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Prefatory Note The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. 1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff. CONFIDENTIAL (FR) CLASS III - FOMC March 25, 1988 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the staff Board of Governors of the Federal Reserve System TABLE OF CONTENTS THE DOMESTIC NONFINANCIAL ECONOMY Personal income and consumption..................... Sales of domestic autos and light trucks ............. Tables Personal income, consumption, and saving.............. Sales of domestic autos and light trucks.............. THE FINANCIAL ECONOMY Tables Monetary aggregates .................................. Commercial bank credit and short- and intermediateterm business credit............................... Selected financial market quotations.................. Page SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Personal Income and Consumption Total personal income increased at a $33.9 billion annual rate in February, following a $10.6 billion increase in January. Both figures were affected by the timing of farm subsidy payments and other special factors; excluding these factors, personal income increased $25.2 billion in February and $18 billion in January. Wages and salaries posted a gain of $15.4 billion in February, up slightly from the average pace of the past several months. Preliminary estimates for February showed nominal personal consumption spending increasing 0.7 percent, after a rise of 0.1 percent in January. Spending on motor vehicles and parts accounted for about one-fifth of the overall rise during February, apparently reflecting a strong response to the widespread availability of manufacturers' incentives on domestically produced cars and trucks. Spending on services moved up sharply for the second month in a row in February, while outlays for nondurable goods edged up 0.2 percent from the January level. With data on spending and income now in hand for a period of four months since the stock market crash, it perhaps is appropriate to offer a very tentative assessment of the wealth effect on consumption. Household net worth fell sharply relative to disposable personal income last October, and as a result, the staff projection for consumer spending relative to income was revised down in the October Greenbook. The drop in stock prices prompted the staff to raise the forecast for the saving rate by roughly 3/4 percentage point from 1988Q1 on. This increase in the saving rate was based on a judgement by the staff that only about one-half to two-thirds 6f the peak-to-trough reduction in the value in the stock market should be reflected in the forecast. Several factors argued against a larger revision in the saving rate: first, the stock market had not been near its peak for very long, and there had been a sense of skepticism in the markets about the sustainability of the high levels reached. This was interpreted by the staff to mean that consumers might not have incorporated fully the previous run-up in stock prices into their spending behavior. Second, the stock market already had declined $200 billion from its peak value by the time of the September Greenbook, so that some of the overall decline in wealth had been reflected in the previous forecast. Third, interest rates fell in the wake of the stock market crash, boosting the value of fixed-income financial assets. In the period since the crash, the personal saving rate indeed has increased from the historically low levels of mid-1987. Consumption growth has