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Confidential (FR) Class III FOMC December 6, 2002 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 Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 The Labor Markets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Industrial Production and Capacity Utilization . . . . . . . . . . . . . . . 5 Consumer Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Tables Changes in Employment . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Selected Unemployment and Labor Force Participation Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Selected Components of Industrial Production . . . . . . . . . 6 Capacity Utilization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Commercial Bank Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Selected Financial Market Quotations . . . . . . . . . . . . . . . . 9 Chart Private Payroll Employment Growth . . . . . . . . . . . . . . . . . 2 Aggregate Hours of Production or Nonsupervisory Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Labor Force Participation Rate and Unemployment Rate . 3 Labor Market Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consumer Debt Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Supplemental Notes The Domestic Economy Labor Markets The labor market report for November was a touch weaker than we had expected. Labor market conditions appear to have slipped a little between October and November, with private employment on nonfarm payrolls falling 48,000, a second noticeable monthly decline. In addition, the unemployment rate popped up to 6.0 percent last month, after having averaged 5.7 percent over the preceding three months. Manufacturing industries continued to perform poorly, shedding 45,000 jobs in November, roughly the same rate of decrease as in the previous several months. The help supply and wholesale trade industries, which are closely related to manufacturing, posted cutbacks of 23,000 and 5,000 respectively, although these losses were somewhat smaller than in October. Outside of manufacturing the largest reduction in employment in November occurred in retail trade where the loss of 39,000 jobs may have been driven in part by poor holiday hiring. Jobs in the transportation and public utilities industries also continued to contract. The services industry (excluding help supply) remained a relative bright spot as employment rose 73,000, matching the average increase since mid-year. Within services, health and education establishments continued their strong expansion, recording gains of 27,000 and 15,000 respectively. The finance, insurance, and real estate industry added 7,000 jobs last month, but the gain was well below the average gains of prior months. Hiring for the Transportation Security Administration continued to boost government payrolls last month, but the Postal Service reported that, because of technological advances, it needed fewer holiday workers than in the past. On net government employment was up 8,000. Aggregate hours of production or nonsupervisory workers declined 0.1 percent in November for the second month in a row; however, because of September’s large increase, the level of hours last month stood just above the third-quarter average. Average weekly hours of production or nonsupervisory workers were unchanged in November from October’s upward revised level of 34.2 hours. The rise in the unemployment rate in November brings the movement of that series more closely in line with other recent labor market indicators. The overthe-month increase was concentrated among adult men, although the unemployment rate among teenagers also moved up considerably. Meanwhile, the labor force participation rate moved down 0.3 percentage point to -2- CHANGES IN EMPLOYMENT (Thousands of employees; based on seasonally adjusted data) 2001 Nonfarm payroll employment1 Previous