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THE DOLLAR, MONETARY POLICY
AND THE ECONOMIC OUTLOOK




Remarks of
John J. Balles, President
Federal Reserve Bank of San Francisco

Meeting With
Southern California
Community Leaders

Laguna Niguel, California
November 26, 1985

In t r o d u c t i o n
Last

month

marked

the

e n d of

CURRENT BUSINESS CYCLE EXPANSION,
FAVORABLE DEVELOPMENTS TO NOTE,

the

third

year

of

the

In MANY WAYS, THERE ARE
OVER THESE THREE YEARS

ALMOST 9 MILLION NEW JOBS WERE CREATED AND THE TOTAL VOLUME
OF GOODS AND SERVICES PRODUCED BY THE

U.S.

MEASURED BY INFLATION-ADJUSTED, OR REAL

ECONOMY/ AS

GNP,

INCREASED TO A

LEVEL MORE THAN TEN PERCENT ABOVE ITS PREVIOUS PEAK IN 1981.

AT THE SAME TIME, THE UNEMPLOYMENT RATE WAS BROUGHT DOWN
FROM 10.7 PERCENT TO 7.1 PERCENT.

ALTHOUGH THIS RATE

REMAINS UNCOMFORTABLY HIGH RELATIVE TO HISTORICAL
EXPERIENCE, IT IS ALSO TRUE THAT A RECORD NUMBER OF
Am e r i c a n s

are

at

w o r k , with

approximately

ADULT POPULATION WORKING IN OCTOBER —

60

percent

of

the

THE HIGHEST RATE IN

THE POST-WAR PERIOD.
Mo r e o v e r ,

this

business

expansion

has

been

accompanied

BY SUBSTANTIAL IMPROVEMENT ON THE INFLATION FRONT.

A t THE

PEAK OF INFLATION IN 1980, THE TWELVE-MONTH RATE OF CHANGE
in t h e

C o n s u m e r P r i c e In d e x

PERCENT ANNUAL RATE.

registered

an

alarming

14.7

BY CONTRAST, OVER THE LAST TWELVE

MONTHS THE INDEX HAS RISEN ONLY 3.2 PERCENT, AND SO FAR IS
SHOWING NO SIGNS OF ACCELERATION.




GRANTED, WE ARE NOT AT

2

-

-

PRICE STABILITY YET/ BUT WE HAVE MADE IMPRESSIVE STRIDES
OVER THE LAST FIVE YEARS TOWARDS ULTIMATELY ERADICATING
INFLATION.
Th e r e

has

been

a

I HAVE JUST REVIEWED.

darker

s i d e , h o w e v e r , to

the

good

news

In THE LAST EIGHTEEN MONTHS WE HAVE

SEEN A MARKED SLOWING IN THE RECOVERY.

RELATED TO THIS HAS

BEEN THE MARKEDLY UNEVEN COMPOSITION OF THE EXPANSION, WITH
SOME SECTORS CONSPICUOUSLY FAILING TO SHARE IN THE OVERALL
PROSPERITY -“NOTABLY AGRICULTURE, FORESTRY, MINING AND SOME
MANUFACTURING INDUSTRIES.

THIS UNEVENNESS HAS SHOWED UP,

AMONG OTHER WAYS, IN THE UNCOMFORTABLY LARGE DIFFERENCES IN
STATE UNEMPLOYMENT RATES WITHIN THE TWELFTH DISTRICT.
So m e

decline

in t h e

rate

AS AN EXPANSION MATURES.

of

economic

growth

is n o r m a l

INDEED, SOME FORECASTERS HAVE

BEGUN TO RAISE THE POSSIBILITY OF A RECESSION NEXT YEAR.
Al t h o u g h
our

this

possibility

research

continuation

staff
of

the

at

the

cannot

Bank

economic

be

ruled

believes

expansion

at

out

completely,

this

point

that

a

through

1986 IS STILL

of

forecast,

THE MOST LIKELY PROSPECT.
Before I

turn

to

some

particulars

this

I

WOULD LIKE TO GIVE YOU A LITTLE BACKGROUND ABOUT THE FEDERAL
BUDGET AND TRADE DEFICITS, THE RECENT BEHAVIOR OF THE
DOLLAR, AND THE PROBLEMS THESE DEVELOPMENTS HAVE POSED FOR
MONETARY POLICY.




