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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 III FOMC November 12, 1992 RECENT DEVELOPMENTS Prepared for the Federal Open Market Committee By the staff of the Board of Governors of the Federal Reserve System CONTENTS II DOMESTIC NONFINANCIAL DEVELOPMENTS Employment and unemployment........................................ Industrial production....................................... ......... Personal income and consumption.................................... Housing markets ............ ....................................... Business fixed investment.......................................... Business inventories ................................ ............ Federal sector.......................... .......... ................ State and local governments ....................................... . Labor costs ................................... ... ................ . Prices ..... . ................................................. .... . Tables Real gross domestic product and related items..................... Changes in employment........ .......................... ............. Unemployment and labor force participation rates.................. Initial claims with EUC adjustment................... ............. Productivity in the nonfarm business sector........................ Growth in selected components of industrial production............ Capacity utilization....... ... ..................................... New orders for durable goods ................................... .. . Production of domestic autos and trucks ........................... Personal income........ ........... ..... ..................... .. .... . Real personal consumption expenditures.......................... Sales of automobiles and light trucks.............................. Private housing activity............... .......................... . Business capital spending indicators.............................. Changes in manufacturing and trade inventories.................... Inventories relative to sales........................ ............. .31 Federal government outlays and receipts ........................... Employment cost index......................... .................... Changes in negotiated wage and compensation rates under major collective bargaining settlements....................... Effective wage change in major union contracts and components of change .................................................. Average hourly earnings .......................................... Inflation rates excluding food and energy......................... Recent changes in producer prices................................... Recent changes in consumer prices..................................... Price indexes for commodities and materials........................ 3 9 13 20 25 30 35 39 41 43 2 4 4 5 8 10 10 11 11 14 14 18 21 26 31 36 40 44 44 45 46 48 48 52 Monthly average prices--West Texas intermediate................... 53 Charts Labor market indicators............... ............................. .. Alternative labor market indicators ................... .... ...... Output per hour ................................................... . Industrial sector indicators...................................... Real disposable personal income.. ................ ................ Real wages and salaries............................................ Personal consumption expenditures.............. ................... Personal saving rate............................................... Consumer attitudes..................... ... ...................... . Private housing starts............................................... 6 7 8 12 15 15 16 19 19 21 Single-family housing starts and adjusted permits ................. Preliminary and revised new home sales................ .......... .. 22 22 House prices....................................................... 24 Stock of new homes for sale........................................ 24 Recent data on orders and shipments................................ 28 Nonresidential construction and selected indicators............... 29 Ratio of inventories to sales...................................... Manufacturers' inventory-shipments ratio by stage of processing... State and local sector surplus (deficit)............. ............ Employment cost index............................................. Compensation in union contracts ............... ................... Commodity price measures.................. ................. . .. .. . Index weights...................................................... . Daily spot and posted prices of West Texas Intermediate........... 33 34 38 42 44 50 52 53 III DOMESTIC FINANCIAL DEVELOPMENTS Monetary aggregates and bank credit................................ Business finance................... ................ ... .............. Treasury and sponsored agency financing............................. Municipal securities............... . ........ ...................... . Mortgage markets.................................................. Consumer credit.................................................... 3 7 9 12 13 17 Tables Monetary aggregates ............................................. Commercial bank credit and short- and intermediate-term business credit..... ........................................... . Gross offerings of securities by U.S. corporations ................ ........... Treasury and agency financing ......................... Gross offerings of municipal securities ............... ... ....... . Consumer credit................... ............................. Consumer interest rates............................................ Gross public issuance of consumer asset-backed securities ........ 2 4 6 10 13 18 18 21 Charts ..... ......... Refinancing indicators........................... .... .14 Mortgage yield spread and volatility............................. . .............. Freddie Mac mortgage refinancings ............... Consumer installment credit outstanding ........................... 15 19 IV INTERNATIONAL DEVELOPMENTS Merchandise trade................................................. . Prices of exports and non-oil imports.............................. U.S. international financial transactions......................... .... Foreign exchange markets................................... ... Developments in foreign industrial countries....................... The former Soviet Union and Eastern Europe ....................... Economic situation in other countries............... .............. 1 5 5 9 13 24 25 14 Tables U.S. merchandise trade: Monthly data............................... Major trade categories............................. ............... .................. Oil imports........... ........................... Import and export price measures .................................. Summary of U.S. international transactions....................... International banking data........................................ Major industrial countries Real GNP and industrial production.............................. . Consumer and wholesale prices.................................... . Trade and current account balances.............................. 14 15 16 ChartsWeighted average exchange value of the dollar..................... Selected dollar exchange rates..................................... 11 11 1 2 3 4 7 8 DOMESTIC NONFINANCIAL DEVELOPMENTS DOMESTIC NONFINANCIAL DEVELOPMENTS Indications of the pace of economic activity in the current quarter are in short supply at this point; what information there is, however, suggests at least a mildly positive trajectory. Private payrolls increased slightly in October, and the same appears true for industrial output. Despite declining consumer sentiment, motor vehicle sales were up last month, and largely anecdotal information on other retail activity is moderately upbeat. Rising orders for nondefense capital goods through September point to a solid gain in shipments this quarter, and the increase in housing starts during the summer augurs well for residential construction activity. Meanwhile, with the amount of slack in the economy still substantial, increases in wages and prices continued to slow. Real GDP According to BEA's advance estimate, real GDP increased at a 2-3/4 percent annual rate in the third quarter. This was somewhat faster than most market observers had anticipated. However, an examination of the details of the report and the subsequent incoming data do not reveal any obvious grounds for the suspicions expressed by some that the growth rate was vastly overstated. The estimated rise in final sales--2.1 percent at an annual rate--seems broadly consistent with the monthly indicators available at this time. BEA's assumption for the September merchandise trade deficit was in line with the already-sizable August figure. Incoming data on manufacturing and wholesale trade inventories also have been in line with BEA's advance estimate of a modest increase in nonfarm inventory investment. The increase in farm inventory investment is not directly verifiable, but it is consistent with the latest data on agricultural production this year. II-1 II-2 REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS (Percent change from previous period at compound annual rates; based on seasonally adjusted data, measured in 1987 dollars) 1990-Q4 to 1991-Q4 1. 2. Gross domestic product Final sales 1992-Q1 Final 1992-Q2 Final 1992-Q3 Advance .1 2.9 1.5 2.7 -. 6 4.7 -. 1 2.1 .0 5.1 -. 1 3.4 -7.0 -3.5 -14.3 3.0 3.2 2.7 16.1 24.1 -. 8 .3 8.5 -17.7 12.6 .4 3. Consumer spending 4. 5. 6. Business fixed investment Producers' durable equipment Nonresidential structures 7. Residential investment -. 1 20.1 8. Government purchases -. 6 1.7 -1.2 2.0 9. Exports of goods and services 7.4 2.9 -1.4 1.9 10. Imports of goods and services 4.8 3.5 14.7 6.9 -9.62 -1.3 2 -8.3 2 -10.7 4.8 -15.5 6.0 5.5 .5 9.8 2.4 7.4 .3 -1.9 1.8 5.0 -21.5 -43.9 -51.5 ADDENDA: 11. 12. 13. Nonfarm inventory investment 1 Retail autos 1 Excluding retail autos 1 14. Farm inventory investment 1 15. Net exports of goods and services 1 16. Nominal GDP 3.5 6.2 4.3 4.5 17. GDP fixed-weight price index 3.5 3.6 2.9 2.1 18. Gross domestic purchases fixed-weight price index 2.8 3.1 3.2 2.4 19. GDP implicit price deflator 3.4 3.3 2.8 1.8 20. Personal saving rate (percent) 4.7 2 4.9 5.3 4.5 1. Level, billions of 1987 dollars. 2. Annual average. -21.8 2 2 II-3 Employment and Unemployment Recent data point to a slight improvement in labor demand. Private payroll employment rose 66,000 in October after remaining about unchanged in September. The average workweek and the index of aggregate hours for private production workers partially reversed their sharp September declines, and the civilian unemployment rate edged down to 7.4 percent. Nonfarm payroll employment was up 27,000 in October; the number was held down by losses in government employment that reflected early retirements by postal workers and the end of the federally funded summer jobs program. In the private sector, the services industry added 89,000 jobs last month, with business services, which tend to be cyclically sensitive, and health services providing most of the increase. Finance, insurance, and real estate added 14,000 jobs, and wholesale trade posted its first increase in more than two years. By contrast, manufacturing employment fell another 56,000 last month. Although declines were widespread by industry, transportation equipment was particularly hard hit by cutbacks in defense spending. However, total hours in manufacturing were flat, as an increase in overtime offset the employment decline. Also, construction posted a modest gain of 20,000 in October, in part reflecting rebuilding activity in the wake of Hurricane Andrew. In the household survey, employment fell 76,000 in October. However, the number of persons unemployed declined 238,000, and the jobless rate edged down 0.1 percentage point. In general, the household measure of employment has changed little from month to month over the past six months, and the runup in the unemployment rate through June, as well as its subsequent decline, primarily 1. The BLS estimates that there were about 45,000 retirements from the Postal Service and about 20,000 exits from the summer jobs program in October. II-4 CHANGES IN EMPLOYMENT1 (Thousands of employees; based on seasonally adjusted data) 1990 1991 Ql 1992 Q2 Q3 Aug. 1992 Sept. Oct. ------------ Average monthly changes ------------Nonfarm payroll employment2 -5 -79 15 74 -3 -109 -72 27 -34 -47 -36 -4 -11 -23 -8 -1 44 31 0 29 -91 -36 -33 -8 -3 -26 -35 -3 30 29 3 12 -4 -17 -16 -9 -1 4 -7 2 28 16 11 19 64 -14 -15 -12 1 -1 21 -1 70 20 39 10 -28 -43 -32 -13 -11 - 8 -16 -4 60 19 11 25 -185 -97 -49 -13 -48 7 -78 1 10 10 19 76 -2 -38 -23 -11 -15 -16 2 0 54 16 6 -70 66 -56 -41 -16 -15 20 -10 14 89 35 45 -39 Private nonfarm production workers Manufacturing production workers -40 -39 -76 -23 18 1 89 -9 -31 -35 -152 -85 0 -33 86 -32 Total employment4 Nonagricultural -32 -39 -62 -54 207 203 75 56 42 46 -35 -49 -36 -60 -76 6 Private Manufacturing Durable Defense-related Nondurable Construction Retail trade Finance, insurance, real estate Services Health services Business services Total government Memo: Aggregate hours of private production workers (percent change) Average workweek (hours) .0 -. 1 .1 .0 -. 1 .7 -.9 34.5 34.3 34.5 34.4 34.4 34.6 34.3 1. Average change from final month of preceding period to final month of period indicated. 2. Survey of establishments. 3. Industries which are dependent on defense expenditures for at least 50 percent of their output. Survey of households. 4. UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES (Percent; seasonally adjusted) Civilian unemployment rate (16 years and older) Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older Labor force participation rate 1992 Q2 1992 Sept. Oct. Q3 Aug. 7.5 7.6 7.6 7.5 7.4 19.6 11.1 6.3 5.6 21.0 11.3 6.5 5.8 20.4 11.6 6.6 5.8 19.8 11.5 6.7 5.9 20.4 11.6 6.6 5.7 18.3 10.9 6.6 5.6 66.2 66.5 66.4 66.4 66.3 66.1 Q1 1990 1991 5.5 6.7 7.2 15.5 8.8 4.4 4.3 18.7 10.8 5.7 5.1 66.4 66.0 .6 34.5 II-5 reflects large swings in the labor force. After rising sharply last winter and spring, the labor force participation rate has declined about a half percentage point since June (chart). Such a decline is very unusual during a recovery. Initial claims for unemployment insurance have come in noticeably under the 400,000 mark of late. These numbers are somewhat deceptive, however; under revisions to the Emergency Unemployment Compensation (EUC) program made in July, some workers are eligible to file for EUC benefits who otherwise would have filed for regular benefits. As shown in the table below, after adjusting regular initial claims for an estimate of this phenomenon, claims recently have been running around 400,000--a level that historically has been consistent with only small gains in payrolls. INITIAL CLAIMS WITH EUC ADJUSTMENT 1 (In thousands; seasonally adjusted by BLS) 1992 Sept. 26 Oct. 3 Oct. 10 Oct. 17 Oct. 24 Oct. 31 All regular programs EUC effect 408 28 392 28 379 25 384 27 369 26 363 23 Adjusted claims 435 420 404 411 395 385 Initial claims 1. 2. Includes revised data. Initial claims (all regular programs) plus the EUC effect. Other labor market indicators point to continued sluggishness in the demand for workers. The Conference Board's index of help- wanted advertising fell back again in September and is scarcely above its cyclical low. Perceived employment prospects, as measured by the Conference Board's consumer confidence survey, remained poor in October: The fraction of respondents believing that jobs are plentiful has barely improved in recent months. A monthly survey of smaller businesses by the National Federation of Independent II-6 LABOR MARKET INDICATORS Aggregate hours of production or nonsupervisory workers 1982 1982=100 - - 130 125 - 120 115 1987 1988 1989 1990 IIIIIIIIii IIiii 1 1991 Labor Force Participation Rate 1IIIIIIII 1992 o110 Percent 67 86.5 66 O - ct 65.5 1987 .......1988 I !__i Initial Claims for Unemployment Insurance Including EUC effect -5 -- ll.,Iii. I I1992 l li 65 in illlll i a5 1991 1990 1989 Thousands 550 500 450 400 - - 500 450 I350 400 All regular programs Oct 31 18 1987 1988 1989 1990 18 19 1991 19ll9 lllllllllll 1992 350 300 250 11-7 ALTERNATIVE LABOR MARKET INDICATORS Help-Wanted Advertising 1967=100 r- Sept I I I 1985 I I 1988 I iillrl l i l il 1992 1990 Conference Board: Percent Reporting Jobs Plentiful Percent Oct· 1986 I __ 1987 I 1989 I 111111111111~11 _______________ 1990 1992 NFIB Survey of Hiring Plans 1 1985 1986 Percentage points 1987 1988 1989 1990 1. Percent of respondents planning to expand employment minus the percent planning to reduce employment during the next three to six months; seasonally adjusted. 1991 1992 II-8 OUTPUT PER HOUR (Nonfarm Business Sector) $1987/hour 1974 1977 1980 1986 1983 1992 1989 PRODUCTIVITY IN THE NONFARM BUSINESS SECTOR (Percent change, annual rate) 1991 1989 ----Output Hours Output per hour .1 1.6 -1.4 1991 1990 Q4/Q4 ------ Q3 Q4 Q1 1992 Q2 03 -.6 -1.9 1.3 1.5 -.3 1.9 1.6 -.9 2.5 2.3 -1.3 3.7 1.7 .1 1.7 3.0 .4 2.6 -.9 -1.0 .1 II-9 Business suggests that hiring plans picked up a little over the course of-this year but remain weak: In September, only about 6 percent more firms (seasonally adjusted) planned to expand employment than planned to reduce employment during the next three to six months; this figure had been around 10 percent prior to the recession. Other employer surveys are similarly downbeat on hiring expectations. Productivity in the nonfarm business sector rose at a 2.6 percent annual rate in the third quarter, reflecting a 3.0 percent rise in output and only a small increase in hours. This pattern--rising output and weak hours--has been evident throughout the recovery. Over the past six quarters of rising output, total hours worked have fallen somewhat, while productivity has increased at an average annual rate of 2-1/2 percent. Industrial Production On balance, activity in the industrial sector has shown little change since May, although the available data suggest that production edged up in October. Last month, physical production measures advanced slightly on net: Sizable gains in output of light trucks, raw steel, and refined petroleum products more than compensated for declines in output of electricity, appliances, paper, and paperboard. As noted earlier, total hours worked by manufacturing production-workers were unchanged in October, and, with productivity likely advancing further, factory production probably rose a little. Two years after the onset of the recession, total industrial production remains about 1-1/2 percent below its peak of the third quarter of 1990. Excluding computers, production is more than 2-1/2 percent below its peak; only output of nondurable consumer goods and of related materials has surpassed pre-recession levels, II-10 GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION (Percent change from preceding comparable period) Proportion in total IP 1991:Q4 1992 1991 1 Q1 Q2 1992 Q3 ---- Annual Rate---Total index Previous July Aug. Sep. ---Monthly Rate---- 100.0 -. 5 -.5 -2.9 -2.9 5.2 5.3 1.6 1.4 .8 .6 -. 4 -. 5 -. 2 4.2 8.5 -20.0 44.4 -8.3 -2.7 1.5 -. 9 95.8 57.1 42.9 25.0 3.7 20.9 18.2 -.9 -1.3 -. 9 2.0 3.2 1.8 1.7 -2.1 -1.4 -2.1 -1.2 3.1 -2.1 -. 7 3.8 2.0 2.6 2.5 9.1 1.4 1.4 2.0 1.0 1.1 1.1 1.4 1.1 1.1 .9 .7 .8 .9 .3 1.0 .8 -. 5 -. 3 -. 2 -. 2 .6 -. 3 -. 2 -. 2 -. 1 -. 1 .1 -1.1 .3 .0 14.6 2.8 3.9 7.9 -1.9 4.2 -8.7 -.2 -1.7 13.2 -12.1 -1.3 7.6 22.0 6.3 3.3 4.0 25.4 1.2 -2.1 .6 2.3 .7 -. 2 .4 1.4 -. 8 .6 -. 4 1.9 -. 2 -1.4 4.4 -8.0 -10.9 -9.1 -9.5 -. 8 -. 9 -1.2 14.2 5.3 -2.3 -6.4 .8 2.7 .4 4.7 .6 1.7 .4 .8 -.4 -. 1 -. 4 -1.2 38.7 18.2 9.0 10.2 -. 2 -1.8 2.3 .0 -3.2 -1.7 -1.4 -6.0 6.4 6.5 8.0 2.8 3.6 4.2 2.0 4.4 1.2 1.0 1.0 2.3 -. 7 -.3 -1.4 -1.3 -. 2 -. 4 .0 .4 80.8 7.3 7.7 -. 8 -3.3 1.0 -1.1 -7.1 -8.5 3.9 4.3 1.5 1.6 1.7 8.1 .7 2.6 2.4 -.4 -1.2 -.9 -. 