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Prefatory Note The attached document represents the most complete and accurate version available based on original files from the FOMC Secretariat at the Board of Governors of the Federal Reserve System. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act. Content last modified 04/01/2015. Class III FOMC - Internal (FR) October 30, 2009 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 Contents The Domestic Nonfinancial Economy ........................................................ 1 Real Gross Domestic Product ...................................................................1 Consumer Spending ..................................................................................3 Prices and Labor Costs..............................................................................6 Tables and Charts Real Gross Domestic Product and Related Items .....................................2 Output per Hour ........................................................................................3 Real Personal Consumption Expenditures ................................................4 Fundamentals of Household Spending .....................................................5 Price Measures ..........................................................................................8 Consumer Prices .......................................................................................9 Broad Measures of Inflation/Surveys of Inflation Expectations.............10 Hourly Compensation and Unit Labor Costs ..........................................11 Change in Employment Cost Index of Hourly Compensation for Private-Industry Workers/Change in ECI Benefits (unpublished) .......12 The Domestic Financial Economy ............................................................ 7 Tables Commercial Bank Credit ............................................................... 13 Selected Financial Market Quotations ........................................... 14 -ii- Supplemental Notes The Domestic Nonfinancial Economy Real Gross Domestic Product According to the BEA’s advance release, real GDP moved up at an annual rate of 3½ percent in the third quarter following a decline at a ¾ percent rate in the second quarter. The BEA’s third-quarter estimate somewhat exceeded our expectation, as stronger-than-anticipated estimate of private inventory investment more than offset a weaker-than-expected final sales. Final sales accelerated in the third quarter, increasing at an annual rate of 2½ percent after having risen at a ¾ percent rate in the second quarter. This acceleration was driven by private domestic expenditures, which turned up in most categories following secondquarter declines. Real personal consumer expenditures increased at an annual rate of 3½ percent in the third quarter after having fallen at an annual rate of 1.0 percent in the second quarter—a swing that was particularly pronounced in the durable goods category because of the temporary boost to motor vehicle purchases from the “cash-for-clunkers” program. Residential investment spending also turned up in the third quarter, rising at an annual rate of nearly 25 percent, following 14 consecutive quarterly declines. Though expenditures on business fixed investment continued to contract in the third quarter, the rate of spending decline moderated a fair bit, in part as a result of a small upturn in outlays on equipment and software. In the government sector, federal spending posted another strong quarterly increase, at an annual rate of 7.9 percent, while spending at the state and local level edged lower. In the external sector, imports of goods and services were estimated to have increased at an annual rate of 16-½ percent in the third quarter and exports to have risen at an annual rate of almost 15 percent. On net, trade in goods and services subtracted about ½ percentage point from the change in real GDP reported in the advance third-quarter estimate after having boosted the second-quarter change by more than 1½ percentage points. The BEA estimated that a slower pace of private inventory liquidation contributed about