIDENTIAL - FR
CLASS II FOMC
1985
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
1979
1980
1981
1982
1983
1984
Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases
2.8
2.0
3.5
4.0
2.9
-. 3
-1.2
.5
.1
-1.0
2.5
3.1
1.5
1.6
2.2
-2.1
-1.2
-. 7
-1.3
-.2
Personal consumption expenditures
Goods
Services
2.7
1.9
3.7
.5
-1.4
2.7
2.0
1.7
2.3
1.3
.4
2.5
5.3
7.1
3.2
Gross private domestic investment
Residential structures
Business fixed investment
-.2
-5.3
7.3
10.7
-5.5
5.5
-15.9
-14.8
-4.6
31.2
12.2
19.8
-Projected1985
1986
Constant (1972) Dollars
-11.8
-20.3
-2.4
6.8
8.7
5.0
5.3
7.6
Gov't. purchases of goods and services
Federal
National defenee
State and local
1.3
1.8
2.6
1.1
2.2
4.2
3.9
1.0
.9
3.7
5.0
-. 6
2.0
6.1
7.6
-.6
3.5
5.4
5.8
2.2
Disposable personal income
2.7
.6
2.7
.9
6.7
11.7
11.1
12.4
8.8
8.5
9.9
12.4
12.3
11.0
3.8
4.1
5.6
7.7
8.6
7.2
expenditures
11.9
11.7
12.2
10.7
8.6
13.1
10.9
9.3
12.6
7.3
3.8
11.2
8.6
7.9
9.4
8.6
8.7
8.5
Gross private domestic investment
Residential structures
Business fixed investment
9.4
6.6
16.6
-5.0
-13.2
6.4
20.5
1.3
14.6
-14.3
-12.4
-1.2
13.7
44.7
.9
35.2
16.4
20.6
4.5
6.2
9.6
Gov't. purchases of goods and services
Federal
National defense
State and local
9.8
9.6
11.5
9.9
13.4
17.1
17.3
11.4
10.9
16.2
17.2
7.9
9.0
13.1
16.8
6.5
5.4
4.2
11.7
6.2
9.0
9.5
10.5
8.7
9.4
12.5
11.4
7.4
Disposable personal income
Personal income
Wage and salary disbursements
12.0
12.6
11.9
10.8
11.0
9.0
11.6
12.2
10.1
6.8
6.4
5.1
7.3
6.2
5.8
10.1
9.8
8.7
6.3
6.8
6.9
1.2
10.3
-9.9
-7.1
8.3
-5.7
-16.2
-25.2
41.5
22.8
27.0
16.1
3.6
-6.0
payroll employment
Manufacturing
3.6
2.6
.
-3.6
.8
-. 6
-1.7
-6.9
.6
-1.5
Nonfarm business
sector
Output per hour
Compensation per hour
Unit labor costs
-1.5
9.0
10.7
10.
11.1
1.5
9.6
8.0
.2
8.0
7.7
8.6
9.;
9.6
6.0
9.9
8.6
11.3
M041
85*
l.
9.6
9.4
I .3
.
6.0
7.0
6.1
2.6
-8.1
Current Dollars
Gross national product
Gross domestic purchases
Final sales
Personal cons
Goods
Services
ption
um
Corporate profits
and
IVA
with
Corporate profits before tax
C.C.Adj.
Nonfam
GNP implicit deflator
Gross domestic business product
fixed-weighted price index <1>
Excluding food and energy
Consumer price index (all urban)
Industrial production
<1> Uses expenditures in 1972 as weights.
4.4
-3.6
10.8
12.5
8.6
4.5
5.9
6.5
6.9
7.2
6.7
5.0
8.5
3.2
.8
2.2
1.1
Hay k1,
Ivao
FEDERAL SECTOR ACCOUNTS
(billions of dollars)
I
Fiscal
Tear
,,
adati.
,P
CT
, I .
taf
198*
-175
741
944
-203
733
939
-206
794
971
-177
787
972
-185
683
867
-184
742
947
-205
Surplu/deficit(-),
o
3
agencies
deficit
Coabined
-10
-P$
-10
-21S
-10
-216
-1
-177
-5
-190
-10
-195
-12
-217
Mt
197
179
185
199
198
O
3
10
9
0
-I
0
5
-5
2
8
12
d-i.
e
666
842
/
. , 1986
I
18
8
Staff
FRB staff estimates
Calender quartr; not seasonally adjustd
C2
CYI985
.ft1
Stt
...
