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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 II - FOMC August 14, 1998 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Business inventories ................ .......................... Industrial production and capacity utilization .......................... Consumer confidence..........................................3 Producer prices ........................... ..... ............. 1 1 3 Tables Changes in manufacturing and trade inventories .................. ..... Growth in selected components of industrial production (Table 1) .......... Capacity utilization in industry (Table 2) ............................. University of Michigan Survey Research Center: Survey of Consumer Attitudes ........................... . Recent changes in producer prices . ............................... 5 6 7 .8 9 Chart Inventory-sales, ratios, by major sector ............................ . 10 THE FINANCIAL ECONOMY Tables Selected financial market quotations .............................. . 11 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Business Inventories The book value of retail inventories fell $5.3 billion at an annual rate in June. However, excluding motor vehicles, stocks accumulated at a rapid $27.7 billion annual rate, more than reversing May's decline of $17.7 billion.1 With sales at non-auto retailers about unchanged in June, the inventory-sales ratio moved back up to 1.41 months, in the middle of the range recorded over the past year. The increase in retailers' stocks in June was spread across a wide range of outlets. Notably, stocks held at general merchandisers, apparel outlets, and furniture and appliance stores (the GAF grouping of stores) increased $11.4 billion at an annual rate, and the inventory-sales ratio for this category moved up to 2.08 months. Still, the inventory-sales ratio in the GAF grouping remained low relative to the levels seen in 1997. Total manufacturing and trade inventories excluding auto dealers rose $45.7 billion at an annual rate in June, accelerating from the $23.9 billion pace registered in May. For the second quarter as a whole, total book-value manufacturing and trade inventories excluding motor vehicles increased $35.4 billion at an annual rate, about in line with BEA's book-value assumptions underlying the advance GDP estimate. However, the composition of inventory investment differs somewhat from BEA's assumptions, and we estimate that once these bookvalue stocks are deflated, the second-quarter change in real inventories will be about $2 billion higher than in the advance GDP release. Industrial Production and Capacity Utilization The index of industrial production decreased 0.6 percent in July after a revised 1.1 percent fall in June. Some of the downward revision for June was the result of more complete information on production losses associated with the GM strike. The strike lowered assemblies from a seasonally adjusted annual rate of 12.4 million units in May to 8.3 million units in July. We now estimate that the GM strike lowered industrial production by 0.9 percentage point in 1. The large decline in stocks held at auto dealers was, of course, to be expected as a result of the GM strike. Note, though, that BEA does not use the book-value data on retail inventories at automotive dealers when constructing motor vehicle inventories in the NIPAs. both June and July; that estimate includes the effects of reduced output at motor vehicle assembly and parts plants and losses at other industries that supply the motor vehicle industry. Manufacturing output declined 0.7 percent in July following a revised drop of 1.2 percent in June. Stripping away the effects on manufacturing output of the strike, factory production would have been little changed, on balance, over the past few months, after moderate gains in the first quarter. The recent weakness in manufacturing production reduced the factory operating rate to 79.0 percent; excluding the effects of the GM strike, capacity utilization in July would have been a touch below 81 