Greenbook/Tealbook

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

December 16,

SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the Federal Open Market Committee

By the Staff Board of Governors of the Federal Reserve System

1994

TABLE OF CONTENTS

Page THE DOMESTIC NONFINANCIAL ECONOMY Housing starts . . Retail inventories

. .

. . . .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

. .

.

. .

1

.

2

Tables Private housing activity . . . . . . . . . . . Changes in manufacturing and trade inventories . . . . . . . . Inventories relative to sales

. . 4 5 5

Charts

Private housing starts . . . . . Ratio of inventories to sales. .

. .

. .

. .

. .

. .

. .

.

.

.

. . .

.

Selected financial market quotations

.

.

.

. .

4 .

.

6

THE FINANCIAL ECONOMY Municipal markets .

.

.

.

.

.

.

S

7

Tables

.

.

. .

10

Chart

S

Ratio of tax-exempt yield to Treasury yield.

9

THE INTERNATIONAL ECONOMY U.S. international transactions in 1994-Q3

.

.

. .

. .

.

.

11

Tables U.S. current account . . . . . . . . . . . Summary of U.S. international transactions

. . 11 13

SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Housing Starts Total housing starts increased 6.9 percent in November to 1.54 million units at an annual rate.

The starts estimate for

October was revised up slightly to 1 44 million units. The regional pattern of changes in total starts suggests that construction in November might have been boosted in part by favorable weather

Temperatures in both the Northeast and the

Midwest were unseasonably warm, on average, and starts in those regions rose by 25 percent or more.

However, temperatures also were

unusually warm in the South, where starts edged up only 2 percent In the West, where average temperatures were unusually cold

starts

fell only 6 percent, well within the normal range of variation. Typically, greater severity of cold weather in the Northeast and the Midwest causes construction in these areas to be more responsive to deviations from normal weather patterns, as compared with the more temperate South and West.

Despite some extreme conditions in

particular areas and periods, average precipitation for the major Census regions was fairly close to seasonal norms. Single-family starts rose to 1.20 million units in November, reversing more than half of the October decline.

In contrast,

single-family permits edged down in both October and November Analysis of the relationship of starts to permits (which are measured with considerably less statistical error than are starts) suggests that single-family construction in November may have been lower than was indicated by the starts estimate.

Single-family starts have been surprisingly resilient in recent months.

Averaging through the monthly variations, starts have

remained essentially unchanged since about midyear.

This pattern is

-2broadly consistent with the behavior of permit issuance for single family homes, which has varied within a narrow range since June. Another sign of continued strength in the single-family sector is that a pickup in new home sales in recent months has brought sales in line with starts.

However

other indicators of housing

demand, including consumer attitudes toward homebuying and builders assessments of new home sales, continued to decline in December

and

applications for mortgage financing to purchase new and existing homes edged down again in early December after rising a bit in November Multifamily housing starts rose from 287,000 units at an annual rate in October to 344,000 in November, the highest level in four years.

In 1994:Q3, the multifamily rental vacancy rate declined

relative to its year-earlier level for the fifth consecutive quarter Retail Inventories Retail inventories rose at a $12 billion annual rate in October, substantially below the pace observed in August and The October slowing was largely attributable to a sharp

September

downswing in auto dealers' stocks, which declined at an $8.3 billion annual rate in October following increases of $44 billion and $20.5 billion in the two preceding months.

Excluding auto dealers,

inventories in retail trade expanded at a $20.3 billion annual rate in October

similar to the September pace and faster than the pace

over the third quarter.

With a 1.3 percent increase in sales, the

retailers' inventory-sales ratio fell from 1.54 to 1.52 months; excluding auto dealers, the ratio was unchanged at 1.49 months. The bulk of the non-auto inventory accumulation in October was in stocks held at stores in the GAF grouping (general merchandise,

apparel

and furniture and appliance); these stocks have expanded at

-3a rate of nearly $20 billion in each of the past three months. However

GAF sales have been quite robust since June, and the

inventory-sales ratio for stores in this broad category; at 2.36 months in October past year

remained within the range observed over the

Among the GAF stores, furniture and appliance outlets

reported another sizable inventory accumulation in October

but

sales of these items also have been strong in recent months.

