The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
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 February 5, 1988 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 THE DOMESTIC NONFINANCIAL ECONOMY Employment and unemployment............................ Hourly earnings ....................................... CBO budget update ....................................... Page 1 4 4 Tables Changes in employment................................... Hourly earnings index .................................. CBO and administration economic forecasts for 1988 and 1989........................................ 2 3 6 THE FINANCIAL ECONOMY Bank credit developments ............................... Consumer installment credit ........................... 7 8 Tables Consumer installment credit ........................... Monetary aggregates.................................... Commercial bank credit and short- and intermediateterm business credit........................ ........ Selected financial market quotations.................. 10 11 12 13 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Employment and unemployment The labor market surveys indicate that employment rose in January, but provide somewhat different assessments of the extent of that growth. Gains in nonfarm payroll employment, as measured by the establishment survey, slowed substantially last month from their brisk fourth-quarter pace. In contrast, employment, as measured by the household survey, was up sharply in January, bringing the rise over the past four months in line with that posted by payroll employment. However, last month's increase in household employment was about matched by labor force growth, and the civilian unemployment rate was unchanged at 5.8 percent. In the payroll report, total nonfarm employment advanced about 110,000 in January. By industry, a substantial increase in the number of jobs at retail trade establishments more than accounted for the overall gains in employment. However, these gains were offset somewhat by employment declines in state and local government, mining, and construction. In manufacturing, employment was up 25,000 compared with average monthly gains of 60,000 during the second half of 1987, and the factory workweek edged up 0.1 hour to 41.1 hours. month were somewhat uneven by industry: Factory job gains last machinery, electrical equipment and food processing posted the largest increases, but employment gains in those industries were partly offset by layoffs in stone, clay, and glass, primary metals, motor vehicles, and apparel. CHANGES IN EMPLOYMENT 1 (Thousands of employees; based on seasonally adjusted data) 1986 1987 Q2 1987 Q3 1987 Q4 Nov. Dec. 1988 Jan. -Average Monthly ChangesNonfarm payroll employment 2 Strike-adjusted 159 159 252 249 163 164 205 227 387 365 302 295 311 308 107 107 Manufacturing Durable Nondurable Construction Trade Finance and services Total government Private nonfarm production workers Manufacturing production workers Total employment Nonagricultural -14 -17 4 13 31 110 30 34 19 15 16 48 108 29 7 0 7 -8 35 100 18 51 31 21 -6 41 85 6 69 44 25 44 59 122 75 89 48 41 21 55 94 25 41 34 7 48 12 140 61 25 12 13 -50 173 32 -67 105 177 112 143 255 203 239 39 -7 174e 174 28 257 252 11 282 297 38 191 193 55 291 280 68 294 371 40 240 197 12 385 307 1. Average change from final month of preceding period to final month of period indicated. 2. Survey of establishments. Strike-adjusted data noted. 3. Survey of households. e--Adjusted by board staff to eliminate distortions caused by the introduction of revised population estimates. SELECTED UNEMPLOYMENT iATES (Percent; based on seasonally adjusted data) 1987 Q3 Q4 Nov. Dec. 6.3 6.0 5.9 5.9 5.8 5.8 16.9 9.7 4.8 4.8 17.0 10.0 4.9 4.7 16.1 9.5 4.6 4.7 16.6 8.8 4.4 4.7 16.6 8.9 4.4 4.7 16.1 8.5 4.4 4.7 16.0 9.1 4.4 4.6 6.0 14.5 5.3 13.0 5.4 13.2 5.1 12.5 5.0 12.2 5.1 12.2 4.9 12.2 5.0 12.2 6.6 5.8 5.9 5.6 5.5 5.5 5.4 5.4 6.9 6.1 6.1 5.9 5.8 5.8 5.7 5.7 1986 1987 Q2 Civilian, 16 years and older 7.0 6.2 Teenagers 20-24 years old Men, 25 years and older Women, 25 years and older 18.3 10.7 5.4 5.5 White Black Fulltime workers Memo: Total National 1. Includes resident armed forces as employed. 