Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, October 4, 1983 : Greenbook Part 2

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Confidential (FR) Class

II FOMC

September 28,

RECENT DEVELOPMENTS

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

1983

TABLE OF CONTENTS
Section
DOMESTIC NONFINANCIAL DEVELOPMENTS

Page

II

Industrial production ..........................................
Employment and unemployment....................................
Personal income and consumption................................
Housing markets..............................................
Business fixed investment......................................
Inventories.............................. .......................
Government sectors: federal, state and local....................
Net exports.................................. ...................
Wages and labor costs..........................................
Prices.............................................................

1
3
5
10
14
14
18
20
21

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

2
2
4
4
6
7
7
9
11
15
15
17
20
23
23

Charts
Private housing starts.........................................
Nonresidential building construction............................

DOMESTIC FINANCIAL DEVELOPMENTS

9
12

III

Monetary aggregates and bank credit.............................
Business finance............................... ................ ..
Government finance
Federal sector.......... .................. .................
State and local sector.........................................
Mortgage markets...............................................
Consumer credit.................................................

2
7
9
10
12
15

Tables
Monetary aggregates................... .... ... ......... ..........
Commercial bank credit and short- and intermediate-term
.............
business credit..................................
Gross offerings of securities by U.S. corporations..............
Treasury and agency financing..................................
Gross offerings of securities by state and local governments....
Mortgage activity at federally insured savings and
loan associations........................................... .
New issues of federally guaranteed mortgage
pass-through securities....................................
Consumer installment credit....................................

2
4
6
8
11
14
14
18

Chart
Comparison of cyclical growth patterns
in consumer installment credit...............................

16

Appendix
Summary of responses of the Reserve Rank Contact Group
on the October 1 deregulation of time deposits...............

INTERNATIONAL DEVELOPMENTS

A-1

IV

Foreign exchange markets........................................
U.S. international financial transactions........................
U.S. merchandise trade..........................................
U.S. current account and statistical discrepancy.................
Foreign economic developments...................................
Major debt problem situations in developing countries............

1
6
10
12
14
24

Tables
Claims on foreigners of U.S.-chartered banks .....................
Claims of U.S.-chartered banks of non-OPEC developing countries..
International banking data........................................
Summary of U.S. international transactions........................
U.S. merchandise trade.......................................
.
Oil imports. ................................ ......................
U.S. current account.............................................
Major industrial countries
Real GNP and IP.......................................
....
Consumer and wholesale prices.................................
Trade and current account balances............................

5
5
6
9
10
11
13
15
16
17

Charts
Weighted-average exchange value of the U.S. dollar...............
Three-month interest rates......................................

2
2

II

- T - I

September 28, 1983

SELECTED DOMESTIC NONFINANCIAL DATA
(Seasonally adjusted)
Latest data
Period

Release
date

Data

Percent change from
Three
Preceding
periods
Year
earlier
period
earlier
(At annual rate)

Civilian labor force
Unemployment rate (%) 1/
Insured unemployment rate (%) 1/
Nonfarm employment, payroll (mil.)
Manufacturing
Nonmanufacturing
Private nonfarm:
Average weekly hours (hr.) 1/
Hourly earnings ($) 1/
Manufacturing:
Average weekly hours (hr.) 1/
Unit labor cost (1967-100)

Aug.
Aug.
July
Aug.
Aug.
Aug.

9-02-83
9-02-83
8-29-83
9-02-83
9-02-83
9-02-83

112.3
9.5
3.6
89.8
18.8
71.0

Aug.
Aug.

9-02-83
9-02-83

Aug.
July

9-02-83
8-31-83

Industrial production (1967-100)
Consumer goods
Business equipment
Defense & space equipment
Materials

Aug.
Aug.
Aug.
Aug.
Aug.

9-15-83
9-15-83
9-15-83
9-15-83
9-15-83

150.5
155.9
152.8
122.1
148.3

Consumer prices all items (1967-100) Aug.
All items, excluding food & energy Aug.
Food
Aug.

9-23-83
9-23-83
9-23-83

300.0
288.5
291.6

Producer prices: (1967-100)
Finished goods
Intermediate materials, nonfood
Crude foodstuffs & feedstuffs

Aug.
Aug.
Aug.

9-09-83
9-09-83
9-09-83

286.4
318.8
254.2

Personal income ($ bil.) 2/

Aug.

9-20-83

4.1
9.5
3.8
1.8
-7.4

5.5
10.1
4.4
1.7
6.0
.5

35.0
7.97

35.0
8.03

35.1
7.97

34.8
7.73

40.3
92.4

40.2
-11.6

40,0
-11.8

39.0
-8.4

-5.5

10.5
7.0
1.6
15.9
13.1

2,755.2

16.9
14.6
13.8
15.3
18.6
4.2
5.3
-.8

2.5
3.1
1.6

4.6
5.3
47.1

3.8
6.5
-1.3

1.4
1.0
3.0

2.8

5.3

6.5

(Not at annual rates)
9-22-83
9-22-83
'9-22-83
9-22-83

88.5
27.2
4.3
22.9

.3
-4.6
-37.4
5.9

4.8
.6
-9.7
2.8

21.3
11.4
-23.6
22.0

July
July
July

9-14-83
8-30-83
9-14-83

1.36
1.50
1.25

1.35
1.48
1.24

1.44
1.58
1.32

1.50
1.69
1.33

Mfgrs.' durable goods inventories to unfilled orders 1/ July

8-30-83

.551

.556

.567

.605

9-13-83
9-13-83

97.6
20.4

-1.4
-.2

-.8
-.8

9.6
7.7

9-06-83
9-06-83
9-06-83

-9.0
6.6
2.3

-8.6
-8.7
-8.3

-1.7
-3.4
3.2

18.6
24.3
4.8

1983
1983
1983

9-08-83
9-08-83
9-08-83

306.57
113.97
192.60

Capital Appropriations, Mfg.
1983-Q2
Housing starts, private (thous.) 2/ Aug.
Leading indicators (1967-100)
July

9-06-83
9-19-83
8-31-83

20,955
1,935
157.7

Mfgrs. new orders dur. goods ($ bil.)Aug.
Capital goods industries
Aug.
Nondefense
Aug.
Defense
Aug.
Inventories to sales ratio: 1/
Manufacturing and trade, total
Manufacturing
Trade
Ratio:

Retail sales, total ($ bil.)
GAP 3/

Aug.
Aug.

Auto sales, total (mil. units.) 2/
Domestic models
Foreign models
Plant & Equipment expen. ($ bil.)4/
Total nonfarm business
Manufacturing
Nonmanufacturing

1/ Actual data used in lieu of percent changes for earlier periods.
2/ At annual rate.
3/ Excludes mail order houses.
7/ Planned-Commerce July and August 1983 Survey.

-3.1
-4.8
-2.1
7.1
3.5

4.6
85.0
15.8

DOMESTIC NONFINANCIAL DEVELOPMENTS

The pace of the recovery slowed somewhat in August from the fast
rate of July and the second quarter.

Industrial production and employment

posted further sizable gains in August, and housing starts and equipment
spending remained at high levels.

But after little change in July, real

consumer spending declined in August, primarily due to weak auto sales.
Recent wage and price developments have remained generally favorable,
but prices of farm products have increased sharply owing to the drought.
Industrial Production
Industrial production rose an estimated 0.9 percent in August,
after increases in June and July of 1.3 and 2.0 percent, respectively.
Since the trough of the recession in November 1982, industrial production
has risen 11.6 percent, and now is only 2.2 percent below the previous
peak reached in July 1981.

Capacity utilization stood at 76.7 percent

in August, which is 7 percentage points above the historical low reached
last November, but still well below its post-war average.
Output gains in August were widespread and were especially sharp
in the production of home goods and construction supplies.

In addition,

unseasonably hot weather in August stimulated electricity use, boosting
the total index by about 0.1 percent.

Strike activity at Western Electric

held output of business equipment to only a fractional rise in August,
however.

Excluding the strike, business equipment probably would have

increased about 1-1/2 percent.

Auto assemblies edged up to an annual

rate of 7.5 million units in August, and industry schedules call
for a 7.8 million rate in September.

II-1

Capacity utilization in the motor

II-2
INDUSTRIAL PRODUCTION
(Percentage change from preceding period;
based on seasonally adjusted data)

1982
04

1983

-----

01

02

Annual rate-----

1983
July

June

Aug.

-----Monthly rate---

10.1

18.3

1.3

2.0

.9

Final products
-6.5
Consumer goods
-6.9
Durable
-22.2
Nondurable
-.9
Business equipment
-14.5
Defense and space equipment 16.5

2.2
5.5
29.7
-1.8
-7.6
9.8

15.0
18.9
36.9
12.8
11.7
5.0

1.3
1.3
2.5
.8
2.0
.3

1.7
1.8
3.1
1.3
1.3
2.1

.. 6
.6
1.4
.3
.1
1.3

Construction supplies

-8.0

24.6

30.5

2.5

2.2

1.7

-11.3
-22.2
5.1
-7.3

20.4
30.5
18.3
2.4

22.0
34.3
20.3
-2.4

1.3
1.9
.9
.6

2.2
2.7
.9
3.0

1.1
1.3
1.0
.8

-8.2

Total

Materials
Durable goods
Nondurable goods
Energy materials

CAPACITY UTILIZATION: MANUFACTURING AND MATERIALS
(Percent, seasonally adjusted)
1982
low

01

Q2

Total industry

69.6

71.2

Manufacturing, total
Advanced processing
Motor vehicles
Primary processing

68.8
70.0
46.1
66.2

Materials, total
Durable goods materials
Metal materials
Nondurable goods materials
Energy materials

66.6
59.8
46.2
70.7
78.5

1983
June July

Aug.

73.9

74.7

76.1

76.7

70.7
71.1
62.0
70.5

73.8
73.4
67.8
74.6

74.8
74.4
70.8
75.5

76.2
75.8
74.0
76.9

76.7
76.1
75.6
77.9

70.1
64.2
56.1
75.2
79.5

73.5
68.9
60.9
78.4
78.7

74.4
70.1
61.7
79.3
78.8

76.0
72.0
62.8
79.9
81.1

76.7
72.9
63.8
80.6
81.7

II-3

vehicles and parts industry now is somewhat below the historical average,
but little spare capacity remains in plants producing the popular large
cars.

In the materials sector, output rose 1.1 percent in August; this

was markedly slower than in the previous month and reflected smaller
increases for coal, steel, and parts for consumer durables.
Employment and Unemployment
The demand for labor strengthened further in August, although at a
slower rate than in the previous two months.

Both the household and

payroll measures of employment rose about 300,000 in August--after adjusting
the establishment survey for the number of workers on strike--compared
with average gains of 400,000 in the preceding three months.

The civilian

unemployment rate remained at 9.5 percent after a sharp decline in the
previous month.
Although reported nonfarm payroll employment fell 400,000, strike
activity, primarily in the Bell Telephone System, accounted for a drop
of 700,000 workers in the establishment count.

Strike-adjusted, manu-

facturing employment rose 85,000 with the largest gains occurring in
lumber and fabricated metals, and the factory workweek edged up one-tenth
of an hour for the third consecutive month.

Employment in services

increased by more than 100,000 for a third straight month, and construction employment rose 50,000.
Unemployment rates for most demographic groups exhibited little'
change from July to August.

Although unemployment rates generally have

declined since last December, the jobless rate for blacks, which is
usually slow to respond to a recovery, has shown little overall change.
However, the number of long-term unemployed (persons without jobs for
more than 26 weeks) has fallen 1/2 million over the past two months,

II-4
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1983

1981

1982

Q1

Q2

June

July

Aug.

-- Average monthly changes-Nonfarm payroll employment 2
Strike adjusted

-172
-170

Manufacturing
Strike adjusted

-40
-40

Durable
Nondurable
Construction
Trade
Finance and services

-33
-8
-21
8

59

Transportation and public
utilities
Strike adjusted
Total government
Private nonfarm production
workers
Manufacturing production
workers

-127
-125

25
27

343
340

423
423

358
389

-411
295

105

89

99

96

160
156

28
85

-99
-28
-20
-18
31

172
170

-15
-9

-25

-13

-11

-1

-23

5

18

-7

-146

42

327

409

320

-452

-47

-108

27

97

84

150

30

561
512

1229
1074

499
494

278
316

Total employment 3
Nonagricultural

-49
-65

-655
5

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
Strike-adjusted data noted.
3. Survey of households.
SELECTED UNEMPLOYMENT RATES
(Percent; based on seasonally adjusted data)

1981

1982

Q1

Q2

1983
June

7.6

9.7

10.3

10.1

10.0

9.5

9.5

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

19.6
12.2
5.1
5.9

23.2
14.8
7.5
7.3

22.8
15.9
8.4
7.8

23.3
15.1
8.2
7.6

23.6
14.4
7.8
7.9

22.8
13.8
7.6
7.2

23.0
14.5
7.5
7.0

White
Black

6.7
15.6

8.6
18.9

9.1
18.5

8.8
18.8

8.6
18.9

8.2
17.9

8.2
18.1

7.3

9.6

10.3

9.9

9.7

9.4

9.4

7.5

9.5

10.2

10.0

9.8

9.3

9.4

Civilian,

16 years and older

Fulltime workers
Memo:
Total nationall

1. Includes resident Armed Forces as employed.

July

Aug.

II-5

and the mean duration of unemployment--a lagging economic indicator--has
dropped two weeks.

As usual for a recovery, expanded employment opportun-

ities this year have led to an increase in labor force participation.
From a comparatively low rate in the spring, the percentage of the population
in the labor force rose to 64.4 percent in August, slightly above the
average participation rate of the last three years.
Personal Income and Consumption
Growth in nominal personal income slowed in August to a 2.8 percent
annual rate, largely owing to the telephone strike and hurricane damage.
Adjusted for special factors, personal income would have grown at a 6.3
percent annual rate, a gain in line with the average for this year.

In

real terms income declined somewhat in August, but given the large tax
cut in July, real disposable income in August is estimated to be 1.4
percent greater than the second-quarter average.
Personal consumption expenditures fell $7 billion in August compared
with average monthly increases of $23 billion during the preceding four
months.

This drop mainly reflected a sharp decline in purchases of

durable goods, especially in the automotive area.

Unit sales of cars

fell to a 9.0 million annual rate in August, off more than 1/2 million
from the average of the preceding three months.

The weakness in sales,

which continued into early September, apparently reflected very tight
inventories for some popular models and the phasing out of dealers'
incentives and interest subsidies.

But the inventory situation has

been alleviated somewhat by the introduction of 1984 models, and domestic
sales recovered in mid-September.
also declined in August.

Purchases of furniture and appliances

II-6

PERSONAL INCOME AND EXPENDITURES
(Based on seasonally adjusted data)

1981

1982

Q1

Q2

1983
June

July

Aug.

