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Strictly Confidential (FR) Class I FOMC

September 25,

SUMMARY AND OUTLOOK

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

1985

DOMESTIC NONFINANCIAL DEVELOPMENTS

Recent developments.

Economic activity appears to have expanded

moderately in the third quarter.

Auto sales have increased sharply since

mid-August, reducing the stocks of 1985 cars.

But outlays for other

types of consumer and investment goods have been sluggish in recent
months.

At the same time, recent increases in prices and wages have been

relatively small.
The index of industrial production rose 0.3 percent in August, but
with downward revisions to earlier months, was only 1/2 percent above the
second-quarter average.

Increases in August were largest for consumer

durable goods--mainly because of a spurt in assemblies of light trucks-and for defense and space equipment.

Output of consumer goods other than

motor vehicles has shown little net change in recent months.

Industrial

capacity utilization--at 80-1/2 percent in August--has been essentially
flat since spring.
Labor demand picked up in August, with nonfarm payroll employment
expanding nearly 300,000-well above the average monthly increment in the
preceding four months.
and finance.

Hiring continued to be brisk in services, trade,

In addition, manufacturing employment rose for the first

time since January, although much of the reported increase may reflect
seasonal adjustment difficulties during the model changeover period in

the motor vehicles industry.

The civilian unemployment rate, which had

held at 7.3 percent since February, dropped to 7.0 percent in August.

Consumer spending rose sharply in August, mainly because of the
surge in auto sales that followed the introduction in mid-August of
wide-ranging incentives for 1985 models.

Sales of domestic autos, which

had been sluggish earlier in the summer, rose to a 9-1/2 million unit
annual rate in August and to a record 12 million unit rate in the first
twenty days of September.

Outlays for consumer goods other than autos,

which had posted vigorous gains at the start of the year, have been lackluster since early spring.

Nonetheless, with real income virtually flat,

on balance, over the past half-year, the saving rate since June has been
below 4 percent, compared with an average of around 6 percent over the
past decade.
Sales of new homes continued to trend up through July, and sales of
existing homes registered a sizable advance in August.

In contrast,

construction of new single-family houses has remained at around a
1.05 million unit annual rate since early spring despite sharply lower
mortgage interest rates.

Multifamily housing activity, however, has

remained relatively buoyant even though vacancy rates in many areas are
at record levels.
Indicators of business fixed investment point to sluggish performance
in the second half.

Although shipments of nondefense capital goods

bounced back in August, new orders, excluding the volatile aircraft
category, fell 3-1/4 percent.

Bookings for high-technology items did

post a substantial increase in August, but orders for these types of
equipment have not grown much over the past year.

Moreover, spending for

nonresidential structures has fallen in recent months, with particular

weakness in outlays for "other" commercial buildings such as stores and
warehouses and for industrial structures.
Inventory investment in July continued at about the slow secondquarter pace.

Faced with sluggish orders and shipments, manufacturers

have held their stocks unchanged this year.

In the trade sector,

stocks at nonauto retailers also have shown little change, on balance,
in recent months, although they continue to appear a bit high in relation
to sales.

At automobile dealers, stocks of 1985 models are being drawn

down by the special financing incentives; given current production
schedules and an expected sales "payback" in coming months, an accumulation
of 1986 models is likely in the fourth quarter.
Recent price and wage data suggest that inflation is holding
steady at rates somewhat lower than earlier in the year.

The consumer

price index rose 0.2 percent for a fourth month in August, below the
average monthly change between December and April.

Retail food and

energy prices, on balance, have been virtually flat since early spring.
Prices of goods other than food and energy were little changed in
August after declining for three months, in part because of continuing
competition from low-priced imports; increases in prices of services,
however, remain sizable.

Wage rates, as measured by the index of

average hourly earnings, were flat in July and August, and now stand
just 3 percent above the level of a year earlier.
Outlook.

The staff estimates that real GNP rose at a 3 percent

annual rate in the third quarter, compared with a 1 percent rate in the
first half.

Growth in domestic final demand appears to have been

well-maintained, largely because of the surge in auto sales; the rise in
outlays for other goods and services probably was small.

At the same

time, inventory investment excluding autos is projected to remain near
the reduced second-quarter pace; and in the external sector, little
change is expected to have occurred in either exports or imports.

It

should be noted that the overall rise in production this quarter largely
reflects developments in the automobile and farm sectors, which together
account for more than a third of the estimated rise in real GNP.

Prices,

as measured by the gross business product fixed-weighted price index, are
estimated to have risen at around a 2-3/4 percent rate, almost a percentage
point less than in the first half.
The most significant change in the assumptions underlying the staff
projections of real activity and inflation is the new path projected for
the foreign exchange value of the dollar.

In light of the recent G-5

announcement, the dollar now is expected to be considerably lower in the
near term than previously assumed and still to decline moderately further
next year.
With respect to monetary policy, the staff is assuming a slowing in
the growth of M1 during the remainder of this year, although growth over
the second half is expected to be above the 3 to 8 percent target range.
For 1986, M1 still is assumed to grow at around the midpoint of the
tentative range.

Interest rates are anticipated to be unchanged to

slightly lower over the projection horizon.

For fiscal policy, the staff

continues to assume the implementation of much of the Congressional

Budget Resolution that was passed in August, although the assumed reductions
in outlays for defense, human resources, and farm programs are a bit
smaller than the congressional targets.

The federal budget deficit on a

unified budget basis is now estimated at $200 billion in fiscal year 1985
and is projected to decline only a bit, to around $192 billion in fiscal
year 1986.

After four years of rapid growth, the structural deficit is

likely to show little change in 1986.
Real GNP growth is expected to average around 2-3/4 percent over
the next five quarters--a bit more than in the last Greenbook.
changes to this projection reflect the lower exchange rate.

The principal

In particular,

imports of goods and services are now projected to stabilize during 1986,
owing to anticipated large increases in prices of foreign goods.

In

addition, increased competitiveness for U.S. exports is expected to be a
stimulus to domestic production next year.

Thus, despite a projected

moderation in domestic final demand to a 2 percent rate during 1986,
domestic production is projected to pick up somewhat.
For domestic demand, the smaller gains projected for 1986 reflect
the absence of incremental fiscal stimulus, the diminishing backlog of
pent-up demands for household durables, and continued slow growth of
business investment.

With the saving rate currently below 4 percent and

indebtedness historically high, consumer spending is expected to slow to
a pace more in line with underlying income growth.

Auto sales, in particular,

are expected to be well maintained at around 10-3/4 million units next
year, but to make no further net contribution to gains in household
spending.

Growth in business fixed investment also is projected to

remain slow.

Although the incentive to invest in new technologies

remains strong, gains in the equipment area are likely to be inhibited by
the substantial margin of existing unused capacity, and outlays for
structures are anticipated to be held down by the end of the boom in
office building.

In contrast, homebuilding is projected to provide some

impetus to growth.
The outlook for inflation also is affected by the revised path for
the dollar.

Incoming information on prices and wages has been quite

favorable, and resource utilization rates are anticipated to be little
changed over the projection horizon.

However, the forces restraining

inflationary pressures are anticipated to be more than offset by rising
costs associated with the sharper depreciation of the dollar.

