Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 7, 1984 : Greenbook Part 2

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Confidential (FR) Class III FOMC

October 31, 1984

RECENT DEVELOPMENTS

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

TABLE OF CONTENTS

Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

Industrial production ..........................................
Employment and unemployment ..
............... ..................
Personal income and consumption...............................
Business fixed investment......................................
Business inventories.....................................
...
Housing markets ..................................... .........
Federal government .
.................................. ... ......
.........................
State and local government .............
.. ...
Exports and imports .................. ............. .....
....
..... .................... ..
Prices ............. . ..........
Wages and labor costs...........................................

1
3
5
8
10
12
14
16
16
17
18

Tables
Industrial production..................... .........
...........
Capacity utilization in industry...............................
.................
.....
.................
Changes in employment
Selected unemployment rates ..................................
Personal income and expenditures................................
Retail sales................ ..................................
Auto sales, production, and inventories........................
Business capital spending indicators...........................
Changes in manufacturing and trade inventories..................
Inventories relative to sales.................................
Private housing activity ......................................
Federal government receipts and outlays.........................
Recent changes in producer prices..............................
......
Recent changes in consumer prices.....................
Selected measures of labor costs
in the nonfarm business sector..............................

2
2
4
4
6
7
7
9
11
11
13
15
19
19
21

Chart
Private housing starts........................

....

......

III

DOMESTIC FINANCIAL DEVELOPMENTS

Monetary aggregates and bank credit.............................

Business finance.............................................

Government finance
Federal

sector................................

...

......

State and local sector.....................................
Mortgage markets......................................

11
13

Consumer credit......... ....................................

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 securities by state and local governments....
Mortgage activity at federally insured savings and

loan associations..........

..........

.......

..... .

pass-through securities................................... .
Consumer installment credit...................................

14
16

New issues of federally guaranteed mortgage

Chart
Consumer installment credit cumulative growth from
cyclical troughs............................................

INTERNATIONAL DEVELOPMENTS

Foreign exchange markets........................................ .
U.S. international financial transactions........................
U.S. merchandise trade..........................................
Foreign economic developments....................................

1
4
9
11

Debt situation in selected developing countries.................

Tables
Summary of U.S. international transactions......................
International banking data..... ................................

5
8

U.S. merchandise trade...........................................
Oil imports .......... ................ .............. ... . ......

9
10

Major industrial countries
Real GNP and IP.......

...........

............

Consumer and wholesale prices.................................
Trade and current account balances............................

13
14

Charts
Weighted-average exchange value of the U.S. dollar................

3-month interest rates........................................

DOMESTIC NONFINANCIAL DEVELOPMENTS

Final demand appears to have picked up again in September, as there
were healthy gains in consumer spending, housing starts, and business
equipment outlays.

At the same time, much of the recent growth in spending

has been met by reduced inventory investment and rising imports, thereby
damping the stimulus to domestic production.

The rise in payroll employment

in September was much smaller than the average gains registered earlier
in the year, and industrial production declined in September for the first
time since the recovery began.

On balance, wage and price inflation has

maintained the relatively moderate pace observed earlier in the year.
Industrial Production
Industrial production dropped 0.6 percent in September, after edging
up just 0.1 percent in August.

About half of the September decrease was

due to reduced motor vehicle production, which had been affected by the
one-week strike at General Motors as well as by continuing production
problems related to the availability of quality parts.

Declines also

occurred in the output of other consumer goods, metals, construction supplies, and materials for a second consecutive month.

Business equipment

production continued to expand in September, although at a slower rate than
during the preceding five months.
Limited information suggests that output in several sectors that had
depressed industrial production in September, most importantly metals and
motor vehicles, will be unchanged or slightly higher in October.

The

significant curtailment of steel output, under way since June, did not
continue into late September and early October.
II-1

In the auto sector, current

II-2

INDUSTRIAL PRODUCTION
(Percentage change from preceding period;
based on seasonally adjusted data)

1984
Q2

1984
1984
Q3

July

Aug.

Sept.

---Monthly rate-Total

11.5

8.6

6.5

Final products
Consumer goods
Durable
Nondurable
Business equipment
Defense and space equipment

11.9
7.4
16.0
4.1
19.1
17.4

8.9
6.0
-1.4
9.1
13.4
12.8

9.6
2.2
-1.5
3.8
25.0
10.7

Construction supplies

14.8

7.6

2.9

Materials
Durable goods
Nondurable goods
Energy materials

12.3
20.6
.5
10.9

8.6
11.7
6.3
3.7

2.6
4.3
.2
2.2

-.6

-. 4

-1.0
-2.2
-. 6

.3
1.0
.3

-. 1

-. 4

.2
.4

-1.1
-1.8

-.1
-. 2

-. 3
-.5

CAPACITY UTILIZATION IN INDUSTRY
(Percent of capacity, seasonally adjusted)
1978-80
High

1982
Low

1967-82
Avg.

July

1984
Aug.

Sept.

87.3

69.6

82.4

82.7

82.6

81.9

Manufacturing
Durable
Nondurable

87.5
89.4
87.2

68.8
64.8
73.8

81.8
80.5
83.9

82.9
82.6
83.1

82.8
82.9
82.8

82.1
82.0
82.3

Mining
Utilities1

90.4
86.8

69.6
79.0

36.5
88.6

78.1
84.1

77.5
84.1

77.4
83.6

Industrial materials

88.9

66.6

83.3

83.1

82.0

Metal materials
Paper materials
Chemical materials

95.4
97.9
91.3

46.2
86.3
64.0

82.2
93.4
85.1

70.8
101.1
78.4

70.4
98.7
78.4

67.6

___

Total industry

n.a.
n.a.

1. Tne 1978-80 high is below the 1967-; 82 average because of the unusually
slow growth in demand for electricity.

II-3

estimates indicate production was 7.0 million units at an annual rate in
October, marginally higher than the 6.9 million unit rate posted in September.
With the ending of the strike at GM factories in Canada, auto assemblies
currently are scheduled to rise to about an 8 million unit annual rate in
November and December.
Employment and Unemployment
The growth in labor demand slowed considerably in the third quarter,
with monthly advances in nonfarm payroll employment averaging about
half the pace observed in the first half of this year.

In line with the

smaller gains in employment, the civilian unemployment rate in the third
quarter remained close to its second-quarter average of 7.5 percent.
However, initial claims for unemployment insurance benefits edged up during
the first two weeks of October, an indication that layoffs may have
picked up in some sectors.
Employment, as measured by the payroll survey, rose just 65,000 on a
strike-adjusted basis in September, continuing the slowdown that began in
July.

In manufacturing, employment fell 125,000, with declines particularly

notable in the metals, machinery, and apparel industries--sectors in which
new orders had weakened during the summer months.

Outside of manufacturing,

employment growth in the services industry, which had been quite strong
earlier in the recovery, slowed in September after accounting for the
return to work of 50,000 striking hospital workers; in contrast, strong
employment gains were reported at trade establishments and by local governments.
In the household survey, employment rose 270,000 in September after
declining in the two preceding months.

As in many recent months, the household

II-4

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)

1983

1984
July

Aug.

Sept.

-Average monthly changesNonfarm payroll employment 2
Strike adjusted
Manufacturing
Durable
Nondurable
Construction
Trade
Finance and services
Total government
Private nonfarm production
workers
Manufacturing production
workers
Total employment 3
Nonagricultural
1.
of
2.
3.

344
339

359
366

179
171

215
204

182
244

139
66

92
70
22
22
69
96
3

108
82
25
22
86
105
1

54
46
8
64
87
122
7

-9
9
-19
9
70
51
46

67
50
17
13
64
20
34

29
52
-23
-12
45
51
38

-124
-74
-50
27
100
83
67

249

259

307

131

111

-12

-106

330
336

400
425

536
495

-170
-140

-353
-294

-426
-306

270
179

282
282

Average change from final month of preceding period to final month
period indicated.
Survey of establishments. Strike-adjusted data noted.
Survey of households.

SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)
1984
July

9.6

7.9

7.5

Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

22.4
14.4
7.8
7.2

19.6
11.9
6.1
6.1

18.7
11.5
5.7
5.9

White
Black

8.4
19.5

6.8
16.5

9.5

1983
Civilian, 16 years and older

Fulltime workers
Memo:
Total national1

Aug.

Sept.

7.5

7.4

18.7
11.5
5.6
6.1

18.3
11.3
5.7
6.1

18.4
11.9
5.5
6.3

19.3
11.4
5.5
5.9

6.4
15.9

6.4
16.0

6.4
16.9

6.4
16.0

6.4
15.1

7.6

7.2

7.1

7.8

7.4

7.3

1. Includes resident Armed Forces as employed.

II-5

survey reported that large changes in employment and the labor force occurred
again among youth, but such changes may be reflecting seasonal adjustment problems.

Jobless rates for most demographic groups have changed very

little, on balance, since May.
Personal Income and Consumption
Personal income rose at a $26.1 billion annual rate in September, a
pickup from the two preceding months.

Higher interest and dividend receipts

contributed substantially to income growth last month, adding almost
$8 billion to the September advance.

Wage and salary disbursements, boosted

by continued gains outside of the manufacturing sector, rose $11.7 billion.
Manufacturing payrolls declined in September, owing to reduced factory
hiring as well as to the six-day strike at General Motors.

For the third

quarter as a whole, growth of real disposable income slowed to a 3.5 percent
annual rate, compared with a 7-1/2 percent pace in the first half of the year.
Real consumer outlays rebounded in September, after two consecutive
monthly declines.

Expenditures at retail outlets retraced part of their

earlier declines, while spending on consumer services continued to trend
upward.

The broadly-based increases in spending at the retail level included

sharp gains among such largely discretionary items as apparel and general
merchandise.

Sales at gasoline stations rose in September, in part reflecting

the turnaround in gasoline prices.
Sales of domestically-produced new automobiles have been influenced
recently by a variety of supply factors.

Problems with parts availability

and auto strikes at General Motors plants, both in the U.S. and Canada,
have limited production and exacerbated the existing tight inventory
situation.

As a result, domestic auto sales during the past several weeks

II-6

PERSONAL INCOME AND EXPENDITURES
(Based on seasonally adjusted data)

1984
Q2

-Percent change from
previous quarter1Total personal income
Nominal
Real 2

12.4
8.3

9.1
6.7

8.7
4.1

Disposable personal income
Nominal
Real 2

12.7
8.6

8.6
6.3

8.1
3.5

Personal consumption expenditures
Nominal
Real 2

8.6
4.6

10.2
7.9

46.3

56.2
9.8
1.5
3.6

26.6
-3.4
-2.0
-1.5

1984
Aug.

Sept.

-Percent change from
previous month-

4.6
.2

--Changes in billions
of dollars from
previous quarterTotal expenditures

July

.0
-.6

1.4
1.1e

--Changes in billions
of dollars from
previous month-.8

-. 9

33.5

-6.7

-6.6
-2.5
.6

4.5
1.0
1.6

Durables
New autos
Furniture & appliances

11.1
4.4
3.2

Nondurables
Food
Apparel

18.3
8.8
3.6

17.0
8.2
6.1

5.0
7.3
-3.1

Services

16.9

29.3

25.0

8.0

8.9

10.6

84.0

64.1

63.1

20.3

18.3

26.1

73.6

52.1

50.5

16.7

15.9

21.8

6.1

5.7

6.3

6.1

6.7

Total personal income
Disposable personal
income
Addendum:
Personal saving rate
(percent)

-3.4
-4.9
-. 5

9.5
-7.5

-3.1
-6.3
-.

18.4

8.8
1

4.6

6.2

1. Changes from previous quarter are at compound rates; monthly changes
are not compound.
2. Personal income is deflated by the implicit deflator for personal
consumption expenditures.
e. Staff estimate.

II-7
RETAIL SALES
(Percent change from previous period;
based on seasonally adjusted data)
1984

1984

July

Aug.

Sept.

Total sales

3.5

2.9

-.7

-1.7

-.6

1.6

(Real)1

2.7

3.0

n.a.

-2.0

-.7

n.a.

Total, less automotive,
gasoline and
nonconsumer stores

3.0

2.5

-1.0

1.7

GAF 2

3.2

3.9

-1.2

-3.8

2.1

Durable
Automotive group
Furniture & appliances

5.1
5.7
3.5

4.3
4.6
3.8

-2.7
-4.5
-1.0

-3.2
-4.2
-2.6

-2.1
-4.3
.3

.6
1.3
-.4

Nondurable
Apparel
Food
General merchandise 3
Gasoline stations

2.7
2.4
2.2
3.4
.3

2.1
6.3
2.3
3.0
1.4

.4
-2.6
1.3
-.7
-2.3

-.9
-4.4
.8
-4.0
-2.4

.2
-1.9
-1.1
1.1
1.2

2.1
5.2
2.6
1.9
2.8

1. BCD series 59. Data are available approximately three weeks following
the retail sales release.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores.
AUTO SALES, PRODUCTION & INVENTORIES

(Millions of units; seasonally adjusted annual rates)
1984
Q2
10.6

Total sales1

Q3
10.3

Aug.

1984
Sept.

9.9

10.2

Oct.

