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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 10, 1981 SUMMARY AND OUTLOOK Prepared for the Federal Open Market Committee By the staff of the Board of Governor of the Federal Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Recent evidence indicates that the current economic downturn is intensifying and becoming more widespread. Disappointing sales in October triggered larger cutbacks in auto production, and housing market activity has declined further. In addition, weakness has spread to other sectors of the economy, as indicated by the broad October drop in manufacturing employment. Rising inventories and slow- ing income growth seem likely to generate further production adjustments in the next few months. Consumers are currently providing very little support for overall economic activity. units a year; Domestic auto sales in October were 5.1 million since the middle of September sales have been dismal despite the continuation of some rebates and concessionary financing programs. Sales of foreign autos are also down (to 2.0 million units a year in both September and October), but most of this reduction seems related to import quotas on Japanese cars. Other discretionary spending has been weak, with sales at general merchandise, apparel, and furniture stores off 1.2 percent in September. Overall, real retail sales were lower than they were at the beginning of the year. Housing activity, already depressed in August, continued to decline in September. Housing starts dropped to an annual rate of 920,000 units, making the third-quarter average the second lowest since World War II. Sales of new single-family homes were only 312,000 units per year in September, a new recorded low. of high interest rates: House prices are also showing the effect the average price of existing houses sold in September was only 5-1/2 percent above a year earlier, and prices of new houses were only 3 percent higher. If these figures could be adjusted for quality differences and financing concessions, they probably would be no higher than a year earlier. Business fixed investment has continued the slow slide that began last spring. Shipments of nondefense capital goods in nominal terms increased only 0.6 percent in September, while new orders fell 8 percent. Spending on nonresidential structures, which has been holding up better than expenditures for producers' durable equipment apparently has weakened a little; construction put-in-place was down 0.6 percent in September. Industrial production in September apparently fell more than the 0.8 percent originally estimated; preliminary indications are that the October reduction will be larger. While production cutbacks in automobiles, steel, and construction supplies have dominated the decline, recently the reductions have become more widespread. The sizable September in- crease in manufacturers' inventories indicates that the moderate imbalance between sales and production evident in earlier months has worsened to some extent. As of August, retail inventories were also relatively high. Slackening production has taken its toll on jobs; unemployment rose to 8 percent in October, the highest level since 1975. Employment reduc- tions were concentrated in manufacturing, with nearly all major industries showing losses. Transportation equipment and primary and fabricated metals were particularly hard hit. I-3 Despite these indications of weakness, the data on consumer prices have been less encouraging recently. percent in September; The consumer price index rose 1.2 although 0.4 percentage points of this increase can be attributed to higher interest rates, the increases for food, medical care, and miscellaneous services were large. However, small increases in the producer price index for finished goods averaging 0.4 percent per month for September and October,hold out some hope that the deceleration in consumer prices that was evident earlier this year may resume. Outlook. It now appears that the fourth-quarter decline in economic activity will be more severe than had been previously projected; real GNP is expected to fall at a 4-1/4 percent per year rate, with industrial production declining even faster. Personal consumption expenditures, business fixed investment, and inventory accumulation are all projected to be weaker in the fourth quarter than shown in the last Greenbook. Inflation, as measured by the gross business product fixed- weighted price index, is expected to be 8-1/2 percent per year this quarter, down from the disappointing 9-1/2 percent rate last quarter. The steeper near-term decline in output implies a more cyclical pattern of economic activity over the projection horizon. The reduction in real GNP is expected to continue in the first quarter of next year, flatten out in the second quarter after inventories have been trimmed, and then rise fairly strongly in the last half of the year. Slow income growth through mid-1982 is expected to limit increases in real consumption expenditures; substantial consumption gains are not likely to reappear until the 10 percent cut in personal tax rates becomes effective in July of next year. Slowly declining mortgage interest rates are projected to permit housing starts to rise from their currently depressed level to 1.3 million units a year by the end of 1982. As was the case