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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FRB CHICAGO ECONOMIC FORUM Federal Reserve Bank of Chicago Gaylord, Michigan September 15, 1987 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE ECONOMY AND MONETARY POLICY Gaylord, Michigan September 15, 1987 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 Forecast Highlights -Trade improvement - Slower consumption growth - Investment improves - Smaller government spending increases - Further employment gains - Continuing output growth A-2 Total Output of Goods and Services Percent change in real GNP 8 6 4 2 0 -2 -4 82 83 84 85 A-3 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Prices Percent change GNP deflator 8 6 4 2 82 83 84 85 A-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Unemployment Rate Percent 12 10 8 ••••••••••••······•••••••••••••••• 6 41...------r------r----~---~----r------r-------. 82 83 84 85 86 A-5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 88 89 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-6 50 75 100 125 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Net .Export •impact on GNP Increase, billions $82 350 300 250 200 GNP less Net Exports 150 100 50 01,----------r-------r--------,---------..----------.83 84 85 86 A-7 87 88 Personal Consumption Expenditures and GNP Increase, billions $82 250 200 150 Consumption 50 0L.--------"T------r------~-----~--------.- 83 84 85 86 A-8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Personal Consumption Expenditures Percent change 8 6 4 2 82 83 84 85 A-9 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real Consumption Expenditures Percent Change 15 Durables 12 9 6 3 0 -3~------------------------ 1983 1984 1986 1985 A-10 1987 1988 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Disposable Personal Income and the Savings Rate Percent 12 10 8 6 Income 4 2 Savings rate a~---------.-------.----------.------~ 83 84 85 A-11 86 87 Household Financial Position Trillion$ 20 15 Net worth 1O ...... Financial assets Tangible :::::: 5 assets :::::: 1983 ~ 0 ~ ~ 1984 ~ ~ A-12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1985 ~ ~ 1986 ~ 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-13 Prices Index, 1982 =100 140 130 120 GNP deflator 110 100 / / / / 90 / Import prices 80 ',------.-------.------.-----.------r-----.-----,------,-----,- 80 81 82 83 84 A-14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 86 87 88 89 Export and Import Activity Billions of $82 600 Imports ••••••••••••••••••••••••••············· 500 400 Exports 300 200 100 0 -100 -200 Lr------r----""T------.--------.--N-et_e_x~po_r_ts---r--_ _ _- , - - - - - - . - - - - ~ 82 83 84 85 A-15 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Changes in New Plant and Equipment Billions of current dollars 15 10 5 0 -5 -10 All Industries -15 -20..,____ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 1985-86 1986-87 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 -5 -10 Petroleum All Industries Mining Public Utilities -15 Machinery -20-'-------------------------------- 1985-86 1986-87 A-17 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Changes in New Plant and Equipment Billions of current dollars 15 Other 10 Commercial 5 -5 -10 Petroleum All Industries -15 Mining Public Utilities Machinery -20-'------------------------------1985-86 1986-87 A-18 Capacity Utilization: Manufacturing Percent 59 64 69 74 A-19 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 79 84 89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Corporate Profits Billions of current dollars 400 300 200 100 59 64 69 74 A-20 79 84 89 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Real Investment as a Percent of Real GNP Percent 10 Equipment 8 6 4 Non-residential Structures 2 01-r-------.-------.--------.--------,--------r------. 59 64 69 74 A-21 79 84 89 Private Domestic Investment Percent change 30 20 10 -10 82 83 84 85 A-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 Government Purchases of Goods and Services Percent change 15 10 5 Federal -5 '-r------,------.---------.