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[Weekly Economic Report October 1 1993 – October 24 1994] [3]
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[Weekly Economic Report October 1 1993 – October 24 1994] [3]
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FOIA Number: 2018-0275-F
FOIA
MARKER
This is not a textual record. This is used as an
administrative marker by the William J. Clinton
Presidential Library Staff.
Collection/Record Group:
Clinton Presidential Records
Subgroup/Office of Origin:
National Economic Council
Series/Staff Member:
Gene Sperling
Subseries:
OA/ID Number:
6718
FolderID:
Folder Title:
[Weekly Economic Report October 1 1993 - October 24 1994] [3]
Stack:
Row:
Section:
Shelf:
Position:
S
16
5
9
3
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
June 24, 1994
CHART OF THE WEEK
The Value of the Dollar (monthly)
105
100
January 1993
95
Index, March 1973 = 100
90
1988-94 average
85
June 23
80
75
1988
1989
1990
1991
1992
1993
The foreign exchange value of the dollar against the currencies of our major
trading partners has fluctuated from 1988 to the present with no apparent
trend. Since the beginning of this year, the value of the dollar has declined,
but its current value is not low by recent historical standards: In mid-1992,
for example, the value of the dollar against this basket of currencies was
more than 10 percent lower than it is today.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
Oil Prices Reverse Earlier Decline
1
Market for Office Buildings Remains Weak
2
TREND
Living Standards in Africa: The "Lost Decade"
3
ARTICLE
Does Lower Inflation Raise Productivity?
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
U.S. Economic Statistics
8
Financial and International Statistics
9
"Do something, quick. How about your cute little impersonation
of Alan Greenspan?"
EYES ONLY
CURRENT DEVELOPMENT
Oil Prices Reverse Earlier Decline
Oil prices have rebounded from their turn-of-the-
year lows, and now are about the same as they were
a year ago. Despite the recent increases, oil prices
in real terms remain near the low end of their range
over the past 20 years (see chart).
Inflation-Adjusted Price of Oil
50
40
Gulf War
1994 Dollars per Barrel
OPEC II
30
OPECI
20
10
1973
1976
1979
1982
1985
1988
1991
1994
. Last observation is average for month-to-date (6/22/94).
Analysis. Several factors have contributed to the
runup in oil prices. On the demand side, prospects
for recovery in Japan and Europe have brightened.
On the supply side, OPEC recently decided to hold
production to current levels, and the U.N. has
maintained restrictions on Iraqi shipments.
The recent runup in oil prices has left them higher
than assumed in our mid-session budget review
forecasts. If the recent rise is not reversed, it would
reduce GDP growth about 0.2 percentage point
below our forecast and raise CPI inflation about 0.3
percentage point above our forecast. Of course, if
these recent price increases prove to be transitory, as
was last autumn's decline, their impact on the
economy will be much smaller.
Weekly Economic Briefing
1
June 24, 1994
EYES ONLY
CURRENT DEVELOPMENT
Market for Office Buildings Remains Weak
Construction expenditures for office buildings remain at very low levels (see first
chart). The pace in the first quarter of this year, at $15 billion (in inflation-
adjusted terms), was only about one-third of the peak rate realized in 1985.
Office Building Activity
20
50
Analysis. The national vacancy
U.S. Downtown Area Vacancy Rate
(left acate)
45
rate for office buildings in
15
40
downtown areas has barely declined
35
Billions of 1987 dollars
from its 1992 high (also shown in
Percent
the first chart). This indicator
10
30
bodes ill for future construction
25
activity.
5
20
Office Building Construction Expenditures
15
Trends in vacancy rates differ
(right scale)
0
10
widely across local markets (see
1960
1963
1986
1989
1992
second chart). Some downtown
areas, including midtown Manhattan, Denver, and Boston, have seen a significant
reduction in vacancy rates, while in other areas, including Dallas, Houston, and
Detroit, the vacancy rate continues to rise. The vacancy rate in Los Angeles has
been about flat for the last few years.
Downtown Office Vacancy Rates
40
Dallas
30
Percent
Los Angeles
20
New York City
10
(Midtown)
0
1981
1984
1987
1990
1993
Weekly Economic Briefing
2
June 24, 1994
EYES ONLY
TREND
Living Standards in Africa: The "Lost Decade"
Per capita income in sub-Saharan Africa has fallen
since 1980 (see chart). This decline stands in sharp
contrast to the rapid growth in Asian countries that
were about as poor in 1965.
Growth of Real GNP Per Capita
6
Asia
For example, per capita income in
Nigeria in 1965 was 28 percent higher
4
Average annual percent change
than in Indonesia. By 1980, Indonesia
had closed the gap to 10 percent. And
2
Africa
Asia
since 1980, Indonesia's per capita GNP
Africa
has increased nearly 4 percent per year
0
while Nigeria's has declined.
Indonesia's per capita income now
-2
1965-1980
1980-1991
exceeds Nigeria's by nearly 80 percent.
Note: Chart includes low-income countries only.
Analysis. Declining prices for Africa's commodity
exports-such as coffee and cocoa, whose prices
have fallen by half since 1980-explain part of the
difference between Asia's "miracle" and Africa's
decline. But differences in economic policy have
also been important. African countries have
suffered from high inflation, large budget deficits,
and overvalued currencies. In addition, they have
been slow to privatize inefficient state enterprises,
and have impeded agricultural productivity through
policies such as price controls. Moreover, rampant
population growth poses other economic challenges.
Perhaps most importantly, the Asian emphasis on
education-especially primary schooling-helped
raise economic growth. In Africa, in contrast, a
smaller and declining fraction of school-age children
received primary education during the 1980s.
Alternative Measures of Well-Being
Since 1960, low-income countries have achieved significant improvements in
life expectancy and literacy, and low-income African countries are no
exception. But African countries still lag behind other countries that were
similarly poor in 1965. In Africa, 50 percent of adults are now literate and life
expectancy is 52 years, but in East Asian developing countries, adult literacy
is 76 percent and life expectancy is 68 years.
Weekly Economic Briefing
3
June 24, 1994
EYES ONLY
ARTICLE
Does Lower Inflation Raise Productivity?
In recent testimony to Congress and in other public statements, Fed Chairman
Alan Greenspan has noted that productivity growth in the United States during the
postwar period has been higher, on average, when inflation has been lower (see
chart). A recent Fed study documents that inflation and productivity growth have
indeed tended to move inversely in the United States throughout the postwar
period-not just during the 1970s-and that the same link is evident in data for
Canada and England, but not in data for Germany or Japan. Chairman Greenspan
has interpreted the evidence for the United States as buttressing the case for
keeping inflation low and perhaps even driving it lower.
Inflation and Productivity Growth
6
Why is this issue important? If lower
inflation leads to faster productivity
4
Productivity Growth (percent)
growth, then reducing inflation might
2
1993
be the best way to bolster living
standards over time. Moreover, if the
0
beneficial effects of low inflation are
-2
large, the short-run pain involved in
getting inflation down will be recouped
-4
0
2
4
6
8
10
12
14
relatively quickly.
Inflation (percent)
Why are inflation and productivity linked? The conventional view among
economists has been that causation runs in the opposite direction: that high
productivity growth leads to low inflation. After all, one reason why firms
undertake productivity-enhancing investment is precisely to reduce their costs and
thus to improve their ability to offer lower prices. On close examination,
however, the data are not particularly friendly toward this hypothesis:
Improvements in productivity do not precede reductions in inflation, as one might
expect if productivity growth were the driving factor.
Another possible explanation for the inflation-productivity link focuses on the role
of oil prices: An increase in the price of an imported input like oil will both raise
prices and reduce output. While this explanation makes sense, it too is not
supported by the evidence: The relationship between inflation and productivity
growth was just as pronounced in the 1960s and 1980s as it was in the 1970s,
when changes in oil prices were dramatic. So the question arises:
Does lower inflation really cause higher productivity? This is the question that
has motivated much recent research. Thus far, the empirical results for the United
States are inconclusive. This is not surprising because there is no obvious reason
why inflation should adversely affect productivity. One possible reason is that,
when inflation is high, managers divert their attention from productive to
Weekly Economic Briefing
4
June 24, 1994
EYES ONLY
unproductive activities-spending too much time worrying about financial
manipulations to "beat inflation" and not enough time "minding the store." This
explanation appears to have some merit during periods of very high inflation when
the benefits of actions to beat inflation may be quite large. But it is not
particularly convincing for periods of moderate inflation like those characteristic
of the U.S. economy during the postwar period.
Another possible explanation builds on the observation that, historically, inflation
has been less predictable when it has been high. Unpredictable inflation leads to
all kinds of mistakes: Businesses make the wrong products, they invest in the
wrong types of equipment, and they focus too much on the short term. Lack of
predictability also makes lenders nervous, so they add a risk premium to their loan
rates-thus increasing the cost of capital and reducing the level of investment.
Like the two explanations reviewed earlier, neither of these stories about how low
inflation leads to high productivity growth squares particularly well with the facts.
Both hypotheses seem most plausible as explanations of long-run trends, not year-
to-year fluctuations. But the evidence suggests that the correlation between
productivity and inflation is mainly a short-run phenomenon.
Conclusion. Despite inconclusive empirical evidence and debatable analytical
explanations, the idea that lower inflation causes higher productivity is becoming
more important in policy debates about inflation. In the meantime, debate is sure
to continue as Congressional staff, academics, and others weigh in on the matter.
Weekly Economic Briefing
5
June 24, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
More Hospital Mergers on the Horizon. A recent Deloitte & Touche survey of
1,200 hospital executives found that 81 percent expect their hospital to become
involved in some sort of alliance, merger, or network within five years. Currently,
only 24 percent are. The survey also found that hospitals are becoming more
willing to work with HMOs. Of the hospitals surveyed, fewer than 50 percent had
formal dealings with HMOs eight years ago; more than 80 percent have such
relationships today. And 98 percent predict that they will have some sort of
agreement with an HMO by 1996.
Callbacks Ringing Up Profits. A growing number of people around the world
are escaping expensive international telephone rates by using callback services.
To use a callback service, a customer dials a special number in the United States
and then hangs up. This call triggers a return call to the customer, who gets a dial
tone to make an international call. The customer is billed at the much lower U.S.
rates. In the past year, the number of callback companies has increased fivefold
to 100, and market volume has risen to $200 million. Although the industry has
survived an earlier bid by AT&T to halt the practice, it still faces many legal
challenges from abroad. As these services become even more common, they may
begin to exert real downward pressure on the prices charged by less competitive
foreign carriers.
Beige Book Indicates Continued Expansion and Moderate Inflation. On
Wednesday, the Federal Reserve released the latest edition of its "beige book"
survey of economic conditions. The survey paints a picture of continued
economic expansion, though at a more measured pace. It also reports only
moderate upward pressure on prices, generally favorable crop conditions, and
strong home sales in most areas of the country. The San Francisco Fed reports
that economic conditions are improving slowly in California. Higher crude oil
prices have induced a slight increase in drilling activity in the Kansas City
District; drilling activity in other districts, however, is reported to be about
unchanged or even down a notch.
Catching Polluters on Film. In the future, cars that pollute may be captured on
film by a sensing device known as a "green camera." The device, developed
some time ago at Denver University and tested this week in the U.K., uses
infrared and ultraviolet beams to measure the pollution emitted from passing cars.
If it finds illegal levels, a photo of the car's license is then turned over to the
police. Supporters of the "green camera" believe that it could drastically reduce
carbon monoxide emissions from the worst polluters. California authorities will
be testing the equipment next month.
Weekly Economic Briefing
6
June 24, 1994
EYES ONLY
RELEASES THIS WEEK
U.S. International Trade
The goods and services trade deficit rose to $8.4 billion
in April from $6.9 billion in March.
Durable Goods
According to advance estimates, new orders for durable goods
were up 0.9 percent in May, the third consecutive monthly
increase.
MAJOR RELEASES NEXT WEEK
Consumer Confidence-Conference Board (Tuesday)
Gross Domestic Product (Wednesday)
Personal Income and Expenditures (Thursday)
Leading Indicators (Friday)
Weekly Economic Briefing
7
June 24, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
3.0
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
1.7
3.5
6.1
1.3
Manufacturing (1978-93)
2.3
4.8
2.6
7.9
6.9
Real compensation per hour
0.6
-0.3
1.2
-0.5
3.1
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.7
Imports
9.2
13.1
13.2
13.5
13.7
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.6
Federal surplus
-2.8
-3.5
-3.3
-3.2
-2.5
Mar.
Apr.
May
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.5
6.4
6.0
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
379
358
191
increase since Jan. 1993
3357
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.1
0.2
PPI-Finished goods
5.0
0.2
0.2
-0.1
-0.1
Weekly Economic Briefing
8
June 24, 1994
EYES ONLY
FINANCIAL STATISTICS
1993
Apr.
May
June 23,
1992
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3661
3708
3699
Interest Rates
3-month T-bill
3.43
3.00
3.68
4.14
4.15
10-year T-bond
7.01
5.87
6.97
7.18
7.10
Mortgage rate, 30-year fixed
8.40
7.33
8.32
8.60
8.46
Prime rate
6.25
6.00
6.45
6.99
7.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
June 23, 1994
Week ago
Year ago
Deutschemark-Dollar
1.601
-1.8
-5.4
Yen-Dollar
101.1
-2.0
-7.1
Multilateral (Mar. 1973=100)
90.39
-1.6
-3.4
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.7 (Q1)
6.0 (May)
2.3 (May)
Canada
3.4 (Q1)
11.0 (Apr)
0.2 (Apr)
Japan
-0.0 (Q1)
2.9 (Mar)
1.4 (Mar)
France
1.0 (Q1)
12.4 (Mar)
1.7 (Apr)
Germany
1.6 (Q1)
6.7 (Feb)
3.2 (Apr)
Italy
0.3 (Q4)
10.6 (Jul)
4.1 (Apr)
United Kingdom
2.6 (Q1)
9.7 (Apr)
2.5 (Apr)
Weekly Economic Briefing
9
June 24, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
June 17, 1994
CHART OF THE WEEK
Bank Failures
250
200
Number of failures
150
100
50
+1
0
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994*
11
total through June 13, 1994
The chart shows the number of failed banks insured by the Bank Insurance
Fund from 1980 through the present. Failures soared in the mid- and late-
1980s, reflecting in particular the oil-related downturn in the Southwest and
the end of the commercial real estate boom in the Northeast. More recently,
failures have subsided dramatically as the economy has improved and bank
profit margins have widened.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
Financial Markets Bet on More Fed Tightening
1
SPECIAL ANALYSIS
Chemomyrdin Leads Stabilization Effort in Russia
2
TREND
Quality of Military Recruits Continues to Improve
3
ARTICLE
Sources of GDP Growth as the Expansion Matures
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
-
MANKOFF
"My God, Ellen, I didn't think our relationship was so
interest rate-sensitive."
EYES ONLY
CURRENT DEVELOPMENT
Financial Markets Bet on More Fed Tightening
Financial market participants expect the Federal
Reserve to increase the rate on federal funds further
in the next month or two. Currently, prices in the
federal funds futures market (see box) predict that
the federal funds rate will average nearly 4-3/4
percent in September, or nearly 1/2 percentage point
above its current level (see chart). Such a level
could be reached, for example, if the Fed were to
notch up the funds rate 1/4 percentage point at both
its July and August meetings.
Federal Funds Rate
5.5
5.5
About a month ago, the market was
5
Futures quotes for September average
5
expecting the funds rate to reach an
even higher level by September, but
4.5
4.5
May 17
developments since then, including
Percent
the most recent action by the Fed
4
4
April 18
on May 17, have apparently damped
March 22
3.5
3.5
those expectations somewhat. At
February 4
this point, both financial market
3
3
Actual
participants and most economic
2.5
2.5
forecasters predict a further increase
Jan 94
Feb 94
Mar 94
Apr 94
May 94
Jun 94
in short-term interest rates during
the second half of the year. But the former
anticipate a larger increase than the latter.
Analysis. Expectations about future rate hikes are
probably already reflected in current long-term
interest rates. Therefore, if the Fed increases the
funds rate in line with current market expectations,
long-term interest rates probably would not change
much from their current levels. If, however, the Fed
were to move more aggressively than the market
now expects, it is likely that long-term interest rates
would increase further, exercising an additional
contractionary influence on economic activity.
The Market for Federal Funds
The federal funds market allows banks to borrow and lend reserves at an
interest rate known as the federal funds rate. The federal funds futures market
allows banks to place bets on the future course of the federal funds rate.
Weekly Economic Briefing
1
June 17, 1994
EYES ONLY
SPECIAL ANALYSIS
Chernomyrdin Leads Stabilization Effort in Russia
Confounding the predictions of both Western pundits and Russian reformers,
Prime Minister Victor Chernomyrdin has been pursuing a tough stabilization
policy since the reshuffling of the government last December.
Until recently, an extensive system of government subsidies in Russia was
maintaining output at an unsustainable level and boosting the rate of inflation (see
Weekly Economic Briefing, January 7, 1994). But Chernomyrdin has slashed
those subsidies and promised to keep the budget deficit under 10 percent of GDP
this year (down from more than 20 percent in 1992). He has also been promoting
a tighter monetary policy to reduce inflation from more than 20 percent per month
in 1993 to less than 10 percent per month by the end of this year.
