STRICTLY CONFIDENTIAL (FX) CLASS I-FOMC

Materialfor

Staff Presentation to the Federal Open Market Committee
February 6,1990

Chad 1

Basic Policy Assumptions
Monetary policy will be aimed at achieving a reduction in inflation over time, in the context of continued economic expansion. Fiscal policy will remain moderately restrictive.

--

For FY91, a deficit-reductionpackage of about $30 billion

-- No dramatic multi-year budget accord
Financial ProJections
Interest rates do not move far from recent levels; they may average a little higher in 1991 than in 1990.
M2 will grow around 6-112 percent in 1990 and 6 percent in.1991.
0

Federal budget deficit will decline from $152 in FY89 to $137 in FY90 and to $118 in FY91. The dollar will depreciate moderately over the next two years.

0

Chad 2

r

REAL GNP
Drought Adjusted

Percent change, SAAR

t

l8

1988 1989

Percent change Q4 to 0 4

1'
4 2
0

Drought Adjusted
4.0 19 . 1.6 2.3

Actual
3.4
2.4
16
. 23
.

1990 1991

1988

1989

1990

1991

CIVILIAN UNEMPLOYMENT RATE

Percent

04 level
1988 1989 1990 1991 53 .
5.3

-

5.9 6.1

1988

1989

1990

1991

INFLATION

-

Percent chanae. 04to 04 Percent change Q4 to Q4

-

-

Consumer Price Index Fixed-weight GNP Prlm Index (Second bar)

Fixed-weight

1989
1990 1991 1988 lo89 1990 44 . 4.2
43
.

ls
sl

ChM 3

ECONOMIC PROJECTIONS FOR 1990

Range

Central Tendency

Adrnlnlstratlon

Staff

Percent change, 0
4 - 0 to

Nominal GNP
July 1989 forecast

4 to 7
4-1/4 to 7-1/2

5-112 to 6-112
5-1/2 to 6-3/4

7.0
6.8

5.7
6.0

Real GNP
Ju/y 1989 forecast

1 to 2-114
1 to2-1/2

1-112 to 2
1-1/2to2

2.6
2.6

1.6
1.6

CPI
July 1989 forecast

3-112 to 5
3 to 5-3/4

4 to 4-112
4-1/2 to 5

4.1
4.1

4.4
4.6

Average level, 04, percent

Unemployment Rate
July 1989 forecast

5-112 to 6-112
5 to 6 1 Q

5-112 to 5-314
5-1/2 to 6

5.4
5.4

5.9
6.1

Chad 4

PRIVATE PAYROLL EMPLOYMENT

PRODUCTION WORKER HOURS

Three Monih Movlng Average

Change, 1 O W a

1-

102

-

Index, 1977-100

Index. 1977-100

-

132

(dlamond la quarterly average)

100

- 130 - 128 - 126 - 124
122

Manufacturing Manufacturing

I
1980

I
1989

100

92

1888

1980

150

-

-

I
1086

-BJ

Adusted Orders (moving average previous three months' data)

d

140

Jan. est.
Total Industrial Production

-

75

130

--86

120

I
1987

I

I

I

**

r

RECESSION PROBABILITY
R U d h h Diebold (Board)

-

-

0.8

I

Smck Warson (NBER)

-

-

0.8

0.8

- 0.6 - 0.4 -
2 0
d

0.4

02

0

I

0

PERSONAL CONSUMPTION EXPENDITURES

r

Percent ohange t o m prevlws quarter. annual rate

1

lo

Percent change

DPI
4.0 3.6 1.2 1.4

Total PCE
1988 1989 1990 3.8

2.3
2.0 1.6

I
1988 1989

I
1980

I
1881

1991
lfi

.-

PERSONAL FINANCIAL SITUATION

Percent

COMPOSITION OF CAR SALES

Mllli~ls

1%
45

Better Than Year Ago

-t
1985 1988

I

Worse

-I
1988 1889

I

35

F

TransplamS (Top segment)

