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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 05/27/2010. Confidential (FR) Class III FOMC April 30, 2004 CURRENT ECONOMIC AND FINANCIAL CONDITIONS Supplemental Notes Prepared for the Federal Open Market Committee by the staff of the Board of Governors of the Federal Reserve System Contents The Domestic Nonfinancial Economy . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Real Gross Domestic Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Personal Income and Consumer Spending . . . . . . . . . . . . . . . . . . 3 Prices and Labor Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Tables Real GDP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Real Personal Consumption Expenditures . . . . . . . . . . . . . 4 PC Price Indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Change in Employment Cost Index of Hourly Compensation for Private-Industry Workers . . . . . . . 7 Labor Productivity and Costs Nonfarm Business Sector . . 9 Charts Change in Real personal Income and Real DPI . . . . . . . . . 4 Michigan Survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Index of Consumer Sentiment . . . . . . . . . . . . . . . . . . . . . . 4 Mean Expected Inflation Next Twelve Months . . . . . . . . . 4 Monthly Core PCE Prices . . . . . . . . . . . . . . . . . . . . . . . . . 6 ECI Benefits Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The Domestic Financial Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Tables Commercial Bank Credit . . . . . . . . . . . . . . . . . . . . . . . . . 11 Selected Financial Market Quotations . . . . . . . . . . . . . . . 12 Supplemental Notes The Domestic Nonfinancial Economy Real Gross Domestic Product According to the BEA’s advance estimate, real GDP increased at an annual rate of 4.2 percent in the first quarter, a percentage point below the staff's April Greenbook estimate. Inventory investment was significantly weaker than we assumed, accounting for about 3/4 percentage point of the difference. In addition, government spending, personal consumption expenditures, and residential investment were all slightly weaker than we anticipated; in contrast, business fixed investment was in line with our expectation, and net exports were a bit stronger than we projected. Private inventory investment contributed just 1/4 percentage point to the change in real GDP last quarter, compared with a boost of 3/4 percentage point in the fourth quarter. The BEA’s procedures for deriving constant-dollar stocks of trucks and for seasonally adjusting them yielded a smaller accumulation than we estimated—albeit still a sizable one. In addition, the BEA’s translation of book-value inventories outside of the motor vehicle sector into constant-dollar terms resulted in a smaller real accumulation of stocks than occurred in the fourth quarter; we had expected the estimate of real nonfarm inventory investment excluding motor vehicles to show the same rate of accumulation as in the fourth quarter. Final sales rose at an annual rate of 3.9 percent in the first quarter after having increased 3.4 percent in the fourth quarter. Among the components of final demand, real PCE moved up at an annual rate of 3.8 percent, as a decline in spending on motor vehicles was more than offset by a pickup in spending on other goods and services. Real business investment in equipment and software posted another double-digit advance in the first quarter, but nonresidential structures investment fell again. Residential investment rose in the first quarter, albeit at a slower pace than in the fourth quarter. Federal government consumption and investment increased at an annual rate of 10.1 percent in the first quarter because of a surge in spending on national defense, while state and local government outlays declined at an annual rate of 2.6 percent. Exports and imports both increased modestly on the heels of outsized jumps in the fourth quarter. On balance, the arithmetic contribution of net exports to the change in real GDP growth was 0.02 percentage point compared with the -0.16 