percent, about 1 percentage point below its long-term average. The output of utilities was unchanged in July, remaining at about trend, and the output of mines increased 0.4 percent. Excluding motor vehicles and parts, manufacturing production edged up 0.1 percent in July after having declined, on average, in the previous two months. The strikes at GM have exacerbated the slowing in this aggregate recently; output of industries that supply the motor vehicle industry declined noticeably in June and July. More generally, the growth in the output of manufacturing excluding motor vehicles and parts has decelerated noticeably this year, in part reflecting the effects of the high dollar and the Asian crisis. The most pronounced weakness has occurred in nondurables and semiconductors. By major market groups, excluding motor vehicles and parts and energy, the output of business equipment advanced 0.6 percent in July after having accelerated significantly in the second quarter. The information processing equipment group posted widespread gains in July led by increases in the production of computers and photographic equipment; the only exception was a reduction in the output of nondefense communication equipment. The output of industrial equipment retraced a portion of its large increase in June. Transit equipment posted another healthy gain in July, and a surge in the production of farm equipment led the acceleration in other equipment. Production in other major market groups decelerated sharply in the second quarter and was sluggish in July. The output of consumer goods inched up in July; a rebound in the production of durables, most notably appliances and air conditioners, more than offset the small decrease in nondurable consumer goods. Nonenergy materials declined 0.2 percent in July due to continuing weakness in basic metals and nondurables; textile, paper, and chemical materials have all decreased over the past three months. The production of construction supplies rose in July after a decline in June, remaining at a very elevated level. Consumer Confidence According to the preliminary report, the Michigan SRC index of consumer sentiment fell a bit in early August but remained in an extremely favorable range. The sub-index of expected conditions moved down to its lowest level this year, reflecting an appreciable decline in respondents' views of business conditions over the next five years. In contrast, the sub-index of current conditions moved up somewhat, as households' appraisals of buying conditions for large appliances rebounded from last month's dip. Among questions not included in the overall index, responses were generally upbeat in early August. Respondents' views of car buying conditions more than retraced their sharp decline in July, and the reading of home buying conditions remained in its favorable range of late. In addition, respondents' assessments of the expected change in unemployment over the next twelve months receded a touch after running up in July. The mean value of expected inflation over the next twelve months moved down 0.3 percentage point in early August to 2.8 percent, and the median value ticked down 0.1 percentage point to 2.5 percent. The mean value of expected inflation over the next five to ten years declined 0.2 percentage point to 2.9 percent; the median edged down 0.1 percentage point to 2.6 percent. Producer Prices Producer prices for finished goods rose 0.2 percent in July--pushed up by increases in food and energy prices--while the core PPI increased just 0.1 percent. 2 Over the twelve months ended in July, producer prices declined 0.3 percent; outside of food and energy, the PPI was up 1.1 percent over this period, compared with no change in the preceding twelve months. 