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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 III - FOMC December 12, SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 1997 TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Producer prices. . . Consumer sentiment . Business inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S. 1 . . 2 Tables CPI and PPI inflation rates . . . . . . . . ... University of Michigan Survey Research Center: Survey of consumer attitudes . . . . . . . . Changes in manufacturing and trade inventories Selected inventory-sales ratios .. Charts Consumer surveys . . . . . . . . . . . . Inventory-sales ratios, by major sector. 5 . . .. .. . . . . .. 57 7 THE FINANCIAL ECONOMY Table Selected financial market quotations . . .. . . . . 8 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Producer Prices The PPI for finished goods moved down 0.2 percent last month, and the index excluding food and energy edged down 0.1 percent. Over the twelve months ended in November, the core PPI 0.3 percent, about 1/4 percentage point less than its rose just increase over the prior year. The price index for finished foods edged down 0.1 percent in November and is down 1-1/4 percent over the past year. specific items, coffee prices continued to decline last month, after having risen considerably earlier this year. food prices have dropped we still think that the November, the Among At the crude level, 6-1/2 percent over the past year. Although CPI for food might have blipped up in risks of persistent pressures in the food area do not seem to be large in the near term. Finished energy prices moved down 0.8 percent in November. Gasoline prices fell considerably for a second month, and refiners' margins dropped back from their elevated levels of early autumn. Prices of residential electricity--about half of the energy index-also fell last month; electricity prices have been unusually late but are about unchanged, on average, over the past volatile of four months. However, natural gas prices continued to rise in November, as concerns about supply adequacy continued into the early part of the month. Nevertheless, spot prices are down since mid- November and may point to some easing in wholesale gas prices in December. Overall, the index for finished energy is 3-1/2 percent below its year-earlier level. Prices of finished consumer goods other than food and energy ticked down 0.1 percent in November. has been particularly favorable. News on motor vehicle prices Prices for new cars and light trucks both moved down last month, and both are down between 1 and 2 percentage points over the past year. turned up, Elsewhere, apparel prices offsetting their declines of September and October while other prices were little changed last month. Prices of capital equipment edged down 0.1 percent in November. In addition to the decline in light vehicle prices, computer prices were down 2-1/2 percent after showing no change in October. price swing This reflected movements in prices of mid-range machines; the index for personal computers was down at about the same rate in both months. At earlier stages of processing, the PPI for intermediate materials other than food and energy inched up in November and stood 1/2 percent higher than a year earlier. Prices for crude materials other than food and energy declined last month and are up 1-1/2 percent over the past twelve months. Consumer Sentiment According to the preliminary report, the Michigan SRC index of consumer sentiment retreated 4.2 index points in early December from the historical high posted in November; nonetheless, the value of the index in early December remained at a very high level. Households reported less favorable views of their personal finances in the past year, expected business conditions in the next year and in the next five years, and of buying conditions for large appliances. In contrast, their views of personal finances in the next twelve months held steady in early December. Among questions not included in the overall index, the index of car buying conditions declined in early December, as did the index of house buying conditions; nonetheless, both indexes remained well within