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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 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 28, 1996 TABLE OF CONTENTS Page THE NONFINANCIAL ECONOMY Real GDP 1996:Q1 (final) . . . . . . .. . Consumer sentiment . . . . . . . . . . .. . . ... . Clarification of change in federal deficit between fiscal 1996 and 1997 .. . . . . . . . . 1 1 2 Tables Real gross domestic product and related items . University of Michigan Survey Research Center: Survey of consumer attitudes . . . . . . . . . . . 3 . .. . 4 . . 5 6 THE FINANCIAL ECONOMY Tables Selected financial market quotations Commercial bank credit . . . . . . . . . . . . . . . . . . . . SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY (final) 1996:Q1 Real GDP According to BEA's final 2.2 percent at an annual rate changed from the drawdown estimate, real GDP increased in the first quarter of 1996, preliminary estimate of 2.3 percent. little A large of motor vehicle inventories, associated in part with the shutdown at General Motors, held down GDP growth about a percentage point. By contrast, final sales in the first grew at a 3.3 percent annual quarter, as both consumption and sizable increases. first quarter However, net investment posted exports fell $18 billion in the about (as measured in chained 1992 dollars), offsetting the large fourth-quarter rate increase. As we expected, the final figure for nonfarm inventory accumulation was estimate, and slightly higher in real terms final sales were a bit lower. than the preliminary The most notable downward revisions were those to Federal government purchases and exports of goods and services; small. revisions to other categories were The preliminary estimate of Federal purchases had been surprisingly large, given budget developments, and the downward revision makes the first-quarter increase more plausible. Today's report included revised first-quarter corporate profits. Profits for corporations other than Federal Reserve Banks (with inventory valuation adjustment and capital consumption adjustments) are estimated to have quarter, an upward revision of $9.2 estimate. sources, risen another $33.2 billion last billion from the preliminary The revision occurred entirely in profits from foreign as domestic profits were unchanged. non-Federal Reserve corporate profits were level since the As a share of GNP, 8.5 percent, the highest late 1960s. Consumer Sentiment The final sentiment report for the Michigan SRC index of consumer showed only a slightly smaller indicated in the preliminary figures. returned to about the middle of the since early 1994. rebound in June than As before, the favorable June index range that has held In response to questions that constitute the aggregate index, respondents views on their current and financial situations rebounded in June. conditions also improved. Views future on expected business However, households' appraisals of buying -2conditions for large household appliances slipped again and stood at the lower end of the range observed for the past two and a half years. Among the series that are not included in the aggregate index, assessments of car buying conditions jumped to the highest level in about a year. However, respondents' appraisals of buying conditions for homes deteriorated because of less favorable views of mortgage interest rates. Consumers' willingness to use credit to finance major purchases rose to its highest reading since July 1994, but their willingness to use savings was little changed. Inflation expectations moved back down in June after surging in May. The mean level of expected inflation over the next year retreated 3/4 