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FRB ECONOMIC FORUM CHICAGO Federal Reserve Bank of Chicago Madison, Wisconsin November 10, 1987 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE ECONOMY AND MONETARY POLICY https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Economic Outlook for the United States A-1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Today's Economy is Different! Stock market Large trade deficits Large capital inflows Large government deficits Changed financial markets Changed industrial structure A-2 Assessing the Stock Market Crash On consumption On investment A-3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Total Output of Goods and Services Percent change in real GNP 8 6 4 2 -2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 83 84 85 A-4 86 87 88 Prices Percent change GNP deflator 8 6 4 2 82 83 84 85 A-5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Unemployment Rate Percent 12 10 8 ••••••••••••••••••••••••••••• 6 4',------r-----.--------.------r----.------r-------r 82 83 84 85 86 A-6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 88 89 Forecast Highlights - Trade improves Consumption slows Investment improves Government spending slows A-7 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real GNP Changes Average 85/86 vs. 87 /88 Personal Consumption Investment Gov't purchases Net Exports Total -50 -25 25 0 Billion$ A-8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 50 75 100 125 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis International Considerations - Foreign exchange value of the dollar - Economic growth abroad - Traded goods prices A-9 Prices Index, 1982=100 140 130 ••• •••••• ••• •••••• •••••• GNP deflator 120 110 Export prices 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 Import prices 80 . . , . _ - - - - . - - - - - - , - - - - - , - - - - - - , , - - - - - r - - - - - , - - - - - . - - - - - . - - - - - - . 80 81 82 83 85 84 A-10 86 87 88 89 Export and Import Activity Billions of $82 600 Imports •••••••••••••••••••••••······••••••••·· 500 400 Exports 300 200 100 0 -100 -200 ',-----,----..-----..-----,N_e_t_ex_p_o_rts---.-----.----~----.- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 83 84 85 A-11 86 87 88 Net Export Impact on GNP Increase, billions $82 350 300 250 200 GNP less Net Exports 150 100 50 o..--------r-------r----------.----------.------------.83 84 85 86 A-12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 88 Personal Consumption Expenditures Percent change 8 6 4 2 82 83 84 85 A-13 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Real Consumption Expenditures Percent Change https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 15 Durables 12 9 6 3 -3.L---------------------------,-------1983 1984 1986 1985 A-14 1987 1988 Disposable Personal Income and the Savings Rate Percent 12 10 8 6 Income 4 2 Savings rate Q..,.__ _ _ _ _, - - - - - - - - - - . - - - - - - - - - . - - - - - - - - - r 83 84 85 A-15 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 Fixed Investment Billions of 1982 dollars 500 Non-res. 82 83 84 85 A-16 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Changes in New Plant and Equipment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Billions of current dollars 15 Other 10 Commercial 5 0 -5 -10 .......... ........... ........... ••••••••••• ........... ........... ::::::::::: ........... ........... ........... ... ............ ............... .. ......... ........... ........... ........... ........... ............ Petroleum All Mining Industries -15 Public Utilities Machinery -20...___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 1985-86 1986-87 A-17 Capacity Utilization: Manufacturing Percent https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 59 64 69 74 A-18 79 84 89 Corporate Profits Billions of current dollars 400 300 200 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 59 64 69 74 A-19 79 84 89 Fixed Investment Percent change 20 15 10 5 rvvvvvvvvvt I I 0 IV\, VVVVVI rvvvvvvvvvt rvvvvvvvvvt rvvvvvvvvv, IV NVUI -5 -10 82 83 84 85 Note: Change from year-ago period, 1982 dollars https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-20 86 87 88 Government Purchases of Goods and Services Percent change 15 10 Total 5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ···························-------------------------------·-·-........ ......................................... ·······............ ... Federal ···-........... 01.,---------r------r--------r------...---------r 83 84 85 86 A-21 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Forecast Summary 1987 1988 Real GNP 2.7 2.8 Prices 3.0 3.5 Unemployment Rate ( 4th Quarter) 6.1 6.0 A-22 Prices and Output 1982=100 140 120 Real GNP 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Deflotor 60 40 20 o'r----.----.-----.--------r---~-----,----~----.---~ 78 80 82 76 84 74 86 72 70 88 A-23 REGIONAL PROSPECTS National economic performance Competitive position A- 24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Total Employment Since 1960 Percent change from 1960 90 U.S. .... .. .... .,• 80 ,/ Wisconsin ..............................,.,,,. 70 60 District less Wisconsin 50 ..•.. .. .. ... .. ----········· .. ....... ,_ •' 40 30 ..- 20 10 -10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ..-~-.--,-,----r----:,--r-,----.----.--,--r---r----.--,-,----r----,--.-,--~---.----.-,----r--...~ 60 63 66 69 72 75 A-25 78 81 84 87 Manufacturing Employment Since 1960 Percent change from 1960 30 20 U.S. 10 District less Wisconsin -10 -20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "r---r---r-----r-----r---,r---r-----,---.------r--.---.----.-..---r---.-~-.----.-----.-.---r----r--.----.------r---r---r 60 63 66 69 72 75 A-26 78 81 84 87 Relative Manufacturing Wage: Wisconsin Index, U.S. average=1.00 1.08 1.06 1.02 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 78 79 80 81 83 82 A-27 84 85 86 87 Wisconsin Productivity Relative to U.S. U.S. average 1.10 =1 1.05 ....··••••••• ,__-··············· 1.00 0.95 0.90 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis L,---,---r----,----r---.------.-.--------r--..----r------r--r-~-------r--.-----.- 70 71 72 73 74 75 76 77 78 A-28 79 80 81 82 83 84 85 86 87 Manufacturing Employment Since 1982 Percent change from 198201 5 Wisconsin District less Wisconsin -5 -10 -15 ' r - - - - - - . - - - - - - - . - - - - - ~ - - - - - - - - - r - - - - - - - - . - - - - - - , - https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 83 84 85 A-29 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE CHALLENGES FOR MONETARY POLICY B-1 Stock Prices CS & P 500) 1941-43 400 = 10 300 200 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 "1--T---.---,----.-"T"""T"'--.---,----,-"T"""T"'--.---,----,-"T"""T"'-.--r---r---r--T"--r---T---r---r--r---.----,-----r--T"""""T"""-r--T"---.-~....-----r-.----,.......,.....-r 47 53 59 65 71 B-2 77 83 89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MONETARY POLICY CONCERNS Long-Run: Economic Growth with Price Stability Short-Run: Maintain Integrity of Financial System 8-3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEDERAL RESERVE STATEMENT October 20, 1987 "The Federal Reserve, consistent with its responsibilities as the nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system." B-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEDERAL RESERVE RESPONSE • Open market operations • Discount window • Wire transfer • Market monitoring B-5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis GLOBALIZATION OF U.S. ECONOMY • Trade flows • Financial flows • Policy coordination B-6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis LEVERAGING OF AMERICA • Rapid government debt growth • High consumer debt-to-income • High corporate debt-to-net worth • Net debtor nation 8-, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MAJOR ECONOMIC IMBALANCES • International trade • Federal budget 8-8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis International Trade Imbalance 8-9 U.S. Current Account Balance Billions of dollars 200 150 100 50 -50 -100 -150 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 60 63 66 69 72 75 B-10 78 81 84 87H1 U.S. Current Account Balance vs. Foreign Capital Inflows Billions of dollars 200 ····••' 150 •• •••• •• Foreign capitol inflow 100 .••• •••• :I !: : 50 I •• •••• ••• ...... 0 ••••••••••••••••••••••••••••••••••••••••••• -50 Current account balance -100 -150 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '-r-~--r-~--.-~-.---r----r----"T-r---.----.------r------.---,.--~-r-----.-~--.....-~-r---r----r---,.-,- 60 63 66 69 72 75 B-11 78 81 84 87H1 Net International Investment Position of U.S. Billions of dollars https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 200 100 I 0 +---'--~L,..._____J.___..J.