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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 02/09/2012. Confidential (FR) Class III FOMC January 27, 2006 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 The Domestic Nonfinancial Economy ........................................................ 1 Real Gross Domestic Product ..........................................................1 GDP Prices.......................................................................................4 Manufactures’ Orders, Shipments, and Inventories.........................4 Sales of New Homes........................................................................4 Tables Real Gross Domestic Product and Related Items ............................2 Price Indexes for Gross Domestic Product ......................................5 Broad Measures of Inflation ............................................................6 Surveys of Inflation Expectations....................................................6 Orders and Shipments of Nondefense Capital Goods......................7 Charts Household Indicators .......................................................................3 Computers and Peripherals ..............................................................7 Communications Equipment............................................................7 Medium and Heavy Trucks..............................................................7 Other Equipment..............................................................................7 Fundamentals of Equipment and Software Investment ...................9 Indicators of Single-Family Housing.............................................10 The Domestic Financial Economy .........................................................11 Tables Commercial Bank Credit ...............................................................12 Selected Financial Market Quotations ...........................................13 Supplemental Notes The Domestic Nonfinancial Economy Real Gross Domestic Product (GDP) According to the BEA’s advance estimate, real GDP rose at an annual rate of 1.1 percent in the fourth quarter after having increased at a rate of 4.1 percent in the third quarter. The slowdown in the fourth quarter reflected decelerations in most major categories of spending with the notable exception of private inventory investment. Real PCE increased at an annual rate of 1.1 percent following an increase at a 4.1 percent rate in the third quarter; the deceleration was the result of a sharp drop in purchases of durable goods, as spending on motor vehicles fell. Total government spending decreased 2.4 percent in the fourth quarter; a small increase in state and local government expenditures was more than offset by a large decline in federal spending. Business fixed investment rose at an annual rate of 2.8 percent in the fourth quarter, down from the 8.5 percent pace in the third quarter; spending on both equipment and software and nonresidential structures decelerated. In the foreign sector, the BEA estimated that real exports rose at a moderate rate for a second quarter but that real imports accelerated; as a result, the arithmetic contribution of net exports to the change in real GDP was -1.2 percentage points last quarter compared with just -0.1 percentage point in the third quarter. In contrast, real private inventories are reported to have increased $25.7 billion in the fourth quarter, adding 1.5 percentage points to the change in real GDP; in the third quarter, the change in private inventory investment held down the change in real GDP by about ½ percentage point. Real output in the nonfarm business sector rose at an annual rate of 0.9 percent in the fourth quarter. Based on the data currently available, the staff estimates that productivity in the nonfarm business sector fell at an annual rate of 0.4 percent last quarter following an increase at