Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 24, 1996 : Greenbook Part 2

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Confidential (FR) ClassIII

FOMC

Part 2

September 18, 1996

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS

Recent Developments

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

Confidential (FR) Class III FOMC

September 18, 1996

RECENT DEVELOPMENTS
I

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

DOMESTIC NONFINANCIAL
DEVELOPMENTS

DOMESTIC NONFINANCIAL DEVELOPMENTS
The available economic indicators point, on balance, to a
considerable slowing in the pace of GDP growth this quarter.
Employment growth is far from weak, however, and the resultant
pressure on labor supplies is evident in continuing acceleration of
wage rates.

Even so, the August price indexes showed inflation to

be still quite subdued.
Labor Markets
The labor market reports revealed slower growth in aggregate
hours of private production workers during July and August than
during the first half of the year.

Nonetheless, labor demand has

remained sufficiently strong to generate a further decline in the
unemployment rate.
The average gain in private payrolls slipped to 180,000 per
month in July and August, compared with the first-half pace of
220,000.

Increases in the financial and real estate industries and

in business services, including help-supply firms, remained
relatively strong in the past two months, but hiring at health and
hotel facilities and at retail establishments was unusually slow in
August.

Construction employment also slowed noticeably in August,

posting growth of just 6,000.

Manufacturing employment changed

little, on net, in recent months after the fluctuations associated
with seasonal shutdowns in the motor vehicle industry are taken into
account.

During July and August, the only notable gains occurred in

motor vehicles and the related fabricated metals and rubber
industries; those gains were offset by further declines in the
apparel industry.
With the average workweek so far in the third quarter about in
line with the average for the first half of the year, the recent
slowing of private employment growth has been reflected in a
deceleration in aggregate hours of private production or
nonsupervisory workers.

Aggregate hours in July and August averaged

1.4 percent above the second-quarter average (annual rate).
Assuming a further moderate increase in September, the quarterly
rise could be closer to 2 percent, still a noticeably lower rate of
increase than the 2.7 percent over the first half of the year.
In contrast to the private sector, employment gains in the
public sector have been surprisingly robust so far in the third
quarter, boosted by sizable increases at state and local

II-1

II-2

CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1995
1994

Nonfarm payroll employment 2
Private
Manufacturing
Durable
Transportation equipment
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Business services
Total government

1995

1996

1996
Q2

June

July

Aug.

------------ Average monthly changes--------318
185
171
200
272
219
228
250
295
176
164
185
253
226
189
173
33
-12
-16
-28
5
-5
-27
25
28
5
6
-15
24
16
-13
32
5
-3
-5
-13
16
2
-6
22
5
-17
-22
-14
-19
-21
-14
-7
25
9
12
39
21
19
23
6
91
54
41
20
87
85
98
28
-3
4
15
15
12
3
20
20
134
110
95
125
116
109
74
81
54
33
29
32
44
37
39
47
23
9
7
16
19
-7
39
77

Private nonfarm production workers 2
Manufacturing production workers

267
34

152
-10

128
-13

163
-30

208
6

220
3

157
-20

138
16

Total employment 3
Nonagricultural

261
225

32
51

-18
-15

390
336

153
188

148
257

274
154

171
253

Memo:
Aggregate hours of private production
workers (percent change) 2
.4
34.6
Average workweek (hours)2
Manufacturing (hours)
41.9

.1
34.5
41.6

.1
34.4
41.4

.3
34.3
40.9

.5
34.4
41.7

1.7
34.7
41.8

-1.2
34.3
41.6

.6
34.4
41.7

1. Average change from final month of preceding period to final month of
period indicated.
2. Survey of establishments.
3. Survey of households.

SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data)
1995

Civilian unemployment rate
(16 years and older)
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older
Full-time workers
Labor force participation rate
Teenagers
20-24 years old
Men, 25 years and older
Women, 25 years and older

1996

June

July

Aug.

5.6

5.5

5.6

5.4

5.3

5.4

5.1

17.6
9.7
4.8
4.9

17.3
9.1
4.3
4.4

17.6
9.2
4.2
4.3

17.4
9.8
4.3
4.3

16.3
9.3
4.1
4.3

15.9
9.3
4.0
4.1

16.4
9.6
4.0
4.3

17.2
8.3
3.8
4.1

6.1

5.5

5.3

5.2

5.3

4.9

66.6

66.4

66.7

66.9

66.7

52.7
77.0
76.0
58.1

53.5
76.6
76.0
58.3

52.9
76.1
75.6
58.5

52.6
76.9
76.0
58.4

52.5
77.0
76.1
58.6

51.4
76.5
76.3
58.7

52.2
76.6
76.4
58.9

50.1
75.6
76.5
58.9

1994

1995

6.1

II-3

governments.

Two special factors contributed to these increases and

suggest that much of the rise will be reversed in September.

First,

the bulk of the gain (100,000 over the July-August period) occurred
in local education, where the trends toward earlier school openings
and year-round schools apparently have not yet been completely
incorporated into the seasonal adjustment factors; in both 1994 and
1995, for example, large advances in August were followed by dips in
September. Second, this year's local summer jobs programs extended
into the August survey reference week and, thus, may have boosted
local noneducation employment.
In the household survey, the unemployment rate dropped
0.3 percentage point in August to 5.1 percent, moving it below the
5.3 percent to 5.6 percent range that had prevailed since early this
year.

Several considerations caution against a literal reading of

this drop.

First, the fall in the unemployment rate was

particularly dramatic for workers aged 20 to 24 years and for those
more than 54 years, groups that have traditionally had more variable
unemployment rates.

In addition, this August's later-than-usual

survey reference week may have overstated the decline in
joblessness.

The unemployment rate for adults aged 25 to 54

years--which has shown less variability over this year--also fell in
August, but by only 0.1 percentage point.

The decline since May in

the rate for this group, which probably is more indicative of the
underlying trend in labor market conditions, has been 0.3 percentage
point, compared with 0.5 percentage point for the overall labor
force.
Other recent indicators support the picture of a still
relatively strong labor market.

Initial claims for unemployment

insurance remained low into early September.

The four-week moving

average for the period ending September 7 was 328,000, compared with
359,000 for the same period last year.

Moreover, expectations of

labor market conditions, as measured by the Michigan Survey Research
Center and Conference Board surveys of households and by the
1. The seasonal adjustment procedures for the Current Population
Survey, unlike those for the establishment survey, do not account
for the timing of the survey reference week. The BLS suggests that,
because the survey week fell in the third week of August, many
students who otherwise might have been unemployed or employed may
have already left the labor force either to go on vacation or return
to school. This hypothesis is consistent with the sharp drop in the
labor force among men aged 16 to 24. However, a puzzling aspect of
the story is why the labor force of student-aged women was
essentially unchanged.

II-4

Labor Market Indicators
Initial Claims for Unemployment Insurance

Thousands

Four-week moving average

Sept. 7
328
1

1985

1987

I1
1991

1989

I
1993

I1II1..
1995

1997

Note. State programs, includes EUC adjustment.

Help Wanted Advertising

Index, 1990=100

Net Hiring Strength

Percent

1997
1989
1993
1985
Note. Series has been adjusted to take account of various structural
and institutional changes, including consolidation ol the newspaper
industry and a tendency toward increased hiring through personnel
supply agencies.

1997
1993
1989
1985
Note. Percent planning an Increase in employment minus percent
planning a reduction.

Job Availability

Expected Change in Unemployment

Percent of Households

FMichigan Survey, next 12 months

Index

1
September

1985

1989

1993

1997

1997
1993
1989
1985
Note. Percentage expecting "more' minus percentage
expecting "less' plus 100.

II-5

LABOR PRODUCTIVITY AND COSTS

(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1995

1996

1995:Q2
to

1.7
2.0
5.3

-,6
-1.1
3.7

2.0
1.8
5.6

1.1
.5
2.2

1.1
.8
4.2

4.1
4.1

3.9
4.0

4.4
4.1

3.0
3.3

4.0
3.7

3.8
3.8

1.9
2.0

3.9
3.8

2.2
1.9

5.0
5.2

1.0
1.5

2.9
3.2

2.8
2.9

3.1

2.6

2.9

3.2

2.9

19941

19951

.3
.5
4.5

.3
.3
3.5

Compensation per hour
Total business
2.3
Nonfarm business
2.5
Unit labor costs
Total business
Nonfarm business
Memo:
ECI compensation
per hour

Output per hour
Total business
Nonfarm business
Manufacturing

1996:Q2

1. Changes are from fourth quarter of preceding year to fourth
quarter of year shown.
2. The nonfinancial corporate sector includes all corporations doing
business in the United States with the exception of banks, stock
and commodity brokers, finance and insurance companies; the sector
accounts for about two-thirds of business employment.

Productivity in the Nonfarm Business Sector
Billions of chained (1992) dollars per hour

1975

1978

1981

1984

1987

1990

1993

1996

II-6

AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)
Twelve-month
percent change
Aug.
1993

Aug.
1994

Percent change to
Aug. 1996 from
Feb.
1996

Aug.
1995

May
1996

-Annual rateTotal private nonfarm

1996
July

Aug.

-Monthly rate-

2.2

2.4

3.0

3.8

4.9

-.2

Manufacturing
Durable
Nondurable

2.2
2.2
2.2

2.6
2.8
2.2

2.8
2.2
3.3

6.0
7.2
3.8

6.8
8.1
4.4

.2
.3
.2

1.0
1.3
.4

Contract construction

1.5

2.4

2.6

3.3

4.5

Transportation and
public utilities

1.0

1.6

2.9

2.7

3.4

Finance, insurance,
and real estate

5.2

3.0

4.7

3.7

2.2

-.7

Total trade

2.3

2.5

3.1

4.0

4.4

-.6

Services

1.9

2.3

3.0

3.3

4.2

-.2

Note. Twelve-month percent changes use NSA data.

Earnings of Production or Nonsupervisory Workers
(Twelve-month change)
3.8

Percent
5.1
-

3.4

4.8

2.6

4 4.2

Aug.
-

Fixed-weight AHE

Chain-weighted AHE

S--"

--ht-

F \
1995

ECI wages and salaries

1996

Average

1990

1991

1992

1993

1994

1995

1996

II-7

Manpower survey of businesses, improved or held steady at quite
favorable levels in recent months.
Revised figures on productivity and costs now show that the
strong gains in hours worked during the first half of this year were
accompanied by some recovery in labor productivity.

Taking into

account BEA's revised estimates of output, productivity in the
nonfarm business sector rose more in the second quarter than
originally estimated, bringing the average growth rate for the first
half of the year to 1.2 percent at an annual rate, up from last
year's dismal 0.3 percent rate.

BEA's revised estimates also show

that compensation per hour in the nonfarm business sector rose at a
3-1/2 percent annual rate over the first half of the year.

This

measure of the change in hourly compensation, while down slightly
from its 1995 pace, continues to run ahead of the rate of increase
in ECI compensation.

The latest four-quarter change in nonfarm

hourly compensation was 3.8 percent, compared with 2.9 percent for
the ECI.
The only current-quarter indicator of labor costs since last
Greenbook is the August reading on average hourly earnings of
production workers.

The twelve-month change in this wage measure

has now moved up to 3-1/2 percent--from 3 percent for the twelve
months ending August 1995.
Industrial Production
After a pause in July, industrial production rose 0.5 percent
2
in August, similar to its pace over the first half of the year.
Increases in August were widespread across manufacturing industries
and were somewhat tempered by a drop in the output of motor vehicles
and parts from its high July level.

In addition, utilities

generation surged, retracing part of the large weather-related
declines earlier in the summer; mining activity also advanced
solidly with gains in coal output and drilling activity.
Output of motor vehicles and parts dropped 2.1 percent last
month after two months of solid gains. Outside the motor vehicle
sector, manufacturing production rose 0.4 percent last month.
Increases in the output of business equipment remained an important
area of strength marked by continued robust growth in office and
computing equipment, an uptick in industrial equipment, and an
increase in defense and space equipment.

Since the end of last

2. Growth of industrial production in May was revised up to
0.7 percent; the growth rates for June and July were unchanged.

II-8

GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1995:Q4
19951

1995

1996

June

July

Aug.

----Annual rate----- --Monthly rate--Total index
Previous

100.0

1.6
1.6

.6
.6

3.0
3.0

6.5
6.0

.6
.6

.1
.1

Manufacturing
Motor vehicles and parts
Mining
Utilities

86.5
5.5
6.0
7.5

1.4
-2.6
-1.8
6.2

1.4
-. 5
-7.7
-2.1

2.4
-20.7
1.9
8.9

7.0
46.6
9.3
.9

.8
2.8
1.4
-1.8

.3
3.6
-1.0
-1.8

.3
-2.1
2.4
1.5

Manufacturing
excluding motor vehicles
and parts

81.0

1.7

1.6

4.1

4.8

Consumer goods
Durables
Nondurables

23.1
3.7
19.4

.1
-.4
.2

.0
4.0
-. 7

.2
-5.4
1.2

.1
7.3
-1.2

.1
3.4
-.5

.3
-2.2
.7

-.3
-1.3
-.2

Business equipment
Office and computing
Industrial
Other

14.0
3.1
4.3
6.7

5.6
36.2
3.5
-3.0

2.1
45.0
2.6
-12.5

19.2
48.4
4.1
17.0

8.1
44.3
-3.2
-.1

1.4
2.8
-.5
1.8

.4
3.5
-.3
-.9

1.1
3.0
.1
.7

Defense and space equipment

2.2

-9.1

-16.4

-.6

6.6

-1.0

1.4

Construction supplies

5.3

-.4

6.0

7.6

2.5

-1.4

-.3

29.5
21.1
8.2
0.2

3.1
5.9
-2.8
-16.8

3.9
6.9
-2.9
-22.4

4.0
7.6
-5.0
12.5

6.9
4.9
12.5
4.1

.8
1.1
-.2
2.8

.2
.0
.7
-3.4

.7
.8
.3
3.6

11.2

21.4

22.7

21.6

20.1

1.6

1.2

1.7

Materials
Durables
Nondurables
Energy
Memo:
Information-related products 2

1. From the final quarter of the previous period to the final quarter of the period
indicated.
2. Includes computer equipment, computer parts, semiconductors, communications
equipment, and selected instruments.

NEW ORDERS FOR DURABLE GOODS
(percent change from preceding period, seasonally adjusted)
Share
1996
HI
Total durable goods
Nondefense aircraft
Adjusted durable goods orders 1
Office & computing machines
Nondefense capital goods
excluding aircraft and computers
Chain-weighted real adj. orders

1996
Q1

1996
Q2

1996
May

1996
Jun

1996
Jul

100.0
4.0
68.0
5.0

0.7
3.0
0.1
2.1

1.6
-28.1
2.0
1.6

4.2
117.2
1.1
-1.2

-0.2
-35.1
1.1
5.0

1.7
30.7
2.3
3.8

17.0

3.4
0.7

-2.7
2.5

-0.0
1.1

1.8
1.5

4.3
2.0

1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle parts.
2. Nominal adjusted durable goods orders were split into two components, computers and
all other. These components were deflated and then aggregated in a chain-weighted
fashion.

II-9
CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89
High

1967-95
Avg.

1995

1996

June

July

Aug.

Total industry

84.9

82.1

83.7

82.8

83.3

83.5

83.3

83.5

Manufacturing

85.2

81.4

83.0

81.6

82.2

82.5

82.4

82.3

89.0
83.5

82.6
80.7

87.6
81.0

85.2
80.1

86.1
80.5

86.6
80.8

86.4
80.8

86.5
80.6

Primary processing
Advanced processing

Manufacturing Sector
Capacity Utilization

1985

1986

1987

Percent

1988

1989

1990

1991

*Percent of respondents in the purchasing managers survey reporting slower
supplier delivees minus those reporting faster delivenes, seasonally
adjusted.

1992

1993

1994

1995

1996

II-10

SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate; FRB seasonals)

1995

Total
Adjusted 1

Autos
Light trucks
North American 2
Autos
Big Three
Transplants
Light trucks
Foreign produced
Autos
Light trucks

1996

1994

1995

June

July

Aug.

15.0

14.7

14.9

15.2

15.1

14.2

15.7

15.0

14.6

14.4

15.3

15.1

14.4

15.6

9.0
6.1

8.6
6.1

8.6
6.3

8.6
6.5

8.8
6.3

8.7
6.4

8.1
6.1

8.8
6.9

12.9
7.3
5.7
1.5
5.7

12.8
7.1
5.4
1.7
5.7

13.1
7.3
5.5
1.8
5.9

13.5
7.3
5.4
1.9
6.1

13.4
7.5
5.6
1.9
5.9

13.3
7.4
5.5
1.9
5.9

12.6
7.0
5.1
1.8
5.7

14.0
7.5
5.3
2.3
6.4

2.1
1.7
.4

1.9
1.5
.4

1.7
1.3
.4

1.7
1.3
.5

1.8
1.3
.4

1.5
1.2
.4

1.7
1.3
.5

1.8
1.4
.4

Note. Components may not add to totals because of rounding. Data on sales
of trucks and imported autos for the most recent month are preliminary and
subject to revision.
1. Excludes the estimated effect of automakers' changes in reporting periods.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry.

GM and Ford Fleet Sales

Buying Conditions for New Vehicles
Diffusion index

Michigan SRC Survey

Millions of units

CONFIDENTIAL

1.5
1.25
1
0.75
0.5
0.25

0
1993

1994

1995

1996

1993

1994

1995

1996

II-11

year, output of defense and space equipment has posted its first
sustained rise since the 1980s.

In contrast, the output of

manufactured consumer goods other than motor vehicles fell last
month as appliance production dropped substantially for a second
month.

The production of construction supplies declined as well,

perhaps the result of some softening of building activity, while
materials output advanced, with gains in both durable and nondurable
materials.
Other indicators of manufacturing activity also point to a
solid pace of industrial activity.

The purchasing managers' indexes

of new orders and production turned up in August and stand at levels
consistent with an appreciable expansion of the manufacturing sector
in the near term.

Real adjusted new orders for durable goods

increased markedly in July, on the heels of three consecutive
monthly increases.
The factory operating rate was 82.3 percent in August.

Both

the utilization rate in primary processing industries and the rate
in advanced processing industries continue to be in the upper end of
the range observed this year.

These relatively high operating rates

have been associated with a modest tendency toward deteriorating
vendor performance, as reported by purchasing managers.
Motor Vehicles
The United Auto Workers

(UAW) reached a tentative three-year

agreement with Ford this week; the vote by the UAW members will be
completed by September 29.

The highlights of the pact include

Ford's concession to keep at least 95 percent of the skilled and
unskilled UAW members at each of its forty-nine assembly and parts
plants in the United States.

While wage increases for current

workers include a combination of lump-sum payments and annual
increases, the UAW agreed to accept a permanently lower entry wage
for new hires at parts facilities.
While negotiations are under way with both Chrysler and General
Motors, the UAW may focus on Chrysler next because that firm is
likely to have fewer problems with this tentative agreement than GM,
for whom the guaranteed employment provision poses a major obstacle.
Indications are that GM would not accept a level higher than
85 percent and would prefer an even lower level.

If negotiations

between GM and the UAW were to break off and a strike were to occur,
the work stoppage probably would begin late this month or in
October.

II-12

The Canadian Auto Workers (CAW) reached a tentative settlement
with Chrysler this week, but this agreement also contains elements
that GM will find difficult to accept, raising the likelihodd of a
CAW strike against GM later this month.

The potential effects on

domestic production of a CAW strike against GM are quite serious.
According to GM, some domestic production would be shut down because
of parts shortages if the strike were to last more than one week,
and, after three weeks, all of GM's assembly plants would be shut
down.

If strike disruptions were to prove lengthy, and underlying

demand did not weaken noticeably, the catch-up in production likely
would extend into next year.

The effects of a strike on domestic

sales would not be so immediate because overall inventories were
near normal levels heading into the strike.
The industry has been experiencing strong demand, with sales of
new light vehicles in July and August averaging about 15 million
units at an annual rate after adjusting for shifts in the reporting
periods by some firms.

This pace is just a bit below the average

sales rate in the first six months of the year.

The ongoing

strength in sales has been supported by consumers' relatively
favorable appraisals of buying conditions for new vehicles, as
revealed in the Michigan SRC survey (chart).

