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Confidential (FR)
ClassIII FOMC
Part 2
December 16, 1998
CURRENT ECONOMIC
AND FINANCIAL CONDITIONS
Recent Developments
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
Confidential (FR) Class IIIFOMC
December 16, 1998
RECENT DEVELOPMENTS
_ _.. _~_~_
Prepared for the Federal Open Market Committee
by the staff of the Board of Governors of the Federal Reserve System
DOMESTIC NONFINANCIAL
DEVELOPMENTS
Domestic Nonfinancial Developments
Overview
Overall economic activity appears to have maintained a good deal of momentum in the
fourth quarter. Domestic final demand has been robust, driving continued solid gains
in overall production and employment, even as a weak trade sector has held down
manufacturing. Labor markets are still tight, but inflation has remained subdued.
Labor Market Developments
Employment strengthened in November, with private nonfarm payrolls rising
249,000--more than in other recent months.1 In the household survey, employment
rose even faster, and the unemployment rate dropped back to 4.4 percent.
Job gains were widespread in November with the notable exception of
manufacturing, where employment shrank another 47,000. 2 Construction payrolls have
surged in the past two months, boosted by strong housing demand. Retail employment
rebounded 65,000 in November after a subpar October, and employment growth in
FIRE remained robust. Gains in the services industries totaled 150,000; business
services--including help supply--and engineering and management services accounted
for much of the rise.
Aggregate hours of production or nonsupervisory workers on private
nonagricultural payrolls rose 0.1 percent last month, and the average workweek
remained essentially unchanged. After correcting for difficulties with the seasonal
adjustment of the workweek in September, we estimate that production worker hours
in November stood about 1-1/4 percent (annual rate) above the third-quarteraverage.3
The household survey continues to indicate tight labor markets. The
unemployment rate fell to 4.4 percent in November from 4.6 percent in October.
1. In addition, private payroll employment growth for September and October was revised up 35,000
per month, on average, which lessened the dropoff in payroll growth for those months reported earlier.
2. Since peaking in March, factories have cut their payrolls by a quarter million. In addition,
anecdotal reports suggest that much of the weakness in the help supply industry in the spring and
summer was the result of declines in placements in the light industrial area.
3. The BLS has indicated that the dip in the September workweek in the published data is linked to
difficulties seasonally adjusting for both the Labor Day holiday and monthly variation in the length of
the pay period. Since 1988, when a change in survey methodology made the workweek sensitive to
variations in the length of pay periods, Labor Day occurred only twice in the survey reference week-1992 and 1998--and, in these instances, the length of the semimonthly pay period increased from ten to
eleven days between August and September. Both the timing of the holiday and the lengthening of the
pay period tend to depress the workweek, but with so few observations, the standard seasonal adjustment
procedures have difficulty capturing the effects. Had there been no dip in the September workweek, the
level of aggregate hours in the third quarter would have been about 0.2 percent higher.
II-2
CHANGES IN EMPLOYMENT
(Thousands of employees; based on seasonally adjusted data)
1998
1996
Nonfarm payroll employment
Private
(Previous)
1997
HI
Q3
Sept.
-Average monthly changes233
282
244
204
224
263
222
166
(156)
1
Oct.
Nov.
172
166
(137)
145
132
(92)
267
249
3
21
-2
-29
-1
-61
-47
222
28
8
42
14
117
45
19
9
241
20
14
34
17
142
61
26
20
223
23
15
34
23
117
44
12
22
195
12
14
48
20
91
16
-12
38
167
-8
9
47
21
77
-14
-32
6
193
32
14
6
22
124
69
7
13
296
47
7
65
23
150
55
22
18
Private nonfarm production workers 1
Manufacturing production workers
190
0
212
16
166
-10
125
-26
169
29
94
-48
137
-46
Total employment 2
Nonagricultural
232
226
240
243
72
79
185
127
597
607
-88
-172
477
735
3.2
34.4
41.6
3.4
34.6
42.0
2.0
34.7
41.8
1.6
34.5
41.7
-0.3
34.4
41.6
0.6
34.6
41.7
0.1
34.6
41.6
Manufacturing
Nonmanufacturing
Construction
Transportation and utilities
Retail Trade
Finance, insurance, real estate
Services
Business services
Help supply services
Total government
Memo:
Aggregate hours of production
workers (percent change) 1' 3
Average workweek (hours) 1
Manufacturing (hours)
Note. Average change from final month of preceding period to final month of period indicated.
1. Survey of establishments.
2. Survey of households.
3. Annual data are percent change from Q4 to Q4. Data for EH are Q2 over Q4 at an annual rate. Quarterly
data are percent change from preceding period at an annual rate. Monthly data are percent change
from preceding month.
Average Weekly Hours
Aggregate Hours of Production or
Nonsupervisory Workers
1982=100
Hours
35
34.8
34.6
34.4
34.2
34
1993
1994
1995
1996
1997
1998
1993
1994
1995
1996
1997
1998
II-3
SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES
(Percent; based on seasonally adjusted data, as published)
1998
Sept.
Oct.
Nov.
4.6
4.5
4.6
4.5
4.6
4.5
4.4
4.4
14.3
3.7
4.2
14.7
3.8
4.0
15.4
3.8
4.0
16.0
3.7
4.0
15.1
3.5
4.1
67.1
67.2
67.0
67.1
67.0
67.1
52.3
76.8
59.9
51.6
76.9
60.5
52.8
76.9
60.5
52.7
76.7
60.3
53.8
76.7
60.4
52.9
76.6
60.4
52.4
76.8
60.4
65.3
67.4
67.7
68.7
69.4
68.2
68.9
1996
1997
Civilian unemployment rate
(concurrent seasonal factors)
5.4
Teenagers
Men, 20 years and older
Women, 20 years and older
HI
Q3
4.9
4.5
4.5
16.7
4.6
4.8
16.0
4.2
4.4
66.8
Teenagers
Men, 20 years and older
Women, 20 years and older
Women maintaining families
Labor force participation rate
Unemployment Rate
Percent
Labor Force Participation Rate
Percent
68
67.5
67
66.5
66
1994
1995
1996
1997
1998
Percent of Population (age 16 to 64)
Percent
That Wants a Job
1994
1995
1996
1997
1998
Percent of Population (age 16 to 64)
That Does Not Want a Job Percent
21.2
20.8
20.4
20
19.6
19.2
1997
1996
1994
1995
Note. Seasonally adjusted by FRB staff.
1997
1996
1994
1995
Note. Seasonally adjusted by FRB staff.
1998
II-4
Labor Market Indicators
Initial Claims for Unemployment Insurance
Thousands
600
4-week moving average
500
400
300
200
1988
1990
1992
1994
1996
1998
Note. State programs, includes EUC adjustment
Net Hiring Strength
Help Wanted Index
Index,1990=100
140
120
100
80
60
1988
1990
1992
1994
1996
1998
Note. Percent planning an increase in employment minus percent
planning a reduction.
1988
1990
1992
1994
1996
1998
Note, Series has been adjusted to lake account of structural and
institutional changes, including consolidation of newspaper industry
and tendency to increase hiring through personnel supply agencies.
Expected Labor Market Conditions
Reporting Positions Hard to Fill
Percent
1988
1990
1992
1994
1996
1998
Index
1988
1990
1992
1994
1996
1998
Note Michigan index: the proportion of households expecting
unemployment to fall less the proportion expecting unemployment
to rse plus 100. Conference Board index: the proportion of
respondents expecting more jobs less the proportion expecting
fewer lobs plus 100.
Domestic Nonfinancial Developments
Using concurrent seasonals, the unemployment rate had held steady at 4.5 percent
from June through October and then edged down 0.1 percentage point in November.4
On a published basis, household employment rose 477,000, and the labor force
participation rate ticked up to 67.1 percent--around where it has fluctuated during the
past two years.
The four-week moving average of initial claims for unemployment insurance
has remained very low, and other indicators--including the Manpower index of net
hiring strength and the Conference Board's help-wanted index--point to sustained
sizable gains in employment. According to the NFIB survey of small firms, hiring
intentions remain high, but tight supplies of potential workers are making positions
hard to fill. Consumers' expectations of changes in labor market conditions over the
next six or twelve months, as measured by the Conference Board and the Michigan
Survey Research Center (SRC), respectively, are less favorable than the levels seen
earlier this year: News reports of international turmoil and corporate downsizings
evidently have led households to be less sanguine about job prospects.
Productivity in the nonfarm business sector is now estimated to have risen at a
3 percent annual rate in the third quarter and almost 2 percent over the past year. In
the nonfinancial corporate sector, output per hour increased 4-1/2 percent last quarter
and was up 2-3/4 percent over the past four quarters. The difference in productivity
growth rates between these sectors over the past year largely reflects differences in
how output is measured: Output has grown more rapidly when measured on the
income side of the accounts--as it is for the nonfinancial corporate sector--than when it
is measured on the product side of the accounts--as it is for the nonfarm business
sector.
Information on labor costs this quarter is limited to the BLS monthly data on
average hourly earnings of production or nonsupervisory workers, which increased just
0.2 percent for a third month in November. Over the past twelve months, average
hourly earnings increased 3.7 percent, down from a 4 percent rate of rise over the
previous twelve-month period; for much of this year, the twelve-month changes were
in excess of 4 percent. The deceleration in average hourly earnings has been fairly
widespread across industries, but most pronounced in manufacturing. Wages have
continued to accelerate in services and in finance, insurance, and real estate, where the
annualized increase over the past three months exceeded 6 percent.
4. When the BLS introduces revised seasonal adjustment factors for the household data next month,
we expect the new seasonal pattern to be similar to that obtained with the concurrent seasonal factors
available this month.
II-6
LABOR PRODUCTIVITY
(Percent change from preceding period at compound annual rate;
based on seasonally adjusted data)
1997
1998
1997:Q3
to
1996 1
1997 1
Q4
Q1
0.9
0.9
4.1
2.1
4.7
4.3
1.6
3.1
3.0
5.2
2.4
1.0
2.6
4.6
Q2
Q3
1998:Q3
Output per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial
corporations 2
2.4
3.5
Compensation per hour
Total business
Nonfarm business
Manufacturing
Nonfinancial
corporations 2
3.9
3.7
2.4
4.0
3.9
5.3
4.9
4.6
4.1
4.1
4.0
2.6
3.8
4.1
3.3
3.4
3.9
3.6
4.6
4.2
1.5
1.6
2.0
2.1
-0.1
4.4
4.0
3.6
4.0
3.7
-1.3
0.9
1.2
4.0
1.5
3.1
3.4
4.3
Unit labor costs
Total business
Nonfarm business
Manufacturing
Nonfinancial
corporations 2
Memo:
ECI compensation
per hour
-2.2
0.7
-1.8
2.5
2.5
0.7
-0.4
1.5
1.1
4.4
3.8
1. Changes are from fourth quarter of preceding year to fourth quarter of year shown.
2. Nonfinancial corporate sector includes all corporations doing business in the United States
except banks, stock and commodity brokers, and finance and insurance companies; the sector
accounts for about two-thirds of business employment.
II-7
AVERAGE HOURLY EARNINGS
(Percentage change; based on seasonally adjusted data)
Twelve-month
percent change
Nov.
1996
Nov.
1997
Percent change to
Nov. 1998 since
Nov.
1998
May
1998
Aug.
1998
------------ Annual rate ------------
1998
Oct.
Nov.
-Monthly rate-
Total private nonfarm
3.7
4.0
3.7
3.2
2.5
0.2
0.2
Manufacturing
Construction
Finance, insurance,
and real estate
Retail trade
Wholesale trade
Services
3.4
2.5
3.3
4.1
1.9
3.2
1.B
3.7
2.1
2.2
0.0
0.7
D.1
0.5
4.0
4.5
4.1
4.0
4.9
4.6
4.8
4.1
5.3
4.2
3.5
4.6
4.9
3.0
2.9
3.9
6.1
0.9
1.1
3.4
0.6
-0.2
0.4
0.3
0.8
0.1
0.1
0.2
Average Hourly Earnings of Production or Nonsupervisory Workers
Percent
- - - - Twelve-month change
SSmoothed twelve-month change*
1986
1988
1990
"Three-month moving average of twelve-month changes.
1992
1994
1996
1998
II-8
GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION
(Percent change from preceding comparable period)
1998
Proportion
1997
19971
1998
HI
03
Sept.
Oct.
Nov.
-Annual rate- --Monthly rate--Total index
100.0
6.6
2-2
.9
-.4
.2
-.3
Mining
Utilities
6.1
6.3
2.1
1.9
-1.1
2.4
-5.8
14.9
-1.0
.2
-. 8
-3.7
-1.2
-3.4
87.6
5.2
2.6
8.3
71.4
7.3
12.8
20.1
38.5
3.2
2.5
-15.8
18.7
23.1
1.0
.4
5.7
2.0
29.1
-3.0
-. 4
-2.8
-1.0
3.2
-. 6
.6
-. 2
1.2
2.3
.4
.0
.2
-1.9
2.1
-. 2
23.3
1.6
1.6
-5.9
-. 9
.4
.4
Business equipment
8.9
5.7
1.2
2.2
.2
1.1
-. 9
Construction supplies
5.4
2.1
4.2
6.0
-.9
1.2
.7
Business supplies
7.5
3.6
.9
-. 4
-. 3
.9
-. 5
24.6
16.1
8.3
4.3
4.5
4.6
-.6
.3
-2.1
-4.9
-4.8
-3.7
-.5
-. 4
-1.0
-.1
.0
-. 5
-.6
-. 7
-. 4
2.1
2.0
4.2
43.6
15.2
48.6
65.2
11.4
9.3
38.9
7.3
37.6
3.9
1.1
4.0
3.2
-. 7
3.4
3.0
-1.2
3.4
Manufacturing
Motor vehicles and parts
Aircraft and parts
High-tech
Other manufacturing
Consumer goods
Materials
Durables
Nondurables
Memo: High-tech industries
Computer equipment
Communication equipment
Semiconductors 2
1. From the final quarter of the previous period to the final quarter of the
period indicated.
2. Includes related electronic components.
CAPACITY UTILIZATION
(Percent of capacity; seasonally adjusted)
1959-97
1988-89
High
Manufacturing
Primary processing
Advanced processing
1998
Avg.
1998
Q1
Q2
Q3
Sept.
Oct.
Nov.
85.7
81.7
81.8
81.2
80.2
80.1
80.2
79.8
88.9
84.2
82.8
81.2
84.8
84.1
80.2
82.8
79.3
82.0
79.5
82.1
80.8
81.7
79.3
-
- --
--
--
-"
79.6
Domestic Nonfinancial Developments
Industrial Production
Activity in the industrial sector remained soft in November. 5 Total industrial
production declined 0.3 percent, held down by a steep weather-related drop in utilities
output and continued weakness in mining output. Manufacturing production was
unchanged, and the factory operating rate fell to 79.8 percent--matching the lowest
level in more than five years.
Output in the high-technology sector continued to increase rapidly in
November. Production of semiconductors, which has been recovering steadily since
midyear, rose 3-1/2 percent, and the apparent pickup in demand for semiconductor
manufacturing equipment in recent months provides further evidence that the slump in
semiconductors has ended. Gains in computer output have also been sizable of late-though somewhat below the spectacular first-half pace. Output of communications
equipment fell in November for a second month after having posted sizable increases
over the first three quarters of the year.
Motor vehicle assemblies totaled 12.9 million units at an annual rate in
November, essentially the same as in October and more than 1 million units above the
average pace over the first three quarters of the year. The high assembly rates in the
past couple of months reflect both the continuing recovery from the strikes at General
Motors last summer and the strong pace of sales. With inventories remaining lean,
manufacturers have scheduled assemblies in December at 12-3/4 million units and plan
to keep production at this rate in the first quarter.
Production of aircraft and parts declined in November but remained at a very
high level. Boeing is aiming to deliver a record number of planes in December, and,
like last year, will keep some assembly lines operating during their usual Christmas
break to help meet this goal. Looking ahead, however, Boeing has announced sizable
reductions in production rates for late 1999 and for 2000. These reductions will come
on top of the previously planned slowdown in the production of 747s slated to begin
in the spring of 1999. A Boeing official has indicated that upstream suppliers have
already been affected by the planned slowdown in the production of 747s in 1999.
5. On November 24, the Federal Reserve published a revision of the index of industrial production
and the related measures of capacity and utilization for the period 1992 to date. The recent paths of
industrial production and capacity were revised up because of more rapid growth in the output and
capacity of high-technology industries. The rate of industrial capacity utilization in the third quarter of
1998 was estimated to be 0.4 percentage point above its previous published figure. With the exception
of stronger growth of manufacturing production in the second and third quarters of 1998--mostly due to
higher assemblies of commercial aircraft--the quarterly pattern of output growth was roughly unchanged.
II-10
Indicators for the Manufacturing Sector
New Orders
1991
1992
1993
Diffusion index
1994
1995
1996
1997
1998
Investment
Percent
Diffusion index
NAPM capital expenditures (right scale)'
I
r
I
I
1987
I
I
1989
i
I
I
I
1991
i
1993
1995
I
4
1997
1999
*One half of the percentage of respondents reporting higher capital expenditures minus one half of the percentage reporting
lower capital expenditures plus 50.
"Percent change in nominal manufactunng investment. Source: Annual Survey of Manufacturers. The figures for 1997 and 1998 are staff estimates.
Contracts for Industrial Buildings
Vacancy Rate, Industrial Buildings
Percent
Billions of dollars, ratio scale
F
Six-month moving average
1992
1995
1
15
1998
1988
1991
1994
1997
Domestic Nonfinancial Developments
Elsewhere, manufacturing production remained weak in November, with
widespread declines in the production of business equipment and business supplies.
Furthermore, materials output continued to trend down; in particular, production of
iron and steel plummeted. In contrast, consumer goods production rose, mostly
owing to increases in the production of appliances, food, and chemicals. The output
of construction supplies advanced briskly for a second month.
Production of Domestic Autos and Trucks
(Millions of units at an annual rate; FRB seasonal basis)
1998
1999
Item
U.S. production
Oct.
Nov.
Dec.1
Q3
Q41
Q1 1
13.0
12.9
12.7
11.4
12.8
12.7
Autos
6.1
5.8
5.8
5.6
5.9
5.7
Trucks
6.9
7.1
6.9
5.8
7.0
7.0
NOTE. Components may not sum to totals because of rounding.
1. Production rates are manufacturers' schedules.
Looking beyond November, most indicators point to continued softness in the
manufacturing sector. The October and November readings in the National
Association of Purchasing Management (NAPM) index of new orders were the lowest
since early 1996, and the Dun and Bradstreet index edged down in October, after
having fallen sharply in September. In addition, the staffs series of real adjusted
durable goods orders turned down in October, following a sizable gain in the third
quarter--and that prior increase was concentrated in categories with long production
cycles and thus is expected to provide only a small boost to industrial production over
the near term. On the other hand, anecdotal evidence from the Beige Book and the
Board staffs contacts with industrial firms sent more mixed signals: Producers of
computers, lumber, building materials, aerospace equipment, trucks, and office
supplies reported strong orders in recent months, while manufacturers of steel,
chemicals, and paper indicated that business is quite weak.
Part2: Recent Developments, December 16, 1998
11-12
New Orders for Durable Goods
(Percent change from preceding period; seasonally adjusted)
Co
t
Ct
Total durable goods
Adjusted durable goods'
Computers
Nondefense capital goods
excluding aircraft
and computers
Other
MEMO
Real adjusted orders
1998
Share,
998:H1
Q2
Q3
Aug.
Sept.
Oct.
100.0
-.8
2.7
2.0
1.3
-2.2
70.0
6.0
-. 6
4.3
3.3
2.7
-1.7
-1.3
2.9
-2.2
-2.9
1.9
18.0
46.0
-2.5
-.5
5.4
2.6
3.8
-3.7
9.3
1.1
-11.7
.3
. ..
.7
4.9
-1.1
3.3
-2.7
. ..
.7
3.6
-1.8
2.0
-. 8
Real adjusted orders excluding
engines and turbines
1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle parts.
2. Nominal adjusted durable goods orders were split into three components: computers, electronic
components, and all other. The components were deflated and then aggregated in a chain-weighted
fashion.
..
Not applicable.
This year's slowing in manufacturing production--and the expectation of only a
limited recovery in 1999--apparently is leaving a mark on plans for capital spending in
1999. According to the semiannual NAPM survey, which provides the first reading on
1999 investment plans, more manufacturing firms are planning to reduce nominal
investment spending next year than are planning to increase it. In the past, the
diffusion index that summarizes these numbers has been a useful predictor of the
change in manufacturers' investment, and, all else equal, the latest reading points to
some slowdown in capacity growth in 1999. In addition, contracts for industrial
buildings have been falling steadily this year, while the vacancy rate has remained
high.
Domestic Nonfinancial Developments
II-13
Personal Consumption Expenditures and Income
Consumer spending has remained strong so far this quarter. 6 Total nominal retail sales
rose 0.6 percent in November, and the retail control category--which excludes sales at
automotive dealers and building and material supply stores--rose 0.4 percent. In
addition, sales at the retail control group are now estimated to have risen 0.8 percent
in October, 0.3 percentage point more than reported in the advance data. Most major
categories within the retail control recorded sizable gains last month, but the rise in
sales at GAF stores (general merchandise, apparel, and furniture and appliance stores)
was especially large. Over past twelve months, sales in the GAF category have risen
6-3/4 percent.
Taken together, the November retail sales report and the available information
on consumer prices suggest that real expenditures for goods other than motor vehicles
rose a solid 1/2 percent in November, to stand about 1-1/4 percent above the thirdquarter average. We estimate that total real goods outlays in November were 1-1/2
percent above their third-quarter average.
Real expenditures for services were little changed in October (the last month
for which data are available), as a steep weather-related drop in energy spending offset
gains elsewhere. 7 Spending on services likely remained weak in November, as
temperatures averaged above normal and stock market volume declined.
Fundamentals remain strong in the household sector. Real disposable income
rose 3-1/4 percent over the year ending in October, about in line with the average of
the past few years. Production worker hours and wages both rose in November, which
points to another increase in income last month. In addition, the rebound in the stock
market thus far this quarter has reversed much of the third-quarter drop in the wealthto-income ratio. Consumer sentiment, as measured by the Michigan SRC, remained at
6. Purchases made over the Internet have soared over the past couple of years and, according to a
study by The Boston Consulting Group, exceeded $13 billion in 1998, about 0.2 percent of total PCE.
So far, they do not appear to be creating great difficulties for the NIPA. One reason is that a sizable
share of Internet spending is for brokerage and travel services; in the NIPA, expenditures in these
categories are estimated from sources such as stock market volume and passenger air miles rather than
from point-of-purchase data. As for goods, the Census Bureau includes-and regularly adds--web sites to
the annual and monthly samples used for the retail sales survey and thus should be capturing purchases
made on line. Payments made by consumers for actual Internet use or on-line access are included in the
services category of PCE.
7. The October decline in energy services was in electricity and reflected the return to more
seasonal temperatures after much warmer-than-average weather boosted air conditioning use in August
and September. In November, energy outlays likely fell again, as the warm weather reduced the need
for heating.
II-14
RETAIL SALES
(Percent change from preceding period)
1998
1998
Q2
Q3
1.9
Sept.
Oct.
Nov.