percentage point to 4.2 percent, which is only a bit above the average reading over the past year of about 4 percent; the median edged down to 2.9 percent. Over the next five to ten years, expected mean inflation also fell back 3/4 percentage point to 4 percent, which is just slightly below the average reading over the past year; the median was little changed at 3.1 percent. Clarification of Change in Federal Deficit Between Fiscal 1996 and 1997 (discussed on page I-3 of Part 1). Although the staff expects capital gains realizations to continue at an elevated rate in both 1996 and 1997, a portion of the fiscal 1996 receipts surprise is forecast to be temporary because the strong financial market gains of 1995 were not anticipated by taxpayers and resulted in unusually high final payments in 1996. Continued strong withheld and estimated tax payments during the first half of this year suggest that taxpayers are incorporating the higher level of capital gains realizations into their current tax payments. As a result, fiscal 1996 revenues are expected to reflect the tax consequences of increased capital gains realized in both 1995 and 1996, whereas the fiscal 1997 revenue reflects, for the most part, only the higher level of gains for 1997. 6-28-96 Real Gross Domestic Product and Related Items (Percent change from previous period at compound annual rates; based on seasonally adjusted data, chain-type indexes) 1994:Q4 to 1995:Q4 1. 2. 1995:Q4 Final 1996:Q1 Preliminary Final .5 Gross domestic product Final sales 1.6 4. 5. 6. Consumer spending Durables Nondurables Services 1.2 .3 -. 3 7. 8. 9. Business fixed investment Producers' durable equipment Nonresidential structures 3.1 4.0 12.3 13.2 12.4 14.1 .9 9.6 7.9 3. 2.2 10. Residential investment -1.4 11. Federal government consumption expenditures and investment Defense Nondefense State and local government consumption -6.6 -6.6 -6.5 12. 13. 14. expenditures and investment 2.1 15. Exports of goods and services 6.5 16. Imports of goods and services 4.6 6.4 -12.8 5.8 3.8 10.1 -12.0 -14.6 1.5 11.0 4.9 1.3 10.9 ADDENDA: 17. Nonfarm inventory investment1 18. Motor vehicles 1 19. Excl. motor vehicles ' 37.42 2.12 35.42 19.5 -2.6 22.1 -24.0 23.9 3.6 -21.4 25.0 20. Farm inventory investment 1 -4.42 -3.5 -6.1 -6.2 21. Net exports of goods and services -114.22 -96.6 -110.6 -114.6 22. Nominal GDP 3.7 2.3 4.5 4.3 23. GDP price index 2.6 2.2 2.4 2.4 24. GDP implicit price deflator 2.4 1.8 2.1 2.1 25. 26. Profit share 3 (Excluding FRB banks) 8.12 7.8 8.4 8.1 8.7 8.4 8.8 8.5 27. Personal saving rate (percent) 4.52 4.9 4.6 4.6 Level, billions of chain (1992) dollars. Annual average. Economic profit as a share of nominal GNP. -. 1 June 28, 1996 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1995 1995 1995 1996 1996 1996 1996 1996 1996 Oct Nov Dec Jan Feb Mar Apr May Jna 90.2 104.8 80.8 88.2 101.3 79.7 91.0 102.4 83.7 89.3 105.8 78.7 88.5 105.2 77.8 93.7 105.4 86.2 92.7 107.8 83.0 89.4 105.1 79.2 92.4 105.4 84.0 Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions .......----------------------------------------------------------------------------------------------------- Personal financial situation Now compared with 12 months ago* Expected in 12 months* 111 120 108 123 112 126 115 131 111 120 112 130 118 127 114 122 118 128 Expected business conditions Next 12 months* Next 5 years* 112 91 111 85 115 95 104 80 109 83 125 91 118 88 110 86 117 93 Appraisal of buying conditions Cars Large household appliances* Houses 125 161 151 130 154 148 133 153 157 122 159 152 129 161 163 134 161 168 125 162 157 127 159 159 137 155 153 40 63 43 62 45 70 36 65 40 65 47 71 45 64 37 64 54 66 Expected unemployment change - next 12 