greenbooks · February 6, 1990

Greenbook/Tealbook

Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

CONFIDENTIAL (FR) CLASS III - FOMC

February 2, 1990

SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the Federal Open Market Committee

By the Staff Board of Governors of the Federal Reserve System

TABLE OF CONTENTS

Page THE DOMESTIC NONFINANCIAL ECONOMY Employment and unemployment. Average hourly earnings. . . Purchasing managers' survey. Consumer surveys . . . . . . Manufacturers' inventories . Addenda. . . . . . . . . . .

. . . . . .

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

. . . . .

. . . . . . .

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

. . . . . .

1 2 3 3 4 4

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

5 5 6 7 11 11 13

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

Tables Changes in employment. . . . . . . . . . . . . Selected unemployment rates. . . . . . . . . . . Average hourly earnings. . . . . . . . . . . . Summary of survey of purchasing managers . . . Changes in manufacturing and trade inventories . . . . . . . . Inventories relative to sales Business capital spending indicators . . . . .

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

Charts . Purchasing managers. . ................. . Average lead time. . . . . . . . . . . . . . . . . ... Consumer attitudes . . . . . . . . . . . . . . . . ... . ... . . . . . . . Ratio of inventories to sales . .. Nonresidential construction and selected indicators. ...

.. .. . .. ..

8 9 10 12 14

Summary of responses to the January 1990 senior loan officer opinion survey . . . . . . . . . . . . . . . ... .

THE FINANCIAL ECONOMY

Tables January senior loan officer opinion survey . . . . . . . . . . . Monetary aggregates Commercial bank credit and short- and intermediate-term business credit . . . Selected financial market quotations . . .

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

19 24

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

25 26

APPENDIX Federal budget developments. . . . . . . . . . . . . . . ...

A-i

Tables Estimates of total budget. . . . . . . . . . . Administration and CBO economic assumptions. . CBO baseline budget projections. . . . . . . . Composition of Administration budget proposals Administration budget projections. . . . . . .

. . . . .

. ... ..A-i . . . ... A-3 . . . .. .A-4 . . . .. .A-5 . . . .. .A-6

... . .

Chart Federal outlays. . . . . . . . . . . . . . . .

-ii-

. .A-8

SUPPLEMENTAL NOTES

THE DOMESTIC NONFINANCIAL ECONOMY

Employment and Unemployment Despite sizable temporary layoffs in motor vehicles and related industries, the civilian unemployment rate was unchanged in January at 5.3 percent, and nonfarm payroll employment was up 275,000.

The gain in

jobs reported in the business survey and the 0.6 percent rise in aggregate hours of production workers probably overstate to some extent the underlying strength in labor demand:

Those over-the-month changes were bolstered by

large increases in construction--associated with unseasonably warm weather-and in retail trade--associated with problems in estimating seasonal swings in holiday staffing. Asexpected, the payroll employment report showed a steep decline in manufacturing jobs in January:

About 90,000 of the drop occurred at motor

vehicle facilities, but stampings and tire production also were affected, reducing employment by another 25,000 in fabricated metals and rubber. Elsewhere, smaller declines continued in the primary metals, machinery, furniture, apparel, and textile industries.

The only notable gain in

factory jobs occurred in the lumber industry and may have been associated with an unusually brisk pace of construction activity last month.

Indeed,

construction employment jumped more than 100,000 last month, more than offsetting the drop of 50,000 that occurred in December when weather was unseasonably harsh.

-2In the services and finance industries, January's increases in employment were about in line with recent trends.

Within services, growth

in business services has slowed, on average, in recent months, but health services continue to expand at a rapid rate, adding almost 50,000 jobs again last month. January.

In trade, employment was shown to have increased 141,000 in

However, 25,000 of the gain reflects the reversal of December's

reported drop in jobs at general merchandisers, suggesting that these retailers recently have expanded employment little, on net, apart from holiday hiring.

Over the past year, employment at general merchandisers has

risen only 22,000; automotive dealers and service stations also have seen a similar small gain.

In contrast, employment gains have continued to be

sizable at food stores and eating and drinking establishments. In the household survey, total employment, which can fluctuate widely from month to month, edged down in January after a small increase in December.

Unemployment declined as well; the number of job losers did jump

85,000, reflecting the industrial layoffs in early January, but the impact on the overall jobless rate was obscured by an unusually steep decline, of almost 170,000, in the count of unemployed entrants to the labor force. That drop also was reflected in a small decline in the labor force participation rate in January. Average Hourly Earnings Average hourly earnings of production workers edged up 0.1 percent in January to a level 3.7 percent above a year earlier.

Average hourly wages

apparently were held down last month by the hiring of a sizable number of relatively low wage construction workers and by the absence of laidoff auto

-3workers.

Hourly earnings in construction were down 2 percent over the

month, and wages in durable manufacturing were off 1 percent. Purchasing Managers' Survey The purchasing managers' survey in January indicates that activity in the industrial sector remained sluggish.

After verging into the positive

range in December, new orders apparently weakened last month, with the number of purchasing managers reporting declines in orders exceeding those reporting increases by 9 percentage points.

Survey readings on production

and employment remained in the negative range.

Some items, though, were

reported to be in short supply, in part because of disruptions caused by the record cold in late December.

Thus, while the margin of suppliers making

faster deliveries still was running above those reporting slower deliveries, the margin in January was not as great as in previous months.

Similarly,

although purchasing managers who paid lower prices in January still outnumbered those who paid higher prices, the net difference of less than 2 percentage points contrasted sharply with the 12 to 13 percentage point spread reported in the preceding several months.

Also, lead times allowed

by purchasing managers in ordering production materials and maintenance and repair supplies were up a bit from the low December levels. Consumer Surveys The Michigan survey of consumer sentiment edged up in January, while the Conference Board index dropped back sharply.

The rise in the Michigan

measure was attributable to a sharp increase in respondents' perceptions of current buying conditions for large household goods; expectations of future business conditions and personal financial situations were down somewhat from December.

Respondents to the Conference Board were more pessimistic in

-4their appraisal of both present conditions and the outlook six months hence. The Michigan Survey measure of inflation expectations over the next 12 months increased 3/4 percentage point to 5.4 percent, the highest reading since last May. Manufacturers' Inventories In current-cost terms, manufacturers' inventories fell at an annual rate of $16 billion in December, following moderate increases in October and November.

For the fourth quarter as a whole, the current-cost data show

that factory stocks rose only $2.3 billion at an annual rate--considerably slower than the average increase of $22-1/4 billion during the first three quarters of last year.

The December inventory reduction was apparently

quite widespread; outside of aircraft, most major industries reported inventory declines. A 0.5 percent drop in factory shipments left the manufacturers' inventory-to-shipments ratio at 1.60 months at the end of December.

The

ratio remained largely unchanged at this level all through the fourth quarter, after following a gradual uptrend over the first three quarters of last year. Addenda The attached table on business spending indicators and the chart on nonresidential construction and selected indicators have been updated to include data through December on construction put-in-place and revised data on shipments and orders for durable goods.

CHANGES IN EMPLOYMENT 1 (Thousands of employees; based on seasonally adjusted data)

1989 1988

1989

1989 Q4

Nov.

1990

Dec.

Jan.

