Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 13, 1996 : Greenbook Part 2

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Confidential (FR) Class II FOMC

Part 2
November 6, 1996

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS

Recent Developments

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

Confidential (FR) Class III FOMC

November 6, 1996

RECENT DEVELOPMENTS

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

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS
The pace of economic expansion slowed considerably in the third
quarter, and early indications point to only moderate growth this
quarter.

Although unemployment has remained low and anecdotal

reports suggest competition for labor, official data show wage
increases to have been subdued in recent months; meanwhile, there
has been no discernible change in the trend of core consumer price
inflation.
Real GDP
According to BEA's advance estimate, real GDP rose 2.2 percent
at an annual rate in the third quarter after increasing 4.7 percent
in the second quarter.

The slowdown in growth was concentrated in

final sales, which edged up just 0.3 percent after increasing more
than 4 percent during the second quarter.

Residential investment,

government purchases, and net exports all declined last quarter, and
personal consumption expenditures were little changed.
In contrast, business investment spending advanced at a brisk
pace.

Real outlays for business fixed investment increased nearly

15 percent, led by strong purchases of transportation and
information-processing equipment.

Inventory investment also rose

sharply, with some firms perhaps rebuilding stocks that had become
too lean when sales surged in the first half;

the rise in inventory

investment contributed nearly 2 percentage points to overall GDP
growth last quarter.
REAL GDP AND SELECTED COMPONENTS IN 1996:Q3
(Percent change; annual rate)
BEA advance

Staff estimate

2.2

2.5

Business fixed investment
Producers' durable equipment
Nonresidential structures

14.7
18.9
3.3

16.2
19.7
6.5

Residential structures

-5.7

-6.6

1.7

Real GDP
Final sales

State and local government

II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1996
1994
Nonfarm payroll employment 2
Private
Manufacturing
Durable
Transportation equipment
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Business services
Total government

1995

1996
Q3

Aug.

Sept.

Oct.

------------ Average monthly changes--------318
185
205
262
160
280
-35
210
295
176
189
245
129
158
32
250
33
-12
-29
6
-22
24
-59
6
28
5
-15
24
-7
31
-35
-2
5
-3
-13
16
-1
18
-13
-10
5
-17
-14
-19
-15
-7
-24
8
25
9
39
20
15
10
8
10
91
54
22
82
56
19
37
81
-3
4
15
12
12
12
4
26
134
110
126
113
70
84
56
119
54
33
32
43
30
44
8
2
23
9
16
17
31
122
-67
-40

Private nonfarm production workers 2
Manufacturing production workers

267
34

152
-10

157
-30

213
5

102
-15

122
12

-10
-38

195
7

Tetal employment 3
Nonagricultural

261
225

32
51

390
336

-15
188

253
202

171
253

313
198

259
336

Memo:
Aggregate hours of private production
workers (percent change) 2
.4
34.6
Average workweek (hours)2
41.9
Manufacturing (hours)

.1
34.5
41.6

.3
34.3
40.9

.5
34.4
41.7

.1
34.4
41.7

.6
34.4
41.7

.9
34.7
41.8

-.9
34.3
41.6

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

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)
1996

1996

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

1994

1995

Aug.

Sept.

Oct.

6.1

5.6

5.4

5.2

5.1

5.2

17.6
9.7
4.8
4.9

17.3
9.1
4.3
4.4

17.4
9.8
4.3
4.3

16.3
9.3
4.1
4.3

16.4
8.9
3.9
4.2

17.2
8.3
3.8
4.1

15.6
8.7
4.0
4.1

16.1
8.8
3.8
4.1

6.1

5.5

5.3

5.1

4.9

5.1

66.6

66.7

66.8

66.7

66.8

66.9

52.7
77.0
76.0
58.1

53.5
76.6
76.0
58.3

52.6
76.9
76.0
58.4

52.5
77.0
76.1
58.6

51.6
76.4
76.4
58.9

50.1
75.6
76.5
58.9

52.4
77.0
76.2
58.8

52.5
77.4
76.3
58.8

II-3

Since the publication of the BEA estimate, additional source
data have become available.

Notably, manufacturing inventories and

construction put in place turned out to be stronger in September
than BEA had assumed.

All else equal, the new data would point to a

third-quarter increase in GDP of about 2-1/2 percent.

The estimates

of third-quarter spending discussed in the remainder of this section
incorporate the new data; the new estimates are summarized in the
table on II-1.
Labor Market Developments
Payroll employment increased 210,000 last month after falling
in September.

On a moving average basis, payroll growth has

moderated since midyear but has remained substantial.

Employment

gains in the household survey have been hefty, too, and the
unemployment rate has moved down to 5.2 percent in recent months
even as labor force participation has moved up.
Other indicators also appear consistent with a relatively
strong labor market.

New claims for state unemployment insurance

have averaged 331,000 over the past four weeks, about equal to the
average in September and only slightly higher than the cyclical low.
The Conference Board index of help-wanted advertising edged up in
September to the high end of the narrow range that has held since
early 1995.

The Michigan Survey of unemployment expectations inched

higher in October but remained at a quite optimistic level.
Similarly, although the Conference Board's consumer survey showed a
mild decline in perceived job availability conditions last month,
the index remained at a relatively favorable level.
The rebound in productivity growth registered earlier this year
apparently came to a halt in the third quarter.

The official

estimates that will be released tomorrow likely will show that
output per hour in the nonfarm business sector edged down about
1/2 percent in the third quarter after rising at a 1.2 percent
annual rate in the first half.
Industrial Production
On the basis of production-worker hours and limited data on
physical output, we believe that industrial activity fell
appreciably in October after rising about 0.2 percent per month on
average during the third quarter.

Much of the slackening is

attributable to labor disruptions in the motor vehicles sector.

II-4

Labor Market Indicators
Initial Claims for Unemployment Insurance
Thousands
Four-week moving average

Oct. 26
331

1992

1988
1990
1986
Note. State programs, includes EUC adjustment.

1994

1996

Help Wanted Advertising

Index, 1990=100

Conference Board
September

1996
1990
1992
1994
1986
1988
Note. Series has been adjusted to take account of various structuraland institutional changes, including consolidation of
the newspaper industry and a tendency toward increased hiring through personnel supply agencies.

Some Jobs Difficult to Fill

Percent

[Bureau of National Affairs' Survey of Personnel Executives

Office/Clerical
1

_
1985

1987

Seasonally adjusted by FRB staff.

1989

1991

L-

I11

1993

1995

1997

II-5

Consumer Surveys of Labor Market Conditions
Job Availability
Percent of Households
70

Conference Board
60

Jobs hard to get
50
40
30
20
10
0

1991

1989

1987

1985

1993

1995

1997

Employment Expectations
Index
130

Fconference Board Survey, 6 months hence
120

110

100

0YOctober

80
I

1985

I
1989

1987

I
1991

1993

1997

1995

Note. Percentage of households responding "more jobs" minus percentage responding 'fewer jobs" plus 100.

Expected Change in Unemployment

Index

-7

200

FMichigan Survey, next 12 months
160

October

120

1985

1987

1989

1991

I
1

1993

Note. Percentage expecting "more" minus percentage expecting "less" plus 100.

1995

40
1997

II-6

Productivity in the Nonfarm Business Sector
Billions of chained (1992) dollars per hour
32

-31

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1978 BEA data.1981
data are unpublished
1996 Q31975
:"**:::
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**:::::

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m-2

1990
-::

1987

1984

1993

1996

:**

- 27

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:**::**::
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19819119418719019319
199 Q3tdaaar npbise BAdaa

. I.

II-7

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1996

1996

Proportion
1995:Q4

19951

July

Aug. Sept.

---- Annual rate----- --Monthly rate--Total index
Previous

100.0

Manufacturing

1.6
1.6

3.0
3.0

6.7
6.7

4.4

.0
.0

.4
.4

86.5

1.4

2.4

7.1

5.4

5.5
1.7

-2.6
-17.1

-20.7
64.0

46.6
15.4

15.3
22.6

3.9
2.2

-2.0
1.5

-2.3
3.3

79.2

2.2

3.0

4.6

4.3

Consumer goods
Durables
Nondurables

23.1
3.7
19.4

.1
-.4
.2

.2
-5.4
1.2

.4
8.2
-1.0

1.7
-1.8
2.3

.3
-2.4
.8

-.5
-.8
-.4

.3
-1.0
.6

Business equipment
Office and computing
Industrial
Other

13.6
3.1
4.3
6.1

7.7
36.2
3.5
.8

13.9
48.4
4.1
4.9

8.1
45.5
-3.7
-3.5

8.1
41.0
-3.1
-1.8

.2
3.0
-. 3
.0

.9
2.7
.4
.2

.9
2.3
.0
-. 1

Defense and
space equipment

1.7

-7.3

-1.7

6.1

10.6

1.5

1.3

-.6

Construction supplies

5.3

-.4

7.7

6.2

-1.3

28.7
20.3

3.4
6.3

3.6
7.1

6.4
4.1

4.7
5.7

.1
-.2

.5
1.1

.0
.0

8.2

-2.8

-5.0

12.6

2.6

-.8

6.0
7.5

-1.8
6.2

1.9
8.9

10.5
1.3

7.0
-7.5

-1.3
-2.7

2.4
1.7

-.2
.4

11.2

21.4

21.6

20.1

16.6

1.6

1.0

Motor veh. and parts
Aircraft and parts
Manufacturing excluding
motor vehicles,
aircraft, and parts

Materials
Durables
Nondurables

Mining
Utilities
Memo:
Information-related products 2

1. From the final quarter of the previous period to the final quarter of the period
indicated.
2. Includes computer equipment, computer parts, semiconductors, communications
equipment, and selected instruments.

NEW ORDERS FOR DURABLE GOODS
(percent change from preceding period, seasonally adjusted)
1996

1996
Share
1996 HI
Total durable goods
Nondefense aircraft
Adjusted durable goods orders1
Office & computing machines
Nondefense capital goods
excluding aircraft and computers
Chain-weighted real adj. orders 2

July

Aug.

Sept.

100.0
4.0
68.0
5.0

1.6
-28.1
2.0
1.6

1.9
18.5
1.8
4.9

1.4
29.6
2.3
3.0

-3.6
-39.7
-2.6
-.3

4.9
126.8
.7
-2.6

17.0

-2.7
2.7

2.0
2.2

3.9
2.5

-6.3
-2.5

4.2
.7

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle parts.
2. Nominal adjusted durable goods orders were split into two components, computers and
all other. These components were deflated and then aggregated in a chain-weighted
fashion.

II-8

CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89

1963-95

High
Manufacturing
Primary processing
Advanced processing

1995

Avg.

1996

July

Aug.

Sept.

85.2

82.1

82.6

82.2

82.4

82.5

82.3

82.2

89.0
83.5

83.4
81.5

86.6
80.9

86.1
80.5

86.4
80.7

86.6
80.8

86.3
80.7

86.2
80.5

Manufacturing Sector
Manufacturing Capacity Utilization
Percent

Vendor Performance*
Percent

J\I?

S
1981

I
1984

1987

'Percent of respondents in the purchasing managers survey reporting slower
supplier deliveries minus those reporting faster deliveries, seasonally
adjusted.

Oct.

A. rf

I
1990

I
1993

II-9
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
1996

U.S. production
Autos
Trucks
Days' supply
Autos
Light trucks
Note.

Oct.

Aug.

Sept.

12.6
6.7
5.9

12.1
6.5
5.6

11.2
5.6
5.6

12.7
6.7
6.0

60.5
67.2

62.3
75.8

61.2
71.5

62.3
75.8

Q4
(Sched.)
11.7
5.9
5.8

Components may not sum to totals because of rounding.

After registering a hefty 12-3/4 million unit annual pace in
the third quarter, initial plans for motor vehicle production in the
fourth quarter showed assemblies dropping back to a 12.1 million
unit annual rate.

In October, assemblies evidently ran at only an

11.2 million unit annual rate, with about three-fourths of the
decline from the third-quarter pace attributable to the disruptions
caused by last month's Canadian Auto Workers strike (see discussion
below).

On balance, the drop in output of motor vehicles and parts

is expected to directly shave 0.3 percentage point off October IP
growth.
Production also apparently declined slightly last month outside
of the motor vehicles sector.

Manufacturing production-worker hours

(excluding motor vehicles and parts, FRB seasonals) dropped
0.3 percent in October.

Hours in most durable goods industries were

down, with the exception of lumber, instruments, and stone, clay,
and glass.

Among the nondurable goods industries, the picture was

mixed, with aggregate hours up in food, leather, textiles, and paper
but down in apparel, petroleum, rubber and plastics, and chemicals.
In industries for which physical output data are available, the
production of steel and lumber declined in October, while output of
home appliances posted its first gain in four months.

Mining output

declined in October; electricity generation edged down but remained
in its normal range for the season.
Forward-looking indicators of industrial activity provide
further evidence of a slowing in manufacturing production growth in
the current quarter.

Real adjusted durable goods orders increased

0.7 percent in September, only partially offsetting a 2.5 percent
drop in August.

The November reading on new orders from the

II-10

SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; FRB seasonals)
1996

Total
Adjustedl
Autos
Light trucks
North American 2
Autos
Big Three
Transplants
Light trucks

1994

1995

Aug.

Sept.

Oct.

15.0
15.0

14.7
14.6

15.2
15.3

15.1
15.1

14.9
15.0

15.7
15.6

14.9
14.9

14.8
14.9

9.0
6.1

8.6
6.1

8.6
6.5

8.8
6.3

8.5
6.4

8.8
6.9

8.6
6.3

7.9
7.0

12.9
7.3
5.7
1.5
5.7

12.8
7.1
5.4
1.7
5.7

13.5
7.3
5.4
1.9
6.1

13.4
7.5
5.6
1.9
5.9

13.3
7.3
5.2
2.1
6.0

14.0
7.5
5.3
2.3
6.4

13.2
7.3
5.2
2.1
5.9

13.2
6.6
4.8
1.8
6.5

1.9
1.5
.4

1.7
1.3
.4

1.7
1.2
.4

1.7
1.3
.5

2.1
1.7
.4

Foreign produced
Autos
Light trucks

1996

1.7
1.3
.5

1.7
1.3
.4

1.7
1.2
.4

Note. Components may not add to totals because of rounding. Data on sales
of trucks and imported autos for the most recent month are preliminary and
subject to revision.
1. Excludes the estimated effect of automakers' changes in reporting periods.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry.

Marketing Incentives for Light Vehicles

Buying Conditions for New Vehicles

(FRB seasonals)
Michigan SRC Survey

Constant dollars per vehicle

Diffusion index

170
160
150
140
Q4

130

S(estimated)

120
!

110
1993

1994

1995

1996

1993

1994

1995

1996

Note. Data frn J.D. Powers, deflated by CPI for new motor vehicls.

II-11

National Purchasing Managers also is consistent with a fourthquarter deceleration in manufacturing activity.

Anecdotal reports

in the Beige Book, as well as business contacts maintained by Board
staff, suggest that industrial output is growing moderately.
The factory operating rate fell further in October from
82.2 percent in September; it currently stands about 3 percentage
points below its high for the current expansion, achieved in
December 1994.

The average factory operating rate in primary-

processing industries is still well above its historical average,
but in advanced-processing industries utilization rates are close to
their long-run averages.
In mid-December we should be releasing the annual revisions of
industrial production, capacity, and capacity utilization.

The

revisions will incorporate updated source data for recent years and
will feature a change in the method of constructing aggregate
indexes.

From 1977 onward, the value-added proportions used to

weight individual series will be updated annually rather than
quinquennially and will be aggregated using a Fisher formula rather
than a linked-Laspeyres formula.

The new aggregation methods will

lower both IP growth and capacity growth, reflecting the smaller
weight that will be applied, on average, to the fast-growing
computer industry; on net, the effect of the reaggregation on
overall capacity utilization should be small.
Motor Vehicles
Sales of new light vehicles in October were about 14.8 million
units at an annual rate, down slightly from the September level. 1
Sales at General Motors actually increased a bit from their level in
September, as a surge in purchases of light trucks more than offset
a sharp drop in car sales in the wake of the disruptions to supplies
caused by the Canadian Auto Workers (CAW) strike.

This strike

lasted almost three weeks, with CAW employees returning to work on
October 24. 2
twofold.

The effect of the strike on GM dealers' stocks was

First, most of GM's vehicles produced in Canada are sold

in the United States.

Second, the strike forced GM to shut down

several domestic assembly lines because of shortages of parts
produced in Canada.

Based on sales data for other producers, it

1. A shift in reporting periods by Toyota held down overall
reported sales in October by about 0.1 million units.
2. In the United States, the UAW has reached agreements with
General Motors, Ford, and Chrysler. Meanwhile, in Canada the CAW
has signed an agreement with Chrysler and today reached a tentative
agreement with Ford.

II-12

does not appear that the other firms picked up many sales last month
as a result of GM's supply problems.

Thus, with stocks having been

run down, production and sales at GM may be shifted from the current
quarter to early next year.

We expect GM to shift a greater portion

of its sales to retail customers

(and to reduce the share allocated

to its fleet customers) until its supply problems ease.
GM's labor woes did not end with the settlement with the CAW.
On October 29, the UAW struck a light truck assembly plant and a key
parts plant.

Although the strikes were settled within a week,

production of GM's full-size pickups and sport utility vehicles was
disrupted, with losses estimated to be about 30,000 units (not at an
annual rate).
Production at GM's North American plants is expected to be back
to normal by next week.
lean for a few months.

However, inventories are likely to remain
Because of capacity constraints, only about

0.2 million of the 0.6 million units

(annual rate) of Canadian

production lost during October are expected to be made up this
quarter; most of the rest should be made up during the first quarter
of next year.

On the domestic front, losses related to the CAW

stoppage in October are estimated to be about 0.75 million units at
an annual rate, and the output losses associated with the UAW strike
are estimated at about 0.4 million units. 3

At this point, we

expect less than one-fourth of these domestic output losses to be
made up by the end of the year, delaying the bulk of the catch-up
4
until the first quarter of next year.
The underlying demand for light vehicles still seems to be
relatively strong.

Sales have eased only a bit from the high level

of the first half, and other indicators have remained quite healthy.
For example, the latest readings on consumers' attitudes toward car
buying conditions edged down in October but still were in the middle
of the range that has prevailed so far this year.

In addition,

increases in the effective prices of new cars have been relatively
modest.

Owing to the strength of the dollar this year, price

3. Start-up problems associated with new models (unrelated to the
CAW strike) further reduced GM's production by another 0.25 million
units or so last month.
4. Capacity contraints, particularly for GM's full-size pickups
and sport utility vehicles, will make it difficult for GM to
completely recapture this production by the end of the first
quarter. In addition, a small amount of the lost production in both
the U.S. and Canada is unlikely to be made up at all, as inventories
for a few of the models affected by the strike were excessive prior
to the work stoppages.

II-13

increases for Japanese vehicles have been small, putting pressure on
the Big Three automakers to hold down buyers' costs for domestic
vehicles as well.

Also, the average level of incentives in the

current quarter appears likely to be little changed from the third
quarter.

Although below the levels of the first half of the year,

the current incentives are still relatively generous by historical
standards.
Personal Income and Consumption
After expanding briskly over the first half of the year, real
personal consumption expenditures increased at only a 0.4 percent
annual rate in the third quarter, and the saving rate moved up to
its highest level in more than three years.

The sharp slowing in

consumption growth was evident across a wide range of goods and
services and occurred despite continued high consumer confidence and
robust real income and wealth gains.

Lenders did tighten their

lending standards a bit in the third quarter, but even so, credit
still appears to have been amply available to most consumers.
In the third quarter, real outlays for durable goods excluding
motor vehicles rose at a 2.7 percent annual rate, reflecting higher
spending on electronic equipment, including computers, and on
household furnishings such as floor coverings, clocks, and lamps.
In contrast, real outlays for furniture and household appliances
declined.

Real expenditures on nondurable goods fell marginally,

reflecting sharp declines in outlays for food and gasoline, and
modest gains for apparel and other items.
Outlays for real energy services fell nearly 10 percent at an
annual rate in the third quarter, reflecting a cooler than average
summer.

