Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 27, 1994 : Greenbook Part 2

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Confidential (FR) Class III FOMC

September 21, 1994

RECENT DEVELOPMENTS

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 economy appears to have expanded at an appreciable clip
this quarter.

Payroll growth reportedly slowed in August, but the

trend of hiring has remained quite strong, according to a range of
indicators.

Manufacturing activity has evidenced notable strength

of late, boosted by a pickup in motor vehicle production.

Measures

of demand are mixed across sectors, with the overall picture being
one of firming final sales, especially of consumer goods, and
slowing inventory investment.

Against a backdrop of rising resource

utilization and the earlier rise in oil prices, materials costs have
continued to surge, and the consumer price index has increased a bit
faster in the past couple of months than during the spring.
Employment and Unemployment
Payrolls grew less rapidly in August, but still at a fairly
brisk rate.

Nonfarm employment rose about 180,000, following gains

averaging 280,000 per month over the first seven months of the year.
The average workweek of production or nonsupervisory workers
declined to 34.5 hours from a relatively high level in July, and
aggregate hours of production workers fell 0.2 percent.
Nevertheless, the average level of hours during July and August was
1.9 percent

(annual rate) above the second-quarter level.

The unemployment rate was unchanged, at 6.1 percent, in August.
The labor force participation rate jumped to 66.6 percent, its
highest level since April, but household employment also surged
714,000.

Even so, the increase in household employment so far this

II-1

II-2

LABOR MARKET INDICATORS
(Seasonally adjusted)
Unemployment Rate

1980

Percent

1982

1984

1986

1988

1990

1992

1994

Labor Force Participation Rate

1981

1983

Percent

1985

1987

1989

1991

Initial Claims for Unemployment Insurance*

- 63
1995

1993

Thousands

-200

1987

1988

* Induding EUC adjustment

1989

1990

1991

1992

1993

1994

1995

II-3
CHANGES IN EMPLOYMENT 1
(Thousands of employees; based on seasonally adjusted data)
1993
1992

1993

1994

1994
Q2

June

July

Aug.

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

229

179
-11
-7
-4

Private
Manufacturing
Durable
Nondurable
Construction
Trade
Finance, insurance, real estate
Services
Health services
Business services
Total government

194

219
3
10
-7
24
47
11
127

19
42

10
116
23
46

229

345

383

251

379
35
36
-1
20
138
11
167
27
4

260
1
-3
4
22
104
0
132
16
70
-9

179

20
62
10

86
-3

164
-1

185
12

211
22

300
24

338
37

171
-3

151
38

127
120

209
219

364
363

459
349

131
195

-442
-242

22
-22

714
549

Aggregate hours of private production
.1
workers (percent change)
34.4
Average workweek (hours)
41.1
Manufacturing (hours)

.3
34.5
41.5

.4
34.5
41.7

.4
34.6
41.7

.4
34.7
42.1

-. 2
34.6
42.0

.4
34.7
41.9

-.2
34.5
42.0

Private nonfarm production workers
Manufacturing production workers
Total employment3
Nonagricultural

Memo:

1. Average change from final month of preceding period to final month of

period indicated.
2. Survey of establishments.
3. Survey of households. Data for 1994 are not directly comparable with earlier
years because of a redesign of the CPS in January 1994.

SELECTED UNEMPLOYMENT AND LABOR PORCE PARTICIPATION RATES1
(Percent; based on seasonally adjusted data)
1994

1994

1993
Q4

6.8

6.5

6.6

20.0
11.3
6.4

19.0
10.5
5.8

19.3
9.7
5.5

Women, 25 years and older

5.7

5.4

Full-time workers

7.4

June

July

Aug.

6.2

6.0

6.1

18.0
10.6
5.3

18.4
9.6
4.0

16.9
9.4
4.7

17.7
9.9
4.9

17.5
10.2
4.8

5.3

5.0

4.9

4.8

4.9

6.8

6.4

6.7

6.2

6.1

6.2

6.1

66.3

66.2

66.6

66.5

66.2

66.3

66.6

Teenagers
20-24 years old

51.3
77.1

51.5
77.1

51.1
76.7

52.7
77.0

53.6
77.0

53.7
77.2

52.5
76.4

53.0
77.0

Men, 25 years and older
Women, 25 years and older

76.6
57.0

76.2
57.1

76.2
57.5

76.3
58.0

75.8
57.9

75.5
57.6

75.8
57.8

75.8
58.2

1992
Civilian unemployment rate
(16 years and older)
Teenagers
20-24 years old
Men, 25 years and older

Labor force participation rate

1993

7.4

1. Data for 1994 are not directly comparable with earlier years because of a
redesign of the CPS in January 1994.

II-4

PAYROLL EMPLOYMENT GROWTH BY SECTOR
(Seasonally adjusted; monthly change)

Thousands

Retail Trade
--

ConstructionThousands
180

Three-month moving average

- ::*:"'%<

140

Three-month moving average

120
:70

I
1990

1991

I
1992

240

1993

160

1992

1993

1994

Three-month moving average

I-X

200

S\-

140
1994

Thousands

Three-month moving average

1991

I
1992

Manufacturing
-

1990

1991

1990

1994

Services Industry
-

120
1993

- 100

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

1990

1991

100

1992

1993

1994

II-5
year still trails the gain in payroll employment by nearly
1 million. 1
The slowdown in hiring reported in the August payroll survey
was concentrated in retail trade and construction.

Retail trade

employment was unchanged in August; however, this followed gains
totaling more than 200,000 in the previous two months.

Much of the

deceleration owed to a decline at eating and drinking
establishments, where employment may have been boosted temporarily
in June and July by activity associated with the World Cup.

(The

baseball strike occurred after the August survey reference week.)
Construction employment fell 6,000, largely because of a
decline in heavy construction, which includes highway and street
construction (but not buildings).

In addition, hiring by special

trade contractors (carpenters, plumbers, and electricians) was the
slowest (only 1,000) in more than a year.
In contrast, manufacturing payrolls rose 32,000 in August.
Much of the strength came in motor-vehicle-related sectors, but
employment was up in a number of other industries as well, including
electrical machinery, apparel, and printing.

In addition, the

factory workweek increased to 42 hours--close to the postwar highs
recorded earlier this year; average overtime hours matched the
postwar high of 4.8 recorded in April.

Outside of manufacturing,

the workweek was down or unchanged in most major sectors.
Other indicators suggest that labor market conditions remain
firm.

Weekly filings of initial claims for unemployment insurance

have fluctuated in a relatively low range of 320,000 to 340,000 per
week since the latter part of July.

The Manpower, Inc.,

index of

1. The Bureau of Labor Statistics preliminary review of unedited
data from state unemployment insurance records for 1994:Q1 suggests
that the gap will widen when the payroll series is rebenchmarked next
June. At this point, the BLS expects to revise the March 1994 level
of payroll jobs upward by 300,000 to 500,000--toward the high end of
the historical range of benchmark adjustments.

II-6

PRODUCTIVITY AND COSTS
Labor Productivity in the Nonfarm Business Sector

1987 dollars per hour

WS
mf SSSSS
mm'~~S~:
":**:*
*:::****:::****:::**
;*:*:*:*: :******:;::::*****
w ,.
*....**'....***...."^

X^w^

.;==:=
p
~s
^
ZSI s^%ss
_^ ~
mf\ ^s~:i
m
mS:f
^>^^W!^:

1980

^
m ^SSf

/--.
^-^^^^~

S
:
i Mi

1982

1984

1986

1988

1992

1990

1994

LABOR PRODUCTIVITY AND COSTS
(Percent change fram pr*ceding period at compound annual rate;
based on seasonally adjusted data)

19921 19931

1993:02
to
1994tQ2

1994

1993
Q3

Output Per hour
Total business
Nonfarz business
Manufacturing
Nonfinancial corporations

3.4
3.2
3.7

2.0
1.9
4.8

3.4
4.1
2.6

5.7
4.9
7.9

2.9
2.9
6.8

-2.7
-2.5
4.5

2.2
2.3
5.4

3.6

2.9

4.5

4.7

3.3

-1.3

2.7

5.1
5.2
4.3

2.9
2.5
3.2

3.1
2.8
4.1

2.4
2.4
4.0

6.2
6.1
3.8

.3
.8
-1.6

3.0
3.0
2.6

4.7

1.9

2.2

1.4

5.1

2.2

1.7
1.9
.6

.9
.6
-1.6

-. 3
-1.2
1.5

-3.1
-2.4
-3.6

3.3
3.1
-2.8

3.2
3.4
-5.8

.7
.7
-2.7

1.0

-1.0

-2.1

-3.1

1.8

1.4

-. 5

Conmensation ner hour
Total business
Nonfarm business
Manufacturing
Nonfinancial corporations2
Unit labor costs
Total business
Nonfarm business
Manufacturing
Nonfinancial corporations 2

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

II-7
net hiring strength for the fourth quarter is little changed from
its high second- and third-quarter levels.
Revised data indicate that labor productivity in the nonfarm
business sector fell at an annual rate of 2.5 percent in the second
quarter.

This decline is twice the rate initially estimated and was

due entirely to a downward revision to nonfarm business output.

The

sharp decrease in output per hour in the second quarter almost
offset the first-quarter gain, but the level of productivity was
still up 2-1/4 percent from a year earlier.
The offsetting movements in labor productivity over the first
two quarters of the year partly reflect an overstatement of hours
growth in the first quarter and the subsequent understatement in the
second quarter. 2
growth.

This pattern also affected hourly compensation

Nonfarm hourly compensation rose 0.8 percent at an annual

rate in the second quarter after a jump of 6.1 percent in the first
quarter.

However, over the four quarters ended in 1994:Q2, nonfarm

hourly compensation was up 3 percent--down from an increase of
3.8 percent over the same period of a year ago.
Our most recent data indicate little change in wage trends.
Average hourly earnings of production or nonsupervisory workers rose
0.2 percent in August and, over the past twelve months, were up
2.5 percent.

2. Data from the establishment survey on employment and average
weekly hours are the principal inputs used by the BLS to estimate
Severe weather
total hours worked during the month and quarter.
caused the workweek to drop sharply during the February survey week.
Following its usual procedure, the BLS made no adjustment to the hours
estimates in the productivity report to account for the fact that the
survey week was not representative of the month as a whole. However,
in estimating output and total compensation for the first quarter, the
Bureau of Economic Analysis assumed that economic activity returned to
more normal levels for the remainder of February. Thus, the
understatement of growth in first-quarter hours boosted productivity
and hourly compensation. These effects were reversed in the second
quarter.

II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
Proportion
in
total
IP
1993:Q4

1994

May

June

July

Aug.

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

100.0

8.3
8.3

5.2
4.4

37.9

-21.6

94.4
55.4
41.8
23.5
3.7
19.8
17.0

6.7
5.8
6.1
4.3
1.9
4.7
3.9

7.1
6.7
6.6
4.8
2.5
5.2

14.9
4.2
3.9
6.8

12.0
33.9
6.1
3.0

2.8
13.6
5.2

Motor vehicles and parts

-3.7

-2.5

8.9

EXCLUDING MOTOR VEHICLES
AND PARTS:
Total index
Products, total
Final products
Consumer goods
Durables
Nondurables
Excluding energy
Business equipment
Office and computing
Industrial
Other
Defense and space equip.
Intermediate products
Construction supplies
Materials
Durables
Nondurables
Energy
Memo:
Manufacturing
Manufacturing excluding,
motor vehicles and parts
Mining
Utilities

.8
.9
.9
1.0
.4
1.1
1.0

.6
.7
.8
1.1
.9
1.2
.6

.5
.7
.9
.7
4.0
.1
.3

-1.1
.1
.1

14.9
10.6

1.2
.3
1.4
1.8

.6
1.6
-. 1
.3

1.6
2.1
2.2
.9

.9
2.1
.6
.4

-10.2

-6.8

-1.3

-.6

4.6
-.4

7.0
11.7

.8
1.1

7.8
12.6
6.7
-.4

.7
.7
1.9
-.6

7.2

39.0
19.8
9.2
10.0

85.2

7.8

79.6
6.9
7.9

5.9
4.9
15.8

9.3
12.1
12.0

9.6
4.8
-11.8

.2
.2
.3
-. 1

.2
1.0
.0
-1.3

.3
.6
4.1

.7
-1.3
-1.2

1. From the final quarter of the previous period to the final quarter of the
period indicated.

1.0
.5
-. 8
-1.3

II-9
Industrial Production
Reflecting a large increase in manufacturing output, the
industrial production index rose 0.7 percent in August.

Moreover,

the increases for the preceding three months are now reported to be
larger than previously estimated.

As a result, the rate of capacity

utilization for total industry has climbed to 84.7 percent-2.8 percentage points above the 1967-93 average.
In August, higher output of motor vehicles and parts directly
contributed 0.5 percentage point to the 1.0 percent rise in
manufacturing output.

Total motor vehicle assemblies increased more

than 1 million units (annual rate) to 12.3 million units.

Industry

sources indicate that quicker retooling for the new model year
permitted the rapid August rise in production.

Indeed, General

Motors met production schedules despite a strike at a parts plant in
August, and the company reports that it will make up the lost output
of about 200,000 units (annual rate) for affected models in
September.
PRODUCTION OF DOMESTIC AUTOS AND TRUCKS
(Millions of units at an annual rate; FRB seasonal basis)
1994
July

Aug.

U.S. production
Autos
Trucks

11.2
6.0
5.2

12.3
6.4
5.9

Days' supply
Autos
Light Trucks

65.9
63.2

1994
Q4
Oct.
Sept.
------ scheduled----12.7
11.9
12.4
6.3
6.8
7.0
5.6
5.7
5.6

56.7
65.4

1. Components may not sum to totals because of rounding.
Outside of the motor vehicle industry, much of the rise in
manufacturing output was from motor-vehicle-related industries such
as tires, consumer steel, and metal stampings; production in these
industries, taken together, was up 3.7 percent in August.

Another

II-10
CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1988-89
High

1967-93

1993

Avg.

1994

June

July

Aug.

Total industry

84.8

81.9

81.5

83.4

83.9

84.2

84.3

84.7

Manufacturing

85.1

81.2

80.6

82.5

83.3

83.4

83.7

84.3

89.1
83.3

82.2
80.6

84.0
79.1

85.8
81.2

87.4
81.6

87.5
81.7

87.4
82.1

87.7
82.8

Primary processing
Advanced processing

MANUFACTURING SECTOR
Capacity Utilization

1985

1986

Percent

1987

1988

1990

1989

1991

1992

1993

1994

Vendor Performance*

Percent

Capacity utilization
----

1985

1986

1987

*Peentof respondens tn he purchan

1988

1989

1990

anaes survey reporng slower

suppt deivees m s tose reporting faster diivenOs, seasonaay

1991

1992

1993

1994

II-11
important contribution came from the continued robust expansion in
the output of business equipment.

Production of office and

computing equipment registered a second consecutive monthly increase
of 2.1 percent, while output of industrial equipment expanded
0.6 percent.
In other areas, output growth was lower in August.

The index

for household durables edged down after a large increase in July,
and production of consumer nondurable goods excluding energy was
little changed.

Utilities output fell 1.3 percent as electricity

usage continued to retreat from an elevated level in June;

contrast to previous months, this August was a bit cooler than
average.

Output of construction supplies remained flat, and mining

production fell for the second straight month.
Because of the surge in August production, as well as revisions
to estimated growth in the preceding three months, the factory
operating rate reached 84.3 percent.

Most of the recent rise

occurred in advanced-processing industries, whose utilization rate
climbed to 82.8 percent.

The utilization rate in primary-

processing industries turned up as well in August, to 87.7 percent,
after having edged lower in the preceding two months.

The pressures

on capacity were mirrored in purchasing managers' reports on vendor
performance in August, which the NAPM reported to be the worst since
mid-1988.
Prices
Higher rates of capacity utilization have exerted discernible
upward pressure on prices at earlier stages of production.

Producer

prices of intermediate materials other than food and energy rose
0.5 percent in August and have risen at about a 6 percent annual
rate during the past three months.

Materials with especially large

increases in recent months include metals, chemicals, and paper.

II-12
SPOT PRICES OF SELECTED COMMODITIES
-- Percent change
1---------------

-----------Current
price
($)

Steel scrap (ton)

Aluminum, London (lb.)
Lead (lb.)
Zinc (lb.)
Tin (lb.)

1.260
134.500
.722
.390
.491
3.589

Memo:
Year
earlier
to Date

INDUSTRIAL COMMODITIES------------------

------------Metals:
Copper (lb.)

To
Aug. 09 2

1993

1992

Aug. 092
to
Sept. 20

4.1
1.1
9.9
-4.3
-10.3
6.5

-19.0
46.8
-10.7
3.0
-7.5
-14.1

31.0
-2.2
30.1
10.2
-. 4
6.0

12.5
-1.5
10.9
2.6
5.6
3.5

44.8

19.6
44.8

16.4
15.9
19.2

Textiles and fibers:
Cotton (lb.)
Burlap (yd.)

-. 9

.709

-3.2

19.6

15.3

.278

-9.6

8.2

3.8

1.1

31.2
15.8

.950
.668

11.4
12.3

1.3
-7.3

12.7
49.2

6.7
.1

17.3

Miscellaneous materials:
Hides (lb.)
Rubber (lb.)

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

Precious metals:

OTHER

393.900
5.595
419.500

-5.9
-5.7
5.5

16.6
38.8
8.0

-2.3
2.0
6.4

305.000
390.000

47.5
53.5

75.8
-6.3

15.750
.453
.471

1.4
-2.9
21.9

64.500
35.500
.548

Corn (bu.)
Wheat (bu.)
Soybeans (bu.)

Other foodstuffs:
Coffee (lb.)

Gold (oz.)

Silver (oz.)
Platinum (oz.)
Forest products:
Lumber (m. bdft.)

Plywood (m. sqft.)

Petroleum:
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)

51.0

COMMODITIES--------------4.0
8.9
2.3

11.0
36.8
14.3

-30.4
8.3

-5.6
10.8

-4.7
20.0

-25.0
-31.0
-22.4

31.5
61.3
14.4

-11.3
-24.2
-5.8

-3.7
-8.6
-11.2

10.6
10.4
-5.3

-7.3
.6
6.1

-3.4
5.5
3.4

-7.9
-17.4
2.8

-11.6

2.015
4.030
5.310

-16.1
-11.7
1.1

41.7
5.8
24.5

-26.9
-10.3
-19.4

-4.0
14.8
-5.1

-9.2
24.0
-13.8

2.210

17.9

-2.3

175.2

24.5

227.4

87.927

10.1

3.4

-5.6

-2.3

-5.3

4.620

-68

-14

139

170

Livestock:
Steers (cwt.)
Hogs (cwt.)

