Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 30, 1997 : Greenbook Part 1

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Strictly Confidential (FR) Class II FOMC

Part 1

September 24, 1997

CURRENT ECONOMIC
AND FINANCIAL CONDITIONS

Summary and Outlook

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

Strictly Confidential (FR) Class II FOMC

September 24, 1997

SUMMARY AND OUTLOOK

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

Domestic Developments
Overview
Once again, the incoming information on the economy's performance has provided
some pleasant surprises. Real GDP grew considerably more in the second quarter than
we had thought, mainly because of impressive, ongoing strength in exports. And
although GDP may have decelerated during the current quarter, activity still seems to
be expanding faster than we predicted in the August Greenbook. Meanwhile, there
have been few signs that the pressures on resources are resulting in any pickup in
wage or price inflation.
The financial markets have greeted this news enthusiastically, pushing bond
yields back close to their 1997 lows and stock prices, overall, to new highs. Investors
seem increasingly enthralled by the "New Era" view--that we are in an extended
period of much-improved trend growth, propelled importantly by technological
advance and by revolutionary changes in the economies of the developing world, with
inflation no worse than a remote risk because of intensified competition.
It is far from clear to us at this juncture that what has occurred requires that we
scrap our existing analytical approach. Indeed, for all the talk of a new "paradigm" to
go with the New Era, we have not seen a fully articulated, alternative macroeconomic
model. It may be that little more is really required to understand the recent
phenomena than some new parameters for our standard model, rather than a fullfledged new paradigm. Even in this regard, however, some caution is warranted. The
ongoing strength of domestic demand may simply be a conventional response to an
irrationally exuberant stock market--a risk that we have often identified in the outlook.
And by many analysts' reckoning, the favorable inflation path of the past year can be
largely, if not entirely, explained by the substantial appreciation of the dollar.
Nonetheless, in what we hope is a judicious response to the incoming news, we have
made some further modifications to our projection, incorporating a somewhat more
optimistic view of productivity prospects and of the likely near-term response of
wages and prices to given levels of resource utilization.
We expect that real GDP growth will average a little less than 3 percent over
the second half of 1997 and the first half of 1998. This is a considerable upgrading
from the last forecast, in which growth averaged 2-1/4 percent. The revision reflects
both the favorable financial market developments of the intermeeting period and the
indications of greater-than-expected ongoing thrust from exports and business fixed
investment. The strength in these sectors, in turn, is likely to have positive multiplier
effects on other components of demand. However, the appreciation of the dollar will
gradually sap some of the energy from export demand, and capital spending is likely

Part 1: Summary and Outlook, September 24, 1997

to be damped eventually by a waning of accelerator effects, flattening cash flows, and
what we anticipate will be a less stimulative financial environment emerging next
year. As a consequence, we are projecting that growth will slow appreciably over the
latter half of 1998 and remain low in 1999, averaging little more than 1-1/2 percent, at
an annual rate, over the six quarters.
With this new forecast contour, output grows fast enough to push the
unemployment rate down to around 4-1/2 percent next spring versus 4-3/4 percent in
the last Greenbook, and even with the subsequent slackening of the expansion, the
unemployment rate remains below 5 percent through 1999. Despite the generally
higher level of resource utilization this time, however, the path of inflation is
somewhat lower in this forecast than in the last.
We still think that the tightness of the labor market and a peaking of the
exchange value of the dollar will likely lead to a rise in inflation, but recent news on
wages and prices has prompted us to trim, again, the dimension of the step-up. In
particular, we are impressed by the degree to which the expansion of plant capacity in
manufacturing, along with foreign competition, seems to be muting price increases in
the goods sector. These competitive pressures, and the diminution of inflation
expectations, also appear to be putting a damper on wages: Although there are many
reports of companies boosting compensation to attract or retain scarce workers, the
available aggregate statistics provide no evidence of a general ongoing acceleration,
suggesting that pay increases are being given more selectively (or in less visible
forms) than in the past. In any event, we have tempered the response of wages to the
low level of unemployment. The dollar does not begin to depreciate until later in this
forecast, so that the disinflationary pressures from falling import prices do not abate so
quickly.
All told, we are predicting that published core CPI inflation, which has been
2.3 percent in the past twelve months, will rise to 2.6 percent next year and 2.8
percent in 1999. This acceleration in each year is damped about 0.2 percentage point
by technical changes to the index.
Key Background Factors
With inflation and inflation expectations having come down as they have, real interest
rates do not look low by historical standards. Nonetheless, financial factors overall do
not appear to be exerting a drag on spending growth at this time. Credit is readily
available, and the cost of equity capital is low. Indeed, the mood of the markets at
this point seems to be such that the near-term behavior of the economy may not

Domestic Developments

prevent an extension of the recent bond market rally--although we are not anticipating
that to occur. In our forecast, we have assumed a shock to the markets of at least
modest proportions, in the form of an upturn in the federal funds rate by next spring;
the tightening begins a little earlier and ultimately amounts to somewhat more than
that assumed in the last few Greenbooks. We project that intermediate- and long-term
interest rates will drift upward through next year, producing a flatter yield curve than
now prevails.
Based on previous performance, our stock market prognostications should have
little credibility at this point. Nevertheless, we feel obliged to say something on this
score because we believe that equity prices are a significant element in the economic
outlook. Price-earnings multiples for major market indexes are historically high today,
at a time when profits stand at record levels; in the past, the highest PEs tended to
occur around cyclical troughs in earnings. Only recently have analysts and investors
manifested any doubts that large companies can indefinitely sustain double-digit profit
gains against a backdrop of moderate nominal GDP expansion. But the market seems
still to be demanding little, if any, compensation for the risk that something might go
awry with the New Era economic scenario. In our forecast, there are some significant
surprises, including disappointing profits and, probably at least as important, the
currently unanticipated tightening of monetary conditions; so we are predicting that
share prices, after wavering in the next few months, will turn down substantially in
1998.
Federal fiscal policy likely will be providing no major impulses--positive or
negative--to aggregate demand during the forecast period. We are assuming that the
1998 appropriations bills will keep things in line with the recent fiscal agreement.
Although there is a risk that the good news on revenues will stimulate proposals for
spending increases or further tax cuts, we have not assumed any additional policy
actions in the projection. We now expect the unified budget deficit for fiscal 1997 to
come in at $28 billion, somewhat below our previous estimate. With the higher path
for nominal GDP likely to boost revenues over the forecast period, we have also
lowered the projected deficit for fiscal 1998 to $51 billion, and we are projecting
$50 billion in fiscal 1999.
The dollar has experienced quite mixed movements recently against various
currencies since the last FOMC meeting. On a trade-weighted basis against other
G-10 currencies, it has declined somewhat. With our interest rates now projected to
rise considerably over the next year or so, we have the G-10 dollar index holding
steady over 1998 and then edging downward in 1999. This trajectory contrasts sharply

Part 1: Summary and Outlook, September 24, 1997

with the 20 percent rise over the past two years. With regard to foreign activity, a
weaker outlook for Asian economies is roughly offset by stronger growth elsewhere;
on net, growth in aggregate foreign GDP is expected to remain close to 4 percent in
1998 and then to edge down to 3-3/4 percent in 1999. Although supply disruptions
have boosted crude oil prices relative to our expectations in the August Greenbook,
our longer-term projection still calls for the spot price for West Texas intermediate oil
to decline somewhat over the rest of this year and then to rise about $0.75 per barrel
in 1998; an additional $1.50 per barrel increase is anticipated for 1999.
Recent Developments and Outlook for the Current Quarter
The BEA's preliminary estimate of second-quarter GDP growth was 3.6 percent at an
annual rate, well above the 2.6 percent figure in the August Greenbook. We see no
reason to expect a significant revision in the "final" estimate that will be released this
Friday. The biggest surprise relative to our forecast (and relative to BEA's advance
estimate) was in exports, as the June figures showed an unexpectedly large increase.
In addition, nothing in the incoming data leads us to expect a downward revision to
the very high second-quarter inventory investment number--in contrast to our
speculations in the last Greenbook.
We expect real GDP growth to slow to about 2-3/4 percent at an annual rate in
the third quarter, a little below the 3-1/2 percent average pace over the past year and a
half but appreciably above the forecast in the August Greenbook. On the production
side, hiring has remained brisk, and recent data would suggest that manufacturing
output will post a large gain this quarter, perhaps approaching 7 percent at an annual
rate.
In addition, domestic final demand appears to be growing rapidly. In the
household sector, booming employment, rising income and wealth, and favorable
sentiment have been lifting consumer demand, as expected. Healthy gains in motor
vehicle and other retail sales through August have prompted us to maintain our
prediction of a better than 4 percent increase in real PCE this quarter.
We also have little altered our projection for residential investment, which we
estimate will decline about 4-1/2 percent at an annual rate this quarter. Starts of
single-family homes were recently revised upward a bit for June and July, but they fell
sharply in August, and permit issuance appears to have drifted lower. Given that
indicators of demand have remained quite bullish and that inventories of unsold new
homes are lean, we are expecting a rebound in starts in September.

Domestic Developments

Summary of the Near-Term Outlook
(Percent change at annual rate except as noted)
1997:Q2
Measure

1997:Q3

Aug.
GB

BEA
prel.

Sept.
GB

Aug.
GB

Sept.
GB

Real GDP
Private domestic final purchases
Personal consumption expenditures
Residential investment
Business fixed investment

2.6
2.8
.8
7.5
15.3

3.6
3.0
1.0
7.1
15.4

3.6
3.1
1.1
7.5
15.5

2.2
5.0
4.2
-5.0
14.6

2.8
5.9
4.1
-4.6
22.9

Government outlays for consumption
and investment

3.7

3.1

3.2

-.5

-.1

Change, billions of chained (1992) dollars
Inventory investment
Net exports

7.2
-17.9

14.1
-6.4

13.1
-6.6

-24.9
-9.2

-19.4
-20.0

Growth in real business fixed investment is now projected to top 20 percent
(annual rate) in the current quarter--the biggest increase in more than a decade. Gains
in this sector continue to be led by investment in office and computing equipment;
shipments have been rising in nominal terms, and prices have been plummeting, so
growth in real outlays appears likely to exceed 50 percent (annual rate) this quarter.
Meanwhile, data on construction put in place through July point to a likely rebound in
outlays for nonresidential structures this quarter.
In contrast to the strength in domestic final demand, the book-value inventory
figures for July are consistent with our notion that the rate of stock accumulation will
drop back considerably. For manufacturing and trade, excluding motor vehicles, the
annualized rate of stockbuilding in July was $26 billion, versus an average of nearly
$50 billion in the second quarter. Although we have raised our prediction of
inventory building for the current quarter as a whole, the deceleration is still expected
to subtract more than a percentage point from GDP growth.
Net exports are also projected to fall substantially--much more than in the last
forecast. The trade deficit widened considerably in July; exports appear to be holding
up well after the second quarter's upside surprise, but strong domestic demand is
apparently sucking in huge volumes of imported goods.

Part 1: Summary and Outlook, September 24, 1997

Incoming data on prices have been a tad softer than we had expected. The CPI
rose another 0.2 percent in August, despite larger increases in food and energy prices
than in previous months; excluding food and energy, the increase in August was only
0.1 percent. Although the unexpectedly small rise in August partly reflected special
factors that will likely be reversed in September (especially the declines in apparel
prices and airfares), increases in both the total CPI and core prices are now projected
at about 2 percent (annual rate) this quarter, about 1/4 percentage point below our
previous projection. With regard to wages, the twelve-month change in average
hourly earnings has held steady in the 3-1/2 percent to 3-3/4 percent range recently;
with the higher minimum wage taking effect on September 1, we think that this
measure will move back to the upper end of that range in the next couple of monthly
readings.
The Longer-Run Outlook
The forecast has real GDP growth holding around 3 percent in the fourth quarter,
bringing growth for the year to 3-1/2 percent. Output is projected to expand
2-1/4 percent in 1998 and 1-1/2 percent in 1999. As noted earlier, the 1997-98
projection is somewhat stronger than in the last Greenbook. The upward revision to
our near-term forecast reflects mainly our expectations that the surge in business fixed
investment will tail off more gradually than we had thought previously and that, given
the stronger trend of final sales, the downshift in the pace of inventory accumulation
will be spread over a longer span.
As was also noted earlier, our forecast of a deceleration in GDP still hinges on
the same fundamental arguments we presented in previous Greenbooks. Although the
recent strength of exports has prompted us to raise our forecast for this component of
GDP, the lagged effects of the appreciation of the dollar still lead us to project a
decline in net exports throughout the forecast period. In addition, the already high
levels of spending on consumer and producer durables, and the implied stock-flow
relationships, suggest some restraint on outlay growth from here. Our assumption of a
considerable rise in interest rates and a sizable stock market correction is also key in
the damping of aggregate demand, especially in the latter part of 1998 and in 1999.
All told, we now expect final sales growth to slow from around 3-3/4 percent over the
second half of this year to 2-1/2 percent in 1998 and 1-1/2 percent in 1999.
With real GDP growth remaining above its potential rate--which we now put
around 2-1/4 percent--through the first half of next year, labor markets are projected to

Domestic Developments

Summary of Staff Projections
(Percent change, compound annual rate)
Measure

1998

1999

2.9
2.3

2.3
2.0

1.5

3.0
2.6

4.0
3.4

2.5
2.0

1.6

PCE
Previous

3.2
3.0

3.8
3.7

2.8
2.6

1.7

Residential investment

Real GDP
Previous
Final sales
Previous

1997:H1

1997:H2

4.3
3.7

-2.2

5.4

-1.7

-2.6

5.4

-1.6

-2.6

10.0
9.6

14.5
9.3

7.9
5.9

5.6

1.4
1.6

.3
.6

.7
.7

BFI
Government purchases
Previous

Change, billions of chained (1992) dollars
Inventory change
Previous

43.8
37.9

-31.9
-40.6

-15.1
-.7

-11.2

Net exports

-27.3

-12.1

-30.0

-22.4

-38.6

-5.6

-37.5

Previous
..

