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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. CONFIDENTIAL (FR) October 11, 1978 SUMMARY AND OUTLOOK By the Staff Board of Governors of the Federal Reserve System SUMMARY AND OUTLOOK I- 1 DOMESTIC NONFINANCIAL DEVELOPMENTS Summary. Indicators of economic activity suggest a moderate rate of expansion in recent months. Industrial production increased further in September, but employment leveled off following the unusually rapid gains earlier this year. Consumer demand for goods apparently remained sluggish while business spending appears to have been increasing at a moderate pace. Nonfood prices continued rising at about the same rapid pace as earlier this year, but renewed inflationary pressures surfaced in the food sector in September following two months of easing. Nonfarm payroll employment was little following small increases in recent months. changed in September, Manufacturing employment and the factory workweek were unchanged, with employment still its May level. below Industrial production is tentatively estimated to have risen somewhat further in September, but probably less than in the earlier months of the quarter. Total retail sales in current dollars have apparently remained on a plateau since last spring. Unit auto sales declined substantially in September, as domestic sales fell to an 8.7 million unit annual rate, following unusually high sales rates in the spring and summer months. Sales of foreign cars also declined in September to 1.9 million units, annual rate. Judging from weekly data, retail sales of nondurable goods appear to have increased in September following little preceding three months. change over the I - 2 Business capital spending has continued to rise, although at a slower pace than in the first half. Shipments of equipment moved up considerably in August, and the July-August average in current dollars was a little more than 3 per cent above that of the second quarter. The value of non-residential construction put in place in August was off a bit from the preceding month, but was still at a high level following large gains in earlier months. Recent trends in orders and contracts suggest that moderate increases will continue in business capital spending. New orders for capital goods, which had declined in July, were boosted in August by sharp increases in the volatile transportation equipment category. However, the important machinery component of capital equipment orders has remained on a plateau since February. In the construction area, the value of contracts rose further in August, indicating continued strength in this sector. Residential construction activity edged lower in August, but remained at a high level. Private housing starts were at a 2.03 million unit annual rate in August, only slightly lower than the upward revised July rate. Housing demand as measured by sales of homes increased further in August, but recent strength has been concentrated in sales of existing homes. I - 3 Inventory accumulation at manufacturers, as measured in book value terms, continued brisk in August, but at a pace somewhat below the second quarter. With a sharp increase in factory shipments the inventory- to-sales ratio in August dropped back and was at a low level. Total government purchases in real terms increased in the third quarter, after declines in the two preceding quarters. The large increase in Federal purchases mainly reflected net additions to CCC inventories. State and local outlays, however, rose by smaller amounts than in the spring quarter, as employment receded somewhat. A sharp, but temporary, decline in some food prices helped hold down the increase in total consumer prices in August for the second month in a row. But renewed food price pressures were reported in September, as producer prices of crude agricultural goods and finished foodstuffs both increased by nearly 2 per cent. Consumer prices of all nonfood items rose 0.7 per cent in August, close to the average rate so far this year. Outlook. The staff estimates that real GNP increased at about a 3 per cent annual rate in the third quarter, little changed from the previous month. Incoming data for residential structures are indicating somewhat more strength than anticipated earlier, while net exports appear a bit weaker than expected. Larger than previously expected price increases--mainly in construction--have resulted in a somewhat higher estimate of inflation for the third quarter; the gross business product fixed-weighted price index is now estimated to have risen at a 7.0 per cent annual rate. I - 4 The policy assumptions underlying the staff