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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 9. SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 1995 TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Producer prices. . . . . . . . . . . . . . . . .... .. 1 Tables Recent changes in producer prices. . Recent changes in producer prices-relative contribution . . . . . . . . . . . . . . . . . . . . . . .. The November Senior Loan Officer Opinion Survey on Bank Lending Practices . . . . . . . . . . . . 2 2 THE FINANCIAL ECONOMY Table Selected financial market quotations . . . . . . . 3 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Producer Prices The PPI for finished goods edged down 0.1 percent in October. Food prices were flat, with declines in fresh fruits and vegetables offset by increases in other components, particularly rice, pasta, meat, and dairy products. Energy prices declined for the fifth consecutive month, reflecting declines in all categories except electricity. Excluding food and energy, finished goods prices were unchanged, the best performance in a year. The PPI for intermediate materials other than food and energy dropped 0.3 percent, its first decline since July 1993. Prices of finished consumer goods other than food and energy increased 0.1 percent. Prices of nondurables rose 0.2 percent as apparel prices posted their largest increase than three years. (0.4 percent) in more Prices of durables were flat, with increases for passenger cars offset by declines for trucks and other consumer durables. In recent years, light truck prices have increased faster than car prices. Last month, however, the twelve-month change in prices of light trucks dropped below those of new car prices. The drop in prices of light trucks also contributed to a small decline in the index for capital equipment. fell last month as well, but the decrease Prices for computers (0.6 percent) was only half the average monthly decline over the past twelve months. The drop in the PPI for intermediate materials other than food and energy reflects the largest decline in prices of manufacturers' materials in recent years. Significant decreases were posted for metals and plastic resins as well as industrial and some agricultural chemicals. RECENT CHANGES IN PRODUCER PRICES (Percent change; based on seasonally adjusted data) 1 Relative importance, Dec. 1994 1995 1993 1994 Q1 1995 Q2 Q3 ----- Annual rate------ Sept. Oct. -Monthly rate- 100.0 22.8 13.6 63.7 40.2 23.5 .2 2.4 -4.1 .4 -.4 1.8 1.7 1.1 3.5 1.6 1.4 2.0 3.2 -1.2 11.3 2.9 2.9 3.0 .6 -4.6 1.5 2.6 3.2 1.8 1.3 8.8 -14.3 2.3 2.3 2.1 .3 1.0 -.5 .2 .3 .1 -.1 .0 -.9 .0 .1 -.1 Intermediate materials 2 Excluding food and energy 95.6 82.9 .8 1.6 4.8 5.2 10.6 10.5 3.9 4.2 -.6 1.8 -.1 .1 -.4 -.3 Crude food materials Crude energy Other crude materials 40.4 34.5 25.1 7.2 -12.3 10.7 -9.4 -.1 17.3 -4.6 -4.5 21.9 -.8 14.6 4.6 42.3 -22.0 -18.2 Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment 2.1 -.4 -2.6 4.2 3.2 -2.1 1. Changes are from final month of preceding period to final month of period indicated. 2. Excludes materials for food manufacturing and animal feeds. RECENT CHANGES IN PRODUCER PRICES -- RELATIVE CONTRIBUTION (Percent change; based on seasonally adjusted data) 1 2 1995 1995 Relative importance Dec. 1994 1993 1994 Q1 Q2 Q3 -----Annual rate-----Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment 100.0 22.8 13.6 63.7 40.2 23.5 .2 .5 -.6 .2 -.2 .4 1.7 .3 .5 1.0 .6 .5 3.2 -.3 1.5 1.9 1.2 .7 .6 -1.0 .2 1.7 1.3 .4 1.3 1.9 -2.1 1.5 .9 .5 Sept. Oct. -Monthly rate.3 .2 -.1 .1 .1 .0 -.1 .0 -.1 .0 .0 -.0 1. Data may not add due to rounding. 2. Changes are from final month of preceding period to final month of period indicated. THE FINANCIAL ECONOMY The November Senior Loan Officer Opinion Survey on Bank Lending Practices The November 1995 Senior Loan Officer Opinion Survey on Bank Lending Practices posed questions about changes in bank lending standards and terms, changes in loan demand by businesses and households, and changes in consumer loan delinquency rates. Fifty- six domestic commercial banks and twenty-one branches and agencies of foreign banks participated in the survey. The survey found that lending standards changed little over the past three months. On balance, a few banks eased standards for business loans to small