STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Material for

Staff Presentation to the Federal Open Market Committee
July 8, 1986

Chart 1

Principal Assumptions

Monetary Policy
Growth of M and M3 around the middle of their ranges , in 1986 and similar expansion in 1987. Fiscal Policy
w

Deficit-reducing actions of about $45 billion in fiscal year 1987.

Other
Major features of Senate tax reform bill are implemented.
w

Foreign exchange value of the dollar about 10 percent lower by year-end 1987. Oil prices settle around $16 per barrel.

Char1 2

Federal Budget

Actual
FY 1985

Staff
FY 1986 FY 1987

Cong. Resolution
FY 1987

Outlays Receipts Deficit High Employment Deficit

946 734 2 12 153

984 768 215 168

1003 833 170 135

995
852
143

NA

Key Tax-Reform Features

rn
rn

Phased-in Reduction of Personal Income Taxes Overall Increase in Business Taxes

rn rn rn

Removal of Investment Tax Credit Less Attractive Depreciation Allowances Restrictions on Tax Shelters Corporate Tax Rates Lowered

Chart 3

c
I

Employment*

Average monthly change, thousands

Industrial Production

mTotai Manufacturing (Secondbar)

7

-

Index 1977 100 ­

300

128

200

126

100

124

+
I
1985 1986

0 -

122

I
1985 1986

Auto Sales

r

Millions

of units,

annual rate

Retail Sales

1

Less Autos, Nonconsumer Items and Gasoline

/- 76
- 74

72

1985

1986

-

Housing Starts
Millions of units, annual rate

-

2.0

33 -

Construction**
11.5

1.5

Single-family
1.0

1985
'Adjusted lor strikes.

1986

"Nonresidential constrwtlon put in piace. "Shipments of nondefense capital goods.

11.0 10.5 1985 1986

Chan 4

Real GNP

F

Percent change from previous period

GNP Less Net Exports
Real GNP
3 1985 2.1 1986 2.7 2 1987 3.2

Less Net Exports
3.2 2.3

2.0

1

a1

a2

H2

1985

1986

1987

GNP Deflator -

Percent change from previous F

1985 1986 1987

3.1
2.4

3.1

a1

02

H2

1985

1986

1987

Unemployment Rate

0 4 Level
1985 1986 1987 7.0 6.9 6.6

Chart 5

Auto Production

-

Annual rate, millions of units

Rotary Rigs in Use

i r

I

-

2100

1400

700

1985

1986

1985

1986

Industrial Production Less Motor Vehicles
and Oil Drilling and Extraction
Import Penetration
Index 1977

-

100

Business Equipment and Sonsumer Goods"

Percent

128

1
8

I26

124

1985

1986

Net Farm Income -

Billions of

rs

BGovernment Payments to Farmers

r

Land Prices

1
6 14
1984 1985 198

Index 19i

00

USDA Annual Survey
I60

I40

I20

1984

1988

1980

1982

1984

191

'Imports of capital and consumer goods. excluding motor vehicles and food, relative to corresponding components of PDE and PCE.

Chart 6

Housing Starts -

Millions of units, annual rate

1

-

Annual Totals
Millions of units

2.0 1.5
1.o

Single

Multi

1985 1988 1987

1.07 1.28 1.32

.67 .59 .40

.5

975

1978

1981

1984

1987

Household Formations -

Monthly Mortgage Payment
Millions per rar F nt

20
.
40

I .5

3
0
I .o

.5 '70-'75 '75-'80 '80-'85 '85-'90

I

c

2
0

1976

1979

1982

1985

Buying Conditions for Houses -

-

Index" -

-

Rental Vacancv Rate
Percent -

-

SRC Survey

Multifamily
-8

-100

-

-7

- 50
I I I I I I I I I I 1
1985 1976 1979 1982

-6

I I I I I I I
1976 1979

I

/ I I
1985

1982

'Good time to buy minus bad time plus 1W.