Unified budget receipts
Unified budget outlays
/
II
i
lIII
I
II
III
IV
166
239
-73
174
230
-56
206
235
-29
187
236
-49
174
247
-73
185
241
-56
230
242
-12
198
242
-44
1
-72
-3
-59
-4
-33
-4
-53
-1
-74
-1
-57
-2
-14
-1
-45
42
4'
13
38
-5
1
54
-1
0
IV*
fvmYdgt
to be fm
Mea e of financiag consted 4ifleO
Met borrovag frMe ublic
ce
ba
Is eashk peraa
r
t71
17
Other
Coeh eoppratin balace, and of pertid.
36
0
20
20
20
18
10
18
14
19
20
10
15
15
20
Spoesored agency borroerwig
30
42
16
46
20
32
18
3
4
4
5
5
5
5
5
All other epaditrunru
Surpluw/defAtt(-)
688
860
283
215
68
577
-172
762
945
327
242
85
618
-183
751
945
326
241
85
619
-194
825
990
355
272
83
635
-165
806
999
348
260
88
651
-193
705
881
295
222
74
586
-176
767
960
332
247
86
628
-193
722
920
316
232
84
604
-198
774
935
320
235
86
615
-161
Seasonally adusted annual rates
740
69
85
799
813
957
968
979
991
1005
332
336
342
347
350
247
251
255
259
262
85
85
87
88
89
625
632
637
644
655
-217
-199
-194
-192
-191
828
1019
355
266
89
664
-191
High employat srplus/df icit(-)
ev*.iaw d at 6 ercent unemeloyment
-126
.a.
-163
a.a.
-163
-140
-162
-169
-128
-185
-161
Maer
MIA ludt$
atcetpts
xpenditures
Purchases
--
1.
2.
timated
O..B., Current adt etatee (April 1985) and .B.A. translations to an NIA basis.
Tbh CO
lUM
budget eae
stmates show revenues of $735 billion
aW $*8
UlliUoe. unified outlays of $938 billion and $995 billion, and
destite of $203 billion and $206 billion in fiscal years 1985 and 1986.
reupeotively. Off-budget outlays ar projected to be $11 billion in
fiscal 1985 and $9 billio in fiscal 1986.
(T Ecopmeac Outlook February 1985.)
Notes Details may met add to totals due to rounding.
-168
-165
-163
-162
na..-not available
3.
4.
5.
Includes Federal Financing Bank, Postal Service Fund, Rural
Electrification and Telephone Revolving Fund, Rural Telephone Sank
and Strategic Petroleum Reserve.
Cthcks issued loss checks paid, accrued tems and other transactions.
Sponsored agency borrowing includes net debt issuance by Federal
Home Loan Banks. FHUIC (excluding participation certificates), FNHA
(excluding mortgage-backed securities), Federal Land Banks, Federal
Interadiate Credit Blnks, Banks for Cooperatives, and Student Loan
Marketing Association marketable debt on a payment basis. The
Administration's definition of borrowing by these agencies is
somewhat broader.
DOMESTIC FINANCIAL DEVELOPMENTS
Recent developments.
Most market interest rates have fallen during
the intermeeting period by 5/8 to slightly more than a full percentage
point.
The federal funds rate has eased somewhat, but the rally has been
given additional impetus by market participants' perceptions that an easing
of reserve conditions by the Federal Reserve might be in process in light of
weaker economic and monetary growth.
Most recently, progress on deficit-
reduction measures has contributed to lower rates.
New commitment rates
for conventional fixed-rate home mortgages have declined only 1/4 percentage
point, while the prime rate is unchanged.
The recent failure of some small
government securities dealers and the difficulties experienced by privately
insured thrift institutions have not led to significant changes in risk
spreads between interest rates, and there is no evidence that financial
institutions' problems are having broader impacts on credit supplies.
The monetary aggregates slowed sharply in March and April, leaving M1
just above the top of its parallel band and the broader aggregates within
their cones.
The deceleration in all of the aggregates to an extent
reflected the waning influence of the earlier declines in interest rates.
The timing of tax refunds and payments appears to have had little net effect
on M1 growth.