Impom (Middle segment)

=Big

3 (Bottom Segment)

10

5 25 15 1988 1987 1988 1989 1990 1991
0

1987

HOUSING STARTS
7

Million unb, SAAR

- 1.5
Total Starts
Millions of units, SAAR

Singlefamily

------------I
1880 1991

0.9

0.6

Multifamily

0.3

1990 1991 1.33

I
1985

I
1988

I
1887

I
1988

I
1989

I

REAL BUSINESS FIXED INVESTMENT

r

Percant change,annual rate

Total Real BFI
10

Percent change, annual rate
1988 1989 1990
'

5

4.2
4.3

1.3 1.8

0 -

5

+

I
1969

I
1990

I

Structures
1991

1991

10

NONDEFENSE CAPITAL GOODS ORDERS

r
Exdudlng Aircraft and Pans &Month Moving Average

- 34 - 32 30

CONTRACTS FOR NONRES. STRUCTURES
6Month Movlng Average

-

6

:P: :\:
26

- 5.8
5.6

5.4

I

I

I

26

52

24

5

Ratlo
1.6
2.4

Nonfarm Inventory Investment

1.5

I

1.4

1.3

-m­
Retail Tmde less A t s uo
22 2

-

1989 Q4

Manufacturing

1.6

1990Q1

-16.7

-1
1.6

.o
15.8 18.8

12

1991 ti1
1.1 1.4 1992 1884 1986 1688

-

Chert 7

REAL FEDERAL PURCHASES
Defense

Percent change, 04 to 04

Nondefense less CCC (Second bar)

1
l2

I
1988 1969

I
1990

i
19 61

6

r

-

MILITARY EXPENDITURES
Billlons of dollars

Administraton Baseline
-320

-

I
1885 1986 1887 1988 1989 1980 19 91

Administration Proposal -280

I
1992 1893 1994

240

REAL STATE AND LOCAL PURCHASES
Percent change, 04 to 04

2

1

State and Local Operating Deficit Billions of dollars

: a
1990

;

1988

1989

1990

19
61

0

"UNEMPLOYMENT'GAP'AND INFLATION

-

4quMer percent change

ia

CPI ex Food and Energy (Top data line) Natural h a Rate ot Unemployment Wl

...,
....
... , ,...

....
.... . . .. ._
12
. ....
....
....
.. . .
. ...
....
....
....
. ....

....
....
....
.... .... 6
....
....
.... -.-
. .
....
....
....
....
....
....
....
....
..., ..

-

9 ....
....

. . .. .. ..

0 -

+

. . .. .. .... .... . .... .... .

