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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 II - FOMC March 27, 1998 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 TO CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Real GDP and corporate profits: 1997:Q4 ...................... Personal income and consumption ............................ 1 2 Tables Real gross domestic product and related items ................... Personal income ....................................... Real personal consumption expenditures ....................... 3 . 4 4 Charts Household indicators ........................................ 5 THE FINANCIAL ECONOMY Table Selected financial market quotations ......................... . 6 THE INTERNATIONAL ECONOMY Developments in foreign industrial countries .................... Erratum............... . .............................. 7 8 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Real GDP and Corporate Profits: 1997:04 According to BEA's final estimate, real GDP increased 3.7 percent at an annual rate in the fourth quarter of 1997. As in the preliminary report, fourth-quarter GDP growth received a strong boost from inventory accumulation, while growth of final sales slowed to 2.3 percent at an annual rate. Consumer spending moderated last quarter, and business fixed investment edged down after a spectacular third-quarter rise. The final estimate of real GDP growth in the fourth quarter was 0.2 percentage point less than the pace reported in BEA's preliminary release. Growth of consumer spending was revised down by 0.6 percentage point, reducing its contribution to GDP growth by 0.4 percentage point; the change reflected new information on utilities and hospital usage. Spending on producers' durable equipment was revised up, raising its contribution to GDP growth by 0.3 percentage point; new information on shipments of aircraft accounted for the change. The GDP chain price index increased 1.4 percent at an annual rate in the fourth quarter. Over the four quarters of 1997, the GDP chain price index increased 1.8 percent. The chain price index for gross domestic purchases--which measures prices of items purchased, rather than produced, in the United States--increased 1.4 percent at an annual rate in the fourth quarter. Over the four quarters of 1997, this measure of prices increased 1.3 percent, the smallest four-quarter increase since the early 1960s. The report included the first estimate of corporate profits for the fourth quarter. BEA estimates that corporate profits on an economic basis (including the inventory valuation adjustment and capital consumption adjustments) declined $9 billion in the fourth quarter after having increased $32 billion in the third quarter. As a share of GNP, corporate profits (excluding Federal Reserve Banks) were 9.7 percent in the fourth quarter, down from 9.9 percent in the third quarter. For 1997 as a whole, the profit share (excluding FR Banks) was also 9.7 percent, up from 9.4 percent in 1996, and marked the best profits performance since 1968. Personal Income and Consumption Real personal consumption expenditures rose 0.3 percent in February following an upward revised gain of 0.6 percent in January. After having surged in January, real outlays for durable goods edged up 0.2 percent in February--held down by a sharp drop in spending for motor vehicles. Real expenditures for nondurable goods rose a robust 0.6 percent in February, while real service expenditures climbed 0.3 percent. The January-February data, along with the lower level of personal consumption expenditures reported for the fourth quarter, put spending on a slightly higher growth trajectory than shown in the Greenbook forecast. Total nominal personal income increased 0.6 percent for a second month in February, buoyed by another strong gain in wages and salaries. Most other components of income registered modest gains. Nominal disposable income also rose 0.6 percent in February, and after factoring in a small increase in prices, real disposable income, which increased 0.8 percent in January, was up another 0.5 percent. With growth in personal income again outpacing that of outlays, the saving rate edged up to 4.3 percent in February. The final report of the Michigan Survey Research Center was little changed from the preliminary report of two weeks ago. Sentiment fell back in March from the exceptionally high February reading but remained at a very favorable level. Compared with the February results, respondents had less favorable views of their current and expected personal finances, and their appraisals