STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Materials for

Staff Presentation to the Federal Open Market Committee
February 11, 1986

Chart 1

Principal Assumptions
-

Monetary Policy
w

Growth of M1 near 7 percent in 1986 and around 6 percent in 1987. Growth of M2 in the range of 7 to 8 percent in 1986 and 1987.

Fiscal Policy
w

Deficit-reducing actions of about $15 billion for FY 1986 budget and an additional $30 billion for FY 1987 budget.

Foreign Exchange Value of the Dollar
Moderate further decline over the course of the projection.

Oil Prices
w

Oil import prices average around $20 per barrel in 1986 and 1987.

ChaR 2

Federal Budget, Fiscal Years

1985
Actual

1986
Staff Administration

1987
Staff Administration

Out Iays

946

978

980

1,001

994

Receipts

734

777

777

834

850

Deficit

212

201

203

167

144

Structural Deficit

:ent of GNP

Billions of

Irs

2alendar Years

60

20

80

40

I
1981

I

I
1983

I

I
1985

I

I

1987

Chart 3

Nonfarm Emolovment . -

-

Average monthly change, thousands

IllOther Ill Manufacturing - (Second bar)

i r

Industrial Production
Index 1977= 100

1

1984

1985

1984

1985

Domestic Auto Sales and Production

-

Millions 01

Retail Sales

-

Billions of

1

rs

-

4
Sales Production

Less Autos, Nonconsumer Items and Gasoline
7 6

73

70

I
1984 1985

I
1984

I
1985

I

Housing Starts and Sales
Millions of units Millions of units

New Orders for Nondefense Capital Goods

1
4.0 2.25 2.00 1.75

r
Total

Billions of dollars

1

I

30
27

3.6 3.2
2.8

24
-

1.50

1984

1985

'
Excluding Aircraft and Parts
1984 1985

21

ChaR 4

Real GNP

r-

Change, Q4 to 04, percent 1

4

2

1970-85 average

1984

1985

1986

1987

GNP Deflator

-

Change, Q4 to Q4, pt

1970-85 average

1984

1985

1986

1987

-

- 8

*\

**--_.
- 6

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

Chart 5

Contributions to Real GNP Growth

-

Selected Components
Private Domestic Final Purc..ases Change in Nonfarm Inventories

Percentage points

4

2

6

-

I
1984 0 2 - 1985 Q4 1986

I
1987

2

ntory.Sales Ratio

I

tio

Manufacturing

1.5

-

I .4

-

Non-auto Trade

-

1.3

I
1979

I

I
1981

I

I
1983

I

I
1985

Chart 6

Real Consumer Spending

Durables

Change, Q4 to 04, percent

-

Change, Q4 to Q4, percer Real PCE Real DPI 5.1 3.9 1.3 3.0 1.9

-

Nondurables and Services (Second bar)
1983 12 1984 1985 8 1986 1987 4

5.3 3.4 2.9 2.6 2.0

1983

1965

1987

Personal Saving Rate

r

Perc l t Saving Rate
-

Annual averages 8

-

6 1986

-

.-*--

4

1987

4.3

I
1973 1977 1981 1985

Auto Loan Delinguencies
Percent

Current Financial Situation*

b n a n c e Companies

1

SRC Survey

1976

1979

1982

1985

1979

1982

1985

*Compared to a year ago. Better minus worse plus I W .

Chart 7

Housing Starts

Total Starts

7

SRC Survey
45 40

-60
50

40

-

, , iT
35 30

30 20 10

25

I

I

I

I

I

I

I

I

I

I

I

I

I

0

LoadValue Greater Than 90%

Rental Vacancy Rate
Percent
1 9

-

Percent of- 1s Ic

1981

1983

1985

1976

1979

1982

1985

Char1 8

Real Business Fixed Investment
Change, 0 4 to Q4, percent

Change, Q4 to Q percer

Real BFI Structures (Second bar)

10

+
0
1987 1983 1985 1987

Capacity Utilization
Index

Cost of Capital

r -i

Index 1980= 1

1
- 1.0

-

\ \ .