Private Mining Manufacturing Construction Transportation and utilities Retail trade Wholesale trade Finance, insurance, real estate Services Help supply services Total government Q1 2002 Q2 Q3 -Average monthly change-119 -63 12 58 -119 -63 12 55 -158 -88 7 30 1 -2 -2 -1 -109 -80 -22 -34 -3 -14 -15 6 -23 -14 -8 -22 -15 5 -8 -8 -16 -7 0 -4 10 -3 -2 12 -2 27 63 81 -54 4 36 8 39 25 5 27 Sept. 2002 Oct. Nov. -4 -13 -8 -3 -35 11 -40 -11 -3 25 48 2 4 6 -5 -47 1 -59 -22 1 8 -11 44 -9 -67 53 -40 ... -48 -2 -45 -4 -10 -39 -5 7 50 -23 8 Total employment (household survey) -153 Nonagricultural -154 -54 -14 53 58 377 315 711 601 -271 -498 -689 -522 Memo: Aggregate hours of private production workers (percent change)1,2 -2.2 34.2 Average workweek (hours)1 Manufacturing (hours) 40.7 -0.5 34.2 40.8 0.3 34.2 41.0 -0.6 34.1 40.8 0.3 34.2 40.8 -0.1 34.2 40.7 -0.1 34.2 40.7 Note. Average change from final month of preceding period to final month of period indicated. 1. Survey of establishments. 2. 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. ... Not applicable. Private Payroll Employment Growth Aggregate Hours of Production or Nonsupervisory Workers (Strike-adjusted data) Thousands of employees 400 154 1982 = 100 154 300 300 152 152 200 200 150 150 100 100 400 1-month Nov. 148 0 3-month moving average Nov. 148 0 146 146 144 144 142 142 -400 140 140 -500 138 -100 -100 -200 -200 -300 -300 -400 -500 1997 1998 1999 2000 2001 2002 2003 1997 1998 1999 2000 2001 2002 2003 138 -3- SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES (Percent; based on seasonally adjusted data) 2001 Civilian unemployment rate (16 years and older) 2002 Q2 Q1 Q3 Sept. 2002 Oct. Nov. 4.8 5.6 5.9 5.7 5.6 5.7 6.0 Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 14.7 8.3 3.6 3.7 16.0 9.8 4.5 4.4 17.1 9.4 4.9 4.8 16.9 9.6 4.6 4.5 15.7 9.7 4.5 4.5 14.6 10.3 4.6 4.6 16.8 9.8 5.1 4.4 Labor force participation rate 66.9 66.5 66.7 66.6 66.8 66.7 66.4 Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 49.9 77.2 75.9 59.7 48.2 76.3 75.6 59.6 47.7 76.7 75.9 59.6 47.6 76.6 75.8 59.6 48.6 76.4 75.9 59.8 47.7 75.9 75.7 59.8 47.3 76.2 75.3 59.6 Labor Force Participation Rate and Unemployment Rate Percent 67.6 Percent 8.0 67.4 7.5 Participation rate (left scale) 67.2 7.0 67.0 6.5 66.8 6.0 66.6 5.5 Nov. 66.4 66.2 4.5 Unemployment rate (right scale) 66.0 65.8 5.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 4.0 1999 2000 2001 2002 3.5 -4- Labor Market Indicators Unemployment Insurance Millions 3.8 3.4 3.0 2.6 2.2 1.8 1.4 1.0 1990 Initial Claims Thousands 700 Nov.23 600 Insured unemployment (left scale) 500 Nov. 30 Initial claims (right scale) 1992 1994 1996 1998 2000 2002 400 300 2004 200 500 480 460 440 420 400 380 360 340 Millions 4.0 Alternative seasonal factors 3.8 3.6 3.6 Nov. 23 Published seasonal factors 3.2 Q1 Q2 Q3 Q4 2003 Net Hiring Strength 4.0 3.4 Q2 2002 Insured Unemployment 3.8 Q1 Thousands 500 480 460 Alternative seasonal factors 440 420 400 380 Published seasonal factors Nov. 30 360 340 Q3 3.4 Q4 Percent 30 Manpower, Inc. (left scale) 20 25 15 Q1 20 10 Oct. 15 5 -5 2003 10 National Federation of Independent Businesses (right scale) 0 3.2 2002 Percent 25 1990 1992 1994 1996 1998 2000 5 2002 2004 0 Note. Percent planning an increase in employment minus percent planning a reduction. Expected Employment Conditions 120 Layoff Announcements Index 120 Conference Board 100 Nov. 100 80 Nov. 80 Thousands 300 300 60 60 Michigan Survey 40 20 200 100 100 40 1990 1992 1994 1996 1998 2000 2002 2004 20 0 Note. The proportion of households expecting unemployment to fall, minus the proportion expecting it to rise, plus 100. 1990 1992 1994 1996 Source. Conference Board. 2000 2001 0 2002 Note. Seasonally adjusted by FRB staff. Source. Challenger, Gray and Christmas, Inc. Help Wanted Index 140 130 120 110 100 90 80 70 200 Nov. Current Employment Conditions 1998 2000 Index 140 130 120 110 100 90 Oct. 80 70 2002 2004 60 Jobs plentiful Percent 60 Jobs hard to get 50 50 40 40 30 Nov. 20 20 Nov. 10 0 30 1990 1992 1994 1996 Source. Conference Board. 