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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 CLASS II - (FR) FOMC January 30, SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 1998 TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Real gross domestic product . Consumer sentiment . . . . . Erratum . . . . . . . . . . . . . . . ......... . . . . . . . . . . . .. .. Tables Real gross domestic product and related items. University of Michigan Survey Research Center: Survey of consumer attitudes . . . . . . . S 4 . 5 THE FINANCIAL ECONOMY . . . . . . . . . . . . . . . . . .. . Liquidity ratios for domestic long-term mutual funds - Mutual funds Tables Net sales of long-term mutual funds .. . Selected financial market quotations .. .. . .. Chart 6 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Real Gross Domestic Product Real GDP is estimated to have increased at a 4.3 percent annual rate in the fourth quarter of 1997, after having risen at a 3.1 percent annual pace in the third quarter. Final sales decelerated about a percentage point in the fourth quarter while the pace of inventory investment picked up. In particular, nonfarm inventory investment was reported to have been almost $50 billion last quarter, up from about $38 billion in the third quarter. The domestic components of final sales more than accounted for the slowdown in spending last quarter. Real consumer spending decelerated in the fourth quarter, with purchases of durable goods registering a substantially smaller increase than in the prior quarter and with outlays for nondurables edging down. Following extraordinary gains in the second and third quarters, spending for producers' durable equipment declined in the fourth quarter; for nonresidential structures also contracted. rose modestly in the fourth quarter; outlays Government purchases gains in defense and in state and local spending were partly offset by a further decline in the federal nondefense category. In contrast to the domestic components, the external sector boosted growth of final sales last quarter. Real exports of goods and services are estimated to have risen at an annual rate of 11.3 percent in the fourth quarter, with the rate of increase At the picking up for both agricultural and nonagricultural goods. same time, import growth dropped back to just 1.3 percent last quarter, held down by a decline in oil imports and modest increases in other categories. Elsewhere in the accounts, personal income growth was quite strong last quarter, and the personal saving rate moved up to 3.9 percent. Although corporate profits are not included in the advance report, the implicit profit share was 10.1 percent in the fourth quarter. 1. To estimate the motor vehicle numbers in the GDP report, BEA adjusted the December sales figures to mitigate the impact of automakers extending their reporting periods into early January. 2. This share is estimated on the assumption that the statistical discrepancy was the same in the fourth quarter as it was in the third quarter. Excluding Federal Reserve banks, the implicit profit share was 9.8 percent. The chain-weighted price index for GDP rose at a 1.5 percent annual rate in the fourth quarter, about the same as the increase registered in the previous quarter. Over the four quarters of last year, this index was up just 1.8 percent, the smallest yearly increase since 1964. Consumer Sentiment According to the final report, the Michigan SRC index of consumer confidence rose in January--almost reversing its December decline and putting it back at the top of the extremely favorable range that has prevailed since early last year. The final level of the index in January was more than 2-1/2 percentage points above the preliminary reading of two weeks ago. Households' views of their current personal financial situation were little changed in January. However, they were decidedly more optimistic about their future personal finances, owing possibly to lower expected inflation. According to the SRC, the fewest number of respondents in thirty years expected inflation to erode their living standards. In addition, consumers were more optimistic about future business conditions. Appraisals of buying conditions for large household appliances