Not applicable.

tighten further. 1 Employers are likely to find that they must pay more for labor, and
though we do not anticipate a significant shift in inflation psychology, we doubt that
all of these cost pressures will be absorbed in the profit share; rather, there will be a
gradual upcreep in the trend rate of price increase.
Consumer spending. Real PCE is projected to rise about 3-1/2 percent this
year, with growth slowing to 2-3/4 percent next year and 1-3/4 percent in 1999. In
the near term, the moderation in inventory investment is expected to take some of the
steam out of overall production and income growth, but financial factors become a
significant influence as time passes. Given our forecast of the stock market, the
household wealth-to-income ratio will be declining throughout the forecast period, but
especially during 1998. Our rule of thumb, derived from various econometric

1. We had failed previously to take account of the effects of technical changes in the CPI on the
estimation of real output. The correction adds 0.1 percentage point to growth in both actual and
potential GDP in 1998 and 0.2 percentage point in 1999.

Part 1: Summary and Outlook, September 24, 1997

formulations, suggests that something like 60 percent of the effect of a change in
wealth should be expected to occur within the first year, so the rise in the market to
date can be expected to provide impetus to expenditure for some time. Indeed, not
until 1999 does this model imply that wealth will become a meaningful restraining
influence on consumption, given our stock market forecast. We have, in effect,
accelerated the drag a little because we think that a substantial downturn in the market
may put a considerable dent in the extraordinary optimism prevailing among
households, as they are confronted with the painful possibility that they may have to
work at building their nest eggs for tuition and retirement the hard, old-fashioned
way--by saving out of current income.
As noted, an additional consideration in our longer-run consumption forecast is
the potential for a downward adjustment from the rapid rate of accumulation of
consumer durables evident in recent quarters. To be sure, ongoing price declines and
the introduction of new products will likely continue to propel rapid growth in
spending on consumer electronics. But sales of light vehicles have been running at a
fairly high level for some time and are likely to drift lower. Similarly, especially in
light of our forecast for housing starts, spending on traditional household goods such
as furniture and appliances is anticipated to decelerate in coming quarters.
Residential investment. We are projecting a moderate decline in residential
investment over the forecast period. For the near term, many of the basic factors
conditioning demand are still quite positive: Job and income growth have been solid,
household wealth is high, and consumers report homebuying conditions (especially
mortgage rates) to be very good. Consequently, we feel reasonably comfortable in
discounting last month's drop-off in single-family building and anticipating that such
starts in the next several months will move back above the 1.1 million unit mark.
However, as mortgage rates and other fundamental determinants become less favorable
next year, some erosion of demand is likely, although we expect only a relatively mild
decline in construction activity in what will still be a very high employment economy
with a historically low cash-flow burden of homeownerhip. All told, we are predicting
that single-family starts will be dropping only to 1.08 million units in 1999 from
1.13 million this year.
Multifamily starts have essentially been on a plateau for some time now, well
above the previous cyclical trough level but well below the peaks of past decades.
With the movement to conventional single-family houses and manufactured homes, the
apartment vacancy rate has come down only a little in the past year, and rents in many
markets have not been strong enough to inspire a great deal of building. Given the

Domestic Developments

economic and financial outlook, we expect a moderate decline in multifamily starts, to
290,000 per year by 1999 from 310,000 in 1997.
Business fixed investment. Growth of real business fixed investment is
expected to drop back to a 6-1/2 percent annual rate in the final quarter of 1997 from
the extraordinary gains posted in the second and third quarters. However, much of
this projected slowing simply reflects a bunching of motor vehicle fleet sales and
aircraft purchases this summer, and the average annual growth rate in the second half
of the year--at almost 15 percent--probably gives a better sense of the current
underlying pace of investment growth. With sales growth projected to weaken and
corporate cash flow coming under increasing pressure, we expect that real BFI growth
will slow to around 8 percent in 1998 and 5-1/2 percent in 1999.
Investment in high-tech equipment should continue to grow rapidly, driven by
continued sharp price declines and technological innovations. Outlays for office and
computing equipment are projected to rise 30 percent or more in 1998 and in 1999.
While "Year 2000" reprogramming costs may strain some companies' information
system budgets, many firms may find earlier replacement of older equipment a costeffective way of addressing some of that special problem. We are also projecting
continuing double-digit increases in outlays for communications equipment, where
advances in wireless technologies and the opening of markets should continue to spur
capacity growth.
The macroeconomic influences we have built into this projection are likely to
be more discernible in other categories of equipment spending. We have raised our
projection for growth of noncomputer, non-communications equipment a bit in 1998,
reflecting the stronger growth in output now expected for next year. Nevertheless,
with sales decelerating and rising interest costs exacerbating pressures on cash flow,
we anticipate that growth in outlays for these types of equipment will slow markedly-to virtually zero by the end of the projection period. In light of the projected
deceleration in capacity utilization, we are forecasting a drop in the absolute level of
manufacturing investment.
After a sharp rebound in the current quarter, increases in outlays for
nonresidential construction are projected to settle in at about a 3 percent pace in 1998
and 1999. New construction contracts have leveled off overall this year, but anecdotal
reports on activity are more upbeat, and the underlying factors that typically influence
construction spending appear relatively favorable at this point. In particular, vacancy
rates remain low, prices for commercial real estate have been rising, and financing for
new projects is readily available and likely to remain so for a while. Although we are

Part 1: Summary and Outlook, September 24, 1997

projecting that longer-term rates will be rising, they stay in the range of the past year,
and, given the long lags in construction in this sector, the rise should not exert much
of a drag on building within the projection period.
Inventory investment. As noted previously, we have raised the near-term
inventory investment forecast somewhat. Although we continue to believe that
businesses eventually will want to reduce stockbuilding to a pace more consistent with
trend GDP growth, in the current environment of strong final demand and with no
overhang, a somewhat higher rate of accumulation may well be desired. As sales
slacken over the course of next year, there could be some unplanned buildup of stocks,
but we have assumed that businesses will get on top of any problems very quickly.
Broadly, nonfarm inventory investment slows in step with final demand through 1999.
Government spending. Real federal expenditures for government
consumption and gross investment are expected to decline at a 1-3/4 percent annual
rate in the fourth quarter. This drop is larger than was projected in the last
Greenbook, reflecting some changes in the timing of defense purchases (the decline in
the third quarter evidently being smaller than we had expected). For 1998, the
forecast is little changed, with federal purchases projected to decline 2 percent; a
similar decline is projected in 1999. We anticipate that real nondefense purchases will
rise about 1 percent next year but turn down in 1999, reflecting the discretionary
spending caps Defense spending is projected to decline 3-1/2 percent next year and
2-3/4 percent in 1999.
Real purchases by state and local governments are projected to rise
2-1/4 percent, on average, over the forecast period, similar to the average gains in
recent years. Although the financial position of most states has continued to improve,
there seems to be no move on the part of public officials to up the pace of outlays.
The impact of welfare reform continues to add an element of caution in state and local
spending and uncertainty to our projection; however, with unemployment rates
anticipated to remain low in most areas, the likelihood of significant pressures on state
funds from social programs seems remote.
Net exports. Real exports of goods and services, which we now expect to run
close to 12 percent this year, is projected to increase only 7-1/2 percent in 1998. The
growth of imports is expected to slip next year as well, reflecting the slower growth in
U.S. activity. On net, declining real net exports are projected to subtract roughly
1/3 percentage point per year from GDP growth in 1998 and 1999. (A fuller
discussion of the prospects for the external sector is contained in the International
Developments section.)

Domestic Developments

The Outlook for the Labor Market
(Percent change, Q4 to Q4, except as noted)
Measure

1996

1997

1998

1999

Output per hour, nonfarm business
Previous

1.2
1.2

1.8
1.0

1.0
.8

Nonfarm payroll employment
Previous

2.1
2.1

2.3
2.2

1.7
1.4

Household employment survey
Previous

2.1
2.1

2.2
2.2

1.5
1.3

Labor force participation rate'
Previous

66.9
66.9

67.2
67.2

67.4
67.3

67.3
...

Civilian unemployment rate'
Previous

5.3
5.3

4.7
4.7

4.5
4.7

4.9
...

.9
.8
.7

1. Percent, average for the fourth quarter.
.. Not applicable.

Labor markets. Reflecting the upward revision to GDP growth over the
second half of this year, we have boosted our near-term forecast for labor demand.
Gains in nonfarm payrolls are now expected to average more than 200,000 per month
over the fourth quarter, before gradually decelerating to about 110,000 per month by
the end of next year and less than 100,000 per month in 1999. We anticipate that the
near-term strength in labor demand will attract some additional workers into the labor
force, and thus we continue to project that the labor force participation rate will begin
to move up again. However, we do not think that the reserve of inactive, yet
qualified, individuals is sufficient to fully meet the added demand, and thus we foresee
the unemployment rate falling to 4-1/2 percent by next spring.
The decline in unemployment would have been even greater had we not also
raised our projection for labor productivity growth in the second half of 1997 and in
the first half of 1998 to about 1-1/2 percent. Output per hour posted an unexpectedly
large increase in the second quarter, suggesting that--despite the prevalence of reports
of difficulty in finding qualified workers--there were as yet no insurmountable
problems of lesser quality. Taking a somewhat more optimistic view of productivity
prospects in light of the recent experience, we have raised our forecast of productivity
growth over the next few quarters by more than typically would be consistent with the
revision to output growth. Productivity growth then decelerates to a subpar rate as
firms lag somewhat in adjusting their labor input to the slower rate of output growth.

Part 1: Summary and Outlook, September 24, 1997

Wages and prices. We have edged down the projection for core CPI inflation
in 1997 to 2.4 percent and trimmed a couple of tenths from the projection for 1998,
which now stands at 2.6 percent. In 1999, the core CPI is projected to rise
2.8 percent. The true acceleration in prices is larger than these numbers suggest, as
the published figures for 1998 and 1999 will be held down by the technical
adjustments to the CPI. But even so, the rise in inflation is smaller than would be
generated by applying historical sacrifice ratios to our unemployment projection.
One factor leading us to be more sanguine about the prospects for rising
inflation is the apparent absence of price pressures in goods markets. Surely, the
dollar's appreciation has been an important part of this story. And, based on our
exchange rate path, the prospect is that we shall be losing that favorable influence over
the coming quarters. However, the reported lack of pricing "leverage" in
manufacturing probably also has been associated with the rapid growth in capacity. In
the projection, we have given somewhat more weight to this story, and thus the easing
of pressures on capacity over the next two years limits the ability by manufacturers to
fully pass their labor cost increases into prices.
In addition, as actual inflation has come down--and stayed down--average
inflation expectations among consumers and businessmen increasingly appear to have
receded. Moreover, judging by the narrowing variance of price expectations in the
Michigan SRC survey, fewer people appear fearful that inflation will get out of hand
in the foreseeable future. One may conjecture that this development owes in part to
the public's perception that the Fed has both the ability and the commitment to keep
inflation in check. This credibility could help to anchor expectations in the period
ahead, muting what might otherwise be greater tendencies for inflation to pick up in
response to tight markets. However, this would not be a permanent preventive: A
persistence of excess demand would ultimately manifest itself in a rise in inflation and
inflation expectations. Nevertheless, we view the possibility of a credibility dividend,
which presumably would be strengthened by the assumed, largely pre-emptive, policy
tightening, as one reason for tempering the wage-price acceleration in this forecast.
Apart from our more optimistic view of core inflation, relative declines in food
and energy prices are expected to hold down overall price increases next year. Energy
prices are projected to change little in 1998, as deregulation restrains price increases
for electricity and gasoline prices drop back from the high levels expected for the
second half of this year. In 1999, energy prices rise a little over 2 percent, reflecting
the uptrend in oil prices. Food prices are projected to rise about 2-1/4 percent in
1998, as this year's crop harvest seems large enough to result in a moderate

I)omestic Developments

CPI Adjusted for Technical Changes
(Four-quarter changes)

CPI
Percent
3.9

-3.6

3.3

A\
/

Excluding adjustments

2.7

2.4

Reported
2.1

...
!

