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SILAS KEEHN REMARKS
WBBM BUSINESS BREAKFAST
PALMER HOUSE
JANUARY 29 ,· 1987
FINANCIAL FORECASTS FOR 1987
I.
tNlRODUCTION
-
I WAS
ASKED TO COMMENl
ON
lHE
INlERNATIONAL DEBl ISSUE
A.
.
(RETORl
DEPENDS ON TOPIC WORDING OR MODERAlOR
INlRODUCTION)
B.
GENERAL OPENING
1.
A VERY IMPORTANT AND DIFFICULT MATTER
2.
BUT SHOULD BE PLACED IN PROPER PERSPECTIVE
3.
WHILE COMPLEX AND TROUBLESOME, PROGRESS BEING
MADE AND MANAGEABLE
Q.
OUTLOOK MORE POSITIVE THAN MANY PERCEIVE IT TO BE
A.
Cµi1:d.t~ !
II.
TEND TO FOCUS ON NEGATIVE ASPECTS - NOT FULLY
APPRECIATE PROGRESS THAT HAS BEEN MADE
~ NEW PROBLEM
t!••
A.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
FOR 1987
IN CURRENT CONTEXT
WBBM BUSINESS
1/29/87
PAGE 2
1.
EMERGED WITH DIFFICULTIES MEXICO EXPERIENCED IN
SUMMER OF 1982
A.
J.
VERY DIFFICULT PERIOD
RECORD HAS BEEN GOOD
1.
IN SPITE OF REPEATED DIRE PREDICTIONS
DEFAULTS - DEBTORS CARTELS - J:;'$:~;;;_··::. ;~:.)--~<
ft-H ~G. eJ ~C.-\ ~tJc;;;._ - k'--~~ ' : 1-k.Y (~
A.
2.
RECURRING CHALLENGES HAVE BEEN MET FOR ALMOST 5
YEARS
/
C.
THE
.
MACHINERY
1.
MORE IMPORTANT ROLE OF THE IMF AND WORLD BANK HAS
._._ -~ (.
.• -~-.
I.~ o .
.....
\.,,..,, 1........\ , P , . ~.
(MECHANISM FOR HANDLING) IS IN PLACE
EMERGED
A.
EXTERNAL ELEMENT - CAN ENFORCE NEED FOR
INTERNAL DISCIPLINE AND CORRECTIONS
2.
ESSENTIAL
COOPERATION/COORDINATION
BETWEEN
CENTRAL BANKS/COMMERCIAL BANKS HAS DEVELOPED
A.
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Federal Reserve Bank of St. Louis
CRITICAL PART OF MACHINERY
.
,.~--<---,' (, (..;;
B.
WBBM BUSINESS
1/29/87
PAGE 3
J ) - ( ~ ,,_.,g w ,;;£. V' ~L"-' i p .r.,.,J.L,.J\V
COMMUNICATION HAS BEEN EXCELLENT - NO
SURPRISES
3.
HAS BEEN TESTED REPEATEDLY - IT
4.
PAST RECORD SUPPORTS EXPECTATION THAT WE WILL BE
WORKS
ABLE TO DEAL WITH THESE ISSUES
---,:. Cv-tJZlN ~ '""--~ ~ .- /
Ill.
CONTINUED PROGRES~-~l
SO REI
AIEP Jp~)MPROV~D AND IMPROVING
WORLD WIDE ECONOMIC SITUATION
A.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
WITH PASSAGE OF TIME THE ECONOMIC ENVIRONMENT WITHIN
WHICH THESE ISSUES MUST BE MANAGED HAS SHOWN PROGRESS
1.
IN THE MAJOR ECONOMIES OF THE WORLD,
THE
EXPANSION CONTINUES
2.
STARTING AT HOME, EXPECTATION BY MOST FORECASTERS
THAT U.S. ECONOMY WILL CONTINUE TO GROW AT MODEST
YET POSITIVE PACE
·3.
FORECASTS OF ECONOMIC GROWTH FOR MOST DEVELOPING
COUNTRIES WHERE DEBT CONCENTRATED ARE POSITIVE IMF PROJECTIONS AS BASIS FOR COMMENT
'
WBBM BUSINESS
1/29/87
PAGE 4
A.
DEVELOPING
COUNTRIES WITH
DEBT-SERVICING
PROBLEMS UP JUST UNDER 31 IN 1987
B.
