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FEDERAL RESERVE BANK OF CHICAGO ECONOMIC FORUM https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Lansing, Michigan June 11, 1991 ECONOMIC OUTLOOK FOR 1991 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-1 m When will the recession be over? iii What will bring us out of the recession? ff! How rapidly will we recover? https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-2 GNP Industrial production percent change, annual rate 4 index, 1987=100 109 2 106 0 103 -2 -4 100 1989 1990 1991 1989 Nonfarm payroll employment Unemployment rate millions 112 percent 8 1990 1991 Peak 7 110 6 108 5 4 106 1989 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1990 1991 1989 1990 1991 A-3 STRAWS IN THE WIND? Industrial production Consumer confidence percent change 1 index, 1985=100 120 0 100 -1 80 -2 60 40 -3 Aug. Oct. 1990 Dec. Feb. 1991 Apr. Aug. Oct. 1990 Housing starts Stock Market millions 1.3 Dow Jones Industrial Average 3,200 Dec. Feb. 1991 Apr. weekly averages 3,000 1.1 2,800 2,600 0.9 2,400 0.7 Aug. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Oct. 1990 Dec. Feb. 1991 Apr. 2,200 July 1990 1991 A-4 REAL GNP OUTLOOK trillions of 1982 dollars 4.18 ,, , ,, , , percent change, annual rate 4 ~ 4.16 4.14 ..,,, 4.12 2 , , , 0 -2 4.10 1990 percentchange,4Q/4Q 8 percent change, annual rate 8 6 6 4 4 2 2 -· 0 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis I -4 1991 1990 -2 1983 I ,-I '85 '87 '89 '91 1991 0 -2 1983 '85 '87 '89 '91 A-5 UNEMPLOYMENT RATE AND CONSUMER PRICES Unemployment rate percent 11 9 7 5 3 1983 '87 '85 '89 '91 Consumer prices percent change, annual rate 8 Percent change 4Q/4Q 6 ' 1983 '84 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '85 '86 '87 '88 '89 '90 '91 A-6 REAL PERSONAL CONSUMPTION EXPENDITURES Change in consumption expenditures percent change, annual rate 6 percent change from year ago 2 1 4 0 2 0 1983 '84 '85 '86 '87 I '88 -1 -2 '89 '90 1990 1991 Composition of consumption expenditures trillions of 1982 dollars 3.0 percent change from year ago 10 Total 24 • ......· 18 YiHlfMtMiiii mw··A ntFJ!!diL ;;;;;;;;,c;guf~~ goqas·•· · • 1.8 5 0 Services ------------- -5 -10 1984 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '86 '88 '90 -15 1990 1991 A-7 THE BASE FOR CONSUMER SPENDING Payroll employment Real disposable personal income average monthly change, thousands 500 average monthly change, billions of 1982 dollars 30 272 15 250 ~;,: 193 0 0 -250 -15 -500 -30 '88 '89 J M M J 1990 S N J M 1991 M '88 '89 Consumer installment debt outstanding Savings rate billions of dollars 750 percent 6 719 4.2 700 J M M J 1990 S N J M 1991 M 4.6 4 664 2 650 '88 '89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J M M J S 1990 N J M M 1991 0 '88 '89 J M M J 1990 S N J M M 1991 A-8 SPENDING FOR DURABLE GOODS Real consumer durable goods spending percent change, annual rate 20 10 urables 6.8 2.3 0 Less motor vehicles & parts -10 -20 '88 '89 0190 0290 0390 0490 0191 Sales of autos and light trucks millions, annual rate 20 1-5 10 5 0 '88 '89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis J M M J 1990 S N J M M 1991 A-9 INVESTMENT INFLUENCES Capacity utilization Corporate profits percent 88 billions of dollars 225 84 200 80 175 76 1986 '87 '88 '89 '90 '91 150 billions of dollars percent 500 140 450 120 400 100 350 80 1986 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '87 '88 '89 '90 '91 '90 '91 Interest payments to cash flow Net cash flow 300 1986 '87 '88 '89 '90 '91 60 1986 '87 '88 '89 A-10 BUSINESS SPENDING AND INVENTORIES Producers' durable