Imports
7.6
3.4
4.1

Domestic
Small
Intermediate & standard
Domestic production 1
Small
Intermediate & standard
Domestic inventories
Days' supply

7.5
3.6
3.9
1.43

1.32

7.7
3.7
4.0
.1
1.39

7.32

6.9
3.5
3.5
.6
1.32
52

1. Components may not add to totals due to rounding.
2. First 20 days.
3. Quarterly days' supply are based on end of quarter stocks and
average sales for the quarter.

II-8

have sagged to about a 7-1/2 million unit annual rate, considerably below
the 8.2 million unit pace seen in the first half of 1984.

Sales of foreign

cars held steady at a 2.4 million unit annual selling pace in the third
quarter.
On the whole, the consumer surveys of the Michigan Survey Research
Center and the Conference Board continued to point to a high level of
consumer optimism.

The Michigan index of consumer sentiment advanced in

September to just below the recent peak of March 1984.

The Conference

Board measure, while lower than in the first half of 1984, remained at a
relatively high level through October.
Business Fixed Investment
Real business fixed investment expanded another 8 percent at an
annual rate in the third quarter--a rapid pace, but well below the extraordinary rate of expansion during the preceding year.
third-quarter gain was in equipment spending.

Virtually all of the

In particular, outlays for

machinery, including high-technology items as well as heavy industrial
machinery, continued to expand rapidly.

Shipments of nondefense capital

goods by domestic producers, which were relatively weak in July and August,
rebounded sharply in September.

In addition, there was a substantial rise

in imports of capital goods.
In the nonresidential construction sector, nominal expenditures fell
in both June and July and showed only a small gain in August.

Outlays for

commercial and industrial construction were little changed, on balance, in
July and August relative to the second quarter.

In contrast, petroleum

drilling and mining showed a small increase in the third quarter, after
declining sharply over the first half of the year.

II-9
BUSINESS CAPITAL SPENDING INDICATORS
(Percentage change from preceding comparable period;
based on seasonally adjusted data)

1984
Q2

July

1984
Aug.

ept.

5.6
4.9
4.1

2.3
-2.0
1.4

-3.8
-1.4
1.3

.7
-4.2
.3

5.4
2.3
-. 3

293

265

226

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

Producers' durable equipment
Nondefense capital goods
Shipments
Orders
Unfilled orders
Sales of heavy-weight trucks
(thousands of units, A.R.)
Nonresidential structures
Nonresidential construction
Commercial building
Industrial building
Contracts for nonresidential
building
Commercial contracts
Industrial contracts

n.a.

20.5

8.7
13.7
4.0

n.a.
n.a.

-1.4
-.9
-3.0

.3
1.8
4.7

-9.8
-2.5
.8

19.7
13.3
14.1

2.9
-.5
15.1

12.9
16.2
4.2

5.8
1.3
26.2

8.0
13.7

-17.8
-14.1
-19.8

II-10

Most forward-looking indicators point to continued growth in investment
spending, although at much slower rates than observed earlier in the recovery.
New orders for nondefense capital goods weakened in the summer months but
rose about 2-1/2 percent in September, and the backlog of unfilled orders
showed a small gain for the third quarter as a whole.

Growth in the value

of new contracts for nonresidential construction also slowed in the third
quarter from the rapid pace posted over the previous year.

The McGraw-Hill

survey of plant and equipment spending plans for 1985 (confidential until
November 9) reported that businesses expect to increase capital expenditures
by nearly 10 percent in 1985, following the 14 percent gain projected for
this year by the August Commerce Department survey.
Business Inventories
Business inventories rose rapidly in July and August,
average annual rate of $23-3/4 billion in real terms.

advancing at an

The pace was somewhat

faster than the second-quarter average of $19-3/4 billion, mainly because
of a more rapid rise in wholesale inventories.

With sales slackening in

July and August, the overall inventory-to-sales ratio based on constant-dollar
values edged up to 1.53, slightly higher than the average level during the
first half of this year.
Manufacturers' inventories rose at an annual rate of $15-3/4 billion
in August, roughly the same as the average pace since February.

Although

factory stocks are still low relative to sales by historical standards,
recent production and employment data suggest that a number of industries,
most notably metals, apparel, and machinery, have adjusted their production,
apparently in an attempt to slow further inventory accumulation.

Indeed,

II-11

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

1984
Q2

73.7
27.8
13.6
32.3
10.5
21.8

56.3
40.4
10.1
5.8
-4.3
10.1

n.a.
30.8
n.a.
n.a.
n.a.
n.a.

24.4
9.1
3.9
11.4
3.8
7.7

19.7
13.8
4.1
1.7
-3.0
4.7

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

1984
Aug.P

Sept.P

54.4
30.5
26.8
-2.9
-9.3
6.5

55.1
42.1
.4
12.6
5.5
7.2

n.a.
19.9
n.a.
n.a.
n.a.
n.a.

25.4
12.0
11.2
2.2
-2.1
4.3

22.2
15.8
5.1
1.2
-.1
1.3

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

Julyr

1984
Aug.P

Julyr

Book value basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. auto
Constant dollar basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. auto

r-revised estimates.
p-preliminary estimates.

INVENTORIES RELATIVE TO SALES1
Cyclical
Reference Points 2
1981 Low 1982 High

1984
Q1

Sept.P

Book value basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. auto

1.39
1.60
1.06
1.36
1.59
1.29

1.53
1.77
1.28
1.44
1.88
1.36

1.33
1.44
1.11
1.37
1.49
1.34

1.33
1.47
1.09
1.34
1.37
1.33

1.34
1.47
1.11
1.35
1.37
1.35

1.35
1.48
1.13
1.37
1.45
1.35

n.a.
1.50
n.a.
n.a.
n.a.
n.a.

1.62
1.91
1.34
1.34
1.49
1.28

1.75
2.11
1.52
1.44
1.81
1.37

1.52
1.73
1.33
1.34
1.38
1.33

1.51
1.76
1.30
1.31
1.27
1.33

1.52
1.76
1.32
1.33
1.28
1.33

1.53
1.76
1.35
1.34
1.30
1.35

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

Constant dollar basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive
Ex. auto

1. Ratio of end-of-period inventories to average monthly sales for the period.
2. Highs and lows are specific to each series and are not necessarily coincident.
r--revised estimates.
p-preliminary estimates.

II-12

the book value of manufacturers' inventories rose at only a $19 billion
annual rate in September, about half the pace recorded in August.

By and

large, recent inventory problems have been in industries that are particularly
vulnerable to import competition and that have experienced some softening
in orders in recent months; both are factors that may have contributed to a
lowering of sales expectations for the near term.
In the trade sector, wholesale inventories grew rapidly over the
summer; the increase was concentrated in stocks of motor vehicles, electrical
goods, and hardware, and may consist of a sizable portion of imports.
Retail inventories rose, on balance, only slightly in July and August.
Stocks at general merchandise and apparel stores were quite high relative
to sales through August, but strong gains in sales in September may have
led to some improvement in their inventory positions.

Auto dealers' stocks

continued to be drawn down in September, owing to the disruptions to auto
production.
Housing Markets
Housing activity rebounded somewhat last month, after weakening
throughout the summer.

Total housing starts in September rose 9 percent,

after an August decline to the lowest rate since late 1982.

The September

advance was broadly based; single-family and multifamily starts increased
by similar margins, and starts rose in all four regions of the country.
In addition, sales of new homes rose sharply in September, more than
reversing the downtrend of the previous two months.
In contrast to the upturn in housing starts during September, newly
issued residential building permits fell for the third consecutive month,

II-13

PRIVATE HOUSING ACTIVITY

(Seasonally adjusted annual rates, millions of units)

All units
Permits
Starts

Single-family units
Permits
Starts
Sales
New homes
Existing homes
Multifamily units
Permits
Starts

1983
Annual

July

Aug.

Sept.

1.61
1.70

1.81
1.97

1.76
1.90

1.50
1.66

1.57
1.75

1.51
1.54

1.42
1.68

.90
1.07

1.02
1.28

.93
1.14

.82
.98

.82
.99

.80
.93

.83
1.01

.62
2.72

.69
2.94

.63
3.04

.62
2.71

.61
2.77

.56
2.70

.68
2.67

.70
.64

.79
.69

.83
.76

.68
.68

.74
.76

.70
.61

.59
.67

.30

.29

.30

Mobile home shipments

1984

n.a.

1. Preliminary estimates.
n.a.--not available.
PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)

Millions
of units

2.0

1.6

1.2

.4
I1 I

II-14

as a sharp drop in multifamily permit issuance more than offset a moderate
rise in single-family permits.

However, the steep decline in the multifamily

component of permits last month was due in part to a distortion in seasonal
factors resulting from the phasing out of federal subsidies for construction
of low-income housing under the Section 8 program.

In previous years, this

program had triggered a runup in permits at the end of the fiscal year.
Federal Government
The federal government recorded a deficit of $175 billion in fiscal
year 1984, $20 billion less than in the preceding year.

Receipts rose

$66 billion in FY1984, owing to the sharp rise in income over the period,
an end to the phase-in of income tax cuts that began in 1981, and the
increase in social security tax rates last January.

In addition to boosting

receipts, the rise in economic activity cut the growth of outlays, particularly
for unemployment insurance.

A sharp reduction in agricultural support

payments also helped limit the increase in outlays.

However, defense

expenditures and interest payments were up by substantial amounts.
During the final days of the 98th Congress, three important fiscal
1985 budget measures were enacted.

First, agreement was reached on a

budget resolution that projects a deficit of $181

billion for the current

fiscal year and somewhat larger deficits in FY1986 and FY1987.

Second, a

continuing resolution was enacted; it provides interim FY1985 funding for
agencies operating without appropriations, as only four of the thirteen
required appropriations bills had been passed.

The interim funding levels

are roughly consistent with the budget resolution.
ceiling was raised to $1.823 trillion.

Finally, the debt

Based on the figures in the budget

II-15

FEDERAL GOVERNMENT RECEIPTS AND OUTLAYS
(Unified budget, billions of dollars)
Fiscal year
1983
1984
Receipts
Individual income
Corporate income
Social insurance
Other receipts1
Outlays
National defense
Human resources
Unemployment insurance
Net interest
Other outlays 2
Deficit

FY1984 less
FY1983

600.6

666.5

65.9

288.9
37.0
209.0
65.6

296.0
56.9
241.9
71.7

7.1
19.9
32.9
6.1

795.8

841.8

46.0

210.5
411.8
32.7
86.9
86.6

227.4
415.1
26.1
111.0
88.3

16.9
3.3
-6.6
24.1
1.7

195.2

175.3

-19.9

1. Includes excise taxes, custom duties, estate and gift taxes, FR earnings
and miscellaneous receipts.
2. Includes spending on energy, agriculture, transportation, and community
and regional development.

II-16

resolution, the higher debt limit is expected to be sufficient for financing
needs through the end of fiscal 1985.
State and Local Government
Activity in the state and local sector continued to expand in the
third quarter as real outlays for goods and services increased substantially
for the third consecutive quarter.

As was the case earlier in the year,

a large advance was reported for real construction expenditures, most
likely reflecting ongoing public works programs, particularly for highways
and roads.

Employment in the state and local sector expanded rapidly in

September for a third consecutive month.
Over the past year and a half, the fiscal position of the state and
local sector, as a whole, has strengthened remarkably, and large surpluses
in the operating and capital accounts have been reported for the first time
since early 1981.

However, with economic activity slowing, surpluses

probably dropped in the third quarter.

Furthermore, referenda will

appear on many state ballots in November that would either reduce state
taxes or limit governmental spending.

In contrast, several states

operating with relatively weak fiscal positions have taken action to raise
taxes.

In fiscal year 1984, tax reductions were more numerous than tax

increases, but quantitatively the effect of increases outweighed the effect
of reductions by an estimated $1 billion.
Exports and Imports
The merchandise trade deficit widened in September from the August
level, but was less than the extraordinary July deficit; imports increased
in September while exports were little changed.

For the third quarter as a

II-17

whole, the trade deficit was more than $30 billion (annual rate) larger
than in either the first or second quarter.
The strong increase in imports in the third quarter occurred among a
wide range of manufactured goods.

The increase reflected, in part, the

effects of the strong exchange value of the dollar on the relative prices
of imported goods and the continued growth of income in the United States.
The value of exports in the third quarter was slightly higher than in the
second quarter.

Some of the increase in exports was in intermediate products

such as electronic parts and equipment to the Far East and automotive parts
to Canada, a significant portion of which return to the United States after
further processing.
As a result of the rising value of the dollar and moderate foreign
inflation, prices of non-oil imports in July and August were little changed
from their second-quarter levels.

The price of imported petroleum drifted

down during this period and in September.

(Further discussion of international

economic developments is included in Part IV.)
Prices
Consumer prices for goods and services continue to increase at a 4
to 5 percent annual pace; the consumer price index advanced 0.4 percent
in September.

The producer price index for finished goods fell 0.2 percent

in September and has remained essentially constant over the past two quarters.
The decline in producer prices in September was the result of an
0.8 percent drop in energy prices, which are lagged one month in the PPI,
and a 0.4 percent decrease in finished foods prices.

Excluding food and

energy, producer prices for both capital equipment and finished consumer
goods were unchanged last month.