percentage point we had expected. The difference is largely explained by the BEA’s lower estimate of imports, with about half of the miss being associated with weaker service imports. The increase in real exports was reported to have been slightly higher than we projected, at 3.2 percent versus our forecasted 2.7 percent, with stronger-than-expected exports of goods more -2Real GDP (Percent change at annual rate from end of preceding period except as noted) 2004:Q1 Measure Real GDP Staff BEA Estimate1 5.2 4.2 4.2 3.9 PCE 4.0 3.8 Residential investment 3.8 2.1 11.6 11.5 -7.9 -6.5 12.4 -1.4 10.1 -2.6 2.7 3.2 3.1 2.0 Final sales BFI Equipment and software Nonresidental investment Government purchases Federal State and local Exports Imports Contribution to change (Percentage points) Nonfarm inventory change Motor vehicles Other Net exports 1. April Greenbook .9 .8 .1 .3 .5 -.2 -.2 .0 -3- than offsetting weaker-than-expected exports of services. Core import price inflation was less than expected, at 6.6 percent versus our projected 7.2 percent. Personal Income and Consumer Spending Total nominal personal income rose at an annual rate of $38 billion in March following upward-revised increases of $46 billion in February and $49 billion in January. For the first quarter, both wages and salaries and supplements to earned income posted larger gains than in the fourth quarter, but the gains in rental and interest income were noticeably smaller. Personal taxes were down $26.5 billion (annual rate) from the fourth-quarter level because of January’s downward adjustment to federal income taxes. As a result, current-dollar disposable personal income increased $155.4 billion in the first quarter. Real disposable personal income, which increased 3.6 percent in 2003, rose at an annual rate of 4.3 percent in the first quarter. Real personal consumption expenditures were up 0.1 percent in March after having increased 0.2 percent per month in January and February. Although spending on motor vehicles turned up in March, it was down sharply, on average, in the first quarter. However, real outlays for other durables increased at an annual rate of 7-1/2 percent last quarter, real spending on non-energy nondurable goods picked up at a 7-1/4 percent rate, and real expenditures for non-energy services expenditures rose at a 4 percent pace. Real outlays for energy goods and services fluctuated widely during the first quarter; for the quarter as a whole, real outlays for nondurable energy products were, on balance, little changed from the fourth-quarter level, but real spending on energy services was sharply higher. The personal saving rate, which had dipped to 1.7 percent in the fourth quarter, inched up to 1.9 percent in the first quarter. According to the final report, the Michigan Survey Research Center’s (SRC) index of consumer sentiment edged down about 1-1/2 points in April, but remained above its level at the end of last year. Both components of the index were down slightly: The “current conditions” component slid about 2 points as consumers’ assessments of their current personal financial situation and of buying conditions for large household appliances both decreased. The “expected conditions” component slipped 1-1/2 points as consumers’ appraisals of their expected personal financial situation and of expected business conditions over the next five years both weakened. Assessments of business conditions over the next twelve months were unchanged. Among those items not included in the overall index, consumers’ assessments of buying conditions for houses strengthened somewhat in April. Consumers’ expectations about the change in unemployment over the next twelve months also improved a touch. In contrast, consumers’ appraisals of buying conditions for cars fell. -4Real Personal Consumption Expenditures (Percent change from the preceding period) 2003 Q2 Q3 Q4 Annual rate 2004 Q1 Expenditure Q1 Total real PCE Excluding motor vehicles Durable goods Motor vehicles Excluding motor vehicles Nondurable goods Energy Other Services Energy Other Memo: Real disposable personal