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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 I FOMC November 10, 1981 RECENT DEVELOPMENTS Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System TABLE OF CONTENTS Section DOMESTIC NONFINANCIAL DEVELOPMENTS Page II Industrial production and capacity utilization.................. Employment................................................. ... ... Personal income and consumer spending............................ Residential construction......................................... Business fixed investment........................................ Business inventory investment.................................... Federal government.............................................. State and local government....................................... Prices........ ........................................... .. .... Wages and labor costs............................................. 1 4 6 10 13 17 19 21 22 24 TABLES: Capacity utilization............................................ Changes in employment............................................ Selected unemployment rates.................................... Personal income................................................. ..... .. ...... . .... Retail sales............................ Auto sales................ ....................................... Private housing activity....................................... Business capital spending indicators............................. Business capital spending commitments........................... McGraw-Hill fall survey of plant and equipment expenditures....... Recent error history of the McGraw-Hill survey................... Changes in manufacturing and trade inventories................... Inventories relative to sales.................................... Fiscal year 1981 budget................................... ..... Recent changes in producer prices............................... Recent changes in consumer prices................................ Selected measures of compensation, productivity and costs........ Negotiated wage rate changes.................................... 3 5 5 7 8 8 12 15 15 16 16 18 18 20 23 23 25 26 CHARTS: Industrial production indexes.................................. Consumer attitudes.............................................. Private housing starts.......................................... Commitments for business capital spending........................ APPENDIX II-A: 2 9 11 14 Planned Changes in the CPI Homeownership Measure. DOMESTIC FINANCIAL DEVELOPMENTS III Monetary aggregates and bank credit.............................. Business finance................................................ Government finance.............................................. Mortgage markets................................................ Consumer credit................................................ 3 7 11 15 17 TABLE OF CONTENTS (cont.) Section TABLES: Page III Monetary aggregates............................................. Commercial bank credit and short- and intermediateterm business credit.......................................... Gross offerings of corporate securities.......................... Federal government and sponsored agency financing................ State and local government security offerings.................... Net change in mortgage debt outstanding.......................... Secondary market for home mortgages.............................. Consumer installment credit..................................... 4 6 10 12 12 14 14 16 CHARTS: Treasury security yield curves................................... Unused C&I loan commitments at selected large commercial banks... APPENDIX III-A: 2 8 Financial Innovation and the Monetary Aggregates-Summary of Bank Contact Group Responses INTERNATIONAL DEVELOPMENTS IV Foreign exchange markets........................................ U.S. international transactions................................. Foreign economic developments................................... Individual country notes......................................... 1 4 10 10 TABLES: U.S. merchandise trade........................................... U.S. oil imports in 1981........................................ International banking data...................................... U.S. international transactions................................. Major industrial countries: . Real GNP and IP............................................ Consumer and wholesale prices.................................. Trade and current-account balances............................. 4 6 7 8A 11 12 13 CHARTS: Weighted-average exchange value of the U.S. dollar............... Selected 3-month interest rates................................. 2 2 II - T - 1 November 10, 1981 SELECTED DOMESTIC NONFINANCIAL DATA (Seasonally adjusted) Latest data Period Release date Data Percent change from Three Year Preceding periods earlier earlier period (At annual rate) Civilian labor force Unemployment rate (%) 1/ Insured unemployment rate (%) 1/ Nonfarm employment, payroll (mil.) Manufacturing Nonmanufacturing Private nonfarm: Average weekly hours (hr.) 1/ Hourly earnings ($) 1/ Manufacturing: Average weekly hours (hr.) 1/ Unit labor cost (1967=100) 11-6-81 11-6-81 10-12-81 11-6-81 11-6-81 11-6-81 106.7 8.0 3.7 91.7 20.2 71.5 5.6 7.5 3.5 -2.7 -16.1 1.2 34.9 7.38 34.9 7.36 35.3 7.26 35.3 6.83 11-6-81 10-29-81 39.4 214.9 39.3 19.9 40.0 11.7 39.7 7.1 Sept. Sept. Sept. Sept. Sept. 10-16-81 10-16-81 10-16-81 10-16-81 10-16-81 152.1 148.5 184.7 103.4 153.1 Consumer prices all items (1967=100) Sept. All items, excluding food & energy Sept. Food Sept. 10-23-81 10-23-81 10-23-81 279.0 264.5 278.6 13.9 14.7 11.7 12.9 14.4 10.5 10.9 11.7 6.3 Producer prices: (1967=100) Finished goods Intermediate materials, nonfood Crude foodstuffs & feedstuffs Oct. Oct. Oct. 11-10-81 11-10-81 11-10-81 273.8 314.3 248.9 6.6 .4 -30.5 4.1 7.3 9.1 -12.0 Sept. 10-20-81 2460.6 Industrial production (1967=100) Consumer goods Business equipment Defense & space equipment Materials Personal income ($ bil.) 2/ Oct. Oct. 11-6-81 11-6-81 Oct. Sept. -9.4 -4.0 -3.9 3.5 -13.2 9.6 -2.1 -4.8 2.4 6.7 -2.3 2.8 -23.6 12.8 11.6 (Not at annual rates) Mfrs. new orders dur. goods ($ bil.) Sept. Sept. Capital goods industries Nondefense Sept. Defense Sept. 11-2-81 11-2-81 11-2-81 11-2-81 85.8 29.5 22.7 6.8 -1.8 -3.1 -8.0 18.1 -2.9 4.8 -2.2 37.3 4.4 4.8 .9 20.0 Inventories to sales ratio: 1/ Manufacturing and trade, total Manufacturing Trade 11-5-81 11-2-81 11-5-81 1.43 1.63 1.25 1.40 1.61 1.23 1.40 1.57 1.22 1.48 1.64 1.27 11-2-81 .584 .574 .568 .560 Sept. Sept. 10-13-81 10-13-81 88.8 18.3 .4 -1.2 1.7 -1.1 10.2 7.4 Oct. 11-4-81 Oct. Oct. 11-4-81 11-4-81 Sept. Sept. 10-19-81 10-29-81 Ratio: Aug. Sept. Aug. Mfrs.' durable goods inventories to unfilled orders 1/ Sept. Retail sales, total ($ bil.) GAF 3/ Auto sales, total Domestic models Foreign models (mil. units.) 2/ Housing starts, private (thous.) 2/ Leading indicators (1967=100) 1/ 2/ 3/ -19.1 -25.5 2.9 918.0 130.1 Actual data used in lieu of percent changes for earlier periods. At annual rate. Excludes mail order houses. -1.7 -2.7 -12.7 -13.3 -11.1 -20.9 -24.0 -12.2 -11.6 -2.9 -38.1 -3.2 DOMESTIC NONFINANCIAL DEVELOPMENTS A widespread deterioration of economic activity appears to be underway in the current quarter. Industrial production is estimated to have declined in October for the third consecutive month, and manufacturing employment fell sharply, with declines occurring in a broad range of industries. Activity in sectors that had been weak, such as autos and housing, declined further. Business fixed investment has continued to slip lower, while inventory accumulation has increased. A burst of consumer price inflation occurred in the third quarter, although price increases have continued to ease for many consumer and producer commodities. Industrial Production and Capacity Utilization Industrial production declined 0.3 percent in August and 0.8 percent in September, according to estimates of a month ago, and available data indicate that a larger cutback occurred in October. Auto assemblies in October were cut by roughly 11 percent, and the output of related parts and materials probably also declined considerably. Trade reports indicate that the industry currently plans a further reduction in assemblies in November to 5.4 million units at an annual rate. Production of durable goods for the home fell in September and evidently again in October. Business equipment output declined in September for the first time since last winter and, given the reduced new orders for equipment and a diminished orders backlog, further weakness in this sector appears likely. Materials output, which had increased only slightly during the first half of 1981, turned down in II-1 II-2 INDUSTRIAL PRODUCTION INDEXES (1967=100) Ratio Sca]Le '180 160 Total Oct 140 -120 _I_ 1 1ii 1iiii iiiiiiiiiiii i 100 Ratio Sca:le 180 :turing Nondurable 160 - Durable 140 120 1975 1977 1979 1981 II-3 CAPACITY UTILIZATION: MANUFACTURING AND MATERIALS (Percent, seasonally adjusted) (1) 1972-1980 quarterly Manufacturing industries Primary Processing Textiles mill products Paper and products Chemical and products Petroleum products Rubber and Plastics products Clay, glass and stone products Iron and Steel Nonferrous metals Fabricated metal products Advanced processing Foods Nonelectrical machinery Electrical machinery Motor vehicles and parts Aerospace and misc. trans. equip. Instruments Materials, total Durable goods materials Raw steel Nondurable goods materials Energy materials 1. 2. (2) 1967-1980 (3) (4) August September highs1 Mean 1981 19812 87.8 82.6 79.3 78.5 93.2 95.0 95.7 85.9 98.5 99.3 84.9 86.7 89.4 79.8 91.6 89.4 79.7 80.8 87.7 77.3 75.9 86.2 78.2 n.a. 88.5 n.a. 75.6 84.9 87.7 102.5 98.2 85.4 78.9 83.9 84.9 79.5 70.6 79.2 83.8 73.5 n.a. n.a. 82.3 72.5 85.7 87.1 87.9 89.8 98.0 81.3 84.5 80.8 79.9 81.1 79.1 83.1 80.3 84.2 59.5 78.6 n.a. 79.4 83.0 59.1 92.0 89.3 77.0 83.2 77.0 80.5 76.3 79.7 92.3 91.3 105.4 93.8 94.7 84.4 81.0 86.8 87.6 89.2 81.4 79.0 80.6 83.5 85.0 80.4 77.4 77.2 83.4 83.9 Highs are specific to each series and are not necessarily coincident. Preliminary estimates. II-4 August and fell by more than 1 percent in September. Further declines apparently occurred among durable materials in October, as raw steel output dropped by more than 6 percent. The capacity utilization rate in manufacturing, which had been edging lower since May, fell to 78-1/2 percent in September. were both broader and deeper than in earlier months. evidence suggests that this slackening Declines The available continued in October, with widespread declines occurring in durable manufacturing. The utilization rate for producers of raw steel dropped almost 3-1/2 percentage points in September and an even greater amount in October. Employment The employment situation weakened markedly in October. Payroll employment, as measured by the survey of establishments, declined 200,000 in October, with job losses heavily concentrated in the industrial sector and only partially offset by gains in the service sectors. Manufacturing employment, which had not fully recovered from the sharp contraction of 1980, dropped 275,000, as sizable losses were pervasive across both durable and nondurable goods industries. Employment in the transporta- tion equipment industry is estimated to have fallen 85,000; because BLS does not attempt to seasonally adjust motor vehicle employment during the traditional model changeover period, the reported October drop reflects the cumulative job loss since June. The factory workweek-- although up slightly from its holiday-reduced September figure--remained near its lowest level since the 1980 recession. In other sectors, weak- ness in construction employment persisted in October, but jobs continued to expand in the trade sector. II-5 CHANGES IN EMPLOYMENT1 (Thousands of employees; based on seasonally adjusted data) 1979 1981 1980 Q2 Aug. Q3 Sept. Oct. -Average monthly changesNonfarm payroll employment 2 Strike adjusted Manufacturing Durable Nondurable Construction Trade Finance and services Government 170 176 34 28 89 117 111 94 21 -1 47 62 -205 -220 -5 1 -6 15 30 84 27 -58 -47 -12 -12 12 79 13 78 60 18 -44 27 76 55 25 10 15 -5 54 86 -79 -30 -1 -29 3 66 35 -75 -5 -23 18 -7 17 128 -113 -275 -183 -92 -19 31 38 16 Private nonfarm production workers Manufacturing production workers 103 -9 110 161 77 113 -212 -16 -67 57 16 -33 -1 -260 Total employment 3 Nonagricultural 172 174 -42 -48 -7 -3 -41 -56 -18 -130 -674 -615 -53 -79 1. Average change from final month of preceding period to final month of period indicated. These figures are revised to reflect new seasonal factors and the 1980 benchmark to the establishment survey data. 2. Survey of establishments. Strike-adjusted data noted. 