Industrial Production and Inflation in Russia
85
30
Industrial production
Already, the effects of these restrictive
80
25
policies are being felt. Both output and
Industrial production index (Dec 91=100)
70
15
65
Consumer price inflation (% monthly)
inflation are down significantly (see
75
20
chart). And official unemployment-
Inflation
while still only about 2 percent-has
been rising.
10
60
Analysis. Open unemployment in
56
5
Russia has been suppressed largely by
Dec 92
Mar 93
Jun 93
Sep 93
Dec 93
Mar 94
maintaining employment in wasteful
and moribund industries. The experience of economic reform in other previously
socialist economies suggests that if the Russian government continues to limit
subsidies to state enterprises, a sharp increase in unemployment is likely. During
Poland's stabilization period, for example, the unemployment rate jumped from
6 percent in 1990 to 15 percent in 1992. The creation of new jobs in the private
sector will help ease the unemployment problem caused by cutbacks in state
enterprises. An effective social safety net (providing job search, training, and
transitional income assistance) would be helpful, but both financing and technical
design difficulties impede its implementation.
Are Official Russian Data on Unemployment Reliable?
Official Russian data understate the extent of unemployment because people
who are effectively no longer working may not be registering with the
authorities. Unemployment benefits are meager (at about 10 percent of the
average wage), and openly unemployed individuals lose the social benefits
provided by many Russian firms. Independent researchers estimate that
Russian unemployment is probably 2 to 3 times the officially reported rate of
2 percent.
Weekly Economic Briefing
2
June 17, 1994
EYES ONLY
TREND
Quality of Military Recruits Continues to Improve
The quality of new military recruits has been
steadily improving since the establishment of the
all-volunteer force in 1973. For example, the
fraction of new recruits with a high school diploma
has risen from about two-thirds in the mid-1970s to
more than 95 percent in recent years (see chart). At
the same time, there has been essentially no change
in the fraction of young civilian workers with a high
school diploma.
Personnel with High School Diploma
100
Analysis. The improving quality of
recruits suggests that service in the
90
Armed Forces remains an attractive
Civilians, 18-24 years
opportunity for many potential
80
Percent
volunteers, and that the current level
of compensation paid to enlisted
70
recruits is sufficient to allow the
Military (new recruits)
60
military to compete effectively in
the labor market.
50
1974
1977
1980
1983
1966
1989
1992
Meaningful comparisons of compensation between
the military and civilian sectors are difficult to make
for at least two reasons. First, the compensation
package offered by the Armed Forces includes not
only take-home wages but also free health care, PX
privileges, housing allowances, and job training. In
total, the non-wage benefits offered by the military
are more generous than the non-wage benefits
offered by civilian employers for comparable
workers.
Second, the military employs mainly high school
graduates in the enlisted ranks. Therefore, the
compensation of newly enlisted personnel should be
compared with the compensation of civilians with a
similar level of education. Over the past decade or
two, the relative wages of high school graduates in
the civilian labor market have declined.
Weekly Economic Briefing
3
June 17, 1994
EYES ONLY
ARTICLE
Sources of GDP Growth as the Expansion Matures
To date, the economic expansion has been led by the interest-sensitive sectors of
the economy-business investment, housing, and consumer purchases of cars and
other durable goods. Spending in these sectors should continue to grow, although
probably not as rapidly as in recent quarters.
As the expansion matures, other sectors will become more important sources of
GDP growth (see chart). Shifts in the composition of growth away from the
interest-sensitive sectors and toward the other components of GDP are typical in
the middle stages of a business cycle.
Contributions to GDP Growth
3.5
3
2.5
Percent per year
2
1.5
1
0.5
0
1993
1994
1995-96
Interest-sensitive
Rest of GDP
In the near-term, there appears to be some scope for accumulation of inventories,
which have been at low levels relative to sales (see Weekly Economic Briefing,
May 6, 1994). In the longer term, net exports should become less of a drag on
GDP growth. Export growth has been held down thus far in the recovery by the
lackluster economic performance of many of our trading partners, especially
continental Europe and Japan. Exports should accelerate, however, as those
foreign economies strengthen. Growth of imports, which have been boosted
noticeably by increased imports of capital equipment, should begin to taper off as
business investment slows.
Investment will remain high. Despite the slowing in the rate of growth of
investment spending, the level of investment (as a share of total GDP) will be
Weekly Economic Briefing
4
June 17, 1994
EYES ONLY
high relative to historical experience. Investment relative to GDP was also high
at a similar stage of the business cycle in the mid-1980s, although the composition
of investment was quite different then: In that expansion, the mix of investment
was more heavily weighted toward nonresidential structures. Such spending was
stimulated by tax incentives, and much of it turned out to be relatively
unproductive. In the current expansion, a larger share of investment spending has
been devoted to business acquisition of equipment.
Weekly Economic Briefing
5
June 17, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Japanese Government Limits Acceptance of American Rice. Cold, wet
summer weather in Japan last year resulted in a catastrophically poor rice harvest,
and forced Japan to open its rice market to a significant volume of imports for
only the second time since 1968. California is a major foreign supplier of the
medium-grain japonica rice favored by the Japanese. But the Japanese
government-controlled rice marketing agency has taken steps to limit consumer
acceptance of foreign rice, particularly American imports, by mixing japonica rice
from the United States and Australia with long-grain indica rice from Thailand
and labeling the result "American" rice. Because the two types of rice cook
differently, the mixture is perceived to be of low quality.
Global Vital Signs Improve. A recent study by Worldwatch Institute reports
signs of improving planetary health. The study says that global production of
chlorofluorocarbons (CFCs) fell nearly 20 percent last year and is down 60
percent from its peak in 1988. This decline can be traced to a series of
international agreements dating from the Montreal Protocol in 1987. The
Copenhagen amendments signed in 1992 call for a complete ban on CFC
production by the end of 1995. The EU nations have pledged to halt production
by the end of this year. Estimates for global carbon emissions are essentially flat
since 1989. However, this plateau masks soaring emissions in developing nations,
especially in Asia.
Sprint Says Hello to European Partners. In a move to expand its global reach,
Sprint announced this week that it will sell a 20 percent stake to the national
carriers of France (France Telecom) and Germany (Deutsche Telekom) for
$4.2 billion. The partnership plans to offer a wide variety of new services-voice,
data and video services for multinationals, calling cards for consumers overseas,
and a range of new wireless services. The Justice Department recently approved
a similar agreement between MCI and British Telecommunications; approval from
Justice will be required before the Sprint deal can proceed.
"Co-Provider" Marriages Bloom. A new study compares the contributions of
young wives to family income in 1963 with their contributions in 1992. "Co-
provider" marriages, in which the wife contributes between 30 and 70 percent of
family income, have become increasingly common: Thirty years ago only about
one-fifth of wives were in such marriages; today, more than two-fifths are.
Marriages in which the wife provides more than 70 percent of family income have
also become more common during this period, but still account for only about
5 percent of all marriages.
Weekly Economic Briefing
6
June 17, 1994
EYES ONLY
RELEASES THIS WEEK
Retail Sales
Retail sales declined 0.2 percent in May. Excluding sales
at auto dealers, retail sales increased 0.3 percent.
Consumer Price Index
The consumer price index increased 0.2 percent in May.
Excluding food and energy, the index was up 0.3 percent.
Industrial Production
The industrial production index increased 0.2 percent in May.
Capacity utilization edged down to 83.5 percent.
Housing Starts
Housing starts increased 3 percent in May. Building permits
decreased 2 percent.
MAJOR RELEASES NEXT WEEK
US International Trade in Goods and Services (Tuesday)
Durable Goods Manufacturers' Shipments and Orders (Thursday)
Weekly Economic Briefing
7
June 17, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
3.0
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
1.7
3.5
6.1
1.3
Manufacturing (1978-93)
2.3
4.8
2.6
7.9
6.9
Real compensation per hour
0.6
-0.3
1.2
-0.5
3.1
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.7
Imports
9.2
13.1
13.2
13.5
13.7
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.6
Federal surplus
-2.8
-3.5
-3.3
-3.2
-2.5
Mar.
Apr.
May
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.5
6.4
6.0
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
379
358
191
increase since Jan. 1993
3357
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.1
0.2
PPI-Finished goods
5.0
0.2
0.2
-0.1
-0.1
New or revised data in boldface.
Weekly Economic Briefing
8
June 17, 1994
EYES ONLY
FINANCIAL STATISTICS
1992
1993
Apr.
May
June 16,
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3661
3708
3811
Interest Rates
3-month T-bill
3.43
3.00
3.68
4.14
4.11
10-year T-bond
7.01
5.87
6.97
7.18
7.07
Mortgage rate, 30-year fixed
8.40
7.33
8.32
8.60
8.33
Prime rate
6.25
6.00
6.45
6.99
7.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
June 16, 1994
Week ago
Year ago
Deutschemark-Dollar
1.631
-2.2
-1.7
Yen-Dollar
103.2
-0.8
-3.2
Multilateral (Mar. 1973=100)
91.87
-1.4
0.0
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.7 (Q1)
6.0 (May)
2.3 (May)
Canada
3.4 (Q1)
11.0 (Apr)
0.2 (Apr)
Japan
0.0 (Q4)
2.9 (Mar)
1.4 (Mar)
France
-0.3 (Q4)
12.4 (Mar)
1.7 (Apr)
Germany
1.6 (Q1)
6.7 (Feb)
3.2 (Apr)
Italy
0.3 (Q4)
10.6 (Jul)
4.1 (Apr)
United Kingdom
2.6 (Q1)
9.7 (Apr)
2.5 (Apr)
Weekly Economic Briefing
9
June 17, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
June 10, 1994
CHART OF THE WEEK
Volume of Applications for Mortgage Refinancing
1,400
1,200
1,000
Index (1990:Q1 = 100)
800
600
400
200
0
1990
1991
1992
1993
The chart shows an index of the volume of applications for mortgage
refinancing. Refinancing volume is generally high when interest rates are
believed to be low or about to rise. The most recent peak in refinancing
occurred in the second half of 1993. Since then, activity has dropped off
markedly as mortgage rates have increased.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
U.S. Trade Surplus with Mexico Inches Up
1
Toyota to Boost U.S. Auto Production
2
State Tax Revenues Rise
3
ARTICLE
Networks and Growth:
From Railroads to the Information Superhighway
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
U.S. Economic Statistics
8
Financial and International Statistics
9
"You'll always be much more than a commodity to me."
EYES ONLY
CURRENT DEVELOPMENT
U.S. Trade Surplus with Mexico Inches Up
NAFTA opponents often claimed that the
Agreement would cause imports from Mexico to
surge, and thus lead to substantial job losses in the
United States. A press report earlier this week lent
apparent support to this claim by noting that our
trade surplus with Mexico in the first quarter of
1994 was only half as large as it had been in the
same quarter 1 year earlier. But that report was
misleading.
U.S. Trade Surplus with Mexico
2
Our trade surplus with Mexico did
decline over the period mentioned
1
in the press report-but that decline
Billions of U.S. dollars
occurred entirely before NAFTA
o
was implemented. Between the
fourth quarter of 1993 and the first
-1
quarter of 1994, the surplus actually
increased slightly (see chart).
-2
1985
1986
1967
1988
1989
1990
1991
1992
1993
Analysis. The decline in our surplus with Mexico
during 1992 and 1993 is not surprising given that
our economy was gathering strength while Mexico's
economy was struggling. Indeed, Mexican GDP
growth in 1993 was the lowest since 1986. With its
political outlook uncertain, Mexico may continue to
experience low economic growth in 1994. If so, our
trade balance with Mexico may well deteriorate later
this year.
As discussed in previous Weekly Economic
Briefings, the primary benefits of trade liberalization
are enhanced productivity and living standards in
the long run. It is these benefits-not the possibility
of short-run increases in our trade surplus with
Mexico-that will constitute the real gains from
NAFTA.
Weekly Economic Briefing
1
June 10, 1994
EYES ONLY
CURRENT DEVELOPMENT
Toyota to Boost U.S. Auto Production
Toyota recently announced plans to cut the price of
the redesigned Camry by 15 percent. Cost savings
are to be realized by shifting more assembly to the
United States, using more U.S.-made parts, and
stepping up efforts to encourage U.S. parts suppliers
to integrate their design and materials choices more
effectively with Toyota's operations.
Unit Labor Costs in Manufacturing Industries
250
Japan
Dollar-Based Index: 1982=100
200
150
100
United States
50
1980
1962
1984
1986
1988
1990
1992
Analysis. Toyota's intention to boost the U.S.
content of the Camry may owe in part to trade
pressures, but exchange rate changes have been
significant. When expressed in dollar terms,
Japanese unit labor costs in manufacturing increased
about 2-1/2 times between 1982 and 1993; more
than 80 percent of this increase was due to a
stronger yen. At the same time, U.S. unit labor
costs increased only slightly, as 4 percent average
nominal compensation gains were nearly offset by
3 percent average growth in productivity.
Consequently, the relative cost of producing goods
in the United States has decreased. This change in
relative cost is encouraging companies like Toyota
to shift to more U.S.-based production and should
help reduce our bilateral trade deficit with Japan.
Weekly Economic Briefing
2
June 10, 1994
EYES ONLY
CURRENT DEVELOPMENT
State Tax Revenues Rise
State tax revenues for the first quarter of 1994 rose
6.7 percent (4.4 percent in real terms) from the
same period last year. Revenue increases were
especially strong in the Southwest (11 percent), the
Great Lakes region (10 percent), and Arkansas (9
percent). Revenues in California, however, edged
down slightly (0.1 percent) over the last four
quarters, reflecting continued slow growth in the
California economy.
A report by the Center for the Study of the States
attributes revenue increases in 1993 and 1994
almost entirely to strong economic growth. In
contrast, revenue increases in 1992 were mostly due
to legislated tax increases.
Increase in State Tax Revenue
(percent change, first quarter over first quarter)
Total
Due to Legislation
1992
7.8
6.8
1993
5.8
0.1
1994
6.7
0.4
Source: Center for the Study of the States
Analysis. The pickup in state economies, with the
consequent improvement in their fiscal positions,
has enabled some states to cut taxes-although such
adjustments generally have been small. Five states
(Arizona, Georgia, Maryland, New Jersey, and New
Mexico) have cut personal income taxes for 1994,
one (Utah) has reduced its sales tax, and at least
three others (Maine, Minnesota, and Washington)
have reduced business taxes.
Weekly Economic Briefing
3
June 10, 1994
EYES ONLY
ARTICLE
Networks and Growth: From Railroads to the Information
Superhighway
The development of the national railroad network during the 19th century spurred
economic growth. Railroads brought people closer together and helped firms
reach their customers and suppliers more quickly and cheaply. The development
of a national communications network has already had similar effects, and the new
technologies that are building the information superhighway will produce
additional benefits.
The Railroad Network. At the dawn of the 19th century, rivers and oceans were
the only inexpensive and reliable means of transportation in the United States. As
a result, economic activity was concentrated near navigable rivers and along the
eastern seaboard. The development of turnpikes and canals before 1850. and
railways after 1850, transformed the economic landscape. By increasing
productivity, these transportation networks made the Nation wealthier.
The net social return on the investment in railroads was very high. Indeed, the
social return exceeded the return to those who invested in the railways because of
"network externalities" that made the railroads more valuable as increasing
numbers of people were connected to them.
The Communications Network. The developing broadband interactive
communications network-the information superhighway-can be expected to
increase productivity throughout the economy in much the same way that the
railways did in the previous century. The new communications network will make
it easier for firms to reach customers and suppliers, and will spur the development
of new services.
Regulatory barriers now limit the rate at which the economy will achieve these
benefits. The Administration's proposed legislation would remove unnecessary
regulatory restrictions, provide a way for other regulatory restrictions to wither
away as effective competition arises, and reduce private sector uncertainty about
the future course of regulation. By encouraging private investment and
accelerating the arrival of the information superhighway (see box), these
legislative proposals have the potential to add more than $100 billion (in 1994
dollars) to GDP over the next decade.
The new regulatory environment should boost the output of the economy in three
ways.
Productivity will increase slightly throughout the economy.
Jobs will shift into economic activities in which workers are more
productive.
Weekly Economic Briefing
4
June 10, 1994
EYES ONLY
Increased private sector investment in an advanced telecommunications
infrastructure will accelerate the rate at which the economy approaches
full employment.
Helpful as it is for understanding certain aspects of the transformation to the
information economy, the railway analogy may not be useful in forecasting the
effect of the advanced communications network on market structure. Whereas the
railroads encouraged the development of large industrial firms, the
communications network may encourage flexibility rather than scale. Some
industries may actually become less concentrated, as small firms emerge to serve
narrow market niches.
Growth in the Telecommunications and Information Services Sector
The Administration's legislation is expected to stimulate considerable growth
in the economy's telecommunications and information services sector. This
sector includes "conduit" (phone, cable, and wireless), "content" (such as
broadcast programming, newspapers, books, recorded music, and video) and
"computers" (hardware, software, and computing services). Much of the
sector's growth will come from the development and deployment of new
products and services, such as personal communications systems and tele-
medicine. In addition, functions once considered part of the manufacturing
sector may be relabeled as "information services." For example, payroll
services performed in-house by manufacturing companies and heretofore
included in measures of manufacturing output and employment increasingly are
being outsourced to companies providing advanced data processing services.