forecasts are For monetary policy, M-1 growth through little changed from a month ago. the end of 1979 is assumed to be near the upper end of the Committee's long-run target range of 4 to 6-1/2 per cent. Short-term interest rates are expected to rise a bit further, as indicated by the lower end of the Federal funds rate range shown in the Bluebook. For fiscal policy, there is still a good deal of uncertainty regarding the size and composition of the eventual tax reduction. We have assumed a tax cut of around $20 billion, effective January 1979, in addition to the extension of the $9 billion of previous tax cuts scheduled to expire at the end of this year. In response to the adoption of the Congressional Budget resolution, Federal outlays are projected to total $491 billion in FY 1979, down $3 billion from the previous estimate; the staff's estimate of the budget deficit is about $41 billion. The staff has deleted the assumption of a crude oil equalization tax. The contour of the projection is little changed from last month. Growth of real GNP is projected to average about 3-1/3 per cent, annual rate, over the five quarters through the end of 1979. We anticipate that growth in economic activity will pick up somewhat in early 1979 as a result of the assumed tax cut, but then drift gradually lower over the balance of the year. During 1979, growth of real business fixed investment-- although moderating over the course of the year--still represents the principal sector showing an above average rise. Residential construction I-5 is expected to weaken gradually as financial market conditions constrain activity. A moderate rate of increase is projected for consumption, and the personal saving rate is anticipated to hold at about 5-3/4 per cent, close to recent levels. Growth in total employment, after averaging 4-1/4 per cent over the year just completed, is shown to slow to about a 2-1/2 per cent annual rate during the projection period. The unemployment rate is expected to hold just under 6 per cent until mid-1979 and then to edge up slightly. The staff continues to anticipate a high rate of inflation next year. The fixed-weighted price index for gross business product is projected to rise at a 7-1/2 per cent annual rate through the end of 1979. Food prices are projected to rise 8 per cent next year, considerably less than the 14 per cent increase so far this year. Mainly as a result of this, the over-all rate of price advance in 1979 is about 1/2 percentage point less than in 1978. The rate of price increase is still expected to show a bulge early in 1979, reflecting in part increases in payroll taxes and minimum wages which go into effect at the beginning of the year. I-6 STAFF GNP PROJECTIONS Per cent changes, annual rate Gross business product Unemployment rate fixed-weighted Nominal GNP 9/13/78 10/11/78 Real GNP 9/13/78 10/11/78 price index 9/13/78 10/11/78 (per cent) 9/13/78 10/11/78 8.2 11.2 11.0 11.2 11.4 8.2 11.2 11.0 11.5 11.5 7.1 20.6 10.6 10.9 -.1 1978-11 1978-IV 7.1 19.6 10.1 10.8 8.0 2.9 3.3 -. 1 8.7 3.1 3.3 1979-I 1979-II 1979-III 1979-IV 12.2 10.5 10.1 10.2 11.8 10.4 10.3 10.5 4.2 3.5 3.2 2.7 4.1 3.3 3.3 2.7 11.6 11.8 4.1 4.3 11.8 12.2 3.5 3.7 -. 7 -. 7 10.9 10.9 3.5 3.4 -. 1 -. 1 10.7 10.8 3.4 3.3 .1 .1 3.6 3.5 -. 1 -. 1 19751 19761 19771 / 1978 1979 1978-11/ 1978-II 1/ Change: 77-11 to 78-II11 77-IV to 78-IV 78-11 to 79-II 78-IV to 79-IV Memo: Growth Over Annual Policy Period: 78-III to 79-111 10.9 10.9 1/ Actual. -1.3 5.7 4.9 3.7 3.8 -1.3 5.7 4.9 3.8 3.7 9.5 5.4 6.2 7.4 7.5 9.5 5.4 6.2 7.5 7.7 6.7 6.3 6.7 6.7 12.1 7.0 6.9 7.9 7.7 6.9 7.0 7.9 7.9 7.2 7.4 12.0 7.5 -1.2 -1.2 October 11, 1978 I-7 CONFIDENTIAL - FR CLASS II FOMC GROSS NATIONAL PRODUCT AND RELATED ITEMS (Quarterly figures are seasonally adjusted. Expenditures and income figures are billions of current dollars at annual rates.) 1978 1979 II I III IV Projected I II Gross national product Final purchases Private Excluding net exports 1992.0 1975.3 1558.6 1582.7 2087.5 2067.4 1642.7 1648.2 2140.6 2119.0 1678.8 1686.1 2196.9 2174.3 1720.0 1726.7 2259.1 2235.5 2315.6 2291.0 1772.1 1818.0 1777.1 Personal consumption expenditures Goods 1276.7 684.9 591.8 1322.9 717.1 1351.4 605.8 728.1 623.3 1384.3 744.9 639.4 345.4 105.3 220.1 20.1 22.1 356.3 108.5 226.2 21.6 21.6 Services III IV 1823.5 2373.3 2348.2 1863.5 1866.7 2433.2 2407.6 1909.9 1910.5 1426.6 768.0 658.6 1465.5 787.9 677.6 1501.5 805.5 696.0 1536.9 822.8 714.1 365.0 109.7 232.7 22.6 22.6 374.1 382.6 110.6 239.9 23.6 23.6 247.4 24.6 24.6 390.3 110.6 254.6 25.1 25.1 399.2 111.6 262.0 25.6 25.6 -7.3 209.1 216.4 -6.7 217.3 224.0 -5.0 225.6 230.6 -5.5 234.6 240.1 -3.2 242.5 245.7 