Available weather data so far in the fourth quarter show

temperatures closer to seasonal norms.

If this pattern holds, the

rise in energy expenditures should provide a small boost to PCE
growth in the current quarter.
Non-energy services increased at a 1.7 percent annual rate in
the third quarter.

Real outlays for medical and transportation

services moved higher, and there was a healthy gain in recreational
services, owing in part to the Olympics.

In contrast, the midsummer

lull in the stock market contributed to a sizable decline in
brokerage services

(a component of personal business services); data

for September, however, indicate that some reversal of this weakness
is in train.

II-14

PERSONAL INCOME
(Average monthly percent change)
1996
1994

1995

Total personal income

Wages and salaries
Private

.1
.1

.4
.5

Other labor income

Less: Personal tax and
nontax payments

Equals: Disposable
personal income
Memo:
Real disposable incomel
Saving Rate (percent)

1996
Q3

Aug.

Sept.

.8
.9

.5
.5

.8
.9

-. 1

1.0

1.2

1.1

.1
3.8

.3
4.7

.1
4.8

.4
4.3

.2
5.4

.4
5.2

.4
5.7

Derived from billions of chained (1992) dollars.

REAL PERSONAL CONSUMPTION EXPENDITURES 1
(Percent change from the preceding period)
1996

1996
Q1

Durables
Motor vehicles
Computers
Other durable goods
Nondurables
Gas and oil
Clothing and shoes
Other nondurables
Services
Energy
Non-energy
Housing
Personal business
Personal care
Recreation
Transportation
Medical
other

Sept.

1995

3.1

1.9

3.5

3.4

-. 1

7.0
1.8
31.8
9.1

1.3
-3.8
52.3
.4

8.2
6.7
50.8
4.2

11.4
3.0
113.6
5.6

-. 8
-6.5
29.5
-1.7

3.1
5.9
2.4
1.4

-1.4
-2.9
2.4
-1.2

3.5
2.1
7.1
2.9

1.1
1.9
.7
1.1

3.7
-3.8
8.4
3.4

1.3
6.2
10.1
-1.2

-.3
-3.8
1.6
-.5

.1
-1.9
1.5
.0

.1
2.6
-.1
-.1

2.0
-5.3
2.3
2.4
-1.3
1.5
4.1
5.3
1.9
4.4

2.4
5.4
2.3
1.8
2.5
2.4
2.8
3.2
2.5
2.1

2.4
7.3
2.2
1.6
5.9
2.6
.8
5.6
-. 1
2.9

2.7
8.8
2.4
1.5
-1.1
2.6
5.8
1.8
2.9
5.6

1.1
-9.8
1.7
1.4
-4.4
2.6
4.1
4.3
2.4
4.3

.1
2.8
.0
.1
-1.0
.2
-1.4
.3
.3
.6

.1
-1.7
.1
.1
1.2
.2
.5
.5
.2
-1.2

- - - Annual rate -

PCE

Aug.

1994

1. Derived from billions of chained (1992) dollars.

Monthly rate

II-15
Savings and Consumer Attitudes
NIPA Personal Saving Rate
Percent

Real Disposable Personal Income
Four-quarter percent change
6
5
4
3
2
1
0
1

1990

1992

1994

1996

1990

1992

1994

1996

Michigan Survey
Consumer Sentiment
Index
140
120
100
80
60
40
1987

1989

1991

1993

1995

Expected Personal Financial Situation*
Index
140

130

120

110

100
1987

1989

1991

1993

* Percent reporting expected situation in 12 months as better less percent who report worse, plus 100.

1995

II-16

Private Housing Activity
(Millions of units; seasonally adjusted annual rate)

1995

Q2 r

Q3P

July r

Aug.r

Sept.P

All units
Starts
Permits

1.35
1.33

1.47
1.41

1.49
1.44

1.48
1.42

1.47
1.46

1.53
1.42

1.44
1.38

Single-family units
Starts
Permits
New home sales
Existing home sales

1.08
1.00
0.67
3.80

1.16
1.08
0.75
3.95

1.19
1.10
0.74
4.21

1.17
1.06
0.81
4.10

1.15
1.07
0.79
4.15

1.23
1.08
0.82
4.14

1.12
1.04
0.82
4.02

Multifamily units
Starts
Permits

0.28
0.33

0.31
0.33

0.31
0.34

0.31
0.36

0.32
0.38

0.30
0.35

0.32
0.34

Mobile homes
Shipments

0.34

0.35

0.37

n.a.

0.37

n.a.

Note. p Preliminary. r Revised. n.a. Not available.

Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units

!
!