Weekly Economic Briefing
5
June 10, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Major U.S. Banks to Establish Subsidiaries in Mexico. By the end of the year,
all seven of the largest U.S. banking companies plan to have separately capitalized
subsidiaries in Mexico. (Currently, Citicorp is the only major bank with
operations in Mexico.) NAFTA puts U.S. and Canadian banks on the same
competitive footing as Mexican banks. Initially, the American banks plan to limit
their activities mainly to foreign exchange trading and general advisory work;
these services are expected to appeal mainly to the largest Mexican firms. Many
in Mexico hope that the American banks will eventually enter the loan market as
well and, by increasing the competitiveness of the banking sector in Mexico,
possibly bring down borrowing costs for both large and small borrowers.
On-Line Financing. Many small businesses struggle to find capital, but new on-
line computer services are expected to make the task of raising funds a little
easier. One service links small businesses and potential investors: companies
pay for a one-page listing, and investors pay to search the listings. Another
service plans to list small-business share offerings to on-line investors. These new
services will connect entrepreneurs-who often have difficulty acquiring
financing-with a national pool of investors.
Strong Farm Equipment Sales Signal Industry Revival. Sales of tractors and
combines in the U.S. were up 16 percent in the first 4 months of this year over
the same period 1 year ago, boosted by still relatively low interest rates, low farm
debt, high farm incomes, and the advent of new technology. Despite the upsurge
in demand, the leading manufacturers-Deere, Case, and Ford New
Holland-remain cautious about adding to their plants' productive capacity.
Pigs in Space. For the first time ever, the weekly feeder-pig auction in Iowa has
gone live via satellite. Pre-registered bidders can participate by phone. Since the
pigs are videotaped on the farm, buyers get to see the animals without having
them exposed to infection from other herds or injury from transportation. The pig
auctioneers received technical assistance from a firm that has 7 years of
experience in video cattle auctions. Pork producers see these auctions becoming
increasingly popular, maybe even having their own cable channel 1 day.
Weekly Economic Briefing
6
June 10, 1994
EYES ONLY
RELEASES THIS WEEK
Producer Price Index
** FOR RELEASE Friday 8:30 a.m. **
The producer price index for finished goods declined
0.1 percent in May.
MAJOR RELEASES NEXT WEEK
Retail Sales (Tuesday)
Consumer Price Index (Tuesday)
Industrial Production (Wednesday)
Housing Starts (Thursday)
Weekly Economic Briefing
7
June 10, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
3.0
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
2.0
4.0
6.4
0.5
Manufacturing (1978-93)
2.3
5.2
3.0
7.4
6.6
Real compensation per hour
0.6
0.1
1.8
-0.2
3.4
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.7
Imports
9.2
13.1
13.2
13.5
13.7
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.6
Federal surplus
-2.8
-3.5
-3.3
-3.2
-2.5
Mar.
Apr.
May
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.5
6.4
6.0
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
379
358
191
increase since Jan. 1993
3357
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.1
N.A.
PPI-Finished goods
5.0
0.2
0.2
-0.1
-0.1
PPI data embargoed until 8:30 a.m., June 10 (Friday).
New or revised data in boldface.
8
June 10, 1994
Weekly Economic Briefing
EYES ONLY
FINANCIAL STATISTICS
Apr.
May
June 9,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3661
3708
3753
Interest Rates
3-month T-bill
3.43
3.00
3.68
4.14
4.12
10-year T-bond
7.01
5.87
6.97
7.18
6.98
Mortgage rate, 30-year fixed
8.40
7.33
8.32
8.60
8.25
Prime rate
6.25
6.00
6.45
6.99
7.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
June 9, 1994
Week ago
Year ago
Deutschemark-Dollar
1.667
0.8
1.9
Yen-Dollar
104.1
-0.8
-2.2
Multilateral (Mar. 1973=100)
93.14
0.3
2.4
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.7 (Q1)
6.0 (May)
2.4 (Apr)
Canada
3.0 (Q4)
11.0 (Apr)
0.2 (Apr)
Japan
0.0 (Q4)
2.9 (Mar)
1.4 (Mar)
France
-0.3 (Q4)
12.4 (Mar)
1.7 (Apr)
Germany
1.6 (Q1)
6.7 (Feb)
3.2 (Apr)
Italy
0.3 (Q4)
10.6 (Jul)
4.1 (Apr)
United Kingdom
2.6 (Q1)
9.7 (Apr)
2.5 (Apr)
9
June 10, 1994
Weekly Economic Briefing
BR/B0/65/SM
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
May 27, 1994
CHART OF THE WEEK
Changes in 10-Year Bond Yields
400
200
Basis point change from 6 months ago
0
-200
-400
1960
1965
1970
1975
1980
1985
1990
The jump in long-term interest rates that has taken place over the past 6
months is one of the steepest such increases of the past 35 years. Long-
term interest rates became much more volatile in the late 1970s. Although
volatility fell somewhat in the late 1980s, bond yields today remain more
volatile than they were before 1979.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
Commodity Prices Rise, Will Inflation Follow?
1
Growth Prospects Improve in Europe
2
TREND
Productivity and Real Compensation
3
ARTICLE
Reinventing Food Aid
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
They
MANKOFF
"An increase in interest rates by the Federal Reserve board today sent the stock market down, but then
the hope that this would lead to sustainable economic growth moved the market back up, until the
realization that higher interest rates could stall the recovery sent it down again, before it ultimately rose
on expectations that a sluggish economy would cause the Federal Reserve board to lower mies."
EYES ONLY
CURRENT DEVELOPMENT
Commodity Prices Rise, Will Inflation Follow?
Commodity prices have posted sharp increases over
the past several months, leading some to argue that
higher inflation is just around the corner.
Analysis. The claim that there is a close
relationship between commodity prices and
economy-wide inflation relies heavily on the
experience of the 1970s. Between 1971 and 1982,
commodity price inflation (measured here by the
widely-watched CRB futures index) and subsequent
core CPI inflation tended to move together (see
chart). But this relationship appears to have fallen
apart over the last decade: core CPI inflation
remained quite flat despite wide swings in
commodity price inflation.
Commodity and Consumer Price Inflation
100
CRB Futures index
15
(left scale)
80
Core Consumer Price Index
(right scale)
10
60
Percent change, yr. ago
40
5
Percent change, yr. ago
20
0
0
-20
1973
1976
1979
1982
1985
1988
1991
1994
Commodity prices react strongly to things like crop
failures, weather, and the behavior of international
producers and cartels. For example, last summer
the CRB index rose sharply because of floods in the
Midwest and drought in the Southeast, but overall
inflation fell. Nevertheless, the fact that several
different commodity price indexes are now all rising
in tandem could be a harbinger of future inflationary
pressures.
Weekly Economic Briefing
1
May 27, 1994
EYES ONLY
CURRENT DEVELOPMENT
Growth Prospects Improve in Europe
The prospects for economic growth in Continental
Europe have brightened in recent months. After
contracting in 1993, the economies of France,
Germany, and Italy are expected to grow this year.
As signs of recovery became clearer, forecasters
raised their growth projections (see table).
Real GDP Growth Rates
1993
1994 Consensus Forecasts
12/93
5/94
Revision
France
-0.8
0.8
1.3
0.5
Germany
-1.9
0.2
0.7
0.5
Italy
-0.7
1.0
1.1
0.1
Source: The Economist.
Analysis. Even these higher forecasted growth rates
will be insufficient to reduce European
unemployment in 1994.
Exports, spurred in part by strong growth in the
United States, are forecasted to be an important
engine of growth for Europe. The OECD, for
example, expects that Germany's growth in 1994
will be entirely due to net export growth.
Faster growth in Europe should lead to a small rise
in U.S. exports. The forecast revisions above, if
actually realized, translate into $4.4 billion in
additional U.S. exports in 1994.
Weekly Economic Briefing
2
May 27, 1994
EYES ONLY
TREND
Productivity and Real Compensation
Economists say that productivity
Real Compensation and Productivity
growth is the wellspring of real
130
Output per Hour
wage increases. Yet allegedly
real compensation has lagged
120
behind productivity in recent
Index, 1973 = 100
110
years. Has it?
100
Compensation per Hour
The answer depends on how
(defisted by consumer prices)
nominal compensation is
90
deflated. If compensation is
deflated by the buying prices
80
1970
1973
1976
1979
1982
1985
1968
1991
1994
paid by American households, a
sizable gap has indeed opened
between productivity and real compensation (see first chart). But if compensation
is deflated by the selling prices received by American businesses, real
compensation tracks productivity closely (see second chart).
Real Compensation and Productivity
The two alternatives give
130
different answers because
Output per Hour
consumer prices have risen
120
faster than output prices since
the mid-1980s.
Index, 1973 = 100
110
The prices of investment
100
goods, especially computers,
Compensation per Hour
(defisted by output prices)
have been rising very
90
slowly. Most investment
goods do not directly enter
80
1970
1973
1976
1979
1962
1985
1988
1991
1994
the consumer price index.
The prices of housing, health care, and other consumer services, which are
larger components of consumer prices than of output prices, have been rising
relatively rapidly.
Analysis. Economists expect productivity to track compensation deflated by
output prices, not consumer prices. The reason is that businesses deciding
whether to expand their workforce compare compensation costs to the value of
what additional workers will produce. This in turn depends on the productivity
of workers and the prices that businesses receive when they sell their output. It
is therefore not surprising that compensation deflated by output prices closely
tracks productivity.
Weekly Economic Briefing
3
May 27, 1994
EYES ONLY
ARTICLE
Reinventing Food Aid
The Rwanda tragedy-and the refugee
U.S. Food Aid Spending, 1993
crisis it has engendered-is a forceful
Emergency
reminder of the importance of
Assistance
(23%)
$387m
humanitarian aid in general and food
Economic
8757m
Development
aid in particular. U.S. food aid
(44%)
programs, which account for about half
$665m
of all world food aid, have three
objectives: to develop markets for our
Market
Development
(33%)
products, to provide emergency
assistance such as famine relief, and to
Total Spending $1.7 billion
encourage long-term economic
development. Each of these objectives warrants scrutiny.
Who gains from market-development spending? One-third of U.S. food aid is
aimed at developing markets for American agricultural products (see chart).
Because they are targeted at middle-income countries, these funds might be better
thought of as a farm support program rather than as food aid.
Export Subsidies and Food Aid
In principle, export subsidies for agricultural commodities under the Export
Enhancement Program (EEP) are aimed at commercial sales, while food aid
addresses needs that would not be met commercially. But reality is sometimes
different. Some EEP recipients actually pay less for wheat than do some aid
recipients. El Salvador, for example, recently requested a wheat EEP allocation
for this reason.
Is famine relief effective? Poorly timed and inappropriately targeted famine
assistance can actually do more harm than good. The Ethiopian famine of 1983-
1984 provides a tragic example. Although it was known in late 1982 that Ethiopia
would soon need large quantities of food aid, large-scale efforts did not begin until
late 1984. Food promised in late 1984 arrived 6 months later, after the rainy
season had begun and roads were impassable. Once the rainy season ended, a
new crop was harvested. Food aid then was not only less needed, but also
potentially counterproductive, because it forced food prices down and lowered the
income of farmers, thereby exacerbating long-term adjustment problems.
In addition, distribution problems can result in too much aid going to urban areas
and too little aid going to rural areas, where famine is often most severe. Too
much aid to urban areas induces the rural population to migrate to cities, thereby
perpetuating food shortages by reducing indigenous food production.
Weekly Economic Briefing
4
May 27, 1994
EYES ONLY
Paradoxically, a shortage of food is frequently not the principal cause of famine.
Instead, crop failures or other problems cause severe losses of income for the
poor, who then lack the income to buy food even though food production is
sufficient to meet at least the subsistence needs of the entire population. Many
regions in the grip of famine-such as Ireland during the potato famine and
Bangladesh in 1974-actually exported food!
It therefore makes sense to target food aid toward those suffering income losses.
Many countries have had success in using low-paying public works programs as
vehicles for delivering aid. These programs assist recovery by keeping the rural
population in the countryside while helping to improve rural infrastructure. For
example, food-for-work programs in Bangladesh were used for irrigation, drainage,
and flood-control projects that ultimately increased crop production by an
estimated 27 percent.
Does food aid promote economic development? Nearly half of U.S. food aid
spending goes for programs to promote long-term economic development by
reducing malnutrition among children and nursing mothers, increasing school
attendance, and alleviating poverty. The goals of these programs are laudable but
little is known about their overall effectiveness. Program operators (including
private voluntary organizations) are not required to collect data that would
facilitate monitoring and evaluation. Development efforts could be made more
effective in reducing hunger and malnutrition if the organizations delivering the
aid were required to collect such data.
Does food aid impede sustainable agricultural development? Critics charge
that donated food pushes food prices down and thus makes it more difficult for
a viable farm sector to emerge. Recent studies find that such effects are often
small, however, because food aid mostly displaces spending on imported food.
Is food aid spending efficient? The kinds of commodities provided as food aid
are chosen because they are cheap for donors, not because they are highly valued
by recipients. Thus a dollar's worth of donated food is frequently worth less than
a dollar to recipients; examples include wheat in urban areas of China, cooking
oil in China, or canned meat and fish in Bolivia and China.
The cost of U.S. food assistance has also been increased by provisions designed
to satisfy domestic constituencies, such as requirements for shipping on U.S. flag
carriers or processing in the United States prior to shipment.
Conclusion. Food aid is likely to remain an important vehicle for providing
development assistance, since its political constituency makes it among the most
acceptable forms of aid. Better targeting and improved delivery can make current
spending levels much more effective.
Weekly Economic Briefing
5
May 27, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
New Computer Price Index Shows Steeper Price Declines. Rapid technical
improvements in computer processor speed, memory, and storage make measuring
computer prices difficult. Changes in quality complicate price comparisons of
even the same model in successive years. Using a quality-adjusted price index for
personal computers, the authors of a recent NBER study find that price declines
were almost 50 percent greater than estimates using conventional methods. By
estimating the value of the characteristics of desktop models, the authors find that
prices fell by an average annual rate of over 30 percent between 1989 and 1992.
In contrast, conventional methods indicate a 19 percent decline.
Taxing Alcoholic Beverages. Recent research compares estimates of the social
costs of alcohol-related traffic accidents to existing excise taxes on alcoholic
beverages. One study states that "the rest of society collectively pays $0.63 in
crash costs each time someone takes a drink." Current alcohol taxes, which
average less than $0.10 per drink, are well below these social costs.
Compaq Takes Lead in World PC Market. Compaq Computer seized the lead
in world market share for personal computers shipped in the first quarter of this
year. This is the first time that Compaq has outpaced perennial leaders IBM and
Apple. Compaq also leads the U.S. market with a 12.4 percent share. Compaq
initially focused on the corporate market, but has recently expanded its retailer
network.
A Hidden Cost of Hyperinflation. For decades, Argentina's hyperinflation
rapidly reduced the value of coins, making vending machines impractical. At
inflation's peak in 1989, a candy bar purchased for 50 centavos would have cost
about 1000 centavos 6 months later. Now that inflation averages only 0.1 percent
per month, vending machines are becoming practical. As a result, Vendor
Argentina, a joint venture between Argentine investors and an American group of
vending machine manufacturers is beginning to see its business grow.
Weekly Economic Briefing
6
May 27, 1994
EYES ONLY
RELEASES THIS WEEK
Gross Domestic Product ** FOR RELEASE Friday 8:30 a.m. **
According to the preliminary report, gross domestic product rose 3.0 percent
(annual rate) in the first quarter.
Durable Goods
According to the advance report, durable goods orders rose 0.1 percent in
April.
MAJOR RELEASES NEXT WEEK
Personal Income (Tuesday)
Consumer Confidence (Tuesday)
Leading Indicators (Thursday)
Employment (Friday)
Weekly Economic Briefing
7
May 27, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
3.0
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
2.0
4.0
6.4
0.5
Manufacturing (1978-93)
2.3
5.2
3.0
7.4
6.6
Real compensation per hour
0.6
0.1
1.8
-0.2
3.4
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.7
Imports
9.2
13.1
13.2
13.5
13.7
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.6
Federal surplus
-2.8
-3.5
-3.3
-3.2
N.A.
Feb.
Mar.
Apr.
1993
1994
1994
1994
Unemployment Rate
6.7'
6.8
6.5
6.5
6.4
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is estimated
to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
278
464
267
increase per month
increase since Jan. 1993
2853
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.3
0.1
PPI-Finished goods
5.0
0.2
0.5
0.2
-0.1
GDP embargoed until 8:30 a.m., May 27 (Friday). New or revised data in boldface.
Weekly Economic Briefing
8
May 27, 1994
EYES ONLY
FINANCIAL STATISTICS
Mar.
Apr.
