STRICTLY CONFIDENTIAL ( X CLASS I-FOMC

F)

Material for

Staff Presentation to the
Federal Open Market Committee

February 5,1991

Chari 1

OUTLINE OF THE PRESENTATION

1.

What are the FOMC projections? What has been assumed about the war and its budgetary consequences?

2.

3.
4.

What about the credit crunch and other financial stresses? Where is the dollar headed?

5.
What might the oil market look like?
6.

What if foreign growth were disappointing? What will bring about an economic upturn? Have we turned the corner toward lower core inflation?

7.
8.

9.
How fast can the economy grow?
10.

What if the Fed were to ease substantially in the near term?

Chart 2

r

ECONOMIC PROJECTIONS FOR 1991

FOMC

- - _ - - _ - _ _ _ _ _ _ _Percent change, 0410 Q4- - - - - - - - - ___
Nominal GNP
previous estimate

Range

Central Tendency

Administration 5.3
7.2

Staff
~ ~

- ----

3'12 to 6'14
3Vr to 7

3V4 to 5'14
5% to 6'/2

5.9
6.4

Real GNP
previous estimate

-112

to 2

'I2 to

11 12

0.9
2.9

1.9
2.2

0 10 3

11 to 2~~ 3,

CPi
previous estimate

3 to 5
3f/210 5

3 to 4'14
91, to 4

'/,

4.3
4.2
~

3.9
4.5
~

- - _ - - - - - _ _ - - - _ Average level, 04, percent- - - - - - - - - - - - - - - ___
Unemployment rate
previow estimate

6'14 to 7'12
5%to 7

6'12 to 7
5'43 lo 6

6.7
5.6

6.1
6.1

THE STAFF PROJECTION (Percent change, annual rate)

-

1991
Q1

1992
Q4

1
Q4

02
6.7
2.0

Q3 6.0 3.1

Ql
6.8 2.8 4.1 4.3 6.1

Q2

03

Nominal GNP Real GNP CPI CPi excluding food and energy Unemployment rate'
1. Percent.

3.3 -1.5 3.4 5.2 6.4

6.7 3.1 4.1 4.6 6.1

6.0 2.6 4.0 4.1 6.1

6.0
2.5

5.9 2.4

3.0
4.5 6.4

4.3 4.7
6.2

3.0
3.9 6.0

3.7
3.0 6.0

Chart 3

REALDEFENSEPURCHASES

r
I
FEDERAL BUDGET OUTLOOK
Billions of dollars

Billions of 1982 dollars
280

265

250

235

I
1989

I
1990

I
1991

I
1992

I

220

-

FY1990

FY1991

FY1992

Total deficit
Ex deposit insurance
NlPA deficit

220 162 158

283 192 165

266
172

136

FISCAL IMPETUS

-

Percent of real federal Durchases
15

Calendar Years

10

5

Stimulus

J
1980 1982 1984 1986

I
1988

I

I

---- -_ I
1990 1992

Restraint

0

+

5

' Four-qusner mvlng average. adpslad lor RTC. YIELD SPREADS
Percent
4

---

&month commercialpaper less 6-month T-bill -Baa corporate bond less long4erm T-bond
3

2

1

0

+

1

1962

1966

1970

1974

1978

1982

1986

1990

SMALL BUSINESS CREDITCONDnlONS *

r

Percent

National total

la

30

20

10

+
0

1974 1976 1978 1980 1982 1984 1986 1988 1990
* Index l Ihe NFlB WNOY. C r d H h m d a lo gel mnw b a s h lo gel. m

10

Chart 5

CHANGES IN BOND RATINGS
Number
400

INTEREST PAYMENTS TO CASH FLOW'

-

Percent
45

Nonlinancial Corporations

300

40

200

35

100

30

1984

1986

1988

19s

1981 1984 1987 1990 * Gross inleresl lo cash flow indvling inleresl payments

25

t-

r

LOAN DELINQUENCY RATES
Percent Last observations. 90Q3

DEBT-SERVICE BURDEN
Percent of DPI

1 2 4

Consumer Loans *

1963

1969

1975

1981

1987

'Consumer loans overdue 30 days + ABA s e w s
** Molrgages overdue 80 days + MBA series

ChaR 6

THE DOLLAR AND THE INTEREST DIFFERENTIAL
Percent

2r

Ratio scale. March 1973 I 100

1 130
Real long-term interest differential'

- 110 - 90

2 -

dollar"
1 1986

3

I
1987

I
1988

I

1989

I
1990

I
1991

I

70

* Dilferencebemeenraresonbnp-~rmU.S.governmentbDndsanda~htedavemgeofloreipnG~tOlonptermgovemmentorpubllc sulhaity b m d mms, edjwted lorexpened innatkn. *' Weighted averacainst foreign 0-10 munvies. adjusted by relative mnsumer prices.