the favorable ranges that have prevailed in the past two years. The expected change in unemployment over the next year rose in early December, reaching to its highest level since April. The mean value of expected inflation over the coming year rose 0.1 percentage point to 3.5 percent, while the median held steady at 2.9 percent. The mean value of expected inflation over the next five to ten years rose 0.3 percentage point to 4.1 percent, while the median edged up 0.1 percent to 3.2 percent. Business Inventories Excluding the stocks held by auto dealers, retail inventories edged down $2.5 billion (annual rate) in October on a book-value basis, and the inventory-sales ratio for non-auto retailers remained at 1.42 months. For all manufacturing and trade excluding motor vehicles, inventories rose at a $42.7 billion annual rate in October, a touch faster than the average increase in the third quarter. With total nonvehicle shipments and sales in manufacturing and trade up 0.4 percent in October, the inventory-sales ratio for this aggregate remained at 1.33 months. -3- CPI AND PPI INFLATION RATES (Percent change) From twelve months earlier Nov. 1996 Nov. 1997 1997 Q2 1997 Q3 Oct. -Annual rate- Nov. -Monthly rate CPI All items (100.0)1 3.3 n.a. 1.0 2.0 .2 n.a 4.4 8.1 2.6 n.a. n.a. n.a. .9 -15.6 2.9 3.6 2.5 1.7 .2 .1 .2 n.a n.a n.a 1.1 n.a. 1.4 -1.2 .1 n.a 1.8 -.8 -.5 -.2 2.1 n.a. n.a. n.a. n.a. n.a. -.2 -7.4 3.6 .5 2.8 -. 1 -12.2 -2.5 -3.3 1.1 -. 3 -. 5 .1 .1 .3 n.a n.a n.a n.a n.a 3.2 n.a. 3.5 2.8 .3 3.0 3.3 -1.3 3.6 n.a. n.a. n.a. n.a. 3.4 3.3 -1.0 3.9 2.8 2.2 -2.4 3.2 .3 .1 -. 1 .5 3.0 -. 6 -3.9 .4 .1 3.8 12.9 -1.2 -3.4 .2 -22.9 -2.0 5.9 .4 .1 .6 .3 -. 5 .0 .0 Consumer goods (38.1) Capital equipment (23.6) .8 .3 .6 -.2 .1 -. 9 .1 -. 3 .1 -. 1 Intermediate materials (100.0) 3 .5 -.1 -2.9 -.1 -. 1 -1.3 .5 .3 .4 .1 10.6 -. 9 -26.0 -3.4 4.0 3.1 34.6 -6.5 -6.4 3.8 1.6 7.7 -58.5 -3.7 -13.4 8.4 .1 .0 10.7 .3 Food (15.9) Energy (7.0) CPI less food and energy (77.0) Commodities (23.4) New vehicles (5.0) Used cars (1.3) Apparel (4.8) House furnishings (3.3) Other Commodities (9.0) Services (53.7) Shelter (28.2) Medical care (6.1) Auto finance charges (0.6) Other Services (18.8) n.a n.a n.a n.a n.a PPI Finished goods (100.0) 2 Finished consumer foods (23.6) Finished energy (14.7) Finished goods less food and energy (61.6) Intermediate materials less food and energy (81.3) Crude materials (100.0) 4 Crude food materials (38.0) Crude energy (42.4) Crude materials less food and energy (19.6) 1. 2. 3. 4. Relative Relative Relative Relative importance importance importance importance weight weight weight weight for for for for CPI, December 1996. PPI, December 1996. intermediate materials, December 1996. crude materials, December 1996. - - 1. 5. December 12, 1997 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1997 1997 1997 1997 1997 1997 1997 1997 1997 Apr May Jun Jul Aug Sep Oct Nov Dec (p) Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions 101.4 115.2 92.5 103.2 113.5 96.6 104.5 113.2 98.9 107.1 114.0 102.6 104.4 110.7 100.3 106.0 114.1 100.7 105.6 109.8 102.8 107.2 114.9 102.3 103.0 111.0 97.9 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 132 130 122 138 126 131 130 133 121 138 127 138 124 136 130 138 121 138 Expected business conditions Next 12 months* Next 5 years* 130 113 142 109 147 121 151 130 150 116 149 119 154 125 151 123 145 111 Appraisal of buying conditions Cars Large household appliances* Houses 136 167 153 150 173 160 154 168 160 136 166 165 139 167 166 143 170 172 141 161 164 140 169 163 135 167 160 41 68 49 71 43 73 49 68 48 70 50 57 37 69 46 69 41 78 113 109 108 104 107 103 100 108 112 3.7 3.0 3.7 2.9 3.5 2.8 3.4 2.7 3.3 2.7 3.5 2.8 3.2 2.8 3.4 2.9 3.5 2.9 3.6 3.8 3.9 3.4 3.8 3.6 3.6 3.8 4.1 2.9 3.0 3.1 2.9 3.0 3.1 3.0 3.1 3.2 Willingness to use credit Willingness to use savings Expected unemployment change - next 12 months Expected inflation - next 12 months Mean Median Expected inflation - next 5 to 10 years Mean Median * -- Indicates the question is one of the five equally-weighted components of the index of sentiment. (p) -- Preliminary (f) -- Final 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. -5- Consumer Surveys Consumer