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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 02/09/2012. Confidential (FR) Class III FOMC December 8, 2006 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 Labor Market Developments ...........................................................1 Consumer Sentiment........................................................................5 Tables Changes in Employment ..................................................................2 Selected Unemployment and Labor Force Participation Rates .......3 University of Michigan Survey Research Center: Survey of Consumer Attitudes .............................................................6 Charts Changes in Private Payroll Employment .........................................2 Aggregate Hours and Workweek of Production or Nonsupervisory Workers .....................................................2 Labor Force Participation Rate and Unemployment Rate ...............3 Employment Change in the Household and Payroll Surveys ..........3 Long-Term Unemployed .................................................................3 Labor Market Indicators ..................................................................4 The Domestic Financial Economy ...........................................................7 Tables Commercial Bank Credit .................................................................7 Selected Financial Market Quotations .............................................8 Charts Net Interest Margin ..........................................................................7 Loan-Loss Provisioning ...................................................................7 Supplemental Notes The Domestic Nonfinancial Economy Labor Market Developments Private payroll employment increased 114,000 in November from a level in October that was 20,000 higher than previously estimated. Over the three months ending in November, private employment rose 104,000 jobs per month on average, slightly less than the pace of 130,000 per month of the preceding three months. Once again in November, hiring at nonbusiness services establishments accounted for much of the overall gain, with employment in the education and health services industry up 41,000 and jobs in the leisure and hospitality industry up 31,000. Retail trade employers stepped up their hiring noticeably last month (20,000) after having shed nearly 100,000 jobs thus far this year. However, weakness persisted in manufacturing (-15,000) and construction (-29,000). In contrast to recent months, the weakness in construction employment was not confined to residential construction; rather, all the major subcategories, within both residential and nonresidential, posted losses. Finally, government employment continued to expand (18,000), again led by hiring in education. Average weekly hours of production or nonsupervisory workers on private nonfarm payrolls held steady at 33.9 hours in November, but were up from the third quarter. The level of aggregate hours of these workers was 0.4 percent (not an annual rate) above the third-quarter average. Average hourly earnings of production or nonsupervisory workers on private nonfarm payrolls rose 0.2 percent in November. For the twelve months ending in November, average hourly earnings rose 4.1 percent, up from an increase of 3.0 percent over the preceding twelve months. In the household survey, the unemployment rate ticked up 0.1 percentage point to 4.5 percent in November, reversing part of its decline the previous month. In contrast, the labor force participation rate edged up to 66.3 percent in November—the highest level that the participation rate has reached since 2003. 