251.3 251.9 454.3 161.8 292.5 463.4 164.0 299.4 473.0 306.4 484.7 171.2 313.5 497.7 177.2 320.5 Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm 322.7 100.3 205.6 16.7 16.9 Net exports of goods and services 1/ Exports Imports -24.1 -5.5 181.7 205.8 205.4 210.9 416.7 424.7 151.5 265.2 147.2 277.6 440.2 154.6 285.6 Gross national product in constant (1972) dollars 1354.2 1382.6 1393.0 1404.2 1418.3 1429.8 1441.5 1451.2 Personal income Wage and salary disbursements Disposable personal income Saving rate (per cent) 1628.9 1050.8 1391.6 5.9 1682.4 1090.2 1433.3 5.3 1730.5 1775.3 1114.0 1140.8 1505.2 5.6 1866.4 1202.9 1591.6 5.5 1917.5 1231.3 1633.6 5.7 1965.0 1262.6 1469.6 5.7 1820.0 1174.5 1554.0 5.8 Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 132.6 172.1 163.4 205.5 173.6 211.5 179.5 216.8 178.9 216.0 182.9 220.3 189.0 226.7 193.8 231.8 Federal government surplus or deficit (-) (N.I.A. basis) High employment surplus or deficit (-) -52.6 -2.9 -23.6 17.4 -27.7 13.8 -30.3 12.9 -33.5 11.9 -30.2 18.0 -32.8 17.3 -33.0 19.8 23.2 22.0 -. 3 20.9 -2.0 20.0 -3.5 21.8 -2.3 101.9 5.8 102.5 5.8 103.1 5.9 103.6 6.0 87.0 20.6 87.4 20.7 87.9 20.8 88.4 20.9 154.1 85.7 87.3 155.6 1.80 10.65 8.85 1.80 1.75 10.55 8.80 1.75 Gov't. purchases of goods and services Federal 2/ State and local State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 31.5 11.5 29.8 9.3 22.9 1.8 Civilian labor force (millions) Unemployment rate (per cent) 99.2 100.2 5.9 100.7 6.0 Nonfarm payroll employment (millions) Manufacturing 84.3 6.2 1.5 101.2 5.9 110.6 166.6 85.7 20.3 86.1 20.3 86.4 20.1 139; 6 82.1 81.7 144.0 83.9 84.5 146.4 84.5 85.3 148.2 84.8 85.8 150.7 86.5 152.5 85.6 87.0 Housing starts, private (million units, A.R.) 1.72 New autos sales, (millions, A.R.) 10.80 Domestic models 8.80 2.00 Foreign models 2.11 12.12 10.01 2.11 2.04 11.16 1.90 10.90 9.00 1.90 1.90 10.90 8.95 1.95 1.85 10.75 8.90 1.85 Industrial production (1967-100) Capacity utilization: all mfg. Materials (per cent) (per cent) 9.19 1.98 20.4 85.3 -. 6 1671.8 5.7 85.7 87.5 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 Accounts table which follows. CONFIDENTIAL - FR CLASS II FOMC I - 8 PER CENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS October 11, 1978 (Annual rates compounded quarterly) 1978 1979 Projected I II III IV I II III IV 3.3 3.0 2.7 2.5 4.1 3.9 4.5 4.2 3.3 2.7 3.2 3.3 3.2 3.1 2.7 Constant (1972) dollars -1.6 -1.1 8.6 11.0 Excluding net exports -1.0 7.7 3.1 2.9 1.6 1.7 Personal consumption expenditures -1.4 -8.1 7.0 6.0 9.7 1.9 1.7 .0 3.9 3.0 3.1 2.8 4.7 5.1 4.1 3.7 3.5 4.0 3.2 2.7 3.7 2.6 2.0 3.3 2.4 -6.7 3.7 2.8 -6.1 5.0 3.0 -8.3 5.0 1.1 -8.3 4.1 2.0 -4.9 2.3 2.3 2.3 -.1 Gross national product Final purchases Private Goods Services 8.7 3.0 3.1 2.7 2.8 2.4 Gross private domestic investment Residential structures Business fixed investment 11.3 15.2 -5.2 2.7 4.2 21.3 2.6 -1.0 2.5 Gov't. purchases of goods and services Federal State and local -3.5 -8.9 -.1 -.2 -15.3 9.6 8.2 15.8 4.2 4.1 6.6 2.7 1.5 -. 1 2.5 2.5 2.5 3.7 5.9 2.5 3.2 2.9 5.5 2.5 3.9 2.5 10.5 10.5 10.3 9.8 8.9 2.6 4.0 1.1 3.5 7.1 6.4 7.0 7.1 20.6 20.0 23.4 17.6 10.6 10.4 9.1 9.5 10.9 10.9 10.2 10.0 11.8 11.7 12.7 12.2 10.4 10.8 10.9 10.3 10.4 10.4 9.8 7.0 .5 15.3 Disposable personal income 15.3 20.2 9.8 8.9 6.3 12.1 10.1 9.6 10.7 12.8 13.0 12.6 11.4 10.8 12.0 10.2 9.2 11.3 10.1 4.5 12.0 10.4 3.3 13.0 9.4 .0 13.1 8.3 .0 12.2 12.1 11.2 14.8 9.2 9.7 Current dollars Gross national product Final purchases Private Excluding net exports Personal consumption expenditures Goods Services 10.3 9.7 10.8 9.4 3.7 Gross private domestic investment Residential structures Business fixed investment 12.2 .5 11.1 31.3 21.0 31.2 13.2 12.9 11.6 Gov't. purchases of goods and services Federal State and local 4.1 -2.0 7.8 7.9 -10.9 19.9 15.4 21.7 13.4 20.0 8.3 5.6 8.5 6.5 12.1 10.0 9.8 9.7 10.3 11.5 9.6 9.8 12.5 10.5 10.0 13.6 10.0 11.0 9.3 12.1 13.8 15.9 12.0 10.7 10.5 10.0 12.3 10.6 10.0 11.4 9.8 10.3 9.0 -35.9 -13.2 130.6 103.3 27.4 11.9 14.3 10.5 -1.3 -1.5 9.2 8.3 14.0 12.1 10.6 3.8 5.7 6.9 3.1 2.0 1.3 2.5 2.3 -. 3 1.6 4.3 2.8 2.4 2.0 2.1 1.7 -3.3 12.0 15.8 1.2 8.1 6.9 2.6 7.7 5.0 2.3 8.4 6.0 2.1 12.5 10.2 1.7 8.8 7.0 1.7 8.9 7.1 1.5 8.9 7.3 Disposable personal income Personal income Wage and salary disbursements Corporate profits with IVA & C.C. Adj. Corporate profits before tax Nonfarm payroll employment Manufacturing Nonfarm business sector Output per hour Compensation per hour Unit labor costs GNP implicit deflator 1/ Gross business product fixed-weighted price index 2/ Industrial production 17 1/ Excluding Federal pay increase rates of change are: 7.4 per cent; 1979 QIV, 7.0 per cent. Using expenditures in 1972 as weights. 