Material for

Staff Presentation to the Federal Open Market Committee
February 9,1988

Chart 1

PRINCIPAL ASSUMPTIONS Monetary Pollcy Objectives
1. Policy aims at maximum sustainable output and employment

growth, avoiding a significant acceleration of inflation.
2. Policy does not seek to constrain exchange rate movements, unless they seriously jeopardize attainment of objective 1.

Implies:
0

Interest rates unchanged to a bit lower through midyear, but moving up moderately thereafter.
M2 and M3 in the middle portion of the tentative ranges for 1988 and growing more slowly in 1989.

0

0

The dollar likely will decline at a moderate rate through the end of the forecast period.

Flscal Policy

No significant changes in fiscal policy beyond those contemplated in the FY88-89 deficit-reductionpackage agreed to in December.

Federal Budget Deficlt

Billions of dollars

-

FY87

FY88
108 144 157 159

FY89
72 136 176 146

Original Gramm-Rudman Target Revised Gramm-Rudman Target Congressional Budget Office Board Staff

144

ma.
148 148

FEDERAL BUDGET DEFICIT
B l l l h ot ddlam
250

p

P

w

200

150

100

50

I
1982

I
1983

I
1984

I
1986

I
1988

I
1987

I
l!

0

Chad 3

ECONOMIC GROWTH

Percentchange from previous period

F=
PRICES

- Percenttochange 04 Q4
QNP GNP less Net Exports

Real GNP

l G N P less Net Exports (Second bar)

1986 1987 1988 1989

2.2 3.8 2.1 2.8 3.2

.6
1.7

I
1987 1888

I
1989
Percent change from previous period

2

I

GNP Deflator W C P l (Second bar)

i 8r

Percent change Q4 to Q4

-

Deflator

CPI

1986

2.2 3.3 3.5 3.8

1.3 4.4

n

1987 1988 1989

4.2
4.7

1987

1888

Economic Projections for 1988

r
Percent change. Q4 to Q4

FOMC Range
Central Tendency Adminlstration

Staff

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

4 to 6 M

5% to 6

6.4 2.4
3.9 5.8

5.7

M

to 3

2 to 2 M
3% to 3% 5% to 6

2.1
3.5
6.0

2M to 4

Unemployment Rate

5M to 6%

Chart 4

[
2.4

PAYROLL EMPLOYMENT

'Thousands, average monthly change

I ManufacIurlng
mother ,Second bar)

I

1
n 9 6

500

124

400

122

300

120

200

118

100

116

1987

1988

114

AUTO SALES AND INVENTORIES
Millions o unlts f Millionsof units
12

AUTO PRODUCTION
Millions of units, SAAR

2.1

1.8

1.5

3

0 1.2 -

1986

1987

5 -

1986

1987

BUSINESS INVENTORY-SALES RATIOS
Ratio 1.5

MANUFACTURERS NEW ORDERS
Ratlo
7

-

Billions of dollars Excluding aircraft
1.7

1.45

47
19e6

1982 dollars

Dec.

- 110
- 105

-

Manufacturing
1.65

1A

- 100 - 95
I I
90

1.35

1.8

less Autos
1.3 1987
I

1.55

REAL CONSUMER SPENDING

r

Percent change from prevlousperiod

- PercenttochangeQ4 04
Total PCE
1988 1987 1988 1989 4.1

Saving Rate*
4.3 3.8 4.7 4.4

.6
1.8 1.7

* Annual average

PERSONAL INCOME

Perwnt change, Q4 to Q4

I Nominal Income

1 lo
8

-

Percent change Q4 to Q4

-

Real DPI
1986 3.6
2.0
1.2

-

Nornlnal Disposable

6

1987 1988 1989

4

1983

Real Disposable

Income
1984

-I

--

1.8

2
# C _ .

1985

198%

1087

1988

1889

NET WORTH

P6rw-dof DPI
5

4.8

r

CONSUMER SENTIMENT
SRC SLIMY

Index

Jan.

