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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 13, 1998 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 DOMESTIC NONFINANCIAL ECONOMY Consumption ................ Producer Prices .......... ....... . .... ............................ .. ......... . 1 2 Tables ................................. Retail Sales ........ Recent Changes in Producer Prices . ...... .......... University of Michigan Survey Research Center: Survey of Consumer Attitudes .. ................. ........ 4 5 6 THE FINANCIAL ECONOMY Table Selected Financial Market Quotations . ....................... 7 SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Consumption According to the advance report, total nominal retail sales jumped 1 percent in October, with strong gains at building material and supply stores and at automotive dealers. In the retail control category, which excludes sales at those establishments, nominal outlays rose 0.5 percent in October after having been little changed in August and September.1 Within retail control, sales at most stores posted moderate to strong gains in October. After having declined over the preceding two months, nominal purchases at apparel stores rebounded nearly 2 percent in October. Nominal sales at gasoline stations rose 0.5 percent; however, physical product data from the Department of Energy indicate that, in real terms, purchases of gasoline fell last month. Retail sales in October were in line with the staff's expectation and suggest no change to our assumptions for consumer spending in the fourth quarter. Based on today's retail sales release and our projections for consumer prices in October, the staff estimates that real personal consumption expenditures for goods other than motor vehicles increased 0.3 percent in October to a level 0.4 percent above the third quarter. According to the preliminary report, the Michigan SRC index of consumer sentiment bounced back 5 points in early November, more than retracing its October decline. Although the index remains below the peak recorded last winter, it continues to be at a high level by historical standards. In early November, households' views of business conditions over the next twelve months and over the next five years rebounded from last month's sharp downturn. Households' assessments of buying conditions for large household appliances were also markedly more favorable in early November. Although the index of current personal financial conditions was little changed in early November, it stayed within the high range that has prevailed for most of the past year. However, respondents' expectations of their personal financial situations twelve months hence weakened slightly. 1. Largely as a result of downward revisions to spending at apparel and food stores, the increase in nominal control in September was revised down 0.1 percentage point. Among questions not included in the overall index, responses were mixed in early November. Respondents' views of the expected change in unemployment over the coming year were somewhat less pessimistic than in October, although they remained less favorable than the readings over the first half of the year. Appraisals of car and home buying conditions remained near historically high levels, despite having fallen from last month's especially lofty assessments. The mean value of expected inflation over the next twelve months held steady in early October at 2.6 percent, but the median value moved down 0.3 percentage point to 2.2 percent. Both the mean and median readings of expected inflation over the next five to ten years fell 0.1 percentage point to 3.1 and 2.7 percent, respectively. Producer Prices The PPI for finished goods increased 0.2 percent in October after a 0.3 percent increase in September. Food prices rose briskly for a second month, and energy prices turned up sharply. Over the twelve months ending in October, the overall PPI declined 0.7 percent; excluding food and energy, producer prices rose 1.1 percent over that period, compared with a 0.2 percent rise over the preceding twelve months. The price index for finished foods rose 0.4 percent in October for the second consecutive month. In both September and October, the index was boosted by hefty price increases for vegetables and for dairy products. Despite these recent increases, overall food prices are up only 0.3 percent over the past twelve months. Food prices jumped in October at the crude stage of processing, the first increase in four months, but the crude food index remained 6 percent below its level of a year earlier. Finished energy prices moved up 1.2 percent in October, after having declined over the previous four months. Prices of gasoline rose considerably last month; as a result of production cutbacks in September, refiners' margins have recovered. Natural gas prices also moved up, in part because colder-than-normal weather boosted demand in mountain and western states. By contrast, fuel oil prices edged down, and electricity rates were little -3changed in October. 