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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class II FOMC November 9, 1983 SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of Bard of Governors of the the Federall Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Recent developments. Economic activity has continued to expand at a vigorous pace, although less rapidly than in the spring. Employ- ment and industrial production recorded further gains in September and October, and unemployment fell sharply. Sales have been brisk since Labor Day, and the inventory cycle, now in its expansion phase, still is contributing to growth in real activity. Wage and price increases in recent months have been somewhat larger than in the first half of the year. Industrial production increased nearly 1-1/2 percent in September and is estimated to have risen an additional 3/4 to 1 percent in October. Output of consumer goods rose further, and production of business equipment continued to register strong gains. Auto production dipped slightly in October, but current production schedules point to a rebound in assemblies in November. The capacity utilization rate apparently rose to about 78-1/2 percent in October, up about 9 percentage points from its recession low. Thus far in the recovery, industrial production has increased at a pace similar to that of earlier postwar expansions. Payroll employment (strike-adjusted) rose more than 330,000 in both September and October, about in line with the average monthly gains over the four preceding months. Increased hiring was widespread in both the goods-producing and service-producing sectors. In manufacturing, the rise in employment in October was the largest monthly gain of the current expansion; the factory workweek, however, fell 0.2 of an hour, partly reversing an exceptionally large September advance. The unemployment rate fell an additional one-half percentage point in October and, at 8.8 percent, is down 2 percentage points from the peak of last December. After a midsummer lull, consumer spending has exhibited new vitality. Unit sales of domestic and foreign-made autos increased in October, reversing a reduced volume during the preceding two months that had resulted from limited stocks of some popular models. Outside the auto sector, retail sales also have picked up, rising about twice as fast in September as in the three preceding months. Strong income gains continue to provide the underpinnings for increased consumer outlays; buoyed by a midyear tax cut, real disposable income rose at a 6-3/4 percent annual rate in the third quarter, and private payrolls increased further in October. The saving rate averaged 4-3/4 percent in the third quarter, up from the second quarter, but still low by historical standards. Homebuilding weakened in September, as housing starts fell back to about their second-quarter average. The drop in starts had been widely expected, as activity around midyear had surged to levels that seemed unsustainable in light of prevailing mortgage market conditions. Permits also fell in September for the second month in a row. After three months of decline, sales of new homes rose in September to near their average pace for the second quarter; sales of existing homes were little changed from their August level. The expansion in business investment activity accelerated in the third quarter. In real terms, fixed investment spending rose at nearly a 15 percent annual rate; outlays for equipment increased for the third quarter in a row, and spending for structures turned up after hav- ing declined in each of the six previous quarters. Recent data on capital goods orders point to further advances in equipment spending into 1984, as do private surveys of spending intentions. Inventory investment also has turned up recently. In constant- dollar terms, nonfarm businesses accumulated inventories at about a $10 billion annual rate in the third quarter, after having liquidated stocks over the previous year and a half. In manufacturing, the book value of stocks rose in both August and September; however, with shipments advancing rapidly, inventory-sales ratios remain at low levels in most industries. Inventories in the trade sector also increased in August; auto dealers' stocks have risen slightly in recent months, but still are low by past standards. Recent wage increases have been somewhat larger than in earlier months. The hourly earnings index rose about 1/2 percent in October; wage increases for production workers were small again in manufacturing and construction but large in the trade and service sectors. In addition, wage increases for white collar workers, as measured by the employment cost index, have gradually accelerated this year. Productivity gains continued to blunt labor cost pressures in the third quarter as output per hour in the nonfarm business sector rose at about a 5 percent annual rate, similar to the strong advances of the two previous quarters. Recent price increases, too, have been larger than in the first half of the year, when temporary influences tended to exaggerate the slowing of inflation. The consumer price index advanced at about a 5-1/4 percent annual rate during the third quarter, compared with a 3 percent rate of increase during the first half of the year. Producer prices, which were little changed during the first half, increased at a 2-3/4 percent annual rate during the third quarter. Consumer energy prices have increased in each of the past six months after having dropped sharply early in the year. In addition, prices for consumer goods other than food and energy have shown some acceleration, reflecting rapidly rising profits in some industries. Outlook. The rate of growth in real GNP in the third quarter, at 7.9 percent, was moderately lower than the exceptionally rapid second quarter