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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. Confidential (FR) Class III FOMC __ January 28, 2000 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Contents 1 Domestic Nonfinancial Developments .......................... Gross Domestic Product (1999:Q4, advance estimate) ...-..... Employment Cost Index ................................ Consumer Sentiment ................................... Tables Real Gross Domestic Product and Related Items ............. Broad Measures of Inflation .............................. Employment Cost Index of Hourly Compensation for Private Industry W orkers .............................. University of Michigan Survey Research Center: Survey of Consumer Attitudes .......................... Charts Components of ECI Benefits Costs ........................ 1 4 7 2 3 5 8 6 9 The Financial Economy .................................... Tables Selected Financial Market Quotations ...................... 9 Supplemental Notes The Domestic Nonfinancial Economy Gross Domestic Product (1999:Q4, advance estimate) According to BEA's advance release, real GDP rose at an annual rate of 5.8 percent in the fourth quarter of 1999 after having increased at a 5.7 percent rate in the third quarter. Final sales rose at an annual rate of 4.6 percent in the fourth quarter--also similar to the pace in the preceding quarter. The change in private inventories contributed more than 1 percentage point to the change in real GDP for the second consecutive quarter; the fourth-quarter figure is based on BEA's assumption that manufacturing and trade inventory investment in December ran close to the substantial average pace of accumulation currently shown in the Census Bureau's data for October and November. Among the components of final sales, real PCE posted a further sizable gain in the fourth quarter, rising at an annual rate of 5.3 percent, and the personal saving rate moved down 0.2 percentage point to 1.9 percent. Real federal government purchases accelerated sharply, to a 16 percent rate, because of a surge in defense outlays.1 In contrast, business spending on equipment and software slowed to an annual rate of about a 5 percent, with decelerations in all of its major components. Spending on structures--both residential and nonresidential-slipped further in the fourth quarter. Finally, real exports and imports both decelerated in the fourth quarter; on balance, net exports held down the rise in real GDP roughly 3/4 percentage point--about the same as in the third quarter. The chain-weighted price index for GDP rose at an annual rate of 2 percent last quarter after an increase of 1.1 percent in the third quarter. The pickup in GDP price inflation reflected larger increases in the price indexes for most of the major categories of private final sales. The figure reported today for fourth-quarter GDP growth was about 1/2 percentage point above the January Greenbook projection. The BEA's estimates for inventory investment and federal government spending both were a good deal higher than the Greenbook projections. As noted above, the disparity in the inventory numbers involves some important assumptions regarding missing data. In the case of federal purchases, the BEA simply translated the jump in vendor payments into purchases, without making any judgment about the degree to which that jump might have reflected financial transactions 1. The jump in the BEA's estimate of defense spending appears to be based in part on the sharp increase in payments to defense vendors during December that may have been related to Y2K concerns. Vendor payments dropped below trend in early January-a pattern consistent with an acceleration of payments before year-end. 1-28-00 -2- Real Gross Domestic Product and Related Items (Percent change from previous period at compound annual rates; based on seasonally adjusted data, chain-type indexes) 1999:Q2 Final 1999:Q3 Final 1999:Q4 Advance 1. Gross domestic product 1.9 5.7 5.8 2. 