in the last Greenbook, net exports are expected to retard the growth of real output, falling about $4 billion (1972 dollars) over the four quarters of next year. Real business fixed investment is projected to decline slightly as well. Inflation is expected to moderate in 1982 with the fixed-weighted gross business product price index rising about 7 percent between this quarter and the fourth quarter of next year. The expected improvement of 2 percentage points over the 9 percent average for 1981 is partially attributable to the 1981 reduction in import prices, which had the immediate effect of raising the GNP deflator; in 1982, as these lower prices appear in domestic expenditure items, they should lower the inflation rate. Weakness in labor and product markets also should put additional downward pressure on prices. After a steep rise in the next few months, the unemployment rate is expected to level off in the last half of next year. The changes in the current projection are attributable to incoming data, rather than revisions in either fiscal or monetary policy assumptions. M1-B growth in 1982 is assumed to be near the middle of its tentative target range. Short-term interest rates for the next few quarters are lower than assumed last month as a result of lower nominal GNP growth. Long-term rates are expected to decline, but remain high by historical standards. I-5 Fiscal policy assumptions are virtually unchanged from a month ago except that the staff is now projecting enactment of only $6 billion of the Administration's $13 billion proposed new expenditure cuts. month, $9 billion of cuts were assumed. Last Given the weaker near-term outlook, the projected deficit for fiscal year 1982 has been increased to $97 billion on a unified budget basis. STAFF GNP PROJECTIONS Percent changes, annual rate Nominal GNP 9/30/81 11/10/81 Real GNP 9/30/8o1 11/10/81 Gross domestic business product fixed-weighted price index Excluding food Total and energy 9/30/81 11/10/8/81 1188173 11/10/81 Unemployment rate (percent) 9/3081 11/10/81 Annual changes: 1979 1/ 12.0 1980 T/ 8.8 1981 11.1 1982 7.5 12.0 8.8 11.1 7.1 3.2 -. 2 1.9 .1 3.2 -. 2 1.8 -. 7 9.7 9.8 9.2 7.6 9.7 9.8 9.4 7.9 8.4 8.2 9.0 7.6 8.4 8.2 9.2 8.0 5.8 7.1 7.4 8.1 5.8 7.1 7.6 8.8 Quarterly changes: 1980-Q1 1/ 12.6 1980-Q2 T/ -1.1 1980-Q3 T/ 11.8 1980-q4 T/ 14.9 12.6 -1.1 11.8 14.9 3.1 -9.9 2.4 3.8 3.1 -9.9 2.4 3.8 10.1 9.8 9.6 9.3 10.1 9.8 9.6 9.3 7.4 9.5 9.3 8.2 7.4 9.5 9.3 8.2 6.2 7.3 7.5 7.5 6.2 7.3 7.5 7.5 1981-Q1 1/ 1981-Q2 T/ 1981-Q3 T/ 1981-Q 4 19.2 4.7 7.7 6.9 19.2 4.7 8.8 5.0 8.6 -1.6 -. 6 -1.8 8.6 -1.6 -. 6 -4.2 10.5 8.2 8.5 8.1 10.5 8.2 9.6 8.5 8.1 9.7 10.0 8.2 8.1 9.7 11.2 8.6 7.4 7.4 7.2 7.7 7.4 7.4 7.2 8.3 1982-Q1 198 2-Q2 1982-Q 3 1982-Q4 6.9 7.2 9.5 10.4 5.2 8.2 10.1 10.7 2/ .2 .3 2.9 3.2 -1.8 .9 3.3 3.2 7.4 7.2 7.2 6.8 7.5 7.4 7.1 6.7 6.8 6.7 6.7 6.5 7.2 7.1 6.7 6.6 7.9 8.1 8.2 8.2 8.6 8.8 8.8 8.8 -3.6 3.1 3.4 -1.2 .2 3.0 -3.6 3.1 3.4 -2.4 -. 4 3.2 9.9 9.5 9.2 8.3 7.3 7.0 9.9 9.5 9.2 9.1 7.4 7.0 8.4 8.8 9.0 9.2 6.7 6.6 8.4 8.8 9.0 9.9 7.1 6.7 1.4 .2 -. 1 .3 .4 .1 1.4 .2 -. 1 .9 .5 .0 1.7 -. 3 1.1 1.6 1.7 -. 3 .4 1.4 9.7 9.7 8.8 7.1 9.7 9.7 9.2 7.2 8.2 8.6 9.1 6.7 8.2 8.6 9.5 6.9 .1 1.6 .2 .5 .1 1.6 .8 .5 Two-quarter 1980-Q2 1/ 19 8 0-Q4 T/ 1981-Q2 T/ 1981-Q4 1982-Q2 1982-Q4 changes: 5.6 5.6 13.3 13.3 11.7 11.7 6.8 7.3 6.7 7.1 10.4 10.0 3/ Four-quarter changes: 9.9 9.9 1979-Q4 1/ 9.4 9.4 198 0-Q4 1/ 9.2 9.5 1981-Q4 8.5 8.5 1982-Q4 1/ Actual. 2/ Percent change from two quarters earlier. 3/ Percent change from four quarters earlier. November 10, 1981 CONFIDENTIAL CLASS II FOMC FR GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1979 1980 Q1 Q2 Q3 Q4 Q1 Q2 Gross national product Final purchases Private Excluding net exports 2340.6 2316.2 1858.0 1838.1 2374.6 2341.5 1876.4 1868.2 2444.1 2430.8 1955.4 1937.5 2496.3 2497.1 2000.7 1993.1 2571.7 2569.1 2052.3 2044.1 2564.8 2557.4 2027.4 2010.3 2637.3 2653.4 2119.9 2075.4 2730.6 2748.0 2189.4 2166.1 Personal consumption expenditures Goods Services 1454.1 784.3 669.9 1478.0 793.8 684.2 1529.1 824.8 704.3 1582.3 855.3 727.0 1631.0 882.0 749.0 1626.8 858.4 768.4 1682.2 883.0 799.2 1751.0 926.8 824.2 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 408.3 116.7 267.3 24.3 20.8 423.2 117.2 272.9 33.1 29.2 421.7 119.8 288.5 13.3 7.8 410.0 120.6 290.2 -.8 -4.4 415.6 115.2 297.8 2.5 1.5 390.9 93.6 289.8 6.1 377.1 99.2 294.0 -16.0 -12.3 397.7 113.0 302.1 -17.4 -14.0 Net exports of goods and services 1/ Exports Imports 19.9 259.1 239.2 8.2 266.8 258.6 17.9 293.1 275.2 7.6 306.3 298.7 8.2 337.3 329.1 17.1 333.3 316.2 44.5 342.4 297.9 23.3 346.1 322.7 Gov't. purchases of goods and services Federal 2/ State and local 458.2 164.8 293.4 465.1 163-.6 301.6 475.4 165.1 310.4 496.4 178.1 318.3 516.8 190.0 326.8 530.0 198.7 331.3 533.5 194.9 338.6 558.6 212.0 346.6 Gross national product in constant (1972) dollar 1479.9 1473.4 1488.2 1490.6 1501.9 1463.3 1471.9 1485.6 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1864.6 1194.8 1580.2 5.3 1906.3 1218.6 1612.8 5.6 1972.3 1248.6 1663.8 5.4 2032.0 1282.2 1710.1 4.7 2088.2 1314.7 1765.1 4.9 2114.5 1320.4 1784.1 6.2 2182.1 1341.8 1840.6 6.1 2256.2 1397.8 1897.0 5.1 7.4 Q3 Q4 Corporate profits with I.V.A. and C.C. Adj Corporate profits before tax 201.9 253.1 196.6 250.9 199.5 262.0 189.4 255.4 200.2 277.1 169.3 217.9 177.9 237.6 183.3 249.5 