pace; the staff's projection of GNP growth for the fourth quarter, while higher than in the last Greenbook, shows a further gradual slowing to about a 6-1/4 percent annual rate. Consumer spending is ex- pected to rise faster than in the third quarter, and a further swing toward inventory accumulation is projected in the nonfarm business sector. However, spending for residential construction appears likely to level off in coming months after strong advances in earlier quarters, and weakness in net exports probably will persist through the end of the year. A further decline in farm output is expected to be accompanied by a reduction in inventories held by the Commodity Credit Corporation, and hence, owing to NIPA accounting conventions, to a reduction in government purchases. The staff's current policy assumptions are similar to those in the last Greenbook. Over the balance of the forecasting horizon, M-2 is assumed to rise at about an 8 percent annual rate--the midpoint of the FOMC range for 1984. Interest rates are expected to be little changed from current levels. With respect to fiscal policy, it is assumed that the deficit for fiscal 1984 will total $190 billion, somewhat smaller than was assumed in the last Greenbook. The revision mainly reflects the impact of a stronger economy on revenues and outlays. As in the last Greenbook, the staff assumes that there will be no major tax legislation in fiscal 1984. The staff's projections of both real growth and inflation for 1984 have been raised moderately in the current Greenbook. Nevertheless, the economy in 1984 still is expected to follow a growth trajectory similar in many respects to the second year of previous postwar expansions. Real GNP, after rising 6-1/2 percent over the four quarters of 1983, is expected to grow at about a 4-1/4 percent pace during 1984. A key element in the slowdown is that the cyclical swing in inventories, from liquidation to rapid accumulation, is likely to have run its course by early 1984. Similarly, housing activity, which typically levels off or declines during the second year of economic recoveries, is expected to contribute little to GNP growth in 1984, and growth of consumer spending on durable goods also is expected to slow next year, in line with reduced income gains. Business fixed investment, however, is likely to remain strong through 1984, and the foreign sector, which depressed GNP growth in 1982 and 1983, should strengthen slightly in 1984. By the fourth quarter of next year, the expansion of output is expected to reduce the unemployment rate an additional three fourths of a percentage point, to around 8 percent. With labor demand increasing, and with a significant increase in payroll taxes, the moderating trend in hourly compensation increases is likely to end; consequently, the staff is expecting most wage measures to rise slightly faster in 1984 than in 1983. Prices, too, are expected to rise a little faster next year than they have in 1983, reflecting strengthening demand conditions in labor and product markets, a rise in import prices stemming from an expected depreciation of the dollar, and advances in food prices resulting from the lagged effects of the summer drought. Over the four quarters of 1984, the fixed-weighted price index for gross business product, a price measure for goods and services produced domestically, is projected to increase 4.9 percent, about 3/4 percentage point more than during 1983. The acceleration in the consumer price index, which includes imports as well as domestically produced goods and services, is likely to be larger, owing to the rising prices of imports. November 9, 1983 STAFF GNP PROJECTIONS Percent changes, annual rate Nominal GNP 9/28/83 11/9/83 Real GNP 9/28/83 11/9/83 Gross domestic business product fixed-weighted price index -----------------------------Total Excluding food and energy 9/28/83 11/9/83 9/28/83 11/9/83 Unemployment rate (percent) 9/28/83 11/9/83 Annual changes: 1981 <1> 1982 <1> 1983 1984 12.2 4.0 7.7 9.4 12.2 4.0 7.9 10.1 2.6 -1.9 3.3 5.0 9.3 6.9 5.0 4.4 9.3 6.9 5.0 4.6 7.6 9.7 9.7 8.6 7.6 9.7 9.6 8.3 5.8 6.4 5.4 3.9 5.8 6.4 5.4 3.9 8.8 9.4 10.0 10.7 8.8 9.4 10.0 10.7 6.7 3.5 4.8 4.7 6.7 3.5 4.8 4.7 10.3 10.1 9.4 9.1 10.3 10.1 9.4 8.7 4.3 4.3 4.4 4.7 4.7 4.7 4.7 4.9 Quarterly changes: 1982 Ql Q2 Q3 Q4 <1> <1> <1> <1> -1.4 6.6 2.7 2.5 -5.5 1.0 -1.0 -1.3 1983 Ql Q2 Q3 Q4 8.2 11.3 11.1 9.1 8.2 13.3 11.6 11.2 1984 Q1 Q2 Q3 Q4 8.8 8.8 9.0 8.8 9.8 8.9 8.8 9.0 -5.5 1.0 -1.0 -1.3 4.1 4.3 4.4 4.1 4.8 4.2 4.2 4.2 2.5 2.6 -2.3 -1.2 -2.3 -1.2 4.7 4.7 4.7 4.7 6.1 4.6 6.1 4.6 1.1 1.3 1.1 1.3 Two-quarter changes: <2> 1982 Q2 <1> Q4 <1> 2.5 2.6 1983 Q2 <1> Q4 10.7 10.1 1 10.7 11.4 6.1 5.8 6.1 7.1 3.9 4.6 3.9 4.5 5.1 4.7 5.1 4.8 -. 6 -1.0 -. 6 -1.4 8.8 8.9 9.4 8.9 4.2 4.3 4.5 4.2 4.5 4.8 4.8 5.0 4.3 4.6 4.7 4.8 -. 3 -. 4 -. 3 -. 4 2.0 -1.7 6.0 4.2 2.0 -1.7 6.6 4.3 9.2 5.4 4.9 4.4 9.2 5.4 4.9 4.7 .9 2.4 -1.6 -. 7 .9 2.4 -2.0 -. 7 1984 Q2 Q4 Four-quarter changes: <3> 1981 1982 1983 1984 Q4 <1> Q4 <1> Q4 Q4 10.8 2.6 10.4 8.9 10.8 2.6 11.1 9.1 <1> Actual. <2> Percent change from two quarters earlier. <3> Percent change from four quarters earlier. November 9, CONFIDENTIAL - FR CLASS II FOMC 1983 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1981 Q1 Q2 1982 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final sales Private Domestic final purchases 2866.6 2855.7 2279.4 2247.5 2912.5 2897.5 2314.0 2292.9 3004.9 2971.4 2371.1 2348.3 3032.2 3017.9 2395.1 2365.9 3021.4 3047.1 2417.3 2387.4 3070.2 3081.4 2449.8 2416.5 3090.7 3095.6 2439.9 2439.0 3109.6 3165.9 2486.2 2480.6 Personal consumption expenditures Goods Services 1802.8 953.2 849.6 1835.8 964.0 871.8 1886.1 984.6 901.5 1904.1 978.5 925.6 1938.9 989.1 949.7 1972.8 997.6 975.2 2008.8 1010.0 998.9 2046.9 1025.1 1021.8 Gross private domestic investment Residential structures Business fixed