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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FRB ECONOMIC FORUM CHICAGO Federal Reserve Bank of Chicago Lake County, Illinois December 8, 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 The Economic Outlook for the United States A-1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Major Considerations Stock market Large trade deficits Large capital inflows Large government deficits Integrated 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 Personal Consumption Expenditures Percent change 8 6 4 2 82 83 84 85 A-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Real Consumption Expenditures Percent Change 15 Durables 12 9 6 Non durables i Services 3 ' -3-'---------------------------1983 1984 1985 1986 A-5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1987 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Disposable Personal Income and the Savings Rate Percent • 12 10 8 6 4 2 Savings rate Oi..-------.-------.---------.-------r 83 84 85 A-6 86 87 Fixed Investment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Percent change 20 15 10 5 vv ~ <loo vv I r 0 i<'~~ ( w w -5 - 10 82 83 84 85 Note: Change from year - ago period , 1982 dollars A- 7 86 87 88 Fixed Investment Billions of 1982 dollars 500 Non-res . 400 300 200 Resid . 82 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 84 85 A- 8 86 87 88 Corporate Profits Billions of current dollars 400 300 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 200 100 59 64 69 74 A- 9 79 84 89 Capacity Utilization: Manufacturing Percent 59 • 64 74 69 A-10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 79 84 89 Business Fixed Investment https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Percent change 30 20 10 Equipment 0 Structures -10 -20..__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 82 83 84 85 Note: Percent change from previous year, 1982 dollars A-11 86 87 88 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-12 Export and Import Activity Billions of ·$82 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 600 Imports ·····•••••••••••••••• •••••·····•••••••• 500 400 Exports 300 200 100 0 -100 _ 200 ~----r-----.-----,-------,-N-e_t_ex~p-o_rt_s,----,----,----, 82 83 84 85 A-13 86 87 88 Prices Index, 1982= 100 140 130 ••••••• ••• •••••• ... ••••• GNP deflator 120 110 Import prices 80 L.------.-------.--------,------,-----,------r-------,----~---~ 80 81 82 83 85 84 A-14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 89 Net Export Impact on GNP Increase, ~illions $82 350 300 250 200 GNP less Net Exports 150 100 50 O'T---------,---------,----------,r----------,-----------r 83 84 85 86 A - 15 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real GNP Changes Average 85/86 vs. 87 /88 Personal consumption Investment Net exports Gov't purchases Total -50 -25 25 0 Billion$ A-16 50 75 100 125 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Government Purchases of Goods and Services Percent change 15 10 5 Total •••••••• ••••••••• ......... ............ 0 ............... ••••············ ·········•··········· ................... .................. ........... ··········· ·-. ··----------------.... Federal -5 I.,--------.----------.--------,--------~-------~ 83 84 85 86 A-17 87 88 Forecast Highlights - Trade improves Consumption slows Investment improves Government spending slows A - 18 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Total Output of Goods and Services Percent change in real GNP 8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6 4 2 -2 82 83 84 85 A-19 86 87 88 Prices Percent change GNP deflator 8 6 4 2 82 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 84 85 A- 20 86 87 88 Unemployment Rate Percent 12 10 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 8 ·•••••••••••••••············· 6 4'.-----.----.----r----r----.-----.------,- 82 83 84 85 86 A-21 87 88 89 Prices and Output 1982=100 140 120 Real GNP 100 Deflator 60 40 20 0 'r----r---.--------.-----,--------,------r------,----r---~ 70 72 74 76 78 80 A-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 84 86 88 REGIONAL PROSPECTS National economic performance Competitive position A -23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Total Employment Since 1960 Percent change from 1960 90 U.S. 80 70 District less Illinois 60 50 Illinois 40 30 20 10 -10 'r--.--r-,--r----.---.----r-r--.-----r-----r-r---r---r--.-r---.---.----r-r---.---.--,--,---.--~~ 60 63 66 69 72 A - 24 75 78 81 84 87 Manufacturing Employment Since 1960 Percent change from 1960 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 30 ......... 20 •••\\..... U.S. ..··•',.......... -- ............ . •. ......·- 10 ._,, , District less Illinois -10 Illinois -20 -30 "r---,--.-----r---,-~--r--.----r--r---r-~--r---.----.--.---r-~--r--,--.-----r--,.---.----~--~~ 60 63 66 69 72 A-25 75 78 81 84 87 Relative Manufacturing Wage: Illinois Index, U.S. ·a verage= 1.00 1.08 1.04 1.02 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 78 79 80 81 83 82 A-26 84 85 86 87 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Non-Manufacturing Employment Since 1982 Percent change from 198201 20 15 10 Illinois 5 -5 ' r - - - - - - , - - - - - - - - r - - - - - - r - - - - - - , - - - - - - - r - - - - - - . - 82 83 84 85 A-27 86 87 88 Private Services Employment in Illinois Index, 1948= 100 400 Personal and business services 300 ..