a 4.4 percent rate in the third quarter. These estimates put the four-quarter change in nonfarm business productivity for 2005 at just under 2½ percent. On the income side of the accounts, real disposable personal income rebounded at an annual rate of 7.0 percent in the fourth quarter after having been severely restrained in the third quarter by the effects of the hurricane. The personal saving rate edged up a bit, but remained below zero. The staff currently estimates that compensation per hour increased at an annual rate of 3.2 percent in the fourth quarter, implying an increase of just under ½ percent from the fourth quarter of 2004. -1- -2- Real Gross Domestic Product and Related Items (Percent change from previous period at a compound annual rate; based on seasonally adjusted data, chain-type quantity indexes) 2005:Q2 2005:Q3 2005:Q4 Final Final Advance 3.3 4.1 1.1 5.6 4.6 -.3 3.4 4.1 1.1 Durables 7.9 9.3 -17.5 Nondurables 3.6 3.5 5.1 Services 2.3 3.3 3.2 Business fixed investment 8.8 8.5 2.8 Nonresidential structures 2.7 2.2 .7 Equipment and software 10.9 10.6 3.5 10.8 7.3 3.5 Federal government 2.4 7.4 -7.0 State and local government 2.6 .2 .4 Exports of goods and services 10.7 2.5 2.4 Imports of goods and services -.3 2.4 9.1 -1.7 -13.3 25.7 -614.2 -617.5 -650.3 Nominal GDP 6.0 7.6 4.2 Nominal GDI 4.7 8.0 n.a. 78.3 66.5 n.a. Change in economic profits2 59.3 -54.5 n.a. Profit share, excluding FR banks3 10.6 10.0 n.a. .2 -2.0 7.0 -.2 -1.8 -.4 Item Gross Domestic Product Final sales Consumer spending Residential investment ADDENDA: Inventory investment1 Net exports of goods and services1 Statistical discrepancy2 Real disposable personal income Personal saving rate (percent) 1. Level, billions of chained (2000) dollars. 2. Billions of dollars. 3. Economic profits as a share of GNP. n.a. not available. -3- Household Indicators Changes in DPI and Wages and Salaries Percent, annual rate 12 Real disposable personal income Real wages and salaries Nominal wages and salaries 9 6 3 0 H1 2004 H2 H1 2005 Q3 -3 Q4 Note. Microsoft dividend is excluded. Household Net Worth and Wilshire 5000 Index 15000 Ratio 7.0 13000 Dec. 11000 Wilshire 5000 (left scale) 6.0 9000 5.5 Q4 7000 5.0 Ratio of household net worth to DPI* (right scale) 5000 3000 6.5 1996 1997 1998 1999 2000 2001 2002 2003 4.5 2004 2005 2006 4.0 * Value for 2004:Q4 excludes the effect on income of the one-time Microsoft dividend in December. Value for 2005:Q4 is a staff estimate. Personal Saving Rate 5 Percent 5 4 4 3 3 2 2 1 1 0 0 Q4 -1 -1 -2 -3 -2 1996 1997 1998 1999 2000 2001 2002 2003 Note. Value for 2004:Q4 excludes the effect on income of the one-time Microsoft dividend in December. 2004 2005 2006 -3 -4- GDP Prices The GDP price index increased at an annual rate of 3.0 percent in the fourth quarter after having risen at a 3.3 percent rate in the preceding quarter. A fairly sharp increase in construction prices boosted the overall GDP price index, but was more than offset by a deceleration in energy prices. The slowing in energy prices also contributed to the deceleration in PCE prices, which rose at an annual rate of 2.6 percent in the fourth quarter compared with a rate of 3.7 percent in the third quarter. Core PCE prices increased 2.2 percent last quarter after having moved up at a 1.4 percent rate in the third quarter; the price index for GDP excluding food and energy also accelerated in the fourth quarter. Manufacturers’ Orders, Shipments, and Inventories New orders for nondefense capital goods excluding aircraft rose 3.5 percent in December following an upward-revised increase of 0.2 percent in November. Orders for non-hightech equipment shot up 4.6 percent after having changed little in November, and orders for computers and peripherals rose strongly for a second month; in contrast, orders for communications equipment posted their second straight large decline. Shipments of nondefense capital goods excluding