investment Change in business inventoriesNonfarm 455.5 111.6 333.1 10.9 8.1 472.1 109.5 347.6 15.0 5.0 495.8 101.7 360.6 33.6 24.1 476.2 94.3 367.6 14.3 6.2 422.9 87.3 361.3 -25.7 -27.6 432.5 91.0 352.7 -11.2 -8.8 425.3 87.9 342.3 -4.9 -2.3 377.4 96.8 337.0 -56.4 -53.7 Net exports of goods and services <1> Exports Imports 31.9 367.3 335.4 21.1 369.2 348.1 22.8 367.5 344.7 29.2 371.0 341.7 29.9 358.4 328.5 33.3 364.5 331.2 .9 346.0 345.0 5.6 321.6 316.1 Gov't. purchases of goods and services Federal <2> State and local 576.3 215.7 360.5 583.5 220.4 363.2 600.3 232.4 367.9 622.8 248.5 374.3 629.8 249.7 380.0 631.6 244.1 387.5 655.7 261.7 394.0 679.7 279.2 400.5 Gross national product in constant (1972) dollars 1510.1 1512.5 1525.8 1506.9 1485.8 1489.3 1485.7 1480.7 Personal income Wage and salary disbursements Disposable personal ncome Saving rate (percent) 2338.3 2394.2 1451.7 1498.1 1967.6 2010.4 6.0 3.7 2490.9 2516.6 2528.1 2563.2 2591.3 1512.3 1530.6 1542.8 1563.8 1579.8 2092.0 2120.5 2127.9 2159.0 2191.5 7.2 5.9 5.6 6.1 7.5 2632.0 1586.0 2227.8 5.4 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 194.7 243.9 188.0 219.0 197.6 227.7 192.0 217.2 162.0 173.2 166.8 178.8 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or 4efleit () -43.4 -15A -47.3 -123 -624 -29.7 -95.8 -46.4 -100.5 -38.1 -113.2 -32.7 .4 36.7 6.1 37. 3.9 32.0 .2 28.8 -3.5 32.0 -. 8 Civilian labor force (aillios) Unemployment rate (percent) Nonfarm payroll employmnt (a lliama Manufacturing 108.2 7.4 91.0 20.2 100.8 7.4 91.2 20.3 108;6 7.4 91.4 20.3 109.1 8.3 91.0 19.9 109.3 8.8 90.3 19.4 110.1 9.4 89.9 19.1 110.6 10.0 89.3 18.7 111.0 10.7 88.8 18.3 Industrial production (1967-100) Capacity utilizatioat all manufacturing (percent) Materials (percent) 151.8 80.6 82.7 152.5 80.8 81.9 153.0 80.3 82.0 146.3 75.9 76.2 141.7 72.9 73.0 139.4 71.6 70.7 138.2 71.1 69.4 135.2 69.0 67.2 1.39 9.96 7.31 2.66 1.18 7.89 5.63 2.25 .96 9.04 6.90 2.14 .90 8.12 5.90 2.22 .95 7.53 5.53 1.99 3) State and local goverment urpls or deficit(-) (I.I.A. bet) Excluding social insurance funds Housing starts, private (million units, A..) New auto sales (millions, A.R.) Domestic models Foreign models 34 .87 7.36 5.13 2.23 168.5 177.3 161.9 167.5 -158.3 -208.2 -99.6 -64.9 31.3 -2.1 1.12 7.78 5.56 2.22 32.9 -1.2 1.26 8.57 6.08 2.49 <1> Balance of payments data and details underlying theb estimates are shon in the International Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total ependitures are shown n the Federal Sector Accounts table which follow. <3> Estimates in table are evaluated at a 6.0 percent high mploment nemployment rate. November 9, 1983 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1981 1982 Q1 Q2 Q3 9.0 6.8 7.3 6.6 .7 -. 9 -. 6 .8 Personal consumption expenditures Goods Services 5.9 8.3 3.3 Gross private domestic investment Residential structures Business fixed investment Gov't. purchases of goods and services Federal National defense State and local Q4 Q1 Q2 Q3 Q4 3.6 1.6 1.1 2.6 -4.9 -2.3 -3.7 -3.9 -5.5 -1.3 -1.6 .0 1.0 -. 8 .1 .8 -1.0 -1.5 -4.0 -. 9 -1.3 4.5 3.0 3.4 .5 -1.6 2.8 3.5 3.5 3.6 -3.0 -6.8 1.4 2.4 2.0 2.9 3.1 1.5 4.7 .9 -. 1 2.1 3.6 5.1 1.9 26.3 -2.3 13.2 12.9 -11.7 6.0 12.3 -30.7 8.7 -22.4 -30.2 -1.6 -34.1 -28.5 -5.9 3.4 17.9 -14.3 4.5 12.5 6.7 .1 -2.0 2.2 13.4 -4.6 3.8 15.2 6.3 -2.7 3.9 10.0 7.5 .2 -. 2 .2 -1.3 -. 5 -5.0 -14.0 13.0 1.3 9.4 26.3 14.0 -. 4 10.6 28.3 5.1 -. 1 4.4 1.9 8.9 -1.4 -3.4 1.9 -. 3 2.6 Gross national product Final sales Private Domestic final purchases 20.5 16.1 16.9 15.3 6.6 6.0 6.2 8.3 13.3 10.6 10.2 10.0 3.7 6.4 4.1 3.0 -1.4 3.9 3.8 3.7 6.6 4.6 5.5 5.0 2.7 1.9 -1.6 3.8 2.5 9.4 7.8 7.0 Personal consumption expenditures Goods Services 14.7 16.6 12.7 7.5 4.6 10.9 11.4 8.8 14.3 3.9 -2.5 11.1 7.5 4.4 10.8 7.2 3.5 11.2 7.5 5.1 10.1 7.8 6.1 9.5 Gross private domestic investment Residential structures Business fixed investment 49.9 7.9 21.4 15.4 -7.5 18.7 21.6 -25.6 15.8 -14.9 -26.0 8.0 -37.8 -26.5 -6.7 9.5 18.2 -9.1 -6.5 -13.0 -11.3 -38.0 46.9 -6.0 Gov't. purchases of goods and services Federal National defense State and local 12.9 18.8 12.9 9.6 5.1 8.9 23.8 2.9 12.0 23.6 10.2 5.3 15.9 30.7 33.9 7.2 4.6 2.1 3.5 6.2 1.2 -8.7 18.0 8.1 16.1 32.1 20.8 6.8 15.5 29.5 16.5 6.8 Disposable personal income 13.1 9.0 17.2 5.6 1.4 6.0 6.1 6.8 Personal income Wage and salary disbursements 13.6 11.7 9.9 7.5 17.2 9.6 4.2 4.9 1.8 3.2 5.7 5.6 4.5 4.2 6.4 1.6 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 51.1 17.2 -18.5 -35.0 30.2 16.9 -10.9 -17.2 -49.3 -59.6 12.4 13.6 4.1 -3.3 1.7 .8 .9 2.4 1.1 .1 -1.8 -7.2 -3.0 -9.5 -1.8 -7.5 -2.7 -7.7 5.2 11.5 6.0 .4 7.3 6.9 3.8 9.6 5.6 -4.4 7.6 12.6 .1 10.0 9.9 -. 4 5.8 6.2 2.3 7.2 4.7 1.3 5.8 4.4 10.6 5.9 9.4 9.0 4.3 5.6 3.7 3.8 10.6 9.0 10.5 8.1 8.9 8.5 9.2 10.6 12.1 7.2 8.2 7.1 4.9 5.8 3.0 4.5 6.4 5.3 5.8 5.4 7.7 3.8 3.9 1.9 8.4 1.9 1.4 -16.6 -11.8 Constant (1972) Dollars Gross national product Final sales Private Domestic final purchases Disposable personal income -5.8 -13.0 -8.8 -34.6 53.2 -6.6 Current Dollars Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy Consumer price index (all urban) Industrial production <1> Excluding Federal pay increases, rates of change were: 1982-Q1, 4.2 percent; 1982-Q4, 3.5 percent. <2> Uses expenditures in 1972 as weights. 