Price stability also was evident, on

II-18

balance, at the intermediate stage of processing; the prices for intermediate
materials excluding food and energy were unchanged in September, bringing
the increase in the third quarter to just 0.5 percent at an annual rate.
Consumer food prices declined 0.1 percent in September, after a 0.6
percent increase in August.

Prices for fresh vegetables reversed some of

their August climb, while the prices of fresh fruit rose sharply last month.
Prices for beef and pork fell in September, and recent developments in
commodity markets suggest that meat prices may continue to fall in coming
months.
Retail energy prices advanced 0.6 percent in September, the largest
monthly increase since April.

A 1.1 percent jump in gasoline prices, which

only partially retraced the summer declines, was primarily responsible for the
increase.

Nevertheless, spot prices for both crude oil and refined petroleum

products have dropped recently, suggesting the September spurt in gasoline
prices could be temporary.

Electricity and natural gas prices rose slowly

last month, after large increases in August.
Excluding food and energy, the consumer price index rose 0.4 percent
in September, after a 0.5 percent increase the preceding month.

Over the

first nine months of 1984, this measure of inflation has been running at
about a 5 percent annual rate, the same pace as observed last year.

Prices

for services increased 0.4 percent in September, while the prices of consumer
commodities advanced 0.5 percent.
Wages and Labor Costs
Wage inflation remained relatively moderate through the third quarter.
The comprehensive employment cost index for wage and salary rates rose at a
3-1/4 percent annual rate during the July to September period.

Over the

II-19
RECENT CHANGES IN PRODUCER PRICES
(Percentage change; based on seasonally adjusted data) 1
Relative
Importance
Dec. 1983

1982

1983

1984
Q2

-Annual
Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment

100.0
24.0
12.0
41.9
22.2

3.7
2.1
-. 1
5.3
3.9

.6
2.3
-9.2
1.9
1.9

5.7
16.9
-8.1
4.5
3.8

Intermediate materials 2
Exc. energy

94.8
79.5

.3
.6

1.4
3.0

2.9
3.8

Crude food materials
Crude energy
Other crude materials

52.8
31.3
15.9

1.5
2.6
-7.6

8.0
-4.6
15.5

12.5
-1.6
-9.7

rate-

1984
Aug. Sept.
-Monthly

rate-

.0
.0
-8.5
3.3
9.6 -18.3
1.3
2.5
2.8
2.5

-. 1
-. 1
-2.5
.4
.3

-.2
-.4
-.8
.0
.0

-1.1
.5

-. 1
.1

.0
.0

-21.3 -5.4
4.2
.8
30.6 -13.3

-1.8
.7
-3.1

.0
-.8
1.2

3.4
1.9

1. Changes are from final month of preceding period to final month of period
indicated.
2. Excludes materials for food manufacturing and animal feeds.

(Percentage

RECENT CHANGES IN CONSUMER PRICES
change; based on seasonally adjusted data)1
Relative
Importance
Dec. 1983

1982

1983

1984
Q3

-Annual rateAll items 2
Food
Energy
All items less food and
energy 3
Commodities3
Services 3

Memorandum:
CPI-W 4

Aug.

Sept.

-Monthly rate-

100.0
18.7
11.9

3.9
3.1
1.3

3.8
2.6
-.5

5.0
9.0
-1.4

3.3
-.7
.8

4.5
3.4
1.7

.5
.6
.1

69.4
26.5
42.9

6.0
5.0
6.9

4.9
5.0
4.8

5.1
3.4
5.9

4.7
3.7
5.3

5.4
4.0
6.2

.5
.4
.5

100.0

3.9

3.3

2.3

2.7

7.5

1. Changes are from final month of preceding period to final month of period
indicated.
2. Official index for all urban consumers, based on a rental equivalence measure
for owner-occupied housing after December 1982.
3. Data not strictly comparable. Before 1983, they are based on unofficial series
that exclude the major components of homeownership; beginning in 1983, data
include a rental equivalence measure of homeowners costs.
4. Index for urban wage earners and clerical workers.

II-20

first three quarters of 1984, this wage measure has been running at a bit
less than a 4 percent annual rate, about 1 percentage point less than
the figure recorded in 1983.

Much of the slowing this year has come from

smaller wage adjustments for white-collar workers, who enjoyed fairly
sizable real wage gains, on balance, during the previous two years.
Union settlements have generally been quite temperate this
year.

First-year wage adjustments under major collective bargaining

agreements that were signed during the first nine months of 1984 averaged
2.5 percent exclusive of COLAs; this is nearly identical to the record low
posted last year for this series, which dates back to 1968.1

Pay cuts and

wage freezes in new contracts have been less prevalent this year than
during 1982 and 1983, but at the same time first-year guaranteed wage
increases in excess of 8 percent have virtually disappeared.

Wage adjust-

ments for all union workers have averaged a bit less than those for nonunion
workers for almost two years now, in marked contrast with the 1970s and
early 1980s when union-nonunion wage differentials widened steadily.
For the private nonfarm sector as a whole, hourly compensation, which
includes fringe benefits and employer payroll taxes in addition to wages,
increased at a 3-3/4 percent annual rate in the third quarter.

At the same

time, productivity in the nonfarm business sector--which had shown strong
cyclical gains earlier in the recovery--was unchanged last quarter.
Productivity typically levels out or declines when output growth slows

1. The latest data do not include the recently ratified contracts at
General Motors and Ford that call for an initial wage hike averaging 2-1/4
percent plus COLAs and profit-sharing.

II-21

SELECTED MEASURES OF LABOR COSTS IN THE NONFARM BUSINESS SECTOR
(Percentage change at annual rates; based on seasonally adjusted data)

1981

1982

1983

1984
Q2

Hourly earnings index, wages of production workers1

Total private nonfarm
Manufacturing
Contract construction
Transportation and
public utilities
Trade
Services

1983-Q4 to
198 4 -Q3

8.3

6.1

3.9

3.5

3.2

2.8

3.1

8.8
8.3

6.0
5.4

2.7
1.5

3.8
2.3

3.0
1.9

3.3
-1.0

3.4
1.0

8.5
6.9
9.1

6.1
5.4
7.0

4.3
4.7
4.9

3.7

3.1

2.6

2.7

2.5

1.8

3.3

4.9

4.2

3.1
2.3
4.1

Employment cost index, wages and salaries of all persons 2
Total
By occupation:
White collar
Blue ollar
Service workers
By union status
Union
Nonunion

1983-Q4 to
1984-Q3

8.8

6.3

5.0

4.2

4.1

3.2

3.8

9.1

6.5

6.0

8.6

5.6

3.8

8.3

8.5

4.6

3.1
4.9
5.2

6.4
2.5
1.8

2.8
1.8
8.2

4.1
3.1
5.0

9.6
8.5

6.5
6.1

4.6
5.2

6.1
3.2

3.2
4.8

1.1
3.9

3.4
3.9

Major collective bargaining agreements 3

3.8
6.8

First-year wage adjustments
Total effective wage change

First nine
months
2.6
4.0

S-

8.8
.5
8.2

7.2
1.4
5.8

2.5
4.0
1983-Q4 to
1984-Q3

Labor costs and productivity, all persons

Compensation per hour
Output per hour
Unit labor costs

1984
to
date

3.9
3.9
.0

6.1
2.9
3.1

3.7
5.5
-1.7

3.7
0.0
3.7

4.5
2.8
1.7

1. Changes are from final quarter of preceding period to final quarter of period
indicated. Quarterly changes at compound rates.
2. Seasonally adjusted by the Board staff.
3. Agreements covering 1,000 or more workers; not seasonally adjusted.

II-22

sharply, as it did last quarter, and the latest data still appear consistent
with a trend growth rate in output per hour of 1 to 1-1/2 percent annually.
With productivity unchanged in the third quarter, unit labor costs advanced
at a 3-3/4 percent annual rate, after rising at only a 3/4 percent annual
pace in the first half of 1984.

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)
1983
Cyclical
low
_-Short-term

-..
rates

Federal funds 2

1984
Highs
-

FOMC
Aug. 21

1984
FOMC
Oct. 2

Oct. 30

---

Change fro
1984
FOMC
Highs Oct. 2

8.42

11.63

10.60

9.84

-1.79

-. 76

7.55
7.62
7.73

10.67
10.77
11.13

10.42
10.59
10.68

10.23
10.36
10.39

9.19
9.38
9.49

-1.48
-1.39
-1.64

-1.04
-.98
-.90

8.00
7.97

11.42
11.35

11.30
11.24

10.77
10.73

9.56
9.63

-1.86
-1.72

-1.21
-1.10

8.08
8.12
8.20

11.52
11.79
12.30

11.42
11.56
11.76

10.86
11.01
11.25

9.64
9.80
10.09

-1.88
-1.99
-2.21

-1.22
-1.21
-1.16

8.68
8.71

11.89
12.20

11.66
11.81

11.09
11.41

9.99
10.29

-1.90
-1.91

-1.10
-1.12

10.50

13.00

12.75

12.00

-1.00

8.89
10.86

11.96
13.20

10.59
11.56

10.25
11.43

9.24
10.69

-2.72
-2.51

U.S. Treasury (constant maturity)
9.33
3-year
10.12
10-year
10.27
30-year

13.49
13.99
13.94

12.44
12.62
12.35

12.29
12.54
12.35

11.37
11.75
11.61

-2.12
-2.24
-2.33

Municipal revenue
(Bond Buyer index)

9.21

11.44

10.475

10.655

10.545

-. 90

-. 11

Corporate--A utility
Recently offered

11.64

15.30

14.10e

13.90e

13.12e

-2.18

-.78

12.55
10.49
1982

14.68
13.70

14.396
13.256

1983

14.266
12.906
1984
FOMC

Lows

Highs

Treasury bills
3-month
6-month

1-year
Commercial paper
1-month
3-month
Large negotiable CDs 3
1-month

3-month
6-month
Eurodollar deposits 4
1-month
3-month
Bank prime rate
Treasury bill futures
Dec. 1984 contract
Dec. 1985 contract

-.75
-1.01

Intermediate- and long-term rates

Home mortgage races
S&L fixed-rate
FNMA ARM. 1-yr.

FOMC

Aug. 21

Oct. 2

-.92
-.79
-.74

14.056
-. 63
-. 21
12.206
-. 70
-1.50
Percent change from:
FOMC
FOMC

Oct. 30

Aug. 21

Oct. 2

Stock prices
Dow-Jones Industrial
776.92 1287.20
1239.73 1191.36
1217.31
-1.8
2.2
96.11
-.2
1.8
58.80
99.63
96.30
94.38
NYSE Composite
-1.7
209.05
-.3
209.78
212.77
118.65
249.03
AMEX Composite
.5
247.45
-2.3
253.33
246.10
159.14
328.91
NASDAQ (OTC)
4. Averages for statement week closest
1. One-day quotes except as noted.
to date shown.
2. Averages for two-week reserve maintenance period
5. One-day quotes for preceding Thur!
closest to date shown. Last observation is for
6. One-day quotes for preceding Frida,
maintenance period ended October 24.
e--estimated.
3. Secondary market.

DOMESTIC FINANCIAL DEVELOPMENTS

Interest rates have declined substantially since the October FOMC
meeting, extending the downtrend that began this summer.

Most market rates

are now 1-1/2 to 2-1/4 percentage points below their highs for the year.
Continuing evidence of slower economic growth and subdued inflationary
pressure helped to sustain the rally in October.

In addition, the market

was buoyed by an appreciable easing in the federal funds rate as discount
window borrowing averaged below $1 billion and large banks evidently modified the cautious approach to reserve management that characterized the
first months following Continental Illinois' funding crisis.

The biggest

yield declines have been registered by private short-term instruments, with
commercial bank liabilities participating fully in the narrowing of risk
premiums even as reports of increased loan loss provisions made the
headlines.
Market optimism that Federal Reserve policy will remain on the less
restrictive side has been based in part on continued sluggish monetary
growth.

Incoming data for M1 and M2 have pointed to renewed weakness in

October after a brief reacceleration in September; both aggregates are
in the lower halves of their annual target ranges.

M3, meanwhile, appears

to be holding near the upper bound of its 1984 range.
Private sector borrowing has slowed somewhat on balance since the
summer, but has still been quite strong.

A slackening of short-term borrow-

ing by nonfinancial businesses has reflected primarily a marked shift
toward long-term financing to take advantage of lower bond rates.

Mortgage

borrowing by households has diminished, and consumer debt growth apparently
has been below the ebullient pace of the first half of the year.
III-1

In the

III-2
MONETARY AGGREGATES
(Based on seasonally adjusted data unless otherwise noted)

1983
Q4

1984
Q3

Aug.

Sept.

Growth from
Q4 1983 to
Sept. 1984

------- Percentage change at annual rates ------

1.
2.
3.

M1
M2
M3

7.2
6.9
8.9

6.1
6.8
10.2

4.6
6.1
8.0

1.5
4.7
4.6
Levels in billions
of dollars
Sept. 1984

Selected components
4.