1 1 The November survey reference week for the household survey was moved forward from the week that included the 12th of the month to the week that included the 5th of the month. According to our contacts at the BLS, the major aggregates such as the unemployment rate and participation rate should be little affected by the change. -1- -2- Changes in Employment (Thousands of employees; seasonally adjusted) 2006 Measure and sector 2005 Q1 Q2 Q3 Sept. Average monthly change Nonfarm payroll employment (establishment survey) Private Natural resources and mining 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) Oct. Nov. Monthly change 165 152 4 -6 25 7 13 6 -1 12 41 14 51 14 221 176 169 6 1 26 13 2 4 2 20 26 -8 69 7 287 115 98 5 11 1 8 -28 9 -3 11 40 -1 44 17 241 185 144 3 -12 4 7 -5 9 -1 15 32 -4 92 42 162 203 147 2 -9 -1 13 -5 12 -2 27 13 -11 96 56 271 79 51 6 -44 -24 -3 2 7 2 0 29 2 76 28 437 132 114 4 -15 -29 11 20 2 -3 11 43 5 69 18 277 2.3 33.8 40.6 3.0 33.8 41.0 2.6 33.9 41.2 1.1 33.8 41.3 .1 33.8 41.1 .3 33.9 41.2 .1 33.9 41.1 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. Changes in Private Payroll Employment Aggregate Hours and Workweek of Production or Nonsupervisory Workers Thousands 400 400 Hours 35.0 2002 = 100 106 3-month moving average 300 300 200 200 100 34.5 100 0 -100 34.0 -200 -300 -300 1999 2000 2001 2002 2003 2004 2005 2006 2007 -400 100 98 -100 -200 -400 102 Nov. Nov. 0 104 Aggregate hours (right scale) 96 33.5 Workweek (left scale) 94 92 33.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 90 -3- Selected Unemployment and Labor Force Participation Rates (Percent; seasonally adjusted) 2006 Rate and group 2005 Q1 Q2 Q3 Sept. Oct. Nov. Civilian unemployment rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 5.1 16.6 8.8 3.8 4.2 4.7 15.5 8.1 3.6 3.9 4.7 14.7 8.1 3.6 3.8 4.7 16.1 8.2 3.5 3.8 4.6 16.4 8.0 3.3 3.8 4.4 15.4 8.5 3.2 3.4 4.5 15.1 8.4 3.3 3.6 Labor force participation rate Total Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 66.0 43.7 74.6 75.4 59.4 66.0 43.7 74.0 75.5 59.4 66.1 43.8 74.2 75.5 59.5 66.2 43.6 74.9 75.4 59.8 66.2 43.3 74.7 75.5 59.7 66.2 43.3 74.6 75.5 59.8 66.3 43.4 74.7 75.7 59.8 Labor Force Participation Rate and Unemployment Rate Percent 67.6 67.4 Percent 7.0 Participation rate (left scale) 6.5 67.2 6.0 67.0 66.8 5.5 66.6 5.0 66.4 Nov. 66.2 4.0 66.0 Unemployment rate (right scale) 65.8 65.6 2000 2001 3.5 2002 2003 2004 Employment Change in the Household and Payroll Surveys 400 Payroll employment** Nov. 200 2005 3.0 2006 Long-Term Unemployed (More Than 26 Weeks) Thousands of employees 500 Household employment* 400 500 300 4.5 100 0 1.6 Percent of labor force 1.6 1.4 1.4 300 1.2 1.2 200 1.0 1.0 100 0.8 0 0.6 0.6 Nov. 0.8 -100 -100 0.4 0.4 -200 -200 0.2 0.2 -300 0.0 -300 2000 2001 2002 2003 2004 Note. Six-month moving averages. * Adjusted to the payroll concept. ** Adjusted for benchmark revision. 2005 2006 2007 2000 2001 2002 2003 2004 2005 2006 2007 0.0 -4- Labor Market Indicators Unemployment Insurance Millions 4.0 4-week moving average Layoff Announcements Thousands 550 Insured unemployment (left scale) 3.6 500 3.2 450 2.8 400 Nov. 25 2.4 Initial claims (right scale) 2.0 1.6 250 Thousands 250 200 200 150 150 100 100 350 Dec. 2 1999 2000 2001 2002 2003 2004 2005 2006 2007 300 250 Nov. 50 0 50 1999 2000 2001 2002 2003 2004 2005 2006 2007 0 Note. Seasonally adjusted by FRB staff. Source. Challenger, Gray, and Christmas, Inc. Labor Market Tightness Exhaustion Rate Percent 50 50 Percent 45 Index 150 3-month moving average 40 45 130 45 Job availability* (right scale) 35 40 40 30 90 Oct. Nov. 35 35 30 30 25 20 25 1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. The exhaustion rate is calculated as the number of individuals who were receiving unemployment insurance benefits but reached the end of their potential eligibility expressed as a percent of all individuals who began receiving such benefits 6 months earlier. 