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Confidential (FR) Class III FOMC Part 2 June 23, 1999 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Recent Developments Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Confidential (FR) Class III FOMC June 23, 1999 RECENT DEVELOPMENTS Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System DOMESTIC NONFINANCIAL DEVELOPMENTS Domestic Nonfinancial Developments Overview Economic activity has continued to expand in the current quarter, though apparently more moderately than earlier in the year. Consumer spending and construction outlays have decelerated from their blistering gains in the first quarter, and this has evidently been only partially offset by faster growth of business purchases of equipment and a lesser decline in real net exports. The labor market has remained tight, with job gains sufficient on average to push the unemployment rate back down to 4.2 percent in May. Wage and price increases have been a bit larger on net in the past few months, but longer-term inflation trends have remained favorable to this point. Labor Market Developments Employment growth has been choppy this year. Smoothing through the fluctuations, private nonfarm payrolls rose an average of 175,000 a month in April and May, essentially unchanged from the pace over the first quarter.' The aggregate hours of private production or nonsupervisory workers rose rather modestly in the past two months, however, as the implicit average workweek edged down somewhat. This is a curious development in such a tight labor market, but it may reflect in small part recent job losses in manufacturing, where workweeks tend to be relatively long. Taking the first five months of the year together, growth in overall payrolls and production worker hours has slipped a bit from the trends in 1998. Factory payrolls contracted in April and May at about the same rate as in the first quarter. Mining also continued to shed workers, reflecting in part the cautious response of domestic drilling companies to the resurgence of oil prices. Over the past several months, growth in construction employment has fluctuated widely. After a sizable increase in the first quarter, construction jobs were little changed, on net, in April and May. Some of the slowing this quarter merely reflects the fact that building activity fell less than the seasonal norm through the winter months; and with workers reportedly in short supply, employers apparently also are straining to meet the usual spring seasonal pickup in hiring. 1. The May establishment report contained the annual benchmark revisions, which include the most recent comprehensive count of payroll jobs; the revisions affect data since April 1997. The revision to the level of payroll employment was small--the not seasonally adjusted March level was raised by 44,000, or less than 0.1 percent. As usual, new seasonal factors were estimated and applied to data back to January 1994. Also, the bias-adjustment factors were revised up an average of 13,000 per month to a monthly average of 150,000, which led to small upward revisions to job growth from April 1998 forward. The BLS uses its biasadjustment factors mainly to capture employment gains due to new establishments that are missed in its regular monthly survey II-2 CHANGES IN EMPLOYMENT (Thousands of employees; based on seasonally adjusted data) 1998 1998 Q3 Q4 Nonfarm payroll employment 1 Private Goods Producing Mining Manufacturing Construction Service Producing Transportation and utilities Trade Finance, insurance, real estate Services Total government --Average 244 217 8 -3 -19 30 208 18 46 26 119 27 Private nonfarm production workers 1 167 142 199 Total employment 2 Nonagricultural 157 171 188 153 2.1 34.6 41.8 1.6 34.6 41.7 Memo: Aggregate hours of private production workers (percent change) 1,3 Average workweek (hours) 1 Manufacturing (hours) 1999 Q1 monthly changes-224 275 209 186 248 171 -16 7 -23 -7 -3 -4 -28 -43 -36 16 55 20 202 241 194 16 16 16 57 58 44 22 25 18 107 142 116 38 27 38 Mar. 1999 Apr. May 83 50 -44 -3 -35 -6 94 9 -27 14 98 33 343 331 4 -12 -28 44 327 20 145 19 143 12 11 18 -92 -7 -45 -40 110 13 14 12 71 -7 156 93 197 16 236 319 169 149 -111 -65 36 -67 155 244 2.7 34.6 41.7 2.0 34.6 41.6 -0.3 34.5 41.5 0.1 34.4 41.6 0.2 34.5 41.7 month of period indicated. month of preceding period to final Note. Average change from final 1. Survey of establishments. 2. Survey of households. 3. Annual data are percent change from Q4 to Q4. Quarterly data are percent change from Monthly data are percent change from preceding month. preceding quarter at an annual rate. Aggregate Hours of Production or Nonsupervisory Workers Manufacturing Employment 1982=100 Millions 20 19.5 19 18.5 18 1988 1990 1992 1994 1996 1998 1988 1990 1992 1994 1996 1998 In contrast, employment growth has remained robust in the service-producing sector. Finance, insurance, and real estate, wholesale and retail trade, services, and transportation and public utilities continued to add jobs in April and May at a rate that, in most cases, matched or exceeded the first-quarter pace. In the household survey, the unemployment rate ticked back down to 4.2 percent in May; before hitting this level in March, the unemployment rate had not been so low since 1970. The labor force participation rate edged down to 67.0 percent in May, toward the lower end of the range it has traced out over the past year. The share of the population out of the labor force but wanting ajob dropped back in May following an uptick in April; overall, this share has not moved much from the very low level reached at the end of 1998. In addition, the number of job leavers who have been unemployed for less than five weeks as a percentage of household employment has risen sharply recently. This is consistent with a tight labor market in which individuals feel more confident about leaving their current employers to look for opportunities elsewhere. Other indicators also suggest, as yet, no appreciable slackening in labor demand. Initial claims for unemployment insurance have remained low since the reference week for the May employment report. Surveys of business hiring plans and help-wanted advertising are off their recent peaks but remain at relatively favorable levels, and firms still report that some types of jobs are very hard to fill.2 Individuals' perceptions of current labor market conditions are quite positive: The proportion of households that reported that jobs are plentiful remained high in the Conference Board survey in May, and in June the Michigan index of expected employment conditions rose sharply. According to the BLS's most recent estimate, productivity in the nonfarm business sector rose at a 3.5 percent annual rate in the first quarter of 1999. This is a downward revision of 1/2 percentage point from the earlier estimate and reflects a reduced estimate of the growth in output. Over the past four quarters, labor productivity rose 2.6 percent. 3 In the nonfinancial corporate sector, 2. The National Federation of Independent Business's diffusion index on net hiring strength and its series on the share of firms reporting that jobs are difficult to fill both dropped sharply in May. These series, however, are volatile, which may partly reflect the variation in sample size from one month to the next: The sample for the NFIB survey in the first month of each quarter is about twice the size as in the second and third months. 3. Updated figures for first-quarter productivity will be published in August. Although nonfarm business sector output is currently reported to have increased at an annual rate of 4.4 percent in the first quarter, we estimate that growth in output will likely be revised back up to around 5 percent at an annual rate. Also, the first-quarter estimate of growth in nonfarm hours, 0.9 percent at an annual rate, does not incorporate the revisions to employment and hours published in the May Employment Situation. However, given these data, we expect only a small revision to the first-quarter increase in hours. II-4 SELECTED UNEMPLOYMENT AND LABOR FORCE PARTICIPATION RATES (Percent; based on seasonally adjusted data, as published) 1998 1999 Q1 Mar. 1999 Apr. 4.4 4.3 4.2 4.3 4.2 14.7 3.8 4.0 14.9 3.6 4.0 14.6 3.4 3.8 14.3 3.2 3.9 14.1 3.4 4.1 12.6 3.6 3.6 67.1 67.0 67.1 67.3 67.0 67.1 67.0 51.6 76.9 60.5 52.8 76.8 60.4 52.8 76.7 60.3 52.8 76.8 60.5 52.6 76.9 60.8 52.1 76.7 60.6 51.9 76.7 60.8 52.1 76.5 60.7 67.4 68.3 68.7 69.1 69.4 68.8 69.1 68.5 Q3 Q4 4.5 4.5 16.0 4.2 4.4 14.6 3.7 4.1 67.1 Teenagers Men, 20 years and older Women, 20 years and older Women maintaining families Civilian unemployment rate Teenagers Men, 20 years and older Women, 20 years and older Labor force participation rate 1997 1998 4.9 Labor Force Participation Rate and Unemployment Rate Percent Percent May Share of the Population Age 16 to 64 Who Want a Job and Are Not in the Labor Force Percent 68 S Unemployment Rate (right scale) LFPR (left scale) 67.5 67 66.5 66 1994 1995 1996 1997 1998 1999 1997 1996 1994 1995 Note. Seasonally adjusted by FRB staff. 1998 Job Leavers Unemployed Less than 5 Weeks as a percentage of Household Employment 1999 Percent 0.36 0.32 0.28 0.24 0.2 0.16 1981 1984 Note. Seasonally adjusted by FRB staff. 1987 1990 1993 1996 1999 II-5 Labor Market Indicators Initial Claims for Unemployment Insurance Thousands June 12 (308) 1979 1983 1987 1991 1995 1999 Note. State programs, includes EUC adjustment. Help Wanted Index Net Hiring Strength Index, 1990=100 - 1988 1990 Manpower, Inc. National Federation of Independent Businesses 1992 1994 1996 1998 1988 1990 1992 1994 1996 1998 Note. Percent planning an increase in employment minus percent planning a reduction. Note. Series adjusted for consolidation of newspaper industry and rise of hiring through personnel supply agencies. Reporting Positions Hard to Fill Reporting Positions Hard to Fill Percent -60 Percent BNA's Survey of Personnel Executives -50 --Technical/Professional Production/Service - - - - Office/Clerical 40 Q2 30 20 - 10 0 1988 1990 1992 1994 1996 1998 1988 1990 1992 1994 1996 1998 II-6 Labor Market Indicators (cont.) Expected Employment Conditions Current Job Availability Percent of households 1988 1990 1992 1994 1996 Index 1998 1988 1990 1992 1994 1996 1998 Note. Michigan index the proportion of households expecting unemployment to fall, less the proportion expecting unemployment to rise, plus 100. Conference Board index: the proportion of respondents expecting more jobs, less the proportion expecting fewer jobs, plus 100. LABOR PRODUCTIVITY (Percent change from preceding period at compound annual rate; based on seasonally adjusted data) 1 Q2 1998 Q3 Q4 1.7 1.5 2.9 2.7 0.1 0.3 2.6 2.5 4.6 4.3 5.6 3.9 3.9 4.7 5.3 4.1 3.5 4.0 6.2 2.5 3.4 3.1 4.4 3.3 4.2 3.8 3.7 4.3 4.2 4.1 4.1 3.7 3.9 4.4 4.0 5.4 3.3 2.6 3.2 3.3 5.0 4.2 4.3 5.1 3.8 4.1 4.6 4.0 4.2 4.7 2.0 2.1 1.4 1.5 4.0 3.7 1.0 1.4 -0.1 -0.4 -0.1 -0.6 -1.3 -1.5 -1.9 1.2 0.7 1.5 -0.3 0.8 0.5 3.4 3.5 3.6 4.1 2.9 1.4 1997 Output per hour Total business Nonfarm business Previous Manufacturing Nonfinancial corporations 2 Compensation per hour Total business Nonfarm business Previous Manufacturing Nonfinancial corporations 2 Unit labor costs Total business Nonfarm business Previous Manufacturing Nonfinancial corporations 2 Memo: ECI compensation per hour 1 1998 1999 Q1 0.9 0.7 0.3 -1.1 1. Changes are from fourth quarter of preceding year to fourth quarter of year shown. 2. Nonfinancial corporate sector includes all corporations doing business in the United States except banks, stock and commodity brokers, and finance and insurance companies; the sector accounts for about two-thirds of business employment. productivity surged 4.2 percent at an annual rate in the first quarter and is up 3.7 percent over the past four quarters. 4 Industrial Production Industrial production rose 0.2 percent last month, despite a sharp weather-related drop in the output of utilities. Manufacturing production rose 0.4 percent in May following gains of similar magnitudes in the preceding three months. The increases in production have lifted the factory operating rate 0.2 percentage point over the past three months to 79.7 percent in May, but this still is nearly 2 percentage points below the long-term average. The output of motor vehicles and parts was up 2.2 percent in May, as the industry attempted to keep up with the blockbuster pace of sales. Production schedules for the third quarter indicate that assemblies are likely to remain high: They call for output to run at an annual rate of 13.1 million units, about the same as in the second quarter. High production rates could well be maintained even if Production of Domestic Autos and Trucks (Millions of units at an annual rate except as noted; FRB seasonal basis) 1999 Item U.S. production Autos Trucks Q Q21 Q31 May June1 July1 12.7 5.6 7.1 13.0 5.6 7.5 13.1 5.7 7.3 13.0 5.5 7.6 13.2 5.6 7.6 13.0 5.7 7.2 60.1 61.4 n.a. n.a. n.a. n.a. 55.8 62.6 n.a. n.a. n.a. n.a. Days' supply Autos Light trucks 2 NOTE. Components may not sum to totals because of rounding. 1. Production rates are manufacturers' schedules. 2. Excludes medium and heavy (class 4-8) trucks. n.a. Not available. 4. Nonfarm business output is calculated on the product side of the national accounts, while the output ofnonfinancial corporations is generated from income-side measures. We estimate that if it were measured from the income side of the accounts, nonfarm business output would have risen roughly 0.4 percentage point more over the past year, accounting for about one-third of the 1.1 percentage point difference between productivity growth in the two sectors over this period. II-8 GROWTH IN SELECTED COMPONENTS OF INDUSTRIAL PRODUCTION (Percent change from preceding comparable period) Proportion 1998 1998 1999 Q4 Q1 19981 1999 Mar. Apr. May -Annual rate- -- Monthly rate--- Total index Previous 100.0 1.9 1.9 2.2 2.2 1.3 1.1 .7 .5 .4 .6 .2 Manufacturing Durables Motor vehicles and parts Aircraft and parts Other Nondurables 88.4 49.6 5.1 3.1 41.4 38.8 2.5 5.3 .7 8.9 5.6 -. 9 4.9 8.6 37.3 -2.6 6.3 .3 1.6 1.9 -3.2 -12.0 3.8 1.1 .4 .7 .7 -1.8 .9 .1 .4 .7 -. 1 -1.2 .9 .1 .4 .6 2.2 -. 8 .5 .2 Manufacturing excluding motor vehicles and parts 83.3 2.6 3.1 1.9 .4 .5 .3 5.4 6.2 -4.9 -1.1 -10.8 -20.5 -8.2 4.8 -. 6 4.9 -. 6 .3 .1 -2.2 Consumer goods Durables Nondurables 27.5 6.0 21.5 -. 4 4.9 -1.8 .1 18.0 -4.4 1.3 7.7 -. 5 .2 -. 8 .5 .3 1.8 -. 1 .1 .8 -. 1 Business equipment Information processing Computer and office eq. Industrial Transit Other 15.4 6.1 2.5 4.8 3.1 1.5 8.3 14.4 53.0 1.5 12.1 -1.4 6.2 11.2 45.9 -2.9 19.1 -8.2 -1.3 6.7 30.9 -6.7 -9.4 2.7 .5 1.8 3.1 -. 1 -1.3 1.4 .9 2.4 2.7 1.1 -. 2 -4.1 .1 1.8 2.3 -1.8 -. 5 -. 1 6.0 5.1 5.9 8.8 -. 4 .3 -. 2 39.1 23.8 3.9 3.6 8.4 1.6 3.8 25.7 -6.3 -2.8 3.5 9.5 51.7 -7.5 -3.2 2.2 2.7 15.7 1.6 2.1 .9 1.4 2.3 2.4 -. 2 .4 .5 3.4 -. 6 -.4 .5 .9 2.4 .7 .2 Mining Utilities IP by market group Construction supplies Materials Durables Semiconductors Basic metals Nondurables 1. From the final quarter of the previous period to the final quarter of the period indicated. CAPACITY UTILIZATION (Percent of capacity; seasonally adjusted) 1988-89 High Manufacturing Primary processing Advanced processing 1959-98 Avg. 1998 1999 1999 Q3 Q4 Q1 Mar. Apr. May 85.7 81.6 80.2 80.1 79.5 79.5 79.6 79.7 88.9 84.2 82.8 81.1 82.9 79.3 82.5 79.3 82.8 78.4 82.7 78.5 82.7 78.6 82.7 78.7 sales were to unexpectedly fall below the industry's forecast, as firms might see an advantage in building inventories prior to the upcoming labor negotiations.5 Elsewhere in manufacturing, advances were again fairly widespread in May. In particular, the high-tech sectors continue to be strong. Production has accelerated sharply for communications equipment in the past two months, while computers and semiconductors have continued to post solid gains in output. In addition, the output of iron and steel rose further in May after having plummeted in 1998. In contrast, production of aircraft and parts fell for the third consecutive month in May, reflecting Boeing's continued downshift in assemblies. The output of nondurable goods, which has been rising slowly since last fall, posted another small increase in May. The gains last month were relatively broadly based, with the main exceptions being apparel and textiles. Recent readings on orders for manufactured goods suggest that factory output should continue to rise at a substantial clip in the near term. The new orders index from the National Association of Purchasing Management (NAPM) bounced up to its highest level in nineteen months in May, partly reflecting the improvement in export orders this year. The staffs series on real adjusted durable goods orders rose 1.2 percent in April following a sizable increase in the first quarter. The latest Beige Book reported improvement in manufacturing activity in most Districts. Respondents noted continued fierce competition from low-priced imports but also suggested that, on balance, foreign demand for manufactured goods has stabilized or improved slightly. The May IP release contained new estimates of manufacturing capacity growth for 1999, which were last updated in December. Manufacturing capacity is now expected to grow 3.8 percent in 1999, versus the earlier estimate of 3.6 percent. The revised estimates reflect in part the May NAPM Semiannual Economic Forecast for Manufacturing, which showed a slight elevation of capital expenditure plans for 1999. 6 Some of the larger upward revisions to capacity growth occurred in high-tech industries such as semiconductors and in industries 5. The current United Auto Workers Union (UAW) and Canadian Auto Workers Union (CAW) contracts expire on September 14 and September 21 respectively. Representatives from the automakers and unions began preliminary negotiations this month. However, in a twist from the usual pattern, the UAW will continue to negotiate simultaneously with General Motors, Ford, and DaimlerChrysler until an agreement is reached with one company. This contract will then set the pattern for the industry. The CAW will follow the more typical pattern of selecting a single company with which to negotiate a new contract. 6. The revision to capacity growth also reflects the incorporation of data on contracts for industrial building. These have been very weak in recent months and held down the revision to capacity growth. II-10 Indicators of Future Production Diffusion index 1991 1992 1993 1994 1995 1996 1997 1998 1999 New Orders for Durable Goods (Percent change from preceding period; seasonally adjusted) Component Total durable goods Adjusted durable goods' Computers Nondefense capital goods excluding aircraft and computers Other MEMO Real adjusted orders 2 Share Share Q 9-H22 1999 1998 Q4 Q1 Feb. Mar. Apr. 100.0 0.6 3.8 -3.9 2.9 -2.1 70.0 6.0 -0.0 0.6 2.0 -0.5 -1.5 -0.7 2.7 4.0 0.6 2.3 18.0 46.0 -2.4 0.8 4.4 1.5 0.8 -2.5 3.9 2.0 -0.2 0.7 0.9 3.3 -1.3 3.0 1.2 ... 1. Orders excluding defense capital goods, nondefense aircraft, and motor vehicle pans. 2. Nominal adjusted durable goods orders were split into three components: computers, electronic components, and all other. The components were deflated and then aggregated in a chain-weighted fashion. ... Not applicable. II-11 Overview of Manufacturing Capacity Change in Manufacturing Capacity Four-quarter percent change Long-term average (1959 to 1999) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Note. Federal Reserve estimates of manufacturing capacity are based on the Survey of Plant Capacity through 1997. The more recent estimates rely on a number of indicators of investment spending and capital input growth. Capital Expenditure Plans Contracts for Industrial Buildings Semiannual NAPM (Six-month moving average) Dec. 1989=100, ratio scale Diffusion index 7, Plans made in December survey I \ /4 \/ Plans made in May survey -3 I I 1992 I 1995 I I 1 2 1998 Note. The December survey reflects plans for the coming year; the May survey reflects plans for the current year. 1990 1992 1994 1996 1998 II-12 SALES OF AUTOMOBILES AND LIGHT TRUCKS (Millions of units at an annual rate, FRB seasonals) 1997 1998 1998 1999 Q4 Q1 1999 Apr. Mar. May __~ Total Adjusted' Autos Light trucks North American 2 Autos Big Three Transplants Light trucks 15.1 15.4 16.2 16.2 16.3 15.0 15.5 16.2 16.2 16.3 8.3 6.8 8.1 7.3 8.5 7.7 Foreign Produced Autos Light trucks 17.2 17.0 8.6 7.6 8.9 8.3 13.8 14.7 6.9 7.1 4.9 14.0 6.8 4.9 4.9 2.0 1.9 2.0 5.0 2.2 7.0 7.1 7.2 6.9 7.6 2.0 2.2 2.3 1.4 1.5 1.5 .8 13.4 14.0 13.9 6.8 7.0 6.8 4.7 2.1 4.8 2.2 6.7 .9 .4 .6 .6 13.1 6.9 4.9 2.0 6.2 16.1 16.1 .7 Note. Components may not add to totals because of rounding. Data on sales of trucks and imported autos for the most recent month are preliminary and subject to revision. 1. Excludes the estimated effect of automakers' changes in reporting periods. 