aircraft jumped 3.2 percent in December following an increase of 0.6 percent in November. Increases in shipments were broad-based across categories of equipment last month. The increase of 3.8 percent in shipments of communications equipment retraced about half of the cumulative decline posted over the preceding two months while shipments of computers and other capital equipment remained on their strong upward trajectories. The book value of inventories held by manufacturers of durable goods (which constitute about two-thirds of total manufacturing inventories) increased at an annual rate of $0.7 billion in December. Shipments of total durable goods increased 3.5 percent, and the inventory-shipments ratio fell to 1.29 months. Sales of New Homes Sales of new homes moved up 3 percent in December to an annual rate of 1.27 million units on the heels of a decline of 9¼ percent in November. Sales in December were up sharply in the West and the Midwest, which more than offset declines in the South and the Northeast. All told, the level of sales in the fourth quarter was about in line with the average level during the first three quarters of 2005. The stock of new homes for sale continued to edge up in December and represented 4.9 months of sales at December’s -5- Price Indexes for Gross Domestic Product (Based on seasonally adjusted data, chain-type indexes) 2005:Q2 2005:Q3 2005:Q4 Final Final Advance 2.6 3.3 3.0 3.3 4.2 3.3 3.3 3.7 2.6 3.5 1.3 2.6 28.6 50.0 9.0 1.7 1.4 2.2 1.5 1.1 1.8 1.9 2.5 3.7 -0.7 -1.8 -1.2 -14.9 -14.4 -13.3 9.9 16.5 19.5 Residential investment 4.3 6.5 7.1 Government consumption expenditures and investment 3.7 6.7 4.9 Exports of goods and services 3.7 2.9 2.9 Imports of goods and services 8.2 9.4 5.1 1.6 -0.0 5.5 GDP less food and energy 2.4 2.8 3.1 Gross domestic purchases less food and energy 2.1 2.5 2.9 Item Gross domestic product Gross domestic purchases Personal consumption expenditures Food and Beverages Energy Excluding food and energy Market-based components Business fixed investment Equipment and Software Computers and peripheral equipment Nonresidential structures Nonpetroleum goods ADDENDA: NOTE: Percent change from previous period at compound annual rates -6- Broad Measures of Inflation (Percent change, Q4 to Q4) Measure 2002 2003 2004 2005 Product prices GDP price index Less food and energy 1.7 1.9 2.0 1.7 2.9 2.8 3.0 2.8 Nonfarm business chain price index 1.1 1.1 2.7 3.1 Expenditure prices Gross domestic purchases price index Less food and energy 1.9 1.7 2.0 1.7 3.4 2.7 3.4 2.6 PCE price index Less food and energy 1.8 1.6 1.7 1.3 3.1 2.2 3.0 1.9 PCE price index, market-based components Less food and energy 1.7 1.4 1.6 1.0 2.8 1.7 3.0 1.7 CPI Less food and energy 2.2 2.1 1.9 1.2 3.4 2.1 3.7 2.1 Chained CPI Less food and energy 1.8 1.7 1.7 .8 2.9 1.8 3.0 1.7 Median CPI Trimmed mean CPI 3.0 2.1 2.0 1.7 2.3 2.2 2.4 2.5 Surveys of Inflation Expectations (Percent) University of Michigan 1 year 2 5 to 10 years 3 Actual CPI inflation 1 Mean Median Mean Median Professional forecasters (10-year) 4 2004:Q1 Q2 Q3 Q4 1.8 2.9 2.7 3.3 3.1 4.0 3.3 3.4 2.7 3.3 2.9 3.0 3.4 3.3 3.1 3.1 2.9 2.8 2.8 2.8 2.5 2.5 2.5 2.5 2005:Q1 Q2 Q3 Q4 3.0 2.9 3.8 3.7 3.6 3.9 4.3 4.6 3.0 3.2 3.5 3.7 3.2 3.3 3.5 3.5 2.8 2.9 2.9 3.1 2.5 2.5 2.5 2.5 Sept. Oct. Nov. Dec. 2006:Jan. 4.7 4.3 3.5 3.4 n.a. 5.5 5.5 4.1 4.1 3.5 4.3 4.6 3.3 3.1 3.0 3.8 3.8 3.3 3.5 3.3 3.1 3.2 3.0 3.1 2.9 2.5 ... ... 2.5 ... Period 1. Percent change from the same period in the preceding year. 2. Responses to the question: By about what percent do you expect prices to go up, on average, during the next 12 months? 3. Responses to the question: By about what percent per year do you expect prices to go up, on average, during the next 5 to 10 years? 