.
I

1977

1979

~~~~"~""'~"~"
1

1981

1983

1985

1987

I-

1989

1991

1993

I 1

1995

1997

II-17

Outside of motor vehicles, we have few firm data on fourthquarter consumer spending.

However, the fundamentals underlying

consumer demand appear supportive of a rebound in coming months.
Income growth remained on a solid upward trend in the third quarter,
with real disposable personal income up almost 5 percent at an
annual rate.

Part of the large advance in third-quarter disposable

income was due to the timing of personal tax payments,
and salary income also advanced at a healthy clip.

but wage

The recent

employment report suggests that estimated labor income in October
will be weak, but we anticipate a recovery in November with a
bounceback in the average workweek and a resumption of growth in
hourly earnings.
In addition, consumer sentiment has remained upbeat.

Although

the Conference Board index dropped back a bit in October, the
readings on this index from July through October were the highest
posted over the current expansion.

Similarly, the Michigan SRC

index moved up in October to the top of the relatively favorable
range that has prevailed since early 1994--buoyed largely by
decidedly more positive views of current conditions (expected
conditions changed little).

Although a hefty 60 percent of SRC

respondents in October expected interest rates to rise, this did not
appear to have much of an adverse influence on their views of
expected unemployment, business conditions, or their personal
financial situation.

Moreover, the SRC survey suggests that the

third-quarter rise in the saving rate was not fueled by heightened
precautionary motives:

The index of expected unemployment change

fell last quarter to its lowest level in almost two years, and
respondents' views of their expected personal financial situation
remained quite favorable--rising to the highest level of the current
expansion.
Housing
As has been the case for some months now, indicators of housing
sector activity have moved in divergent directions of late, making
it difficult to gauge the effects of this year's backup in mortgage

5. Payment of the third and final installment of tax liabilities
resulting from OBRA-93 temporarily depressed second-quarter
disposable income. In the third quarter, tax payments fell back to
more normal levels--providing a commensurate boost to disposable
income.

II-18

Indicators of Single-Family Housing Demand
(Seasonally adjusted)
New Home Sales

Permits and Startts
Thousands

Thousands

S1400
Sept.

1300
-1200

1100

It
\/

Sept.
Permits

SI.... .

1994

....

i ..

1995

......

1000

900

/* *********' *****

800

1996

1994

1995

1996

Builders' Rating of New Home Sales & Consumer Homebuying Attitudes
Diffusion index

Consumers' attitudes

. ..

.*-

.
ct

Builders' attitudes

- 30

1
. .I
.I
60
1990
1991
1992
1993
1994
1995
1996
Note. The first index is calculated from the National Association of Homebuilders and the second from the Survey Research Center.

Constant-Quality Price Indexes for New and Existing Homes
Percent
--

New homes

, Q3 -

/\
V-

Existing homes

I
I

1990
1991
1992
1993
1994
1995
1996
Note. Percent change from a year earlier. The index for existing homes is the repeat sales index published by Freddie Mac
and Fannnie Mae; the index for new homes is published by the Census Bureau.

II-19
rates. 6

On the production side, starts of single-family houses,

which shot up in August, fell back in September to the lowest level
seen so far this year.

And permits for single-family structures,

which are less volatile than starts, have shown a discernible
downdrift since last spring.
In contrast, new home sales edged down in September but
remained well above the average pace during the first half of this
year--and at a level typically consistent with higher starts than
observed in the past couple of months.

Furthermore, the Michigan

Survey's index of consumer homebuying attitudes, which had eroded
earlier this year, snapped back in October to a level similar to
that seen last spring.

A survey of home builders' assessments of

current sales, which historically has been correlated with the
Commerce Department's new home sales series, has trended down since
last spring, but applications for mortgages to purchase homes (both
new and existing) remained flat, on net, through mid-October, in the
neighborhood of the relatively strong level that has prevailed since
early this year.

All told, the available information suggests that

the single-family sector probably has softened in recent months, but
only a bit.
The index of prices of similar-quality existing homes was up
3-3/4 percent in the third quarter from its year-earlier reading,
according to Freddie Mac and Fannie Mae.

This price index

accelerated considerably from the middle of 1995 through the first
quarter of this year but has moderated since then.

The Census

Bureau's constant-quality price index for new homes rose about
3 percent during the past year, about the same as the average pace
seen during the previous two years.
Multifamily housing starts rose to a 316,000 unit annual rate
in September, reversing most of the August decline.

From a longer

perspective, the level of multifamily starts in the third quarter
was up 12 percent from the 1995 average; building permits for these
units also have moved higher this year. One factor that may hold
back further construction in this sector is the rising inventory of
unoccupied units.

Vacancy rates for apartments rose to

9-1/2 percent in the third quarter, 1/2 percentage point more than
the average reading during the previous two years.

Thus far,

however, rents do not appear to have suffered as a result:

The

6. Although mortgage rates have moved down about 50 basis points
since early September, they still are about 75 basis points above
their levels of early this year.

II-20

Fundamental Determinants of Equipment Spending
Acceleration of Business Output
Four-quarter percent change

Percentage points

1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
Note. The accelerator is the eight-quarter percent change in business output less the year-earlier eight-quarter percent change.

Real Domestic Corporate Cash Flow
Four-quarter percent change

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

User Cost of Capital
Four-quarter percent change

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

II-21

consumer price index for rental units rose 2-3/4 percent during the
twelve months ended in September, about 1/2 percentage point more
than its pace over the previous year.
Business Fixed Investment
Real business fixed investment accelerated sharply, to about a
16-1/4 percent annual rate, in the third quarter, but the
fundamental determinants of investment point to less rapid gains in
the near term.

Increases in cash flow should continue to provide

some impetus to spending, but the effect of the acceleration of
business output should now be about neutral, and the rate of decline
in the user cost of capital has slowed.

Nonetheless, user costs

remain quite favorable for the fast-growing office and computing
category.
The third-quarter advance in PDE of close to 20 percent (annual
rate) was led by a sharp increase in real expenditures on office and
computing equipment.

Anecdotal reports tend to confirm the strength

implied by the recent spending data, with a number of computer
industry leaders reporting favorable third-quarter results.

For

example, Compaq Computer's earnings per share grew 40 percent
relative to a year ago, nearly twice analysts' expectations.
Intel's 45 percent increase relative to the same period last year
outpaced market forecasts by an even wider margin.

Microsoft

registered a solid gain, and even Apple Computer earned a small
profit.

Our contacts in the computer industry report that sales to

businesses, especially of high-end servers, represent an important
part of recent performance.
In a further mark of very strong demand for computer equipment,
Intel Corporation announced in late October that it has been unable
to meet manufacturers' needs for 200 MHz Pentium Pro processors used
in high-end servers.

Indeed, investment may be constrained somewhat

in the fourth quarter if what systems vendors describe as "a serious
shortage" of these processors persists.
Growth of real investment in communications equipment jumped
more than 30 percent at an annual rate in the third quarter.

addition, orders for communications equipment were up a hefty
7 percent, a rise that should sustain fairly rapid growth in
spending in this sector over the near term.

On September 27, the

U.S. Court of Appeals granted a temporary stay to the implementation
of rules opening the local phone monopolies to competition.
development and the threat of lengthy legal delays introduces

This

II-22

BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1996

1996

July

Aug.

Sept.

Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories

-.5
.8
3.7
-.3
.0

2.9
1.5
-.8
4.7
1.7

1.8
1.5
4.5
4.8
-.5

-1.6
-2.3
-.8
-1.5
-3.1

2.4
1.1
4.6
-1.0
.3

1.8
2.3
1.1
4.5
2.3

Shipments of complete aircraft I

1.4

12.2

n.a.

2.7

50.5

n.a.

-2.2

1.2

n.a.

-.2

n.a.

3.1
3.1
2.1
8.7
2.2

-6.5
-1.7
1.6
-8.5
-1.2

4.9
2.7
4.9
7.1
.9

7.0
3.7
3.0
15.1
1.2

-10.4
-4.9
-.3
-14.0
-4.3

15.6
2.5
-2.6
1.6
4.8

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

1.0
-6.6
3.0
-2.9
-1.6
4.5
10.6

.0
8.3
-1.0
1.2
-8.0
3.1
.0

2.6
8.1
1.8
8.1
-1.8
-1.0
4.9

-1.3
-3.3
-. 9
-.8
-.5
-.7
-2.4

3.6
.5
8.7
7.2
-5.4
4.4
4.5

1.1
1.4
-2.5
2.2
7.6
-.4
1.7

Rotary drilling rigs in use

6.6

12.4

-4.7

-2.3

-.1

-4.9

11.6
13.1
7.7

3.8
6.7
-3.8

14.7
18.9
3.3

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

Producers' durable equipment

Sales of heavy trucks
Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
Nonresidential structures

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

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using PRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Based on 1992 chain-weighted data; percent change, annual rate.
n.a. Not available.

II-23

additional uncertainty into the outlook for investment in the
telecommunications industry.

However, rapid technological

improvements and rising demand for services are likely to sustain
growth of expenditures even in the absence of deregulation.
Spending on motor vehicles increased at a 21 percent annual
rate in the third quarter.

Auto fleet sales were strong but are

expected to weaken in the fourth quarter as GM diverts sales to
retail customers in the wake of its recent production disruptions.
Sales of heavy trucks continued to drift lower, reflecting the
ongoing weakness in orders.

Domestic expenditures on aircraft

rebounded to a level above that in the first quarter.

Demand for

aircraft continues to be robust; the value of orders received by
Boeing rose in August, with all the increase coming from domestic
customers.
Expenditures on other capital goods were up at a mere
1-1/4 percent pace in the quarter.

Orders for these types of

equipment also were up only slightly in the quarter after having
fallen in the second quarter.

The leveling off of new orders after

two years of rapid increases suggests that investment growth in this
category will remain sluggish in the current quarter.
Real expenditures on nonresidential structures firmed in the
third quarter, more than reversing the second-quarter decline.
Incorporating the likely revisions to the third-quarter data,
spending has risen at a 3-1/4 percent annual rate so far this year,
down from the 5 percent increase in 1995.

Data on the value of

contracts for private nonresidential buildings now look more in line
with this pattern of slower growth in spending on structures.

Large

upward revisions to the contracts data for the first half of this
year have lifted the path of this series considerably, eliminating
much of the inconsistency that had existed between the spending data
and the earlier reports that contracts were falling; a six-month
moving average now shows a plateau since early 1995.
Business Inventories
Following a modest rate of accumulation in the second quarter,
the pace of business inventory investment picked up considerably
over the summer.

Although the lull in consumer spending undoubtedly

was a factor, the accelerated inventory buildup could well have
reflected in part desires of some businesses to replenish stocks
that had been drawn down sharply in late spring and early

II-24

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1996
Q1

1996
Q3

July

Aug.

Sept.

Book value basis
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

16.7

13.2

n.a.

61.0

56.5

n.a.

25.0
12.3
6.3
7.3
7.3
-2.9
-8.4
5.5

6.0
-6.2
-10.7
11.3
7.6
8.2
3.5
4.6

n.a.
13.1
10.4
n.a.
n.a.
n.a.
n.a.
n.a.

39.1
6.9
6.3
-1.9
-4.2
56.0
19.7
36.3

39.3
14.9
12.5
14.6
13.0
27.1
15.6
11.5

n.a.
17.4
12.5
n.a.
n.a.
n.a.
n.a.
n.a.

-5.4
17.5
12.0
3.8
4.0
-21.7
-23.6
3.0

7.9
1.9
-3.9
6.5
3.3
5.2
2.0
3.2

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

56.4
46.0
13.7
1.5
-.4
41.5
10.5
31.0

26.0
27.2
5.6
15.9
14.4
4.5
-2.7
7.3

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

Chained (1992) dollars basis
Total
Excluding motor vehicles
Manufacturing
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

INVENTORIES RELATIVE TO SALES

(Months' supply; based on seasonally adjusted data)
1996
Ql

1996
Q3

July

Aug.

Sept.

Book value basia
1.43

1.40

n.a.

1,39

1.40

n.a.

retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles

1.40
1.45
1.34
1.32
1.30

1.37
1.40
1.29
1.31
1.28

n.a.
1.39
1.28
n.a.
n.a.

1.36
1.39
1.28
1.28
1.25

1.37
1.39
1.28
1.30
1.26

n.a.
1.39
1.28
n.a.
n.a.

Retail

1.49

n.a.

1.51

1.52

n.a.

1.66
1.44

1.70
1.42

n.a.
n.a.

1.74
1.43

1.76
1.45

n.a.
n.a.

1.38
1.36

1.36
1.33

n.a.
n.a.

1.35
1.32

1.35
1.33

n.a.
n.a.

Total
Excluding wholesale and

Auto dealers
Excluding auto dealers
Chained (1992) dollars basis
Total
Excluding motor vehicles
Manufacturing

1.39

1.35

n.a.

1.34

1.35

n.a.

Wholesale
Excluding motor vehicles

1.35
1.33

1.34
1.31

n.a.
n.a.

1.31
1.28

1.33
1.30

n.a.
n.a.

Retail

1.37

n.a.

1.38

1.39

n.a.

Auto dealers

1.54

1.57

n.a.

1.56

1.54

n.a.

Excluding auto dealers

1.34

1.33

n.a.

1.34

1.35

n.a.

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

II-25

summer.

Despite the substantial inventory investment in these

two months, stocks held by most types of firms were fairly well
aligned with sales at the end of August.

In addition, preliminary

September data for manufacturing suggest that the situation was
little changed in that sector in the latter part of the third
quarter.

The general picture regarding inventory-sales ratios

depicted by the Census data is consistent with reports from other
sources,

such as the recent Purchasing Managers Surveys and

anecdotal reports from the latest Beige Book.
MANUFACTURERS' RECENT INVENTORY INVESTMENT
By stage of processing and market grouping
(Book value, billions of dollars at annual rate)

Q1
12.3

Q2
-6.2

Q3
13.1

1996
July
6.9

Aug.
14.9

Sept.
17.4

By stage of processing
Materials and supplies
Work-in-process
Finished goods

2.0
7.4
2.9

-10.4
5.9
-1.7

2.5
3.4
7.1

7.5
.8
-1.3

-5.2
9.2
10.9

5.2
.3
11.8

By market grouping
Producers' dur. equip.

9.9

12.0

18.0

14.4

3.7

2.3
-. 4
7.1
.2

-1.3
-2.1
3.1
.9

1.0
2.4
5.7
2.9

4.1
7.6
6.7
-. 4

.3
1.8
5.7
6.6

-1.5
-2.1
4.8
2.6

.4
-1.0
3.0

-. 3
-1.7
-4.8

1.7
1.4
-2.0

-2.4
-1.9
-6.8

4.6
3.1
-7.3

2.8
2.9
8.0

Total manufacturing

Information equip.
Industrial equip.
Transportation equip.
Other equipment
Household durables
Home goods & apparel
Other

Manufacturing inventories expanded further in August and
September.

As in July, a substantial portion of the August-

September buildup was in stocks of capital goods.

However, the

latest accumulation also comprised consumer goods--household
durables, home goods, and apparel--for the first time since
February.

On the whole, manufacturers' inventories were reasonably

balanced at the end of the third quarter, with stock-shipments
ratios for most industries and market groupings still hovering near

7. For most types of non-auto retail establishments, inventorysales ratios reached their most recent lows in May of this year; for
manufacturers and wholesale distributors, the recent troughs
occurred in July.

II-26

SELECTED INVENTORY-SALES RATIOS
(Months' supply, based on Census book-value data, seasonally adjusted)
Cyclical
reference points
1990-91
High

Manufacturing and trade
Less wholesale and retail
motor vehicles

1994-95
Low

Most recent
12-month range
High
Low

August/
September
19961

1.58

1.40

1.45

1.39

1.40

1.57

1.40

1.44

1.39

1.37

Manufacturing
Primary metals
Nonelectrical machinery
Electrical machinery
Transportation equipment
Motor vehicles
Aircraft
Nondefense capital goods
Textile
Petroleum
Home goods & apparel

1.75
2.08
2.48
2.08
2.94
.97
5.85
3.09
1.71
.94
1.96

1.39
1.45
1.88
1.52
1.59
.53
4.42
2.33
1.44
.88
1.70

1.46
1.62
1.94
1.60
1.87
.67
5.95
2.58
1.66
.92
1.89

1.39
1.55
1.84
1.52
1.65
.56
4.89
2.38
1.49
.80
1.70

1.39
1.61
1.81
1.51
1.65
.55
5.14
2.39
1.55
.80
1.72

Merchant wholesalers
Less motor vehicles
Durable goods
Nondurable goods

1.36
1.31
1.83
.96

1.28
1.26
1.54
.98

1.34
1.31
1.64
1.03

1.28
1.25
1.58
.97

1.30
1.26
1.61
.98

Retail trade
Less automotive dealers
Automotive dealers
General merchandise
Apparel
G.A.F.

1.61
1.48
2.21
2.43
2.56
2.44

1.46
1.42
1.60
2.21
2.47
2.24

1.56
1.48
1.82
2.34
2.66
2.37

1.48
1.41
1.64
2.20
2.35
2.23

1.52
1.45
1.76
2.26
2.44
2.27

1. September 1996 ratios for manufacturing; August 1996 ratios for wholesale
and retail trade.

II-27

Inventory-Sales Ratios, by Major Sector
(Book value)

Manufacturing
Ratio

2.2

1.95

STotal

1.7

Excluding aircraft and parts
!

" -.

Sept.
1

1.2

-1.5

1.4

1.3

Aug.

1.2

1.1

1980

1982

1984

1986

1988

1990

1994

1992

1996

Retail
Ratio
1.7

2.7 'I.

2.5

GAF group (left scale)

'fi,

.',
-

Is-*

2.3

1 n

Aug.

Total excluding autos (ght scale

2.1

1980

1982

1984

1986

1988

1990

1992

1-I

1994

1.6

1996

II-28

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars except as noted)
Fiscal year totals
September
1995

1996

Outlays
Deposit insurance (DI)
Spectrum auction (SA)
Other

136.1
.4
.0
135.7

Receipts
Deficit

(+)

Dollar

Percent

change

1560.1
-8.3
-.3
1568.8

44.7
9.5
7.3
27.9

2.9
-53.3
-95.5
1.8

1351.5

1452.8

101.3

7.5

163.9

107.3

-56.6

-34.5

1995

1996

122.3
-.7
-.1
123.1

1515.4
-17.8
-7.6
1540.9

143.3

157.7

-7.2

-35.4

Adjusted for payment timing shifts 1
and excluding DI and SA

Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Other

128.6
23.6
18.9
28.2
13.3
7.4
2.1
18.2
16.8

130.9
22.4
19.2
29.1
14.1
7.7
2.3
15.7
20.2

1540.9
272.1
232.2
335.8
159.9
89.1
26.0
220.4
205.4

1576.6
268.1
241.1
349.7
175.8
92.0
26.9
227.3
195.7

35.7
-4.0
9.0
13.8
16.0
2.9
.9
6.9
-9.7

2.3
-1.5
3.9
4.1
10.0
3.3
3.3
3.1
-4.7

Receipts
Individual
Withheld
Nonwithheld
Refunds (-)
Social insurance taxes
Corporate
Other

143.3
60.9
36.3
27.2
2.6
39.9
33.0
9.5

157.7
68.7
39.5
30.6
1.5
43.4
35.1
10.5

1351.5
590.2
499.9
175.8
85.6
484.5
157.1
119.8

1452.8
656.4
533.1
212.2
88.9
509.4
171.8
115.1

101.3
66.3
33.2
36.4
3.3
24.9
14.7
-4.7

7.5
11.2
6.6
20.7
3.8
5.1
9.4
-3.9

Deficit(+)

-14.7

-26.7

189.4

123.8

-65.6

-34.6

Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on a
weekend or holiday. The monthly and fiscal year to date outlays for defense,
Medicare, income security, and "other" have been adjusted to account for this
shift.

II-29

the low end of their recent ranges and considerably below the
previous cyclical peak observed during the 1990-91 downturn.
Downstream in retail trade, the bulk of the inventory buildup
since midyear has been at general merchandisers, apparel outlets,
and at stores in the "miscellaneous" consumer goods category.
Although inventory-sales ratios for most types of non-auto retailers
have been edging up since May, at the end of August they were still
well below their recent highs observed in the autumn of 1995.
Wholesale inventories, excluding motor vehicles and the volatile
farm products series, also expanded in July and August.

However,

stocks held by distributors of some consumer goods--in particular,
apparel and electrical appliances--fell in July and August, leaving
inventory-sales ratios for these wholesale establishments relatively
low.
Federal Sector
Total real federal purchases decreased at a 4 percent annual
rate in the third quarter, pulled down by a 5 percent decline in
real defense purchases.

Real federal nondefense purchases were down

almost 2 percent (annual rate).

The drop in federal purchases for

the third quarter reversed the positive growth seen in the previous
two quarters and brings purchases back closer to their underlying
trend rate of decline.
The unified budget deficit for fiscal 1996 was $107 billion,
about $10 billion below the projections made by OMB and CBO last
summer and $57 billion below the deficit posted in fiscal 1995.
Receipts climbed to a level 7-1/2 percent above that of the previous
fiscal year, while outlays increased about 3 percent. 10
The jump in federal receipts was led by an 11 percent increase
in individual income tax payments.

Preliminary data on 1995

individual tax returns have thus far been made available only to
Treasury and CBO.

CBO Director O'Neill recently stated that neither

CBO nor OMB knows what has caused the jump in individual receipts
but said that the agencies will continue to analyze the data over

8. These "miscellaneous" goods include cameras and other home
photographic equipment, jewelry, books, toys, bicycles, and sporting
goods.
9. Adjusted for calendar payment shifts and excluding deposit
insurance and spectrum auction proceeds, an "adjusted" deficit came
in at $124 billion for fiscal 1996, $66 billion below the adjusted
deficit for last fiscal year.
10. Adjusted for calendar payment shifts, deposit insurance, and
spectrum auction proceeds, "adjusted" outlays increased about
2 percent in fiscal 1996.

II-30

the next few months to determine the likely source of this
strength.

The rise in social insurance taxes, a more subdued

5 percent, is about in line with the growth in wages and salaries.
Corporate receipts increased about 9-1/2 percent, consistent with
the growth in corporate profits.
In addition to closing out the fiscal year, September unified
budget data also contained one of the four "due dates" for estimated
individual tax payments, which normally provide useful information
about total tax liabilities for the current tax year.

Individual

nonwithheld tax payments for September were approximately 13 percent
higher than a year earlier, and gross corporate tax payments rose