equipment percent change, annual rate 15 percent change 30 i 15 0 0 -15 -15 -30 1982 '83 '84 '85 '86 '87 '88 '89 '90 1989 1990 1991 Nonfarm inventories change in billions of 1982 dollars 75 change in billions of 1982 dollars, annual rate 40 50 20 25 0 I 0 • -0.1 -20 -25 -40 1982 '83 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '84 '85 '86 '87 '88 '89 '90 1989 1990 1991 A-11 REAL ESTATE MARKETS Months' supply of new homes Mortgage rates and new home sales percent 20 thousands of units, annual rate 900 ,, 8 \ I 700 15 ' \ , .,.. 500 I 6 ;,~ 10 4 Rates ► 300 1979 '81 months 10 '83 '85 '87 '89 5 '91 2 1984 '85 Nonresidential structure investment Vacancy rates billions of 1982 dollars 175 percent 24 '86 '87 '88 '89 '90 '91 Office 18 150 12 ---- -------------Industrial 125 6 100 1981 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '83 '85 '87 '89 '91 0 1984 '85 '86 '87 '88 '89 '90 A-12 INTERNATIONAL CONSIDERATIONS Contribution to GNP Merchandise trade billions of 1982 dollars 75 billions of dollars 50 50 i 25 0 -25 -50 1986 '87 10 '88 '89 '90 '91* 1986 '87 '88 '89 '90 '91 *First quarter, annual rate. Relative price of U.S. manufacturing exports GNP growth abroad, 1991 * index, 1987= 100 150 percent -2 0 2 4 I Japan 125 Germany France 100 75 1963 '67 *OECD projection. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '71 '75 '79 '83 '87 lllllllilll!lltll!lllllHtltHlHtlttHlfl iIIIIIIlililIIliillIIlIIiiiiil IIIIIlIIItlIIItlitltl '91 * *OECD projection. A-13 GOVERNMENT PURCHASES OF GOODS AND SERVICES Government purchases Federal government billions of 1982 dollars 900 billions of 1982 dollars 375 Total 325 600 State and local 275 --------------· _ _ - .. _ ____ _____ ,...... Defense ~- • 225 300 1988 1989 1990 1988 1991 1989 1990 1991 State and local government State and local government surplus/deficit billions of 1982 dollars 490 billions of dollars 60 475 30 460 0 445 -30 ---------~._ Total 430 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1989 1990 ------- Less SI funds.... , - __ , ,_ -60 1991 1988 1989 1990 1991 A-14 SUMMING IT UP !~Ji Recession bottoms this quarter [@ No dominant driver for recovery filii Modest recovery rate https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-15 REGIONAL DEVELOPMENTS https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-16 EMPLOYMENT Total Manufacturing index, 1973=100 160 index, 1973=100 120 140 100 '-.,,,,---------U.S. 120 80 100 80 1973 '76 '79 '82 '85 '88 '91 60 1973 '76 Total Manufacturing index, 1973=100 130 index, 1973=100 110 '79 '82 '85 '88 '91 7th Distri 120 100 110 90 100 80 Michigan 90 1973 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '76 '79 '82 '85 '88 '91 70 1973 '76 '79 '82 '85 '88 '91 A-17 EMPLOYMENT SHARES United States Michigan percent of total 80 percent of total 80 - - - - - - - • 60 ---------Service-producing 60 - - - - - - ----------- -Service-producing 40 40 Goods-producing 0 1973 Goods-producing 20 20 '76 '79 '82 '85 '88 '91 0 1973 '76 '79 '82 Goods-producing shares Service-producing shares percent of total 45 percent of total 80 40 75 35 70 30 65 25 60 1973 '76 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '79 '82 '85 '88 '91 1973 , ,----'76 '79 _,, '85 '88 '91 ---- --- '82 U.S. - - - '85 '88 '91 A-18 EMPLOYMENT SHARES - 1990 Industry Lansing/East Lansing Michigan U.S. 100% 100% 100% 17.4 14.4 12.1 2.3 27.6 23.8 17.9 5.9 22.7 17.3 10.1 7.2 3.0 3.8 5.4 82.6 72.4 77.3 22.0 23.9 23.7 5.9 4.8 6.2 Services 20.3 23.8 25.6 Government 31.8 15 ..9 16.6 2.6 4.0 5.3 Total Goods-producing Manufacturing Durables Nondurables Mining & construction