Nominal Dollar Exchange Rates Percent change
6/90 lo 2/1/91

r

Nominal Interest Rates
Percent
Change 6/90 to 2/1/91

Level
2/1/91

Pound Sterling Deutschemark Canadian Dollar Yen

-1 3 -1 3 -1 -1 4 1 -1

Three-month Germany Japan

us.

0.9 0.8

-1.5
-0.2 -0.3
-0.6

9.10 8.19 6.75
8.62 6.78 7.92

S.Korea Taiwan Dollar

Long-term Germany Japan U.S.

c
-4

DOLLAREXCHANGE RATE: PAST AND PRESENT CYCLES'

Index, peak-100 Maximum

-* _ - - __-I I I
-3

-.-<

.-. -.--.
*.

.-

Average Present _.-_
--. -Minimk

I
-2
-1

I
0

I
1

I
2

I
3

I
4

I
5

I
6

I
7

I
8

I
9

i
95 85

.._

105

75

Number of quaners from peak

' Wsphted average agalnrt foreign G-10counlrles Present and lour premous cycler smce 1969 are depicted. Peak of present cycle IS
mlrd qYmE.,of159o

Chart 7

Petroleum and Products
OIL PRICES

Dollars per barrel

40

West Texas Intermediate'

30

-

U S . Import Price

'WTi

\------

-

20

10

J
1983

I
1984

I
1985

I
1986

I
1987

I
1988

I
1989

I
1990

I
1991

I
1992

1

0

' Spot prices through Januav 1991. Fuhlre prices February through Decerraer 1991

OPEC CRUDE PRODUCTION'
(Million barrels per day)

1990-H1 1990-03 199O-Q4 1 9 91
Total Saudi Arabia" Kuwait" Iraq Other OPEC
'

1992 2. 41 69 . 10 . 3.0 13.3

OPEC Accord (July)

2. 35 5.7 2.0 3.0 12.8

21.7 6.5 0.7 1.4 13.2

23.1 83 . 01 . 0.4 14.3

22.3 85 . 0.0 06 . 13.3

22.5 5.4 1.5 3.1 1. 25

Does not inclwe natural gas lqudr or lease cornensates
IS

** Includes hall 01 Neural Zone proaLdion mrough July I990 Eegmnlngm august. all N e m a l Zone producton

anrbuted lo Saudi Araaia

WORLD PRODUCTION AND CONSUMPTION *
Million barrels per day Production
Consumplion (right bar)

I 1

I I

I I
53

52

51

=in

.

1989

1990

1991

1992

Excludes con$urr+mon and producllon consurn& in current and f o m r centrally-plannedeconomies.

Chart 8

INDUSTRIAL PRODUCTION *

INDUSTRIAL PRODUCTION *
12-monlh percent chanae 18

r

12-month percent change

12

6

+
Canada and U.K.

0
-

I

I

t

F
CONSUMER PRICES *

18

12

Germany

\

Franceand Italy

\

i:
l o

I-

I

I
12-month percent change

6

CONSUMER PRICES *

r
1988

12-month percent chanae

Canada and U.K.

I

1989

1990

1988

1989

1990

ECONOMIC POLICY ABROAD

Inflation has slowed in recent months, but concerns remain; dispersion of growth has widened. Monetary policies will be cautious, but interest rates may decline as inflation eases. Fiscal policy will be essentially neutral on average, with Germany an important exception.

'Average using U.S. non-agricullurd export weights, 1978-83.

