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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 September 16, 1988 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 THE DOMESTIC NONFINANCIAL ECONOMY Page Retail sales and inventories . . . . . Tables Retail sales and inventories . . . . . Business inventories . . . . . . . . . Inventory/sales ratios . . . . . . . . Erratum . . . . . . . . . . . . . . . THE FINANCIAL ECONOMY Tables Monetary aggregates . . . . . . . . . Commercial bank credit and short- and intermediate- term business credit Selected financial market quotations THE INTERNATIONAL ECONOMY U.S. merchandise trade through July Table U.S. merchandise trade through July 1 SUPPLEMENTAL NOTES DOMESTIC NONFINANCIAL ECONOMY Retail Sales and Inventories Total retail sales edged down in August after little change in July. Sales in the control category were flat in August; the control figure was revised up slightly for June to 0.9 percent, but was unrevised for July at 0.2 percent. On balance, the August level of nominal spending for the retail control was about 1-1/4 percent above the second-quarter average. The weakest category in August sales was the automotive group, which posted a decline of 1.8 percent, in part reflecting the decline in unit sales of automobiles from 10.8 million units in July to an estimated 10.3 million units in August at an annual rate (BEA basis). In addition, furniture and appliance stores posted a large decline in sales for a second month, after strong gains earlier this year. Sales at nondurable goods establishments were generally lackluster. On a current-cost basis, retail inventories fell $2.1 billion at an annual rate in July after a $22.8 billion accumulation in the second quarter. The July decline was almost entirely in auto dealers' stocks; the current market value of nonauto retail inventories was little changed. Most types of retail establishments reported small inventory changes in July. For stores in the G.A.F. grouping, inventory 1. The retail control category, which excludes sales at automotive dealers, building material and supply stores, and gasoline stations, is used by the BEA in constructing personal consumption expenditures. accumulation slowed to just under $1 billion at an annual rate, compared with increases of $4.5 billion in the second quarter and nearly $8 billion in the first quarter. On the whole, the inventory-sales ratios for stores in this broad category have edged down somewhat in recent months. For all manufacturing and trade, the current market value of inventories rose $26.5 billion at an annual rate in July, about half the pace seen in the second quarter. The overall inventory-sales ratio for manufacturing and trade, at 1.50 months in July, was unchanged from June but notably below the 1.53 average around the turn of the year. RETAIL SALES (Seasonally adjusted percentage change) 1987 04 Total sales Previous estimate' (REAL)2 -.6 -1.2 1988 01 02 2.2 1.8 1.7 2.3 Previous estimate Total less auto dealers, nonconsumer stores, and gasoline stations Previous estimate' GAF 3 Durable Automotive dealers Furniture and appliances Other durable goods Nondurable Apparel General merchandise Other nondurables Memo: Motor vehicle sales5 Autos Light trucks Autos6 June 1988 July .6 .4 .1 .5 .7 .3 -. 