3. Survey of households. SELECTED UNEMPLOYMENT RATES (Percent; based on seasonally adjusted data) 1979 1980 Q2 Q3 1981 Aug. Sept. Oct. 5.8 7.1 7.4 7.2 7.2 7.5 8.0 16.1 Teenagers 9.0 20-24 years old 3.3 Men, 25 years and older Women, 25 years and older 4.8 17.7 11.5 4.7 5.5 19.2 12.3 4.8 5.7 18.7 11.7 4.8 5.7 18.8 11.8 4.8 5.5 19.3 12.1 5.0 5.9 20.6 12.8 5.5 6.1 White Black and other 5.1 11.3 6.3 13.2 6.5 13.7 6.2 14.6 6.1 15.0 6.5 15.1 6.9 15.5 Fulltime workers 5.3 6.8 7.1 6.9 6.7 7.2 7.7 White collar Blue collar 3.3 6.9 3.7 10.0 4.0 9.8 4.0 9.6 3.9 9.3 4.1 10.2 4.1 11.0 Total, 16 years and older II-6 Total employment (household survey), which had fallen substantially in September, posted a further small decline last month. Unemployment increased by more than one-half million workers, and the unemployment rate moved upward for the third consecutive month and at 8.0 percent was the highest rate since 1975. The latest increase in joblessness occurred largely among adult male workers. As in September, layoffs accounted for a large share of the October increase in unemployment. Personal Income and Consumer Spending Total personal income growth slowed to a 9-1/2 percent annual rate in September, as employment cutbacks trimmed the rate of growth in private wages and salaries. The contraction of payroll employment and the small rise in average hourly earnings in October suggest that a further slowing of private wage and salary disbursements has occurred. In real terms, wages and salaries have been virtually unchanged since January. Retail sales in constant dollars in September were a bit lower than early this year. Nominal sales gains in August and September--1.3 percent and 0.4 percent, respectively--were only large enough to offset rising prices. Sales at gasoline service stations rose sharply in September, while sales at food stores remained essentially unchanged after a sharp advance in August. In contrast, spending for general merchandise, apparel, and furniture and appliances (GAF) declined 1.2 percent in September; in the third quarter as a whole, nominal outlays for these discretionary items were up only fractionally. II-7 PERSONAL INCOME (Based on seasonally adjusted data) 1980 1979 Q2 - Total personal income Wage and salary disbursements Private Disposable personal income Nominal Real - - - Q3 1981 July August Percentage changes at annual rates1 - Sept. - - - 12.3 11.0 8.7 12.6 17.1 11.3 9.6 10.8 11.6 9.0 9.2 6.8 7.2 8.7 9.3 9.0 9.9 11.8 13.7 7.7 5.8 11.7 2.0 10.9 .8 8.0 1.4 11.4 2.2 17.0 4.7 9.5 3.0 8.7 -1.8 - - - - - Changes in billions of dollars 2 - - - - Total personal income 18.3 18.7 14.6 25.4 34.0 22.8 Wage and salary disbursements Private Manufacturing 10.3 8.9 2.0 9.8 8.1 2.3 7.0 5.9 3.1 11.7 9.9 2.9 11.0 9.9 2.9 14.5 13.8 2.7 9.6 5.9 3.1 8.9 2.8 9.6 4.1 7.8 1.5 14.4 5.9 23.9 15.3 9.0 .2 10.3 2.2 1.0 .9 .2 Other income Transfer payments Less: Personal contributions for social insurance Memorandum: Personal saving rate 3 .9 .8 5.2 5.6 .2 5.4 .7 4.9 5.0 4.9 19.6 4.8 1. Changes over periods longer than one quarter are measured from final quarter of preceding period to final quarter of period indicated. Changes for quarterly periods are compounded rates of change; monthly changes are not compounded. 2. Average monthly changes are from the final month of the preceding period to the final month of period indicated; monthly figures are changes from the preceding month. 3. Monthly saving rate equals the centered three-month moving average of personal saving as a percentage of the centered three-month moving average of disposable personal income. II-8 RETAIL SALES (Percent change from preceding period; based on seasonally adjusted data) 1981 Q1 Q2 Q3 June July Aug. Total sales 4.9 -. 4 2.3 2.2 .0 1.3 (Real)1 2.9 -1.7 .2 1.9 -1.0 Total, less autos and nonconsumption items 3.5 1.0 .9 1.6 Total, exc. auto group, gasoline, and nonconsumption items 3.3 1.1 1.0 1.7 GAF 2 3.1 1.1 .2 2.7 -2.2 2.3 8.5 10.0 4.4 -4.1 -5.6 -2.6 5.7 10.5 -. 5 3.8 5.5 2.1 .8 2.5 -4.0 2.5 4.5 3.8 1.2 1.5 -. 2 1.5 2.0 1.8 3.1 1.4 -.4 .3 .4 -2.5 -1.1 .7 -.2 2.1 2.8 -.2 .1 -.5 -. 1 -1.8 1.5 Durable goods Automotive Furniture & appliances Nondurable goods Apparel Food General merchandise 3 Gasoline 3.3 5.1 2.1 1.8 4.9 1.3 -.5 2.3 3.2 .1 .7 1.2 2.7 .1 -.1 Sept. .4 .4 -.4 -.5 .7 .2 -. 4 .9 .0 -1.2 1. BCD series 59. Data are available approximtely 3 weeks following the retail sales release. 2. General merchandise, apparel, and furniture and appliance stores. 3. General merchandise excludes mail-order nonstores; mail-order sales are also excluded in the GAF composite sales summary. (Millions of units; AUTO SALES seasonally adjusted annual rates) 1981 July Aug. Sept. 9.0 8.2 10.1 8.8 7.2 2.3 2.1 2.3 2.1 2.0 2.0 7.3 5.6 6.9 5.9 7.9 6.9 5.1 Small 3.9 2.9 3.5 3.1 4.1 3.5 2.6 Intermediate & standard 3.4 2.8 3.4 2.8 3.9 3.5 2.5 Q2 Q3 10.0 7.9 Foreign-made 2.7 U.S.-made Q1 Total Note: Components may not add to totals due to rounding. Oct. II-9 '1 9 81 Consumer Attitudes Index 1975 * 1976 1977 1978 1979 1980 1981 Micigan Survey Research Center index of Consuner Sentiient (1966 QI = 100) and Conference Board Index of Consuer Confidence (1969-1970 100). Bases of indexes ae derived from responses (favorble minus pessimnisc) to twe equaly weighted quesions. Questions in the two indexes are dfferent Note: CB index plotted middle of bi-monthly period to May-June 1977, and monthly beginning to 1977 OIV, and monthly begining in January 1978. June 1977: SRC index plotted middle of quarter II-10 Sales of new domestic autos plunged from a seasonally adjusted annual rate of 6.9 million units in September to a rate of 5.1 million units rate in October. The decrease in sales occurred even though some of the fall rebate programs were extended through October and into November. Sales of new imported cars in October continued at the reduced 2.0 million unit rate of September, in large part reflecting the import quota on Japanese-made cars. Consistent with sluggish consumer demands in recent months, the Michigan and Conference Board surveys for October suggest that consumer confidence in favorable business conditions and employment and income prospects has declined significantly since last summer. While the Michigan survey found expectations of generally lower inflation and interest rates, the outlook for future economic conditions deteriorated. In a special question added to the October Conference Board Survey, 30 percent of the respondents said that they had delayed a purchase because of high interest rates. Those interviewed said that on average they would have had to pay 17-1/4 percent interest on the postponed purchase. Cars were the most frequently mentioned postponed outlay. Residential Construction Conditions in the housing market in September deteriorated further, thus extending the general decline that began in 1978. Housing starts fell nearly 2 percent in September to a 920,000 unit seasonally adjusted annual rate, approaching the post-war low. also declined further in September. Permits issued for new houses Sales of new houses, at an annual rate of 312,000 units, were the lowest in the 18-year history of the series. Sales of existing houses have not declined quite so precipitously, II-11 PRIVATE HOUSING STARTS (Seasonally adjusted annual rate) Millions of units 2.4 Total 2.0 1.6 1.2 Sing Le-family .8 Multifamily 1978 1979 .4 1980 1981 II-12 PRIVATF HOUSING ACTIVITY (Seasonally adjusted annual rates, millions of units) 1980 1981 Annual 01 02 03 1.19 1.29 1.18 1.39 1.11 1.18 .87 .97 0.91 1.05 .87 .93 .84 .92 .71 .85 .69 .87 .64 .78 .49 .64 .53 .70 .49 .60 .45 .62 .53 2.88 .51 2.54 .45 2.59 .36 2.28 .42 2.52 .36 2.26 .31 2.07 Multifamily units Permits Starts .48 .44 .49 .52 .47 .39 .38 .33 .39 .34 .37 .34 .40 .30 Mobile home shipments .22 .25 .26 n.a. .27 .23 n.a. All units Permits Starts Single-family units Permits Starts Sales New homes Existing homes 1. Preliminary estimates. July Aug. Sept.1 II-13 possibly reflecting the importance of loan assumptions and seller financing in supporting this type of activity. Measures of house prices have continued to increase this year, although less than prices in general. The average price of existing homes sold in September was $79,000, only 5.6 percent above September 1980. The average price of new homes sold in September was $82,800, up 3 percent from September 1980. Largely in response to weak effective demand for housing, cost increases for construction inputs also have diminished in recent months. The producer price index for materials for all types of construction edged lower during the third quarter, following an advance of about 8-1/2 percent over the previous year. Producer prices for softwood lumber and plywood--key inputs in housing construction--have declined steadily since mid-summer. Business Fixed Investment Business fixed investment in real terms edged lower in the third quarter, following a small decline in the second quarter. Equipment spending has been especially weak in the past two quarters and is only moderately above its cyclical low of 1980-Q2. There was a substantial increase in purchases of motor vehicles in the third quarter, but as measured in the national income and product accounts this was more than offset by reduced outlays for electrical and nonelectrical machinery and selected transportation items. Business spending for structures continued to rise in the third quarter, though at a slower rate than in early 1981. Real outlays increased for all major types of structures except in the public utility sector where expenditures fell slightly. II-14 COMMITMENTS FOR BUSINESS CAPITAL SPENDING (Seasonally Adjusted) Nondefense Capital Goods Orders Billions of 1972 dollars* 14 - 12 1979 Billions of 1 idential Construction Contracts 1975 1977 Quarterly average of monthly data. 1979 1981 II-15 BUSINESS CAPITAL SPENDING INDICATORS (Percentage change from preceding comparable period; based on seasonally adjusted data) 1981 Q1 Q2 Q3 Nondefense capital goods shipments Current dollars Constant dollars1 1.4 .3 3.2 -.6 1.1 .3 Addendum: Sales of heavyweight trucks (thousands) 247 226 232 205 Nonresidential construction Current dollars Constant dollars 8.0 5.7 1.7 1.2 3.4 2.9 2.3 1.7 24.7 30.1 Addendum: Oil and gas well drilling (millions of feet) 26.7 Aug. July -2.7 -3.3 2.7 3.4 235 29.5 Sept. .6 .2 256 -. 6 -1.0 25.1 25.6 1. FRB staff estimate. BUSINESS CAPITAL SPENDING COMMITMENTS (Percentage change from preceding comparable period; based on seasonally adjusted data) 1981 Q1 Q2 Q3 July Aug. Sept. Nondefense capital goods orders Current dollars Constant dollars 1.2 -2.5 1.9 .8 -. 2 .0 4.3 4.5 2.0 2.8 -8.0 -8.5 Machinery Current dollars Constant dollars1 1.1 -2.1 3.1 .6 -.4 -2.1 -3.5 -4.0 7.7 7.4 -4.3 -5.1 6.32 4.68 6.10 4.62 5.97 4.47 6.17 4.54 6.01 4.45 5.89 4.44 -25.2 -28.5 10.2 9.4 -9.7 -10.0 -28.9 -24.5 -30.2 -23.8 21.5 21.6 Addenda: Ratio of current dollar unfilled orders to shipments Total Machinery Nonresidential building contracts Current dollars Constant dollars1 i. FRB staff estimate. II-16 MCGRAW-HILL FALL SURVEY PLANT AND EQUIPMENT EXPENDITURES ANTICIPATED FOR 1982 (Percent change from prior year) All business 9.6 Manufacturing 11.5 Durables 10.1 Nondurables 12.9 Nonmanufacturing 8.3 RECENT ERROR HISTORY OF THE FALL MCGRAW-HILL SURVEY Year Anticipated Change ------------------------- Actual Change Error (Anticipated Less Actual Change) Percent------------------------2.8 1970 8.3 5.5 1971 2.4 1.9 1972 6.9 8.9 -2.6 1973 10.6 12.8 -2.2 1974 13.6 12.7 .9 1975 11.8 .3 11.5 1976 8.8 6.8 2.0 1977 13.0 12.7 1978 11.1 13.3 -2.2 1979 9.9 15.1 -5.2 1980 9.5 9.3 1981 11.9 8.8 .5 .3 .2 1 1. Anticipated by August Commerce Survey. 3.1 II-17 Capital spending commitments in real terms continue to indicate weakness in expenditures. Total contracts and orders for plant and equipment, an overall indicator of capital investment spending, fell 5.8 percent in September. In the equipment category, orders for non- defense capital goods dropped 8.5 percent. The ratio of unfilled orders for nondefense capital goods to their shipments continued to fall as it has for the most part during 1980 and 1981. Contracts as well as permits for nonresidential structures increased in September. However, these are volatile series and the September advances follow large declines in August. In addition to this near-term weakness, the latest McGraw-Hill survey indicates that no increase is likely in 1982's real capital spending. According to the survey, businesses plan to increase current dollar capital outlays by 9.6 percent in 1982, but they anticipate that prices for capital goods will go up by the same amount. It should be noted that in past periods of sluggish economic activity,the McGrawHill survey has tended to overestimate actual expenditures. Business Inventory Investment Manufacturing and trade inventories were accumulated at an increased rate in July and August. This, plus the large increase in manufacturing inventories in September, suggests that the total inventory accumulation in 1981-Q3 will be substantial. Inventory-to-sales ratios generally have been rising. Movements in manufacturers' inventory have been dominated for the past three to four months by the accumulation of durable stocks. In II-18 CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates) 1979 1980 Q1 Q2 Q3 1981 July 49.0 31.5 23.7 7.8 10.3 7.2 1.4 1.1 31.0 16.4 10.2 6.2 11.7 2.9 -2.3 1.4 41.1 34.2 18.5 15.7 .0 6.8 -3.5 3.1 35.0 12.7 9.8 3.0 6.7 15.6 12.2 2.6 n.a. 26.7 25.3 1.4 5.6 n.a. n.a. n.a. 46.5 26.0 26.1 -.2 -9.7 30.2 14.7 5.9 53.7 17.9 16.4 1.5 17.0 18.8 7.3 4.4 n.a. 36.3 33.4 2.9 9.4 n.a. n.a. n.a. 7.2 6.8 .4 -.1 -.3 -2.5 -1.0 .6 -2.2 -1.2 -1.3 4.6 -1.6 -4.3 -5.9 11.0 .9 3.2 6.9 5.7 n.a. n.a. n.a. n.a. n.a. 16.1 7.3 -6.4 15.2 6.3 6.4 -2.2 7.2 1.3 -2.8 n.a. n.a. n.a. n.a. n.a. Aug.(r) Sept.(p) Book Value Basis Total Manufacturing Durable Nondurable Wholesale Retail Automotive Gen. Merchandise Constant Dollar Basis Total Manufacturing Wholesale Retail Automotive INVENTORIES RELATIVE TO SALES 1 1980 Cyclical Peak 2 Q1 Q2 Q3 1981 July 1.53 1.76 2.36 1.18 1.21 1.44 2.01 2.28 1.39 1.61 2.09 1.11 1.08 1.31 1.47 2.22 1.41 1.60 2.05 1.12 1.11 1.36 1.77 2.21 n.a. 1.63 2.13 1.10 1.13 n.a. n.a. n.a. 1.41 1.60 2.07 1.10 1.10 1.37 1.73 2.29 1.43 1.61 2.10 1.10 1.14 1.37 1.69 2.26 n.a. 1.63 2.15 1.10 1.12 n.a. n.a. n.a. 1.76 2.11 1.45 1.48 2.05 1.63 1.97 1.33 1.36 1.51 1.66 1.95 1.40 1.42 1.84 n.a. n.a. n.a. n.a. n.a. 1.68 1.97 1.38 1.45 1.88 1.70 2.00 1.45 1.43 1.70 n.a. n.a. n.a. n.a. n.a. Aug.(r) Sept.(p) Book Value Basis Total Manufacturing Durable Nondurable Wholesale Retail Automotive Gen. Merchandise Constant Dollar Basis Total Manufacturing Wholesale Retail Automotive 1. Ratio of end-of-period inventories to average monthly sales for the period. 