Chart 9

REAL GNP: U.S. AND FOREIGN
Percent change, Q4 to 0 4

F
r

United States * Foreign ** (right bar)

- Foreign GNP" i5 Percent change

-

-I4
1
0

0 4 to 0 4

G-6
1989 1990 3.2 1.3 1.8 2.6

Other
2.8 1.9 2.6 3.8

I
1 1
1989 1990

t
t 1 1
1991 1992

I 1 1
1991

1 1

1 1
1992

1 1

CONSUMER PRICES: U.S. AND G-6 COUNTRIES "*
4-quarter percent change

United States

Percent change Q4 to 0 4

G-6^"

U.S
4.6 6.3 3.9 3.9

1989 1990 1991 1992
1989

4.8

5.1
4.4 3.8

1990

1991

1992

REAL GhP IN G-6 COUNTRIES "*

r

&quarter percent change

-

\ Greenbook
\

\\

'+- , _--/

,
/

_c---

0/
/
//

/c--

-2
0 -

'

/

/

+

Alternative forecast

I

I

I

I

I

I

I

2

Chart 10

NON-AGRICULTURAL EXPORTS
Ratio scale. billions of 1982 dollars. SAAR Ratio scale. billions of dollars, SAAR 525 450 375

Percent change 0 4 to 0 4
1990 1991 1992

300

Value Price
1982$

11
1

11 2 10

13
1

225

10

11

150
1987 1988 1989 1990 1991 1992

150

AGRICULTURAL EXPORTS

Ratio scale, billions
of 1982 dollars. SAAR Ratio scale, billions
01 dollars. SAAR
150

Percent change 0 4 to cbl
1990 1991 1992

-

Value Price
1982$
20 1987 1988 1989 1990 1991 1992

-6 -3
-3

12 8 4

8
7
1

SHARE OF US. EXPORTS. 1990 *

ALTERNATIVE SCENARIO

Deviation from Greenbook,
1992-04

Billions of 1982$. SAAR

Exports of goods Exports of services Net exports. (goods and services)

-1 0
-

5

-

9

’ Eslimatej shares for 1990.

Chan 1 1

JON-OIL IMPORTS
iatio scale, billions f 1982 dollars, SAAR

550 500 450

-

Ratio scale, billions of dollars, SAAR

1550

Percent change 0 4 to Q4
1990 1991 1992

400

Value
350

5 2
3

4 2 2

8
1

300

-

- 300

Price
1982$

7

250

80

0 4 Level

Price MBD ($/barrel)

60

1989
40

17.67 28.85 21.00 21.00

8.2
7.4

1990 1991 1992
4

8.5 9.1

1987

1988

1989

1990

1991

1992

20

EXTERNAL DEFICITS

t

r

Billions of dollars, SAAR

REAL NET

Ratio scale, billions of 1982 dollars. SAAR

Current Account Trade (right bar)

1

750

4

650

150

1988 1989 1990 1991 1992

f
1987

550

Exports
450 1992

+I7

350

1988

1989

1990

1991

1992

* Goods and semces

C h M 12

REAL OUTPUT AND SALES

-

Billions of 1982 dollars
4500

4400

44

5’

/ / / /

// //

0 :

4300

4200

Change, annual rate, percent

REAL FINAL SALES

4100

4000

Real Final Sales
3900

3800 1991 1992

3700

I
1986

I
1987

I
1988

I
1989

I
1990

I
1991

I
1992

3600

3.3

31
.

2.9

2.7
* Nonfarm. 1902 ddlnn

Chart 13

CONTRIBUTIONS TO REAL GNP GROWTH

r
1. Real GNP

1990
Q4

Ql

1991
Q2

H2

1992

Percent change, annual rate

-2.1

-1.5

2.8

3.1

2.6

I
2 REALFINAL ALES . S 3 Netexports . 4 . Exports 5 . imports

Contribution, percentage points

-. 1
22 . 11 . -1.1

-. 13 1.5

.O
-1.5 -. 29 -. 10 -7 . -1.2 . l . 2 -2 .

a a
. 5 .5 -6 . . 3 -3 . 11 .

2.0
.4

25 . .4 14 . 1 .o 21 . 14 . .3 .4

1.3 . 9 16 . 12 . . 3 . 1

6. Private domestic Rnal purchases - . 33 7. Consumption -2.1 8. Residential structures 7 9. Business fixed investment -.6

-.

& a

10. Government 11. Defense 1 2 iNVENTORY INVESTMENT 1.

1 .o . 9
-2.0

-. 1
-3 . 11 .

