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CONFIDENTIAL (FR)
CLASS III - FOMC
January 29, 1999
SUPPLEMENT
CURRENT ECONOMIC AND FINANCIAL CONDITIONS
Prepared for the
Federal Open Market Committee
By the Staff
Board of Governors
of the Federal Reserve System
TABLE OF CONTENTS
Page
THE DOMESTIC NONFINANCIAL ECONOMY
1
1
2
Gross Domestic Product: 1998:Q4 ..........................
....
.....................
Consumer Sentiment .........
The Annual Report of the Congressional Budget Office ............
Tables
Real Gross Domestic Product and Related Items .................
University of Michigan Survey Research Center:
.........
Survey of Consumer Attitudes . .......
CBO Budget and Economic Projections . ......................
4
.........
5
6
THE FINANCIAL ECONOMY
Erratum .........
........
................
..........
3
Tables
Selected Financial Market Quotations ........................
Commercial Bank Credit .................
...........
....
7
8
THE INTERNATIONAL ECONOMY
Erratum .........
........................
.........
. 3
SUPPLEMENTAL NOTES
THE DOMESTIC NONFINANCIAL ECONOMY
Gross Domestic Product: 1998:Q4
Real GDP is estimated to have increased at an annual rate of 5.6 percent in the fourth
quarter of 1998; for the year as a whole, real GDP rose 4.1 percent. In the fourth quarter,
real final sales accelerated more than 4 percentage points to an annual rate of 6 percent, while
nonfarm inventory investment declined $5.3 billion.
The robust increase in final sales reflected strength in both domestic demand and
exports. Real consumer spending rose at an annual rate of 4.4 percent; outlays for durables
increased sharply, reflecting a surge in, motor vehicle sales. After having posting a small
decline in the third quarter, outlays for producers durable equipment rose at a 21 percent pace
in the fourth quarter, boosted by strength in purchases of high-tech and transportation
equipment. Outlays for nonresidential structures, which declined in the first half of this year
and were unchanged in the third quarter, posted a 5-1/2 percent gain last quarter. Spending
for residential structures continued to climb, rising at an annual rate of 10.1 percent in the
fourth quarter. Federal purchases--which rose at a 7.9 percent annual rate--were boosted by a
large increase in the nondefense category.
Exports declined over the first three quarters of last year, but rebounded in the fourth
quarter, rising at an annual rate of 18.8 percent. At the same time, imports rose at a 16
percent rate, boosted by substantial gains in the capital goods and the automotive vehicles and
parts components. All told, net exports fell $3.9 billion in the fourth quarter.
The chain-weighted price index for GDP rose at an annual rate of 0.9 percent, about
the same as in the previous two quarters.
Consumer Sentiment
According to the final report, the Michigan Survey Research Center index of consumer
sentiment rose more than three percentage points in January to its highest since last August.1
Respondents had more favorable views of their current finances, and assessments of their
1. Today's report also indicates that sentiment was higher later in January than it had been
earlier in the month. The overall index in the final report was almost three percentage points above the
preliminary release of January 15. Respondents interviewed over the final weeks of the survey were
particularly more optimistic about future business conditions and expected personal finances.
-2future financial positions were little changed. Households were decidedly more optimistic
about expected business conditions in January, and appraisals of buying conditions for large
household appliances also improved.
Among the questions not in the overall index, the index of expected unemployment
change fell 9 percentage points in January; compared with this last three months, this marked a
considerable improvement of views on labor market conditions over the next year. In
addition, appraisals of buying conditions for homes and cars remained at extremely favorable
levels in January.
Expected inflation continued to creep up. The mean and median of expected inflation
over the next year each increased 0.2 percentage point in January to 3 percent and 2.7 percent,
respectively. The mean of expected inflation over the next 5 to 10 years increased 0.3
percentage point in January to 3.5 percent, and the median edged up to 3 percent--both
readings are their highest since December 1997.
The Annual Report of the Congressional Budget Office
The Congressional Budget Office's annual report on the economic and budget outlook,
released on January 29, projects a budget surplus of $107 billion for the current fiscal year
(FY1999) under current law. This projection expects the continuation of the strong growth in
receipts experienced over the last five years; indeed, in the current fiscal year, receipts are
forecast to rise to 20.7 percent of GDP, a post-war high. On the spending side, outlays are
estimated to edge down this year to 19.5 percent of GDP, the lowest level since the
mid-1970s. CBO expects the surplus to total $131 billion in FY2000.