In addition,

food prices, which are expected to be essentially flat in 1985, are
projected to rise nearly as much as overall prices in 1986.

Reflecting

these influences, the fixed-weighted price index for gross business
product is projected to increase 4-1/4 percent next year, an acceleration
from the 3-1/4 percent rise expected this year that is sharper than shown
in the last Greenbook.
Detailed data for these projections are in the tables shown on the
following pages.

September 25, 1985
I-7
STAFF GNP PROJECTIONS

Percent changes, annual rate
Gross domestic
business product
fixed-weighted
price index
Nominal GNP

Real GNP

rate

Total

8/14/85

9/25/85

8/14/85

9/25/85

Unemployment

------------------------

8/14/85

Excluding food
and energy

9/25/85

8/14/85

9/25/85

(percent)

8/14/85

9/25/85

Annual changes:
1983
1984
1985
1986

<1>
<1>

7.7
10.8
6.1
6.2

7.7
10.8
6.1
6.3

3.7
6.8
2.4
2.7

9.6
7.5
7.3
7.1

9.6
7.5
7.3
7.1

14.9
10.7
5.6
7.1

10.1
7.1
1.6
4.3

7.9
7.5
7.4
7.2

7.9
7.5
7.4
7.2

Quarterly changes:
1984

Q1
Q2
Q3
Q4

<1>
<1>
<1>
<1>

14.9
10.7
5.6
7.1

1985

Ql <1>
Q2 <1>
Q3
Q4

5.6
4.5
6.2
5.8

.3
1.9
3.0
3.0

7.3
7.3
7.3
7.2

7.3
7.3
7.2
7.2

1986

Q1
Q2
Q3
Q4

5.6
7.1
7.3
7.6

2.5
2.7
2.8
2.9

7.1
7.1
7.1
7.1

7.2
7.1
7.0
7.0

-1.0
-. 3

-1.0
-. 3

.1
-. 1

.1
-. 1

-. 1
.0

-. 1
-. 1

-2.1
-1.3
.0
-. 1

-2.1
-1.3
.0
-. 2

Two-quarter changes: <2>
1984

Q2 <1>
Q4 <1>

12.8
6.4

1985

Q2 <1>
Q4

5.1
6.1

1986

Q2
Q4

6.3
6.5

12.8
6.4

8.6
2.9

8.6
2.9

4.2
3.8

4.2
3.8

5.1
6.0

1.0
3.1

1.1
3.0

3.5
3.4

3.7
2.8

6.3
7.4

2.5
2.5

2.6
2.9

3.8
4.2

3.9
4.4

4.4
4.4

4.1
4.5

4.4
4.4

4.4
4.8

Four-quarter changes: <3>
1983
1984
1985
1986

Q4 <1>
Q4 <1>
Q4
Q4

10.4
9.5
5.6
6.4

10.4
9.5
5.5
6.9

<1> Actual.
<2> Percent change from two quarters earlier.
<3> Percent change from four quarters earlier.

CONFIDENTIAL - FR
CLASS II FOMC

September 25, 1985
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of current dollars at annual rates.)

1983

1984

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Gross National Product
Gross domestic purchases
Final sales
Private
Domestic final purchases

3173.8
3154.2
3216.8

3267.0
3273.4

3431.7
3461.5
3419.0
2727.6
2757.4

3553.3
3604.8
3479.5
2775.1
2826.6

3644.7
3703.4
3594.1
2850.4
2909.1

3694.6
3785.2
3622.8
2861.8
2952.4

3758.7
3814.8
3722.1
2941.6
2997.6

2538.0

3286.4
2604.2

2518.4

2610.7

3346.6
3363.0
3350.9
2661.1
2677.5

Personal consumption expenditures
Goods
Services

2070.4
1034.6
1035.8

2141.6
1073.0
1068.6

2181.4
1095.8
1085.7

2230.2
1122.8
1107.5

2276.5
1152.2
1124.4

2332.7
1179.0
1153.7

2361.4
1178.6
1182.8

2396.5
1192.8
1203.8

Gross private domestic investment
Residential structures
Business fixed investment
Change in business inventories
Nonfarm

405.0
113.3
334.6
-42.9
-32.6

449.6
129.8
339.3
-19.4
-5.4

491.9
142.3
353.9
-4.3
11.6

540.0
143.4
383.9
12.7
14.1

623.8
151.2
398.8
73.8
60.6

627.0
155.6
420.8
50.6
47.0

662.8
155.3
435.7
71.8
63.7

637.8
153.5
447.7
36.6
27.2

Net exports of goods and services <1>

19.6
328.5
308.9

-6.5
328.1
334.5

-16.4
342.0
358.4

-29.8
346.1
375.9

-51.5
358.9
410.4

-58.7
362.4
421.1

-90.6
368.6
459.3

-56.0
367.2
423.2

678.8
273.0
405.8

682.2
270.5
411.6

689.8
269.2
420.6

691.4
266.3
425.1

704.4
267.6
436.8

743.7
296.4
447.4

761.0
302.0
458.9

780.5
315.7
464.8

Gross national product in
constant (1972) dollars

1491.0

1524.8

1550.2

1572.7

1610.9

1638.8

1645.2

1662.4

Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)

2662.8
1608.1
2261.4
5.7

2714.4
1642.1
2302.9
4.2

2763.3
1671.3
2367.4
5.0

2836.5
1715.4
2428.6
5.3

2920.5
1755.7
2502.2
6.1

2984.6
1793.1
2554.3
5.7

3047.3
1819.5
2606.4
6.3

3096.2
1847.6
2644.5
6.2

Exports
Imports
Gov't. purchases of goods and services
Federal <2>
State and local

Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-) <3>
State and local government surplus or
deficit(-) (N.I.A. basis)
Excluding social insurance funds
Civilian labor force (millions)
Unemployment rate (percent)
Nonfarm payroll employment
Manufacturing
Industrial production (1977=100)
Capacity utilization: all manufacturing (percent)
Materials (percent)
Housing starts, private (million units, A.R.)
New auto sales (millions, A.R.)
Domestic models
Foreign models

179.1
161.7

216.7
198.2

245.0
227.4

260.0
225.5

277.4
243.3

291.1
246.0

282.8
224.8

291.6
228.7

-185.7
-80.9

-167.3
-74.2

-180.9
-102.5

-180.5
-113.1

-161.3
-113.3

-163.7
-129.6

-180.6
-146.1

-197.8
-169.3

34.1
-1.9

43.9
7.0

47.4
9.5

51.2
12.0

53.9
13.4

54.5
12.6

47.6
4.3

55.6
11.1

110.7
10.4

111.2
10.2

112.1
9.3

112.1
8.5

112.7
7.9

88.8
18.1

89.6
18.3

90.5
18.5

91.8
18.9

93.0
19.2

103.3
70.2
71.4
1.64
8.46
6.06
2.40

106.8
72.5
73.6
1.67
9.10
6.81
2.28

111.7
75.8
77.0
1.79
9.22
6.92
2.31

114.9
77.4
79.3
1.72
9.94
7.29
2.65

119.3
79.8
82.0
1.95
10.52
8.22
2.30

113.5

113.8

7.5

7.4

114.2
7.2

94.0
19.4

94.9
19.5

95.8
19.6

121.5
80.8
82.6

123.4
81.6
83.0

123.1
81.0
81.4

8.23

1.66
10.30
7.94

1.60
10.29
7.50

2.38

2.36

2.79

1.86
10.60

<1> Balance of payments data and details underlying these estimates are shown in the International Developments
section of this part of the Greenbook.
<2> Components of purchases and total receipts and total expenditures are shown in the Federal Sector Account table
which follows.
<3> Estimates in table are evaluated at a 6 percent high employment unemployment rate.