8 percent, suggesting that the strong tax liabilities seen last year
are persisting this tax year.
On the outlay side, developments in health-related programs
were mixed in fiscal 1996.

The 10 percent rise in Medicare outlays,

after adjustment for payment timing shifts, is consistent with its
In contrast, Medicaid grew at an historically

recent trend growth.
low 3 percent rate.

Declines in welfare program enrollments, state-

level reforms that continued the shift in Medicaid payments toward
managed-care arrangements, a decline in disproportionate-share
payments, and relatively small increases in overall health costs all
appear to have contributed to the restrained growth in Medicaid
spending.

Nominal defense outlays, adjusted for payment timing

shifts, continued their decline, falling 1-1/2 percent compared with
last year.

Adjusted nondefense outlays, excluding the major

entitlement programs

(social security, income security, and health)

and net interest, were down almost 5 percent, primarily reflecting
the restraint imposed on programs funded by the past fiscal year's
annual appropriations.
In sharp contrast to last year's budget battle, seven regular
appropriations bills and a final omnibus appropriations bill,
covering programs ordinarily included in the remaining six regular
appropriations bills, were all completed before the start of fiscal
Legislated budget authority for discretionary spending
1997.
programs climbed $9 billion, from $493 billion in fiscal 1996 to

11. "Lower 1996 Deficit Raises Key Questions For Budget Writers
About Future Trends," Daily Report for Executives, Bureau of
National Affairs, No. 209, October 29, 1996.

II-31

$502 billion in fiscal 1997.12

However, CBO estimates that total

discretionary outlays will increase less than $2 billion in fiscal
1997.
This is partly a consequence of a $3 billion offset to
outlays

(but not budget authority) resulting from a provision of the

omnibus appropriations bill that imposes a special levy on thrift
institutions to recapitalize the Savings Association Insurance
Fund. 1 3
RECENT BUDGET APPROPRIATIONS
(Billions of dollars, fiscal years)
1995

1996

1997

Budget authority
Total
Defense
Nondefense

498.1
262.4
235.7

493.2
264.8
228.3

502.4
265.8
236.6

Outlays
Total
Defense
Nondefense

548.0
270.2
277.8

535.5
264.2
271.4

537.2
264.9
272.4

Note.

Scored by the Congressional Budget Office.

State and Local Governments
Total real state and local government consumption and
investment spending now appears to have risen about 1-3/4 percent in
the third quarter.

Real consumption expenditures were up at a

1.5 percent annual rate after a 5.6 percent jump in the second
quarter.

The unusual pattern reflects gyrations in real

compensation associated with the snowstorms last winter, as many
educational employees who lost days during the storm made them up in
the second quarter; in the third quarter, the level of compensation
returned to trend.

Taking into account expected revisions

associated with the September construction data, real investment
spending probably rose 2-1/2 percent in the third quarter.
Employment of state and local government workers, the only data
available for the fourth quarter, fell 32,000 in October after a

12. Budget authority in fiscal 1997 is approximately the same as
the President's request in the fiscal 1997 budget and is $5 billion
more than planned in the fiscal 1997 congressional budget
resolution.
13. To raise SAIF's reserve ratio to the statutorily mandated
minimum of 1.25 percent from the June level of 0.55 percent, the
legislation calls for a one-time special assessment on most SAIF
deposits of 68 basis points. After the assessment, SAIF premiums
could then be allowed to fall to a level near that for BIF deposits.

II-32

drop more than twice as large in September.

The two declines came

after unusually large gains in previous months and likely reflect,
at least in part, seasonal adjustment difficulties.

In October, the

big drop was concentrated in state education workers, unlike in
previous months when the large swings were among local government
education workers.
States cut taxes, on net, during their 1995 and 1996
legislative sessions, the first reductions since 1985.
years, the cuts

In both

($3.3 billion in 1995 and $4 billion in 1996) were

about 1 percent of the previous year's general fund collections.
The focus both years was on personal income taxes.

In 1996, the

largest reductions were in New York, Ohio, Connecticut,
Massachusetts, and New Jersey, with smaller cuts in eleven other
states.

In addition, fifteen states reduced corporate income taxes,

and twenty states cut sales taxes.

The reductions are scheduled to

take effect during fiscal year 1997, which began July 1 for most
states.

Meanwhile, nine states had a variety of tax initiatives on

the November 5 ballot, most limiting taxes:

Four of five states

passed initiatives that would impose a requirement for voter or
legislative approval of new or increased taxes;
initiative in Oregon is too close to call.

the result of the

Two of five initiatives

limiting property taxes passed.
Most states have been working to develop welfare programs that
must be in place by July 1, 1997, to comply with the federal
Temporary Assistance for Needy Families Act passed in August.

far, thirty-three states have submitted plans to the Department of
Health and Human Services.

Federal aid to states under the new

block grant is tied to the caseload count in the 1992-94 period.
Because caseloads have fallen in all but three states (Alaska,
Hawaii, and Minnesota) in recent years, most states would receive
more money this year under the block grant program than under the
original entitlement program.

Thus, states have a strong incentive

to submit their plans early, as the federal government will not
disburse funds on the block grant basis until the plans are declared
14

complete.14 The extent to which states will pick up costs for
immigrants and others who lose under the legislation is unclear.

far, Maryland has indicated it may make aid available to the
children of immigrants, and New Jersey, Utah, and Nebraska would use

14. HHS has declared eight plans complete, and another five are
expected to be declared complete in the near future.

II-33

some state money to help noncitizens.

In contrast, the governor of

California is not likely to support the use of state funds to
replace federal aid.
step up aid:

Meanwhile, some local governments likely will

For example, more than a half-dozen counties in

Northern California have announced that they will continue to
provide prenatal care to illegal immigrant women if state aid is cut
off.
Labor Costs
Although recent data point to more subdued compensation
increases than in the first half of this year, the underlying trend
in labor cost growth still appears to be upward.

In the third

quarter, the employment cost index (ECI) for private industry
workers rose 2.5 percent at an annual rate compared with 3.2 percent
in the second quarter.

However, the recent quarterly movements in

the ECI have been buffeted by fluctuations in the commissions earned
by sales workers;

on a twelve-month basis, the ECI was up

2.9 percent, slightly more than the 2.6 percent rise posted over the
same period a year ago.

Other measures of labor costs, such as

preliminary estimates of compensation per hour in the nonfarm
business sector and average hourly earnings also suggest a gradual
acceleration over the past year.
The acceleration in the ECI has been concentrated in wages and
salaries, which rose 3.3 percent over the year ended September 1996,
compared with 2.8 percent in the preceding twelve months.

Benefit

costs again helped to moderate overall compensation growth, rising
1.8 percent on a twelve-month basis, 0.3 percentage point below the
twelve-month change a year ago.

This year's deceleration in benefit

costs was largely in pensions, unemployment insurance, and workers'
compensation.
An additional factor restraining benefit cost inflation has
been the continued slow growth of employer costs for health
insurance, which in the ECI rose just 0.7 percent over the twelvemonth period ending in September.

Although this increase is a bit

higher than a year ago, it is well below the 7 percent pace of the
early 1990s.

The result of this sharp deceleration is that health

care costs are now adding only about 0.1 percentage point per year
to overall ECI growth, down from a contribution of almost
1 percentage point per year in the late 1980s.

II-34

EMPLOYMENT COST INDEX OF HOURLY COMPENSATION
FOR PRIVATE INDUSTRY WORKERS
1995
Sept.

1996
Dec.

Mar.

June

Sept.

----- Quarterly percent change------(compound annual rate)
Total hourly compensation 1
Wages and salaries
Benefit costs
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services

2.6
3.0
2.4

2.6
2.6
2.1

2.9
4.3
-0.3

3.2
3.6
2.7

2.5
2.6
2.7

3.0
2.2
4.2

3.0
3.2
3.2

2.6
1.9
1.9

2.3
3.8
2.5

1.0
3.4
2.5

4.1
-1.0
5.9
3.7

2.8
4.6
1.3
2.5

3.4
1.6
2.6

By occupation
White-collar
Blue-collar
Service occupations
Memo:
State and local governments

2.2

2.5
2.6
0.3

3.5
2.2
1.3

3.1
3.2
2.6

2.8

2.5

2.8

----- Twelve-month percent change---Total hourly compensation
Excluding sales workers
Wages and salaries
Excluding sales workers
Benefit costs
By industry
Construction
Manufacturing
Transportation and
public utilities
Wholesale trade
Retail trade
FIRE
Services
By occupation
White-collar
Blue-collar
Service occupations
Memo:
State and local governments

1.4
2.3
3.8

2.2
2.6
3.7

2.6
2.5
3.1

2.7
2.8
3.0

2.8
2.3
2.4

2.8
2.4
1.9

3.0
2.5
1.9

3.0
2.6
2.0

3.0

2.9

2.8

2.6

1. Seasonally adjusted by the BLS.

II-35

EMPLOYMENT COST INDEX OF HOURLY WAGES AND SALARIES
FOR PRIVATE INDUSTRY WORKERS
(Twelve-month percent changes)
1995

Hourly wages and salaries
By industry
Construction

1996

Sept.

Dec.

Mar.

June

Sept.

2.8

3.2

3.4

3.3

1.9

2.4

3.0

3.4

3.1

Manufacturing
Transportation and

2.9
3.4

2.9
2.8

2.9
2.5

3.4
2.4

public utilities
Wholesale trade
Retail trade
FIRE

4.2
2.1
3.7

4.7
2.4
3.7

4.3
3.5
4.2

4.3
2.9
4.2

3.7
3.2
3.6

Services

2.5

2.4

3.0

3.5

2.8
2.8
2.7

2.9
2.9
2.2

3.4
2.9
2.3

3.5
3.02.5

3.6
2.9
2.7

3.1

3.2

2.8

By occupation
White-collar
Blue-collar
Service occupations
Memo .

State and local governments

EMPLOYMENT COST INDEX OF HOURLY BENEFIT COSTS
FOR PRIVATE INDUSTRY WORKERS

(Twelve-month percent changes)
1995

1996

Sept.

Dec.

Mar.

June

Sept.

2.1
0.0
-0.1
1.4
7.8
3.3
0.9

2.2
0.1
0.1
3.6
4.7
3.4
1.2

1.6
-0.3
-0.3
-0.5
4.7
3.3
1.2

1.7
0.1
0.1
2.2
3.3
3.4
0.9

1.8
0.7
0.7
1.7
3.5
3.6
0.6

By industry
Goods-producing
Service-producing

1.0
2.7

1.7
2.4

1.3
1.7

2.0
1.6

1.9
1.8

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

2.9
1.1
1.1

2.6
1.7
1.0

1.8
1.4
0.5

1.8
1.9
0.5

2.1
1.6
0.4

2.5

2.6

2.7

2.2

1.9

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

Memo:
State and local governments

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

II-36

Components of ECI Benefits Costs
(Private industry workers; twelve-month percent change)

Supplemental Pay

Insurance Costs
Percent

Percent
*

:' \

20
2

S15

Nonproduction
bonuses
f .
,I

,'/

1984

Total

1986

1988

1990

1992

Health
5

1982

r l.

1994

, -5
1996

1;
1982

1984

1986

lj
1988

-1
1990

1992

1994

1996

Retirement and Savings

Paid Leave
Percent

Percent

1982

Percent

1984

1986

1988

1990

1992

1986

1988

1990

1992

State Unemployment Insurance

Workers' Compensation Insurance

1982

1984

1994

1996

1994

1996

II-37

Several recent surveys of firm benefit programs suggest four
main reasons for the slowdown. 1 5

First, recent years have seen a

tremendous shift from traditional fee-for-service plans to managed
care and preferred-provider plans, with the number of workers in
traditional plans falling from more than 70 percent in 1988 to
around 25 percent in 1995.

Second, over the same period, the

proportion of workers and dependents covered by employer-provided
health care fell from 78 percent to 74 percent.

Third, employers

have passed along an increasing share of premium costs to the
workers.

The fraction of full-time workers who pay no premium has

declined about 10 percentage points since 1988, and the average
fraction of the premium paid by workers rose from 25 percent to 33
percent in 1995 alone.

Fourth, increases in total health care
In

premiums have dropped sharply for all types of insurance plans.

part, this drop reflects an increase in deductibles and co-payments
paid by insurees.

However, price increases for health care services

also have slowed sharply, with the PCE price index for medical care
services excluding insurance premiums up about 2 percent over the
past year, compared with increases in the 3-1/2 to 4 percent range
in the previous few years.
Other measures of labor costs also show a modest uptick in
compensation inflation.

BEA estimates that compensation per hour in

the nonfarm business sector rose almost 4-1/2 percent in the third
quarter, up from 3.8 percent in the previous quarter.

On a four-

quarter-change basis, this measure of compensation has been up at a
3-3/4 percent to 4 percent pace since mid-1995.

This higher rate of

growth in compensation costs, coupled with relatively weak
productivity gains, has led to a pickup in the growth of unit labor
costs to about 3-3/4 percent over the same period.

Average hourly

earnings of production and nonsupervisory workers--the only wage
data available for the fourth quarter--were unchanged in October.
This series has been quite volatile in recent months, with twelvemonth changes fluctuating between 3 percent and 3-1/2 percent.
Nonetheless, the underlying trend in this series appears to be one
of gradual acceleration, broadly in line with the trends shown by
the ECI for wages of production workers.

15. The information summarized here comes chiefly from three
sources: the 1996 Hay/Huggins Benefits Report, the KPMG Peat Marwick
1996 Health Benefits Survey, and The American Hospital Association's
final report on recent trends in employer health insurance coverage
and benefits for 1996.

II-38

PUBLISHED LABOR PRODUCTIVITY
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1996

1995
19941

19951

1995:Q3
to
1996:Q3

Nonfarm Business Sector
.5

-1.1

1.8

-.4

Compensation per hour

2.5

4.1

3.3

3.7

4.4

3.8

Unit labor costs

2.0

3.8

5.2

1.5

3.2

4.8

3.6

Output per hour

1. Changes are from fourth quarter of preceding year to fourth quarter
of year shown.
2. 1996 Q3 data are unpublished BEA estimates.

Earnings of Production or Nonsupervisory Workers
(Twelve-month change)
Percent

ECI wages and salaries
- -S

-4

Average

1990

1991

1992

1993

1994

1995

1996

II-39

Prices
The incoming data on consumer price inflation have remained
favorable.

Although the CPI excluding food and energy rose

0.3 percent in September, this followed an increase of only
0.1 percent in August.
September.

The overall CPI also was up 0.3 percent in

The energy component, however, is likely to add

noticeably to the overall CPI in coming months.
The CPI for energy was flat in September after declining in the
preceding three months.

Heating oil prices were up sharply in

September owing both to low inventory levels and the run-up in crude
oil prices since early that month.
about flat.

However, motor fuel prices were

We would have expected the increase in crude oil prices

to show up in retail gasoline prices by now; but according to the
Lundberg survey, gasoline prices were just beginning to rise in late
October.

Gasoline margins--for both marketers and refiners--now

stand at extremely low levels, and margins on heating oil also are
on the low side.

The low gasoline margins seem to be, in part, the

result of ongoing price wars around Los Angeles, which have left
gasoline prices about 15 cents per gallon lower than elsewhere in
California.

Such low margins probably cannot be maintained very

long, however, and unless crude oil prices drop substantially,
outsized energy price increases are likely in coming months.
Consumer food prices have continued to play out the effects of
rising grain prices earlier in the year.

The CPI for food rose

another 0.5 percent in September and is up at about a 5 percent
annual rate over the past six months.

High prices for feed grains

earlier in the year continued to boost prices for dairy products,
meats, poultry, and eggs in September.

But grain prices have come

down sharply since midsummer, and this drop should lead to smaller
increases in consumer food prices by year-end.
The September data showed no sign of a pickup in the trend of
core inflation:

In the absence of a few special factors, core CPI

inflation probably would have registered an increase of 0.2 percent
rather than the 0.3 percent published figure.

Prices of new

vehicles rose 0.6 percent in September, owing in part to a largerthan-usual share of new-model-year vehicles in the September

II-40

CPI AND PPI INFLATION RATES
(Percent change)
From twelve
months earlier
Sept.
1995

Sept.
1996

1996
Q2

1996
Q3

-Annual rate-

All items (100.0) 1
Food (15.8)
Energy (6.7)
CPI less food and energy (77.5)
Commodities (23.9)
New vehicles (5.0)
Used cars (1.3)
Apparel (5.0)
Services (53.6)
Owners' equivalent rent (19.7)
Tenants' rent (5.8)
Medical care (6.1)
Auto finance charges (0.6)

2.5

3.0

2.7
-1.8
2.9

3.8
5.2
2.7

1.5

1.2

0.6

0.1

1.8
7.6
-1.3

2.3
0.3
-1.3

2.4
-5.8
-1.8

3.2
-4.1
-4.8

3.9
4.3
18.4
2.7

Aug.

Sept.

-Monthly rate-

2.3
5.6
-7.4
2.4

0.4
-0.6
0.1
-0.1
0.1
.0
-1.5

3.6

3.3

3.6

0.2

3.2
2.3
5.0
11.4

3.0
2.8
3.3
-0.9

2.8
2.6
3.1
0.3

2.7
3.0
3.3
13.7

0.1
0.1
0.2
1.8

2.9

2.8

1.5

0.3

PPI
Finished goods (100.0) 2
Finished
Finished
Finished
and

consumer foods (23.4)
energy (13.4)
goods less food
energy (63.2)

Consumer goods (38.5)
Capital equipment (24.7)
3
Intermediate materials (100)

Intermediate materials
less food and energy (82.6)
4
Crude materials (100)

Relative
Relative
Relative
Relative

importance
importance
importance
importance

weight
weight
weight
weight

4.2
7.1

2.4
13.1

8.6
-7.4

1.0
0.7

2.0

1.4

0.9

1.2

-0.1

2.2
1.6

1.6
1.1

1.4
0.1

1.1
1.2

.0
-0.1

4.8

0.5

1.8

-1.1

0.2

-0.6

0.1

6.1

-1.6

-1.3

2.8

10.2

17.5

14.6
20.9
-10.3

40.7
11.4
-11.0

7.4
-5.5
7.2

Crude food materials (44.7)
Crude energy (31.4)
Crude materials less
food and energy (23.9)
1.
2.
3.
4.

3.0
-0.8

for
for
for
for

16.7
-8.0
-8.2

0.2

-1.5

-0.3
0.7
0.1

-3.8
0.6
0.6

CPI, December 1995.
PPI, December 1995.
intermediate materials, December 1995.
crude materials, December 1995.

II-41

sample.16 In addition, apparel prices rose 0.5 percent on a
seasonally adjusted basis after larger declines in preceding months;
this monthly pattern apparently owes to the late introduction of
fall clothing lines this year.

Finally, airfares jumped nearly

3 percent in September following the re-introduction of a 10 percent
tax on airfares in late August. This tax is temporary, and Congress
failed to renew it before recess; if Congress does not renew the tax
when it reconvenes after the election, the tax will expire again in
January.
BROAD MEASURES OF INFLATION
(Four-quarter percent changes)
1993
03

1994
03

1995
03

1996
Q3

GDP chain price index

2.6

2.4

2.5

2.1

GDP deflator

2.6

2.3

2.6

1.9

Nonfarm business chain
price index

2.6

2.5

2.1

1.7

Gross domestic purchases
chain price index
Less food and energy

2.3

2.5

2.3

2.0

2.6

2.4

2.5

1.8

PCE chain price index
Less food and energy

2.5
2.9

2.7
2.7

2.1
2.4

2.2
1.8

PCE deflator
Less food and energy

2.5
2.9

2.6
2.7

2.2
2.3

2.0
1.7

CPI
Less food and energy

2.8
3.3

2.9
2.9

2.7
3.0

2.9
2.7

Median CPI

2.8

3.1

3.2

2.9

Product prices

Expenditure Prices

1. Excluding housing.
The quiescence of the CPI data was paralleled by the slow
growth of PCE prices, which rose at a 1.6 percent rate in the third
quarter.

Indeed, over the past four quarters, the PCE chain price

16. The Big Three announced prices for 1997 cars that are about
1-1/2 percent above prices for comparably equipped 1996 models-about 1 percentage point smaller than last year's price increases.
Of course, some of these price increases reflect quality
improvements. On November 13, the BLS plans to report its estimates
of quality changes for 1997-model vehicles.

II-42

SPOT PRICES OF SELECTED COMMODITIES
---------------- Percent change1

Current
price
($)

1994

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

Memo:
Year
earlier
to date

Dec. 26
to
Sept. 172

Sept. 172
to
Nov. 05

-3.5
-6.6
-12.9

-32.4
1.9
-17.1

7.6
-7.3
1.4

-29.3

1.7
7.2

-1.0
-1.9

-1.1
-4.9

-1.4
-10.0

-.5
-11.7

71.0
1.9

1995

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

.990
126.500
.636

64.9
2.9
73.5

Precious metals
Gold (oz.)
silver (oz.)

379.300
4.795

-1.7
-5.0

431.000
324.000

-37.1
1.5

-14.4
-6.1

73.2
18.4

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

21.890
.665
.653

15.6
32.4
12.7

16.8
7.7
22.6

21.1
16.5
8.6

-. 8

Livestock
Steers (cwt.)
Rogs (cwt.)
Broilers (lb.)

71.000
53.500
.606

-3.4
-12.9
-4.9

-5.7
27.5
10.7

9.1
20.4
15.5

-1.4
-1.8
-3.4

6.0
30.5
4.2

2.510
4.455
.702

-23.2
11.4
-19.6
38.5

57.4
24.0
29.0
-8.1

-6.6
-14.9
11.7
-5.9

-22.5
-3.2
-17.4
-5.6

-22.9
-15.3
-1.8
-17.3

1.270

153.1

31.7

-3.1

104.800
90.900
236.130
328.330

22.1
31.9
4.8
29.1

-1.3
-9.6
.2
3.7

-4.6

-5.9

-16.0

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

U.S. farm crops
corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)
Other foodstuffs
Coffee (lb.)
Memo :
JOC Industrials
JOC Metals
KR-CRB Futures
KR-CRB Spot

6.645

-39.1
-1.7
-1.8
3.3
-3.5

30.1
34.2
28.7

8.1
-. 5

-1.1

-3.4
-4.2

2.4
-6.2
-11.8
-3.4
-3.2

1. Changes, if not specified, are from the last week of the preceding year to
the last week of the period indicated.
2. Week of the September Greenbook.

II-43
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index, 1990=100

Metals

KR-CRB Spot Industrials
Ratio scale, index, 1967=100

KR-CRB Industrials

Sept.

Oct.
1996

KR-CRB Futures
Ratio scale, index, 1967=100

Sept.

Oct.
1996

210

Note. Weekly data, Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the KR-CRB spot price index consists entirely of industrial
commodities, excluding energy. The KR-CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is hold by CIBCR, 1994.

II-44

index excluding food. and energy increased only 1.8 percent,
1/2 percentage point less than over the preceding four quarters.

contrast, increases in the overall PCE chain price index, like the
overall CPI, have remained about constant, reflecting the energy
price increases earlier in the year.

Product prices--which include

energy but with a much smaller weight than in expenditure prices-also have continued to decelerate over this period.
