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Confidential (FR) Class III FOMC November 15, 1999 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 TABLE OF CONTENTS THE DOMESTIC NONFINANCIAL DEVELOPMENTS Retail Sales Page ..................................................... 1 Michigan Survey of Consumer Attitudes ............................... R etail Inventories .................................. 1 ............ .4 Tables Retail Sales ...................................................... 2 University of Michigan Survey Research Center: Survey of ............................. Consumer Attitudes ................ 3 Changes in Manufacturing and Trade Inventories .......................... 5 Charts Inventory-Sales Ratios, by M ajor Sector ................................. 6 Productivity in the Nonfarm Business Sector ............................. 9 THE FINANCIAL ECONOMY Tables Selected Financial Market Quotations ................................... 10 Supplemental Notes Consumer Spending and Sentiment Retail sales. According to the advance report, total nominal retail sales were unchanged in October. For the second consecutive month, a decline in sales at automotive dealers held down overall sales. Nominal purchases at stores in the retail control category, which excludes sales at automotive dealers and building material and supply stores, increased 0.4 percent last month after gains of 1.0 percent and 0.7 percent in August and September. In October, most of the major categories within the retail control posted solid gains in nominal spending. The largest increases in sales occurred at stores selling in the "other durable goods" category and at drug stores. The only major categories in which sales declined in October were general merchandise stores-where sales were little changed--and furniture and appliance outlets--where sales fell about 1 percent. Both of these categories, however, had registered large increases in September. Sales in the retail control for October came in somewhat stronger than we assumed in the November Greenbook, but not enough to materially change our view of the pace of consumer spending in the fourth quarter. Michigan survey of consumer attitudes. According to the preliminary estimates, the Michigan Survey Research Center index of consumer sentiment moved back up in November, with improvements in both the current and expected conditions components. The index now stands near the top of the very favorable range that we have seen so far this year. Respondents had more positive views of their current financial situations and were more upbeat about prospects for their future finances in early November. Assessments of future business conditions also improved this month, and appraisals of buying conditions for large household appliances were unchanged. Among those questions not in the overall index, the index of expected unemployment change rose in early November. With the exception of a sharp dip in June, this series had moved within a relatively narrow and fairly favorable range since January. Appraisals of buying conditions for cars perked up in early November, and appraisals of buying conditions for homes improved noticeably, reflecting in part more favorable assessments of mortgage rates. Nonetheless. the index of home buying conditions remains well below the range that prevailed between the middle of 1997 and the middle of 1999. Concerns about near-term inflation eased somewhat in early November. The mean of expected inflation over the next twelve months fell 0.4 percentage point to 3.1 percent, and the median declined to 2.7 percent. However, the mean of November 12, 1999 RETAIL SALES (Percent change; seasonally adjusted) 1999 1999 Q1 Q2 Q3 3.2 1.7 2.1 2.3 1.3 1.5 Retail control 1 Previous estimate 2.7 1.9 1.6 1.6 1.0 1.0 Total excl. automotive group Previous estimate 3.0 1.8 1.4 1.4 GAF 2 Previous estimate 3.6 1.3 1.3 1.3 Durable goods stores Previous estimate 3.9 1.0 2.7 3.0 1.8 2.1 -1.1 -1.0 4.4 2.2 -1.3 -2.0 1.8 .4 1.7 -1.6 -. 5 .3 2.5 1.1 1.1 1.7 1.8 1.0 1.0 -1.0 .6 .9 2.0 .5 .6 .8 .9 .6 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 3 Gasoline stations Other nondurable goods 4 Eating and drinking Drug and proprietary 2.7 4.5 1.6 3.9 -1.8 3.9 1.2 4.3 2.2 Aug. Sept. Oct. -.1 .9 .5 .3 2.8 1.2 -. 