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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. CONFIDENTIAL (FR) CLASS III - FOMC August 12, 1988 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS THE DOMESTIC NONFINANCIAL ECONOMY Page Retail sales and inventories................... Producer prices................................ Farm output.......................... ........ Tables Retail sales................................. Business inventories........................... Inventory/sales ratios.................. ...... Recent changes in producer prices.............. THE FINANCIAL ECONOMY Monetary aggregates and interest rates......... Tables Monetary aggregates............................ Commercial bank credit and short- and intermediate- term business credit........... Selected financial market quotations........... SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Retail Sales and Inventories Retail spending on goods apparently moderated in July. retail control category Sales in the edged up 0.2 percent during the month from May and June levels that were revised up substantially. Second-quarter growth in nominal control now is estimated to have run at about an 8 percent annual pace. However, price increases were sharp last quarter, and spending in real terms in the control category probably moved up at about a 1-1/2 percent annual rate. Overall, the July retail sales report implies an upward revision to BEA's preliminary estimate of real consumption spending during the second quarter of nearly 1 percentage point, or roughly $5 billion. In July, sales at food stores moved up 0.5 percent--about in line with expected food price increases. Sales at apparel stores posted a gain of 1.6 percent, and the estimate for sales in May was revised up. Nevertheless, even with apparel price increases expected to be small in July, real apparel spending likely retraced only a small part of its sharp second-quarter decline. Sales at general merchandise stores edged up only 0.2 percent in July, after two months of large gains. Purchases at furniture and appliance stores, which have been an area of strength in recent months, dropped back 1 percent. 1. The retail control category excludes sales at automotive dealers, building material and supply stores, and gasoline stations. The current market cost of retail inventories rose in June at a $25 billion annual rate. The June increase brought the retailers' stock accumulation during the second quarter to $22.4 billion, fairly close to the increase assumed by BEA when the preliminary GNP estimates for the second quarter were prepared. Auto dealers' stocks, which dominated retail inventory changes in the preceding several months, accounted for only one-fourth of the accumulation in June. Outside of auto dealers, there was a fairly large ($7.7 billion, annual rate) buildup at general merchandise stores, although because of declines in the preceding two months the accumulation of general merchandise stocks over the second quarter only amounted to $2.3 billion annual rate--more moderate than the first-quarter pace. Elsewhere, apparel inventories posted a $2.1 billion rise in June, but other types of retail stocks were little changed. Excluding autos, the ratio of inventories to sales edged up in June and remained near the recent high recorded in 1987-Q4 and 1988-Q1. Producer prices The producer price index for finished goods rose 0.5 percent in July, maintaining the somewhat faster rate of increase that has been evident in this price measure in recent months. Food prices rose less rapidly than in June, and energy prices were little changed. However, the prices of finished goods other than food and energy were up 0.6 percent, well above the average pace of recent months. The index for finished foods was up 0.4 percent in July, after rising more than 1 percent in June. Although beef and pork prices fell sharply last month, increases were widespread for other foods, particularly poultry and eggs, fruits and vegetables, and cooking oils. To a large extent, both the