Broilers (lb.)

U.S.

farm crops

Memo:
Exchange value of the

-25.3
-7.7

dollar (March 1973=100)

Yield on Treasury bill,
3
3-month

1.
Changes, if not specified, are to the last week of the year indicated and from
the last week of the preceding year.
2.

Week of the August Greenbook.

Changes are in basis points.

II-13

COMMODITY PRICE MEASURES
Journal of Commerce Index
Ratio scale, index 1980=100

CRB Spot Industrials
Ratio scale, index 1967=100
Sept13
CRB Industrials
S

313
-

309

S303
f"
July

'1 1 1 1 1 1j 297
Aug.
Sept.
1994

CRB Futures
Ratio scale index 1967=100

CRB Futures

-237
I
-

Sept20

233
229

i
210

Note. Wekly data, Tuedays; Journal of Commrce data monthly before 1965. Vertical kne on small panels indicate week o last Greeo ook.
The Journal o Commerce index is based almost entirely on industrial commodities, wth a small weight given to energy comodities, and the
CRB spot price index consists entirely of industrial commodlies, excuding energy. The CRB futures index gives abo a 60 percent weight
to food cmnmoditiae and spits the remaning weight roughly equally among energy commodites, industrial commodities and precious metals.

225

II-14
INTERMEDIATE MATERIALS PRICES AND FINISHED GOODS PRICES
(Excluding food and energy; twelve-month change)
PPI Consumer Goods Excl. Food and Energy

Percent

PPI intermediate materials

1978

1980

1982

PPI consumer goods

1984

1986

1988

1990

1992

PPI Capital Equipment

1994
Percent

PPI

intermediate materials

PPI capital equipment

./
I

1978

1980

1982

1984

1986

1988

1990

1994

CPI Commodities Excl. Food, Energy and Used Cars

Percent

PPI intermediab materials

CPI commodities

1990
1992
1978

1980

1982

1984

1986

Note. Shaded areas are periods when actual output is above potential.

1988

1994

1990

1994

1992

II-15
The increases in metals prices likely reflect not only the recent
increases in operating rates in these industries but also the
recovery in activity in other industrialized countries that has
contributed to rising global metals prices.

Chemicals prices also

have been affected by the run-up in crude-oil prices.
Spot commodity prices also have increased generally since the
last Greenbook.

Most industrial materials posted further large

increases--copper, aluminum, zinc, and tin prices were all up more
than 4 percent--although scrap steel prices declined in recent weeks
after large increases prior to that.

Corn and wheat prices also

increased significantly in recent weeks.

Although corn prices

remained well below their spring levels, wheat prices have more than
offset their declines this summer.

Coffee prices have been

extremely volatile in recent weeks; however, their average so far in
September is not much different from that of July.
Recent developments in intermediate materials prices may exert
upward pressure on finished goods prices in the coming months, but
past experience indicates that the extent of pass-through from
materials prices to prices of finished goods can vary greatly
(chart).

Little pass-through was apparent when materials prices

accelerated in 1983 and 1984 during the beginning of the expansion.
That episode illustrates that accelerating materials prices may give
false signals about subsequent changes in finished goods prices,
particularly when utilization is relatively low.

Econometric

evidence suggests that the pass-through tends to be more pronounced
when the economy is operating at high levels of utilization (shaded
areas); however, that result was far more apparent in the late 1970s
than the late 1980s.
The PPI for finished goods rose 0.6 percent in August, the
largest monthly increase since October 1990.

In addition to another

II-16

RECENT CHANGES IN CONSUMER PRICES
(Percent change; based on seasonally adjusted data) 1

Relative
importance,
Dec. 1993

1992

1993

1993
-Q4

1994

----- Annual rate-----All items 2
Food
Energy
All items less food
and energy
Commodities
Services

100.0
15.8
7.0

2.7
2.9
-1.4

3.3
4.9
1.2

2.5
-1.1
4.7

2.5
2.8
-4.9

77.2
24.4
52.8

3.3
2.5
3.7

3.2
1.6
3.9

3.4
2.4
3.7

2.9
.6
4.2

100.0

Memo:
CPI-W 3

2.9
1.5
2.0

2.9

2.5

3.1

2.5

July

Aug.

-Monthly rate.3
.5
1.8

.3
.4
1.4

3.1
4.2
2.4

.2
.1
.2

.3
-. 1
.4

2.5

1. Changes are from final month of preceding period to final month of period indicated.
2. Official index for all urban consumers.
3. Index for urban wage earners and clerical workers.

RECENT CHANGES IN PRODUCER PRICES
1
(Percent change; based on seasonally adjusted data)

Relative
importance,
Dec. 1993

1992

1993

1993
--Q4

1994
Q1

1994
Q2

----- Annual rate------

July

Aug.

-Monthly rate-

100.0
22.9
13.3
63.7
40.3
23.4

1.6
1.6
-.3
2.0
2.1
1.7

.2
2.4
-4.1
.4
-.4
1.8

-.3
5.2
-15.6
.9
1.5
.3

3.6
-.6
15.4
3.0
2.0
4.3

-.3
-5.8
-2.6
2.1
1.5
3.6

.5
.5
2.5
.1
.0
.1

.6
.7
1.7
.4
.4
.1

Intermediate materials 2
Excluding food and energy

95.2
82.3

1.1
1.2

.8
1.6

-.3
1.6

2.8
1.9

2.6
3.9

.6
.4

.7
.5

Crude food materials
Crude energy
Other crude materials

44.1
34.4
21.5

3.0
2.3
5.7

7.2
-12.3
10.7

18.4
-22.1
15.4

-4.5
10.1
22.7

-20.9
26.9
-2.1

-2.1
-1.3
2.0

-1.4
-.1
1.4

Finished goods
Consumer foods
Consumer energy
Other finished goods
Consumer goods
Capital equipment

1. Changes are from final month of preceding period to final month of period indicated.
2. Excludes materials for food manufacturing and animal feeds.

II-17
jump in energy prices, prices of finished foods registered a
0.7 percent increase.

The PPI for finished goods other than food

and energy rose 0.4 percent in August, following two months of no
change.

Price increases were especially large for light motor

vehicles and a variety of nondurable consumer items, including
tobacco products and cosmetics.
The twelve-month change in the PPI for finished goods other
than food and energy increased from 0.5 percent in July to
1.9 percent in August.

This increase, however, was mostly the

result of the 25 percent decline of tobacco prices in August 1993,
which has now dropped out of the twelve-month percent change.
Excluding food, energy, and tobacco, the most recent twelve-month
change in prices of finished goods was 1.8 percent, up a bit from
the 1.6 percent pace in the previous twelve-month period. 3
Despite significant upward pressure on prices at earlier stages
of processing, inflation at the consumer level has only increased
modestly.

The consumer price index has risen a little faster of

late, posting increases of 0.3 percent for three months running-including August.

The recent edging up of CPI inflation has been

led by some solid increases in energy and certain food and service
prices.
Retail energy prices rose 1.4 percent in August, the second
consecutive large increase.

The recent increases in energy prices

primarily reflect the pass-through of higher crude oil prices (the
posted price of a barrel of West Texas intermediate rose from $13.50
in March to $18.50 in July.)

Since late July, however, crude oil

prices have reversed some of their earlier increase, and the

3. The decline in prices of tobacco products at the retail level
was spread over August and September of 1993. As these declines drop
out of the twelve-month change in the CPI excluding food and energy in
September, that index will be boosted by 0.1 percentage point.

II-18

DAILY SPOT AND POSTED PRICES OF WEST TEXAS INTERMEDIATE
Dollars per barrel

Spot

Oct

Nov

Dec

Jan

Apr

May

June

Aug

Sep

*Posted prices are evaluated as the mean of the range listed in the Wall Street Journal.

MONTHLY AVERAGE PRICES-WEST TEXAS INTERMEDIATE
Year and Month

Posted

Spot

October
November
December

17.10
15.55
13.39

18.15
16.68
14.51

13.78
13.63
13.46
15.13
16.80
17.97
18.56
17.40
16.14

15.02
14.78
14.66
16.38
17.88
19.07
19.65
18.37
17.29

1994
January
February
March
April
May
June
July
August
September
1. Price through September 20.

II-19
Lundberg survey for early September suggests that an easing in
retail energy prices has already begun.
The CPI for food rose 0.4 percent in August.

Coffee prices

posted another large gain as the huge increases in spot prices
continued to be passed on to the consumer level.

Excluding coffee

prices, retail food prices were up only 0.1 percent last month,
continuing the moderate trend evident since the beginning of the
year.
Prices of consumer goods other than food and energy fell
slightly in August.
apparel category;
0.2 percent.

The decline was concentrated in the volatile

in other categories, consumer goods prices rose

Prices of services other than energy rose 0.4 percent

in August, following four months of 0.2 percent increases.

Owners'

equivalent rent posted a second consecutive 0.4 percent increase,
following three months of more modest increases: tenants' rent also
was up 0.4 percent in August.

Nonetheless, the twelve-month changes

in these series remain at 3-1/4 percent

(owners' rent) and

2-1/2 percent (tenants' rent), the same as their twelve-month
changes a year ago.

Medical services prices rose 0.4 percent for

the fourth consecutive month.

Over the past twelve months, medical

fees increased 5.0 percent, down from 6.4 percent in the previous
twelve-month period.
Motor Vehicles Sales
Sales of new light vehicles rebounded in August to a
15.5 million unit annual rate

(FR seasonals),

purchases of autos and light trucks.

with increases in

The recent strength reflects

both a temporary boost from heavy incentives on Japanese makes and

4. Sales are reported on an FRB seasonally adjusted basis to
correct for problems in the BEA seasonal factors that do not
accurately account for variations in the reporting periods used by
automakers.

II-20
SALES OF AUTOMOBILES AND LIGHT TRUCKS 1
(Millions of units at an annual rate: FRB seasonals)
1993

1994

1992

1993

June

July

Aug.

Total
(BEA Seasonals)

12.8
12.8

13.9
13.9

14.6
14.5

15.0
15.5

14.8
14.8

14.7
14.5

14.3
13.7

15.5
15.3

Autos
Light trucks

8.4
4.5

8.7
5.2

9.0
5.5

9.2
5.8

9.1
5.7

9.0
5.7

8.7
5.6

9.6
5.7

10.5
6.3
5.1
1.2
4.2

11.8
6.8
5.5
1.3
5.0

12.5
7.1
5.7
1.4
5.4

12.9
7.3
5.9
1.4
5.6

12.7
7.2
5.7
1.5
5.5

12.5
7.0
5.5
1.6
5.5

12.1
6.7
5.2
1.5
5.4

13.1
7.4
5.6
1.8
5.7

2.3
2.1
.2

2.2
2.0
.2

2.0
1.9
.1

2.1
2.0
.1

2.1
2.0
.2

2.2
2.0
.2

2.1
2.0
.1

2.4
2.2
.2

.72
.63

.74
.64

.74
.65

.73
.63

.72
.61

.70
.59

North American2
Autos
Big Three
Transplants
Light trucks
Foreign produced
Autos
Light trucks
Memo: domestic nameplate market share
Total
Autos

Note: Data on sales of trucks and imported autos for the most recent month
are preliminary and subject to revision.
1. Components may not add to totals because of rounding.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry: before January 1994, some vehicles produced in Mexico were
also excluded.

II-21

LIGHT VEHICLE SALES
Autos and Light Trucks: Big Three

Millions of units, annual rate

1994

1993

1992

1991

Autos: General Motors and Ford

Millions of units, annual rate

Total

Retail

/ I

7- -

I*'

-C

Fleet

z
C-

^-~\

-c----

\'#
1991

1992

1993

Note: These data were provided on a confidential basis.

1994

II-22
September 16, 1994
RETAIL SALES
(Percent change; seasonally adjusted)

1993

1994

Aug.

3.0

1.5

1.1
1.1

Retail control1
Previous estimate

1.4

1.0

1.2
1.2

Total excl. automotive group
Previous estimate

1.9

1.5
1.5

GAF 2
Previous estimate

2.0

1.8
1.8

1.7
1.8

Durable goods

5.7

2.2

1.5
1.4

1.2
.9

-.6
-.5

1.3

7.4
7.1
4.8
-1.3

-1.6
4.2
.0
.1

4.0

1.3
1.1
1.7
1.0

-. 2
-1.6
.0
2.4

2.2
1.2
1.7
.5

1.4

1.0

Total sales
Previous estimate

stores

Previous estimate
Bldg. material and supply
Automotive dealers
Furniture and appliances
Other durable goods
Nondurable goods stores
Previous estimate
Apparel
Pood
General merchandise 3
Gasoline stations
Other nondurables*

-.2
4.0
4.4

June

July

1.1

-1.3
.9
1.9
3.0
.6

1. Total retail sales less building material and supply stores and
automotive dealers, except auto and home supply stores.

2. General merchandise, apparel, furniture, and appliance stores.
3. Excludes mail-order nonstores; mail-order sales are also excluded
from the GAF grouping.
4. Zncludes sales at eating and drinking places, drug stores, and
proprietary stores.

II-23
some easing of the supply constraints that had held down sales of
domestic nameplates since the first quarter.
Among Big Three makes, an improved supply of light vehicles
permitted rebounds in sales of autos and light trucks after downward
trends since the beginning of the year (chart, top panel).
Confidential data from GM and Ford on automobile sales indicate that
the rebound occurred in fleet sales, which are primarily made to
rental car companies (chart, bottom panel).

When faced with limited

supplies of vehicles earlier this year, automakers apparently denied
vehicles to their captive rental car companies and now are meeting
rental car demand with the newly available supply.

Furthermore, the

addition of third shifts at two plants producing pickup trucks and
sports utility vehicles began to alleviate supply constraints in
that segment of the market, allowing sales to edge up in August.
The latest reading on car buying attitudes from the Michigan
SRC survey shows more positive consumer sentiments.

Fewer consumers

expressed concerns that past and expected interest rate hikes will
choke off the recovery.

In September, the preliminary estimate of

consumers' appraisals of car buying conditions jumped nearly
6 percent, reaching its highest level since April.
Given the high level of demand since the turn of the year,
domestic automakers have been able to raise prices of cars and light
trucks 4 and 5 percent, respectively, as measured by the PPI during
the twelve months ended in August.

Moreover, the continued

appreciation of the yen has boosted Japanese prices and raised the
BLS import price index for autos 5 percent during the twelve-month
period ended in July.
Personal Income and Consumption
Nominal retail sales increased 0.8 percent in August, boosted
by a sharp rebound in sales of durable goods from a weak July.

II-24
PERSONAL CONSUMPTION EXPENDITURES
Real PCE for Goods Excluding Motor Vehicles*

Billions of 1987 dollars

e Quarterly averages
1450

Aug.
1420

1390

1360

1330

1993

1300

1994

*Jun.,
July, and August ae sta estihms

Home Sales and Spending on Other Durable Goods

Four-quarter percent change
15

S-

/
(right scale)
5

/
,I
.I.
I
0

1988

198

1989

199

1990

199

1991

192191
1992

1993

1994

II-25
Spending in the retail control category increased 0.6 percent in
August, the same rate as the upward-revised estimate in July.
Factoring in the latest CPI data, real consumption of goods
excluding motor vehicles is estimated to have risen 0.4 percent in
August to a level 4.8 percent (annual rate) above the second-quarter
average:

The latest increase maintains the brisk pace that has

prevailed since early 1993.
The fastest growing subcategory of spending on nonauto goods
during this period has been durables, particularly furniture and
household equipment.

Historically, growth in spending on furniture

and household equipment has tended to track growth in home sales,
Although growth in home sales leveled off during the first half of
this year, it remained high relative to a year ago
panel).

(figure, bottom

Thus, growth in spending on these household durables has

also remained high.
Real disposable income remained on a solid upward trend through
July.

However, judging from the most recent labor market report,

wage and salary growth for August is likely to be below the pace of
the first half of the year.

The modest upward trend in interest

income attributable to rising interest rates is likely to provide
only a slight offset.
Measures of consumer attitudes have been relatively stable
recently.

The Michigan index of sentiment edged up in the first

half of September, according to preliminary results.

The increase

reflected mixed changes in assessments of current and prospective
conditions; improved expectations about future conditions (an
official cyclical leading indicator) offset less positive appraisals
of current conditions (chart, top panel).

Both the Michigan and the

Conference Board indexes have been fluctuating near, but slightly
below, their post-recession peaks.

II-26

PERSONAL INCOME
Real Disposable Personal Income
3920
0 Quartery averages

3840

3760

3680

1993

3600

1994

PERSONAL INCOME
(Average monthly change at an annual rates billions of dollars)
1993
1993

1994

33.5

30.3

18.5

7.3

29.9

Wages and salaries
Private

-8.8
-10.2

13.7
13.6

19.8
17.0

15.8
13.7

3.7
5.2

16.8
15.2

Other labor inome

2.5

2.7

1.8

1.7

1.8

Proprietors' income
Farm

2.9
.7

16.2
10.7

.5
-1.7

-5.5
-6.9

-5.0
-6.3

1.0
-. 5

1.9
.8
-2.7

.7
.3
-3.1

2.3
.9
3.2

-2.4
2.1
5.3

-2.5
1.6
5.5

.3
1.7
5.0

Transfer payments

4.6

4.1

4.9

2.8

3.0

4.6

Less: Personal contributions
for social insurance

1.1

3.1

1.3

4.4

5.2

4.1

1.4

3.7

29.1

25.1

14.4

5.9

26.2

-6.4

16.4

11.8

2.8

-4.2

6.1

Total personal income

Rant
Dividend
Interest

Less:

July

1.3

Personal tax and nontax

payments
Equals:
iMemo

June

Disposable personal income

Real disposable income

II-27

INDICATORS OF CONSUMER ATTITUDES
Consumer Sentiment
Index

Michigan Survey (right scale)

1986

1987

1988

1989

1990

1991

1992

1993

1994

Current Conditions

1986

1987

Index

1988

1989

1990

1991

1992

1993

1994

Expected Conditions

Index

Conference Board Survey

Aug.

