Greenbook/Tealbook

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 02/09/2012.

Confidential (FR) Class III FOMC

March 24, 2006

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 Sales and Prices of New and Existing Homes .................................1 Equipment Spending........................................................................1

Tables Private Housing Activity..................................................................2 Orders and Shipments of Nondefense Capital Goods......................5

Charts Private Housing Starts and Permits..................................................2 Indicators of Single-Family Housing...............................................3 Computers and Peripherals ..............................................................5 Communications Equipment............................................................5 Medium and Heavy Trucks..............................................................5 Non-high-tech, Non-trans. Equipment.............................................5

The Domestic Financial Economy ...........................................................6 Tables Commercial Bank Credit .................................................................6 Selected Financial Market Quotations .............................................7

Supplemental Notes The Domestic Nonfinancial Economy Sales and Prices of New and Existing Homes Sales of new homes fell 11 percent in February to an annual rate of 1.08 million units; the sharp drop suggests that residential construction will decline in the coming months. The stock of new homes for sale increased in February, and it represented 6.3 months of sales at February’s unusually depressed pace of sales. The months’ supply of new homes has been trending upward since October 2004 and is now at a level not seen since the end of 1995. At the same time, sales of existing homes turned up in February for the first time since last August. Total sales rose 5.2 percent to an annual rate of 6.9 million units; sales of single-family homes increased 4.7 percent while sales of condos and co-ops were up 8.8 percent. The inventory of homes for sale ticked down in February, but the months’ supply of homes at February’s sales pace remained elevated compared with its range of recent years. The average sales price of new homes was about 3 percent higher in February than it was a year earlier, and the median price of new homes in February was 3 percent lower than a year earlier. The Census Bureau began phasing in a new sampling frame in January 2005, and the sales prices of homes in the current sample may not be comparable to the previous sample. Because the sample of homes sold in 2005 contained a mixture of homes drawn from both the old and new sampling frames, the year-to-year changes in the prices of new homes sold should be interpreted with caution. That said, staff estimates of the magnitude of the bias suggest that new home prices have been decelerating in recent months. The median sales price of existing homes sold was up 10.6 percent in February from a year earlier. The median price of single-family homes climbed 11.7 percent. Although the rate of increase of single-family home prices remained robust, the percent change over the twelve months ending in February was smaller than the twelve-month changes of the summer and fall. The median price of condos and co-ops rose 3.5 percent from a year earlier, continuing a marked deceleration that began in the spring of 2005. Equipment Spending New orders for nondefense capital goods excluding aircraft fell 2¼ percent in February after having ticked up in January. Orders for non-high-tech equipment plunged -1-

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Private Housing Activity (Millions of units, seasonally adjusted; annual rate except as noted) 2005 Sector All units Starts Permits Single-family units Starts Permits Adjusted permits1 Permit backlog2 New homes Sales Months’ supply3 Existing homes Sales Months’ supply3 Multifamily units Starts Permits Permit backlog2 Mobile homes Shipments Condos and co-ops Existing home sales

2006

2005

Q2

Q3

Q4

Dec.

Jan.

Feb.

2.07 2.15

2.04 2.11

2.10 2.18

2.06 2.11

1.99 2.08

2.30 2.22

2.12 2.18

1.72 1.68 1.69 .17

1.69 1.64 1.67 .16

1.75 1.71 1.74 .17

1.72 1.69 1.72 .17

1.61 1.65 1.67 .17

1.84 1.69 1.71 .17

1.80 1.66 1.67 .16

1.28 4.45

1.29 4.30

1.30 4.50

1.29 4.70

1.28 4.80

1.21 5.30

1.08 6.30

6.18 4.40

6.28 4.30

6.26 4.60

6.06 4.90

5.86 4.90

5.79 5.10

6.06 5.10

.35 .47 .06

.35 .47 .06

.35 .47 .06

.34 .42 .06

.38 .43 .06

.46 .53 .06

.32 .52 .06

.15

.13

.13

.19

.18

.17

.90

.92

.92

.88

.89

.78

n.a. .85

1. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas. 2. Number outstanding at end of period. Excludes permits that have expired or have been canceled, abandoned, or revoked. Not at an annual rate. 3. At current sales rate. The ratio of n.s.a. inventories to n.s.a. sales is seasonally adjusted by the Census Bureau; as a result, the s.a. ratio may not be the same as the ratio of s.a. inventories to s.a. sales. Quarterly and annual figures are averages of monthly figures. n.a. Not available.