4 -1.2 2.6 Motor vehicles and parts EXCLUDING MOTOR VEHICLES AND PARTS: Total index Products, total Final products Consumer goods Durables Nondurables Excluding energy Business equipment Office and computing Industrial Other Defense and space equip. Intermediate products Construction supplies Materials Durables Nondurables Energy Memo : Manufacturing excluding motor vehicles and parts Mining Utilities 1. From the final quarter of the previous period to the final quarter of the period indicated. CAPACITY UTILIZATION (Percent of capacity; seasonally adjusted) 1967-91 1991 1992 1992 Avg. Sep. Q2 Q3 July Aug. Sep. Total industry 82.1 79.9 78.8 78.7 79.1 78.7 78.4 Manufacturing 81.4 78.8 77.9 77.7 78.0 77.7 77.2 82.3 81.0 81.3 77.7 81.3 76.5 81.7 76.0 82.5 76.2 81.5 76.1 81.0 75.7 Primary processing Advanced processing II-11 while defense equipment, industrial equipment, and construction supplies have shown little or no sign of recovery. NEW ORDERS FOR DURABLE GOODS (Percent change from preceding period; seasonally adjusted) 1992 Share Total durable goods 1 100 Adjusted durable goods 66 Office and computing 2 5 Nondefense capital goods 16 Other 45 Q3 -1.9 1.3 2.1 2.5 .8 2.6 2.8 4.4 -.6 3.8 Sep. Aug. July -2.7 .1 -2.5 -.9 .7 Q2 -.4 -2.3 4.2 -5.2 -2.0 -.1 1.5 -4.1 9.5 -.5 1. Excludes defense capital goods, nondefense aircraft, motor vehicle parts, and those companies not reporting unfilled orders. 2. Excludes aircraft and computers. Indicators of the direction of manufacturing activity are mixed. Adjusted orders for durable goods, which exclude motor vehicles and items with unusually long lead times, rose in September after a decline in August. The October NAPM index inched back to only a fraction above the 50 percent level, and the Chicago purchasers' index moved below 50 percent. Anecdotal reports--such as those contained in the Beige Book--are similarly ambiguous. PRODUCTION OF DOMESTIC AUTOS AND TRUCKS (Millions of units at an annual rate; FRB seasonal basis) 1992 Q2 Q3 Sep. Oct. 1992 Nov. Dec. -schedules- U.S. production Autos Trucks 10.0 6.1 3.9 9.5 5.6 3.9 9.4 5.6 3.8 9.9 5.5 4.4 10.6 6.0 4.6 10.3 5.7 4.7 1. Components may not add to totals due to rounding. Prospects appear favorable for near-term production in the motor vehicle industry, however. Total assemblies in October rose to a 9.9 million unit annual rate, half a million units higher than in September; all the gain was in the production of light trucks, as auto assemblies declined somewhat. Given recent sales levels, it II-12 INDUSTRIAL SECTOR INDICATORS (Seasonally Adjusted) Production Worker Hours Millions - 570 S- 560 Manufacturing 550 540 530 520 O 1988 I-iiiitiiiiilii 490 I I -.... I 1987 1989 500 510 ct. 1990 1991 1992 Purchasing Managers' Index Percent 65 60 - 55 50 45 - 1987 1988 40 1989 1090 1991 1992 II-13 appears likely that some of the step-up in assembly rates scheduled for the remainder of the quarter will be realized. Personal Income and Consumption Growth in real income remains exceptionally weak for a business-cycle upswing. Real disposable personal income was flat in the third quarter, and, even adjusting for the effects of Hurricanes Andrew and Iniki, it increased at only a 0.5 percent annual rate. 2 Since the trough in disposable income in the first quarter of 1991, real DPI has risen at a 1.7 percent annual rate, compared with a 4.5 percent average in other recoveries panel).3 (chart, top The shortfall is concentrated in real wages and salaries (chart, bottom panel). Judging from the October labor market report, labor income likely rose early in the fourth quarter. Although real personal consumption expenditures increased at a 3-1/2 percent annual rate in the third quarter, that increase was based largely on gains in June and July. Real PCE was flat in August and edged up just 0.1 percent in September. 4 The 2. Hurricanes Andrew and Iniki affected several components of nominal personal income in both August and September. Most prominently, destruction of uninsured property was counted as a reduction in rental income. Other large effects were a reduction in farm proprietors' income due to crop damage and to the destruction of property, and reduced wages and salaries for employees unable to work in the aftermath of the storms. The latest estimates of Hurricane Andrew's effects on personal income are smaller than the initial estimates, because BEA now believes that more of the losses were insured than originally thought. The initial estimate was that Hurricane Andrew reduced rental income of persons and proprietors by about $46 billion; the current estimate is a reduction of $22.6 billion. It should be noted that, although the hurricane effect on personal income was reduced, the larger insurance company payouts likely will show up as lower estimates of corporate profits for the third quarter. BEA's estimates of hurricane effects on other components of the national income accounts were little changed. 3. The average is calculated from the recoveries that began in 1961:Q1, 1970:Q4, 1975:Q4, and 1982:Q4. 4. BEA did not make specific adjustments to account for the impact of Hurricanes Andrew and Iniki on real PCE; some of the effects are, of course, already embedded in the underlying source However, nominal data (predominately retail sales information). personal consumption expenditures were reduced because BEA subtracts insurance payouts from insurance premiums to generate its estimate (Footnote continues on next page) II-14 PERSONAL INCOME (Average monthly change at an annual rate; billions of dollars) 1992 1991 Q1 12.8 21.6 Wages and salaries Private 5.2 3.8 Other labor income Q2 1992 Proprietors' income July 9.6 13.0 10.6 -7.8 36.2 11.3 8.6 3.6 .9 6.4 5.2 4.8 3.5 18.0 16.8 -3.7 -4.8 1.5 Total personal income Q3 1.4 1.4 1.4 1.4 1.5 1.4 Aug. Sep. .1 7.1 -4.2 4.3 1.5 -5.2 16.5 Farm -.3 1.7 -5.9 1.9 -.7 -6.5 12.9 Rent Dividend Interest .6 -.8 -.6 -.1 .1 -8.6 3.7 1.2 -.8 -1.1 1.5 -3.8 .5 1.6 -4.0 -21.6 1.8 -3.7 17.8 1.0 -3.7 Transfer payments 7.8 12.2 5.3 4.9 2.9 6.7 Less: Personal contributions for social insurance 1.1 1.9 .6 .6 1.4 -.2 -.1 -5.0 3.3 4.4 4.8 6.5 1.9 12.9 26.6 6.3 8.6 5.9 -14.3 1.2 9.8 -1.9 1.5 -.9 -1.6 Less: Personal tax and nontax payments Equals: Disposable personal income Memo: Real disposable income 5.2 .5 34.3 6.9 REAL PERSONAL CONSUMPTION EXPENDITURES (Percent change from the preceding period) 1992 1991 Ql Q2 1992 Q3 ------Annual rate----Personal consumption expenditures July Aug. Sep. ----Monthly rate---- .0 5.1 -.1 3.4 .4 .0 .1 Durable goods Excluding motor vehicles -2.5 -1.0 16.5 15.2 -2.1 -1.6 8.6 19.2 -.2 2.7 .0 .9 1.0 1.0 Nondurable goods Excluding gasoline -1.5 -1.6 5.5 5.6 -1.5 -1.7 1.7 1.5 .8 .8 -.1 -.3 -.3 -.3 Services Excluding energy 1.6 1.5 2.2 3.0 1.2 .9 3.1 3.3 .3 .3 .1 .2 .2 -.0 Memo: Personal saving rate (percent) 4.7 4.9 5.3 4.5 4.6 4.5 4.6 II-15 Real Disposable Personal Income F ---- Index, trough = 100 ---- Current episode Average history -- ,-- " " -I I 0 I I 1 2 I I 3 I 4 5 6 Number of quarters from trough Current trough = 1991:Q1 (includes troughs 1961:Q1 1970:Q4 1975:1 1982:04) Real Wages and Salaries Index, trough = 100 109 -- - Current episode - - Average history 108 107 'F-- - -F 106 -F 105 .- "-- - 104 103 102 101 100 I 0 I I 1 2 t 3 1 4 I 5 Numbers of quarters from trough Current trough = 199101 (Includes troughs 1961:Q1 1970:4 197501 1982:04) 99 6 II-16 Personal Consumption Expenditures Billions of 1987 dollars 3420 * Quarterly averages 3360 Sep. - 3300 3240 II 1989 I 1990 Personal Consumption Expenditures for Goods K 3180 1992 Billions of 1987 dollars 1600 * Quarterly averages 1560 1520 1480 1440 1989 1991 1990 Personal Consumption Expenditures for Services F 1400 1992 Billions of 1987 dollars 1920 * Quarterly averages 1860 Sep. 1800 1740 I 1989 I 1990 1680 1991 II-17 September gain reflected a substantial increase in purchases of durable goods, such as furniture and household equipment, that may have been influenced by rebuilding efforts following Hurricane Andrew. In addition, sales of new motor vehicles were up a bit in September, and unseasonable weather boosted electricity consumption. These increases were largely offset by a decline in spending on nondurable goods, leaving total consumer spending near its July level (chart). Coincident with this stagnation in consumption, the Michigan and Conference Board indexes of consumer sentiment have drifted lower since July. One area of improvement since July has been sales of light motor vehicles. The latest data show substantial increases in sales for September and again in October. Seasonal adjustment problems (associated with the extensive incentive programs on light trucks at the end of the 1991 model year) may have misallocated some sales between September and October; nevertheless, the average 13.1 million unit annual rate for the two months together was considerably above the July-August pace. Most of the gains reflected a strengthening in the market for light trucks; sales of cars remained sluggish. The relative gains in the truck market reflect further growth in the sales of minivans and lower-priced pickups. Part of the stagnation in sales of North America-produced autos since July may be attributed to reductions in fleet sales to car rental companies. The personal saving rate moved down to 4.5 percent in the third quarter--4.6 percent excluding identified hurricane effects. (Footnote continued from previous page) of nominal spending on insurance. Real PCE on insurance is estimated using a different method, which does not directly capture hurricane effects. As a result, the discrepancy between the two measures is forced into the deflator for insurance services. II-18 1 SALES OF AUTOMOBILES AND LIGHT TRUCKS (Millions of units at a seasonally adjusted annual rate) 1992 1992 Sept. Oct. 1991 01 02 03 July Aug. 12.30 8.39 3.91 12.37 8.31 4.06 12.99 8.50 4.49 12.59 8.21 4.38 12.49 8.34 4.15 12.54 7.94 4.60 12.73 8.35 4.39 13.50 8.30 5.20 2 North American Autos Big Three Transplants Light trucks 9.73 6.14 4.99 1.14 3.59 9.86 6.07 5.02 1.05 3.79 10.57 6.32 5.17 1.15 4.25 10.41 6.24 4.90 1.34 4.17 10.33 6.41 5.10 1.31 3.92 10.38 5.96 4.61 1.35 4.42 10.53 6.35 5.12 1.23 4.18 11.27 6.29 5.17 1.12 4.98 Foreign produced Autos Light trucks 2.57 2.25 .32 2.50 2.24 .27 2.43 2.18 .24 2.18 1.97 .20 2.16 1.93 .23 2.16 1.98 .17 2.21 2.00 .21 2.23 2.01 .22 .70 .63 .72 .63 .73 .63 .73 .64 .72 .63 .71 .60 .73 .64 .75 .65 Total Autos Light trucks Memo: Domestic nameplate Market share, total Autos Note: Data on sales of trucks and imported autos for the current month are preliminary and subject to revision. 1. Components may not add to totals because of rounding. 2. Excludes some vehicles produced in Canada and Mexico that are classified as imports by the industry. II-19 PERSONAL SAVING RATE Percent 14 Quarterly Four-quarter moving average ::::::: SII I . :::.::... . : :..:140 . .. . S: . ... : 192 • . , 19 . .. .i~i~i~i~i.. ... iiii.. %.* ..... - ::::::- L. .I . 19 19 ::: . .. .. .:ii.. I . .. I...... .LI . . 198 .. . \ .. . .. - .0 ...... 198 .. 1- .I 1980 1982 1984 1986 2. . 19 I 1992 o, 7. ...... -140~~i , ....,..........iiii~i. iii 1978 10 1988 1990 1992 II-20 Despite this drop, the underlying trend of the personal saving rate (as measured by a four-quarter moving average) has been upward since around the beginning of 1990 (chart). Housing Markets Housing market indicators have continued to be mixed but, on balance, now provide fairly persuasive evidence of a moderate pickup in demand and production since midyear. Housing starts, which rose substantially in August, edged up further in September to 1.26 million units at an annual rate, the highest reading since March (table and chart). Permit issuance rebounded in September after little change in August. Rebuilding in the wake of Hurricane Andrew did not have a discernible effect on national or regional estimates of starts and permits in September. 5 Single-family starts inched up to an annual rate of 1.07 million units in September, their second-highest level this year. Single-family permits increased more rapidly than starts in September, narrowing the gap between the two series, which was unusually wide in August (chart, top panel). The closer alignment of the two indicators suggests that greater confidence can be placed in the starts estimate. 6 Also, the preliminary estimate of new home sales for September (lower panel, dashed line) edged down only a little from the August figure, which was revised upward substantially (solid line). Large upward revisions in new home sales have occurred with regularity this year; the dot on the chart 5. The Census Bureau has made a special effort to identify construction activity that reflects rebuilding following Hurricane Andrew. Beginning with the September release, Census changed its definitions of starts and permits to include units being totally rebuilt on an existing foundation. 6. Because the permits series is less subject to sampling error than starts, high readings of starts relative to permits can be an indication of irregularities affecting the starts estimate. II-21 PRIVATE HOUSING ACTIVITY (Millions of units; seasonally adjusted annual rates) 1991 1992 Q1 Q2 Q3P Julyr Aug. r Sep.p .95 1.01 1.12 1.26 1.05 1.14 1.09 1.20 1.08 1.10 1.08 1.24 1.12 1.26 .75 .84 .92 1.06 .88 .98 .89 1.03 .88 .96 .88 1.06 .90 1.07 .51 3.22 .62 3.41 .56 3.43 .62 3.35 .61 3.45 .62 3.31 .62 3.28 .20 .17 .19 .20 .17 .16 .21 .17 .20 .14 .20 .18 .21 .19 Annual All units Permits Starts Single-family units Permits Starts Sales New homes Existing homes Multifamily units Permits Starts p 1992 Preliminary. r Revised estimates. PRIVATE HOUSING STARTS (Seasonally adjusted annual rate) Millions of units 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 II-22 SINGLE-FAMILY HOUSING STARTS AND ADJUSTED PERMITS (Seasonally adjusted annual rate) Thousands of units -1500 1300 Starts li, # 1100 -I permits1 - 1986 1987 1988 1989 9IIII Il 9III 1991 1990 1lIIll 99ll 1992 1. Adjusted permits equals total permits plus total starts outside of permit-issuing areas. PRELIMINARY AND REVISED NEW HOME SALES (Seasonally adjusted annual rate) Thousands of units - Revised ------- Preliminary I f - _ r~ I IS I -I) / ,sept. / i9 I I* I I I I I I I I I r I I r I r I i~i 1990 1990 ii I ii 1991 1991 I I I I r I I I 1992 I ILLI_ I 1992 900 II-23 indicates the level to which a typical revision would raise the September preliminary estimate. The demand for single-family housing has been pulled in two different directions by the flattening of house prices in recent years (chart, upper panel). Slowing price increases have contributed to a decline in the cash-flow burden of a mortgage, which has helped support housing demand. However, the weakness of house prices also has diminished the amount of price appreciation that buyers probably expect, thereby damping the demand for homeownership as an investment. On the supply side of the housing market, the outstanding inventory of new homes for sale continued to decline in the third quarter, to the lowest level in about nine years panel). (chart, lower Moreover, when measured relative to sales as months' supply, the stock of homes for sale is near the low end of its historical range. Although this may signal an emerging tightness in the market, the flatness of prices suggests that, so far, the supply of homes for sale has been adequate in relation to demand. Multifamily housing starts edged up to 185,000 units (annual rate) in September but continued to be impeded by a persistent oversupply of rental apartments and the resulting restraint on rents. In the third quarter, the vacancy rate for multifamily rental properties edged down to 9.3 percent--only a little below the 9.6 percent reading in the year-earlier period. 7. The Census Bureau samples newly issued building permits and then obtains information about sales of the newly permitted units. Although an imputation is made for houses that are sold before a permit is issued, an underestimate occurs if the number of such units is unusually large, as has occurred repeatedly this year. From the preliminary estimate to the final estimate, the average revision for the first half of this year was about 32,000 units. II-24 HOUSE PRICES (Seasonally adjusted) Thousands of dollars New home, constant-quality price 1 V. -V Existing home, constant-quality price ,---------Existing home, constant-quality price2 V.--- - -90 I 1 II II 1990 1989 1988 1987 II o 1992 1991 1. Estimated price of a home with characteristics typical of houses built in 1987. 2. Series derived by moving the median existing home price from a base period of 1987:Q1 according to the FHLMC repeat-sales price index. STOCK OF NEW HOMES FOR SALE (Quarterly average of seasonally adjusted monthly data) Number of months Thousands of units Average number of new homes for sale (right scale) x - 5 5 - Months supply of new homes for sale 1 (left scale) I1982 I II I -I 1984 I I 1986 1. Number of homes for sale divided by new home sales. I I I -- 270 lI I I l i1 11 1992 II-25 Business Fixed Investment Real outlays for producers' durable equipment posted another strong increase in the third quarter, led, once again, by a sharp increase in outlays for computing equipment. Recent data on orders and shipments at domestic manufacturers point to a softening in the computer industry, but, at the same time, suggest that other areas 8 are picking up. Real outlays for nonresidential structures, which had changed little over the first half of 1992, declined sharply in the third quarter. Outlays for computing equipment have risen at close to a 40 percent annual rate during the past year and a half, accounting for almost all the increase in producers' durable equipment spending during this period. According to industry sources and articles in trade publications, investment in computers has been driven by further price reductions and product innovations.10 However, the nominal value of shipments of computing equipment declined fairly sharply in both August and September, and new orders have fallen, on net, during the past few months (chart). The data in hand point to further growth in real outlays for computing equipment in the current quarter, but at a slower pace than earlier in the year. 8. September data on shipments of nondefense capital goods suggest a small upward revision to third-quarter PDE. Outlays for computing equipment are expected to be revised down nearly $2 billion (1987 dollars), while outlays for PDE excluding aircraft, motor vehicles, and computers are expected to be revised up about $2-3/4 billion. 9. Data on construction put-in-place, which became available after the advance GDP report, suggest an upward revision to outlays for nonresidential structures of close to $2 billion (1987 dollars). Even with this revision, these outlays still would show a decline of about $5 billion in the third quarter. 10. It should be noted that the surge in business spending for computing equipment since early 1991 has been accompanied by a dramatic deterioration in the trade balance for computers and parts. During this period, constant-dollar imports, which constitute about half of business purchases of computing equipment, jumped more than 80 percent, while exports rose 33 percent; as a result, the trade balance in this sector declined from a surplus of $2-1/2 billion to a deficit of $14-1/2 billion (1987 dollars). II-26 BUSINESS CAPITAL SPENDING INDICATORS (Percent change from preceding comparable period; based on seasonally adjusted data) 1992 Q1 1992 Q2 Q3 July Aug. Sep. -3.0 .2 .4 .1 -2.1 -2.4 -3.2 -2.2 2.2 3.1 -2.5 4.8 -10.2 n.a. Producers' durable equipment Shipments of nondefense capital goods Excluding aircraft and parts Office and computing All other categories .5 .2 5.0 -1.2 1.4 2.6 3.8 2.3 .6 2.9 .4 3.7 Shipments of complete aircraft 1 64.6 -12.7 n.a. Sales of heavy weight trucks 7.1 5.9 2.0 .8 1.2 4.6 Orders of nondefense capital goods Excluding aircraft and parts Office and computing All other categories 2.5 4.0 9.2 2.6 -. 4 .5 4.4 -. 6 -3.8 2.4 2.1 2.5 -5.4 -1.3 -2.5 -. 9 -3.9 -3.1 4.3 -5.2 7.8 6.2 -4.1 9.5 Construction put-in-place Office Other commercial Industrial Public utilities All other .6 -4.9 1.5 2.4 5.2 -2.7 .6 -6.7 3.8 -6.0 2.5 6.2 -3.9 -13.6 -4.6 -9.1 .2 1.5 -2.0 -9.7 -6.8 1.1 1.3 .8 -4.5 -4.4 -8.3 -11.8 -. 