- 3 The B u d g e t
For

and

T r a d e De f i c i t s

calendar

1985,

year

the

federal

government

DEFICIT IS PROJECTED TO BE A MIND-BOGGLING
Be t w e e n

1981

and

1983

the

deficit

relative

$193
to

budget

BILLION.

GNP

almost

TRIPLED TO ABOUT 5 PERCENT OF GNP, AND HAS REMAINED IN THAT
NEIGHBORHOOD EVER SINCE,

THERE IS NO PRECEDENT IN OUR

PEACE-TIME HISTORY FOR NUMBERS OF THIS MAGNITUDE.

GlVEN THE

DEADLOCK THAT HAS PREVAILED IN CONGRESS FOR THE LAST SEVERAL
YEARS OVER ATTEMPTS TO COME TO GRIPS WITH THE BUDGET
IMBALANCE, I AM NOT OPTIMISTIC THAT THE DEFICIT WILL BE CUT
SIGNIFICANTLY IN THE FORESEEABLE FUTURE.

THE PROTRACTED

DEBATE, FOR EXAMPLE, IN RECENT WEEKS OVER LEGISLATION TO CUT
THE DEFICIT IN CONNECTION WITH RAISING THE FEDERAL DEBT
CEILING HAS ONLY SERVED TO CONFIRM THIS VIEW IN MY MIND.
The FEDERAL DEFICIT REPRESENTS A SUBSTANTIAL CLAIM ON
OUR NATION'S SAVINGS, CURRENTLY ABSORBING BETWEEN 45 TO 50
PERCENT OF THE NET SAVINGS MADE BY HOUSEHOLDS, BUSINESSES
AND STATE AND LOCAL GOVERNMENTS.

THIS HAS RESULTED IN SOME

OF THE TRADITIONAL "CROWDING OUT," AS IT IS CALLED, OF
HOUSING AND BUSINESS CAPITAL OUTLAYS THAT OCCUR WHEN
DEFICITS PUT UPWARD PRESSURE ON INTEREST RATES.

In THIS

EXPANSION, HOWEVER, THE BURDEN OF FINANCING THE BUDGET
DEFICIT HAS FALLEN TO A SIGNIFICANT EXTENT ON THE FOREIGN
SECTOR OF THE ECONOMY —

IN OTHER WORDS, ON INDUSTRIES WITH

IMPORTANT EXPORT MARKETS OR THAT FACE HEAVY COMPETITION FROM
FOREIGN IMPORTS.



-

4

-

I'm sure you're all familiar by now with the story of
how the growing budget deficit ultimately translated into a
depressed foreign sector of the economy.

The massive

CAPITAL INFLOW FROM ABROAD PROMPTED BY HIGH INTEREST RATES
HERE BID UP THE VALUE OF THE DOLLAR BY APPROXIMATELY 50
PERCENT BETWEEN MID~1980 AND EARLY 1985.

THE EFFECT WAS TO

MAKE OUR EXPORTS EXPENSIVE IN TERMS OF FOREIGN CURRENCIES/
WHILE THE DOLLAR PRICE OF IMPORTS TO THE

U.S.

FELL.

As

A

RESULT/ OUR BALANCE ON OUR INTERNATIONAL ACCOUNT
DETERIORATED ALARMINGLY AS EXPORTS GREW SLUGGISHLY/ AND IN
SOME SECTORS DECLINED/ WHILE IMPORTS SURGED.