Private Housing Starts and Permits (Seasonally adjusted annual rate)

Millions of units

2.0

2.0

1.8

1.8 Single-family starts

Feb.

1.6 1.4

1.6 1.4

1.2

1.2 Single-family adjusted permits

1.0

1.0

.8

.8

.6

.6 Multifamily starts

.4

.4 Feb.

.2 .0

.2 1999

2000

2001

2002

2003

2004

Note. Adjusted permits equal permit issuance plus total starts outside of permit-issuing areas.

2005

2006

.0

-3-

Indicators of Single-Family Housing Existing Home Sales

New Home Sales

6500

Thousands of units 6500

6000

Feb.

6000

5500

5500

5000

5000

4500

4500

1500

Thousands of units 1500

1300

1300

1100

4000

1999

2000

2001

2002

2003

2004

2005

2006

4000

1100

Feb.

900

700

Source. National Association of Realtors.

900

1999

2000

2001

2002

2003

2004

2005

700

2006

Source. Census Bureau.

Homebuying Indicators

Mortgage Rates Percent 9

9 Fixed rate

Diffusion index 120 MBA purchase index (right scale) Michigan homebuying attitudes (left scale) 100

8

8

7

7

80

6

60

5

40

4

20

3

0

Index 575 525 475 425

6

Mar.

Mar. 17 375

5

325

1-year ARM rate 4 3

1999 2000 2001 2002 2003 2004 2005 2006 Note. The March readings are based on data through March 22, 2006. Source. Freddie Mac.

10

10 Feb.

5

5

0

0

1999

2000

2001

2002

2003

2004

225

2005

Source. For repeat transactions, OFHEO; for average price, National Association of Realtors.

Percent change from year earlier 25

25

Constant quality Average price of homes sold

20

20

15

Q4

-5

1999 2000 2001 2002 2003 2004 2005 2006 2007

Prices of New Homes

Percent change from year earlier 20 Repeat transactions, purchase-only index Average price of homes sold 15

15

275

Note. MBA index is a 4-week moving average. Source. Mortgage Bankers Association and Michigan Survey.

Prices of Existing Homes 20

Mar.

2006

-5

15

10

10 Feb.

5

5

Q4

0

0

-5

-5

-10

1999

2000

2001

2002

2003

2004

2005

2006

-10

Note. Starting in 2005, average price values are adjusted by Board staff to take into account new sampling procedures. Source. Census Bureau.

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4½ percent last month, after having risen strongly on balance in December and January, leaving the January-February average level 2½ percent above the fourth-quarter average. Orders for communications equipment surged for a second month in February while orders for computers and peripherals retraced almost half of their January decline. Shipments of nondefense capital goods excluding aircraft dropped 1 percent in February after having been unchanged in January. Shipments of non-high-tech equipment fell 1½ percent last month—their first monthly decline since last July. However, backlogs of unfilled orders widened slightly last month, and we continue to expect solid gains in shipments over the coming months. Shipments of communications equipment moved up ¾ percent in February following very strong gains in the previous two months. In contrast, shipments of computers and peripherals only inched up last month following a sharp decline in January. The recent shipments and orders data for computers are consistent with anecdotal reports from the industry that the first quarter was weak.

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Orders and Shipments of Nondefense Capital Goods (Percent change; seasonally adjusted current dollars) 2005 Category

Q3

Q4

2006 Dec.

Annual rate

Jan.

Feb.