4. Quarterly CPI projections compiled by the Federal Reserve Bank of Philadelphia. ... Not applicable. n.a. Not available. -7- Orders and Shipments of Nondefense Capital Goods (Percent change; seasonally adjusted current dollars) 2005 Indicators Q3 Q4 Oct. Annual rate Nov. Dec. Monthly rate Shipments Excluding aircraft Computers and peripherals Communications equipment All other categories 1.8 3.2 -6.6 30.8 2.3 34.3 14.9 29.5 -11.5 15.8 4.5 1.7 5.7 -2.2 1.5 3.4 .6 2.7 -5.5 .9 4.6 3.2 5.3 3.8 2.8 Orders Excluding aircraft Computers and peripherals Communications equipment All other categories -15.6 4.0 -10.7 23.2 4.8 83.7 10.3 14.2 -19.0 13.3 6.7 1.1 -2.0 10.8 .7 22.2 .2 8.1 -8.9 -.1 -.6 3.5 1.5 -3.6 4.6 Memo: Shipments of complete aircraft1 26.2 n.a. 28.8 26.6 n.a. 1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate. n.a. Not available. Computers and Peripherals Communications Equipment Billions of dollars, ratio scale 13 12 Shipments Orders 10 13 12 10 Dec. 8 8 6 6 Billions of dollars, ratio scale 20 17 14 Shipments Orders 11 11 8 8 Dec. 5 4 1999 2000 2001 2002 2003 2004 2005 2006 4 2 1999 2000 Medium and Heavy Trucks 950 800 700 Dec. 600 500 950 2002 2003 2004 2005 2006 800 52 2 54 52 Dec. 48 48 44 44 40 500 400 300 300 40 200 36 1999 2000 2001 2002 2003 2004 2005 2006 Note. Annual rate, FRB seasonals. Source. For class 4-8 trucks, Ward’s Communications; for class 5-8 trucks, ACT Research. Shipments Orders 700 600 Dec. Billions of dollars, ratio scale 54 400 200 2001 5 Other Equipment Thousands of units, ratio scale Sales of class 4-8 trucks Net new orders of class 5-8 trucks 20 17 14 1999 2000 2001 2002 2003 2004 2005 2006 36 -8- sales pace. The average price of new homes was 4 percent lower in December than a year earlier, and the median price of new homes in December was down 3½ percent from the previous year. 1 1 These estimated rates of change should be interpreted cautiously because the Census Bureau began using a new sample frame in January 2005 which has characteristics that differ considerably from the previous year. -9- Fundamentals of Equipment and Software Investment Real Business Output 4-quarter percent change 8 8 6 6 4 Q4 4 2 2 0 0 -2 -2 -4 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 -4 User Cost of Capital 3 High-Tech 4-quarter percent change 3 0 0 -3 -3 Q4 -6 15 Non-High-Tech 4-quarter percent change 10 10 5 5 -6 0 -9 -9 -12 -12 -15 1990 1992 1994 1996 1998 2000 2002 2004 2006 -15 -5 -10 -5 1990 1992 1994 1996 1998 2000 2002 2004 2006 -10 NABE Capital Spending Diffusion Index 4-quarter percent change Index 25 25 48 20 20 36 15 15 Q3 36 24 24 12 12 0 0 10 5 0 0 -5 -5 -12 -10 -24 1990 1992 1994 1996 1998 2000 2002 2004 2006 48 Q4 5 -10 0 Q4 Real Corporate Cash Flow 10 15 -12 -24 1990 1992 1994 1996 1998 2000 2002 2004 2006 Note. The diffusion index equals the percentage of respondents planning to increase spending minus the percentage of respondents planning to reduce spending. Source. NABE Industry Survey. - 10 - Indicators of Single-Family Housing Existing Home Sales New Home Sales 6500 Thousands of units 6500 6000 6000 Thousands of units 1500 1500 1300 5500 5500 5000 5000 4500 4500 4000 1999 2000 2001 2002 2003 2004 2005 2006 4000 1300 Dec. Dec. 1100 1100 900 900 700 Source. National Association of Realtors. 1999 2000 2001 2002 2003 2004 2005 700 2006 Source. Census Bureau. Homebuying Indicators Mortgage Rates Percent 9 9 Fixed rate Dispersion index 120 MBA purchase index (right scale) Michigan homebuying attitudes (left scale) 100 8 8 7 7 80 6 Jan. 6 60 5 Jan. 5 40 4 20 3 0 Index 575 525 475 Jan. 20 425 375 325 1-year ARM rate Jan. 4 3 1999 2000 2001 2002 2003 2004 2005 2006 Note. The January readings are based on data through January 25, 2006. Source. Freddie Mac. 10 10 Dec. 5 5 0 0 Percent change, annual rate 25 25 Constant quality Average price of homes sold 20 20 15 15 10 10 Q4 5 0 Dec. -5 -5 1999 2000 2001 2002 2003 2004 225 Prices of New Homes Percent change from year earlier 20 Repeat transactions, purchase-only index Average price of homes sold 15 Q3 15 1999 2000 2001 2002 2003 2004 2005 2006 2007 Note. MBA index is a 4-week moving average. Source. Mortgage Bankers Association and Michigan Survey. Prices of Existing Homes 20 275 2005 Source. For repeat transactions, OFHEO; for average price, National Association of Realtors. 