Over the coming decade, budget surpluses are projected to rise steadily, cumulating to
more than $2-1/2 trillion and reaching 2.8 percent of projected GDP in FY2009. The onbudget balance, which excludes social security and the postal service, moves into surplus in
FY2001 and trends up over the next decade, cumulating to nearly $800 billion. An
implication of the rising budget surpluses is that federal debt held by the public is projected to
decline to 22 percent of GDP by FY2005--below its previous post-war low--and to less than
10 percent of GDP by FY2009. The projections assume that discretionary spending will equal
the statutory caps on such spending each year through FY2002, when the caps expire, and will
increase with inflation thereafter. The budget projections are based on a path of real GDP
growth that hovers around 2.3 to 2.4 percent per annum, except in 2000 when it is forecast to
be 1.7 percent.
THE FINANCIAL ECONOMY
Erratum
On page III-A-2 of the Appendix to the Domestic FinancialDevelopments section of
the Greenbook, the last sentence in the third paragraph should read:
By contrast, over half of the branches and agencies of foreign banks--which have been
tightening credit standards and terms much more than domestic banks for several months-would tighten on 60 percent or more of their outstanding commitments.
THE INTERNATIONAL ECONOMY
Erratum
In the table on page IV-23 of the InternationalDevelopments section of the Greenbook,
the German current account balance should be + $24.3 billion.
-41-29-99
Real Gross Domestic Product and Related Items
(Percent change from previous period at compound annual rates;
based on seasonally adjusted data, chain-type indexes)
1998:Q2
Final
1998:Q3
Final
1998:Q4
Advance
1. Gross domestic product
1.8
3.7
5.6
2.
4.6
2.8
6.0
6.1
4.1
4.4
3.
Final sales
Consumer spending
4.
Durables
11.2
2.4
21.4
5.
Nondurables
5.3
2.1
3.2
6.
Services
5.4
5.4
1.7
12.8
-. 7
16.7
7.
Business fixed investment
8.
Producers' durable equipment
18.8
9.
Nonresidential structures
-2.3
.2
5.5
15.0
9.9
101
-1.0
21 0
10.
Residential investment
11.
Federal government consumption
expenditures and investment
7.3
-1.4
7.9
State and local government consumption
expenditures and investment
1.8
3.1
2.1
-2.8
188
9.3
2.3
16.0
29.9
47.0
-22.5
52.4
-9.0
41 7
8.2
56.0
33.5
-245.2
-259.0
-262.9
2.7
4.7
65
.9
1.0
9
2.6
3.2
3 6
.4
.2
0
12.
13.
14.
Exports of goods and services
Imports of goods and services
-7.7
------------------------------------------
ADDENDA:
15.
16.
17.
Nonfarm inventory investment '
Motor vehicles '
Excl. motor vehicles '
18.
Net exports of goods and services '
19.
Nominal GDP
20.
GDP price index
21.
Real disposable personal income
22.
Personal saving rate (percent)
1.
Level, billions of chained (1992) dollars.
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CBO BUDGET AND ECONOMIC PROJECTIONS 1
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2611
2255
355
143
212
2727
2346
381
164
217
Budget Projections
(Billions of dollars; fiscal years)
Receipts
Outlays
Surplus
On-Budget
Off-Budget
1815
1707
107
-19
127
1870
1739
131
-7
138
1930
1779
151
6
145
2015
1806
209
55
153
2091
1881
209
48
161
2184
1951
234
63
171
2288
2032
256
72
183
2393
2086
306
113
193
2500
2166
333
130
204
Economic Assumptions
(Calendar years)
----------------- Percent change, year over year----------------4.1
2.3
2.5
Nominal GDP
Real GDP
CPI-U
3.8
1.7
2.6
4.3
2.2
2.6
4.5
2.4
2.6
4.6
2.4
2.6
4.6
2.4
2.6
4.6
2.4
2.6
4.5
2.4
2.6
4.5
2.3
2.6
4.5
2.3
2.6
4.4
2.3
2.6
-------------------- Percent, annual average--------------------4.6
5.1
5.4
5.6
5.7
5.7
5.7
5.7
5.7
5.7
5.7
Three-month
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
4.5
Ten-year
5.1
5.3
5.4
5.4
5.4
5.4
5.4
5.4
5.4
5.4
5.4
Unemployment rate
Yield on selected
Treasuries
1. The projections assume that revenues and mandatory outlays evolve according to
Discretionary spending is
laws in effect at the time the projections were made.
assumed to be in compliance with the statutory caps through 2002 and to grow at the
rate of inflation in succeeding years. The on-budget surplus excludes the surplus
of social security and the Postal Service (which are off-budget).
Source.
