Materialfor

Staff Presentation to the Federal Open Market Committee
June 29,1988

Chart 1

Policy Assumptions
-Federal Reserve seeks to curb inflationary pressures.

*No additional steps are taken to cut the federal
budget deficit through FY89.

Financial Conditions
Interest rates rise, probably by a percentage point or more between now and next spring. Rate increase induces a rise in monetary velocity - M2 grows around 6 percent in 1988 and 4 percent in 1989. - M3 grows faster than M2 in both years. .The dollar depreciates moderately on balance over the projection period.

c ai 2 hl

ECONOMIC ACTIVITY

Percant change, SAAR Percent change Q4 to Q4 Dome!

0 DornestlcSpending (Second bar)
1987 1988 1989 1987 1988 1989

GNP
4.0

Spend
3.4

2.9 2.1

1.7 .7

Q4 level

1986 1987 1988 1989

6.8
5.9 5.7 5.9

INFLATION

OFlxed-Welght GNP Index O G N P Deflator (Second bar)

Percent change, SAAR
8

Percent change t0 Q4
6

FixedWeigM Prices
1987 1988
4.0
4.3 4.2

Deflator
3.3 3.7 3.8

4

2
1989

0
1987

1988

1989

Chart3

-

REAL PERSONAL CONSUMPTION EXPENDITURES AND DISPoSABLE INCOME Percent change from four quarters earller
7 10

Saving Rate
Annual average

1983
- 5

5.4

1984 1985

6.2
4.5 4.4 3.8 4.5 4.6

I
1983 1984

0

+

1986 1987 1988

I
1985

I
1986

I
1987

I
1988

I
1989

1989
5

HOUSEHOLD NET WORTH

RaUo to DPI

CONSUMER SENTIMENT Conference Board

Index

125

4

100

2

Michigan Survey
75

0
1983 1984 1985 1986 1987 19

50

HOUSiNG STARTS

-

Mllllons of units. annual rate

-

1.5

Total Stark Millions of units,
annual rate 1983 1.71

-

1

1984 1985
3.5

1.77 1.74 1.81 1.63 1.46 1.38

1986 1987 1988

I
1983 1984

I
1985

I
1986

I
1987

I
1988

I
1989

1

1989

Chart 4

NONFARM INVENTORY INVESTMENT
Average annual rates, 1982 dollars 75

Total
Average annual rates, 1982 dollars 198704

50

52
38 47

25

198801

U
I
1988

0 1989

+

02

H2

37
18

I
1989 Ratlo

25

REAL INTEREST RATE *
1.5

BUSINESS INVENTORY-SALES RATIOS

rlQe2
dollars

Ratlo

1
Trade less Autos

1.75

-

1.7

1.65

1.6

1986

1987

1988

1988

1987

1988

1.55

* 90 day paper rate minus prior 6-month inflation rate for WI Intermedale g o d s excluding food and energy.

September 1987 to ADril 1988 - Current Cost Data

RECENT INCREASES IN NONFARM BUSINESS INVENTORIES

-

In billions of dollars

In percant

-

Total excludlng retail auto Manufacturing Industrial materials, nondefense capital goods Wholesale Machinery and metals Retail Apparel General merchandise. amliances. furniture

61

5.3
4.4 6.0 8.9 13.8 4.6 0.0 4.9

24 14 24 10 13

0
6

c at 5 hr

REAL BUSINESS FIXED INVESTMENT

- 20 - 10 1988 1989

Total BFI Percent change

2.3

r

NONDEFENSE CAPITAL GOODS ORDERS &month movlng average Bllllons of dollars Excluding alrcrafl and parls

r

CONTRACTS 6-month movlng average NonresldentlalConshudon

Bllllons of dollars

1
1988

6'2

1986

1987

-."
Ratlo
10

FINANCING GAP

Billions of dollars, annual rate

INTEREST COVERAGE *

1
Capital Outlays

5oo
400

Nonflnandal Corporatlons
8

300

6

Internal Funds

200

I l l l l l l l l l l l l l 100
1977
1981

1985

1989

1977 2 -

t

1
1981 1985 1989

4

FEDERAL BUDGET DEFICIT
Billions of dollars

Fiscal Year
1988 1989

Greenbook Forecast
158
157

Gramm-Rudman Target Trigger
144 136

n.a.
146

REAL FEDERAL PURCHASES
Deferme
ONondefense less CCC (Second bar)

Percant change. 4 4 to a4 - .