11
11
1967
11

1973

1976

1979

1962

1885

1 988

lGS1

U6

CPI - FOOD

CPI - ENERGY

P e mchange. 8AAR

1
2

-vl
I
1989 1090 19 91

0

6

3

,
D

1889

1090

19
91

ChM 0

CONSUMER INFLATION EXPECTATIONSFOR YEAR AHEAD

-

Petwill
10

Michigan SRC Survey

6

4

I

I
1082

I

I
1984

I

I
1986

I

I
1988

I

I
1880

I

2

EMPLOYMENTCOST INDEXES PRIVATE INDUSTRY

-

I
1982

I

I
1984

I

I
1888

I

I
1988

I

I
1880

I

I

0

ECI GOODS PRODUCING

-

ECI SERVICE PRODUCING
12-rnoMh perwnt change

-

6

Nages and

4

2 1984 1885 lQ86 1987 1088 1969

C hai 10

7

NonfinancialCorporations

- 16
- 12

\\/

- 8

l l l l l l l l l l l l l l l l l l l l l l

- 4

l

o

REAL DISPOSABLE PERSONAL INCOME

r

Percent change, 0 4 to 04

i9
6

3

+ 0
3 1970 1973 1976 1979 1982 1985 1988 1991

DEBT RATIOS

Percent
100

L-­

-

85

Household Debt Relative t DPI o
70

J
I I
I I

Gross Domestic Business Product

1 1 1 1 1 1 1
1988 1991

55

I

1

1

1

1

1

1

1

1

1

1

40

1970

1973

1976

1979

1982

1985

C M 11

-

INTEREST PAYMENTS RELATIVE TO CASH FLOW'
Percent

NonfinandalCorporations

-50

-/-

-40

-30

-

-20

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 l l I l O

-

1970

1973

1976

1979

1982

1985

1988

1991

Gmw Int.reat pnymsntp relative 10 caeh now indding immt paymsntp.

RATING CHANGES ON CORPORATE BONDS

r
1979

Number

-Im

r

DEFAULTS ON LOW-RATED BONDS Percont ot outnandlng

-I8

i6
4

2

1981

1983

1985

1987

1989

1979

1981

1983

1985

1987

1989

0

Mwdy's d m

lo87 exdud- 1exSEo.

r

DELINQUENCY RATES
C & I oans at Commercial Banks L (seasonallyadjusted)

PerOent

1 r
lo

DELINQUENCY RATES
Commerolal Mor$agea at

Perm

t

L e InsuranceCompanler, H

14
2 1

Delinquent Loans
Loans in Process of Foreclosure

1981

1983

1985

1987

1989

0

Chad 12

FIRMS WITH INTEREST EXPENSE EXCEEDINGCASH FLOW

r1973-74Type
RIcrsslon
24
1988 soucture (Second bar)

lgeOsmrc(ure
1988 Structure (Second bar)

24 18 12

18 12

6

6

0 .

Base year

Second year of Recession

Base year

Second year of Recession

0

JUNK BOND SPREAD

SPREADS ON C 8 I LOANS AT BANKS

-

500

Loan Rate less Federal Funds Rate (floating rate loans)

400

200

200

(fixed rate loans)

I1

I

I

I

I

I

I

I

I

Ill,
1989

1880

1983

1986

1987

1088

1989

0

- Summary of January 1990 Senior Bank Loan Officer Survey
0

-

72 percent had tightened standards for merger and LBO loans.

0

57 percent had tightened standards for below-investment-grade customers for other than merger and LBO loans.
7 percent had tightened standards for investment-grade borrowers for other than merger and LBO loans.
81 percent had become less willing to make construction loans.

ChM 13

HOUSEHOLD DEBT SERVICE AS A PERCENT OF DISPOSABLE PERSONAL INCOME
P.rant

II

I

I

I

I

I

I

I

I

I

I

I

I

I

1

I

I

I

I

I

I

I

Ill,

1970

1972

1974

1976

1978

1880

1982

1984

1986

1988

loo0

r

CONSUMER LOAN DELINQUENCIES
P6#?6fll

MORTGAGE DELINQUENCIES

-

Perwlli

All Clod-End Loans (commercial banks).

1

4 3

13
2

3

(finance companies)
1

I I I I I I I I I I I I I I Illo

1'
1

Auto less
-400
95

1"
1 1989

-200

82

1-year Treasury
I

v

0 -

+

89

-200 1984 1985 1986 1987 1988 1989

86

Cha4 14

r

DEBT AGGREGATES

4querter p e r m change

lW
20

10

0 -

+

1960

1863

1866

1969

1972

1975

1978

1981

1984

1987

1990

10

r

TOTAL DOMESTIC NONFlNANClALDEBT AND NOMINALGNP

4quanSr p e r m change

Debt

T
-I
15

- 0
1984

1987

lwo

Chart 15

FOREIGNEXCHANGE VALUE OFTHE US. DOLLAR

Ratio scale. March 1973 1W
170

-

150

Selected Dollar Exchange Rates
Percentchange 6/89 to

130

mw

Deutschemark -15
110

Yen Pound sterling

1

-8

Canadian dollar -1
90

S. Koreanwon

3

Taiwan dollar

0

I
1985 1986

I
1987

I
1988

I
1989

I

70

REAL LONG-TERM INTERESTRATES”’

