Greenbook/Tealbook

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CONFIDENTIAL (FR) CLASS III - FOMC

January 31,

SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the Federal Open Market Committee

By the Staff Board of Governors of the Federal Reserve System

1997

TABLE OF CONTENTS

Page THE NONFINANCIAL ECONOMY

Real GDP . . . . . . Consumer sentiment . Errata . . . . . . .

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Tables Real gross domestic product and related items. . . . University of Michigan Survey Research Center: Survey of Consumer Attitudes . . . . . . . . . . . THE FINANCIAL ECONOMY Senior Loan Officer Opinion Survey on Bank Lending Practices--Correction . . . . . . . . . . . . . . Table Selected financial market quotations . .

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4 5

SUPPLEMENTAL NOTES

THE DOMESTIC NONFINANCIAL ECONOMY

Real GDP Real GDP is estimated to have increased at a 4.7 percent annual rate in the fourth quarter of 1996.

Final sales to domestic

purchasers rose at a 2.8 percent annual rate.

Consumer spending

rebounded, increasing at a 3.4 percent rate after rising only fractionally in the third quarter.

However, business fixed

investment slowed sharply; although outlays for nonresidential structures surged at a 22.5 percent annual rate, spending for producers' durable equipment edged down.

Government purchases were

about unchanged in the fourth quarter, with declines in both the federal defense and nondefense areas offset by continued moderate growth in purchases by state and local governments. The external sector--where the December merchandise trade figures and other information have yet to become available--added importantly to overall real GDP.

Real exports of goods and services

are estimated to have surged at a 25.5 percent annual rate. Unusually large gains were reported for both agricultural and nonagricultural goods.

At the same time, imports grew at a moderate

4.7 percent rate, held down by a sharp decline in oil imports. The pace of inventory investment--which is estimated largely from data through November--is reported to have declined only slightly from that in the third quarter.

Stocks of motor vehicles

declined a bit, and retail inventories are estimated to have moved up only slightly after a large increase in the third quarter. However, inventory accumulation by manufacturers and wholesalers is estimated to have been somewhat greater than in the prior quarter. Real disposable personal income increased at a 2.5 percent annual rate in the fourth quarter, just under its pace earlier in the year.

With the upswing in consumer spending, the personal

saving rate dipped to 5.1 percent last quarter; the saving rate averaged 4.9 percent in 1996 compared with 4.7 percent in 1995. On inflation, the chain-weighted price index for gross domestic product rose at a 1.8 percent annual rate in the fourth quarter, a bit below the pace that prevailed over the first three quarters of the year.

Although the price index for gross domestic purchases

accelerated somewhat as a result of the pickup in consumer energy

prices, falling export prices damped the rise in the overall product price index. BEA's estimate for real GDP growth last quarter was 1-1/4 percentage point above our forecast in the January Greenbook. Real export growth was stronger than we had anticipated; while nominal trade flows were in line with our reading of the incoming data, we were surprised by the 2-1/4 percent (annual rate) drop in export prices.

Furthermore, the decline in residential investment

last quarter was much smaller than we had expected:

In the third

quarter, BEA's estimates for residential investment had been surprisingly low based on the pattern of housing starts, and we did not anticipate the prompt return to the path of spending that is implicit in the advance estimate.

Together, the surprises in

exports and residential investment accounted for about half of our miss on overall GDP.

The remainder of our underestimate reflected

smaller errors in our forecasts for expenditures on consumer durables, nonresidential construction, and motor vehicle inventories. The 1-3/4 percent annual rate increase in the GDP chain price index last quarter was well below the 2-1/2 percent pace projected in the January Greenbook.

The miss in GDP prices largely is

attributable to unexpected movements in the prices of exports and, to a lesser extent, imports; the price index for gross domestic purchases increased at a 2-1/2 percent pace, in line with the Greenbook projection. Although a good many of the source data for the fourth quarter, particularly the December readings for inventories and net exports, have yet to be released, we do not feel that BEA has made any unreasonable assumptions for the missing information.

Accordingly,

at this juncture, we have no statistical basis on which to expect a large revision to the advance estimate. We shall make a more complete reassessment of the forecast when all of the detail underlying BEA's estimates becomes available on Monday.

But our tentative reading of the data in hand leads us to

anticipate that, in most sectors, we'll simply be adjusting the forecasted levels of spending to reflect the fourth-quarter surprises and leaving the projected growth rate of activity from here little changed.

The elevation of the level of activity is

small and is unlikely to imply a significant change in inflationary pressures from what was projected in the Greenbook.