and middle-market borrowers while leaving those for large firms unchanged. A few banks also tightened standards for commercial real estate loans of all types, and a couple of banks tightened residential mortgage lending standards. A small net fraction of banks reported increased willingness to make consumer loans. Taken together, these results suggest that the easing of lending standards over the past few years has virtually ceased. In contrast, a substantial fraction of banks noted that terms on business loans that their bank was willing to make had eased further over the past quarter, although the number of banks reporting easier terms has declined since the start of the year. The survey results indicate that demand for bank loans continued to rise over the past quarter, but likely at a slackening pace. On net, surveyed banks reported higher demand for business loans, but the share reporting stronger demand was smaller than it has been for several years. The net fraction of the respondents noting stronger demand for residential mortgages and consumer installment loans had jumped in the third quarter, but fell back in the latest survey. In contrast, the share of banks reporting -4stronger demand for commercial real estate loans remained near its level of the past two quarters. Commercial and Industrial Loans The survey found that only a few banks, about 5 percent on net, had eased standards for approving commercial and industrial loans and lines of credit, other than those to be used to finance mergers and acquisitions, to small and middle-market firms over the past three months. For the first time since mid-1993, large businesses saw no net easing. Branches and agencies of foreign banks actually reported a small tightening of business lending standards in the latest survey, after no change in August. Many of the respondents noted that they had eased their terms on business loans over the past three months, although the net fraction reporting easier terms was somewhat smaller than in the past few quarters. Large fractions of the domestic respondents reduced credit-line costs and tightened spreads of loan rates over base rates for large and middle-market firms. fractions eased these terms for small firms. Significantly smaller Generally smaller fractions of the respondents reported having eased other terms, including the size of credit lines, loan covenants, and collateralization requirements. Large fractions of the foreign branches and agencies also reported having eased business loan terms. As they have for several quarters, the respondents attributed the easing of loan terms and standards to more aggressive competition from other commercial banks and, to a lesser extent, from nonbank lenders. The easing may also reflect greater sensitivity of loan demand to loan terms. A significant fraction of the respondents noted that the sensitivity of business loan demand to the terms offered at their bank relative to terms available at -5their competitors had increased. Except for the branches and agencies of foreign banks, however, the fraction of respondents noting increased sensitivity declined relative to the survey in May, when this question was last asked. Over the course of the year, the net fraction of domestic banks reporting increased demand for business loans has trended down. In the latest survey, only about 10 percent of the respondents reported greater demand by large and small firms, and there was no net increase in demand reported for middle-market firms. By contrast, the comparable percentages a year ago were near 40, 20, and 30 percent for large, middle-market, and small firms, respectively. The respondents reporting increased demand in November indicated that the strength was the result of customers' inventory financing needs and investment in plant and equipment. In addition, merger and acquisition activity reportedly boosted demand, especially by larger customers. Those banks reporting weaker demand for business loans generally attributed the weakness to the same set of factors. On net, about 20 percent of the branches and agencies of foreign banks reported increased demand on the current survey, with the strong increase attributed primarily to merger and acquisition activity. Commercial Real Estate Loans A small net fraction of domestic respondents reported tighter