100

4.2

-80

38 .

lS83

1986

1987

-80

Chart 6

HOUSING STARTS
Mllilons o unlts, AR f
7

HOME SALES

- 1.6

Mlllions of units. AR 1.5

M l l i h of unHs, AR
4.5

4

I
1985
1986

0.8

0.9

3.5

0.4

0.6

3

I
1987

0

0.3

1985

1988

1987

2.5

MORTQAQEPAYMENT ON NEW HOME Percent of PersonalIncome

MULTIFAMILY RENTAL VACANCY RATE
Peraent

24

20

16

~

I

L

1965

1986

1987

REAL RESIDENTIAL INVESTMENT

r
LJ
1988

Percent change from end of previous period
20

Residential investment

-

Net change Q4 to Q4

-

Total
10

1986 1987

12.5 -2.9 -.2 2.3

6 I
1987

1988 1989

I
1988

1
1989

10

Chad 7

REAL BUSINESS FIXED INVESTMENT

Equipment Structures

Percent change, Q4 to Q4

-

10

Percent change 0 4 to 04 Total

-

(Second bar)

0’ -

I1
I
1908
1W7

10

1988 1989
2.7

I
1988

I
1989

1 20

Capacity Utilization Rates

r

Percent

1978-80 high

Dec. 1986

Dec. 1987

Manufacturing Durable Steel Nondurable Paper Chemicals Textiles
* Preliminary unpublished data

86.5 86.3 100.3 87.0 92.7 82.9 88.3

80.2 77.3 64.7 84.4 93.9 81.2 90.8

82.2 79.8 89.6* 85.8 97.8* 84.4* 94.1*

r

CONTRACTS
NonresidentialConsbudion m o n t h moving average

VACANCY RATES
Billions of dollars Percent

/*1

.,,

-

Percent
20

ColdwellBanker
15

r10

Industrial

5

1 1 1 1 1 1 1 0
1981 1963
I985

1987

Charl8

REAL STATE AND LOCAL PURCHASES

r
1986 1987
1988

Percent change, Q4 to 04
6

Billions of dollars

-

Surplus less Trust Funds
4

7.5

-6.4 -4.6

3.5
1989
"

REAL FEDERAL PURCHASES

r

Peroent change. Q4 to Q4 - .

HDefense =Nondefense less CCC (Second bar)

1
- 5

Percent change 0 4 to Q4

-

lo

Total Purchases
-.2

; 1986 1987
1988

2.9 -5.0
-1.4

1989

5

Total Funds Raised

r

Percent of GNP
120

I"

State and Local Government

1971

1974

1977

1980

1986

1989

"OKUN'SLAW"

-

Change in unemploymentrate, Per-ntagepointS

LABOR PRODUCTIVITY Percentchange. Q4 to Q4

-

8

Nonfarm Business

4

2

-o+

2

4

8

8

1983

1985

1987

1989

0

Growth in Real GNP. percent
LABOR FORCE G R O W Percent Pemntchange, Q4 t Q4
o
66

UNEMPLOYMENTRATE

-

Pemnt
12

Quarterly

68

-

Parlidpation Rate

.

10

84

62

80

111111

1983 1985 1887

8

8

11970 1 1 1 1 1
4
1 1981 1983 1985 1987 11111 I77
'

Chati 10

COMPENSATION PER HOUR AND CONSUMER PRICES

-

Percent change from four quarters earlier

Compensation per Hour

-I*

r
Percent change 0 4 to 0 4

-

Real Norninr 1985 1986 1987 1988

.8
1.3 -1.9

4.8
3.4

2.8 4.2

-.2

1983

1884

1985

1986

1987

1988

1989

EXPECTED INFIATION

percent change Over nexll2 months

CAPACITY UTILIZATION

I

-

Percent

SRC Survey of Households

90

Manufacturing

85

80

75

1983

1884

1985

1986

1987

70 983 1985 1987 1w9

c at 1 h r1

EXTERNAL BALANCES
Billions of 1982 dollars

-

Billions of ddlars

-

; - \
40
Real GNP Net Exports

Surplus
Deficit
/

0 -

+

/ /
/

/ -

40

/

/

80
/

/ /

/

/*

80

/

/

/

120

/

120

180

1983

Current Account
/

/ - - - - - & -

-

160

1985

1987

1989

Components of Real Net Exports of Goods and Services
Percent change, Q4IQ4

1986

1987 17

1988 15 19 7

198: 15 17

Exports of Goods and Services Goods Services imports of Goods and Services Goods Services