1998 2000 2002 2004 10 0 -5- 66.4 percent, the lowest level since January 1996.1 Household employment plummeted 689,000 in November. Over the past two months, household employment has fallen 960,000, retracing most of the 1.1 million increase that took place in August and September. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls increased 0.3 percent in November. Over the twelve months ended in November, the change in average hourly earnings was 2.9 percent, down from 3.9 percent over the previous twelve months. In the weeks following the reference week for the labor market reports, initial claims for unemployment insurance moved lower. The drop in new claims in the week ended November 30 put the four-week moving average at 377,000; using alternative seasonal factors—calculated excluding the spike in claims after September 11, 2001—that figure was 391,000, 40,000 below the late October level. However, Labor Department staff caution that the unevenness of weekly filings during holiday periods may have contributed to the most recent decline. Industrial Production and Capacity Utilization The recent data, as reported in this week’s historical revision to the industrial production and capacity measures, are summarized in the attached table. Consumer Credit Consumer credit increased at an annual rate of 1 percent in October, below the downward revised 3-1/2 percent pace in the third quarter. In October, revolving credit rose moderately while nonrevolving credit contracted slightly. 1. The labor force participation rate was also 66.4 percent in January 2002, but we attribute the low level in that month to problems with the seasonal adjustment process, and the participation rate rebounded in February. -6Selected Components of Industrial Production (Percent change from preceding comparable period) Proportion 2001 Component Total Previous 2001 20022 1 (percent) 20023 H1 Q3 Aug. Sept. Oct. 100.0 100.0 -5.7 -5.9 2.9 3.4 3.5 3.5 -.2 -.2 .0 -.2 -.8 -.8 84.7 78.3 71.6 -6.1 -6.5 -6.0 2.4 1.2 .6 3.0 1.7 1.1 .0 .1 .0 -.2 -.2 -.2 -.7 -.4 -.5 Mining Utilities 6.3 9.0 -.6 -5.4 -4.4 13.4 3.2 8.6 .2 -2.8 -1.0 2.7 -.7 -1.9 Selected industries High technology Computers Communication equipment Semiconductors4 6.6 1.3 2.3 3.0 -9.6 -5.9 -20.2 -3.5 7.1 22.7 -14.4 16.9 7.7 9.5 -21.2 29.7 1.1 1.4 -.8 2.1 .0 1.5 -3.7 1.5 .7 2.1 -.9 .9 Motor vehicles and parts 6.5 -1.2 16.4 18.2 -.1 -.6 -3.4 Market groups excluding energy and selected industries Consumer goods Durables Nondurables 21.9 3.5 18.5 -2.2 -8.0 -1.0 -.1 4.1 -.9 -.7 -5.8 .2 -.5 -.9 -.4 .2 -.2 .3 -.5 -.7 -.4 Business equipment Defense and space equipment 7.8 1.8 -13.7 3.7 -6.6 3.7 -3.8 6.7 .4 .5 -1.0 .1 -.9 .3 Construction supplies Business supplies 6.6 7.4 -5.9 -6.5 3.1 -.2 1.2 3.8 .3 .2 -.1 -.4 -.6 -.2 25.3 13.6 11.7 -7.3 -9.0 -5.4 2.7 2.2 3.2 3.0 1.6 4.8 .1 .3 -.2 -.2 -.4 .2 -.5 -.5 -.4 Manufacturing Ex. motor veh. and parts Ex. high-tech industries Materials Durables Nondurables 1. Fourth-quarter to fourth-quarter change. 2. Annual rate. 3. Monthly rate. 4. Includes related electronic components. ... Not applicable. Capacity Utilization (Percent of capacity) 19672001 average 1982 low 199091 low Q1 Q2 Q3 Sept. Oct. Total industry 81.9 70.8 78.6 75.1 75.7 76.2 76.1 75.4 Manufacturing High-tech industries Excluding high-tech industries 80.8 80.5 80.8 68.6 75.6 68.1 77.2 74.6 77.3 73.4 61.8 74.8 73.9 62.2 75.3 74.3 62.2 75.8 74.1 62.1 75.7 73.6 62.1 75.1 Utilities Mining 86.8 87.9 78.6 77.2 83.3 84.2 85.2 85.5 84.8 87.8 85.5 88.2 85.0 88.4 84.4 86.3 Sector 2002 -7- Consumer Debt Growth Percent 20 Quarterly, s.a.a.r. 16 12 8 Q3 ● 4 Oct. 0 -4 1990 1992 1994 1996 1998 2000 2002 -8Commercial 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 & Agency Other2 Loans3 7. Total 8. Business 9. Real estate 10. Home equity 11. Other 12. 