been a bit stronger than expected, but income growth also has been more rapid than anticipated in our October forecast. The personal saving rate, which had averaged 4 percent in 1986Q4 and 1987Q1 and fallen to about 3 percent during 1987Q2 and Q3, has moved up to an average of 4-3/4 percent in the past four months. In part, the increase in the saving rate reflects a variety of special factors. For example, farm subsidy payments provided a temporary boost to personal income in October, and to a lesser extent in December and February; swings in such payments are not thought to have large immediate effects on spending. Also, auto incentive plans accelerated some consumer spending into August and September, somewhat depressing the saving rate relative to the underlying trend. Such considerations suggest that some caution is appropriate in stating the "before" and "after" saving rates, and, of course, many forces other than the stock market decline have affected consumer behavior. Nonetheless, at this point the saving rate rise that has occurred does seem to be prima facie evidence of a significant wealth effect, one at least as large as was incorporated in the staff forecast. Sales of domestic autos and light trucks Sales of domestically produced autos were 6.7 million units at annual rate in mid-March, down substantially from the average of 7.9 million units in February and early March. by the timing of incentive programs. Sales likely were affected In particular, programs originally had been scheduled to end for General Motors cars at the end of February, boosting sales late in that month, and to end at Ford on March 8, boosting sales in early March. Both incentive programs have now been extended until the end of April. Sales of domestically produced light trucks also fell in mid-March, to 3.8 million units from a 4.4 million unit rate early in the month. affected the timing of these sales. Incentives also have PERSONAL INCOME, CONSUMPTION, AND SAVING 1987 1987 Q3 1988 Jan. Q4 Feb. -Average monthly change, billions of dollarsTotal personal income Wages and salaries Farm proprietors Other 21.7 12.2 .2 22.6 13.6 -. 7 28.6 13.8 2.6 10.6 13.3 -8.2 9.3 9.7 12.2 5.5 33.9 15.4 8.5 10.0 * --Percent change -- Nominal PCE Durables Nondurables Services Memo: Personal saving rate (percent) 5.7 9.5 1.5 -1.6 30.1 -20.1 .1 5.0 8.3 1.8 9.5 2.7 7.4 -.8 .8 3.7 2.8 4.8 4.8 -. 6 .7 1.8 .2 .8 5.2 *Changes for periods longer than one month are at annual rate; one-month changes are at monthly rate. SALES OF DOMESTIC AUTOS AND LIGHT TRUCKS (Millions of units at annual rate, FRB seasonals) 1-10 11-20 21-30 Month January Total Cars Trucks 9.107 5.773 3.334 11.207 7.460 3.747 11.700 7.657 4.043 10.924 7.129 3.795 February Total Cars Trucks 12.597 8.042 4.555 11.496 7.443 4.053 13.106 8.508 4.598 12.226 7.925 4.301 March Total Cars Trucks 12.212 7.843 4.369 10.503 6.678 3.825 SALES OF DOMESTIC AUTOS BY MAKER (Millions of units at annual rate, FRB seasonals) General Motors1 1-10 4.092 1988 February 11-20 21-29 Month 3.775 4.398 4.052 March 1-10 11-20 3.530 3.253 Ford 2.316 2.143 2.105 2.160 2.550 1.912 Chrysler 1.201 1.156 1.292 1.207 1.284 1.087 Volkswagen .040 .041 .065 .049 .029 .036 Honda .302 .210 .499 .337 .315 .257 Nissan .049 .057 .067 .058 .072 .066 Toyota .028 .042 .050 .040 .041 .041 Mazda .015 .020 .031 .022 .021 .026 8.042 7.443 8.508 7.925 7.843 6.678 (8.091) (7.260) (8.347) (7.929) Total for all auto makers (BEA seasonals) (7.526) (6.942) 1. Includes some autos produced in cooperation with Toyota. Note: Domestic autos and trucks include some units produced in Canada and in Mexico for General Motors, Ford, and Chrysler. (Based MONETARY AGGREGATES on seasonally adjusted data unless otherwise noted) -----------------------------------------------------------------"----' 1987 1988 Growth -----------------4 87 1987<1> Q3 Q4 Dec. Jan. Feb. Feb. 8 8 p --------------------------------1. 