1987 1988 Nov. HOURLY EARNINGS INDEX 1 (Percentage change; based on seasonally adjusted data) 1986 1987 Q2 1987 Q3 1987 Q4 ---Annual rate--Total private nonfarm Manufacturing Durable Nondurable Contract construction Transportation and public utilities Finance, insurance and real estate Total trade Services Nov. Dec. 1988 Jan. --Monthly rate--- 2.3 2.7 2.6 2.7 3.3 .5 -.2 .5 1.7 1.3 2.3 2.2 2.0 1.8 2.3 .8 2.1 2.1 2.2 3.4 2.1 2.6 1.2 .2 2.3 2.3 2.4 2.4 .2 .2 .2 1.2 .2 .2 .2 -1.4 .2 .2 .2 1.4 2.8 2.4 3.5 2.3 .1 -.2 -.1 4.4 1.8 3.1 4.6 2.2 4.6 .5 2.5 3.2 3.4 3.5 4.6 1.4 .3 .7 -.7 -.1 -.2 .8 .5 .9 .6 5.1 2.1 6.6 1. Excludes the effect of interindustry shifts in employment and fluctuations in overtime hours in manufacturing. 2. Changes over periods longer than one quarter are measured from final quarter of preceding period to final quarter of period indicated. Quarterly changes are compounded annual rates. As measured by the household survey, employment rose 385,000 in January, with job gains relatively widespread by demographic group. However, most demographic groups also posted labor force gains, and jobless rates, on balance changed little over the month. By industry, unemployment rates rose in construction and in manufacturing, but were little changed in most other industries. Hourly earnings Wage rates, as measured by the hourly earnings index, rose 0.5 percent in January, after a small decline in December. Sharp increases in construction and services, which are the most volatile components of the overall index, accounted for much of the rise. Over the past 12 months, this measure of wage change has risen about 3 percent for the nonfarm sector and 2-1/4 percent in manufacturing. CBO Budget update The CBO reported to Congress yesterday that the FY1988 deficit is expected to rise to $157 billion from last year's deficit of $148 billion. CBO estimates that the deficit will increase further in FY1989 to $176 billion, assuming no changes in current spending and tax laws and that defense and nondefense discretionary appropriations are held constant in real terms. The CBO estimates for FY1988 and FY1989 take account of the budget summit agreement reached last November and the enactment of legislation implementing the agreement. However, they estimate that the effect of the legislation still falls nearly $10 billion short of the $45 billion of deficit reduction stipulated for FY1989. Details of CBO's budget estimates and the underlying economic and technical assumptions are scheduled to be released on February 11. Nonetheless, CBO made available the broad outlines of their economic forecast. As shown on the table, CBO projects real GNP to grow 1.8 percent from the fourth quarter of 1987 to the fourth quarter of 1988. In 1989, real GNP growth is expected to pick up to a 2.6 percent pace. Inflation, as measured by the GNP deflator, is forecast to run about 4 percent this year and 4-1/4 percent next year. However, inflation measured by the CPI, which affects anticipated cost-of-living adjustments for social security and a number of other entitlement programs, is projected to be higher--nearly 5 percent in both 1988 and 1989. Interest rates in the CBO forecast are shown to rise on average from those experienced in 1987. These assumptions are considerably more pessimistic than those being used by the Administration for their upcoming FY1989 budget proposals. CBO AND ADMINISTRATION ECONOMIC FORECASTS FOR 1988 AND 1989 (By calendar year) Actual Forecast 1988 1989 Fourth Quarter to Fourth Quarter (Percent change) Real Gross National Product 3.8 CBO 3.8 Administration 1.8 2.4 2.6 3.5 GNP Deflator CBO Administration 3.3 3.3 3.9 3.9 4.2 3.7 Consumer Price Index(CPI-U) 4.4 CBO 4.4 Administration 4.9 4.3 4.8 3.9 Calendar-Year Average (Percent) Three-Month T-Bill Rate CBO Administration 5.8 5.8 6.2 5.3 6.7 5.2 Ten-Year Gov. Note Rate CBO Administration 8.4 8.4 9.3 8.0 9.5 7.4 Civilian Unemployment Rate CBO Administration 6.2 6.1 6.2 5.8 6.1 5.6 Sources: Congressional Budget Office, February 4, 1988 and Office of Management and Budget, December 23, 1987. 