(The

advance retail sales report for November showed a 2.3 percent rise in furniture and appliance sales last month, after increases of 1.1 percent in October and 2.1 percent in September )

On balance,

the accumulation of nondurable retail inventories in October was fairly widespread;

of the major categories, only food stores

reported any notable inventory declines. For all manufacturing and trade excluding retail auto dealers, inventories rose at a $54 billion annual rate in October same pace as the third-quarter average.

about the

With a 0.3 percent

increase in non-auto shipments and sales in October

the inventory

sales ratio for manufacturing and trade, excluding auto dealers, edged up to 1 38 months, only a little above the low end of the range of the past year

1 For all manufacturing and trade excluding auto dealers, inventory investment in September was revised up only slightly, as upward revisions to manufacturing and wholesale stock buildups were nearly offset by downward revisions to the accumulation of retail inventories. The net revision to the September inventory change is not expected to have much effect on BEA's estimate of third-quarter GDP growth.

PRIVATE HOUSING ACTIVITY (Millions of units; seasonally adjusted annual

1993 Annual Q4 All units Starts Permits Single-family units Starts

Permits New-home sales Existing-home sales Multifamily units Starts Permits

Note:

p Preliminary

rates)

1994 Q1

Q2

Q3

r

Sant

r

nrt

r

1.29

1 48

1 37

1.44

1 .47

1.51

1 44

1.54

1 20

1 38

1 29

1 35

1 37

1.43

1 40

1 38

1 13 .99

1 29 1 13

1 17 1.06

1 19 1.07

1 21 1.04

1.23 1.05

1 15 1.05

1 20 1.04

.67 3.80

77 4,17

.69 4.05

.66 4.06

.68 3.93

72 3.89

3

16 21

19 .25

r Revised

.28 37

n.a

73 91

n.a. n.a.

29 35

34 35

Not available.

Private Housing Starts (Seasonally adjusted annual rate) Millions of units

1980

Nov .

1982

1984

1986

1988

1990

1992

1994

CHANGES IN MANUFACTURING AND TRADE INVENTORIES (Billions of dollars at book value and annual rates; based on seasonally adjusted data) 1994 Q1 Total Excluding wholesale and retail motor vehicles Manufacturing Defense aircraft Nondefense aircraft Excluding aircraft Wholesale Excluding motor vehicles Retail Automotive Excluding auto dealers

Q2

1994 Q3

Aug.

Sept

Oct.

18.4

75.6

70.6

93.9

50.8

45.6

21.1 9.4 -4.4 -1.4 15.2 3.1 8.3 5.9 2.6 3.4

58.9 13.3 -4.7 3.7 14.4 23.0 16.6 39.4 10.4 29.0

53.4 13.7 -2.3 -.8 16.8 22.7 23.0 34.2 17.5 16.7

57.0 4.4 -4.9 2.0 7.3 11.5 18.7 78.0 44.0 34.0

27.9 -5.8 -2.9 -4.7 1.8 14.1 11.7 42.5 20.5 22.0

49.6 17.5 .2 -2.5 19.7 16.2 11.9 12.0 -8.3 20.3

9.9 11.8 9.9 -2.0 3.0 2.0 2.5 -.5

39.0 35.6 .7 16.0 10.8 22.3 -1.9 24.2

38.4 31.2 3.6 14.0 14.5 20.7 6.9 13.8

34.5 36.2 -1.6 5.8 12.5 30.2 4.3 25.9

8.2 7.2 -16.4 4.2 2.0 20.4 -2.3 22.7

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Constant-dollar basis Total Excluding motor vehicles Manufacturing Wholesale Excluding motor vehicles Retail Automotive Excluding auto dealers

INVENTORIES RELATIVE TO SALES 1 (Months supply; based on seasonally adjusted data at book value) 1994 Q1 Total Excluding wholesale and retail motor vehicles Manufacturing Defense aircraft Nondefense aircraft Excluding aircraft Wholesale Excluding motor vehicles Retail Automotive Excluding auto dealers

Q2

1994 Q3

Aug.

Sept.

Oct.