----------Ave-age monthly changes-------Nonfarm payroll employment 2 Strike-adjusted

2.76 275

204 206

240 245

163 177

151 127

281 278

96 22

275 273

248 248 29 20 9 14 64 11 118 27

176 177 -8 -13 5 8 47 12 99 28

198 203 -10 -12 2 10 32 11 137 42

115 128 -30 -29 -1 14 38 15 76 48

152 128 -23 -23 -0 -7 42 10 86 -1

294 291 -20 -18 -2 20 87 20 157 -13

63 -11 -28 -28 0 -50 -22 11 71 33

277 275 -112 -101 -11 104 141 10 106 -2

Private nonfarm production workers Manufacturing production workers

197 20

142 -11

151 -14

94 -27

120 -20

277 -31

24 -18

235 -107

Total employment 3 Nonagricultural

192 193

146 145

165 181

-41 -68

156 164

251 288

52 15

-25 37

Private Strike-adjusted Manufacturing Durable Nondurable Construction Trade Finance, insurance, real estate Services Total government

1. Average change from final month of preceding period to final month of period indicated. 2. Survey of establishments. Strike-adjusted data noted. 3. Survey of households.

SELECTED UNEMPLOYMENT RATES (Percent; based on seasonally adjusted data)

1989 1988

1989

5.5

Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older White Black

1989

5.3

15.3 8.7 4.2 4.3

15.0 8.6 3.9 4.2

15.0 8.4 3.9 4.2

4.7 11.7

4.5 11.5

Fulltime workers

5.1

Memo: Total nationall

5.4

Civilian, 16 years and older

1990

Nov.

Dec.

Jan.

5.3

15.0 8.7 3.9 4.2

15.2 8.9 4.0 4.3

15.3 9.0 4.0 4.2

15.2 8.9 3.9 4.3

14.5 8.5 4.2 4.1

4.5 11.3

4.5 11.8

4.5 11.9

4.6 11.8

4.5 11.3

4.9

5.0

5.2

5.3

5.2

1. Includes resident armed forces as employed.

AVERAGE HOURLY EARNINGS

(Percentage change; based on seasonally adjusted data) 1

1989 1988

Total private nonfarm Manufacturing Durable Nondurable Contract construction Transportation and public utilities Finance, insurance and real estate Total trade Services Memo: Hourly earnings index 2

1989

1989 Q4

Nov.

1990

Dec.

Jan.

-Annual rate-

-Month-y rate-

3.7

3.9

4.0

4.1

3.8

3.0 2.8 3.1 2.3

2.7 2.4 3.4 3.2

2.2 2.3 2.5 3.2

3.6 4.1 3.3 2.1

2.2 1.0 4.4 4.0

.2 .0 .2 .6

.3 .3 .5 .7

-. 4 -1.0 .4 -2.0

2.0

2.1

1.8

2.7

1.0

-. 6

5.3 4.1 4.9

4.5 4.0 5.6

6.0 4.0 6.1

5.6 4.1 5.7

4.5 4.3 5.2

-1.0 .0 -. 4

1.2 .5 .8

-. 2 .4 .4

3.5

3.8

3.9

3.5

-. 1

1. Changes over periods longer than one quarter are measured from final quarter of preceding period to final quarter of period indicated. 2. The Hourly Earnings Index after 1988 was produced by FRB staff.

February 1, 1990 SUMMARY OF SURVEY OF PURCHASING MANAGERS FOR INDUSTRIAL FIRMS

1989 Q2 - - - - - New orders Increases Same Declines Net change (n.s.a.) <1> Net change (s.a.) <1> New export orders Increases Same Declines Net change (n.s.a.) <1,2>

1989 Q3

1989 Q4

1989 Oct

1989 Nov

- - - - - Percent reporting - - - - - -

29 56 15 14 7.8

26 52 22 4 4.0

24 69 7 17.4

24 70 6 17.7

20 51 29 -9 -9.3

Production Increases Same Declines Net change (n.s.a.) <1> Net change (s.a.) <1> Employment

Increases Same Declines Net change (n.s.a.) <1> Net change (n.s.) <1> Prices paid Increases Same Declines Net change (n.s.a.) <1> Net change (s.a) <1> Inventories Increases Same Declines Net change (n.s.a.) <1> Net change (s.a.) <1> Vendor performance Slower Same Faster Net change (n.s.a.) <3> Net change (s.a) <3> Average lead times, number of days, seasonally adjusted MRO supplies 29 25 26 Production materials 56 58 54 Capital goods 174 171 172 <1> Increases minus declines.

<2> Data on export orders available only since January 1988. <3> Slower less faster.

19 54 27 -7 -.7

19 73 8 11.0

16 7, 5 11.0

1989 Dec

1990 Jan

2/1/90

Purchasing Managers* (Seasonally adjusted) Percent

Percent

New orders

an.

______I l lI

1984

1986

1988

1984

1986

1988

Percent

1-1984

1l1-----75 1988 1986

1990

Percent

1990

Percent reporting increases are netted with those reporting decreases. **Positive entries represent slower deliveries.

1984

1986

1988

1990

2/1/90

-9-

Average Lead Time (Monthly, seasonally adjusted) MRO SUPPLIES

-- 20

1980

1982

1988

1990

1988

1990

PRODUCTION MATERIALS

1980

1982

1984

1986

CAPITAL GOODS

I 1980

I 1982

I 1984

I 1986

Source: Calculated by FR staff from monthly purchasing managers reports.

Jan.

I 1990

February 2, 1990

Consumer Attitudes Index

Conference Board Index of Consumer Confidence 120 [ /'

Jan Ii

iF,

90I

F',

80Michigan Survey Research Center Index of Consumer Sent iment

I4 I (I

1989

The base of the Michigan Index is February 1966; the base of the Conference Board Index is the annual average for 1985. Both indexes are an average of five equally-weighted questions that relate to current and expected economic conditions. However, the questions in the two surveys are different and the timing of the surveys in the field varies.

-11 CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data)

1989

Oct.

Nov.

61.2 47.6 21.4 11.5 28.3 13.6 14.7

39.1 30.0 17.6 20.1 9.1 11.1

-2.3 -----

31.0 67.1 9.9 38.7 -17.6 -36.0 18.5

41.3 41.7 13.2 11.7 16.4 -.4 16.8

16.2 19.2 8.3 5.2 2.6 -3.0 5.7

9.9 18.9 12.0 -.5 -1.6 -9.0 7.4

--------

46.7 43.0 1.1 30.6 14.9 3.6 11.3

38.9 34.3 11.6 11.7 15.6 4.6 11.0

Dec.

Current-cost basis: Total Total excluding auto Manufacturing Wholesale Retail Automotive Excluding auto

7.4

-16.1

Constant-dollar basis: Total Total excluding auto Manufacturing Wholesale Retail Automotive Excluding auto

INVENTORIES RELATIVE TO SALES <1> (Months supply; based on seasonally adjusted data)

1989 Q2

1989

Oct.

Nov.

Dec.

Range in preceding 12 months:<2> High Low Current-cost basis: Total Total excluding auto Manufacturing Wholesale Retail Automotive Excluding auto

1.48 1.46 1.53 1.27 1.59 1.87 1.49

1.54 1.51 1.64 1.31 1.64 2.06 1.53

1.51 1.47 1.57 1.28 1.63 2.05 1.51

1.52 1.49 1.60 1.28 1.64 2.04 1.52

--1.60 -----

1.53 1.49 1.60 1.29 1.64 2.03 1.53

1.52 1.49 1.60 1.28 1.64 2.04 1.53

1.48 1.46 1.52 1.31 1.51 1.70 1.44

1.52 1.51 1.63 1.36 1.56 1.93 1.47

1.50 1.47 1.57 1.33 1.55 1.88 1.46

1.49 1.48 1.58 1.32 1.52 1.72 1.46

--------

1.51 1.49 1.59 1.33 1.55 1.81 1.47

1.51 1.49 1.59 1.32 1.56 1.84 1.48

1.60

Constant-dollar basis: Total Total excluding auto Manufacturing Wholesale Retail Automotive Excluding auto

<1> Ratio of end of period inventories to average monthly sales for the period. <2> Highs and lows are specific to each series and are not necessarily coincidential. Range is for the 12-month period preceding the latest month for which data are available.