In contrast to the situation with labor costs, there appear to
be few price pressures coming from materials.

The Journal of

Commerce industrial materials index has declined 4-1/2 percent since
the last Greenbook and remains below its year-ago level.

As noted

above, farm commodity prices have come down considerably in recent
months.

Prices of steel scrap and plywood also have come down since

the last Greenbook.

The PPI for crude materials less food and

energy moved up in September but remained 10 percent below its yearearlier level.

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1

Selected Financial Market Quotations 1
(Percent except as noted)
1996
Instrument

Change to Nov. 5, from:

Feb.

July

FOMC,*

low

high

Sep. 24

Feb.

July

FOMC,

low

high

Sep. 24

5.39

-0.07

0.09

5.21
5.40
5.64

-0.18
-0.33
-0.50

-0.12
-0.23
-0.38

5.50
5.59

-0.13
-0.18

-0.15
-0.18

1-month
3-month
6-month

5.44
5.59
5.83

-0.16
-0.21
-0.39

-0.17
-0.17
-0.30

Eurodollar deposits'
1-month
3-month

5.38
5.56

-0.13
-0.18

-0.13
-0.12

Bank prime rate

8.25

0.00

6.62
7.06
7.19

-0.76
-0.78
-0.59

-054
-0.55
-0.42

Municipal revenue (Bond Buyer)

6.24

-0.30

-0.16

Corporate-A utility, recently offered

8.23

-0.58

-0,43

10.36

-0.54

-0 13

8.42
6.01

-0.64
-0.41

-0.36
-0.23

Nov. 5

Short-term rates

Federal funds2
3

Treasury bills
3-month
6-month
1-year

Commercial paper
1-month
3-month
Large negotiable CDs4

Intermediate- and Long-term Rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year

High-yield corporate 6
Home mortgages7
FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate
Record high

1996

Percentage change to Nov. 5, from:

July

FOMC,

Record

July

FOMC,

Level

Date

low

Se.
e24
24

Nov 5
Nov5

hih

low

Sep. 24

6094.23

10/18/96

5346.55

5894.74

6081.18

-0.21

13.74

3.16

NYSE Composite

378.43

11/5/96

336.07

365.51

378.43

0.00

12.60

3.53

S&P 500 Composite

710.14

11/5/96

626.65

686.48

714.14

0.56

13.96

4.03

1258.10

10/15/96

1042.37

1211.47

1229.07

-2.31

17.91

1.45

Wilshire 5000
6943.80
10/18/96
6099.34
6723.87
6920.29
-0.34
13.46
1. One-day quotes except as noted.
2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date November 6, 1996.
3. Secondary market
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6 Merrill Lynch Masterl high bond index composite.
7 Quotes for week ending Friday previous to date shown.
* Figures cited are as of the close on Septmeber 23.

2.92

Stock exchanee index
Dow-Jones Industrial

NASDAQ(OTC)

Selected Interest Rates
Short-Term
Percent
Monthly

--...
-.........

Percent

Daily
FOMC

Prime rate (daily)
Federal funds
Three-month Treasury bill
Discount rate (daily)

9/24

Federal funds

., *

.'*

*- .
Three-month T-bill

1990

1991

1992

1993

1994

1995

1996

9/20

9/27

10/4

10/11

10/18

10/25

11/1

Long-Term
Percent

Percent

Monthly

I1990
1990

1991
1991

12
1992

13
1993

1994

1995
1995

1996

9/20

9/27

10/4

10/18
10/11
1996

10/25

11/1

DOMESTIC FINANCIAL DEVELOPMENTS

The FOMC's decision at its September meeting to keep the
federal funds rate at 5-1/4 percent triggered a rally in most
financial markets, with money market interest rates falling about
10 basis points and long-term rates edging lower.

Subsequently,

intermediate- and long-term interest rates have declined further as
incoming data have generally confirmed the view that economic
has slowed and inflation has remained

subdued.

growth

Currently, the

thirty-year Treasury bond rate is 6.6 percent, down about 40 basis
points from the September meeting.

Allowing for typical term

premia, the prevailing structure of rates suggests that market
participants have mostly ruled out System tightening in the months
ahead.
The rally in bond markets was accompanied by further price
increases in the equity markets.

The Dow and S&P 500 indexes have

risen 3 percent to 4 percent since the previous FOMC meeting,
bringing their cumulative gains from the end of 1995 to
and 16 percent
had recorded

respectively.

larger gains

19 percent

In contrast, the NASDAQ index

(which

in August and September) has risen less

than 1-1/2 percent since the September meeting;

still, it is up

17 percent on the year.
Overall growth of credit appears to have remained moderate in
recent months.

Business borrowing from banks and in the bond market

picked up in September and October after a lull in the summer; the
pickup was offset in part, however, by a sizable runoff of
commercial paper. Growth of household debt evidently has slowed a
bit, reflecting a further deceleration in consumer credit and some
slowing of mortgage borrowing from its first-half pace.
local government debt

State and

contracted in the third quarter, while

borrowing by the federal government picked up more than seasonally
from its weak second-quarter pace.

Stronger expansion of bank

credit in the past two months has been funded with wholesale
liabilities, boosting M3

growth markedly relative to that

of M2.

Bank Credit and the Monetary Aggregates
The growth of bank credit picked up a percentage point in
October but, adjusted for mark-to-market accounting effects, was, at

III-1

III-2

Treasury Yield Curve and Selected Short-Term Futures Rates
Treasury Yield Curve

Change inTreasury Yields
since 09/23/96

Percent
-

7.5

Basis points

09/23/96

-20
11/05/96

-40

-60
'1

1 3 5

10
20
Maturity in years

.25

Federal Funds Futures Rates

Percent

3
5
7 10
Maturity in years

3-month Eurodollar Futures Rates

Percent
i

7.5

7.0

09/23/96
09/23/96

.. **"

09/24/96

6.5

09/24/96
6.0

11/05/96
-

11/05/96

5.5

Oct.

Nov.

Dec.
Jan.
Contract months

Feb.

Dec-96

Mar-97

Note. Changes are taken from levels of the day before the previous FOMC meeting.

.i
Sep-97
Jun-97
Contract months

5.0
Dec-97

III-3

6-3/4 percent, little changed from September. 1

Expansion in both

months was entirely accounted for by loan growth.

Business loans

were up at an annual rate of more than 14 percent in October after
rising at a 22-1/2 percent annual rate in September. Reasons for
the huge surge in business lending at banks have been elusive,
although it followed a couple of months of anemic expansion when
external financing needs likely were rising with a buildup of
inventories.

The increase has been widespread among large, small,

and foreign banks, and while linking the gain to specific types of
business spending is not possible, some of the increase in September
appears to be attributable to unusually strong demands to finance
mergers and acquisitions.

In addition, preliminary results from the

November Senior Loan Officer Opinion Survey suggest that banks have
continued to ease standards and terms for business loans since
August.2
Growth in real estate loans at banks was weak in October, as it
has been for most of this year, apparently reflecting the tendency
of banks to securitize home mortgages.

The home equity component of

real estate loans, however, has grown much more rapidly of late,
averaging around a 13 percent annual rate in September and October.
Meanwhile, the retrenchment in consumer lending became more
pronounced as loans held by banks contracted slightly in October;
even after adding back loans that had been securitized, bank
consumer loans grew at an annual rate of only about 1-1/4 percent

last month.
The recent growth in bank loans has been funded in large part
with wholesale deposits. M3, bolstered by substantial increases in
large time deposits, expanded at a 10-1/2 percent annual rate in
October, after a 7-1/4 percent rise in September.

The recent

strength in M3 has pushed this aggregate to the top of its 2 percent
to 6 percent annual growth range for the year. M2 growth stayed at
3-1/4 percent in October, again reflecting some runoff in liquid
deposits, which internalize shifts of funds related to sweep
accounts.

The volume of new retail sweeps set a record in October

of nearly $15 billion.

1. Bank credit has been adjusted to remove the effects of
accounting rules that require the booking of changes in the market
value of certain bank securities and the booking of revaluation
gains in derivative portfolios.
2. Results of the Senior Loan Officer Opinion Survey are
discussed in more detail in the appendix.

III-4

Commercial Bank Credit
(Percentage change; seasonally adjusted annual rate)

Type of credit

1. Bank credit - reported

1995

Aug

Sep

Oct p

1996p
(billions of $)

8.8

2.6

1.3

-1.8

5.0

6.0 3,711.9

- adjusted 1

7.1

4.0

2.0

-0.8

7.0

6.8

3,654.5

Securities - reported

4.1

-2.7

-6.4

-13.5

-6.8

-2.1

967.6

- adjusted'

-2.2

2.4

-4.3

-10.3

0.1

0.5

910.3

U.S. government

-3.3

1.0

-2.3

-10.0

2.4

-6.8

699.7

Other 2

28.8

-11.5

-17.0

-22.5

-30.4

10.8

268.0

10.8

4.6

4.1

2.4

9.3

8.9

2,744.2

11.6

5.1

6.7

2.6

22.4

14.2

766.9

8.5

3.2

7.3

1.8

2.4

1,113.8

Loans 3

Business

Real estate

10.

Home equity

5.2

-0.5

3.0

9.0

10.5

16.3

82.1

11.

Other

8.7

3.5

3.3

7.2

1.2

1,031.6

10.7

4.9

5.8

3.3

9.3

-0.7

517.7

17.6

9.2

7.8

5.1

8.4

1.2

673.4

7.7

-1.1

-14.8

4.7

33.5

345.9

12.

Consumer - reported

13.

- adjusted 4

14.

Other 5

Note. Adjusted for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates
shown are percentage changes in consecutive levels, annualized but not compounded.
1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115).
2. Includes securities of corporations, state and local governments, and foreign governments and any trading account assets that
are not U.S. government securities.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans, loans to farmers, state and local governments, and all others not elsewhere classified. Also includes
lease financing receivables.

III-5

MONETARY AGGREGATES

(Based on seasonally adjusted data)
1996
1995

1996
Q3

Aug.

Sept

Aggregate or component

1995:Q4
Level
to
(bil. j$
Oct. Oct. 96 Oct. 96
(p)
(p)
(p)

Percentage change (annual rate) 1

Aggregate

-1.8
3.9
5.8

-0.7
3.B
5.1

4. Currency

5.4

3.7

5. Demand deposits

1.4
-11.1

-9.6
3.8
4.8

-8.4
3.3
7.2

-18.1
3.3
10.4

-5.2
4.0
6.0

1075.3
3775.2
4809.5

7.9

7.5

8.7

5-4

390.2

10.6

-2.0

-8.8

-5.9

-26.6

2.2

396-5

-18.5

-30.2

-31.7

-32.9

-42.5

-24.0

280.2

5.7

6.9

9.5

8.1

12.0

8.1

2700.0

-3.3
15.0
18.9

11.2
-3.0
9.3

8.0
1.9
13.7

10.8
4.9
14.9

7.0
4.5
17.4

15.8
5.8
14.5

12.0
0.8
13.3

1247.8
941,1
511.0

14.5

10.2

8.7

8.6

22.4

37.4

14.2

1034.3

15.5

13.8

15.7

9.6

22.6

53.1

17.7

481-1

23.1
4.6
12.0

8.8
11.6
2.9

18.5
-16.4
4.6

20.4
-8.0
21.4

25.7
18.1
22.2

7.8
34.9
65.5

19.0
1.7
13-8

264.4
187-3
104.4

4.1

2.1

5.8

6.2

4.1

3.0

3.5

6.0

4.6
3.7

-0.5
6.8

3-0
4.2

445.b
3378.7

Selected components

6. Other checkable deposits
7. M2 minus M1 3
Savings deposits
Small time deposits
Retail money market funds
11. M3 minus M2

Large time deposits, netS
Institution-only money market
mutual funds
RPs
Eurodollars
Memo
16.
17.

Monetary base
6
Household M2

Average monthly change (billions of dollars) 7
Memo

Selected managed liabilities
at commercial banks:
18.
Large time deposits, gross
19.
Net due to related foreign
institutions
20. U.S. government deposits
at commercial banks

6.6

-0.1

0.0

8.0

1.7

9.7

-3.7

519-6

10.6

21.7

1.1

-1.0

3.0

-3.4

. -

243.6

17.9

1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. Sum of seasonally adjusted Ml, retail money market funds, savings deposits, and small time deposits.
3. Sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted separately.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
6. M2 less demand deposits
7. For the years shown, 'average monthly change" is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
p--Preliminary.

III-6

Net Sales of Selected Mutual Funds
(Billions of dollars; quarterly and annual data at monthly rate)
1996

Memo:
Sept.
assets

1994

1995

Aug.

Sept.

Oct.e

11.0

12.2

23.9

14.2

18.3

19.8

13.4

1621.6

7.2

11.1

18.9

11.5

14.8

16.5

10.3

1359.3

Aggressive growth

2.2

3.2

6.0

3.3

4.6

4.9

3.2

264.1

Growth

2.0

3.5

5.1

2.6

4.0

4.4

1.7

446.1

4.2

4.4

7.7

5.6

6.0

7.5

5.8

643.8

3.8

1.2

5.0

2.7

3.5

3.3

3.0

262.3

Bond funds

-1.4

2.0

3.8

2.6

2.0

4.9

1.0

854.1

High-yield

0.2

0.9

1.0

1.6

2.0

1.6

0.8

72.5

Income

2.2

1.7

2.9

1.6

1.3

2.9

1.5

330.2

-3.8

-0.6

-0.1

-0.6

-1.3

0.4

-1.3

451.4

Stock funds
Domestic

Growth & income
International

Other

I. Includes precious metals funds, not shown elsewhere.
2. Calculated as the sum of "Growth and income" and "Income equity" in the ICI data.
e Estimate.
Source. Investment Company Institute.

Even as M2 growth continued to be subdued in October, net sales
of mutual fund shares slowed.

Inflows to equity funds declined

following a pickup in activity in August and September; nonetheless,
net sales amounted to $13-1/2 billion, about the same rate of inflow
as in the third quarter as a whole.

In October, investors' demand

for all types of equity funds was down from the previous month, but
the dropoff was greatest for the more speculative types of funds.
Net sales of bond mutual funds were $1 billion in October, down from
Sales of all
the $2-1/2 billion monthly rate in the third quarter.
major types of bond funds weakened last month.
Although data are incomplete, commercial banks apparently
recorded another increase in profits in the third quarter. Reports
from forty-five of the top fifty bank holding companies indicate
that net income rose about 3-1/2 percent from a year earlier, a
marked slowdown from the 13 percent year-over-year expansion for the
top fifty bank holding companies recorded in the third quarter of
1995.

Profits were held down in the third quarter by the one-time

III-7

assessment required of those banks with deposits insured by the
Savings Association Insurance Fund (SAIF).3 On the other hand.
the shift by banks toward loans and away from securities provided a
boost to net interest margins. Banks also continued to score gains
in fee income, a major source of profit growth over the past several
years. A number of banks increased loss provisions, although the
ratio of nonperforming loans to total loans actually fell at many
banks from their year-earlier levels.
Business Finance
Gross bond offerings by nonfinancial corporations rebounded in
the second half of September and strengthened further in October
(table). In part, the recent increases have reflected the typical
seasonal pickup that occurs after Labor Day, but the decline in
long-term interest rates since mid-September also appears to have
encouraged more bond funding. Indeed, roughly one-fourth of
October's strong issuance came in the final three days as long-term
rates shed nearly 20 basis points. Meanwhile, commercial paper of
nonfinancial firms declined in October for the fourth straight month
(chart, lower left panel). A number of issuers have paid down
commercial paper debt with proceeds from asset sales, while others
have used repatriated profits that had accumulated in Puerto
Rico.
Gross equity issuance by nonfinancial firms, which slowed in
response to the market correction in July and remained low in August
and September, posted a sharp increase in October (table). The
rebound in equity issuance reflected the recent gains in stock
prices as well as renewed interest in initial public offerings.
First-day price changes for IPOs in September rebounded to about

3. The total assessment of $4,7 billion applies to all
institutions holding SAIF-insured deposits. Commercial banks will
bear about $1.2 billion of the total assessment. The after-tax cost
will be somewhat less because the assessment reduces banks' taxable
income. Overall, the SAIF assessment appears to have lowered bank
profits about 6 percent in the third quarter, and thus could account
for a significant part of the slowdown in the four-quarter growth of
commercial bank profits. The payment is due November 29, but it had
to be booked as a third-quarter expense.
4. Many large U.S. corporations invested profits from their
Puerto Rican operations in a fund created to support Puerto Rican
economic development; these investments were encouraged largely by
tax credits. The favorable tax treatment was eliminated, however,
in the minimum wage bill enacted in late August. Since then, some
firms have withdrawn their Puerto Rican funds and used the cash to
pay down commercial paper liabilities.

III-8

20 percent, double the average increases in the previous two months
(chart, lower right panel).
Merger activity continues at a record-setting pace and involves
deals in a wide range of industries. Although pending mergers will
rely heavily on stock swaps for financing, the sheer magnitude of
ongoing activity will keep equity retirements relatively high.
These retirements plus the continued brisk pace of share repurchases
will almost certainly cause nonfinancial firms to continue to retire
equity on net in the near term.5
Stock prices have increased since the September FOMC meeting,
with the Dow and S&P 500 indexes up 3 percent to 4 percent to record
highs and the NASDAQ Composite up about half as much (chart, upper
panel).
It appears that the stock market's continued strong
performance has been supported by the perception that because
inflation remains subdued and economic growth is moderating, the
likelihood that monetary policy will be tightened in the near term
is low. In addition, earnings have continued to be healthy.
Earnings of firms in the S&P 500 were up about 8 percent from four
quarters earlier, decelerating from the 10 percent to 12 percent
range over the preceding several quarters. Nonetheless, the
twelve-month-forward price-to-earnings ratio for the S&P 500
continued to climb and, at just under 16 in October, eclipsed its
1987 high (middle panel).
News on the credit quality of nonfinancial corporations remains
largely favorable. Even though the rate of business failures among
nonfinancial firms edged up in the third quarter, it remains quite
low (lower left panel). Moreover, estimated defaults on junk bonds
in the third quarter were at the historically low rate of less than
1 percent (lower right panel), and spreads on junk bonds remain very
narrow, although they increased sharply on a handful of lower-rated
junk bond issues following the release of disappointing
third-quarter earnings reports for those companies. The value of
junk debt upgraded by Moody's in the third quarter exceeded the
value of that downgraded by better than two-to-one, and the value of

5. The recently announced acquisition of MCI by British
Telecommunications alone results in domestic equity share
retirements of around $26 billion. Even though a large portion of
the deal involves a stock swap, the acquisition by a foreign company
implies that domestic nonfinancial equity is retired, with foreign
equity used as payment. The MCI share retirements probably will not
occur before the second half of 1997, as the merger will be subject
to an extensive review by regulators in the United States.

III-9

GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS 1
(Billions of dollars; monthly rates, not seasonally adjusted)
1996
Aug.

Sept.

Oct. P

48.48
6.76
41.73

44.43
5.73
38.70

60.58
6.70
53.88

60.20
11.97
48.23

10.33
4.45
5.88

4.60
1.97
2.63

3.40
1.94
1.46

4.23
2.41
1.82

8.06
4.46
3.60

10.73

13.77

10.57

10.36

11.43

16.83

6.45
3.02
1.95
1.07

6.31
5.57
3.26
2.31

5.65
3.65
1.81
1.84

5.25
4.11
2.25
1.86

5.07
4.31
1.77
2.55

9.34
5.53
2.10
3.43

1.71
30.81

3.59
37.20

2.16
31.16

2.34
28.34

2.48
42.45

3.91
31.40

1994

1995

41.29
5.49
35.80

47.64
6.10
41.54

64.87
13.91
50.96

corporations
Nonfinancial
Stocks 2
Initial public offerings
Seasoned offerings

3.10
1.14
1.96

4.39
1.70
2.69

Bonds

7.99

Type of security
All U.S. corporations
Stocks 2
Bonds

By rating, bonds sold in U.S.
4.41
Investment grade
2.65
Speculative grade
2.01
Public
.63
Rule 144A
Financial corporations
Stocks 2
Bonds

2.39
27.81

Note. Components may not sum to totals because of rounding.
1. These data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
3. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
p Preliminary.

Average First-Day Price Change of IPOs

Commercial Paper Issued by Nonfinancial Firms

(Change inoutstandings over period shown)
Billions of dollars, monthly rate

Percent
4

3
2
1
+

0O
1

2
3
4
1994

1995

1996

1995

III-10

Selected Stock Indexes

Jan.

Feb.

Mar.

Apr.

May

June
1996

July

Index, Dec. 29, 1995=1

Aug.

Sept.

Oct.

Nov.

12-Month Forward Price-Earnings Ratio for S&P 500
Monthly

I
I
1978

I
I
1982

1980

I
1984

I
1986

I
1988

1990

I 1 I
I
1992

I
1994

I
1996

Failed-Business Liabilities

Default Rate on Junk Bonds

(As a percentage of total liabilities)

(Ratio of junk bond defaults to junk bonds outstanding
at end of previous year)

Percent
SNoian-l

Percent
1.25

Nonfinandal

1
:1
~

~'
~:

"
~

0.75

~
f:

0.5

1M1
~

03-

C~t:

'f :S~
t.
s~

e:+
.

P- - - _ _

1990

1993

'*A an annual rate.
"Based on data through August and at an annual rate.
Source. Dun & Bradstreet.

0.25

0
1996

1985

1989

1993

'At an annual rate.
Source. Edward Altman, CS First Boston.

III-11

junk debt currently under review for possible upgrades exceeds that
under review for possible downgrades by more than three-to-one.
Finally, upgrades predominated among merger-related ratings changes
in the third quarter, suggesting that Moody's continues to view
recent mergers as value-enhancing rather than leading to credit
quality problems.
Household Sector Finance
Total household borrowing appears to have slowed in the third
quarter, reflecting a moderating pace in the growth of both mortgage
and consumer credit.

Preliminary indications are that total

consumer credit contracted slightly in September, reducing thirdquarter growth to a 5 percent annual rate.

Growth in revolving

credit slowed to just under a 10 percent rate during the quarter,
while the nonrevolving forms of consumer credit were up only about 2
percent on balance.
Data available for the third quarter suggest that growth in
mortgage borrowing slowed marginally from its first-half pace.
Although growth in real estate loans at commercial banks slowed
substantially in September, the increase for the third quarter as a
whole, at a 3-1/4 percent rate, was about the same as in the second
quarter.

However, net issuance of federally related mortgage

securities in the third quarter declined somewhat from its strong
second-quarter pace, and direct portfolio holdings of Fannie Mae and
Freddie Mac were unchanged.
In response to increased delinquency and charge-off rates on
consumer loans this year, commercial banks generally tightened
credit availability to consumers a notch during the third quarter.
About half of the respondents to the Senior Loan Officer Opinion