September 25, 1985
CONFIDENTIAL - FR

PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)

CLASS II FOMC

1983

1984

Q1

Q2

Q3

Q4

Q1

Q2

Q3

3.3
3.7
1.1
3.5
4.0

9.4
12.3
6.4
8.6
12.1

6.8
7.4
4.9
6.2
6.9

5.9
8.7
4.2
6.3
9.7

10.1
12.9
3.6
4.2
7.6

7.1
7.9
10.3
8.5
9.5

1.6
5.4
-1.0
-2.4
2.3

4.3
.9
7.9
8.4
4.0

Personal consumption expenditures
Goods
Services

2.6
3.5
1.5

10.0
12.6
7.3

3.8
5.4
2.1

6.8
9.5
3.8

4.6
7.8
1.2

7.9
10.7
4.6

.7
-1.9
3.8

3.6
3.8
3.3

Gross private domestic investment
Residential structures
Business fixed investment

34.1
64.5
.0

52.5
78.1
9.6

38.4
31.6
18.7

37.0
4.0
30.6

71.6
21.3
20.6

-2.2
1.2
21.3

24.9
-4.6
13.7

-13.1
-5.5
8.5

-8.2
-17.4
6.8
-1.2

-2.6
-5.9
7.6
-.2

-.5
-5.3
-1.9
2.7

-4.3
-8.7
9.2
-1.4

1.0
-2.8
3.4
3.5

18.6
45.2
12.2
3.7

5.4
6.2
-2.3
4.8

5.9
15.2
17.5
-.2

2.1

3.3

7.7

8.2

8.6

6.3

3.9

3.5

Gross national product
Gross domestic purchases
Final sales

8.5
6.7
5.9

12.3
16.0
8.9

10.1
11.4
8.1

10.6
12.2
8.4

14.9
17.6
7.3

10.7
11.4
13.8

5.6
9.1
3.2

7.1
3.2
11.4

Personal consumption expenditures
Goods
Services

4.8
3.6
6.1

14.5
15.7
13.3

7.6
8.8
6.6

9.2
10.2
8.3

8.6
10.9
6.2

10.2
9.6
10.9

5.0
-.1
10.5

Gross private domestic investment
Residential structures
Business fixed investment

34.3
79.3
-5.5

52.0
71.9
5.7

43.2
44.4
18.5

45.3
3.3
38.4

78.0
23.6
16.5

2.0
12.1
23.9

24.9
-. 6
14.9

Gov't. purchases of goods and services
Federal
National defense
State and local

-1.3
-6.9
7.9
4.2

2.0
-3.
9.8
5.8

4.5
-2.0
3.3
9.0

.9
-4.3
13.2
4.4

7.8
2.0
12.5
11.5

24.3
50.5
14.7
10.0

9.6
7.8
-.8
10.7

10.7
19.4
22.1
5.2

4.
3.6
5.6

7.5
8.0
8.7

11.7
7.3
7.3

10.7
11.0
11.0

12.7
12.4
9.7

8.6
9.1
8.8

8.4
8.6
5.9

6.0
6.7
6.5

Corporate profite with I.V.A. and C.C.Adl.
Corporate pofits before tea

94.8
16.0

114.3
125.7

63.4
73.3

26.8
-3.3

29.6
35.5

21.3
4.5

-10.9
-30.3

13.0
7.1

Nonfarm payroll wem oywt
Manufacturint

.5
-1.2

3.4
4.4

4.2
6.2

5.8
7.8

5.5
6.4

4.3
4.5

3.9
2.4

4.0
1.1

4.4
5.7
1.3

8.1
3.5
-4.2

2.1
2.2
.1

1.0
4.1
3.0

2.9
6.1
3.1

5.5
3.7
-1.7

-1.1
3.6
4.7

2.2
3.7
1.4

3.0

2.6

3.1

4.4

4.4

3.3

3.9

2.7
4.9
.4

3.9
3.5
4.3

4.5
3.4
4.2

3.5
3.8
4.2

4.
3.k
5.2

4.1
5.6
3.7

. 4.0
4.9
3.7

3.5
3.9
3.6

11.5

14.0

19.8

12.0

16.0

7.6

6.4

-. 7

Q4

Constant (1972) Dollars
Gross national product
Gross domestic purchases

Final sales
Private
Domestic final purchases

Gov't. purchases of goods and services
Federal
National defense
State and local
Disposable personal income

Current Dollars

Disposable personal income
Personal income
Wage and salary disbursements

Nonfarm businass sector
Output per hour
Compensation per hour

Unit labor costs
GNP implicit deflator <1>
Gross domestic business product

fixed-vwighted price index <2>
Excluding food and energy
Consumer price index (all urban)
Industrial production

<1> Excluding the federal pay increase, the rate of change in
<2> Uses expenditures in 1972 as weights.

1393-Q4 was 4.4 percent.

-14.3
-4.7
11.5

2.8

I-10
CONFIDENTIAL - FR
CLASS II FOMC

September 25, 1985

GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Quarterly figures are seasonally adjusted.
Expenditures and income
figures are billions of current dollars at annual rates.)

Projected
1986

1985
Q2

Q3

Q4

4021.5
4138.2
3988.5
3130.6
3247.3

4091.1
4200.0

4057.5
3189.6
3298.5

4163.6
4267.4
4129.2
3247.4
3351.2

4240.3
4335.4
4205.5
3308.2
3403.3

2550.2
1235.9
1314.3

2596.5
1255.4
1341.1

2636.7
1269.5
1367.2

2677.0
1283.4
1393.6

2717.6
1296.9
1420.7

632.4
160.5
468.3
3.6
1.0

673.8
167.1
473.2
33.5
31.4

683.8
170.3
480.5
33.1
31.4

695.4
174.4
487.4
33.6
32.4

708.6
179.5
494.7
34.4
33.2

720.5
183.4
502.3
34.8
33.6

-94.0
347.7
441.6

-94.6
346.6
441.3

-105.8
358.0
463.8

-116.7
363.0
479.7

-108.9
375.2
484.1

-103.8
387.5
491.3

-95.1
402.8
497.9

791.9
319.9
472.0

810.9
324.2
486.7

837.4
339.1
498.3

848.9
342.7
506.2

857.9
344.0
513.9

867.9
346.5
521.4

881.8
352.6
529.2

897.3
360.0
537.3

Gross national product in
constant (1972) dollars

1663.5

1671.3

1683.6

1696.3

1706.8

1718.3

1730.3

1742.9

Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)