2. Highs are specific to each series and are not necessarily coincident. (r) Revised estimates. (p) Preliminary estimates. II-19 particular, the book value of inventories in the primary metals and machinery industries have been rising since May. At the same time shipments and orders in these industries have remained weak, an indication that part of this accumulation was probably unintended. Stocks of retail stores excluding the automotive grouping showed sizable increases in August, rising at an annual rate of $4.1 billion and constant dollar basis. A substantial part of this buildup occurred at general merchandise stores where sales have been relatively unchanged in recent months. Stocks of automotive stores declined at a $2.8 billion annual rate in August, reflecting the initial success of rebates and other promotional sales efforts. Auto dealers' stocks of new cars were reduced further in September, but they rose in October with the sharp drop in sales. Federal Government Final figures for the budget for FY1981 show receipts of $602.6 billion, outlays of $660.5 billion, and a deficit of $57.9 billion. The deficit was $2.3 billion higher than estimated by the Administration in the July Mid-Session Review. To a large extent the underestimate reflects the effects of slower economic activity on receipts. (An attached table shows the evolution of budget estimates for FY1981.) In the final quarter of the fiscal year, total expenditures on an NIA basis were $3.1 billion higher, at an annual rate, than projected at the time of the Mid-Session Review. Purchases of nondefense goods were higher primarily because of acquisitions for the Strategic Petroleum Reserve. Transfer payments were lower than forecast in the Mid-Session II-20 THE FISCAL YEAR 1981 BUDGET (Unified budget; billions of dollars) Jan. 1980 Time of Budget Estimate July Jan. Mar. July 1980 1981 1981 1981 Actual Mar. 1980 Outlays Defense Int. Affairs Energy Agriculture Interest (net) Comm. & Housing Income Security1 Fiscal Ass't. All Other 2 Total 146.2 9.6 8.1 2.8 67.2 0.7 336.1 9.6 35.5 615.8 150.5 10.1 6.9 2.0 68.4 0.4 334.0 7.4 31.8 611.5 157.5 10.3 7.2 2.2 67.6 579.0 600.0 -15.8 346.5 7.3 34.5 633.8 11.3 8.7 1.1 80.4 3.5 352.1 6.9 37.6 662.7 162.1 11.3 9.3 1.2 77.2 3.2 349.4 6.8 34.7 655.2 160.4 11.8 9.5 4.0 83.1 4.2 348.7 6.9 32.6 661.2 159.7 11.1 10.6 5.6 82.6 4.0 348.4 6.6 31.8 660.5 589.2 628.0 591.6 604.0 605.0 607.5 608.8 600.3 607.8 605.6 n.a. 602.6 +16.5 -29.8 -55.2 -54.9 -55.6 -57.9 0.7 161.1 Receipts Current Law Total Deficit (percentage) Economic Assumptions, Calendar Year 1981 GNP growth (Q4/Q4) Unemployment rate CPI (Q4/Q4) Bill rate (annual average) 11.7 11.4 12.6 12.3 11.0 11.8 7.3 9.0 8.5 9.8 7.7 12.6 7.7 10.5 7.5 8.6 9.5 9.0 13.5 11.1 13.6 1. Education, Training and Employment, Social Services, Health, Income Security and Veterans Benefits. 2. Science, Natural Resources, Transportation, Community Development, Justice, General Government, Offsetting Receipts and Allowances. II-21 Review, but this was almost exactly offset by higher subsidies. Receipts were less than previously projected, reflecting the downward revision in the level of unified budget receipts and some technical factors. Congressional action on the budget for FY1982 continues to lag, causing forecasts for this fiscal year's deficit to become increasingly uncertain. bills. The House has completed action on 11 of the 13 appropriation The Senate, however, has passed only five major bills, which generally exceed the targets set by the Administration in September. State and Local Government Purchases by state and local governments in real terms have fallen further in recent months, as outlays continue to be constrained by the ongoing reduction in federal grants-in-aid, sluggish growth of tax receipts, and high cost of financing construction projects. The decline in construction spending has been particularly sharp, and the value of new construction in real terms in the third quarter was 22 percent below its extremely high first-quarter level. For the first nine months of the year, real construction outlays were 5-1/2 percent below the average for 1980. Outlays for education buildings and for water and sewer projects were well below 1980 levels, while highway and street construction was higher due to a boost in road-building last winter. Preliminary data indicate that state and local employment edged up about 20,000 in October. Overall, state and local employment has weak- ened over the last half year. In the past 6 month period, payrolls fell around 400,000 after six quarters of little change. The phase-out of federally financed public service jobs accounted for most of the II-22 decrease over the last half-year; almost 300,000 CETA jobs have been eliminated since February. Prices The slowdown in inflation so far this year has been most evident in markets for commodities rather than services. food prices In recent months, retail have risen more rapidly and increases continued to be sizable for both homeownership and consumer services. Producer prices of finished goods advanced 0.6 percent in October, following a 0.2 percent rise in September. This swing is exaggerated by the treatment of car and truck prices in the PPI. The September index was lowered significantly as liquidation allowances for 1981 models were included in car and truck prices, and the October index was boosted by inclusion of 1982 models at higher prices. Nevertheless, over the past two months price increases for many other finished consumer goods and for a broad range of capital equipment items have been below those earlier in the year. At the intermediate level, the index for materials other than food and energy rose just 0.1 percent in October. The weakness in commodity prices may be starting to reflect the recent declines in import prices, as well as slack demand. At the consumer level in September, a sharp rise in home financing costs (3.2 percent) was partly responsible for the high September CPI rate. The total index, excluding house purchase and mortgage interest costs, advanced 0.8 percent, which is close to the average monthly advance in this measure during the past year. Mortgage costs in the September index were boosted by the increases of FHA/VA ceiling rates II-23 RECENT CHANGES IN PRODUCER PRICES (Percentage change at annual rates; based on seasonally adjusted data)1 Relative importance 1981 Q3 Oct. Q1 100.0 23.1 12.0 44.6 20.3 11.8 7.5 27.8 10.4 11.4 13.3 1.6 66.8 7.8 12.0 6.8 1.8 4.5 8.8 9.8 2.8 5.6 -7.0 3.1 5.7 2.2 .5 6.9 2.7 .4 Intermediate materials 2 Exc. energy 93.6 77.3 12.4 10.1 14.3 8.0 7.7 8.8 4.3 6.7 3.1 6.3 Crude Materials Food Energy Other 57.7 26.8 15.5 8.6 26.9 7.5 -23.1 110.0 -36.7 8.6 4.3 1.7 -12.1 1.6 3.2 Finished goods Consumer food Consumer energy Other consumer goods Capital equipment Q2 Sept. 1980 1980 __Dec. 6.6 -2.8 -4.4 12.4 10.8 .4 1.3 -30.2 -30.5 14.2 -14.2 2.7 -10.1 1. Changes are from final month of preceding period to final month of period indicated. 2. Excludes materials for food manufacturing and animal feeds. RECENT CHANGES IN CONSUMER PRICES 1 (Percentage change at annual rates; based on seasonally adjusted data) 2 Relative importance Dec. 1980 All items 100.0 Food 17.3 Energy 10.8 Homeownership 25.8 All items less food, energy, and homeownership 3 49.6 Used cars 3.0 Other commodities 3 20.5 Other services 3 26.1 Memorandum: Experimental CPI 4 100.0 1981 Q2 1980 Q1 12.4 10.2 18.1 16.5 9.6 2.1 49.1 3.1 7.4 -.1 4.7 16.9 13.5 10.9 3.0 21.3 13.9 11.7 2.9 19.6 9.9 18.3 8.1 10.3 8.0 6.5 6.6 10.1 8.8 4.9 7.8 10.0 12.4 44.2 6.8 13.3 12.3 48.3 5.9 11.3 10.8 11.5 5.7 10.3 9.6 Q3 Sept. 1. Based on index for all urban consumers (CPI-U). 2. Changes are from final month of preceding period to final month of period indicated. 3. Includes the home maintenance and repair component of homeownership costs. 4. BLS experimental index for "All items"--CPI-U-X1--which uses a rent substitution measure for homeownership costs. II-24 from 15-1/2 to 17-1/2 percent. A subsequent reduction to 16-1/2 percent should have a moderating influence on the October index. Food prices at the consumer level rose rapidly in September, as an earlier increase in livestock prices was passed on to the retail level. However, producer prices for finished foods were little changed in September and October, and a renewed price decline has been evident at the farm level since mid-summer. These developments suggest that inflation rates for consumer foods should moderate in the near-term. Although gasoline prices rose in September for the first time since March, the energy grouping continued to register only a small increase. If food, energy, and homeownership are excluded, the September and third-quarter rates for the remaining half of the CPI exhibit marked increase over the pace of the first half of this year. Services, which do not slow in the first half, account for much of the recent acceleration. The third-quarter increase for services includes exceptional adjustments in mass transit fares and telephone rates as well as the large once-a-year hike in school tuition and related costs. Medical services also have risen faster in the third quarter than during the first half of the year. Wages and Labor Costs Wage rates, as measured by the hourly earnings index for production workers, rose at an 8.2 percent annual rate in the third quarter, and the preliminary data for October show another relatively small increase. This index has risen at an 8-3/4 percent annual rate over the first 3 quarters of 1981, a deceleration of almost 1 percentage point from last year's rapid advance. Increases in hourly compensation for all persons working II-25 SELECTED MEASURES OF COMPENSATION, PRODUCTIVITY, AND COSTS (NONFARM BUSINESS) (Seasonally adjusted annual rates) 19 0... 1980 Q1l Q2 . 1981. Q3 Sept. . . 1st three Oct. quarters Hourly Earnings Index - production workers1 Total private nonfarm Manufacturing Durable Nondurable Contract construction Transportation and public utilities Total trade Service 9.6 9.6 10.9 11.6 9.8 7.6 9.4 8.8 9.5 9.4 9.6 9.8 8.3 8.2 9.7 9.6 10.0 4.9 8.5 11.0 7.1 8.5 6.9 7.7 8.6 8.6 8.2 8.8 5.6 2.4 10.2 9.0 12.3 3.0 -. 3 8.2 2.2 8.7 9.2 9.2 9.1 7.6 5.9 -4.0 2.5 9.1 8.1 9.0 Labor Productivity and Costs - all persons 1 Compensation per hour Output per hour Unit labor costs 10.1 .1 9.9 11.6 4.3 7.0 9.6 1.4 8.1 9.4 -2.2 11.9 n.a. n.a. n.a. n.a. n.a. n.a. 10.2 1.1 9.0 Addendum: Employment Cost Index, wages and salaries - all persons2 Total By Occupation: White collar Blue collar Service Workers By Bargaining Status: Union Nonunion 9.0 10.5 8.4 n.a. n.a. n.a. n.a 8.7 9.6 8.1 11.7 8.3 12.2 8.4 9.1 5.5 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10.9 8.0 8.0 11.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 10.3 7.5 n.a. 1. Changes over periods longer than one quarter are measured from final quarter of preceding period to final quarter of period indicated. Quarterly changes are at compound rates; monthly changes are not compounded. 2. Percent change from final month of previous period, compounded. Seasonal adjustment performed by FRB staff. II-26 NEGOTIATED WAGE RATES CHANGES Under Major Collective Bargaining Setlements1 1980 1981 1st 3 Qs 7.4 6.0 9.5 7.1 11.5 9.3 3492 3787 1480 6.2 4.6 8.0 5.0 7.9 6.4 2028 2268 306 9.1 8.0 11.7 10.3 12.4 10.0 1464 1489 1174 1979 All Industries First-year adjustments Average over life of contract Workers affected (in thousands) Contracts with escalator provisions First-year adjustments Average over life of contract Workers affected (in thousands) Contracts without escalator provisions First-year adjustments Average over life of contract Workers affected (in thousands) 1. Contracts covering 1,000 or more workers; estimates exclude potential gains under cost-of-living clauses. II-27 in the private nonfarm sector of the economy--a more comprehensive measure of wage and supplement costs--have averaged about the same rate so far this year as in 1980. The wage component of compensation has slowed somewhat, but the increase in social security taxes has added about 0.9 percentage points(annual rate) to the rise over the first three quarters of this year. Due to the relatively light bargaining calendar this year, new settlements have played a smaller than usual rose in wage developments. On the other hand, contractual changes in previously negotiated agreements are of growing importance in numerous key industries. Recently, wage concessions have been granted by union and management employees at several major airlines and at financially-troubled firms in the motor vehicle parts, rubber, and steel industries. Negotiated changes in work rules that could bolster productivity are also becoming more frequent. Labor productivity in the nonfarm business sector declined at a 2.2 percent annual rate in 1981-Q3, primarily reflecting the drop in output. Since the business cycle peak in 1980-Q1, output per hour has risen at a 0.6 percent annual rate. This poor productivity performance has offset little of the rise in hourly compensation. As a result, unit labor costs in the nonfarm sector rose at almost a 12 percent rate in 1981-Q3 and at a 9 percent annual rate in the first three quarters of 1981. APPENDIX II-A* PLANNED CHANGES IN THE CPI HOMEOWNERSHIP MEASURE The measurement of owner-occupied housing costs for the consumer price index will be changed from the present method, based on house prices and mortgage interest rates, to a.rental equivalence index, according to an announcement on October 27 by the Bureau of Labor Statistics (BLS). This change.will be introduced in two stages: first, in January 1983, in the index for all urban consumers (CPI-U); and second, in January 1985, in the index for wage earners and clerical workers (CPI-W).1 As occurs in major CPI revisions, the revised procedure will not be extended back to earlier periods, and thus the switch to these new measures will not affect the past index levels but only those subsequent to the change. The old series will continue to be constructed for a six-month overlap period in each case. The rental equivalence measure to be included in the CPI-U in 1983 represents an initial refinement of the current CPI rent index. This work, already underway, essentially involves reweighting of the rent sample to better represent owner-occupied housing and some changes in calculation procedures. Augmentation of the rent sample and other improvements derived from BLS research will require more time. Depending on the continued availability of funds, BLS will introduce these improvements in part by 1985 and more completely by the time of the next CPI revision, probably in 1986. According to BLS, the experimental "rent substitution" measure (CPI-U-X1)--now reported in the monthly CPI release with four other experimental measures--will be emphasized more in the future. In this series, the current CPI rent index 2 is substituted for the homeownership measure. Almost as important, its weight, which is based on the estimated rental value of owner-occupied housing, 3 is well below that of the homeownership component of the CPI-U. As seen in the chart that follows, the rent substitution measure for "All items" rises substantially less than the current published index in periods such as 1979-80 and recent months when mortgage rates and/or house prices rise rapidly and boost the CPI-U homeownership measure. The opposite occurs when the CPI measure of mortgage rates or house prices declines (1980-Q3, 19 8 1-Q1). * Prepared by Lucy A. Cifuentes, Economist, Wages, Prices, and Productivity Section, Division of Research and Statistics. 