3.4 4.5 4.6 5.1 4.9 5.3 3. Final sales Consumer spending 4. Durables 9.1 7.7 11.8 5. Nondurables 3.3 3.6 6.1 6. Services 5.2 5.0 3.5 7.0 10.9 2.5 4.9 7. Business fixed investment 8. Equipment and software 11.2 15.7 9. Nonresidential structures -5.3 -3.8 -5.3 5.5 -3.8 -1.2 2.1 4.1 16.0 .9 4.8 4.4 10. Residential investment 11. Federal government consumption expenditures and investment 12. State and Local government consumption expenditures and investment 13. Exports of goods and services 4.0 11.5 6.9 14. Imports of goods and services 14.4 14.9 10.6 13.1 41.2 71.4 1.3 12.7 15.6 11.8 28.5 55.8 -319.0 -338.2 -356.1 ADDENDA: 15. Nonfarm inventory investment 16. Motor vehicles 1 17. Excl. motor vehicles 1 18. Net exports of goods and services 1 19. Nominal GDP 3.3 6.8 7.9 20. GDP price index 1.3 1.1 2.0 21. Profit share 2 9.6 9.3 9.5 9.2 n.a. n.a. 22. (Excluding FR banks) 23. Real disposable personal income 3.2 2.9 4.6 24. Personal saving rate (percent) 2.5 2.1 1.9 1 2. Level, billions of chained (1996) dollars. Economic profits as a share of nominal GNP. BROAD MEASURES OF INFLATION (Four-quarter percent change) 1996 Q4 1997 Q4 1998 Q4 1999 Q4 Product prices GDP chain price index 1.7 1.6 1.1 1.6 Nonfarm business chain price index1 1.5 1.5 0.4 1.4 Gross domestic purchases chain price index Less food and energy 1.7 1.3 1.1 1.3 0.7 1.1 1.9 1.5 PCE chain price index Less food and energy 2.2 1.6 1.3 1.4 1.0 1.4 2.0 1.5 CPI Less food and energy 3.1 2.6 1.9 2.2 1.5 2.4 2.6 2.1 Median CPI Trimmed mean CPI 2.9 2.9 2.9 2.2 3.0 1.9 2.2 1.9 Expenditure prices 1. Excluding housing. (accelerated payments) rather than actual deliveries. The differences in the estimates of inventory change and defense spending were offset to some extent by lower-than-anticipated figures for business fixed investment, residential investment, and net exports. The increase in the GDP price index was almost 1/2 percentage point above our projection; the difference is largely attributable to lower-than-expected prices for imports and higher-than-expected prices for computers and software. The data in the advance release for fourth-quarter GDP also imply that productivity in the nonfarm business sector rose at an annual rate of about 4-3/4 percent last quarter--and 3-1/4 percent over the four quarters of 1999. Employment Cost Index The Employment cost index for hourly compensation of private industry workers increased at an annual rate of 4.3 percent in the three months ending in December, up from the 3.4 percent increase posted in the preceding quarter. The wage and salary component of compensation rose at an annual rate of 4.0 percent, while benefit costs were up at a 5.5 percent rate. Over the twelve months of 1999, hourly compensation increased 3.4 percent, about the same as during 1998. (Excluding sales occupations, ECI compensation rose 3.7 percent over the twelve months ending in December, compared with a 3.1 percent increase over the preceding year.) At 3.4 percent, ECI wage inflation was 0.4 percentage point lower in 1999 than in 1998, but benefit costs accelerated 1 percentage point, rising at the same pace as wages in 1999. Benefit detail--other than that for health insurance--is unpublished and is provided to us by the BLS on a confidential basis. Health insurance costs rose 5.8 percent over 1999, up from a 2.5 percent increase over the preceding twelvemonth period. Employer costs for workers compensation fell 0.7 percent over 1999, but this rate of decline was much slower than that seen in 1998, when these costs dropped 5.3 percent. Elsewhere, nonproduction bonuses provided a rare exception to the general pattern of benefit cost acceleration: After having risen 6.2 percent during 1998, nonproduction bonuses declined 7.6 percent during 1999. 