··••••• .... ••••••• .... •••••···•••••• •••••• •••• ....... •••••• 200 ·······•••···•••• ••••••••••••••• ....... ··••••••••• ••••••••••••••••• ~ --- F.I.R.E _ ,.-♦-·-·-·-·-·-· .--::;;-::--...._ _,,,,.--- -•-•~,,;,,,_.,.....:-::-__. Trode ~ ......lliiiliiiuiia;•i;:i;_~·~-:_,.....~~~~~~~;~-;~;;::::;;:::::::;;;;;::::::::::;;::;;;;;;;;;;::::::::::=:::=:::=::::::::::---100 t1 T.C.U. 01.,-----r-------.-------,------,------.-------r-------.-------~ 48 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 53 58 68 63 A-28 73 78 83 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE CHALLENGES FOR MONETARY POLICY 8- 1 Stock Prices CS & P 500) 1941-43 == 10 400 300 200 100 47 53 59 65 71 B-2 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 B-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 B- 7 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 B-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 75 72 B-10 78 81 84 87H1 U.S. Current Account Balance vs. Foreign Capital Inflows Billions of dollars 200 150 .. ..····••' •••• Foreign capital inflow 100 50 ..... I I ..1· •• ...... 0 •••••••••••••••••••••••••••••••••••••••••• .••• •••• -50 Current account balance -100 -150 -200 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 'T----r---r-r-~---r---r-r-~---.---.--.---.-----.--.--..--,-----.--.--..--,-----.--.--..---r-----r--.----. 60 63 66 69 72 75 B-11 78 81 84 87H1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Net International Investment Position of U.S. Billions of dollars 200 100 o+-----L-..J,...__J_ __J__..L.__~-L-------L.--L-_..J.____.__L.......c::=~---r---.---.- -100 -200 -300..___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 78 79 80 81 82 B-12 83 84 85 86 U.S. Imports and Exports: Nominal Index, 198-Sq 1 = 100 140 Imports-Nominal 130 120 Exports-Nominal 90 L , - - - - - - , - - - , - - - . . - - - - - - - - - - - r - - ~ - - . . - - - - - - - - - - - r - - ~ - - ~ - - - - - r - - - - - - . - - ~ 85 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 86 B-13 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U.S. Imports and Exports: Real Index, 1985q 1 = 100 140 130 Imports-Real 120 Exports-Real 110 100 90 ',--------y-----r---..-----r----.----,,----.---~---,.---____.--~-- 85 87 86 8 - 14 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U.S. Net Exports: Real vs. Nominal Billions of- dollars 100 50 Nominal -50 -100 Real -150 -200 82 83 84 85 B-15 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Budget Imbalance B-16 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Deficit Percent of GNP 8 6 4 2 -2 60 64 68 76 72 B- 17 80 84 88 Gross Public Debt of U.S. Treasury Trillions of dollars 72 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 74 76 80 78 B- 18 82 84 86 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Total Interest on Debt Percent of budget outlays 20 18 16 14 12 10 76 78 80 82 Fiscal year B-19 84 86 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 • Average for first three quarters. B-20 79 80 81 82 83 84 85 86 87• Sources of Total Net Available Savings Percent of 'GNP 12 9 Domestic savings 6 3 Savings from abroad Net investment abroad -J-'------------------------------70 71 72 73 74 75 76 77 78 • Average for first three quarters B-21 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 79 80 81 82 83 84 85 86 87• Domestic Savings and Investment Percent of GNP 10 Margin Dome st ic (Domestic savings savings~-~~ less investment) 8 6 4 Private domestic investment 2 o~...........82 83 84 85 • Average for first three quarters. B-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Personal Savings Percent o·f disposable personal income 12 10 8 6 4 2 60 64 68 72 76 Note: Horizontal line represents the overage value from 1960 to 1981 B-23 80 84 88 Consumer Installment Debt Percent of disposable personal income 22 20 18 16 14 12 60 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 64 68 72 76 B-24 80 84 88 Net Funds Raised by Nonfinancial Corporate Business Billions of dollars https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 200 Debt instruments 100 ....-·-"\ . ······ •····..····..........................--.......... .,0 ~ - - - - - . . : . . : = : . . . . __ _ _~---..;=----;_,II,::,__~...-.,--:: •••~ - _ _ ; ; , . -_ _ _ _ _ __ Net equity issues \ ...............···•••• "-··· -100 L,..----.--r--r-----r--~-.------r-~---,,------r--~--Y--.---.---,-----r--r-------r 70 72 74 76 78 • Average for first two quarters 8-25 80 82 84 86 87• 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Corporate Debt to Net Worth Ratio Percent 100 90 80 70 60 70 72 74 78 76 Note: Net worth measured on historical cost basis B-26 80 82 84 86 88 POLICY IMPLICATIONS 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 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B-28 85 86 87 88 89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Domestic Spending vs. Output Gross domestic purchases as a percent of GNP 103 102 101 99 98 65 67 69 71 73 75 • Average for first three quarters. B-29 77 79 81 83 85 Trade Weighted Dollar March 1973=100 175 150 125 100 73 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 76 • 82 79 B- 30 85 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis DOMESTIC POLICY GOALS Economic Growth with Price Stability B-31 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 B-32 68 71 74 77 80 83 86 89 Consumer Prices Percent change from year-ago 16 14 12 10 8 6 4 2 0 60 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 64 68 72 B- 33 76 80 84 88