Michigan Survey

SI
1986

1987

I
1988

I
1989

1990

I
1991

I
1992

1993

I_
1994

II-28
PRIVATE HOUSING ACTIVITY
(Millions of units; seasonally adjusted annual rates)
1994

1993
Annual
Q4

Q2p

June r

July r

Aug.p

All units

Starts
Permits

1.29
1.20

1.48
1.38

1.37
1.29

1.44
1.35

1.36
1.32

1.41
1.34

1.44
1.35

Single-family units
Starts
Permits

1.13
.99

1.29
1.13

1.17
1.06

1.19
1.07

1.16
1.05

1.20
1.03

1.17
1.05

New-home sales
Existing-home sales

.67
3.80

.77
4.17

.69
4.05

.66
4.06

.61
3.96

.66
3.95

n.a.
n.a.

.16
.21

.19
.25

.20
.23

.25
.29

.20
.27

.21
.30

.28
.30

Multifamily units
Starts
Permits
Note. p Preliminary.

r Revised.

n.a. Not available.

PRIVATE HOUSING STARTS
(Seasonally adjusted annual rate)
Millions of units

1
1978

I
1980

I I
1982

I I
1984

1986

I I
1988

1990

I I I
1992

I
1994

II-29
Housing Markets
Most indicators of housing demand eased a bit further during
the intermeeting period, but single-family construction was
surprisingly resilient.
Single-family starts edged down 3 percent in August to
1.17 million units (annual rate).

Nonetheless, as in July, the

level was close to the second-quarter average of 1.19 million units.
Permit issuance for single-family projects corroborates the recent
leveling off in starts.

Prior to these most recent readings,

single-family construction had been trending down with the rise in
mortgage interest rates that began late last year; the monthly
pattern, however, was obscured by last winter's severe weather.
The strength of single-family production during the summer
months is at odds with most other indicators, which have been
pointing to a further softening of housing demand.

New-home sales

in June and July averaged 17 percent below the high of last year's
fourth quarter, and the level of sales suggests that demand is not
sufficient to support the recent rate of production.
existing homes are down as well.

Sales of

These data on softening sales

volumes are corroborated by assessments of market conditions by
builders and lenders, as recorded in industry surveys through early
September (chart, middle and bottom panels).

Consumer homebuying

attitudes, on the other hand, have improved in recent months.
The weakening of demand has yet to show through in prices,
which by most measures have continued to increase at about a 3-to-4
percent annual rate for the nation as a whole.

Rising construction

costs, however, may be offsetting the effects of reduced demand.
Although lumber prices have been flat in recent weeks, they are
about 7 percent above even the elevated level of a year earlier.
Costs of plywood and most other building materials rose further in

II-30
SINGLE-FAMILY HOUSING INDICATORS
Single-Family Starts and Permit Issuance
Thousands of units
-1600
Monthly

Starts*

Permit issuance

1989

1990

1992

SIncludes starts outside permit-issuing places.

4500

-800

1993

New and Existing Home Sales
Thousands of units

Thousands of units
-

Monthly

New home sales (right scale)
July

4000

3500

Existing home sales (left scale)

3000 I-

2500

1989

1990
1990

1200

Aug.-

1991
1991

1992
1992

1993

1994
1994

9/21/94

II-31

INDICATORS OF HOUSING DEMAND
(Seasonally adjusted)
Consumer Homebuying Attitudes*
Millions of units, annual rate

Diffusion index
Consumer homebuying attitudes (right scale)

Sept. (p)

Aug.

Single-Family Starts (left scale)
A_

1987

1988

aII

1989

1990

1991

1992

1994

1993

SThe homebuying attitudes index is calculated by the Survey Research Center (University of Michigan) as the proportion of respondents
rating current conditions as good minus the proportion rating such conditions as bad.

Builders' Rating of New Home Sales*
Millions of units, annual rate

Diffusion index
Builders' rating of new home sales (right scale)

-4."'

Single-Family Starts (left scale)

1987

1988

1989

1990

1991

1992

1993

'The index is calculated from National Association of Homebuilders data as the proponion of respondents rating current sales as good
to excellent minus the proportion rating them as poor

MBA Index of Mortgage Loan Applications
Millions of units, annual rate
-

1994

March 16, 1990 = 100
210
Purchase index (right scale)

Sept. 9

Single-Family Starts (left scale)
I

1990

1991

1992

1993

1994

150

II-32

CALIFORNIA AND THE NATION
Permit Issuance
Thousands of units

Thousands of units
-

2700

Annual

U.S. (right scale)

California (left scale)
300

2000

I,
I

1994*

180 1-

1964

1959

1969

1974

1979

*1994 projected as twice the level of the first six months.

Growth in Building Permits, 1993:H1 to 1994:H1

J Less than 10%
[

10% to 24%
25% and greater

---

1984

1989

1 1

1994

1300

II-33
August and, like lumber, have increased more rapidly during the past
year than have prices in general.

Construction labor costs, by

contrast, continue to rise only slowly, except for some skilled
trades in scattered local markets.
In the multifamily sector, starts rose in both July and August.
These increases regained most of the ground lost by the sharp drop
in June, which had followed a surge in May.

Permit issuance for

these projects moved to a higher level during the summer--added
evidence that this segment of the market is beginning to recover
from its depressed levels of the past several years.

Continued high

vacancies and soft rents argue against a sharp rebound, however, and
production for the foreseeable future should remain less than half
the peak levels reached in the mid-1980s.
The federal income tax credit for construction or
rehabilitation of rental housing for low-income households, which
was reauthorized a year ago, 5 is often cited as a key cause of
the recent strengthening in multifamily construction; however, our
estimates suggest that the actual influence of the credit has been
quite modest.

First, the equity injected into apartment

construction through the tax credits is small relative to the size
of the market, owing in part to statutory caps on the amount of
credits that can be issued annually and to the costs of syndicating
the credits.

Second, some of the construction projects to which the

credits are assigned would have gone forward even without the
credit.

And third, even if the tax credits tipped the scales in

favor of some projects, the resulting increased housing supply would

5. The tax credit is a reduction in federal tax liability each year
for ten years for owners of, and investors in, low-income rental
housing. Credits are available for new construction or rehabilitation
of existing properties and are based on development costs, the number
of qualifying low-income housing units, and ceilings on state issuance
of credits. For new construction, up to 70 percent of the development
costs (excluding land expenses and architectural and other
professional fees) are available for tax credits.

II-34
FUNDAMENTAL DETERMINANTS OF BUSINESS FIXED INVESTMENT
Cost of Capital

Percent
....

change

.Four-quarter

Other equipment

:::::i

iJ~!
::::::
"Y

ili

....

.:a
::z:F:!:
i::

\.r%

Office and
computing

S::

:i::

1964

i::::1 I i
I

1969

r .'.I

1974

1979

equipment

:'::-4: I
l

:::

I
*/i}3;Ili', : -\ ' ".

1984

::
I

1989

Acceleration of Business Output

1994

Percentage points

,:..Eight-quarter percent changa:Jess year-e.arier eight-quarter percent.change

iNi A A:AiiiiiVV
i
'
1969

1974

1979

]
]:::

F
Wi***I"

1964

x.
1
:!i:

1984

1989

Real Domestic Corporate Cash Flow

1994

Percent

".Four-quarterchange

i[iVAt

i]}i
1964

1969

1974

1979

1984

1989

1994

II-35
tend to lower rents in the local market and thus deter unsubsidized
projects.
One factor buoying the national housing statistics this year
has been a turnaround in the California economy.

Housing

construction in the state continued to decline in 1992 and 1993.
even as the nation overall was recovering from the recession
(chart).

Last year, California accounted for only 7 percent of the

nation's residential construction, down from an 18 percent share as
recently as 1986.

This year, building has increased, house prices

have stabilized in several large metro areas, and sales of existing
homes statewide in the second quarter jumped 24 percent from a year
earlier.

But, despite the turnaround, California's homebuilding

performance this year falls short of most other states in the
booming West (bottom panel).
Business Fixed Investment
The limited data available for the third quarter are consistent
with the view that growth of real business fixed investment, though
still strong, has been slowing during 1994 after the sharp advance
in 1993.

In July. nominal new orders and shipments of nondefense

capital goods were down.

On the other hand, unfilled orders

increased in July, business purchases of motor vehicles improved in
August, and indicators of third-quarter construction activity were
up slightly.
Looking at the fundamental determinants of capital spending,
increases in long-term interest rates caused the cost of capital for
equipment excluding computers to rise in the second quarter for the
first time in three years (chart).

The cost of capital for

computers continued to decline, although at a much less dramatic

II-36
BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1993

1994

May

June

July

7.1
8.0
5.2
8.8

1.0
1.2
3.3
.5

2.3
4.6
1.7
5.4

1.0
1.9
-.3
2.5

3.0
2.3
2.4
2.2

-2.0
-2.0
-2.4
-1.9

Shipments of complete aircraft1

34.1

10.0

-33.0

-9.9

64.4

-51.5

Sales of heavy trucks

10.3

-1.0

5.3

-1.9

11.8

-12.9

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

10.4
10.9
12.9
10.4

6.2
1.7
.8
1.9

.2
4.2
6.7
3.5

-.9
-2.5
-1.4
-2.9

7.2
7.5
.9
9.5

-4.7
-3.1
.4
-4.2

Construction put-in-place
Office
Other conmercial
Institutional
Industrial
Public utilities
Lodging and misc.

5.0
4.6
13.7
-4.5
1.3
7.4
.6

-3.1
-.3
-6.0
-6.7
1.0
-2.2
-2.7

5.8
4.1
12.3
7.3
7.1
2.7
-.7

.9
-1.3
2.2
2.2
.7
1.0
-3.5

1.3
-.9
3.1
3.2
-1.7
3.0
-5.6

1.1
2.7
1.3
1.4
1.9
.5
-3.6

Rotary drilling rigs in use

-3.7

2.2

-1.6

-.7

21.1
27.5
3.3

10.9
18.6
-11.8

9.2
6.5
19.6

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

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

Nonresidential structures

Memo
Business fixed investment2
Producers' durable equipment2
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 constant-dollar data; percent change, annual rate.
n.a. Not available.

II-37
pace than in recent years. 6

In addition, the "accelerator

effect," proxied by the eight-quarter change in output growth,
waned.

The growth of cash flow through midyear, on the other hand,

was still solid.
Shipments of nondefense capital goods (excluding aircraft)-office and computing equipment as well as other equipment--declined
about 2 percent in July, offsetting June advances.

Nevertheless,

shipments of both types of capital goods in July were still roughly
at their average levels for the second quarter.
declined in July.

New orders also

Bookings for office and computing equipment

advanced 0.4 percent, but this gain was more than offset by a
4.2 percent decline in orders for other capital goods.
Nevertheless, orders for nondefense capital goods remained at a high
level in July relative to shipments.

Thus, the already sizable

orders backlog continued to grow.
Rising sales of motor vehicles boosted capital spending
significantly in the first quarter, but sales dropped off in the
second quarter.

The fluctuations in fleet sales of light vehicles,

which were discussed earlier, accounted for this pattern.

Light

vehicle sales turned up in August, as did sales of heavy-weight
trucks.

The continuing strength in demand for heavy trucks has

stretched industry capacity and motivated truck manufacturers to
bring new capacity on line in the fall.
Turning to nonresidential structures, construction put in place
increased 1.1 percent in July, after climbing 5.8 percent in the
second quarter.

On a six-month moving average basis, construction

continues to trend up at about the same rate as in 1993 despite

6. In addition to higher interest rates, a large part of the change
is attributable to a slowing in the rate of decline of computer
prices. As discussed in detail in the August Greenbook, this slowing
appears to be the result of a poorly constructed sample for the
producer price index for computers that is the basis for the BEA's PDE
deflator.

II-38

ORDERS AND SHIPMENTS OF NONDEFENSE CAPITAL GOODS
Office and Computing Equipment
Billions of dollars

1991

1992

1993

1994

Billions of dollars

1991

1992

1993

1994

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

1991

1992

1993

1994

Billions of dollars

1991

1992

1993

1994

II-39
being hit hard by winter weather in the first quarter.

Outlays for

all construction categories, except lodging, showed strong to
moderate gains.

Several recent key indicators of commercial construction
activity were consistent with the view that conditions are
improving.

The National Real Estate Index (NREI), showed increases

in prices over the past year for retail structures and office
buildings.

Given the huge declines in prices for office buildings

witnessed in recent years, these increases were a significant
departure.

An alternative measure of office prices--the Russell-

NCREIF index--has shown some signs of leveling off.

Moreover, the

Russell-NCREIF index of nominal rental income for U.S. office
properties began to inch up in the second quarter.
August survey of Real Estate was also upbeat.

The FDIC's

Nationwide, 89

percent of the bank examiners and liquidators responding to the
survey believed that prices of commercial real estate were either
holding steady or increasing at the beginning of the third quarter,
up from 74 percent at the same time last year and a low of
54 percent in early 1992.

Another indication of improving

conditions was the decline of vacancy rates.

Both downtown and

suburban vacancy rates continued to edge down in the second quarter.
These rates have come down sharply over the past two years--from
around 20 percent to roughly 16 percent--and vacancy rates are now
at their lowest level in three years.
In the natural gas industry, exploration has leveled off
lately, but industry analysts view this development as a temporary
lull.

Exploration activity is apparently being scaled back in

response to the recent decline in natural gas spot prices.

Most

analysts believe, however, that these price declines reflect
transitory developments--such as the mild summer--that reduced

II-40

NONRESIDENTIAL CONSTRUCTION AND PERMITS
(Six-month moving average)
Total Building

Index, Dec. 1982

100, ratio scale

S280
210

Construction (C)
140

July
Permits (P)

I
1982

1983

1984

1985

I
1986

I
1987

C
)ffice

I
1988

I
1989

I
1991

1111111111
1992

1993

1994

1995

Other Commercial

1982

Industrial

1982

I
1990

1984

1986

1988

1990

1992

1994

1986

1988

1990

1992

1994

Institutional

1986

1988

1990

1992

1994

1982

1984

II-41

INDICATORS OF COMMERCIAL REAL ESTATE CONDITIONS
National Real Estate Index

Russell-NCREIF Indicators, U.S. Total

Percent change, annual rate
24

Retail prices

Index, 1983:Q1 - 100
-- 1 140

Office property value

8
Office prices

, ,,

1988

1989

1990

1991

1992

1993

1994

FDIC Survey of Real Estate Prices

Nominal office rental income

1988

1989

1990

1991

1992

1993

1994

U.S. Office Vacancy Rates
Percent

Percent

Aug.
Prices steady or increasing
Suburban

8 1

1991

1992

1993

*This series is available only after 1991.

1994

1988

1989

19Downtown

1990

---

1991

1992

1993 1994

II-42
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1993
Q4

1994
Q1

1994
Q2

May

June

July

Current-cost basis
Total
Excluding auto dealers
Manufacturing
Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale
Automotive
Excluding auto dealers

18.4
15.9
9.4
-4.4
-1.4
15.2
3.1

75.6
65.3
13.3
-4.7
3.7
14.4
23.0

122.4
105.0
20.8
-8.2
8.7
20.4
43.3

47.0
38.9
8.7
-4.1
-.9
13.7
-1.4

25.8

Retail

18.8
5.5
-13.1
-4.7
-4.5
-3.9
6.1

5.9

39.4

58.2

39.7

-32.2

13.3
12.5

2.6
3.4

10.4
29.0

17.4
40.8

8.1
31.5

-17.1
-15.1

-3.1
1.5
-7.7
-.4
5.0
-4.5
9.6

9.9
7.3
9.9
-2.0
2.0
2.5
-.5

39.6
41.8
3.3
13.0
23.3
-2.1
25.4

81.0
79.5
12.2
32.9
35.9
1.5
34.5

18.8
11.5
-4.2
-14.7
37.8
7.4
30.4

28.8
45.9
39.6
1.8
.3
37.6
21.4

Constant-dollar basis
Total
Excluding auto dealers
Manufacturing
Wholesale
Retail
Automotive
Excluding auto dealers

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

INVENTORIES RELATIVE TO SALES 1
(Months supply; based on seasonally adjusted data)
1993

1994

May

June

July

Current-cost basis
1.43

1.41

1.40

1.42

Excluding auto dealers
Manufacturing

1.41
1.42

1.39
1.40

1.40
1.39

1.39
1.38

1.40
1.41

Defense aircraft
Nondefense aircraft
Excluding aircraft
Wholesale

5.24
5.05
1.29
1.34

4.80
4.98
1.28
1.31

4.85
5.85
1.26
1.33

4.96
6.14
1.26
1.33

4.86
5.64
1.25
1.32

4.96
5.77
1.29
1.33

Retail
Automotive
Excluding auto dealers

1.51
1.66
1.47

1.50
1.61
1.47

1.54
1.67
1.50

1.52
1.67
1.48

1.53
1.67
1.49

1.51
1.66
1.47

Total

Constant-dollar basis
1.50

1.48

1.47

n.a.

Excluding auto dealers

1.49

1.47

1.41.

1.47

n.a.

Manufacturing
Wholesale

1.51
1.44

1.48
1.40

1.47
1.41

1.47
1.42

1.46
1.41

n.a.
n.a.

Retail

1.55

1.53

1.56

1.54

1.55

n.a.

1.60
1.53

1.56
1.52

1.57
1.56

1.57
1.54

1.58
1.55

n.a.
n.a.

Total

Automotive
Excluding auto dealers

1. Ratio of end of period inventories to average monthly sales for the period.

II-43
demand.

In the longer run, demand for natural gas and renewed

exploration are expected to be bouyed by. among other things, the
Clean Air Act, which has induced many utilities to switch to gasfired plants.
Manufacturing and Trade Inventories
Overall business inventory accumulation slowed markedly in
July, as a sizable drawdown in retail inventories offset part of the
increase in manufacturing and wholesale stocks.

For all

manufacturing and trade, inventories rose at a $28.8 billion annual
rate in current-cost terms in July compared with a second-quarter
pace of $75.7 billion.

A substantial portion of the July

accumulation was in stocks of producer goods; in contrast, the
backup during May and June occurred in stocks of consumer goods in
the retail sector.

The inventory-sales ratio for all manufacturing

and trade moved up somewhat in July, as total shipments and sales
fell 0.8 percent.

Nonetheless, at 1.42 months, the ratio remained

toward the middle of the range posted over the past year.
By major sector, the inventory situation was quite varied.
Manufacturers' inventory investment accelerated in July; factory
stocks rose at a $39.6 billion annual rate in current-cost terms-nearly triple the second-quarter pace.

The July run-up was

accompanied by a 1.6 percent drop in factory shipments, and the
manufacturers' inventory-shipments ratio showed an unusually steep
one-month rise, from 1.38 to 1.41 months.
More specifically, industry detail shows that more than half of
the July accumulation of manufacturing inventories was in stocks of
materials, supplies, and work-in-process, or in finished goods
inventories held in materials-producing industries.