-

Percem
10

Selected Interest Rates

‘1\
1985

Percent

June Feb.2
1989 1990 Three-month Germany 6.92 Japan 5.35 us. 9.20 Long-term
Germany 6.92 Japan 5.08 us. 8.28 8.05 7.06 8.20

UnitedStates

8.05
6.58
8.42

I
1986

I
1987

I
1988

I
1989

I

Chan 16

INDUSTRIAL PRODUCTION ABROAD
4qu-r

CONSUMER PRICES ABROAD
4 q u w p e r m change
8

percent change

-I*
U.K.,Canada,ltaly
- 6

Japan,Germany,Ftanca

4

1887

1988

1889

1887

1988

1989

0

COMMODITY PRICES

r

Index, Jan.lgs3-100, ratlo scale

1
125

US. Dollars
110

ForeignCurrency"

05

ECONOMIC POLICY ABROAD
Inflation flat recently;continued concern about capacity pressures and upcoming wage negotiations. Tight monetary stance, with gradual decline in interest rates in 1990-H2 and 1991 as growth slows. Fiscal policy generally neutral;tax reduction in 1990 and additional spending in Germany related in part to East European immigrants.
* Federal Rewrve Board experimental index exduding aude dl. ** Webhted averclg. for lhe rlx mJorfonlgn Industrid munbkr wing1082 GNP.

Chan 17

REAL GNP

Percent O h ~ g eSAAA . 6

r
U n M States.

Foreign"
Percentchange, Q
3Q4

Foreign Industrial CounmeS" (Second bar)

t
1989 1980 1691

4

GNP
1988 1989 1990 1991 3.9 2.9 2.3
3.0

Domestic Spending
4.0 3.5 2.7 3.1

ECONOMIC ACTIVITY: ALL FOREIGN COUNTRIES"

I
1888 1087

I
1888

I
1989

I
lgeo

I
1691

r

CONSUMER PRICES

P e r m change

-

Percent change Q41oQ4

Foreign"'