M2 was depressed in April by a substantial drop in overnight
RPs, as banks reduced their holdings of Treasury securities and some overnight RPs were classified as term agreements over the Easter weekend.
In
addition, the broader aggregates might have been restrained in April by the
failure of seasonal factors to account adequately for flows into IRA/Keogh
deposits.
Issuance of large CDs by commercial banks surged in March but
fell back a bit in April, paralleling the pattern of bank credit expansion.
I-14
I-15
However, large CDs at thrift institutions have been quite weak, evidently
reflecting slower asset growth at savings and loans.
S&Ls apparently have
been bidding less aggressively for both retail and wholesale funds in the
past few months, perhaps influenced by constraints on asset expansion
imposed by FHLBB net worth standards.
The growth of domestic nonfinancial sector debt during the first four
months of 1985 appears to have remained robust, but a bit below last year's
pace.
Despite an estimated widening of the financing gap and continued
strong merger activity, overall business borrowing evidently has fallen off
a bit.
The sum of business loans and nonfinancial commercial paper has
been growing at a moderate pace in recent months, and in light of favorable
conditions in long-term markets, bond-issuance has been strong.
Stock
prices have remained near their peaks since the last FOMC meeting, and
issuance of new equity shares has picked up appreciably; however, retirements of equity have continued massive, swamping new issues.
Borrowing by state and local governments has been strong.
Offerings
of long-term tax-exempt securities have grown, with volume in the past
month or so boosted by increased issuance of refunding bonds as market
yields dropped considerably.
Despite a large inflow of federal tax receipts,
Treasury borrowing remained substantial in April, temporarily swelling the
Treasury's cash balance at the end of that month to $40 billion.
Borrowing
by the federally sponsored credit agencies has been moderate this year,
with FNMA and FHLMC accounting for most of the activity.
The Farm Credit
Banks have paid down securities, as farm debt extensions continue weak
owing to depressed agricultural conditions.
I-16
Total residential mortgage growth remained vigorous in the first
quarter.
Mortgage lending at thrift institutions, however, was compara-
tively sluggish, and commitment activity was off.
The sponsored housing
agencies have met some of the demand for mortgage funds through portfolio
purchases, and issuance of federally guaranteed mortgage pass-through
certificates also picked up in the first quarter.
Consumer installment debt continued to swell at a remarkable pace in
March and there is
no real indication of a slowing in
April.
Some house-
holds that experienced delays in receiving their federal income tax refunds
may have used consumer credit to make purchases, but this would seem only a
partial explanation for the persistent strength of installment credit.
Although delinquency rates on consumer loans appear to have edged upward
in the past couple of quarters, they remain historically low and creditors
still appear more than willing to lend, given the attractive interest
margins.
Outlook.
It is expected that overall credit growth will remain brisk
in the next several months as the economy continues to expand, although the
composition of flows may change somewhat.
Absent an unanticipated weakening
in economic or monetary growth, short-term interest rates are unlikely to
drop appreciably further.
Long-term rates could decline further, however,
if a convincing deficit-reduction program is approved by Congress.
The gap between business capital expenditures and internal funds may
be narrowed in the near term by slower inventory accumulation, but with
continued heavy retirements of equity shares, business borrowing probably
will remain robust.
sources of funds.
Firms likely will continue to emphasize longer-term
However, short-term borrowing will be necessary as well,
I-17
and bank business loan growth is projected to rebound from the weak April
rate to the moderate pace observed since the middle of last year.
Borrowing by state and local governments is expected to moderate
somewhat in coming quarters, although likely buoyed for a while longer by
refunding issues.
Treasury borrowing will be somewhat lighter in the
second quarter, owing to the seasonal bulge in receipts.
More fundamen-
tally, though, the trajectory of the budget deficit implies that pressures
on credit markets from the federal sector will continue unabated in the
months ahead.
The rate of household borrowing is expected to edge down.
Some
further slowing in the growth of demand for durable goods and mounting
repayments on indebtedness both are expected to exert some moderating
influence on consumer credit.
Home mortgage flows are likely to be sus-
tained by robust home building and sales activity.
If investors' concerns
about the soundness of thrift institutions were to escalate, the ability of
these institutions to finance additional mortgage assets could be curtailed,
but the capacity of debt markets to absorb mortgage-related securities
appears adequate to meet the residual demand for funds without much upward
pressure on mortgage rates.