1997

1996

1995

1994

1.8
1999

1998

CPI excluding food and energy
Percent
-3.8

3.6

3.4
/

/ s

Excluding adjustments

3.2

i--

-2.8

-'/

-2.6
Reported
2.4

I
1994

____

9
1995

6
1996

1 7
1997

19,
1998

,
1999

Part 1: Summary and Outlook, September 24, 1997

Staff Inflation Projections
(Percent change, Q4 to Q4, except as noted)
Measure

1996

1997

1998

1999

2.1
2.1

2.3
2.6

2.7

Food
Previous

1.8

2.2

1.5

2.4

Energy
Previous

-1.5

-.0
1.0

2.2

Consumer price index
Previous

-1.6

2.5
.

Excluding food and energy
Previous

2.4

2.6
2.8

2.8

2.5

PCE chain-weighted price index
Previous

1.7
1.8

2.2
2.3

2.5

Excluding food and energy
Previous

1.8
2.0

2.3
2.4

2.5

GDP chain-weighted price index
Previous

1.9
1.9

2.2

ECI for compensation of private
industry workers'
Previous

3.1
3.2

3.3

-. 5

1.9

Prices of core non-oil merchandise
imports
Previous

.2
Percentage points

MEMO

Adjustment to the core CPI for
technical changes 2

1. December to December.
2. Adjustments are calculated relative to the methodological structure of
the CPI in 1994.
.. Not applicable.

accumulation of inventories over the coming year; we have a slight further pickup in
1999 along with faster labor cost growth. Overall, we expect the total CPI to rise
2 percent this year, 2-1/4 percent in 1998, and 2-3/4 percent in 1999.
Our forecast for hourly compensation now shows the ECI for private industry
accelerating from 2.9 percent in the twelve months ended this past June to 3.2 percent
in 1998. The slightly more modest acceleration of compensation in this projection
reflects, in part, the lower forecast for inflation; real compensation gains (measured in

Domestic Developments

terms of product prices) have been somewhat above trend productivity growth
recently, a pattern we expect to continue over the forecast period. In addition, we
continue to hear reports that employers are increasingly replacing general wage
increases with more flexible pay arrangements--such as bonuses and incentive pay-and targeting pay gains to workers in high demand, which may be altering the
historical short-run relationship of aggregate compensation growth to general labor
market conditions. The UPS settlement has not materially affected our view of the
wage outlook. Although some analysts have pointed to the settlement as signaling an
important shift in bargaining power towards workers, a closer look at the details of
this contract suggests that the eventual settlement was much more favorable to UPS
than was reported in the press. 2
Monetary and Credit Flows
Domestic nonfinancial debt is projected to rise about 4-1/2 percent this year
and to average slightly more than that over the next two years as well. Federal sector
debt is expected to continue increasing in a range of only 1 to 2 percent per year over
the forecast period. Debt of state and local governments, which appears to be growing
at a 3 percent rate this year, is expected to grow a little faster over the next two years,
largely owing to smaller retirements of debt that had been advance-refunded in
previous years.
Household debt is projected to slow slightly from the 6 percent growth pace of
1997. Borrowing for home mortgages in the period ahead appears likely to remain
around the moderate pace seen so far this year, although home equity lending will
likely continue to substitute for other types of loans to households. Consumer credit is
expected to grow just a little faster than income. Access to consumer credit is
unlikely to be a problem for most households. Delinquency rates on consumer loans,
which had risen since late 1994, appear to have leveled off of late, suggesting less
inclination on the part of lenders to tighten standards in the months ahead beyond the
limited steps taken over the last year or so.

2. In particular, much of the discussion in the press focused on the sizable wage increases given to
part-time workers (about 8 percent per year over five years). As it turns out, however, these increases
apply only to currently employed part-time workers. Newly hired workers will receive only a slightly
higher starting wage than under the old contract (and then will progress at the same rate as in the

previous contract). Because UPS has very high turnover among its part-time workforce, we estimate that
the actual increase in the company's wage costs for part-time workers will be closer to 3 percent per
year, about the same as the increase for full-time workers.

Part 1: Summary and Outlook, September 24, 1997

Business borrowing should expand briskly over the forecast period, as capital
spending picks up, profits flatten, and financing conditions stay generally favorable.
Merger activity will likely ease somewhat from this year's record pace, but still require
substantial amounts of debt financing. A less robust outlook for profits and declining
stock prices could damp the current enthusiasm for lower-rated bonds and cause risk
spreads to widen. Overall bond issuance is projected to slow only slightly, however,
from its unusually strong third-quarter pace. With delinquencies on business loans
still at historically low levels, bank lending standards have continued to ease of late,
although any further easing might be limited if the softer earnings picture in our
projection materializes.
The recent surge in growth in M2, apparently outdistancing that of GDP, likely
reflects some temporary substitution away from investment in equity markets, as
suggested by the lull in flows into equity mutual funds and surge into money funds
following the mid-August plunge in equity prices. M2 growth, projected to be near
the upper end of its 1 percent to 5 percent range this year, should slow with the
slackening of GDP growth over the next two years. Additional restraint on M2
growth from increases in short-term nominal interest rates in 1998 may be largely
offset if the equity market correction anticipated in our forecast prompts some shift
toward safer investments. M3 has grown quite rapidly in recent months and appears
likely to exceed its 2 percent to 6 percent range by a wide margin this year. The
recent surge in M3 owes partly to a substitution by banks of domestic funding for
overseas sources and is unlikely to be sustained in the period ahead. However, M3 is
expected to continue growing significantly faster than GDP over the next two years,
reflecting strength in bank lending and an ongoing penetration by institutional money
funds in the liquidity-management market.
Alternative Simulations
The two alternative scenarios that we have included this month depict the implications
of differing assumptions regarding the federal funds rate. The first scenario holds the
funds rate at its current 5-1/2 percent level through the end of 1999. These lower
rates are sufficient to boost GDP growth relative to our baseline forecast about
1/4 percentage point in 1998 and 3/4 percentage point in 1999. Given the faster
output growth, the unemployment rate remains below 4-1/2 percent throughout the
projection period and the inflationary consequences are more substantial, particularly
in 1999.

Domestic Developments

The second alternative assumes that the funds rate begins to rise soon and
reaches 7 percent next summer. In this scenario, output growth falls to about
2 percent in 1998 and to 1-1/4 percent in 1999. This slower rate of output growth
pushes the unemployment rate up to 5-1/4 percent by late 1999 and almost eliminates
the acceleration in prices, at least as published with the anticipated technical changes.

Alternative Federal Funds Rate Assumptions
(Percent change, Q4 to Q4, except as noted)
1996

1997

1998

1999

Real GDP
Baseline
No further change
Tighter policy

3.2
3.2
3.2

3.6
3.6
3.6

2.3
2.6
1.9

1.5
2.2
1.3

1
Civilian unemployment rate
Baseline
No further change
Tighter policy

5.3
5.3
5.3

4.7
4.7
4.7

4.5
4.4
4.7

4.9
4.4
5.2

CPI excluding food and energy
Baseline
No further change
Tighter policy

2.6
2.6
2.6

2.5
2.4
2.4

2.6
2.7
2.5

2.8
3.2
2.5

Measure

1. Average for the fourth quarter.

Strictly Confidential <FR>
Class II FOMC

September 24, 1997
STAFF PROJECTIONS OF CHANGES IN GDP, PRICES, AND UNEMPLOYMENT

(Percent, annual rate)

Consumer 1
price index

GDP chain-weighted
Nominal GDP
Interval

08/14/97
----

09/24/97

Real GDP
08/14/97

price index

09/24/97

08/14/97
I~

09/24/97

08/14/97

09/24/97

Unemployment
2
rate
08/14/97

09/24/97

ANNUAL

1995
1996
1997
1998
1999

QUARTERLY

1996

02
Q3
Q4
1997

Q1
Q2
03

Q4
1998

Q2
Q3
Q4
1999

Q2
03
Q4

TWO-QUARTER

1996

Q2
04

-0.2
-0.1

-0.2

1997

Q2
04

-0.4
-0.2

1998

Q2
Q4

-0.0
-0.0

-0.2

1999

Q2
Q4

FOUR-QUARTER
1995

0.2

Q4
Q4
Q4
Q4

1.
2.
3.
4.

0.0

0.2

1996
1997
1998
1999

-0.1

For all urban consumers.
Level, except as noted.
Percent change from two quarters earlier; for unemployment rate, change in percentage points.
Percent change from four quarters earlier; for unemployment rate, change in percentage points.

0.0
-0.3
-0.6
-0.1

0.0

-0.3
-0.6

-0.2
0.4

Strictly Confidential <FR>
Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, ANNUAL VALUES
(Seasonally adjusted annual rate)

September 24, 1997

- - - Projected - - Item

Units

1991

1992

1993

1994

1995

1996

1997

1998

1999

5916.7
6079.4

6244.4
6244.4

6558.1
6389.6

6947.0
6610.7

7265.4
6742.1

7636.0
6928.4

8079.2
7188.0

8464.0
7384.1

8784.3
7501.5

0.4
0.0
-0.4
-0.8

3.6
4.0
3.9
4.9

2.4
3.0
2.1
3.7

3.3
3.6
2.7
3.7

1.6
1.2
2.2
2.5

3.2
3.6
3.1
3.8

3.6
4.0
3.4
4.4

2.3
2.5
2.5
3.2

1.5
1.6
1.6
2.0

Personal cons. expenditures
Durables
Nondurables
Services

-0.2
-3.1
-1.0
0.9

4.2
9.4
3.4
3.6

2.7
7.4
1.6
2.3

3.1
6.3
3.0
2.5

2.2
3.0
1.0
2,7

2.7
3.9
1.8
2.8

3.5
7.8
1.8
3.4

2.8
4.0
2.7
2.6

1.7
1.4
1.1
2.1

Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures

-6.0
-2.6
-12.5
1.1

5.5
9.6
-3.4
16.9

9.9
12.2
4.5
7.8

7.6
10.2
1.1
4.2

6.5
8.3
2.0
-1.9

11.7
12.2
10.3
3.9

12.0
16.5
0.9
1.8

7.9
9.6
3.1
-2.6

5.6
6.6
2.9
-2.2

8.6
4.1

4.1
7.4

4.6
10.2

10.0
12.3

10.3
5.6

9.3
11.8

12.3
14.9

7.6
9.2

6.1
7.0

-0.7
-3.1
-5.3
1.0

1.7
1.3
-1.3
2.0

-1.4
-6.1
-6.9
2.0

0.1
-3.9
-6.0
2.7

-1.4
-6.0
-5.9
1.4

2.0
1.5
1.1
2.2

0.9
-1.1
-3.0
2.0

0.7
-2.0
-3.5
2.3

0.7
-2.2
-2.7
2.3

-3.0
-1.2
-22.3

7.0
2.0
-29.5

22.1
29.5
-70.2

60.6
49.0
-104.6

27.3
35.7
-98.8

25.0
22.5
-114.4

60.7
54.0
-139.3

35.7
31.5
-165.1

28.7
25.3
-194.8

6 change

3.8

6.3

5.0

5.8

4.0

5.6

5.5

4.4

3.7

Millions

108.3
6.8

108.6
7.5

110.7
6.9

114.1
6.1

117.2
5.6

119.5
5.4

122.2
4.9

124.7
4.5

126.0
4.7

EXPENDITURES

$
Ch.

Nominal GDP
Real GDP

Bill.
Bill.

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

% change

Exports
Imports
Gov't. cons. & investment
Federal
Defense
State & local
Change in bus. inventories
Nonfarm
Net exports
Nominal GDP

Bill.

