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fomc | 1,979 | Yes, by about 10 percent. Another way of characterizing it, although I decided not to put it into this little story, is that a couple months ago we essentially had assumed that the real price of oil was going to be unchanged in 1980. Now we are assuming, in effect, that the real price of oil will increase by 20 percent... | 104 |
fomc | 1,979 | That certainly wipes out any monetary policy effect. | 9 |
fomc | 1,979 | We will be fortunate if it is that small. | 10 |
fomc | 1,979 | Right, that's what he said. | 7 |
fomc | 1,979 | On the other hand, not to seek to achieve a monetary policy effect would just mean that that effect would be all the bigger. | 26 |
fomc | 1,979 | It's a large increase. | 5 |
fomc | 1,979 | Shall I continue? | 5 |
fomc | 1,979 | Proceed. | 2 |
fomc | 1,979 | [Statement continued.] | 4 |
fomc | 1,979 | Let me ask a question. You say the current account is essentially in a zero position this year. In the way we used to calculate the current account a couple years ago it would be what? | 39 |
fomc | 1,979 | It would be minus about $15 billion. | 9 |
fomc | 1,979 | It's a $15 billion difference. | 7 |
fomc | 1,979 | The improvement between the two years, rather than being $14 billion, is approximately $8 billion. So you still have the significant improvement in the level no matter which way you calculate it. | 38 |
fomc | 1,979 | [Statement--see Appendix.] | 6 |
fomc | 1,979 | Jim, suppose your presumption is incorrect--that both you and Ted have misgauged [the oil price outlookl--and the OPEC price goes up something like 40 percent. | 38 |
fomc | 1,979 | Well, in that case, we'd be talking about adding another quarter or half point to the deflator and I would think taking at least something comparable, if not more, out of the real side. And in the short run 1 think there is quite a rapid passthrough now of these costs. We'd get some lag effects obviously into 1980 and ... | 88 |
fomc | 1,979 | So if there were to be something like a 40 percent increase in the [oil] price level coming out of the December OPEC [meeting], you'd expect this to be hitting the first half of 1980? | 44 |
fomc | 1,979 | We'd expect a good chunk of it to hit in the first half, but [the effect] carries on. In the current forecast, which has an increase of roughly half that size, we have-- | 41 |
fomc | 1,979 | That's why I doubled it. | 6 |
fomc | 1,979 | We think our forecast is likely to entail something like a 3/4 percentage point increase in personal consumption prices. That is in addition to the other things going on in the energy area, of which there are many. If we were to assume roughly symmetrical effects, we'd double that, so it gets into the 1-1/2 percent are... | 132 |
fomc | 1,979 | Well, I'm a little confused. Are you saying a 40 percent increase in imported oil prices will bring a 1-1/2 percent increase in GNP prices? | 35 |
fomc | 1,979 | In 1980, right. | 7 |
fomc | 1,979 | Over and above what he already has. | 8 |
fomc | 1,979 | No, that's the total effect. | 7 |
fomc | 1,979 | It's 3/4 point for 20 percent. | 11 |
fomc | 1,979 | 3/4 point in addition. | 7 |
fomc | 1,979 | What percentage of the GNP is oil now? m.KICHLINE. I don't know. The deflators in the energy sector in GNP are about 8 percent. | 36 |
fomc | 1,979 | Ted, am I right that you rather markedly changed your outlook for [growth in] foreign economies, mainly because of the higher oil prices? | 28 |
fomc | 1,979 | Yes. We have marked it down quite remarkably. We essentially have real growth over the next four quarters of 1-1/2 percent, which is slow growth. Only in one of the major countries do we have what we call a recession, or negative growth. But we have [economic activity in] all the major countries dropping down--essentia... | 222 |
fomc | 1,979 | But you were counting on [the economies of] our trading partners growing at 3 to 4 percent next year and on that helping our balance of payments. | 32 |
fomc | 1,979 | Well, that was some time ago. A forecast of 3 percent was reasonable at the beginning of the year. | 23 |
fomc | 1,979 | But now their [expected growth is] down almost to that danger point where they could tip into a recession. | 22 |
fomc | 1,979 | It is at the point at which it may be somewhat arbitrary [whether we call it a small positive or small negative]. Sluggish growth is the way I'd say it. M S . TEETERS. So the possibility does exist that we could get a worldwide recession? | 53 |
fomc | 1,979 | Yes, and if you add in the United States with our forecasts--[unintelligible] others which are less pessimistic, let me put it that way--growth for the QECD area, including the United States, is about zero. It's minus 1-112 percent here and plus 1-1/2 percent there; and we're about half or 40 percent of the total, so i... | 86 |
fomc | 1,979 | We've never managed to grow at 1 to 1-1/2 percent without sliding into a recession. Have the others? | 26 |
fomc | 1,979 | Well, in the rest of the world, other major industrial countries--with the exception of the oil crisis--have not had recessions in the postwar period. They've had growth recessions, but they've not had negative growth or recessions. S o there is really no comparable experience with the exception of the United Kingdom. | 65 |