2. Prices of core consumer goods increased 0.3 percent, while the PPI for capital goods was up 0.1 percent. Because the core PPI is made up of these two series, this combination of price increases appears unusual; BLS confirmed that this pattern reflects rounding. The PPI for food rose 0.4 percent in July. Vegetable prices surged following large declines in the prior two months, and dairy prices continued to climb. Even so, finished food prices have increased just 1/2percent over the past twelve months. Finished energy prices increased 0.3 percent in July. Although prices of gasoline and fuel oil fell, those declines were more than offset by increases in prices of natural gas and electricity. According to BLS, the rise in electricity prices reflected, in part, the increase in demand related to hot weather in some parts of the country and the associated switch to higher-cost fuels for generation. Overall, the index for finished energy has dropped 7-1/2 percent over the past year, pulled down by the decline in crude oil prices that began last fall. Prices of finished consumer goods other than food and energy increased 0.3 percent last month. Prices of passenger cars and light trucks jumped in July, as the BigThree's coupon incentives expired. Prescription drug prices moved up 1.7 percent further and have increased more than 22 percent over the past year.3 In contrast to these increases, apparel prices dropped back 0.2 percent in July, and the PPI for tobacco was unchanged. Prices of capital goods were up 0.1 percent in July, as higher prices for motor vehicles were partly offset by a further decline in computer prices. At earlier stages of processing, the PPI continued to signal little inflationary pressure. The index for intermediate materials other than food and energy was unchanged in July and is down nearly 1/2percent since a year ago. Prices for crude materials other than food and energy dropped 1.8 percent in July and are down 7-3/4 percent from a year earlier. 3. Much of the increase in the past year reflected a 243 percent surge in the price of psychotherapeutic drugs. CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data) 1997 Q4 1998 Q1 1998 Q2 Apr. May June Book value basis Total Excluding wholesale and retail motor vehicles Manufacturing Excluding aircraft Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers 39.8 62.7 7.7 21.6 -6.4 7.9 40.2 15.6 15.0 18.1 19.5 6.0 .9 5.1 55.3 23.3 19.2 17.3 11.5 22.1 1.6 20.5 35.4 18.6 6.5 1.2 11.3 -12.1 -17.6 5.5 36.6 32.6 11.9 -20.3 -2.5 9.3 2.8 6.5 23.9 12.7 6.9 21.2 28.9 -40.3 -22.6 -17.7 45.7 10.4 .8 2.8 7.6 -5.3 -33.0 27.7 SELECTED INVENTORY-SALES RATIOS (Months' supply, based on Census book-value data, seasonally adjusted) Cyclical reference points 1990-91 1995-96 high low Range over preceding 12 months High Low June 1998 1.58 1.38 1.39 1.37 1.38 1.55 1.35 1.36 1.34 1.37 Manufacturing Primary metals Nonelectrical machinery Electrical machinery Transportation equipment Motor vehicles Aircraft Nondefense capital goods Textiles Chemicals Petroleum Home goods & apparel 1.75 2.08 2.48 2.08 2.93 .97 5.84 3.09 1.71 1.44 .94 1.96 1.38 1.49 1.77 1.41 1.51 .56 4.44 2.27 1.42 1.25 .80 1.63 1.40 1.61 1.75 1.39 1.69 .59 5.12 2.33 1.52 1.41 .89 1.69 1.36 1.53 1.66 1.30 1.57 .54 4.34 2.12 1.40 1.30 .83 1.59 1.39 1.63 1.62 1.33 1.82 .63 4.88 2.15 1.55 1.40 .87 1.64 Merchant wholesalers Less motor vehicles Durable goods Nondurable goods 1.36 1.31 1.83 .95 1.26 1.22 1.55 .91 1.30 1.28 1.62 .96 1.26 1.23 1.55 .91 1.30 1.28 1.59 .96 Retail trade Less automotive dealers Automotive dealers General merchandise Apparel 1.61 1.48 2.22 2.42 2.53 1.50 1.43 1.69 2.20 2.27 1.51 1.42 1.77 2.14 2.45 1.45 1.40 1.60 2.00 2.32 1.45 1.41 1.55 2.02 2.46 2.42 2.23 2.17 2.06 2.08 Manufacturing and trade Less wholesale and retail motor vehicles GAF -6TABLE 1 GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION (Percent change from preceding comparable period) 1998 Proportion 1997 Q1 1998 Q2 -Annual rate- Total index Previous 100.0 May June July -- Monthly rate--- 1.2 1.2 1.9 2.5 .4 .3 -1.1 -1.2 -1.5 -. 6 -. 6 Manufacturing Durables Motor veh. and parts Aircraft and parts Computer and office eq. Nondurables 86.2 46.6 5.2 2.3 1.8 39.6 2.3 2.6 -17.7 10.8 56.6 1.8 1.1 2.8 -12.1 .0 58.1 -1.1 .1 .4 1.4 .6 2.7 -. 2 -. 7 -. 2 Manufacturing excluding motor vehicles and parts 81.0 3.7 1.9 .0 -. 3 .1 9.9 -16.5 -5.2 19.1 .2 4.5 -1.9 .6 .4 .0 .1 Mining Utilities -. 