DEVELOP I NG COUNTRIES WI TH OUT DEBT -SERVICING
PROBLEMS UP ALMOST 41 IN 1987
C.
THE 15 MOST HEAVILY INDEBTED COUNTRIES UP
3-1/2%
D.
4.
BUT NON-OIL DEVELOPING UP ALMOST 4%
EXPORT OP PORT UN IT I ES FOR THESE COUNTRIES THIS
YEAR POSITIVE, SAY, 4-6%
5.
BUT MORE NEGATIVELY, THOSE DEVELOP I NG COUNTRIES
HEAVILY DEPENDENT ON OIL EXPORTS
A.
CONTINUE TO FACE DIFFICULT PROBLEMS
B.
PARTICULARLY IF THEY EXPERIENCE NEGATIVE
ECONOMIC GROWTH THIS YEAR AND REDUCED LEVELS
OF EXPORTS
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Federal Reserve Bank of St. Louis
WBBM BUSINESS
1/29/87
PAGE 5
6.
UNDER
THOSE
DIFFICULTIES
CIRCUMSTANCES,
GENERATING
WOULD
FOREIGN CURRENCY
- - - - --SERVICE DEBTS - -NlitHOI &' ---·•-=-=;...IF
Tll;il 3 1
A.
JC
TO
COUNTft¥ lN
U1ft -.
THIS WOULD BE PARTICULARLY TRUE IF OIL PRICES
.
DECLINE
B.
HAVE
. }...,,, 1 ,1.,,..(0..--li<-1-i-J~
~
,.6 .... ·, ~~-~
M'J ~ ~
~
- ",,......,-.
~ _,,_.,,,.. r - - ~ • . . • .
BUT EVEN HERE,
A CONTINGENCY HAS BEEN
PROVIDED FOR - PROVISIONS INCLUDED IN LAST
RESTRUCTURING
_t _ _
)J._'1.,)t. CCV~
C.
IN OT~R
V..r--i
4
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
T:
l /.
~~. .MECHANISM
-vv<J
(..,.,c,-) -r-
I
IN PLACE °"TV
~~ ~
,,-C..:... /
,
FROM AN EXPORT PERSPECTIVE, DECLINE OF DOLLAR HAS
NOT HAD AS MUCH IMPACT ON SOME DEVELOPING
COUNTRIES AS IS THE CASE WITH GERMANY AND JAPAN
A.
MANY DEBTORS LIKE KOREA - NOT A DEBT PROBLEM
- TIED TO THE DOLLAR
B.
MANY OTHERS - MAJOR SOUTH AMERICAN ARE
LOOSELY TIED
WBBM BUSINESS
1/29/87
PAGE 6
(1)
TEND TO DEVALUE
(2)
IN FACT, DEPRECIATED RELATIVE TO DOLLAR
{ 3)
EXPORT POSIT IONS WON I T BE AS ADVERSELY
AFFECTED AS DECLINE IN THE VALUE OF THE
DOLLAR
w✓v
rz.-~ ,J
pcr--n.:.r·o ~-- . }(··
AGAINST
OTHER CURRENCIES MIGHT
SUGGEST
to
B. WE TALK ABOUT LDC EXTERNAL DEBT
----------
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Federal Reserve Bank of St. Louis
AS A BROAD
SUGGESTING THAT THE WHOLE CATEGORY IS
BAD -
CATEGORY JUST NOT
RIGHT
1.
MANY
2.
TOTAL EXTERNAL DEBTS OF DEVELOPING COUNTRIES
ARE SERVICING THEIR DEBTS ON SCHEDULE
SOMETHING OVER S900 BILLION
3.
OF
THAT TOTAL,
SOME S575 BILLION INVOLVES
COUNTRIES EXPERIENCING REPAYMENT DIFFICULTIES
4.
BREAKING THE NUMBER DOWN FURTHER, S240 BILLION
OWED BANKS WORLD WIDE, ABOUT SlOO BILLION TO U.S.
BANKS
WBBM BUSINESS
1/29/87
PAGE 7
5.
CERTAINLY A SIGNIFICANT AMOUNT BUT LOOMS A LITTLE
LESS THREATENING THAN THE LARGER NUMBER
C.
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Federal Reserve Bank of St. Louis
AT SAME TIME, POSITION OF U.S. BANKS LENDING TO LDCS
HAS IMPROVED
1.