Congressional Budget Office, The Economic and Budget Outlook:
Fiscal Years 2000-2009. January 1999.
cbobud.txt (01-29-99)
-7III-T-1
Selected Financial Market Quotations
(One-day quotes in percent except as noted)
1999
1998
Change to Jan. 28 from
selected dates (percentage points)
FOMC*
FOMC*
Instrument
June 30
Nov. 16
Dec. 22
Jan. 28
June 30
Nov. 16
Dec. 22
Short-term
Federal funds
FOMC intended rate
Realized rate 1
5.50
5.51
5.00
5.08
4.75
4.82
4.75
4.80
-.75
-.71
-.25
-.28
.00
-.02
Treasury bills 2
3-month
6-month
1-year
4.97
5.04
5.10
4.41
4.42
4.34
4.42
4.43
4.33
4.38
4.29
4.31
-.59
-.75
-.79
-.03
-.13
-.03
-.04
-.14
-.02
Commercial paper
1-month
3-month
5.54
5.47
5.13
5.09
5.37
5.01
4.79
4.75
-.75
-.72
-.34
-.34
-.58
-.26
Large negotiable CDs 2
1-month
3-month
6-month
5.60
5.61
5.68
5.19
5.31
5.12
5.58
5.15
5.00
4.86
4.86
4.86
-.74
-.75
-.82
-.33
-.45
-.26
-.72
-.29
-.14
Eurodollar deposits 3
1-month
3-month
5.56
5.59
5.19
5.31
5.50
5.13
4.81
4.81
-.75
-.78
-.38
-.50
-.69
-.32
Bank prime rate
8.50
8.00
7.75
7.75
-.75
-.25
.00
Intermediate- and long-term
U.S. Treasury (constant maturity)
2-year
10-year
30-year
5.49
5.44
5.62
4.56
4.85
5.28
4.56
4.64
5.07
4.58
4.67
5.11
-.91
-.77
-.51
.02
-.18
-.17
.02
.03
.04
U.S. Treasury 10-year indexed note
3.76
3.80
3.79
3.75
-.01
-.05
-.04
Municipal revenue (Bond Buyer) 4
5.36
5.28
5.21
5.24
-.12
-.04
.03
Corporate bonds, Moody's seasoned Baa
7.11
7.37
7.23
7.23
.12
-. 14
.00
High-yield corporate 5
9.20
10.62
10.49
10.45
1.25
-.17
-.04
Home mortgages (FHLMC survey rate) 6
30-year fixed
1-year adjustable
6.96
5.68
6.93
5.56
6.69
5.55
6.78
5.57
-. 18
-.11
-.15
.01
.09
.02
Record high
Level
Date
Nov. 16
FOMC*
Dec. 22
Jan. 28
9,643.32
1,275.09
2,477.34
491.41
11,702.09
1-8-99
1-8-99
1-28-99
4-21-98
1-8-99
9,011.25
1,135.87
1,861.68
390.42
10,383.89
8,988.85
1,202.84
2,138.03
401.83
10,956.28
9,281.33
1,265.37
2,477.34
423.97
11,620.80
Stock exchange index
Dow-Jones Industrial
S&P 500 Composite
NASDAQ (OTC)
Russell 2000
Wilshire 5000
1999
1998
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.
1. 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 December 21, 1998.
Change to Jan. 28
from selected dates (percent)
Record
high
-3.75
-.76
.00
-13.72
-.69
Nov. 16
FOMC*
Dec. 22
3.00
11.40
33.07
8.59
11.91
3.25
5.20
15.87
5.51
6.07
Commercial Bank Credit
(Percent change; seasonally adjusted annual rate)
1999
1998
Type of credit
SQ3
1. Bank credit: Reported
Adjusted 1
2.
3.
Securities: Reported
Adjusted 1
4.
5.
U.S. government
6.
Other 2
7.
Loans 3
8.
Business
9.
Real estate
1998
Q4
Nov
Dec
Level,
Jan
Jan p
1999 p
(billions of $)
11.2
9.0
16.7
10.6
5.6
-3.4
4,536.1
10.4
7.9
15.3
17.8
4.1
-2.0
4,416.8
15.0
12.7
24.9
8.8
8.9
-16.3
1,218.9
12.3
8.5
20.0
37.4
3.2
-12.1
1,099.7
6.1
0.9
10.2
25.4
3.2
1.5
793.8
35.0
38.0
54.1
-20.6
19.3
-48.2
425.1
9.8
7.6
13.7
11.3
4.3
1.4
3,317.2
11.4
12.7
16.0
10.5
-2.7
0.1
945.3
6.6
1.9
8.6
19.9
12.5
2.5
1,325.3
10.
Home equity
0.4
-1.6
-2.0
3.7
-1.2
-6.2
96.7
11.
Other
7.2
2.1
9.5
21.3
13.7
3.2
1,228.7
-1.6
-7.1
2.5
4.8
7.2
2.9
503.0
6.1
4.3
6.5
5.9
11.5
7.9
763.1
29.9
29.5
33.7
-1.8
-5.7
-0.4
543.5
12.
Consumer: Reported
Adjusted 4
13.
14.
Other 5
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 in consecutive 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.
p Preliminary.
@FedFRASER