Consumer Sentiment Based on the full sample tabulations, the Michigan SRC index of consumer sentiment rose slightly in January, remaining at the upper end of the favorable range that has prevailed since early 1994. Respondents expressed more favorable views of business conditions in the next twelve months, as well as more positive views of buying conditions for large household appliances.

Other components of the

overall index declined somewhat, but generally remained in very positive ranges.

On balance, the upbeat attitudes reversed the

slight decline in the overall index registered in the preliminary report. Among questions not included in the overall index, the results were also upbeat.

The index of car buying conditions advanced

strongly, and the index of home buying conditions also rose, with more households reporting that now is a good time to buy because "times are good."

The expected change in unemployment in the next

year moved up, but stayed in the favorable range that has prevailed since last summer. The median value of expected inflation over the coming year was unchanged at 3 percent, while the mean shifted up 0.2 percentage point to 4.1 percent.

The mean and median values of expected

inflation over the next five to ten years moved up 0.1 percentage point to 4.0 percent and 3.1 percent, respectively. Errata The projections for industrial production (IP) and capacity utilization shown in Part 1 of the Greenbook did not reflect the new aggregation methods.

The corrected forecast is shown below: IP (percent change, annual rate)

Capacity utilization-mfg. (percent)

Quarterly 1997-Q1 Q2 Q3 Q4

2.7 2.1 2.1 2.3

82.2 82.3 82.2 82.3

1998-Q1 Q2 Q3 Q4

2.3 2.2 2.4 2.5

82.3 82.3 82.3 82.4

Four-quarter 1997-Q4 1998-Q4

2.3 2.4

82.3 82.4

Interval

Real Gross Domestic Product and Related Items (Percent change from previous period at compound annual rates; based on seasonally adjusted data, chain-type indexes)

1995:Q4 to 1996:Q4

1996:Q2 Final

1996:Q3 Final

1996:Q4 Advance

1. Gross domestic product

3.4

4.7

2.1

4.7

2.

3.1

4.1

.5

4.9

2.7

3.4

.5

3.4 5.4

3.

Final sales Consumer spending

4.

Durables

5.5

11.4

-2.6

5.

Nondurables

1.8

1.3

.4

1.7

6.

Services

2.5

2.7

1.3

3.8

9.1

3.8

17.5

4.2

7.

Business fixed investment

8.

Producers' durable equipment

9.4

6.7

20.9

-1.7

9.

Nonresidential structures

8.4

-3.7

8.4

22.5

10.

Residential investment

4.0

16.3

-5.2

-1.3

11.

Federal government consumption expenditures and investment

2.4

9.4

-3.5

-1.8

-5.5

-1.8

12.

Defense

1.5

10.0

13.

Nondefense

4.2

8.3

.6

-1.9

State and local government consumption expenditures and investment

2.2

6.7

1.1

2.2

Exports of goods and services Imports of goods and services

7.6 8.6

5.6 9.9

-. 9 9.3

25.5 4.7

20.22 -3.32 23.52

11.7 5.7 6.0

34.6 7.2 27.4

31.5 -3.9 35.4

-3.0

-5.1

-. 4

.1

14. 15. 16.

ADDENDA: 17. Nonfarm inventory investment 1 Motor vehicles 1 18. Excl. motor vehicles 1 19. 20.

Farm inventory investment 1 1

-114.7

-137.4

-100.7

21.

Net exports of goods and services

22.

Nominal GDP

5.2

6.5

3.8

6.2

23.

GDP price index

2.1

2.2

2.0

1.8

24.

GDP implicit price deflator

1.8

1.8

1.7

1.4

25. 26.

Profit share 3 (Excluding FR banks)

n.a. n.a.

8.7 8.4

8.7 8.4

n.a. n.a.

27.

Personal saving rate (percent)

4.92

4.3

5.3

5.1

1. 2. 3.

Level, billions of chain (1992) dollars. Annual average. Economic profits as a share of nominal GNP.

-114.22

January 31, 1997 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1996 May

1996 Jun

1996 Jul

1996 Aug

1996 Sep

1996 Oct

1996 Nov

1996 Dec

1997 Jan (f)

89.4 105.1 79.2

92.4 105.4 84.0

94.7 107.5 86.5

95.3 107.8 87.3

94.7 102.0 90.1

96.5 106.6 89.9

99.2 107.5 93.9

96.9 104.9 91.8

97.4 106.8 91.3

Personal financial situation Now compared with 12 months ago* Expected in 12 months*