_ /JJt'# 5
'.:", _-l-' -h.. 11•-e..,j
7 o L t..-J <.. V1J ,;;,,...-1.._µ ~ _ _ . , /
TOTAL U.S. B ~ S .'AS PERCENT OF CAPITAL FROM
2801 TO 1751 FROM 1982 TO 1986
A.
BANK CAPITAL POSITIONS HAVE IMPROVED OVER
\ ~~~
~
PAST FEW YEARS-~(C--A.{~,(
.r 7' ,)a-~-<-~,·~
;;~~~-<t.i.l
B.
IN A BETTER RELATIVE POSITION TO DEAL WITH
PROBLEM
C.
AND CAPITAL EXPOSURES TO BANKS TO INDIVIDUAL
COUNTRY RISKS DOWN SHARPLY FROM 1982 TO 1986
(1)
BRAZIL FROM ABOUT 301 OF CAPITAL TO 201
(2)
MEXICO FROM ABOUT 351 TO A LITTLE OVER
201
(3)
AND
SIMILAR
TRENDS
FOR
ARGENTINA,
VENEZUELA, PHILIPPINES AND NIGERIA
WBBM BUSINESS
1/29/87
PAGE 8
IV.
DON'T WANT TO SUGGEST THIS PROBLEM BEHIND US
A.
MUST CONTINUE TO MAKE PROGRESS AND ACTIVELY MANAGE
1.
DEPENDENT ON CONTINUED ECONOMIC GROWTH
IN
DEVELOPED WORLD
,·I
A.
SPECTER OF PROTECTIONISM VERY TROUBLESOME
B.
TRADE WAR EVEN IF SEEMINGLY FOCUSED ON
DEVELOPED COUNTRIES OR DEVELOPING WITHOUT
DEBT PROBLEMS
(1)
V.
WOULD UNSTICK THE SITUATION
CONCLUSION
A.
ON A NUMBER OF GROUNDS)THEN)INTERNATIONAL DEBT ISSUE
DOES NOT LOOM QUITE SO LARGE
1.
MECHANISM IN PLACE AND WORKING
2.
ECONOMIC ENVIRONMENT FAVORABLE
3.
LENDERS IN BETTER AND IMPROVING POSITION
B. HOPE THESE COMMENTS WILL HELP TO PUT THIS ISSUE IN A
MORE CONSTRUCTIVE PERSPECTIVE
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Federal Reserve Bank of St. Louis
•
•
•
•
•
WBBM BUSINESS
1/29/87
PAGE 9
REVIEW OF PAST FEW YEARS
I.
HAS BEEN A GOOD ECONOMIC CYCLE - \S ~-l'-
ff.~ ...J Cl~
(~~T::z-~
.•
A.
C.
LENGTH
1.
NOW IN THE FIFTH YEAR
2.
COMPARATIVELY - A LONG CYCLE
A.
CERTAINLY VERY SERIOUS AT THE TIME
B.
PARTICULARLY HERE IN MIDWEST
EMPLOYMENT
1.
PAYROLL EMPLOYMENT OVER lOOMM FOR FIRST TIME
A.
TOTAL EMPLOYMENT EVEN HIGHER
(.;'!/_· rt.JA~ ~ - tJ . /
.,,,.,.-.---.......
y-··-·
·-
·--·
~ - - - - -
2:.
8-l/2MM NEW JOBS SINCE LAST PEAK (1980)
3.
ABOUT 12MM NEW JOBS SINCE BOTTOM OF RECESSION
(1982)
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Federal Reserve Bank of St. Louis
•
WBBM BUSINESS
1/29/87
PAGE 10
4.
AVERAGE SOME 200,000-220,000 MONTHLY
5.
THREE
CONSECUTIVE MONTHS
OF
INCREASES
IN
MANUFACTURING SECTOR
D.
E.
F.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
UNEMPLOYMENT
1.
6.71 LAST MONTH
2.
HIGHER THAN LIKE - NEED TO MAKE PROGRESS
3.
BUT, AGAIN, EMPLOYMENT SIDE HAS BEEN POSITIVE
INFLATION
1.
VERY POSITIVE RESULT THIS FAR INTO CYCLE
2.
LUCKY HITS - OIL/FOOD/IMPORTS
3.
MAJOR ACCOMPLISHMENT
INDUSTRIAL OUTPUT
1.