5 .6 .2 -.1 Aug. -.2 .5 1.2 2.1 2.0 .9 .6 .2 .2 .0 .3 1.1 2.2 1.2 -.3 -.4 -2.1 4.9 1.8 .6 -.5 -1.0 -3.7 -2.1 2.2 5.9 5.7 1.2 .4 5.3 2.2 .5 1.7 2.0 .2 -2.1 -.3 -1.8 -1.2 .9 .4 .6 1.8 .6 .5 .2 -.3 1.6 -1.5 -1.0 -.2 1.1 2.0 .8 3.1 .7 1.2 2.9 1.4 -.1 2.1 .4 -.4 -.9 14.7 10.0 4.7 15.6 10.8 4.8 15.6 10.8 4.8 15.9 11.1 4.8 15.4 10.4 5.0 15.4 10.2 5.2 9.9 10.8 10.6 11.0 10.8 10.3 1. Based on incomplete sample counts approximately one month ago. 2. BCD series 59. Data are available approximately 3 weeks following the retail sales release. 3. General merchandise, apparel, furniture, and appliance stores. 4. General merchandise excludes mail order nonstores; mail order sales are also excluded in the GAF grouping. 5. Millions of units at an annual rate; FRB seasonals. 6. BEA seasonals. --Data are unavailable because of a future release date. BUSINESS INVENTORIES (Change at annual rates in seasonally adjusted current cost; billions of dollars) 1988 1987 Manufacturing and trade 1988 Q3 Q4 Q1 Q2 Apr. May June July 35.8 82.4 39.7 56.9 45.2 57.8 67.8 26.5 58.8 (Previous) Manufacturing Trade, total Wholesale Retail Ex autos Durable Auto Nondurable 29.0 53.4 23.8 29.6 15.3 22.2 14.2 7.4 19.2 16.6 1.8 14.8 9.2 8.0 5.5 6.8 22.3 17.4 26.5 -9.1 12.5 -17.3 -21.6 8.2 21.1 35.9 13.1 22.8 9.9 15.9 12.8 6.9 14.9 30.3 21.6 8.7 .7 8.6 8.0 .1 25.7 32.1 -1.3 33.5 11.6 26.4 21.9 7.1 22.7 18.7 45.1 19.0 26.1 7.8 -2.1 17.5 12.7 .4 -2.2 8.6 13.5 -2.5 9.9 .1 Totals may not add because of rounding. INVENTORY/SALES RATIOS 1988 1987 1988 r Q3 Q4 Q1 Q2 Apr. May June July r Manufacturing and trade 1 50 1.53 1.53 1.52 1.51 1.51 1.50 1.50 Manufacturing Trade, total Wholesale Retail Excluding auto 1.61 1.41 1.23 1.59 1.51 1.61 1.46 1.27 1.65 1.54 1.62 1.45 1.31 1.60 1.55 1.58 1.46 1.30 1.62 1.55 1.59 1.45 1.30 1.59 1.54 1.58 1.45 1.30 1.60 1.53 1.56 1.44 1.28 1.61 1.53 1.58 1.44 1.28 1.60 1.53 r--Revised. p--Preliminary. 5 Erratum The sentence in Part 1 describing the staff CPI projection for 1989 (page 1-9, lines 4 to 6) should read: The CPI, which is not affected by the pay adjustment, shows a more stable rate of inflation of around 4-3/4 percent for the year. MONETARY AGGREGATES (based on seasonally adjusted data unless otherwise noted) 1987 1 1988 Ql 1988 Q2 ------------ Percent change 1. 2. 3. Ml H2 M3 6.2 4.0 5.4 3.8 6.8 7.1 1988 Jun 1988 Jul 1988 Aug p Growth Q4 87Aug 88p t annual rates--------------------- 6.3 7.7 7.5 9.1 3.8 6.4 0.2 2.5 4.0 Levels bil. * Aug 88p ------------ Percent change at ar ual rates--------- Selected components 4. MI-A 5. Currency 6. Demand deposits 7. 8. 9. 10. 11. 12. 13. 14. Other checkable deposits H2 minus M1 2 Overnight RPs and Eurodollars, NSA General purpose and broker/dealer money market mutual fund shares, NSA Commercial banks Savings deposits, SA, plus MMODAs, NSA3 I Small time deposits Thrift institutions Savings deposits, SA, plus IMDAs, NSA Small time deposits 4 17. M3 minus H2 18. 19. 20. 21. 22. 