10.6 9.3 7.2 6.7 11.0 12.1 7.3 7.0 7.4 6.9 7.4 7.9 6.9 7.9 6,8 7.2 7.5 7.4 .9 13.2 7.1 5.1 6.7 5.0 4.4 3.8 1978 QI, 7.2 per cent; 1978 QIV, 6.9 per cent; 1979 QI, CONFIDENTIAL - FR CLASS II FOMC I-9 GROSS NATIONAL PRODUCT AND RELATED ITEMS (Expenditures and income figures are billions of current dollars.) October 11, 1978 Projected 1978 1979 1972 Gross national product Final purchases Private Excluding net exports Personal consumption expenditures Goods Services Gross private domestic investment Residential construction Business fixed investment Change in business inventories Nonfarm Net exports of goods and services 1/ Exports Imports Gov't. purchases of goods and services Federal 2/ State and local Gross national product in constant (1972) dollars Personal income Wage and salary disbursements Disposable personal income Saving rate (per cent) Corporate profits with I.V.A. and C.C. Adj. Corporate profits before tax 1973 1974 1975 1976 1977 1171.1 1161.7 908.6 911.9 1306.6 1288.6 1012.0 1412.9 1404.0 1101.3 1095.3 1528.8 1539.6 1201.2 1180.8 1700.1 1689.9 1330.4 1323.0 1887.2 1871.6 1477.6 1488.7 2104.3 2084.0 1650.0 1660.9 2345.3 2320.6 1840.9 1844.4 733.0 410.5 322.4 809.9 457.5 352.3 889.6 498.3 391.3 979.1 541.5 1090.2 599.2 491.0 1206.5 657.4 549.2 1333.8 718.7 615.1 1482.6 796.0 686.6 188.3 62.0 220.0 243.0 68.2 164.6 8.8 136.0 17.9 14.7 190.9 51.5 150.2 -10.7 -14.3 10.2 12.2 297.8 91.9 190.4 15.6 15.0 347.4 105.9 221.2 20.2 20.8 386.5 116.8 214.6 55.1 150.6 8.9 10.8 -3.3 72.7 75.9 7.1 101.6 94.4 6.0 137.9 131.9 20.4 147.3 126.9 7.4 163.2 155.7 -11.1 175.5 186.6 -10.9 203.4 214.3 -3.6 238.5 242.1 253.1 269.5 102.2 167.3 302.7 191.5 338.4 123.1 215.4 359.5 129.9 229.6 394.0 102.1 151.0 248.9 434.0 153.8 280.2 479.7 169.7 309.9 1171.1 1235.0 1217.8 1202.3 1271.0 1332.7 1383.5 1435.2 1052.4701.3 901.7 7.8 1154.9 1255.5 805.9 1086.7 7.7 1380.9 1529.0 983.6 1892.2 1303.0 5.1 1704.3 1098.9 1449.9 5.6 9.4 942.5 633.8 801.3 6.2 1019.1 66.1 111.1 764.6 984.6 7.3 437.5 890.1 1184.4 5.7 145.1 110.8 251.0 24.7 24.7 1217.8 1612.8 5.7 92.1 99.1 83.6 95.9 127.0 144.2 162.3 186.2 96.2 115.8 126.9 120.4 155.9 173.9 201.5 223.7 -17.3 -6.7 -10.7 -70.6 -53.8 -48.1 -33.5 -32.4 -5.9 -. 7 17.1 -19.4 -9.3 -4.6 10.3 16.8 State and local government surplus or deficit (-) (N.I.A. basis) Excluding social insurance funds 13.7 13.0 7.6 6.2 20.7 29.6 26.9 21.2 5.6 4.1 -2.9 -6.2 5.5 11.5 6.1 -2.0 Civilian labor force (millions) Unemployment rate (per cent) 86.5 5.6 88.7 4.9 91.0 5.6 92.6 8.5 94.8 7.7 97.4 7.0 100.3 6.0 102.8 5.9 Nonfarm payroll employment (millions) Manufacturing 73.7 19.2 76.8 20.2 78.3 20.1 76.9 18.3 79.4 19.0 82.2 19.6 85.6 20.3 87.7 20.8 129.3 84.2 87.7 117.8 73.6 73.6 129.8 80.2 80.4 137.1 82.4 81.9 144.6 83.8 84.3 153.2 85.6 87.1 1.34 8.91 1.16 8.66 1.54 10.12 7.49 1.42 7.08 1.58 8.63 1.50 1.99 11.13 9.07 2.06 1.94 11.25 9.25 2.00 1.82 10.71 8.87 1.84 Federal government surplus or deficit (N.I.A. basis) High employment surplus or deficit (-) Industrial production (1967-100) Capacity utilization: all manufacturing (per cent) Materials (per cent) 119.7 88.0 129.8 87.5 92.4 Housing starts, private (million units, A.R.) New auto sales, (millions, A.R.) 2.36 10.93 9.32 1.61 2.05 11.42 9.65 1.77 Domestic models Foreign models 83.1 I ' 1/ 2/ Balance of payments data underlying these estimates are shown in the International Developments section of this part of the Greenbook. Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accounts table which follows. I - 10 October 11, 1978 PER CENT CHANGES IN GROSS NATIONAL PRODUCT AND RELATED ITEMS CONFIDENTIAL - FR CLASS II FOMC 1972 1973 1974 1975 1976 1977 Projected 1978 1979 Constant (1972) dollars 5.7 5.5 Gross national product Final purchases Private 5.5 4.9 -.7 -1.4 -2.3 -1.3 .2 -. 3 -1.0 5.7 4.3 5.5 6.4 4.9 4.7 5.3 6.0 3.8 3.5 3.8 3.9 3.7 3.6 3.7 3.3 1.8 .7 3.2 5.8 6.4 5.0 4.7 5.0 4.4 3.4 2.6 4.3 3.6 3.5 3.6 21.6 23.4 4.7 13.2 20.5 9.1 8.1 3.1 7.6 3.2 -5.6 5.2 2.4 5.2 .8 2.3 -1.2 4.4 3.2 3.3 3.2 4.1 4.0 3.6 -1.4 6.7 6.3 Excluding net exports 7.0 5.1 Personal consumption expenditures Goods Services 5.9 4.7 6.5 5.3 5.0 4.4 -.9 -3.4 2.3 Gross private domestic investment Residential structures Business fixed investment 12.9 18.8 8.1 10.0 -3.7 12.2 -11.4 -24.6 -.3 Gov't. purchases of goods and services Federal State and local 1.5 -1.7 3.8 -. 2 -5.4 3.2 4.2 6.7 -1.5 2.1 3.5 10.1 11.6 9.9 10.3 11.0 10.9 12.2 11.0 8.1 8.9 8.1 8.2 8.2 9.7 9.1 7.8 11.2 9.8 10.8 12.0 11.0 10.8 11.1 12.5 11.5 11.3 11.7 11.6 11.5 11.4 11.6 11.1 9.8 8.9 11.1 10.1 8,7 11.8 11.4 10.7 12.2 10.7 9.7 11.8 10.6 9.3 12.0 11.2 10.8 11.6 Disposable personal income 2.1 -. 