RECORD LEVEL
2.
SHIFT IN EMPLOYMENT TO SERVICES
3.
BUT STILL PRODUCING MANUFACTURED PRODUCTS AT
RECORD LEVELS
WBBM BUSINESS
1/29/87
PAGE 11
II.
SPECIFICS
A.
B.
C.
AUTOS - OVER llMM IN '86
1.
EXPECT LOWER IN '87, SAY, 10.3/10.4
2.
314TH CONSECUTIVE YEAR OVER lOMM
HOME BUILDING
1.
ABOUT 1.8MM IN 1986
2.
EXPECT 1.6-1.7 IN 1987
3.
415TH CONSECUTIVE YEAR OVER l.SMM
WHEN THESE TWO ACTIVITIES ARE OPERATING AT THESE
LEVELS - BASIC ECONOMY PRETTY GOOD
Ill.
NET - THIS HAS BEEN AND IS A BETTER ECONOMIC ENVIRONMENT
THAN WE GIVE IT CREDIT FOR
A.
CERTAINLY VERY UNEVEN
1.
GEOGRAPHIC AREAS (MIDWEST)
2.
SECTORS
OF
MANUFACTURING)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ECONOMY
( AGRICULTURE,
HEAVY
WBBM BUSINESS
1/29/87
PAGE 12
B.
NOT A NORMAL CYCLE - WE HAVE BEEN GOING THROUGH A
PERIOD OF SIGNIFICANT ADJUSTMENTS
1.
ESCALATING LEVELS OF INFLATION DURING LATE
THE BLOW-OFF
2.
1
1
70S -
79- 1 80
SINCE THEN, HAVE EXPERIENCED DISINFLATION EVEN
DEFLATION
3.
4.
/ J '[_,. ")
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
,,._,/'1
5.
VERY RUGGED PROCESS - H~~DLY ~N EVEN TRANSJTION.
~~ •.P,,~ 'lVVi''- ' ·r-·
ou.:-~ ,.._.(-t\--U '"",,,.,
NOT AN EVEN STAIRCASE~R--OOR ,NTJ.R.E. ECONOMY ON
(>, Ct-,, .J..
- Al~cC.c-.£,s:r;- U'Ydf~ c:.-Loi.c·,,J
T~ WA¥ l:H> - .QR ON TIIE WA f DOWN .lr-f e~-,-J ~ tJ c'-b
TO BELABOR THE POI NT - AGRICULTURE THE CLASSIC
EXAMPLE
A.
LAND VALUES/COMMODITY PRICES ESCALATED ALMOST
OUT OF REASON AS INFLATION ROARED UP
B.
BUT HAVE FALLEN PRECIPITOUSLY AS INFLATION
{AND
llE.RY IMPORTANTLY AS EXPECTATIONS ABOUT
INFLATION) RECEDED
,
WBBM BUSINESS
1/29/87
PAGE 13
C.
AS A CONSEQUENCE. AGRICULTURE IS EXPERIENCING
A VERY TRAUMATIC ADJUSTMENT AS THEY BECOME
ACCUSTOMED TO THIS NEW ENVIRONMENT
t.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
BUT IN THE BROAD CONTEXT OF THE WHOLE COUNTRY. PRICE
STABILITY DO.ES. MATTER
1.
THE REDUCTION LEVEL IN RATES OF INFLATION - ONE
OF THE
MORE
SIGNIFICANT ACCOMPLISHMENTS - HAS
PLACED OUR ECONOMY ON A MUCH BETTER FOOTING
2.
~
POSITIVE ASPECT OF THIS ECONOMIC CYCLE
*
*
*
*
*
WBBM BUSINESS
1/29/87
PAGE 14
COMMENTS RELATING JO ECONOMIC OUTLOOK
I.
EXPECT A CONTINUATION OF GROWTH PATTERN EXPERIENCED IN
1986
,
A. MODEST BUT POSITIVE
1.
B.
BROAD SENSE RESULTS NOT UNLIKE LAST YEAR
UNDERNEATH THAT BROAD EXPECT AT ION, SOME IMPORTANT
SHIFTS - FIRST, SOME CAUTIONARY COMMENTS
C.
GROWTH IN CONSUMPTION WILL DECLINE
1.
CONSUMER LED US OUT OF RECESSION
2.