- - Percentage changes at annual rates1 - Total Personal Income
Nominal
Real 2

11.1
3.4

4.6
-.3

4.0
1.8

8.7
3.9

5.9
6.4

7.1
-.3

2.8
-2.0e

Disposable personal income
Nominal
Real

11.1
3.4

5.1
.2

5.2
2.9

8.2
3.5

4.5
4.7

20.7
13.5

2.6
-2.2e

9.3
1.7

7.5
2.5

5.2
2.9

15.1
10.0

4.7
4.9

6.8
-.4

-3.9
-8.7e

Expenditures
Nominal
Real

3
- - Changes in billions of dollars - -

18.9

10.6

8.4

20.8

13.3

16.1

6.5

8.8
7.0
1.0

5.1
3.4
-. 6

8.3
6.9
3.7

14.7
13.3
4.4

8.7
11.1
3,7

12.2
10.8
4.8

6.8
1.8
2.1

Other income

11.3

6.0

1.3

7.0

5.3

4.5

-.3

Disposable personal income
Nominal

15.8

10.0

9.1

15.3

8.6

39.9

Expenditures
Durables
Nondurables
Services

12.8
.5
4.1
8.2

12.0
2.5
1.9
7.6

8.2
-. 5
2.1
6.6

26.7
8.2
9.2
9.4

8.4
5.5
3.3
-.4

-7.0
12.3
1.4 -10.4
4.1
.6
-.7
10.3

6.6

5.8

5.4

4.0

3.7

Total personal income
Wages and salaries
Private
Manufacturing

Personal saving rate (percent)

4.7

5.0

5.2

e--staff estimate
1. Changes over periods longer than one quarter are measured from final
quarter of preceding period to final quarter of period indicated. Changes
for quarterly periods are compounded rates of change; monthly changes are
not compounded.
2. Total personal income is deflated by the personal consumption expenditure
deflator.
3. Average monthly changes are from the final month of the preceding period
to the final month of period indicated; monthly figures are changes from
the preceding month.

II-7
RETAIL SALES
(Percent change from previous period;
based on seasonally adjusted data)
1982

1983

Q4

Q1

Q2

June

Total sales

2.8

.3

5.9

.8

-.2

(Real)1

2.4

.3

4.9

.6

-.6

Total, less automotive group
and nonconsumer stores

1.0

.6

3.0

.3

.0

.6

Total, less automotive
group, nonconsumer stores,
and gasoline stations

1.2

1.3

2.9

.5

-.1

.4

GAF 2

1.8

1.2

4.2

.8

-1.4

-.2

7.7
11.8

.4
-2.6

12.4
17.6

1.7
2.2

-.7
-.8

-4.9
-9.2

2.6

3.2

4.0

-.3

1.5

-.4

.7
.2
.6
2.1
-.7

.3
-.4
-.3
1.2
-4.3

3.0
7.2
2.6
3.1
3.8

.3
-1.0
-.1
2.0
-.7

.0
-2.5
.8
-2.0
1.2

.4
-1.8
.0
.5
2.1

Durable
Automotive Group
Furniture &
appliances
Nondurable
Apparel
Food
General merchandise 3
Gasoline stations

July

Aug.
-1.4
n.a.

1. BCD series 59. Data are available approximately 3 weeks following the
retail sales release.
2. General merchandise, apparel, furniture and appliance stores.
3. General merchandise excludes mail-order nonstores; mail-order sales
are also excluded in the GAF grouping.
AUTO SALES
(Millions of units; seasonally adjusted annual rates)
1982
Q4

Q1

Q2

June

1983
July

Aug.

Sept.

8.6

8.5

9.1

9.7

9.8

9.0

n,a.

Imports

2.5

2.4

2.3

2.5

2.5

2.3

n.a.

Domestic

6.1

6.1

6.8

7.2

7.3

6.6

6.81

Small

2.8

2.5

3.0

3.3

3.0

2.6

n.a.

Intermediate & Standard

3.3

3.6

3.9

3.8

4.2

4.0

n.a.

Total

Note:

Components may not add to totals due to rounding.

1 First 20 days

II-8

Spending for nondurable goods in August rose 0.4 percent in nominal
terms, following little change in the previous month; sales of gasoline
posted a large increase.

Service expenditures are estimated to have

edged down in August after a rapid increase in July, but part of the
decline is attributable to reduced telephone installations and other
temporary factors.

Overall, with the tax cut boosting nominal disposable

income and consumption slowing, the saving rate in July and August rose
to the 5 percent range, a percentage point above the second quarter
level, but still well below the average rate that has prevailed since
1975.
Consumers remain much more optimistic than they were a year ago,
according to surveys conducted in August by both the Michigan Survey
Research Center and the Conference Board.

Both institutions' measures of

confidence show consumer optimism well above the levels of a year ago,
although the public's evaluation of market conditions for house, car, and
large appliance purchases was slightly less favorable than that expressed
in July.

Respondents expressed concern about higher interest rates, but

were more willing to use savings or credit to make a major purchase than
at any other time in the past three years.
Housing Markets
Housing activity has continued to show a mixed response to the
higher mortgage interest rates that have prevailed since May.

In August

private housing starts rose to a seasonally adjusted annual rate of 1.94
million units, following three months in the 1-3/4 million unit range.
Gains were recorded in both single- and multifamily units, probably
owing in part to favorable financing commitments negotiated earlier.

By

II-9
PRIVATE HOUSING ACTIVITY
(Seasonally adjusted annual rates, millions of units)
1983
June

July

Aug.1

1.64
1.68

1.76
1.74

1.78
1.79

1.67
1.94

.85
1.08

.93
1.11

1.01
1.13

.92
1.03

.91
1.14

.41
1.99

.61
2.58

.65
2.86

.66
2.94

.62
2.79

n.a.
2.71

Multifamily units
Permits
Starts

.45
.40

.61
.62

.71
.58

.75
.61

.86
.76

.75
.80

Mobile home shipments

.24

.28

.30

.31

n.a.

n.a.

1982

Q1

Q2

1.00
1.06

1.46
1.69

Single-family units
Permits
Starts

.55
.66

Sales
New homes
Existing homes

All units
Permits
Starts

1. Preliminary estimates.
PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions
of units
12.0

1979

1980

1981

1982

1983

II-10

contrast, newly-issued residential building permits, usually a less
volatile measure of homebuilding activity, declined in August after four
consecutive monthly increases.

Nearly all the drop was accounted for by

permits for multifamily structures and for units in the South.
Sales of homes have declined recently, probably portending a downward adjustment in single-family starts.

Existing-home sales fell 5 percent

in July and 3 percent in August, while sales of new houses declined 6.5
percent in July (latest data).

Recent surveys by the Federal Reserve

Banks as well as by the National Association of Home Builders suggest
that part of this slowing in housing sales and mortgage credit demand
has been interest-rate induced.

In line with these sales developments,

the stock of unsold new houses edged up in July, although inventories
remain low by historical standards.
Business Fixed Investment
Spending for business fixed investment in July and August remained
near the advanced level of June.

The growth in equipment expenditures

has moderated somewhat from the rapid second-quarter rate, but is still
relatively strong.

In addition, the decline in overall nonresidential

construction appears to be ending.
Shipments of nondefense capital goods, excluding the volatile aircraft category fell 2.9 percent in August, after rising 7 percent in June
and remaining unchanged in July.

Despite the decline last month, ship-

ments in July and August were about 3 percent above the second-quarter
level, with the advance coming mainly in office and computing equipment
and industrial and service machinery.

Sales of heavy trucks also remained

II-11

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

1982
Q4

1983
June

July

Aug.

5.3

9.3

-4.4

-0.6

.3

6.1

7.0

1.5

-.1

15.7

9.3

-11.2

5.9

-.7

2.5

12.1

6.1

-4.8

1.2

5.77

5.56

5.36

5.10

5.29

5.34

4.23

4.12

3.95

3.78

3.75

3.87

162

173

180

200

185

204

-.3

-4.6

-4.0

2.6

-.1

n.a.

Q1

Q2

-3.8

.0

-6.0

Producers' durable equipment
Nondefense capital goods
Shipments
Excluding aircraft &
parts
Nondefense capital goods
Orders
Excluding aircraft &
parts
Addenda:
Ratio of unfilled orders
to shipments (months)
Excluding aircraft &
parts (months)
Sales of heavy-weight
trucks (thousands of
units, annual rate)

.0

-2.9

Nonresidential structures
Nonresidential construction

II-12
NONRESIDENTIAL BUILDING CONSTRUCTION
Billions
of dollars

I-

1979

1980

1981

1982

1983

1. Includes shopping centers, department stores, banks, drugstores,
and warehouses.

II-13

strong with the July-August average 8 percent above the second-quarter
average.

New orders excluding aircraft rose 1.2 percent in August after

a 4.8 percent decline in July.

Orders are now at a relatively high

level, having risen about 20 percent over the first eight months of the
year.
Investment in nonresidential structures has stabilized in recent
months, as construction increased 2.5 percent in June and fell only
slightly in July.

Most of the increase between May and July was in the

"other" commercial category, which includes shopping centers and warehouses.
This type of construction has been on a downtrend since the end of the
shopping-mall boom around 1980; however, building of shopping centers
often responds to the kind of improvement in housing markets that has
occurred this year.

Most other types of investment in structures were

little changed between May and July, although climbing office vacancy
rates should continue to discourage starts of new offices.
The Commerce Department survey of planned plant and equipment
spending conducted in August showed a decline in nominal terms of 3.1
percent in 1983 compared with 1982.

Because reported spending in the

first half of the year was down about 5 percent from the second half of
1982, this survey implies a substantial increase in investment outlays
over the second half of this year.

In addition, the Conference Board

reported that capital appropriations net of cancellations of the nation's
1,000 largest manufacturers rose 10-1/2 percent in the second quarter,
bringing the cumulative increase from the trough in the third quarter of
1982 to about 30 percent.

Appropriations tend to lead expenditures by

an average of about a year, suggesting that capital spending for these

II-14

companies is likely to continue to increase at least through mid-1984.
Business Inventories
Recent data suggest that the rebuilding phase of the inventory cycle
is beginning.

Manufacturing and trade inventories rose at an annual

rate of $6.7 billion in constant-dollar terms in July, leaving the
overall business inventory-sales ratio only fractionally higher than
the June value of 1.55.

This level, the lowest since November 1973,

together with the current strength in production, points to a continued
restocking.
Although many manufacturing industries stepped up their inventory
rebuilding efforts in July, some key durable goods industries continued
to draw down their stocks.

Two of these, primary metals and nonelectrical

machinery, have been slow in reducing their excess stocks in the current
recovery.

However, stock depletions in July brought inventory-shipments

ratios close to their pre-recession lows, and an inventory buildup in
these two industries appears likely.
In the trade sector, retail auto stocks were drawn down further in
July but rose in August.

Inventories at most non-auto retail outlets

overall were little changed in July, but merchant wholesalers reported a
$7.4 billion accumulation.

Despite this increase, wholesale stocks

are still low relative to sales.
The Government Sector--Federal, State, and Local
Growth in federal outlays continued to slow during July and August.
As a result, spending for the fiscal year to date is about 10 percent
above the corresponding outlays of one year ago, significantly less than

II-15
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates)

Book value basis
Total
Manufacturing
Durable
Nondurable
Wholesale trade
Retail trade
Automotive
Constant dollar basis
Total
Manufacturing
Wholesale trade
Retail trade
Automotive

1981

1982

33.3
18.2
11.7
6.5
4.6
10.4
2.1

-14.2
-17.4
-11.0
-6.4
1.8
1.4
.1

5.3
2.0
.9
2.4
-.2

-8.2
-8.4
.6
-.5
-.4

1983
May

Q2

Q1

JulyP

Juner

-34.9
-30.4
-23.3
-7.1
-8.8
4.3
1.5

9.2
0.3
1.9
-1.5
-3.8
12.7
2.7

10.3
9.0
11.0
-2.0
-19.7
21.0
-.6

-1.6
-9.1
-10.7
1.6
-2.7
10.2
1.7

11.9
9.4
-1.8
11.2
10.3
-7.8
-10.6

-14.5
-12.3
-5.3
3.1
.2

-2.1
-0.8
-2.9
1.7
-1.6

4.0
4.1
-5.1
5.0
-3.3

-6.0
-4.2
-2.8
1.0
-1.7

6.7
2.7
7.4
-3.4
-3.1

INVENTORIES RELATIVE TO SALES 1
Cyclical
reference points 2
June 1981 1982 peak

Q1

Q2

1983
Juner
May

JulyP

Book value basis
Total
Manufacturing
Durable trade
Nondurable trade
Wholesale trade
Retail trade
Automotive

1.42
1.59
2.07
1.11
1.14
1.39
1.79

1.54
1.78
2.48
1.18
1.31
1.45
1.92

1.46
1.61
2.16
1.09
1.25
1.40
1.66

1.39
1.53
2.04
1.03
1.19
1.36
1.45

1.39
1.54
2.07
1.03
1.19
1.34
1.43

1.36
1.48
1.96
1.00
1.15
1.34
1.41

1.36
1.50
1.98
1.02
1.16
1.33
1.37

Constant dollar basis
Total
Manufacturing
Wholesale trade
Retail trade

1.63
1.92
1.38
1.37

1.77
2.14
1.53
1.45

1.66
1.93
1.48
1.40

1.60
1.85
1.42
1.36

1.59
1.85
1.41
1.35

1.55
1.79
1.37
1.33

1.56
1.79
1.39
1.33

1.70

1.79

1.50

1.34

1.35

1.27

1.26

Automotive

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

II-16

the rate of expansion seen earlier this year.

Continuation of this

trend implies that for this fiscal year outlays could fall $10 billion
short of the administration's July projection of $810 billion.

This

shortfall would reflect lower expenditures for unemployment insurance
and related items caused by the stronger economy, as well as a slower
than expected pace of defense outlays and farm subsidy payments.
The economic recovery also has led to improvements on the revenue side
of the budget.

Largely reflecting reductions in tax rates, collections

have been running below their levels of a year earlier throughout the
current fiscal year, but recent strong income growth has narrowed the
gap between this and last year's receipts.

Moreover, preliminary data

indicate a substantial rise in corporate tax collections in September,
suggesting that this gap will narrow further.
At this date a considerable amount of work remains to be done on
the fiscal year 1984 budget.

Of the 13 budget appropriation bills, four

have been enacted into law, and Senate and House conferees have agreed
on another three.

But action by one or both houses is still required on

six bills that account for three-fourths of all spending subject to the
annual appropriations process.

It thus appears likely that by October 1

Congress again will have to fund some departments and agencies through a

continuing resolution.

So far, congressional actions imply fiscal year

1984 spending that is within the limits set by the Congressional First
Budget Resolution.

However, Congress has shown resistance to approving

the $12 billion in revenue increases also contained in the budget resolution.

II-17

(Unified

Month

FEDERAL RECEIPTS AND OUTLAYS
budget, cumulative monthly data, billion of dollars)

Receipts
(Cumulative, fiscal year to date)
Percent
I
FY1982
FY1983
Change!

