STRICTLY CONFIDENTIAL (FR) CLASS I-FOMC

Material for

Staff Presentation to the Federal Open Market Committee
January 30,1996

Chart 1

Recent Indicators
Hours and Output Growth
r
Percent change, saar 1 8 Production worker hours
- 6
Jan. 2a

-

I

Initial Claims
Thousands Four-week moving average

- 4

380

360

+

340

320

0

- 154
quarterly average
Dee.

b quarterly average

- 17
Dm.

:TI,,
- 147
140

- 16 - 15

14

133

2.52

Diffusion Indexes

Percent

Chained 1992 dollars
--Q4

-Iw

J40

2.48

-23

2.44

- 0
-20 Jan.

+

I

I

I

2.4

I
1993

I

I

I

140

1993

1994

1995

1994

1995

chart 2

Forecast Summary
Real GDP
Percent change, annual rate

Q4/Q4 Percent Change

1996 1997
2.0

Unemployment Rate

Percent

Consumer Price Indexes

Percent change, annual rate

CPI
1994 1995 1996 2.6 2.7

-

CPlX

Q4/Q4 Percent Change
CPI ex food and energy

2.8
3.1

3.0
2.9

2.8
3.0

Total CPI

1997

I

I

I

I

L
1997

1994

1995

1996

Chart 3

Financial Market Conditions

l n W n expecwmn basad on prim l y e u and w a w e CPI changes fw Month end lOyear Treasury rates, respdveiy. ' er

a
6

GDP Gap and 2-Year Lag o Real Funds Rate f Percent
Real Federal Funds Rate Lagged 2 Years'

Percent

10
8

4

6

2

+ 0
2 4

4 2

0 -

+

2
4

6

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2ooo

The m d funds rate is deflated by Q4-t0-04 core CPI inlkfion, using (befcfe 1982) h e exprimental series that tmals i owner's equivdanl rent consis(enUy throughout himry.

Distribution of Bank Assets By Capital Status* (Percent of industry assets) 199O:W
Under Capitalized Adequately Capitalized Well Capitalized

1995:03
0.5

Bank Business Lending Policies
Percer

-

60

30

Easier

31.3 38.6 30.1

0 -

+

2.9 96.6

Standards

Tighter

30

60
'Adjusted for examiner ratings.

1990

1992

1994

1996

Chart 4

Fiscal Policy Outlook
Fiscal Assumptions - Billions of Dollars of Deficit Reduction, Relative to OBRA-93 Path December Greenbook FY 1996 F Y I 9 9 7 Total' Discretionary Mandatory Taxes
* Excluding interest savings.

January Greenbook PI1996 FY1997
-21 -21 0 0
-1 9

"Downpayment"?? FY1996 FY1997
-1 8

-25
-1 7

-31
-28 -22

+2
-1 9

-1 9
0 0

-21

-7
-1

-1
+4

-4

+I 9

+25

-

- 6

.-­ -----A--r-­ --.

- 4

- 2

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

I

1 0

1.6

0.8

0 -

+

0.8

1980

1983

1986

1989

1992

1995

Chart 5

Summary of the Outlook External Sector
External Balance

-

Current Account
Billions of dollars
0

-

Percent

of GDP
1985 1986 1987 1992 1993 1994 1995 1996 1997 -3.0 -3.4 -3.5 -1.o -1.5 -2.2 -2.2 -1.9 -1.9

Goods and Services

50

,-

_.-. --. ..- -- 100

150

I

I

I

I

I

1992

1995

U.S.Exports and Imports of Goods and Services

r

(Chained 1992 dollars)

4-quarter pement change

1 1 0
’ \

‘-’

I

I

I

I

1992

1993

1994

1995 1995

I

1996 1996

I

1997 1997

I

Contribution of Net Exports to U.S.Growth

1
- 5 5

0

r

(Chained 1992 dollars)

Percentage points, saar

1

1992

1993

1994

1995

1996

1997

Chatt 6

Exchange Rates
Dollar and Interest Differential
Percentage points
Index, March Is73 = 100

-95

Percent change, Q4 to Q4

1

-90

-85

-80
I

I

I

I

I

I

I

I

I

1988

1993 1994 1 995 1994 1996 * weighted average against foreign G-10 auntras, edpsted by dative wnwmer prims. Diffennce belwean rates on long-ierm U.S. lya government bond and a weighted average of foreign G-10 oer benchmark

1990

1992

government bonds. adiusbsd for expaded iflath.