It NOW APPEARS

THAT OUR DEFICIT IN TRADE IN GOODS AND SERVICES PLUS
INVESTMENT INCOME FOR 1985 WILL REACH A RECORD OF $140 "$150
BILLION/ AN UNPRECEDENTED FIGURE.
L et

me

note

parenthetically

that

I

recognize

that

the

BUDGET DEFICIT IS NOT THE ONLY FACTOR ACCOUNTING FOR THE
HIGH DOLLAR AND THE IMPACT ON OUR FOREIGN TRADE.

OUR

POLITICAL STABILITY/ LOW INFLATION/ VIGOROUS ECONOMY/ AND
DIVERSIFIED RANGE OF INVESTMENT OPPORTUNITIES ALL HAVE MADE
THE DOLLAR A PARTICULARLY ATTRACTIVE INVESTMENT VEHICLE IN
RECENT YEARS.

HOWEVER/ IN MY OPINION/ THE BUDGET DEFICIT

HAS BEEN THE SINGLE MOST IMPORTANT FACTOR PRODUCING THE
SHARP RUN-UP IN THE DOLLAR'S VALUE SINCE 1980.




-

5

-

Un e v e n Ec o n o m y

As

we've all been made aware by now, the strong

dollar's impact on U.S. COMPETITIVENESS has led to a dual
economy,

O n one hand, from the standpoint of

U.S.

and tourists, the strong dollar has been a bonanza.
other hand,

U.S.

consumers

O n the

firms competing with overseas businesses

HAVE BEEN PUT AT A SEVERE COST DISADVANTAGE.
MILLION NEW JOBS CREATED SINCE 1982, ALMOST

Of THE 9

1\ MILLION

HAVE

BEEN IN THE SERVICE AND TRADE SECTORS WHICH ARE FAIRLY WELL
INSULATED FROM IMPORT COMPETITION.

In CONTRAST, THERE HAS

BEEN LITTLE GROWTH IN MANUFACTURING EMPLOYMENT, AND AN
ACTUAL LOSS OF ALMOST A HALF MILLION JOBS IN AGRICULTURE.
This

uneven

development

has

led

to

FOR PROTECTION FOR A WIDE RANGE OF U.S.

increasing

demands

INDUSTRIES

INCLUDING AGRICULTURE, STEEL, AND TEXTILES.

In MY OPINION,

PROTECTIONISM IS NOT THE ANSWER, IT DOES NOT ADDRESS THE
FUNDAMENTAL PROBLEM THAT WE AS A NATION ARE NOT SAVING
ENOUGH TO FINANCE OUR EXPENDITURES FOR HOUSING AND PLANT AND
EQUIPMENT, COVER THE FEDERAL DEFICIT, AND BE IN BALANCE ON
OUR INTERNATIONAL ACCOUNT.

PROTECTIONISM WOULD ONLY SHIFT

THE BURDEN OF THE BUDGET DEFICIT TO SOME OTHER SECTOR, NOT
ELIMINATE IT.
Re l i e f

for

Ea r l y

the
this

Do l l a r
y e a r , the

PROSPECTS FOR THE




U.S.

emergence

of

less

optimistic

ECONOMY, SUBSEQUENT DECLINES IN

6

-

-

INTEREST RATES/ AND SUBSTANTIAL FOREIGN EXCHANGE
INTERVENTION ON THE ORDER OF $10 BILLION BY THE U.S. AND
OTHER CENTRAL BANKS IN LATE FEBRUARY HELPED TO PUSH THE
DOLLAR DOWN APPROXIMATELY 8 PERCENT BETWEEN FEBRUARY AND
Se p t e m b e r .
These

developments

were

followed

by

the

Se p t e m b e r

AGREEMENT BY THE GROUP OF 5, WHICH CONSISTS OF THE U.S./
Ja p a n /

the

U n i t e d K i n g d o m / Fr a n c e

Ge r m a n y ,

and

to

coordinate

THEIR OVERALL ECONOMIC POLICIES TO ENCOURAGE FURTHER ORDERLY
DEPRECIATION OF THE DOLLAR AND TO SUPPORT SUCH COORDINATION
WITH FOREIGN-EXCHANGE MARKET INTERVENTION WHERE APPROPRIATE.
S ince

the

a g r e e m e n t , the

dollar

has

declined

PERCENT AGAINST OTHER CURRENCIES AS A WHOLE.
February

there

has

been

a total

drop

of

15

a

further

7

THUS/ SINCE

percent

in t h e

TRADE WEIGHTED VALUE OF THE DOLLAR.
Ho w e v e r ,

the

depreciation

HAS VARIED A GREAT DEAL.