RATIO OF INVENTORIES TO SALES (Current-cost data) Manufacturing

Wholesale 1.9

Excluding motor vehicles, farm and groceries I,

- I

Total manufacturing 2~'

I "'N '

t i

St I

I.'-

'it-

Excluding transportation equipment Total wholesale

I 1985

I 1986

I 1987

I 1988

Total Retail

1985

II Ratio

1986

1987

1988

1989

I 1 8

19 I 1985

1989

1986

1987

1988

Retail Excluding Autos and Food

1985

1986

1987

1988

1989

Ratio

1989

1.6

-13-

BUSINESS CAPITAL SPENDING INDICATORS (Percentage change from preceding comparable periods; based on seasonally adjusted data)

1989 Q3

Oct.

1989 Nov.

Dec.

2.2 -2.3 -.2 -.8 -1.0 -3.5 .0 -.2

-4.4 -1.9 -7.9 -.4

-.1 1.2 2.2 .9

.7 1.5 1.3 1.6

-.5

1.7

-.8

n.a. -43.7

-26.1

n.a.

Producers' durable equipment Shipments of nondefense capital goods Excluding aircraft and parts Office and computing equipment All other categories

3.0 3.0 6.1 2.3

Weighted PDE shipments'

3.1

1.2

Shipments of complete aircraft 2

14.7

46.2

Sales of heavy-weight trucks

-3.7

-2.2

-4.7

10.4

-11.2

-.3

1.0 2.9 1.8 3.1

-2.5 -4.2 6.5 -6.6

6.0 1.7 -4.2 3.2

1.8 -4.1 -9.2 -2.7

8.1 4.7 1.4 5.5

18.0 1.9 -4.7 3.5

-.4

2.2

-2.8

2.8

1.4

-.8 -3.4 -6.5 3.8 3.9 .3

1.9 -3.5 5.4 -1.8 7.0 5.3

-.5 -2.0 1.4 -.8 2.3 -2.5

-.1 -2.1 5.7 -.9 -1.0 -2.6

-.1 -.3 -1.5 .5 .4 .6

-2.9 -.7 -7.7 .6 -1.8 -4.3

16.2

3.0

-3.1

-3.2

-.4

-3.1

Orders of nondefense capital goods Excluding aircraft and parts Office and computing equipment All other categories Weighted PDE orders'

Nonresidential structures Construction put-in-place Office Other commercial Public utilities Industrial All other .otary drilling rigs in use

1. Computed as a weighted sum of 25 individual equipment series (excluding aircraft) from the Census M-3 report with weights equal to the fraction of final business spending for each type of equipment. 2. From the Current Industrial Report (CIR) titled "Civil Aircraft and Aircraft Engines." Seasonally adjusted with BEA seasonal factors. To estimate PDE spending for aircraft, BEA uses the aircraft shipments shown in that report, not the corresponding Census M-3 series. The CIR does not provide information on aircraft orders. n.a. Not available.

-14-

NONRESIDENTIAL CONSTRUCTION AND SELECTED INDICATORS <1>

Index, Dec. 1982 = 100, ratio scale

1980

1982

1984

1986

1988

Office

Other Commercial

Industrial

Institutional (P)

(NC) -'^-

-4,

(c)

1986

1988

1984

I 1986

I 1988

<1> Six-month moving average for all series shown. Data end in November for all series except contracts, which go through December. <2> Varies by panel: either permits (P), contracts (CN), or new commitments(NC).

THE FINANCIAL ECONOMY Summary of Responses to the January 1990 Senior Loan Officer Opinion Survey

The January 1990 Senior Loan Officer Opinion Survey on Bank Lending Practices focused on credit standards and lending terms for different types of C&I loans and whether various price and nonprice terms on new loans had been tightened recently.

Respondents were asked about their loan policies

with respect to different categories of C&I loans that are believed to pose different degrees of credit risk; these included merger-related loans, nonmerger-related loans to investment-grade C&I customers, nonmerger-related loans to below investment-grade firms, C&I loans to new customers, and real estate loans for acquisition, land development, and construction (ADC loans).

In addition, respondents were asked to rank various factors that

may have led them to alter their loan policies toward C&I and ADC customers, and what percent of their loans in this latter category would have been made by savings and loan associations in the absence of recent problems in the thrift industry. The survey indicated that many banks reported tightening their credit standards and nonprice terms of credit for the riskier types of C&I loans, but not for nonmerger-related loans to their investment-grade borrowers. Survey results also revealed that a large majority of respondents had become less willing to make ADC loans.

Nevertheless, a number of banks indicated

that they were making such loans to customers that had formerly borrowed from thrifts.

Policy Changes for C&I Loans in General About one-fifth of respondents reported a decreased willingness to extend overall business credit during the past six months.

All of these

banks cited a less favorable economic outlook as a reason, followed, in order of importance, by industry-specific problems, a deterioration in the quality of their overall loan portfolio, pressures on their capital positions, and regulatory pressures.

About one-sixth of banks indicated

that their willingness to extend business credit to new as opposed to existing customers had declined over the past half year. Policy Changes for Specific Categories of C&I Loans Changes in policy over the past six months toward different types of C&I loans were far from uniform.

Nearly three-fourths tightened their

credit standards for reviewing loan applications for merger-related loans and over half did so on nonmerger-related loans to below investment-grade firms.

By contrast, less than one-tenth of respondents tightened their

credit standards on nonmerger-related loans to investment-grade firms.

That

a decline in the general economic outlook was the most important factor motivating tighter lending policies for overall C&I loans and that standards were mainly tightened for riskier types of loans is consistent with the notion that increases in downside risk tend disproportionately to affect the perceived credit risk of highly leveraged firms and of noninvestment-grade firms. Banks also were asked whether they changed specific price and nonprice terms for these three types of C&I loans in the last six months.

Virtually

all respondents indicated that they either tightened or left unchanged these terms, but for investment-grade customers not involved in merger activity,

there was relatively little restriction.

Over half of the respondents

reported tightening loan covenants for merger-related loans and for nonmerger-related loans to noni-vestment-grade firms.

(Such covenants help

limit loan losses by preventing excessive risk-taking by borrowers and by providing banks more leeway in working out problem loans.)

For these two

types of loans, nearly two-fifths reported increasing loan rate spreads with respect to base rates.

With respect to credit lines, over one-half of

surveyed banks reduced maximum line sizes for merger-related loans and about two-fifths, for nonmerger-related loans to below investment-grade firms. For nonmerger-related loans to investment-grade borrowers, one-eight of respondents reported lowering sizes of maximum credit lines, one-tenth reported increasing loan rate spreads, and about one-tenth indicated that they tightened loan covenants.

The difference in the frequency of

tightening loan covenants across the different loan types may reflect, in part, the greater risks posed by borrowers involved in merger-related activity and by noninvestment-grade businesses relative to the risks posed by investment-grade firms borrowing for nonmerger-related purposes. Loan Policy Changes for ADC Loans Nearly four-fifths of respondents reported a reduced willingness to make ADC loans compared to six months ago.

Of these banks, nearly three-

fifths reduced permissible loan-to-value ratios, and substantial proportions reported restricting credit for income-generating properties (nearly onehalf) and for single-family homes (nearly one-third) that were not sold prior to construction.

About one-third of the banks reporting less

willingness indicated that they had lowered loan sizes and about one-third

imposed limits on loans outside of their geographic area.

