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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 12 SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS Prepared for the Federal Open Market Committee By the Staff Board of Governors of the Federal Reserve System 1993 TABLE OF CONTENTS Page THE DOMESTIC NONFINANCIAL ECONOMY Retail sales . . . Consumer sentiment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tables Retail sales . . . . . . . . . . . . . . . . . . . . University of Michigan Survey Research Center: Survey of consumer attitudes . . . . . ..... Indicators of consumer sentiment . . . . . . . . .. THE FINANCIAL ECONOMY The November Senior Loan Officer Opinion Survey on Bank Lending Practices. . . . . . . . . . . . . . Tables . . . . . . . . . . . . . . . Monetary aggregates Commercial bank credit and short- and intermediate-term business credit. . . . . . . . . Selected financial market quotations . . . . . ... SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Retail Sales Nominal retail sales are estimated to have increased 1.5 percent in October, boosted by the turnaround in sales at auto dealers and by a surge in spending at building material and supply stores, which have benefited from higher levels of residential construction activity. In the retail control category, which excludes spending at automotive dealers and building material and supply stores, nominal sales rose 0.7 percent in October, following a downward-revised gain of 0.4 percent in September. About a third of the increase in outlays in the retail control category in October resulted from a jump in spending at gasoline stations, where nominal sales rose 2.9 percent. Given the 4-1/2 percent increase in gasoline prices last month--reflecting the hike in the federal excise tax--spending in this category likely fell in real terms. Elsewhere, sales in October were mixed. merchandise stores increased 1.1 p Purchases at general ercent, but sales at furniture and appliance stores edged down after rising strongly for several months. Spending at stores selling "other durable goods" increased 0.6 percent, but was revised down sharply for August and September. Consumer Sentiment The Michigan index of consumer sentiment edged down in the first part of November to 82.0, but remained well above its thirdquarter average of 77.4. The current-conditions index fell slightly because of a decline in consumers' assessments of buying conditions for large household appliances. slipped somewhat: The expected-conditions index also Respondents' expectations about their personal financial situations over the next twelve months improved notably, but their outlook for general business conditions fell sharply. Among the survey questions not included in the overall index, results for the first part of November were generally upbeat. Consumers' appraisals of buying conditions for houses continued on a strong upward trend, and assessments of buying conditions for cars rose sharply. Expectations of the change in unemployment also improved, retracing the deterioration in October. Both the average and median values of expected inflation over the next twelve months fell 0.6 percentage point, to 3.4 percent and 2.8 percent, respectively. The average expectation of inflation over the next five to ten years dropped sharply to 4.0 percent; the median expectation also declined substantially to 3.2 percent. November 12, 1993 RETAIL SALES (Percent change; seasonally adjusted) 1993 Q1 1993 Q2 Q3 .4 1.8 1.5 1.4 Retail control1 Previous estimate .4 1.0 1.0 1.0 Total excl. automotive group Previous estimate .4 1.2 1.1 1.0 GAF 2 Previous estimate .8 1.6 2.4 2.3 Durable goods stores Previous estimate .4 3.9 3.1 3.2 Total sales Previous estimate Bldg, material and supply Automotive dealers Furniture and appliances Other durable goods Nondurable goods stores Previous estimate Apparel Food General merchandise Gasoline stations Other nondurables 4 3 1.1 .4 .9 -1.3 .5 -2.6 .5 2.2 2.8 -. 6 Aug. .3 -.2 1.7 .2 1.0 Oct. 1.5 1.6 1.7 3.2 4.2 2.4 5.1 .6 Sep. -1.2 -1.0 1.3 -1.7 .8 -3.9 .6 .4 .9 .8 2.6 -3.2 .3 .8 .8 -.6 .6 .1 -2.5 .7 2.6 -.4 .9 -. 1 1.9 1. Total retail sales less building material and supply stores and automotive dealers, except auto and home supply stores. 2. General merchandise, apparel, furniture, and appliance stores. 3. Excludes mail order nonstores; mail order sales are also excluded from the GAP grouping. 