3143.8
1882.7
2654.8
4.5

3174.7
1910.6
2726.5
5.1

3202.0
1933.4
2718.5
3.2

3264.2 3317.9
1963.4
1993.1
2771.1 2826.7
4.4
4.6

3371.9
3429.7
2023.9
2055.3
2869.0 2915.0
4.5
4.5

3490.6
2087.6

292.3
222.3

298.5
221.0

319.4
240.6

311.2
232.0

301.5
222.8

308.0
228.3

313.3
232.1

319.7
237.0

-165.1
-129.4

-214.1
-178.3

-192.9
-157.3

-198.7
-163.4

-204.8
-169.2

-195.7
-160.1

-190.3
-155.4

-189.0
-155.0

50.3
1.7

52.0
2.6

52.7
2.5

53.9
2.7

Q1

Q2

Q3

Q4

Gross National Product
Gross domestic purchases
Final sales
Private
Domestic final purchases

3810.6
3885.2
3770.0
2978.1
3052.6

3853.1
3947.1
3835.2
3024.3
3118.3

3911.2
4005.9
3907.6
3070.2
3164.8

3967.2
4073.0
3933.6
3084.7
3190.5

Personal consumption expenditures
Goods

2446.5
1212.1
1234.4

2493.0
1231.1
1261.9

2536.0
1246.5
1289.5

Gross private domestic investment
Residential structures
Business fixed investment
Change in business inventories
Nonfarm

646.8
155.2
450.9
40.7
34.1

643.2
158.0
467.3
17.9
11.4

Net exports of goods and services1
Exports
Imports

-74.5
360.7
435.2

Gov't. purchases of goods and services
2
Federal

Services

State and local

Corporate profits with I.V.A. and C.C. Adj.
Corporate profits before tax
Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-)3
State and local government surplus or
deficit(-) (N.I.A. basis)
Excluding social insurance funds

48.6
1.6

115.2
7.3

115.4
7.2

116.0
7.2

116.6
7.2

117.1
7.1

117.6
7.0

118.1
7.0

96.6
19.6

Nonfarm payroll employment
Manufacturing

(percent)

Materials (percent)
Housing starts, private (million units, A.R.)
New auto sales (millions,
A.R.)
Domestic models

Foreign models

4.6

115.2
7.3

Civilian labor force (millions)
Unemployment rate (percent)

Industrial production (1977=l00)
Capacity utilization: all manufacturing

2963.4

50.3
4.2

97.3
19.4

98.0
19.4

98.6
19.5

99.1
19.5

99.7
19.6

100.3
19.6

100.8
19.7

123.8
80.5
81.5

124.2
80.3
80.4

124.7
80.2
79.9

125.6
80.1
79.9

126.4
80.1
79.8

127.3
80.0
79.8

128.3
80.1
79.7

129.2
80.1
79.7

1.80
10.87
8.46
2.42

1.77
10.92
8.27
2.65

1.73
12.10
9.20
2.90

1.80
9.90
6.90
3.00

1.80
10.70
7.70
3.00

1.80
10.70
7.70
3.00

1.80
10.70
7.60
3.10

1.80
10.60
7.50
3.10

53.7
8.3

1. Balance of payments data and details underlying these estimates are sh

48.9
1.1

Q1

in the International Developments

section of this part of the Greenbook.

2. Components of purchases and total receipts and total expenditures are ebom is the Federal Sector Account table
which follows.
3. Estimates in table are evaluated at a 6 perceot hlah employment unmployeat rate.

I-11
September 25, 1985
PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)

CONFIDENTIAL - FR

CLASS II FOMC

Q1

Q2

Q3

Q4

Projected_
1986
Q3
Q2
Q1

.3
3.9
-. 3
-. 4
4.1

1.9
3.2
4.6
4.8
6.4

3.0
2.9
4.6
3.2
3.1

3.0
2.7
-. 1
-. 5
-. 8

2.5
2.4
2.7
3.3
3.2

2.7
1.8
2.7
3.2
2.1

5.2
5.4
5.0

4.8
5.4
4.2

4.3
5.1
3.4

-2.0
-5.8
2.6

3.2
3.9
2.4

1.7
1.5
2.0

3.1
5.3
-1.6

-3.5
6.4
14.5

-9.8
3.9
-2.6

24.7
13.0
1.6

2.0
3.7
2.8

3.4
6.1
2.8

.3
.7
-. 2
.0

3.7
-. 4
7.2
6.7

10.8
20.0
8.3
4.4

1.4
.2
2.1
2.2

.2
-2.6
2.1
2.2

.8
-1.2
2.1
2.1

-1.6

8.2

-3.7

3.5

4.0

1.5

1.8

1.8

5.6
7.6
5.2

4.5
6.5
7.1

6.2
6.1
7.8

5.8
6.9
2.7

5.6
6.6
5.7

7.1
6.1
7.1

7.3
6.6
7.3

7.6
6.5
7.6

Personal consumption expenditures
Goods
Services

8.6
6.6
10.6

7.8
6.4
9.2

7.1
5.1
9.0

2.3
-3.4
7.9

7.5
6.5
8.4

6.3
4.6
8.0

6.3
4.4
8.0

6.2
4.3
8.0

Gross private domestic investment
Residential structures
Business fixed investment

5.8
4.6
3.0

-2.2
7.4
15.3

-6.5
6.5
.9

28.9
17.5
4.3

6.1
7.9
6.3

7.0
10.0
5.9

7.8
12.2
6.1

6.8
9.0
6.2

Gov't. purchases of goods and services
Federal
National defense
State and local

5.9
5.4
4.0
6.3

10.0
5.6
12.8
13.0

13.7
19.7
9.8
9.9

5.6
4.3
7.3
6.5

4.3
1.5
6.5
6.2

4.8
2.9
5.6
6.0

6.6
7.2
7.3
6.1

7.2
8.7
7.2
6.3

Disposable personal income
Personal income
Wage and salary disbursements

1.6
6.3
7.8

11.2
4.0
6.1

-1.2
3.5
4.9

8.0
8.0
6.4

8.3
6.7
6.2

6.1
6.7
6.3

6.6
7.0
6.4

6.8
7.3
6.4

1.0
-10.7

8.8
-2.3

31.4
40.5

-9.9
-13.5

-11.9
-14.9

8.9
10.2

7.1
6.8

8.4
8.7

3.3
.0

2.9
-2.7

2.7
.0

2.3
1.2

2.4
.8

2.3
.8

2.3
1.0

2.1
1.0

-3.1
5.0
8.4

1.0
3.3
2.3

1.0
3.0
2.0

.7
3.9
3.2

1.2
4.8
3.6

.9
4.3
3.4

1.2
4.5
3.3

1.2
4.7
3.5

GNP implicit deflator
Gross domestic business product
2
fixed-weighted price index
Excluding food and energy
Consumer price index (all urban)

5.4

2.6

3.1

2.7

3.0

4.3

4.3

4.5

3.6
4.6
3.2

3.7
3.8
4.2

2.8
3.7
2.3

2.8
3.5
2.9

3.5
4.0
4.1

4.3
4.7
4.5

4.3
4.7
4.6

4.5
4.8
4.8

Industrial production

2.1

1.4

1.7

2.9

2.6

2.8

3.0

3.1

1985

Q4

Constant (1972) Dollars
Gross national product
Gross domestic purchases

Final sales
Private
Domestic final purchases
Personal consumption expenditures

Goods
Services
Gross private domestic investment
Residential structures
Business fixed investment
Gov't. purchases of goods and services
Federal
National defense
State and local
Disposable personal income
Current Dollars
Gross national product
Gross domestic purchases
Final sales

Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax
Nonfarm payroll employment
Manufacturing
Nonfarm business sector
Output per hour
Compensation per hour
Unit labor costs
1

1. Excluding Federal pay increase, the rate of change in 1985-Q1 is 5.0 percent and in 1986-Q1 is 2.9 percent.
2. Uses expenditures in 1972 as weights.