1 -1.5 .3 -7.0 .3 1.2 .9 2.9 Rotary drilling rigs in use -4.7 -1.4 .7 6.5 -.2 -1.0 -17.7 -4.3 n.a. 13.2 3.5 n.a. 3.0 16.1 .3 n.a. n.a. n.a. -16.0 Nonresidential structures Footage drilled 2 Memo: Business fixed investment 3 1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines." Monthly data are seasonally adjusted using FRB seasonal factors constrained to BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using BEA seasonal factors. 2. From Department of Energy. Not seasonally adjusted. 3. Based on constant-dollar data; percent change, annual rate. n.a. Not available. II-27 Spending on transportation equipment declined significantly last quarter, owing largely to another sharp swing in aircraft purchases. Purchases of new aircraft jumped to an unsustainably high level in the second quarter and then dropped back to a relatively low level in the third quarter. These outlays may rebound in the current quarter but are likely to trend down during the next couple of years owing to the overcapacity among domestic carriers. Investment in items other than transportation and computing equipment advanced at an annual rate of 11-1/2 percent in the third quarter, and a large, widespread increase in orders points to further gains in coming months. Purchases of communications equipment accounted for most of the increase in spending in the last quarter. Part of this strength probably stems from a movement among telephone companies toward digital technologies and fiber optics. In addition, purchases of cellular phones, fax machines, and modems have been trending upward for some time. Outlays for nonresidential structures, which had fluctuated within a fairly narrow range earlier this year, dropped sharply last quarter. Among sectors, office construction posted the largest decline in the third quarter; the annual rate of decline in this sector over the first three quarters of this year was about the same as in 1991. Activity in the industrial and "other commercial" sectors also dropped considerably in the third quarter, and growth in institutional construction slowed. For the nonresidential construction sector as a whole, new commitments (the sum of contracts and permits for this sector) have flattened out this year, after sharp declines in 1990 and 1991. However, construction, which usually lags new commitments by about half a year, has continued to trend down this year, albeit not as 11/4/92 11-28 RECENT DATA ON ORDERS AND SHIPMENTS Office and Computing)Equipment Equipment Billions of dollars 7 - - Orders ShipmenIts r\ - 6 Sep. 1v dI 5 1 1987 1988 I 1989 1llH Ilt_... il.ll 1990 1991 Other Equipment (ex cluding aircraft and computers) 4 llllllIlll 1992 Billions of dollars Billions of dollars 24 - Orders ---- Shipmelnts -22 Sep. A- /n V 1987 1988 20 1 1989 1990 18 II-29 NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS* (Index, Dec. 1982 = 100, ratio scale) Total Building Construction (C) ------ Permits (P), Contracts (CN), or New commitments (NC) 1982 1984 1986 1986 1988 1990 1992 1992 1984 1986 1988 1990 1992 1986 1988 1990 1992 Institutional Industrial 1984 1990 Other Commercial Office 1984 1988 1986 1988 1990 1992 1984 *Six-month moving average for all series shown. For contracts, total only includes private, while individual sectors include private and public. New commitments are the sum of permits and contracts. II-30 sharply as in 1991. The office sector, where the lag between new commitments and construction is relatively long, continues to be the weakest component of nonresidential structures. Moreover, office vacancy rates around the country generally remain very high, especially in downtown areas, and prices for office properties have continued to decline. All told, a further shrinkage of activity in this market segment is likely for at least the next few quarters. The picture in the industrial sector is similar, though less severe. Currently, there is plenty of spare capacity in the industrial sector. New commitments currently are running well below the level of construction, suggesting that activity will remain weak, at least in the near term. In contrast, new commitments and construction appear to be fairly well aligned in the other commercial and institutional sectors. The "other commercial" sector shrank substantially in 1991 but has flattened out, on net, this year. The prospects for this sector depend critically on the future course of the retail sector of the economy. Finally, drilling activity, which sagged earlier this year, increased in October to a level of 753 rigs in use, up 10 percent from the previous month. Much of this pickup is attributable to the recovery from damage caused by Hurricane Andrew and higher prices for natural gas. Business Inventories The available data indicate that businesses in manufacturing and trade may have trimmed their stocks in September, after sharp accumulations in July and August, and there appear to be no serious inventory overhangs at this time. In manufacturing, inventories were reduced in September at an annual rate of $12 billion in current-cost terms, retracing a II-31 CHANGES IN MANUFACTURING AND TRADE INVENTORIE (Billions of dollars at annual rates; based on seasonally adjusted data) 1992 Q1 Q2 1992 Q3 July Aug. Sep. Current-cost basis Total Excluding auto dealers Manufacturing Excluding aircraft Wholesale Retail Automotive Excluding auto dealers -7.9 -13.7 -11.2 -7.1 -1.2 4.5 5.8 -1.3 22.7 16.1 -1.5 6.3 6.1 18.1 6.6 11.5 n.a. n.a. 6.9 12.7 3.2 n.a. n.a. n.a. 42.0 41.7 7.6 15.7 3.5 30.8 .3 30.5 25.8 26.0 25.3 26.7 6.9 -6.4 -.3 -6.1 n.a. n.a. -12.2 -4.4 -.8 n.a. n.a. n.a. -13.2 -18.0 -8.7 -4.9 .5 4.8 -4.4 7.4 1.9 -6.5 2.1 11.8 5.5 6.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 35.6 33.0 7.8 .5 27.3 2.7 24.6 30.1 22.2 19.3 9.8 1.0 7.9 -6.8 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Constant-dollar basis Total Excluding auto dealers Manufacturing Wholesale Retail Automotive Excluding auto dealers INVENTORIES RELATIVE TO SALES 1 (Months supply; based on seasonally adjusted data) 1992 Q1 Q2 1992 Q3 July Aug. Sep. Current-cost basis Total Excluding auto dealers Manufacturing Excluding aircraft Wholesale Retail Automotive Excluding auto dealers 1.52 1.50 1.62 1.45 1.36 1.54 1.85 1.46 1.51 1.49 1.57 1.41 1.36 1.57 1.90 1.48 n.a. n.a. 1.57 1.41 1.33 n.a. n.a. n.a. 1.49 1.47 1.55 1.39 1.32 1.56 1.88 1.48 1.52 1.49 1.60 1.44 1.34 1.56 1.89 1.47 n.a. n.a. 1.57 1.41 1.32 n.a. n.a. n.a. 1. Ratio of end of period inventories to average monthly sales for the period. II-32 substantial portion of the runup in August. l l The August accumulation of manufacturing stocks apparently was the result of a sharp drop in shipments. (Factory production edged down in August, even after adjusting for the effect of Hurricane Andrew and a strike at General Motors.) As shipments rose in September, factory stocks were drawn down, and inventory-shipments ratios for most industries returned to the low end of their recent ranges. Although a substantial part of the September drawdown was in defense aircraft, liquidation was widespread in other durable goods industries as well. By stage of processing, manufacturers apparently have continued to carefully manage their holdings of production materials and work-in-process, over which they have more direct control, and inventory-shipments ratios trended downward (chart, middle and lower panels). For finished goods, however, the inventory-shipments ratio generally has remained flat in recent months, around the level that prevailed during the one and one-half years before the 1990-91 sales slump (chart, upper panel). In wholesale trade, inventories changed little in September, after moderate accumulations in July and August. For the third quarter as a whole, inventories of merchant wholesalers rose at a $3 billion annual rate in current-cost terms--about what BEA assumed in its advance GDP estimate--while sales rose 3.3 percent (not annualized). The inventory-sales ratio for the wholesale trade sector fell to 1.32 months at the end of September, the low end of the range posted over the past year. 11. In constructing the advance GDP estimate for the third quarter, BEA assumed that manufacturing inventories declined in September at an annual rate of $8.1 billion in current-cost terms-about $4 billion less liquidation than indicated by the incoming data. Given BEA's estimates of IVAs and implicit inventory deflators, the discrepancy may lead to a downward revision to thirdquarter nonfarm inventory investment of about $1 billion in real terms. II-33 RATIO OF INVENTORIES TO SALES (Current-cost data) Ratio 2.1 Manufacturing 1.9 ''Ab. S" ,' ,ep Exclu d ing airc raft Sept 't'.' * ' -\ 1.5 .5 1'S,, 1.3 1980 1982 1984 1986 1988 1990 1992 Ratio 1.5 Wholesale - 1.4 Sept. - 1.3 - 1.2 1986 1984 1982 1980 1990 1988 1992 Ratio 1.7 - Ratio 2.7 - Retail * 2.3 - **, 2.1 - G.A.F. ., Excluding auto . 1980 ,1 Aug. ' * ,-A 1982 1984 1986 1988 1990 " 1992 1.5 1.4 II-34 MANUFACTURERS' INVENTORY - SHIPMENTS RATIO BY STAGE OF PROCESSING (Current-cost data) Finished Goods Ratio 0.7 0.65 0.6 0.55 0.5 0.45 1980 1982 1984 1986 1988 1990 Work in Process 1992 Ratio 0.7 0.65 0.6 0.55 0.5 0.45 1980 1982 1984 1986 1988 1990 Materials and Supplies 1992 Ratio 0.7 0.65 0.6 0.55 0.5 0.45 1980 1982 1984 1986 1988 1990 1992 II-35 Non-auto retail inventories fell back in August, reversing a portion of the sharp increase in July. The August liquidation was largely in stocks of nondurable goods--apparel, food, and general merchandise--where stocks have been broadly in line with sales. For stores in the GAF grouping, inventory buildups averaged a moderate $7-1/2 billion (current cost) annual rate over the first two months of the third quarter and left the inventory-sales ratio for GAF stores at 2.37 months in August, considerably below its recent peak of 2.51 months in December of last year. Given the sizable 1.1 percent rise in GAF sales in September (and a 3.6 percent growth over the third quarter as a whole) shown in the latest advance retail sales report, inventories held by stores in this important category probably are in reasonably good shape at present. Federal Sector The unified budget showed a deficit of $290 billion in FY1992-about $20 billion larger than in FY1991 but considerably smaller than had been anticipated only a few months ago. OMB projected a deficit of $334 billion in July, and CBO's August estimate was $314 billion. Outlays for deposit insurance turned out to be lower than had been anticipated by either agency, largely because of fewer resolutions of troubled banks by the Bank Insurance Fund. OMB also overestimated spending in several other areas, notably defense and health, and was much too pessimistic about receipts. Excluding deposit insurance and contributions to the Defense Cooperation Account, the deficit increased from $247 billion in FY1991 to $292 billion in FY1992. Receipts grew 3.5 percent in FY1992. The rise in taxes lagged the 4.2 percent gain in nominal GDP over this period, largely because of the change in withholding rules that lowered withheld individual income taxes by about $2 billion per month beginning in II-36 FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS (Unified basis, billions of dollars, except where otherwise noted) Fiscal years Q3 1991 Q3 1992 FY1991 FY1992 Outlays Deposit insurance (DI) Defense Cooperation account (DCA) 355.7 36.0 338.0 -6.4 1323.8 66.6 1381.9 2.9 58.1 -63.7 -4.8 .0 -43.6 -5.2 38.4 Outlays excluding DI and DCA National defense Net interest Social security Medicare and health Income security Other 324.5 78.6 49.4 67.9 47.4 42.4 38.9 344.6 77.4 49.4 72.5 54.7 48.1 42.5 1300.7 316.9 194.5 269.0 175.7 170.8 173.8 1384.2 303.4 199.4 287.5 208.6 199.4 185.9 83.5 -13.5 4.9 18.5 32.9 28.6 12.1 6.4 -4.3 2.5 6.9 18.7 16.7 7.0 Receipts Withheld + FICA Nonwithheld + SECA Corporate income taxes Other 264.4 185.9 28.5 21.7 28.3 275.6 185.8 34.4 24.2 31.2 1054.3 745.1 168.2 98.1 42.8 1091.7 765.1 173.8 100.3 52.6 37.4 20.0 5.6 2.2 9.8 3.5 2.7 3.3 2.2 22.8 91.4 60.2 62.4 68.9 269.5 246.8 290.2 292.5 20.7 45.7 7.7 18.5 Deficit(+) excluding DI and DCA Note: Components may not add to totals due to rounding. Dollar Percent change change 4.4 -95.6 -88.1 II-37 March. Most recently, however, estimated personal income tax payments--nonwithheld income taxes and self-employment contributions--were 20 percent higher in the third quarter than a year earlier. The increase appears to reflect both greater liabilities and changes in tax laws that require taxpayers to meet a greater percentage of their liabilities through estimated payments. Outlays increased 4.4 percent in FY1992: excluding deposit insurance and the Defense Cooperation Account, the rise in outlays was 6.4 percent. Most of the increase was in the Medicare, health, and income security functions. In contrast, defense spending decreased 4.3 percent, despite a third-quarter bulge associated with a bunching of weapons deliveries, higher spending for operations and maintenance, and severance allowances related to the downsizing of the military. Higher defense outlays also were evident in the advance NIPA estimates for the third quarter, where defense purchases rose at nearly a 7 percent annual rate in real terms after five quarters of sizable declines. Meanwhile, nondefense purchases fell at a 1.4 percent annual pace, mainly because of decreased purchases of structures and "other" items. The appropriations bills passed by the Congress and signed by President Bush hold total discretionary outlays for FY1993 nearly $10 billion below the discretionary spending caps set by the Omnibus Budget Reconciliation Act; almost all the difference is in defense spending, which is slated to fall 5 percent below its level in FY1992. However, some of the restraint is anticipated to be offset by about $7 billion of emergency outlays, not subject to the spending caps, to compensate victims of hurricane damage. President Bush has vetoed the tax and urban aid bill. Lastly, II-38 STATE AND LOCAL SECTOR SURPLUS (DEFICIT)* (NIPA basis) Level 1972 $ Billions 1977 1982 1987 Percent of GDP 1972 1992 Percent 1977 *Excludes social Insurance funds. 1982 1987 1992 II-39 State and Local Governments According to BEA's advance estimate, real purchases of goods and services by state and local governments edged up at a 0.4 percent annual rate in the third quarter, buoyed by an infusion of federal funding for summer jobs. Outlays for structures were unchanged, as increases for highways, hospitals, and school buildings were offset by decreases for other types of structures. And purchases of other goods and services fell, reflecting a sizable rise in government charges for providing medical and educational services. 12 Meanwhile, receipts appear to have increased only a little in the third quarter, as a modest rise in tax collections was largely offset by a drop in federal aid. The decline in grants was the first in two years and owed in part to a small drop in grants for Medicaid, AFDC, and other public assistance programs; the decline undoubtedly is temporary, given the sharp uptrend in spending under these programs. All told, the deficit of operating and capital accounts, excluding social insurance funds, is estimated by the staff to have jumped to well over $50 billion, at an annual rate, in the third quarter (chart). Although budgets remain under pressure, governments have been averse to another round of tax increases. Indeed, tax hikes during state legislative sessions completed in 1992 are expected to result in just a $4 billion increase in collections, compared with $15 billion and $10 billion in increases during the 1991 and 1990 sessions respectively. Instead, governments have focused on spending cuts, especially for higher education and local government aid (other than for elementary and secondary schools). For example, California's recent budget agreement reduced aid to counties, 12. To avoid double counting, such charges are treated as negative outlays in the National Income and Product Accounts. II-40 EMPLOYMENT COST INDEX (Percent change from preceding period at compound annual rates; based on seasonally adjusted data) 1991 1992 June Sep. Dec. Mar. June Sep. Private industry workers 4.5 4.1 4.0 4.0 2.5 3.2 By industry: Goods-producing Service-producing 4.9 4.5 4.1 4.1 4.4 4.0 5.1 3.3 2.5 2.1 3.9 3.2 By occupation: White-collar Blue-collar Service workers 4.9 4.1 6.1 4.0 4.9 6.3 2.9 3.7 3.3 4.3 4.4 4.3 2.9 3.2 2.5 3.2 3.6 4.6 By bargaining status: Union Nonunion 4.9 4.9 4.9 4.1 3.7 2.5 7.4 4.4 3.2 2.5 4.3 3.2 4.2 6.6 3.0 6.9 3.3 5.7 3.3 6.0 1.8 3.4 2.2 6.5 Total compensation costs: Memo: Wages and salaries Benefits 1. Changes are from final month of preceding period to final month of period indicated. Percent changes are seasonally adjusted by the BLS. Data by bargaining status are not seasonally adjusted. EMPLOYMENT COST INDEX (Private industry workers; twelve-month percent changes) 1991 1992 1990 1991 Sep. Dec. Mar. June Sep. Private industry workers 4.6 4.4 4.5 4.4 4.2 3.7 3.4 By industry: Goods-producing Service-producing 4.8 4.6 4.6 4.3 4.5 4.5 4.6 4.3 4.6 4.0 4.1 3.5 3.9 3.1 By occupation: White-collar Blue-collar Service workers 4.9 4.4 4.7 4.5 4.3 4.8 4.4 4.4 5.5 4.5 4.3 4.8 4.0 4.3 4.8 3.5 4.0 3.9 3.3 3.7 3.5 By bargaining status: Union Nonunion 4.3 4.8 4.6 4.3 4.8 4.3 4.6 4.3 5.2 4.0 4.8 3.4 4.6 3.1 4.0 6.6 3.7 6.2 3.7 6.4 3.7 6.2 3.4 6.3 3.0 5.5 2.7 5.2 Total compensation costs: Memo: Wages and salaries Benefits II-41 cities, and special districts by more than $1 billion. It also reduced aid to the two university systems around 10 percent, and aid to community colleges about 25 percent. Several other states, including Ohio and Louisiana, cut spending on higher education as well. Many states have raised tuition and fees, with increases ranging from 13 to 60 percent. Labor Costs Continuing weakness in the labor market and moderating inflation have led to further slowing of compensation cost increases. The Employment Cost Index (ECI) for hourly compensation for private industry workers increased 3.2 percent (annual rate) over the three months ended in September. Over the twelve months ended in September, ECI hourly compensation rose 3.4 percent--more than a percentage point below the pace of the preceding twelve months. This substantial deceleration was evident both in the wages and salaries and in the benefits components of the ECI. At 2.7 percent, the twelve-month rise in wages and salaries was the lowest reading since the survey began in the mid-1970s. The deceleration in benefits costs reflects, in part, continued slowing in the rate of increase of health-care expenses. The deceleration of the past two years has been especially great in the state and local sector, likely reflecting the fiscal pressures on those governments. Compensation per hour of state and local workers rose 3.5 percent over the past twelve months, about the same increase as in private industry. Through 1990, compensation gains for state and local workers had been outpacing gains in private industry by more than one percentage point. Within the private sector, the deceleration in hourly compensation has been greater in the service-producing sector than in the goods-producing sector. In part, this reflects an especially II-42 Employment Cost Index Private Industry Workers Compensation Twelve-month percent char Private Industry - - - - State and Local Government 1988 1990 1992 1988 Private Industry Workers Compensation omp n Twelve-month percent change -- n 10 r - Goods-producing Industries industries ------- Finance, insurance and Real Estate - - -Service-producing - 1990 1992 Private Industry Workers Compensation 9 8 7 * 6 I j/'''''r I 1988 1992 1 I I 1990 "^w " I I 1990 1 1992 1988 II-43 low reading for the finance, insurance, and real estate industry: Compensation per hour in that industry has increased only about 1-1/4 percent over the past twelve months. However, the ECI for finance, insurance, and real estate is extremely volatile, reflecting the inclusion of commissions and bonuses in the data, and the recent small increases in compensation costs in that industry may not persist. The deceleration also has been widespread by occupation, but has been especially rapid among service workers. For these workers, compensation was up 3.5 percent over the twelve months ended September, down 2 percentage points from the preceding twelve-month period. The deceleration has been smallest--although still notable--among blue-collar workers. This slower deceleration may reflect the heavier unionization among blue-collar workers. According to the ECI, the increase in compensation costs for unionized workers was about unchanged over the past twelve months and actually picked up over the past two years. Wages and salaries for unionized workers, however, have shown a small amount of deceleration over this period. Separate data on new major collective bargaining agreements also show a small deceleration in union wages. The series on effective wage change in agreements covering 1,000 or more workers rose 3.2 percent for the year ended in September, about 1/4 percentage point below the increases recorded in 1990 and 1991. This measure of wage change--which includes the effects of firstyear adjustments from new settlements and the deferred adjustments and COLAs under prior settlements--is conceptually similar to the ECI for wages and salaries. The contributions of first-year adjustments and COLAs have slowed this year relative to 1991, but deferred adjustments under earlier contracts have not. II-44 Compensation in Union Contracts Employment Cost Index ---- Twelve-month percent change Union Non-union 6 - N N»> ---'I- 4 3 2 1 L I I I I .. 