Projection Error and Actual Change in the Price-Adjusted G-10 Dollar"
Percentchange, Q4 to Q4

I Error

1
10

+ 0
-

1988
1989

1990 19 91 1992
1993
1994

10

1995

% m u is difference betwefm adualchange and for&

made one year earlier.

I

US. Implications o a Four Percent Change in the Price-Adjusted DollaP Percent change from baseline GDP f
Wid bars: dollar depreciation open bars: ddlar appreciation

-I
0.25

+
0
-

0.25

I
1996

I

I

I
1998

1997

*

Change is phased in over four quartersof 1996and heH a new leWllfwlW7 and 1998. t
Charge in percent w bi u m to GDP n ib S

chart 7

Foreign IndustrialProduction and Consumer Prices
(%month man'ng averages)

115 110 105 100 95 90

/ , L

Consumer Prices*

l15. 110

1
1992 1993 1994 1995

v
Industrial Production
2 1992 1993 *West Germany 1994 1995

United Kingdom

115 110 105 100

4

4

95

90

J

J 1
105 2 100

2

0
-

+

IP

0
-

+

90

95

I

I

I

I

1992

1993

2

1994

1995

2 1992 1995

1993 1994 'Exdudes mortgage interest payments.

Canada

Japan

2 1992 1993 1994 1995 1992

I

I

I

1993

1994

1995

malt8

Foreign Outlook
F i i Policy*
G-10 Interest Rates

Change

1994 8 1995
Change 1996 & 1 9 9i
%

r

Percent

-

Germany France

. I
1%

2%
2%
2%

%

* h
1993

10-Year Real Rate

Average. 1981-1W

0

Italy
United Kingdom Canada Japan

1%
1%

Amage. 1981-199E

1%
-1 %

3-MOnth Real Rate

' I.

h
1994

..'.- ,,' .'

1995

1996

1997

Percent change, Q4 to 0 4

Percent change, saaf

1 9 m 9 z 9 5 ? 9
Europe (G-7) Japan Canada Mexico

15 . 14 . 09 . -9.5

2.3 31 . 24 . 43 . 25 .
6.7

2.5 2.3 23 .
5.5

l4
1994 1995 19 i 1997 *Chained 1992 dollars US. wnagricuhral merchandise expart weights.

. Other Latin Am. 2 9
Other Asia 7.5

30 .
6.7

4quarter percent change

Percent change, Q4 to Q4

1995199f? 199z
W. Gemany France Italy

15 . 19 . 59 . 29 . 21 .

19 . 18 . 4.4 2.8 16 .

20 . 1.8

40 .
3.0 20 .

v\, , -

U.K.' Canada Japan

0

Forelgn G - 7
1996

- -1997

-0.8
1.1

0.0
1.2

0.0

Average

14 .

1994

1995

' U S . m n 4 l import weights.

Exdudes rnottgaw inter& payments.

Risks to the Forecast
Foreign Growth: Prqectiin Error and A d u d Deviation from 19881995Average" Percent change Q4 t Q4 o

I

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I

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I

I

1988 * Error is d-nm

1991 1992 b e t u r n actual growth md hecastmade o m year&.

1989

1990

1993

1994

1995

U.S. implications o One Percentage Point Change in Foreign Growthf f

r
-

Percent change from baseline GDP

Sdidbars: increased rW o m O P ~ ~ X Tdecr�a5e(fIarOWm S:

1

0.25

+
0
-

0.25

1996

1997

1998

n GDP hdd a higher (lower)l e d kr 1997 and 1998. t 'Change phased in orer 199s: Change in Prmntcwmibulirn%DP

U.S. GDP implications: Comparison o Increased Foreign Growth and Ddlar Depreciation f Percent change from baselineGDP

1

0.4

1996

1997

1998

Chart 10

External Pressures on Short-Term Interest Rates

Baseline:

Greenbook forecast extended to 2002

Monetary Policy Assumptions:

(a) Real GDP held close to baseline
(b) Price level held close to baseline

Alternative Scenario:

Dollar depreciates during 1996-2000 by an amount sufficient to narrow the U.S. current account deficit by 2 percent of GDP

Real Short-Term Interest Rates*
Deviationfrom baseline, percentage points

Price-levelTargebng

GDP Targeting

I

I

I

I

I

I

1996

1998

2oM)

2002

* Federal funds rate less inflation over previousfour quarters.

chart 12

Corporate Equities Held by Households Billions ofdollars

Held ~y defined benetit pension funds

-
-

I
I I

-4Ooo

-20oo

I

1

I

I

1

1

0

1987 1988 1989 1990 1991 1992 1993 1994 1995 Cor a equiSes held throu h defined contribution pension plans, variable annu~es, & IRA/Kaogh% and personal busts. IncPudes mrpaateequity he8 by direct household ownership of mutual fund shares.

Income

(1992dollars)
All households Less than 10,000

Distributions of Assets and Debt, b Income in 1992 (Percent of all househo 9 Median 'ercentage Assets debt assets of payment iouseholds ratio'
(1) (41

families

10,000-19,999 20,000-29,999 30,000-49,999 50,000-99,999 100,000-249,999 250,000or more

100 0. 17.6 19.6 15.3 20.8 19.3 61 . 1.3

100.0

7.2 14.7 2. 61 23.2 19.5

I

4.7 7.7 1. 43 32.6 22.9 10.6

1. 54 1. 16 14.7 15.3 1. 71 16.2 14.9 6.2

15.9 27.9 35.0 45.2 56.3 5. 11 46.8

68.3 5 .I 1 44.3 33.6 28.8 20.2 10.9

Bankruptcies and Charge-offs
Percent
2.8

-

Thousands

Bank Willingness to Lend
to Consumers

Percent

1400
Charge-off rate for consumer lcans

r

-
1M)
.
50

2.1

-300

-

More

Q4 1.4 NonbusinessbankNptcieS per 100,000 people
-20)

+ 0 50

LeSS
100

0.7

-

0

100

chart 13

Producers’ Durable Equipment
(Chained 1992 dollars, percent change, annual rate)

Average growth in expansion Projection

1980s’
1. PDE

Current2

1995 8.2 30.4 4.3 4.6

1996
2.0

1997 4.4 14.9 16 .

70 . 3. 28 6.0 38 .

11.2
27.6 8.8 8.8

2 Computers . 3. Other 4.
I

18.8 -1.7 -2.7

Industrialequipment

.3

0 1. Average growth rate from cydical tough in PDE (1982:(14) cydical peak (1989:CS). ae to 2 Average growth rt from cydical fmugh in PDE (1992:Ql) 1995P3. .

Percent charge, Q4 to Q4

Change, Q4 to Q4

1
l2 30

r

p a e n t change, Q4 to Q4

Change. Q4 to Q4

20

820

8

10

4 10

4

+ 0 10

0 0 - 4 10

+

+

+ 0
4

20 _.

a 1982 1987 1992 1997

m __

8

1982

1987

1992

1997

PDE - Computers

- BiiliiSOfchailed - 1992dollars

Flab0 scale

­ -

170 130

-90
-50

Selected Forecasts of U.S. Unit PC Sales Growth, 1996

-

Source
IBM

(Percent change) Forecast* Comments

28

Some uptick in 1996; still filling the small business market About the same as 1995 Some upside risks Growth a bit slower than in 1995:but still healthv

1982-1995 Trend

- 10

DEC
Intel Texas Instruments

low 20’s
17-20 15-20

1982

1987

1592

1997

* Growth for fhe entire indusby, not individual mmpiny.

-8

- 6

CPI en food and energy
- 4

--:=-<::z*----- 2

-.
I

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I

1

" 0

1987

1B 9B

1988

1990

1981

lsSe

1953

1994

1595

1996

1997

1988

1991

1993

1995

1997

1988

1991

1993

1595

1987

PPllMiM&eri&

MarfaCh.ing--

-

Percent
1967-1995

A
8

4

0 -

+

I I 1988

I

I

I

I

I

I

I

1991

1953

1995

1997

chart 15

Potential Output

Supply-side Components of Potential GDP
(Adrage annual growth rate) Long-term trends

Projection

1960-73
1. Potential GDP

1973-79

1979-90

1990-97
19 .
1 .o 1.1 -2 .