-. 1
-3 .
.I

Note: Components may n d sum to t t l because of rounding. oas

Chart 14

CONSUMER SENTIMENT

Index

SALES OF AUTOS AND LIGHTTRKCKS

M

lions of unlts

F
r
I

Mlchlgan SRC Survey

[I
40

1981

1984

1987

1990

1981

1984

1987

1990

PCE DURABLES, EX. MOTOR VEHICLES

Percent change. annual rate

REAL DPI

Percent change, annual rate 12

1
6 3

l2

9

9

6

0

+

u
198?-1988 avg.
1989 1990

I-

1991

1983-1988

1989

1990

1991

avg.

-

- 36
-34

- 32 - 30

. I

28

I

I

I

I

I

26

Chan 15

EMPLOYMENTCOST INDEXES
Prlvate industry workers excluding sales Sales workers

6

3

1987

1988

1989

1990

1991

1992

0

'Conpensallon.

CIVILIAN UNEMPLOYMENT RATE

Quanerly average. percent
8

7

6

5

1987

1988

1989

1990

1991

1992

-

CONSUMER PRICE INDEXES

r

4 Percent change, Q4 to a

Comrnoditles, ex. food and energy

Services. ex. energy

6

4

2

n
1987 1989 1991 1992

Chart 16

SUPPLYSIDE COMPONENTS OF GNP

1. GNP

Annual average growth rate

Long-term trends
1940-73 1973-79 1979-89

Projectii

1989-90

1990-9!

3.7
1.2
1.4 .1

2.6

@

1.o
1.9

@

2.
3. 4. 5. 6.

LABOR INPUT
Working-age population Labor force participationrate Employment rate Average weekly hours Technical factors1

2.0
1.9 .8 -.2

a a
.7 .O
.4
.4 .1 -.l -. 1

1.5

.9

.O
-.4 .1

-.7
.1

-. 1 -.3 -.3
1.7 -.9
ma. n.a. n.a. n.a. n.a. n.a. ma.

8
.o

1.o

7.
8. 9. 0.
11.

LAEOR PRODUCTIVITY~
Privatecapital deepening Public capital deepening TOTAL FACTOR PRODUCTIVITY Energy Research and development Educationand experience Other

2.5
.8 .2

. 6
.7

a
.7

-.l -.l

.o
-.I

.o
.6

1.5
.1 .4 .2 .8

2. 3. 4. 5.

.o
.2

-. 1
.2

.o
.2 .4

.o
-.3

.3

.O

.O

1.Technicalfactors include:the ratio of GNP to the output of the nonfarm business sector: the ratio of nonfarm buslness employment to householdemployment; and rounding error. 2.Nonfarm business sector n.a.Not applicable

c

2.6% potential

4700

-

- 4500

-

- 4300

- 4100 - 3900

1
1985

- 3700

I
1986

I
1987

I
1988

I
1989

1
1990

I
1991

I
1992

I

3500

Chart 17

WHAT IF THE FED WERE TO EASE SUBSTANTIALLY IN THE NEAR TERM?

SCENARIO 1 :

FOMC judges, correctly, that the economy is "one percent weaker" than Greenbook suggests; it lowers fed funds rate to achieve the same output level in late 1992 as in the Greenbook. FOMC judges, incorrectly, that economy is weaker than Greenbook suggests; it eases now, but realizes by midyear that the Greenbook was right and reverses course to avoid seriously overshooting the Greenbook output path in 1992.

SCENARIO 2:

1991
Real GNP, Q4lQ4 Greenbook Scenario 1 Scenario 2 Unemploymentrate, Q4 Greenbook Scenario 1 Scenario 2 CPI, Q4lQ4 Greenbook Scenario 1 Scenario 2

1992
26
. 2.9
2.2

60
.

1.9 1.6 2.3 61 . 6.2
6.0

6.0
6.0
3.9 3.8
4.0

3.9 3.9 3.9

Q1

Q2

1991
Q3

Q4

1 9 9 2
Q1

Q2

Q3

Q4

Federal funds rate Greenbook Scenario 1 Scenario 2

6.75 6.75 6.75 6.75 6.25 5.0 6.25
5.0

6.75 6.75 6.75 6.75 5.25 5.5
I

5.0

5.0

60 .
7.25

6.75 6.75

6.25 7.5

8.0

7.75