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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 05/27/2010. Confidential (FR) Class III FOMC December 10, 2004 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 Producer Prices ................................................................................1 Consumer Sentiment........................................................................3 Business Inventories ........................................................................3 Production of Motor Vehicles..........................................................5 Tables Recent Changes in Producer Prices .................................................2 Recent Changes in Producer Prices―Relative Contribution...........2 University of Michigan Survey Research Center: Survey of Consumer Attitudes .............................................................4 Changes in Manufacturing and Trade inventories ...........................6 Production of Domestic Autos and Trucks......................................7 Charts Book-Value Inventories Relative to Shipments and Sales ..............6 Inventory-Consumption Ratios, Flow-of-Goods System ................6 The Domestic Financial Economy ...........................................................8 Tables Commercial Bank Credit .................................................................8 Selected Financial Market Quotations .............................................9 The International Economy ....................................................................10 Prices of Internationally Traded Goods .........................................10 Non-Oil Imports.............................................................................10 Oil ..................................................................................................10 Exports ...........................................................................................10 Tables Prices of U.S. Imports and Exports................................................12 Charts Oil prices........................................................................................12 Supplemental Notes The Domestic Nonfinancial Economy Producer Prices Following October’s sharp increase, the producer price index for finished goods rose 0.5 percent in November, led by another sizable increase in energy prices. Over the twelve months ending in November, prices of finished goods rose 5 percent. Excluding food and energy, the PPI rose 0.2 percent in November, following increases of 0.3 percent in each of the preceding three months. Core finished goods prices rose 1.9 percent between November 2003 and November 2004, compared with a 0.5 percent increase over the preceding twelve-month period. The PPI for energy rose 1.8 percent in November, on the heels of October’s jump of 6.8 percent. The increase last month was the result of sharp increases in the prices for residential natural gas and electricity; prices of refined products fell slightly following October’s surge. The twelve-month change in the PPI for energy was nearly 20 percent, double the increase of the previous year. However, the collapse in crude oil prices in early December has been matched by large declines in wholesale prices of gasoline and heating oil—pointing to large declines in the PPI and CPI for finished energy in December. Food prices increased 0.4 percent in November. Vegetable prices climbed higher, but the index for fresh fruits fell 17 percent after the sharp increases of September and October; the decline came as California’s orange crop replaced the hurricane-related losses to the Florida citrus fruit harvest. Producer food prices increased nearly 3 percent for the year ending in November, a large deceleration from the previous twelve-month period. Core consumer goods prices rose 0.2 percent in November, as did the price index for capital goods. The increase in core goods prices was led by a rise of 0.6 percent in the price