1. The CPI-W refers to the traditional CPI population. In 1978, at the time of the last major CPI revision, the BLS began to publish the more comprehensive CPI-U, which covers the expenditures of the urban civilian population. 2. Which reflects housing typically occupied by renters. 3. Derived from information in the 1972-73 Consumer Expenditures Survey. II-A-1 II-A-2 A change in the homeownership measure was first proposed before the last CPI revision, but was postponed to allow more time for research and discussion. According to BLS, the timing of the announcement and of the effective dates for introducing the changes now planned was influenced by several considerations, particularly by the need for substantial advance notice to the public. The early change in the CPI-U (January 1983) is a response to recent tax legislation that indexes tax brackets and personal exemptions to this measure. The new tax brackets must be announced in December 1984 and will be based on CPI-U data over the previous two years. Most private contracts, as well as government transfer payments, are linked to the CPI-W. In view of the number and duration of such contracts, a longer advance notice was considered advisable for this series. Factors in hastening the BLS decision include the increasing public concern about the validity of the present homeownership measure as well as the serious erosion of the data base for this measure associated with recent developments in the mortgage and housing markets. II-A-3 CHANGES IN CONSUMER PRICES: PUBLISHED AND EXPERIMENTAL INDEXES (3-month changes, at compound annual rates) Published Index (CPI-U) /I !//' I 1 I I /V Experimental I I I I Index (CPI-U-X1) I 'I 'I 1978 1979 1980 1981 1. Experimental index measures owner-occupied housing costs on a rental equivalence basis, but using the current CPI rent index. III - T SELECTED 1 FINANCIAL MARKET QUOTATIONS 1 (Percent) 1981 q wc FOmC Oct. 6 Change from: OMC Julvy Rith Oct. 6 7ov. 9 July High Aug. 18 19.93 18.19 15.46 13.9np -6.03 -1.56 Treasury bills 3-month 6-month 1-year 15.72 15.42 14.52 15.72 15.62 14.74 13.90 14.12 13.83 11.1 11.63 11.48 -4.53 -3.79 -3.04 -2.71 -2.49 -2.35 Commercial paper 1-month 3-month 6-month 18.23 17.68 16.86 18.02 17.63 17.09 14.84 15.07 14.97 12.77 12.59 12.25 -5.46 -5.09 -4.61 -2.07 -2.48 -2.72 Large negotiable CDs 3 i-month 3-month 6-month 18.55 18.38 18.16 18.14 18.08 18.20 15.14 15.57 15.81 13.03 12.97 12.90 -5.52 -5.41 -5.26 -2.11 -2.60 -2.91 19.49 18.91 18.66 18.73 16.00 17.03 14.14p 14.3 3p -5.35 -4.58 -1.86 -2.70 20.50 20.50 19.00 17.00 -3.50 -2.00 U.S. Treasury (constant maturity) 3 -year 10-year 30 -year 15.75 14.71 13.96 15.90 14.79 13.95 15.78 15.14 14.60 13.25 13.39 13.56 -2.50 -1.32 -.40 -2.53 -1.75 -1.04 Municipal (Bond Buyer) 11.44 11.944 12.934 12.44 1.00 -.49 Corporate A&a New issue Recently offered 16.73 16.55 16.636 17.726 17.17p 5 16.45e -.44 -. 10 17.11 1980 17.276 -1981 18.286 18.376 qhort-term rates rederal funds 2 Eurodollar deposits 1-month 3-month 2 Bank orime rate Intermediate- and longterm rates Primary conventional mortgages Dec. 31 - RHigh POMC. Oct. 6 Nov. 9 -1.27 1.26, .09 Percent change from: FOMC. 1981 Oct. 6 High Stock Prices 963.99 1,024.05 Dow-Jones Industrial 79.14 77.86 NYSE Composite 380.36 348.99 AMEX Composite 223.47 202.34 VASDAQ (OTC) Ir. One-day quotes exceot as noted. 2. Averages for statement week closest to date shown. 3. Secondary market. p--Preliminary -. 1 -16.5 855.21 856.26 3.8 -9.4 71.67 69.03 5.4 -14.5 325.29 308.69 7.6 -10.5 199.92 185.87 a. One-day quotes for oreceding Thursday. 5. Average for preceding week. 6. One-day quotes for preceding Friday. e--Estimated. DOMESTIC FINANCIAL DEVELOPMENTS M1-B posted a small increase in October, about offsetting its September contraction. M2 also strengthened, reflecting both the upturn in M1-B and bigger inflows to the nontransactions component following the introduction of the tax-exempt all savers certificate on October 1. The expansion of the monetary aggregates was, nonetheless, less rapid than provided for by the System's injection of nonborrowed reserves and money market conditions eased considerably over the intermeeting period. Most short-term market rates of interest have fallen 2 to 2-3/4 percentage points, drifting lower in October and declining sharply further in early November. The basic discount rate was lowered to 13 percent, and banks cut their prime lending rate 2 percentage points to 17 percent. Long-term yields generally have fallen by around 1/2 to 1-3/4 percentage points, and home mortgage rates have eased a bit from record highs posted in mid-October. Although market sentiment has been improved by signs of near-term easing of money and credit demands, concerns remain about the long-range implications of federal budget policy. Such concerns are reflected in the upward sloping yield curve that has emerged recently. The overall credit demands of nonfinancial businesses moderated in October. Firms borrowed less heavily from banks and in the commercial paper market, and their issuance of long-term securities remained limited. As the bond market rallied in early November, public offerings picked up, likely reflecting long-delayed debt restructuring. Available data suggest that household borrowing in the mortgage market has continued to shrink, and consumer installment credit, which had been buoyed for a time by stronger car sales, likely weakened substantially in October. III-1 Meanwhile, III-2 TREASURY SECURITY YIELD CURVES Percent --- I \ August 24 Ns Ns October 6 - - ~- - November 9 LLIIIL 111 II L[I I I~L LL L L LLI I YEARS TO MATURITY AI III-3 the government sector placed heavy demands on credit markets as the Treasury began financing a record quarterly unified plus off-budget deficit, and state and local governmental borrowing remained substantial. Monetary Aggregates and Bank Credit M1-B, adjusted for shifts to NOW accounts, grew at only a 3-1/2 percent annual rate in October. The persistent weakness in the growth of M1-B in the face of declining interest rates appears attributable both to a slowing of nominal GNP growth and to continued intensive efforts to economize on cash balances as interest rates still remain at historically high levels. As summarized in an appendix to this section, the findings of a recent Reserve Bank survey indicate a considerable spreading of sophisticated cash management techniques this year--with more in store for the future. M2 advanced at a 9-1/4 percent annual rate in October, up from the comparatively slow pace of the previous month and the third quarter as a whole. The relatively small M1-B component accounted for a disproportion- ately large part of the acceleration in the broader aggregate as growth in the nontransactions component registered a rather modest pick-up despite the advent of the all savers certificate (ASC). Sales of ASCs were sizable, but the bulk of these funds appears to have shifted from other small time deposits, particularly 6-month MMCs. Survey results indicate that ASCs had attracted $27-3/4 billion during the first part of October.1 Meanwhile, MMCs ran off by a record amount, 1. The data cover deposit flows over the first two weeks of October for commercial banks, MSBs and credit unions, and over the first twenty days of the month for S&Ls. By institution, the $27-3/4 billion in ASCs was divided as follows: $13-1/2 billion at S&Ls; $10-1/4 billion at commercial banks; $2-3/4 billion at MSBs; and $1-1/4 billion at credit unions. III-4 MONETARY AGGREGATES (Based on seasonally adjusted data unless otherwise noted)1 4 1981 Q1 Q2 --- Money stock measures 1. M1-A 2 2. (Adjusted) 3. M1-B 2 4. (Adjusted) 5. M2 6. M3 Selected components 7. Currency Q3 Q Aug. Sept. Oct.e '80 to e Oct. '81 Percentage change at annual rates ---- -20.8 (-1.7) 4.9 (-0.8) 8.3 12.4 -5.3 (5.1) 8.7 (5.3) 10.6 10.6 5.5 7.9 -3.7 (-1.5) 0.2 (-0.7) 7.1 10.2 3.0 (6.5) 7.3 (6.9) 11.6 13.4 -7.6 (-5.2) -2.8 (-4.0) 6.4 8.2 3.0 (2.8) 3.6 (3.4) 9.2 6.5 5.0 4.0 -1.0 3.0 -8.1 0.6 4.2 1.3 8.9 10.9 5.5 8. Demand deposits -32.9 -11.8 -8.0 1.5 -11.7 3.6 -14.1 9. Other checkable deposits 372.3 107.4 21.5 31.3 23.7 6.6 180.0 10. 11. 12. 13. 14. 15. 16. 17. 18. M2 minus M1-B (11+12+13+16) 3 Overnight RPs and Eurodollars, NSA Money market mutual fund shares, NSA Commercial banks savings deposits small time deposits Thrift institutions savings deposits small time deposits 9.4 0.0 84.5 6.0 -30.5 30.2 3.5 -29.6 19.0 11.3 58.9 113.7 4.2 -11.9 13.4 - 0.3 -12.6 4.7 9.4 12.8 87.8 6.8 -19.6 21.0 -2.9 -23.0 5.1 13.0 27.6 99.2 10.8 -29.9 30.9 -3.9 -28.0 5.7 19. 20 21. Large time deposits at commercial banks, net4 at thrift institutions 39.6 40.6 34.7 10.3 10.1 11.2 24.6 26.6 15.1 26.0 26.3 22.3 7.7 5.3 21.9 -3.6 -8.2 19.1 22.6 22.7 21.8 22. Term RPs, NSA 18.1 12.2 41.6 5.5 82.4 -33.4 19.2 9.4 -110.7 94.9 6.3 -21.7 20.1 0.2 -23.3 8.6 11.0 -108.8 72.7 10.4 -19.8 24.0 4.0 -22.4 13.7 10.5 1.7 127.6 6.4 -19.5 23.6 0.3 -20.5 10.1 -Average monthly change in billions of dollars-MEMORANDA: 23. Managed liabilities at commercial banks (24+25) 24. Large time deposits, gross 25. Nondeposit funds 26. Net due to related foreign institutions, NSA 27. Other 5 28. U.S. government deposits at 6commercial banks 4.3 5.1 -0.8 8.8 7.5 1.3 6.3 7.0 -0.7 11.3 9.5 1.8 0.0 2.8 -2.8 -5.4 -1.2 -4.2 -1.6 0.7 0.5 0.8 0.9 -1.7 4.2 -2.4 -1.3 -1.6 -4.6 0.4 1.1 -0.3 -0.7 -2.7 -0.3 3.5 -0.6 0.3 1. Quarterly growth rates are computed on a quarterly average basis. 2. Figures in parentheses have been adjusted to remove the distorting effects since the beginning of 1981 of shifts of funds out of demand deposits and other accounts into NOW accounts. Based on a variety of evidence, it is estimated that 77-1/2 percent of inflows into other checkable deposits-in excess of "trend"-was from demand deposits in January, and 72-1/2 percent in subsequent months. 3. Overnight and continuing contract RPs issued to the nonbank public by commercial banks, net of amounts held by money market mutual funds, plus overnight Eurodollar deposits issued by Caribbean branches of U.S. member banks to U.S. nonbank customers. Excludes retail RPs. 4. Net of large-denomination time deposits held by money market mutual funds and thrift institutions. 5. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold under agreements to repurchase and other liabilities for borrowed money (including borrowings from the Federal Reserve), loans sold to affiliates, loan RPs, and other minor items. Changes since October 1980 are partially estimated. 6. Consists of Treasury demand deposits at commercial banks and Treasury note balances. e--estimated. III-5 presumably reflecting large transfers into ASCs and into SSCs, which also showed strong gains.l A comparatively small portion of the flows to ASCs appears to have been diverted from savings accounts, which declined at a slightly slower pace than in September. The amount moving into ASCs from retail RPs, which contracted by $2-3/4 billion through mid-October to a level of about $11-1/2 billion, also appears to have been small. The volume of retail RPs purchased with the intent to roll over into ASCs evidently was smaller than expected, and the bulk of these instruments represents high-yielding, low-denomination alternatives to regulated deposits. Finally, as expected, MMMFs seem to have been a minor source of funds for ASCs; expansion in MMMFs last month showed only a moderate slowing from the strong September pace. The overnight RP component of M2 declined by $2-1/4 billion (not seasonally adjusted) in October, following an even larger contraction in September. The weakness in RPs may reflect in part reduced needs by bank dealer departments, whose securities inventories declined in both September and October. Moreover, banks may have experienced collateral constraints as U.S. government demand and note balances rose substantially over the two-month period. Growth of M3 decelerated to a 6-1/2 percent annual rate in Octo- ber, the slowest rate of expansion in this measure in a year and a half. The slowdown reflected primarily a runoff in large time deposits at com- 1. Flows into SSCs have surged since the August 1 removal of the cap on ceiling rates, even though survey results indicate that the proportion of banks and MSBs paying the maximum allowable rates has fallen to about 60 percent. Of those institutions, 85 percent paid returns on SSCs that were within 2 percentage points of the 16 percent nominal ceiling rates in September. About 80 percent of S&Ls were paying ceiling rates on SSCs in September. III-6 COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT (Percentage changes at annual rates, based on seasonally adjusted data)1 1980 Q3 Q4 1981 Q1 Q2 Q3 Aug. Sept. Oct.e Oct. 80 to Oct. 81 e Commercial Bank Credit 1. Total loans and investments at banks 2 12.9 14.5 7.8 8.2 9.0 10.1 10.6 8.1 9.8 2. 