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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 June 27, 1997 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 Real GDP: 1997:Q1. . . . . . . . . . . . . . . . . . . Michigan (SRC) Survey of Consumer Attitudes. . . . . . Tables . . . Real Gross Domestic Product and Related Items. . University of Michigan Survey Research Center: Survey of Consumer Attitudes . . . . . . . . . . . THE FINANCIAL ECONOMY Table Selected financial market quotations . . . . . . . . . SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Real GDP: 1997:Q1 As expected, the BEA's final estimate of real GDP for the first quarter changed little from the preliminary estimate. Relative to the staff expectations shown in Part 2, the final estimate indicated somewhat smaller downward revisions to business equipment spending and to nonfarm inventory accumulation. This report would not lead us to materially alter our current-quarter forecast of real output. FIRST-QUARTER GROWTH OF REAL GDP (Billions of 1992 chained dollars) BEA Preliminary Category Real GDP Inventory investment Final sales PCE BFI Residential structures Government Net exports Exports Imports Memo: Real GDP growth (percent, annual rate) Revision to preliminary BEA June 25 Final GB 98.8 34.3 64.9 66.2 21.8 4.0 .2 -28.4 23.1 51.6 .2 -4.3 4.8 -.5 -2.1 .1 .5 6.4 -.9 -7.4 2.3 -2.8 5.0 -.7 -1.3 .5 .2 6.1 -.7 -6.9 5.8 5.8 5.9 The final report also included revised estimates of corporate profits for the first quarter. Corporate profits (with inventory valuation and capital consumption adjustments) now are reported to have risen $42.4 billion from the fourth-quarter level. This figure represents a downward revision of about $4 billion from the preliminary release. The downward revision occurred in the foreign component of profits; domestic profits were revised up slightly. The profit share of GNP (excluding Federal Reserve banks) was 8.8 percent in the first quarter, up from 8.4 percent in the fourth quarter. 1. Profits in the fourth quarter were held down about $18 billion because of a special assessment on thrift institutions to recapitalize the Savings Association Insurance Fund. Excluding this adjustment, the fourth-quarter profit share would have been 8.6 percent. Real gross domestic income (GDI)--the output of the economy measured from the income side of the national accounts--increased 5.9 percent at an annual rate in the first quarter, the same as GDP. Over the past four quarters, however, real GDI has increased 4.7 percent, compared with real GDP growth of 4.1 percent. Michigan (SRC) Survey of Consumer Attitudes According to the final report, the Michigan SRC index of consumer sentiment climbed 1.3 percentage points in June to an historical high; the preliminary report had shown only a small increase (0.2 percentage point). Respondents had highly favorable assessments of future business conditions and of their current financial situation relative to last year. While households were less optimistic about their personal financial situation over the coming year, that index remains at a high level. Similarly, appraisals of buying conditions for large household appliances fell back in June, but remained at a highly favorable level. Among the questions not included in the overall index, the index of expected unemployment change over the next 12 months, which has been on a downtrend for more than a year, edged down in June. The index of car buying conditions rose to its highest level since early 1994, reflecting favorable views concerning price discounts and interest rates. However, appraisals of home buying conditions were unchanged in June as more positive views on home prices were offset by more negative views of current mortgage rates. Households' willingness to use credit to finance a major purchase fell back somewhat in June after a jump in May, while their willingness to use savings rose. The mean of expected inflation over the next 12 months edged down 0.2 percentage point to 3.5 percent in June and has changed little, on balance, of the past four months. The mean and median of expected inflation over the next five to ten years both edged up 0.1 percentage point to 3.9 and 3.1 percent, respectively in June. 6-30-97 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. 1997:Q1 Preliminary Final 1995:Q4 to 1996:Q4 1996:Q4 Final 3.1 3.8 5.8 5.9 3.1 4.9 3.8 4.1 2.7 3.4 5.7 5.6 Gross domestic product Final sales Consumer spending 4. Durables 5.4 5.0 19.3 18.8 5. Nondurables 1.8 1.8 4.9 4.6 6. Services 2.6 3.8 3.3 3.4 9.5 5.5 11.5 11.0 7. Business fixed investment 8. Producers' durable equipment 9.7 -. 