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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 03/31/2011. Confidential (FR) Class III FOMC August 5, 2005 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Contents The Domestic Nonfinancial Economy ........................................................ 1 Employment Situation .....................................................................1 Unemployment Insurance Claims....................................................5 Tables Changes in Employment ..................................................................2 Selected Unemployment and Labor Force Participation Rates .......3 Unemployment Insurance Programs................................................6 Charts Changes in private Payroll Employment .........................................2 Aggregate Hours of Production or Nonsupervisory Workers..........2 Labor Force Participation Rate and Unemployment Rate ...............3 Persons Working Part-Time for Economic Reasons .......................3 Short-Term Quit Rate ......................................................................3 Labor Market Indicators ..................................................................4 Unemployment Insurance ................................................................7 The Domestic Financial Economy ...........................................................8 Tables Commercial Bank Credit .................................................................8 Selected Financial Market Quotations .............................................9 Supplemental Notes The Domestic Nonfinancial Economy Employment Situation The labor market continued to improve gradually in July, in line with our expectations. Private nonfarm payroll employment rose 181,000, little different from average gains over the first half of the year, and the unemployment rate held steady at 5 percent. 1 Employment gains were widespread last month, with the one-month diffusion index moving up to its highest level since May of last year. 2 Retail trade employment jumped 50,000 in July, with most component industries contributing to the increase. Robust job growth continued in health care services (29,000), food services (30,000) and financial activities (21,000), where job gains were concentrated in real estate and real estate credit. Employment in manufacturing changed little last month (-4,000), as did employment in the related industries of temporary help services (-2,000) and wholesale trade (8,000). Average weekly hours of production and nonsupervisory workers on private nonfarm payrolls held steady at 33.7 hours in July. Aggregate hours increased 0.2 percent, on par with average increases over the first half of the year. In the household survey, the unemployment rate was down slightly from its secondquarter average, while the labor force participation rate ticked up 0.1 percentage point to 66.1 percent, slightly above its second-quarter average. Alternative gauges of labor market slack were mixed. The number of individuals unemployed for longer than six months, as a percent of unemployment—a proxy for the relative difficulty of job finding—retraced some of its drop in June but remained below its second-quarter average. However, the number of individuals employed part time for economic reasons in nonagricultural industries was little changed last month and up slightly from the second quarter. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls rose 0.4 percent in July. Over the past twelve months, average hourly earnings rose 2.7 percent, above the 2 percent increase over the preceding twelve months. 