1981-Q1, 10.5 percent; -6.5 -3.4 1981-Q4, 8.1 percent; -14.8 -20.3 -2.3 -8.6 -8.2 I-10 November 9, 1983 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) ---------- Proj ected---------1984 1983 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Gross national product Final sales Private Domestic final purchases 3171.5 3210.9 2533.5 2516.5 3272.0 3286.6 2603.2 2611.7 3363.3 3351.5 2649.7 2675.6 3454.0 3416.9 2710.6 2751.9 3535.8 3485.4 2763.7 2817.7 3612.1 3574.3 2819.6 2879.0 3689.0 3651.2 2876.5 2941.6 3769.6 3730.5 2937.1 3005.3 Personal consumption expenditures Goods Services 2073.0 1035.6 1037.4 2147.0 1077.3 1069.7 2186.5 1102.9 1083.6 2248.0 1134.0 1114.0 2298.8 1157.6 1141.2 2345.6 1177.0 1168.6 2390.1 1197.9 1192.2 2437.4 1219.1 1218.3 Gross private domestic investment Residential structures Business fixed investment Change in business inventories Nonfarm 404.1 111.3 332.1 -39.4 -39.0 450.1 128.4 336.3 -14.5 -10.3 501.0 140.7 348.4 11.8 22.3 541.0 142.7 361.2 37.1 34.1 569.3 144.7 374.2 50.4 43.6 571.2 147.2 386.2 37.8 40.0 589.3 152.7 398.8 37.8 607.0 155.7 412.2 39.1 37.3 Net exports of goods and services <1> Exports Imports 17.0 326.9 309.9 -8.5 327.1 335.6 -25.9 339.2 365.1 -41.3 345.0 386.3 -54.0 351.9 406.0 -59.4 363.1 422.5 372.2 437.3 -68.2 385.5 453.6 Gov't. purchases of goods and services Federal <2> State and local 677.4 273.5 404.0 683.4 273.7 409.7 701.8 281.2 420.6 706.3 275.0 431.3 721.7 280.7 441.0 754.7 304.7 450.0 774.7 315.3 459.4 793.4 324.2 469.2 Gross national product in constant (1972) dollars 1490.1 1525.1 1554.4 1578.3 1597.0 1613.4 1629.9 1646.9 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 2713.6 2657.7 1648.4 1610.7 2255.9 2301.0 5.4 4.0 2923.9 1769.9 2496.1 5.2 2968.0 1804.7 3027.6 1839.0 2585.2 4.9 3087.8 1873.9 2636.0 4.9 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) <3> State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) Capacity utilization: all manufacturing (percent) Materials (percent) 181.8 169.7 218.2 203.3 2761.4 2852.8 1681.5 1730.9 2361.5 2435.8 4.7 5.0 254.6 231.5 -65.1 258.3 229.2 261.4 226.3 269.7 228.6 283.3 236.2 299.5 246.4 -187.9 -111.8 -183.6 -112.2 -184.3 -119.0 -187.3 -127.3 -188.8 -133.5 -183.3 -72.4 -166.1 -65.2 40.4 5.5 51.7 16.1 54.5 17.9 59.1 22.1 56.0 18.3 51.5 13.1 47.6 8.5 44.4 4.6 110.5 10.3 111.2 10.1 112.2 9.4 112.2 8.7 113.0 8.6 113.5 8.4 113.9 8.2 114.4 8.0 88.8 18.3 89.5 18.5 90.2 18.8 91.4 19.1 92.2 19.5 93.0 19.8 93.6 20.1 94.2 20.4 151.5 77.3 77.4 156.0 79.2 80.0 158.3 79.9 81.3 160.6 80.7 82.5 163.2 81.6 83.9 165.7 82.5 85.1 138.5 70.7 70.1 144.5 73.9 73.5 -187.9 -102.7 2535.0 4.8 37.0 1.75 1.79 1.65 1.65 1.70 1.75 10.10 10.05 9.70 9.70 9.90 9.22 7.60 7.55 7.50 7.30 7.40 6.92 2.50 2.50 2.30 2.40 2.40 2.31 -------------------- - - - ---'- ---- ------ ---- "--<1> Balance of payments data and details underlying these estimates are shown in the International Developments Housing starts, private (million units, A.R.) New auto sales (millions, A.R.) Domestic models Foreign models 1.69 8.46 6.06 2.40 - - 1.68 9.10 6.81 2.28 1--- ---- section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. <3> Estimates in table are evaluated at a 6.0 percent high employment unemployment rate.. November 9, 1983 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) CONFIDENTIAL - FR CLASS II FOMC Proj ected----------1984 -------1983 Q3 Q4 4.2 4.2 3.7 3.3 4.2 4.2 4.0 3.3 2.7 1.8 3.6 2.0 2.0 2.0 2.2 1.8 2.7 18.3 .8 11.2 -4.0 1.8 9.1 8.6 10.0 9.3 8.0 2.4 9.6 -3.8 -15.1 11.6 4.4 1.3 -1.9 9.2 3.4 16.1 39.7 9.5 2.7 6.3 11.4 6.2 2.8 6.7 7.9 4.9 .7 2.3 2.2 13.3 9.8 11.5 16.0 11.6 8.1 7.3 10.2 11.2 8.0 9.5 11.9 9.8 8.3 8.1 9.9 8.9 10.6 8.3 9.0 8.8 8.9 8.3 9.0 9.0 9.0 8.7 8.9 Q2 Q3 Q4 Q1 9.7 6.8 8.8 11.9 7.9 5.1 5.0 6.2 6.3 2.9 4.6 7.2 4.8 3.3 3.8 4.8 10.0 13.5 6.4 3.5 5.3 1.4 6.5 6.8 6.2 4.0 3.9 4.2 28.7 57.3 -1.5 49.8 79.5 7.9 44.3 37.0 14.6 35.5 1.6 13.1 -8.8 -18.0 6.5 -1.8 -1.1 -2.8 7.4 .0 2.9 3.5 Q1 Q2 Constant (1972) Dollars Gross national product Final sales Private Domestic final purchases 2.6 .6 3.0 3.9 Personal consumption expenditures Goods Services Gross private domestic investment Residential structures Business fixed investment Gov't. purchases of goods and services Federal National defense State and local Disposable personal income Current Dollars Gross national product Final sales Private Domestic final purchases Personal consumption expenditures Goods Services 5.2 4.2 6.3 15.1 17.1 13.0 7.6 9.8 5.3 11.7 11.8 11.7 9.3 8.6 10.1 8.4 6.9 10.0 7.8 7.3 8.3 8.2 7.3 9.0 Gross private domestic investment Residential structures Business fixed investment 31.4 75.3 -5.7 53.9 76.7 5.1 53.5 44.5 15.3 36.0 5.7 15.5 22.6 5.7 15.2 1.3 7.1 13.5 13.3 15.8 13.7 12.6 8.1 14.1 Gov't. purchases of goods and services Federal National defense State and local -1.3 -8.0 7.8 3.5 3.6 .3 10.7 5.8 11.2 11.4 13.4 11.1 2.6 -8.5 16.0 10.6 9.0 8.6 18.8 9.3 19.6 38.8 14.5 8.4 11.0 14.7 11.0 8.6 10.0 11.8 11.6 8.8 Disposable personal income 5.1 8.2 10.9 13.2 10.3 6.4 8.2 8.1 Personal income Wage and salary disbursements 4.0 6.4 8.7 9.7 7.2 8.3 13.9 12.3 10.3 9.3 6.2 8.1 8.3 7.8 8.2 7.8 59.0 5.4 107.5 106.0 85.4 68.1 5.9 -3.9 4.9 -5.0 13.3 4.1 21.9 14.1 24.8 18.3 .1 -. 1 2.9 5.2 3.4 7.0 5.4 7.6 3.7 7.1 3.1 6.7 2.8 6.2 2.7 6.1 6.6 4.3 -2.1 5.0 4.5 -.5 1.4 5.1 3.7 1.0 6.8 5.7 .7 5.2 4.4 1.2 5.3 4.1 1.6 5.3 3.6 3.3 3.4 4.6 4.7 4.6 4.5 4.6 4.1 3.5 4.3 4.1 4.8 4.7 4.8 4.7 5.4 4.7 4.7 5.2 4.8 4.7 5.3 4.9 4.7 5.4 5.0 4.9 5.5 18.4 21.0 12.1 6.0 5.9 6.6 6.3 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator <1> Gross domestic business product fixed-weighted price index <2> Excluding food and energy urban) Consumer price index (all Industrial production -- 5.5 10.1 '-'----------"I---- I--------------~"""I--' <1> Excluding the Federal pay increase, the rate of change in 1984-Q1 is 4.4 percent. <2> Uses expenditures in 1972 as weights. " I-12 CONFIDENTIAL - FR CLASS II FOMC (Expenditures November 9, 1983 GROSS NATIONAL PRODUCT AND RELATED ITEMS and income figures are billions of current dollars.) 