Economic Report of the President

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maintaining its alignment with short-term market rates and preventingsharp changes in the incentive for banks to borrow from the FederalReserve.Starting in August, Ml growth began to speed up. By the fourthquarter of 1982, Ml had risen 8.5 percent above its level in thefourth quarter of 1981, well above the upper end of the 1982 targetrange. Over the same period, M2 increased 9.8 percent, slightly morethan the top of its target range. These increases in the monetary aggregatesoccurred against the background of an economy that wasstill in recession.Part of the strength in Ml may be attributable to the effects of alarge volume of All-Savers Certificates maturing in the fourth quarterof 1982, as the maturing funds moved through checking accounts orwere temporarily "parked" there. Federal Reserve analysis suggestedthat an additional factor was an unusual demand for liquidity. Muchof the increase in Ml was in interest-bearing negotiable order ofwithdrawal (NOW) accounts, which provide elements of both savingsand transactions accounts. From the fourth quarter of 1981 to thefourth quarter of 1982, checkable deposits other than demand depositsgrew about 35 percent. With market interest rates falling, theseinterest-bearing deposits, such as NOW accounts, provided a safeand convenient store of liquidity at a time of economic and financialuncertainty. Increased liquidity demand may also account for theabove-target growth of M2.As discussed in Chapter 1, the behavior of the "income velocity"measures—the ratios of GNP to the various monetary aggregates—was unusual in 1982. The velocity of Ml rose 3.2 percent a year onaverage over the 20 years ending in 1981, but in 1982 it declined 4.9percent. While a tendency toward slower velocity is not unusual inthe midst of a recession when interest rates generally are falling, theonly other fourth quarter to fourth quarter decline in Ml velocitysince the beginning of the current series in 1959 was a 0.1 percentfall in 1967. The velocity of M2, which historically has been relativelytrendless, declined 6.0 percent in 1982; the largest previous declinewas 3.8 percent in 1976. Without some accommodation of monetarygrowth—particularly for M1 —to this drop in velocity, monetarypolicy would have been more restrictive than had been"intendedwhen the 1982 targets were established.The number, size, and rapidity of recent changes in the financialsector may well have affected the behavior of velocity. As indicated inTable 6-8, checkable deposits other than ordinary demand depositsaccounted for only 2.3 percent of Ml in December 1978. In December1980, just before NOW accounts were authorized nationally,other checkable deposits were 6.5 percent of Ml, but by December140
1982 their share had risen to over 21 percent. Because these interestbearingdeposits may be regarded by their holders in part as savingsrather than solely as transactions balances, the reported growth ofMl in 1981 and 1982 probably overstates the growth in transactionsbalances.TABLE 6-8.—Components of Ml and M2, 1978-82[Averages of daily figures; billions of dollars; seasonally adjusted, except as noted]Item19781979December198019811982 »CurrencyPlus* Demand deposits %Equals- MlOther checkable depositsPlus* Savings deposits 3Small time depositsOvernight repurchase agreements (RPs) and overnight Eurodollars *...Equals- M2 9Money market mutual fund balances (excluding institution accounts)*97 4257 484363 2479 9533 924.0711,403.91061265 916 9389 04217652 626.334 41,518.91161271426 9414 5398.9751.735.061.91,656.21231240 777 0440 9343 6854 738.115121,822.7132 6244 61013478 5400 3904 245.6177 51,999.11 Preliminary.includes travelers checks.'Includes Money Market Deposit Account introduced December 14, 1982.4 Not seasonally adjusted.B M2 will differ from the sum of components by a consolidation adjustment that represents the estimated amount of demanddeposits and vault cash held by thrift institutions to service time and savings deposits.Source: Board of Governors of the Federal Reserve System.In general, the demand for any particular monetary aggregate—and hence its income velocity—depends in part on the difference betweenmarket rates of interest and the rates earned on the deposits inthat aggregate. Consequently, the increased portion of Ml depositsthat pay interest and the decline in market interest rates have combinedto lower Ml velocity.The rapid growth of general purpose and broker/dealer moneymarket mutual fund balances, which are included in M2 but not inMl, has tended to raise Ml velocity and to lower M2 velocity. FromDecember 1980 to December 1982 these money market mutual fundbalances grew from $61.9 billion to $177.5 billion, which exceededthe growth in other checkable deposits by $41.2 billion. Althoughmost money market mutual fund balances are subject to transfer bycheck, the average turnover of these accounts has been relatively low.Interpretation of the macroeconomic significance of changes in themonetary aggregates became more difficult in late 1982 when theDepository Institutions Deregulation Committee authorized two newaccounts. In mid-December, banks and thrift institutions introduced aMoney Market Deposit Account with limited transactions capabilitiesand no interest rate ceiling. Within about 2 weeks, these accounts141
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CONTENTSPageECONOMIC REPORT OF THE
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ECONOMIC REPORT OF THE PRESIDENTTo
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Monetary policy will play a critica
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Interest Rates and the U.S. Trade D
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THE ANNUAL REPORTOF THECOUNCIL OF E
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CONTENTSPageCHAPTER 1. FROM RECESSI
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PageConclusions 122CHAPTER 6. REVIE
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CHAPTER 1From Recession to Recovery
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slowed somewhat in the 1970s regard
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nal GNP growth is reflected in a sl
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inflation. More specifically, the A
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inflation rate, or with a 12 percen
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1988, an increase of about one-four
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CHAPTER 2The Dual Problems of Struc
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frequently associated with poor hea
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Chart 2-2Distribution of Unemployme
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Chart 2-4Distribution of Unemployme
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These findings suggest several conc
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Wage RigidityA number of studies sh
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that these measures may have caused
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Most young people find jobs or leav
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to employers who hire youths. Tax c
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defined broadly to include individu
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ship between incomplete experience
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CHAPTER 3The United States in the W
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with 2.6 percent in the other Organ
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TABLE 3-1 .—Structure ofthe U.S.
