STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Materialfor

Staff Presentation to the
Federal Open Market Committee

July 5,1989

Basic Assumptions
Federal Reserve will seek to bring about a gradual reduction in the underlying rate of inflation.
Fiscal policy will remain moderately restrictive.
Crop yields will be normal.
crude oil prices will fall somewhat from current levels.

Financial Projections
Interest rates will change little through 1990.

M2 will grow around 4 percent in 1989and 6 1/2percent in 1990.

The dollar will depreciate moderately.

Chart 2

REAL GNP

Percent change, SAAA

Percent change
Q41oQ4

Drought Actual Adjusted

DrougMAdjusted (Second bar)

1987
4

5.0 2.8 2.2 1.6

5.0

1988 2 1989 1990 1987 1988 1989 1990
0

3.5 1.6 1.6

CIVILIAN UNEMPLOYMENT RATE

percent

Q4 level
1987 1988 1989 1990 5.9

5.3
5.6 6.1

1987

1988

1 989

1990

7

c

INFLATION
Consumer Prim Index

r

Percent change. a4 to a4 1 8

Percent change
Q41oQ4

Fixed-weigt CPI GNP

flxed-weight GNP Prim Index (Second bar)

1987
4

4.4 4.3 4.9 4.6

4.0 4.5 4.5 4.4

1988 2 1989 1990 1987 1988 1989 1990
0

Chalt 3

ECONOMIC PROJECTIONSFOR 1989 FOMC Range NominalGNP previous estimate Real GNP previous estimate CPI previous estimate
5t 7 34 o 1
5 I/,? 6 1 / 2 lo

Central Tendency

Admlnlstratlon

Staff

- - - - - - - - - Percent change, 04 to 04 - - - 6t 7 1 4 o 1
6 1/210 7 1/2

-- --~~

?
7.4

6.4
7.I

1 112to3
I I / . to 3 1/4

1 1 2 t 2 1R 1 o
21/2lo3

2 9t 3.2 . o
3.5

2.2
3.0

4 1 2t 6 1 o
3 1/2 lo 5 1/4

5 to 5 1 2 1
41/2to5

?
3.6

49 .
4.9

--------UnemploymentRate previous estimate
5t 6 o
5106

Average /eve/, 04, percent

--------56 .
5.5

5 14t 5 3 4 1 o 1
5 1 4 to 5 1/2 1

?
5.2

ECONOMIC PROJECTIONS FOR 1990 FOMC Range
I

Central Tendency

Admlnlstratlon

Staff

- - - - - - - - - Percent change, 04 to 04 - - - - - - - - Nominal GNP Real GNP CPI 4114to0 112to 2 1 2 1
3 to 6 114

5112to63I4
1 to 2

?
?

6.0
1.6

4 to 5

?

4.6

--------UnemploymentRate 4 1 2 to 6 1 2 1 1

Average level, 04, percent

--------6.1

5 1 2 to 6 1

?

1275

1200

I-&
Chal4

REAL CONSUMER SPENDING

REAL PERSONAL INCOME
Billions of 1982 Dollars 3475

r

Billions of 1982 Dollars

2700

2400

2625

r

-

3375

Motor Vehicles

2550

3275

1125

2475

3175

1050

1987

1988

1989

24w

2m 1987 1988 1989

3075

CONSUMPTIONAND HOUSEHOLD NET WORTH, RELATIVE TO DISPOSABLE INCOME
4.8

-

Ratlo

Percent

-98

Consumption Rate
4.6

-96

4.4

- 94
I
1980 1981

4.2

-92

4

I
1982

I
1983

I
1984

I
1985

I
1986

I
1987

I
1988

I
1989

90

REAL PERSONALCONSUMPTIONEXPENDITURESAND REAL DISPOSABLE INCOME

r

Percent lnmme Consumption (Semnd bar)