Chart 7

Real Personal Consumption Expenditures and Disposable Personal Income

-

Percent change from previous period

Personal Saving Rate Annual average

PCE
DPI (Second bar)

1985 1986 1987

4.6 4.2

4.0

r

Mortgage Refinancings
Percent

Selected Household Borrowing
Billions of dollars

Share of FHA Endorsements
40

30

20

10

1984

1985

1986

Chart 8

Contracts and Orders for Capital Goods

-

1982 d

irs

-

Commerce Department P&E SUNey for 1988 Percent change from 1985

-

3-month Moving Average
34

Winter
32

Spring

Total Total less Petroleum and Mining

2.3

.2

30

3.7

3.2

28

I
1984 1985

I
1986

Real Business Fixed Investment

Equipment
$I -I I&

Percent change, annual rate

1

lo

r

Total BFI

-

Percent change, annual rate

1986 Q1

- 13.3
- 7.1 - 0.4
2.5
2.4

Q2
II II

-

!i Ii
II II
a1

L! Structures

a2
H2

I
HI H2

1
1984

H2 1987 H1 H2

1986

1987

Cost of Capital-Eq,uipment Office Building Vacancy Rate Index 1981 = 100 Banker, Coldwell Banker. Metro Areas -

1

Percent

I

Without Tax Reform

-----_
I
1987

I
1981

I
1983

I

I
1985

I

Y
-

‘f i
- 20 - 18 - 16
1985 1986

1983

ChaR 9

Nonfarm Inventory Investment
Annual rate. billions of 1982 dollars

- to GNP growth Percentage points annual rate

Contribution

30

1986 Q1 Q2

2.0 -.5 -.4

20

H2 1987 H1 H2

10

.1
.2

a4

a1

02

H2

H2

1985

1986

1987

Financina GaD

r

Annual rate, billions of dollars

Nonfinancial Corporations Capital Expenditures internal Funds

1
I
I
1985 1988

425

350

275

I
1983 1984

I
1987

Net Funds Raised Annual rate, billions of dc Nonfinancial Corporations
Debt

Loans and Short-term Paper Relative to Total Debt
irs

Nonfinancial Corporations

-I

tio

- zoo
I0 0

50

+
0 I
I

100
1987

1985

1986

1977

46 .42 1980 1983 1986

Chan 10

State and Local Government Receipts Billions of dollars Total Federal Receipts Grants Own-Source
1984 1985 1986 1987 540
575
607
637
94 99 105 99 446
476
502
537

State and Local Net Borrowing Billions of dollars

FOF Accounts
150

100

50

1984

1985

1986

1987

State and Local Real Purchases

-Operating SurplusBllllons of dollars
1984 3
1985 1986 2
1987 1.9 15.9 6.2 1.7

1

1984

1985

1986

1987

Federal Government Real Purchases
Percent change, Q4 to Q4

LExcluding

ccc

1

15
10

Real Defense Spendins Change,
Q4 to 0 4 percent

-

7.6 5.9

5

-k

0 -

5

1984 1985 1986
1987

Chart 11

Compensation Per Hour
Percent change, Q4 tc

-

I4

Compensation Percent change, Q4 to Q4

Business

4

1985 1986 1987

3.7 2.9 3.7

2

Employment Cost Index

r
1984

Percent change from year earlier

Employment Cost Index

1

r

Percent change from year earlier 1

Service-Producing

1965

1986

1984

1965

1986

Labor Productivity and Unit Labor Costs

-

Percent change from year earlier Percent change, Q4 to Q4 Productivity

Nonfarm Business

ULC
4.3
1.o

- .6
Productivity

-.
I
1987

1.8 1987 .8

2.9

I
1983 1984

I
1985

I
1986

Chan 12

PCE Energy Prices

Non-Petroleum Import Prices

-

Index, 1982= 100

1

1985

1986

1987

GNP Fixed-Weight Price Index
Percent change from previous p e q x l rGNP Fixed-Weight Price Index

1985

...

.._
1987

I
4 4
3

-

2

I
3.5 24 .
3.4

I

Change, 0 4 to 0 4 percent

-

1

1986

Chart 13

Foreign Exchange Value of the U.S. Dollar
Ratio scale, March 197

I 0

50

25

I0

1

1979

I

I

1981

I

I

1983

I

I

1985

I

7
5

Real Longterm Interest Rates**
Percent

1

1979

1981

1983

1985

*Weighted average against or of foreign G.10 countries using total 1972.78 average trade. *. Long.tsrm government or public authority band rates adjusted lor expected inflation estimated by a 3Emonth centered moving average of actual infiation (staff forecasts where needed).

Chart 14

Industrial Production
Change from year earlier,
11

!O

Real GNP -

0 4 to Q4, pel

I5

United States Foreign Industrial Countries* (Second bar)

0

5

+

,
5 1983 1984 1985 1986 1984 1985 1986 1987

0
-

Consumer Prices

r

Change from year earlier, pf

Consumer Prices

-

Q4 to Q4, percent

United States Foreign Industrial Countries” (Second bar)

1’

1983

1984

1985

1986

1984

1985

L

1986

L 1987

‘Weighted average of the six major foreign industrial Countries using total 1972-78 average trade.