of autos, but light truck prices fell by a similar amount. Over the period from November 2003 to November 2004, prices of both capital goods and core consumer goods have risen about 2 percent, a noticeable pickup from the previous twelve-month period. At earlier stages of processing, the index for core intermediate materials rose 0.4 percent in November, following October’s 0.3 percent increase. Over the twelve months ending in November, the price index for core intermediate materials rose 8 percent, reflecting sizable increases in the prices of a wide variety of products, especially metals and -2- Recent Changes in Producer Prices (Percent change; based on seasonally adjusted data)1 12-month change3 Weights2 Product 2004 Nov. 2003 Nov. 2004 2004 Q2 Q3 Sept. Oct. Annual rate Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment Nov. Monthly rate 100.0 21.5 15.9 62.6 37.1 25.6 3.4 7.8 10.0 .5 .4 .7 5.0 2.9 19.8 1.9 1.9 2.1 4.4 9.9 5.6 2.4 2.0 2.9 .5 -8.0 7.1 1.6 1.3 2.0 .1 .1 -.9 .3 .4 .4 1.7 1.6 6.8 .3 .2 .4 .5 .4 1.8 .2 .2 .2 Intermediate materials4 Excluding food and energy 95.8 78.4 3.0 1.8 10.4 8.0 11.7 9.3 9.6 9.6 .2 .7 1.0 .3 .7 .4 Crude food materials Crude energy Other crude materials 39.9 39.8 20.4 26.1 10.4 17.9 -5.1 58.6 25.6 9.7 91.6 -33.2 -37.5 -27.1 51.3 -2.1 -6.6 -2.5 -.8 7.9 5.4 1.8 17.0 2.5 1. Changes are from final month of preceding period to final month of period indicated. 2. Relative importance weights for December 2003, which are based on 1997 shipment levels. Years prior to 2002 are based on 1992 shipment weights. 3. Not seasonally adjusted. 4. Excludes materials for food manufacturing and animal feeds. Recent Changes in Producer Prices -- Relative Contribution1 (Percent change; based on seasonally adjusted data)2 12-month change4 Product Weights3 Nov. 2003 Nov. 2004 2004 Q2 2004 Q3 Sept. Annual rate Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment 100.0 21.5 15.9 62.6 37.1 25.6 3.4 1.6 1.5 .3 .1 .2 5.0 .6 3.1 1.2 .7 .5 4.4 2.0 .9 1.5 .7 .7 Oct. Nov. Monthly rate .5 -1.8 1.1 1.0 .5 .5 .1 .0 -.2 .2 .1 .1 1. Data may not add due to rounding. 2. Changes are from final month of preceding period to final month of period indicated. 3. Relative importance weights for December 2003, which are based on 1997 shipment levels. Years prior to 2002 are based on 1992 shipment weights. 4. Not seasonally adjusted. 1.7 .3 1.1 .2 .1 .1 .5 .1 .3 .1 .1 .1 -3- industrial chemicals. Core crude materials prices rose 2.5 percent in November, on the heels of October’s even larger increase, with iron and steel scrap prices once again the main culprit. Consumer Sentiment According to the preliminary report, the Michigan Survey Research Center’s (SRC) index of consumer sentiment rose nearly 3 points in December to 95.7, about equal to its average since the beginning of the year. December’s increase resulted from stronger readings for both components of the index. Within the “current conditions” component, consumers’ assessments of buying conditions for large household appliances improved, while assessments of their current personal financial situation were unchanged. Within the “expected conditions” component, consumers’ assessments of expected personal financial conditions ticked up, and the index for expected business conditions moved higher. Among the items not included in the overall index, consumers’ expectations about the change in unemployment over the next twelve months were about unchanged. Consumers’ appraisals of buying conditions for houses improved to their highest level in eight months, and consumers’ appraisals of buying conditions for cars retraced most of last month’s sharp drop. The mean and median of expected inflation over the next twelve months increased to 3.5 percent and 3 percent, respectively. The mean of expected inflation over the next five to ten years edged down to 3 percent, while the median edged up to 2.8 percent. Business Inventories The book value of wholesale inventories increased at an