Outlays
(Cumulative, fiscal year to date)

Percent
Changel

FY1982

FY1983

63.3
117.9
194.2

66.7
132.9
205.3

5.4
12.7
5.7

October
November
December

45.2
89.2
146.0

40.5
82.5
137.0

January
February
March

201.3
244.3
289.6

194.5
233.4
276.9

-3.4
-4.5
-4.4

240.1
298.0
361.5

272.4
336.5
406.1

13.5
12.9
12.3

April
May
June

365.4
402.1
468.5

343.1
376.9
443.4

-6.1
-6.3
-5.4

427.6
483.3
542.9

475.6
538.7
601.8

11.2
11.5
10.8

July
August

513.1
558.1

487.3
537.0

-5.0
-3.8

607.4
667.0

667.1
734.3

9.8
10.1

599.9

-2.9

728.4

809.8

11.2

Memo:
Fiscal year total actual or
Administration midyear
617.8
projection

-10.4
-7.5
-6.2

Outlays

1. Percentage change of FY1983 cumulative year-to-date (receipts or outlays)
from corresponding FY1982 levels.

II-18

Outlays in the state and local government sector appear to have
picked up a bit since the beginning of the year.

Construction spending,

the smallest but most volatile component of state and local purchases,
was up in June and July from the low levels seen earlier in the year.
Although employment has remained near the 13 million level for the past
year, wage gains for these workers continue to be greater than for those
in the private sector, pushing up outlays for compensation.

On the

revenue side, the economic recovery and recent tax legislation continue
to improve this sector's finances.

Large budget surpluses (net of social

insurance fund accumulations) were recorded in the first half of 1983,
and personal tax collections in August were 4.4 percent above the secondquarter average.

Much of this tax increase is attributable to increased

tax rates.
Net Exports
The foreign sector continues to be a restraining influence on the

domestic economy.

In July, the merchandise trade deficit worsened to

$71.2 billion (annual rate), up from a second quarter average of $58.6
billion.

Beginning in the second quarter, imports turned up in both

nominal and real terms across a broad range of commodities as the domestic
economy strengthened and the strong dollar continued to hold down the
relative price of imports.

Exports (both nominal and real) have changed

little this year, largely reflecting sluggish economic activity in major
trading-partner countries and the effects of a strong dollar on the
price competitiveness of U.S. goods.

For a more complete discussion of

international developments, see Part IV.

II-19

Wage and Labor Costs
High unemployment rates and low price inflation continue to moderate
wage increases.

The hourly earnings index for production workers actually

fell 0.1 percent in August with part of the decline reflecting the telephone
industry strike; but even excluding this sector, average wage gains in August
were very small.

So far this year wages have risen only at a 3.1 percent

annual rate, in contrast to 1981 and 1982 when they rose 8.4 and 6.0
percent, respectively.

Wage increases for white-collar workers, as

measured by the employment cost index, also have eased, rising at a 5.5
percent annual rate in the first half of this year, compared with 6.4
percent during 1982.
Major collective bargaining agreements were quite moderate again in
the third quarter.

Because of high wages relative to nonunion and

international competitors, and because of depressed conditions in certain
unionized industries, union workers continued to accept pay cuts or

freezes, notably in new contracts negotiated in the construction and
airline industries, and at steel firms outside the master contract.

In

addition, the recent telephone settlement provides considerably smaller
wage adjustments than were negotiated in the previous contract three
years earlier.

Wage increases will average 5.5 percent in the first year

followed by 1-1/2 percent plus a COLA during both the second and third
year of the contract.

In the auto industry, however, strong pressures to

restore wage parity with other autoworkers resulted in an unusually large
settlement at Chrysler.

Under the new two-year settlement, the gap between

Chrysler's wages and those at Ford and GM was reduced from $2 to $1
immediately and a further narrowing should occur in 1985.

II-20

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

Q1

Q2

1983
H1

1983
1980

1981

1982

Hourly earnings index, wages of production workers1
Total private nonfarm
Manufacturing
Contract construction
Transportation and
public utilities
Trade
Services

9.6

8.4

6.0

5.3

3.3

4.3

10.9
7.7

8.8
8.1

6.1
5.2

4.5
6.1

1.3
-. 5

2.9
2.8

9.3
8.8
9.5

8.5
7.1
9.1

6.1
4.8
6.6

8.3
4.6
3.6

2.9
5.1
6.4

5.6
4.8
5.0

5.3

4.6

Employment cost index, wages and
I

T

Total
By occupation:
White collar
Blue collar
Service workers
By bargaining status:
Union
Nonunion

salaries of all persons
s

m

9.0

8.8

6.3

3.9

8.7
9.6
8.1

9.1
8.6
8.3

6.4
5.6
8.5

4.3
4.5
-2.1

10.9
8.0

9.6
8.5

6.5
6.1

5.8
2.5

5.4
4.1
1.8
4.5
5.8

5.2
4.1

Major collective bargaining settlements, first-year wage adjustments 2
Contracts with COLAs
Contracts without COLAs

8.0
11.7

2.2
7.0

-

---

9.0
1.2
7.7

7.2
.8
6.3

6.8
3.7
3.0

4.6
4.3
.2

9.8

6.4

7.0

4.7

8.0
10.6

-2.7
3.8

Labor costs and productivity, all persons

Compensation per hour
Output per hour
Unit labor costs

10.8
.2
10.5

5.7
4.0
1.6

3
Employment cost index, compensation

Compensation per hour

9.8

1. Changes are from final quarter of preceding period to final quarter of
period indicated. Quarterly changes at compound rates.
2. Data are for contracts covering 1,000 or more workers.
3. Not seasonally adjusted.

II-21

As usual for the early stages of a recovery, productivity grew
rapidly in the first half--at a 4.8 percent annual rate--contributing to
a sizable rebound in corporate profits.

The recent productivity gains

appear consistent with a trend growth rate slightly above 1 percent--a
modest improvement from the experience of the 1970s.

The rapid rise in

productivity growth in the first half of this year, along with an easing
of hourly compensation growth from 7-1/4 percent last year to 5-1/2 percent,
have contributed to a significant slowing of unit labor costs.
Prices
Although moderate labor costs and five consecutive quarters
of declining import prices have helped to-restrain inflation, unfavorable
developments in the farm sector have boosted producer prices and are likely to
end the restraining influence that food prices have had on retail prices.
The consumer price index rose at a 5 percent annual rate in July and
August, after about a 3 percent average during the previous six months.
Producer prices of finished goods advanced at annual rates of only 1.3
percent in July but 4.6 percent in August.
The effect of the summer drought has been sharp and prompt at the
farm level.

The producer price index for crude foods jumped nearly 4

percent in August after three months of decline.

Prices of soybeans

climbed nearly 22 percent, and large increases were registered for corn,
hogs, poultry, and fresh vegetables.

At the consumer level, the CPI

food index advanced 0.2 percent in August after two months of decline,
as sharp increases for fresh vegetables and poultry were largely offset
by further declines in meats.

Over the past 12 months the CPI food com-

ponent has risen less than 2 percent, helping to hold down the overall CPI.

II-22
Energy prices have eased after their second-quarter spurt.

Although

gasoline prices rose in August, natural gas rates have been flat recently
after nearly two years of rapid increases.

With continued stability in

crude oil markets, the energy sector should represent a relatively favorable
element in the near-term inflation outlook.
Outside the food and energy areas, consumer prices rose at annual
rates of 6.7 percent in July and 5.4 percent rate in August.
were boosted by large increases for cigarettes and used cars.

Both rates
New car

prices also rose substantially in August, in part reflecting the end of
incentive programs as well as the absence of the customary year-end
discounts; nonetheless, the CPI measure of car prices, which attempts to
adjust for quality change, is less than only two percent above the year-ago
level.

At the producer level, the price increase for cars was a significant

factor in the August acceleration in the capital equipment component.
There also has been some pickup in inflation at the intermediate
materials level.

Over the past three months, the producer price index

for intermediate materials less food and energy--a measure that is significantly influenced by labor costs as well as by prices for primary
inputs--has risen at a 4.7 percent annual rate, similar to the pace for
finished goods excluding food and energy items.

Previously the intermediate

materials series, affected by slack demand, had been virtually flat for
more than a year, the longest such period in almost two decades.

Price

increases for crude materials less food and energy, an extremely volatile
index, appear to be slowing since midyear.

II-23
RECENT CHANGES IN CONSUMER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1

All items 2
Food
Energy
All items less food and
energy 3
Commodities 3
Services 3
Memorandum:
CPI-W 4

Relative
Importance:
Dec. 1982

1981

1982

100.0

8.9

3.9

19.0
12.4

4.3
11.9

3.1
2.8
1.3 -25.1

68.6
26.2
42.4

9.4
7.9
10.6

6.0
5.0
7.0

100.0

8.7

3.9

Q1

Q2

.4

Aug.

5.4

4.8

5.2

1.7
21.0

-1.2
4.0

2.5
8.8

3.9
2.9
4.6

6.7
8.0
5.3

5.4
5.9
5.0

4.4
5.7
3.7

.3

1983
July

4.9

4.0

6.0

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

RECENT CHANGES IN PRODUCER PRICES
(Percentage change at annual rates; based on seasonally adjusted data)1
Relative
Importance
Dec. 1982
Finished goods
Consumer foods
Consumer energy
Other consumer goods
Capital equipment
Intermediate materials 2
Exc. energy
Crude food materials
Crude energy
Other crude materials

1983
1981

1982

100.0
23.7
13.2
40.5
22.5
95.2
78.8

7.1
1.4
14.1
7.1
9.2
7.3
6.6

3.7
2.1
-. 1
5.3
3.9
.3
.6

51.2
34.4
14.4

-14.0
22.8
-11.4

1.5
2.6
-7.6

Q2

July

Aug.

-4.7
4.1
-35.5
-2.0
2.0
-4.7
.8

2.9
-.3
12.0
2.5
2.1
3.6
2.8

1.3
-7.4
2.9
5.5
1.7
3.4
4.1

4.6
5.1
3.3
3.0
7.9
5.3
4.9

18.1
-9.2
-16.2

.8 -30.6
-4.8 -7.1
59.3 27.0

47.1
-1.8
12.0

Q1

1. Changes are from final month of preceding period to final month
of period indicated; monthly changes are not compounded.
2. Excludes materials for food manufacturing and animal feeds.

III-T-1

SELECTED FINANCIAL MARKET QUOTATIONS 1
(Percent)
1982
FOMC
Highs Dec. 21

1983
Recent FOMC
FOMC
low July 13 Aug. 23 Sept. 27

Change from:
Recent FOMC
low
Aug. 23

Short-term rates
Federal funds 2

15.61

8.69

8.48

9.21

9.41

9

14.57
14.36
13.55

7.90
8.01
8.11

7.96
7.97
7.95

9.10
9.30
9.39

9.19
9.33
9.37

Commercial paper
1-month
3-month

15.73
15.61

8.48
8.43

8.17
8.13

9.19
9.30

Large negotiable CDs 3
1-month
3-month
6-month

15.94
16.14
16.18

8.59
8.62
8.78

8.26
8.26
8.29

16.36
16.53

9.44
9.56

17.00
13.97
13.50

Treasury bills
3-month
6-month
1-year

.04 p

.56

-.37

8.73
8.88
9.01

.77
.91
1.06

-. 46
-.45
-.36

9.24
9.34

8.88
8.97

.71
.84

-.36
-.37

9.33
9.58
10.00

9.37
9.50
9.81

9.10
9.18
9.35

.84
.92
1.06

-.27
-. 32
-.46

8.68
8.71

9.70
10.05

9.73
10.04

9.44
9.50

.76
.79

-.29
-.54

11.50

10.50

10.50

11.00

11.00

.50

0

8.98
9.56

8.21
8.53

9.83
10.17

9.61
10.09

8.92
9.59

.71
1.06

-.69
-. 50

9.36 10.91
11.40
10.12
I0.2
!,O,,Z ~ 11.44

11.02
11.57
11.56

10.83
11.45
11.44

1.47
1.33
1.17

-. 19

.64

-.28

Eurodollar deposits 2
1-month
3-month

Bank prime rate
Treasury bill futures
Dec. 1983 contract
June 1984 contract
Intermediate- and longterm rates
U.S. Treasury (constant
3-year
10-year
30-year

maturity)
15.16
14.9
14.80

9.87
10.54
10*32

7t

9.704

Municipal (Bond Buyer)

13.44

10.054

Corporate--Aa utility
Recently offered

16.-4

1U.96

Ul

12.3S* 12.50e

17.66
1982

13.63

12.55

13.3

S&L fixed-rate mortgage commitment

9.354

12.22.

13.891 13.721

Highs

July 13

-. 12

1.19

-. 28

1.17

-. 17

Percent change from:

1983

FlC

Lows

9.424

-. 12

FOC

Aug. 23

Sept. 27

183

FOMC

high

Aug. 23

Stock prices
4.6
0
1197.82 1192.89 1247.97
776.92 1248.30
Dow-Jones Industrial
3.4
-1.6
97.47
94.27
95.90
99.01
58.80
NYSE Composite
2.1
-4.8
234.51
229.67
241.07
246.38
118.65
AMEX Composite
2.4
-8.6
300.78
293.66
314.59
328.91
159.14
NASDAO (OTC)
4. One-day quotes for preceding Thursday
1. One-day quotes except as noted.
2. Averages for statement week closest to date shown. 5. One-day quotes for preceding Friday.
3. Secondary market.

p-preliminary.

e--estiated.

.

DOMESTIC FINANCIAL DEVELOPMENTS

Short-term rates of interest generally have declined by 1/4 to 1/2
percentage point since the August FOMC meeting, while long-term rates have
fallen 1/8 to 1/4 of a point.

Conditions in the reserves market have eased

somewhat as monetary expansion has remained on the slow side and economic
indicators have continued to point to a moderation in the pace of expansion.
Recent money stock movements have put all of the aggregates clearly within
their longer-run ranges, which has helped to alleviate investor concerns
that there might be further near-term tightening actions by the System.
Credit growth also appears to be running well within the FOMC's monitoring range for the year.

Treasury debt continues to grow rapidly--though

at a slower pace on a seasonally adjusted basis than in the first half--while
aggregate debt growth of private domestic nonfinancial sectors remains moderate.

The federal deficit in the third quarter has been somewhat smaller

than anticipated, but the Treasury has not altered its market borrowing
schedule enough to prevent a further buildup in its already large cash balance.
In the state and local sector, long-term bond offerings have remained
substantial but well under the unprecedented volumes in the spring; mortgage
revenue issues have continued to be important and so have refunding issues,
the proceeds of which have been largely invested in Treasury securities.
Strong growth in profits has helped to hold down business cash needs, and
overall business borrowing has remained limited while net equity issuance
has run somewhat below the record pace of the first half.

With bond yields

still considerably above their spring lows, corporations have focused their
borrowing more on short-term markets.

Household borrowing has continued

III-1

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

1982
Q4
-----Money stock measures
1.
M1
2. (M1)3
3.
M2
4.
M3

13.1
(14.5)
9.3
9.5

Q1

Q2

1983
June

July

Aug.

1

Growth from
base period
to Aug. 19832

Percentage change at annual rates ----

14.1
(13.8)
20.3
10.2

12.2
(12.7)
10.1
8.1

10.2
(7.6)
10.4
10.9

8.9
(3.3)
6.6
5.5

2.8
(7.0)
6.2
8.7

9.1
(7.5)
8.1
9.1
Level in billions
of dollars
Sept. 1983P

Selected components

7.4

10.9

10.6

8.6

5.1

7.7

5.

Currency

6.

Demand deposits

8.4

2.7

4.0

7.4

8.9

-6.3

7.

Other checkable deposits

34.0

46.2

30.6

17.9

14.7

15.5

125.8

8.