Currency

Demand deposits

Other checkable deposits

7. M2 minus M12
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
Commercial banks
Savings deposits, SA, plus
MMDAs, NSA 4
Small time deposits
Thrift institutions
Savings deposits, SA, plus
4
MMDAs, NSA
Small time deposits
M3 minus M25
Large time deposits
6
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA
Term Eurodollars, NSA

9.7

8.7

7.2

7.6

7.7

4.6

156.6

-0.5

1.2

3.4

0.3

-7.8

4.9

246.5

9.6

15.9

9.9

8.8

11.3

9.5

140.7

9.7

6.8

7.1

6.6

5.6

8.5

1756.3

23.4

19.3

-8.2

-2.1

42.5

-32.8

56.9

-1.2
12.4

9.8
5.4

15.5
6.7

10.6
7.2

0.0
5.8

11.2
8.2

151.9
751.8

5.9
19.3
7.3

6.5
4.4
6.4

-3.4
18.4
7.7

-7.8
19.4
6.6

2.6
14.0
8.7

369.7
382.2
804.5

-7.0
18.8

-0.9
11.8

2.6
8.9

-13.3
22.6

-23.2
27.1

-9.9
20.6

312.2
492.2

15.8

17.5

24.6

15.5

4.4

6.9

580.5

15.7
-0.4
58.1

24.8
10.0
59.0

31.5
24.2
46.4

25.9
21.2
35.1

8.3
1.9
20.6

3.7
11.7
-12.3

393.0
258.0
134.9

16.6
50.0
-4.4

10.9
18.4
4.9

6.8
41.8
-0.4

7.6
14.6
-31.0

14.1
22.7
-18.5

43.2
64.6
82.9

2.8
76.5
-31.9

-- Average monthly change in billions of dollars -MEMORANDA:
23. Managed liabilities at commercial
banks (24+25)
Large time deposits, gross
24.
25.
Nondeposit funds
26.
Net due to related foreign
institutions, NSA
27.
Other 7
28.

5.3
0.1
5.2

4.6
2.0
2.6

7.0
7.9
-0.9

2.4
-0.1
2.5

1.5
-2.4
3.7

2.3
-0.7
3.2

425.4
312.6
112.8

3.2
2.1

1.9
0.6

0.9
-1.8

-0.4
2.9

-1.6
5.3

0.8
2.4

-35.2
148.0

U.S. government deposits at commercial
8
-1.2
1.2
-1.3
1.2
1.0
3.8
banks
1. Quarterly growth rates are computed on a quarterly average basis. Dollar amounts shown under memoranda for quarterly changes are calculated on an end-month-of-quarter basis.
2. Nontransactions M2 is seasonally adjusted as a whole.
3. Overnight and continuing contract RPs issued to the nonbank public by commercial banks plus overnight Eurodollar
deposits issued by branches of U.S. banks to U.S. nonbank customers, both net of amounts held by money market mutual
funds. Excludes retail RPs, which are in the small time deposit component.
4. Growth rates are for savings deposits, seasonally adjusted, plus money market deposit accounts (MMDAs), not seaCommercial bank savings deposits excluding MMDAs declined during August and September at rates of
sonally adjusted.
10.4 and 3.8 percent respectively. At thrift institutions, savings deposits excluding MMDAs decreased in August and
September at rates of 12.3 and 2.1 percent respectively.
5. The non-M2 component of M3 is seasonally adjusted as a whole.
6. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
7. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold
under agreements to repurchase and other liabilities for borrowed money (including borrowings from the Federal
Reserve and unaffiliated foreign banks), loans sold to affiliates, loan RPs and other minor items. Data are partially
estimated.
8. Consists of Treasury demand deposits at commercial banks and Treasury note balances.

III-3

public sector, borrowing by state and local governmental units continued
strong in September and October.

A surplus in the federal budget in Sep-

tember resulted in a somewhat lower volume of Treasury borrowing in that
month, but heavy federal borrowing resumed in October.
Monetary Aggregates and Bank Credit
Following a moderate rebound to a 6 percent annual rate of growth
in September, M1 weakened again in the first half of October, placing
this aggregate well below the midpoint of its 4- to 8-percent target range.
Runoffs of demand deposits resumed in early October after an interlude of
moderate expansion in September; other checkable deposits also had been
drawn down by mid-month.

Currency expansion in October apparently moved

only a bit above the sluggish pace registered during September.
M2 growth picked up in September to an 8 percent annual rate, but
evidently slowed somewhat in October.

Its nontransactions component

accelerated to an 8-1/2 percent rate of growth in September and apparently
remained close to that pace in October.

Inflows to general purpose and

broker/dealer money market mutual funds quickened in September and October
as returns posted on the funds (which included effective capital gains)
moved down more slowly than market interest rates.
The drop in market interest rates also enhanced the attractiveness of
retail nontransactions instruments offered by depository institutions, on
which rate adjustments have lagged market movements.

Weekly data indicate

that MMDAs increased in early October, likely heralding the first monthly
increment in these accounts since April.

Small time deposits, although

slowing somewhat, nevertheless grew at a brisk 17-3/4 percent rate in
September, and data for commercial banks suggest only a modest further

III-4

slowing in the first half of October.

In addition, outflows from savings

deposits have abated since August.
M3 recovered from its sluggish August pace to grow at a 7-3/4 percent
annual rate in September, and was at the top of its 1984 target range of 6
to 9 percent.

Growth in the non-M2 component of M3 edged up only slightly

in September to a 7 percent annual rate; however, available data suggest
that this component accelerated sharply in October, despite apparently
larger runoffs of term Eurodollars.

Inflows to institution-only money

market funds had picked up in September as market yields declined relative
to returns recorded on these accounts, and even stronger inflows were
recorded in October.

Growth of large time deposits (net of MMMF holdings)

may have strengthened again in October after subsiding further in September.
Growth of large time deposits in September had been restrained by a
runoff in these deposits at thrift institutions.

The contraction at thrifts

reflected in large part the problems of Financial Corporation of America,
whose S&L subsidiary had issued massive amounts of these deposits earlier,
and in part some easing of demands for mortgage credit; thrifts evidently
resumed net issuance of large time deposits in October.

At commercial

banks, a runoff of gross large time deposits in September and sizable
issuance in early October were apparently in response to sharp swings in
U.S. government deposits.

Treasury deposits surged in September, reducing

the need for managed liabilities, then were drawn down in October when
debt-ceiling problems were not resolved until midmonth.
Bank credit expanded at a 7-1/4 percent annual rate during September,
a little slower than in August.

Banks substantially reduced their holdings

of U.S. Treasury securities, principally in their investment accounts, and

III-5

cut back some on their acquisition of other securities.

Loan growth, in

contrast, increased moderately in September--to a 9-1/4 percent rate--but
was much slower than earlier in the year; incoming data indicate that loan
expansion at large banks may have slackened in October.

There are wide-

spread reports that concerns about capital adequacy are leading large banks
to pursue less aggressive lending and placement policies, with particular
emphasis on limiting low margin assets.

Business loan growth moderated in

September, in part owing to an easing of merger-related lending.

Consumer

loan growth at banks slowed markedly, while real estate lending was little
changed from the reduced pace of the previous two months.

Security loans

bounced back sharply from their August decline, apparently reflecting the
demands of nonbank dealers for financing of their enlarged holdings of U.S.
Treasury securities.
Business Finance
Business demands for bank loans and short-term market credit eased
considerably in the third quarter as a whole, despite a widening of the
gap between capital spending and internal sources of funds at nonfinancial
corporations.

In September, for the first time this year, growth in the

total of nonfinancial commercial paper and business loans at domestic
banking offices and foreign branches of U.S. banks dropped below a 10
percent annual rate; third-quarter growth was at about half the rate of
the second quarter.

Declines in corporate bond rates have encouraged

businesses to shift to longer-term financing, both to support current
business activity and to refinance short-term merger-related debt incurred
earlier.

Public bond offerings by nonfinancial firms were substantial

both domestically and in the Eurodollar market during the third quarter.

III-6
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data)

19842
July

--------------------------1.

Total loans and securities
3
at banks
Securities

Treasury securities

Other securities

13.9

Sept.

Levels in
bil. of dollars
Sept.

Commercial Bank Credit ----------------------

8.1

8.7

8.2

7.2

1688.8

1.1

434.7

4.4

-9.2

4.5

1.7

10.6

-2.3

-11.1

4.4

7.3

13.1

-7.9

4.7

-2.4

9.2

7.2

17.5

13.1

9.3

11.0

7.4

9.3

18.9

17.1

8.5

10.2

9.1

6.0

464.6

-38.5

19.7

9.8

177.6

25.6

9.5

3
Total loans

7.2

Aug.

-7.1

183.7
251.0
1254.1

Business loans

Security loans

-4.4

Real estate loans

14.5

11.3

11.4

11.6

11.5

369.6

Consumer loans

21.5

21.6

14.8

21.1

14.0

8.6

253.0

-112.2

--------------- Short- and Intermediate-Term Business Credit ------------

10.

Business loans net of bankers
acceptances

18.2

17.3

8.9

9.1

9.6

7.7

455.2

Commercial paper issued by non4
financial firms

22.8

67.1

43.8

55.4

39.2

32.3

64.9

12.

Sum of lines 10 & 11

18.7

22.5

12.8

14.1

13.3

10.9

520.1

13.

Line 12 plus loans at foreign
5
branches

18.4

22.6

12.5

13.4

14.3

-22.2

45.4

-11.8

2.9

25.4

9.3

12.0

10.)

11.

14.

Total bankers acceptances outstanding

15.

Line 13 plus total bankers acceptances
outstanding

16.
17.

Finance company loans to business
Total short- and intermediateterm business credit (sum of
lines 15 and 16)

12.9

9.4
-26.7

-11.9

4.7

28.8

8.4

n.a.

10.6

14.

15.1

22.9

n.a.

11.8

11.3

540.1
79.1
619.2

n.a.

n.a.--not available.
1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Growth rates beginning 1984 have been estimated after adjusting for major changes in reporting panels and
definitions that caused breaks in series at the beginning of January. Data should be regarded as highly
preliminary.
3. Loans include outstanding amounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (f not a bank), and unconsolidated nonbank
subsidiaries of the holding company.
4. Average of Wednesdays.
5. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
6. Based on average of current and preceding ends of month.
7. Beginning in September, growth rates for total loans and investments, total loans, business loans, and
real estate loans have been adjusted to eliminate effects of loan reclassifications and of loan transfers from
Continental Illinois National Bank to the FDIC.

III-7

The trend toward longer-term debt issues continued in October, even
though commercial paper borrowing apparently picked up, too.

The gross

volume of bonds publicly offered in domestic markets by all types of businesses was $10 billion, well above the already strong monthly average for
the third quarter.

An additional $2.5 billion was offered abroad.

Moreover,

the average maturity of fixed-rate bonds issued by nonfinancial firms was
much longer in October than in any other month this year, and the issuance
of variable-rate and extendible notes moderated considerably during September and October from the preceding three months.
The volume of corporate bond issuance in the U.S. market in recent
months has been buoyed by the sale of medium-term notes.

Activity in this

sector, which for years consisted almost exclusively of issues by auto
finance companies, has gained momentum as smaller captive finance companies,
other financial institutions, and even some industrial issuers have entered
the market as an alternative to commercial paper issuance.

Seventeen

corporations have sold medium-term notes so far this year, compared with
three in 1983.

These notes are issued in a manner similar to commercial

paper but at longer maturities.

The notes are offered continuously on a

best-efforts basis through dealers at maturities selected by the purchasers-from a minimum, usually, of nine months to a maximum of 3 to 10 years, with
coupon rates varying with maturity.

The volume of medium-term notes offered

during the third quarter was about $2.7 billion, more than double the
average issuance earlier in the year.
Stock prices have fluctuated since the last FOMC meeting, with most
broader indexes ending up as much as 2 percent higher.

An exception was the

AMEX index, which declined 1-3/4 percent due mostly to the poor performance

III-8
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly rates, not seasonally adjusted, billions of dollars)

1984

1983

Q3P

8.91

8.36

6.85

8.21

6.92

Stocks--total 2
Nonfinancial
Utility
Industrial
Financial

4.30
3.07
.80
2.27
1.23

Bonds--total1
By industry
Nonfinancial
Utility
Industrial
Financial

Corporate securities - total1

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
Floating rate or extendible notes
Bonds sold abroad - total
Nonfinancial
Financial

AugP

SeptP

OctP

10.77

12.79

11.40

14.80

5.79

8.65

10.60

7.90

12.30

2.17
1.11
.22
.89
1.06

1.94
1.27
.28
.99
.67

1.70
.90
.15
.75
.80

2.05
1.00
.15
.80
1.10

1.70
1.00
.20
.80
.70

3.91

4.75

3.85

6.95

8.55

6.20

10.00

2.03
.95
1.08

1.49
.64
.85

1.88

3.26

1.91
.46
1.45
1.94

3.30
.90
2.40
3.65

4.20
.95
3.25
4.35

3.10
.95
2.15
3.10

5.50
1.50
4.00
4.50

1.13
1.57
.48
.37

.93
1.59
.61
.36

1.19
1.34
.75
.15

2.20
2.75
1.20
.20

2.60
3.45
1.85
.30

2.55
1.45
1.10
.50

1.40
5.10
2.40
.30

.75

.28
1.26
.58

.34
.42
1.35

.55
.59
1.77

.61
.34
2.24

1.01
.61
.91

1.85
.80
.70

1.44
.86
.58

1.06
.42
.64

2.12
.88
1.24

2.19
.53
1.66

3.50
1.80

2.50
.60
1.90

.38
.46
.70
.33

.37

p--preliminary.
1. Securities issued in the private placement market are not included.
proceeds rather than par value of original discount bonds.
2. Includes equity issues associated with debt/equity swaps.