1 The BLS reported that hurricane Dennis, which struck several southern states near the beginning of the July reference week, had no discernable effect on national payroll employment. 2 The diffusion index measures the percent of industries with employment increasing plus one-half of the percent of industries with employment unchanged. -1- -2- Changes in Employment (Thousands of employees; seasonally adjusted) 2004 Measure and sector 2004 Q4 2005 Q1 Q2 May Average monthly change Nonfarm payroll employment (establishment survey) Private Previous Manufacturing Construction Wholesale trade Retail trade Transportation and utilities Information Financial activities Professional and business services Temporary help services Nonbusiness services1 Total government Total employment (household survey) Memo: Aggregate hours of private production workers (percent change)2 Average workweek (hours)3 Manufacturing (hours) June July Monthly change 183 171 171 3 23 7 13 9 -2 12 45 15 59 12 146 190 182 182 -6 29 4 13 5 0 15 53 14 67 8 210 182 172 172 -6 24 6 17 18 2 13 41 9 51 10 115 195 186 173 -12 23 6 22 7 4 14 37 7 81 8 379 126 117 97 1 6 11 28 5 -6 7 8 -3 55 9 376 166 164 144 -21 15 2 10 -4 0 19 57 10 82 2 163 207 181 ... -4 7 8 50 8 2 21 33 -2 55 26 438 2.4 33.7 40.8 2.4 33.7 40.6 2.3 33.7 40.6 2.8 33.7 40.4 -.2 33.7 40.4 .2 33.7 40.4 .2 33.7 40.4 1. Nonbusiness services comprises education and health, leisure and hospitality, and "other." 2. Establishment survey. Annual data are percent changes from Q4 to Q4. Quarterly data are percent changes from preceding quarter at an annual rate. Monthly data are percent changes from preceding month. 3. Establishment survey. ... Not applicable. Changes in Private Payroll Employment 500 Thousands 500 Aggregate Hours of Production or Nonsupervisory Workers 106 2002 = 100 106 3-month moving average 400 400 300 300 104 July 200 200 100 104 July 100 102 100 100 98 98 96 0 102 96 0 -100 -100 -200 -200 -300 -300 -400 1997 1998 1999 2000 2001 2002 2003 2004 2005 -400 94 1997 1998 1999 2000 2001 2002 2003 2004 2005 94 -3- Selected Unemployment and Labor Force Participation Rates (Percent; seasonally adjusted) 2004 Rate and group 2004 2005 Q4 Q1 Q2 May June July Civilian unemployment rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 5.5 17.0 9.4 4.4 4.4 5.4 17.1 9.3 4.3 4.2 5.3 16.9 9.5 4.1 4.1 5.1 17.3 8.8 3.8 4.2 5.1 17.9 8.8 3.8 4.1 5.0 16.4 8.8 3.7 4.2 5.0 16.1 8.3 3.8 4.3 Labor force participation rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 66.0 43.8 75.0 75.3 59.3 66.0 44.1 75.3 75.3 59.2 65.8 43.5 74.4 75.2 59.1 66.0 43.9 74.3 75.5 59.2 66.1 44.0 74.3 75.6 59.3 66.0 43.9 74.8 75.5 59.2 66.1 43.8 74.7 75.5 59.5 Labor Force Participation Rate and Unemployment Rate Percent 67.4 Percent 7.0 67.2 6.5 67.0 6.0 Participation rate (left scale) 66.8 5.5 66.6 66.4 July 66.2 5.0 4.5 66.0 Unemployment rate (right scale) 4.0 65.8 65.6 1994 1995 1996 1997 1998 Persons Working Part-Time for Economic Reasons (Percent of household employment) 4.0 1999 2000 2001 2002 2003 2004 2005 3.5 Short-Term Quit Rate (Unemployed less than 5 weeks) Percent of household employment 0.35 3-month moving average Percent 4.0 3.5 3.5 0.30 0.30 3.0 0.25 0.25 July 3.0 July 2.5 2.0 2.5 1994 1996 1998 2000 2002 2004 0.20 2.0 0.15 0.20 1994 1996 1998 2000 2002 2004 0.15 -4- Labor Market Indicators Labor Market Tightness Unemployment Insurance Percent 3.5 4-week moving average Thousands 550 Percent 40 Index 150 Job availability* (right scale) 500 2.0 1.5 110 25 90 20 15 250 Initial claims (right