I
1980

I
1982

I

I
1984

I

---__
Percent

1986

Oil Drilling

Office Building
Billions of dollars

r
Seismic Crews
-

r-

1
Contracts
18

12

2000

8 -

Vacancy Rate

6

1000 1981 1983 1985

2

I
1981

I

I
1983

I
1985

0

Chart 9

Nonfinancial Corporations

-

--

-c.---_-­

- 200
- 150

- 100

-

50

I

I

I

I

I

I

I

I

I

I

c

- 1.4 - 1.2
/-------

-

1
-

- 1.0

I

I

I

I

I

I

I

I

I

I

- .8

Funds Raised

-

Interest Relative to Income
Annual rate, billions oi ars
?nt

0Debt 110 Equity

200

40

100

+

0
-

1984

1985

1986

1987

35

30

25 1981 1983 1985 1987

ChsR 10

Real Federal Government Purchases

I 0 Total
Excluding CCC

Change, Q4 to Q4, pel -

nt

20

10

+

0
-

Real State and Local Government Purchases

-

Change, Q4 to Q4, pe

t

4

2

0

1983 1984 1985 1986 1987

State and Local Surolus

c

Annual rate, billions of dollars

/
I I
I I

Total

- 30

Excluding Trust Funds

---------I I I I I I I I

- 15

+
0 -

ChsR 1 1

Sectoral Saving Flows
Percent of I 4P -

ss Private Dome

-

20

15

10

5

+ 0

5

u
1985

Debt Relative to GNP
Ratio

1.60

Federal Government
1.20

.80

.40

1975

1978

1981

1984

1987

Chart 1 2

I-

------I

20

1987

2.0

I

I

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I

I

I

I

I

Labor Productivity
1982 dollars per hour

c

A

1973

1977

1981

Compensation Per Hour and Unit Labor Costs
Change, Q4 to Q4, percent

farm Business Sector Compensation per Hour

5
4

3
2 1

1983

1984

1985

1986

1987

Chart 13

Food and Energy Prices

Nonpetroleum Import Prices

-

Change, Q4 to 04, pe

-

Unit Value Index 19

100

PCE Component Deflators

120

Prices and Unit Labor Costs

100

110

1983

1985

19%

Change from year earlier, percent

GNP Fixed-weighted Price Index

1

Chart 14

Foreign Exchange Value of the U.S. Dollar
Ratio scale, March 19:

i00

150

125

Feb. 7

Price Adjusted Dollar
Weighted Average Dollar*/ Relative Consumer Prices
00

u
1980 1982

I

I
1984

I

1
1986

75

Real Long-term Interest Rates*

*

1980

1982

1984

1986

* *-on9

*Weighleo average against or 01 lore gn G.10 C O L n l l es ,song iota 1972 76 aberage
term government or u d b IC a d n o r q Dono ,ales a01-steo lor expecteo ml at on estlmateo
by a 36 rnonln centere0 mor ng average 0 1 act-at nllal on (stall lo(ecast5 nnerg n e e ~ e ~ ~

Chan

15

r

Wholesale Prices
Change from year earlier, percent

Commodity Prices
Change from year earlier, percent

1

pconomist Index

1

1982

1984

1986

U.S. Oil Import Price
Ratio scale, price per barrel

1 5 0

1960

1982

1984

1986

*Weighted average of the six major foreign industrial countries using total 1972-76 average trade

Chart 16

Consumer Prices

-

Change, Q4 to Q4s pi

It

WForeign Industrial Countries*

- WUnited States (Second bar)

-t t 6

r

Real GNP
Change, Q4 to (14, p i

WForeign Industrial Countries* United States (Second bar)

1984

1985

1986

1987

1984

1985

1988

1987

Real GDP Growth-Non-OPEC Developing Countries

r

Change, Q4 to Q4, percent

1

1982

1984

1986

External Balances-Non-OPEC Developing Countries

r

Billions of dollars

a
Current Account

1+
40

0
-

20

80 80

I
1982

I

I
1984

I

I
1986

I

Weighted average of foreign G.10 countrles using total 1972.78 average trade.