Service-producing Wholesale & retail trade Finance, insurance, real estate Transportation & public utilities https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A-19 MONETARY POLICY PERSPECTIVES https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-1 THE LEGACY OF THE 1980s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-2 THE 1980s - A REWARDING PERIOD 5 Industrial production index, 1987=100 120 4 100 3 80 2 60 Real GNP trillions of 1982 dollars 1 1970 '73 '76 '79 '82 '85 '88 '91 40 1970 '73 '76 '79 Payroll employment millions 130 Consumer prices percent change from year ago 16 110 12 90 8 70 4 50 1970 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '73 '76 '79 '82 '85 '88 '91 0 1970 '73 '76 '79 '82 '82 '85 '85 '88 '88 '91 '91 B-3 ... BUT UNEVEN PERFORMANCE Regional employment index, 198204=100 130 Auto sales millions of units 10 U.S. 8 120 110 ' 6 2 0 1983 '85 '87 '89 '91 Industrial production index, 198204=100 200 ... ______ Total 150 '86 '87 '88 _..., .... _____ ~ ·-·--·-· 120 100 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '85 '89 '90 '91* Private residential 160 Consumer goods '85 '84 *First 4 months, annual rate. Defense 125 1983 1982 '83 Construction spending billions of dollars 200 175 75 Foreign makes 4 Southwest 100 90 -~. . ,,,. ·-■--- ,,,,,,. '87 '89 '91 _,.-,. Private ' nonresidential Public 80 40 1982 '83 '84 '85 '86 ----- .. .. '87 '88 '89 '90 '91* *First 4 months, annual rate. B-4 ... AND IMBALANCES DEVELOPED Federal deficit (N IPA basis) Net international investment position percent of GNP 8 billions of dollars 300 4 0 0 -300 iii I l:: _ l:::i:_:i::_1:_1: ::1:: _ 1_:: __l :_ i_:_ 1::_ • -600 -4 -8 1949 '55 '61 '67 '73 '79 '85 -900 '91 1978 '80 '84 '82 '86 ,; !!l!l!!!l!! 11111111111 :·.:'._·: : :':.:·_·:'. : ::':·.::·.,':. : ;~;t~;~; '88 '90* *Estimate. Corporate debt to net worth* Household debt percent 100 percent of disposable income 100 90 80 80 70 60 60 40 1970 '74 '78 '82 '86 '90 50 1970 '74 '78 '82 '86 '90 *Historical cost basis. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-5 THE 1980s - A DECADE OF CONSUMPTION, MUCH FINANCED BY FOREIGNERS Domestic spending vs. output Foreign capital inflow gross domestic purchases as percent of GNP 104 percent of GNP 4 102 2 100 0 98 96 '74 1970 '78 '82 '86 '90 -2 1970 '74 '78 '82 '86 Domestic nonfinancial debt owed to foreigners Net interest paid by U.S. nonfinancial firms percent of total debt outstanding 9 billions of dollars 150 '90 120 7 90 5 60 3 30 1 1970 '74 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '78 '82 '86 '90 0 1970 '74 '78 '82 '86 '90 B-6 ... BUT FLOW OF FUNDS FROM ABROAD WON'T CONTINUE Trade weighted dollar Government bond rates index, March 1973=100 180 percent 15 12 140 9 6 100 3 60 0 1984 '85 '86 '87 '88 '89 '90 '91 1984 '85 '86 '87 '88 '89 '90 '91 Current account and capital inflow Income receipts from and payments to foreigners billions of dollars 200 billions of dollars 150 Foreign ;, capital inflowI~ '._ 100 100 I 0 -100 -200 1960 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '65 '70 '75 '80 .-- 50 Current account balance '85 '90 0 1960 Payments '65 '70 '75 '80 '85 '90 B-7 THE 1980s - CHOSE CONSUMPTION OVER INVESTMENT Personal consumption expenditures Net private domestic investment percent of real GNP percent of real GNP 8 ,... 