In addition, J.D.

Powers estimates that incentives in the current quarter, while down
noticeably from earlier this year, remain at a relatively high
level.

At the same time, price changes have been moderate, although

finance rates have moved up recently.
The monthly changes in sales this year have been quite
volatile, and the results for recent months continue this pattern,
falling in July and then rebounding sharply in August.

Part of this

swing reflects movements in GM's sales of autos to fleets.

New cars

make up about 75 percent of GM's total fleet sales (chart).

The

company began July with inventories on the lean side--at about 60
days--and with most assembly plants closed during the first two
Consequently, it deferred some fleet sales from
July to August in order to ensure that retail sales were not unduly
weeks of the month.

crimped by shortages of popular vehicles.

GM's fleet sales,

which were at a twelve-month low, rebounded in August.

Its retail

3. The overall swing in sales of light vehicles in July and
August may be somewhat exaggerated because the current seasonal
factors may not yet fully reflect the effects of GM's consolidated
downtime during the first two weeks of July: this consolidation was
introduced in 1994.

II-13

sales, which were flat in July, also moved up in August, but sales
of light trucks more than accounted for the gain.
Automakers continued efforts this summer to rebuild inventories
in the aftermath of the March strike and to meet the surprising
strength in sales.

Measured against the average pace of sales in

July and August, days' supply of light vehicles in August is
estimated to have been at about the usual target level of 65 days.
However, days' supply of autos--at about 63 days--was still a little
on the lean side, while days' supply of light trucks was about 70
days.

Although the strike will have serious implications for

fourth-quarter assembly plans, the level of the initial production
schedules for the coming quarter--published a few weeks before the
strike--was consistent with sales holding near the 15 million unit
mark for the rest of the year.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)

U.S. production
Autos
Trucks

July

Aug.

13.4
7.0
6.3

12.6
6.7
5.9

59.4
70.5

62.8
69.3

1996
Q4
Q3
Sept.
--------- scheduled-------12.2
13.0
13.1
6.2
7.0
7.2
6.0
6.1
6.0

Days' supply 1
Autos
Light trucks

...
...

....
....

Components may not sum to totals because of rounding.
Note:
1. Based on average sales in July and August.
Personal Income and Consumption
Consumer spending slowed noticeably in the middle of the year.
Spending on goods other than motor vehicles dropped sharply in June
and was flat in July, with the weakness fairly widespread;

outlays

for services also were little changed, on balance, over this period.
Advance estimates of retail sales in August, however, show a
moderate upturn that suggests that consumer spending may be moving
back to a pace more consistent with the sustained high levels of
consumer confidence, further gains in the value of household assets,
and continued ready access to credit for most potential borrowers.
The sharpest rebounds in nominal retail sales in August
occurred at general merchandisers and apparel stores, which would
seem to bear out the anecdotal reports of relatively strong back-toschool sales.

Moreover, the CPI for apparel fell in August, which

II-14

Retail Sales
(Percent change; seasonally adjusted)
1996

Total sales
Previous estimate
Retail control'
Previous estimate
Durables
Furniture and appliances
Other durable goods
Nondurables
General merchandise
Food
Drug and proprietary stores
Other nondurable goods

2.3

1.2
1,3
1.7
1.8
3.3
2.0
4.3
1.4
2.0
.5
1.3
1.8

1.6
1.6
-. 3
3.3
1.6
2.3
.9
1.1
1.9

June

-. 6
-. 5
-. 7
-. 5
-1.2
-. 7
-1.7
-. 6
-. 9
.2
-. 1
-1.0

July

Aug.

.1
.1
.2
.5
.3
.0
.6
.2
.2
.9
1.4
-. 5

.2
.2
.8
-. 2
1.5
.1
.7
-. 7
.4
.3

1. Total retail sales excluding building material and supply stores and automotive dealers (but including
auto and home supply stores).

PCE Goods Excluding Motor Vehicles
Billions of chained (1992) dollars
2000
e Quarterly
1920

Aug.

1840

1760

1680

- --... 1993
1994
Note. June, July and August numbers are staff estimates.

1996

1600

II-15

PERSONAL INCOME
(Average monthly percent change)
1995

1996

1994

1995

Total personal income

Wages and salaries
Private

.1
.1

.4
.5

.5
.5

Other labor income

Less: Personal tax and
nontax payments

Equals: Disposable
personal income
Memo:
Real disposable incomel
Saving Rate (percent)

1996
Q2

June

July

.4
.5

.8
.9

1.3
1.5

-. 1
-.2

-. 1

1.0

1.1

1.2

.1
3.8

.3
4.7

.4
5.2

.1
4.8

.4
4.4

.8
5.3

-.1
5.3

Derived from billions of chained (1992) dollars.

REAL PERSONAL CONSUMPTION EXPENDITURES 1
(Percent change from the preceding period)

1995
Q4

1996
Q1

1996

1994

1995

3.1

1.9

1.1

3.5

3.4

-.4

-.0

3.1

1.9

1.1

3.5

3.3

-.5

-.2

7.0
1.8
31.8
9.1

1.3
-3.8
52.3
.4

-1.0
-9.8
95.6
-3.2

8.2
6.6
50.8
4.1

11.8
4.0
113.8
5.6

-2.1
-3.2
3.5
-2.3

-1.2
-3.9
-1.5
.7

3.5
2.1
7.1
2.9

1.1
1.9
.7
1.1

-.4
4.5
-2.4
-.4

3.7
-3.8
8.4
3.4

1.6
6.4
10.4
-. 9

-.2
3.2
-.7
-.5

.2
-2.5
-.2
.7

2.0
-5.3
2.3
2.4
5.4
5.3
1.9
1.3

2.4
5.4
2.3
1.8
3.8
3.1
2.5
2.1

2.3
-12.2
3.0
1.8
4.7
8.3
3.1
2.5

2.4
7.3
2.2
1.6
-.4
5.6
-.1
4.6

2.5
9.8
2.2
1.6
5.8
2.0
2.5
1.8

-.2
-5.2
.1
.2
.6
-.6
.1
.0

.1
-.8
.1
.2
-.1
.3
.3
-.1

- - - Annual rate - - -

PCE
Estimated revision 2
Durables
Motor vehicles
Computers
Other durable goods
Nondurables
Gas and oil
Clothing and shoes
Other nondurables
Services
Energy
Non-energy
Housing
Household operation
Transportation
Medical
Other

June

July

Monthly rate

1. Derived from billions of chained (1992) dollars.
2. Staff estimate of revised PCE growth based on August retail sales report.

II-16

Private Housing Activity
(Millions of units; seasonally adjusted annual rate)

1995

1995
Q4

Q2 r

1996
May r

Juner

JulyP

All units
Starts
Permits

1.35
1.33

1.41
1.44

1.47
1.41

1.49
1.44

1.48
1.45

1.47
1.42

1.46
1.45

Single-family units
Starts
Permits
New home sales
Existing home sales

1.08
1.00
0.67
3.80

1.13
1.08
0.68
3.98

1.16
1.08
0.75
3.95

1.19
1.10
0.74
4.21

1.14
1.10
0.74
4.28

1.20
1.09
0.73
4.16

1.13
1.07
0.78
4.14

Multifamily units
Starts
Permits

0.28
0.33

0.28
0.36

0.31
0.33

0.30
0.34

0.33
0.35

0.27
0.33

0.32
0.38

Mobile homes
Shipments

0.34

0.35

0.37

n.a.

Note. p Preliminary. r Revised. n.a. Not available.

Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units

July

Single-family
Ju ly

I1977|
1977

I 1979I I
1979

19811

1
1983

195I

197

1981

1983

1985

1987

1989I

I1991

1993 I

I1995I

1989

1991

1993

1995

II-17

implies a sizable increase in real purchases of clothing and
footwear for the month.

Although sales at furniture and appliance

dealers were flat in August, outlays for other durables posted a
sizable gain.

However, nominal sales at gasoline stations fell in

August for the third straight month, only partly because of price
declines.

Nominal outlays at food stores and at eating and drinking

places were down as well.

The retail sales data suggest that real

personal consumption expenditures

(PCE) for goods excluding motor

vehicles rose about 1/2 percent in August after no gain in July.
This puts the average for July and August slightly below the secondquarter level.
Growth in real expenditures for services was weak in June and
July.

Real outlays for energy services fell in both months,

reflecting the return to more normal weather in June and slightly
cooler than average temperatures in July.

For the country as a

whole, temperatures remained on the cool side again in August, which
should hold down spending on energy services.

Non-energy services

were little changed in both months, in part because of estimated
lower expenditures on brokerage and investment services as well as
on moving and insurance outlays. 5
Real disposable personal income edged down in July after two
sizable monthly gains.
August;

Real DPI likely was up appreciably again in

the sharp increases in production worker hours and average

hourly earnings last month should translate into a sizable gain in
private wages and salaries.

Thus, the personal saving rate could

well jump above the 5 percent mark again this quarter, as it did
during the lull in spending at the end of 1995.
Housing Markets
Evidence of a slowdown in single-family housing activity
continued to accumulate over the summer.

Starts of single-family

homes dropped 5-3/4 percent in July; smoothing through the month-tomonth fluctuations, the series has been edging down since April.

4. Based on the advance retail sales data, the staff estimates
that real PCE for goods other than motor vehicles increased
0.3 percent in July. The revised retail sales figures indicate
that, in addition to the downward revision for July, the drop in
real PCE in June was steeper than previously estimated
(-0.7 percent).
5. Although purchases of tickets to Olympic events boosted the
"spectator sport" component of services about $3 billion in July,
the added spending was largely offset by an abrupt $2 billion
decline in outlays for movie tickets--a possible Olympics side
effect.

II-18

Single-Family Housing Activity
(Seasonally adjusted)

-----

Thousands
of units

New Home Sales

Thousands
of units

Single-Family Starts

1300

- Two-month moving average
Monthly starts

-------

Preliminary
Revised

1200

SJly
t

July

1100

1000

900
1995

1996

1995

Builders' Rating of New Home Sales

Diffusion index
80

Sept.

1988

1991

1990

1989

1993

1992

1995

1994

1996

Note. The index is calculated from National Association of Homebuilders data as the proportion of respondents rating current sales as good
minus the proportion rating them as poor. FRB seasonals.

Consumer Homebuying Attitudes

JL.=

fiD
fusion

index

100

Sept. (p)
25

.. I

1995
1994
1993
1992
1991
1990
1989
1988
Note. The homebuying attitudes index is calculated from Survey Research Center data as the proportion of respondents
rating current conditions as good minus the proportion rating such conditions as bad. FRB seasonals.

1996

II-19

In contrast to the decline in starts, new home sales jumped
8 percent in July.

But the rise was accompanied by large downward

revisions to the April and May estimates as well as a small
reduction in the reading for June.

The history of large revisions

to preliminary estimates of new home sales suggests that little
weight should be given to the July reading. 6

Of greater

significance in the report on new home sales is the downward
revision of sales in 1996:Q2, which now shows a slight decrease from
the first quarter.

This declining pattern is confirmed by the

trajectory of existing home sales, which decreased in June and July.
Sales of existing homes tend to lag other indicators of singlefamily activity because a substantial share are recorded at the
closing, while new home sales are recorded mainly at the time a
sales contract is signed.
More recent indicators suggest that, on the whole, sales of
single family homes continued to soften late in the third quarter.
A survey of builders showed that their assessments of new home sales
continued to weaken a bit in August and September.

Over the same

period, homebuying attitudes, as measured by the Michigan survey,
eroded further.

However, applications for mortgages to purchase

homes remained flat through early September at the relatively high
level that has prevailed so far this year.

Taken together, this

evidence points to a modest slippage in the production and sales of
single-family homes in recent months.
Multifamily housing starts jumped to 322,000 units
rate) in July, almost offsetting a decline in June.

(annual

Building

permits for multifamily housing, which also have had a zigzag
pattern so far this year, surged to the highest level since early
1990.

There are some indications that apartment construction at the

national level may be outpacing the growth of demand.

particular, the vacancy rate for multifamily rental units was higher
in the second quarter, compared with the year-earlier level, marking
the third consecutive quarter in which vacancies have risen.
Moreover, real residential rents, as measured in the CPI, continued

6. The large revisions resulted mainly from the difficulty of
estimating sales of houses that are sold before issuance of a
building permit and therefore are not detected immediately by the
sampling of permits conducted by the Census Bureau. In the past
three and one-half years, homes that were sold before the start of
construction accounted for more than half of the revisions to the
series but constituted only about one-third of total new home sales.

II-20

BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)

1995

1996

May

June

July

3.0
3.1
5.1
7.7
1.4

-. 5
.8
3.7
-. 3
.0

2.9
1.5
-. 8
4.7
1.7

2.8
.3
.1
4.2
-. 6

.4
3.4
2.8
6.4
2.9

-1.5
-2.4
-1.8
-.6
-3.1

-3.9

1.4

12.2

38.2

-39.4

2.7

Sales of heavy trucks

6.4

-2.2

1.2

10.0

-6.9

Orders of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories

8.8
3.4
7.5
2.3
2.2

3.1
3.1
2.1
8.7
2.2

-6.5
-1.7
1.6
-8.5
-1.2

11.1
-. 3
-1.2
-7.7
1.8

-4.6
2.6
5.0
7.5
.6

7.6
4.2
3.8
16.1
1.5

Construction put-in-place
Office
Other commercial
Institutional
Industrial
Public utilities
Lodging and miscellaneous

-1.0
-10.8
1.0
-1.2
-1.9
-4.8
26.6

1.0
-6.6
3.0
-2.9
-1.6
4.5
10.6

-. 3
8.1
-1.4
.9
-8.1
2.5
.0

-3.4
3.9
-6.4
3.6
-10.0
-1.8
-4.6

3.0
15.2
.1
2.9
5.1
-4.4
7.4

-2.2
-6.9
-2.7
-1.6
-3.0
2.6
-3.6

Rotary drilling rigs in use

-5.4

6.6

12.4

3.8

-3.1

-2.3

2.5
3.0
1.0

11.6
13.1
7.7

4.0
6.0
-1.2

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

Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
Shipments of complete aircraft I

Nonresidential structures

Memo:
Business fixed investment 2
Producers' durable equipment 2
Nonresidential structures 2

1. From the Current Industrial Report "Civil Aircraft and Aircraft Engines."
Monthly data are seasonally adjusted using FRB seasonal factors constrained to
BEA quarterly seasonal factors. Quarterly data are seasonally adjusted using
BEA seasonal factors.
2. Based on 1992 chain-weighted data; percent change, annual rate.
n.a. Not available.

II-21

to edge down in the second quarter and were about flat in July and
August.
Business Fixed Investment
Early indications for the current quarter suggest that real PDE
will advance substantially faster than the 6 percent pace registered
in the second quarter.

New orders for nondefense capital goods

rebounded in July after a decline in the second quarter.

The

biggest spurt was in orders for communication equipment, which rose
16 percent in July after an increase of 7-1/2 percent in June.
Industry contacts report that the expanding array of services being
offered over phone lines--call waiting, caller ID, voice
mailboxes--require new software and upgrades to switching equipment,
providing an ongoing boost to this component of PDE.

addition, real spending on office and computing equipment has
maintained substantial momentum.

After adjusting for the continuing

large price decreases in this sector, orders and shipments posted
further gains in July.

Elsewhere, orders for other capital goods

have increased for three consecutive months, although they appear to
have decelerated from the rapid pace of the past few years.
Spending on transportation equipment eased a bit in July and
August from the second-quarter level.

Sales of heavy trucks were

flat in July, after a sharp drop in June.

Fleet sales of light

vehicles were off in July but appear to have snapped back in August.
Boeing continued to build on its already large backlog of orders for
commercial aircraft, but a major retooling effort and strained labor
relations have hindered their ability to achieve planned increases
in production.
BEA reported that real expenditures on nonresidential
structures dipped slightly in the second quarter.

Subsequent

downward revisions to data on construction put-in-place point to a
somewhat larger decline, at about a 2 percent annual rate.
Construction in July was a near mirror image of June:

all

categories of buildings posted gains in June but fell back the
subsequent month, while public utilities declined in June but
bounced up in July.

On balance, the declines in July retraced only

7. On August 8, the FCC announced new rules implementing the
Telecommunications Reform Act of 1996. The act opens the local
phone monopolies to competition and will have widespread effects in
the telecommunications industry, including, perhaps, a substantial
increase in equipment investment. However, the effects these
changes most likely will not begin to be felt until sometime next
year at the earliest.

II-22

Orders and Shipments of Nondefense Capital Goods
Office and Computing Equipment
Billions of dollars

' July

Orders

Shipments

1992

1993

1994

1996

1995

Communications Equipment
Billions of dollars

" July

I
1992

1993

r
1994

.
1995

1996

Other Equipment (Excluding Aircraft, Computing, and Communications Equipment)
Billions of dollars

'A July

I '

•

- %

J~f
\/

199
1992

19
1993

199

19519

1994

1995

1996

II-23

Nonresidential Construction and Contracts
(Six-month moving average)
Total Building

1980

1982

Index, Dec. 1982 = 100, ratio scale

1984

1986

1988

Office

1990

1992

1994

1996

Other Commercial
280
230
180

130

80
1984

1986

1988

1990

1992

1994

1996

Industrial

1984

1986

1988

1990

1992

1994

1996

Institutional
350
290
m

230

~ 170
110

1984

1986

1988

1990

1992

1994

1996

1984

1986

1988

1990

Note, For contracts, total includes private only, while individual sectors include public and private.

1992

1994

1996

II-24

CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1995
Q4

1996
Q1

1996
02

May

June

July

Book value basis
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

13.9

16.7

13.2

-17.4

9.9
9.5
9.6
6.0
8.4
-1.7
6.4
-8.1

25.0
12.3
6.3
7.3
7.3
-2.9
-8.4
5.5

6.0
-6.2
-10.7
11.3
7.6
8.2
3.5
4.6

-23.0
-14.7
-18.1
-9.1
-7.9
6.4
6.8
-.4

-9.6
-4.2
-13.7
5.1
.0
3.1
8.6
-5.4

31.5
7.0
10.3
2.2
-1.7
40.0
14.6
25.4

7.5
-14.3
11.2
3.5
6.2
-7.1
25.0
-32.1

-5.4
16.4
12.0
3.8
4.0
-21.7
-23.2
1.5

5.4
-.7
-4.2
4.2
1.4
5.4
1.9
3.5

-22.5
-22.8
-9.5
-12.7
-11.2
-.1
1.6
-1.8

-12.7
-18.9
-4.4
-5.0
-8.3
-3.3
-2.3
-1.0

n.a.
n.a,
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

4.1

50.0

Chained (1992) dollars basis
Total
Excluding motor vehicles
Manufacturing
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

INVENTORIES RELATIVE TO SALES
(Months' supply; based on seasonally adjusted data)
1995
04

1996
Q1

1996
Q2

May

June

July

Book value basis
Total
Excluding wholesale and
retail motor vehicles
Manufacturing
Excluding aircraft
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers

1.43

1.40

1.39

1.40

1.39

1.40
1.44
1.33
1.33
1.30
1.53
1.79
1.45

1.40
1.45
1.34
1.32
1.30
1.49
1.66
1.44

1.37
1.40
1.29
1.31
1.28
1.49
1.70
1.42

1.37
1.40
1.29
1.31
1.27
1.48
1.67
1.41

1.37
1.40
1.29
1.31
1.27
1.49
1.71
1.42

1.36
1.39
1.28
1.28
1.24
1.50
1.74
1.43

1.39
1.35
1.39
1.34
1.32
1.43
1.74
1.33

1.38
1.35
1.39
1.35
1.33
1.37
1.54
1.32

1.36
1.33
1.35
1.34
1.31
1.37
1.57
1.31

1.35
1.32
1.35
1.34
1.31
1.36
1.55
1.31

1.36
1.33
1.36
1.33
1.30
1.37
1.57
1.31

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

Chained (1992) dollars basis
Total
Excluding motor vehicles
Manufacturing
Wholesale
Excluding motor vehicles
Retail
Auto dealers
Excluding auto dealers
Note. Ratio of

end-of-period inventories to average monthly sales for the period.

II-25

part of the June rise but left the nominal level of spending below
the second-quarter average.

These recent data--although only

preliminary figures--could mark the beginning of a slowdown in
nonresidential construction that has been suggested for some months
by the drop in construction contracts.

