Greenbook/Tealbook

Prefatory Note

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1

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CONFIDENTIAL (FR) CLASS III FOMC

June 27, 1997

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 Real GDP: 1997:Q1. . . . . . . . . . . . . . . . . . . Michigan (SRC) Survey of Consumer Attitudes. . . . . . Tables . . . Real Gross Domestic Product and Related Items. . University of Michigan Survey Research Center: Survey of Consumer Attitudes . . . . . . . . . . . THE FINANCIAL ECONOMY Table Selected financial market quotations

. . . . . . . . .

SUPPLEMENTAL NOTES THE DOMESTIC NONFINANCIAL ECONOMY Real GDP:

1997:Q1

As expected, the BEA's final estimate of real GDP for the first quarter changed little from the preliminary estimate.

Relative to

the staff expectations shown in Part 2, the final estimate indicated somewhat smaller downward revisions to business equipment spending and to nonfarm inventory accumulation.

This report would not lead

us to materially alter our current-quarter forecast of real output. FIRST-QUARTER GROWTH OF REAL GDP (Billions of 1992 chained dollars)

BEA Preliminary

Category

Real GDP Inventory investment Final sales PCE BFI Residential structures Government Net exports Exports Imports Memo: Real GDP growth (percent, annual rate)

Revision to preliminary BEA June 25 Final GB

98.8 34.3 64.9 66.2 21.8 4.0 .2 -28.4 23.1 51.6

.2 -4.3 4.8 -.5 -2.1 .1 .5 6.4 -.9 -7.4

2.3 -2.8 5.0 -.7 -1.3 .5 .2 6.1 -.7 -6.9

5.8

5.8

5.9

The final report also included revised estimates of corporate profits for the first quarter.

Corporate profits (with inventory

valuation and capital consumption adjustments) now are reported to have risen $42.4 billion from the fourth-quarter level.

This figure

represents a downward revision of about $4 billion from the preliminary release.

The downward revision occurred in the foreign

component of profits; domestic profits were revised up slightly. The profit share of GNP

(excluding Federal Reserve banks) was

8.8 percent in the first quarter, up from 8.4 percent in the fourth quarter.

1. Profits in the fourth quarter were held down about $18 billion because of a special assessment on thrift institutions to recapitalize the Savings Association Insurance Fund. Excluding this adjustment, the fourth-quarter profit share would have been 8.6 percent.

Real gross domestic income

(GDI)--the output of the economy

measured from the income side of the national accounts--increased 5.9 percent at an annual rate in the first quarter, the same as GDP. Over the past four quarters, however, real GDI has increased 4.7 percent, compared with real GDP growth of 4.1 percent. Michigan (SRC) Survey of Consumer Attitudes According to the final report, the Michigan SRC index of consumer sentiment climbed 1.3 percentage points in June to an historical high; the preliminary report had shown only a small increase

(0.2 percentage point).

Respondents had highly favorable

assessments of future business conditions and of their current financial situation relative to last year.

While households were

less optimistic about their personal financial situation over the coming year, that index remains at a high level.

Similarly,

appraisals of buying conditions for large household appliances fell back in June, but remained at a highly favorable level. Among the questions not included in the overall index, the index of expected unemployment change over the next 12 months, which has been on a downtrend for more than a year, edged down in June. The index of car buying conditions rose to its highest level since early 1994, reflecting favorable views concerning price discounts and interest rates.

However, appraisals of home buying conditions

were unchanged in June as more positive views on home prices were offset by more negative views of current mortgage rates. Households' willingness to use credit to finance a major purchase fell back somewhat in June after a jump in May, while their willingness to use savings rose. The mean of expected inflation over the next 12 months edged down 0.2 percentage point to 3.5 percent in June and has changed little, on balance, of the past four months.

The mean and median of

expected inflation over the next five to ten years both edged up 0.1 percentage point to 3.9 and 3.1 percent, respectively in June.

6-30-97

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

1. 2. 3.

1997:Q1 Preliminary Final

1995:Q4 to 1996:Q4

1996:Q4 Final

3.1

3.8

5.8

5.9

3.1

4.9

3.8

4.1

2.7

3.4

5.7

5.6

Gross domestic product Final sales Consumer spending

4.

Durables

5.4

5.0

19.3

18.8

5.

Nondurables

1.8

1.8

4.9

4.6

6.

Services

2.6

3.8

3.3

3.4

9.5

5.5

11.5

11.0

7.

Business fixed investment

8.

Producers' durable equipment

9.7

-. 9

13.4

12.7

9.

Nonresidential structures

9.1

25.8

6.5

6.6

6.0

6.7

10.

Residential investment

3.9

-1.8

11.

Federal government consumption expenditures and investment

1.5

-5.3

-3.1

-3.2

.2

-6.9

-10.0

-10.1

4.1

-2.1

12.

Defense

13.

Nondefense

14.

11.3

11.7

State and local government consumption expenditures and investment

2.1

1.9

2.0

2.1

Exports of goods and services Imports of goods and services

7.4 8.3

25.0 3.3

11.2 23.2

10.8 19.9

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

17.12 -3.62 20.72

19.3 -4.6 23.9

52.0 .3 51.7

49.2 .2 49.0

20.