1977 1978 1979 1980 1981 1982 -- Projected--1983 1984 Gross national product Final sales Private Domestic final purchases 1918.3 1895.3 1501.5 1505.5 2163.9 2137.4 1705.5 1706.6 2417.8 2403.5 1929.1 1915.9 2631.7 2641.5 2103.7 2079.7 2954.1 2935.6 2339.9 2313.6 3073.0 3097.5 2448.3 2430.9 3315.2 3316.5 2624.3 2638.9 3651.6 3610.4 2849.2 2910.9 Personal consumption expenditures Goods Services 1204.4 657.0 547.4 1346.5 728.5 618.0 1507.2 813.5 693.7 1668.1 883.5 784.5 1857.2 970.0 887.1 1991.9 1005.5 986.4 2163.6 1087.4 1076.2 2368.0 1187.9 1180.1 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 324.1 95.8 205.2 23.0 21.9 386.6 111.2 248.9 26.5 25.4 423.0 118.6 290.2 14.3 8.6 401.9 102.9 308.8 -9.8 -4.5 474.9 104.3 352.2 18.5 10.9 414.5 90.8 348.3 -24.5 -23.1 474.0 130.8 344.5 -..3 1 1.8 584.2 150.1 392.8 41.3 39.5 Net exports of goods and services <1> Exports Imports -4.0 182.7 186.7 -1.1 218.7 219.8 13.2 281.4 268.1 23.9 338.8 314.8 26.3 368.8 342.5 17.4 347.6 330.2 -14.7 334.6 349.2 -61.7 368.2 429.8 Gov't. purchases of goods and services Federal <2> State and local 393.8 143.4 250.4 431.9 153.6 278.3 474.4 168.3 306.0 537.8 197.0 340.8 595.7 229.2 366.5 649.2 258.7 390.5 692.2 275.8 416.4 761.1 306.2 454.9 Gross national product in constant (1972) dollars 1369.7 1438.6 1479.4 1475.0 1513.8 1485.4 1537.0 1621.8 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1540.4 983.2 1314.0 5.9 1732.7 1106.3 1474.0 6.1 1951.2 1237.6 1650.2 5.9 2165.3 1356.7 1828.9 6.0 2435.0 1493.2 2047.6 6.6 2578.6 2746.4 3001.8 1568.1 1667.9 1821.9 2176.5 2338.5 2563.0 5.8 4.8 4.9 167.3 194.7 192.4 229.1 194.8 252.7 175.4 234.6 192.3 227.0 -45.9 -30.6 -29.5 -29.2 -16.1 -18.6 -61.2 -36.0 -62.2 -25.9 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 28.0 10.1 30.3 10.0 30.4 6.6 30.6 3.5 35.3 4.4 31.3 -1.9 51.4 15.4 49.9 11.1 Civilian labor force (millions) Unemployment rate (percent) 99.0 7.1 102.3 6.1 105.0 5.8 106.9 7.1 108.7 7.6 110.2 9.7 111.5 9.6 113.7 8.3 Nonfarm payroll employment Manufacturing 82.5 19.7 86.7 20.5 89.8 21.0 90.4 20.3 91.2 20.2 89.6 18.9 90.0 18.7 93.3 19.9 138.1 82.2 82.6 146.1 84.7 85.6 152.5 86.0 87.6 1.96 11.13 9.07 2.06 2.00 11.29 9.29 2.00 1.72 10.68 8.36 2.32 rporate profits with I.V.A. and C.C.Adj. Corporate profits before tax Federal government surplus or deficit(-) (N.I.A. basis) High employment surplus or deficit(-) (millions) Industrial production (1967=100) Capacity utilization: all manufacturing Materials (percent) Housing starts, private (million units, New auto sales (millions, A.R.) Domestic models Foreign models (percent) A.R.) 147.0 79.6 80.4 1.30 9.04 6.62 2.42 150.9 79.4 80.7 1.10 8.56 6.24 2.32 164.8 174.2 -147.1 -58.8 138.6 71.1 70.1 1.06 8.00 5.77 2.23 228.2 208.4 278.5 234.4 -181.3 -88.0 -186.0 -123.0 147.6 75.3 75.2 1.70 9.12 6.77 2.35 161.9 81.2 83.2 1.71 9.94 7.51 2.43 ----------------------------------------------------<1> Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbook. <2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. November 9, 1-13 CONFIDENTIAL - FR CLASS II FOMC 1983 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS -Proj ected1983 1984 1977 1978 1979 1980 1981 1982 Gross national product Final sales Private Domestic final purchases 5.5 5.1 6.0 6.5 5.0 4.9 5.6 5.5 2.8 3.5 4.0 2.9 -. 3 .5 .1 -1.0 2.6 1.8 2.0 2.7 -1.9 -. 7 -1.3 -. 1 3.5 2.8 3.3 5.0 5.5 4.4 4.4 5.3 Personal consumption expenditures Goods Services 5.0 5.1 4.9 4.5 4.2 4.8 2.7 1.9 3.7 .5 -1.4 2.7 2.7 2.1 3.3 1.4 .1 2.9 4.4 5.7 3.0 4.1 4.4 3.9 Gross private domestic investment Residential structures Business fixed investment 16.1 18.6 11.7 10.5 2.8 12.8 -. 2 -5.3 7.3 -11.8 -20.3 -2.4 9.2 -5.1 5.2 -14.5 -15.4 -4.8 13.0 40.3 .2 18.9 9.8 11.0 Gov't. purchases of goods and services Federal National defense State and local 1.5 3.7 .8 .2 2.0 -.1 .4 3.3 1.3 1.8 2.6 1.1 2.2 4.2 3.9 1.0 .8 3.8 5.2 -1.0 1.8 5.6 7.1 -.5 .6 .9 8.1 .5 4.2 5.4 8.8 3.3 Disposable personal income 4.0 4.9 2.7 .6 3.2 .5 3.3 :4.3 Gross national product Final sales Private Domestic final purchases 11.7 11.1 11.7 13.2 12.8 12.8 13.6 13.4 11.7 12.4 13.1 12.3 8.8 9.9 9.0 8.5 12.2 11.1 11.2 11.2 4.0 5.5 4.6 5.1 7.9 7.1 7.2 8.6 10.1 8.9 8.6 10.3 Personal consumption expenditures Goods Services 11.1 9.8 12.7 11.8 10.9 12.9 11.9 11.7 12.2 10.7 8.6 13.1 11.3 9.8 13.1 7.3 3.7 11.2 8.f 8.2 9.1 Gross private domestic investment Residential structures Business fixed invesment 25.7 33.1 17.9 19.3 16.1 21.3 9.4 6.6 16.6 -5.0 -13.2 6.4 18.2 1.4 14.1 -12.7 -13.0 -1.1 14.4 44.1 -1.1 23.2 14.8 14.0 Gov't. purchases of goods and services Federal National defense State and local 8.8 11. 8.0 7.5 9.7 7.1 8.0 11.2 9.8 9.6 11.5 9.9 13.4 17.1 17.3 11.4 10.8 16.3 17.4 7.5 9.0 12.9 16.5 6.6 6.6 6.6 13.3 6.6 10.0 11.0 14.8 9.2 Disposable personal income 10.0 12.2 12.0 10.8 12.0 6.3 7.4 9.6 Personal income Wage and salary disbursements 10.7 10.5 12.5 12.5 12.6 11.9 11.0 9.6 12.5 10.1 3.9 5.0 6.5 6.4 9.3 9.2 Corporate profits with I.V.A. and C.C.Adj. Corporate profits before tax 21.1 17.1 15.0 17.7 1.3 10.3 -9.9 -7.1 9.6 -3.3 -14.3 -23.2 38.5 19.6 22.0 12.5 Nonfarm payroll employment Manufacturing 3.9 3.6 5.1 4.2 3.6 2.6 .6 -3.6 .8 -. 6 -1.7 -6.5 .4 -1.0 3.7 6.8 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 2.2 7.5 5.2 .6 8.6 8.0 -1.5 9.0 10.7 -. 7 10.4 11.1 1.9 9.8 7.7 -. 1 7.8 7.9 3.4 5.8 2.3 1.9 5.4 3.5 GNP implicit deflator Gross domestic business product fixed-weighted price index <1> Excluding food and energy Consumer price index (all urban) 5.8 7.4 8.6 9.2 9.4 6.0 4.2 4.4 6.1 6.3 6.5 8.0 7.8 7.6 9.9 8.6 11.3 10.0 8.5 13.5 9.5 9.3 10.3 6.0 6.9 6.2 4.2 5.0 3.3 4.7 4.6 5.2 Industrial production 5.9 5.8 4.4 -3.6 2.6 6.5 9.7 Constant (1972) Dollars Current Dollars <1> Uses expenditures in 1972 as wsights. -8.1 9.4 9.2 9.7 November 9, 1983 FEDERAL SECTOR ACCOUNTS (Billions of dollars) Unified budget receipts Unified hudget outlays Surplus/deficit(-). unified buget Surplus/df ctt(-), off-uda- t 3 aencle Combined deficit to be financed Means of financing combined deficits Net borrowing from public Decrease in cash operating balance Other 1982 iT* I* 612 03 90 137 205 -68 140 201 -61 167 196 -29 157 194 -37 149 212 -63 155 216 -61 190 214 -25 174 215 -41 15 -146 -14 -204 -1 -69 -2 -63 -4 -34 -5 -42 -3 -66 -3 -64 -5 -29 -5 -46 