2. Excludes some vehicles produced in Canada that are classified as imports by the industry. Fleet and Retail Sales of Light Vehicles (Annual rate, FRB seasonals) Millions of units Medium and Heavy Truck Sales (Annual rate, BEA seasonals) Millions of units SRetail SFleet May May 1 1 1995 1996 1997 1998 1999 1995 1996 I 1997 I 1998 1999 II-13 that produce construction supplies--most notably, lumber and related products and stone, glass, and clay products. Motor Vehicles Adjusted for shifts in manufacturers' reporting periods, light vehicle sales rose nearly 1 million units in May to an extraordinary 17 million units at an annual rate. So far this year, adjusted light vehicle sales have averaged a robust 16.3 million unit pace. Recent indicators point to continued strength in vehicle demand in the near term, and industry analysts' expectations for third-quarter sales currently lie in the range of 16.4 million to 16.7 million units (annual rate). The surge in sales in May reflected higher retail purchases--that is, sales and leases to consumers. 7 So far this year, retail purchases have averaged 83 percent of total industry light vehicle sales--up noticeably from the fourth quarter of last year. Consumers' willingness and ability to maintain vehicle purchases at elevated levels have no doubt been aided by favorable trends in personal income and wealth as well as generous marketing incentives.8 These incentives have helped to hold down prices: According to the CPI, over the past year prices for autos have fallen 3/4 percent while--despite very strong demand--prices for light trucks are up just 3/4 percent. In the Michigan survey, the index of car-buying conditions remains at a very positive level, although it has moved a bit lower on net since January. On the business front, fleet sales of light vehicles have remained strong so far this year, with purchases running just above their 1998 level. Demand for medium and heavy trucks also has been quite robust. Sales of these vehicles in May were 642,000 units at an annual rate, up by about 17,000 units from the level in April. In addition, new orders for heavy trucks rose sharply in May and, for the first time in seven months, backlogs increased. Consumer Spending and Personal Income Smoothing through the monthly ups and downs, growth in consumer spending appears to have moderated from the first quarter's spectacular pace, but it has remained quite brisk. Real PCE in April and May still appears to be up at an annual rate of more than 4 percent from the first-quarter average. The fundamental determinants of consumption growth remain positive: Income and wealth have continued to trend up, and consumer confidence consequently is extraordinarily high. 7. Data on retail purchases and on fleet sales are confidential. 8. Incentives include cut-rate financing on loans offered by auto companies through their financing subsidiaries. II-14 Near-Term Indicators of Motor Vehicle Demand Marketing Incentives for Light Vehicles (FRB seasonals) Interest Rates on New Auto Loans 1992 dollars per vehicle Percent 1600 Commercial Banks - - - - Finance Companies 1400 1200 1000 800 600 '-I I 400 1993 1995 1997 1999 1993 I I 1995 I I 1997 , 01 I I 1999 Note: Rates at finance companies are a volume-weighted average of all loans from the subsidiaries of Big Three manufacturers. Buying Attitudes for New Vehicles New Auto and Truck Prices Percent (Twelve-month change) 1993 1995 1997 1999 Index Michgan Survey 1993 1995 1997 1999 II-15 Household Indicators Personal Consumption Expenditures Percent 8 Quarterly percent change at an annual rate Four-quarter percent change 6 4 2 + 0 2 1996 1994 1995 1993 Note. Q2 values are staff estimates based only on April and May data. 1997 1998 Real Disposable Personal Income Percent 8 --- Quarterly percent change at an annual rate Four-quarter percent change 6 4 2 + 0 2 1993 1994 1995 1996 1997 1998 1999 Note. NIPA DPI has been adjusted by allocating wages and salaries to the period in which they were earned. Ratio of Net Worth to DPI Ratio 6.25 5.75 5.25 4.75 1993 1994 1995 1996 1997 1998 1999 Note. NIPA DPI has been adjusted by allocating wages and salaries to the period in which they were eamed. II-16 RETAIL SALES (Percent change from preceding period) 1998 1999 Q4 Q1 Total sales Previous estimate 2.3 Retail controll Previous estimate Durable goods Furniture and appliances Other durable goods Nondurable goods Apparel Food General merchandise Gasoline stations Other nondurable goods 1999 May Mar. Apr. 3.4 3.5 .0 .1 .4 .1 1.0 1.3 2.8 2.9 .6 .6 .7 .4 .5 1.4 1.1 1.6 3.2 3.2 3.2 .4 .5 .3 -. 2 .0 -. 4 1.4 1.1 1.6 1.3 .5 1.1 2.1 -1.1 1.7 2.8 4.8 1.5 4.3 1.5 2.7 .7 .1 -. 1 .8 2.6 .8 .9 1.9 -.4 -. 3 5.1 1.5 .3 .5 .7 .9 -. 8 -. 1 1. Total retail sales less sales at building material and supply stores and automotive dealers, except auto and home supply stores. REAL PERSONAL CONSUMPTION EXPENDITURES (Percent change from the preceding period) 1998 Q4/Q4 PCE Durables 1998 1999 Q4 Q1 - Annual rate - 1999 Feb. --- Mar. Apr. Monthly rate --- 5.3 5.0 6.8 .8 .5 -. 1 -1.1 13.2 24.5 12.9 2.7 .6 Motor vehicles 15.1 49.6 -. 8 2.1 -. 4 Other durable goods 11.8 9.9 23.5 3.1 1.2 -. 6 4.7 4.2 9.4 1.2 .5 -1.0 4.0 -4.6 4.4 2.4 6.5 2.7 3.0 9.9 6.0 17.1 6.8 1.7 -30.8 3.3 2.4 5.1 2.5 3.1 9.9 5.2 11.6 -2.2 4.3 19.5 3.7 2.9 6.8 3.4 2.1 12.3 7.0 35.0 -. 7 .2 -. 4 .2 .2 .6 .7 .1 1.2 -. 6 -6.0 .3 .5 3.5 .4 .2 .5 .4 .2 1.2 .7 3.9 .3 .5 -1.5 .6 .2 1.0 .1 .3 1.8 1.7 11.3 .2 Nondurables Services Energy Non-energy Housing Household operation Transportation Medical Recreation Personal business Brokerage services Other Note. Derived from billions of chained (1992) dollars. -1.9 II-17 According to the advance report for May, nominal spending at stores in the retail control category, which excludes automotive dealers and building material and supply stores, rose 0.5 percent. In addition, nominal growth in the retail control was revised up from 0.4 percent to 0.7 percent in April. Gains last month were spread widely across major types of retail outlets, with particularly large increases reported by stores selling furniture and appliances, "other durable goods," food, and general merchandise. BEA uses nominal sales in the retail control to construct its estimates of real PCE for goods other than motor vehicles; given the relatively small changes, overall, in the CPI for these items, the retail sales data should translate into a sizable increase in real expenditures last month. The most recent information on outlays for services is for April, when real service outlays are estimated by the BEA to have risen 0.5 percent for the second consecutive month. Particularly large gains were recorded for recreational services and brokerage fees. Real expenditures for electricity and natural gas edged lower, but weather data suggest that, for the second quarter as a whole, real spending for energy services will likely be little changed from the firstquarter level. The increases in hours worked and average hourly earnings in the May employment report suggest a solid increase in nominal wages and salaries last month, which, with prices up only modestly, should yield a sizable boost to real income. On average, the year-on-year growth in real disposable income in April and May appears to be running close to the trends seen in late 1998 and early 1999. In April, outlays grew at about the same rate as disposable income, and the personal saving rate held steady at -0.7 percent. According to its preliminary report for June, the Michigan Survey Research Center's index of consumer sentiment climbed to the second-highest reading ever. Respondents' views about expected business conditions during the next five years nearly reached the historical peak, and appraisals of current buying conditions for automobiles and major household durables remained in very favorable ranges. Housing Markets Housing demand has been robust this spring, and builders have been hard pressed to keep up with it. Starts of single-family houses zig-zigged in the past couple of months but averaged 1.33 million units (annual rate)--somewhat below the pace in the fourth and first quarters. Multifamily starts also fell off in April and May. As we have noted previously, aided by mild weather, builders did not pare construction as much as they usually do in the late fall and winter. This II-18 PERSONAL INCOME (Percent change) 1998 1997 1998 -- Q4/Q4 -- Q3 -- 1999 Q4 1999 Q1 Feb. Annual rate -- -- Mar. Monthly rate Apr. -- Total personal income 5.4 5.1 4.5 5.5 5.2 .5 .3 .5 Wages and salaries Private 7.2 7.9 6.3 6.8 5.9 6.3 6.4 7.0 6.9 6.9 .6 .6 .2 .2 .6 .6 Other labor income 2.8 3.5 2.7 2.6 3.6 .4 .5 .5 Transfer payments 3.8 3.4 2.5 1.9 6.1 .1 .6 .2 11.5 9.7 5.8 6.1 4.0 .7 -. 2 .6 Equals: Disposable personal income 4.4 4.3 4.3 5.4 5.4 .4 .4 .5 Memo: Real disposable incomel 2.9 3.5 3.2 4.3 4.3 .4 .4 -. 1 2.1 .5 .2 .0 -. 6 -. 7 -. 7 -. 7 Less: Personal tax and nontax payments Saving rate (percent) 1. Derived from billions of chained (1992) dollars. Business Conditions Consumer Confidence Index Index 1988 1990 1992 1994 1996 1998 1988 1990 1992 1994 1996 1998 II-19 Private Housing Activity (Millions of units; seasonally adjusted annual rate) 1998 1998 03 Q4 0 1r 1999 Mar.r Apr.r May P All units Starts Permits 1.62 1.60 1.64 1.62 1.70 1.71 1.77 1.72 1.75 1.65 1.58 1.57 1.68 1.59 Single-family units Starts Permits Adjusted permits1 1.27 1.18 1.28 1.27 1.19 1.28 1.35 1.25 1.34 1.39 1.27 1.37 1.39 1.24 1.34 1.25 1.21 1.29 1.41 1.23 1.33 New home sales Existing home sales .89 4.97 .86 4.98 .95 5.10 .90 5.21 .90 5.42 .98 5.24 n.a. n.a. Multifamily units Starts Permits .35 .42 .36 .43 .35 .45 .38 .45 .35 .41 .33 .36 .27 .35 Mobile homes Shipments .37 .37 .37 .38 .38 .37 n.a. Note. p Preliminary. r Revised. n.a. Not available. 1. Adjusted permits equals permit issuance plus total starts outside of permit-issuing areas, minus a correction for those starts in permit-issuing places that lack a permit. Total Private Building (Seasonally adjusted annual rate) Miios Millions ofits of units 2.5 Total 2.0 May 1.5 May igle-Family S..,,. , * . I *I'I. . . 1J** " *' , ' "-.. 1976 1978 1980 1982 1984 1986 1988 1990 I May - t .o,' .o., 1992 1994 .5' . - 1996 ! 1998 May II-20 Indicators of Housing Demand and Prices Builders' Rating of New Home Sales Diffuion ind Diffusion index 80 June 60 40 20 0 -20 -40 -60 1990 1991 1992 1993 1994 1995 1996 1997 1998 -80 1 Note. Calculated from National Association of Homebuilders' data as the proportion of respondents rating current sales as good minus the proportion rating them as poor. Seasonally adjusted by Board staff. Consumer Home-Buying Attitudes MBA Index of Purchase Applications Ditffusion index Index 4-week average moving 4-week moving average 1 350 90 80 300 June 70 250 60 200 50 150 40 30 - 100 Source. Michigan Survey, not seasonally adjusted Prices of Existing Homes Prices of New Homes Percent Percent 12 Change from year earlier .A ,pr. Average 1'IN t I I I SI It I It I itV 8 8 I , 1 ' Change from year earlier 10 Q 1 6 ,--t ,,, ,', 6 I\ Apr. 1 4 4 2 Constant quality (quanerly) I1It I II I I Repeat sales (quarterly) 0 2 -2 -4 1995 1996 1997 1998 9-6 1999 0 i ] 1995 r T i i 1996 l ' i l 1997 l ' l 1998 i F t 1999 II-21 spring, with limited availability of labor and some materials, builders evidently have been unable to boost starts by the usual seasonal increment. Data on home sales, which are available only through April, remained strong. Indeed, sales of new homes rose to an annual rate of 980,000 units in that month, the second highest level on record and well above the first-quarter pace. Existing home sales were at a 5.24 million unit pace in April, a bit above the average earlier this year. (New homes sales are the more current indicator, for they generally are reported at the contract phase rather than at closing, as is more common for the existing home series.) Last week, the contract rate for thirty-year, fixed-rate mortgages stood at 7.65 percent, more than 80 basis points above its average late last year and early this year. 9 Despite the recent rise in mortgage rates, indicators of housing demand have remained strong. Applications for mortgages to purchase homes have picked back up recently. In addition, builders' ratings of new home sales soared in June to the highest level on record. However, recent data from the Michigan survey showed that the back-up in mortgage rates has contributed to some retreat in consumers' assessments of homebuying conditions. Reflecting the pressures of demand, some acceleration may be occurring in the prices of homes, but the statistics at this point are mixed. The volatile series on average prices for new homes jumped in April relative to a year ago. In addition, the constant-quality price index for new homes--which holds constant a number of attributes and is thus a better measure of house price inflation--has accelerated in recent quarters. However, in the market for existing homes, the data that we normally look at show no pickup in price gains--despite reports of fast sales and bids above asking prices. In fact, over the twelve months ended in April, the average price of existing homes increased 5.3 percent, down about 1 percentage point from the same period a year ago. In the first quarter, the repeat sales index, which tracks sales of the same units over time, was up 4.9 percent from a year earlier. Although this is a relatively high rate of increase, it is, nonetheless, about 1 percentage point less than the recent peak in the year-over-year price gains registered in the second quarter of last year. Cost pressures appear to be mounting in this sector. The average hourly earnings of construction workers, which decelerated last year, have picked up in recent months and in May had risen 3.6 percent from a year earlier. The 9. Over the same period, adjustable-rate mortgage (ARM) rates have risen more than 35 basis points. The share of ARM mortgage originations has risen from a recent low of 8 percent in October to 14 percent in April (latest available data). II-22 Indicators of Input Costs for the Construction Sector (Change from year earlier) Average Hourly Earnings Percent Employment Cost Indexercent Percent 4.5 4.5 4.0 4.0 Mar. 1995 1996 1997 1998 1999 Lumber 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 S1.0 Percent 100 Spot price 1995 1995, 1996 197 1997 1998 1998 1.0 1999 Plywood Percent 100 Spot price 80 80 60 e S 40 40 20 20 0 0 -20 -20 , -40 1995 1996 1997 1998 1999 40 40 \ 1996 1997 1998 1999 Note. The June reading is an average of weekly data through June 18. Percent Producer price index ,-40 1995 Note. The June reading is an average of weekly data through June 18. GvDSum Products 60 All Construction Materials Percent 6 Producer price index 5 30 4 20 3 May 2 10 y 1995 1996 15 17 ,6 '' 8 1997 1998 1999 1 -10 0 -20 -1 Note. PPI Intermediate Materials and Components for Construction. II-23 employment cost index for the construction industry, which includes both wages and benefits but holds constant the mix of jobs and overtime, also has accelerated noticeably during the past few quarters. With regard to construction materials, the prices of gypsum, lumber, plywood, and insulation materials have soared recently. 10 However, the producer price index for components and materials for construction--which measures the cost of inputs for all types of construction (not just residential)--has risen only 1 percent over the twelve months ended in May. The increase in this aggregate index has been held back by lower prices for asphalt roofing materials and a variety of metals.11 Business Fixed Investment Producers' durable equipment. Real outlays on producers' durable equipment appear to have accelerated in the current quarter, with spending on computing equipment leading the way. Nominal shipments of office and computing equipment surged 6-1/2 percent in April, one of the largest monthly increases in the current expansion. Combined with significant declines in the PPI for computing equipment, this pace of nominal spending has given real outlays a leg-up on another outsized gain this quarter. The underlying trend in business demand for computing equipment is difficult to read, however, because it is impossible to identify the extent of business efforts to address the Y2K problem. The replacement of old hardware that was not Y2K-compliant has certainly added to spending over the past year. However, corporate reports seem to suggest that, on balance, this boost is now waning. Still, the ongoing patterns of technological advance, steep price declines, and the shift towards electronic commerce seem likely to continue to increase firms' desired stock of computing equipment. Furthermore, given the expansion in the stock of computers that has already occurred and their very fast depreciation rate, the level of gross investment needed merely to replace obsolete equipment is rising rapidly. Outlays for transportation equipment also appear set for a hefty gain in the current quarter. Business demand for motor vehicles, particularly for medium and heavy trucks, is remarkably strong, and the backlog of unfilled orders for 10. Shortages of drywall may be creating bottlenecks and delaying the completion of projects. However, the cost pressures on the price of single-family houses owing to the recent run up in drywall prices are limited: The typical house requires about 7,000 square feet of drywall, which even at today's inflated prices costs only about $1000. 11. Any acceleration in construction costs has not yet been evident in the Census estimate of average cost per start of single-family houses, which decelerated in 1998 and has picked up only modestly, on net, during the past few months. The data on average cost per start do not hold constant either the regional composition or the attributes of the units under construction. II-24 BUSINESS CAPITAL SPENDING INDICATORS (Percent change from preceding comparable period; based on seasonally adjusted data, in current dollars) 1998 1999 Q3 Q4 Q1 1999 Feb. Mar. Apr. 1.0 Producers' durable equipment 1.6 4.0 -1.4 -.3 2.7 Excluding aircraft and parts 1.4 1.7 -. 6 -. 4 3.2 .8 Office and computing Communications equipment All other categories 2.0 2.1 1.0 .6 5.3 1.2 -.1 5.7 -2.5 2.0 -5.2 .0 -1.0 5.5 4.4 6.6 1.7 -1.8 Shipments of complete aircraft 5.3 22.5 -21.2 -28.9 -17.8 15.6 Medium & heavy truck sales (units) 9.9 9.8 5.9 8.6 -.3 -3.4 Orders for nondefense capital goods Excluding aircraft and parts Office and computing Communications equipment All other categories 4.3 4.7 2.7 -3.0 7.7 -4.3 -1.6 .6 5.8 -4.4 6.9 3.1 -.5 11.6 2.4 -6.4 .5 -.7 -.1 1.1 .1 3.9 4.0 3.9 3.9 -1.3 .4 2.3 -2.8 .6 1.7 1.4 -.2 -.6 .1 11.8 3.1 11.0 4.1 .4 -3.3 .0 3.0 5.5 2.9 1.0 -2.3 7.8 3.7 3.9 5.3 4.4 .5 3.1 .0 -.3 .8 .1 -.2 -1.2 -3.0 -1.2 -3.8 -.7 -7.2 -2.4 -13.9 -6.9 -4.1 -5.0 7.9 9.7 34.9 33.9 9.9 -34.3 1.5 2.9 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Shipments of nondefense capital goods Nonresidential structures Construction put in place, buildings Office Other commercial Institutional Industrial Lodging and miscellaneous Rotary drilling rigs in usel -11.9 Memo (1992 Chained dollars): Business fixed investment Producers' durable equipment Office and computing Communications equipment Motor Vehicles Aircraft Other equipment 2 Nonresidential structures -.7 -1.0 50.0 12.4 -29.9 -53.2 2.8 .2 -14.7 14.6 17.8 49.2 18.3 43.9 34.8 .1 6.0 1. Percent change of number of rigs in use, seasonally adjusted. 2. Producers' durable equipment excluding office and computing, communications, motor vehicles, and aircraft and parts. n.a. Not available. II-25 Business Investment in Computing Equipment Orders and Shipments PPI for Computers Percent Percent .a -12 Twelve-month change -16 -20 V/ 1996 1997 1998 1996 1999 1997 1998 1999 Real Investment and Capital Stock for Computers Percent Four-quarter change Investment S 1989 1990 1991 Capital stock 1992 1992 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 1998 1998 -24 II-26 Recent Data on Orders and Shipments (Three-Month Moving Averages) Communications Equipment Billions of dollars 9 Orders 7 Shipments / " 5 / I-k 1996 1997 1999 1998 Other Equipment (Total Excluding Aircraft, Computers, Communications) Billions of dollars / / \ 1 26 - '. (~ ~ ~I. . .I. . . .(. . .I. .1 1996 . . ,I. . . . .I, . . 1997 .I iI I, . . I . . I I , . , , I 1998 J 1999 Unfilled Orders to Shipments Ratio for Other Equipment Excluding Engines & Turbines Ratio q r ' ~1996 I '' 1996 '' I f 'l I . p '[ . 1 . 1 III 1997 1 . I99 I99 I, . . . . . 