standards for commercial real estate loans of all types. This was the first survey since 1992 showing a net tightening, albeit modest, of standards for all types of these loans. Demand for commercial real estate loans reportedly picked up over the last three months, with about the same net fraction of banks reporting higher demand as has prevailed since this question was added to the survey in May. The foreign branches and agencies reported no change in their -6standards on commercial real estate loans and a small net increase in demand. Loans to Individuals The supply of credit to households was little changed over the past three months. Only about 5 percent of the domestic respondents, on net, reported that they were more willing to make consumer installment loans than they had been three months ago, down a bit from the August survey and the lowest percentage since 1991. The respondents also reported a small tightening of standards for approving residential mortgage applications, the first such tightening since 1993. Demand for credit by households increased, on balance, but at a slower pace than was reported in the August survey. Less than 10 percent of banks, on net, reported increased demand for consumer installment loans, down from more than 20 percent in the last survey. About 15 percent of the banks reported higher demand for residential mortgages, but this was well below the 50 percent posted in August. Consumer Loan Delinquencies Special questions on the survey asked the respondents about changes in their banks' consumer loan delinquency rates over the past year. A majority of the banks reported that their delinquency rate had increased, and only a few banks reported a decrease. The higher delinquency rates were largely anticipated, however, as only about 10 percent of the banks, on net, indicated that their banks' delinquency rates had deteriorated more than expected over the year. The banks attributed the rise in delinquencies primarily to the increase in household debt burdens. In addition, some banks noted that an increased willingness of borrowers to declare bankruptcy and slower economic growth in their market area had contributed to the -7rise. A number of banks had responded to rising delinquencies by tightening lending standards, tightening non-price lending terms, or raising spreads of lending rates over market rates. In most cases, however, the banks reported that they had made small rather than large changes. -8Selected Financial Market Quotations1 (Percent except as noted) 1994 1995 Instrument Change to Nov. 8,1995 from: FOMC, 1994 1994 FOMC, Nov. 8 Feb. 3 high Sep. 26 5.80 5.74 2.67 0.08 -0.06 5.78 6.38 6.84 5.29 5.38 5.39 5.36 5.26 5.13 2.23 1.99 1.61 -0.42 -1.12 -1.71 0.07 -0.12 -0.26 3.16 3.25 6.13 6.32 5.81 5.73 5.82 5.75 2.66 2.50 -0.31 -0.57 0.01 0.02 3.11 3.25 3.41 6.10 6.39 6.89 5.75 5.74 5.74 5.74 5.74 5.65 2.63 2.49 2.24 -0.36 -0.65 -1.24 -0.01 0.00 -0.09 3.06 3.25 6.06 6.38 5.72 5.72 5.72 5.75 2.66 2.50 -0.34 -0.63 0.00 0.03 6.00 8.50 8.75 8.75 2.75 0.25 0.00 4.60 5.81 6.31 7.82 8.04 8.16 5.98 6.28 6.58 5.58 5.92 6.25 0.98 0.11 -0.06 -2.24 -2.12 -1.91 -0.40 -0.36 -0.33 Municipal revenue (Bond Buyer)5 5.49 7.37 6.18 5.93 0.44 -1.44 -0.25 Corporate-A Utility, recently offered 7.35 9.05 7.57 7.33 -0.02 -1.72 -0.24 6.97 4.12 9.25 6.79 7.57 5.77 7.44 5.67 0.47 1.55 -1.81 -1.12 -0.13 -0.10 Feb. 3 High 3.07 5.66 3.13 3.27 3.52 Sep.26 Short-term Rates Federal Funds2 Treasury Bills3 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs 3 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 Home mortgages6 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high 1989 1995 Low, FOMC, Jan. 3 Sep.26 Percentage change to Nov. 8 from: Record 1989 FOMC, high low Sep. 26 Stock Exchange Index Level Dow-Jones Industrial 4852.67 11/08/95 2144.64 4765.60 4852.67 0.00 126.27 1.83 NYSE Composite 315.55 11/08/95 154.00 311.82 315.55 0.00 104.90 1.20 NASDAQ (OTC) 1067.40 9/13/95 378.56 1038.05 1047.94 -1.82 176.82 0.95 Date Nov. 8 Wilshire 5843.27 9/21/95 2718.59 5774.95 5843.21 -0.00 114.94 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is average to date for maintenance period ending November 8, 1995. 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. Quotes for week ending Friday previous to date shown. 1.18
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