of buying conditions for large household appliances edged off a bit. However, responses on business conditions were mixed. Households were more optimistic about business conditions over the next twelve months but were less sanguine about conditions over the next five years. Of those questions not in the overall index, the index of expected unemployment change, which had returned to a low level in February, edged up in March. Consumers' willingness to use savings to finance a major purchase rose in March to the highest reading of the current expansion, but their willingness to use credit fell back a bit after having risen sharply earlier in the year. The mean of expected inflation over the next twelve months rose 0.3 percentage point to 2.9 percent in March, and the median edged up to 2.5 percent. Average expected inflation over the next five to ten years rose slightly to 3.3 percent but the median edged down to 2.8 percent. 3-26-98 -3- Real Gross Domestic Product and Related Items (Percent change from previous period at compound annual rates; based on seasonally adjusted data, chain-type indexes) 1996:04 to 1997:Q4 1. 2. 3. Gross domestic product Final sales Consumer spending 1997:Q3 Final 1997:Q4 Preliminary 1997:Q4 Final 3.7 3.1 3.9 3.7 3.1 4.7 2.5 2.3 3.6 5.6 3.1 2.5 1.7 1.9 4. Durables 6.8 18.4 5. Nondurables 1.4 4.3 6. Services 4.0 3.9 5.4 4.4 9.0 19.2 -3.5 -. 8 12.9 24.1 -3.3 -. 3 -. 7 6.7 -4.3 -2.3 2.7 9.7 9.1 7. Business fixed investment 8. Producers' durable equipment 9. Nonresidential structures 10. Residential investment 5.6 11. Federal government consumption expenditures and investment -. 7 12. Defense -. 8 13. Nondefense -. 6 14. 15. 16. State and local government consumption expenditures and investment Exports of goods and services Imports of goods and services -1.1 1.2 -5.7 -1.0 -2.1 1.3 -8.6 -1.2 -2.3 1.0 -8.6 2.0 2.3 1.8 1.8 10.2 14.4 4.4 14.6 10.0 6.4 8.3 5.3 57.82 3.32 54.52 38.3 .3 38.0 64.4 7.2 57.2 64.5 8.6 4 55.9 4 8.02 9.5 9.8 ADDENDA: 17. 18. 19. Nonfarm inventory investment 1 Motor vehicles 1 Excl. motor vehicles 1 20. Farm inventory investment 21. Net exports of goods and services 1 22. Nominal GDP 5.6 4.6 5.4 5.2 23. GDP price index 1.8 1.4 1.4 1.4 24. 25. Profit share 3 (Excluding FR banks) 10.02 9.72 10.2 9.9 n.a. n.a. 10.0 9.7 26. Real disposable personal income 3.7 2.6 4.5 4.5 27. Personal saving rate (percent) 3.92 3.5 3.8 3.9 1. Level, billions of chained (1992) dollars. 2. Annual average. 3. Economic profits as a share of nominal GNP. 4. Estimate. -146.52 -164.1 -158.5 9.8 -159.1 PERSONAL INCOME (Average monthly change at an annual rate; billions of dollars) 1997 1998 1996 1997 Q2 Q3 Q4 Jan. Feb. Total personal income 32.5 32.2 25.1 24.0 38.3 40.9 43.7 Wages and salaries Private 21.2 19.6 21.2 19.0 15.4 14.3 16.2 13.9 30.6 28.8 30.4 26.1 34.6 32.1 Other labor income .5 .9 .6 1.1 1.2 1.3 1.2 Proprietors' income Farm 2.2 .8 2.0 -. 2 3.1 .9 .7 -1.7 1.7 -.3 1.4 -2.1 1.3 -2.5 Rent Dividend Interest .7 2.8 2.2 -. 3 3.0 2.4 -. 5 2.0 2.8 .1 2.1 1.8 -1.1 2.1 2.1 -. 9 2.1 2.0 -.5 1.9 1.8 Transfer payments 4.2 4.5 2.6 3.1 3.7 8.8 5.5 Less: Personal contributions for social insurance 1.4 1.5 1.0 1.0 2.0 4.2 2.2 9.2 7.7 7.3 4.9 8.7 -6.1 9.6 23.3 24.4 17.8 19.2 29.6 46.9 34.1 9.6 16.1 12.3 9.8 22.8 40.4 26.2 Less: Personal tax and nontax payments Equals: Disposable personal income Memo: Real disposable income1 1. Billions of chained (1992) dollars. REAL PERSONAL CONSUMPTION EXPENDITURES (Percent change from the preceding period) 1997 1997 Q2 Q3 - - - Annual rate - Personal consumption expenditures 1998 Q4 - Jan. - Feb. Monthly rate 3.6 .9 5.6 2.5 .6 .3 Durable goods Excluding motor vehicles 6.8 8.4 -5.4 1.6 18.4 11.8 1.9 4.5 2.2 3.7 .2 1.1 Nondurable goods Excluding gasoline 1.4 1.3 -2.1 -2.7 4.3 4.7 -1.2 -1.6 .8 .6 .6 .7 Services Excluding energy 4.0 4.2 3.9 3.4 3.9 4.4 4.4 4.4 .3 .6 .3 .3 3.9 3.7 4.2 3.1 3.5 2.6 3.9 4.5 4.2 .8 4.3 .5 Memo: Personal saving rate (percent) Real disposable incomel 1. Percent changes derived from billions of chained (1992) dollars. Household Indicators Real Disposable Personal Income 12-month percent change 1987 1989 1991 1993 1995 1997 Ratio of Net Worth to Disposable Income Ratio Q1(revised)- .:tiiiii I 1987 1989 Note. Data for 1998:Q1 are staff estimates. 