8 3.8 -22.3 -13.9 -13.0 1.9 .7 2.6 .1 .1 .1 Current dollars Gross national product Final purchases Private Excluding net exports Personal consumption expenditures Goods Services 9.7 9.5 9.9 Gross private domestic investment Residential structures Business fixed investment 17.7 25.0 12.2 16.8 6.6 16.4 -2.5 -16.7 10.8 -11.0 -6.5 -.3 27.3 32.5 9.6 22.6 34.8 15.7 16.7 15.2 16.2 11.3 4.6 13.5 Gov't. purchases of goods and services Federal State and local 8.3 6.1 9.8 6.5 .1 10.8 12.3 8.7 14.5 11.8 10.7 12.5 6.2 5.5 6.6 9.6 11.7 8.4 10.2 6.0 12.6 10.5 10.4 10.6 Disposable personal income 7.9 12.5 9.2 10.4 9.0 10.0 11.3 11.2 Personal income Wage and salary disbursements 9.7 9.4 11.7 10.6 9.7 9.0 8.7 5.4 10.0 10.4 10.7 10.5 11.5 11.7 11.0 10.8 19.3 17.3 7.6 20.4 -15.6 9.6 14.7 -5.1 32.4 29.5 13.5 11.5 12.6 15.9 14.7 11.0 Nonfarm payroll employment Manufacturing 3.4 3.1 4.3 5.2 1.9 -. 4 -1.7 -8.7 3.2 3.7 3.6 3.4 4.1 3.2 2.4 2.4 Nonfarm business sector Output per hour Compensation per hour Unit labor costs 3.0 5.8 2.7 1.7 7.8 6.0 -2.9 1.9 9.9 7.9 3.6 8.5 4.7 1.5 8.3 6.7 .5 9.0 8.4 1.9 9.5 7.6 GNP implicit deflator Gross business product fixed-weighted price index 1/ 4.1 3.3 5.9 5.7 9.6 9.4 5.2 5.4 5.9 6.2 7.4 7.5 7.5 7.7 Industrial production 9.2 8.4 -8.9 10.2 5.6 5.5 6.0 Corporate profits with IVA & C.C. Adj. Corporate profits before tax 1/ Using expenditures in 1972 as weights. 10.5 11.4 9.3 9.4 12.7 9.7 10.4 -. 4 FEDERAL SECTOR ACCOUNTS (billions of dollars) Unified budget receipts 3/ Unified budget outlays 3/ Surplus(+)/Deficit(-), unified budget Surplus(+)/Deficit(-), off-budget agencies 4/ Fiscal Year 1977* 357.8 402.8 -45.0 / FY 1978 Admin. F.R. 1/ Board 401.2 402.1 452.3 450.2 -51.1 -48.1 Admin. 1/ 448.2 496.6 -48.5 FY 1979e/ F.R. Cong. 2/ Board 450.0 448.7 491.3 487.5 -38.8 -41.3 October 11, 1978 366.1 417.0 -50.9 CY 78 F.R. Board 416.2 459.4 -43.2 -10.5 CY 1977* / F.R. Staff Estimate Calendar quarters; unadjusted data 1977 1978 IV* I* II* III IV I 84.5 85.4 125.3 106.9 98.3 98.3 113.3 111.2 111.3 114.4 122.5 121 5 -28.8 -25.8 14.0 -7.5 -24.2 -23.2 -1.3 -8.7 -11.0 -10.5 -12.9 -12.8 n.a. -10.4 Means of financing combined deficits: Net borrowing from public Decrease in cash operating balance Other 5/ 53.5 -1.7 1.9 54.9 4.0 3.2 59.1 -3.3 2.7 62.0 0 -0.6 45.7 10.4 -2.0 n.a. n.a. n.a. 56.8 -0.6 5.3 53.9 0.3 -0.2 20.7-9 6.82.6 Cash operating balance, end of period 19.1 15.1 22.4 15.1 12.0 n.a. 12.3 12.0 12.3 5.2 n.a. 19.1 n.a. 15.1 n.a. 6.8 19.9 2.0 362.710 411.9 411.4454.7 153.5 98.5 55.0 301.2 -43.3 374.5 422.6 145.1 94.3 50.8 277.5 -48.1 427.6 461.2 153.8 99.8 54.0 307.4 -33.6 385.5 444.1 152.2 97.1 55.1 291.9 -58.6 Memo: Sponsored agency borrowing 6/ 9/ NIA Budget 7/ Receipts Expenditures Purchases (total) Defense Nondefense All other expenditures Surplus(+)/Deficit(-) 140.7 92.3 48.4 271.21 -49.2-- 411.010/ 451.9 151.4 98.3 53.0 300.510, -40.9- 457.7-1/ 499.7 169.0 105.5 63.5 330.7 -42.0 10 461.7 495.3 165.9 105.0 60.9 329.46 -33.6-- 1979 II 137.2 122 5 14.7 III 116.2 124.8 -8.6 -3.6 -2.3 -3.3 -1.3 -3.4 -3.9 -4 3 20.8 5.9 2.8 2.5 -11.1 -3.2 15.1 -4.9 0.5 15.5 10.4 -0.3 19.8 3.0 3.7 -6.3 -3 0 -1.5 16 8 0 -3.9 6.4 17.5 22.4 12.0 9.0 12.0 12.0 4.5 6.5 6.1 2.8 2.1 4.6 5 6 467.2 497.4 166.6 105.8 60.8 330.8 -30.2 481.2 514.0 171.7 107.9 63.3 342.8 -32.8 Seasonally adjusted annual rates 454.9 424.8 438.5 450.9 396.2 448.8 448.4 466.2 481.2 488.4 151.5 147.2 154.6 161.8 164.0 103.7 98.6 99.8 102.7 97.9 53.6 48.6 54.8 59.1 60.3 297.3 301.2 311.6 319.4 324.4 -33.5 -23.6 -27.7 -30.3 -52.6 High Employment Surplus(+)/Deficit(-) 11.9 18.0 17.3 17.4 13.8 12.9 10.3 -16.2 -2.9 15.0 n.a. -4.6 3.0 n.a. -3.0 n.a. (NIA basis) 8/ p--preliminary n.a.--not available r--revised e--estimated *actual 1/ OMB Mid-Session Review of the 1979 Budget (July 6, 1978) and the Department of Commerce, Survey of Current Business (July 1978). 2/ Second Concurrent Budget Resolution (September 20, 1978). 3/ Adjusted for accounting change in earned income credit payments--formerly treated as income tax refunds and now classified as outlays. 4/ Includes Federal Financing Bank, Postal Service Fund, Rural Electrification and Telephone Revolving Fund, Rural Telephone Bank, Housing for the Elderly and Handicapped Fund (until October 1977), and Pension Benefit Guaranty Corporation. 5/ Checks issued less checks paid, accrued items and other transactions. 6/ Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives. 7/ All NIA data incorporate the Department of Commerce's July 1978 GNP revisions. 8/ FRB staff estimates. 9/ Includes $2.5 billion of borrowing from the Federal Reserve on September 10, 1977 which was repaid October 4, 1977. 