1
1988

4

3

2

1

1987

L
1989 1990

0

ChM 5

-

I
I
I
1

------

1.5

Total Starts

- 1.2

- 0.9 - 0.6
1908
1989 H1 1990 H1 1.43 1.45

/-----

- 0.3

0

I

I

MORTGAGE RATES
Percent

GNMA-10 YR TREASURY RATE SPREAD

-

PWCeM

2.4

2

1.6

12

0.8

1985

1987

1989

0.4

1985

1987

1989

MORTGAGE-SERVICING BURDEN

RENTALVACANCY RATES BY REGION
Ratio *

r
1985 * Monthly p y m m I i 1987
~ m

1

Percent 112

0.35

1989

2 -

1985

1987

1989

1

ChM 6

REAL BUSINESS FIXED INVESTMENT

r

Percent change,SAAR

-

20

Total Real BFI Percent change, annual rate

10

1988H1 H2 1989 H1 H2 1989 H1 H2

11.2 2.5

+
0

..
10 1988
1em

8.3 3.2
2.0 1.9

1890

PLANT AND EQUIPMENT SPENDING

NONDEFENSE CAPITAL GOODS ORDERS Blllbns ot dollars

-

1988

actual increase. Commerce Depf.

1989 planned increase 9.9% 10.9%

Exduding Aircrafl and Parts $Month Moving Average

10.3% 10.3%

McGW-Hill

‘Commerce Survey

1987

1988

1989

REAL INVENTORY-SALES RATIOS

i.6

r
-

1.7

NONFARM INVENTORY INVESTMENT Average annual ram. 1882 dollam

-

60
Auto Dealer Sodm

1.5

\
IessXutcS

Manufacturing

Omer (Socxwld bar)

1.6

40

-
-

1.5

20

1.3

1.4

0

Chml7

REAL STATE AND LOCAL PURCHASES

Percent change. 04m 04

--

i4
3

1987 2 1988 1989 1 1990

State and Local Operating Deficit
9.2

13.3
15.7 15.5

1987

1988

1989

1990

0

REALFEDERALPURCHASES

-

Percent change. 04 to 04 1 1 8

Total Less CCC
Percent change Q4toQ4

-

Defense Nondefense less CCC (Secondbar)

1 1 2

1987 1988 1989 1990

7.0 -1.1

-. 30
-1.2

1987

1988

1989

1990

"

BUDGET SURPLUS/DEFICIT(-)

-

FY07

Billions of dollars

FY88

FY89

FY90

On Budget

-1 69

-1 94

-200 52
-1 48

-1 77
68
-1 09

Off Budget
Total

20
-1 50

39
-1 55

Memo: Fiscal Impetus'
'Percent of Real Federal Purchases

2.3

2.1

-2.6

-7.4

ChM 8

- 8

-

-\----\
\4

00----

----

- 6

- 4

- 2

0
-

+

1
1985

I
1986

I
1987

I

I

I

I

2

NON -OIL IMPORT PRICES Percent change. SAAR

r
160

PPI INTERMEDIATE GOODS Percent change, SAAR Excluding Food and Energy

1

l2

OIL AND ENERGY PRICES $/Barrel Index, i988ailiw
20

-

CPI FOOD PRICES
Percentchange, SAAR

12

Oil Import Price
18

1
\

\

\

..---- 128 - 112

- 144

16

CPI Energy Prices
14

12 1988 1989 1990

9 6

-

p\ -\
\r
0

-.

1988

1989

1990

Chart 0

CONSUMER INFLATION EXPECTATIONS

r

Percent 10 Michigan SRC Survey 8

-

-

12 - 9

Tdal

-
I

/--= 6 :' --_ : /
- 3

Wages and Salaries

I

I

I

I

I

I

I

I

- 0

ECI - GOODS PRODUCING

ECI - SERVICE PRODUCING

F
1985

12-Month PercernChanae "

-

12-MonthPercentChange

Total

Wages and

Salaries

i
6

4

&

1987

1989

1985

1987

1989

Chad 10

Alternative Forecasts
Greenbook forecast extended through 1991, with assumption of $25 billion FY 91 deficit reduction package and M2 growth of 7 percent in 1991. Less inflation pressure is associated with any level of resource NAlRUthan in utilization -equivalent to assuming 1/2 percent ~QWX Baseline. Same M2 path as in Baseline. More inflation pressure is associated with any level of resource utilization-equivalent to assuming 1/2 percent hisher NAlRU than in Baseline. Same M2 path as in Baseline.