2006 -5 -10 5 0 -5 1999 2000 2001 2002 2003 2004 2005 2006 Note. Average price is a 12-month moving average with a missing value in January 2005. Constant quality price index is a 4-quarter moving average. Both series are seasonally adjusted by Board staff. Source. Census Bureau. -10 - 11 - The Domestic Financial Economy - 12 - Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total 1. Adjusted1 2. Reported 3. 4. 5. 6. Securities Adjusted1 Reported Treasury and agency Other2 7. 8. 9. 10. 11. 12. 13. 14. Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5 Level ($ billions), Jan. 2006e 2004 2005 2005: Q3 2005: Q4 Dec. 2005 Jan.e 2006 8.9 8.4 10.4 9.7 9.6 9.7 5.8 5.3 8.5 7.5 5.9 6.2 7,242 7,382 6.6 5.2 4.9 5.6 7.4 5.1 -.3 13.4 .5 1.7 -5.4 12.0 -.7 -2.0 -9.7 8.8 -5.4 -7.9 -9.1 -6.0 1.9 3.5 9.5 -4.5 1,852 1,992 1,142 851 9.8 1.2 14.0 43.8 9.8 8.8 5.9 7.9 11.5 13.5 14.0 11.1 14.5 3.0 .4 8.2 12.9 11.8 17.0 10.9 18.2 4.9 3.4 6.4 8.1 9.5 8.3 -1.9 10.2 -4.5 -4.9 17.3 13.3 14.7 10.6 -1.6 12.8 -8.3 7.9 42.5 7.3 22.0 7.7 -4.7 9.9 7.5 3.3 -14.1 5,390 1,034 2,916 435 2,482 691 1,055 749 Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and 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 are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. e Estimated. - 13 - III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2004 2005 2006 Instrument Change to Jan. 26 from selected dates (percentage points) June 28 Dec. 31 Dec. 12 Jan. 26 2004 June 28 2004 Dec. 31 2005 Dec. 12 1.00 2.25 4.00 4.25 3.25 2.00 .25 1.36 1.74 2.18 2.52 3.83 4.19 4.34 4.38 2.98 2.64 2.16 1.86 .51 .19 Commercial paper (A1/P1 rates)2 1-month 3-month 1.28 1.45 2.29 2.28 4.26 4.37 4.47 4.54 3.19 3.09 2.18 2.26 .21 .17 Large negotiable CDs1 3-month 6-month 1.53 1.82 2.50 2.72 4.46 4.61 4.62 4.75 3.09 2.93 2.12 2.03 .16 .14 Eurodollar deposits3 1-month 3-month 1.29 1.51 2.32 2.49 4.35 4.47 4.55 4.65 3.26 3.14 2.23 2.16 .20 .18 Bank prime rate 4.00 5.25 7.00 7.25 3.25 2.00 .25 Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year 2.88 3.97 4.90 3.08 3.63 4.34 4.48 4.47 4.67 4.51 4.46 4.61 1.63 .49 -.29 1.43 .83 .27 .03 -.01 -.06 U.S. Treasury indexed notes 5-year 10-year 1.56 2.25 1.03 1.65 2.11 2.20 1.97 2.09 .41 -.16 .94 .44 -.14 -.11 Municipal general obligations (Bond Buyer)5 5.01 4.49 4.49 4.42 -.59 -.07 -.07 Private instruments 10-year swap 10-year FNMA6 10-year AA7 10-year BBB7 5-year high yield7 5.21 5.30 5.59 6.18 8.30 4.65 4.61 4.98 5.38 7.34 5.09 4.97 5.39 6.00 8.33 5.04 4.92 5.38 5.96 8.20 -.17 -.38 -.21 -.22 -.10 .39 .31 .40 .58 .86 -.05 -.05 -.01 -.04 -.13 Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable 6.21 4.19 5.77 4.10 6.30 5.15 6.12 5.20 -.09 1.01 .35 1.10 -.18 .05 Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month Record high 2004 2005 2006 Stock exchange index Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000 Change to Jan. 26 from selected dates (percent) Level Date Dec. 31 Dec. 12 Jan. 26 Record high 2004 Dec. 31 2005 Dec. 12 11,723 1,527 5,049 728 14,752 1-14-00 3-24-00 3-10-00 1-26-06 3-24-00 10,783 1,212 2,175 652 11,971 10,768 1,260 2,261 690 12,655 10,809 1,274 2,283 728 12,874 -7.79 -16.60 -54.78 .00 -12.73 .25 5.11 4.94 11.80 7.54 .39 1.06 .98 5.65 1.73 1. Secondary market. 2. Financial commercial paper. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Most recent Thursday quote. 6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: June 28, 2004, is the day before the most recent policy tightening began. December 12, 2005, is the day before the most recent FOMC meeting. _______________________________________________________________________
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