4. Includes sales at eating and drinking places, drug stores and proprietary stores. November 12, 1993 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1993 Mar 1993 Apr 1993 May 1993 Jun 1993 Jul 1993 Aug 1993 Sep 1993 Oct 1993 Nov (p) 85.9 85.6 80.3 81.5 77.0 77.3 77.9 82.7 82.0 101.6 75.8 99.9 76.4 98.7 68.5 98.7 70.4 96.2 64.7 95.1 65.8 95.2 66.8 98.7 72.5 97.9 71.7 111 119 104 120 103 115 108 117 102 112 96 114 104 114 104 119 106 126 76 73 77 76 95 76 83 78 Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions Personal financial situation Now compared with 12 months ago* Expected in 12 months* Expected business conditions Next 12 months* Next 5 years* Appraisal of buying conditions 136 152 173 Cars Large household appliances* Houses 137 155 167 140 152 163 140 147 166 141 147 171 138 150 166 134 143 170 132 151 170 145 147 176 117 115 125 127 130 129 133 137 132 4.9 4.9 4.1 4.8 4.4 5.7 4.8 5.2 4.4 5.0 4.9 4.6 4.8 4.6 4.0 4.8 3.4 4.0 Willingness to use credit Willingness to use savings Expected unemployment change next 12 months Expected inflation - next 12 months Expected inflation - next 5 to 10 years * -- Indicates the question is one of the five equally'-weighted components of the index of sentiment. (p) -- Preliminary (f) -- Final Note: Figures on financial, business, and buying condi.tions are the percent reporting 'good times' (or 'better') minus the percent reporting 'bad times' (or 'worse'), plus 100. Asterisk (*) indicates the question is one of the five equally-weighted components of the index of sentiment. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall. Indicators of Consumer Sentiment Consumer Confidence Index --- - 150 Michigan Index of Consumer Sentiment - -Conference Board Index of Consumer Sentiment - - -4 , 0\/ / 6I VnrJNx~ 90 (p) Nov Nov (p) -t 11111111l l SIIIIII i llllllt111111111 1989 1988 120 \ i 1 1990 111111 iili II 1 III111 Il 1992 1 1993 1991 Unemployment Expectations* 60 -- gi11111 J 30 1c)94 Index Michigan Survey Conference Board Survey ---- -4 40 nt 4 Nov (p) 1 , / 20 \ A . -- 10 4 / A/ I S111 1988 I 111 IIII 1989 III I 11W JI 11L11 1990 lllll 1111 1991 1 0 11111 111111 111111111 11111 I 1992 1993 The unemployment expectations indexes represent the fraction of households expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. 10 )94 19 THE FINANCIAL ECONOMY The November Senior Loan Officer Opinion Survey on Bank Lending Practices The November 1993 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 prime rate lending. Sixty domestic commercial banks and eighteen U.S. branches and agencies of foreign banks participated in the survey. The survey results show a further easing of the terms and standards on loans to both businesses and households; the share of banks that reported easing was about the same in the November as in the August survey. Demand for credit continued to grow in November, but responses were less uniformly positive than in the last survey. Respondents reported easing terms and standards on commercial and industrial loans to firms of all size categories, with the greatest share of banks reporting easing for large firms. commercial real estate loans were little changed. Standards for A small fraction of respondents indicated that they had eased standards on home mortgage loans, and a larger fraction reported increased willingness to make loans to individuals. Demand for business loans by large firms, which had been reported up in the previous survey, was little changed on balance over the last three months, while demand from small and middle market firms increased at about the same substantial share of banks as reported in the August survey. Household demand for credit continued to grow, particularly for installment credit, but demand for home equity lines of credit fell back a bit. 1. The response from one domestic bank had not been received when this summary was prepared. Special questions on the survey addressed the importance of prime rate lending and the determinants of the prime rate. Respondents indicated that the fraction of their commercial and industrial loans priced off the prime had declined substantially since the late 1980s. Banks identified the federal funds rate as the interest rate having the most influence on the level of the prime. They attributed the current wide spread of the prime rate over market rates to a variety of factors, but especially to a perceived insensitivity of the demand for credit to the level of the prime. Business Lending Commercial and industrial loans other than for mergers. Domestic respondents reported some easing of credit standards for firms in all size categories, with around one-fifth easing for large firms and 10 percent for small firms. changed