However, other market

indicators have been generally upbeat; for example, the commercial
vacancy rate reported by Coldwell Banker continued to decline in the
second quarter, and property values appear to be stable.
Business Inventories
With a relatively small net change over the second quarter,
businesses in manufacturing and trade (excluding automotive dealers
and distributors) still faced low inventory-sales ratios around
midyear.

Incoming data for July showed a sharp pickup in inventory

investment, mainly at retail trade establishments.
Manufacturers' inventories turned up at an $8 billion annual
rate in July (book-value), after declining from March through June.
The July accumulation was notable because it was predominantly in
stocks of materials and supplies; inventories of finished goods were
reduced further, while work-in-process stocks were about unchanged.
MANUFACTURERS' INVENTORY INVESTMENT
By stage of processing and market grouping
(Book value, billions of dollars at annual rate)
1995
Q4

1996
May

June

July

Total manufacturing

9.5

12.3

-6.2

-14.7

-4.2

7.8

By stage of processing:
Materials and supplies
Work-in-process
Finished goods

1.5
4.7
3.3

2.0
7.4
2.9

-10.4
5.9
-1.7

-12.9
2.9
-4.7

-16.9
7.1
5.6

10.8
-.3
-2.6

By market grouping:
Producers' durable equip. 10.0
Information equip.
Industrial equip.
Transportation equip.
Other equipment
Household durables
Home goods and apparel
Other

9.9

-1.9

-6.5

14.7

5.0
.2
3.2
1.6

2.3
-.4
7.1
.9

-1.3
-2.1
3.1
.9

-4.7
.2
2.1
.5

-6.9
-6.3
5.7
1.0

5.3
7.5
2.2
-.3

.9
.4
-1.8

.3
-1.0
3.0

-.3
-1.7
-4.8

-.3
-2.6
-9.9

-.9
-1.2
4.4

-2.5
-1.8
-2.6

The sizable pickup in the accumulation of materials reversed several
months of drawdowns and presumably is a favorable sign in regard to

II-26

Inventory-Sales Ratios, by Major Sector
(Book value)

Manufacturing

Ratio
2.2

1.95

1.7

1.45
Excluding aircraft and parts
I

1980

1982

1984

1986

' ;"'.
I

1988

1990

1992

July
I

1994

1.2

1996

Wholesale Excluding Motor Vehicles
Ratio
1.5

1.4

1.3

1.2

1.1

1
1980

1982

1984

1986

1988

1990

1992

1994

1996

Retail
Ratio
1.7
i1
.

tll

I .

1.6

1.5

1.4

1980

1982

1984

1986

1988

1990

1992

1994

1996

II-27

production plans, especially in capital goods industries.

By market

grouping, the July buildup was concentrated in stocks of producers'
durable equipment (table above) and coincided with strong gains in
equipment orders.

Data at more disaggregated levels show that the

accumulation of PDE stocks in July was distributed fairly evenly
among all major categories--information, industrial, and
transportation equipment.

In contrast, manufacturers' inventories

of non-auto consumer goods continued to decline.

For many

manufacturing industries, inventory-shipments ratios edged down
further in July from levels already low by historical standards.
In the trade sector, wholesale inventories posted only a modest
net increase in July. held down by a substantial decline in stocks
of farm products.

Part of the decline in stocks of farm products

may have resulted from declines in grain prices in June and July-especially prices of wheat and corn.

Excluding farm products,

wholesale inventories expanded at an $18 billion annual rate in
July, considerably above the average pace of $7 billion over the
second quarter.
in retailing.

A pickup in inventory investment was also evident
Non-auto retail inventories expanded at a $25 billion

annual rate in July, more than five times the pace over the second
quarter.

Although inventory-sales ratios for most retail categories

turned up in July, they remained relatively low by historical
standards.

For retail GAF stores, where consumer spending is

considered largely discretionary, the inventory-sales ratio in July
was still near the low end of the range of recent years.

balance, as of July, most types of trade establishments appeared
positioned for further restocking.
Federal Government
The incoming news on the unified budget continues to be quite
favorable.

For the first ten months of fiscal year 1996, the

deficit (adjusted for payment shifts, deposit insurance, and
spectrum auction proceeds) came to $117 billion, $52 billion less
than in the comparable period a year ago.

In part, the shrinkage of

the deficit has reflected solid growth in receipts:

Both individual

and corporate income taxes have risen substantially above yearearlier levels.

In addition, adjusted outlays have increased only

2-1/2 percent so far this fiscal year, in part because of reductions
in discretionary appropriations.

As for fiscal 1996 as a whole, the

CBO's mid-August estimate was for a deficit of $116 billion,
essentially the same as the estimate released by OMB in July.

II-28

FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars except as noted)

Fiscal year to date totals
July

Outlays
Deposit insurance (DI)
Spectrum auction
(SA)
Other
Receipts
Deficit

(+)

1995

1996

106.3
-. 8
-7.0
114.2

Dollar
change

Percent
change

1995

1996

130.9
-. 2
.0
131.1

1248.0
-16.8
-7.6
1272.5

1296.4
-7.3
-.2
1304.0

48.4
9.5
7.4
31.4

92.7

103.8

1110.8

1194.3

83.5

7.5

13.6

27.1

137.2

102.1

-35.1

-25.6

3.9
-56.6
-1.0
61.5

Adjusted for payment timing shifts 1
and excluding DI and SA

121.3
20.6
20.2
28.0
13.1
6.6
2.2
17.3
13.2

131.1
22.5
20.3
29.3
16.1
7.7
2.4
18.2
14.6

1279.7
224.6
192.6
279.7
131.7
73.6
21.7
185.3
176.3

1311.8
223.6
200.4
291.3
146.3
76.2
22.3
193.5
158.1

32.1
-1.0
7.8
11.6
14.6
2.7
.6
8.3
-18.3

4.1
4.1
11.1
3.6
2.7
4.5
-10.3

Receipts
Individual
Withheld
Nonwithheld
Refunds (-)
Social insurance taxes
Corporate
Other

92.7
42.8
41.5
3.1
1.8
36.5
3.4
10.0

103.8
49.8
48.1
3.6
1.9
39.3
5.0
9.8

1110.8
485.1
422.0
144.6
81.4
404.8
121.6
99.3

1194.3
541.6
449.7
177.6
85.7
425.1
133.6
93.9

83.5
56.5
27.7
33.0
4.3
20.3
12.0
-5.4

7.5
11.6
6.6
22.8
5.2
5.0
9.9
-5.4

Deficit(+)

28.6

27.3

168.9

117.4

-51.5

-30.5

Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Other

2.5
-. 4

Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on a
weekend or holiday. The monthly and fiscal year to date outlays for defense,
Medicare, income security, and "other" have been adjusted to account for this

shift.

II-29

In contrast, the NIPA data for the first half of 1996 show
surprisingly robust growth in real federal consumption and
investment expenditures.

BEA now estimates that real defense

spending rose at an annual rate of 6 percent in the first quarter
and 10-1/2 percent in the second quarter; this growth is largely
explained by a bulge in aircraft deliveries in the first half and
the fact that the recorded spending increases were from a belowtrend fourth-quarter level.

In addition, as was noted in the August

Greenbook with reference to the advance figures, NIPA estimates for
nondefense expenditures seem strong relative to the trends in
unified budget accounts.
The Congress reconvened after Labor Day and is expected to stay
in session about one month.

The primary order of business has been

fiscal 1997 appropriations.

As of September 17, the President had

signed appropriations for the District of Columbia, Agriculture, the
legislative branch, and military construction.

For the remaining

nine appropriations bills, press reports suggest that the President
is advocating about $4-1/2 billion more funding for domestic
programs, and about $3 billion less for defense, than the Congress
has indicated a willingness to accept.

These differences are

unlikely to be resolved in time to enact all appropriations bills
before the beginning of fiscal 1997; hence, several appropriations
bills will probably be rolled into either a full-year omnibus
appropriations bill or a continuing resolution lasting at least six
months.

In the latter case, funding for the affected programs will

likely be set in accordance with fiscal 1996 levels.
Finally, although federal regulations are still to be written,
action on welfare reform has largely shifted to the states, which
must submit their plans for reform to the federal government by
July 1, 1997.

The federal legislation sets out an ambitious

timetable for moving welfare recipients into the labor market-indeed, a state will not receive its full federal grant unless
25 percent of the participants in its federally funded welfare
program are engaged in "work-related activities" in fiscal 1997, and
the percentage rises incrementally to 50 percent by fiscal 2002.
However, the states have considerable discretion in designing their
8. BEA's quarterly estimates of nondefense purchases rely on
various unpublished indicators of government spending. BEA will do
a full reconciliation of its nondefense purchases figures, and other
components of federal expenditures, with the final fiscal 1996
budget data when they are available. Revised NIPA data will be
published with BEA's 1997 annual revision.

II-30

programs, and assessing how the reforms will affect the labor market
and other economic variables is extremely difficult until more is
known about how the new state programs will be shaped.

Key

uncertainties include how the states will define work-related
activities and which individuals they will require to engage in such
activities; adding to the uncertainty is the possibility that some
of the more stringent features of the law will be reexamined by the
next Congress.
State and Local Governments
Indicators of spending in the third quarter by state and local
governments are mixed.

As mentioned earlier, employment gains have

been sizable in recent months.

However, because much of the

increase reflects the timing of school openings and of summer jobs
programs, the apparent strength is likely to prove temporary.
Otherwise, employment appears to have been trending up gradually
over the past year or so.

Real outlays for construction fell in

July for the third consecutive month.

Much of the weakness in the

past three months was in the building of educational facilities and
sewer systems.

Overall, construction in the first seven months of

this year about matches the average for 1995 as a whole.

However,

the fundamentals suggest that this lull will be temporary:

State

and local revenues have been quite strong of late, and
infrastructure needs abound, particularly in education, as the
population of school-age children is expected to continue to rise
for another decade.
On the revenue side, strong growth in receipts in recent years
has buoyed fiscal positions.

According to the Center for the Study

of the States, the states enjoyed robust gains in tax revenue in the
second quarter of this year, when high final payments and strong
estimated taxes boosted personal income receipts.

Sales tax growth

also was quite strong in the second quarter.
Prices
The incoming data on inflation at the retail level have
continued to be quite favorable.

Both the overall CPI and the CPI

excluding food and energy edged up only 0.1 percent in August after
rising 0.3 percent in July.

Over the twelve months ended in August,

the overall CPI increased 2.9 percent, up from the 2.6 percent pace
over the preceding twelve months.

Excluding food and energy,

however, prices have risen 2.6 percent in the past year, down from
the 2.9 percent increase in the year-earlier period. In contrast to

II-31

the first half of this year, when both food and energy prices were
contributing to inflation, rising food prices have been roughly
offset by falling energy prices over the past few months.
In August, retail energy prices fell 0.6 percent, the third
consecutive monthly decline.

The price of gasoline continued to

drop at the retail level, reflecting the earlier declines in crude
oil prices, but fuel oil prices turned up in August following three
months of large declines.

Utility rates were mixed:

Electricity

prices rose further, while natural gas prices were flat.

The

initial run-up in crude oil prices, a result of the delay in Iraq's
limited oil sale, was reflected in producer prices for gasoline in
August.

The conflict with Iraq in early September and subsequent

suspension of its oil sale has driven up crude oil prices
considerably further.
Retail food prices moved up 0.4 percent in August, about the
same as the average increase over the past six months.

High grain

prices continued to boost prices for dairy products, beef, pork, and
poultry.

The index for dairy products jumped 2.0 percent last

month, while the prices of beef, pork, and chicken advanced
1.7 percent, 2.1 percent, and 1.2 percent respectively.

The index

for cereals and bakery products was flat in August, as lower cereal
prices offset price increases for flour and other bakery products.
Over the past six months, cereal prices have dropped about 8 percent
at an annual rate; however, large increases in the other components
of the cereals and bakery products index have more than offset this
decline in cereal prices.
The index for commodities other than food and energy edged down
0.1 percent in August after essentially no change in each of the
preceeding three months.

Apparel prices dropped 1.5 percent on a

seasonally adjusted basis, reflecting retailers' decisions both to
delay the introduction of higher-priced fall clothing and to offer
large discounts on spring and summer clothing. Apart from apparel,
the prices of other commodities excluding food and energy were
unchanged in August. Among other commodities, used car prices were
flat in August following four months of declines; over the past six
months, used car prices have dropped at a 5 percent annual rate,
offsetting a pickup of similar magnitude over the preceding sixmonth period.

II-32

CPI AND PPI INFLATION RATES
(Percent change)
From twelve
months earlier
Aug.
1995

Aug.
1996

1996
Q1

1996
Q2

-Annual rate-

July

Aug.

-Monthly rate-

CPI
All items (100.0)1
Food (15.8)
Energy (6.7)
CPI less food and energy (77.5)
Commodities (23.9)
New vehicles (5.0)
Used cars (1.3)
Apparel (5.0)
Services (53.6)
Owners' equivalent rent (19.7)
Tenants' rent (5.8)
Medical care (6.1)
Auto finance charges (0.6)

2.6

2.9

3.2

3.8

0.3

2.5
-1.0
2.9

3.6
3.9
2.6

2.0
12.9
2.8

4.2
18.4
2.5

0.5
-0.4
0.3

1.5

1.0

2.2

0.6

-0.1

2.0
9.0
-0.9

2.1
-0.3
-2.0

1.5
8.6
1.0

2.4
-5.8
-1.8

0.2
-0.1
-0.1

0.1
.0
-1.5

3.6

3.3

3.0

3.6

0.3

0.2

3.3
2.4
5.1
13.3

3.1
2.7
3.5
-1.7

3.1
2.9
3.7
-16.2

2.8
2.6
3.1
0.3

0.3
0.3
0.3
0.9

0.1
0.1
0.2
1.8

1.3

3.0

3.2

2.7

0.3

1.7
-2.5

5.1
6.4

0.5
21.2

2.3
12.9

0.2
-0.9

1.0
0.7

1.9

1.4

0.6

0.9

0.1

-0.1

2.1
1.7

1.6
1.0

0.7
0.4

1.2
0.2

-0.1
0.3

.0
-0.1

5.4

-0.2

1.8

-0.3

0.2

6.9

-1.8

-3.4

-1.2

-0.3

0.1

-1.4

13.9

19.2

17.6

2.0

0.2

2.9
-13.2
10.2

23.5
23.5
-12.4

-0.9
82.5
-8.9

40.1
12.5
-11.1

2.7
3.9
-1.6

-0.3
0.7
0.1

0.1
0.3
-0.6
0.1

PPI
Finished goods (100.0) 2
Finished
Finished
Finished
and

consumer foods (23.4)
energy (13.4)
goods less food
energy (63.2)

Consumer goods (38.5)
Capital equipment (24.7)
Intermediate materials (100)

Intermediate materials
less food and energy (82.6)
Crude materials (100) 4
Crude food materials (44.7)
Crude energy (31.4)
Crude materials less
food and energy (23.9)
1.
2.
3.
4.

Relative
Relative
Relative
Relative

importance
importance
importance
importance

weight
weight
weight
weight

for
for
for
for

CPI, December 1995.
PPI, December 1995.
intermediate materials, December 1995.
crude materials, December 1995.

II-33

BROAD MEASURES OF INFLATION
(Four-quarter percent changes)
1993
Q2

1994
Q2

1995
02

1996
Q2

GDP chain price index

2.6

2.2

2.6

2.2

GDP deflator

2.6

2.1

2.6

2.1

Nonfarm business chain
price index

2.6

2.1

2.4

1.7

Gross domestic purchases
chain price index
Less food and energy

2.5

2.0

2.7

2.0

2.6

2.2

2.7

1.8

PCE chain price index
Less food and energy

2.8
3.0

2.1
2.5

2.7
2.6

2.1
1.9

PCE deflator
Less food and energy

2.8
3.0

2.1
2.4

2.7
2.6

2.0
1.8

CPI
Less food and energy

3.1
3.4

2.4
2.8

3.0
3.0

2.9
2.7

Median CPI

3.0

2.9

3.1

3.0

Product prices

Expenditure prices

1. Excluding housing.
The CPI for services other than energy was up 0.2 percent in
August following increases of 0.3 percent in each of the four
preceding months.

Rent of shelter rose 0.3 percent, in line with

its average monthly increase over the past year, while the price of
services

excluding energy and shelter rose 0.2 percent, down

slightly from its recent monthly increases.

Among the components of

non-energy, non-shelter services, the index for medical services
rose 0.2 percent in August;

over the past twelve months the index

has increased 3-1/2 percent, compared with roughly 5 percent in each
of the two preceding years.

In August, airfares fell slightly;

although the reintroduction of a 10 percent federal tax on airfares
affected some fares, those increases were more than offset by heavy
price discounting on other fares.

In contrast, auto finance charges

moved up 1.8 percent last month, apparently reflecting less generous
auto incentives this year relative to the normal seasonal pattern;
over the past three months, auto finance charges have jumped nearly
17 percent at an annual rate, up from a 2 percent increase in the

II-34

SPOT PRICES OF SELECTED COMMODITIES
---------------

Percent change

1994

Dec. 26
to
Aug. 132

l - - -

- - - - - - - - - --

Memo:

Current
price
($)

Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)

1995

.920
136.500
.627

64.9
2.9
73.5

383.450

-1.7

1.7

5.040

-5.0

7.2

-3.5
-6.6
-12.9

-29.4
4.1
-11.6

Aug. 132
to
Sept. 17

Year
earlier
to date

-4.2
-2.2
-6.2

-31.9

-4.9
-21.2

Precious metals
Gold (oz.)

Silver (oz.)

-1.7

-1.1
-. 2

-. 4

-7.4

Forest products
Lumber (m. bdft.)
Plywood (m. sqft.)

433.000
367.000

-37.1

22.070
.615

15.6
32.4
12.7

1.5

-14.4

61.6

7.2

-6.1

6.5

11.2

50.3
.0

Petroleum

Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)
Livestock
Steers (cwt.)

Hogs (cwt.)
Broilers (lb.)
U.S. farm crops
Corn (bu.)
Wheat (bu.)
Soybeans (bu.)
Cotton (lb.)

.656
72.000
54.500

-3.4

16.8
7.7
22.6
-5.7

14.3
16.2
-. 9

6.0
.2
9.6
9.1
-10.7

28.3

3.9
28.6
12.5

.627

-12.9
-4.9

27.5
10.7

34.8
12.0

3.240

-23.2
11.4

57.4
24.0

29.0

.743

-19.6
38.5

42.1
-5.9
12.4

-8.1

-2.1

-3.9

1.310

153.1

-39.1

42.7

-7.7

10.5

-2.7

1.5
-1.0

-2.7
-9.9
.4

4.600
8.045

3.1
-34.3

-9.6
-. 6

10.1

2.1
12.3

-7.2

27.2
-18.2

Other foodstuffs

Coffee (lb.)
Memo:
JOC Industrials
JOC Metals

109.800
91.900

22.1
31.9

KR-CRB Futures
KR-CRB Spot

244.400
342.770

4.8

3.3

29.1

-3.5

-1.7
-1.8

-8.8

2.4
3.9

-2.2
-.2

1. Changes, if not specified, are from the last week of the preceding year to
the last week of the period indicated.
2. Week of the August Greenbook.

3.2

II-35

Commodity Price Measures
Journal of Commerce Index
Ratio scale, index, 1990=100

1996

July

Aug.
1996

Sept.

July

Aug.

Sept.

KR-CRB Spot Industrials
Ratio scale, index, 1967=100

1996

KR-CRB Futures
Ratio scale, index, 1967=100

KR-CRB Futures

Note. Weekly data, Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the KR-CRB spot price index consists entirely of industrial
commodities, excluding energy. The KR-CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.