10/ Quarterly average exceeds fiscal year total by $1.0 billion for fiscal year 1977, by $1.0 billion for fiscal year 1978, and by $3.5 billion for fiscal year 1979, due to spreading of wage base effect over calendar year. 11/ The fiscal year totals as published in the July 1978 Survey of Current Business are based on unadjusted data and do not conform to the average of four seasonally adjusted quarters. The FRB staff estimates, therefore, have been adjusted in order to make the Commerce Department and the staff's estimates comparable. I - 12 DOMESTIC FINANCIAL DEVELOPMENTS Summary. Short-term market interest rates generally have risen 25 to 50 basis points further since the September FOMC meetings. Long-term yields, which had been comparatively stable despite the large increases in short-term rates from mid-August to mid-September, basis points since then, but still have risen 5 to 30 remain below their July peaks. average rate charged by S&Ls on mortgages has also edged up in The recent weeks. A key impetus to the general advance in market yields was provided by intermeeting increases in the System's Federal funds rate objec- tive--cumulating to 3/8 percentage point in strengthened growth in the monetary aggregates. 14-3/4 per cent annual rate in August pace. response to evidence of M-1 advanced at a September, well above the already rapid In addition to continued strong transactions demand for money, M-1 growth was bolstered temporarily by the early disbursement of social security checks and delays in processing quarterly Federal tax payments by individuals due to an unusually large volume. picked up in September, M-2 expansion also as a result of faster growth in M-1. Inflows into time and savings deposits subject to regulatory ceilings at both commercial banks and thrift prisingly large in September. institutions were sur- Continued sizable inflows of funds to the six-month money market certificate--which now pays the highest rate of all maturities of small time deposits--accounted for a large part of the strength in small time deposits. I - 13 Bank credit growth accelerated to a 10 per cent annual rate in September following weakness in August, which was attributable to declines in investments and security loans. In September these components expanded while real estate and business lending advanced at just below their average rates for the third quarter as a whole. Although credit flows to the private nonfinancial sectors of the economy in the third quarter were considerably below the first half, primarily due to reduced business borrowing, they apparently picked up slightly in September. While public bond offerings by corporations again were rela- tively light, short- and intermediate-term business borrowing was somewhat larger than in August. In the household sector, growth of consumer credit probably changed little in September, but expansion of mortgage lending is likely to have increased for the second consecutive month. Public sector borrowing, on the other hand, which had been bolstered in August by a surge in advance refundings of tax-exempt issues prior to the September 1 implementation of new Treasury regulations, fell substantially in September. Outlook. Sectoral credit flows through the remainder of the year are likely to remain about the same as in the third quarter. With increased cash flow available to nonfinancial corporate businesses to finance incremental investment expenditures, fourth quarter is likely to stay about flat. their net borrowing in Little change in the the compo- sition of short- versus long-term borrowing appears in prospect. The U.S. Treasury's financing needs will rise seasonally in remainder of the current quarter, with the Treasury expected to issue the I - 14 about $11 billion of securities, concentrated in the coupon area. Municipal security issues to finance new projects will likely maintain recent levels, while sponsored agency issues should taper off somewhat. A slight moderation in probable, net flows of consumer instalment credit appears as growth of credit liquidations continues to reflect recent rapid additions to the stock of debt, while new credit extensions are restrained by the moderate rates of growth projected for consumer expenditures. In light of continued success of the six-month money market certificates in attracting funds, staff projections of deposit flows at thrift institutions have been raised. quisitions are expected to rise in As a result, S&L net mortgage ac- the current quarter, despite some rebuilding of liquid assets and reduced borrowing from the FHLB banks. While mortgage investment by the diversified lenders may slacken a bit, on