Baseline:

Less Inflation:

More Inflation:

1989

1990

1991

Percent change, Q4 to 0 4

Real GNP
Baseline Less Inflation More Inflation
2.2 2.1 2.3 1.6 1.8 1.4 2.4 2.9 1.9

GNP Prices
Baseline Less Inflation More Inflation
Q4 level, percent 4.5 4.4 4.6 4.4 3.9 4.9 3.9 3.1 4.6

Unemployment Rate
Baseline Less Inflation More Inflation Billions of dollars
5.6 5.6 5.6 6.1 6.1 6.1 6.2 6.0 6.4

Budget Deficit
Baseline Less Inflation More Inflation
148 148 148 109 108 111

98 89 108

Chad 11

r
Weighted Average'

-

170

r
Selected Dollar Exchange Rates
Percent Change 12/88106130/89

-

- 150 - 130 - 110

Deutschemark Yen Pound sterling Canadiandollar

11 17 18
0

-90

S.Ko~anwOn -3
Taiwan dollar

-8

I
1984

I

I
1986

I

I
1988

I

70

REAL LONG-TERM INTEREST RATES*"
Percent

Selected Interest Rates Percent

Dec. June30 1988 1989
Three-month: Germany 5.32 4.41 9.25 Long-term: Qermany Japan
6.30 4.51 9.11 6.90 5.49 8.09 7.10 4.51 9.20

us.
* Weiehted average against o of fordgn 0-10 Muntnes using told 1972-76 averagetrade. r . AdNsted by rdative consumer prices. * **' Multilateral trade-weightedaverage of long-term government or publk wthoriry bond Pafes adjusted for expected inflation eslmated by a 36-nwnthcentered moving average of acturd inllation (stall forecastswhere needed).

Chad 12

INDUSTRIAL PRODUCTION ABROAD '
Percent change from twelve months earlier

CONSUMER PRICES ABROAD Percent chfmge from twelve months earlier

1 10

5

4

3

2

t
1986 1987 1988 1989 1986 1987 1988 1989

COMMODrrY PRICES *'

c

I

c

J-4

Foreign Currency

1980

1981

1982

1983

1984

1985

1986

1987

1988

I989

0

ECONOMIC POLICY ABROAD
Continued concern about inflation and capacity pressures Additional monetary tightening in 1989 in some countries, with gradual easing in 1990 as growth slows and inflation declines. Fiscal policy generally neutral, but tax reductions scheduled for Germany in 1990.

-

0

0

" Federal

Weighted average for the six major foreign industrial countries using 1982 GNP. Reserve Board experimental index excluding cwde oil.

Chart 13

Consumer Prices
JAPAN, GERMANY, FRANCE, AND KALY Peroentchanae h r n f w r auarters earlier

1

1985

1

1 1986

1 1987

1 1988

1 1989

1
0 1990

Real GNP
UNITED KINGDOM AND CANADA
Percent change from four quarters earlier

JAPAN, GERMANY, FRANCE, AND rALY P e r mchange horn four quaners eadier

L :
1985 1986 1987 1988 1989 1990
1985 1986 1987

1988

1989

1990

-

REAL GNP

Percem change, SAAR
*

t
r
I

U n b d &lea

SIXFcreign lndustrlal Countries ** (Second bar)

GNP
4

Domestic Spendlng

2

1 989
1990

38
.

1998

1989

1990

0

ECONOMIC ACTIVIPI: ALL FOREIGN COUNTRIES '*
P e r m change from four quaners earlier

I
1985 1986

I
1987

I
1988

I
1989

1
15e0

CONSUMER PRICES

r

Percent change. annual rate

Fordgn"' U.S.

1987 1988 1989

25 .
31 . 41 . 33 .

43
. 43
. 49
.

1990

46
.