114 122

118 128

115 129

119 129

109 130

115 127

121 133

117 132

116 128

Expected business conditions Next 12 months* Next 5 years*

110 86

122 97

120 102

127 105

131 103

137 108

130 107

136 103

Appraisal of buying conditions Cars Large household appliances* Houses

127 159 159

138 164 161

139 161 158

134 155 149

132 161 159

135 158 157

134 155 156

141 160 162

41 63

45 71

Indexes of consumer sentiment (Feb. 1966=100) Composite of current and expected conditions Current conditions Expected conditions

137 155 153

Willingness to use credit Willingness to use savings Expected unemployment change - next 12 months

121

123

115

114

112

114

110

110

114

Expected inflation - next 12 months Mean Median

4.9 3.0

4.2 2.9

4.3 2.9

4.1 3.0

4.3 3.2

4.2 3.0

4.0 3.0

3.9 3.0

4.1 3.0

Expected inflation - next 5 to 10 years Mean Median

4.8 3.2

4.0 3.1

4.2 3.1

4.6 3.2

4.1 3.2

4.2 3.0

3.7 3.0

3.9 3.0

4.0 3.1

-

I

I

----

* --

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' '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.

(or

-6THE FINANCIAL ECONOMY Senior Loan Officer Opinion Survey on Bank Lending Practices-Correction Complete results of the Senior Loan Officer Opinion Survey on Bank Lending Practices now show respondents' willingness to make consumer installment loans to be essentially unchanged over the last three months.

Preliminary results discussed in Part 2 of the

Greenbook (pp. III-7 and III-A-2) had suggested a slight decline.

Selected Financial Market Quotations 1 (Percent except as noted) 1996 Instrument

Feb.

1997 July

FOMC,*

high

Dec. 17

5.15

5.39

4.76 4.67 4.55

Change to Jan. 30, from: Feb.

July

FOMC,

Jan. 30

low

high

Dec. 17

5.27

5.30

0.15

-0.09

0.03

5.21 5.40 5.64

4.86 5.03 5.20

5.04 5.10 5.28

0.28 0.43 0.73

-0.17 -0.30 -0.36

0.18 0.07 0.08

5.27 5.12

5.50 5.59

5.65 5.48

5.44 5.45

0.17 0.33

-0.06 -0.14

-0.21 -0.03

5.21 5.12 4.99

5.44 5.59 5.83

5.52 5.43 5.49

5.33 5.42 5.53

0.12 0.30 0.54

-0.11 -0.17 -0.30

-0.19 -0.01 0.04

5.13 5.13

5.38 5.56

5.50 5.44

5.31 5.44

0.18 0.31

-0.07 -0.12

-0.19 0.00

8.25

8.25

8.25

8.25

0.00

0.00

0.00

4.98 5.58 6.02

6.62 7.06 7.19

5.95 6.39 6.63

6.16 6.61 6.88

1.18 1.03 0.86

-0.46 -0.45 -0.31

0.21 0.22 0.25

Municipal revenue (Bond Buyer)5

5.67

6.24

5.93

6.02

0.35

-0.22

0.09

Corporate-A utility, recently offered

7.18

8.23

7.67

8.02

0.84

-0.21

0.35

9.57

10.36

9.76

9.72

0.15

-0.64

-0.04

6.94 5.19

8.42 6.01

7.57 5.52

7.88 5.57

0.94 0.38

-0.54 -0.44

0.31 0.05

low

Short-term rates Federal funds 2 Treasury bills

3

3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs 3 1-month 3-month 6-month Eurodollar deposits 4 1-month 3-month Bank prime rate Intermediate- and Long-term Rates U.S. Treasury (constant maturity) 3-year 10-year 30-year

High-yield corporate

6

Home mortgages 7 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate Record high

1996

1997

Percentage change to Jan 30, from:

July

FOMC,*

Record

July

FOMC,

Level

Date

low

Dec. 17

Jan. 30

high

low

Dec. 17

Dow-Jones Industrial

6883.90

1/21/97

5346.55

6268.35

6823.86

-0.87

27.63

8.86

S&P 500 Composite

786.23

1/22/97

626.65

720.98

784.17

-0.26

25.14

8.76

1388.06

1/22/97

1042.37

1260.98

1371.02

-1.23

31.53

8.73

370.65

1/22/97

307.78

350.48

368.29

-0.68

19.61

5.08

Stock exchange index

NASDAQ (OTC) Russell 2000

Wilshire 7594.85 1/22/97 6099.34 6998.62 7556.79 -0.50 23.90 7.98 1. One-day quotes except as noted. 2. Average for two-week reserve maintenance period closest to date shown. Last observation is the average for maintenance period ending January 29, 1997. 3. Secondary market. 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. Merrill Lynch Master II high-yield bond index composite. 7. Quotes for week ending Friday previous to date shown. * Figures cited are as of the close on December 16.