2. 3. Percentage change at anal rates------------------------- Percentage change at annual rates--- Ml M2 M3 6.3 4.0 5.4 , 0.8 2.8 4.5 4.0 4.0 5.5 -2.9 1.8 1.4 12.8 9.7 8.2 1.1 8.7 10.2 Levels bil. $ Feb. 88p Selected components 4. 5. 6. M1-A Currency Demand deposits 7. Other checkable deposits 8. 8.7 -1.0 M2 minus M1<2> 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. g0. 3.3 M3 minus M2<4> 24. 25. 26. 27. 28. 29. Managed liabilities at commercial banks 125+26) Large time deposits, gross Nonposit funds Net due to related foreign institutions, NSA Other<7> U.S. government deposits at commercial banks<8> 9.5 -2.4 494.5 9.9 0.1 9.2 -13.6 11.6 7.9 6.0 -8.7 199.4 287.8 19.0 7.7 265.1 11.4 2187.2 5.2 4.0 4.0 3.6 7.5 -25.6 -8.5 6.3 2.5 1.8 3.5 3.5 0.8 5.6 4.6 1.9 -1.7 7.4 3.0 -4.3 9.3 13.7 3.5 -4.2 14.8 3.4 -11.6 16.0 10.9 11.1 -0.3 7.8 6.8 9.9 14.4 10.5 22.2 10.5 4.5 23.5 2.9 25.6 16.1 20.2 -4.1 10.2 3.0 29.9 13.5 --- 3.7 0.3 3.4 5.3 5.4 -0.1 2.9 -0.3 4.5 -1.1 1.0 -1.0 0.4 0.3 -0.7 63.2 76.6 in 21.6 6.3 3.1 10.6 7.2 -7.7 18.6 31.8 10.1 4.9 17.3 13.3 232.2 933.6 540.0 393.6 947.6 -5.4 398.8 27.3 548.9 15.9 771.9 -5.0 -12.6 10.4 14.4 13.1 17.0 488.5 323.6 164.9 64.3 2.3 -78.9 1.3 -36.4 -25.7 5.6 2.2 3.4 -79.0 2.4 7.1 4.1 0.2 9.4 6.6 -9.7 19.4 Average monthly change 6.1 3.5 2.6 ~----- -0.9 18.9 8.5 11.2 3.4 MEMORANDA:<6> -4.1 4.0 10.8 Large time deposits At commercial banks, net<5> At thri*t institutions Instituti- -only money market mutual fund shares, NSA Term RPs, Net NSA Term Euroc;llars, Net NSA 4.0 3.5 13.6 Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares, NSA Commercial banks Savings deposits, SA, plus MMDAs, NSA<3> Small time deposits Thrift institutions Savings deposits, SA, plus MMDAs, NSA<3> Small time deposits -1.6 7.3 -7.5 2.8 54.7 37.5 -9.8 98.7 108.9 84.6 billions of dollars--- 0.2 -0.1 0.3 2.5 5.3 -2.8 569.1 394.5 174.6 7.3 -3.9 -7.0 7.3 -6.3 3.5 1.9 172.7 -9.6 -7.5 4.0 22.6 SAmounts shown are from fourth quarter to fourth quarter. SNontransactions M2 is seasonally adjusted as a whole. SCommercial bank savings deposits excluding MMDAs increased during January and February at rates of 5.4 percent and 13.4 percent, respectively. At thrift institutions, savings deposits excluding MMDAs decreased during January and February at rates of 3.6 percent and 0.5 percent, respectively. The non-ZM component of M3 is seasonally adjusted as a whole. SNet of large-denomination time deposits held by money market mutual funds and thrift institutions. SDollar amounts shown under memoranda are calculated on an end-month-of-the-quarter basis. . Consists of borrowings from other than commercial banks in the form of federal funds purchased, securities sold under agreements to repurchase, and other liabilities for borrowed money (including borrowings from the Federal Reserve and unaffiliated foreign banks, loan RPs and other minor items). Data are partially estimated. SConsists of Treasury demand deposits and note balances at commercial banks. -- preliminary. COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT (Percentage changes at annual rates, based on seasonally adjusted data) 1986:Q4 to 1987:04 Q3 1987 Q4 1988 Dec. Jan. Feb.p Levels bil. $ Feb.P ----------------------- Commercial Bank Credit -----------------1. 