May 26,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3817
3661
3753
Interest Rates
3-month T-bill
3.43
3.00
3.50
3.68
4.16
10-year T-bond
7.01
5.87
6.48
6.97
7.09
Mortgage rate, 30-year fixed
8.40
7.33
7.68
8.32
8.53
Prime rate
6.25
6.00
6.06
6.45
7.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
May 26, 1994
Week ago
Year ago
Deutschemark-Dollar
1.649
-0.5
1.2
Yen-Dollar
104.6
0.3
-3.6
Multilateral (Mar. 1973=100)
92.65
-0.1
2.2
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.7 (Q1)
6.4 (Apr)
2.4 (Apr)
Canada
3.0 (Q4)
10.6 (Mar)
0.2 (Apr)
Japan
0.0 (Q4)
2.8 (Feb)
1.4 (Mar)
France
-0.3 (Q4)
12.3 (Feb)
1.7 (Apr)
Germany
-0.8 (Q4)
6.7 (Feb)
3.2 (Apr)
Italy
0.3 (Q4)
10.6 (Jul)
4.1 (Apr)
United Kingdom
2.6 (Q1)
9.8 (Mar)
2.5 (Apr)
GDP embargoed until 8:30 a.m., May 27 (Friday).
Weekly Economic Briefing
9
May 27, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
May 13, 1994
CHART OF THE WEEK
Change in Core Inflation from Recession Troughs
3
Average
2
Recession
Average Late
Expansion
1
Percentage Points
Average Early Expansion
0
-1
-2
Current Expansion
Forecast
-3
-4
-3 -2 -1 T 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quarters after trough
The chart compares the change in core CPI inflation during the current
economic expansion to the average of previous expansions. Inflation tends
to be fairly stable during the first 3 years of economic expansions, but has
fallen in this one. Inflation typically increases in the fourth year. (See Current
Development, page 2, for a discussion of inflation in the current expansion.)
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
Bundesbank Cuts Key Interest Rates, Others Follow
1
Inflation Update
2
ARTICLE
How Close Is the Economy to Capacity?
3
SPECIAL ANALYSIS
Commerce Takes First Step Towards Green GDP Accounts
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
QUOTATION OF THE WEEK
"Bond people are perverse. We never react in the way people
expect."
Senior Portfolio Manager
(Wall Street Journal, April 29, 1994)
EYES ONLY
CURRENT DEVELOPMENT
Bundesbank Cuts Key Interest Rates, Others Follow
The Bundesbank lowered its key interest rates by 50
basis points on Wednesday. The discount rate-the
cheapest rate at which banks can borrow from the
Bundesbank and the effective floor on money
market interest rates-was set at 4.5 percent. The
Lombard rate-the most expensive rate at which the
Bundesband lends to banks and the effective ceiling
on money market rates-was set at 6.0 percent.
As has been the pattern recently, other European
central banks responded with cuts of their own. The
central banks of France, Italy, Denmark,- Belgium,
the Netherlands, Portugal, and Austria all followed
the Bundesbank.
Analysis. The Bundesbank has been cutting interest
rates slowly since mid-1992. Money market interest
rates have declined along with the official rates (see
chart). Since inflation has been declining steadily,
real interest rates have not fallen as quickly as
nominal rates. With inflation currently running at
3.1 percent, short-term real interest rates are 2
percent-down from 5.5 percent in mid-1992 and
slightly below their average over the past 20 years.
The German economy is projected to grow slowly
this year. Declining interest rates should help
provide a much-needed stimulus.
Short-Term Interest Rates in Germany
12
Money market rate
10
Lombard rate
8
Percent
Discount rate
6
4
2
0
9206
9209
9212
9303
9306
9309
9312
9403
Weekly Economic Briefing
1
May 13, 1994
EYES ONLY
CURRENT DEVELOPMENT
Inflation Update
In April consumer prices rose 0.1 percent and
producer prices (for finished goods) fell 0.1 percent.
Consumer price inflation so far this year is running
below last year's rate (see table). Producer price
and GDP inflation, although somewhat higher than
last year's very low rates, remain very moderate.
So far this year, both consumer and GDP inflation
are running slightly below the Administration's
forecast.
Analysis. Given the excellent recent record, why is
there so much fear of increasing inflation?
The perception that GDP is growing faster
than expected raises fears that it will soon
exceed its noninflationary "potential" (see
Article, page 3).
Typically, inflation begins to increase after
11 quarters of expansion (see Chart of the
Week). Market participants might fear that
the U.S. economy will repeat this pattern.
But the historical pattern of substantial increases in
inflation as an expansion progresses is not
inevitable. Economic policy in this expansion
reduces the probability of an inflationary
overheating of the economy.
The Administration's restrained fiscal policy
promotes sustainable, noninflationary
growth.
The Fed's move to raise interest rates will
restrain economic growth and therefore
further reduce the risk of inflation.
Inflation Rates
1993
1994
Administration
To Date*
Forecast for 1994
CPI
2.7%
2.3%
3.0%
PPI (finished goods)
0.2
2.7
-
GDP Deflator
2.2
2.6
2.7
Annual rate.
Note: CPI embargoed until Friday 8:30 a.m.
Weekly Economic Briefing
2
May 13, 1994
EYES ONLY
ARTICLE
How Close is the Economy to Capacity?
As the economy approaches capacity, concerns about increasing inflation are
mounting. How large is the current gap between GDP and "potential" output?
And how fast is potential output growing? The answers to these two questions
are critical for assessing the risk of increased inflation.
There seems to be widespread agreement that potential is growing at about 2.4 or
2.5 percent per year. But there are substantial differences in estimates of the size
of the current GDP gap (see table). The size of the current gap determines how
much GDP can grow before fueling inflation.
DRI has a relatively pessimistic estimate of potential output. With its
GDP gap of 0.9 percent and potential growth rate of 2.4 percent per
year, the economy could grow 8.1 percent (0.9 + 2.4 + 2.4 + 2.4) over
1994, 1995, and 1996.
Even with the most optimistic estimate by WEFA (another private
forecasting firm), the economy could grow 8.7 percent (1.8 + 2.3 + 2.3
+ 2.3) over these 3 years.
The Administration's January forecast projected 8.4 percent total
growth over these 3 years, right in the middle of these two numbers.
Estimates of Potential GDP
Gap between Actual and
Growth of
Source
Potential GDP (1994:1)
Potential GDP
DRI
0.9%
2.4%
Meyer and Associates
1.0
2.5
Federal Reserve*
1.2
2.4
Congressional Budget Office
1.3
2.4
WEFA
1.8
2.3
"Unofficial. Estimate based on data published in Business Week.
For several reasons, the Administration makes its projections based on a range for
potential GDP. First, there is some uncertainty about the level and growth of
potential (as seen in the table). Second, potential output is not an absolute ceiling.
The amount of inflationary pressure depends on by how much and for how long
the economy temporarily exceeds potential.
Weekly Economic Briefing
3
May 13, 1994
EYES ONLY
The chart compares the current Administration forecast of GDP with this range
for potential. The range reflects the estimates in the table. In the first quarter
of 1993, the gap between actual and potential GDP was between 2 and 2-1/2
percent. But faster economic growth in the second half of 1993 narrowed the gap.
As of the first quarter of 1994, it was between 3/4 and 1-1/2 percent. Our current
forecast calls for growth slightly faster than potential through 1996.
Potential and Actual GDP
5700
5600
Range for Potential GDP
5500
Billions of 1987 Dollars
5400
5300
5200
Administration January GDP Forecast
5100
Actual GDP
5000
1993
1994
1995
1996
Analysis. If the forecasted path for GDP does not exceed estimates of potential
for the next few years, why is there so much concern about inflation?
GDP is close enough to potential that one or two strong quarters of
growth could push output above potential, thereby creating inflationary
pressures.
Some analysts believe that output is now growing somewhat faster than
we forecast.
There is uncertainty about the level of potential. Under our forecast,
GDP reaches the lower bound of the range of sensible estimates of
potential next year.
Therefore, even though a reasonable forecast suggests that it will be 3 years before
the economy reaches potential, it is certainly possible that output could get there
much sooner.
Weekly Economic Briefing
4
May 13, 1994
EYES ONLY
SPECIAL ANALYSIS
Commerce Takes First Step Towards Green GDP Accounts
This week the Commerce Department presented its conceptual basis for estimating
"green GDP," its integrated economic and environmental satellite accounts
(IEESA). It also presented the first phase of this effort: estimates of mineral
resources in the United States from 1958 to 1991. Future phases will provide
similar estimates for renewable resources, such as fisheries and forests, and
environmental resources, such as air and water.
The IEESA treats natural and environmental resources as productive assets,
analogous to the treatment of business capital. Like industrial equipment, natural
and environmental assets help produce flows of goods and services. Just as
capital depreciates, resources can lose their productivity through depletion or
degradation. And the stock of resources can be augmented through discoveries
of new deposits and cleanup efforts-just as investment augments the capital
stock.
Initial estimates for minerals. The value of proven reserves of mineral resources
adds 3 to 7 percent to the value of the country's private capital stock.
Additionally, depletion of proven reserves has been offset by additions, leaving
the stock of proven reserves down only slightly over the last 33 years (see chart).
Thus, the United States has not been "running out" of proven mineral reserves.
Because of this, adding mineral depletion to the standard national accounts would
have little net effect on GDP.
Analysis. In a purely physical
Proven Mineral Stocks
sense, the United States must be
1,400
running down its endowments
1,200
(proven plus unproven) of minerals.
1,000
In a practical sense, these
Billions of 1987 dollars
endowments are continually
800
expanding as technological
600
improvements make it economically
400
feasible to recover minerals from
more hostile environments, from
200
deeper deposits, and from deposits
0
1958
1961
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
with lower concentrations of
minerals. Using proven reserves as a measure of the country's mineral stock does
not fully take into account either this ultimate scarcity or these future
technological improvements.
Weekly Economic Briefing
5
May 13, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Global Foreign Direct Investment Declines. Based on international balance of
payments figures, global foreign direct investment fell about 14 percent in 1992.
This was the second consecutive year of decline. The main factors behind the
decrease were the continued long-term decline of direct investment by Europe and
a sharp drop in direct investment by Japan. Direct investment by the United
States rose nearly 20 percent, making the United States the world's leading
investor for the first time since 1986. Investment in industrialized countries was
down, while East Asian countries, especially China, continued to experience
sizable investment increases.
New Report Recommends Investment Budget. In its third report, the
Competitiveness Policy Council focuses on the need for greater investment in
infrastructure and human capital. The Council recommends that the Federal
Government establish an investment budget to highlight the share of Federal
spending that goes into public investment. It envisions the budget process
incorporating a "soft target" for the share of the total budget that should go to
Federal investment. The Council suggests a non-defense investment target of 12
percent of total non-defense outlays, which in FY 1995 would shift an additional
$16 billion into public investment.
GM Wins Approval for Pension Funding Plan. This week, the Pension Benefit
Guarantee Corporation endorsed a General Motors plan to contribute an extra $10
billion in cash and stock over the next 2 years to its pension fund for its hourly
workers. GM has the nation's largest unfunded pension liability, estimated at over
$20 billion (see Weekly Economic Briefing, December 3, 1993). GM also expects
to make its regular pension contributions of about $8 billion through 1996.
Weekly Economic Briefing
6
May 13, 1994
EYES ONLY
RELEASES THIS WEEK
Consumer Prices ** FOR RELEASE Friday 8:30 a.m. **
Consumer prices rose 0.1 percent in April.
Producer Prices
Producer prices for finished goods fell 0.1 percent in April.
Retail Sales
According to the advance report, retail sales fell 0.8 percent
in April.
MAJOR RELEASES NEXT WEEK
Industrial Production and Capacity Utilization (Monday)
Housing Starts (Tuesday)
Balance of Payments (Thursday)
Weekly Economic Briefing
7
May 13, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
2.6
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
2.0
4.0
6.4
0.5
Manufacturing (1978-93)
2.3
5.2
3.0
7.4
6.6
Real compensation per hour
0.6
0.1
1.8
-0.2
3.4
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.5
Imports
9.2
13.1
13.2
13.5
13.5
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.8
Federal surplus
-2.8
-3.5
-3.3
-3.2
N.A.
Feb.
Mar.
Apr.
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.5
6.5
6.4
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
278
464
267
increase since Jan. 1993
2853
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.3
0.1
PPI-Finished goods
5.0
0.2
0.5
0.2
-0.1
CPI embargoed until 8:30 a.m., May 13 (Friday). New or revised data in
boldface.
Weekly Economic Briefing
8
May 13, 1994
EYES ONLY
FINANCIAL STATISTICS
Mar.
Apr.
May 12,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3817
3661
3653
Interest Rates
3-month T-bill
3.43
3.00
3.50
3.68
4.13
10-year T-bond
7.01
5.87
6.48
6.97
7.36
Mortgage rate, 30-year fixed
8.40
7.33
7.68
8.32
8.77
Prime rate
6.25
6.00
6.06
6.45
6.75
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
May 12, 1994
Week ago
Year ago
Deutschemark-Dollar
1.668
0.1
3.4
Yen-Dollar
104.4
1.6
-6.5
Multilateral (Mar. 1973=100)
93.24
0.2
2.6
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.6 (Q1)
6.4 (Apr)
2.4 (Apr)
Canada
3.0 (Q4)
10.6 (Mar)
0.2 (Mar)
Japan
0.0 (Q4)
2.8 (Feb)
1.1 (Feb)
France
-0.3 (Q4)
12.3 (Feb)
1.5 (Mar)
Germany
-0.8 (Q4)
6.7 (Feb)
3.2 (Mar)
Italy
0.3 (Q4)
10.6 (Jul)
4.2 (Mar)
United Kingdom
2.6 (Q1)
9.8 (Mar)
2.3 (Mar)
CPI embargoed until 8:30 a.m., May 13 (Friday).
Weekly Economic Briefing
9
May 13, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
May 6, 1994
CHART OF THE WEEK
Help Wanted Advertising and the Unemployment Rate
180
12
Help Wanted Advertising
(left scale)
160
10
140
Index, 1967 = 100
8
120
Percent
100
6
80
4
Unemployment Rate
60
(right scale)
40
2
1964
1967
1970
1973
1976
1979
1982
1985
1988
1991
1994
Increases in help wanted advertising and decreases in the unemployment
rate are highly correlated. This year, help wanted advertising has increased
sharply, but remains well below its previous two business-cycle peaks.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
Central Banks Intervene to Support the Dollar
1
First Quarter Profits Report
2
Will the Auto Rebound Last?
3
USAir Insolvency Threatened
4
ARTICLE
Inventories Send Mixed Signal for Growth
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
Releases
8
Economic Statistics
9
Financial and International Statistics
10
/
,
(Eo
CULUM
leo Cullum for Barron's
"Once again, how many of you think we should tinker with the economy!"
EYES ONLY
CURRENT DEVELOPMENT
Central Banks Intervene to Support the Dollar
The United States, joined by Germany, Japan, and
at least 12 other countries intervened in foreign
exchange markets Wednesday to support the dollar.
This was the second time in a week that the United
States intervened.
Value of the U.S. Dollar
130
125
Yen per dollar
120
Currency per dollar
115
110
105
100
Multilateral index
(1 Jan 93 - 100)
95
Mar 93
Jun 93
Sep 93
Dec 93
Mar 94
Analysis. As the chart shows, the multilateral
exchange rate is approximately where it was 15
months ago. So why is the dollar perceived to be
weak?
The recent decline of the dollar relative to
the mark switched the story from a strong
yen to a weak dollar.
The dollar's approach to the psychologically
important 100 yen barrier raised expectations
of further declines were that barrier to be
breached.
Short-term interest rates have risen here and
declined abroad-especially in Europe.
Normally, the dollar would have risen in
response to such changes in interest rates.
Therefore, the dollar's weakness is puzzling
given the increased return on U.S. interest-
bearing assets. Expectations of increased
U.S. interest rates cannot explain the puzzle,
but expectations of higher foreign interest
rates could.
Weekly Economic Briefing
1.
May 6, 1994
EYES ONLY
CURRENT DEVELOPMENT
First Quarter Profits Report
Major corporations reported operating profit increases of 11 percent for the first quarter
of 1994 compared to the first quarter of 1993. In the fourth quarter of 1993, profits
increased a remarkable 38 percent from the fourth quarter of 1992.
Recent high profits are partially attributable to modest wage increases and continued
corporate restructuring. Higher profits are good news for investment because firms often
finance their projects from their earnings.
Net
Sector
Operating
Comments on Selected Industries
Profit
Basic
+7%
Winter weather hurt steel, but demand is strong. Aluminum
Materials
losses continue. Chemicals show surprising strength.
Energy
-5%
Low oil prices hurt many large oil companies; those with
refinery and chemical businesses fare better.
Industrial
+22%
Heavy equipment manufacturers have a good quarter.
and
Transportation equipment makers benefit from strong heavy
truck sales. Trucking companies hurt by weather, but see
Transport
traffic improving. Air-freight carriers report strong earnings
growth, especially overseas.
Consumer,
+11%
Autos, homebuilders, furnishings and appliances all have
Cyclical
good quarter. Newspapers gain on ad growth.
Consumer,
+3%
HMOs report good earnings from increased enrollments and
Noncyclical
cost moderation. Food retailers see gains. Tobacco profits
better than expected.
Technology
+29%
Computer manufacturers, chipmakers, and software
developers are strong. Aerospace earnings fairly flat despite
slow defense and commercial orders. Communications firms
report solid profit growth.
Financial
+13%
Money center banks have good operating profits despite a
Services
sharp decline in trading revenues. Eastem regional banks
especially strong. Property insurers hit by earthquake and
storms. Securities firms still growing but slower than last
year; those targeting retail investors fare best.
Utilities
+15%
Electric companies were virtually flat. Telephone companies
performed better than expected, boosted by cellular
operations and steady growth in core business.