CONFIDENTIAL - FR
CLASS II FOMC

1-12
September 25, 1985
GROSS NATIONAL PRODUCT AND RELATED ITEMS
(Expenditures and income figures are billions of current dollars.)
-Projected-

1979

1980

1981

1982

1983

1984

1985

1986

Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases

2417.8
2404.5
2403.5
1929.2
1915.9

2631.7
2607.7
2641.4
2103.7
2079.7

2957.7
2929.8
2931.7
2335.2
2307.2

3069.2
3050.2
3095.4
2444.9
2425.9

3304.8
3313.1
3318.3
2632.7
2641.0

3662.8
3727.0
3604.6
2857.2
2921.4

3885.5
3977.7
3861.6
3039.3
3131.6

4129.1
4235.2
4095.2
3219.0
3325.1

Personal consumption expenditures
Goods
Services

1507.1
813.4
693.7

1668.0
883.5
784.5

1849.1
966.1
883.0

1984.9
1002.6
982.2

2155.9
1081.5
1074.4

2341.8
1175.7
1166.1

2506.4
1231.4
1275.0

2656.9
1276.3
1380.6

Gross private domestic investment
Residential construction
Business fixed investment
Change in business inventories
Nonfarm

423.0
118.5
290.2
14.3
8.6

401.9
102.9
308.8

484.2
104.3
353.9
26.0
18.2

414.9
91.3
349.6
-26.1
-23.9

471.6
132.2
352.9
-13.5
-3.1

637.8
153.9
425.7
58.2
49.6

649.1
160.2
464.9
23.9
19.5

702.1
176.9
491.2
34.0
32.6

Net exports of goods and services1
Exports
Imports

13.2
281.3
268.1

28.0
369.9
341.9

19.0
348.4
329.4

-8.3
336.2
344.4

-64.2
364.3
428.5

-92.2
353.3
445.5

-106.1
382.1
488.2

Gov't. purchases of goods and services
2
Federal
State and local

474.4
168.3
306.0

537.8
197.0
340.8

596.5
228.9
367.6

650.5
258.9
391.5

685.5
269.7
415.8

747.4
295.4
452.0

822.3
331.5
490.8

876.2
350.8
525.4

Gross national product in
constant (1972) dollars

1479.4

1475.0

1512.1

1480.0

1534.7

1639.3

1678.7

1724.6

Personal income
Wage and salary disbursements
Disposable personal income
Saving rate (percent)

1951.1
1237.6
1650.2
5.9

2165.3
1356.7
1828.9
6.0

2429.4
1493.1
2041.7
6.7

2584.6
1568.7
2180.5
6.2

2744.2
1659.2
2340.1
5.0

3012.1
1804.0

3196.2
1922.5
2717.7
4.3

3402.5
2040.0
2893.5
4.6

Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

194.8
252.7

175.4
234.6

189.9
221.2

159.1
165.5

225.2
203.2

285.7
235.7

305.3
228.9

310.6
230.0

Federal government surplus or deficit (-)
(N.I.A. basis)
High employment surplus or deficit (-)

-16.1
-20.8

-61.2
-36.4

,-64.3
-31.3

-148.2
-61.6

-178.6
-92.7

-175.8
-139.6

-192.7
-157.1

-194.9
-160.0

30.4
6.6

30.6
3.5

37.6
7.8

32.9
-.8

44.1
6.6

52.9
10.4

105.0
5.8

106.9
7.1

108.7
7.6

110.2
9.7

111.6
9.6

113.5
7.5

115.4
7.3

117.3
7.1

89.8
21.0

90.4
20.3

91.2
20.2

89.6
18.8

90.2
18.4

94.5
19.4

97.6
19.5

100.0
19.6

State and local government surplus or
deficit (-) (N.I.A. basis)
Excluding social insurance funds

Civilian labor force (millions)
Unemployment rate (percent)
Nonfarm payroll employment (millions)
Manufacturing

-9.8
-4.5
23.9
338.8

314.8

2576.8
6.1

50.4
3.8.

52.2
2.4

Industrial production (1977=100)
Capacity utilization: all manufacturing (percent)
Materials (percent)

110.7

108.6

111.0

84.6
87.1

79.3
81.1

78.3
81.1

70.3
71.7

109.2
74.0
75.3

121.8
80.8
82.3

124.6
80.3
80.4

127.8
80.1
79.8

Housing starts, private (million units, A.R.)
New auto sales (millions, A.R.)
Domestic models
Foreign models

1.72
10.68

1.30
9.04
6.62
2.42

1.10
8.56
6.24
2.32

1.06
8.00
5.77
2.23

1.70
9.18
6.77
2.41

1.77
10.43
7.97
2.46

1.77
10.94
8.20
2.74

1.80
10.68
7.63
3.05

8.36

2.32

103.1

1. Balance of payments data underlying these estimates are shown in the International Developments section of this
part of the Greenbook.
2. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table
which follows.

September 25,
CONFIDENTIAL - FR
CLASS II FOMC

1985

PERCENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS

1979

1980

1981

1982

-Projected-1985
1986

1983

1984

4.8
6.0
3.4

5.3
7.1
3.2

3.8
3.7
4.0

1.8
1.3
2.5

13.7
41.7
2.5

31.2
12.2
19.8

.2
2.1
6.4

4.5
6.7
2.5

Constant (1972) Dollars
-. 3

-2.1
-1.2
-. 7
-1.3
-. 2

Gross national product
Gross domestic purchases
Final sales
Private
Domestic final purchases

-1.2
.5
.1
-1.0

Personal consumption expenditures
Goods
Services

.5
-1.4
2.7

2.0
1.7
2.3

-11.8
-20.3
-2.4

10.7
-5.5
5.6

Gross private domestic investment
Residential structures
Business fixed investment

-. 2
-5.3
7.3

Gov't. purchases of goods and services
Federal
National defense
State and local

1.3
1.8
2.6
1.1

Disposable personal income

2.7

2.2
4.2
3.9
1.0
.6

-15.8
-14.8
-4.7

1.0
3.6
5.1
-. 6

2.0
6.1
7.6
-. 6

-. 3
-. 6
7.1
.0

3.5
5.4
5.8
2.2

5.0
8.4
6.0
2.7

2.5
2.2
3.3
2.7

2.7

.9

3.5

6.7

2.3

2.3

10.8
12.5
8.6

6.1
6.7
7.1

6.3
6.5
6.0

7.0
4.7
9.3

6.0
3.6
8.3

Current Dollars
Gross national product
Gross doestic purchases
Final sales

11.7
11.1
12.4

8.8
8.4
9.9

12.4
12.3
11.0

3.8
4.1
5.6

7.7
8.6
7.2

Personal consumption expenditures
Goods
Services

11.9
11.7
12.2

10.7
8.6
13.1

10.9
9.3
12.6

7.3
3.8
11.2

8.6
7.9
9.4

Gross private domestic investment
Residential structures
Business fixed investment

9.4
6.6
16.6

Gov't. purchases of goods and services
Federal
National defense
State and local

9.8
9.6
11.5
9.9

13.4
17.1
17.3
11.4

10.9
16.2
17.2
7.9

Disposable personal income
Personal income
Wage and salary disbursements

12.0
12.6
11.9

10.8
11.0
9.6

Corporate profits with I.V.A. and C.C.Adj.
Corporate profits before tax

1.2
10.3

Nonfarm payroll employment
Manufacturing
Nonfarm business sector
Output per hour
Compensation perhour
Unit labor costs
GNP implicit deflator
Gross domestic business product
fixed-weighted price index 1
Excluding food and energy
Consumer price index (all urban)
Industrial production
1.