1. The Administration's projection is for the total labor force, including armed forces residing in the United States. In recent years, this rate has tended to be 0.1 to 0.2 percentage points below the civilian unemployment rate. THE FINANCIAL ECONOMY Bank Credit Developments Bank credit is estimated to have grown at a strong 11-3/4 percent pace in January following two straight monthly declines. Despite a sharp pickup in acquisitions of U.S. government securities, growth of total securities slowed owing to faster runoffs of other securities. Total loans at banks rebounded in January largely reflecting a turnaround in security and other loans. Recent behavior of these loan categories likely reflects in part the pattern of financial activity since the October stock market crash. The November-December decline in financial activity appears to have depressed these components of bank credit; their January pickup coincides with evidence of increased corporate bond and equity issuance. Volatility in these two loan categories explains much of the variation in total loan growth in recent months. As illustrated in the table on the next page, tot 1 loans excluding the security and other loan categories have grown at a relatively stable 7 to 9 percent rate since October. Business loans expanded at an 8-1/2 percent rate in January, close to the December pace. Strong C&I loan expansion since year end likely reflects financing needs associated with production and inventories and perhaps, most recently, a pickup in mergers and corporate restructurings. Business loans booked at overseas offices of U.S. banks were especially strong as borrowers switched to more favorable LIBOR-based pricing given the unusually wide spreads between the prime rate and market rates in January. Real estate loan growth weakened in January, likely reflecting recent declines in housing starts and sales of existing homes. Consumer loan growth is estimated to have picked up to about a 7-3/4 percent pace in January, perhaps related to the reintroduction of auto sales incentive programs. Growth in the sum of commercial paper of nonfinancial businesses and business loans slowed in January. Commercial paper declined sharply, although it has maintained much of the increase it posted during December when firms over-issued in anticipation of year-end rate pressures that failed to materialize. Some of the decline in commercial paper last month may also reflect increased issuance of corporate bonds related to the flattening of the yield curve since December. Total Bank Loans Net 1 Change Growth 2 Rate Total Bank Loans less Security and Other Loans Security and Other Loans Net 1 Change Growth Rate Net 1 Change Growt Rate Oct. 18.6 13.3 15.5 12.7 3.1 17.4 Nov. -3.0 -2.1 9.2 7.4 -12.2 -67.4 Dec. -4.1 -3.1 11.4 9.2 -15.5 -90.8 Jan. 3 20.7 14.3 11.3 9.0 9.4 59.6 1. Change in monthly averages in billions of dollars. 2. Seasonally adjusted annual rate. 3. Data for January are preliminary. Consumer Credit Consumer installment credit outstanding rose at an 8.8 percent annual rate in December, following a 5.2 percent gain in November. The pickup in December was about evenly split between automobile and revolving credit. Automobile lending rose at nearly a 12 percent rate 9 as consumers responded to the latest round of incentive programs offered by the big three auto-makers and on some imports. The very strong expansion of revolving credit (19.4 percent annual rate) was almost entirely at commercial banks and was widespread--both geographically