13. 14. Consumer Adjusted4 Other5 Level, Nov. 2002p ($ billions) Q2 2002 Q3 2002 Sept. 2002 Oct. 2002 Nov.p 4.1 5.0 5.1 5.1 8.7 12.5 10.5 12.0 8.3 5.9 17.0 18.5 5,656 5,858 8.8 12.0 6.0 20.8 13.7 12.9 25.5 -3.3 10.7 24.0 24.5 23.1 1.2 7.6 21.2 -11.4 6.1 -2.0 10.0 -19.1 34.4 37.6 39.2 35.2 1,493 1,695 1,008 688 2.6 -3.7 7.2 19.9 6.2 2.1 -9.0 6.9 40.8 3.5 8.0 -8.8 18.8 40.4 16.5 13.8 -8.2 21.3 19.4 21.5 9.0 -5.9 20.2 25.0 19.7 10.9 -.7 19.2 17.5 19.4 4,162 972 2,002 208 1,793 3.8 7.4 -.1 5.1 3.6 4.1 4.7 1.0 6.6 16.8 2.5 23.3 4.1 5.2 1.8 2.0 6.9 10.7 588 931 601 2001 2002 Note. All data are adjusted 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. The conversion from a thrift to a commercial bank charter added approximately $37 billion to the assets and liabilities of domestically chartered commercial banks in the week ending May 8, 2002. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FIN 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, and 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. p Preliminary. -9- III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2000 2001 2002 2002 Instrument Change to Dec. 5 from selected dates (percentage points) June 26 Sept. 10 Nov. 5 Dec. 5 2000 June 26 2001 Sept. 10 2002 Nov. 5 Short-term FOMC intended federal funds rate 6.50 3.50 1.75 1.25 -5.25 -2.25 -.50 Treasury bills 1 3-month 6-month 5.66 5.94 3.19 3.13 1.40 1.38 1.20 1.25 -4.46 -4.69 -1.99 -1.88 -.20 -.13 Commercial paper (A1/P1 rates) 1-month 3-month 6.56 6.56 3.42 3.24 1.54 1.49 1.29 1.32 -5.27 -5.24 -2.13 -1.92 -.25 -.17 Large negotiable CDs 1 1-month 3-month 6-month 6.64 6.73 6.89 3.46 3.26 3.24 1.57 1.55 1.52 1.38 1.35 1.39 -5.26 -5.38 -5.50 -2.08 -1.91 -1.85 -.19 -.20 -.13 Eurodollar deposits 2 1-month 3-month 6.63 6.69 3.41 3.26 1.55 1.55 1.38 1.37 -5.25 -5.32 -2.03 -1.89 -.17 -.18 Bank prime rate 9.50 6.50 4.75 4.25 -5.25 -2.25 -.50 Intermediate- and long-term U.S. Treasury3 2-year 10-year 30-year 6.54 6.35 6.22 3.59 5.14 5.55 1.83 4.38 5.25 1.99 4.42 5.18 -4.55 -1.93 -1.04 -1.60 -.72 -.37 .16 .04 -.07 U.S. Treasury 10-year indexed note 4.09 3.26 2.46 2.50 -1.59 -.76 .04 Municipal revenue (Bond Buyer) 4 5.99 5.25 5.20 5.24 -.75 -.01 .04 7.38 7.15 7.64 8.40 12.30 5.62 5.64 6.30 7.11 12.72 4.62 4.71 5.65 7.30 13.49 4.60 4.67 5.47 6.98 12.36 -2.78 -2.48 -2.17 -1.42 .06 -1.02 -.97 -.83 -.13 -.36 -.02 -.04 -.18 -.32 -1.13 8.14 7.22 6.89 5.64 6.13 4.25 6.13 4.19 -2.01 -3.03 -.76 -1.45 .00 -.06 Private instruments 10-year swap 10-year FNMA 10-year AA 5 10-year BBB 5 High yield 6 Home mortgages (FHLMC survey rate) 7 30-year fixed 1-year adjustable Record high 2001 Change to Dec. 5 from selected dates (percent) 2002 Stock exchange index Level Dow-Jones Industrial S&P 500 Composite Nasdaq (OTC) Russell 2000 Wilshire 5000 Date Sept. 10 Nov. 5 Dec. 5 Record high 2001 Sept. 10 2002 Nov. 5 11,723 1,527 5,049 606 14,752 1-14-00 3-24-00 3-10-00 3-9-00 3-24-00 9,606 1,093 1,695 441 10,104 8,678 915 1,401 386 8,624 8,623 907 1,411 394 8,578 -26.44 -40.65 -72.06 -34.92 -41.85 -10.23 -17.02 -16.79 -10.50 -15.11 -.63 -.97 .68 2.17 -.53 1. Secondary market. 2. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time. 3. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 4. Most recent Thursday quote. 5. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. 6. Merrill Lynch Master II high-yield bond. 7. For week ending Friday previous to date shown. _______________________________________________________________________ NOTES: June 26, 2000, is the day before the FOMC meeting that ended the most recent period of policy tightening. September 10, 2001 is the day before the terrorist attacks. November 5, 2002, is the day before the most recent FOMC meeting. _______________________________________________________________________ BA:DAM
@FedFRASER