Only about one-

fifth reported widening the spread of loan rates over base rates, and about one-seventh reduced the maximum maturity additional limits on loan participations.

f these loans or imposed Nearly two-fifths of banks

reporting a reduced willingness to make these loans indicated that they had cut off credit to some customers and one-fifth had denied loans to new customers. Almost all banks that were less willing to make these loans cited a less favorable economic outlook as a reason, and nearly three-fourths mentioned industry-specific problems as a factor.

About one-half of such

banks indicated that a deterioration in the quality of their loan portfolio was a factor in changing their attitude and about one-seventh cited pressures on their bank's capital position. Impact of the Thrift Crisis on Bank ADC Lending Approximately one-third of respondents indicated that their ADC loans were higher than they would otherwise be owing to the thrift crisis.

these banks, the vast majority estimated that less than ten percent of such loans made in the last six months would have been made by savings and loan associations in the absence of problems in the thrift industry. Geographically, these banks were concentrated in the Philadelphia, Richmond, and San Francisco Federal Reserve Districts.

Several of these banks

mentioned that they lent only to the higher-quality former thrift customers that sought credit.

TABLE 1 SENIOR LOAN OFFICER OPINION SURVEY ON BANK LENDING PRACTICES AT SELECTED LARGE BANKS IN THE UNITED STATES (Status of policy as of January 1990) (Number of banks and percent of banks answering question) (By volume of total domestic assets, in $ billions, as of September 30,

l.a.

Has your bank's willingness to extend credit to C&I customers decreased Yes ----------Banks Pet

All Respondents $10.0 and Over Under $10.0

5 3 2

(2.0) (1.7) (2.5)

5 2 3

Less favorable economic outlook ----------Banks Mean

58 26 32

46 (79.3) 20 (76.9) 26 (81.3)

(2.0) (1.5) (2.3)

Industry

specific

Regulatory

problems

-----------

Banks Mean

8 4 4

(2.4) (2.0) (2.8)

4 2 2

Has your bank's willingness to lend to new C&I customers decreased relative to its lend to existing customers over the last six months? No ----------Tanks Pct

10 (17.2) 4 (15.4) 6 (18.8)

All Respondents $10.0 and Over Under $10.0

Other

pressures

-----------

(1.6) (1.7) (1.5)

Yes ---------Banks Pet

Total Banks

If you answered yes to question 1.a, which of the following were important reasons? (Please rank by importance.) Pressures Deterioraton bank ion in capital quality of portfolio position ----- --------Banks Mean Banks Mean

2.a.

over the last six months?

No ---------Banks Pet

12 (20.7) 6 (23.1) 6 (18.8)

All Respondents $10.0 and Over Under $10.0

1989)

Banks Mean 1 1 1

(3.5) (2.r) (5.0)

(1.0) ( 0) (1.0}

willingness to

Total Banks

48 (82.8) 22 (84.6) 26 (81.3)

58 26 32

If you answered yes to question 2.a, which of the following actions have been taken with respect to new customers relative to existing customers? (More than one answer may apply.)

Credit standards tightened Banks All Respondents $10.0 and Over Under $10.0

Pct

9 ( 90.0) 3 ( 75.0) 6 (100.0)

Maximum loan size or credit line reduced Banks

Pet

4 (40.0) 1 (25.0) 3 (50.0)

Spreads over base rates widened Banks

Pet

2 (20.0) 1 (25.0) 1 (16.7)

Credit to new customers generally cut off Banks 0 0 0

Other -------Banks

Pct

2 (20.0) 1 (25.0) 1 (16.7)

As of September 30, 1989, 27 respondents had domestic assets of $10 billion or more; combined assets of these banks totalled $690 billion, compared to $907 billion for the entire panel of 60 banks, and $2.80 trillion for all domestically chartered federally insured commercial banks.

Average rank calculated using 1 for most important, 2 for next most important, and so forth.

Total Banks 10 4 6

Please indicate how your bank's credit standards for approving loan applications related to mergers and ("Credit standards" should be interpreted to encompass acquisitions have changed in the last six months. requirements with respect to ability to repay, ability to weather an economic downturn, quality of balance Please report changes in enforcement sheets, collateral requirements, as well as credit/business history. Merger-related loans include those made to finance of already existing terms as changes in standards. leveraged buyouts, other mergers and acquisitions, and defensive restructurings--such as equity and debt buybacks--related to mergers and acquisitions.) Eased considerabEased Essentially ly somewhat unchanged -------------------------------Total Pct Banks Banks Pet Banks Pct Banks

Tightened considerab- Tightened somewhat ly -------------------Banks Pct Banks Pet 5 ( 8.6) 1 ( 3.8) 4 (12.5)

All Respondents $10.0 and Over Under $10.0

37 (63.8) 18 (69.2) 19 (59.4)

With respect to merger-related loans your bank currently is terms have changed in the last six months with respect to:

16 (27.6) 7 (26.9) 9 (28.1)

willing to approve,

58 26 32

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

please indicate how

a. maximum size of credit lines Essentially Somewhat Somewhat Significanincreased unchanged reduced tly reduced ---------------- ---------------------Pet Banks Pct Banks Pet Banks Pet Banks All Respondents $10.0 and Over Under $10.0 - - - - - - - - - - - - --.-

23 (39.7) 10 (17.2) 9 (34.6) 5 (19.2) 14 (43.8) 5 (15.6) .-. --.- - - - - --..-

Significantly increased ----------Total Banks Pet Banks

1 ( 1.7) 24 (41.4) 0 ( 0.0) 12 (46.2) 1 (3.1) 12 (37.5) --.-. - --.- --.-

0 0 0 - --

( 0.0) ( 0.0) ( 0.0) - - --.-

58 26 32 --

b. spreads of loan rates over base rates Somewhat Significanwidened tly widened -------------------Banks Pct Banks Pet All Respondents $10.0 and Over Under $10.0

2 ( 3.4) 0 ( 0.0) 2 ( 6.3)

Essentially Somewhat narrowed unchanged --------------.--Pct Banks Pct Banks

36 (62.1) 20 (34.5) 18 (69.2) 8 (30.8) 18 (56.3) 12 (37.5) ---.- - --.- --.- -- --.-

0 ( 0 ( 0 ( -.-

Significantly narrowed ----------Total Banks Pet Banks

0 ( 0.0) 0.0) 0 ( 0.0) 0.0) 0 ( 0.0) 0.0) --.-.- - - ---.-

58 26 32 -.

loan covenants

Tightened considerably Banks All Respondents $10.0 and Over Under $10.0

Pet

5 ( 8.8) 1 (3.8) 4 (12.9)

Tightened somewhat --------Banks Pet 27 (47.4) 10 (38.5) 17 (54.8)

Eased considerabEased Essentially somewhat ly unchanged ------------- ----------Banks Pct Pct Banks Pct Banks 25 (43.9) 15 (57.7) 10 (32.3)

0.0) 0 0.0) 0 0 ( 0.0)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

Total Banks 57 26 31

-215.