'The percent change in net operating profit from the first quarter of 1993 to the first quarter of
1994.
Weekly Economic Briefing
2
May 6, 1994
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CURRENT DEVELOPMENT
Will the Auto Rebound Last?
Strong sales of cars and light trucks have helped to
power the current economic expansion and have
been responsible for buoyant Big Three profits. But
how much more growth can be expected?
Motor Vehicle Sales
Motor vehicle sales are highly
18
cyclical (see chart). In the last
three expansions, sales almost
16
doubled from trough to peak.
14
Millions of units
Low car purchases during the
12
recession led to an increase of
the average age of cars on the
10
road to its current record value
8
of 8.1 years. This pent up
demand to replace the aging
6
1967
1971
1975
1979
1983
1987
1991
stock of cars gives momentum
Shaded bars denote recessions
to automobile demand.
Analysis. Two factors might moderate the outlook
for autos. First, higher interest rates will reduce
affordability. Each 100 basis point increase in
interest rates cuts vehicle sales by about half a
million units (3 percent of current sales). Second,
automobile makers announced higher prices this
week. With imported car prices rising faster than
U.S. inflation, will Detroit revert to its 1980s
practice of going for higher prices and short-term
profits, or will it keep prices down and go for
market share?
If future interest rate increases are modest and
Detroit only increases prices in line with general
inflation, the odds favor an auto expansion that
should run at least another year. Sales could
increase by another million units and peak around
17 million units.
Weekly Economic Briefing
3
May 6, 1994
EYES ONLY
CURRENT DEVELOPMENT
USAir Insolvency Threatened
USAir, the sixth largest U.S. air carrier, reported an
operating loss of $131 million for the first quarter of
1994. Although most other carriers began to earn
operating profits (or narrowed their losses) as the
economy strengthened, USAir saw its highest
quarterly loss since 1992.
Absent a boom in air travel, USAir may seek
bankruptcy protection in 1994 or 1995. Two
warning signs suggest that USAir might file under
Chapter 11 this year rather than next. First, USAir
raised cash through selling its accounts receivable at
the end of 1993. This expensive method of
borrowing makes sense only when firms are shut out
by banks and the financial markets. Second,
minority owner British Airways announced in March
that it would not invest more until USAir engages in
major cost cutting.
Analysis. With its current
Operating Losses at USAir
cost and route structure,
12
operating
USAir is probably not viable
expenses
operating
operating
expenses
in the long run. New
cents per available seat mile
11
revenues
operating
operating procedures will
revenues
save costs by shortening
10
aircraft turnaround time, but
increased competition from
9
Continental and Southwest
will depress revenues (see
8
1993
projected
chart).
Operating expenses are projected to fall because of new operating
procedures, but without wage and work rule concessions proposed
by management (shaded area), USAir will still show a loss.
But USAir wage levels are
now among the industry's highest. To become
profitable, USAir probably also needs major wage
and work rule concessions from its unions, which
account for half of its 48,000 employees (see shaded
area in chart). The unions are unlikely to agree
unless they obtain a substantial ownership interest in
exchange.
Weekly Economic Briefing
4
May 6, 1994
EYES ONLY
ARTICLE
Inventories Send Mixed Signal for Growth
Real GDP grew at a 2.6 percent annual rate during the first quarter of this year,
but final sales-GDP minus inventory accumulation-grew at only a 0.9 percent
annual rate. Thus inventory accumulation added 1.7 percentage points to the
annual growth rate of GDP in the first quarter. The strong inventory accumulation
last quarter can be either good or bad news for growth during the second quarter
of this year.
Bad news for second quarter growth? Normally, the combination of high
inventory accumulation and slow growth in final sales would lead analysts to
lower their short-run forecast for GDP growth. If the high first quarter inventories
resulted from goods piling up as a result of disappointing sales, firms would limit
increases in output this quarter. Rather than producing more, they could simply
sell from inventories.
Good news for second quarter growth? But several factors support a more
optimistic analysis-that the strong inventory accumulation signals good news for
growth over this quarter.
If inventories were being stocked deliberately to prepare for strong
expected future sales, the burst of inventory accumulation would
indicate a potential for stronger GDP growth in the second quarter.
Although there is little direct evidence on expected future sales,
consumer demand remains solid. And the weakness in last quarter's
final sales was attributable to large dips in exports and government
purchases that are likely to be temporary. Therefore, the outlook for
sustained growth in sales looks good.
Inventories remain low. The inventory-sales ratio has fallen sharply
since the recession. (See chart on the next page). The rebuilding of
inventories that has occurred during many previous expansions has yet
to kick in. Last quarter's strong inventory accumulation resulted in
only a slight uptick in the inventory-sales ratio. If inventory rebuilding
is sustained, it could be an important positive factor in the later phases
of the current expansion. This rebuilding might have begun, but it is
too soon to tell.
Weekly Economic Briefing
5
May 6, 1994
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Inventory-Sales Ratio
2.8
2.7
Months
2.6
2.5
2.4
1970
1975
1980
1985
1990
Note: Shaded areas are recessions.
"Just in Time" and the Trend in Inventories
There is no downward trend in inventories. Some analysts have suggested that
the current low level of inventories is caused by improved management of
production and inventories-especially "just-in-time" inventory management.
But the chart shows that the inventory-sales ratio has no downward trend,
particularly since the mid-1980s when just-in-time inventory management began
to be practiced in the United States.
With just-in-time inventory management, firms do not stockpile parts and
materials. Rather, they rely on suppliers to make deliveries as needed. Just-in-
time inventories may not reduce the total amount of inventories held in the
economy. Firms using the parts and materials in production will hold smaller
inventories. But, to assure just-in-time delivery, suppliers might need to hold
larger inventories.
Weekly Economic Briefing
6
May 6, 1994
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Inflation Concerns Rise. In its most recent survey, NAPM reported that the most
mentioned economic concern was inflation. The purchasing executives ranked
environmental and regulatory costs second and interest rates third. In the
December 1993 survey, inflation ranked sixth among economic concerns, and
interest rates were eighth. The increased concern about inflation occurred even
though respondents currently expect prices to increase in 1994 by less than they
reported in December's survey.
JEC Report: Higher Interest Rates Pose Risk for Economic Growth. The
Joint Economic Committee's annual report gives credit to the Administration's
economic plan for turning around the economy in 1993 and for addressing the
deficit problem. But it states that the continuing fiscal restraint will limit
economic growth, leaving a greater role for monetary policy. It notes, however,
"The interaction of financial leverage [e.g. hedge funds] with interest rate
increases by the Fed may be the single biggest danger to the continued economic
recovery." It also observes, "Instead of calming the financial market's [fears of
inflation], the Fed's actions seem to have made them more nervous."
Solid Economic Growth Reported Throughout the Country. The economic
expansion continues in most areas of the country, according to the Federal
Reserve's survey. California is showing signs of recovery, with increased loan
demand and an improving market for homes. Manufacturing activity continues
to expand-except for aerospace. Production of automobiles, vehicle parts, steel,
and building materials is near capacity.
Electronic Filing of Tax Returns Gains. The IRS reports that overall filings for
the 1994 season so far are running slightly behind returns for this time last year.
But a record number of electronic filings have been received so far, including
nearly a half a million over the phone in the TeleFile pilot program. The average
refund of returns processed so far is $1026, up almost 5 percent from this time in
1993.
The Hidden Costs of Spring. For the estimated 40 million Americans with
allergies, this spring has been a miserable one. High pollen counts will probably
mean an estimated 3 million days of work lost. In addition, many sufferers may
have another 2 weeks of work impaired by allergy symptoms and drowsiness from
medication. Spending on treatment will exceed $2 billion on medications, plus the
cost of millions of boxes of tissues.
Weekly Economic Briefing
7
May 6, 1994
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RELEASES THIS WEEK
Employment ** FOR RELEASE Friday 8:30 a.m. **
Payroll employment rose by 267,000 jobs in April. The
unemployment rate fell 0.1 percentage point to 6.4 percent.
Leading Indicators
The composite index of leading indicators rose 0.7 percent
in March.
Productivity
Productivity in nonfarm business increased at a 0.5 percent
annual rate in the first quarter.
MAJOR RELEASES NEXT WEEK
Producer Prices (Thursday)
Retail Sales (Thursday)
Consumer Prices (Friday)
Weekly Economic Briefing
8
May 6, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
2.6
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
2.0
4.0
6.4
0.5
Manufacturing (1978-93)
2.3
5.2
3.0
7.4
6.6
Real compensation per hour
0.6
0.1
1.8
-0.2
3.4
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.5
Imports
9.2
13.1
13.2
13.5
13.5
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.8
Federal surplus
-2.8
-3.5
-3.3
-3.2
N.A.
Feb.
Mar.
Apr.
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.5
6.5
6.4
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
278
464
267
increase since Jan. 1993
2853
Inflation (percent per period)
CPI
5.8
2.7
0.3
0.3
N.A.
PPI-Finished goods
5.0
0.2
0.5
0.2
N.A.
Employment figures and unemployment rate embargoed until Friday, 8:30 a.m.
New or revised data in boldface.
Weekly Economic Briefing
9
May 6, 1994
EYES ONLY
FINANCIAL STATISTICS
Mar.
1992
1993
Apr.
May 5,
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3817
3661
3696
Interest Rates
3-month T-bill
3.43
3.00
3.50
3.68
4.03
10-year T-bond
7.01
5.87
6.48
6.97
7.11
Mortgage rate, 30-year fixed
8.40
7.33
7.68
8.32
8.53
Prime rate
6.25
6.00
6.06
6.45
6.75
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
May 5, 1994
Week ago
Year ago
Deutschemark-Dollar
1.666
0.1
5.6
Yen-Dollar
102.7
1.1
-6.8
Multilateral (Mar. 1973=100)
93.03
0.3
4.4
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.6 (Q1)
6.4 (Apr)
2.5 (Mar)
Canada
3.0 (Q4)
11.1 (Feb)
0.2 (Mar)
Japan
0.0 (Q4)
2.8 (Jan)
1.1 (Feb)
France
-0.3 (Q4)
11.7 (Dec)
1.5 (Mar)
Germany
-0.8 (Q4)
6.6 (Jan)
3.2 (Mar)
Italy
0.3 (Q4)
10.6 (Jul)
4.2 (Mar)
United Kingdom
2.4 (Q4)
10.0 (Jan)
2.3 (Mar)
Unemployment rate embargoed until Friday, 8:30 a.m.
Weekly Economic Briefing
10
May 6, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
April 29, 1994
CHART OF THE WEEK
Crude Oil Prices Rebound
22
20
Dollars per barrel
18
16
14
12
Jan 93
Apr 93
Jul 93
Oct 93
Jan 94
Apr 94
Oil prices have rebounded sharply this month to their mid-1993 level. Market
participants suggest that the following factors might account for the recent
change in prices: OPEC members are staying within their production quotas,
the prospect for increased sales by Russia and Iraq has diminished, and
demand-especially from the United States-has increased.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
GDP Scorecard: First Quarter of 1994
1
China's Economy Booms, Inflation Surges
2
Anti-Dumping: U.S. Industry Is the Most Frequent Target
3
ARTICLE
What Is "Neutral" Monetary Policy?
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
QUOTATION OF THE WEEK
"If a foreign country can supply us with a commodity cheaper
than we ourselves can make it, better buy it of them with some
part of the produce of our own industry, employed in a way in
which we have some advantage."
-Adam Smith
EYES ONLY
CURRENT DEVELOPMENT
GDP Scorecard: First Quarter of 1994
Real GDP grew at an annual rate of 2.6 percent during the first quarter. Declining
exports and government purchases were major negatives. Inventory accumulation
added substantially to growth.
The following scorecard gives the growth of major GDP components during the
first quarter and indicates factors affecting their recent performance or outlook.
Component
Growth'
Comments
Consumer
26.3%
Purchases of autos and light trucks continued
expenditures on
to be very strong.
motor vehicles
Other consumer
2.6%
All other consumer spending stayed on track
expenditures
for a solid, but not spectacular, expansion.
Producers' durable
13.5%
Business investment continued to be a key
equipment
source of strength. Purchases of computers
and information processing equipment grew
at about the same rate as total equipment.
Housing
9.1%
Housing investment was slowed from its
stunning 30 percent growth rate in 1993:4 by
bad weather. But it remained strong.
Nonresidential
-16.1%
Weather depressed nonresidential
structures
construction.
Inventories (change,
$30.5
Inventory investment gave a major boost to
billions of 1987$)
GDP growth. Real GDP less inventory
accumulation grew at only a 0.9 percent rate
in the first quarter.
Government
-6.2%
Federal purchases fell at a sharp 12 percent
purchases
rate. State and local purchases were also
down, probably again due to bad weather.
Exports
-9.3%
Exports are very volatile. They pulled down
GDP growth in 1994:1, but they were a major
positive factor in 1993:4's strong growth.
Over the last 4 quarters, real exports have
increased 2.9 percent.
Imports
2.8%
The import surge moderated. But, like
exports, imports are subject to large quarter-
to-quarter fluctuations.
Percent real growth in first quarter at annual rate (except inventories). These preliminary figures are
subject to substantial revision.
Weekly Economic Briefing
1
April 29, 1994
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CURRENT DEVELOPMENT
China's Economy Booms, Inflation Surges
Sweeping economic reforms begun in 1978 have
spurred an explosion of economic growth in China.
Real GDP growth has averaged about 10 percent
over the past 10 years. Growth has been especially
rapid outside the state-owned sector, and state enter-
prises now account for less than half of industrial
output. In 1993, for example, industrial production
grew by more than 20 percent, but the output of
state enterprises rose by only about 2 percent.
After reaching nearly 20 percent in
Chinese Inflation
1993, inflation for the 12 months
30
through February exceeded 25 percent
25
(see chart). The Chinese authorities
20
tried to restrict credit to restrain
Percent per annum
inflation in July 1993. But these
15
restrictions were short-lived. State-
10
owned enterprises and some local
5
governments hurt by lack of credit
successfully lobbied the authorities to
0
1985
1996
1987
1988
1989
1990
1991
1992
1993
1994*
1994 figure is for February.
ease monetary policy. State-owned
enterprises remain an obstacle to
tighter money since about half are unprofitable and
rely on loans to meet operating expenses.
Analysis. Tight credit has led some state-owned
enterprises to lay off workers and cut pay. These
dislocations, along with changes engendered by
rapid growth and concerns about rising inflation,
have led to social unrest and demonstrations by
displaced and laid-off workers.
In 1989, similar economic conditions-rapid growth,
rising inflation, and government attempts to restrain
inflation-contributed to the social pressures that
culminated in the Tiananmen Square uprising.
Ironically, these pressures may lead the Chinese to
clamp down politically just when we are asking
them to be more forthcoming. But some analysts
believe that after 4 years of rapid economic growth,
popular support for the regime is quite strong.
Weekly Economic Briefing
2.
April 29, 1994
EYES ONLY
CURRENT DEVELOPMENT
Anti-Dumping: U.S. Industry Is the Most Frequent Target
Anti-dumping laws aim to protect American
business from "unfair" competition from imports.
However, foreign anti-dumping laws affect our
exports. In fact, over the past 5 years, U.S.
industries have been the most frequent target of
anti-dumping cases initiated worldwide (see chart).
Anti-Dumping Cases by Target Country, 1989-1993
100
80
Number of cases initiated against
60
40
20
0
United States
China
Japan
Korea
Talwan
Brazil
The use of anti-dumping laws is spreading. As
recently as 1990 about 2 dozen countries had anti-
dumping laws. More than 40 do now, and several
others are expected to adopt such laws once the
Uruguay Round is ratified.
GATT implementing legislation. The implement-
ing legislation for the Uruguay Round will not only
reshape our anti-dumping laws but will help
determine how similar laws are written abroad,
because foreign anti-dumping laws often mimic U.S.
practice. Several countries (including the EU,
Australia, and Mexico) automatically link their anti-
dumping procedures used against U.S. exporters to
those we use against their exporters.
Moreover, foreign anti-dumping cases are sometimes
initiated to retaliate against cases initiated here. For
example, Mexico and Canada initiated anti-dumping
cases against the U.S. steel industry in response to
cases filed against them in June 1992.
Weekly Economic Briefing
3.
April 29, 1994
EYES ONLY
ARTICLE
What Is "Neutral" Monetary Policy?
According to recent comments by several Federal Reserve officials and according
to minutes of FOMC meetings, the goal of the Federal Reserve is a so-called
neutral policy stance. But what does the Fed mean by neutral? A possible
definition of a neutral monetary policy is one that allows the economy to grow at
its "potential" growth rate, which is the sum of the rate of growth of the labor
force and the rate of growth of labor productivity. (Most economists believe that
the potential growth rate of the U.S. economy is about 2-1/4 to 2-1/2 percent.)
Since the 1990 recession, there has been substantial slack in the economy. And
until this year, the Fed said it was pursuing an expansionary policy, that is one
that allowed the economy to grow faster than "potential." Given the slack in the
economy, the expansionary monetary policy aided the recovery without creating
substantial inflationary pressure. Since February, the Fed claims it has been
moving toward a neutral policy. Nonetheless, we believe there is still slack in the
economy. Why would the Fed move to tighten before all the slack in the
economy disappeared?