1.70

2.30
1.30
.30
1.00
1.00

Total reflects gross

3. Bonds categorized according to Moody's bond ratings. Excludes mortgage-backed bonds.
4. Includes bonds convertible into equity and bonds with warrants attached where the warrants
entitle the holder to purchase equity in the future.

III-9

of oil stocks.

Market values of S&L stocks outperformed the broader indexes

during this same period, as their earnings prospects improved with recent
declines in interest rates.

The estimated $2.3 billion volume of new stock

issued during the month was about unchanged from the monthly average so far
this year, and was sluggish compared with the monthly average of $4.3 billion for 1983.
Government Finance
Federal sector.

The staff at present is projecting a combined (on-

and off-budget) deficit of $71 billion for the current calendar quarter.
The Treasury is expected to reduce its cash balance by about $14 billion
during the quarter, and to borrow about $58 billion, net, from the public.
Net bill financing could well total $20 billion, accounting for its largest
share of marketable borrowing since the last quarter of 1982, when financing
needs had reached a peak.

Although gross issuance of bills is expected to

rise just slightly, a reduced volume of maturing bills (which were issued
under debt-ceiling constraints last spring) should result in an enlarged
net volume.
During the intermeeting period, the Treasury operated under a restrictive statutory debt ceiling.

The normal end-of-quarter auctions of 4- and

7-year notes and 20-year bonds, originally scheduled for late September, were
postponed twice.

Finally, on October 13 the ceiling was raised by $251 bil-

lion to $1,824 billion.

The disruption forced the Treasury to insert the

postponed auctions into an already heavy calendar; as a result, the Board
staff estimates that the Treasury will sell more than $80 billion, gross,
of coupon securities over the period from mid-October to the end of the year.
In conjunction with the domestic auction of 4-year notes, the Treasury

III-10
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)

Q4f

1984
Aug.

Sept.

Oct.f

Treasury financing

Combined surplus/deficit(-)

-37.9

-70.8

-34.7

14.9

-27.7

53.8

57.7

25.5

4.1

19.6

51.0
13.5
37.5
2.8

55.9
20.1
35.8
1.8

24.8
13.0
11.8

2.8
-3.6
6.4
1.3

18.7
2.3
16.4
.9

Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments(-)

Bills
Coupons
Nonmarketable
Decrease in the cash
balance
Memo: Cash balance
at end of period
Other 2
Federally sponsored credit
agencies, net cash borrowing 3
FHLB

-16.8

13.6

5.0

30.4

16.8

11.3

- .5

4.2

12.5

6.0

4.8

11.3

3.0

4.2

FNMA

2.0

-. 8

Farm Credit Banks

FHLMC

0.5

SLMA

0.5

-19.1

30.4

7.4

23.0

-. 2

f--staff forecast.
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.

III-11

has auctioned for the first time $1 billion of 4-year notes specially
targeted to foreign buyers.

Investment bankers submitted bids totaling

four times the amount auctioned, and the average effective annual yield
was nearly 35 basis points below that of the domestic issue; retail demand
for the notes appears moderate, with the most recent quotes on the targeted
issue maintaining about the initial yield spread relative to the companion
domestic note.
Borrowing by the federally sponsored credit agencies slowed sharply
in October, owing largely to a cutback by the Federal Home Loan Bank System.
Its reduced borrowing needs reflected a lighter volume of advances to
S&Ls generally, and the renewed ability of the Financial Corporation of
America to raise some funds directly in the credit markets.

Borrowing by

the other sponsored agencies continued its moderate third-quarter pace into
October.
The Federal National Mortgage Association recently announced an aftertax loss of $43 million for the third quarter.

The loss was the result of

a negative interest margin totaling $56 million and an addition of $35
million to the allowance for loan losses.

The addition to the loan loss

reserve followed upon an increase in FNMA's foreclosure rate during the
first three quarters.

Most of the loans foreclosed have been long-term,

fixed-rate mortgages.
State and local sector.

Gross offerings of long-term municipal

securities have continued strong in recent weeks.

Offerings in October are

estimated at about $8.3 billion, seasonally adjusted, roughly equaling
the third-quarter average.

The October offerings included several large

utility issues, as well as bonds earmarked for work on highways, schools,

III-12

and medical facilities.

In the short-term tax-exempt market, volume has

fallen off as HUD recently ceased offering project notes amid confusion
regarding arbitrage restrictions contained in the Deficit Reduction Act.
The volume of tax-exempt bonds for single-family housing is estimated
to have totaled around $1.2 billion in October.

The legislated state-by-

state ceilings for 1984 imply a maximum volume of about $15 billion of such
issues, should every state reach its limit.

Thus far, more than $10 billion

have been sold.
GROSS OFFERINGS OF SECURITIES BY STATE AND LOCAL GOVERNMENTS
(Monthly totals or monthly averages; billions of dollars)

1983

1984
Q3e

Sept.e

Oct.P

-------------- Seasonally adjusted -------------Total
Long-term
Short-term1

10.39
7.20
3.19

9.42
5.84
3.58

8.99
5.75
3.24

10.40
8.40
2.002

8.50
6.60
1.902

10.00
8.30
1.702

------------ Not seasonally adjusted -----------Total
Long-term
Refundings
Single-family
housing 3
Short-term1

10.39
7.20
1.17

7.82
5.04
.80

10.57
6.38
.93

9.72
7.62
.79

8.20
6.20
.50

.92
3.19

.12
2.78

.29
4.19

2.70
2.102

1.90
2.002

10.20
8.50
.90
1.20
1.702

e--estimate. p--preliminary.
1. These figures exclude tax-exempt commercial paper.
2. Excludes HUD cancellations.
3. Data from the Department of Housing and Urban Development.
Interest rates on municipal bonds rose during the first few weeks
after the last FOMC meeting, but reversed direction in mid-October.

The

Bond Buyer revenue and general obligation bond indexes are both down about
10 basis points since the last FOMC meeting.

At the same time, though,

rates on taxable securities dropped appreciably more, and the ratio of

III-13

tax-exempt to taxable yields thus has increased sharply further, reaching
its highest level since June 1983.
Mortgage Markets
Interest rates in the primary mortgage market continued to decline
during the intermeeting period.

Average contract rates on new commitments

for conventional fixed-rate mortgages at S&Ls had slipped 21 basis points
to 14.05 percent by late October.

The effective yield on commitments for

FHA-insured loans at mortgage companies retreated about 45 basis points;
in light of market developments, the ceiling rate on VA-guaranteed loans
was cut 1/2 percentage point to 13 percent in late October.
On adjustable-rate home mortgages, the commitment rate on conventional
1-year ARMs at S&Ls has dipped about 10 basis points to 11.90 percent since
the October FOMC meeting.

The spread favoring 1-year ARMs over fixed-rate

mortgages at S&Ls has narrowed about 60 basis points since June, when the
Treasury yield curve was especially steep.

Nevertheless, ARMs apparently

have remained the dominant instrument in the conventional home loan market-in September, two-thirds of conventional loans closed at major originators
carried adjustable-rate features.
In secondary markets, yields on fixed-rate instruments have fallen
about 55 basis points since the previous FOMC meeting.

For adjustable-rate

loans, required yields posted by FNMA under its standard purchase program
moved down 70 basis points on contracts that permit annual interest rate
adjustments.
New mortgage commitments at federally insured S&Ls were down in
September for the fourth consecutive month, leaving mortgage commitments
outstanding about 5 percent below the June peak of $67 billion.

With

III-14

MORTGAGE ACTIVITY AT FEDERALLY INSURED SAVINGS AND LOAN ASSOCIATIONS 1
(Billions of dollars, seasonally adjusted)

Mortgage commitments
New Outstanding

Net change in mortgage assets
Mortgage Mortgage-backed
Total
loans
securities

(1)

(2)

(3)

(4)

(5)

1983-Aug.
Sept.
Oct.
Nov.
Dec.

15.3
15.8
14.0
15.2
15.0

48.5
49.8
51.0
53.8
56.5

8.8
8.0
6.4
6.5
6.0

5.6
5.5
3.7
5.6
5.7

3.2
2.5
2.7
1.0
.3

1984-Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept. p

17.2
18.1
17.0
16.8
19.5
18.1
17.8
14.8
13.6

58.0
60.4
62.8
63.0
66.1
66.9
66.6
65.4
63.5

5.8
6.1
10.0
10.0
10.6
10.7
8.7
8.4
5.7

4.9
6.0
5.9
7.5
8.4
7.9
8.1
5.7
5.1

.9
.1
4.1
2.6
2.2
2.8
.6
2.6
.6

p--preliminary.
1. Insured S&Ls account for approximately 98 percent of the assets of all
Net changes in mortgage assets reflect adjustments to
operating S&Ls.
account for conversions of S&Ls to savings banks.
2. End of month. Includes loans in process.

NEW ISSUES OF FEDERALLY GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
(Monthly averages, millions of dollars, n.s.a.)
FNMA and
Memo:
FHLMC swap issues

All
issues

GNMAs

FHLMCs

1983-Q1
Q2
Q3
Q4

7122
7368
7619
5733

3841
4753
4835
3403

1955
1392
1544
1673

1326
1223
1240
657

2204
1880
2115
1954

1984-Q1
Q2
Q3 p

4892
4020
5130

2745
2343
2206

886
1133
1428

1261
545
1496

1745
1492
2659

5438
5799
4153

2325
2373
1921

1580
1564
1140

1533
1862
1092

2576
3317
2085

Period

July
Aug.
Sept. p
p--prelimi nary.

FNMAs

III-15

mortgage swap activity and mortgage acquisitions both subsiding, the
net growth in S&L mortgage assets diminished to $5.7 billion--about half
the record increase attained in June.
New issues of federally guaranteed mortgage pass-through securities
declined in September from the 1984 high reached in the prior month. 1
FHLMC- and FNMA-underwritten pass-through issues, which had increased in
July and August on the strength of vigorous swap activity, tapered off in
September.

Issuance of GNMA-guaranteed mortgage-backed securities fell

further during the third quarter in response to the earlier rise in interest
rates as well as to the unusually low FHA/VA share of home mortgage originations, attributable to stiff competition from conventional ARMs.
The rate of expansion in residential mortgage debt outstanding was
apparently trimmed a percentage point or so in September from the nearly
11 percent rate of the previous three months.

That rate, in turn, was

about 1-1/2 points below the high reached in May.
Consumer Credit
Growth in consumer installment credit has moderated from the unusually
rapid pace of the first half, although remaining strong relative to past
economic recovery periods.

Installment debt outstanding increased at a

16-1/2 percent annual rate in August, compared with nearly 20 percent in
July and 24 percent during the second quarter.

Preliminary data--based

primarily on commercial banks and retail stores--suggest some further
1. Private sector pass-through securities have comprised a scant 2.5 percent
share of total new issue volume. However, the Secondary Mortgage Market
Enhancement Act, signed October 3, is designed to encourage an expansion of
private issues of mortgage-backed securities. The Act exempts certain of
these issues from state securities and investment laws, and permits limited
forward trading.

III-16
CONSUMER INSTALLMENT CREDIT
1984
1983
---Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

July

By major holder:
Commercial banks
Finance companies
All other

11.3

17.4

24.1

19.8

16.5

12.5p

8.7
15.5
10.1

14.8
25.1
16.3

23.8
31.2
21.3

26.3
8.9
19.5

13.4
18.1
18.3

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

SAAR ------

48.3

67.8

97.9

85.3

72.0

55.2p

13.6
12.9
21.7

20.9
19.0
27.9

35.0
25.0
37.9

41.1
7.7
36.5

21.3
15.8
34.9

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

23.4
5.0
19.9

41.5
0
26.3

55.7
9.2
33.0

38.3

31.6
13.3
27.1

15.7p
n.a.
n.a.

16.8
30.1

-------- Annual percentage rate
Interest rates
At commercial banks 2
New cars, 48 mos.
Personal, 24 mos.
Credit cards
At auto finance companies 3
New cars
Used cars

Sept.

Percent rate of growth, SAAR----

------- Billions of dollars,
Change in outstandings-total
By type:
Automobile credit
Revolving credit
All other1

1984
Aug.

13.92
16.50
18.78

13.32

13.53
16.35
18.71

n.a.

16.16
18.73

12.58
18.74

14.11
17.55

14.15
17.61

-----

n.a.
n.a.

n.a.

14.08
16.75
18.81

14.68
17.77

15.01
17.99

15.16
18.10

n.a.

1. Includes primarily personal cash loans, home improvement loans, mobile
home loans, and sales finance contracts for non-automotive consumer durable
goods.
2. Average of "most common" rates charged, on loans of specified type and
maturity, during the first week in the middle month of each quarter.
3. Average rate for all loans of each type made during the period, regardless of maturity.
n.a.--not available.
p--preliminary.

III-17

slackening of growth in September.