income 2.5 2.9 .5 -4.2 4.5 5.7 4.2 5.8 1.5 .4 1.5 3.3 2.7 17.7 15.3 19.7 1.2 -18.6 3.6 1.7 -12.7 2.3 6.9 5.2 28.0 39.7 19.1 7.3 3.7 7.7 2.8 4.1 2.7 3.2 4.0 .7 -8.4 8.8 5.4 22.5 3.7 2.8 1.1 2.8 3.8 5.1 -4.7 -18.3 7.5 6.4 -.8 7.2 4.3 10.8 4.0 2.4 4.9 6.8 .5 4.3 Change in Real Personal Income and Real DPI Percent, annual rate 12 12 Real personal income Real DPI 10 10 8 8 6 6 4 4 2 2 0 0 -2 1 2 2002 H1 1 H2 2 Q1 Q2 2002 2003 Q3 1 Q4 -2 Q1 2003 2004 Michigan Survey Index of Consumer Sentiment Median Expected Inflation Next twelve months 115 1966 = 100 115 4.0 110 110 3.5 105 105 3.0 3.0 100 100 2.5 2.5 95 2.0 2.0 90 90 1.5 1.5 85 85 1.0 1.0 80 80 0.5 0.5 75 0.0 95 Percent 4.0 Apr. 3.5 Apr. 75 1998 1999 2000 2001 2002 2003 2004 1998 1999 2000 2001 2002 2003 2004 0.0 -5- In April, the median of expected inflation over the next twelve months rose to 3.2 percent, while the mean jumped to 4 percent. Both measures stand at their highest levels since the middle of 2001. In contrast, the median and mean of expected inflation over the next five to ten years slid to 2.7 percent and 3.2 percent, respectively. Prices and Labor Costs The chain-weighted GDP price index is estimated to have increased at an annual rate of 2.5 percent in the first quarter, and the index for PCE prices was up at a 3-1/4 percent rate. Core PCE prices rose at a rate of 2 percent last quarter following an increase of 1.2 percent in the fourth quarter. The BEA’s estimate of core PCE price inflation was somewhat higher than the staff’s estimate because it included an upward-revised increase in the price index for medical services in January. With the revision, the four-quarter change in core PCE prices was 1.3 percent in the first quarter compared with 1.6 percent over the four quarters ending in 2003:Q1. The employment cost index of hourly compensation for private industry workers increased at an annual rate of 4.3 percent over the three months ending in March. The wages and salaries component of the ECI rose at an annual rate of 2.5 percent while the benefits component increased at a pace of nearly 11 percent. Over the twelve months ending in March, the ECI for total compensation rose 3.9 percent, about matching the increase in the preceding two twelve-month periods. Wages and salaries in March were up 2.6 percent from a year earlier, about 1/2 percentage point less than the increase in the preceding year. Workers in the construction industry, where activity has been remarkably strong, as well as those in retail trade and services saw wages accelerate over the year ending in March. However, wages in the financial industry, which had been increasing rapidly, slowed markedly; workers in manufacturing, transportation, and wholesale trade also saw their wages decelerate. In contrast, benefit costs increased 7 percent over the twelve months ending in March, a pickup of nearly a percentage point over the previous twelve months.1 The acceleration in benefit costs mainly reflected a step-up in contributions to defined-benefit pension funds. The rise in costs for health insurance, which previously had been contributing to a pickup in benefit costs, slowed a bit in this report, although the rate of increase remained high. With the rapid rise in benefit costs, the twelve-month changes in hourly compensation for workers in most industries in March were at or above the rates of increase recorded in the preceding year; the exceptions were finance and wholesale trade. 1. With the exception of health insurance, detail on benefits costs are unpublished and are provided by the BLS on a confidential basis. -6PCE Price Indexes (Percent changes) From twelve months earlier Mar. 2003 Item Mar. 2004 2003 2004 Q4 Q1 -Annual rateAll items Food and Beverages Energy PCE less food and energy Commodities Services Memo: CPI1 CPI less food and energy1 Core PCE, market-based components 1. Current-methods. 