2. Total loans and securities at banks 7.9 Other securities 5. Total loans 8.4 2257.7 6.0 3.1 4.1 -2.7 3.6 529.7 12.4 2.2 7.2 3.2 -0.4 334.0 -4.5 4.7 -1.2 -12.9 10.5 195.7 8.8 4. 5.9 9.1 U.S. government securities -1.0 -1.3 3. 2.9 5.0 Securities 7.0 7.3 2.8 -2.5 8.5 9.8 1727.9 6. Business loans 7.5 3.4 4.7 5.1 6.2 3.0 569,9 7. Security loans 1.0 19.1 -108.5 -174.0 110.7 166.8 41.8 8. Real estate loans 18.1 13.5 14.5 12.1 9.1 11.2 592.4 9. Consumer loans 4.9 5.8 4.5 3.7 6.3 8.8 330.2 .0. Other loans 1.0 -12.2 -42.2 -0.1 -2.4 -2.3 193.6 --------- Short- and Intermediate-Term Business Credit --------Business loans net of bankers acceptances 7.6 13. 14. 15. Sum of lines 13 & 14 16. Bankers acceptances: 3 related ' 17. 3.2 566.6 25.3 -38.1 -127.1 134.2 92.3 18.2 3.5 4.2 1.5 9.1 6.0 -5.1 24.4 58.4 -2.7 2.3 6.8 8.9 7.7 19.8 7.1 6.3 Commercial paper issued by nonfinancial firms 5.8 -1.6 Sum of lines 11 6 12 5.4 6.0 Loans at foreign branches 5.4 7.2 12. 2.9 -4.1 2 3.2 16.6 14.2 -1.3 4.8 584.9 90.2 675.1 U.S. trade 4 13.3 Line 15 plus bankers acceptances: U.S. trade related 18. Finance company loans to business 19. Total short- and intermediateterm business credit (sum of lines 17 & 18) 3 8.4 5.5 -13.9 n.a. 34.95 6.9 6.3 n.a. 707.35 14.5 16.8 n.a. 202.75 n.a. 910.05 8.6 -20.5 7.6 8.6 1. Average of Wednesdays. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Based on average of data for current and preceding ends of month. 4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 5. January data. n.a.--not available III-T-1 SELECTED FINANCIAL MARKET QUOTATIONS 1/ (percent) 1987 Jan-Feb 2/ lows FOMC Change from: 2/ FOMC 1988 FOMC Oct 16 Dec 16 Feb 10 Mar 24 Oct 16 Feb 10 Short-term rates 6.57 6.56 -1.03 -0.01 5.61 17 -1.14 6.71 6.10 6.40 -1.34 0.18 0.21 0.30 794 8.65 8.22 7.93 6.41 6.45 6.58 665 -1.36 200 0.17 0.20 nh 5.85 5.80 7.92 -1.33 9.12 6.46 6.51 6.57 6.9 6.89 -2.23 0.13 0.16 6.00 8.09 7.81 7.81 6.00 6.00 7.79 .69 8.41 8.13 6.71 6.81 6.70 6.75 -1.09 -0.01 -1.94 -0.06 7.50 9.25 8.75 8.50 8.50 -0.75 0.00 9.52 5.95 5.30 5.31 5.35 7.59 7.74 5.81 5.73 -nonth 1-month 6.71 7.59 Federal funds 3 Treasury bills 4/ 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CD's 4/ d -u~k~^ urodollar deposits 5/ 3-month Bank prim rate -2.23 0.32 Intermediate- and long-tern rates U.S. freasury (constant maturity) 6.34 66 0.38 7.01 729 10.23 10.24 8.15 9.00 9.14 7.28 8.11 8.35 . 8.51 8.77 Municipal reveue 6/ (Bncr Buyer index) 6.92 9.59 8.47 7.76 8.27 -1.32 0.51 Corporate-A utility Recently offered 8.78 11.50 10.59 9.66 10.04 -1.46 0.38 HeIe rtgage rates 7/ Fixed-ate AIM, 1-yesar 7.52 9.10 11.58 8.45 10.69 7.99 9.84 7.61 9.92 7.49 -1.66 -0.96 0.08 -0.12 -ysar 30-ypar Record Year end higbs 0.42 1988 1987 1986 0.40 Low Percent crhage frm: PMe eoaoi FMC -25.66 -20.74 -18.55 -17.50 3.15 3.17 9.04 7.52 Feb 10 Mar 24 ghis Feb 10 Stock prices 5 DoJones Inustrial 18 .9 NYSE Cmposite 13.58 SC site NAAQ ( ) .83 2722.42 1738.74 1962.04 2023.8 1 99 125.91 144.42 149.00 01 231.90 272.65 297.30 291.88 349.32 37560 1/ One-day quote except as noted. 2/ Last buinss day prior to stock market decline on Monday Oct. 19 1987. 3/ Average or to-meek reserve mainteanoe period closest to date shown except Jan-Feb. low wich is one-week averge Feb. 25. Iast observation is average for maintenanoe e ending Mar. 23, 1988. 4/ Seondary marlket. 5/ Average for statesent week closest to date shown. 6/ Ore-day closest tes for ursday. 7/ Quotes for week endin Friday closest to date shown.
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