Uses expenditures in 1972 as weights.

-5.0
-13.2
6.4

20.5
1.4
14.6

-14.3
-12.4
-1.2

13.7
44.7
.9

35.2
16.4
20.6

1.8
4.1
9.2

8.2
10.4
- 5.7

9.0
13.1
16.8
6.5

5.4
4.2
11.7
6.2

9.0
9.5
10.5
8.7

10.0
12.2
9.8
8.6

6.6
5.8
7.4
7.1

11.6
12.2
10.1

6.8
6.4
5.1

7.3
6.2
5.8

10.1
9.6
8.7

5.5
6.1
6.6

6.5
6.5
6.1

-9.9
-7.1

8.3
-5.7

-16.2
-25.2

41.5
22.8

26.9
16.0

6.9
-2.9

1.7
.5

3.6
2.6

.6
-3.6

.8
-. 6

-1.7
-6.9

.7
-1.8

4.7
5.3

3.4
.3

2.4
.6

-1.5
9.0
10.7

-. 7
10.3
11.1

1.5
9.6
8.0

.2
8.0
7.7

3.5
4.9
1.4

2.7
4.1
1.4

.2
3.9
3.7

1.0
4.2
3.1

1.4

9.2

9.6

6.0

3.8

3.

3.6

3.4

9.9
8.46
11.3

9.9
8.5
13.5 -

9.7
9.4
10.3

5.9
7.0
6.1

3.7
4.6
3.2

4.0.
4.3

4.1

3.6
4.2
3.4

3.6
4.2
3.9

3.9

-1.9

2.2

11.6

2.3

2.6

-7.1

5.9

September 25,

1985

FEDERAL SECTOR ACCOUNTS
(Billions of dollars)
FRBstaff eImates

_______at

___________

7
2737~ F- 986e / 3
FIB
Admin.
PRB
Staff
1/
Staff

666
42
-37A

736
937
-201

736
936
-200

780
955
-175

775
967
-192

-10
-185

Unified budget receipts
Untfted budget outlays
Surplus/deficit(-). unfied budtI4
Surplus/deficit(-). off-budget
4
agencies
Combined deficit to be fluancd

-10
-211

-11
-211

-2
-178

203
10
-2

197
13
r

20

18

quarterna not aeasonally adusted .
1985
1986
1I*
Itl
IV
I
II

IlI

174
230
-56

207
234
-27

189
234
-45

175
244
-69

181
241
-60

224
241
-16

195
242
-67

1

-3
-59

-5
-32

-4
-49

-1
-70

-I
-61

-2
-18

-1
-48

202
2
5

64
13
-6

42
4
13

45
-10
-3

69
2
-1

52
0
8

31
-10
-3

46
0
2

18

Fy985
Adeln.
1/

Fiscal
ear
1O84a

15

18

14

24

18

15

15

25

25

9

4

4

817
1001
353
263
89
655
-190

CY985
FRB
Staff

1984
IV*

683
868
-184

744
942
-197

166
239
-72

-5
-197

-10
-195

-13
-210

-71

180
0
-2

199
-8
6

199
-6
2

20

25

CY
1984*

Calenda
I*

Means of fliancig combined deficit:
Net borrowing from public
Decrease l cash operlttls
5
Other

Cash operatin
Hmoe:

ele

Sponsored

lencA

171
'7
*

se. 0d of pertod

30

8

agency borrowiag

30

U.a.

21

n.a.

19

30

21

4

688
860
283
215
68
577
-172

756
946
326
238
88
620
-188

749
942
325
238
86
617
-193

809
978
343
255
88
635
-169

795
993
347
257
89
646
-198

705
881
295
222
74
586
-176

764
956
331
243
88
625
-193

722
920
316
232
84
604
-198

771
937
320
234
86
617
-165

Seasonally adjusted annual rates
734
770
780
784
801
948
963
979
989
996
324
339
343
344
347
241
247
251
255
259
83
92
92
89
88
624
624
636
645
650
-214
-193
-199
-205
-196

-126

n.a.

-159

n.a.

-162

-140

-157

-169

-129

-178

NIA Budget
Recepts
Expenditure
Purchases

Defese

Moandefense
All other expenditures
Surplus/deficit(-)
High employment surplus/deficit(-)
evaluated at 6 pqrcat woe ploymant
~__

1.
2.

3.

__

~___1__

~

W-actual

~~

Note: Details

pt

,z

naF4

aet

l p.

ad total* due to roundiag.
to

-157

-163

-169

-160

-155

~__I______~___I

e--estimated

Nid-eaaSioe
aSview, AStuqt 30, 1985.
The Coagrqstel
i Buoget 1e4olution, passed August I, 1985. shows revenuea of
$737 billion *q $796 billio, cembined unified and off-budget outlays of
$946 bilktp id
$96 billion, and total deficite of $210 billion and $172
billeso i'tinfel
y"r"n 1185 and 190.. repeattvrly.
CW B.gt
estigtem
tht l* orpeate the Budget Resolution policy
The latest
aseauptioas and the Auguet 1985 CO pcomomic forecast abho revenues of $737
billion a
$790 billlote, ebim g ualfted *ad off-%bdget outlays of $946 billion
and $965 illtlon, an total defiq to of 1210 billion and $175 billion in fiscal

years 194ve * )

_~__I_~_

n.a.--not available
4.

Includes Federal Financing Bank, Postal Service Fund, Rural
Electrification and Telephone Revolving Fund, Rural Telephone Bank
and Strategic Petroleum Reserve.
5. Checks Issued less checks paid, accrued items and other transact ons.
6. Sponsored agency borrowing Includes net debt issuance by Federal
Home Loan Banks. FHLMC (excluding participation certificates). FNMA
(excluding mortgage-backed securitles). Federal land Banks. Federal
Intermediate Credit Banks, Banks for Cooperatives, and Student Loan
Marketing Association marketable debt on a payment basis. The
Adminlstration's definition of borrowing by these agencies Is
somewhat broader.

DOMESTIC FINANCIAL DEVELOPMENTS

Recent developments.

Interest rates have recorded generally small

mixed changes on net since the August FOMC meeting.