Ch. $

EMPLOYMENT AND PRODUCTION

Nonfarm payroll employment
Unemployment rate
Industrial prod. index
Capacity util. rate - mfg.

change

-0.0
78.0

3.9
79.5

3.0
80.8

5.7
83.1

1.8
83.1

3.9
82.1

4.8
82.7

2.3
82.7

1.4
82.0

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.01
12.52
9.74
2.77

1.20
12.85
10.51
2.34

1.29
13.87
11.71
2.15

1.46
15.02
12.88
2.13

1.35
14.73
12.82
1.90

1.48
15.05
13.34
1.71

1.45
15.00
13.09
1.91

1.41
14.92
13.09
1.83

1.37
14.54
12.77
1.77

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

5932.4
3.5
3.7
0.8
6.0

6255.5
6.2
7.3
4.0
6.2

6576.8
5.1
4.2
1.5
5.1

6955.2
5.7
5.1
2.4
4.2

7270.6
4.1
5.2
2.4
4.8

7637.7
5.5
5.8
2.0
4.3

8057.6
5.1
5.6
3.2
3.8

8430.6
4.3
4.7
2.7
3.7

8744.5
3.6
4.1
1.9
3.9

Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

t change

4.5
6.9
6.6

11.3
6.8
6.6

19.0
7.5
7.2

14.1
8.2
7.9

11.0
8.9
8.6

9.1
9.6
9.3

5.6
9.8
9.5

1.0
9.5
9.2

-1.1
9.0
8.8

Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill. $

-196.0
75.8
11.5

-280.9
86.3
18.3

-250.7
87.4
19.7

-186.7
96.8
27.9

-174.4
103.1
32.5

-110.5
105.3
34.1

-30.1
105.9
34.4

-18.4
112.3
40.6

-36.8
108.5
36.7

2.6
2.6

2.5
2.5

2.4
2.4

2.2
2.3

1.9
1.9

2.1
2.1

2.2
2.2

2.7
3.1
3.5

2.3
2.7
3.1

2.5
2.7
2.8

2.3
2.6
3.0

2.3
3.2
2.6

1.4
2.1
2.4

1.9
2.3
2.6

2.2
2.7
2.8

3.5

3.6

3.1

2.6

3.1

3.2

3.3

3.5
4.5
1.0

-0.2
1.8
2.0

-0.1
1.9
2.0

0.4
2.8
2.4

1.2
3.3
2.1

1.8
3.7
1.8

1.0
3.5
2.5

INCOME AND SAVING

PRICES AND COSTS

% change

GDP implicit deflator
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI, hourly compensation

Nonfarm business sector
Output per hour
Compensation per Hour
Unit labor cost

1. Changes are from fourth quarter to fourth quarter.
2. Private-industry workers.

Strictly Confidential <FR>
Class II FOMC

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)

September 24, 1997

1995
Ql

1995
Q2

1995
Q3

1995
Q4

1996

1996
Q2

1996
Q3

1996
Q4

1997
Q0

1997
Q2

7168.9
6703.7

7209.5
6708.8

7301.3
6759.2

7381.9
6796.5

7467.5
6826.4

7607.7
6926.0

7676.0
6943.8

7792.9
7017.4

7933.6
7101.6

8035.4
7165.5

0.9
1.3
1.8
2.5

0.3
0.2
1.9
2.2

3.0
1.9
3.3
2.7

2.2
1.3
2.0
2.5

1.8
3.1
2.6
4.4

6.0
6.5
5.2
5.5

1.0
2.4
0.2
2.1

4.3
2.5
4.5
3.2

4.9
5.9
3.0
5.1

3.6
3.8
2.9
3.1

Personal cons. expenditures
Durables
Nondurables
Services

1.5
-3.0
1.7
2.4

2.9
3.9
0.9
3.7

2.6
9.3
0.7
2.2

1.8
2.0
0.7
2.3

3.1
4.8
1.7
3.5

3.7
9.7
2.6
3.1

0.5
-1.9
0.6
1.0

3.3
3.5
2.1
3.9

5.3
14.1
4.7
3.9

1.1
-5.2
-2.1
4.0

Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures

14.2
16.1
9.5
-7.0

5.7
6.2
4.3
-15.5

1.6
2.0
0.7
8.4

4.9
9.4
-5.8
8.5

11.7
13.1
8.2
8.3

13.0
14.9
7.9
17.9

16.5
19.1
10.0
-4.5

5.9
2.6
15.3
-4.3

4.1
6.7
-2.1
3.3

15.5
24.2
-4.6
7.5

Exports
Imports

7.2
10.0

9.3
7.7

13.5
2.3

11.5
2.4

1.7
13.1

9.6
14.1

1.9
13.2

25.5
6.8

9.9
17.9

20.2
20.5

Gov't. cons. & investment
Federal
Defense
State & local

0.6
-1.1
-1.1
1.7

-0.1
-4.5
-1.6
2.6

-0.7
-1.3
-4.0
-0.4

-5.4
-16.4
-15.9
1.9

1.8
7.5
6.1
-1.4

7.2
8.8
11.0
6.3

-1.1
-4.2
-4.6
0.7

0.1
-5.2
-7.1
3.3

-0.4
-5.8
-11.8
2.7

48.5
54.7
-113.5

21.6
34.0
-112.8

17.0
29.6
-92.9

22.2
24.4
-76.1

2.3

5.2

4.5

117.9
5.6

Item

Units

EXPENDITURES

Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

s change

3.2
6.8
7.6
1.2

8.0
14.5
-100.8

21.3
17.3
-112.6

4.7

7.7

3.6

6.2

7.4

5.2

118.5
5.6

119.2
5.4

119.9
5.3

120.5
5.3

121.1
5.3

121.9
4.9

0.8
82.3

1.6
81.7

6.2
82.1

3.3
82.3

4.5
82.3

4.4
82.5

4.3
82.5

1.42
14.86
13.00
1.86

1.41
14.96
13.18
1.78

1.46
15.04
13.38
1.66

1.50
15.13
13.43
1.70

1.49
15.08
13.38
1.70

1.42
14.95
13.18
1.76

1.47
15.26
13.34
1.92

1.46
14.51
12.67
1.85

7220.6
2.6
4.1
0.2
4.6

7298.3
4.4
4.3
2.6
4.5

7388.5
5.0
5.1
2.5
4.6

7475.3
4.8
6.8
3.5
4.7

7610.5
7.4
6.6
1.1
4.1

7669.1
3.1
5.1
2.7
4.5

7796.1
6.8
4.8
0.7
3.9

7919.2
6.5
8.0
4.6
3.7

8015.1
4.9
5.0
2.9
4.1

-2.9
8.5
8.2

10.0
8.7
8.4

31.7
9.2
8.9

7.9
9.3
9.0

20.0
9.6
9.3

12.1
9.7
9.4

0.6
9.6
9.4

4.5
9.6
9.3

18.1
9.8
9.6

9.1
9.9
9.7

-191.5
107.7
37.7

-179.5
105.6
35.3

-176.5
101.1
30.3

-150.2
97.8
26.8

-153.6
104.1
33.2

-111.6
114.4
43.1

-99.5
102.6
31.1

-77.1
100.4
28.9

-55.5
104.7
33.5

-34.7
105.6
34.0

Change in bus. inventories
Nonfarm
Net exports

Bill. Ch. $

Nominal GDP

% change

4.2

Nonfarm payroll employment
Unemployment rate

Millions

116.5
5.5

116.9
5.6

117.4
5.7

Industrial prod. index
Capacity util. rate - mfg.

6 change

3.9
84.2

-0.7
83.1

3.2
82.9

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.32
14.67
12.66
2.01

1.29
14.42
12.46
1.96

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

7175.1
4.5
7.4
4.5
5.3

Corp, profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

% change

Federal surpl./deficit
State & local surpl./def.
Ex. social ins. funds

Bill.

37.9
31.6
-138.9

32.9
26.5
-105.6

63.7
58.3
-126.3

76.7
69.3
-132.9

EMPLOYMENT AND PRODUCTION

INCOME AND SAVING

16
$

PRICES AND COSTS

ECI, hourly compensation

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost

1. Private-industry workers.

3.3
3.3

2.0
2.1

2.1
2.0

2.2
2.1

2.9
2.8

1.7
1.9

2.6
2.7

1.9
1.9

2.4
2.4

1.5
1.6

3.0
2.7
3.3

% change

GDP implicit deflator
GDP chn.-wt, price index
Gross Domestic Purchases
chn.-wt, price index
CPI
Ex. food and energy

2.5
3.5
3.3

1.7
2.1
2.8

1.9
2.6
2.7

2.7
3.2
2.7

1.8
3.4
2.7

2.4
2.8
2.4

2.4
3.3
2.7

1.9
2.3
2.2

0.9
1.0
2.9

2.9

2.6

2.9

2.5

3.5

2.8

2.5

3.4

-1.6
2.6
4.2

0.8
3.1
2.3

1.1
2.7
1.6

1.6
2.9
1.3

1.9
2.8
0.9

2.2
4.4
2.1

-1.0
2.9
3.9

1.8
3.3
1.5

1.4
4.5
3.1

2.8
3.2
0.4

I-21

Strictly Confidential
Class II FOMC

<FR>

REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS, QUARTERLY VALUES
(Seasonally adjusted, annual rate except as noted)

- - - - - - - - - -

- - - - - --

September 24,

1997

Projected - - - - - - - - - - - - -

1997
Q3

1997
Q4

1998
Q1

1998
02

1998
Q3

1998
Q4

1999
Q1

1999
Q2

1999
Q3

1999
Q4

8123.9
7215.6

8224.0
7269.2

8330.8
7323.8

8428.3
7371.8

8510.8
7406.3

8586.2
7434.4

8668.3
7461.5

8744.6
7487.8

8822.0
7514.0

8902.2
7542.7

2.8
3.7
3.9
5.9

3.0
2.5
3.7
3.7

3.0
2.9
3.7
4.3

2.6
3.3
2.3
3.5

1.9
2.8
1.7
2.8

1.5
1.2
2.2
2.2

1.5
1.9
1.2
2.0

1.4
1.5
1.6
2.0

1.4
2.0
1.3
2.1

1.5
1.1
2.3
2.0

Personal cons. expenditures
Durables
Nondurables
Services

4.1
15.3
2.7
2.7

3.4
8.2
2.1
3.1

3.3
4.7
3.5
2.9

3.3
5.5
3.2
2.9

2.8
3.6
2.6
2.7

1.9
2.2
1.5
2.1

1.8
1.9
1.3
2.1

1.7
0.9
1.1
2.1

1.7
1.0
0.9
2.2

1.6
1.7
0.9
1.9

Business fixed investment
Producers' dur. equipment
Nonres. structures
Residential structures

22.9
28.8
7.9
-4.6

6.6
8.0
3.0
1.3

12.5
16.1
3.1
-0.0

7.1
8.6
3.1
-1.4

5.3
6.1
3.1
-4.0

6.7
8.0
3.0
-4.9

5.8
6.8
3.0
-5.2

5.8
6.9
3.0
-3.3

5.5
6.5
2.9
-0.9

5.2
6.1
2.9
0.7

Exports
Imports

4.9
12.0

14.7
9.6

11.4
9.7

6.5
11.4

2.4
9.1

10.1
6.7

3.4
6.5

8.2
8.3

2.5
7.0

10.7
6.3

Gov't. cons. & investment
Federal
Defense
State & local

-0.1
-3.4
-3.6
1.8

0.9
-1.8
-3.1
2.4

0.6
-2.3
-4.4
2.3

0.4
-3.1
-5.6
2.3

1.8
0.9
1.0
2.3

0.2
-3.6
-4.9
2.3

0.5
-2.6
-3.4
2.2

1.4
-0.3
0.3
2.2

0.7
-2.2
-2.7
2.3

57.4
49.8
-152.9

44.9
38.5
-145.0

32.3
26.8
-144.5

38.7
34.4
-160.2

42.1
38.6
-180.6

29.7
26.4
-175.0

34.0
30.7
-186.0

30.1
26.7
-190.1

32.1
28.7
-205.7

18.5
15.2
-197.4

% change

4.5

5.0

5.3

4.8

4.0

3.6

3.9

3.6

3.7

Nonfarm payroll employment
Unemployment rate

Millions
t

122.6
4.8

123.2
4.7

123.9
4.6

124.5
4.5

124.9
4.5

125.3
4.5

125.6
4.6

125.9
4.7

126.1
4.8

126.4
4.9

Industrial prod. index
Capacity util. rate - mfg.

' change
%

5.8
83.0

4.5
83.0

3.5
83.0

2.7
82.9

1.5
82.5

1.6
82,3

1.6
82.2

1.4
82.1

1.2
82.0

1.4
81.9

Housing starts
Light motor vehicle sales
North Amer. produced
Other

Millions

1.43
15.16
13.18
1.98

1.43
15.05
13.17
1.88

1.43
15.04
13.18
1.86

1.42
14.99
13.15
1.84

1.40
14.88
13.06
1.82

1.38
14.75
12.95
1.80

1.36
14.65
12.87
1.78

1.36
14.55
12.78
1.77

1.37
14.47
12.71
1.76

1.38
14.50
12.73
1.77

Nominal GNP
Nominal GNP
Nominal personal income
Real disposable income
Personal saving rate

Bill. $
% change

8100.0
4.3
4.5
2.6
3.8

8196.1
4.8
5.2
2.6
3.6

8300.3
5.2
6.0
5.3
4.1

8396.2
4.7
4.1
1.6
3.7

8475.9
3.9
4.6
2.0
3.6

8549.9
3.5
4.3
1.8
3.5

8631.7
3.9
4.9
4.3
4.1

8706.7
3.5
3.7
0.9
3.9

8781.0
3.5
3.9
1.1
3.8

8858.4
3.6
4.1
1.5
3.8

Corp. profits, IVA & CCAdj.
Profit share of GNP
Excluding FR Banks

% change
%
%

-3.5
9.7
9.5

0.1
9.6
9.4

4.2
9.6
9.4

4.8
9.6
9.4

-1.9
9.5
9.2

-3.0
9.3
9.1

-1.9
9.2
8.9

-1.3
9.1
8.8

-0.2
9.0
8.8

-0.9
8.9
8.7

Federal surpl./deficit
State & local surpl./def.
Ex. social ins, funds

Bill. $

-13.5
101.2
29.6

-16.7
111.9
40.3

-27.8
112.8
41.2

-15.7
113.5
41.8

-11.5
111.5
39.8

-18.5
111.3
39.6

-40.7
110.4
38.6

-36.1
108.9
37.1

-32.0
107.8
36.0

-38.4
107.1
35.3

1.6
1.5

2.0
2.0

2.2
2.2

2.1
2.1

2.0
2.0

2.4
2.4

2.1
2.1

2.1
2,1

2.1
2.1

1.2
2.1
1.9

1.7
2.7
2.8

2.0
2.1
2.5

1.9
2.3
2.5

1.9
2.4
2.6

2.0
2.5
2.6

2.4
2.7
2.8

2.1
2.8
2.8

2.1
2.7
2.8

3.2

3.4

2.7

3.4

3.5

3.4

2.9

3.4

3.5

1.5
3.2
1.7

1.4
3.6
2.2

1.6
3.5
2.0

1.4
3.5
2.2

0.7
3.5
2.8

0.5
3.5
3.0

0.6
3.5
2.9

0.9
3.5
2.6

1.2
3.6
2.3

1.1
3.6
2.5

Item

Units

EXPENDITURES

Nominal GDP
Real GDP

Bill. $
Bill. Ch. $

Real GDP
Gross domestic purchases
Final sales
Priv. dom. final purchases

% change

Change in bus.
Nonfarm
Net exports

inventories

Nominal GDP

Bill. Ch. $

EMPLOYMENT AND PRODUCTION

INCOME AND SAVING

PRICES AND COSTS

% change

GDP implicit deflator
GDP chn.-wt. price index
Gross Domestic Purchases
chn.-wt. price index
CPI
Ex. food and energy
ECI, hourly compensation