1998 r . '1 2.7 1999 II-27 these vehicles remains very large. Shipments of aircraft to domestic carriers appear likely to post a strong rebound in the current quarter. These shipments have been bouncing around very high levels since early last year, reflecting a surge in demand in response to strong growth in air traffic and soaring airline profits. However, with order backlogs down, the level of aircraft investment appears poised to fall. Spending on equipment outside of the high-tech and transportation sectors has remained sluggish. In April, shipments of this equipment declined nearly 2 percent, and imports of capital goods were weak. However, forward-looking indicators are more positive. Excluding gas turbines (for which orders have surged but lead times are long), orders for these items have been strong of late, and the backlog of unfilled orders has stabilized after having fallen considerably in 1998. Nonresidential structures. After remaining flat in 1998, we estimate that real nonresidential construction rose at an annual rate of 4-1/2 percent in the first quarter, reflecting, in part, sharp increases in the construction of office buildings, other commercial structures, and lodging facilities.12 In April, though, construction put in place declined in all of the major building categories. Moreover, since around the turn of the year, contracts for future construction generally have either been flat or have trended lower.13 According to the National Real Estate Index, prices for office buildings rose 13 percent in the first quarter from a year earlier--similar to the average pace during the previous year or so. Vacancy rates ticked up in the first quarter but remained very low relative to the rates in the early 1990s. Together, these data indicate that the gains in office construction during the past few years have not led to supply imbalances to date, and given the decline in contracts for office buildings, it seems unlikely that projects in the pipeline will lead to excess capacity. Elsewhere, the prices for retail stores have decelerated sharply since the beginning of last year. Retail outlets are the largest component of the "other commercial" category in the construction put in place data; building in this sector has been moving sideways over the past couple of 12. We anticipate an upward revision to first-quarter growth in nonresidential construction from 3 percent at an annual rate to 4-1/2 percent at an annual rate. 13. With the release of the May data, contracts were revised back to early 1998. The level of nonresidential contracts in the first quarter of 1999 was revised up 7 percent. Although the trend through the first quarter is still flat to down, it is not as weak as it appeared before the revision. However, contracts are now reported to have declined more steeply in April--leaving the level only one percent above the previous estimate. These data are still subject to further revision. II-28 Nonresidential Construction and Contracts (Six-month moving average) Total Private Building Dec. 1982 = 100, ratio scale Office Other Commercial Institutional Industrial Note. Individual sectors include both public and private building. II-29 Indicators of Market Conditions for Nonresidential Structures and Apartments Office Vacancy Rate Percent 22 S. Suburban Market ....... .... 20 National Market 18 16 - Downtown Market 14 12 1990 1992 1992 1991 1993 1993 1994 1994 1995 1995 1996 1996 1997 1997 10 Q1 '.. 1998 1998 S8 1999 1999 Source. CB Richard Ellis Property Values of Office Buildings Percent Change from year earlier 20 Property Values of Retail Stores Percent 10 Change from year earlier 15 Q1 5 10 5 0 0 -5 -5 -10 -15 1990 1992 1994 1996 1998 Source. National Real Estate Index 1990 1992 1994 -- 1996 10 Source. National Real Estate Index Property Values of Warehouses Percent 10 Change from year earlier Property Values of Apartments Percent 15 Change from year earlier Q1 5 10 5 0 0 -5 - Source. National Real Estate Index -10 -5 _in 1990 1992 1994 1996 Source. National Real Estate Index 1998 II-30 CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars; annual rate except as noted; based on seasonally adjusted Census book value) 1998 1999 1999 Category Manufacturing and trade Less wholesale and retail motor vehicles Manufacturing Less aircraft Merchant wholesalers Less motor vehicles Retail trade Automotive dealers Less automotive dealers Mar. Feb. Apr. Q3 Q4 Q1 41.4 26.2 33.4 42.8 63.5 26.3 33.8 6.3 9.6 27.3 9.6 9.9 7.4 1.3 -7.0 -3.9 -12.9 -3.0 -8.0 -9.4 -7.4. 3.1 -7.4 .5 26.4 24.5 11.3 6.3 5.9 4.7 22.3 21.5 8.0 1.0 6.3 5.7 7.6 5.7 1.8 21.9 14.9 6.9 40.4 22.6 17.8 28.5 14.7 13.8 63.0 46.9 16.0 27.3 15.8 11.5 SELECTED INVENTORY-SALES RATIOS IN MANUFACTURING AND TRADE (Months' supply, based on seasonally adjusted Census book value) Cyclical reference points Category 1990-91 high Manufacturing and trade Less wholesale and retail motor vehicles 1991-98 low Range over preceding 12 months High Low April 1999 1.58 1.37 1.39 1.35 1.36 1.55 1.34 1.37 1.32 1.33 Manufacturing Primary metals Steel Nonelectrical machinery Electrical machinery Transportation equipment Motor vehicles Aircraft Nondefense capital goods Textiles Paper Chemicals Petroleum Home goods & apparel 1.75 2.08 2.56 2.48 2.08 2.93 .97 5.84 3.09 1.71 1.32 1.44 .94 1.96 1.36 1.46 1.59 1.61 1.21 1.51 .53 4.05 2.04 1.38 1.06 1.25 .80 1.59 1.40 1.74 2.25 1.67 1.39 1.85 .64 4.97 2.21 1.59 1.23 1.45 .99 1.75 1.33 1.57 1.86 1.61 1.21 1.49 .52 4.05 2.04 1.48 1.17 1.37 .85 1.59 1.33 1.67 2.11 1.61 1.21 1.52 .53 4.04 2.01 1.54 1.19 1.38 .83 1.53 Merchant wholesalers Less motor vehicles 1.36 1.31 1.24 1.21 1.33 1.32 1.29 1.27 1.30 1.29 Durable goods Nondurable goods 1.83 .95 1.54 .90 1.66 .99 1.59 .94 1.59 .97 1.61 1.48 1.44 1.38 1.48 1.42 1.42 1.36 1.44 1.36 2.22 2.42 2.53 2.42 1.56 1.98 2.27 2.04 1.66 2.04 2.54 2.09 1.56 1.91 2.35 1.98 1.70 1.93 2.31 1.99 Retail trade Less automotive dealers Automotive dealers General merchandise Apparel GAF II-31 years, and the contracts data do not suggest any major change in this trend in the coming months. Business Inventories At a $10 billion annual rate in book value terms, the April pace of stockbuilding in manufacturing and trade excluding motor vehicles was little changed from the first-quarter pace. Given these subdued rates of inventory investment and the strong gains in business sales, stocks, in the aggregate, remain relatively lean, and only isolated imbalances are evident in the sectoral detail. The book value of manufacturers' inventories fell in April at an annual rate of about $7 billion, following a decline of the same size in March. Indeed, stocks have fallen in each of the past six months at an average annual rate of $16 billion. This drop largely has been due to shrinking stocks at aircraft firms, a development that seems to be related to the falloff in production at Boeing and is reflected in a large decline in work-in-process inventories in the transportation sector. Excluding aircraft, inventories, on balance, have declined slightly this year, and inventory-shipments ratios have eased. Most notably, inventoryshipments ratios have been pared significantly in sectors such as metals and chemicals, where stocks ran up substantially last year as a result of weak demand. Wholesale inventories (excluding motor vehicles) accumulated at an annual rate of roughly $6 billion in April. A $10 billion increase in inventories at drug wholesalers more than accounted for this rise. Sales at both wholesale distributors and retail outlets have been very strong this year, and before April's stockbuilding, the wholesale inventory-sales ratio for drugs had slipped to a very low level. For the nonauto wholesale sector as a whole, the inventory-sales ratio ticked up in April, but it was still well below the high levels recorded over the second half of last year. On balance, wholesale stocks seem to be at fairly comfortable levels. Inventory-sales ratios for metals and minerals and miscellaneous durables (a category that includes wholesalers of steel scrap) have backed off substantially since last autumn, and the ratio for professional and commercial equipment (a category that includes computers) has dropped sharply in recent months. However, inventory-sales ratios remain stubbornly high at wholesalers of machinery and chemicals. Retail stocks remained very lean in April. Non-auto retail inventories rose moderately, and the inventory-sales ratio remained at 1.36 months for the third month in a row. This is the lowest inventory-sales ratio recorded since 1980. Most notably, inventories of apparel outlets increased only marginally in April, and the inventory-sales ratio for these stores, which had run up last year, declined to 2.31 months, down from 2.54 months in September of last year. II-32 Inventory-Sales Ratios, by Major Sector (Book value) Manufacturing Ratio VVV' 1 I 1 I 1989 1987 I I 1991 I 1993 I I 1995 I I 1997 Wholesale Apr. I 1999 Ratio Total excluding motor vehicles Total excluding motor vehicles, chemicals, metals, and industrial machinery I 1987 I I I I 1989 I IIIII 1993 1995 1997 Retail Excluding Autos 1987 1989 1999 Ratio 1991 1993 1995 1997 1999 II-33 Federal Government The federal budget surplus over the twelve months ended in May was $94 billion, a $34 billion decline versus the corresponding year-earlier period. Adjusting outlays for payment timing shifts and excluding deposit insurance, major asset sales, and spectrum auction proceeds, the year's improvement was about $55 billion. Over April and May alone, the adjusted surplus was about $10 billion higher than in the same period last year. Total adjusted outlays are about the same as during the year-earlier period as declines in spending on net interest, income security, Medicare, and defense offset moderate increases elsewhere. This spring's tax season did not provide as great a revenue surprise as experienced in 1997 and 1998. Underlying personal tax liabilities continue to grow at a steady pace. During April and May, nonwithheld income and selfemployed taxes (which include both final payments on 1998 liabilities and estimated taxes for the first quarter of 1999) were about 11 percent higher than last year. Individual income tax refunds also rose sharply, largely reflecting the child tax credit that became effective in 1998. Corporate tax receipts were down 16 percent, likely reflecting, in part, weak profits in 1998. On May 21, the President signed the 1999 Emergency Supplemental Appropriations Act into law. It provides $15 billion in emergency appropriations for fiscal years 1999 through 2005 and is estimated to increase outlays by $3.7 billion in fiscal year 1999 and $7.4 billion in fiscal year 2000. About 80 percent of the spending in these two years is allocated to defense. The remainder is allocated to disaster aid and farm relief. Because these outlays were deemed "emergency" spending, they are not counted against the discretionary spending caps. State and Local Governments Real spending by state and local governments appears to be holding roughly steady in the second quarter after having risen about 8 percent at an annual rate in the first quarter. The surge in spending last quarter was driven mainly by construction outlays as unusually favorable weather allowed highway work to proceed without the typical seasonal slowdown. Construction fell sharply in April, though it remained well above the pace of late 1998. Employment growth also moderated in the spring after exceptionally large gains in the first quarter. So far this year, job growth has averaged 30,000 per month, slightly above the average for 1998 as a whole. On balance, finances in most states appear to be finishing their fiscal years in good shape. Survey data published by the Center for the Study of the States II-34 FEDERAL GOVERNMENT OUTLAYS AND RECEIPTS (Unified basis; billions of dollars) April-May 12 months ending in May. 1998 1999 Percent change 1998 1999 Outlays Deposit insurance Spectrum auction Sale of major assets Other 270.5 -0.8 -0.1 -3.2 274.5 275.2 -1.0 -0.2 0.0 276.5 1.8 35.9 221.4 -100.0 0.7 1622.2 -4.5 -6.8 -3.2 1636.7 1685.1 -5.6 Receipts 356.3 364.7 1681.9 1779.1 5.8 85.8 89.5 59.7 94.0 57.4 Surplus -2.8 0.0 1693.4 Percent change 3.9 23.3 -59.0 -100.0 3.5 Outlays excluding deposit insurance, spectrum auction, and sale of major assets are adjusted for payment timing shifts 1 Outlays National defense Net interest Social security Medicare Medicaid Other health Income security Other 277.7 45.3 41.8 62.8 32.4 16.8 4.9 39.5 34.2 276.5 44.7 40.2 Receipts Individual income and payroll taxes Withheld + FICA Nonwithheld + SECA Refunds (-) Corporate Gross Refunds (-) Other 356.3 364.7 286.6 300.6 197.2 Surplus 186.0 147.7 47.1 30.6 34.6 4.0 39.1 78.6 -0.4 -1.4 -3.9 2.8 -1.8 6.1 4.9 -5.5 2.5 1652.4 270.9 245.1 374.5 196.8 99.0 28.6 230.7 206.8 1694.6 272.8 234.5 387.2 190.1 104.9 31.6 235.9 237.7 0.7 -4.3 3.4 -3.4 5.9 10.6 2.3 14.9 2.4 1681.9 1779.1 5.8 1324.2 1117.7 305.1 98.6 189.2 38.5 4.9 6.0 11.2 29.1 -16.2 -6.7 66.4 -1.5 24.2 168.5 1420.6 1207.3 334.8 121.5 180.2 211.5 31.3 178.3 7.3 8.0 9.7 23.2 -4.8 -0.9 29.3 5.8 88.2 12.2 29.5 84.4 186.1 64.6 31.8 17.8 5.2 37.3 35.1 164.2 60.9 25.6 32.3 6.6 213.5 2.6 Note. Components may not sum to totals because of rounding. 1. A shift in payment timing occurs when the first of the month falls on a weekend or holiday, or when the first three days of a month are nonworking days. Outlays for defense, social security, Medicare, income security, and "other" have been adjusted to account for these shifts. n.a.--Not applicable II-35 State and Local Sector Real Consumption and Investment Quarterly percent change at an annual rate 1999:Q1 "'''' ''''' "'''' ""' """ ''''' ""' i.....F1. 1997 Note. Consumption and investment growth in 1999:01 is a staff estimate. - 1999 Billions of chain weighted (1992) dollars, annual rate Real Construction e 1998 Monthly level Quarterly level 1997 1997 1998 1998 1999 1999 II-36 CPI AND PPI INFLATION RATES (Percent change) From twelve months earlier May 1998 May 1999 1998 1999 Q4 Q1 1999 Apr. -Annual rate- May -Monthly rate- All items (100.0) 1 Food (15.4) Energy (6.3) CPI less food and energy (78.3) Commodities (24.0) New vehicles (5.0) Used cars and trucks (1.9) Apparel (4.8) Tobacco (1.2) Other Commodities (11.1) Services (54.3) Shelter (29.9) Medical care (4.5) Other Services (19.9) 2.4 -5.6 2.2 2.1 1.7 2.0 2.9 -6.2 2.3 2.4 -2.0 1.6 .2 .6 1.0 .0 -. 9 -. 3 -2.5 .0 10.7 .2 -. 3 -. 8 -. 9 5.2 -1.3 34.3 -11.5 -6.8 81.5 -. 5 -. 4 -. 6 3.1 2.7 2.8 2.4 3.4 3.1 2.8 3.0 3.3 2.3 3.8 2.8 1.4 1.7 3.7 3.1 1.4 1.6 1.0 -6.1 2.3 -2.7 .8 2.9 2.2 1.7 -. 6 4.3 1.0 28.0 -. 7 .1 6.1 .4 .4 -1.3 .1 .6 -.1 .1 .6 1.5 3.6 .1 -. 1 .9 -. 2 -1.4 -. 0 PPI 2 Finished goods (100.0) -1.2 -7.2 Finished consumer foods (23.3) Finished energy (11.9) Finished goods less food and energy (64.8) Consumer goods (39.6) Capital equipment (25.2) Intermediate materials (100.0) 3 -1.5 Intermediate materials less food and energy (83.2) Crude materials (100.0) 4 Crude food materials (42.2) Crude energy (31.9) Crude materials less food and energy (25.9) 1. 2. 3. 4. Relative Relative Relative Relative importance importance importance importance weight weight weight weight for for for for .0 .0 .0 .2 .6 .2 -1.1 -3.4 -2.3 -1.2 -2.9 -1.7 -9.0 -4.4 -5.8 -12.5 1.3 5.5 -9.5 -10.0 -6.7 -6.1 2.3 -10.7 1.5 -1.8 -24.0 -1.7 -29.7 -5.2 -2.5 8.5 -1.1 2.2 11.9 2.3 -. 2 CPI, December 1998. PPI, December 1998. intermediate materials, December 1998. crude materials, December 1998. II-37 indicate relatively strong revenue gains through the third quarter of fiscal 1999 (in almost all cases the first quarter of calendar 1999). In addition, almost all of the states are expected to have their fiscal year 2000 budgets in place on time this year. Prices and Wages Prices. Since the previous Greenbook, we have received CPI data for both April and May. The CPI rose a hefty 0.7 percent in April but was unchanged in May. The large April increase owed, in part, to a 6 percent rise in energy prices. But the CPI excluding food and energy also played a role, posting a 0.4 percent monthly increase. In May, the core CPI excluding food and energy edged up just 0.1 percent while energy prices fell. Balancing the two reports, the underlying trend in core inflation appears little changed, with only a hint of incipient acceleration in prices. The large increase in energy prices in April was the result of both the run-up in crude oil prices and some refinery fires in California, which pushed up gasoline prices there. The May decline in energy prices was, in large part, a result of a partial easing of the gasoline supply problems in California; nationally, gasoline prices fell 2.6 percent last month, and survey evidence suggests that the decline continued in June. By contrast, heating fuel prices, which were not affected by the California refinery problems, moved up further in May, reflecting continued pass-through of the increase in crude oil prices earlier this year. Consumer food prices rose 0.1 percent in April and 0.4 percent in May. Fruit and vegetable prices, which typically account for much of the short-run volatility in food prices, posted large increases in both months. Excluding fruits and vegetables, food prices changed little over the past two months. Over the past twelve months, the CPI for food has increased 2.1 percent. The CPI for commodities other than food and energy rose 0.6 percent in April but edged down 0.1 percent in May. These swings in the core CPI for commodities mainly reflected price movements in the volatile tobacco and apparel categories. Since their peak in January, tobacco prices have come down about 3 percent (not at an annual rate). But they were still up 28 percent over the past twelve months, contributing roughly 1/4 percentage point to core inflation over that period. So far this year, apparel prices have fallen 3/4 percent at an annual rate, in line with their pace of decline last year. Among other consumer goods, prices of new motor vehicles were about flat in April and May, with new truck prices rising a bit and new car prices falling on net. Prices of used cars and trucks posted hefty increases in April and May after having decreased in each of the preceding four months. II-38 Measures of Core Consumer Price Inflation (Twelve-month change except as noted) CPI Excluding Food and Energy Percent 8 \I 3-month change ' " 2 Y 1 - 1990 1992 1993 0 1994 CPI Services and Commodities Percent I- V. . " CPI services ex. energy C May CPI commodities ex. food and energy 1 May 1990 1991 1992 1993 1994 1995 1998 1997 1996 1999 CPI and PCE Percent 8 1 7 CPI ex. food and energy May PCE deflator ex. food and energy - -A - - ,, 1990 1991 1992 1993 1994 1995 1996 1997 1998 1991Apr. ,,1990 1999 II-39 The CPI for services other than energy rose 0.4 percent in April and 0.2 percent in May. The April rise was boosted by large increases in airfares and hotel room rates; prices in both of these areas fell in May. For the period ahead, press reports on airfares have sent conflicting signals in recent weeks: At the start of June, major airlines reportedly implemented an across-theboard 4 percent increase in "leisure" airfares, but the following week reports indicated that several airlines had offered temporary steep discounts on selected flights with excess capacity. The BLS recently published their new "current-methods" CPI, which attempts to approximate how the CPI would have behaved if current methods for constructing the index had been used over history. This new series is more useful than the published CPI for making comparisons over time because it is less affected by technical changes. Over the twelve months ended in May 1999, the current-methods CPI excluding food and energy increased 1.9 percent, compared with an increase of 2.1 percent over the preceding twelve-month period. 14 This index does not take into account the effects of the change in baseyear weights introduced in January 1998, which also affects comparability of inflation rates. If the index also is adjusted for the new weights, its increase over the twelve months ended in May 1998 would be 2.0 percent. The PPI for capital goods increased 0.2 percent in May, the first increase in six months. Producer prices of motor vehicles rose in May, in part because manufacturers had added incentives earlier in the year than usual. Elsewhere among capital goods, computer prices fell 2.2 percent in May and are down 24 percent over the past twelve months. Prices of non-energy materials at earlier stages of processing appear to have stopped falling this year, and some measures have edged up slightly: The PPI for intermediate materials has risen in each of the past three months after fifteen months with no increases in this series. In part, the pickup in core intermediate materials prices likely reflects the indirect effects of higher energy prices. However, as mentioned earlier, prices of a variety of materials used in home construction, notably plywood, softwood lumber, and gypsum products, also have risen sharply in recent months as strong demand appears to be leading to shortages. The picture for the PPI for crude materials other than food and energy is more mixed, with an increase in May but declines in March and April. On balance, the PPI for core crude materials has moved up 14. The published CPI excluding food and energy was up 2 percent over the twelve months ended in May 1999 and 2.2 percent over the preceding twelve-month period. II-40 SPOT PRICES OF SELECTED COMMODITIES ---------------Percent change 1 - - - - - - - - - - - - - Current price ($) - Dec. 29 to May 112 May 112 to June 22 Memo: Year earlier to date 1997 1998 .670 94.000 .609 -21.5 19.3 -1.9 -14.8 -47.5 -17.6 10.1 13.1 6.9 -11.8 14.4 1.3 -16.3 -23.4 2.1 Precious metals Gold (oz.) Silver (oz.) 258.550 5.080 -20.7 27.2 -1.1 -18.0 -2.6 7.4 -7.5 -5.8 -12.2 -5.0 Forest products 3 Lumber (m. bdft.) Plywood (m. sqft.) 394.000 495.000 -26.6 -1.7 2.7 3.3 15.0 22.6 14.2 30.3 40.7 59.7 Petroleum Crude oil (barrel) Gasoline (gal.) Fuel oil (gal.) 15.560 .480 .429 -27.4 -23.5 -29.6 -36.1 -33.5 -33.6 49.0 51.3 30.2 1.1 -4.8 .4 26.4 7.6 8.3 Livestock Steers (cwt.) Hogs (cwt.) Broilers (lb.) 67.000 36.500 .602 4.2 -30.8 -24.4 -13.2 -55.7 15.0 8.9 154.8 5.8 4.3 -7.6 .3 6.3 -12.0 -9.8 U.S. farm crops Corn (bu.) Wheat (bu.) Soybeans (bu.) Cotton (lb.) 1.975 2.728 4.470 .533 -3.8 -24.1 -3.2 -10.9 -19.4 -5.7 -21.1 -10.2 -1.0 -15.4 -14.0 -.8 -3.2 -2.8 -2.5 -6.4 -17.2 -13.7 -31.9 -29.1 Other foodstuffs Coffee (lb.) 1.075 26.1 -31.4 -6.4 -1.8 -11.2 91.300 78.100 191.550 256.580 -7.3 -4.7 -4.9 -7.6 -9.8 -18.5 -17.2 -14.1 1.6 9.3 .4 -2.3 1.6 -1.3 -. 