M2 minus Ml (9+10+11+14)

8.1

22.4

9.4

10.4

5.9

7.2

1620.2

9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

4

34.2

Overnight RPs and Eurodollars, NSA
General purpose and broker/dealer money
market mutual fund shares, NSA
Commercial banks
Savings deposits, SA, plus
5
MMDAs, NSA
Small time deposits
Thrift institutions
Savings deposits, SA, plus
5
MMDAs, NSA
Small time deposits
M3 minus M2 (18+21+22)
Large time deposits
6
At commercial banks, net
At thrift institutions
Institution-only money market
mutual fund shares, NSA
Term RPs, NSA

28.

U.S. goverment deposits at commercial
banks8

17.4

244.5

-68.7

-6.8

-10.3
13.1

2.6
9.3

138.7
688.0

52.4

-57.5
57.8

-44.0
16.5

296.1
-48.5
14.7

62.4
-24.1
12.4

25.5
2.6
10.2

2.4
24.8
8.6

-2.7
22.4
6.4

355.7
332.2
748.3

171.0
-51.0

56.8
-18.0

18.1
3.6

-3.9
18.8

-10.0
20.0

332.6
415.7

-12.8
14.6

10.4

-36.5

-2.3

13.9

-0.6

23.1

391.6

4.2
-1.5
29.3

-43.0
-49.9
-14.6

-0.5
-15.6
55.4

19.7
11.1
46.3

7.1
-14.7
73.3

23.1
3.7
78.1

311.8
226.7
85.1

32.7
34.4

-32.7
19.4

-41.9
31.2

-35.6
-21.2

-18.4
-45.8

-6.2
56.1

38.4
44.8

MEMORANDA:
23. Managed liabilities at commercial
banks (24+25)
24.
Large time deposits, gross
25.
Nondeposit funds
Net due to related foreign
26.
institutions, NSA
7
27.
Other

47.3

141.8

Average monthly change in billions of dollars -

4.8
-0.7
5.5

365.6
284.2
81.4

-3.7
-8.1

7.4
-1.9

-51.4
132.8

11.0

-3.4

-2.7
-4.0
1.3

-19.0
-16.5
-2.5

-0.1
-4.3
4.2

-2.7
-0.2
-2.5

-14.0
-2.1
-11.9

-0.7
2.0

-4.9
2.5

2.4
1.7

2.7
-5.3

.0.3

0.2

0.2

1.7

20.6

I. Quarterly growth rates are computed on a quarterly average basis. Dollar mounts shown under memoranda for quarterly
changes are calculated on an end-aonth-of-quarter basis.
2. The base for Ml is the second-quarter 1983 average.
The base period for M2 is the February-Harch 1983 average. The
base period for M3 is the fourth-quarter 1982 average.
3. Ml seasonally adjusted using an experimental model-based procedure applied to weekly data.
4. Overnight and continuing contract RPs issued to the nonbank public by commercial banks plus overnight Eurodollar
deposits issued by branches of U.S. banks to U.S. nonbank customers, both net of amounts held by money market mutual
funds. Excludes retail RPs, which are in the small time deposit component.
5. Beginning December, 1982, growth rates are for savings deposits, seasonally adjusted, plus money market deposit
accounts (MMDAs), not seasonally adjusted. Commercial bank savings deposits excluding MDAs, were unchanged in June
and declined at rates of 10.2 percent in July and 11.2 percent in August. At thrift institutions, saving deposits
excluding MMDAs increased during June at an annual rate of 12.5 percent and declined during July and August at rates
of 2.0 and 0.7 percent respectively.
6. Net of large-denomination time deposits held by money market mutual funds and thrift institutions.
7. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold
under agreements to repurchase and other liabilities for borrowed money (including borrowings from the Federal Reserve
and unaffiliated foreign banks), loans sold to affiliates, loan RPs and other minor items.
Data are partially estimated.
8. Consists of Treasury demand deposits at commercial banks and Treasury note balances.

III-3

strong, but with indications of some slackening over the the course of the
quarter as car and home sales moderated.
Monetary Aggregates and Bank Credit
Growth in M1 slowed to a 2-3/4 percent annual rate in August, and
appears to be continuing at around that pace in September.

The demand

deposit component of this aggregate has been especially weak, declining over
the past two months.

On the whole, M1 is estimated to be expanding at around

a 9 percent rate on a quarterly average basis in the third quarter, the stillrapid increase mainly reflecting the arithmetic effect of the steep climb in
May and June.

M1 velocity probably will register a small rise in the third

quarter, its second consecutive increase,.but it remains below its level in
the fourth quarter of last year when the current economic upswing began--an
unprecedented development in the postwar years.
M2 growth in September appears likely to run a little below the already
rather sluggish pace of July and August.

Between June and September, the

nontransactions component has grown at a 6-1/2 percent annual rate, the
slowest rate over any three-month span in 2-1/2 years.

The rise in market

interest rates since May would not seem large enough to have prompted such a
slowing in M2, and no available data on financial flows point to any iden-

tifiable asset reallocation that might explain the recent weakness of M2;
moreover, personal and business saving are estimated to have risen in the

current quarter.
Within the nontransactions component of M2, the third quarter was
marked by a decided shifting away from MMDAs, and toward small time deposits.

Six-month MMCs and 2-1/2-year deposits attracted sizable volumes of funds

III-4
COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT
(Percentage changes at annual rates, based on seasonally adjusted data) 1

1982
Q4

Q1

Q2

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

2.

Securities
Treasury securities

4.

Other securities

5.

-

Total loans and securities
2
at banks

3.

Total loans

1983
June

9.9

23.9

18.4

53.5

36.8
6.4

11.2

1515.7

4.1

8.9

422.2

11.9

10.4

174.4

-1.0

8.3

247.8

6.8

11.5

11.9

1093.5

-1.3

6.4

12.2

10.4

404.6

-5.3

-56.4

75.3

-40.5

22.9

4.8
2

Aug.

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

9.9

.5.8

2

July

Levels in
bil. of dollars
Aug. 1983

9.7

6.

Business loans

7.

Security loans

8.

Real estate loans

4.8

7.1

9.7

13.0

9.1

11.6

322.5

9.

Consumer loans

4.9

6.3

10.3

11.5

19.8

14.2

205.5

Short- and Intermediate-Term Business Credit -------10.

Total short- and intermediateterm business credit (sum of
lines 14, 15 and 16)

-3.0

-3.1

-1.5

5.6

10.5

n.a.

n.a.

11.

Business loans net of bankers
acceptances

0.5

3.6

-0.4

7.2

11.3

10.3

396.2

12.

Commercial paper issued by non3
financial firms

-39.6

-33.1

-4.6

-0.4

-2.9

-4.9

0.3

-2.3

9.5

4.0

7.8

n.a.

n.a.

-30.9

-7.3

n.a.

n.a.

13.

Sum of lines 11 & 12

14.

Line 13 plus loans at foreign
4
branches

15.
16.

Finance company loans to business

5

Total bankers acceptances outstanding

-15.2
5

22.9

-23.5

-13.4

10.8

44.7

8.6

10.4

440.9

457.2

n.a.--not available.
1. Average of Wednesdays for domestically chartered banks and average of current and preceding ends of months for
foreign-related institutions.
2. Loans include outstanding mounts of loans reported as sold outright to a bank's own foreign branches, unconsolidated nonbank affiliates of the bank, the bank's holding company (if not a bank), and unconsolidated nonbank
subsidiaries of the holding company.
3. Average of Wednesdays.
4. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks.
5. Based on average of current and preceding ends of month.

III-5

as their rates rose relative to those posted on MMDAs.

1

Outflows from money

market mutual funds meanwhile diminished as their yields, too, became more
attractive relative to those on MMDAs.
M3 has grown more rapidly than M2 over the past two months, as depository institutions evidently have moved to offset some of the weakness in
core deposits through the use of managed liabilities.

The non-M2 component

of M3 has risen at around a 20 percent annual rate in August and September,
with big increases in term RPs at banks and in large CDs at thrift institutions. 2

Banks also turned to their foreign branches in August to raise

$7-1/2 billion.

Reportedly, this pattern reflected the activities of a few

large banks seeking to add to their term liabilities; these banks apparently
sought funds abroad because the market for term federal funds is thinner than
the market for term Eurodollars.

Through mid-September there has been some

reversal of this funding pattern.
Bank credit growth in August, at an 11 percent annual rate, was a bit
above the advanced pace of previous months.

As in July, net acquisition of

U.S. government securities was far smaller than in the preceding nine months,
and loan growth was comparatively strong.
loans continued to grow rapidly.

Real estate, consumer and business

Fragmentary data for September, primarily

for large banks, suggest a deceleration in bank credit, with the slowing
occurring mainly in the loan category--especially business and consumer loans.
Over the course of the cyclical upswing to date, growth in bank consumer and real estate loans has considerably outstripped that of bank business
1. Depository institutions have begun to advertise for the new ceiling-free
accounts which can be issued starting October 1. These developments are
described in Appendix A.
2. Thrifts have issued large CDs to finance repayment of relatively costly
FHLB advances as well as to fund lending.

III-6
GROSS OFFERINGS OF SECURITIES BY U.S. CORPORATIONS
(Monthly totals or monthly averages, millions of dollars)

1982
Year

1983
Q1

--------------Corporate securities--total

8,153

Securities sold in U.S.
Publicly offered bonds1
Privately placed bonds
Stocks 2

7,017
3,653
817
2,547

Securities sold abroad 3

1,136

Q2

July

p

Aug.

p

Sept.

f

Seasonally adjusted --------------

10,872

11,467

10,834
9,935
4,621
4,975
700 e
700 e
4,614
5,159

8,491

7,062

7,200

7,885
2,585
700 e
4,600

6,700
2,300
700 e
3,700

6,200
2,500
700
3,000

362

1,000

606

--- Domestic offerings, not seasonally adjusted --Publicly offered bonds--total1
By industry
Utility
Industrial
Financial
By quality 4
Aaa and Aa
A and Baa
Less than Baa
No rating (or unknown)
Memo items:
Equity based bonds 5
Original discount bonds
Par value
Gross proceeds

Stocks--total 2
By industry
Utility
Industrial
Financial

3,653

4,575

5,092

2,550

2,550

976
1,236
1,441

986
1,292
2,297

1,385
2,300
1,407

1,570
288
692

355
600
1,595

1,370
1,505
286
492

1,757
1,885
563
370

1,210
2,219
825
838

414
1,756
221
159

1,410
410
225
505

302

861

1,271

1,231

457

440
366

952
281

2,300

0
0

2,547

4,734

4,949

4,000

3,000

871
1,119
557

1,203
2,148
1,383

693
3,064
1,192

430
2,500
1,070

400
2,300
300

3,100

Total reflects gross proceeds rather than par value of original discount bonds.
Includes equity issues associated with debt/equity swaps.
Notes and bonds, not seasonally adjusted.
Bonds categorized according to Moody's bond ratings.
Includes bonds convertible into equity and bonds with warrants attached where
the warrants entitle the holder to purchase equity in the future.
p--preliminary.
f--forecast. e--estimate.
1.
2.
3.
4.
5.

III-7

loans.

This is consistent with the pattern in the early stages of other

recent recoveries.

So, too, is the relatively rapid expansion of security

portfolios.
Business Finance
The pace of business balance sheet restructuring slowed appreciably
in the third quarter.

As interest rates rose after their troughs in early

May, corporate bond issuance contracted and has been at low levels since
June.

With a smaller volume of funds being raised in the long-term markets

and with firms beginning to build inventories, corporations increased their
reliance on short-term debt.

The combined growth of business loans at com-

mercial banks and commercial paper of nonfinancial firms strengthened progressively from May through August before apparently moderating in September.
Total (publicly offered) corporate bond sales have been below $3 billion every month since June, compared with an average monthly issuance of
about $4-3/4 billion in the first half of this year.

In August, three issu-

ers--General Motors Acceptance Corp., Citicorp, and Merrill Lynch--accounted
for about 40 percent of the total bond volume and for the relatively large
amount of funds raised by financial firms.

Most of the longer-term nonfinan-

cial issues have been sold by utilities or have been backed by mortgages.
Despite the easing in bond rates recently, they remain about 1-1/4 percentage
points above their spring lows, and there has yet to be any noticeable pickup
in bond issuance.
Overall business debt growth has remained moderate in the current quarter, partly because cash flows have continued ample relative to outlays and
partly because equity financing has remained attractive.

Stock prices have

risen since the last FOMC meeting, with the major market indexes increasing

III-8
TREASURY AND AGENCY FINANCING 1
(Total for period; billions of dollars)

FY83

Aug.P

1983
Sept.f

03f

Q4f

-43.3

-66.2

Treasury financing
Combined surplus/deficit(-)

-208.8

-18.8

-1.8

212.4

20.5

15.5

47.9

46.6

200.3
62.9
137.4
12.1

10.7
2.8
16.9
.8

13.3
.4
12.9
2.2

44.6
6.5
38.1
3.3

44.4
12.4
32.0
2.2

Means of financing deficit:
Net cash borrowing
from the public
Marketable borrowings/
repayments(-)
Bills
Coupons
Nonmarketable
Decrease in the cash
balance

Memo: Cash balance
at end of period
Other 2
Federally sponsored credit
agencies net cash borrowing 3

-7.6

3.2

-18.5

-9.0

18.9

37.0

18.5

37.0

37.0

18.1

4.0

-4.9

1.2

.1

2.3

.9

FHLB

.0

.0

.2

FNMA

.5

.2

1.0

1.2

Farm Credit Banks

.4

-. 5

.6

-. 6

FHLMC

.1

.1

-. 1

SLMA
1. Numbers reported on a not seasonally adjusted, payment basis.
2. Includes checks issued less checks paid, accrued items and other
transactions.
3. Includes debt of Federal Home Loan Banks, the Federal National Mortgage
Association, the Federal Farm Credit Bank System, the Federal Home Loan
Mortgage Corporation, and the Student Loan Marketing Association. Excludes
mortgage pass-through securities issued by FNMA and FHLMC.
p--preliminary, f--forecast.

III-9

2 to 4-1/2 percent.

Nonetheless, the market has been showing less exuber-

ance than earlier--with greater caution especially toward the more speculative "high tech" issues--and new equity issuance has diminished from its
earlier record pace.

In the third quarter gross stock offerings are expected

to average $3.7 billion per month (seasonally adjusted), compared with a
monthly average of $4.8 billion in the first half of the year.
Government Finance
Federal Sector.

The staff expects a third-quarter combined federal

deficit of $43-1/4 billion, about $8-1/2 billion less than earlier staff
projections.

The Treasury will have borrowed about $48 billion net in the

third quarter, with $45 billion of this borrowing in the market; "other
means of finance" (including float and other bookkeeping adjustments) is
expected to provide as much as $4-1/2 billion, leaving an unprecedented
end-of-quarter cash balance of $37 billion.
The large runup in the cash balance in the third quarter resulted
primarily from lower-than-expected outlays at the same time as the Treasury
about maintained its normal financing schedule.1

During the quarter, the

Treasury raised $38 billion through the sale of coupon securities and about
$6-1/2 billion through the sale of bills.
Over the past two years, the Treasury has allowed fluctuations in its
borrowing needs, arising from seasonal and other sources as well as from
forecast errors, to show through in substantial swings in its cash balance
with only minimal response in financing activity.