6
10

20
11
8 6
18

-2
9
11 1

11

2
2
0

6
5 12

FOREIGN EXCHANQE VALUE OF THE U.S. DOLLAR

-

Ratio scale, March 1973-100

1

170

r

A

Price Adjusted'" Dollar

I
1980

I
1982

I

I
1984

I

I
1986

I

I
1 088
Percent

70

REAL LONG TERM INTEREST RATES ***

I
1980

I

I
1982

I

I
1984

I

I
1986

I

I
1988

3

*Weightedaveraga agahd a d foreign G-10wuntries using total 1972-76 average bade. ** Aqusted by relative wmumer prioes. *** Muilllateral tdewdghted averege of Lagterm gcwernment w public authorily bmd rater adjusled for expected idlatbn estknated by a SSmonth cmtered moving average d actuai inlbtiar (&If fwecss(s where needed).

C h d 13

Recent Trends in Interest Rates
UNITED STATES

-

10-Year US. Treasury Bond Constant Maturity

10

Federal Funds
V

I

I

I

I

I

I

I

I

I

I

I

J

F

M

A

M

J

J

A

S

O

N

D

I

I

I

J

F
1988

I

1987

-
BellwetherQovemment Bonds

-7
- 8
- 5

- 4

I I I I
I

- 3
I I I I I
I

I

I

I

2

Average of PubllcAuthority Bonds

- 7

- 8

\ -”\

- 5

\

Call Money
h

- 4
#. \\, 2, ‘-

I I
I

- 3

I

I

I

I

I

I

I

I

I

I

I

2

Chart 14

ECONOMIC ACTIVITY

CANADA, JAPAN, AND UNITED KINQDOM

-

Pemnt Change, Q4 to 04

Real GNP

=Total

Domestlc Demand

(Second bar)

I

‘i: -I4
lWQ
8

L
1885
1888

1Q87

1888

QERMANY, FRANCE, AND ITALY *

Percent Change, Q4 t Q4 o -

Real GNP
w ~ o t aDomestlo Demand (Second bar) i

5 4 3

I
1885

I
l8 Q6 1987

I

n ila i
1Q8I

UNITED STATES
Real GNP B T o t a l Domestic Demand (Second bar)

Percent Change, Q4 to Q4

I
18 95
*W

I
1988

I
1887 1988
1989

e g W n v q e uahg 1882 QNP.

Chart 15

r=
=All

ECONOMIC ACTIVTTY: WORLD
US. Real GNP
Foreign Countries Real GNP * (Second bar)

Percent Change, Q4 to Q4

L
1985

L
1986
1987

L
19� 11

CONSUMER PRICES

-

Percent Change, Q4 to Q4
6

I States United I industrialCountries '* Foreign

(Second bar)

5

4

L

I

1985 1986 1987 * Wdghtod average using U.S.non-agricullural e m s . 1878-83.
**Weighted average udng 1982 GNP lor the six major loreign induslriai cantries.

L

1BE

I

2 1 0

3

Chalt I S

NONAGRICULTURALEXPORTS"

Percent change, Q4 to Q4

-

Ratio scale, bllllons of 1982 dollars

Ratio scale, billions of dollars

Volumes of Nonagricultural Exports*
350

1986

1987 9 29
49

300

1 . Industrial Supplies

9 13
31

2. Capital Goods
Buslness machines

250

3. Automotive
4. Consumer Goods
5 . All Other

-1
15

22
21 21

200

14

6. Total Nonagricultural 10

22
150

AGRICULTURAL EXPORTS
RaNo scale. billions of 1982 dollars Ratio scale. billions of dollars

1985

1987

1989
Ratio scale. billions of dollars

150

OIL IMPORTS
Ratlo scale. MBD

4c

8.1
40

Volume

­ -

90
60
70

7.2 36
Volume /

36 6.3

60
50

/32

32

5.4

28

Value

28

4.5

24

1985
*

1987

19E

24

3.6

Excludinggdd.