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -11.5 -4.7 -8.1 5.1 -15.2 -2.3 -24.5 -7.1 -36.3 -17.1 -66.5 -21.5 -74.2 -21.1 -67.9 -13.3 21.9 -1.7 26.5 2.1 28.9 4.0 26.6 1.3 23.9 -1.7 28.6 .9 103.2 5.8 103.7 5.9 104.2 6.2 104.7 7.3 105.0 7.5 105.2 7.5 90.2 21.1 90.5 20.9 90.8 20.8 90.5 20.3 90.2 20.0 90.8 20.2 142.3 75.9 75.2 148.7 79.1 80.1 State and lo:al government surplus or (N.I.A. basis) deficit (-) Excluding social insurance funds Civilian labor force (millions) Unemployment rate (percent) 29.5 7.1 102.3 5.8 102.4 5.7 89.0 21.0 89.7 21.1 152.7 86.9 88.4 152.3 85.9 87.5 152.6 85.3 87.2 Housing starts, private (million units, A.R.) 1.64 11.56 New autos sales, (millions, A.R.) 9.30 Domestic models 2.25 Foreign models 1.84 10.65 8.16 2.49 1.79 10.79 8.63 2.16 Nonfarm payroll employment (millions) Manufacturing Industrial production (1967=100) Capacity utilization: all mfg. (percent) Materials (percent) 152.5 84.4 86.3 1.59 9.80 7.43 2.37 152.6 83.4 85.8 1.23 10.65 7.87 2.77 144.5 77.9 78.8 1.06 7.68 5.53 2.14 1.39 8.80 6.51 2.29 1.54 9.04 6.57 2.47 Balance of payments data and details 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 Swhich follows. 17 I-8 November 10, CONFIDENTIAL - FR CLASS II FOMC 1981 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1980 1979 Q1 Q2 Q3 -1.7 -2.5 -3.0 -1.6 4.1 7.2 8.7 5.5 Q4 Q3 Q4 -9.9 -10.4 -13.3 -14.4 2.4.1 6. 4.. 3.8 4.4 4.9 8.5 -9.8 -17.7 .0 5.1 4.0 6.4 Q2 Q1 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports 3.6 4.2 2.8 .8 -. 3 2.1 7.0 10.2 3.7 Personal consumption expenditures Goods Services .9 -2.7 5.5 -1.2 -4.6 3.0 4.7 6.0 3.1 Gross private domestic investment Residential structures Business fixed investment 10.6 -6.5 5.2 1.7 -10.8 -. 4 -9.9 -3.6 13.4 Gov't. purchases of goods and services Federal National defense State and local .7 8.0 2.2 -3.3 -. 5 -7.9 3.8 4.0 1.2 -3.6 2.0 3.9 6.1 13.1 7.1 2.4 6.9 18.9 9.8 .6 2.5 11.9 6.2 -2.8 -5.0 -13.1 -. 1 .3 2.2 2.0 5.9 2.3 3.1 .5 3.5 .8 1.3 -4.9 4.1 2.9 Gross national product Final purchases Private Excluding net exports 12.7 11.5 12.8 10.8 5.9 4.4 4.0 6.7 12.2 16.1 17.9 15.7 8.8 11.4 9.6 12.0 12.6 12.0 10.7 10.6 -1.1 -1.8 -4.8 -6.5 11.8 15.9 19.5 13.6 14.9 15.0 13.8 18.7 Personal consumption expenditures Goods Services 11.0 8.5 14.2 6.7 4.9 8.8 14.6 16.6 12.2 14.7 15.6 13.5 12.9 13.1 12.7 -1.0 -10.3 10.8 14.3 12.0 17.0 17.4 21.4 13.1 Gross private domestic investment Residential structures Business fixed investment 17.0 1.8 13.9 15.4 1.8 8.6 -1.5 9.1 25.0 5.6 -16.7 11.0 -21.8 -56.4 -10.4 -13.3 25.7 6.0 23.7 68.5 11.5 Gov't. purchases of goods and services Federal National defense State and local 6.3 10.7 8.2 3.9 6.2 -2.9 8.2 11.6 9.2 3.7 15.0 12.2 18.8 35.4 26.2 10.6 17.5 29.5 23.2 11.2 10.6 19.8 12.4 5.6 2.6 -7.5 8.4 9.1 20.2 40.2 35.0 9.7 Disposable personal income 13.5 8.5 13.3 11.6 13.5 4.4 13.3 12.8 Personal income Wage and salary disbursements 12.8 13.5 9.3 8.2 14.6 10.2 12.7 11.2 11.5 10.5 5.1 1.8 13.4 6.6 14.3 17.8 Corporate profits witn IVA & C.C. Adj. Corporate profits before tax -1.6 8.3 -10.1 -3.4 6.0 18.9 -18.8 -9.7 24.8 38.6 -48.9 -61.8 21.9 41.4 12.7 21.6 3.7 3.5 3.1 2.1 2.4 -.1 1.2 -3.6 1.5 -2.4 -1.6 -9.7 -1.0 -5.9 2.7 3.7 -.9 10.9 11.9 -1.6 10.4 12.1 -1.1 -8.6 9.7 -.2 9.7 9.9 .3 10.2 9.9 -2.9 11.3 14.6 3.6 9.0 5.3 -. 2 9.8 10.1 8.4 7.8 7.8 8.1 9.3 10.7 9.7 7.5 10.2 9.7 7.2 12.5 9.5 6.9 14.0 10.0 11.1 14.3 10.1 7.4 16.5 9.3 8.2 12.9 .8 -. 3 Disposable personal income -17.8 -3.1 -5.4 -5.6 -24.2 2.2 -28.9 -60.2 -19.9 -10.0 16.0 -1.5 11.1 64.2 4.0 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 . I 5.4 -1.0 -10.6 2.8 2.3 -19.6 .3 -6.2 19.2 ' Excluding Federal pay increases, rates of change were: 9.2 percent; 1980-Q4, 9.7 percent. Uses expenditures in 1972 as weights. 1979-Q1, 8.3 percent; 1979-Q4, 7.5 percent; 1980-Q1, I-9 November 10, CONFIDENTIAL - FR CLASS II FOMC 1981 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1981 S Q1_Q2 Q3 Q Q1 1982 Projected Q2 Q3 Q4 Gross national product Final purchases Private Excluding net exports 2853.0 2848.5 2272.0 2242.8 2885.8 2862.5 2285.1 2264.3 2947.0 2929.4 2338.9 2320.9 2982.9 2977.6 2369.5 2346.3 3021.2 3020.2 2404.3 2385.9 3081.5 3079.5 2450.7 2436.5 3156.6 3156.1 2514.8 2502.2 3237.8 3236.3 2577.2 2561.5 Personal consumption expenditures Goods Services 1810.1 964.3 845.8 1829.1 962.6 866.5 1888.6 990.1 898.6 1918.0 996.0 922.0 1953.6 1008.6 945.0 1994.0 1027.1 966.9 2048.5 1058.5 990.0 2094.1 1084.7 1009.4 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 437.1 116.7 315.9 4.5 6.8 458.6 110.7 324.6 23.3 21.5 449.8 101.4 330.8 17.6 13.9 433.6 94.4 333.9 5.3 5.3 433.3 95.9 336.4 1.0 1.0 444.5 101.4 341.1 2.0 2.0 454.2 106.9 346.8 .5 .5 468.9 114.4 353.0 1.5 1.5 Net exports of goods and services 1/ Exports Imports 29.2 367.4 338.2 20.8 368.2 347.5 18.0 362.8 344.8 23.2 365.7 342.5 18.4 359.4 341.0 14.2 362.1 347.9 12.6 371.3 358.7 15.7 383.0 367.3 Gov't. purchases of goods and services Federal 2/ State and local 576.5 221.6 354.9 577.4 219.5 357.9 590.5 227.7 362.9 608.1 239.2 368.9 615.9 240.9 375.0 628.8 247.7 381.1 641.3 253.9 387.4 659.1 265.4 393.7 Gross national product in constant (1972) dollars 1516.4 1510.4 1508.2 1492.0 1485.4 1488.8 1500.7 1512.5 Persoonal income Wage and salary disbursements personal income Disposable Saving rate (percent) 2319.8 1442.9 1947.8 4.6 2368.5 1467.0 1985.6 5.4 2440.0 1497.8 2040.1 4.9 2483.4 1512.2 