1 -.3 -4.4 -8.0 -11.5 -13.6 Metals Copper (lb.) Steel scrap (ton) Aluminum, London (lb.) Memo: JOC Industrials JOC Metals CRB Futures CRB Spot 1. Changes, if not specified, are from the last week of the preceding year to the last week of the period indicated. 2. Week of the May Greenbook. 3. Reflects prices on the Friday before the date indicated. II-41 Commodity Price Measures Journal of Commerce Index Ratio scale, index, 1990=100 CRB Spot Industrials Ratio scale, index, 1967=100 Apr. May June 1999 CRB Futures Ratio scale, index, 1967=100 Note. Weekly data, Tuesdays. Vertical lines on small panels indicate week of last Greenbook. The Journal of Commerce index is based almost entirely on industrial commodities, with a small weight given to energy commodities, and the CRB spot price index consists entirely of industrial commodities, excluding energy. The CRB futures index gives about a 60 percent weight to food commodities and splits the remaining weight roughly equally among energy commodities, industrial commodities, and precious metals. Copyright for Journal of Commerce data is held by CIBCR, 1994. II-42 BROAD MEASURES OF INFLATION (Four-quarter percent change) 1996 Q1 1997 Q1 1998 Q1 1999 Q1 Product prices GDP chain price index 2.0 1.9 1.2 1.0 Nonfarm business chain-type price index1 1.3 1.9 1.1 0.5 Gross domestic purchases chain-type price index Less food and energy 2.0 2.0 1.8 1.5 0.7 1.1 0.8 0.9 PCE chain-type price index Less food and energy 2.0 2.0 2.2 1.8 0.9 1.3 1.0 1.2 CPI Less food and energy 2.8 2.9 2.9 2.5 1.5 2.3 1.7 2.2 Median CPI Trimmed mean CPI 3.4 2.8 2.8 2.7 2.9 2.0 2.8 1.7 Expenditure prices 1. Excluding housing. SURVEYS OF (CPI) INFLATION EXPECTATIONS (Percent) University of Michigan Professional 1 year Actual inflation i 5 to 10 years Mean 2 Median 3 Mean 4 Median 5 forecasters (10-year) 6 1997-Q1 Q2 Q3 Q4 2.9 2.3 2.2 1.9 3.8 3.6 3.4 3.3 2.9 2.9 2.7 2.8 3.8 3.8 3.6 3.8 3.1 3.0 3.0 3.1 3.0 2.9 3.0 2.7 1998-Q1 Q2 Q3 Q4 1.5 1.6 1.6 1.5 2.8 3.0 2.8 2.7 2.4 2.6 2.4 2.4 3.3 3.3 3.2 3.2 2.9 2.8 2.8 2.8 2.6 2.5 2.5 2.5 1999-Q1 Q2 1.7 3.0 3.1 2.6 2.7 3.3 3.3 2.8 2.8 2.3 2.5 1999-Jan. Feb. Mar. 1.7 1.6 1.7 3.0 2.8 3.1 2.7 2.5 2.7 3.5 3.3 3.0 3.0 2.8 2.7 2.3 Apr. May June 2.3 2.1 3.0 3.2 3.2 2.7 2.8 2.6 3.0 3.5 3.4 2.8 2.9 2.8 2.5 1. CPI; percent change from the same period in the preceding year. 2. Average increase for responses to the question: By about what percent do you expect prices (CPI) to go up, on the average, during the next 12 months? 3. Median increase for responses to the question above. 4. Average increase for responses to the question: By about what percent per year do you expect prices (CPI) to go up, on the average, during the next 5 to 10 years? 5. Median increase for responses to question above. 6. Compiled by the Federal Reserve Bank of Philadelphia. II-43 about 1-1/2 percent so for this year after having fallen 16 percent over the twelve months of 1998. Since PPI prices were collected in mid-May, commodity price movements have been mixed. Steel scrap prices have risen sharply and aluminum prices have moved higher, but prices for copper dropped sharply. Prices of lumber and plywood have continued to skyrocket. For the second quarter, median household inflation expectations for the year ahead averaged 2.7 percent according to the Michigan survey, about the same as in the first quarter but up from the 2.4 percent average of the second half of 1998. Longer-term median inflation expectations from the Michigan survey (for five to ten years ahead) remained at 2.8 percent in the second quarter, the same as in the preceding four quarters. Wages. Average hourly earnings increased 0.4 percent in May after an increase of 0.2 percent in April. Revised data pushed up the twelve-month change as of April by 0.3 percentage point, to 3.5 percent.15 Over the twelve months ending in May, average hourly earnings have increased 3.6 percent, compared with 4.3 percent over the preceding twelve-month period. Low price inflation in 1998 and early 1999 probably helped hold down the latest wage change figures. In addition, the May 1998 twelve-month change included a minimum wage hike, which may have boosted growth in hourly earnings by as much as 1/4 percentage point over that period. 15. In addition to the usual update of seasonal factors in the BLS's annual revision to the payroll data, the new average hourly earnings figures also reflect the correction of mistakes in the previously published March and April data for wholesale and retail trade. II-44 AVERAGE HOURLY EARNINGS (Percentage change; based on seasonally adjusted data) Twelve-month percent change May 1997 May 1998 Percent change to May. 1999 May 1999 Nov. 1998 1999 Feb. 1999 Apr. - - - - - - - -Annual rate- - - - - - - Total private nonfarm May -Monthly rate- 3.9 4.3 3.6 3.9 4.0 .2 .4 Manufacturing 2.9 2.9 2.7 3.9 5.1 .6 .4 Construction Transportation and public utilities Finance, insurance, and real estate 3.7 3.5 3.6 4.1 6.6 .3 .8 2.8 3.0 2.7 3.5 4.5 .5 .5 3.7 5.9 4.6 4.5 4.2 .5 .4 Retail trade 4.4 5.1 4.0 4.6 4.5 .6 .2 Wholesale trade 4.5 4.9 3.3 3.0 3.4 .1 .3 Services 4.2 4.8 4.2 4.3 3.4 .1 .4 Average Hourly Earnings (Three-month moving average of twelve-month change) Percent Percent 8 7 Total May Manufacturing * ' * 1990 ' * 1992 ' * ' * 1994 ' * ' * 1996 ' * ' * * *' * 1998 1990 1992 1994 1996 1998 Percent Percent Trade 1994 1996 1998 1990 1992 1994 1996 1998 DOMESTIC FINANCIAL DEVELOPMENTS III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 1998 Change to June 22 from selected dates (percentage points) 1999 Instrument Dec. 31 FOMC* May 18 Oct. 15 Dec. 31 FOMC* May 18 Short-term Federal funds FOMC intended rate Realized rate 1 4.75 4.58 4.75 4.85 -.25 -.69 .00 .13 .00 -. 14 Treasury bills 2 3-month 6-month 1-year 4.37 4.39 4.33 4.55 4.62 4.64 Commercial paper I-month 3-month 4.90 4.84 4.80 4.83 -.30 -.12 .07 .17 .17 .18 Large negotiable CDs 2 1-month 3-month 6-month 5.01 4.97 4.97 4.86 4.94 5.05 Eurodollar deposits 3 1-month 3-month 4.94 4.94 4.75 4.88 -.40 -.22 .00 .12 .19 .18 Bank prime rate 7.75 7.75 -.50 .00 .00 Intermediate- and long-term U.S. Treasury (constant maturity) 2-year 10-year 30-year 4.54 4.65 5.09 5.31 5.66 5.91 5.65 5.94 6.07 1.52 1.36 1.05 1.11 1.29 .98 .34 .28 .16 U.S. Treasury 10-year indexed note 3.88 3.82 4.00 .31 .12 .18 Municipal revenue (Bond Buyer) 4 5.26 5.34 5.52 .31 .26 .18 Oct. 15 Corporate bonds, Moody's seasoned Baa High-yield corporate 5 7.23 7.75 8.06 .80 .83 .31 10.52 10.42 10.68 -.61 .16 .26 7.10 5.71 7.65 5.94 1.16 .58 .88 .36 .55 .23 Home mortgages (FHLMC survey rate) 6 30-year fixed 1-year adjustable Record high 1998 Change to June 22 from selected dates (percent) 1999 Level Date Dec. 31 FOMC* May 18 June 22 11,107.19 1,367.56 2,652.05 491.41 12,549.05 5-13-99 5-13-99 4-26-99 4-21-98 5-13-99 9,181.43 1,229.23 2,192.69 421.96 11,317.59 10,853.47 1,339.49 2,561.84 441.35 12,293.78 10,721.63 1,335.88 2,580.26 447.33 12,238.98 Stock exchange index Dow-Jones Industrial S&P 500 Composite Nasdaq (OTC) Russell 2000 Wilshire 5000 June 22 1. Average for two-week reserve maintenance period ending on or before date shown. Most recent observation is average for current maintenance period to date. 2. Secondary market. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time. 4. Most recent Thursday quote. 5. Merrill Lynch Master II high-yield bond index composite. 6. For week ending Friday previous to date shown. * Data are as of the close on May 17, 1999. Record high -3.47 -2.32 -2.71 -8.97 -2.47 Dec. 31 FOMC* May 18 16.78 8.68 17.68 6.01 8.14 -1.21 -.27 .72 1.35 -.45 Selected Interest Rates Percent Selected Short-Term Interest Rates Percent Federal Funds FOMC May 18 Daily Statement Week Averages -7.0 - 6.0 S5.0 -4 n, Apr. 30 Jun. 22 Note. Vertical dashed lines indicate end of reserve period. Percent 3-Month Treasury Bills 5.5 S FOMC May 18 Daily ... L..L 3.5 1998 , Apr. 30 1999 Percent Selected Long-Term Interest Rates SWeekly Friday r Weekly May 18 - ** ****.... ......... -. Corporate 30-Yr. Treasury' Treasury bonds 30-year constant maturity Municipal bonds'"' Percent -9 FOMC 1 Corporate bonds Moody's Baa . ".."".. Jun. 22 Municipal ^" Bond Buyer Revenue (Thursday) . .. . .. .. . . . -- I.-I' . . 1998 - . 4 .U 1999 I I I I I Apr. 30 I i I I I I i I _ I I Jun. 18 'Daily freauency. Percent Selected Mortgage Rates Percent 9.0 Weekly Friday S8.0 7.0 ARM -- -- .- - - - - 6.0 - 5.0 , I 1998 I I I I I I I I I I I 4 .0 1999 Apr. 30 Jun. 18 Domestic Financial Developments Overview Market reaction to the announcement that the FOMC had adopted a tightening bias at its May meeting was muted, but subsequent evidence of continued economic strength and official comments heightened concerns that a sequence of hikes in the federal funds rate might be close at hand. By mid-June, just before the release of the consumer price index for May, the thirty-year Treasury coupon yield was 6.11 percent, up 20 basis points from the May FOMC meeting, and coupon yields at shorter maturities had risen more than 30 basis points. Market participants found comfort in the subdued price report and in Chairman Greenspan's congressional testimony the next day, and Treasury yields fell back considerably. However, the rally fizzled after a couple of days, and long rates have returned to their recent highs. Futures rates indicate that markets have priced in a 25 basis point increase in the funds rate at the June meeting and are putting some weight on another 25 basis point boost by late summer. Measures of market liquidity have deteriorated a touch over the intermeeting period. On-the-run/off-the-run spreads on Treasury securities have edged up, as have bid-ask spreads for off-the-run securities with less than five years to maturity. However, credit risk spreads have registered small mixed changes: Spreads of investment-grade corporate bond rates over Treasuries have risen a little, while spreads on junk bonds are down slightly. Equity prices of many firms have swung widely over the intermeeting period, partly in response to the movements in bond yields. But, overall, stocks seem to have fared better than bonds, apparently reflecting generally favorable earnings expectations. The S&P 500 and Nasdaq price indexes are little changed, on net, from the May FOMC meeting, while the DJIA is down about 1 percent. Business and household borrowing appears to have slowed somewhat in the second quarter from the very brisk first-quarter pace. Gross corporate bond issuance was heavy in April and May, but dropped off when interest rates moved up in late May. When interest rates dipped in mid-June, issuers returned to the market. Bank lending to businesses has been weak since the start of the year, but there are signs of a stirring in June. In the household sector, the growth of consumer credit slowed to a 3-1/2 percent annual pace in April, and the growth of home mortgage debt for the second quarter as a whole seems likely to edge off its double-digit pace of the preceding two quarters. Meanwhile, municipal bond issuance has continued to be moderate, and the Treasury has paid down a sizable amount of debt this quarter. Growth of the broad monetary aggregates slowed sharply in May, mainly because of an unwinding of the tax-related run-up in April. So far this year, M2 III-2 Selected Short-Term Futures Rates Federal Funds Rates -...... June Percent 6/22/1999 Day before FOMC meeting, 5/17 July Aug. Eurodollar Rates (Three-Month) S Percent 6/22/1999 ** * * Day before FOMC meeting, 5/17 Sept. Oct. Change Since Day Before FOMC Meeting, 5/17 Basis points J-99 S-99 D-99 M-00 J-00 Change Since Day before FOMC Meeting, 5/17 Basis points S40 30 20 10 June July Aug. Sept. Oct. J-99 S-99 D-99 M-00 J-00 III-3 Spreads on Corporate Securities AA Corporate Bond Yield Less 10-Year Treasury Basis points [Month-end through May 1999 Basis points 140 1997 FOMC May 18 Dec. 1998 Mar. June Note. + indicates the latest observation (June 22). Source. Merrill Lynch. BBB Corporate Bond Yield Less 10-Year Treasury Basis points Basis points FOMC May 18 1997 1998 Dec. Mar. June Note. + indicates the latest observation (June 22). Source. Merrill Lynch. High-Yield Bond Yield Less 7-Year Treasury Basis points Basis points [Month-end through May 1999 FOMC I May 18 + L . I . I I 1997 1 . I I I . I 1998 Note. + indicates the latest daily observation (June 22). Source. Merrill Lynch Master II. I I I I Sept. Dec. Mar. June III-4 GROSS ISSUANCE OF SECURITIES BY U.S. CORPORATIONS (Billions of dollars; monthly rates, not seasonally adjusted) 1998 Apr. May 107.7 9.0 98.6 83.7 9.0 74.7 107.3 15.5 91.7 6.5 3.7 2.8 7.0 2.7 4.3 7.5 1.7 5.8 10.2 3.9 6.4 25.7 23.9 28.0 30.9 29.2 8.4 8.2 1.5 6.7 1.9 14.0 10.3 1.8 8.5 1.4 16.5 6.8 .6 6.2 .6 15.7 9.2 1.3 7.9 3.1 19.4 6.8 1.1 5.7 4.7 13.8 13.1 1.8 11.4 2.2 4.8 49.1 4.4 57.7 2.2 55.2 2.0 70.6 1.5 43.8 5.3 62.5 1.1 2.3 -3.3 5.4 2.0 5.8 6.1 7.4 8.3 1.2 4.5 -2.5 Type of security 1997 1998 Q4 All U.S. corporations Stocks 1 Bonds 77.4 9.8 67.6 94.0 10.6 83.4 87.8 8.7 79.0 5.0 1.8 3.2 6.2 2.2 4.0 18.6 Nonfinancial corporations Stocks 1 Initial public offerings Seasoned offerings Bonds 2 By rating, sold in U.S. Investment grade Speculative grade Public Rule 144A Other (Sold Abroad/Unrated) Financial corporations Stocks 1 Bonds Memo: Net issuance of commercial paper, nonfinancial corporations 3 Change in C&I loans at commercial banks 3 1999 Q1 Note. Components may not sum to totals because of rounding. These data include speculative-grade bonds issued privately under Rule 144A. All other private placements are excluded. Total reflects gross proceeds rather than par value of original discount bonds. 1. Excludes equity issues associated with equity-for-equity swaps that have occurred in restructurings. 2. Bonds categorized according to Moody's bond ratings, or to Standard & Poor's if unrated by Moody's. Excludes mortgage-backed and asset-backed bonds. 3. End-of-period basis. Seasonally adjusted. III-5 has risen at a 6-1/2 percent annual rate, and M3 at a 6 percent annual rate, from the fourth-quarter levels. Overall, the growth of bank credit remained weak in May, but partial data suggest that it may be strengthening in June. Business Finance Gross bond issuance by nonfinancial corporations totaled $29 billion in May, about the same strong pace as in earlier months this year. Junk bond issuance in May was the largest in almost a year and accounted for nearly half the month's total offerings. The rise in bond rates in late May led a number of investmentgrade and junk firms to postpone scheduled bond offerings. However, issuers jumped back into the market when rates fell at the end of last week, and the forward calendar remains sizable. Short- and intermediate-term business credit has expanded at a slower pace than in the first quarter. Business loans contracted in May, more than erasing a modest increase in April, but have turned up in early June. Commercial paper outstanding was up in May, following a small increase in April; so far in June, commercial paper has risen moderately. Credit quality in the corporate business sector, while still strong overall, has slipped a bit further. The default rate for junk bonds has trended up since the start of the year. Business failures, after surging in April, moderated in May and then picked up again in June. On a twelve-month basis, they show a rise from 1998, but remain low by the standards of this decade. Downgrades of bonds of nonfinancial firms outpaced upgrades by a small amount during May and the first half of June. However, looking ahead, Moody's Watchlist suggests little further net deterioration in the near term, as the dollar value of debt on review for upgrades about matches that for downgrades. Gross equity issuance by nonfinancial corporations was strong in May, totaling about $10 billion, the largest amount in nearly a year. Both seasoned offerings and IPOs picked up. Although the volume of scheduled offerings remains large, equity issuance so far in June has slowed, held down by weak advances in equity prices and by some reduced enthusiasm for Internet-related offerings. Equity retirements associated with cash-financed mergers remained low in May. Nonetheless, announcements of such mergers continue to be numerous, and the backlog of pending deals suggests that equity retirements will pick up soon. Announcements of share repurchases so far this year imply a slight moderation from the pace of equity retirements in 1998, when actual repurchases by nonfinancial firms totaled a record $169 billion. III-6 Corporate Finance and Stock Prices Default Rates of Outstanding Junk Bonds Liabilities of Failed Businesses to Total Liabilities Percent - 10 - Percent - -1.5 Annual, nonfinancial firms Annual 8 -6 May- - 1.2 - 0.9 4 0.6 IIIII 2 nI 1. 0 1986 1990 1988 1992 1994 1996 0.3 0.0 1986 1998 1988 1990 1992 1994 1996 1998 'Through June 11, previous 12 months. 'Previous 12 months. Source. Dun & Bradstreet. Selected Stock Indexes Corporate Earnings Percent change from 4 quarters earlier 40 Quarterly Percent change from last FOMC' to June 22 -30 * . - DJIA 20 -1.06 20 S&P 500 0.19 10 Nasdaq 0.86 Russell 2000 1.10 0 Wilshire 5000 -0.14 Internet -7.75 .'" - ,' :**" 'P o2t NIPA afer-tax book profits SS&P 500 operating earnings per share I I I I I I I 1990 1994 1992 1996 - 1 I -10 SMay 18,1999. -20 1998 * Staff estimate. Source. Goldman Sachs, IIB/E/S. Forward Earnings-Price Ratio against 30-Year Treasury Yield Monthly Percent 12 S&P 500 forward earnings-price ratio* . *.. ..... * .. . ,. * **. June 22 .... * 4 Real 30-year Treasury yield" 1984 1986 1988 1990 SBased on l/B8E/S operating earnings over coming 12 months. " Nominal yield less Philadelphia Fed 10-year inflation expectations. 1992 16 1994 1996 1998 III-7 Changes in major indexes of stock prices have been mixed since the previous FOMC meeting. The DJIA is down slightly, although it is up 17 percent for the year. Meanwhile, the S&P 500 and the Nasdaq are roughly unchanged, and are about 2 to 3 percent off their highs reached earlier in the spring. The prices of Internet stocks slid about 8 percent over the intermeeting period, bringing them about 16 percent below their earlier peaks, but still up 40 percent for the year. Equity prices have held up quite well in recent months in the face of rising interest rates. Support has come from surprisingly strong first-quarter earnings and anticipation of even better second-quarter earnings. Analysts currently expect second-quarter S&P 500 earnings per share to be about 8-1/2 percent higher than four quarters earlier, up from a 6-3/4 percent increase in the first quarter.' There have been only sporadic earnings warnings thus far, which is usually viewed as a bullish signal. The S&P 500 twelve-month forward earnings-price ratio has moved up in June, but it remains near its record low in April. Moreover, the gap between the forward earnings-price ratio and the real thirty-year Treasury yield is at its narrowest for the twenty-one years such data are available. Commercial Real Estate Finance Commercial mortgage lending appears to have slowed in the second quarter. Banks' holdings of commercial mortgages grew near a 5-1/2 percent average annual rate in April and May, less than half the rate posted in the first quarter. Conduit lenders, citing resistance to higher mortgage rates, continue to report difficulties in originating commercial loans, and sector analysts have revised down their forecasts for the issuance of commercial mortgage-backed securities in coming months. Gross CMBS issuance backed by previously originated loans is expected to be $13-1/2 billion in the second quarter, down from $16 billion in the first quarter. About half of the second-quarter securities were issued in late May, perhaps putting some pressure on spreads of highly rated CMBS securities. On balance, such spreads are up 16 to 18 basis points over the intermeeting period. In contrast, spreads on lower-rated CMBS securities have tightened of late, as new investors have entered the market in pursuit of yield. Credit performance in the commercial mortgage sector continues to look good. At life insurance companies, delinquency rates for commercial mortgage loans dropped to their lowest level since 1965, when the American Council of Life 1.A measure of earnings per share that accounts for changes in the composition of firms included in the S&P 500 index is expected to increase 11 percent over the year ended in 1992:Q2, up from the 9-1/2 percent rise in the previous quarter. III-8 Commercial Real Estate 10-Year Commercial Mortgage Rate Growth in Commercial Mortgage Holdings Percent (Seasonally adjusted annual rate) 7 FQuarterly Percent rMonthly 15 1995 1996 1997 1998 1999 Source. Barron's/Levy National Mortgage Survey. 