declines in meat prices and the increases for other food products undoubtedly are reflecting the effects of drought. The prices of crude foods were up 1-1/2 percent in July; the biggest increases were for corn and turkeys. In the energy sector, prices fell sharply for crude oil and for a number of refined products. However, prices were higher for gasoline, reflecting tightness in inventories in that market. Excluding food and energy, a broadly based pickup was apparent among consumer nondurables, the prices of which rose 1.2 percent in July to a level about 5-1/2 percent above a year earlier. The prices of consumer durables were up 0.4 percent in July, the same as in June. Capital goods prices were little changed last month. Intermediate materials prices (excluding food and energy) advanced 0.7 percent in July, a little faster than in the two previous months. This index, which includes the prices of a broad range of industrial inputs, has risen 7-1/4 percent over the past year. The PPI for crude materials excluding food and energy was up 1-1/2 percent, mainly because of a jump in the price of steel scrap. Farm output The Department of Agriculture's August 11 assessment of agricultural supply and demand conditions showed downward revisions in projected 1988 output of the major crops compared with the July 12 estimate. The August crop report is the first that is based extensively on samples taken in the field. Corn output now is expected to total 4.5 billion bushels, down from a projected 5.2 billion bushels in mid-July and a 1987 harvest of 7.1 billion bushels. The estimate for soybeans was marked down from 1.65 billion bushels in July to 1.47 billion bushels this month; last year, soybean production was 1.91 billion bushels. The projection for wheat was revised down slightly. Overall, potential crop losses now appear slightly larger than the figures that were built into the August Greenbook, but not enough to appreciably affect the GNP forecast for coming quarters. 5 RETAIL SALES (Seasonally adjusted percentage change) 1988 Q1 Q2 Previous estimate1 1.2 .8 Previous estimate 4.9 Furniture and appliances .6 1.7 -1.0 1. 2. 3. also 4. .8 1.9 2.2 -1.0 -. 3 1.4 2.2 General merchandise 3 Memo: Motor vehicle sales4 Autos Light trucks .2 1.8 Food Other nondurables -. 3 -. 2 Other durable goods Apparel 1.5 1.2 .0 .3 Motor vehicle dealers Nondurable July 1.2 .5 1.2 GAF 2 Durable 1988 June .8 .3 Total sales Total less auto dealers, nonconsumer stores, and gasoline stations Previous estimate May .9 1.1 1.1 1.6 .8 -1.5 15.6 10.8 4.8 15.6 10.8 4.8 15.8 15.9 15.4 10.7 5.1 11.1 10.4 5.0 4.8 Based on incomplete sample counts approximately one month ago. General merchandise, apparel, furniture, and appliance stores. General merchandise excludes mail order nonstores; mail order sales are excluded in the GAF grouping. Millions of units at an annual rate; FRB seasonals. BUSINESS INVENTORIES (Change at annual rates in seasonally adjusted book value; billions of dollars) Manufacturing and trade (Previous) Manufacturing Trade, total Wholesale Retail Ex autos Durable Auto Nondurable 1988 1988 1987 Q3 Q4 Ql Q2 Mar. Apr. May r Junep 36.8 81.4 41.0 55.3 26.6 46.5 60.7 53.0 58.8 20.2 16.6 1.8 14.8 9.2 8.0 5.5 6.8 27.9 53.4 23.8 29.6 15.3 22.2 14.2 7.4 23.6 17.4 26.5 -9.1 12.5 -17.3 -21.6 8.2 20.9 34.5 12.1 22.4 10.2 15.4 12.2 7.0 11.9 14.7 13.2 1.5 18.3 -10.2 -16.8 11.7 16.2 30.3 21.6 8.7 .7 8.6 8.0 .1 28.6 32.1 -1.3 33.5 11.6 26.4 21.9 7.1 17.9 40.9 15.9 25.0 18.3 11.1 6.7 13.8 Totals may not add because of rounding. INVENTORY/SALES RATIOS 1987 ---- ~- =---Q4 Q3 1988 --- ~----Q2 Q1 1988 Mar. Apr. May r Junep Manufacturing and trade 1.50 1.53 1.53 1.51 1.50 1.51 1.51 1.50 Manufacturing Trade, total Wholesale Retail Excluding auto 1.62 1.41 1.23 1.59 1.51 1.60 1.46 1.27 1.65 1.54 1.62 1.45 1.31 1.60 1.55 1.58 1.46 1.30 1.62 1.55 1.58 1.44 1.29 1.58 1.53 1.59 1.45 1.30 1.59 1.54 1.58 1.45 1.30 1.60 1.53 1.56 1.44 1.28 1.61 1.54 r--Revised. p--Preliminary. RECENT CHANGES IN PRODUCER PRICES (Percentage change; based on seasonally adjusted