Please indicate how your bank's credit standards for approving loan applications from investment-grade C&I customers (other than those related to mergers and acquisitions) have changed in the last six months. ("Credit standards" and "merger-related loans" should be interpreted as in question 3.) Tightened considerab- Tightened Essentially Eased ly somewhat unchanged somewhat ------------------------------- ----------Banks Pet Banks Pot Banks Pot Banks Pot All Respondents $10.0 and Over Under $10.0

1 ( 1.8) 0 (0.0) 1 ( 3.2)

3 ( 5.3) 2 ( 7.7) 1 ( 3.2)

52 (91.2) 23 (88.5) 29 (93.5)

1 ( 1.8) 1 ( 3.8) 0 ( 0.0)

Eased considerably ----------Total Banks Banks Pc' 0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

57 26 31

6. With respect to loans to investment-grade C&I customers (other than merger-related loans) that your bank currently is willing to approve, please indicate how terms have changed in the last six months with respect to: a. maximum size of credit lines Significan- Somewhat tly reduced reduced ------------------Banks Pet Banks Pet 2 ( 3.5) I ( 3.8) 1 (3.2)

All Respondents $10.0 and Over Under $10.0

6 (10.5) 1 ( 3.8) 5 (16.1)

SignificanEssentially Somewhat tly unchanged increased increased ------------------- ----------Banks Pct Banks Pet Banks Pot 48 (84.2) 23 (88.5) 25 (80.6)

1 (1.8) 1 ( 3.8) 0 ( 0.0)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

Total Banks 57 26 31

b. spreads of loan rates over base rates SicnificanSomewhat widened tly widened -------------------Banks Pet Banks Pot All Respondents $10.0 and Over Under $10.0

1 0 1

( 1.8) ( 0.0) ( 3.2)

5 1 4

( 8,8) ( 3.8) (12,9)

Esse-tiasll niCangced ----------Banks Pct 48 (84.2) 23 (88.5) 25 (80.6)

Somewha narrowed ----------Banks Pet 3 ( 5.3) 2 ( 7.7) 1 ( 3.2)

Significantl nrrcoed ----------Banks Pot 0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

Total Banks 57 26 31

c. loan covenants Tightened considerab- Tightened somewhat ly ---------------Banks Pet Banks Pet All Respondents $10,0 and Over Under $10.0

1 ( 1.8) 0 ( 0.0) 1 ( 3.3)

5 ( 8.9) 3 (11.5) 2 ( 6.7)

Essentially Eased unchanged somewhat -------------------Banks Pet Banks Pct 50 (89.3) 23 (88.5) 27 (90.0)

O ( 0.0) 0 ( 0.0) 0 ( 0.0)

Eased considerably ----------Total Banks Pet Banks 0 ( 0.0) 0 ( 0.0) 0 0.0)

56 26 30

Please indicate how your bank's credit standards for approving loan applications (other than those related to mergers and acquisitions) from below investment-grade C&I customers have changed in the last six months. ("Credit standards" and "merger-related loans" should be interpreted as in question 3.) Eased Tightened considerab- Tightened Essentially Eased considerably somewhat unchanged somewhat ly --------------------- --------------------- ----------- Total Banks Pct Banks Pct Banks Pct Banks Pet Banks Pct Banks All Respondents $10.0 and Over Under $10.0

4 ( 6.9) 2 ( 7.7) 2 ( 6.3)

29 (50.0) 11 (42.3) 18 (56.3)

25 (43.1) 13 (50.0) 12 (37.5)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

0 0 0

( 0.0) ( 0.0) 0.0)

58 26 32

With respect to loans to below investment-grade C&I customers (other than merger-related loans) that your bank currently is willing to approve, please indicate how terms have changed in the last six months with respect to: a.

maximum size of credit lines Significantly increased ----------- Total Banks Pct Banks

SignificanSomewhat Essentially Somewhat tly reduced reduced unchanged increased ----------------------------------- ----------Banks Pet Banks Pct Banks Pct Banks Pet All Respondents $10.0 and Over Under $10.0

4 ( 6.9) 2 ( 7.7) 2 ( 6.3)

20 (34.5) 8 (30.8) 12 (37.5)

34 (58.6) 16 (61.5) 18 (56.3)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

58 26 32

spreads of loan rates over base rates Significantly narrowed ----------Total Banks Pct Banks

SignificanSomewhat Essentially Somewhat narrowed widened unchanged tly widened ---------------------------------------Banks Pct Banks Pet Banks Pct Banks Pet All Respondents $10.0 and Over Under $10.0

1 (1.7) 0 ( 0.0) 1 ( 3.1)

21 (36.2) 8 (30.8) 13 (40.6)

35 (60.3) 17 (65.4) 18 (56.3)

1 (1.7) 1 ( 3.8) 0 ( 0.0)

0 ( 0.0) 0 ( 0.0) 0 (0.0)

58 26 32

c. loan covenants Tightened Eased considerab- Tightened Essentially Eased considerably somewhat unchanged somewhat ly ------- -------------------- ----------- ----------- Total Banks Pct Banks Pet Banks Pct Banks Pct Banks Pct Banks All Respondents $10.0 and Over Under $10.0

3 { 5.3) 2 ( 7.7) 1 ( 3.2)

28 (49.1) 9 (34.6) 19 (61.3)

26 (45.6) 15 (57.7) 11 (35.5)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

57 26 31

Roughly what percent of the construction and land acquisition and development loans that your bank has made in the last six months would you estimate went to firms that would have borrowed from thrift institutions absent recent adverse developments in that industry? Between 10 Over 25 and 25 Essentially Under 10 none percent percent percent ---------------------- -------------------Total Banks Pct Banks Pet Banks Pet Banks Pet Banks All Respondents $10.0 and Over Under $10.0

34 (61.8) 13 (52.0) 21 (70.0)

19 (34.5) 11 (44.0) 8 (26.7)

2 ( 3.6) 1 ( 4.0) 1 ( 3.3)

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

55 25 30

SPlease indicate your bank's willingness to make construction and land acquisition and development loans now as opposed to six months ago. Somewhat more ------Banks Pet

Much more ----------Banks Pct All Respondents $10.0 and Over Under $10.0

11.

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

Somewhat less ----------Banks Pet

Unchanged ----------Banks Pet

0 ( 0.0) 0 ( 0.0) 0 ( 0.0)

11 (19.3) 3 (12.0) 8 (25.0)

Much less ----------Banks Pet

35 (61.4) 19 (76.0) 16 (50.0)

Total Banks

11 (19.3) 3 (12.0) 8 (25.0)

57 25 32

If you answered "less" to question 10 (answers iv. or v.), please indicate which of the following steps your bank has taken in this regard (more than one answer may apply).

i.) ii.) iii.) iv.) v.)

vi.) vii.) viii.) ix.) X.) xi.) xii.)

lowered the maximum amount that can be lent to a single borrower. lowered the maximum size of loans generally. reduced the maximum maturity of loans. restricted the availability of credit to finance single-family home construction prior to the homes having been sold. restricted the availability of credit to finance the construction of income properties prior to permanent (takeout) financing having been arranged. imposed additional limits on out-of-area lending. imposed additional limits on loan participations. reduced permissible loan to value ratios. widened spreads over base rates. cut off credit to some existing customers. generally denied credit to new customers. other (please specify). Lowered max. loan

to ind, borrower Pet All Respondents $10.0 and Over Under $10.0

(30.4) (27.3) (33.3)

Lowered max. size

of loans generally Banks

Pet

15 (32.6) 7 (31.8) 8 (33.3)

Reduced may. maturity of loans

Restricted Restricted credit to credit to single const. of homes income prop.

Banks

Pet

7 (15.2) 3 (13.6) 4 (16.7)

Pet

Banks

14 (30.4) 7 (31.8) 7 (29.2)

Pet

21 (45.7) 9 (40.9) 12 (50.0)

Imposed add. limits Reduced Imposed add. limits on loan permissible to out-of- participaloan/value area loans tions ratios

Banks

Pet

Banks

15 (32.6) 7 (31.8) 8 (33.3)

Pet

Banks

6 (13.0) 4 (18.2) 2 (8.3)

26 (56.5) 10 (45.5) 16 (66.7)

(CONTINUED) Cut off credit to some customers --------Banks Pet All Respondents $10.0 and Over Under $10.0

12.

