STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Material for

StafS Presentation to the
Federal Open Market Committee

July 2, 1991

ChM 1

COMPOSITE INDEX OF LEADING ECONOMIC INDICATORS

-

180

150

120

90

1

1

1

1

1

1

I

I

I

I

1

1

1

1

1

1

1

I

I

I
1989

I

1971

1974

1977

1980

1983

1986

6 0

PROBABlLlPlOF EXPANSION, BASED ON LEADING INDICATORS *
Percent

'Each Obsewatlm represents the probablltty that an expansion has begun o will begin dudng the nexf three months. r

INDEX OF COINCIDENT INDICATORS
Index, 1967-100

I--

-

180

150

".

120

90

J

l

I
1971 1971

I

I

I

I

I

I
1977 1977

I

I

I

I

1

I

I

1

1

1

I

l

l

1974 1974

1980 1980

1983

60

1986

1989

Chad 2

REAL GROSS NATIONAL PRODUCT

4-quarter percent chanae

Contributions to Real GNP Growth in the First Year of Expansion (percentage points)

J

n

t Cvcle
91:Q2 Trough 3.7 17 . . 6 .2 -2 . 11 . -. 11 15 . 22 .

91:Ql Trough
GNP Personal consumption Producers'durable equipment Construction Government purchases (ex. CCC) Exports of goods and services Imports of goods and services Inventories (Incl. CCC) MEMO: Final sales (ex. CCC)

Average of Four Earlier Cycles'