.0
-.1
.4
.3
1.2
1.0
.6
2.3
3.6
.4
-3.0
.8
1.2
.6
2.6
.9
1.3
1.3
1.0
1.0
.0
.0
.8
.5
.4
GAF 2
1.1
.6
-.2
.6
1.2
Durable goods
Furniture and appliances
Other durable goods
.0
-.6
.6
1.9
2.6
1.3
-.1
-.2
-.1
1.1
.1
1.9
.4
.8
-.0
Nondurable goods
Apparel
Food
General merchandise
1.6
1.1
1.7
1.8
.8
-.6
1.1
.1
.1
-3.2
.0
.9
.7
2.2
.4
.3
.4
.8
.6
1.4
Gasoline stations
-. 4
.4
-. 2
.1
.0
Other nondurable goods
2.1
1.6
.4
1.2
-.5
Total sales
Previous estimate
Building materials
and supplies
Automotive dealers
Retail controll
Previous estimate
1. Total retail sales less sales at building material and
Ssupply stores and automotive dealers, except auto and home
supply stores.
2. General merchandise, apparel, furniture, and appliance stores.
PERSONAL INCOME
(Average monthly percent change)
1998
1996
--
1997
Q4/Q4 --
Q1
--
Q2
1998
Q3
Annual rate --
Aug.
---
Sept.
Oct.
Monthly rate ---
Total personal income
5.9
5.4
5.9
4.5
4.3
.4
.2
.4
Wages and salaries
Private
6.5
7.3
7.2
7.9
7.4
7.9
5.6
6.0
5.8
6.2
.7
.8
.2
.2
.5
.5
Other labor income
-2.4
2.8
5.9
2.9
2.7
.2
.2
.2
Less: Personal tax and
nontax payments
12.4
11.5
17.1
10.1
5.6
.8
.0
.3
Equals: Disposable
personal income
4.9
4.4
4.0
3.5
4.1
.3
.3
.5
Memo:
Real disposable incomel
Saving rate (percent)
2.7
2.9
2.9
2.1
4.0
1.2
2.6
.4
3.1
.2
.2
.3
.3
-.1
.3
-.2
1. Derived from billions of chained (1992) dollars.
II-15
Household Indicators
Ratio of Net Worth to DPI
Ratio
1988
1990
1992
1994
1996
1998
Note. The 1998:Q4 observation is a staff estimate.
Real Disposable Personal Income
12-month percent change
1988
1990
1992
1994
1996
1998
Consumer Confidence
Index
----
Michigan Survey
Conference Board
1988
1990
1992
1994
1996
1998
Michigan Survey
Index
-
1988
Expected conditions
Current conditions
1990
1992
1994
1996
1998
II-16
SALES OF AUTOMOBILES AND LIGHT TRUCKS
(Millions of units at an annual rate, FRB seasonals)
1998
Total
Adjusted1
Autos
Light trucks
North American 2
1998
1996
1997
Ql
Q2
Q3
Sept.
Oct.
Nov.
15.0
15.1
15.1
15.0
15.1
15.3
16.1
16.0
14.6
14.6
15.5
15.5
16.4
16.3
15.3
15.4
8.5
6.5
8.3
6.8
8.0
7.0
8.4
7.6
7.7
6.8
8.2
7.3
8.7
7.7
7.9
7.4
13.2
13.3
13.1
13.1
14.1
12.5
13.5
14.3
Autos
7.3
6.9
6.6
7.1
6.4
6.9
7.3
6.5
Big Three
Transplants
Light trucks
5.3
2.0
6.1
4.9
2.0
6.2
4.7
1.9
6.5
5.0
2.0
7.0
4.2
2.3
6.2
4.9
2.0
6.6
5.0
2.2
7.0
4.5
2.0
6.7
Foreign Produced
Autos
1.7
1.3
1.9
1.4
1.9
1.4
2.0
1.4
2.0
1.3
1.9
1.2
2.1
1.4
2.1
1.4
.4
.6
.6
.6
.7
.7
.7
Light trucks
.7
Note. Components may not add to totals because of rounding. Data on sales
of trucks and imported autos for the most recent month are preliminary and
subject to revision.
1. Excludes the estimated effect of automakers' changes in reporting periods.
2. Excludes some vehicles produced in Canada that are classified as imports
by the industry.
New Car and Light Truck Incentives
1992 dollars per vehicle
1600
Index
1600
5
1400 4.5
1200
1200
1000
1000 3.5
600
600
2.5
400
2
1993
1995
1997
1999
Note. Incentve data from J.D. Power, deflated by CP for all dams.
Dec.
N
K
3-
800
1991
Michigan Survey (right scale)
Conference Board (left scale)
4 -
800
400
Index
S
-1400
Buying Attitudes for New Vehicles
(3-month moving average)
1991
1993
1995
-
V
1997
1999
Domestic Nonfinancial Developments
II-17
a relatively favorable level in early December, although it has retraced only a little of
the decline it has posted since peaking earlier this year.
Motor Vehicles
Sales of new light vehicles remained strong in November at 15.4 million units at an
annual rate (adjusted for shifts in reporting periods), although they were one million
units below the spectacular pace of October. Among the major companies, Chrysler,
Toyota, and Honda reported high levels of sales in both months. But sales at General
Motors and Ford, which were boosted in October by heavy incentives on 1998 models,
dropped sharply in November as supplies of these cars dwindled. The disappointing
November results at GM--despite the generous incentives on 1999 vehicles--are likely
a factor behind its decision to extend its incentives into the first quarter.
According to the Michigan SRC, consumers' attitudes toward car-buying
conditions remained upbeat in early December, reflecting favorable assessments of
prices. Increases in sticker prices on the 1999 models were modest and incentive
programs have been generous. The Conference Board index of buying intentions was
about unchanged in November at a fairly high level. In addition, auto company
sources have indicated informally that sales in early December remained robust.
Housing Markets
Housing has continued to boom. Single-family starts were at a 1.35 million unit
annual rate in November, up 60,000 units from the strong October pace. Sales of new
homes were at an 851,000 unit annual rate in October; for 1998 as a whole, new home
sales are on track to break the high recorded in 1977. The October level of existing
homes sales (which is a lagging indicator) was about the same as the average from
January to September.
Near-term leading indicators point to continued strength in single-family
housing for at least the next few months. The thirty-year fixed mortgage rate averaged
about 6.7 percent during the first half of December, down a bit from November. After
having spiked to a record in October, mortgage applications for home purchase have
slipped a bit, on net, during the past six weeks, but are still at a very high level. The
jump in October applications coincided with a short-lived dip in the fixed mortgage
rate to below 6.5 percent. In December, builders' assessments of homebuying
conditions broke the record set in November; similarly, consumers' assessments of
homebuying conditions, as measured by the Michigan SRC, hit a record last month.
The typical seasonal pattern looks for single-family starts to decline about
II-18
Private Housing Activity
(Millions of units; seasonally adjusted annual rate)
1
1998
1997
01
Q2
03
r
SeDt.r
Oct. r
Nov.P
All units
Starts
Permits
1.47
1.44
1.58
1.59
1.57
1.53
1.63
1.58
1.57
1.54
1.69
1.69
t,65
1.65
Single-family units
Starts
Permits
Adjusted permits 1
1.13
1.06
1.14
1.24
1.15
1.24
1.24
1.14
1.23
1.27
1.17
1.26
1.25
1.16
1.26
1.29
1.20
1.28
1.35
1.23
1.32
New home sales
Existing home sales
.80
4.22
.86
4.68
.90
4.78
.85
4.78
.84
4.69
.85
4.79
n.a.
n.a.
Multifamily units
Starts
Permits
.34
.39
.34
.44
.33
.38
.36
.41
.32
.38
Mobile homes
Shipments
.35
.37
.37
.37
.37
.38
n.a.
Note. p Preliminary. r Revised. n.a. Not available.
1. Adjusted-permits equals permit issuance plus total starts outside of permit-issuing areas, minus a correction for
those starts in permit-issuing places that lack a permit.
Private Housing Starts
(Seasonally adjusted annual rate)
Millions of units
1
I
I
1977
I t
1979
I
1981
i 1
1983
I I
1985
I
I I
1987
I - I
1989
I
I
1991
I
I
1993
I
I
1995
I
I
1997
J_
1999
II-19
Indicators of Housing Demand
Builders' Rating of New Home Sales, SA
Diffusion index
80
60
40
20
+
0
20
40
60
80
1990
1991
1992
1993
1994
1995
1996
1997
1998
Note. The index is calculated from National Association of Homebuilders data as the proportion of respondents rating current sales as good
minus the proportion rating them as poor.
MBA Index of Mortgage Loan Applications for Home Purchase, SA
Index
350
4-week moving average
-------- Weekly
300
250
200
r
150
100
50
1990
1991
1992
1993
1994
1995
1996
1997
1998
Consumer Home-Buying Attitudes, NSA
Diffusion index
100
75
50
25
0
1990
1991
1992
1993
1994
1995
1996
1997
Note. The homebuying attitudes index is based on the Michigan Survey and iscalculated as the proportion of respondents
rating current conditions as good minus the proportion rating conditions as bad.
1998
II-20
BUSINESS CAPITAL SPENDING INDICATORS
(Percent change from preceding comparable period;
based on seasonally adjusted data, in current dollars)
1998
1998
Q2
Q3
Aug.
Sept.
Oct.
1.4
1.6
4.7
.8
.6
1.6
1.4
2.0
2.1
1.0
-.2
-.9
-2.4
3.7
-1.5
4.3
3.0
-1.0
9.5
3.0
.6
-.1
3.9
-4.0
-.6
-12.6
5.3
-20.0
-3.3
62.8
4.7
9.9
5.7
3.6
4.2
-.1
-.9
4.3
-4.9
-1.8
4-3
4.7
2.7
-3.0
7.7
9.1
2.5
-1.3
6.2
3.2
-3.3
6.4
-2.2
17.8
7.2
-6.7
-8.6
1.9
-4.1
-13.8
1.1
.5
1.8
-3.0
5.7
.6
-2.3
-2.5
4.3
.4
-2.8
-. 8
-. 5
11.3
-. 4
-3.9
3.6
13.3
1.1
1.1
-6.3
-.2
-8.3
.8
5.5
2.1
-. 3
-4.6
-. 1
Rotary drilling rigs in usel
-11.9
-13.4
-5.7
-4.7
-5.9
Memo (1992 Chained dollars):
Business fixed investment
Producers' durable equipment
Office and computing
Communications equipment
Other equipment 2
Nonresidential structures
12.8
18.8
59.7
10.2
8.8
-2.3
-1.2
-1.1
49.5
11.8
2.5
-1.5
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Producers' durable equipment
Shipments of nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
Shipments of complete aircraft
Sales of heavy trucks
Orders for nondefense capital goods
Excluding aircraft and parts
Office and computing
Communications equipment
All other categories
Nonresidential structures
Construction put in place, buildings
Office
Other commercial
Institutional
Industrial
Lodging and miscellaneous
1. Percent change of number of rigs in use, seasonally adjusted.
2. Producers'
durable equipment excluding office and computing,
communications, motor vehicles, and aircraft and parts.
n.a. Not available.
.9
Domestic Nonfinancial Developments
II-21
50 percent from October to January. However, many builders are apparently carrying
a large backlog of orders, which provides an incentive for them to curtail starts less
than usual this year. Of course, builders' ability to do this will depend, in part, on the
weather and on the willingness of workers to stay on construction sites beyond the
normal season. Indeed, this phenomenon may help explain some of the strength in
starts in November. To the extent that builders are able to continue to defy the
normal seasonal downshift, seasonally adjusted starts could be boosted considerably
over the next few months; after seasonal adjustment, each unit actually begun in
January is equivalent to about 1-3/4 units started in June.
Multifamily housing starts averaged about 350,000 units at an annual rate in
October and November, just above the average for the first nine months of the year.
Financing for most of the units started in the past couple of months was probably put
together before the recent turmoil in the market for commercial mortgage backed
securities (CMBS).
Permit issuance for multifamily units has been running at a fairly high level, on
balance, this fall, suggesting that starts of such units will be well-maintained for at
least the next couple of months. In addition, financing conditions have eased. In
particular, spreads for CMBS--though substantially above the very low levels seen last
spring--have narrowed in the past few weeks. Moreover, the multifamily sector has a
fairly broad base of credit suppliers, and industry contacts report that pension funds,
insurance companies, and government sponsored enterprises, including Freddie Mac
and Fannie Mae, have continued to be active players, helping to blunt the impact of
the difficulties in the CMBS and REIT markets.
Business Fixed Investment
Real business fixed investment appears to have picked up markedly of late, after
having been depressed in the third quarter by a strike-related drop in business
purchases of motor vehicles and ongoing weakness in nonresidential construction.
Producers' durable equipment. Real expenditures on producers' durable
equipment have posted sizable gains of late after having hit a lull in the third quarter.
Nominal shipments of office and computing equipment climbed almost 4 percent in
October, after two months of decline, and, with computer prices falling rapidly, real
expenditures on office and computing equipment look poised to post another large
gain in the fourth quarter. Outlays for communications equipment are also likely to
register a hefty gain: Shipments--although down in October--were 3 percent above
II-22
Orders and Shipments of Nondefense Capital Goods
Office and Computing Equipment
Billions of dollars, ratio scale
1996
1997
1998
Other Equipment
Billions of dollars, ratio scale
1996
1997
1998
Communications Equipment
Billions of dollars, ratio scale
1996
1997
1998
Other Equipment Less Engines and Turbines
Billions of dollars, ratio scale
1996
1997
1998
Domestic NonfinancialDevelopments
II-23
their third-quarter level, and with new orders running well ahead of shipments, a
sizable backlog of orders remains to be filled.
Outlays for transportation equipment are also rising briskly this quarter. Fleet
sales of light vehicles to businesses rebounded smartly in October and November, after
having been held down in the third quarter when General Motors routed vehicles to
the consumer market. Sales of heavy trucks surged to record levels this fall, and
business expenditures on aircraft appear to have been well maintained.
Outside of the high-tech and transportation sectors, nominal shipments in
October were 1 percent above the third-quarter average. However, new orders plunged
13-3/4 percent--a drop that was steepened by the unwinding of the third-quarter jump
in orders for engines and turbines. Excluding this sector, orders fell about 6 percent in
October; declines were evident in all major categories.
Nonresidential structures. Nonresidential construction has remained soft:
The level of spending in the third quarter was about 2 percent below the recent high
reached in the fourth quarter of 1997, and the construction-put-in-place data for
October point to further slippage in the current quarter. The office sector has been the
one bright spot, as rising prices and falling vacancy rates have provided a considerable
lift to activity. However, the recent contracts data suggest that office construction is
likely to decelerate in coming quarters. Expenditures for many other types of
construction have been sluggish for some time, and contracts have weakened
considerably.
As in the multifamily housing sector, financing conditions for nonresidential
construction have improved somewhat in recent weeks. Spreads on CMBS have
narrowed, and originations in this market appear to be resuming. Furthermore,
anecdotal reports indicate that other suppliers of credit, such as insurance companies
and pension funds, have continued to be active in commercial real estate markets.
However, credit standards for loans by banks and thrifts for nonresidential structures
remain firm, and the large declines in the stock prices of equity REITs have limited
their ability to acquire new properties.
Business Inventories
The incoming data suggest that a deceleration in the rate of inventory accumulation
may be under way. The book value of manufacturing and trade inventories (excluding
motor vehicles) slowed to a $17-1/2 billion annual rate in October, about half the pace
recorded in the third quarter. With a few exceptions--notably, chemicals, paper,
II-24
Nonresidential Construction and Contracts
(Six-month moving average)
Total Private Building
1980
1982
Index, Dec. 1982 = 100, ratio scale
1984
1986
1988
1990
1992
1994
1996
1998
Other Commercial
Office
S-
200
-150
100
1984
1986
1988
1990
1992
1994
1996
1 50
1998
1984
1986
1988
1990
1992
1994
1996
1998
1988
1990
1992
1994
1996
199B
Institutional
Lodging and Miscellaneous
-
-
350
250
150
I
I I
I I I
1984 1986 1988
I I
1990
11
1992
1 I
1994
I 1 1 50
1996 1998
Note. Individual sectors include both public and private building.
1984
1986
Domestic Nonfinancial Developments
II-25
machinery, and metals and minerals--inventories generally seem to be in line with
sales.
In manufacturing, inventories increased at a $35 billion annual rate in October,
up substantially from the $7-1/2 billion pace in the third quarter. Stockbuilding at
manufacturers of aircraft and parts accounted for about half of the inventory
investment in October. Indeed, Boeing has experienced a considerable run-up in
inventories over the past several months, in part because financing difficulties have
prevented some foreign customers from taking ownership of finished planes. With
some of the financing difficulties apparently being resolved, Boeing reportedly
delivered twelve planes out of inventory in November. We expect this drop in aircraft
inventories to be reflected in Census's book value data for November. Outside of
aircraft, manufacturing inventories expanded at a $17-1/2 billion pace in October.
Inventories held by food producers rose nearly $5 billion; this buildup may have been
due, in part, to this year's early harvest.
The book value of wholesale inventories excluding motor vehicles fell at a
$10 billion annual rate in October after a large buildup in the third quarter. As
expected, distributors of farm products liquidated some of the stocks they had
accumulated in September as a result of the early harvest, and there were scattered
reductions elsewhere. The overall ratio of inventories to sales (excluding motor
vehicles) remained at the high end of the range of recent years, with quite notable
overhangs at distributors of machinery and metals and minerals.
Retailers, excluding automotive dealers, shed inventories at a $7-1/2 billion
annual rate in October, following only a small accumulation in the third quarter. The
drawdown was concentrated in the "other nondurable goods" grouping, which includes
gas stations, restaurants, and drug stores. Inventories were also liquidated at apparel
outlets, more than reversing September's buildup. On balance, retail inventories
appear fairly well aligned with sales.
Federal Sector
The October Monthly Treasury Statement reported a $32 billion unified budget deficit,
$4 billion lower than a year earlier. Receipts have been bounced around lately by
timing shifts and, on balance, were 4-1/2 percent higher in October than a year earlier.
The year-over-year increase in withheld income taxes and social insurance
contributions slowed to only 2 percent because this October had one less work day
than did October 1997. Daily Treasury data indicate that receipts in these categories
rebounded in November, in part reflecting an extra work day this year. Combining
II-26
CHANGES IN MANUFACTURING AND TRADE INVENTORIES
(Billions of dollars at annual rates;
based on seasonally adjusted data)
1998
1998
Memo:
Oct.
level
Q2
Q3
Aug.
Sept.
7.0
41.4
47.9
72.0
34.8
1083.8
35.0
19.0
6.9
-.4
10.9
-11.5
-16.6
5.0
33.8
7.4
1.3
26.4
24.5
7.6
5.7
1.8
41.7
9.7
-2.8
37.5
30.2
.7
-1.1
1.8
39.2
1.3
2.9
42.4
38.5
28.2
28.8
-.6
17.4
35.0
17.7
-8.4
-10.2
8.1
15.6
-7.5
964.9
471.5
416.6
283.4
255.0
328.9
90.5
238.4
Oct.
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
Oct.
1998
1.58
1.38
1.39
1.38
1.39
1.55
1.35
1.37
1.35
1.37
Manufacturing
Primary metals
Steel
Nonelectrical machinery
Electrical machinery
Transportation equipment
Motor vehicles
Aircraft
Nondefense capital goods
Textiles
Paper
Chemicals
Petroleum
Home goods & apparel
1.75
2.08
2.56
2.48
2.08
2.93
.97
5.84
3.09
1.71
1.32
1.44
.94
1.96
1.38
1.49
1.69
1.77
1.41
1.51
.56
4.44
2.27
1.42
1.06
1.25
.80
1.63
1.40
1.67
2.10
1.75
1.39
1.85
.64
5.12
2.33
1.59
1.22
1.45
.91
1.72
1.36
1.54
1.80
1.61
1.24
1.57
.54
4.34
2.12
1.40
1.13
1.34
.86
1.59
1.39
1.70
2.15
1.65
1.26
1.62
.53
4.34
2.12
1.56
1.24
1.45
.92
1.74
Merchant wholesalers
Less motor vehicles
Durable goods
Nondurable goods
1.36
1.31
1.83
.95
1.26
1.22
1.55
.91
1.33
1.32
1.64
.99
1.28
1.25
1.58
.94
1.33
1.31
1.66
.97
Retail trade
Less automotive dealers
Automotive dealers
General merchandise
Apparel
GAF
1.61
1.48
2.22
2.42
2.53
2.42
1.50
1.43
1.69
2.20
2.27
2.23
1.50
1.42
1.77
2.10
2.54
2.12
1.45
1.40
1.56
2.00
2.35
2.06
1.44
1.39
1.62
2.03
2.44
2.07
I-27
Inventory-Sales Ratios, by Major Sector
(Book value)
Manufacturing
Ratio
2.15
1.9
1.65
1.4
1.15
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Wholesale Excluding Motor Vehicles
Ratio
1.5
1.4
1.3
1.2
1.1
1
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
Retail
Ratio
1.7
1.6
1.5
1.4
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
II-28
FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS
(Unified basis; billions of dollars)
12 months ending in Oct.
October
1997
1998
Percent
change
1997
1998
Outlays
Deposit insurance
Spectrum auction
Sale of major assets
Other
150.9
-0.4
0.0
0.0
151.3
152.4
-0.4
0.0
0.0
152.8
1.0
n.a.
n.a.
n.a.
1.0
1612.3
-14.6
-11.0
0.0
1637.9
1653.0
-4.4
-2.6
-3.2
1663.1
Receipts
114.9
120.0
4.4
1594.2
1726.5
Surplus
-36.0
-32.5
n.a.
-18.1
73.5
Percent
change
2.5
n.a.
n.a.
n.a.
1.5
n.a.
Adjusted for payment timing shifts 1
and excluding deposit insurance and spectrum auction
Outlays
National defense
Net interest
Social security
Medicare
Medicaid
Other health
Income security
Other
143.5
24.5
21.8
30.6
17.1
9.4
2.5
18.1
19.5
144.8
Receipts
Individual income and
payroll taxes
Withheld + FICA
Nonwithheld + SECA
Refunds (-)
Corporate
Other
Surplus
19.4
31.7
16.9
10.0
2.6
17.9
22.8
0.9
-3.9
-10.8
3.8
-1.2
5.5
6.1
-1.1
16.6
1630.2
274.6
244.3
366.5
191.0
96.8
28.2
230.5
198.2
1662.9
269.5
241.0
380.4
192.6
101.8
29.9
232.7
215.0
114.9
120.0
4.4
1594.2
1726.5
8.3
97.2
91.6
6.5
0.9
3.3
14.4
99.6
93.4
7.3
1.1
1.8
18.6
1249.3
1063.4
279.4
93.5
184.7
160.2
1366.3
1150.9
315.0
99.7
187.2
173.0
9.4
8.2
12.7
6.6
1.4
8.0
-28.6
-24.9
23.6
2.4
2.0
12.3
26.0
-46.0
29.2
n.a.
-36.0
63.6
2.0
-1.9
-1.4
3.8
0.8
5.1
6.3
1.0
8.5
n.a.
Note. Components may not sum to totals because of rounding.
1. A shift in payment timing occurs when the first of the month falls on
a weekend or holiday. Outlays for defense, Medicare, income security, and
"other" have been adjusted to account for this shift.
n.a.--Not applicable
Domestic Nonfinancial Developments
II-29
October and November, collections for withheld income taxes and social insurance
contributions were a solid 7 percent above the year-earlier average. Because of a
provision in the 1997 Taxpayer Relief Act that allowed firms to defer the payment of
August and September excise taxes until October, "other" revenues were nearly
30 percent higher than in October 1997.