1990 1987 I I . I . I I . . I 1992 1991 CHANGES IN NEGOTIATED WAGE AND COMPENSATION RATPS UNDER MAJOR COLLECTIVE BARGAINING SETTLEMENTS (Percent change) 1992 1990 1991 HI 03 Q3 parties under prior settlements Wage rate changes (all industries) 2 First-year adjustments 4.0 3.2 Average over life of contract 2,004 Workers affected (in thousands) 3.6 3.2 1,744 2.8 3.0 653 3.0 3.1 585 3.0 2.8 --- Compensation rate changes (all industries) 3 4.1 4.6 First-year adjustments 3.4 3.2 Average over life of contract 1,278 1,155 Workers affected (in thousands) 3.2 3.5 255 3.3 3.0 450 ------- 1. Estimates exclude lump-sum payments and potential gains under cost-ofliving clauses. 2. Contracts covering 1,000 or more workers. 3. Contracts covering 5,000 or more workers. EFFECTIVE WAGE CHANGE IN MAJOR UNION CONTRACTS AND COMPONENTS OF CHANGE 1987 Total effective wage change Contribution of: New settlements Prior settlements COLAs .7 1.8 .5 1988 1989 1989 1990 1990 1991 1991 2.6 1987 3.2 3.5 3.6 3.2 .7 1.3 .6 1.2 1.3 .7 1.3 1.5 1.1 1.9 .7 .5 .9 1.9 .4 1988 1. Changes over the four quarters ended this period. 1992:03 1992;03' II-45 The only direct piece of statistical information available on fourth-quarter labor costs is average hourly earnings for production or nonsupervisory workers, which rose 0.2 percent in October. Average hourly earnings are volatile on a month-to-month basis, but smoothing through the monthly wiggles, they have shown a slowing in response to labor market slack. Over the twelve months ended in October, average hourly earnings were up 2.6 percent, about 1/4 percentage point less than over the preceding twelve-month period. AVERAGE HOURLY EARNINGS (Percent change; based on seasonally adjusted data) 12 months ending in October 1992 1991 1990 Aug. 1992 Sep. Oct. --Monthly rate-- Total private nonfarm Manufacturing Services Finance, insurance, real estate 3.4 3.9 4.0 2.9 2.8 3.7 2.6 2.1 3.2 .8 .5 .8 3.9 4.0 4.0 1.9 -.3 .1 -.2 .2 -.1 .4 -1.1 .6 Recent news on producer and consumer prices has continued to be very favorable. October. The PPI for finished goods rose 0.1 percent in The index for goods other than food and energy declined 0.1 percent, largely reflecting a sharp decline in seasonally adjusted prices of passenger cars. Over the past twelve months, the PPI excluding food and energy has increased 2 percent, about 1-1/4 percentage points less than in the preceding year. In September--for the fifth consecutive month--the CPI for items other than food and energy rose just 0.2 percent. With these modest increases, the twelve-month change in this measure has fallen rapidly, to 3-1/4 percent in September, down about 1-1/4 percentage points from a year earlier (table). This is the smallest increase II-46 INFLATION RATES EXCLUDING FOOD AND ENERGY Percent change from twelve months earlier Sep. Sep. Sep. 1990 1991 1992 5.5 4.5 3.3 3.7 4.0 4.3 4.4 2.5 2.4 4.8 2.1 5.5 1.1 3.2 3.7 10.4 4.3 3.5 .7 2.5 4.2 2.5 2.8 1.3 1.0 .3 .9 6.4 4.7 3.6 6.0 4.6 13.7 -.1 13.5 9.6 6.0 3.1 3.3 9.5 -2.8 .7 8.4 4.9 PPI Finished goods1 3.5 3.3 2.0 Consumer goods 3.4 3.7 2.2 Capital equipment, excluding computers 3.3 3.5 2.4 1.4 -.8 1.1 .1 -9.4 2.9 2 ECI hourly compensation Goods-producing Service-producing 4.9 5.0 4.8 4.5 4.5 4.5 3.4 3.9. 3.1 Civilian unemployment rate3 5.7 6.8 7.5 82.8 78.8 6.1 4.7 CPI Goods excluding used cars Alcoholic beverages New vehicles Apparel Housefurnishings Housekeeping supplies Entertainment Services Owners' equivalent rent Tenants' rent Other renters' costs Auto finance charges Airline fares Medical care Entertainment PPI intermediate materials PPI crude materials 3.0 1.8 8.0 -13.6 -3.0 7.3 3.3 Factors Affecting Price Inflation Capacity utilization3 (manufacturing) 77.2 1, 4 Inflation expectations Non-oil import prices 5 Consumer goods, excluding food, and beverages Autos 3.6 2.4 .4 2.8 3.6 1.0 .5 4.2 3.7 2.3 autos. 1. October to October changes. 2. Private industry workers, periods ended in September. 3. End-of-period value. 4. University of Michigan Survey, twelve-month horizon. 5. BLS import price index (not seasonally adjusted), periods ended in September. n.a. - not available II-47 in this measure since 1966, except for the period of wage-price controls in the early 1970s. During the twelve months ending in September, prices of goods other than food and energy have risen just 2-1/2 percent, about 1-3/4 percentage points less than the pace in the preceding twelve-month period. Prices of nonenergy services have decelerated markedly as well, especially for airfares, tenants' rents, and auto finance charges. Even the price of medical services has decelerated over the past two years. This deceleration in the CPI for items other than food and energy reflects, in large part, the substantial slack in product and labor markets. Unemployment has remained at a high level, putting downward pressure on labor costs in both the goods- and serviceproducing sectors (table). Low levels of capacity utilization in manufacturing also have restrained price increases. Furthermore, non-oil import prices have remained subdued, although these prices did accelerate a bit in the past twelve months. Overall, consumer prices were up just 0.2 percent in September, as food prices increased further while energy prices were unchanged (table). The increase in food prices reflected a continued rebound in fresh fruit and vegetable prices, which retraced their April-July declines during August and September. Despite the pickup in fruits and vegetables, food prices are up just 1-3/4 percent over the past twelve months. Given ample harvests, there appears to be little upward pressure in train on food prices in coming months. Consumer energy prices were unchanged in September and have risen 2-1/4 percent over the past twelve months. In September, gasoline prices declined, continuing to reverse a runup earlier in the summer. However, private survey data for October and early November show that retail gasoline prices were up somewhat on a II-48 RECENT CHANGES IN PRODUCER PRICES (Percent change; based on seasonally adjusted data) Relative importance Dec. 1991 1 1992 1990 1991 Q1 1992 Q2 Q3 Sep. ----- Annual rate-----Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment Oct. -Monthly rate- 100.0 21.9 13.8 64.2 39.5 24.7 5.7 2.6 30.7 3.5 3.7 3.4 -. 1 -1.5 -9.6 3.1 3.4 2.5 1.0 .3 -7.0 3.7 3.6 3.5 3.3 -1.0 17.9 1.8 2.4 .9 1.6 3.6 -.5 1.2 1.2 .9 .3 .4 .8 .2 .2 .0 .1 ,1 1.4 -.1 -.1 -.2 Intermediate materials 2 Excluding food and energy 95.3 81.7 4.6 1.9 -2.7 -.8 .0 1.7 5.4 1.7 .3 1.0 .1 .0 .0 -.2 Crude food materials Crude energy Other crude materials 41.2 40.0 18.7 -4.2 19.1 .6 -5.8 -16.6 -7.6 11.8 -26.6 15.0 1.9 51,5 4.8 -6.2 16.4 2.5 .6 3.6 -.5 .6 -.5 -1.3 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 (Percent change; based on seasonally adjusted data) 1 Relative importance Dec. 1991 1992 1990 1991 Q1 Q2 1992 Q3 ----- Annual rate-----All items 2 Food Energy All items less food and energy Commodities Services Aug. Sep. -Monthly rate- 100.0 16.0 7.4 6.1 5.3 18.1 3.1 1.9 -7.4 3.5 1.5 -6.9 2.6 -1.2 12.5 2.6 4.7 .4 .3 .9 -. 2 .2 .4 .0 76.6 24.8 51.9 5.2 3.4 6.0 4.4 4.0 4.6 4.8 5.3 4.8 2.8 2.1 2.9 2.5 2.1 2.6 .2 .2 .3 .2 .2 .1 100.0 6.1 2.8 3.0 2.7 2.9 .4 .1 Memorandum: CPI-W 3 1. Changes are from final month of preceding period to final month of period indicated. 2. Official index for all urban consumers. 3. Index for urban wage earners and clerical workers. II-49 seasonally adjusted basis. 13 The index for residential natural gas rose for a fourth consecutive month; it now stands 4-1/2 percent above its May level. Wellhead prices began moving up during the summer after the long-lived supply bubble was finally worked off. More recently, hurricane damage to the Gulf Coast and expectations of a cold winter have boosted spot prices, suggesting that--aside from monthly volatility--additional advances in residential gas prices are in store. As of November 9, spot prices were about 25 percent higher than before Hurricane Andrew. For goods other than food and energy, prices at retail rose just 0.2 percent in September. Goods prices were held down by further declines in prices of house furnishings and personal care goods; prices of these items continued to drop back, after posting sizable increases early in the year. Prices of services other than energy were up just 0.1 percent in September, as shelter prices were unchanged. Prices of capital goods also have remained subdued, as excess capacity and weak demand held back price increases. In the past year, the PPI for capital goods was held down by computer prices that dropped 16 percent during the twelve months ending in October. However, price increases for other capital goods have also been restrained over this period, rising just 2-1/2 percent, about 1 percentage point below the year-earlier pace. Modest price increases for motor vehicles over the past twelve months contributed importantly to this slowing. For the October index, BLS fully 13. Gasoline prices in November have been boosted by federal clean air rules requiring that only oxygenated fuels be sold in thirtynine metropolitan areas with high emissions of carbon monoxide. Industry analysts estimate that refiners' costs have risen three to five cents per gallon. However, the effect on the CPI likely will be less because areas with oxygenated gasoline account for only onethird of the CPI sample. II-50 COMMODITY PRICE MEASURES * -- Total Journal of Commerce Index, total Journal of Commerce Index, metals 101 Ratio scale, index (1980100) - 130 125 -- / 11591 It 5 , Sv -N 1 4 1986 1985 ' Nov 10 - Nov 91 105 Metals - 95 1987 Oct 96 1992 Jq t 1984 Sep •i, I SJ 1983 - 105 103 98 85 F1n 1989 1988 r 1 1990 IlllIi 1992 t 1991 1993 7r Oct 1992 Sep 93 Nov CRB Spot Industrials Ratio scale, index (1967-100) 340 SORB Industrials S300 , - 294 290 280 275 Nov 10 - 260 - 240 Sep Oct 1992 260 Nov26 S220 1983 1984 1987 1986 1985 1988 1989 1990 1991 1992 L 200 1993 CRB Futures Ratio scale, index (1967=100) - 320 310 CRB Futures -290 - 230 213 209 250 - - 209 270 199 Sep Oct Nov 189 1992 Nov 10 - ,, .., t , , , i 3 Weekly 891 data, 1984 Tuesdays; ,, I , , , I 1985 Joumal 1986 of r . , I , 1987 Commerce I , , , I , , , I 1988 data monthly 1989 before 1990 1985 , 1991 , I , 1992 210 , I . , -. 190 1993 Dotted lines.indicate week of last Greenbook. II-51 incorporated the 1993 model-year vehicles into the PPI sample. 1 4 On a quality-adjusted basis, passenger car prices actually fell 1/2 percent in the twelve months ending in October, as, in addition to modest sticker price increases, automakers began to discount the new models immediately. Although light truck prices moved up 4-1/4 percent in the year ending in October, this still was a 1-1/4 percentage point slowdown from the year-earlier pace. Spot measures of industrial commodity prices have fallen, on balance, since the last Greenbook (table and chart). The Journal of Commerce index of industrials has declined about 2-1/2 percent from the end of September, retracing nearly half its increase since the beginning of the year; its metals subindex has fallen 6 percent since the time of the last Greenbook. These declines are consistent with the recent sluggishness in industrial production--both here and abroad. Finally, spot prices of crude oil have moved down more than a dollar over this period (chart). 14. In contrast to the PPI, BLS introduces the new model year vehicles into the CPI gradually, fully incorporating them by January. II-52 PRICE INDEXES FOR COMMODITIES AND MATERIALS 1 I - S ep. 1990 6.0 Oct. Oct. Oct. -- vA•-i n Oct. -- -4.2 19.1 4 1. PPI for crude materials la. Foods and feeds la. Energy 1b. Excluding food and energy 1c. Excluding food and energy. seasonally adjusted 1991 -5.8 -16.6 -7.6 n.a. .7 -7.6 10 10 -2.7 .6 3. Journal of Commerce industrials 3a. Metals Nov. 10 Nov. 10 -2.4 -3.9 4. Dow-Jones Spot Nov. 10 -1.7 5. IMF commodity index 5a. Metals 5b. Nonfood agriculture Sept. Sept. Sept. -5.2 6. Economist (U.S. dollar index) Nov. Nov. · ·· A+a MW n.a. Nov. Nov. -- k -11.6 2. Commodity Research Bureau 2a. Futures prices 2b. Industrial spot prices - - t*ri 29 3 .6 Oct. 6a. Industrials to To Memo Year earlier ianto Last obser· ·- .- 1992 Sep. .6 r. 1.9 .9 n.a n.a. 2.9 n.a. -6.5 -11.3 2.7 3.0 .0 -4.1 4.9- -6.7 -1.7 -5.5 5.7 6.1 -2.6 -6.0 -12.1 5.6 -1.5 -1.1 -3.5 .7 -8.9 1.3 -1.4 6.4 1.6 -4.4 -3.2 -9.1 -14.9 3 3 · ·- · -7.2 -7.1 n.a. n.a. .2 -2.3 5.3 ---- · ·- -1.0 6.4 1.6 n.a. -3.7 -3.3 -5.5 - ····- ·-- 1. Not seasonally adjusted. 2. Change is measured to end of period, from last observation of previous period. 3. Week of the September Greenbook. 4. Monthly observations. IMF index includes items not shown separately. n.a. Not available Index Weights Energy Food Commodities Precious Metals Others r 0 E U PPI for crude materials 41 41 1 t8 CRB futures 57 14 14 14 CRB industrials 100 Journal of Commerce index 12 88 Dow-Jones 58 25 17 IMF index 55 45 Economist 50 1. Forest products, industial metals, and other industrial materials -·- II-53 Daily Spot and Posted Prices of West Texas Intermediate 1 Dollars per barrel Dec Jan Feb Mar Apr May June July Aug Sep Oct Nov 1. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal. MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE Year and Month Posted Spot 1991 December 18.47 19.52 17.63 17.72 17.81 19.20 19.90 21.46 20.77 20.32 20.83 20.77 19.59 18.82 19.00 18.92 2024 20.94 22.38 21.76 21.35 21.90 21.68 20.53 1992 January February March April May June July August September October November 1 1. Price through November 11. DOMESTIC FINANCIAL DEVELOPMENTS III-T-1 1 SELECTED FINANCIAL MARKET QUOTATIONS (percent) 1992 1992 1992 Chan ro---------------------------1992 1992 1992 Chanae fromi FOMC Oct 6 Sept 4 FOMC Sept 4 Oct 6 Nov 9 Short-term rates Short-term rates Federal funds 2 3.19 3.24 3.00 -0.19 -0.24 Treasury bills 3 3-month 6-month 1-year 2.92 2.96 3.06 2.73 2.84 2.93 3.08 3.49 0.16 0.34 0.43 0.35 0.46 0.56 Commercial paper 1-month 3-month 3.22 3.22 3.14 3.14 3.28 3.56 0.06 0.34 0.14 0.42 Large negotiable CDs 3 1-month 3-month 6-month 3.06 3.06 3.11 2.97 3.04 Eurodollar deposits4 1-month 3-month Bank prime rate 3.30 3.17 0.11 0.44 3.05 3.50 3.52 0.41 0.20 0.46 0.47 3.31 3.31 2.94 3.06 3.13 3.56 -0.18 0.25 0.19 0.50 6.00 6.00 6.00 0.00 0.00 U.S. Treasury (constant maturity) 3-year 4.38 10-year 6.40 30-year 7.29 4.24 6.30 7.41 5.16 7.00 7.75 0.78 0.60 0.46 0.92 0.70 0.34 Municipal revenue (Bond Buyer) 6.31 6.45 6.70 0.39 0.25 Corporate--A utility recently offered 8.06 8.26 8.65 0.59 0.39 Home mortgage rates FHLMC 30-yr. FRM FHLMC 1-yr. ARM 7.84 5.15 7.93 5.01 8.29 5.17 0.45 0.02 0.36 0.16 Intermediate- and long-term rates ----------------.-------------- --------- --------------------------- 1989 Record highs Date Lows Jan 3 1992 FOMC Oct 6 Nov 9 Percent change from: Record highs 1989 lows FOMC Oct 6 51.11 49.76 26.25 64.32 50.36 1.97 2.92 4.80 9.03 4.07 .......................... Stock prices Dow-Jones Industrial 3413.21 NYSE Composite 233.73 AMEX Composite 418.99 NASDAQ (OTC) 644.92 Wilshire 4121.28 - 6/1/92 9/14/92 2/12/92 2/12/92 1/15/92 2144.64 3178.19 3240.87 154.00 224.09 230.63 305.24 367.71 385.36 378.56 570.55 622.05 2718.59 3928.03 4087.78 1/ One-day quotes except as noted. 2/ Average for two-week reserve maintenance period, closest to date shown. Last observation is average to date for maintenance period ending November 11. 1992. -5.05 -1.33 -8.03 -3.55 -0.81 3/ Secondary market. 4/ Bid rates for Eurodollar deposits at 11 a.m. London time. 5/ Based on one-day Thursday quotes and futures market index changes. 6/ Quotes for week ending Friday previous to date shown. Selected Interest Rates* Statement Week Averages Short-Term Percent Prime Rate (daily) 10 ; Federal Funds Prime Rate ----------------------- t S, - a 3-month T-Bill ' i- t~ t Discount Rate Discount Rate (daily) Federal Funds -i 4 3-month T-8I11 I · · · 1 l0n6 1993 Percent Long-Term 0/1t4 10/6 10/14 10/6 10/14 il in0ll/ll,2 11/9 10/30 1992 Percent 10/22 **- 5 Primary Fixed-Rate Mortgage 10 H- I 10 30-Year T-Bond I 1 1 1989 1990 I I 1991 1992 II 1993 SFriday weeks are plotted through November 6. statement weeks through November 4. 10/22 1992 10/30 11:9 DOMESTIC FINANCIAL DEVELOPMENTS Interest rates have risen appreciably over the intermeeting period. The failure of the System to validate market expectations of an easing step after the last FOMC meeting prompted interest rates in all maturities to increase 15 to 20 basis points. As political developments raised concerns about possible expansion of the federal deficit and incoming data suggested continued moderate growth of the economy, intermediate- and long-term rates rose further, bringing the total increase over the period to 25 to 90 basis points. Revised expectations on the economy also helped buoy the equity market: Major stock price indexes have risen between 2 percent and 5 percent since the last FOMC meeting. Spreads between private and Treasury yields widened a touch over the period, partly because of heavy issuance of corporate and municipal securities. Those sectors of the market suffered as well from reduced flows of cash into bond mutual funds and sales of securities by insurance companies to fund hurricane claims. The market for municipal securities rallied somewhat in November as issuance slackened and a greater focus on the possibility of tax increases may have spurred buying. The evidence on credit flows remains mixed. Business loans, which had strengthened in September, leveled off in October, and, after accounting for special factors, commercial paper outstanding was also flat. Gross equity issuance by nonfinancial corporations edged up in October, and public bond issuance remained strong; the proceeds of these offerings were targeted primarily for debt repayment. In the household sector, refinancing activity has continued to dominate mortgage transactions, but borrowing for home purchase reportedly has risen somewhat; installment credit recorded a small increase in September, the first since January. III-1 State and III-2 MONETARY AGGREGATES (based on seasonally adjusted data unless otherwise noted) 1991 1 1992 Q2 1992 Q3 1992 Aug 1992 Sep Growth 1992 Q4 91Oct pe Oct 9 2pe ------------ Percent change at annual rates--------------------1. 2. 3. Ml M2 M3 8.0 2.8 1.2 9.8 0.4 -1.3 10.3 0.3 -0.3 15.6 3.2 3.4 19.1 3.5 1.4 22 5 0 Levels ------------ Percent change at annual rates---------- -- bil. $ Sep 92 Selected components 4. 5. 6. 5.6 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 18. 19. 20. 21. 22. 23. 