Further, a desire to

lengthen the maturity of the debt appears to have led the Treasury to
1. The Treasury balance ended the second quarter somewhat higher than had
been expected, largely because of sales of nonmarketable securities to state
and local governments.

III-10

proportionately larger increases in offerings of the 7- and 20-year issues
in the end-of-quarter financing and the 10- and 30-year issues in the midquarter refunding.

The Treasury reportedly will attempt to lengthen the

maturity of its debt further; it is also reviewing the sources of volatility
in its cash balance and possibilities for expanding the amount of its balance that can be kept in tax and loan accounts.
In the fourth quarter, the staff expects that the Treasury will borrow
$44-1/2 billion in the market to finance a deficit of about $66 billion.
This amount of borrowing is $15 to $20 billion less than the amount that the
Treasury anticipated in mid-August; the cash balance is projected to decline
to about $18 billion by year-end.
Federally sponsored credit agencies borrowed about $2-1/4 billion in
the third quarter after no net borrowing in the second.

About half this

borrowing was accounted for by FNMA, with the balance shared between the
Farm Credit Banks and SLMA.

With lending activity remaining weak, housing

agencies have added to their liquid balances, according to available data1.
At the Farm Credit Banks lending activity also remains low, and they are
expected to run off debt in September.
State and Local Sector.

Gross offerings of tax-exempt bonds totaled

about $6.4 billion (seasonally adjusted) in August, well above the July
level but below the $8.0 billion monthly average over the second quarter.
1. While FNMA continues to purchase mortgages at a rate in excess of $1 billion per month, liquidations remain historically high. Sources at FNMA
report that "normal" liquidations (foreclosure, amortization and repayments
in full) continued to be substantial in the third quarter, accounting for
the major share of liquidations. Moreover, FNMA has also continued to sell
mortgages from its portfolio through the issuance of mortgage-backed securities.

III-ll

The volume of such offerings in September appears to have remained comparatively moderate.
GROSS OFFERINGS OF SECURITIES BY STATE AND LOCAL GOVERNMENTS
(Monthly totals or monthly averages; billions of dollars)
1982
Year

QI

QII

1983
Julye
Aug.e

Sept.f

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

10.29
6.58
3.71

10.30
7.21
3.09

10.89
8.01
2.88

7.56
4.41
3.15

11.45
6.40
5.05

7.60
5.30
2.30

------------- Not seasonally adjusted -----------Total
10.29
Long-term
6.58
Refundings
.27
Mortgage revenue 1.24
Short-term1
3.71

8.65
6.23
.94
1.07
2.42

13.09
9.11
1.95
1.26
3.98

7.08
4.08
.44
1.37
3.00

10.80
5.80
1.60
1.60
5.00

7.50
5.00

2.50

1. These figures do not include tax-exempt commercial paper.
e--estimate. f--forecast.
As shown in the table, a sizable portion of the August volume comprised
refunding issues.

Because funds raised for refunding purposes are subject

to investment yield restrictions under the arbitrage provisions of the federal
tax code, the proceeds from many of these issues likely will be invested in
specially tailored nonmarketable Treasury securities (S.L.G.S.) until refunding occurs.

During the first eight months of this year, the Treasury issued

more than $8 billion of S.L.G.S. to accommodate much of the $9.3 billion in
state and local government refunding offerings that came to market over a
comparable period.
Housing issues accounted for a good part of the new capital (nonrefunding) volume during August, continuing the step-up in such issues that began
in July.

Apparently, issuers have been accelerating mortgage bond issuance

III-12

in an effort to fund single-family housing before constraints imposed by the
Mortgage Subsidy Bond Act of 1980 become binding.

This act prohibits issu-

ance of single-family revenue bonds after the end of the year.
Until recently, public power utilities had issued no tax-exempt bonds
since June, evidently in response to the uncertainty concerning the default
of the Washington Public Power Supply System (WPPSS).

However, in early

September the Michigan Public Power Agency sold a $590 million issue to
finance part of a coal-fired electric generating plant.

Because the revenue

streams that would repay bondholders are subject to take-or-pay contracts,
the rate was somewhat higher than otherwise comparable utility bonds without
take-or-pay provisions.1
Rates in the long-term tax-exempt market have declined slightly since
the last meeting of the FOMC; the Bond Buyer index of yields on general obligation issues stood at 9.42 percent last week, down 28 basis points from its
late-August level.

The ratio of tax-exempt to Treasury bond yields continued

its downward trend during the intermeeting period, falling to 80 percent in
September, substantially below the fourth-quarter 1982 peak of more than 90
percent.
Mortgage Markets
The average contract interest rate on new commitments for fixed-rate

conventional home mortgages at savings and loan associations has fallen by 17
basis points, to 13.72 percent, from the recent high reached just prior to
the August FOMC meeting.

On August 23, the ceiling rate on level-payment FHA/

VA home loans was reduced by 1/2 percentage point to 13 percent as discounts
1. Four investor-owned utilities are involved with WPPSS Project No.3. One
of these recently came to market with a taxable bond and paid an incremental
risk premium of about 70 basis points.

III-13

in primary and secondary markets fell to about one point.1 By late September,
discounts on GNMA-guaranteed pass-through securities issued against pools of
13 percent FHA/VA mortgages had edged down to about two points. 2
In July outstanding mortgage commitments of S&Ls reached a record $47
billion, and the net change in S&L mortgage assets also reached a record (see
table on page 111-14).

Holdings of both mortgage loans and mortgage-backed

securities increased substantially.

As a result, the mortgage-asset share

of S&L portfolios edged up for the second consecutive month, following a continuous decline (by about 10 percentage points) between late 1981 and May of
this year.

S&Ls also increased their holdings of cash and nonmortgage invest-

ments during July and, at 12.8 percent, their liquidity ratio remained high. 3
In August, as well as in July, packaging of mortgage assets into pool
securities continued to grow briskly.

New issues of mortgage pass-throughs

guaranteed by federal agencies (GNMA) or federally sponsored enterprises
(FNMA and FHLMC) have been historically large in recent periods, totaling
$8.5 billion in August.

Issuance of GNMAs was particularly robust, hitting

a record $6 billion.
Securities issued by FNMA and FHLMC under their swap programs recently
have accounted for a major proportion of all pass-throughs issued and guaranteed by these agencies--over 90 percent in both July and August.

However,

institutional motives for swapping have been changing since late last year.
Until that time, swaps usually were done by depository institutions to convert low-rate mortgages to securities eligible (or acceptable) for RPs.

More

1. The ceiling had been raised by a full percentage point, to 13-1/2 percent,
on August 1 as discounts approached 8 points.
2. The ceiling reduction on August 23 increased discounts by nearly 3 points.
3. August data on savings and loan association activities are expected to be
available in time for the Greenbook supplement.

III-14

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

Mortgage commitments
New Outstanding2
(2)
(1)
1983-Jan.
Feb.
Mar.
Apr.
May
June r
July p

10.7
12.6
13.3
12.1
12.8
14.7
13.7

32.2
35.2
38.0
40.8
43.1
44.9
47.0

Net change in mortgage assets
Mortgage Mortgage-backed
Total
loans
securities
(5)
(4)
(3)
2.4
5.9
5.5
3.9
3.6
7.2
7.8

0.5
2.5
1.3
2.6
2.3
3.8
5.5

1.9
3.4
4.2
1.3
1.3
3.4
2.3

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

NEW ISSUES OF FEDERALLY GUARANTEED MORTGAGE PASS-THROUGH SECURITIES
(Monthly averages, millions of dollars, n.s.a.)
All
issues

GNMAs

FHLMCs

1982-Q1
Q2
Q3
Q4

3281
3483
4916
6725

1066
1187
1305
1779

1436
1644
2249
2727

691
600
1218
2147

1963
2013
3149
3795

1983-01
02
July
August

7113
7458
7660
8488

3810
4930
4518
5996

1955
1392
1491
1440

1326
1136
1651
1052

2203
1793
2835
2303

Period

FNMAs

Memo:
FNMA and
FHLMC swap issues

III-15

recently, some institutions have been selling the FNMA or FHLMC issues out
of portfolio.

In early September, in fact, a large West Coast S&L sold $1.5

billion in FHLMC-guaranteed certificates obtained earlier through a swap,
reportedly the largest single financing transaction in U.S. corporate history.
There is some evidence of increased importance of adjustable-rate lending by thrift institutions recently.

It appears that the upturn in rates

has underscored the vulnerability of thrift earnings margins and encouraged
them to market ARMs more aggressively.

Preliminary data indicate that thrifts

had only moderately positive earnings in the first half of 1983--and secondquarter results benefited greatly from extraordinary income associated with
capital gains on assets previously marked to market values.
Consumer Credit
During July, consumer installment debt outstanding expanded at a 16-1/2
percent annual rate, more rapidly than in any month since early 1979.

Growth

during the third quarter as a whole probably trailed the July pace, however,
as new car sales declined during August and early September.

Also, large

commercial banks have reported slower expansion of consumer loans during
August and early September.
Growth of installment credit since mid-1982 has consistently outpaced
the typical pattern during similar phases of past cycles (see chart on page
111-16).

Slow increases in such debt during 1980-82 helped reduce consumer

installment indebtedness relative to personal income, and the recent surge
is tending to restore historically more normal debt-to-income ratios.
An upturn in the proportion of total consumer installment credit outstanding held by commercial banks this year followed a four-year period of
decline.

Commercial bank attitudes toward consumer lending have grown more

III-16
COMPARISON OF CYCLICAL GROWTH PATTERNS
IN CONSUMER INSTALLMENT CREDIT
(Quarterly percent change at an annual rate)

SPercent

*V.3 Average rate of change for six previous postwar
economic recoveries

D

Rate of change for the most recent economic

recovery

16

-12

*:*:*:*

Quarter

.**.** *
1

g
o

T

.*

T-l
T

Quarter.1

Trough

Quarter

* July 1983 only.

.

,

.

.___I______I__

**
•

Tl
.'.

.

'.':::::

~

_

oo±

•

o; o

4

III-17

favorable during the past year, in part because the spread over funds costs
has widened.

The profitability of consumer lending also has been aided by

some relaxation of statutory limits on finance rates and by a low incidence
of repayment problems on debt outstanding.
Repayment difficulties on consumer installment credit contracts continued to decline during the second quarter.

The delinquency rate for

closed-end consumer installment loans at commercial banks fell to the lowest
level in ten years, and auto loan delinquencies at major auto finance companies were at an all-time low for the 17-year series.

Mortgage delinquency

rates, by contrast, have remained at or near record highs.

During the first

half of 1983, personal bankruptcies were down 6 percent compared with the
corresponding 1982 period, and during July they were 13 percent below the
year-earlier experience.

III-18
CONSUMER INSTALLMENT CREDIT

1981

1982

--------Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other1

By major holder:
Commercial banks
Finance companies
All other

5.8

4.0

7.1

10.9

7.3
7.7
4.5

3.9
7.0
2.6

5.0
7.1
9.1

12.1
16.5
7.4

At auto finance companies 4
New cars
Used cars

1983
May

9.3
11.9
9.5
6.9

June

July

SAAR --------15.1

16.4

17.7
22.2
9.7

21.4
14.8
12.6

Billions of dollars, SAAR -----------

18.2

13.1

24.2

37.5

32.4

52.9

58.1

8.5
4.5
5.3

4.9
4.4
3.8

6.5
4.4
13.3

15.9
10.6
11.0

15.8
6.2
10.4

23.7
14.5
14.7

29.1
9.9
19.2

4.8
4.6
3.9

10.2
6.8
7.1

20.6
1.3
15.7

18.5
4.3
9.6

29.1
5.6
18.2

33.2
10.9
14.0

-0.1
13.4
5.4
-----------

Interest rates
At commercial banks 2
New cars, 48 mos. 3
Personal, 24 mos.
Credit cards

Q2

Percent rate of growth,

---------Change in outstandings--total
By type:
Automobile credit
Revolving credit
All other 1

Q1

Annual

percentage rate -------------

16.54
18.09
17.78

16.83
18.65
18.51

14.81
17.59
18.89

13.90
16.57
18.79

13.90
16.57
18.79

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

13.505
16.285
18.755

16.17
20.00

16.15
20.75

12.12
19.83

11.80
18.75

11.94
18.76

11.57
18.58

12.775
18.255

1. Includes primarily personal cash loans, home improvement loans, and sales
finance contracts for non-automotive consumer durable goods.
2. Average of "most common" rates charged, on loans of specified type and maturity,
during the first week in the middle month of each quarter.
3. Data for periods prior to 1983-Q1 are for new-car loans at a 36-month maturity.
4. Average rate for all loans of each type made during the period, regardless of
maturity.
5. Data shown are for August 1983.
n.a.--not available.

APPENDIX A*
SUMMARY OF FINDINGS OF RESERVE BANK STAFF ON
OCTOBER 1 DEREGULATION OF TIME DEPOSITS

At its meeting of June 30 the Depository Institutions Deregulation Committee removed many of the remaining restrictions on small
time deposits with original maturities or notice periods greater than
31 days. Appendix Table 1 presents a summary of these changes. The
removal of interest rate ceilings may not be viewed as a major change
because existing regulation permit depositories to offer rates on
several account categories subject to market-indexed ceilings or
ceiling-free. Nevertheless, the newly-deregulated deposit accounts
could have an impact in two areas: the monetary aggregates and the
balance sheets of depository institutions. Growth of the broader
money stock measures could be affected, to the degree that funds
were shifted from non-money stock sources, and the liquidity of the
public's money holdings could be affected, by changes in early withdrawal penalties and alterations in the maturity of money balances.
The deregulation offers banks and thrifts more flexibility in
changing the maturity structure of their small time deposits, since
they may now offer any maturity in the 32-day to 18-month range.
In order to assess the effects of the deregulation, Reserve
Bank Staff has been asked to report on the intentions of depository
institutions in their Districts. Specifically, the Bank Contact
Group has been requested to describe the strength of promotional
campaigns to attract deposits to the newly deregulated accounts and
to report on intended pricing policies.
Initial responses imply little impact on deposit flows, since
depository institutions, at least at the outset, are not planning to
market these new instruments aggressively, and their proposed terms
are in line with market interest rates. For the same reasons, the
maturity structure of banks and thrift liabilities should not change
significantly. Nationwide, marketing efforts so far are much less
aggressive than those introducing MMDAs last year; indeed, in half
of the Districts no media advertising was found. Three Districts
reported one or two institutions offering price promotions, either a
cash bonus or a "bridge" account paying above above market rates.
A nearly unanimous response from the Contact Group was that most
depository institutions were adopting a "wait and see" approach.
Because of the success of MMDAs and relatively weak loan demand,
institutions evidently do not have a pressing need for new deposits.
Still, the situation could change quickly. Comments seem to suggest
that although no one wants a rate war, no one is willing to lose one.
* Prepared by Paul O'Brien, Economist, Banking Section, Division of
Research and Statistics.