Our judgment is

that these accumulations were mainly associated with planned
increases in production, with concerns about lengthening order lead

II-44

RATIO OF INVENTORIES TO SALES
(Current-cost data)
Manufacturing

Ratio
-

2.2

- 1.95

- 1.7

July -

I
1980

1982

..
AI

1984

a
I
1986

1988

a
1990

1.45

I 1
1994
1992

Wholesale

1.2

Ratio

- 1.5

1.4

1.3

1.2

L.1

1980

1982

1984

1986

1988

1992

1990

Retail
Ratio

1994

Ratio

2.7 -

GAF group

"*
'.L

2.5

- 1.6

2.3

1980

1982

ph. a

1984

1986

1988

1990

1992

1.5

1.4

Total excluding auto

2.1

1.7

1994

II-45
times and rising prices also playing a role.

Among other finished

goods, the largest buildup was in stocks of capital goods
(industrial machinery, business equipment, and aircraft).
A similar pattern emerged in the recent buildup of wholesale
inventories, which expanded substantially in July and over the
second quarter.

As in manufacturing, a sizable portion of the

wholesale inventory accumulation in recent months consisted of
stocks of producer durables--machinery, business equipment, metals,
and so on.

The net increase in nondurable stocks in the wholesale

sector was small in recent months.
In contrast, retail inventories declined in July, falling at a
$32.2 billion annual rate.

The decline was predominantly in

automotive inventories and general merchandise stocks.

The drawdown

of general merchandise stocks in July, together with a 0.4 percent
increase in sales, sharply reduced the inventory-sales ratio for
this type of retail establishment.

At 2.28 months in July, the

ratio was near the low end of the range observed over the past year.
Federal Sector
NIPA revisions for the second quarter of 1994 show that real
federal government purchases decreased at an annual rate of
8.8 percent, rather than the 5 percent reduction reported in the
advance estimates.

The change occurred mostly in nondefense

purchases, which are now estimated to have fallen at an annual rate
of 14 percent--twice the advance report estimate of 7 percent.

BEA

attributes the revision to a relabeling of certain transactions from
nondefense purchases to grants, rather than a reduction in total
government spending.

Total spending was actually revised up

$3.7 billion.
The unified budget deficit for the fiscal year through July was
$183 billion, 24 percent less than for the same period in fiscal

II-46
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS

(Unified basis, billions of dollars, except where otherwise noted)

Fiscal year to date
Jul.
1993

Jul.
1994

FY1993

FY1994

Outlays
Deposit insurance (DI)

120.2
-3.4

118.0
-. 6

1179.7
-23.9

1207.2
-4.4

27.5
19.5

2.3
-81.7

Outlays excluding DI
National defense
Net interest
Social security
Medicare and health
Income security
Other

123.6
25.9
17.2
25.6
20.1
18.7
16.1

118.6
22.1
18.0
26.7
20.8
17.0
14.0

1203.6
244.4
165.9
253.5
190.1
177.4
172.2

1211.6
230.0
167.7
265.9
207.4
180.0
160.6

8.0
-14.5
1.7
12.4
17.2
2.6
-11.5

.7
-5.9
1.1
4.9
9.1
1.4
-6.7

Receipts
Personal income taxes
Social insurance taxes
Corporate income taxes
Other

80.6
37.5
32.3
2.7
8.2

84.8
37.4
34.0
3.8
9.6

939.0
414.6
353.9
91.1
79.5

1024.0
441.6
381.8
110.0
90.6

85.0
27.0
27.9
18.9
11.1

9.0
6.5
7.9
20.8
14.0

Deficit(+)
Excluding DI

39.6
42.9

33.2
33.8

240.8
264.7

183.3
187.7

-57.5
-77.0

-23.9
-29.1

Details may not add to totals because of rounding.

Dollar Percent
change change

II-47
1
CBO BUDGET PROJECTIONS
(Billions of dollars, except where noted)

Fiscal years
1994

1995

1996

1997

1998

1999

Outlays

1467

1525

1609

1684

1758

1863

Receipts

1265

1363

1433

1492

1562

1632

Deficit

202

162

176

193

197

231

Deficit (percent of GDP)
Total
3.0
Excluding Deposit Insurance 3.1

2.3
2.5

2.4
2.5

2.5
2.5

2.4
2.5

2.7
2.7

1998

1999

CBO ECONOMIC ASSUMPTIONS
Calendaryears

1994

1995

1996

1997

------- Percent change, year over year----Real GDP

4.0

3.0

2.4

2.1

2.2

GDP deflator

2.2

2.5

2.6

2.7

CPI-U

2.6

3.1

3.3

3.4

---------- Percent, annual average--------Civilian unemployment rate 2

6.2

5.8

5.9

6.0

6.1

Interest rates
Treasury bills
Treasury notes

4.1
6.8

5.5
6.8

5.1
6.5

4.9
6.5

1. The projections assume that revenues and outlays for major benefit
programs evolve according to laws in effect at the time the projections are
made, and that appropriations through FY1999 for other programs are
consistent with the discretionary spending caps. The projections include
Social Security and the Postal Service, which are off-budget.
2. Pre-1994 basis.
Source:

CBO, The Economic and Budget Outlook: An Update, August 1994.

II-48
1993.

The lower deficit reflects both a sizable increase in

receipts and restrained growth.

In particular, outlays (excluding

deposit insurance) have increased only 0.7 percent this fiscal year,
restrained by declines in defense and other discretionary spending.
July outlays decreased 4 percent from last year's level because July
1993 had "double" pay dates (that is, five Fridays) that boosted
defense and income security outlays.
effect, outlays grew about 1 percent.

After accounting for this
Moreover, medicare and health

spending, though up 9 percent this fiscal year over the same period
last year, has grown significantly more slowly than during the 19901992 period.
The Congressional Budget Office (CBO) released revised deficit
estimates in August.

In The Economic and Budget Outlook: An Update.

the CBO projects a deficit of $202 billion for FY1994, $18 billion
below the Administration's forecast.

The bulk of the difference

between deficit estimates is in their outlay projections.

Data for

the first ten months of FY1994 clearly are more consistent with the
CBO estimate.
The CBO five-year forecast anticipates that the deficit will
decline to $162 billion in 1995 but then rise to $231 billion in
1999.

The Administration projects a deficit of $207 billion in

1999.

The Administration's lower deficit forecast is primarily

attributable to differences in assumptions about real GDP growth.
The Administration shows growth of 2.5 percent per year for the last
three years of the decade, while CBO assumes growth closer to
2.1 percent.
The Violent Crime Control and Law Enforcement Act of 1994
authorizes $30.2 billion over the next six years.

The funding comes

from reductions in federal employment, and the act is supposed to be
deficit neutral.

Most spending in the crime bill will be state and

II-49
local grants, although it also includes a small reallocation of
federal purchases.
State and Local Government Sector
Real spending on state and local government structures
increased 2.0 percent in July to a level more than 3 percent above
the second-quarter average.

Most of the recent strength occurred in

construction of water and sewer facilities and "other buildings," a
category that includes a wide range of government buildings, such as
offices, courtrooms, and prisons.

Nevertheless, construction

outlays remain below the high reached in the fourth quarter of 1993.
Meanwhile, employment in state and local governments during
July and August averaged only slightly above the second-quarter
level.

Employment at local government educational establishments

(the largest subgroup) continued to rise; state education jobs also
expanded.

However, these gains were largely offset by reductions in

employment in other local government operations.

On a year-over-

year basis, growth of state and local government employment--at
1-1/2 percent in August--remained at the reduced pace that has
prevailed for the past two years.

II-50

STATE AND LOCAL SECTOR

Construction Put in Place

Billions of 1987 dollars

Quarterly

.IH

1988

1989

1990

1991

1992

1994

1993

Employment

Percent

Twelve-month change

1986

1987

1988

1989

1990

1991

1992

1993

1994

DOMESTIC FINANCIAL
DEVELOPMENTS

III-T-1
1
SELECTED FINANCIAL MARKET QUOTATIONS
(Percent except as noted)

Mid-Oct
lows

Instrument
SHORT-TERM RATES
2
Federal funds
3
Treasury bills
3-month
6-month
1-year

Change to Sep 20. 1994:

1994

1993
Feb 3

FOMC,
Aug 16Sep 20

From Mid-Oct
lows

From
Feb

From FOMC,
Aug16

3.07

4.27

4.71

1.64

3.01
3.09
3.23

3.13
3.27
3.52

4.45
4.95
5.31

4.62
5.09
5.50

1.61*
2.00
2.27

1.49
1.82
1.98

3.13
3.23

3.16
3.25

4.65
4.87

4.90
5.01

1.77
1.78

1 .74

3.08
3.22
3.23

3.11
3.25
3.41

4.56
4.81
5.25

4.83
5.04
5.45

1.75
1-82
2.22

1.72
1.79
2.04

3.06

3.06
3.25

4.56
4.81

4.81
5.00

1.75
1.75

1.75

3.25
6.00

6.00

7.25

7.75

1.75

4.06
5.19
5.78

4.60
5.81
6.31

6.58
7.14
7.51

6.75

2.15
1.72
1.47

.17

7.78

2.69
2.34
2.00

5.41

5.49

6.49

6.51

1.10

1.02

.02

6.79

7.35

8.25

8.68

1.89

1.33

.43

6.74
4.14

6.97
4.12

8.57
5.56

8.66
5.49

1.92
1.35

1.69
1.37

.09
-.07

Commercial paper
1-month

3-month

1.76

3
Large negotiable CDs
1-month

3-month
6-month
4
Eurodollar deposits
1-month
3-month

Bank prime rate

1.75

INTERMEDIATE- AND LONG-TERM RATES
U.S. Treasury (constant maturity)
3-year
10-year
30-year
5
Municipal revenue
(Bond Buyer)
Corporate--A utility.
recently offered
6
Home mortgages
FHLMC 30-yr fixed rate
FHLMC 1-yr adjustable rate

1989

7.53

Percentage change to Sep 20:
From

1994

Record high
______F_______

Stock exchange index
Level
3978.36
267.71
803.93
4804.31

Dow-Jones Industrial
NYSE Composite
NASDAQ (OTC)
Wilshire

Date

rom

Low.
Jan. 3

1/31/94 2144.64
2/2/94 154.00
3/18/94 378.56
2/2/94 2718.59

FOMC,*
Aug 16

Sep 20

3760.29
254.52
732.89
4561.51

3869.09
255.91
766.74
4613.53

record
high
-2.75
-4.41
-4.63
-3.97

Frou

1989
low
80.41
66.18
102.54
69.70

1. One-day quotes except as noted.
2. Average for two-week reserve maintenance
period closest to date shown. Last observation
is average to date for maintenance period ending
Sept. 28. 1994.
3 Secondary market.
* Rates are as of the close on Aug, 15, 1994.

.39
.27

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. Quotes for week ending Friday
previous to date shown.

From FOMC.
Aug 16
2.89
.55
4.62
1.14

SELECTED INTEREST RATES*
(Percent)
Statement week averages

Short-term

1990

1991

1992

1993

1994

ay10
v 10

8/12

8/19

9/2

9/16

1994
Weekly/Dly

FOMC
816
Pmnty

ftw-aae

mortoeCM

I I

1990

1991

1992

1993

1994

Staement weeks are plotted throug Sept 14; Friday weeks trough
Sept 16, 1994.

8/12

8/19

8/6

9t2
1994

3I
I

9116

"yI~

DOMESTIC FINANCIAL DEVELOPMENTS

The half-point hike

in the discount and federal funds

rates

implemented in the wake of the August FOMC meeting outstripped
market expectations, and
response.

other money market yields firmed in

Major commercial banks promptly followed the System

action, raising the prime rate 1/2 percentage point, to 7-3/4
percent.
The press

release announcing the August policy moves was widely

interpreted as indicating that subsequent action was on hold, at
least

for a few months,

somewhat.

But,

and longer-term rates initially fell

later in the intermeeting period, in light

of data

suggesting that underlying inflationary pressures might be greater
than previously thought, long rates more than reversed their earlier
declines.
since

On balance, these rates have risen 15 to 40 basis

the FOMC meeting.

Corporate bond

line with Treasury yields.

points

rates generally moved up in

Despite the rise in interest rates.

however, major stock indexes rose between 1 and 5 percent over the
intermeeting period.
The monetary aggregates declined in August

after growing

moderately in July, and they appear to be stabilizing in September.
Smoothing through monthly movements, the aggregates have
sluggish, mostly reflecting the effect of the
relative to deposit rates.

remained

rise of market yields

The lack of a sustained improvement in

the bond markets has continued to encourage businesses to
heavily on bank loans and

commercial paper for credit.

rely

Merger

transactions and stock repurchases have been absorbing more equity
shares than are being issued.

State and local governments also have

trimmed long-term borrowings but have maintained issuance of shortterm debt.

Net federal borrowing has risen this quarter owing to

seasonal expansion of the budget deficit.

III-1

Home mortgage lending

III-2

(Based

MONETARY AGGREGATES
on seasonally adjusted data, except where noted)

1994
1993

1994
Q2

June

July

Aggregate or component
Percentage change

Aggregate

1.
2
3.

10.5
1.4
0.7

Ml
M2
M3

6-0
1.9
0.3

1.9
1.9
0-5

3.7
-2.2
0.0

1993:Q4
to
Aug.
(p)

Aug

94
(p)

Level
(bil. $)
Aug. 94
(p)

(annual rate)1

7.6
4.6
6.1

-1.6
-2-0
-1.9

3.7
1.4
0.7

1152.2
3597.2
4241.4

Selected components
4. Currency

10.3

11.8

10.6

9.6

5. Demand deposits

13.3

7.7

-2.5

2.5

9.3

-4.0

8.4

-0.2

-1-1

0.6

3.8

-7.3

3.2

-2.2

0.4

2445.0

-4.8
3.3
14.0
4.3
212.1

-7.6
7.9
-2.0
21-6
-33.2

-1.9
-2.2
6.2
20.7
54.1

1194.8
777.6
362.9
84.7
24.6

14.5

-1.3

-3.2

644.1

12.1

0.0

340.0

6. Other checkable deposits

-2.3

8.
9.
10.
11.

Savings deposits
Small time deposits
Retail money market funds
Overnight RPs, n.s.a.

Overnight Eurodollars, n.s.a.

13. M3 minus M2
4

14.

Large time deposits, net

15.

Inscitution-only money market
mutual funds
Term RPs, n.s.a.
Term Eurodollars, n.s.a.

16.
17.

0.0

2.0

-5.0

2.9
-10.5
-2.1
21.2
-15.5

2.9
-7.8
-0.1
25.6
6.9

-2.1
-2.9
17.8

-8.6
2.0
-19.1
34.2
136.8

-3.3

7. M2 minus M1

-8-4

-7.2

-6.9

-4.7

-4.0

-26.8
-13.7

-22.8
25.9

-5.4
18.B
0.0

0.9

16.4
31.5

13.1

1.4

10.2

9.7

7.7

5.1

1.4
54.4
40.6

9.9
21.3
19.6

7.8
-3.8

8.0
1.9

345.4

2.2

388-3

-0.6

-11.2
-29.1
0.0

8.3
1.7

10.8

6-5
-1.7

410.2

-17.8
6-4
7.7

169-3
100.7
49.7

Memo
18 Monetary base
19. Household M22

10.4
-0.1

10.1
0 3

Average monthly change (billions of dollars)

8.8
0.4

409.2
3089.6

Memo
Managed liabilities at commercial
banks (lines 22 + 23)
Large time deposits, gross
Nondeposit funds
Net due to related foreign
institutions
s
Other
U S. government deposits at
commercial banks

24.0
-3.3
27.3
12.9
14.5
0.2

11.9
1.6
10.3

9.7
-2.1
11.8

18.7
3,2
15.5

15.7
4,4
11.3

9.1
1.1

13.2
-1.5

16.6
-1.0

11.3
0.0

-0.4

-8.4

-5.0

-1.7

974.7

346.0
628.7

212.9
415.8
S

15.2

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 currency, retail money funds, and other checkable, savings and small time
deposits.
3. For years, "average monthly change' is based on the dollar change from December to December. For quarters,
it is based on the dollar change across the last months of quarters.
4. Net of holdings of money market mutual funds, depository institutions, U.S. government, and foreign banks
and official institutions.
5. Borrowing from other than commercial banks in the form of federal funds purchased, securities
sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the
Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items). Data are partially esCimat-

III-3
activity appears to have rebounded in the third quarter from its
surprisingly weak second-quarter pace.

Consumer credit demand was

down only a touch in July, and consumer loan growth at banks
remained strong in August.
Monetary Aggregates and Bank Credit
M2 declined at a 2 percent pace in August, following a strong
July gain, but preliminary data indicate that the outflow ceased in
early September.

The runoff in August reflected weakness in most of

the aggregate's liquid components:

Demand and other checkable

deposits declined, which together reversed most of their July
increase, while outflows from savings deposits accelerated.
Despite monthly fluctuations, M2, on balance, has hovered near
the lower bound of its growth cone in the third quarter.

Its slow

growth has reflected increasing opportunity costs on most of its
components.

Historically, yields on OCDs and savings (including

MMDAs) have adjusted quite slowly to changes in market rates
(chart).

As opportunity costs rise, depositors who are more rate

sensitive move balances from these accounts to small time deposits
and money market mutual funds, whose rates are more closely tied to
market rates.

However, yields on small time deposits appear to be

adjusting more slowly in this episode than the norm, probably
prompting some depositors to more actively shift out of M2 and into
other investments.
These shifts seem to be bypassing bond mutual funds to a large
extent, although inflows to stock funds have been robust.
funds posted outflows in July and likely in August.

Bond

Some investors

apparently acquired securities directly, as evidenced by the
$4 billion increase in net noncompetitive tenders in August (chart).
M3 contracted at a 2 percent pace last month, which left the
aggregate near the lower bound of its annual growth range.

Large

III-4

THREE-MONTH T-BILL RATE AND SELECTED DEPOSIT RATES
Percent

Six-month CD

Total savings
Three-month T-bill
__

1986

1987

1988

1989

1990

1991

1992

NET NONCOMPETITIVE TENDERS

1986

1988

1990

1992

1993

1994

Billions of dollars

1994

III-5
time deposits expanded briskly, as they have since May.

This

renewed growth partly reflects banks' use of wholesale rather than
retail liabilities to fund credit growth.

In addition, some of the

growth in large time deposits may owe to banks' efforts to replace
Treasury deposits, which have declined nearly $20 billion
(seasonally adjusted) from their recent high during the tax period
in April.
Bank credit expanded at a 5 percent rate in August, off from
its rapid July pace.