Survey in early November said that they had tightened approval
standards for credit cards, and a fourth said they had done so for
other types of consumer loans.

A small net fraction of banks

indicated that they were less willing to make consumer loans in
November than they had been in August (chart).

In contrast to the

tighter stance toward consumer loans, banks on balance had eased
standards for home equity loans and kept standards about unchanged
for other home mortgage loans.
Although comprehensive data on delinquency and charge-off rates
for the third quarter are not yet available, it appears that the
delinquency experience on consumer loans may have begun to
stabilize.

In their third-quarter earnings commentaries, some banks

III-12

GROWTH OF CONSUMER CREDIT
(Percent change: seasonally adjusted annual

rate)
Memo:
Outstanding
Sep.,

1996

Type of credit

Total
Auto
Revolving
Other

1994

1995

14.5
13.4
18.2
11.8

14.2
10.7
22.0
9.1

12.0
8.8
16.9
9.5

7.6
9.4
12.8
-.6

Q3 e

Aug.

5
5-1/2
9-1/2
-1-1/2

5.2
2.2
6.7
6.3

1996

(billions of
Sep.pe
dollars) pe
-2-1/2
-3
2-1/2
-9

1.173
372
456
345

r Revised.
pe Preliminary estimate.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)
1995
Nov.

1994

1995

At commercial banks 1
New cars (48 mo.) 1
Personal (242 mo.)
Credit cards

8.1
13.2
n.a.

9.6
13.9
16.0

9.4
13.8
15.8

At auto finance cos.
New cars
Used cars

9.8
13.5

10.8
14.0

Type of loan

May

1996
July

Aug.

Sep.

9.1
13.6
15.8

8.9
13.5
15.4

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

9.1
13.4
15.7

n.a.
na.
n.a.

9.9
13.3

9.4
13.3

9.8
13.8

10.5
13.9

Feb.

1. Average of "most common" rate charged for specified type and maturity during
the first week of the middle month of each quarter.
2. Stated APR averaged across all credit card accounts at all reporting banks.
3. Average rate for all loans of each type made during period, of any maturity.
n.a. Not available.

Bank Willingness to Lend

Consumer Credit Growth Rate
Percent, saar

Index
-1 100
Quarterly

I ^A
1 1 1 1 1 I I 1 1 11
1972

1976

1980

1
1984

II
1988

I 1 I I II
1992 1996

Note. Weighted responses of banks more willing to make
consumer loans minus those less willing.

1972

1976

1980

1984

1988

1992

1996

III-13

reported that credit card losses had leveled off, and several large
bank issuers of credit cards reported sizable earnings increases.
MBNA, the second largest bank-card issuer, achieved a 33 percent
year-over-year gain in net income; credit card specialists First
USA, Capital One, and Advanta all had double-digit percentage
increases in earnings. Each reported a charge-off rate that was
higher than in the year-ago quarter but little changed from the
previous quarter.

The gains in earnings in the face of relatively

high charge-offs were generally attributed to strong loan growth
and, in some cases, to the repricing of receivables upon expiration
of low introductory interest rates,
Treasury and Agency Financing
The staff anticipates that the Treasury will finance the
projected $55 billion fourth-quarter fiscal deficit by borrowing
about $39 billion from the public and by drawing down its cash
balance by around $14 billion.

About a quarter of the funds raised

this quarter will be from weekly bill auctions.

Although the size

of these auctions has been increasing, the Treasury will also likely
need to issue three cash management bills before year-end.

One of

these bills, for $13 billion, will be auctioned in conjunction with
the midquarter refunding, which includes $18.5 billion of three-year
notes, $10 billion of ten-year notes, and $10 billion of thirty-year
bonds.

The overall package will raise the average maturity of the

debt slightly.

Since the Treasury's announcement of its intention

to shorten the average maturity of public debt in May 1993, the
average has fallen from 73 months to about 62 months most recently.
On September 25,

the Treasury provided details of the new

indexed securities program.

A ten-year note will be issued in

January 1997, and other maturities will be added in quarterly
auctions in April, July, and October.

The Treasury will offer

indexed securities through a uniform price auction.

The structure

of the securities is similar to that of the Canadian Real Return
Bonds.

That is, the value of the principal will be adjusted for

inflation using the not-seasonally-adjusted consumer price index,
and every six months the security will pay interest equal to a fixed
percentage of the inflation-adjusted value of the principal.

The

bonds will be eligible for the STRIPS program as of the first issue
date.
Issuance of debt by government-sponsored enterprises continued
at a subdued rate in September, compared with the brisk pace earlier

III-14

TREASURY FINANCING
/Tr

-. A

1 1 ^

__. -r 2.11

DBillions ofr

_- -

ollars;

total for

period)

1996
Nov. p

Dec. p

-34.0

-40.7

19.7

38.5
3.7
34.8
10.4
24.3

12.5
3.7
8.8
-1.7
10.4

40.6
0.0
40.6
36.5
4.0

-14.6
0.0
-14.6
-24.5
9.9

-6.2

14.4

18.6

5.0

-9.1

-14.0

0.1

2.2

2.9

-4.8

4.1

38.0

44.2

29.8

25.6

20.7

29.8

Item

53.7

-33.3

-55.1

Means of financing deficit
Net cash borrowing and
repayments (-)
Nonmarketable
Marketable
Bills
Coupons

-23.5
2.1
-25.6
-38.3
12.7

39.4
-1.0
40.3
-12.4
52.7

Decrease in cash balance

-16,2

Other 1

Total surplus/deficit

(-)

Memo:
Cash balance, end of period

Q4P

Oct.e

Note. Data reported on a payment basis. Details may not sum to totals
because of rounding.
1. Accrued items, checks issued less checks paid, and other transactions.
Projection.
p
e
Estimate.

NET CASH BORROWING OF GOVERNMENT-SPONSORED ENTERPRISES
(Billions of dollars)
1996

Agency
FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA

10.0
19.1
1.6
2.8
-1.0

5.7
3.6
10.8
-2.1
0.2

July
1.9
3.2
2.1
-1.9
1.3

Aug.
2.7
2.2
1.9
-0.1
0.4

Sep.
1.1
-1.8
6.8
-0.1
-1.5

Note, Excludes mortgage pass-through securities issued
by FNMA and FHLMC.

III-15

in the year.

Spreads of GSE-issued securities over comparable

Treasury securities remain stable, at about 15 basis points for
five-year notes and around 25 basis points for ten-year notes.
Legislation was enacted on September 30 permitting the Student
Loan Marketing Association (Sallie Mae) to reorganize, after
shareholder approval, into a private, state-chartered holding
company.

Sallie Mae management must develop a privatization plan

that would transfer existing financial assets to a GSE subsidiary of
the new holding company; this GSE subsidiary must be dissolved no
Loans made after the reorganization

later than September 30, 2008.

plan is in effect would become assets of a non-GSE subsidiary.

The

status of the current outstanding debt obligations of Sallie Mae
would not be affected by the privatization.
Municipal Financing
Gross offerings of long-term municipal debt rose in October
from the pace in September, reflecting a sharp pickup in new capital
issuance from the seasonal lull in the third quarter;
volume fell slightly (table).

refunding

Trade reports indicate that yields on

long-term revenue bonds would need to fall about 50 basis points, to
around 5-1/2 percent, before there would be a sizable increase in
refunding volume from the low October level.
The ratio of yields on long-term tax-exempt bonds to comparable
Treasuries edged up in October from the relatively low levels in
August and September.

The yield ratio may have been boosted

GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Billions of dollars; monthly rates, not seasonally adjusted)
1996
Sept.

Oct.

1993

1994

1995

27.2

16.1

14.9

20.4

17.1

15.7

18.9

1
Long-term
Refundings

23.3
15.7

12.8
4.0

12.1
3.6

15.6
4.5

11.9
3.9

11.6
3.8

15.7
3.0

New capital

7.6

8.8

8.5

11.1

8.0

7.8

12.7

3.9

3.3

2.8

4.8

5.2

4.1

Total tax-exempt

Short-term

Total taxable

Note. Includes issues for public and private purposes.
1. Includes all refunding bonds, not just advance refundings.

3.2

III-16

slightly by the heavier issuance volume in October, but it remains
fairly low because of diminished concerns that federal tax reform
would adversely affect the tax-exempt status of municipal bonds.
Thus far, enactment of federal welfare reform has not hurt the
credit ratings of states despite fears expressed by some analysts
that the new law would impose a heavy fiscal burden on the states.
In the view of Standard and Poor's, the transition period is long
enough to provide time for most states to implement the changes
outlined in the legislation without severely straining their fiscal
situation.

Nonetheless, states with large immigrant populations--

notably New York, California, Texas, and Florida--may face serious
strains because the new legislation will reduce federal support for
legal immigrants.

APPENDIX

THE NOVEMBER SENIOR LOAN OFFICER OPINION SURVEY
ON BANK LENDING PRACTICES
The November 1996 Senior Loan Officer Opinion Survey on Bank
Lending Practices posed questions about bank lending standards and
terms, loan demand by businesses and households, and credit-scoring
models used in credit card lending operations.
The survey results show some continued easing of credit supply
for businesses, but some pullback for households.
Several banks
reduced standards on business loans and many eased terms. However,
a large number of banks raised standards for credit card lending,
and many tightened standards for other consumer lending.
Only a few
banks tightened standards on home mortgage applications, while
several eased standards on home equity loans. Terms on consumer
loans were also firmed by many banks.
The survey found a moderation in demand for credit from both
businesses and households.
Banks reported little change in demand
for commercial and industrial loans, although many experienced an
increase in demand for commercial real estate loans.
Several banks
reported weaker demand from households, including demand for
mortgages and for consumer loans.
Special questions on the survey examined banks' use of creditscoring models for credit card lending. The responses suggest banks
use these models to assist in many aspects of their lending process,
from targeting solicitations to setting terms. The models are
designed to predict a variety of events, including delinquencies,
defaults, and expected profitability. However, the majority of
respondents said their models had been too optimistic over the past
year, predicting better outcomes than had actually been realized.
Lending to Businesses
The survey found a slight easing of lending standards for
business loans (chart). As in August, about 5 percent of the
domestic respondents eased standards over the past three months for
loans to large firms. A similar fraction of foreign branches and
agencies, which typically lend to large firms, eased standards.
Around 10 percent of the domestic respondents eased standards for
loans to middle-market firms and to small firms, larger fractions
than in August. The fractions of banks that said they had eased
Forty percent of the domestic
terms are also larger than in August:
respondents reported narrowing spreads over base rates and lowering
costs of credit lines for large firms; about 30 percent reported
narrowing spreads for smaller borrowers. Smaller fractions eased
other terms, including size of credit lines, loan covenants, and
collateralization requirements. About a third of the foreign
respondents reported easing terms. Most of those banks that eased
their standards or terms for business loans said they did so because
of more aggressive competition from other banks and from nonbank
Furthermore, between 20 percent and 40 percent of the
lenders.
respondents reported greater sensitivity to changes in terms at
their banks of their loan demand from large, middle-market, and
small firms, with the largest fraction reporting increased
sensitivity for middle-market firms.
A special question asked banks why spreads of lending rates
over base rates on smaller loans remained elevated relative to their
levels in the late 1980s whereas spreads on larger loans were not so
elevated. Banks offered a wide variety of explanations for the
wider spreads, but by far the most popular was that the pricing of
III-A-1

III-A-2

these loans has become more accurate and now reflects more fully the
costs and risks associated with them. Many respondents also said
that banks are now willing to lend to a riskier class of borrower
than they were in the late 1980s.
Several respondents said making
small business loans is now more costly, in part because of
increased regulation. Those that cited increased regulation pointed
most commonly to Community Reinvestment Act requirements as the
source of the higher costs.

Despite the rapid growth in commercial and industrial loans at
all commercial banks registered in September and October, reporting
banks said that demand for these loans was little changed over the
past three months. On net, a couple of the respondents, less than 5
percent of the sample, reported increased demand from large and from
small firms, and one bank, on net, reported decreased demand from
middle-market firms. About one-fourth of the foreign respondents,
however, reported stronger demand.
In August, between 10 percent
and 20 percent of the domestic respondents indicated they had
experienced increased demand. Banks attributed changes in demand to
variations in their customers' investment in plant and equipment,
inventory financing needs, and, for larger customers, merger and
acquisition financing needs.
Domestic and foreign respondents indicated little change in
standards for construction and land development loans. About 15
percent of the domestic respondents and 30 percent of the foreign
respondents experienced an increase in demand for these loans.
Lending to Households
The survey found slight evidence of tightened standards for
home mortgage applications over the past three months, as about 5
percent of the banks, on net, indicated tighter standards (chart).
Twelve percent of the banks reported weaker demand for these loans.
The August survey also had found little evidence of a change in
standards, but about twice as many banks indicated reduced demand.
The survey found continued evidence of more stringent consumer
lending practices. More than half the banks tightened their
standards for approving credit card applications, and a quarter
tightened standards for other consumer loans, similar fractions to
those found on the August survey. About 5 percent of the banks said
they were less willing to make consumer installment loans than they
were three months ago, the third consecutive survey showing a slight
net fraction indicating a decline in willingness. Several banks
also tightened terms on their credit cards over the past three
months:
About one-third of the respondents lowered credit limits,
and about one-fifth raised spreads over market rates. Banks
reported no change in the minimum fractions of outstanding balances
required to be repaid. Banks also reported no change in terms on
other consumer loans, including maximum maturities, spreads of loan
rates over market rates, and minimum required down payments. Ten
percent of the respondents reported weaker demand for consumer loans
over the past three months.
The evidence of tighter standards and terms as well as the
weaker demand for consumer loans found by the survey is consistent
with the pronounced slowdown in the growth of consumer credit that
occurred in the second half of this year. At the same time, nearly
20 percent of the respondents said they had eased standards for home
equity, an area of household credit that has grown significantly in
recent months.
Credit-Scoring Models and Credit Card Lending
A series of special questions asked about banks' use of
credit-scoring models in their credit card lending operations.

III-A-3

Banks most commonly use the models to select candidates for credit
card solicitations and to approve applications, with fewer banks
using the models to set or adjust terms on accounts. More than half
the respondents said they have not tightened terms on existing
accounts that are current on payments because of a worsened credit
score. Nearly half, however, said they have lowered credit limits
on such accounts, although not below existing balances, and about
one-fourth had raised interest rates.
Only a few banks had lowered
credit limits below existing balances, forcing repayments, on an
account in good standing with a worsened credit score.
The models are designed to predict a variety of events:
Most
of the models predict delinquencies or defaults, although some
models predict bankruptcy or expected profitability. Nearly
two-thirds of the respondents indicated that their models had been
too optimistic over the past year, predicting better outcomes than
actually occurred. Many respondents attributed these failures to
the short time period over which the models were estimated and to an
increase in consumers' willingness to declare bankruptcy. In
response to the recent poor performance of their models, banks most
commonly raised cutoff scores necessary to qualify for credit and
placed more weight on other sources of information. About half the
banks experiencing poor predictions reestimated or redefined their
Finally, over the past three months nearly 60 percent of
models.
the banks that use credit-scoring models to approve credit card
applications tightened the score necessary to qualify.

III-A-4

Measures of Supply and Demand for C&I Loans, by Size of Firm Seeking Loans
Net Percentage of Domestic Respondents Tightening Standards for C&I Loans

Permc
80

....

Large
Medium

\\.

small
40

. * "
1990

1991

1992

1993

-20

1994

1995

1996

Net Percentage of Domestic Respondents Increasing Spreads of Loan Rates over Base Rates

Percent
80

Large

.....

Medium

---

Small

40
..

',.

20
20

-40

1994

1993

1995

Net Percentage of Domestic Respondents Reporting Stronger Demand for C&I Loans

1993

1994

1995

Percent

1996

III-A-5

Measures of Supply and Demand for Loans to Households
Net Percentage of Domestic Respondents Tightening Standards for Mortgages to Individuals

1990

1991

Percent

1993

1994

1996

1995

Net Percentage of Domestic Respondents indicating More Willingness to Make Consumer Installment Loans

Percent

kn
SI1I

Net Percentage of Domestic Respondents Reporting Stronger Demand for Loans to Households

1993

1994

1995

t I

Percent

INTERNATIONAL DEVELOPMENTS

U.S.

International Trade in Goods and Services
In August, the deficit in U.S. international trade in goods

and services was somewhat less than in July, as exports rose twice
as fast as imports.

For July-August combined, however, the deficit

(at an annual rate) was significantly larger than the second-quarter
level.

NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)
1995

Annual rates
1996
Q1
Q2
Q3e/

Real NIPA I/
Net exports of G&S

-107.6

-104.0 -114.7 -132.2

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

-105.1
-173.4
68.4

-96.9 -112.2 -134.6
-170.9 -188.0 -206.9
74.0
75.8
72.3

Monthly rates
1996
Jun
Jul
Aug

-8.2
-14.6
6.4

-11.6
-17.5
5.9

-10.8
-17.0
6.2

1. In billions of chained (1992) dollars.
e. BOP data are two months at an annual rate.
Source. U.S. Dept. of Commerce. Bureaus of Economic Analysis and Census.
For July-August combined, exports were 2 percent less than in
the second quarter.
gold and aircraft.

Three-fourths of the drop was in nonmonetary
Exports of machinery and automotive products in

July-August were at about the same levels as recorded in the second
quarter.

For July-August combined, imports were only marginally

higher than in the second quarter.

Increases in imported industrial

supplies, consumer goods, and automotive products were offset by a
drop in imports of semiconductors and nonmonetary gold.
Oil Imports
The quantity of oil imported during July and August averaged
about the same rate as observed during May and June, but was
slightly above the 1996Q2 pace.

Seasonally strong consumption

helped maintain imports at a high rate.

Preliminary Department of

Energy statistics indicate that oil imports declined significantly
in September from their July-August pace.

Weaker oil consumption

and significant deliveries of oil from the Strategic Petroleum
Reserve contributed to the decline in oil imports.

IV-1

IV-2

11-6-96

U.S. International Trade in Goods and Services
(Seasonally adjusted annual rate)
Net Exports
Billions of dollars

NIPA Exports and Imports
Ratio scale, billions of chained (1992) dollars
1220

1020

820

620

420

1989 1990 1991 1992 1993 1994 1995 1996

Selected NIPA Exports

Selected NIPA Imports

Ratio scale, billions of chained (1992) dollars

Ratio scale, billions of chained (1992) dollars
180

160

'7
Consumer goods

140

0/
120

100
*

Automotive /

1989 1990 1991 1992 1993 1994 1995
ex computrs
semiconductors

41 1

1989 1990 1991 1992 1993 1994 1995 1996

1992

19I 3

99hinery

I I T

IV-3

U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars. SAAR, BOP basis)
T.ev

l
.T1l

Alla

Amount Change 1/
1996
1996
Q2
Q3e/
Jul
Aug

1996
07

1996

Oie/

Exports of G&S

836.4

819.7

807.7

831.8

15.8

-16.7

-29.1

24.1

Goods exports
Agricultural
Gold
Other goods

612.4

596.6
60.9
5.6
530.1

585.3
60.0
4.7
520.6

607.9
61.9
6.5
539.6

12.3
-3.0

-15.7
0.7

-26.3
1.3

6.2
2.3

-6.9
-9.5

-21.9

22.6
1.9
1.8
18.9

28.2
43.0
33.4

23.9
41.9
33.0
140.6

32.4
44.0
33.8

6.9
-2.2
-2.6

-5.2
-0.3

Aircraft & pts
Computers
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW

60.2
12.5

539.7
33.4
43.2
34.9
140.2
63.0
34.6
7.9
20.5

141.2

63.4
34.6
7.1
21.7

62.2
34.3

6.9
21.1

141.8

64.6
35.0
7.3
22.4

1.7

-1.5
1.0

1.0
1.5

0.4
0.0

0.3

-0.8

-0.7

1.2

129.3
70.5
25.2

127.1

124.9
66.5
27.6

129.3
69.6
24.0

0.4

-2.2

68.1
25.8

2.6
1.3

-2.4
0.6

224.0

223.1

222.3

223.8

3.5

-0.9

Imports of G&S

948.6

954.3

946.8

961.8

31.1

Goods imports
Petroleum

800.4

803.5
69.6
7.5
726.4

795.3
72.2
5.4
717.6

811.8
66.9
9.6
735.2

29.3
14.1
7.8

3.1
-0.5
-7.1

1.8

10.7

13.1
61.5

13.7
61.6
33.4
117.1

1.7
-1.7
-6.7
-1.2

0.4

Ind supplies
Consumer goods

All other
Services exports

Gold

Other goods

70.1
14.6
715.7

5.7

Aircraft & pts
Computers
Semiconductors
Other cap gds

12.7
60.5
37.0
115.5

116.9

12.5
61.4
32.9
116.7

Automotive
from Canada
from Mexico
from ROW

131.1
49.2
24.1
57.8

136.4
51.7
22.9
61.8

133.6
49.6
21.3
62.7

139.2
53.8
24.5
60.9

6.1
1.3
1.3

-1.2
4.0

Ind supplies
Consumer goods
Foods
All other

126.9
166.3
35.9
29.7

130.8
170.1
35.8
28.6

129.0
166.9

2.7
3.0
1.7

3.9
3.7
-0.1

29.3

132.6
173.2
36.5
28.0

1.7

Services imports

148.2

150.8

151.6

150.0

Memo:
Oil qty (mb/d)
Oil price ($/bbl)

9.83
19.53

9.97
19.11

10.48
18.85

9.46
19.37

33.1

35.2

3.5

1.08
1.97

1.1
-3.9
1.4
5.3
2.5

-5.7

-8.4
-0.2
-1.6
0.7

8.5
2.1
0.8
1.1

-4.1
-2.2

2.4