0 167 17 1 161 -8 -8 15s 5 5 62 10 -2 56 4 3 47 -13 -1 48 -9 4 44 22 -0 56 5 3 43 -10 -4 43 0 3 9 20 20 20 15 20 15 28 37 15 10 20 20 M *1.c. 23 17 3 -2 -3 0 1 4 5 7 7 646 826 276 203 615 21 279 191 552 -I 542 -20 623 007 274 194 79 533 -183 Seasonally adjuted annual rates 695 709 653 644 666 832 854 879 893 819 274 281 275 281 305 231 199 206 214 223 58 74 75 61 74 579 598 588 545 551 -I4 -188 -188 -184 -166 726 913 315 237 78 598 -187 -6 -100 -72 Fiscal Year 1983* 616 728 -111 601 796 -1 17 -1M 2/ P.. Board CY 1982* 668 848 667 857 -1 -10 609 740 -1 -11 -12 -M -14 -194 -IS -205 12 194 I 3 Sponsored agency borrowing5 FTP984a Ait. 1/ 0 -11 Cash operating balance, and of period Memo: FRB Staff Estimates Calendar quarters; not seasonally adjusted 83 1984 I I III I* ITI* IV Ct9It83e P.R. Board Fiscal Year 1982* - NIA Budget Receipts Expen ditures Purchases Defense Nondefense All other expenditures Surplus/deficit (-) High Employment (H.E.) surplus/deficlt(-) evaluated at the unemployment rate of 6 percent 3A 740 2 173 7 489 -112 -46 , 1. 2. 3. 701 873 294 226 6 591 -186 -83 -118 3"00 -45 •e-aaga aM 227 3 573 -172 30 27 11 79 543 -186 .et 649 617 744 259 179 799 73 79 506 -147 -59 ** estitd Mid-session Review of the 1984 Budget, July 1983. The August CBOestimate of the First Concurrent Resolution on budget the -- Fiscal Year 1984 indicated revenues $677 of billion and outlays $860 of billion. The lack of Congresional action on revenue measures has CBO led to reestimate FY1984 receipts to be $666 billion and outlays to be $858 billion. Outlays in either estimate wouldd be $8.5 billion higher if the "Reserve fund" for relief is recession fully utilized. Includes Federal Financing Bank, Postal Service Fund, Electrification, Rural and Telephone Revolving Fund, Rural Telephone Bank and FY1982) in (beginning the Strategic Petroleum Reserve. NOTE: Ouarterly figures may not add to yearly totals due to rounding. s I 4. I 5. I -65 -103 -112 -112 -119 -127 n.a.--not available Checks issued less checks paid, accrued items and other transactions. FRB staff estimates and actuals include Federal Home Loan Banks, FHLMC (excluding participation certificates), FNMA (excluding mortgage-backed securities), Federal Land Banks, Federal Intermediate Credit Banks for Cooperatives, and Student Loan Marketing Association marketable debt on a payment basis. DOMESTIC FINANCIAL DEVELOPMENTS Recent Developments. The monetary aggregates in October remained within their longer-run ranges. M1 moved below the midpoint of its moni- toring range by posting only a small gain for the third straight month. However, M2 growth picked up markedly from its weak September pace to a 9 percent annual rate, owing largely to a near doubling in the expansion of its nontransactions component. The further deregulation of deposit rates on October 1 evidently played only a small role in the strengthening, as recent growth in small time deposits simply matched the advanced July-August pace after some moderation in September. Heavier inflows to overnight RPs and Eurodollars and to those money market mutual funds included in M2 also contributed to the faster growth of this aggregate. The rebound in M3 was much less pronounced than for M2, as banks ran off large time deposits and term RPs in volume as part of a sizable reduction in managed liabilities. The federal funds rate quickly settled into a 9-1/4 to 9-1/2 trading range after quarter-end statement date pressures abated; other market interest rates have moved up on balance since the last FOMC meeting, 1/8 to 1/4 percentage point for short-term instruments and 1/4 to 1/2 percentage point for bonds. The steepening yield curve seems attributable to indications that the pace of economic expansion is more robust than previously anticipated by market participants, increasing the likelihood of a prospective firming in shorter-term credit markets, especially given the lack of legislative progress in reducing future federal budget deficits. In addition, there has been a small contraction in Treasury bill supplies as the Treasury has maneuvered to manage its finances in I-15 I-16 the absence of congressional action on the federal debt ceiling. The Treasury has drawn down its total cash balance, which had ballooned to $37 billion by the end of September, to about $8 billion most recently. Business demands for external credit appear to have remained quite limited in October; although capital expenditures have been strengthening, so, too, have cash flows. The composition of business borrowing continues to be weighted in favor of short-term credits, in association with further inventory accumulation as well as a desire by businesses to wait for more attractive bond market conditions. Commercial paper issuance and lending to U.S. businesses by foreign branches of U.S. banks and by smaller domestic banks represented the main sources of such credit. Gross offerings of corporate bonds by nonfinancial firms were very light in October. Although some stock price indexes reached new highs just after the last FOMC meeting, price declines thereafter more than retraced these gains and new share offerings, while substantial, remained well below the very heavy volume of the first half of the year. Consumer installment credit is estimated to have registered an 11 percent annual rate of advance in both August and September. Growth of consumer loans at commercial banks in October appears to have soared to around a 25 percent pace, likely reflecting strength in purchases of consumer durables, especially autos, and increased bank willingness to grant such loans. Auto loan rates at commercial banks have declined somewhat further in recent months, and with the phaseout of rebate subsidy programs at finance subsidiaries of domestic auto manufacturers nearly completed, the commercial bank share of auto financing has