Much of the deceleration reflected a

contraction in securities.

Although loan growth also dropped a bit,

it still was strong at a 10-1/4 percent annual rate.
grew briskly.

Consumer loans

Real estate loans accelerated, partly owing to the

acquisition by banks of thrift assets.

Some of the faster growth

also may be the result of increased issuance of adjustable rate
mortgages, which banks are more apt to hold than fixed-rate
mortgages and which are typically securitized.

In addition, data

from the second quarter call report indicate a modest pickup in
commercial real estate lending at medium- and small-sized banks:
credit extended in this market may still be boosting real estate
loan growth.
Business loan growth slowed somewhat in August but nonetheless
proceeded at nearly a 10 percent rate.

Banks reportedly have been

more aggressive in making such loans, and the most recent Survey of
Terms of Bank Lending found that the interest rate spreads on smalland medium-sized business loans over the federal funds rate fell
between May and August.

Expanding external financing needs and a

shift from bond markets appear to have boosted demands for shortand intermediate-term credit.

III-6

COMMERIAL BANK CREDIT AND SHORT- AND INTERMDIATE-TERM BUSINESS CREDIT 1

(Percentage change at annual rate, based on seasonally adjusted data)
Dec.

Level,

1992
to Dec.

Type of credit

1994
Q2

1994
Q1

1994
Jun

1994
Jul

1994
Aug

1993

Aug
1994
($billions)

Commercial bank credit

7.9

4.9

3.2

16.1

6.9

2.6

3.7

-6.8

961.4

9.6

10.0

2.5

1.4

-. 6

-6.7

745.3

4.3

40.0

23.1

6.8

19.6

-7.7

216.1

4.0

4.4

4.1

3.4

16.2

10.3

2,290.5

-1.8

8.3

8.7

4.8

17.0

9.7

622.0

11.5

967.9

22.0

17.9

429.0

1. Total loans and securities

5.3

8.5

Securities

U.S.

government

Other

Loans

Business

Real estate

4.5

4.0

7.2

Consumer

9.0

11.6

12.6

9.6

Security

35.6

Other

10.

12.5

7.9

5.1

3,251.9

-19.6
6

-34.6

-20.2

26.8

-41.6

75.1

6.5

-11.3

-24.3

39.4

9.9

196.5

Short- and intermediate-term business credit
11. Business loans net of bankers
acceptances
Loans at foreign branches

12.

-12.1
-2.5

13. Sum of lines 11 and 12
14.

Commercial paper issued by
nonfinancial firms

15.

Sum of lines 13 and 14

4.4

17.

Loans at finance companies

18.

Total (sum of lines 15,
and 17)

16,

7.7

18.8
8.5
-9.2

4.6
-5.4

4.1
-2.4

3.6

4.9

2.8

17.9

-13.3

-28.8

14.1

14.5

10.3

-1.1

6.8

7.4

4.4

-12.2
4

-7.4

-12.2

-1.1

16. Bankers acceptances, U.S.
3
trade-related ,4

1.
ages
from
2.
3.

8.1

-2.1

17.2

612.1

16.1

15.9

22.9

17.2

9.7

635.0

9.6

8.0

151.6

9.4

786.6

15.7
-11.8

n.a.

20
20.1

-3.6

n.a.

327.8

n.a.

1,128.4

5
-.

9.5

Except as noted, levels are averages of Wednesday data and percentage changes are based on averof Wednesday data; data are adjusted for breaks caused by reclassification; changes are measured
preceding period to period indicated.
Loans to U.S. firms made by foreign branches of domestically chartered banks.
Acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of

goods.

4. Changes are based on averages of month-end data.
5. July 1994.
n.a. Not available.

III-7
Business Finance
Nonfinancial firms continued to find long-term financing
opportunities less
bonds

attractive, and gross

issuance of stocks and

remained sluggish in August and early September.

offerings were

few and small;

Junk bond

issuance of investment-grade debt was

somewhat better maintained, but the average pace of offerings
July and August was still

off by almost 50 percent

half of the year.

equity side, gross public

On the

from the first
issuance,

including initial public offerings, slackened in July and
to be weak in August.
to the summer holiday
September does not

continued

Although some of this weakness may have owed
season, the calendar of issues slated for

suggest a significant pickup in the pace of

equity offerings.
For financial corporations, bond issuance

rose in August,

owing to a surge in offerings of asset-backed securities.

Because

they have short maturities and often offer floating interest rates,
asset-backed securities have found particular favor among investors
seeking protection from rising interest rates.
There was

considerable activity on the merger and acquisition

front over the intermeeting period, and estimates suggest that the
volume

could top $85

billion this year

primarily driven by a surge

(chart).

in megamergers

total sales price of $1 billion or more).

The pickup has been

(transactions with a
The total value

megamergers completed this year already is higher than in any of the
previous three years, and the calendar of proposed megamergers is
heavy.

In one merger of note, Martin Marietta and Lockheed recently

announced plans to combine in a deal, valued at $8.8 billion, that
is scheduled to close in early 1995.
Merger activity thus far this year has been concentrated in a
few industries--principally media and telecommunications, health

III-8

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

1994
Type of security

1992

1993

All U.S. corporations
Stocks 2
Bonds

40.84
7.04
33.80

53.42
9.65
43.77

4.42
4.03
.87
3.16
.39

Nonfinancial corporations
Stocks2
Sold in U.S.
Utility
Industrial
Sold abroad
Bonds
Sold in U.S.
Utility
Industrial
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown
Financial corporations
Stocks 2
Sold in U.S.
Sold abroad
Bonds
Sold in U.S.
Sold abroad
By quality 3
Aaa and Aa
A and Baa
Less than Baa
Unrated or rating unknown

Jun

Julp

Augp

52.90
8.18
44.72

40.78
5.48
35.30

43.39
6.77
36.63

23.93
4.46
19.47

29.28
3.43
25.85

5.32
5.12
1.06
4.00
.19

4.33
4.03
.65
3.38
.30

3.38
3.19
.44
2.75
.19

3.97
3.68
.78
2.91
.29

1.29
1.23
.08
1.16
.06

1.60
1.54
.23
1.30
.07

13.67
12.83
5.33
7.50
.84

16.19
15.55
7.34
8.21
.64

11.07
10.33
4.57
5.76
.74

6.50
5.63
1.84
3.79
.87

7.53
6.67
2.26
4.41
.87

5.10
4.50
1.20
3.30
.60

5.74
5.00
1.00
4.00
.74

2.18
7.74
2.86
.09

2.56
8.70
4.17
.09

.80
5.60
3.92
.00

.59
3.02
1.99
.00

.92
4.03
1.74
.01

.06
1.92
.98
.00

.23
3.20
.69
.03

2.62
2.51
.11

4.61
4.16
.45

3.82
3.55
.28

2.10
1.95
.15

2.79
2.66
.13

3.17
2.28
.89

1.82
1.81
.02

20.13
18.67
1.46

27.58
25.02
2.56

33.65
29.28
4.37

28.81
24.59
4.22

29.10
25.09
4.00

14.37
13.00
1 37

19.50
18.20
1.30

1.55
6.77
.31
.04

1.78
9.01
.49
.08

3.31
11.24
.63
.04

4.08
9.68
.17
.11

2.43
10.85
.20
.20

2.06
2.85
.00
.01

.74
3.27
.19
.00

1. Securities issued in the private placement market are not included. 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.

III-9
1
MERGER AND ACQUISITION ACTIVITY OF U.S. NONFINANCIAL CORPORATIONS

Billions of dollars
SSize of transaction

Less than $1 billion
$1 billion or more
-

.. 1.:..,

1986

,.:.:...:,

1985

120

1987

1988

1989

1990

1991

1992

1993

1994

1. Divestitures are excluded. 1994 estimate represents activity through August at an annual rate.

LEVERAGED BUYOUT ACTIVITY OF U.S. NONFINANCIAL CORPORATIONS'
Percent

Billions of dollars

1985

Dollar value (right scale)
Percent of total merger activity (left scale)

1986

1987

1988

1989

1990

1991

1992

1 Including diveslitures. 1994 estimate represents activity over the first half of the year at an
annual rate.

1993

1994

III-10
care. chemicals and pharmaceuticals, and defense.

For the most

part, the mergers have been motivated either by technological
synergies or by the need to consolidate in response to changed
demand conditions.

The mergers have been financed to a large extent

by stock swaps rather than by cash and debt.

This financing pattern

contrasts with the experience of the 1980s, which was the heyday of
the leveraged buyout (chart).

Because a high proportion of recent

merger activity has been financed through stock swaps, the impact of
this activity on equity retirements is less than in the 1980s.
However, looking forward, the crowded calendar will involve mergerrelated retirements of equity that, when added to share repurchases,
likely will keep net equity issuance negative next year.
State and Local Government Finance
Gross issuance of long-term tax-exempt debt fell to about
$11

billion in August. as the volume of refunding dropped to $1-1/2

billion, its lowest level since early 1991.

For the first eight

months of this year, long-term issuance is down about 40 percent
from the same period in 1993, with the decline due entirely to a
dropoff in refunding activity.

The limited amount of long-term

issuance, along with heavy retirements, suggests that outstanding
long-term tax-exempt debt has declined thus far this year.

Since

1952, net issuance of such debt has been negative in only two
quarters and has never been negative over an entire year.

The

reduced supply has helped to hold down yields on municipal
securities relative to those on Treasuries.
Meanwhile, gross issuance of short-term tax-exempt debt was a
hefty $6 billion in August after even heavier issuance in June and
July.

A large volume of short-term issuance might appear surprising

in light of the improved financial positions of most state and local
governments, which suggests less need to cover gaps in cash flows.

III-11
In fact, the recent pickup in short-term issuance has not kept pace
with retirements in this maturity sector as well and is consistent
with some decline in the stock of outstanding short-term debt.

GROSS OFFERINGS OF MUNICIPAL SECURITIES 1
(Monthly rates, not seasonally adjusted, billions of dollars)
1994

1992

1993

June

July p

Augp

21.2

27.2

17.7

16.1

23.9

19.2

17.2

Long-term
2
Refundings

18.9
10.4

23.3
15.7

15.5
7.4

12.4
3.4

14.8
5.1

19.1
2.1

11.3
1.4

New capital

8.5

7.6

8.1

9.0

9.7

10.3

9.9

3.3

3.9

2.4

3.7

9.1

6.7

5.9

Total tax-exempt

Short-term

Total taxable
1.
2.
p

0.2

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

Treasury Financing
The Treasury will likely finance the projected third-quarter
fiscal deficit of $49-1/2 billion mainly by borrowing $31
from the public and by drawing down its cash balance.

billion

Nonmarketable

borrowing is expected to turn negative owing to a large paydown in
state and local government series

(SLGS) as a consequence of the

sharp falloff in advance refunding.
The Treasury announced sharp cutbacks in the sizes of its
weekly bill auctions in advance of its expected large inflows on the
September 15 tax date.

These actions surprised market participants

somewhat, in light of the Treasury's intention, announced in May
1993, to shorten the maturity of the public debt.

In practice,

though, the Treasury has shortened its average maturity by issuing

III-12
TREASURY FINANCING 1
(Total for period; billions of dollars)

1994

1994
Q3p

Jul.

-49.4

-33.2

7.7
-.5
8.2
-22.7
30.9

30.9
-3.2
34.1
-6.5
40.7

-3.2
-3.6
0.4
7.6
-7.2

51.3
.8
50.5
8.3
42.2

-6.4

12.0

30.7

-9.8

-8.7

-2.0

6.4

5.7

-12.2

12.8

51.0

Item

39.0

20.3

30.1

39.0

Total surplus/deficit (-)

Aug. e

-29.3

Sept.p

13.2

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

-17.1
-.3
-16.8
-22.4
5.7

2
Other
Memo:
Cash balance, end of period

1. Data reported on a payment basis.
2. Includes checks issued less checks paid, accrued items, and other
transactions.
p--projected.
e--estimated.
Note: Details may not add to totals because of rounding.

1
NET CASH BORROWING OF FEDERALLY SPONSORED CREDIT AGENCIES
(Billions of dollars)

1994

1993

Apr.

May

June

5.4
17.1
19.3

8.9
-2.7
5.3

5.7
12.9
15.3

6.2
2.7
2.4

3.4
5.7
4.3

-2.1
4.7

Farm Credit Banks

-.1

1.5

-.7

0.2

-0.1

1.2

SLMA
FAMC

-.1
0

1.0
0

1.3
0

3.2
0

1.5
0

2.1
0

Agency
FHLBs
FHLMC
FNMA

1. Excludes mortgage pass-through securities issued by FNMA
and FHLMC.
2. Federal Agricultural Mortgage Corporation.

III-13

AVERAGE MATURITY OF TREASURY DEBT
Months

1960

1965

1970

1975

1980

1985

30
1995

1990

DIFFERENCE BETWEEN TREASURY AND FEDERAL RESERVE STAFF ESTIMATES
OF YIELD ON A THIRTY-YEAR CONSTANT MATURITY BOND
Basis Points

1988

1989

1990

1991

1993

1994

III-14

MORTGAGE YIELD SPREADS
(Monthly; not seasonally adjusted)

Basis points

t
gI

Ii
r

I
I,
4r

1985

1986

1987

1988

1989

1990

1991

1992

FRM

1993

pre:

1994

1 Spread between the yield on the thirty-year fixed rate mortgage and the average yield on ten-year and seven-year Treasury notes.
2. ARM rate less the one-year Treasury rate.

ISSUANCE OF AGENCY MORTGAGE PASS-THROUGH SECURITIES
(Monthly; not seasonally adjusted)

Billions of dollars

Gross issuance

Net issuance

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

III-15

more one-year bills and two-year notes and fewer longer-term
securities.

Nonetheless, on the whole, the average maturity of the

public debt maturity had decreased only modestly by early this
year

(chart).
The Treasury's decision to move to a semiannual auction

schedule for the thirty-year bond has had a noticeable effect on the
bond's yield in relation to the rest of the term structure.
Typically, on-the-run, or the most recently issued, securities have
liquidity value, which is capitalized into their price, lowering
their yield compared to off-the-run securities.

Given the change in

the issuance cycle, liquidity premiums on thirty-year bonds are
capitalized for six months rather than for three months under the
old schedule, implying a higher price and lower yield.

Because the

Treasury's estimates of constant-maturity yields are based on the
on-the-run securities, these widely reported yields include such
liquidity effects.

Moreover, the Treasury's calculation of

constant-maturity yields makes no adjustment for changes in
duration, thereby overstating the extent of interest rate changes,
Board staff estimates of constant-maturity yields, which remove such
liquidity and duration effects, suggest that the impact can be
substantial at times

(chart).

Over this intermeeting period,

however, the wedge has not been significant, as the on-the-run
thirty-year bond incorporates little liquidity value.
Mortgage Markets
Since the last FOMC meeting, the yield spread between the
conventional fixed-rate thirty-year mortgage and comparable Treasury
securities is about unchanged, but the spread on adjustable-rate
mortgages over the one-year Treasury bill has narrowed 16 basis
points (chart).

Portfolio lenders have continued to price ARMs

aggressively, to the point where the ARM-to-Treasury rate spread on

III-16

recently closed mortgages has turned negative; the ARM rate on new
lending, of course, reflects start rates that may be initially set
low to entice borrowers but that adjust upward over time.
Partial data for the third quarter indicate that mortgage
lending activity has picked up from an unusually weak second quarter
pace.

Real estate loan growth at commercial banks has been notably

strong, in part reflecting the relative strength of ARM financing.
Mortgage loan growth at thrifts in the second quarter turned
positive for the first time in over a year and is expected also to
pick up further in the current period.

While the Mortgage Bankers

Association purchase application index declined on a seasonally
adjusted basis from its level in the second quarter, much of the
weakness is likely attributable to a shift of originations from
mortgage companies to banks and thrifts.

The ARM share of

conventional mortgage originations remained above 40 percent,
according to the Federal Housing Finance Board, and depositories are
more active than are mortgage bankers in this sector of the market.
Gross issuance of pass-throughs by the agencies declined to
about $19-1/2 billion in August, the lowest monthly volume since
April 1991.

Net issuance also has been relatively weak recently,

totaling only $6-1/2 billion in June and $8 billion in July,
substantially below January's $17 billion.

One reason for the

decline in issuance is that lenders typically hold the bulk of the
ARMs that they originate in portfolio.

Even so. agencies appear to

be participating in the increase in ARM originations.

So far in

1994, total ARM-backed securities issuance has jumped 28 percent
above the same period as last year, and the agency sector has
accounted for about 85 percent of all new ARM-backed securities
issued thus far in 1994.

The limited new supply of pass-through

securities coupled with generally lower rate volatility have

III-17

contributed to relatively tight spreads between mortgage securities
and Treasuries in secondary markets.
Consumer Credit
Consumer installment credit increased at an 8 percent
seasonally adjusted annual rate in July, half its June pace.
However, this deceleration was overstated by the reclassification of
about $2 billion of loans at one large finance company, formerly
reported as "other consumer loans."

which trimmed about 3 percentage

points from the growth of total installment credit in July.
Interest

rates on consumer loans at commercial banks increased

over the period from May to August.

The average "most common" rate

on a forty-eight-month new-car loan rose about 60 basis points to
8.4 percent.

Rates on two-year personal loans and credit card plans

also rose, but by lesser amounts.

The spread of the auto loan rate

against three-year Treasuries widened a bit in August but remained
well below the average of the past ten years (chart).

Spreads on

personal loan rates and credit card rates were little changed and
remained near their ten-year averages.
Credit quality of commercial bank consumer loans improved,
based on data reported on the second-quarter call report.
Delinquency rates on all types of consumer loans edged down; the
largest decline occurred for credit card loans.

Delinquency rates

at large banks were sharply lower, while those at small banks were
up slightly.

The American Bankers Association series on delinquency

rates also indicated declines in rates for five types of closed-end
consumer loans and for credit cards.

III-18
GROWTH OF CONSUMER CREDIT
(Percent change: seasonally adjusted annual rate)
Memo:
Outstanding
July 1994

Type of credit

1994
r

1994
Juner
July

(Billions
of dollars)

1992

Total
r
p

9.0
9.2
11.9
5.4

10.9
9.1
15.6
7.0

16.0
18.9
17.9
10.0

16.0
20.1
15.6
11.2

7.9
16.5
14.0
-11.3

855.5
305.7
316.2
233.6

6.3

Noninstallment

.2
-1.0
4.8
-3.4

Installment
Auto
Revolving
Other

1993

-5.5

4.2

-15.7

-12.6

-2.9

51.0

8.0

10.4

14.1

14.3

7.2

906.5

.6
Revised.
Preliminary.