Chart 17

r

Change from year earlier, percent

-

Change from year earlier, p

nt

20

2
0

10

10

+

0
-

+
0 1 0

1 0

!
O

1 0

1984

1986

-

?O
L
O
1984 1986

Nonagricultural Exports

r

Change from year earlier,

c

Agricultural Exports
nt

-

Change from year earlier,

nt

20

20

10

Volume

10

+
0 10

+
0 10

!O

!O

3 0

3
0

1984

1986

1984

1986

*Unit value divided by the average consumer price level in other G.10 countries expressed in U.S. dollars

Chart 18

Non-oil Imports
Change from year earlier, per -

nt

-

.

10

Relative Price*
/--\,

+
0 -

10

1982

1984

1986

Change from year earlier, percent -

L O

!O

I0

+

0
-

1 0

*Unit value

divided by

US. GNP fixed-weighted price index.

Chart 19

External Balances
Seasonally adjusted, annual rate, billions of ars

1

\

Surplus
Deficit

+

\

0
-

50

t

I00

I50

1

I
1982

I

I
1984

I

I
1986

I

Real Net Exports of Goods and Services

r

Seasonally adjusted, annual rate, billions of 1982 -

us

50

+

0
-

50

00

I
1982

I

I
1984

I

I
1986

I

50

Chart 20

U.S. Capital Transactions
-

( Billions of Dollars; Net Inflows

= +)

1982

1983

1984

1985'

1986'

1. Net Private and Official Capital Flows

- 24

29

77

88
98

104 100

2. 3. 4. 5.

Private Capital Flows
US. Banking Offices

- 17 - 45
14 13
-7 33

30
19 14

82 23 34 25 -5
30 -107

33 62 3

33 68
-1

Bonds and Stocks Direct Investment and Other Non-Bank Flows Transactions

-4
-1 17

6. U.S. and Foreign Official

- 10
31 -119

4
34

7. Statlsticai Discrepancy

8. Balance on Current Account
e Estimated P Projected

-8

-46

-138

Chart 2 1

Impact of Alternative Assumptions

i 986

i 987

1988

Change in Real GNP (%)

Higher Money Growth Lower Oil Prices Less Fiscal Restraint
Change in GNP Deflator (Yo)

Higher Money Growth Lower Oil Prices Less Fiscal Restraint
Unemployment Rate (Q4 level, %)

- '/2
0

'/ 4

- */2

1

Y 2

2% 0 1

Higher Money Growth Lower Oil Prices Less Fiscal Restraint

- 'h 0 0

-1 - 'h - '/2

- 11 h - 1/2

- 1h

Higher Money Growth = M1 growth rate 1 % % higher than staff forecast. Lower Oil Prices = Oil prices $5 per barrel lower than staff forecast. Less Fiscal Restraint

= No additional deficit-reducing actions beyond FY 1986 actions.

Chart 22

Forecast Summary for 1986
-

Board Members Percent change, annual average Range Median

Presidents Range Median

Stall

Adminis. tralion

Nominal GNP

5 to 7

6%

6t08V2

7'/4

6 '/2

8.0

Real GNP

2% to 4

23/4

3 to 4%

3%

3

4.0

GNP Deflator

2% to 4

3%

3 to 4%

3%

3'/2

3.8

Average level, percent

Unemployment Rate

6% to 7

6%

6V2 to 7

6

6Y 2

6.7

FOMC Projections for 1986 Reported to Congress July 16, 1985
Range
Percent change, Q4 to 0 4

Central Tendency

Nominal GNP Real GNP GNP Deflator
Average level,Q4, percent

5% to 8%

7 to 7%
2% to 3%

2 to 4
3 to 5%

3% to 4 % 6% to 7%

Unemployment Rate

6 % to 7%