1
8

Percent change 04toQ4

Total Total Purchases ex. CCC

l6

1987

0.9

6.4

0

+

1988 -6.2 1989 -0.4

- 4.0 - 0.3

1987

1989

8

REAL STATE AND LOCAL PURCHASES

Percent change. 4 4 to 4 4

Surplus less Ttust Funds
Billions of dollars
1987 1988 1989

-

- 7.7 - 4.8
1.8

1988

1980

Chart 7

EXTERNALBALANCES
Billions of 1982 dollars Billions of dollars

+ 0 -

\,

surplus

+

0 -

40

40

80

80

120

120

160

160

I
1983

I
1985

I

I
1987

I

I
1989

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

1986

1987 17

1988

1989 16

Exports of Goods and Services

6
10

14
17

Goods Services Imports of Goods and Services Goods Services

18 14 9 7 19

18

-2
9
11

8 3

14

5

2
7

3
10

1

Chad 8

-

FOREIGN EXCHANGE VALUE OF THE U.S. DOLLAR

Reno scale, March 1973 = 100

-

170

- 150
Weighted Average'

-

Price Adjusted"

130

110

I
1980

I
1982

I

I
1984

I

I
1986

I

I
1988

70

REAL LONG-TERM INTEREST RATES"'

Percent
12

I

I

I

I

I

I

I

I

I
1988

1980 1982 1984 1986 'Weighted average against or of foreign G-10 counhies using total 1872.76 averagetrade. ** Adjusted by relative consumer p b s . *'* MuMlataral hadeweighted average of long-tern government or pubb authodty bond rates adjusled for expected inflation estimated by a BsmOnVl centered moving everwe of actual inflation (stsnlorecash, where needed).

chut 0

Economic Activity
CANADA, JAPAN, AND UNITED KINGDOM Percent change, 0 4 to 0 4 FRANCE, GERMANY, AND ITALY ' Perant change, 0 4 to 0 4

r

1
Total Domestic Demand

7

' ' '\ ''.
Gross National Product

'.'
' \

4

'X

3

-

1986
1987 1986 1989

ALL FOREIGN COUNTRIES **
Percent change, 0 4 to 0 4

UNITED STATES Percent change, 0 4 to 0 4
7
6

5

, National Produ Gross
, '

4

2

Total Domestic Demand 'X

'.
1989

1986

1987

1986

* Weighted average uslng 1982 QNP. ** Welghtd average uslng 197883 US. non-agrioulhlralexpom.

c a t 10 hr

COMMODITY PRICES *

Index, 1982= 100

7 130

I

I
1984

I
1986

I

I

I

CAPACITY UTILIZATION ABROAD **

-

Percent

1 9 5

120

110

100

90 1980 1982 1984 1986 1988

75

1988

WHOLESALE PRICES
Percent change from year eariler

CONSUMER PRICES
Percent change, Q4 to Q4

4

United States

2

0 -

+

2

/
4

6 1983 1985 1987
* FRB experimental price index exdudhg o d e dl. ** Weighted average for the six major foreign industrial munlries using 1982 GNP.

1986

1987

1988

1989

Chart 11

NONAGRICULTURAL EXPORTS
Ratlo scale, bllllons of 1982 dollars Ratlo scale, bllllons of dollars