also improved in January. Among the questions not in the overall index, the index of expected unemployment change fell back in January following an unexpected surge in December. Consumers' willingness to use credit was higher in January, while their willingness to use savings was little changed. The mean of expected inflation over the next twelve months dropped to a historical low of 2.8 percent in January, and the median declined to 2.3 percent. The mean of expected inflation over the next five to ten years fell 1/2 percentage point to 3.4 percent while the median declined 1/4 percentage point to 2.9 percent. Consumer confidence as measured by the Conference Board and Michigan surveys moved in opposite directions in December and January. The Conference Board survey showed that consumer confidence rose sharply in December and then fell back in January. In January, views on expected business and employment conditions as well as future income gains were decidedly more pessimistic--the opposite of the Michigan results. Nevertheless, despite the differences between the two indexes over the past two months, both surveys indicate that consumer confidence remains at the highly favorable level that prevailed in the second half of last year. -3- Erratum On page 3 of Part 1, the characterization of our projected federal budget was incorrect. Our economic projection leads us to expect that the federal budget will be about in balance in fiscal years 1998 and 1999. 1-30-98 -4- Real Gross Domestic Product and Related Items (Percent change from previous period at compound annual rates; based on seasonally adjusted data, chain-type indexes) 1. 2. 3. 1996:04 to 1997:Q4 1997:Q2 Final 1997:Q3 Final .97:Q4 Advance 3.9 3.3 3.1 4.3 3.5 2.5 4.7 3.6 3.8 .9 5.6 3.2 Gross domestic product Final sales Consumer spending 4. Durables 7.0 -5.4 18,4 2.6 5. Nondurables 1.6 -2.1 4.3 -. 4 6. Services 4.2 3.9 3.9 5.1 8.2 14.6 19.2 -3.6 7. Business fixed investment 8. Producers' durable equipment 11.8 23.0 24.1 -3.9 9. Nonresidential structures -. 8 -4.7 6.7 -2.7 5.9 7.4 2.7 10.4 -1.1 .7 10. Residential investment 11. Federal government consumption expenditures and investment 12. Defense 13. Nondefense 14. 15. 16. 1.2 -5.7 State and local government consumption expenditures and investment Exports of goods and services Imports of goods and services 2.9 -3.8 2.1 1.2 2.3 2.1 10.9 13.3 18.4 20.5 4.4 14.6 11.3 1.3 54.12 2.42 51.72 70.1 2.6 67.5 38.3 .3 38.0 49.7 5.0 44.7 8.2 2 7.5 9.5 10.5 ADDENDA: 17. 18. 19. Nonfarm inventory investment Motor vehicles Excl. motor vehicles ' 20. Farm inventory investment1 21. Net exports of goods and services 1 22. Nominal GDP 5.8 5.2 4.6 5.9 23. GDP price index 1.8 1.8 1.4 1.5 24. 25. Profit share 3 (Excluding FR banks) n.a. n.a. 9.9 9.6 10.2 9.9 n.a. 26. Real disposable personal income 3.7 3.1 2.6 4.7 27. Personal saving rate (percent) 3.82 4.2 3.5 3.9 1. 2. 3. Level, billions of chained (1992) dollars. Annual average. Economic profits as a share of nominal GNP. -1 42.12 -136.6 -164.1 -141.4 n.a. January 30, 1998 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1997 May 1997 Jun 1997 Jul 1997 Aug 1997 Sep 1997 Oct 1997 Nov 1997 Dec 1998 Jan (f) Indexes of consumer sentiment (Feb. 1966=100) 103.2 113.5 96.6 104.5 113.2 98.9 107.1 114.0 102.6 104.4 110.7 100.3 106.0 114.1 100.7 105.6 109.8 102.8 107.2 114.9 102.3 102.1 111.4 96.1 106.6 113.5 102.2 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 122 138 126 131 130 133 121 138 127 138 124 136 130 138 123 136 124 141 Expected business conditions Next 12 months* Next 5 years* 142 109 147 121 151 130 150 116 149 119 154 125 151 123 142 109 148 123 Appraisal of buying conditions Cars Large household appliances* Houses 150 173 160 154 168 160 136 166 165 139 167 166 143 170 172 141 161 164 140 169 163 135 166 161 145 171 172 49 71 43 73 49 68 48 70 50 57 37 69 46 69 39 75 55 74 Expected unemployment change - next 12 months 109 108 104 107 103 100 108 114 106 Expected inflation - next 12 months Mean Median 3.7 2.9 3.5 2.8 3.4 2.7 3.3 2.7 3.5 2.8 3.2 2.8 3.4 2.9 3.4 2.8 2.8 2.3 3.8 3.0 3.9 3.1 3.4 2.9 3.8 3.0 3.6 3.1 3.6 3.0 3.8 3.1 3.9 3.1 3.4 2.9 Composite of current and expected conditions Current conditions Expected conditions Willingness to use credit