110 25 70 Hard to fill** (left scale) 50 15 30 10 10 1999 2000 2001 2002 2003 2004 2005 2006 2007 *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. Net Hiring Plans Expected Labor Market Conditions Percent 30 30 Index 120 120 Conference Board Manpower, Inc. 25 25 100 Q4 20 Nov. 20 100 Nov. 15 15 10 10 5 0 National Federation of Independent Business (3-month moving average) 1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. Percent planning an increase in employment minus percent planning a reduction. 80 60 Dec. Michigan SRC 80 60 5 0 40 1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. The proportion of households expecting labor market conditions to improve, minus the proportion expecting conditions to worsen, plus 100. 40 -5- Consumer Sentiment According to the preliminary report, the Michigan Survey Research Center’s (SRC) index of consumer sentiment dipped in early December to 90.2 after having edged down in November. The recent decrease reflected a weakening in the “expected conditions” component that more than offset a modest strengthening in the “current conditions” component of the overall index. Among those items not included in the overall sentiment index, consumers’ expectations about the change in unemployment over the next twelve months worsened a bit. In addition, consumers’ appraisals of buying conditions for cars weakened. However, consumers’ appraisals of buying conditions for homes improved. Meanwhile, the median of expected inflation over the next twelve months remained unchanged, and the median over the next five to ten years ticked up to 3.1 percent in early December. -6December 8, 2006 University of Michigan Survey Research Center: Survey of Consumer Attitudes Indexes of consumer sentiment (Not seasonally adjusted) 2006 Category Dec.P May June July Aug. Sept. Oct. Nov. Composite of current and expected conditions1 Current conditions1 Expected conditions1 79.1 96.1 68.2 84.9 105.0 72.0 84.7 103.5 72.5 82.0 103.8 68.0 85.4 96.6 78.2 93.6 107.3 84.8 92.1 90.2 106.0 108.2 83.2 78.6 Personal financial situation Now compared with 12 months ago2 Expected in 12 months2 102 112 113 120 110 122 109 112 99 122 118 131 119 125 118 123 81 80 88 79 87 80 75 84 99 92 113 97 112 97 97 95 Appraisal of buying conditions Cars Large household appliances2 Houses 112 147 121 124 159 123 130 158 119 124 160 117 128 151 116 137 160 129 140 156 134 137 162 136 Expected unemployment change - next 12 months 127 127 129 130 125 122 121 123 Prob. household will lose a job - next 5 years 24 21 21 19 23 22 23 20 Expected inflation - next 12 months Mean Median 4.7 4.0 4.4 3.3 3.8 3.2 4.6 3.8 3.6 3.1 3.7 3.1 3.3 3.0 3.5 3.0 Expected inflation - next 5 to 10 years Mean Median 3.8 3.2 3.4 2.9 3.2 2.9 3.5 3.2 3.2 3.0 3.5 3.1 3.5 3.0 3.6 3.1 Expected business conditions Next 12 months2 Next 5 years2 Note. Figures on financial, business, and buying conditions are the percent reporting ’good times’ (or ’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. P Preliminary. 1. Feb. 1966 = 100. 2. Indicates the question is one of the five equally-weighted components of the index of sentiment. Consumer sentiment Expected inflation 1985 = 100 180 1966 = 100 130 160 Percent 5 5 120 4 Michigan SRC (right scale) 140 120 100 100 Nov. 90 Dec.P 80 4 Median, 5 to 10 years ahead 110 Dec.P 3 2 2 80 Median, 12 months ahead 1 60 40 P Preliminary. 2002 2004 1 70 Conference Board (left scale) 2000 3 2006 60 0 2000 P Preliminary. 