During the 21 months of economic re-

covery from the trough in November 1982 through August 1984, the cumulative
expansion in consumer credit totaled 28 percent, 6 percentage points more
than in the most rapid of the four previous recoveries (see chart on page
111-18), and nearly double the average for the four earlier periods.
The unusual strength in consumer credit during the current business
advance likely reflects both stronger than normal increases in new lending
and weaker than normal growth in repayments on outstanding loans.

The

robust pace of spending on consumer durables has generated a heavy volume
of new borrowing.

At the same time, the extended period of sluggish credit

growth prior to the business recovery set the stage for a relatively light
volume of repayments for several quarters into the recovery.

More recently,

however, with loan repayments becoming more reflective of credit extended
during the recovery rather than before, repayments are no doubt accelerating,
thereby imposing more of a drag on net credit expansion.

Together, the slow-

down in consumer spending during the third quarter and the probable swelling
of repayments have begun to squeeze the growth rate of consumer debt after
its explosive advance.
After modest increases between May and August, interest rates on
consumer loans at banks apparently have been stable to slightly higher.
According to an informal survey, a few banks have raised their offering
rates by 50 basis points or less since the end of August, while others have
made no change.

Some banks noted that they expect to reduce rates in

November; in cases where loans are made with adjustable rates tied to the
prime rate, automatic reductions in offering rates will occur at the next
adjustment period in response to the recent drop in the prime.

III-18

CONSUMER INSTALLMENT CREDIT
CUMULATIVE GROWTH FROM CYCLICAL TROUGHS
Percent
1982-84

Number of Quarters Past Trough
in Business Cycle

III-19

At the automobile finance companies, new-car loan rates climbed
another 15 basis points in September, and have now risen more than 100
basis points since early spring.

(An increase of

100
basis points would

add about $4 to the monthly payment on a typical auto loan.)

The rise in

rates at auto finance companies this year has restored the customary positive spread between finance company and bank auto loan interest rates,
following a period in which the auto finance companies had supported the
car market with cut-rate financing.

INTERNATIONAL DEVELOPMENTS

Foreign Exchange Markets
The trade-weighted average value of the dollar is little changed
from its level at the time of the last FOMC meeting.

The dollar has

exhibited considerable movement in the intermeeting period, however, amid
shifting opinion about the strength of U.S. economic activity, about the
implications of weakness in oil prices for different currencies, and
about Federal Reserve policy in the near term.
During the first half of the intermeeting period, the weightedaverage dollar rose to a new record level even as U.S.-foreign
interest-rate differentials continued to narrow (see chart).

Market

commentary suggests that demand for dollars may have been sustained by
some further downward revision in expectations of U.S. inflation and by a
belief that economic growth in the United States would continue to
outpace growth elsewhere, particularly in Europe.

Emerging weakness in

world oil prices also appeared initially to generate support for the
dollar, although the implications of oil price changes for the dollar are
not unambiguous.

Since mid-October, however, the dollar has fallen 2-2/3 percent
from its peak as U.S.-foreign short-term interest-rate differentials have
declined sharply further.

(Longer-term differentials, though also

narrowing, showed much less change than short-term differentials.)
Factors in the dollar's drop appear to have included a reassessment of
the strength of U.S. economic activity, a backing away from initial
IV-1

IV-2

Chart 1

10/31/84

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S.
Daily series

DOLLAR

March 1973=100
-- 1152

144

142
'140

138
July

August

3-MONTH INTEREST PATES
Daily series

September
1984

October
Percent per annum
13

FOMC
October 2
12

%.0

U.S. CD's
'S.

10
Weighte d Average
Foreign

ni t11111111t i
July

niii
iiii ti

int i
arittt :ilit:lt l l II tllt
September
August
1984

Rate

l i l111111111111111

October

IV-3

judgments of the likely magnitude and effects of oil price declines, and
a market perception that the Federal Reserve might be easing reserve
conditions more than had previously been thought.

In addition,

intervention

the Desk, may have provided some impetus to the dollar's decline.
While the dollar depreciated somewhat, on balance, against most
major currencies, it changed little against the Canadian dollar and
appreciated 1-3/4 percent against sterling.

Canadian interest rates

moved somewhat lower along with U.S. rates in the intermeeting period,
and major banks in Canada reduced their prime rates from 13 to 12-1/2
percent late in the period.

Sterling meanwhile was depressed by ongoing

labor problems and by the prospect of a reduction in British oil

revenues.

The Bundesbank
sold a moderate amount of dollars, concentrated in several actions
visible to the market; perhaps because its sales were reminiscent of the
very large sales of late September, they had a substantial, though
temporary, effect on the mark/dollar rate.

The Desk
October 17.

sold dollars against marks on

The Desk's sales on that day totalled $95 million and were

detected in the market.

The Desk acted as the mark/dollar rate rebounded

from the low reached after the Bundesbank's intervention.

IV-4

U.S. International Financial Transactions
Data that were not available when the Commerce Department released
second-quarter balance of payments figures in mid-September reveal that
U.S. nonbank residents once again reported a sharp increase in their net
financial liabilities to foreigners in that quarter.

A large portion of

this $5.5 billion net inflow appeared to be related to merger financing,
just as it was in the first quarter.

Based on these data, the estimated

statistical discrepancy for the second quarter would be revised downward
to $7.8 billion from the $13.3 billion previously reported.

(See line 10

of the Summary of U.S. International Transactions.)
In August, recorded capital inflows exceeded the $9 billion
merchandise trade deficit, although net inflows recorded over the two
month span of July and August totalled only a little more than 50 percent
of the trade deficit over the same period.

Banks recorded a moderate net

capital inflow in August, a significant portion of which appears to be
associated with a reduction of bankers' acceptance claims on residents of
Japan.

Private foreign net purchases of U.S. Treasury obligations were

quite large in August, totalling more than $6 billion (line 3).

Nearly

$2 billion of net purchases can be attributed to the World Bank, which
actively manages its portfolio but is not expected to add much to its net
holdings of U.S. Treasury securities over the rest of the year.

About $3

billion of the remaining $4 billion of securities purchases is accounted
for by net purchases by residents in the United Kingdom.

A large part of

this figure reflects a $1.7 billion purchase of 30 year Treasury bonds by
a group of securities firms led by Salomon Brothers.

The bonds, held in

custody in the United Kingdom, were used to support the issue of CATS

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)

1982
Year
Private Capital
Banks
1. Change in net foreign
positions of banking offices
in the U.S. (+ = inflow)
a) with own foreign offices
b) all other

-39.5
-8.9
-30.6

1983
Year

15.3
8.1
7.8

1984
June

July

Aug.

-2.6
0.1
-2.7

-6.6
-1.2
-5.4

-3.0
-7.1
4.1

4.0
0.8
3.3

2.2

-0.2

0.6

0.2

0.4

0.3

0.5

0.4

0.9

1983
Q4

11.4
8.7
2.6

13.0
*
13.0

Securities
2. Private securities
transactions, net

a)
b)
c)

foreign net purchases
(+) of U.S. corporate bonds
foreign net purchases
(+) of U.S. corporate stocks
U.S. net purchases (-) of
foreign securities

3. Foreign net purchases (+) of U.S.
Treasury obligations 1/
Official Capital
4. Changes in foreign official
reserve assets in U.S.
(+ = increase)
a)

By area
G-10 countries (incl. Switz.)
OPEC
All other countries
By type
U.S. Treasury securities
Other 2/

Changes in U.S. official reserve
assets (+ = decrease)

-0.5

0.1

-0.8

0.2

0.3

-0.7

2.4

6.1

6.5

8.3

1.7

1.4

6.6

1.5

2.9

5.2

6.4

-3.0

-0.7

2.2

0.5

2.5

-12.7
6.9
8.8

6.4
-8.5
7.3

1.7
-1.5
6.1

2.3
-2.8
-2.5

-0.7
-2.4
2.3

-1.3
0.5
3.1

-0.8
1.6
-0.3

2.3
-1.3
1.6

5.7
-2.7

7.0
-1.8

2.6
3.8

-0.2
-2.7

-0.3
-0.5

2.1
0.1

-1.8
2.3

2.6
-0.1

-5.0

-1.2

-1.0

-0.7

-0.6

-0.1

-0.4

-0.3

-1.6
2.3
-0.3
-17.2
-1.7

-3.5
2.4
1.9
-19.7
6.0

1.9
7.7
-4.5e
-24.4
7.8e

-25.9

-25.7

-7.5

-14.0

-9.0

Other transactions (Quarterly data)
6. U.S. direct investment (-) abroad
7. Foreign direct investment (+) in U.S.
8. Other capital flows (+ = inflow) 3/ 4/
9. U.S. current account balance 4/
10. Statistical discrepancy 4/

MEMO:
U.S. merchandise trade balance -- part
of line 9 (Balance of payments basis,
seasonally adjusted)

-0.1

-36.5

-61.1

-19.4

Includes U.S. Treasury notes publicly issued to private foreign residents.
Includes deposits in banks, commercial paper, acceptances, & borrowing under repurchase agreements.
Includes U.S. government assets other than official reserves, transactions by nonbanking concerns, and other banking and
official transactions not shown elsewhere.
4. Includes seasonal adjustment for quarterly data.
*
Less than $50 million.
e/ Estimated.
NOTE: Details may not add to total because of rounding.
1.
2.
3.

IV-6

(Certificates of Accrual on Treasury Securities) that were marketed to

non U.S. residents in bearer form through Salomon Brothers' U.K.
affiliate.
It is widely believed that investors are especially attracted to
securities issued in bearer form.

The large August volume of CATS issued

with Treasury obligations as backing tends to confirm this view, but may
exaggerate it, because investors may have purchased these particular
securities with unusual intensity in anticipation of imminent
restrictions on such issues.

In any event, bearer CATS are unlikely to

figure prominently among U.S. Treasury obligations purchased by
foreigners after August, because on September 7 the Treasury did issue
regulations prohibiting further issuance of bearer instruments backed
more than 50 percent by U.S. government securities. It remains to be seen
if the Treasury issues targeted for foreigners, which seek to preserve
some of the anonymity of investors, are given a vigorous reception.
Foreign private net purchases of U.S. corporate securities increased
slightly in August.

The increase in foreign net purchases of U.S.

corporate bonds in part reflects the increased issuance of bonds in the
Euromarket by U.S. corporations through their domestic offices rather
than through finance affiliates in the Netherlands Antilles after the
repeal of withholding tax on interest paid to foreigners and the
concomitant legal changes.

Prior to the repeal, finance affiliates in

the Netherlands Antilles were active in acquiring funds for U.S.
corporations, and these funds were recorded in the balance of payments
statistics as direct investment inflows when transferred to domestic
offices.

By contrast, Eurobonds issued directly from the domestic office

IV-7

of a U.S.

corporation are recorded as private foreign purchases of U.S.

securities.

Evidence for September shows that U.S. corporations are

electing to offer an even greater proportion of their Eurobond issues
through their domestic offices.
Data on foreign official capital flows for August show a moderate
increase in G-10 dollar holdings in the United States. On the whole, OPEC
members decreased their dollar holdings in August, approximately
counterbalancing their buildup of dollar holdings in July. Other
countries collectively increased their holdings very little in August
Partial information for September shows
that official holdings at the New York Federal Reserve Bank declined
moderately,

INTERNATIONAL BANKING DATA
(Billions of dollars)

1981
Dec.

1982
Dec.

Mar.

1983
June
Sept.

Dec.

7.8

32.9

49.2

43.6

44.1

39.3

Net Claims of U.S. Banking
Offices on Own IBFs 1/

11.8

16.2

14.6

12.8

10.5

Sum of lines 1 and 2
of which:
(a) U.S.-chartered banks
(b) Foreign-chartered banks

19.6
22.3
-2.6

49.1
40.0
9.1

63.8
53.7
10.0

56.4
49.9
6.5

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks

13.2

15.8

16.9

Eurodollar Holdings of
U.S. Nonbank Residents 2/

95.5

112.6

116.4

Net Claims of U.S. Banking
Offices (excluding IBFs) on Own
Foreign Offices

June

1984
July

35.3

32.2

27.6

30.3

30.1

5.2

4.1

4.4

8.1

6.8

6.3

54.6
48.7
5.9

44.5
40.8
3.6

39.4
36.9
2.5

36.6
34.7
1.9

35.7
33.7
2.0

37.1
35.6
1.5

36.4
35.7
.8

17.3

18.7

18.5

19.9

19.7

20.6

20.2

120.4

121.3

126.4

128.0

123.1

122.5

119.5

Mar.

August

Sept.3/

119.4

Corresponds to net claims of international banking facilities (IBFs) on all foreign residents, including
all banks whether related or not, and all nonbanks.
2. Includes term and overnight Eurodollars held by money market mutual funds.
3. Through September 30.
Note: These data differ in coverage and timing from the overall banking data incorporated in the international transactions
accounts. Line 1 is an estimate constructed as the residual of line 3 minus line 2. Line 2 is data for the last Wednesday of
the month for the sample of monthly IBF reporters. Line 3 is an average of daily data reported to the Federal Reserve by U.S.
banking offices. Line 4 is an average of daily data. Line 5 is the month-end value for data through September 1983. For
dates after September 1983, the overnight portion is an average of daily data and the term portion is an average of Wednesday
data.