2 Compensation in manufacturing, retail trade, and services (particularly for health-service workers) accelerated in 1999, but this was offset by a deceleration in finance, insurance, and real estate (FIRE) and in transportation and public utilities. By occupation, a sharp deceleration in the compensation of sales workers over the course of 1999 offset more rapid increases in compensation for 2. In this release, BLS announced that the definition of nonproduction bonuses will be expanded beginning in June of this year to include hiring and referral bonuses. EMPLOYMENT COST INDEX OF HOURLY COMPENSATION FOR PRIVATE INDUSTRY WORKERS 1998 Dec. 1999 Mar. June Sept. Dec. ----- Quarterly percent change-----(Compound annual rate) Total hourly compensation1 Wages and salaries Benefit costs By industry Construction Manufacturing Trans., comm., and public utilities Wholesale trade Retail trade FIRE Services 4.6 5.0 3.9 6.7 0.9 4.3 3.1 -1.4 3.0 -2.8 2.0 By occupation White collar Blue collar Service occupations Memo: State and local governments 2.1 2.6 4.4 4.4 4.6 2.0 5.1 6.3 12.7 3.4 7.0 4.1 1.9 4.7 5.2 3.3 3.8 4.8 4.1 4.6 3.2 4.6 ----- Twelve-month percent change---- Total hourly compensation Excluding sales workers Wages and salaries Excluding sales workers Benefit costs By industry Construction Manufacturing Trans., comm., and public utilities Wholesale trade Retail trade FIRE Services By occupation White collar Sales Nonsales Blue collar Service occupations Memo: State and local governments 3.4 3.7 3.5 3.7 3.4 3.0 3.0 3.3 3.4 2.2 3.8 2.6 2.9 3.2 2.7 2.8 3.4 2.8 2.4 3.3 3.4 2.2 5.7 3.0 5.9 3.0 3.6 2.8 3.5 3.0 4.3 3.5 5.3 3.1 3.9 3.0 4.7 3.0 4.0 3.8 4.1 3.4 3.9 6.8 3.3 2.7 2.9 3.1 3.2 3.0 2.9 3.1 3.4 3.9 3.3 2.9 3.4 3.2 2.6 3.3 3.1 2.7 3.5 1.9 3.8 3.4 3.3 3.0 2.9 3.0 2.9 3.4 1. Seasonally adjusted by the BLS. Components of ECI Benefits Costs (CONFIDENTIAL) (Private industry workers; twelve-month change) Insurance Costs Supplemental Pay Percent Percent Paid Leave Retirement and Savings Percent Workers' Compensation Insurance State Unemployment insurance Percent flA 1985 1990 1995 Note. Unpublished and confidential ECI benefits detail. S15 other white-collar workers and for blue-collar and service workers. For whitecollar occupations, the acceleration in the compensation of non-sales workers was concentrated in executive, administrative, and managerial occupations; among blue-collar and service occupations, the pickup was more broad-based. Consumer Sentiment According to the final report, the Michigan Survey Research Center index of consumer sentiment shot up 6-1/2 points in January to a record level. Looking at prospects for the coming year, consumers in January were even more optimistic about their own personal financial situations and about general business conditions than they were during 1999. In addition, survey respondents have never before expressed such favorable expectations for business conditions over the next five years. Appraisals of buying conditions for large household appliances also bounced back in January, and assessments of current financial situations moved slightly above last month's favorable level. Most of the questions not included in the overall index recorded modest changes in January. Appraisals of buying conditions for cars rose a little this month, while appraisals of home buying conditions slipped a bit. Views on buying conditions for both of these big-ticket items, although still reasonably positive, were in the lower end of the ranges posted over the past two years. The index of expected unemployment change ticked down in January, indicating that respondents continue to hold a very favorable outlook for labor market conditions. One area in which responses from households changed noticeably in January was in their willingness to use savings to finance a major purchase: This index surged to the highest level recorded since mid-summer and to the second highest reading in the 16 years that the question has been included in the survey. The mean of expected inflation over the next year ticked down 0.1 percentage point to 3.5 percent in January, and the median of expected inflation was unchanged at 3.0 percent. Looking five years ahead, the mean of