INTEREST RATES ON CONSUMER LOANS
(Annual percentage rate)
Type of loan

1991

1993

Feb.

May

11.1
15.2
18.2

At commercial banks
New cars (48 mo.)
Personal (24 mo.)
Credit cards

1992
9.3
14.0
17.8

8.1
13.5
16.8

7.5
12.9
16.1

7.8
13.0
16.2

12.4
15.6

9.9
13.8

9.5
12.8

8.9
12.2

9.9
13.5

1994
July

Aug.

...
...
...

8.4
13.3
16.3

2
At auto finance cos.
New cars
Used cars

10.2
13.9

...
...

1. Average of "most common" rate charged for specified type and maturity during
the first week of the middle month of each quarter.
2. For monthly data, rate for all loans of each type made during the month
regardless of maturity.
Note: Annual data are averages of quarterly data for commercial bank rates and
of monthly data for auto finance company rates.

III-19
COMMERCIAL BANK CONSUMER LOAN RATE SPREADS
(Consumer rate less yield on three-year Treasury note)
Auto

1974

Percent

1978

1982

1986

1990

Credit Cards

1974

Percent

1978

1982

1986

1990

Personal

1974

1994

Percent

1978

1982

1986

1990

1994

INTERNATIONAL DEVELOPMENTS

U.S.

International Trade in Goods and
In July, the U.S.

to $11.0 billion;

the

Services

trade deficit in goods and

services widened

deficit was larger than in June and, when

expressed at an annual rate. was substantially larger than in the
second

quarter.

NET TRADE IN GOODS & SERVICES
(Billions of dollars, seasonally adjusted)

Year
1993

Quarters
93Q4
94Q1
94Q2
(annual rates)

-73.9

-82.2

Months
May
Jun
Jul
(monthly rates)

Real NIPA 1/
Net Exports of G&S

-104.0

-112.9

Nominal BOP

Net Exports of G&S
Goods, net
Services, net

-75.7
-132.6
56.8

-79.9
-97.3 -107.5
-132.7 -147.8 -166.5
52.8
50.5
59.0

-9.4
-14.3
4.9

-9.0
-14.0
5.0

-11.0
-15.7
4.7

1/ In billions of 1987 dollars. SAAR.
Source:
U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.

Exports of goods and services in July dropped back to levels
recorded in April and May, and were 1 percent less than the secondquarter average.

One part of the decline in exports was transitory.

Aircraft exports were low for seasonal reasons in July and are
expected to have rebounded in August.

Similarly, exports of

automotive products to Canada dropped in July (as did imports of
automotive products from Canada).

Another part of the decline

reflected a drop back from the comparatively high levels recorded in
June: exports of machinery and consumer goods were less than in
June, nonetheless, they were still higher than in either of the two
preceding months.

Agricultural exports

(primarily soybeans)

declined in July to about the second-quarter average level.

On the

other hand, exports of nonagricultural industrial supplies
(especially chemicals) increased strongly in both June and July.

IV-1

IV-2

U.S. International Trade in Goods & Services

Real NIPA Goods & Services
Ratio Scale, Bil 87$. SAAR

Net Exports of Goods & Services
Bil$, SAAR

1991

1992

1993

Selected Exports

1994

1991

Machinery Ex Computers

- --- -

Automotive

1992

1993

Selected Imports

Bil 87$, SAAR

09/21/94

1994

Bil 87$, SAAR

SMachinery Ex Computers
- ---- - Automotive
-Consumer Goods

Ind. Supp. (Nonag Ex Gold)

S90

^^^

^-'V^-^S/

1l1liii
II I ffiiiiii 1 1 t

1
1992

1993

1994

1991

1992

1993

1994

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

Levels

Months

94Q1

94Q2

$Change 1/
Q1
Q2

Exports of G&S

659.5

684.6

-5.6

25.1

700.3

677.7

-22.7

Goods Exports
Agricultural
Gold
Computers
Other Goods

472.1
43.7
9.4
31.3
387 7

490.7
43.8
5.7
31.9
409.3

-6.6
-1.6
-3.8
0.7
-2.0

18.6
0.1
-3.6
0.6
21.6

504.3
44.0
2.5
33.8
424.0

484.0
42.7
4.6
33.1
403.6

-20.3
-1.3
2 1
-0.7
-20.4

34.2
23.5
105.6

34.1
24.0
114.1

-0.2
2.8
-0.1

-0.2
0.6
8.5

35.1
24.6
119.2

23 2
23 7
115 6

-11.9
-0.9
-3.7

Automotive
to Canada
to Mexico
to ROW

54.4
29.0
7.9
17.5

55.9
30.6
5.5
19.8

-0.6
-0.4
-0.5
0.2

1.6
1.7
-2.4
2.3

56.7
30.4
0.0
26.2

51.4
26.5
0.0
24.9

-5.2
-3.9
-0.0
-1.4

Ind Supplies
Consumer Goods
All Other

96.2
55.4
18.4

102.3
58.3
20.5

-0.2
-1.5
-2.1

6.1
2.9
2.1

105.5
61.4
21.5

109.5
58 3
21.9

4.0
-3.0
0.4

Services Exports

187 4

193.9

1.0

6.5

196.0

193 6

-2.4

Imports of G&S

756.8

792.1

11.8

35.3

808.8

809.6

Goods Imports
Petroleum
Gold
Computers
Other Goods

619.9
41.6
8.8
41.8
527.7

657.2
51.5
4.7
44.3
556.7

8.5
-6.0
-1.2
1.5
14.2

37.3
9.9
-4.1
2 6
29.0

672.6
58.7
1.8
44.9
567.2

672.4
61.0
2.6
44.6
564.2

-0.2
2.3
0.8
-0 3
-3.0

11.3
23.1
94.4

12.3
23.7
98.6

-1.1
1.3
5.6

1.0
0.6
4.2

12.3
23.7
100.7

9.3
25.4
102.4

-3.0
1.7
1.7

Automotive
from Canada
from Mexico
from ROW

108.1
36.9
13.4
57.8

116.5
41.2
9 4
65.9

2.2
-1.1
0.4
2.9

8.4
4.3
-4.0
8.2

121.8
43.6
0.0
78.2

119.2
36.9
0.0
82.2

-2.6
-6.7
-0.0
4.0

Ind Supplies
Consumer Goods
FFB
All Other

101.3
137.8
29.4
22.5

106.5
144.5
30.5
24.2

5.4
-0.2
0.5
0.4

5.2
6.7
1.1
1.7

107.6
145.7
31.1
24.3

109.8
144.3
31.4
22.4

2.2
-1.4
0.3
-1.9

Services Imports
Memo:
Oil Qty (mb/d)

136.9

134.9

3.2

-2.0

136.3

137.2

0.9

9.00

9.61

-0.24

0.61

10.29

10.05

-0.24

Aircraft & Pts
Semiconductors
Other Cap Gds

Levels

$Chg 1/

Jun

Jul

1/ Change from previous quarter or month.
U.S. Dept. of Commerce. Bureaus of Economic Analysis and Census
Source:

The
and was

level

of imports in July was about the

2 percent higher than the

small increases in imported

oil,

same as in June.

second-quarter average.
other industrial supplies,

automotive products from Japan were offset by declines
aircraft, consumer goods,
In the
first

and

In July.
and

in imported

automotive products from Canada.

second quarter the

trade deficit was

larger than

in the

quarter and significantly larger than at any time since

1988

Exports of goods and services were 4 percent higher than in the
first
the

quarter;

increases occurred in both goods and

sharpest rises recorded for machinery,

(particularly chemicals,
transportation receipts
services

rose 5 percent;

industrial supplies

aluminum, and paper),
from foreigners.

services with

and

travel and

Imports of

goods and

the increase was spread about evenly over

most categories of merchandise.

The exception was imported oil

whose value jumped nearly 25 percent.
The

quantity of oil imported

day) eased

only slightly from the

in July

(10 million barrels per

record high levels

in June.

The

strength of imports in June was associated with increased
consumption of oil that accompanied the onset of the
season.

summer driving

In July, imports remained strong as inventories rose at a

quicker pace while production eased.

Preliminary Department of

Energy statistics indicate that in August consumption of oil
slightly, inventories continued to be rebuilt,
somewhat but

and imports fell

remained over 9 mb/d.
Imports and Exports

Prices of Merchandise

The price of imported oil continued its upward
rising another $1.00
the $1.00

rose

per barrel to reach $16.62

rise in June

trend in July

per barrel.

While

prices occurred as OPEC production remained

roughly unchanged in the face

of increasing world oil demand, the

onset of the Nigerian oil workers

unions strike on July 4 pushed the

IV-5
PRICES OF U.S. IMPORTS AND EXPORTS
(percent change from previous period)
Quarters
Months
9304
94Q1
94Q2
May
Jun
Jul
(annual rates)
(monthly rates)
----------------- BLS Prices----------------0.7
-2.1
7.4
0.9
0.8
1.1
-30.2
-24.3
67.5
8.4
5.5
7.1
2.0
1.3
2.8
0.2
0.3
0.5

Merchandise Imports
Oil
Non-Oil

Merchandise Exports
Agricultural
Nonagricultural
Ind Supp Ex Ag
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods

5.9
-0.9
-6.1
2.3
6.9
0.9

0.8
5.4
-5.1
-0.1
2.0
-0.1

16.0
4.4
-6,6
2.7
2.4
1.0

1.7
-0.1
-0.9
0.1
0.2
0.2

2.4
0 5
-0.2
0.3
0.1
-0.1

14.09

12.67

14.66

14.65

15 65

0.5
8.2
-0.6

Foods, Feeds, Bev.
Ind Supp Ex Oil
Computers
Capital Goods Ex Comp
Automotive Products
Consumer Goods
Memo:
Oil Imports ($/bbl)

4.1
19.9
2.2

-7.3
2.9

0.4
1.4
0.2

-4.0
-6.9
2.3
1.3
0.7

7.8
-10.0
0.9
1.5
0.8

9.4
-6.4
-0.2
0.9
0.2

0.6
-0.8
0.0
0.1
0.1

-------

1.4

00
-2.2
03

0.3
-2.1
0.6

1 2
-1.0
0 2
0.1
-0.3

2.0
-0.4
0 1
0.2
0.0

Prices in the NIPA Accounts--------

Fixed-Weight
Imports of Gds & Serv.
Non-oil Merch Ex Comp

-2.8
0.5

7.8
3.6

4.4

Exports of Gds & Serv.
Nonag Merch Ex Comp

2.2
3.5

2.9

Oil Prices

$ per bbl

1987

16.62

Spot WTI
Import Unit Value

1988

1989

1990

1991

1992

1993

1994

price of oil higher still.
closing spot oil prices
as $16.70

per barrel

After

peaking at

$20.55

(West Texas Intermediate

(the lowest levels

on August

(WTI))

fell as

low

since April)

as concern over

Nigerian production disruption abated and the unions

suspended their

strike

(September 5).

barrel.
fall in
above

Import

Currently,

spot WTI is trading at $17.17

prices in August and

September should
prices are

spot and futures prices; import

$16.00

per barrel in August,

per

follow this

expected to be

and to average about $15.25

per

barrel in September.
Prices

of non-oil imports

consecutive month.
for imported
months.

The

goods

sharpest increase

coffee, the

price

Other than for foods,

months were strongest
other than

rose in July for

in July, as

of which jumped
import

Prices of

While prices of
this year,

small range

imported consumer
in recent months

in recent

followed by capital

imported automotive products
rise much in June or

which increased earlier in the year did not
July.

in June, was

60 percent in two

price increases

for industrial supplies

computers.

the fifth

goods have varied within a
increases have occurred more

often than declines.
Price increases of nonagricultural exports have moved up
during the year, with the
recorded for
Only small

sharpest increases

nonagricultural industrial

supplies

(especially paper).

price changes were reported for exported

automotive products, and capital
recent months,

goods,

goods other than computers in

corn) as they did in June

Price data for August will
Current Account through
The U.S.

consumer

Prices of agricultural exports declined in July

(primarily soybeans and

U.S.

in recent months

be released by BLS on September

29.

1994-02

current account deficit was

the second quarter,

(largely wheat).

$147.9 billion SAAR in

$18.6 billion larger than in the first quarter.

The deficit for net goods and services widened as an increase
in net receipts from service transactions

(largely from foreign

travelers in the United States, especially for World Cup Soccer) was
more than offset by an increase in the deficit for merchandise trade
(imports increased more than exports rose).
U.S. CURRENT ACCOUNT
(Billions of dollars, seasonally adjusted annual rates)
Goods & Services
Balance

Investment
Income, net

Transfers
net

Current Acct
Balance

Years
1992
1993

-40.4
-75.7

4.5
3.9

-32.0
-32.1

-67.9
-103.9

Quarters
1993-1
2
3
4

-57.7
-76.3
-89.0
-79 9

7.4
2.7
8.1
-2.4

-29.1
-28 8
-30 5
-40.1

-79.4
-102.4
-111.4
-122.3

-97.3
-108.0

-3.2
-10.0

-28.7
-29.9

-129 3
-147.9

-10.7

-6.8

-1.2

1994-1-r
2
Memo:
$ Change
Q2-Q1
Source

-18.6

U.S. Department of Commerce, Bureau of Economic Analysis
Both payments and receipts of investment income rose sharply

in Q2, with income payments on foreign assets in the United States
increasing more than income receipts from U.S. assets abroad.
jump in income payments

reflected higher interest rates

The

(which

pushed up portfolio payments) as well as higher income payments on
foreign direct investment in the United States.

Most of the

increase in income receipts from U.S. assets abroad reflected higher
interest rates and receipt of past due interest payments owed to
U.S. banks by Brazil.
Net unilateral transfers rose marginally in the second
quarter.

IV-8
U.S. International Financial Transactions
Foreign official assets held in the United States rose
strongly in July for the third straight month
of U.S. International Transactions table).

(line 1 of the Summary

July's increase was

related only in part to reported foreign exchange-market
intervention by the G-10 countries.

Within the G-10, significant

increases were registered by Canada, Japan, and Switzerland, while
outside the G-10 most of the rise was accounted for by Singapore and
the BIS.

Mexican reserves in the United States continued to fall.

Banking inflows, at $10.9 billion, also continued at
approximately the same rate as May and June

(line 3).

About half of

the net inflow was attributable to investment banks and securities
dealers.

Daily average data indicate continued inflows in August

from own foreign offices and IBFs

(line 1 of the International

Banking Data table).
Private foreigners sold U S. securities net in July, in
contrast to huge net purchases in the the first quarter and
significant net additions in May and June (line 4 of the Summary
table).

Holdings of Treasury securities fell by $9 billion in July

(line 4a): much of the international activity in U.S. Treasury
securities in 1994 has been recorded in Caribbean financial centers,
particularly Bermuda, the British West Indies, and the Netherlands
Antilles, and presumably reflects the activities of certain "hedge"
and other investment funds.

Net private sales of U.S. Treasury

securities reported for these areas amounted to $12.7 billion in the
second quarter and another $7.5 billion in July.
Corporate and other bond purchases by private foreigners were
almost halved in July to a net $5.8 billion

(line 4b); of the total,

about $2.5 billion was for U.S. agency bonds.

Small net sales of

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS 1
(Billions of dollars, not seasonally adjusted except as noted)
Quarter

I
I

Year

S1992

1993

Official capital
1. Changes in foreign official reserve
assets in U.S. (+ - increase)
a G-10 countries

70.0

b. OPEC countries

38.3
4.8
4 9

-5.1

28.6

45.3

All other countries

2. Changes in U.S. official reserve
assets (+ - decrease)
Private capital
Banks
3. Change in net foreign positions of
banking offices in the U.S.
3
Securities
4. Foreign net purchases of
U.S. securities (+)
4
a

Treasury securities

b
c

Corporate and other bonds
Corporate stocks

5. U.S. net purchases (-) of
foreign securities
a Bonds
b Stocks

1993
Q3

1994
Q4

3.9

-.7

1994

18.1

23.1

10.6

13-0

6.4

8.4

5 8

-2 .3
2 0

-4.4
-3.0

-1.0

-1.4

1.5

3 5

6 1

6 3

-. 1

-3.1

-. 9

19 2

-.5

-.7

-. 1

3.5

1.7

1.3

5.3

37.3

37.4

10.4

10.5

11.8

68.1
37 4
34.3
-3.7

106.8

21.4
3 6

46.6

25.6

8.3

31.1
9.4

6.3
-7.3

61.6

14.9

26 1

14 ,6

12 2

7 0

-42.0

-31.6

-3.9
-8.9

14.9

2 6

10 0

5 8

-1.3

1 6

-1

- 9

-18.3

-26.4

6 -10.7

4.1

-4 5

- 1

6 -12.0

-4.0

-6 7

-20.4

-20

-18

-6.3

-22

-24 8

-7 8

21.4
56 1

3 0

12 0

3.9

U.S. current account balance (s.a.)

-67.9 -103.9

Statistical discrepancy (s.a.)

-17.1

21.1

27.6
-27.9
-8.4

8.1
-1 5
-30
4.0

-7.4

-. 2

-63.3

-57

-4.2

-6.3

-7.9

-21

-41.0
9.9
18.1

2 8

7 1

-32.3
-14.5

10.9

7 7

-61.0

Other flows (quarterly data, s a.)
6 U S direct investment (-) abroad
7 Foreign direct investment in U.S.
8 Other (+ = inflow)

13.6

8.9

15.0

-124.3

July

7.9

11.4

-47.9
-15.6
-32.3

June

15 4

4.7

9 1

35.6

19 6

May

I
_

12.1

29 8

Month

7 6

-37.0
-3 5

-4.5
-1 4
-3

n.a.
n.a.
n.a

n a.
n.a.
n.a.

na
na
na

n.a.

n a.

n.a.

1 The sum of official capital, private capital, the current account balance, and the statistical
Details may not sum to totals becuse of rounding
discrepancy is zero
2 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
Includes changes in custody liabilities other than U.S. Treasury
lending under repurchase agreements).
bills.
3 Includes commissions on securities transactions and therefore does not match exactly the data on
U S international transactions published by the Department of Commerce.
4. Includes Treasury bills.
5. Includes U.S government agency bonds.
6. 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

INTERNATIONAL BANKING DATA 1/
(Billions of dollars)

1991

1. Net claims of U.S.

1992

Dec.

Sept.

-35.8

-71.6

-114.6

1993

1994
Dec.

Mar.