622.5 5.8 12.5 11.2 11.5 14.6 19.4 17.4 26.6 9 31 286.4 327.8 11.0 8.8 13.4 12.9 25 366.1 -3.0 -3.5 -1.6 -2.5 -2 2493.6 -27.1 16.2 54.3 -26.8 19 -3.9 0.5 12.0 -13.3 -6.7 18.9 -29.4 -7.2 -1.6 10.0 -16.3 -5.1 8.3 -18.7 -5.8 -0.5 13.4 -18.8 -4.7 9.2 -19.3 -17.1 2.6 16.7 -16.6 -2.8 10.8 -17.4 -5.7 17. M3 minus M2 3 21 3.9 7.1 13.3 1.1 -6.9 9.3 -16.8 Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares Commercial banks Savings deposits (including MMDAs) Small time deposits Thrift institutions Savings deposits (including MMDAs) Small time deposits 22.8 -6.9 M2 minus M12 17.1 1.1 Other checkable deposits 11.2 12.4 Currency Demand deposits 9.1 8.4 3.4 M1-A -9.5 -2.9 4.1 -8.9 -23 697.1 74.5 345.7 1262.3 734.4 527.9 811.5 425.1 386.4 -11.7 -5.1 -31.7 ---- -18.9 -14.8 -37.0 -16.3 -16.0 -16.8 -11.7 -10.2 -20.7 -15.3 -17.4 -5.3 -23 -27 -4 379.8 311.8 68.0 33.4 -22.0 -11.0 Large time deposits At commercial banks, net 4 At thrift institutions Institution-only money market mutual fund shares Term RPs, NSA Term Eurodollars, NSA 20.1 6.1 -22.7 39.9 -2.8 -33.1 54.9 5.0 -23.9 0.0 21.7 -63.3 -66 38 -5 217.2 73.2 46.7 Average monthly change in billions of dollars---- MEMORANDA:5 24. Managed liabilities at commercial banks (25+26) 25. Large time deposits, gross 26. Nondeposit funds 27. Net due to related foreign institutions 6 Other 28. 29. U.S. government deposits at commercial 7 banks -0.5 -0.2 -0.4 -1.0 -4.8 3.8 0.4 -0.8 5.2 -1.3 0.2 1.3 1.0 -3.7 4.8 2.4 -1.5 3.9 3.5 -3.4 6.9 0.6 4.1 -3.4 7.4 3.2 3.6 2 -4 63.0 254.0 -7.2 -3 25.4 -0.1 10.7 698.3 381.2 317.1 Amounts shown are from fourth quarter to fourth quarter. Nontransactions M2 is seasonally adjusted as a whole. The non-M2 component of M3 is seasonally adjusted as a whole. Net of large denomination time deposits held by money market mutual funds and thrift institutions. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities for borrowed money (including borrowing from the sold under agreements to repurchase, and other liabilities Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimat 7. Consists of Treasury demand deposits and note balances at commercial banks. pe - preliminary estimate 1. 2. 3. 4. 5. 6. III-3 local governments have issued a large volume of tax-exempt bonds, both to refund old debt and to raise new capital. Federal borrowing, induced by the persistent deficit, has remained large. Monetary growth strengthened further in October. Ml, propelled by mortgage refinancing activity and the effects of low short-term interest rates, grew at a 22 percent annual rate. This strength bolstered M2, which increased at about a 5 percent pace. The non-M1 component of M2 fell slightly, as redemptions of small time deposits more than offset large inflows into retail money market mutual funds. M3 was about flat. Monetary Aggregates and Bank Credit The expansion of M2 quickened to a 5 percent annual rate in October after two months at about 3 percent. With this growth, M2 in October edged closer to, but remained below, the lower bound of its target range. None of the strength in M2 showed through to M3, which was about unchanged in October, falling further below the lower bound of its target range. The growth rate of M1 increased to 22 percent in October, mainly reflecting lagged adjustment to reductions in interest rates resulting from previous monetary easings. In addition, special factors can account for perhaps a third of Ml growth over the last two months. First, the recent surge in mortgage refinancing has raised demand deposit accounts; staff estimates suggest that refinancings increased demand deposits by roughly $2 billion in September and an additional $3 billion in October. Second, as required under the recent tightening of loopholes in Regulation D, has ceased its special sweep account program. The resulting reclassification of large time deposits as other checkable deposits implied an increase of about $1-1/2 billion to Ml and M2 on a monthly average basis in October. Lastly, shipments of currency III-4 COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT' (Percentage change at annual rate, based on seasonally adjusted data) 1990 Dec. to 1991 Dec. 1992 Q2 1992 Q3 1992 Aug. 1992 Sep. 1992 Oct. p Level, bil.$ 1992 Oct. p Commercial bank credit 1. Total loans and securities at banks 2. Securities 3. U.S. government 4. Other 5. Loans 3.9 3.0 4.1 5.4 6.8 4.0 2,922.7 17.7 16.4 15.0 22.1 7.7 10.4 823.8 23.8 21.9 17.6 28.1 9.1 11.8 645.0 1.6 -1.8 5.7 0.7 2.7 6.1 178.8 -0.2 -1.8 0.1 -1.0 6.4 1.5 2,099.0 6. Business -2.8 -4.2 -0.8 -3.8 5.4 -1.0 603.0 7. Real estate 2.9 0.2 0.4 -1.0 5.1 4.6 885.7 8. Consumer -4.0 -2.9 -2.5 -4.4 -2.0 -4.0 355.5 9. Security 21.3 21.1 13.8 35.6 71.0 0.0 66.2 Other -2.8 -9.0 1.7 1.3 12.3 5.1 188.5 10. Short- and intermediate-term business credit 11. Business loans net of bankers acceptances -2.4 -3.7 -1.1 -3.4 5.6 -3.0 596.2 12. Loans at foreign branches 2 -1.6 26.3 1.6 -42.9 4.9 14.8 24.7 13. Sum of lines 11 and 12 -2.4 -2.6 -1.0 -4.8 5.6 -2.3 620.9 -10.4 -3.9 7.1 15.3 1.7 18.5 145.1 -3.9 -2.9 0.5 -1.1 4.9 1.6 766.0 -16.2 -27.3 -19.5 -29.4 -25.1 n.a. 23.4 1.4 -1.6 7.4 12.0 0.8 n.a. 304.25 -2.9 -3.1 2.0 1.8 3.2 n.a. 14. Commercial paper issued by nonfinancial firms 15. Sum of lines 13 and 14 16. Bankers acceptances, U.S. traderelated 3,4 17. Finance company loans to business 4 18. Total (sum of lines 15, 16, and 17) 1,092.6 1. Average of Wednesdays. Data are adjusted for breaks caused by reclassifications. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 4. Based on average of data for current and preceding ends of month. 5. September 1992. p--Preliminary. n.a.--Not available. 5 II-5 abroad, the bulk of which was apparently directed to Eastern Europe, have boosted currency growth. This measure, however, may overstate actual net currency shipments, as outflows of currency are captured more accurately than are reflows back into the U.S. The growth of Ml continued to account for all of the expansion of M2. The nontransaction component of M2 fell at an annual rate of 2 percent in October, as the first increase in retail money market mutual funds since May and the rapid expansion of overnight RPs and Eurodollar deposits were more than offset by redemptions of small time deposits. Anecdotal reports suggest that the increase in money funds accompanied a substantial drop in net inflows to stock and bond funds in October. Despite the pickup in M2, M3 growth slowed in September and came to a halt in October. Non-M2 M3 fell at a 23 percent annual rate in October, primarily the result of the continuing runoff in large time deposits. foreign banks Issuance of CDs by branches and agencies of (Yankee CDs) was particularly weak around quarter-end. Institution-only money market funds, which had been growing rapidly, were unchanged in September and fell markedly in October, also reflecting in part quarter-end effects. Some investors are very sensitive to the spread between the rate paid on these funds and RP rates, a spread that typically narrows on settlement days and around quarter-ends. September 30 ended both a maintenance period and a quarter, heightening window-dressing pressures and sending RP rates above the typical money fund rate, inducing huge net redemptions. Bank credit grew at a 4 percent rate in October, down from its 6-3/4 percent pace in September, as a slowdown in loan growth more than offset an increased pace of securities acquisitions. Nonetheless, the increase in loans in October was the second consecutive monthly rise after four months of decline. III-6 GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS (Monthly rates, not seasonally adjusted, billions of dollars) ----------------- 1992----------------1990 1991 Q2 Q3 p AUGp SEp OCTp 19.82 17.68 32.15 29.36 41.42 38.17 42.04 39.78 36.98 33.63 42.90 41.61 38.52 36.47 Stocks--total 2 Nonfinancial Utility Industrial Financial 1.95 1.03 0.35 0.68 0.92 5.44 3.72 0.42 3.30 1.72 7.08 4.99 1.24 3.75 2.09 5.69 2.86 1.11 1.75 2.83 5.28 2.95 0.95 2.00 2.33 5.31 2.62 1.82 0.79 2.70 6.97 3.23 0.51 2.71 3.74 Bonds Nonfinancial Utility Industrial Financial 15.73 5.62 1.97 3.64 10.11 23.92 9.52 2.99 6.54 14.40 31.09 12.33 5.41 6.92 18.76 34.09 14.86 7.45 7.42 19.23 28.35 11.53 5.73 5.80 16.83 36.30 14.93 7.06 7.87 21.38 29.50 15.50 4.50 11.00 14.00 3.42 6.44 0.15 0.04 3.72 12.09 1.03 0.02 2.84 15.02 3.31 0.02 4.75 15.01 3.12 0.04 2.72 12.17 2.64 0.08 4.98 15.97 2.59 0.02 5.72 12.02 4.18 0.35 0.40 2.43 3.27 0.80 0.63 2.99 4.08 0.84 0.52 6.63 3.26 2.18 0.28 6.76 4.45 2.00 0.28 7.96 2.79 1.84 0.33 6.13 6.61 3.12 0.43 4.00 3.23 1.56 1.92 0.46 1.46 2.33 1.00 1.33 2.46 1.06 1.40 2.04 0.73 1.31 3.20 1.30 1.90 1.00 0.30 0.70 1.70 0.90 0.80 0.22 0.10 0.12 0.46 0.38 0.08 0.79 0.67 0.12 0.22 0.17 0.04 0.16 0.14 0.01 0.29 0.29 0.00 0.36 0.21 0.14 Corporate securities -total 1 Public offerings in U.S. By quality 3 Aaa and Aa A and Baa Less than Baa No rating (or unknown) Memo items: Equity-based bonds 4 Mortgage-backed bonds Other asset-backed Variable-rate notes Bonds sold abroad Nonfinancial Financial Stocks sold abroad Nonfinancial Financial 1. - total - total Securities issued in the private placement market are not included. Total reflects gross proceeds rather than par value of original discount bonds. 2. Excludes equity issues associated with equity-for-equity swaps that have occurred in restructurings. Such swaps totaled $9.4 billion in 1990. 3. Bonds categorized according to Moody's bond ratings, or to Standard and Poor's if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds. 4. Includes bonds convertible into equity and bonds with warrants that entitle the holder to purchase equity in the future. p--preliminary. III-7 Bank lending of all types slowed in October. After increasing at a 5-1/2 percent rate in September, business loans contracted slightly in October. The relative strength of business loans in September stands in contrast to the substantial runoffs in the preceding ten months, and may have reflected in part cutbacks in initial public stock offerings, some of the proceeds of which had been used to pay down bank debt. Real estate loans increased at a 4-1/2 percent rate in October, only a bit below September's pace and the third highest monthly rate this year; more than half the October increase, however, was the result of acquisitions of real estate loans from failed thrift institutions. Consumer loan growth in October was held down by increased securitization of such loans, which resulted in a decline in bank holdings of these loans at a rate of nearly 5 percent; adjusted for securitizations, the growth of consumer loans was unchanged from September at about 2 percent. Business Finance Net borrowing by nonfinancial businesses appears to have remained subdued in October. Last month, business loans at banks were about unchanged, and gross public issuance of bonds, while keeping at September's rapid pace in October, was mostly directed toward debt refinancing. The pace of bond issuance was greatest early in the month; it slowed markedly when rising rates made refinancing less attractive. Commercial paper issuance rebounded from the quarter-end runoff in the first week of October and continued strong thereafter, with about half the net increase intended to finance an acquisition. Over the intermeeting period, yield spreads on investment-grade corporate bonds widened further, bringing the cumulative increase since mid-September to 10 to 20 basis points. These spreads likely owe part of their rise to sales of corporate securities by some III-8 property-casualty insurance companies in the wake of Hurricanes Andrew and Iniki. In addition, Marriot's announcement of plans to split the company into a debt-free hotel management corporation and a debt-laden real estate corporation reawakened concern about event risk and increased yields on debt of companies for which similar restructurings might prove attractive. Adding to the negative tone in the market, reports circulated that dealers were meeting increasing resistance to the supply of new corporate issues and Moody's placed General Motors' bonds on credit watch. Yield spreads on junk bonds have been under pressure as well in recent months and are up about 1/2 percentage point since their trough in early June, although they are still down 1 percentage point since January. Junk bond issuance remained brisk in October at more than $4 billion, the second highest monthly reading this A few planned offerings, however, were postponed last month year. because of the backup in interest rates. Because most of the offerings of junk bonds have been for debt refinancings, postponements do not have the same immediate disruptive consequences as in 1989 and 1990, when they often prevented the financing of acquisitions and buyouts. Reflecting investors' higher demand for quality, many junk bond mutual funds reported in October the first outflows of the year; previous inflows were substantial and probably contributed to the sizable drop in spreads from January to June. Of late, a few large issuers of commercial paper have experienced negative ratings actions. Dealers report some difficulty in placing paper through the year-end for weaker credits. Moreover, after Moody's and Duff & Phelps placed GMAC on credit watch, investors demanded a premium of 10 to 15 basis points on its paper. Following the recent downgrades of Sears Roebuck Acceptance Corporation and Westinghouse Credit Corporation (WCC), two sizable III-9 direct issuers of commercial paper, market participants also have become concerned about the capacity of the market to absorb the further increases in medium-grade paper that would occur if GMAC were downgraded a notch as well. Reflecting that concern, WCC announced last week that it would pay down commercial paper, turning instead to bank loans for short-term financing. Gross equity issuance by nonfinancial corporations picked up slightly in October, staying about in line, at $3.2 billion, with the slower pace evident since June; volume was bolstered by Ford's $1.0 billion offering of preferred stock. Nonfinancial IPO volume increased in October but remained at only half its pace early in the year. Issuance by financial firms was fairly strong, reflecting the $1.1 billion sale of Preferred Equity Redemption Cumulative (PERC) stock by Citicorp. On balance, stock prices have moved up since the last FOMC meeting. The NYSE composite has risen about 3 percent, while the Dow Jones Industrial index is up 2 percent. The lesser gain of the Dow partly reflects weakness in the share prices of IBM and Westinghouse, both of which reported disappointing third-quarter earnings. In addition, the turmoil leading up to the management shakeup at GM, the continued flow of red ink at that firm in the third quarter, and the anticipated slashing of its common dividend weighed heavily on GM's stock price and the DJIA. revival in high-tech and biotech stock prices Paced by a (perhaps bolstered by hopes of Clinton Administration support), the NASDAQ index has jumped about 9 percent. Both money center and regional bank indexes have surged, bettering the performance of the S&P500. Treasury and Sponsored Agency Financing The staff anticipates that a $125 billion deficit for the fourth quarter will be financed by $88 billion of borrowing and by a III-10 TREASURY AND AGENCY FINANCING 1 (Total for period; billions of dollars) 1992 Q3 Q4 p Oct.p Nov.p Dec.p Treasury financing Total surplus/deficit (-) -62.4 -124.9 -41.8 -44.9 -38.2 Means of financing deficit: Net cash borrowing from the public 77.0 87.7 -2.8 62.7 27.7 Marketable borrowings/ repayments (-) Bills Coupons Nonmarketable 72.6 16.1 56.4 4.4 83.7 30.4 -2.5 -6.5 4.0 -.3 61.4 18.0 43.5 1.3 24.7 18.9 5.8 3.0 Decrease in the cash balance Memo: Cash balance at end of period 2 Other 53.3 4.0 -11.7 32.6 39.4 -1.1 -5.7 58.8 26.2 19.4 20.5 26.2 4.5 5.1 -16.7 16.1 -2.8 Federally sponsored credit agencies, net cash borrowing 3 9.0 FHLBs 2.3 FHLMC FNMA Farm Credit Banks SLMA 2.5 5.0 FAMC 4 -.7 .0 1. Data reported on a not seasonally adjusted, payment basis. 2. Includes checks issued less checks paid, accrued items and other transactions. 3. Excludes mortgage pass-through securities issued by FNMA and FHLMC. 4. Federal Agricultural mortgage Corporation. p--projected. Note: Details may not add to totals due to rounding. III-11 substantial drawdown of the cash balance. Thus far in the fourth quarter, the Treasury has increased the gross issuance in the weekly bill auctions from $20.4 billion to $23.6 billion, more than reversing the sharp reductions in auction sizes in the third quarter. Meanwhile, gross coupon auctions have been increased as much as $500 million. The staff anticipates further increases in both bill and coupon auction sizes and that the Treasury will sell a long-term cash management bill to mature after the April 1993 tax payment date. The Treasury is in the midst of its mid-quarter refunding, selling $37 billion of securities. The $11-1/4 billion sale of "ten-year" notes is a reopening of the current on-the-run security in order to alleviate an "acute, protracted shortage." In the Treasury's view, the persistence over several months of that note's concessionary rate in the financing market, its position below the rest of the yield curve, and widespread fails-to-deliver constitute evidence of a lasting shortage. This first test of the reopening policy stated in the Joint Report on the Government Securities Market went well, with strong demand at the auction and some narrowing of spreads in the term financing market. Legislation regulating Fannie Mae and Freddie Mac was signed into law by President Bush on October 29. The legislation establishes a new Office of Federal Housing Enterprise Oversight within the Department of Housing and Urban Development, to be funded by assessments on the agencies based on their assets and mortgagebacked securities. The legislation requires that the financial condition of each of the two agencies be examined at least annually and imposes minimum capital levels. III-12 Municipal Securities Yields on long-term municipal bonds moved up about 35 basis points in October but fell back somewhat in November. On balance since late July, tax-exempt rates have risen nearly 60 basis points, boosting the ratio of tax-exempt to Treasury yields from a midsummer low of 0.83 to 0.87. Gross issuance of long-term debt has run at an extremely heavy pace in the past three months. A substantial volume of gross issuance came from advance refundings in the third quarter, as rates were low and many issuers rushed offerings in anticipation of future rate increases. Retirements reportedly have slowed after an extraordinary surge in early July, but they are likely to continue to restrain overall debt growth of this sector. 1 According to market reports, tax-exempt mutual funds experienced outflows in October after recording strong inflows throughout the year. This probably explains part of the relative poor performance of municipal yields that month, as mutual funds are the predominant buyer in this market, accounting for more than 85 percent of the net increase in tax-exempt securities outstanding during the first half of the year. Reflecting hurricane losses, sales of municipal bonds by property-casualty insurance companies, another significant group of investors, have added to the pressure on rates. Bond issuance has fallen markedly in the past week. especially refunding issues. Moreover, net issuance is expected to decline sharply in January, when about $8 billion in municipal debt is likely to be called (and financed in part by maturing SLGSs). As a 1. Approximately $10 billion of municipal debt was redeemed on July 1, 1992, representing about 1 percent of outstanding municipal bonds. Another $5 billion was retired during the rest of the third quarter, and retirements are expected to be around $5 billion in the fourth quarter, according to several market analysts. III-13 result of this decline, and perhaps also because investors are contemplating a fiscal package early in the new administration that includes higher marginal tax rates, yields on tax-exempt securities recently backed down about 10 basis points. GROSS OFFERINGS OF MUNICIPAL SECURITIES (Monthly rates, not seasonally adjusted, billions of dollars) 1992 Aug. Sep.p Oct.p 23.76 23.09 28.93 22.91 20.89 16.60 23.32 17.46 22.24 18.00 28.54 18.18 22.30 20.33 5.12 9.35 5.81 10.79 7.44 10.02 6.01 11.99 7.68 10.50 6.57 13.76 1.73 .55 4.29 .75 5.86 .44 4.24 .85 10.36 .39 Q2 Q1 1990 1991 13.49 16.60 16.75 21.64 Total tax-exempt 13.24 Long-term 2 10.26 16.18 12.84 16.20 14.47 1.68 8.58 3.11 9.73 2.98 .25 3.34 .42 Total offerings 1 Refundings New capital Short-term Total taxable 1992 Q3 p--preliminary. 