0.7
0.4
1.3

-1.5
-0.4
-5.8
-4.8

-5.0

4.4
3.1
-3.5

-2.8

11.8

14.9

8.1
4.7
-4.4
7.9

16.5
-5.3
4.2
17.6

-2.0
3.9
-1.6

0.6

-0.0

0.3

4.2

1.1
0.2

5.5
4.2

0.5
-2.7
6.4

-1.8

-1.0

2.8
0.7
0.0
-0.1

3.5
6.4
1.2
-1.2

2.6

3.6

-1.6

0.56
0.23

-1.02
0.52

0.15
-0.42

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

3.2

IV-4
PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)
Annual rates
1996
01
02

Monthly rates
1996
Jul
Aug
Sep

----------- BLS prices (1990=100)----------2.4
1.5
-2.7
-0.1
0.1
0.8
47.4
41.0
-1.4
2.0
2.1
5.0
-1.2
-2.3
-3.0
-0.4
-0.1
0.3

Merchandise imports
Oil
Non-oil
Foods, feeds, bev.
Ind supp ex oil
Computers
Capital goods ex comp
Automotive products
Consumer goods
Merchandise exports
Agricultural
Nonagricultural
Ind supp ex ag
Computers
Capital goods ex comp
Automotive products
Consumer goods

-4.5
-3.1
-8.1
-0.4
-0.8
1.2

11.6
-5.0
-16.7
-4.4
-0.3
-0.9

-10.7
-5.0
-10.4
-2.7
0.5
-0.9

-1.4
-0.9
-0.3
-0.2
0.2
-0.1

-0.8
0.0
-0.7
-0.4
0.0
0.0

1.9
0.6
-1.2
0.1
0.3
0.2

1.0
13.8
-0.9

2.6
31.4
-1.2

-3.7
-18.1
-1.0

-0.5
-1.9
-0.2

-0.2
-0.2
-0.2

-0.8
-7.3
0.1

-3.6
-9.2
2.3
-0.1
2.3

-4.8
-7.5
1.7
0.2
1.5

-3.2
-11.8
0.2
0.4
0.1

-0.6
-1.7
-0.2
-0.1
0.0

-0.5
-0.9
0.0
0.2
0.0

0.6
-1.3
0.0
0.0
0.2

---Prices in the NIPA accounts (1992-100)-Fixed-weight
Imports of gds & serv.
Non-oil merchandise

0.0
-3.1

0.7
-3.8

-2.0
-3.1

...
...

...

Exports of gds & serv.
Nonag merchandise

0.3
-2.2

1.4
-2.6

-1.7
-1.5

...
...

.
...

11-6-96

Oil Prices
Dollars per barrel

Spot West Texas intermediate

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

IV-5
Oil Prices
The price of imported oil increased by roughly 2 percent in
July and again in August and then jumped up 5 percent in September.
These increases follow substantial price declines during May and
June.

The price of imported oil now stands 24 percent above its

September 1995 level. Spot WTI rose more than $2 per barrel in
September, averaging $23.99 per barrel, and rose another $0.90 per
barrel in October. Fighting in the Kurdish region of Northern Iraq
and concern over the level of heating oil stocks in the United
States and Europe helped push prices up. The announcement of a
settlement of the dispute among the Kurds has resulted in a decline
of nearly $2 per barrel during the last few days.

Spot WTI is still

quite volatile and is trading in the $22-24 per barrel range.
Prices of Non-oil Imports and Exports
Prices of non-oil imports decreased during the third quarter,
at a somewhat faster pace than in recent quarters.

Prices of

imported capital goods and industrial supplies continued to fall
sharply.

Prices of imported foods also fell in the third quarter,

nearly reversing a substantial increase in the second quarter.
Prices of exports also fell in the third quarter, with the
bulk of the decline due to rapidly falling agricultural prices
On balance, prices of non-agricultural exports
(especially grains).
fell, with continued declines seen in prices of computers and
industrial supplies.
U.S.

International Financial Transactions

Private foreign purchases of U.S. Treasury securities slowed
markedly in August from the extraordinary pace in July. (See line
Most
4.a of the Summary of U.S. International Transactions table.)
of this slowing is attributable to offshore financial centers, which
recorded small net sales in August following net purchases of more
than $25 billion in July. Outside of these financial centers, there
was a slowing in treasury purchases from the United Kingdom and a
pickup from Japan. Private foreign purchases of other securities
picked up only modestly in August, leaving total foreign net
purchases of U.S. securities about $26 billion smaller in August
than in July.
The smaller capital inflow through securities purchases in
August was largely offset by smaller outflows through banking

IV-6

transactions (line 3).

Bank outflows in July were swollen by RP
lending made to finance the huge foreign purchases of treasuries.
In August, there was little RP lending and bank outflows declined.
Foreign official reserves in the United States increased
$4-1/2 billion in August, only slightly faster than in July (line
1).

However, partial data from FRBNY indicate foreign official
reserves in the United States rose by almost $20 billion in
September.

Large increases were reported by Spain, developing

countries in Asia, Japan, and Saudi Arabia.
U.S reserve assets declined almost $8 billion in August (line
4), largely reflecting Mexico's medium-term swap repayments to the
U.S. Treasury.
U.S. net purchases of foreign securities slowed slightly in
August (line 5), as smaller net purchases of foreign equities were
only partly offset by larger net purchases of foreign bonds.

IV-7

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)
1994

1995

1996

1995

39.8

10.6

52.2
28.5

Jul

13.3

3.1

Aug

Official capital

1. Change in foreign official reserve
assets in U.S. (increase. +)

109.9
33.1

-3.9

4.3

-2.1

G-10 countries

28.9

OPEC countries

-3.3

All other countries

12.4

c.
2.

38.0

Change in U.S. official reserve
assets (decrease. +)

Piae

5.3

72.5

-2.6

-.8

16.7

-9.7

4.5

24.5

5.1

-. 2

atal

Banks
3.

Change in net foreign positions 1
of banking offices in the U.S.

Securities
4.

102.8

-33.1

-8.4

10.7

-25.9

-11.4

-30.6

92.9

190.7

69.8

23.5

48.6

61.0

46.3

20.8

34.7

99.9

37.4

1.8

12.0

31.3

38.2

7.0

53.9

82.6

27.0

32.8

23.4

9.5

10.6

-12.8

Foreign net purchases of

U.S. securities (+)
a.

Treasury securities

Corporate and other bonds

Corporate stocks

4.3

U.S. net purchases (-) of
foreign securities
a.

Bonds

Stocks

-57.3

8.2

5.3

17.7
4.0

3.8

-98.8

-35.7

-32.5

-34.5

-9.2

-48.5

-13.6

-18.7

-12.0

-48.1

-50.3

-22.1

-13.8

-54.5

-95.5

-18.0

-44.1

6.3

-1.4

3.2

-7.0

-6.3

-2.6

-3.4

-5.2

-22.5

-17.5

-3.6

-1.1

-23.2

-23.0

-20.0

Other flows (quarterly data, s.a.)
6.

U.S. direct investment (-) abroad

Foreign direct investment in U.S.

-14.9

8. Other (inflow. + )5
.S. currentaccount
palanc(s
Statistical discrepancy (s.a.)

49.8

60.2

-7.0

25.0

14.8

8.6

17.8

-15.1

1.1

-38.8

28.7

-148.4

-148.2

-37.7

-30.4

-34.9

-13.7

31.5

-41.5

29.4

4.1

10.7

7.6

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

IV-8

INTERNATIONAL BANKING DATA1
(Billions of dollars)

1994
Dec.
1. Net claims of U.S.
banking offices
(excluding IBFs) on
own foreign offices
and IBFs
a. U.S.-chartered
banks
b. Foreign-chartered
banks
2. Credit extended to U.S.
nonbank residents
a. By foreign branches
of U.S. banks
b. By Caribbean
offices of foreignchartered banks
3. Eurodollar holdings of
U.S. nonbank residents
a. At all U.S.chartered banks and
foreign- chartered
banks in Canada and
the United Kingdom
b. At the Caribbean
offices of foreignchartered banks

1995
Dec.

Mar.

224.0 -260.0 -260.1 -245.0 -245.8

-70.1
-153.9

-86.1

-84.1

-77.2

-72.3

-173.9 -176.0 -167.8 -173.5

Sep. Oct.**

-240.4 -246.3 -240.8

-70.7

-72.5

-70.1

-169.7 -173.8 -1 7.7

23.1

26.5

27.3

28.8

28.9

28.6

29.2

30.3

78.4

86.3

90.0

85.4

n.a

n.a.

na.

85.6

91.2

95.7

101.0

100.1

101.1

101.4

106.1

86.0

92.3

96.6

97.7

n.a

n.a.

n.a

n.a.

n.a

n.a.

MEMO: Data as recorded in thee U.S. international
transactions accounts
4. Credit extended to U.S.
172.6 207.3 212.7
nonbank residents
5. Eurodeposits of U.S.
nonbank residents

Jun.

1996
Jul.
Aug.

243.8

276.9

290.0

1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in
timing from the banking data incorporated in the U.S. international transactions
accounts.
Lines la. Ib, and 2a are averages of daily data reported on the FR 2950 and FR2951.
Lines 2b and 3b are end-of-period data reported quarterly on the FFIEC 002s.
Line 3a is an average of daily data (FR 2050) supplemented by the FR 2502 and end-ofquarter data supplied by the Bank of Canada and the Bank of England. There is a break in
the series in April 1994.
Lines 4 and 5 are end-of-period data estimated by BEA on the basis of data provided by
the BIS, the Bank of England, and the FR 2502 and FFIEC 002s. They include some foreigncurrency denominated deposits and loans. Source: SCB
**Data for October are thru October 21.

IV-9

Foreign Exchange and Foreign Financial Markets
The weighted-average value of the dollar against the
currencies of the major industrial countries has changed little
balance since the

September FOMC meeting.

Over this

period, U.S.

long-term interest rates have fallen 50 basis points in the absence
of any move by the Federal Reserve to raise interest rates and on
weaker than expected

incoming data on U.S.

economic activity.

Foreign long-term rates have come down about 40 basis points on
average since mid-September.
The dollar's movements against
unusually diverse.

individual currencies have been

The dollar has been strongest against the yen,

appreciating nearly 4 percent

The

since the September FOMC meeting.

yen has weakened as market participants have appeared to scale back
their expectations
package this year.

as to

the size of a supplemental fiscal

stimulus

First, the fiscally conservative Liberal

Democratic Party emerged from the October 20 general election with a
near majority, and then had difficulty finding coalition partners,
raising questions about

its ability to take any fiscal action.

addition, recent indicators on Japanese economic activity have on
balance seemed relatively weak, generating renewed uncertainty as to
the strength of the

recovery and appearing to push off further into

the future any move by the Bank of Japan toward tighter monetary
policy.
The dollar has been weakest over the intermeeting period
relative to the pound, depreciating 5 percent.

The pound

strengthened in early October, aided by what market commentary
judged a successful Conservative Party conference, appreciated
further on stronger than expected activity data, and was
added boost on October 30 by the surprise decision to

given an

raise the Bank

of England's minimum lending rate by 25 basis points to 6 percent.
The dollar has depreciated
dollar.

2-1/2 percent against the Canadian

The Canadian currency's continued strength has been aided

by low inflation data and a favorable report on the Canadian fiscal
situation by Finance Minister Martin, including a forecast of a
small

federal budget surplus

in the fiscal year after next.

Bank of Canada responded to the

The

strength of the Canadian dollar in

IV-10

Weighted Average Exchange Value of the Dollar
(Daily data)
Index, March 1973 = 100

August

September

October

November

Interest Rates in Major Industrial Countries
Ten-year bond yields
Change
Nov. 6
Sept. 24

Three-month rates
Sept. 24

Nov. 6

Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

3.00
0.53
5.78
4.12
3.50
8.38
3.02
2.72
1.56
4.75

3.08
0.51
6.22
3.09
3.33
7.56
3.02
2.90
2.00
4.53

0.08
-0.02
0.44
-1.03
-0.17
-0.82
0.00
0.18
0.44
-0.22

6.18
2.85
7.81
7.33
6.21
8.81
6.35
6.02
3.86
7.62

5.92
2.54
7.66
6.16
5.87
7.66
6.05
5.79
3.78
7.24

-0.26
-0.31
-0.15
-1.17
-0.34
-1.15
-0.30
-0.23
-0.08
-0.38

Weighted-average
foreign

3.63

3.53

-0.10

6.23

5.80

-0.43

United States

5.57

5.37 P

-0.20

6.77

6.28P

-0.49

~
Note.

Change

flt

2~.

.
is

Change

perc

s.
Preliminary.

IV-11
the context of continued low inflation and moderate growth by
lowering its band for the overnight rate three times by a total of
75 basis points to a range of 3 percent to 3-1/2 percent.
The dollar has appreciated slightly on balance against the
mark since mid-September.

The dollar-mark rate has remained firm in
the face of statements by Bundesbank officials appearing to suggest
that the outlook for German growth is relatively favorable and that
further Bundesbank easing is not to be expected. The currencies of

most other EC countries have strengthened slightly against the mark
recently, despite statements by German officials warning that
European Monetary Union should not proceed unless proposed members
strictly adhere to prescribed economic criteria.

On October 12, it

was announced that the Finnish markka was joining the EUs Exchange
Rate Mechanism. Italian Prime Minister Prodi indicated that he
hopes to have the lira join the ERM by the end of the year.
Since the September FOMC meeting, short-term interest rates in
major foreign industrial countries have generally moved lower,
registering a weighted-average decline of 10 basis points.

While

short-term interest rates in Japan and Germany have remained little
changed, several European countries have reduced money market
intervention rates and/or official lending rates.

Within the EU.

the Bank of Italy cut its discount rate 75 basis points, the Swedish
Riksbank lowered its repo rate four times by a total of 55 basis
points, the Spanish central bank lowered its intervention rate by 50
basis points, and the Bank of France reduced its intervention rate
by 5 basis points.

The Swiss National Bank lowered its discount

rate 50 basis points to 1.00 percent, citing what it considered the
excessive strength of the Swiss franc as an important factor
motivating the reduction.
Long-term interest rates have moved lower in all of the
foreign G-10 countries since mid-September. The largest declines
abroad have been in Canada and Italy (both about 115 basis points),
while long-term rates have eased 25 basis points in Germany and 30
basis points in Japan.
The Mexican peso has depreciated 5 percent since midSeptember, moving from about the 7-1/2 pesos per dollar level to
just under 8 pesos per dollar.

There does not appear to have been

any one factor behind the peso's decline.

The peso may have been

IV-12

depressed by the decision to sell only a minority share in the state
oil company's petrochemical business, possibly calling into question
the government's commitment to privatization, and the ongoing
political difficulties of the ruling PRI party.

The Desk did not
intervene for U.S. monetary authorities during the period.
Developments in Foreign Industrial Countries
Recent indicators from the major foreign industrial countries
suggest moderate expansion of economic activity in the third
quarter.

In Japan, industrial production grew strongly after

declining slightly in the second quarter.

German industrial

production and manufacturing orders rose on balance albeit at a
slower pace than the rapid growth recorded in the second quarter.
U.K. real GDP grew 3 percent (SAAR) as retail sales continued at a
French consumption of manufactured products advanced
strongly in the third quarter, primarily owing to a temporary surge
in car sales. In Canada, recent indicators have been mixed, but on

brisk pace.

balance point to a pickup in the pace of economic activity.
High unemployment rates persist, especially in France, Italy,
Germany, and Canada, contributing to subdued wage and price
pressures abroad. Recent 12-month rates of consumer-price inflation
have been near zero in Japan and have averaged about 1-1/2 percent
in Germany, France, and Canada. Italian consumer-price inflation
continued on its steep downward trend, falling to 3 percent in
Underlying yearOctober (from double that rate about a year ago).
over-year inflation ticked up in the United Kingdom to a bit below 3
percent in September.
The recent rise in U.K. inflation pressures prompted the
government to raise official interest rate by 25 basis points on
October 30. In contrast, in both Canada and Italy moderating
inflation as well as continued concerns about the pace of economic
activity prompted monetary authorities to lower official interest
rates by 75 basis points since the September FOMC meeting.
The Italian government recently released its 1997 budget aimed
at reducing its budget deficit to 3 percent of GDP, although there

IV-13

is considerable uncertainty that this goal will be achieved given
that this ratio is expected to be nearly 7 percent this year.
Individual country notes.
4.4 percent

In Japan, where real GDP increased

(SAAR) during the first half of 1996, third-quarter

indicators point to continued expansion.

Industrial production rose

1.4 percent from its second-quarter level, while new car
registrations and housing starts grew at a robust pace.

The

unemployment rate dropped slightly, and the ratio of job offers to
job applicants has increased gradually since late last year.

JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996

Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio1
Business Sentiment2
CPI (Tokyo area) 3
Wholesale Prices

Q1
0.4
1.6
3.4
2.4
3.3
0.67
-12
-0.3
0.0

Q2
-0.3
1.4
0.8
-7.7
3.5
0.69
-3
0.1
1.3

Q3
1.4
2.6
n.a.
6.8
3.3
0.71
-7
0.0
0.7

Aug
Jul
4.9
-2.3
13.4
-9.1
24.4 -19.5
8.0
-3.1
3.4
3.3
0.72
0.71
...
...
0.0
0.4
1.4
0.5

Sep
1.0
9.3
n.a.
8.7
3.3
0.71
...
-0.4
0.0

Oct
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
...
-0.1
n.a.

1. Level of indicator.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook (Tankan survey)
3. Percent change from previous year.

Wholesale and consumer prices had increased slightly earlier
this year in response to the depreciation of the yen.

Recently,

however, prices have stabilized and 12-month inflation rates are
close to zero.

The further depreciation of the yen recently has

been modest, but may put some upward pressure on prices in coming
months.
The current account surplus has been on an erratic upward
trend since last April, reaching an eight-month high of $8.2 billion
(SA) in August.

The merchandise trade surplus was $4.7 billion

in September, down from $6.5 billion in August.

(SA)

IV-14
In elections for the Lower House of the Diet held on
October 20, the Liberal Democratic Party (LDP) gained seats, but did
not achieve an absolute majority.

Although the LDP's former

coalition partners, the Social Democratic party (SDP) and the New
Harbinger Party (Sakigake) have decided not to join the government,
they have agreed to support the LDP in forming a minority government
under Prime Minister Hashimoto.

The fiscally conservative tone of

the likely new government has reduced prospects for tax cuts and
supplemental spending in the near term.
Incoming data indicate that real activity in Germany continued
to expand in the third quarter, albeit at a more muted pace than the
6 percent (SAAR) increase in the second quarter.

Industrial

production and manufacturing orders rose in the third quarter, but
at an uneven pace. Both rose in July and August on average, but
fell off in September, although the latest data are likely to be
revised upward (due to the treatment of non-respondents in the
estimate).
The IFO business climate survey, an indicator of current
and expected conditions in industry, showed significant improvement
in the third quarter, particularly in the expectations component of
the index.

Unemployment, while still very high, has levelled out at

just below 4 million workers (s.a.) and the all-German unemployment
rate edged up to 10.4 percent in September. Inflation remained
subdued in September, with producer prices down over the preceding
12 months and consumer prices up by a little less than 1-1/2
percent. The autumn forecast of the six research institutes
projected real GDP growth of 1-1/2 percent in 1996, rising to 2-1/2
percent next year.
The 1997 federal budget is currently under consideration in
the German parliament. Because the 1996 budget deficit is likely to
overshoot official projections, it is widely expected that the
Finance Ministry will propose cutting expenditure more than in the
draft 1997 budget issued last summer, although those expenditure
cuts remain unspecified. The tax legislation that formed part of
the fiscal plan announced by Chancellor Kohl last spring has had a
bumpy ride in the parliament, where approval of the SPD-dominated
Bundesrat (the upper house) is required. It remains uncertain

IV-15

GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
Q1

Jun

Jul

Aug

Sep

Industrial Production

-2.4

3.0

0.8

0.4

0.8

0.0

-1.8

Orders
Unemployment Rate (%)
Western Germany
Eastern Germany

-0.5
10.3
8.9
16.1

3.8
10.3
9.0
15.6

0.7
10.3
9.1
15.3

1.8
10.3
9.0
15.5

0.9
10.3
9.0
15.3

0.1
10.3
9.1
15.2

-3.6
10.4
9.3
15.3

Capacity Utilization1

83.1

82.1

82.5

...

Business Climatel' 2
-15.3 -17.7 -11.3 -21.0 -14.0 -12.0
-8.0
1 3
Consumer Prices '
1.4
1.3
1.4
1.2
1.3
1.4
1.4
1. Western Germany.
2. Percent of firms (in manufacturing, construction, wholesale, and
retail) citing an improvement in business conditions (current and
expected over the next six months) less those citing a deterioration in
conditions.
3. Percent change from previous year.

whether Germany will be able to reduce its general government
deficit the 3 percent of GDP reference value laid out in the
Maastricht Treaty, although the Kohl government continues to

maintain that fiscal measures will bring the deficit to 2-1/2
percent of GDP in 1997 from an expected 4 percent of GDP this year.
In France, third-quarter economic activity was boosted by a
surge in car sales ahead of the expiration of a government autopurchase incentive scheme at end-September. Consumption of
manufactured products registered a sharp rise in August, but fell
back in September, putting the third-quarter average 2-1/2 percent
above the second-quarter level. Industrial production (excluding
construction) in July-August rose to a level 1.9 percent above the
second-quarter average, largely due to an increase in automobile
production. However, consumer confidence dipped further in
September reflecting general discontent with the French government
and the rise in unemployment to a new post-war high of 12.6 percent.
Consumer-price inflation continued to moderate, in part as the VAT
increase of August 1995 no longer influenced the calculation of the
year-over-year inflation rate. The October business confidence
survey suggests that output will be subdued in the fourth quarter;
the assessment of contemporaneous output declined while future

IV-16

output expectations were unchanged

(with the notable exception of

the automobile sector, which showed a large deterioration).

FRENCH ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
Q1
Consumption of
Manufactured Products
Industrial Production 1
Capacity Utilization
Unemployment Rate (%)
Consumer Prices2
1.
2.

4.9

-1.6

2.5

Jun
2.1

Jul
-0.7

Aug
3.4

1.3
83.8
12.1
2.1

0.0
83.0
12.4
2.4

n.a.
n.a.
12.5
1.8

-0.4
...
12.4
2.3

0.0
1.9
......
12.4
12.5
1.6
2.3

Sep
-1.5
n.a.
12.6
1.6

For the months of July and August, INSEE publishes a composite number
for industrial production.
Percent change from previous year.

On October 31,

the EU Commission announced that it accepted

the French government's planned 37-1/2 billion franc financial
transfer from state-owned France Telecom to the government to cover
future pension liabilities.

This transfer will lower France's 1997