2004 Feb. Mar. Monthly rate 2.4 1.6 1.0 3.2 .2 .3 1.5 2.8 4.0 2.6 .2 .3 24.0 1.2 -9.5 26.9 1.7 2.2 1.4 1.4 1.2 2.0 .1 .2 -1.9 -1.1 -2.2 .3 .1 .3 2.8 2.5 2.6 2.7 .1 .1 3.0 1.8 .8 3.6 .3 .5 1.7 1.6 1.0 1.8 .2 .4 1.4 1.5 .8 1.8 .2 .2 Monthly Core PCE Prices 12 month changes 6 month changes 3 month changes Percent 5 4 3 2 Mar. 1 0 1999 2000 2001 2002 2003 2004 -1 -7Change in Employment Cost Index of Hourly Compensation for Private-Industry Workers 2003 Industry and occupational group Total hourly compensation Wages and salaries Benefits By industry Construction Manufacturing Transportation and public utilities Wholesale trade Retail trade FIRE Services By occupation White collar Blue collar Service occupations Memo: State and local governments 2004 Mar. June Sept. Dec. Quarterly change (compound annual rate) 1 Mar. 5.5 4.1 8.5 3.4 2.5 5.7 4.4 3.5 6.1 3.1 2.0 5.6 4.3 2.5 10.9 3.3 6.6 4.1 3.2 3.3 3.9 3.0 2.7 3.5 9.4 3.2 5.4 .8 20.9 3.4 4.7 2.1 2.1 3.7 3.1 2.4 3.6 6.2 4.3 4.1 2.9 1.9 4.1 1.6 3.8 6.1 2.6 1.7 3.6 4.3 5.7 4.9 4.6 2.6 4.1 2.8 4.8 3.8 3.2 3.3 3.5 2.7 3.8 6.7 4.7 4.0 4.0 2.2 3.2 3.9 12-month change Total hourly compensation Excluding sales workers Wages and salaries Excluding sales workers Benefits By industry Construction Manufacturing Transportation and public utilities Wholesale trade Retail trade FIRE Services By occupation White collar Sales Nonsales Blue collar Service occupations Memo: State and local governments 1. Seasonally adjusted by the BLS. 3.8 3.8 3.0 2.9 6.1 3.5 3.8 2.6 2.8 6.1 4.0 4.0 3.0 3.0 6.5 4.0 4.1 3.0 3.1 6.4 3.9 3.9 2.6 2.6 7.0 3.2 4.7 3.8 4.6 3.8 4.7 3.4 4.1 3.5 4.7 3.8 4.7 2.0 7.0 2.8 4.1 3.0 1.2 6.6 2.9 3.5 3.7 2.5 7.3 3.3 3.3 3.2 3.3 7.4 3.6 4.0 2.5 3.5 3.3 3.8 3.8 3.7 3.9 4.0 3.4 3.4 2.2 3.7 4.1 3.3 4.0 3.5 4.1 4.2 3.0 4.1 3.2 4.3 4.0 3.2 3.6 3.5 3.7 4.5 3.2 4.2 4.1 3.6 3.3 3.3 -8- ECI Benefits Costs (confidential) (Private-industry workers; 12-month change) Insurance Costs Supplemental Pay Percent 20 15 30 15 20 20 Health Percent 30 20 Nonproduction bonuses Total 10 Total 10 10 5 5 0 0 0 -10 -5 -20 -5 1990 Mar. 1995 2000 2005 Paid Leave 10 Mar. 0 -10 1990 1995 2000 2005 -20 Retirement and Savings 8 Percent 8 6 6 Percent 25 25 Mar. 20 15 Mar. 2 0 10 10 5 4 15 5 0 4 20 0 2 1990 1995 2000 2005 0 -5 Workers’ Compensation Insurance Mar. 10 1995 2000 2005 -5 State Unemployment Insurance Percent 15 15 1990 Percent 25 25 Mar. 20 20 10 15 0 0 -5 10 5 5 0 -5 5 10 0 5 15 -5 -5 -10 1990 1995 2000 2005 -10 -10 1990 1995 2000 2005 -10 -9- Labor Productivity and Costs Nonfarm Business Sector (Percent change from preceding period at compound annual rate; seasonally adjusted) 2003 2004 2002 20031 Q31 Q41 Q11 All persons2 4.3 5.4 9.5 2.5 3.6 All employees3 4.5 5.9 10.8 2.9 2.5 Compensation per hour 1.8 3.6 4.8 2.4 4.1 Unit labor costs -2.4 -1.7 -4.3 -.1 0.5 Output per hour Note. Annual changes are from fourth quarter of preceding year to fourth quarter of year shown. 1. Staff estimate. 2. Includes non-employees (published definition). 3. Assumes that the rate of increase in hours of all persons equals the rate of increase in hours of all employees. Four-quarter changes in compensation per hour in the nonfarm business sector, have been running roughly in line with changes in the ECI over the past year. Official figures for the first quarter will be released on May 6, and we currently estimate that compensation per hour increased at an annual rate of 4.1 percent last quarter. The release also will incorporate revisions to compensation in the third and fourth quarters of last year, based on unemployment insurance tax records that are more comprehensive (but much less timely) than the average hourly earnings figures used by the BEA in forming its initial compensation estimates.2 We currently estimate that the four-quarter change in compensation per hour through the first quarter of this year was about 4 percent. On May 6, the Bureau of Labor Statistics will also release its advance estimate of productivity for the first quarter. Based on the NIPA output data and the available data on hours, we estimate that output per hour in the nonfarm business sector increased at an annual rate of 3.6 percent in the first quarter, above the fourth-quarter pace but below the average increase of the last two years. Productivity measured with only employee hours is expected to have increased more slowly, at an annual rate of 2.5 percent in the first quarter. The rates of 2. The unemployment insurance data are more comprehensive than the average hourly earnings data because they cover a broader range of workers, they cover almost all nonfarm establishments, and they include alternative forms of compensation such as bonuses and stock options. - 10 - increase differ because of a sharp decline in the hours worked by self- employed workers in March. - 11 Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total 1. Adjusted1 2. Reported 3. 