a percentage point to the change in real GDP in the third quarter: Real private inventories fell at an annual rate of $131 billion following a $160 billion decline in the preceding three-month period. On the income side of the accounts, real disposable personal income fell at an annual rate of 3½ percent in the third quarter, retracing much of a second-quarter increase that had been augmented by one-time economic recovery payments of $250 to beneficiaries of -1- -2- Real Gross Domestic Product and Related Items (Percent change from previous period at a compound annual rate; based on seasonally adjusted data, chain-type quantity indexes) 2009:Q1 2009:Q2 2009:Q3 Third Third Advance -6.4 -.7 3.5 -4.1 .7 2.5 .6 -.9 3.4 2.5 -3.1 8.1 Durables 3.9 -5.6 22.3 Nondurables 1.9 -1.9 2.0 -.3 .2 1.2 Business fixed investment -39.2 -9.6 -2.5 Nonresidential structures -43.6 -17.3 -9.0 Equipment and software -36.4 -4.9 1.1 -38.2 -23.3 23.4 Federal government -4.3 11.4 7.9 State and local government -1.5 3.9 -1.1 Exports of goods and services -29.9 -4.1 14.7 Imports of goods and services -36.4 -14.7 16.4 Inventory investment1 -113.9 -160.2 -130.8 Net exports of goods and services1 -386.5 -330.4 -348.3 Nominal GDP -4.6 -.8 4.3 Nominal GDI -5.9 -2.6 n.a. 185.4 249.8 n.a. 59.1 43.8 n.a. 8.3 8.6 n.a. .2 3.8 -3.4 3.7 4.9 3.3 Item Gross Domestic Product Final sales Consumer spending Goods Services Residential investment ADDENDA: Statistical discrepancy2 Change in economic profits2 Profit share3 Real disposable personal income Personal saving rate (percent) 1. Level, billions of chained (2005) dollars. 2. Billions of dollars. 3. Economic profits as a share of GNP. n.a. not available. Source: Bureau of Economic Analysis. -3- Social Security and other retirement programs. The personal saving rate fell to 3.3 percent in the third quarter after having jumped to 4.9 percent in the second quarter. According to the BEA, nonfarm business output rose at an annual rate of 4.0 percent in the third quarter; this implies that nonfarm business productivity increased at an annual rate of 7½ percent in the third quarter following an increase at a 7 percent rate in second quarter. Output per Hour (Percent change from preceding period at an annual rate; seasonally adjusted) Sector Nonfarm business All persons All employees2 2007:Q3 2008:Q3 to to 2008:Q3 2009:Q31 1.2 .8 3.8 3.7 2008 2009 Q4 Q1 Q2 Q31 .8 -1.0 .3 1.1 7.0 7.7 7.5 7.2 1. Staff estimates. 2. Assumes that the growth rate of hours of non-employees equals the growth rate of hours of employees. Source: For output, U.S. Dept. of Commerce, Bureau of Economic Analysis; for hours, U.S. Dept. of Labor, Bureau of Labor Statistics. Consumer Spending Real PCE fell 0.6 percent in September after jumping in August. For the third quarter as a whole, PCE moved up at an annual rate of about 3½ percent. The recent monthly volatility was the result of swings in motor vehicle sales during and after the government’s cash-for-clunkers program. Real outlays for other goods and services moved up by a robust ¼ percent per month, on average, in the third quarter. While the spending gains were broad-based across the various categories of goods and services, the increases for furniture, electronics, and other durable goods were especially pronounced. Real disposable personal income was reported to have fallen for the fourth consecutive month in September. The final October reading from the Reuters/University of Michigan survey indicated that consumer sentiment edged down relative to September and remained at a level consistent with only sluggish gains in spending. -4- -5- -6- Prices and Labor Costs The latest monthly readings on PCE prices came in broadly similar to our estimates in the October Greenbook and indicate that consumer price inflation has remained subdued in recent months. Both total and core PCE prices edged up 0.1 percent in September. Broader measures of inflation also showed a deceleration in prices over the past year. The change in GDP prices over the four quarters ending in 2009:Q3 was only ¾ percent compared with the increase of 2½ percent over four quarters ending a year earlier. GDP prices