balance the net change in total mortgage debt is somewhat over the remainder of the year, and little expected to pick up further pressure on primary mortgage rates is anticipated. With bank credit expansion about the same as the third quarter pace, banks are likely to add further to managed liabilities. With liquidity positions and credit availability already relatively tight at non-money center banks, their terms of lending may become still more stringent. Commercial banks are expected actively to promote savings accounts subject to automatic transfers which will be permitted beginning November 1. This is likely to induce shifts from demand deposits to savings deposits and have only slight effects on deposit flows at thrifts. I - 15 Since underlying credit conditions may exert little pressure on market interest rates, market expectations concerning inflation and real economic activity together with monetary policy actions would appear to be the major determinants of any interest rate movements over the coming months. Demand for money--whether in the form of demand deposits or savings with attomatic transfer features--may remain strong, projected growth in nominal GNP. considering Further System tightening moves may be needed to keep growth of the monetary aggregates within their long-run ranges. I - 16 INTERNATIONAL DEVELOPMENTS Summary. The dollar has been under considerable downward pressure during the past four weeks. This occurred despite the announcement of a sharp reduction in the U.S. trade deficit in August, the upward movement of U.S. interest rates and other:policy developments -- for example, improved prospects for energy legis- lation -- that might have been expected to increase confidence in the dollar. The decline in the average value of the dollar since September 12 has been 3 per cent. Upward pressure through most of the period was concentrated on the Swiss franc. The franc moved up sharply against all currencies until Swiss authorities announced a new strategy of energetic intervention and less reliance on capital controls in order to contain the rise of their currency, particularly against the German mark. The franc was forced down from its peak rate against the mark, and it now stands 4 1/4 per cent below its high against the dollar. The German mark also was under increasing upward pressure over the past four weeks, In August the U.S. trade deficit fell sharply, reversing the jump recorded in July. The deficit for July and August combined was $33 billion at an annual rate -the second quarter. only a little larger than in Nonagricultural exports for the two-month period were up 3 per cent from the second quarter but non-oil imports were up 5 per cent. I - 17 Recently released data for U.S. international transactions in the second quarter reveal a sharp increase in U.S. direct investment income and a shift towards a smaller deficit from travel and tourism. These developments reinforced the sharp reduction in the trade deficit in the second quarter to bring the current-account deficit down to $13 billion at an annual rate -- less than half the rate in the preceeding quarter. Private capital transactions through banks resulted in a sizable net capital inflow in the second quarter. Adjusting for special factors, this inflow appears to have continued, but at a slower rate in July and August. Foreign official reserves in the United States increased $5.6 billion in July and August despite a $1 billion decline in OPEC holdings. showed little Indicators of official holdings net change in September but increased sharply again in early October The expansion of real output abroad continues to appear stronger than it had been earlier in the year, although growth rates remain well below historical averages in all industrial countries. Inflation rates moved up over the first half of the year in several countries including Canada and the United Kingdom, but some slowing has occurred in recent months. In France the deregulation of prices has led to a sharply higher rate of price increase which authorities hope will abate soon. Germany and Switzerland continue to enjoy virtual price stability -- consumer price increases over the latest I - 18 twelve months have been 2.4 per cent in Germany and even less in Switzerland. Japan and several small European countries have also recorded good price performances with consumer price increases of about 4 per cent over the latest twelve months. Outlook. Over the past several months the staff has be- come increasingly confident that moderate real growth will continue through 1979 in major foreign economies. Uncertainties persist, how- ever, especially with respect