23. Large time deposits At commercial banks, net5 At thrift institutions Institution-only money market mutual fund shares, NSA Term RPs, NSA Term Eurodollars, NSA 2.8 1.4 3.9 9.2 4.8 0.7 504.4 8.7 -1.0 9.4 -4.4 8.4 1.0 7.7 10.4 8.2 2.9 5.2 -2.5 207.2 290.0 13.6 8.3 10.6 11.0 17.1 -0.9 278.1 3.3 7.8 8.3 4.4 2.0 3.3 2250.1 4.1 -11.8 3.0 3.0 -38.5 45.9 81.4 5.8 2.5 1.8 3.5 3.5 0.8 5.6 19.3 7.2 2.8 13.7 8.7 -7.3 21.3 3.1 6.8 3.2 11.8 9.1 2.3 14.0 -14.5 9.0 11.1 6.2 3.0 4.8 1.7 3.1 5.0 2.2 8.8 1.6 2.1 1.3 7.3 3.8 -2.8 12.9 2.3 -1.8 5.3 230.9 961.7 547.6 414.2 974.7 403.5 571.2 11.2 8.4 6.8 15.1 16.0 9.4 813.1 8.5 11.2 3.4 7.3 3.4 15.7 7.5 6.7 8.8 15.2 23.4 0.0 18.6 27.3 1.4 13.4 21.4 -2.9 515.8 347.9 167.9 3.0 32.8 13.8 44.0 6.6 -23.4 -49.3 27.1 18.4 -20.9 7.9 12.9 -30.6 25.1 19.4 -11.3 -19.5 71.6 84.0 121.0 99.5 ----- Average monthly change in billions of dollars---MEMORANDA:' 24. Managed liabilities at commercial banks (25+26) 25. Large time deposits, gross 26. Nondeposit funds 27. Net due to related foreign institutions, NSA 7 Other 28. 29. U.S. goverrment deposits at commercial banks" 6.1 3.5 2.7 1.5 2.3 -0.8 7.9 1.5 6.4 4.8 4.1 0.7 4.0 6.2 -2.2 11.2 6.8 4.4 610.8 413.5 197.3 2.9 -0.2 -6.1 5.3 4.0 2.4 -0.8 1.6 2.2 -4.4 7.9 -3.5 19.1 178.2 0.3 -0.4 -1.0 -2.7 -1.8 -4.4 15.8 1. Amounts shomw are from fourth quarter to fourth quarter. 2. Nontransactions 2His seasonally adjusted as a whole. 3. Commercial bank savings deposits excluding MMDAs grew during July and August at rates of 9.6 percent and 7 percent, respectively. At thrift institutions, savings deposits excluding HMDAs grew during July and August at rates of 6.5 percent and 5 percent, respectively. 4. The non-M2 component of H3 is seasonally adjusted as a whole. 5. Net of large denomination tim deposits held by money market mutual funds and thrift institutions. . Dollar amounts shown under memoranda are calculated on an end-month-of-quarter basis. Consists of borrowing from other than commercial benks 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). Data are partially estimated. 8. Consists of Treasury demand deposits and note balances at commercial banks. p - preliminary COMMERCIAL BANK CREDIT AND SHORT- AND INTERMEDIATE-TERM BUSINESS CREDIT (Percentage changes at annual rates, based on seasonally adjusted data)1 1986:Q4 to 1988 1987:Q4 Q1 2. Total loans and securities at banks Securities 3. U.S. government securities 4. Other securities 5. Total loans June July P Aug. Commercial Bank Credit -- --------------------- ----------------------1. Q2 Levels bil.$ P Aug. 7.9 7.8 11.9 11.1 4.9 6.7 2366.7 5.0 5.4 8.9 10.6 -9.6 5.3 546.3 9.1 6.8 12.9 13.5 -17.2 8.7 347.3 -1.3 2.9 2.0 5.5 3.6 -.6 199.0 8.8 8.6 12.9 11.2 9.4 7.2 1820.4 6. Business loans 7.5 2.7 16.7 14.3 12.7 1.6 601.5 7. Security loans 1.0 76.6 -12.1 -6.2 -18.7 4 4.2 39.4 8. Real estate loans 18.1 10.8 13.8 12.3 11.6 13.4 631.9 9. Consumer loans 4.9 10.4 7.2 5.3 3.5 5.6 343.2 -2.3 5.4 13.2 11.9 7.6 LO. Other loans .6 204.4 --------- Short- and Intermediate-Term Business Credit--------11. Business loans net of bankers acceptances 2 12. Loans at foreign branches 13. Sum of lines 11 & 12 14. Commercial paper issued by nonfinancial firms 15. Sum of lines 13 & 14 16. Bankers acceptances: related 3,4 7.6 -4.1 2.3 115.8 17.0 4.1 12.8 1.4 -35.3 -48.5 63.2 10.8 14.4 20.0 617.8 7.2 5.2 16.6 12.5 -1.6 8.8 12.2 -7.8 -23.3 9.4 6.0 5.7 16.0 10.0 6.5 3.9 -11.6 -9.5 -10.9 4.9 14.8 9.0 5.9 n.a 738.5 9.2 n.a. 222.9 6.7 n.a. 961.4 90.4 708.2 U.S. trade 13.3 Line 15 plus bankers acceptances: U.S. trade related 6.3 18. Finance company loans to business 16.6 8.4 12.1 8.7 19. Total short- and intermediateterm business credit (sum of lines 17 & 18) 8.4 5.6 14.2 17.2 17. 3.1 597.9 -7.3 n.a. 32.6 5 1. Average of Wednesdays. 