Farm inventory investment

-4.02

-2.6

-1.2

-1.1

21.

Net exports of goods and services 1

-113.62

-98.4

-126.8

-120.7

22.

Nominal GDP

5.0

5.4

8.1

8.3

23.

GDP price index

2.1

1.9

2.8

2.7

24.

GDP implicit price deflator

1.8

1.5

2.2

2.2

25.

Corporate profits 3

670.1

716.8

712.5

15. 16.

4

670.22

26. 27.

Profit share (Excluding FR banks)

8.9 8.6

8.7 8.4

9.1 8.8

9.1 8.8

28.

Personal saving rate (percent)

4.92

5.1

4.8

4.7

1, 2. 3. 4.

Level, billions of chain (1992) dollars. Annual average. With inventory valuation adjustment (IVA) and capital consumption adjustment (CCAdj), level, billions of dollars. Economic profits as a share of nominal GNP.

June 27, 1997 UNIVERSITY OF MICHIGAN SURVEY RESEARCH CENTER: SURVEY OF CONSUMER ATTITUDES (Not seasonally adjusted) 1997 May

1997 Jun (f)

1997 Jan

1997 Feb

1997 Mar

1997 Apr

97.4 91.3

99.7 107.2 94.9

100.0 109.8 93.6

101.4 115.2 92.5

117 132

116 128

114 134

119 134

132 130

122 138

126 131

137 108

130 107

136 103

135 113

138 105

130 113

142 109

147 121

132 161 159

135 158 157

134 155 156

141 160 162

130 164 166

135 166 155

136 167 153

150 173 160

154 168 160

Expected unemployment change - next 12 months

114

110

110

114

107

112

113

109

108

Expected inflation - next 12 months Mean Median

4.2 3.0

4.0 3.0

3.9 3.0

4.1 3.0

3.8 3.0

3.5 2.8

3.7 3.0

3.7 2.9

3.5 2.8

4.2 3.0

3.7 3.0

3.9 3.0

4.0 3.1

3.7 3.1

3.6 3.0

3.6 2.9

3.8 3.0

3.9 3.1

1996 Oct

1996 Nov

1996 Dec

96.5 106.6 89.9

99.2 107.5

96.9 104.9

93.9

91.8

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

115 127

121 133

Expected business conditions Next 12 months* Next 5 years*

131 103

Appraisal of buying conditions Cars Large household appliances* Houses

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

106.8

103.2 113.5 96.6

104.5 113.2 98.9

Willingness to use credit Willingness to use savings

Expected inflation - next 5 to 10 years Mean Median

* --

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' (or '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.

Selected Financial Market Quotations 1 (Percent except as noted)

1996 Instrument

1997

Feb.

July

FOMC *

low

high

May 20

5.15

Change to June 26, from: Feb.

July

FOMC *

low

high

May 20

5.39

0.28

0.04

-0.07

4.76 4.67 4.55

5.21 5.40 5.64

0.27 0.39 0.78

-0.18 -0.34 -0.31

-0.13 -0.31 -0.22

5.27 5.12

5.50 5.59

0.34 0.51

0.11 0.04

-0.04 -0.09

5.21 5.12 4.99

5.44 5.59 5.83

0.39 0.54 0.77

0.16 0.07 -0.07

-0.03 -0.07 -0.13

5.13 5.13

5.38 5.56

0.43 0.50

0.18 0.07

0.00 -0.06

8.25

8.25

0.25

0.25

0.00

4.98 5.58 6.02

6.62 7.06 7.19

1.26 0.92 0.76

-0.38 -0.56 -0.41

-0.18 -0.21 -0.14

n.a.

n.a.

n.a.

n.a.

0.08

Municipal revenue (Bond Buyer) 5

5.67

6.24

0.15

-0.42

-0.09

Corporate-A utility, recently offered

7.18

8.23

0.61

-0.44

-0.21

High-yield corporate 6

9.57

10.36

-0.19

-0.98

-0.21

6.94 5.19

8.42 6.01

0.64 0.47

-0.84 -0.35

-0.33 -0.12

June 26

Short-term rates Federal funds 2 3

Treasury bills

3-month 6-month 1-year Commercial paper 1-month 3-month Large negotiable CDs3 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 U.S. Treasury indexed bond

Home mortgages7 FHLMC 30-yr fixed rate FHLMC 1-yr adjustable rate

1996

Record high

Stock exchange index Dow-Jones Industrial S&P 500 Composite NASDAQ (OTC) Russell 2000

Percentage change to June 26, from:

1997 July

FOMC *

Record

July

FOMC *

Level

Date

low

May 20

June 26

high

low

May 20

7796.51

6/20/97

5346.55

7228.88

7654.25

-1.82

43.16

5.88

898.70

6/20/97

626.65

833.27

883.68

-1.67

41.02

6.05

1452.43

6/24/97

1042.37

1341.24

1436.38

-1.11

37.80

7.09

396.49

6/19/97

307.78

366.57

390.27

-1.57

26.80

6.47

Wilshire 8484.51 6/20/97 6099.34 7861.08 8364.37 -1.42 37.14 6.40 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 June 25, 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 May 19, 1997.