from the August survey. These figures are little About 13 percent of U.S. branches and agencies of foreign banks eased lending standards and none reported tightening; in August none of the branches and agencies reported a change in credit standards. With respect to loan terms, many banks eased the cost of credit and credit lines. About half of the domestic respondents reported reductions for large and middle market firms, and about a quarter for small firms. These levels surpass the substantial number of respondents that reported easing fees and lending rates in August. Smaller fractions of respondents eased other terms, including loan covenants, credit line size, and collateralization. About twice as many respondents eased these terms for large firms as for small firms. Similar, although slightly smaller, fractions of foreign respondents reported having eased terms. -8Real estate loans. Both domestic and foreign respondents indicated that credit standards for commercial real estate loans were little changed. On net, domestic respondents reported a slight tightening on loans secured by commercial office buildings and a slight easing for other types of commercial real estate loans. Although scattered signs of easing were also evident in previous surveys, there has been no reversal of the substantial tightening of lending standards reported in 1990 and 1991. At U.S. branches and agencies of foreign banks standards for commercial real estate loans were unchanged. Demand. Demand for business loans from large firms was mixed among respondents, with a few more banks experiencing a strengthening than a weakening; in August, the evidence of strengthening had been more clear-cut. By contrast, a substantial fraction of respondents indicated that demand from small and middle market firms increased over the last three months, continuing the pattern reflected in the August survey. Respondents attributed declines in demand from large firms to increased financing from nonbank sources, consistent with the recent heavy pace of bond and equity issuance. Changes in credit needs for funding inventories and investment in plant and equipment were commonly cited as a source of both declines and increases in demand. Branches and agencies of foreign banks experienced a moderate increase in demand for business loans. Lending to households As in August, there was a substantial increased willingness at respondent banks to make consumer and residential mortgage loans. Nearly a fifth of respondents reported greater willingness to make consumer installment loans, down slightly from the previous survey. Standards for approving mortgage applications have been eased in the last three months at just under 15 percent of banks queried, above the share of banks which reported having eased these standards in August. Loan demand from households was again reported to have increased. More than a quarter of respondents experienced increased demands for consumer installment credit and for mortgages. On net, respondents found that demand for home equity loans had dropped. This decline may be due to paydowns of this form of debt with the proceeds from refinancing of first mortgages. Consumer loans at banks have expanded rapidly this year, following two years of runoffs. Banks attributed this reemergence of growth to a variety of reasons: The leading explanation was increased demand, particularly for automobile loans; less commonly cited reasons included increased demand for revolving credit, increased demand for student loans, as well as a more aggressive lending stance by the bank. Although the pace of securitization of consumer loans has slowed and some banks appear to be taking back onto their balance sheet consumer receivables that had backed maturing securities, these factors were assigned a relatively minor impact on consumer loan growth this year. While a few banks reported that more than 10 percent of their consumer loans are student loans, almost two-thirds indicated this share was under 5 percent. Prime rate lending The November survey asked a series of questions about the fraction of loans priced off the prime rate and the determinants of the prevailing prime rate. The survey responses suggest that perhaps 20 percent of domestic respondent banks' outstanding loans are linked to the prime. The types of loans with the largest proportion tied to prime were home equity loans and C&I loans; about -10- two-fifths of these loans were reported as prime based. A bit less than one-fifth of real estate loans other than home equity loans and around 