2002 2004 2006 0 -7- The Domestic Financial Economy Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total2 Level,1 Nov. 2006*e 2004 2005 H1 2006 Q3 2006 Oct. 2006* Nov. 2006*e 8.9 10.5 11.9 7.7 .0 6.0 7,794 Loans3 Total To businesses Commercial and industrial Commercial real estate 9.7 11.6 11.7 10.0 3.5 5.3 5,835 1.2 11.7 13.2 17.1 16.4 15.6 18.9 12.9 9.1 2.2 4.6 6.9 1,162 1,408 To households Residential real estate Revolving home equity Consumer Originated4 Other5 15.6 43.8 8.8 6.0 7.4 12.0 13.3 3.1 .5 8.4 7.7 .1 6.7 7.1 12.0 7.0 3.2 5.8 5.5 3.0 6.5 .3 -10.9 -1.6 4.8 -1.9 4.3 9.5 9.6 15.8 1,726 449 725 1,113 814 6.6 5.2 4.9 5.7 7.6 5.3 .0 13.3 12.8 13.0 8.3 19.4 1.1 2.1 4.2 -.6 -10.6 -12.4 -27.5 7.0 8.1 10.6 -2.0 26.5 1,960 2,124 1,171 953 Securities Adjusted2 Reported Treasury and agency Other6 * Adjusted to remove the effects of a consolidation of a sizable amount of thrift assets onto a commercial bank’s books in October 2006. Note. Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. 1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels. 2. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 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. 6. 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. e Estimated. Net Interest Margin Loan-Loss Provisioning Percent Percent of average assets 4.6 Quarterly 1.4 Quarterly Q3 4.4 1.2 4.2 1.0 4.0 0.8 3.8 0.6 3.6 0.4 3.4 Q3 3.2 1990 1993 1996 1999 2002 2005 Note. Net interest margin is net interest income divided by average interest-earning assets. Source. Call Report. 0.2 0.0 1990 1993 1996 Source. Call Report. 1999 2002 2005 -8III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2004 2005 Change to Dec. 7 from selected dates (percentage points) 2006 Instrument June 28 Dec. 30 Oct. 24 Dec. 7 2004 June 28 2005 Dec. 30 2006 Oct. 24 1.00 4.25 5.25 5.25 4.25 1.00 .00 1.36 1.74 3.99 4.22 5.00 4.99 4.85 4.86 3.49 3.12 .86 .64 -.15 -.13 Commercial paper (A1/P1 rates)2 1-month 3-month 1.28 1.45 4.23 4.37 5.25 5.24 5.25 5.23 3.97 3.78 1.02 .86 .00 -.01 Large negotiable CDs1 3-month 6-month 1.53 1.82 4.49 4.65 5.33 5.37 5.30 5.28 3.77 3.46 .81 .63 -.03 -.09 Eurodollar deposits3 1-month 3-month 1.29 1.51 4.36 4.52 5.32 5.38 5.35 5.35 4.06 3.84 .99 .83 .03 -.03 Bank prime rate 4.00 7.25 8.25 8.25 4.25 1.00 .00 Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year 2.88 3.97 4.90 4.43 4.35 4.47 4.93 4.78 4.90 4.58 4.42 4.56 1.70 .45 -.34 .15 .07 .09 -.35 -.36 -.34 U.S. Treasury indexed notes 5-year 10-year 1.56 2.25 2.03 2.10 2.61 2.52 2.17 2.17 .61 -.08 .14 .07 -.44 -.35 Municipal general obligations (Bond Buyer)5 5.01 4.38 4.33 4.03 -.98 -.35 -.30 Private instruments 10-year swap 10-year FNMA6 10-year AA7 10-year BBB7 10-year high yield7 5.21 5.38 5.60 6.25 8.41 4.92 4.84 5.27 5.82 8.30 5.36 5.19 5.78 6.34 8.39 4.95 4.79 5.40 5.95 8.19 -.26 -.59 -.20 -.30 -.22 .03 -.05 .13 .13 -.11 -.41 -.40 -.38 -.39 -.20 Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable 6.21 4.19 6.21 5.16 6.40 5.60 6.11 5.43 -.10 1.24 -.10 .27 -.29 -.17 Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month Record high 2005 Change to Dec. 7 from selected dates (percent) 2006 Stock exchange index Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000 Level Date Dec. 30 Oct. 24 Dec. 7 Record high 2005 Dec. 30 2006 Oct. 24 12,343 1,527 5,049 797 14,752 11-17-06 3-24-00 3-10-00 12-5-06 3-24-00 10,718 1,248 2,205 673 12,518 12,128 1,377 2,345 762 13,802 12,278 1,407 2,428 792 14,200 -.52 -7.87 -51.91 -.64 -3.74 14.56 12.74 1.08 17.69 13.44 1.24 2.17 3.53 3.92 2.89 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. October 24, 2006, is the day before the most recent FOMC announcement. _______________________________________________________________________
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