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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 November 8, 1996 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 Page THE NONFINANCIAL ECONOMY Productivity and costs . . . Wholesale trade inventories . . . . . . . . . . . . . . Tables Labor productivity and costs . . . Changes in manufacturing and trade inventories Inventories relative to sales.. . Selected inventory-sales ratios. . Chart Inventory-sales ratios, by major sector. . . . . S. 6 . 7 THE FINANCIAL ECONOMY Table Selected financial market quotations . . . . . . SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Productivity and Costs Output per hour in the nonfarm business sector increased 0.2 percent at an annual rate in the third quarter after increasing 0.5 percent in the second quarter. The third-quarter figure is based on BEA's advance estimate of a 2.3 percent gain in nonfarm business output and a 2.1 percent gain in the hours worked of all persons. Growth in productivity from the same quarter of last year amounted to 0.3 percent, down from 0.8 percent in the previous four quarters. Nonfarm compensation per hour increased 3.9 percent at an annual rate in the third quarter, little different from the revised 3.8 percent rate in the second quarter. By comparison, the growth in hourly compensation in the ECI reported last month was 2.5 percent in the third quarter, down from 3.2 percent in the second quarter. Although both measures of hourly compensation show the same long-run trends, large discrepancies between their rates of change are common in the quarterly data. Compared with the ECI, the productivity and cost data showed substantially faster growth in wages and salaries, but a bit slower growth in benefits. Unit labor costs in the nonfarm business sector rose 3.7 percent at an annual rate in the third quarter, bringing the change over the four quarters ended in September to 3.4 percent, up slightly from the 3.2 percent increase in the previous four-quarter period. 1. Hours of all persons include employees, unpaid family workers, and self-employed persons. The hours of unpaid family and selfemployed workers are derived from the household survey, and quarterly changes in these hours have been unusually volatile since the redesign of the Current Population Survey at the start of 1994. Netting out the hours growth for these two groups, hours of all employees in the nonfarm business sector grew 2.9 percent in the third quarter. 2. One important difference between the two measures is that the productivity and cost data are based on changes in the quarterly averages while the ECI data are based on changes between the last months of the quarter. Average hourly earnings of production or nonsupervisory workers--a major source of the data used to construct the hourly wages and salaries estimate in the productivity and cost data--grew 2.7 percent at an annual rate from June to September, compared with 3.5 percent from the second-quarter average to the third-quarter average. Wholesale Trade Inventories Wholesale inventories declined in September at an annual rate of $39.6 billion (book value). In addition, the change in wholesale stocks in August was revised down substantially; the data now show a drawdown of $3.3 billion in that month compared with an increase of $14.6 billion in the preliminary report. While sizable reductions in stocks of motor vehicles were reported for both August and September, stocks held by many other types of wholesale establishments also fell. For the quarter as a whole, inventories of non-automotive stocks in the wholesale trade sector declined at a $10.4 billion annual rate, considerably less than the $4 billion increase assumed by BEA