IV-9

U.S. Merchandise Trade
In September, the U.S. merchandise trade deficit was larger than in
August but less than the record July level.

For the third quarter as a

whole, the trade deficit was more than $30 billion larger, at an annual
rate, than in either the first or second quarters. Data for September and
the third quarter are not yet available on an international transactions
or GNP basis.

Some preliminary assessments were made for this Greenbook;

the data and further discussion will be included in the Greenbook
supplement.
Imports in the third quarter increased sharply from the
second-quarter level.

Despite sharp month-to-month volatility, the rate

of imports in all three months exceeded that recorded in the second
quarter.

The increase for the third quarter as a whole was spread
U.S. MERCHANDISE TRADE 1/

__
1983
Year

Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Non-oil
Trade Balance
Volume (Bil 72$, SAAR)
Exports
Agricultural
Nonagricultural
Imports
Oil
Non-oil

200.3
36.6
163.6

218.3

261.3
53.8
207.5
-61.1

1984

1984
8 mo.

J/A

1984 Aug.

179.8

215.7
41.2
174.5

218.4
37.1
181.3

221.4
35.9
185.6

220.7
35.0
185.7

329.9
58.1
271.8

319.2
55.4
263.8

321.3
59.6
261.7

359.0

328.4

60.0
299.0

56.8
271.6

38.8

-111.8

-103.5

-102.9

-137.6

-107.7

16.3

15.8

62.4

17.0
60.6

15.1

57.3

62.7

15.0
64.6

14.9
64.7

4.9
81.9

5.4
104.6

5.1
102.3

5.5
100.3

5.6
114.4

5.3
103.5

International transactions and GNP basis.

IV-10

among a wide range of commodity categories, particularly industrial
supplies and machinery.

Among individual items, strong increases were

recorded for steel, chemicals, electronic equipment and parts, clothing
and textiles, and passenger car imports from Canada and Japan.
The volume

Oil imports declined slightly in the third quarter.

imported decreased steadily during the period; a rate of about 5.3
million barrels per day (mbd) in September brought the quarterly average
to about 5.7 mbd.

The price of imported oil dropped to about $27.30 per

barrel in September and reflected weak spot prices during the summer; the
average for the third quarter was about $27.80 per barrel.

From the

summer until early October spot prices strengthened as OPEC reduced its
level of crude oil production.

Recent cuts in prices by Norway, the

United Kingdom and Nigeria reflect a weakness in the price of light crude
oil relative to heavy crude oil.

OIL IMPORTS

1983
Year
Volume (mbd, SA)
Price ($/BBL)
Value (Bil. $, SAAR)

5.20
28.42
53.80

Q4
5.53
28.30
57.14

Q1
5.40
28.05
55.41

Q2
5.76
28.26
59.61

1984
J/A
5.85
28.02
59.98

Aug.
5.59
27.77
56.78

The value of exports in the third quarter was slightly higher than
in the second quarter.

The increase was largely in manufactured goods

(especially machinery and industrial supplies).

The value of

agricultural exports in the third quarter was maintained at the
second-quarter rate because a sharp increase in wheat shipments (largely
to the Soviet Union) offset declines in other commodities (particularly
soybeans and corn).

IV-11

Foreign Economic Developments.

Economic expansion in major

foreign industrial economies is continuing, except in the United
Kingdom, where the coal miners' strike continues to depress industrial
production.

Although industrial production in Germany also declined

somewhat in August, after a substantial post-strike recovery in July,
other indicators suggest a continuing expansion.

In Japan, industrial

production has decelerated in the last year but in the third quarter
was about 11 percent above its year-earlier level.

Industrial

production during the summer rose in Canada, France, and Italy,
although the pace of the advance in each country was uneven.

The most

recent unemployment rate in each of the major foreign countries is
above the level at the beginning of this year.
Inflation rates remained low or have continued to decline in the
major foreign countries.

In September, the year-on-year increase of

the trade-weighted average of consumer price indices in the foreign
G-10 countries was 4-1/4 percent, the lowest since the early 1970s and
1-1/2 percentage points below the rate of a year earlier.
The cumulative current account surplus for Japan through the
third quarter was $31 billion (s.a.a.r.), an increase of $11 billion
from the corresponding period of last year.

The external position of

the United Kingdom deteriorated further in the third quarter while the
French trade balance continued to improve.
Individual Country Notes.

Industrial production in Japan rose in

the third quarter by 1.6 percent (s.a.), the slowest rate of advance
since early 1983.

This deceleration was widely expected and coincides

with the government forecast of a slowing of activity from the rapid

October 31,

1984
REAL GNP AND INDUSTRIAL PRODUCTION IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD, SEASONALLY ADJUSTED)

Q4 /Q 4
1982

Q4 /Q 4
1983

1983
Q4

CANADA
GNP
IP

-4.9
-10.8

7.1
16.1

1.2
3.7

FRANCE
GDP
IP

1.4
-1.8

.6
1.8

.6
.0

GERMANY
GNP
IP

-1.6
-5.4

2.9
5.9

1.3
2.2

ITALY
GDP
IP

-2.3
-6.7

JAPAN
GNP
IP

3.8
-2.7

UNITED KINGDOM
GDP
IP
UNITED STATES
GNP
IP

1984
Q2 Q3

1984
JULY

AUG.

SEP.

3.5

-. 5

.9
-.4
1.3 -1.0

N.A.
N.A.

3.1

1.5 -2.1
1.1 -5.0

N.A.
N.A.

2.1

1.2
1.7

.8
1.0

.7
.5

N.A.
N.A.

3.7

-1.3

1.4

3.6
8.6

1.9
3.2

1.6
2.8

N.A.
1.6

2.4

-. 7

.8 -.9
.0 -2.6

N.A.
N.A.

1.6
.1

4.1
4.8

-1.5
-7.5

6.3
15.0

2.4
2.7

1.7
2.1

.7
1.6

* DATA NOT AVAILABTE ON A MONTHLY OR QIJARTERLY BASIS.
QUARTERLY DATA,

JUNE

N.A.
N.A.

+ IF

MAY

LATEST QUARTER FROM YEAR AGO.

*.1

-1.1

-2.3

-9.6

(

4.6

14.1

N.A.

)

-2.2

N.A.

4.6
9.7

1.0
2.3

N.A.

-1.1

-. 2

-. 6

LATEST 3 MONTHS
FROM YEAR AGO+

N.A.

3.7
4.3

5.9
10.9

2.6
-1.1

6.4
9.2

October 31,

1984
CONSUMER AND WHOLESALE PRICES IN MAJOR INDUSTRIAL COUNTRIES
(PERCENTAGE CHANGE FROM PREVIOUS PERIOD)

1983
Q3 Q4

1984
Q2 Q3

Q4/Q4
1982

Q4/Q4
1983

CANADA
CPI
WPI

9.7
4.5

4.6
3.5

1.4
1.5

1.6
.9

.9
.4

1.2
1.6

.9
1.2

.9
N.A.

FRANCE
CPI
WPI

9.5
8.5

9.8
14.6

2.8
4.0

2.1
3.7

1.9
3.6

1.7
3.4

1.8
2.9

1.7
N.A.

.7
1.1

1.0
.9

1.2

.9
1.7

.5
.8

.0
N.A.

2.9
3.2

2.1
2.2

GERMANY
CPI
WPI

.5
.2

.5
N.A.

N.A.
N.A.

7.3
13.2

-. 2 -. 2
-.9 -1.4

.1
N.A.

.6
N.A.

1.8
3.3

1.2
N.A.

.7
N.A.

N.A.
N.A.

10.1
10.9'

.6
-. 1

-. 2
.8

1.6
.2

.7
N.A.

2.5
.2

.9
.6

.2
.5

N.A.
N.A.

4.7
6.2

.4
-. 2

N.A.
N.A.

4.2
2.0

2.9
1.6

2.3
2.3

3.5
3.3

JAPAN
CPI
WPI

2.9
1.6

1.9
-3.3

.9
-1.0

-. 2
.2

1.4
-. 6

UNITED KINGDOM
CPI
WPI

6.2
6.5

5.1
5.6

2.0
2.0

1.3
.8

1.1
1.3

.6
1.8

2.:
2.4

1.1
.2

1.0
.6

1.1
.4

1.2
1.1

.9
.4

LATEST 3 MONTHS
FROM YEAR AGO

3.9
3.8

12.8
9.1

___

OCT.

N.A.
N.A.

16.6
12.4

1_____11

1984
AUG. SEP.

.1
N.A.

ITALY
CPI
WPI

UNITED STATES
CPI (SA)
WPI (SA)

JULY

-. 1
.2

1.0
.2

October 31, 1984
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES 1/
(BILLIONS OF U.S. DOLLARS; SEASONALLY ADJUSTED)
1983
Q3 Q4

1984
Q2 Q3

1984
JULY AUG.

1982

1983

14.4
2.1

14.4
1.4

4.3
1.1

3.1
-.2

3.5
.0

3.6
.0

4.1
.5

N.A.
N.A.

1.5

1.6

1.1

-14.0
-12.1

-5.9
-4.2

-1.7
-.9

-. 6
.3

-. 2
.3

-1.5
-.5

-1.1
-1.0

.4
N.A.

-. 6

-. 1

GERMANY
TRADE
CURRENT ACCOUNT (NSA)

20.9
3.5

16.4
4.1

4.1
.6

3.7
-2.3

3.4
3.7

4.3
.7

3.2
-.2

N.A.
-.6

.5
-1.2

1.4
-. 1

N.A.
-. 5

N.A.
.0

ITALY
TRADE
CURRENT ACCOUNT (NSA)

-12.8
-5.7

-7.8
.6

-1.4
1.1

-2.1
1.5

-1.3
-.1

-2.5
-1.7

-3.0
N.A.

N.A.
N.A.

-1.1

-.1

-.9

N.A.

18.8
6.9

31.2
21.0

7.8
6.1

8.5
5.7

8.2
5.5

10.0
7.2

11.1
9.2

10.1
7.4

3.6
3.1

3.4
2.5

2.8
1.8

3.9
3.0

4.1
9.6

-.8
4.4

-.7
-.1

-.4
1.2

-.0
.9

-.1
1.2

-1.7
-.6

-1.9
-.9

-. 1
.2

-. 2
.1

-. 7
-. 4

-1.0
-. 6

-36.5
-9.2

-61.1
-41.6

CANADA
TRADE
CURRENT ACCOUNT
FRANCE
TRADE 2/
CURRENT ACCOUNT 2/

JAPAN
TRADE 2/
CURRENT ACCOUNT
UNITED KINGDOM
TRADE
CURRENT ACCOUNT 2/
UNITED STATES
TRADE
CURRENT ACCOUNT

-14.9 -17.5 -19.4
-9.6 -11.8 -17.2

-25.9 -25.7 -30.0
-19.7 -24.4 N.A.

JUNE

-7.5 -14.0
*

I/ THE CURRENT ACCOUNT INCLUDES GOODS, SERVICES AND PRIVATE AND OFFICIAL TRANSFERS.
2/ QUARTERLY PATA ARE SUBJECT TO REVISION AND ARE NOT CONSISTENT WITH ANNUAL DATA.
* COMPARABLE MONTHLY OR QUARTERLY CURRENT ACCOUNT DATA ARE NOT PUBLISHED.

-9.0
*

SEP.

N.A.
*

-7.1
*

IV-15

rate of the first half of this year.

In August, new housing starts

rose by 2.6 percent (s.a.), following a 4.4 percent gain in July, while
new construction orders advanced significantly in both months.

Retail

sales rose by more than 5 percent (s.a.) in September following an over
3 percent drop in August.

Abnormally hot summer weather is said to

explain in part this pattern of sales.
improved somewhat during the summer:

Labor market conditions
unemployment declined marginally

from June's record level of 2.81 percent and overtime work picked up in
August.

The sizeable increases in consumer prices in September and

October are believed to reflect mainly seasonal factors; year-on-year
increases remain low.
Both the trade and current account surpluses rose in September.
The cumulative trade surplus through September was $42 billion
(s.a.a.r.), compared with a surplus for the same period of last year of
$31 billion.
Negotiations within the government are continuing over the budget
for FY 1985 (beginning April 1).

Prime Minister Nakasone, who was

re-elected to a second two-year term on October 31, remains committed
to a reduction of the government deficit, while Finance Minister
Takeshita has mentioned that proposals are being considered for a tax
cut to stimulate domestic demand.

A draft of the FY 1985 budget is

expected in late December or early January.

The Finance Ministry has

also floated proposals aimed at reducing tax evasion associated with
the establishment of multiple tax-free savings accounts.

At present,

an individual can legally exempt from taxation interest received on
holdings of up to 3 million yen each (or a total of approximately

IV-16

$37,000) in bank savings deposits, postal savings accounts, and
government bonds.

On October 29 the long-term prime rate was lowered

from 7.9 percent to 7.6 percent in

line with declines in government

bond rates.
Industrial production in Germany has rebounded from the strikeinduced losses incurred in June.

The index for July-August was 3

percent above its pre-strike level in April-May.
year, July-August was up by 4.6 percent.

Compared with last

Data on orders and business

climate surveys point toward further expansion.