against

individual

currencies

SlNCE THE G~5 AGREEMENT/ THE

DOLLAR ESSENTIALLY HAS REMAINED UNCHANGED AGAINST THE
Ca n a d i a n

d o l l a r / has

depreciated

approximately

15.9

percent

AGAINST THE JAPANESE YEN, AND HAS DECLINED 6.8 PERCENT
AGAINST THE MAJOR EUROPEAN CURRENCIES.
T he DECLINE IN THE DOLLAR'S VALUE SINCE FEBRUARY HAS
BEEN HEARTENING, BUT NEVERTHELESS THE DOLLAR'S VALUE STILL
REMAINS APPROXIMATELY 35 PERCENT ABOVE ITS 1980 BASE.




In MY

-

7

-

OPINION/ FURTHER SIGNIFICANT PROGRESS IN BRINGING THE DOLLAR
DOWN WILL DEPEND UPON/ AMONG OTHER THINGS/ MEANINGFUL
REDUCTIONS IN THE U.S. FEDERAL BUDGET DEFICIT/ FOR THE
REASONS I HAVE ALREADY DESCRIBED TO YOU.

‘ ALSO HAVE
I

DESCRIBED TO YOU MY VIEWS ABOUT THE LIKELIHOOD OF THAT
HAPPENING IN THE FORESEEABLE FUTURE.
IN THIS CONTEXT/ IT IS INTERESTING TO NOTE THAT JAPAN/
WHOSE CURRENCY HAS MOVED THE MOST AGAINST THE DOLLAR/ HAS
SUPPORTED ITS FOREIGN EXCHANGE INTERVENTION WITH A RANGE OF
DOMESTIC POLICY INITIATIVES.

SlNCE THE SEPTEMBER MEETING/

SHORT-TERM INTEREST RATES HAVE RISEN SIGNIFICANTLY IN JAPAN.
In ADDITION/ THE JAPANESE HAVE ANNOUNCED FISCAL INITIATIVES/
SUCH AS LOW- INTEREST HOUSING PROGRAMS/ TO STIMULATE DOMESTIC
DEMANDS/ AS WELL AS VARIOUS TECHNICAL CHANGES THAT WILL OPEN
up

Ja p a n

to

foreign

pharmaceutical

and

telecommunications

FIRMS.
Mo n e t a r y Po l i c y
Ov e r

the

last

y e a r - a n d - a - h a l F/ t h e

most

pressing

CONCERN OF MONETARY POLICY HAS BEEN TO FACILITATE THE
TRANSITION OF THE ECONOMY TO MORE MODERATE BUT SUSTAINABLE
RATES OF GROWTH AS THE NEGATIVE EFFECTS OF THE BUDGET
DEFICIT BEGAN TO MAKE THEMSELVES FELT ON THE TRADE ACCOUNT.
This

goal

helps

explain

the

F e d 's

concern

about

how

to

RESPOND TO THE RAPID GROWTH OVER THE LAST 12 MONTHS OF 11,5
PERCENT IN THE Ml MONETARY AGGREGATE/ WHICH CONSISTS OF




-

8

-

CURRENCY AND ALL CHECKABLE DEPOSITS,

THIS GROWTH HAS PUT HI

WELL ABOVE THE ORIGINAL 4 TO 7 PERCENT Ml TARGET FOR 1985
ADOPTED LAST YEAR, AND EVEN SIGNIFICANTLY ABOVE THE NEW/
HIGHER TARGETS FOR THE SECOND HALF OF THE YEAR ADOPTED LAST
Ju l y .
Un d e r
OF SUCH

a

CONCERN.