in preparing the advance estimate of real GDP for the third quarter. In the non-auto categories, stocks of farm products fell even more sharply in September than in the two preceding months. Given the steep price declines for crops in September, a large portion of the book-value drop in this category probably reflected changes in prices rather than changes in real quantities. Elsewhere, stock accumulation occurred at distributors of capital goods--machinery and professional and commercial equipment--but inventories in most other categories were reduced. Sales at non-auto wholesale establishments rose 0.9 percent in September, and their inventory-sales ratio fell to 1.23 months. LABOR PRODUCTIVITY AND COSTS (Percent change from preceding period at compound annual rate; based on seasonally adjusted data) 1995 19941 19951 Q4 1996 Ql Q2 Q3 1995:Q3 to 1996:Q3 Output per hour Total business Nonfarm business Manufacturing Nonfinancial corporations2 .3 .5 4.5 .3 .3 3.5 -.6 -1.1 3.7 2.0 1.7 5.6 1.1 .5 2.9 .3 .2 6.3 .7 .3 4.6 .4 1.9 2.5 1.1 1.3 ND ND 2.3 2.5 2.7 4.1 4.1 4.2 4.4 4.1 4.1 3.0 3.3 .4 4.1 3.8 5.8 4.3 3.9 4.6 4.0 3.8 3.7 1.9 3.9 4.0 2.6 3.7 ND ND 1.9 2.0 -1.7 3.9 3.8 .7 5.0 5.2 .4 1.0 1.5 -4.9 3.0 3.3 2.8 4.0 3.7 -1.6 1.5 1.9 1.5 1.5 2.4 ND Compensation per hour Total business Nonfarm business Manufacturing Nonfinancial corporations2 Unit labor costs Total business Nonfarm business Manufacturing Nonfinancial corporations 2 3.3 3.4 -. 8 ND 1. Changes are from fourth quarter of preceding year to fourth quarter of year shown. 2. The nonfinancial corporate sector includes all corporations doing business in the United States with the exception of banks, stock and commodity brokers, finance and insurance companies; the sector accounts for about two-thirds of business employment. CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at annual rates; based on seasonally adjusted data) 1996 Q1 Q2 1996 Q3 July Aug. Sept. Book value basis Total Excluding wholesale and retail motor vehicles Manufacturing Excluding aircraft Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers Chained 16.7 13.2 n.a. 61.0 38.6 n.a. 25.0 12.3 6.3 7.3 7.3 -2.9 -8.4 5.5 6.0 -6.2 -10.7 11.3 7.6 8.2 3.5 4.6 n.a. 13.1 10.4 -15.0 -10.4 n.a. n.a. n.a. 39.1 6.9 6.3 -1.9 -4.2 56.0 19.7 36.3 25.5 14.9 12.5 -3.3 -.9 27.1 15.6 11.5 n.a. 17.4 12.5 -39.6 -26.1 n.a. n.a. n.a. -5.4 7.9 n.a. 56.4 26.0 n.a. 17.5 12.0 3.8 4.0 -21.7 -23.6 3.0 1.9 -3.9 6.5 3.3 5.2 2.0 3.2 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 46.0 13.7 1.5 -.4 41.5 10.5 31.0 27.2 5.6 15.9 14.4 4.5 -2.7 7.3 n.a. n.a. n.a. n.a. n.a. n.a. n.a. 11992) dollars basis Total Excluding motor vehicles Manufacturing Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers INVENTORIES RELATIVE TO SALES (Months' supply; based on seasonally adjusted data) 1996 Q1 Q2 1996 Q3 July Aug. Sept. Book value basis Total Excluding wholesale and retail motor vehicles Manufacturing Excluding aircraft Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers 1.43 1.40 n.a. 1.39 1.40 n.a. 1.40 1.45 1.34 1.32 1.30 1.49 1.66 1.44 1.37 1.40 1.29 1.31 1.28 1.49 1.70 1.42 n.a. 1.39 1.28 1.27 1.24 n.a. n.a. n.a. 1.36 1.39 1.28 1.28 1.25 1.51 1.74 1.43 1.37 1.39 1.28 1.29 1.26 1.52 1.76 1.45 n.a. 1.39 1.28 1.27 1.23 n.a. n.a. n.a. 1.38 1.36 1.39 1.35 1.33 1.37 1.54 1.34 1.36 1.33 1.35 1.34 1.31 1.37 1.57 1.33 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. 