1. Includes issues for public and private purposes. 2. Includes all refunding bonds, not just advance refundings. Voters approved more than 60 percent of the nearly 400 general obligation bond issues placed on ballots in the recent election by state and local governments. 2 Although only about $7 billion in debt was authorized, this election's approval rate is higher than in the past several elections, when voters turned down most issues. Mortgage Markets Interest rates on conventional home mortgages have followed Treasury rates upward over the intermeeting period; as of last week. rates on fixed-rate loans were up 36 basis points to 8.29 percent, and rates on adjustable-rate loans were up 16 basis points to 5.17 percent. Spreads of mortgage pass-through yields over Treasuries have edged 20 to 30 basis points above their extremely narrow levels of this past summer. Enormous refinancing activity 2. Many state constitutions require a referendum before allowing a general obligation debt issue to be sold. 1.97 .61 II-14 Refinancing Indicators (NSA) Percent of originations March 16, 1990 = 100 250< Monthly Weekly 2000 FHLMC Refinancing Volume (left scale) 1500 11 Ii v I\ 1^ 1 '"\ II II \, j, 1000 Week End Oct 30, 19 500 IMBA Refinancing ndex (right scale) MBA Refinancing Index (right scale) 0 1990 1991 1992 Mortgage Yield Spread and Volatility (Weekly) Basis Points Percent 225 200 175 150 125 1989 1990 1991 1. Spread is Freddie Mac primary mortgage market survey rate less 7-year Treasury yield. 2. Volatility is the standard deviation ot daily oercentaae chanaes in yield over orevious 120 davs. annualized. 1992 III-15 Freddie Mac Mortgage Refinancings (Percentage of total refinancings in new products) Original Product: 30-Year Fixed-Rate Mortgage Percent New Products F 5- or 7-Year Balloon Mortgage SAAdjustable-Rate Mortgage J 15-Year Fixed-Rate Mortgage S30-Year Fixed-Rate Mortgage - 100 80 60 40 20 -L _IJ 1986 1987 1988 1989 1990 1991 Q1 Q2 Q3 1992 III-16 and high interest rate volatility put pressure on these spreads (chart). Fifteen-year and balloon mortgages have become more popular in recent years. In 1992, only about 40 percent of the thirty-year, fixed-rate mortgages that FHLMC had previously purchased have been refinanced by another thirty-year mortgage, down from nearly 80 percent three years ago (chart). Fifteen-year mortgages have grown to about 40 percent, and five- and seven-year balloon mortgages to about 10 percent, of FHLMC refinancing activity. Recent legislation has enacted several significant changes to the mortgage insurance program of the Federal Housing Administration (FHA) and the mortgage guarantee program of the Veterans Administration (VA). In particular, changes to the FHA program are expected to make FHA mortgages less costly and easier to obtain, thereby increasing the volume of FHA loan originations. One change, increasing the maximum loan size, is not likely to have much effect, because the average loan size is substantially below the old maximum. Another change is more significant, as it repeals the 57 percent limitation on the amount of closing costs that the loan can finance. This limit was widely perceived as having constrained the volume of FHA mortgage loans by increasing the amount of cash required at closing. Changes to the VA mortgage guarantee program expand the pool of eligible borrowers, lower the refinancing cost for veterans, and authorize the VA for the first time to guarantee adjustable-rate mortgages. Also for the first time and effective immediately, interest rates on VA-guaranteed mortgages are no longer constrained by a VA-administered ceiling rate, but, like other mortgage rates, are free to be determined by market forces. III-17 Consumer Credit Consumer installment credit outstanding rose at a seasonally adjusted annual rate of 2-3/4 percent in September, following seven months of decline. The increase in September reflected rebounds in both automobile loans and revolving credit, while runoffs continued in the "other loans" category. The 4-1/4 percent gain in auto credit was the largest since October 1989; in the intervening period, the stock of auto debt had shrunk by 12 percent. The upturn in revolving credit follows a six-month period of notable weakness. The ratio of outstanding installment credit to disposable personal income was 16.3 percent in September, the lowest since mid1985 (chart). Estimated principal and interest payments also have continued to trend down relative to disposable income, as lower interest rates and the net paydowns of outstanding balances have enabled consumers to reduce the cash flow burden of outstanding credit. Over the past dozen years a number of nonfinancial firms have entered the third-party credit card market, most often through the medium of a nationally chartered bank, which enabled these firms to "export" the interest rate charged in their home states and avoid the ceilings imposed by the state of residence of the cardholder. Under the Bank Holding Company Act, as amended, these banks generally fall into two types: "nonbank banks," for example. Sears (Greenwood Trust; Discover card) and American Express (American Express Centurion Bank; Optima card); and "credit card banks," for example, General Electric Finance (two banks). (Monogram Credit Card Bank) and Household Passage of the Competitive Equality in Banking Act (CEBA) in 1987 essentially precluded establishment of any more nonbank banks, but it grandfathered existing entities and limited their asset growth to 7 percent per year. However, CEBA also III-18 CONSUMER CREDIT (Seasonally adjusted) Memo: Outstandings (billions of ..ollars) d 1992 Percent change (at annual rate) 1992 19891 1990 1991 1992 HI Aug. r 03P Sept.P Sept.P Installment 5.8 2.6 -1.0 -1.3 -.4 -1.9 2.7 722.3 Auto Revolving Other 1.4 15.2 4.2 -2.4 11.9 .8 -7.6 8.9 -2.3 -4.3 3.8 -3.5 .8 4.0 -6.6 -3.7 3.4 -5.9 4.2 8.8 -6.3 257.9 249.9 214.6 Noninstallment 3.9 -3.5 -10.0 13.0 8.2 15.7 3.4 57.4 Total 5.6 -. 4 .3 -. 6 2.7 779.6 2.1 -1.7 1. Growth rates are adjusted for discontinuity in data between December 1988 and January 1989. r--revised, p--preliminary. Note: Details may not add to totals due to rounding. CONSUMER INTEREST RATES (Annual percentage rate) 1992 July Aug. Sept. 1989 1990 1991 Feb. May 12.07 15.44 18.02 11.78 15.46 18.17 11.14 15.18 18.23 9.89 14.39 18.09 9.52 14.28 17.97 ... ... ... 9.15 13.94 17.66 ... ... 12.62 16.18 12.54 15.99 12.41 15.60 10.19 14.00 10.67 14.01 9.94 13.67 8.88 13.49 8.65 12.06 At commercial banks1 New cars (48 mo.) Personal (24 mo.) Credit cards At auto finance cos. New cars Used cars 2 1. Average of "most common" rate charged for specified type and maturity during the first week of the mid-month of each quarter. 2. Average rate for all loans of each type made during the month regardless of maturity. November 6, 1992 Mortgage and Consumer Finance III-19 Consumer Installment Credit Outstanding SA. As a Percent of Personal Disposable Income ent 21 .. . -..20 19 »5 «·, .l//tl I :::: *^-X I' l9 '1» / M.5 I If tt·-".fS ;s:w:: · · ::: : :-X .,Xe :::::/ 18 13 12 - i" Xx., .is~is w t ·i~ ~l 17 15 14 1962 1967 1972 1977 1982 1987 -- t11 1992 III-20 established the separate category of credit card banks, which it exempted from both the BHC Act and growth limitations. 3 After AT&T introduced the no-fee AT&T/Universal card as a Visa or MasterCard product in 1990, banks complained to the two licensing organizations, which subsequently modified their membership rules to make it difficult, if not impossible, for a firm owned by a nondepository to join the Visa or MasterCard system. To circumvent this constraint, some nondepositories have adopted the practice of "co-branding," whereby a nonfinancial firm wishing to establish a national credit card program reaches an agreement with an existing member of MasterCard or VISA to share billing on the face of the card. In the past couple of months, two major nonfinancial corporations--General Motors and General Electric--have each introduced a new credit card as a co-branded MasterCard. Furthermore, GTE has begun issuing a combined MasterCard-telephone charge card through a co-branding arrangement with Associates National Bank (Ford). There are reports that other telephone companies may enter into such arrangements as well and that Chrysler may soon join the credit card club. So far, however, the increased competition has had no notable effect on the price or quantity of credit, as loan balances have merely been shifted among institutions. Gross public issuance of credit card-backed securities has been sluggish so far this year, in part reflecting slow growth of receivables as well as the much improved state of bank balance sheets and capital positions (table). However, even in the absence of any new cards, issuance of card-backed securities is expected to 3. A "nonbank bank" is an institution holding a commercial bank charter that agrees either to not take deposits or to make commercial loans. A "credit card bank" is an institution that engages only in credit card operations. III-21 pick up in 1993 as a number of earlier issues mature and either pay down completely or begin scheduled amortization. In 1993, twenty- five separate issues totaling $14.75 billion (of which Citicorp alone accounts for $5.55 billion) will mature and will either return to the balance sheet or have to be rolled over. GROSS PUBLIC ISSUANCE OF CONSUMER ASSET-BACKED SECURITIES (Monthly averages in billions of dollars, not seasonally adjusted) TOTAL Type of Collateral Credit Auto Cards Other 1988 1989 1990 1991 1.29 1.88 2.87 3.07 .46 .65 .87 1.23 .66 1.00 1.83 1.70 .16 .22 .17 .13 .67 .92 1.83 1.70 .25 .64 .80 1.05 .36 .31 .25 .31 1991 Q3 Q4 3.66 2.89 1.57 1.27 1.87 1.54 .22 .09 1.12 1.21 2.12 1.54 .43 .14 1992 Q1 Q2 Q3 2.26 2.41 2.14 1.55 1.26 .99 .32 .88 1.06 .39 .26 .09 1.91 1.30 .90 .32 .93 1.20 .03 .18 .05 Type of Issuer Commercial Finance Bank Company Other 1. Includes boat, recreation vehicle, mobile home and personal loans. 2. Includes retailers and savings and loan institutions. Note: Details may not add to totals due to rounding. INTERNATIONAL DEVELOPMENTS INTERNATIONAL DEVELOPMENTS Merchandise Trade The U.S. merchandise trade deficit widened sharply in August to $9.0 billion (seasonally adjusted, Census basis), July deficit of $7.3 billion. up from a revised A 6 percent drop in exports far outweighed the 1 percent decline in imports, leading to the largest monthly U.S. trade deficit since November 1990. The decline in exports in August was widespread across all major trade categories, while the decline in imports was concentrated in oil, foods, and consumer goods. U.S. MERCHANDISE TRADE: MONTHLY DATA (Billions of dollars, seasonally adjusted, Census basis) Exports Imports Total Ag. NonAg. Total Oil NonOil 1992-Jan Feb 35.5 37.7 3.6 3.7 31.9 33.9 41.3 40.9 3.6 3.3 37.6 37.6 -5.8 -3.3 Mar 37.1 3.5 33.6 42.7 3.4 39.2 -5.6 Apr May Jun 36.4 35.7 38.2 3.8 3.3 3.5 32.7 32.4 34.7 43.5 42.9 44.9 4.0 4.2 4.8 39.5 38.7 40.1 -7.1 -7.1 -6.7 Jul Aug 37.8 35.5 3.9 3.6 33.9 32.0 45.1 44.5 4.8 4.5 40.3 40.0 -7.3 -9.0 Source: Balance U.S. Department of Commerce, Bureau of the Census. For July-August combined, the trade deficit widened to $105 billion at an annual rate (BOP basis). Exports were little changed from the second quarter, while imports increased by 2-1/2 percent. Beginning in the second quarter of 1992 there appears to have been an upward shift in the level of the trade deficit after five consecutive quarters of deficits in the $60-80 billion (AR) range. Most of the increase in non-oil imports in July-August was in capital goods and consumer goods. Computers accounted for much of the increase in imported capital goods. IV-1 U.S. domestic sales of IV-2 MAJOR TRADE CATEGORIES (Billions of dollars. BOP basis, SAAR) Year 1991 1991 $ Change 1992 03 04 01 Q2 Q3-e Trade Balance -73.4 -80.7 -74.2 -68.9 -97.7 -105.4 Total U.S. Exports 416.0 416.6 431.4 431.8 430.3 Agricultural Exports Nonagric. Exports 40.1 375.8 40.7 375.9 43.2 388.2 43.3 388.5 101.8 3.6 100.5 3.4 100.0 3.6 14.3 83.9 12.7 84.3 167.0 36.4 27.3 103.3 Q3e-Q3 Q3e-02 -24.7 -7.8 435.2 18.6 4.9 42.0 388.3 44.7 390.5 4.1 14.6 2.7 2.2 99.7 3.8 100.4 3.4 103.1 4.2 2.6 0.7 2.8 0.8 14.7 81.8 13.9 82.1 13.6 83.4 14.3 84.6 1.6 0.3 0.8 1.2 166.7 176.3 176.4 174.1 169.9 3.1 -4.2 35.4 26.8 104.5 40.8 27.9 107.5 42.6 27.4 106.4 37.7 28.6 107.8 33.2 27.9 108.9 -2.3 1.0 4.4 -4.6 0.7 1.1 40.0 43.7 41.7 42.9 46.2 48.9 5.3 2.7 22.8 17.5 25.0 18.7 23.1 18.6 20.8 22.1 23.7 22.5 24.5 24.5 -0.5 5.8 0.8 2.0 45.9 21.0 44.9 20.1 48.2 22.1 47.9 21.5 48.7 19.0 49.9 18.6 5.0 -1.4 1.3 0.3 489.4 497.3 505.6 500.7 528.0 540.7 43.4 12.7 51.2 438.2 52.5 444.8 48.8 456.8 41.5 459.2 51.9 476.1 55.7 484.9 3.3 40.1 3.9 8.8 83.9 2.9 3.9 80.0 2.3 3.8 83.3 3.1 4.8 84.3 2.3 4.4 88.4 3.7 4.6 87.0 2.3 4.2 7.1 -0.0 0.4 -1.4 -1.5 -0.4 Other Ind. Suppl. 77.1 73.9 75.4 77.7 80.1 80.6 6.7 0.5 Capital Goods Aircraft & Parts Computers & Parts 120.7 11.7 26.1 121.3 12.5 27.1 122.1 11.5 26.8 125.1 12.1 27.7 131.4 13.5 30.7 136.2 11.3 33.7 14.9 -1.2 6.6 4.8 -2.2 2.9 82.9 81.7 83.8 85.4 87.2 91.3 9.6 4.0 84.9 28.8 56.2 90.8 33.1 57.7 88.6 30.1 58.5 87.8 30.9 56.9 89.3 31.7 57.6 89.4 33.0 56.4 -1.4 -0.1 -1.3 0.1 1.3 -1.2 108.0 26.5 14.1 109.9 26.3 16.5 118.7 26.4 17.7 116.2 26.8 19.0 119.0 29.1 18.9 125.1 28.8 18.4 15.2 2.5 1.8 6.1 -0.3 -0.6 Industrial Gold Suppl. Fuels Other Ind. Suppl. Capital Goods Aircraft & Parts Computers & Parts Other Machinery Automotive Products To Canada To Other Consumer Goods Other Nonagric. Total U.S. Imports Oil Imports Non-Oil Imports Industrial Suppl. Gold Other Fuels Other Machinery Automotive Products From Canada From Other Consumer Goods Foods All Other e--Average of first 2 months of quarter at an annual rate. Source: U.S. Department of Commerce. Bureau of Economic Analysis. IV-3 computers were very strong, fueled by price wars and by a push by U.S. businesses to upgrade PCs and workstations to take advantage of improved software. Most of the increased sales were in the low end of the computer spectrum, items that are often imported. Other machinery imports also rose strongly in July-August; the increase in these imports since the end of 1991 represents the first significant advance in this category since 1988 and is consistent with some firming in domestic spending for these goods. Imports of oil fell in August, as both quantity and price declined from the levels recorded in July. The noticeable decline in the quantity of oil imported in August largely reflected a decrease in domestic stocks (after four months of increase or no change), and to a lesser extent the effects of the temporary shutdown of the Louisiana Offshore Oil Pipeline (LOOP) brought about by Hurricane Andrew. For July-August combined, however, imports of oil were above the second-quarter pace, reflecting the strong level of imports in July. Preliminary Department of Energy data for September indicate a drop in oil consumption and an increase in stocks; imports in September (BOP basis) may have tipped up slightly. OIL IMPORTS (BOP basis, seasonally adjusted annual rates) 1992 Q1 Value (Bil. $) Price ($/BBL) Quantity (mb/d) Q2 41.47 15.27 7.44 51.86 17.48 8.12 Months Q3-e 55.75 18.58 8.21 May Jun Jul Aug 50.11 17.41 7.88 57.64 18.81 8.39 57.56 18.67 8.44 53.93 18.49 7.99 e--Average of first 2 months of quarter at an annual rate. Source: U.S. Department of Commerce, Bureau of Economic Analysis. Since June, the spot price for West Texas Intermediate (WTI) generally has fluctuated around $22 per barrel and lately has slipped below $21 per barrel. Relatively strong OPEC production (particularly in Iran and Saudi Arabia) and lackluster demand IV-4 IMPORT AND EXPORT PRICE MEASURES (percent change from previous period, annual rate) Year 1992-Q3 1991-Q3 Quarters 1992 Q1 Q2 Q3 (Quarterly Average, AR) --------------------Imports. Total Foods, Feeds, Bev. Industrial Supplies Ind Supp Ex Oil* Capital Goods Automotive Products Consumer Goods Months 1992 Aug Sep (Monthly Rates) BLS Prices--- ----- --- - ------ 2.8 -1.1 1.8 0.4 4.0 2.5 4.2 -1.2 10.0 -15.1 4.7 4.7 0.9 6.2 0.8 -15.0 12.1 -0.5 -3.4 -2.6 0.3 6.6 -1.5 9.7 2.1 8.4 4.6 5.3 0.5 -0.3 0.4 0.5 0.9 0.2 0.4 0.2 0.4 0.2 0.2 0.7 0.1 -0.1 4.5 2.6 -45.0 4.4 44.4 -2.7 25.5 4.8 0.1 0.4 0.1 0.2 1.0 -0.4 0.2 1.4 1.8 2.6 -1.2 -1.3 -6.5 1.2 1.6 5.9 2.0 -2.0 5.5 0.9 1.2 1.6 0.7 -13.6 5.5 1.2 1.3 0.3 -0.3 -4.4 0.7 0.2 0.1 0.0 0.2 3.0 -0.3 -0.2 0.2 0.0 -0.5 1.2 -3.3 -1.0 -1.0 2.7 -7.6 2.0 -3.6 0.3 1.9 -0.1 Memo: Oil Non-oil Exports. Total Foods, Feeds, Bev. Industrial Supplies Capital Goods Automotive Products Consumer Goods Memo: Agricultural Nonagricultural ------------- Prices in the NIPA Accounts-----------Fixed-Weight 2.6 8.0 1.1 -4.2 -48.9 1.8 4.8 72.1 0.0 6.3 28.6 4.3 0.6 -2.9 1.4 -0.7 -4.1 -0.4 1.5 -1.1 1.8 -0.4 -15.0 3.0 Imports, Total Oil Non-oil -0.2 8.1 -1.2 -6.9 -48.6 -1.5 2.3 70.7 -2.3 1.6 29.1 -1.1 Exports, Total Ag Nonag -1.2 -3.0 -1.0 -1.1 -5.2 -0.7 -1.8 -1.6 -1.8 -2.8 -9.1 -2.1 Imports, Total Oil Non-oil Exports, Total Ag Nonag Deflators */ Months not for publication. IV-5 recently have combined to depress oil prices. stands at $20.49 per barrel. Spot WTI currently These movements in spot prices suggest that import prices were little changed from the August level in either September or October. Exports rose slightly in July-August from the second-quarter average, but were still only slightly higher than in the fourth quarter of 1991. The quantity of exports remained essentially flat, as increases in exports of computers, automotive products, and agricultural products (particularly wheat, rice, and soybeans) were offset by declines in exports of aircraft and other products. By area, a downward turn in exports to Western Europe was offset by increased exports to Latin America and developing nations in Asia. Prices of Exports and Non-oil Imports Non-oil import prices rose by about 4-1/2 percent at an annual rate in the third quarter according to the BLS, following a decline in the previous quarter. Strong price increases in imports of capital goods were attributable in part to the depreciation of the dollar over the summer. Prices of imported consumer goods and automotive products also rose noticeably in the third quarter. Prices of non-agricultural exports rose only slightly in the third quarter, while prices of agricultural exports fell sharply. continuing the price declines of the previous three quarters. U.S. International Financial Transactions Partial data on international capital transactions for the third quarter indicate large inflows of private capital, especially through bank transactions, and sizable outflows of official capital. This pattern represents a shift from that in recent quarters when official transactions showed large net inflows and accounted for the bulk of the total net capital inflows. Despite the substantial increase in private capital inflows in the third quarter, total net IV-6 inflows thus far reported for the quarter were substantially less than the projected current account deficit, indicating a large positive statistical discrepancy. In the first half of the year, the discrepancy was large and negative. Part, but not all, of the swing in the discrepancy appears to have been associated with larger currency shipments abroad, which are omitted from the accounts. Banks in the United States recorded large net inflows in August and September, bringing the total for the third quarter to $20 billion. (See line 1 of the Summary of U.S. International Transactions table.) Most of the September inflow was attributable to end-of-quarter transactions by U.S. branches and agencies of foreign banks. As a group, these banks increased their net liabilities to related foreign offices by about $15 billion in the last weeks of September and reduced these liabilities by more than $6 billion in the early days of October. Averaging through the quarter-end movements, it still appears that the foreign-based banks have increased their reliance on related foreign offices for funds in recent months. As shown on line lb of the International Banking Table, on a monthly average basis, foreign-chartered banks in the United States increased their net liabilities to own foreign offices by $10 billion between August and October. This figure is roughly consistent with the asset growth at branches and agencies and the runoff of large CDs issued by them in the United States. Net purchases of U.S. corporate and agency bonds by private foreigners picked up in August and remained brisk in September, bringing total purchases to $7 billion for the quarter. 