1 .8 -. 6 -. 8 -. 9 2.0 -. 1 .3 .6 .8 1.4 1. Total retail sales less sales at 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 GAF grouping. 4. Also includes sales at liquor stores and mail order houses. November 12, 1989 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1999 1999 1999 1999 1999 1999 1999 1999 Mar. Apr. May June July Aug. Sept. Oct. 1999 106.8 121.1 97.6 107.3 118.9 99.8 106.0 116.5 99.2 104.5 114.1 107.2 115.9 101.5 103.2 112.7 97.1 107.7 118.5 100.7 Nov (P) 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 Cars Large household appliances* Houses 105.7 116.3 99.0 104.6 115.9 97.4 130 134 134 136 133 135 133 133 132 135 132 139 132 135 127 133 142 140 141 141 144 147 147 140 150 140 147 123 115 114 122 118 118 124 118 120 152 172 167 150 167 168 151 182 171 150 176 168 153 171 167 148 165 153 145 169 149 146 166 149 148 166 153 52 75 53 88 47 48 62 59 Willingness to use credit Willingness to use savings Expected unemployment change - next 12 months Prob. household will lose a job - next 5 years Expected inflation - next 12 months Mean Median Expected inflation - next 5 to 10 years Mean Median 98.4 113 109 110 102 109 113 110 112 114 21 23 22 20 24 21 20 20 19 3.1 2.7 3.0 2.7 3.2 2.8 3.1 2.5 3.0 2.7 3.2 2.8 3.2 2.7 3.5 2.9 3.1 2.7 3.0 2.7 3.0 2.8 3.5 2.9 3.3 2.8 3.3 2.9 3.3 2.8 3.5 2.9 3.2 2.8 3.3 2.8 * -- 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 conditions are the percent reporting 'good times' (or 'better') minus the percent reporting 'bad times' (or 'worse'), plus 100. Expected change in unemployment is the fraction expecting unemployment to rise minus the fraction expecting unemployment to fall, plus 100. expected inflation over the next five to ten years edged up to 3.3 percent in November while the median was unchanged at 2.8 percent. Retail Inventories The book value of retail inventories rose at an annual rate of $10.8 billion in September. Excluding autos, retail inventories increased at an annual rate of $11.2 billion, close to the average pace recorded in the first two months of the quarter and about unchanged from the second-quarter pace. However, with nonauto retail sales rising 1.4 percent in the third quarter (not at an annual rate), the inventory-sales ratio for this category fell to 1.35 months, the lowest quarterly ratio since 1980. Inventories held by outlets selling nondurable goods increased at an $8.3 billion pace in September, led by stockbuilding at food stores and at "other nondurable goods" establishments--the category that includes eating and drinking places, and drug and proprietary stores. In contrast, apparel stores liquidated inventories in September for the third consecutive month. Non-auto inventories held by durable goods retailers expanded at an annual rate of $2.8 billion in September, as the accumulation that occurred in the miscellaneous "other durable goods" category more than offset the drawdown in stocks at lumber and building materials retailers. For the quarter as a whole, total manufacturing and trade inventories (excluding motor vehicles) rose at an annual rate of $42.8 billion in book value terms, up substantially from the $12.9 billion pace reported in the second quarter. Nonetheless, the retail inventory data for September were weaker than the BEA assumed in its advance estimate of real GDP. They were also a bit below the estimate that we incorporated into our November Greenbook forecast and would reduce our estimate of the change in real GDP in the third quarter to an annual rate of about 5-1/4 percent. Productivity and Costs The BLS reported that output per hour of all persons in the nonfarm business sector rose at an annual rate of 4.2 percent in the third quarter, up from the 0.6 percent rate of increase in the second quarter. The sharp rise in labor productivity reflected a 5.7 percent increase in real output in the nonfarm CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars; annual rate except as noted; based on seasonally adjusted Census book value) 1999 1999 Category Manufacturing and trade Less wholesale and retail motor vehicles Manufacturing Less aircraft Merchant wholesalers Less motor vehicles Retail trade Automotive dealers Less automotive dealers Sept. Aug. July Q1 Q2 Q3 34.3 34.8 