III-A-1

III-A-2

An interesting feature of early promotional materials is the emphasis
on the flexibility available to the depositor, rather than on higher
rates.
In their planned pricing policies, depository institutions are
hoping to retain as much discretion as possible.
Interest rates are
to be set subjectively to keep the cost of these deposits in line
with their overall cost of funds.
Some smaller institutions plan to
tie their rates to those on comparable Treasury securities, but most
will use the Treasury rates as guides only. Minimum deposits of $500
to $1,000 were reported in most Districts, with the lower figure
applying to maturities beyond one year.
In keeping with the theme
of flexibility, some institutions intend to offer more favorable
terms for large deposits. The consensus is that interest rates
offered will stay in line with market rates.
Prior to deregulation, most institutions are offering 91-day,
26-week, 18-month, and 30-month certificates. Among those institutions that have already made a decision, a common policy is to drop
the 18- and 30-month certificates and replace them with maturities
of 1, 2, 3, 4 and 5 years. In several Districts, institutions plan
to offer certificates in any maturity the depositor selects, in one
case up to 20 years, but there appears to be a tendency to limit
these "tailored" accounts to special customers only. Only two
institutions mentioned an interest in using the newly-authorized
accounts to alter their deposit maturity structure. For the most
part, maturity decisions are being based on marketing rather than
liability management grounds.
There were few reported differences between the plans of
thrifts and commercial banks. Thrifts, and smaller institutions
in general, were more likely to continue offering interest rates
directly pegged to Treasury securities while maintaining the current
maturity structure or lowering minimum balances. One S&L in the
Sixth District expressed the fear that the deregulation could result
in a further shift of deposits to shorter maturities.
The information reported by the Contact Group reveals two
themes. First depository institutions hope to retain as much flexiSecond, there is an effort toward
bility as possible in pricing.
Institutions hope
product differentiation and market segmentation.
to compete more on non-price terms, such as maturities offered, and
to segregate depositors on the basis of deposit size and desired
maturity.

III-A-3
Appendix Table 1
Summary of Time Deposit Regulations
Deposit Maturity
Range
_

Before October 1, 1983

7 to 31 days

32 days to 1 year

-4.

Over 1 year to less
than 2-1/2 years

No interest rate ceiling on
7- to 31-day deposits,
must be nonnegotiable

May be negotiable

$2,500 minimum deposit

$2,500 minimum deposit

Early withdrawal penalty
of at least half the
interest due

Early withdrawal penalty
of at least half the
interest due

2 maturities available: 91day and 26-week

Any maturity

$2,500 minimum deposit

No required minimum deposit

Interest rate ceiling tied
to Treasury bill yield.
No compounding

No restrictions on interest
rates

Early withdrawal penalty
of 3 months' interest

Early withdrawal penalty of
30 day's interest

Any maturity in range 18months up to 30-months

Any maturity

Interest rate ceiling tied
to Treasury coupon yield

No restriction on interest
rates

Early withdrawal penalty of
6 months' interest

Early withdrawal penalty of
3 months' interest

No required minimum deposit

No required minimum deposit

No interest rate ceiling
or minimum deposit on
IRA/Keogh deposits over

No longer a distinction

iR

2-1/2 years and more

As of October 1, 1983

mnnths

Early withdrawal penalty of
6 months' interest

Early withdrawal penalty of
3 months' interest

(No other restrictions)

(No other restrictions)

INTERNATIONAL DEVELOPMENTS

Foreign Exchange Markets
Since the last FOMC meeting, dollar exchange rate movements have
often paralleled day to day changes in domestic interest rates.

As shown

in the top panel on the next page, the weighted average value of the
dollar has fluctuated within a two percent range.

The dollar firmed

moderately in late August, but has since depreciated to its earlier
levels following declines in dollar interest rates and a slight firming
in foreign interest rates.

Recent statistics showing a growing U.S.

current account deficit may also have contributed to recent weakness in
the dollar.

Foreign interest rates increased by about 15 basis points on

average, as the Bundesbank raised its Lombard rate by 1/2 percent, and
the Austrian and Dutch central banks similarly increased their discount
rates.

On a bilateral basis, the dollar has changed little overall

against the mark and other EMS currencies, while depreciating by three
percent against the yen and appreciating by two percent against the
pound.

IV-1

IV-2

WEIGHTED AVERAGE EXCHANGE VALUE OF THE U.S.

DOLLAR

March 1973=100

9.5

9

8.5

June

July

August

September

IV-3

Gold prices varied within a range of $400 to $425 an ounce, and
showed surprisingly little reaction to international crises such as the
KAL jetliner shooting and the renewed fighting in Lebanon.

IV-4

U.S. banks' foreign lending in the second quarter.

The claims of

U.S.-chartered banks on non-OPEC developing countries and smaller
developed countries rose slightly in the second quarter of 1983, while
claims on the G-10 countries and Switzerland declined by a large amount.
Claims on the non-OPEC developing countries rose $0.9 billion
(slightly under 1 percent) in the second quarter, about twice the rise in
the first quarter.

For the first half of 1983 claims on these countries

rose $1.3 billion compared with a $7.4 billion increase a year earlier.
Claims on Latin American countries rose $0.4 billion in the second
quarter.

While claims on Argentina, Colombia, and Peru increased, there

were decreases in claims on Brazil and Chile.

The net decline of $0.6

billion in claims on Brazil resulted from non-renewals or repayments on
credits to some banks, combined with Brazil's inability to draw at end-May
on the $4.4 billion 8-year commercial bank loan because of failure to meet
certain IMF performance criteria.

Repayment by Brazil of a $383 million

installment on a 1982 bridge loan was also delayed.

Claims on Mexico rose

only $0.1 billion, reflecting Mexico's decision to wait until July and
August to draw $1.1 billion

on the $5 billion 6-year commercial bank loan

obtained in early March, and repayment of private sector debt.
Claims on the smaller developed countries rose $0.6 billion after
increasing throughout 1982 and early 1983. and claims on Eastern Europe
fell further.

Claims on the G-10 countries and Switzerland fell $5.6

billion (3 percent) in the second quarter, mainly reflecting reductions in
interbank deposits.

IV-5
TABLE 1.

Claims on:

CLAIMS ON FOREIGNERS OF U.S.=CHARTERED BANKS
(Billions of dollars)

Q-1

Change (no sign = increase)
1982
1983
Q-2
Q-3
Q- 4
Q-1
Q- 2

Outstanding
6/30/83

Total, all countries

4.4

15.3

2.7

0.7

1.1

Non-OPEC developing
countries

1.2

6.2

0.3

3.0

0.4

0.9

108.2

OPEC countries

0.7

1.0

0.9

0.2

1.0

-0.4

28.1

Eastern Europe

-0.6

0

-0.2

Smaller developed
countries
G-10 countries and
Switzerland
Offshore banking
centers
Miscellaneous

TABLE 2.

-0.5

2.3

1.4

-1.1

1.7

2.1

6.0

-0.3

-0.1

-0.4

-0.1

0.6

-0.9
0
1.9

1.0

0.2

4.1

1.6

-5.1

-0.5

-2.4

-1.6

-3.6

0.6

-5.6

435.5

6.0

34.5

175.2

1.7

67.8

-0.6

15.7

CLAIMS OF U.S.-CHARTERED BANKS ON NON-OPEC DEVELOPING COUNTRIE!
(Billions of dollars)

Claims on:
Latin America
of which:
Argentina
Brazil
Chile
Colombia
Mexico
Peru
Others
Asia and Africa
of which:
Korea
Philippines
Taiwan
Others
Total

0-1

Change (no sign = increase)
1982
1983
0-1
0-2
0-2
0-3
0-4

2.2

4.8

0.8

-0.1

0.2

0.6
0.5
0.2

-0.3
1.7
0.4
0.3
2.2
0.6
-0.1

-0.5
1.1
-0.2
0.2
-0.2
0.1
U.3

-0.3

-1.0

1.4

-0.8
-0.1

Outstanding
6/30/83

0.4

72.8

0.1

0.4

0.5
0.1
0.3
-0.4
-0.3

0.2
-0.3
-0.2
0.4
-0.2
0.2

-0.6
-0.2
0.3
0.1
0.2
0.1

9.4
22.5
5.8
3.2
25.0
2.6
4.3

-0.5

3.1

0.2

0.5

35.4

-0.1

0.3
0.4
-0.1
0.8

0.4
-0.3
-0.1
-0.5

1.6
0.3
0.3
0.9

-0.1
0.3
-0.1
0.1

-0.2
-0.1
0.8

10.8
6.4
5.0
13.2

1.2

6.2

0. 3

3.0

0.4

0.9

-0.3

1.3
-0.1
-.

Comments may not add to totals because of rounding.

108.2

IV-6
U.S. International Financial Transactions
In August, U.S. banking offices (including IBFs) borrowed about
$5 billion, net, from their affiliated foreign offices (see line 1(a)
of the International Banking Data Table).

Partial data suggest that

this capital inflow was largely reversed in early September.

Several

factors appear to have contributed to the capital inflow in August,
which was accounted for largely by the nine largest U.S.-chartered
banks.

First, in the July-August period a number of these large banks

reportedly expected a backup in interest rates steeper than that
Accordingly, they sought to increase the

implicit in the yield curve.

maturities of their interbank borrowings by substituting term
borrowings in the Eurodollar markets for borrowings in the domestic

INTERNATIONAL BANKING DATA
($ billion)
1981

1.

2.

3.

1

I

1982

Dec.

Mar.

June

Sept.

Dec.

U.S. Banking Offices'
Positions Vis-a-Vis
Own Foreign Offices 1/
(a)
Total
(b)
U.S.-Chartered Banks
(c) Foreign Chartered Banks

9.2
-8.9
18.1

10.7
-2.8
13.5

16.6
1.3
15.3

6.9
-4.4
11.3

8.4
-3.1
11.5

Credit Extended to U.S.
Nonbank Residents by Foreign
Branches of U.S. Banks 2/
(a) Total
(b) NY Banks Only

13.2
8.8

13.8
9.1

14.1
9.7

16.1
11.4

Eurodollar Holdings of
U.S. Nonbank Residents 3/ 4/

93.6

104.2

116.0

111.5

......

1

Average

T/

Roldings

1.J-

o

J

..

Wednesdays,

at

all

banking

net

offices

2 ..l t

--

J

----

ue

to

own

in

e,

forsign

Canada

.
o

and

the

ice

=

United

(+).

1983
Apr.

May

-5.6
-17.5
11.9

-6.3
-16.6
10.2

-4.7
-13.4
8.7

-. 4
-11.6
11.3

-1.7
-11.4
9.8

3.2
-5.8
9.1

15.7
11.2

16.4
12.2

16.0
11.9

16.8
12.3

16.8
12.2

16.6
12.1

16.3
11.7

110.3

114.1

117.6

119.9

119.7

n.a.

n.a.

1.

_

Mar.

.

.JJ

--

j

June

July

t

I

Kingdom

and

at

branches

of

U.S.

banks

worldwide.

Aug.

IV-7
federal funds market, which is predominantly an overnight market.
Substitution of term borrowing for overnight borrowing was also evident
in the domestic RP markets as term RPs rose sharply in August, while
overnight RPs declined somewhat.
Second, in the July-August period some of the parent holding
companies of these large banks may have channeled funds to their
domestic offices through their affiliated foreign offices.

Deposits by

U.S. bank holding companies at their affiliated foreign offices
increased by over $2 billion in July, continuing a trend which has seen
such deposits grow from $11.6 billion at the beginning of the year to
$17.1 billion at the end of July.

Virtually all of this increase was

accounted for by the holding companies of the nine largest banks.
When providing funds to its subsidiary bank a holding company
will often place the funds in a foreign office of the bank rather than
a domestic office in order to minimize required reserves.-

In

the past the U.S. commercial paper market has often been the source of
funds deposited by these bank holding companies at their foreign

affiliates.

However, in the July-August period outstanding commercial

paper issued by the parent

holding companies of the nine largest

banks increased by only $1 billion.

For 1983 as a whole the increase

in issuance of such paper has been only a small fraction of the
1/ Depending on its maturity, a deposit at a domestic office will be
subject to either a 12 percent reserve requirement on transactions
balances or a 3 percent reserve requirement on nonpersonal time
deposits; but a deposit at a foreign office can result in an increase
in required reserves only if it is relent to a U.S. nonbank resident or
to the U.S. head office. Even in the latter case the current reserve
requirement on Eurocurrency liabilities is only 2-5/8 percent.
Moreover, for most large banks the Eurocurrency reserve requirement is
not binding currently because it is applied to the sum of net
borrowings from affiliated foreign office (including IBFs) and branch
loans to U.S. nonbank residents, which for most of these banks is
negative.

IV-8
increase in deposits at foreign affiliates.

Another possible source of

these holding-company deposits was the sizable volume of adjustablerate preferred stock that was issued by these firms early in the year.
The growth of deposits by bank holding companies at affiliated
foreign offices is one factor behind the renewed growth of total
Eurodollar holdings of U.S. nonbanks (line 3 of the International
Banking Data Table), which increased by nearly $10 billion in the first
half of the year, despite a $4 billion decline over that period in the
holdings of money market mutual funds.

Total Eurodollar holdings had

contracted by about $6 billion in the second half of 1982, when a

series of shocks to international financial markets apparently
prompted concerns about the safety of offshore deposits.
Foreign official reserve assets held in the United States
increased by $1 billion in July.

Partial data, based on holdings at

the FRBNY, indicate a foreign official capital outflow of $4 billion in
August,
. OPEC holdings at the FRBNY also declined by

$2 billion in August, bringing the cumulative decline in OPEC official
reserve holdings in the United States during 1983 to an estimated $7
billion.
U.S. official reserve assets were about unchanged, on balance, in
the July-August period.

The U.S. reserve position at the IMF increased

by $500 million over this period as a result of the provision of
dollars in connection with drawings on the Fund.

Foreign exchange

market intervention increased holdings of German marks and Japanese yen
in August, but net holdings of foreign currencies declined because of
the final repayment of outstanding swap drawings by Mexico.