Chad 15

Exports
AGRICULTURAL EXPORTS
Ratio scale, billions of 1982 dollars
60

50

Value

-

60
50

Percent Change Q4 to 04
1988 1989 1
0

1990 10 7
3

40

40

30

30

Value Price

24 25
0

20

I
1986

I

I
1988

I

I
1990

19829
20

1

COMPUTERS
Ratio scale, billions of 1982 dollars
130
100

-

Ratio scale, billions of dollars

7 130

Percent Change
0 4 I0 04 1988 1989 -2 -12
11

70

15

40

Value

17

Price

-6
24

-

10

I
1986

I

I
1988

I

I
1990

1982$
10

OTHER NON-AGRICULTURAL EXPORTS
Ratio scale, billions of 1982 dollars
400

Ratio scale, billions of dollars
400 350

Percent Change Q4 to 04
1988 1989 1990

350

250

250

Quantity
200 200

150

3
150 1986 1980 1990

1982$

16

10

Chan 16

Non-oil imports

PRICES

-

Percent change, 0 to Ql 1

1989

QUANTITIES

-

-

1988 1989

-3 -5

Percent change, 0 1 to 0 1

1988

1. Food 2 Industrial Supplies .
3. Computers 4. Other Capital Goods

6 17 -1 9
7 5

1
10

-6

1. Food
2. lndustrlalsupplies

3.compute0
4. Other Capital Qmds 5. Automotive

5. Automotive

6. Consumer Goods
7. Other 8. TotalNon-oll
NlPA ~ed-wai@IIndeues

9 9 9

3
4
3 5

5

6. ConsumerGoods 7 Other . 8 Total Non-oll .
NIPA aavunb.

1 1 69 1 6 -1 1

17
9
1
2

-4

-2
9

3

NON-OIL IMPORTS

Ratio scale.
billions of 1982 dollars
480

-

Ratio scale, billions of dollars

420

360

300

240

OIL
9 r

Ratio scale, million barrels per day

420 360

1480

-

Percent Change Q4 to 0 4

1988 9

1989 1990

value

3
2
1

8
5

300

Price

7
1

I 1982)

2

1986

1988

1990

240

Ratio scale, billions of dollars

i 63

Percent Change

WtoQ4
1988
-42

1989 36

1990
7
-1

4

value
35

-18
-26

Price

34
1

I
1986
* Excluding conpielm.

I

I
1988

I

1
1990

1982s
28

11

8

Ch&ll7

U.S.External Accounts
EXTERNAL DEFICITS Billions o dollars f
50
Billions o 1982 dollars i

BlllIon8 of Dollars Annual Rate, 0 4

-

1988 1989 1990

75

Real GNP Net Exports of Goods and Services
/

1

..

1 7 -'

.

5
100

100

Merchandise Trade 128

122

128

125

-

125

Current
Account'

131

130

137

Real Net

150 150

Exports

105

92

85

175

3
175 1984 1986
1988

1990

US. INTERNATIONAL NET INVESTMENT POSITION
Bililons of dollars

400

P e r m ofQNP
Ne C u d lnvsah Acmmr Posit

Mo

0 -

+

1987
200

-3.5 -2.6

-8

1988
400

-10 -12 -14

1989 -2.3 1990 -2.4

600

800

1981-1984 Average

1985

1987

1989

lW0

Alternative Forecast
Baseline: Greenbook forecast extended through 1991, with assumption of $25 billion FY91 deficit reduction package and M2 growth of 7 percent in 1991.

Unchanged Dollar: Dollar remains at current level; M2 growth unchanged from baseline path.
1989 Percent change, 0 4 to 0 4 1990 1991

Real GNP, U.S.
Baseline Unchanged Dollar 2.2 2.2 1.6 1.3 2.4 1.9

GNP Prices
Baseline Unchanged Dollar 4.5 4.5 4.4 4.2 3.9 3.3

Real GNP Abroad*
Baseline Unchanged Dollar 0 4 level 2.7 2.7

2.7
3.0

2.5 3.3

Current Account **
Baseline Unchanged Dollar -130 -1 29 -137 -138 -1 35 -151

* Other G-10 countries: ** Exduding capital gains and losses.