scale) 30 350 July 23 2.5 450 300 Rate of insured unemployment (left scale) 35 400 3.0 130 10 Hard to fill** (left scale) July 70 50 July 30 1.0 1996 1998 2000 2002 2004 1996 1998 2000 2002 30 2004 *Proportion of households believing jobs are plentiful, minus the proportion believing jobs are hard to get, plus 100. **Percent of small businesses surveyed with at least one "hard to fill" job opening. Source. For job availability, Conference Board; for hard to fill, National Federation of Independent Business. Exhaustion Rate and Long-Term Unemployed Percent 50 Layoff Announcements Percent of labor force 1.8 Thousands 250 200 200 1.6 45 1.4 40 June Exhaustion rate* (left scale) 35 1.2 150 July July Unemployed more than 26 weeks (right scale) 25 1996 1998 2000 2002 0.8 0.6 100 50 50 0.4 0.2 2004 100 0 1996 *Note. Seasonally adjusted by FRB staff. Exhaustion rate is number of individuals who exhausted benefits without finding a job, expressed as a share of individuals who began receiving benefits six months earlier. 1998 2000 2002 0 2004 Note. Seasonally adjusted by FRB staff. Source. Challenger, Gray, and Christmas, Inc. Net Hiring Plans Expected Labor Market Conditions Percent 30 30 Index 140 25 Q3 20 Index 120 Michigan SRC (right scale) Manpower, Inc. 25 120 100 20 100 July 15 15 80 10 1996 1998 2000 80 July Conference Board (left scale) 60 10 National Federation of Independent Business (3-month moving average) 5 0 150 1.0 30 20 250 5 2002 2004 Note. Percent planning an increase in employment minus percent planning a reduction. 0 60 40 40 1996 1998 2000 2002 2004 Note. The proportion of households expecting labor market conditions to improve, minus the proportion expecting conditions to worsen, plus 100. 20 -5- Unemployment Insurance Claims Initial claims for unemployment insurance under state programs dipped 1,000 to 312,000 for the week ending July 30. The four-week moving average of initial claims decreased 2,000 to 317,000, its lowest value since early March. The level of insured unemployment under state programs for the week ending July 23 was 2.6 million, remaining close to the level it has held since the beginning of April. The insured unemployment rate was unchanged at 2 percent. The Domestic Financial Economy -6- Unemployment Insurance Programs (In Thousands) 2005 Item June 18 June 25 July 2 July 9 July 16 July 23 July 30 320 316 315 311 325 321 341 337 309 305 316 313 316 312 2660 2617 2646 2617 2571 2599 0 0 0 2628 2581 NA NA NA NA Seasonally adjusted1 Initial Claims All regular programs2 State programs Insured unemployment All regular programs3 State programs Extended benefits4 2639 2615 2597 2572 0 0 State-insured Unemployment rate5 2.0 2.0 2.1 2.0 2.0 2.0 NA Initial Claims (Four-week moving avg.) All regular programs2 State programs 337 334 327 324 324 321 325 321 322 319 323 319 321 317 327 427 371 2411 2625 2630 297 2509 260 NA Not seasonally adjusted Regular state programs Initial claims Insured unemployment 290 287 2405 2415 1. Only data for regular state programs are seasonally adjusted. 2. Includes federal employees and ex-servicemen. 3. Includes federal employees, railroad workers, and ex-servicemen. 4. Includes state and federal emergency extended benefits. 