1995 1996 1997 1998 1999 *Q2 is April and May average at annual rate. Source. Bank Credit Survey. CMBS Yield Less 10-Year Treasury Basis points - CMBS Gross Issuance Billions of dollars Weekly through June 18 BB S,.. BBB ... I, , , , , , , .--' ^: --- , , , I ^ *---*- . .. , , , , ,I 1999 1997 1998 Source. Bank of America Securities. *Staff estimate. Source. Commercial Mortgage Alert. Commercial Mortgage Loan Delinquency Rates Percent SQuarterly Commercial banks 1986 1988 1984 Source. ACLI, Bank Call Report. 1990 1992 1994 1996 1998 III-9 Insurance began compiling the data. Delinquency rates for commercial mortgage loans at banks also touched a new low in the first quarter. Equity prices for real estate investment trusts were little changed over the intermeeting period, as enthusiasm for REIT shares fizzled quickly in May. Activity by REITs has been limited; equity issuance in March and April was weak, and REIT property acquisitions in April were the lowest since October 1995. Household Finance Household wealth has scored another solid increase in the second quarter, with capital gains on stock holdings and real estate pushing the ratio of household net worth to disposable income to a new high. At the same time, households have provided mixed signals about their preferences for risk. Net inflows to equity mutual funds are estimated to have been $15 billion in May, well below the rapid pace in April but still above the first-quarter rate. Weekly data through mid-June point to moderate inflows again this month. Investors shifted away from high-yield bond funds, withdrawing, on net, $1-1/2 billion in May--the first monthly outflow since last December--a pattern that has continued through mid-June. Households with 401(k) plans allocated funds to safer investments, with new contributions to fixed-income investments jumping to nearly 25 percent of total contributions in May from only 16 percent in April. However, transfers of existing 401(k) assets were primarily out of fixed-income funds and into company stock. On net, in May, such transfers and contributions favored equities over fixed-income assets. Data for the second quarter suggest that household debt growth has slowed from the 9-1/2 percent annual pace over the previous two quarters. Consumer credit grew at a 3-1/2 percent annual rate in April, well below the average pace in the first quarter, and loans extended by banks to individuals contracted in May. Though down from its recent rapid pace, growth in home mortgage debt appears to have remained sizable in the second quarter, in keeping with continued strength in housing activity. Indeed, the Mortgage Bankers Association purchase index has risen sharply since the May FOMC meeting, despite increases in interest rates. The contract interest rate on a thirty-year fixed-rate mortgage was 7.65 percent last week, 55 basis points above the level at the time of the May FOMC meeting. More recent indicators suggest that home mortgage rates have retraced about one-quarter of that increase. On balance, household credit performance has improved slightly this year. Consumer loan delinquencies reported by banks on the Call Report and the American Bankers Association survey edged down in the first quarter, while measures of credit card delinquencies at banks were mixed. Delinquency rates III-10 Household Net Worth Relative to Disposable Income Ratio (Quarterly data; seasonally adjusted) r'I s K. e - 1998 1994 1990 1986 1982 1978 1974 1970 p. Staff projection. .. Net Flows of Mutual Funds (Excluding reinvested dividends; billions of dollars; monthly rates; not seasonally adjusted) 1998 1996 1997 HI H2 QI 1999 Apr. 19.3 22.7 293 11.4 16.4 Equity funds Domestic International 18.0 14.1 4.0 19.0 15.8 3.1 21.1 18.6 2.5 5.4 6.7 -1.3 Hybrid funds 1.0 1.4 1.7 Bond funds International High-yield Other taxable Municipals 0.2 -0.2 1.0 -0.1 -0.5 2.4 -0.1 1.4 1.0 0.1 6.5 0.0 1.8 3.5 1.2 Total long-term funds Maye Assets Apr. 26.8 14.8 4,505 10.5 12.6 -2.1 25.5 26.1 -0.6 14.8 15.6 -0.8 3,265 2,846 419 0.1 -0.5 -0.2 0.2 381 5.9 -0.2 0.5 4.3 1.3 6.4 -0.1 1.0 3.9 1.6 1.5 -0.1 0.9 1.1 -0.4 -0.2 0.1 -1.5 1.2 -0.1 859 25 127 4902 304 e Staff estimates based on ICI weekly data. Source. Investment Company Institute (CI). 401(k) Plan Contributions and Transfers (Percent of total) 1998 Contributions' 1999 Q1 Apr. 1998 May Transfers 2 1999 QI Apr. May Company stock 19 19 18 18 -84 -53 -97 73 Equity funds Domestic International 47 42 5 43 38 5 56 53 4 47 43 4 -16 -14 -2 -4 27 -32 39 32 7 27 16 11 Hybrid funds 12 17 10 11 11 -44 -3 -14 Fixed income 3 22 21 16 24 89 99 61 -86 0.8 0.9 0.8 0.6 1.2 1.6 1.7 1.4 Memo: Total as % of assets 1. Allocation of new contributions to 401(k) plans; percentages sum to 100. 2. Allocation of transfers among existing assets within 401(k) plans; percentages sum to zero. 3. Includes bond and money funds and GIC/stable value investments. Source. Hewitt Associates. III-11 Household Debt Growth Percent (Seasonally adjusted) 1970 1974 p. Staff projection. 1978 MBA Purchase Index (Seasonally adjusted) 1982 March 16, 1990 = 100 1986 1990 1994 1998 Consumer Loan Delinquency Rates at Percent Commercial Banks 6 SQuarterly F Weekly Credit cards 5 0 .--.l---l / All loans / \ 1 4 3 2 S..... Revolving home equity.. Revolving home equity I I I I 1993 1991 I I I I 1997 1995 I I I I I I 1993 1991 1999 I I I I I 0 1999 1997 1995 I 1 Source. Call Reports. Delinquencies Percent Personal Bankruptcy Filings Per 100,000 persons (Seasonally adjusted) 600 Monthly EQuarterly - Credit card receivables (Moody's) ,- 500 400 Apr. 300 200 -" -w "-p . Auto loans at finance companies - 100 I1I 1991 1993 1995 1997 1999 I I I II 1986 1 1990 I 1994 I I 0 1998 Source. Administrative Office of the U.S. Courts. III-12 Treasury and Agency Finance Treasury Financing (Billions of dollars) 1998 1999 Item Q4 Q1 Q2 e Apr. May June' Total surplus, deficit (-) -54.5 5.8 147.2 113.5 -24.0 57.7 Means of financing deficit Net borrowing Nonmarketable Marketable Bills Coupons 32.3 8.2 24.1 53.3 -29.2 7.5 2.2 5.2 34.0 -28.7 -112.3 3.4 -115.8 -78.0 -37.8 -85.2 3.8 -89.0 -75.5 -13.4 -.6 .9 -1.5 -1.7 .2 -26.6 -1.3 -25.3 -.8 -24.5 21.4 -4.1 -30.6 -36.5 32.5 -26.6 .9 -9.1 -4.3 8.3 -8.0 -4.6 17.5 21.6 52.2 58.1 25.6 52.2 Decrease in cash balance Other' MEMO Cash balance, end of period NOTE. Components may not sum to totals because of rounding. 1. Direct loan financing, accrued items, checks issued less checks paid, and other transactions. e Estimated. Net Cash Borrowing of Government-Sponsored Enterprises (Billions of dollars) 1998 1999 Agency FHLBs Freddie Mac Fannie Mae Farm Credit Banks Sallie Mae Q3 Q4 QI Mar. Apr. May 14.7 32.7 24.2 -.4 .5 38.9 54.4 29.7 -.8 1.6 20.2 11.8 15.1 3.0 1.4 18.6 .0 4.1 -.1 .3 13.2 11.2 3.6 1.0 n.a. 6.1 n.a. 13.9 -.9 n.a. 32.2 10.0 42.2 20.0 55.2 30.0 55.2 30.0 62.7 36.0 70.2 40.0 MEMO: Outstanding Fannie Mae benchmark notes Freddie Mac reference notes NOTE. Excludes mortgage pass-through securities issued by Fannie Mae and Freddie Mac. n.a. Not available. III-13 for loans at the captive auto finance companies and for credit card receivables that back securities continued to decline in April. Personal bankruptcy filings dropped sharply during the first quarter, more than retracing the run-up at the end of last year. The 1998 increase appears to have been boosted by efforts to file cases ahead of proposed legislation that would limit the ability of certain debtors to obtain forgiveness for their obligations. 2 Government Securities Markets Over the intermeeting period, the Treasury issued, on net, $15 billion of marketable securities to meet seasonal fluctuations in the cash balance. Gross issuance was concentrated in the shorter maturities, with $90 billion raised in three- and six-month bills and $20 billion sold in one-year bills. Demand for the only coupon security auctioned during the intermeeting period, the two-year note, was greater than expected and stronger than in the most recent midquarter refunding. Apparently, the shorter maturity securities were more appealing to investors concerned with the prospects of the Fed tightening. In light of strong inflows of tax receipts, the Treasury expects to pay down a record $116 billion of marketable securities, on net, for the second quarter as a whole. Even so, the Treasury cash balance is projected to be a sizable $52 billion on June 30. The Treasury again stated that it is considering steps to alleviate concerns that debt paydowns are impinging on liquidity of on-the-run Treasury securities. An approach that has been used successfully in the past is to reduce the number of auctions, thereby increasing the available dollar amount of on-the-run Treasury securities at each auction. A more unusual program, for which details have not been provided to the public, would allow the Treasury to issue more on-the-run Treasuries and use part of the proceeds to repurchase its off-the-run securities, thus raising the share of on-the-run securities relative to total Treasury debt. Canada has recently inaugurated such a program in the context of its own budget surpluses. Government-sponsored enterprises continued to issue large blocks of benchmark securities over the intermeeting period as part of their ongoing attempt to take advantage of the vacuum created by the shrinking volume of Treasury securities. Since mid-May, Fannie Mae, Freddie Mac, and the Federal Home Loan Banks have together sold close to $16 billion in benchmark securities. Also, Fannie Mae issued its first thirty-year benchmark bond and plans to offer at least two benchmark bonds each year. In an effort to compete with Fannie Mae's and 2. The House passed bankruptcy reform legislation in May of this year, and the Senate will consider legislation this summer. III-14 State and Local Finance Gross Offerings of Municipal Securities (Billions of dollars; monthly rates, not seasonally adjusted) 1997 1998 Long-term Refundings New capital 17.9 6.6 11.3 21.9 8.5 13.4 Short-term Total tax-exempt 3.6 21.5 1.1 Total taxable 1998 Q4 1999 Q1 Mar. Apr. May 21.0 7.8 13.2 19.2 6.2 12.9 24.3 8.1 16.2 15.8 5.3 10.5 16.2 4.1 12.1 2.4 24.3 2.3 23.4 1.4 20.6 1.4 25.7 1.0 16.8 0.7 17.0 1.1 0.8 1.4 1.2 0.6 0.9 Note. Includes issues for public and private purposes. 1. All issues that include any refunding bonds. Municipal Revenue Bond and 30-Year Treasury Yields Percent Weekly Thursday - .I't" 30-year Treasury yield June 17 1994 Source. Bond Buyer. 1995 1996 1997 1998 1999 Ratio of 30-Year Revenue Bond Yield to 30-Year Treasury Yield 1.1 1.05 1 0.95 0.9 0.85 0.8 1994 1995 1996 Note Average of weekly data. + indicates latest observation (June 17). 1997 1998 1999 III-15 Freddie Mac's large, liquid issues, the FHLBs increased the minimum issue size of their jumbo notes from $1 billion to $3 billion. The heavy supply of benchmark agency securities and greater uncertainty in financial markets have been accompanied by a widening of the securities' spreads relative to on-the-run Treasuries. Since the May FOMC meeting, spreads have widened 15 basis points, to about 67 basis points. Municipal Finance Gross issuance of long-term municipal bonds totaled about $16 billion in May, close to April's pace but down from the strong first-quarter rate. New capital issuance picked up in May after having been temporarily depressed during tax season, when investor demand tends to wane. Funding needs for education and transportation projects continued to account for the bulk of issuance. Advance refundings fell further in May, as rising yields reduced profitable refinancing opportunities. Yields on long-term municipal bonds have risen 18 to 24 basis points over the intermeeting period, about in line with those on comparable Treasuries. Credit quality of municipal debt issuers remains strong. During May and early June, Standard & Poor's upgraded considerably more issues than it downgraded, continuing the pattern of net upgrades that has prevailed over the past few years. Money and Bank Credit Growth of the broad monetary aggregates slowed in May after rising briskly in April. Liquid deposits, which had surged in April in anticipation of tax payments, expanded at a more modest rate in May, reflecting the clearing of those payments in late April and in early May. M2 decelerated to a 4-1/2 percent annual rate in May. Growth of M3 also moved down to a 4-1/2 percent annual rate in May, bringing growth for the year down to just below 6 percent at an annual rate. The deceleration in May partly reflects smaller inflows into institution-only money market mutual funds. More important, M3 growth was held down by a decline in large time deposits due largely to a limited need for funding by banks. Growth in bank credit, adjusted for mark-to-market accounting, picked up a little in May, but only to a sluggish 3 percent pace, and appears to have strengthened more in June. Securities holdings at banks increased slightly, as banks continued to run off mortgage-backed securities of government-sponsored agencies. However, data for early June indicate that securities holdings have picked up appreciably. Loan growth was modest in May but appears a bit stronger in early June. Commercial and industrial loans contracted sharply in III-16 MONETARY AGGREGATES (Based on seasonally adjusted data) 1998 1998 1999 - - Q4 Q1 1999 Mar. Apr. Aggregate or component 1998:Q4 to May (p) Level (bil. $) May 99 (p) May 99 (p) Percentage change (annual rate) 1 Aggregate 1.8 8.5 10.9 5.0 11.0 12.8 2.8 7.2 7.1 10.1 2.8 -2.0 6.9 8.8 8.1 9.7 -4.5 11.3 7.4 11.4 -1.0 1.3 12.2 10.2 -4.0 4.6 4.6 3.1 6.5 5.9 1104.3 4507.0 6113.2 -15.4 -16.3 10.8 -4.0 -.2 480.9 368.8 246.7 Selected Components 8.3 -4.2 4. Currency 5. Demand deposits 6. Other checkable deposits 7. M2 minus M1 8. 9. 10. 3 Savings deposits Small time deposits Retail money market funds 11. M3 minus M2 4 12. 13. 14. 15. Large time deposits, net Institution-only money market mutual funds RPs Eurodollars 5 9.6 .2 .4 4.9 10.9 13.0 8.7 14.0 -1.4 23.7 15.6 -2.1 28.4 18.0 11.1 .3 9.4 7.4 7.7 3402.7 11.9 -5.7 20.5 2.1 -5.0 3.1 15.3 -3 6 12.6 12.8 -3.9 9.1 11.5 -5.0 15.7 1674.6 931.5 796.5 18.0 6.6 -15.2 6.3 4.7 4.4 1606.2 9.8 4.7 -1.0 -22.1 11.6 -8.0 -3.8 613.9 34.7 17.4 8.6 41.8 16.6 3.1 17.9 11.6 -9.1 -1.8 -48.2 32.8 21.1 -37.3 18.7 13.8 16.3 3.1 16.9 .3 4.3 544.6 290.9 156.9 8.8 6.2 7.1 9.9 11.7 7.6 8.7 12.1 7.9 5.6 9.1 8.3 4.1 10.1 7.8 2.3 5.0 4.2 13.8 6.3 7.6 6.4 10.1 7.5 2290.2 1447.1 534.8 4138.1 Memo Liquid Deposits 6 Sweep-adjusted M1 7 Monetary base Household M2 8 12.1 8.8 10.3 9.7 Average monthly change (billions of dollars) 9 Memo Selected managed liabilities at commercial banks: 20. Large time deposits, gross 21. Net due to related foreign institutions 22. U.S. government deposits at commercial banks 1.6 .6 8.1 4.8 -10.1 2.5 4.4 -.1 0 .5 -3.0 5.2 -3.1 . 745.3 -7.2 -6.0 . 204.2 1.9 1.2 . 19.3 1. For the years shown, Q4-to-Q4 percent change. For the quarters shown, based on quarterly averages. 2. Sum of Ml, retail money market funds, savings deposits, and small time deposits. 3. Sum of retail money funds, savings deposits, and small time deposits. 4. Sum of large time deposits, institutional money funds, RP liabilities of depository institutions, and Eurodollars held by U.S. addressees. 5. Net of holdings of depository institutions, money market mutual funds, U.S. government and foreign banks and official institutions. 6. Sum of demand deposits, other checkable deposits, and savings deposits. 7. Sweep figures used to adjust these series are the estimated national total of transaction account balances initially swept into MMDAs owing to the introduction of new sweep programs on the basis of monthly averages of daily data. 8. M2 less demand deposits. 9. For the years shown, "average monthly change" is the Q4-to-Q4 dollar change, divided by 12. For the quarters shown, it is the quarter-to-quarter dollar change, divided by 3 p--Preliminary III-17 Commercial Bank Credit (Percent change; seasonally adjusted annual rate) 1998 Type of credit 1. Bank credit: Reported Adjusted1 2. 1998 1999 Level, May 1999 (billions of $) Mar Apr May -0.8 -8.8 1.7 2.5 4,502 15.4 1.3 -1.6 1.5 2.9 4,416 Q4 Q1 11.0 16.8 10.3 3. Securities: Reported 13.9 22.8 -5.8 -18.7 0.6 0.1 1,189 4. Adjusted' 11.2 17.6 1.9 9.3 -0.3 1.3 1,102 5. U.S. government 5.9 8.3 4.1 11.4 0.3 -2.0 797 6. Other 2 32.1 51.9 -23.6 -75.6 1.2 4.3 391 10.0 14.7 1.1 -5.2 2.1 3.4 3,313 7. Loans 3 8. Business 12.1 16.1 -0.2 4.6 4.3 -6.4 949 9. Real estate 6.7 10.2 7.1 -0.2 1.5 6.1 1,346 10. Home equity 0.0 -3.2 -2.4 1.2 11.0 12.1 100 11. Other 7.3 11.4 7.9 -0.4 0.9 5.7 1,246 -1.8 4.8 2.3 -3.1 1.2 -9.8 496 5.8 7.8 2.9 3.0 1.7 -4.9 755 29.6 33.1 -12.4 -37.8 0.7 27.3 522 12. Consumer: Reported Adjusted 4 13. 14. Other 5 Note. Adjusted 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 shown are percentage changes in consecutive levels, annualized but not compounded. 1.Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FASB 115). 2. Includes securities of corporations, state and local governments, and foreign governments and any trading account assets that are not U.S. government securities. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans, loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. III-18 May, mainly because of securitizations. Nevertheless, even after adjusting for securitizations, business loans fell 2 percent in May. Results from the May Survey of Terms of Business Lending indicate that banks may have become slightly more cautious lenders. Spreads on business loans relative to the intended federal funds rate have risen across all risk categories since February, with larger increases for loans with higher risk ratings. Also, delinquencies and charge-offs for commercial and industrial loans ticked up further in the first quarter, although they remain at low levels. Consumer loans on banks' books also declined sharply in May, reflecting brisk securitizations and a notable drop in originations, but appear to have remained flat in June. In contrast, growth in real estate loans accelerated in May and early June, likely because of a weaker pace of securitizations than in previous months. INTERNATIONAL DEVELOPMENTS International Developments U.S. International Transactions Trade in Goods and Services For the first quarter of 1999, the nominal U.S. trade deficit in goods and services was $215 billion SAAR, substantially larger than for any quarter in 1998, as exports fell and imports rose strongly. In April, the U.S. trade deficit was $18.9 billion, nearly the same as recorded in the previous two months, with exports and imports both edging up. Trade data for May will be released on July 20. Net Trade in Goods & Services (Billions of dollars, seasonally adjusted) Annual rate Monthly rate 1998 1999 01 -238.2 -259.0 -250.0 -310.1 -164.3 -246.9 82.6 -182.9 -173.0 -259.9 -254.3 77.0 81.3 -215.0 -296.8 81.8 1998 03 I 04 1999 Feb. I Mar. I Apr. Real NIPAl Net exports of G&S Nominal BOP Net exports of G&S Goods, net Services, net -18.5 -25.2 6.6 -18.9 -25.7 6.7 -18.9 -25.5 6.6 1. Billions of chained (1992) dollars. Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census. n.a. Not available. ... Not applicable. The value of exports in the first quarter was 2 percent lower than in the fourth quarter. A good part of the decline reflected a reversal of the surge in exports of aircraft and automotive products that occurred at the end of last year. Exports to countries in Asia were generally lower in the first quarter than in the fourth quarter, because the level of exports in the fourth quarter had been boosted by record year-end deliveries of aircraft to that region. Exports in April increased somewhat, following declines in the previous five months. Exports of computers and semiconductors turned up moderately, and there were small increases in most other major trade categories. The value of imports in the first quarter was 2 percent higher than in the fourth quarter, with the largest increases in automotive products, consumer goods, and machinery. In contrast, the value of imported oil dropped 8 percent, primarily because of sharp price declines prior to February. Total imports rose moderately in April, but the increase was more than accounted for by a sharp jump in the value of oil imports, mostly as a result of higher oil prices. There were small-tomoderate increases in imports of most other major trade categories. The exception was a large decline in imports of automotive products from Canada and Mexico that partly reversed steady increases recorded in previous months. IV-2 U.S. International Trade in Goods and Services Contribution of Net Exports to Real GDP Growth Percentage points, SAAR 2 1 0 -1 -2 I -3 I 1991 I I 1993 I I 1995 L 1 ...1 1997 1999 -4 Bil$, SAAR Net trade in computers and semiconductors --2( Net automotive trade with Canada and Mexico I 1991 I I 1993 I I 1995 --4( I 1997 1999 Bil$, SAAR Selected Imports SAircraft I 1991 I 1993 I I 1995 I I I,,, 1997 1. Excludes agriculture and gold. 2. Excludes computers and semiconductors. I, 1999 1991 1993 1995 1997 1. Excludes oil and gold. 2. Excludes computers and semiconductors. 