fomc | 1,979 | You know, this discussion does not really reflect what went on.at the QECD meeting. The numbers are roughly the same but there was not a great sense of pessimism and not a sense of world recession. Rather there was a mild degree of feeling that it was good to have economies desynchronized instead of having the cycle mo... | 69 |
fomc | 1,979 | Henry, let me correct you on that. Our forecasts are lower than the OECD forecasts in large part because they essentially were dealing with our old oil price assumption of no increase in the real price of oil in 1980. So we have a very different outlook. Their forecast is close to 2 percent for the same G-10 countries,... | 80 |
fomc | 1,979 | I know, but by the time this discussion took place the recent increases were known so that was reflected in the conversation. | 24 |
fomc | 1,979 | True, but I would comment that within the U.S. government, for example, people are only now in the process of focusing on the implications of the [outlook for] oil prices. And I think the same is true for most other countries' forecasts; they have not looked at their official forecasts since July. They're now looking a... | 126 |
fomc | 1,979 | Did I understand you to say that you are expecting essentially an equivalent move in the consumer price index for these countries, from a 9 percent rate of increase to 7 percent? | 36 |
fomc | 1,979 | This quarter in round numbers it's 9-1/4 percent; a year from now it's 7-1/2 percent. It looks like their consumer price inflation rate peaked last quarter at 11 percent plus. [We expect] some moderation. And they don't have the assistance of housing costs and things like that on their consumer price index. | 70 |
fomc | 1,979 | You've taken into account the higher oil price increase in doing that? | 13 |
fomc | 1,979 | We tried to, let's put it that way. The forecasts are all supposed to be consistent. | 19 |
fomc | 1,979 | 1 still don't understand this oil price business. If the weight is 8 percent and you get a 40 percent [price] increase, that's more than 3 percent of GNP. Why doesn't it have a 3 percent impact on GNP? | 51 |
fomc | 1,979 | What I was quoting was energy prices. We forecast the energy price deflator, which aside from imported oil includes domestic oil, coal, and natural gas prices. When you put that all together, you find that domestic prices would tend to be rising more rapidly as time goes on because of the decontrol. But next year, unle... | 210 |
fomc | 1,979 | Imported oil is about 3 percent of GNP. Imported oil is half of our total oil [consumption], isn't it? | 26 |
fomc | 1,979 | Yes. But the point is, as Jim explained, some prices move with imported oil and some prices move partially with imported oil, and one has to add all those things up. | 36 |
fomc | 1,979 | You still haven't included any indirect effects? | 8 |
fomc | 1,979 | That's right. And in our forecasting exercise they carry well into 1981. | 16 |
fomc | 1,979 | With respect to Governor Coldwell's question, in your additive process you haven't really included any dynamics in the business effects. That is, there must be a point at which another 3/4 percentage point decline in real consumption would have a material impact on inventories and capital spending that would run throug... | 66 |
fomc | 1,979 | That's right. The 3/4 point effect, for example, this year did not carry through fully to our price forecast. It's roughly 1/2 percent. So we have weaker activity as a result of higher world oil prices and in fact we assume that's going to have an impact in other areas in the domestic economy. | 66 |
fomc | 1,979 | Now I'm confused--not that I wasn't before. I thought that when you calculated the U.S. deflator the price of imported goods [always] came in with a negative sign. | 37 |
fomc | 1,979 | It does. | 3 |
fomc | 1,979 | That means that if the price of imported oil is going up relatively fast, that can have a strong impact on the CPI but it's not at all clear that it will have a direct impact on the deflator. | 42 |
fomc | 1,979 | I was referring to the personal consumption expenditure deflator. It gets measured there directly and subtracted out when we look at the difference in export and import prices. So the deflator will always understate the effect--the price impact--on consumers of rapid increases in foreign prices. When we look at the per... | 80 |
fomc | 1,979 | My own feelings are perhaps more pessimistic for '80 than yours, for different reasons. I wonder in terms of our current analysis how much allowance we should make for the shock effect aspect [of developments in the energy areal. For example, when we had our [earlier] energy shock, it wasn't really the price but the [c... | 291 |
fomc | 1,979 | With the rising price of energy--and I'm thinking now primarily of electric energy--and a presumed move by industry to use it more efficiently, is there a possibility that that will give us a lower industrial production index than we might overwise have had? | 50 |
fomc | 1,979 | We've tried to account for that as best we can. As you well know, a number of years ago we had a fine idea to use for part of the IP index electric power usage as a proxy for output. That was pre-1973. And we've felt very nervous about that ever since 1973, quite frankly. Some of the past data that have come in--this w... | 141 |
fomc | 1,979 | But you're not continuing to use whatever factors were developed? | 11 |
fomc | 1,979 | No, we have made adjustments since about ' 1 2 . I guess, when-- | 19 |