32 . 18 . .4 . I -. 1 .7 -1 .Q 13 . 1.9

55 . 3.2 .6 1.1 .4 .2 -1.2 14 . 4.2

-

PERSONAL SAVINGS RATE

Percent

- 12
- 9

- 6
L-

- 3

~~~~~~1111111111I1IIIIIII11111111111111II ) I
1950 1956 1962 1968 1974 1980 1986 1992

- 1982 dollars -

w-

5000

- 4000 - 3000
- 2000

~ ~ ~ ~ ~ ~ ~ ~ ~ l l l l l l l l l l l l l l l l l l l l l l l l l l l l l l
1950 1956 1962

ChM 4

VACANT HOUSING UNITS

r
...............

Mllllona

i4
................

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

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

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

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

1865

1970

1975

1080

1985

lee0

I
lo80

I

I

I

I

I
1 -

I

I

I
1988

I
lee0

I

I

1982

1884
Percent

50

OFFICE VACANCY RATES

NONRESIDENTIALSTRUCTURES-1990

1982 dollars

-

Total Office Other commercial Industrial Institutional Drilling and mining

01111111111080

121 19 22

17 20
17
26

Utilities and other
1982 1084 1986 1988 1990

Chart 5

NET BORROWING BY NONFINANCIAL SECTORS
Percent of GNP Total Households and Businesses

1
68

1

1

1

1

I

I

1

1

1

I

l

l

1

1

1

1

1

I

1

1

1

1
1992

0

1972

1976

1980

1984

1988

NONFINANCIAL BUSINESSES
Net Borrowing
Net Eqully Issuance

- FUNDS RAISED

Percent of GNP

1 1 5
Net Borrowing

-I

lo

1
1968

1

1

1
1972

I

I

I

I

I

I

1

1

1

1

I

1976

1980

I 1 1984

1

I

I

V

1

1

1

I 1992

1988

5

HOUSEHOLDS - FUNDS RAISED

-

Percent of GNP Consumer Credit

Home Mongages
1 9

1 1 1968

1

1

1
1972

1

1

I

I

I

I

I

I
1980

I

1

I

I
1984

I

I

I

I

I

I

1

I
1992

3

1976

1988

Chart 6

\,1970:4
\ \

Cycle
\

-

1.1

-

- 1.050
- 1

- 0.95
I I I I

I

I

I

I

I

I

0.9

1.5

0.75

0 -

+

0.75

1960

1965

1970

1975

1980

1985

1990

1.5

7

- 9
Total Ex DCW and Deposlt Insurance

Flscal Years

-

- 7

Total

./*

-5
- 3

/ / /

I
I I

/

,"\ '.
I

I

I

I

I

I

I

I

I

I

1

1

Char( 7

STATE AND LOCAL SURPLUSlDEFlClT

roperating
and capltai Accounts

Percent of GNP

11.5

I

0.75

f

/

-

0

+

- 0.75
~ ~ ~ ~ ~ ~ ~ ~ ~ 1 1 1 1 1 1 1 1 1 1 I 1I Il 1 l 1 l1 l1,5 l l l
1960 1965 1970 1975 1980 1965 1990

STATE AND LOCAL GOVERNMENT REAL PURCHASES
Bllllons of 1982 dollan
520

390

260

I30

Structures

1

Chart 8

-

LABOR PRODUCTIVITY
Index. 1982-100 Index. 1982-100

N o n f m Business

- 120 1
120

-

/

* .

- 110 - 100
- 990
0

J l f l I
1968

1 1 1 1 I
1976

I I 1 1 1 1 1 1 1 1 1 I I I I L ,
1980

1972

1984

1988

1982

PRICES FOR PCE EXCLUDING FOOD AND ENERGY’
12

9

6

3

0
‘Shndng lndlcales prlodr when unenploymenl rale exceeds NAlRU

Chart 9

US. External Accounts

MAJOR FACTORS AFFECTING THE EXTERNAL SECTOR

Recovery of U S . domestic demand. Moderate pickup in growth on average in the major foreign industrial countries. Recent strength o the dollar persists. f Oil prices remain near current levels.

EXTERNAL BALANCES
Billions of 1982 dollars, SAAR

Billions of dollars, SAAR

-

50

t\
*
~

\ Current Account

+
0

Billions of dollars annual rate, 0 4

0

-

I 50

I -

Real Net Expo 'rts

II A 1 / u l
1 \)

\ \ \
b-2-

1990 1991 1992

.

-

50

Merchandise -111 -73 - 8 4 Trade Current Account

-94 -45 -52

100

100

Merchandise Trade

Real Net Exports

-9

-4

-14

150

150

1989

1990

1991

1992

Chart 10

THE DOLLAR AND THE INTEREST DIFFERENTIAL
Percent
Ratio scale. March 1973 = 100 130

Real long-term interest differential'
110

90

Pnce-adjusted
dollar"
c

Dollar

J
1986
'

I
1987

I
i988

I
1989

I
1990

1
1991

70

Oinerence beween rates on long-term U S government bands and a weighled average 01 loretgn G.10 long-term government or publtc authorfry band rates. adjusted 101expected lnllatlon '' Weighted average agalnst lorelgn G-10 countries. adjusted by relative consumer o n e s

Nominal Dollar Exchange Rates
Percent change 12/90 to 6/28/91

Nominal Interest Rates
Percent

Change
12,90 to 6,28/91

Level 6/28/91

Deutschemark
Pound Sterling
Yen
Canadian Dollar

21 19 3 -2 1 0

S. Korean Won
Taiwan Dollar

Three-mnth Germany Japan U.S. Long-term Germany Japan

-0.17 -0.35 -1.76 -0.28 0.04 0.16

9.00 7.92 6.06
8.50 6.78 8.24

us.

SHORT-TERM INTEREST RATES

-

Percent

Weekly
9

l1

Foreign

p
LONG-TERM INTEREST RATES
1

r

Percent
11

Weekly

9

7t u
1989 1990 1991 1989 1990 1991