June

July

-122.1

-157.5

-175.4

-191.0

4.2

-15.1

-29.9

-41.0

-48.8

-126.3

-142.4

-145.6

-150.0

-150.3

Aug.

-199.2

banking offices
(excluding IBFs)
on own foreign
offices and IBFS
a. U.S.-chartered

12.4

17.0

-48.3

-88.6

12.5

banks
b. Foreign-

-127.1

chartered
banks
2. Credit extended to
U.S. nonbank
residents
a. By foreign

23.9

21.4

21.8

21.4

22.2

22.4

22.6

n.a.

95.9

90.9

88.6

83.9

n.a.

77.0

77.8

75.1

73.6

79.3

80.3

82.4

79.2

84.2

82.1

n.a.

branches of
U.S. banks
b. By Caribbean
offices of
foreign-chartered
banks
3.

Eurodollar holdings
of U.S. nonbank
residents
a. At all U.S.-chartered

102.9

banks and foreignchartered banks in
Canada and the
United Kingdom
b. At the Caribbean

n.a.

offices of
foreign-chartered
banks
MEMO: Data as recorded in the U.S. international transactions accounts
4. Credit extended to

179

192

197

202

207

n.a.

239

237

236

235

234

n.a.

U.S. nonbank
residents
5. Eurodeposits of U.S.
nonbank residents
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, Ib, and 2a are averages of daily data reported on the FR 2950 and FR 2951.
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 of quarter 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 SEA on the basis of data provided by the BIS, the Bank
of England, and the FR 2502 and FFIEC 002s. It includes some foreign-currency denominated deposits and
loans. Source: SCB

corporate stocks continued

in July

(line 4c).

U.S.

residents,

the other hand, continued net purchases of foreign securities at
the moderate rates seen since the beginning of the second quarter
(line 5).
Recently released preliminary data for second-quarter direct
investment capital flows show a substantial falloff of both outflows
and inflows from the very high levels of 1994:Q1

(lines 6 and 7).

In both cases the declines were largely associated with shifts in
accounts receivable and payable between parent firms and affiliates,
reflecting shifting financing decisions.

At $7.8 billion for the

quarter, outflows of U.S. direct investment abroad were double the
value of inflows for foreign investment in the United States.
However, net outflows for direct investment declined, from $12.8
billion in the first quarter, to $3.9 billion (line 6 plus line 7).
The preliminary statistical discrepancy was a small negative
$3.5 billion for the second quarter, but the very large revision of
the statistical discrepancy for the first quarter underlines the
"softness" of the preliminary numbers.

The revised figure for the

first quarter of negative $14.5 billion represents a $19.2 billion
shift from the preliminary number of $4.7 billion.

The primary

causes of the change were revisions in bank claims on own foreign
offices and the receipt of data on the claims and liabilities of
U.S. nonbanks that normally lag by a quarter.

The

(preliminary)

statistical discrepancy for the first two quarters of 1994 now
stands at a negative $18 billion.

When combined with the impact of

currency shipments of approximately $13 billion in the first half
that are unrecorded in the balance of payments, the total of
unrecorded net capital outflows and net imports now stands at $31
billion for the first half of 1994.

Two possible sources of such a sizable discrepancy are the
series on credit extended to and Eurodeposits of U.S. nonbank
residents.

As part of recent improvements introduced by BEA in the

U.S. international accounts, BEA is now using data reported to the
BIS as a major source of information on these items.

As shown in

lines 4 and 5 of the International Banking Data Table. BEA's data
for these accounts recorded a capital inflow of $6 billion in the
first quarter.

Federal Reserve statistical reports present a quite

different picture; as reported on lines 2a and 2b of the same table,
the sum of the differences between the March and December levels of
credit extended to U.S. nonbanks equals a net outflow of $2.7
billion.

Further, our independent measures of Eurodollar holdings

(lines 3a plus 3b),

total a net outflow of $2.3 billion.

Thus,

Federal Reserve figures estimate a capital outflow totaling $5
billion for these items -- a difference that would account for $11
billion of the revised statistical discrepancy in the first quarter,
However, since the coverage of the Federal Reserve series is less
complete than that of the BIS, it is still possible that these
differences do not account for the statistical discrepancy in
1994:Q1.
Foreign Exchange Markets
The weighted average foreign exchange value of the dollar,
shown in the chart, declined 1-1/2 percent on balance during the
intermeeting period, with concerns over U.S. inflation apparently
the primary factor contributing to the decline.

The dollar rose

shortly after the Federal Reserve tightened monetary conditions on
August 16,

but subsequently fell on concerns that the Federal

Reserve was likely to fall behind what was needed to prevent a rise
in U.S. inflation.

The dollar rebounded temporarily at the end of

August on U.S. GDP figures for the second quarter that suggested

IV-13
WEIGHTED AVERAGE EXCHANGE VALUE OF THE DOLLAR
March 1973 = 100

I
FOMC
Aug. 16

September

August

July

June

INTEREST RATES INTHE MAJOR INDUSTRIAL COUNTRIES
Three-month Rates
Aug. 16
Sept. 21
Change
Germany
Japan
United Kingdom
Canada
France
Italy
Belgium
Netherlands
Switzerland
Sweden

4.90
2.29
5.56
5.92
5.56
9.56
5.54
4.86

10-year Bond Yields
Aug. 16 Sept. 21
Change

0.10
0.02
0.38
-0.33
-0.07
-1.06
-0.17
0.17
-0.31
-0.72

7.20
4.57
8.60
9.06
7.75
11.61
8.29
7.23
5.26
11.64

7.67
4.46
9.02
9.01
8.20
11.93
8.56
7.60
5.50
11.30

0.47
-0.11
0.42

8.85

5.00
2.31
5.94
5.59
5.49
8.50
5.37
5.03
4.00
8.13

Weighted-average
foreign

5.06

5.02

-0.04

7.58

7.82

0.24

United States

4.86

5.07

0.21

7.19

7.55

0.36

4.31

-0.05

0.42
0.32
0.27
0.37
0.24
-0.34

U.S. economic growth was beginning to slow.

In the following weeks,

however, the dollar gave up all of these gains, weakened in part by
figures showing that in August U.S. producer prices, capacity
utilization, and industrial production had all increased by more
than market participants had expected.

Toward the end of the

intermeeting period, the dollar weakened against the yen on news of
a widening of the U.S. trade deficit in August and worries about
ongoing trade talks with Japan.
The Canadian dollar rose 2-1/2 percent against the dollar
during the intermeeting period.

Most of this rise reflected an

unwinding of concerns that a victory by the separatist Parti
Quebecois in provincial elections on September 16 would lead to
Quebec's eventual secession from Canada.

The slim margin of the

Parti Quebecois' popular vote victory supported pre-election polls
showing a substantial majority of Quebec's citizens opposed to
secession.
Sterling rose 2-1/4 percent against the dollar during the
intermeeting period.

About half of of this rise occurred after the

Bank of England surprised market participants by raising its money
market intervention rate 1/2 percentage point on September 12.
Strong economic growth and a desire to prevent the emergence of
inflation were cited as the basis for the rate increase.

Data

released subsequent to the rate increase suggested U.K. inflation
may be picking up.
Ten-year bellwether bond yields rose 45 basis points in Germany
during the intermeeting period and by 20 to 40 basis points in most
other European countries.

These increases followed reports of

strong second-quarter GDP growth in both Germany and the United
Kingdom.

A non-trivial portion of the backup in European interest

rates occurred after the release of stronger-than-expected U.S.

economic data, suggesting a common component to concerns about the
pickup in U.S. and European economic activity.
In Japan the ten-year bellwether bond yield declined 10 basis
points,

reflecting Japan's weak second quarter economic performance,

as well as low business confidence, which both suggest that the
Japanese economy is recovering at a considerably slower pace than
that in Europe.
While long term interest rates rose in the United States and
Europe during the intermeeting period, the ten year bellwether bond
yield declined 5 basis points in Canada, reflecting an unwinding of
the risk premium that it had developed prior to Quebec's
parliamentary election.
The yield on the bellwether bond in Sweden declined 35 basis
points on balance during the intermeeting period.
national elections on September 18.
participants'

Prior to

the yield declined on market

relief that it appeared a centrist, as opposed to a

far-left, coalition would form the next government.

Following the

election, the bellwether bond yield gave up some of its pre-election
gains after the Social Democratic Party indicated that it intends to
form a minority government.
Three-month interest rates rose 10 basis points to 5.00 percent
in Germany during the inter-meeting period.

Over the same period,

the Bundesbank conducted all of its RPs at a fixed rate of 4.85
percent.

Comments by Bundesbank Council members concerning the

future scope for monetary easing were mixed during the period, but
three-month Euromark futures rates backed up slightly, suggesting
the market expects a slightly accelerated pace of Bundesbank
tightening.

The yield on the December 1994 three-month Euromark

futures contract is currently 30 basis points above the current
three-month rate, and the yield on the December 1995 three-month

IV-16
Euromark futures contract

is currently

current three-month rate.

175 basis points above

the

These yields reflect both expectations of

the future path of three-month rates, as well as liquidity and risk
premia.

In Japan, short-term rates remained unchanged at about 2.30
percent during the intermeeting period.

Three-month Euroyen futures

rates declined about 10 basis points during the period, with most of
this decline occurring at the end of the period, following the
release of weaker than expected second quarter GDP figures.

The

yield on the December 1994 Euroyen futures contract is 20 basis
points above the current three-month rate, and the yield on the
December 1995 Euroyen futures contract is 140 basis points above the
current three-month rate.

The Desk did not intervene
during the period.
Developments in Foreign Industrial Countries
Real GDP grew strongly

(by 4 percent or more. SAAR) in the

second quarter in Germany, France, the United Kingdom, and Canada.
confirming that recovery is firmly established, but Japanese real
GDP contracted.

Components of GDP showed differing patterns of

growth across these economies.

In Japan, growth in public

investment and private housing expenditures was offset by weakness
in private consumption and investment spending.

In Germany, final

domestic demand contracted and inventory investment surged, while in
France all components of final domestic demand were strong.

In the

United Kingdom, government expenditures made an important
contribution to growth, while in Canada a surge in fixed investment
was the primary source of growth.

Net exports provided support in

Germany. Canada, and the United Kingdom. but subtracted from growth

in Japan and France.

Available data for the third quarter are

mixed, but in general suggest a slight moderation from the rapid
pace of expansion in the second quarter.
Consumer price inflation remains low in major foreign
industrial countries, but in several there has been a pickup in
input prices and producer prices.

Unemployment rates have started

to level off or come down, but they remain well above estimated
NAIRUs.
In Japan. after growth of nearly 4 percent (SAAR) in the first
quarter, real GDP declined 1.6 percent in the second quarter, as
consumption expenditures, plant and equipment investment, and net
exports fell.

While consumption expenditures are expected to

reverse their decline in the third quarter, reflecting the effects
of tax rebates and unusually hot weather, the second-quarter decline
in economic activity underscores the weak and tentative nature of
the recovery.
JAPANESE REAL GDP
(percent change from previous period. SAAR)
1992

1993

Q4/Q4

1993
Q3
Q4

1994
Q1

GDP
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

1.2
0.4
1.7
-0.8
2.2
-0.6

0.0
0.3
1.1
-1.3
3.0
-0.1

1.1
0.7
1.8
1.3
2.5
-1.0

-2.8
-0.5
3.0
-6.0
3.7
-0.5

4.0
3.0
5.6
-3.3
1.8
0.6

-1.6
-0.3
-2 8
2.2
1.3
0.6

Exports
Imports
Net Exports

3.5
-0.9
0.6

-2.2
5.4
-1.0

3.0
0.6
0.4

-8.1
8.2
-2.4

17.9
10.8
0.8

5.9
16.0
-1.2

(contribution)

Data for the third quarter are mixed, but on balance suggest a
resumption of growth.

Industrial production and housing starts

moved up moderately in the second quarter, but they edged down
somewhat in July.

New car registrations declined in the second

quarter but rebounded in August.

Similarly, new machinery orders

were up strongly in June and July following a second-quarter
decline, on average.

Recent movements in the unemployment rate and

the job offers/applicants ratio point to further deterioration in
the labor market.
JAPANESE ECONOMIC INDICATORS
(percent change from previous period except where noted, SA)

Industrial Production
Housing Starts
Machinery Orders
New Car Registrations
Job Offers Ratio*
Business Sentiment**

1993
Q4
-3.7
-2.0
-0.7
-3.3

Q1
1.9
1.1
3.7
1.7
6.9 -16 5
8.5
-7.5

0.66 0.66
-56

-56

1994
Q23 Q3
May
n.a. -1.2
2.7
n.a.
0.5
0.3
n.a.
1.7
9.4
n.a. -4.6
7.4

0.64 n.a.
-50

0.64

-39

June
July

Aug.

-1 7
-2.3
9 3
-0 2

n.a.
n.a
7.8
n.a.

0.63
-

0.62

n.a.

* Level of indicator.
** Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.

In the Bank of Japan's August economic survey

(Tankan), the

index of business sentiment of major manufacturing firms

(the

percentage having a favorable view of business conditions minus the
percentage with an unfavorable outlook) registered its second
consecutive increase after more than four years of decline.
However, sentiment on balance is still negative, and firms predicted
a 4 percent fall in investment in the fiscal year that began in
April, about the same predicted decline as in May's survey.
Real GDP rose 4 percent at an annual rate in western Germany in
the second quarter, nearly twice the first-quarter rate of increase.
In the first quarter, a surge in construction spending

(due to mild

winter weather and tax incentives) boosted growth, but in the second
quarter, inventory accumulation was the major source of growth.
Consumption declined substantially, owing partly to the decline in
real disposable income this year.

Construction fell, as expected

after the weather-induced surge in the first quarter, while
machinery and equipment investment spending rose for the second

IV-19
consecutive quarter.

Both exports and imports grew strongly, and

net exports made a modest contribution to growth.
WEST GERMAN REAL GDP
(percent change from previous period, SAAR)

1992

1993

Q4/Q4

0.3

-0.5

4.4

-1.2

2.2

4.0

Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)

1.7
3.7
-2.8
4.4
-0.6

-2.4
-0.8
-8.2
-1.8
0.2

4.6
8.4
1.3
4.1
-1.3

-5.2
-1.3
-9.3
2.4
-2.8

3 4
1.4
18.0
-3.9
-0.1

3.6
-3.9
-2 7
-1 6.4

Exports
Imports
Net Exports

-2.8
1.2
-1.3

0.8
-5.1
1.7

5.2
6.2
0.1

9.2
-2.9
3.7

3.4
8.1
-1.0

20 3
23 3
0 6

GDP

(contribution)

1993

In July, industrial production continued to expand

1994

(although

the July figure is expected to be revised downward), while the
volume of retail sales fell further, suggesting that inventory
accumulation may have continued into the third quarter.

However, a

July survey showed a marked improvement in west German businesses
views concerning finished goods inventories, except in consumer
goods sectors.

Increases in manufacturing orders and firms'

production plans in June and July suggest that economic activity is
likely to continue to pick up.
WEST GERMAN ECONOMIC INDICATORS
(percent change from previous period except where noted. SA)

Industrial Production
Retail Sales
Manufacturing Orders
Capacity Utilization

Unemployment Rate
Production Plans*

(%)

1993
Q4
Q3
0.4 -0.3
2.0 -1 9
1.7 -0.9

1994
Q1
0.3
1.3
2.6

Q2
2.7
-3.2
3.8

May

June

July

-0.1
6.7
-0.1

1.8
-0.9
2.8

2.3
-1.9
0.7

Aug.

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

8.5

8.9

9.2

9.3

9.2

9.3

-15.0

-8.0

3.3

7.7

8.0

9.0

n.a.

78.2

78.1 79.4 81.5

* Percent of manufacturing firms planning to increase production in
the next three months minus those planning to decrease production.

In eastern Germany. industrial production
to

show strong gains,

June.

advancing

(NSA) has

continued

21-1/2 percent in the year ending in

led by basic and producer goods, which were up nearly 30

percent.

Manufacturing orders

(NSA) also have

recently, and are up more than 15

gains

evidenced strong

percent for the year ending

in June.
In France,
quarter.

(SAAR) in the second

Growth was broad based with consumption,
demand all

domestic

total

real GDP rose 4 percent

expanding at a 4 percent annual

strength in consumption is
automobile purchases
incentives appear

investment,

and
The

rate

partly due to government subsidies on

(which rose almost

to have had most

33 percent,

SAAR).

These

of their impact early in the

quarter, as the

consumption of manufactured products, which includes

autos,

in May and was almost flat in June.

declined

FRENCH REAL GDP
(percent change from previous period, SAAR)

1993
Q3
Q4
0
1.2

1994
Q1
Q2
4.0
2.8

1992
Q4/Q4
0.6

1993
Q4/Q4
-0.5

Total Domestic Demand
Consumption

-0.3
1.8

-2.1
0.3

-1.3
2.8

-0.9
0

5.7
0

4.3
4.0

Investment

-2.1

-4.4

3.6

-2.0

-1.2

4.0

Government Consumption
Inventories (contribution)

-2.0
-1.1

0.3
-1.2

1.6
-3.9

0.8
-0.3

1.6
5.5

2.0
0.3

5.6
2.3
0.8

3.1
-2.6
1.6

14.3
4.5
2.5

3.6
0.4
0.9

GDP

Exports
Imports
Net Exports

(contribution)

Exports

grew rapidly, but the increase

reflecting increased demand for

Consumer
August

a result,

the

slightly negative.

percent above their year-earlier level.

The French government budget,
21,

prices were unchanged for the third month in a row in

and remained at 1.7

September

in imports was larger,

investment goods.

contribution of net exports remained

1.6 10.8
13.4 11.7
-3.1 -0.2

sets a 1995 central

presented to Parliament on
government deficit target of

IV-21
FRENCH ECONOMIC INDICATORS
(percent change from previous period except where noted, SA)
1993
Q3 Q4
Q1 Q2
0.8 -0.5
1.0
2.4
11.9 12.3 12.5 12.6
2.1 -1.9
0.7
1.4

Industrial Production
Unemployment Rate (%)
Consumption of
Manufactured Products
Consumer Prices (NSA)
0.2

0.5

0.4

0.6

1994

May

June

July

0.3
12.7
-1.1

-0.7
12.6
0.2

n a
12.6
n.a.

n.a
n.a.
n.a.

0.2

0.0

0 0

3,6 percent of GDP, down from 4.1 percent in 1994.

Aug

The target is to

be achieved largely by holding expenditure growth to the rate of
inflation.