15 percent of consumer loans are tied to prime, according to 2 the survey responses. The responses indicate that the share of commercial and industrial loans linked to prime is inversely related to the size of borrower. Close to 60 percent of domestic respondents reported that more than three-quarters of C&I loans to small firms are prime based. About 50 percent reported that more than half of their C&I loans to middle market firms are prime based. Nearly two-thirds of the respondents reported that a quarter or less of their C&I loans to large firms were prime based. The respondents placed the shares of C&I loans that were prime based in the late 1980s at appreciably higher levels, particularly for loans to large and middle market borrowers. At U.S. branches and agencies of foreign banks, less than a quarter of C&I loans were prime based, with nearly threequarters placing the share at less than 10 percent. The survey asked the respondents which interest rates have had the greatest influence on the level of the prime rate and why the current spread of the prime over market rates is so high. Both domestic and foreign respondents cited the level of the federal funds rate as the most influential determinant of the level of the prime, followed at some distance by LIBOR and rates on CDs with maturities less than six months. The respondents attributed the recent high spread in part to a perceived insensitivity of the quantity of credit demanded to a rate cut. Forty-five domestic respondents felt that a prime rate cut would not increase borrowing by current customers, and almost as many believed that a cut would 2. These averages were calculated using the mid point of reported percentage ranges, weighted by separately reported data on outstanding loans as of mid-October. -11not attract additional borrowers. In addition, a large number of respondents attributed the high level of the prime to the cost of having to hold additional capital and to other increases in regulatory expenses. Foreign respondents as well did not see a cut in the prime as leading to increased demand and, in addition, pointed to an increased riskiness of prime-based loans. Slightly less than half of the domestic respondents reported using derivatives to hedge the risk associated with prime-based lending. Respondents reported that their counterparties in their derivatives transactions were primarily U.S.-chartered banks, U.S. securities firms, and foreign banks or securities firms. Only two of the U.S. branches and agencies of foreign banks used derivatives to hedge their prime-rate risk. -12MONETARY AGGREGATES (Based on seasonally adjusted data except as noted) 1992:Q4 1992 1 1993 Q2 2 1993 Q3 2 1993 Aug. 1993 Sep. Aggregate or component 1993 Oct. (pe) Level to (bil. $) Oct. 93 Sep 93 (pe) Percentage change (annual rate) Aggregate 14.3 1.7 0.2 10.5 2.2 2.3 12.9 3.1 1.2 10.1 1.6 0.8 13.6 4.0 3.4 4. M1-A 13.7 13.1 14.2 13.9 16.5 5. 6. 9.1 18.0 9.7 16.0 11.6 17.2 11.6 16.4 14.6 18.5 7. Other checkable deposits 15.4 6.3 10.7 3.6 8. -2.7 -1.4 -1.1 -2.2 2.7 *10.3 35.5 -5-2 -0.1 !4.5 -15.8 -5.8 14.8 -22.1 -0.7 -0.4 4.6 -7.9 -4.3 0.7 -10.4 -0-6 -6 , 3.3 -16.5 -15.8 -19.5 18.2 7.8 -22.6 1. Ml 2. M2 3. M3 1106.5 3532.9 4176.8 Selected components Currency Demand deposits M2 minus Ml Overnight RPs and Eurodollars, n.s.a. General-purpose and broker10. dealer money market funds 11 Commercial banks Savings deposits 12. Small time deposits 13. 14. Thrift institutions Savings deposits 15. Small time deposits 16. 8.6 9 11% 700.5 7 10% 316.4 13% 376.4 11 12 8% 406.0 -0.3 -4 -2% 2426.4 42.8 45.9 34 12 -5.7 -6.8 -3% -I 3% -84 -5%4 1 -13 332.4 1253.6 777.2 476.4 758.5 431.6 326.9 -4y 643.9 -8 -7% -9 333.7 270.5 63.1 -5% 18% -4 194.1 95-4 44.7 9. M3 minus K23 Large time deposits 4 At commercial banks At thrift 4•estiutions Institution-only money market mutual funds Term RPs, n.s.a. Term Eurodollars, n.s.a. -10.7 -4.1 1.7 -11.5 -5.2 1.1 -13.4 2 -3 1 -10 -6 0 -13 -9.3 -3.9 0.0 9 -1.7 0.1 -8.4 -8.9 0.7 2.7 -6.1 -7.5 -10.3 -6.8 -9.4 -1.9 0.4 38.3 7.7 -12.6 24-3 -34.5 -10.5 -5.0 54.4 -0.9 5.3 -10.5 -4.0 2.9 -12-7 0.1 6.9 0.2 5.1 -7.8 5.0 -7.5 24.7 15 -19 16 81.4 Average monchly change (billions of dollars) Memo Managed liabilities at com'l. banks (lines 25 26) Large time deposits, gross Nondeposit funds Net due to related foreign institutions 5 Other U-S- government deposits at 6 commercial banks 6.5 9.9 6.1 7.2 1 736.7 -1.0 -5.7 -4.9 -4.2 0 7.5 15.6 11.0 11.4 1 335.5 401.2 2.6 5.0 11.2 4-4 14.5 -3.5 4.8 6.5 0 1 120.7 280.4 2.4 -0.6 -0.7 -5.2 24.2 1- *Percentage change' is percentage change in quarterly average from fourth quarter of preceding year to fourth quarter of specified year 'Average monthly change' is dollar change from December to December, divided by 12. 