3. Excludes Canada and Mexico. -6( IV-3 U.S. Exports and Imports of Goods and Services (Billions of dollars, SAAR, BOP basis) Amount Changel 1999 1999 Q1 Mar. Apr. 11.5 -19.2 -1.0 Exports of G&S 1998 Q4 947.6 Levels 1999 1999 Mar. Apr. Q1 928.4 924.6 936.1 Goods exports Agricultural Gold Other goods 680.5 54.3 7.1 619.1 657.2 47.3 2.9 607.0 651.9 46.5 2.9 602.6 661.7 48.1 3.9 609.7 23.5 5.1 1.8 16.5 -23.3 -7.0 -4.2 -12.1 -4.5 -1.2 -0.1 -3.2 9.8 1.6 1.0 7.1 63.6 45.6 39.5 160.4 56.6 44.1 42.1 158.8 51.1 43.2 42.9 161.7 51.5 45.7 45.2 159.5 7.4 0.7 2.1 -0.1 -7.0 -1.4 2.5 -1.6 -4.8 -0.8 1.0 4.7 0.4 2.4 2.3 -2.2 74.7 43.7 11.9 19.1 71.4 42.7 10.3 18.4 70.1 42.7 10.2 17.2 74.2 42.7 11.3 20.2 6.5 7.0 1.6 -2.2 -3.3 -1.0 -1.7 -0.7 -1.5 0.2 0.1 -1.8 4.0 -0.0 1.1 3.0 129.8 79.2 26.3 126.1 79.6 28.2 126.7 78.2 28.8 128.4 81.0 24.3 0.4 -1.2 0.6 -3.6 0.4 1.9 0.2 -3.5 1.8 1.7 2.8 -4.4 267.1 271.2 272.7 274.5 7.0 4.1 3.5 1.7 1120.7 1143.4 1152.0 1163.4 20.6 22.8 3.8 Aircraft & pts Computers Semiconductors Other cap gds Automotive to Canada to Mexico to ROW Ind supplies Consumer goods All other Services exports Imports of G&S 1998 Q4 30.5 11.4 934.8 45.8 6.6 882.5 954.0 42.4 3.2 908.4 960.1 44.4 3.4 912.3 968.2 57.1 3.3 907.8 17.9 -4.0 -0.8 22.7 19.1 -3.4 -3.3 25.9 1.6 3.9 0.7 -3.1 Aircraft & pts Computers Semiconductors Other cap gds 24.2 74.7 31.9 143.3 22.2 77.6 33.4 145.9 22.2 75.2 33.2 146.0 22.2 79.4 35.6 142.6 -2.1 1.8 3.1 2.9 -0.3 1.5 1.5 2.6 0.7 -5.4 -0.9 -1.7 Automotive from Canada from Mexico from ROW 161.2 58.1 30.6 72.5 171.6 65.1 30.9 75.6 175.3 66.1 34.3 75.0 164.9 59.9 31.0 74.0 16.9 10.0 4.8 2.1 10.4 7.0 0.3 3.1 3.7 2.3 3.6 -2.2 -10.4 -6.2 -3.3 -0.9 Ind supplies Consumer goods Foods All other 143.1 220.9 41.6 41.4 142.2 229.1 41.7 44.6 144.7 227.1 40.6 48.1 144.7 231.3 42.5 44.5 -4.0 2.1 0.3 1.4 -0.9 8.2 0.1 3.2 3.2 -6.3 -1.6 5.2 0.1 4.2 1.9 -3.6 185.8 189.4 191.9 195.2 2.7 3.6 2.3 3.3 11.00 11.38 11.21 10.39 10.84 11.20 11.57 13.51 -C).80 -C.19 0.20 -0.99 -0.17 1.14 0.73 2.31 Goods imports Petroleum Gold Other goods Services imports Memo: Oil qty (mb/d) Oil price ($/bbl) 1. Change from previous quarter or month. Source. U.S. Department of Commerce, Bureaus of Economic Analysis and Census. IV-4 Quantity and price of imported oil. The quantity of imported oil edged up in the first quarter relative to the fourth quarter, and rose further in April due to strong inventory demand. Preliminary Department of Energy statistics indicate that imports in May increased modestly. The price of imported oil rose 20 percent in April (to around $13.50 per barrel) following an 11 percent increase in March. These price increases were largely driven by a March agreement by OPEC and non-OPEC producers to reduce supply by two million barrels per day. After trading near $19 per barrel in early May, spot WTI fell about $2.50 per barrel in response to surprisingly high exports from Russia, higher production from Nigeria, and high global product inventories. Spot WTI averaged $17.75 per barrel in May. More recently, oil prices have rebounded somewhat on news that OPEC's compliance with production cuts is near 90 percent. Spot WTI is currently trading around $18 per barrel. Prices of non-oil imports and exports. For April and May combined, prices of non-oil imports decreased 2 percent at an annual rate, a somewhat larger rate of decline than in the previous two quarters. Prices of "core" imports declined 11/2 percent at an annual rate following two quarters of virtually no price change. The decline in core prices reflected a swing from increases to decreases in the prices of machinery and consumer goods combined with smaller (or zero) declines in prices of imported industrial supplies and foods. Prices of automotive products rose slightly. For April and May combined, prices of exports were about unchanged from the first quarter level compared to 1 to 2 percent declines in the first and fourth quarters. Although prices of agricultural exports recently turned up, the April and May average was still well below that of the first quarter. Prices of "core" exports rose 1-1/2 percent at an annual rate in April and May combined led by increases in chemicals and metals. This increase followed little change in "core" export prices in the first quarter and a decline of 1 percent AR in the fourth quarter of 1998. Price data for June will be released on July 13. IV-5 Prices of U.S. Imports and Exports (Percentage change from previous period) 1998 Q4 Annual rates 1999 Q2 e Q1 Monthly rates 1999 May Apr. Mar. ----------- BLS prices (1995=100)---------1.9 -1.7 5.5 0.1 1.0 0.7 -17.7 -20.5 216.9 11.8 19.4 8.0 -0.7 -0.7 -2.1 -0.5 -0.2 0.1 Merchandise imports Oil Non-oil Core goods* Foods, feeds, beverages. Industrial supplies ex oil Computers Semiconductors Cap. goods ex comp & semi Automotive products Consumer goods Merchandise exports Agricultural Nonagricultural Core goods* Industrial supples ex ag Computers Semiconductors Cap. goods ex comp & semi Automotive products Consumer goods 0.3 -0.1 -1.4 -0.4 -0.1 0.1 0.7 1.3 -6.0 -0.9 -0.3 0.5 -4.7 -1.7 0.0 -0.3 -0.2 0.9 -16.6 -9.0 -17.9 -3.1 -2.2 -0.3 2.6 2.9 2.2 0.7 -1.3 -2.4 0.1 -0.5 -0.7 -0.3 0.1 -0.1 1.5 1.3 0.5 -0.1 0.1 0.1 0.7 0.3 -1.7 -0.4 -0.2 -0.1 -2.1 -1.1 -0.1 -7.3 -1.4 -6.0 -0.6 -8.8 0.6 -1.1 0.3 1.4 -0.4 -3.0 -0.2 -0.1 -5.6 -5.0 -2.0 -6.5 2.5 -5.2 -1.6 -7.6 -3.9 0.1 1.4 0.4 1.7 0.6 0.0 0.3 -0.5 -0.1 -0.1 -0.4 -1.5 0.1 -0.1 -0.1 ----- Prices in the NIPA accounts (1992=100)----- Chain-weight Imports of goods & services Non-oil merchandise Core goods* -0.2 -3.4 n.a. -1.1 -1.7 n.a. 0.3 -0.0 n.a. Exports of goods & services -0.9 -1.8 Nonag merchandise Core goods* -1.2 */ Excludes computers and semiconductors. e/ Average of two months. n.a. Not available. ... Not applicable. -0.7 -1.3 -0.2 n.a. n.a. n.a. ... ... ... ... Oil Prices 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 IV-6 U.S. Current Account The U.S. current account deficit increased to $274 billion (SAAR) in the first quarter of 1999. The deficit for goods and services widened, while the deficit for net unilateral transfers narrowed and the deficit on income was little changed. The larger deficit for goods and services reflected a wider trade deficit, as exports fell and imports rose; the surplus on services edged up as receipts rose more than payments increased. The reduction in net unilateral transfers in the first quarter reflected lower U.S. government grant disbursements, which were boosted in the fourth quarter by the annual payment of grants to Israel. As is customary each June, estimates of U.S. international transactions were revised to incorporate updated source data and improved methodologies. These revisions lowered the deficit $12 to $13 billion in 1997 and 1998 and had varying effects on deficits in other years. Most of this revision reflected higher estimated portfolio investment receipts, owing to new data from the end-1997 outward portfolio survey, which raised considerably the estimates of U.S. holdings of foreign securities. Also this year, changes were made to the presentation of the current account to be more consistent with the presentation of the NIPA accounts. The "net income" category has replaced "net investment income" and includes compensation of employees, previously included in services. In addition, a small part of the previous measure of unilateral transfers was removed and is now included in the new capital account measure. U.S. International Financial Transactions Foreign official reserves held in the United States increased marginally in April (line 1 of the Summary of U.S. International Transactions table). Decreases in assets of industrial countries, particularly Western Europe and Canada, were offset by increases in developing countries in Latin America and Asia. Reserves of Argentina, Brazil, and Venezuela registered significant increases, while Mexican reserves increased moderately. Increased reserves were also reported for China, Hong Kong, and Singapore. Overall, reduced foreign official holdings of Treasury securities were more than matched by increases in foreign official claims on U.S. banks, and to a lesser extent, increases in foreign official holdings of U.S. government agency bonds. Partial data through May from the FRBNY indicate a slight reduction last month in total foreign official reserves held in the United States. In sharp contrast to recent periods, banks reported large net outflows in April of $27 billion (line 3). These outflows were reported almost entirely by U.S. agencies and branches of foreign-based banks and were attributed largely to the unwinding of borrowing from, or increased lending to, related offices in the Caribbean financial centers and Japan. U.S. agencies and branches reduced their IV-7 assets (especially C&I loans) in April. At the same time, they increased their issuance of large time deposits. (The premium that Japanese banks had been paying to issue large CDs fell from around 20 basis points to zero in midMarch.) U.S. Current Account (Billions of dollars, seasonally adjusted annual rate) Period Goods and services balance Net income Net transfers Current account balance Annual -104.7 -164.3 3.2 -12.2 -42.0 -44.1 -143.5 -220.6 1998:Q1 Q2 Q3 Q4 -133.4 -167.8 -182.9 -173.0 1.0 -2.2 -27.8 -19.7 -39.7 -39.5 -43.1 -53.9 -172.1 -209.6 -253.9 -246.7 1999:Q1 -215.0 -18.9 -40.4 -274.3 -34.4 -15.1 9.9 -42.0 -3.2 -25.6 8.1 0.8 0.2 -3.6 -10.7 13.5 -37.5 -44.3 7.2 -27.7 1997 1998 Quarterly Change Q2-Q1 Q3-Q2 Q4-Q3 Q1-Q4 Source: U.S. Department of Commerce, Bureau of Economic Analysis. Private foreigners bought net $32 billion of U.S. securities in April, up slightly from March (line 4). Although both total U.S. bond issuance and U.S. issues abroad decreased significantly in April, net foreign purchases of U.S. corporate and other bonds were $19 billion, only moderately below the March level. Purchases of corporate bonds were concentrated in the U.K. and Caribbean financial centers. Large net purchases of U.S. federally-sponsored agency bonds were also reported in those same markets and in Japan. Foreigners' appetite for U.S. equities was very robust in April. Net purchases were registered at $18 billion as compared to $11 billion for the first quarter. Activity in U.S. stocks was strongest in Western Europe, the Caribbean financial centers, and Japan. Holdings of Treasury securities declined somewhat, principally by Western European investors. U.S. residents continued to be net sellers of foreign securities in April (line 5) as net purchases of $3 billion of foreign bonds were more than offset by net sales of IV-8 $6 billion of foreign stocks. Large net purchases of foreign bonds were recorded vis-a-vis Argentina, Mexico, and Korea. Significant net purchases of foreign stocks vis-a-vis Japan ($3.4 billion) were overwhelmed by net sales elsewhere, particularly in the United Kingdom. Recently-released balance of payments data for 1999:Q1 show a sharp reduction in foreign direct investment flows into the United States (line 7). Inflows in 1998:Q4 were swollen by several extraordinarily large takeovers; and the 1999:Q1 figures represent a return to more normal levels. U.S. direct investment abroad accelerated in 1999:Q1 (line 6), bringing it above last year's record-setting pace. Net U.S. currency shipments decreased to $2.4 billion in 1999:Q1 from $6.3 billion in 1998:Q4 (line 8). The statistical discrepancy, which reflects the errors and omissions in recorded transactions in both the current and capital account, was an outflow of some $16 billion in 1999:Q1, down somewhat from the $38 billion outflow in 1998:Q4. This discrepancy implies either an overstatement of net capital inflows or an understatement of net current account outflows. IV-9 Summary of U.S. International Transactions (Billions of dollars, not seasonally adjusted except as noted) 1997 1998 20.0 1999 1998 Q2 Q3 Q4 Q1 Mar -18.6 -9.7 -46.3 25.4 8.0 5.9 Apr Official capital 1. Change in foreign official assets in U.S. (increase, +) a. G-10 countries b. OPEC countries c. All other countries 2. Change in U.S. official reserve assets (decrease, +) Private capital Banks 3. Change in net foreign positions of banking offices in the U.S.' Securities' 4. Foreign net purchases of U.S. securities (+) a. Treasury securities 3 b. Corporate and other bonds4 c. Corporate stocks 5. U.S. net purchases (-) of foreign securities a. Bonds b. Stocks 6 Other flows (quarterly data, s.a.) 6. U.S. direct investment (-) abroad 7. Foreign direct investment in U.S. 8. Foreign holdings of U.S. currency 9. Other (inflow, +) 5-6 U.S. current account balance (s.a.) Statistical discrepancy (s.a.) .5 1.8 6.5 -10.0 * 12.5 13.1 6.1 12.9 5.2 -9.0 -16.0 .1 .1 -11.6 -34.7 2.8 10.1 2.6 -7.8 1.0 -1.2 -7.2 -1.0 -6.8 -1.9 -2.0 -2.4 3.9 .3 34.0 58.4 1.2 52.1 14.3 21.1 8.0 -27.1 346.7 275.8 96.9 22.8 81.2 51.6 30.5 31.7 147.2 128.1 49.3 172.3 26.0 57.4 1.1 27.8 24.6 41.0 -9.1 50.1 7.4 20.7 -4.8 18.9 71.3 54.2 13.6 -6.1 15.7 10.6 2.4 17.6 -89.1 -11.0 -29.7 14.7 16.5 7.4 3.6 3.1 -48.2 -40.9 -17.4 6.4 -25.8 -3.8 7.8 7.0 10.4 6.2 -. 8 8.2 1.7 1.8 -2.6 5.7 -110.0 109.3 24.8 -48.5 -143.5 -143.2 -132.8 193.4 16.6 -164.5 -220.6 10.1 -43.2 20.9 2.3 5.3 -52.4 10.3 -21.6 24.9 7.3 -20.3 -63.5 31.9 -30.8 120.6 6.3 -131.7 -61.7 -37.7 -38.3 19.1 2.4 9.1 -68.6 -15.7 n.a. n.a. n.a. n.a. n.a. n.a. n.a n.a n.a n.a n.a n.a .2 7.5 NOTE. The sum of official capital, private capital, the current account balance, and the statistical discrepancy is zero. Details may not sum to totals because of rounding. 1. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes changes in custody liabilities other than U.S. Treasury bills. 2. Includes commissions on securities transactions and excludes securities acquired through exchange of equities; therefore does not match exactly the data on U.S. international transactions published by the Department of Commerce. 3. Includes Treasury bills. 4. Includes U.S. government agency bonds. 5.Transactions by non banking concems and other banking and official transactions not shown elsewhere plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1 through 5 since publication of the quarterly data in the Survey of Current Business. 6. Quarterly balance of payments data include large U.S. acquisitions of foreign equities associated with foreign takeovers of U.S. firms. These are not included inline 5.b but are included inline 9. n.a Not available. *Less than $50 million. IV-10 Foreign Exchange Markets In the period since the May FOMC meeting, the exchange value of the dollar experienced pronounced upward and downward fluctuations against most currencies, appreciating about 1.4 percent on balance in terms of the major currencies index. The dollar depreciated 1 percent on balance against the yen and appreciated 3.6 percent against the euro. Exchange Value of the Dollar Index, May 17, 1999 = 100 104 Daily -; Ma 18 FOVIMC : - - 103 - *., .'.*.*, I 102 . S101 -- °99 Major Currencies I-I March I April May 98 June The dollar's weakening against the yen over the period was accompanied by a 17 basis point narrowing of the yield spread between U.S. and Japanese 10-year government debt. The leak and ultimate release of Japanese GDP data on June 10, showing that the economy grew at an annualized rate of 7.9 percent in the first quarter, evidently took most market participants by complete surprise and led to an immediate strengthening of the yen. Earlier talk of further fiscal stimulus measures also provided some support for the yen. Japan's monetary authorities intervened on four occasions late in the period, buying exceptionally large amounts of dollars and euros, to stem the currency's appreciation. Share prices in Japan have surged more than 7 percent since the May FOMC meeting. Short-term Japanese interest rates have remained near zero, as the Bank of Japan continues its efforts to support economic activity through ample provision of liquidity. IV-11 Financial Indicators in Major Industrial Countries Three-month rate Ten-year yield Equities Country Jun. 23 Change Jun. 23 Change Change Canada 4.86 0.20 5.65 0.18 0.95 Japan 0.03 -0.01 1.75 0.51 7.10 Euro area 2.65 0.07 4.46 0.32 5.67 United Kingdom 4.94 -0.31 5.13 0.33 5.15 Switzerland 1.01 0.07 2.94 0.27 2.82 Australia 4.96 0.08 6.27 0.22 0.08 United States 5.13 0.19 6.00 0.34 -1.16 Memo: Weighted-average foreign 2.78 0.06 4.59 0.35 NOTE. Change is in percentage points from May 17 to June 23. The dollar's strengthening against the euro over the intermeeting period continued a trend that began almost immediately after the inception of the new currency in January. As in the preceding intermeeting periods, the dollar's rise vis-à-vis the euro was accompanied by a widening of U.S. dollar and euro-area government bond yield differentials, as signals of ongoing robust growth in the United States contrasted with indications of sub-par economic activity on average in the eurozone countries. The Bank of England lowered its repo rate 25 basis points, noting that price pressures appeared well contained and that U.K. economic growth had slowed considerably in the first quarter. Share prices in eurozone countries and the United Kingdom have risen more than 5 percent since the May FOMC meeting. On balance, the dollar appreciated more than 3 percent against sterling, with most of this change occurring late in the period. Latin American financial markets experienced several bouts of increased stress, which were caused both by home-grown problems, such as uncertainty over the commitment of Argentine authorities to maintaining the currency board regime and the slowing progress towards fiscal reform in Brazil. Expectations for higher global interest rates following the FOMC's announcement of the adoption of a tightening bias at the May meeting also contributed to the stress in these markets. Brady bond stripped spreads spiked higher in May and early June. On balance, Brazilian and Argentine Brady bond spreads remain 60 to 110 basis points above levels recorded in mid-May, while Mexican and Venezuelan Brady spreads are little changed. The real has depreciated about 6 percent against the IV-12 Financial Indicators in Latin America, Asia, and Russia Country Currency/ US dollar Change Jun. 22 Short-term Interest Rates Jun.21/22 Change Dollar-denominated bond spreadl Jun.21/22 Change Equity prices Change Mexico 9.39 -0.05 19.75 -0.25 7.09 -0.03 -1.33 Brazil 1.77 5.86 21.05 -2.00 11.19 0.63 -1.45 Argentina 1.00 0.00 7.50 2.45 9.00 1.13 -1.21 Chile 507.50 4.17 n.a. n.a. n.a. n.a. 2.07 China 8.28 -0.00 n.a. n.a. 1.48 0.26 46.82 Korea 1160.00 -3.89 5.10 0.15 1.90 -0.08 22.03 32.36 -1.31 4.70 0.05 n.a. n.a. 13.28 Singapore 1.70 -0.81 1.25 -0.25 n.a. n.a. 12.63 Hong Kong 7.76 0.07 5.67 0.78 n.a. n.a. 11.25 Malaysia 3.80 0.00 3.00 -0.10 2.61 0.16 4.01 Thailand 36.58 -1.80 4.25 -0.50 1.11 -0.22 16.74 6700.00 -15.46 22.24 -8.76 7.22 -0.26 20.29 Philippines 37.60 -0.79 n.a. n.a. 3.04 0.19 1.02 Russia 24.43 -1.13 n.a. n.a. 48.15 -12.82 40.92 Taiwan Indonesia NOTE. Change is in percentage points from May 17 to June 21/22. 