2 Overall, the index for finished energy has dropped 10 percent over the past twelve months. Prices of finished consumer goods other than food and energy, which jumped 0.5 percent in September, were unchanged in October; prices for these goods rose about 2 percent over the twelve months to October compared with an increase of only 3/4 percent over the previous twelve-month period. Within consumer goods, prices for cars rose 0.5 percent last month, while light truck prices were unchanged. Prices of both cars and light trucks had risen considerably in September after sizable declines in earlier months.3 Cutting through these monthly movements, prices of new cars in October were 3/4 percent lower than a year earlier, and prices of light trucks were down /2 percent. Among other consumer goods, prices generally remained the same or declined a bit, with a large price decline reported for home electronic equipment. Prices of capital equipment were unchanged in October and are down about 1/2 percent over the past twelve months. Price increases in October for cars and for heavy trucks--for which the demand has been very strong--were offset by price declines for computers and other capital equipment. Computer prices fell 2.2 percent in October, about in line with the average monthly change over the past year. The PPI for intermediate materials other than food and energy declined 0.3 percent in October for the second consecutive month, bringing the decline over the past twelve months to about 1 percent. Prices for crude materials other than food and energy dropped 2.7 percent in October--the largest decline since June 1991--and are down nearly 14 percent over the past year. 2. The staff had expected that the large rebates and price cuts in Virginia would result in a noticeable decline in electricity prices in October. A BLS analyst reported that these rebates were not included in the October PPI, but may show up in November. 3. In October, the PPI sample largely shifts from old to new model-year vehicles. Prior to seasonal adjustment, the old model-year vehicles typically have been heavily discounted in September, and the new vehicles entering the sample in October usually come in at a higher price than the discounted prices on last year's models. Because price movements are large and the timing of discounts can differ from year to year, the interpretation of monthly changes in the PPI for motor vehicles can be complicated at this time of the year. On an NSA basis, new car prices increased 6.9 percent in October, and light truck prices were up 6.3 percent. -4November 13, 1998 RETAIL SALES (Percent change; seasonally adjusted) 1998 1998 Q1 Total sales Previous estimate Q2 Q3 2.1 1.9 Aug. Sept. Oct. -. 1 -. 1 Retail controll Previous estimate 1.6 1.3 1.0 1.0 Total excl. automotive group Previous estimate 1.9 1.4 1.0 1.0 GAF 2 Previous estimate 3.5 1.1 Durable goods stores Previous estimate 3.4 2.3 -1.2 -1.3 1.8 5.7 2.5 4.6 3.4 2.3 3.6 .4 -3.1 2.8 1.3 .9 2.6 .2 .5 1.1 1.6 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 4.1 .3 2.9 -4.5 1.8 2.3 2.4 -. 6 .1 .1 .1 -. 9 .6 .1 -2.0 .4 .1 1.2 -3.0 .0 .8 -. 4 .4 1.1 .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. RECENT CHANGES IN PRODUCER PRICES (Percent change; based on seasonally adjusted data)1 Relative importance, Dec. 1997 1998 1996 1997 Q1 Q2 1998 Q3 ----- Annual rate-----Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment Sept. Oct. -Monthly rate- 100.0 23.2 13.6 63.2 38.0 25.2 2.8 3.4 11.7 .6 .8 .4 -1.2 -. 8 -6.4 .0 .3 -. 6 -3.0 -1.8 -27.0 2.3 3.9 .0 .3 .9 -1.1 .3 1.4 -1.2 .3 1.8 -10.2 2.3 3.3 .9 .3 .4 -. 1 .4 .5 .4 .2 .4 1.2 .1 .0 .0 Intermediate materials 2 Excluding food and energy 94.9 81.8 .7 -. 9 -. 8 .3 -4.4 -. 9 -1.3 -1.2 -1.9 -1.5 -. 2 -. 3 -. 2 -. 3 Crude food materials Crude energy Other crude materials 42.1 36.4 21.5 -1.0 51.2 -5.5 -4.0 -23.1 .0 -14.3 -53.5 -13.6 -.7 -14.6 -5.6 -22.6 -15.2 -18.3 -1.9 -1.7 -1.3 4.0 1.9 -2.7 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 1 (Percent change; based on seasonally adjusted data) 2 Relative importance Dec. 1997 1998 1996 1997 Q1 Q2 1998 Q3 ----- Annual rate-----Finished goods Consumer foods Consumer energy Other finished goods Consumer goods Capital equipment 100.0 23.2 13.6 63.2 38.0 25.2 2.8 .8 1.5 .4 .3 .1 -1.2 -. 