U.S.
4.3 4.5 4.4 4.5

1988 1989 1990 1991

3.1 4.3 3.5 3.5

Chart 18

Exports
AGRICULTURAL EXPORTS
Rallo scale, blllions of 1982 dollars, SAAR

-

Ratio scale, billions of dollars, SAAR

-

50

-

Percent change 0 4 to 0 4

50

40

40

1989
Value

1990
7
4

1991
7
4

3
-7

30

30

Price

1982$
20

10

3

3

J
1986

I
1987

I
1988

I
1989

I
1990

I
1991

I

20

COMPUTERS
Ratlo scale, blllions of 1982 dollars, SAAR
100 70

40

-r
Quantity
c

Ratio scale, billions of dollars, SAAR

_---

-

_ - / -

100

-

70

Percent change Q4 to Q4

Value

40

1989
-4

1990
4

1991
5
-8

Value Price

-11

-8

i982$
10

a

13

14

J
1986

I
1987

I
1988

I
1989

I
1990

I
1991

I

10

OTHER NON-AGRICULTURAL EXPORTS
of 1982 dollars, SAAR

Ratio scale, blllions

Ratio scale, billions of dollars, SAAR

1

Percent change Q4 to Q4

-

1989
Value Price

1990

1991 1 6
4

12
1 11

13
3 9

1982$
150 1986 1987 1988 1989 1990 1991 150

12

Chart 19

Non-oil Imports
PRICES QUANTITIES Percent change, a 4 to ~4
1988 4 14
-1
6

r
1. Food

2. Industrial Supplies 3. Computers 4. Other Capital Goods 5. Automotive 6. Consumer Goods

1989 -10 -1 -11
-1

1 r

Percent change, a to ~4 4
1988 5 -2
11

I

1. Food

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

9 0

5. Automotive
6. Consumer Goods

-1 0
6 4

5 11 4

7. Other 8. Total Non-oll
NlPA fixed-weight indexes

7. Other 8. Total Non-oll
NlPA accounts

7

COMPUTERS
Ratio scale, billlons of I982 dollars, SAAR

Ratlo scale, billlons of dollars. SAAR

-

Percent change Q4 to Q4
1989 1990 2 -8 1991 3
-8

__--_--Value
I0

24 -11
39

lo

Price
19826

11

11

1986

1987

1988

1989

1990

1991

OTHER NON-OIL IMPORTS
Ratio scale, billions of 1982 dollars, SAAR

500
450

Ratio scale, billions of dollars, SAAR
500

Percent change a 4 to a 4
1989 1990 6 1991 8 6 2

, ’
450

400

350

-_---Quantity

350

Value Price
1982$

2 0

3w

300

5
2

3

250

1986 1987 1988 1989 1990 1991

Chart 20

Petroleum and Products
FqlCES ol am per barrel
40-

Dollanperbsnd -40

West Texas Intermediate
20-

-24

US. Import Price

10

1
1882

I
1083

10

0

I
1984

I
1985

I
1086

I
1087

I
1988

I
1080

I
1000

I
1001

1

0

FREE WORLD OIL PRODUCTION
Peroantoftotal

I
60
40

OPEC
United States
40

20

20

0

1979

0

U.S. IMPORTS
rnlllbn barrob per day
11

RatloBCab,

9

Quantity

p- -c-
_c-­

-

1988
40

Q4 Level

-

7

Price MBD ($/barrel)
12.85 17.60 18.00 19.25 7.8

5

1989 1990

8.3
8.4 8.8

3
1986

I
1987

I
1988

I
1080

I
1000

I
1991

I

1991
20

Chart 21

U.S. External Accounts
Billlons of 1982 dcilars

EXTERNAL DEFICITS
Billions of dollars

0

I

Billions of dollars Annual rate, Q4

-

1989 1990 1991

Real GNP Net Exports of Goods and Services

,. .,
-1

/
0

/

/

50

100

Merchandise
Trade -125 current
Account'-121

-111

-96

-109

-90

150

Real Net
Exports -62
200
1885
1986

-40

-8

1987

1988

1989

lge0

1991

2
w
Exdudes Oapltd palns and l m e a

US. CAPITAL TRANSACTIONS
Blliions of Dollars. Net Inflows
e

-

+
1990p
74 15 38 17 4 22 1 16

-

1987
1. Pllvate CaPltal, net 2. U.S. Banking Offices 3. Bonds and Stocks 1 2 4. Direct investment 2 3 5. Other Flows 6. US and Forelgn Offlclal Assets .. 7. UnitedStates 1 (increase -) 8. Other G-10 Countries 9. Other Countries 10. Statlstlcal Dlscrepancy Memo: 11. current Account 12. US. and Other 0 1 0 net Purchases of Dollars 103 47 26 22 8 55
10

1988
105 21 36 43

1989

-

39 6 2 -1 60 97

5 32 -7 16 23 -11
-1 26 2

88 12 45 26 5 -1 6 -27
-4 15 37 -1 09 -72

5
11
-1 07 n.a.

~

1. The refinanangd foregn governments' military sales d6iat through the sale of securities guaranteedby the US. governmen1has been exdudedfrom changes in US. government assets,U.S. purchases of foreign securities. M ohsnges in bank custody claims on,for ' ners 2. ~mnriadions i(h finanee affiliator in th%ethkaA ~ntiiies ave t-n exdude3 horn direct investment ~ n added to w h d foreign purohama of U.S. aecuritler. 3. Exdudes upiw gains and lasses. e estimate P = pr4-n

-