SURVEYS OF(CPI)INFLATION EXPECTATIONS
EXPECTATIONS
(Percent)
Actual
inflationl

University of Michigan
(l-year)
(1-year)
Median
Mean 2

Livingston
(1-year) 4

Conference
Board
(1-year)

Professional
forecasters5
(10-year)

University of Michigan
(5- to -10-year) 7
Mean 6
Median

4.6
4.6
4.5
4.5

3.7
3.9
3.8
3.6

4.8
5.0
4.9
5.3

3.7
3.9
4.0
3.7

4.6
4.8
4.6
4.4

3.5
3.7
3.5
3.5

5.2
5.2
4.7
4.7

3.9
3.8
3.4
3.7

4.3
4.2
4.3
4.2

3.5
3.5
3.5
3.5

5.0
4.8
5.0
4.3

3.3
3.4
3.4
3.2

2.9

4.2
4.2
4.0
3.9

3.3
3.4
3.2
3.0

4.1
4.3
4.3
3.9

3.1
3.3
3.1
3.1

2.8

4.1
4.3

3.0
3,0
3.0

4.2
4.3
4.2

3.2
3.1
3.1

2.9

3.6
4.1
4.0

3.0

3.7
4.0
3.9

3.1
3.1
3.1

3.0

4.2
4.2
4.3

3.1
3.2
3.2

3.0

4.1
4.8
4.0

3.0
3.2
3.1

3.0

4.2
4.6
3.9

3.1
3.2
3.1

1992-Q1
Q2
Q3
Q4

2.9
3.1
3.1
3.1

3.4
3.8
4.0
3.8

2.7
3.1
3.0
2.9

1993-Q1
Q2
Q3
Q4

3.2
3.1
2.7
2.7

4.3
4.4
4.7
3.8

3.1
3.3
3.1
3.2

1994-Q1
Q2
Q3
Q4

2.5
2.4
2.9
2.7

3.9
4.2
4.5
4.1

2.9
3.0
3.2
3.1

2.9

1995-Q1
Q2
Q3
Q4

2.8
3.1
2.6
2.7

4.1
4.1
3.9
3.6

3.1
3.1
2.9
2.8

3.2

1996-Q1
Q2
Q3

2.7
2.8

3.9
4.5
4.1

2.9
3.0
3.1

1995-Oct.
Nov.
Dec.

2.8
2.6
2.5

3.6
3.8
3.3

2.9
2.8
2.7

1996-Jan.
Feb.
Mar.

2.7
2.7
2.8

4.0
3.6
4.2

2.9
2.8
2.9

4.1
4.0
4.1

Apr.
May
June

2.9
2.9
2.8

4.5
4.9
4.2

3.0
3.0
2.9

4.2
4.5
4.3

July
Aug.
Sept.

3.0
2.9

4.3
4.1
3.9

2.9
3.0
3.3

3.6
3.4
3.4
3.2

3.5

2.8

4.2
4.4

1. CPI; percent change from the same period in the prior year.
2. Average increase for responses to the question: By about what percent do you
expect prices (CPI) to go up, on the average, during the next 12 months?
3. Median increase for responses to the question above.
4. Average 12-month-ahead forecast of the CPI by 'informed' business economists.
Constructed by the Federal Reserve Bank of Philadelphia from disaggregated
Livingston data; data are for the last month of the period indicated.
5. Compiled by the Federal Reserve Bank of Philadelphia.
6. Average increase for responses to the question: By about what percent per year do
you expect prices (CPI) to go up, on the average, during the next 5 to 10 years?
7. Median increase for responses to question above.

II-37

previous three months

(when loan rates were lagging the rise in

market yields).
After declining over much of this year, industrial materials
prices have risen in recent weeks.

The Journal of Commerce

industrial materials index has risen 1.5 percent since mid-August
but remains just below the level recorded at the end of last year.
Metals prices are down slightly, on balance, since mid-August.
However, the prices of lumber and plywood have surged in recent
weeks.

The PPI for crude materials less food and energy edged

up in August but remains 6-1/4 percent below its level last
December.
Changes in indicators of consumers' inflation expectations have
been mixed since July.

Mean expected inflation over the next twelve

months fell to 3.9 percent in the preliminary September Michigan
Survey of consumers; median expected inflation, a less volatile
series, edged up to 3.3 percent.

Expectations for inflation for the

next five to ten years, as measured by the median response, remained
in the range of other readings this year, at 3.1 percent.
Agriculture

Because much of the uncertainty about production is behind us,
agricultural markets have been less volatile in recent weeks than
earlier in the summer.

The USDA's most recent crop production

estimates showed little change from previous published numbers.
Corn production is projected to be about 19 percent above last
year's level, and soybean production is expected rise 5 percent.
With the harvest of this year's spring wheat crop mostly completed,
total wheat production this year is projected to be up about
5 percent.

The cattle herd has continued to decline:

The number of

cattle on feed as of August 1 was 14 percent below the level at the
same point last year.

On the other hand, poultry production for the

9. Since the last Greenbook, lumber and plywood prices have
increased sharply. As of early September, the plywood price nearly
equaled its 1995 high, and the lumber price was only moderately
below its peak in early 1994. These prices have responded to
unexpectedly high demand owing to the continued strength of housing
construction. The supply of wood products has been limited by
environmental protections that have constrained production in some
Also, inventory positions going into
areas of the United States.
the third quarter were unusually low because of uncertainty about
pricing of wood products imported from Canada; quotas on Canadian
products result in taxes if specified limits are exceeded.
Hurricane Fran may have played a small role but is not mentioned by
market analysts as a significant factor in the recent rise in
prices.

II-38

seven months ended in July--the most recent reliable production
estimate--showed a 7 percent increase from the the same period a
year ago.
Prices for crops traded in futures markets have been mixed.
Prices of corn and wheat have dropped about 10 percent on most
futures contracts for delivery of this year's crop.

On the other

hand, the price of soybeans has edged up a bit in recent weeks,
owing mostly to concerns about the weather across the Midwest in
late August.

Cash prices for crops have moved in the same direction

as futures prices.

However, the cash price of corn has dropped much

more than futures prices--about 35 percent--since mid-August,
perhaps reflecting earlier delivery of some corn grown in the
Southeast, as farmers took advantage of high prices on the cash
market in advance of this year's harvest in the corn belt.

Prices

for cattle have moved up further on both cash and futures markets,
and hog prices have dropped back some.
U.S. CROP PRODUCTION
Latest USDA
projections
for 1996
1993
1994
1995
Aug. 12
Sept. 12
----------- Billions of bushels ----------Corn
Soybeans
Wheat

6.34
1.87
2.40
--------

Rice

.16

10.10
2.52
2.32

7.37
2.15
2.19

8.70
2.30
2.25

8.80
2.27
2.30

Billions of hundredweight --------.20

.17

------------ Millions of bales ------------Cotton

16.13

19.66

17.91

18.58

17.90

--------- Billions of 1992 dollars --------Memo:
Value, all crops

60.05

74.50

64.04

68.62

68.74

1. Calculated by the Federal Reserve staff from USDA data:
includes production of most field crops.
Source. U.S. Department of Agriculture.

DOMESTIC FINANCIAL
DEVELOPMENTS

II-T-1

Selected Financial Market Quotations'
(Percent except as noted)
Change to Sep. 17, from:

1996
Instrument

Feb.

July

FOMC,

Slow

high

Aug. 20

5.39

5.24

5.21
5.40
5.64

5.04
5.11
5.32

5.50
5.59

5.37
5.40

Large negotiable CDs3
1-month
3-month
6-month

5.44
5.59
5.83

5.31
5.38
5.54

Eurodollar deposits'
1-month
3-month

5.38
5.56

5.28
5.38

Bank prime rate

8.25

6.62
7.06
7.19

6.14
6.59
6.80

Municipal revenue (Bond Buyer) 5

6.24

Corporate-A utility, recently offered

Feb.

July

FOMC,

low

high

Aug. 20

.13

-.11

.04

.17
.38

-.06
-.09

5.98

.45

-.12

8.23

7.83

.85

-.20

10.36

10.00

-.40

-.04

8.42
6.01

7.88

-.14
-.I1

.40
.01

Sep. 17

Short-term rates
Federal funds2
Treasury bills'
3-month
6-month
I-year

Commercial paper
1-month
3-month

Intermediate- and Long-term Rates
U.S. Treasury (constant maturity)
3-year
10-year
30-year

High-yield corporate
Home mortgages7

FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate
Record high

Stock exchange index
Dow-Jones Industrial

5.89
1996

July

FOMC,

Percentage change to Sep. 17, from:
Record

July

FOMC.

Level

Date

low

Aug. 20

Sep. 17

high

low

Aue. 20

5889.20

9/16/96

5346.55

5721.26

5888.83

-.01

10.14

2.93

NYSE Composite

365.42

9/16/96

336.07

356.61

364.43

-.27

8.44

2.19

S&P 500 Composite

683.98

9/16/96

626.65

665.69

682.94

-. 15

8.98

2.59

1249.15

6/5/96

1042.37

1124.67

1203.31

-3.67

15.44

6.99

NASDAQ (OTC)

-84
9.88
5/24/96
6099.34
6504.57
6701.87
Wilshire 5000
6758.69
1. One-day quotes except as noted.
2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date ending September 25 1996.
3. Secondary market.
4. Bid rates for Eurodollar deposits at 11 a.m. London time.
5. Most recent observation based on one-day Thursday quote and futures market index changes.
6 Merrill Lynch MasterII high bond index composite.
7. Quotes for week ending Friday previous to date shown.

3.03

Selected Interest Rates
Short-Term
Percent

Percent
Daily

Monthly

Prime rate (daily)
S Federal funds
-Three-month Treasury bill
.------- Discount rate (daily)

FOMC
8/20

Federal funds..

Three-month T-bill

I
1990

1991

1992

1 994
I 1
1994
1993

1
1996

1995

8/16

8/23

8/30

9/6

9/13

Long-Term
Percent

Percent

Monthly

-....
-

Primary fixed-rate mortgage
Corporate bond (A-rated utility)
Thirty-year Treasury bond

WY7
I.
199I
1990

I
1991

1992

I
1993

1994

I
1995

1996

8/16

8/23

8/30
1996

9/6

9/13

DOMESTIC FINANCIAL DEVELOPMENTS

The decision at the August FOMC meeting to keep reserve
conditions unchanged had little impact on financial market prices.
However,

interest rates have been volatile over the intermeeting

period, responding sharply at times on the

release of data

suggesting greater or lesser growth and inflationary pressure.
Reports of the attitudes of Federal Reserve officials also
precipitated significant market moves on occasion, with a reported
leak of discount rate proposals causing rates to rise yesterday.
All told, on net,

short-term yields have risen around

15 basis

points over the intermeeting period, and long-term rates are up
20 to 25 basis points.
Despite the higher rates, stock prices
intermeeting period, with the blue chip
or so,

establishing new highs

(chart).

rose over the

indexes up about

3 percent

Small-capitalization stocks,

which had fallen particularly sharply in the mid-July selloff, fared
even better, with the NASDAQ composite rising 7 percent.

Still,

this index remains around 3-3/4 percent below its previous peaks.
In mid-September the price-earnings ratio for the S&P 500 stood at
the high end of its range over the past decade.
Money and credit flows appear to have remained subdued in the
third quarter.

Business borrowing from banks and in the securities

markets has been sluggish, apparently because ample internal funds
have damped credit needs.
growth has continued at
the year:

In the household sector, consumer credit

a pace well below that reported earlier in

and while there is only partial data on mortgage credit

growth, in the current quarter signs suggest some slowing.
and local

State

debt has contracted this quarter, more than offsetting the

small increase in the previous quarter.

In contrast, the federal

government has stepped up its borrowing a little in the third
quarter, after taking advantage of unusually large tax inflows to
pay down bills in the second.

Growth in the broader monetary

aggregates picked up a bit in August from July's sluggish pace, and
partial data for September point to possibly another pick up this
month.
The slowdown in business borrowing in August occurred even as
supply conditions remained very favorable.

Rate spreads on

corporate debt and business loans were quite low, and banks
evidently still were aggressive lenders to firms, likely because

III-1

III-2

Selected Short-Term Futures Rates and Stock Market Indexes
Federal Funds Rates

Eurodollar Rates (3-Month)

Percent

_ .........

Percent

09/17/96
09/12/96
08/20/96

Sep

Oct

09/17/96
09/12/96
08/20/96

.........
----

Nov
Contract months

Dec

Jan

D-96

aII

M-97

J-97
S-97
Contract months

Selected Stock Indexes

D-97

Index, Dec. 29, 1995=1
1.20

1.15

1.10

1.05

1.00

0.95
Jan

Feb

Mar

Apr

May
1996

Jun

Jul

Aug

Sep

III-3

measures of business credit quality remained positive.

By contrast,

household credit quality has continued to deteriorate somewhat, and
some survey and anecdotal reports show that banks are raising their
standards for lending to households, particularly for credit cards.
Bank Credit and the Monetary Aggregates
Bank credit contracted in August at an annual rate of
1 percent,

extending a period of weakness evident since the spring.

The weakness was

concentrated at large banks, where loans

4 percent rate last month;

fell at

because of fairly brisk growth at small

banks, however, loans expanded at a 2-1/2 percent pace overall.
Large banks also

shed securities at a rapid clip,

much of this year.
anemic

as they have over

Data for the first half of September show only

growth in bank credit.

Business loans

grew at

a pace of only

2-1/2 percent in August,

even though banks reportedly continued to price such loans
aggressively for large customers.

The spread of the C&I loan rate

for large loans over the intended federal funds rate,

as reported in

the Survey of Terms of Bank Lending to Business, narrowed somewhat
in August compared with three months earlier and is near record low
levels

(chart, top panel).

The spread for small and medium-sized

business loans was unchanged, remaining appreciably under the wide
spreads of the early 1990s but above those of the late 1980s.
Growth of real estate loans bounced back in August to a
7-1/4 percent annual growth rate.

Some of the increase likely

reflects the relatively large share of new mortgages that
adjustable rates,
their books.

carry

as banks are more likely to keep such mortgages on

By contrast, the growth of consumer loans, at

4 percent, was again held down by securitization.

With the addition

of securitized loans, consumer loans grew at a 10-1/2 percent annual
rate last month.
The most recent data on bank earnings

suggest that the trend to

move assets off the balance sheet has not hurt profitability
left panel).

(bottom

The sharp rise in second-quarter profits at commercial

banks mainly reflected a substantial rise in noninterest income,
which encompasses

revenue generated from many off-balance-sheet

activities, including servicing and fee income from securitized
consumer and real estate loans.

Second-quarter profits also

benefited from a slight widening of the net interest margin but were
held down by higher loan-loss provisioning.

Even so, banks have

been able to hold provisioning to a relatively low level because

III-4

Commercial Bank Credit
(Percentage change; seasonally adjusted annual rate)1

1996

e of c

1995

1U1t

- I

siu

luoi,

aneutes

Securities

1996
Q2

1996
Jun

1996
Jul
if\

1 r

1996
Aug
n 1

Level,
Aug
1996
(billions of $)
AQ 0

3.5

0.6

-2.9

-10.2

-6.7

-11.0

966.3

3.5

0.6

-2.9

-10.2

-6.7

-11.0

966.3

-11.1

-0.2

-9.7

702.3

U.S. government

-3.1

-2.5

0.7

Other 2

25.6

8.4

-11.5

-7.9

-23.8

-14.4

264.0

10.8

7.1

4.6

5.9

3.8

2.5

2,702.5

11.6

7.4

5.2

5.1

6.3

2.4

744.3

8.5

4.8

3.2

3.6

1.1

7.2

1,109.2

Loans 3

Business

Real estate

Home equity

5.2

4.6

-1.0

-6.0

6.1

9.1

80.1

Other

8.7

4.8

3.5

4.2

0.7

7.2

1,029.1

10.

Consumer

10.7

6.9

4.9

12.3

4.9

4.0

514.3

17.7

13.9

9.3

15.2

6.9

10.6

671.4

Adjusted 4

11.

12.

Security

14.4

-3.3

-8.0

-7.3

-26.3

-53.8

76.7

13.

Other5

18.4

21.0

12.8

10.0

15.5

-3.2

257.9

1. Monthly levels are pro rata averages of Wednesday data. Quarterly and annual levels (not shown) are simple
averages of monthly levels and levels for the fourth quarter respectively. Growth rates shown are percentage changes in consecutive
levels, annualized but not compounded.
2. Includes municipal securities, foreign government securities, corporate bonds, equities, and trading account assets.
3. Excludes interbank loans.
4. Includes estimates of consumer loans that have been securitized by banks and are still outstanding.
5. Includes loans to nonbank financial institutions, farmers, state and local governments, banks abroad, foreign
governments, and all others not elsewhere classified. Also includes lease financing receivables.

III-5
Commercial Bank Data
Bank Lending Terms (by Size of Loan)*

Basis Points
i--

| Quarterly

-1

500

Under $100 thousand

400

-1

.
*

$100 thousand to $1 million

'"'

300

-1200

40.
\
/

,' -

'."**"'\

$1 million or larger

.'00.
.
100

1987

1988

1989

1991

1990

1992

1993

1994

1995

1996

* Average commercial and investment loan rate spread over intended federal funds rate.

Profitability

Loan Quality

Percent

Percent, NSA

Pernt, SA

Quarterly

Quartery, SAAR

Return on assets (left axis)
Total delinquencies as a
percent of loans (right axis)

1.0
80

Return on equity (right axis)
0.8

- '

0.6

Ratio of reserves 10
delinquent loans (left axis)

0.4

501-

0.2

40 I-

Lll
19AR

L1iIllIlifilt ,1,l,,11,v
1990

1992

199q

'
Irlllllrlllllrlllllr111
19qA

Illlrllrrllr
199q

149

1994

1 94

III-6
MONETARY AGGREGATES
(Based on seasonally adjusted data)

1996
1995

1996
Q2

June

July

Aggregate or component

1995:Q4
Level
to
(bil. $)
Aug.
Aug. 96 Aug. 96
(p)
(p)
(pl

Percentage change (annual rate) 1

Aggregate

-1.8
3.9
5.8

-2.7
5.8
7.1

0.7
3.9
5.3

-0.5
5.3
4.5

4. Currency

5.4

2.3

3.7

7.3

5. Demand deposits

1.4

10.9

10.6

-11.1

22.7

6.6

-8.8
1.9
2.6

-9.9
3.7
5.1

-3.4
4.2
5.5

1099.4
3757.2
4744.8

10.1

7.5

4.7

385.0

11.7

-9.0

-9.1

6.4

407.5

18.5

25.4

31.2

32.1

-22.5

298-6

9.6

5.9

7.7

6.4

9.3

7.6

2657.7

-3.3
15.0
18.9

15.2
0.6
14.2

11.2
-3.0
10.5

9.4
-0.9
20.0

6.7
2.7
13.0

10.0
5.4
14.8

11.9
-0.1
13.1

1223.7
933.8
500.2

14.5

12.3

10.5

1.5

5.3

10.9

10.6

987.7

16.5

16.3

15.8

12.9

454.1

Selected components

6. Other checkable deposits
7. M2 minus M13
8.
9.
.0.

Savings deposits
Small time deposits
Retail money market funds

4
11. M3 minus M2

12.
13.
14.
15.

Large time deposits, net
Institution-only money market
mutual funds
RPs
Eurodollars

7.6

13.6

23.1

27.9

8.8

29.1

16.8

20.4

18.9

257.2

4.6
12.0

-3.0
11.7

11.6
7.5

-50.4
16.0

-42.9
-17.1

-13.3
26.0

-4.3
9.3

178.5
99.2

4.1
4.1

1.6
5.2

2.1
3.1

5.8
4.5

7.4
3.2

6.2
5.8

3.2
4.1

444.1
3351.9

487.3

Memo
16. Monetary base
17. Household M2 6

Average monthly change

(billions of dollars}

Memo
Selected managed liabilities

18.
19.

at commercial banks:
Large time deposits, gross
Net due to related foreign
institutions

20. U.S. government deposits
at commercial banks

5.5

2.9

3.5

2.7

-0.1

-1.3

6.6

-4.7

0.0

3-9

8.7

9.7

-1.0

-7.0

-4.7

5.1

-3.7

. .
.

243.4

18.3

1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. Sum of seasonally adjusted Ml, retail money market funds, savings deposits, and small time deposits.
3. Sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted separately.
4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
6. M2 less demand deposits
7. For the years shown, "average monthly change" is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
p--Preliminary.

III-7

overall loan quality remains excellent:

Some deterioration in the

performance of consumer loans has been offset by improvements in
commercial

real estate loans, while delinquency and charge-off rates

on other types of loans have remained very low.
loan-loss
loans

As a result, banks'

reserves continue to be high relative to their delinquent

(bottom right panel).
Despite the weakness

in bank credit in August, M3 grew at a

5 percent annual rate, faster than in July but below the pace set in
the first half of the year.