The rate of

unemployment, however, has remained high at 9.3 percent (s.a.) through
September.
Consumer price inflation continues to be moderate:

consumer

prices in October were about 2 percent above the year-earlier level.
Wages and salaries in July were 2.5 percent above July of last year.
Negotiations continue between the government and Germany's largest
union, the public service employees.

The government recently made an

offer of a 2.5 percent increase in compensation, while the union wants
a 5 percent raise plus an increase in paid annual leave from 30 to 40
days.
The cumulative current account through September was in balance,
compared with a $0.5 billion (a.r.) surplus for the same period of last
year.

Similarly, the trade surplus so far this year is less than $2

billion (a.r.) smaller than last year's comparable figure.
The government's plan for a large tax cut scheduled for 1986
(DM 10 billion) and 1988 (DM 10 billion) remains officially unchanged
despite statements by the Economics Minister that the first cut should

IV-17

be advanced to 1985 in order to stimulate the economy.
Industrial production in the United Kingdom continued to decline
in August and its three-month average fell to 1 percent below its yearearlier level.
miners' strike.

This weakness is in part the result of the ongoing coal
To date the effect of this strike on other industries

has been limited despite the substantial drop in coal output.
three-fourths of the miners have remained away from work.

About

Negotiations

to end the eight-month strike have made little progress; however, a
strike by the pit supervisors, which would have halted virtually all
coal production, has been avoided.
The U.K. unemployment rate rose 0.1 percent to 12.9 percent
(s.a.) in September.

Retail prices rose slightly in September but the

year-over-year inflation rate fell to 4.7 percent.
The U.K.'s external position deteriorated sharply in the second
and third quarters.

The trade deficit was $7.5 billion (s.a.a.r.) in

the third quarter, bringing the total deficit for the first nine months
of 1984 to $4.9 billion (s.a.a.r.), from $1.1 billion for the
comparable period in 1983.

Although the U.K. oil account remains in

substantial surplus, future growth of this surplus is expected to be
tempered by the $1.35/barrel reduction in the price of British North
Sea oil, announced on October 17 in response to Norwegian price cuts.
The cumulative current account deficit for the first three quarters
equalled $440 million (s.a.a.r.), compared with a $4.7 billion surplus
for the comparable period in 1983.

Fourth-quarter figures, however,

are expected to benefit by the release from the European Community of
the 1983 budget refund amounting to about $550 million.

IV-18

On Monday, October 1, the Bank of England purchased Johnson
Matthey Bankers (JMB), one of five members participating in the London
fix, for £1 in order to prevent the possible widespread effects of
its insolvency.

The parent company (Johnson Matthey group) agreed to

contribute £50 million in new capital to JMB prior to its sale and
the leading U.K. financial institutions have supplied the Bank of
England with sizable indemnities in case the losses on JMB's commercial
loan portfolio exceed its (recently augmented) capital.

To shore up

the parent company, the largest shareholders agreed to invest a further
£25 million in the Johnson Matthey group and a consortium of banks
have provided the group with a £250 million line of credit.
Industrial production in France rose by 4.6 percent (s.a.) in the
July-August period.

However, this increase may reflect unusual

seasonal production patterns over the summer holiday period.
recent data continue to suggest weak economic activity.

Other

Real GDP data

for the second quarter were revised downward slightly, showing a 0.4
percent (s.a.) decline in the quarter and a year-over-year increase of
only 1 percent.

The unemployment rate in September was unchanged at

10.1 percent (s.a.) following increases in nine of the previous ten
months.

Inflation has continued to moderate with the year-over-year

consumer price inflation rate easing to 7.1 percent in September.
On October 29 the French government announced that its 1985
monetary target would be a growth rate of M2R in the range of 4 to 6
percent, down slightly from the 1984 target range of 5-1/2 to 6-1/2
percent.

(M2R in June was 9.2 percent above its year-earlier level and

was up by 6.7 percent (s.a.a.r.) compared with its base period centered

IV-19

in December 1983.)

The government also announced that the current

monetary control technique of placing ceilings on commercial bank
credit expansion will be removed at the end of this year and replaced
by a credit control system relying on commercial banks holding required
reserves at the Bank of France.

Details of the new system remain to be

worked out.
There was a small trade surplus in September.

For the first nine

months of this year, the cumulative trade deficit was $3 billion
(s.a.a.r.), less than half the deficit recorded in the same period last
year.
The latest industrial production data indicate that the economic
recovery in Italy is continuing; the average level of industrial
production was 2.5 percent higher in July and August than in the same
two months of 1983.

Also, the unemployment rate fell from 10.4 percent

in the second quarter to 10.1 percent in the third quarter of 1984.
The official September household survey shows that consumers' outlooks
remain positive, with more families likely to buy consumer durables
than was the case in July.

Consumers are also more confident that

inflation has moderated, and they expect this trend to continue.

the end of September, the year-on-year inflation rate was 9.5 percent,
the lowest such rate since March 1973.
The government's proposed budget for next year calls for a
deficit equivalent to 15.7 percent of GDP in 1985, down from the latest
projection of 16.5 percent for 1984.
are not yet available.

Details of the budget proposals

Despite labor opposition, the government

appears to be counting on holding wage increases for government workers

IV-20

to 7 percent as a way to encourage wage restraint in the private sector
and to reduce inflationary expectations.

If the rate of inflation is

brought down to 7 percent, Prime Minister Craxi has proposed that a new
"heavy" lira be issued in 1985 or later, worth 1000 of the current
lire.
The trade deficit for the first seven months of this year was
$9.8 billion (s.a.a.r.), compared with $8.7 billion in the same period
in 1983.
Economic expansion in Canada continues at a moderate pace.
Industrial production declined slightly in August following a sharp
jump in July; the July increase was associated with a pickup in the
automotive sector and an across-the-board increase in U.S. imports.

October 29, Canadian U.A.W. members ratified a three-year contract,
ending the 13-day strike against General Motors.

The contract includes

a larger increase in hourly wages and more paid time off than the
recent settlement with U.S. workers, but does not contain the job
security and training provisions of the latter.

If inflation in both

countries were to average 5 percent over the next three years, average
wage rates for G.M.'s Canadian workers would rise about 20 percent,
compared with a 17 percent rise for U.S. workers.

The unemployment

rate in August increased 0.6 percent from July to 11.8 percent (s.a.),
the highest rate in a year.

The rise is associated with an increase in

the labor force rather than a decline in employment.
In September, the consumer price index stood only 3.8.percent
(s.a.) above its year-earlier level.

The cumulative trade surplus

through August reached $15.6 billion (s.a.a.r.), somewhat higher than

IV-21

in the same period last year.

An increasing service account deficit,

however, helped hold the current account surplus to $1 billion
(s.a.a.r.) in the first half of 1984, compared with $3.2 billion in the
comparable period last year.
In early October a Swedish government-appointed committee
formally recommended that a limited number of foreign banks be allowed
to establish subsidiaries in Sweden.

Changes in the existing banking

laws, which prohibit foreign banking operations in Sweden, should take
place in July 1985 with foreign banks beginning operations in early
1986.

Foreign banks would be required to provide the same range of

banking activities as domestic banks and would be regulated in the same
manner.

Other restrictions include the prohibition of foreign banks

owning shares of any domestic banks or of any non-bank financial
institutions.

In their first year of operations, foreign bank's equity

capital would be limited to a maximum of $9 million and a minimum of
$3 million.

IV-22

Debt Situation in Selected Developing Countries
The Philippines and Venezuela recently reached agreements in
ciple with their bank creditors on multi-year reschedulings,

prin-

and Argen-

tina, Brazil and Chile have begun or are about to begin discussions with
bank creditors on financing packages for 1985 and subsequent years.
Argentina and the Philippines are taking measures prerequisite to the
approval of IMF programs.

Mexico, Brazil and Chile continue to operate

successfully under their IMF programs, although Brazilian inflation
remains high, and Chile has had to take additional measures to meet its
fiscal targets.

Peru's external arrears continue to accumulate.

New lending to non-OPEC developing countries by banks in the BIS
reporting area continued at a relatively low level in
according to the BIS'

latest quarterly report.

the second quarter,

The second-quarter data

show an increase in outstanding claims on non-OPEC developing countries
of $4.7 billion, after adjustment for the effects of exchange rate
changes.

This brings the net increase for the first half to about $ 6

billion, close to the rate of net bank lending last year.
the quarterly series is

less broad than in

the semiannual series and has

usually shown a smaller volume of new lending.)
in

claims on Mexico,

(Coverage in

Increases (unadjusted)

Brazil and Chile reflected primarily drawings on

loans arranged earlier as part of financing packages,

and accounted for

more than one-half of the total, but there seems also to have been an
increase in voluntary lending to Mexico.

Much of the rest was accounted

for by new lending to Egypt and Israel.
Following the IMF Managing Director's acceptance of a letter of
intent,

Argentina and its bank creditors opened discussions on a new

medium-term credit and restructuring.

By late October,

Argentina had

IV-23

eliminated interest arrears on public sector debts to bank through May 2
and repaid the $100 million short-term credit obtained from banks as part
of the March 30 package.

The banks on the Working Committee have agreed

to another postponement of the repayment of the $750 million balance due
on the 1982 bridge loan; it is now scheduled for January 15.

Inflation

intensified in September when the CPI rose by 27.5 percent to a level 687
percent higher than a year earlier.
only by

The peso price of the dollar rose

23.4 percent in September; since the end of 1983, it has risen

about 26 percent less than the CPI.

Another compensatory wage adjustment

was announced at the beginning of October to achieve a 6 percent increase
in real wages in the first nine months of the year.

It is payable half

at the end of October and half at the end of November.

Another wage

adjustment has been promised early next year to bring real wages in
December 1984 to a level 8 percent above a year earlier.

By delaying

payment of these increases, the authorities hope to reconcile their
promises to the Argentine people with the commitments recently made to
the IMF on wage policies and the public sector deficit.
Brazil registered a trade surplus of $9.7 billion during the first
nine months of the year, exceeding the target of $9 billion for the
entire year.

The current account deficit for 1984 is now expected to be

$2 billion, substantially below the IMF projection of $5.3 billion.

The

general price index increased by 10.3 percent in September, not significantly different from the average during the first eight months of the
year.

The monetary base and M1 increased substantially in September as

the regulations passed in mid-September to restrict the growth of credit
do not appear to have been entirely successful in slowing such growth.

IV-24

Negotiations with creditor banks on a possible multi-year rescheduling
are expected to begin on November 14.

Brazil is expected to have about

$8 billion in cash reserves by year-end and may not seek new credits from
banks in 1985.
Mexico's current account surplus in the first half of 1984 was $3.3
billion, $1 billion higher than in the first half of 1983.

The surplus

is likely to narrow in the second half, reflecting some rise in imports
as the economy begins to recover and the lagged effect of the increase in
dollar interest rates in the second quarter.

Nevertheless, the surplus

for the year is likely to reach about $4.5 billion, some $2 billion more
than previously projected, unless there is a significant decline in world
oil prices in coming days.

The annual rate of increase in the CPI in the

first three quarters was 61 percent, down from 85 percent in the same
period of 1983.

In the third quarter, the annual rate was 43.1 percent.

There continue to be indications that economic activity began to pick up
in the third quarter.
Chile would like to negotiate a rescheduling of debt due bank creditors over 1985-90 and some reduction in interest charges.

A request to

banks for about $800 million in new money for 1985 also looks likely.
Negotiations are expected to begin in November.

Chilean authorities have

begun discussions with the IMF on a new arrangement to follow the
stand-by that expires at the end of this year.

Chile has complied with

that program, but additional adjustment measures were taken in September
in order to remain in compliance through the end of the year.
Peru's external arrears continue to mount and are now about $300
million.

Banks have discussed the possibility of disbursing $100 million

IV-25

(held over from a 1983 agreement) in return for an equivalent drawdown of
Peru's reserves and payment of interest arrears, but are divided on
whether to do this in the absence of a viable IMF program.

The Peruvian

government is also divided on the proposal.
Venezuela's private sector interest arrears now exceed $1 billion.
Final approval of the rescheduling agreement reached last month is contingent on the government making substantial progress in reducing those
arrears.
On October 11, the Managing Director of the IMF accepted the
Philippines' letter of intent for an 18-month stand-by arrangement.

certain prior actions are taken, and if the Managing Director receives
assurances that adequate financing will be forthcoming, the program will
be sent to the Executive Board in early November.

At that point, the

United States, Japan and Korea will provide bridge financing of $80
million until the Philippines is able to draw on the stand-by.

In mid-

October, the peso was allowed to "float" and soon depreciated by about 10
percent.

Later in October, the government raised petroleum product

prices and various retail prices, touching off public disturbances.

The

exchange rate and price measures fulfill some of the prior actions
required by the IMF.

On October 9, the Philippines was granted a fourth

90-day extension of the moratorium on the payment of principal to banks
on non-trade debt.

On October 17 the advisory committee of creditor

banks announced it had reached agreement to reschedule over a 10-year
period about $5 billion in Philippine loans maturing between October 1983
and December 1986, to provide $925 million in new money, and also to
provide a revolving short-term trade facility of about $3 billion.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, November 7, 1984 : Greenbook Part 2

FRASER