Outlays in October were only 1 percent higher than a year earlier, held down
by declining net interest payments and defense outlays and by continued restraint in
Medicare expenditures. The Commodity Credit Corporation and Supplemental
Security Income are the only entitlement programs showing substantial increases in
outlays in recent months, and the increases in these areas reflect recent policy changes
that raised payments to farmers and relaxed SSI eligibility restrictions.
State and Local Governments
Real purchases of goods and services by state and local governments appear to have
decelerated again of late after having risen about 3-1/2 percent at an annual rate in the
third quarter. Real construction outlays in October were slightly below the thirdquarter average--and about 4-1/2 percent below the high reached in the first quarter of
1997. In addition, payroll employment rose only a little, on net, in October and
November.
In November, forty-six states, the District of Columbia, and five U.S. territories
together settled lawsuits with the tobacco industry. The agreement requires payments
totaling $206 billion (over the next twenty-five years) to compensate states for their
smoking-related health costs, and it contains initiatives aimed at curbing smoking
among young persons. In earlier agreements with Florida, Minnesota, Mississippi, and
Texas, the tobacco industry had agreed to pay an additional $38 billion. Combining
all agreements, payments will be small through 1999, but are scheduled to rise to the
range of $7 billion to $9 billion per year by 2000. The states are concerned that the
federal government may seek a portion of these payments on the grounds that it
provided much of the funding for the smoking-related Medicaid outlays.
II-30
CPI AND PPI INFLATION RATES
(Percent change)
From twelve
months earlier
Nov.
1997
Nov.
1998
1998
Q2
1998
Q3
-Annual rate-
Oct.
Nov.
-Monthly rate-
CPI
All items (100.0) 1
1.5
Food (15.3)
Energy (7.0)
CPI less food and energy (77.7)
Commodities (24.1)
New vehicles (5.1)
Used cars and trucks (1.9)
Apparel (4.9)
Tobacco (0.9)
Other Commodities (11.3)
Services (53.6)
Shelter (29.4)
Medical care (4.4)
Other Services (19.8)
1.7
-. 4
2.2
2.3
-9.2
2.3
1.9
-6.7
2.6
2.8
-5.6
2.3
.4
.7
1.0
1.2
.0
-. 1
-. 6
-5.7
1.0
6.1
.5
-. 3
4.3
.2
12.2
.0
-1.1
4.9
.8
16.5
.3
1.3
4.7
1.7
16.9
-. 8
2.9
3.1
3.4
2.7
3.1
2.7
2.9
3.5
3.4
2.2
3.8
4.1
2.8
3.2
3.6
1.7
-. 7
-. 7
.3
-. 3
.2
-. 2
.1
-11.0
.7
-7.4
.9
-8.8
.4
.. 2
-. 5
-1.2
.2
1.3
1.9
1.0
.1
.1
.6
-.3
2.2
-. 1
3.6
-.6
1.9
-.2
.0
.0
.1
.1
-.2
-2.9
-1.8
-2.2
.5
-1.5
-. 1
.0
.7
.0
-1.1
-.2
PPI
Finished goods (100.0)2
-1.1
-3.5
Finished consumer foods (23.2)
Finished energy (13.6)
Finished goods less food
and energy (63.2)
Consumer goods (38.0)
Capital equipment (25.2)
Intermediate materials (100.0) 3
Intermediate materials
less food and energy (81.8)
Crude materials (100.0) 4
-6.2
5.7
1.7
Crude food materials (42.1)
Crude energy (36.4)
Crude materials less
food and energy (21.5)
1.
2.
3.
4.
Relative
Relative
Relative
Relative
importance
importance
importance
importance
weight
weight
weight
weight
for
for
for
for
-. 8
-1.2
-19.0
-4.9
-17.5
-7.2
-32.6
-15.7
-1.1
-7.0
-8.6
-17.3
-20.6
-13.6
1.7
-1.4
4.0
1.9
-2.7
-1.9
.0
-2.5
CPI, December 1997.
PPI, December 1997.
intermediate materials, December 1997.
crude materials, December 1997.
Domestic Nonfinancial Developments
II-31
Prices
Inflation has remained reasonably steady. Both the overall consumer price index and
the index excluding food and energy were up 0.2 percent last month. 8 November to
November, the total CPI rose 1.5 percent and the core measure moved up 2.3 percent-the gap being mainly attributable to the sharp decline in energy prices.
Consumer energy prices were unchanged in November. Prices of natural gas
and electricity both increased on a seasonally adjusted basis. But motor fuel and
heating fuel prices declined around 1 percent, and survey evidence from early
December points to further declines in those categories--not surprising, given that
crude oil prices have dropped to stunningly low levels, with the WTI spot price now
running near $11 per barrel.
The CPI for food edged up 0.1 percent in November after having posted an
unusually large increase in October. Prices for fruits and vegetables declined, as did
those in the meat, poultry, fish, and eggs category. And, although dairy prices
continued to rise, the increase was smaller than those of the preceding three months.
Overall food prices are up 2.3 percent over the past twelve months--the same as the
rise in the CPI excluding food and energy.
Among commodities other than food and energy, consumer prices of new motor
vehicles were unchanged in November, reflecting both the ongoing heavy incentives,
especially on 1998-model-year vehicles, and the relatively small increases in sticker
prices on the 1999 models. 9 Motor vehicle prices have been quite soft for some time,
and now stand slightly below the levels of two years ago. The rising dollar was a
major factor in holding down prices over much of this period, although more recently,
industry contacts have suggested that the intense struggle to maintain market share has
been important as well.
Non-energy service prices rose 0.3 percent in November, and were up
3.1 percent over the past twelve months--just a bit higher than the increase over the
preceding twelve months. Prices of shelter and medical services have accelerated
some over the past year while prices of many other service items have decelerated.
8. The cigarette makers' increase of $0.45 per pack went into effect too late in the month to be
captured in the November surveys for either the PPI or the CPI. If the wholesale price increase is
passed through fully to the retail level, it would add 0.2 percent to the overall CPI and 1/4 percent to the
index excluding food and energy items; the increase in the CPI should be seen mostly in December.
9. For any given model of vehicle, the CPI begins pricing the new-model-year version in the month
when dealers report that sales exceed those for the old-model-year vehicles. Thus, the share of newmodel-year vehicles in the CPI gradually increases over the autumn. A little more than half of the
vehicles priced in the November CPI were from the new model year.
II-32
Measures of Core Consumer Price Inflation
(Twelve-month changes except as noted)
CPI Excluding Food and Energy
Percent
3-month changes
Nov.
1990
1991
1992
1993
1994
1995
1996
1997
2
1998
CPI Services and Commodities
Percent
'
I'r
-
CPI services ex. energy
e-
^
-
""-.Nov.
\
/-N/
'_"
''''""
CPI commodities ex food and energy
Nov.
1990
1991
1992
1993
1994
1995
1996
1997
1998
CPI and PCE
Percent
CPI ex. food and energy
PCE deflator ex food and energy
-
-
%
1990
1991
1992
1993
1994
1995
1996
1997
,/
-
1998
Oct.
17
Domestic Nonfinancial Developments
II-33
Most other broad price measures have continued to rise less rapidly than the
CPI. The GDP chain price index rose only 0.9 percent over the year ended in the third
quarter of 1998, nearly 1 percentage point lower than the increase over the preceding
year. Very soft prices for capital equipment have been important in holding down
overall GDP prices: The PPI for capital equipment was about unchanged over the past
twelve months, after having posted a small decline over the preceding period.
The deceleration in GDP prices also owes to a continued deceleration in the
chain price index for personal consumption expenditures, whose rate of increase has
diverged from that of the CPI to an unusual extent. Over the year ended in the third
quarter of 1998, the PCE chain price index increased 0.7 percent, nearly 1 percentage
point less than the rise in the CPI over this period. The gap is even larger when we
exclude food and energy items, with the PCE measure increasing 1-1/4 percentage
points less than the CPI. Part of the divergence between these measures reflects the
fact that PCE prices already incorporate the geometric-mean CPIs that BLS has been
producing on an experimental basis and that will not be incorporated into the official
CPI until January; this factor accounts for about 0.2 percentage point per year of the
divergence between PCE prices and the CPI as currently measured. But most of the
divergence reflects a grab-bag of other differences between the two measures--different
weights, different price estimates for some items, and the inclusion in PCE of
expenditures by nonprofit institutions and some other expenditures that are not
included in the CPI. 10
There are few signs of inflationary pressures at earlier stages of processing.
The PPI for intermediate materials other than food and energy edged lower again in
November and is down 1-1/2 percent over the past twelve months. The PPI for core
crude materials has dropped nearly 16 percent over the past year. Since the middle of
November, most commodity prices have moved downward. The Journalof Commerce
industrial price index has declined nearly 2 percent over the past month, and the CRB
futures index--which is heavily influenced by food commodities--has fallen to its
lowest level in decades.
10. On Friday, December 18, the BLS is expected to announce that it will begin to update the
weights in the CPI more frequently than the current procedure of decennial updates (although the change
will not take effect for a couple of years). Earlier work in this area has suggested that more frequent
updating would not have any appreciable effect on increases in the CPI. In any case, this change will
have no effect on the PCE chain price index, which does not utilize the CPI weights.
II-34
BROAD MEASURES OF INFLATION
(Four-quarter percent change)
1995
Q3
1996
Q3
1997
Q3
1998
Q3
Product prices
GDP chain price index
2.2
1.9
1.8
0.9
1.8
1.3
2.0
0.5
Gross domestic purchases chain-type price index
Less food and energy
2.2
2.3
1.7
1.4
1.6
1.6
0.4
0.7
PCE chain-type price index
Less food and energy
2.1
2.3
1.9
1.6
1.9
1.9
0.7
1.1
CPI
Less food and energy
2.6
3.0
2.9
2.7
2.2
2.3
1.6
2.4
Median CPI
Trimmed mean CPI
3.2
2.7
3.1
2.9
2.9
2.4
2.8
2.0
Nonfarm business chain-type price index
i
Expenditure prices
1. Excluding housing.
SURVEYS OF (CPI)
Actual
inflation I
INFLATION EXPECTATIONS
(Percent)
University of Michigan
(1-year)
(5- to -10-year)
Mean 2
Median 3
Mean 4
Median 5
Professional
forecasters
(10-year)6
1997-Ql
Q2
Q3
Q4
2.9
2.3
2.2
1.9
3.8
3.6
3.4
3.3
2.9
2.9
2.7
2.8
3.8
3.8
3.6
3.8
3.1
3.0
3.0
3.1
3.0
2.9
3.0
2.7
1998-Q1
Q2
Q3
Q4
1.5
1.6
1.6
2.8
3.0
2.8
2.7
2.4
2.6
2.4
2.5
3.3
3,3
3,2
3.1
2.9
2.8
2.8
2.8
2.6
2.5
2.5
2.5
July
Aug.
Sept.
1.7
1.6
1.5
3.1
2.7
2.7
2.6
2.4
2.3
3.1
3.0
3.4
2.7
2.7
2.9
2.5
Oct.
Nov.
Dec.
1.5
1.5
2,6
2,7
2.8
2.5
2.3
2.7
3.2
3.1
3.1
2.8
2.8
2.8
2.5
1. CPI; percent change from the same period in the preceding year.
2. Average increase for responses to the question: By about what percent do you
expect prices (CPI) to go up, on the average, during the next 12 months?
3. Median increase for responses to the question above.
4. Average increase for responses to the question: By about what percent per year
do you expect prices (CPI) to go up, on the average, during the next 5 to 10 years?
5. Median increase for responses to question above.
6. Compiled by the Federal Reserve Bank of Philadelphia.
II-35
Daily Spot and Posted Prices of West Texas Intermediate
Dollars per barrel
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Note. Posted prices are evaluated as the mean of the range listed in the Wall Street Journal.
Oct.
Nov.
Monthly Average Prices of West Texas Intermediate
Month
Posted
Spot
January
February
March
April
May
June
July
August
September
October
November
December 1
15.33
14.78
13.44
13.90
13.13
12.09
12.36
11.73
12.65
12.81
11.54
9.50
16.71
16.06
15.02
15.44
14.86
13.66
14.08
13.36
14.95
14.39
12.94
11.18
1. Through December 15, 1998.
Dec.
II-36
SPOT PRICES OF SELECTED COMMODITIES
---------------Percent changel - - - - - - - - - - - - -- Current
price
($)
Dec. 30
to
Nov. 102
Nov. 10 2
to
Dec. 15
Memo:
Year
earlier
to date
1996
1997
.690
72.667
.551
-21.3
-15.1
-8.5
-24.3
15.9
-.6
-6.2
-45.8
-13.8
-9.2
-3.1
-6.2
-16.9
-47.5
-19.1
Precious metals
Gold (oz.)
Silver (oz.)
292.550
4.900
-4.8
-6.1
-21.4
28.3
.7
-18.2
.1
-2.2
2.5
-16.8
Forest products
Lumber (m. bdft.)
Plywood (m. sqft.)
290.000
317.000
59.2
-3.2
-29.6
-4.8
-6.8
7.3
6.6
-1.6
1.8
9.3
9.740
.322
.326
29.3
27.2
18.3
-31.7
-25.8
-29.7
-30.9
-22.0
-24.9
-12.8
-17.6
-12.1
-42.2
-37.6
-36.2
Livestock
Steers (cwt.)
Hogs (cwt.)
Broilers (lb.)
58.000
11.000
.600
-1.1
14.9
12.5
3.0
-36.4
-21.2
-7.4
-42.1
24.7
-7.9
-45.7
-2.4
-14.7
-72.2
30.1
U.S. farm crops
Corn (bu.)
Wheat (bu.)
soybeans (bu.)
Cotton (lb.)
2.110
3.198
5.430
.592
-24.4
-12.8
-3.7
-8.7
.2
-22.6
-1.8
-9.7
-17.8
-3.4
-16.9
3.6
.5
-5.9
-3.3
-10.5
-17.6
-12.6
-19.8
-5.6
Other foodstuffs
Coffee (lb.)
1.230
34.7
25.4
-27.0
-1.2
-29.3
-4.1
-8.3
-. 1
.9
-8.6
-5.0
-3.2
-8.4
-7.2
-14.8
-11.2
-12.1
-1.8
-3.0
-6.3
-1.3
-9.5
-18.1
-17.7
-13.4
Metals
Copper (lb.)
Steel scrap (ton)
Aluminum, London (lb.)
Petroleum
Crude oil (barrel)
Gasoline (gal.)
Fuel oil (gal.)
Memo:
JOC Industrials
JOC Metals
CRB Futures
CRB Spot
89.400
73.400
191.670
266.420
1. Changes, if not specified, are from the last week of the preceding year to
the last week of the period indicated.
2. week of the November Greenbook.
Domestic Nonfinancial Developments
II-37
Signals about short-term inflation expectations have been mixed of late.
According to the Michigan SRC, median one-year-ahead inflation expectations were
2.7 percent in early December, after several months of readings in the range of
2-1/4 percent to 2-1/2 percent. Longer-term inflation expectations have remained low,
with both the Michigan survey's median five- to ten-year-ahead inflation expectations
and the Philadelphia Fed's survey of professional forecasters' ten-year expectations
continuing to show expected inflation below 3 percent.
II-38
Commodity Price Measures
Journal of Commerce Index
Ratio scale, index, 1990=100
1998
CRB Spot Industrials
Ratio scale, index, 1967=100
CRB Industrials
CRB Futures
Ratio scale, index. 1967=100
Note Weekly data, Tuesdays. Vertical lines on small panels indicate week of last Greenbook The Journal of Commerce index is based almost
entirely on industrial commodities, with a small weight given to energy commodities, and the CRB spot price index consists entirely of industrial
commodities, excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly
equally among energy commodities, industnal commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994.
DOMESTIC FINANCIAL
DEVELOPMENTS
III-T-1
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
1997
Change to Dec. 15 from
selected dates (percentage points)
1998
Instrument
Dec. 31
Oct. 14
FOMC*
Nov. 17
Dec. 15
Dec. 31
Federal funds
FOMC intended rate
Realized rate
5.50
5.44
5.25
5.40
5.00
5.08
4.75
4.79
-.75
-.65
Treasury bills 2
3-month
6-month
1-year
5.22
5.23
5.22
3.93
4.06
4.01
4.41
4.42
4.34
4.38
4.40
4.29
-.84
-.83
-.93
Commercial paper
1-month
3-month
5.65
5.57
5.26
5.11
5.13
5.09
5.24
5.00
-.41
-.57
Large negotiable CDs 2
1-month
3-month
6-month
5.65
5.72
5.74
5.34
5.30
5.09
5.19
5.31
5.12
5.49
5.13
4.98
-.16
-.59
-.76
Eurodollar deposits 3
1-month
3-month
5.63
5.72
5.25
5.25
5.19
5.31
5.44
5.13
-.19
-.59
Bank prime rate
8.50
8.25
8.00
7.75
-.75
Intermediate-and long-term
U.S. Treasury (constant maturity)
2-year
10-year
30-year
5.66
5.75
5.93
4.08
4.58
5.00
4.56
4.85
5.28
4.47
4.62
5.03
-1.19
-1.13
-.90
U.S. Treasury 10-year indexed note
3.70
3.72
3.80
3.80
.10
Municipal revenue (Bond Buyer) 4
5.40
5.17
5.28
5.18
-.22
.01
-. 10
Corporate bonds, Moody's seasoned Baa
7.28
7.23
7.37
7.22
-.06
-.01
-. 15
High-yield corporate 5
9.06
11.20
10.62
10.44
1.38
-.76
-. 18
6.99
5.53
6.49
5.36
6.93
5.56
6.69
5.53
-.30
.00
.20
.17
-.24
-.03
Oct. 14
FOMC*
Nov. 17
Short-term
Home mortgages (FHLMC survey rate)
30-year fixed
I-year adjustable
6
Record high
Stock exchange index
Dow-Jones Industrial
S&P 500 Composite
NASDAQ (OTC)
Russell 2000
Wilshire 5000
Change to Dec. 15
from selected dates (percent)
1998
Level
Date
Oct. 14
FOMC*
Nov. 17
Dec. 15
9,374.27
1,192.33
2,050.42
491.41
11,106.10
11-23-98
11-27-98
12-9-98
4-21-98
7-17-98
7,968.78
1,005.53
1,540.97
324.98
9,060.47
9,011.25
1,135.87
1,861.68
390.42
10,383.89
8,823.30
1,162.83
2,012.60
389.57
10,591.28
1. Average for two-week reserve maintenance period ending on or before date shown. Most recent
observation is average for current maintenance period to date.
2. Secondary market.
3. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time.
4. Most recent Thursday quote.
5. Merrill Lynch Master II high-yield bond index composite.
6. For week ending Friday previous to date shown.
* Data are as of the close on November 16, 1998.
Record
high
-5.88
-2.47
-1.84
-20.72
-4.64
Oct. 14
FOMC*
Nov. 17
10.72
15.64
30.61
19.88
16.90
-2.09
2.37
8.11
-.22
2.00
Selected Interest Rates
Percent
Selected Short-Term Interest Rates
Percent
Federal Funds
Oct. 23
Dec. 15
Note. Vertical dashed lines indicate end of reserve Period.
3-Month Treasury Bills
r
Percent
-n
FOMC
Nov. 17
Dailly
5.5
J*
I IIll
1998
1997
II i
iIf I
ff
I II Itl
Dec. 15
Percent
Percent
Weekly
Weekly
Friday
FOMC
ov. 17
Corporate
*. ."* -.
Treasury bonds
30-year constant maturity
ui
.
,
i
.
iI
ml
I
--
Corporate bonds
. Moody'sBaa
""..-.**
Municipal bond s
Bond Buyer Revenue
(Thursday)
.
I
Oct. 23
Selected Long-Term Interest Rates
l
fI
ILlr II .l If
.
-
I
s1r
1998
1997
MunicipaJ
30-Yr. Treasury"
III
I
|
...
"'""'
*'*
......
Oct. 23
"Daily frequency.
Percent
Selected Mortgage Rates
I
I
I "'
4.5
Dec. 11
Percent
FWeekly
Friday
FRM
.-.
1
1997
"' ..
.*
I
I
I
I
*•
ARM
**
*
...
.
t
..***"
I
I
I
1998
I
•
I
*
.
I
I
I
***
.
I
..
1
Oct. 23
Dec. 11
Domestic Financial Developments
Overview
Financial markets showed further signs of mending over the intermeeting period,
although the process has been anything but smooth, and signs persist of an elevated
aversion to risk and an increased preference for liquidity. Major share price indexes
initially extended their strong recovery in the days following the November FOMC
meeting. Many touched new highs. But, over the past two weeks, the generally
negative tone to corporate earnings announcements and concerns about prospects for
Latin America produced several downdrafts in equity prices, leaving major equity
indexes showing mixed changes on net since mid-November.
Prices of Treasury securities benefited from positive news on inflation,
particularly the continued decline in oil and other commodity prices. The quest for
safe havens also contributed at times to the intermeeting decline in Treasury yields-particularly for the most liquid, on-the-run issues. Longer-term Treasury bonds shed
as much as 1/4 percentage point, on balance, over the intermeeting period.
Spreads for both investment-grade and high-yield corporate bonds relative to
Treasuries narrowed early in the intermeeting period, although a portion of the
improvement in bond spreads was reversed more recently as investors' concerns about
risk and liquidity reintensified. The liquidity of the corporate bond market reportedly
has been limited by a reluctance of dealers to commit capital to market-making as they
position their balance sheets for reporting at year-end. In the commercial paper
market, significant year-end pressures remain as investors are demanding a large
premium to hold lower-tier issues across the turn of the year; however, the premium
has come down substantially of late and quality spreads on shorter-dated paper have
narrowed, suggesting a generally improving tone in this market.
Borrowing by businesses has remained brisk this quarter. Offerings of
investment-grade corporate bonds soared to a record in November as firms took
advantage of low rates. Moreover, a growing number of below-investment-grade
issuers have come to the market, although volume remains well below the strong pace
of the first half of the year. The greater receptivity of the capital markets--evident
also in a mild recovery in equity issuance--has permitted firms to rely less heavily on
banks.
Borrowing by households appears to be staying high in the fourth quarter.
There was a notable pickup in consumer credit growth in October, and November loan
III-2
Equity and Treasury Markets
Selected Stock Indexes
[ndex(7/01/98 = 100)
Jul
Aug
Sep
1998
Oct
Nov
Dec
On-the-Run Premiums for Treasury Securities*
Basis Points
S&P 500 Implied Volatility
Percent
Aug
Sep
Oct
1998
Nov
Treasury Yield Curve
Percent
1
Nov. 16
-
1 I 5I
Aug
Sep
Oct
Nov
Dec
1998
"Spreads of next-to-most-recently over most-recently issued secunty.
Note. New five- and thirty-year Treasury securities issued on Nov. 16.
1 3 5
7
I
10
I0
20
Maturity in Years
3
30
4.6
Domestic FinancialDevelopments
III-3
figures for banks suggest a sizable further increase. Loan applications through early
December and real estate loan growth at banks point to heavy borrowing in the home
mortgage sector.
The Treasury increased its net borrowing in the bill sector in the fourth quarter,
leading to a net paydown of an estmated $30 billion of coupon securities as the overall
need for funds remained modest. Meanwhile, state and local governments have
continued to issue bonds in volume, primarily to finance capital outlays.
Rapid growth in bank credit continued through November, reflecting not only
strong lending to households but an outsized buildup of securities. These asset
acquisitions have been funded importantly by liquid deposits, as growth in the broad
monetary aggregates has continued at a double-digit pace.