annual rate of $43 billion in October following a $22 billion accumulation in September. Sales at non-auto wholesalers increased 1.6 percent in October, and the inventory-sales ratio was unchanged at 1.13 months. Stocks held by wholesalers of durable goods rose at an annual rate of $41 billion in October. The rise was led by a large accumulation of $16 billion in the metals and minerals sector; wholesalers of lumber and building materials also posted a relatively large increase. Wholesalers of nondurable goods added to stocks at an annual rate of -4- December 10, 2004 University of Michigan Survey Research Center: Survey of Consumer Attitudes Indexes of consumer sentiment (Not seasonally adjusted) 2004 Category Composite of current and expected conditions1 Current conditions1 Expected conditions1 May June July 90.2 103.6 81.6 95.6 96.7 106.7 105.2 88.5 91.1 Aug. Sept. Oct. Nov. Dec.P 95.9 107.9 88.2 94.2 103.7 88.0 91.7 92.8 104.0 104.7 83.8 85.2 95.7 106.3 88.8 Personal financial situation Now compared with 12 months ago2 Expected in 12 months2 113 125 112 130 115 134 121 133 113 128 112 127 113 124 113 125 Expected business conditions Next 12 months2 Next 5 years2 105 98 117 108 124 108 114 108 116 110 113 97 115 104 120 112 Appraisal of buying conditions Cars Large household appliances2 Houses 144 156 160 144 164 162 142 158 160 144 158 156 148 155 162 152 158 155 138 158 155 150 163 164 Expected unemployment change - next 12 months 107 96 93 106 105 105 106 104 Prob. household will lose a job - next 5 years 27 25 25 22 22 28 23 21 Expected inflation - next 12 months Mean Median 3.9 3.3 4.0 3.3 3.5 3.0 3.1 2.8 3.2 2.8 3.6 3.1 3.3 2.8 3.5 3.0 Expected inflation - next 5 to 10 years Mean Median 3.3 2.8 3.4 2.9 3.1 2.8 3.1 2.7 3.1 2.8 3.2 2.8 3.1 2.7 3.0 2.8 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. -5- $2 billion in October as modest accumulations in a variety of sectors were mostly offset by a $12 billion runoff in farm products. Production of Motor Vehicles The final estimate of motor vehicle production for November showed assemblies at an annual rate of 11.9 million units, slightly below the October rate. On balance, dealer inventories of light vehicles ended the month unchanged from the high level that prevailed at the end of the third quarter. -6Changes in Manufacturing and Trade Inventories (Billions of dollars; seasonally adjusted book value; annual rate) 2004 Sector Q1 Q2 Q3 Aug. Sept. 82.0 120.4 86.4 106.3 6.4 n.a. 55.6 94.1 76.4 90.5 36.7 n.a. Manufacturing Ex. aircraft 24.0 25.6 38.9 39.0 32.3 33.9 39.5 43.8 4.8 15.1 26.3 26.1 Wholesale trade Motor vehicles and parts Ex. motor vehicles and parts 23.5 3.2 20.3 33.7 1.3 32.4 39.1 3.3 35.7 39.9 5.2 34.7 21.9 -3.2 25.2 42.9 -2.4 45.3 Retail trade Motor vehicles and parts Ex. motor vehicles and parts 34.5 23.1 11.4 47.7 25.0 22.7 15.0 6.6 8.4 26.9 10.6 16.2 -20.4 -27.1 6.7 Manufacturing and trade Ex. wholesale and retail motor vehicles and parts Oct. n.a. n.a. n.a. n.a. Not available. Book-Value Inventories Relative to Shipments and Sales Ratio 1.700 1.700 Retail trade ex. motor vehicles and parts 1.525 1.525 Manufacturing Sept. 1.350 1.350 Oct. 1.175 1.000 1.175 Wholesale trade ex. motor vehicles and parts 1992 1993 1994 1995 1996 Oct. 1997 1998 1999 2000 2001 2002 2003 1.000 2004 Inventory-Consumption Ratios, Flow-of-Goods System Days’ supply 64 64 62 62 Total 60 60 58 58 56 56 Total ex. motor vehicles and parts 54 54 52 52 Oct. 50 48 46 50 48 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 46 -7Production of Domestic Autos and Trucks (Millions of units at an annual rate except as noted; FRB seasonals) 2004 Item U.S. production Autos Trucks Days’ supply2 Autos Trucks Inventories3 Autos Trucks H1 2005 Q41 Q3 Q11 2004 Oct. Nov. Dec.1 12.1 4.3 7.8 11.8 4.3 7.6 12.0 4.2 7.9 12.3 4.5 7.8 12.1 4.1 8.0 11.9 4.1 7.8 12.2 4.4 7.8 77 62 88 72 62 79 n.a. n.a. n.a. n.a. n.a. n.a. 76 66 83 78 64 87 n.a. n.a. n.a. 3.33 1.09 2.24 3.26 1.08 2.18 n.a. n.a. n.a. n.a. n.a. n.a. 3.27 1.09 2.18 3.26 1.06 2.20 n.a. n.a. n.a. Note. Components may not sum to totals because of rounding. 