9 13.4 12.7 9. Nonresidential structures 9.1 25.8 6.5 6.6 6.0 6.7 10. Residential investment 3.9 -1.8 11. Federal government consumption expenditures and investment 1.5 -5.3 -3.1 -3.2 .2 -6.9 -10.0 -10.1 4.1 -2.1 12. Defense 13. Nondefense 14. 11.3 11.7 State and local government consumption expenditures and investment 2.1 1.9 2.0 2.1 Exports of goods and services Imports of goods and services 7.4 8.3 25.0 3.3 11.2 23.2 10.8 19.9 ADDENDA: 17. Nonfarm inventory investment 1 18. Motor vehicles 1 19. Excl. motor vehicles 1 17.12 -3.62 20.72 19.3 -4.6 23.9 52.0 .3 51.7 49.2 .2 49.0 20. Farm inventory investment -4.02 -2.6 -1.2 -1.1 21. Net exports of goods and services 1 -113.62 -98.4 -126.8 -120.7 22. Nominal GDP 5.0 5.4 8.1 8.3 23. GDP price index 2.1 1.9 2.8 2.7 24. GDP implicit price deflator 1.8 1.5 2.2 2.2 25. Corporate profits 3 670.1 716.8 712.5 15. 16. 4 670.22 26. 27. Profit share (Excluding FR banks) 8.9 8.6 8.7 8.4 9.1 8.8 9.1 8.8 28. Personal saving rate (percent) 4.92 5.1 4.8 4.7 1, 2. 3. 4. Level, billions of chain (1992) dollars. Annual average. With inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj), level, billions of dollars. Economic profits as a share of nominal GNP. June 27, 1997 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1997 May 1997 Jun (f) 1997 Jan 1997 Feb 1997 Mar 1997 Apr 97.4 91.3 99.7 107.2 94.9 100.0 109.8 93.6 101.4 115.2 92.5 117 132 116 128 114 134 119 134 132 130 122 138 126 131 137 108 130 107 136 103 135 113 138 105 130 113 142 109 147 121 132 161 159 135 158 157 134 155 156 141 160 162 130 164 166 135 166 155 136 167 153 150 173 160 154 168 160 Expected unemployment change - next 12 months 114 110 110 114 107 112 113 109 108 Expected inflation - next 12 months Mean Median 4.2 3.0 4.0 3.0 3.9 3.0 4.1 3.0 3.8 3.0 3.5 2.8 3.7 3.0 3.7 2.9 3.5 2.8 4.2 3.0 3.7 3.0 3.9 3.0 4.0 3.1 3.7 3.1 3.6 3.0 3.6 2.9 3.8 3.0 3.9 3.1 1996 Oct 1996 Nov 1996 Dec 96.5 106.6 89.9 99.2 107.5 96.9 104.9 93.9 91.8 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 115 127 121 133 Expected business conditions Next 12 months* Next 5 years* 131 103 Appraisal of buying conditions Cars Large household appliances* Houses Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions 106.8 103.2 113.5 96.6 104.5 113.2 98.9 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. Selected Financial Market Quotations 1 (Percent except as noted) 1996 Instrument 1997 Feb. July FOMC * low high May 20 5.15 Change to June 26, from: Feb. July FOMC * low high May 20 5.39 0.28 0.04 -0.07 4.76 4.67 4.55 5.21 5.40 5.64 0.27 0.39 0.78 -0.18 -0.34 -0.31 -0.13 -0.31 -0.22 5.27 5.12 5.50 5.59 0.34 0.51 0.11 0.04 -0.04 -0.09 5.21 5.12 4.99 5.44 5.59 5.83 0.39 0.54 0.77 0.16 0.07 -0.07 -0.03 -0.07 -0.13 5.13 5.13 5.38 5.56 0.43 0.50 0.18 0.07 0.00 -0.06 8.25 8.25 0.25 0.25 0.00 4.98 5.58 6.02 6.62 7.06 7.19 1.26 0.92 0.76 -0.38 -0.56 -0.41 -0.18 -0.21 -0.14 n.a. n.a. n.a. n.a. 0.08 Municipal revenue (Bond Buyer) 5 5.67 6.24 0.15 -0.42 -0.09 Corporate-A utility, recently offered 7.18 8.23 0.61 -0.44 -0.21 High-yield corporate 6 9.57 10.36 -0.19 -0.98 -0.21 6.94 5.19 8.42 6.01 0.64 0.47 -0.84 -0.35 -0.33 -0.12 June 26 Short-term rates Federal funds 2 3 Treasury bills 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs3 1-month 3-month 6-month Eurodollar deposits 4 1-month 3-month Bank prime rate Intermediate- and long-term rates U.S. Treasury (constant maturity) 3-year 10-year 30-year U.S. Treasury indexed bond Home mortgages7 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate 1996 Record high Stock exchange index Dow-Jones Industrial S&P 500 Composite NASDAQ (OTC) Russell 2000 Percentage change to June 26, from: 1997 July FOMC * Record July FOMC * Level Date low May 20 June 26 high low May 20 7796.51 6/20/97 5346.55 7228.88 7654.25 -1.82 43.16 5.88 898.70 6/20/97 626.65 833.27 883.68 -1.67 41.02 6.05 1452.43 6/24/97 1042.37 1341.24 1436.38 -1.11 37.80 7.09 396.49 6/19/97 307.78 366.57 390.27 -1.57 26.80 6.47 Wilshire 8484.51 6/20/97 6099.34 7861.08 8364.37 -1.42 37.14 6.40 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 June 25, 1997. 3. Secondary market. 4. Bid rates for Eurodollar deposits at 11 a.m. London time. 5. Most recent observation based on one-day Thursday quote and futures market index changes. 6. Merrill Lynch Master II high-yield bond index composite. 7. Quotes for week ending Friday previous to date shown. * Figures cited are as of the close on May 19, 1997.
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