Business Finance
Offerings of new corporate bonds have rebounded strongly since the end of the third
quarter, and the market has come to embrace a wider variety of issuers. Investmentgrade offerings soared to a record $23-1/2 billion in November, with more than half of
the proceeds earmarked to pay down short-term debt, much of it accumulated since
August. Moreover, the improving tone of this market was evident in the maturities of
bonds sold, which on average rose from twelve years in October to eighteen years in
November. The relatively high spreads between investment-grade corporate debt and
Treasury securities evidently have not discouraged issuers, no doubt because the level
of corporate yields remains quite low by historical standards.
Recent indications of the condition of the commercial paper market have been
mixed. Over the intermeeting period, the spread between medium-grade and prime
paper fell sharply on short-dated issues that mature before the end of the year, but the
same spread on thirty-day paper has widened, with a significant jump occurring on the
day that the maturity crossed the year-end. Although investors have continued to
demand a hefty premium to hold medium-grade paper over the four days at year-end,
the premium has come down notably in recent days. Moreover, the placement of
paper over year-end has proceeded somewhat ahead of last year's pace.
Issuance of junk bonds has picked up since mid-October, but the market still
shows signs of stress. Offerings have been largely limited to well-known firms,
particularly telecommunications and other noncyclical firms, and issuance has been
running at only about half the extraordinary monthly pace that was recorded in the
first half of the year. Spreads on high-yield debt relative to Treasury securities remain
nearly double the level observed in the spring.
III-4
GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS
(Billions of dollars; monthly rates, not seasonally adjusted)
1998
Type of security
1997
Q1
Q2
Q3
All U.S. corporations
69.7
94.3
97.0
9.8
59.9
12.7
81.6
14.8
82.2
5.0
1.8
3.2
6.1
1.2
4.8
17.0
Stocks1
Bonds
Nonfinancial corporations
Stocks i
Initial public offerings
Seasoned offerings
Bonds
By rating, sold in U.S. 2
Investment grade
Speculative grade
Public
Rule 144A
corporations
Financial
Stocks1
Bonds
Nemo;
Net issuance of commercial
paper, nonfinancial corporations 3
Change in C&I loans at
commercial banks 3
Sept.
Oct.
Nov.
70.1
79.9
69.2
98.2
6.1
64.0
4.8
75.1
8.2
61.0
9.4
88.8
8.4
2.8
5.6
3.7
1.0
2.8
2.3
.1
2.2
5.1
4.4
.7
5.9
3.2
2.7
27.2
26.8
15.6
10.3
12.3
31.5
7.4
8.0
1.5
6.5
13.1
12.6
2.1
10.5
10.7
14.3
3.0
11.3
10.1
4.2
1.4
2.8
6.8
2.7
1.4
1.3
8.7
3.3
.0
3.3
23.4
8.1
.9
7.2
4.8
42.6
6.6
54.3
6.4
55.3
2.3
48.3
2.4
64.8
2.6
46.5
3.0
57.1
1.1
4.5
.5
7.4
7.2
-5.2
.4
6.1
3.5
11.5
7.4
6.3
27.9
.1
Note. Components may not sum to totals because of rounding. These
data include speculative-grade bonds issued privately under Rule 144A.
All other private placements are excluded. Total reflects gross proceeds
rather than par value of original discount bonds.
1. Excludes equity issues associated with equity-for-equity swaps that have
occurred in restructurings.
2. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's
if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds.
3. End-of-period basis. Seasonally adjusted.
Major Components of Net Borrowing by Nonfinancial Corporations
Billions of dollars'
* Corporate bonds(e)
Bank business loans and paper"
-
m1995
'Monthly rate.
I
I
1996
1997
1998
'"Bank loans to business including CLOs plus domestic nonfinancial commercial paper; calculated on a period-end basis.
e-Staff estimate.
Domestic FinancialDevelopments
III-5
Gross public issuance of equity shares by nonfinancial firms picked up in
November; however, as has been the case for the past couple of months, activity was
dominated by several large issues. The few IPOs brought to market since the last
FOMC meeting, which were mostly Internet-related, have been remarkably well
received, with some stocks appreciating so sharply that questions have been raised
about mispricing by the underwriters. Encouraged by the performance of recent IPOs,
a number of firms, including many that have delayed public offerings in recent
months, have filed registration statements, suggesting that a surge of new issues may
occur after the usual year-end lull in underwriting activity.
While the earlier financial turmoil has had a lingering effect on securities
markets, small businesses appear to have encountered little difficulty in accessing
credit throughout this period, even though banks report that they have slightly firmed
lending standards and terms for small, as well as large, customers. According to the
November survey of the National Federation of Independent Business, the net
proportion of small businesses that found credit harder to obtain remained near the
bottom of the range seen during the current expansion, and hardly any of the
responding firms anticipated a deterioration in their access to credit looking one
quarter ahead. Indeed, reductions in the prime rate that accompanied recent policy
easings have helped lower the cost of much of their borrowing.
There is not much evidence of any deterioration in the credit quality of
nonfinancial firms generally. In November, the amount of debt downgraded by
Moody's slightly exceeded the amount upgraded, but the amounts put on watch for
potential upgrade were higher than potential downgrades. Although the rate of
nonfinancial business failures edged up in recent months, it remained near the low end
of its range over the 1990s. (There was, however, some downgrading of financial
firms, mostly reflecting difficulties with large trading losses or soured loans arising
from foreign operations.)
Profits of nonfinancial corporations, measured by four-quarter growth of NIPA
economic profits after tax, slipped in the third quarter. The weakness largely owed to
the continued decline in receipts generated abroad; however, domestic profit growth
also slowed, reflecting in part softer prices for manufactured goods, notably metals and
electronic components.
Equity prices continued to climb after the November FOMC meeting, with
most major indexes reaching record highs. Some of those gains have been lost in
recent sessions, as earnings warnings by some large firms and developments in Latin
III-6
Spreads on Corporate Securities
BBB Corporate Bond Yield* less Ten-year Treasury
Basis points
Basis Points
240
Month-end through Nov. 1998
+
-
Nov. 17
FOMC
220
I
- 200
-
-
1997
180
1998
Aug
Sep
Oct
1998
*Source. Merrill Lynch
Note. + Indicates the latest observation (Dec. 15).
Nov
Dec
High-Yield Bond Yield* less Seven-year Treasury
Basis points
Basis Points
-
700
Sep. 29 Oct. 15 Nov.17
FOIMC
FOMC Ease
600
v
500
400
300
1997
I'
ug
1998
I
Sep
I
Oct
Nov
1998
'Merrill Lynch Master II High Yield Bond index
Note. + indicates the latest observation (Dec. 15).
Medium Grade less Prime Commercial Paper Yield
Basis points
Basis Points
Month-end through Nov. 1998
Fifteen-day paper
Thirty-day paper
.........
''
-~'
1997
'
1998
Note. Data tor the fifteen-day issue are only available since January 1998.
Note. + indicates the latest daily observation (Dec. 15).
Aug
Sep
Oct
1998
Nov
Dec
III-7
Business Finance
NFIB: Credit Harder to Obtain Now
than 3 Months Ago (Net)
NFIB: Credit Expected to Become Harder
to Obtain over Next 3 Months (Net)
Percent
Percent
FMonthlv
1990
1992
1994
1996
1998
Note. Respondents consist of firms that sought credit
in the past three months.
1990
1992
1994
1996
1998
Note. Respondents consist of firms that sought credit
in the past three months.
NIPA Economic Profits After-tax
Selected Stock Indexes
Percent change from 4 quarters earlier
Percent change to Dec. 15 since:
Last
SFoMC'
Year-end
1997
1. DJIA
20
2. S&P 500
2
20
3. Nasdaq
8
28
4. Russell 2000
0
-11
5. Money Center
Banks
0
-9
*Nov. 16,1998.
30
1990
1992
1994
1996
Forward Earnings-Price Ratio and
Real Thirty-year Treasury Yield
1998
Percent
Completed Mergers of U.S. Nonfinancial
Corporations
Billions of 1997 dollars'
Aug.-
SETotal deal value
Nov."
SValue of equity retired
S&P 500 forward earnings-price ratio*
Jan.July*
n
1988
1993
1998
"Based on UB/E/S operating earnings over coming
12 months.
*Nominal yield less Philadelphia Fed ten-year inflation
expectations.
1990
1992
1994
1996
*Deflated to 1997 dollars using GDP deflator.
"At an annual rate.
1998
III-8
Commercial Real Estate
CMBS Yield less Ten-Year Treasury
Basis points
CMBS Gross Issuance
Billions of Dollars
Quarterly through 1998:Q3
1
I
. I
1998
1996
1994
Note. + indicates most recent weekly spread (Dec. 14).
Source. Morgan Stanley.
Equity Prices
I
I
I
I
Ii
0
i
1996
1997
1998
1999
Note. + indicates Q4 estimate based on preliminary data.
Source. Commercial Mortgage Alert.
REIT Gross Equity Issuance
Billions of Dollars
January 1, 1997 = 100
End of month through Nov. 1998
I
1998
1997
Note. + indicates most recent daily value (Dec. 14).
Source. National Association of Real Estate Investment Trusts.
1
-
I
-I
I
I f
Il
I
I_
0
1996
1997
1998
1999
Note. + indicates Oct. and Nov. average at quarterly rate.
Source. National Association of Real Estate Investment Trusts.
Domestic FinancialDevelopments
III-9
America have weighed on the markets. Stock prices of the basic materials sector-among the hardest hit by the turmoil in Asia and emerging markets--continued to drop,
while technology shares, which had also suffered more than the broader indexes during
the earlier swoon, instead appreciated sharply over the intermeeting period. The
recovery in equity prices since mid-October has reduced the forward earnings-price
ratio from its recent peak. Although it has opened up a bit from the extremes reached
earlier this year, the still narrow gap between this equity yield and the inflationadjusted Treasury yield suggests that equity valuations are quite lofty. This seems
rather at odds with the wide spreads still found on bonds, suggesting that those spreads
may reflect more the lower liquidity of the bond market than risk aversion on the part
of investors.
Mergers have continued to be completed at a strong pace in recent months,
despite the turmoil in financial markets. The equity retirements from completed deals
are expected to set a record in the fourth quarter, boosted by a couple of blockbuster
foreign acquisitions of domestic companies. Moreover, more than $110 billion of new
megamergers, led by the $81 billion combination of Exxon and Mobil, have been
announced in recent weeks and will close sometime next year. Continuing the trends
of this merger wave, the recent announcements are largely intra-industry and represent
friendly combinations of firms looking to cut costs in industries with excess capacity.
Commercial Real Estate
The commercial real estate financing market, which had been under severe strain since
mid-August, has staged a notable recovery. Commercial mortgage-backed securities
issues brought to market in November were generally well-received, which has helped
to build confidence among issuers and investors. The market improvement has
perhaps been most evident in pricing: The yield on A-rated CMBS fell 27 basis
points since the November Greenbook, adding to a decline that began in mid-October.
More speculative BB-rated issues have shed 50 basis points since early November,
reversing a trend toward higher yields that began in September; new buyers have
entered into the market for the subordinated pieces of these securitizations.
Nevertheless, spreads relative to Treasury securities remain quite wide compared with
those earlier in the year. CMBS issuance has rebounded sharply in the current quarter
and is expected to remain strong in the first quarter of 1999.
In contrast to the improvement in the CMBS market, REIT share prices and the
level of REIT gross equity issuance remained subdued in November, likely owing to
III-10
Household Net Worth Relative to Disposable Income
Ratio
(Seasonally adjusted)
1974
1970
p. Staff projection.
1978
1990
1986
1982
1994
1998
Net Flows of Mutual Funds
Excluding Reinvested Distributions
(Billions of dollars; monthly rates; not seasonally adjusted)
1998
Memo: End
of October
Liquidity
Assets
Ratio
1996
1997
H1
Q3
Oct.
Nov.e
19.3
22.7
29.3
10.5
6.7
28.7
3,805
5.5
Equity Funds
Domestic
International
18.0
14.1
4.0
19.0
15.8
3.1
21.1
18.6
2.5
4.7
5.9
-1.2
2.4
3.1
-0.7
17.7
16.9
0.8
2,651
2,287
365
6.0
5.6
8.3
Hybrid Funds
1.0
1.4
1.7
-0.1
-0.3
1.6
344
8.1
Bond Funds
International
High-yield
Other Taxable
Municipal
0.2
-0.2
1.0
-0.1
-0.5
2.4
-0.1
1.4
1.0
0.1
6.5
0.0
1.8
3.5
1.2
6.0
-0.3
-0.4
5.3
1.4
4.6
-0.3
0.4
3.9
0.6
9.5
0.0
4.8
2.1
2.5
809
24
108
382
295
3.1
7.2
6.2
2.9
2.5
Total Long-Term Funds
Source. Investment Company Institute (ICI).
e Staff estimates based on ICI weekly data.
Domestic FinancialDevelopments
III-11
continued concerns that over-building could restrain the growth of rental income from
commercial properties.
Household Finance
Household balance sheets have benefited from the rise in equity prices over the past
two months, and the ratio of net worth to income probably has returned to near the
record heights reached in the second quarter of 1998. Households have exhibited a
renewed appetite for risky financial assets, with flows into equity and high-yield bond
mutual funds continuing the rebound that began in mid-October. Flows into high-yield
bond funds during November--at $4-1/2 billion--were the strongest of any month on
record. However, according to weekly data provided by ICI on a confidential basis,
high-yield bond and equity inflows diminished during the first weeks of December, as
stock prices faltered and market volatility turned up.
Based on fragmentary data through November, household borrowing appears to
have grown briskly this quarter. Growth in mortgage debt has continued to be spurred
by strong home purchases and heavy refinancing activity. Despite the paydown of
installment loans that typically accompanies mortgage refinancing, consumer credit
growth picked up to a 9 percent annual rate in October.1
Indicators of household credit quality remain favorable on balance. Call Report
data show that the delinquency rate on consumer loans at commercial banks was about
unchanged in the third quarter, while the ABA delinquency rate on all closed-end
consumer loans declined. Moody's reported that the delinquency rate on credit card
accounts in securitized pools in October continued the downtrend observed over the
past year. Delinquency rates on loans at the auto finance companies declined in
October and remain well below the peak reached in early 1997. The MBA reported
that sixty-day and over delinquencies on home mortgage loans also edged down in the
third quarter. One distinctly negative note is that personal bankruptcies rose at a 7
percent annual rate in the third quarter, a marked increase from the 2-1/2 percent
average rate over the previous four quarters. However, the pickup may be linked to
the progress of bankruptcy reform legislation in the third quarter. Some lawyers
1. A revision of the Call Report data involving members of a large bank holding company increased
the growth rate of consumer credit in the third quarter to near 7 percent, up from the previous estimate
of 4-1/2 percent.
III-12
Household Debt Growth
Percent
(Seasonally adjusted)
1970
1974
p. Staff projection.
1982
1978
1986
1994
1990
1998
Consumer Loan Delinquency Rates at Banks
Percent
(Seasonally adjusted)
Quarterly
Credit cards
..-
*
0...
Q3
Sl
1
I I
I
1
I
1
1988
1986
1984
Q3
loans
SAll
1990
I
I
I
1992
1994
I
I
1996
I
1998
Source. Call Reports.
Personal Bankruptcy Filings
Per 100,000 persons
(Seasonally adjusted)
ABS Yield less Two-Year Treasury
Basis points
600
Quarterly
500
400
300
200
100
0
I l
1984
I
I
!
1989
l
i
I
1993
i _
i I
1998
Source. Administrative Office of the U.S. Courts.
1989
1992
1995
Source. Salomon Smith Barney.
Note. Latest observation is for Dec. 11.
1998
Domestic FinancialDevelopments
III-13
reportedly encouraged clients to file for bankruptcy before a new federal law might
take effect.
Issuance of asset-backed securities picked up strongly in November, and home
equity securitizers returned to the market after sitting out the month of October.
Nonetheless, home equity spreads remain wide, and home equity lenders that rely on
securitizations as their primary source of funding continue to encounter resistance from
investors. Issuance of subprime home equity securities has picked up, but many of the
deals required guarantees from private insurers, in contrast to most deals completed
earlier in the year. The problems of these originators may have caused some reduction
in lending to households with blemished credit histories, but other intermediaries with
alternative sources of financing, such as diversified parent companies or wellcapitalized partners, are likely finding that reduced competition is providing favorable
lending opportunities in this market.
Government Finance
The Treasury increased its net borrowing in the bill sector to an estimated $55 billion
in the fourth quarter, in part through larger weekly auctions implemented in late
September. Given this increase, and the fact that overall borrowing needs remain
modest, about $30 billion of coupon securities should be paid down, on net, in the
quarter.
The only coupon auction scheduled during the intermeeting period, that of the
two-year note, met with modest demand--similar to the most recent mid-quarter
refunding--perhaps evidencing dealers' reluctance to assume large positions in an
uncertain market as the year-end approaches. Indeed, the four primary government
securities dealers that close their books at the end of November pared some of their
positions significantly last month. Also, on the demand side, foreign official holdings
of U.S. Treasury securities at the Federal Reserve Bank of New York, which had
declined sharply in September as pressures developed in international financial
markets, continued to rebound and now stand just $15 billion below their April peak.
Spurred in part by the growth of their mortgage portfolios, Fannie Mae and
Freddie Mac have raised a sizable volume of funds both domestically and abroad.
Fannie has issued about $40 billion of benchmark notes since it started the program in
January, of which international investors are reported to have bought around
2. Both the House and the Senate approved bankruptcy reform legislation, but a compromise bill
was not voted on in the Senate before it adjourned in October.
III-14
Treasury Financing
(Billions of dollars)
1998
Item
Ql
Q2
Total surplus, deficit (-)
-30.2
136.9
Means of financing deficit
Net borrowing
Nonmarketable
Marketable
Bills
Coupons
25.9
17.3
8.6
4.1
3.5
Sep
Oct
3.0
38.2
-32.5
n.a.
-81.8
15.9
-97.7
-78.8
4.6
-28.8
10.1
-38.9
-3.5
-18.9
-46.4
7.3
-53.7
-38.8
-14.8
15.3
3.6
11.7
13.6
-1.9
21.4
.9
20.5
34.2
-13.7
4.3
-44.6
33.4
-2.5
2.7
20.3
.0
-10.5
-7.6
10.7
14.5
27.6
72.3
38.9
38.9
36.2
Decrease in cash balance
Other'
MEMO
Cash balance, end of period
Q3
Nov
n.a.
15.8
NOTE. Components may not sum to totals because of rounding.
1. Direct loan financing, accrued items, checks issued less checks paid, and other transactions.
Net Cash Borrowing of Government-Sponsored Enterprises
(Billions of dollars)
1998
Agency
FHLBs
FHLMC
FNMA
Farm Credit Banks
SLMA
Q1
Q2
Q3
Aug
Sep
Oct
4.0
24.1
11.3
-1.2
-1.4
10.5
7.0
25.1
2.4
-3.1
14.7
32.7
24.4
-0.4
0.5
6.5
5.0
8.0
-6.6
0.1
8.7
19.2
7.4
6.4
0.4
24.1
13.7
0.7
-3.6
n.a
NOTE. Excludes mortgage pass-through securities issued by FNMA and FHLMC.
III-15
State and Local Finance
GROSS OFFERINGS OF MUNICIPAL SECURITIES
(Billions of dollars; monthly rates, not seasonally adjusted)
1998
Total tax-exempt
Long-term
Refundingsa
New capital
Short-term
Total taxable
1996
1997
Q1
Q2
Q3
17.9
14.3
4.9
9.4
21.5
17.9
6.6
11.3
23.3
22.0
9.5
12.5
27.5
24.3
8.5
15.7
3.6
3.6
1.3
0.8
1.1
1.3
Sept.
Oct.
Nov.
23.1
20.2
8.1
12.1
20.6
17.5
8.4
9.1
21.7
19.5
6.8
12.7
21.0
19.3
6.9
12.5
3.2
2.9
3.1
2.2
1.7
0.8
1.3
1.0
0.5
0.7
Note. Includes issues for public and private purposes.
1. All issues that include any refunding bonds.
Tax-Exempt to Taxable Yield Ratio
Thirty-Year Revenue Bond Yield to Thirty-Year Treasury Yield
Ratio
1.1
Monthly
+
-
1.05
1
0.95
0.9
0.85
0.8
1994
1995
Note. Average of weekly data.
Note. + indicates the latest observation (Dec. 10).
1996
1997
1998
III-16
Part 2: Recent Developments, December 16, 1998
40 percent. The strong interest shown by international investors owes in part to a
desire by foreign central banks to invest their dollar reserves in safe securities amid
the international financial crisis, even though these securities are not explicitly
guaranteed by the government. Although Freddie Mac has issued a much smaller
quantity of its reference notes, the agency recently announced its intention to move to
a monthly auction schedule for this series and anticipates total issuance of $40 billion
over the next twelve months.
Spreads between non-callable non-benchmark agency-issued securities and
Treasuries widened 6 to 7 basis points over the intermeeting period, perhaps reflecting
investors' renewed concern about liquidity. Indeed, more liquid benchmark securities
fared slightly better, posting spread increases of 3 basis points or less. Spreads on
benchmark securities are near 40 basis points for three-year notes and 60 basis points
for ten-year notes.
Municipal Finance
Total tax-exempt bond issuance was little changed from October. Advance refunding
activity remains below the levels seen in the first nine months of the year, in part
because the low yields on Treasury bonds relative to municipal bonds make refunding
more expensive (issuers hold Treasuries in escrow accounts until the old muni can be
called and redeemed). In addition, advance refunding likely is being constrained by
the limited supply of bonds eligible to be refunded, which has been reduced by the
strong refunding activity since the middle of 1997. Nevertheless, new capital issuance
to date in the fourth quarter has been sizable, and 1998 overall is likely to post the
largest gross issuance of tax-exempt bonds since the all-time high issuance in 1993.
Investor demand for tax-exempt bonds has strengthened since October. Taxexempt mutual funds attracted an estimated $2-1/4 billion of inflows in November, up
from $1/2 billion in October. Market sources indicate that retail demand has
strengthened as some investors have sought to avoid volatility in equity markets. The
recent firming of demand helped pull down the thirty-year revenue yield index about
10 basis points since the November FOMC. Even so, ongoing supply pressures and
continued preference for Treasuries left muni yields relative to Treasuries at very high
levels.
Money and Bank Credit
The monetary aggregates posted another strong month in November. Substantial net
flows into liquid deposits contributed to a 10-1/2 percent rate of increase in M2 last
III-17
MONETARY AGGREGATES
(Based on seasonally adjusted data)
1998
1997
Q2
1998
Q3
Sept
Oct.
Aggregate or component
1997:Q4
Level
to
(bil. $)
Nov. Nov. 98 Nov. 98
(p)
(p)
(p)
Percentage change (annual rate)
Aggregate
.2
7.4
10.2
-2.4
6.6
7.1
5.1
-5.6
1.1
8.4
-11.6
-7.0
1
3.5
14.8
14.5
7.2
12.7
12.9
10.2
10.4
14.7
1.7
8.8
1087.7
4376.0
11.0
5909.6
15.4
-1.9
-9.9
10.1
1.6
9.0
9.0
7.7
17.8
8.2
456.7
-4.4
.6
376.5
246.6
9.8
18.6
14.6
10.4
11.3
3288.3
11.9
-1.3
21.3
15.8
1.5
48.3
14.9
1.6
31.3
14.7
-1.5
17.0
13.7
-. 7
25.1
1576.0
961.6
750.8
8.4
13.8
13.3
27.0
17.7
1533.5
-8.8
8.1
7.9
611.9
60.9
-20.3
20.4
44.4
35.3
498.5
46.2
12.5
20.9
5.6
277.8
145.3
8.6
5.9
7.1
10.2
2199.0
1393.1
509.9
3998.0
Selected Components
Currency
Demand deposits
Other checkable deposits
7. M2 minus M1
7.5
-2.0
-12.2
3
Savings deposits
Small time deposits
Retail money market funds
11. M3 minus M24
5
12.