20.7 11.8 10.5 6.5 3.9 4.9 0.7 8.4 7.9 -5.1 7.3 8.1 Investments 3. Treasury securities 39.1 11.1 14.8 15.7 -5.7 -10.0 -18.1 4. Other securities 11.5 12.3 8.0 1.7 9.1 13.1 10.8 15.5 10.2 15.5 6.8 8.9 10.8 12.0 14.0 7.9 10.5 15.5 21.0 6.5 11.9 20.2 22.1 18.3 13.0 15.0 -10.2 60.1 27.3 53.2 -5 54.5 - 132.7 47.5 19.6 18.4 4.6 11.0 9.4 7.3 8.5 10.1 9.2 6.9 9.0 -7.6 -0.2 -1.4 -1.4 0.0 -1.4 1.4 n.a. n.a. 5. Total loans 2 6. Business loans 2 7. Security loans 8. Real estate loans 9. Consumer loans Short- andd Intermediate-Term Business Credit -10. Total short- and intermediateterm business credit (sum of lines 14, 15 and 16) 9.0 14.2 13.7 15.8 26.6 29.6 26.9 n.a. n.a. Business loans net of bankers acceptances 14.5 24.2 5.6 10.5 22.2 26.0 20.6 12.7 15.4 11. 12. Commercial paper issued by nonfinancial firms3 13. Sum of lines 11 & 12 14. Line 13 plus loans at foreign branches 4 15. 16. 1. -19.7 -6.2 29.5 42.2 59.4 76.7 87.0 7.0 38.6 10.3 20.7 8.2 14.1 26.6 32.0 28.7 11.9 17.9 19.3 11.3 14.0 28.4 33.8 30.2 15.5 19.4 14.6 8.5 19.3 14.7 15.4 1.5 n.a. n.a. 35.6 23.1 28.9 22.6 33.3 n.a. n.a. 9.8 Finance company loans to business 5 -4.6 Total bankers acceptances outstanding 5 21.0 -15.7 Average of Wednesdays for domestic-chartered banks and average of current and preceding ends of months for foreign-related institutions. 2. Loans include outstanding amounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and unconsolidated nonbank subsidiaries of the holding company. 3. Average of Wednesdays. 4. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestic-chartered banks. . Based on average of current and preceding ends of months. e--estimated. n.a.--not available, III-7 mercial banks. Issuance of large time deposits by S&Ls moderated only slightly. At commercial banks, total managed liabilities contracted in October, as inflows to core deposits and U.S. government deposits strengthened somewhat and bank credit expansion slowed. Indeed, net advances to foreign branches were boosted by $4-1/2 billion in October. Banks con- tinued, however, to increase their purchases of federal funds from Federal Home Loan banks. 1 Bank credit grew in October at an 8 percent annual rate, down somewhat from the pace of the previous two months. Runoffs of Treasury securi- ties abated and bank acquisitions of other securities accelerated, but loan expansion slowed markedly. Business loan growth, though still robust, dropped to its slowest pace since May. Expansion in security loans moder- ated as dealers trimmed their inventories, and real estate lending slowed. Business Finance Overall borrowing by nonfinancial businesses appears to have moderated in October from the relatively strong third-quarter pace. In short- term markets, the decline in business loan growth at banks was accompanied by a sharp reduction in net issuance of nonfinancial commercial paper. The deceleration in bank lending to businesses reflected a net decline in such loans at foreign-related institutions, after several months of rapid expan1. In the past two months, some improvement in deposit flows coupled with reduced mortgage lending has enabled S&Ls also to rely less on managed liabilities--FHLB advances in particular. The decline in advances was unanticipated, leading to a buildup in FHLB liquidity to historically high levels and an accompanying increase in federal funds sales by these institutions. III-8 UNUSED C&I LOAN COMMITMENTS AT SELECTED LARGE COMMERCIAL BANKS (billions of dollars, seasonally adjusted) $ billions 325 300 275 250 225 200 175 150 125 I I 1979 IIll I ll, I I,, 1981 III-9 sion, as well as slower growth at large banks.1 Latest data available indicate that unused business loan commitments at large banks increased significantly again in September. The continued brisk expansion of commitments in part may have reflected attempts by firms to ensure access to credit in the event that conditions in long-term markets remain unfavorable or banks decide to become more selective in their lending in a weakening economy. The volume of public corporate bond offerings continued low in October, particularly for industrial and financial corporate issues, owing to the high level of long-term rates. Offerings by utilities have held up quite well, but even in this sector several sizable issues were postponed in October when market conditions deteriorated temporarily. Private place- ment activity also is estimated to have remained sluggish in October, as life insurance companies apparently have continued to respond to the potential for liquidity pressures by directing a larger portion of their new investments into more liquid instruments. Share prices have risen somewhat over the intermeeting period; nevertheless, the broad indexes are still well below their recent peak levels of mid-August. Because of the weak market conditions, new equity offerings in October totaled only $700 million, seasonally adjusted, just half of the already reduced pace of the third quarter. 1. The weakness at large banks may partly reflect the wide spread of the prime rate over the London Interbank Offered Rate (LIBOR). Many large banks now include LIBOR as a pricing option in loan agreements with large corporate customers, and some report that they often book or rebook loans abroad when customers elect the LIBOR option. Accordingly, with the prime-LIBOR spread remaining wide in October, lending to U.S. residents by foreign branches of domestically chartered banks picked up from the already rapid pace of recent months. In addition, the weakness in business lending at large banks also reflects Dupont's partial repayment of the loan it took down in August to finance its acquisition of Conoco. Repayment was reportedly made with the proceeds from new issues of commercial paper, which by November 6 totaled nearly $2 billion. :I-I GROSS OFFERINGS OF CORPORATE SECURITIES (Monthly totals or monthly averages, millions of dollars) 1981 -------Corporate securities--total Publicly offered bonds1 Privately placed bonds Stocks 5,942 3,443 523 1,976 By quality 2 Aaa and Aa A and Baa Less than Baa 3 Nov. Oct. Seasonally adjusted 6,886 3,007 843 3,036 ------ Not 'ub ic iv offered bonds--Total 1 Bv Industrv 'rtilit Ind.2strial inanci al Q3 Q2 3,615 1,603 609 1,403 f p p Q1 3,400 2,000 700 700 ------4,700 3,300 700 700 seasonally adiusted ----- 3,038 3,597 1,125 1,275 97 1,289 465 624 1,383 939 333 R0 -- 914 1,728 396 1,246 1,663 688 685 627 364 610 1,325 215 -- 439 491 150 155 167 85 1,175 480 343 173 135 107 1,889 2,850 1,403 900 499 1,186 204 1,012 1,425 413 486 597 320 386 417 97 1,677 2,150 1 ,35 2,700 -- 275 Memo Items . Convertible bonds Original discount bonds Par value Gross proceeds StQcks--total Hy Industry Utility Indus trial Financial 800 f--forecast. p--preliminary. 1. Total reflects gross proceeds rather than par value of original discount bonds. 2. Bonds categorized according to Moody's bond ratings. 3. Tncludes issues not rated by Moodv's. III-11 Government Finance The combined unified and off-budget deficit of the federal government in the current quarter likely will be a record $54 billion. 1 To finance this deficit, the Treasury's market borrowing requirementsswollen by continuing redemptions of savings bonds and other nonmarketable securities--will amount to $41 billion. The remainder will be covered by a reduction of the Treasury's cash balance and other means of finance. It is expected that all of the increase in Treasury borrowing in the fourth quarter will be in the short-term area. The Treasury will likely tap the bill market for a record $24-1/2 billion, while the volume of coupon financing probably will be about in line with other recent quarters. Thus far in the quarter, the Treasury has raised $18 billion of net new money, including nearly $4 billion in the recently completed mid-quarter financing. Borrowing by federally sponsored credit agencies dropped off sharply in October to about half the pace of the third quarter. This decline reflected a net repayment of debt by the FHLBs in response to their high liquidity. FNMA raised $1.8 billion in new money in October, about $.3 billion of which was in Residential Financing Securities (one-year debentures that satisfy the requirements for depository institution investment of ASC proceeds). New yields on these instruments change daily. In Octo- ber they averaged about the same as the investment yield on 1-year Trea1. About $12 billion of this figure is the result of an accelerated Social Security payment at the end of the quarter. January's payment will be issued on Thursday, December 31, since January 3 is a Sunday and the previous Friday is a holiday. III-12 FEDERAL GOVERNMENT AND SPONSORED AGENCY FINANCING 1 (Total for period; billions of dollars) f FY81 f Q3 Q4 Oct. -78.9 -15.4 -53.9 -16.3e -13.6 R8.9 22.5 41.0 10.6 L1.5 23.0 65.9 4.6 17.9 24.6 16.4 5.7 4.9 5.5 6.0 Nonmarketable borrowings/ repayments(-) Other means of finance 2 Change in cash balance -9.5 -2.7 -2.3 -4.0 -.7 +2.3 -2.5 7.8 -7.6 -. 4 3 .7 e -2.4 -1.0 -2.3 -5.4 Federally sponsored credit agencies net cash borrowing 3 37.5 15.4 6.4 2 .8 1.4 Nov. Treasury financing Combined surplus/deficit(-) Net marketable borrowings/ repayments(-) Bills Coupons e 1. Numbers reported on a not seasonally adjusted, payment basis. 2. Includes checks issued less checks paid, accrued items and other ransactions. 3. Includes debt of Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, and the Federal Farm Credit Bank System. e--estimated. f--forecast. STATE AND LOCAL GOVERNMENT SECURITY OFFERINGS (Monthly totals or monthly averages, billions of dollars) 198l 1980 H1 ------------Total Long-term Short-term 6.22 4.03 2.19 e--estimate. 6.22 4.03 2.19 f--forecast. Sept. Oct. Nov. Seasonally adjusted --------6.51 3.71 2.80 ---------Total Long-term Short-term Q3 f e e Year 6.30 3.60 2.70 8.40 4.60 3.80 8.80 3.30 5.50 Not seasonally adjusted 6.41 3.79 2.62 5.95 3.25 2.70 7.60 3.50 4.10 7.30 3.50 3.80 6.00 3.30 2.70 ---6.00 3.50 2.50 III-13 sury bills, giving institutions a sizable positive net return on ASC proceeds--as well as saving FNMA some money. The rate spread between other FNMA obligations and Treasury securities with similar maturities has narrowed from more than 125 basis points in late summer to around 100 basis points currently. The gross issuance of municipal securities remained high in October. Volume in the long-term market totaled $3-1/4 billion (seasonally adjusted)--only slightly less than the third-quarter average. A signi- ficant portion of the proceeds of long-term debt continued to be used for corporate-type purposes, such as pollution control. In the short-term sector, gross issuance swelled to $5-1/2 billion with financings by HUD and the state of Washington accounting for more than three-quarters of this total. More generally, tax-exempt issuers appear to have stepped up their use of short-term financing in recent months, partly in response to the high level of bond yields. The outstanding volume of tax-exempt commercial paper (not included in the short-term totals in the table) has increased from about $500 million in June to $900 million in October. Perhaps reflecting the heavy volume of short-term financing, shortterm tax-exempt yields have fallen over the intermeeting period by less than half the decline in yields on Treasury issues of comparable maturity. The introduction of ASCs may also have been a factor in the relative stickiness of short-term municipal yields, but the effect was clearly less severe than some predictions had suggested. III-14 NET CHANGE IN MORTGAGE DEBT OUTSTANDING (Seasonally adjusted annual rates, in billions of dollars) 01 02 1980 03 04 o1 151 104 47 87 54 33 122 95 27 143 105 38 114 82 33 113 76 37 07 63 34 26 26 2 17 11 18 3 48 9 1 -1 14 7 19 3 35 14 39 -1 11 3 18 4 34 25 46 1 9 8 15 2 37 21 30 1 10 * 14 2 36 27 23 -1 9 1 19 3 32 25 9 * 9 8 10 1 35 Mortgage debt 1981 02 0 3e By type of debt Total Residential Other 1 By type of holder Commercial banks Savings and loans Mutual savings banks Life insurance companies FNMA and GNMA GNMA mortgage pools FHLMC and FHLMC pools Other 2 1. Includes commercial and other nonresidential as well as farm properties. 2. Includes mortgage companies, real estate investment trusts, state and local government credit agencies, state and local government retirement funds, noninsured pension funds, credit unions, Farmers Home Administration and Farmers Home pools, Federal Land Banks, Federal Rousing Administration, Veterans Administration, and individuals. e--Partially estimated. *--Between 0S.5 billion and $-0.5 billion. SFCONDARY MARKET FOR ROMW MORTGACGS FNMA auctions of forward purchase commitments' Conventional FHA/VA Amount ($ millions) Offered Accepted Period Yield to FNMA (percent) Amount ($ millions) Offered Accepted Yield to FNMA (percent) Yield on NMA securities for immediate delivery 2 (percent) 1980--High Low 426 29 133 20 17.51 12.76 644 97 324 52 15.93 12.28 14.41 10.79 1981--High Low 316 12 168 11 19.22 14.83 257 26 182 16 19.23 14.84 17.46 13.18 Sept. 21 28 35 -21 -19.22 43 30 -19.23 16.33 17.46 Oct. 5 13 19 26 15 28 -11 16 18.61 -18.61 26 -40 16 21 -17.74 -18.51 16.72 16.24 16.24 16.95 2 - - -- -- -- 15.93 Nov. - 1. Auction yields on fixed-rate level-payment loans are gross, before deduction of 38 basis points for mortgage servicing. 