7 -1.2 -14.5 -15.3 -. 4 1.4 3.7 3.3 IP by market group, excluding motor vehicles and parts and energy Consumer goods Durables Nondurables 22.9 4.0 19.0 3.3 10.6 1.8 -. 2 5.2 -1.3 .0 1.3 -. 3 -. 8 -1.1 -. 8 Business equipment Information processing Industrial Transit Other 12.3 5.5 4.5 1.1 1.3 2.9 6.3 -2.0 19.4 -8.8 9.6 15.6 5.6 5.1 6.3 -. 1 1.6 1.3 2.4 .5 1.6 .6 1.2 8.5 1.0 1.1 -.3 .3 -. 1 .0 1.0 -. 6 -. 2 -. 8 .1 1.6 Construction supplies Materials Durables Semiconductors Basic metals Nondurables 5.6 30.1 21.1 3.7 3.3 9.0 4.0 6.0 30.8 3.8 1.1 2.8 11.1 -8.5 -. 8 -3.1 .4 -. 9 2.0 -1.1 -. 6 -. 6 .4 -1.5 -. 3 .9 -. 1 -. 9 .7 3.0 -. 9 -. 8 TABLE 2 CAPACITY UTILIZATION IN INDUSTRY (Percent of capacity; seasonally adjusted) 1967-97 Avg. 1988-89 High 1998 1998 1 Ql Q2 May June July Total industry 82.1 85.4 82.5 82.0 82.4 81.2 80,5 Manufacturing 81.1 85.7 81.6 80.8 81.1 79.9 79.0 Primary processing Textile mill products Paper and products Chemicals 2 Petroleum products Rubber and plastics products Lumber and products Stone, clay, and glass Primary metals Iron and steel Nonferrous metals Fabricated metal products 82.4 85.5 92.4 83.2 86.6 84.8 82.6 78.2 81.2 81.0 81.5 77.9 88.9 90.4 98.0 92.0 88.5 89.6 93.6 83.5 92.7 95.2 89.3 82.0 85.6 82.9 92.8 87.7 97.2 87.3 81.3 80.8 91.5 91.3 92.0 78.4 84.8 82.3 91.3 86.1 96.9 87.9 81.9 79.6 88.8 87.5 90.5 78.1 85.0 83.7 91.0 86.0 96.2 88.0 81.8 79.8 89.0 87.8 90.6 78.4 84.1 81.0 90.8 85.2 96.4 87.2 82.1 79.3 86.6 84.9 88.9 77.7 83.6 81.5 89.0 85.0 96.9 87.0 82.6 79.2 85.5 84.1 87.3 77.0 Advanced processing Foods Apparel products Printing and publishing Furniture and fixtures Chemicals 3 Industrial machinery and computer equipment Electrical machinery Motor vehicles and parts Autos and light trucks4 Aerospace and misc. transportation equipment Instruments Miscellaneous manufactures 80.5 82.9 81.0 85.7 81.5 76.7 84.2 85.4 85.1 91.7 86.6 82.2 79.8 81.3 74.9 82.8 78.2 74.3 79.0 80.7 74.4 81.4 77.9 74.9 79.5 81.1 74.1 81.6 77.6 74.8 78.0 79.8 74.1 80.7 77.9 75.1 76.9 79.4 73.9 81.0 77.9 74.5 81.4 81.0 76.6 85.4 84.0 89.1 92.3 84.0 80.5 72.7 78.3 85.1 78.5 69.6 74.8 85.0 78.5 73.5 79.7 85.3 77.6 62.6 66.1 84.9 77.5 52.8 53.2 75.2 81.7 75.4 87.3 81.4 79.0 80.7 80.1 80.5 80.1 79.9 79.5 80.3 80.0 79.2 80.1 79.5 78.8 80.6 80.0 78.5 87.5 87.3 88.0 92.6 91.6 86.6 90.1 90.3 90.8 91.4 89.0 91.9 89.3 91.8 Mining Utilities 1. The historical highs shown are specific to each series and did not occur in the same month. 2. Includes industrial organic and inorganic chemicals, synthetic materials, plastics resins, and fertilizers. 3. Includes drugs and toiletries, soaps and detergents, paints and allied products, pesticides, and other miscellaneous chemical products. 4. Series begins in 1977. August 14, 1998 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1997 Dec 1998 Jan 1998 Feb 1998 Mar 1998 Apr 1998 May 1998 Jun 1998 Jul 1998 Aug (P) 102.1 111.4 96.1 106.6 113.5 102.2 110.4 120.0 104.2 106.5 113.7 101.9 108.7 115.5 104.3 106.5 113.9 101.7 105.6 115.4 99.3 105.2 113.3 100.0 104.5 115.7 97.3 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 123 136 124 141 142 145 128 134 131 138 130 134 130 134 132 139 132 137 Expected business conditions Next 12 months* Next 5 years* 142 109 148 123 155 121 158 119 162 121 158 118 150 116 145 119 146 109 Appraisal of buying conditions Cars Large household appliances* Houses 135 166 161 145 171 172 149 170 170 146 167 176 145 169 178 148 166 172 152 170 171 139 162 169 153 168 170 39 75 55 74 56 78 49 82 51 70 54 78 50 68 54 82 49 78 Expected unemployment change - next 12 months 114 106 99 100 97 102 105 111 109 Expected inflation - next 12 months Mean Median 3.4 2.8 2.8 2.3 2.6 2.4 2.9 2.5 2.7 2.4 3.1 2.6 3.2 2.7 3.1 2.6 2.8 2.5 Expected inflation - next 5 to 10 years Mean Median 3.9 3.1 3.4 2.9 3.2 2.9 3.3 2.8 3.2 2.7 3.3 2.8 3.3 2.9 3.1 2.7 2.9 2.6 Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions Willingness to use credit Willingness to use savings * -- Indicates the question is one of the five equally-weighted components (p) -- Preliminary (f) -- Final of the index of sentiment. Note: Figures on financial, business, and buying conditions are the percent reporting 'good times' 'better') minus the percent reporting 'bad times' (or 'worse'), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. (or -9- RECENT CHANGES IN PRODUCER PRICES (Percent change) Relative importance Dec. 1997 1997 1996 1997 Q4 Q1 1998 Q2 ----- Annual rate-----Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment Intermediate materials 1 Excluding food and energy Crude food materials Crude energy Other crude materials 100.0 23.2 13.6 63.2 38.0 25.2 2.8 3.4 11.7 .6 .8 .4 -1.2 -.8 -6.4 .0 .3 -5.7 -. 6 94.9 .7 -. 8 81.8 -. 9 .3 42.1 36.4 -1.0 21.5 -5.5 51.2 -4.0 -23.1 .0 -1.2 -3.0 1.5 -2.0 -1.8 -27.0 2.3 3.9 .0 -.6 .0 -4.4 -. 9 -. 8 -. 3 4.1 5.4 -8.2 -14.3 -53.5 -13.6 .0 .6 -3.1 June -Monthly rate-. 1 .1 -1.7 .6 1.4 .2 .3 -. 9 .0 -1.6 -1.2 -3.0 -2.3 -5.0 July -. 3 -. 1 .0 .0 .1 -3.9 -2.8 -. 5 -1.8 -. 6 Note: Changes are from final month of preceding period to final month of period indicated. 1. Excludes materials for food manufacturing and animal feeds. -10 Inventory-Sales Ratios, by Major Sector (Book value) Manufacturing Ratio - 2.15 1.9 1.65 1.4 June S1.15 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Wholesale Excluding Motor Vehicles Ratio 1.5 1.4 1.3 June 1.2 - 1.1 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Retail Ratio 1.7 2.8 2.6 - , , , . 2.2 GAF group (left scale) - ,, , ,, , , , 1.6 , ''f,June 1.4 Total excluding autos (right scale) 2 11 1.8 1979 1981 1 1 1983 19 1985 1 9 1987 1 1989 .1 1 1991 I 1993 I I 1995 1 1997 1.3 -11- Selected Financial Market Quotations' (Percent except as noted) 1997 1998 Chan e to Aug. 13, from: FOMC * FOMC * Instrument Sep. 30 Feb. 24 July 1 Federal funds intended rate 2 realized rate 5.50 5.51 5.50 5.48 Treasury bills4 3-month 6-month 1-year 4.93 5.08 5.18 Aug. 13 Sep. 30 Feb. 24 July 1 5.50 5.51 0.00 0.04 0.00 0.07 0.00 0.04 5.13 5.11 5.18 4.97 5.04 5.10 -0.02 -0.11 -0.19 -0.22 -0.14 -0.19 -0.06 -0.07 -0.1 1 5.51 5.48 5.47 5.44 5.54 5.47 -0.01 -0.01 0.03 0.03 -0.04 0.00 5.59 5.67 5.72 5.54 5.54 5.56 5.60 5.61 5.68 -0.04 -0.09 -0.11 0.01 0.04 0.05 -0.05 -0.03 -0.07 5.56 5.63 5.50 5.53 5.56 5.59 5.53 5.56 -0.03 -0.07 0.03 0.03 -0.03 -0.03 8.50 8.50 8.50 8.50 0.00 0.00 0.00 5.80 6.12 6.41 5.57 5.69 5.97 5.49 5.44 5.62 -0.43 -0.68 -0.81 -0.20 -0.25 -0.37 -0.12 0.00 -0.02 U.S. Treasury 10-year indexed note 3.61 3.68 3.76 0.19 0.12 0.04 Municipal revenue (Bond Buyer) 5.63 5.29 5.36 -0.29 0.05 -0.02 Corporate bonds, Moody's seasoned Baa 7.66 7.30 7.11 -0.49 -0.13 0.06 High-yield corporate 7 9.02 8.93 9.20 0.47 7.28 5.51 6.99 5.59 6.96 5.68 -0.37 0.09 Short-term rates Commercial paper 1-month 3-month Large negotiable CDs 4 1-month 3-month 6-month Eurodollar deposits 1-month 3-month Bank prime rate Intermediate- and long-term rates U.S. Treasury (constant maturity) 2 -year 10-year 30-year Home mortgages' FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1998 Percentage change to Aug. 13, from: FOMC* Record FOMC July 1 Level Date Feb.24 July 1 Aug. 13 high Feb.24 Dow-Jones Industrial 9337.97 7/17/98 8370.10 8952.02 8459.50 -9.41 1.07 -5.50 S&P 500 Composite 1186.75 7/17/98 1030.56 1133.84 1074.91 -9.42 4.30 -5.20 NASDAQ (OTC) 2014.25 7/20/98 1738.71 1894.74 1802.54 -10.51 3.67 -4.87 491.41 4/21/98 454.30 457.39 403.83 -17.82 -11.11 -11.71 Stock exchange index Russell 2000 1.72 -6.19 -9.93 9834.35 10663.62 10003.82 11106.10 7/17/98 Wilshire 1. One-day quotes except as noted. 2. FOMC's intended rate. 3. Average for two-week reserve maintenance period ending on or before date shown. Most recent observation is average for current maintenance period to date. 4. Secondary market. 5. Bid rates for Eurodollar deposits at 11 a.m. London time. 6. Most recent observation based on one-day Thursday quote and futures market index changes. 7. Merrill Lynch Master II high-yield bond index composite. 8. Quotes for week ending Friday previous to date shown. * Figures cited are as of the close on June 30.
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