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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FRB ECONOMIC FORUM CHICAGO Federal Reserve Bank of Chicago Clinton, Iowa August 9, 1988 The Economy and Monetary Policy A-1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Current Economic Conditions and the Economic Outlook for the United States A-2 GNP - the output of goods and services trillions of 1982 dollars 4.2 4.0 3.8 3.6 3.4 3.2 3.0 2.8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1978 '79 '80 '81 '82 '83 *First quarter of 1988 at an annual rate. A-3 '84 '85 '86 '87 '88* Industrial production index, 1977=100 140 130 120 110 100 1978 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '79 '80 '81 '82 '83 *Average for first six months of 1988. A-4 '84 '85 '86 '87 '88* Payroll employment millions of employees 110 105 100 95 90 85 80 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1978 '79 '80 '81 '82 '83 • Average for first five months of 1988. A-5 '84 '85 '86 '87 '88* Relative trade improvement index, 198501=100 150 125 100 Exports 75 50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 A-6 1986 1987 1988 Durable goods exports index, 198601=100 170 . 160 Electrical equipment 150 ...• ••• ••• 140 100 Total . -- • •• •• . . • •• •• .··~~--.. 110 ♦ • •• 130 120 ♦ •• . •• ••• ' •• •• •••• •• • __ ; ; ; ; ; ; ; • Industrial machinery • 90 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1986 1987 A-7 1988 Nondurable goods exports index, 198601=100 170 160 Paper and paperboard 150 ,,_, 140 ✓✓ 130 ; 120 ,. 110 i ~ 100 .. ✓ ✓ ---- -- •••••• __ ; , - ____ ,,✓ ✓✓ ✓ ✓ Chemicals ✓ Total ;; •• •• Pharmaceuticals •• 90 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1986 1987 A-8 1988 Personal consumption expenditures trillions of 1982 dollars 2.6 2.4 2.2 2.0 percent change 5.0 2.5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 1983 1984 1985 1986 *First quarter of 1988 at an annual rate. A-9 1987 1988* Resource utilization percent 90 Industrial capacity 85 80 75 70 65 1978 '79 '80 '81 percent 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '82 '83 '84 '85 Unemployment rate , '86 '87 '88 '87 '88* . 8 6 4 2 0 1978 '79 '80 '81 • Average for first five months of 1988. '82 '83 A-10 '84 '85 '86 Consumer prices percent change from year ago 10 8 6 Less food and energy 4 2 Total 0 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 A- 11 1986 1987 1988 Producer prices index, 1982=100 110 --- . I 105 _,J ~/ - ✓/Intermediate \ 100 "-,,-✓ goods 95 90 85 Crude materials 80 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 A-12 1986 1987 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Average hourly earnings percent change from year ago 8 6 4 2 0 1982 1983 1984 1985 A-13 1986 1987 1988 Looking ahead • An aging expansion? • Supply constraints • Demand conditions Personal consumption Investment Foreign trade Government A-14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Personal consumption expenditures percent change 6 5 4 3 2 0 1983 1984 1985 1986 A-15 1987 1988 1989 Private domestic investment billions of 1982 dollars 750 •••• 600 •••• • •• • • • • Total ----------------···· 450 ••• •••••••• Nonresidential fixed investment 300 Residential fixed investment .. 150 ------------------------··············· Change in business inventories • • ■ • • • • • • • • • • • ■ 0 -150 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 A-16 1986 1987 1988 1989 Export and import activity billions of 1982 dollars 700 600 Imports 9 I I I I I I I ■ •••••••• 500 -· ------------ ---- 400 ■ • • • •• •• •• • •• • • • • •• Exports 300 200 100 Net exports 0 -100 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1983 1984 1985 1986 A-17 1987 1988 1989 Government purchases of goods and services billions of 1982 dollars 500 State and local -------- 450 400 Federal 350 --------------------------■ 300 250 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1983 1984 1985 1986 A-18 1987 1988 1989 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis GNP - output of goods and services percent change in real GNP 8 7 6 5 4 3 2 1 0 1983 1984 1985 1986 A- 19 1987 1988 1989 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Prices percent change (CPI) 7 6 5 4 3 2 1 0 1983 1984 1985 1986 A-20 1987 1988 1989 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Iowa Economy A-21 Total employment growth index, 1982=100 115 District states minus Iowa 110 105 Iowa 100 95 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 *Average for first four months of 1988. A-22 1986 1987 1988* Manufacturing employment growth index, 1982=100 110 District states minus Iowa 105 II 100 ' ,,,I I I I I I ,------, ' ,,, , ____ _ I 95 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 *Average for first four months of 1988. A-23 1986 1987 1988* Iowa industry earnings: 1987 percent of total 0 5 10 Manufacturing Services Trade Farm Government Other* Finance, insurance, and real estate Construction https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis *Mining, transportation, and public utilities. A-24 15 20 25 U.S. agricultural exports percent change, January 1987 to April 1988 120 100 80 60 40 20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 0 corn soybeans all agriculture A-25 agricultural machinery Iowa's export performance (First quarter 1987 to first quarter 1988) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis +29% +17% Iowa Other District States A-26 Total employment growth index, 1982=100 110 _,,. _,, ---• _ 100 -----~· ------------------. _,,,,,,,--■--::,.■~---·-·-·_,, Illinois 105 .,,,_.,,,- -- -- -- -- - - ~ ~ Iowa ---- ---- Clinton area* 95 90 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1983 1984 1985 1986 *Includes Clinton, and Jackson counties in Iowa, and Caroll, and Whiteside counties in Illinois. A-27 1987 Manufacturing employment growth index, 1982=100 104 100 ./ 96 • .,~ ................ / -------- ............._ ; --------- ------ • .............__ Iowa --·----- ., .......... ___ -- -- -- ', Illinois 92 / . / ./·' • -../ ' ',, ' ,......, ~--- -- --- 88 84 80 1983 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1984 1985 1986 *Includes Clinton, and Jackson counties in Iowa, and Caroll, and Whiteside counties in Illinois. A-28 1987 The Challenges for Monetary Policy B-1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Globalization of U.S. economy • Trade flows • Financial flows • Policy coordination B-2 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 B-3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Major economic imbalances • International trade • Federal budget ·,r B-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis International Trade Imbalance B-5 . U.S. current account balance billions of dollars 200 100 0 -100 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960 '62 '64 '66 '68 '70 '72 '74 *First quarter of 1988 at an annual rate. 8-6 '76 '78 '80 '82 '84 '86 '88* U.S. current account balance vs. foreign capital inflows billions of dollars 200 Net foreign capital inflow 100 0 I ---------- I I 1 I I / ,-- -- I -100 Current account balance -200 1960 '62 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '64 '66 '68 '70 '72 '74 •First quarter of 1988 at an annual rate. B-7 '76 '78 '80 '82 '84 '86 '88* Net international investment position of U.S. billions of dollars 200 100 0 -100 -200 -300 -400 -500 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1978 '79 '80 '81 '82 *Estimate. B-8 '83 '84 '85 '86 '87* U.S. balance on goods and services billions of dollars 50 -- --"" -- 0 , -- _, ..... ', Services ' -------, \ Total -50 Goods -100 -150 -200 1960 '62 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '64 '66 '68 '70 '72 '74 *First quarter of 1988 at an annual rate. 8-9 '76 '78 '80 '82 '84 '86 '88* U.S. net exports: real vs. nominal billions of dollars 50 0 -50 Nominal -100 -150 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1982 1983 1984 1985 B-10 1986 1987 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis federal Budget Imbalance B-11 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal deficit percent of GNP 8 6 4 2 0 -2 1960 '64 '68 '72 '76 B-12 '80 '84 '88 Gross public debt of U.S. Treasury trillions of dollars 3.0 2.5 2.0 1.5 1.0 0.5 0.0 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1972 '74 '76 '78 '80 B-13 '82 '84 '86 '88 Total interest on debt percent of budget outlays 22 20 18 16 14 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 1976 '77 '78 '79 '80 '81 '82 fiscal year B-14 '83 '84 '85 '86 '87 Uses of total net available savings percent of GNP 12 10 8 Private domestic investment 6 4 2 Federal deficit 0 -2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1970 '72 '74 '76 80 '78 *First quarter of 1988 at an annual rate. B-15 '82 '84 86 '88* Sources ot total net available savings percent of GNP 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 Domestic savings 6 4 Savings from abroad 2 0 -2 1970 '72 '74 '76 '78 '80 *First quarter of 1988 at an annual rate. B-16 '82 '84 86 '88* https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Domestic savings and investment percent of GNP 10 Domestic savings 8 l 6 Private domestic investment i 4 2 0 1982 1983 1984 1985 *Rrst quarter of 1988 at an annual rate. 8-17 1986 1987 1988* Personal savings percent of disposable personal income 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 6 4 2 0 1960 '64 '68 '72 '76 NOTE: Horizontal line represents the average value from 1960 to1981. B-18 '80 '84 '88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Consumer installment debt percent of disposable personal income 20 18 16 14 12 10 1960 '64 '68 '72 '76 B-19 '80 '84 '88 Net funds raised by nonfinancial corporate business billions of dollars 200 150 Debt instruments 100 50 0 ----------- ...... ~ Net equity issues -50 \ \ \ \ \ ________ , ' -100 1970 '72 '74 '76 '78 *First quarter of 1988 at an annual rate. B-20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '80 '82 '84 '86 '88* Corporate debt to net worth ratio percent 100 90 80 70 60 50 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1971 '73 '75 '77 '79 NOTE: Net worth measured on historical cost basis. 8-21 '81 '83 '85 '87 Policy Implications B-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal budget deficit outlook billions of dollars 250 200 150 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 50 0 1980 1981 1982 1983 1984 1985 1986 fiscal year *Assuming President's fiscal 1989 budget is adopted. B-23 1987 1988 1989* Domestic spending vs. output gross domestic purchases as a percent of GNP 103 102 101 100 99 98 97 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1966 '68 '70 '72 '74 '76 *First quarter of 1988 at an annual rate. B-24 '78 '80 '82 '84 '86 '88* Trade weighted dollar index, March 1973= 100 175 150 125 100 75 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1973 '74 '75 '76 '77 '78 '79 '80 B- 25 '81 '82 '83 '84 '85 '86 '87 '88 Gross foreign capital inflow billions of dollars 250 200 150 Private 100 50 Official 0 -50 1981 1982 1983 1984 B-26 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1985 1986 1987 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Domestic policy goals - Economic growth with price stability B-27 Real GNP: actual vs. trend trillions of 1982 dollars 5.0 4.5 4.0 3.5 1967-1988 trend X 3.0 2.5 2.0 1.5 1.0 0.5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1948 '52 '56 '60 '64 '68 B-28 '72 '76 '80 '84 '88 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 0 1960 '64 '68 '72 '76 B-29 '80 '84 '88