been on the upswing. I-17 Mortgage credit growth likely has been slowing from the brisk thirdquarter pace, but the recent modest easing in rates on fixed-rate mortgages and the more active promotion of adjustable-rate mortgages probably have tended to bring forth some added housing transactions. New and outstanding mortgage commitments at S&Ls in September maintained their previous high levels. Even so, the net change in mortgage assets at these institutions eased off further from a peak in July. Issuance of GNMA pass-throughs has been well maintained with a portion of them being packaged into mortgagebacked bonds by finance subsidiaries of large building companies. Offerings of housing-related tax-exempt bonds by state and local governments also have surged in recent months, accounting for a sizable portion of total municipal long-term offerings. Overall gross offerings of tax-exempt bonds in October, however, were up only a bit from the thirdquarter average. Outlook. The monetary and credit aggregates appear fairly securely within their ranges for the current year, and the staff is not anticipating any significant change in market interest rates in the period immediately ahead. However, in light of the projected course of economic expansion and credit demands, it seems likely that if any rate pressures emerge in the next several months, they will be in an upward direction. The federal sector will be continuing to absorb a large proportion of private savings. The Treasury recently announced that its marketable borrowing this quarter will total $42 billion, near the third-quarter figure, despite a sizable widening of the deficit. The essentially flat level of borrowing by the Treasury in the current quarter is somewhat I-18 deceptive in terms of the attendant market impact, since the decline in the Treasury's cash balance places added pressure on credit supplies as commercial banks issue more managed liabilities than otherwise to replace government deposits and the Federal Reserve sells securities to offset the reserve impact of any decline in Treasury balances held with the System. The first quarter will, in any event, see a resurgence of such federal borrowing to a level of around $55 billion. State and local borrowing is likely to remain substantial as well, although the outcome of congressional deliberations regarding mortgage and industrial revenue bonds cannot be judged at this time. The corporate financing gap is expected to grow in coming months as capital expenditures expand faster than internally generated funds. Since corporations are unlikely to move decisively to fund their debt at current bond rate levels, and inventories are likely to be rising, shortterm business debt probably will continue growing moderately. Barring a material drop in stock prices, new equity issues should remain an important source of funds. Credit flows to households probably will be moderately above thirdquarter levels into the winter months. Household mortgage debt formation should be restrained, though, by pressure on fixed-rate mortgage rates to restore a more normal spread over bond rates and effects of the recent softening of building activity. But, given the projected pattern of consumer spending on durables and the prevailing attitudes of households and lenders, consumer installment credit flows are apt to remain above the third-quarter pace. INTERNATIONAL DEVELOPMENTS Recent developments. The U.S. dollar has firmed since the last FOMC meeting, appreciating about 1-1/2 percent on a trade-weighted average basis. Factors supporting the dollar were a slight increase in U.S. short-term interest rates relative to foreign rates, together with increased political tensions in the Middle East and the Caribbean. The German mark depreciated considerably against the dollar early in November when it was reported that a large German commercial bank was experiencing difficulties. Other continental European currencies have also shown comparable declines against the dollar over the period, but the French and Italian authorities were able recoup some of their earlier reserve losses as the franc and lira came under upward pressure in the EMS in recent weeks. The Japanese yen has declined slightly over the past month, partly reflecting the adoption in Japan of a mildly stimulative economic package, including a widely anticipated one-half percentage point decline in the discount rate. U.S. authorities purchased $30 million equivalent of yen in the market. The prices of gold and silver have declined considerably over the past month. In the case of silver the price has fallen nearly 15 percent, apparently because of news of official sales by Peru and the apprehension that there might be other sales out of holdings by debtor countries. The drop in silver prices may have influenced the gold price, and both prices were affected by increases in long-term interest rates. I-19 I-20 Economic activity in the major foreign industrial countries is somewhat mixed, but averages out to a rather slow pace. Industrial production was up briskly in Japan in the third quarter, and was rising in Canada, though at a slowed pace, but in the other countries industrial production has not shown any sustained gains. Unemployment rates are holding at historic highs, except for Canada where unemployment has been declining for ten months. Inflation rates in the industrial countries have generally been lower through September than they were in 1982, but recent monthly data show some divergent experience across countries with no clear trend overall. Developments in the international debt situation are also diverse. Mexico, Chile, and Ecuador are meeting the conditions of their IMF programs, but Argentina and Peru have not met some conditions and Brazil and the Philippines are having difficulty in establishing new agreements. with the