2089.5 5.7 2522.3 1533.3 2125.0 5.5 2564.8 1556.7 2158.9 5.1 2628.3 1584.9 2246.2 6.3 2682.9 1621.4 2289.4 6.0 182.7 213.4 191.8 216.7 207.2 230.7 218.2 237.1 -104.0 -.6 -148.0 -46.1 -146.3 -42.1 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 203.0 257.0 190.3 229.0 189.4 230.0 189.1 225.2 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) 3/ -46.6 .5 -47.2 6.6 -60.1 1.7 -96.6 -16.1 36.9 6.6 36.1 4.3 38.2 5.5 35.4 2.1 105.8 7.4 106.8 7.4 106.4 7.2 106.8 8.3 91.2 20.2 91.5 20.4 91.9 20.5 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 mfg. (percent) Materials (percent) Housing starts, private (million units, A.R.) New autos sales, (millions, A.R.) Domestic models Foreign models 1/ 2/ 151.8 79.9 82.2 1.39 9.96 7.31 2.66 152.5 79.8 81.2 153.1 79.2 81.2 1.18 7.89 5.63 2.25 .97 9.03 6.90 2.13 91.6 20.1 148.4 75.9 77.2 .87 7.80 5.70 2.10 -103.9 -8.8 33.5 -.6 107.1 8.6 91.2 19.7 147.0 74.6 75.5 1.00 8.30 6.20 2.10 32.8 -2.0 34.2 -1.4 36.0 107.3 8.8 107.5 8.8 107.8 8.8 91.0 19.5 148.6 74.8 76.1 1.10 8.70 6.40 2.30 90.9 19.6 150.3 75.2 76.9 1.20 9.10 6.70 2.40 -. 4 91.0 19.7 152.0 75.6 77.5 1.30 8.95 6.55 2.40 Balance of payments data and details underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. Estimates in table are evaluated at a 5.1 percent high employment unemployment rate. Evaluated at a 6.1 percent unemployment rate, the high employment budget would show a deficit of $37.6 billion in 1980-Q4 and a deficit of 8 $43.4 billion in 1981-Q4, and a deficit of $70.4 billion in 19 2-Q4. I-10 November 10, CONFIDENTIAL - FR CLASS II FOMC 1981 PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS (Annual rates compounded quarterly) 1981 Q___ 1982 Projected Q3 Q2 Q4 QI Q2 Q3 Q4 3.3 3.5 3.9 4.4 3.2 3.1 3.5 3.4 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports -1.6 -4.7 -4.5 -3.2 -. 6 -.5 -.4 1.9 -4.2 -2.3 -3.0 -3.2 -1.8 -1.2 -1.0 -.5 Personal consumption expenditures Goods -2.1 -5.3 1.6 4.3 5.0 3.5 -1.9 -5.0 1.7 .0 -1.4 1.6 1.2 1.2 1.2 4.6 7.0 2.1 3.0 4.4 1.5 -6.9 -. 5 -3.5 3.8 16.8 -.6 1.9 15.6 .4 6.3 22.7 1.0 Services -21.4 -29.7 -3.0 Gross private domestic investment Residential structures Business fixed investment 24.2 3.6 13.3 16.1 -23.4 -2.1 -9.2 -33.3 -.4 Gov't. purchases of goods and services Federal National defense State and local 5.4 14.8 1.1 .2 -5.6 -8.4 2.6 -3.8 -. 5 5.3 8.1 -4.0 .7 5.3 5.9 -2.0 -2.1 -3.7 4.6 -1.1 1.0 4.1 4.5 -.9 1.5 4.7 4.6 -.6 1.3 4.4 9.6 -.7 3.0 1.4 2.2 1.5 -. 7 -. 6 10.1 1.8 Gross national product Final purchases Private Excluding net exports 19.2 15.5 16.0 14.9 4.7 2.0 2.3 3.9 8.8 9.7 9.8 10.4 5.0 6.8 5.4 4.5 10.1 10.3 10.9 11.2 10.7 10.6 10.3 9.8 Personal consumption expenditures Goods Services 1.2 17.2 10.9 4.3 -. 7 10.1 13.7 11.9 15.7 6.4 2.4 10.8 8.5 7.5 9.6 11.4 12.8 9.9 9.2 10.3 8.1 Gross private domestic investment Residential structures Business fixed investment 45.9 14.0 19.6 10.7 25.0 5.7 9.0 23.5 6.9 13.6 31.2 7.3 Gov't. purchases of goods and services Federal National defense State and local 13.5 19.3 10.4 10.0 .6 -3.7 8.7 3.3 9.4 15.7 18.4 5.7 12.4 21.8 25.1 6.8 8.6 11.8 10.1 6.7 8.2 10.4 9.9 6.8 11.6 19.4 27.1 6.7 Disposable personal income 11.2 8.0 11.4 10.0 6.8 6.5 17.2 7.9 Personal income Wage and salary disbursements 11.8 13.5 8.7 6.9 12.6 8.7 7.3 3.9 6.4 5.7 6.9 6.2 10.3 7.4 8.6 9.5 Corporate profits with IVA & C.C. Adj. Corporate profits before tax Nonfarm payroll employment 50.4 12.6 1.8 .5 -22.8 -37.0 1.4 4.2 -1.9 1.8 1.6 1.9 -. 6 -8.2 -1.4 -8.6 -12.9 -19.2 -1.5 -6.6 21.5 6.2 -1.1 -3.7 36.2 28.5 -. 2 1.1 23.0 11.7 .4 2.0 4.3 11.6 7.0 1.4 9.6 8.1 -2.2 9.4 11.9 -.9 8.5 9.4 -.5 8.9 9.4 2.1 8.1 5.8 6.4 9.4 9.6 7.1 7.3 6.6 7.3 8.2 9.7 7.5 9.6 11.2 12.0 8.5 8.6 11.1 7.5 7.2 10.5 7.4 7.1 6.5 7.1 6.7 6.8 6.7 6.6 6.9 -3.7 4.4 4.7 4.6 Disposable personal income Current dollars Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs hour GNP implicit deflator 1/ 21.1 -19.2 11.4 -7.4 -29.7 7.9 7.6 5.2 10.4 -13.7 -24.8 3.8 5.2 2.9 10.9 6.8 Gross domestic business product fixed-weighted price index 2/ Excluding food and energy onsumer price index (all urban) 8.3 Industrial production -. t/ 2/ -. i .. . -------- ~--------- Excluding Federal pay increases, the rates ot change are: 7.1 percent; 1982-Q4, 6.4 percent. Uses expenditures in 1972 as weights. 1.9 IY9l-1, 1.6 -11.7 9./ percent; Y1981-4, a.0 percent; 1982-Q1, I-11 November 10, 1981 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) Projected 1981 1982 1975 1976 1977 1978 1549.2 1556.1 1216.2 1189.4 1718.0 1706.2 1344.1 1330.4 1918.0 1897.0 1502.5 1506.7 2156.1 2133.9 1701.3 1701.9 2413.9 2396.4 1922.6 1909.2 2626.1 2632.0 2097.3 2074.0 2917.2 2904.5 2316.4 2293.6 3124.3 3123.0 2486.7 2471.5 Personal consumption expenditures Goods Services 976.4 539.5 437.0 1084.3 598.5 485.7 1205.5 657.8 547.7 1348.7 729.1 619.6 1510.9 814.5 696.3 1672.8 887.6 785.2 1861.5 978.2 883.2 2022.5 1044.7 977.8 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 206.1 55.3 157.7 -6.9 -10.5 257.9 72.0 174.1 11.8 13.9 322.3 95.8 205.5 21.0 20.2 375.3 111.3 242.0 22.2 21.8 415.8 118.6 279.7 17.5 13.4 395.3 105.3 296.0 -5.9 -4.7 444.8 105.8 326.3 12.7 11.9 450.2 104.6 344.3 1.2 1.2 Net exports of goods Exports Imports 26.8 154.9 128.1 13.7 170.9 157.1 -4.2 183.3 187.5 -. 