13.
14.
15.
Large time deposits, net
Institution-only money market
mutual funds
RPs
Eurodollars
8.5
9.9
9.9
2.3
16.3
13.6
-2.6
20.9
19.6
18.8
17.1
15.2
-2.7
-3.5
21.0
17.4
31.2
36.5
14.6
-7.7
21.6
10.5
14.3
29.8
38.4
-18.4
Memo
Liquid Deposits
6
Sweep-adjusted M17
Monetary base
Household M28
4.3
6.0
5.9
6.6
8.5
4.6
4.1
8.7
5.4
9.7
12.0
13.8
3.7
6.9
8.9
7.6
11.5
14.7
8.3
9.3
13.3
10.3
9.1
10.9
Average monthly change (billions of dollars) 9
Memo
Selected managed liabilities
at commercial banks:
20. Large time deposits, gross
21. Net due to related foreign
institutions
22. U.S. government deposits
at commercial banks
11.2
-3.9
.1
5.0
-15-8
4.3
-2.1
3.8
5.4
7.0
-1.1
23.4
-2.4
2.0
7.0
12.8
-3.6
2.7
.
732.2
. . 220.1
S
28.8
1. For the years shown, fourth quarter-to-fourth quarter percent change. For the quarters shown, based on
quarterly averages.
2. Sum of seasonally adjusted Ml, retail money market funds, savings deposits, and small time deposits.
3. Sum of retail money funds, savings deposits, and small time deposits, each seasonally adjusted aeparately.
of depository institutions, and
4. Sum of large time deposits, institutional money funds, RP liabilities
Eurodollars held by U.S. addressees, each seasonally adjusted separately.
5. Net of holdings of depository institutions, money market mutual funds, U.S. government, and foreign banks
and official institutions.
6. Sum of seasonally adjusted demand deposits, other checkable deposits, and savings deposits.
7. Sweep figures used to adjust these series are the estimated national total of transaction account
balances initially swept into MMDAs owing to the introduction of new sweep programs, on the basis of monthly
averages of daily data.
8. M2 less demand deposits.
9. For the years shown, "average monthly change" is the fourth quarter-to-fourth quarter dollar change,
divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3.
p--Preliminary.
III-18
Commercial Bank Credit
(Percent change; seasonally adjusted annual rate)
1998
Type of credit
1. Bank credit: Reported
Adjusted 1
2.
1997
Level,
Nov
Q2
Q3
Sep
Oct
Nov
No
1998
(billions of $)
9.0
5.4
9.1
15.5
25.3
9.3
4,527.0
8.6
6.0
8.0
10.2
18.1
15.1
4,397.4
3.
Securities: Reported
10.3
0.5
12.3
20.6
42.1
9.2
1,225.6
4.
Adjusted1
8.5
2.3
8.2
-0.1
15.3
32.6
1,095.9
6.2
-3.4
0.6
-6.5
11.3
22.3
787.9
20.8
9.2
37.6
75.2
99.5
-13.8
437.7
8.6
7.2
8.0
13.5
19.2
9.3
3,301.4
5.
U.S. government
6.
Other 2
7.
Loans3
8.
Business
8.8
7.0
12.6
15.2
27.9
10.8
950.5
9.
Real estate
9.2
6.3
1.8
1.1
5.4
19.3
1,307.0
15.5
-0.8
-2.5
3.7
-7.4
17.3
98.3
8.7
6.9
2.1
0.9
6.4
19.6
1,208.7
-1.5
1.7
-5.4
7.7
-1.4
4.8
501.3
4.1
9.1
3.8
6.8
-0.3
5.7
745.4
20.9
16.0
30.6
47.9
57.1
-12.5
542.6
10.
Home equity
11.
Other
12.
Consumer: Reported
Adjusted4
13.
14.
Other5
Note. 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
shown are percentage changes inconsecutive levels, annualized but not compounded.
1.Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115).
2. Includes securities of corporations, state and local governments, and foreign governments and any trading account assets that
are not U.S. government securities.
3. Excludes interbank loans.
4. Includes an estimate of outstanding loans securitized by commercial banks.
5. Includes security loans, loans to farmers, state and local governments, and all others not elsewhere classified. Also includes
lease financing receivables.
Domestic FinancialDevelopments
I-19
month, only a modest slowing from October. Continuing declines in M2's opportunity
cost following the policy moves this fall have helped fuel growth in this aggregate, but
the advance was limited by a marked slowing in retail MMMF growth. Nevertheless,
M2 growth for the year is well above the upper bound of its annual range, and the
strength in M2 in October and November points to another decline in velocity in the
current quarter. M3 grew at a 14-3/4 percent pace in November, somewhat faster than
in October, as still-strong flows into institution-only MMMPs were accompanied by a
resumption of issuance of large time deposits.3
Despite sizable net flows into core deposits, banks have relied heavily on
wholesale liabilities for funding, as commercial bank credit, adjusted for mark-tomarket rules, expanded at a 15 percent rate in November. Indeed, over the past four
months, bank credit has surged, on average, at a nearly 16 percent annual rate, the
most rapid four-month pace in twenty-five years. The strength in bank credit has been
evident both in its securities and loans components, suggesting that banks generally are
comfortable with their capital positions. In particular, bank holdings of securities
increased at about a 33 percent annual rate in November, even as bank loans grew at a
robust 9-1/4 percent pace.
The strength in bank lending last month spanned most loan categories. Real
estate loans surged, with home mortgages accounting for the bulk of this increase.
The growth in home mortgages was lifted by a strong housing market as well as heavy
refinancing activity, which often involves temporarily warehousing new loans on
banks' books until they are securitized. Consumer loans originated by banks
rebounded last month amid vigorous household spending on durables.
Business loan growth dropped back to a 10-3/4 percent rate in November on a
month-average basis, and weekly data indicate an even sharper slowing since the
middle of October. This pull-back is consistent with the notion that the earlier surge
in business loans was driven importantly by stresses in capital markets, which have
partly unwound. Banks apparently responded to the reduction in competition for loans
and to concerns about the economic outlook by raising spreads on new loans.
According to the latest Survey of Terms of Business Lending conducted during the
first week of November, the average spread between rates on newly originated bank
C&I loans and the intended federal funds rate has increased 9 basis points since the
last survey in August. This average, however, masks a more substantial rise on loans
3. The appendix to this section reviews the behavior of debt and monetary aggregates over 1998 as
a whole.
III-20
Part 2: Recent Developments, December 16, 1998
that were not made under commitment, as spreads on such loans widened nearly
50 basis points at domestic banks and nearly 40 basis points at U.S. branches and
agencies of foreign banks.
While the combination of strong loan demand and high spreads on C&I loans
brightens the outlook for bank earnings going forward, profits last quarter were hurt
by sharp declines in trading revenues and increased provisioning for hedge-fund and
foreign loan losses, especially at the ten largest banks. In contrast, the return on
equity of other banks, which tend to rely on more traditional banking activities,
remained high. For the banking system as a whole, net interest income and
noninterest, nontrading income were robust, and provisioning for losses on most
domestic loans stayed low. Quality indicators of banks' balance sheets remained
favorable, on net, and virtually all bank assets were at well-capitalized banks.
Appendix
A Review of Debt and Money in 1998
The monetary and debt aggregates accelerated considerably in 1998. The growth of
M2, M3, and domestic nonfinancial sector debt exceeded staff projections made in
both February and July, and the two broad monetary aggregates substantially overshot
their annual ranges. Debt, by contrast, finished the year within its annual range, albeit
in the upper half.
The pickup in total debt growth reflected an acceleration in nonfederal
borrowing, as federal debt began to contract. With overall demands for credit strong
and banks apparently willing to expand their balance sheets significantly, bank credit
grew relatively rapidly over the year. Bank loans expanded especially quickly in late
summer and early fall, when securities markets were disrupted and borrowers turned to
banks for credit. The strong expansion in M3 partly reflected banks' need to finance
credit growth, but it also owed to institution-only money market mutual funds, which
accelerated sharply from an already-brisk pace. M2 displayed surprising strength. Its
rapid growth owed in part to reductions in market interest rates in the second half of
the year and the consequent declines in the opportunity costs of holding M2 assets,
neither of which was anticipated in staff projections earlier in the year, and perhaps in
part to lagged adjustments to earlier gains in household wealth. In addition, M2 was
boosted in the autumn by heightened demands for safety and liquidity as a result of
turbulent market conditions. Nonetheless, the factors driving M2 this year remain
incompletely understood.
Domestic Nonfinancial Debt
The growth of domestic nonfinancial sector debt is estimated at 6-1/4 percent for 1998
on a fourth-quarter to fourth-quarter basis, up noticeably from 5 percent in 1997 and
substantially above the 4-1/2 percent advance in nominal GDP estimated by the staff.1
Although debt growth increased, the aggregate remained within the FOMC's 3 to 7
percent range. Federal debt outstanding actually contracted over the year, reflecting
the first budget surplus on a fiscal-year basis since 1969. The debt of other
nonfinancial sectors accelerated to an 8-3/4 percent pace, a substantial pickup from
last year's 6-1/2 percent pace and the fastest annual growth in a decade.
Household finance. Reflecting brisk growth in consumption, especially spending on
durables, growth in consumer credit picked up this year. Moreover, very favorable
home mortgage financing conditions and a sharp increase in housing activity and
refinancings contributed to an acceleration of home mortgage debt. The disruption to
financial markets in late summer and early fall evidently resulted in some restraint on
1. The growth rates for money and debt for 1998 presented in this appendix are preliminary
estimates. For debt measures, they are based on data through October and, for monetary and bank credit
aggregates, on data through November.
III-A-2
Part 2: Recent Developments, December 16, 1998
credit to the most marginal borrowers, but elsewhere appears to have left little imprint
on household borrowing. For the year, household debt once again has outpaced
household income. Nonetheless, indicators of credit quality in the household sector
remained fairly stable, and lenders maintained a generally accommodative posture.
Business finance. Growth in nonfinancial business debt picked up to nearly a doubledigit rate in 1998 as capital outlays outstripped internal funds and share retirements
moved sharply higher. The disruptions in credit markets in late summer and early fall
shifted financing from the capital markets to banks, but as conditions in securities
markets improved after mid-October, a growing number of firms returned to the bond
market. As of November, issuance of both investment-grade and junk bonds already
exceeded the totals for all of 1997. Measures of financial condition of the business
sector registered mixed changes.
Borrowing in the market for commercial mortgages strengthened over the first
three quarters of the year, with funding concentrated in the commercial mortgagebacked securities market. However, the disruptions to financial markets in late
summer led to a sharp cutback in this source of funds, although the accompanying
wider spreads drew some banks and other institutional lenders back into the market.
State and local finance. The debt of state and local governments is estimated to have
expanded 6-1/2 percent this year, up from last year's pace. State and local
governments stepped up their borrowing to finance new projects and to advance-refund
eligible bonds outstanding. With tax revenues boosted by healthy income growth,
measures of the financial condition of states and localities improved.
Depository Credit
Growth in credit extended by depository institutions picked up in 1998. The bulk of
this acceleration was accounted for by bank credit, though thrift credit also expanded
at a faster rate than in the previous year. Bank credit (adjusted for mark-to-market
accounting rules) expanded 10-1/4 percent, up from 8-1/2 percent in 1997 and the
fastest rate since 1984. The share of bank credit in domestic nonfinancial debt rose to
its highest level since 1988. The pickup in bank credit growth reflected accelerations
both in adjusted security holdings and in loans held on banks' books. The increase in
loans originated by banks was even greater than that of loans held on banks' books, as
the pace of bank loan securitization also picked up. Loan growth was spurred by C&I
and security loans, which expanded rapidly over the year, especially late in the
summer and early in the fall. Largely owing to securitizations, consumer loans on
banks' books were about flat while real estate loans rose moderately.
Monetary Aggregates
M2 expanded rapidly in 1998, growing an estimated 8-3/4 percent on a fourth-quarter
to fourth-quarter basis. It exceeded its annual range of 1 to 5 percent by a wide
margin. In part, the rapid growth in M2 was a continuation of a development that
appeared in the second half of 1997, when M2 growth began to exceed that of
nominal GDP despite little change in the opportunity cost of holding M2 assets. Since
Domestic FinancialDevelopments, Appendix
III-A-3
then, M2 velocity has fallen in each quarter, representing a distinct break from a
previous trend of stable or rising velocity. To some degree, the rapid growth in M2
since mid-1997 may reflect portfolio adjustments by households in response to
substantial increases in their wealth resulting from stock market gains. More recently,
heightened demands for liquidity and safety since late summer and reductions in the
opportunity cost of holding M2 assets have boosted M2 growth. The expansion of
liquid accounts (retail money fund shares and liquid deposits), at 12-1/4 percent over
the year, was particularly strong.2 Growth of M2 in 1998 has far outpaced that
predicted by standard models.
M3 rose 10-3/4 percent from the fourth quarter of 1997 through the fourth
quarter of 1998, accelerating 2 percentage points from last year and far exceeding its 2
to 6 percent range for 1998. The strong growth in core deposits included at the M2
level funded part of the expansion in bank credit, but banks also relied importantly on
managed liabilities in M3 to obtain funds. The non-M2 component of M3 was given a
sharp boost by institution-only money funds, as well. Rapid growth in these
instruments partly reflected a long-term trend of substituting money funds for in-house
management of corporate liquid assets. In the fall, growth of money funds was lifted
further by the policy easings, as their yields lagged declines in market rates.
2. MZM grew about 14 percent over the year. For the first time in four years, M1 did not contract,
as new retail sweep activity slowed. Still, depository institutions implemented an additional $60 billion
of retail sweep arrangements this year, lowering required reserve balances by another $5-1/4 billion or
III-A-4
THE GROWTH AND FLOW OF MONETARY AND CREDIT AGGREGATES
(Q4 to Q4 averages, seasonally adjusted unless otherwise noted)
1994
1995
1996
1997
19981
Memo:
1998 Q4
levels
(billions
of dollars) 1
Domestic nonfinancial debt - total
Federal
Nonfederal
4.9
5.7
4.6
5.4
4.4
5.7
5.3
3.8
5.9
5.0
0.7
6.6
6.3
-1.2
8.8
16,040.6
3,748.4
12,292.2
Depository credit
Bank credit 2
Thrift credit
4.9
5.7
2.6
5.8
7.2
1.6
4.2
4.4
3.6
6.6
8.6
0.7
8.3
10.2
2.2
5,644.1
4,383.7
1,260.4
M1
Sweep-adjusted M13
M2
M3
2.5
3.4
0.6
1.7
-1.6
1.6
3.9
6.1
-4.5
5.2
4.6
6.8
-1.2
6.0
5.7
8.8
1.6
5.7
8.7
10.8
1,085.6
1,390.5
4,373.3
5,902.0
Memo: Nominal gross domestic product
5.8
4.2
5.8
5.6
4.5
8,624.6
32.1
-11.8
-2.0
18.1
-40.5
4.1
22.5
-67.9
44.3
30.6
-37.2
46.3
34.3
-19.6
37.0
456.6
621.0
n.a.
-5.3
-34.7
29.4
170.3
100.4
69.9
220.6
152.8
67.9
227.2
146.6
80.4
344.6
187.0
157.8
3,287.8
2,537.1
750.7
59.2
-9.5
29.8
37.2
113.8
50.8
56.2
6.0
160.6
56.4
71.7
31.7
225.4
65.9
81.6
77.2
222.2
137.8
44.7
38.7
1,528.6
497.7
612.4
415.8
Growth rates or flows
Growth rates (percent)
Flows ($ billions, December to December)
Currency
M1 Transactions deposits
Sweep-adjusted transactions deposits 3
M2
Nontransactions M2
Savings, MMDAs, and small time deposits
Retail MMMFs
Non-M2 component
Institution-only MMMFs
M3
Large time deposits
Total RPs and Eurodollars, net (NSA)
1. Preliminary estimates. For debt aggregates, based on data through Octoberl998. For credit and monetary aggregates,
based on data through November1998. Figure for nominal GDP is staff projection.
2. Adjusted for the estimated effects of mark-to-market accounting rules.
3. Sweep figures used to adjust this series are the estimated national total of transaction account balances initially swept into
MMDAs by new sweep programs, on the basis of monthly averages of daily data.
INTERNATIONAL DEVELOPMENTS
International Developments
U.S. International Trade in Goods and Services
In September, the U.S. nominal trade deficit in goods and services was
$14.0 billion, significantly smaller than in August. The trade deficit in the third quarter
was modestly larger than in the second quarter. Trade data for October will be released
on December 17 and will be discussed in the Greenbook supplement.
Net Trade in Goods & Services
(Billions of dollars, seasonally adjusted)
Annual rates
1998
1997
Monthly rates
1998
Q1
Q2
Q3
-136.1
-198.5
-245.2
-253.9
-110.2
-140.0
-175.5
-183.0
Jul
Aug
Sep
Real NIPA1
Net exports of G&S
Nominal BOP
Net exports of G&S
Goods, net
Services, net
-198.0
87.7
-222.8
82.8
-257.8
82.3
-257.4
74.4
-14.5
-21.0
6.5
-15.9
-22.7
6.8
-14.0
-20.6
6.6
1. In billions of chained (1992) dollars.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.
The value of exports increased 21/4 percent in September. The rise was mostly due
to a jump in deliveries of aircraft, although exports of automotive products also increased
(a rebound from the GM strike). For the third quarter as a whole, however, exports
declined 4 percent at an annual rate. A sharp increase in aircraft exports was more than
offset by decreases in exports of most other export categories, especially automotive
products (reflecting the effects of the GM strike early in the quarter), industrial supplies,
machinery, services, and agricultural products. Exports of computers and semiconductors
increased slightly, while exports of consumer goods were about flat. By area, the decline
in exports reflected decreases in exports to Canada and Eastern Europe. There were small
increases to other areas, suggesting that recent declines in exports to developing countries
in Asia are subsiding.
The value of imports decreased slightly in September, as increases in automotive
products from Canada (a rebound from the GM strike) were about offset by decreases in
the value of imported oil (a decrease in volume). For the third quarter as a whole,
imports declined 21/2 percent at an annual rate. There were declines in imports of oil
Part 2: Recent Developments, December 16, 1998
IV-2
U.S. International Trade in Goods and Services
Contribution of Net Exports to Real GDP Growth
Percentage Points
i
L_
1990
.-
1992
1994
1998
1996
Bil$, SAAR
Net Trade in Computers
and Semiconductors
Net Automotive Trade
with Canada and Mexico
190
1990
1990
1992
1994
1996
I/Excludes agriculture and gold.
2/Excludes computers and semiconductors.
1992
1992
994
1994
1996
1996
1998
I/Excludes oil and gold.
2/Excludes computers and semiconductors.
3/Excludes Canada and Mexico.
199I
1998
InternationalDevelopments
US. Exports and Imports of Goods and Services
(Billions of dollars, SAAR, BOP basis)
Levels
1998
Q2
Q3
1998
Aug
Sep
Amount Change 1
1998
1998
Aug
Q2
Q3
Sep
Exports of G&S
921.2
910.6
905.1
925.5
-25.0
-10.5
3.9
20.4
Goods exports
Agricultural
Gold
Other goods
659.3
52.0
4.2
603.0
654.2
49.0
5.2
600.0
646.3
49.5
6.6
590.3
670.5
45.4
6.4
618.8
-26.6
-4.4
-1.1
-21.2
-5.0
-3.0
1.0
-3.0
0.4
-2.8
3.9
-0.6
24.1
-4.1
-0.2
28.4
44.8
44.8
35.5
162.8
58.0
45.1
37.4
158.8
46.3
45.3
37.9
156.8
72.7
45.3
38.5
156.9
-4.1
-0.7
-2.3
-5.6
13.3
0.3
1.9
-4.1
-8.8
0.7
2.2
-5.8
26.4
-0.1
0.5
0.2
72.2
39.0
12.3
20.8
65.4
33.8
10.5
21.1
67.2
36.0
10.1
21.1
72.3
37.6
13.1
21.5
-5.5
-1.8
-0.9
-2.9
-6.8
-5.2
-1.9
0.3
10.4
8.1
2.0
0.4
5.1
1.7
3.0
0.4
134.1
80.1
28.8
128.3
80.2
26.8
128.1
80.3
28.3
127.4
80.3
25.4
-4.7
1.7
0.0
-5.9
0.1
-2.0
-1.2
0.4
-0.2
-0.8
0.0
-2.9
261.9
256.4
258.8
255.0
1.6
-5.5
3.5
-3.7
Imports of G&S
1095.4
1088.5
1095.9
1093.9
9.2
-6.9
20.1
-2.0
Goods imports
Petroleum
Gold
Other goods
917.1
53.9
5.5
857.7
911.7
48.7
7.3
855.7
919.2
49.5
9.2
860.5
917.6
46.5
7.7
863.4
8.4
-1.0
-1.2
10.6
-5.4
-5.2
1.9
-2.0
20.9
-0.6
4.0
17.5
-1.5
-3.0
-1.5
2.9
Aircraft & pts
Computers
Semiconductors
Other cap gds
22.4
71.7
33.5
142,9
21.8
71.1
31.6
142.2
19.6
70.3
32.3
144.4
21.5
72.1
31.2
141.3
4.6
-0.7
-3.3
1.1
-0.7
-0.5
-2.0
-0.6
-4.6
-0.7
1.2
3.4
1.9
1.8
-1.1
-3.1
Automotive
from Canada
from Mexico
from ROW
146.0
49.0
28.5
68.5
143.3
47.4
25.8
70.0
146.8
47.1
28.5
71.3
154.9
55.4
28.7
70.8
-2.0
-4.0
1.3
0.8
-2.7
-1.6
-2.7
1.5
18.7
7.3
8.2
3.2
8.1
8.4
0.2
-0.5
Ind supplies
Consumer goods
Foods
All other
147.3
217.4
41.8
34.7
147.4
216.8
40.6
40.9
149.2
215.8
40.2
41.8
146.1
215.3
40.3
40.8
2.9
8.2
0.0
-0.1
0.1
-0.6
-1.2
6.2
2.2
-3.4
-1.0
1.7
-3.1
-0.5
0.1
-1.0
178.4
176.8
176.7
176.2
0.8
-1.5
-0.8
-0.5
11.80
12.51
11.50
11.60
11.94
11.34
10.83
11.76
0.98
-1.39
-0.30
-0.91
0.23
-0.36
-1.11
0.42
Aircraft & pts
Computers
Semiconductors
Other cap gds
Automotive
to Canada
to Mexico
to ROW
Ind supplies
Consumer goods
All other
Services exports
Services imports
Memo:
Oil qty (mb/d)
Oil price ($/bbl)
1. Change from previous quarter or month.
Source. U.S. Dept. of Commerce, Bureaus of Economic Analysis and Census.
IV-4
Part2: Recent Developments, December 16, 1998
(mostly due to price declines), automotive products (because of the GM strike early in
the quarter), and semiconductors.
Oil imports and prices. The quantity of imported oil fell sharply in September,
with weaker consumption, delivery delays due to storms in the Gulf of Mexico, and
unusually high inventories contributing to the fall. For the third quarter, as a whole, the
quantity of imported oil was about 1 percent (at an annual rate) below the second-quarter
level. Preliminary Department of Energy statistics indicate relatively flat imports in
October and November, reflecting continuing high stocks and a slow start to the winter
heating season.