- Canada, France, Germany, Italy, Japan, United Kingdom -

1
4 2

0

ChaR 15

Mexico Real GDP
Change from year earlier, percent
1 4

Current Account Blllions of dollars

1985 1986

- 2.1 - 1.8

I
1963

I

I
1985

I

I
1987

16

I

1987

Other Non-OPEC Developing Countries Real GDP Change from year earlier, percent -

l6
4 2

- Current Account
Billions of dollars
1982 1983 1964 1985 1986 1987

- 61
- 42

- 27 - 26
- 25

- 23

0

1983 1985 1987

OPEC-Real GDP Change from year earlier, percent
1983 1984 1985 1966 1987 0.4

Current Account
us

0
-

10

20 2.5

- 3.0
I

I

I
1985

I
1987

1983

30

Chart 16

Nonagricultural Exports

-

Destination of 1985
US. Nonagriculturai Exports Percent

-

Japan Canada Other Industrial Countries Mexico Other Non-OPEC
Developing Countries OPEC Communist Countries

9
28
30
3

6
19

5

1983

1985

1987

Agricultural Exports

- of 1982 dollars ons

io scale,

Ratio : 918,
billions of dc u s

-

-

Destination of 1985
U.S. Agricultural Exports Percent

18
7
25
8

40

Japan Canada Other Industrial Countries

35

Mexico Other Non-OPEC Developing Countries

5

30

OPEC
Communist Countries

30

7

25

1983 1985 1987

Chart 17

Non-oil Imports

Changes in Price of US. Nomoil Imports Percent, seasonally adjusted annual rates

-

-

Ratio scale, 19t

I00

15

198503 198601 -198403 I98503

Foods, Feeds, Beverages industrial Supplies Capital Goods Automotive Products Consumer Goods Total

-7 - 10
-3 2

15 3 6 15 6

10

105

0
-3

8

Origin of 1985 US. Non-oil Imports Percent Japan Canada Other Industrial Countries Communist Countries Mexico Other Developing Countries 23 22 27

-

1983 Ratio scale, billions of 1982 dollars

r

95 90 1985 1987 Ratio scal billions of ars 350 300 250 200 I50 1963 1965
198;

00

1
4 23

Chart 18

Summary of U.S. Current Account Transactions

-

Billions of Dollars, Seasonally Adjusted Annual Rates

1985
Hl

1986
H2
H1

1987
H2

1. Exports 2. Nonagricultural 3 . Agricultural 4 Imports . 5. Non-Oil 6. Oil 7 Trade Balance . 8. Other Current Account
Transactions, Net

2 14 214 185 187 30 27 339 360 288 325 5 1 35 - 124 - 145 7 -118 9 - 136

227 200 26 370 336 34 - 143

250 222 28 383 348 35 - 133

275 245 30 400 363 37 - 125

9. Current Account
10. Real GNP Net Exports of Goods and Services (1982Dollars)

0 - 138 - 133

5

0 - 125

-108

-146

-135

-112

-92

Chart 19

Forecast Summary

Board Members
Percent change,

Presidents
Range
Median

Staff

a to a 4 4

Range

Medlan

Nominal GNP
1986 1987
3 % t 5% o 5 to 7

4% 6

4% to 6% 6 to 8th

5?4

7%

5
6%

Real GNP
1986 1987 2/ to 2% '& 2 to 4%

2% 3

2% t 3% o 2% to 4

3

3%

h 23 3'A

GNP Deflator
1986 I987

1 'h to 3 l to 3% ' h

2'h 3

2 t 3% o 3 to 4%

2% 3%

2/
'2 3

9verage level, a4, percent

Unemployment Rate
1986 1987 7 t 7.2 o 6% to 7.0 7.0
6.8
6.9t 71 o . 6% to 7 0 . 7.0 6% 69
. 66
.

FOMC Projections for 1985

Reported to Congress Feb. 19, 1986

Range
Percent change, a4 to 0 4

Central Tendency
6 % to 7%
3 to 3%

Nominal GNP Real GNP

5 to 8V2
2 3 to ~

4%

GNP Deflator
Average Ievel,04, percent

2% to 4 %

3 to 4

Unemployment Rate

6 % to 6 %

About 6 '/2