Nonfarm business sector
Output per hour
Compensation per hour
Unit labor cost

1. Private-industry workers.

Strictly Confidential <FR>
Class II FOMC

CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS

1996
04

Item

1.8
2.7
-0.8

Net exports
Exports
Imports

1997
Q4

1998
01

1998
Q2

1998
03

1998
04

96Q4/
9504

97Q4/
96Q4

3.6
3.8

2.8
3.8

3.0
2.6

3.0
3.0

2.6
3.3

1.9
2.8

1.5
1.2

3.2
3.6

3.6
4.0

2.8
2,5

3.9
4.9

3.7
3.1

3.7
3.5

2.3
2.9

1.7
2.3

2.2
1.8

3.1
3.1

3.4
3.7

0.7
-0.4
-0.4
1.6

2.8
1.2
0.5
1.1

1.8
0.3
0.4
1.1

2.4
0.6
0.4
1.4

0.4
0.5
-0.1
0.1

Business fixed investment
Producers' dur. equip.
Nonres. structures
Residential structures

1997
03

3.6
1.1
0.9
1.5

personal cons. expenditures
Durables
Nondurable a
Services

1997
02

3.0
4.2

final purchases

1997
Ql
4.9
6.0

Real GDP
Gross dom. purchases
Final sales
Priv. dom.

1.5
1.6
-0.1
0.3

2.2
2.0
0,2
-0.2

-1.0
1.1
-2.1

-0.3
2.2
-2.4

-0.9
0.6
-1.5

0.4
1.7
-1.2

0.1
1.3
-1.2

-0.0
-0.2
-0.2
-0.1
0.2

0.2
-0.1
-0.1
0.0
0.3

-1.0
-1.0
0.0

-0.7
-0.6
-0.1

Government cons. & invest.
Federal
Defense
Nondefense
State and local
Change in bus.
Nonfarm
Farm

September 24, 1997

inventories

Note. Components may not sum to totals because of rounding.

0.6
0.5
0.1
-0.2

0.7
0.6
0.1
-0.2

1.1
0.9
0.3
0.2

1.2
1.2
0.0
0.1

-0.7
0.8
-1.4

-0.9
0.3
-1.2

0.3
1.2
-0.9

-0.4
1.0
-1.4

-0.4
1.4

0.1
-0.1
-0.2
0.0
0.3

0.1
-0.2
-0.2
0.0
0.3

0.3
0.1
0.0
0.0
0.3

0.0
-0.2
-0.2
-0.0
0.3

0.4
0.1
0.0
0.1
0.3

.2
-0.1
-0.1
0.1
0.2

-0.7
-0.6
-0.0

0.3
0.4
-0.1

0.2
0.2
-0.0

-0.6
-0.6
-0.0

0.1
0.0
0.1

0.2
0.2
-0.0

-1.8

98Q4/
97Q4

Strictly Confidential <FR>
Class II FOMC

CONTRIBUTIONS TO GROWTH IN REAL GROSS DOMESTIC PRODUCT AND RELATED ITEMS

September 24, 1997

_ _

1997
Q4

Item
Real GDP
Gross dom. purchases
Final sales
Priv. dom. final purchases

1998
Q1

1998
02

1998
Q3

1998
04

1999
01

1999
02

1999
03

1999
04

97Q4/
9604

98Q4/
9704

9904/
9804

3.0
2.6

3.0
3.0

2.6
3.3

1.9
2.8

1.5
1.2

1.5
1.9

1.4
1.5

1.4
2.1

1.5
1.1

3.6
4.0

2.3
2.6

1.5
1.7

3.7
3.1

3.7
3.5

2.3
2.9

1.7
2.3

2.2
1.8

1.2
1.7

1.6
1.6

1.3
1.7

2.2
1.7

3.4
3.7

2.5
2.6

1.6
1.7

2.2
0.4
0.7
1.1

2.2
0.4
0.6
1.1

1.9
0.3
0.5
1.1

1.3
0.2
0.3
0.8

1.1
0.1
0.2
0.8

1.1
0.1
0.2
0.9

1.1
0.1
0.2
0.8

2.4
0.6
0.4
1.4

1.9
0.3
0.5
1.1

1.3
1.2
0.1
-0.0

0.8
0.7
0.1
-0.1

0.6
0.5
0.1
-0.2

0.7
0.6
0.1
-0.2

0.6
0.5
0.1
-0.2

0.6
0.5
0.1
-0.1

0.6
0.5
0.1
-0.0

0.6
0.5
0.1
0.0

1.2
1.2
0.0
0.1

0.8
0.7
0.1
-0.1

Personal cons. expenditures
Durables
Nondurables
Services
Business fixed investment
Producers' dur. equip.
Nonres.

structures

Residential structures
Net exports
Exports
Imports

0.4
1.7
-1.2

0.1
1.3
-1.2

-0.7
0.8
-1.4

-0.9
0.3
-1.2

0.3
1.2
-0.9

-0.5
0.4
-0.9

-0.1
1.0
-1.1

-0.6
0.3
-1.0

-0.4
1.4
-1.8

-0.3
0.9
-1.2

Government cons. & invest.
Federal
Defense
Nondefense
State and local

0.2
-0.1
-0.1
0.0
0.3

0.1
-0.1
-0.2
0.0
0.3

0.1
-0.2
-0.2
0.0
0.3

0.3
0.1
0.0
0.0
0.3

0.0
-0.2
-0.2
-0.0
0.3

0.1
-0.2
-0.1
-0.0
0.3

0.2
-0.0
0.0
-0.0
0.3

0.2
-0.1
-0.1
0.1
0.2

0.1
-0.1
-0.1
0.0
0.3

-0.7
-0.6
-0.1

-0.7
-0.6
-0.0

0.2
0.2
-0.0

-0.6
-0.6
-0.0

0.2
0.2
0.0

0.2
0.2
-0.0

-0.2
-0.2
-0.0

Change in bus. inventories
Nonfarm
Farm

Note. Components may not sum to totals because of rounding.

Strictly Confidential
Class II FOMC

STAFF PROJECTIONS OF FEDERAL SECTOR ACCOUNTS AND RELATED ITEMS
(Billions of dollars except as noted)

(FR)

Fiscal year
1996a

Item

1997

1998

1999

UNIFIED BUDGET

Not seasonally adjusted

Receipts'
1
Outlays
Surplus/deficit'
On-budget
Off-budget
Surplus excluding
2
deposit insurance
Means of financing
Borrowing
Cash decrease
3
Other
Cash operating balance,
end of period

1453
1560
-107
-174
67

1578
1606
-28
-105
76

1636
1687
-51
-133
82

1697
1747
-50
-146
96

349
401
-52
-69
17

496
396
100
61
39

386
403
-17
-21
4

362
429
-67
-78
12

368
419
-51
-65
14

508
421
88
42
46

397
419
-22
-32
10

387
474
-87
-104
17

370
404
-34
-50
16

520
434
86
34
51

420
435
-15
-27
13

387
454
-67
-84
16

-116

-43

-56

-53

-56

-19

-68

-52

-23

-88

-35

-15

-68

130
-6
-16

36
17
-25

67
-13
-2

63
0
-13

48
-1
5

-69
-18
-13

9
24
-16

56
-3
14

42
11
-2

-69
-15
-4

37
-5
-10

64
10
13

37
10
-13

-67
-15
-4

28
-5
-9

51
10
6

1758
1775
461
307
154
1313
-17
62

1806
1847
470
307
163
1377
-41
60

1820
1856
470
306
163
1386
-36
60

1835
1867
471
308
164
1396
-32
60

1848
1887
471
307
164
1416
-38
60

Seasonally adjusted annual rate

NIPA FEDERAL SECTOR
Receipts
Expenditures
Consumption expend.
Defense
Nondefense
Other expenditures
Current account surplus
Gross investment
Current and capital
account surplus
FISCAL INDICATORS

1997

1999

1998

1997
a

September 24,

1550
1679
447
302
145
1232
-129
69

1691
1736
459
308
151
1277
-45
62

1675
1731
458
306
152
1273
-56
58

1712
1747
464
311
153
1283
-35
62

1734
1748
461
308
153
1286
-14
63

-197

-107

-114

-97

-76

-79

-90

-77

-73

-79

-101

-96

-92

-98

-223

-177

-178

-177

-166

-178

-197

-190

-189

-194

-210

-200

-192

-193

-.1

1.6

-1

-.8

-1

-2

-1

-. 4

-1.3

High-employment (HEB)
surplus/deficit
Change in HEB, percent
of potential GDP
Fiscal impetus (FI),
percent, cal. year

-. 6

-2.3

-2.2

-1.1

1. OMB's September 1997 deficit estimates (assuming the enactment of the President's proposals) are $37 billion in FY97, $58 billion in FY98 and $57
Budget receipts,
billion in FY99. CBO's September 1997 baseline deficit estimates are $34 billion in FY97, $57 billion in FY98 and $52 billion in FY99.
outlays, and surplus/deficit include corresponding social security (OASDI) categories. The OASDI surplus is excluded from the on-budget deficit and
shown separately as off-budget, as classified under current law. The Postal Service deficit is included in off-budget outlays beginning in FY90.
2. OMB's September 1997 deficit estimates (assuming the enactment of the President's proposals), excluding deposit insurance spending, are $51
billion in FY97, $63 billion in FY98 and $59 billion in FY99. CBO's September 1997 baseline deficit estimates, excluding deposit insurance, are $48
billion in FY97, $61 billion in FY98 and $56 billion in FY99.
3. Other means of financing are checks issued less checks paid, accrued items, and changes in other financial assets and liabilities.
4. HEB is the NIPA current and capital account surplus in current dollars, with cyclically sensitive receipts and outlays adjusted to the level
of potential output generated by 2.0 percent real (chain-weighted) growth (2.1 and 2.2 percent in 1998 and 1999, respectively, to reflect CPI
modifications) and an associated unemployment rate of 6 percent. Quarterly figures for change in HEB and FI are not at annual rates. Change in HEB,
as a percent of nominal potential GDP, is reversed in sign. FI is the weighted difference of discretionary changes in federal spending and taxes in
chained (1992) dollars, scaled by real federal consumption plus investment. For change in HEB and FI, negative values indicate restraint.
5. Fiscal year data for the unified budget come from OMB; quarterly data come from the Monthly Treasury Statement and may not sum to
OMB fiscal year totals.
a--Actual.
b--Preliminary.