Sentiment Index 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Current Conditions index 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Expected Conditions Index 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data) 1997 Q1 1997 Q2 Q3 Aug. Sept. Oct. 35.8 51.5 43.7 29.5 83.1 43.8 30.9 16.5 9.1 14.3 11.5 5.0 2.1 2.8 48.9 25.1 19.8 19.1 14.3 7.4 -2.1 9.6 36.7 17.3 13.3 15.8 14.2 10.5 5.4 5.1 21.1 22.1 12.0 31.0 25.5 -23.7 2.9 -26.6 71.4 8.5 11.9 38.6 34.1 36.1 7.3 28.8 42.7 23.9 18.1 18.5 21.3 1.4 3.9 -2.5 Book value basis Total Excluding wholesale and retail motor vehicles Manufacturing Excluding aircraft Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers SELECTED INVENTORY-SALES RATIOS (Months' supply, based on Census book-value data, seasonally adjusted) Cyclical reference points 1990-91 1995-96 high low Manufacturing and trade Less wholesale and retail motor vehicles Range over preceding 12 months High Low October 1997 1.58 1.37 1.38 1.35 1.37 1.55 1.34 1.35 1.32 1.33 Manufacturing Primary metals Nonelectrical machinery Electrical machinery Transportation equipment Motor vehicles Aircraft Nondefense capital goods Textile 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 1.36 1.49 1.80 1,41 1.48 .56 4.15 2.31 1.44 1.25 .75 1.67 1.37 1.68 1.87 1.46 1.61 .62 4.73 2.39 1.53 1.31 .84 1.74 1.34 1.59 1.71 1.29 1.52 .56 4.09 2.21 1.47 1.27 .75 1.65 1.35 1.60 1.72 1.32 1.56 .54 4.70 2.28 1.49 1.33 .80 1.71 Merchant wholesalers Less motor vehicles Durable goods Nondurable goods 1.36 1.31 1.83 .96 1.24 1.21 1.53 .93 1.27 1.24 1.56 .96 1.22 1.20 1.50 .92 1.26 1.24 1.53 .97 Retail trade Less automotive dealers Automotive dealers General merchandise Apparel 1.61 1.48 2.21 2.43 2.56 1.50 1.43 1.68 2.21 2.42 1.52 1.45 1.77 2.26 2.56 1.48 1.41 1.68 2.08 2.44 1.50 1.42 1.75 2.07 2.56 2.44 2.23 2.27 2.10 2.12 GAF Inventory-Sales Ratios, by Major Sector (Book value) Manufacturing Ratio 2.15 1.9 1.65 1.4 1979 1981 1983 1985 1987 1989 1991 1993 1995 1,15 1997 Wholesale Excluding Motor Vehicles Ratio 1.5 1.4 1.3 1.2 1.1 1 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 Retail Ratio 1.7 1.6 1.5 1.4 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 -8Selected Financial Market Quotations' (Percent except as noted) 1997 Instrument Jan. 2 Change to Dec. 11 from: Mar. FOMC * low Nov. 12 Mar. FOMC * low Nov. 12 Dec. 11 Jan. 2 5.27 5.42 -0.39 5.04 5.17 5.37 5.06 5.18 5.19 0.02 0.08 -0.06 5.40 5.45 5.76 5.68 0.28 0.21 5.32 5.42 5.58 5.87 5.80 5.84 0.48 0.38 0.34 5.31 5.44 5.88 5.81 0.50 0.37 8.25 8.50 0.25 6.25 6.56 6.83 5.72 5.82 6.02 -0.41 -0.72 -0.73 -0.53 -0.74 -0.81 -0.06 -0.09 -0.13 U.S. Treasury 10-year indexed note 3.36 3.54 n.a. 0.18 -0.01 Municipal revenue (Bond Buyer) 6 5.97 5.45 -0.51 -0.52 -0.20 Corporate-A utility, recently offered 7.97 7.22 -0.42 -0.75 -0.08 High-yield corporate 7 9.49 9.05 -0.67 -0.44 -0.01 7.84 5.54 7.17 5.50 -0.47 -0.07 -0.67 -0.04 -0.07 -0.03 Short-term rates Federal funds2 Treasury bills 3 3-month 6-month 1-year 0.02 0.01 -0.18 Commercial paper4 1-month 3-month Large negotiable CDs I-month 3-month 6-month Eurodollar deposits 5 1-month 3-month Bank prime rate Intermediate- and long-term rates U.S. Treasury (constant maturity) 3-year 10-year 30-year Home mortgages FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1997 Percentage change to Dec. 11, from: FOMC * Stock exchange index Record FOMC Level Date Jan. 2 Nov. 12 Dec. 11 high Jan. 2 Nov. 12 Dow-Jones Industrial 8259.31 8/6/97 6441.49 7552.59 7848.99 -4.97 21.85 3.92 S&P 500 Composite 983.79 12/5/97 736.01 921.13 954.94 -2.93 29.75 3.67 1745.85 10/9/97 1279.70 1590.72 1558.54 -10.73 21.79 -2.02 465.21 10/13/97 357.96 435.40 424.70 -8.71 18.64 -2.46 NASDAQ (OTC) Russell 2000 Wilshire 9486.69 10/7/97 7146.80 8917.32 9125.19 -3.81 27.68 2.33 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date for maintenance period ending December 17,1997. 3. Secondary market. 4. As of September 2, 1997, commercial paper rates are those collected by the Depository Trust Company; prior rates are averages of offering rates at several large dealers. 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 November 10, 1997.
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