2. Loans at foreign branches are loans made to U.S. firms by foreign branches of domestically chartered banks. 3. Based on average of data for current and preceding ends of month. 4. Consists of acceptances that finance U.S. imports, U.S. exports, and domestic shipment and storage of goods. 5. July data. n.a.--not available --preliminary SELECTED FINANCIAL MARKET QUOTATIONS 1/ (percent) Jan-Feb lows Change from: 1988 1987 2/ Oct 16 Feb FOMC lows Aug 16 Sept 15 FOMC Aug 16 Short-term rates Federal funds 3/ 5.95 7.59 6.38 7.80 8.14 Treasury bills 4/ 3-month 6-month 1-year 5.30 6.93 5.59 5.77 6.10 7.06 7.54 7.69 7.17 7.3 5.31 5.35 Commercial paper 7.5A 7.74 7.43 0.34 0.11 -0.16 -0.26 5.81 5.73 7.94 6.41 8.26 8.04 8.11 -0.22 -0.31 5.85 5.80 5.78 7.92 8.90 6.44 6.49 8.24 8.55 8.10 8.17 8.40 -0.14 -0.38 -0.45 6.00 6.00 7.79 9 6.60 6.69 8.31 8.59 8.16 8.27 -0.15 -0.32 7.50 9.25 8.50 10.00 10.00 0.00 U.S. Treasury (constant maturity) 6.34 9.52 3-year 10.23 10-year 7.01 10.24 7.29 30-year 7.28 8.11 8.32 8.51 8.91 9.00 -0.33 1-month 3-month Large negotiable CD's 4/ Eurodollar deposits 5/ 1-month 3-month Bank prime rate 6.45 8.65 6.55 9.12 8.42 8.85 Intermediate- and long-term rates -0.44 -0.40 Minicipal reverue 6/ (Bond Biyer index) 6.92 9.59 7.76 8.18 7.88 -0.30 Corporate-A utility Recently offered 8.78 11.50 9.63 10.53 10.17 -0.36 9.10 7.52 11.58 8.45 9.84 7.59 10.57 8.00 10.53 8.14 -0.04 0.14 Home mortgage rates 7/ Fixed-rate AM, 1-year 1986 1987 Record Year end highs 1988 Lows FOU Aug 16 Sept 15 Percent change from: FCM Aug 16 Stock prices Dow-Jones Indistrial NYE Composite AMEX Ccosite NASDAQ (Tc) 1895.95 13.58 26.7 348.83 2722.42 1738.74 2021.51 2092.28 187.99 65.01 55.26 125.91 147.49 151.60 231.9 294. 297.70 291.88 375.66 382.70 1/ One-day quotes except as noted. 2/ Last business day prior to stock market decline on Monday Oct. 19, 1987. 3/ Average for two-week reserve maintenance period closest to date shown except laws shmn which are one-week averages ending Feb. 25 and Feb. 10, respectively. Last observation is average to date for maintenance period ending Sept. 21, 1988. 3.50 2.79 1.06 1.87 4/ Secondary market. 5/ Average for statement week closest to date shown. 6/ One-day quotes for Thursday. 7/ Quotes for week ending Friday closest to date shown e-estimate INTERNATIONAL DEVELOPMENTS U.S. Merchandise Trade Through July In July, the seasonally adjusted U.S. merchandise trade deficit was substantially smaller than the deficit recorded for June and was the lowest monthly deficit recorded since March 1985. At an annual rate, the July deficit was $110 billion, well below the $120 billion annual rate deficit recorded in the second quarter (column 7 in the table that follows). Month-to-month changes in the trade deficit are volatile; nonetheless, the July figures appear to be part of a steady improving trend that emerged at the beginning of the year. Virtually all of the improvement in the trade deficit in July was due to a reduction in imports. Imports, which had risen strongly in June, declined even more in July to a rate last recorded in the third quarter of 1987 (column 4 in the table). Oil imports declined slightly in July with the volume easing a bit and the price of imports dropping by about $0.45 per barrel from June levels. Imports of other industrial supplies decreased in July from the stronger levels recorded in