M3 is being supported by banks'

substitution toward large time deposits, which are included in M3,
and away from borrowings from foreign offices, which are not.
Institution-only money market mutual funds also grew briskly again
last month, likely owing to the drop in short-term market rates in
early August:

Because changes in yields on these funds lag changes

in market rates, declines in market rates provide an incentive to
shift money into these funds temporarily.
M2 growth also picked up in August, rising at a 3-3/4 percent
rate, as the attractiveness of holding M2 assets improved in the
wake of the early August decline in short-term market rates.

Retail

money market mutual funds, which have posted double-digit growth
rates for several quarters, rose at a 14-3/4 percent annual pace in
August.
M1 rose in August at a 4-1/2 percent pace after adjusting for
the initial effects of sweeps.

While the sweep-adjusted growth of

other checkable deposits was moderate, currency continued to expand
rapidly, likely fueled by overseas demand.

Demand deposits, a

relatively volatile component of M1, rebounded from their July
runoffs,

growing at a 4-3/4 percent annual rate after adjusting for

the effects of a large new retail sweep program.

Mutual Funds
Net sales of equity mutual funds snapped back smartly in August
from the retrenchment in the wake of the mid-July drop in equity
prices; still, they remained somewhat below the record volume in the
first half of the year (chart, top panel).

In addition, investor

demand for the more speculative of the equity funds resurfaced last
month (bottom panel).

Inflows to bond funds also picked up in

August, fueled by stronger net sales at high-yield bond funds and at
income funds--which hold a mixture of bonds and stocks.

The heavy

inflows at high-yield funds suggest that investors remain confident
about the earnings prospects of speculative-grade firms.

III-8

Preliminary data for the first two weeks of September show that
inflows to stock and bond funds remained reasonably firm.
Although we lack hard data on the types of investors that
pulled back from mutual funds in July, industry sources indicate
that retirement accounts were largely unaffected by the volatile
market conditions.

It is thought that most individuals with

defined-contribution plans or IRA or Keogh accounts tend to review
their accounts only after receiving periodic statements, not on a
daily basis.

Furthermore, most contributions are through automatic

payroll deductions and cannot be altered easily.

These factors

suggest that retirement-related inflows may not be much affected by
short, relatively mild corrections.
Business Finance
Gross bond offerings by nonfinancial corporations in August
continued at about the reduced pace of July (table).

Preliminary

data indicate that issuance slowed further in the first two weeks of
September.

Issuance by investment-grade firms has likely been held

down of late by a limited need for external funding as well as by
the usual summer fall off in activity.

Even so, speculative-grade

offerings rebounded in August from the lull in July.

However, even

with the upturn, junk bond issuance in August remained below the
monthly average so far this year, and investors continued to take a
cautious view toward a few of the most speculative issues.

With no

merger-related issuance, the volume of outstanding nonfinancial
commercial paper declined in August for a second month (chart, lower
left panel); data for the first few weeks of September show further
declines this month.
Gross equity issuance by nonfinancial firms, which plunged in
July, posted another sharp decline in August, leaving its level at
only one-quarter of the record high set in June (table). The
slowdown, which was likely magnified by July's market correction,
brings issuance into more normal alignment with past price movements
(lower right panel).

Gross issuance remained weak in early

September.
Nonfinancial merger activity shows no sign of slowing, with the
volume of large deals through August running nearly 30 percent ahead
So far this year,
of last year's record pace (chart, upper panel).
equity retirements have accounted for roughly half of the total
value of large nonfinancial mergers, about the same proportion as in
the preceding two years.

However, with most of the pending mergers

III-9

Net Sales of Long-Term Mutual Funds
Billions of dollars
Monthly

SStock Funds
(Billions of dollars)
Week ended:
Aug 14
0.9
21
5.0
28
3.7
Sep 4
1.3
11
3.8
Stock funds

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

Net Sales of Selected Mutual Funds
(Billions of dollars; quarterly and annual data at monthly rate)
1996

Sitock Funds
Domestic

Auge

July
assets

16.8

18.3

1468.0

18.4

12.7

14.9

1225.4

1994

1995

June

11.0

12.2

24.9

23.1

11.1

19.4

7.2

Memo:
July

Aggressive growth

2.2

3.2

5.3

6.8

3.6

4.9

227.3

Growth

2.0

3.5

5.6

4.7

2.7

3.5

401.5

4.2

4.4

8.4

7.1

6.2

591.2

3.8

1.2

5.5

4.7

4.1

3.4

242.6

Bond Funds

-1.4

2.0

5.0

2.6

2.9

3.1

829.2

High-yield

0.2

0.9

0.8

1.2

0.7

1,9

67.1

Income

2.2

1.7

3.6

2.2

2.4

1.7

314.1

Other

-3.8

-0.6

0.6

-0.8

-0.2

-0.5

448.0

Growth & income
International

1. Includes precious metals funds, not shown elsewhere.
2. Calculated as the sum of 'Growth and income' and 'Income equity' in the ICI data.
e Estimate.
Source: Investment Company Institute.

III-10

GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS 1
(Billions of dollars; monthly rates, not seasonally adjusted)
1996
Type of security

1994

1995

41.29
5.49
35.80

47.64
6.10
41.54

58.31
7.41
50.90

Nonfinancial corporations
Stocks 2
Initial public offerings
Seasoned offerings

3.10
1.14
1.96

4.39
1.70
2.69

Bonds

7.99

All U.S. 2 corporations
Stocks
Bonds

June

JulyP

Aug.P

64.44
13.75
50.69

67.66
13.44
54.22

41.51
7.69
33.82

41.65
5.29
36.36

5.25
2.17
3.09

10.24
4.42
5.82

11.43
4.00
7.43

6.10
1.49
4.61

3.17
1.86
1.31

10.73

12.07

13.56

15.16

10.42

10.56

6.45
3.02
1.95
1.07

5.87
4.95
2.68
2.27

6.29
5.57
3.26
2.31

7.63
5.34
4.04
1.30

7.10
2.32
1.20
1.12

5.45
4.11
2.25
1.86

1.71
30.81

2.16
38.83

3.50
37.13

2.02
39.06

1.59
23.40

2.12
25.80

By rating, bonds sold in U.S.
Investment grade
4.41
Speculative grade
2.65
Public
2.01
Rule 144A
.63
Financial corporations
Stocks 2
Bonds

2.39
27.81

Note. Components may not sum to totals because of rounding.
1. These data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
2. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
3. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
p Preliminary.

Commercial Paper Issuance by
Nonfinancial Firms
Billions of dollars, monthly

Equity Issuance and Prices
rate

Billions of dollars

Percent

[Change in outstandings over period shown

July
1993

1994

Note. Seasonally adjusted.

1995

1996

1990

1991

1992

* NASDAQ price index.

1993

1994

1995

1996

III-11

Megamerger Activity of Domestic Nonfinancial Corporations
Billions of dollars
140
E

Stock swaps between domestic companies plus assumed liabilities
SPayments that result in equity retirements 1

Quarterly
1986

SI40
1987

1985

120

20
1988
1988

1989

1990
1990

1991
1991

1992
1992

1993
1993

1994
1994

1995
1995

1996
1996

Note. Deals in
in which the value of the target is
is $1
$1 billion or greater. Excludes acquisitions
acquisitions in
in which the target company remains
an independent entity after the transaction.
1.
1. Includes
Includes payments to target company's shareholders
shareholders in
in the form of cash or debt, as well as stock swaps between aa Percent 60
and a U.S. target.
foreign acquiror and
target
100
2. Through August at an annual rate.
2.

Capital
Capital Shares of
of Domestic
Domestic Nonfinancial Corporations

80
Percent
20

Quarterly

ri ,

- 17

Profit share
/ of sector GDP.
,'
Note. Profit share equals
economic
profits before tax expressed as a percentage
-,
o
til
l

1960

1966

1972

tl11!l

1978

- 8

t*
il

'l'

1984

Note. Profit share equals economic profits before tax expressed as a percentage of sector GOP.

1990

1996

III-12

GROWTH OF CONSUMER CREDIT
(Percent change; seasonally adjusted annual

rate)

1996
Type of credit

Total
Auto
Revolving
Other
r
p

1994

1995

Q1r

Q2 r

June r

July p

14.5
13.4
18.2
11.8

14.2
10.7
22.0
9.1

11.8
7.9
16.8
9.7

7.1
10.6
14.4
-5.4

7.0
18.5
5.7
-3.5

8.0
6.3
19.4
-5.1

Memo:
Outstanding
July, 1996
(billions
of dollars)
1163.7
369.1
454.0
340.6

Revised.
Preliminary.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)
Type of loan
At commercial banks 1
New cars (48 mo.)
Personal (24 mo.)
Credit cards
2
Credit cards
All accounts
Accounts assessed
interest
At auto finance cos.
New cars
Used cars

1995
Nov.

1996
June

July

8.9
13.5
n.a.

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

9.1
13.4
n.a.

15.8

15.4

n.a.

15.7

15.4

n.a.

10.8
14.0

9.9
13.3

9.6
13.3

9.5
13.6

9.8
13.8

n.a.
n.a.

1994

1995

8.1
13.2
16.2

9.6
13.9
n.a.

9.4
13.8
n.a.

9.1
13.6
n.a.

n.a.

16.0

15.8

n.a.

15.8

9.8
13.5

Feb.

May

Aug.

Note. Annual data are averages of quarterly data for commercial bank rates and
of monthly data for auto finance company rates.
1. Average of "most common" rate charged for specified type and maturity during
the first week of the middle month of each quarter.
2. The rate for all accounts is the stated APR averaged across all credit card
accounts at all reporting banks. The rate for accounts assessed interest is the
annualized ratio of total finance charges at all reporting banks to the total average
daily balances against which the finance charges were assessed (excludes accounts for
which no finance charges were assessed).
3. For monthly data, rate for all loans of each type made during the month
regardless of maturity.
n.a. Not available.

III-13

structured as stock swaps--including virtually all of the large
telecommunications deals--merger-related equity retirements should
moderate in coming months.

In contrast, announcements of share

repurchases have continued at a brisk pace, with large cash-rich
firms accounting for the bulk of the buybacks.
Recent movements in credit quality--as measured by changes in
Moody's ratings--remain favorable, with the value of debt upgraded
in July and August exceeding that downgraded by a sizable margin.
In addition, among the nonfinancial

companies on Moody's Watchlist

at the beginning of September, the majority of debt--especially
speculative-grade debt--was on review for an upgrade.

The pace of

junk bond defaults this year continues to run well below its
historical average, and junk bond spreads have returned to historic
lows after having widened a bit in July.
Another favorable indicator of business financial health is the
continued growth of corporate profits.

Before-tax economic profits

of domestic nonfinancial corporations, as measured in the national
income and product accounts, posted another strong gain in the
second quarter, rising 19 percent from a year earlier.
profit

Healthy

growth throughout the current expansion has raised the profit

share of sector output for domestic nonfinancial corporations to its
highest level since the late 1970s
improvement

(lower panel).

in profits in recent years has

interest payments by firms.

Part of the

resulted from lower

The share of profits plus net interest,

a broader measure of the return on capital that includes

income to

creditors as well as equity holders, has increased less
dramatically.
Household Sector Finance
Household borrowing slowed in the second quarter, but growth
appears to be holding steady in more

recent months.

The growth of

total consumer credit picked up a bit in July, to an 8 percent
seasonally adjusted annual rate, still well below the
pace early in the year

(table).

12 percent

The growth of revolving credit

rebounded in July following an unusually small rise in June; over
the two-month period, revolving credit advanced at a 12-1/2 percent

pace--below the first-half rate of almost 16 percent.
The growth of mortgage credit slowed in the second quarter from

its robust first-quarter pace.

The few available indicators of

mortgage activity in the third quarter are mixed although leaning on
the side of some slowing.

Builders' assessments of new home sales

III-14

Household Credit Quality
Mortgage Delinquency Rates
Seasonally adjusted, 30 days or more past due

Percent

Quarterly

All loans (MBA)
02
.
-

Loans at banks (Call Report)

1980

1990

1994

1992

1996

Closed-End Consumer Loan Delinquency Rates at Banks
Seasonally adjusted, 30 days or more past due

Percent

Quarterly

i l

1988

1986

1984

1982

....-

Call Report

s1 -.iR

- i

1980

1982

1984

I
1986

1988

1992

1990

1994

Credit Card Delinquency Rates at Banks
Seasonally adjusted, 30 days or more past due

Percent
Call Report

Quaterly
7r|

li:
al:

1 Ia

. Q2
Q2 _

ABA

1980

1984

1986

1988

1990

""i

1992

Note. The MBA and ABA series are by number of loans; the Call Report series are by dollar volume.

1994

1 -

III-15

activity have deteriorated in recent months, based on survey data.
Still, mortgage applications for home-purchase loans remain at a
relatively high level, and the average
loans

growth rate for real estate

at commercial banks over July and August was close to the

second-quarter rate.
Indicators of household credit quality in the second quarter
paint a mixed picture but on balance suggest some further
deterioration.

Mortgage delinquency rates were little changed and

remain on the low side of historical experience.

According to the

Mortgage Bankers Association survey, the delinquency rate for home
mortgages edged down in the
contrast, showed a slight

second quarter;

increase

Call Report data, in

(chart, top panel).

The Call

Report delinquency rate for revolving home equity loans edged lower,
while the

rate for other home mortgage loans

increased a bit but

remained relatively low.
Delinquency rates for consumer loans in the second quarter
suggest that repayment problems worsened slightly, although most
delinquency rates remain well below historical peaks
The American Bankers Association

(middle panel).

(ABA) series for closed-end loans

has reversed about half of its decline from the 1991:Q3 high, and
bank Call Report data show a similar pattern.
Credit card delinquencies continue to portray a less
picture.

reassuring

The ABA series for credit card delinquencies reached

another new high in the second quarter

Data from

(bottom panel).

the Call Report also show that delinquencies moved higher but have
yet to approach the previous peak.

A Moody's series for

delinquencies on credit card receivables in securitized pools

rose

in June but is well below the level it reached in the last
recession.

Problems with credit card loans have been linked with

personal bankruptcies, which rose to more than 1 million at an
annual rate in the first half of this year.
Treasury and Agency Financing
The staff anticipates that the Treasury will finance the
projected $40 billion third-quarter fiscal deficit mostly by
borrowing from the public and that the
only slightly

(table).

cash balance will decline

Because the midquarter refunding included a

thirty-year bond, borrowing has tilted toward coupon issues and away
from bills, with net bill redemptions of $15

billion.

coupon auctions are expected to raise $51 billion.

By contrast,

III-16

TREASURY FINANCING
(Billions of dollars: total for period)
1996
Item

Total surplus/deficit (-)

Q3 P

July

Aug.e

Sep.P

53.2

-40.1

-27.1

-41.2

28.2

Means of financing deficit
Net cash borrowing and
repayments (-)
Nonmarketable
Marketable
Bills
Coupons

-23.5
2.1
-25.6
-38.3
12.7

33.9
-1.9
35.7
-15.2
51.0

29.1
-4.0
33.1
16.2
16.9

15.3
1.4
13.9
-8.8
22.7

-10.5
0.8
-11.3
-22.7
11.4

Decrease in cash balance

-16.2

4.2

1.3

23.7

-20.8

Other 1

-13.6

2.1

-3.3

2.2

3.1

38.0

33.9

36.8

13.1

33.9

Memo:
Cash balance, end of period

Note. Data reported on a payment basis. Details may not sum to
totals because of rounding.
1. Accrued items, checks issued less checks paid. and other
transactions.
p Projection.
e Estimate.

(Billions

GROSS OFFERINGS OF MUNICIPAL SECURITIES
of dollars: monthly rates, not seasonally adjusted)
1996
Q2

Jul.

Aug.

15.4

20.9

18.3

17.0

12.1
3.6
8.5

13.7
5.5
8.2

16.1
4.5
11.6

11.6
2.6
9.0

12.7
4.8
7.9

2.8

1.7

4.8

6.7

4.3

1993

1994

1995

27.2

16.1

14.9

23.3
15.7
7.6

12.8
4.0
8.8

Short-term

3.9

3.3

Total taxable

Total tax-exempt
Long-term
1
Refundings
New capital

Note.
Includes issues for public and private purposes.
1. Includes all refunding bonds, not just advance refundings.

III-17

Over the intermeeting period, the General Accounting Office
released a study concluding that Treasury Secretary Rubin had
operated within his authority in shifting securities out of
government trust funds to avoid a default during the debt-ceiling
crisis late in 1995.
Little time remains in the current session for the Congress to
pass legislation to shore up the Savings Association Insurance Fund.
The plan approved by the House Banking Committee will likely face
opposition by independent insurance agents, who have opposed any
banking bill that does not
banks.

roll back the insurance powers of

Treasury Secretary Rubin also opposes the bill partly on

the grounds that it would unacceptably weaken consumer protection
rules.

Despite the lack of legislation, FICO spreads over

Treasuries actually narrowed

1 to 3 basis points over the past

month, to 29 basis points for the three-year strips and 40 basis
points for the nineteen-year strips.
securities

Spreads of other agency-issued

over comparable Treasuries remained stable at about

15 basis points for five-year notes and 30 basis points for ten-year
notes.
Municipal Bonds
Gross offerings of long-term municipal debt totaled nearly
$13

billion in August, up slightly from the pace in July but off a

good bit from the second quarter

(table).

Much of the decline is

attributable to a seasonal slowdown in new capital volume.
Refunding issuance picked up in August to about the average pace in
the first half of the year.

Indeed, trade reports indicate that

several large issuers tapped the market to take advantage of the
light supply of and strong investor demand for debt.

Although

retirements of long-term debt dropped back in August from July's
heavy pace, they again exceeded gross issuance, resulting in a net
decline in debt outstanding.

The ratio of yields on thirty-year

tax-exempt securities to comparable Treasuries has maintained its

low level over the intermeeting period:

in mid-September, it was the

lowest it has been since early 1995.

1. A proposal to use of the Federal Reserve surplus to support
FICO bonds was approved by committee, but was dropped by
Representative Leach.

INTERNATIONAL DEVELOPMENTS

U.S. International Trade in Goods and Services
The deficit in U.S. international trade in goods and services
widened substantially in July.

Exports were 3-1/2 percent lower

than the level in June, while imports rose 1-1/4 percent.

The

decline in exports reflected a temporary drop in shipments of
aircraft, reduced transfers of gold, a further decline in exports of
semiconductors, and decreased exports of volatile categories such as
automotive products, consumer goods, and other industrial supplies.
It appears that a portion of the overall decline in exports in July
reflects a residual seasonal in the data.
A large portion of the increase in imports in July was in
services

(payment of Olympic-related fees and royalties) and oil

(almost entirely quantity).
Data for August will be released on October 18.
NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)

1995

Annual rates
1996
Q2
Q1
Q04

1995

Real NIPA 1/
Net exports of G&S

-107.6

-84.9 -104.0 -115.2

Nominal BOP
Net exports of G&S
Goods, net
Services, net

-105.1
-173.4
68.4

-77.6
-97.4 -113.4
-152.1 -171.0 -188.0
74.5
73.5
74.6

Monthly rates
1996
Jul
Jun
May

-10.5
-16.8
6.2

-8.2
-14.6
6.4

-11.7
-17.5
5.8

1. In billions of chained (1992) dollars.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.

In the second quarter, the deficit in net exports of goods and
services was substantially larger than in the first quarter, and
moved back to levels last recorded a year ago.