IV-9
SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars)
1981
Private Capital
Banks
1.
Change in net foreign positions of banking
offices in the U.S. (+ = inflow)

1982

1983

Year

Year

-34.3
-2.7
-31.3

-40.7
-9.6
-31.1

-10.2

1.2

Q-IV

Q-

Q-II

May

June

July

-7.1

-7.5
-9.6
2.1

1.0
1.0
2.0

-1.4

-1.5

1.2

-0.8

-0.6

*

0.1

2.1

2.8

0.1

0.1

0.8

0.5

0.1

0.1

4.8

3.6

1.9

2.9

1.7

0.4

0.4

0.6

-5.7

-7.9

-3.5

-1.8

-3.2

-1.5

-0.5

-0.7

3. Foreign net purchases (+) of U.S. Treasury
obligations 1/

2.5

6.5

2.1

2.8

2.8

1.4

2.0

-1.8

Official Capital
4. Changes in foreign official reserve assets
in U.S. (+ - increase)

5.5

2.7

1.8

0.3

2.3

1.7

0.1

1.0

-10.8
12.7
3.6

-12.7
6.6
8.8

-2.8
-0.8
5.4

2.7
-1.4
-0.9

2.0
-3.6
3.9

1.2
-1.0
1.5

-1.0
-1.7
0.9

4.1
-0.1
-3.1

5.0
0.5

5.8
-3.1

4.3
-2.6

3.0
-2.7

2.0
0.3

0.9
0.8

0.2
-0.1

3.6
-2.6

-5.2

-5.0

-2.0

-0.8

*

-0.1

-0.1

0.1

-9.7
22.0
-10.8
4.6
24.2

3.0
10.4
-5.7
-11.2
41.4

2.0
2.8
-3.1
-6.6
14.7

0.3
2.0
-3.5
-3.6
8.8

-0.6
1.5
-3.1
-9.7
0.4

MEMO:
U.S. merchandise trade balance - part of line 9
(Balance of payments basis, seasonally adjusted) -28.1

-36.4

-11.4

-8.8

-14.7

a) with own foreign offices
b) all other
Securities
2. Private securities transactions, net
a) Foreign net purchases (+) of U.S.
corp. bonds
b) Foreign net purchases (+) of U.S.
corp. stocks
c) U.S. net purchases (-) of foreign
securities

a) By area
G-10 countries and Switzerland
OPEC
All other countries
b) By type
U.S. Treasury securities
Other 2/
5. Changes in U.S. official reserve assets
(+ = decrease) 3/
Other transactions (Quarterly data)
6. U.S. direct investment (-) abroad
7. Foreign direct investment (+) in U.S.
8. Other capital flows (+ - inflow) 4/ 5/
9. U.S. current account balance 5/
10. Statistical Discrepancy 5/

1.
2.
3.
4.

Includes
Includes
Includes
Includes

allocations of SDRs, and other banking and official transactions not shown elsewhere.
Less than $50 million.

NOTE:

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

-5.6

Details may not add to total because of rounding.

10.5
108
-0.3

n.a.
n.a.
o.a.
n.a.
n.a.

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

-4.8

-5.9

U.S. Treasury notes publicly issued to private foreign residents.
deposits in banks, commercial paper, acceptances, & borrowing under repurchase agreements.
newly allocated SDR's of $1.1 billion in January 1981.
U.S. government assets other than official reserves, transactions by nonbanking concerns,

5. Includes seasonal adjustment for quarterly data.
*

4.4 -5.6
-2.T -2.4
6.4
3.1

IV-10
U.S. Merchandise Trade
The U.S. merchandise trade deficit increased to nearly $60
billion at an annual rate in the second quarter from rates of $35-45
billion in the previous two quarters.

In July the trade deficit rose

to $71 billion at an annual rate. Preliminary August trade data were
released by the Commerce Department on Wednesday afternoon, September
28; this information will be summarized in the Greenbook Supplement.
Beginning in the second quarter, the value and volume of imports
turned up across a broad range of commodity categories and from most
geographic areas as U.S. economic activity strengthened and as the
price competitiveness of imported items continued to benefit from the
dollar's appreciation.

In July, the increase was about half in oil and

half in other items, especially machinery.
U.S. MERCHANDISE TRADE*
1983

1982
Year
Value (Bil. $, SAAR)
Exports
Agricultural
Nonagricultural

4Q

1Q

2Q

June

July

211.2
37.2
174.0

193.4
33.1
160.3

198.0
36.0
162.0

195.7
35.3
160.3

195.7
36.8
158.9

197.8
36.9
161.0

Imports
Oil
Nonoil

247.6
61.2
186.4

238.8
60.5
178.3

233.3
42.0
191.3

254.3
52.1
202.2

253.8
54.3
199.4

269.0
60.8
208.2

Trade Balance

-36.4

-45.4

-35.2

-58.6

-58.1

-71.2

17.1
61.2

15.9
56.3

16.9
56.0

16.1
56.1

16.6
55.7

16.7
55.8

5.0
71.8

5.0
70.0

3.6
75.6

4.8
79.9

5.0
78.6

5.6
83.1

Volume (Bil. 72$, SAAR)
Exports - Agric.
- Nonagric.
Imports - Oil
Nonoil

* International Transactions and GNP basis.

Monthly data are estimated.

IV-11
On a seasonally adjusted basis, the volume of oil imports rose to
nearly 6 million barrels per day (mbd) in July while the average price
was just under $28 per barrel.

The volume of oil imports was unusually

low in the first four months of the year in response to several
temporary market situations, but beginning in May the volume of imports
increased as the influence of the temporary factors ended and as U.S.
economic activity picked up.

Prices of oil imports, which had declined

during the first four months, edged up in May and June and steadied in
July.

Prices in the spot markets which had increased steadily from

March to early August, have eased slightly in recent weeks but are
still mostly at or slightly above official prices.

OPEC crude oil

production is estimated to average 18.0-18.5 mbd in the third quarter,
0.5-1.0 mbd above the official "ceiling".
OIL IMPORTS
1982
Year

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

5.36
31.26
61.2

1983

I
4Q

5.35
30.97
60.5

1Q

2Q

3.91
29.41
42.0

5.16
27.69
52.1

June

5.32
28.03
54.3

July

5.96
27.94
60.8

For exports, neither the value nor the volume has changed very
much during the past three quarters or in July, largely reflecting
sluggish economic activity in major trading-partner countries and the
effects of a strong dollar on the price competitiveness of U.S. goods.
The volume of exports of machinery and industrial supplies dropped by
more than 20 percent from the fourth quarter of last year to the second
quarter of this year.

In July, machinery exports rose somewhat as did

IV-12
exports of consumer goods (together these two categories account for 40
percent of all non-agricultural exports).

However declines in exports

of other types of goods in July, such as industrial supplies, nearly
offset the increases.
The small increase in the value of agricultural exports since the
fourth quarter of last year was almost entirely the result of higher
prices of exports.

The first quarter run-up in volume was largely

attributable to the bunching of wheat deliveries to the U.S.S.R.

In

June and July, higher levels of shipments of soybeans and cotton helped
offset declines in the volume of other commodities, particularly corn.

U.S. Current Account and Statistical Discrepancy
The U.S. current account was in deficit by $39 billion at
an annual rate in the second quarter, nearly three times the size of
the first- quarter deficit and larger than deficits recorded in the

second half of last year.

(See the table below)

Most of the second-quarter increase in the current account
deficit was attributable to merchandise trade.

Exports declined

marginally from first-quarter rates (largely lower exports of
industrial supplies and machinery) while imports rose by 9 percent
(widely spread through all major commodity categories).

There was also

a small decline in net military sales from an unusually strong first
quarter rate, and in other miscellaneous transactions.
Partly offsetting these changes was an increase in net income

receipts from U.S. direct investments abroad from relatively low
first-quarter rates.

First quarter direct investment income receipts

IV-13
were reduced by unusually large capital losses (primarily exchange rate
translation losses).
Preliminary indications are that the statistical discrepancy was
very small in the second quarter.

U.S. Current Account
billions of dollars, SAAR

1982

Year

Current Account Balance
Trade Balance
Exports
Imports

1982

Q3

-11.2

-26.4

-36.4
211.2
247.6

-52.3
209.0
261.3

I
Q4I

1983

$ Change
1Q83 to
2Q83

Q1r

Q2

-26.5

-14.3

-38.8

-24.5

-45.4
193.4
238.8

-35.2
198.0
233.3

-58.6
195.7
254.3

-23.4
-2.3

+21.0

Investment Income, net
Direct, net
Portfolio, net

27.3
18.0
9.3

27.3
17.7
9.6

24.0
16.9
7.1

20.4
10.9
9.5

23.7
15.3
8.5

+3.3
+4.4
-1.0

Military, net
Other Services, net
Unilateral Transfers

0.2
5.7
-8.0

0.2
5.4
-7.0

-0.1
4.7
-9.7

2.1
4.6
-6.2

0.8
2.7
-7.4

-1.3
-1.9
-1.2

Memo Item:
Statistical Discrepancy
in the BOP account.

41.4

60.3

58.6

35.3

1.5

-33.8

IV-14

Foreign Economic Developments.

Economic activity in major foreign

industrial countries continues to revive, in general, though the pace of
the recovery varies widely.

Real GNP in the second quarter rose sharply

in Canada, while increases in Germany and Japan were more moderate.
Canada and Germany experienced a significant pickup of residential
construction, and in Canada there was also a rapid advance in investment
in plant and equipment.

In Japan the second quarter rise reflected

mainly growth of public spending and net exports as well as an increase
in investment in plant and equipment to the level of the fourth quarter
of last year.

Real GDP in the second quarter declined in the United

Kingdom after a sharp rise in the revised data for the first quarter.
Real output in the second quarter advanced marginally in France and
declined sharply in Italy.

In the United Kingdom and Canada,

unemployment at the end of the summer was somewhat below the peak rates
attained last spring, while in Germany, France and Italy, unemployment
rates remain at or close to record levels.

The stance of fiscal policy

in the major foreign industrial countries remains restrictive.

In

Japan, however, the weakness of domestic demand and the expanding
external surplus is expected to increase pressure for expansionary
measures.
Inflationary pressures abroad have remained moderate in recent
months.

Inflation rates in Canada, Germany, and the United Kingdom have

increased from the low rates of the first quarter.

In Italy, consumer

and wholesale price increases have slowed somewhat this year from the
high levels of the past several years.
Trade balances in Japan, France, and Italy continue to strengthen,

September 28, 1983

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

Q4/Q4
1981

Q4/Q4
1982

1982
Q3 Q4

1983
Q1 Q2

APR.
a

I

I

r

*

*

1.1

1.1

1.7

*

*

*

.8

.0
.2
.5 1.0

-2.1
-5.6

-.8 -.3
-2.8 -1.9

.6 1.1
1.3 2.6

*

.0

1.0

-2.4
-6.1

-2.2
-7.6

-.2
2.2

.4 -1.7
-.6 -2.7

-4.5

4.7

-2.1

.6

-4.5

4.7

-2.1

.6

.9
1.7

.4
-. 8

.9
1.6

*

.8
-. 2

-.7

*

1.5
-3.4

-5.0
-11.8

GDP

1.8

1.3

-.6

.9

IP

-.5

-2.6

-2.1

GNP
IP

.6
-.3

GDP
IP

.5
.4

GNP
IP

2.7
5.7

UNITED
KINGDOM:

GDP
IP

-.1
-.6

1.1
.9

UNITED
STATES:

GNP
IP

2.0
-1.7

-1.7

FRANCE:

I

1.8
5.2

1.8
2.8

.8

LATEST 3 MONTHS
FROM YEAR AGO+

AUG.

JUL.

*

-.8 -.7
-2.5 -3.1

GNP
IP

CANADA:

1983
JUN.

MAY

*

N.A.
*.9

r

*N

N.A.
N.A.

2.3 -2.3 N.A.

2.2
2.1
.5
.3

N.A.

GERMANY:

*1.0

2.9

*

2.9

-. 9

*

.5
1.9

N.A.

ITALY:

JAPAN:

3.7
-1.7

-7.5

.2
.7

-. 2 -. 3
-. 9 -2.1

.1

.5

2.3

1.3

4.3

1.3

* DATA NOT AVAILABLE ON A MONTHLY OR QUARTERLY BASIS.
+ IF QUARTERLY DATA, LATEST QUARTER FROM YEAR AGO.

.2

2.8

*

-3.7
-7.1

1.0

N.A.

2.5
3.5

*

*
2.8
*
N.A.

2.4
2.1

-1.8
*1.3

1.3

*

.9

2.4
7.2

September 28, 1983

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

a
Q4/Q4
1981

Q4/Q4
1982

1982

Q1

Q2

Q3

Q4

CANADA:

CPI
WPI

12.3
8.5

9.7
4.5

2.5
1.4

3.1
1.9

2.2 1.6
.8
.3

FRANCE:

CPI
WPI

14.1
12.7

9.5
8.5

2.8
2.7

3.1
2.6

1.4
1.9

GERMANY:

CPI
WPI

6.5
10.4

4.7
3.1

1.5
1.8

1.4
1.3

1.1
.0

CPI
WPI

18.4
18.7

16.6
12.4

4.0
3.3

3.0
2.0

4.1
3.2

CPI
WPI

1.0
-.1

2.9
1.3

.3
.2

UNITED
KINGDOM:

CPI
WPI

11.9
9.6

6.2
6.5

1.7
2.5

UNITED
STATES:

CPI (SA)
WPI (SA)

9.6
7.3

4.5
3.7

ITALY:
JAPAN:

.7 1.3
.7
.3

.6
.7
2.6
2.4

.7
.0

-2.0

.8

3.6

2.9

1.6

1.6

4.5
3.3

-5

MAY

1.4
1.5

1.9
1.0

1.0

3.2
1.6

1983
Q1 Q2

mmI

2.9
4.0

.7
1.0

.6

-. 1

-.1
.9
-1.9 -1.0

.5
1.0

.7
1.2

.5 2.0
1.4 2.0

1.9
1.5

.5
1.1

-.1
-. 7

1983
JUN. JUL.

1.1
.4

.4
.4

.5
N.A.

.5
1.0

.9
.0

.6
N.A.

.4
.4
.7 -. 5

1.2
-. 3

AUG.

.3
.8

-. 9
.3

.0
.2

.2
.2

.5
.1

LATEST 3 MONTHS
FROM YEAR AGO

5.5
3.5

2.6
-1.0

.4
N.A.

14.6
9.9

-. 5
-. 2

2.0
-2.4
4.1
5.6

1.0
.2

2.5
1.6
--

*

September 28, 1983
TRADE AND CURRENT ACCOUNT BALANCES OF MAJOR INDUSTRIAL COUNTRIES#
(BILLIONS OF U.S. DOLLARS; SEASONALLY ADJUSTED)

1981

1982

TRADE
CURRENT ACCOUNT

5.8
-4.8

14.8
2.4

TRADE+
CURRENT ACCOUNT+

-9.3
-4.7

-14.0
-12.0

GERMANY:

TRADE
CURRENT ACCOUNT (NSA)

11.9
-7.3

20.6
3.6

ITALY:

TRADE
CURRENT ACCOUNT (NSA)

-15.9
-8.6

-14.6
-5.8

CANADA:

FRANCE:

Q1

1982
Q2 Q3
3.8
.8

4.0
.9

-3.0 -4.0
-2.1 -4.4

-4.2
-3.2

5.3
.9

5.2
-1.6

2.9
-.1

5.0
-.4

-6.2 -2.8
-4.6 -.9

1983
1

Q4
4.1
.9
-2.9
-2.3

3.3
.2
-3.5
-3.8

5.1
4.7

5.3
1.7

-3.2 -2.4
.4
-.7

-1.5
-2.0

Q2
4.2
.9
-1.7
-1.1
3.9
.8
-1.9
N.A.

MAY

1983
JUN. JUL.

AUG.

1.4

1.2

1.1

*

*

*

*

-.5

-.4

-.0

*

*

-1.0
*

N.A.

*

1.4
.6

1.5
.2

1.2
-1.2

N.A.
-1.3

.2

N.A.

-.7

-.4

*

*

*

*

JAPAN:

TRADE+
CURRENT ACCOUNT

20.1
4.8

18.8
6.9

4.3
.9

5.5
2.8

5.1
2.3

4.0
1.6

6.5
3.5

8.1
6.0

3.3
2.3

2.0
1.4

3.0
2.1

N.A.
N.A.