18 (39.1) 9 (40.9) 9 (37.5)

Generally denied credit to new customers ---------Banks Pet 9 (19.6) 1 ( 4.5) 8 (33.3)

Other ----------Banks Pet 12 (26.1) 8 (36.4) 4 (16.7)

Total Banks 46 22 24

If you have tightened your supply of credit for construction and acquisition and land development loans in the last six months, which of the following were important reasons? (Please rank in order of importance.) Pressures on bank capital position

Banks Mean All Respondents $10.0 and Over Under $10.0

7 ( 3.3) 2 ( 3.0) 5 ( 3.4)

DeterioratLess ion in favorable quality of economic portf :olio outlook ------ ----------Banks Mean Banks Mean

19 ( 2.1) 7 ( 1.9) 12 ( 2.3)

43 ( 1.6) 21 ( 1.6) 22 ( 1.6)

Industry specific problems ----------Banks Mean 34 ( 1.7) 16 ( 1.8) 18 ( 1.7)

Other ----------Banks Mean 7 ( 3.1) 4 ( 2.3) 3 ( 4.3)

Pet

Total Banks 46 22 24

Widenene spreads over base rates Banks

Pet

10 (22.2 2 ( 9.5 8 (33.3:

-24MONETARY AGGREGATES (based on seasonally adjusted data unless otherwise noted)

19891

1989 Q3

1989 Q4

1989 Nov

1989 Dec

Growth 1990 Q4 89Jan pe Jan 90pe

------------ Percent change at annual rates--------------------0.5 4.5 3.3

1.5 7.1 4.0

6.7 7.6 2.8

2.7 8.4 4.9

12.2 7.8 3.7

-2 4 2

------------ Percent change at annual rates------------

3 54 3 Levels bil. $ Dec 89

Selected components 4. 5. 6.

0.4

MI-A

1.2

3.7

-1.9

Currency Demand deposits

Other checkable deposits

0.9

2.2

12.1

11.1

M2 minus M12

5.9

9.0

7.9

10.3

1.1

-12.8

-16.5

9. 10. 11. 12. 13. 14. 15. 16.

Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares, NSA Commercial banks 3 Savings deposits, SA, plus MMDAs, NSA Small time deposits Thrift institutions 3 Savings deposits, SA, plus MMDAs, NSA Small time deposits

17. M3 minus M2 18. 19. 20. 21. 22. 23.

9.9

Large time deposits 5 At commercial banks, net At thrift institutions Institution-only money market mutual fund shares, NSA Term RPs, NSA Term Eurodollars, NSA

16.1

16.7

-5

510.8

14 -20

222.1 281.2

286.7

2418.9

72.8 309.1 1064.5 543.3 521.2 968.9 354.8 614.1

-1.2

-7.0

-14.9

4.4 10.1 -7.7

-1.5 2.1 -9.8

-7.5 1.5 -28.2

-8.5

-12.1

40.1 6.5 8.9

9.4 -115.0 38.4

-4

822.8

----- Average monthly change in billions of dollars---MEMORANDA:6

24. Managed liabilities at commercial banks (25+26) 25. Large time deposits, gross 26. Nondeposit funds Net due to related foreign 27. institutions 7 Other 28. 29. U.S. government deposits at commercial banks 8

5.4 2.6 2.8

3.4 -0.3 3.7

0.0 2.8

0.7 3.0

-0.8 4.6

-1.2 4.5

-0.3

-1.2

-0.8

0.5

-1.6 -1.2 0.9

1 -8

7.2 242.3

-2

21.3

Amounts shown are from fourth quarter to fourth quarter. Nontransactions M2 is seasonally adjusted as a whole. Commercial bank savings deposits excluding MMDAs grew during December and January at rates of 11.5

percent and 6 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew

during December and January at rates of 3.8 percent and 6 percent, respectively. The non-M2 component of M3 is seasonally adjusted as a whole. institutions. Net of large denomination time deposits held by money market mutual funds and thrift Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securities sold under agreements to repurchase, and other liabilities for borrowed money (including borrowing from the Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated. 8. Consists of Treasury demand deposits and note balances at commercial banks. pe - preliminary estimate

4. 5. 6. 7.

Note: Data on the monetary aggregates do not incorporate the results of the benchmark and seasonal review.

-25COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT (Percentage changes at annual rates, based on seasonally adjusted data) 1988:.Q4 to 19 89:Q4

1989 Nov.

Dec.

Jan.p

Levels bil.$ December

------------------ Commercial Bank Credit - -------------------S Total loans and securities at banks 2.

8.0

5.4

3.9

-2.8

2577.4

4.1

1.6

11.8

7.1

588.2

U.S. government securities

0.3

5.4

19.1

17.8

-1.8

396.9

Other securities

7.3

-6.2

-3.5

-15.8

6.7

-21

181.3

8.1

9.9

3.6

3.0

-3.9

1999.2

Securities S

7.2

Total loans

Business loans

6.4

8.3

-1.6

-13.7

634.2

Real estate loans

2.7

13.7

11.6

10.7

11.7

754.8

Consumer loans

6.5

6.1

6.5

8.0

378.1

Security loans

4.2

-6.8

-21.1

-26.2

-80.2

-41

37.8

Other loans

1.5

10.6

-9.6

-22.5

-30.1

194.3

10.

3.8

------ Short- and Intermediate-Term Business Credit ---------11.

Business loans net of bankers acceptances

12.

Loans at foreign branches

13.

Sum of lines 11 & 12

14.

Commercial paper issued by nonfinancial firms

15.

Sum of lines 13 & 14

16.

Bankers acce tances: related '

17.

10.3

17.3

15.2

5.1

1.5

3.5

-1.1

-12.4

U.S. trade 5.8

Line 15 plus bankers acceptances: U.S. trade related

18.

Finance company loans to business

19.

Total short- and intermediateterm business credit (sum of lines 17 & 18)

4.9 3

-10.3

2.9

14.1

n.a.

-2.3

7.0

n.a.

1.7

n.a.

1078.96

1. Average of Wednesdays. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domesti cally chartered banks. 3. Based on average of data for current and preceding ends of month. 4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 5. November data. p--preliminary. n.a.--not available

SELECTED FINANCIAL MARKET QUOTATIONS 1/ (percent) 1987

Change from:

2/ Oct 16

March Higs

FC Dec 19 Feb 1

ar 89 FUC Highs Dec 19

Short-term rates Federal funds 3/

9.85

8.50

8.24

Treasury bills 4/ 3-rmnth 6-rnnth 1-year

9.09 9.11 9.05

7.67 7.48 7.20

7.76 7.71 7.54

7.94 8.65

10.05 10.15

8.75 8.39

8.23 8.14

7.92 8.90 9.12

10.07 10.32 10.08

8.76 8.43 8.20

8.18 8.20 8.23

Eurodollar deposits 5/ 1-Minth 3-mDnth

8.00 9.06

10.19 10.50

8.81 8.50

Bank prime rate

9.25

11.50

U.S. Treasury (constant maturity) 3-year 9.52 10-year 10.23 10.24 30-year Municipal revenue 6/ (Bond Bayer index)

Comercial paper 1-mnth 3-Month

Larg

-1.61

-0.26

-1.82

-0.52

-2.01

-0.25

8.19 8.25

-2.00 -2.25

-0.62 -0.25

10.50

10.00

-1.50

-0.50

9.88 9.53 9.31

7.73 7.78 7. 5

8.35 8.42 8.44

7.95

7.29

7.52

-0.43

0.23

11.50

10.47

9.36

9.75

-0.72

0.39

11.58 8.45

11.22 9.31

9.75 8.39

10.05 8.41

-1.17 -0.90

0.30 0.02

negotiable CD's 4/

T-nonth 3--month 6-month

Intermediate- and long-term rates

Corporate-A utility Recently offered Home nmrtgage rates 7/ Fixed-rate ARM, 1-year

1989 Record higs

Date

Lows Jan 3

1990 FOC Dec 19

Feb 1

Percent change fom: Record highs

1989 FOCM Lows Dec 19

Stock prices Dow-Jones Industrial NSE Composite AMER Composite

NASDAQ (TC) Wilshire

2810.15 199.34

1/2/90 10/9/89

397.03

10/10/89

485.73 10/9/89 3523.47 10/9/89

2144.64 2695.61 2586.26 154.98 189.40 181.52 305.24

367.95

351.50

378.56 434.35 417.76 2718.59 3314.70 3166.40

One-day quotes except as noted. Last business day prior to stock market decline on Monday Oct. 19, 1987. Average for two-week reserve maintenance period closest to date shown. Last observation is average to date for the maintenance period ending February 7, 1990.