Strictly Confidential Class II FOMC
September 24, 1997
Change in Debt of the Domestic Nonfinancial Sectors
(Percent)

Year

1987
1988
1989
1990
1991

9.2
8.9
7.6
6.5
4.3

8.0
8.0
7.0
11.0
11.1

9.6
9.2
7.8
5.3
2.3

12.0
9.5
8.5
7.5
4.9

15.9
10.7
9.9
9.6
6.6

5.1
8.6
6.0
1.9
-1.7

6.9
9.8
7.7
3.3
-1.8

Quarter
1997:1
2
3
4
1998:1
2
3
4

Note. Quarterly data are at seasonally adjusted annual rates.
1. Data after 1997:Q2 are staff projections. Changes are measured from end of the preceding period to
end of period indicated except for annual nominal GDP growth, which is calculated from Q4 to Q4.
2. On a monthly average basis, total debt grew 4.4 percent in 1997, 5.0 percent in 1998, and 4.7 percent in 1999.
3. On a monthly average basis, federal debt rose 1.0 percent in 1997, 1.9 percent in 1998, and 1.5 percent in 1999.
4. On a monthly average basis, nonfederal debt increased 5.6 percent in 1997, 6.0 percent in 1998, and 5.8 percent in 199.
2.6.3 FOF

12.1
6.5
5.7
5.1
8.4

7.4
7.6
6.4
4.4
3.8

Strictly Confidential Class II FOMC
September 24, 1997
Flow of Funds Projections: Highlights
(Billions of dollars except as noted)

Seasonally adjusted annual rates
1998

1997

Calendar year

538.0
-90.0
628.0

733.0
-90.0
823.0

784.5
-78.0
862.5

95.8
-82.0
306,0

103.1
-90.0
314.5

117.4
-90.0
326.4

122.4
-78.0
343.9

317,7
245.8
67.6
92.4

311.2
237.4
67.1
92.0

312.3
235.9
67.9
92.5

314.3
234.3
68.7
92.8

316.0
235.4
69.5
93.1

-5.8
119.0

22.3
125.3

36.5
124.0

85.3
124.6

40.0
122.4

16.6
122.0

-97.1
-69.2
-100.1

34.1
8.9
17.3

158.5
56.4
66.6

52.2
42.5
50.8

-84.0
-69.2
-87.8

142.3
36.8
21.8

186.1
64.0
87.0

330.6

370.2

178.4

244.2

268.0

290.0

288.8

304.4

183.9
8.6
1.0
7.6

183.5
6.8
-1.2
8.0

183.3
7.7
0.4
7.3

183.2
9.6
1.9
7.7

183.1
8.5
0.6
7.8

182.9
7.5
-1.0
8.4

183.3
9.7
1.7
8.0

184.1
10.0
2.2
7.9

663.2
-124.8
788.0

623.8
-82.0
705.8

79.6
-72.8
284.9

80.5
-124.8
289.6

291.1
195.9
52.4
91.8

316.3
244.0
66.9
92.2

35.0
115.8

84.2
124.1

50.2
50.2
30.3

81.2
48.0
52.0

287.8

299.5

183.6
8.9
0.9
8.0

185.4
8.4
0.6
7.8

600.0
-86.2
686.2

461.1
-83,6
544.7

556,7
-72.8
629.5

151.6
-58.0
328.7

36.1
-86.2
234.5

82,2
-83.6
266.4

313.4
235.8
68.3
92.6

315.6
235.4
69.3
93.4

335.5
233.0
85.9
91.3

33.9
121.0

44.6
123.2

44.6
118.9

145.0
145.0
110.9

44.2
44,2
35,9

74.1
74.1
71.8

Depository instituions
16 Funds supplied

233.2

280.8

Memo (percentage of GDP)
17 Domestic nonfinancial debt 5
18 Domestic nonfinancial borrowing
19
Federal government 6
20
Nonfederal

185.2
9.4
1.9
7.5

183.6
8.2
0.5
7.6

1996

1997

1998

1999

Net funds raised by domestic
nonfinancial sectors
1 Total
2 Net equity issuance
3 Net debt issuance

651.1
-64.2
715.3

570.2
-91.9
662.1

669.8
-85.0
754.8

681.1
-58.0
739.1

Borrowing sectors
Nonfinancial business
4 Financing gap 1
5 Net equity issuance
6 Credit market borrowing

8.4
-64.2
193.9

69.6
-91.9
268.9

109.7
-85.0
322,7

Households
7 Net borrowing 2
Home mortgages
8
9
Consumer credit
10 Debt/DPI (percent) 3

363.8
263.9
86.3
90.5

315.1
229.7
68.2
91.9

State and local governments
it
Net borrowing
12 Current surplus 4

12.7
126.1

Federal government
13 Net borrowing
14 Net borrowing (quarterly, n.s,a.)
15 Unified deficit (quarterly, n.s,a.)

Category

Note. Data after 1997:Q2 are staff projections.
I. For corporations: Excess of capital expenditures over U.S. internal funds.
2. Includes change in liabilities not shown in lines 8 and 9.
3. Average debt levels in the period (computed as the average of period-end debt positions) divided by disposable personal income.
4. NIPA surplus less changes in retirement fund assets plus consumption of fixed capital.
5. Average debt levels in the period (computed as the average of period-end debt positions) divided by nominal GDP.
6. Excludes government-insured mortgage pool securities.
2.6.4 FOF

International Developments
Recent Developments
Since the day before the August FOMC meeting, the foreign exchange value of the
dollar has depreciated in terms of the mark and other European currencies but has
appreciated in terms of the yen. The dollar has appreciated as well in terms of several
southeast Asian currencies. On balance, the multilateral-trade weighted-average dollar
has declined nearly 2 percent in terms of the other G-10 currencies and in terms of the
currencies of a broader group of countries including our major developing-country
trading partners.
The dollar has declined about 2-3/4 percent against the mark over the
intermeeting period as the perceived likelihood of a tightening of Bundesbank policy
in the near term has risen. Stronger real economic activity in Germany and some
evidence of rising inflation underlie these heightened expectations of Bundesbank
tightening. In addition, it is widely believed that any Bundesbank move will come
before the announcement next May of which countries will be participating in Stage
Three of EMU and that any further moves from then until the European Central Bank
assumes responsibility for monetary policy on January 1, 1999, are unlikely.
The dollar has appreciated about 1-1/2 percent in terms of the yen since the
August meeting. Data showing weaker-than-expected Japanese real economic activity
in the second quarter and some signs of continued sluggishness in this quarter
contributed to downward pressure on the yen. Some spillover effects from substantial
depreciations of several southeast Asian currencies may also have been a factor.
On average, short-term market interest rates in the major foreign industrial
countries changed little over the intermeeting period. Despite considerable market
commentary about the prospects for an increase soon in official Bundesbank rates,
German short-term market rates did not change. Average ten-year bond yields moved
down 20 basis points abroad. The largest declines occurred in Italy, which benefited
from favorable budget developments and renewed confidence in the outlook for its
participation in EMU, and the United Kingdom, where previous policy tightening
seems to be having an effect.
The dollar moved up slightly against the Mexican peso over the intermeeting
period. While Mexican inflation continued to outpace that of its trading partners and
the real exchange value of the peso appreciated, indications of continued robust
growth, along with trend decline in inflation, buoyed investor interest and supported
the peso. The Thai baht, Malaysian ringgit, and Philippine peso depreciated an
additional 7 to 10 percent against the dollar.

Part 1: Summary and Outlook, September 24, 1997

Since the August FOMC meeting, European stock prices have moved up, but to
varying degrees. German stock prices have increased only marginally whereas Italian
stock prices are up more than 12 percent and U.K. prices have risen nearly 5 percent.
In Japan, stock prices declined an additional 4-1/2 percent on balance over the period.
Stock prices in several southeast Asian countries, including Malaysia, Indonesia, and
the Philippines, fell further in late August and early September and have been volatile
since then.

. The Desk did not intervene.
Expansion of real economic activity continues to be robust in all the major
foreign industrial countries except Japan. In Germany, second-quarter real GDP grew
at an annual rate of 4.1 percent, led by exports and personal consumption. In July,
industrial production and manufacturing orders rose further, and according to the IFO
survey, the business climate improved sharply. In the United Kingdom, real GDP
expanded at an annual rate of 4.0 percent in the second quarter; consumption and
investment expenditures were particularly strong. Industrial production through July
and retail sales through August were higher as well. U.K. export orders declined in
July and August, and survey data suggest that growth in manufacturing industries is
slowing, partly in response to recent monetary tightening and the strength of the
pound. Canadian real GDP grew at an annual rate of 4.9 percent in the second
quarter, led by growth of total domestic demand of nearly 7-1/2 percent. Employment
expanded further through August, but the unemployment rate remained at 9.0 percent
because the labor force grew rapidly. In Japan, real GDP declined in the second
quarter at an annual rate of 11.2 percent. As expected, consumption fell sharply, more
than reversing its first-quarter burst that preceded the increase in the consumption tax.
Private investment also fell. In contrast, exports grew vigorously. Some improvement
is suggested by a rebound in industrial production and continued strength in machinery
orders in July; however, housing starts declined further that month, and new car
registrations through August were down. Problems remain in the financial sector.
Consumer price inflation remains low in the major foreign industrial countries.
German inflation moved above 2 percent in August for the first time in more than two
years; partial data suggest that inflation edged back down in September. U.K.
inflation declined slightly in August from the July rate; but at 2.8 percent, it remained
above the government's target of 2-1/2 percent.

InternationalDevelopments

Financial markets have remained volatile in many of the southeast Asian
economies. Although indicators of second-quarter real economic activity in those
countries and some partial data for July show generally steady growth, negative
implications of the financial turmoil for their real growth may become evident in later
data. Elsewhere in Asia, Korean real GDP growth was robust through the second
quarter, and industrial production expanded further in July; but several corporate
bankruptcies raised concerns, including about the health of the financial sector. Real
output growth in Taiwan appears to have slowed in the second quarter, in part the
result of transitory weather and agricultural problems but also because of a slowing of
export growth. Real economic activity continues to expand briskly in Singapore, Hong
Kong, and China.
Real economic activity is also growing strongly in the major Latin American
countries. In Mexico and Argentina, real GDP through the second quarter and
industrial production through July show continued strong growth. In Brazil, real GDP
rebounded sharply in the second quarter from a first-quarter decline.
The nominal U.S. deficit in trade of goods and services widened in July from
its second-quarter average. Exports declined about 3/4 percent from the second
quarter, led by decreases in aircraft and consumer goods. Imports rose 1 percent from
the second quarter, with the largest increases in capital goods and automotive products.
In the second quarter, the sharp gain in exports had exceeded the rise of imports,
resulting in a narrowing of the nominal trade deficit. The improvement in the trade
balance offset further deterioration of net investment income, and the current account
deficit narrowed somewhat in the second quarter. The quantity of imported oil rose in
the second quarter in response to increased consumption and continued strong in July
and (preliminary) August.
Prices of nonagricultural exports rose slightly on average in July and August
whereas the prices of agricultural exports dropped sharply. The prices of non-oil
imports declined on average in July and August, but at a rate somewhat diminished
from the rates recorded in the previous two quarters. The price of imported oil rose
2.2 percent in August. Delays in deliveries of Iraqi oil and disruptions of shipments
from Colombia contributed to the slight increase. Oil import prices have changed
little on balance since April. The price of spot WTI rose $0.30 in August to average
$19.93 per barrel. WTI has been trading in the $19-$20 per barrel range during
September.

Part 1: Summary and Outlook, September 24, 1997

Outlook
In extending the forecast through 1999, we needed to take account explicitly of the
scheduled start of Stage Three of European Monetary Union on January 1, 1999. We
have assumed that EMU will go forward as planned with eleven countries as initial
members.'

Accordingly, our projection for dollar exchange rates in 1999 incorporates

the assumption that after January 1, 1999, bilateral rates among the currencies of these
countries will be fixed and short-term market interest rates will be identical in these
currencies. In reporting our outlook for activity and prices abroad, we have added
aggregates for the EU-11.
Summary of Staff Projections
(Percentage change from end of previous period)

1997

Measure

1998

1999

4.1
4.1

3.9
3.9

3.7
--

4.9
2.3

14.7
8.9

7.6
4.4

6.1
--

12.0
5.4

9.6
6.3

9.2
7.2

7.0
--

3.8
3.7

4.0
4.1

Real exports
Previous

14.9
11.9

Real imports
Previous

19.2
18.9

Foreign output
Previous

The staff projects that total foreign real output (weighted by U.S. bilateral
export shares) will increase at an annual rate of about 4 percent over the final two
quarters of this year and will decelerate slightly through 1999. We continue to expect
that the dollar will depreciate moderately from recent levels, but not until late in the
forecast period, reflecting the tightening of U.S. monetary conditions during 1998.
Although projected growth for U.S. real output is somewhat below that for foreign real
output, we project that growth of real imports will exceed that of real exports over the
forecast period; historical experience indicates that U.S. imports are more responsive
to U.S. income growth than are U.S. exports to growth abroad. As a consequence,
real net exports will subtract about 1/3 percentage point from annual real GDP growth
throughout the forecast period. Upward revision to the forecast path for U.S. real GDP
growth since the August Greenbook raises our projected growth of real imports.
Continued strong export performance has led us to revise up our forecast for real
1. Those countries are Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the
Netherlands, Portugal, and Spain.

InternationalDevelopments

export growth as well. As a result, the projected contribution of net exports to real
GDP growth is about the same as in the August Greenbook.
The dollar. We have adjusted the path of the dollar relative to that in the
August Greenbook to reflect recent exchange rate changes and the changed assumption
about U.S. monetary policy. We continue to expect that the weighted-average value of
the dollar will decline at some point during the forecast period as widening U.S.
current account deficits depress the dollar, particularly against the yen. Although we
remain agnostic as to the timing and degree of dollar adjustment, we believe that a
tightening of U.S. policy during 1998 will counter incipient downward pressure on the
dollar and so have forecast that the weighted-average dollar in terms of the other G-10
countries remains unchanged through the end of next year. The dollar is projected to
depreciate moderately during 1999 as market recognition of the growing U.S. external
imbalance is assumed to show through at some point. We expect that the CPIadjusted value of the dollar in terms of the currencies of key developing countries will
rise in the fourth quarter of this year but decline thereafter as currency turmoil in those
countries subsides.
Foreign G-7 countries. Real GDP growth in the foreign G-7 countries
(weighted by U.S. bilateral export shares) is projected to average 3-1/4 percent at an
annual rate during the second half of this year and then to slow to 2-3/4 percent next
year and 2-1/2 percent in 1999. In Japan, real GDP should rebound this quarter from
its second-quarter decline as domestic demand improves. Over the second half of this
year, real output growth is projected to average about 3 percent at an annual rate;
during 1998, growth is projected at 2-1/2 percent. Although the positive contribution
of net exports is expected to continue, it should lessen over the forecast period while
domestic demand will strengthen moderately. Similarly, in Germany, the boost to
GDP growth from net exports is projected to abate somewhat over the forecast period
while domestic demand will gradually strengthen. Output growth should slow from its
rapid second-quarter pace to an annual rate of 3 percent over the rest of this year and
then should average about 2-3/4 percent next year.2 In the United Kingdom, domestic
demand is expected to decelerate in response to past and prospective monetary and
fiscal tightening as well as some lessening of the effect of this year's windfall gains to
depositors of some financial institutions. These developments should slow U.K. real
GDP growth to 2 percent next year from 2-3/4 percent during the remainder of this
2. For the EU-11 region as a whole, real GDP growth is projected to average about 2-3/4 percent at
an annual rate over the remainder of this year and during 1998 (weighted by GDP). Some
strengthening is projected on average in 1999.