2a of the Summary Table.) (See line Private foreign purchases of Treasury securities, especially bonds and notes, also picked up in August, reaching almost $8 billion (line 3). These purchases were concentrated in the United Kingdom and Japan. In September IV-7 SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS (Billions of dollars) 1992 1990 1991 1991 Year Year _Q_ 01 02 36.6 -18.4 -2.1 4.4 -291 -10.9 -6.0 25.7 -13.7 1992 _0Q3 July Aug. Sept. -2.5 20.0 -4.9 11.9 13.0 -4.3 1.7 -11.5 -6.3 -0.8 -4.4 6.6 7.7 11.8 7.1 1.7 3.2 10.1 -1.5 -2.8 -1.2 -3.8 -31.6 -46.8 -11.1 -9.1 -8.8 -1.0 19.3 1.9 -0.8 32.1 16.0 13.3 21.0 10.0 -17.6 0.5 1.2 -5.8 1.2 20.8 39.3 29.6 2.5 -2.2 Private Capital Banks 1. Change in net foreign positions of banking offices in the U.S. (+ - inflow) Securities 2. Private securities transactions, a) net 2 foreign net purchases 16.2 (+) of U.S. corporate bonds b) (+) of U.S. corporate stocks c) * -1.4 -2.4 -14.8 -8.0 -2.7 -4.1 10.4 5.5 0.3 7.9 -2.7 20 3 -8.6 2.3 2.6 -13.4 2.4 3.3 3.6 2.3 1.0 2.7 -2.5 2.9 1.3 -0.2 11.6 15.9 19.5 -15.1 -1.3 1.7 -15.5 14.8 12.6 14.9 11.1 -0.3 4.7 -0.9 -4.1 1.2 0.7 6.0 9.2 -8.3 -2.4 3.4 -9.3 5.8 1.2 -1.1 1.5 2.0 0.4 1.5 * n.a. n.a. n.a. U.S. net purchases (-) of foreign securities 3. 2.1 foreign net purchases Foreign net purchases (+) of U.S. Treasury obligations Official Capital 4. Changes in foreign official reserves assets in U.S. (+ - increare) a) By area G-10 countries OPEC All other countries b) 1.8 By type U.S. Treasury securities 4 Other 5. 0.3 Changes in U.S. official reserve assets (+ - decrease) 5 Other transactions (Quarterly data) -32.7 6. U.S. direct investment (-) abroad 7. 8. Foreign direct investment (+) in U.S. 6 Other capital flows (+ - inflow) 9. U.S. current account balance 10. -27.1 45.1 -11.7 11.5 -15.1 5.7 -3.8 -11.0 n.a. 6.0 n.a. 11.0 n.a. -5.8 8.6 2.5 14.0 -90.4 -3.7 -7.2 -5.9 -17.8 n.a. -1.1 2.4 -8.4 -19.6 n.a. -73.4 -18.5 -17.2 -24.4 n.a. 47.4 Statistical discrepancy MEMO: U.S. merchandise trade balance -- part of line 9 (Balance of payments basis, seasonally adjusted) 1. Includes changes in -108.9 positions of all depository institutions, bank-holding companies, between brokers/dealers and unaffiliated foreigners and certain transactions (particularly borrowing and lending under repurchase agreements ) 2. These data have not been adjusted to exclude commissions on securities transactions and, therefore, do not match exactly the data on U.S. international transactions as published by the Department of Commerce. 3. Includes all U.S. bonds other than Treasury obligations. 4. Includes deposits in banks, commercial paper, acceptances, borrowing under repurchase agreements, and other securities. 5. Seasonally adjusted, 6. Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and official transactions not shown elsewhere. In addition, it the Department of Commerce and revisions to the data in Survey of Current Business. *--Less than 850 million. NOTE: Details may not add to total because of rounding. includes amounts resulting from adjustments to the data made by lines 1 through 5 since publication of the quarterly data in the INTERNATIONAL BANKING DATA (Billions of dollars) 1991 1990 Dec. 1. Net Claims of U.S. Banking Offices (excluding IBFS) on Own Foreign Offices and IBFS (a) U.S.-chartered banks (b) Foreign-chartered banks 2, Credit Extended to U.S. Nonbank Residents by Foreign Branches of U.S. Banks 3. Eurodollar Holdings of U.S. Nonbank Residents 1/ Mar. June -31.3 5.5 -36.9 -23.8 7.6 -31.3 -13.7 5.4 -19.2 24.7 26.0 116.1 114.6 1992 Sept. Oct. */ Dec. Mar. June July Aug. -14.1 11.0 -25,2 -35.8 12.4 -48.3 -41.4 3.2 -44.6 -56.8 8.3 -65.1 -56.0 9.0 -65.0 -54.1 11.2 -65,3 -58.2 12.7 -70.9 -608. 15.1 -75.8 23.9 23.7 23.9 23,3 24.5 25,1 24.8 24.8 25.1 105.8 100.8 102.9 100.3 91.2 89.6 86.6 84.6 86.7 Sept. 1. Includes term and overnight Eurodollars held by money market mutual funds. Note: These data differ in coverage and timing from the overall banking data incorporated in the international transactions accounts. Line 1 is an average of daily data reported to the Federal Reserve by U.S. banking offices. Line 2 is an average of daily data. Line 3 is an average of daily data for the overnight component and an average of Wednesday data for the term component. */ Data through October 26. IV-9 foreigners made net sales of Treasuries totaling $3 billion. Widespread sales by Europeans more than offset Japanese net purchases of almost $3-1/2 billion. For the quarter as a whole, private foreigners purchased less than $6 billion in Treasuries, about one-half of the amount purchased in the second quarter. Foreigners resumed selling U.S. equities on a modest scale in August and picked up the pace of net sales in September. For the quarter, net sales of equities totaled almost $4 billion, about equal to the total sales in the first two quarters (line 2b). U.S. residents continued to acquire foreign securities, especially European equities, in August and September, though at a somewhat slower pace than in July. For the third quarter net purchases of stocks and bonds totaled almost $15 billion (line 2c). Foreign official reserves in the United States declined $13 billion in September. Most of the decline was attributable to reduced holdings by the BIS and Canada. Large reductions in French, Spanish, and Swedish reserves were offset by increases in German and U.K. reserves. Partial data for October indicate that official reserves at The FRBNY rose more than $5 billion as a $9 billion increase in BIS holdings was only partially offset by reductions in Spanish, German, and Swiss holdings. Foreign Exchange Markets The weighted average value of the dollar, shown in the accompanying chart, rose 9 percent since the last FOMC meeting. The IV-10 dollar began appreciating shortly after the meeting as market expectations for further Federal Reserve easing dissipated. It continued to rise on German interest rates declines, and on the expectation that a Clinton administration would use fiscal policy to stimulate the economy, reducing the likelihood for further easing by the Federal Reserve. The dollar rose 12 percent against the mark during the period, but rose only 3-1/2 percent against the yen in part because expectations for monetary easing in Japan have been more subdued than those in Europe, and perhaps also because the huge Japanese trade surplus continued to widen. Interest rates in Japan changed little during the period; the three-month CD rate declined 5 basis points, and the yield on the bellwether bond declined 10 basis points. Expectations for Bundesbank easing were mixed toward the end of the period because the impetus for easing posed by evidence of a weakening German economy was offset by stubborn German inflation, a growing budget deficit, and upcoming wage negotiations. Market commentary also suggests that the Bundesbank will postpone further rate cuts pending anticipated devaluations of the weaker ERM currencies by year-end. Three-month rates in Germany declined 5 basis points to 8.85 percent during the period. They had been down by more, but rebounded towards the end of the period. The yield on the bellwether bond declined 5 basis points to 7.30 percent. Elsewhere in Europe, interest rate movements were more pronounced due to an unwinding of exchange rate pressures and the pursuit of more growth-oriented monetary policies. In the United Kingdom, three-month rates declined just over 200 basis points to about 7 percent, reflecting a shift in government priorities from inflation reduction to the pursuit of economic IV-11 WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR March 1973 = 100 Daily Oct. 6 August September October SELECTED DOLLAR EXCHANGE RATES November August 3 = 100 SDaily August September October November IV-12 This shift towards growth. response to further signs came in growth-oriented policies of economic deterioration, and was also a part of government efforts to appease critics of its proposal to shut-down several government-owned coal pits. Three-month rates are currently 330 basis points below their average level in August, and the market expects base points rates to decline an additional 175 basis over the next few months. Three-month rates in Italy declined 240 basis points during the period but remain 250 basis points above their average level June, before the exchange rate pressures on the Since the in lira intensified. last meeting, Italy has succeeded in passing several budget deficit reduction measures, and the lira has 7-3/4 percent against the mark. strengthened Italian government officials have hinted that the lira may reenter the ERM around year's end. Three-month rates in France and Sweden declined 290-350 basis point over the period, mostly in response to reduced exchange rate 95 basis points below pressures. Three-month rates in France are their level in August, and the spread between French and German three-month rates is currently narrower than its average level in August. In Spain, although some exchange rate pressures persist, threemonth rates declined 145 basis points to 13.90 percent, perhaps because capital controls instituted during the EMS crisis have provided the Bank of Spain with some room to maneuver rates lower. By European Community agreement, these capital controls, as well as those in Ireland, must be removed by the end of this year. At the time of their removal the market expects the peseta and the Irish punt, as well as the Portuguese escudo to be devalued 5-10 percent. In Canada voters overwhelmingly rejected a referendum on constitutional reforms on October 26. This rejection was widely IV-13 anticipated and had only a minor effect on the Canadian dollar. Three-month rates in Canada declined 80 basis points on balance during the period. These rates had declined by more, but downward pressure on the Canadian dollar prompted the Bank of Canada to tighten somewhat towards the end of the period. The Canadian dollar declined 1-1/4 percent, on balance, against the U.S. dollar during the period. Developments in Foreign Industrial Countries Real economic activity in major foreign industrial countries has proceeded at a sluggish pace in the third quarter. In Japan, incoming data for industrial production, inventories, and new car registrations continued to suggest weakness. Similarly, for western Germany and the United Kingdom, industrial production, orders, and measures of business confidence are down relative to the second quarter. and Italy. In addition, real activity appears to be slowing in France In contrast, a recovery may have taken hold in Canada during the third quarter, as industrial production, orders, and retail sales showed moderate increases. Moderation in economic activity has generally led to lower inflation, except in western Germany. Individual country notes. In Japan, activity appears to have remained generally weak in the third quarter. While industrial production (s.a.) rose 4.6 percent in September, this mainly reflected recovery from an unusually sharp seasonal drop in the previous month. For the third quarter as a whole, industrial REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES (Percentage change from previous period, seasonally adjusted) 1 1991 Q4/Q4 Q4/Q4 1990 1991 Q4 1992 1992 ----------------Q1 Q2 Q3 May June July Aug. Sept. Latest 3 months from year ago 2 Canada GDP IP -2.0 -6.3 -.0 -1.4 1.5 -.3 1.7 1.9 5.8 5.4 .0 -1.1 .3 -. 2 .2 .3 n.a. n.a. -.5 .1 -.2 1.0 .1 .2 -. 1 n.a. n.a. -1.7 2.0 .3 -.3 -1.2 2.0 2.8 -.3 -2.0 n.a. -1.9 -. 1 1.6 -3.8 1.7 -.5 .4 1.1 .6 2.5 .2 -2.9 n.a. n.a. 4.5 5.2 6.9 3.0 -1.6 -.0 -1.2 .9 -3.1 .2 -2.3 n.a. .1 -1.9 -1.0 -3.1 -1.6 -.7 -.3 -.1 -.4 -.8 -.2 -.2 n.a. n.a. -1.0 .1 -.5 .1 -.2 .7 -. 7 .4 1.3 .7 .4 K K x M -.4 1.9 X X X .2 .0 .0 X K .1 X n.a. .6 -. 6 France GDP IP X X n.a. 2.4 -. 7 WEST GERMANY GDP IP A A -1.4 -. 4 .2 -2.0 1.1 -2.3 n.a. 1.5 .4 x Italy GDP IP X x -2.2 X n.a. X n.a. JAPAN GDP IP K x 2.5 x .4 K -4.2 x 4.6 1.5 -6.3 United Kingdom GDP IP X K .0 K K 1.0 -.3 n.a. -1.3 M x -.2 1.9 .7 X -. 6 UNITED STATES GDP IP -. 5 .3 1. Asterisk indicates that monthly data are not available, 2. For quarterly data, latest quarter from year ago. x .7 x -. 4 x .8 -.4 CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES 1 (Percentage change from previous period) 1991 Q4/Q4 1990 04/Q4 1991 Q2 Q3 1992 -------------------Q1 Q2 Q3 Q4 1992 --------------------------- Latest 3 months July Aug. Sept. Oct. from year ago I~ Canada CPI WPI 4.1 -3.2 .7 -1.6 .6 -. 9 -. 1 -. 4 3.6 .7 2.9 -3.6 .7 -1.5 .8 -.7 .4 .5 .2 .3 .0 .1 .7 .4 .8 -1.0 .4 .8 .6 n.a. .3 .1 X * 1.1 .5 4.9 1.9 .5 .6 .5 -2.0 .0 -1.3 -. 1 .5 n.a. n.a. 1.2 1.5 .1 n.a. 2.8 -1 .1 .4 n.a. 3.6 -1.0 .3 n.a. .6 n.a. 5.1 2.1 France CPI WPI X West Germany 3.0 .9 3.9 1.6 6.3 9.9 6.1 1.1 3.2 1.9 3.2 -1.3 10.0 5.9 CPI WPI .9 .3 1.5 .7 1.0 1.7 .5 1.4 .0 1.2 .8 .7 n.a. .2 -. 3 .4 -. 4 1.1 -. 7 -.3 -. 4 1.3 .0 -.1 -.1 -.4 .1 .1 .1 .5 -. 3 -. 1 n.a. 1.7 -1.1 4.2 4.9 .4 .6 1.0 .5 .5 1.4 2.2 1.1 -.1 .4 -. 4 .2 .1 .1 .4 .1 n.a. .1 3.6 3.3 3.0 -.1 .7 .0 .9 .5 .7 .0 .8 .8 1.4 -1.0 .8 -. 4 1.4 .1 -. 3 United Kingdom CPI WPI United States CPI (SA) WPI (SA) 1. 6.3 6.4 Asterisk indicates that monthly data are not available. n.a. .1 TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1 (Billions of U.S. dollars, seasonally adjusted except where otherwise noted) 1991 1990 1992 ------ -------------- 1991 June June 1992 July Aug. July Aug. Sept. Sept. 02 Q3 Q4 Q1 Q2 Q3 5.0 -25.5 1.7 -6.0 .9 -6.6 1.0 -7.3 1.7 -6.1 1.6 -6.3 n.a. n.a. .4 -. 2 .5 1.2 .7 -. 6 -9.3 -5.3 -1.5 -.2 .4 n.a. 1.1 n.a. 1.9 n.a. 1.3 n.a. 1.2 -. 6 n.a. -1.5 -1.6 -.2 -9.5 n if n 65.2 46.4 12.9 -19.5 -1.1 2.8 6.7 4.4 3.4 8.5 -5.9 -5.9 -2.2 -5.6 -6.3 n.a. 1.3 -2.7 .8 -5.2 3.9 -1.4 3.8 n.a. -13.0 -21.5 -3.5 -4.6 -4.9 -3.7 -3.3 -5.0 -1.9 n.a. -4.0 n.a. n.a. n.a. -1.5 n.a. n na. n.a. 9.4 -21.5 Trade Current account n.a. .8 France Trade Current account Germany .8 N 2 Trade (NSA) Current Account (NSA) Italy Trade Current account (NSA) -12.2 -14.4 x x n Japan Trade Current account 51.7 35.9 78.5 73.1 19.7 21.0 21.2 28.0 24.5 26,2 18.8 19.5 22.9 28.6 28.8 28.1 8.0 8.5 8.5 9.7 8.3 8.5 9.4 9.9 -33.0 -26.8 -18.3 -8.0 -3.8 -. 4 -4.0 -2.1 -4.7 -1.1 -5.4 -3.0 -5.7 -4.7 -6.3 -5.8 -1.8 -1.4 -2.2 -2.0 -2.2 -2.1 -2.0 -1.8 -108.9 -90.4 -73.4 -3.7 -16.4 2.4 -20.2 -11.1 -18.5 -7.2 -17.2 -5.9 -24.4 -17.8 n.a. n.a. -8.0 -8.1 -9.4 n.a. United Kingdom Trade Current account United States Trade Current account 1. The current account includes goods, services, that monthly data are not available. 2. Before July 1990, West Germany only. N x and private and official transfers. Asterisk indicates x N IV-17 production was only 0.1 percent higher than in the second quarter, and was 6.3 percent below its year-earlier level. The inventories to shipments ratio (s.a.) rose an additional 0.6 percent in the third quarter, and showed a year-over-year increase of 8.2 percent. Retail sales (n.s.a.) in the third quarter were 1.8 percent below their level in the third quarter of last year. registrations New passenger car (s.a.) declined 2.6 percent in the third quarter and fell 10.8 percent below their year-earlier level. Housing starts (s.a.) have continued to be the strongest indicator, registering a 2.9 percent increase in the third quarter. The unemployment rate (s.a.) in September remained unchanged at 2.2 percent. However, the job offers to applicants ratio (s.a.) continued to decline, falling to its lowest level in four years. Inflationary pressures have remained subdued. Consumer prices in the Tokyo area (n.s.a.) were nearly unchanged in October, and their 12-month change declined to 1.2 percent. However, much of the decline in the 12-month change over recent months was due to lower prices of perishable foods. Excluding perishable food prices, the 12-month change in consumer prices was 2.3 percent in October. Wholesale prices (n.s.a.) declined by 0.3 percent in September, as their 12-month decrease remained at 1.1 percent. The trade surplus (s.a.) increased somewhat further in September. For the first nine months of the year, the trade surplus was $79 billion (s.a.), 38 percent higher than the surplus in the same period last year. The downturn in real economic activity in western Germany registered in the second quarter appears to have persisted into the third quarter. Industrial production (s.a.) dropped 1.9 percent in the third quarter relative to its average in the second quarter and in September was significantly below its level in the fourth quarter IV-18 of last year. The volume of new orders for west German manufactured goods (s.a.) fell steadily between February and September. For the third quarter, total orders declined 2.3 percent relative to their second-quarter average, reflecting a drop in both domestic and foreign orders. Measures of business confidence have exhibited sharp declines in recent months. One survey of production plans in September registered its steepest drop since the end of 1982. On a slightly more positive note, the volume of retail sales (s.a.) was essentially unchanged in the third quarter relative to the second quarter average. Despite increasing in March and April on a year/year basis, industrial production in eastern Germany (n.s.a.) has declined in more recent months and in July stood 5.1 percent below year-earlier levels. After remaining steady throughout 1991 at roughly 6.3 percent, the unemployment rate (s.a.) in western Germany has edged up this year and stood at 6.6 percent in October. Consumer price inflation (n.s.a.) in western Germany remained strong through October, increasing to 3.8 percent on a year/year basis. Other prices have moderated somewhat in recent months, likely reflecting the appreciation of the DM against its major trading partners. The combined German current account has continued to deteriorate. The cumulative current account deficit (n.s.a.) for all of Germany reached $18.5 billion in August, about $2 billion larger than the deficit through August of last year. The widening of the current account deficit primarily reflects a decline in the value of exports. In September, M3 in western and eastern Germany combined was 9.1 percent (s.a.a.r.) higher than in the fourth quarter of 1991, well above the Bundesbank's M3 target range of 3-1/2 to 5-1/2 IV-19 percent growth for 1992. Three-month interest rates have continued to drift down slowly since the official Bundesbank easing on September 14 that reduced the discount and Lombard rates to 8.25 and 9.5 percent, respectively, and now stand between 8.8 and 8.9 percent. In early September, the draft budget and medium-term financial plan that was approved by the German cabinet in July was presented to the German parliament. Over the past several weeks, however, the draft budget for 1993 has been the subject of considerable controversy. The Finance Ministry now estimates a gap of DM 16 billion between expenditures and revenues in the draft budget, due to a drop in expected tax revenues and to additional financial obligations in eastern Germany. To bridge the DM 16 billion gap, the cabinet has approved a series of measures, including expenditure reduction, additional borrowing, and additional revenues through privatization receipts and coin sales. This modified 1993 draft budget continues to hold the growth of expenditures to 2.5 percent in nominal terms, but the Federal deficit is now expected to increased to DM 44 billion from a projected deficit of DM 40.5 billion this year. No mention has been made of additional taxes in 1993, but there has been discussion of tax