and by size of bank. Many banks indicated that they were running promotions to boost normally strong seasonal gains. In addition, some banks reported increased takedowns on pre-arranged over-draft lines. CONSUMER INSTALLMENT CREDIT (Seasonally adjusted) Net change (billions of dollars) 1987 Percent change (at annual rate) 1987 1987 Nov.r Dec. p Dec. 8.8 2.63 4.45 612.6 7.7 6.6 2.21 1.93 350.9 9.2 12.4 4.7 2.0 4.0 10.2 11.7 19.4 2.3 1.73 2.52 2.32 -.39 261.7 145.9 205.0 2.1 2.3 7.0 8.0 8.3 10.6 6.4 -2.9 11.2 11.9 8.6 6.0 1.44 -.35 .70 2.71 1.02 .42 275.0 143.8 84.8 10.1 12.5 18.5 5.3 .98 .29 64.8 1986 Totall Total, excluding auto Memo: Outstandings (billions of dollars) 1987 HI H2P Nov.r 10.5 3.5 8.4 5.2 5.7 3.0 7.8 17.8 10.6 2.6 4.1 3.6 2.5 8.1 20.7 8.0 10.7 Dec. Selected types Auto Revolving All other Selected holders Commercial banks Finance companies Credit unions Savings 2 institutions .42 .48 1. Includes items not shown separately. 2. Savings and loans, mutual savings banks, and federal savings banks. r--revised. p--preli minary. Note: Details may not add to totals due to rounding. MONETARY AGGREGATES (Based on seasonally adjusted data unless otherwise noted) 1986:Q4 to 1987:04 1. 2. 3. 5.9 4.1 5.4 Ml M2 M3 03 04 1987 Nov. -- Dec. Percentage change at annual rates -0.1 3.7 -6.5 -5.6 3.0 4.3 -0.6 4.8 5.7 4.3 1. 1988 Jan. p e 15 10 7 Growth 04/8 7 Jan./ 88 pe 4 5 5 Levels bill. $ Dec./87 Selected components 4. -2.2 5. Currency 6. Demand deposits 7. B. 9. 10. 11. 12. 13. 14 If 16. 17. 18. 19. 20. 21. 22. 23. Other checkable deposits M2 minus M1 2 Overnight RPs and Eurodollars, NSA General purpose & broker/dealer money market mutual fund shares, NSA Commercial banks Savings deposits, A, plus MMDAs, NSA Small time deposits Thrift institutions Savings deposits, A, plus MDAs, NSA Small time deposits 4 M3 minus M2 Large time deposits 5 At commercial banks, net At thrift institutions Institution-only money market mutual fund shares, NSA Term RPs, NSA Term Eurodollars, NSA -1.3 13.1 3.4 14.2 4.3 -6.0 -6.7 14 498.3 6.7 MI-A 9.9 13.5 7.9 16 199.7 -8.1 0.4 -18.8 -16.6 12 291.6 4.6 2.4 -7.9 -3.8 17 254.7 4.1 4.6 1.5 4.5 8 2142.5 -92.7 -24.4 14.1 3.4 11.6 7.3 -4.7 15.4 2.1 -5.4 25.1 2.6 17.4 7.6 72 77.2 7.1 5.4 19 6 221.5 919.1 1.0 12.3 6.6 2 11 8 534.5 384.7 929.6 -7 19 399.8 529.9 6.1 2.4 5.0 1.7 2.3 3.4 3.7 -2.4 8.0 3.6 9.6 5.8 -4.0 10.1 -14.4 16.2 -25.3 25. -12.8 21.9 10.9 11.8 11.1 23.0 0.2 -1 766.7 8.3 10.6 4.1 6.2 4.1 10.7 14.2 9.2 24.3 23.4 21.6 27.2 8.9 0.7 24.3 -5 -11 8 489.0 322.9 166.0 2.3 32.5 15.1 1.9 26.4 16.6 17.9 -2.6 11.1 101.5 31.4 9.0 1.4 -32.8 6.5 88.6 106.7 92.3 -- Average monthly change in billions of dollars -MEMORANDA: 24. Managed liabilities at commercial banks (25+26) 25. Large time deposits, gross Nondeposit funds 26. Net due to related foreign 27. institutions, NSA 28. Other 29. U.S. government depogits at commercial banks 563.1 2.9 -0.8 3.7 5.2 5.4 -0.2 4.5 7.3 5.1 1.7 -. 9 0 -2.8 3.4 -. 9 386.7 176.4 3.2 -0.6 1.0 -1.2 -3.7 0.7 7.3 -3.9 -6.5 5.7 162.4 -1.5 0.2 3.1 -14.6 14.0 24.0 1. Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. 2. Nontransactions M2 is seasonally adjusted as a whole. 3. Growth rates are for savings deposits, seasonally adjusted, plus money market deposit accounts (MMDAs) not seasonally adjusted. Commercial bank savings deposits excluding MMDAs increased during December and January at of 2.0 percent and 1 percent, respectively. At thrift institutions, savings deposits excluding MMDAs de d during December and January at rates of 8.2 and 4 percent, respectively. 4. '...non-M2 component of M3 is seasonally adjusted as a whole. 5. Net of large-denomination time deposits held by money market mutual funds and thrift institutions. 6. Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold under agreements to repurchase, and other liabilities for borrowed money (including borrowings from the Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated. 7. Consists of Treasury demand deposits and note balances at commercial banks. pe--preliminary estimates. COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT (Percentage changes at annual rates, based on seasonally adjusted data) 1986:Q4 to L987:Q4 Levels Q3 Q4 ------------------1. 1987 Nov. Dec. 1988 Jan." Commercial Bank Credit --------- bil. $ Jan.P ----------- Total loans and securities at banks 2. 7.5 7.3 2.8 -1.1 -0.9 Securities 5.0 8.4 3.0 2.1 6.6 9.1 18.7 2.8 -4.3 10.9 17.2 338.9 -1.3 -7.9 3.5 13.0 -0.6 -18.9 193.3 8.3 7.0 2.7 -2.1 -3.1 14.3 3. U.S. government securities 4. Other securities 5. Total loans 11.8 3.8 2244.8 532.2 1712.6 6. Business loans 7.4 1.9 7.3 2.8 8.3 7. Security loans 0.8 28.4 -102.7 -198.7 -160.8 64.3 35.4 8. Real estate loans L8.1 13.6 15.1 14.0 13.2 10.0 582.4 9. Consumer loans 3.8 6.5 4.3 4.5 2.6 -3.9 0.0 10. Other loans ------- Short- 11 Business loans net of bankers acceptances 1 Loans at foreign branches2 13. Sum of lines 11 & 12 14. 7.4 Commercial paper issued by nonfinancial firms 15. Bankers acceptances: related3,4 7.0 -2.3 17. -26.6 -61.2 7.8 48.6 574.9 324.7 195.2 and Intermediate-Term Business Credit 8.1 7.6 -38.3 -140.4 171.3 2.2 6.4 3.5 10.3 -11.4 24.6 10.7 60.8 -34.7 4.8 10.6 1.5 7.8 28.2 8.6 4.5 568.7 16.5 585.1 80.6 5.8 0.6 13.7 Sums of lines 13 & 14 16. -4.1 -24.0 8.4 23.7 3.4 13.1 -29.2 1.6 8.4 5.2 8.5 n.a. 699.35 14.2 14.5 17.2 7.2 n.a. 199.95 9.7 7.8 8.2 n.a. 899.15 665.7 U.S. trade Line 15 plus bankers acceptances: U.S. trade related 18. Finance company loans to business 19. Total short- and intermediateterm business credit (sum of lines 17 & 18) 6.2 3 n.a. n.a. 4.3 n.a. 36.15 1 Average of Wednesdays. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Based on average of data for current and preceding ends of month. 4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 5. December data. n.a.--not available. III-T-1 SELECTED FINANCIAL MARKET QUOTATIONS (percent) 1/ 1988 1987 FCM 3/ 2/ Sept 3 Oct 16 Dec 16 Feb 4 Jan-Feb laows Care fron: 3/ Oct 16 FCMC Dec 16 Shortterm rates Federal hunds 4/ 6.75 -0.84 0.04 5.65 6.71 6.05 6.23 -1.28 -1.53 -1.51 -0.29 -0.35 . 8.65 8.22 7.93 6.57 6.59 -1.T -165 -2.06 -1.3 9.12 7.81 8.09 6.58 7.81 6.63 6.71 -1.34 -1.51 -2.27 -1.18 -2.41 -1.10 7.01 7.11 7.79 8.69 8.41 8.13 6.71 6.81 -1.08 -1.70 -1.88 -1.32 8.25 9.25 8.75 8.50 -0.75 -0.25 8.48 9.29 9.52 10.23 10.24 8.15 9.00 9.14 7.44 8.124 8.46 -2.08 -0.71 .76 -1.99 -1.78 0.68 5.95 6.85 7.59 5.30 5.31 5.35 6.19 6.30 6.98 6.93 7.58 7.74 5.81 5.73 6.88 6.97 5.85 5.80 5.78 6.90 7.01 7.35 9.12 Eurodollar deposits 6/ 1-month 3-amoth 6.00 6.00 Bank prime rate 7.50 Treasury bills 5/ 6-amth 1-year Cmeriac paper l-anth 3-Iamcth Large negotiable MD's 5/ 6Cnth Intermediate- and lrg-ter 7.01 729 micipal revene 7/ -0.48 rates U.S. Treasury (constant naturity) 6.34 3-year 10year 30-year 6.71 9.47 (Bonduer ndex) 6.92 8.47 9.59 8.57 7.84 -1.75 -0.73 orpoate-A utility rntly offered 8.78 10.60 11.50 10.59 9.70 -1.80 -0.89 9.10 7.52 10.63 7.8 11.58 8.45 10.66 7.91 10.16 7.74 -1.42 -0.71 -0.50 -0.17 Hr mortgage rates 8/ Fixed-rate AR4, 1-year 1987 1985 Record Year ed bdghs 1988 FOC Dec 16 Feb 4 Percent charge from CMC Reoord ighs Dec 16 Stock prices Do-Joras Industrial 1895.95 1.58 NYSE Cposite MX Ccpoeite 1/ 34DAQ(.83 -day quotes except as roted. 19357 141 29.34 4.52 -2.58 2.57 319.25 344.66 24.29 7.96 2722.42 1974.4 1 38. 55 2/ ay prior to increase in disount rate 1 252.10 269.42. Sept. 4, 1987. 7.04 5/ Seodary raet. Average fr stat nt week closest to date shawn. ast business day prior to stock araet decline on Mday tes for 7/ da Oct. 19, 1987. rsday losest 4/ Average for to-week reserve mainterance period closest to date shown, except Jan -Feb. low, which is o-eek average endiug / Quotes for week endig Friday cloest to date shoni. Sept. 3, tich is re-wek average edirg Sept. 2. Feb. 25, -estiate Last observation is average fbr current minterance perod to date. 3/
@FedFRASER