ordinary

c i r c u m s t a n c e s , the

inflationary

dangers

RAPID RATE OF Ml GROWTH WOULD HAVE BEEN CAUSE FOR
BUT/ AS CHAIRMAN VOLCKER EMPHASIZED RECENTLY IN

HIS LETTER TO CONGRESSMAN WALTER FAUNTROY/ CHAIRMAN OF THE
Ho u s e S u b c o m m i t t e e

on

D o m e s t i c M o n e t a r y Po l i c y /

CIRCUMSTANCES HAVE NOT BEEN ORDINARY.

M l 'S RAPID GROWTH HAS

BEEN ACCOMPANIED BY A SHARP DECLINE IN ITS VELOCITY —

THE

RATE AT WHICH IT CIRCULATES IN THE ECONOMY.
This

decline

is r e m i n i s c e n t

of

the

decline

in v e l o c i t y

IN 1982-83 WHICH/ IN RETROSPECT/ APPEARS TO HAVE REFLECTED
GREATER BUSINESS AND HOUSEHOLD WILLINGNESS TO KEEP LARGER
AMOUNTS OF CURRENCY AND CHECKABLE DEPOSITS ON HAND AS
INTEREST RATES DECLINED.

ALTHOUGH THE PARALLELS ARE NOT

PERFECT, PART OF THE CURRENT DECLINE IN VELOCITY AND
ACCOMPANYING SURGE IN ii APPEARS TO BE THE SAME PHENOMENON
vl
-- A RESPONSE TO THE GENERAL DECLINE IN INTEREST RATES THAT
HAS OCCURRED SINCE MID-1984.

ADDITIONALLY, THERE HAS BEEN

THE EFFECT OF DEREGULATION OF INTEREST RATES PAYABLE ON
CHECKABLE DEPOSITS.




9

-

Be c a u s e
as

the

of

concern

BY THE

the
to

e c o n o m y 's

uncertainty

prevent

the

-

about

M l 's

expansion

b e h a v i o r , as w e l l

from

being

derailed

ADJUSTMENTS TO THE BUDGET AND TRADE

IMBALANCES, CHAIRMAN VOLCKER INDICATED IN HIS LETTER TO
Co n g r e s s m a n F a u n t r o y
or

FOMC,

decided

that

that

Ml

F e d e r a l O p e n M a r k e t Co m m i t t e e ,

the

growth

above

PERCENT TARGETS WOULD BE ACCEPTABLE,

the

3

revised

to

8

MEANWHILE, THE OTHER

MONETARY AND CREDIT AGGREGATES USED AS TARGETS BY THE FED
ARE GENERALLY WITHIN THE GROWTH RANGES SET FOR THE YEAR,
Un d e r

these

c i r c u m s t a n c e s , in t h e

setting

of

monetary

POLICY, PARTICULAR ATTENTION IS BEING GIVEN TO ON“GOING
DEVELOPMENTS IN THE ECONOMY, IN DOMESTIC CREDIT MARKETS, AND
IN FOREIGN EXCHANGE MARKETS.
Ec o n o m i c O u t l o o k
Let

me

conclude

by

saying

a

few w or ds

about

the

ECONOMIC OUTLOOK FOR THE U.S. ECONOMY, AND FOR CALIFORNIA.
OUR STAFF AT THE BANK IS PREDICTING A 3.3 PERCENT EXPANSION
IN THE NATIONAL ECONOMY, AS MEASURED BY THE GROWTH IN REAL

GNP
This

BETWEEN THIS QUARTER AND THE FOURTH QUARTER OF
is

somewhat

higher

than

the

2

percent

gain

1986.

expected

THIS YEAR, WHICH REPRESENTED A SLUGGISH FIRST HALF BUT A
STRONGER SECOND HALF.