6 219.8 220.4 13.4 281.3 267.9 S23.3 339.8 316.5 22.8 366.0 343.2 15.2 368.9 353.7 339.9 122.7 217.2 362.1 129.2 232.9 394.5 143.9 250.6 432.6 153.4 279.2 473.8 167.9 305.9 534.7 198.9 335.8 588.1 227.0 361.1 636.3 252.0 384.3 Gross national product in constant (1972) dollars 1233.9 1300.4 1371.7 1436.9 1483.0 1480.7 1506.8 1496.8 Personal income Wage and salary disbursements Disposable personal income Saving rate (percent) 1265.0 806.4 1096.1 8.6 1391.2 889.9 1194.4 6.9 1538.0 983.8 1311.5 5.6 1721.8 1943.8 1105.2 1236.1 1462.9 1641.7 5.2 5.2 2160.2 1343.7 1821.7 5.6 2402.9 1480.0 2015.8 5.1 2599.6 1574.1 2204.9 5.8 110.5 132.1 138.1 166.3 164.7 192.6 185.5 223.3 196.8 255.4 182.7 245.5 192.9 235.3 200.0 224.5 -69.3 -29.2 -53.1 -20.1 -46.4 -23.0 -29.2 -15.7 -14.8 -2.2 -61.2 -18.2 -62.6 -1.8 -125.5 -24.4 Gross national product Final purchases Private Excluding net exports and services 1/ Gov't. purchases of goods and services Federal 2/ State and local Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 1979 1980 Federal government surplus or deficit (N.I.A. basis) High employment surplus or deficit (-) State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 5.5 -7.6 16.6 .9 28.1 10.1 29.0 9.0 26.7 2.9 29.1 2.1 36.6 4.6 34.1 -1.1 Civilian labor force (millions) Unemployment rate (percent) 92.6 8.5 94.8 7.7 97.4 7.0 100.4 6.0 102.9 5.8 104.7 7.1 106.4 7.6 107.4 8.7 Nonfarm payroll employment (millions) 76.9 18.3 79.4 19.0 82.5 19.7 86.7 20.5 89.8 21.0 90.6 20.3 91.6 20.3 91.1 19.6 130.5 79.5 81.1 138.1 81.9 82.7 146.1 84.4 85.6 152.5 85.6 87.4 151.4 78.7 80.4 149.5 75.1 76.5 1.54 10.12 8.63 1.50 1.99 11.13 9.07 2.06 2.02 11.28 9.29 1.99 1.75 10.70 8.38 2.32 1.10 8.71 6.41 2.30 1.15 8.76 6.46 2.30 Manufacturing 117.8 Industrial production (1967=100) Capacity utilization: all manufacturing (percent) 72.9 73.4 Materials (percent) Housing starts, private (million units, A.R.) New auto sales, (millions, A.R.) Domestic models Foreign models 1/ 2/ 1.16 8.66 7.08 1.58 147.0 79.1 80.0 1.29 9.04 6.62 2.42 Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I-12 November 10, 1981 CONFIDENTIAL - FR CLASS II FOMC PERCENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS 1975 1976 1977 1978 1979 1980 -1.1 .3 -. 1 -.6 5.4 4.2 5.3 6.2 5.5 5.2 6.0 6.5 4.8 4.7 15.4 5.2 3.2 3.5 4.0 2.9 -.2 .7 .2 -1.0 5.6 6.7 4.3 4.9 5.2 4.5 4.7 4.2 5.4 2.9 1.9 4.1 19.2 21.3 5.3 15.7 18.5 11.9 Projected 1981 1982 Constant (1972) dollars Gross national product Final purchases Private Excluding net exports Personal consumption expenditures Goods Services Gross private domestic investment Residential structures Business fixed investment -20.8 -12.5 -12.1 1.3 -5.2 6.5 -12.5 -18.6 -3.0 4.1 -5.7 1.6 -5.2 -7.5 -1.6 .2 2.1 3.6 -1.0 -.4 1.8 5.4 -1.7 .0 -. 7 -2.3 .5 2.1 4.1 .8 .9 2.0 -.9 .0 3.7 1.5 1.9 2.6 1.2 2.9 6.3 5.7 1.0 2.0 3.6 3.6 4.4 3.1 .7 2.1 1.7 8.0 9.6 9.0 7.9 10.9 9.6 10.5 11.8 11.6 11.2 11.8 13.3 12.4 12.5 13.2 12.9 12.0 12.3 13.0 12.2 8.8 9.8 9.1 8.6 11.1 10.4 10.4 10.6 7.1 7.5 7.4 7.8 Personal consumption expenditures Goods Services 9.9 -9.0 11.1 11.1 10.9 11.2 11.2 9.9 12.7 11.9 10.8 13.1 12.0 11.7 12.4 10.7 9.0 12.8 11.3 10.2 12.5 8.7 6.8 10.7 Gross private domestic investment Residential structures Business fixed investment -9.9 -4.7 .8 25.1 30.2 10.3 25.0 33.1 18.1 16.5 16.1 17.7 10.8 6.6 15.6 -4.9 -11.3 5.8 12.5 .5 10.3 1.2 -1.1 5.5 Gov't. purchases of goods and services Federal National defense State and local 11.8 10.6 7.7 12.5 6.5 5.3 3.7 7.3 8.9 11.4 8.5 7.6 9.7 6.6 7.1 11.4 9.5 9.5 11.2 9.6 12.9 18.5 18.4 9.8 10.0 14.1 16.1 7.5 8.2 11.0 14.9 6.4 Disposable personal income 9.8 9.0 9.8 11.5 12.2 11.0 10.6 9.3 Personal income Wage and salary disbursements 8.2 5.3 10.0 10.4 10.6 10.6 12.0 12.3 12.9 11.8 11.1 8.7 11.2 10.1 8.2 6.4 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 16.5 -3.3 25.0 25.9 19.3 15.8 12.6 15.9 6.1 14.4 -7.2 -3.9 5.6 -4.2 3.7 -4.6 Nonfarm payroll employment Manufacturing -1.7 -8.8 3.2 3.7 3.9 3.6 5.1 4.2 3.6 2.6 .8 -3.5 1.1 -.1 -.6 -3.2 3.2 9.6 4.7 2.0 -8.1 5.5 -.2 7.6 8.7 -.7 9.7 10.4 -.3 10.0 10.3 1.2 10.1 8.8 .4 8.6 8.1 9.6 5.2 5.8 7.3 8.5 9.0 9.2 9.2 9.1 5.5 6.0 5.8 6.3 6.5 6.5 7.8 7.5 7.7 9.7 8.4 11.3 10.8 5.8 5.8 4.4 Gov't. purchases of goods and services Federal National defense State and local Disposable personal income Current dollars Gross national product Final purchases Private Excluding net exports Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator Gross domestic business product fixed-weighted price index 1/ Excluding food and energy Consumer price index (all urban) Industrial production 1/ Uses expenditures in 1972 weights. -8.9 9.2 7.8 9.8 8.2 13.5 9.4 9.2 10.5 7.9 8.0 9.0 -3.5 3.0 -1.3 FEDERAL SECTOR ACCOUNTS (Billions of dollars) November 10, 1981 FRB Staff Estimates FY 1982 e/ F.R. Admin. 