The federal funds

market has been a touch firmer, with trading mostly in the 7-3/4 to 8
percent range, but fluctuations in rates over the intermeeting period have
been influenced more by incoming economic news.

Most recently, short-term

rates have eased somewhat with the announcement by financial officials of
the five major industrial countries of policies aimed at lowering the value
of the dollar.
Supply conditions and credit quality concerns meanwhile have had some
notable effects on the structure of market rates.

Yields on short-dated

Treasury bills, for example, have declined about 1/4 percentage point, owing
in large part to constraints imposed on bill issuance by the federal debt
ceiling.

Municipal bond rates have risen relative to taxable rates under

the pressure of continued heavy supply.

The perceived riskiness of debt

of some federal agencies has been increased in recent weeks by discussion
of the Farm Credit System's problems and of means of assisting the FSLIC;
the deterioration in yield spreads for Farm Credit securities has been
especially marked.

In the mortgage sector, the problems of the EPIC

partnerships led to some weakening of the market for pass-through
securities that rely on private insurance.

Mortgage-backed securities of

federally sponsored agencies, however, experienced only transitory rate
pressures, and available evidence suggests that the home mortgage market
overall has not been significantly affected by the EPIC situation.
The monetary aggregates surged again in August, after some
deceleration in July.

M1 increased in August at more than a 20 percent
I-15

I-16

pace and growth continued rapid in early September, leaving MI appreciably
above its 3 to 8 percent target range.

The lower opportunity cost of

holding money balances no doubt has continued to boost M1 growth, but the
rise in this aggregate greatly exceeds what would be expected based on
historical relationships linking M1 to income and interest rates.

Growth

in M2 jumped to 11-1/4 percent in August, reflecting the strength in M1.
Among other M2 components, inflows to MMDAS and savings deposits continued
strong while small time deposits contracted further as depositors shifted
to more liquid assets.

M3, expanding at an 8-1/2 percent annual rate,

remained well within its annual growth range.

In addition to the strength

of its M2 component, large time deposits in M3 increased in August after
declining sharply in June and July.
Borrowing by domestic nonfinancial sectors seems to have slowed a
little in the third quarter, owing primarily to a temporary easing in
federal government demands.

By drawing down cash balances built up in

July, the Treasury limited its net borrowing from the public to $16 billion
in August.

As noted above, federal borrowing has been constrained in

September by the debt ceiling, which forced the Treasury not only to pay
down bills but also to postpone its normal end-of-quarter financing.
In the household sector, the growth in consumer installment credit
in June and July was appreciably below the 20 percent pace earlier in the
year, owing to a sharp slowdown in revolving credit.

Consumer lending at

banks weakened further in August, reflecting in part stiffer competition
from auto finance company sales programs.

However, given the reported

slowing in retail sales of goods other than autos, installment credit
expansion may have continued at a reduced pace in August.

Growth in

I-17

mortgage indebtedness has been well maintained, with the sale of mortgagebeacked securities to diversified investors accounting for a large share
of the credit flow.
Nonfinancial businesses in August and September concentrated their
still heavy borrowing in long-term markets, as yields on corporate bonds-though continuing to back up a bit--remained close to the 6-year lows
reached at midyear.

Gross volume in August and September continued near

the strong second-quarter rate with an increased portion of new issues
carrying maturities of 20 years or more.

Short-term borrowing, in contrast,

has slowed appreciably except for a spurt in commercial paper issuance in
early August.

A great part of recent long-term borrowing by business firms

appears to be for purposes of balance sheet restructuring and financing
mergers and acquisitions.

Despite increased offerings of new equity, stock

retirements continued to exceed new stock issuance by a large margin.
Municipal market activity has been particularly robust in the
third quarter, with tax-exempt volume buoyed by a heavy slate of refunding
issues.

Private-purpose revenue bonds have constituted the major portion

of tax-exempt volume.

Sales of industrial development bonds have accelerated,

and those of housing revenue bonds remain strong.
Outlook.

The staff anticipates that interest rates generally will

fluctuate around present levels over the remainder of the year, with market

participants closely assessing incoming data for signs of strength or
weakness in economic activity.

Total credit expansion is expected to

remain brisk and even increase in the fourth quarter, bolstered by heavy
federal borrowing and increased issuance in tax-exempt markets.

Looking

further ahead, however, the credit market pressures could ease a bit,
producing a decline in interest rates.

Government demands on the credit

I-18

market should diminish somewhat after the fourth quarter, and the household
sector likely will move to a more sustainable saving posture.
The Treasury is expected to run a combined deficit of $70 billion
in the fourth quarter, which probably will be financed almost entirely by
borrowing from the public.

Another bulge in debt issuance by state and

local governments--both for public and private purposes--is expected in the
final months of 1985.

As in several recent years, legislative proposals to

limit or eliminate certain types of tax-exempt financing have created
incentives to rush issues to market prior to year-end.

Even in the absence

of legislative action on the tax reform proposals, the volume of municipal
offerings is likely to fall off appreciably after year-end, as potential
issuers employ the proceeds of late 1985 offerings and await clarification
of the nature and timing of possible restrictions.
The volume of merger activity and stock retirements will continue
to inflate corporate borrowing in the fourth quarter.

In addition, the gap

between capital outlays and internal funds, which appears to have turned
negative in the third quarter, is expected to become moderately positive
again in coming months as inventory accumulation picks up and cash flow
slows.

Borrowers porbably will continue to place emphasis on long-term

financing, but bank borrowing may strengthen somewhat from the recent
weak pace.
The termination of interest rate concession programs on autos and
some slowing in other durable expenditure categories likely will damp
further the pace of consumer credit growth in coming months.

However,

home mortgage borrowing is expected to pick up as activity in the singlefamily housing market responds to earlier interest rate declines.

Mortgage

I-19

pools are apt to remain an important vehicle for mortgage flows, as thrift
institutions restrain their asset growth to avoid tighter regulatory net
worth restrictions.

INTERNATIONAL DEVELOPMENTS

Recent developments.

After increasing by 5 percent from the last

FOMC meeting through mid-September, the weighted average foreign exchange
value of the dollar began to decline, with movements in the dollar during
this period continuing to be strongly influenced by shifting views about
the strength of U.S. economic activity.

Following the announcement on

September 22 by the G-5 finance ministers and central bank governors that
exchange rates should better reflect fundamental economic conditions, the
dollar fell sharply, resulting in an overall decrease of about 2 percent
since the August FOMC meeting.

In their announcement, the G-5 financial

officials expressed their belief that in view of present and prospective
fundamental economic conditions and policy actions, some further orderly
appreciation of foreign currencies against the dollar was desirable, and
that they stood ready to encourage such exchange rate movements when it
would be helpful to do so.

. The New York Desk sold a total of $276
million against yen and marks on September 23 and 24.
In July, foreign official purchases of U.S. Treasury securities
fell off from their second-quarter pace, but foreign private net
purchases -- primarily by Japanese residents -- rose sharply.
Similarly, net foreign purchases of U.S. corporate securities were up
significantly from their second-quarter rate.
I-20

Foreign net purchases of

I-21

U.S. corporate bonds exceeded $4 billion in July, bringing the total for
the first seven months of the year to nearly $22 billion.