-------r------,- 83 84 85 86 A-23 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 87 ' 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Forecast Summary 1987 1988 Real GNP 2¾ 3 Prices 3¼ 4¼ Unemployment Rate ( 4th Quarter) 6.2 6.0 A-24 Prices and Output 1982=100 140 120 Real GNP 100 80 Deflater 60 40 20 0 '-r-------.----r--------.-----r-------r---------r----....-----...------r- 70 72 74 76 78 80 A-25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 84 86 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis REGIONAL PROSPECTS National economic performance Competitive position A-26 Total Employment Since 1960 Percent change from 1960 90 U.S. -101r---.---.--.---.----.---i--r--.---.--r-.-.-----.---r-r---.--.----,-.----.--.----,-...----r--.-----,,---87 75 78 81 84 72 69 66 63 60 A-27 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Manufacturing Employment Since 1960 Percent change from 1960 30 ,, , ,,' ,' 20 ' '\ \\ ................. '' '' !' __ ,,,, U.S. '' ' \ I '' ' I ,,,,,. _______ _ I '' I '' ' , I 10 \ ' , I '• I I --- ,// ',, ,' I ,I Michigan I I I -10 r--.-----.---.-r--.----,---,----.~r--,--.----.-.-r--.---.-----.--.-r--r---.----.--.-.----.-----~ 60 63 66 69 75 72 A-28 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 78 81 84 87 Relative Manufacturing Wage: Michigan Index, U.S. average= 1.00 1.25 1.24 1.23 1.22 , 1 .21 78 79 80 81 82 83 A-29 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 84 85 86 87 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Michigan Productivity Relative to U.S. U.S. average = 1 1.2 1. 1 ··••••···•••••• ....·········••••••••••••• ·••••········••••••••••• 0.9 i._----.----.--------.----~--~---.-----r---~----.- 78 79 80 81 82 83 A-30 84 85 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Manufacturing Employment Since 1982 Percent change from 198201 20 Michigan 10 U.S. District less Michigan -10 -20 ,-------,---------r-------,r-----,-------.-------.- 82 83 84 85 A-31 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis THE CHALLENGES FOR MONETARY POLICY B-1 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 RELATED ECONOMIC IMBALANCES • Industrial structure • International trade • Federal budget • Savings and investment 8-4 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Industrial Structure Imbalance B-5 Employment Shares: Manufacturing vs. Services Percent of nonfarm payroll employment 30 Services -------------------------- 20 • -----------·············· -------···· --·······--·······---------· ··············-------------- Manufacturing 10 o~-----.---------r---.------.----~---,r----.------r---~--~ 77 79 83 81 1987 estimate based on YTD through July. B-6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 85 87 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Employment Shares: Manufacturing vs. Services Percent of nonform payroll employment 40 30 Services 20 10 ------------------ 47 51 ------------------- 55 ----------------· 59 63 -------------------······· -------- 67 1987 estimate based on YTD through July. B-7 71 75 79 ---Manufacturing 83 87 Manufacturing Shares: Employment vs. Output Percent* 40 Employment 30 Average output share •••••--••••••- 20 _ Output 10 0 ,--.--,r-,--r----.----.---.--.---.-----,---,---r-----r----r---.---.-----.~---r-----r----r---..----r----1r---r------r---r----r---r---.--.-.-.-r~---.---.--.-r-.- 47 52 57 62 67 *Employment: percent of nonfarm payroll employment Output: percent of real GNP B-8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 72 77 82 87 Productivity: Nonf arm Business vs. Manufacturing 1977 130 = 100 Manufacturing 120 110 100 Nonfarm business 90 80 70 60 50 40 'T--.----r--r---.---.--.----.---r-y---i---,.------r-----r----r--.---r-.-------r-----r-----r-----r----r--.--.,.--.---,.......,----,--,--,----,-,-,----r--r---.---.--.--.--,- 47 52 57 62 67 B-9 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 72 77 82 87 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis International Trade Imbalance B-10 U.S. Current Account Balance Billions of dollars 200 150 100 50 -50 -100 -150 60 63 66 69 75 72 B-11 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 78 81 84 87 U.S. Current Account Balance vs. Foreign Capital Inflows Billions of dollars 200 .. .