1/ Board CY 81 e/ E.R. Board Calendar quarters; unadjusted data 1981 I* II* III* IV I Fiscal Year 1980* Fiscal Year 1981* 520.0 579.6 602.6 660.5 662.4 704.8 632.7 729.8 533.0 600.9 614.6 688.1 127.0 160.6 135.2 167.3 183.7 167.4 156.7 165.3 138.9 188.1 146.7 165.6 192.4 186.0 -59.6 -57.9 -42.5 -97.1 -67.9 -73.5 -33.6 -32.1 16.3 -8.6 -49.2 -18.9 6.4 -14.2 -73.8 -21.0 -78.9 -18.2 -60.7 -21.3 -118.4 -15.3 -83.2 -23.5 -97.0 -2.2 -35.8 -6.4 -38.5 -5.5 10.8 -6.9 -15.5 -4.7 -53.9 -5.9 -24.8 -5.1 1.3 -5.6 -40.9 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 3/ 70.5 3.2 0.1 79.3 2.3 -2.7 59.0 0.0 1.7 112.5 2.4 3.5 79.3 3.6 0.3 90.1 1.2 5.7 27.7 8.7 -0.6 35.8 1.6 1.1 -2.6 -5.7 -2.5 18.5 -2.3 -0.7 38.5 7.6 7.8 29.3 0.0 -4.5 5.7 -5.2 -1.8 39.0 0.0 2.0 Cash operating balance, 21.0 18.7 18.7 16.3 12.3 11.1 12.3 10.7 16.4 18.7 11.1 11.1 16.3 16.3 21.4 37.7 n.a. 26.6 24.3 35.1 9.0 3.6 9.7 15.4 6.4 6.1 8.7 5.4 Receipts Expenditures Purchases Defense Nondefense All other expenditures Surplus(+)/deficit(-) 527.3 578.2 190.2 126.1 64.1 388.0 -50.9 n.a. 667.5 220.2 147.4 72.8 447.3 n.a. 678.3 719.3 247.4 171.7 75.7 '471.9 -41.0 631.3 745.1 245.4 169.8 75.6 499.7 -113.8 540.8 602.0 198.9 131.7 67.2 403.1 -61.2 625.8 688.4 227.0 152.9 74.1 461.4 -62.7 573.2 641.1 212.0 141.6 70.4 429.1 -67.9 617.4 664.0 221.6 145.2 76.4 442.4 -46.6 High Employment (H.E.) Surplus(+)/deficit(-) evaluated at H.E. unemployment rate of: 5.1 percent 6.1 percent -16.7 -39.5 -1.1 -26.7 n.a. n.a. -17.9 -45.7 -18.2 -41.6 -1.8 -28.2 -13.3 -37.6 0.5 -24.9 Unified budget receipts Unified budget outlays Surplus(+)/deficit(-), unified budget Surplus/deficit(-), off-budget agencies 2/ Combined deficit to be financed Memo: end of period Sponsored agency borrowing' 19* 1980 IV* II III 154.7 190.0 -35.3 NIA Budget *--actual e--estimated Seasonally adjusted annual rates 641.7 628.0 631.1 621.0 636.6 746.6 668.2 696.5 724.8 735.8 240.9 247.7 219.5 227.7 239.2 148.2 154.6 163.5 167.8 171.9 71.3 73.0 75.7 73.1 75.8 448.7 468.8 485.6 494.9 498.9 -60.1 -96.8 -104.7 -104.9 -47.2 6.6 -19.2 1.7 -25.2 -16.1 -43.4 -8.8 -36.7 -0.6 -29.0 624.4 773.3 253.9 176.0 77.9 519.4 -148.9 -46.1 -73.7 n.a.--not available. On September 24, 1981, the Administration presented revised estimates of unified budget receipts and 1. OMB Mid-Session Review of the 1982 Budget, July 1981. outlays for FY1982. The Fall Budget Program Fact Sheet estimates receipts of $666.2 billion and outlays of $709.3 billion for a deficit of $43.1 billion. 2. Includes Federal Financing Bank, Postal Service Fund, Rural Electrification and Telephone Revolving Fund, and Rural Telephone Bank. 3. Checks issued less checks paid, accrued items and other transactions. 4. FRB staff estimates include Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives marketable debt on an offering basis. NOTE: Quarterly figures may not add to yearly totals due to rounding. = DOMESTIC FINANCIAL DEVELOPMENTS Summary. Interest rates have declined since the October FOMC meet- ing as financial markets have responded to further weakening in economic activity, an associated moderation in private sector credit demands, and continued sluggishness in narrow money growth. After trading in a 14-1/2 to 15-1/2 percent range throughout most of the intermeeting period, the federal funds rate has dropped below 14 percent. Meanwhile, most other short-term rates have fallen 2 to 2-3/4 percentage points from their early October levels. In concert with these developments, the prime lending rate has been cut 2 percentage points to 17 percent. The one-point reduction in the basic discount rate announced at the end of October added momentum to the slide in money market rates in early November. Yields in long-term securities markets have also moved down from the record weekly highs posted in mid- to late September. Most of these rates now stand 3/4 to 1-1/2 percentage points below those levels. Commitment rates posted for conventional home mortgages have receded from their early October peak as well, and equity prices have recovered somewhat from the depressed levels at the end of the third quarter. The relative movement in short-term and long-term rates has produced an upward-sloping yield curve for taxable securities for the first time in more than a year. M1-B, adjusted for shifts into NOW accounts, grew at only a 3-1/2 percent rate in October, roughly offsetting a decline in the preceding month. From the fourth quarter of 1980 through October 1981, growth in this aggregate was only 1-1/4 percent at an annual rate, well below the FOMC's long-run range. I-14 I-15 M2 expansion also picked up in October, reflecting an acceleration in its nontransaction component as well as the up-tick in M1-B. Deposi- tory institutions garnered an estimated $27-3/4 billion in the new taxexempt all savers certificates (ASCs) during the first part of October; however, most of the money placed in ASCs represented diversions from other components of M2--primarily time deposits. Bank credit advanced at an 8 percent rate in October--down from the pace of the preceding two months--as growth in all major lending categories tapered off. The expansion in loans to business firms was about 13 percent at an annual rate--its slowest pace since April. Inflows into core deposits and government accounts during October were sufficient to finance the expansion in bank credit; consequently these institutions cut their dependence on managed liabilities, contributing to a slowing of M3 growth. Thrifts also took advantage of renewed deposit flows to pay down FHLB advances in October and to rebuild liquidity as their mortgage lending activity deteriorated further. The deceleration in bank business lending was but one part of a more general reduction in short-term credit demands by this sector. After sky- rocketing in the third quarter, the net issuance of commercial paper by nonfinancial corporations slowed to a virtual standstill in October. Pub- lic offerings of long-term debt, while up somewhat from the depressed third-quarter pace, remained sluggish, but volume did pick up markedly in early November