On a general government basis the deficit is likely to

be larger due to deficits in the social security budget and at the
local government level.
Real GDP in the United Kingdom expanded rapidly in the second
quarter.

Oil production and net exports continued to boost growth.

Total domestic demand also contributed to growth, boosted by private
and government consumption expenditures.
U.K. REAL GDP
(percent change from previous period, SAAR)
1992

Q4/Q4

Total Domest ic Demand
Consumption
Fixed Invest ment
Government Consumption
Inventories (contribution)
Exports
Imports
Net Exports

GDP

Non-oil GDP

(contribution)

1993

Q&/Q4
0.3

1994
Q1
Q2
3.8
4.0

2.6

3.6

0.8
1.3
0.0
-0.6
0 0

3.0
3.1
1.7
1.6
0.5

2.6
4.4
7.0
1.8
-1.7

5.2
4.1
9.1
0.9
1.0

0.8
1.8
11.0
1.1
-2.4

1.6
1.8
-1 2
3.4
0 0

3.9
6.5
-0.9

3.3
4.3
0.0

10.4
8.9
0.2

5.3
13.2
-2.2

18.1
5.9
2.8

4.2
-4.2
2 .-

0.2

2.3

2.9

2.4

3.2

3.6

A sharp drop in oil production in July resulted in flat
industrial production despite a pickup in manufacturing production.
Retail sales expanded in July, but fell back in August, with the end
of summer discounting by retailers.

Rising input prices contributed

to an increase in producer price inflation in August, after declines
in the previous seven months.
U.K. ECONOMIC INDICATORS
(percent change from previous period except where noted, SA)
1993
Q3__Q4
1.3
1.4
1.1
0.8
10.4 10.0

Input Prices (NSA)*
Producer Prices (NSA)
RPI ex. MIP (NSA)**

Q2
2.1
0.9
9.4

May
0.5
0.2
9.4

1994
une
0.1
0 0
9.4

July
0.0
0.6
9.3

5.4 -0.7 -3.0
3.8 3 8 3.3
3.1
2.7
2.7

Industrial Production
Retail Sales
Unemployment Rate (%)

Q1
0.9
1.1
9.8

0.6
2.2
2.4

0.9
2.1
2.5

2.3
2.1
2.4

3.2
2.0
2.2

Aug.
n.a.
-0 4
9.2
3 4
2.3
2.3

Percent change from year earlier
* Retail prices excluding mortgage interest payment, percent change
from year earlier.

In the first change in monetary policy since February, the
government set a minimum lending rate of 5.75 percent on September
12 that resulted in a 50 basis-point rise in base lending rates.
Chancellor of the Exchequer Kenneth Clarke stated that the rate
increase was in response to the strong and rapid pickup in growth
and was designed to ensure that no risks were taken with inflation.
Available indicators in Italy suggest that the recovery has
continued in the second and third quarters.
picked up significantly in May and June.

Industrial production

Consumer confidence

increased in June and edged down only slightly in July.
ITALIAN ECONOMIC INDICATORS

Industrial Production*

1993
Q4
0.1

Capacity Utilization (%)
Unemployment Rate (%)

74 4
11.3

Consumer Confidence
Business Sentiment**

96.3
4

(%)

Q1
2.6

Q2
6.1

74.5
11.3

76.0
11.6

100.6 112.8
19
17

In August,

(NSA)
1994
Apr. May
0.2
9.2

June
8.7

Ju1y
n.a

108.4 112.6
25
17

117.3
8

116.8
n.a.

* Percent change from year earlier level.
** Percent of manufacturing firms having a favorable view of business
conditions minus those with an unfavorable outlook.

IV-23

new car registrations and electricity consumption were up 8.1
percent and 7 3 percent, respectively, relative to August 1993.
Economic activity in Canada surged in the second quarter,
largely on the strength of business machinery and equipment
investment and a resumption of construction activity

Inventory

accumulation and continued strong exports also contributed to the
unexpectedly robust pace.

CANADIAN REAL GDP
(percent change from previous period. SAAR)

1992

Exports
Imports
Net Exports (contribution)

2.2
4.5
-0.1

1.7
3.6
-0.8

9.4
3.3
1.7

Consumption
Fixed Investment
Government Consumption

Q4/Q4
3.2

0.6
-5.8
0.8

GDP

1993

Q4/Q4
0.5

10.9
11.1
-0.3

6.8
4.4
0.7

1993

1994

Q3
1.3

Q4
4.4

Q1
6.4

2.4 4.4
11.3
1.5
0.2 -3.3

3.0
18.2
-2.4

14.3
15.6
-0.7

18.2
15.1
0.7

3.6

4.6
0.8
1.3

Preliminary indicators for the third quarter suggest that
economic activity will continue at a healthy, but more moderate,
pace.

Growth in the composite index, Canada's main leading

indicator, slowed in July and August, continuing a trend begun in
May and the volume of retail sales fell in July.

Rising commodity

prices and the lower level of the Canadian dollar through August
continued to contribute to industrial-product price inflation, but
so far consumer price inflation remains subdued.
effects of recent tax cuts.

Excluding the

12-month consumer price inflation

averaged 1.6 percent in August.

CANADIAN ECONOMIC INDICATORS
(percent change from previous period except where noted,

May
01
a2
0.7
2.9 0.8
3.3
1.3
1.1
2.3
2.1 0.6
0.4
0.8
0.5
11.0 10.7 10.7

1994
June
0.8
1.6
0 5
0.1
10.3

-0 2
4.6

0.0
6.0

1993
Industrial Production
Retail Sales
Composite Index*
Employment
Unemployment Rate (%)
Consumer Prices**
Industrial Product
Prices**

0.9
1.0
1.3
1.0
2.0
1.8
0.2
0.3
11.4 11.1
1.7
3 0

1,8
2.9

0.6
3.1

0.0
5.0

SA)

n.a.
n.a.
-1 .8
n.a.
0.3
0.4
0.5
0 2
10.2
10 3
0.2
6.2

0.2
n.a.

* NSA.
** Percent change from year earlier.

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

1993
Q4

Apr.

May

trade
Japan:
current account

30.5
30.6

31.3
33.8

30.9
34.2

11.6
12.5

8.5
10.0

10.7
11.8

11.6
12 0

trade*
Germany:
current account*

14 4
-3.4

10.2
-5.1

15.6
-3.7

3.9
-1.0

3.0
-2.7

8.6
-0.1

n.a
n a

trade
France:
current account

5.5
4.1

1.5
--

1.3
--

1.1
--

n.a

U.K.: trade
current account

-5.0
-2.7

-4.3
-0.7

-3.6
-0.9
-n.a.

-1.6
--

-1.1
--

6.2
6.4

6.9
1.3

2.0
1.4

2.7
1.3

n.a.
4.2

n.a.
2.4

1.8
-6.1

1.4
-5.5

0.6
--

0.2
--

1.0
-

1.7

trade
Italy:
current account*
trade
Canada:
current account

1994

2.8
n.a.

4.0
n.a.

n.a.
6.9
1.9
-5.5

* Not seasonally adjusted.
-- Data not available on a monthly basis.

Jun.

Jul.

n.a.

September 21, 1994

Chart 1

Industrial Production for Major Foreign Countries
Ratio Scale, Seasonally Adjusted, Monthly

1987=100

1990

1991

1992

1993

1994

1987=100

1990

1991

1992

1993

1994
--

United Kingdom

France

1991

1992

1993

1994

Italy

1990

S19I
1990

1991

1992

1993

1994

1991

1992

1993

1994

Canada

1991

1992

1993

1994

1990

130

Chart 2

S-ptLemOe- 2"

'.-l

Consumer Price Inflation for Major Foreign Countries
12-Month Percent Change

Japan

W Germany

I
1990

1991

1992

1993

1994

1991

1992

1993

1994

1990

1991

1992

1993

1994

1990

1991

1992

1993

1994

1993

1994

France

6 1-

1990

SExcluding mortgage interest payments.
12
Italy

1990

1991

1992

1993

1994

1990

1991

1992

Economic Situation in Other Countries
Growth appears strong in major developing economies other than
Venezuela and Russia.
Mexico grew strongly in the second quarter, according to
preliminary statistics released just before the August presidential
election.

In Brazil, inflation has fallen under the latest

stabilization plan, which took effect July 1.

Price controls in

Venezuela have restrained inflation, and output continues to
contract.
low.

In Argentina, growth is steady while inflation has stayed

In China, strong growth continues and inflation rates have

risen;

strong export growth has pushed the trade balance for the

year into surplus.

In Taiwan, consumer prices rose substantially in

August because of bad weather.

In Korea, output growth and

inflation have both risen recently.

Russian output continues to

fall, but inflation has also fallen: tax revenues are running far
below projections.
Individual country notes.

In Mexico, real GDP rose 3.8 percent

in the second quarter from the same quarter last year.

This strong

growth was well above the 0.5 percent rise in the first quarter, and
exceeded most private and official forecasts.

The surge was

attributed to increases in foreign direct investment and spending on
public infrastructure.

These data are preliminary and were released

just before the Mexican presidential elections; hence, their
implications for the strength of the recovery will remain unclear
until revised GDP data are released.
percent in August from a year earlier.

Consumer prices rose 6.8
The trade deficit in the

first half of 1994 was $8.9 billion, up from $6.9 billion in the
same period last year.
In the presidential elections on August 21, Ernesto Zedillo.
candidate of the ruling Institutional Revolutionary Party

(PRI), won

IV-28

RECENT MEXICAN FINANCIAL INDICATORS
EXCHANGE VALUE OF THE MEXICAN PESO

Pesol$

Daily

Jan

Feb

Mar

Apr

May

June

July

Aug

1-MONTH INTEREST RATE IN MEXICO

"Weekly

Jan

Percent

Feb

Apr

May

June

Aug

MEXICAN STOCK INDEX

jan

Feb

Sep

January 3. 1994 = 100

Mar

Apr

May

June

July

Aug

Sep

IV-29

a decisive victory.

The wide margin of Zedillo's victory, as well

as the reporting of only scattered, minor electoral irregularities.
largely dispelled concerns that political turmoil would continue to
restrain economic activity even after the elections.
As shown in the following chart on Mexican financial
developments, pressure on the peso eased in the runup to the
presidential election as polls indicated increasing support for the
PRI.

By the time of the election, Zedillo's victory had been

largely discounted.

Since then, however, pressure on the peso has

increased because of uncertainties related to the renewal within the
next few weeks or months of the annual anti-inflation pact.

The

peso/dollar exchange rate has moved closer to the "lower" limit of
its fluctuation band.

The rate on one-month peso-denominated

Treasury bills fell steadily from its recent peak of 17.7 percent at
the July 19 auction to 13.4 percent at the August 17 auction.

The

rate rose slightly in the three weeks following the election before
falling back to 13.4 percent on September 21.

The Mexico City stock

market, which gained steadily in the month before the election, also
has largely leveled off since then.
In Brazil. inflation has continued to fall under its latest
stabilization program, the Plano Real, implemented July 1.
prices

Consumer

rose 7.8 percent in July, 5.5 percent in August, and are

projected to rise even less in September.
50 percent in June.

By contrast, prices rose

Under the plan, the central bank committed to

maintain the value of Brazil's newly introduced currency at no less
than one dollar per real.

Although nominal interest rates have

declined since early July, the exchange rate has continued to be
about $1.10 per real.

The central bank's international reserves

have remained at about $40 billion since June.

Finance Minister Rubens Ricupero resigned in mid-September
after unintentionally stating during an interview that the aim of
the government's economic plan was to support the presidential
candidacy of former finance minister Henrique Cardoso.

Owing to the

popularity of the current program. Cardoso holds a strong lead over
other presidential candidates.

If he does not amass a majority in

the October 3 election, however, a runoff between the top two
contenders is scheduled for November 15.

Ciro Gomes, the new

finance minister, has pledged to adhere to the current program.

reduce inflationary pressures, the government recently announced
that it would slash tariffs on over 400 goods.

Recent reports that

the central bank has had to provide some assistance to banks facing
liquidity problems have caused some disturbance, albeit minor so
far, in financial markets.
The cumulative trade surplus for the year through July 1994 was
$7.6

billion, roughly equalling the surplus recorded over the same

period last year.

Economic activity reportedly slowed in July;

but

in August retail sales in Sao Paulo have been robust, up 22 percent
from July and 70 percent from a year ago.
In Venezuela. consumer inflation has been restrained by price
controls imposed on basic goods and services in late June.

Monetary

policy remains highly expansionary, however, putting upward pressure
on non-controlled prices.

Consumer price inflation was 5.2 percent

in August, down from 9 percent in June and 6.3 percent in July;
nevertheless, inflation remains high compared with monthly rates of
about 3 percent last year.

The maximum bank loan rate has fallen to

about 3 percent in recent weeks, substantially below consumer
inflation.

The authorities hope that negative real interest rates

will stimulate economic activity and reduce urban unemployment.
contracted 2.8 percent in the first half of 1994 from a year

GDP

earlier, while the urban unemployment rate reached 8.9 percent in
June, up from 6.6 percent at the beginning of the year.

In early

September, the Caldera administration announced an economic recovery
plan that emphasizes deficit reduction, privatization, and foreign
investment in the petroleum industry.
Imports in July dropped nearly 30 percent from a year earlier,
due to weak aggregate demand as well as the strict foreign exchange
controls imposed the previous month.

Non-oil exports in July and

August were unchanged from a year earlier, compared with 21 percent
growth during the first half of 1994.

The central bank's official

reserves, excluding gold, reached an estimated $7.1 billion at the
end of August, up from $5.5 billion in late June.
Following previous takeovers this year, the authorities on
September 12 took over Banco Consolidado. which holds an estimated 8
percent of deposits in the banking system.

The bank will remain

open during restructuring and is expected to be eventually
reprivatized.
In Argentina. growth appears steady while inflation remains
low.

Industrial production during the first half of 1994 was up 6

percent from a year earlier.

Consumer prices were 3.8 percent

higher in August than a year earlier.

Strong import growth caused

the cumulative trade deficit for the year through June to widen to
$2.1 billion, from $240 million for the year-earlier period.
Exports rose 12 percent from the year-earlier period, while imports
rose 34 percent.

Argentina registered a current account deficit of

$3.3 billion in the first quarter of 1994, up from $1.8 billion a
year earlier.
The Treasury initiated auctions of three-month peso and dollar
denominated T-bills on August 22.

On September 19, the auction

rates for these two bills were 7.5 percent and 6.2 percent

respectively.

The government also announced its intention to

privatize nearly all

remaining state

Growth in China remains
signs of moderating, has

enterprises by early 1995.

strong and

risen again.

inflation, which had shown
Value-added in industry

18 percent in August compared with the

year-earlier period;

year through August, industrial

is up 16 percent.

output

rose

for

the

This

strong industrial growth still appears

slightly slower than growth

last year.

27 percent higher in August

Urban consumer prices were

1994 than a year earlier, after rising 24 percent in July.
continuing problems with inflation have caused the
postpone additional

price

reforms, and

The

authorities to

have led to plans to outlaw

"unreasonable" profits.
China ran a trade surplus of $170 million in August,
straight monthly surplus.
August

is $100

million, compared to a deficit of $5.7

same period last year
reflects

The trade surplus for the year

its third
through

billion

in the

The movement from deficit to surplus

strong exports, which are

eight months of last year;

up 32 percent

imports are up

over the first

18 percent.

Imports are

reportedly fueled primarily by equipment imports of foreign-funded
enterprises, which account for 45

percent of imports this

Equity markets in China boomed in August.
Shenzhen A share markets, which are not
tripled between July 29 and
only to foreigners,
the

recent surge,

open to

September 21.

year.

The Shanghai
foreigners,

and
roughly

B shares, which are open

rose about 20 percent over this period.

Despite

share prices remain well below their record levels

of last year.
In Taiwan. GNP rose 5.8 percent in the
same quarter last

year.

percent from July and
in inflation was

7.1

second quarter from the

Consumer prices in August were up 2.4
percent from a year earlier.

attributed to typhoons that caused food

This spike
prices to

rise sharply, and is not expected to persist.

Taiwan's current

account surplus in the first half of 1994 was $2.4 billion, down
from $3 billion in the first half of last year.
trade surplus was $800 million;

In August Taiwan's

exports rose 5 percent from the same

month last year, while imports rose 11 percent.
In Korea. real GNP increased by 8.1 percent in the second
quarter from the same quarter last year, driven especially by strong
growth in investment.
recovery.

Rising inflation has accompanied the economic

Consumer prices rose 7.4 percent in August from a year

earlier, compared with a 4.4 percent rise in August 1993.

The

central bank has tightened liquidity in an effort to reduce
inflation, contributing to a marked rise in interest rates during
the past three months.

The interest rate on three month CDs was

15.3 percent on September 13,

almost three hundred basis points

above the average rate in June.
Merchandise exports increased by 11.9 percent in the first
seven months of 1994. as demand strengthened in industrial countries
and yen appreciation enhanced Korea's competitiveness.

Merchandise

imports rose 14.7 percent over the same period, however, as strong
investment demand fueled imports of capital goods.

Hence, the

current account deficit for the first seven months of this year
widened to $2.9 billion, from $1.2 billion a year earlier.
In Russia, the ruble-dollar exchange rate depreciated 6.2
percent during August and about 6 percent during the first three
weeks of September, up sharply from the 3.8 percent average monthly
depreciation from May through July.

The pressure on the ruble

appears to reflect substantial credits to the agricultural sector,
the industrial sector, and the Northern Territories, which has
increased demand for dollars.

Russian official statistics indicate that during the first
eight months of 1994. real GDP fell

16.5 percent and industrial

production contracted 23.4 percent compared with the same period in
1993.

These figures probably overstate the actual decline in

economic activity, however, because they do not adequately cover the
private sector.

Monthly consumer price inflation in both July and

August was around 5 percent, well below last year's average monthly
rate of 20 percent.

On August 22,

the Central Bank of Russia

reduced its three-month refinance rate from 12.5 percent a month to
10.8 percent a month.
Through June, Russia was complying with the major commitments
in its Systemic Tranformation Facility

(STF) with the IMF.

fiscal situation, however, continues to deteriorate.

The

Government

officials indicate that nominal federal tax receipts are now running
at only 50 percent of revenue projections.

This partly reflects

lower than anticipated inflation, but also reflects sharper than
expected declines in output, increased tax evasion, and
unrealistically optimistic initial projections

In response, the

government has reduced expenditures relative to budget and increased
its use of sequestration, in an effort to satisfy fiscal targets
outlined in the STF.

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 27, 1994 : Greenbook Part 2

FRASER