excluding food and energy also decelerated over that period, reflecting a drop in core PCE inflation and a deceleration in both residential and business fixed investment prices. After decelerating sharply in the first half of the year, measures of labor costs rebounded in the third quarter, posting moderate rates of increase. Based on the most recent NIPA data, we estimate that compensation per hour in the nonfarm business sector (as published in the productivity and cost release) increased at an annual rate of nearly 2 percent in the third quarter after decreasing at an annual rate of 2¼ percent in the first half. The fall in this measure of compensation per hour in the first half included a drop of 4¾ percent (annual rate) in the first quarter, which may have reflected a steep decline in bonus payments; a similar drop in bonuses reported in the employment cost index (ECI). Following an increase at an annual rate of only ¾ percent over the first half of the year, the ECI for private industry workers increased at an annual rate of 1¾ percent over the three months ending in September. The ECI index for wages and salaries, which increased at an annual rate of 1¾ percent over the three months ending September, was boosted by gains in several industry categories such as retail trade, accommodation and food services, and other services, which may reflect the increase in the minimum wage in July. The ECI index for benefits rose more slowly, increasing at an annual rate of 1 percent over the three months ending in September, as increases in a number of components were partially offset by declines in the retirement and savings, state unemployment, and workers’ compensation components. According to the ECI, employer contributions for health insurance rose 4¾ percent over the 12 months ending in September, up from a rise of 4 percent over the preceding year. Taken together, the available indicators thus far provide no evidence that any dramatic change in the rate of increase of health insurance costs is in the offing. Private surveys— which typically show somewhat larger increases than the ECI—suggest that overall premiums (that is, the shares paid by both employers and employees) will rise in the neighborhood of 6 to 7 percent in 2010, just a bit above the survey results for 2009. -7- Among the major plans for public employees, premiums in the Federal Employees Health Benefits Program are expected to increase 7½ percent, on average, in 2010 after a rise of 6½ percent in 2009. The premiums for the California Public Employees’ Retirement System are expected to move up 3 percent in 2010 after a 5 percent increase in 2009. The Domestic Financial Economy Tables attached -8- -9- -10- -11- -12- -13Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted) Type of credit Total Level1 Oct. 2009e 2007 2008 H2 2008 H1 2009 July 2009 Aug. 2009 Sept. 2009 Oct. 2009e 10.0 4.9 4.6 -5.8 -7.1 -6.9 -12.5 -10.8 9,049 Loans2 Total Core To businesses Commercial and industrial Commercial real estate 10.8 9.6 4.6 5.2 3.1 3.4 -7.2 -4.4 -16.4 -8.8 -15.3 -12.6 -18.3 -17.9 -15.6 -14.4 6,708 5,964 19.0 9.4 16.3 6.0 14.0 3.2 -13.9 -1.6 -15.7 -5.5 -26.5 -6.8 -31.9 -9.2 -28.5 -10.3 1,378 1,663 To households Residential real estate Revolving home equity Closed-end mortgages Consumer Memo: Originated3 Other 5.5 5.6 5.5 6.8 6.5 18.7 -3.0 13.0 -7.9 7.1 5.6 .7 -5.2 12.8 -11.1 7.6 4.5 1.3 -1.4 6.6 -4.4 .0 -1.7 -25.4 -8.0 -6.5 -8.6 -5.2 -2.3 -72.4 -11.3 -5.3 -13.7 -3.0 -7.4 -35.8 -21.1 -5.7 -27.1 -3.2 -5.7 -22.0 -14.0 -4.2 -17.9 -.6 -2.0 -25.1 2,074 601 1,473 848 1,243 743 7.7 -5.4 28.1 6.0 15.0 -4.2 9.8 29.0 -12.0 -1.0 -1.7 .1 22.1 48.3 -13.6 18.7 33.4 -2.3 4.9 11.9 -5.5 3.2 6.6 -2.1 2,341 1,407 934 Securities Total Treasury and agency Other4 Note: Yearly annual rates are Q4 to Q4; quarterly and monthly annual rates use corresponding average levels. Data have been adjusted to remove the effects of mark-to-market accounting rules (FAS 115) and the initial consolidation of certain variable interest entities (FIN 46). Data also account for the effects of nonbank structure activity of $5 billion or more. 1. Billions of dollars. Pro rata averages of weekly (Wednesday) levels. 