May and June, and were less than the average for either the first or second quarters (by 2 to 5 percent); the July decline was partly in chemicals and partly in various metals. Imports of capital goods in July declined 10 percent from an unusually strong June level, returning to the average rate recorded in each of the preceding four months (and the average of the first quarter). Deliveries of large jets to U.S. customers declined from a high level in June. The decline in imports of machinery was spread over a broad range of categories. Imports of semiconductors in July were an exception, being only marginally less than the strong June rate; steady increases throughout the year have raised the value of these imports 15 percent between January and July. Imports of automotive products from Canada dropped sharply in July (these shipments are subject to sharp seasonal swings in July and August). While imports of automotive products from the rest of the world increased somewhat in July, the rate of imports during the last four months was less than during the first quarter. Imports of consumer goods dropped sharply in July to a level that was about 3 to 4 percent below the average for both the first and second quarters. Nearly half of the decline was in apparel and in footwear, which did not rise as strongly this July as in previous Julys; the seasonal factor for apparel peaks in July, jumping to the 125 to 200 range for various items. The value of exports in July was lower than the June rate, and somewhat under the average for the second quarter (column 1 in the table). There were increases in the value of agricultural exports in July; higher exports of soybeans and corn were only partly offset by declines in wheat and cotton exports. While a 5 percent increase in exports of capital goods in July was from a relatively low June level, the amount of exports in July was higher than the averages for either the first or second quarters (by 2 to 5 percent); about one-fourth of the increase in July was in exports of computers. Exports of industrial supplies were as strong in July as they were in June (which was about 4 percent above the average in the first quarter). Exports of consumer goods in July were as high as in May and June (and about 15 percent 11 above the first-quarter rate). Exports of automotive products declined sharply in July to the lowest level recorded since last July (reflecting strong seasonal movements only imperfectly captured in seasonal factors). U.S. Merchandise Trade Billions of Dollars, Seasonally Adjusted Annual Rates Balance- of-Payments Accounts Total (1) Exports Agric. Nonagric. (3) (2) Total (4) Imports Non-oil Oil (5) (6) Balance (7) Monthly Press Release Customs CIF Value Value Balance Balance (9) (8) Years 1986 1987 34 43 334 357 -145 -160 -138 -152 -155 -170 387 35 352 -159 40 51 357 367 -158 -159 437 45 392 -165 -151 -149 -154 -154 -168 398 418 301 319 442 438 40 41 402 397 -141 -120 -131 -115 -150 313 322 320 312 426 436 453 422 39 44 40 39 387 392 412 384 -113 -113 -133 -110 -106 -99 -140 -97 -124 224 250 369 410 227 240 260 272 Quarters 1987 - 1988 - 1 2 -170 -172 -172 -133 Months 1988 - April May June July -- Note: Monthly -117 -158 -11 data on a Balance-of-Payments Basis are estimates, and are for Official Use Only.
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