The price of imported oil declined 26 percent (at an annual rate) in the third
quarter, despite a strong price increase in September. The price of imported oil rose
sharply in October, as well, largely reflecting weather-driven delivery delays, civil unrest
in Nigeria and Colombia, and decreased production due to maintenance in the North Sea.
In November, the spot price of West Texas Intermediate (WTI) fell back to $12.94 per
barrel after trading above the $14 level in September and October. This decline was
driven by higher than expected production from OPEC, weaker than expected
consumption (especially in OECD Asia), and surprisingly high inventories. OPEC's
unwillingness to extend production cuts and the peaceful resolution of the Iraqi situation
also contributed to falling prices. WTI traded briefly below $11 in mid-December, the
lowest level since 1986. Spot WTI is currently trading between $11 and $12 per barrel.
Prices of non-oil imports and exports. Price data for November and revised
data for October were released on December 16. Prices for non-oil imports edged up in
October and November, marking the first time since 1995 that these prices advanced two
months in a row. Prices for exports also edged up in November for the first time since
May, as increase in agricultural prices (led by a sharp rise in grain and oilseed prices)
offset a dip in the prices of other export categories. Additional details and revised tables
will be included in the Greenbook supplement.
U.S. Current Account
The U.S. current account deficit widened $18 billion (SAAR) in the third quarter
to $245 billion (SAAR). The increase resulted from a widening in the deficit on
investment income (importantly from a reduction in direct investment receipts from
abroad), a small increase in unilateral transfers (mostly an increase in U.S. government
InternationalDevelopments
Prices of U.S. Imports and Exports
(Percentage change from previous period)
Annual rates
1998
Q2
Q1
Monthly rates
1998
Sep
Aug
Q3
Oct
..------------- BLS prices (1995=100) --------------11.6
-5.8
-6.2
-0.4
0.1
-61.5
-31.6
-25.9
-0.4
3.6
-5.3
-3.7
-4.5
-0.4
-0.2
-3.8
-2.7
-3.5
-0.4
-0.1
Merchandise imports
Oil
Non-oil
Core goods*
Foods, feeds, beverages.
Industrial supplies ex oil
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods
Merchandise exports
Agricultural
Nonagricultural
Core goods*
Industrial supples ex ag
Computers
Semiconductors
Cap. goods ex comp & semi
Automotive products
Consumer goods
-5.1
-11.1
-17.3
-17.2
-3.2
-0.1
-1.1
-0.1
-4.0
-19.1
-4.9
-2.4
-0.8
-2.7
-7.0
-8.1
-10.4
-14.2
-3.9
-1.6
-1.5
-2.4
-0.6
-0.9
-0.8
-0.1
-0.2
-0.3
1.5
-0.4
-0.9
0.0
-0.4
-0.1
0.0
-5.0
-15,6
-3.7
-3.5
-3.3
-7.0
-2.8
-2.1
-4.5
-11.7
-3.7
-2.4
-0.5
-4.1
-0.1
0.0
-0.5
-3.0
-0.2
-0.2
-
-9.0
-10.5
-6.8
0.0
-0.1
-0.5
-5.2
-11.8
-8.6
-0.1
0.3
-1.4
-9.1
-14.0
-10.3
-0.3
0.3
-0.8
-0.2
-1.0
0.0
-0.1
0.0
0.0
-1.0
-0.7
0.0
-0.1
-0.1
0.1
-I
-I
(
(
(
(
(
-(
-(
1
1
(
1
---------Prices in the NIPA accounts (1992=100)--------Chain-weight
Imports of goods & services
Non-oil merchandise
Core goods*
-10.4
-5.6
-3.3
-4.8
-4.4
-3.3
Exports of goods & services
Nonag merchandise
Core goods*
-3.4
-3.5
-2.4
-2.9
-3.5
-2.3
*/ Excludes computers and semiconductors.
Oil Prices
Dollars per barrel
F
Spot West Texas Intermediate
1988
1989
1990
1991
1992
I
1993
1994
1995
1996
1997
1998
IV-6
Part2: Recent Developments, December 16, 1998
grants), and a modest increase in the goods and services deficit. The increase in the
goods and services deficit was due to a reduction in net service transactions, primarily
from a drop in receipts from foreign travelers and passenger fares. The deficit in goods
trade in the third quarter was virtually unchanged from the second quarter.
U.S. CurrentAccount
( Billions of dollars, seasonally adjusted annual rates)
Transfers,
Investment
Goods & services
balance
income, net
net
Current acct
balance
Years
1996
1997
-108.6
-110.2
14.2
-5.3
-40.6
-39.7
-134.9
-155.2
Quarters
1997-1
2
3
-112.5
-106.1
-108.4
0.1
1.8
-6.2
-35.5
-36.1
-37.8
-148.0
-140.4
-152.4
-4
-113.8
-17.0
-49.3
-180.2
1998-1
-140.0
-9.0
-37.9
-186.9
-226.8
2
-175.5
-13.5
-37.8
3
-183.0
-21.8
-40.3
-245.2
-10.8
8.0
-4.5
-8.3
-11.6
11.4
0.2
-2.6
-27.8
-6.8
-39.8
-18.4
Memo:
$ Change
Q4-Q3
Q1-Q4
Q2-Q1
Q3-Q2
-5.4
-26.2
-35.5
-7.5
Source. U.S. Department of Commerce, Bureau of Economic Analysis.
U.S. International Financial Transactions
Foreign official assets held in the United States increased in October after a sharp
decline in September (line 1 of the U.S. International Transactions table), A rise in the
holdings of European countries accounted for nearly all of the October inflow and about
half of the swing from September to October. The remainder of the shift was primarily
the result of a cessation of September's large outflows by Brazil and Argentina. Partial
data for November from the Federal Reserve Bank of New York indicate that foreign
official inflows continued on the order of $15 billion, about two-thirds of which was from
industrialized countries. The same data suggest that Brazilian and Argentinian official
InternationalDevelopments
holdings in the United States have remained stable in November (for a second straight
month), suggesting that news of the IMF package may have eased, at least temporarily,
pressure on their currencies. The increase in Korean official holdings, noted last month,
continued in October and partial data suggest a further increase in November.
Net purchases of U.S. securities by private foreigners were modest in both
September and October (line 4); however, the composition of the inflow changed from
September to October. Foreign net purchases of U.S. Treasuries accounted for an inflow
in September and a small outflow in October (line 4a). The shift was mostly accounted
for by the large and volatile transactions of financial institutions in the United Kingdom.
Net sales were concentrated in the Treasury bond and note markets, while purchases of
Treasury bills remained strong.
After heavy selling in September, foreign net purchases of U.S. stocks recovered,
leading to an inflow in October (line 4c). The swing was more than accounted for by
transactions in financial centers in the Caribbean.
As in September, foreign purchases of corporate and other bonds were largely
responsible for the securities inflow in October (line 4b). Bond purchases were sizeable
in October, owing to a large number of new Eurobond issues by U.S. corporations. Most
of the action was through financial centers in Europe and the Caribbean. There were net
sales of Agency securities in October. U.S. investors sold foreign securities on net in
October (line 5). Bond sales accounted for about 65 percent of the October sell-off.
Significant sales of European and Japanese securities, noted in the last Greenbook,
continued in October. Selling in Japan was concentrated among one or two respondents
in the bond market. In addition, marked sales of foreign stocks were observed in
financial centers in the Caribbean.
Large net capital inflows recorded through private banking transactions continued
in October on a month-end basis (line 3). About one-third of the inflow was concentrated
in one bank's position vis-a-vis its own foreign offices in Switzerland. The recent large
inflows have been associated with a record increase in domestic bank credit. Although
the credit surge continued in November, preliminary data suggest that bank flows
reversed. This may be the result of a boom in (non-large time) deposit growth in
November, implying that there was less of a need for bank inflows from abroad to finance
credit.
IV-8
Part 2: Recent Developments, December 16, 1998
Summary of U.S. International Transactions
(Billions of dollars, not seasonally adjusted except as noted)
1997
1997
1996
Q4
QI
Q2
1998
1998
Q3
Sept
Oct
Official capital
1. Change in fordgn official assets
127.7
19.9
-26.3
12.4
-9.9
-46.0
36.6
1.8
13.0
4.0
-.5
8.9
-10.0
*
5.1
-12.6
-.9
-12.7
-1.0
-4.5
-A
-1.9
34.6
46.2
-5.7
5.6
287
346.6
71.2
773
155.6
118.9
12.7
-110.6
147.2
128.1
71.3
35.5
25.8
9.8
-89.1
-51.4
-59.3
6. U.S. direct investment (-) abroad
-25.7
12.6
-1.7
3.0
-4.8
-. 1
-19.2
9.7
-2.0
-.1
-.1
52.9
29.1
30.8
99.
22.1
33
4.7
-1.5
47.7
31.1
27.1
57.0
15.2
-.3
26.6
-4.2
5.6
7.8
-10.1
-3.6
6.1
2.3
-8.8
-125
-27.4
15.5
9A
233
-48.2
-9.1
-9.7
15.2
.3
-2.8
7.4
8.1
3.3
-40.9
-26.4
-1.0
6.1
8.0
-81.1
-121.8
-35.5
-34.3
-40.5
-21.2
n.a
n.a
7. Foreign direct investmentin U.S
77,6
93.4
28.5
25.9
19.1
27.1
n.a
n.a
8. Foreign holdings of U.S. currency
17.4
24.8
9.9
.7
2.3
7.3
n.a
n.a
9. Other (inflow, + )5
-80.3
-50.9
14.9
-13.6
8.4
n.a
n.a
-134.9
-59.6
-155.2
-99.7
-45.0
-52.0
-46.7
-3.1
-56.7
9.1
-61.3
1.6
-3.5
n.a
n.a
n.a
n.a
in US. (increase, +)
a. G-10 countries
b. OPEC countries
c. All other countries
2. Change in US. official reserve
15.4
76.3
assets (decrease, +)
Banks
3. Change in net foreign positions
of banking offices in the US.
Securities 2
4. Foreign net purchases of U.S.
securities (+)
a. Treasury securities 3
b. Corporate and otherbonds 4
c. Corporate stocks
5. U.S. net purchases (-) of foreign
securities
a. Bonds
b. Stocks
-50.1
.1 -11.6
S-34.4
Other flows (quarterly data, s.a.)
U.S. current account balance (s.a.)
Statistical discrepancy (s.a.)
NOm The sum of official capital, private capital, the current account balance, and the statistical discrepancy is zero. Details maynot sum to
totals because of rounding.
1. Changes in dollar-denominated positions of all depository institutions and bank holdingcompanies plus certain transactions between brokerdealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes changes in custody liabilities other
than U.S. Treasury bills.
2. Includes commission son securities transactions and therefore does not match exactly the data on U.S. international transactions published by the
Department of Commerce.
3. Includes Treasury bills.
4. Includes U.S. government agency bonds.
5 Transactions by nonbankin g concerns and other banking and official transactions not shown elsewhere plus amounts resulting from adjustments
made by the Department of Commerce and revisions in lines 1 through 5 since publication of the quarterly data in the Survey of Current Business.
InternationalDevelopments
Recently released U.S. balance of payments data for the third quarter show a
marked drop in U.S. foreign direct investment abroad from the record levels in recent
quarters (line 6). Foreign direct investment in the United States strengthened in the third
quarter and remains near last year's record pace (line 7). As a result of continued merger
activity (including the completion of the Daimler-Benz-Chrysler merger), we expect
inflows to reach record highs in the fourth quarter.
There was a notable rise in foreign holdings of U.S. currency in the third quarter
(line 8), largely a result of shipments to Russia.
The statistical discrepancy in the U.S. international accounts narrowed
significantly in the first three quarters of 1998 (last line), as compared with 1997. The
magnitude of the discrepancy in the second quarter was revised down from negative $9.4
billion (reported last month) to $1.6 billion. In the third quarter, the statistical
discrepancy was negative $3.5 billion, indicating some combination of over-recorded net
capital inflows or under-recorded net exports.
IV-10
Part2: Recent Developments, December 16, 1998
Foreign Exchange Markets
Since the November FOMC meeting, the foreign exchange value of the dollar on
a weighted average basis against other major currencies declined about 1 1/4percent on
balance, led by a 3 percent depreciation against the yen. Factors weighing on the dollar
during the period included perceptions that U.S. economic activity remains vulnerable to
financial turbulence in Latin America, especially Brazil, as well as the impeachment
proceedings. The dollar was buoyed during the period by interest rate cuts abroad and
continued signs of strength in the U.S. economy, which led market participants to
discount the probability of further monetary easing in the near future.
Commodity prices continued to fall in the intermeeting period, with the
Commodity Research Bureau index declining to a 21-year low and oil prices reaching a
12-year low. The dollar appreciated about 21/2 percent against the Australian dollar
during the period, as weakness in commodity prices weighed on the latter currency. The
decline in oil prices tended to weaken currencies of oil exporters such as Norway; the
dollar gained about 31/2 percent against the Norwegian krone
. Weak commodity prices was one of several factors behind the 15 percent
depreciation of the Russian ruble during the period. More importantly, the moratorium
on foreign debt repayment ended, Russian households were allowed to withdraw savings,
which some used to buy foreign currency, and there has been substantial growth in the
monetary base.
The dollar's movements against other major currencies were more moderate
during the period. The dollar depreciated percent against the mark, on balance. The
surprise coordinated interest rate cut by the Bundesbank and other euro-area central banks
on December 3 contributed to the dollar's stability against the mark. The Bundesbank
lowered its repo rate 30 basis points to 3 percent as did the Bank of France, the National
Bank of Belgium, and the Netherlands Bank. Most other euro-area central banks lowered
official interest rates to 3 percent during the period, largely completing the convergence
process ahead of the launch of the monetary union in January. This amounted to a cut of
40 basis points by the Finnish central bank, a decrease of 50 basis points by the Bank of
Spain, a reduction of 69 basis points by the Central Bank of Ireland, and a 75-point cut in
Portugal. The Bank of Italy was the only euro-area central bank that did not lower its
official interest rates to 3 percent, instead cutting its discount rate 50 basis points to
3 1/2
percent. However, the Bank of Italy did conduct repurchase operations at an interest
rate near 3 percent during the period.
InternationalDevelopments
Exchange Rates indexes
Index, September 1, 1998 = 100
--
FOMC
-\
I
Nov. 17
A
'
'.
,
SOther Important Trading Partners
- ,---
-
Major Currencies
September
October
November
December
Financial Indicators in Major Industrial Countries
Three-month rates
Dec. 16
Change
Ten-year yields
Dec. 16
Change
Canada
Japan
Germany
United Kingdom
France
Italy
Switzerland
Australia
5.24
0.53
3.26
619
3.24
3.20
1.40
4.82
-024
0 02
-0.34
-069
-0.26
-0.64
-0.04
-0 10
486
3.88
4.49
389
402
2.31
481
-0.30
0.47
-0.29
-0.45
-0.37
-0.47
-0.24
-0.35
Weighted-average
foreign
335
-024
3.57
-0.12
United States
5 13P
-0.18
4 62 5
-0 23
1.35
Equity prices
Change
-1.901
-2.30
-0.07
1.92
119
3.35P
1.93
0.85
0.56'
104
IV-12
Part2: Recent Developments, December 16, 1998
The dollar eased about 1/4percent against sterling, as the Bank of England lowered
its official repo rate 50 basis points during the period in response to further indications of
weakening economic activity in the United Kingdom. The U.S. dollar depreciated about
1 percent against the Canadian dollar, in part as the results of Quebec's election made a
secession referendum less likely. The Bank of Canada reduced its bank rate 25 basis
points following the November FOMC policy action by the Federal Reserve.
The trend towards monetary easing continued elsewhere as well. Monetary
authorities in Australia, New Zealand, Denmark, Sweden, Greece, Poland, the Czech
Republic, Hungary, Taiwan, and China lowered official rates during the intermeeting
period.
The widespread declines in short-term interest rates have generally been
accompanied by a reduction in longer term interest rates. Yields on 10-year government
bonds fell 30 to 50 basis points in most of the euro-area countries and the United
Kingdom during the period, compared with a 23-basis-point decline in the United States.
The one exception to the downward trend is Japan, where the yield on the 10-year
benchmark bond rose 47 basis points as expected future bond issuance rose along with
the expected size of the latest fiscal stimulus package and the announcement that Nippon
Credit Bank would be nationalized. Equity price performance was mixed in the major
industrial countries.
In the initial period following the November FOMC meeting, emerging market
assets continued to benefit from a calmer global atmosphere. In late November, however,
a resurgence of flight-to-quality flows affected a number of these markets, although not in
as uniform a manner as seen in September and October. In part these developments were
sparked by the rejection of a key pension reform measure by Brazil's lower house of
Congress. The yield spread on Brazilian Brady bonds over U.S. Treasuries widened
almost 240 basis points on balance, while similar spreads in Argentina and Mexico
narrowed slightly. The spread on Venezuelan Brady bonds declined nearly 120 basis
points, in part a reaction to the absence of radical policy U-turns or a repudiation of debt
that some market participants seemed to have feared would follow the election of Hugo
Chavez. Meanwhile, the spreads on dollar-denominated bonds in Asian emerging market
economies declined, or in the cases of China and Indonesia, firmed only slightly. Equity
Financial Indicators in Latin America, Asia, and Russia
Currency/US dollar
Mexico
Brazil
Short-term
interest rates
Dec. 16
Change
Dec 15/16
9.903
-0.65
33.40
Dollar-denominated
bond spread
Change
0.90
Dec. 15/16
Change
9.50"
Equities
Change
-0.37
-5.1
b
2.37
-12.7
8.34"
-0.09
-11.1
1.2045
1.18
27.80
-5.70
.9998
0.00
8.00
0.00
Chile
472.80
2.78
Venezuela
561.60
-1.30
China
8.2778
0.00
Korea
1207.50
-8.31
7.00
-0.25
32.20
-1.23
4.70
-0.40
-3.4
Singapore
1.6495
1.13
1.38
-0.87
7.9
Hong Kong
7.7478
0.05
5.45
-0.26
-3.5
Malaysia
3.80
-0.01
6.19
-0.31
5.91"
-1.03
17.5
Thailand
36.30
-0,77
6.00
-2.25
3.25 Y
-1.04
-0.2
Indonesia
7600
0.66
42.35
-14.75
10.29 Y
0.85
15.9
Philippines
39.33
-1.67
3.826
-0.45
7.0
Russia
21.35
14.17
5 1 .2 3 b
-12.83
1.2
Argentina
Taiwan
13.54
-4.1
-45.38
-1.19
25.1
2.469
0.13
-8.6
4.889
-0.88
29.3
Note. Change is in percentage points from November 16 to December 15/16. b Stripped Brady bond yield spread over
U S Treasuries. Q Global bond yield spread. I Eurobond yield spread. y Yankee bond yield spread
Part2: Recent Developments, December 16, 1998
IV-14
prices rose substantially in several Asian emerging market nations, with the major
exceptions of China, Hong Kong, and Taiwan, where share prices fell. Korean share
prices rose 29 percent, on balance, and the won appreciated 8 percent against the dollar as
the government's plan to reorganize five major industrial groups (the chaebols) was wellreceived by the market. Equity prices on most Latin American exchanges fell between 4
and 13 percent, while Venezuelan share prices soared 25 percent, on balance, largely
following the presidential election.
. The Desk did not intervene during the period for
the accounts of the System or the Treasury.
InternationalDevelopments
Developments in Foreign Industrial Countries
Recent data suggest that the pace of growth in most of the major industrial
countries has been slowing during the past several months. Japan remains mired in
recession with real GDP still falling and aggregate investment contracting at double-digit
rates. In Germany, industrial production fell sharply in August and September and,
despite a rebound in October, production is below its third-quarter average. Elsewhere in
Europe, a similar picture emerges: industrial production trends have been flat or falling
since late summer in France and the United Kingdom. In Italy, production has recently
picked up but, with deteriorating business sentiment, the rebound could prove to be
fleeting. In Canada, the underlying production trend has been distorted by strikes in the
manufacturing and construction industries over the summer. Although a rough estimate
of strike-adjusted growth suggests some slowing since the beginning of the year, a
substantial pickup in November employment may herald a sizable rebound in fourthquarter activity.
Consumer price inflation is very subdued, reflecting low and falling import prices,
especially for commodities, and output that is below potential in the major foreign
industrial countries. (The exception is the United Kingdom where output is projected to
fall below potential by the end of the year.) On a twelve-month basis, inflation is slightly
negative in Japan (abstracting from the jump in produce prices that followed recent
typhoons), is at or below 1 percent in Germany, France, and Canada, and is 1-1/2
percent in Italy. In the United Kingdom, retail price inflation appears to have stabilized
at a rate of 2-1/2 percent.
Since the November Greenbook, short-term interest rates have been cut by 50 basis
points in the United Kingdom and 25 basis points in Canada. Official rates were cut on
December 3 in a coordinated policy move of the EURO-11 countries with cuts of 30 basis
points in France, Germany, and several other countries, and larger cuts in four of the
countries.
Individual country notes. Japan is experiencing its most protracted recession of
the postwar era, with economic activity contracting for four consecutive quarters and the
level of GDP now almost 5 percent below its 1997Q1 peak. During the third quarter, GDP
declined 2.6 percent (SAAR), with business and residential investment plunging 17.3
percent and 22.5 percent, respectively. Private consumption also contributed to the poor
performance, falling 1.1 percent. In one piece of good news, the effects of the April
IV-16
Part 2: Recent Developments, December 16, 1998
stimulus package were finally visible, as public investment surged 15.4 percent and
government consumption rose 3.5 percent. Net exports contributed 1 percentage point to
growth, with exports gaining almost 7 percent and imports falling for the sixth consecutive
quarter.
JAPANESE REAL GDP
(Percent change from previous period, SAAR)
1996
1997
1997
1998
_Q4
Ql ,Q2
Q3
GDP
5.1
-0.8
-3.7
-4.8
-2.9
-2.6
Total Domestic Demand
Consumption
Investment
Government Consumption
Inventories (contribution)
4.5
2.4
8.2
3.1
0.3
-2.2
-1.1
-4.8
-1.0
0.0
-5.3
-3.8
-6.4
-8.4
-0.3
-3.9
1.4
-14.3
2.8
-0.3
-4.5
-0.6
-12.9
0.6
-0.3
-3.8
-1.1
-10.0
3.5
-0.4
12.0
7.3
0.6
7.6
-3.3
1.4
6.3
-6.1
1.6
-10.6
-4.4
-1.0
-7.6
-21.4
1.6
6.7
-1.4
1.0
Exports
Imports
Net Exports (contribution)
1. Annual changes are Q4/Q4.
Recent data provide little evidence of a rebound. The performance of consumption
indicators is mixed, with household expenditure in October well above the third-quarter
average but with retail sales and auto registrations continuing to decline. The
unemployment rate in October remained at 4.3 percent for the third consecutive month,
while the offers-to-applicants ratio edged down to a new record low of 0.48. Industrial
production and housing starts appear to have stabilized in recent months but remain at
historically weak levels. Public demand remained strong in October, with public works
contracts up about 10 percent (not annualized) from third-quarter levels. Twelve-month
consumer price inflation turned positive in October and November, reflecting a temporary
surge in fresh produce prices after several typhoons, but "core" inflation remains slightly
negative.