deficit by about 1/2 percent of GDP.
In the United Kingdom, preliminary estimates indicate that
real GDP grew 3 percent in the third quarter after expanding 2.2
percent in the previous quarter.

Retail sales continued at a brisk

pace in the third quarter while industrial production rose modestly.
Consumer confidence remained very strong in October, while the
purchasing managers' index continued to signal strength in
manufacturing orders, especially for consumer goods.

The

unemployment rate continued to decline and in September reached 7.4
percent, its lowest level in five and a half years.
Consumer-price inflation ticked up in September to a 12-month
rate of 2.9 percent, above the government's target rate of 2-1/2
percent or less.

The underlying rate of increase of average

earnings rose to 4 percent in August.

The recent rise in underlying

inflation likely contributed to the surprise decision to raise the

IV-17

UNITED KINGDOM ECONOMIC INDICATORS

(Percent change from previous period except where noted, SA)
1996
Q1

Real GDP (a.r.)

2.6

2.2

3.0

Non-oil GDP (a.r.)
Industrial Production
Retail Sales
Unemployment Rate (%)
Consumer Prices 1
Producer Input Price&
Average Earning 2

2.7
0.1
0.4
7.9
2.9
3.0
3.7

1.9
0.2
1.3
7.7
2.8
0.0
3.8

3.0
0.3
0.8
7.5
2.9
-2.6
n.a.

Jun
...

Jul

Aug

Sep

-0.3
0.9
7.5
2.8
-2.5
4.0

...
0.5
-0.3
7.4
2.9
-2.9
n.a.

.
-0.8
1.5
7.7
2.8
-2.3
3.8

.
0.6
-0.6
7.6
2.8
-2.4
4.0

1. Retail prices excluding mortgage interest payments. Percent change
from previous year.
2. Percent change from previous year.

Bank of England's minimum lending rate by 25 basis points to 6
percent following the monthly meeting between Governor George and
Chancellor Clarke on October 30.
In Italy, real GDP declined 1.6 percent
quarter.

(SAAR) in the second

This drop retraced the modest rise in the first quarter,

with both movements largely due to inadequate adjustments for the
leap year.

The second-quarter decline also reflected a significant

drawdown in inventories.

The drag of inventories on the economy is

ITALIAN REAL GDP
(percent change from previous period, SAAR)
1995

GDP
Private Consumption
Investment
Government Consumption
Exports
Imports
Total Domestic Demand
Net Exports (contribution)
Inv. Change(contribution)

Q1
6.3
2.5
10.2
-0.6
24.7
0.3
0.9
5.4
-2.3

Q2
0.8
2.8
7.3
-0.8
14.6
16.0
0.6
0.3
-2.2

Q3
2.4
1.3
4.0
-0.2
2.1
10.7
4.3
-1.7
2.7

Q4
0.3
0.1
6.0
-1.7
-11.2
-1.4
3.1
-2.7
2.2

1996
Q1
1.7
0.2
-2.4
-1.0
1.0
-6.7
-0.1
1.7
0.4

Q2
-1.6
0.4
2.5
0.4
-2.0
-19.2
-5.6
3.9
-6.3

IV-18
expected to have lessened in the third quarter and recently, Prime
Minister Prodi announced that real GDP is likely to have grown 2
percent

(SAAR) in the third quarter.

indicators have been weak.

However, the latest monthly

Business sentiment remained gloomy while

consumer confidence has declined in recent months.

Industrial

production rose slightly in August after dropping significantly in
July.

ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996
Q1
-2.0
75.9
12.0
107.7
15.7
5.0
7.7

Q2
-1.4
76.6
12.2
113.8
-1.0
4.3
3.4

Q3
Jul
n.a. -2.8
n.a.
. .
12.2
114.1 115.0
n.a.
-6.0
3.5
3.6
n.a.
2.7

Aug
0.5
...

Sept.
Oct.
n.a.
n.a.
.
...
...
112.0 106.00
n.a.
n.a.
3.4
3.0
n.a.
n.a.

Industrial Production
Cap. Utilization (%)
Unemployment Rate (%)
Consumer Confidence
115.2
2
Bus. Sentiment (%)
2.0
Consumer Prices3
3.4
Wholesale Prices3
2.0
1. Level of index, NSA.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.

Good news on inflation continues.

Consumer-price inflation on

a year-over-year basis fell in October to 3 percent, its lowest
level in 27 years.

Further progress on consumer price inflation is

likely in light of continued moderation in wholesale and producer
price inflation, in part reflecting the appreciation of the lira
over the past year and a half.
On September 27, the Italian government announced a tougherthan-expected 1997 budget that aims to reduce Italy's 1997 fiscal
deficit to 3 percent of GDP.

The deficit reduction package--which

may generate $41 billion equivalent in deficit reduction--will be
implemented in three phases.

The core of the package, accounting

for around $25 billion equivalent, will raise approximately $17
billion from spending cuts and around $8 billion from new revenues.
The second phase of the budget, which will be implemented early next
year, aims to generate an additional $8 billion equivalent through

IV-19

the so-called "Euro Tax".

This tax will be applied to all but the

poorest residents on a sliding scale of income.

Finally, the

government intends to generate a further $8 billion from what the
authorities call "special Treasury operations," akin to France's
creative accounting a la France Telecom1.

By law, the parliament

has until the end of the year to ratify the proposed budget.

Recent indicators for Canada suggest that the economy is
continuing to expand, although at an uneven pace.

Employment

dropped in September and was up only slightly for the third quarter
as a whole, while retail sales for July and August on average were
only a little above the second-quarter level. However, housing
starts rose again in the third quarter, and July-August averages of
new factory orders and shipments were both 3 percent above secondquarter levels. Both business and consumer confidence slipped in
the third quarter. Business confidence is still at a relatively
high level, but consumer confidence remains weak. On October 23,
the Canadian Auto Workers ratified a labor agreement with General
Motors, ending a 20-day strike that had idled production at all of
GM's Canadian facilities.
Core consumer-price inflation is near the bottom of the Bank
of Canada's 1-3 percent target band. The low level of inflation
combined with the recent appreciation of the Canadian dollar
prompted the Bank of Canada to cut official interest rates again on
October 28; at 3.50 percent, the Bank rate is now at its lowest
level since 1963.

1Specifically, this sum will be generated through the transfer
of funds held in the reserves for severance payment of employees of
state holding companies--ENEL and ENI--that will be fully privatized
in 1996 and 1997.

IV-20

CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted. SA)
1996
Q1

Jun

Jul

Aug

Sep

0.4

0.5

n.a.

-0.1

1.3

0.1

n.a.

-0.5
-0.0
1.0
1.8
0.7
9.5
1.4

2.4
2.6
0.3
10.9
0.2
9.6
1.4

n.a.
n.a.
n.a.
4.1
0.1
9.7
1.4

-0.2
-1.8
0.4
3.8
-0.4
10.0
1.4

2.9
3.9
0.1
-5.2
0.1
9.8
1.2

-0.7
-1.8
-0.4
0.3
0.6
9.4
1.4

n.a.
n.a.
n.a.
2.2
-0.3
9.9
1.5

96.4

101.5

100.8

...

....

Business Confidence

137.6

149.1

148.3

...

Industrial Production
Manufacturing Survey:
Shipments
New Orders
Retail Sales
Housing Starts
Employment
Unemployment Rate (V)
Consumer Prices1
Consumer Attitude

1. Percent change from year earlier.
2. Level of index, 1991 = 100.
3. Level of index. 1977 =100.

EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1995
1996

106.6
Japan: trade
current account 110.6

16.6 13.6
15.4 15.3

63.6
Germany: tradel
current account -16.7

14.1 16.4
-2.5 -3.3

France: trade
current account
U.K.:

trade

20.1
16.6
-18.3

current account

-4.6

Italy: trade
current account1

27.6
27.4

Canada:

trade

current account

5.8
7.3

4.7
3.8

-5.6 -5.5

Jun

Jul

Aug

Sep

14.4
n.a.

6.3
6.2

3.3
6.0

6.5
8.2

4.7
n.a.

n.a.
4.7
n.a. -1.4

7.3
-2.9

n.a.
n.a.

1.9
1.6

2.0
0.0

2.7
n.a.

n.a.
n.a.

n.a. -1.7

-1.9

n.a.
n.a.

...

n.a.
n.a.

2.9

n.a.

...

8.5 12.6
5.9 11.1

n.a.
n.a.

4.2
4.3

20.7

5.9

7.1

n.a.

2.2

2.1

-8.1

-1.2

0.8

n.a.

...

1. Not seasonally adjusted.
.. Data not available on a monthly basis.

n.a.

. .

0.7

-1.8

-0.9

...

IV-21

November 6,1996

Industrial Production in Selected Industrial Countries
(Monthly data; seasonally adjusted; ratio scale, index)
Japan

Germany
- 120

-120

110

1991=100

100

-90
I
1991

1992

1993

1994

90
,

1995

1996

1991

France

1992

1993

1994

1995

1996

United Kingdom
-

120

110

1992

100
oo

1991

100

110

1994

100

111

1993

1995

1996

1991

Italy
-

120

1992

1993

1994

1995

1996

Canada
-

120

-110

110

100

-90

1991

1992

1993

1994

1995

1996

120

1991

1992

1993

1994

1995

1996

IV-22

November 6, 1996

Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Japan

Percent
-"

W. Germany

Percent

II-wlI

1991

1992

1993

1994

1995

1991

1996

1I1

1992

1993

1994

1995

1996

1995
1994
1993
1992
1991
Note: Excludes mortgage interest payments.

1996

United Kingdom

France
--

-3

I
1991

1992

1993

I
1994

1995

1996

Canada

Italy
-

1991

1992

1993

1994

1995

1996

1991

1992

1993

1994

1995

1996

IV-23

Economic Situation in Other Countries

In Latin America, indications about economic activity have
been mixed. Mexico and Argentina have been recovering from their
low points in 1995, growth in Brazil appears to have slowed because
of weak industrial performance, and economic performance in
Venezuela has remained poor, except for the oil sector. In major
Asian countries, economic expansion has slowed, while the Russian
economy has continued to decline. Inflation in Mexico rose in
September for seasonal reasons, has been low in Argentina and
Brazil, and has declined in Venezuela. Trade surpluses narrowed in
the third quarter in Mexico and Argentina, and the trade balance
moved into deficit in Brazil. In the first three quarters of 1996,
China's trade surplus was half of that recorded over the same period
a year earlier, while Taiwan's trade surplus widened. In Korea, an
export slowdown contributed to a significant widening in the trade
deficit in the first eight months of the year.
Individual country notes.

In Mexico, monthly indicators

showed a resumption in the growth of economic activity in the third
quarter after a pause in the second quarter. Industrial production
rose 5 percent (SA, not annual rate) in the July-August period after
a 2 percent decline in the second quarter.

The continued recovery

in domestic demand led to a rise in imports and a reduction in the
trade surplus in that quarter to its lowest level since 1995:Q1,
Monthly inflation was 1.6 percent in September, up from a low
of 1.3 percent in August but still well below the recent peak of 2.8
percent in April. Most of the uptick in September was due to a
seasonal rise in education expenses associated with the start of the
school year. The downward trend in inflation rates has been helped
by the stability of the exchange rate during 1996 through September.
However, the peso has depreciated about 5 percent since midSeptember as market participants focused on the real appreciation of
the peso during 1996 (about 15 percent on net even after the recent
slip) and the potential loss of competitiveness for Mexican exports.
The Bank of Mexico responded to the peso's depreciation by
tightening conditions in the money market and rates on 28-day cetes
have risen ore than 6 percentage points. The Bank of Mexico made
clear that it was responding to the rapidity of the peso's decline,
not to the level of the peso.

IV-24

One specific factor that may have intensified pressure on the
peso was the government's announcement on October 13 that it would
not sell a majority stake in Pemex's petrochemical plants as
planned, but would instead create a series of petrochemical
subsidiaries and maintain a 51 percent stake in them, with only a
minority stake sold to private investors.

That was seen as a

retreat due to pressure from the old guard of the ruling party (PRI)
and, therefore, raised doubts about the government's commitment to
its privatization plans.
Pressure on the peso also came from uncertainty ahead of the
signing of a new "pacto" between Mexican government, labor, and
business on October 26.
surprises.

In the event, the agreement provided few

The minimum wage will increase 17 percent in December

(with no further increases planned for 1997) versus a target of 15
percent inflation for 1997 (December-over-December), and compares
with 1996 inflation that is expected to be about 27 percent.

The

government projected for 1997 real GDP growth of at least 4 percent,
a small

(0.5 percent of GDP) budget deficit, and a current account

deficit of less than 2 percent of GDP.

MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994
1995
1996
1996
-6.2
4.5
Real GDP
4.5
-7.5
Industrial Production (SA)
6.3
3.6
Unemployment Rate (%)
I
52.1
7.1
Consumer Prices
7.0
-18.5
Trade Balance 2
2
72.5
79.4
Imports
79.5
60.8
Exports 2
2
-0.7
-29.5
Current Account
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA

Q2
7.2
11.1
5.6
6.4
2.2
21.4
23.6
0.6

Aug
Q3
n.a....
12.7
n.a.
5.3
5.5
1.3
4.4
1.4
0.4
7.5
22.9
7.9
24.3
...
n.a.

Sep
n.a.
5.5
1.6
0.6
7.8
8.4
...

In Argentina, real GDP grew 2.6 percent in the second quarter
from a year earlier, and August and September industrial production
showed increases of 9.2 percent compared with a year earlier

(SA),

providing evidence that the recovery from the 1995 recession is well
underway.

Unemployment nonetheless remains very high, and inflation

has been low.

The recovery contributed to a narrowing of the trade

IV-25

surplus in July and August.

International reserves have rebounded

from the decline experienced following the resignation of Finance
Minister Cavallo last summer, and stood at $15 billion at endSeptember.

ARGENTINE ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994
1995
1996
1996
Q2
2.6
2.6
17.1
-0.2
2.2
1.3

Q3
n.a.
8.6
......
0.7
n.a.
n.a.

Aug
...
9.2

Sep

Real GDP
7.4
-4.4
Industrial Production (SA)
5.7
-6.2
9.2
Unemployment Rate (%)2
11.7
17.4
Consumer Prices 1
3.9
1.5
0.0 0.2
3
Trade Balance
-4.0
3.0
0.2 n.a.
Current Account 3
-9.1
-1.7
...
...
1. Percentage change from previous period.
2. Unemployment figures available only in May and October of each year. The
annual figure is the average of the two surveys.
3. Billions of U.S. dollars, NSA, current account under Q2 is for the first half
of 1995.
Argentina's slow recovery from the recession led to lowerthan-expected tax revenues and the larger-than-expected fiscal
deficit for the first half of 1996, prompting the senate to pass a
new package of tax increases in September.

In October, Argentina

was granted a waiver for missed fiscal performance criteria under
its IMF standby arrangement.
In late September, Argentine labor unions launched a thirtysix hour general strike to challenge President Menem's free market
reforms.

Unshaken, President Menem signed a controversial decree

deregulating the country's union-controlled health-care system and
allowing Argentines to choose their own medical plans.
In Brazil, indications are that economic activity has slowed
considerably since the second quarter, when real GDP rose by 7
percent

(s.a.a.r.).

Consumer prices were stable in September, for a

twelve-month inflation of 13 percent, the lowest increase since the
early 1970s.
The trade deficit widened to $0.7 billion in September,
bringing the cumulative trade deficit to $1.4 billion for the year
through September.

Preliminary data suggest that the deficit could

have widened further in October.
continued to depreciate slowly.

The real/dollar exchange rate has
Brazil's international reserves

IV-26

stood at $59 billion at the end of September, down only slightly
from its $60 billion peak in May. In late October, Brazil issued
$750 million in 5-year global bonds, which traded at 280 basis
points above U.S. Treasuries on October 30.

BRAZILIAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994
1995
1996
1996
4.2
5.9
Real GDP
3.6
7.9
Industrial Production (SA) 1
5.1
4.4
Open Unemployment Rate (%)
1
22.0
929.0
Consumer Prices
2
-3.2
10.4
Balance
Trade
2
-1.8
-17.8
Current Account
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA

Q2
2.3
0.3
5.9
3.6
0.1
-4.1

Q3
n.a.
n.a.
5.5
1.9
-1.2
-3.7

Aug
...
-0.8
5.6
0.5
-0.3
...

Sep
n.a.
5.2
0.0
-0.7
...

The

In Venezuela, consumer price inflation continued to fall.

overall economy appears to be doing better than expected, but this
is mostly due to high oil prices.
deteriorate.

The non-oil sectors continue to

Venezuela is trying to improve its fiscal position and

is using windfall revenues from higher oil prices partly to repay
foreign and domestic debt.

As a result of high oil prices,

international reserves reached a record $9 billion (excluding gold)
at end-September, a rise of $3 billion since December 1995.
VENEZUELAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1996
1996
1995
1994
Q3
Q2
n.a. n.a.
......
11.1
30.9 13.2
n.a.
-2.1
...
...

2.2
-2.8
Real GDP
10.8
8.8
Unemployment Rate (%)
56.6
70.9
Consumer Prices 1
-6.0
-3.6
TradeBalance 2
2
3.1
2.5
Current Account
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA, non-oil trade balance.

Aug

Sep

4.1
n.a.
..

3.6
n.a.
..

In China, real GDP increased by 9.6 percent in the first three
quarters of 1996 from its year-earlier level, indicating that real
activity has continued to decelerate slightly.

Despite some

relaxation of credit conditions in recent months, the tight credit

IV-27

conditions that generally have prevailed since the latter part of
1993 succeeded in reducing the 12-month consumer price inflation
rate to 7.4 percent in September, compared with an inflation rate of
25.5 percent in 1994.

The trade balance in the first nine months of

this year registered a surplus of $8.2 billion, compared with a
$16.4 billion surplus a year earlier, as the dollar value of exports
fell by 4 percent over the period. China has continued to receive
strong capital inflows, particularly in the form of foreign direct
investment.

Direct investment was $29.3 billion in the first nine
months of this year, a 17 percent rise from its year-earlier level.
Foreign reserves were $95 billion at the end of September, up from
$75 billion at the end of 1995.
CHINESE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994

GDP I

11.8
Real
Industrial Production 22.0
25.5
Consumer Prices
5.2
Trade Balance 2
1. Cumulative from the beginning of
2. Billions of U.S. dollars, NSA

1995

10.2
17.8
10.1
16.7
the year

1996

Q2
9.8
n.a.
8.6
2.1

Q3
9.6
n.a.
7.9
7.3

Aug
n.a.
8.1
3.0

Sep
n.a.
7.4
3.2

In Taiwan, growth in real activity has remained weak by
historical standards, even though the central bank has allowed
nominal interest rates to fall by 150 basis points since late 1995.
Industrial production rose only 1.9 percent from its year-earlier
level in the third quarter, and investment spending also appears to
have remained subdued. Taiwan's trade surplus rose to
in the first nine months of this year, compared with a
surplus over the same period of 1995. The marked rise
surplus mainly reflected a fall in the dollar value of

$10.2 billion
$4.2 billion
in the trade
imports of 3

percent over the period, due to sluggish domestic demand: exports
rose by only four percent over the same period. Taiwan's 12-month
inflation rate was 3.8 percent in September. Foreign exchange
reserves stood at $86.7 billion at the end of September, compared
with $90.4 billion a year earlier.

IV-28

TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1994

Real GDP
6.5
Industrial Production
6.6
Consumer Prices
2.6
Trade Balancel
7.8
Current Account I
6.2
1. Billions of U.S. dollars. NSA

1995

6.1
4.2
4.6
8.3
5.0

1996

Q2
5.4
-0.5
2.3
3.2
n.a.

1996

Q3
......
1.9
3.5
4.6
n.a.

Aug

Sep

0.1
5.1
1.1
..

.
3.9
3.8
2.1
...

In Korea, real GDP grew 6.7 percent in the second quarter from
its year-earlier level, a marked decline from output growth rates of
nearly 10 percent in the first three quarters of last year.

pronounced deceleration in exports, due to weak demand in several of
Korea's principal export markets, including semiconductors,
petrochemicals, and steel, has contributed to the slowdown in
activity.

In the first eight months of this year, Korea's exports

were 7 percent higher than in the same period a year earlier,
compared with 32 percent growth in 1995 as a whole.

The export

slowdown has been reflected in a significant widening in Korea's
current account deficit to $15.2 billion in the first eight months
of the year

(about 4 percent of GDP).

The central bank has allowed

the won to depreciate against the U.S. dollar by about 5 percentage
points since the end of May because of concern about the export
slowdown.

Consumer prices in September were 4.7 percent above their

year-earlier level.

KOREAN ECONOMIC INDICATORS
except where noted)
(Percent change from year earlier
1996
1995
1994
8.4
Real GDP
10.7
Industrial Production
6.2
Consumer Prices
-3.1
Trade Balancel
-4.5
Current Account 1
1. Billions of U.S. dollars, NSA

9.0
11.7
4.5
-4.7
-8.9

Q2
6.7
7.3
5.1
-2.8
-4.7

1996

Aug
Q3
n.a....
n.a.
n.a.
5.3
5.2
-2.8
n.a.
-3.5
n.a.

Sep
...
n.a.
4.7
n.a.
n.a.

IV-29

The OECD formally invited Korea to become its 29th member on
October 11. Korea will become a member officially after the Korean
legislature ratifies the agreement, which is expected to occur
before the end of this year.
In Russia, the economy and economic reform have muddled along
as President Boris Yeltsin prepared for and underwent bypass
surgery, which was apparently successful.

Indications are that real

economic activity has continued to decline, but the rate of decline
has been moderating.

Over the past three months, monthly inflation

has been under one percent, while the ruble-dollar exchange rate has
depreciated by less than 3 percent per month and has stayed well
within the crawling band "corridor" established by the Central Bank.
Russia missed fiscal revenue targets under its three-year,
$10 billion IMF Extended Fund Facility, prompting the IMF to delay
the release of this month's tranche.

This marks the second time

that Russia has missed fiscal performance criteria since the program
began eight months ago. Tax revenue for January through September
1996 was only $32 billion, or 74 percent of the planned revenue.
The Russian government has been taking action to strengthen tax
collection, and announced shortly after the departure of the IMF
mission that October revenue was up 30 percent over September's.
Russia is expected to introduce a Eurobond later this year and
has received "speculative" ratings for its foreign currency debt of
Ba2 from Moody's and BB-minus from Standard and Poor's.

The rating

places Russia above Brazil, Mexico, and Romania but below Hungary,
Slovakia, and Poland.

RUSSIAN ECONOMIC INDICATORS
(Percent change from year earlier
except where noted)
1996
1995
1994
-4
-15
Real GDP
-3
-21
Industrial Production
7
10
Consumer Prices 1
1
2
9
Ruble Depreciation
18.3
12.1
Trade Balance 2
5.7
1.3
CurrentAccount 2
1. Percent change from previous period.
2. Billions of U.S. dollars.

Q2
-7
-5
2
2
5.3
n.a.

Q3
-7
-7
1
6
4.9
n.a.

1996

Aug
-8
-8.5
-0.2
-2.6
1.9
...

Sep
-5
-6.8
0.3
-1.0
1.8
...

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 13, 1996 : Greenbook Part 2

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