1. Production rates for the fourth and first quarters and December reflect the latest schedules from Ward’s Communications. 2. Quarterly and annual values are calculated with end-of-period stocks and average reported sales; excludes medium and heavy trucks. 3. End-of-period stocks; excludes medium and heavy trucks. n.a. Not available. -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, Nov. 2004 ($ billions) 2003 Q1 2004 Q2 2004 Q3 2004 Oct. 2004 Nov. 2004 5.9 5.6 11.3 11.9 11.8 8.7 4.8 5.4 2.3 2.5 10.2 8.2 6,498 6,662 8.7 7.3 8.8 5.0 17.9 19.5 24.2 12.2 14.3 3.6 11.1 -8.2 -7.9 -5.1 -4.1 -6.7 -4.7 -3.4 -29.4 39.1 11.5 4.5 -2.4 15.1 1,735 1,899 1,147 752 4.9 -9.4 11.1 30.8 8.8 5.4 5.8 6.7 8.8 -5.2 10.1 37.8 6.2 11.4 10.4 20.7 10.8 -2.8 21.1 38.5 18.5 4.2 -2.2 -.4 9.7 5.9 7.9 37.2 3.3 19.7 12.4 11.7 4.9 1.6 16.0 45.1 10.9 -7.5 3.0 -18.2 9.7 6.4 11.8 30.0 8.4 -8.4 .9 23.9 4,763 881 2,515 393 2,122 665 1,040 702 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. -9- III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2003 Change to Dec. 9 from selected dates (percentage points) 2004 Instrument Dec. 31 June 28 Nov. 9 Dec. 9 2003 Dec. 31 2004 June 28 2004 Nov. 9 Short-term FOMC intended federal funds rate 1.00 1.00 1.75 2.00 1.00 1.00 .25 Treasury bills 1 3-month 6-month .93 1.00 1.36 1.74 2.04 2.24 2.20 2.36 1.27 1.36 .84 .62 .16 .12 Commercial paper (A1/P1 rates)2 1-month 3-month 1.00 1.05 1.28 1.45 2.01 2.16 2.26 2.37 1.26 1.32 .98 .92 .25 .21 Large negotiable CDs 1 1-month 3-month 6-month 1.06 1.09 1.16 1.30 1.53 1.82 2.05 2.23 2.42 2.34 2.43 2.61 1.28 1.34 1.45 1.04 .90 .79 .29 .20 .19 Eurodollar deposits 3 1-month 3-month 1.04 1.07 1.29 1.51 2.03 2.20 2.32 2.38 1.28 1.31 1.03 .87 .29 .18 Bank prime rate 4.00 4.00 4.75 5.00 1.00 1.00 .25 Intermediate- and long-term U.S. Treasury4 2-year 10-year 30-year 1.83 4.40 5.22 2.88 4.90 5.55 2.81 4.35 5.01 2.94 4.29 4.90 1.11 -.11 -.32 .06 -.61 -.65 .13 -.06 -.11 U.S. Treasury 10-year indexed note 2.00 2.23 1.75 1.64 -.36 -.59 -.11 Municipal 20-year G.O.5 4.61 4.94 4.56 4.63 .02 -.31 .07 Private instruments 10-year swap 10-year FNMA6 10-year AA 7 10-year BBB 7 5-year high yield 7 4.66 4.72 5.05 5.74 7.94 5.21 5.30 5.59 6.18 8.30 4.65 4.69 4.99 5.51 7.32 4.51 4.52 4.89 5.36 7.30 -.15 -.20 -.16 -.38 -.64 -.70 -.78 -.70 -.82 -1.00 -.14 -.17 -.10 -.15 -.02 Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable 5.85 3.72 6.21 4.19 5.76 4.16 5.71 4.15 -.14 .43 -.50 -.04 -.05 -.01 Record high Change to Dec. 9 from selected dates (percent) 2004 Stock exchange index Level Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000 Date June 28 Nov. 9 Dec. 9 Record high 2004 June 28 2004 Nov. 9 11,723 1,527 5,049 644 14,752 1-14-00 3-24-00 3-10-00 12-1-04 3-24-00 10,357 1,133 2,020 584 11,056 10,386 1,164 2,043 607 11,397 10,553 1,189 2,129 629 11,691 -9.98 -22.14 -57.83 -2.25 -20.75 1.89 4.93 5.41 7.72 5.75 1.60 2.16 4.19 3.72 2.58 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. AA1 rated. Source. Bloomberg. 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 beginning of the current tightening period. November 9, 2004, is the day before the most recent FOMC meeting. _______________________________________________________________________ - 10 - The International Economy Prices of Internationally Traded Goods Non-Oil Imports. In November, the prices of U.S. imports of non-oil goods and of core goods rose 0.7 and 0.8 percent, respectively, the largest monthly increases since January. Although every major category saw a price increase, the main contribution came from industrial supplies, whose prices rose 2.8 percent, mostly because of higher natural gas prices. For both capital goods (excluding computers and semiconductors) and foods, feeds and beverages, prices increased 0.3 percent. After a 0.4 percent increase in October, prices for automotive products rose