44.2 41.7 41.5 49.3 10.2 12.9 42.8 49.9 35.4 43.1 -12.9 -3.0 -3.6 5.1 10.6 13.3 28.2 21.2 -8.3 10.2 11.9 8.4 7.5 6.5 8.0 6.2 25.6 21.3 31.4 26.5 18.9 17.5 26.5 20.0 39.7 23.1 16.6 30.3 20.1 10.2 7.9 -2.9 10.9 -17.9 -13.0 -4.9 30.9 4.7 26.2 10.8 -.4 11.2 SELECTED INVENTORY-SALES RATIOS IN MANUFACTURING AND TRADE (Months' supply, based on seasonally adjusted Census book value) Cyclical reference points Category Range over preceding 12 months September 1999 1991-98 low High Low 1.58 1.37 1.39 1.33 1.33 1.55 1.34 1.37 1.29 1.30 Manufacturing Primary metals Steel Nonelectrical machinery Electrical machinery Transportation equipment Motor vehicles Aircraft Nondefense capital goods Textiles Paper Chemicals Petroleum Home goods & apparel 1.75 2.08 2.56 2.48 2.08 2.93 .97 5.84 3.09 1.71 1.32 1.44 .94 1.96 1.36 1.46 1.59 1.61 1.21 1.51 .53 4.05 2.04 1.38 1.06 1.25 .80 1.59 1.38 1.74 2.25 1.66 1.26 1.62 .55 4.48 2.11 1.59 1.23 1.45 .99 1.75 1.28 1.56 1.94 1.52 1.17 1.39 .51 3.68 1.87 1.53 1.14 1.33 .76 1.53 1.30 1.54 1.93 1.60 1.16 1.45 .51 4.36 1.96 1.56 1.16 1.33 .75 1.61 Merchant wholesalers Less motor vehicles 1.36 1.31 1.24 1.22 1.35 1.34 1.28 1.26 1.29 1.27 1.83 .95 1.54 .90 1.66 1.01 1.56 .95 1.57 .97 1.61 1.48 1.44 1.38 1.46 1.40 1.42 1.35 1.43 1.34 2.22 2.42 2.53 2.41 1.59 2.00 2.28 2.06 1.74 2.04 2.49 2.11 1.61 1.91 2.25 1.97 1.67 1.91 2.25 1.96 1990-91 high Manufacturing and trade Less wholesale and retail motor vehicles Durable goods Nondurable goods Retail trade Less automotive dealers Automotive dealers General merchandise Apparel GAF Inventory-Sales Ratios, by Major Sector (Book value) Manufacturing Ratio Sept. I I 1987 I I 1989 I I 1991 I I 1993 I I 1995 I I I 1999 1997 Wholesale Excluding Motor Vehicles 1987 1989 Ratio 1991 1993 1995 1997 1999 Retail Excluding Autos Ratio Sept. I 1987 I I 1989 I I 1991 I I 1993 I I 1995 I I 1997 I 1 1999 business sector and a 1.5 percent increase in hours of all persons.1 Over the four quarters ending in the third quarter of 1999, productivity increased 2.9 percent, up from the 2.4 percent rise over the previous four quarters. Taking into account our expected revisions to the third-quarter NIPA figures would raise our current estimate of the change in productivity in the third quarter to about 5-1/4 percent (annual rate); the increase over the past four quarters would be roughly 3-1/4 percent. LABOR PRODUCTIVITY AND COSTS (Percent change from preceding period at compound annual rate: based on seasonally adjusted data) 1998:Q3 Item to 1999 1997' 1998' Output per hour 2.2 3.1 2.7 .6 4.2 2.9 Compensation per hour 4.2 5.3 4.2 4.8 4.8 4.6 Unit labor costs 2.0 2.1 1.4 4.2 .6 1.7 Output per hour 3.3 4.1 4.1 3.2 n.a. 4.13 Compensation per hour 4.3 5.4 4.7 4.8 n.a. 5.23 Q1 Q2 Q3 1999:Q3 Nonfarm business sector Nonfinancial corporations 2 Unit labor costs 1.0 1.2 .6 1.6 n.a. 1.13 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. 3. Percent change from 1998:Q2 to 1999:Q2. Hourly compensation of all persons in the nonfarm business sector rose at an annual rate of 4.8 percent in the third quarter, unchanged from the secondquarter pace. Over the most recent four quarters, hourly compensation increased 4.6 percent, down from the 5.7 percent rise in the previous four quarters. Unit labor costs edged up at an annual rate of 0.6 percent last quarter and have increased 1.7 percent increase since the third quarter of 1998. With today's release, the BLS published revised estimates of productivity and costs in the nonfarm business sector and the nonfinancial corporate sector for 1.In putting together the Greenhook. we estimated that hours of all persons in the nonfarm business sector would increase at an annual rate of 2.4 percent in the third quarter; this estimate was almost a percentage point too high. The error reflected our underestimate of the decline in hours of self-employed workers. the period from 1959 to the middle of 1999. which incorporate data from the comprehensive revision of the national income and product accounts. For the nonfarm business sector, the BLS revised up its estimates of productivity growth during the 1990s by about 0.3 percentage point per year, on average. 