STRICTLY CONFIDENTIAL (FR) CLASS 11-FOMC

Materials for

Staff Presentation to the Federal Open Market Committee
July 9, 1985

Principal Assumptions
Monetary Policy
Growth of M1 of around 8% percent during 1985 and 5% percent in 1986.

Fiscal Policy
Deficit-reducing actions of around $50 billion for FY 1986.

Other
Foreign exchange value of the dollar declines at an 8 percent annual rate.

Growth in GNP and Money

-

Change from previous period, annual rate,

I
1982
1983

I
1984

I

1985

Federal Budget

-

Unified budget, fiscal year, billions of dollars

1984

1985

1986

Outlays Receipts Deficit Structural Deficit

842
666
175
126

940
732
208
160

969
784
185
158

Employment

-

Change, annual rate, millions of persons

Industrial Production

1
Manufacturing Other
3

-

Index 1977=100

1
1
1983 1984
0
1985
0

0
-

+

1983

1984

1985

I

r
-

Real Retail sales
Billions of 1972 irs

Automobile Sales

-

Millions of units

36

3
4

Domestic
1983 1984
1985

Housing Permits and Sales
'ns of units
Millions iits

Orders for Nondefense Capital Goods
38
.
Billions of irs

>
1983 1984 1985

&
Sales Permits

3.5

2 7

3.2

2 4

?.9

21

1983

1984

1985

Real GNP and Domestic Spending

-

Change, (14 to Q4, p~

nt

0 Domestic Spending
Real GNP 1983 1984 1985 1966 4 6.3 5.7 2.2 2.5 8

Real Domestic Spending 8.0 8.7 3.4 2.1

1983

1984

1985

1986

Unemployment Rate
Q4 Level 1983 1984 1985 1986 8.5 7.2 7.1 7.1

GNP Deflator

r

Change, 0 4 to Q4. percent

1
4

1983 1984 1985 3.8 3.6 3.5 3.8

2

1988

1983

1984

1985

1986

Real Gross National Product

r

Percent Change from trough
7

I
-2 0

I
Trough

I

I
+20

I

I

+4 0

I

I
+60

I

I

+aQ

I

I
+10Q

Industrial Production

r

Percent change from trough
7

16

8

+
0 -

-20

Trough

+20

+4Q

+80

+lo0

Current Cycle

r
Real GNP Domestic Purchases GNP Less Net Exports Domestic Final Purchases Domestic Purchases Less Inventory Investment

Percent changes, annual rates

First 6 Quarters 7.1
8.8

Next 4 Quarters

2.0

3.3 3.8

6.7

*Includes cycles wlth troughs in 1954. 1881. 1070, 1975.

inventory Investment
Inventory-Sales Ratio

-

.

.....

...

itio

I .5

I.4

I .3

1981

Real Inventory Investment
Annual rate, billions of 197:

ws

20

11

I

10

I

+
0

1
0

I
1982 1983

I
1984

I
1985

I

1988

Consumption and Disposable Income

r

Change, annual rate, percent

real PCE

1

Net Tax Payments to Personal lncor

Real Net Worth Per Household
Snt

-

I

Index. end of 1980=100

13

104

12

11
0

, u

1981 1983 18 9: 1981 1983 198

98

Consumer Sentiment

Auto Loan Delinquencies
Index 1966=100

Michigan Survey

Finance Company

I

ent

I0 0

2.5

-80
2.0
60
1.5
1979 1982 198! 1977 1981

I!