Monthly rate

Shipments Excluding aircraft Computers and peripherals Communications equipment All other categories

1.8 3.2 -6.6 30.8 2.3

35.1 15.6 24.2 -9.2 17.3

5.2 3.8 2.7 5.8 3.8

-4.4 .0 -5.7 5.3 .4

.6 -1.1 .3 .8 -1.6

Orders Excluding aircraft Computers and peripherals Communications equipment All other categories

-15.6 4.0 -10.7 23.2 4.8

89.9 11.9 17.7 -21.3 15.2

1.9 4.9 4.3 -5.8 6.1

-19.8 .3 -12.5 16.1 1.1

1.6 -2.3 4.8 9.6 -4.6

Memo: Shipments of complete aircraft1

26.2

27.6

27.5

31.7

n.a.

1. From Census Bureau, Current Industrial Reports; billions of dollars, annual rate. n.a. Not available.

Computers and Peripherals 13 12

Communications Equipment

Billions of dollars, ratio scale Shipments Orders

10

13 12 10

Feb.

8

8

20 17 14

Billions of dollars, ratio scale Shipments Orders

20 17 14

11

11

8

8 Feb.

5 6

4

1999 2000 2001 2002 2003 2004 2005 2006

4

2

800

Thousands of units, ratio scale Sales of class 4-8 trucks Net new orders of class 5-8 trucks

700 600

950

55

800

52

700 Feb.

600

2

55 52

Feb. 48

400

44

44

300

40

40

200

36

500

400 300

1999 2000 2001 2002 2003 2004 2005 2006 Note. Annual rate, FRB seasonals. Source. For class 4-8 trucks, Ward’s Communications; for class 5-8 trucks, ACT Research.

Billions of dollars, ratio scale Shipments Orders

48

500

200

1999 2000 2001 2002 2003 2004 2005 2006

Non-high-tech, Non-trans. Equipment

Medium and Heavy Trucks 950

5

6

1999 2000 2001 2002 2003 2004 2005 2006

36

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The Domestic Financial Economy

Commercial Bank Credit (Percent change, annual rate, except as noted; seasonally adjusted)

Type of credit Total Adjusted1 Reported Securities Adjusted1 Reported Treasury and agency Other2 Loans3 Total Business Real estate Home equity Other Consumer Adjusted4 Other5

Level (billions of dollars), Feb. 2006

2004

2005

2005: Q3

2005: Q4

Jan. 2006

Feb. 2006

8.9 8.4

10.4 9.6

9.6 9.7

5.8 5.2

9.4 9.7

15.9 15.4

7,358 7,494

6.6 5.2 4.9 5.6

7.4 5.0 -.4 13.2

.5 1.7 -5.3 12.0

-.6 -2.4 -10.1 8.4

4.4 6.2 11.7 -1.0

31.4 28.6 34.3 20.9

1,904 2,040 1,176 864

9.8 1.3 14.0 43.8 9.8 8.8 5.7 7.8

11.5 13.4 14.0 11.1 14.5 3.0 .6 8.2

12.9 11.4 17.0 10.8 18.2 4.8 3.6 7.0

8.1 9.5 8.3 -1.9 10.2 -4.4 -4.5 17.4

11.0 25.9 11.0 -3.9 13.6 6.5 7.4 -4.1

10.6 11.0 9.2 -5.5 11.7 2.4 6.8 22.6

5,454 1,047 2,947 433 2,514 692 1,064 769

Note. Data are adjusted to remove estimated effects of consolidation related to FIN 46 and for breaks caused by reclassifications. Monthly levels are pro rata averages of weekly (Wednesday) levels. Quarterly levels (not shown) are simple averages of monthly levels. Annual levels (not shown) are levels for the fourth quarter. Growth rates are percentage changes in consecutive levels, annualized but not compounded. 1. Adjusted to remove effects of mark-to-market accounting rules (FIN 39 and FAS 115). 2. Includes private mortgage-backed securities, securities of corporations, state and local governments, foreign governments, and any trading account assets that are not Treasury or agency securities, including revaluation gains on derivative contracts. 3. Excludes interbank loans. 4. Includes an estimate of outstanding loans securitized by commercial banks. 5. Includes security loans and loans to farmers, state and local governments, and all others not elsewhere classified. Also includes lease financing receivables.