1.41

1.41

1.41

1.39

1.40

1.40

1.39 1.40 4.80 5.00 1.28 1.31 1.30 1.50 1.61 1.47

1.39 1.39 4.85 5.84 1.26 1.33 1.30 1.54 1.67 1.50

1.38 1.36 4.69 5.54 1.25 1.32 1.30 1.55 1.75 1.50

1.36 1.34 4.49 5.62 1.23 1.30 1.29 1.53 1.70 1.48

1.37 1.35 4.95 5.38 1.23 1.31 1.29 1.54 1.71 1.49

1.38 1.37 4.79 5.76 1.25 1.32 1.29 1.52 1.63 1.49

1.46 1.52 1.44 1.39 1.39 1.53 1.56 1.52

1.46 1.51 1.43 1.41 1.39 1.56 1.57 1.55

1.46 1.51 1.41 1.40 1.39 1.57 1.62 1.56

1.44 1.49 1.40 1.39 1.38 1.56 1.62 1.54

1.44 1.50 1.40 1.39 1.38 1.56 1.61 1.55

n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

Constant-dollar basis Total Excluding motor vehicles Manufacturing Wholesale Excluding motor vehicles Retail Automotive Excluding auto dealers

1. Ratio of end-of-period inventories to average monthly sales for the period.

-6-

Ratio of Inventories to Sales (Book value) Manufacturing

1980

Ratio

1982

1984

1986

1988

1990

1992

1994

Wholesale excluding motor vehicles

1980

1982

1984

Ratio

1986

1988

1990

1992

1994

Retail Ratio

Ratio

GAF group

Oct.

. 4

%--

Total excluding auto

1980

1982

1984

1986

1988

1990

1992

1994

THE FINANCIAL ECONOMY Municipal Markets The municipal market continued to rally for a time after the close of the Greenbook on Wednesday, as concern about the Orange County developments receded further.

The ratio of municipal bond

yields to Treasuries dropped from 0.91 last week to 0.89, measured about Thursday noon, its lowest level since early November. Issuance of tax-exempt debt increased to almost $3 billion over the week, the highest weekly volume in about a month. However, the rally stalled on Thursday, and the municipal market again showed signs of stress, especially in short-term maturities.

Tax-exempt bond and money funds circulated large bid

lists indicating sizable net redemptions over the week.

The yields

on Orange County notes backed by letters of credit are about 225 basis points above comparable paper issued elsewhere in California.

Dealers also report being unable to place the tax-

exempt paper of Riverside County, California, and Texas municipalities, even though these entities have no exposure to the loss-plagued investment pools in Orange County and Texas. Orange County's estimate of the losses on its investment pool remains at about $2 billion.

The county's new financial advisor,

Robert Hayes, has vowed to completely restructure the fund's portfolio within ninety days.

At that time, the average maturity of

securities in the fund should resemble that of a typical money market fund.

The restructuring has already begun, as the fund sold

almost $500 million in medium-term fixed-income agency issues on Thursday; the remaining $1 billion in the fund's most liquid securities are slated to be sold today.

The fund will sell its more

unusual structured notes at later dates.

In a related development,

an Orange County official announced that it would file a lawsuit as

-8early as next week

alleging that Merrill Lynch failed to disclose

the risks associated with the securities it sold to the county

-9-

Ratio of Tax-Exempt Yield to Treasury Yield Weekly

Ratio S-

0.93

0.92

0.91

0.9

0.89

0.88

0.87

I

SI Nov 10

Nov 17

Weekly

Nov 24

I Dec 1

0.86 Dec 8

Dec 15 Ratio

-

0.96

0.94

0.92

0.9

0.88

0.86

I I I I I I I I 1 I I I I I I I I J J A S O N D J F M A M J J A S O N D 1993 1994 Ratio of the Bond Buyer 30-year revenue bond index to yield on 30-year Treasury bond. J

F

I I M

I A

I M

0.84

-10SELECTED FINANCIAL MARKET QUOTATIONS (Percent excect as noted)