Volumes of Nonagricultural Exports"
Percent change
350
350

198zQ119BBal.
1986Q1 1987Q1

300

-

300

1 . Industrial Supplies

8 20
-1

13

2. Business Machines

51 27
23

250

250

3 . Other Capital Goods
4 . Automotive

Volume

-5
16
31

5. Consumer Goods
6. All Other
7. Total Nonagrlcultural

25
11

200

200

Value

8

25
150 1985 1987 1989 150

AGRICULTURAL EXPORTS
Ratlo scale, bllllons of 1982 dollars
45

OIL IMPORTS
Ratlo scale, bllllons of dollars
Ratlo scale, MBD

-

Ratlo scale, bllllons of dollars

90
8.1 40 7.2 70 60 35 6.3 50 5.4 30 4.5 30 80

40

25 1985
* Excluding gokl

1987

1989

20

Chart 12

r
I
-

Prices of Non-oil Imports
Percent Change

1
8
6
9

r

Volumes of Non-oil Imports*
Percent change

1

1 . Food

-1 0 17 -9

1 . Food

0

2
1

2. Industrial Supplies

2. Industrial Supplies

5
31 1 7 -3 0

3. Business Machines

-4
13

3. Business Machines
4. Other Capital Goods 5. Automotive

47 16

4. Other Capital Goods

5. Automotive
6. Consumer Goods

8
8

-1
1

6. Consumer Goods
7. Total Non-oil

7. Total Non-oil
NlPA fixed-welght Indexes

6

9

7

PRICE OF NON-OIL IMPORTS
Raib scale, index, 1982- 100

NON-OIL IMPORTS"
Ratlo scale, bllllons of 1982 dollars Ratlo scale, bllllons of dollars

* Excludnggold.

EXTERNAL BALANCES
Bllllons of dollars
50

0 -

+

Current Account

-

50

-

Merchandise Trade
/'

100
/
/

/

/

/

/

150

I
1980

I

I
1982

I

I
1984

I

I
1986

I

I
1988

I
Bllllons of dollars

200

-

US. INTERNATIONAL INVESTMENT POSITION
End of year

-

400

200

0

+

200

400

600

BOO

C M 14

PCE PRICE INDEX FOR FOOD

F
1985 1986 1987

-

CRUDE OIL PRICES
Imported oil

dIrIr
1988 1989

-

-

/

_---I
1989

I
1985 1986

I
1987

I
1988

10

PRICE OF NONOIL IMPORTS EXCLUDING BUSINESS MACHINES

Flxed-weightIndex

I
1985 1986

1
1987

I
1988

I
1989

5

Chad 15

UTILIZATION RATES IN NONENERGY MATERIALS INDUSTRIES RELATIVETO LONG-RUN AVERAGES

-

Percent
60

Percent dlslribution
0 lo 1 standard devlallon

above long-run average

I I
More than one standard devlalion

4 0

20

-1 0 1 1985 0 4 1986 a1

0

-

-1

0 1 Aprll1988

-1 0 1 1978 0 4 - 1979 0 1

7

- 60
urchasing Managers' Survey April - May

120

Purchaslng Managers' Survey

CAPACITY UTILIZATION RATE -- ADVANCED PROCESSING INDUSTRIES
Percent 100

90

80

70

1970

1973

1976

1979

1982

1985

1988

Chart 16

Nonfarm Business

-

15

-

10

1977 1980 1983 1986

/---

- 5

--*-

- 0

"

+

1989

7

- 19
-5s0

Nonfarm Business

Output per Hour
Percent change

-

-

18

Trend : 1. A P 1981 a3 to 1989 a 4

- 17
1987

Trend .5% -1973 Q4 lo: 1981 a3

- 16
I I

1988 1989

I

I

I

I

I

I

I

I

I

I

15

r
I

LABOR COSTS AND PRICES

Percent change from four quarters earlier

0 Unit Labor Cost-Nonfarm Business

1
GNP Fixed-Weight

l6

Chat I7

ALTERNATIVE PROJECTIONS

-

1988 Real GNP Percent change, 0 4 to 0 4 GNP Prices Percent change, 0 4 to 0 4 Unemployment Percent, 0 4 Baseline Stable Rates Baseline Stable Rates Baseline Stable Rates
2.9 3.0 4.3 4.3 5.7 5.7

1989
2.1 3.0 4.2 4.3 5.9 5.5

1990
2.2 3.6 3.8 4.4 6.0 5.1

FORECAST SUMMARY

FOMC
Range
Percent change. 0 4 to Q4

Central Tendency

Admlnlstratlon

Staff

Nominal GNP
1988 1989
4 to 7

6 to 6’12 5 3i4 to 6v2

6.6 7.1

6.7 6.0

4 to 7’14

Real GNP
1988 1989 1 to 3’12 1 to3 2 3i4 to 3 2 to 2’14 3.0 3.3 2.9 2.1

GNP Deflator
1988 1989
Average level, Q4, percent

2 3i4 to 4 2 to 5

3 to 3’12 3’12 to 4

3.5 3.7

3.7 3.8

Unemployment Rate
1988 1989
I

5’14 to 6’12 5 to 7

5’12 5 ‘I4 to 6

5.5 5.3

5.7 5.9