2. Average net yields to investors assuming prepayment in 12 years on pools of 30-year FHA/VA level-payment mortgages typically carrying the prevailing ceiling rate on such loans. III-15 Mortgage Markets Mortgage debt formation weakened further in the third quarter, dropping to the slowest pace since the second quarter of 1980. The decelera- tion was most pronounced in the residential sector, especially at S&Ls where net mortgage lending ground to a halt in September. The near-term outlook for mortgage lending at thrift institutions worsened in September against a backdrop of record-high mortgage rates and weakened deposit flows. New commitments at S&Ls fell to $2.9 billion (seasonally adjusted), the lowest monthly pace since the series originated in 1976, and loan commitments outstanding at these institutions declined further. High mortgage rates are, of course, deterring loan originations more generally. The slow activity at mortgage bankers is reflected in part by weak demand in auctions of FNMA purchase commitments. The volume of con- ventional and FHA/VA mortgage commitments offered in the bi-weekly FNMA auctions in October was only about an eighth of the already depressed average volume per auction in 1980. In addition, there has been no commitment activity since mid-September in FNMA's auction for graduated-payment FHA mortgages.1 In addition, mortgage activity currently is being limited by the rapidly changing nature of mortgage instruments. Many mortgage lenders continue to be reluctant to make long-term fixed-rate mortgage loans, while consumers reportedly remain reluctant to accept the risks associ1. Commitments under FNMA's new mandatory delivery program also have fallen sharply. The level of these commitments averaged only $50 to $60 million in September and October, down from an average of $220 million in the previous three months. III-16 CONSUMER INSTALLMENT CREDIT (seasonally adjusted annual rates) 1979 1981 1980 Q2 Change in outstandings -- total - - - - Percent Q3 Aug. rate of growth - Sept. - 14.0 0.5 7.1 9.6 10.7 10.5 14.5 19.9 12.1 0.0 5.5 -2.9 1.0 15.3 13.8 18.8 8.5 2.2 21. 1 9.8 2.2 22.5 5.8 2.1 By type: Automobile credit Revolving credit All other -- -Change in outstandings By type: Automobile credit Revolving credit All other -- total 38.4 - - 1.4 Billions of dollars - - - 22.4 30.5 34.3 33.8 25.4 5.9 27.4 3.5 2.9 14.7 8.6 15.1 0.0 2.9 -1.5 1.2 8.8 12.4 22.4 5.0 3.1 18.2 14.0 6.2 -8.4 8.4 1.4 1.0 8.9 12.5 3.0 24.1 4.1 28.6 3.5 1.5 32.2 0.2 Extensions -- total By type: Automobile credit Revolving credit All other 324.8 305.9 344.1 348.3 346.8 353.1 93.9 120.2 110.7 83.0 129.6 93.3 87.9 147.7 108.5 103.7 146.0 98.6 102.o 143.6 100.3 11O.1 148.0 95.0 Liquidations -- 286.4 304.5 321.7 317.8 312.5 319.3 17.5 16.7 16.2 15.6 15.3 15.5 By major holder: Commercial banks Finance companies All other total Memo: Ratio of liquidations to disposable income (percent) -- I~--I 3.0 2.2 III-17 ated with adjustable-rate mortgages, even with their typical 75 to 100 basis point markdown below fixed-rate loans. Nonetheless, recent FHLBB survey data indicate that almost 30 percent of all conventional first mortgage loans closed in early September were adjustable-rate instruments of some kind. Consumer Credit Consumer installment credit growth in September remained at about the August pace, up somewhat from the previous few months. The increase in credit growth--nearly all of which was at finance companies--resulted solely from a surge in automobile sales that was spurred by sales incentives programs. Judging from the plunge in new car sales in October and sluggish consumer spending generally, the expansion in consumer credit was likely quite weak last month. Weakness in consumer lending was evident at large weekly reporting banks in October. Owing in part to the sluggish combined growth in installment and mortgage debt since early 1980, households in the aggregate have reduced their debt burdens. In particular, the ratio of debt repayments to dis- posable personal income declined in the third quarter to near its lowest level in 10 years. APPENDIX III-A* FINANCIAL INNOVATION AND THE MONETARY AGGREGATES-SUMMARY OF BANK CONTACT GROUP RESPONSES Owing to the persistent weakness of M1-B this year, Reserve Bank staff were asked to gather information regarding recent and prospective developments in the use of cash management techniques. The findings suggest that monetary growth in 1981 likely has not been substantially reduced by a spreading of deposit sweeping arrangements, in which transaction balances are kept from rising above predetermined levels by periodic transfers of funds to higher yielding assets; rather, the recent weakness in money demand appears to have reflected a more intensive use of cash management capabilities already in place as the year began--in particular, the ability of large corporations to sweep their own accounts, augmented by growing use of related cash management techniques such as cash concentration accounts, lock boxes, and deposit information systems. However, there were fairly widespread indications in most Federal Reserve districts that demands by smaller and medium sized firms for deposit-sweeping and other cash management services are growing rapidly. In response, a large number of regional banks apparently have begun to develop programs that will become available within the next year or two, some as soon as early next year. On the consumer side, growth in M1-B may also be affected in the near term by the growing popularity and aggressive promotion of consumer-oriented cash management services, and the continuing development by depository institutions of retail accounts offering high liquidity coupled with market-related rates of return. Although the availability of cash management services and attractive substitutes for traditional transaction balances appear likely to expand considerably in coming months and years, it was beyond the scope of the survey to quantify the impact on M1-B. On the one hand, the relatively few very large corporations that already have assimilated fully available cash management techniques likely account for a considerable part of business transaction activities. On the other hand, many of the firms that have not yet adopted more sophisticated cash management techniques may do so rapidly. Under the deposit-sweeping arrangements currently available to businesses--usually at large banks--balances typically are swept daily, apparently about mid-morning. Sweeps may also be made upon the instruction of the customer, and there are a few reports that deposits may be put into interest bearing alternatives up until noon or later. Swept funds typically are placed in RPs or very short-term--overnight to 5-day-commercial paper. Lesser amounts are said to be placed in CDs and Eurodollar deposits, with the latter apparently available generally from large banks in the New York and Philadelphia areas, but obtainable elsewhere mainly to accommodate specific requests of customers. Although bank cash management services for smaller firms remain largely in the * Prepared by Thomas F. Brady, Economist, Banking Section. III-A-1 III-A-2 developmental state in most areas, some banks already have begun to publicize and offer such services. Arrangements to pay for deposit-sweeping services vary by customer and may involve fees, compensating balances (with required levels sometimes linked to market interest rates), spreads between what the swept funds earn and what the customer receives, or some combination of such procedures. It is thought that as deposit-sweeping services grow in popularity and usage, more standardized pricing may develop. Banks discourage overdrafts at the wholesale level, and overdraft privileges do not appear to play a role in corporate cash management techniques. There has been, however, increasing demand for cash concentration accounts, lock boxes, and especially deposit information and projection services. The use of these techniques is reported to have increased considerably in the past year in several districts. Consumers also may make use of cash management services or they may acquire various forms of highly liquid assets featuring marketrelated rates of returns. Currently, cash management accounts are offered by brokerage firms. They involve linking a demand deposit, a MMMF, and an account at the brokerage firm; account minimums are on the order of $20,000. Excess cash from the brokerage account is swept weekly into the MMMF while checks written on the demand deposit account are funded by running down first excess cash in the brokerage account and then the MMMF. Credit is automatically extended to cover checks in excess of funds in the MMMF by making margin loans against the securities in the brokerage account. Most districts report that cash management accounts are being heavily promoted--including seminars to explain their use--and that they have elicited considerable interest. A similar service has been developed very recently in which a NOW account and a MMMF are linked, with weekly deposit sweeping designed to maintain a $2,500 average balance in the NOW account. Although this low minimum balance type of service currently is offered only by a few institutions, major credit card companies are reportedly in the process of providing client banks with similar capabilities. Such services reportedly will become operational early in 1982. At least one bank is offering retail RPs connected to NOW accounts, with funds transferred between the NOW account and the RP at the customer's 1. For example, a New York City bank has recently begun to offer a service to smaller firms which sweeps excess deposits into a MMMF daily. For a fee of $100 per month, average balances are kept at $6,500; a second plan, which maintains an average balance of $20,000, has no fee attached. Another bank is reported prepared to sweep small firms' funds into RPs in lots of $25,000. III-A-3 instructions, in $100 lots. As well, there are several reports suggesting that banks continue to seek competitive products that offer high liquidity and market-related yields. For example, a West Coast bank is reported to be offering $100,000 14-day CDs for $20,000 with the difference lent a rate equal to the yield on the CD. However, there at was-general agreement,aong respondents that banks' attempts to compete with MMMFs by using loophole MMCs have not been very successful.1 Overdraft privileges on retail accounts are quite common and are reported to have grown significantly in recent years. It is not clear to what extent individuals use this feature as a cash management technique. 1. Loophole MMCs--an arrangement whereby the issuing depository institutions makes MC available for less than the $10,000 legal minimum denomination by lending the depositor a portion of this amount, often up to $7,000--appear-to be generally available in the New York district but less common elsewhere. The loan rate is typically a fixed spread, usually a percentage point, over the MMC rate, but sometimes floats with the Treasury bill rate. In some cases, the MMC is linked with a transaction account and is checkable up to the maximum line of credit. INTERNATIONAL DEVELOPMENTS Foreign Exchange Markets As shown by the chart on the next page, the weighted average value of the dollar has moved sharply down, up, and back down since the September Greenbook, depreciating by about 3 percent on balance. The net depreciation was associated with a decline of more than 3 percentage points in short-term dollar interest rates, compared with an average decline of about 1 percentage point in short-term foreign interest rates. The temporary strengthening of the dollar during the middle of October was associated with renewed sentiment that dollar interest rates might move back up, with increased tensions in the Middle East following the assassination of Egyptian President Sadat, and with political confrontations in Poland. On October 4 the EMS currency band was realigned, with the central rates for the Deutschemark and Dutch guilder revalued by 5-1/2 percent vis-a-vis the Belgian franc, Danish Krone and Irish pound, while the central rates for the French franc and Italian lira were devalued by 3 percent. As a result of the realignment the market value of the French franc depreciated by about 4 percent against the mark, which moved the franc to the top of the new currency band while the mark and guilder moved to the bottom. The market value of the Belgian franc depreciated by about 2 percent against the mark. The EMS realignment provided scope for a reduction of French interest rates, which have declined by around 3 percentage points since the last Greenbook. German interest rates have declined by about 1 percentage point over the same period. IV-1 Continuing tight monetary IV-2 WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S. DOLLAR Daily Series March 1973=100 116 Greenbook September 30 11 S 112 - 110 108 106 S104 i111111 11111111111 August September October 102 November Percent per annum SELECTED 3-MONTH INTEREST RATES Daily Series S19 Greenbook September 30 - 18 U.S. S 17 - WEIGHTED AVERAGE FOREIGN RATE A -- 15 - \ 14 -- 13 I IIIIIIIIIIIIIII August 16 12 IV-3 conditions in Switzerland have contributed to a further 5 percent appreciation of the Swiss franc against the mark since the end of September. IV - 4 U.S. International Transactions U.S. merchandise trade. In September the U.S. merchandise trade deficit was reduced substantially from the extraordinarily large August figure as exports rose and as imports declined. agricultural and levels. nonagricultural Exports of both goods rose in September from low August The drop in imports in September was largely in nonoil trade, was spread among most commodity categories (including steel and foreign cars), and largely reversed the sharp run-up in values in August. Oil imports in September amounted to 6.0 million barrels per day (seasonally adjusted), about 7 percent less than recorded in August; the average import price was essentially unchanged from August levels. U.S. 1980 Year Merchandise Trade* 1 9 8 1 1 Aug. Sept. Value (Bil. $. SAAR) Exports Agricultural Nonagricultural 224.0 42.0 181.7 244.4 50.9 193.5 241.9 44.3 197.6 232.0 39.6 192.5 228.9 38.7 190.2 234.0 41.7 192.3 Imports Petroleum Nonpetroleum 249.3 78.9 170.4 263.1 83.3 179.8 269.6 84.8 184.8 260.9 71.9 189.0 284.4 78.2 206.3 253 72.3 181.5 Trade Balance -25.3 -18.7 -27.7 -28.9 -55.5 -19.7 Volume (Bil. 72$. SAAR) Exports - Agricultural - Nonagric. 