Between the first

and second quarters, NIPA real exports grew at a 6 percent annual
rate; real imports rose at a 10 percent annual rate.
The increase in real exports of goods and services in the
second quarter was largely in aircraft and computers and to a lesser
extent in consumer goods and automotive products to Canada (partly a
rebound in shipments after the strike in March against GM).
Shipments of gold rose sharply in the second quarter, largely

IV-1

IV-2
9-18-96

U.S. International Trade in Goods and Services
(Seasonally adjusted annual rate)
Net Exports
Billions of dollars

NIPA Exports and Imports
Ratio scale, billions of chained (1992) dollars
1220

1020

820

620

420

1989 1990 1991 1992 1993 1994 1995 1996

Selected NIPA Exports
Ratio scale, billions of chained (1992) dollars

Selected NIPA Imports
Ratio scale, billions of chained (1992) dollars

1989 1990 1991 1992 1993 1994 1995 1996

IV-3

U.S. EXPORTS AND IMPORTS OF GOODS AND SERVICES
(Billions of dollars, SAAR, BOP basis)
.-

1996

Amount Change
/
1996
1996
Jul
Q2
Jun

Jun

.Til

Exports of G&S

819.7

834.5

836.8

806.3

5.3

14.7

-2.0

-30.5

Goods exports
Agricultural
Gold
Other goods

600.1
6.3
530.5

612.4
60.2
12.5
539.7

611.7
58.7
10.4
542.6

583.5
59.9
4.7
518.9

2.4
2.6
2.6
-0.7

12.3
-3.0
6.2
2.3

-4.9
-2.7
-1.3
-1.0

-28.2
1.2
-5.7
-23.7

26.5
45.4
37.5
138.4

33.4
43.2
34.9
140.2

32.3
42.1
34.6
140.0

24.0
42.0
33.1
141.2

1.4
2.0
-0.2
-4.1

6.9
-2.2
-2.6
1.7

-2.3
-1.2
-0.2
-0.5

-8.3
-0.1
-1.5
1.2

62.0
33.1
7.6
21.3

63.0
34.6
7.9
20.5

66.3
36.5
8.4
21.4

62.2
34.3
6.9
21.0

0.0
-1.1
0.6
0.5

1.0
1.5
0.3
-0.7

2.0
2.3
-0.5
0.2

-4.1
-2.2
-1.5
-0.4

Ind supplies
Consumer goods
All other

128.9
67.9
23.9

129.3
70.5
25.2

130.7
71.3
25.3

125.0
66.6
24.8

-1.7
2.1
-2.3

0.4
2.6
1.3

1.7
0.3
1.2

-5.7
-4.6
-0.6

Services exports

219.7

222.1

225.1

222.8

3.0

-2.3

Imports of G&S

917.1

947.8

935.0

946.5

25.1

30.7

-30.2

11.4

Goods imports
Petroleum
Gold
Other goods

771.0
55.9
6.8
708.3

800.4
70.1
14.6
715.7

787.1
67.5
9.9
709.7

793.7
72.2
5.5
716.1

21.2
2.4
3.3
3.9

29.3
14.1
7.8
1.8

-31.0
-5.0
-5.2
-20.8

6.6
4.7
-4.4
6.4

11.0
62.2

12.7
60.5
37.0
115.5

14.5
57.6
34.4
116.8

12.2
61.4
32.9
116.4

0.4
0.3
-0.9
1.8

1.7
-1.7
-6.7
-1.2

1.6
-4.2
-3.5
1.4

-2.3
3.9
-1.6
-0.3

129.4
49.1
24.0
56.3

133.2
49.6
21.3
62.3

5.7
-0.1
1.7
4.1

6.1
3.5
1.3
1.3

-8.3
-1.8
-1.4
-5.1

3.8
0.4
-2.7
6.0

2.7
3.0
1.7
1.7

-2.2
-4.4
-1.1
-0.1

2.7
0.6
0.0
-0.3

1.08
1.97

-0.10
-1.16

0.58
0.18

Aircraft & pts
Computers
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW

Aircraft & pts
Computers
Semiconductors
Other cap gds

63.2

43.7

116.7

_QL

Automotive
from Canada
from Mexico
from ROW

125.0
22.8
56.4

131.1
49.2
24.1
57.8

Ind supplies
Consumer goods
Foods
All other

124.2
163.4
34.2
28.0

126.9
166.3
35.9
29.7

126.2
166.2
35.2
29.4

128.9
166.8
29.0

2.5
4.8
1.5
-0.6

Services imports

146.1

147.5

147.9

152.7

3.9

8.74
17.56

9.83
19.53

9.93
18.62

10.51
18.80

-0.56
1.80

Memo:
Oil qty (mb/d)
Oil price

($/bbl)

45.7

Change from previous quarter or month.

35.2

IV-4

PRICES OF U.S. IMPORTS AND EXPORTS
(Percentage change from previous period)

1S 95

Mt -tIl

Annual rates
1996

0t)
L

r+r
ra

1996
0

M01r

.Tgu.

TiiI

----------- BLS prices (1990=100)----------1.6
2.4
-1.1
-0.6
-1.1
-0.2
0.4
47.4
41.4
-3.3
-6.5
1.5
-1.1
-0.4
-1.2
-2.3
-0.5
-0.4

Merchandise imports
Oil
Non-oil

-7.4
0.2
-7.5
-2.5
1,6
-0.0

-4.5
-3.1
-8.1
-0.4
-0.8
1.2

11.5
-5.0
-16.9
-4.4
-0.3
-0.9

0.5
-0.9
-1.5
-0.4
-0.1
0.0

-2.7
-0.4
-1.7
-0.3
-0.2
-0.3

-1.2
-0.8
-0.4
-0.2
0.2
-0.2

0.0
23.0
-2.7

1.0
13.8
-0.9

2.6
31.4
-1.0

0.4
3.1
0.0

-0.2
-2.2
0.1

-0.5
-2.0
-0.3

-11.0
-7.4
1.8
5.0
0.4

-3.6
-9.2
2.3
-0.1
2.3

-4.8
-7.5
1.8
0.2
1.5

0.0
-0.7
0.0
0.2
-0.3

-0.1
-0.1
0.4
0.0
0.1

-0.5
-2.0
-0.1
0.0
0.0

Foods, feeds, bev.
Ind supp ex oil
Computers
Capital goods ex comp
Automotive products
Consumer goods
Merchandise exports
Agricultural
Nonagricultural
Ind supp ex ag
Computers
Capital goods ex comp
Automotive products
Consumer goods

---Prices in the NIPA accounts (1992=100)-Fixed-weight
Imports of gds & serv.
Non-oil merchandise

-2.3
-2.4

0.1
-3.1

-3.5

Exports of gds & serv.
Nonag merchandise

-1.0
-4.0

0.2
-2.2

1.6
-2.3

0.8

9-18-96

Oil Prices
Dollars per barrel

Spot West Texas intermediate

Import unit value

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

IV-5

reflecting foreign holdings at the FRBNY being transferred out of
the country; imports of gold were raised by a similar amount in the
second quarter as the gold left the FRBNY and moved into U.S.
customs territory. Net exports of gold in the second quarter were
close to zero. By area, the increase in merchandise exports over the
first half of 1996 was largely to Canada, Mexico, and the United
Kingdom.
The sharp increase in imports in the second quarter was spread
among almost all major trade categories and largely reflected the
strength of U.S.
year.

economic activity during the first half of the

One exception to this trend was imports of semiconductors

which dropped substantially.
About half of the rise in the value of imports was in imported
oil.

The increase in the second quarter was about evenly split

between price and quantity.

A larger than normal seasonal inventory

accumulation that has rebuilt stocks from historically low levels
offset the seasonal decline in oil consumption.

Preliminary

Department of Energy statistics indicate that oil imports declined a
bit on average in August from the brisk July pace as refiners
trimmed stocks in anticipation of a decline in crude prices once oil
shipments from Iraq commence.
Oil prices.
slightly.

In July, the price of imported oil increased

This increase followed substantial price declines during

the previous two months.

The decline in oil prices between April

and July reflected an unwinding of temporary weather and production
shocks to the oil market earlier in the year. Even after declines in
May and June, the price of imported oil in the second quarter was 11
percent higher than in the first quarter.

Spot WTI rose nearly

$0.90 per barrel in July, averaging $21.32 per barrel and rose
another $0.70 per barrel in August.

Following recent political

upheaval in Northern Iraq, spot WTI has been quite volatile and is
trading in the $22.00-24.00 per barrel range.

Although Iraq

reached an agreement in July with the United Nations to export a
limited quantity of oil

(estimated to be 800,000 b/d) under U.N.

supervision, oil prices have remained firm since then because of
uncertainty regarding the timing of these oil flows.

On September

1. the U.N. Secretary General announced that these oil sales would
be postponed.

IV-6

Prices of Non-oil Imports and Exports
Prices of U.S. non-oil imports declined slightly in July,
about the same as in each of the two previous months.

There were

decreases in prices of all major end-use categories (particularly
foods and industrial supplies) with the exception of automotive
products (which rose slightly).
In the second quarter, prices of non-oil imports decreased at
a rate that was slightly more than in the two previous quarters.
Prices of imported capital goods (especially computers and
semiconductors) and industrial supplies fell sharply.

These

decreases were only partly offset by substantial price increases in
a broad array of imported foods

(coffee, grains, and vegetables)

that occurred early in the quarter.
Prices of exports declined slightly in July, primarily because
of falling prices of agricultural products, as agricultural
developments in the northern hemisphere reported recently have
pointed to a robust supply response this fall.

Agricultural export

prices had been recording double-digit increases from September 1995
through May 1996, following disappointing grain harvests last year
at a time of vigorous world demand.

Prices of nonagricultural

products have declined in each of the past four quarters at a 5-10
percent annual rate

(led by decreases in prices of exported

industrial supplies and computers).

These prices also declined in

July.
Price data for August will be released on September 24.
U.S. Current Account through 1996-Q2

The U.S. current-account deficit widened $15.6 billion SAAR in
the second quarter.

The increase in the deficit on goods and

services (described above) and a shift to a deficit on investment
income more than offset lower net unilateral transfers.
Net investment income swung back into deficit in the second
quarter as income payments to foreigners on investments in the
United States rose more than U.S.
investments abroad.

income receipts on earnings from

Net unilateral transfers were smaller in the

second quarter than in the first quarter because of a reduction in
U.S. Government grants:

grants in the first quarter had been boosted

by outflows displaced from the fourth quarter of 1995 by temporary
Federal Budget constraints.

IV-7

U.S. CURRENT ACCOUNT
(Billions of dollars, seasonally adjusted annual rates)
Goods & services
balance

Investment
income, net

Transfers,
net

Current acct
balance

Years
1994
1995

-104.4
-105.1

-4.2
-8.0

-39.9
-35.1

-148.4
-148.2

Quarters
1994-1
2
3
4

-90.8
-103.5
-113.8
-109.4

4.7
-2.5
-6.4
-12.4

-32.7
-38.0
-39.9
-48.9

-118.8
-144.1
-160.0
-170.6

1995-1
2
3
4

-118.1
-127.3
-97.3
-77.6

-3.6
-3.4
-17.4
-7.6

-34.6
-33.2
-36.0
-36.6

-156.2
-163.9
-150.8
-121.7

1996-1
-2

-96.9
-111.5

1.0
-6.4

-43.6
-37.2

-139.5
-155.1

19.8
-19.3
-14.6

9.9
8.6
-7.5

-0.6
-7.0
6,4

Memo:
5 Change

Q4-Q3
Q1-Q4
Q2-Q1
Source.

29.0
-17,7
-15.6

U.S. Dept. of Commerce, Bureau of Economic Analysis.

U.S. International Financial Transactions
Net private foreign purchases of U.S. Treasury securities were
huge in July. (See line 4a of the Summary of U.S. International
Transactions table.)

About 60 percent of this total was booked in a

single location, the Netherlands Antilles; moreover, these latter
purchases were financed primarily by RP transactions with banks and
securities dealers in the United States, accounting for more than
half of the large net outflow reported in line 3 of the Summary
table.

However, monthly average data for banks (but excluding

securities dealers and IBFs) show none of the outflow registered in
the end-of-month data for July, and only a small net outflow in
August (line 1 of the International Banking Data table).
Net foreign private purchases of corporate and other bonds
were also quite strong in July, but almost half of the total was for
U.S. government agency bonds

(line 4b of the Summary table).

Although private foreigners sold U.S. corporate stocks net in July,

IV-8

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS
(Billions of dollars, not seasonally adjusted except as noted)

1995
1994

1996

1995

Jun

10.8

52.2

13.4

6.6

5.6

-3.6

28.5

6.2

-2.1

-. 8

109.8

39.6

33.1
4.3

Jul

Official capital
1. Change in foreign official reserve
assets in U.S. (increase. +)

38.0

G-10 countries

28.9

OPEC countries

-3.3

All other countries

12.4

Change inU.S. official reserve
assets (decrease, +)

5.3

72.5

27.7

-9.7

-1.9

16.6
.2

24.5
*

Private capital
Banks
3.

Change in net foreign positions
1
of banking offices in the U.S.

Securities
4.

-30.1

-7.0

10.0

-28.7

-11.3

-25.3

-29.4

92.9

190.7

69.8

23.5

48.5

60.3

22.8

46.1

34.7

99.8

37.4

12.0

31.3

14.2

38.3

53.9

82.6

27.0

32.7

22.7

4.3

8.2

5.3

Foreign net purchases of
U.S. securities (+)
a.

102.6

Treasury securities

Corporate and other bonds

Corporate stocks

-57.3

U.S. net purchases (-) of
foreign securities
a.

Bonds

Stocks

-98.8

-35.7

1.8
17.7
4.0

3.8

-32.5

-34.5

7.6
.9

6.3
-19.9

9.3
-1.4

-9.4

-7.0

-9.2

-48,5

13.6

-18.7

-12.0

-2.6

-1.9

-3.4

-48.1

-50.3

-22.1

-13.8

-22.5

-17.5

-7.5

-3.6

-95.5

-18.0

-44.1

-23.2

-23.0

n.a

10.7

n.a

1.5

n.a

Other flows (quarterly data, s.a.)
6.

U.S. direct investment (-)

abroad

-54.5

Foreign direct investment in U.S.

49.8

Other (inflow, + )5

-42.1

U.S. currentaccount alance
Statistical jdiscrepancy

a.1

sa_.

-148.4
-13.7

60.2
-9.9
-148.2
31.5

25.0

14.8

5.6

18.3

-37.7

-30.4

-41.5

29.4

28.7
-12.2
-34.9
4.1

-38.8
7.6

n.a
n.a

Note. The sum of official capital, private capital, the current account balance, and the statistical
discrepancy is zero. Details may not sum to totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holding companies
plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing
and lending under repurchase agreements) Includes changes in custody liabilities other than U.S.
Treasury bills.
2. Includes commissions on securities transactions and therefore does not match exactly the data on
U.S. international transactions published by the Department of Commerce.
3. Includes Treasury bills.
4. Includes U.S. goverment agency bonds.
5. Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere
plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1
through 5 since publication of the quarterly data in the Survey of Current Business.
* Less than $50 million.
n.a. Not available.

IV-9

INTERNATIONAL BANKING DATA 1

(Billions of dollars)

1992
Dec.
1.

Net claims of U.S.
banking offices
(excluding IBFs) on
own foreign offices
and IBFs
a. U.S.-chartered
banks
b. Foreign-chartered
banks

2. Credit extended to U.S.
nonbank residents
a. By foreign branches
of U.S. banks
b. By Caribbean
offices of foreignchartered banks
3. Eurodollar holdings of
U.S. nonbank residents
a. At all U.S.chartered banks and
foreign- chartered
banks in Canada and
the United Kingdom
b. At the Caribbean
offices of foreignchartered banks

1993
Dec.

-71.6 -122.1

1994
Dec.

-224.0 -260.0

Mar.

1996
Jun.
Jul.

-260.1 -245.0

Aug.

-245.8 -240.4

-17.0

4.2

-70.1

-86.1

-88.6

-126.3

-153.9

-173.9

24.8

21.8

23.1

26.5

27.3

28.8

28.9

28.6

n.a.

90.9

78.4

86.3

90.0

85.4

n.a.

90.0

77.8

85.6

91.2

95.7

101.0

100.1

101.1

n.a.

79.2

86.0

92.3

96.6

97.7

n.a.

207.3

212.7

n.a.

276.9

290.0

n.a.

MEMO: Data as recorded in the U.S. international
transactions accounts
4. Credit extended to U.S.
172.8
180.1
172.6
nonbank residents

5. Eurodeposits of U.S.
nonbank residents

1995
Dec.

218.8

213.7

243.8

-84.1

-77.2

-72.3

-70.7

-176.0 -167.8 -173.5

-169.7

1. Data on lines 1 through 3 are from Federal Reserve sources and sometimes differ in
timing from the banking data incorporated in the U.S. international transactions
accounts.
Lines la. lb, and 2a are averages of daily data reported on the FR 2950 and FR2951.
Lines 2b and 3b are end-of-period data reported quarterly on the FFIEC 002s.

Line 3a is an average of daily data (FR 2050) supplemented by the FR 2502 and end-ofquarter data supplied by the Bank of Canada and the Bank of England. There is a break in
the series in April 1994.
Lines 4 and 5 are end-of-period data estimated by BEA on the basis of data provided by
the BIS, the Bank of England, and the FR 2502 and FFIEC 002s. They include some foreigncurrency denominated deposits and loans. Source: SCB

IV-10

the absolute size of the outflow continued at the low levels
observed in recent months (line 4c).
U.S. investors purchased foreign securities net at a moderate
rate in July, about equally divided between bonds and stocks (lines
5a and 5b of the Summary table).

These purchases were not

concentrated in any particular country or region.
The increase in foreign official reserve assets held in the
United States was smaller in July than in June (line 1).

Partial

information from FRBNY indicates more substantial increases in
August and early September.
Recently released data on direct investment capital flows for
the second quarter show a continuation of strong capital outflows
from the United States (line 6).

Direct investment capital inflows

fell significantly in the second quarter (line 7);

since there was

no evidence of a fall-off in foreign takeovers in the United States,
the lower capital inflows suggest a shift in the financing of these
activities to domestic U.S. sources.
Foreign Exchange and Foreign Financial Markets
The weighted-average dollar has appreciated about 1/2 percent
on balance since the time of the August FOMC meeting.

The dollar

rose during the first week and a half of September amid heightened
market expectations of an imminent tightening of U.S. monetary
policy.

These expectations receded somewhat after the release of

softer-than-expected data on retail sales and consumer prices.

The

dollar fell back on September 18, mainly on the release of data
showing a bigger-than-expected jump in the U.S. trade deficit in
July.

The dollar's move upward earlier in the period was preceded

by a rise in U.S. long-term interest rates, that on average, was not
matched abroad.

On balance, during this period, the differential

between U.S. and average foreign long-term interest rates has
widened about 35 basis points in favor of the dollar.
Since August 20, the dollar gained 3/4 percent against the
Japanese yen, as market participants reassessed the strength of the
current economic expansion in Japan.

The weaker-than-expected

Tankan survey for August suggested a lower likelihood of a near-term
increase in official interest rates.

The release of data showing

that real GDP declined in the second quarter as well as the
increased likelihood of an early general election in October

IV-11

Weighted Average Exchange Value of the Dollar
(Daily data)
Index, March 1973 = 100

September

August

July

June

Interest Rates in Major Industrial Countries
Three-month rates

Ten-year bond yields
Aug. 20

Sept.18

6.25
3.12
7.76
7.24
6.38
9.27
6.59

6.16
2.86
7.78
7.37
6.21
8.98
6.37

-0.09
-0.26
0.02
0.13
-0.17
-0.29
-0.22

6.20

6.02

-0.18

4.09

3.89

-0.20

7.99

7.73

-0.26

-0.23

6.38

6.25

-0.13

0.13

6.59

6.82p

Change

Aug. 20

Sept. 18

Germany
Japan

3.25
0.60

3.00
0.53

-0.25
-0.07

United Kingdom
Canada
France

5.72
4.29
3.91

5.75
4.05
3.53

Italy

8.81

8.44

0.03
-0.24
-0.38
-0.37

Belgium
Netherlands
Switzerland
Sweden

3.26
2.89
2.25

2.95
2.71

-0.31
-0.18

1.81

-0.44

5.18

4.75

-0.43

Weighted-average
foreign

3.86

3.63

United States

5.38

5.51p

Note.

Change is in percentage points.

P Preliminary.

Change

0.23

IV-12

contributed to this change in market perceptions.

Rising tensions

in Iraq and heightened concerns about the vulnerability of the
Japanese economy to a sharp rise in oil prices also seemed to weigh
on the yen.

The yen recovered with the news of the unexpectedly

large U.S. trade deficit, reversing more than half of the dollar's
earlier gains against the yen.
The dollar appreciated 1-1/4 percent against the mark since
the time of the August FOMC meeting.