2. Excludes interbank loans. 3. Includes an estimate of outstanding loans securitized by commercial banks that retained recourse or servicing rights. 4. Includes private mortgage-backed securities; securities of corporations, state and local governments, and foreign governments; and any trading account securities that are not Treasury or agency securities. e Estimated. Source: Federal Reserve. Total Loans at Commercial Banks Allowance for Loan Losses at Commercial Banks Billions of dollars Billions of dollars 4500 NBER Monthly peak 140 NBER Monthly peak 120 4000 100 Large* 3500 Large* Oct. Oct. 3000 Small** Small** 2500 Feb. June Oct. 2008 Feb. June Oct. 2009 60 40 2000 June Oct. 2007 80 20 June Oct. 2007 Feb. June Oct. 2008 Feb. June Oct. 2009 Note: The NBER peak is the last business cycle peak as defined by the National Bureau of Economic Research (NBER). * Large domestically chartered commercial banks are defined as the top 25 domestically chartered commercial banks, ranked by domestic assets as of the previous commercial bank Call Report to which the H.8 release data have been benchmarked. ** Small domestically chartered commercial banks are defined as all domestically chartered commercial banks not included in the top 25. Source: Federal Reserve. -14Selected Financial Market Quotations (One-day quotes in percent except as noted) 2008 Change to Oct. 29 from selected dates (percentage points) 2009 Instrument Sept. 12 Aug. 11 Sept. 22 Oct. 29 2008 Sept. 12 2009 Aug. 11 2009 Sept. 22 2.00 .13 .13 .13 -1.87 .00 .00 1.46 1.80 .18 .28 .11 .20 .06 .17 -1.40 -1.63 -.12 -.11 -.05 -.03 Commercial paper (A1/P1 rates)2 1-month 3-month 2.39 2.75 .22 .29 .18 .21 .19 .22 -2.20 -2.53 -.03 -.07 .01 .01 Large negotiable CDs1 3-month 6-month 2.79 3.09 .32 .46 .25 .35 .22 .32 -2.57 -2.77 -.10 -.14 -.03 -.03 Eurodollar deposits3 1-month 3-month 2.60 3.00 .50 .80 .40 .55 .30 .45 -2.30 -2.55 -.20 -.35 -.10 -.10 Bank prime rate 5.00 3.25 3.25 3.25 -1.75 .00 .00 Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year 2.24 2.97 3.93 1.20 2.70 3.97 .99 2.44 3.74 .99 2.44 3.76 -1.25 -.53 -.17 -.21 -.26 -.21 .00 .00 .02 U.S. Treasury indexed notes5 5-year 10-year 1.33 1.77 1.54 1.89 1.11 1.69 .76 1.51 -.57 -.26 -.78 -.38 -.35 -.18 Municipal general obligations (Bond Buyer)6 4.54 4.65 4.20 4.39 -.15 -.26 .19 4.26 4.36 6.62 7.22 10.66 3.98 4.35 5.41 6.72 10.61 3.67 4.12 5.11 6.36 9.90 3.65 4.09 5.16 6.28 9.59 -.61 -.27 -1.46 -.94 -1.07 -.33 -.26 -.25 -.44 -1.02 -.02 -.03 .05 -.08 -.31 5.78 5.03 5.29 4.72 5.04 4.52 5.03 4.57 -.75 -.46 -.26 -.15 -.01 .05 Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month Private instruments 10-year swap 10-year FNMA7 10-year AA8 10-year BBB8 10-year high yield8 Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable Record high Change to Oct. 29 from selected dates (percent) 2009 Stock exchange index Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 D.J. Total Stock Index Level Date Aug. 11 Sept. 22 Oct. 29 Record high 2009 Aug. 11 2009 Sept. 22 14,165 1,565 5,049 856 15,807 10-9-07 10-9-07 3-10-00 7-13-07 10-9-07 9,241 994 1,970 562 10,243 9,830 1,072 2,146 621 11,083 9,963 1,066 2,098 580 10,924 -29.67 -31.88 -58.45 -32.20 -30.89 7.80 7.22 6.49 3.22 6.64 1.35 -.52 -2.27 -6.52 -1.43 1. Secondary market. 2. Financial commercial paper. 3. Bid rates for Eurodollar deposits collected around 9:30 a.m. eastern time. 4. Derived from a smoothed Treasury yield curve estimated using off-the-run securities. 5. Derived from a smoothed Treasury yield curve estimated using all outstanding securities and adjusted for the carry effect. 6. Most recent Thursday quote. 7. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 8. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: September 12, 2008, is the last business day before Lehman Brothers Holdings filed for bankruptcy. August 11, 2009, is the day before the August 2009 FOMC monetary policy announcement. September 22, 2009, is the day before the most recent FOMC monetary policy announcement. _______________________________________________________________________
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