SUSTAINED US INTO EXPANSION - UJilJr.J,~,....J.t~'\---~
~trvc~·~-G".--+ ) ~ " '
ABILITY TO MAINTAIN PACE HAS TO BE OPEN TO
3.
QUESTION
4.
CONSUMER INSTALLMENT DEBT AT VERY HIGH LEVEL
5.
PERSONAL INCOME UNDER PRESSURE
6.
CONSUMER MIGHT WELL BEGIN TO RESTRAIN EXPENDITURES
D. CAPITAL SPENDING/BUSINESS INVESTMENT
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Federal Reserve Bank of St. Louis
WBBM BUSINESS
1/29/87
PAGE 15
1.
UNDER PRESSURE
2.
TAX BILL : I T C / ~ ~ '!J!P~ECI All ON -
3.
MANUFACTURING: LOW OPERATING RATIOS.
--
,1-.-~<..,._,,.,,,e.J
NO PUSH FOR
CAPACITY BUT SPENDING FOR PRODUCTIVITY/EXPENSE
REDUCTION WILL CONTINUE - OFFERS SOME POTENTIAL
4.
OVERBUILDING IN SOME COMMERCIAL REAL ESTATE
CATEGORIES - OVERDUE FOR CORRECTION
E.
F.
GOVERNMENT SPENDING DOWN
1.
FISCAL DEFICIT BEGINS TO MODERATE
2.
HAS BEEN VERY STRONG STIMULUS OVER PAST FEW YEARS
3.
BUT SPENDING AT STATE/LOCAL LEVEL STRONG
CONSUMPTION, INVESTMENT, GOVERNMENT PURCHASE.,.._~ LOWER
.l: (rufl.)
II.
THE AREA OF IMPROVEMENT - INTERNATIONAL TRADE
A.
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Federal Reserve Bank of St. Louis
SHIFT HAS BEEN SLOW IN COMING
1.
NO PROOF THAT HERE YET
2.
NOVEMBER TRADE NUMBERS DISCOURAGING
zv-~-,
&-.;)
l,J (
H
-i.--~~
.1 ,
i......
WBBM BUSINESS
1/29/87
PAGE 16
B.
BUT HAVE HAD SIGNIFICANT DECLINE IN VALUE OF DOLLAR
(D.M.- 451; YEN- 401)
1.
HAS TO PROVIDE BETTER TRADE OPPORTUNITY TO THOSE
COUNTRIES
2.
AND REDUCE IMPORTS FROM THEM AS PRICES RISE
3.
ADMITTEDLY,
THIS
DOESN'T
DEAL
WITH
OTHER
EXPORT ING COUNTRIES WHOSE CURRENCIES HAVE NOT
RISEN
4.
BUT, NET, EXPECT GOOD INCREASE IN EXPORTS;
REDUCTION IN RATE OF IMPORTS
Ill.
OUTLOOK CONTINUES TO BE POSITIVE ALBEIT MODEST
A.
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Federal Reserve Bank of St. Louis
CERTAINLY UNEVEN - PARTICULARLY IN MIDWEST - MANY NOT
BACK TO 1979-80 LEVELS
1.
SECTORS HARD HIT IN DISINFLATIONARY PROCESS AGRICULTURE
2.
EFFECT OF RISING VALUE OF DOLLAR ON EXPORTS
WBBM BUSINESS
1/29/87
PAGE 17
IV.
A.
HEAVY MANUFACTURING
B.
MACHINE TOOLS
C.
AGRICULTURE
B.
CONTINUE TO GO THROUGH A DIFFICULT ADJUSTMENT PROCESS
C.
BUT STILL IN A BROAD SENSE OUTLOOK FAVORABLE
THERE ARE SOME IMBALANCES IN THE SYSTEM
A.
DEBT THE COMMON DENOMINATOR
1.
FISCAL DEFICIT (TRADE DEFICIT)
2.
CONSUMER DEBT LEVEL
3.
I
'-/
B.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
CORPORATE DEBT LEVEL
-
,
Ji._;)-(
C
-•·
-C • . :---: •
,..-6.
..,
--~
c_,,_. {'V
_,I u.,:2.r. ,J
IF WE MAKE PROGRESS IN CORRECTING THEM
1.
WE COULD BE ESTABLISHING BASIS FOR A LENGTHY AND
POSITIVE CYCLE
*
*
*
*
*