Part 1: Summary and Outlook, September 24, 1997

year. In Canada, growth of private consumption and investment spending are both
projected to slow some from their recent rapid pace over the forecast period as
monetary policy tightens. Nevertheless, domestic demand growth should remain
robust while net exports continue to make a negative contribution; real output growth
moves from 3-1/2 percent during the remainder of this year to a bit less than that next
year.
Consumer price inflation is projected to remain low over the forecast period in
the foreign G-7 countries. U.K. inflation is expected to benefit in the next few
quarters from the effects of recent strength in sterling but to rise somewhat over 1998
as the tightness in domestic markets shows through. Inflation in Japan is projected to
drop back to less than 1 percent per year once the anniversary of the April 1 tax hike
has passed; as a consequence, average inflation in the G-7 countries (weighted by U.S.
bilateral import shares) should move down to about 1-1/2 percent in 1998.
Our assumptions about interest rates in several countries reflect the timetable
for EMU and our perception of the constraints that schedule will place upon the
central banks involved. We expect that additional tightening in Europe led by the
Bundesbank will move up short-term market interest rates by the end of this year.
Rates in the other EU-11 countries are assumed to converge to German rates by the
end of 1998. We have incorporated into the forecast an assumption that the European
Central Bank will tighten somewhat during 1999 as the European expansion matures,
leading to a rise in market rates. We also expect some further tightening by the Bank
of England by the end of this year but have postponed until late 1998 and 1999 the
assumed tightening by the Bank of Japan. Long-term market interest rates abroad are
assumed to move up gradually over the forecast period as slack in these economies is
reduced.
Other countries. Real GDP in our major developing-country trading partners is
projected to increase at an average annual rate of about 5-1/2 percent (weighted by
U.S. bilateral export shares) during the second half of this year, a slight downward
revision from August. For countries in Latin America, this revision reflects some
offset we expect to very strong second-quarter growth figures, and we have raised our
figure for 1997 as a whole. For countries in Asia, an offset to strong second-quarter
growth is a factor in some cases, for example, Singapore; but for several southeast
Asian countries, we have lowered the forecast in response to the turbulence in their
financial markets and to announced government policies. In 1998-99, annual real
output growth in developing countries is expected to average 5-3/4 percent.

InternationalDevelopments

Mexican real GDP growth is projected to remain robust, with some slowing
from the very rapid rate recorded for the first half of this year. Growth should
average 4-3/4 percent this year and next. In Argentina, stronger-than-expected growth
in the first half of this year has led us to project growth at an annual rate of 6 percent
for the remainder of this year and for 1998. In Brazil, we expect substantial slowing
from the unsustainably high growth in the second quarter and then real output growth
of 3 percent during 1998. We continue to highlight the downside risk to our forecast
for Brazil posed by real appreciation of its currency and large current account and
fiscal deficits. A downturn in Brazil could exert significant spillover effects on
Argentina.
Our outlooks for the Philippines, Malaysia, and especially Thailand have been
revised downward as a result of the expected adverse effects on domestic demand of
higher interest rates, volatility in financial markets, and deterioration of asset quality.3
Apparent strength in Singapore and Hong Kong is expected to continue over the
forecast period and will largely offset these downward revisions. On average, real
output in our Asian developing-country trading partners is projected to grow at an
annual rate of 6-1/2 percent over the remainder of this year and during next year,
slightly lower than the August Greenbook forecast. We have lowered our forecast for
annual growth in Korea as well, to 7 percent for the second half of this year and 6-1/4
percent next year, as the effects of corporate bankruptcies and related scandals are
expected to weaken domestic demand.
U.S. real exports and imports. In constructing the forecast for real exports of
goods and services, we questioned whether the factors that underlay the very rapid
growth of real exports over recent quarters signaled a change in the relationship
between export volumes and their fundamental determinants. In doing so, we tried to
determine the extent to which those factors would continue or reverse. Available
evidence is not yet sufficient for us to come to unambiguous answers to these
questions. In this forecast we have raised the growth rate of real nonagricultural
exports other than computers and semiconductors (core exports) from that in the
August Greenbook, carrying forward, but to a declining extent, an unexplained
increment to export growth. Core exports are projected to grow at an average annual
rate of 8 percent over the second half of this year and to slow to 5-1/4 percent in 1998
and 1-1/2 percent in 1999. The slowdown in core exports results from the lagged
3. The downward revisions to our forecast for growth in Thailand, 3-1/4 percentage points for 1997
and 3 percentage points for 1998, are large. However, because Thailand has a very small share in U.S.
bilateral exports, these revisions imply little change to our forecast for average growth in the region.

Part 1: Summary and Outlook, September 24, 1997

effects of dollar appreciation since 1995 and our assumption, noted above, that the
special factors boosting export growth will diminish over time. When the forecast for
core export growth is combined with that of continued rapid growth in the volumes of
computers and semiconductors and moderate growth of services, real exports of total
goods and services is projected to grow at an annual rate of 9-1/2 percent over the
second half of this year and to slow to 7-1/2 percent in 1998 and 6 percent in 1999.
Our forecast for growth of real non-oil imports other than computers and
semiconductors (core imports) has also been increased since the August Greenbook.
Core imports are projected to grow at an annual rate of 9-1/2 percent in the second
half of this year, slowing to 6-3/4 percent in 1998 and 3-3/4 percent in 1999. In the
near term, the upward revision to growth of core imports results from the stronger
path for U.S. GDP. In 1998, the higher path for the dollar contributes to the upward
revision of core imports as well. Over the forecast period, the projected slowing of
U.S. output growth and projected dollar depreciation contribute to the deceleration of
core imports. Imports of computers and of semiconductors are again projected to
continue to grow rapidly. We expect the quantity of oil imports to decline from the
surprisingly high second-quarter rate during the latter half of this year and then to rise
during the remainder of the forecast period in line with increases in consumption. We
are now projecting U.S. oil production to remain flat, rather than to decline, because
of our expectations of increased production from offshore fields in the Gulf of Mexico.
Total imports of goods and services are forecast to expand at an annual rate of 11
percent during the second half of this year, 9 percent next year, and 7 percent in 1999.
Oil prices. The staff has raised its projections slightly for the price of
imported oil in the near term because of the strength of U.S. economic activity and the
interruption of oil export flows from Colombia. For the third quarter, the price has
been revised up $0.41 per barrel to $17.31. We project that the price of imported oil
will fall somewhat during the fourth quarter, with the return of Iraqi and Colombian
exports to the world market and a projected increase in North Sea production, but will
rise subsequently. Non-OPEC producers are having difficulty bringing new fields
under development into production within their planned time period. Many of the
planned projects are technologically ambitious, especially the development of offshore
fields. Another factor for the delays is the overall tightness in the offshore rig market.
Finally, the development of several onshore fields has been delayed by problems in
securing pipeline routes.
Prices of non-oil imports and exports. The prices of non-oil imports of core
goods are projected to fall a bit further this quarter but then to rise over the remainder

InternationalDevelopments

of the forecast period at an increasing rate. The acceleration in core import prices
results in part from the switch from dollar appreciation earlier this year to a flat dollar
and then depreciation in 1999. In addition, projected declines in non-oil commodity
prices through 1998 hold down core import prices in the near term, but not in late
1998 and 1999. Prices of core nonagricultural exports are also projected to decline in
the near term and to rise subsequently at an increasing rate in line with comparable
U.S. domestic prices.

Selected Trade Prices
(Percentage change from end of previous period
except as noted; seasonally adjusted)
Projection
Trade category

1997
1998
HI

0.9
-10.8

-0.3
-13.0

-0.2
-3.6

1999

1.2
2.1

1.7
2.0

Exports

Nonagricultural (core)
Agricultural
Imports
Non-oil (core)

-1.2

-0.4

0.8

0.6

1.9

Oil (level, dollars per barrel)

18.00

17.31

16.48

16.94

18.50

NOTE. Prices for exports and non-oil imports of goods exclude computers
and semiconductors and are on a NIPA chain-weighted basis.
The price of imported oil for multiquarter periods is the price for the final
quarter of the period.

Nominal trade and current account balances. The nominal trade deficit on
goods and services is expected to widen from $105 billion in the second quarter of
this year to $140 billion at the end of 1999. The deficit on net investment income is
projected to increase by about $20 billion over that same interval. We project that the
current account deficit will average $167 billion or 2 percent of GDP this year but will
widen to $215 billion or 2-1/2 percent of GDP in 1999.

September 24,
Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, Q4 to Q4)

1997

---- Projected ---1991

1992

1993

1994

1995

1996

1997

1998

1999

0.0
2.5
-1.6
2.1

0.5
0.1
0.4
0.1

3.1
0.4
2.7
-0.1

4.9
0.8
4.9
3.5

0.7
2.6
2.0
1.3

2.3
3.0
2.9
1.9

4.0
-0.0
3.2
2.7

3.1
2.5
1.9
2.7

2.3
2.5
1.6
2.9

1.3
3.3
1.9

-0.0
0.9
-0.8

-0.5
-0.2
0.1

4.3
3.4
2.7

0.3
0.7
2.3

2.1
2.1
0.2

2.4
2.8
2.4

2.5
2.7
2.4

2.5
3.2
3.1

Foreign G-7 Average
weighted by 1991 GDP

1.7

0.2

0.6

2.9

1.7

2.3

1.9

2.5

2.6

Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries

2.9
0.8
6.4

1.9
0.3
5.1

3.2
1.8
6.0

5.1
3.9
7.0

1.7
1.3
2.1

4.0
2.4
6.8

4.0
2.8
5.8

3.9
2.7
5.8

3.7
2.4
5.7

4.1
3.2
5.7
NA

1.8
0.9
3.7
NA

1.8
1.2
2.7
NA

0.0
0.8
2.2
NA

2.1
-0.8
2.9
2.7

2.0
0.1
3.2
2.0

1.9
1.7
2.6
1.6

2.1
0.6
2.8
1.9

2.2
0.8
2.9
2.1

3.0
4.0
6.1

1.8
3.4
4.9

2.1
4.2
4.1

1.6
2.6
3.8

1.9
1.7
5.9

1.7
1.4
2.7

1.4
2.0
1.8

1.8
2.1
2.0

1.9
2.2
2.5

Foreign G-7 Average
weighted by 1991 GDP

4.1

2.4

2.5

1.8

1.6

1.5

1.8

1.6

1.8

Average weighted by share of
U.S. non-oil imports

3.9

1.9

2.0

1.0

1.1

1.3

1.8

1.5

1.7

Measure and country
REAL GDP
Canada
Japan
United Kingdom
EU-11 Average (1)
of which:
France
Germany (2)
Italy

CONSUMER PRICES
Canada
Japan
United Kingdom (3)
EU-11 Average (4)
of which:
France
Germany (2)
Italy

1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. West German data through 1991; all Germany thereafter.
3. CPI excluding mortgage interest payments which is the targeted inflation rate,
4. Harmonized CPI's for the EU-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.