increases in 1995. In France, monthly indicators point to continued weakness in the third quarter. Although the July-August average of industrial production was flat (s.a.), output in the manufacturing sector declined 1.2 percent relative to June. It is likely that production continued to trend down in September, as the Bank of France's measure of industrial output fell in that month. The unemployment rate edged up in the third quarter to 10.3 percent (s.a.). In addition, foreign and domestic orders and business confidence all fell (s.a.) in September. The only positive indicator was real IV-20 consumption of manufactured products which rose 1.2 percent (s.a.) (a third of total consumption), in September, to lie 0.5 percent above its second-quarter average. Inflation in September continued it gradual decline. The consumer price index was 2.6 percent above its year-earlier level, down slightly from 2.7 percent in August. Through September, France's cumulative trade surplus was $4.3 billion (s.a.), a substantial improvement relative to $5.7 billion deficit registered over the same period last year. This favorable trade balance performance masks a significant slowdown in French export growth that has contributed to the slowdown in overall economic growth. In the third quarter, French merchandise exports (s.a.) were 2.2 percent below their average in the first half of 1992, and slightly below their level in the third quarter of last year. On October 27, the French Chamber of Deputies approved the 1993 budget. The deficit is projected to equal FF165 billion or 2.2 percent of GDP, slightly less than the 1992 deficit now estimated at FF180 billion. The increase in total expenditures is to be held to 3.4 percent in 1993, although certain categories of expenditures such as job training, agriculture, education, and justice will increase by significantly more. Tax revenues are projected to rise only 2.9 percent, largely due to very slow growth in VAT and corporate income tax revenues, and a small reduction in the corporate income tax rate. In Italy, economic growth is slowing. Recently released figures show that real GDP grew only 0.8 percent (s.a.a.r) in the second quarter compared with 2.4 percent (s.a.a.r) in the first quarter. Other recent indicators suggest that this slowdown in activity continued into the third quarter. Industrial production IV-21 (n.s.a.) declined 3.7 percent in the 12 months ending in August, and new orders fell 1.6 percent in the year ending in July. Although retail sales in July were up 7.8 percent from July 1991, the rate of increase was slower than those recorded earlier this year. The consumer confidence index in September plunged 9.3 percent from July's level (n.s.a) (the survey is not conducted in August) and lies 15.5 percent lower than in September 1991. A rebound in consumer confidence is unlikely in the near term due to higher taxes and lower wage growth. For the year ending in October, Italian consumer prices rose 5 percent from year-earlier levels. Since June, consumer price increases have been trending down on a year/year basis. Wholesale prices were up 1.7 percent, for the year ending in August. The inflation rate should rise in the coming months as the effective 15 percent devaluation of the lira begins to affect prices. Another wage-price spiral may ensue if the unions succeed in demanding the reinstatement of the scala mobile, Italy's recently abolished system of wage indexation. Approximately 25 percent of the 93 trillion lira billion equivalent) by Parliament. (roughly $71 1993 deficit reduction package has been approved On October 22, the lower house approved an additional 50 percent of the package and sent it to the upper house where the measure is predicted to pass a confidence vote. Budget committees in both houses are currently debating the remaining 25 percent of the package. This progress in fiscal consolidation, together with general easing of exchange market tensions and faltering Italian growth, induced the Bank of Italy to lower the discount rate 100 basis points to 14 percent on October 23. Another discount rate cut is likely when Parliament approves the remaining portions of the deficit reduction package. IV-22 Latest data for the United Kingdom indicate that the economy may be contracting again. Industrial production (s.a.) percent in August after rising 1 percent in July. fell 0.3 (The July increase was entirely accounted for by a resumption in energy production after spring maintenance on North Sea oilfields was completed.) Manufacturing production (s.a.) contracted 0.3 percent in August to a level 0.5 percent below a year ago. In October, the CBI's industrial survey indicated that recovery is unlikely to be led by the corporate sector. Business confidence and investment intentions continued to recede, reversing most of the rise that occurred earlier this year. Consumer spending has picked up slightly in recent months; the volume of retail sales (s.a.) rose 1.2 percent in August and 0.2 percent in September to stand 1.5 percent above a year ago. In the third quarter, sales were 0.5 percent higher than in the previous quarter and at their highest level since the first half of 1990. However, in October consumer confidence fell again to its lowest level since 1990, pointing to weak sales in the current quarter. Unemployment (s.a.) continued to rise in September to a rate of 10.1 percent. Inflation continues to be moderate, despite the depreciation of the pound. Consumer prices (n.s.a.) rose 0.4 percent in September after rising 0.1 percent in August. The 12-month inflation rate remained at 3.6 percent, the lowest since 1986. Excluding mortgage interest rates, consumer prices were 4 percent above their level of September 1991, at the upper boundary of the government's new inflation target of 1-4 percent. Producers' output prices (n.s.a.) rose slightly in October after they stood still in September and were 3.3 percent above their year-earlier level. producers' materials and fuels The prices of (n.s.a.) rose 2.5 in October after IV-23 rising 1.1 percent in September, largely reflecting price increases of imported materials associated with sterling's devaluation. Despite continued weakness balance (s.a.) in domestic demand, the trade deteriorated substantially in the third quarter. cumulative current account deficit quarters (s.a.) The for the first three of the year was $13.5 billion, compared with a deficit of $7.3 billion in the same period of 1991. In Canada, economic indicators for the third quarter suggest a resumption of recovery after four quarters of very slow growth. Monthly GDP 0.5 at factor cost percent above (s.a.) for July-August its second-quarter average, as industrial production increased 0.4 percent, percent, and factory orders retail sales (s.a.) (s.a.) fell to (s.a.) (s.a.) rose 0.9 percent. quarter as a whole, housing starts total employment combined came in were up 1.3 In the third increased 6.7 percent and (s.a.) rose 0.1 percent. The unemployment rate 11.3 percent in October, its second consecutive monthly decline. Recent price data show continued success Canada's efforts to reduce base inflation. the CPI, excluding food and energy September. The all-items Although wholesale prices (n.s.a.), CPI was up 1.3 (n.s.a.) rose for the Bank of The 12-month change in fell to 1.6 percent in percent over this period. 0.5 percent in September, they stand only 2.1 percent above their year-earlier level. settlements increased an average of 2.4 percent Wage (a.r.) during the first eight months of the year, compared with a 3.6 percent average for all of 1991 and 5.6 percent in 1990. The current account deficit second quarter to $25.1 (s.a.a.r.) widened slightly in the billion, as a rebound in imports caused a moderate decline in Canada's merchandise trade surplus. August combined, the trade surplus (s.a.a.r.) was $6.7 For Julybillion, up IV-24 from $5.6 billion in the second quarter, reflecting continued rapid growth in exports. On Monday October 26, Canadians voting in a non-binding referendum decisively rejected an agreement on constitutional reform reached by Prime Minister Mulroney and the ten provincial premiers in August. Although the stated purpose of the proposals was to foster national unity, failure to adopt the plan is not likely to lead to a dissolution of the Canadian federation. Financial markets have reacted favorably to the apparent resolution of some of the political uncertainty associated with the referendum vote. The Former Soviet Union and Eastern Europe Inflation in Russia accelerated sharply in September. It appears that a substantial volume of new central bank credits were granted in late August and early September to both reduce the volume of inter-enterprise arrears and to support Russian exports to other countries in the ruble area. Retail prices are reported to have increased about 25 percent in September, after increasing 11 and percent in July and August, respectively. 10 Since the beginning of September the external value of the ruble has declined by almost half. The pace of output declines appears to have slowed in September. Industrial production is reported to have been 28 to 29 percent below year-earlier levels in September, compared with 27 percent in August, and 21 percent in July. In late October the Supreme Soviet (parliament) turned down President Yeltsin's request to delay a meeting of the Congress of People's Deputies scheduled for December 1, Opposition leaders have said that they plan to use the Congress, which is Russia's highest political body, to force changes in the Russian cabinet, including the ouster of acting Prime Minister Yegor Gaidar. IV-25 In Poland, the government of Prime Minister Hanna Suchocka has introduced several pieces of economic legislation that attempt to address the continuing fiscal crisis and the stalled privatization program. The fiscal deficit, which was targeted to be 5 percent of GDP in 1992, is now expected to be closer to 8 percent. poor fiscal situation, the real economy shows Despite the signs of improvement, with positive performance in industrial output and exports. The Czech and Slovak Federal Republic (CSFR) is scheduled to divide into two independent countries on January impending breakup has economic policies. 1, 1993. The raised many uncertainties about future Slovak leaders have already said that they intend to move away from the privatization measures adopted by the federal government, which to date have been successful. Economic Situation in Other Countries Mexico's tight fiscal and monetary policies are constraining real GDP growth. International reserves fell by an estimated $1.4 billion in the past six months, despite sharply higher domestic interest rates. to depreciate The authorities have taken steps to allow the peso somewhat more in 1993 than in 1992. Brazil's economic activity remains depressed, and inflation continues to be high, amid unceasing political turmoil. No progress is being made in getting the IMF stand-by arrangement back on track. industrial sales this year are the real exchange rising. In Argentina, Continuing appreciation of rate and deterioration of the trade and current accounts have prompted the government to waive all taxes on export goods and to raise the basic tax rate on imports. on the debt reduction package seems to be imminent. real GDP growth exceeds 8 percent in 1992. bolivar and a large 10 percent Final agreement In Venezuela, Overvaluation of the fiscal deficit led the central bank to allow a currency depreciation in October. Tight monetary policy IV-26 in Korea continues to reduce inflationary pressures, and the trade deficit is falling. In Taiwan, slower real GDP growth prompted the central bank to lower its discount rate. Public investment is rising strongly this year as an ambitious development program begins to be implemented. The trade surplus continues to narrow. Individual country notes. Mexico's tight fiscal and monetary policies are likely to hold 1992 real GDP growth to about the same rate (2.8 percent) as in the first half of the year. These policies are yielding a public sector fiscal surplus, excluding privatization proceeds, and slowing twelve-month inflation toward single-digit rates, a goal that the government hopes to reach next year. The CPI rose by 0.9 percent in September and by 0.7 percent in October, leaving it 14.8 percent higher than a year earlier. International reserves, including gold, on October 31 were $18.3 billion, an estimated $1.4 billion less than six months earlier. The decline reflects a smaller capital account surplus and a sharp increase in the current account deficit. In the first half of 1992, the current account deficit was $10.2 billion, twice as much as in the first half of 1991, but the capital account surplus fell to $10.9 billion from $13.6 billion. In January-August 1992, the trade deficit was $9.8 billion, up from $3.8 billion a year earlier. Imports were 27.6 percent higher, but exports were only 3.6 percent higher. Manufactured exports were 9.6 percent higher, but petroleum, agricultural, and mining products exports were lower. The growth of manufactured exports owes much to automobile and truck exports, which, through June, were 33.6 percent higher than a year earlier. Other manufactured exports were only 4.3 percent higher. On October 20, the Mexican authorities doubled the rate at which they are depreciating the lower limit of the band within which the peso/dollar exchange rate is allowed to fluctuate. This limit IV-27 is now moving by 40 centavos per dollar per day, or by 4.6 percent over a full year, up from 20 centavos. upper, more appreciated The limit, remains fixed at 3,056.2 pesos per dollar. On November the lower limit was 3.4 percent lower than the upper limit. 9, The policy change was part of an extension of the anti-inflation pact between government, business, and organized labor. to expire in January The pact was due 1993 and will now run until the end of 1993. The Mexican financial markets, where rumors of an imminent devaluation were widespread, were relieved that this possibility had receded with the policy announcement. The spot rate for the dollar strengthened from 3,143 pesos per dollar on October 19 to 3,123 pesos on November 9, when it was of the band. 1.3 percent above the lower limit The Mexican stock market index rose strongly on the The twenty-eight-day Treasury-bill rate eased after news. 870 basis points since mid-March. 18.8 percent, down from 19.7 rising At the November 4 auction, it was percent on October 14. In Brazil, economic activity remains depressed and inflation continues to be high. percent in Real GDP is projected to rise by only 0.3 1992, down from 0.9 percent in 1991. Monthly inflation in October is estimated at between 25 and 27 percent, somewhat higher than in recent months which accounts (20-24 percent). In Sao Paulo state, for roughly one-third of the country's GDP, conditions appear to be worsening. economic In metropolitan Sao Paulo, where unemployment remains at about 16 percent, sales of durable goods were 15-25 percent lower in October than a year earlier. Overall economic performance would be even worse, were it not for export growth and the good agricultural harvest so far this year. In January-September 1992, exports were 10 percent higher than in the same period of 1991, while imports were 3 percent lower. As a result, the cumulative nine-month trade surplus was $11.7 IV-28 billion, up from $9 billion in the same period of 1991. The wider trade surplus reflects the depressed internal demand and an improved competitive position as a result of a 15 percent real exchange rate depreciation between the end of 1991 and June 1992. At the end of August, international reserves were a record $22 billion, up from $8 billion at the end of 1991, mainly due to large capital inflows. Sterilization operations are aggravating the fiscal problem, because of the high cost of domestic debt. Poor economic performance reflects the loss of consumer and investor confidence generated by political turmoil in recent months. A congressional vote forced President Collor to step down in early October while the Senate considers whether to impeach him for his role in government corruption. Vice President Itamar Franco became acting president, but he and his economic team have not yet shown that they are serious about pushing fiscal and monetary reforms. Brazil has made no headway in getting its IMF stand-by program back on track. The Brady-style bank debt restructuring package is stalled until the IMF is satisfied with Brazil's fiscal performance. In Argentina, industrial sales were 20 percent higher in the first eight months of 1992 than in the same period of 1991. In October, consumer prices rose 1.3 percent and were 17.9 percent above a year earlier. In contrast, wholesale prices were only 3.8 percent above a year earlier, reflecting competitive pressure from imported goods. Because of the fixed peso/dollar exchange rate and the inflation differential, the real exchange rate has appreciated and the balance of payments has deteriorated. A trade deficit of about $1 billion is officially forecast in 1992, in contrast to trade surpluses throughout the past decade. To achieve a balanced trade account during 1993, the government is waiving all taxes on export goods (including the 18 percent VAT), and raising the basic IV-29 tax rate on imports by 7 percent. The resulting net loss of fiscal revenues will be made up by other tax and expenditure changes. In early November, final agreement on the Brady-style debt reduction package already approved by Argentina and its commercial bank advisory committee appeared to be imminent. Venezuela's real GDP was 8-3/4 percent higher in the first nine months of 1992 than in the same period of 1991, mainly because private sector output surged over 13 percent. The CPI rose by 2.3 percent in October, when it was 34 percent above a year earlier. In October, the bolivar was allowed to depreciate by nearly 10 percent. The bolivar was under pressure owing to its progressively larger overvaluation, concern over a large 1992 fiscal deficit, and political uncertainty. The central bank attempted to counter this pressure through a tight monetary policy that included stricter enforcement of bank reserve requirements. As a result, interest rates rose in October, until, on October 28, they spiked to record levels of 2,600 percent in the overnight interbank market and 51 percent for 89-day central bank bills. The central bank reacted by supplying reserves to the banking system at 60 percent, thereby limiting interbank interest rates to that level. In early November, the exchange rate moved narrowly around 77 bolivars per dollar. In Korea, tight monetary policy is continuing to reduce inflationary pressures this year. Consumer prices were 5.7 percent higher in September than a year earlier, down from 9.4 percent in the year ending September 1991. In the first ten months of 1992, the trade deficit (on a customs clearance basis) narrowed to $5.4 billion from $9.9 billion in the same period of 1991. Import growth has slowed considerably due to the slowdown in domestic demand. In Taiwan, real GDP growth year-over-year slowed to an estimated 5.5 percent in the third quarter of 1992. Net exports IV-30 fell, due in part to weak external demand. investment rose. However, domestic Public investment in 1992 is likely to be about 18 percent higher than in 1991 as an ambitious six-year infrastructure development program has begun to be implemented. Partly in response to the slowing economy, the central bank cut its discount rate by 0.5 percent to 5.625 percent in early October, more than reversing an increase of 0.25 percent adopted in May to fight inflation. In October, the twelve-month increase in the CPI was 5.1 percent. In the first ten months of 1992, exports were 7.4 percent higher than in the same period of 1991, while imports were 13.4 percent higher. The trade surplus for the ten-month period fell to $8.4 billion from $10.8 billion in January-October 1991, despite a rapidly growing trade surplus with China, mainly through Hong Kong.
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