INTERNATIONAL DEVELOPMENTS
Recent developments.
The weighted-average foreign exchange value
of the dollar has exhibited wide swings since the last FOMC meeting,
depreciating 5 percent on balance to a current level about 10 percent
below its late-February peak.
The primary apparent influences on
exchange rate movements over the period were revisions in perceptions
about the strength of U.S. economic activity, about the stability of
certain U.S. financial institutions, and about the responses of monetary
policy and dollar interest rates.
Following a period of weakness earlier in the year, the pound has
appreciated almost 7 percent against the dollar since the last FOMC
meeting.
The 3-month sterling interbank rate has declined about 1-3/4
percentage points from its late January peak, but remains about 2-1/2
percentage points above its level prior to the sharp rate hikes in
mid-January.
, available data on U.S. international capital account
transactions during the first quarter indicate that official reserve
assets in the United States declined by $5-1/2 billion for the G-10
I-18
I-19
countries and nearly $11 billion for all foreign countries.
Private
foreign net purchases of U.S. Treasury obligations declined considerably
to less than $3 billion in the first quarter, while private foreign net
purchases of U.S. corporate securities matched the fourth-quarter inflow
of more than $10 billion.
Transactions reported by U.S. banking offices
shifted to a massive first-quarter net inflow of nearly $18 billion; half
of that net inflow, however, reversed a net outflow to own foreign
offices on the final day of 1984, apparently for purposes of window
dressing.
The U.S. merchandise trade deficit rose in the first quarter after
dropping sharply in the fourth quarter.
The value of exports was
essentially unchanged from the fourth quarter, as agricultural exports
declined and nonagricultural exports increased somewhat.
The value of
oil imports declined about 25 percent in the first quarter, partly
reflecting lower prices, but mainly reflecting a lower import volume
as domestic oil consumption declined slightly and inventories were drawn
down.
Meanwhile, nonoil imports rebounded sharply in volume, continuing
a pattern of large erratic fluctuations that began in the first quarter
of 1984.
In most major foreign industrial countries, economic activity
appears to have weakened during the early months of the year.
In
Germany, severe weather contributed to a decline in industrial
production.
Industrial production also contracted in Japan and Canada,
although other indicators of activity suggest continued first-quarter
growth.
Unemployment rates have recently increased in the European
countries and declined somewhat in Canada and Japan.
Inflation in the
I-20
foreign industrial countries generally remains low; in some, however,
domestic prices have accelerated during early 1985 in association with
increases in import prices. In particular, German consumer prices rose at
an annual rate of 5 percent in the first four months of the year
(n.s.a.), compared with 3 percent in the final quarter of 1984.
In the non-OPEC developing countries, economic activity rebounded
at about a 4 percent average growth rate in 1984 following the
recession of 1982-83.
The combined current account deficit of these
countries declined by $45 billion during 1983-84, but the trade surpluses
of Mexico and Brazil so far in 1985 are running somewhat lower than in
1984.
Progress toward debt reschedulings has been mixed.
The initial
signing of the multi-year commercial bank rescheduling for Mexico took
place on March 29, after Mexico reached agreement with the IMF management
on the country's economic policies for 1985.
Preliminary reschedulings
and trade credit arrangements between commercial banks and the
authorities in Brazil and Argentina hinge on the outcome of negotiations
with the IMF over new economic stabilization programs.
Argentina's
inflation increased to a 30 percent monthly rate in April, but some
significant tightening of monetary policy occurred in late April and
early May.
Claims of BIS-reporting banks on external borrowers increased by
$126 billion (or about 6 percent) in 1984, compared with a $105 billion
increase in 1983.
Claims on non-OPEC developing countries increased by
$9 billion (about 2-3/4 percent), compared with $12 billion (nearly 4
percent) in 1983.
I-21
Outlook.
The staff continues to project a moderate depreciation of
the dollar throughout the forecast period, though from a lower starting
point than in the last Greenbook.
The projection for economic activity
in the major foreign industrial countries is little changed, with GNP
growth at about 3 percent in 1985 and slightly weaker in 1986.
Inflation
rates in the major foreign industrial countries are expected to average
roughly 4 percent in both years.