Housing Starts

r

Millions of units, annual rate

1

Mortgage Rate
?nt

Mortgage Payment as Percent of Disposable Income
?nt

18

46

Mortgage Delinquency Rate

2 , 16 14

42

36

12

34

1981

1983

1985

-
-

Multifamily Vacancv Rate

-

Percent

-

- 7.5

-

- 1.8 - 1.2

- 7.0 - 6.5
- 8.0

I 1
1975

I

l

I

l

I

l

I

(
1985

1977

1979

1981

1983

I

I 1

I

I

I

I

l

l

I

Real Business Fixed Investment

Change, annual rate, percent

1

10
5

1983

1984

1985

1986

Plant and Equipment Spending Plans Commerce Spring Survey
Increases, percent

Actual 1984 Total Manufacturing
Commercial

Planned 1985
9.2 12.7 10.6 .8

16.0 19.1 17.4 9.0

Commercial Other

1985 Outlays
Billions of dollars

ComDuters and Office Machines
Billions 01 us

Office Building and Vacancies
rs

1 0

12

3 0

8

20

A

1979

1981

1983

1E

/

Manufacturing

Ratio of Capital Outlays to Internal Funds
atio

1.5

1.o

Total Funds Raised
Annual rate, billions of dollars

Short-term Debt to Total Debt Outstanding

c

----­
- 50 - 45

100

+ 0

I
1984 1985

I
1986

I

Real Federal Government Purchases
Fxcluding CCC

1983

1984

Real State and Local Government Purchases

-

Change, (I4 to 04. pt

-

1983

1984

1985

1986

State and Local Surplus
Annual rate, billions of dollars

bxcluding Trust Funds

1

I
1978

I

I
1979

I

I

I
1982

1

I

1
1985

I

1984 1985

Billions of dollai -

1986

Federal Government State and Local Households Business

199

202 49
247

181 38 256 220

37
242 257

228

Total

734

726

696

Memo: Debt growth rate, percent

14.0

12.1

10.4

Employment
Change. Q4 to 04. millions of Derwns

I

bonfarm Payrolls
Manufacturing

I
4
2

1983

1984

1985

1988

Labor Productivity
1972 dollars per hour

onfarm Business Sector

8.0

7.5

1973

1977

1981

1985

Compensation Per Hour and Unit Labor Costs
Change from year earlier, percent

honfarm Business Sector

1
- 8

-

4 , - , - -

------

Business Product Prices and Unit Labor Costs
Change from year earlier, [ mt Percent change, Q4 to Q4

ULC
12
1983 1984 1965 0.0 1.9
4.6

Prices
3.7 4.0 3.5

8

1988

3.5

4.0

4

1973

1977

1981

1985

r

Oil Import Prices
Dollars per barrel

Non-oil Import Prices

1

External Balances

r

Seasonally adjusted, annual rate, billions of dollars

+ 0
-

50

00

50

Real Net Exports of Goods and Services
Seasonally adjusted, annual fate, billions of 1972 dollars

50

25

+ 0
25

I
1981

I

I
1983

I

I
1985

I

Foreign Exchange Value of the U.S. Dollar

I

r
Weighted Average Dollar */

March I �

100

150

I
/ /

130

Price Adjusted Dollar

I10

90

I
1979

I
1981

I

I
1983

I

I
1985

Real Long-term Interest Rates""

Percent

!
9

6 3 3

I
1979

I
1981

I

I
1983

I

I
1985

*Weighted average against or of foreign 0.10 comtries using total 1872.76 average trade. "*Long~term government or public authority bond rates adjusted for expected inflation estimated by a 3B.manth centered moving average of actual inflation (staff forecasts where needed).

Real GNP
Change from year earlier, perc It 9

-

6

3

t

0
-

3

I
1981

I

I
1983

I

I
1985

I

Consumer Prices

-

Change from year earlier,

nt

5

'2

9

6

3

I
1981

I

I
1983

I

I
1985

I

* Weiphted average Of foreign G.10 countries using total 1972.76 averape trade

Nonagriculturai Exports

r

Change from year earlier, pe ­

mt

15

10

5

0 5

+

10

15

I
1981

I

I
1983

I

I
1985

I

U.S. Merchandise Exports
Seasonally adjusted, annual rate, billions of llars

c

250

200

150

I0
0

50

-

Exports and Imports Relative to Real GNP

-

-

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

1966

1972

Capital Goods Imports Relative to Real PDE

Excluding Motor Vehicles

Excluding Food and Vehicles

Percent

-

-

-14

-

-12

-

- 10

1
1981 1983 1985

I

I

I

I

2
I

- 8

- 6

1981

1983

1985

Volume of Non-oil Imports
Ratio scale, billions of 19: llars

i50

i30

10

90

70

Real GNP
Change from year earlier, percent

1

I
1981

I

I
1983

I

I
1985

I

Forecast Summary

Board Members
'ercmt change, 0 4 l o 0 4
Range Median

Presidents
Range Median

Staff

Nominal GNP
1985 1986 6 % to 7 6 'h
7

6% to 7% 6% to 8%

7 7%

53A
6 'h

5% to 7%

Real GNP
1965 1988

2% to 3% 2to3%

2%
2%

2% to 3%

2 3~

2 '/4 2%

2 to 4

3

GNP Deflator
1985 1986

3% to 4 3 to 4%

33 h
4%

3% to 4% 3% to 5%

4
4%

3%

3 Jh

Lvnrage level. percent

Unemployment Rate
1985 1986 6% to 7%
7 7Y 4

7 to 7%
6% to 7%

7 'A

6% to 7%

7

7 7

FOMC Projections for 1985
-

Reported to Congress Feb. 20, 1985 Range
Percent change, 0 4 to 0 4

Central Tendency
7% to 8

Nominal GNP Real GNP GNP Deflator
Average level. 0 4 , percent

7 to 8%

3% to 4 %
3 to 4 %

3% to 4
3% to 4

Unemployment Rate

6% to 7%

6% to 7