40
30 1985 1987 1989

20

Chalt 17

Prices of Non-oil Imports
Percent change, Q4 to Q4 1986
1 . Food

1987

Volumes of Non-oil Imports*
Percent change, Q4 to Q4 1986
1 . Food

-

1987
7

-1

9
-1

-3
11
6
-Q

2
9 16
44

2. industrial Supplies
3 . Capital Goods
Business machines

2. Industrial Supplies
3. Capital Goods
Business machlnes

9
-8

19

35

4. Automotive

10 7

5

9

4. Automotive

5
12

4

5. Consumer Goods
6. Total Non-oil
NlPA fixed-welghted indexes

5. Consumer Goods
6. Total Non-oil

-2

6

7

10

6

NON-OIL IMPORTS
140

-

- 140
Deflator
/*

Ratio scale, billions d 1882 dollars

Ratio scale. billions of dollars

r440

400

1

/

130

/ / /

/ -

130

120

/
/

- 120

360

/
0

Excluding Business Machines
/

/
/’

/

- 110

/ /
/

320

/

- 100
I 1989

90

280

:; l :J
m

I

1985

I

I

1087

I

240

1885

1987

1089

chart 18

EXTERNAL BALANCES
Billions of ddlars
80

80

100

120

140

160

180

1984

1986

1988

200

U.S. Capital Transactions

-

Billions of Dollars, Net inflows = 1985 106 40

+
e

f

1. Private Capital, net
2.

1986 04 18 71 2 -7
24

1987 93
47

1988 75 30 40

U.S. Banking Offices

3. 4.

Bonds and Stocks1 Direct Investment1 Other Flows

60
5

35
4 7

5

5.

1
18 -8

0
20

6. Statistical Discrepancy
7. U.S. and Foreign Official Assets, net

18 53

33

54

Memo:

0. Current Account
9. U S . and other G-10 Purchases of Dollars

-1 16 -1 7
-10

-141 10

-1 64

-149 na na

95 152

10. Estimated Total Net Official Accumulation of Dollar Assets

42

1. Transactions wlth flnance affiliates In the Netherlands Antilles have been excluded from dhect Investment and added to forelgn purchases of U.S. securltles.

Chart 19

Alternative Scenarios for the U.S. Economy
Percent change, Q4 to Q4, except as noted
1988 1989

A. Staff Forecast
1. Real GNP

2.1

2.8 1.7 4.7 -131 1.9

2. Total Domestic Purchases

0.6
4.2 -146 1.9

3. Consumer Prices
4. Current Account Balance'

5. Real GNP in Other G-10 Countries2

B. Unchanged Dollar with Unchanged Policies
Devlatlons from Forecast 1. Real GNP 2. Total Domestic Purchases -0.1 0.1
-0.1

-0.7
0.2

3. Consumer Prices
4. Current Account Balance'

-0.8
-9

-1 -0.1

5. Federal Funds Rate3

-0.7 0
0.5

6. M2
7. Real GNP in Other G-10 Countries2

0
0.1

C. Unchanged Dollar, Tighter U.S. Monetary Policy
Deviations from Forecasl 1 . Real GNP -1.2 -1.2

-3.3
-2.9

2. Total Domestic Purchases
3. Consumer Prices
4. Current Account Balance'

-0.1
8

-1

.o
14

5. Federal Funds Rate3
6. M2
7. Real GNP in Other G-10 Countries2

2.3
-2.0 -0.1

3.0
-4.0 -0.1

1. Bllllons of U.S. dollars. G 4 level. I 2. Weighted average using total 1972-76 average trade
3 . Percentage points. c14.