InternationalDevelopments
The Bank of Japan's December "Tankan" survey showed a further decline in
business confidence, with particular weakness in the manufacturing sector. The diffusion
index for large manufacturers declined from -51 in September to -56 in December (not
shown), marking the sixth consecutive decline. The diffusion index for small
manufacturers fell from -57 to -60, the lowest score since these firms were included in the
survey in 1967.
JAPANESE ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Ql
Q2
Q3
Aug
Sep
Oct
Nov
-1.2
-5.1
0.0
-1.3
3.3
-1.1
NA
1.1
-6.2
-7.6
7.2
-3.2
1.7
NA
Machinery Orders
-4.2
-6.5
-4.6
-8.1
15.1
-10.2
NA
New Car Registrations
Unemployment Rate (%)
-7.5
-3.4
2.2
-3.5
6.7
-11.8
-7.4
3.6
4.2
4.3
4.3
4.3
4.3
NA
0.61
0.53
0.50
0.50
0.49
0.48
NA
-51
...
...
...
Industrial Production
Housing Starts
Job Offers
Ratio 1
Business Sentiment 2
area) 3
CPI (Tokyo
Wholesale Prices 3
1.
2.
3.
-31
-38
2.1
0.6
-0.1
-0.1
-0.1
0.4
1.0
-0.4
-1.6
-0.7
-0.2
-1.5
-2.8
-3.5
Level of indicator.
Percent of large manufacturing firms having a favorable view of business conditions less those
with an unfavorable view (Tankan survey).
Percent change from previous year, NSA.
Japan's dollar-denominated monthly trade surplus rose to an all-time high of $12.1
billion in October, up almost 30 percent from September. Of this rise, about half reflects an
increase in the yen-denominated surplus (mainly due to a decline in imports), and the
remainder reflects the fact that a given quantity of yen now translates into a larger quantity
of dollars. Through the first ten months of 1998, Japan's trade surplus was $110 billion at an
annual rate, up sharply from the $83 billion surplus registered during all of 1997.
In mid-November, the government announced a fiscal stimulus package with headline
value of ¥24 trillion (4.8 percent of GDP). The package contains about ¥6 trillion of personal
IV-18
Part2: Recent Developments, December 16, 1998
and corporate tax income cuts and about ¥18 trillion of expenditures, including new public
works projects, increased funding for government financial institutions (an attempt to ease
the credit crunch), and a small quantity of consumption vouchers. As is typically the case
with Japanese stimulus packages, however, the headline value significantly overstates the
likely economic impact ("real water" content). In addition to the ¥6 trillion of tax cuts, only
¥6 trillion of the other measures would qualify as real water.
In mid-November, the BOJ announced three measures designed to facilitate firms'
financing efforts and provide a modest degree of economic stimulus. First, the BOJ
expanded the maximum maturity of commercial paper eligible for use in its repo operations
from three months to one year. Second, effective December 21, the BOJ will establish a
temporary facility to refinance (at the official discount rate) half of the loans made by
financial institutions during the fourth quarter. Third, the BOJ will consider establishing a
new lending mechanism that would involve the use of private debt as collateral.
On December 13, the Japanese authorities nationalized Nippon Credit Bank (NCB)
after an examination by the Financial Supervisory Agency found NCB to be insolvent. The
nationalization of NCB will proceed in a manner similar to that of Long-Term Credit Bank.
In particular, shareholders effectively will be wiped out, senior management will be replaced,
and all NCB obligations (with the possible exception of subordinated debt) will be fully
protected.
Significant variation in growth rates and sentiment exists across the EURO-11
countries. Weighted by GDP shares, however, recent data point to falling business
confidence and slowing industrial production, as well as consumer confidence that has been
stuck at low levels for some time now. The good news for the EURO-11 countries has been
the steady decline in inflation rates.
InternationalDevelopments
EURO-11 ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Nov
Q2
Q3
Aug
Sep
Oct
0.8
0.5
NA
..
...
...
Industrial Production 2
1.0
0.5
0.7
-0.9
-0.9
NA
NA
Rate 3
11.9
11.6
11.4
11.4
11.3
10.04
NA
Business Confidence
2.0
2.0
-0.7
-1.0
-2.0
-5.0
-8.0
Consumer Confidence
-7.7
-5.3
-4.7
-5.0
-5.0
-3.0
-2.0
1.2
1.5
1.2
1.2
1.1
1.1
Ql
GDP 1
Unemployment
Consumer Prices 5
NA
NOTE: Series are the weighted averages of the eleven countries in EMU where weights depend on GDP,
except as otherwise noted.
1. Q3 data have been reported for 3 countries only. Luxembourg is not included in the estimates.
2. The estimates exclude Luxembourg (for which there are no data), and Austria, Ireland, and Portugal
(where data have not been released for recent months). Data for Spain have been seasonally adjusted
using X-11 ARIMA; the official data are not seasonally adjusted. Because only 3 countries have yet
reported October data, no estimate is given.
3. Weighted average of national unemployment rate statistics. Excludes Luxembourg. Q3 rate for
Portugal is a forecast. Monthly data for Spain, Italy and Portugal do not exist and are constructed
using a cubic spline on the quarterly data.
4. The drop in the October rate relative to September is a reflection of the omission of October
employment rate data for Spain, Italy, and Portugal: October data for these countries cannot be
constructed without the quarterly data. The September unemployment rate, calculated excluding
these same countries, would be 10.1. Because only 3 countries have reported November data, no
estimate is given.
5. Harmonized CPI; percent change from previous year, weighted by shares in private final domestic
consumption of households converted to a common currency using estimated PPP exchange rates.
GDP growth in Germany resumed in the third quarter as private consumption and
investment bounced back strongly from their second-quarter pace, pushing overall growth up
to 3.5 percent (SAAR). The rebound in the third quarter exaggerates the trend in real activity
because of special factors that distorted the pattern of growth over the preceding two
quarters--warmer than usual weather in the first quarter and an April increase in the VAT that
accelerated both construction and consumption expenditures into the first quarter. Export
growth fell sharply in the third quarter as did inventory stockbuilding. Survey data suggests
that the retrenchment of inventory stocks was intentional as manufacturers have noted for
some time now that inventory stocks are too high.
IV-20
Part2: Recent Developments, December 16, 1998
GERMAN REAL GDP
(Percent change from previous period, SAAR)
1996
1997
1997
Q_4
1998
IQ1
I Q2
Q3
GDP
2.1
2.3
1.3
5.9
0.2
3.5
Total Domestic Demand
1.2
1.5
3.1
7.4
-1.4
2.4
Consumption
1.3
1.0
3.2
3.4
-1.6
3.8
Investment
2.3
-0.8
0.5
11.1
-16.9
8.7
Government Consumption
0.8
-2.9
-11.5
16.2
-1.8
-0.5
Inventories (contribution)
-0.2
1.7
3.5
0.1
3.8
-1.4
Exports
8.5
11.1
-1.0
0.8
10.9
1.5
Imports
5.1
8.2
4.8
5.6
5.7
-2.3
Net Exports (contribution)
0.9
0.8
-1.7
-1.4
1.5
1.2
1.
Annual changes are Q4/Q4.
Monthly data suggest that the pace of growth has been slowing since August
notwithstanding the healthy estimate of third quarter GDP. Industrial production fell in
August and September and, despite a pickup in October, production is currently below its
third-quarter level. The volume of manufacturing orders has been trending down since the
start of the year, with weakness in both domestic and foreign orders. The German industry
association reported abysmal September and October figures for incoming orders for plant
and machinery, with foreign orders especially weak. September and October surveys of
business confidence (the IFO survey) indicated that more firms believe that business
conditions have deteriorated than improved. The slowdown in economic activity is reflected
in the unemployment rate which, having declined by over a percentage point during the
course of the past year, appears to have stabilized at 10.6 percent in November.
Price data continue to show the absence of any inflationary pressure. In November,
consumer prices rose 0.7 percent on a 12-month basis. October producer prices, wholesale
prices, and import prices were down 1.2, 4.7, and 5.7 percent, respectively, from their yearearlier levels.
InternationalDevelopments
GERMAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Q1
Q2
Q3
Aug
Sep
Oct
Nov
1.9
-0.5
1.7
-0.9
-2.5
1.0
NA
2.1
11.5
0.2
11.2
-0.5
10.8
-1.5
10.8
0.2
10.7
-2.5
10.6
NA
10.6
Western Germany
Eastern Germany
9.6
19.2
9.4
18.5
9.2
17.5
9.2
9.2
9.1
9.1
17.6
17.2
16.9
16.9
Capacity Utilization 1
87.3
87.2
87.0
......
18.3
16.0
6.0
7.0
-1.0
-6.0
NA
1.2
1.3
0.8
0.8
0.8
0.7
0.7
1.1
1.3
0.8
0.7
0.7
0.7
0.6
Industrial Production
Orders
Unemployment Rate (%)
Business
Climate1, 2
...
Consumer Prices 3
All-Germany
Western Germany
1.
2.
3.
Western Germany.
Percent of firms citing an improvement in business conditions (current and expected over the next
six months) less those citing a deterioration.
Percent change from previous year.
In France, third-quarter GDP growth was 2.1 percent (SAAR), substantially lower
than second-quarter growth, which was revised up to 3.3 percent (from 2.8 percent). In
contrast to the recent trend of strong domestic demand propelling GDP growth, third-quarter
growth reflected a surge in net exports with domestic demand restrained by an inventory
swing from a pace of moderate stockbuilding in the second quarter to one of decumulation in
the third quarter. Consumption and investment also slowed from their second-quarter pace.
Fourth-quarter indicators are limited, but they point to the possibility of additional
slowing. In October, consumption of manufactured goods declined from its September level.
and an index of business confidence plummeted, holding at the lower level through
November. The unemployment rate, however, edged down slightly in October.
Consumer price inflation is at a 40-year low. In November, the consumer price index
rose 0.2 percent on a 12-month basis, down from 0.4 percent in October.
IV-22
Part2: Recent Developments, December 16, 1998
FRENCH REAL GDP
(Percent change from previous period, SAAR)
1996
1997
1997
1998
Q4
Ql
Q2
Q3
GDP
2.4
3.1
3.2
2.8
3.3
2.1
Total Domestic Demand
1.4
1.8
3.2
4.9
4.1
0.6
Consumption
1.8
2.6
4.6
2.6
4.4
3.0
-0.1
1.0
1.7
6.1
3.9
3.3
Government Consumption
2.6
0.9
1.5
1.6
1.8
1.0
Inventories (contribution)
-0.2
-0.2
-0.2
1.7
0.3
-2.0
Exports
10.0
13.2
4.0
4.3
1.4
12.2
Imports
6.5
9.3
4.2
10.9
3.6
8.0
Net Exports (contribution)
1.0
1.3
0.0
-1.9
-0.7
1.4
Investment
1.
Annual changes are Q4/Q4.
FRENCH ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Q1
Q2
Q3
Aug
Sep
Oct
Nov
Consumption of Manufactured
Products
1.4
0.8
2.6
-1.4
2.1
-0.7
NA
Industrial Production
0.8
1.1
0.1
0.0
-0.9
NA
NA
Capacity Utilization
86.5
86.5
85.5
...
...
Unemployment Rate (%)
12.2
11.9
11.8
11.8
11.7
11.6
NA
Business Confidence1
18.0
19.3
19.0
20.0
17.0
4.0
5.0
0.7
1.0
0.7
0.7
0.5
0.4
0.2
Consumer Prices
1.
2.
2
Percent balance of manufacturing firms citing an improvement in the outlook versus those citing a
worsening.
Percent change from previous year.
InternationalDevelopments
In Italy, industrial production rose in September and again in October after having
declined (on a quarterly basis) through most of the year, and consumer confidence posted a
sizable rebound in November. But a drop in capacity utilization in the third quarter and
business sentiment that has been deteriorating since August make the outlook for fourth
quarter growth difficult to read as yet.
ITALIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Ql
Q2
Q3
Aug i
Sep
Oct
Nov
1.1
..
NA
...
119.7
Industrial Production
Capacity Utilization1 (%)
Unemployment Rate (%)
Consumer Confidence 2
-0.1
78.2
-0.2
79.5
-0.3
76.6
-1.6
1.7
12.1
118.6
12.3
122.7
12.4
117.0
...
117.0
...
115.2
...
116.6
Business Sentiment 3 (%)
Consumer Prices 4
32.0
1 1.7
11.7
1.8
9.0
1.8
14.0
1.9
5.0
1.8
-3.0
1.7
1.
2.
3.
4.
NA
1.5
NSA.
Level of index, NSA.
Percent of manufacturing firms having a favorable view of business conditions minus those with an
unfavorable outlook.
Percent change from previous year.
Inflationary pressures remain subdued. After having held relatively steady at around
1.8 percent throughout much of the year, consumer price inflation dipped to 1.5 percent on a
12-month basis in November. This latest drop likely reflects the passthrough of falling oil
and commodity prices.
The pace of economic activity in the United Kingdom slowed in the third quarter, as
real GDP expanded 1.5 percent (SAAR). Consumer expenditure increased 1.6 percent,
somewhat faster than in the second quarter but well below the average rate of growth last
year. Investment expenditure grew 9.7 percent, following a decline in the second quarter.
Net exports subtracted 2.3 percentage points from growth, and inventories made a small
positive contribution following a sizeable positive contribution in the second quarter.
Available data for the fourth quarter point to continuing deceleration. Industrial
production was unchanged in October, with manufacturing output declining for the third
IV-24
Part2: Recent Developments, December 16, 1998
consecutive month. The volume of retail sales declined further in October, and business and
consumer confidence remain at low levels. Business surveys continue to suggest further
contraction of the manufacturing sector, while surveys of service sector activity indicate only
modest growth in October and a slight contraction in November. The official claims-based
unemployment rate remained 4.6 percent in November.
UNITED KINGDOM REAL GDP
(Percent change from previous period, SAAR)
1996
1997
1997
_Q4
1998
Q1
Q2
Q3
GDP
2.6
3.9
2.9
3.1
1.9
1.5
Total Domestic Demand
2.8
5.2
6.2
4.4
1.6
3.3
Consumption
Investment
3.9
5.1
4.7
8.8
6.0
11.5
2.3
12.5
1.3
-4.6
1.6
9.7
Government Consumption
1.4
0.0
1.1
4.5
3.4
2.2
Inventories (contribution)
-0.8
0.7
0.2
0.0
1.0
0.2
Exports
8.5
2.0
-2.0
8.3
-1.9
Imports
9.1
6.7
10.6
12.2
3.2
6.4
5.0
-0.2
-1.2
-3.2
-1.7
0.4
Net Exports (contribution)
1.
-2.3
Annual changes are Q4/Q4.
Producerinput prices fell further in November. The twelve-month rate of retail price
inflation (excluding mortgage interest payments) remained 2.5 percent in November, meeting
the inflation target for the fourth consecutive month. On an EU-harmonized basis, consumer
price inflation is somewhat lower and declined to 1.3 percent in October.
At its December meeting, the Monetary Policy Committee (MPC) of the Bank of
England reduced the official repo rate 50 basis points to 6.25 percent, following reductions of
50 basis points in November and 25 basis points in October. The MPC noted that the outlook
InternationalDevelopments
UNITED KINGDOM ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
QI
Industrial Production
Q2
Q3
Aug
Sep
Oct
Nov
-0.3
1.2
0.1
-0.4
-0.7
0.0
NA
Retail Sales
0.9
0.2
0.5
0.3
-0.4
-0.4
NA
Unemployment Rate (%)
4.9
4.8
4.6
4.6
4.6
4.6
4.6
10.7
-0.7
-11.7
-15.0
-12.0
-29.0
-27.0
0.0
3.3
-13.3
-17.0
-15.0
-22.0
-14.0
2.5
3.0
2.6
2.5
2.5
2.5
-9.7
-7.9
-9.1
-9.4
-9.5
Business Confidence 1
Consumer Confidence
2
Retail Prices 3
Producer Input
1.
2.
3.
4.
Prices 4
-10.1
2.5
-8.9
Percent of firms expecting output to increase in the next four months minus those expecting output
to decrease.
Level of index, expectations of general economic situation over the next 12 months.
Excluding mortgage interest payments. Percent change from previous year.
Percent change from previous year.
for global economic activity appears to have weakened and surveys of domestic activity
continue to indicate "a deterioration across the economy."
In Canada GDP grew 1.8 percent (SAAR) in the third quarter, with an increase in
net exports more than accounting for the overall increase. Exports have managed to post
solid gains in 1998, despite the impact of the Asian crisis on commodity exports. Growth was
restrained by a swing in inventory investment, from a modest level of stockbuilding in the
second quarter to a small decumulation of stocks in the third quarter. To a large extent, the
inventory situation reflects the effect of strikes in manufacturing and construction that
occurred in June and July. Solid gains in employment were registered in September and
October, and the November employment report showed the second largestmonthly gain over
the 1990s. The gains in employment are no doubt boosted by a recovery in the
manufacturing and construction industries hurt by the summer strikes. At the same time, the
pickup in employment and a surge in manufacturing orders in October could indicate that,
despite survey evidence of falling business and consumer confidence, near-term growth could
be surprisingly strong.
IV-26
Part2: Recent Developments, December 16, 1998
CANADIAN REAL GDP
(Percent change from previous period, SAAR)
1996
1997
1998
1997
Q4
Q1
Q2
Q3
GDP
1.7
4.4
2.8
3.1
1.4
Total Domestic Demand
3.7
4.7
2.8
0.1
4.2
2.9
13.6
-2.0
0.1
4.1
7.3
0.4
0.7
2.6
1.1
-0.9
1.2
0.3
2.7
-0.3
-0.5
5.6
10.7
2.6
-1.6
Exports
3.0
11.0
7.1
9.1
1.9
5.7
Imports
Net Exports (contribution)
1. Annual changes are Q4/Q4.
8.3
-1.6
13.5
-0.7
8.5
-0.4
0.0
3.3
8.9
-2.4
-8.1
5.2
Consumption
Investment
Government Consumption
Inventories (contribution)
1.8
-3.0
2.2
-0.4
1.1
-4.5
In November, the Bank of Canada reduced its Bank Rate 25 basis points to 5.25
percent. In its semi-annual Monetary Policy Report published on November 16, the Bank
lowered its forecast for 1999 GDP growth to 2-1/2 percent "in light of adverse effects of
international developments." The bank forecast remains above the consensus forecast of 2
percent, with the difference largely attributable to the outlook for net exports. The Bank
forecasts that 1999 core CPI inflation will be above the rate of 1-1/2 percent projected for
1998 (year over year) but will likely remain in the lower half of its 1 to 3 percent target
range.
InternationalDevelopments
CANADIAN ECONOMIC INDICATORS
(Percent change from previous period except where noted, SA)
1998
Q_
Q3
Q2
Aug
Sep
Oct
Nov
GDP at Factor Cost
0.7
0.3
0.3
0.7
0.1
NA
NA
Industrial Production
0.3
0.2
0.0
2.1
0.2
NA
NA
-1.7
-0.6
1.5
8.5
-2.4
4.1
NA
Retail Sales
0.3
1.6
0.9
-0.2
1.1
NA
NA
Employment
0.7
0.7
0.3
0.3
0.5
0.4
0.7
Unemployment Rate (%)
8.7
8.4
8.3
8.3
8.3
8.1
8.0
Consumer Prices 1
1.0
1.0
0.9
0.8
0.7
1.0
Consumer Attitudes 2
118.4
115.0
103.3
..
Business Confidence 3
155.0
148.9
128.6
...
New Manufacturing Orders
1.
2.
3.
...
NA
...
...
...
.
Percent change from year earlier.
Level of index, 1991 = 100.
Level of index, 1977 = 100.
EXTERNAL BALANCES
(Billions of U.S. dollars, SAAR)
1998
Sep
Oct
trade
current account
98.0
115.9
114.0
111.8
107.3
130.7
94.9
130.3
112.7
149.8
144.6
145.3
Germany: trade 1
current account
65.4
-16.0
81.8
15.4
77.6
-15.4
57.1
-28.8
80.8
-13.7
91.6
-27,8
France:
trade
current account
25.5
35.7
26.4
36.8
31.6
41.1
26.0
27.2
44.2
41.4
NA
NA
U.K.:
trade
current account
-31.5
-3.3
-30.2
4.0
-34.4
NA
-25.2
......
-50.5
NA
Italy:
trade
current account
22.6
10.3
29.9
30.9
28.0
NA
29.2
NA
29.1
NA
NA
NA
trade
current account
Not seasonally adjusted.
14.5
-12.0
10.0
-14.5
13.9
-11.5
14.9
......
12.8
NA
____1__
Japan:
Canada:
1.
Q2
|
Q3
Aug
1
IV-28
Part2: Recent Developments, December 16, 1998
Industrial Production in Selected Industrial Countries
1991=100
Japan
--I 20
1991=100
Germany
120
110
--
NJ-I-T
l
100
L-
I I I t , l . l.Is I
1995
1996
1993
1994
I II ,
1997
1998
I
l
I 11111
1993
1994
Fil
1995
I III
1996
Y
A^
90
Il
80
1997
1998
United Kingdom
France
120
^-
110
,,,i,,i,, I , , , i
u l
--
100
90
1993
1994
1995
1996
1997
1998
Italy
1993
1994
1995
1996
1997
1998
Canada
80
130
120
110
100
1993
1994
1995
1996
1997
1998
1993
1994
1995
1996
1997
1998
InternationalDevelopments
Consumer Price Inflation in Selected Industrial Countries
(12-month change)
Germany
Japan
Percent
Percent
7
6
5
4
A
3
hA A
2
1
1993
1994
1995
1996
1997
1998
United Kingdom
France
Percent
Percent
IL
1993
1994
1995
1996
1997
iI
1994
I
I
LL I
I I
I Li
I I I II I II
.
.
a
1993
1998
Ii
1995
1996
1998
Canada
Italy
Percent
Percent
v
i
1993
I
1997
1994
1995
1996
1997
1998
I
I
1993
1
I
I
1994
I I I I
r
It I I t t
1995
1996
I I I
1 11
1997
i
'
t
1998
IV-30
Part2: Recent Developments, December 16, 1998
Economic Situation in Other Countries
Activity in most of the Asian developing economies remains depressed, although
there are signs that Korea and the ASEAN economies may be nearing a trough, while
Chinese growth has shown a modest pickup. Trade balances across the region have
improved sharply over the past year owing primarily to reductions in imports, while exports
remain weak. Inflation in these countries has generally stabilized, although in many cases it
remains higher than before the crisis began.
In contrast, the downturn in most key Latin American economies has worsened
considerably in recent months. Real GDP was down sharply in the third quarter in both
Brazil and Argentina in response to the high interest rates needed to defend their currencies,
while activity in Venezuela has been dampened by extremely low oil prices. All of these
countries still show substantial trade deficits despite slower import growth, owing largely to
the effects of lower prices for oil and other exported commodities. Inflation remains
relatively high in Mexico and Venezuela, but is quite low in Argentina and deflationary
pressures have been seen in Brazil.
The Russian economy continues to contract. An agreement on domestic debt
restructuring has been announced, although foreign lenders are generally unhappy with the
terms. Meanwhile, negotiations on rescheduling of Soviet-era debt continue. The latest draft
budget currently under consideration by the Duma falls well short of what the IMF has
indicated will be necessary in order for further assistance to be made available.
Individual country notes. In Korea, recent data suggest that activity may be
bottoming out, although special factors have complicated our interpretation of the evidence.