W e expect that consumer spending WILL CONTINUE TO GROW
THROUGH

1986

BUT SIGNIFICANTLY BELOW THE RELATIVELY ROBUST

RATES FOR THE FIRST THREE QUARTERS OF THIS YEAR, AS




-

10

-

HOUSEHOLDS IN 1986 BUILD UP THEIR DEPLETED SAVINGS.

A t THE

SAME TIME, A RELATIVELY LOW OPERATING RATE FOR FACTORIES AND
WIDESPREAD VACANCIES IN OFFICE SPACE SUGGEST THAT BUSINESS'S
EXPENDITURES ON EQUIPMENT AND CONSTRUCTION WILL BE SLUGGISH.

A

RECENT McGRAW HlLL SURVEY OF BUSINESS CAPITAL SPENDING

INTENTIONS SHOWED SLIGHTLY LOWER DOLLAR OUTLAYS NEXT YEAR
COMPARED TO THIS.

EVEN AFTER TAKING INTO ACCOUNT THAT

SURVEY'S CHRONIC TENDENCY TO BE PESSISMI ST IC, AND MAKING
SOME REASONABLE ESTIMATES OF PRICE INCREASES FOR CAPITAL
GOODS, IT STILL APPEARS THAT WE COULD END UP WITH BUSINESS
CAPITAL SPENDING (iN INFLATION-ADJUSTED TERMS) GROWING MORE
SLOWLY NEXT YEAR THAN THIS.
Ho w e v e r ,

by

the

second

half

of

next

y e a r , the

effects

OF THIS year's DEPRECIATION OF THE DOLLAR WILL BEGIN TO GIVE
A BOOST TO THE ECONOMY AS OUR EXPORTS BECOME MORE
COMPETITIVE ABROAD AND DOMESTIC PRODUCERS ARE BETTER ABLE TO
COMPETE WITH IMPORTS.

OUR STAFF ESTIMATES THAT THE DECLINE

TO DATE IN THE DOLLAR'S VALUE WOULD BE SUFFICIENT TO BOOST

GNP

GROWTH IN THE SECOND HALF OF

1986

RELATIVE TO ITS

A t THE SAME

SLUGGISH PACE IN THE FIRST HALF OF THE YEAR.

TIME, HOWEVER, THE RESULTING RISE IN THE PRICE OF IMPORTS
FROM A DEPRECIATING DOLLAR IS EXPECTED TO RESULT IN A SLIGHT
UPTICK IN INFLATION FROM THIS YEAR'S EXPECTED RISE OF ABOUT
3*2

percent.

Finally,

it a p p e a r s

that

there

will

be

little

CHANGE IN THE OVERALL UNEMPLOYMENT RATE IN THE ECONOMY,
RECENTLY AT A RATE OF A LITTLE OVER 7 PERCENT.




-

11

-

Ca l i f o r n i a S c e n e
Finally, let me now turn to a brief discussion of the

In recent months some sectors of the

California economy.

California economy have continued to do very well, despite a
SLOWDOWN IN ECONOMIC ACTIVITY STATEWIDE.

TRADE AND

SERVICES, WHICH TOGETHER MAKE UP MORE THAT 50 PERCENT OF
C a l i f o r n i a 's
to

be

n o n -a g r i c u l t u r a l

consistently

is a l s o

true

for

strong

sectors

nation.

the

b a s e , have

employment
of

s t a t e 's e c o n o m y , a s

the

Ae r o s p a c e

proven

activity, buoyed

by

DEFENSE SPENDING, HAS PROVIDED AN ADDITIONAL SOURCE OF
strength.