On August 22, the Bundesbank

Council surprised the market and lowered the German repo rate 30
basis points to 3.00 percent, the first change in this rate since
February.

Central banks in Austria, Belgium, France, and the

Netherlands followed the Bundesbank's action with smaller 20 basis
point reductions in their official rates.

The Bank of Canada also

cut its official rates on August 22, bringing down its target band
for the overnight rate 25 basis points to 3.75 to 4.25 percent.
Sweden's Riksbank gradually lowered its repo rate 25 basis points
since the August FOMC meeting.
Although prospects for German economic expansion appear to
have improved, recent statements by Bundesbank officials hinting
that there may be room for a further reduction in official rates if
money growth continues to moderate have rekindled hopes that
monetary policy will be eased a bit further.

Prospects of easier

monetary policy in Germany weakened the mark against several other
European currencies, such as the French franc, relieving pressures
felt earlier in the period.

Factors that recently have weighed on

the franc include worries about the weak pace of French economic
expansion, concerns about the government's ability to lower the
deficit/GDP ratio to 3 percent in 1997, and fears of renewed labor
unrest in protest of planned public spending cuts.
Since the August FOMC meeting, 10-year rates have fallen
abroad, on average nearly 15 basis points.

Long-term interest rates

fell in all of the major foreign industrial countries except Canada,
where they rose about 15 basis points, and the United Kingdom, where
they did not change, on balance, as recent indicators in both these
countries have suggested a pickup in economic activity.

The biggest

declines in long-term rates occurred in Sweden and Italy (25-30
basis points), amid improved prospects for fiscal consolidation,
better-than-expected progress in reducing inflation, and gathering

IV-13

evidence that economic activity has slowed.

Japanese long-term

rates also fell about 25 basis points, in part owing to a less
sanguine view of the recent strength of the economic expansion.
Short-term interest rates in the major foreign industrial
countries have fallen on average almost 25 basis points during this
period.

The biggest declines in 3-month rates (40-45 basis points)

occurred in Italy, France, Sweden, and Switzerland.

In the United

Kingdom, 3-month interest rates rose slightly from their level at
the time of the August FOMC meeting.
The dollar has risen more than 2-1/2 percent against the Swiss
franc during this period, reflecting large liquidity injections by
the Swiss National Bank aimed at reinvigorating the flagging economy
and preventing, and hopefully reversing, appreciation of the franc
against the mark.

Over the past few years, the franc has become

overvalued relative to the mark.

Recently, the Swiss National Bank

seems to have effectively abandoned its medium-term money supply
target for an exchange rate target against the DM.

Swiss call-money

rates decreased more than a full percentage point since the August
FOMC meeting, while 3-month rates are down nearly 45 basis points,
and 10-year rates declined 20 basis points.
The dollar has weakened 3/4 percent against sterling, amid
mounting evidence that U.K. economic activity has picked up lately,
reducing the probability of further official interest rate cuts.
The pound may have also benefited from higher oil prices as the
United Kingdom is a small net exporter of oil.

The dollar also

declined slightly against the Canadian dollar, but appreciated about
1/2 percent against the Mexican peso during the period.
Foreign equity prices, which fell sharply in June and July,
have risen on balance since the August FOMC meeting.

U.K., German,

and Canadian stock prices, have recovered to levels near peaks
reached earlier this year.

In contrast, the recovery of stock

prices in France, Italy, and Japan has lagged behind, probably
reflecting less optimism about economic activity in those countries.
The Desk did not
intervene for U.S. monetary authorities during the period.

IV-14

Developments in Foreign Industrial Countries
A now-complete set of second-quarter GDP data for the foreign
G-7 countries confirm some pickup in growth in the first half of
1996 relative to the preceding year.

Despite a drop in GDP in the

second quarter, Japanese growth on balance was strong in the first
half, and the economy appears to have continued to expand into the
summer months.

German GDP rebounded sharply in the second quarter,

and more recent indicators suggest further expansion.

Although

second-quarter GDP in the United Kingdom was held down by slower
inventory investment, final demand was robust, and other indicators
have been positive.

Recent indicators in Canada also suggest that

activity is picking up following a sluggish second quarter.

contrast, both the French and Italian economies have been stagnant
in recent months.
Unemployment rates are still high in most countries, and
inflation pressures remain subdued.

Recent year-over-year consumer-

price inflation has averaged about 1-1/2 percent in Germany and
Canada, slightly more in France, and under 3 percent in the United
Kingdom.

Italian inflation has continued to trend down, dipping

below 3-1/2 percent in August.

As a result of yen depreciation,

Japanese prices have risen slightly this year after declining
throughout most of 1995.
Fiscal policy continues to be restrictive in most countries,
with Germany and France in particular attempting to reduce their
budget-deficit-to-GDP ratios to or below the Maastricht reference
value of 3 percent by 1997.

Although the Italian government does

not expect to reach a 3 percent budget balance ratio, a substantial
reduction is planned there as well.
Individual country notes.

In Japan real GDP declined 2.9

percent (SAAR) in the second quarter, after a downward-revised 12.2
percent increase in the first quarter.

A sharp drop in private

consumption accounted for the entire decrease in GDP, while growth
in private residential and nonresidential investment roughly offset
declines in inventory investment, government consumption, and net
exports.

About 2 percentage points of the decline in GDP is

accounted for by the extra leap-year day in the first quarter.

IV-15

JAPANESE REAL GDP

(Percent change from previous period, SAAR)1

1994

1995

1996
Q4
4.8

Q1
12.2

Q2
-2.9

0.4

2.5

Q3
2.3

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

0.4
1.1
-1.4
0.6
0.2

3.8
2.6
6.2
2.8
0.1

4.6
4.7
4.3
1.0
0.3

7.2
2.5
19.1
-1.5
0.3

13.7
9.9
19.7
13.9
0.4

-2.2
-5.0
6.8
-5.2
-0.7

Exports
Imports
Net Exports (contribution)
1. Annual changes are Q4/Q4.

9.0
11.3
-0.0

3.8
16.5
-1.3

-6.3
12.6
-2.1

5.1
28.4
-2.3

-7.0
3.6
-1.3

4.0
10.8
-0.7

GDF

Recent indicators point to continued expansion.

In July,

industrial production was about 2-1/2 percent above its secondquarter level, while machinery orders and housing starts grew at a
robust pace.

New car registrations dipped in August following a

large gain in July, but remain on an upward trend.

The unemployment

rate dropped slightly in July, and the ratio of job offers to job
applicants has increased gradually since late last year.
The Bank of Japan's August survey

(Tankan) registered a small

decrease in the diffusion index of business sentiment at major
manufacturers from its May level, contrary to market expectations of
a slight increase.

Although the indexes for smaller manufacturers

and major non-manufacturers increased modestly in the August survey,
the index for smaller non-manufacturers edged down.

Fixed

investment plans for the current fiscal year of both large and small
manufacturers increased sharply over their year-ago levels.
Month-to-month changes in wholesale and consumer prices have
been positive in recent months.

These increases stem from the

effect of past yen depreciation on import prices, as prices of
domestically produced goods have continued to decline.
The current account surplus increased sharply in May following
many months of decline and rose further in June before edging down
in July.

The merchandise trade surplus was $6.7 billion

August, up sharply from the second-quarter average.

(SA) in

IV-16

JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1996

Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Unemployment Rate (%)
Job Offers Ratio 1

Q1
0.4
1.6
3.4
2.4
3.3
0.67

Business Sentiment2

-12

Q2
-0.3
1.4
0.8
-7.7
3.5
0.69
-3

Q3
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

May
Jun
2.4
-4.3
3.5 -11.0
-5.0
-7.6
11.8
-7.8
3.5
3.5
0.69
0.71

-7

...

Jul
4.9
13.4
24.4
8.0
3.4
0.72

Aug
n.a.
n.a.
n.a.
-3.1
n.a.
n.a.

......

CPI (Tokyo area) 3
-0.3
0.1
n.a.
0.1
-0.1
0.4
0.1
3
Wholesale Prices
0.0
1.3
n.a.
1.3
1.4
1.4
0.5
1. Level of indicator.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook (Tankan survey).
3. Percent change from previous year.

Real GDP in Germany rebounded sharply in the second quarter,
rising more than 6 percent (SAAR), following a 2 percent decline in
the first quarter.

Domestic demand and net exports contributed

about equally to second-quarter growth.

Investment was particularly

strong, as construction activity surged following the unseasonably
cold winter, although spending on machinery and equipment remained
lackluster.

Private consumption registered a healthy increase,

while government expenditures rose despite a freeze on federal
expenditures imposed by the Finance Ministry in mid-March.

The

improvement in net exports reflected an increase in exports coupled
with a drop in imports.

A sizable decline in the level of inventory

investment, which is a residual in the national accounts and can be
subject to substantial revision, made a significant negative
contribution to growth in the second quarter.
Limited information available for the third quarter suggests
that activity continued to expand, albeit at a somewhat more muted
pace.

Industrial production in July was nearly 1 percent above its

second-quarter average level, and manufacturing orders continued to
trend up.

A rise in the IFO business climate survey in July more

than reversed the surprising drop in June.

Unemployment, while

still high, has levelled out at just above 3.9 million workers
(s.a.), and the all-German unemployment rate has remained at

IV-17
GERMAN REAL GDP
(Percent change from previous period, SAAR)
1994
1995
1995

1996

1.1

0.4

0.0

-1.9

6.1

4.0
0.3
8.8
2.4
1.5

0.9
3.0
-2.2
2.5
0.0

-0.5
-0.2
-2.1
3.8
-0.7

0.3
-0.9
-5.1
0.8
1.8

-1.8
2.4
-20.8
2.7
1.3

3.1
3.5
30.9
7.0
-6.2

9.5
11.1
-0.4

5.4
4.6
0.2

3.5
-0.2
1.0

3.1
4.2
-0.3

-0.2
0.0
-0.1

3.2
-7.0
2.9

GDP

3.6

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)
Exports
Imports
Net Exports (contribution)
1. Annual changes are Q4/Q4.

GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted. SA)
1995

Industrial Production
Orders
Unemployment Rate (%)
Western Germany
Eastern Germany
Capacity Utilization 1

Business Climatel, 2
Retail Sales (real)3
Consumer Prices1 '3

Q4
-1.9
-2.9
9.7
8.5
14.9

1996
Q1
-2.4
-0.5
10.3
8.9
16.1

84.3

83.0

-10.3
-2.0
1.6

-15.3
-1.3
1.4

Q2
2.9
3.7
10.3
9.0
15.6
82.1

May
0.7
-0.7
10.3
9.0
15.6

Jun
0.7
1.9
10.3
9.0
15.5

Jul
0.2
0.9
10.3
9.0
15.3

......

-17.3 -16.0
n.a. -3.0
1.4
1.5

Aug
n.a.
n.a.
10.3
9.1
15.2
...

-21.0 -14.0
n.a.
n.a.
1.2
1.3

n.a.
n.a.
1.4

1. Western Germany.
2. Percent of firms (in manufacturing, construction, wholesale, and
retail) citing an improvement in business conditions (current and
expected over the next six months) less those citing a deterioration in
conditions.
3. Percent change from previous year.

IV-18
10.3 percent since April.

Inflation remains subdued, with producer

prices down over the past 12 months and consumer prices up by a
little under 1-1/2 percent.
The 1997 draft federal budget was approved by Chancellor
Kohl's cabinet in mid-July.

Many of the austerity measures

incorporated into the 1997 draft budget stem from the fiscal plan
proposed last April.

Measures in the plan have been split into five

different pieces of legislation, three of which received final
parliamentary approval on September 13.

The remaining two pieces of

legislation require the explicit approval of the Bundesrat
upper house of the German parliament).

(the

With the draft budget, which

includes very low wage increases for public sector employees, as
well as some spending reductions at the state and local level, the
German Finance Ministry hopes to move the deficit of the
consolidated general government sector to 2-1/2 percent of GDP in
1997, below the Maastricht reference value.
In France, real GDP contracted 1.5 percent (SAAR) in the
second quarter following a 4.5 percent increase in the first
quarter.

The swing in growth between the first and second quarters

was exaggerated by both inadequate adjustment for leap year as well
as a first-quarter rebound from the public sector strikes at the end
of last year.

However, even abstracting from these effects some

slowing in demand appears to have occurred in the second quarter.
Private consumption, the category most affected by the strike, was
only slightly above its average level over the preceding half-year
in the second quarter, while investment declined for the third
straight quarter and government spending slowed.

Inventories

continued to be drawn down, although at a more moderate pace than in
the first quarter.

Net exports contributed negatively to GDP growth

as a result of a sharp decline in exports.
Monthly indicators for the third quarter are scant (and
combined July-August data will not be available until late
September).

In July, the unemployment rate was unchanged at its

all-time high, and business and consumer sentiment remained subdued.
The fall in consumer prices in July and August reflected lower food
and energy prices, as well as soft domestic demand.

IV-19

FRENCH REAL GDP
(Percent change from previous period, SAAR)1
1994

1995

1996

GDP

4.2

0.4

0.5

-1.8

4.5

-1.5

Total Domestic Demand

4.9

0.4

3.4

-3.2

2.3

-0.2

Consumption

1.6

1.1

-0.3

-1.0

10.5

-3.8

Investment

4.7

0.1

6.8

-1.6

-1.5

-2.3

Government Consumption

0.6

1.1

1.6

1.5

1.9

0.8

Inventories (contribution)

2.8

-0.5

1.9

-2.6

-4.0

2.4

7.6
10.2
-0.7

0.8
0.9
-0.0

-3.9
5.7
-2.8

-4.2
-9.0
1.5

14.6
6.5
2.2

-6.7
-2.5
-1.3

Exports
Imports
Net Exports (contribution)
1. Annual changes are Q4/Q4.

On September 18, the government unveiled its 1997 central
government budget, designed to reduce the consolidated deficit to 3
percent in 1997.

The central government deficit is projected to

narrow only a small amount, as tax reform implies a gross cut of
FF25 billion (1/4 percent of GDP),
the 1996 budgeted levels.

while nominal spending is held to

The 3 percent target is expected to be

attained through an improvement in the social security deficit,
expected surpluses on other welfare accounts, and creative
accounting measures

(such as a one-time payment from France Telecom

worth 1/2 percent of GDP).
Earlier in September the government announced a five-year tax
reform program beginning next year that includes lower income tax
rates and payroll taxes partially offset by fewer deductions, higher
excise taxes, and a one-percent hike in the CSG (a flat tax on most
forms of income),

the base of which will also be widened.

One

objective of the reform is to boost consumption by lowering income
taxes, while raising other taxes in order to underline the
government's commitment to fiscal consolidation.

IV-20

FRENCH ECONOMIC INDICATORS

(Percent change from previous period except where noted. SA)
1995

Q4
-1.6
83.6
11.9
-2.0

1996

Q1
1.3
83.8
12.2
4.9

Q2
0.2
83.0
12.4
-1.6

May
0.8
...
12.4
0.2

Jun
-0.2
...
12.5
2.0

Jul
n.a.
..
12.5
n.a.

Aug
n.a.
...
n.a.
n.a.

Industrial Production
Capacity Utilization
Unemployment Rate (%)
Consumption of
Manufactured Products
Consumer Prices1
1.9
2.1
2.4
2.4
2.3
2.3
1.7
1. Percent change from previous year. Includes the increase in the VAT on
August 1. 1995

Second-quarter GDP growth for the United Kingdom was revised
downward slightly to 1.5 percent (SAAR), about the same rate as in
the first quarter.
(3.7 percent, SAAR),
expanded strongly.

Growth of final domestic demand was quite robust
as both private consumption and investment
A sharp slowdown in inventory accumulation

provided the main offset to positive growth in other components of
domestic demand,

UNITED KINGDOM REAL GDP
(Percent change from previous period,

1994

1995

SAAR)1

1995

1996
Q4
1.6

1.6

1.5

0.7
2.7
8.7
2.7
-2.9

GDP

4.3

1.9

Q3
2.5

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

3.4
2.6
3.4
1.9
0.8

0.9
1.6
-2.8
1.1
0.1

1.8
0.0
-2.4
0.5
2.1

1.6
2.6
0.5
0.5
-0.2

3.5
3.8
6.3
0.3
0.0

Exports
Imports
Net Exports (contribution)
Non-oil GDP

10.6
7.3
0.7
4.1

5.1
2.1
0.8
1.7

13.2
8.9
1.1
2.3

2.2
2.4
-0.1
1.5

5.3
12.1
-1.9

1. Annual changes are Q4/Q4.

1.5

n.a.
n.a.
n.a.
1.5

IV-21

Indicators from the third quarter on balance point to a pickup
in the pace of economic activity.

Retail sales fell in July but

rebounded strongly in August, confirming recent survey evidence
suggesting a significant increase in consumer demand.

Industrial

production moved up in July following a sharp fall in June to a
level a little above the second-quarter average.

The purchasing

managers' index for August was at its highest level in a year and
signaled particular strength in manufacturing output, while the
unemployment rate continued to decline, reaching 7.5 percent in
August.

Consumer price inflation has held steady around 2-3/4

percent in recent months, a little above the government's target
rate of 2-1/2 percent or less.

UNITED KINGDOM ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995
1996
Q4
QI
Q2
May
Jun
Jul
Aug
-0.8
0.5
n.a.
-0.1
0.2
0.1
1.0
Industrial Production
Retail Sales
0.7
0.4
1.2
0.3
1.5
-0.5
1.0
7.5
7.7
7.6
7.7
7.7
8.0
7.9
Unemployment Rate (%)
2.8
2.8
2.8
2.8
2.8
2.9
2.9
Consumer Prices1
-2.2
-2.3
-2.4
0.0
0.3
6.5
3.0
Producer Input Prices
3.8
3.8
3.8
n.a.
3.3
3.7
3.8
Average Earnings
1. Retail prices excluding mortgage interest payments. Percent change
from previous year.
2. Percent change from previous year.

In Italy, the advance GDP release stated that real economic
activity declined 2 percent (SAAR) in the second quarter.

[No

further details will be available until final second-quarter GDP is
released on October 4.]

This drop reversed the first-quarter

increase, with both movements largely due to inadequate adjustment
for the leap year.
second quarter;

Little information is available beyond the

consumer confidence declined in July, although it

was a little above its second-quarter average.
News on inflation continues to be encouraging.

Consumer price

inflation on a year-over-year basis fell in August to its lowest
level in 27 years.

Further progress on consumer price inflation is

IV-22

likely in light of continued moderation in wholesale and producer
price inflation, reflecting the appreciation of the lira over the
past year and a half.

ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995
1996
Q4
-0.9
78.5
11.9
110.0
11.3
5.9
10.6

Q1
-2.0
75.9
12.0
107.7
15.7
5.0
7.7

Q2
-1.4
76.6
12.2
113.8
-1.0
4.3
3.5

May
0.4
...
...
114.8
-4.0
4.3
3.5

Jun
2.9
...
...
117.9
-9.0
3.9
2.4

Jul
n.a.
...
...
115.0
n.a.
3.6
n.a.

Aug
n.a.

Industrial Production
Cap. Utilization (%)
Unemployment Rate (%)
Consumer Confidence1
n.a.
2
Bus. Sentiment (%)
n.a.
Consumer Prices3
3.4
3
Wholesale Prices
n.a.
--1. Level of index, NSA.
2. Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.
3. Percent change from previous year.

Prime Minister Romano Prodi is expected to present his
government's 1997 federal budget to parliament by the end of
September.

The government's 1997-1999 economic planning document--

which forms the basis of next year's budget--calls for the general
government deficit to improve to 4.4 percent of GDP, falling short
of the Maastricht Treaty reference value of 3 percent in 1997.1
Economic activity in Canada expanded at a slow pace in the
second quarter. Although the rate of growth was the same as in the
first quarter, it reflected a considerably weaker domestic economy
offset by a rebound in net exports.

Consumption expenditures were

about flat, while business fixed investment declined, as a pickup in
residential construction was offset by declines in machinery and
equipment investment and non-residential construction.

A large

draw-down in inventories, following ten consecutive quarters of
accumulation, subtracted 2.9 percent from the quarter's growth.

Net

exports made a large positive contribution, as exports increased

The 4.4 percent figure is on a cash basis, not a national income basis;
when adjusted to conform to the Maastricht definition, the figure is closer
to 5.4 percent.