2 -. 9 .0 .1 -. 1 -3.0 -. 4 -4.1 1.4 1.5 .0 .3 .2 -. 1 .2 .5 -. 3 .3 .4 -1.3 1.4 1.3 .2 Sept. Oct. -Monthly rate.3 .1 .0 .3 .2 .1 1. Data may not add due to rounding. 2. Changes are from final month of preceding period to final month of period indicated. .2 .1 .2 .0 .0 .0 November 13, 1998 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1998 Mar. 1998 Apr. 1998 May 1998 June 1998 July 1998 Aug. 1998 Sept. 1998 Oct. 106.5 113.7 101.9 108.7 115.5 104.3 106.5 113.9 101.7 105.6 115.4 99.3 105.2 113.3 100.0 104.4 113.9 98.3 100.9 111.7 93.9 97.4 112.8 87.5 102.4 116.8 93.1 Personal financial situation Now compared with 12 months ago* Expected in 12 months* 128 134 131 138 130 134 130 134 132 139 132 139 126 131 131 133 132 130 Expected business conditions Next 12 months* Next 5 years* 158 119 162 121 158 118 150 116 145 119 146 111 130 117 118 101 132 113 Appraisal of buying conditions Cars Large household appliances* Houses 146 167 176 145 169 178 148 166 172 152 170 171 139 162 169 150 163 170 142 164 166 153 162 178 150 171 171 49 82 51 70 54 78 50 68 54 82 48 77 53 65 53 70 49 77 Expected unemployment change - next 12 months 100 97 102 105 111 109 112 121 118 Expected inflation - next 12 months Mean Median 2.9 2.5 2.7 2.4 3.1 2.6 3.2 2.7 3.1 2.6 2.7 2.4 2.7 2.3 2.6 2.5 2.6 2.2 Expected inflation - next 5 to 10 years Mean Median 3.3 2.8 3.2 2.7 3.3 2.8 3.3 2.9 3.1 2.7 3.0 2.7 3.4 2.9 3.2 2.8 3.1 2.7 1998 Nov. (P) Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions Willingness to use credit Willingness to use savings * -(p) (f) Indicates the question is one of the five equally-weighted components of the index of sentiment. -- Preliminary -- Final Note: Figures on financial, business, and buying conditions are the percent reporting 'good times' '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. (or -7Selected Financial Market Quotations (One-day quotes in percent except as noted) 1997 Instrument Change to Nov. 12 from selected dates (percentage points) 1998 Dec. 31 FOMC* Sept. 29 Oct. 15* Nov. 12 Dec. 31 FOMC* Sept. 29 Oct. 15* Short-term Federal funds FOMC intended rate Realized rate 1 5.50 5.44 5.50 5.48 5.25 5.40 5.00 4.84 -.50 -.60 -.50 -.64 -.25 -.56 Treasury bills 2 3-month 6-month 1-year 5.22 5.23 5.22 4.36 4.41 4.33 3.93 4.06 4.01 4.37 4.40 4.29 -.85 -.83 -.93 .01 -.01 -.04 .44 .34 .28 Commercial paper 1-month 3-month 5.65 5.57 5.25 5.13 5.26 5.11 5.10 5.13 -.55 -.44 -.15 .00 -.16 .02 Large negotiable CDs 2 1-month 3-month 6-month 5.65 5.72 5.74 5.29 5.22 5.12 5.34 5.30 5.09 5.18 5.30 5.10 -.47 -.42 -.64 -. 11 .08 -.02 -.16 .00 .01 Eurodollar deposits 3 1-month 3-month 5.63 5.72 5.25 5.19 5.25 5.25 5.19 5.31 -.44 -.41 -.06 .12 -.06 .06 Bank prime rate 8.50 8.50 8.25 8.00 -.50 -.50 -.25 Intermediate- and long-term U.S. Treasury (constant maturity) 2-year 10-year 30-year 5.66 5.75 5.93 4.45 4.61 5.15 4.08 4.58 5.00 4.47 4.77 5.25 -1.19 -.98 -.68 .02 .16 .10 .39 .19 .25 U.S. Treasury 10-year indexed note 3.70 3.57 3.72 3.80 .10 .23 .08 Municipal r-venue (Bond Buyer) 4 5.40 5.17 5.17 5.28 -.12 .11 .11 Corporate bonds, Moody's seasoned Baa 7.28 7.10 7.23 7.33 .05 .23 .10 High-yield corporate 5 9.06 10.46 11.20 10.71 1.65 .25 -.49 Home mortgages (FHLMC survey rate) 6 30-year fixed 1-year adjustable 6.99 5.53 6.64 5.42 6.49 5.36 6.89 5.48 -.10 -.05 .25 .06 .40 .12 Record high Change to Nov. 12 from selected dates (percent) 1998 Level Date FOMC* Sept. 29 Oct. 15* Nov. 12 9,337.97 1,186.75 2,014.25 491.41 11,106.10 7-17-98 7-17-98 7-20-98 4-21-98 7-17-98 8,108.84 1,048.69 1,739.22 368.01 9,603.94 7,968.78 1,005.53 1,540.97 324.98 9,060.47 8,829.74 1,117.69 1,851.06 392.20 10,26282 Stock exchange index Dow-Jones Industrial S&P 500 Composite NASDAQ (OTC) Russell 2000 Wilshire 5000 1. Average for two-week reserve maintenance period ending on or before date shown. Most recent observation is average for current maintenance period to date. 2. Secondary market. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time. 4. Most recent Thursday quote. 5. Merrill Lynch Master II high-yield bond index composite. 6. For week ending Friday previous to date shown. * Data are as of the close on the previous business day. Record high -5.44 -5.82 -8.10 -20.19 -7.59 FOMC* Sept. 29 Oct. 15* 8.89 6.58 6.43 6.57 6.86 10.80 11.15 20.12 20.68 13.27
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