•·.. 150 •' Foreign captial inflow 100 50 •••• .••• / : I . :I .. •••• ... 0 •••••••••••••••••••••••••••••••••••••••••••• ••••••• -50 Current account balance -100 -150 -200 ,----,------,---,---,r--r-~--r------.--.----,--,-------r---r-~-r---r--r--ir--.----.------.----.-.--,--,----,------. 60 63 66 69 72 B-12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 75 78 81 84 87 Net International Investment Position of U.S. Billions of dollars 200- 100 0 -f---L-__,J_____L.______j__-L,____J___j_____J___L,__J_..L_....J.._____i;==-~----r-----.----.- -100 -200 -300J___ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 78 79 80 81 82 B-13 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 83 84 85 86 U.S. Net Exports: Real vs. Nominal Billions of dollars 100 50 -200 82 83 84 85 B-14 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87 88 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Budget Imbalance B-15 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Federal Deficit Percent of GNP I!I ltillfI :::_===:;=•·===:_===!= .·:·=:_==: =====·_•;•=.: : :l: :_· ====:: _i: : : : _1·===:·===_:·:_:=: : ·:·: : : :·= =1'.;:_===:;::. _= : : ::::::::l:_::::··===.:::::: ::~·-·=:_== :_~·-::::_·!:: :::::: ::~:.·: :_i=: : ·===.= : :_:·==: :=_;•.·==:_==:_:·.====_•===·: : :=: ::_l:_:•·_· -2 '-f-=½--,---.------.------.------.----.--.-.----r="-.---.--.---~~~----,---,,-,--p l 1:.:.:. . ,--.i:i:li:,;f l i:.:.:.: l ;;;;;:., l ,---.----.--,--~-r 60 64 68 76 72 B-16 80 84 88 Gross Public Debt of U.S. Treasury Trillions of dollars 72 74 76 78 80 B-17 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 82 80 Fiscal year B-18 84 86 Uses of Total Net Available Savings Percent of GNP 12 9 Private domestic investment 6 3 Federal deficit 0 -3 70 71 72 73 74 75 76 77 78 79 B-19 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 81 82 83 84 85 86 87H1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sources of Total Net Available Savings Percent of GNP 12 9 Domestic savings 6 3 Savings from abroad Net investment abroad -3 70 71 72 73 74 75 76 77 78 79 B-20 80 81 82 83 84 85 86 87H1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ., Savings and Investment Imbalance B-21 Domestic Savings and Investment Percent of GNP 10 Domestic savings 8 6 4 Private domestic investment i---2 0 82 83 84 85 B-22 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 86 87H1 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Personal Savings Percent of disposable personal income 12 10 8 6 4 2 60 64 68 76 72 Note: Horizontal line represents the average 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 64 68 72 76 B-24 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 84 88 Net Funds Raised by Nonfinancial Corporate Busine~s Billions of dollars 200 Debt instruments 100 0 ........... .......... ··••••••••••••••••••••••••••••••············••••••••••••••••••••········ .•. .\ .\ \ Net equity issues ~ \ \ ••••••••••·········· -100 ~-...---,----,-----"T------.---.---,----,----.---.---.-------,---y----r----r-----r- 70 72 74 76 78 B-25 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 82 84 86 Corporate Debt to Net Worth Ratio Percent 100 90 80 70 60 70 72 74 76 78 Note: Net worth measured on historical cost basis B-26 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 80 82 84 86 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 0 80 81 82 83 84 Fiscal Year 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 68 71 74 77 B-29 80 83 86 Trade Weighted Dollar March 1973=100 175 150 125 100 73 76 79 82 B-30 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 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 (1947-198702 and 1967-198702) Billions of 1982 dollars 4000 3000 2000 1000 i..------.------r------r----,----.....-----r------.---~ 47 52 57 62 67 B-32 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 72 77 82 87 Real GNP and Inflation Percent change 15 Inflation 10 5 0 Real GNP -5 70 72 74 76 78 80 B-33 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 82 84 86 88