The Fed's control over the economy works with substantial lags. It takes between
6 and 18 months for changes in interest rates to affect real activity. Hence, to
avoid an inflationary overshooting, the Fed might have felt it necessary to act well
in advance of reaching full employment.
Implementing a neutral monetary policy. Given that the Fed does not directly
control the growth of the economy, how would the Fed implement a neutral
monetary policy? In particular, what indicators could it use to judge that it is
actually pursuing a policy that is neutral for growth?
In the past, the Fed often relied on the rate of growth of money as an indicator of
monetary policy. But in recent years the relationships among money, output, and
prices have become extremely unstable. Consequently, the money aggregates are
no longer very useful for monetary policy.
Some analysts have suggested the real short-term interest rate as a policy
indicator. Chairman Greenspan has stated repeatedly that the nearly zero real
short-term rates that the economy enjoyed from late 1992 through early 1994 were
unsustainably low. The Fed apparently attaches some importance to this indicator.
Is there a neutral real short-term interest rate? The table on the next page
shows real short-term interest rates-the 3-month Treasury bill rate minus a
forecast of 3-month inflation-for selected periods. The 0.3 percent rate in 1993
was well below the historical average. But the real short-term rate exhibits large
Weekly Economic Briefing
4
April 29, 1994
EYES ONLY
and persistent swings over time. Only the 1960s and (so far) the 1990s look close
to the "average."
Real Short-Term Interest Rates
Period
Percent
1955-93
1.3
1955-59
-0.7
1960-69
1.1
1970-79
-0.3
1980-89
4.0
1991-93
1.0
1993
0.3
In the 1970s, high inflation led to negative real interest rates.
The large budget deficits of the 1980s pushed real rates of interest to
unprecedentedly high levels.
In 1993, a combination of expansionary monetary policy, fiscal
restraint, and an economy only beginning to recover from recession
kept real rates of interest low.
As these cases suggest, the real short-term interest rate depends on the state of the
economy and also on both fiscal and monetary policy. Hence, what is a neutral
real interest rate for one period might not be neutral for another. In particular, a
shift toward smaller fiscal deficits should lower the neutral real rate of interest.
There is no single real short-term interest rate that is neutral for all times and in
all circumstances.
With the recent 75 basis point increase in nominal short-term interest rates and the
current 3 percent rate of expected inflation, the real short-term interest rate is now
about 0.75 percent-slightly below its 1955 to 1993 historical average.
Weekly Economic Briefing
5
April 29, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Recycling Plant Out of Sorts. Better than expected curbside recycling has
produced financial problems for San Diego County's new $134 million trash-
sorting plant. Given the willingness of residents to sort their garbage, a curbside
recycling program is proving to be a more cost-effective means of diverting waste
from landfills than operating the plant. The plant is losing money because it does
not have enough trash to process.
New Consortium to Develop Plastic Fiber Optical Networks. A group of
leading manufacturers and researchers has formed the High Speed Plastic Network
Consortium to develop and market networks based on plastic optical fiber
technology. Glass fiber optics are not currently used in short and medium
distance applications because of high cost and user-unfriendly connection systems.
But the new plastic fibers will be able to compete with copper-wired systems in
a variety of applications. With the assistance of an ARPA grant, the consortium
will develop applications for aircraft, automotive, and data communication
networks as well as for computer and office equipment wiring.
New Tribal Casino Agreement. Connecticut Governor Weicker has reached a
new agreement with the Mohegan tribe that allows it to operate casinos in
exchange for at least $80 million a year in payments to the state. This agreement
means that the Mashantucket Pequots, who currently have a casino monopoly in
the state, will now share the gambling business with the Mohegans. By allowing
two tribes this right, the state is guaranteed $160 million in payments from the
tribes, who as sovereign nations cannot be taxed. If the Legislature opens up the
casino business to others, the payments could be in jeopardy.
GM Parts Makers Join Toyota Group. Three General Motors subsidiaries have
joined Toyota's auto parts association. This is the first time that affiliates of a
Big Three auto maker have been offered membership in the group. Other
independent American parts manufacturers are already members.
Diet Centers Report Losses. Jenny Craig reported a loss for the most recent
quarter. The loss includes a charge for reducing the number of centers the
company operates, part of an ongoing commitment to a leaner structure. The
company's profits have been trimmed over the past year, as Americans seem to
be cutting down on diets and exercise.
Weekly Economic Briefing
6
April 29, 1994
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RELEASES THIS WEEK
GDP
Real GDP grew at a 2.6 percent annual rate in the first
quarter. The GDP fixed-weight price index increased 2.9
percent.
Personal Income ** FOR RELEASE Friday 8:30 a.m. **
Real disposable income rose 0.3 percent in March. Real
consumption expenditures rose 0.1 percent.
Durable Goods
According to the advance estimate, durable goods orders
increased 0.4 percent in March.
Employment Cost
Compensation in private industry increased 0.7 percent in the
first quarter of 1994 according to the employment cost index.
MAJOR RELEASES NEXT WEEK
Leading Indicators (Tuesday)
Weekly Economic Briefing
7
April 29, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:3
1993:4
1994:1
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
2.9
7.0
2.6
GDP deflator
5.6
2.2
1.6
1.3
2.6
Productivity
Nonfarm business
1.2
1.9
4.0
6.1
N.A.
Manufacturing (1978-93)
2.3
5.2
3.0
7.2
N.A.
Real compensation per hour
0.6
0.1
1.8
-0.1
N.A.
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.6
12.0
12.1
Residential investment
4.7
4.2
4.1
4.3
4.4
Exports
8.0
11.6
11.5
11.9
11.5
Imports
9.2
13.1
13.2
13.5
13.5
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
2.8
3.0
2.8
Federal surplus
-2.8
-3.5
-3.3
-3.2
N.A.
Jan.
Feb.
Mar.
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.7
6.5
6.5
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
-31
198
456
increase since Jan. 1993
2498
Inflation (percent per period)
CPI
5.8
2.7
0.0
0.3
0.3
PPI-Finished goods
5.0
0.2
0.2
0.5
0.2
New or revised data in boldface.
Weekly Economic Briefing
8
April 29, 1994
EYES ONLY
FINANCIAL STATISTICS
Feb.
Mar.
Apr. 28,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3906
3817
3668
Interest Rates
3-month T-bill
3.43
3.00
3.25
3.50
3.89
10-year T-bond
7.01
5.87
5.97
6.48
7.04
Mortgage rate, 30-year fixed
8.40
7.33
7.15
7.68
8.32
Prime rate
6.25
6.00
6.00
6.06
6.75
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
Apr. 28, 1994
Week ago
Year ago
Deutschemark-Dollar
1.664
-1.6
5.2
Yen-Dollar
101.6
-2.0
-9.3
Multilateral (Mar. 1973=100)
92.71
-1.5
3.6
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
3.6 (Q1)
6.5 (Mar)
2.5 (Mar)
Canada
3.0 (Q4)
11.1 (Feb)
0.2 (Mar)
Japan
0.0 (Q4)
2.8 (Jan)
1.1 (Feb)
France
-0.3 (Q4)
11.7 (Dec)
1.5 (Mar)
Germany
-0.8 (Q4)
6.6 (Jan)
3.2 (Mar)
Italy
0.3 (Q4)
10.6 (Jul)
4.2 (Mar)
United Kingdom
2.4 (Q4)
10.0 (Jan)
2.3 (Mar)
Weekly Economic Briefing
9
April 29, 1994
Gene
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
April 22, 1994
CHART OF THE WEEK
Investment Rates and Productivity Growth
4.0
Japan
3.5
Ireland
Iceland
Portugal
Norway
Growth rate of real GDP per capita (percent)
Finland
3.0
Italy
Turkey
Austna
Canada
Spain
2.5
Belgium
Greece
Luxembourg
Germany
U.K.
France
2.0
Denmark
Netherlands
O
Australia
U.S. Sweden
1.5
Switzerland
1.0
New Zealand
0.5
16
18
20
22
24
26
28
30
32
Investment as share of GDP (percent)
The chart compares the average annual growth rate of GDP per capita to the
average investment rate by country for the 1970 to 1990 period. Countries
that invest a high fraction of their output have high rates of productivity
growth. During the past year, the United States investment rate has
increased by about one percentage point. Over time, this could increase
GDP growth by 0.1 to 0.2 percentage point.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENT
Fed Raises Interest Rates Again
1
SPECIAL ANALYSIS
China's Development Strategy
2
ARTICLE
Designing Spectrum Auctions
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
QUOTATION OF THE WEEK
"Please keep interest rates low for me and J.
high for my mother."
Private communication received by Alan Blinder
(April 1994)
EYES ONLY
CURRENT DEVELOPMENT
Fed Raises Interest Rates Again
The Federal Reserve Board announced Monday that it was increasing interest rates
for the third time this year. Although it did not specify the size of the increase,
it is widely believed to be another 25 basis points, leaving the target Federal
Funds rate at 3.75 percent. On Monday and Tuesday, major banks raised their
prime rate by 50 basis points to 6.75 percent.
Chairman Greenspan made the decision to raise rates following telephone
consultation with members of the FOMC, but without a specific vote. The next
regularly scheduled meeting of the FOMC is May 17.
Long-term Rates. Long-term rates continue to ratchet up with each hike in the
Federal Funds rate. Since the first FOMC move in February, the rate on 10-year
Treasury bonds has increased over 100 basis points-a surprisingly large amount.
Long-term and short-term interest rates usually move in the same direction.
But there have been occasions-notably when the Fed moved to monetary
restraint in 1973 and 1988-when increases in short-term rates were
accompanied by declines in long-term interest rates. Long-term rates could
decline following a Fed tightening if it caused or were accompanied by a
substantial reduction in inflationary expectations.
On average, when short-term interest rates change, long-term interest rates
change by only about 1/3 as much. But since the Fed's move in February,
long-term rates have increased much more than short-term interest rates.
The Administration's January forecast projected that short-term interest
rates would rise somewhat over the next 2 years, but that long-term inter-
est rates would not change. (The Blue Chip consensus had a similar fore-
cast.) Our reasoning was that the gap between short-term and long-term
interest rates was unusually large, implying that the projected increase in
short-term interest rates had already been built into long-term interest rates.
Why have long-term interest rates moved so dramatically and unexpectedly? As
we have argued in previous editions of the Weekly Economic Briefing, the
markets are either overreacting to the increases in short rates that we have already
seen or they are expecting further increases in short rates in the future.
Additionally, some market observers suggest that bond rates rose sharply in
response to sales of bonds that had been purchased on margin.
Increase in Discount Rate Likely
The Federal Reserve's discount rate, the rate charged to banks for borrowing directly from
the Fed, has been 3.0 percent since July 1992. The Fed is likely to raise the discount rate
soon to bring it into line with the Federal Funds rate, the rate banks charge each other for
overnight loans. Although an increase in the discount rate is likely to make headlines, it
would be largely symbolic. Few transactions actually take place at the discount rate.
Weekly Economic Briefing
1
April 22, 1994
EYES ONLY
SPECIAL ANALYSIS
China's Development Strategy
Our February bilateral trade deficit with China ($1.7
billion) was, once again, second in magnitude only
to our deficit with Japan. But this does not mean
that China is following a protectionist development
strategy.
China does not regularly run an overall trade
surplus. Despite its large surplus with the United
States, China ran an overall trade deficit of more
than $12 billion last year. Japan's trade surplus, on
the other hand, exceeded $120 billion (see chart).
As is common for a developing country, China has
run current account deficits for 5 of the past 10
years.
1993 Trade Balances
140
120.4
120
100
80
Billions of U.S. dollars
59.3
60
40
22.8
20
0
-12.2
-20
-40
China
Japan
Balance with U.S.
Overall Balance
Our increased bilateral deficit with China reflects
a shift of production away from Hong Kong and
Taiwan. In recent years, producers of running
shoes, toys and garments have moved from Hong
Kong and Taiwan to mainland China, where labor
costs are lower. Our combined-deficit with these
three jurisdictions has changed little over the same
time period.
China is relatively open to foreign investment.
Although the United States has problems with some
of China's policies toward foreign investment,
international capital flows are less regulated in
China than they were in Japan until recently.
Weekly Economic Briefing
2
April 22, 1994
EYES ONLY
Foreign direct investment in China reached $20
billion in 1993. U.S. firms account for just under
10 percent of foreign direct investment in China, in
large part because they have not been as active as
firms from Hong Kong and Taiwan.
China has begun to liberalize. Special Economic
Zones encourage foreign investment and liberalize
international trade. The success of the "open door"
policies in these zones has made them a laboratory
for the reforms that have spread to other areas of
China. Although substantial non-tariff barriers
remain, the role of giant state trading companies has
been reduced, import controls have been
rationalized, and export subsidies have been largely
eliminated in China. As a result, China is relatively
open compared to other low-income countries.
Benefits of imports from China. The United
States imports low-cost consumer goods such as
toys, dolls, sneakers, other shoes, and apparel from
China. These products are bought primarily by the
poor and middle class, who enjoy lower prices and
greater variety as a consequence. U.S. firms that
buy Chinese electrical machinery and office
equipment are able to lower their costs and increase
their competitiveness. In addition, by obtaining
goods cheaply from abroad, the United States is able
to specialize in areas where its productivity
advantages over other countries are greatest. This
specialization raises our overall productivity and our
living standards. These benefits are tangible. If we
were to revoke China's MFN status, the annual cost
to U.S. purchasers of Chinese imports would be
around $5 billion. The cost to the United States
would rise if we were to lose markets for our
specialized exports (such as aircraft) to Chinese
retaliation.
J.
Weekly Economic Briefing
3
April 22, 1994
EYES ONLY
ARTICLE
Designing Spectrum Auctions
Last year, Congress required the Federal Communications Commission (FCC) to
conduct auctions for radio spectrum allocated for personal communications
services (PCS)-an advanced type of cellular telephone service. As with radio
and television licensees, PCS licensees will have the right to use a portion of the
spectrum within a region. Over 500 regions have been designated.
Auctioning off public assets can help the government raise revenue and help place
assets in their most valuable uses (see Weekly Economic Briefing, April 8, 1994).
But the details of auction design matter.
Uncertainty and Royalty Payments. The ultimate value of PCS licenses is
highly uncertain. PCS licenses could become extremely valuable if wireless
transmission replaces telephone and cable television service. But PCS licenses
could instead have little value-if PCS technology turns out to be more expensive
than currently hoped, if competition with existing cellular service lowers revenues
more than is now expected, or if alternative technologies such as fiber optic lines
turn out to be cheaper than currently believed.
Such large uncertainties can make bidders less willing to pay high prices to the
government. To reduce this problem, the FCC could seek royalty payments (a
percentage of gross revenues, for example) instead of up-front cash payments for
the license. The FCC will soon decide whether to use a royalty-based auction
scheme for selling PCS licenses, or just to sell licenses for an up-front fee.
Royalties would probably increase the long-run revenues to the government.
Royalty payments let bidders share the risk of future value of the
license with the government. (If the license ultimately has little value,
royalty payments will be correspondingly small.) Risk-averse bidders
will in consequence bid more for the license.
When bidders have different beliefs about the ultimate value of a
license, to avoid the "winner's curse" (see box) they tend to bid less
than their private views would warrant. Royalty-based,auctions reduce
the importance of differences in bidders' beliefs.
If potential bidders have trouble raising the capital necessary for up-
front license payments, a royalty-based auction may increase the
number of bidders. Greater competition generally leads to higher bids.
Weekly Economic Briefing
4
April 22, 1994
EYES ONLY
Spectrum auctions based on royalties also have disadvantages.
A licensee that must share revenues with the government will not reap the
full benefits of its investments, and in consequence may invest less.
The government must develop an administrative machinery for monitoring
licensee revenues.
The "Winner's Curse"
When competing bidders have different beliefs about the ultimate value of an
object being sold at auction, the winner of the auction may actually overpay.
This occurs because the winner of the auction is likely to have the most
optimistic beliefs about the value of the object being sold.
For example, suppose three oil companies are bidding on an offshore tract. The
firms are uncertain about the value of the oil they might find. Because the
firms have different geological information about the area, their best estimates
differ. The first firm believes the tract is worth $90, and the second and third
firms believe the tract is worth $100 and $110, respectively. If each firm bids
what it thinks the tract is worth, the third firm will win at a price of $110. In
fact, the tract is probably worth only $100-this is the best estimate of tract
value using the information possessed by all three firms.
If bidders are aware of this problem, they may reduce their bids. The third
firm might bid only $95, even though it believes the tract is worth $110,
because it recognizes that if it wins the auction, that could mean it has overly
optimistic beliefs about the tract's value.
Oil companies found that they had repeatedly overestimated the reserves in the
offshore oil leases that they won at auction. Therefore, they now routinely take
into account the "winner's curse" by shaving their bids.
Weekly Economic Briefing
5
April 22, 1994
EYES ONLY
BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Home Builders' Sales Outlook Moderates. According to the National
Association of Home Builders survey, the outlook for home sales deteriorated for
the fifth straight month in April. Only 38 percent of those surveyed expect home
sales for the next 6 months to be "good," compared with 48 percent in March.
Margin Loan Activity Continues to Grow. The New York Stock Exchange
reports that margin loans outstanding to all investors were $62 billion at the end
of March, down slightly from their record peak in February. This represents about
a 40 percent increase from a year earlier. With margin loan rates fairly low (8.5
percent for a $5000 loan at Merrill Lynch, for example), more individuals are
using margin loans to pay off high-cost credit cards and other debts.