September 24, 1997

Strictly Confidential (FR)
Class II FOMC
OUTLOOK FOR FOREIGN REAL GDP AND CONSUMER PRICES: SELECTED COUNTRIES
(Percent, quarterly change at an annual rate)

------------------------ Projected --------------------------1997
1998
1999

-----------------"I-"-------------------

Measure and country

----

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

4.9
3.7
5.7 -11.2
3.3
4.0
0.9
4.5

3.8
2.4
3.2
3.0

3.4
3.9
2.4
2.6

3.2
2.7
2.1
2.6

3.3
2.5
1.9
2.6

3.1
2.4
1.8
2.7

2.8
2.4
1.7
2.7

2.5
2.5
1.7
2.9

2.4
2.5
1.6
2.8

2.3
2.5
1.6
3.0

2.1
2.5
1.6
3.0

REAL GDP
Canada
Japan
United Kingdom
EU-11 Average (1)
of which:
France
Germany
Italy

1.0
1.2
-0.7

4.0
4.1
6.0

2.3
3.4
2.5

2.3
2.5
2.0

2.6
2.6
2.3

2.4
2.7
2.3

2.5
2.8
2.5

2.4
2.6
2.5

2.5
3.1
2.7

2.5
3.2
3.5

2.5
3.3
3.5

Foreign G-7 Average
weighted by 1991 GDP

2.8

-0.9

2.8

2.9

2.6

2.5

2.4

2.5

2.6

Average weighted by share of
U.S. nonagricultural exports
Total foreign
Foreign G-7
Developing Countries

3.4
3.5
4.2

4.4
1.3
8.1

4.0
3.3
5.3

4.1
3.1
5.7

3.9
2.8
5.7

3.9
2.8
5.8

3.8
2.7
5.7

3.9
2.5
5.8

3.7
2.4
5.7

3.7
2.4
5.8

3.6
2.4
5.7

3.6
2.3
5.8

2.1
0.0
2.9
1.7

1.6
1.5
2.6
1.2

1.9
1.6
2.8
1.6

1.9
1.7
2.6
1.6

1.9
1.8
2.6
1.9

2.0
0.2
2.7
1.8

2.0
0.4
2.8
1.9

2.1
0.6
2.8
1.9

2.1
0.8
2.8
2.0

2.1
0.8
2.9
2.0

2.1
0.8
2.9
2.1

2.2
0.8
2.9
2.1

1.5
1.7
2.4

0.9
1.6
1.6

1.3
2.0
1.6

1.4
2.0
1.8

1.6
2.0
2.0

1.5
2.0
2.0

1.8
2.0
2.0

1.8
2.1
2.0

1.9
2.1
2.3

1.9
2.2
2.5

Foreign G-7 Average
weighted by 1991 GDP

1.4

1.6

1.8

2.0

1.4

1.5

1.6

1.7

1.8

Average weighted by share of
U.S. non-oil imports

1.3

1.6

1.8

1.9

1.3

1.4

1.5

1.6

1.7

CONSUMER PRICES

(2)

Canada
Japan
United Kingdom (3)
EU-11 Average (4)
of which:
France
Germany
Italy

1. Includes all of the European Union countries except the United Kingdom, Denmark,
Sweden, and Greece; weighted by GDP.
2. Percent change from same period a year earlier.
3. CPI excluding mortgage interest payments which is the targeted inflation rate.
4. Harmonized CPI's for the EU-11, weighted by shares in final consumption of
households converted to a common currency using estimated PPP exchange rates.

Strictly Confidential
Class II FOMC

September 24, 1997

(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS

------

1991

1992

1993

1995

1994

Projected ------

1997

1996

1998

1999

NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth, Q4/Q4
Net Goods & Services
Exports of G&S
Imports of G&S

0.4
0.8
-0.4

-0.4
0.4
-0.8

-0.6
0.5
-1.1

0.4
1.2
-0.7

-0.4
1.1
-1.4

-0.4
1.1
-1.6

-0.6
1.6
-2.1

-0.4
1.1
-1.5

-0.3
0.9
-1.2

Percentage change, Q4/Q4
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/

8.6
7.1
10.1
21.7
41.8
7.0

4.1
-0.9
10.4
25.2
64.8
2.3

4.6
4.1
-5.5
23.7
32.9
3.6

10.0
6.0
16.6
32.0
66.9
6.9

10.3
9.0
-3.4
55.7
80.4
5.7

9.3
4.7
5.7
33.8
45.9
7.6

12.3
2,5
2.4
67.1
34.3
13.2

7.6
2.6
0.0
45.8
41.2
5.2

6.1
3.5
1.9
43.1
41.2
1.5

Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

4.1
-2.7
8.1
35.9
55.3
2.5

7.4
1.4
12.1
45.1
42.0
5.4

10.2
3.2
10.1
39.3
34.2
9.5

12.3
1.4
-0.2
44.8
54.5
12.2

5.6
7.3
1.5
46.2
92.7
-1.2

11.8
5.0
8.3
23.6
57.9
10.5

14.9
11.0
0.5
55.0
45.0
12.7

9.2
3.5
3.2
40.0
41.8
6.7

7.0
2.0
1.8
39.5
40.6
3.7

-98.8
791.2
890.1

-114.4
857.0
971.5

-139.3
969.5
1108.8

-165.1
1061.5
1226.6

-194.8
1124.3
1319.1

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-22.3
599.9
622.2

-29.5
639.4
669.0

-70.2
658.2
728.4

-104.6
712.4
817,0

Billions of dollars
US CURRENT ACCOUNT BALANCE

-4.5

-55.4

-90.5

-133.5

-129.1

-148.2

-167.4

-183.5

-214.0

Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP)

-29.9
580.7
610.6

-38.3
617.7
655.9

-72.0
643.0
715.0

-104.4
699.7
804.1

-101.9
794.6
896.5

-111.0
848.8
959.9

-112.0
933.1
1045.2

-114.6
1010.0
1124.5

-138.7
1068.9
1207.6

Net Investment Income
Direct, Net
Portfolio, Net

20.3
55.6
-35.4

18.0
51.6
-33.6

19.7
55.7
-36.0

9.7
50.8
-41.0

6.8
60.0
-53.2

2.8
66.8
-63.9

-15.4
68.3
-83.7

-27.2
69.2
-96.4

-33.6
78.4
-112.0

5.1

-35.2

-38.1

-38.8

-34.0

-40.0

-41.8

Net Transfers

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

Strictly Confidential
Class II FOMC

September 24, 1997

(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS
1995

1994
Q1

1996
------------------------

1.0
1.3
-0.3

-1.5
0.2
-1.7

-0.7
1.1
-1.8

-1.5
0.2
-1.7

1,9
2.9
-0.9

11.5
6.6
-10.7

1.7
-3.8
12.5
46.2
19.9
-1.2

9.6
9.7
-34.3
31.8
28.3
13.2

1.9
0.3
13.1
29.2
37.6
-3.1

25.5

41.0
97.0
8.2

13.5
20.3
19.7
89.6
100.3
1.0

49.2
28.7
113.8
23.9

7.7
-4.0
12.5
57.3
108.0
2.2

2.3
8.4
28.0
65.8
157.1
-10.0

2.4
2.2
-19.7
61.8
98.8

13.1
14.6
-7.6
6.4
30.4
14.5

14.1

2.7
67.2
30.7
10.3
11.0

13.2
1.2
10.6
26.9
75.5
12.2

6.8
2.1
-19.6
32.0
146.4
4.3

-100.8
828.2
929.0

-112.6
847.4
960.0

-138.9
851.4
990.2

-105.6
901.1
1006.6

-131.5

-142.3

-171.3

-147.5

-111.1
848.6
959.7

-130.1
840.3
970.4

-104.8
878.0
982.8

3.5
64.2
-60.7

-5.5
60.3
-65.7

5.0
76.4
-71.4

-34.8

-35.8

-47.7

NIPA REAL EXPORTS and IMPORTS
Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S

-1.1
-0.2
-0.9

-0.4
1.7
-2,1

-0.4
1.1
-1.5

0.3
1.5
-1.2

-0.5
0.8
-1.2

0.0
1.0
-1.0

1.2
1.5
-0.3

Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/
Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

-1.8
2.4
-25.2
21.4
111.8
-6.8

17.7
12.9
8.1
24.3
23.4
20.3

10.6
2.0
45.3
35.5
65.9
7.4

14.7
6.9
57.2
48.4
79.1
8.6

7.2
6.0
-1.3
34.9
72.0
2.9

7.6
2.7
-8.6
32.9
60.7
6.9

19.0
4.1
27.2
48.3
23.7
19.6

13.1
-0.4
33.5
42.3
74.4

9.9
-0.9
-36.2
57.0

10.0
24.4
-8.1
8.1
29.6
7.3

10.3

64.3
12.5

9.3
3.8
-17.5

63 .1

56.2
11.0

-3.6

13.5

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-97.6
676.0

-103.9
704.1

773. 6

808.0

-111.1
722.1
833.2

-105.9
747.3
853.2

-113.5
760.4
873.9

-112.8
777.4
890.3

-92.9
802.4
895.4

900.7

-76.1
824.6

Billions of dollars

US CURRENT ACCOUNT BALANCE
Net Goods & Services (BOP)
Exports of G&S (BOP)
Imports of G&S (BOP).

-104.6

-128.0

-145.5

-156.1

-138.8

-142.8

-132.5

-102.2

-90.6

-101.5
688.4
789.9

114.0
710.9

-113.2
761.5
874.7

-123.2
785.9
909.1

-95.5
806.4
901.9

-75.5

824.9

111.6
736.8
848.4

7.2
51.0
-43 .8

3.3
51.5
-48.2

8.2
57.6
-49.4

12.9
64.1
-51.3

-1.6
53.9
-55.5

-56.7

8.2
66.2
-57.9

-38.7

-47.7

-33.8

-32.5

-35.4

-34.5

-41.6

662.5

753.1

Net Investment Income
Direct, Net
Portfolio, Net

17.9
51.7
-33 .8

10.6
48.9
-38.3

Net Transfers

-31.9

-37.1

824.6

900.1
7.8
64.5

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

-98.2
828.4
926.6

Strictly Confidential
Class II FOMC

September 24, 1997

(FR)
OUTLOOK FOR U.S. INTERNATIONAL TRANSACTIONS

---------------..---------------- Projected --------------------------------

1997
Q1

1998
Q3

1999
Q4

0.3
1.4
-1.1

-0.6
0.5
-1.1

-0.2
1.2
-1.4

-0.8
0.4
-1.2

0.4
1.5
-1.1

NIPA REAL EXPORTS and IMPORTS

Percentage point contribution to GDP growth
Net Goods & Services
Exports of G&S
Imports of G&S

-1.2
1.2
-2.4

-0.4
2.4
-2.8

-1.1
0.7
-1.8

0.4
1.9
-1.4

0.0
1.5
-1.5

-0.9
0.9
-1.8

-1.1
0.3
-1.4

Percentage change from previous period, SAAR
Exports of G&S
Services
Agricultural Goods
Computers
Semiconductors
Other Goods 1/

9.9
3.7
-27.6
72.3
39.0
12.4

20.2
3.5
20.9
85.5
15.3
25.1

4.9
1.4
7.2
60.8
41.2
0.2

14.7
1.4
17.0
51.8
43.8
16.5

11.4
2.0
-7.2
49.1
41.2
13.2

6.5
2.7
-3.7
46.4
41.2
3.9

2.4
2.7
3.8
43.8
41.2
-3.9

10.1
3.0
7.8
43.8
41.2
8.5

3.4
3.5
2.0
43.8
41.2
-2.9

8.2
3.5
-5.6
43.3
41.2
6.0

2.5
3.5
3.9
42.7
41.2
-5.0

10.7
3.6
7.8
42.7
41.2
8.5

Imports of G&S
Services
Oil
Computers
Semiconductors
Other Goods 2/

17.9
24.2
-10.8
51.3
71.2
15.3

20.5
9.5
44.6
71.6
19.1
17.0

12.0
5.7
-6.3
51.8
50.7
10.5

9.6
5.6
-15.6
46.4
43.8
8.3

9.7
5.1
-9.4
40.7
42.7
8.3

11.4
3.7
33.3
39.7
42.2
7.6

9.1
2.7
10.9
39.8
41.1
6.1

6.7
2.5
-15.5
40.0
41.4
4.9

6.5
2.2
-11.3
39.5
40.6
4.2

8.3
2.0
26.5
39.5
40.6
3.7

7,0
1.9
2.7
39.6
40.8
3.5

6.3
1.9
-6.8
39.4
40.4
3.3

-180.6
1062.4
1243.0

-175.0
1088.3
1263.2

-186.0
1097.3
1283.3

-190.1
1119.2
1309.3

-205.7
1126.0
1331.7

-197.4
1154.9
1352.3

Billions of chained 1992 dollars
Net Goods & Services
Exports of G&S
Imports of G&S

-126.3
922.7
1048.9

-132.9
966.0
1098.9

-152.9
977.7
1130.6

-145.0
1011.7
1156.7

-144.5
1039.4
1183.9

-160.2
1056.0
1216.2

Billions of dollars
US CURRENT ACCOUNT BALANCE

-159.9

-156.9

-175.5

-177.4

-163.1

-175.3

-195.3

-200.3

-200.4

-205.2

-222.7

-227.7

Net Goods & Services (BOP) -117.2
897.0
Exports of G&S (BOP)
Imports of G&S (BOP) 1014.2

-106.6
936.2
1042.8

-118.8
935.1
1053.9

-105.6
964.1
1069.8

-99.9

-110.4
1004.9

-127.6
1010.4
1138.0

-120.3
1034.9

-131.0
1043.4

1174.4

-148.9
1070.3
1219.2

-140.2
1097.6

1155.1

-134.6
1064.5
1199.0

-28.7

-30.1
72.6
-102.6

-30.3

-31.7
77.6
-109.3

-34.8

74.5
-104.9

79.6
-114.4

-37.6
81.9
-119.4

-50.0

-39.0

989.7
1089.6

1115.3

Net Investment Income
Direct, Net
Portfolio, Net

-14.1
69.5
-83.6

-17.7
67.7
-85.3

-21.7

69.3
-77.3

66.7
-88.4

-24.2
66.9
-91.1

-25.9
68.0
-93.9

69.5
-98.1

Net Transfers

-34.7

-36.3

-39.0

-50.0

-39.0

-8.0

1. Merchandise exports excluding agricultural products, computers, and semiconductors.
2. Merchandise imports excluding oil, computers, and semiconductors.

1237.7

-50.0

Full text of Federal Open Market Committee Meeting Minutes, Transcripts, and Other Documents : Meeting, September 30, 1997 : Greenbook Part 1

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