Available

banking data suggest a sizable net inflow into U.S. banking offices from
abroad during the third quarter.
U.S. chartered banks' claims on foreigners resumed their decline
in the second quarter of 1985, decreasing about $9 billion (2 percent).
As was generally the case last year, the drop in total claims was
concentrated on the major industrial countries and offshore banking
centers.

Since the beginning of 1984, U.S. bank claims on the non-OPEC

developing countries have been essentially unchanged; there was a small
decline in such claims in the first half of this year.
The U.S. current account recorded a deficit of $127 billion,
s.a.a.r., in the second quarter of 1985, slightly larger than in the
first quarter.

A larger merchandise trade deficit -

4-1/2 percent and imports increased slightly -

exports dropped by

was partly offset by

increased income receipts from investment abroad.

Most of the increase

in income receipts was from U.S. direct investment abroad and was
accounted for by a shift from large capital losses to small capital
gains, primarily as a consequence of the decline in the exchange value
of the dollar.
In July, the U.S. merchandise trade deficit (s.a.a.r.) was
smaller than that registered in June and for the second quarter,

resulting from a sharp drop in imports that was offset somewhat by a
moderate decline in exports.

The decline in imports was widespread

across major commodity groups, including oil.

Much of the July drop in

exports was in agricultural commodities, particularly wheat.

While

I-22

nonagricultural exports decreased from June levels, they were about the
same as the second-quarter rate, as a decline in machinery exports was
offset by increases in exports of aircraft and of automotive products to
Canada.
The pace of economic activity in the major foreign industrial
countries has rebounded on balance since the first quarter, but growth
remains uneven and influenced by special factors.
remained low.

Inflation abroad has

The current accounts in Japan and Germany have

strengthened so far this year.
Among the major developing countries, Mexico has fallen out of
compliance with its IMF program and will have to forgo the last three
drawings under its present IMF arrangement.

Argentina has completed the

process leading to the initial disbursement from its $4.2 billion bank
credit and is expected soon to reduce sharply its arrears, but
difficulties loom ahead regarding compliance with the end-September IMF
The prospects that Brazil will succeed in

performance tests.

negotiating an IMF program in the near term were dealt a setback when
the finance minister and the central bank president resigned.

The

Philippines did not meet the qualitative targets for the second IMF
program review, and the September IMF drawing is being delayed.
Outlook.

The staff is now projecting a more substantial

depreciation of the dollar than previously, in the near term, followed
by a continued moderate rate of decline.

The projected level of the

dollar at the end of the forecast period is about 5 percent less than in
the last Greenbook.

The staff projection for economic activity in the

I-23

foreign industrial countries is essentially the same as in the last
Greenbook, but somewhat slower growth is now expected in the developing
countries.

Based on recent data for merchandise trade and other

transactions (which suggest some offsetting adjustments in the
components) and the recent decline in the dollar,

the staff has reduced

somewhat its projection of the current account deficit for 1985, to
$130 billion, and for 1986, to about $140 billion.

STRICTLY CONFIDENTIAL
CLASS II FOMC

(FR)
SEPTEMBER 24, 1985
OUTLOOK FOR U.S. NET EXPORTS AND RELATED ITEMS
(BILLIONS OF DOLLARS, SEASONALLY ADJUSTED ANNUAL RATES)

1984-

ANNUAL
1985-P 1986-P

1. GNP EXPORTS AND IMPORTS 1/

1984
Q3-

(

Ql-

Q2-

1985
Q3-P

Q4-P

CURRENT $, NET
EXPORTS OF G+S
IMPORTS OF G+S

-64.2
364.3
428.5

-92.3 -106.2
353.3
382.1
445.5 488.2

-90.6
368.6
459.3

-56.0
367.2
423.2

-74.5
360.7
435.2

-94.0
347.7
441.6

-94.7 -105.9
346.6
358.0
441.3
463.8

CONSTANT 72 $, NET
EXPORTS OF G+S
IMPORTS OF G+S

-15.0
146.0
161.1

-32.1
140.1
172.4

-27.5
146.2
173.8

-27.0
147.4
174.4

-13.4
147.1
160.5

-28.4
143.7
172.1

-33.8
137.9
171.8

-33.8
137.3
171.2

-108.3 -133.5 -148.3

-130.0

-98.2

-118.1

2. U.S. MERCHANDISE TRADE BALANCE 2/

-32.6
141.6
174.3

-132.0 -134.5 -149.5

l1-P

Q2-P

1986
Q3-P

-116.8 -109.0 -103.9
363.0 375.2
387.5
479.7
484.1
491.3
-32.5
141.9
174.4

-28.9
144.5
173.5

-26.2
147.3
173.6

Q4-P
-95.2
402.8
497.9
-22.4
151.1
173.6

-156.3 -150.8 -146.2 -140.0

EXPORTS
AGRICULTURAL
NONAGRICULTURAL

220.3
38.4
181.9

214.7
28.9
185.9

232.5
29.8
202.6

222.1
36.9
185.3

225.4
38.3
187.2

222.8
33.5
189.4

213.0
28.3
184.6

210.1
25.6
184.5

213.1
28.0
185.0

219.5
29.2
190.3

227.2
29.9
197.3

236.2
30.0
206.2

246.9
30.2
216.7

IMPORTS
PETROLEUM AND PRODUCTS
NONPETROLEUM

328.6
57.5
271.1

348.3
48.4
299.9

380.8
46.3
334.5

352.1
57.8
294.4

323.6
56.8
266.9

341.0
45.2
295.7

345.0
52.8
292.2

344.6
48.1
296.5

362.6
47.3
315.3

375.8
47.1
328.7

378.0
45.5
332.4

382.4
46.5
335.9

386.9
46.1
340.8

-151.1 -143.6

-138.8

-133.4
17.7

3. U.S. CURRENT ACCOUNT BALANCE
OF WHICH: NET INVESTMENT INCOME

-101.5 -129.9 -141.7

-130.0 -101.9

-121.3 -127.3 -129.0 -142.2

19.1

19.9

19.2

13.0

16.0

10.1

22.3

21.8

25.4

20.5

19.8

18.8

REAL GNP--TEN INDUSTRIAL 4/
REAL GNP--NONOPEC LDC 5/

3.1
4.1

2.7
3.7

2.8
3.8

5.0
4.3

3.5
3.8

0.5
3.4

4.0
3.4

3.1
3.5

2.7
3.6

2.7
3.7

2.6
4.0

2.6
4.3

2.6
4.6

CONSUMER PRICES--TEN IND. 4/

4.9

4.5

3.9

2.6

4.8

5.4

5.7

2.7

3.6

4.3

4.3

3.3

3.7

4. FOREIGN OUTLOOK 3/

1/
2/
3/
4/
*5/
P/

ECONOMIC ACTIVITY AND PRODUCT ACCOUNT DATA.
INTERNATIONAL ACCOUNTS BASIS.
PERCENT CHANGE, ANNUAL RATES.
WEIGHTED BY MULTILATERAL TRADE-WEIGHTS OF G-10 COUNTRIES PLUS SWITZERLAND;
WEIGHTED BY SHARE IN NONOPEC LDC GNP.
PROJECTED

PRICES ARE NOT SEASONALLY ADJUSTED.