1994 Instrument

Oct lows

Feb

Change

FOMC,* 3 Nov 15 Dec

15

to Dec

From Oct 93 lows

15,

1994

From Feb 3

From FOMC,* Nov 15

SHORT-TERM RATES Federal

funds

3.07

3.07

4.75

5.50

Treasury bills 3-month 6-month 1-year

3.01 3.09 3.23

3.13 3.27 3.52

5.28 5.69 6.11

5.54 6.19 6.64

2.53 3-10 3.41

0.26

Commercial paper 1-month 3-month

3.13 3.23

3.16 3.25

5.32 5.76

6.13 6.30

3.00 3.07

0.81 0.54

3.08 3.22 3.23

3-11 3.25 3.41

5.27 5.71 6.01

6.08 6.31 6.82

3.00 3.09 3.59

0.81 0.60 0.81

3.06 3.25

3.06 3.25

5.25 5.75

6.06 6.25

6.00

6.00

7.75

8.50

2.50

0.75

4.06 5.19 5.78

4.60 5.81 6.31

7.37 7.94 8.09

7.66 7.79 7.86

3.60 2.60 2.08

0.29 -0.15 -0.23

5.41

5.49

7.23

7.02

1.61

-0.21

6.79

7-35

8.89

8.78

1 .99

6.74 4.14

6.97 4.12

9.19 6.01

9.15 6.56

2.41 2.42

0.75

3

Large negotiable CDs 1-month 3-month 6-month 4 Eurodollar deposits l-month 3-month

Bank prime rate

0.50 0.53

3.00 3.00

0.81 0.50

INTERMEDIATE- AND LONG-TERM RATES U.S. Treasury 3-year 10-year 30-year

(constant maturity)

5 Municipal revenue (Bond Buyer) Corporate--A utility, recently offered 6 Home mortgages FHLMC 30-yr. fixed rate FHLMC 1-yr. adjustable rate

I 1989

1994

1 43

-0.11 -0.04 0.55

Percentage change to Dec 15:

Record high Stock exchange index Level

Dow-Jones Industrial NYSE Composite NASDAQ (OTC) Wilshire

3978.36 267.71 803.93 4804.31

Date

Low, Jan. 3

1/31/94 2144.64 154.00 2/2/94 378.56 3/18/94 2/2/94 2718.59

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 Dec 21. 1994. 3. Secondary market.

FOMc,* Nov 15

Dec

3829.73 254.84 768.14 4611.07

3765.47 248.96 730.68 4480.90

15

From record high

From 1989 low

-5.35 -7.00 -9.11 -6.73

75.58 61.66 93.02 64.82

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. * Figures

are as of the close on Nov. 14,

1994.

From FOMC,. Nov 15

-1.68 -2.31 -4.88 -2.82

-11THE INTERNATIONAL ECONOMY International Transactions in 1994-Q3

U.S.

The U.S. current account deficit was $167

billion SAAR in the

third quarter, $15 billion larger than in the second quarter. of the change was in net trade in goods and services more than exports grew)

Most

(imports rose

A 4.5 percent increase in the value of

imports was spread among all major trade categories and reflected the strength of consumption and investment spending in the United States.

The 3.5 percent increase in exports was largely in

machinery, industrial supplies and consumer goods. Both income payments and receipts rose sharply in the third quarter

with income payments on foreign assets in the United States

increasing more than income receipts from U.S. assets abroad.

The

jump in income payments primarily reflected higher earnings on foreign direct investment in the United States; payments to foreign residents on their portfolio investments in the United States also rose, reflecting both higher interest rates and greater liabilities.

U.S. CURRENT ACCOUNT (Billions of dollars, seasonally adjusted annual rates) Goods & services balance

Investment income, net

Transfers net

Current acct. balance

Years 1992 1993

-40.4 -75.7

4.5 3.9

-32.0 -32.1

-67.9 103.9

Quarters 1993-1 2 3 4

-57.7 -76.3 -89.0 -79.9

7.4 2.7 8.1 -2.4

-29.1 -28.8 -30.5 -40.1

-79.4 .102.4 111.4 122.3

-97 3 '106.6 -118.0

-3.2 -11 2 -15.8

-28.7 33.8 33.1

-129.3 -151.6 -166.9

-9.3 11.5

-8.0 -4.6

-5.1 ,8

-22.4 15,3

1994-1 2-r 3 Memo: $ Change Q2-Q1 Q3-Q2 Source:

U.S. Department of Commerce, Bureau of Economic Analysis.

-12Most of the increase in income receipts on U.S. assets abroad reflected a sharp rise in earnings on direct investments; income on portfolio investments abroad also rose largely reflecting higher interest rates. Capital flows. rose to more than $13

Foreign direct investment in the United States billion in the third quarter, up from

$5 billion in the second quarter U.S.