-7.97 20.59 .9422.21 -11.47

-13.99 -10.13

20.54

14.74 21.93

-4.06 -4.16 -4.47

-3.82 -4.47

4/ Secondary market. 5/ Bid rates for Eurodollar deposits at 11 a.m. London time. 6/ Based on one-day Thursday quotes and futures-market index changes. 7/ Quotes for week ending Friday closest to date shown.

APPENDIX

FEDERAL BUDGET DEVELOPMENTS President Bush has submitted his FY1991 budget to the Congress, with proposals that satisfy the Gramm-Rudman-Hollings requirements. The budget projections hinge on assumptions of fairly robust economic growth and falling interest rates, which cause the baseline deficit to fall year by year. In contrast, the Congressional Budget Office (CBO) has released estimates, based on less favorable economic assumptions, that show the baseline deficit remaining in the neighborhood of $140 billion through 1993. Near-term Budget Developments and Prospects This week's news contained much information about the prospects for the budget in the near term, including updated estimates for FY1990. As shown in table 1, the Administration now projects an FY1990 deficit of $124 billion, compared with a figure of $99 billion in the July MidSession Review. Outlays were revised up nearly $20 billion, largely because of legislation passed since midsummer. Most notably, FIRREA contributed to an $8 billion upward revision in expenditures for deposit insurance, which now are expected to total $11 billion in FY1990. Spending on defense also was revised up. Changes to revenues were smaller, on net, as a sharp reduction in projected taxes in response to weak incoming data on corporate profits and tax payments was partially offset by technical reestimates of other revenues. CBO, however, estimates the FY1990 deficit at $138 billion. Table 1 ESTIMATES OF TOTAL BUDGET (Billions of dollars)

Administration Mid-Session Baseline Review

Proposed

CBO Baseline

--------------------FY1990-----------------Total deficit Receipts Outlays

99 1080 1179

124 1073 1197

124 1074 1197

138 1067 1205

-------------------- FY1991-----------------Total deficit Receipts Outlays

85 1152 1237

102 1156 1259

63 1170 1233

138 1137 1275

1. Includes extension of food stamp program, which is scheduled to expire in 1991, and adjustments for other accounting anomalies.

The gap between the Administration and CBO baseline estimates widens in FY1991. These estimates assume that budget authority for discretionary programs is held constant in real terms at FY1990 levels and that benefit programs and taxes evolve according to current laws. In effect, they determine how much outlays will have to be cut, or revenues raised, to reduce the deficit to the Gramm-Rudman FY1991 target of $64 billion. According to the Administration, the baseline deficit will decline to $102 billion next year; this level requires deficitreducing actions of at least $38 billion to meet the Gramm-Rudman target. CBO's baseline deficit, $138 billion, is unchanged from 1990. According to CBO's numbers, however, the package of cuts would have to be roughly twice as large as that of the Administration. The Administration's projection of a sizable decline in the baseline deficit next year hinges largely on its favorable expectations for economic performance in 1990 and 1991--that is, it forecasts robust growth, stable inflation, declining interest rates, and booming profits Notably, OMB anticipates an increase in real GNP of 2-1/2 (table 2). percent for 1990 and 3-1/4 percent for 1991. CBO's assessment is less optimistic: It expects real GNP to advance less than 2 percent in 1990 and about 2-1/2 percent in 1991, though, like OMB, CBO sees prices continuing to rise about 4 percent per year. The interest rate forecasts of the two agencies are similar for 1990, but OMB sees rates dropping about a percentage point in 1991. Longer-run Budget Prospects:

The CBO Baseline

As shown in table 3, CBO expects deficits to remain sizable over the next several years but to decline somewhat as a share of GNP-from 2-1/2 percent in 1990 to 1-1/2 percent in 1995. With no real growth in discretionary spending, outlays fall from about 22 percent of GNP this year to less than 21 percent in the mid-1990s, while the revenue share drops only a little. The CBO projection is based on real GNP growth of about 2-1/2 percent per year through 1995, with inflation remaining at roughly 4 percent. Interest rates, however, are projected to decline--especially short-term rates, which fall to about 5-3/4 percent in 1995.

Table 2 ADMINISTRATION AND CBO ECONOMIC ASSUMPTIONS

Forecast 1990 1991

1992

----- Percent change,

Projected 1993 1994

1995

calendar year average-----

Real GNP Administration CBO GNP deflator Administration CBO CPI 1 Administration CBO ---------

Percent,

calendar year average--------

Unemployment rate Administration CBO rate Three-month Treasury bill 6.7 Administration 6.9 CBO Ten-year Treasury note rate 7.7 Administration CBO 7.8 Corporate profits as a percent of GNP Administration CBO

6.4 5.6

1. Administration forecasts the CPI-W; CBO forecasts the CPI-U.

Table 3 CBO BASELINE BUDGET PROJECTIONS (Fiscal years)

1990

1992

1991

Gramm-Rudman deficit targets

138 1067 1205

138 1137 1275

135 1204 1339

141 1277 1418

100

2.5 19.6 22.1

1995

130 1355 1484

118 1438 1555

As a percentage of GNP---------

-----------Total deficit Revenues Outlays

1994

Billions of dollars-----------

------------Total deficit Revenues Outlays

1993

2.4 19.6 22.0

2.2 19.5 21.7

2.1 19.4 21.5

1.8 19.3 21.2

1.6 19.3 20.8

The Administration Budget Proposals President Bush's proposals are consistent, at this stage, with the requirements of the Gramm-Rudman law. Given the underlying economic and technical assumptions, his program meets the deficit target of $64 billion in FY1991 and achieves balance by FY1993. President Bush proposes a modest reduction--relative to the baseline--in defense spending and some reallocation of resources among nondefense programs over the next few years. He also continues to press for a cut in capital gains taxes and proposes a new incentive to spur personal saving. Proposals for FY1991. The Administration is proposing deficitOutlays reducing actions totaling $39 billion for FY1991 (see table 4).

1. Under the Administration plan, households filing joint tax returns and earning less than $120,000 would be allowed to contribute $5000 per year to a Family Savings Account (FSA); single filers with incomes below $60,000 could put in $2500. Contributions would not be deductible, but earnings on accounts held for more than seven years would be tax-exempt. Because there is no upfront deduction for the contributions, the estimated revenue loss to the Treasury in early years is small--reaching only $1 billion by 1995. Allowable investment vehicles would be the same as for current IRAs. Contribution limits on IRAs, 401Ks, and Keoghs would not change under this proposal, but the Administration would like to waive the penalty for early withdrawals of up to $10,000 from IRAs, if the withdrawn funds are used for first-time home purchases.