Ca l i f o r n i a

has

increased

its

share

of

defense

CONTRACTS TO ABOUT 25 PERCENT, ARGUING FOR A BRIGHT FUTURE
FOR

the

aerospace

sector

as

defense

contracts

continue

to

GROW.
Co n s t r u c t i o n
16 percent

activity

increase

in t h e

also

has

average

remained
annual

STARTS IN THE FIRST NINE MONTHS OF 1985.

s t r o n g , with

rate

of

a

housing

HOWEVER, CONTINUED

HISTORICALLY HIGH INTEREST RATES, A DISINFLATIONARY
ENVIRONMENT, AND SOME INDICATIONS OF OVERBUILDING IN OFFICE
SPACE, CLOUD THE FUTURE.
T he AGRICULTURAL SECTOR CONTINUES TO SUFFER FROM THE
PROBLEMS OF INCREASED WORLD PRODUCTION, A HIGH DOLLAR, AND
TRADE BARRIERS ABROAD, AND THESE PROBLEMS ARE LIKELY TO
persist.
less




in

Al t h o u g h

Ca l i f o r n i a

farmland
than

prices

elsewhere

generally
in t h e

have

declined

n a t i o n , land

used

-

12

-

FOR SUCH CROPS AS ALMONDS AND WINE GRAPES HAS LOST AS MUCH
AS

50

TO

80 PERCENT

OF ITS VALUE IN THE PAST TWO OR THREE

YEARS.
Th e SEMICONDUCTOR INDUSTRY HAS SUFFERED FROM SLOWER
GROWTH IN MICROCOMPUTER SALES AND A SEVERE INVENTORY
OVERHANG FROM THE RAPID GROWTH PERIOD OF
Ad d i t i o n a l l y ,

there

is

now

an

1983

investigation

AND

1984.

underway

of

ALLEGED DUMPING IN OUR MARKETS BY CERTAIN JAPANESE PRODUCERS
OF SEMI-CONDUCTORS.

OVER THE LONGER-RUN,

SEMICONDUCTOR

MARKETS WILL EXPAND, PROVIDED TECHNOLOGICAL INNOVATION
CONTINUES.

BUT CURRENT DIFFICULTIES LEAVE NEARER-TERM

PROSPECTS LESS CERTAIN.
Th e

outlook

for

the

Lo s An g e l e s -Or a n g e Co u n t y

area

is

BRIGHTER THAN FOR THE STATE AS A WHOLE BECAUSE STRONG
SECTORS SUCH AS DEFENSE FIGURE MORE PROMINENTLY LOCALLY,
WHILE JUST THE OPPOSITE IS TRUE FOR A WEAK SECTOR SUCH AS
AGRICULTURE.
provide

TH IS MIX OF STRONG AND STABLE SECTORS SHOULD

So u t h e r n Ca l i f o r n i a

with

c o n t i n u e d , if

moderate,

ECONOMIC GROWTH.
Co n c l u d i n g R e m a r k s
IN SUMMARY, WE SEE THE ECONOMIC EXPANSION CONTINUING AT
A MODERATE PACE THROUGH

1986.

SOME UPTICK IN INFLATION ALSO

IS LIKELY, ALTHOUGH THE RATE STILL WILL BE SUBSTANTIALLY
BELOW THE DOUBLE DIGIT RATES THAT BATTERED THE ECONOMY AS
RECENTLY AS FOUR YEARS AGO.




- 13 Ad m i t t e d l y

the

uneven

tone

as

between

different

sectors

OF THE ECONOMY IS LIKELY TO CONTINUE/ UNLESS OR UNTIL THE
MASSIVE IMBALANCE IN THE FEDERAL DEFICIT IS REDUCED/ WITH A
CONSEQUENT FURTHER LOWERING OF BOTH INTEREST RATES AND THE
INTERNATIONAL VALUE OF THE DOLLAR,

SOLUTIONS TO THESE

PROBLEMS ARE BEYOND THE ABILITY OF MONETARY POLICY ALONE TO
REMEDY,

NEVERTHELESS/ I BELIEVE THAT THE FEDERAL RESERVE

CAN TAKE CONSIDERABLE SATISFACTION FROM ITS KEY ROLE IN
CURBING INFLATION SINCE 1980/ WHILE AT THE SAME TIME SEEING
THE ECONOMY AS A WHOLE ENJOY ONE OF THE STRONGER EXPANSIONS
OF THE POST-WAR PERIOD,