(See line 7 of the Summary of

International Transactions table.)

One of the factors swelling

inflows was the takeover of Gerber by Sandoz.

A revival of takeover

activity by foreign firms in the United States has been an important factor in swelling inflows during much of 1994.

Another factor has

been the revival of affiliates' profits and reinvested earnings. U.S. direct investment abroad also has been affected by continued takeover activity abroad by U.S. firms.

However, direct

investment capital outflows in the third quarter ($9.5 billion) remained about level with the second quarter

far below the fourth

quarter of 1993 and the first quarter of 1994 (line 6)

These wide

swings largely reflected short-term intercompany debt transactions between finance affiliates in the United Kingdom and their U.S. parents.

-131

SUMMARY OF U.S. INTERNATIONAL TRANSACTIONS (Billions of dollars, not seasonally adjusted except as noted) Quarter

Month

Ii

I Year

1993

I_

I

1992

1993

I

|

1994

1994

I

I

Q4

I___Q2A

Q

Q2

Q3

_

I

1

Aug.

Sept.

Oct.

I

official capital

1. Changes in foreign official reserve assets in U.S. (+ - increase) a. G-10 countries b. OPEC countries c. All other countries

2. Changes in U.S. official reserve assets (+ = decrease)

38.3 4.8

70.2

23.3

8.7

29.9

4.8

15.7

4.9

-5.1

-4.7

28.6

45.4

-.9 19.4

3.9

-.7

-.7

-.1

3.5

-.2

-.1

-.1

-.2

35.6

8.5

4.7

38.0

38.1

10.0

-8.1

7.7

1.3

68.1 37.4

105.5

45.8

31.1

24.7

8.1

34.3

61.2

-3.7

19.6

25.5 12.2

10.4 1.0 .5 8.9

-2.4

Private capital Banks

3. Change in net foreign positions of banking offices in the U.S. 3 Securities 4. Foreign net purchases of U.S. securities (+) 4 a. Treasury securities b. Corporate and other bonds

5

c. Corporate stocks

5. U.S. net purchases (-) of foreign securities a. Bonds b. Stocks

6.3

5.9

9.5 13.7

-7.3 14.8

5.3 1.7

8.0

-1.3

-1.2

-47.9 -132.8 -15.6 -69.5

-34.6 -13.9

-25.1 -18.0 -6.6 -5.3

-9.2 -2.3

-3.7 -.9

-.2 -.9

-32.3

-63.3

-20.7

-18.5

-12.7

-7.0

-4.6

.7

Other flows (quarterly data, s.a.) 6. U.S. direct investment (-} abroad 7. Foreign direct investment in U.S. 8. Other (+ = inflow)

-41.0 9.9

-57.9 21-4

-22.7 8.1

-24.8 12.0

-8.0 5.4

n.a. n.a.

n.a. n.a.

n.a. n.a.

18.1

68.6

2.7

5.4

6.2

-9.5 13.3 -6.1

n.a.

n.a.

n.a.

U.S. current account balance

-67.9 -103.9

-30.6

-32.3 -37.9

-41.7

n.a.

n.a.

n.a.

5.3

n.a.

n.a.

n.a.

Statistical discrepancy

(s.a.)

(s.a.)

-17.1

21.1

4.0

-14.5

-4.3

1. The sum of official capital, private capital, the current account balance, and the statistical discrepancy is zero. Details may not sum to totals becuse of rounding. 2. Changes in dollar-denominated positions of all depository institutions and bank holding companies plus certain transactions between broker-dealers and unaffiliated foreigners (particularly borrowing and lending under repurchase agreements). Includes changes in custody liabilities other than U.S. Treasury bills. 3. Includes commissions on securities transactions and therefore does not match exactly the data on U.S. international transactions published by the Department of Commerce. 4. Includes Treasury bills. 5. Includes U.S. government agency bonds. 6- Transactions by nonbanking concerns and other banking and official transactions not shown elsewhere

plus amounts resulting from adjustments made by the Department of Commerce and revisions in lines 1 through 5 since publication of the quarterly data in the Survey of Current Business. * Less than $50 million. n.a. Not available.