A-5

are to be lowered $25 billion relative to baseline, with the largest reductions slated for medicare ($6 billion), defense ($3 billion), and Proposed changes in miscellaneous user fees-agriculture ($3 billion). which are scored in the budget as offsets to outlays--amount to $6 billion.

Table 4 COMPOSITION OF ADMINISTRATION BUDGET PROPOSALS1 (Change from baseline in billions of dollars, fiscal years)

Outlays Defense Medicare Agriculture User fees Other Receipts Capital gains Social security Excise taxes Other Deficit

1991

1992

1993

-25 -3 -6 -3 -6 -7

-37 -9 -8 -5 -4 -11

-53 -17 -11 -6 -5 -14

14 5 4 3 2

11 3 4 4 0

4 1 4 5 -6

-39

-48

-57

1. Excluding payments to the SSIDRF. 2. Extension of OASDI coverage to additional state and local employees and HI coverage to all workers in the sector. The budget also calls for $14 billion in new revenues in FY1991. About $5 billion is projected to come from a revamped proposal to cut the effective tax rate on capital gains; this proposal would allow an exclusion from gross income of 30 percent of the realized gains on certain assets held more than three years, with smaller exclusions for assets held for shorter periods. According to the Administration, enactment of this provision would result in an increase in realizations large enough to add $5 billion, on net, to FY1991 receipts. The longerrun relationship between capital gains rates and tax collections, of course, is uncertain; but the Administration projects small revenue gains at least through 1995. Much of the remaining FY1991 revenue would come from bringing additional state and local employees under the social security system (OASDI) and extending medicare coverage (HI) to all workers in that sector. Similar proposals have been rejected by the Congress in the past. The Administration is also requesting about $3 billion of hikes

in excise taxes, including the extension of the telephone excise tax, which currently is scheduled to expire at the end of 1990. The longer-run outlook. In contrast to CBO, the Administration expects the deficit to disappear by the mid-1990s--whether measured on a baseline or on a policy basis. However, the $9 billion surplus shown in table 5 for the proposed budget in FY1995 unde-states the federal government's total contribution to national saving by $102 billion because it includes an outlay of that amount to a new off-budget fund, the Social Security Integrity and Debt Reduction Fund (SSIDRF) which is designed to protect the assets in the social security trust funds. Excluding payments to the SSIDRF, the budget is projected to run a surplus of $111 billion in FY1995.

Table 5 ADMINISTRATION BUDGET PROJECTIONS (Fiscal years, billions of dollars)

1990

1991

1992

1993

1994

1995

Baseline deficit(-) Receipts Outlays

-124 1073 1197

-102 1156 1259

-73 1235 1308

-38 1324 1361

-10 1402 1412

17 1481 1463

Proposed deficit(-) Receipts Outlays

-124 1074 1197

-63 1170 1233

-25 1246 1271

6 1328 1322

11 1409 1398

9 1486 1477

Memo: Payments to SSIDRF Deficit excl. payments to SSIDRF(-)

0 -124

0 -63

0 -25

14 20

54 64

102 111

The Administration projections assume that real GNP will continue to grow about 3 percent per year and that inflation will decline to about 3 percent by 1995. OMB assumes a somewhat steeper fall in nominal interest rates than does CBO; but the two projections do not show much difference in the levels of real rates by the mid-1990s. Prospects for defense spending. One reason for the projected improvement in the deficit path over this period is the lack of further growth in real defense spending. In real terms, defense appropriations have already declined 13 percent from their 1985 peak. And if they are held constant in real terms over the next five years at FY1990 levels-the baseline assumption--nominal outlays will fall from about 5-1/2

2. See page II-A-7 for a detailed description of the proposed fund.

percent of GNP in FY1990 to about 4-1/2 percent in FY1995; by contrast, the share averaged 6-1/2 percent between FY1985 and FY1987. The Bush program incorporates small across-the-board reductions in defense appropriations, which would shave another 1/2 percentage point off the defense share of GNP by FY1995; in real terms, defense outlays would decline about 2 percent a year. The proposed cuts are much smaller than those reportedly under consideration a few months ago; ndeed, President Bush this week announced that he is prepared to negotiate with the Soviet Union about further troop reductions. For comparison, the $180 billion package discussed a few months ago was widely interpreted as consistent with declines in real defense spending of about 4 percent per year. Prospects for nondefense spending. The Bush program contains sizable reductions in nondefense spending (excluding payments to the SSIDRF) over the next five years. But the broad thrust of such spending shows little change. Outlays on human resources programs (for example, social security, health, and education) will continue at about 11 percent of GNP. Spending in other areas is expected to rise much less rapidly than nominal GNP over the next five years, but this expectation largely reflects an anticipated decline in net interest outlays. Among the major programs, the growth in medicare is shaved under the Bush proposals, with nominal outlays cut $15 billion below baseline by FY1995, primarily through cuts in reimbursement rates to hospitals and doctors. The budget also builds in large savings in agriculture but does not specify how these will be achieved. Changes elsewhere are relatively small; funding is increased relative to baselines for a few programs such as NASA and Head Start, but the increases are more than offset by reductions elsewhere. The Social Security Integrity and Debt Reduction Fund (SSIDRF). The Administration has proposed a mechanism that it believes will help to move the overall budget into surplus after the early 1990s. The plan is complicated. First, it would require the government to make annual payments from the general fund into a new off-budget fund--the SSIDRF. After a brief phase-in period, the payments would be equal to the Thus, projected annual surplus in the social security trust funds. the SSIDRF would effectively neutralize the influence of the buildup in the social security trust funds on the official budget statistics; however, in the absence of other changes in outlays and revenues, it would do nothing to reduce government demands on credit markets.

3. Payments to the SSIDRF between 1993 and 1999 would be based on the annual balances (net inflows) in the OASDI trust funds, as projected in 1989 by the Board of Trustees of the Social Security System under intermediate (II-B) economic and demographic assumptions. Payments would increase from 15 percent of the projected balance ($14 billion) in FY1993 to 85 percent ($102 billion) in FY1995; beginning in 1996, they would equal the projected OASDI surplus.

FEDERAL OUTLAYS * (As a percent of GNP) National Defense -

Baseline

Administration policy

I I

1986

1983

1989

1992

S13

Human Resources

Baseline Administratio pol-------cy Administratio. policy

---I 10

[..

___r.

Other (excluding Net Interest Outlays) 4

-1 3

- -

Baseline

Administration policy -

I 1980

I 1983

I 1986

1989

Source: OMB, Budget of the U.S. Government, FY 1991, January 190. * Outlays exclude payments to the Social Security Integrity and Debt Reduction Fund.

I 1992

I I

A-9

Second, the proposal extends the Gramm-Rudman framework beyond 1993, with a target of zero in the official deficit in each year. Noting that this measure of the deficit would include payments to the SSIDRF, the proposal, in effect, requires that the non-social security part of the budget--as conventionally defined--be brought close to balance by the mid-1990s. Relative to the Administration baseline, balancing the budget as defined under this proposal would require sizable spending cuts and revenue increases. In FY1995, for example, such actions would need to total roughly $100 billion. Relative to CBO's baseline, achieving balance would require even greater cuts--more than $200 billion, equivalent to roughly 3 percent of that year's projected GNP.

Cite this document

APA

Federal Reserve (1990, February 6). Greenbook/Tealbook. Greenbooks, Federal Reserve. https://whenthefedspeaks.com/doc/greenbook_19900207_part1

BibTeX

@misc{wtfs_greenbook_19900207_part1,
  author = {Federal Reserve},
  title = {Greenbook/Tealbook},
  year = {1990},
  month = {Feb},
  howpublished = {Greenbooks, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/greenbook_19900207_part1},
  note = {Retrieved via When the Fed Speaks corpus}
}