1.35 1.32 1.34 1.31 1.28 1.38 1.56 1.34 1.35 1.33 1.35 1.33 1.30 1.39 1.54 1.35 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Chained (1992) dollars basis Total Excluding motor vehicles Manufacturing Wholesale Excluding motor vehicles Retail Auto dealers Excluding auto dealers Note. Ratio of end-of-period inventories to average monthly sales for the period. -5- SELECTED INVENTORY-SALES RATIOS (Months' supply, based on Census book-value data, seasonally adjusted) Cyclical reference points 1990-91 High Manufacturing and trade Less wholesale and retail motor vehicles 1994-95 Low Most recent 12-month range High Low August/ September 19961 1.58 1.40 1.45 1.39 1.40 1.57 1.40 1.44 1.39 1.37 Manufacturing Primary metals Nonelectrical machinery Electrical machinery Transportation equipment Motor vehicles Aircraft Nondefense capital goods Textile Petroleum Home goods & apparel 1.75 2.08 2.48 2.08 2.94 .97 5.85 3.09 1.71 .94 1.96 1.39 1.45 1.88 1.52 1.59 .53 4.42 2.33 1.44 .88 1.70 1.46 1.62 1.94 1.60 1.87 .67 5.95 2.58 1.66 .92 1.89 1.39 1.55 1.84 1.52 1.65 .56 4.89 2.38 1.49 .80 1.70 1.39 1.61 1.81 1.51 1.65 .55 5.14 2.39 1.55 .80 1.72 Merchant wholesalers Less motor vehicles Durable goods Nondurable goods 1.36 1.31 1.83 .96 1.28 1.26 1.54 .98 1.34 1.31 1.64 1.03 1.28 1.25 1.58 .97 1.27 1.23 1.57 .94 Retail trade Less automotive dealers Automotive dealers General merchandise Apparel G.A.F. 1.61 1.48 2.21 2.43 2.56 2.44 1.46 1.42 1.60 2.21 2.47 2.24 1.56 1.48 1.82 2.34 2.66 2.37 1.48 1.41 1.64 2.20 2.35 2.23 1.52 1.45 1.76 2.26 2.44 2.27 1. September 1996 ratios for manufacturing and wholesale; August 1996 ratios for retail trade. -6- Inventory-Sales Ratios, by Major Sector Manufacturing (Book value) Ratio 2.2 1.95 Total 1.7 1.45 Excluding aircraft and parts i I 1980 I 3 1982 I 1 1984 I 1986 l ' i i 1988 I I 1990 I I 1992 . ,'S. I f 1994 I - , I 12 1996 Wholesale Excluding Motor Vehicles Ratio 1.5 1.4 1.3 1.2 1.1 1 1980 1982 1984 1986 1988 1990 1992 1994 1996 Retail Ratio 1.7 1.6 1.5 1.4 1980 1982 1984 1986 1988 1990 1992 1994 1996 Selected Financial Market Quotations' (Percent except as noted) 1996 Instrument Feb. Change to Nov. 7, from: July FOMC, low high Sep.24 5.39 0.13 -0.11 0.05 5.21 5.40 5.64 0.26 0.41 0.59 -0.19 -0.32 -0.50 -0.13 -0.22 -0.38 5.50 5.59 0.11 0.29 -0.12 -0.18 -0.14 -0.18 5.44 5.59 5.83 0.07 0.27 0.46 -0.16 -0.20 -0.38 -0.17 -0.16 -0.29 5.38 5.56 0.12 0.25 -0.13 -0.18 -0.13 -0.12 8.25 0.00 0.00 0.00 6.62 7.06 7.19 0.89 0.68 0.46 -0.75 -0.80 -0.71 -0.53 -0.57 -0.54 Municipal revenue (Bond Buyer)5 6.24 0.25 -0.32 -0.18 Corporate-A utility, recently offered 8.23 0.47 -0.58 -0.43 10.36 0.23 -0.56 -0.15 8.42 6.01 0.84 0.41 -0.64 -0.41 -0.36 -0.23 low July FOMC,* high Sep. 24 Feb. Nov. 7 Short-term rates Federal funds 2 Treasury bills 3 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs' 1-month 3-month 6-month Eurodollar deposits4 1-month 3-month Bank prime rate Intermediate- and Long-term Rates U.S. Treasury (constant maturity) 3-year 10-year 30-year High-yield corporate 6 Home mortgages 7 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high Stock exchange index I Percentage change to Nov. 7, from: 1996 July Record FOMC, July FOMC, Level Date low Sep. 24 Nov. 7 high low Sep. 24 6206.04 11/7/96 5346.55 5894.74 6206.04 0.00 16.08 5.28 NYSE Composite 384.91 11/7/96 336.07 365.51 384.91 0.00 14.53 5.31 S&P 500 Composite 727.65 11/7/96 626.65 686.48 727.65 0.00 16.12 6.00 1258.10 10/15/96 1042.37 1211.47 1254.14 -0.31 20.32 3.52 Dow-Jones Industrial NASDAQ (OTC) Wilshire 7045.82 11/7/96 6099.34 6723.87 7045.82 0.00 15.52 4.79 1 One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average to date for the maintenance period ending November 6, 1996. 3. Secondary market. 4. Bid rates for Eurodollar deposits at 11 a.m. London time. 5. Most recent observation based on one-day Thursday quote and futures market index changes. 6. Merrill Lynch Master II high-yield bond index composite.1996. 7. Quotes for week ending Friday previous to date shown.
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