months 133 124 122 135 131 123 124 121 123 Expected inflation - next 12 months Mean Median 3.6 2.9 3.8 2.8 3.3 2.7 4.0 2.9 3.6 2.8 4.2 2.9 4.5 3.0 4.9 3.0 4.2 2.9 Expected inflation - next 5 to 10 years Mean Median 3.7 3.1 4.0 3.1 3.9 3.1 4.2 3.1 4.2 3.2 4.3 3.2 4.1 3.0 4.8 3.2 4.0 3.1 Willingness to use credit Willingness to use savings * -- 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. -5Selected Financial Market Quotations' (Percent except as noted) 1994 Instrument high 1996 Change to June 27, from: Feb. FOMC, low May 21 1994 June 27 high 5.02 5.12 5.25 5.06 5.20 545 -0.72 -1.18 -1.39 5.37 5.38 5.50 5.51 -0.63 -0.81 5.31 5.35 5.44 5.40 5.50 5.69 -0.70 -0.89 -1.20 5.28 5.34 5.38 5.50 -0.68 -0.88 8.25 8.25 -0.25 6.18 6.62 6.82 6.50 6.91 7.06 -1.32 -1.13 -1.10 Municipal revenue (Bond Buyer) 5 6.17 6.20 -1.17 Corporate-A utility, recently offered 7.90 8.17 -0.88 I Feb. 1996 FOMC, low May 21 Short-term rates Federal funds2 5.26 Treasury bills 3 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs 3 1-month 3-month 6-month Eurodollar deposits4 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 6 Home mortgages 11.43 10.00 10.15 -1.28 8.08 5.78 8.29 5.93 -0.96 -0.86 7 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1989 1996 Low, FOMC, Level Date Tan 3 May 71 I 5778.00 5/22/96 2144.64 NYSE Composite 363.74 5/24/96 S&P 500 Composite 678.51 1249.15 index Stnek exchanae Dow-Jones Industrial NASDAQ(OTC) Percentage change to June 27, from: FOMC. Record 1989 7 hioh Inw Mav21 5748.82 5677.53 -1.74 164.73 -1.24 ]54.00 361.09 357.58 -1.69 132.19 -0.97 5/24/96 275.31 673.15 668.55 -1.47 142.84 -0.68 6/5/96 378.56 1248.11 1166.01 -6.66 208.01 -6.58 Tune Wilshire 6758.69 5/24/96 2718.59 6719.13 6566.27 -2.85 141.53 -2.27 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is average maintenance period to date July 3, 1996. 3. Secondary market. 4. Bid rates for Eurodollar deposits at 1 a.m. London time. 5 Most recent observation based on one-day Thursday quote and futures market index changes. 6. Merrill Lynch Master IIhigh-yield bond index composite. 7. Quotes for week ending Friday previous to date shown. -6- COMMERCIAL BANK CREDIT (Percentage change; seasonally adjusted annual rate) 1 Typ cr of 1995 1995 Q4 1996 Q 1996 Mar 1996 Apr 1996 May Level, May 1996 (billions of $) 1. Total loans and securities 8.7 5.i 4.7 -3.0 5.3 1.4 3,654.6 2. Securities 3.5 2.8 -0.3 -19.4 -1.3 8.3 986.2 3. U.S. government 3.4 -2.7 -17.8 -0.5 14.8 713.7 4. Other 2 1.2 5,9 -23.5 -3.5 -7.9 272.6 6.0 6.7 3.2 7.7 -1.1 2,668.3 6.3 5.9 -4.0 9.0 4.0 730.9 8.5 3.9 4.5 5.4 1.6 2.0 1,097.5 5. Loans 3 6. Business 7. Real estate 8. Home equity 5.2 3.1 5.1 -1.5 3.0 -4.5 79.7 9. Other 8.8 3.9 4.4 5.8 1.8 24 1.017.8 10.6 6.2 7.1 7.4 6.2 -5.5 503.9 17.6 19.1 13.9 12.2 9.6 2.0 653.1 -0.5 -2.8 -9.8 8.5 -53.2 81.9 17.7 21.9 11.2 33.4 -2.4 254.2 10. 11. Consumer Adjusted 4 12. Security 13. OtherS 18.5 1. Monthly levels are pro rataaverages of Wednesday data- Quarterly and annual levels (not shown) are simple averages of monthly levels and levels for the fourth quarter respectively. Growth rates shown are percentage changes in consecutive levels, annualized but not compounded. 2. Includes municipal securities, foreign government securities, corporate bonds, equities, and trading account assets. 3. Excludes interbank loans. 4. Includes estimates of consumer loans that have been securitized by banks and are still outstanding. 5. Includes loans to nonbank financial institutions, farmers, state and local governments, banks abroad, foreign governments, and all others not elsewhere classified. Also includes lease financing receivables.
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