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TABLE 3-2.—Trade balances by comm
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concentrate on doing what it does r
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the United States will depress pric
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Chart 3-3Real Exchange Rates Of Maj
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AN UNDERVALUED YEN?The explanations
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arily reduced the international com
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nancial markets. These transactions
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TABLE 3-6.—Economic performance b
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were undoubtedly a highly favorable
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of lenders that some debtors will n
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CHAPTER 4Increasing Capital Formati
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ate of net investment was required,
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able share in Japan and 56 percent
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During the 1970s, productivity grow
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MEASURING NATIONAL SAVINGDomestic s
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TAX RULES AND PERSONAL SAVINGMany e
Page 95 and 96: on consumption taxation might also
Page 97 and 98: Nevertheless, a number of economic
Page 99 and 100: tion permitted businesses to deprec
Page 101 and 102: A final problem under current tax l
Page 103 and 104: fleeted efforts to deal with proble
Page 105 and 106: egulation was probably not applicab
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Page 109 and 110: system resulted. Price controls, wh
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Page 113 and 114: Price and allocation controls only
Page 115 and 116: nications industries through the re
Page 117 and 118: Several major pieces of legislation
Page 119 and 120: tempt to set cartel rates would be
Page 121 and 122: computer information and advertisin
Page 123 and 124: of computer technology to the payme
Page 125 and 126: trend by widening the sources and u
Page 127 and 128: changes. That is, members can arbit
Page 129 and 130: ceived to be a consequence of exces
Page 131 and 132: lowest point in the post-World War
Page 133 and 134: ing. Partly in response to the drop
Page 135 and 136: Chart 6-3Ratio of Consumer Installm
Page 137 and 138: Chart 6-4RATIO1.85Real Inventory/Sa
Page 139 and 140: percent increase in real defense pu
Page 141 and 142: 8.8 percent in 1981. These declines
Page 143 and 144: housing. Borrowing by the nonfinanc
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Page 149 and 150: TABLE 6-9.—Economic outlook for 1
Page 151: A critical element in achieving hea
Page 155 and 156: LETTER OF TRANSMITTALCOUNCIL OF ECO
Page 157 and 158: Report to the President on the Acti
Page 159 and 160: ety of interagency and internationa
Page 161: ence J. Kotlikoff (Yale University)
Page 165 and 166: CONTENTSNATIONAL INCOME OR EXPENDIT
Page 167 and 168: B-70. Mortgage debt outstanding by
Page 169 and 170: NATIONAL INCOME OR EXPENDITURETABLE
Page 171 and 172: TABLE B-2.—Gross national product
Page 173 and 174: 19291933193919401941194219431944194
Page 175 and 176: TABLE B-5.—Changes in GNP and GNP
Page 181 and 182: TABLE B-ll.—Gross national produc
Page 183 and 184: TABLE B-13.—Output, costs, and pr
Page 185 and 186: TABLE B-14.—Personal consumption
Page 187 and 188: TABLE B-16.—Gross and net private
Page 189 and 190: TABLE B-18.—Inventories and final
Page 191 and 192: TABLE B-20.—Relation of national
Page 193 and 194: TABLE B-21.—National income by ty
Page 195 and 196: TABLE B-22.—Sources of personal i
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TABLE B-24.—Total and per capita
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Year or quarterTotalTotalTABLE B-26
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POPULATION, EMPLOYMENT, WAGES, AND
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TABLE B-29.—Noninstitutional popu
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TABLE B-31.—Selected employment a
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TABLE B-33.—Civilian unemployment
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TABLE B-35.—Unemployment by reaso
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TABLE B-37.— Wage and salary work
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TABLE B-39.—Average weekly earnin
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TABLE B-41.—Changes in productivi
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TABLE B-43-—Industrial production
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TABLE B-45.—Capacity utilization
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TABLE B-46.—New construction acti
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TABLE B-48.—Nonfarm business expe
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TABLE B-50.—Manufacturers' shipme
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Year or monthAllitemsPRICESTABLE B-
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TABLE B-53.—Consumer price indexe
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TABLE B-55.—Changes in consumer p
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TABLE B-57.—Producer price indexe
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MONEY STOCK, CREDIT, AND FINANCETAB
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TABLE B-63.—Commercial bank loans
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TABLE B-64.—Total funds raised in
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TABLE B-66.—Aggregate reserves of
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TABLE B-67 .—Bond yields and inte
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TABLE B-69.—Consumer installment
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TABLE B-71-—Mortgage debt outstan
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TABLE B-72.—Federal budget receip
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TABLE B-74.—Relation of Federal G
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TABLE B-76.—Federal Government re
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TABLE B-78.—State and local gover
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TABLE B-80.—Estimated ownership o
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CORPORATE PROFITS AND FINANCETABLE
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Year or quarterTABLE B-84.—Corpor
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TABLE B-86.—Relation of profits a
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TABLE B-88.—Determinants of busin
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TABLE B-9Q.~Current assets and liab
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TABLE B-92.—Common stock prices a
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AGRICULTURETABLE B-94.—Farm incom
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TABLE B-96.—Farm input use, selec
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TABLE B-98.—U.S. exports and impo
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INTERNATIONAL STATISTICSTABLE B-100
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TABLE B-101.—U.S. international t
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TABLE B-103.—U.S. merchandise exp
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TABLE B-105.—International invest
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TABLE B-107.— World trade balance
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TABLE B-109.—Growth rates in real
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TABLE B-lll.—Unemployment rate, a
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