fomc | 1,979 | YOU still use electric power. But you have a trend factor that's more-- | 15 |
fomc | 1,979 | Yes, it's about-- | 5 |
fomc | 1,979 | In a sense the productivity factors have been changed. | 10 |
fomc | 1,979 | And then of course you still have output [data]. You still have manhours, too, and you can look at the manhours . | 28 |
fomc | 1,979 | That's right. And we have physical product data with a lag that accounts ultimately for about half the series. | 21 |
fomc | 1,979 | Jim, you had a model that tracked inventories that ran off industrial production data, which you reactivated again. Is that tracking the GNP data still? Do the inventory numbers in the GNP account look to be correct? | 45 |
fomc | 1,979 | They do not look out of line. | 8 |
fomc | 1,979 | Jim, as I look over your forecast, you have some fairly heavy negatives on gross private domestic investment in the fourth quarter [and] the first quarter of next year. But in terms of the GNP, I assume that your decline in personal consumption expenditures made the tail wag the dog here. Is that a good assumption? | 65 |
fomc | 1,979 | Well, I think they're both important. On the investment side, the big mover in the short run for some time has been residential construction investment; business fixed investment is important as well. For 1980 as I remember we have a decline in business investment measured from the fourth quarter of about 3 percent. An... | 129 |
fomc | 1,979 | Y o u have government purchases going up and I don't have the [unintelligible] proportions here to balance off but it looked to me as if you might have an offset here between government purchases and gross private [investment], leaving consumption as the swing package. | 53 |
fomc | 1,979 | In dollar terms, certainly the goods portion of consumption is about twice the size of the investment sector. | 20 |
fomc | 1,979 | What are the possibilities that the consumer is going to confound you still in this fourth quarter and push off the decline until the first quarter of next year? | 31 |
fomc | 1,979 | I would not be willing to risk any of my own money on consumer behavior. I think it's possible. Our view has been that the arguments against that strengthen as each month goes by and as consumers have been using financial assets or debt or reducing savings to finance their purchases. But who knows? It's quite conceivab... | 70 |
fomc | 1,979 | My recollection is that the consumer surveys have been showing a little more strength lately. | 17 |
fomc | 1,979 | That's true. | 3 |
fomc | 1,979 | You really have to get a pretty big decline in consumption in November and December to make this come out right, don't you? | 25 |
fomc | 1,979 | NO, I think our forecast is that if we get zero to a 1/4 percent increase in retail sales in November and December, we will hit this number. | 34 |
fomc | 1,979 | If you get what? What was the number? | 10 |
fomc | 1,979 | A quarter of a percent increase in total retail sales excluding autos. We have a separate auto forecast. That's nominal. | 23 |
fomc | 1,979 | In nominal terms. | 4 |
fomc | 1,979 | That's right. | 3 |
fomc | 1,979 | Your October figure is preliminary? | 6 |
fomc | 1,979 | Oh, yes. It's the advance; it's not even the preliminary report. | 15 |
fomc | 1,979 | The "flash" or whatever you want to call it. | 12 |
fomc | 1,979 | And it could go the other way, too, couldn't it? | 13 |
fomc | 1,979 | It could go the other way. | 7 |
fomc | 1,979 | I think we could have a very poor Christmas season, which would start out the new year with an inventory clean-up job and that kind of thing. | 30 |
fomc | 1,979 | I don't want to be a Pollyanna, but do you have any sense at all of when we will begin to get some very substantial substitution in the energy area? Clearly, we're getting to the point in energy prices where a lot of secondary and tertiary recoveries get to be very attractive. You point out that the natural gas substit... | 127 |
fomc | 1,979 | No, I don't. We have been getting scattered reports suggesting that some utilities have been switching back. Those that converted under pressure or for price reasons have been switching back and trying to return to the use of natural gas. But there are constraints in these areas. I guess our view is that we don't know ... | 108 |
fomc | 1,979 | Just two things, Mr. Chairman. I wanted to make a comment very much along the lines of the question asked by Phil Coldwell. The national and international companies headquartered in our region who deal not only in the manufacturing area but in the retail area report exceptionally strong orders and backlogs. They're sur... | 153 |
fomc | 1,979 | You mean rational expectations are an empty box? | 9 |
fomc | 1,979 | Mark, I think you had the only copy with that particular page blank. | 15 |
fomc | 1,979 | Perhaps we can have Mr. Axilrod's statement and then we'll have a coffee break. | 19 |
fomc | 1,979 | [statement--seeAppendix.] | 7 |
fomc | 1,979 | Well, you've given us something to chew on other than a donut! | 14 |
fomc | 1,979 | May I ask just one question? Steve, did I understand you to say that you were assuming $2 billion as the initial borrowing on alternative C? | 30 |
fomc | 1,979 | Alternative C. | 3 |
fomc | 1,979 | And $1-1/2 billion on alternative B? | 12 |
fomc | 1,979 | Yes. | 2 |
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