2. "Percentage change" is percentage change in quarterly average from preceding quarter to specified quarter *Average monthly change' is dollar change from the last month of the preceding quarter to the last month of the specified quarter, divided by 3. 3. Seasonally adjusted as a whole. 4. Net of holdings of money market mutual funds, depository institutions, U.S. government, and foreign banks ,d official institutions. 5. Borrowing 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 borrowing from the Federal Reserve and unaffiliated foreign banks, loan RPs, and other minor items), 6. Treasury demand deposits and note balances at commercial banks. Data are partially estimated. -13COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT1 (Percentage change at annual rate, based on seasonally adjusted data) Type of credit Dec. 1991 to Dec. 1992 1993 Q2 1993 Q3 1993 Sep. 1993 Aug. 1993 Oct. p Level, Oct. 1993 p ($billions) Commercial bank credit 1. Total loans and securities at banks 2. Securities 3. U.S. 4. Other government 5. Loans 6. Business 7. Real estate 8. 9. 3.6 .1 3,056.5 13.0 11.2 8.0 9.6 7.8 -5.5 898.2 17.5 12.9 8.6 9.5 9.6 -4.0 717.8 5.2 4.9 10.0 0.0 -9.9 180.5 5.6 4.5 .7 2.4 .2 -5.1 -1.1 .2 2.4 585.4 -2.2 2.1 5.2 3.7 2.4 4.0 5.0 917.9 Consumer -1.8 7.1 8.7 8.4 4.2 12.7 380.6 Security 10. -1.2 18.4 44.9 62.7 -26.5 43.7 -49.4 79.2 1.2 12.2 .8 -1.8 -1.8 195.2 Other -3.2 -9.1 .4 2,158.2 Short- and intermediate-term business credit 576.0 -3.3 -1.4 -2.4 -. 6 -3.7 2.0 -5.2 -31.3 -48.0 -22.2 -3.1 -1.5 -3.6 -2.2 Commercial paper issued by nonfinancial firms 9.5 15.8 22.5 23.5 4.5 -8.9 160.5 Sum of lines 13 and 14 -. 8 3.0 -2.4 -2.4 757.8 11.5 n.a. 21.1 11. Business loans net of bankers acceptances 12. Loans at foreign branches 2 13. Sum of lines 11 and 12 14. 15. 1.9 1.7 -4.4 5.7 -. 6 21.3 597.3 5 16. Bankers acceptances, U.S. 3 4 trade-related , -16.9 -14.2 -11.1 -11.4 5 17. Finance company loans to business4 1.8 18. Total (sum of lines 15, 16, and 17) -. 5 -. 4 3.0 4.8 5.5 n.a. 305.4 .9 1.9 3.3 0.0 n.a. 1,085.8 1. Except as noted, levels are averages of Wednesday data and percentage changes are based on averages of Wednesday data; data are adjusted for breaks caused by reclassification; changes are measured frcn preceding period to period indicated. made by foreign branches of domestically chartered banks. 2. Loans to U.S. firs 3. Acceptances that finance U.S. imports, U.S. exports, and damestic shipment and storage of goods. 4. Changes are based on averages of month-end data. 5. September 1993. p Preliminary. n.a. Not available. -14SELECTED FINANCIAL MARKET QUOTATIONS (Percent except as noted) 1992 1993 Change to Nov 10, 1993 t __ Instrument FOMC, Mid-Oct Sep 21 lows Sept. 4 Nov 10 From FOMC, Sep 21 Mid-Oct lows SHORT-TERM RATES Federal funds 3.19 3.01 3.07 3.00 -0.01 -0.07 2.92 2.96 3.06 2.92 3.05 3.25 3.01 3.09 3.23 3.12 3.26 3.40 0.20 0.21 0.15 0.11 0.17 0.17 3.22 3.22 3.15 3.16 3.13 3.23 3.15 3.40 0.00 0.24 0.02 0.17 3.06 3.06 3.11 3.11 3.12 3.25 3.08 3.22 3.23 3.10 3.35 3.38 -0.01 0.23 0.13 0.02 0.13 0.15 3.31 3.31 3.06 3.06 3.06 3.25 3.06 3.38 0.00 0.32 0.00 0.13 6.00 6.00 6.00 6.00 0.00 0.00 4.21 5.47 6.14 4.06 5.19 5.78 4.51 5.72 6.21 0.30 0.25 0.07 0.45 0.53 0.43 5.49 5.41 5.72 0.23 0.31 8.06 7.10 6.79 7.21 0.11 0.42 7.84 5.15 6.96 4.36 6.74 4.14 7.11 4.17 0.15 -0.19 0.37 0.03 3 Treasury bills 3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs 1-month 3-month 6-month 4 Eurodollar deposits l-month 3-month Bank prime rate INTERMEDIATE- AND LONG-TERM RATES U.S. Treasury (constant maturity) 3-year 10-year 30-year 5 Municipal revenue (Bond Buyer) 4.38 6.40 7.29 Corporate--A utility, recently offered 6 Home mortgages FHLMC 30-yr. fixed rate FHLMC 1-yr. adjustable rate Record high S 1989 ____ 1993 I I I Level _I I I I Low, I FOMC, I I Date I Jan. 31 Sep 21 iNov 101 _ I __I 3697.64 260.48 787.42 4701.68 11/2/93 2144.64 3537.24 3663.55 10/15/93 154.00 251.59 256.57 10/15/93 378.56 733.56 776.50 10/15/93 2718.59 4515.06 4628.16 Stock exchange index Dow-Jones Industrial NYSE composite NASDAQ (OTC) Wilshire I __ ! 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 10, 1993. 3. Secondary market. Percentage change to Nov 10 From I From record I 1989 high I low 1 -0.92 -1.50 -1.39 -1.56 70.82 66.60 105.12 70.24 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. I I From FOMC, I Sep 21 I 3.57 1-98 5.85 2.50