to inflation rates in several countries -notably the United Kingdom, France, Italy and Canada. These uncer- tainties cloud the growth outlook towards the end of 1979. More- over, growth rates are unlikely to be sufficient to reduce unemployment in many countries. The staff projection for U.S. trade remains essentially unchanged -- a deficit of $33 billion at an annual rate is expected in the current quarter, and this rate is expected to continue through most of 1979 with a slow shrinkage of the deficit occuring late next year. A U.S. trade deficit of this size appears to be in line with market expectations and is not expected to contribute either to a stronger dollar or to a weaker dollar. Better inflation performances in some countries compared to the United States could well lead to further small appreciations of their currencies against the dollar, although scope for a rebound of the dollar exists -- particularly against the Swiss franc and Japanese yen. The major tensions in ex- change markets in coming months are likely to be within the EC snake I - 19 and among the currencies of prospective members of a new European Monetary System or expanded snake. Thus, exchange markets for European currencies are likely to remain unsettled and the dollar could well continue to be buffeted by these cross currents, at least in the near term. Over the next year the staff foresees little change in the average value of the dollar from its average level in August-September. CONFIDENTIAL (FR) CLASS II FOMC -- Outlook for U.S. Net Exports and Related Items (billions of dollars, seasonally adjusted annual rates) October 11, 1978 -- 1977 1978P GNP NET EXPORTS - Intl Acct . data (GNP net exports - GNP Acct. data) . 2. 3. a) Merchandise Trade Balance -11.1 (-10.9) -10.7 (-10.9) -31.1 1/ IVP I -6.4 1 9 7 II III III IV J -- 1 1978 II IIIP I 1 9 7 9P -3.3 (-3.6) -35.5 -32.2 -44.8 -23.8 -5.3 -. 3 (-.6) -7.0 (-7.3) (-6.7) -4.7 (-5.0) -5.2 (-5.5) -2.9 (-3.2) -31.2 -32.2 -33.5 -32.0 -33.6 -32.5 -30.4 (-24.1) (-5.5) 4. 5. 6. Exports (excl. military) Agricultural Nonagricultural 120.6 24.4 96.2 138.6 29.3 109.3 164.5 28.9 135.6 122.7 26.0 96.6 140.3 32.0 108.3 143.6 30.6 113.0 148.1 28.7 119.4 154.5 28.8 125.7 161.1 28.6 132.5 167.5 28.7 138.8 174.9 29.6 145.3 7. B. 9. Imports Petroleum and petrol. products Nonpetroleum 151.6 45.0 106.7 174.1 43.1 131.0 196.7 48.3 148.4 167.5 39.8 127.7 171.5 43.2 175.8 43.0 132.8 181.6 46.3 135.3 186.5 44.9 141.6 194.7 48.5 146.2 200.0 49.4 150.6 205.3 50.3 155.0 .9 17.3 1.7 1.6 20.5 2.7 2.4 21.5 3.4 2.8 22.0 3.6 3.2 22.6 3.8 3.6 22.6 3.9 -15.2 -5.2 -10.0 -12.6 -2.9 -9.7 -10.0 -. 3 -9.7 10. 11. 12. 13. 14. 15. b) Military transactions, net 2/ c) Investment income, net 3/ d) Other services, net 4/ u.S. CURRENT ACCOUNT BALANCE a) GNP net exports (line 1.) b) U.S. Govt & private transfers 5/ -15.2 -11.1 -4.1 -17.5 -10.7 -6.8 3.0 22.2 3.7 -13.1 -3.3 -9.8 .4 18.4 2.2 -27.4 -24.1 -3.3 128.2 1.9 21.3 2.8 -13.0 -5.3 -7.7 2.0 20.4 2.8 -14.4 -7.0 -7.4 2.2 21.8 3.1 -14.9 -6.4 -8.5 -14.3 -4.7 -9.6 Constant (1972) dollars Merchandise exports (excl. military) (7. change, annual rates) 18. 19. Merchandise Imports (7. change, annual rates) Foreign Outl o ok - 67.0 (0.3) 71.5 (6.7) 78.2 (9.4) 72.8 65.7 (4.5) (51.3) 73.2 (2.0) 74.1 (4.9) 75.8 (9.5) 77.4 (8.7) 78.8 (7.4) 80.6 (9.5) 71.0 (13.0) 16. 17. 75.0 (5.6) 78.8 (5.1) 74.5 (7.0) 75.1 (3.2) 74.8 (-1.6) 75.7 (4.9) 76.8 (5.7) 78.4 (8.2) 79.3 (4.5) 80.4 (5.7) 2.9 7.9 3.6 5.5 4.1 6.2 5.6 4.9 3.6 6.8 3.6 4.8 3.9 5.5 4.1 6.2 4.1 6.9 4.2 7.0 Ten Industrial Countries ./ 20. Real GNP, % change, annual rates 21. Consumer Prices, % change, A.R. / Differs from Intl. Aect. data (line 1) in the inclusion of revisions and new data. / Excludes grants to Israel under military assistance acts and exports financed by those grants. 3/ Excludes U.S. Govt. interest payments to foreigners, and reinvested earnings of incorporated affiliates which are included in line 15. 4/ Includes travel, transportation, fees and royalties, and miscellaneous other service transactions. 3/ Includes U.S. Govt. grants, U.S. Govt. interest payments to foreigners, remittances and pensions, by U.S. military assistance grants, incorporated affiliates. and exports to Israel financed and reinvested earnings of ~- -,____________________________ 6/ Weighted by the shares of Canada, France, Germany, Italy, Japan, United Kingdom, Netherlands, Sweden, Belgium, and Switzerland in the sum of the real GNP of the ten countries in dollar terms. p/ Projected. / Estimated. 1/ Published data. NOTE: Foreign outlook data have been revised to include 10 countries,
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