New Energy-Efficient Lamp Introduced. This week in Europe, GE Lighting
introduced a new lamp, called Genura, that uses a high-frequency magnetic field
to produce light. This bulb combines the long life and energy efficiency of a
fluorescent with the aesthetic qualities of an incandescent. In the United States
the 23-watt Genura bulb will produce light similar to a 75-watt bulb. Initially it
will sell for about $20, but it should produce energy savings of $40 over its
lifetime. The bulbs should be available commercially later this year, and to
consumers sometime next year.
World Economic Growth Outlook Improving. The IMF projects that world
economic growth will be 3.0 percent in 1994 and 3.7 percent in 1995. Industrial
economies are expected to expand at 2.4 percent this year, twice the rate of last
year. The IMF forecast shows the United States leading the industrial economies
this year with 3.9 percent growth. Developing countries will continue to
experience strong growth of 5.5 percent this year. Economies in transition,
especially the former Soviet States, will continue to experience deteriorating
conditions, but growth should improve in 1995.
Weekly Economic Briefing
6
April 22, 1994
EYES ONLY
RELEASES THIS WEEK
Housing Starts
Housing starts increased 12.1 percent from February to
March, to an annual rate of 1.47 million units.
Trade Deficit
The trade deficit (goods and services) increased to $9.7 billion
in February from $6.6 billion in January.
MAJOR RELEASES NEXT WEEK
Durable Goods (Wednesday)
GDP (Thursday)
Personal Income (Friday)
Weekly Economic Briefing
7
April 22, 1994
EYES ONLY
U.S. ECONOMIC STATISTICS
1970-
1993
1993:2
1993:3
1993:4
1993
Percent growth (annual rate)
Real GDP
2.5
3.1
1.9
2.9
7.0
GDP deflator
5.6
2.2
2.3
1.6
1.3
Productivity
Nonfarm business
1.2
1.9
-0.4
4.0
6.1
Manufacturing (1978-93)
2.3
5.2
6.0
3.0
7.2
Real compensation per hour
0.6
0.1
-1.2
1.8
-0.1
Shares of Real GDP (percent)
Business fixed investment
11.0
11.5
11.5
11.6
12.0
Residential investment
4.7
4.2
4.0
4.1
4.3
Exports
8.0
11.6
11.6
11.5
11.9
Imports
9.2
13.1
13.1
13.2
13.5
Shares of Nominal GDP (percent)
Personal saving
4.8
3.0
3.3
2.8
3.0
Federal surplus
-2.8
-3.5
-3.5
-3.3
-3.2
Jan.
Feb.
Mar.
1993
1994
1994
1994
Unemployment Rate
6.7
6.8
6.7
6.5
6.5
* Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
-31
198
456
4.
increase since Jan. 1993
2498
Inflation (percent per period)
CPI
5.8
2.7
0.0
0.3
0.3
PPI-Finished goods
5.0
0.2
0.2
0.5
0.2
Weekly Economic Briefing
8
April 22, 1994
EYES ONLY
FINANCIAL STATISTICS
Feb.
Mar.
Apr. 21,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3906
3817
3653
Interest Rates
3-month T-bill
3.43
3.00
3.25
3.50
3.74
10-year T-bond
7.01
5.87
5.97
6.48
6.91
Mortgage rate, 30-year fixed
8.40
7.33
7.15
7.68
8.49
Prime rate
6.25
6.00
6.00
6.25
6.75
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
Apr. 21, 1994
Week ago
Year ago
Deutschemark-Dollar
1.692
-1.1
+5.8
Yen-Dollar
103.65
-0.5
-6.4
Multilateral (Mar. 1973=100)
94.11
-0.8
+4.1
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
+3.1 (Q4)
6.5 (Mar)
2.5 (Mar)
Canada
+3.0 (Q4)
11.1 (Feb)
0.2 (Feb)
Japan
0.0 (Q4)
2.8 (Jan)
1.2 (Jan)
France
-0.1 (Q4)
11.7 (Dec)
1.8 (Jan)
Germany
-0.8 (Q4)
6.6 (Jan)
3.4 (Feb)
Italy
0.3 (Q4)
10.6 (Jul)
4.2 (Feb)
United Kingdom
+2.4 (Q4)
10.0 (Jan)
2.4 (Feb)
Weekly Economic Briefing
9
April 22, 1994
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
April 15, 1994
CHART OF THE WEEK
Federal Receipts as a Share of GDP
30
25
20
Percent of GDP
15
10
5
0
1946
1951
1956
1961
1966
1971
1976
1981
1986
1991
Income tax
Corporate taxes
Payroll taxes
Other receipts
Federal receipts have been about 20 percent of GDP since World War II.
The share of revenue raised by personal income taxes has also been roughly
constant. Declines in the share of corporate income taxes and other taxes
(excises, duties) have been offset by increased reliance on payroll taxes as
a source of revenue.
EYES ONLY
CONTENTS
CURRENT DEVELOPMENTS
Inflation Remains Moderate, But Up Slightly from Last Year
1
No Trend in Financial Market Volatility
2
Truck Strike Has Little Impact on Overall Economy
3
ARTICLE
The Odds Have It: Gambling in the U.S.A.
4
DEPARTMENTS
Business, Consumer, and Regional Roundup
6
Releases
7
Economic Statistics
8
Financial and International Statistics
9
QUOTATION OF THE WEEK
"The public interest is closely aligned with that of bondholders."
Former Fed Governor Wayne Angell, commenting
on maintaining the Fed's independence to tighten
monetary policy (Wall Street Journal, April 11, 1994)
EYES ONLY
CURRENT DEVELOPMENT
Inflation Is Moderate, But Up Slightly from Last Year
This week's reports on consumer and producer prices
continue to show moderate inflation. Core consumer
price inflation (CPI excluding food and energy) was
2.9 percent at an annual rate over the first 3 months
of the year, the same rate of increase as over the last
12 months. Core producer price inflation (PPI for
finished goods excluding food and energy) was 3.3
percent over the first 3 months of the year, compared
to 0.4 percent over the last 12 months.
How does a core CPI inflation rate of 3
Core Inflation
7
percent look in the light of recent
economic history? Beginning in 1985,
6
CPI excluding food & energy
core CPI inflation was between 4 percent
5
Percent change (12 month)
and 4-1/2 percent. When it increased in
the late 1980s, the Fed moved to a
3
restrictive policy. With a lag, the 1990-
91 recession steadily reduced CPI infla-
2
PPI excluding food & energy
tion to below 3 percent last year. (Core
,
PPI inflation showed a similar pattern in
0
1963
1964
1985
1966
1987
1968
1969
1990
1991
1992
1993
the same period, although its changes led
CPI changes and were larger.)
Analysis. In retrospect, the period from mid-1993
through early 1994 is likely to appear to be one of
unusually low inflation. Indeed, the Administration
forecasts an increase in inflation as a consequence of
a strengthening economy.
Even if oil prices stay low, the downward
pressure they have been exerting on inflation
has about run its course. As economies
around the world recover, upward pressure on
the price of oil and other commodities is
likely.
The 3.3 percent rate of increase of the core
PPI so far this year might herald the beginning
of a slight increase in CPI inflation.
For those, such as Wayne Angell, who would
like to see inflation decline to zero, seeing the
trough in inflation is a disappointment.
Weekly Economic Briefing
1
April 15, 1994
YES ONLY
CURRENT DEVELOPMENT
No Trend in Financial Market Volatility
In recent months, there has been growing
concern that the expansion of derivative
securities and hedge funds may have increased
the volatility of financial markets. This echoes
the concern about program trading activities
expressed a few years ago.
The charts show the month-
Ten-Year Treasury Bond Returns
to-month returns from hold-
20
ing bonds and stocks. There
has been no discernable in-
crease in the volatility of
10
either bond or stock returns.
Percent per month
0
Bond returns have periodic
changes in their volatility.
-10
They were particularly
volatile in the 1979 to 1982
-20
period, when the Fed was
making no effort to stabilize
1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1965 1988 1991 1994
interest rates. But the recent
Stock Market Returns
period has not been
20
particularly volatile.
Stock market volatility has
10
been fairly constant over the
Percent per month
last 30 years. Volatility has
0
been relatively low over the
last year.
-10
-20
1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994
Weekly Economic Briefing
2
April 15, 1994
EYES ONLY
CURRENT DEVELOPMENT
Truck Strike Has Little Impact on Overall Economy
Although it has been almost 2 weeks since 75,000
Teamsters went on strike against 22 freight carriers,
shippers and consumers have noticed little
disruption. In contrast, the trucking strike in 1979
significantly disrupted freight traffic. It affected
300,000 workers at 350 firms.
Analysis. Although total employment in trucking
has grown 20 percent since 1979, the unionized
sector of the industry has shrunk dramatically. The
main reason is the 1980 legislation that partially
deregulated the trucking industry and that allowed a
large number of non-union firms to enter the
market.
In 1979, negotiations between the Teamsters and the
trucking industry were closely watched as the first
major test of the Carter Administration's wage
guidelines. Today, there is little concern that a
generous new union contract will set the stage for
economy-wide wage increases, for several reasons:
The striking union has many fewer workers
than previously.
The strike is not mainly over wage levels.
The key issue is management's demands for
rule changes that would allow firms to make
greater use of part-time workers and rail
transport. This emphasis reflects the
Teamsters' weakened bargaining position
since trucking was deregulated.
Unions in other industries have become less
likely to base negotiations on the provisions
of wage agreements signed in key industries
such as trucking and steel.
Weekly Economic Briefing
3
April 15, 1994
EYES ONLY
ARTICLE
The Odds Have It: Gambling in the U.S.A.
Gambling is a large and growing business in the United States. In 1992,
Americans made legal wagers of $330 billion and, after covering payouts of
winners, the gambling industry earned $30 billion in revenues. This dwarfs the
revenues earned by other entertainment industries-for example, movie ticket sales
are only about $5 billion per year.
Gambling Activity: Annual Wagers and Revenue
Wagers
Revenue
(billions)
(billions)
State lotteries
$24.4
$11.5
Nevada/NJ casinos
237.7
9.0
Horse racing
14.1
2.9
Indian reservations
15.2
1.5
Charitable games
4.8
1.3
Bingo
4.3
1.0
Greyhound racing
3.3
0.7
Card rooms
8.4
0.7
Cruise ships and riverboats
11.6
0.7
Other casino activities
3.6
0.5
Jai alai
0.4
0.1
Legal bookmaking
2.1
0.1
Total
$329.9
$29.9
Notes: Figures are for 1992. Wagers are the total amount bet for each gambling
activity. Revenue is wagers minus payouts. Source: International Gaming and
Wagering Business, August 1993.
Gambling is becoming ubiquitous.
9 states have authorized casinos (including riverboat gambling).
37 states and the District of Columbia have lotteries.
Over 100 Indian reservations have some form of gambling (casinos or
high-stakes bingo, for example).
43 states permit some form of parimutuel betting (horse or greyhound
racing, or jai alai, for example).
Only 2 states (Hawaii and Utah) have no legalized gambling.
Weekly Economic Briefing
4
April 15, 1994
ONLY
The uses of gambling revenue. To stay in business, the gambling industry's
receipts must exceed its payouts to winning gamblers. Accordingly, gamblers lose
money on average. The industry's revenues must be large enough to cover its
costs, its profit margin, and any taxes that may be assessed by state, local, or
Federal governments.
States use two basic methods to raise revenues from gambling:
Casino games and parimutuel betting are taxed by levying an excise
tax on gambling revenues. For example, New Jersey assesses an 8
percent excise tax on the amount retained by casinos. The casinos use
the remaining 92 percent to cover wages and other costs and to provide
a net profit.
When states sponsor gambling, such as a lottery, they typically retain
a much higher fraction of the proceeds (see table on previous page).
For instance, the average state-run lottery pays out only 50 percent of
gross wagers as prizes. Other costs, such as advertising and fees paid
to merchants, consume part of revenues. The balance-close to half
of wagers-is retained by states as a tax.
What is the scope for raising further tax revenue from gambling? Economic
analysis indicates that gamblers are not very responsive to the "price" of
gambling. That is, when the winning payoffs change but the odds stay constant,
the overall amount wagered changes only slightly. This observation indicates that
an excise tax on the entire gambling industry would not significantly discourage
gambling, and therefore would not erode the tax base provided by the gambling
industry. If only a segment of the gambling industry is subject to tax, however,
there is a large potential for consumers to shift gambling activity to untaxed
segments of the industry, causing the tax base to shrink.
Who bears the burden of taxes on gambling? The typical gambler at casinos
is from the middle class. Patrons of lotteries tend to have lower incomes than
average. Hence, taxes on gambling are regressive. The implicit tax on state
lotteries is especially so.
Weekly Economic Briefing
5
April 15, 1994
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Mortgage Loan Fees at 20-Year Low. Initial fees and charges on conventional
mortgages that closed in February averaged 0.99 percent of the loan balance. This
is the first month since December 1973 that initial fees and charges have averaged
less than 1 percent of the loan balance. The downward trend in fees, which began
in 1982, likely reflects three factors: the popularity of "no point" loans among
households refinancing their homes, a more competitive mortgage market where
lenders often compete with lower fees, and accounting rules adopted several years
ago that limit the amount of initial fees and charges that a lender may recognize
as current income.
Top-Rated Ideas to Boost Productivity Growth. Blue Chip forecasters recently
rated 15 ideas to improve U.S. productivity growth on the basis of political
feasibility and economic soundness. The top-ranked suggestion was, "Increase the
quality of education, including appropriate financial support for job training and
retraining." The second most popular idea was, "Avoid protectionism and let the
dollar seek competitive levels."
Spain Offers Old Car Bounty. The Spanish government is offering a cash
incentive to owners of older cars to trade them in for newer models that pollute
less. Cars over 10 years old that are turned in for scrap will be eligible for a $720
discount on the 13 percent licensing tax on new cars. Automakers have also
announced their own incentives of up to $1445. The government incentive, which
will last for 6 months, is an attempt to revive a struggling auto sector. France
announced a similar scheme in February that quickly boosted new car sales.
There is speculation that the new Italian government may make a similar offer.
Defense Technology to End Tailgating? The latest defense-conversion
technology for cars is a palm-sized, radar-like device designed to smooth traffic
flow and prevent collisions by beeping when something gets too close. The
company developing the device, Amerigon, used technology originally created at
Lawrence Livermore National Laboratory for laser experiments in nuclear fusion.
Motorists can use sets of these devices to help parallel park, back up, and change
lanes. The devices can also trigger an air bag and create an "intelligent" cruise-
control system to keep cars at a fixed distance. The components of the device
cost only about $10. Amerigon hopes to have the devices installed in cars by
1997.
Trust Funds Running Out. A recent trustees' report estimates that the Medicare
hospital trust fund is expected to run out of money by 2001. The report notes that
the Medicare program is not sustainable in its present form. The outlook for the
other Social Security trust funds is also gloomy. The disability fund will be
exhausted next year if there are no changes in the law, and the retirement fund
will run out in 2036, 8 years sooner than last year's report predicted.
Weekly Economic Briefing
6
April 15, 1994
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RELEASES THIS WEEK
Consumer Prices
The consumer price index rose 0.3 percent in March.
Producer Prices
The producer price index for finished goods rose 0.2 percent
in March.
Retail Sales
According to the advance report, retail sales rose 0.4 percent
in March.
Industrial Production ** FOR RELEASE FRIDAY 9:15 A.M. **
Industrial production rose 0.5 percent in March. Capacity
utilization increased 0.2 percentage point to 83.6 percent.
MAJOR RELEASES NEXT WEEK
Housing Starts (Wednesday)
Weekly Economic Briefing
7
April 15, 1994
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U.S. ECONOMIC STATISTICS
1970-
1992
1993
1993:3
1993:4
1992
Percent growth (annual rate)
Real GDP
2.5
3.9
3.1
2.9
7.0
GDP deflator
5.7
2.8
2.2
1.6
1.3
Productivity
Nonfarm business
1.2
3.6
1.9
4.0
6.1
Manufacturing (1978-92)
2.1
4.8
5.2
3.0
7.2
Real compensation per hour
0.7
2.1
0.1
1.8
-0.1
Shares of Real GDP (percent)
Business fixed investment
10.9
10.6
11.5
11.6
12.0
Residential investment
4.8
4.0
4.2
4.1
4.3
Exports
7.9
11.6
11.6
11.5
11.9
Imports
9.0
12.3
13.1
13.2
13.5
Shares of Nominal GDP (percent)
Personal saving
4.9
4.0
3.0
2.8
3.0
Federal surplus
-2.8
-4.6
-3.5
-3.3
-3.2
1970-
Feb.
Mar.
1992
1993
1992
1994
1994
Unemployment Rate
6.7
7.4
6.8
6.5
6.5
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
168
198
456
increase since Jan. 1993
2498
Inflation (percent per period)
CPI
5.9
2.9
2.7
0.3
0.3
PPI-Finished goods
5.2
1.6
0.2
0.5
0.2
Newly released data in boldface.
Weekly Economic Briefing
8
April 15, 1994
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FINANCIAL STATISTICS
Feb.
Mar.