as the decline in long-term rates gathered momentum. Equity financing totalled only $700 million (seasonally adjusted) in October, about half the third-quarter pace. I-16 Households evidently reduced their borrowing in September, and most likely continued to borrow lightly in October. The level of S&L holdings of residential mortgages was unchanged in September and their loan commitment activity was cut back still further. Growth in consumer installment credit also was about unchanged in September from its August pace, with finance companies continuing to dominate the market, especially for auto credit. The sharp fall-off in auto sales in October suggests that consumer credit growth slowed substantially in that month. The government sector continued on balance to place large demands on credit markets. State and local governments sold a considerable amount of short-term debt and issued bonds at a pace only slightly below the high third-quarter average. From the beginning of October through mid-November the U.S. Treasury raised $18 billion in new cash from the public. Borrow- ing by federally sponsored agencies, in contrast, fell back sharply as FHLBs ran off debt using funds repaid by S&Ls. Outlook. In the months ahead the staff expects credit demands by the private sector to moderate further, largely as a result of the projected weakness in the economy. Under these conditions, over the near term interest rates in both short- and long-term markets may be under some additional downward pressure. In the business sector, cutbacks in capital spending plans are expected to reduce external financing needs substantially in the fourth quarter; consequently, demands for credit by nonfinancial corporations are likely to taper off. It is probable that firms will enter the bond market in size to attempt a restructuring of their balance sheets if long-term rates stay at their current levels or decline further. I-17 Credit flows to the household sector also are expected to remain sluggish. High mortgage rates and limited primary market activity on the part of the troubled thrift industry suggest that mortgage credit growth will be slow, and the expected weakness in auto sales portends sluggish activity in this major component of consumer installment credit as well. The government sector, on the other hand, is expected to remain a source of sizable demand in credit markets. Borrowing by the federal government will be heavy over the balance of the quarter, as the Treasury completes its financing of a record quarterly deficit. State and local governments are expected to continue raising substantial amounts of money. INTERNATIONAL DEVELOPMENTS Summary. The weighted-average value of the dollar has declined, on balance, by about 3 percent since the end of September. During that period the dollar experienced upward and downward fluctuations over a range of 4-1/2 percent, responding to political developments in the Middle East and Poland as well as to movements in actual or expected relative interest rates. Over the period as a whole U.S. short-term interest rates declined about 3 percentage points, while a weighted average of comparable foreign rates declined by around 1 percentage point. The United States remained out of the market. On October 4 the EMS was realigned; the central rates for the German mark and Dutch guilder wer revalued by 5-1/2 percent vis-a-vis the Belgian franc and the Danish krone, while the central rates for the French franc and Italian lira were devalued by 3 percent. After the realignment the French franc moved to the top of the new EMS band, and the mark and guilder moved near their intervention floors. I - 18 I - 19 Economic activity in the major foreign economies remained generally weak in the third quarter, according to preliminary indicators. Industrial production was flat or negative in most countries; the principal exception was Japan, where expanding exports were a supporting factor. In France also activity appears to have picked up in the summer months, and inflation accelerated. Unemployment rose further in all major foreign economies from already high levels. With acti- vity sluggish and unemployment high, government deficits are tending to rise. There are few signs yet of significant abatement in price inflation, though the rate of price increase appears to have slowed in the United Kingdom after a bulge earlier in the year. The German and Japanese current-account balances showed further gains in the third quarter. The Japanese balance has now moved into substantial suplus, while the German deficit is diminishing. In the United States, the trade deficit in the third quarter rose slightly to $29 billion (SAAR), as the deficit in September dropped sharply from a temporary peak in August. somewhat in the quarter. Exports declined About half of the decline reflected a slow- down in agricultural shipments early in the quarter. Other exports also declined somewhat, with a rise in coal exports more than offset by a drop in exports of civilian aircraft and smaller declines in other commodity categories. On the import side, the value of oil I - 20 imports fell sharply as both price and quantity declined. imports increased moderately. Other With the small increase in the trade deficit, and probably a small decline in net service receipts, it appears that the third-quarter current account was about in balance, compared with a small surplus in the second quarter. U.S.