4 . 1
12 . 30 .
-. 1

33 .

2 .

Laborinput

3 .

Laborpro&xtivii'
Technical factors

2.0 . 9
.4

27 . 16 .
1.1

I

4.
1

*

.o

Nonfarm hid-+< e . . ...

r.

2 Technical f a d a s indug: the r;ilpof GDP I Uw wQut ofthe nonfarm business sector: the rabo of nonfarm business )
empbVmen1to household empbymsmand r m n d t g m r .

C an d ( 9 2 dollars hi e 1 9 )
31
..

25

1
9

1 3
1960

1966

1972

l7 S8

1984

19 90

19 96

Labor Force

Rae*
Percent

Okun's Law

Fourquarter change in Unemployment Rate

la

Semi-annual,

1990-95
2 2

I
2
4
6

- O+

Fourquarter Percent Change in Real GDP

Chart 16

Has Inflation Been Surprisingly Low?
Revisions to Forecast for 1995

Prices Excluding Food and Energy

Blue Chip: Jan. 95 Jan. 96 Staff: Jan. 95 Jan. 96
1. 2.

12month percent change*

-

PPI

CPI

1993 3.3 2.8 2.9 2.7 5.6 5.6 5.4 5.6 1994 1995

.3
1.6 2.7

3.1 2.8
3.0

0 4 to Q4 percent change. Annual average.

* November to November.

CPI Excluding Food and Energy

r

Percent change, annual rate
1992:Q3

-I8
Reduced-form price equation Sample period: 68:Q1-92:Q3

I

Dynamic Simulation

1990

1991

1992

1993

1994

1995

19%

1997

Employment Cost Index*

1992:Q3

Percent change, annual rate

-

Phillipscurve Sample period: 62:02-92:Q3 Dynamic Simulation
4

____----. ,_____-----

1992 1993 1994 Spiicad wim hourly n o r d m business mmpensafionprior lo 198o:Cn.

1930

1991

1995

1996

1997

Chart 1 7

Labor Market Conditions
Civilian Unemployment Rate UnemploymentlessMan 6 percent Percent
12

8

4

Fourquatter change in ECI Compensation

0

1980

1982

1984

1986

1988

1990

1992

1994

1396

Help Wanted Advertising Index rmference bard*

1

150
120

90

60

* lndudes Abraham(l987)adjus@mts.

Job Availability

1980

1982

1 984

1986

1988

1990
agencies.

1992

1994

1996

30

*Adjusted addi+hrially bend in employment at p e m n e l sup& fa

Percent of households

1

75

1982

1984

1986

1988

1990

1992

1994

1996

--I I

-cag -hne

ia

12

6

I

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I

1

I

I

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I

I

1

i

I

I

I

I

0

lSW

1983

1986

1988

1992

1995

RiQMdapOverUIltLpaCosLs

Fia

-

1.58

Average (1980-1995)

1.54

1.50

1.46

I

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1

I

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1

1

1

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1

I

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1.42

1SW

1 s

1986

1989

1992

1995

Chad 19

ECONOMIC PROJECTIONS FOR 1996

FOMC
Range Central Tendency
Percent change, Q4 to Q

Staff

NominalGDP
previousestimate

3.9 to 5.0
45/8 to 5l12

4.3 to 4 8 .
to 531g

4.5 1.a

Real GDP
previous estimate

1.6 to 2.5
n.a.

2.0 to 2.2
n.a.

CPI
previousestimate

2.5 to 3.0
2l/2 tO3’12

2.7 to 2.9
2 7 1to 3‘14 ~

3.0

Average level, Q4, percent Unemploymentrate
previous estimate

5.5 to 6.1
5l/2 to 6114

5.6 to 5.8
to 6’18

5.6

ma.

Not applicable.

NOTE: Centraltendencies constructed by dropping top and bottom three from distribution.