Apr. 14,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3906
3817
3663
Interest Rates
3-month T-bill
3.43
3.00
3.25
3.50
3.58
10-year T-bond
7.01
5.87
5.97
6.48
6.97
Mortgage rate, 30-year fixed
8.40
7.33
7.15
7.68
8.26
Prime rate
6.25
6.00
6.00
6.25
6.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
Apr. 14, 1994
Week ago
Year ago
Deutschemark-Dollar
1.710
-0.4
+7.4
Yen-Dollar
104.2
-0.6
-8.4
Multilateral (Mar. 1973=100)
94.86
-0.4
+4.7
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
+3.1 (Q4)
6.5 (Mar)
2.5 (Mar)
Canada
+3.0 (Q4)
11.1 (Feb)
0.2 (Feb)
Japan
0.0 (Q4)
2.8 (Jan)
1.2 (Jan)
France
-0.1 (Q4)
11.7 (Dec)
1.8 (Jan)
Germany
-0.8 (Q4)
6.6 (Jan)
3.4 (Feb)
Italy
-0.5 (Q3)
10.6 (Jul)
4.2 (Feb)
United Kingdom
+2.4 (Q4)
10.0 (Jan)
2.4 (Feb)
Weekly Economic Briefing
9
April 15, 1994
BR/BO/GS/SM
EYES ONLY
WEEKLY ECONOMIC BRIEFING
OF THE PRESIDENT OF THE UNITED STATES
Prepared by the Council of Economic Advisers
with the assistance of the Office of the Vice President
April 8, 1994
CHART OF THE WEEK
Stock Prices versus Long-Term Interest Rates
30
12
Price-Earnings Ratio, S&P 500 (left scale)
10
25
8
20
Percent
6
Percent
15
4
10
2
Real 10-Year Treasury Yield
(right scale)
5
0
1981
1984
1987
1990
1993
Stock prices and interest rates tend to move in opposite directions. When
interest rates increase, stock prices decline as investors try to sell stock and
move into money market funds, bonds, and other interest-bearing assets.
EYES ONLY
CONTENTS
SPECIAL ANALYSIS
The Stock Market and Economic Activity
1
CURRENT DEVELOPMENTS
Good News, Bad News California Recovery
3
Grain Trade with Canada Grows Under Free Trade Agreement
4
ARTICLE
Auctioning Government Assets
5
DEPARTMENTS
Business, Consumer, and Regional Roundup
7
Releases
8
Economic Statistics
9
Financial and International Statistics
10
PEANUTS CHARLES M. SCHULZ
3-5
© 1994 United Feature Syndicate. inc
DOG FLAKES"? WHO
ORDERED "DOG FLAKES
!
C
Her
Cereal and pet food exports from the United States to Canada have
increased dramatically under the free trade agreement between the two
countries (see Current Development, page 4).
EYES ONLY
SPECIAL ANALYSIS
The Stock Market and Economic Activity
The stock market has been extremely volatile recently. As of Monday, the
Standard and Poor's composite stock price index was down 8.9 percent from its
peak on February 2. By Thursday, it had recovered somewhat, but was still down
6.5 percent from its peak.
While stock market declines often do signal lower economic activity, the recent
decline must be viewed in the context of the volatility of stock prices.
Despite its recent decline the stock market remains high relative to
earnings (see Chart of the Week). Moreover, the recent decline is not
large compared to those that have occurred during the last 25 years
(see table).
A decline in the stock market is sometimes followed by a slowdown
or a recession in economic activity, but this is not always the case. As
the table shows, there is truth in the old saw, "The stock market has
predicted nine out of the last five recessions."
Stock Market Declines
Date of
Date of
Price
Followed by
Peak
Trough
Decline
Recession?
Jul. 1959
Oct. 1960
-10.1%
Yes
Dec. 1961
Jun. 1962
-22.5%
No
Jan. 1966
Oct. 1966
-17.3%
No
Dec. 1968
Jun. 1970
-29.0%
Yes
Jan. 1973
Dec. 1974
-43.4%
Yes
Sep. 1976
Mar. 1978
-15.8%
No
Nov.1980
Jul. 1982
-19.4%
Yes
Aug.1987
Dec. 1987
-26.8%
No
Jun. 1990
Oct. 1990
-14.8%
Yes
Feb. 1994
-6.5%
No (CEA
forecast)
Note: Percent decline in Standard and Poor's composite stock price index
from peak to trough in stock price. The February 1994 figure is the decline from
February 2 through April 7.
continued
Weekly Economic Briefing
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April 8, 1994
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The stock market's links to the real economy. The stock market has two direct
effects on real economy activity.
Wealth Effect. Corporate equity is about 17 percent of private net
worth. Consumption depends on wealth, so a decline in the value of
the stock market reduces spending. A 10 percent, sustained reduction
in the value of stock market wealth would depress consumption,
leading to a 0.4 percent decline in GDP.
Cost of capital effect. The stock market is a source of finance for
firms' investment spending. The higher the market, the cheaper it is
to finance investment by selling new equity. A 10 percent decline in
the stock market would lead to a reduction in investment of about 4
percent, resulting in a further 0.6 percent decline in GDP.
Weekly Economic Briefing
2
April 8, 1994
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CURRENT DEVELOPMENT
Good News, Bad News California Recovery
After a 4-year barrage of bleak economic
Employment in California
12.6
news, California's long-awaited economic
recovery appears to have begun. California
12.5
added payroll jobs in January and
12.4
Millions of workers
February-the first consecutive 2-month
12.3
gain since mid-1990. As the chart shows,
12.2
however, this increase is too small to offset
12.1
the sharp decline in employment that began
12.0
in 1990. Moreover, it will take time before
11.9
1989
1990
1991
1992
1993
we know if the recent uptick is the
beginning of a sustainable upward trend.
Other indicators also show improvement. California
housing sales in January were 20 percent above a
year ago while California business failures declined
by 23 percent. Consumer confidence in the Pacific
region jumped a healthy 6.8 percent from February
to March.
Despite these promising signs, it is likely that
California's jobless rate will exceed the nation's
throughout the 1990s as the aerospace squeeze
continues. Over the next few years, more
unemployed people will leave the State, drop out of
the labor force, or settle for jobs that pay less than
the ones they have lost.
Short-Term Unemployment Rate Movements After Natural Disasters
The January 17 earthquake may have helped to revive the California economy in the short
run. Changes in regional unemployment rates following Hurricane Andrew, Hurricane
Hugo, and the San Francisco earthquake of 1989 suggest that regional unemployment rates
usually decline in the 3 to 6 months following a major natural disaster.
The biggest decline (about 2 full percentage points) occurred in Miami after
Hurricane Andrew. The unemployment rate there was over 10 percent before the
hurricane hit.
A smaller decline followed the 1989 San Francisco earthquake-arguably because
the region was already at full employment.
Based on this pattern, it is likely that the recent LA earthquake will cause a noticeable
reduction in the region's high unemployment rate in the coming months.
Weekly Economic Briefing
3
April 8, 1994
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CURRENT DEVELOPMENT
Grain Trade with Canada Grows Under Free Trade
Agreement
The recent surge in imports of wheat from Canada
has created the impression that the U.S.-Canada Free
Trade Agreement (CFTA) has hurt American
farmers. But that impression is misleading. The
CFTA has been good for U.S. agriculture in general
and for the grain sector in particular.
Since the CFTA took effect, the U.S. agricultural
trade balance with Canada has moved from a deficit
of about $408 million in 1987 to a surplus of $625
million in 1993. The balance in grain trade with
Canada has also improved as
U.S.-Canada Grain Trade
net exports of processed
300
products (such as breads,
Processed grains
pasta, cereals, and pet foods)
200
have outstripped net imports
Net exports (millions of dollars)
100
of bulk grain commodities
(see chart).
0
Last year, the trade balance
-100
in grain deteriorated as
Bulk grains
imports rose sharply. But
-200
Balance in grain trade
1993 was an unusual year.
Heavy rains and flooding led
-300
1988
1989
1990
1991
1992
1993
to poor U.S. harvests, while
aggressive subsidization of
exports through the Export Enhancement Program
(EEP) diverted part of the smaller U.S. production
overseas, driving up domestic prices and attracting
imports.
Analysis. As farm trade with Canada has expanded,
the United States has been importing more bulk
agricultural commodities and exporting more
intermediate and finished agricultural goods. The
market for processed goods such as breakfast cereals
is more stable than the market for basic wheat or
barley. Imports from Canada are therefore likely to
fluctuate more than exports to Canada. Temporary
import surges in a year of bad harvests are thus
neither surprising nor a cause for concern.
Weekly Economic Briefing
4
April 8, 1994
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ARTICLE
Auctioning Public Assets
The government controls many public assets. When the private sector can utilize
those assets more effectively than the government, the government often allows
private firms to do so. Public assets used by private firms include:
Licenses to use parts of the radio spectrum for radio and television
broadcasting or wireless communication
The right to produce oil and gas from offshore tracts
Licenses to dam rivers to generate hydroelectric power
Military bases that will be converted to civilian use
The right to cut timber in national forests.
These public assets are often extremely valuable. The government earned nearly
$1 billion from timber harvests in 1993; the government earns about $3 billion
annually from oil and gas auctions and royalty payments; and upcoming auctions
for the radio spectrum allocated to personal communications services (PCS)-an
advanced type of cellular telephone service-are expected to bring more than $10
billion to the U.S. Treasury. In one extreme example, the government sold 17,000
acres of land for $42,000. Weeks later, these lands were resold to a major oil
company for $37 million.
Methods of Allocating Assets. A number of methods can be employed to decide
which private firms will be permitted to use public assets.
Licenses can be given away randomly, as was done for some cellular
telephone licenses.
A license can be awarded without charge to the best applicant, as
chosen through a hearing. This was the traditional method for
choosing licensees for radio and television stations and for
hydroelectric projects.
Licenses can be sold for a fixed price, as is done with grazing rights.
Licenses can be auctioned to the highest bidder. Offshore oil and gas
production rights have historically been auctioned.
Recent legislation authorizes the Federal Communications Commission (FCC) to
conduct auctions for the electromagnetic spectrum allocated to PCS.
Advantages of Auctions. In choosing among these alternatives, the government
typically has several objectives. It seeks revenue from the use of public assets,
seeks to ensure that the assets are used efficiently, and seeks to ensure that other
social objectives are satisfied as inexpensively as possible. Using auctions to
Weekly Economic Briefing
5
April 8, 1994
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allocate rights to use public assets has advantages in satisfying each of these
objectives.
Auctions will maximize the revenues to the government because
competition among bidders raises the price the government receives.
This is important when the rights being allocated are worth billions of
dollars, as is the case for the examples above.
Of all the methods for choosing licensees, auctions are the most likely
to place the asset in its most economically efficient use. The private
firm that can create the most wealth out of the asset is most likely to
make the highest offer. Other methods of allocating assets to private
firms will be less successful at achieving this outcome unless the
market for resale of government assets works well. But buyers may
have less interest in acquiring the asset on the second go-round. For
example, buyers may worry that an oil tract is being offered for resale
because the seller discovered too late that the geography is unfavorable
for oil production, or because the tract would be expensive to utilize
for buyers that did not purchase adjoining tracts.
Auctions can be designed to accommodate other social objectives. For
example, the government can set-aside some timber tracts for auctions
limited to minorities or small businesses. Alternatively, the
government can impose conditions on licensees. For example, the
government can auction broadcast spectrum for television, and require
a successful licensee to devote certain program hours to news or public
interest programming.
Despite these advantages, auctions have historically been more the exception than
the rule in allocating public assets to the private sector-but their use is rising.
Weekly Economic Briefing
6
April 8, 1994
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BUSINESS, CONSUMER, AND REGIONAL ROUNDUP
Agricultural Export Subsidies: Spending Up, Volume Down. A recent USDA
report shows a decline in subsidized agricultural export volume for the first half
of fiscal 1994 despite increased spending on subsidies. The tonnage of subsidized
wheat was down 25 percent over the previous year. But subsidies per ton
averaged almost 50 percent higher than during the first half of fiscal 1993, so total
spending on subsidies rose. Subsidized tonnage of flour, barley malt, and
vegetable oils was similarly lower than in the previous year despite significant
increases in subsidy rates. Barley sales were 13 percent higher, but at a cost of
a more than 80 percent increase in the subsidy per ton.
Medicare Payment Gap Widening. This week, the Physician Payment Review
Commission estimated that Medicare pays doctors 59 percent of what private
insurance companies pay. In 1989, doctors received 68 percent of what private
insurance companies paid. The Commission noted the success in limiting the
reimbursement of doctors by Medicare, but raised concerns about a potential
shortage of doctors willing to treat Medicare patients at reduced fees.
Additionally, the Commission found a 50 percent increase in the volume of
doctors' services per Medicare beneficiary from 1986 to 1993.
Second Major Telco-Cable Deal Falls Apart. Cox Enterprises, a cable system
operator, and Southwestern Bell recently called off their proposed partnership
arrangement. In February, Bell Atlantic and TCI cancelled the largest proposed
telco-cable merger. Many smaller deals are also in trouble. For example,
Canada's BCE Telecom is renegotiating its investment in Jones Intercable.
NAPM Price Index Falls in March. Increases in the National Association of
Purchasing Managers' (NAPM) price index survey received a lot of attention early
in the year and "moved markets." The price index was 64.2 in March, down from
67.0 percent in February. This could have been interpreted positively by the
markets-a sign of some moderation of inflation pressures. But its announcement
Monday was accompanied by a 17 basis point jump in long-term interest rates.
Small Businesses Report Strong Demand for Workers. According to a survey
of small businesses by the NFIB, 29 percent of small firms plan to expand
employment and only 5 percent plan to reduce it. Nearly a quarter of firms also
reported having difficulty filling job openings.
Weekly Economic Briefing
7
April 8, 1994
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RELEASES THIS WEEK
Leading Indicators
The index of leading indicators fell 0.1 percent in February.
Automobile Sales
Domestically produced automobiles sold at a 7.7 million unit
annual rate in March, an increase of 4 percent from February.
MAJOR RELEASES NEXT WEEK
Producer Prices (Tuesday)
Consumer Prices (Wednesday)
Retail Sales (Wednesday)
Industrial Production and Capacity Utilization (Friday)
Weekly Economic Briefing
8
April 8, 1994
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U.S. ECONOMIC STATISTICS
1970-
1992
1993
1993:3
1993:4
1992
Percent growth (annual rate)
Real GDP
2.5
3.9
3.1
2.9
7.0
GDP deflator
5.7
2.8
2.2
1.6
1.3
Productivity
Nonfarm business
1.2
3.6
1.9
4.0
6.1
Manufacturing (1978-92)
2.1
4.8
5.2
3.0
7.2
Real compensation per hour
0.7
2.1
0.1
1.8
-0.1
Shares of Real GDP (percent)
Business fixed investment
10.9
10.6
11.5
11.6
12.0
Residential investment
4.8
4.0
4.2
4.1
4.3
Exports
7.9
11.6
11.6
11.5
11.9
Imports
9.0
12.3
13.1
13.2
13.5
Shares of Nominal GDP (percent)
Personal saving
4.9
4.0
3.0
2.8
3.0
Federal surplus
-2.8
-4.6
-3.5
-3.3
-3.2
1970-
Feb.
Mar.
1992
1993
1992
1994
1994
Unemployment Rate
6.7
7.4
6.8
6.5
6.5
Figures beginning 1994 are not comparable with earlier data. The 1993 unemployment rate is
estimated to have been 7.4 percent on a basis comparable to the 1994 data.
Payroll employment (thousands)
increase per month
168
198
456
increase since Jan. 1993
2498
Inflation (percent per period)
CPI
5.9
2.9
2.7
0.3
N.A.
PPI-Finished goods
5.2
1.6
0.2
0.5
N.A.
No new data this week.
Weekly Economic Briefing
9
April 8, 1994
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FINANCIAL STATISTICS
Feb.
Mar.
Apr. 7,
1992
1993
1994
1994
1994
Dow-Jones Industrial Average
3284
3522
3906
3817
3693
Interest Rates
3-month T-bill
3.43
3.00
3.25
3.50
3.53
10-year T-bond
7.01
5.87
5.97
6.48
6.86
Mortgage rate, 30-year fixed
8.40
7.33
7.15
7.68
8.47
Prime rate
6.25
6.00
6.00
6.25
6.25
INTERNATIONAL STATISTICS
Exchange Rates
Current level
Percent Change from
Apr. 7, 1994
Week ago
Year ago
Deutschemark-Dollar
1.718
+2.8
+6.1
Yen-Dollar
104.9
+2.3
-7.7
Multilateral (Mar. 1973=100)
95.24
+2.1
+3.5
Real GDP
Unemployment
CPI
International Comparisons
growth
rate
inflation
(last 4 quarters)
(last 12 months)
United States
+3.1 (Q4)
6.5 (Mar)
2.5 (Feb)
Canada
+3.0 (Q4)
11.1 (Feb)
0.2 (Feb)
Japan
0.0 (Q4)
2.8 (Jan)
1.2 (Jan)
France
-0.1 (Q4)
11.7 (Dec)
1.8 (Jan)
Germany
-0.8 (Q4)
6.6 (Jan)
3.4 (Feb)
Italy
-0.5 (Q3)
10.6 (Jul)
4.2 (Feb)
United Kingdom
+2.4 (Q4)
10.0 (Jan)
2.4 (Feb)
Weekly Economic Briefing
10
April 8, 1994