another 0.2 percent. Prices for imported consumer goods, which had not increased since February 2004, ticked up 0.1 percent. Import prices of computers continued to decline, whereas prices for semiconductors edged up. The average level of imported core goods prices in October and November was 2½ percent at an annual rate above the third-quarter level. The main contributions to the increase were from foods and non-oil industrial supplies. Both automotive products and, to a lesser extent, capital goods (excluding computers and semiconductors) also experienced price gains. Oil. The BLS price of imported oil fell 2.6 percent in November. The spot price of West Texas Intermediate (WTI), a light, low-sulfur crude oil, fell 8.8 percent in November, to average about $48.50 per barrel. Since October, the spot price of WTI has fallen sharply, due in part to rising oil inventories and the return of some oil production in the Gulf of Mexico. The spot price of WTI closed at $42.54 per barrel on December 9. The prices of more sulfurous grades of crude oil, which had not increased as rapidly as WTI in October, have not fallen as much recently. The price of imported oil tends to be more closely aligned with the prices of higher sulfur crude oils than with WTI. Exports. In November, the prices of U.S. exports of total goods and of core goods increased 0.3 and 0.4 percent, respectively. Much of November’s rise was due to a 1 percent increase in industrial supplies, reflecting higher prices for chemicals and metals. After declining 1.3 percent in October, prices of agricultural exports edged down another 0.1 percent. Export prices of capital goods (excluding computers and semiconductors) increased 0.3 percent, and prices for consumer goods edged up - 11 - 0.1 percent. Export prices of computers continued to decline, but prices for semiconductors were unchanged. The average level of exported core goods prices in October and November was 4 percent at an annual rate above the third-quarter level. A large increase in prices for industrial supplies more than offset a large decline in the prices for exported agricultural products. Additional positive contributions came from both capital goods (excluding computers and semiconductors) and automotive products. - 12 Prices of U.S. Imports and Exports (Percentage change from previous period) Annual rate 2004 Q2 Q3 Q4e Monthly rate 2004 Sept. Oct. Nov. ----------------------- BLS prices --------------------7.4 7.9 10.6 0.5 1.6 0.2 43.2 56.5 77.9 3.0 11.6 -2.6 3.0 1.5 1.7 0.1 -0.1 0.7 Merchandise imports Oil Non-oil Core goods* Cap. goods ex comp & semi Automotive products Consumer goods Foods, feeds, beverages Industrial supplies ex oil 4.3 0.0 1.4 -0.5 7.8 18.7 2.4 1.6 1.7 -0.4 3.3 8.4 2.4 1.3 2.8 0.1 8.9 5.1 0.1 0.0 0.2 0.0 1.3 0.1 0.0 0.1 0.4 0.0 1.2 -0.8 0.8 0.3 0.2 0.1 0.3 2.8 Computers Semiconductors -8.6 -7.0 -8.8 -4.4 -7.1 -3.7 -0.6 -0.2 -1.1 -0.9 -0.3 0.2 6.0 -0.1 3.7 0.4 0.7 0.3 6.6 0.8 1.3 1.1 17.5 14.4 0.6 1.3 0.9 2.3 -31.1 14.5 4.0 2.6 1.2 -0.6 -12.0 16.2 0.5 0.1 -0.1 -0.1 1.7 0.7 0.7 0.4 0.3 -0.2 -1.3 2.4 0.4 0.3 0.0 0.1 -0.1 1.0 0.3 2.1 -7.3 -3.7 -3.6 4.7 -0.2 -0.1 -0.5 1.3 -0.5 0.0 Merchandise exports Core goods* Cap. goods ex comp & semi Automotive products Consumer goods Agricultural products Industrial supples ex ag Computers Semiconductors Chain price index Imports of goods & services Non-oil merchandise Core goods* --------------------- NIPA prices --------------------6.4 5.0 n.a. ... ... ... 2.8 1.1 n.a. ... ... ... 4.0 2.1 n.a. ... ... ... Exports of goods & services Total merchandise Core goods* 4.6 5.3 5.8 1.5 1.2 1.8 n.a. n.a. n.a. ... ... ... ... ... ... ... ... ... */ Excludes computers and semiconductors. e/ Average of two months. n.a. Not available. ... Not applicable. Oil Prices Dollars per barrel Spot West Texas Intermediate Import unit value 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 55 50 45 40 35 30 25 20 15 10 5
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