-based banks increased their net advances to their foreign branches (on a daily average basis) by about $6 billion in SeptemberOctober, while credit extended by the branches to U.S. nonbanks rose about $2 billion. The rise in credit to U.S. borrowers indicated a continued shift to LIBOR pricing, as the prime rate exceeded LIBOR by about 200 basis points in September and October. For the year, through October, net advances to foreign branches were up about $1 billion, but credit extended by the branches to U.S. nonbanks expanded by about $6 billion. A larger flow of funds was connected with placements in the Eurodollar market by U.S. nonbanks. Such holdings rose from about $60 billion at the beginning of the year to about $85 billion in August. About one-third of the increase was accounted for by purchases of Eurodollar CDs by money market mutual funds. Such CDs are an increasingly important component of banks' borrowings. Foreign net purchases of U.S. corporate stocks were negligible in July and August, in contrast to sizeable inflows through mid year. However, foreign net purchases of U.S. bonds were maintained at a substantial rate. Foreign official assets in the United States declined $4.8 billion in August, and appear to have declined by a further $1 billion I - 21 in September and October. Holdings of the G-10 countries fell about $2-1/2 billion in August, and by a like amount in September-October, . Holdings of OPEC countries were about unchanged over the August-October period; they had increased by $10.6 billion in the first seven months of the year. Outlook. A gradual recovery of economic activity in major indus- trial countries is projected for next year. However, the rate of growth of real GNP through the fourth quarter of 1982 is still expected to be less than 3 percent. The principal near-term source of strength in some countries is the export sector. On this projection unemploy- ment would continue to rise, but the staff is not assuming any significant shift toward stimulative policies. Inflation is expected to decelerate, with capacity utilization well below historical levels and wage settlements tending to moderate. This foreign outlook is not significantly changed from a month ago, but changes in other factors have had the effect of reducing the projected current-account deficit to perhaps $5 billion in 1982, down from about $21 billion. The main changes are (1) an earlier decline in the dollar exchange rate; (2) reduced demand in the U.S. economy; (3) lower average import prices for petroleum in 1982, and (4) larger agricultural exports as a result of a large U.S. harvest and some reduction in harvests elsewhere. The average value of the dollar in recent months has been somewhat lower than projected earlier, largely reflecting the shifts in relative interest rates. Further declines over the year ahead are expected to be relatively minor unless U.S. interest rates decline significantly relative to foreign rates. November 10, 1981 OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS (BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES) CONFIDENTIAL (FR) CLASS II FOMC 1980 ANN. 1. 2. 3. P/ 1981 Q II 1981 III 1981 Q IV 1982 Q I 1982 Q II 1982 QOI1 1982 Q IV CURRENT $, NET EXPORTS OF G&S IMPORTS OF G&S 23.3 339.8 316.5 22.8 366.0 343.2 15.2 368.9 353.7 29.2 367.4 338.2 20.8 368.2 347.5 18.0 362.8 344.8 23.2 365.7 342.5 18.4 359.4 341.0 14.2 362.1 347.9 12.6 371.3 358.7 15.7 383.0 367.3 CONSTANT 72 $, NET EXPORTS OF G&S IMPORTS OF G&S 52.0 161.1 109.1 44.1 159.5 115.4 36.3 150.1 113.7 50.9 162.5 111.6 46.2 161.2 115.4 39.5 157.9 118.4 39.8 155.9 116.1 38.3 150.2 111.9 36.2 148.5 112.3 35.2 149.7 114.6 35.7 151.9 116.1 74.6 75.7 79.4 78.5 78.7 79.2 79.7 TERMS OP TRADE (1972=100) 1/ ------- ---- ------ --- --- 72.7 -- -- --- --- ---- U.S. MERCHANDISE TRADE BALANCE 2/ --- 77.1 --- ---- 79.0 --- -- - --- --- --- 78.8 ---- --- 0- -25.3 -24.8 -30.8 -18.7 -27.7 -28.9 -23.7 -26.1 -28.4 -33.4 -35.0 EXPORTS (EXCL. MILITARY) AGRICULTURAL NONAGRICULTURAL 224.0 42.2 181.7 239.1 45.4 193.8 239.3 50.1 189.2 244.4 50.9 193.5 241.9 44.3 197.6 232.0 39.6 192.5 238.2 46.6 191.6 237.5 48.0 189.5 237.9 49.3 188.6 239.3 50.6 188.7 242.5 52.5 190.0 IMPORTS PETROLEUM AND PPODUCTS NONPETROLEUM 249.3 78.9 170.4 263.9 77.8 186.1 270.1 70.6 199.5 263.1 83.3 179.8 269.6 84.8 184.8 260.9 71.9 189.0 261.9 71.3 190.6 263.6 71.5 192.1 266.3 71.2 195.1 272.7 70.5 202.2 277.5 69.1 208.4 -5.0 13-1 32.3 36.2 34.6 33.7 .6 10.8 .6 10.7 .6 8.1 U.S. CURRENT ACCOUNT BALANCE NET INVESTMENT INCOME FOREIGN OUTLOOK - 3.7 4.7 32.8 34.4 1.8 10.5 .5 9.6 4.3 -1.3 2.8 33.2 -. 9 .9 32.0 -4.7 -4.7 -7.8 -7.8 -6.6 -6.6 30.3 32.1 34.9 2.2 8.6 2.7 7.6 TEN INDUSTRIAL COUNTRIES 3/ REAL GNP, X CHANGE, ANNUAL BATES CONSUMER PRICES, 4/, % CHANGE, ANNUAL RATES 1/ 2/ 3/ 1981 Q I 1982 ANN. GNP NET EXPORTS OF WHICH: 4. 1981 ANN. 1.8 8.4 1.2 8.2 2.0 8.6 2.8 7.5 GNP EXPORT IMPLICIT DEFLATOR DIVIDED BY GNP IMPORT IMPLICIT DEFLATOB. INErNATIONAL ACCOUNTS BASIS. GEOMETRIC NEIGHTS USED TO AGGREGATE FOREIGN REAL GNP AND CONSUMER PRICBS -- PERCENT SHARE IN TEN-COUNTBY TOTAL MULTILATERAL TRADE. CANADA (9.15), JAPAN (13.6X), UNITED KINGDOM (11.9%), GERMANY (2C.8X), PBACE (13.1%), ITALY (9.0X), BELGIUM (6.4%), THE NETHERLANDS (8.3%), SNITZERLAND (3.61), SNEDEN (4.2%). PROJECTED.
@FedFRASER