Willingness to use savings Expected inflation - next 5 to 10 years Mean Median * -- Indicates the question is one of the five equally-weighted components of the index of sentiment. (p) -- Preliminary (f) -- Final Note: Figures on financial, business, and buying conditions are the percent reporting 'good times' (or 'better') minus the percent reporting 'bad times' (or 'worse'), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. -6- THE FINANCIAL ECONOMY Mutual Funds The top panel of the attached exhibit updates our information on net sales of mutual funds, to include the final December totals released Friday by the Investment Company Institute. As shown, December net sales of bond funds slowed substantially from the extremely high levels of November, but remain at a solid pace relative to previous months and quarters. Net sales of equity funds declined more modestly during December, with small net outflows continuing among international funds. As shown in the bottom panel, liquidity ratios for both equity and bond funds remained near their recent levels. Net Sales of Long-Term Mutual Funds (Billions of dollars excluding reinvested distributions; quarterly and annual data at a monthly rate) 1997 Memo: 1995 1996 Q2 Q3 Oct. Nov. Dec. Dec. assets 10.7 18.5 18.7 22.2 18.5 18.2 16.8 2400 9.7 14.7 13.9 18.7 18.5 18.9 17.5 2053 Aggressive Growth 3.1 4.7 2.4 4.8 4.0 3.0 2.3 370 Growth 3.1 3.9 3.2 5.9 5.8 7.0 6.3 677 Growth & income 3.7 6.2 8.3 7.9 8.9 8.9 8.8 1003 International 1.0 3.9 4.8 3.5 0.1 -0.7 -0.7 347 Bond funds -0.4 1.3 3.0 5.1 3.7 11.4 5.6 1031 High-yield 0.7 1.0 1.7 1.6 0.9 2.1 2.2 104 Balanced 0.5 0.9 1.8 1.8 1.2 4.0 2.3 316 Other -1.6 -0.7 -0.5 1.7 1.6 5.3 1.1 611 Stock funds Domestic equity 1 1. Includes precious metals funds not shown elsewhere. Source. Investment Company Institute (ICI) Liquidity Ratios for Domestic Long-Term Mutual Funds Percent 14 Monthly Stock 12 10 -, Bond Source. Investment Company Institute. D Selected Financial Market Quotations' (Percent except as noted) 1997 1998 Instrument Chan e to Jan. 29, from: FOMC * Jan. 2 Sep. 30 Dec. 16 FOMC * Jan. 29 Jan. 2 Sep. 30 Dec. 16 Short-term rates Federal funds 2 5.63 -0.16 0.06 0.13 5.06 5.03 4.99 0.01 -0.11 -0.29 0.13 -0.05 -0.19 -0.04 -0.15 -0.19 5.47 5.40 -0.01 -0.07 -0.04 -0.08 -0.32 -0.30 5.53 5.53 5.54 0.14 0.11 0.04 -0.06 -0.14 -0.18 -0.34 -0.26 -0.25 5.50 5.53 0.12 0.09 -0.06 -0.10 -0.31 -0.22 8.50 0.25 0.00 0.00 5.39 5.58 5.85 -0.74 -0.96 -0.90 -0.49 -0.54 -0.56 -0.31 -0.20 -0.12 U.S. Treasury 10-year indexed note 3.64 n.a. 0.03 0.07 Municipal revenue (Bond Buyer) 6 5.33 -0.63 -0.30 -0.12 Corporate-A utility, recently offered 7.09 -0.55 -0.35 -0.21 8.90 -0.82 -0.12 -0.14 7.12 5.53 -0.52 -0.04 -0.16 0.02 -0.05 0.00 Treasury bills 3 3-month 6-month 1-year Commercial paper 4 1-month 3-month Large negotiable CDs 3 1-month 3-month 6-month Eurodollar deposits 5 1-month 3-month Bank prime rate Intermediate- and long-term rates U.S. Treasury (constant maturity) 3-year 10-year 30-year High-yield corporate 7 Home mortgages8 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1997 1998 FOMC * Stock exchange index Dow-Jones Industrial S&P 500 Composite NASDAQ (OTC) Russell 2000 Percentae chanee to Jan. 29, from: Record FOMC * Level Date Jan. 2 Dec. 16 Jan. 29 high Jan. 2 Dec. 16 8259.31 8/6/97 6441.49 7922.59 7973.02 -3.47 23.78 0.64 983.79 12/5/97 736.01 963.39 985.49 0.17 33.90 2.29 1745.85 10/9/97 1279.70 1536.56 1619.49 -7.24 26.55 5.40 465.21 10/13/97 357.96 420.76 431.99 -7.14 20.68 2.67 Wilshire 9486.69 10/7/97 7146.80 9162.76 9372.50 -1.20 31.14 2.29 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average for maintenance period ending January 28,1998. 3. Secondary market. 4. As of September 2, 1997, commercial paper rates are those collected by the Depository Trust Company; prior rates are averages of offering rates at several large dealers. 5. Bid rates for Eurodollar deposits at 11 a.m. London time. 6. Most recent observation based on one-day Thursday quote and futures market index changes. 7. Merrill Lynch Master II high-yield bond index composite. 8. Quotes for week ending Friday previous to date shown. * Figures cited are as of the close on December 15, 1997.
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