expected inflation increased 0.3 percentage point to 3.5 percent, while the median rose 0.1 percentage point to 3.0 percent. January 28, 2000 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1999 1999 1999 1999 1999 1999 1999 1999 2000 May June July Aug. Sept. Oct. Nov. Dec. Jan. (f) 104.5 114.1 103.2 98.4 107.2 115.9 101.5 97.1 107.2 116.8 101.0 105.4 112.2 101.1 112.0 117.3 108.6 Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions 106.8 121.1 97.6 107.3 106.0 118.9 116.5 99.2 99.8 112.7 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 133 135 133 133 132 135 132 139 132 135 127 133 138 138 133 132 135 141 Expected business conditions Next 12 months* Next 5 years* 144 114 147 122 147 118 140 118 150 124 140 118 146 123 150 125 165 133 Appraisal of buying conditions Cars Large household appliances* Houses 151 182 171 150 176 168 153 171 167 148 165 153 145 169 149 146 166 149 148 166 156 141 158 154 144 169 152 52 75 53 88 49 73 50 65 47 62 48 59 50 68 110 102 109 113 110 112 111 105 104 22 20 24 21 20 20 21 19 18 Expected inflation - next 12 months Mean Median 3.2 2.8 3.1 2.5 3.0 2.7 3.2 2.8 3.2 2.7 3.5 2.9 3.3 2.9 3.6 3.0 3.5 3.0 Expected inflation - next 5 to 10 years Mean Median 3.5 2.9 3.3 2.8 3.3 2.9 3.3 2.8 3.5 2.9 3.2 2.8 3.5 2.9 3.2 2.9 3.5 3.0 Willingness to use credit Willingness to use savings Expected unemployment change - next 12 months Prob. household will lose a job - next 5 years * -- Indicates the question is one of the five equally-weighted components of the index of sentiment. (p) -- Preliminary (f) -- Final Note: Figures on financial, business, and buying conditions are the percent reporting 'good times' (or 'better') minus the percent reporting 'bad times' (or 'worse'), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. Selected Financial Market Quotations (One-day quotes in percent except as noted) 1999 2000 Instrument FOMC* Change to Jan. 27 from selected dates (percentage points) 1999 1999 FOMC* June 29 Dec. 31 Dec. 21 Jan. 27 Jue 29 Dec. 31 Dec. 21 Short-term FOMC intended federal funds rate 4.75 5.50 550 550 .75 .00 .00 Treasury bills 3-month 6-month 1-year 4.70 4.92 4.89 5.17 5.49 5.63 5.39 5.60 5.64 5-42 5-54 5.79 .72 .62 .90 .25 .05 .16 .03 -.06 .15 Commercial paper 1-month 3-month 5.18 5.12 5.13 5.75 6.30 5.93 5.64 5.82 .46 .70 51 .07 -.66 -. 11 Large negotiable CDs 1-month 3-month 6-month 5.21 5.32 5.43 5.72 5.90 6.08 6.47 6.17 6.15 5.80 5.94 614 59 .62 .71 .08 .04 .06 -.67 -.23 -.01 Eurodollar deposits 2 1-month 3-month 5.13 5.25 5.69 5.88 6.38 6.13 5.69 5.94 .56 .69 .00 .06 -.69 -.19 Bank prime rate 7.75 850 8.50 850 .75 .00 .00 Inrermediate-and long-term U.S. Treasury (constant maturity) 2-year 10-year 30-year 5.68 5.93 6.07 6.24 6.45 6.48 6.21 6.36 6.44 651 6.68 653 .83 .75 .46 27 .23 .05 .30 32 .09 4.01 4.33 4.31 4.32 .31 -.01 -01 5.62 623 6.17 6.34 .72 .11 .17 8.05 8.18 8.27 8.23 .18 .05 -.04 1053 10.94 10.95 11.09 56 .15 .14 7.63 5.93 8.06 656 7.86 6.49 8.26 6.56 .63 .63 .20 .00 .40 .07 U.S. Treasury 10-year indexed note Municipalrevenue (Bond Buyer) 3 Corporate bonds, Moody's seasoned Baa High-yield corporate 4 Home mortgages (FHLMC survey rate) 5 30-year fixed 1-year adjustable Stock exchange index Dow-Jones Industrial S&P 500 Composite Nasdaq (OTO Russell 2000 Wilshire 5000 1. 2. 3. 4. 5. * 2000 1999 Record high Level Date Dec. 31 FOMC* Dec. 21 Jan. 27 11,723 1,469 4,235 534 13,813 1-14-00 12-31-99 1-21-00 1-21-00 12-31-99 11,497 1,469 4,069 505 13,813 11,144 1,418 3,784 467 13,249 11,028 1,399 4,040 517 13,396 Secondary market. Bid rates for Eurodollar deposits collected around 9:30 am. Eastern time. Most recent Thursday quote. Merrill Lynch 175 high-yield bond index composite. For week ending Friday previous to date shown. Data are as of the close on December 20, 1999. Change to Jan. 27 from selected dates (percent) Record high -5.93 -4.81 -4.62 -3.17 -3-02 Dec. 31 FOMC* Dec. 21 -4.08 -4.81 -.73 2.43 -3.02 -1.04 -138 6.76 10.67 1.11
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