18.1 73.4 19.5 73.2 17.5 73.3 16.6 69.8 16.2 69.3 17.9 69.5 Imports - Petroleum - Nonpetrol. 6.8 67.6 6.3 67.8 6.2 70.7 5.6 73.7 6.2 80.5 5.7 71.6 */ International Transactions and GNP basis. IV - 5 For the third quarter as a whole, the trade deficit was little changed from that of the second quarter with the value of both exports and imports declining. About half of the decline in exports was in agricultural shipments during the summer months. Falling prices accounted for about half the decline in agricultural exports and a drop in volume the other half. By September, agricultural exports particularly shipments of wheat and soybeans, began to pick up with the beginning of the new crop year, even though prices continued to ease. The decline in the value of nonagricultural exports in the third quarter was concentrated in metals (reflecting particularly a drop in the volume of aluminum and a decline in the price of gold) and in civilian aircraft. The drop in aircraft exports was from a particularly large number of deliveries of big jets in the previous quarter. These and smaller declines in other commodity categories more than offset the sharp pick-up in the volume of coal exports in the third quarter that followed the settlement of the miners' strike. On average, the volume of nonagricultural exports dropped about 5 percent as demand from major trading partners continued to be weak, while prices of these exports rose by about 2 percent on average. The third quarter decline in imports about equalled that of exports. However, the decrease was more than accounted for by a sharp drop in oil imports that far exceeded an increase in nonoil imports. Oil imports in the third quarter declinedin both volume and in price. The volume of oil imported averaged 9 percent less than in the second quarter while the price dropped $2.35 per barrel. Despite some sharp month-to-month fluctuations, the trend in oil imports this year has been IV - 6 downward as a result of a drawdown of U.S. oil stocks and continued weakness in consumption 1981 US. 1Q Volume (mbd, SA) Price ($/BBL) Value (Bil. $, SAAR) 6.59 34.63 83.3 Oil Imports 2Q 6.52 35.62 84.8 3Q 5.92 33.27 71.9 July Aug. Sept. 5.38 33.69 65.4 6.54 33.09 78.2 6.04 33.11 72.3 As a result of the October OPEC meeting, Saudi Arabia agreed to raise the price of its crude oil by $2 per barrel to $34 per barrel and to cut production to sustain this price through 1982. Several other oil exporters (Nigeria, United Kingdom, Norway, Mexico) had been aligned to the Saudi price prior to the meeting and are expected to raise their price proportionally. Even though some producers agreed to cut their prices to the new unified $34 per barrel marker price (adjusted for quality differentials), the market share of these producers had already fallen precipitously during 1981 so that the net effect of the unified pricing agreement will be to increase the weighted average official OPEC price. If the Saudis cut production sufficiently to prevent dis- counts by other producers from the agreed unified price, the average U.S. import price should reach about $35 per barrel early next year and remain at that level through 1982. The increase in nonoil imports in the third quarter was largely in machinery and in consumer goods, with smaller increases in steel and automotive imports from Canada being offset by decreases in both food imports and in foreign car imports. The number of cars imported from IV - 7 Japan and Europe in the third quarter was 6 percent less than in the second quarter, and was 20 percent less than the peak import rate in the third quarter of last year. Since then (3Q80), foreign cars imported has declined each quarter. the number of During this period dealer inventories of foreign cars have been drawn down to near record lows as sales declined only gradually. U.S. International Capital Transactions. U.S.-based banks advanced, on a daily average basis, $5 billion to their own foreign branches in September-October. During the same interval, loans to U.S. nonbank residents by those foreign branches increased, on a daily average basis, by about $2 billion. The increase in branch loans most likely resulted from more extensive use by borrowers of LIBOR-pricing options included in loan commitments. The prime rate exceeded LIBOR by an average of 215 International Banking Data (billions of dollars) 1. 2. 3. */ 1/ 2/ 3/ Banking Positions Vis-รก-vis Own Foreign Offices 1/ All banks (a) U.S.-based banks (b) (c) Foreign-based banks Credit Extended to U.S. Nonbank Residents by Foreign Branches of U.S. banks 2/ Eurodollar Holdings of U.S. Nonbank Residents 3/ 1980 Dec. March June 7.2 -14.6 21.8 3.0 -16.9 19.9 5.0 -14.1 19.2 4.2 7.0 7.1 8.6 60.8 66.3 76.8 85.5 1 981 Sept. Aug. */ Oct. 8.9 7.5 -10.0 -12.1 18.9 19.6 2.9 -15.2 18.1 9.2 10.6 n.a. n.a. Daily average through October 28. Daily averages, net due to own foreign offices = (+). Daily averages. End of month. p IV - 8 basis points in September and 195 basis points in October, somewhat more than the 170 basis point average differential for the first eight months of the year. As shown in the table above, Eurodollar holdings of U.S. nonb.nk residents increased by about $25 billion in the first 8 months of the About $9 billion of the increase was accounted for by holdings year. of Eurodollar CDs by money-market mutual funds. The great bulk of these Eurodollar CD holdings are with London branches of U.S. banks. Through- out this period U.S. banks significantly increased their reliance on the London CD market as a source of funds. As a percentage of outstanding CDs at domestic offices of weekly-reporting banks, CDs issued by London branches increased from 25 to 31 percent. During the 8 months the reserve- adjusted costs to U.S. banks of Eurodollar and domestic CDs were about equal. The development of the Eurodollar CD market is likely to continue. In mid-October three U.S. banks successfully petitioned the dealer community to be treated as top-tier banks in the secondary market for Eurodollar CDs, i.e., to be traded homogeneously at the lowest rate in that market. This should improve the liquidity of the three banks' issues, as well as the liquidity of the issues of the four banks already included in the top tier. The addition of names to the top tier will make that market deeper and perhaps allow an even narrower bid-asked spread than the 10 basis points now quoted by dealers. Beginning at the end of August new data have been collected on overnight Eurodollar deposits of U.S. nonbank residents at foreign branches of U.S. banks. These data show that U.S. nonbank residents November 10, 1981 U.S. International Transactions (in billions of dollars, receipts, or increase in liabialites 1. 2. 1979 Year 1980 Year CHANGE IN NET FOREIGN POSITIONS OF BANKING OFFICES IN THE UNITED STATES 1/ 14.7 -29.8 PRIVATE SECURITIES TRANSACTIONS, NET 2/ A. FOREIGN NET PURCHASES OF U.S. CORP. BONDS B. FOREIGN NET PURCHASES OF U.S. CORP. STOCKS C. U.S. NET PURCHASES (-) OF FOREIGN SECURITIES -3.3 .3 1.0 -4.6 3. FOREIGN NET PURCHASES (+) OF U.S. TREAS. 4. CHANGE IN FOREIGN OFFICIAL RESERVE ASSETS IN U.S., INCREASE (+) BY AREA A. G-10 COUNTRIES AND SWITZERLAND B. OPEC C. ALL OTHER COUNTRIES OBLIGATIONS 3/ BY TYPE D. U.S. TREASURY SECURITIES 4/ E. OTHER 5/ 5. CHANGE IN U.S. RESERVE ASSETS INCREASE (-) 6. TRADE BALANCE, n.s.a. 7. ALL OTHER TRANSACTIONS AND STATISTICAL DISCREPANCY MEMO: BIL. $ SEASONALLY ADJ. ANNUAL RATES MERCHANDISE TRADE BALANCE CURRENT ACCOUNT BALANCE 1/ 2/ 3/ 4/ 5/ 6/ EXCLUDES EXCLUDES INCLUDES INCLUDES INCLUDES INCLUDES 6/ = (+)) 1981 July Aug. Sept. n.a. 6.1 -. 9 n.a. 1.7 .6 2.6 -1.4 n.a. .1 .3 .1 -. 3 .4 .2 n.a. 1.4 .7 n.a. -. 5 .5 n.a. 14.9 5.6 -3.1 n.a. -. 2 -4.8 n.a. -21.1 6.5 1.5 -2.5 12.1 5.3 1.9 5.7 -2.0 -8.0 2.5 2.3 -1.4 2.4 -1.1 -2.9 -1.6 -. 3 -21.6 8.6 9.7 5.2 7.2 -1.6 -2.1 -1.1 -1.7 1.8 -1.7 -3.1 -. 3 -7.8 -3.7 .8 -27.3 -25.3 -5.3 -5.6 24.6 43.0 10.2 12.9 -27.3 1.4 -25.3 3.7 -18.7 13.0 -27.7 4.3 Q1 Q2 03 -10.2 -7.4 2.5 1.2 4.3 -3.0 2.0 .8 1.7 -. 5 4.8 2.7 -13.1 n.a. .2 .7 -. 4 -2.2 -4.9 n.a. -4.0 10.1 -28.9 n.a. -11.5 n.a. -55.5 n.a. -9.2 LIABILITIES TO FOREIGN OFFICIAL INSTITUTIONS. U.S. TREASURY OBLIGATIONS. U.S. TREASURY NOTES PUBLICLY ISSUED TO PRIVATE FOREIGN RESIDENTS. NON-MARKETABLE SECURITIES. DEPOSITS IN BANKS, COMMERCIAL PAPER, ACCEPTANCES, & BORROWING UNDER REPURCHASE AGREEMENTS4 NEWLY ALLOCATED SDR'S OF $1,139 MILLION IN JANUARY 1979; $1,152 MILLION IN JANUARY 1980; and $1,093 MILLION JANUARY 1981. n.a. -2.1 n.a. -19.7 n.a. IV - 9 currently hold about $2 billion more in overnight Eurodollar deposits than the slightly more than $6 billion in such deposits now included as a component of M2. Half of the $2 billion in newly-reported overnight deposits are at the Caribbean branches of about two dozen regional banks. In October, on a daily average basis, the amounts of such deposits reported by the individual regional banks ranged from less than $5 million to more than $120 million. Overall, the new data strongly suggest that the practice of offering overnight Eurodollar investments to corporate customers has now spread from the current M2 reporters (a total of 27 major money center and larger regional banks) to a second tier of smaller regional banks. The remainder of the $2 billion of newly-reported overnight Eurodollar deposits of U.S. nonbanks at foreign branches of U.S. banks are outside the Caribbean, primarily in London. The London deposits appear to be held mostly by money market mutual funds that are willing to accept a somewhat lower yield in London to avoid Caribbean exposures. To the extent that these London deposits are held by money market mututal funds they are already reflected in M2. Foreign official reserve assets in the United States billion in August. fell about $4.8 Partial data, based on holdings at the FRBNY, indicate additional decreases totalling about $1.0 billion in September and October. Holdings of the G-10 countries fell about $2.9 billion in August and $2.3 billion in September-October, . OPEC holdings fell about $1.6 billion in August, but increased by a like amount in September-October IV - 10 Foreign Economic Developments. Economic activity in most of the major foreign industrial economies has continued to be weak. Japan, Only in where in the third quarter expanding exports served to support a 1.2 percent (sa.) rise in the level of industrial production above its level of the previous quarter, strength. has economic activity shown some In recent months, the unemployment rate in the major foreign industrial countries remained virtually flat or rose from already high levels and there has been little significant change in the rate of increase of consumer prices. The Japanese and the German current-account balances showed continued improvement in the third quarter. of $2.4 billion in Japan recorded a current-account surplus the third quarter, as compared with a $2 billion surplus in the second quarter and a deficit of $1 billion in the first quarter. The third quarter German current-account deficit is expected to be lower than the $2.3 billion deficit (s.a.) posted in the second quarter. In most of the major industrial countries both monetary and discretionary fiscal policy remain restrictive; the principal exception is Japan where the Bank of Japan has projected an increase in the growth rate of M2 in the fourth quarter. The generally weak economic activity and high unemployment and interest rates have tended to increase government deficits. Individual Country Notes. In Japan, a continued widening of the current-account surplus has given rise to a renewal of international criticism of Japanese trade policies. The current-account surplus for September of almost $1.4 billion (s.a.) was the largest in two years and REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES (Percentage change from previous period, seasonally adjusted) Canada: France: Germany: Italy: Japan: 1978 1979 1980 Q1 Q2 GNP IP 3.7 3.4 3.0 4.7 0.0 -1.6 -0.9 -0.7 -1.0 -2.5 0.2 -0.3 2.3 2.3 1.0 1.9 1.3 2.6 GDP IP 4.0 1.9 3.7 4.7 1.5 -1.2 0.2 0.5 -0.6 -2.2 0.2 0.0 -0.1 -2.0 -1.1 -4.1 1.2 -0.8 3.6 2.0 4.5 5.3 1.7 -0.1 1.9 0.9 -2.0 -2.4 0.0 -1.5 -0.4 -1.8 0.4 2.2 -0.7 -0.3 n.a. * -1.2 -3.6 GDP IP 2.6 1.9 5.0 6.6 4.0 5.6 2.1 4.4 -0.9 -2.7 -2.7 -7.6 2.0 5.3 0.6 0.7 -0.8 -2.5 n.a. -5.1 * 0.2 GNP IP 6.0 6.2 5.9 8.3 5.5 7.1 1.8 4.1 0.8 0.2 1.5 -2.3 0.5 1.6 1.1 1.7 1.2 -0.3 n.a. 1.2 * 2.6 1.0 3.6 3.6 1.7 2.7 -2.1 -6.6 -0.9 -2.3 -1.5 -3.0 -1.3 -3.0 -0.4 -2.7 -1.0 -1.2 -0.6 -0.8 n.a. n.a. * 1.5 * -0.0 * -0.1 n.a. 4.8 5.8 3.2 4.4 -0.2 -3.6 0.8 0.1 -2.6 -5.3 0.6 -1.5 0.9 4.5 2.1 2.0 -0.4 0.5 * 0.1 * 0.6 * -0.3 * -0.8 