2 The revised data eliminate the slowdown in productivity growth in the early 1990s that was apparent in the pre-revision data. The revised data remain consistent with a sharp acceleration in productivity in the middle of 1995, and another acceleration at the end of 1997. However, the revised data suggest that the acceleration at the end of 1997 is somewhat more gradual (0.3 percentage point) than in the unrevised data (0.5 percentage point). The revised data also show a different pattern for the increases in hourly compensation in the nonfarm business sector over the past several years. Most notably, the four-quarter change through the second quarter of 1999, previously reported as 4.3 percent was revised up to 4.9 percent, while the change over the prior four quarters was revised up even more, from 4.3 percent to 5.3 percent. With these revisions in place, this measure of hourly compensation in the nonfarm business sector now shows a sizable deceleration, a pattern similar to the employment cost index and average hourly earnings. The revisions for the nonfinancial corporate sector were similar to those for the nonfarm business sector. The BLS revised up productivity growth in the 1990s by approximately 0.3 percentage point per year, although in this case the largest revisions were to the data for the most recent year and a half (0.5 percentage point on average). The BLS now estimates that productivity growth for nonfinancial corporations averaged 4.0 percent from the end of 1997 to the first half of 1999, up from the 3.5 percent previously published. 2. As in the Appendix to the Domestic Nonfinancial Developments section of the November Greenhook. the data in the text and the chart are shown on a methodologically consistent basis. -9- Productivity in the Nonfarm Business Sector* 1990=100 S125 )3 Current -120 2 - 115 is- 110 -105 -100 - 95 -90 -85 -80 -75 -70 1973 1976 1979 1982 1985 1988 1991 1994 1997 Productivity Growth (Percent change, annual rate) 1980:Q1 to 1iq n-3 " "~"~' 1990:Q2 to 1qqc-9 Nonfarm business Current Previous Nonfinancial corporate Current Previous . Staff estimates. All figures are shown on a methodologically consistent basis. 1995:Q2 to 1 Q7-04 1997:Q4 to 1 qq.Q'3 L 65 2000 Selected Financial Market Quotations (One-day quotes in percent except as noted) 1998 Change to Nov. 10 from selected dates (percentage points) 1999 Instrument Oct. 15 Dec. 31 FOMC' Oct. 5 Nov. 10 1998 Oct. 15 1998 Dec. 31 FOMC Oct. 5 Short-term FOMC intended federal funds rate 5 00 4 75 525 5.25 25 .50 00 Treasury bills ' 3-month 6-month 1-year 4.05 4.12 406 4.37 4.39 4.33 469 4.81 498 505 5.18 5.21 1.00 1.06 1.15 68 .79 .88 36 37 .23 Commercial paper I-month 3-month 527 5.13 4.90 4.84 5.30 5.96 5.26 5.75 -.01 62 .36 .91 -.04 -21 Large negotiable CDs ' I-month 3-month 6-month 5.35 5.31 5.10 5.01 4.97 4.97 5.38 6.08 5.97 5.37 5.95 5.95 .02 .64 85 .36 .98 .98 -01 - 13 -02 Eurodollar deposits 2 1-month 3-month 534 5.28 4.94 494 531 600 5.31 5.94 -.03 66 .37 1.00 .00 - 06 '25 ".75 8 25 8.25 00 .50 00 Intermediate- and long-term U.S. Treasury (constant maturity) 2-year l0-year 30-year 4.13 458 502 4.54 4 65 09 5 ( 595 6 t 581 600 6 09 1 68 1.42 1.07 1 27 1 35 1.00 11 05 -11 U S. Treasury 10-year indexed note 369 \rS 4 07 408 39 20 01 21 :6 5 6 (1 SS S3 1 2' " 23 2 13 x7 ')10 1 , Bank prime rate Municipal revenue (Bond Buyer) Corporate bonds. Moody' seasoned Haa - 11 2' High-yield corporate Home mortgages (FHLMC survey ratcew 30-year fixed 1-year adjustable h -t0 5 3h Record high Dow-Jones Industnal S&P 50n Composite NasdaqiOTCi Russell 2000 Wilshire 5)00) I 2. 3 4 11.326 04 1.418 79 3.155 6 491 41 12.97699 i 12 5: 31 IDc S-25-.'9 -- 16h.-' I IIt l- ' 4-1-s .l 6-94 Secondary market Bid rates for Eurodollar deposits collected arounJ 9 Most recent Thursday quote Merill Lsnch 175 high-eld bond index coinposiie n 5 For %.eekending Friday pre tious to date sho'. 0 * lata areasof the cloe on (Kcti'r 4. 19 0 ).l1 43 1.22'1 2.112 421 '6 11.31" 5' ':,4 6: 4 FOMC Oc 5 10.401 23 I 04 2.'"s5 "42 h i 1. O0 a ni Etatern tInlm i I "2 - 1 35 u' 14 22 1 0" 7 Change to No\ 10 from 'elected dates ipercenti 19Y4 i9'8 Date 10 , ." Stock exchange index Level 6 Nos 10 111.59')74 1.3 46 . 5 -4 "2 12.653 ) Record high Dec. 31 -63 -3 ') I() -' (69 -2 49 15 15.4 I'3 4.3 3 6 34 11 0 FOMCOct 5 1i ;2 .l
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