______J___L.._--1..._..__--.l_..i,__.l,.___c==------,,--------,----r------r- -100 -200 -300-'-------------------78 79 80 81 82 B-12 . 83 84 85 86 U.S. Imports and Exports: Nominal Index, 1985q 1 = 100 140 Imports-Nominal 130 120 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 Exports-Nominal ~--,------.-----r---.------.-----r---,----r----r----,---~---r 85 86 87 B-13 88 U.S. Imports and Exports: Real Index, 1985q 1 = 100 140 130 Imports-Real 120 Exports-Real 110 100 90 L,-----.---~---r----r--~---r----r---.-----~--.....----- 85 87 86 B-14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 88 U.S. Net Exports: Nominal vs. Real Billions of dollars 100 0 •••• •••• •••• ••••• •••••• •••• •••• •• . .·······.................. •• ~ •• ••• •••••• ••••• -100 ............... . ·•..... ..,............. . . . .... •••••••• Real -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 83 84 85 B-15 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Budget Imbalance 8-16 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Deficit Percent of GNP 8 6 11111111111111111 4 2 60 64 68 72 76 8-17 80 84 88 Gross Public Debt of U.S. Treasury Trillions of dollars https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 72 74 76 78 80 B-18 82 84 86 88 Total Interest on Debt Percent of budget outlays 20 18 16 14 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 76 78 80 82 Fiscal year B-19 84 86 88 Uses of Total Net Available Savings Percent of GNP 12 9 Private domestic investment 6 3 Federal deficit 0 70 71 72 73 74 75 76 77 78 79 B-20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 81 82 83 84 85 86 87H1 Sources of Total Net Available Savings Percent of GNP https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 12 - 9 - - - - - - Domestic savings 6 3 Savings from abroad 0~ ~~~~ ~ - Net investment abroad -3-'-----------------------------70 71 72 73 74 75 76 77 78 79 B-21 80 81 82 83 84 85 86 87H1 Domestic Savings and Investment Percent of GNP 10 Domestic savings --~ 8 6 4 Private domestic · investment -2 0 82 83 84 85 B-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87H1 Personal Savings Percent of disposable personal income 12 10 8 6 4 2 60 64 68 72 76 Note: Horizontal line represents the average value from 1960 to 1981 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-23 80 84 88 Consumer Installment Debt Percent of disposable personal income 22 20 18 16 14 12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 60 64 68 76 72 B-24 80 84 88 Net Funds Raised by Nonfinancial Corporate Business Billions of dollars 200 Debt instruments 100 .•-.. ...., •••• ......_ c : - _ ~••o :••. _ - ~ -•- - & 4 L ~• - - - - , ; . . • . - - - - - - - - - - 0 +-------------=-,:___ _ _ _ ___:::ll.l ··································"························ •••••··•• ···-··· ..•••••• i •.. \ ~ \ Net equity issues \. ..\ \ ... ••••••••••••••••••••••• -100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '-r--"T"--~-~-~-~----r-----.---.-----r-----r----r-----r-~--.--.---,--....---- 70 72 74 76 80 78 8-25 82 84 86 87H1 88 Corporate Debt to Net Worth Ratio Percent 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 90 80 70 60 70 72 74 76 78 80 Note: Net worth measured on historical cost basis B-26 82 84 86 88 POLICY IMPLICATIONS • Fiscal policy • Regulatory policy • Monetary policy B-27 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Budget Deficit Outlook Billions of dollars 250 200 150 100 50 80 81 82 83 84 Fiscal Year B-28 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 86 87 88 89 Domestic Spending vs. Output Gross domestic purchases as a percent of GNP 103 102 101 99 98 65 67 69 71 73 75 77 * Average for first three quarters. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-29 79 81 83 85 Trade Weighted Dollar March 1973=100 175 150 125 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 100 73 76 79 82 B-30 85 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DOMESTIC POLICY GOALS Economic Growth _with Price Stability B-31 Real GNP: Actual vs. Trend (1947-198703 and 1967-198703) Billions of 1982 dollars 5000 4000 3000 2000 1000 47-87 trend 'r--,,--r--~--r-----,--.------r---.-----,r----,--~-~------- 47 50 53 56 59 62 65 68 B-32 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 71 74 77 80 83 86 89 Consumer Prices Percent change from year-ago 16 14 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 6 4 2 60 64 68 76 72 8-33 80 84 88