IMF. Venezuela apparently has the resources to manage the servicing of its debt but has strained relations with its bank creditors because interest arrears have accumulated. BIS data show a very sharp decline in bank lending to developing countries since the middle of 1982, and also indicate that U.S. banks have slowed their lending somewhat more than other banks. It was announced that the BIS countries plus Switzerland, but excluding the United States, favored in principle lending SDR 3 billion to the IMF as interim financing when the process of ratifying the increase in IMF quotas is completed. The U.S. merchandise trade deficit rose markedly to a $72 billion annual rate in the third quarter. than imports, especially of oil. Exports rose slightly, but much less Agricultural exports were up in the I-21 third quarter, largely because of increased shipments of soybeans. Nonagricultural exports rose in several categories. Much of the increase was in shipments to non-OPEC developing countries, possibly reflecting some recovery from the earlier deep cuts as well as continued strong demand in some countries in Asia. well below year-earlier levels. Exports to Western Europe were On the import side, the volume of oil imports was up considerably as U.S. oil consumption rose and stocks were slightly increased, and average oil import prices were also up moderately. Nonoil imports continued to gain in line with the strengthening of the U.S. economy, plus the continuing effects of an appreciated dollar. Net inflows of private capital through banks rose sharply in the third quarter, and transactions in securities also resulted in net inflows. Banks reported net inflows from their own foreign offices as well as from nonaffiliated foreign accounts -- possibly reflecting the slowdown in lending to LDCs as well as a more general reduction in interbank and other lending abroad. Weekly data for October indicate some reflow to foreign offices, partly to finance increased loans to U.S. residents that were booked at the foreign branches. In securities transactions, net foreign purchases of U.S. corporate stocks were substantial through September, though the rate of inflow has slowed during the year. U.S. net purchases of foreign securities were considerably reduced in the third quarter. Foreign official accounts in the United States were drawn down substantially in the third quarter, including a continued reduction in OPEC holdings. Preliminary data for I-22 October show some rebuilding of foreign official accounts, but OPEC accounts were still declining. Outlook. The dominant feature of the outlook over the next year is the much faster pace of recovery projected for the United States than for other industrial countries. While recent projections have raised the pace of recovery here, the pace abroad continues to be projected at about half the U.S. rate. This pattern of activity has resulted in some increase in the trade and current-account deficits projected for next year -- to about $110 billion and over $85 billion, respectively. However, there has been some reduction in the deficits projected earlier for the final quarter of 1983, based on the more recent trade data. The emergence of massive and growing deficits is expected to lead to a moderate depreciation of the dollar over the course of 1984, but the extent of the decline is likely to be cushioned by relatively firm U.S. interest rates. CONFIDENTIAL (FR) CLASS II FOMC NOVEMBER 8, 1983 OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES) 1982 ANN. 1. 1983-P ANN. 1984-P ANN. 1982 Q3 1982 1983 Q1 1983 1983 1983-P 1984-P 1984-P q1 Q2 1984-P 1984-P Q3 Q4 GNP NET EXPORTS CURRENT $, NET EXPORTS OF G+S IMPORTS OF G+S 17.4 347.6 330.2 -14.7 334.6 349.2 -61.7 368.2 429.8 1.0 346.0 345.0 5.5 321.6 316.1 17.0 326.9 309.9 -8.5 327.1 335.6 -25.9 339.2 365.1 -41.3 345.0 386.3 -54.0 351.9 406.0 -59.4 363.1 422.5 -65.0 372.2 437.3 -68.2 385.5 453.6 CONSTANT 72 $, NET EXPORTS OF G+S IMPORTS OF G+S 28.9 147.3 118.4 10.7 138.2 127.6 -0.1 144.3 144.4 24.0 146.4 122.4 23.0 136.5 113.5 20.5 137.3 116.8 12.3 136.2 123.9 8.8 139.9 131.1 1.1 139.6 138.4 -2.0 140.5 142.5 -1.1 143.0 144.1 0.2 145.1 145.0 2.5 148.6 146.1 84.6 88.5 85.8 83.9 84.6 89.7 88.7 87.1 88.6 88.0 86.6 85.1 83.6 TERMS OF TRADE (1972=100) 1/ -52.3 -45.4 -35.2 -58.6 -71.6 -87.4 214.1 39.6 174.5 209.0 33.8 175.2 193.4 33.1 160.3 198.0 36.0 162.0 195.7 35.3 160.3 203.1 37-8 165.3 205.4 40.7 164.7 206.6 40.u 166.6 211.1 40.3 170.9 214.9 39.3 175.6 224.0 3S.0 185.0 263.7 56.5 207.3 325.7 68.2 257.5 261.3 68.9 192.3 238.8 60.5 178.3 233.3 42.0 191.3 254.3 52.1 202.2 274.6 66.3 208.3 292.8 65.5 227.3 308-2 65.8 242.4 320.0 67.2 252.8 330.6 68.4 262.2 344.1 71.6 272.5 -40.7 -87.0 -26.4 -26.5 -14.3 -38.8 -46.5 -63.3 -77.3 -84.1 -91.1 -95.5 27.3 24.0 20.4 23.7 30.59 30.4 29.1 28.2 27.3 26.8 -1.7 0.6 2.5 1.5 1.7 2.3 2.5 2.4 2.5 2.8 6.0 4.5 6.0 5.3 5.4 5.5 5.6 5.3 5.3 -36.4 -63.2 EXPORTS (EXCL. MILITARY) AGRICULTURAL NONAGRICULIURAL 211.2 37.2 174.0 200.5 37.5 163.1 IMPORTS PETROLEUM AND PRODUCTS NONPETROLEUM 247.6 61.2 186.4 -11.2 2. U.S. MERCHANDISE TRADE BALANCE 2/ 3. U.S. CURRENT ACCOUNT BALANCE OF WHICH:NET 4. FOREIGN OUTLOOK COUNTRIES 3/ INVESTMENT INCOME -111.6 27.3 26.2 27.8 0.0 1.2 2.3 5.7 5.5 -101.6 -108.9 -115.7 -120.1 TEN INDUSTRIAL REAL GNP, % CHANGE, ANNUAL BATES CONSUMER PRICES, % CHANGE, ANNUAL RATES 8.1 S------- 6.0 -- ------------- '-------------------- 1/ GNP EXPORT IMPLICIT DEFLATOR DIVIDED BY GNP IMPORT IMPLICIT DEFLAICB ED EY GIP 2/ INTERNATINAL ACCCUNIS IBSIS 3/ GEOMETRIC WEIGHTS USED TC AGGREGATE FOREIGN REAL GNP AND CONSUMEE PRICES -- PERCENT SHARE IN TEN-CLUiEXY TOTAL IHOLILATERAL TRADE. GERMANY (20.82), JAPAN (13.6), fBANCE |3J. 1), UNITED KINGDOM (11.8).,CANADA (9.1X) , ITALY 9.0X), flBE AETHERLADS5 18.3), EELGIUB (6.41), <SWEDEN (4.21), SWIIZERLAND (3.61) P/ PROJECIEE
@FedFRASER