1 Multilateral trade-weighted average lor lorelgn G-10counlies

U.S. 3-Month CD

7

5

ChaR 11

t+

I -

I+INDUSTRIAL PRODUCTION' INDUSTRIAL PRODUCTION'
12-month percent change
7

15

10

r

12-monthDercenl chanae

10

5

5

t

I

-

0

+

-

0

1

5

1988

1989

1990

1991

10

t

France and Italy

i5
10

1988

1989

1990

1991

CONSUMER PRICES

12-monthpercent change

CONSUMER PRICES'

8

Canada and U.K.

r L I

12-monthpercent change

-

France and Italy

Japan

1988

1989

1990

1991

ECONOMIC POLICY ABROAD
Growth slowing in Japan and Germany following very strong first quarters, but inflation concerns remain. Tentative signs of pickup in some weaker economies. Monetary policy cautious, but interest rates may decline further in some countries as inflation eases. Fiscal policy in Germany tighter following expansion this year: policies slightly contractionary on average in other countries.

'Averages wmghled by bllaleral shares o U S "on-agncullural expons n

Cham 12

REAL GNP: US. AND FOREIGN
Percent change, SAAR

r
Foreign' (right bar)

1

5
4

-

Foreign GNP'
Percent change

G-6

Other

3

1990 H1

2.0

3.8
2.7 3.1
3.6

2
1

1990 H2 -0.6 1991 H1 1991 H2 1992 0.1

0 1

+

2.0
2.8

3.8

REAL GNP: G-6 COUNTRIES"
Percent chanae. SAAR

Germany

1

Japan
6

4

2

+
0 -

2 4
1990 1991 1992

CONSUMER PRICES: U S . AND G-6 COUNTRIES'.'

c

4-quaner percent change

r

us

-7

&'...-Other

G-6 countries

L United Slates

% '

U.S.

I
1989

1
1990

I
1991

I
1992

' Average of 22 Induslrld and 8 developmg COUnlOeE weighled by bilateral shares '' Averages weghted by brlalerd shares In U S non agricultural expods
.'.Average uslng U S bllalerd no" 01 inport waghls
1

t
10

6

Consumer Prices"'
Percent change
0 4 to Q4

-

5

G-6

U.S.
4.6 6.3

1989
4

4.2 4.5 4.1 3.3

1990
3

1991 1992

3.4

3.7

2
1

U S "on-agricultural expons

Chart 13

FACTORS AFFECTING NONAGRICULTURAL EXPORTS

r
Total Relative prices

Change, billions of 1982 dollars, SAAR

0 Foreign growth (nght bar)

1 5 0

1990

FACTORS AFFECTING NON-OIL IMPORTS

Total

b
I I I
I

1

I
I
1

I

:

1 IL

I

1
I 1-

1

1

I I 1

I

I

I

I

Change. billions of 1982 dollars, SAAR

- 0 Relative prices U - 0 S growth (right bar) I I I I
7

1
I I 1 1 ; ;
I I
i I

5o

40

30

20

u
-

I

I

I

t

I I I I

I

I I I

10

+

I I I I

0

10

-

20

I
I

I
I

30

I
1990

u
1991

I
1992

I
40

Char! 14

Alternative Scenarios
Baseline: Greenbook forecast extended through 1993; M2 growth at 5-112 percent in 1992 and 1993. Dollar at the level projected in February, almost 15 percent below level now projected; federal funds rate unchanged from baseline. Foreign growth remains at about 1-112 percent; federal funds rate unchanged from baseline.

February Dollar:

Weak Foreign Growth:

Percent change, Q4 to Q4 Real GNP, U S . Baseline February Dollar Weak Foreign Growth GNP Prices Baseline February Dollar Weak Foreign Growth Real GNP, Foreign * Baseline February Dollar Weak Foreign Growth

1-112 2-112 1-112

2-314 4-114 2

2-112 5 1

4 4-112 4

3-112 4-112 3-114

3-114

5
2-112

2-114 2-114 1-112

3-112 3-114 1-112

3-112 4 1-112

Q4 Level, $billions Current Account Baseline February Dollar Weak Foreign Growth

-45 -37 -48

-52 -20 -73

-56
-32 -95

*

Average of 22 industrial and 8 developing countries weighted by bilateral shares in U.S. nonagricultural exports.

Chart 15

ECONOMIC PROJECTIONS FOR 1991

~ ~~ ~

FOMC

Range

Central Tendency

Adminlstration

Staff

_____
Nominal GNP Drevious estimate Real GNP previous estimate GPI previous wtimate
3-314 to 5-314
S l L ? to 5-1/2

Percent change, 0 4 to Q45.3
53 .

4-112 to 5-114
3-3/4 to 5-1 14

5.3
5.9

112 to 1-112
-1/2t 1-1/2 o

314 to 1
3/4 to 1-1/2

0.9
09 .

1.5
1.Q

3-1 I4 to 3-314
'3-114 t o 4

4.3
4.3

3.4
39
.

- - - -Average level, Q4, percent- - - - - ­
Unemployment rate previous estimate

&It2 to 7
6 l Z to 7-112 -/

6-314 to 7
&1/2 to 7

6.7
6.7

6.6
61
.

ECONOMICPROJECTIONS FOR 1992

FOMC

Range

Central Tendency

Administration

Staff

- - - _ _ _ _ - - - _ _ _ _ -Percent change, Q4 to Q4- - - - - - - - - - - -Nominal GNP Real GNP CPI
4 to 6-3t4
5-112 to 6-112

7.5 3.6 3.9

6.1

2 to 3-1 12 2-1 I4 to 3-1 I4 2-1 I2 to 4-1 14 3 to 4

2.8 3.7

- - - - _ _ _ _ Average level, 0 4 , percent- - - - - -..____-_

-- ----- --~ ~

Unemployment rate

6 to 6-314

6-114 to 6-112

6.6

6.3