-7III-T-1

Selected Financial Market Quotations (One-day quotes in percent except as noted) 2004

2005

Change to Mar. 23 from selected dates (percentage points)

2006

Instrument June 28

Dec. 30

Jan. 30

Mar. 23

2004 June 28

2005 Dec. 30

2006 Jan. 30

1.00

4.25

4.25

4.50

3.50

.25

.25

1.36 1.74

3.99 4.22

4.38 4.45

4.55 4.63

3.19 2.89

.56 .41

.17 .18

Commercial paper (A1/P1 rates)2 1-month 3-month

1.28 1.45

4.23 4.37

4.47 4.55

4.73 4.84

3.45 3.39

.50 .47

.26 .29

Large negotiable CDs1 3-month 6-month

1.53 1.82

4.49 4.65

4.64 4.77

4.91 5.03

3.38 3.21

.42 .38

.27 .26

Eurodollar deposits3 1-month 3-month

1.29 1.51

4.36 4.52

4.56 4.67

4.81 4.95

3.52 3.44

.45 .43

.25 .28

Bank prime rate

4.00

7.25

7.25

7.50

3.50

.25

.25

Intermediate- and long-term U.S. Treasury4 2-year 5-year 10-year

2.88 3.97 4.90

4.43 4.35 4.47

4.54 4.49 4.63

4.79 4.73 4.84

1.91 .76 -.06

.36 .38 .37

.25 .24 .21

U.S. Treasury indexed notes 5-year 10-year

1.56 2.25

2.03 2.10

1.93 2.05

2.14 2.25

.58 .00

.11 .15

.21 .20

Municipal general obligations (Bond Buyer)5

5.01

4.38

4.42

4.43

-.58

.05

.01

Private instruments 10-year swap 10-year FNMA6 10-year AA7 10-year BBB7 5-year high yield7

5.21 5.30 5.59 6.18 8.30

4.92 4.82 5.25 5.84 8.28

5.06 4.88 5.39 5.96 8.17

5.26 5.08 5.61 6.14 8.17

.05 -.22 .02 -.04 -.13

.34 .26 .36 .30 -.11

.20 .20 .22 .18 .00

Home mortgages (FHLMC survey rate) 30-year fixed 1-year adjustable

6.21 4.19

6.21 5.16

6.23 5.33

6.32 5.41

.11 1.22

.11 .25

.09 .08

Short-term FOMC intended federal funds rate Treasury bills1 3-month 6-month

Record high

2005

Change to Mar. 23 from selected dates (percent)

2006

Stock exchange index Dow Jones Industrial S&P 500 Composite Nasdaq Russell 2000 Wilshire 5000

Level

Date

Dec. 30

Jan. 30

Mar. 23

Record high

2005 Dec. 30

2006 Jan. 30

11,723 1,527 5,049 748 14,752

1-14-00 3-24-00 3-10-00 3-23-06 3-24-00

10,718 1,248 2,205 673 12,518

10,900 1,285 2,307 731 12,979

11,270 1,302 2,300 748 13,136

-3.86 -14.78 -54.44 .00 -1.95

5.16 4.28 4.30 11.05 4.94

3.40 1.28 -.29 2.29 1.21

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. Most recent Thursday quote. 6. Constant-maturity yields estimated from Fannie Mae domestic noncallable coupon securities. 7. Derived from smoothed corporate yield curves estimated using Merrill Lynch bond data. _______________________________________________________________________ NOTES: June 28, 2004, is the day before the most recent policy tightening began. January 30, 2006, is the day before the most recent FOMC meeting. _______________________________________________________________________