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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. 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.
@FedFRASER