Against this background, the staff's
projection for the US current account deficit is around $120 billion for
1985 and $135 billion for 1986, compared with a recorded deficit of $102
billion in 1984.
STRICTLY CONFIDENTIAL (FR)
CLASS II FOMC
MAY 14,
1985
OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS
(BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES)
ANNUAL
1984- 1985-P 1986-P
1984
1985
Q3-
94-
-90.6
368.6
459.3
-56.0
367.2
423.2
1986
3-P
Q4-P
Q1-P_
g 2-P
1. GNP EXPORTS AND IMPORTS 1/
CURRENT $, NET
EXPORTS OF G+S
IMPORTS OF G+S
-64.2
364.3
428.5
-81.8
363.7
445.5
-93.7
388.2
481.9
CONSTANT 72 $, NET
EXPORTS OF G+S
IMPORTS OF G+S
-15.0
146.0
161.1
-25.4
144.3
169.7
-24.5
148.5
173.0
2. U.S. MERCHANDISE TRADE BALANCE 2/
-107.4 -122.0 -135.8
3-P
-73.0
361.4
434.4
-72.3
362.1
434.3
-88.3
363.4
451.7
-93.8
367.8
461.6
-93.0
374.1
467.1
-94.1
382.6
476.7
-94.8
392.6
487.4
-92.7
403.6
496.3
-27.0 -13.4
-26.1
147.4 147.1
144.0
174.4 160.5
170.1
---------------
-22.7
144.3
167.0
-25.8
144.1
169.9
-26.9
144.8
171.7
-26.3
145.6
172.0
-25.3
147.3
172.6
-24.0
149.5
173.5
-22.4
151.7
174.0
-129.6
-97.6
-113.3 -113.0 -128.1 -133.7
-133.7 -135.9 -138.0
-135.8
EXPORTS
AGRICULTURAL
NONAGRICULTURAL
220.3
38.4
181.9
224.8
33.6
191.2
238.7
35.8
202.9
222.2
36.9
185.4
225.4
38.3
187.1
224.3
34.1
190.2
224.3
33.7
190.7
224.5
33.2
191.3
226.0
33.3
192.7
229.7
34.2
195.5
234.9
35.5
199.3
240.9
36.2
204.7
249.3
37.3
212.1
IMPORTS
PETROLEUM AND PRODUCTS
NONPETROLEUM
327.8
57.3
270.5
346.8
49.8
297.0
374.5
49.9
324.6
351.9
57.8
294.0
323.0
56.4
266.6
337.6
42.3
295.3
337.3
50.4
287.0
352.6
54.5
298.1
359.7
52.2
307.5
363.4
48.2
315.2
370.7
49.3
321.5
378.9
51.1
327.8
385.1
51.1
334.0
3. U.S. CURRENT ACCOUNT BALANCE
-101.7 -120.0 -134.1
-132.3 -100.8
*----*----w-------------------
-109.5 -109.1 -126.5 -134.9
-131.1 -133.6 -135.6 -136.0
18.1
17.1
15.7
11.5
16.2
17.8t
17.7
16.7
16.4
15.8
15.8
16.1
14.9
REAL GNP--TEN INDUSTRIAL 4/
REAL GNP--NONOPEC LDC 5/
3.0
4.1
3.1
4.0
2.8
4.1
4.0
4.4
4.2
4.1
2.9
3.79
2.9
3.7
2.8
3.8
3.1
3.9
3.1
4.0
2.6
4.3
2.4
4.6
2.7
4.9
CONSUMER PRICES--TEN IND. 4/
4.9
4.2
3.9
2.6
4.9
5.0?
4.2
3.1
3.9
4.3
3.8
3.6
3.7
OF WHICH:
NET INVESTMENT INCOME
FOREIGN OUTLOOK 3/
ECONOMIC ACTIVITY AND PRODUCT ACCOUNT DATA.
INTERNATIONAL ACCOUNTS BASIS.
PERCENT CHANGE, ANNUAL RATES.
WEIGHTED BY MULTILATERAL TRADE-NEIGHTS OF G-10 COUNTRIES PLUS SHITZERLAND; PRICES ARE NOT SEASONALLY ADJUSTED.
WEIGHTED BY SHARE IN NONOPEC LDC GNP.
PROJECTED
@FedFRASER