5. Percent of covered employees receiving regular state benefits. -7- Unemployment Insurance (Weekly data; Seasonally adjusted) Initial Claims Thousands 600 550 500 450 400 350 July 30 312 300 State programs Incl. EUC Adjustments<1> 1992 1994 1996 1998 2000 2002 250 2006 2004 Insured Unemployment Millions 4.4 4.2 4.0 3.8 3.6 Incl. EUC Adjustment<2> 3.4 3.2 3.0 2.8 July 23 2.58 2.6 2.4 State Programs 2.2 2.0 1992 1994 1996 1998 2000 2002 2004 <1> Beginning July 18, 1992, includes initial claims filed under the emergency unemployment benefits program by individuals also eligible to file under regular programs. The EUC program ended on April 30, 1994. <2> Includes staff estimate of emergency benefits recipients who are also eligible to file under regular programs. 1.8 2006 -8- Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total 1. Adjusted1 2. Reported 3. 4. 5. 6. Securities Adjusted1 Reported Treasury and agency Other2 7. 8. 9. 10. 11. 12. 13. 14. Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5 Level ($ billions), July 2005e 2003 2004 Q1 2005 Q2 2005 June 2005 Julye 2005 5.9 5.6 8.9 8.4 14.4 12.4 9.8 9.6 6.5 7.4 8.4 6.5 6,973 7,114 8.6 7.2 8.9 4.9 6.5 5.1 5.0 5.4 23.0 15.1 20.7 6.5 5.7 5.2 -5.7 22.4 -15.2 -10.3 -27.5 14.9 9.1 2.1 3.5 .2 1,856 1,998 1,178 820 4.9 -9.4 11.1 30.8 8.8 5.4 5.8 6.8 9.8 1.5 13.9 43.4 9.7 8.8 6.0 7.9 11.4 16.9 13.5 18.7 12.6 8.2 5.0 -.9 11.3 13.0 13.4 13.2 13.5 3.3 -2.5 9.2 14.5 6.6 17.3 9.3 18.9 4.9 2.9 23.9 8.2 17.6 18.9 11.0 20.3 8.7 5.6 -45.9 5,116 978 2,765 431 2,334 695 1,054 679 Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. e Estimated. -9III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2004 Change to Aug. 4 from selected dates (percentage points) 2005 Instrument June 28 Dec. 31 June 29 Aug. 4 2004 June 28 2004 Dec. 31 2005 June 29 1.00 2.25 3.00 3.25 2.25 1.00 .25 1.36 1.74 2.18 2.52 3.06 3.23 3.39 3.60 2.03 1.86 1.21 1.08 .33 .37 Commercial paper (A1/P1 rates)2 1-month 3-month 1.28 1.45 2.29 2.28 3.22 3.34 3.45 3.61 2.17 2.16 1.16 1.33 .23 .27 Large negotiable CDs1 3-month 6-month 1.53 1.82 2.50 2.72 3.47 3.65 3.72 3.94 2.19 2.12 1.22 1.22 .25 .29 Eurodollar deposits3 1-month 3-month 1.29 1.51 2.32 2.49 3.28 3.44 3.51 3.69 2.22 2.18 1.19 1.20 .23 .25 Bank prime rate 4.00 5.25 6.00 6.25 2.25 1.00 .25 Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year 2.88 3.97 4.90 3.08 3.63 4.34 3.67 3.76 4.06 4.08 4.15 4.39 1.20 .18 -.51 1.00 .52 .05 .41 .39 .33 U.S. Treasury indexed notes 5-year 10-year 1.56 2.25 1.03 1.65 1.41 1.69 1.74 1.95 .18 -.30 .71 .30 .33 .26 Municipal revenue (Bond Buyer)5 5.37 5.04 4.76 4.90 -.47 -.14 .14 Private instruments 10-year swap 10-year FNMA6 10-year AA7 10-year BBB7 5-year high yield7 5.21 5.30 5.59 6.18 8.30 4.65 4.61 4.98 5.38 7.34 4.35 4.28 4.76 5.34 7.97 4.74 4.58 5.08 5.58 7.76 -.47 -.72 -.51 -.60 -.54 .09 -.03 .10 .20 .42 .39 .30 .32 .24 -.21 Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable 6.21 4.19 5.77 4.10 5.53 4.24 5.82 4.47 -.39 .28 .05 .37 .29 .23 Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month Record high 2004 Change to Aug. 4 from selected dates (percent) 2005 Stock exchange index Level Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000 Date Dec. 31 June 29 Aug. 4 Record high 2004 Dec. 31 2005 June 29 11,723 1,527 5,049 689 14,752 1-14-00 3-24-00 3-10-00 8-2-05 3-24-00 10,783 1,212 2,175 652 11,971 10,374 1,200 2,069 643 11,947 10,610 1,236 2,191 672 12,364 -9.49 -19.09 -56.60 -2.42 -16.19 -1.60 1.98 .73 3.11 3.28 2.27 3.00 5.92 4.52 3.49 1. Secondary market. 2. Financial commercial paper. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Most recent Thursday quote. 6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: June 28, 2004, is the day before the most recent policy tightening began. June 29, 2005, is the day before the most recent FOMC announcement. _______________________________________________________________________
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