data)1 Relative Importance Dec. 1987 1987 1987 Q4 1988 1988 Q1 Q2 -Annual rate- June July -Monthly rate- 100.0 25.9 9.6 40.1 24.4 2.2 -.2 11.2 2.7 1.3 -1.9 -5.7 -9.6 1.7 -.7 2.7 6.0 -18.5 5.7 3.2 4.6 9.4 4.8 2.4 3.6 .4 1.1 -1.6 .3 .4 .5 .4 .0 .9 .1 Intermediate materials 2 Excluding energy 95.0 82.5 5.5 5.2 4.3 7.2 4.3 8.2 7.4 6.9 .6 .5 .6 .7 Crude food materials Crude energy Other crude materials 39.5 41.9 18.6 1.8 10.7 22.6 -4.8 -15.2 18.0 17.7 -24.1 15.9 30.5 12.2 -7.0 4.2 -1.0 .2 1.5 -5.4 1.9 Finished goods Consumer foods Consumer energy Other consumer goods Capital equipment 1. Changes are from final month of preceding period to final month of period indicated. 2. Excludes materials for food manufacturing and animal feeds. THE FINANCIAL ECONOMY Monetary Aggregates and Interest Rates Based on more complete data, estimates of M2 and M3 growth during July were revised down to 3 and 5-1/2 percent annual rates, respectively. The adjustments largely reflect downward revisions to small time deposits, which lowered the growth rate of the nontransactions component of M2 to just 1 percent last month. Since August 9, most market interest rates have moved up further and the federal funds rate has firmed to 8-1/8 percent. While increases in Treasury bill rates have been minor in recent days, private money market rates and yields on long-term Treasuries have risen another 10 to 20 basis points. On August 11, most major banks increased their prime rate by 1/2 percentage point, returning the spreads between the prime rate and key short-term rates to more normal levels. MONETARY AGGREGATES (based on seasonally adjusted data unless otherwise noted) 19871 1988 Q1 1988 Q2 1988 May 1988 Jun 1988 Jul p Growth Q4 87Jul 88p ------------ Percent change at annual rates-------------------1. 2. 3. 6.2 4.0 ,5.4 Ml M2 M3 ------------ 3.8 6.7 7.0 6.3 7.8 7.1 0.2 4.7 4.4 Percent change at annual 9.8 5.2 6.3 9.1 3.0 5.4 rates------------ 5.8 6.5 6.7 Levels bil. $ Jul 88p Selected components 4. 5. 6. M1-A 2.8 Currency Demand deposits 7. Other checkable deposits 8. M2 minus M12 9. 10. 11. 12. 13. 14. 15. 16. Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares, NSA Commercial banks 3 Savings deposits, SA, plus MMDAs, NSA Small time deposits Thrift institutions 3 Savings deposits, SA, plus MMDAs, NSA Small time deposits 17. M3 minus M2 4 Large time deposits At commercial banks, nets At thrift institutions Institution-only money market mutual fund shares, NSA Term RPs, NSA Term Eurodollars, NSA 8.7 -1.0 13.6 3.3 4.1 10.8 1.4 9.4 -4.4 8.3 7.7 -13.3 3.9 -4.1 8.4 1.0 6.5 -11.6 10.6 8.0 8.4 6.2 3.6 67.4 7.7 10.4 4.8 504.1 8.2 2.9 206.3 290.6 11.0 17.1 278.3 3.7 0.9 2241.5 -58.5 76.1 -13.3 230.4 958.5 548.7 409.7 972.0 404.0 568.0 19.3 7.2 2.8 13.7 8.7 -7.3 21.3 4.5 6.8 3.2 11.7 9.1 2.3 14.0 7.9 4.2 3.3 10.3 14.5 793.6 7.2 6.4 8.8 7.3 7.7 5.7 13.6 20.5 0.0 17.9 25.6 2.9 509.0 340.5 168.5 -24.8 33.3 31.1 -49.3 -1.1 23.7 -20.9 -5.4 84.8 110.5 94.4 8.5 11.2 3.4 7.3 3.4 15.7 3.0 29.9 13.8 44.0 3.4 -24.3 -30.6 8.9 19.4 -17.3 0.9 -3.5 6.9 6.5 0.9 10.7 9.2 -15.0 9.0 11.1 6.2 3.0 4.8 1.7 20.7 -----Average monthly change in billions of dollars---MEMORANDA : 24. Managed liabilities at commercial banks (25+26) 25. Large time deposits, gross 26. 1.2 2.3 -1.1 Nondeposit funds Net due to related foreign institutions, NSA 7 Other 28. 29. U.S. government deposits at commercial banksa 7.0 1.5 5.5 12.4 2.4 10.0 3.3 4.1 -0.8 4.8 6.3 -1.5 596.0 406.8 189.2 7.8 2.1 -0.9 0.1 1.0 -2.4 9.9 179.3 2.9 -2.7 -1.8 27. 2.9 -0.3 -6.1 5.1 0.3 -0.4 -1.0 20.2 1. Amounts shown are from fourth quarter to fourth quarter. 2. Nontransactions M2 is seasonally adjusted as a whole. 3. Commercial bank savings deposits excluding MMDAs grew during June and July at rates of 12.9 percent and 8.9 percent, respectively. At thrift institutions, savings deposits excluding MMDAs grew during June and July at rates of 9 percent and 6.5 percent, respectively. 4. The non-M2 component of M3 is seasonally adjusted as a whole. 5. Net of large denomination time deposits held by money market mutual funds and thrift institutions. 6. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. 7. Consists of borrowing from other than commercial banks in the form of federal funds purchased, securitites sold under agreements to repurchase, and other liabilities for borrowed money including borrowing from the Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated. 8. Consists of Treasury demand deposits and note balances at commercial banks. p - preliminary COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT 1 (Percentage changes at annual rates, based on seasonally adjusted data) 1986:Q4 1988 1987:04 - 01 02 Ma ~ Jun i July Levels bil.$ P July ----------------------- Commercial Bank Credit ----------------------1. 2. Total loans and securities at banks Securities 3. U.S. government securities 4. Other securities 5. Total loans 7.9 7.8 11.9 13.0 11.1 4.8 5.0 5.4 8.9 5.1 10.6 -9.6 9.1 6.8 12.9 10.1 13.5 -1.3 2.9 2.0 -3.6 5.5 8.8 8.6 12.9 15.4 11.2 -17.2 3.6 9.2 2353.3 543.9 344.8 199.1 1809.2 6. Business loans 7.5 2.7 16.7 17.6 14.3 12.5 600.6 7. Security loans 1.0 76.6 -12.1 22.0 -6.2 -21.8 37.9 8. Real estate loans 18.1 10.8 13.8 16.3 12.3 12.0 625.1 9. Consumer loans 4.9 10.4 7.2 5.3 5.3 3.9 341.7 0. Other loans 13.2 21.9 11.9 5.9 204.0 -2.3 5.4 --------- Short- and Intermediate-Term Business Credit Business loans net of bankers acceptances 2 12. Loans at foreign branches 13. Sum of lines 11 & 12 14. Commercial paper issued by nonfinancial firms 15. Sum of lines 13 & 14 16. Bankers acceptances: related 7.6 2.3 17.0 18.2 14.4 -4.1 115.8 4.1 61.9 -35.3 7.2 5.2 16.6 20.0 12.5 -1.6 8.8 12.2 28.0 -7.8 6.0 5.7 16.0 20.9 10.0 -11.6 -9.5 -24.9 -10.9 12.2 -48.5 596.9 19.0 10.2 615.9 -22.3 89.7 6.0 705.6 U.S. trade 13.3 n.a. 32.85 Line 15 plus bankers acceptances: U.S. trade related 6.3 4.9 14.8 18.5 n.a. 734.95 18. Finance company loans to business 16.6 8.4 12.1 11.6 n.a. 221.25 19. Total short- and intermediateterm business credit (sum of lines 17 & 18) 8.4 5.6 14.2 17.2 n.a. 956.15 17. 8.9 1. Average of Wednesdays. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Based on average of data for current and preceding ends of month. 4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 5. June data. n.a.--not available p--preliminary MARKET QUOTATIONS 1/ SELECTED FINANCIAL (pecent) age ALfm: 1988 1987 Jan-Feb los 2/ Oct 16 Feb FOC los Jun 30 Aug 11 FIC Jun 30 Short-term rates Federal fimds 3/ 5.95 7.59 6.38 7.58 7.80 0.22 5.31 5.35 6.93 7.58 7.74 5.59 5.77 6.10 6.56 6.71 6.98 7.01 7.44 7.66 0.45 5.81 5.73 7.94 5 6.41 6.45 7.62 7.61 8.13 8.30 0.51 0.69 7.92 8.90 9.12 6.44 6.49 6.55 7.57 7.65 7.77 8.08 8.35 8.69 0.51 0.70 0.92 :7. 6.60 7.65 8.01 9.25 8.50 9.00 10.00 1.00 6.34 7.01 7.29 9.52 10.23 10.24 7.2 8.11 8.32 8.18 8.82 8.87 8.82 9.35 9.40 0.64 0.53 0.53 6.92 9.59 7.76 8.12 8.18 0.06 8.78 11.50 9.63 10.30 10.31 0.01 9.10 11.58 8.45 9.84 7.59 10.39 7.81 10.44 7.90 0.05 0.09 Treasury bills 4/ th 1-year amnmrial paper 1-ronth 3- mth Larmentiable CD's 4/5.85 th th 5.80 5.78 Eurodollar depoits 5/ 1-month 3-mnth 6.00 6.00 Bak prme rate 7.50 6.69 Interundiate and loqp-term rates U.S. freasury (onstant aturity) year 30-year Hmdcpal reverne 6/ (Bord Byer index) Caporate-A utility Recetly offered came or ARI, -rate AFiz 1-year rates 7/ 7.52 1986 1987 Record ear end higbs Los 7.69 8.29 1988 Peraent dbare from: FOC Jun 30 Aug 11 FOC Jun 30 Stock prices Dow-Joeas InTrrstrial 18 .95 NSE Caposite NASDAQ ) 1.58 .2 3Et.8te 348. 2722.42 1738.74 2141.1 1.99 125. 1 1 . . 455.01 231. .26 291. . 1. .30 9.74 379.11 1/ Or-day qnotes emnept as noted. day prior to stock mrket decline on Moay 2/ Last hirs Oct. 19, 1987. 3/ Aveae fr to-week reserve nntenance period losest to date 2 exl ept Io sahbon hicb are om we averags exeek i at s average Feb. 25 and Feb. 10 respetively. Last ob fbr naintenanoe period iig Aug. 10, 198. -4.8 -3.0 -4.05 -3.94 arnket. 4/ Sec a 5/ Average f statent week closest to date shan. 6/ Oe-day quotes fbr 7/ Qotes reek dig Friday closest to date shon e-estimate
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