UNITED
KINGDOM:

TRADE
CURRENT ACCOUNT+

6.4
12.7

3.7
8.2

.4
1.2

.2
2.3

1.0
1.7

2.1
3.0

-.4
1.2

-1.0
-.5

-. 8
-. 6

.3
.4

-. 5
-. 3

-. 2
.0

UNITED
STATES:

TRADE
CURRENT ACCOUNT

-28.1
4.6

-36.4
-11.2

-8.8 -14.7
-3.6 -9.7

-5.6

-4.8

-5.9

N.A.

*

*

-6.1 -5.9 -13.1 -11.4
.6 1.4 -6.6 -6.6

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

*

*

IV - 18

reflecting in part the weakness of domestic demand in these countries.
Elsewhere, trade balances have been deteriorating somewhat as the
recovery has progressed.
Individual Country Notes.

In Japan, the increase in real GDP

growth in the second quarter is an encouraging sign that recovery may
have finally taken hold, but private domestic demand is lagging.
Recently released GNP figures for the second quarter show that real
output advanced at a 3.6 percent rate (s.a.a.r.), up sharply from revised
growth of only 0.9 percent in the first quarter.

Most of the advance

derived, however, from increases in public spending and an expanding real
external surplus (both of which contributed an amount equal to about half
of the total gain).
the quarter.

Real exports grew by almost 11 percent (s.a.a.r.) in

Although private domestic demand -- and private

consumption, in particular -- were still relatively sluggish, the
improved performance of investment in plant and equipment in the quarter
(4 percent growth, s.a.a.r.) and continued advances in industrial
production suggest that recovery is underway.
There are no signs of any significant upward price pressures in
Japan.

In fact, consumer prices fell by 0.5 percent in August to a level

virtually unchanged from that at the beginning of the year.

Wholesale

prices, which also declined in August, were some 3 percent below their
year-previous level.
The Japanese current account continued in July its advance to
record levels.

The July surplus was $2.1 billion (s.a.), bringing the 7-

month total to more than $11-1/2 billion (s.a.).

Although exports fell

IV -

19

slightly in July, imports reversed the strong gain seen in June and fell
by over $1 billion.
German real GNP rose by 4 percent (s.a.a.r.) in the second quarter.
The level of real GNP has now risen for two quarters, after an eleven
quarter period of decline or stagnation.

Recovery in the first quarter

was based on domestic private consumption, while investment, especially
in construction, rose strongly in the second quarter.

Industrial

production has risen in the three months to July to a level 6 percent
above the end of last year.

Unemployment in August remained at the 9.4

percent rate (s.a.) recorded in July.
Inflation has accelerated somewhat from very low rates earlier this
year.

During the four months ending in August consumer prices rose at an

annual rate of 4.3 percent, perhaps in part reflecting a one percentage
point increase in the VAT in July.

Also, the import price index has

risen strongly since early this summer, reflecting the strength of the
dollar and the world recovery.

Wholesale prices rose by almost 1 percent

in August.
The current account showed a $1.3 billion deficit (n.s.a.) in
August, bringing the current account so far this year into rough balance,
compared with a small deficit for the same period last year.

Although

the merchandise trade balance weakened compared with last year, the
services balance has improved.
On September 8, the Bundesbank raised its Lombard rate from 5
percent to 5-1/2 percent, citing the strong growth of Central Bank Money.
From the fourth quarter of 1982 through August, CBM growth was 8-1/2

IV - 20

percent (a.r.) compared with a target range of 4-7 percent between fourth
quarters.
The 1984 federal budget has been submitted to the legislature by
the government.

Expenditures are scheduled to grow by 2 percent,

implying a decline in real terms.

The government deficit is projected to

fall from an estimated DM 41 billion this year to DM 37 billion in 1984.
French real GDP increased by less than 1 percent (s.a.a.r.) in the
second quarter after remaining unchanged in the first quarter.
Industrial production in June decreased by 2.3 percent (s.a.), completely
reversing the increase of the previous month and falling 0.8 percent
below its year-earlier level.

Private surveys and government forecasts

suggest that economic activity is expected to weaken in the second half
of the year as the government's austerity measures initiated in March are
increasingly felt.
Inflationary pressures appear to have moderated in recent months.
While consumer prices increased an average of 1 percent per month in the
first four months of the year, the average monthly increase was 0.7
percent over the next four month period.

In August consumer prices were

9.8 percent above their year earlier level.

The government's announced

goal is to reduce the inflation rate to 8 percent this year and 5 percent
by the end of next year.
Both the trade and current account deficits increased substantially
in the first quarter and declined sharply in the second quarter, a
pattern reflecting in part distortions arising from the March devaluation
of the franc.

For the first half of the year, the current account was in

IV -

21

deficit by $9.7 billion (s.a.a.r.), less than the $12 billion current
account deficit recorded last year.

The trade deficit in the first eight

months of 1983 was $8.4 billion (s.a.a.r.), compared with a $14 billion
trade deficit in 1982.
On September 14 the government announced details of its 1984 budget
proposal.

As officials had indicated previously, the budget will aim at

limiting the deficit to 3 percent of GDP, approximately the same level as
this year.

The increase in government expenditure will be held to 6.3

percent, about half the rate of increase of government spending in the
1983 budget.

Several "temporary" tax increases imposed earlier this year

have been extended for an additional year.

These include a one

percentage point surtax on all taxable income and an additional surtax
(equal to 5 percent to 8 percent of tax liabilities) applied only to
approximately the upper 10 percent of income earners.
In the United Kingdom real GDP in the first half of the year
averaged more than 3 percent higher than its level in the first six
months of 1982, but concerns about a possible slowing in the pace of
recovery remain.

Based on newly revised data using 1980 prices, the

average of the output,

income, and expenditure measures of real GDP fell

2.8 percent (s.a.a.r.) in the second quarter after a revised increase of
8-1/2 percent in the first.

The three GDP measures give somewhat

conflicting evidence about the shape of GDP expansion during the first
half of 1983 and this ambiguity has contributed to the concern that the
recovery may be faltering.

Industrial production rose 2.2 percent (s.a.)

in July after falling by 1.8 percent in June.

Although still strong, the

IV -

volume of retail sales (s.a.)
starts similarly were

fell

22

from June through August.

Housing

lower in the May-July period than they were in the

previous three months.

The unemployment rate declined marginally

August to 12.3 percent.

in

The retail price index in August was 4.6 percent

above the year earlier level while the producer price index was 5.4
percent higher.
Revised estimates, particularly for the earnings of the invisibles
account, now show the U.K. current-account balance moving from a $1.2
billion surplus

in the first quarter to a $0.5 billion deficit

second quarter of this year.

in the

The trade balance showed a $2 billion

deficit for the first 8 months of this year, compared with a $1 billion
surplus

in the corresponding period of 1982.

Economic activity in Italy remains weak.
1-1/2 percent (s.a.a.r.)
percent

After expanding by about

in the first quarter, real GDP fell by about 7

in the second quarter.

Declines in real investment

consumption account for much of the weakness.

Inflation has continued

its slow moderation, aided in part by the weak economy.
inflation decelerated to 9-1/2 percent
a 13 percent

and private

Wholesale price

in July (year/year), compared with

rate in the 12-month period ending in July 1982.

Consumer

prices in August were less than 14 percent above their year-earlier
level;

the increase in consumer prices

in the 12-month period ending in

the previous August was about 17 percent.
On September 12,

the Craxi government announced decree laws which,

if approved by Parliament, will reduce state pension benefits and health
benefits by about 5 trillion lire in 1984.

The enlarged public sector

deficit (EPSD) this year is expected to reach 85-90 trillion lire, or

IV -

about 16 percent of GDP.
of the present government.

23

Reducing the deficit is one of the main goals
Since several temporary indirect tax

increases expire in December, many observers are projecting an EPSD of
100-120 trillion lire (16-19 percent of GDP) next year in the absence of
further measures.
announced shortly.
first time.

Additional fiscal policy proposals are expected to be
In July, the government issued indexed bonds for the

The first issue of these certificates, worth 1 billion lire,

paid a real interest rate of 2.5 percent.
Canadian real economic activity continues to expand at a strong
pace:

real GNP rose by 7.5 percent (s.a.a.r.) in the second quarter,

virtually the same rate recorded in the first quarter.

While real

consumption expenditures have grown by 4.7 percent (s.a.a.r.) over the
first half of 1983, residential construction jumped by 24 percent over
the level of the first half of 1982.

A drop in July housing starts,

however, suggests a moderation of these rapid advances.

In the second

quarter, real investment in plant and equipment advanced by 8.2 percent
(s.a.a.r.) after posting declines for the previous five consecutive
quarters.

Runoffs in inventories continued through the second quarter

although at a much reduced rate compared with 1982.
Export growth, particularly to the United States, continues to be
an important element in Canada's rapid economic expansion.

Real exports

of goods and services have been expanding at a rate of 23 percent
(s.a.a.r.) over the first half of 1983.

Trade account surpluses, though

high by historical standards, have shown a downward trend since April of
1983, reflecting a recovery of import demand from recession levels.

IV-24

The level of inflation remains at a rate less than half the doubledigit levels reached in the previous two years.

From January through

August of this year the CPI has risen 5.4 percent (a.r.).

Average non-

indexed wage increases in major settlements continued to fall in the
second quarter to reach a 5.9 average annual percent increase.
The narrow monetary aggregates have continued to grow at rapid
rates after declines in late 1981 and the first half of 1982.

In the

first eight months of this year, M1 and M1-A grew at 15.5 and 18.8 percent (s.a.a.r.), respectively.

However, July and August have shown a

moderation from the rates of the second quarter.

During the same period,

M2 and M3 have grown at much lower rates of 6.6 and minus 1.9 percent,
respectively.
The Debt Problem Situation in Important Developing Countries
Mexico, Chile, Peru and Ecuador are operating successfully under
IMF programs.

However, continuing problems in arranging external

financing confront Brazil, Argentina and Venezuela.

The Philippines is

finding it difficult to reach agreement with the IMF on the country's
economic program.
On August 23, Mexico repaid on schedule the $1.2 billion balance
still outstanding of the emergency credits that it received a year ago
from the BIS, the U.S. Treasury and the Federal Reserve.

Mexico became

eligible on August 15 to draw another $1.1 billion from the $5 billion
commercial bank credit signed last March, but because of an easing
foreign exchange situation delayed doing so and drew only $600 million on
September 13.

Mexico also announced that $560 million of private sector

interest arrears owed to banks would be paid, half on September 30 and

IV-25

half by December 15.

Mexico recorded a $2.6 billion current account

surplus in the first half of 1983, mainly because imports were 60 percent
lower than in the same period of 1982.

With imports now recovering

slowly, it is likely that the current account will be roughly in balance
in the second half.

The consumer price index, which has doubled in the

past year, rose by less than 4 percent in August--the second smallest
monthly increase this year.

Deposit interest rates have been gradually

reduced since June as the monthly inflation rate eased.

On September 22

Mexico announced that it would depreciate the "free" rate for the peso
gradually by 13 centavos per day.

From the recent level of about 150

pesos to the dollar, this would mean a devaluation of 8 percent if continued through the rest of 1983.
Brazil has signed a new letter of intent with the IMF.

However,

the IMF is not expected to make any disbursements until early November,
following the end of the time period during which the Brazilian Congress
could overturn the decree law which reduces wage indexation.

With no new

money from the IMF or banks, Brazil's gross public sector arrears have
grown to about $3 billion.

Brazil faces a combined 1983-84 financing gap

of about $11 billion, which it hopes to meet through a combination of a

Paris Club rescheduling of payments to official creditors (almost $2
billion), additional bank credit ($6.5 billion), and further coordinated
foreign official financial assistance in the form of $2.5 billion in
increased export guarantees that are now under negotiation.
Late in August, Argentina drew the last $300 million of the $1.1
billion bridge loan signed last December, and used the proceeds to bring
interest payments current up to the end of July.

After the IMF approved

IV-26

Argentina's August 8 action lifting its discriminatory restrictions
against British remittances, the banks signed the $1.5 billion medium-term
loan contract that had been under negotiation for several months.
ever, the first disbursement of $500 million was held up.

How-

A number

of banks initially refused to sign a model debt restructuring agreement
with Argentine Airlines--a precondition to the disbursement--and to extend
by 30 days the repayment of $350 million due on September 15 under the
bridge loan until Argentina followed through on promises to modify a
provision of its bankruptcy law that gave preferred status to domestic
creditors over foreign creditors and to provide equal access to the private sector in the foreign exchange market.
satisfaction on these points.

The banks have now received

The 30-day extension on the bridge loan

that was eventually granted, was needed to allow time to complete the
signing of the model debt restructuring agreement.
now planned for early October.
being held up pending:

The disbursement is

Argentina's August drawing from the IMF is

(i) completion of a formal review of its adherence

to the IMF's performance criteria; (ii) a waiver on its temporary use of
an export tax rebate which constitutes a multiple currency practice; and,
(iii) elimination of arrears other than those to be refinanced.

The IMF

is delaying steps (i) and (ii) because of the imminent danger that Argentina, which has been in compliance with the quantitative criteria of its
IMF stand-by agreement, will fall out of compliance early in the fourth
quarter.

The risk of non-compliance has increased since late August when

Argentina increased government expenditures, cut taxes, and raised the
minimum wage by substantially more than recent increases in the CPI.

IV -27

Venezuela's economic authorities will not ask for a CFF drawing or
Fund program before the December presidential elections, although they are
still considering whether to negotiate a stand-by arrangement with the
Fund for 1984.

Banks would like to have an IMF program in place as a pre-

condition to the renegotiation of the country's $34 billion of foreign
debt, of which $16 billion is due by the end of 1984.

Venezuelan authori-

ties are resisting a liberalization of price controls and a unification of
the exchange rate system as part of an IMF-approved program.

The floating

exchange rate depreciated sharply from 11.2 bolivars per dollar on July 1
to 16.8 bolivars per dollar on August 10, before stabilizing at 13 per
dollar in September.
February.

The exchange rate was 4.3 bolivars per dollar in

On September 26 a Presidential decree was approved allowing

payments of foreign debt at the preferential exchange rate of 4.3 bolivars
per dollar in order to resolve an estimated $400 million of interest
arrears.
Chile and its creditor banks are completing negotiations on the
restructuring of $3.4 billion of debt coming due in 1983 and 1984, with a
model agreement scheduled for signing in October.

Chile drew $500 million

from a $1.3 billion bank loan on August 31, and repaid $310 million out of
a

$400 million bridge loan from the BIS.

Chile will be eligible to draw

another $570 million on the bank credit at the end of September.
An IMF mission visited the Philippines during the second week of
September, but the mission was unable to reach agreement with the authorities regarding the economic policies that should be pursued under the
one-year stand-by program approved last February.

It is not yet clear

whether the Philippines is out of compliance with the Fund program.

Since

IV-28

mid-August several measures have been taken by the Philippines to restrain
inflationary pressures and reduce the deficit in the balance of payments.
Commercial bank reserve requirements on demand and time deposits are being
raised, and in addition, the central bank has announced a tightening of
its restraints on credit expansion from the target levels specified
earlier.

Lastly, the limits on the amount of permissible holdings of

foreign exchange by commercial banks will be reduced by roughly
three-fourths.