1. Mexico, Brazil, Argentina, Venezuela, and Russia: Stripped Brady bond yield spread over U.S. Treasuries. China and Korea: Global bond yield spread. Malaysia and Philippines: Eurobond yield spread. Thailand and Indonesia: Yankee bond yield spread. n.a. Not available. dollar. Major Latin American stock market indexes declined 1 to 2 percent over the intermeeting period. In contrast to the heightened stress experienced in Latin American markets, financial markets in the Southeast Asian economies generally improved, with share price indexes up substantially in most of these countries. The price of gold slumped another 15 dollars, to below $260 per troy ounce, as market participants continued to focus on the announcement made by U.K. authorities that they would sell off more than half of the country's monetary gold reserves in coming years. The Desk did not intervene during the period for the accounts of the System or the Treasury. IV-13 Developments in Foreign Industrial Countries Recent economic developments in the major foreign industrialized countries suggest that GDP growth may have strengthened somewhat. Signs of improvement were evident in Germany, where final domestic demand was strong in the first quarter and the drag coming from net exports considerably reduced relative to the fourth quarter of 1998. For the euro area overall, the pickup in growth was more modest, as Germany's better performance was partially offset by the slowing growth of domestic demand in France. In the United Kingdom, data for the second quarter suggest that activity has picked up after two quarters of very little growth. In Japan, real GDP rose a surprising 7.9 percent (SAAR) in the first quarter, but the extent to which this strong number represents a shift toward sustained improvement is unclear. The sharp rise in GDP contradicts an unemployment rate that continues to rise and other indications that the economy remains stagnant. With the exception of an uptick in CPI inflation in Canada, inflationary pressures remain subdued. In Japan, consumer prices remain below year-earlier levels, while twelve-month consumer price inflation in the euro area has edged up but is still near 1 percent. In the United Kingdom, concerns that inflation might be trending below its target prompted the Bank of England to cut interest rates 25 basis points in June. In Japan, the surge in real GDP in the first quarter marked the first quarterly growth in a year and a half and brought GDP back to its 1998Q1 level. All components of domestic demand increased robustly. Private consumption and residential investment each rose about 5 percent (SAAR), business fixed investment was up more than 10 percent, and public investment surged at almost a 50 percent rate for the second consecutive quarter, with public demand contributing more than 4 percentage points to GDP growth. External demand subtracted 1 percentage point from growth, with exports contracting slightly and imports expanding 7.5 percent, after seven consecutive quarterly declines. Indicators for the second quarter provide little evidence of further expansion. Industrial production during April was down 3.4 percent (not annualized) from March and down 1.3 percent from the first-quarter average. April private "core" machinery orders plunged to a ten-year low, falling 11.1 percent below the firstquarter average. Labor market conditions also remained depressed, with unemployment at an all-time high of 4.8 percent in both March and April and the offers-to-applicants ratio remaining near an all-time low. The real household IV-14 Japanese Real GDP (Percent change from previous period, SAAR) 1998 1998' 19971 Component Q2 Q2 1999 Q4 Q3 Q1 -.8 -3.0 -2.9 -1.2 -3.3 7.9 Total domestic demand -2.2 -3.2 -4.5 -2.2 -1.9 9.2 Consumption -1.1 -. 1 -.6 -.6 -.6 5.0 Private Investment -4.9 -15.9 -13.5 -12.7 -21.1 9.5 Public Investment -4.5 8.6 -11.3 15.6 49.8 47.9 Government consumption -1.0 1.1 .6 3.1 -2.2 3.2 Inventories (contribution) .0 -.3 -.3 -.5 -.1 .0 Exports 7.6 -6.0 -7.6 7.4 -12.1 -1.2 Imports -3.3 -7.7 -21.4 -.5 -3.1 7.5 1.4 .0 1.0 -1.4 -1.0 GDP Net exports (contribution) 1.6 1. Q4/Q4. Japanese Economic Indicators (Percent change from previous period except as noted, SA) 1999 1998 Indicator Q3 Q4 Q1 Feb. Mar. Apr. May .0 -.7 .6 1.3 2.7 -3.4 n.a. Housing starts -6.7 -1.8 7.8 3.2 8.8 -3.5 n.a. Machinery orders -4.0 -2.7 1.9 2.8 6.6 -10.9 n.a. New car registrations .7 -11.9 3.6 -5.2 1.2 -5.4 6.8 Unemployment rate' 4.3 4.4 4.6 4.6 4.8 4.8 n.a. Industrial production Job offers ratio 2 .49 .47 Business sentiment 3 .49 .49 .49 .48 -51 -56 n.a. ... ... ... area) 4 -.1 .7 -.2 -.2 -.4 -.2 Wholesale prices 4 -.7 -3.6 -4.0 -3.8 -3.4 -3.5 CPI (Tokyo 1. Percent. 2. Level of indicator. 3. Tankan survey, diffusion index. 4. Percent change from year earlier, NSA. n.a. Not available. ... Not applicable. n.a. -.6 -3.4 IV-15 expenditure series in April rebounded modestly from a plunge during the first quarter, but new car registrations during the second quarter have slowed from their first-quarter pace. The twelve-month Tokyo CPI inflation rate fell to -0.6 percent in May, suggesting the continued presence of deflationary pressures. Japan's trade surplus during the first five months of 1999 was $110 billion at an annual rate, essentially unchanged from the $108 billion surplus during all of 1998. Denominated in dollars, merchandise imports and merchandise exports during the first five months of the year were almost identical to their 1998 averages. In mid-June, the government announced a package of measures intended to address rising unemployment and encourage firm restructuring. The package aims to create 700,000 new jobs, mainly through public subsidies and other government-sponsored job creation measures. The package also includes proposals to strengthen worker retraining programs and increase the duration and generosity of unemployment benefits. To facilitate corporate restructuring, the package calls for debt-for-equity swaps, in which banks would forgive enterprise loans in exchange for shares, and legal reforms to streamline bankruptcy proceedings and facilitate firm restructuring. The measures in this package will be funded by a supplemental budget expected to total about ¥500 billion (0.1 percent of GDP) The eleven European Union countries in the euro zone registered growth of 1.7 percent at an annual rate in the first quarter, according to preliminary estimates from Eurostat. The pace of real economic activity has picked up following the slowdown at the end of last year, mainly due to better German performance. However, France and Italy have slowed, and, as a group, the three countries still appear to be growing below potential and more slowly than many other euroarea countries. German first-quarter growth owed entirely to broad-based strength in domestic demand. Strong gains in private consumption, government spending, and fixed investment were tempered by a sharp reduction in the pace of inventory accumulation. In France, domestic demand slowed sharply from its robust pace in the fourth quarter. Although fixed investment spending was unexpectedly strong, consumption and government spending posted only modest gains. Net exports subtracted slightly from first-quarter growth. IV-16 Euro-11 Real GDP (Percent change from previous period, SAAR) Component 19971 1999 1998 19981 Q2 Q3 Q4 Q1 Euro-11 GDP 3.0 2.0 2.3 1.9 1.2 1.7 Germany: GDP Domestic demand Net exports 2 1.8 1.1 0.7 1.3 2.6 -1.3 0.0 -1.2 1.2 1.8 2.8 -0.9 -0.6 2.9 -3.4 1.8 1.9 -0.1 France: GDP Domestic demand Net exports 2 3.1 2.3 0.8 2.7 3.4 -0.6 3.4 4.1 -0.5 1.2 -0.1 1.3 3.0 4.8 -1.6 1.3 1.5 -0.2 2.9 .9 3.3 2.2 -1.1 n.a. Italy: GDP 1. Q4/Q4. 2. Contribution to GDP growth. Little information is available for the second quarter. Unemployment rates in the euro area have fallen in recent months. In Germany, industrial production moved up in April, suggesting that the recovery in the first quarter may be continuing there. In contrast, industrial production in France and Italy declined significantly in April, indicating a continuing slowdown in France and no sign of reversal in the weak pace of economic activity in Italy. Price pressures continue to be mild. Twelve-month consumer price inflation for the euro area edged up to 1.1 percent in April, reflecting the effects of higher oil prices and the decline in the value of the euro. Forward-looking indicators for the euro area are suggestive of continued recovery in industry, but are less positive for household spending. Consumer confidence edged down further in May, likely in reaction to the Kosovo conflict. Confidence in the construction sector remains low but has improved steadily since the end of 1998. Higher production expectations have helped boost confidence in the industrial sector in recent months. Still, industrial confidence remains near lows registered in the first quarter. IV-17 Euro-11 Current Indicators (Percent change from previous period except as noted, SA) 1998 Indicator Q3 Industrialproduction Euro-11 1 Germany France Italy Unemployment rate Euro-112 Germany France Consumer prices3 Euro-11 4 Germany France Italy 1999 Q4 Q1 Feb. Mar. Apr. May .2 1.0 .1 .1 -.4 -2.1 -.2 -1.9 .0 -.2 -.4 1.5 -.4 -3.2 -.5 -1.3 .6 .1 1.2 1.9 n.a. 0.7 -.6 -1.4 n.a. n.a. n.a. n.a. 10.9 10.9 11.8 10.7 10.7 11.5 10.5 10.6 11.5 10.5 10.6 11.5 10.5 10.6 11.5 10.4 10.6 11.4 n.a. 10.5 n.a. 1.1 .7 .6 2.0 .8 .4 .3 1.7 .9 .3 .3 1.4 .8 .2 .2 1.4 1.0 .4 .4 1.3 1.1 .7 .4 1.5 n.a. .4 .4 1.5 1.Index excludes construction. May figure includes Eurostat estimate for Portugal. 2. Standardized to ILO definition. Includes Eurostat estimates in some cases. 3. Percent change from year earlier. 4. Eurostat harmonized definition. Euro-11 Forward-looking Indicators (Percent balance measure, SA) 1998 Indicator 1999 Q3 Q4 -4.6 -2.0 -.3 0.0 -1.0 -3.0 -4.0 -13.3 -15.0 -9.0 -9.0 -9.0 -7.0 -8.0 -.7 -7.3 -10.6 -11.0 -12.0 -11.0 -10.0 Production expectations 11.0 3.0 1.0 1.0 0.0 2.0 3.0 Total orders -4.0 -13.0 -20.0 -20.0 -23.0 -20.0 -20.0 Stocks 8.0 11.0 14.0 15.0 14.0 14.0 14.0 Consumer confidence' Construction confidence 2 Industrial confidence 3 Q Feb. Mar. Apr. May Ofwhich: NOTE: Diffusion indexes based on European Commission surveys in individual countries. 1. Averages response to questions on financial situation, general economic situation, and purchasing attitudes. 2. Averages response to questions on output trend and orders. 3. Averages response to questions on production expectations, orders, and stocks. IV-18 In late May, the ECOFIN Council, which is composed of finance ministers of the fifteen member states in the European Union, approved a proposal submitted by Italian Finance Minister Amato to change the official fiscal deficit target for 1999 from 2 percent of GDP to a maximum of 2.4 percent of GDP. The revision to Italy's budget deficit was due to a reduction in the official growth projection for 1999 in light of disappointing growth so far this year. This decision weighed on the euro, as it generated concern about prospects for fiscal discipline in Europe. Economic activity in the United Kingdom remained very weak in the first quarter, with real GDP essentially unchanged from its fourth-quarter level. Consumption expenditures grew a robust 4.5 percent (SAAR), the strongest rate in more than a year. Government spending was also up sharply, but investment spending declined after growing at double-digit rates in the previous two quarters and inventories subtracted about 3/4 percentage point from growth. Net exports made a significant negative contribution to growth for the sixth consecutive quarter, as exports fell and imports rose moderately. U.K. Real GDP (Percent change from previous period, SAAR) 1998 Component 19971 Q2 GDP 1999 19981 Q3 Q4 Q1 3.9 1.1 1.2 1.1 .3 -. 1 Total domestic demand Consumption Investment Government consumption Inventories (contribution) 5.2 4.3 10.6 0.2 .7 2.6 1.7 7.2 1.7 -.0 2.1 1.9 -2.8 1.7 1.1 1.7 .3 11.0 2.2 -.7 3.9 2.2 12.2 1.1 .2 1.9 4.5 -6.7 5.8 -.7 Exports Imports Net exports (contribution) 7.5 11.3 -1.2 .1 6.2 -2.0 7.0 10.4 -1.2 2.1 5.8 -1.3 -6.1 5.2 -3.7 -5.3 1.2 -2.1 1. Q4/Q4. Preliminary indicators suggest that the pace of activity picked up in the second quarter. Industrial production edged up further in April to a level 0.4 percent above the first-quarter average. Business surveys through May point to renewed expansion of activity, and business confidence through May has risen sharply from very low levels late last year. For April and May on average, the volume of retail sales was up 0.6 percent from the first-quarter average. IV-19 Conditions in the labor market remain healthy. The official unemployment rate was unchanged at 4.5 percent in May, and the Labor Force Survey unemployment rate edged down to 6.2 percent for the February-April period as employment expanded modestly. U.K. Economic Indicators (Percent change from previous period except as noted, SA) 1998 1999 Indicator Q4 Q3 Q1 Feb. Mar. Apr. May Industrial production .0 -.8 -.9 .0 .4 .1 n.a. Retail sales .4 -.1 1.0 -.3 .6 -.3 1.0 Unemployment rate1 4.6 4.6 4.5 4.6 4.5 4.5 4.5 Business confidence 2 -11.7 -23.0 -10.3 -10.0 -8.0 -1.0 15.0 Retail prices 3 2.6 2.6 2.6 2.4 2.7 2.4 2.1 Producer input prices4 -9.1 -9.2 -5.8 -6.5 -3.8 -1.3 -2.6 5.1 4.6 4.6 4.6 4.8 4.6 Average earnings 4 n.a. 1. Percent. 2. Percentage of firms expecting output to increase in the next four months less percentage expecting output to decrease. 3. Excluding mortgage interest payments. Percent change from year earlier. 4. Percent change from year earlier. n.a. Not available. ... Not applicable. The twelve-month rate of retail price inflation (excluding mortgage interest rates) fell to 2.1 percent in May, the lowest inflation rate in over four years. Producer input prices for materials and fuel edged up in April, but were little changed in May. On a twelve-month basis, input prices were down 2.6 percent in May. With sterling stronger than expected, the Monetary Policy Committee of the Bank of England voted to reduce the repo rate 25 basis points to 5 percent at its June meeting. The MPC had noted in May that if sterling did not depreciate as expected, "further easing of monetary policy might be needed to prevent undershooting of the inflation target." Canadian GDP rose 4.2 percent (SAAR) in the first quarter, maintaining the vigorous pace of the previous quarter. Robust U.S. demand for Canadian products continued to fuel activity, as export growth remained strong and net exports contributed 1.8 percent towards growth in the first quarter. Domestic demand rose 3.3 percent, as firms expanded their workforce and augmented IV-20 their capital stock sharply to keep pace with the strong external demand. These sizable employment gains helped boost consumer spending by over 5 percent in the quarter. Partially offsetting this pickup in fixed investment and consumption, inventory investment slowed to a more sustainable pace following the rebuilding of strike-depleted inventories in the fourth quarter of 1998. Canadian Real GDP (Percent change from previous period, SAAR) Component 19971 1998 19981 Q2 Q3 1999 Q4 Q1 4.4 2.8 1.1 2.6 4.8 4.2 Total domestic demand Consumption Investment Government consumption Inventories (contribution) 4.9 4.1 10.6 .3 .4 1.1 2.0 2.0 2.1 -.8 2.2 5.8 6.5 1.5 -2.7 -4.0 .9 .1 -.1 -4.6 4.9 .0 4.5 2.4 3.4 3.3 5.1 7.6 -.6 -1.1 Exports Imports Net exports (contribution) 11.9 14.6 -.8 9.0 4.2 1.9 5.6 7.6 -.6 11.2 -6.2 6.5 14.2 15.9 -.2 8.5 4.2 1.8 GDP 1. Q4/Q4. Recent indicators suggest that growth has slowed from the 4.2 percent pace of the first quarter. Employment in April and May on average was down from its level in the first quarter. Gains in consumer spending also appear to have moderated, as retail sales fell 0.4 percent in April. New orders of manufactured goods fell sharply in both March and April, albeit from a high level. However, substantial improvements in consumer and business confidence imply that any abatement in the pace of activity may be modest. Twelve-month CPI inflation has risen sharply in recent months mainly as a result of higher energy prices. At the same time, the twelve-month change in core prices (which exclude energy and food prices) also rose from slightly below 1 percent in February to 1.4 percent in May. This increase in core inflation along with the announcement of a tightening bias by the Federal Reserve has led to a sharp turnaround in market expectations regarding future policy actions by the Bank of Canada. Following these events, futures contracts on Bankers' Acceptances priced in over 50 basis points of tightening by the Bank of Canada by September of this year. IV-21 Canadian Economic Indicators (Percent change from previous period except as noted, SA) 1998 Indicator Q3 1999 Q4 Feb. Q1 Mar. Apr. May. .3 1.1 .8 .1 .3 n.a. n.a. Industrial production -.4 1.2 1.0 -.3 .3 n.a. n.a. New manufacturing orders 1.9 4.5 .6 5.2 -2.8 -1.5 n.a. Retail sales .6 -. 1 2.5 -.2 1.1 -.4 n.a. Employment .5 1.3 .9 .1 -.2 .1 -.1 8.3 8.0 7.8 7.8 7.8 8.3 8.1 .9 1.1 .8 .7 1.0 1.7 1.6 103.2 109.8 116.9 ... ... ... 128.6 132.3 150.1 ... ... ... GDP at factor cost Unemployment rate1 Consumer prices2 Consumer attitudes 3 Business confidence 4 1. Percent. 2. Percent change from year earlier. n.a. Not available. ... Not applicable. 3. Level of index, 1991 = 100. 4. Level of index, 1977 = 100. IV-22 External Balances (Billions of U.S. dollars, SAAR) 1999 Q2 1998 Q3 Q4 Q1 Apr. May Japan Trade Current account 114.0 113.3 107.3 118.5 113.0 133.0 113.1 118.0 105.4 83.0 104.4 n.a. EU-11 Trade1 Current account' 109.6 97.7 105.8 86.3 97.5 84.3 47.4 41.3 n.a. n.a. Germany Trade Current account 75.7 3.6 73.9 7.3 71.9 -18.3 79.3 -4.1 n.a. n.a. France Trade Current account 22.3 37.0 29.4 42.7 26.2 48.3 18.5 34.5 16.8 n.a. n.a. n.a. Italy Trade Current account' 30.7 30.8 27.9 42.6 25.4 20.5 18.8 16.8 n.a. n.a. -31.0 -8.0 -34.7 15.8 -41.4 6.4 -45.4 -11.9 -42.1 10.7 -12.3 15.0 -10.1 12.9 -10.7 20.4 -3.6 19.7 Country and balance UnitedKingdom Trade Current account Canada Trade Current account 1. Not seasonally adjusted. n.a. Not available. ... Not applicable. IV-23 Consumer Price Inflation in Selected Industrial Countries (12-month change) Germany Japan Percent Percent 1994 France 1995 1996 1997 1998 1999 United Kingdom Percer Percent 7 6 5 4 3 2 1 1994 Italy 1995 1996 1997 1998 1999 1994 1995 1996 1997 1998 1999 Canada Percent 5 4 3 2 -1 -2 IV-24 Industrial Production in Selected Industrial Countries Jn 1994=100 - 120 Japan - 1994=100 - 120 Germany - 110 110 - 100 100 1994 i 1995 I 1996 ' I lI ' 1 II. 1997 1998 1999 90 France 120 - 110 1 I I I1 1 1997 1998 1996 11 11 11 1994 1995 90 1999 United Kingdom 120 - -110 100 100 I 1994 1995 1996 1997 1998 I 90II I Italy - I 1994 1999 - 120 120 1995 1996 I II III 1997 1998 1999 anada120 - - 110 195 1995 196 1996 197 1997 198 1998 199 1999 120 - 110 100 194 1994 90 I 100 190 1 1994 195 1995 19 1996 19 1997 19 1998 1 1999 90 IV-25 Economic Situation in Other Countries There is increasing evidence that the international financial crisis may be abating, although its effects on economic activity in Latin America are far from over. In Brazil and Mexico, output growth appears to have recovered somewhat, inflation has remained subdued, and the trade surplus has improved. Venezuela's economy may be bottoming out, although prospects remain precarious. In Argentina, pressures in financial markets have recently resurfaced; GDP contracted sharply in the first quarter, deflation has intensified, and imports have fallen sharply. In developing Asia, Korea and the ASEAN economies appear to be recovering particularly strongly from last year's deep recession. Growth remained strong in Taiwan, and in China, industrial production remains firm. In Hong Kong, GDP fell further in the first quarter, but financial market pressures have lessened markedly in recent months, suggesting improved prospects. Trade surpluses in Korea, the ASEAN countries, and China are falling as imports have begun to rebound. Inflation throughout developing Asia has remained moderate or declined, with more rapid deflation in Hong Kong. In Russia, GDP rose in the first quarter, inflation has remained steady, and the trade surplus remains strong. The political landscape remains a concern. In Brazil, recent data suggest that economic activity may have bottomed out. Real GDP posted surprisingly strong growth in the first quarter (SAAR), boosted by special factors such as phenomenally high growth in agriculture (reflecting in part an early harvest). However, industrial production fell slightly in April, after rising in March, and unemployment has remained high by historical standards. The weak economy has helped keep inflationary pressures at bay; the CPI has risen by less than 4 percent since the end of January, after the real's peg to the dollar was abandoned. The trade balance has improved less than expected following the large depreciation of the real; the trade balance shifted from a deficit of $6-1/2 billion in 1998 to a small surplus over the February-May period (SAAR). Although imports fell 18 percent, exports also fell by 7 percent. The decline in exports reflects weak demand from Argentina and other Latin trading partners and a fall in world prices of many primary commodity exports. Developments since mid-May have fueled concerns that the fiscal reforms may be stalling. Various court challenges to reforms passed by Congress earlier this year have called into question about 1 percentage point of the fiscal adjustment that had been expected for 1999. The privatizations of several state government electricity firms have been postponed under pressures from workers and other IV-26 privatization opponents. Finally, President Cardoso's approval rating has fallen to its lowest level ever amid increasing infighting among members of his fragile political coalition. These developments contributed heavily to a rise in market interest rates over late May and early June, despite surprisingly low inflation and the continued gradual reduction in the central bank's overnight lending rate, the Selic rate. The Selic rate has fallen from 45 percent in early March to 22 percent recently. All indications are that Brazil has so far satisfied all of the performance criteria under its IMF program, including fiscal targets. The IMF is in the process of reviewing recent performance and setting performance criteria for the rest of the year. Brazilian Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 1999 1998 Q4 Q1 Mar. Apr. May Real GDP' 2.0 -1.9 -6.6 4.1 ... ... .. Industrial production 3.9 -2.1 -3.7 .4 1.9 -.3 n.a. Unemployment rate 2 5.7 7.6 7.6 7.4 7.4 7.5 n.a. 5.2 1.7 1.8 2.3 3.0 3.4 3.1 Trade balance 4 -8.4 -6.4 -5.3 -1.5 1.6 -2.5 -.6 Current account1 -33.8 -34.9 -46.8 -20.7 -18.2 -30.4 Consumer prices 3 -19.7 1. Annual rate. Annual figures are Q4/Q4. 