We estimate that seasonally-adjusted real GDP rose at an annual rate of a little over 2 percent
in the third quarter, compared with declines of 5 percent in the second quarter and 23 percent
in the first quarter. However, our estimate of seasonally-adjusted third-quarter growth was
artificially boosted due to the fact that the three-day Korean thanksgiving holiday fell in
October this year; normally the holiday is in September. This distortion is also clearly seen
in the industrial production data. Nevertheless, industrial output in the September-October
period combined was down 4 percent from the same period one year earlier, much less than
the 12.4 percent fall recorded in the July-August period. The unemployment rate rose further
to a seasonally adjusted 8.5 percent in October.
InternationalDevelopments
IV-31
ECONOMIC INDICATORS
__]
Real
GDP 1
Q2
I Q3
Sep
I Oct
Nov
7.1
5.5
-5.1
2.3
......
7.1
6.7
-12.0
-8.2
0.1
-8.0
n.a.
4.9
4.4
8.2
7.0
6.9
7.2
6.8
Trade Balance 3
-15.0
-3.2
45.6
42.4
45.6
41.4
n.a.
Current Account3
-23.0
-8.2
46.4
38.0
44.4
33.0
n.a.
Industrial Production 2
Consumer Prices
2
1.Percent change from previous period, SAAR estimated by staff.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA.
In a major step in the process of corporate restructuring, the five largest
conglomerates (chaebols) reached agreement on a variety of reforms with the government
and creditor banks. The chaebols have agreed to reduce substantially the number of their
operating units through mergers and spin-offs. This should allow them to focus on core
industries, with the aim of improving efficiency and establishing more management
transparency. Under the agreement, the chaebols will have to close units that are judged to
have little chance of survival, and creditor banks are to halt new loans to these weak
subsidiaries. The chaebols have reiterated their promises to end cross-debt guarantees among
their conglomerates and to lower their debt-to-equity ratios (414 percent as of June) to 200
percent by the end of 1999. All funds raised through the sales of noncore units and any
capital increases are to be used to make debt repayments to banks. If the chaebols fail to
abide by these promises, their creditor banks are supposed to halt new loans to the groups or
demand payment of outstanding debts.
Recent indicators for the ASEAN region also show some signs that the pace of
contraction has slowed. Real GDP fell again in the third quarter in Indonesia and Malaysia,
but at a much lower rate than earlier in the year. Although industrial production remains well
below year-earlier levels across the region, only in the Philippines and Singapore has the
decline intensified in recent months. Real GDP growth in the Philippines was unexpectedly
strong in the third quarter, but this likely reflects an increase in agricultural production, which
rebounded from a very low second-quarter level.
IV-32
Part 2: Recent Developments, December 16, 1998
ASEAN ECONOMIC INDICATORS: GROWTH
1996
1997
1998
Q__Q2 Q3
Real
Aug
Sep
Oct
GDP 1
Indonesia
8.0
4.7
-35.8
-2.8
...
...
...
Malaysia
8.6
7.8
-8.9
-2.3
...
...
...
Philippines
5.8
5.2
-3.1
4.4
...
...
...
Singapore
6.9
7.7
-2.1
-3.8
...
...
.
Thailand
6.4
-0.4
.........
Indonesia
6.6
6.2
-22.1
-23.0
..
...
...
Malaysia
11.0
10.7
-6.1
-10.3
-11.6
-10.9
-10.4
Philippines
8.4
8.8
0.4
-5.8
-7.9
-7.8
n.a.
Singapore
3.3
4.6
-1.0
-4.4
-6.3
-1.7
-7.9
-0.4
-15.7
-11.7
7.2
Thailand
1. Percent change from previous period, SAAR estimated by staff.
2. Percent change from year earlier.
-10.4
-8.9
-5.4
Industrial Production2
ASEAN ECONOMIC INDICATORS: INFLATION
1996
1997
1998
Q_____2Q3
Aug
Sep
Oct
Nov
Consumer Prices
Indonesia
8.0
6.5
52.2
79.7
81.0
82,4
79.4
78.0
Malaysia
3.5
2.7
5.7
5.6
5.6
5.5
5.2
5.6
Philippines
8.4
5.1
9.0
9.6
10.5
10.0
10.2
11.2
Singapore
1.4
2.0
0.3
-0.8
-0.8
-1.4
-1.7
n.a.
Thailand
5.8
1. Percent change from year earlier.
5.6
10.3
8.2
7.6
7.0
6.7
4.7
In a possible sign of returning confidence in the region, ASEAN stock markets have
rallied and currencies across the region have strengthened significantly since mid-September,
although they remain well below their pre-crisis levels. Inflation appears to have stabilized
across the region, mainly reflecting weak domestic demand. Twelve-month inflation in
Indonesia declined somewhat in November for the second consecutive month, reflecting in
InternationalDevelopments
IV-33
part the rupiah's appreciation, while prices in Singapore continue to fall. All the ASEAN
countries are now running trade surpluses, with balances up sharply across the region relative
to last year. The improvement has resulted mainly from a reduction in imports rather than
increases in export revenues. However, in recent months imports across the region appear to
have stabilized; Thai imports rose in October.
Against the backdrop of exchange controls introduced in September, the authorities in
Malaysia are continuing their efforts to reflate the economy by aggressively lowering interest
rates and loosening fiscal policy. Some progress has been made in restructuring the region's
deeply troubled financial and corporate sectors, although the pace of reform has been very
slow. In Thailand the restructuring process was dealt a blow by the unelected Thai Senate,
which has delayed the passage of crucial amendments to the bankruptcy and foreclosure
laws, possibly until as late as March 1999.
ASEAN ECONOMIC INDICATORS: TRADE BALANCE
1996
1
1998
1997
Q2
Q3
Jul
Aug
Sep
Oct
Indonesia
Malaysia
Philippines
6.9
-0.1
-11.9
11.9
-0.2
-10.5
24.8
13.8
-1.0
23.1
16.5
2.0
26.4
11.7
0.4
21.6
18.0
1.7
21.4
19.8
4.0
n.a.
20.9
1.5
Singapore 2
-5.9
-5.8
9.5
11.0
7.5
9.7
15.8
12.7
-4.6
10.4
12.7
11.7
11.2
15.2
13.3
Thailand
-16.1
1.Billions of U.S. dollars, AR, NSA.
2. Non-oil trade balance.
In Hong Kong, real GDP declined in the third quarter for the fourth consecutive
quarter, and the unemployment rate in October was 5 percent, double its level at the
beginning of the year. Twelve-month inflation in October was near zero. Hong Kong's
merchandise trade deficit has continued to narrow in recent months, reflecting continued
weakening of imports. Foreign exchange reserves were $89 billion at the end of October, up
very slightly from their recent low in September. In early December, the Hong Kong
Monetary Authority relaxed rules on property lending in an effort to stimulate residential and
other construction, allowing banks to make loans up to 85 percent (formerly 70 percent) of a
property's value.
IV-34
Part2: Recent Developments, December 16, 1998
HONG KONG ECONOMIC INDICATORS
1996
Real GDP 1
1997
1998
Q2
Q3
Aug
Sep
Oct
4.5
5.3
-1.6
-4.7
...
6.3
5.8
4.4
2.8
2.7
2.3
0.1
Trade Balance
-17.8
-20.6
-18.0
-9.7
1. Percent change from previous period, SAAR estimated by staff.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA. Imports are c.i.f.
-1.1
-2.3
-1.2
Consumer
Prices 2
...
...
In China, industrial production continued to strengthen in October and November
following some pickup in the third quarter, while the price level appears to have stabilized
after falling earlier in the year. The apparent pickup in activity is largely a result of strong
fixed asset investment by state enterprises and the government; these investments were up
nearly 20 percent in the August-October period from a year-earlier, compared with an
increase of only about 11 percent in the first half of 1998. The increase in state investment
appears to have come at the cost of a reduction in the pace of enterprise and bank reforms.
However, some reforms continue. China announced in November that the People's Bank
would be restructured at the end of 1998, with the establishment of nine branches that cut
across provincial lines. In late November, China ordered the Communist Party and state
ministries to end their direct management of business enterprises, effective at the beginning
of 1999, although these enterprises will continue to be owned by the state.
CHINESE ECONOMIC INDICATORS
(Percent change from year earlier except where noted)
1996
Real GDP
1997
1998
Q2
Q3
Sep
Oct
Nov
9.7
8.8
6.8
7.6
13.0
11.1
8.1
8.6
10.2
10.6
11.0
8.3
2.8
-0.9
-1.4
-1.5
-1.1
-0.8
Trade Balancel
12.2
1.Billions of U.S. dollars, AR, NSA.
40.3
47.4
51.2
46.8
37.0
33.6
Industrial Production
Consumer Prices
......
China's trade surplus has fallen in recent months, reflecting weakening exports. The
average value of exports in the September-November period was 11 percent below its year-
IV-35
InternationalDevelopments
earlier level, while the value of imports was down 21/2 percent. Foreign direct investment
inflows were $36 billion in the first 10 months of 1998, up about I percent from the yearearlier period. Total reserves less gold, which increased $33 billion in 1997 before
stabilizing in the first nine months of 1998, were $145 billion in September. On December 9,
China launched a $1 billion global bond issue at a spread of 288 basis points above U.S.
Treasury securities.
In Taiwan, real GDP rose sharply in the third quarter. The improvement reflects in
part an increasing trade surplus as a result of a decline in imports. The value of imports was
down 16 percent from its year-earlier level in the third quarter; exports were down 10 percent
over the same period. Inflation has picked up sharply since September as a result of an
increase in food prices following damage from two typhoons. Inflation excluding food prices
remains quite low. Foreign exchange reserves rose to $88 billion in November, the highest
level since July 1997.
TAIWAN ECONOMIC INDICATORS
1996
Real GDP 1
Industrial Production
Consumer Prices 2
Trade Balance 3
Current
Account 3
2
1998
1997
Q2
Q3
Sep
Oct
Nov
5.7
6.8
2.1
6.2
...
...
..
1.8
6.8
4.3
5.0
6.7
1.6
n.a.
3.1
0.9
1.7
0.6
0.4
2.6
3.9
14.8
7.7
5.4
14.0
13.2
-0.2
19.2
11.0
7.7
3.0
2.1
...
...
..
1.Percent change from previous period, SAAR estimated by staff.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA.
In October and November, several Taiwanese companies defaulted on loan
obligations, fueling liquidity problems-including bank runs-at a number of small financial
institutions. As a result, banks have reportedly become much less willing to lend. The
financial turmoil contributed to weakness in the stock market, which the government
countered by establishing a stock stabilization fund. The fund was widely credited with
spurring a stock market rally preceding the December 5 parliamentary elections, in which the
ruling Nationalist Party widened its majority from 51 percent to 55 percent of the legislature.
IV-36
Part2: Recent Developments, December 16, 1998
Recent data for Mexico indicate that the economy is continuing to expand at a healthy
pace, although export growth has slackened as a result of a slump in world oil demand.
Third-quarter GDP, September industrial production, and October employment were all
strong. However, the trade deficit widened in October to its highest level since before the
1995 recession as a fall in oil exports nearly offset moderate growth in other export
categories. Imports continued to expand in October, although at a slower pace than earlier
this year, in response to the weak peso. The third-quarter current account deficit was nearly
$19 billion.
MEXICAN ECONOMIC INDICATORS
1996
I
S
Real GDP 1
1998
1997
Q2
Q3
Sep
Oct
Nov
5.1
7.0
6.1
7.7
......
10.4
9.2
5.0
6.1
6.0
n.a.
n.a.
5.5
3.7
3.2
3.2
3.3
3.1
n.a.
27.7
15.7
15.3
15.9
15.9
16.7
6.5
0.6
-4.8
-9.2
-8.4
-9.6
n.a.
Imports 3
89.5
109.8
124.0
123.2
130.8
133.2
n.a.
Exports 3
96.0
110.4
119.2
114.4
122.4
123.6
n.a.
-18.8
-13.8
-2.3
-7.4
Current Account 3
1. Percent change from previous period, SAAR estimated by staff.
...
...
Industrial Production 2
Unemployment Rate (%)
Consumer Prices 2
Trade Balance 3
17.4
.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA.
The technical deadline for the government's 1999 budget was midnight
December 15, but debate was delayed because of the negotiations over the $61 billion bank
bailout program (known as Fobaproa). The Mexican congress decided on December 14 that
it would hold an "extraordinary period of sessions" beginning December 17 to debate the
country's 1999 budget. The government's proposal has been attacked by both of the two
main opposition parties. This is the second consecutive year that the legislature has faced a
serious budget debate, owing to the majority achieved by the opposition parties in the July
1997 election. In general, the budget proposal contains a conservative fiscal stance with a
fiscal deficit of 1.25 percent of GDP in 1999 and 1 percent in 2000, down from 1.4 percent in
1998. With the resolution of Fobaproa reform, the major sticking point in the debate
InternationalDevelopments
IV-37
appears to be the proposed 15-percent tax on telephone usage the government has proposed
to fill the gap caused by plunging oil revenue.
In recent weeks, financial markets in Mexico have continued to fluctuate under
pressure from events in international markets (particularly Brazil) and uncertainty over the
congressional debate on Fobaproa and the government budget. However, markets have been
somewhat less volatile than during the August-October period. Between mid-November and
December 15, the peso has strengthened about 1 percent; the stock market has decreased 5
percent; and spreads on Mexican Brady bonds, adjusted for collateral, fell 37 basis points.
The 28-day Cetes rate has risen by 200 basis points, reflecting a tightening of monetary
policy by the Bank of Mexico.
In Brazil, activity has plunged because the central bank has kept interest rates at very
high levels to defend the real. Real GDP declined by nearly 6 percent (SAAR) in the third
quarter after the central bank doubled its overnight interest rate to about 40 percent in early
September. Industrial output, which had already weakened over the summer, dropped
sharply in September and fell further in October. The decline in production in the interestrate-sensitive durable goods sector was particularly large. In November, motor vehicle sales
were about 40 percent below their year-earlier level. Reflecting the fall in activity, year-overyear inflation has declined in recent months as inflation has been negative on a month-tomonth basis.
Reflecting the fall in economic activity, imports in October were down 10 percent
from the previous year. However, declines in commodity prices have caused the value of
exports to decline 5 percent from the previous year. Brazil's trade deficit for the year through
October totaled $5.2 billion (AR), down somewhat from the same period last year. The
current account deficit for the year through September 1998 was about $31 billion (AR),
slightly higher than over the same period in the previous year, as a narrowing in the trade
deficit was more than offset by higher interest payments on foreign debt and by higher
repatriations of dividends and capital.
On November 13, an IMF-led package of financial assistance for Brazil totaling $41.5
billion was announced. The package contained $18 billion in funds from the IMF under a
three-year stand-by arrangement, $14.5 billion from bilateral donors, and $9 billion in loans
from the World Bank and Inter-American Development Bank. The government had made
IV-38
Part2: Recent Developments, December 16, 1998
BRAZILIAN ECONOMIC INDICATORS
1996
Real GDP 1
1998
1997
Q2
Q3
Sep
Oct
Nov
2.9
3.2
5.4
-5.9
...
...
1.7
3.9
1.8
-1.5
-2.4
-1.2
n.a.
Open Unemployment Rate (%)
5.8
6.1
8.8
8.5
8.3
8.3
n.a.
Consumer Prices3
9.1
4.3
4,5
3.6
3.2
3.0
n.a.
-5.5
-8.4
-1.6
-7.2
-9.6
-6.0
n.a.
-33.8
-31.6
-37.7
-58.2
-47.9
n.a.
Industrial Production
Trade Balance
4
2
-24.3
Current Account 4
1. Percent change from previous period, SAAR.
2. Percent change from previous period, SA.
3. Percent change from year earlier.
4. Billions of U.S. dollars, AR, NSA.
significant progress in passing portions of its fiscal program, which calls for a reduction in
the deficit. However, on December 2 the lower house of congress rejected a controversial
civil servant pension reform measure. The rejection, which came only two hours after the
IMF Executive Board had approved the IMF loan, raised doubts about Brazil's political
commitment to fiscal reform. (Brazil's successful completion of fiscal targets is crucial to
the continuation of the IMF program.) The fiscal situation, as well as weak economic data,
have depressed stock prices since late November, although short-term market interest rates
somewhat surprisingly have risen by only a couple of percentage points.
Reflecting recent events, net capital outflows on December 11 and 14 were
$600 million and $300 million respectively, relative to net outflows averaging $100 million
per day over the first nine days of December. Slight inflows were registered on December
15, largely reflecting the foreign acquisition of a Brazilian telecommunications firm.
Reserves stood at $39 billion on December 14. On December 15, the central bank announced
that it was adding $4.8 billion in IMF money to its reserves, and would add a further $4.5
billion in bilateral money on Friday. Despite the outflows, the central bank has reduced its
overnight interest rate from 40 percent in mid-November to about 32 percent on December
15, presumably because it believes the international support package has boosted confidence
and because it has been concerned about the sharp decline in economic activity.
IV-39
InternationalDevelopments
In Argentina, there is clear evidence that the economy has entered a downturn; real
GDP growth decelerated to 2.9 percent in the third quarter on a year-over-year basis, which
we estimate represents about a 10 percent decline (SAAR) from the second quarter.
Consumer prices fell in November, and the 12-month inflation rate remained below 1
percent. External balances continue to show significant deficits; the cumulative trade deficit
through October this year was over $3.5 billion (AR) compared with about $1.5 billion (AR)
over the same period a year ago. International reserves less gold were about $23 billion at
the end of November, roughly unchanged from a month ago.
On the fiscal front, the Senate approved the 1999 government budget without any
changes to key economic assumptions. The budget projects economic growth of 4.8 percent,
which is widely regarded as being too optimistic. The Senate also approved a tax reform bill
(earlier approved by the lower House) that contained some fiscal reforms, including a
crackdown on tax evasion, that the IMF had been pushing for under its three-year $2.8 billion
Extended Fund Facility to Argentina.
ARGENTINE ECONOMIC INDICATORS
1996
1
1997
1998
SQ2
Q3
Sep
Oct
Nov
..
...
...
4.2
8.4
11.0
-10.5
3.1
8.6
5.1
0.0
-2.2
-6.4
17.2
14.9
13.2
13.2
...
...
Consumer Prices 2
0.1
0.3
1.
1.1
0.9
0.9
Trade Balance 4
1.8
-2.2
-0.2
-4.4
-3.2
n.a.
Real GDP
Industrial Production 2
Unemployment Rate (%)3
1
-5.9
n.a.
n.a.
....
...
-3.8
-9.3
-7.2
Current Account 4
by
staff.
SAAR
estimated
period,
1. Percent change from previous
2. Percent change from year earlier.
3. Unemployment figures available only twice a year (May and August for 1998). The annual figure is the
average of the two surveys. The second and third quarter figures are for May and August respectively.
4. Billions of U.S. dollars, AR, NSA.
Venezuelan economic activity continues to decline, driven by the slump in oil prices;
real GDP contracted about 5 percent in the third quarter on a year-over-year basis, which we
estimate translates into a 15 percent (SAAR) decline from the second quarter. The twelvemonth inflation rate remained high at over 30 percent in November, although it was down
IV-40
Part2: Recent Developments, December 16, 1998
slightly from the previous month. Weak oil prices and an overvalued currency continue to
hurt external balances.
In the presidential election held on December 6, Hugo Chavez scored a convincing
victory, capturing over 55 percent of the vote. This changes the political scene in Venezuela
because, for the first time in 40 years of democracy, power will not rest with one of the two
traditional political parties. Chavez, the leader of a failed coup attempt in 1992, ran on a
platform that was often critical of free markets. However, he has made very conciliatory
statements since winning, assuring investors that the government would honor all its
commitments. As a result, the stock market has rallied, climbing over 20 percent on
December 8, the first day of trading after the election results. Chavez's government will not
take over until early February. No specific new economic measures have been announced
yet, nor has the new cabinet been named.
VENEZUELAN ECONOMIC INDICATORS
1996
1997
1998
SQ___2
Q3
Sep
Oct
Nov
Real GDP 1
-0.4
5.1
-7.0
Unemployment Rate (NSA, %)
11.8
11.7
11.3
11.0...
103.3
37.6
39.0
34.4
34.3
32.8
Non-oil Trade Balance 3
-4.9
-6.8
-9.7
-12.2
-13.1
n.a.
n.a.
Trade Balance 3
13.6
11.4
2.5
-1.5
-1.7
n.a.
n.a.
Consumer
Prices2
-14.9
Account 3
n.a.
8.8
6.0
-0.3
Current
1.Percent change from previous period, SAAR estimated by staff.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA.
...
...
31.2
......
The Russian economy remains in turmoil. Real GDP fell sharply in September, and
industrial output was down 11 percent year-over-year in October. The ruble has fallen by
about 16 percent relative to the dollar over the last month following a period of relative
exchange rate stability between late September and mid-November. The sharp increase in
the cost of imports since August has caused inflation to soar, from 6 percent on a twelvemonth change basis in July to nearly 70 percent in November.
The Russian government has announced terms for restructuring the domestic debt
frozen in August. Under the arrangement, investors will receive ruble cash worth
InternationalDevelopments
IV-41
10 percent of half of the nominal value of their debt holdings as of August 19. The cash is to
be paid in three equal installments, the second two including 30 percent annual interest. An
additional 20 percent is to be paid in three-year zero-coupon bonds (which will reportedly be
acceptable as tax payments and for the purchase of shares in Russian banks); the remaining
70 percent will be restructured into four-to-five-year coupon bonds, with a 30 percent interest
rate in the first year, falling by 5 percentage points a year to 10 percent in the fifth year. The
value of the debt to be restructured is about 280 billion rubles, which was worth $45 billion
when it was frozen in August; at current exchange rates it is worth about $13 billion.
Nonresidents hold about one-quarter of the debt. Final arrangements for currency conversion
and repatriation are still to be negotiated; foreign investors are quite unhappy with the terms
being discussed. The government also continues to negotiate with foreign creditors on
rescheduling of its Soviet-era external debt, while maintaining that it will meet in full all
obligations of the Russian Federation, issued since 1991.
The Cabinet has finally submitted a draft 1999 budget to the Duma. The plan aims to
trim the deficit from 5 1/2percent of GDP in 1998 to 2 1/2percent next year, with a primary
percent. This is unlikely to satisfy the IMF, which has made known that it
surplus of 1 3/4
would like to see a primary surplus of 3-4 percent of GDP next year. The draft budget
includes the expectation that external financing next year will amount to over 1 percent of
GDP, or about 46 billion rubles. At the current exchange rate of about 21 rubles to the dollar,
this would amount to over $2 billion. The IMF continues to stress that further assistance will
not be forthcoming without a coherent budget and some signs that it is being implemented.
Nevertheless, talks are continuing, with another IMF mission to Russia scheduled for
January.
IV-42
Part2: Recent Developments, December 16, 1998
RUSSIAN ECONOMIC INDICATORS
1996
1997
1998
SQ2
Q3
Sep
Oct
Nov
n.a.
n.a.
Real GDP 1
-3.5
0.8
-5.4
-22.7
-17.0
Industrial Production 2
-5.2
1.9
-1.3
-11.7
-14.5
-11.1
n.a.
Unemployment Rate (%)
9.3
9.0
10.0
11.5
11.5
11.6
n.a.
Consumer Prices2
52.8
14.8
7.3
26.2
52.2
58.8
66.7
Ruble Depreciation 2
12.5
12.7
7.0
39.4
61.3
64.0
65.7
Trade Balance3
25.3
19.8
0.4
12.6
32.4
n.a.
3.3
-17.3
12.1
Current Account 3
1. Percent change from previous period, AR.
2. Percent change from year earlier.
3. Billions of U.S. dollars, AR, NSA.
n.a....
n.a.
@FedFRASER