1993 Consumer Confidence 1989 1991 I I 1995 I I 1997 Expected Change in Unemployment Index 1987 I 1993 1995 1997 Index 1987 1989 1991 1993 1995 1997 Note. Percentage expecting 'more" minus percentage expecting "less" plus 100. Selected Financial Market Quotations' (Percent except as noted) 1997 1998 Instrument Change to Mar. 26. from: FOMC * Sep. 30 Jan. 2 5.50 5.51 5.50 5.44 4.93 5.08 5.18 5.18 5.19 5.18 5.51 5.48 5.56 5.54 5.59 5.67 5.72 5.64 5.69 5.71 5.56 5.63 Feb. 4 FOMC * Mar. 26 Sep. 30 Jan. 2 Feb. 4 0.15 -0.08 -0.04 -0.10 -0.19 -0.04 -0.04 -0.08 0.16 0.00 -0.03 -0.05 -0.09 0.00 -0.08 -0.10 -0.05 -0.10 -0.09 5.59 5.69 0.00 -0.07 -0.03 -0.13 8.50 8.50 0.00 0.00 5.88 6.12 6.41 5.62 5.67 5.86 -0.23 -0.44 -0.45 0.03 0.01 0.10 0.29 0.12 0.10 U.S. Treasury 10-year indexed note 3.61 3.70 0.15 0.06 0.10 Municipal revenue (Bond Buyer) 6 5.63 5.41 -0.21 0.01 0.09 Corporate-A utility, recently offered 7.44 6.96 -0.38 0.10 0.10 High-yield corporate 9.02 9.04 -0.17 -0.19 -0.03 7.28 5.51 7.03 5.50 -0.20 0.16 -0.76 0.17 -0.04 0.08 ______ Short-term rates Federal funds intended rate realized rate 2 Treasury bills 4 3-month 6-month 1-year 0.00 0.04 5.08 5.00 5.14 Commercial paper 1-month 3-month Large negotiable CDs 4 1-month 3-month 6-month 5.59 5.59 5.62 Eurodollar deposits 1-month 3-month Bank prime rate Intermediate- and long-term rates U.S. Treasury (constant maturity) 3-year 10-year 30-year Home mortgages 8 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1998 Percentage change to Mar. 26, from: FOMC * Stock exchange index Record FOMC * Level Date Jan. 2 Feb. 4 Mar. 26 high Jan. 2 Feb. 4 Dow-Jones Industrial 8906.43 3/20/98 7965.04 8160.35 8846.89 -0.67 11.07 8.41 S&P 500 Composite 1105.65 3/24/98 975.04 1006.00 1100.80 -0.44 12.90 9.42 NASDAQ (OTC) 1828.54 3/26/98 1581.53 1666.34 1828.54 0.00 15.62 9.73 477.81 3/26/98 436.52 437.80 477.81 0.00 9.46 9.14 Russell 2000 Wilshire 10507.21 3/24/98 9327.71 9565.62 10482.20 -0.24 12.38 9.58 1. One-day quotes except as noted. 2. FOMC's intended rate. 3. Average for two-week reserve maintenance period ending on or before date shown. Most recent observation is average for current maintenance period to date. 4. Secondary market. 5. Bid rates for Eurodollar deposits at 11 am. London time. 6. Most recent observation based on one-day Thursday quote and futures market index changes. 7. Merrill Lynch Master II high-yield bond index composite. 8. Quotes for week ending Friday previous to date shown. * Figures cited are as of the close on February 3, 1998. THE INTERNATIONAL ECONOMY In Japan, the Liberal Democratic Party on March 26 announced the outline of a ¥16 trillion (3.2 percent of GDP) fiscal stimulus package. This preliminary package was heavily weighted towards public investment, with particular emphasis on the environment, education, energy, and disaster-relief measures. The LDP, however, also called for swift consideration of sizable cuts in personal income and corporate tax rates. The package included some proposals for further structural reforms. Notably, it urged policymakers to develop a global strategy for disposing of the banking system's collateral-backed bad loans and for revitalizing the real estate market. The LDP also suggested that public funds--in addition to the recently approved ¥30 trillion--should be made available to buy securitized debt from financial companies. The March 26 announcement was too incomplete to determine what share of the ¥16 trillion headline figure will translate into actual fiscal stimulus. In recent years, the actual stimulus in such packages has been roughly 40 to 50 percent as large as the headline figure. This suggests new effective stimulus of ¥6-8 trillion, somewhat larger than what was assumed in the March Greenbook. The LDP will hammer out the details of its proposals during the next month. After these details are announced, the proposals must be adopted by the government and approved by the Diet. On March 27, the German cabinet approved the launch of European Monetary Union in 1999 with 11 members. The decision came immediately following the Bundesbank's convergence report that--in much stronger language than in the EMI and EC reports released on March 25--expressed "serious concerns" as to whether Italy and Belgium had achieved fiscal sustainability. The report noted that Italy and Belgium had exceeded the 60 percent debt-to-GDP ratio "particularly strongly" and stated that they needed to make binding commitments to cut debt before entering EMU. The Bundesbank also noted that Italy and Finland had been participating in the ERM for less than two years and therefore had not fully met the exchange rate criteria. -8- Erratum Central banks of major foreign industrial countries reported about $500 million in net purchases of dollars over the intermeeting period. Part 1 of the Greenbook incorrectly reported $500 million in net sales of dollars.
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