2. Percent. "Open" unemployment rate. 3. Annual figures are December-over-December. Quarterly figures are the quarterly average relative to the same quarter a year earlier. Monthly figures are the level in the month relative to a year earlier. Price index is IPC-A. 4. Billions of U.S. dollars, annual rate. 5. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. Recent Mexican data suggest that the economy continues to recover from its slowdown in the fourth quarter of 1998. Although industrial production fell slightly in April on a seasonally adjusted basis, it has risen since the beginning of the year. The trade deficit has narrowed since the beginning of the year, as maquiladora exports to the United States were strong, and petroleum prices surged from their depressed levels at the beginning of the year. Consumer prices in May rose at their slowest pace since 1994 as spending remained sluggish while the peso's strength kept import prices down. Since December, inflation has been 15.6 percent (SAAR), about a percentage point lower than the rate over the same period in 1998. IV-27 Mexican Economic Indicators (Percent change from previous period, SA, except as noted) 1999 1998 Indicator 1997 1998 Q1 Q4 Mar. Apr. May Real GDP' 7.2 2.9 .1 1.3 ... Industrial production 9.3 6.6 -. 4 1.2 1.5 -1.3 n.a. Unemployment rate 2 3.7 3.2 3.0 2.7 2.7 2.7 n.a. 15.7 18.6 17.6 18.6 18.3 18.2 18.0 -7.7 -7.3 -6.3 -7.4 -4.8 -6.0 Consumer prices 3 Trade balance4 .6 ... Imports 4 109.8 125.2 128.0 129.3 133.3 132.0 141.6 4 110.4 117.5 120.7 123.0 125.9 127.2 135.6 -7.4 -15.8 -18.6 -11.7 ... Exports Current account5 . 1. Annual rate. Annual figures are Q4/Q4. 2. Percent. 3. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 4. Billions of U.S. dollars, annual rate. 5. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. The new Bank Deposit Insurance Institute (IPAB), which was created to rescue the bank bailout fund, announced on June 1 the transition timetable for limiting deposit insurance to about $100,000 per account by the year 2005. The IPAB also established rules for bank contributions to the insurance fund and is determining the process for selling bank assets acquired during the 1995 peso crisis. In what may be the first test of its ability to resolve lingering banking sector problems, the IPAB announced on June 18 that Grupo Financiero Serfin SA, Mexico's third largest banking group, will be taken over by the government and auctioned off if current shareholders are unwilling to recapitalize the bank themselves. On June 15, Mexico announced that it is requesting a $4.1 billion 17-month standby agreement from the International Monetary Fund. The new loan, which is likely to be approved by the IMF Executive Board in early July, is part of a larger effort by Mexico to cover the major portion of its outstanding external debt payments through the next presidential election in the fall of 2000. Over the next year, Mexico will receive additional credit of $5.2 billion from the World Bank, $3.5 billion from the Inter-American Development Bank, and $4.0 billion from the U.S. Eximbank. Moreover, the $6.8 billion swap facility IV-28 with Canada ($800 million), the U.S. Treasury ($3 billion), and the Federal Reserve ($3 billion) has been renewed through December 2000 under the North American Framework Agreement. In recent weeks, financial markets in Mexico have seesawed as investors first grew nervous over the Fed's announcement of a bias toward tightening and then were calmed by the news of Mexico's likely agreement with the IMF. On May 25, the peso depreciated 2.2 percent to 9.6 pesos per dollar, and the Bank of Mexico responded by selling $65 million to stabilize the currency. Since June 15, however, markets have rallied on the news of Mexico's extended credit lines and expectations of only a mild hike in U.S. interest rates. Interest rates on the benchmark 28-day Mexican treasury bills (cetes) fell 124 basis points to yield 20.48 percent at the June 22 auction, while the peso appreciated nearly 2 percent to 9.3 pesos per dollar. In Argentina, pressures in financial markets have recently resurfaced and data on economic activity confirm that the recession continues. In the first quarter, seasonally adjusted GDP fell for the third straight quarter. Industrial production grew in April from the previous month (SA) but was nevertheless about 12 percent lower than a year earlier; in the first quarter, industrial production was down sharply from the fourth quarter last year. Exports continued to decline, but the sharp slowdown in economic activity caused imports to decline by more, thus narrowing external imbalances. March's trade surplus was the first surplus since early 1997. With weak aggregate demand, consumer prices fell in May for the fourth consecutive month. Campaigning for the October presidential elections is underway. Uncertainty about politics and about the future of Argentina's currency peg (including the dollarization proposal) has led to a modest increase in interest rates since midMay. President Menem has expressed interest in moving quickly on official dollarization and having the process underway before he leaves office in December. However, political support for immediate dollarization appears weak--the likely presidential candidate from Menem's own Peronist party (rival Eduardo Duhalde, the governor of the Buenos Aires province) and the presidential candidate of the opposition Alliance party have both recently spoken out in favor of maintaining the convertibility of the Argentine peso to the U.S. dollar, but against the idea of dollarization. IV-29 Argentine Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 1999 1998 Q4 Q1 Mar. Apr. May . 8.5 -.5 -5.7 -6.1 ... ... Industrial production 8.6 .4 -7.4 -4.3 -4.0 3.8 rate 2 14.9 12.9 12.4 n.a. ... ... .3 .7 .8 -.1 -.6 -.7 -1.2 -2.2 -3.6 -2.1 .0 2.9 n.a. -9.4 -12.4 -14.8 ... ... Real GDP' Unemployment Consumer prices3 Trade balance 4 Current account 5 -2.1 n.a. n.a. .. 1. Annual rate. Annual figures are Q4/Q4. 2. Percent, NSA. Q4 figures are from a survey conducted in October. 3. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 4. Billions of U.S. dollars, annual rate. 5. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. With the recent rise in oil prices, the Venezuelan economy is improving slowly, but still remains precarious. Car sales in May rose nearly 20 percent from April, but nevertheless were down 50 percent from their year earlier. The 12-month inflation rate continued to decline slowly in May but, with the bolivar not allowed by the government to depreciate as rapidly, the real exchange rate continues to appreciate and become further overvalued. While the overall trade balance remains in surplus, the non-oil trade deficit fell to -$8.4 billion in February (SAAR). Venezuela has decided not to try to sign the monitoring agreement with the IMF that, until recently, it was actively seeking. It appears the government feels that the stringent conditions for such an agreement--including a rise in gasoline prices, extensive government spending cuts, and steps toward a more competitive exchange rate--are too costly politically, as President Chavez prepares for the July 25 election of a new constituent assembly that would have the power to change the constitution. It is generally believed that the lack of an IMF agreement will make it very difficult for the government to raise a proposed $2 billion on international capital markets later this year designed to help cover the budget deficit. IV-30 Venezuelan Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 1998 M Q4 Real GDP' 1999 Q1 Mar. Apr. May 5.5 -8.2 -19.8 n.a. ... ... . 11.7 11.2 11.0 n.a. ... ... . 37.6 29.9 31.2 27.6 25.0 23.5 Non-oil trade balance4 -7.5 -8.6 -8.1 n.a. n.a. n.a. n.a. balance 4 10.6 3.4 2.9 n.a. n.a. n.a. n.a. 4.7 -1.7 -.9 n.a. ... ... Unemployment rate 2 Consumer Trade prices3 Current account 5 29.1 1. Annual rate. Annual figures are Q4/Q4. 2. Percent. NSA. 3. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 4. Billions of U.S. dollars, annual rate. 5. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. In Korea, the pace of the recovery appears to have accelerated further. Real GDP increased at nearly a 15 percent seasonally adjusted annual rate in the first quarter. Domestic demand rose, as a strong increase in consumption more than offset a further decline in fixed investment. Industrial production declined in April, but reversed only one-third of the very strong rise of the previous month. The unemployment rate declined to 6.4 percent in May, well below its peak late last year of over 8 percent. Despite the recent increase in the pace of activity, inflation has remained subdued, with consumer prices less than 1 percent above their year-earlier level. The trade and current account surpluses have continued to shrink as imports have risen with the revival of activity. The current account surplus in the first four months of this year was nearly 40 percent below the surplus in the corresponding period last year. Despite progress, government efforts to restructure the financial system remain far from complete. The Financial Supervisory Commission announced that nonperforming loans of financial institutions were 11 percent of total loans at the end of the first quarter, up slightly from end-1998. With a stricter definition of non-performing loans going into effect at the end of the year, this figure is expected to rise significantly further. The previously announced sale of government-owned Seoul Bank to Hong Kong and Shanghai Bank has been IV-31 delayed due to disputes over the terms of the sale. The other planned sale of a Korean bank to foreign interests--the acquisition of Korea First Bank by Newbridge Capital-collapsed last month due to similar disagreements. Korean Economic Indicators (Percent change from previous period, SA, except as noted) Indicator 1997 1998 1999 1998 Q4 I Mar. Q1 Apr. May Real GDP' 3.7 -5.3 6.0 14.7 Industrial production 5.3 -7.3 10.0 1.9 4.7 -1.9 n.a. Consumer prices 2 6.6 4.0 6.0 .7 .5 .4 .8 -3.2 41.2 35.8 33.3 30.6 31.2 n.a. -8.2 40.0 34.7 27.2 31.4 24.2 n.a. Trade balance 3 Current account 4 ..... 1.Annual rate. Annual figures are Q4/Q4. 2. Percent change from year earlier. 3. Billions of U.S. dollars, annual rate. 4. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. Recent indicators for the ASEAN countries provide further evidence that economic activity in the region has bottomed out and a recovery has begun. First quarter GDP growth was stronger than expected in Indonesia, the Phillippines and Singapore. Industrial production in Malaysia and Singapore rose significantly, reflecting renewed vigor in the electronics sector, while industrial production in Thailand and the Philippines began to accelerate. Notwithstanding increasing export values across the region, trade surpluses have begun to narrow since late last year as import growth has resumed, with the Philippines even recording a trade deficit in April. ASEAN financial markets have surged recently as signals of an economic recovery have begun to emerge. The region's currencies have remained firm, while the Indonesian rupiah has strengthened on optimism about prospects for political and economic reforms following national elections in June. Inflation continues to decline across the region, mainly reflecting weak domestic demand. IV-32 ASEAN Economic Indicators: Growth (Percent change from previous period, SA, except as noted) Indicator and country 1997 1998 1999 1998 4 Feb. Q1 Q4 Mar. Feb. Apr. Real GDP' Indonesia 2.3 -19.6 -.0 20.6 ... ... .. Malaysia 6.0 -10.3 7.4 8.5 ... ... .. Philippines 5.0 -1.8 -1.6 3.9 ... ... . Singapore 8.0 -.9 .9 6.4 ... ... Thailand -4.8 n.a. n.a. n.a. ... ... .. Industrialproduction Indonesia 13.2 -13.7 5.6 5.9 ... ... .. Malaysia 10.7 -7.2 2.5 1.6 10.0 5.8 -3.6 Philippines 5.2 -11.4 -3.7 5.4 2.5 -.3 -2.7 Singapore 4.7 -.4 2.5 6.0 5.6 .1 -2.2 Thailand -.5 -10.0 2.6 1.6 1.6 -.7 3.1 1. Annual rate. Annual figures are Q4/Q4. n.a. Not available. ... Not applicable. ASEAN Economic Indicators: Trade Balance (Billions of U.S. dollars, SAAR) 1998 Country 1997 1999 1998 Q4 Q1 Mar. Apr. May Indonesia 11.9 21.5 15.5 19.6 26.5 24.9 n.a. Malaysia -.1 14.9 19.3 19.4 21.5 20.2 n.a. -10.5 -.2 2.7 2.6 .1 -1.5 n.a. Singapore -7.4 8.3 9.5 6.7 6.1 2.5 1.9 Thailand -4.6 12.2 11.3 11.1 10.7 11.8 n.a. Philippines n.a. Not available. ... Not applicable. IV-33 ASEAN Economic Indicators: CPI Inflation (Percent change from year earlier, except as noted) Country 1997' 1998' 1998 1999 Q4 Q1 Feb. Mar. Apr. May Indonesia 10.3 77.6 78.4 56.0 53.7 45.4 38.2 30.7 Malaysia 2.9 5.3 5.4 4.0 3.9 3.0 2:9 2.9 Philippines 6.6 10.4 10.6 10.1 9.9 8.7 7.9 6.7 Singapore 2.0 -1.5 -1.6 -.6 -.6 -.6 -.3 .1 Thailand 7.6 4.3 5.0 2.7 2.9 1.6 .4 -.5 1.December/December. n.a. Not available. ... Not applicable. The Finance Ministry of Thailand stated that Thai banks will now be allowed to retroactively use the equity portion of hybrid security issuances to meet previous entry requirements for the government's tier-one recapitalization program. The government of Singapore announced that it will open its retail banking sector to foreign investors by issuing full banking licences to a limited number of foreign banks and by raising the limit on foreign ownership of domestic banks. In Hong Kong, real GDP continued its steady decline in the first quarter. The unemployment rate rose to 6.3 percent in the March-May period, up from 6.0 percent in the December-February period. Consumer prices continue to fall sharply. The merchandise trade deficit narrowed slightly in April from March. Foreign exchange reserves were $89 billion at the end of May, down slightly from April but nevertheless about $2 billion higher than their September low. Spreads between one-year Hong Kong government debt and U.S. Treasuries were around 80 basis points on June 22, roughly unchanged since mid-May, but nevertheless down sharply from their levels of nearly 280 basis points in January. IV-34 Hong Kong Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 1999 1998 Q4 Q1 Mar. Apr. May Real GDP' 2.8 -5.7 -1.4 -2.8 ... Consumer prices2 5.2 -1.6 -0.8 -1.8 -2.6 -3.8 -4.0 -20.6 -10.6 -4.5 -2.5 -6.0 -3.5 n.a. Trade balance 3 1. Annual rate. Annual figures are Q4/Q4. 2. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 3. Billions of U.S. dollars, annual rate. Imports are c.i.f. n.a. Not available. ... Not applicable. In China, industrial production growth remained relatively steady through April. Moderate deflation continues, reflecting weak private demand as well as falling import prices. The trade surplus has narrowed since the fourth quarter of 1998, although it began widening again in May. The seasonally adjusted level of exports, which fell sharply during 1998, have grown rapidly since the fourth quarter. Exports in the March-May period (SA) were 5 percent higher than in the December-February period. Over the same period, however, imports surged--the seasonally adjusted level of imports rose 22 percent, after being roughly flat since 1995. The strength in imports appears to reflect an antismuggling campaign begun in the second half of last year. As a result of this campaign, some smuggled imports that were previously unrecorded in the customs statistics (and thus increased China's sizeable errors and omissions in the balance of payments) are now passing through official import channels. China cut interest rates in mid-June, hoping to encourage domestic spending. Deposit rates were cut about 1-1/2 percentage points (to 2-1/4 percent for oneyear deposits), while lending rates were cut about /2 percentage point. The rate cut, along with a reduction in taxes on stock transactions and an announcement that more private companies would be allowed to list on the stock market, contributed to surging Chinese share prices. IV-35 Chinese Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 Q1 1998 Q4 Real GDP' Industrial production2 Consumer prices Mar. Apr. May 8.2 9.5 13.8 2.2 ... ... . 11.7 7.8 9.6 12.5 11.5 8.9 n.a. .4 -1.0 -1.1 -1.4 -1.8 -2.2 n.a. 40.4 43.6 35.1 19.4 6.3 11.1 22.7 2 Trade balance 3 Q1 1999 I Mar. 1. Annual rate. Quarterly data estimated by staff from reported four-quarter growth rates. Annual figures are Q4/Q4. 2. Percent change from year earlier. 2. Billions of U.S. dollars, annual rate. Imports are c.i.f. n.a. Not available. ... Not applicable. In Taiwan, real GDP rose strongly in the first quarter. The unemployment rate was 2.8 percent in May, roughly unchanged from the beginning of the year. Prices in May were slightly above their year-earlier level, ending several months of deflation. Taiwan's trade surplus rose sharply in the first five months of 1999, with the value of exports rising 5 percent from a year earlier and the value of imports falling 6 percent. Taiwan's foreign exchange reserves rose to US$96 billion at the end of May, the highest level since July 1995. Taiwan Economic Indicators (Percent change from previous period, SA, except as noted) 1998 Indicator 1997 Q4 Real GDP' 1999 1998 Mar. Q1 Apr. May 7.1 3.7 3.9 4.5 ... ... 7.3 4.0 -.3 1.6 4.7 1.5 -1.5 .3 2.1 2.9 .7 -.5 -.1 .5 Trade balance3 7.5 5.9 .4 14.2 15.4 19.6 23.7 Current account 4 7.7 3.4 2.0 8.4 ... ... .. Industrial production Consumer prices 2 1. Annual rate. Annual figures are Q4/Q4. 2. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 3. Billions of U.S. dollars, annual rate. Imports are c.i.f. 4. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. IV-36 The Russian economy has begun to show some signs of improvement, but a fractured political landscape continues to impede progress on reforms needed to pull the economy out of its recession, secure economic stability, and obtain funding from the IMF. On the bright side, month-to-month inflation has remained steady at around 3 percent since March, industrial output was up 1.5 percent in the 12 months to April, and GDP surged in the first quarter. The exchange rate has remained under 25 rubles per dollar since mid-April and has even strengthened since midMarch. The RTS stock index, up 65 percent this year, recently regained its precrisis level in ruble terms. The weak ruble and rising oil prices have enabled Russia to run large trade surpluses. Russian Economic Indicators (Percent change from previous period, SA, except as noted) Indicator 1997 1998 - 1998 Q4 1999 Q1 Mar. May Apr. Real GDP' 2.6 -9.0 -.9 5.7 Industrial production 1.7 -5.1 2.9 10.4 3.3 -.2 1.0 Unemployment rate 2 10.8 11.5 11.7 13.0 14.2 14.1 14.1 11.0 84.4 70.0 102.8 107.7 113.1 116.7 6.8 71.3 23.9 -16.2 8.0 -1.2 .2 14.7 14.2 34.2 27.3 31.5 37.1 n.a. 4.0 2.4 26.6 n.a. Consumer prices3 Ruble depreciation 4 Trade balance 5 Current account 6 ... ... ... ... .. .. 1. Annual rate. Annual figures are Q4/Q4. 2. Percent. 3. Percent change from year-earlier period, except annual figures, which are Dec./Dec. 4. End of period, NSA. 5. Billions of U.S. dollars, annual rate. 6. Billions of U.S. dollars, NSA, annual rate. n.a. Not available. ... Not applicable. However, political instability, underscored by last month's sacking of the Primakov government and the ongoing battle over IMF-required reforms, continues to inhibit the ability of the authorities to consolidate economic gains and restore confidence in the economy. Although Russia seems to have successfully avoided any fallout from the sacking of Primakov and appointment of Sergei Stepashin to the post of Prime Minister, it has become clear that the legislature will neither quickly nor quietly pass key reforms on taxation and bank restructuring. Russia may, however, be able to tolerate a delay in IMF IV-37 disbursements, as the economy has outperformed expectations recently, enabling reserves to rise $500 million over the past four weeks. Also, political momentum for a restructuring of debts owed to bilateral and commercial creditors appears to be gathering speed, as members of the G-7 move to improve relations with Russia following the peace agreement in the Balkans.
@FedFRASER