75 60 6 - 45 4 30 2 - 15 0 0 1950s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960s 1970s 1980s 1950s 1960s 1970s 1980s B-8 1990/91: A PERIOD OF TRANSITION https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-9 1990/91 - PRIVATE DEBT ADJUSTMENT UNDERWAY Net funds raised by nonfinancia• corporations Consumer installment debt billions of dollars, annual rate percent of disposable income 20 300 Debt instruments 200 18 100 16 0 ''---~ Net equity issues,_,; -100 -200 1975 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis '78 '81 '84 '87 '90 14 12 1975 '79 '83 '87 '91 B-10 1990/91 - INTERNATIONAL TRADE ADJUSTMENT PROCEEDING Real net exports and trade weighted dollar Imports and exports of goods and services billions of 1982 dollars 100 index, March 1973=100 175 700 150 600 125 500 100 400 75 300 billions of 1982 dollars Trade weighted ~,,dollar ► 0 -100 -200 1983 '85 '87 '89 '91 1983 '85 '87 Average U.S. productivity growth Merchandise trade balance percent, annual rate 4 Nonfarm 100 '91 billions of dollars, annual rate business sector .._ Manufactu ring 3 ___ ., ; .,. - , Excluding imported petroleum products ~ 0 ~ 2 '89 -100 1 0 1950s https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1960s 1970s 1980s -200 1975 '79 '83 '87 '91.* *First quarter, annual rate. B-11 1990/91 - BUDGET DEFICIT ADJUSTMENT, A STEP IN THE RIGHT DIRECTION Octob.er 1990 budget deficit package: Deficit reduced almost $500 billion over 5 years ;j Outlays cut about $325 billion ~ Revenues increased about $160 billion The October 1990 deficit reduction package billions of dollars 180 135 ii 90 Budget process revamped .~ Spending caps vs. deficit targets ~ Pay as you go process ~ Mini sequesters 45 0 1991 '92 '93 '94 fiscal year Revenue increases '95 The deficit outlook billions of dollars 400 Deficit outlook better with package, but 300 With package Without package Still large this year and next ~ Weak economy w Deposit insurance costs ~ Gulf war https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 200 100 0 1989 1990 '91* '92* '93* fiscal year '94* '95* *Based on CBO estimates of January, 1991. B-12 KEY TO SUCCESSFUL TRANSITION: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-13 1990/91 - SOME MONETARY POLICY CONSIDERATIONS Growth and inflation Oil prices* percent change from year ago 8 dollars per barrel 40 6 30 4 20 2 10 0 0 -2 1986 '87 '88 '89 '90 1986 '91 '87 '88 '89 '90 '91 *West Texas intermediate crude. Total debt and bank credit • percent change, annual rate 12 Bank credit~ ;: =·=: ; 9 M2 percent change, annual rate 10 Domestic nonfinancial debt 8 ' 6 3 6 0 -3 F https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A A J 1990 0 D F 1991 A F A J 1990 A D F 1991 A B-14 1990/91 - MONETARY POLICY RESPONSE Required reserves of depository institutions billions of dollars 75 - All three monetary policy tools used: ~ Reserve requirements cut i1 Discount rate reduced 50 - m. Open market operations eased 25 0 1987 '88 '89 '90 '91* • Average of first 4 months. Discount rate Interest rates percent 8 percent 11 7 9 6 7 5 4 1989 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1990 1991 5 1989 1990 1991 B-15 UNTIL RECENTLY, REAL GNP ABOVE POTENTIAL Real GNP: actual vs. trend trilli.ons of 1982 dollars 5 4 1969-90 trend 3 + Average trend growth percent, annual rate 4 - 2 1947-90 trend 1 0 1947-90 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1947-68 1969-90 0 t947 '51 '55 '59 '63 '67 71 75 79 ~3 ~7 '91 B-16 AFTER 1990/91 TRANSITION, MOVE TO GROWTH WITH PRICE STABILITY https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real GNP and CPI less food and energy percent change, annual rate 15 10 5 :I: : : .!:: : _i: : :_:=:_1:: _!=:: :_1:: : ·::__ 0 _: :!:: :::: ::;:::~::_;:_::: : _: ::_!=:::_ : :. _·: :::: ii i It It ]I Growth -5 1970 '73 '76 '79 '82 '85 '88 '91 * *1991: first quarter growth from year ago. B-17