4. 5. 6. Securities Adjusted1 Reported Treasury and agency Other2 7. 8. 9. 10. 11. 12. 13. 14. Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5 Level, Apr. 2004e ($ billions) 2003 Q4 2003 Q1 2004 Feb. 2004 Mar. 2004 Apr.e 2004 5.9 5.6 -.5 .1 10.4 11.4 22.6 23.1 12.2 14.2 8.9 .8 6,239 6,416 8.7 7.4 8.7 5.5 6.9 8.1 2.5 16.8 17.2 19.8 25.6 11.1 51.1 49.6 72.6 14.4 23.9 29.1 32.4 23.9 4.1 -22.0 -8.4 -43.9 1,745 1,922 1,198 724 4.9 -9.3 11.1 30.7 8.8 5.6 5.9 6.6 -3.2 -11.8 -2.3 31.4 -6.6 10.8 9.4 -7.4 7.9 -4.8 9.3 38.2 5.2 11.6 10.5 16.8 12.1 3.3 10.3 26.8 7.9 4.4 1.8 37.2 7.7 -5.0 20.1 42.7 16.6 10.2 10.5 -20.2 10.9 -6.9 24.9 32.3 23.8 3.2 -6.7 -7.5 4,494 859 2,344 317 2,027 641 1,012 650 Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and 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 are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables. e Estimated. - 12 - III-T-1 Selected Financial Market Quotations (One-day quotes in percent except as noted) 2003 Change to Apr. 29 from selected dates (percentage points) 2004 Instrument June 24 Dec. 31 Mar. 15 Apr. 29 2003 June 24 2003 Dec. 31 2004 Mar. 15 Short-term FOMC intended federal funds rate 1.25 1.00 1.00 1.00 -.25 .00 .00 Treasury bills 1 3-month 6-month 0.81 0.82 0.93 1.00 0.95 1.00 0.95 1.13 .14 .31 .02 .13 .00 .13 Commercial paper (A1/P1 rates)2 1-month 3-month 0.95 0.91 1.00 1.05 1.01 1.02 1.01 1.08 .06 .17 .01 .03 .00 .06 Large negotiable CDs 1 1-month 3-month 6-month 0.96 0.93 0.92 1.06 1.09 1.16 1.03 1.04 1.08 1.05 1.11 1.31 .09 .18 .39 -.01 .02 .15 .02 .07 .23 Eurodollar deposits 3 1-month 3-month 0.94 0.91 1.04 1.07 1.02 1.04 1.03 1.10 .09 .19 -.01 .03 .01 .06 Bank prime rate 4.25 4.00 4.00 4.00 -.25 .00 .00 Intermediate- and long-term U.S. Treasury4 2-year 10-year 30-year 1.14 3.46 4.53 1.83 4.40 5.22 1.55 3.91 4.83 2.37 4.71 5.44 1.23 1.25 .91 .54 .31 .22 .82 .80 .61 U.S. Treasury 10-year indexed note 1.70 2.00 1.49 2.15 .45 .15 .66 Municipal revenue (Bond Buyer) 5 4.89 5.04 4.75 5.28 .39 .24 .53 Private instruments 10-year swap 10-year FNMA6 10-year AA 7 10-year BBB 7 5-year high yield 7 3.67 3.84 4.13 5.16 8.95 4.66 4.72 5.05 5.74 7.94 4.11 4.24 4.56 5.21 7.76 4.95 5.03 5.37 5.95 8.00 1.28 1.19 1.24 .79 -.95 .29 .31 .32 .21 .06 .84 .79 .81 .74 .24 Home mortgages (FHLMC survey rate) 8 30-year fixed 1-year adjustable 5.21 3.51 5.81 3.73 5.41 3.41 5.94 3.69 .73 .18 .13 -.04 .53 .28 Record high 2003 Change to Apr. 29 from selected dates (percent) 2004 Stock exchange index Level Dow-Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000 Date Dec. 31 Mar. 15 Apr. 29 Record high 2003 Dec. 31 2004 Mar. 15 11,723 1,527 5,049 606 14,752 1-14-00 3-24-00 3-10-00 4-5-04 3-24-00 10,454 1,112 2,003 557 10,800 10,103 1,104 1,939 567 10,799 10,272 1,114 1,959 567 10,867 -12.37 -27.08 -61.20 -6.45 -26.33 -1.74 .18 -2.23 1.86 .62 1.68 .85 1.01 .05 .63 1. Secondary market. 2. Financial commercial paper. 3. Bid rates for eurodollar deposits collected around 9:30 a.m. Eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Most recent Thursday quote. 6. Constant maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. 8. For week ending Friday previous to date shown. _______________________________________________________________________ NOTES: June 24, 2003, is the last day before the most recent policy easing. March 15, 2004, is the day before the most recent FOMC meeting. ___________________________________________________________________
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