IV-23

while imports declined, reflecting the weakness in consumer spending
and the decline in machinery and equipment investment.

CANADIAN REAL GDP
(Percent change from previous period, SAAR)1
1994
1995
1995

1996

4.9

0.7

Q3
1.2

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

2.5
3.1
4.9
-1.5
-0.1

-0.1
0.9
-1.8
-1.4
0.1

-1.5
2.5
-5.2
-4.7
-1.0

-0.5
0.0
6.6
-1.1
-1.6

3.8
5.1
12.0
-1.9
-1.4

-3.2
0.2
-2.8
1.1
-2.9

Exports
Imports
Net Exports (contribution)

20.9
14.0
2.2

5.0
4.0
0.4

10.7
4.5
2.4

12.3
9.5
1.1

-1.6
4.1
-2.4

6.5
-5.6
5.2

GDP

Q4
0.9

Q1
1.3

Q2
1.3

1. Annual changes are Q4/Q4.

Indicators for the third quarter suggest that activity is
expanding at a moderate pace.

Manufacturing shipments and new

orders both advanced markedly in July, and strong employment growth
in August more than offset declines in May and June.

Housing starts

retreated in July and were little changed in August, although the
average of the two months was about 3 percent above the secondquarter level.

Consumer price inflation remains subdued and near

the bottom of the Bank of Canada's 1-3 percent target band.
The Canadian Auto Workers

(CAW) reached a tentative three-year

labor agreement with Chrysler Corporation Canada on September 17,
averting a possible strike at Chrysler's Canadian facilities.

The

possibility of a Canadian auto strike remains, however, as the CAW
will now attempt to extend the agreement to cover workers at Ford
Canada and General Motors of Canada.

IV-24

CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1995
1996
Q4

Industrial Production
-0.3
0.3
Manufacturing Survey:
Shipments
-0.4
-0.5
New Orders
-0.1
-0.0
Retail Sales
-0.7
1.0
Housing Starts
5.8
1.8
Employment
0.3
0.7
Unemployment Rate (%)
9.4
9.5
Consumer Prices1
2.1
1.4
1. Percent change from year earlier.

May

Jun

Jul

Aug

0.6

-0.2

n.a.

2.5
2.7
0.4
10.9
0.2
9.6
1.4

2.1
5.2
0.2
21.4
-0.1
9.4
1.5

0.0
-1.7
0.6
3.8
-0.4
10.0
1.4

3.0
3.7
n.a.
-5.2
0.1
9.8
1.2

n.a.
n.a.
n.a.
0.1
0.6
9.4
1.4

EXTERNAL BALANCES
(Billions of U.S. dollars, seasonally adjusted)
1995
1996
Q1

Apr

May

Jun

Jul

Aug

Japan: trade
106.6
current account 110.6

16.6 14.0
15.5 15.3

2.5
3.4

4.8
5.8

6.7
6,2

3.3
6.0

6.7
n.a.

Germany: tradel
63.6
current account' -16.7

14.1 16.2
-2.5 -3.4

5.5
-0.3

6.2
-1.6

4.6
1.4

n.a.
n.a.

1.9
1.6

n.a.
n.a.

n.a.

France: trade
current account
U.K.: trade
current account

20.0
16.7

5.8
7.3

4.7
3.8

0.6
0.9

2.2
1.3

-18.3

-5.4

n.a.

-2.1

-1.5

-10.6

-1.6

n.a.

...

Italy: trade
current account 1

27.6
27.4

8.5 12.6
5.9 n.a.

3.5
3.0

6.8
4.8

4.2
n.a.

n.a.
n.a.

Canada: trade

20.7

5.8

7.2

2.1

2.8

2.4

2.2

n.a.

-8.1

-1.2

0.8

...

......

current account

Not seasonally adjusted.

... Data not available on a monthly basis.

IV-25

September 18, 1996

Industrial Production in Selected Industrial Countries
(Monthly data; seasonally adjusted; ratio scale, index)
Japan

Germany
120

110

120

110

1991=100

1991

1992

1993

1994

1995

100

1996

1991

France

1992

1993

1994

1995

1996

Italy

1991

1993

1994

1995

1996

United Kingdom
--

1991

1992

120

1991

1992

1993

1994

1995

1996

1992

1993

1994

1995

1996

Canada

1992

1993

1994

1995

1996

1991

120

IV-26

September 18, 1996

Consumer Price Inflation in Selected Industrial Countries
(12-month change)

Japan

W. Germany

Percent

Percent
i 12

1991

1992

1993

1994

1995

1991 1992

1996

France

1993

1994
1995
1991
1992
1993
Note: Excludes mortgage interest payments.

1996

1993

1994

1995

1996

1993

1994

1995

1996

Italy

Canada
--

19911991 1992
1992

1996

1992

United Kingdom
-i

1991 1992
1991
1992

1995

1991

1993

1994

1995

1996

1991

1992

1993

1994

1995

1996

IV-27

Economic Situation in Other Countries
In Latin America, the economies of Argentina and Brazil are
recovering from their low points in 1995, while the Mexican economy
slowed a bit in the second quarter and Venezuela's domestic demand
fell sharply.

The Russian economy has continued to decline.

Inflation slowed in Mexico, Venezuela, and Russia in recent months,
and has been low in Brazil by that country's standards.

In the

major Asian developing economies, economic growth is proceeding at a
moderate pace, with Korea showing some evidence of an increase in
inflationary pressures.

Mexico's trade surplus narrowed slightly

and Brazil and Argentina secured small trade deficits, while
Venezuela's deficit has increased substantially in the last few
months.

In Asia, Taiwan's trade balance has improved markedly

despite slow export growth, while China's surplus has decreased and
Korea's deficit has shown a considerable widening.
Individual country notes.

In Mexico, economic growth slowed

in the second quarter, following three quarters of strong recovery
from the sharp downturn in the first half of 1995.

Real GDP

declined an estimated 0.3 percent (SA, not annual rate) in the
second quarter and industrial production rose less than 2 percent
(SA, not annual rate), half the average quarterly growth rate in the
three previous quarters.

Imports grew in July to reach their

highest level since December 1994, indicating that domestic demand
is continuing to recover.

Exports also grew substantially, but not

as fast as imports, resulting in some narrowing of the trade
surplus.

The current account balance improved in the second

quarter, but most of the gain was due to a decrease in net factor
payments, especially interest payments.
Monthly inflation fell from a recent peak of 2.8 percent in
April to 1.3 percent in August.

While the decline partly reflects

seasonal factors, the stability of the exchange rate and continued
tight monetary policy are expected to continue to keep inflationary
pressures subdued in the coming months.
On August 7, the Bank of Mexico began a program to rebuild its
international reserves, without appearing to manage the exchange
rate, by selling dollar put options at auction to commercial banks.
The strike price of the options on any given day is the previous
day's reference exchange rate (providing that the rate is no weaker

IV-28

than the average of the preceding twenty trading days). The Bank
sold $130 million in options at the first auction on August 7, all
of which were exercised within a few days of the auction.
MEXICAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994
1995
1996
Real GDP
4.5
-6.2
Industrial Production (SA)
4.5
-7.5
Unemployment Rate (%)
3.6
6.3
Consumer Prices 1
7.1
52.1
Trade Balance 2
-18.5
7.0
2
Imports
79.4
72.5
Exports 2
60.8
79.5
2
Current Account
-29.5
-0.7
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA

Q1
-1.0
2.8
6.2
8.3
1.9
19.9
21.9
-0.1

Q2
7.2
13.7
5.6
6.4
2.2
21.4
23.6
0.6

1996
Aug
Jul

...
n.a.
5.8
1.4
0.4
7.6
8.0
...

n.a.
n.a.
1.3
n.a.
n.a.
n.a.
...

Due to the success of the program in its first month and the
continued stability of the peso, the amount sold at the second
auction on August 30 was raised to $200 million.

The 20-day

constraint remained binding for the first half of September (thus no
options were exercised),

though the recent firming of the peso

removed that constraint by September 17.
In Argentina, real GDP grew 3.2 percent in the second quarter
from a year earlier and July industrial production showed an
increase of 7.3 percent compared with a year earlier, providing
solid evidence that the economy is recovering.

Notwithstanding

higher economic activity, inflation has remained low, with August
consumer prices 0.1 percent above their year-earlier level,

The

trade surplus remained almost unchanged in July. International
reserves less gold and securities reached $14.6 billion at endAugust, a bit lower than in May and June due to the political
uncertainty created by the dismissal of Finance Minister Cavallo.
Argentina's slow recovery from the recession led to lower than
expected tax revenues and the larger than expected fiscal deficit
for the first half of 1996. The package of measures sent to Congress
by the government to compensate for the shortfall has been
continuously delayed, and it is expected to yield only about $600800 million in savings this year, instead of the $1.6 billion

IV-29

ARGENTINE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994

Real GDP
Industrial Production (SA)
Unemployment Rate (%)2

1995

1996

7.4
5.7

-4.4
-6.2

Q1
-3.2
-9.1

11.7

17.4

...

1996

Q2
3.2
2.6

Jul
...
7.3

17.1

...

Aug
n.a.

ConsumerPrices 1
3.9
1.5
-0.3 -0.1
0.5 -0.1
Trade Balance 3
-4.0
3.0
0.2
1.3
0.2 n.a.
3
Current Account
-9.9
-3.2
0.6
1.3
...
1. Percentage change from previous period.
2. Unemployment figures available only in May and October of each year.
annual figure is the average of the two surveys.
3. Billions of U.S. dollars, NSA
originally planned.

These measures were not well received by

Argentines, and the largest union federation, the CGT, called for
another general strike on September 26 and 27.

Menem angered the

unions further in early September, when he announced his intention
to pass a labor reform package that includes suspending collective
wage bargaining and replacing redundancy payouts with unemployment
insurance.

On September 16, the IMF released a statement indicating

that it supports Argentina's program to reduce the fiscal deficit to
about $5 billion (1.7 percent of GDP) in 1996.
In addition to the efforts to contain its fiscal difficulties,
Argentina is working to strengthen its banking system.

The Central

Bank has announced a program with foreign private banks in Argentina
to create a contingency fund against possible banking liquidity
crises of between $3-5 billion (which represents about 10 percent of
deposits).

The Repo Program, as it is called, involves an automatic

credit line in exchange for dollar-denominated government bonds from
foreign private banks to the Central Bank in case of a liquidity
crisis.

It is not yet clear when the system will go into effect.

In Brazil, there are indications that the economy is beginning
to recover.

Real GDP grew 1.7 percent (SA, not annual rate) in the

second quarter from the previous period, and industrial output (SA)
increased in July.
standards.

Inflation has remained low by Brazilian

The cumulative trade deficit for January to July was

$0.5 billion, compared with a $4.3 billion deficit a year earlier.
International reserves at the end of July 1996 totalled $60 billion
(liquidity concept), up considerably from $42 billion a year ago.

IV-30

On September 5, Brazil announced new rules allowing Brazilian
banks to raise capital overseas by placing bonds abroad and using
the resources to lend to exporters with 180-day maturities.
Previously, raising capital overseas for exports had been limited to
agricultural goods.

In mid-September, President Cardoso signed a

bill exempting shipments from export taxes.
BRAZILIAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994
1995
1996
Real GDP
5.9
4.2
1
Industrial Production (SA)
7.9
3.6
Open Unemployment Rate (%)
5.1
4.4
1
Consumer Prices
929.0
22.0
Trade Balance 2
10.4
-3.2
Current Account 2
-1.8
-17.8
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA

Q2
01
-2.1 2.3
-1.5
0.3
6.4 5.9
2.5
3.6
-0.4 0.1
-3.4 -4.1

1996

Jul
...
4.3
5.9
1.2
-0.2
...

Aug
...
n.a.
n.a.
0.5
n.a.
...

In addition, Brazil has removed some products from a low-tariff
group of import items, effectively increasing import tariffs on the
items from 4-6 percent to 12-16 percent.

On September 12, the

Brazilian Senate approved a Central Bank request to conduct
unlimited buybacks of the country's $57 billion Brady Bonds.
In Venezuela, consumer price inflation fell further in August,
partly due to an estimated 18 percent drop in consumer demand since
the start of its IMF austerity program in mid-April.

The non-oil

trade deficit has widened slightly in July, but has remained fairly
stable every month since April.

Total reserves less gold have

increased since the stabilization package was announced in April and
reached $8.4 billion at the end of July, up from $6.7 billion in
May.

This increase in net capital inflows has led to a 17 percent

rise in M2 and a subsequent drop in interest rates by 48 percentage
points to around 20 percent a year over the past three months.
On July 31, Venezuela announced the creation of a special
fund, the Debt Rescue Fund, which will use windfall revenues from
oil prices higher than $14.70 per barrel to pay off foreign and

IV-31

VENEZUELAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994
1995
1996
1996
Real GDP

-2.8

2.2

8.8

10.8

Unemployment Rate (%)

Q2
......

Q1
...
...

11.1

Consumer Prices
70.9
56.6
24.0 30.9
Trade Balance 2
-3.6
-6.0
-0.8 -1.9
Current Account 2
2.5
2.4
..
...
1. Percentage change from previous period.
2. Billions of U.S. dollars, NSA, non-oil trade balance.
domestic debt commitments.

Jul

Aug
...

...

5.0
-0.6
...

4.1
n.a.
...

As of September 5, Venezuela's basket of

crude and products had risen to $20 per barrel, while the average
for the year so far is $17

per barrel.

The higher oil prices are

expected to yield about $2.5 billion in additional revenue.
Although Venezuela has been doing well overall with the new
IMF program, its privatization program is in shambles.

On August

28, Venezuela cancelled the sale of Banco de Venezuela after rumors
and confusion led to the withdrawal of bids, and the program could
be threatened by political disputes.

Venezuela's top banks have

traditionally been associated with different political parties that
have used them to bankroll election campaigns and to provide jobs
for supporters.

Only days earlier, the sale of Alucasa. a small

aluminum concern, was delayed, and at the beginning of September
union protests began over the proposed year-end privatization of the
state-owned holding company Corporacion Venezolana de Guayana (CVG).
In China, real GDP increased by 9.8 percent in the first half
of 1996 from its year-earlier level, as strong growth in consumption
demand offset much weaker growth in investment.

The central bank

cut its lending rate by about 40 basis points on August 22,
following an earlier interest rate cut in May.

The apparent easing

in credit conditions in recent months reflects the authorities'
perception that a more accommodative stance is warranted, given a
sharp fall in inflation over the past year, as well as to help
alleviate the heavy debt-servicing burden of state-run enterprises.
The authorities estimate that 50 percent of state-run enterprises
are unprofitable, though this figure appears conservative.

China's

trade surplus in the first eight months of the year declined to $5
billion, compared with $15.4 billion in the same period last year.

IV-32

The decline in

the surplus reflected a fall in the level of exports

of about 4 percent over the period from its year-earlier level.
Consumer prices in July were 8.3 percent higher than their yearearlier level.
CHINESE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1994
1995
1996
1996
Aug
Jul
Q2
Q1
1
Real GDP
11.8
10.2
10.2
9.8...
Industrial Production
22.0
17.8
16.2
n.a.
n.a.
n.a.
Consumer Prices
25.5
10.1
9.9
8.6
8.3
n.a.
Trade Balance 2
5.2
16.7
-1.2
2.1
1.1
3.0
1. Cumulative from the beginning of the year
2. Billions of U.S. dollars. NSA
Real GDP in Taiwan expanded 5.4 percent in the second quarter
from its year-earlier level.

The central bank announced a cut in

the discount rate of 25 basis points on August 9, following a
similar reduction in late May.

The interest rate cuts are intended

to stimulate domestic demand, which has experienced weak growth by
historical standards for more than a year.

Slow domestic demand

growth has been reflected in a fall of about 1 percent in the level
of Taiwan's imports during the first eight months of the year.

This

decline contributed to a widening of the trade surplus to $8.2
billion over the same period, compared with $3.5 billion a year
earlier.

Taiwan's 12-month inflation rate rose to 5.1 percent in

August, a noticeable increase from an average rate of below 3
percent during the first seven months of the year.

However, most of

the jump in the inflation rate in August was attributed to temporary
factors, mainly reflecting a spike in food prices following Typhoon
Herb.
TAIWAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1996
1995
1994
Aug
Jul
Q2
Q1
Real GDP
6.5
Industrial Production
6.6
Consumer Prices
2.6
1
7.8
Trade Balance
6.2
Current Account I
1. Billions of U.S. dollars, NSA

6.1
4.2
4.6
8.3
5.0

5.3
0.1
3.0
2.5
1.5

5.4
-0.5
2.3
3.2
n.a..

...
1.7
1.4
1.4

n.a.
5.1
1.1

IV-33

In Korea, real GDP grew 6.7 percent in the second quarter from
its year-earlier level, a marked decline from output growth rates of
nearly 10 percent in the first three quarters of last year.

Fixed

investment spending has been particularly sluggish, expanding only
4.2 percent in the second quarter from its year-earlier level.
Despite the slowdown in activity, the central bank has raised
interest rates several hundred basis points during the past few
months, after having maintained an accommodative monetary policy
stance during the latter part of 1995 and first few months of this
year. The recent tightening apparently reflects concern about a
significant widening of the current account deficit and some
evidence of a modest pickup in inflation.

The current account

deficit widened to $11.7 billion in the first seven months of this
year, compared with $6.5 billion a year earlier.

Weak export growth

contributed to the larger deficit, as exports expanded only 9
percent over the period from their year-earlier level.

The

authorities have allowed the won to depreciate about 6 percent
against the dollar since late April to partly offset a deterioration
in Korea's external competitiveness associated with the strong
appreciation of the won against the yen during the past year.

The

consumer price index increased 5.3 percent in August from its yearearlier level, compared with a rise of 3.5 percent a year earlier.
KOREAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1995
1996
1994
Real GDP
8.4
Industrial Production
10.7
Consumer Prices
6.2
1
-3.1
Trade Balance
Current Account 1
-4.5
1. Billions of U.S. dollars, NSA

9.0
11.7
4.5
-4.7
-8.9

Q1
7.9
8.9
4.9
-2.4
-4.6

Q2
6.7
7.3
5.1
-2.8
-4.7

1996

Jul
...
8.0
5.6
-1.7
-2.3

Aug
...
n.a.
5.3
n.a.
n.a.

IV-34

In Russia, Boris Yeltsin essentially disappeared from public
view after having won the mid-June election.

However, in a break

from past reluctance to admit health problems, he announced last
week that he will undergo heart surgery in Moscow at the end of
September, and calmed financial markets.
Economic activity has continued to decline in 1996.
Second-quarter GDP and industrial production were down 7 and 5
percent respectively from their levels a year ago.

Consumer price

inflation has been at the lowest levels since the 1992 beginning of
the reforms.

Cumulative inflation for the first seven months of

1996 was 16.1 percent.

The ruble has declined about 1 percent in

the past two weeks, which is slightly faster than its planned
depreciation of about 1.5 percent per month.

However, the ruble

still remains well within the corridor established by the Central
Bank.

Interest rates on government securities remain high in

nominal terms:

the six-month treasury bill yield averaged 78

percent this week, up from last week's 74 percent, indicating
continuing political and economic uncertainty.
Russia has now completed two quarterly reviews and four
monthly reviews under its three-year, $10.1 billion Extended Fund
Facility (EFF).
be disbursed.

The program's conditions must be met for funds to
Although the IMF has not yet denied a payment, the

RUSSIAN ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
1994
1995
Real GDP
Industrial Production
Consumer Prices 1
Ruble Depreciation 1
Trade Balance 2
Current Account 2
1. Monthly Rate.
2. Billions of U.S. dollars.

-15
-21
10
9
14.3
3.2

-4
-3
7
2
18.1
5.3

Q1
-3
-4
3
2
5.6
2.6

1996
Jul
Jun

Q2
-9
-7
-8
-5
1
2
1
2
n.a....
...
n.a.

-9
-7
1
2
..

July payment was delayed for two weeks until Russian authorities
took steps to boost inadequate tax collections.

However, the IMF

approved an increase in the target for the 1996 budget deficit from
4 percent of GDP to 5.25 percent when it became clear that the
original target would not be met.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 24, 1996 : Greenbook Part 2

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