GNP IP United Kingdom: United States: GDP IP * GNP data are not published on monthly basis. Q4 Q1 1981 Q2 --- 1980 Q3 1981 June July n.a. n.a. * 0.5 -2.2 n.a. n.a. * 2.5 Q3 -0.1 0.2 Aug. * * 0.6 * n.a. * * ] 1.6 * * * -1.3 * 1.9 Sept. * n.a. -0.9 -0.9 -0.9 * * -13.6 18.2 * -2.6 * CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES (Percentage change from preceding period) MEMO: Q2 1980 Q3 Q4 Q1 1981 Q2 Q3 July Aug. 1981 Sept. Oct. Latest 3 Months from Year Ago Canada: CPI WPI 2.8 1.1 2.8 2.8 2.8 3.2 3.2 2.5 3.1 2.1 3.0 n.a. 0.9 0.4 0.7 -1.6 0.7 3.1 n.a. n.a. 12.7 9.5 France: CPI WPI 3.1 0.8 3.2 0.6 2.8 3.4 3.0 1.5 3.3 4.5 3.9 4.0 1.7 1.5 1.2 1.1 1.1 0.3 n.a. n.a. 13.6 14.1 1.8 1.7 0.7 -0.2 0.8 0.7 2.2 3.9 1.8 2.3 1.2 2.1 0.4 0.7 0.3 1.3 0.5 0.9 0.3 n.a. Italy: CPI WPI 3.9 3.6 4.2 2.2 5.3 3.8 5.2 5.0 4.3 5.1 2.8 n.a. 0.9 0.9 0.7 1.2 1.4 1.3 2.0 n.a. Japan: CPI WPI 3.0 4.8 1.1 0.7 1.2 -0.7 1.3 -0.7 1.3 1.1 -0.1 1.4 -0.3 0.4 -1.0 0.5 2.0 0.0 0.4 n.a. 5.8 4.0 2.2 2.3 1.9 1.2 2.4 3.0 4.9 3.4 1.7 2.1 0.4 0.5 0.7 0.9 0.6 0.8 n.a. 0.9 11.3 10.5 3.1 2.5 1.9 3.3 3.1 2.1 2.6 2.6 1.8 2.2 2.9 1.0 1.2 0.4 0.8 0.3 1.2 0.2 n.a. n.a. 10.8 8.1 Germany: CPI WPI United Kingdom: CPI WPI United States: CPI(SA) WPI(SA) -- 6.4 9.3 18.6 18.5 3.6 1.4 TRADE AND CURRENT-ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIESa (Billions of U.S. dollars; seasonally adjusted) 1980 1981 July Aug. Sept. 0.4 * 0.3 * 0.1 * -2.1 -0.4 -2.4 -1.1 n.a. * 0.0 -1.4 * * 0.2 -4.4 3.1 -2.3 n.a. 1.7 -5.0 -1.5 0.4 -2.6 n.a. -0.9 -5.5 -2.9 -4.5 -5.8 -4.8 -4.4 n.a. n.a. -1.4 -1.7 * * 1.4 -1.8 2.9 -0.2 3.3 -1.0 1.5 2.1 3.0 4.5 n.a. n.a. -2.9 5.0 -5.6 1.4 1979 1980 Q1 Q2 Q3 Canada: Trade Current Account 3.4 -4.2 6.7 -1.6 1.4 -0.8 0.9 -1.0 2.0 -0.2 2.4 0.3 1.4 -1.1 0.8 -2.0. France: Trade Current Account -2.4 1.1 -14.2 -7.9 -3.4 -2.6 -3.5 -1.2 -4.0 -2.1 -3.2 -2.0 -2.7 -2.4 Germany: Trade Current Account (NSA) 12.3 -5.3 4.9 -17.4 1.7 -2.9 1.2 -4.0 1.1 -7.1 0.9 -3.3 Italy: Trade Current Account -5.2 5.5 -22.6 -9.8 -4.1 -4.4 -4.4 -1.5 -8.6 -1.0 Japan: Tradeb Current Account 18 -8.8 2.1 -10.7 -1.8 -5.0 -0.9 -4.1 United Kingdom: Trade b Current Account -7.4 -3.0 2.9 6.6 -0.9 0.2 -0.7 -0.2 -25.3 3.7 -10.1 -2.1 United a b * States: (NSA) Trade Current Account -27.3 1.4 -6.7 -0.5 Q4 Q1 -4.7 3.3 Q2 Q3 0.6 n.a. -1.3 * 5.5 2.0 6.3 2.4 1.6 0.1 2.2 0.9 2.5 1.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 0.0 0.3 -6.9 1.1 The current account includes goods, services, and private and official transfers. Quarterly data are subject to revision and are not consistent with annual data. Comparable monthly current account data are not published. -7.2 -1.0 n.a. * - - -4.6 * -1.6 * I- IV - 14 brought the total surplus for the quarter to $2.4 billion, which is somewhat above the second quarter surplus. Trade relations with the United States and the EC in particular have begun to show signs of strain as Japan's cumulative bilateral surpluses with them for the last six months have reached $7.4 and $5.4 billion (n.s.a.), respectively. The strength of the Japanese trade position has arisen both from ongoing growth in real exports, which expanded at a 14 percent annual rate in the third quarter, and a decline in real imports (at a 3-1/2 percent annual rate). Although the latest monthly assessments of the domestic economy by the Bank of Japan and the Economic Planning Agency are upbeat about the prospects for near-term expansion of consumer spending, the pace of the recovery of domestic demand still appears to be moderate at best, as medium and small-scale firms still Although hold large unplanned inventories. industrial production (s.a.) rose sharply in September from its low August level, the. unemployment rate moved upward again after 3 months of decline. The ratio of job offers to acceptances, a reliable indicator of labor-market conditions in Japan, fell in September, also indicating weakness. Wholesale prices in September were unchanged from their level in August. Although there was a sharp upward movement in the CPI, in September and October it was still less than 4 percent above its yearprevious level, quarters. reflecting the moderate trend of consumer prices in recent The Bank of Japan has projected an increase in the growth rate of M2 in the fourth quarter to a year-over-year rate of 10-11 percent, about a point higher than the comparable figure for the previous quarter. IV - 15 Industrial production in Germany in the third quarter declined somewhat further from its low level of the second quarter. This weakness was fairly evenly spread across all industries with above average weakness in steel and strength in automobiles. The rate of unemployment at 6.2 percent (s.a.) reached a post-war record in October. at the same time, were at their lowest level in Job openings, the post-war years. Apart from exports, for which recent data indicate a slowing of growth, no domestic demand sector shows enough strength to indicate an early end to the stagnation in output. The rate of inflation continues to be relatively high. prices rose in excess of 8 percent the CPI rose by 5.2 percent. its year-earlier level. (a.r.) in Wholesale the third quarter, while The CPI in October was 6.7 percent above While the high rate of inflation in wholesale prices point to no early let up in consumer price inflation, the recent strengthening of D-mark exchange rates should have a moderating effect on import prices and hence on the general price level. The adjustment of the current-account deficit, which began in the second quarter, appears to be continuing. Seasonally adjusted, the second-quarter deficit was about half of the first-quarter deficit. Preliminary data through September indicate that the adjusted third quarter current-account deficit has been reduced further. the adjustment has occurred in the trade account, The bulk of where large gains in export volumes have improved the trade balance. Only one month after the government presented its budget for 1982, which projected a significant decline in the deficit below this year's DM 35 billion, it has become apparent that a weaker economy than IV - 16 previously expected will generate less tax revenues and require more unemployment benefits. So far, the additional fiscal shortfall is estimated officially at about DM 7 billion. The government intends to cover this shortfall by new taxes and a larger transfer of Bundesbank profits than originally expected. In France, real GDP grew by 4.8 percent (s.a.a.r.) in the second quarter of this year. however, The level of GDP in the first half of this year, remained below its level for the same period in 1980. An increase in real consumption expenditures of nearly 5 percent and a rise of more than 34 percent in real exports, which were supported mainly by a sharp increase in services exports, were the most important factors leading to the strong real growth in the second quarter. In the third quarter, consumer price inflation accelerated to more than 15-3/4 percent from more than 13 percent in the second quarter. The current-account deficit (s.a.) fell from nearly $2-1/2 billion in the first quarter to under $1/2 billion in the second quarter. three consecutive quarters of improvement, the third quarter deteriorated somewhat. After the trade balance (s.a.) in The trade deficit in the first three quarters this year was about $3-3/4 billion dollars smaller than that recorded in the corresponding period in 1980. French interest rates have fallen since the realignment within the EMS, when the franc-mark central rate was changed by 8-1/2 percent. At the end of September, 3-month money, percent; in early November, for example, the rate was 15-1/2 percent. Industrial production in the United Kingdom, some signs of recovery. was earning 18-5/8 is starting to show Although total industrial production was flat IV - 17 in July and declined slightly in August, the index for manufacturing industry alone increased by 8 percent in the three-month period ending in August. Output is still depressed, however, with total industrial production at the same level that it was in the first quarter of this year and manufacturing output only slightly above the first-quarter level. In addition, a preliminary estimate for the third quarter indicates a 2 percent (s.a.a.r.) decline in personal consumption for the second consecutive quarter. Third-quarter consumption is estimated to have been at the level prevailing in the same quarter last year. Real personal disposable income has fallen sharply this year; a decline in the personal saving rate -- from 16.5 percent (s.a.) in to 12.5 percent in the second quarter -- the final quarter of 1980 has moderated the impact of the drop in real disposable income on consumption. Since April, when increases in various indirect taxes and public charges substantially raised the price level. U.K. inflation has been fairly moderate. In the five-month period ending in prices rose about 7 percent (a.r.). increased 8-1/2 percent. September, consumer Wholesale prices during this period Partly in order to prevent exchange-rate depreciation from adding to the inflation rate, the Bank of England has exerted upward pressure on market interest rates. In mid-September, the London clearing banks raised their base rates 2 percentage points to 14 percent. At the beginning of October the base rates were again increased by 2 percentage points, but subsequently have been reduced by 1 percentage point to 15 percent. Trade and current-account data for September have been published, but data for the March-August period are not yet available. service labor dispute has delayed publication of these data.) (The civil The IV - 18 September data indicate that the U.K.'s trade and current accounts are still in surplus -- $24 million and $267 million, respectively -- but that there has been a sharp reduction from surpluses averaging $1-1/4 billion in the trade account and $2 billion in the current account in January and February of this year. Industrial production data confirm the weakness of the Italian economy; in the third quarter, industrial production was 2 percent below its year-earlier level. Leading indicators, however, suggest that the weakening in economic activity may have begun to moderate somewhat in the last four months of this year. After moderate increases in the summer, the consumer price index rose sharply in September and October to a level over 18-1/2 percent above that of the year-earlier level. In the third quarter, the trade deficit (s.a.) was $4-1/2 billion; in the first 9 months of 1981, the deficit was almost $14 billion, compared with a deficit of about $17 billion in the corresponding period of last year. On September 30, the Spadolini government presented its 1982 budget proposals to Parliament. to remain steady, Expenditures relative to GDP are slated with investment expenditures rising and social welfare expenditures falling. Personal income taxes are scheduled to rise sharply. The final form of the budget is unclear, however, because labor unions are resisting the tax increase. There is strong evidence that a slowdown in in Canada in the third quarter of this year. economic activity began Industrial production (s.a.) fell 1.3 percent in August after falling 2.2 percent in July. The unemployment rate increased slightly in October over September to 8.3 IV - 19 percent; this represents a more than 1 percentage point increase over the August rate of 7.2 percent. There was little change in the Canadian inflation rate in the third quarter. The Canadian trade surplus fell from about $850 million in the second quarter to less than $640 million in the third quarter. The more than $2.9 billion surplus recorded in the first three quarters of this year is almost $1.4 billion below the surplus for the comparable period a year earlier. The Swedish government has proposed a major reform of its personal income tax system to be effected over the 1983-85 period. According to the proposals, marginal income tax rates will be reduced significantly, with the largest reductions accruing to those who earn between $20,000 and $30,000. Additionally, income levels to which the marginal tax rates apply are scheduled to rise on average by 5-1/2 percent per year over the period. The consequent loss of revenue will be partially offset by a limit on the deductibility of mortgage interest. If the bill is passed in its current form, it is likely that the government will propose an increase in payroll taxes to finance the remaining net revenue loss. Real activity as yet shows no signs of recovery in the Benelux countries. In August, Belgian industrial production was below its year-earlier level, and the unemployment rate was again unchanged from the July level of 14.4 percent (n.s.a.). Inflation remains high; the consumer price index in the three months ending October averaged 8 percent above its year-earlier level. In the Netherlands, industrial production in the second quarter averaged 1 percent (s.a.) below its average for IV - 20 the first quarter, and unemployment rose further in August and September to 9.5 percent (s.a.), more than 2 percentage points higher than its during the first month of the year. level The consumer price index in October was 7.1 percent above its year earlier level, Disagreements about the future course of fiscal policy led recently to the resignation of the Belgian and Dutch governments. No new elections have been scheduled in the Netherlands, and negotiations for a new coalition cabinet are underway. The Belgian election held on November 8 resulted in gains for the right-wing Liberal party and substantial losses for the Flemish Social Christian party of outgoing Prime Minister M. Eyskens. No party won enough votes to form a government by itself, and a new coalition will have to be formed.
@FedFRASER